STRATA Skin Sciences - Q2 2024

Transcript

Operator (participant)

Ladies and gentlemen, th`ank 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. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, please press star, then one on your telephone keypad. To withdraw your question, please press star, then two. 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 14th, 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.

Joey Delahoussaye (Head of Investor Relations)

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 30th, 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 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 in it. The content of this call contains time-sensitive information that is accurate only as of today, August 14th, 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 is now my pleasure to turn the call over to CEO, Dr. Dolev Rafaeli.

Dolev Rafaeli (CEO)

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, $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 it, that is still the plan.

Our DTC results thus far are encouraging as we grew the number of XTRAC patients' 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 billings in the second quarter were down 6% year-over-year, following the first quarter decline of 3% year-over-year. We continue to believe we are near trough levels and with increased DTC efforts, we will turn positive on this metric.

These last two quarters of low and mid-single-digit declines are in contrast to year-over-year declines of 15%, 12%, and 14% in the second quarter of 2023, third quarter of 2023, and fourth quarter of 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 and at incrementally higher margins without having to increase the install base. Our domestic install base of TheraClearX devices continues to grow, and we ended the second quarter at 117 devices in the U.S., as compared to 92 at the end of the first quarter.

During the second quarter, more patients were pre-approved for photodynamic acne treatment with the TheraClearX device than in the first quarter. Recent published studies, as highlighted in press releases over the past few months, points 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 photodynamic treatment and see it as a viable alternative in the large acne treatment market, either as, 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 the national dermatology clinic groups accounts, that account for nearly 40% of the XTRAC install 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. Chris?

Christopher Lesovitz (CFO)

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 30th, 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 30th, 2024, along with our credit facility with MidCap 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 30th, 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.

Dolev Rafaeli (CEO)

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 to pursue other interests. We thank him for his years of service as our Chief Financial Officer and wish him well in the future endeavors. We welcome John Gillings, who brings many years of private equity investment management and equity research experience, and will be the Chief 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 questions and answer session. Operator?

Operator (participant)

Ladies and gentlemen, if you wish to ask a question on today's call, you will need to press star, then the number one on your telephone. If your question has been answered and you wish to withdraw your request, you may do so by pressing star, then two. If you are using a speakerphone, please pick up your handset before entering your request and speaking on the call. One moment please for the first question. The first question today comes from Jeffrey Cohen with Ladenburg Thalmann. Please go ahead.

Destiny Hance (Associate Director of Equity Research)

Hi, thank you. This is Destiny on for Jeff. Thank you for taking our questions. I wanted to maybe start with some of the, well, 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.

Dolev Rafaeli (CEO)

First of all, good afternoon, Destiny. Nice to talk to you. Internationally, we are active in multiple markets. The 4 biggest markets are 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 lamp technology devices. We have about 450 devices or accounts in Japan, which is the largest market share of the relevant technology of the time. We started converting these over to XTRAC about 6 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, but also the better results that you can get with excimer laser, namely XTRAC. We are now up to approximately, I don't have the exact number in front of me, but we're 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.

So the Japanese market is characterized with 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, 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 the XTRAC has. So the Momentum itself got cleared by US FDA in late 2021.

And it took us about a year and a half to get through the Japanese FDA. And we anticipate that the volumes of devices going into Japan are going to remain more or less stable, somewhere around the 40 devices, most of which are going to be 40 devices a year, most of which are going to be placements, some of which are going to be outright sales. And these devices are going to be gradually migrating from the older Velocity 7 XTRAC technology to the Momentum. I'm not sure I fully answered the question. I think you also asked about margins.

So I want to point out something that's going to provide an answer to your question about Japan, but also a more fuller answer. So when you look at the gross margin of the company, the second quarter of 2024 has a higher gross margin than 2023. But it's more important to look at that time passed. So if you look at 2019 and 2021, so 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 recurring revenue. The overall gross margin of the company was very close to 70%, and we ended Q2 2024 at 58%.

If you want to bridge that gap between 58% and 70%, it almost completely lies not in the change of mix and sales of capital equipment outside of the U.S., but more in the fact that the company had a lot of depreciation of the install base and amortization of the acquisitions flow through the cost of goods. We are dealing with both of these. The amortization of the acquisitions, we're dealing through write down of the intangibles, which happened at the end of last year.

The depreciation is dealt with in what we do in the domestic market, removing non-productive devices away from accounts that are not productive and using the equipment for capital equipment sales. So we're actually using a device that's partially depreciated and selling it away from the capital equipment. So if you look at the financials, you'll be able to see two things. The one thing, which I believe you were pointing to, which is the gross margin. But the other thing is, if you look at the cash flow statement, you'll see that our cash flow for investment purposes went dramatically down because in Q2 2023, we were at $3.5...

For the six months, we were at $3.5 million, where in Q2 2024, we're at $1 million. So we use $2.5 million less. Why? Because we're not increasing that install base. We're actually doing the opposite. And that is helpful both from a cash flow perspective as well as gradually over time, it's gonna reduce the depreciation that flows through the P&L and increase the margin back to where it is supposed to be, which is closer to 70%.

Destiny Hance (Associate Director of Equity Research)

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, are you 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 additions 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 is that stayed pretty consistent through the first half of the year?

Dolev Rafaeli (CEO)

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. So if that account is either-

Destiny Hance (Associate Director of Equity Research)

Mm-hmm.

Dolev Rafaeli (CEO)

a non-user or a dabbler, and it doesn't make any sense to leave the device out there with them and provide service, provide. So provides technical service as well as providing the sales team support to that account and the reimbursement support. In terms of the numbers, I just want to provide a perspective of numbers, and Ladenburg has been graceful enough to cover in terms of research this business for some years now. So what I'm gonna do now is I'm gonna just go back a few years. In 2018 and 2019, we've done the same thing. We did a turnaround.

We removed more than we placed for a period of time in order to stabilize what's needed in the field. And then a year later, in 2019, we placed 160 new accounts, and we removed approximately 70. So we grew by net 90. And I anticipate the same thing to happen here. So what we're doing now and you will be able to notice this through the average revenue per device.

What we're doing now is we're trying to remove as many as we can that are dabblers or non-users, and/or use the opportunity as a wake-up call for them to say, "You have been a great user in the past. You stopped using or you're using less. Here's your opportunity to grow. Let us help you grow." So that becomes an opportunity. We have some in which that wake-up call works, and they're becoming more productive, and some that we end up removing. And you were right, pointing out that we removed more than we placed. We actually placed in Q2 7 devices. So you're right, you can do the math.

We placed seven and removed more. I anticipate that towards the end of this year, the removals, the net removals are gonna stop, and there's gonna be net placements. Is that gonna happen in Q3 or Q4? I don't know yet, but it will happen for sure after we start seeing the average revenue per device expanding. So we need to see utilization going up in the accounts that we keep. The utilization should go up, and when it goes up, we are gonna start adding more accounts. Again, I'm gonna point you back to historical numbers. In 2018, we ended the year with approximately $7,200 per device per quarter.

We ended 2019 with $7,500 per device per quarter, which was more user, more usage and also more accounts. We ended the second quarter at approximately fifty, fifty, sorry, $5,369 per device, which is equivalent to what we had in 2023. And I would like to see Q3 expansion of that number and then Q4 expansion of that number, and then we're gonna start seeing net expansion in the number of devices.

Destiny Hance (Associate Director of Equity Research)

Okay, got it. Thank you for that, that color. I appreciate it. I guess lastly, I am impressed that your marketing in 2024 is actually looking better than it did in 2021. And 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 sheerly on having more experience and more data to pull from, from your previous DTC marketing efforts?

Dolev Rafaeli (CEO)

It's a combination of everything you said, plus the fact that we haven't been advertising for approximately two years. And 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, as a matter of fact, more availability in terms of number of accounts now. So it's easier to place them into an appointment. And yes, the experience helps.

Destiny Hance (Associate Director of Equity Research)

Got it. All righty, that does it for us. Thank you for taking the questions.

Dolev Rafaeli (CEO)

Absolutely. Thank you, Destiny.

Operator (participant)

As a reminder, if you would like to ask a question, please press Star and one to be joined into the question queue. This concludes our question and answer session. I would like to turn the conference back over for any closing remarks.

Dolev Rafaeli (CEO)

Thank you, Betsy. 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 to 2024 financial results, likely in November. Thank you and have a good day.