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

It is now my pleasure to introduce your host, Rich Cockrell, of Investor Relations. Thank you, Rich. You may begin..

Good morning, everyone, and thank you for joining us today. Earlier today, STRATA Skin Sciences released its financial results for the third quarter ended September 30, 2023. A copy of that release is available on the company's website.

Now before we begin, I'd like to remind everyone that comments made by management during this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include, but are not limited to, remarks about future expectations, plans and prospects for the company.

We encourage you to review the company's filings with the SEC, which identifies specific risk factors that may cause actual results to differ materially from those contained in any forward-looking statements made today.

The company does not undertake to update any forward-looking statements as a result of new information or future events or developments. With us on the call today are Dolev Rafaeli, Vice Chairman, President and Chief Executive Officer; and Chris Lesovitz, Chief Financial Officer.

Following management's prepared remarks, we will open the call for questions. And with that, I'd now like to turn the call over to Dolev. Go ahead, Dolev..

Thank you, Rich, and good afternoon, everyone. We appreciate you joining us today for our third quarter 2023 earnings conference call. Chris will give an overview of the quarter, after which I will provide remarks on the strategic direction of the business.

Before I turn it over to Chris, I first want to address the recent changes in leadership at STRATA. The company has undergone a recent reorganization of its Board of Directors to streamline its structure and enhance its alignment with the company's strategic objectives.

As part of the reorganization, Bob Moccia has transitioned from his position as CEO and a member of the Board. I'm humbled and deeply honored to have accepted the Board's offer to serve as Vice Chairman, President and CEO.

Accumulating over 30 years of experience in health care and medical devices, my vision moving forward is to concentrate on advancing and expanding our core products XTRAC, VTRAC and TheraClearX by reintroducing our direct-to-consumer further referred to as DTC initiative that was in place during my previous three tenures and allowed for clear growth of that business.

Some of you may recall that I managed a similar business strategy at the previous public company growing it by over 300% and subsequently selling same business to STRATA in 2015. I later served as STRATA's President and CEO from 2018 to 2021, following an investment made into the company, I myself and Accelmed Growth Partners.

That second period was marked by a turnaround of the business' core growth elements.

This turnaround helped in shifting the business to become a cash flow positive, growing the domestic and international installed base and the corresponding revenue streams, eliminating costs in noncore and noncore activities, enhancing the technology by launching new products and filing new patents and making sure the platform was ready for adding additional businesses, which in turn, allowed the company to successfully cross the COVID-19 challenge and be prepared for the core business growth and acquisitions that followed in 2021.

As you will see during my remarks later, I believe this will directly increase our recurring revenue and unit utilization thereby increasing our gross profit margins. It is back to basics here at STRATA, and we look forward to your continued support. Now I will turn it over to Chris to review the financials..

Thank you, Dolev. I'll start with a quick overview of our third quarter 2023 results. For the three months ended, total revenues were $8.9 million, down 6% from $9.4 million in the prior year period. And year-to-date, our revenue was $24.7 million compared to $25.6 million last year.

We currently have 81 TheraClear devices in place year-over-year, which I'll review in a later slide. As you can see, revenues have trended upwards from 2020 to 2022, with 2023 year-to-date revenues of $24.7 million.

We ended the third quarter in a solid cash position with $8.5 million in cash, cash equivalents and restricted cash as of September 30, 2023. This cash position remains boosted by the refinancing of our senior term facility on June 30, 2023, offset by an increase in inventories and a decrease in accrued expenses and other current liabilities.

We continue to carefully manage expenses while reinvesting in high ROI growth. On this slide, we show the revenue breakout of recurring versus equipment sales to physicians as well as our domestic versus international revenue.

Recurring revenues from our dermatology procedures were $5.3 million compared to $5.8 million last year and have remained relatively flat over the last two quarters. We estimate this Q3 revenue represents about 70,000 XTRAC treatments in the quarter. Equipment revenues were $3.6 million versus $3.6 million last year, remaining flat.

Domestically, we had $5.8 million of revenue compared to $6.1 million last year over the same period. While we had a steady increase in our equipment sales revenue, which Dolev will delve into more later, we expect these to decrease and recurring to be the real revenue driver for the business going forward.

As you can see here, non-GAAP adjusted EBITDA improved 21% year-over-year. This growth stems from improved cash cost effectiveness with G&A and sales and marketing expenses decreasing 16.5% year-over-year to $5.3 million. As we prepare to shift back to a DTC model, we aim to reduce total revenue cost and increase margins.

We believe we are well equipped for this change and are optimistic about the future of STRATA. Now I'll hand it back over to Dolev..

Thank you, Chris. We're very encouraged by the improving trends of our business through the third quarter. I'd like to begin by discussing our changes in strategic directions to the company and the reintroduction of the DTC marketing and business model.

It has been shown before by myself and the team in STRATA that we can vastly increase the unit economics and margins in the business. Our ability to execute and grow all starts with our primary customer, the physician. Our clinical support infrastructure is there.

And by bringing back direct-to-consumer advertisement, we can vastly enhance the unit economics. The goal will be to drive improved margins through increasing utilization as our products generate incremental recurring revenue, coupling the approach with the fully integrated suite of services that supports the partner clinics.

We have a team standing by to support them. The sales – through the wholesale cycle we drive patients to the clinics. We support the clinics through clinical support team. We support the clinic through reimbursement services. We support the patients through helping them out with their reimbursement payments and we support technically the devices.

So we're there to give them answers whether it's the partner clinic or the patients. With XTRAC, the solution or the forward is very straight forward. We're going to be driving recurring revenue with the direct-to-consumer DTC approach. And this approach will be a win-win-win scenario.

For the physician, generating more revenue and patients to the clinic, for the patient, driving a better clinical outcome. And obviously, for the payer who are going to be paying less for the outcome of the patients.

The table on Slide 9 shows the historical contribution of the DTC efforts for this business, where the table illustrates that over the years when the company decided not to use direct-to-consumer approach through COVID-19 in 2020 and into 2021. And then again, in 2022, these metrics have trended down.

The leads shown in purple represents the number of patients demonstrating interest in the solution of the XTRAC excimer laser procedure offering the benefits to them. The appointments in orange resulted by our call center, and where the patients were placed into an appointment with the physician in their clinics.

And finally, in green, you can see the RDX charts, which are the patient charts created by the physicians for patients that they found meeting – XTRAC meeting their needs to be treated.

I believe that the deemphasis of patient marketing and support services during the period between 2021 and today, severely impacted the product utilization because STRATA was no longer driving patients to the physician's offices and consequently offered less partner support services to the clinics, which in turn impacted our partnership relationships with the physicians.

It's already been demonstrated three times in the past between 2018 and 2019 pre-pandemic, then between 2020 and 2021 post-pandemic and once again, before when I built this business in the previous company that by focusing on the patient and the consumer marketing that would drive the patient's interest coming into the clinics that would also drive the business in the clinic.

And as you can see on Slide 10, the domestic growth strategy is focused on expanding installations within the established physician network and by driving the average revenue per device in these clinics.

Historically, as you can see that the revenue per device prior to the company stopping direct-to-consumer patient advertising was $7,100 per device per quarter. And today, with an installed base that is larger by 25%, driving that average revenue per device will further increase not only unit economics, but the top line revenue.

This also holds true for TheraClearX. We currently have 81 TheraClearX devices deployed in clinics that mostly pursue cash paying patients. However, as evidenced by our market data, the more successful users and those who pursue the procedure as a clinically relevant and insurance reimbursed versus out-of-pocket pay to patients are more successful.

I believe there is a much better opportunity in placing TheraClearX with our clinical dermatologist network and leveraging our already established suite of services, helping them use insurance reimbursement codes to reduce out-of-pocket costs to the patients and provide better clinical outcomes, thereby increasing patient volumes and utilization.

TheraClearX offers a compelling solution for an acne software that is reimbursable when prescribed to treat active inflammatory lesions. Refocusing our messaging can open up a much larger patient population.

As evidenced over the past few years, the international installed base of over 1,400 devices has proven to be able to provide a solid revenue stream of capital equipment sales, service and device placements. I'm confident that with the new markets initiated by – in the past three years, this trend will be further strengthened.

With our strengthened balance sheet and improved profitability, rebuilding DTC is our top strategic priority and will provide improved profitable near-term growth.

As we close our third quarter, I want to reiterate our top priority is to reignite the customer experience and value to our clinical partners while improving the quality of life for their patients.

Our new marketing initiatives, along with strategic management of our installed base will support rebuilding recurring revenue growth and margin expansion over the long-term. We remain intently focused on executing our strategic plan to drive profitable revenue growth and thereby enhance the shareholder value.

Now I ask the operator to open the line for questions.

Operator?.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question comes from the line of Jeffrey Cohen with Ladenburg Thalmann. Please proceed with your question..

Chris, how are you?.

Good, Jeff.

How are you?.

Excellent. So a couple of questions from my end.

So I guess, firstly, big picture from the breakout of recurring and equipment of that $5.3 million and $3.6 million, we're going to see the recurring bounce back and drive the business more so than the equipment line going forward? Is that safe to assume? And could you maybe talk about how that's happening over the coming weeks and months as far as the call center marketing, support services, et cetera?.

I'll take that. Hi Jeff, how are you? Good afternoon. Happy to be back. So as you've been with the company, you've been covering the company through the past few years, and you've seen that rebound happen twice.

The first time in 2018 when the company was coming out of a period of two years of no direct-to-consumer advertising and mostly focused on capital equipment sales. And the second time in the transition between COVID and non-COVID coming into 2021, when the company reignited the direct-to-consumer advertising.

What you've seen is that turning direct-to-consumer advertising back on, while it takes time because we need to start advertising, get the leads in. Once we get the leads in, we need to send them into appointments. These appointments need to show up in the clinics.

So the demand on the clinics, the pull-through in the clinics starts growing up while that takes time and it takes anywhere between a quarter and three quarters depends on how fast we can ramp up. Once that starts happening, we see the leads driving appointments and those driving the procedure revenue.

And as we've shared on the slides in the – on the earnings call site, and we've shared in the past, that is controlled by the company and that ramp-up period can be controlled by the company.

It would be safe to assume that, that ramp-up is going to take between – this will take effect between the second and third quarter of next year only because the first quarter is always a slower quarter for the recurring revenue because that's when insurance benefits are being reset.

So that's usually traditionally historically in the past 20 years have been a slower quarter, but you can start seeing that effect happening in the second and into the third quarter of next year. That has no impact on capital equipment sales, which happened mostly outside of the U.S.

and are driven by our traditional markets, the Middle East, China, Japan, Korea as well as new markets, which are expected to take form next year, and the company has discussed them over the last year. And these markets are Mexico and India and Israel.

So the combination of these old markets and new markets is going to keep on driving capital equipment sales. The addition of recurring revenue on – into 2024 is going to potentially drive the operating margins up and by that drive cash flow from operations to be positive again. Now the second portion of my comment had to do with TheraClearX.

The TheraClearX, as you know, is an acne treatment device, but the company's approach to the deployment of that device, which was launched in the beginning of 2023 was to place these devices with physicians that are seeking patients that are willing to pay out of pocket.

That is despite the fact that there is a specific reimbursement code that covers that procedure and that reimbursement code pays an average – national average Medicare average of $118 and private payer codes that pay – or private payer payment that pays up to upwards of $300 per procedure.

We – and as you can look through in my prepared remarks, we believe that the deployment of these devices with partners that are actually utilizing the reimbursement code is going to make the expansion of that procedure easier, both for the company as well as for the physicians and the patients because by utilizing the full suite of services that the company has starting from driving patients to the clinics and supporting the clinics through reimbursement, the reimbursement process and as well as supporting the patients in their own payments is going to help drive that revenue from our perspective, but also the deployment of devices and usage by physicians and the number of patients being treated.

The procedure itself is clinically proven and has been working very nicely for several years prior to the time the company has acquired it. I think the change that we're trying to do now is going to result, if successful, in growth and utilization, unit economic and by that, expanding the bottom line results..

Got it. And one more, if I may. Could you maybe compare and contrast the recurring model currently with the recurring model for XTRAC, do you perceive coming back in the U.S. as far as pay per energy, pay per session with or without a monthly, weekly or minimum..

Okay.

So – and you're asking compare and contrast XTRAC to TheraClearX?.

Yes..

So XTRAC today uses three CPT codes, 969, 20, 21 and 22, which are used for treatment of areas of – skin areas that are up to 250 square centimeters between 250 and 500 and above 500. And these three reimbursement codes pay to the physician an average of about $180 per treatment. There's a scale.

There's three codes and different payouts, but about $180. Our average take from that is about $80. All of that information is included in the 10-Q, but we're taking about 40% of that. And we're taking that for the provision of a suite of services to the physician.

And that suite of services includes all the way from driving patients to the clinic, handling the pre-procedures, so getting them preauthorized and preapproved by the payer providing clinical training to the clinic, providing training to their reimbursement team at the back end and also supporting the patients themselves by providing co-pay support.

So the patients have the opportunity of not having any out-of-pocket cost for their procedure. So if you want to look at the patient as being the unit economic of the patient, that patient is going to go through eight to 20 procedures for treatment of psoriasis, and that would result in 8x to 20x $180 to the physician or 8x to 20x payment to us.

In 2019, pre-pandemic, the company had 23,000 – approximately 23,000 new patient charts. So the company had in treatment within the partner network, approximately 23,000 individual patients. As we speak now and the charts will show when these go on the website, we are year-to-date at 10,000.

The difference between 23,000 and 10,000 comes from two sources. One, the reduction in the number of patients that were put into treatment by the DTC process. So in 2019, it was 6,000.

And the other is the reduction in – regardless of direct-to-consumer, the reduction in the individual unit economics and the individual clinic economics utilization of the devices. And that is driven by the focus of the company being more towards clinical promotion and direct-to-provider promotion.

So speaking about the clinical benefits of the procedure and less using the tools that were in place of promoting the front half or the front end of the office, driving patients to the office, the back end of the office, helping them through the reimbursement process and helping them through getting paid – helping the office is getting paid and helping the patients with their co-pay.

These value-add services, which have been there for years have proved to be very successful in driving the business from a standstill, and I'm using 2018 as a standstill, and I'm using 2021 as a standstill because there was no DTC prior to 2018 for a few years, and there was no prior to 2021 because of COVID-19, driving it within the following fiscal year to be very productive.

So we've seen that for every patient that we've set up with an appointment in a clinic, we actually had a halo effect. So the multiplier was 2.1. We sent one patient to the clinic and 2.1 new charts showed up.

Why? Because patients were speaking among themselves and because people were seeing the advertisement and not calling us but calling the clinic directly or also because the clinic was more – on average was more enthusiastic at driving the patients for the procedure.

So if you look at the difference between 2018 and in 2019, the gross margins were pushed up by more than 15% only because that revenue comes with an incremental contribution margin of in excess of 90%. Now I'll compare that to TheraClearX as per your request.

So TheraClearX, the Medicare reimbursement rate for the CPT reimbursement code that represents what TheraClearX does, which is the treatment of an acne lesion through suction and removal of whatever is inside the lesion and the code number is 10040. But the average Medicare national reimbursement for that is $118.

What we have seen among partner clinics that already use the TheraClearX is that they treat the patient, they build that code, but they also build an office visit code that ranges between $50 and $70 per visit. So the unit economic for the office is anywhere between $170 to $190 per visit. The patients need six to eight visits to get fully cleared.

And so you can do the multiplier for the office, you can do the multiplier for the patient.

However, the big difference for the patient is that instead of paying in a cash pay approach, instead of paying $200 to $250 per visit, what they're only responsible for is either their co-pay or if we fully deploy that we're going to even take care of parts of that – of the co-pay.

And so that makes a huge change for the patient where the physician has less of a convincing job to do because he does not have to push the patients towards a cash pay procedure, but rather treat them in the clinic. Now as a reminder, acne is the number one condition that clinical dermatologists are treating. So there's no shortage of patients.

So that's about the unit economic. The company has chosen historically to place these devices with a monthly minimum charge and a per-procedure charge that was much lower. That resulted in some of the clinics taking advantage of the first few months and trying to see if it works. And when it didn't work, they pulled back.

And what – the clinics that were productive were the clinics that were actually doing what I have described, which is a reimbursable procedure.

As you have seen in the past few quarters since the deployment of this model, the expansion was slower in terms of expansion in a number of clinics and was also limited in the returns per clinic in the sales or revenue per device per clinic. So that's my compare and contrast between the two of them.

I think moving forward, we tend to be successful with deploying this as a reimbursable procedure because we have all of the support mechanism to give the suite of services and provide these services to the clinics and to the patients..

Okay, Dolev, perfect. Thank you very much for taking the questions. Appreciate it..

Absolutely. Thank you..

Thank you. [Operator Instructions] All right. I see no further questions at this time. I'd now like to turn the floor back over to management for any closing remarks..

Thank you, operator, and everyone, for your time and investment in STRATA Skin Sciences. We look forward to update you on our progress in the next quarterly call..

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation..