STRATA Skin Sciences, Inc. Q2 FY2025 Earnings Call

Ladies and gentlemen, thank you for standing by. Good afternoon, and welcome to the STRATA Skin Sciences Inc. Second Quarter 2025 Financial Results and Corporate Update Conference Call. 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 1 hour after the end of the call through February 13, 2026. I would like to turn the call over to Jules Abraham of Core IR, the company's Investor Relations firm. Please go ahead, sir.

Thank you, Steve. Good afternoon, and thank you all for participating in today's conference call. Earlier this afternoon, the company released its financial results for the quarter ended June 30, 2025. 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 John Gillings, Vice President of Finance. 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 on 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 within. The content of this call contains time-sensitive information that is accurate only as of today, August 13, 2025. And 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. Dolev?

Thank you, Jules, and good afternoon to everyone on the call. The second quarter of 2025 saw pivotal developments positioning our business for future growth and lasting shareholder value creation. We're especially heartened by the American Medical Association's historic expansion of CPT codes for STRATA's XTRAC 308-nanometer excimer laser in May of this year. The revision of these codes expands reimbursement eligibility for excimer laser treatments to include multiple inflammatory and autoimmune skin conditions beyond their original psoriasis indication, enabling coverage for conditions such as vitiligo, atopic dermatitis, mycosis fungoides, lichen planus, alopecia areata, and cutaneous T-cell lymphoma, among approximately 30 indications. The implications of these changes could not be more dramatic for us and our providers. While the revisions are set to go into effect on January 1, 2027, we have commenced the process to accelerate access to these revised codes through temporary G codes. Assuming successful implementation of the temporary G codes into the 2026 reimbursement period, we have the potential to pull forward revenue opportunities by 1 year as we expand into new indications. These developments open our addressable market to 30 million patients, expanding our total available market threefold. In addition, we have submitted economic data to support a potential increase in the reimbursement rates for each of our codes. Should rate increases be approved, we could be headed into a period where both the number of patients eligible for treatment and the revenue per patient procedure are increasing simultaneously. We've also continued to strengthen our practice partners through our Elevate 360 consulting model and our innovative direct-to-consumer campaigns. Elevate 360 focuses on improving revenue for both clinics and STRATA by supporting the implementation of best practices to drive optimal use of the XTRAC lasers. By providing deeper analytics, we help physicians understand the financial opportunities associated with the patients they already see in their clinics and those they have prescribed but did not follow through with XTRAC scheduling. Having these best practices in place lays the groundwork for effectively managing and benefiting from the dramatic increase in patients' eligibility for reimbursement under the expanded CPT codes I mentioned previously. Optimizing XTRAC devices' placement in physicians' practices facilitates more procedures and opportunities that utilize the resources we provide. Further, simultaneously expanding our direct-to-consumer marketing campaign increases XTRAC device utilization and recurring revenue per device across our domestic installed base. We ended the second quarter with 844 units placed with partners' clinics in the U.S., down from 846 at the end of the first quarter. While we continue to seek optimization of the installed base, the activity behind the numbers paints a more complete picture. During the second quarter, we removed 21 devices from suboptimal partners and placed 19 devices with new accounts that are interested in growing with us. Importantly, these 19 placements represent the highest number of placements in the United States in the last 6 quarters, which we view as a positive leading indicator for future revenue growth. Given these initiatives and growth-driving code developments, we continue to believe that the opportunity to increase utilization for our XTRAC devices is significant, and we continue to see positive results from the refocus of our direct-to-consumer strategy. We generated roughly 1,100 direct-to-consumer-driven patient appointments in the second quarter with a 61% show rate. In addition, our proprietary RDX system handled benefits for approximately 5,100 patients in the second quarter. Of these patients, roughly 1,000 were acne patients with our TheraClearX partner clinics and about 2,500 were psoriasis patients. The balance of patients were other indications treated by XTRAC that would have generally involved extra effort and pre-approvals, illustrating the strong demand for excimer laser therapy among these patients who will soon be more easily covered under the updated CPT codes. Turning briefly to TheraClearX, we reached an installed base of 161 TheraClearX devices in the U.S. at the end of the second quarter, up from 117 devices at the end of Q2 2024. TheraClearX continues to be a small but growing portion of our revenue. On the first quarter call, in May, we highlighted the potential impact of the tariffs on our international business. While we were able to complete some sales in China during the 90-day tariff pause, the uncertainty about the future they have caused has created a temporary drag on our international business. We generated international revenue of $2.6 million in the second quarter, which declined 15% compared to the prior year period. International equipment sales were significantly affected by lingering trade disruptions in China and distributor challenges in Korea. We continue to see strong underlying demand in these markets and expect these geographies to return to growth once things stabilize. While we will continue navigating the seasonality of our business, specifically a slower first and second quarter, as we turn to the second half of 2025, we continue to anticipate normal seasonality, gaining positive momentum heading into the year-end with the caveat that tariffs still represent a significant unknown. In 2026, we look forward to the potential positive impact of our ongoing discussions with the Centers of Medicare and Medicaid Services to obtain temporary codes that would accelerate access to our recently expanded reimbursement for XTRAC. Notably, we have secured strong support from members of the legislature, patient advocacy groups, and leading academic key opinion leaders. We are further encouraged by the growing body of peer-reviewed publicly available clinical study supporting excimer laser therapy, which points to the new and enhanced application adding to the hundreds of other studies published over the years. Last Thursday, we published a press release with reimbursement and clinical updates that we would point out to you if you have not already read it. In addition, this press release offered a brief update on our litigation against LaserOptek regarding its use of false and misleading statements in its marketing. We believe we are strongly positioned in this suit and have the potential to be awarded significant damages. We are pleased that the court agreed with our position that LaserOptek Korea, the parent of LaserOptek America, should be added as a defendant. In addition, C. Dalton, LLC, the entity that represented LaserOptek Korea's interest in the United States, has been added as a defendant. These are important developments and help ensure that should damages be awarded, these responsible will not be able to shield themselves behind other legal entities. Before turning the call over to John for our financial discussion, let me take a moment to discuss the three recent publications that support excimer laser in vitiligo and atopic dermatitis, expanding the potential use of XTRAC. In a peer-reviewed study featured in the International Journal of Dermatology, a multicenter randomized controlled trial evaluated the efficacy and safety of 308-nanometer excimer laser therapy in combination with oral JAK inhibitors. A total of 240 adult patients were enrolled and monitored over a 52-week period. The study demonstrated superior repigmentation in combination therapy with patients receiving 308-nanometer excimer laser combined with the JAK inhibitor, reporting a 100% overall response rate and 96% pigment stability, indicating a durable response. Further, the study showed that treatment was well tolerated across all groups with no serious adverse events reported over the trial. It is noteworthy to point out that there is no other technology that is enabling such results and that the addition of vitiligo as a covered indication will open the door for somewhere between 3 million and 4 million existing patients seeking not only temporary remission gained from pharmaceuticals but full repigmentation. A second study published in Human Vaccines & Immunotherapeutics highlights the conjunctive use of excimer laser with JAK inhibitor on a patient that developed segmental vitiligo 1 week after her third HPV vaccine, achieving approximately 70% repigmentation. Further, a third study published in Dermatology Therapy evaluated the safety and efficacy of 308-nanometer excimer laser therapy in conjunction with JAK inhibitors for the treatment of refractory vitiligo in patients complicated by moderate-to-severe atopic dermatitis. The trial involved 19 patients who had not responded to conventional therapy. Patients showed a mean 55% improvement compared to a 39% improvement with the JAK inhibitor alone, suggesting a strong synergistic mechanism. The domestic market has approximately 18 million atopic dermatitis patients. Importantly, STRATA has been preparing for the potential expansion into combined therapy and owns recently granted patents for the methods of combining systemic biologic and JAK inhibitor medication with excimer laser dosimetry-controlled treatments. This positions us well for the potential market expansion associated with combination treatment for more challenging patients. With that, I'd like to turn the call over to John, who will review our financial results in more detail.

Thank you, Dolev. Our total revenue for the second quarter of 2025 was $7.7 million, down 9% compared to Q2 of 2024. This was driven primarily by the challenging international environment Dolev described. Global recurring revenue for the second quarter of 2025 was $5.1 million, down 4% versus the prior year period. Turning to the U.S. Excluding deferred billings and other GAAP adjustments, XTRAC gross domestic recurring billings were $4.7 million in the second quarter of 2025, a decline of 2% versus the prior year period. Moving to the equipment business, revenue was $2.5 million in the second quarter of 2025, down 18% versus the second quarter of 2024. This was due primarily to challenges in specific international markets with lingering trade disputes in China and supplier challenges in Korea. Gross profit of $4.3 million or 56% of revenue for the 3 months ended June 30, 2025, declined from $5 million during the same period in 2024. The reduction in gross profit was driven primarily by lower sales with increases in manufacturing overhead contributing. Total operating expenses were $6.5 million in the second quarter of 2025, up roughly $1 million versus $5.5 million in the prior year period. Engineering and product development was down 57% year-over-year. Selling and marketing increased 16% versus the prior year due primarily to increases in headcount in the sales and call center and increase in DTC spending. G&A expense increased roughly $700,000 versus the prior year period. Of this, roughly $340,000 is due to litigation that we have chosen to pursue primarily against LaserOptek. In addition to this, G&A expense in the second quarter of 2025 is compared to an abnormally low quarter in the prior year. The second quarter of 2024 had the lowest G&A expense of the year, coming in $500,000 below Q1 of 2024, which was the next lowest quarter of the year. Adjusted EBITDA for the second quarter was a loss of $762,000. Turning to the cash flow statement, cash used in operations was $1.9 million in the second quarter. Of this, $1.3 million represents a payment of restricted cash to the state of New York related to the sales tax accrual that we took in the third quarter of 2024. Of the remaining $600,000, roughly $340,000 relates to the legal expenses I described previously. We exited Q2 2025 with cash and equivalents of $6 million. As of June 30, 2025, the company had 4,171,161 common shares outstanding. That concludes my prepared remarks, and I'd like to turn the call back over to Dolev for any remaining comments.

Thank you, John. In summary, our team is extremely passionate about our business and laser-focused on driving growth. We are excited about what lies ahead, including a seasonally stronger second half of 2025 as well as a potential tripling of our patient population with expanded indications for use of our excimer laser, given favorable reimbursement beginning in 2026 using temporary G codes. That said, we believe it is important to caution investors about the potential impact of tariffs on our international business. While it is no meaningful impact on our business in the first quarter, we saw some weakening in China in the second quarter. We hope to move past these issues and hope to be able to offer greater clarity on the third quarter call, which we expect to hold in mid-November. Now I'd like to turn the call over to the operator so that we can begin the question-and-answer session.

First question comes from Jeffrey Cohen with Ladenburg Thalmann.

A couple of questions from our end. So can you give us a sense on your back half of the year expectation as far as the international business? Just recap with us what was in Q2 and perhaps what we should anticipate for the back half?

Jeff, it's great to have you on the call. John will provide the specific figures. Our expectation for the second half of the year is not very different from last year. However, I want to emphasize that these expectations are uncertain concerning tariffs. We are unsure about the situation in China, especially since the administration has just extended the timeframe and conditions are changing frequently. Aside from that, we expect the business to continue as usual, and you can refer to last year's progression from the first half to the second half in the international business. John, could you share the specific numbers since you just mentioned them earlier?

Yes. So I was just going to say, we haven't given specific guidance versus the second half. But I think Dolev gave you a good indication that our initial expectations were for it to be roughly similar to the prior year, but we do have to give that caution that depending on what happens with the tariffs, we could see any given quarter move fairly significantly. Had it not been for the 90-day pause in the second quarter, our international revenue could have been impacted considerably more. So until that calms down, it's hard to give anything really more concrete than that.

Okay. That's helpful. Could you provide an update on the lawsuit? Specifically, what are the estimated costs for the second half of the year, and what is the status with the three entities regarding monetary damages? Also, could you remind us of the legal body handling the case?

That's a great question. I'll begin with the anticipated damages. The entry of a company like LaserOptek, which engaged in false and misleading advertising, particularly regarding the reimbursability of their devices, is concerning since their devices are not reimbursable. The guidelines from the American Medical Association and the American Academy of Dermatology, along with specific code descriptors dating back to 2012, clearly state that only excimer lasers can be utilized. They claimed their devices were technologically superior, but even their FDA filings compared their products to those that STRATA no longer sells and haven't been in the market for over a decade. Their misleading claims about device reimbursability and alleged technological superiority, coupled with the fact that their devices lack clinical studies for psoriasis, even in their original market of Korea or in the U.S., stand in contrast to the hundreds of peer-reviewed clinical studies for XTRAC. When we urged them to halt their actions, they disregarded our requests, leading to the litigation. We filed the lawsuit in August, and by November, the court issued an order prohibiting them from claiming their devices are reimbursable and from making comparative advertisement claims. Over the four years they were in the market, they managed to acquire accounts with existing excimer users or convert previous customers to their device. As a side note, we've been able to regain most of these larger accounts now. However, this situation has resulted in immediate revenue loss from accounts that transitioned to LaserOptek, as well as potential future revenue loss due to the confusion created by their misleading information in the market. While I won't go into specifics regarding damages, they are in the eight-digit range based on expert calculations, and STRATA will pursue this thoroughly, unless a settlement is reached before the case progresses further. It's also worth mentioning that LaserOptek has been hiding behind non-existent entities. When we began this lawsuit in August 2024, they claimed all relevant parties were present, but we recently discovered that LaserOptek America is not a legitimate entity; it's a DBA for another company, C. Dalton International, LLC. Furthermore, they misrepresented themselves as representatives of Korea, which they are not. The judge has expressed dissatisfaction with their business conduct. Regarding legal expenses, most are behind us as we approach the end of discovery. The inclusion of these two new defendants may prolong the case, but they won't introduce any new information. LaserOptek has designated most of their documents as attorney's eyes only, complicating our understanding of the damages. Nonetheless, we have a clear framework for our estimates. Importantly, LaserOptek is publicly traded and has assets, which means we can recover our damages awarded by the court or in any settlement discussions now that we can access all relevant parties, who are significant in size given the accounts we've lost. I hope that clarifies your question. If you need further clarification, feel free to ask.

Yes. Just one more. Could you give us a sense of how many units during this period that were placed out there in the marketplace?

How many units were placed by LaserOptek?

Yes.

I cannot provide a specific number because it has been concealed as part of their legal practices. We do have our estimates and the known accounts, but this situation complicates those accounts. We have made our position clear both directly and through the American Academy of Dermatology. For a provider to utilize a device and bill for codes that specifically mention excimer laser risks them being charged with fraud by CMS, which can lead to significant fines and the forfeiture of all their revenue. Additionally, it can harm their reputation. They are aware of these risks, which explains why some of the accounts they took have returned to us. Other reasons include the fact that these devices do not perform nearly as well as the XTRAC. If they had proof that their devices were the same or better, they would have conducted at least one clinical study, but they haven't done even one. In my prepared remarks, I discussed three recent studies on XTRAC, one involving 240 patients over 52 weeks. These are the actions expected from a reputable market player. Furthermore, during the litigation discovery, we discovered that LaserOptek had a practice of approaching individuals involved in drafting changes to the CPT codes and participated in modifying those codes. This revelation surprised both us and the American Medical Association, which has a strict policy against outside interference. This also reflects poorly on their actions in court, identifying them as unethical operators, which will have consequences for them. That is why we emphasized these issues, as we believe pursuing them is prudent. Jeff, since you have covered other companies in the medical device dermatology sector, you may have encountered similar situations before, but I don't think anything is as clear-cut as this case. The codes are explicitly for excimer laser, and the guidelines have been established since 2012. Misrepresenting themselves as STRATA employees and attempting to switch accounts will likely be costly for them. Thank you for your question.

The next question comes from Jeremy Pearlman with Maxim Group.

First one related to these temporary G codes. Is there anything else on your end that has to be done? Or has the review process already begun? And then what time frame could we expect a response?

Thank you for the question. I'll provide some additional details. We discovered that LaserOptek was manipulating aspects within the AMA, which was affecting market conditions. Consequently, we approached CMS before the 2025 law-making cycle, which is now in effect, and requested changes based on three key points. Firstly, there was a specific code change that took effect on January 1, 2024, which narrowed the code language to focus strictly on psoriasis. This limitation impacted the ability to apply the codes to other patient groups. As I mentioned earlier, around 30% to 40% of our codes are still utilized for non-psoriasis patients, but this requires substantial effort from us. We assist providers by guiding each of these patients through a pre-authorization process to ensure they receive treatment. To illustrate, out of 5,100 patients, 2,500 had psoriasis, 1,000 had acne, totaling 3,500, and approximately 1,500 were non-psoriasis patients treated with XTRAC. The expansion of codes, set to take effect on January 1, 2027, will ease the burden of processing these patients individually for pre-approval. We initiated discussions with CMS prior to the 2025 rule-making process. Their feedback, which we expect in November along with the final rule, indicated they needed more data to make an independent decision and sought input from the American Medical Association regarding code expansion. Therefore, we submitted a code change application to the AMA, resulting in an expansion of the code descriptor that was discussed in our previous call and press releases. The new code descriptor will require a review by the RUC Committee, which assesses the values associated with these codes, including treatment costs for other conditions like vitiligo and atopic dermatitis. This review is currently underway, and the RUC Committee recently sent a survey to providers. Our company is not part of this process, but its outcome will determine whether the time component in the codes will increase. The more significant issue relates to the practice expense component of the reimbursement code. This includes costs for items like gloves, local anesthesia, and the equipment itself. The American Academy of Dermatology approached the AMA in 2023 requesting a higher value for this practice expense. Currently, our codes reimburse around $160 per procedure, with approximately $22 attributed to the cost of the device. The American Academy of Dermatology argued that this amount should be closer to $80 and provided their reasoning. However, in 2023, CMS, being cautious about the budget, acknowledged the request but stated that no supporting data was provided. Our current application to CMS includes three components. The first is related to the time aspect, which I've covered. The second pertains to the device utilization, for which we are providing CMS with data from 2018 to the present, showing that 1,300 clinics have utilized the devices. This includes our partner clinics and those that purchased the devices from us or from Ra Medical, which we acquired in 2021. We have detailed data for these 1,300 clinics that suggest the cost of the device in the code should be approximately 4.5 times higher, around $95. If this adjustment occurs, our average reimbursement could rise from $160 by about $70, reaching up to $230, primarily based on the practice expense component. If the time component also increases, reimbursements will rise even further. The third request involves temporary G codes. CMS's response in November 2024 for the 2025 fiscal year indicated that they could not provide G codes since the existing code applied solely to psoriasis. Now that we have an expanded code, G codes can be attributed to the new indications. We have the necessary data to support the expanded practice expense and time to increase code values. We have strong backing from key opinion leaders and patient advocacy groups representing numerous patients who greatly value this treatment modality. Additionally, large provider groups are submitting comments to CMS supporting our request. Regarding the timeline, CMS issued their draft rule for 2026 about three weeks ago. The comment period ends in the second week of September, followed by a hearing on the topic, although it is unclear if we will be included in that. We expect the final rule to be released in November. I hope this clarifies the timeline for you.

Yes, it does. And then on the last earnings call, you mentioned that roughly 100 clinics were currently undergoing that Elevate 360 consulting services. Are there any metrics you could share about how that has impacted those clinics?

I didn't prepare this information for this cycle, but we plan to include it in future company disclosures. I can share that all clinics that have completed the full process have shown higher revenue in Q2 compared to the same quarter last year, with some experiencing significant growth. To outline the process, we provide insights to the owner or key person at each clinic, whether it's an individual clinic or a group. For instance, one clinic in Florida was productive for us in 2022 and 2023, generating around $40,000 to $50,000 per year, indicating they were making approximately $100,000. However, their revenue started to decline. In October 2024, we initiated our process with them. We discovered that over the previous year, they had 886 relevant patients but only submitted 160 into our RDX portal, meaning they considered about 20% of their relevant patient population suitable for treatment. We secured pre-authorization for 132 of those patients, but they had only initiated treatment for 6. The disconnect occurred between the reimbursement manager and the scheduling staff, which is likely the front desk needing to inform patients about their insurance coverage for these 132 approvals. Each of these patients represents about $3,000 in value for the clinic and around $1,000 for us. If they had engaged all 132 patients, they could have generated about $400,000 while we would have achieved around $100,000. By the end of Q1 2025, not only did we have 25 patients in treatment at that clinic, but we also expanded from one clinic to nine within the same ownership group, and all were now producing. This clinic became a center of excellence for northern Florida. I can provide more examples from other clinics, but I believe you're looking for metrics across the 100 accounts, and we will ensure to share that in a press release or during our next call.

Okay. Great. And just last question related to the TheraClear devices. It seems like the installed base was flat quarter-over-quarter. Are you going through the same review process as you are in the XTRAC installed base on TheraClear? Or are you just leaving what's out there and hopefully, recurring revenue will grow a little bit, but the main focus is still on the XTRAC, especially with all the CPT codes potential?

Well, first of all, the primary focus is on the XTRAC devices because they offer the greatest potential for growth. Currently, we have about 850 devices on the market, and for every $1,000 increase in productivity per account, we expect to see an increase of $850,000 in revenue. There is significant potential with the patients already in our clinics who have been prescribed treatment but are not yet undergoing it. Additionally, we handle groups similarly, although it is somewhat more complex due to their centralized scheduling, business operations, and regulatory oversight. Nonetheless, we see equivalent potential there and will share more data for insight. Regarding TheraClearX, you are correct that the installed base is increasing, but not at the same pace as XTRAC. We previously indicated that we expect to have around 200 devices by the end of 2025, and that projection still stands. When TheraClear was launched in late 2023, our strategy was to target clinics treating cash-pay patients, but we recognized in early 2024 that converting these patients is challenging, and clinics are struggling with this model. Now about half of our clinics are utilizing billing codes and are seeing growth. While revenue from TheraClear is increasing, it remains modest, so providing detailed metrics for this is less critical than demonstrating the success of XTRAC, which has significant upside due to the expanded reimbursement and higher payments associated with the codes, as well as increased adoption based on real-world clinical studies.

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

Thank you, everyone, for showing up for this call. I appreciate your interest in the company. We will be presenting again in the middle of November, presenting our third quarter results. Thank you very much.

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