STRATA Skin Sciences, Inc.
Q1 2022 Earnings Call Transcript

Published: 11 May 2022

[Operator:]

Greetings. Welcome to the STRATA Skin Sciences First Quarter 2022 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Leigh Salvo. You may begin.

[Leigh Salvo:]

Thank you, and good afternoon, everyone. Joining me today are Bob Moccia, Chief Executive Officer; and Chris Lesovitz, Chief Financial Officer. Earlier today, STRATA released financial results for the quarter ended March 31, 2022. A copy of the press release is available on the company’s website. Before we begin, I’d like to remind you that management will make statements during this call that include forward-looking statements within the meaning of federal securities laws, which are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that do not relate to matters of historical fact or relate to expectations or predictions of future events, results, or performance are forward-looking statements. All forward-looking statements, including without limitation, those relating to our operating trends and future financial performance are based upon our current estimates and various assumptions. These statements involve material risk and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements. Accordingly, you should not place undue reliance on these statements. For a list and description of the risks and uncertainties associated with our business, please refer to the Risk Factor section of our public filings with the SEC, including our annual report on Form 10-K for the year ended December 31, 2021. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, May 11, 2022. STRATA disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward-looking statements, whether because of new information, future events or otherwise. Also during this presentation, we refer to domestic gross recurring billings, which is a non-GAAP financial measure. A reconciliation of this non-GAAP financial measure to the most directly comparable GAAP financial measure is available on the company’s earnings release for the first fiscal quarter ended March 31, 2022, which is accessible on the SEC's website and posted on the Investor Relations page of STRATA’s website at www.strataskinsciences.com. And with that, I'll turn the call over to Bob Moccia.

[Robert Moccia:]

Thanks, Leigh. Good afternoon, everyone, and thank you for joining us for our first quarter 2022 earnings call. I am pleased to share that our Q1 results signal a great start to the year as we continue to make notable progress on target growth strategies, further validating our confidence in delivering strong 2022 results. We were able to navigate the pandemic-related challenges of early Q1 to close the quarter slightly ahead of our initial expectations. Moreover, we were able to successfully increase our global footprint in the dermatology space through strong commercial execution, expanded partnerships and strategic acquisitions. As noted on our last earnings call, in early January, we faced headwinds from virus-related office closures, staffing shortages and lost days in the field for our sales force. In addition, our first quarter is historically impacted by seasonality as insurance co-pays reset for the new year. Despite these factors, STRATA achieved revenue growth in the first quarter of 2022, up 21% over the first quarter of 2021. Our strong performance in the quarter was a result of several factors, including commercial execution leading to expanded extract utilization within our installed base, conversion of additional Pharos excimer lasers customers to our platform and continued growth in equipment sales, particularly in international markets. More specifically, our domestic XTRAC installed base increased to 903 devices, up from 890 at the end of Q4 2021. And internationally, we are pleased to see continued strength in equipment sales. Our decision to remain flexible in offering either placement or purchase models in order to best attract international customers has paid off, and we will continue this approach going forward in order to capture the greatest market share possible, especially as we branch out and explore new international markets. Throughout the first quarter, we made notable progress on strategies identified last year to secure success in driving long-term sustainable growth. Some recent highlights include

[Christopher Lesovitz:]

Thank you, Bob. Revenues for the first quarter of 2022 were $7 million, a 21% increase over the first quarter of 2021. Considering headwinds from Omicron, our first quarter revenue was driven by continued focus on driving usage with XTRAC partners and strong equipment sales internationally to start the new year. Recurring revenues in the first quarter were $5.1 million, an increase -- an 8% increase over the first quarter of 2021. The increase in recurring revenues was strong, even with the impact from the lost treatment days in January due to COVID surge as well as insurance resets. Equipment revenues for the first quarter were $1.9 million, a 72% increase as compared to $1.1 million for the first quarter of 2021. These results reflect the flexibility we have granted in our international distribution partners to drive top line revenues. We have found that in some markets, the placement model is not a good commercial option. Thus, we want to be able to gain share with capital sales. For the first quarter of 2022, non-GAAP gross domestic recurring billings was $5 million, an 8% increase as compared to $4.6 million in the first quarter of 2021. Overall gross profit for the first quarter was $4.1 million or 59% of revenues as compared to $3.7 million or 64% of revenues for the first quarter of 2021. The lower gross margin in the quarter was primarily due to the increase in intangible amortization expenses associated with our recent asset acquisitions of TheraClear and Pharos. Looking ahead, we expect these gross margin improvement throughout the remainder of 2022, returning to historical levels in the mid-60s. With some quarterly fluctuations based on the mix between recurring revenues from system placements and equipment sales. In addition, while we’ve taken steps to mitigate supply chain risk, some minimal impact is still anticipated. Gross profit for recurring revenues in the first quarter were $3 million or 60% of revenues as compared to $3.2 million or 68% of revenues in the first quarter of 2021. As previously noted, the decreases in profit margins were due to the increase in intangible amortization expenses associated with our recent asset acquisitions of TheraClear and Pharos. Operating expenses were $6.4 million, an increase of 5% compared to $6.1 million in the first quarter of 2021. Going forward, we expect operating expenses to slightly increase as we prepare for the launch of TheraClear acne in Q3 and our continued investments in sales and marketing throughout 2022. Net loss for the first quarter of 2022 was $2.5 million or a loss of $0.07 per basic and diluted common share as compared to the net loss for the first quarter of 2021 of $2.4 million, or a loss of $0.07 per basic and diluted common share. At March 31, 2022, cash and cash equivalents was $10.9 million as compared to $12.6 million at December 31, 2021. Turning to our guidance for the full year 2022. As we laid out in our last quarter's earnings call, we continue to expect full year 2022 revenues to be in the range of $33 million to $35 million, representing strong double-digit growth. We are pleased with the progress that we made towards this goal in Q1 and are looking forward to building upon this strong base in the coming quarters. With that, Bob and I would like to open the call for questions.

[Operator:]

[Operator Instructions] Our first question comes from the line of Jeffrey Cohen with Ladenburg Thalmann. Please proceed with your question.

[Destiny Alexandra Buch:]

Hi. This is actually Destiny on for Jeff. Thank you for taking our questions. Firstly, I was just wondering if you could discuss a little bit more about the marketing efforts underway ahead of your TheraClear launch. I'm just curious, is there any crossover with patients suffering from both acne and psoriasis. And are you able to leverage any of this historic marketing that you have for your current patients and clinics and kind of use that to educate your TheraClear campaign?

[Robert Moccia:]

Hi, Destiny. Thanks for your question. Yes. So we've got a lot of activity going on. As you can imagine, we are getting ready for a launch right now. We're scheduling for July. We've done some additional market research. We've actually placed some machines with 5 key opinion leaders in the acne space. So they could get some experience with it, give us some feedback from patients who they treat. And also, they'll help us with them before and after photos. We have a launch meeting, we will do training for our sales force in June in preparing marketing materials for the launch. So we are at full speed, getting ready for this exciting launch for us moving into this acne space. It's a great opportunity. We have a lot of experience in it from past companies and I think we will be very successful there. As far as crossover, as you probably realize, acne is typically a disease state of teenagers and young females that does cross over slightly into psoriasis, but I think the majority of our psoriasis patients are probably more mature in age. So the real opportunity is with the 900 current XTRAC partners because they are medical dermatologists in general who are treating medical conditions. So if they're treating psoriasis, they're typically treating acne as well. So we expect that those will be key targets for us just to kind of round out their device options for patients now for psoriasis, vitiligo, atopic dermatitis, we will add acne. And I think there'll be other indications for TheraClear down the road. So the crossover really comes with our partners, not so much with the patients themselves, although there will be some.

[Destiny Alexandra Buch:]

Okay. I got it. Similar strategies, different messaging, I got it. And then that kind of leads into the next question. I'm curious what other indications do you think that TheraClear would be appropriate for? I've heard you mention a couple of times that you're definitely thinking about expanding it.

[Robert Moccia:]

Yes. So IPL Light is used for not only acne, but hair removal. It's also used for redness associated with rosacea, can be used for fine lines and wrinkles, tattoo removals. So there's a number of different options. We are going to look at the markets and identify what makes the most sense for the audience that we are trying to reach, mainly our current partners and beyond. And we will go down that road with some additional clinical studies and support materials. So when we go and promote it, we will have some good clinical data to show the physicians.

[Destiny Alexandra Buch:]

Okay. Understood. So maybe I'll just transition to some of the Pharos comeback. What strategies are you utilizing to kind of determine which accounts your sales organization is spending the most time with? Are there certain metrics that you're utilizing? Or how are you approaching that?

[Robert Moccia:]

Sure. Well, it really starts with the number of Pharos owners who are coming off service contracts. We identified that early on in the process that they're approximately 250, about 155 of them are coming off in 2022. We had some success, obviously, in the first quarter in transitioning another 15, so the total is up to 45. But the ones that haven't come over yet, that doesn't mean we won't get them. It just means that they're not ready. A lot of these dermatology practices have purchased those Pharos machines, and they're still working. So until they have a need for service or an event happens where the machine just doesn't work for them anymore, they're going to continue to use that machine. But once that happens, we will be in a position, hopefully, to step in and offer them the XTRAC partnership. But as far as targeting, certainly, we want to get all of them, but the highest volume ones are certainly at the top of our list. Those are some of the Pharos users that -- were actually XTRAC users years ago and switched over to Pharos, so we hope to bring -- hoping to bring them back.

[Destiny Alexandra Buch:]

Okay. I understand. Got it. And then maybe just shifting to your comments around OUS efforts. Can you discuss some of the additional territories you believe you'll expand into next? And are you able to disclose any additional partnerships OUS at the moment?

[Robert Moccia:]

Yes. We haven't signed any new partnerships in Q1. We are looking to expand, particularly in Asia because we've had a lot of success over there. We've got a registration going in Taiwan. We've looked at Australia as an opportunity as well. We haven't done much in Europe, and I think that's an area that we want to explore next and see if the kind of opportunities exist there for not only XTRAC, but for TheraClear. And we also have not done much in Latin America, and we know that there is an opportunity for absolutely for TheraClear there, there actually are some devices down there currently. So we hope to expand upon that and then introduce XTRAC as well.

[Destiny Alexandra Buch:]

Okay. Last one, and then I'll jump back in queue. You've had an appetite for M&A recently. So I'm curious if there are any other areas you think some tuck-ins or an acquisition would be appropriate or if they're going to be full throttle focused on your current platforms for the remainder of '22 and '23? Thank you.

[Robert Moccia:]

Thanks, Destiny. Yes, I mean, obviously, we want to be focused on launching TheraClear and doing that correctly. I mean commercial execution around that as well as the continued growth of XTRAC is most important to us. But that being said, I think I've said it before, we want to be opportunistic. And we're looking in the medical side of dermatology. So we're looking at additional medical devices and potential indications could be skin cancers or hyperhidrosis. So warts is a very undertreated area. And I don't rule out the possibility of adding atopical at some point. The management team has a lot of experience in marketing and selling topicals in dermatology. So if that right -- the right opportunity came along in that area, that's something we explore as well.

[Destiny Alexandra Buch:]

Perfect. Thank you.

[Robert Moccia:]

Thanks, Destiny.

[Operator:]

Our next question comes from the line of Suraj Kalia with Oppenheimer & Company. Please proceed with your question.

[Suraj Kalia:]

Hey, Bob, Chris. Can you hear me all right?

[Robert Moccia:]

Hear you fine. Good afternoon.

[Suraj Kalia:]

I hope everyone is safe and healthy.

[Robert Moccia:]

Thank you.

[Suraj Kalia:]

So Bob, let's start out with patient retention or rather completing their full course, how do things stack up currently in the U.S.? And more specifically, when I look internationally, your focus internationally, curious if you can give us some guidepost on how to think about OUS just in terms of whether it's TheraClear or whether it's XTRAC, right? How should we think about patients coming in and completing their full regimen of treatment?

[Robert Moccia:]

Sure. Yes. Our data shows that on average the typical patient for psoriasis is coming in about a dozen times, and we have clinical data that shows that the -- you'll see a 75% PASI score after about 6.7 treatments. So a little bit more than actually the clinical says, but I don't think that's unusual. Every dermatologist treats the disease state differently. So we think we are doing well in that area. Retention of those patients is certainly a focus of ours. We are using our customer service group as well as some of our new marketing efforts are direct-to-patient mailings and e-blast to remind them that when they get a flare up again to come back in and get the XTRAC treatment, especially we are assuming that it was successful for them in clearing up their disease state. So I think that is a big effort that we want to continue to drive. It did drop off during COVID, as you would imagine, it was hard enough to get patients to come in for a doctor's visit to begin with, never mind retention. So that's clearly a focus for us. On the international side, I think, as you know, Suraj, the majority of the treatments internationally are for vitiligo and that requires more treatments. And my understanding from our distributors is that a lot of the dermatologists that treat vitiligo on an international basis do it in large clinics. So they'll set up a whole day basically to treat vitiligo patients and just run number of patients through the excimer laser in a single day and then bring them back again, obviously, on some type of schedule. So I can't really give you the details of what the percentage of them who finished the treatment is. But I think my experience has been with international dermatology markets that the patients are a little bit more intuitive to finishing their therapy than they are in the U.S. So I'm guessing it might be leaving a little bit better in the U.S., but I don't have any real data to support that.

[Suraj Kalia:]

Fair enough. Bob, in terms of -- one question for you and one for Chris. So Bob, in terms of the number of -- I believe you said about 100 -- please forgive me if I screwed up these numbers, like 168 clients delivered $2.1 million in the quarter or 48% of recurring. I'm sure I screwed up one of these numbers. I mean, the rough math suggests it's about a little around 12,000, 12,500 per quarter. As you get entrenched in the business, Bob, what are you seeing that these guys are doing differently versus the others? What does the GAAP analysis suggest? And Chris, if I could pose a question for you. In terms of the RA contribution for FY '22 guide. My memory is failing me. Remind me how you'll factor in "organic versus acquired growth?" Gentlemen, thank you for taking my questions.

[Robert Moccia:]

Thanks, Suraj. I will take the first part. So it's 162 high volume customers that contributed about $2.4 million or 48%. And I think with the high volume customers from my experience, what differs them -- with them is, one, obviously, they're very sold on the usage of the XTRAC laser, not only for psoriasis, but for vitiligo as well. They use it not only as a monotherapy, but in combination with some of the drugs that they're using. Secondly, I think they understand the economic value to their practice by treating more patients, obviously, they're able to generate more revenue for their practice. So I think that they understand that piece of it as well. And then lastly, I think the high volume customers typically have a pretty large patient base. I think on average, a typical dermatology practice, we'll see somewhere in the range of 50 to 60 patients a day, but a high volume practice may see close to 100. So typically, there's a bigger practices that could be in a group -- and they generate, obviously, more patients, which probably generates more revenue out of that practice. So hopefully, that answers your question, and I'll turn it over to Chris.

[Christopher Lesovitz:]

Hey. Good afternoon, Suraj. So on the Ra acquisition, we didn't really put in there what we were anticipating from a dollar revenue standpoint. However, as noted in prior quarters here, we want to try to gain 40% to 45% of that 270 units that are out there from a service contract perspective. We anticipate that, that sales mix will probably mirror our current revenue per machine. anywhere from the $6,000 to $7,000 per device when it's all said and done. So that's where we are anticipating for this year.

[Suraj Kalia:]

Thank you.

[Operator:]

And we have reached the end of the question-and-answer session. I will now turn the call back over to Bob Moccia for closing remarks.

[Robert Moccia:]

Yes. Thanks. We just like to thank everybody for joining the call today, and I look forward to speaking to you with our Q2 results shortly, I believe. So thanks again, and have a good evening.

[Operator:]

And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.