Ladies and gentlemen, thank you for standing by. Good afternoon and welcome to the STRATA Skin Sciences Inc. First Quarter of 2024 Financial Results and Corporate Update Conference Call.

[Operator Instructions] Participants of this call are advised that the audio of this conference call is being broadcast live over the Internet and is also being recorded for playback purposes. A webcast replay of the call will be available approximately 1 hour after the end of the call through November 15, 2024. .

And with that, I'd like to turn the call over to Joey [ Deleuze ]. Please go ahead. .

Good afternoon, and thank you for participating in today's conference call. Earlier this afternoon, the company released its financial results for the quarter ended March 31, 2024. A copy of that press release can be found on the company's website at www.strataskinsciences.com, under the Investors tab.

Joining me on today's earnings call from STRATA Skin Sciences management team are Dr. Dolev Rafaeli, Chief Executive Officer; and Chris Lesovitz, Chief Financial Officer.

During this call, management will be making forward-looking statements, including statements that address STRATA Skin Sciences' expectations for future performance or operational results..

Forward-looking statements involve risks and other factors that may cause actual results to differ materially from those statements.

For more information about these risks, please refer to the risk factors described in STRATA Skin Sciences' most recently filed annual report on Form 10-K and subsequent periodic reports filed with the SEC and STRATA Skin Sciences' press release that accompanies this call, particularly the cautionary statements in it.

The content of this call contains time-sensitive information that is accurate only as of today, May 15, 2024. Except as required by law, STRATA Skin Sciences disclaims any obligation to publicly update or revise any information to reflect events or circumstances that occur after this call. .

It is now my pleasure to turn the call over to CEO, Dr. Dolev Rafaeli. .

Thank you, Joey. Good afternoon for everyone on the call. During the first quarter, we continued to execute on the multifaceted turnaround strategy introduced when I was appointed CEO late last year. Clinical results using extract are proven across the hundreds of thousands of patients treated for psoriasis, vitiligo and eczema.

And our strategy is primarily focused on adjusting our extract device placements and increasing our DTC marketing to drive extract device utilization and recurring revenue per device over the coming quarters, across our domestic installed base of approximately 900 devices. .

During my previous tenure here at STRATA, we have been successful with these strategies, and we feel comfortable driving similar results in 2024 and beyond.

We started our DTC spend ramp-up at the beginning of the first quarter in a limited region of the country and expect to increase our marketing allocation to DTC in the coming quarters to drive patients' appointments and expand the program into additional geographical areas.

During the first quarter, we have expanded from our original 4 targeted areas to 6 and generated over 500 patient appointments at a cost per appointment of under $300 in a cost per lead of under $40. .

These metrics are in line with our previous DTC campaigns from my previous 10 years and in stark contrast to the 21 appointments scheduled by STRATA in the first quarter of 2023 when the company did not apply DTC.

These metrics are in line with those achieved in the first quarters of each 2019 and 2021, in which with a full DTC spend budget across the nation we achieved 1,900, 1,800 appointments, respectively, after 3 quarters of ramp-up. The first quarters in each of those years followed periods of no DTC spend.

And as a reminder, domestic gross recurring revenue in both 2019 and 2021 experienced strong double-digit growth. Another strategic initiative is optimizing our extract device places. .

We have some underperforming dermatology partners. So instead of staying settled with underperforming assets, we constantly consider removing these devices from such clinics and placing the devices in other dermatology clinics that have demonstrated the potential for higher utilization.

Higher [ utilization ] is a benefit for both the clinic and STRATA Skin. So we are always looking to optimize our installed base on the extra placements, the opportunity to increase utilization of our extract devices from both increased DTC spend and a repositioning of underperforming devices is significant. .

Successful execution of our strategy could increase the average gross recurring revenue per device for -- from approximately $21,000 in 2023 to $30,000, which we last enjoyed in fiscal 2019 right before the COVID pandemic.

This transition will take some time as a similar turnaround that started in mid-2018 resulted in the fourth quarter of 2019, reaching nearly $8,000 in gross recurring revenue per device. .

The return to these efficiencies across our installed base of over 900 devices could mean an incremental $8 million in high-margin revenue, allowing us to reach profitability and positive cash flow in the process.

We have seen evidence that our domestic business may have already been positively impacted by our strategic initiatives, and are encouraged by -- that we are on the right path. .

In the first quarter of 2024, our gross domestic recurring billings were down just 3% year-over-year, making that the smallest year-over-year decline in the past 7 quarters since the end of the second quarter of 2022.

During the most recent 3 quarters, from second quarter of 2023 through the fourth quarter of 2023, this metric was down 15%, 12% and 14%, respectively.

Thus, this much smaller decline in gross domestic recurring billings of 3% in the first quarter of 2024 was a marked improvement, providing some optimism that this metric can turn positive in the upcoming quarters, further cementing the business turnaround. .

As part of our strategic turnaround, we successfully removed 32 extract devices in the first quarter of 2024 and placed 16 devices into new accounts, including 6 that were placed into comeback accounts that represent clinics, with existing excimer laser business that opted to reengage with STRATA through our partnership model.

These changes have resulted in a domestic recurring installed base of 907 extract devices at the end of the first quarter, down from 923 at the end of 2023. We expect this optimization to continue in the upcoming quarters.

Beyond XTRAC, we continue growing our domestic installed base of TheraClearX device through the implementation of our recurring revenue model. In the first quarter, we successfully grew the TheraClearX installed base from 92 at the end of 2023 to 104 at March 31, 2024.

We are encouraged by the uptake of clinics beginning to use the acne surgery CPT code. The first quarter ended with 47 of the 104 clinics submitting RDF insurance reimbursement charts at a rate of 65 charts per week as compared to none in the same period previous quarters. There are over 50 million patients with acne in the U.S.

and the unique and reimbursable underlying [ photodynamic ] approach with TheraClearX can address limitations of existing acne treatments and drive reimbursable recurring revenue for our dermatology partners similar to the XTRAC model. .

Lastly, continued penetration in key international markets is also an objective for us. In late December 2023, we've extended our exclusive distribution agreement with our distributor in Korea. And in early April, we did the same with our exclusive distributors in China and Japan.

International revenue typically accounts for approximately 30% to 35% of our total revenue, and these 3 territories alone account for over 50% of those revenues. So to extend these long-lasting relationship is mutually beneficial for both sides.

Going forward, we expect to see continued growth in our DTC marketing efforts, driving expert utilization and gross domestic recurring billings, each from which are key components for us to demonstrate improved operating leverage and reaching profitability. A key initiative in this turnaround is our focus on cost controls.

Notably, in the first quarter, we've reduced our cash burn by $1.1 million or 41%, and our operating expenses by $1 million or 14% compared to last year. We talked about these collective strategy -- strategic initiatives before, and we will continue discussing them in the future calls -- in future calls.

As these tangible financial changes and results are proof of our commitment to narrowing our losses, extending the cash runway of the company and becoming profitable. .

Now I'd like to turn the call over to Chris who will review our financial results in much more detail.

Chris?.

Thank you, Dolev. Our total revenue for the first quarter of 2024 was $6.8 million, versus $7.6 million in the first quarter of 2023. Revenue was negatively impacted by the deferred gross brings, lower domestic equipment revenue and the discontinuation of STRATAPEN.

Global recurring revenue for the first quarter of 2024 was $4.7 million versus $5.2 million in the first quarter of 2023. Excluding deferred billings and other GAAP adjustments, XTRAC gross domestic recurring billings were $4.6 million in the first quarter of 2024, down 3% from $4.7 million in the first quarter of 2023.

Equipment revenue was $2.1 million in the first quarter of 2024 versus $2.4 million in the first quarter of 2023. .

International sales of XTRAC and VTRAC devices compromised the majority of the equipment revenue in both periods. Gross profit decreased to $3.1 million for the 3 months ended March 31, 2024, from $4.4 million during the same period in 2023.

As a percent of revenues, the gross profit was 45.6% for the 3 months ended March 31, 2024, as compared to 58% for the same period in 2023.

The decrease in gross profit percentage was primarily the result of lower recognition of Q4 deferred revenue in Q1 from the prior year in the same period, higher depreciation costs due to more XTRAC lasers and new TheraClearX devices placed into service, higher material and production costs and the write-off of obsolete various inventory assets. .

Total operating expenses in the first quarter of 2024 were $6 million versus $7 million in the first quarter of 2023. The decrease in operating expenses is a direct result of our rightsizing efforts and a purposeful leaner cost structure implemented in late 2023.

Sales and marketing declined by approximately $725,000 year-over-year and G&A declined by approximately $200,000 year-over-year. The goal is to return a leaner cost structure last seen in 2019.

Our cash, cash equivalents and restricted cash position of $6.6 million at March 31, 2024, along with our modified credit facility with MidCap Financial, supports our growth initiatives and leaner cost structure. We continue to believe we can execute on our strategic goals for 2024, given our current financial position.

As of March 31, 2024, the company had 35,060,920 common shares outstanding. .

That concludes my prepared remarks, and I'd like to turn the call back over to Dolev for any remaining comments. .

Thank you, Chris. With both XTRAC and TheraClearX, we have 2 solutions for the dermatology market that benefit patients, the dermatology clinics and health care systems through reimbursed treatments and, of course, STRATA Skin.

Our turnaround strategy is starting to take root and some of the metrics in the first quarter, including narrowing decline in recurring revenues and a significant reduction in operating expenses point to that.

We have successfully rightsized our operating and corporate overhead, reemphasized the DTC growth engine domestically to drive device utilization and anticipate adjusting our domestic extract device footprint on a routine basis to remove devices from underperforming accounts and placing them with more promising accounts..

We expect to be successful with our multipronged strategy. But as I've said before, it will take some time to reach the finish line and complete the turnaround. Our team and strategies are proven and we are resolute in our drive. We thank our investors for their support and look forward to reporting continued corporate progress. .

Now I'd like to turn the call over to the operator so that we can begin the question-and-answer session.

Operator?.

[Operator Instructions] And our first question here will come from Jeffrey Cohen with Ladenburg Thalmann & Co. .

So I guess, firstly, could you talk about or identify the region of the country you're referencing in DTC? And then maybe give us a sense of a number of regions that you'll have in place, say, by the end of '24?.

Good question. So we anticipate to be covering all regions by the end of the year. We hope to get there by the end of -- by the middle of the third quarter. In terms of DTC spend, we moved the needle up in terms of DTC spend based on efficiencies. We needed to see the cost per lead and the cost per appointment remain within these ranges.

We also need to see the uptake of these patients into the funnel and converting it to patients in extra treatment. And as we do that, we grow gradually. So as I said, end of Q2 or the middle of Q3 to be fully deployed. .

And you're saying all regions this year. .

Yes. I'm saying that by the end of this year, we're going to be advertising in all regions. I refer the listeners to the investor deck presentation that we have online, which shows the outcome of the first quarter in terms of patient leads in the New York City area, which was 1 of the 4 areas we advertised.

That page has both the placements of the devices in the market as well as the patient needs. And we anticipate the same visual to be in all other regions.

These advertisement -- these leads have come in that are converted into an appointment, the appointments happened 2, 3 weeks later, as these are being scheduled in and then patients start to be treated. So revenue follows that with a couple of weeks. But yes, by the end of this year, we're going to be covering all regions. .

Okay. Got it.

So could you talk about for a bit and kind of in a perfect world in what you're planning for? Give us kind of a guesstimate of where you think XTRAC placements could be through Q2 and the end of the year and the same with TheraClearX?.

I'll start with TheraClearX, and which we have, as I've detailed in previous calls, we have an inventory on hand of just about 200 devices. And we would like to be in a position where by the end of this year or the first quarter of next year, we're going to be at or close to deploying all of these devices, so utilizing the inventory we own.

The deployment of these devices, as we've outlined before, is mostly with accounts that are going to be using reimbursement. I'm saying mostly because not all of them do. And these accounts need the patient flow to go through.

And as I've presented in my prepared remarks, we are now up to 65 new patients a week, which is a run rate of over 3,000 new patients for this new technology. And this is only coming from 47 of the 104 accounts. So the rest of the accounts, 57 accounts are still based -- these accounts are still based on cash paying patients.

So that's with the TheraClearX. .

And as we move forward towards -- throughout the year, we do anticipate to start talking about account utilization. And the same as with XTRAC, the replacement of existing devices in the market if we cannot get the throughput and the utilization from any one of these devices.

So -- and there was a press release that came out this week that discussed the nature of the accounts we go into. .

We mostly target existing XTRAC accounts and mostly with group -- private equity-owned group roll-up clinics where we can have a clear understanding on how they're going to be utilizing the devices and how they're going to be utilizing the reimbursement codes.

Because once we put our devices out there, the utilization is the only way -- utilization of the device is the only way where we can make money as well as they can make money. So that's with TheraClearX.

On XTRAC, we've ended 2023 with 923 devices deployed in the market, just over $5,000 per device, average revenue per device for every quarter in 2023. The -- as you can see from the numbers we put out, we're actually -- we actually took that number down to 907.

And we will continue the process of redeploying these devices, so taking them out from nonproductive accounts, redeploying them with more productive accounts and using the existing inventory without having to expand or build more devices into our own balance sheet before we fully utilize these 923 devices. .

Okay. Got it. And then just [ target ] in lastly to [ lab ] for us as far as these new accounts. Talk a little bit about the funnel or the trends with regard to XTRAC more importantly, as far as utilization trends, the funnel and the upside.

Is it coming on the utilization side? And how does that funnel of leads or new placements looking?.

Funnel is most -- sorry, the utilization is the biggest upside we have because placing more devices is easier with the approach that says we placed the technology free of charge. We charge a fee per use, and there's no minimum charge.

We can place as many devices as we want, but the outcome of that is higher depreciation, which we started experiencing in 2022 and more so in 2023. And that's why I'm replacing, repositioning these assets before we extend the number of assets we have in the market. Extending utilization, we ended 2023 with just over $5,000 per device per quarter. .

And just for reference, we ended 2019 with 7,500. So the upside is about 50% in the recurring revenue. So -- and that's where the team is focused, both with the -- and we break the accounts by tiers, so both by working on Tier 1 and Tier 2 accounts, which are the big utilizers.

And seeing what we can do to help them grow with either serving them patients through DTC or training or training of their staff as well as working on the lower tiers to see if we can move accounts from Tier 5 up to Tier 3 and 4, or if we can move them up, we move them out, and we cut out from the bottom, that's Tier 5, and we try to move them up the tier letter, if you wish.

And we've outlined this in our press release earlier this week by saying that our best results would come from someone that has or had an existing excimer laser franchise, and they've owned a device, whether this was our device XRTRAC or it was a ferrous device.

The -- in the last quarter, we placed 16 new devices, 6 of which were into accounts that had previously owned an excimer laser and had a business. And the reason we are mostly seeking these accounts, and there are about 250 of these in the market is that they have an existing business, we don't need to build them from scratch. .

We come in and we grandfather an existing business and what we need to do is provide them the technology, the training, the support, the reimbursement support and so on, but it gives us a head start on taking a new account than starting from scratch. .

[Operator Instructions] And this will conclude our question-and-answer session. I'd like to now turn the conference back over to Dr. Dolev Rafaeli for any closing remarks. .

I want to thank all of you for participating in today's call and for your interest in STRATA Skin Sciences. We look forward to sharing our progress on our next quarterly conference call when we report our second quarter 2024 financial results, likely in July of 2024. Thank you, and have a good day. .

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines..