STRATA Skin Sciences, Inc. Q4 FY2022 Earnings Call

Hello, and welcome to the STRATA Skin Sciences Fourth Quarter 2022 and Full Year Earnings Call and Webcast. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Bob Moccia. Please go ahead.

Thank you, everyone. Joining me today are Bob Moccia, Chief Executive Officer; and Chris Lesovitz, Chief Financial Officer. Earlier today, STRATA released financial results for the quarter ended December 31, 2022. A copy of the press release is available on the company's website. Before we begin, I'd like to remind you that management will make statements during this call that include forward-looking statements within the meaning of the federal securities laws, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that do not relate to matters of historical facts or relate to expectations or predictions of future events, results of performance are forward-looking statements. All forward-looking statements, including, without limitation, those relating to our operating trends and future financial performance are based upon our current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements. Accordingly, you should not place undue reliance on these statements. For a list and description of these risks and uncertainties associated with our business, please refer to the Risk Factors section of our public filings with the SEC, including our annual report on Form 10-K for the year ended December 31, 2022. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, March 31, 2023. STRATA disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward-looking statements whether because of new information, future events or otherwise. Also, during this presentation, we refer to gross domestic recurring billings, which is a non-GAAP financial measure. A reconciliation of this non-GAAP financial measure to the most directly comparable GAAP financial measure is available in the company's earnings release for the fourth fiscal quarter ended December 31, 2022, which is accessible on the SEC's website and posted on the Investor Relations page of STRATA's website. And with that, I'll turn the call over to Bob Moccia. Thank you, everyone, for joining us today. 2022 proved to be a record year for STRATA. We announced record revenue of $36.2 million, which was above guidance, representing a 20.6% growth compared to the prior year period. Our successes are a direct result of our acute focus on commercial execution and strategic priorities. As a brief recap, this year, we achieved record revenues, acquired and successfully commercially launched TheraClearX for acne treatment, launched XTRAC 1.0 Momentum, an aesthetic laser device, strengthened our leadership team with the addition of John Bagdasarian, Vice President, Professional Relations; and Mike Goodman, Head of International Sales, entered into new international markets, including Israel and Mexico, and continued to raise awareness of our XTRAC and TheraClearX systems at various dermatology conferences. To achieve the strong double-digit growth, we continue to invest in direct-to-consumer marketing and directed dermatologist marketing, engaged with high-volume accounts, refurbished and deployed underutilized assets, and interacted with key opinion leaders to fine-tune our messaging and help deliver clinical support to our devices. Since September 30, 2022, we placed 45 XTRAC machines, resulting in a total of 909 systems placed in dermatologist offices in the United States. This growth signals the demand and need for additional treatment options for psoriasis, eczema, and vitiligo. XTRAC continues to present us with a unique opportunity as 80% of the users in the United States use it for psoriasis. As we have previously mentioned, we have an initiative with our commercial team to drive usage for vitiligo. We expect the recent approval of the first FDA drug treatment for vitiligo, ruxolitinib cream, more commonly known as OPZELURA, could complement XTRAC treatment and drive traffic to dermatologist offices. In February of this year, we announced the launch of our new XTRAC website. The new website is patient-forward, educational, and easy to use. It allows potential patients to find a dermatologist in the area using the practice finder function. The website emphasizes our focus on broadening patient awareness with the ultimate goal of serving patients who suffer from dermatologic conditions and increasing XTRAC usage. At the beginning of 2022, we announced the acquisition of TheraClearX from Theravant Corporation. TheraClearX is a non-invasive in-office treatment targeting the root cause of mild to moderate acne. In July 2022, we commercially launched TheraClearX. As part of our launch, we carried out additional market research, built inventory, invested in our sales force, and created a marketing plan. We have utilized the XTRAC sales channels to sell through the TheraClearX System, and we are excited to continue patient and physician education on the TheraClearX device. The cost of TheraClearX to the patient is a fraction of the cost of the competitive devices launched this year. As a reminder, 20% to 25% of all visits to dermatologists are for acne, often treated with prescription drugs that can be costly. Our device delivers a unique combination of broadband light and vacuum technology that begins to clear the skin rapidly. Our TheraClearX treatment can help potentially increase compliance with prescription acne treatments as patients begin to see results quickly. A poster titled 'Advancement in Personalized Photodynamic Therapy for Rapid Visible Improvement in Patients with Mild-to-moderate Acne' was presented this January at the ODAC Dermatology, Aesthetic and Surgical Conference. The clinical assessment was conducted by Dr. Gilly Munavalli, MD, Medical Director and Founder of Dermatology Laser and Vein Specialists of Carolinas in Charlotte, North Carolina; and Dr. Jason Smith and Dr. Taylor Smith of Northwest Georgia Dermatology. The objective of the clinical assessment was to evaluate via photographs changes in visible active lesions and skin texture after a series of tailored photopneumatic therapy treatments delivered to patients with mild-to-moderate acne. Highlights from the clinical assessment included that all patients experienced a visible reduction in comedones, pustules, and inflammatory facial lesions; redness reduction; and improvement in skin texture, pore size, and perilesional erythema observed in the treatments. Most patients responded with two to three treatments. One adult female patient with persistent perioral acne experienced complete clearance, and adverse events were infrequent and limited to mild erythema, mild bruising, superficial erosions, and temporary changes in pigmentation. These results are encouraging to continue to highlight the efficacy and safety of TheraClearX as a treatment for acne. This February, TheraClearX was demonstrated in the Inaugural Winter Clinical Conference. Dr. Joel Cohen, MD, who is the Director of AboutSkin Dermatology in Greenwood Village, Colorado, spoke during the live presentation. In Dr. Cohen's practice, he utilizes TheraClearX to build confidence in compliance for patients while waiting for prescription therapy to kick in. The results from the clinical assessment and the demonstration at the Winter Clinical Conference continue to highlight TheraClearX's safety and efficacy for treating acne, with continued exposure in clinic and industry conferences as well as connection to our existing sales channels; we are confident in the potential growth of TheraClearX in 2023. This exposure helps us to broaden the awareness of our device and its proven capabilities. We are excited to see TheraClearX make an impact on revenues this year. Now turning to our international operations. Internationally, we sold 100 systems made up of 88 XTRAC and 12 VTRAC systems. This compares to the 38 systems we sold in 2021. As a reminder, we have signed distribution agreements in Korea, Japan, China, Israel, Saudi Arabia, Kuwait, Oman, Qatar, Bahrain, UAE, Jordan, Iraq, and most recently, Mexico. This January, we announced an exclusive agreement with MINO Labs, a private company that represents international pharmaceutical companies to commercialize innovative products in Mexico for the distribution of XTRAC, VTRAC, and TheraClearX in Mexico for three years. When we look at Mexico's population, it is estimated that 80% of the population is affected by mild to severe acne. We are excited to enter Mexico's nearly $300 million market, as there is a great need for additional treatment options. We look forward to updating the community on our progress in gaining regulatory approval, which we expect to receive in the fourth quarter of this year. In our international markets, there remains a great opportunity to market our TheraClearX system, and we expect this to be a focus this year. This year, we welcomed Michael Goodman to STRATA as the Head of International Sales. We have already seen meaningful improvement in our international operations, specifically noting our increased international sales and STRATA's expansion into Israel and Mexico.

Thank you, Bob. Revenues for the fourth quarter of 2022 were $10.6 million, a 17% increase over the fourth quarter of 2021 and a 13% increase over the third quarter of 2022. Our fourth quarter revenue was driven primarily by the continued increase in equipment sales internationally. Recurring revenues in the fourth quarter were $6.5 million, a 12% increase over the third quarter of 2022. Similarly, the increase in recurring revenues was driven by the continued increase in XTRAC usage as a result of the increased emphasis on sales force execution. Equipment revenues for the fourth quarter were $4.1 million, an increase of 72% compared to the $2.3 million for the fourth quarter of 2021 and an increase of 14% compared to $3.6 million for the third quarter of 2022. The increase in equipment sales is a result of our increased focus on the international markets. Over the past year, we have made significant changes. We welcomed Michael E. Goodman as Head of International Sales. We remain flexible in our international product offerings, and we now have direct distribution agreements with our international partners. As we discussed last quarter and included in our press release issued this morning, we provided information on a non-GAAP measurement described as gross domestic recurring billings, which represent the amount invoiced to 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 future quarters, adjustments for co-pays and other discounts. We also want to provide transparency with respect to the deferred revenue. Since we defer a portion of our GAAP recurring revenue for future quarters, a decrease in deferred revenue can impact each subsequent quarter. For the fourth quarter of 2022, non-GAAP gross domestic recurring billings were $5.8 million, a decrease of 6% compared to $6.1 million in the fourth quarter of 2021 and an increase of 4% compared to the $5.5 million for the third quarter of 2022. Overall gross profit for the fourth quarter was $6.8 million or 65% of revenues compared to $6 million or 66% of revenues for the fourth quarter of 2021. Net loss for the fourth quarter of 2022 was $160,000 or a loss of $0.05 per basic and diluted common share, compared to a net loss for the fourth quarter of 2021 of $849,000 or a loss of $0.02 per basic and diluted common share, and a net loss from the third quarter of 2022 of $995,000 or a loss of $0.03 per basic and diluted common share. Now turning to the results for the full year 2022. Revenues were $36.2 million, a 20.6% increase over 2021. Recurring revenues in 2022 were $23 million, and equipment revenues for the full year were $13.1 million, a 76% increase over 2021. For the full year 2022, non-GAAP gross domestic recurring billings were $22.2 million, a 1% increase over the full year 2021. Overall gross profit in 2022 was $21.8 million or 60% of revenues compared to $19.9 million or 66% of revenues for the full year 2021. The gross profit percentage decrease is attributed to the recording of amortization expense associated with our RA and Theravant acquisitions in addition to the sales mix during the year between equipment revenue and recurring. Total operating expenses in 2022 were $26.4 million, an increase of 8.9% compared to $24.3 million for the full year 2021. This increase was driven primarily by our continued execution on our growth initiatives and expanding our business in the United States. Additionally, we would like to mention that while companies have been facing supply chain issues, we have been able to use parts from our existing machines for repairs. This has allowed us to mitigate delays and maintain a timely process for maintenance on our equipment. Net loss for the year of 2022 was $5.5 million or a loss of $0.16 per basic and diluted common share compared to a net loss for the full year of 2021 of $2.7 million or a net loss of $0.08 per basic and diluted common share. At December 31, 2022, cash and cash equivalents were $6.8 million compared to $8.8 million as of September 30, 2022, resulting partially from the payment of $1 million for the acquisition of Theravant. We are conservatively estimating top line revenue to be in the $38 million to $40 million range for 2023. These estimates reflect our current growth expectations on the business and do not reflect the strategic initiatives we are implementing, which should enhance our business growth during the year.

With that, Bob and I would like to open it up for call for questions.

Thank you. Our first question today is coming from Jeffrey Cohen from Ladenburg Thalmann. Your line is now live.

Good morning, Bob and Chris. How are you?

Good morning, Jeff. How are you?

Congrats on the 21% year-over-year. And I guess, firstly, can we jump into the guide, which kind of appears a little bit on the conservative side, I think 7.7% is the midpoint on the top line. Any thoughts or commentary, and I know that some of this is related to more equipment sales focus.

Yes, there is a little bit more equipment sales focused, not only internationally but somewhat in the domestic market as well, Jeff. As we found out last year in working with some of the Pharos ex-owners, some of them just aren't interested in getting into the partner model. So we've opened it up to potential equipment sales to some of these customers, as well as, as we've always done, selling into big institutions. So that's part of it. We took a conservative approach to the guidance for a number of reasons. There are a lot of initiatives, particularly around international expansion that are reliant on regulatory approvals. We have the vitiligo opportunity. We need to see how that materializes with the approval of OPZELURA. How much that drives patients into the doctor's office. We think it's going to be good. So we're optimistic and we believe that we can increase, hopefully, our guidance as the year goes on. But coming out of the gate, we want to take a conservative approach to it.

I got it. And as far as ex U.S. in our estimates, it looks like that the growth for '23 would be five to tenfold off the U.S. growth levels. Is that accurate assessment?

One more time on that, Jeff?

On the ex-U.S. growth rate and the ex-U.S. component of your revenues, it looks like from what we're estimating that's going to be multiple times higher as far as growth rate goes?

Going into 2023?

Yes, off that...

Yes. I mean, we think it will still probably be around the same percentage of our overall revenue makeup as 2022. We finished around 35%.

Okay. Got it. And could you talk about alopecia briefly? Are you seeing treatments out there that are going on with XTRAC for alopecia specifically?

There is some off-label use. I mean, obviously, we can't go on and promote that. But certainly, the laser can be used for alopecia successfully. There are a few, I think, small studies out there, something we've thought about. We've done some work around it and looked at the potential for getting that indication. So it's certainly an opportunity for us.

Got it. And can you talk about any recent trends as far as treatments go and number of cycles, number of sessions, patient compliance, and adherence?

Yes. I mean, I think the big issue we faced last year with XTRAC was staffing. It's still been an issue. Once you get the patient into the program, they—depending on the severity of the disease, whether it's vitiligo or psoriasis—we think we have a high success rate in getting them through the whole treatment process for psoriasis. As you know, it's somewhere between 10 and 20 treatments. And for vitiligo, it's generally more than 20 treatments. We do have a coupon program, which helps defer some of the costs, so that's been effective. And with TheraClear, we're just getting started. We've had a lot of success in getting placements. Now we're into driving usage with those placements and expanding our footprint even more. So we're excited about that opportunity as well.

Okay. And then lastly for us, you brought it up. Can you jump into TheraClear, and talk about can you give us a sense of number of placements, regions, typical treatment numbers for patients and cost?

Yes. So we finished the year 2022 with 17 placements. We've had a lot of success in Q1. And obviously, we'll be reporting our Q1 numbers here in early May. But we really saw a big pickup here in the first quarter. And mainly because we've put a lot more of our sales force emphasis behind it. As you know, last year, it was a soft launch. We're really trying to gain a lot of information, market research, and putting the plans together. But it's really started to get traction here in the first quarter. Typical treatment is around five treatments. They start to see results after the first or second treatment, which is great, which makes them come back. What we're hearing from the dermatology community is the pricing to the patient is across the board, but I'd say, on average, it's about $250. We've heard as high as $400 in some of the major cities. But on average, it's about $200 to the patient per treatment. So five treatments is $1,000, which is very reasonable considering some of the other costs for some of the other devices out there.

Okay. That's it. Thanks for taking the questions.

Thanks, Jeff.

Thank you. We reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments.

Thanks. Yes. Thank you for joining us today. We've made great progress on multiple fronts in 2022, and we are excited to continue executing throughout this year. Our goal is to help those who suffer from dermatologic conditions. And with the advancements we have made over the past year, we are better equipped to serve them. Thank you again. We look forward to a successful 2023 and catching up in the first quarter.

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.