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..

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..

our consistent level of investment in DTC advertising has continued to drive patient interest and appointments for XTRAC treatment. Our new direct to dermatology marketing has our sales force delivering disease state messaging on benefits of XTRAC laser treatments for psoriasis, vitiligo and atopic dermatitis.

This is now being reinforced by the efforts of our professional relations activities, which has KOLs speaking about XTRAC at medical meetings and the value of targeted phototherapy as an excellent treatment option for patients either alone or in combination with drug therapies.

We expect all these commercial activities will drive increased usage of XTRAC and grow recurring revenues. In addition, reengaging with high volume accounts, customers that produce more than $40,000 in revenue per year has also shown positive outcomes.

In the first quarter of 2022, we had 162 high volume accounts that contributed $2.4 million or 48% of the total gross domestic recurring revenues. This compares to 150 high volume accounts that contributed $2.4 million or 48% of total gross domestic return revenues in Q1 of 2021.

This not only signals our ability to add new high volume customers, but our lower tiered accounts are contributing at higher levels. It is important to note that these high volume accounts are also the primary targets for receiving XTRAC Momentum, our enhanced excimer laser launched in February.

Momentum represents the latest in excimer laser technology delivering high power and a faster repetition rate than previous models. The Momentum also offers a new user interface and slim design intended to improve the treatment experience for both the physician and the patient. We have already commenced placements in the U.S.

with a goal of deploying 15 to 20 machines by year-end. These placements will allow dermatologists to treat patients more efficiently and in return, further improve our recurring revenue stream in these participating high volume accounts.

Removal, refurbishment and redeployment of non-revenue generating placements is also a strategy we are pursuing in order to gain further leverage in cost efficiencies and to mitigate potential suppliers chain risks. Typically, when we identify a customer that has not placed an order in 6 months, we begin the process of removal.

This approach has been successful for us thus far, and we plan to continue this practice going forward with the goal of keeping non-revenue generating customers at or below 15% of our domestic installed base. Lastly, supporting our commercial team with improved marketing campaigns that can best drive usage among dermatologists.

We were pleased to become a corporate sponsor of the Global Vitiligo Foundation, we look forward to further supporting their mission of improving the quality of life for individuals with Vitiligo for years to come. Additionally, STRATA had a positive presence at the recent American Academy of Dermatology meeting in Boston.

We had a number of productive one-on-one meetings with current and potential partners. In addition, our excimer laser was discussed and included in the various presentations on psoriasis and vitiligo. Turning to our acquisition of Ra Medical's dermatology business last August.

In the first quarter, we were successful in adding 15 former Pharos device owners to our platform, bringing our total to 45 new customers to date. These come back customers are now committed to our XTRAC system and recurring revenue partnership model.

Looking ahead, the majority of the remaining 198 Pharos service contracts expire in 2022, providing substantial opportunities that our sales force -- our sales team can leverage throughout the year. We are actively engaged with these customers in order to provide a smooth transition to XTRAC -- to the XTRAC platform.

We anticipate further conversion will remain high. And while not all Pharos customers will switch to XTRAC, we are confident that we can achieve at least the current conversion rate of at least 40% to 45%.

In terms of expansion in the dermatology market, our acquisition in January of the TheraClear acne system from Theravant Corporation enables us to leverage our existing sales force, customer base and distribution network to enter the estimated $5.5 billion acne market.

Our goal is to launch the new TheraClear as part of STRATA's portfolio in the third quarter of this year.

Tracking this time line, we have already begun to solicit customer feedback, the other key clinical support, build inventory and invest in sales force training and marketing initiatives targeted towards dermatologists with large populations of acne patients. The feedback thus far is very favorable.

Dermatologists are looking for solutions to common skin problems like acne that not only will quickly provide visible results, but that can also be an economic contributor to their practice. Longer term, we believe that TheraClear system has additional indications for dermatologic conditions, which we plan to develop and launch in the coming years.

Turning to our international results. As I mentioned at the onset of the call, we saw particularly strong international equipment sales. Total revenue for our international business in Q1 2022 grew 45% over Q1 of 2021, reflecting our renewed focus on key regions outside of the U.S.

as well as our flexible approach to working with customers and distribution partners. In the coming quarters, we have plans to further expand internationally. We believe that we can leverage the TheraClear acne [ph] system in more countries as acne presents a large opportunity, particularly in Latin America.

As we enter the second quarter, we have seen Q1 Momentum persist and are optimistic this trend will continue. We saw a strong marching with the staffing issues existing throughout the pandemic. We are finally showing signs of subsiding.

We have a training initiative with our sales force in Q2, and we plan to introduce a new automated system that will give our team the tools to target and increase business with historical and current data analysis. Our direct-to-dermatology marketing is also taking hold, and we are seeing the results in increased revenues from the prior year.

Our focus on commercial execution is paying off, and I am more encouraged than ever that STRATA is heading in the right direction, on track for the remainder of 2022 and expanding its potential going forward. As I look towards the rest of the year, I am very excited about the many catalysts STRATA has on the horizon.

We are looking forward to rolling out TheraClear acne [ph] and expanding into the acne care market, further driving adoption and utilization of XTRAC and is interacting more directly with dermatologists to increase exposure among the dermatology community. With that, I'd like to turn the call over to Chris..

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

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?.

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..

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..

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..

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?.

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..

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?.

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..

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..

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..

Perfect. Thank you..

Thanks, Destiny..

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

Hey, Bob, Chris.

Can you hear me all right?.

Hear you fine. Good afternoon..

I hope everyone is safe and healthy..

Thank you..

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?.

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..

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..

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..

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..

Thank you..

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..

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..

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