Greetings. Welcome to the STRATA Skin Sciences Fourth Quarter and Full Year 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. Please note this conference is being recorded.

I will now turn the conference over to your host, Leigh Salvo, Investor Relations. You may begin..

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 December 31, 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 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, March 21, 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 fourth fiscal quarter ended December 31, 2021, which is accessible on the SEC 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..

Thanks, Leigh. Good afternoon, everyone, and thank you for joining us for our fourth quarter 2021 earnings call.

I’m incredibly proud of the progress that STRATA team made throughout 2021 as we navigated and adapted to unprecedented pandemic-driven global challenges, changes in executive management, and several new initiatives that were introduced and executed throughout the year.

Our many achievements were the result of strong commercial execution that delivered growth from our core XTRAC business and resulted in record quarterly revenue in Q4. We also expanded our opportunity through acquisition of the U.S.

dermatology business of a competitive platform and to new global markets, and fortified our team with highly experienced industry leaders. Most recently, we expanded into the large acne treatment market through another acquisition further setting up 2022 as a transformational year for our business.

I’d like to briefly cover some of our recent financial highlights, as well as trends we have seen so far this year. While we did experience headwinds related to staffing shortages brought on by the Omicron wave late in Q4, we ended the fourth quarter of 2021 at $9.1 million, an increase in 35% over the fourth quarter of 2020.

In addition, we finished full year 2021 with a strong year-over-year growth of 30% versus full year 2020.

Our recurring revenue from our XTRAC partners continued to increase, validating the positive impact of our investment in direct-to-consumer marketing, direct-to-dermatologist marketing, as well as our commitment to improving salesforce commercial execution.

Despite pandemic-related challenges, interest in XTRAC remains strong and we were able to continue to grow our domestic installed base. We exited the fourth quarter with 890 recurring revenue XTRAC devices in place in the U.S., up from 832 units at the end of 2020.

In group practices, where we continue to see a highly leverageable opportunity, we added another 76 devices, bringing our total up to 327 from 251 at the end of 2020.

As we entered 2022, our business was impacted to some degree by the enduring Omicron surge into the first half of January, particularly in larger metropolitan areas, staffing and dermatologists offices, and last days in the field for our salesforce due to the virus also had a negative impact on revenues at the start of the new year.

Our first quarter also sees the impact of seasonality as insurance copays reset for the New Year. Despite these factors impacting our U.S. recurring revenue, we have seen strong equipment in sales and are on track to achieve 18% to 20% year-over-year growth in the first quarter of 2022.

We are also seeing the benefit of our acquisition of Ra Medical’s dermatology business last August, as we began to win Pharos comebacks, which are providers who returned to our XTRAC system and recurring revenue partnership model from device ownership.

Within the first five months since the acquisition, our commercial team successfully converted nearly half of Ra’s Pharos customers with expiring service contracts to XTRAC, yielding 30 new placements by year-end. The majority of the remaining Pharos service contracts expire in 2022.

And as such, we are actively engaging with this highly targeted list of potential new XTRAC customers and are prepared to deliver a smooth transition to our platform. In early January, we were pleased to announce our acquisition of Theraclear acne system from Theravant Corporation, enabling us to enter the estimated $5.5 billion acne market.

Research shows that 20% to 25% of all visits to dermatologists are for acne, and are often treated with prescription drugs that can be costly or difficult to obtain and have significant side effects.

Theraclear delivers the combination of vacuum and broadband light for treating back acne that has been proven to clear skin rapidly for a fast and visible reduction in acne and associated redness. The quick improvement experienced by patient drives compliance and repeats visits to complete the therapy.

Therapeutic can be used as a monotherapy or in addition to other topical and/or oral drugs being prescribed. We view this asset acquisition as a perfect fit for STRATA’s market expansion goals as we can leverage our current customer base, commercial team and worldwide distribution network to drive utilization in the dermatologists office.

We have already started several activities in preparation for the launch, including additional market research, building inventory, investing in Salesforce training, and creating a marketing plan targeted towards potential patients and dermatologists with large populations of acne patients.

We continue to anticipate commercial launch in the third quarter of this year. Our salesforce is anxious to start promoting and selling this new device and preparing a list of key customers to approach upon launch. Based on initial conversations we’ve had with our dermatology customers, feedback has been overwhelmingly positive.

On the product development front, last month, we announced the commercial launch of XTRAC Momentum 1.0, it’s first U.S. – and its first U.S. installation.

This enhanced XTRAC engine-related technology delivers higher power, a faster repetition rate than current models and offers a new user interface and slim design intended to improve the treatment experience.

We expect the Momentum will become a catalyst for a high volume customers to treat more patients and increased revenues as we roll this device out over time. Turning to our international business, total revenue for the full year grew 28% over 2020, highlighted the significant traction achieved through our distribution partners.

The OUS opportunity remains an important element in our overall growth goals. We will continue to offer the option of recurring revenue place model as well as equipment sales to provide flexibility in these regions.

We are especially encouraged by the potential expansion opportunity internationally in vitiligo as that indication is more frequently treated by XTRAC in international markets.

Additionally, in January of this year, we announced expansion into Israel through a partnership with JuvenIL, the dermatology and esthetics portion of Trimaco, a leading distributor in Israel.

This agreement enables us to commercialize it, market our XTRAC as related to an additional 300,000 psoriasis and 160,000 vitiligo patients is already underway with the first placement early this year.

At the beginning of 2021, identified several areas of focus for the year that included return to historical investment in DTC marketing, with resumed funding to consumer advertising; actively engaging with high-volume of customers or accounts; bringing non-revenue-generating customers back following the impact of the pandemic on their business; and supporting our sales organization with improved marketing campaigns that can test drive usage among dermatologists.

We make consistent and notable progress throughout the year. First, our investment in DTC marketing had the anticipated upside impact on our business.

RDX charts, which reflect insurance benefit requests for new and existing patients throughout the calendar year, and represent patients who have been entered into our system as potential XTRAC patients, trended above 2019 levels throughout 2021 and are directly tied to our DTC efforts.

In terms of the number of high-volume accounts producing above 40,000 in revenue per year, in the fourth quarter, the number of high-volume customers was steady at 213 versus 214 in Q3, and up from 186 in Q1. High-volume customers contributed well over 3 million in revenues and accounted for 54% of all revenues in Q4.

High-volume customers will continue to be a focus in 2022 as well as moving all customers up in our revenue tiers throughout the year.

The continued focus on the number of high-volume customers reflects the commitment and execution of our salesforce in expanding usage and driving recurring revenue with our customers and will continue to be a priority for us going forward.

We also made significant improvement in bringing non-revenue customers back throughout 2021, with a goal of keeping the total percentage of non-revenue-generating devices below 15% of our total U.S. installed base, with an average start-up time of 60 days.

We were successful in ending the year 2021 with 15% of our installed base non-generating revenue in Q4, down from 19% in Q1. In 2022, we plan to continue to identify placements with customers who are not producing revenues, refurbishing those machines and reselling them to new customers.

In Q1, we have already removed 21 devices that will be redeployed to new XTRAC customers. Lastly, our new direct-to-dermatology marketing initiative is underway. This includes updated sales materials that focus on specific disease states and training to reinforce XTRAC’s effectiveness in treating approved indications on every call.

In addition, we continue to work with third-party – a third-party vendor to interact with payers with a goal of improving coverage for vitiligo in atopic dermatitis.

We are also interacting more directly with KOLs and office space dermatologist to fine tune our messaging going forward, gearing up to participate in several dermatology meetings and to recruit an advisory committee.

In short, we expect direct-to-dermatologist marketing to continue to be a key driver in 2022 as we further expand XTRAC’s usage across all indications. Before I turn the call over to Chris, I want to welcome Dr. Patricia Walker to our Board of Directors.

Patty is an practicing dermatologist and has deep experience leading R&D efforts for several high-quality medical device and therapeutic companies, as well as for numerous educational institutions. We are excited to have the opportunity to leverage her vast industry experience.

In addition, John Bagdasarian has joined the STRATA team as Vice President of Professional Relations. John brings years of experience in dermatology and building advocacy with KOLs and dermatology societies within the specialty.

In this role, John will be focused on capitalizing his – on his relationships with dermatologic foundations, KOLs and strengthening our key partnerships. Lastly, STRATA will be participating in the American Academy of Dermatology Meeting in Boston this week, where we hope to see some of you.

With that, I will now turn the call over to our CFO, Chris Lesovitz.

Chris?.

Thank you, Bob. Revenues for the fourth quarter of 2021 were $9.1 million, a 35% increase over the fourth quarter of 2020 and a 17% increase over third quarter of 2021. Our fourth quarter revenue was driven primarily by the continued increase in XTRAC usage, as well as increase in equipment sales internationally.

Recurring revenues in the fourth quarter were $6.7 million, a 32% increase over the fourth quarter of 2020 and a 17% increase in the third quarter of 2021. Similarly, the increase in recurring revenues was driven by the continued increase in XTRAC usage as a result of increased emphasis on salesforce execution.

Equipment revenues for the fourth quarter were $2.4 million, an increase of 45% as compared to the $1.6 million for the fourth quarter of 2020, and an increase of 19% as compared to $2 million for third quarter of 2021. These results reflect an increase due to the more focus on international equipment sales.

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

With the fourth quarter 2021, non-GAAP gross domestic recurring billings was $6.1 million, an increase of 14% as compared to $5.4 million in the fourth quarter of 2020 and an increase of 6% as compared to the $5.8 million for the third quarter of 2021.

Overall, gross profit for the fourth quarter was $6 million, or 66% of revenues, as compared to $4.5 million or 68% of revenues for the fourth quarter of 2020 and $5.4 million, or 70% of the revenues for the third quarter of 2021.

Gross profit for recurring revenues in the fourth quarter were $4.9 million or 74% of revenues as compared to $4.5 million or 68% of revenues in the fourth quarter of 2020 and $4.2 million or 74% of the revenues for the third quarter of 2021.

The reason for the increase in the overall gross profit was primarily due to the continued increase in XTRAC usage as a result of increased emphasis on salesforce execution. Our gross margins remained strong in the fourth quarter at 66%. We expect these margins to remain stable in the 65% to 70% range in the coming quarters.

However, some light negative impact is anticipated from the supply chain issues being experienced worldwide.

Net loss for the fourth quarter 2021 was 849,000 or a loss of $0.02 per basic and diluted common share as compared to net loss for the fourth quarter of 2020 of $443,000 or a loss of $0.01 per basic and diluted common share and a net loss for the third quarter of 2021 of $521,000 or a loss of $0.02 per basic and diluted common share.

Now turning to results for the full year 2021. Revenues were $30 million, a 30% increase over 2020. Recurring revenues in 2021 were $22.5 million, a 29% increase over the full year 2020. And equipment revenues for the full year were $7.4 million, a 31% increase over 2020.

For the full year 2021, non-GAAP gross domestic recurring billings were $22.1 million, a 31% increase over the full year 2020. Overall gross profit in 2021 was $19.9 million or 66% of revenues as compared to $14.1 million or 61% of revenues for the full year 2020.

The increase in gross profit is a result of the continued increase of XTRAC usage globally and strong equipment sales. Gross profit on recurring revenues for full year 2021 was $16.1 million or 72% of revenues as compared to $11.6 million or 67% of revenues for the full year 2020.

The increase in gross profit is a result of the continued increase of XTRAC usage globally. Total operating expenses in 2021 was $24.3 million, an increase of 33% as compared to $18.2 million for the full year 2020.

This increase was driven primarily by the sales and marketing spend, which was higher due to the impact of COVID-19 on our business in 2020. Going forward, we expect operating expenses to increase largely due to the rollout of Theraclear and increased sales and marketing expenses around XTRAC.

Net loss for the full year 2021 was $2.7 million, or a loss of $0.08 per basic and diluted common share, as compared to the net loss for the full year of 2020 of 4.4 million, or a net loss of $0.13 per basic and diluted common share.

At December 31, 2021, cash and cash equivalents was $12.6 million as compared to $13.1 million at the September 30, 2021. Turning to our guidance for the full year 2022.

Despite Omicron headwinds and assurance resets for the New Year in the first quarter of 2022, STRATA projects 2022 full year revenue to be between $33 million and $35 million, representing a strong double-digit year-over-year growth. With that, Bob and I would like to open up the call for questions..

At this time, we’ll be conducting a question-and-answer session. [Operator Instructions] Our first question is from Jeffrey Cohen with Ladenburg Thalmann. Please proceed with your question..

Hi, Bob and Chris, how are you?.

Good.

Jeff, how are you today?.

Just fine. So can you walk us through how you’re anticipating Theraclear rolling out 2022.

I know there’s unions out there now, but how do you expect to roll that out as far as your commercial salesforce and what will be your financial model there?.

Sure. Yeah, we – we’re anticipating rollouts somewhere around mid-year, probably about July, we want to try to get it out before the acne season, which typically is August, September.

There are some machines that are out there, we had to build up some inventory, and we’re just really trying to rebrand around Theraclear, so it has a much more sharper message than it’s been delivered in the past. The salesforce will be rolling it out. We anticipate that our first set of customers will be our 900 XTRAC partners.

Those are medical doctors treating medical conditions with medical devices. So – and ideally, we want to try to put Theraclear into those offices. We have relationships with those folks and think that would be an excellent place for us to start. There’s a lot of options for treating acne, as you know, a lot of drug options.

But the reimbursement around drugs has really fallen off dramatically over the last several years. So we think we’ll have a very nice competitive story with Theraclear in talking to the dermatologist who treat acne and give them an option that’s not only good for their patients, but good for their practice. So we’re looking forward to that.

It’s not going to be a capital equipment sale to answer your second part of the question. We’re looking at probably some type of lease or monthly fee, so that this in partnership with the dermatologist, and then we’ll be probably charging on a per use basis..

Okay, got it.

And then can you walk us through the Momentum 1.0 as far as conversions during the coming year? We’ll be going after the highest high-volume practices first and how that work as far as leasing arrangements and taking back older units?.

Yep, absolutely. We will absolutely be targeting our high-volume customers. As you know, it’s a faster machine. It works a lot quicker than some of the older models, which allows the dermatologists to treat more patients and a lot of these, particularly the high-volume dermatologists do clinics, psoriasis clinics for eczema or for vitiligo.

So we want to put in their hands the fastest machine that’s available, so we’ll be targeting those folks first. We don’t have a lot of them built currently. I think we have about six or eight in inventory that will roll out here quickly.

And as we build more roll amount to the additional targets that we have set, and it will take back the other machines that they currently have and refurbish them and place them or redeploy them somewhere else where they can generate revenue for us..

Got it. And then two quick clarifications on some numbers.

Chris, you talked about Q1 on an annual basis, was that 18% to 20% I heard?.

Yes. Correct..

Okay, got it.

And then your commentary on gross margins was mid-60s is probably a good range for 2022?.

Yes. Most likely with the current supply chain issues around a country. Yeah, we’re looking between mid-60s to high-60s..

Okay, perfect. That’s it for us. Thanks for taking the questions..

No problem..

Thanks, Jeff..

Our next question is from Suraj Kalia with Oppenheimer. Please proceed with your question..

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

Hi, Suraj, how you doing? Yes, we hear you fine..

Hope everyone is safe and healthy. Hey, so, Bob, either a question for you or Chris.

For FY 2022, the guide, can you give us the mix of organic XTRAC versus Pharos pull-through versus Theraclear?.

Well, Suraj, we’re not breaking out Ra from our XTRAC business as you can understand. As we convert Ra customers over to XTRAC, they become XTRAC partners. So we – we’re really only measuring kind of the conversion rate, if you will.

And as you heard earlier in the call, we converted 30 out of the 70, I think, it was about 75 machines that came off service contracts in Q4. And well, from August through Q4, we have another 150-plus coming off in 2022. So we expect to have at least as good a rate of conversion, as we’ve had so far. So that’s in the 40% to 45% range.

And even the ones that have not come over yet, those aren’t lost opportunities, they just aren’t ready yet. A lot of these machines coming off service contracts, but it’s still operational. So the dermatologists are continuing to use them. And I think they will, until they have an issue with them. And at that point that’ll be our opportunity to step in.

So I think if I break down kind of like what 2022 looks like, I mean, the emphasis is going to be a course on recurring revenue, which is a combination of our existing XTRAC partners, as well as our conversions from Ra. And then we have our international business, which continues to grow very nicely.

We’re hoping to expand not only in the countries that we already are in, but beyond that, we’re also looking to bring on a Head of International Sales here in the near future to really help us jumpstart that. And then lastly, Theraclear. And Theraclear, as I mentioned, will be launched in Q3.

We’re not expecting a whole lot of impact in 2022 from Theraclear. Obviously, we have to place the machines out there. We have to get them up and running, obviously train staffing – staff within the dermatologists office. So it will be a contributor in the second half, but it’s not a big contributor overall.

So those are the four levers, I think, if you’re looking at how we’re going to hit the numbers that we’re kind of laying out there..

Fair enough.

Hey, Bob, on Momentum, give us an idea about the initial accounts being targeted and the thought process around patient retention and the metrics used there off?.

Good question. Yeah, so I mean, again, for Momentum, we’re targeting our highest prescribers. We placed our first one out in a very big clinic out in California.

We’ve identified the next five that we want to get Momentum into, they’re all high-volume customers who generate not only a lot of revenue for their own individual practices, but for STRATA as well. So, that will be where we’ll focus.

As far as patient retention, we actually really have an initiative underway, Suraj, where we’re collecting more data than I think we ever have before in the company.

We’re also looking at a salesforce SFA system, so we can capture what they’re doing on every call, what kind of inventory is out there, what the usages, what specific indications they’re using it for. So, one of the things that I identified when I came over earlier last year was the data wasn’t as robust as it could be.

So we have a real initiative that’s being supported by the Board to really upgrade our overall data collection. And that way, we can focus a lot more on retaining patients going forward. So it is an important piece for us and something that we are looking at..

Fair enough. And last question from my side, Bob, I’ll hop back in queue. You guys gave some metrics in terms of revenues per customer, so to speak. If I could frame a question differently, Bob, how does geographic concentration – revenue concentration in the U.S.

look like? And by the same token, how does the pie chart for sales rep concentration look like? I.e., these many reps produce this much amount or the majority of it. Does the Pareto rule still apply for the rep part of the equation? Gentlemen, thank you for taking my questions and congrats on the progress..

Thanks, Suraj. Yeah, I mean, the Coast – both East Coast and West Coast are really where the majority of the revenue is generated. And I – my experience has been that that’s probably true for most dermatology companies. We also have a pretty good presence in the Upper Midwest, if you will, like Chicago, Wisconsin, Indiana, Illinois, that area.

So – but majority really is the East and West Coast. We do have 30 reps out there currently.

Most of them are generating somewhere between about each quarter, probably about a $0.5 million to – excuse me, you want to?.

Yeah, Bob was saying this is mainly Northeast and the West is where majority of our XTRAC domestic revenue is coming from. And as you would imagine, a lot of our sales force is allocated to those type of territories..

Thank you..

We have reached the end of the question-and-answer session. And I’ll now turn the call over to CEO, Baba Moccia for closing remarks..

I’d just like to thank everyone for joining our call today, and we look forward to catching up and see you with the next STRATA quarter. Thank you..

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