STRATA Skin Sciences, Inc. Q3 FY2023 Earnings Call

Greetings, and welcome to the STRATA Skin Sciences Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Rich Cockrell, of Investor Relations. Thank you, Rich. You may begin.

Good morning, everyone, and thank you for joining us today. Earlier today, STRATA Skin Sciences released its financial results for the third quarter ended September 30, 2023. A copy of that release is available on the company's website. Now before we begin, I'd like to remind everyone that comments made by management during this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include, but are not limited to, remarks about future expectations, plans and prospects for the company. We encourage you to review the company's filings with the SEC, which identifies specific risk factors that may cause actual results to differ materially from those contained in any forward-looking statements made today. The company does not undertake to update any forward-looking statements as a result of new information or future events or developments. With us on the call today are Dolev Rafaeli, Vice Chairman, President and Chief Executive Officer; and Chris Lesovitz, Chief Financial Officer. Following management's prepared remarks, we will open the call for questions. And with that, I'd now like to turn the call over to Dolev. Go ahead, Dolev.

Thank you, Rich, and good afternoon, everyone. We appreciate you joining us today for our third quarter 2023 earnings conference call. Chris will give an overview of the quarter, after which I will provide remarks on the strategic direction of the business. Before I turn it over to Chris, I first want to address the recent changes in leadership at STRATA. The company has undergone a recent reorganization of its Board of Directors to streamline its structure and enhance its alignment with the company's strategic objectives. As part of the reorganization, Bob Moccia has transitioned from his position as CEO and a member of the Board. I'm humbled and deeply honored to have accepted the Board's offer to serve as Vice Chairman, President and CEO. Accumulating over 30 years of experience in healthcare and medical devices, my vision moving forward is to concentrate on advancing and expanding our core products XTRAC, VTRAC and TheraClearX by reintroducing our direct-to-consumer initiative that was in place during my previous three tenures and allowed for clear growth of that business. Some of you may recall that I managed a similar business strategy at the previous public company, growing it by over 300% and subsequently selling that business to STRATA in 2015. I later served as STRATA's President and CEO from 2018 to 2021, following an investment made into the company by myself and Accelmed Growth Partners. That second period was marked by a turnaround of the business' core growth elements. This turnaround helped in shifting the business to become cash flow positive, growing the domestic and international installed base and the corresponding revenue streams, eliminating costs in non-core activities, enhancing the technology by launching new products and filing new patents, and making sure the platform was ready for adding additional businesses. This, in turn, allowed the company to successfully navigate the COVID-19 challenges and be prepared for the core business growth and acquisitions that followed in 2021. As you will see during my remarks later, I believe this will directly increase our recurring revenue and unit utilization, thereby increasing our gross profit margins. It is back to basics here at STRATA, and we look forward to your continued support. Now I will turn it over to Chris to review the financials.

Thank you, Dolev. I'll start with a quick overview of our third quarter 2023 results. For the three months ended, total revenues were $8.9 million, down 6% from $9.4 million in the prior year period. Year-to-date, our revenue was $24.7 million compared to $25.6 million last year. We currently have 81 TheraClear devices in place year-over-year, which I'll review in a later slide. As you can see, revenues have trended upwards from 2020 to 2022, with 2023 year-to-date revenues of $24.7 million. We ended the third quarter in a solid cash position with $8.5 million in cash, cash equivalents and restricted cash as of September 30, 2023. This cash position remains boosted by the refinancing of our senior term facility on June 30, 2023, offset by an increase in inventories and a decrease in accrued expenses and other current liabilities. We continue to carefully manage expenses while reinvesting in high ROI growth. On this slide, we show the revenue breakout of recurring versus equipment sales to physicians, as well as our domestic versus international revenue. Recurring revenues from our dermatology procedures were $5.3 million compared to $5.8 million last year and have remained relatively flat over the last two quarters. We estimate this Q3 revenue represents about 70,000 XTRAC treatments in the quarter. Equipment revenues were $3.6 million versus $3.6 million last year, remaining flat. Domestically, we had $5.8 million of revenue compared to $6.1 million last year over the same period. While we had a steady increase in our equipment sales revenue, which Dolev will delve into more later, we expect these to decrease and recurring to be the real revenue driver for the business going forward. As you can see here, non-GAAP adjusted EBITDA improved 21% year-over-year. This growth stems from improved cash cost-effectiveness with G&A and sales and marketing expenses decreasing 16.5% year-over-year to $5.3 million. As we prepare to shift back to a DTC model, we aim to reduce total revenue cost and increase margins. We believe we are well equipped for this change and are optimistic about the future of STRATA. Now I'll hand it back over to Dolev.

Thank you, Chris. We're very encouraged by the improving trends of our business through the third quarter. I'd like to begin by discussing our changes in strategic direction for the company and the reintroduction of the DTC marketing and business model. It has been shown before by myself and the team in STRATA that we can vastly increase the unit economics and margins in the business. Our ability to execute and grow all starts with our primary customer, the physician. Our clinical support infrastructure is there. By bringing back direct-to-consumer advertising, we can significantly enhance the unit economics. The goal will be to drive improved margins through increasing utilization as our products generate incremental recurring revenue, coupling the approach with the fully integrated suite of services that supports the partner clinics. We have a team standing by to support them. The sales – through the wholesale cycle we drive patients to the clinics. We support the clinics through a clinical support team. We support the clinics through reimbursement services. We support the patients through assisting them with their reimbursement payments and we support technically the devices. We're there to provide answers, whether it's for the partner clinic or the patients. With XTRAC, the solution moving forward is very straightforward. We're going to be driving recurring revenue with the direct-to-consumer DTC approach. This approach will create a win-win-win scenario: for the physician, generating more revenue and patients to the clinic; for the patient, driving a better clinical outcome; and, obviously, for the payers who will be paying less for the outcomes of the patients. The table on Slide 9 shows the historical contribution of the DTC efforts for this business, where the table illustrates that over the years when the company decided not to implement a direct-to-consumer approach through COVID-19 in 2020 and into 2021, and then again in 2022, these metrics have trended down. The leads shown in purple represent the number of patients demonstrating interest in the solution of the XTRAC excimer laser procedure offering benefits to them. The appointments in orange were facilitated by our call center, in which patients were placed into an appointment with the physician in their clinics. Lastly, in green, you can see the RDX charts, which are the patient charts created by the physicians for patients that they found to meet the needs for the XTRAC treatment. I believe that the deemphasis of patient marketing and support services during the period between 2021 and today has severely impacted product utilization because STRATA was no longer driving patients to the physician's offices and consequently offered less support services to the clinics, which in turn impacted our relationships with the physicians. It has already been demonstrated three times in the past: between 2018 and 2019 pre-pandemic, then between 2020 and 2021 post-pandemic, and once again, when I built this business in the previous company, that by focusing on the patient and consumer marketing, we can drive patient interest into the clinics, which also drives business in the clinic. As you can see on Slide 10, the domestic growth strategy focuses on expanding installations within the established physician network and driving the average revenue per device in these clinics. Historically, the revenue per device before the company paused direct-to-consumer patient advertising was $7,100 per device per quarter. Currently, with an installed base that is larger by 25%, driving that average revenue per device will further increase not only unit economics but also top-line revenue. This holds true for TheraClearX. We currently have 81 TheraClearX devices deployed in clinics that mostly pursue cash-paying patients. However, market data indicates that the more successful users — those who pursue the procedure as clinically relevant and insurance reimbursed versus out-of-pocket payments — achieve more success. I believe there is a substantial opportunity in deploying TheraClearX with our clinical dermatologist network, leveraging our established suite of services to help them use insurance reimbursement codes to minimize out-of-pocket costs for patients and provide better clinical outcomes, thereby increasing patient volumes and utilization. TheraClearX offers a compelling solution for acne treatment that is reimbursable when prescribed for active inflammatory lesions. Refocusing our messaging can open up a much larger patient population. As evidenced over the past few years, the international installed base of over 1,400 devices has proven to provide a solid revenue stream of capital equipment sales, service, and device placements. I'm confident that with the new markets initiated over the past three years, this trend will be further strengthened. With our strengthened balance sheet and improved profitability, rebuilding DTC is our top strategic priority and will provide improved profitable near-term growth. As we close our third quarter, I want to reiterate that our top priority is to reignite the customer experience and value for our clinical partners while improving the quality of life for their patients. Our new marketing initiatives, along with strategic management of our installed base, will support rebuilding recurring revenue growth and margin expansion over the long term. We remain focused on executing our strategic plan to drive profitable revenue growth and enhance shareholder value. Now I ask the operator to open the line for questions.

Thank you. We will now be conducting a question-and-answer session. Thank you. Our first question comes from the line of Jeffrey Cohen with Ladenburg Thalmann. Please proceed with your question.

Chris, how are you?

Good, Jeff. How are you?

Excellent. So a couple of questions from my end. So I guess, firstly, big picture from the breakout of recurring and equipment of that $5.3 million and $3.6 million, we're going to see the recurring bounce back and drive the business more so than the equipment line going forward? Is that safe to assume? And could you maybe talk about how that's happening over the coming weeks and months as far as the call center marketing, support services, et cetera?

I'll take that. Hi Jeff, how are you? Good afternoon. Happy to be back. As you've been with the company, you've been covering the company through the past few years, and you've seen that rebound happen twice. The first time was in 2018 when the company emerged from a period of two years without direct-to-consumer advertising and mostly focused on capital equipment sales. The second time was in the transition between COVID and non-COVID coming into 2021, when we reignited direct-to-consumer advertising. What you've seen is that turning direct-to-consumer advertising back on, while it takes time because we need to start advertising and generate leads. Once we get the leads in, we need to send them into appointments. These appointments need to materialize in the clinics. Thus, the demand on the clinics and the pull-through starts increasing, but that process takes time and can range anywhere between a quarter and three quarters depending on how quickly we can ramp up. Once that starts happening, we see the leads driving appointments, and those driving the procedure revenue. As we've shared in the slides during the earnings call, that process is manageable by the company, and this ramp-up period can be controlled. We can safely assume that this ramp-up will take effect between the second and third quarter of next year only because the first quarter is historically a slower quarter for recurring revenue due to insurance benefit resets. So, traditionally this has been a slower quarter for the past 20 years. Nevertheless, we can expect to see positive effects occurring in the second and into the third quarter of next year. This does not impact capital equipment sales, which happen primarily outside of the U.S. and are driven by our traditional markets — the Middle East, China, Japan, Korea, as well as new markets expected to emerge next year, which we have discussed over the last year: Mexico, India, and Israel. The combination of these established and new markets will continue to drive capital equipment sales. The addition of recurring revenue in 2024 is projected to positively influence operating margins and, thus, cash flow from operations become positive again. Now, the second portion of my comment focuses on TheraClearX. The TheraClearX device, as you know, is an acne treatment tool, but the company's approach to deploying it in early 2023 was to place these devices with physicians seeking patients willing to pay out of pocket. This was despite the fact that a specific reimbursement code covers that procedure, which pays an average of $118 from Medicare and up to approximately $300 from private payers per procedure. We believe that deploying these devices with partners who utilize the reimbursement code will facilitate the expansion of the procedure for both the company and the physicians and patients. By leveraging our entire suite of services, starting from driving patients to the clinics and supporting them through the reimbursement process, we can drive revenue from our perspective; improve device deployment usage by physicians; and increase the number of patients treated. The procedure itself is clinically proven and has worked efficiently for several years prior to the company's acquisition.

Got it. And one more, if I may. Could you maybe compare and contrast the recurring model currently with the recurring model for XTRAC, do you perceive coming back in the U.S. as far as pay per energy, pay per session with or without a monthly, weekly or minimum?

Okay. So – and you're asking to compare and contrast XTRAC to TheraClearX?

Yes.

So XTRAC today utilizes three CPT codes: 969, 20, 21, and 22, which are used for treatment of skin areas up to 250 square centimeters, between 250 and 500, and above 500. These three reimbursement codes pay the physician an average of about $180 per treatment. There is a scale of payment among three codes, but the average is about $180. Our average take from that is about $80. This information is included in our 10-Q, as we take about 40% for the provision of a suite of services to the physician. This suite of services includes everything from driving patients to the clinic, handling the pre-procedure preparations for authorization, providing clinical training to the clinic, training their reimbursement team at the back end, and support for the patients by providing co-pay support. This ensures that patients encounter minimal out-of-pocket costs for their procedures. For each patient undergoing treatment for psoriasis, they typically go through eight to 20 procedures, resulting in a revenue range of 8x to 20x payments to the physician, translating into significant revenue for us as well. In 2019, pre-pandemic, the company had approximately 23,000 new patient charts in the partner network. As we speak, we're year-to-date at around 10,000. The difference between the two numbers arises from two sources: one, the reduction in the number of patients initiated through the DTC process, and two, the reduction in individual clinic economics utilization, which has been driven by the company emphasizing clinical and direct-to-provider promotion over patient marketing. We have historically seen that for every patient we've set up with an appointment in a clinic, we experienced a multiplier effect of 2.1 — meaning we sent one patient to the clinic and witnessed 2.1 new charts. This occurs due to patients discussing their experiences among themselves, seeing advertisements, and either directly contacting the clinic or being more motivated to seek treatment. Regarding the differences in the procedures, XTRAC employs three codes with varying reimbursements, averaging around $180. Conversely, TheraClearX's Medicare reimbursement rate for its treating acne lesions is about $118, with partners billing not only for the procedure itself but also for an office visit that might range from $50 to $70. This positions the economic model more favorably for patients seeking treatment. Overall, the units deployed with footholds built around reimbursable procedures will likely yield better outcomes in terms of utilization and profitability for both our partners and the patients they serve. Thank you.

Got it, Dolev, perfect. Thank you very much for taking the questions. Appreciate it.

Absolutely. Thank you.

Thank you. We will now conclude the call. I see no further questions at this time. I'd now like to turn the floor back over to management for any closing remarks.

Thank you, operator, and everyone, for your time and investment in STRATA Skin Sciences. We look forward to updating you on our progress in the next quarterly call.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.