STRATA Skin Sciences Q3 2023 Earnings Call Transcript

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Provided by Quartr
November 14, 2023

There are 6 speakers on the call.

Operator

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. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Rich Cockrell of Investor Relations.

Operator

Thank you, Rich. You may begin.

Speaker 1

Good morning, everyone, and thank you for joining us today. Earlier today Strata Skin Sciences released its financial results for the Q3 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.

Speaker 1

We encourage you to review the company's filings with the SEC, which identify 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 Dola Braphele, Vice Chairman, President and Chief Executive Officer and Chris Lesovits, Chief Financial Officer. Following management's we will open the call for questions. And with that, I'd now like to turn the call over to Dolek.

Speaker 1

Go ahead, Dolek.

Speaker 2

Thank you, Rich, and good afternoon, everyone. We appreciate you joining us today for our Q3 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 the Board of Directors to streamline its structure and enhance its alignment we are working with the company's strategic objectives.

Speaker 2

As part of the reorganization, Bob Mortier he has transitioned from his position as CEO and a member of the Board. I am humbled and deeply honored we have accepted the Board's offer to serve as Vice Chairman, President and CEO. Accumulating over 30 years of experience in healthcare and medical devices, my vision moving forward is to we will concentrate on advancing and expanding our core products X TRAC, D TRAC and TheraPurex 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 said 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 am Exelnet Growth Partners.

Speaker 2

That second period was marked by a turnaround of the businesses 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 cost we are executing our technology by launching new products And filing new patents and making sure the platform was ready for adding additional businesses, which in turn allows the company to successfully cross the COVID-nineteen 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.

Speaker 3

Thank you, Dollav. I'll start with a quick overview of our Q3 of 2023 results. For the 3 months ended, total revenues were $8,900,000 down 6% from 9,400,000 in the prior year period and year to date, our revenue was $24,700,000 compared to $25,600,000 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 we ended the 3rd quarter in a solid cash position with $8,500,000 in cash, cash equivalents and restricted cash as of September 30, 2023.

Speaker 3

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 5,300,000 compared to $5,800,000 last year and have remained relatively flat over the last two quarters. We estimate this Q3 revenue represents about we expect to

Speaker 2

continue to expect to be approximately $70,000 extract treatments

Speaker 3

in the quarter. Equipment revenues were $3,600,000 versus $3,600,000 last year, remaining flat. Domestically, we had $5,800,000 of revenue compared to $6,100,000 last year over the same period. We are currently preparing to be the real revenue driver for the business going forward. As you can see here, non GAAP adjusted EBITDA we expect to be approximately $16.5 percent year over year to $5,300,000 As we prepare to shift back to a DTC model, we aim to reduce total revenue cost and increase margins.

Speaker 3

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

Speaker 2

Thank you, Chris. We're very encouraged by the improving trends of our business through the Q3, 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 advertisements, we can vastly enhance the unit economics.

Speaker 2

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 types through the wholesale cycle, we drive patients to the clinics, we support the clinic 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. We're there to give them answers whether it's the partner clinic or the patients.

Speaker 2

With XTRAC, the solution or the forward is very straightforward. We're going to be driving recurring revenue with the direct to consumer DTC approach and this approach it will be a win win win scenario for the physician, generating more revenue and patients through 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 we are looking for this business, where the table illustrates that over the years when the company decided not to use direct to consumer approach through COVID-nineteen in 2020 and into 2021 and then again in 2022, these metrics have trended down. The leads shown in purple represent the number of patients demonstrating interest in the solution of the extra 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 the need meeting extra meeting their needs to be treated.

Speaker 2

I believe that the de emphasis of patient marketing and support services during the period between 2021 today severely impacted the product utilization because Strata was no longer driving patients to the physicians' offices and consequently offered less partner support services to the clinics, which in turn impacted our partnership relationships with dispositions is already being demonstrated 3 times in the past between 2018 2019 pre pandemic, then between 2020 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 clinic 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 networks 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 increased not only unit economics, but the top line revenue.

Speaker 2

This also holds true for TheraClear X. We currently have 81 Therapearl X device is 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 TheraCORE X 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. Therapear X offers a compelling solution for an acne sufferer that is reimbursable when prescribed to treat active inflammatory lesions.

Speaker 2

Refocusing our messaging can open up a much larger patient population. As evidenced over the past few years, the international installed base of over 1400 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 3 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 3rd 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 initiative along with strategic management of our installed base will support rebuilding recurring revenue growth and margin expansion over the long term.

Speaker 2

We remain intensely focused on executing our strategic plan to drive profitable revenue growth and thereby enhance shareholder value. I will now ask the operator to open the line for questions. Operator?

Operator

Thank you. We will now be conducting a question and answer session. It may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Thank you.

Operator

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

Speaker 4

Chris, how are you?

Speaker 3

Good, Jeff. How are you?

Speaker 4

Excellent. So, couple of questions from our end. So, I guess, firstly, big picture from the breakout of recurring and equipment of that 5.3 and 3.6, 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 months as far as the call center and marketing

Speaker 5

I'll take that. Hi, Jeff. How are you? Good afternoon. Happy to be back.

Speaker 5

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 Twice. The first time in 2018 when the company was coming out of a period of 2 years we have 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.

Speaker 5

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 on the earnings call site and we've shared in the past that is controlled by the company and that ramp up period It would be safe to assume that that ramp up is going to take between This will take effect between the 2nd Q3 of next year, only because the Q1 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 Q3 of next year. That has no impact on capital equipment sales, which happened mostly outside of the U.

Speaker 5

S. And are Driven by our traditional markets, the Middle East, China, Japan, Korea as well as new markets, which are expected we will 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 debt, drive cash flow from operation to be positive again. Now The second portion of my comment had to do with TheraClear X.

Speaker 5

The TheraClear X, as you know, is an acne treatment device, Yes, 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 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 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 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.

Speaker 5

The procedure itself is clinically proven and has been working very nicely for several years prior to the time the company has I think the change that we're trying to do now is going to result if successful in

Speaker 4

Got it. And one more if I may. Could you maybe compare and contrast the recurring model currently With the recurring model for extract, 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.

Speaker 5

Okay. So and you're asking compare and contrast extract to TheraClearx? Yes. Yes. So, Xtract today uses 3 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.

Speaker 5

And these three reimbursement codes pay to the physician an average of about $180 per treatment. There's Scale, there's 3 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 the 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 pre approved by the 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.

Speaker 5

So if you want to look at the patient as being a unit the unit economic of the patient, that patient is going to go through

Speaker 2

we expect to be approximately $80 to the physician or

Speaker 5

8x to 20x payment to us. In 2019 pre pandemic, the company had 23,000, approximately 23,000 new patient we have a number of 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 23,010,000 comes from 2 sources.

Speaker 5

1, 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 of 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 20 'twenty one is a standstill because there was no DTC prior to 2018 for a few years and there was no DTC prior to 2021 because of COVID-nineteen, 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 clinic, we actually had a halo effect.

Speaker 5

So the multiplier was 2.1. We sent 1 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 Driving the patients for the procedure. So if you look at the difference between 2018 in 2019, the gross margins were pushed up by more than 15% and only because that revenue comes with an incremental contribution margin in excess of 90%.

Speaker 5

Now I'll compare that to TheraClear X as compared to your request. So TheraClear X, the Medicare reimbursement rate for the CPT reimbursement code that represents what TheraClear X does, which is the treatment of an acne lesion through suction and removal 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 TheraClear X is that they treat the patient, they build that code, but they also build an office visit code that ranges between dollars 50 $70 per visit. So the unit economic for the office is anywhere between 100 and $70 to $190 per visit. The patients need 6 to 8 visits to get fully cleared. And so you can do the multiplier for the office, you can do the multiplier for the patients.

Speaker 5

However, the big difference for the patient is that instead of paying in a cash pay approach, instead of paying $200 to $2.50 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 copay. So that makes a huge change for the patient where the physician he has less of a convincing job to do because he does not have to push the patients towards 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. That's about the unit economics. The company has chosen historically to place these devices with a monthly minimum charge And a per procedure charge that was much lower.

Speaker 5

That resulted in some of the clinics Taking advantage of the 1st 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 I think moving forward, we stand tends 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.

Operator

Thank you. 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.

Speaker 5

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.

Operator

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

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Key Takeaways

  • Leadership transition: Dola Braphele was appointed Vice Chairman, President and CEO following a board reorganization aimed at streamlining structure and aligning with the company’s strategic objectives.
  • Q3 financial results: Total revenue fell 6% year-over-year to $8.9 million (YTD $24.7 million), with recurring procedure revenues of $5.3 million and equipment sales of $3.6 million, while ending the quarter with $8.5 million in cash and achieving a 16.5% non-GAAP adjusted EBITDA margin.
  • Return to DTC marketing: Management plans to reintroduce direct-to-consumer initiatives to drive patient leads into partner clinics, leveraging proven campaigns that previously delivered over 300% growth and boosted device utilization and margins.
  • Insurance-driven product strategy: The company will emphasize reimbursable treatments for its XTRAC and TheraClearx systems—where CPT codes pay physicians $118–$300 per session—while providing co-pay support to reduce patient out-of-pocket costs and enhance recurring revenue.
  • International expansion: With more than 1,400 devices installed overseas and new market entries planned in Mexico, India and Israel, management expects continued capital equipment sales growth outside the U.S.
AI Generated. May Contain Errors.
Earnings Conference Call
STRATA Skin Sciences Q3 2023
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