STRATA Skin Sciences, Inc. Q4 FY2023 Earnings Call

Greetings and welcome to the STRATA Skin Sciences Fourth Quarter 2023 Earnings Conference Call and Webcast. All participants are currently in a listen-only mode. After the formal presentation, there will be a brief question-and-answer session. This conference is being recorded. It is now my pleasure to introduce your host, Rich Cockrell from STRATA Investor Relations. Thank you, Rich. You may begin.

Thank you, operator. Good morning, everyone, and thank you for joining us for the STRATA Skin Sciences Fourth Quarter and Full Year 2023 Earnings Conference Call. Earlier today, we released our financial results for the quarter ended December 31, 2023. You can find a copy of the press release on the company's website. Before we begin, I'd like to remind everyone that this call may include forward-looking statements. These statements are not guarantees of future performance and involve risks and uncertainties that could cause actual results to differ materially. We encourage you to review the SEC filings, which highlight these risks and uncertainties. The company does not commit to updating any forward-looking statements as new information becomes available. Now, today on the call, we have Dr. Dolev Rafaeli, our CEO; and Christopher Lesovitz, our CFO. Each will provide an overview of the company's Q4 performance and discuss the strategic outlook. After their remarks, we will open the floor for questions. And with that, I'd like to turn the call over to Dolev. Go ahead, sir.

Thank you, Rich, and good afternoon, everyone. Reflecting on 2023, it's evident that it was a pivotal year for STRATA, characterized by strategic leadership adjustments, product innovation, and substantial market expansion. The strategic change in leadership at the end of the year, which saw my return to STRATA in October, marks a significant commitment to our proven strategic vision that drives growth and operational excellence. A robust reinvigoration of the direct-to-consumer, DTC recurring revenue model has been a cornerstone of our strategy, proving to be a vital element of our success, especially evidenced during my previous tenure as CEO for our core XTRAC business between 2011 and 2015 and from 2018 to 2021. It was these periods that marked a transformation in STRATA, steering the business toward positive cash flow from operations, expanding our footprint both domestically and internationally, streamlining operations, and sparking innovation through the launch of new products and services. Central to our plan has been the focus on our flagship products, the XTRAC, VTRAC, and TheraClearX. A key highlight of the year was the successful introduction of our TheraClearX Acne Therapy System in January of 2023. By year's end, we placed 92 devices under the recurring procedure model. During 2023, STRATA also significantly increased its domestic and international recurring revenue installed base to 964 XTRAC devices as of December 31, 2023. This expansion underlines our capability to innovate and efficiently respond to market demand. Just last month, we took an important step to secure our future growth through the amendment of our credit facility with MidCap Financial Trust. This adjustment in our financial strategy ensures alignment with the company's current and future business projections in supporting operational and capital needs, which is crucial for our continued growth and further expansion of assets. More recently, we have initiated a campaign to extend insurance coverage to essential dermatological conditions, aligning with our mission to enhance patient access to vital treatments through improved insurance practices and broad inclusion of CPT codes. Initially, our efforts are concentrated on securing payer coverage for XTRAC treatments for multiple indications, including vitiligo, CTCL, alopecia areata, and atopic dermatitis. This initiative is a testament to our commitment not only to increase the accessibility of our treatments but also to advocate for the well-being and quality of life of those affected by these conditions. I note that not all of these conditions are currently approved indications, but we are in the process of moving forward to see if such use may be approved in the future. Leveraging our best database of over 270,000 pest XTRAC patients, we are actively collaborating with prominent patient advocacy groups in the Blythe dermatology key opinion leader community. STRATA also commenced targeted advocacy with legislators to enhance access to the XTRAC fleet. As we continue to ramp up the DTC revenue model in 2024, we remain laser-focused on executing our key strategic priorities. First and foremost, we are working diligently to drive utilization and rationalizing placements of both our XTRAC and TheraClearX devices. This involves leveraging our strengthening balance sheet to rebuild and expand the DTC capabilities and stimulate patient demand. By bringing patients directly to physicians' offices, we can increase procedural volumes and device utilization, thereby generating incremental high-margin recurring revenue.

Thank you, Dolev. Let's dive into our financials for the fourth quarter and full year 2023. Our total revenue for the quarter was $8.7 million and $33.4 million for the full year. This decrease from the prior year is reflective of the decline in recurring revenue for the company, which we are now shifting back to in 2024. A crucial element of our approach involves risks centering our efforts on our foundational business, collaborating with doctors' offices and driving customers to them. This is a return to our roots, a strategic maneuver to enhance the utilization rates within our recurring revenue model, and we are confident that these efforts will start to show a tangible impact in 2024. Breaking down the total revenues, our global recurring revenues for the full year 2023 were $21.5 million, as compared to global recurring revenues of $23 million for the full year 2022. Equipment revenues were $11.8 million for the full year 2023, as compared to $13.1 million for the full year 2022. Looking forward to 2024, we are building upon the launch of the TheraClearX system, in which our emphasis on recurring revenue has started to shape our revenue mix. This strategic pivot is designed to enhance long-term sustainability and profitability with an emphasis on TheraClearX being reimbursed from CPT and continuing our focus on the recurring model for XTRAC. Turning our attention to our operational efficiencies, particularly within our selling and marketing and general and administrative areas. I'm pleased to share that we've taken deliberate steps to refine our cost structure. In the latter half of 2023, we implemented reductions in sales and marketing expenditures, which are expected to come to full fruition in 2024. This is part of our broader strategy to return to a leaner expense structure as previously seen in 2019. In addition to the cost savings above, we intend to eliminate non-productive accounts, not only by reducing the costs associated with servicing but also repurposing those materials. On the G&A front, we have experienced a slight increase in expenses to $10.5 million, driven largely by one-time legal and accounting costs and transitions within our executive team. Our strategic plan for 2024 will optimize the utilization of our devices, maximize operational efficiency, and ultimately, improve our bottom line. These adjustments reflect our proactive stance in ensuring STRATA operates at a sustainable and competitive cost base, allowing us to invest more deeply in growth and innovation. The full financial impact of these changes is anticipated by the end of 2024. Finally, despite a net loss for the quarter, which included the $2.3 million goodwill impairment recognition mentioned in our earnings release, we are confident in our strategic direction. Our balance sheet remains strong with a solid cash position to support our growth initiatives. Cash and cash equivalents and restricted cash at December 31st, 2023 were $8.1 million compared to $6.8 million at year-end 2022. With this stronger position, combined with the anticipated revenues from the sale or use of our products, operating expense management, and our amended credit facility with MidCap Financial, we believe we are well-positioned to continue growing into 2024. I'll now hand the call back over to Dolev to discuss our strategic outlook and operational priorities.

Thank you, Chris. As we conclude the fourth quarter, we remain focused on aligning our operations more closely with the evolving market demand and our long-term vision for STRATA. This quarter has been foundational in setting the stage for the reinvigoration of our DTC marketing and business model, an approach we believe is critical for sustainable growth and enhanced profitability. Our journey towards this strategic realignment highlights our commitment to leveraging the inherent strengths of our business, particularly our close relationship with physicians and our robust clinical support infrastructure. These elements are pivotal not only in driving utilization of our devices but also in creating valuable opportunities for both STRATA and the healthcare providers we partner with. Our goal is to significantly improve our margins through heightened device utilization, generating substantial recurring revenue in the process. The core DNA of the DTC approach is providing unparalleled support at every touchpoint; the patient and provider insurance benefits support, the patient co-pay support, and provider clinical support and patient advocacy. It's important to acknowledge that shifts of this magnitude require time to fully manifest in our financials. The previous focus of our efforts, the direct-to-provider marketing, has laid a solid foundation, yet the move towards a more DTC-centric approach marks a return to a proven strategy that has historically driven our growth and success. As we advance, our primary focus will remain on maximizing the economic efficiency of each device placed. In the coming quarters, we anticipate the impact of these strategic shifts to become increasingly evident in our performance metrics. The XTRAC partnership represents a cornerstone of our strategy to enhance recurring revenue streams. Usage is driven by both STRATA, facilitating a patient appointment utilizing DTC, as well as by the provider prescribing their own patients. The DTC approach fosters a halo effect in which patients are driven both directly as well as indirectly to the procedure. As a reminder, the XTRAC procedure benefits all; the patients receive a side effect-free clinically effective procedure; the cost for the insurance payer is the lowest of all alternatives; and the partner clinics generate incremental revenue. This slide encapsulates the past ebb and flow of patient engagement within our practices, punctuated by the influence of our DTC marketing efforts. The initial needs marked in blue showcase patient interest in our XTRAC Excimer Laser treatment. Dark gray highlights the scheduled appointments, a direct result of our targeted marketing campaigns. The green bars represent our RDX charts, reflecting the translation of leads and appointments into actual new patient charts ready for treatment. As we started ramping up our DTC efforts in 2024, we have focused on four geographic areas: New York City, Florida, Texas, and Illinois. We've selected these areas to validate our historical cost per lead, which is around $30 to $40, and our historical cost per in-clinic patient appointment, which is approximately $300. Each of the patients, whether driven by DTC or provider-generated, generates a patient chart in STRATA's proprietary RDX system, which allows the tracking of insurance benefits and supports the providers and patients in fully realizing this. As a reminder, during 2019 and 2021, we were able to drive 5,000 and 6,000 patient appointments respectively, contributing about 25% of the overall new patients. As the value of the full course of treatment of an individual patient to STRATA and to the partner clinics is more than $1,200 and $2,900 respectively, successful capture of these patients in the clinic and into procedures is critical and our key monitors as these newly generated appointments are underway. For 2023, with DTC underutilized, STRATA had a total of 185 leads, 23 appointments, and 11,787 RDX charts. These numbers represent our baseline as we reinstate our DTC. Our DTC campaign started ramping up in the second half of January 2024 and will continue expanding as we increase the number of targeted periods. The unit economics for each individual XTRAC device is best measured by an average revenue per device. Prior to the pandemic in 2018 and 2019, when DTC was the core focus, we saw significant growth in the number of XTRAC devices deployed as well as an increase in the average revenue per device. In 2019, each of the 820 partner clinics generated, on average, $7,200 per quarter. Post-pandemic, while the business has mostly returned, the company focused its marketing resources on direct-to-provider initiatives, increasing sales and marketing expenses from $12 million to over $15 million, while reducing the DTC initiative and its costs. The impressive 13% growth in domestic installed base from 820 in 2019 to 923 in 2023 was coupled with a lack of DTC-driven appointments and its associated halo effect, resulting in a reduction of 28% in the average revenue per device per quarter to approximately $5,200 per device per quarter for 2023. The expansion in the installed base lays a robust foundation to revitalize our DTC initiatives aimed at boosting procedure volumes, enhancing device utilization and driving up the average revenue per device per quarter all while being able to rationalize the size of the installed base. The TheraClearX system represents a parallel success story, with 92 devices already active in clinics focusing on cash-paying patients; yet the substantial opportunity lies in integrating the TheraClearX into our clinical dermatology network where the focus shifts to insurance reimbursed treatment. This pivot not only reduces the financial burden on the patient but also promises improved clinical outcomes, thereby potentially increasing patient volume and device utilization. Late in the fourth quarter of 2023, we have started transitioning existing accounts and adding others to the insurance reimbursement cuts. To date, our insurance benefits team has processed several hundred individual patient charts, resulting in 86% payer pre-authorizing a course of our treatments for patients and providers all across the country. The CPT treatment code average Medicare payment rate is approximately $120 with private payers sharing. STRATA already owns approximately 200 TheraClearX devices and each additional patient represents approximately $500 to $1,200 of potential incremental revenue for STRATA and providers respectively. Internationally, as we expand into new markets, our installed base of over 1,400 XTRAC and VTRAC devices continues to provide a robust and reliable revenue stream. In closing, I want to emphasize the strides we've made in 2023 as we recommit to our DTC model and capitalize on our expanded installed base. The strategic efforts are integral to our mission of enhancing the patient and physician experience and are the driving force behind our anticipated growth and margin improvement. Looking ahead, our commitment to operational excellence and strategic marketing will elevate STRATA's profitability and shareholder value in the near term. We thank you for your support and look forward to navigating the future with confidence and clarity. Let's now open the floor for questions.

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

Hi, Dolev and Chris. How are you?

Hi Jeff.

Hi Jeff.

So, firstly, could you talk about how you're planning on defining non-productive accounts and perhaps give us a sense of what percent of accounts out there are currently either falling beneath that non-productive line?

Absolutely. I'll start with that, and Chris can then add more metrics if you wish. So this initiative is not new. This was already discussed by a previous management going into the third and fourth quarter of last year. However, as you've been following this business for several years now, you know that probably the most important metric in how this business becomes profitable is how much revenue we generate per device because almost every other expense is fixed. So for reference, in 2018, our average revenue per device was in the range of $5,000 per device per quarter, and we were able to push that up with all of our initiatives in DTC to almost $7,500 per device by the end of 2019, so 2019 represented about $30,000 per device. In 2019, we had 820 devices, the same installed base of net, the company at the other end was almost the same installed base met the company at the other end of the pandemic coming into 2021 as the company started extending the installed base. Coming out of the pandemic in 2021, the business or the year was a story of two halves. In the beginning, offices were coming out of the pandemic and started starting their businesses back up. But then by the end of 2021, we were back at the same run rate. So if you look at 2021 as a whole, the average revenue per device for 890 devices by the end of 2021 was approximately $25,000 per device. Now fast forward to 2023, we have over 900 devices in the market, 923; however, the average is about $21,000 for the whole year. And that gives us an opportunity. The opportunity is either reviving existing devices or removing them and using them instead of building new devices when we start expanding again. The threshold metric would be obviously how much revenue this device is generating or how much this device can generate. But as a whole, if you look at this as an install base, every one of these devices that does not generate in excess of, on average, in excess of $15,000 or $16,000 is not contributing to the bottom line. And that's the target. So the target is going to be to optimize the install base on the one hand and increase utilization on the existing install base on the other hand. I would not anticipate very strong moves in the install base either way. If you look back into the company's disclosures in the past, we have every year removed in the range of 100 to 120 devices. And in the years that the company was expanding, we've placed more than 100 or 120. And in the years that the company was shrinking, we've placed less than 100 or 120. So it's not going to be a complete stop of expansion, but it's going to be somewhat of a shrinkage of non-performing devices just in order to replace them with accounts that can be more productive as we reintroduce DTC. Chris, do you want to add something?

No, I think you nailed it pretty much there. As Dolev mentioned, the main goal here is to get these non-productive accounts out and use that excess inventory for us internally at the warehouse. And then, we redeploy them to actual producing dermatology offices. Exactly. Yeah, Dolev pretty much summed it up pretty well.

So Jeff, it's more a movement within the balance sheet. So instead of having to recreate additional devices, new devices and move them into PD&E, we already have them. We're moving them away from non-productive accounts either into other productive accounts or into the warehouse so that these can be utilized into productive accounts.

Got it. Okay. Could you talk about alopecia a little bit as far as what's the recommended number of treatments over what duration and are there any current data points or studies ongoing?

That’s a great question. Alopecia and some other conditions have substantial clinical data available. After this call, I will follow up with you and send you the clinical data showing how the eczema laser is applied to treat these issues. Specifically, I am referring to alopecia areata, which is characterized by hair loss patches caused by autoimmune conditions. I am also referring to CTCL, another disease caused by autoimmune factors. Clinicians have used the extract to treat these conditions. Although these treatments are considered off-label because the FDA labeling of the device is designated for psoriasis, vitiligo, atopic dermatitis, and leukoderma, they have been treated for many years and are accepted for payment by commercial payers. Our aim is to bridge the gap. We are unable to actively promote anything that is not FDA-labeled, which is a significant point for us. While we are providing clinical data, we cannot promote the device's use. Additionally, it is challenging for us to negotiate with payers regarding off-label indications. Nonetheless, we have a strong track record of these conditions being approved and reimbursed by both Medicare and private payers.

Okay. Got it. On next question could you talk a little bit about some of the clusters out there OUS as far as direct and growth in say LatAm, Europe as well as Asia?

Our largest user bases have traditionally been in Asia, specifically in China, Japan, and South Korea, as well as in the Middle East. These regions have distinct characteristics; for example, in Japan and South Korea, this procedure is covered by healthcare insurance providers. We are recognized as a leading brand in these markets and hold a significant market share among providers. In contrast, markets like China are more focused on aesthetic demands, relying mostly on cash payments, while in the Middle East, particularly in Saudi Arabia and surrounding countries, it is primarily state healthcare insurance driven. We have over 1,500 devices in these areas, which we've had for more than 14 years. We began our operations in these markets 14 years ago, and our sales are divided into three categories. We sell capital equipment, which includes new devices used for replacing existing ones and opening new accounts. We also sell parts and consumables, contributing about one-third of our revenue as the excimer laser requires gas and other components for maintenance. In both these international markets and domestically, the lifespan of the XTRAC device exceeds 10 years, with some devices in operation for 14 or 15 years, though they still need maintenance parts and gas. The third sales component, introduced in 2021, involves placing devices based on recurring revenue, which began at the end of 2020 and grew to approximately $1.5 million in annual revenue as of last year. This trend holds true across all Asian markets. However, China has opted out of this arrangement due to constraints on managing devices that they do not own. We still maintain device placements in Korea and Japan, enabling users to engage in therapy without the burden of upfront costs for capital equipment.

Okay. Got it. And then lastly for us, if I may, ask you a little bit on 2024. So firstly, I'm wondering how many therapy or devices you aspire to have in at the end of the year? And then secondly, no guidance on top or bottom line. You did mention growth. Are you referring to 5% growth or 20% growth or any idea there that you can now provide?

Let me address the second question. Our main focus in 2024 is to return the company to a growth phase, particularly in the recurring revenue aspect, while also maintaining other areas of the business. The recurring revenue comprises three main parts. First, as mentioned, is our presence in non-US markets, which is an established and expanding sector for us. We have been active in these markets for many years, and we hold a leading position. This segment operates efficiently for us, our distributors, and our customers. In 2023, our revenue from these markets was approximately $1.5 million. The second aspect is the TheraClearX. We have acquired around 200 devices, and our main objective has been to deploy these devices effectively, shifting our focus during Q4 2023 from cash-paying patients to clinics that primarily rely on insurance reimbursement. As I discussed during the third quarter earnings call in November, our aim is to determine whether we can encourage clinics to adopt our procedures, successfully navigate insurance approvals for patients, and ensure that clinics receive payments for the services rendered. Currently, we have hundreds of patients whose insurance claims have been submitted, with high approval rates and minimal denials. We are now monitoring how providers are treating patients, filing for reimbursements, and receiving payments. The average Medicare reimbursement rate we see is approximately $120, with private payers typically paying a similar amount, though rates can vary by region. We have a substantial number of patients currently undergoing treatment and payment processes. By the end of the first quarter, we expect to provide guidance on the anticipated growth of recurring revenue per device and the number of devices we expect to have by year-end. The first quarter outlook is promising, reflecting increasing acceptance of reimbursement processes. This trend is partly due to another device on the market that has not met expectations, leading potential cash-pay patients to realize they can get covered through insurance, thereby reducing their out-of-pocket costs. Our experience across various regions with a large number of payers gives us confidence that by the end of Q1, we will be able to set quality targets related to revenue. As for our device count, we ended 2023 with slightly over 5,000 devices. If we can reach the levels we saw at the end of 2021, between $7,000 and $7,200 per device by the end of 2024, it would represent a significant improvement in our recurring revenue. To reiterate, our recurring revenue has been declining for several quarters, so achieving this target would mark a crucial turning point.

Perfect. Okay, that does it for us. Thanks for taking the questions.

Thank you. Our next question comes from the line of Jonathan Lawrence.

Hey Dolev and Chris, how are you doing? My question was answered. Can you hear me?

Yes.

Okay, great. I was just curious about the direct-to-consumer business. How is that going as far as the traction in both extract and also on TheraClearX? What you saw previously when you were doing this and kind of if anything's changed or is the spend dollars and getting the leads?

Thank you for your question. I want to highlight some points from my earlier remarks. When STRATA discontinued direct-to-consumer marketing at the start of 2022, their spending for that effort in 2021 was around $2 million, which resulted in approximately 6,000 enforcements, equating to about 25% of new patients entering the clinic. Essentially, the company supported about 25% of patient growth during that time. In 2022, we ceased DTC efforts and redirected resources towards direct-to-provider marketing and promoting new therapeutics. As we consider restarting direct-to-consumer efforts, we aim to generate more leads and sales. The first essential step is to reassess our current costs, especially since two years have passed, during which media costs and online advertising regulations have evolved, along with the promotion strategies used by other pharmaceutical companies. We began DTC marketing again in the latter half of January 2024, starting with four territories, to evaluate our standing in terms of results. We were pleased to find that our cost per lead was around $30 and our cost per appointment was approximately $300, remaining stable. We've since expanded our efforts to more categories and I'll provide further details at the end of the first quarter. We're observing an increase in the number of leads and appointments being scheduled in the clinic. We expect to see the results of our DTC campaign within two to three months, as there is a process from the initial appointment to the procedure prescription and the eventual creation of treatment codes. By the end of 2024, I hope to report that in Q4, we spent as much as we did in Q4 of 2021 and generated the same number of appointments as we had at that time. I provided a baseline in my remarks so that in future conference calls we can track the success of this initiative. I am confident that with our current cost levels for leads and appointments, we can significantly expand our efforts through the end of Q1 and into Q2.

Okay. Thank you very much.

Thank you, John.

Thank you. There are no further questions at this time. I would like to turn the floor back over to Dr. Rafaeli for closing comments.

I would like to thank everyone for showing up for our earnings call. We will be back at the end of the first quarter to provide further updates. Thank you very much.

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