Greetings, ladies and gentlemen, and welcome to the STRATA Science – STRATA Skin Sciences' Third Quarter 2022 Earnings Conference Call. At this time all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Nicole Jones, Investor Relations. Thank you. Please go ahead..

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 September 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 the 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 facts 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 risks and uncertainties that could cause actual results or events 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 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 the live broadcast today, November 9, 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 in the company's earnings release for the third fiscal quarter ended September 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.

I will now turn the call over to Bob..

Thank you, Nicole. We are really excited to announce very strong revenues of $9.4 million for the period ending September 30, 2022, representing 22% year-over-year growth driven by record XTRAC sales. We have remained acutely focused on the commercial execution and positioning the company for accelerated growth over the coming quarters.

We remain targeted in our sales approach and are focused on closing the loop between our direct-to-consumer advertising efforts and the prescribing dermatologists, which we believe has set the stage for our success this quarter. During Q3, we successfully introduced our new product, TheraClearX for mild-to-moderate acne.

We are enthusiastic about entering into this $5.5 billion acting treatment market, and we believe our product has the potential to make a meaningful impact for those who suffer from acne. The device utilizes vacuum extraction with light therapy to clear out the occluded pours while reducing sebum or oil production simultaneously.

Importantly, TheraClearX delivered STRATA an exciting new commercial opportunity – growth opportunity whereby we have the ability to sell through our well-established partnership program.

Contributing to our record sales this quarter was our focus on our targeted therapy messaging, increasing equipment sales in our international markets and key opinion leader engagement. In our international markets, we have remained flexible in our offerings, shifting to more equipment sales.

As we saw this quarter, what we projected going forward is that our international revenue will largely come from capital equipment sales. STRATA has continued to invest in direct-to-consumer, also known as DTC marketing and direct-to-dermatologist marketing to ultimately drive awareness, adoption and utilization of XTRAC.

Our approach to DTC has become more focused as we rely on analytics to drive our tactics and strategy to drive decisions around our marketing efforts. In August, Ladenburg Thalman hosted a key opinion leader, or KOL, event with Dr. Benjamin Lockshin, MD FAAD, for STRATA as part of its health care Symposium Series. Dr.

Lockshin is a Director of Clinical – Director of the Clinical Trials Center at DermAssociates and has been a board-certified dermatologist for over 18 years. He also serves as an Assistant Professor at Georgetown University. During Dr.

Lockshin’s presentation, he highlighted XTRAC as a safe and cost-effective option for patients suffering from chronic skin conditions like psoriasis and vitiligo. He discussed XTRAC place as a non-pharmaceutical approach to manage chronic diseases and how the device can be used across spectrum disease severity from monotherapy to combination therapy.

We would like to thank Ladenburg Thalmann and Dr. Lockshin for their time and efforts in hosting this KOL event. Turning now to XTRAC. Earlier this year, we debuted XTRAC Momentum, which has a smaller sleeker footprint allows for faster procedure times.

We remain enthusiastic about our rollout of momentum as it represents the latest in excimer laser technology and provides an improved treatment experience for physicians and patients alike.

As of September 30, 2022, there are 899 XTRAC systems placed in dermatologist offices in the United States, an increase from 890 units placed in the period ended December 31, 2021. We continue to be focused on our strategy of refurbishing and redeploying underutilized assets. This effort helps on multiple fronts.

It allows STRATA to reduce cost of goods sold since we are able to utilize the parts from those other machines that have been removed. Additionally, it allows us to better manage our weather supply chain issues as they arrive.

We believe keeping underutilized machines below 15% will ensure that the machines in the market are being utilized on a minimum level basis. In July, Insights, Osler became the first FDA-approved treatment for vitiligo, optronic autoimmune condition that causes the skin to lose pigment.

With the approval of the first prescription treatment for vitiligo, we believe this could help drive patients into dermatologist office and demand for XTRAC services as a complement to the prescription treatments for vitiligo.

As a reminder, STRATA acquired the assets of Ra Medical Systems in August of last year, effectively eliminating our major medical equipment competitor in allowing us to market our full business solution to Ra Medical's existing base.

The acquisition increased our installed base by an additional 400 dermatology practices, accounting for 250 new accounts. Our sales force is aggressively focused on converting Pharos uses to the XTRAC partnership model.

We are pleased to have converted 10 of the Pharos uses to XTRAC partnership this quarter totaling in 67 customers to date who are committed. We are on track with our conversion expectations.

As we previously mentioned, conversions are largely dependent on when a Pharos device will need to be serviced, in which, at that time, we have the opportunity to convert the customer to the XTRAC partnership model.

In July, we announced the commercial introduction of TheraClearX, our noninvasive in-office treatment targeting the root cause of mild-to-moderate acne, launching the company to the $5.5 billion acne treatment market. The device combines vacuum technology and broadband light to treat acne.

Through our partnership program, dermatologists are able to offer the TheraClearX to patients without the need to purchase expensive equipment. With acne accounting for 20% to 25% of dermatological visits, we believe TheraClearX could be a great synergy for the company.

Additionally, STRATA is leveraging its national sales force and commercial team to sell through its existing channels. We expect to have several places by the end of 2022 and execute on our full launch in 2023. With respect to our international operations, we have remained flexible to the strategy, which has shifted to more equipment sales.

In this model, devices are sold directly to dermatologists emphasize you a cash-driven reimbursement approach. As a reminder, we have distribution agreements in Korea, Japan, China, the Middle East and Israel. Furthermore, acne delivers a large international opportunity, which we hope to address with TheraClearX device.

With our focus on international operations, we believe we will continue to see meaningful growth into the future. With that, I would like to now turn the call over to Chris to discuss the financials.

Chris?.

Thank you, Bob. Revenues for the third quarter of 2022 were $9.4 million a 22% increase over the third quarter of 2021. Our third quarter revenue was driven by strong international equipment sales. Non-GAAP adjusted EBITDA was $1.1 million as compared to $900,000 for the third quarter of 2021.

Equipment revenues for the third quarter were $3.6 million and a 78% increase as compared to $2 million for the third quarter of 2021. Recurring revenues in the third quarter were $5.8 million as compared to $5.7 million for the third quarter of 2021.

Non-GAAP gross domestic recurring billings was $5.5 million a 5% decrease as compared to $5.8 million in the third quarter of 2021. Overall, gross profit for the third quarter was $5.8 million or 61.6% of revenues as compared to $5.4 million or 69.7% of revenues for the third 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 TheraClearX and Pharos. Excluding amortization, gross margin was 67% in Q3 of 2022 versus 71.6% in Q3 of 2021.

The decrease in gross profit percentage was primarily the result of the product mix with higher sales of dermatology procedures equipment, which has a lower margin than dermatology recurring procedures. Looking ahead, we continue to expect to see gross margin improvement throughout the remainder of 2022.

Operating expenses were $6.6 million, an increase of 12.7% compared to $5.8 million in the third quarter of 2021.

The increase reflects investments in our commercial strategy, including higher direct-to-dermatologists marketing, professional relations activities, various expenses related to the launch of TheraClearX, increased employee-related expenses and higher consulting service costs.

Net loss for the third quarter of 2022 was $1 million or a loss of $0.03 per basic and diluted common share as compared to the net loss for the third quarter of 2021 of $500,000 or a loss of $0.02 per basic and diluted common share. At September 30, 2022, cash and cash equivalent was $8.8 million as compared to $10 million at June 30, 2022.

Now turning to our full year guidance we laid out in the beginning of the year. We continue to expect full year 2022 revenues to be in the range of $33 million to $35 million. I will now turn the call over to Bob for his closing remarks.

Bob?.

As we look at the remainder of the year, we believe there are a few catalysts that will continue to drive revenues. We project TheraClearX to be a significant contributor to our revenues in 2023. To reiterate, we plan on utilizing our already existing sales force to market the device.

As dermatologists look for nonprescription complementary treatment for acne, we are confident that TheraClearX could provide results and clinical benefit necessary. As we mentioned earlier, we launched XTRAC Momentum for our major customers.

The devices improved design and increased throughput will allow for treatments to be completed quicker, which could drive increased utilization. Over the past year, STRATA has aggressively implemented an initiative where underutilized machines were moved into redeployed with the goal to reduce the underutilization machines to 15%.

By focusing on this strategy, we were able to manage costs and potential supply chain issues. When looking towards the international markets, our flexible sales model has allowed us to shift more towards equipment sales.

By this measure, the international sales channels are making a meaningful impact on our revenues, which we plan to continue for the remainder of the year and beyond. Our acquisition of Ra Medical Systems will also contribute to our revenue growth as we aim to convert Ra users to extract as devices need servicing or repair.

The XTRAC partnership model is ideal for dermatologists in their practices as it does not require the purchase of capital-intensive equipment, the asset-light model allows dermatologists to remain flexible in their offerings.

We remain excited to capitalize on our catalyst and over the remainder of this year, we will continue to drive XTRAC utilization, grow our presence in our international markets, focused on our direct-to-consumer and direct-to dermatologists to marketing and continue to roll out TheraClearX, which we believe will meaningfully contribute to growing our top-line.

I will turn the call over to the operator for a question-and-answer session.

Operator?.

Thank you. [Operator Instructions] The first question today is coming from Jeff Cohen of Ladenburg Thalmann. Please go ahead..

Hi, this is Destiny on for Jeff. Thank you for taking our questions..

Hi, Destiny..

Hi, hope you guys are doing well. I’d like to start first with your commentary around leveraging your DTC campaigns that are existing for XTRAC and that you’re leveraging for TheraClear.

Can you just give us some additional color on the benefits that, that will have in terms of not only growing your top-line, getting awareness out to other accounts, but also the benefits in terms of your sales and marketing costs..

Sure. Yes. As you know, the company has had a lot of success in the past with direct-to-consumer advertising, in particular, using social media platforms as well as in-office promotion driven from the offices out to their patients.

And we’ve been – had a lot of success with XTRAC with the partnership model in driving patients into dermatologist office for treatments. And we think that will work just as well with TheraClear we haven’t completely rolled out a full program for TheraClear at this point.

As you know, we’re having a controlled launch here since July and really gearing up for our full launch as we move into 2023.

But we do see the opportunity to develop in-office materials, waiting room type materials, procures that the patients can bring home, and we’ll be utilizing social media as well for TheraClear as part of our overall DTC marketing plan for 2023.

As that relates to our sales and marketing efforts, really is, I think, I’ve talked about it before, Destiny, it’s in my mind, closing the loop. So, we’ll follow up that with also direct-to dermatologist marketing.

We want to make sure that when we do send patients into the dermatologist office that the providers is sure that XTRAC or TheraClear is the right choice for that patient.

So that requires not only our marketing and professional relations activities, but our sales force in there delivering the right message to our providers so that they feel confident in prescribing XTRAC or TheraClear for their patients.

Does that answer your question?.

It definitely does. Thank you for that. And then I guess I’d like to transition towards your commentary around vitiligo. We enjoyed hosting Dr. Lockshin for our investor event and when he was discussing this new drug that recently launched, he was discussing that there could be opportunity for STRATA to also benefit from that.

And I heard you discuss that briefly in your prepared remarks.

So, I’m just wondering if you can speak a little bit more to that? And if there are any trends you’re seeing early on?.

Sure. Absolutely. So there hasn’t been – as you probably know, anything really approved for the indication vitiligo for a longtime drug or a device to that matter. XTRAC is one of the few medical treatments that is available for vitiligo.

So the approval of Opzelura we believe, is going to probably caused a lot of vitiligo patients who haven’t saw treatment for a while to return to the dermatologists to see what this is all about. And as Dr.

Lockshin said on the interview you had with them, I think not only will that additional patient load coming into the dermatologist be good for XTRAC, but there is some anecdotal discussion out there between KOLs that the drug might work better with light. And obviously, XTRAC is a light therapy, targeted therapy, very effective in use on vitiligo.

So, we believe that as dermatologists get more experience with Opzelura, they may incorporate light therapy or XTRAC into that treatment regimen. So I think that’s exciting for us. And we’ve already armed our sales force with information around that and marketing materials to promote that message..

Okay. Got it. Thank you. And then lastly for us, can we just discuss your OUS strategy a bit more and more specifically around the TheraClear device? Thank you for taking our question..

Sure. Thanks, Destiny. Yes. So, I think, as you know, earlier this year, we started to transition a little bit more to capital equipment sales, OUS. We do still have a placement model out there. We have a number of placements in Asia.

But we did get feedback from some of our distributors that they thought that they could be more effective in actually selling capital equipment in some of the countries. So, we want to be flexible with our distributors. They have boots on the ground and figure that they know those markets better than we do.

So, we did give them that flexibility and it’s really paid off for us. Particularly, if you remember last quarter, we had a $1 million sale in China. That was very helpful for Q2 as well as for the overall year.

And it continues going forward, we’re seeing more and more of our partners looking to purchase machines and sell them in their countries versus the placement. So that’s worked very well. And we believe that’s going to be similar with TheraClear.

We think that will when we start to launch TheraClear in other countries, particularly the Asian countries as well as we think there’s an opportunity in Latin America, they’ll probably be mainly capital equipment sales. It’s – the device is not as expensive as an XTRAC or VTRAC for that matter.

So, I think we’ll probably see more of our partners looking to purchase the TheraClear from us than in the placement model..

Got it. All right, thank you for taking our questions. I’ll jump back in queue..

Thanks, Destiny..

Thank you. The next question is coming from Suraj Kalia of Oppenheimer. Please go ahead..

Good afternoon Bob and Chris. This is actually Mike on for Suraj..

Hey, Mike how are you doing?.

Good Bob. Thanks for taking our questions.

I wanted to start by asking – how is the utilization in revs [ph] per system, especially if you can comment on higher volume accounts versus lower volume accounts? And I don’t know if you gave any of the high-volume account metrics that I think you’ve shared in the past around a number of accounts dollars of revs, percent of revs that kind of thing..

Yes, we did it. We – as you know from last quarter, we have around 200 high-volume accounts. That number doesn’t fluctuate a whole heck of a lot. They’re generating about 50%, maybe a little bit over 50% of our overall revenue. And they continue to be real drivers of the business.

They seem to have come – overcome some of the operational issues that we’re seeing in some of our more middle accounts, if you will. We’ve talked about it a lot this year. There’s a lot of staffing issues out there. We know that a lot of dermatologists have sold their practices to private equity.

So, I think post-COVID, there’s been a lot of changes in the dermatology landscape, and we’ve done a good job navigating through that, but the high-volume customers, in particular, continue to really drive our business..

Okay. That makes sense, Bob. Thanks.

And then turning to the consumer in this current environment, are you seeing any changes in consumer behavior, any impact on their session completion rates, that sort of thing?.

No. I think the patients have come back really strong. I mean, in talking to dermatologists that are in private practice, they have long waiting lists of patients and long waits for appointment. So the number of patients is not an issue. Again, staffing has been the real problem operationally.

They’ve had a lot of turnover and hiring has been a problem just like in any other industry. So that’s been the real kind of headwind that we’ve seen all year long. We’re hoping that it’s really starting to go in the other direction now and we’re expecting a strong Q4. So, I think those – some of those issues will start to take care of themselves.

But I mean that’s really the only thing that I would say has been a headwind for us. As far as patients go, the patients have been back very strong..

Okay. That’s great to hear. And then you said you expect a strong 4Q. Any color you would offer as to the performance either on the top-line or gross margin line relative to 3Q sort of look at the balance of the year, obviously, you reaffirmed your guide for the year despite the nice beat today..

Yes. I’ll let Chris take on that one..

Yes, sure. I mean you can expect the margins to still increase as compared to prior three quarters here. With that being said, the recurring revenue, historically, you’ll see Q4 has always been the best quarter for us, and we’re anticipating that to occur again. Equipment-wise, international. Historically, Q4 has always dipped a little bit.

So we’re anticipating the same there, but we’re expecting another strong quarter and a strong recurring revenue quarter..

Great. Yes, Mike, just to add to that. I mean, as you know, psoriasis is the majority of our usage in the United States for XTRAC. And as the weather gets cooler, that’s when psoriasis starts to flare up. So we always see the fourth quarter being very, very strong for that reason and no reason to believe it won’t be this time around as well..

Okay, that’s all really helpful. Thanks guys..

Sure..

[Operator Instructions] We’re showing no additional questions in queue at this time. I’d like to turn the floor back over to Mr. Moccia..

Thank you again for joining us for the third quarter earnings call. We look forward to updating you on our continued progress. Everybody, have a good evening..

Ladies and gentlemen, thank you for your participation. This concludes today’s event. You may disconnect your lines at this time, and enjoy the rest of your evening..