STRATA Skin Sciences, Inc. Q2 FY2024 Earnings Call

Ladies and gentlemen, thank you for standing by. Good afternoon and welcome to the STRATA Skin Sciences Inc. Second Quarter 2024 Financial Results and Corporate Update Conference Call. At this time, all participants are in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Participants of this call are advised that the audio of this conference call is being broadcast live over the internet and is also being recorded for playback purposes. A webcast replay of the call will be available approximately one hour after the end of the call through February 14, 2025. I would now like to turn the call over to Joey Delahoussaye of Core IR; the company’s Investor Relations firm. Please go ahead, sir.

Thank you, Betsy. Good afternoon and thank you for participating in today's conference call. Earlier this afternoon, the company released its financial results for the quarter ended June 30, 2024. A copy of that press release can be found on the company's website at www.strataskinsciences.com under the Investors tab. Joining me on today's earnings call from STRATA Skin Sciences Management Team are Dr. Dolev Rafaeli, Chief Executive Officer; and Chris Lesovitz, Chief Financial Officer. During this call, management will be making forward-looking statements, including statements that address STRATA Skin Sciences expectations for future performance or operational results. Forward-looking statements involve risks and other factors that may cause actual results to differ materially from those statements. For more information about these risks, please refer to the risk factors described in STRATA Skin Sciences most recently filed annual report and Form 10-K and subsequent periodic reports filed with the SEC and STRATA Skin Sciences press release that accompanies this call, particularly the cautionary statements in it. The content of this call contains time sensitive information that is accurate only as of today, August 14, 2024. Except as required by law, STRATA Skin Sciences disclaims any obligation to publicly update or revise any information to reflect events or circumstances that occur after this call. It's now my pleasure to turn the call over to CEO, Dr. Dolev Rafaeli.

Thanks, Joey, and good afternoon to everyone on the call. During the second quarter, we made continued financial and strategic progress in turning our business around. Total revenue of $8.4 million grew 2% year-over-year. Total operating expenses declined approximately $860,000 or 14% year-over-year, and our loss from operations declined by $1.5 million to roughly $500,000 from approximately $2.0 million last year. On the last quarterly earnings call, I mentioned that we expected to ramp our DTC marketing spend into year-end to create additional patient awareness about XTRAC and its ability to treat psoriasis, eczema, and vitiligo, and that is still the plan. Our DTC results thus far are encouraging. As we grew the number of XTRAC patient appointments in the second quarter from our first quarter levels, additionally, our cost per lead and cost per appointment metrics thus far in 2024 are lower than that seen in 2021 when we were less focused on DTC like we are now. Given our DTC success thus far in the first half of 2024, we have expanded from our initial DTC focus in just four marketing areas in the metro northeast to 28 active marketing areas with a more national focus on lead generation. Our gross domestic recurring billing in the second quarter was down 6% year-over-year following the first quarter decline of 3% year-over-year. We continue to believe we are near true levels and with increased DTC efforts, we will turn positive on this metric. These last two quarters of low and mid-single digit declines contrast with year-over-year declines of 15%, 12%, and 14% in the second quarter 2023, third quarter 2023, and fourth quarter 2023, respectively. With respect to our strategy of redeploying underperforming XTRAC devices in our installed base, evidence that we are committed to this strategy lies in our installed base of XTRAC devices declining from 907 units at the end of the first quarter to 881 units at the end of June. Again, this is a concerted effort to redeploy our devices in clinics that can drive higher utilization and procedural volume or sell such devices. This effort helped the second quarter equipment revenue increase by 11% from $2.8 million in the second quarter of 2023 to $3.1 million in the second quarter of 2024. We plan to continue to optimize our XTRAC footprint here in the US in the coming quarters. If we are successful in the coming quarters, and it will take some time in driving utilization to levels seen before the COVID-19 pandemic, we could increase our annual revenue by approximately $8 million at incrementally higher margins without having to increase the install base. Our domestic installed base of TheraClearX devices continues to grow and we ended the second quarter at 117 devices in the US, compared to 92 at the end of the first quarter. During the second quarter, more patients were pre-approved for photopneumatic acne treatment with the TheraClearX device than in the first quarter. Recent published studies highlighted in press releases over the past few months point to a growing body of evidence with respect to the effectiveness and safety of our TheraClearX platform for mild to moderate acne. Our goal is for dermatologists and patients alike to have increased awareness of our photopneumatic treatment and see it as a viable alternative in the large acne treatment market, either as a monotherapy or as an adjunct therapy. As study results show, it can be effective in either scenario. We are focused on growing our TheraClearX presence with National Dermatology Clinic Groups that account for nearly 40% of the XTRAC installed base, along with high acne volume accounts across all regions. Since the end of the second quarter, we completed a financing that raised $2.1 million in gross proceeds. I believe in our strategy focus and approach and showed the confidence I have by participating in this offering. Similarly, insiders and long-standing existing institutional shareholders also participated demonstrating their conviction in our corporate direction. The proceeds will be used to continue our turnaround and growth efforts. Now, I'd like to turn the call over to Chris, who will review our financial results in more detail.

Thank you, Dolev. Our total revenue for the second quarter of 2024 was $8.4 million versus $8.3 million in the second quarter of 2023. Global net recurring revenue for the second quarter of 2024 was $5.3 million versus $5.5 million in the second quarter of 2023. Excluding deferred billings and other GAAP adjustments, XTRAC gross domestic recurring billings were $4.7 million in the second quarter of 2024, down 6% from $5.1 million in the second quarter of 2023. Equipment revenue was $3.1 million in the second quarter of 2024, versus $2.8 million in the second quarter of 2023. International sales of XTRAC and VTRAC devices comprised the majority of equipment revenue in both periods. Gross profit increased to $4.9 million for the three months ended June 30, 2024, from $4.3 million during the same period in 2023. As a percentage of revenues, the gross profit was 58.5% for the three months ended June 30, 2024, as compared to 52.3% for the same period in 2023. Total operating expenses in the second quarter of 2024 were $5.4 million versus $6.3 million in the second quarter of 2023; a 14% reduction. Our cash, cash equivalents, and restricted cash position of $6.8 million at June 30, 2024, along with our credit facility with mid-cap financial supports our growth initiatives and leaner cost structure. We continue to believe we can execute on our strategic goals for 2024 given our current financial position. As of June 30, 2024, the company had 3,506,025 common shares outstanding, reflective of the 1-for-10 reverse split in early June. Subsequent to the end of the second quarter, we raised $2.1 million in gross proceeds through the sale of 665,136 shares, with insider participation in this financing showing the conviction in STRATA's strategic plan, ability to execute, and path to profitability. That concludes my prepared remarks and I'd like to turn the call back over to Dolev for any remaining comments.

Thank you, Chris. As we shared on this call, our strategy remains consistent with prior communications. Our execution is on track and the conviction from management and shareholders closest to the story remains resolute, as reflected in the recent capital raise where these shareholders contributed approximately 50% of the gross capital raise. I would also like to provide a fond farewell to Chris, as he will be leaving STRATA Skin to pursue other interests. We thank him for his years of service as our Chief Financial Officer and wish him well in his future endeavors. We welcome John Gillings, who brings many years of private equity investment management and equity research experience and will be the key Financial Officer of the company moving forward. Now, I'd like to turn the call over to the operator so that we can begin the question-and-answer session.

The first question today comes from Jeffrey Cohen with Ladenburg Thalmann. Please go ahead.

Hi, thank you. This is Destiny on for Jeff. Thank you for taking our questions. I wanted to maybe start with some of the agreements and the approval in Japan; how there's a minimum number of units that have to be purchased per the agreement. I'm wondering if you can give a little more color on that? And then, just remind us how international equipment sales impact margins? And if we should see any changes or fluctuations as you launch more heavily in Japan?

First of all, good afternoon, Destiny. Nice to talk to you. Internationally, we are active in multiple markets. The four biggest markets are in Japan, South Korea, China, and the Middle East; each one has a unique agreement. But in general, they all have the option to purchase capital equipment outright or to place devices in the market. Specifically in Japan, we started working about 15 years ago, and our first entry into the Japanese market was with the VTRAC devices, which are excimer laser technology devices. We have about 450 devices or accounts in Japan which is the largest market share of the relevant technology of that time. We started converting these over to XTRACs about six years ago. In Japan, things move slower because the country is more conservative in terms of making changes. So the first wave was with key opinion leaders and there were multiple clinical studies published in Japanese and in English by key opinion leaders in Japan, supporting the clinical efficacy and the better results that you can get with excimer laser namely, XTRAC. We are now up to approximately 100 devices of XTRAC in Japan, many of which are replacements to the old VTRAC devices, some of which are with newer, younger doctors. The Japanese market is characterized by two things. One, they do more placements than capital equipment purchases because they want the consistency of knowing how much they pay and getting the technological support and the maintenance support of the device. And two, the leading doctors want to have the best, the fastest, and the most advanced technology. It took us about a year and a half to get the Japanese FDA clearance for the Momentum and the Momentum is the most advanced level of technology that XTRAC has. The Momentum itself got cleared by the US FDA in late 2021 and it took us about a year and a half to get through the Japanese FDA. We anticipate that the volumes of devices going into Japan are going to remain more or less stable, somewhere around 40 devices, most of which are going to be placements, some of which are going to be outright sales. These devices will gradually migrate from the older Velocity 7 XTRAC technology to the Momentum. I am not sure I fully answered the question. I think you also asked about margins. The second quarter of 2024 has a higher gross margin than 2023, but it’s important to look at that over time. If you look at 2019 and 2021, the two years straddling the COVID pandemic, at which time the revenue mix of the company was about one-third capital equipment sales and two-thirds return revenue, the overall gross margin of the company was very close to 70%. We ended Q2 2024 at 58%. To bridge that gap, the change in sales of capital equipment outside of the US is not the main factor, but rather the depreciation of the installed base and amortization of acquisitions affect the cost of goods. We are addressing both the amortization of acquisitions and the depreciation by removing non-productive devices from accounts that aren't productive and using the equipment for capital equipment sales; effectively selling a device that is partially depreciated. Looking at the financials, you’ll see two things: first, the gross margin, which I believe you pointed out; and second, if you look at the cash flow statement, you’ll see that our cash flow for investment purposes has dramatically decreased— in Q2 2023 we were at $3.5 million and in Q2 2024 we are at $1 million, which is $2.5 million less. The reason for this is that we are not increasing the installed base, rather we are reducing it.

Okay, got it. Got it. And that actually kind of leads into my next question. Can you talk a bit about how much more shrinkage, if you will, you're expecting on the installed base? And for the quarter, obviously, there were more removals from unproductive accounts than additions, based on math. But I'm curious to know how many placements you are— or new placements I should say, you had in the quarter? And then tied to that as well which I'm sure you'll touch on in your answer; are there any changes to the parameters that you're using to determine if an account is unproductive? Or has that stayed pretty consistent through the first half of the year?

So I'll start from the last question. The parameters are the same; we're removing an account if we don't see a future with that account. If that account is either a non-user or a dabbler, it doesn't make sense to leave the device out there with them and provide service, technical service, and sales team support. In terms of the numbers, I just want to provide a perspective: in 2018 and 2019, we did the same thing; we removed more than we placed for a period of time in order to stabilize what’s needed in the field. In a year later, in 2019, we placed 160 new accounts and removed approximately 70; so we grew by a net of 90. I anticipate the same thing to happen here. Currently, we are trying to remove as many as we can that are dabblers or non-users. We placed 7 devices in Q2. I anticipate that towards the end of this year, the removals will stop and there will be net placements. Is that going to happen in Q3 or Q4? I don't know yet, but it will definitely happen after we start seeing the average revenue per device expand. We need to see utilization going up in the accounts that we keep. The utilization should go up. When it does, we are going to start adding more accounts. Again, I'll point you back to historical numbers: in 2018, we had approximately $7,200 per device per quarter, and we ended 2019 with $7,500 per device per quarter. We ended the second quarter at approximately $5,369 per device, which is equivalent to what we had in 2023. I would like to see Q3 expansion of that number and then Q4 expansion of that number. Then we are going to start seeing net expansion in the number of devices.

I guess, lastly—I'm impressed that your marketing in 2024 is actually looking better than it did in 2021. I’m just wondering if there have been any changes to call out that are causing that? Are you in new channels? Are you using different messaging? Or is it just based purely on having more experience and more data to pull from your previous DTC marketing efforts?

It's a combination of everything you said, plus the fact that we haven't been advertising for approximately 2 years. When you go back into markets that were dormant for a period of time, it is very helpful in terms of cost per lead and cost per appointment. We also have, again, more availability in terms of number of accounts now. It's easier to place them into appointments, and yes, the experience helps.

This concludes our question-and-answer session. I would like to turn the conference back over for any closing remarks.

I want to thank all of you for participating in today's call and for your interest in STRATA Skin Sciences. We look forward to sharing our progress on our next quarterly conference call when we report our third quarter 2024 financial results likely in November. Thank you and have a good day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.