STRATA Skin Sciences, Inc. Q4 FY2020 Earnings Call

Greetings and welcome to the STRATA Skin Sciences Fourth Quarter 2020 Earnings Conference Call. I will now hand it over to your host, Leigh Salvo. You may begin.

Thank you, and good afternoon, everyone. Earlier today, STRATA released financial results for the quarter ended December 31, 2020. A copy of the press release is available on the company's website. Before we begin, I would like to remind everyone that comments and various remarks about future expectations, plans and prospects constitute forward-looking statements for purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. These statements include, but are not limited to, our plans, objectives, expectations, intentions, and other statements that contain the words such as expects, contemplates, anticipates, plan, intend, believe, assumes, predicts, and variations of such words or similar expressions that predict or indicate further events or trends that do not relate to this historic matter. These statements are based on our current beliefs or expectations and are inherently subject to significant known and unknown uncertainties and changes in circumstances, many of which are beyond our control. There can be no assurances that our beliefs or expectations will be achieved. Actual results may differ materially from our beliefs or expectations due to financial, economic, business, competitive, market, regulatory, or other political factors or global pandemic events, such as the current COVID-19 pandemic. Given the uncertainties affecting companies in the medical device industry, any or all of the company's forward-looking statements may prove to be incorrect. Therefore, you should not rely on any such factors or forward-looking statements. In addition, more specific risks and uncertainties facing the company are set forth in its reports on Form 10-Q and 10-K filed with the SEC. STRATA encourages you to carefully review and consider the disclosures found in its SEC filings, which are available at www.sec.gov and on the company's website. As a reminder, this conference call is being recorded and will be available for audio rebroadcast on STRATA's website. Furthermore, the content of this conference call contains time-sensitive information that is only accurate as of the date of the live broadcast, March 24, 2021. STRATA undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this conference call. Leading the call today will be Bob Moccia, President and CEO. Joining him will be Matt Hill, Chief Financial Officer. With that, I would now like to turn the call over to Bob.

Thank you, Leigh, and good afternoon, everyone. Welcome to our fourth quarter 2020 earnings call. We hope everyone is remaining safe and healthy. I'm really excited to be participating in my first call as CEO of STRATA Skin Sciences. It is an honor to have the opportunity to lead this company. I thank the Board for their confidence in my leadership skills, experience in the dermatology industry, and track record of building growth companies. STRATA has always had a strong reputation and a history of being a reliable partner in dermatology with excellent self-service-oriented staff and best-in-class technology with XTRAC excimer laser. XTRAC has been shown in more than 150 peer-reviewed clinical studies to be the safest and most effective treatment on the market for psoriasis, vitiligo, and atopic dermatitis, skin diseases that impact more than 31 million people in the U.S. today. There is a significant value proposition with XTRAC, and I'm confident our unique business model can drive sustained growth. Before we review our fourth quarter performance, I want to take a moment to acknowledge the challenges faced this past year with COVID-19 and express our gratitude to everybody on the front line dedicated to keeping us safe and helping us recover from this pandemic. I also want to thank the STRATA team for your unwavering commitment to our mission. Our improving performance despite COVID is a testament to the team's ability to step up and deliver through unprecedented hardships. Thank you. Turning briefly to our financial summary. Total revenue for the fourth quarter was $6.7 million, a 24.5% decline over the fourth quarter of 2019 and a 19.7% increase compared to the third quarter of 2020. Recurring revenue for the fourth quarter was $5.1 million, a 22.7% decrease over the fourth quarter of 2019 and a 34.2% sequential increase over the third quarter of 2020. While we are encouraged by the positive recovery trends in the U.S. in the third quarter and early part of the fourth quarter, supported by the gross domestic recurring billings at 97% of previous October, in the middle of November, with COVID-19 resurgences and associated dermatology office staffing challenges, we began experiencing reduced volumes, which have persisted into the first quarter of 2021. Internationally, our leading overseas markets, South Korea, Japan, China, and the Middle East experienced similar variability as in the U.S. Notably, in the fourth quarter, we broadened our presence in Japan through the expansion of our distribution agreement, and most recently in China, shifting business from equipment sales to recurring revenues similar to the success measures taken in South Korea. We plan to continue to drive and validate our unique recurring revenue model in these countries with the goal of increased momentum in XTRAC sales and improved margins over the long term. We exited the fourth quarter with an installed base of 860 recurring revenue XTRAC devices, including 832 in the U.S. and 28 international placements, 27 of which have been placed in South Korea and one in Japan. Turning next to recap our recent business highlights. As announced last October, we were pleased to see that Cigna issued a new medical coverage policy for excimer laser therapy that included the treatment for vitiligo as medically necessary. Following this positive coverage announcement, we began an outreach program to advise Cigna-covered patients afflicted with vitiligo and dermatologists of this important coverage update. We believe this change could encourage patients who have previously not sought treatment due to lack of insurance coverage to seek treatment or to return to dermatology offices to manage their condition. Last November, we announced the publication of a peer-reviewed health economic study entitled Therapies for Psoriasis: Clinical and Economic Comparisons in the November 2020 issue of the Journal of Drugs in Dermatology. As a reminder, our XTRAC excimer laser was found to deliver the fastest results with the fewest adverse events at the most economical cost of all treatments analyzed, including topicals, traditional UV therapy, biologics, and systemic therapies. Additionally, patients treated with our XTRAC excimer laser had fewer actual treatment days compared to all of the modalities. It was also the only therapy where patients achieve remission without a maintenance therapy. We also announced the introduction of 'Home by XTRAC', an at-home treatment for patients who do not qualify for in-office treatments. This approach leverages our direct-to-consumer advertising to identify patients who do not have access to a local provider or where out-of-pocket costs are potentially an issue. While still in the early innings of a pilot program, we believe this adjunct offering could support a comprehensive patient journey and a meaningful solution for patients who cannot receive our XTRAC treatments in the clinical setting. Turning to our outlook for 2021. While the dermatology market saw a nice recovery in Q3 and the early part of Q4 2020, what we have experienced and validated with our customers is that offices are still not operating at pre-COVID levels in Q1 of 2021. They are not fully staffed and thus are not yet able to offer the comprehensive suite of services that were available prior to the pandemic. We believe with more widespread vaccinations, dermatology offices will return to pre-COVID capacity as we move into the second half of 2021. In the near term, however, we expect that the impact of COVID will continue to be a meaningful headwind on our business, with a continuation of regional variability as dermatology clinics reopen from shutdowns but face potential shortages in staff and resources. Encouragingly, there appears to be a steady increase in investments in the dermatology market. Big pharma has entered the space with biologics and new topical drugs, which while effective, are higher-priced in comparison to traditional topical and oral treatments. These new therapies are indicated for psoriasis, atopic dermatitis, and in some cases, are seeking an indication for vitiligo. These investments are spreading awareness with respect to the potential treatment, which we believe has the potential to drive more patients to seek treatment from a dermatologist and further to raise awareness of XTRAC as a potential treatment option. With reimbursement and access challenges with these alternative therapies, we believe that patients and physicians will turn to XTRAC based on its safety, efficacy, and cost benefits. To that end, we're rolling out marketing initiatives to dermatologists to demonstrate the clear value proposition of our XTRAC solution. We will be further training our representatives so they can improve the experience for clinics and dermatologists, which we believe will lead to more effective partnerships and a return of dormant accounts to active recurring revenue-generating accounts. As part of these efforts, we plan to optimize our comprehensive support services to ensure that we are meeting the needs of our patients and partner clinics. In closing, I believe that we have a tremendous opportunity to extend the value proposition of XTRAC in the dermatology market today. And once the headwinds from this pandemic are behind us, we can return to stable, predictable long-term growth. My initial priorities include evaluating our current situation, opportunities, and trends impacting the broader market, with particular attention on our sales and marketing strategy, allowing us to make the most efficient and effective improvements. I plan to continue personally engaging with customers over the coming weeks to understand their needs and how we can improve our partnership. In addition, we have some exciting launches planned for the second half of the year, and I want to ensure we are well-prepared to successfully introduce them to the market. Moreover, our international business presents a valuable opportunity to expand our placements, contributing to growth going forward. I am encouraged that we have the opportunity to drive additional growth through that channel. We look forward to the months ahead to update you on our progress. I'd like to now turn it over to Matt Hill for a closer look at our fourth quarter.

Thank you, Bob. I welcome you to the STRATA team and look forward to working with you further. Looking at the financials, revenues for the fourth quarter of 2020 were $6.7 million, a 24.5% decrease as compared to revenues of $8.9 million for the fourth quarter of 2019, and up 19.7% from the third quarter of 2020, reflecting the general shutdown, staffing issues, and restarted partner clinics due to the COVID-19 pandemic in the fourth quarter. Recurring revenues for the fourth quarter of 2020 were $5.1 million, a 22.7% decrease as compared to $6.6 million for the fourth quarter of 2019 and up 32.4% from the third quarter of 2020. Equipment revenues for the fourth quarter of 2020 were $1.6 million, a decrease of 29.5% as compared to $2.3 million for the fourth quarter of 2019. Overall, revenues continued to be negatively impacted by the COVID-19 pandemic with continued office closures and staffing issues in the dermatologist's offices. In addition, our equipment revenue will be impacted in the shorter term by our transition from the capital equipment model to the recurring model internationally. But we anticipate higher revenues and margins in the longer term as our partners drive in-country placements. As we discussed last quarter and included in our press release this afternoon, we provided information about a non-GAAP measurement described as gross domestic recurring billings, which represents the amount invoiced to our partner clinics when treatment codes are sold to the physician. It does not include normal GAAP adjustments, which are deferred revenue from prior quarters recorded as revenue in the current quarter, the deferral of revenue from the current quarter recorded as revenue in the future quarters, and other adjustments for co-pay and other discounts. We have felt that this is an important disclosure in light of the COVID-19 pandemic to assist in understanding our business and to more effectively view the trends that we're seeing. We also want to provide transparency regarding deferred revenue since we defer a portion of our GAAP recurring revenue into future quarters. A decrease in deferred revenue impacts each subsequent quarter. Deferred revenue added to the third, fourth, and first quarter of '20 and the third and fourth quarter of '20 and first quarter of 2021 were $500,000, $1.4 million, and $1.8 million, respectively, meaning our recurring revenue in the fourth quarter was reduced by approximately $400,000. Deferred recurring revenue in and out of each quarter of 2019 had remained steady at approximately $2 million. For the perspective on the impact to Q1 2021, we added, as previously mentioned, $1.8 million from Q4 2020 into Q1 2021. In the prior year, we added $2.3 million from Q4 2019 into Q1 2020. Therefore, if you do the math, we started day 1 2021, $500,000 below recurring revenue than in the comparable quarter of 2020. This, combined with the COVID-related headwinds and transition of equipment sales that we noted earlier, is expected to have a negative impact on Q1 2021 revenue. Gross domestic recurring billings for October, November, and December 2020 were $1.6 million, $1.5 million, and $2.3 million, respectively. Our total gross domestic recurring billings for the fourth quarter of 2020 were $5.4 million as compared to $6.9 million in 2019 and $4.7 million in the third quarter of 2020. Overall, gross profit for the fourth quarter of 2020 was $4.5 million or 67.6% of revenues as compared to $6.1 million or 68.8% of revenues for the fourth quarter of 2019. Gross profit was up 10.1% from the third quarter of 2020. Gross profit for recurring revenues for the fourth quarter of 2020 was $3.8 million or 74.4% of revenues as compared to $5 million or 76.5% of revenues in the fourth quarter of 2019. Gross profit for recurring revenue was up 10.1% from the third quarter of 2020. The primary reason for the decrease in gross profit in the fourth quarter of 2020 as compared to the same period in 2019 was the result of lower recurring sales due to the COVID-19 pandemic and unapplied costs, partially offset by lower depreciation expense. Engineering and product development costs for the fourth quarter of 2020 were $324,000 as compared to $214,000 for the fourth quarter of 2019 as a result of timing of certain engineering projects. Selling and marketing costs for the fourth quarter of 2020 were $2.6 million as compared to $3.1 million for the fourth quarter of 2019, primarily due to the downturn in business as a result of the COVID-19 pandemic. The company has managed its costs with lower trade show costs, travel costs, compensation costs, and direct-to-consumer advertising costs. We plan to steadily increase direct-to-consumer spending and sales headcount in order to fuel growth at our partner clinics and serve the growing installed base, respectively. General and administrative costs for the fourth quarter of 2020 were $1.9 million as compared to $2.9 million for the fourth quarter of 2019, due to the result of lower legal, consulting, and accounting fees incurred in 2019 with the company's restatement. Other expense for the fourth quarter of 2020 was approximately $20,000 compared to $500,000 for the fourth quarter of 2019 as a result of lower interest expense and additional costs in 2019 for the extinguishment of our long-term debt. Net loss for the fourth quarter of 2020 was $400,000 or a loss of $0.01 per basic and diluted common share as compared to the net loss for the fourth quarter of 2019 of $500,000 or a loss of $0.02 per basic and diluted common share. At December 31, 2020, cash, cash equivalents, and restricted cash was $18.1 million. We continue to manage our cash prudently, and we'll make investments where we expect to see a return and to provide growth for the business. In summary, while we cannot predict when this pandemic will end, we remain confident that we are prepared to manage through these uncertain times. And now, Bob and I would like to turn the call back to the operator for Q&A.

Our first question is from Jeffrey Cohen with Ladenburg Thalmann.

I have a few questions for you. First, regarding the recurring revenue as it impacts the fourth quarter into the first quarter of 2021, could you discuss what that will look like in the second quarter of 2021 and beyond? Or share your thoughts on how that might develop?

Yes. I think we certainly are seeing that the dermatology offices are open, Jeff. What we're not seeing is the return of patients to pre-COVID levels, and the fact that some of these offices have not fully staffed yet. But my feeling is that as more and more people get vaccinated, I think those numbers are going to increase on both counts. I think you'll see more patients seeking treatment that they hadn't sought in the last several months because of COVID. I also think that the offices will be hiring back staff and getting more of a full complement of treatments that they typically offer. So I'm encouraged going forward. I think there are some headwinds that we are still facing, but as folks get vaccinated, I think we'll start to get out of that mess.

Okay. Got it. And then secondly for me is a housekeeping item. Could you walk us through domestic and international revenue for Q4, please, or for the year?

Sure. I can explain the domestic and international revenue for the year, and then we can subtract the balance from Q3 to calculate Q4. Our domestic revenue has been strong, and we are seeing an increase in international revenue, particularly in recurring revenue. This is encouraging, especially since we had 28 placements internationally, with the first one in Japan. Please hold on for a moment. Thank you for your patience.

No. That's okay. I can jump on after...

Yes. I will make sure that you get that. That's part of our 10-K filing. I'll make sure you get that.

Got it. And then Bob, lastly for me. Could you talk a little bit about your prepared remarks as far as second half launches? Are you referring to new equipment or new channels or modifications to current therapy?

Good question. Actually, a little bit of all of it. We're certainly looking at expanding our international footprint. I think there's an opportunity there, and we're in the process of identifying countries that offer the greatest return for our time and effort to get into there. But yes, I think that's one. Two, we do have some upgrades coming to our lasers. So that will be an important launch for us in the second half. And then we're also looking at other opportunities to grow the indications that we have. Vitiligo, I think, is a real opportunity going forward, which may not have been fully capitalized here in the company. I think that's something that we can put more attention to with our sales and marketing efforts.

Okay. And can you give us a sense of what part of Vitiligo Cigna is responsible for as far as your payer pool significant?

Yes. Currently, coverage is around 76% of all of the claims that go in. So it's pretty good. I mean, I think it can be better. Obviously, we had the good success with Cigna. I would like to reach out to some of the other payers and see if we can get a similar type of acceptance that we have with Cigna, and that would be an even greater opportunity for us. So right now, the coverage is good, but we want to make it better.

Our next question is from Suraj Kalia with Oppenheimer. Yes, currently, coverage is around 76% of all claims that go in. It's decent, but I believe it can improve. We had good success with Cigna, and I would like to reach out to other payers to see if we can achieve similar acceptance. That would create an even greater opportunity for us. So, while the current coverage is solid, our goal is to enhance it further.

Bob, Matt, can you hear me all right?

Yes.

Bob, welcome aboard, and wish you all the success.

Thank you.

So Bob, a lot of information has been provided. Given that this is your first call, I don't want to go into too much detail. I'll keep it to two questions. First, on a macro level, I know you're still getting acquainted with things, but you've been in the industry long enough to have some insight. Do you perceive a demand issue or a supply issue? Are you doing everything possible while the demand grows over time, or are there constraints on your end, such as resources, marketing, or any other factors that could influence the supply side?

Good question. I don't view it that way. When I joined, I noticed that the company has shifted from a capital sales model to a recurring model, which was one of the reasons I was attracted to it. It's more akin to selling pharmaceuticals. My experience has largely been in selling to dermatologists, and success in that arena relies on building relationships and frequency. Regular visits to their offices are essential, along with thorough office calls to establish partnerships with those dermatologists. I believe we can improve in this area, which is why I'm currently focused on enhancing our sales and marketing execution. There are adjustments we can make, including potentially providing additional training to our sales team that could help us stimulate demand for the recurring business. For me, that is the top priority. We certainly don't want to overlook other placements and meeting our goals there. However, driving the recurring business is crucial because it will sustain our growth moving forward.

Got it. Bob, let me address the company-specific issue. I'd like to break this down into two parts. First, considering the limited time you've had to review everything, have you identified any urgent operational issues that need your immediate attention, aside from COVID? Second, can we implement measures to enhance patient retention and encourage them to complete their full treatments instead of focusing solely on bringing in new patients? Congratulations again, Bob.

Thanks, Suraj. To answer your first question, no, nothing that I would call a surprise. Obviously, I did my due diligence before I came on board, and everything was as I expected and even in better shape in some cases. So I don't see any major issues to address at this point. As far as your second question about recurring customers, again, I think that really starts with the dermatologists. The dermatologists do not want to give up patients. That's been a trend that they've been dealing with now for the last several years because of pharmacy benefit managers, managed care, and payers. They tend to sometimes lose patients to general practitioners, and they try to keep patients just like everyone else. So again, that's back to the relationship building, the partnership. If we can ensure that the dermatologists and the complete office understand the duration of therapy that needs to take place for XTRAC to be effective, then I think we'll be able to keep those patients and bring them back because we know that it's effective, we know that it's safe, and we know that the patient doesn't need as much follow-up as they do for typical topical treatments, which are expensive. So I think we have a lot of good benefits and features that we can present to the dermatologists, and again, that's something that we want to make sure our reps are doing on every call.

And we have reached the end of the question-and-answer session. I will now turn the call over to Bob Moccia for closing remarks.

Well, great. Thank you. Again, I'm just very excited to be here, and I'm looking forward to further updating you about our advances in the future. In the meantime, I hope everyone will please remain safe and have a good evening. Thank you.

And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.