STRATA Skin Sciences, Inc. Q2 FY2023 Earnings Call

Greetings. Welcome to STRATA Skin Sciences' 2Q 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to your host, Nicole Jones, Investor Relations. You may begin.

Thank you. Joining on today's call will be Bob Moccia, Chief Executive Officer; and Chris Lesovitz, Chief Financial Officer. Earlier today, STRATA released financial results for the quarter ended June 30th, 2023. 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 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 results or 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 the 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 31st, 2022. This conference call contains time-sensitive information and is accurate only as the live broadcast today, August 9th, 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 domestic growth 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 second fiscal quarter, June 30th, 2023, which is accessible on the SEC's website and posted on the Investor Relations page of STRATA website at www.strataskinsciences.com. And with that, I'll turn the call over to Bob Moccia.

Thank you, Nicole. I appreciate everyone joining us on today's call. In the second quarter, we made operational progress, achieving several milestones across our business. Notable achievements include our TheraClearX review and expert publication in the Journal of Clinical and Aesthetic Dermatology, securing $12 million in financing with MidCap Financial, increasing our TheraClearX installed base to over 70 devices, Dr. Glynis Ablon starting and treating patients in the TheraClearX clinical study, and placing 18 new XTRAC devices in the domestic market. During the second quarter of 2023, we reported revenues of $8.3 million compared to $9.1 million in the same period of 2022. Excluding a significant one-time order from China in the second quarter of 2022 amounting to $1.5 million, sales increased by 8.8% during this period. Additionally, about $900,000 in expected international sales were postponed to the latter half of 2023 due to seasonality and reduced capital spending stemming from higher interest rates and slowed macroeconomic factors. We anticipate recovering those sales in the second half of 2023. We continue to see significant opportunities ahead for XTRAC. As previously mentioned, new FDA-approved treatment options for vitiligo have emerged in the past year. It's important to note that non-segmental vitiligo represents about 15% of domestic XTRAC procedures. We believe the growing interest in vitiligo treatment options will present more opportunities to raise awareness and use of XTRAC. For the remainder of the year, we aim to remove non-profitable or underused devices from our installed base. We are also considering plans to transition lower-tier partners into existing membership programs that would offer them codes in line with their usage, potentially creating a more reliable revenue stream for STRATA. Earlier this year, we launched TheraClearX, which we believe will be a key driver of our business. We have seen remarkable growth with 73 TheraClearX devices placed as of June 30th, 2023. Furthermore, as mentioned in our last earnings call, we sold over 6,000 TheraClearX treatment codes, reflecting the increasing adoption and effectiveness of our acne solution. We are actively expanding awareness of TheraClearX through various channels. We've rolled out training programs for both our sales team and new TheraClearX providers, focusing on how to engage patients and promote cash pay services in their offices to drive utilization. Additionally, we've hosted peer-to-peer webinars where experienced dermatologists with TheraClearX share best practices with users. In May, we announced that Dr. Glynis Ablon from Albon Skin Institute and Research Center in Manhattan Beach, California, initiated treatment for the first six patients in her TheraClearX open-label single-arm clinical trial. This study, which lasts seven weeks, evaluates the efficacy and safety of TheraClearX for treating mild-to-moderate acne in healthy teenagers and young adults, aiming to further validate its use as a standalone treatment. The study will involve 30 healthy male and female subjects aged 12 to 40 over the seven-week period, and we expect it to conclude by the end of Q3. Acne affects up to 50 million Americans each year and accounts for 20% to 25% of dermatology visits, particularly impacting adolescents, with 85% experiencing some level of acne from ages 12 to 24. We believe TheraClearX, with its FDA-cleared technology, is well-positioned to meet this market need. In July 2023, we announced that the Journal of Clinical and Aesthetic Dermatology published a review and expert perspectives article in its June 2023 issue, discussing photo-pneumatic technology for treating mild-to-moderate acne vulgaris. The roundtable featured dermatologists Ashish Bhatia, Girish Munavalli, and Jason Smith. Key insights included that TheraClearX is both safe and effective, showing visible improvement in acne as early as the second treatment. Additional benefits noted were improvements in pore size, redness, and skin texture. TheraClearX settings can be adjusted for all Fitzpatrick skin types, and treatment sessions are quick and comfortable, leading to satisfied patients. TheraClearX is ideal for new acne patients looking to speed up their treatment or for existing patients wanting to enhance their current regimen. The JCAD review, audited by Dr. Munavalli, highlighted TheraClearX's mechanism of action, key features of the device, and positive clinical outcomes. Dr. Munavalli frequently uses TheraClearX in his clinic to treat mild-to-moderate acne and noted the lack of downtime and early visible reductions in redness that patients experience. The expert perspectives provided in the roundtable further established the safety and effectiveness of TheraClearX. This publication reinforces the device's efficacy and helps increase its market visibility. As we move forward, we remain focused on our strategic priorities, including advanced sales training and expanding our market presence through virtual events and industry conferences, which will strengthen our role as a leader in providing innovative phototherapy solutions to patients and healthcare providers worldwide. I will now hand the call over to Chris to discuss the financials.

Thank you, Bob. Revenues for the second quarter of 2023 were $8.3 million as compared to revenues of $9.1 million in the second quarter of 2022. Global recurring revenues in the second quarter of 2023 were $5.5 million as compared to global recurring revenues of $5.6 million for the second quarter of 2022. Equipment revenues for the second quarter of 2023 were $2.8 million as compared to $3.5 million for the second quarter of 2022. For the second quarter of 2023, non-GAAP XTRAC gross domestic recurring billings were $5.1 million as compared to $6 million in the second quarter of 2022. Overall gross profit for the second quarter of 2023 was $4.3 million or 52.3% of revenues as compared to $5 million or 54.8% of revenues for the second quarter of 2022. The decrease in gross profits during the three months ended June 30th, 2023, was primarily the result of higher depreciation material costs, lower recognition of previously deferred service revenue associated with assumed service contracts from the Ra Medical acquisition, which is decreasing as the related service contracts expire, and an increase in domestic sales with longer warranty periods leading to a greater amount of deferred revenues for those sales. Looking ahead, we can expect gross margins throughout the remainder of 2023 to be in the mid-50s to low 60s with some quarterly fluctuation based on the mix between recurring revenues from system placements and equipment sales. Operating expenses for the second quarter of 2023 were $6.3 million as compared to $6.7 million in the second quarter of 2022. The decrease in operating expenses in the second quarter of 2023 is primarily due to a reduction in sales and marketing costs, offset by a slight increase in engineering and G&A expenses. Other expenses for the second quarter of 2023 were $1.2 million as compared to $200,000 for the second quarter of 2022. The increase in other expense for the second quarter was primarily attributed to a loss on the debt extinguishment of $900,000 for the three and six months ended June 30th, 2023. Net loss for the second quarter of 2023 was $3.1 million, or a loss of $0.09 per basic and diluted common share, as compared to net loss for the second quarter of 2022 of $1.9 million, or a loss of $0.05 per basic and diluted common share. As of June 30th, 2023, cash and cash equivalents were $10.4 million. The increase in cash and cash equivalents is due to the $12 million financing with MidCap Financial. The new debt facility consists of a refinancing of the existing $8 million term loan and an additional $7 million tranche funded at closing. STRATA also has the option to receive an additional $5 million tranche in 2024. For the fiscal year ending December 31st, 2023, we are revising guidance in the range of $35 million to $38 million. This adjustment is attributed to a slowdown in capital expenditure spending and macroeconomic factors that have impacted our equipment sales. While we believe sales could improve during the second half of this year, this updated guidance offers a current and conservative perspective on the business. We are pleased with the progress made in Q2 and are looking forward to building upon the strong base in the second half of the year. As Bob mentioned, sales internationally were pushed into the second half of the year, and it is our expectation that these will materialize in subsequent quarters during the balance of the year.

At this time, we will be conducting a question-and-answer session. And our first question comes from the line of Jeff Cohen with Ladenburg Thalmann. Please proceed with your question.

Hi. Thank you. This is actually Destiny on for Jeff. I guess can we start kind of following Chris' comments around those international sales. Do you have any additional color to what quarter that will be in? Is it more of a Q4 type of revenue recognition? Or do you think it will be split more evenly between Q3 and Q4?

Yes, this is Bob. Thanks for your question. Yes, we think it's going to probably be more into the Q4 quarter. We'll start to see some rebound in Q3, but we're hearing particularly from a couple of our Asian partners that credit issues and interest rates have caused them to ask us to push these out. We do expect to recover them, but I think it's going to be later in the year.

Okay, got it. And then could I just transition to vitiligo for a second? I know with the launch of OPZELURA, there's been a lot more awareness around vitiligo. So, I'm wondering, have you heard anything about it being used in conjunction with your systems? Or is there anything else you can discuss really around vitiligo.

Sure. Now, anecdotally, yes. Obviously, it's not been studied in combination, so we can't promote it that way. But anecdotally, we have heard from some KOLs who are using our laser alongside OPZELURA and getting very good results. So, we'd love to be able to promote that, but obviously, we're not allowed to do that. The noise level has really helped overall just for XTRAC and vitiligo. It's been approved for a number of years for that indication. And I think that patients have enjoyed the re-pigmentation that they get from using the excimer laser, which is one of the key selling points for it. So, I think as more patients start to see the new opportunities with the drugs that are out there like OPZELURA, and with some additional JAKs that are coming and that are going to be approved shortly, we'll see more patients coming in to get treated, and that will help us with the usage of excimer as well.

Okay, got it. And then I believe you said vitiligo accounted for about 15% of procedure revenues, if I heard that correctly. So, I'm wondering, do you think it will remain consistent at that level or based on some of the greater awareness do you think that could increase going forward?

Yes, that's our hope. We hope it will actually start to increase. Coverage by insurance companies has always been one of the challenges we face. We have excellent coverage for psoriasis, over 80% to 90% of all claims go through. For vitiligo, it's still 70%, which is really good. But even if you get one rejection, the doctor starts to question itself. We do have a reimbursement team that's part of the services we provide for XTRAC, which has been very effective in getting coverage for patients. We've utilized that quite a bit with our commercial team. And we do hope that vitiligo will become a bigger overall piece of the pie for XTRAC.

Okay. And then lastly for us, I know you called out some macro-level issues internationally. I'm just wondering if there's anything else that you can call out that impacted the topline and that we should be considering as we model the rest of the year?

No, I don't think there is. I mean you'll see year-over-year, the big drop was international revenue. We had the one-time China sale in 2022. When we take that out, we pretty much did grow the business, but we didn't grow as much as we wanted to, mainly because of what we've discussed regarding the international push out of orders.

Okay, perfect. That does it for us. Thank you for taking our questions.

Sure. Thank you.

And it looks like we have reached the end of the question-and-answer session. I'll now turn the call back over to CEO Bob Moccia for closing remarks.

Thank you. And thank you all again for all of your continued support. Before I conclude the call, I would like to mention that STRATA will be hosting a key opinion leader event on September 20th. The webcast will include XTRAC and TheraClearX experts who will provide their perspectives and experience with STRATA's devices inside the clinic. Please look out for more details as we get closer to the event. Thank you, and we look forward to keeping the community updated on our achievements.

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