Good day, and welcome to the STRATA Skin Sciences' Second Quarter 2021 Earnings Conference Call. [Operator Instructions]. Please note, this conference is being recorded. I would now like to turn the conference over to Leigh Salvo, Investor Relations. Please go ahead..

Thank you, and good afternoon, everyone. Joining me today are Bob Moccia, Chief Executive Officer; and Matt Hill, Chief Financial Officer. Earlier today, STRATA released financial results for the quarter ended June 30, 2021. 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, the impacts of COVID-19 on our business and prospects for recovery, including the distribution and effectiveness of the COVID-19 vaccines, expense management, expectations for hiring, migration of customers from the Pharos system to XTRAC and to new -- and to execute new service agreements to at least portions of the Pharos user base to generate in our organization, including transitioning, meaning capital equipment purchasers into recurring revenue users to integrate the Pharos service business into the company's field service offering, marketing opportunity, guidance for revenue, gross margin and operating expenses, commercial expansion and product pipeline development expected future product launches and milestones and expected results and performance from our partnerships and commercial products, including patient outcomes, are based upon our current estimates and various assumptions.

These statements involve material risks 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 Factors section of our public filings with the SEC, including our annual report on Form 10-K for the year ended December 31, 2020.

This conference call contains time-sensitive information and is accurate only as of the live broadcast today, August 16, 2021.

STRATA Skin Sciences 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 in the company's earnings release for the second quarter ended June 30, 2021, and 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.

Bob?.

Thanks, Leigh. Good afternoon, everyone, and thank you for joining us for our Second Quarter 2021 Earnings Call. Our results in the second quarter demonstrate the traction our strategies are making to best reposition STRATA for long-term growth.

Before addressing the highlights of the quarter, I'd like to take a moment to discuss STRATA's exciting announcement made earlier today regarding its acquisition of the U.S. dermatology business for Ra Medical Systems and its Pharos excimer laser for the treatment of psoriasis, vitiligo and atopic dermatitis.

This transaction gives STRATA some significant advantages. The Pharos U.S. customer base includes more than 280 active service contract customers and approximately 150 currently inactive accounts. STRATA will provide the opportunity to the current Pharos customers to join the over 850 dermatology partners under the XTRAC recurring business model.

It positions STRATA as the predominant provider of excimer laser treatments to address the $6 billion U.S. market for the treatment of chronic diseases.

The transaction immediately provides STRATA with the opportunity to market its full business solution to Ra Medical's existing customer base of 400 dermatology practices, thus making way for STRATA to substantially increase its recurring revenue base in the future.

It also provides a highly synergistic path to gain additional placements for STRATA's XTRAC excimer laser system. It delivers an added long-term recurring revenue growth potential and prospective customer base for STRATA. STRATA also gains sophisticated pipeline of potential customers with expired contracts.

These dermatologists are already familiar with the benefits of excimer treatments, and have a current patient base. This reduces the start-up time and training normally associated with the onboarding of new customers. Importantly, this transaction cements STRATA as a true leader in providing innovative products for the treatment of dermal conditions.

Under the terms of the agreement to acquire Ra Medical's dermatology business and an asset transaction for consideration consisting of an upfront payment of approximately $3.7 million in cash, STRATA will also assume a service contract obligation of approximately $1.5 million, receive certain inventories of $250,000 and assume certain other liabilities in the amount of $50,000.

The acquisition is expected to be accretive to STRATA's EBITDA in the first quarter of 2022. Now to our second quarter results. We are in the early stages of the rollout on a new strategic plan focused on commercial execution. I am encouraged with the top line improvement.

Our increased investment initiatives, such as marketing directly to potential customers, expanding our sales force in order to build stronger relationships with our providers, partnering with clinics through our support services and delivering a clear and consistent message on the benefits of XTRAC excimer laser has been successful in driving a greater awareness and instrumental in gaining renewed commercial traction.

Starting with a few financial highlights. Total revenue in the second quarter was $7.4 million, an 83.1% year-over-year increase. Sequentially, revenues grew 28% over the first quarter, largely due to the growth in recurring revenue and equipment revenue shipped at the end of Q1, but recognized in the second quarter.

Recurring revenue was $5.5 million, a 95% increase over the second quarter of 2020 and a 17% increase over the first quarter of 2021, reflecting the shift in focus from capital equipment sales to recurring revenue. We exited the second quarter with an installed base of 889 recurring revenue XTRAC devices, including 848 in the U.S.

and 41 international placements. This is up from 871 units at the end of March. We are pleased that we continue to expand our impressive partner footprint here and abroad. As we highlighted last quarter, patient visits approved in March and continued throughout the second quarter. We believe that most offices are back to 90% to 95% of pre-COVID levels.

More specifically, with the increased availability of the vaccine, more and more patients are returning for treatments that they had been postponing. In terms of office staffing limitations, with the exception of certain regions, most of our customer practices have reinstated normal operations in routine hours.

Overall, throughout the quarter, we saw continued improvement in our momentum, and we entered the third quarter in the strongest and the best position since the onset of the pandemic, with a clear focus on continued commercial execution, which remains our highest priority.

Last quarter, I identified several key areas of focus for STRATA, and I am pleased to announce that we have made progress across these initiatives. Starting with increased investment in direct-to-consumer marketing. In the fourth quarter of 2020, we resumed funding consumer advertising, and within the first few months, began to see a positive impact.

In the second quarter, we reached a return in DTC spending to 2019 levels, and that increased commitment reaped additional upside and returns, validating our market approach.

RDX charts that track the number of patients seeking reimbursement from XTRAC treatment and are largely driven by our direct-to-consumer advertising are still tracking above 2019 levels. We were delighted to see that new and returning patients are once again seeking out our treatment, and this is a very positive sign of future trends.

Second, we're actively reengaging with our high-volume accounts, defined as accounts that produce above $40,000 in revenue per year. In the first quarter, we had 148 high-volume accounts. During the second quarter, we successfully increased the strong base of high-volume accounts to 186, a 25% sequential increase.

While some of this traction is likely related to summer seasonality, overall, we believe it's a very positive metric, and further reflects the mounting strength of our sales organization in expanding and driving utilization of the XTRAC across all indications.

I'm excited by the early progress we have made, and believe there's a promising indication of the potential we have to further penetrate these accounts in the near future. Third, targeting customers that have not yet started producing revenues, whether due to COVID or other related issues was another key priority this year.

Sequential trend has been encouraging. Typically, we found these accounts were more severely impacted by the pandemic and have been closed for more than a year. In the first quarter, we had approximately 23% or 198 XTRAC nonrevenue-generating partners. We are now at approximately 17% or 152. Our goal is to reduce that percentage to less than 15%.

Our sales force continues to focus on and support these accounts to affect a return to more consistent production levels by deploying dedicated support services and DTC campaigns, including marketing initiatives directly to current and prospective patients in their regions.

In some cases, laser systems that were determined not to be valuable to the customer or to STRATA were removed. These systems can now be redeployed in offices where they will be seen with greater utilization.

Lastly, we continue to pursue opportunities to support our sales organization through marketing campaigns that can best drive awareness among dermatologists. The increasing spending on direct to dermatologist marketing, thereby creating further awareness of the XTRAC product line and the value it adds to partner clinics and patients.

On that front, we were recently pleased to welcome Brent Cowgill as our new Vice President of Marketing. His 20-year background in healthcare, sales and marketing will prove to be invaluable in the execution of our strategic marketing efforts.

In addition to implementing and overseeing programs pursuing a high level of direct customer interaction, Brent will be spearheading initiatives relative to the advancement and relaunch of our extract XTRAC platform for the treatment of vitiligo, a skin disease affecting approximately 5 million people in the U.S. today.

On the international front, we are working with our distributors and making progress to shift from capital sales to a recurring revenue model.

In addition to the benefit to STRATA of the more predictable revenue stream, this model enables our distributors to stay closer to the customers, improves cash flow and provides the benefit of a longer warranty, but while a win-win opportunity, we still expect that it will take time to implement.

In summary, we are well underway to executing on the plan we outlined in our first quarter call to drive commercial traction. Our recent results demonstrate measurable organic and inorganic growth and give me confidence that we can reach our goal of 2019 revenue levels by the end of this year and double-digit growth in 2022.

As we look to the second half of the year, we will continue to execute our plans to focus on reengagement with high-volume accounts, continuing to support our sales organization in driving market initiatives for customers and their patients as well as working through the integration of the Ra Medical dermatology business.

We will continue to pursue additional M&A opportunities to further accelerate our plans to establish STRATA as a leader in dermatological medical devices.

With regard to the second half of this year, we remain optimistic about our ability to reach our goal [indiscernible] recurring revenue levels by year-end as more patients return to dermatology practices. The latter part of Q3 and Q4 typically represent a seasonal uptick for psoriasis patients seeking treatment.

And as long as headwinds don't present themselves as a result of the recent developments with the Delta variant and increase in COVID infections, we are on track to achieve that goal. With that, I will now turn the call over to our CFO, Matt Hill.

Matt?.

Thank you, Bob. As mentioned, revenues for the second quarter of 2021 were $7.4 million, an 83% increase over the second quarter of 2020 and a 28% increase over the first quarter of 2021.

Our second quarter revenue was particularly strong due to increased recurring revenue and international equipment that was shipped at the end of Q1 but was recognized in Q2.

Recurring revenues were $5.5 million, a 95% increase over the second quarter of 2020 and a 17% increase over the first quarter of 2021, which, as mentioned, reflects the opening and staffing of dermatologist offices as the world has opened and people feel comfortable venturing out to see their derms.

Equipment revenues were $1.9 million, an increase of 56% as compared to the $1.2 million for the second quarter of 2020 and an increase of 65% as compared to the $1.1 million for the first quarter of 2021.

As we stated in the first quarter conference call, there were systems that shipped in the first quarter where we could not recognize the revenue until the second quarter. We expect more normalized equipment sales in the third quarter.

As we discussed last quarter, and included in our press release issued this afternoon, we provide information on a non-GAAP measurement described as gross domestic recurring billings, which represents the amount invoiced to 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 future quarters, adjustments for co-pay and other discounts.

We felt that this was an important disclosure in light of the COVID-19 pandemic to assist in understanding our business and to more effectively view the trends that we're seeing with our business. We also wanted 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 can impact each subsequent quarter. Non-GAAP gross domestic recurring billings were $5.5 million as compared to $1.8 million in the second quarter of 2020 and $4.6 million for the first quarter of 2021.

The impact of deferred revenue and the reconciliation from non-GAAP gross domestic recurring billings to recorded revenue was a negative $128,000 as compared to a favorable $1 million in the second quarter of 2020.

With increasing and more consistent revenue, we're seeing the normalization of the impact of deferred revenue consistent with pre-COVID levels. Overall, gross profit was $4.8 million or 64% of revenues as compared to $2 million or 49% of revenues for the second quarter of 2020 and $3 million or 64% of revenues for the first quarter of 2021.

Gross profit for recurring revenues was $3.8 million or 70% of revenues as compared to $1.4 million or 51% of revenues in the second quarter of 2020 and $3.2 million or 68% of revenues for the first quarter of 2021.

The primary reason for the increase in overall gross profit was a result of higher sales, partially offset by higher depreciation expense in the second quarter of 2021, and partially offset by an unfavorable impact of deferred revenue in 2021 as compared to 2020.

Engineering and product development costs were $400,000 as compared to $200,000 for the second quarter of 2020 and $400,000 in the first quarter of 2021. The increase was the result certain ongoing engineering projects.

Selling and marketing expenses were $3.2 million as compared to $1.2 million in the second quarter of 2020 and $2.9 million in the first quarter of 2021. The Sales and marketing expenses were sequentially and annually higher primarily as a result of investments in sales and marketing and direct-to-consumer advertising.

While in 2020, the company managed its costs as a result of the downturn in business attributable to the COVID-19 pandemic. General and administrative expenses were $2.1 million as compared to $1.9 million in the second quarter of 2020 and $2.8 million in the first quarter of 2021.

General and administrative expenses were higher as a result of higher compensation, severance and stock cutting costs, primarily as the result of the CEO transition in the first quarter of 2021. Other income, for the three months ended June 30, 2021, was $2 million as compared to an expense of $18,000 for the 3 months ended June 30, 2020.

In the second quarter of 2021, we received notification that the Paycheck Protection Program loan have been forgiven, and we recorded a gain on the extinguishment of debt in the amount of the loan of $2 million.

Net income for the second quarter of 2021 was $1.1 million, earnings of $0.03 per basic and diluted common share as compared to the net loss for the second quarter of 2020 of $1.7 million or a loss of $0.05 per basic and diluted common share and 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 June 30, 2021, cash, cash equivalents and restricted cash was $17 million as compared to $17.5 million at March 31, 2021. After cutting discretionary spending in 2020 due to the pandemic in the fourth quarter of 2020, we began our investment back into DTC advertising and in Q1 2021 reach pre-COVID levels.

In addition, we are making investments in sales and marketing to drive our commercial execution, which will increase our cost structure. Lastly, in connection with the acquisition of the U.S.

dermatology business of Ra Medical, we are able to leverage in-house resources in sales, marketing, call center, field service technicians, and after the integration transition costs with increased comebacks, we see the acquisition of the U.S. dermatology business of Ra Medical being accretive to EBITDA in the first quarter of 2022.

And now, Bob and I would like to open the call for questions..

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

So a couple of questions. So congratulations on the announcement and I see the upfront. Can you walk us through how kind of a macro standpoint, how this affects the company overall, meaning it sounds like it's a 50% increase across the board on units and arguably some of the other metrics.

But how might this work for an existing derm under the Ra platform that's acquired a unit over the past year and how that kind of transition to your technology and your model might look like over the coming weeks and months and quarters?.

Sure. No, good question. So we obviously want to have a smoother transition as we possibly can. There's over 400 Pharos users out there or potential users, 280 who are active and another 150 who had used the Pharos laser at one point and have not recently. So we think that's a real opportunity for us.

So in order to make the transition as smooth as possible, a lot of them are under service contracts. We're going to honor those contracts going forward until they expire. And in some cases, we may extend them for a short period of time, which will also give us time to reintroduced the XTRAC partnership program to these potential accounts for us.

A lot of them, obviously, are familiar with laser and have a well-established patient base. So it's not going to be hard to educate these folks on the benefits of using the laser yourself. It's really educating them on the benefits that surround our partnership.

As you know, the direct-to-consumer advertising, the reimbursement support, clinical support, technical support, all the services that we bring in that partnership and we think that's the key to bring these people over and establishing more comebacks and placements going forward..

I got it.

And how might that look like as far as the actual equipment goes, you'll have an opportunity over the coming quarters? to transfer over to your equipment, or do you expect them to stick with the existing equipment?.

A little bit of both. I think, you kind of put a timeline there, anybody who's bought a Pharos probably in the last year or so, I wouldn't expect them to transfer over very quickly. So that's why we want to give them the opportunity to extend their service agreement if need be.

But we're going to target based on the expiration of some of the agreements that are in place. And as they expire, we'll be reaching out to these customers and trying to bring them over to the extract and using our equipment. We don't have plans to manufacture the Pharos excimer laser going forward..

Okay. Got it. And it looks like margins look pretty solid for the quarter.

What do you expect on that front? And any thoughts on how Q3 is going or how the back half may look other than your anticipation that it drives higher than '19 levels?.

Jeff, great question. This is Matt. our key is getting back to pre-COVID levels in driving the recurring revenue. So when we look at the revenue going forward, as you know, that as recurring revenue grows, the base cost in COGS is pretty much fixed.

So therefore, margins on each incremental dollar, we get around 90% -- a little over 90% in those margins, which is why when you look back in Q4 of 2019, we had revenue, we had margins on the recurring at about 76.5%, and overall, almost 74%. So that is our goal is to get to approaching 2019 levels in revenue -- in recurring revenue.

But what you'll need to look at is that the -- our capital sales won't be as high as we've been transitioning our international business away from capital and back into the recurring model as we believe that is favorable to the company's valuation as well as cash flow and driving the overall business..

Got it.

And lastly for me, what about timing? Any commentary there on when this may close? Do you need a shareholder vote, or do you expect this to close during the current quarter?.

We are signing close. So we are closed as of today..

Next question comes from Suraj Kalia with Oppenheimer..

Bob, so again, just following up on the Ra question. So Bob, I heard through your commentary.

And should we think about this as more in terms of the net effect would be, in essence, a certain amount of new customers that eventually would transition to STRATA? Is that the way to think about it, or are there some additional synergies that we might have probably missed in this picture, or I might have missed picture..

Yes. I think what we're looking at it, Suraj, is that, again, we're picking up 400 potential extract customers here going forward. we have already made based. There's 280 who are very active and have agreements already in place with Ra that we'll be taking over and servicing their needs.

So it gives our sales force an opportunity and a reason to go in and revisit with these folks who obviously are probably familiar with XTRAC certainly know the excimer laser system very well. And it gives us an opportunity, again, to talk to them about our extract partnership.

And we believe it's the most effective way to deliver the excimer laser treatments to both providers and patients with all the support services we offer not only the direct-to-consumer advertising, which drives the patients in, but the reimbursement assistance, the customer service, technical support and so on, as you know, we think that's a comprehensive way of really delivering these exit treatments.

So that's the potential. It obviously gives us the opportunity to bring some comebacks to have more placements, and more importantly, to drive more usage in the recurring model. So that's the key issue. It also cements us as the leader in 308 excimer laser in the U.S. We are the predominant supplier now.

There is another small provider out of Korea, but doesn't have really much of a foothold in the U.S. So we do have that position created by this acquisition. So we're really excited about it. We've been very successful, as you know, with comebacks over the years. I believe, in 2018, we had 15. In 2019, we had 19. 2020, we had 23.

Year-to-date, we have 18 comebacks. So this is only going to accelerate that process. So it's a real opportunity for us..

And the only thing I would add, Suraj, would be that it allows us to keep the high-end users that might have departed from a recurring model to purchase one of their own units and allows us to work with those partners in order to keep them in the STRATA partnership..

So Bob, if I could just belabor on that question.

So pick your -- if the Pareto rule holds true out of these 40 accounts -- 400 accounts, right, so how should we think about the utilization rate or revenues per practice over time, how do you all intend to melt that? And what would be the appropriate time for us to start measuring the ROI specifically on the transaction?.

Good question. I think that goes back to the growth drivers that we described coming out of Q2. We have really made a concerted effort here to focus on commercial execution; high-volume customers, we increased them from -- to 186 in the second quarter from 148. So we're making progress.

In nonrevenue-producing customers in Q1 were a real issue for us, it was 23% of our overall installed base, and we reduced that to 17%, and we'll get that down below 15%. And then the other metrics we didn't talk about in the call was revenue per system per quarter. In the first quarter, we did 5,400 per system per quarter.

In the second quarter, we were around 60 -- 100 per system per quarter. And our goal by the end of the year is to be at 7,500. So I think that will translate across not only our extract systems, but any of the Ra systems that we can bring over.

So it's just simple math, Suraj, right? The more systems we have out there, the more we're generating per system, our revenue is going to substantially grow..

Bob, I'll just ask one more, and I'll let others take the baton.

So Bob, Korea, can you give us a status update on the shared revenue model or the recurring revenue model that was being implemented some time back?.

Thanks, Suraj. Thanks a lot, Suraj. I appreciate it. When we look at Korea, and Bob alluded to a little bit on the call, we have -- initially out of the gate, we were very successful in launching our recurring revenue model in Korea. But over the last couple of quarters, it slowed down a little bit.

And we've been placing in Japan, primarily Japan and China. We're still placing in Korea, but we're working on a distributor to ensure that they have the level of growth that we both expect out of this. very lucrative model for both parties..

[Operator Instructions]. Our next question comes from Joe [indiscernible] with H.C. Wainwright..

Great. This is Matt on for Joe. First, I want to extend congrats on the encouraging sales tractions. But our question is more related to the geography and the current ongoing pandemic. I wonder if you guys have any insight about areas or regions that you might be being contributors as they come out of the pandemic.

And possibly other area is other countries that are risks, particularly if we're seeing more restrictions coming into place and how this might affect your strategy going forward..

Sure. Good question. As we -- I think we stated in the call, we believe that -- Across the country, we're about 90% to 95% back as far as patient visits and staffing in most of the country.

The one -- it's actually two areas that we've identified, and this has come mainly through our sales force and what they're seeing out there as well as I've spent some time in the field. There has been a slow uptake in some parts of California around L.A., in particular, and also in New York City.

Some of the biggest cities in Boston are all a little bit slower coming back. And I think if you look at how they came back with mass and people going back into the city, particularly in New York, it's not hard to explain. A lot of the patients that visit dermatologists in Manhattan, in particular, come from outside of the borough.

If they're not coming into the borough for work, then they're not probably going in there to see a dermatologist either. So that's been a little slower coming back than some of the other regions. But for instance, we see in the Midwest, we're operating at 95% to 100% of capacity. It's a much better picture. So it is a little bit regional.

It really hasn't affected our strategy too much. We are expanding our sales force by a couple of territories and probably would inevitably add someone in the Northeast and somewhere in the Midwest, I would believe.

And that will certainly accelerate our ability to increase our frequency, which is key to driving usage, and that's really what we're focused on. So unless the Delta really starts to take more of a hold right now, we don't anticipate any problems, but we're watching it very closely..

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

Thank you, operator, and I'd like to thank everyone for joining us today, and we look forward to talking to you again with our Q3 results. Thank you..

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