Greetings ladies and gentlemen and welcome to the STRATA Skin Sciences Second Quarter of 2022 Earnings Conference Call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Leigh Salvo, Investor Relations..

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 June 30, 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 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 Factor section of our public filings with the Securities and Exchange Commission, 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, August 10, 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 recently comparable GAAP financial measure is available on the company’s earnings release for the second fiscal quarter ended June 30, 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..

Thanks, Leigh. Good afternoon, everyone, and thank you for joining us for our second quarter 2022 earnings call.

Continued execution on our commercial growth plan delivered another quarter of positive financial results including record revenue and further validates our opportunity gained share in the market for in-office treatment of dermatologic conditions.

Our team is more energized than ever as we've expanded our portfolio and entered new markets where we see tremendous long term potential. Second quarter revenue was $9.1 million reflecting a 23% year-over-year growth and included a $1 million, one-time capital equipment sale in China.

As we have discussed on previous calls, going forward we will be offering the flexibility of both a placement model and capital equipment sales internationally, and expect that OUS revenue will largely come from capital equipment sales, whereas U.S. customers will continue to follow our placement model.

As of the end of Q2, our domestic XTRAC installed base increased to 915 devices, up from 903 at the end of Q1 of 2022.

Excluding the contribution from the equipment sale in China, our results were driven by a continued focus on strong commercial execution, expanded usage among existing XTRAC users, particularly our high volume customers, increased KOL engagement and support for STRATA’s product portfolio through advocacy and at industry events and continue direct to dermatologist marketing.

More recently, we were excited to commercially launch TheraClearX, our FDA cleared technology that allows us to address the substantial market opportunity for acne treatment with a noninvasive, highly effective, in-office procedure. This soft launch in select markets enables us to continue to build inventory and gain more market knowledge.

We expect this to be a meaningful growth driver for us in the future. As an update on the commercial strategies that we first outlined in 2021, we continued our focus on high volume accounts or customers that produce more than 40,000 in revenue per year, which yielded further improvement in the second quarter.

These customers are value to STRATA as they account for roughly half of our overall revenues. In Q2, we had 210 high volume accounts that contributed 54% of total gross domestic recurring revenues as compared to 185 high volume accounts contributing 51% of total gross domestic recurring revenues in Q2 of 2021.

These high volume accounts are also our primary targets for receiving XTRAC Momentum. As a reminder XTRAC Momentum is our newly improved laser that allows dermatologists to treat patients even more efficiently.

We remain on track to reach our goal of deploying 15 to 20 XTRAC Momentum machines by year end, with the plan over time to improve the overall quality machines deployed in the U.S. and drive further utilization.

We also continued to invest in direct-to-consumer and direct-to-dermatologist marketing, further driving patient awareness and product adoption in dermatology practices. Our sales force is delivering a more refined message, highlighting the benefits of our medical devices for patients with psoriasis, vitiligo, and eczema.

This coupled with our continued professional relations activities has allowed STRATA to expand uses of XTRAC and increase recurring revenues.

In an effort to gain further leverage in cost efficiencies and to mitigate potential supply chain risk, we made great progress in removal, refurbishment, and redeployment of non-revenue generating placements of prior XTRAC placements that have not been in use for six months or more.

We have outlined a goal of keeping non-revenue generating customers at or below 15% of our domestic installed base and we work hard every quarter to achieve that level. Turning to our expansion into the acne treatment market. As I noted earlier, we recently announced U.S.

commercial launch of TheraClearX, a noninvasive in-office treatment that targets the root cause of mild-to-moderate acne. The TheraClearX system based on FDA cleared technology acquired through an asset acquisition earlier this year is engineered and indicated specifically for the treatment of acne on patients face, chest, and back.

This was an exciting milestone for us as I'm confident we can be highly competitive in the estimated $5.5 billion acne market. Our enhanced device combines vacuum technology and intense broadband light, which has been proven to show significant promise in the fight against acne.

In order to achieve best results, patients are recommended to complete four to six treatment sessions that are pain free and can be completed in 15 to 20 minutes. Over the past several months, we have worked to prepare our sales force for the launch of TheraClearX.

As part of these preparations we held a national launch meeting in June and established a TheraClearX Advisory Board to discuss the long-term strategy and vision for the product. We also actively engage with key leaders in the dermatology space with continued dialogue paying off.

We plan to keep these productive conversions a priority so that we can support our partner dermatological clinics as best possible. Additionally, we continue to invest in marketing initiatives targeted towards dermatologists with large populations of acne patients.

As part of those efforts, we are excited to now offer an acne treatment through STRATA's well-established partnership program, which offers dermatology practices in the U.S. practical, in-office treatment solutions without the need to purchase expensive equipment.

In addition, our commercial team has an excellent opportunity to target the current XTRAC installed base as many synergies exist.

We are still in the early stages of rolling out this platform and expect to see measurable contribution from TheraClearX beginning in 2023, but are very encouraged by the significant opportunity, competitive advantages, and early physician interest.

Long-term we believe that TheraClearX system has the potential for a number of additional indications for dermatologic conditions, which we're excited to pursue in the coming years. Turning to our acquisition of the RA Medical's dermatology business.

We were pleased to convert an additional 12 machines in the second quarter, bringing our total to 57 new customers to date that are committed to our extract partnership model. There are now 54 Pharos service contracts that are due to expire in 2022. Then in 2023 and 2024, there's a remaining 43.

The biggest factor in our ability to transition customers is timing. Customers will use the Pharos machines they own until they need maintenance and once that occurs, STRATA has the opportunity to convert these customers to the XTRAC model.

We are well positioned to capitalize on these potential customers and actively engage to offer a seamless transition to XTRAC. Encouragingly, we are on track with our initial expectations and believe there is more opportunity to convert Pharos users in the coming months. Turning to our international results.

As noted earlier, we received a one-time payment of approximately $1 million from a capital equipment sale in China. This sale further reinforces our decision made in Q1 to offer either placement or purchase models to international customers.

This strategy has been successful for us thus far, and we will continue to remain flexible in our offerings so that we can capture the greatest market share possible. We were pleased to welcome Michael Goodman to the STRATA team as our new Head of International Sales in Q2.

In this newly created role, Michael has become a key leader in our expanding commercial leadership team. Since joining in mid-May, Michael has been charting a plan to grow current business with distributors and has been using task relationships to begin discussions in new countries in Asia, Latin America, and Europe.

Additionally, we sold an XTRAC machine in Europe in August, our first in that market in several years, giving us renewed optimism that we can open more doors for us Internationally. STRATA has the capability and capacity to target additional international markets.

Acne presents a large opportunity across the globe, and we plan to leverage the TheraClearX system to penetrate those opportunities. Combined with our extract presence and an increased focus on distributor relationships, I see our international franchise driving meaningful results for us as soon as 2023.

Entering the second half of 2022, we are cautiously optimistic in our ability to deliver strong results that remain in line with our current guidance of full year revenue growth in the range of 10% to 17% year-over-year.

We will monitor factors impacting the broader macroeconomic environment and adjust commercial strategies as necessary with continued attention to cost efficiencies and cash preservation. Our team is more energized than ever with the numerous growth callus on the horizon and the encouraging customer attention we are gaining.

We will continue rolling out XTRAC to capitalize on the large acne care market, increase our presence internationally, further drive adoption utilization of XTRAC through continued support for our customers and DTC advertising and continue to execute our key commercial strategies. With that, I'd like to turn the call over to Chris..

Thank you, Bob. Revenues for the second quarter of 2022 were $9.1 million, a 23% increase over the second quarter of 2021. Our second quarter revenue was driven by an increase in gross domestic billings and strong international equipment sales.

Equipment revenues for the second quarter were 3.5 million, an 83% increase as compared to $1.9 million for the second quarter of 2021.

As Bob noted, our Q2 revenue, this quarter concluded a one-time capital equipment sale in China of approximately $1 million and reflects our previously communicated strategy to focus more on equipment sales internationally. Recurring revenues in the second quarter were $5.6 million, a 2% increase over the second quarter of 2021.

Non-GAAP gross domestic recurring billings was $6 million, a 9% increase as compared to $5.5 million in the second quarter of 2021. Overall gross profit for the second quarter was $5 million or 55% of revenues as compared to $4.8 million or 65% of revenues for the second quarter of 2021.

The lower gross margin in the quarter is primarily due to the increase in intangible amortization expenses associated with our recent asset acquisitions of TheraClearX and Pharos. Excluding amortization gross margin was 61% in Q2, 2022 versus 66% in Q2, 2021. This is attributed to equipment sales, which has a lower gross profit margin.

Looking ahead, we continue to expect to seek gross margin improvement throughout the remainder of 2022, returning to historical levels in the mid-sixties, with some quarterly fluctuation based on mix between recurring revenues from system placements and equipment sales.

In addition, while we have taken steps to mitigate supply chain risks, some minimal impact is still anticipated. Gross profit for recurring revenues in the second quarter were $3.3 million or 59% of revenues as compared to $3.8 million or 70% of revenues in the second quarter of 2021.

As we have communicated the lower gross profit margin was due to the increase in tangible amortization expenses related to our asset acquisitions of TheraClearX and Pharos. Operating expenses were $6.7 million, an increase of 18% compared to $5.7 million in the second quarter of 2021.

This increase reflects investments in our commercial strategy, including higher direct to dermatologist marketing, professional relations activities, various expenses relating to the launch of TheraClearX and an increased employee related expenses. Additionally in the quarter, we increased spend on our international business and trade shows.

Net loss for the second quarter of 2022 was $1.9 million or a loss of $0.05 per basic and diluted common share, as compared to net earnings for the second quarter of 2021 of $1.1 million or earnings of $0.03 per basic and diluted common share. At June 30, 2022 cash and cash equivalents was $10 million as compared to $10.9 million at March 31, 2022.

Turning to our guidance for the full year of 2022. As we laid out at the beginning of the year, we continue to expect full year 2022 revenues to be in the range of $33 million to $35 million representing growth of 10% to 17%.

We are pleased with the progress that we made towards this goal in the first half of 2022 and we believe that we are on track to finish the year on a high note. With that, Bob and I would like to open the call for questions..

Thank you very much, sir. [Operator Instructions] The first question comes from Jeffrey Cohen of Ladenburg..

Hi, Bob and Chris how are you?.

Good, Jeff, how are you tonight?.

Just fine. So a few questions from our side.

So congrats on the lump from China for the second quarter, should we expect that to normalize back to previous levels for the back half of the year and going forward?.

Yes, absolutely. That was some leases that they converted over. So it was kind of a one time in the second quarter, but we expect to normalize going forward..

Okay. And as far as ex-U.S.

inclusive of China, you mentioned that your focus will be predominantly upon equipment specifically, but do you expect the ex-U.S to occur on the recurring side of things?.

Japan still has a pretty good recurring revenue model running there. But some of the other partners that we have expressed interest in equipment sales for their partners. So I think that you'll see more of a mix of equipment sales internationally than you will of recurring revenue..

Okay, got it.

And could you walk us through some of the differences on the Momentum machine that you're rolling out this year?.

Yes, sure. The momentum is number one, it has a smaller footprint. It's more of a taller machine. The current machines are more closer to the ground, if you will. It's a more efficient, faster working laser.

So what we anticipate is that where some dermatologists will run laser clinics the fact that it works faster and more efficiently, that they'll be able to see more patients. So I think we'll help us in driving revenue as we, distributing more of these throughout the country. But it's just a sleeker of machine.

It has a better interface, better software. So it's an upgrade all around and I think, certainly for our high volume customers, we want to try to put them in their hands as quickly as we can..

Right.

I think you just answered my next question, which is most of the older machines are going to those 210 high volume accounts or are they going to new accounts?.

Yes, no, mainly to our high volume customers. Our goal is to deploy about 15 to 20 this year. And as we build them and replace some of the older machines with our high volume customers will be getting their Momentums..

Okay, got it. That does it for us. Thanks for taking the questions..

Great, thanks Jeff..

Thank you. The next and last question comes from Suraj Kalia of Oppenheimer..

Good afternoon, Bob and Chris. This is actually Mike on for Suraj. Thanks for taking our questions..

Hi, Mike.

How you doing?.

Hey, good, Bob, how are you? Good to see both sequential and year-over-year growth in recurring revs.

Again, curious if you can provide us any color on the per system metrics, just to help us get a handle on utilization, either revs per system and or DTC spend per system, how those are trending?.

From, again it’s a DTC part. I mean, we don't break it down by system Mike, but we haven't really changed the spend quarter-over-quarter. It's been pretty steady. We do have a little bit of a drop off in the middle of the summer.

But then we pick it back up in the fall because as you probably know, diseases like psoriasis and atopic dermatitis tend to flare up as you move into the cooler months. So we put more spending behind it in those, cooler months to drive patients in. What was the other metric you asked? I apologize..

Oh, it's revenues per system, how those are trending relative to historic levels?.

Yes, so and domestically the average recurring revenue per system is around 5,700 hours. And as we've noted in the past, that more machines we're putting out there, the more we're de diluting. So that number kind of comes down, but sequentially a quarter-over-quarter, it increases..

Okay. That's helpful, Chris, thanks.

And then any material COVID or staffing impacts in any of your geographies, either in 2Q or continuing down to 3Q?.

Yes, no good question. what we've heard from our partners and from dermatologist in general, the patient levels are back, back to normal, matter of fact, they're probably a little bit above normal staffing though is still an issue with a number of offices. And what they're finding is that they have a number of more patients in a daily visits.

So that is a problem for the offices. We haven't seen an effect us too much. We stay very close to it and obviously talk to our KOLs as much as, as we can and help them with appointments and making sure that patients can get in to get their laser treatment, but staffing remains an issue out there, but the patient levels have returned to normal..

That's great to hear on the patients. Thanks, Bob..

Absolutely..

And then finally, any updates you can share on some of the, you know, topical Jack inhibitors that are out there, any impacts or effects that you're seeing in any of your markets?.

Yes. They make a lot of noise as you know, mainly the [indiscernible], which was originally approved for atopic dermatitis, driven in, some new patients seeking treatment.

And we do get some use in atopic dermatitis as a conjunctive therapy, if you will, but the real good news is they just recently, as you probably heard, got approval for vitiligo, which was something we were anticipating and hoping for because, my feeling is that it's going to drive in a number of vitiligo patients who haven't sought treatment in the past because of lack of good therapies out there.

And that's going to help us because there has been some anecdotal, information given to us by KOLs that eczema legs, there will actually help if -- with patients who are using [indiscernible] and shorten the length of time that they have to be on that drug. Because right now I think the label says six months of therapy.

So it's a long therapy track for the patient for the patient and if we can combine that with excimer laser that might shorten that therapy..

That's great to hear. Thanks for that update, Bob.

And then finally round that good to hear another 12 contract conversions is the conversion rate still, in the tip, in the range that you said last quarter, kind of that 40% to 45%, obviously I'm sure it can fluctuate quarter-to-quarter or overall or if you're even disclosing that at this time?.

Yes. We're still kind of in that range. I mean, we're on target for where we would hope to be at this point. We've got a number of Pharos customers in the pipeline that, I think we talked about it. Timing is the biggest issue here.

I think under the circumstances in the environment with inflation and such, a lot of these practices are holding onto the machines as long as they can until they breakdown and when they finally breakdown, that's our opportunity, for to, best can convert them over to the extract partnership. So I think it's going to get better as time goes on.

And some of these machines that have been out there for a while, we'll start to have issues, but we've been pretty successful and feel good about where we're at and think that it's only going to improve as time goes on..

That's great. That does it for our question. Thanks a lot guys..

Thanks, Mike..

We have a follow up question from Jeffrey Cohen of Ladenburg..

Hey just a quick one, Bob, if you could comment as far as TheraClear and the anticipated rollout? Second fall under equipment on the revenue side will be no recurring associated with TheraClear placements.

Is that right?.

Yes, so TheraClear will be recurring revenue. We'll going through his rentals and we'll be selling as same as codes as we do with our current extract..

Yes, Jeff, our model is that there's going to be a monthly charge to the practice and then they will pay us per usage, per code, just like with XTRAC..

Got it. Okay, perfect. Thanks for taking that..

No problem..

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

Thank you, Operator. Next week, we look forward to our XTRAC eczema laser featured in-depth discussion with Dr. Ben Lockshin, Director of the Clinical Trial Center at U.S. Dermatology Partners, in a live webcast on August 16, hosted by Jeff Cohen of Ladenburg Thalmann. The discussion will focus on growing psoriasis and vitiligo markets.

Thank you all for your interest in STRATA and good evening..

Thank you. Ladies and gentleman, this concludes today's conference. Thank you for your participation and you may now disconnect your lines..