Greetings, and welcome to STRATA Skin Sciences Fourth Quarter 2020 Earnings Conference Call. [Operator Instructions]. I will now turn the conference over to your host, Leigh Salvo. You may begin..

Thank you, and good afternoon, everyone. Earlier today, STRATA released financial results for the quarter ended December 31, 2020. A copy of the press release is available on the company's website.

Before we begin, I would like to remind everyone that comments and various remarks about future expectations, plans and prospects constitute forward-looking statements for purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995.

These statements include, but are not limited to, our plans, objectives, expectations, intentions and other statements that contain the words such as expects, contemplates, anticipates, plan.

Intend, believe, assumes, predicts and variations of such words or similar expressions that predict or indicate further events or trends that do not relate to this historic matter.

These statements are based on our current beliefs or expectations and are inherently subject to significant known and unknown uncertainties and changes in circumstances, many of which are beyond our control. There can be no assurances that our beliefs or expectations will be achieved.

Actual results may differ materially from our beliefs or expectations due to financial, economic, business, competitive, market, regulatory or other political factors or global pandemic events, such as the current COVID-19 pandemic.

Given the uncertainties affecting companies in the medical device industry, any or all of the company's forward-looking statements may prove to be incorrect. Therefore, you should not rely on any such factors or forward-looking statements.

In addition, more specific risks and uncertainties facing the company are set forth in its reports on Form 10-Q and 10-K filed with the SEC. STRATA encourages you to carefully review and consider the disclosures found in its SEC filings, which are available at www.sec.gov and on the company's website.

As a reminder, this conference call is being recorded and will be available for audio rebroadcast on Strata's website. Furthermore, the content of this conference call contains time-sensitive information that is only accurate as of the date of the live broadcast, March 24, 2021.

STRATA undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this conference call. Leading the call today will be Bob Moccia, President and CEO. Joining him will be Matt Hill, Chief Financial Officer. With that, I would now like to turn the call over to Bob..

Clinical and Economic Comparisons in the November 2020 issue of Journal of Drugs in Dermatology. As a reminder, our XTRAC excimer laser was found to deliver the fastest results with the fewest adverse events at the most economical cost of all treatments analyzed including topicals, traditional UV therapy, biologics and systemic therapies.

Additionally, patients treated with our XTRAC excimer laser had fewer actual treatment days compared to all of the modalities. It was also the only therapy where patients achieve remission without a maintenance therapy. We also announced the introduction of Home by XTRAC, an at-home treatment for patients who do not qualify for in-office treatments.

This approach leverages our DTC advertising to identify patients who do not have access to a local provider or where out-of-pocket costs are potentially an issue.

While still in the early innings of a pilot program, we believe this adjunct offering could support a comprehensive patient journey and a meaningful solution for patients who cannot receive our XTRAC treatments in the clinical setting. Turning to our outlook for 2021.

While the dermatology market saw a nice recovery in Q3 and the early part of Q4 2020, what we have experienced and validated with our customers is that offices are still not operating at pre-COVID levels in Q1 of 2021.

They are not fully staffed and thus are not yet able to offer the comprehensive suite of services that are available prior to the pandemic. We believe with more widespread vaccinations that dermatology offices will return to pre-COVID capacity as we move into the second half of 2021.

In the near term, however, we expect that the impact of COVID will continue to be a meaningful headwind on our business with a continuation of regional variability as dermatology clinics reopen from shutdowns but face potential shortages in staff and resources.

Encouragingly, these continue to be a steady -- there seems to be a steady increase in investments in dermatology in the market -- dermatology market. Big pharma has entered the space with biologics and new topical drugs, which while effective, are higher-priced in traditional topical and oral treatments.

These new therapies are indicated for psoriasis, atopic dermatitis, and in some cases, are seeking an indication for vitiligo.

These investments are spreading awareness with respect to the potential treatment, which we believe has the potential to drive more patients to seek treatment from a dermatologist and further to raise awareness of XTRAC as a potential treatment option.

With reimbursement and access challenges with these alternative therapies, we believe that patients and physicians will turn to XTRAC based on its safety, efficacy and cost benefits. To that end, we're rolling out marketing initiatives to dermatologists to demonstrate the clear value proposition of our XTRAC solution.

We will be further training our representatives so they can improve the experience of clinics and dermatologists, which we believe will lead to more effective partnerships and a return of dormant accounts to active recurring revenue-generating accounts.

As part of these efforts, we plan to optimize our comprehensive support services to ensure that we are delivering to the needs of our patients and partner clinics. In closing, I believe that we have a tremendous opportunity to further expand -- extend the value proposition of XTRAC in the dermatology market today.

And once the headwinds from this pandemic are behind us, return to stable, predictable long-term growth. My initial priorities include evaluating our current situation, opportunities and trends impacting the broader market, with particular attention on our sales and marketing strategy, we can make the most efficient and effective improvements.

I plan to continue personally engaging with customers over the coming weeks to understand their needs and how we can improve our partnership. In addition, we have some exciting launches planned for the second half of the year, and I want to be sure we are well prepared to successfully introduce them to the market.

Moreover, our international business presents a valuable opportunity to expand our placements, contributing to growth going forward. I am encouraged that we have an opportunity to drive additional growth and utilize through that channel. We look forward to the months ahead to update you on our progress.

I'd like to now turn it over to Matt Hill for a closer look at our fourth quarter..

Thank you, Bob. I welcome you to the STRATA team and look forward to working with you further. Looking at the financials.

Revenues for the fourth quarter of 2020 were $6.7 million, a 24.5% decrease as compared to revenues of $8.9 million for the fourth quarter of 2019 and up 19.7% from the third quarter of 2020, reflecting the general shutdown, staffing issues and restarted partner clinics due to the COVID-19 pandemic in the fourth quarter.

Recurring revenues for the fourth quarter of 2020 were $5.1 million, a 22.7% decrease as compared to $6.6 million for the fourth quarter of 2019 and up 32.4% from the third quarter of 2020. Equipment revenues for the fourth quarter of 2020 were $1.6 million, a decrease of 29.5% as compared to $2.3 million for the fourth quarter of 2019.

Overall, revenues continued to be negatively impacted by the COVID-19 pandemic with continued office closures and staffing issues in the dermatologist office. In addition, our equipment revenue will be impacted in the shorter term by our transition from the capital equipment model to the recurring model internationally.

But we anticipate higher revenues and margins in the longer term as our partners drive in-country placements.

As we discussed last quarter and included in our press release this afternoon, we provided information on a non-GAAP measurement described as gross domestic recurring billings, which represents the amount invoiced to our partner clinics when treatment codes are sold to the physician.

It does not include normal GAAP adjustments, which are deferred revenue from prior quarters recorded as revenue in the current quarter, the deferral of revenue from the current quarter recorded as revenue in the future quarters and other adjustments for co-pay and other discounts.

We have felt that this is an important disclosure in light of the COVID-19 pandemic and -- to assist in understanding our business and to more effectively view trends that we're seeing with our business.

We also want to provide transparency with respect to deferred revenue since we defer a portion of our GAAP recurring revenue into future quarters, a decrease in deferred revenue impact each subsequent quarter.

Deferred revenue added to the third, fourth and first quarter of '20 -- third, fourth quarter of '20 and first quarter of 2021 were $500,000, $1.4 million and $1.8 million, respectively. Meaning our recurring of the revenue in the fourth quarter was reduced by approximately $400,000.

Deferred recurring revenue in and out of each quarter of 2019 had remained steady at approximately $2 million. For the perspective on the impact to Q1 2021, we added, as previously mentioned, $1.8 million from Q4 2020 into Q1 2021. In the prior year, we added $2.3 million from Q4 2019 into Q1 2020.

Therefore, if you do the math, we started day 1 2021, $500,000 below recurring revenue than in the comparable quarter of 2020. This combined with the COVID-related headwinds and transition of equipment sales, we noted earlier, are expected to have a negative impact on Q1 2021 revenue.

Gross domestic recurring billings for October, November and December 2020 were $1.6 million, $1.5 million and $2.3 million, respectively. Our total gross domestic recurring billings for the fourth quarter of 2020 were $5.4 million as compared to $6.9 million in 2019 and $4.7 million in the third quarter of 2020.

Overall, gross profit for the fourth quarter of 2020 was $4.5 million or 67.6% of revenues as compared to $6.1 million or 68.8% of revenues for the fourth quarter of 2019. Gross profit was up 10.1% from the third quarter of 2020.

Gross profit for recurring revenues for the fourth quarter of 2020 was $3.8 million or 74.4% of revenues as compared to $5 million or 76.5% of revenues in the fourth quarter of 2019. Gross profit for recurring revenue was up 10.1% from the third quarter of 2020.

The primary reason for the decrease in gross profit in the fourth quarter of 2020 as compared to the same period in 2019 was the result of lower recurring sales due to the COVID-19 pandemic unapplied costs, partially offset by lower depreciation expense.

Engineering and product development cost for the fourth quarter of 2020 were $324,000 as compared to $214,000 for the fourth quarter of 2019 as the result of timing of certain engineering projects.

Selling and marketing costs for the fourth quarter of 2020 were $2.6 million as compared to $3.1 million for the fourth quarter of 2019, primarily due to the downturn in business as a result of the COVID-19 pandemic.

The company has managed its cost with lower trade show costs, travel costs, compensation costs and direct-to-consumer advertising costs. We plan to steadily increase DTC spend and sales head count in order to fuel the growth at our partner clinics and serving the growing installed base, respectively.

General and administrative costs for the fourth quarter of 2020 were $1.9 million as compared to $2.9 million for the fourth quarter of 2019, due to the result of lower legal, consulting and accounting fees incurred in 2019 with the company's restatement.

Other expense for the fourth quarter of 2020 was approximately $20,000 compared to $500,000 for the fourth quarter of 2019 as a result of lower interest expense and additional costs in 2019 for the extinguishment of our long-term debt.

Net loss for the fourth quarter of 2020 was $400,000 or a loss of $0.01 per basic and diluted common share as compared to the net loss for the fourth quarter of 2019 of $500,000 or a loss of $0.02 per basic and diluted common share. At December 31, 2020, cash and cash equivalents and restricted cash was $18.1 million.

We continue to manage our cash prudently, and we'll make investments where we expect to see a return and to provide growth for the business. In summary, while we cannot predict when this pandemic will add, we remain confident that we are prepared to manage through these uncertain times.

And now, Bob and I would like to turn the call back to the operator for Q&A..

[Operator Instructions]. Our first question is from Jeffrey Cohen with Ladenburg Thalmann..

A few questions for you. So first, as you spoke about the recurring revenue from -- as it affects Q4 into Q1 2021.

Could you talk about what that looks like into the second quarter of '21 and beyond? Or hypothesize with us what that may look like?.

Yes. I think we certainly are seeing that the derm offices are open, Jeff. What we're not seeing is the return of patients to pre-COVID levels, and that -- and the fact that some of these offices have not fully staffed yet. But my feeling is that as more and more folks get vaccinated, I think those numbers are going to increase on both counts.

I think you'll see more patients seeking treatment that they hadn't sought in the last several months because of the COVID. And I also think that the offices will be hiring back staff and getting more of a full complement of treatments that they typically offer. So I'm encouraged going forward.

I think there are some headwinds that we are still facing, but as folks get vaccinated, I think we'll start to get out of that mess..

Okay. Got it. And then secondly for me is a housekeeping item.

Could you walk us through domestic and international revenue for Q4, please, or for the year?.

Sure. Yes. I can walk you through domestic and international revenue for the year. And then we could just subtract out the balance from Q3 to get Q4. So looking at our revenue from domestic.

And as you know, that we've been growing the international revenue with the recurring revenue, so we're starting to see an uptake in that revenue, which is a positive sign as we get -- as we had 28 placements that were placed in -- that were placed internationally. And our first one was placed in Japan. So give me one second, Jeff.

So looking -- let's see. My apologies, Jeff. Give me one second..

No. That's okay. I can jump on after....

Yes. I will make sure that you get that. That's part of our 10-K filing. I'll make sure you get that..

Got it. And then Bob, lastly for me.

Could you talk a little bit about your prepared remarks as far as second half launches? Are you referring to new equipment or new channels or modifications to current therapy?.

Good question. Actually, a little bit of all of it. We're certainly looking at expanding our international footprint. I think there's an opportunity there, and we're in the process of identifying countries that offer the greatest return for our time and effort to get into there. But yes, I think that's one.

Two, we do have some upgrades coming to our lasers. So that will be an important launch for us in the second half. And then we're also looking at other opportunities to grow the indications that we have. Vitiligo, I think, is a real opportunity going forward, maybe has not been fully capitalized here in the company.

And I think that's something that we can put more attention to with our sales and marketing efforts..

Okay.

And can you give us a sense of what part of Vitiligo Cigna is responsible for as far as your payer pool significant?.

Yes. Currently, coverage is around 76% of all of the claims that go in. So it's pretty good. I mean I think it can be better. Obviously, we had the good success with Cigna. I would like to reach out to some of the other payers and see if we can get a similar type of acceptance that we have with Cigna, and that would be an even greater opportunity for us.

So right now, the coverage is good, but we want to make it better..

[Operator Instructions]. Our next question is from Suraj Kalia with Oppenheimer..

Bob, Matt, can you hear me all right?.

Yes..

Bob, welcome aboard, and wish you all the success..

Thank you..

So Bob, a lot of information has been provided. And given that this is your first call, I don't want to go in too much into the weeds. Just -- I'll just relegate it to 2 questions. One, let me start out on a macro level. Admittedly, Bob, you're still getting your arms around it, but you've been in the space long enough.

And I'm sure you've already sort of done some level of reconnaissance.

Bob, do you see a demand problem or a supply problem? And by that, I mean, are you guys doing everything you can and the demand curve needs to develop over time? Or are you constrained in certain way, feet on the ground, advertising, something, whatever, that could shift the supply curve from your side?.

Good question. Yes, I don't see it that way. I mean I think what -- as I looked at this, Suraj, when I came onboard is, the company has transitioned from a capital sales model to a recurring model, which is one of the things that attracted me to it. It's more of a drug sale, if you think about it.

I've spent a lot of my career in selling drugs to dermatologists. And the way you're successful there is building relationships and frequency. You need to be in those offices on a regular basis. You need to do the complete office call and really get to know and partner with those dermatologists.

And I think we can do a better job here, and that's why I'm really focused on our sales and marketing execution right now. I think there's some tweaks that we can make. Maybe some additional training to our sales force, which will help us drive demand in that recurring business. To me, that's priority one.

Certainly, we don't want to lose track of more placements and achieving our goals there. But really, for me, it's all about driving the recurring business because that's really going to sustain the growth going forward..

Got it. Bob, let me go down to the company specific issue. And I'll kind of keep this as a two part.

Giving you the benefit of doubt in terms of relatively little time to have had a look at everything, are there any pressing operational issues, company-specific that you have identified that -- and I'm not talking about COVID, that require your immediate attention. That's one part.

And the second part is, is this something that we can do to improve patient retention operationally to make them come back for their full treatments rather than running for the next new patient to bring on the roster. Bob, congrats again..

Thanks, Suraj. To answer your first question, no, nothing that I would call a surprise. Obviously, I did my due diligence before I came on board, and everything was as I expected and even in better shape in some cases. So I don't see any major issues to address at this point. As far as your second question and recurring customers.

Again, I think that really starts with the dermatologists. The dermatologists do not want to give up patients. That's been a trend that they've been dealing with now for the last several years because of PBMs and managed care and payers. They tend to sometimes lose patients to general practitioners and they try to keep patients just like everyone else.

So again, that's back to the relationship building, the partnership. And I think if we can be sure that the dermatologists and the complete office understands the duration of therapy that needs to take place for XTRAC to be effective, then I think we'll be able to keep those patients and bring them back. Because we know that it's effective.

We know that it's safe. And we know that the patient doesn't need as much follow-up as they do to typical topical treatments, and they're expensive. So I think we have a lot of good benefits -- features and benefits that we can present to the dermatologists. And again, that's something that we want to make sure our reps are doing on every call..

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

Well, great. Thank you. Again, I'm just very excited to be here, and I'm looking forward to further updating you about our advances in the future. In the meantime, I hope everyone will please remain safe and hope they have the good happy evening, this evening. Thank you..

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