Earnings Call: Q2 2021

Aug 16, 2021

Good day, and welcome to the Strata Skin Sciences Second Quarter 2021 Earnings Conference Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Lee Salvo, Investor Relations. Please go ahead. Thank you, and good afternoon, everyone. Joining me today are Bob Moshe, Chief Executive Officer and Matt Hill, Chief Financial Officer. Earlier today, Strata released financial results for the quarter ended June 30, 2021. 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, the impact of COVID-nineteen on our business and prospects for recovery, including the distribution and effectiveness of the COVID-nineteen vaccines, expense management, expectation for hiring, Migration of customers from the Pharos system to Xtract and to execute new service agreements to at least portions of the Pharos user base to generate in our organization, including transition Leading capital equipment purchasers into recurring revenue users to integrate the Pharos service business into the company's field service offering, Marketing opportunity, guidance for revenue, gross margin and operating expenses, commercial expansion and product pipeline development, Expected future product launches and milestones and expected results and performance from our partnerships and commercial products, including patient outcomes, 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 Factors section of our public filings with the SEC, including our annual report on Form 10 ks for the year ended December 31, 2020. This conference call contains time sensitive information and is accurate only as of the live broadcast today, August 16, 2021. Stratus Consciences 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 directly comparable GAAP financial measure is available in the company's earnings release for the Q2 ended June 30, 2021, and 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 Moshe. Bob? Thanks, Lee. Good afternoon, everyone, and thank you for joining us Our results in the Q2 demonstrate the traction our strategies are making to best reposition Strata for long term growth. Before addressing the highlights of the quarter, I'd like to take a moment to discuss Strata's exciting announcement made early today regarding its acquisition of the U. S. Dermatology business for Ra Medical Systems and its Pharos Exzema Laser for the treatment of psoriasis, vitiligo and atopic dermatitis. This transaction gives Strata some significant advantages. The Pharos U. S. Customer base includes more than 280 active service contract customers and approximately 150 currently inactive accounts. Strata will provide the opportunity to join the over 850 dermatology partners under the Xtract recurring business model. It positions Strata as the predominant provider of EZSMER laser treatments to address the $6,000,000,000 U. S. Market for the treatment of chronic diseases. The transaction immediately provides Strata with the opportunity to market its full business solution to Ra Medical's existing customer base of 400 dermatology practices, thus making way for STRATA to substantially increase its recurring revenue base in the future. It also provides a highly synergistic path to gain additional placements for Strata's extract eczema laser system. It delivers an Added long term recurring revenue growth potential and prospective customer base for Strata. Strata also gains sophisticated line of potential customers with expired contracts. These dermatologists are already familiar with the benefits of eczema treatments and have a current patient base. This reduces the startup time and training normally associated with the onboarding of new customers. Importantly, this transaction cements Strata as a true leader and provide innovative products for the treatment of dermatologic conditions. Under the terms of the agreement to acquire Ra Medical's dermatology business in an asset transaction for consideration consisting of an upfront payment of approximately $3,700,000 in cash, Strata will also assume a service contract obligation $1,500,000 received certain inventories of $250,000 and assumed certain other liabilities in the amount of $50,000 The acquisition is expected to be accretive to Strata's EBITDA in the Q1 of 2022. Now to our Q2 results. We are in the early stages of the rollout on a new strategic plan focused on commercial execution. I am encouraged with the top line improvement. Our increased investment initiatives such as marketing directly to potential customers, expanding our sales force in order to build stronger relationships with our providers, Partnering with clinics through our support services and delivering a clear and consistent message on the benefits of extract Esmeliza has been successful in driving a greater awareness and instrumental in gaining renewed commercial traction. Starting with a few financial highlights. Total revenue in the Q2 was $7,400,000 an 83.1% year over year increase. Sequentially, revenues grew 28 over the Q1, largely due to the growth in recurring revenue and equipment revenue shipped at the end of Q1, but recognized in the 2nd quarter. Recurring revenue was $5,500,000 a 95% increase over the Q2 of 2020 And a 17% increase over the Q1 of 2021, reflecting the shift in focus from capital equipment sales to recurring revenue. We exited the Q2 with an installed base of 889 recurring revenue extract devices, including 848 in the U. S. And 41 international placements. This is up from 871 units at the end of March. We are pleased that we continue to expand our impressive Partner footprint here and abroad. As we highlighted last quarter, patient visits improved in March and continued throughout the Q2. We believe that most offices are back to 90% to 95% of pre COVID levels. More specifically, with the increased availability of the vaccine, More and more patients are returning for treatments that they had been postponing. In terms of office staffing limitations, With the exception of certain regions, most of our customer practices have reinstated normal operations and routine hours. Overall, throughout the quarter, we saw continued improvement in our momentum and we entered the Q3 in the strongest and the best position since the onset of the pandemic with The clear focus on continued commercial execution, which remains our highest priority. Last quarter, I identified several key areas of focus for Strata And I'm pleased to announce that we have made progress across these initiatives. Starting with increased investment in direct to consumer marketing. In the Q4 of 2020, we resumed funding to consumer advertising and within the 1st few months began to see a positive impact. In the Q2, we reached a return in DTC spending to 2019 levels and that increased commitment reaped additional upside in returns, Validating our market approach. RDX charts that track the number of patients seeking reimbursement or extract treatment And are largely driven by our direct to consumer advertising are still tracking above 2019 levels. We were delighted to see that new and returning patients are once again seeking out our treatment and this is a very positive sign of future trends. 2nd, we actively reengaging with our high volume accounts defined as accounts that produce above $40,000 in revenue per year. In the Q1, we had 148 high volume accounts. During the Q2, we successfully increased this strong base of high volume accounts to 186, a 25% sequential increase. While some of this traction is like related to summer seasonality, overall, we believe is a very positive metric and further reflects the mounting strength of our sales organization and expanding and driving utilization of the X TRAC across all indications. I'm excited by the early progress we have made and believe there's a Promising indication of the potential we have to further penetrate these accounts in the near future. 3rd, Targeting customers that have not yet started producing revenues, whether due to COVID or other related issues was another key priority this year. Sequential trend has been encouraging. Typically, we found these accounts were more severely impacted by the pandemic and have been closed for more than a year. In the Q1, we had approximately 23% or 198 extract non revenue generating partners. We are now at approximately 17% or 152. Our goal is to reduce that percentage to less than 15%. Our sales force continues to focus on and support these accounts to affect our return to more consistent production levels By employing dedicated support services and DTC campaigns, including marketing initiatives directly to current and prospective patients in their regions. In some cases, laser systems that were determined not to be valuable to the customer or to Strata were removed. These systems can now be redeployed in offices where they will be seen with greater utilization. Lastly, we continue to pursue opportunities to support our sales organization through marketing campaigns can best drive awareness among dermatologists. Increasing spending on direct to dermatologist marketing thereby creating further awareness The Xtract product line and the value it adds to partner clinics and patients. On that front, we were recently pleased to welcome Brent Kogel As our new Vice President of Marketing, his 20 year background in Healthcare Sales and Marketing will prove to be invaluable in the execution of our strategic marketing efforts. In addition to implementing and overseeing programs pursuing a high level of direct customer interaction, Brent will be spearheading initiatives Relative to the advancement and re launch of our extract platform for the treatment of vitiligo, a skin disease affecting approximately 5,000,000 people in the U. S. Today. On the international front, we are working with our distributors and making progress to shift from capital sales to a recurring revenue model. In addition to the benefit to Strata of the more predictable revenue stream, this model enables our distributors to stay closer to the customers, improves cash flow and provides the benefit of a longer warranty, but while a win win opportunity, we still expect that it will take time to implement. In summary, we are well underway to executing on the plan we outlined in our Q1 call to drive commercial traction. Our recent results demonstrate measurable organic and inorganic growth and give me confidence that we can reach our goal of 2019 revenue levels by the end of this year and double digit growth in 2022. As we look to the second half of the year, We will continue to execute our plans to focus on reengagement with high volume accounts, continuing to support our sales organization in driving market initiatives customers and their patients as well as working through the integration of the Ra Medical Dermatology business. We We will continue to pursue additional M and A opportunities to further accelerate our plans to establish Strata as a leader in dermatological medical devices. With regard to the second half of this year, we remain optimistic about our ability to reach our goal to grow 2019 recurring revenue levels by year end, As more patients return to dermatology practices, the latter part of Q3 and Q4 typically represent a seasonal uptick for psoriasis patients Seeking treatment. And as long as headwinds don't present themselves as a result of the recent developments with the Delta variant and increase in COVID infections, We are on track to achieve that goal. With that, I will now turn the call over to our CFO, Matt Hill. Matt? Thank you, Bob. As mentioned, revenues for the Q2 of 2021 were $7,400,000 an 83% increase over the Q2 of 2020 and a 28% increase over the Q1 of 2021. Our 2nd quarter revenue was particularly strong due to increased recurring revenue and international equipment that was shipped at the end of Q1, but was recognized in Q2. Recurring revenues were $5,500,000 a 95% increase over the Q2 of 2020 and a 17% increase over the Q1 of 2021, which as mentioned, reflects the opening and staffing of dermatologist offices as the world has opened and people feel comfortable venturing out to see their derms. Equipment revenues were $1,900,000 An increase of 56% as compared to the $1,200,000 for the Q2 of 2020 and an increase of 65% as compared to the $1,100,000 for the Q1 of 2021. As we stated in the Q1 conference call, there were systems that shipped in the Q1 Well, we could not recognize the revenue until the Q2. We expect more normalized equipment sales in the Q3. As we discussed last quarter and included in our press release issued this afternoon, we provided information on a non GAAP measurement described as gross domestic recurring billings, which represents the amount invoiced to partner clinics when treatment codes are sold to the physician, Does not include normal GAAP adjustments, which are deferred revenue from prior quarters, recorded as revenue in the current quarter, the deferral of revenue from the current quarter, recorded as revenue in future quarters, adjustments for co pay and other discounts. We felt that this was an important disclosure in light of the COVID-nineteen pandemic to assist in understanding our business and to more effectively view the trends that we are seeing with our business. We also wanted to provide transparency with respect to deferred revenue Since we defer a portion of our GAAP recurring revenue into future quarters, a decrease in deferred revenue can impact each subsequent quarter. Non GAAP gross domestic recurring billings were $5,500,000 as compared to $1,800,000 in the Q2 of 2020 and $4,600,000 for the Q1 of 2021. The impact of deferred revenue and the reconciliation From non GAAP gross domestic recurring billings to recorded revenue was a negative $128,000 as compared to a favorable $1,000,000 in the Q2 of 2020. With increasing and more consistent revenue, we're seeing the normalization of the impact of deferred revenue consistent with pre COVID levels. Overall, gross profit was $4,800,000 or 64 percent of revenues as compared to $2,000,000 or 49% of revenues for the Q2 of 2020 $3,000,000 or 64% of revenues for the Q1 of 2021. Gross profit for recurring revenues was $3,800,000 or 70 percent of revenues as compared to $1,400,000 or 51% of revenues in the Q2 of 2020 $3,200,000 or 68 percent of revenues for the Q1 of 2021. The primary reason for the increase in overall gross profit was a result of higher sales, partially offset by higher depreciation expense in the Q2 of 2021 and partially offset by an unfavorable impact of deferred revenue in 2021 as compared to 2020. Engineering and product development costs were $400,000 as compared to $200,000 for the Q2 of 2020 $400,000 in the Q1 of 2021. The increase was a result of certain ongoing engineering projects. Selling and marketing expenses were $3,200,000 as compared to $1,200,000 in the Q2 of 2020 and $2,900,000 in the Q1 of 2021. Sales and marketing expenses were sequentially and annually higher primarily as a result of investments in sales and marketing and direct to consumer advertising, while in 2020, the company manages costs as a result of the downturn in businesses attributable to the COVID-nineteen pandemic. General and administrative expenses were $2,100,000 as compared to $1,900,000 in the Q2 of 2020 and $2,800,000 in the Q1 of 2021. General and administrative expenses were Higher as a result of higher compensation, severance and stock option costs, primarily as the result of CEO transition in the Q1 of 2021. Other income for the 3 months ended June 30, 2021 was $2,000,000 as compared to an Expense of $18,000 for the 3 months ended June 30, 2020. In the Q2 of 2021, we received notification that the Paycheck Protection program loan have been forgiven and we recorded a gain on extinguishment of debt in the amount of the loan of $2,000,000 Net income for the Q2 of 2021 was $1,100,000 earnings of $0.03 per basic and diluted common share As compared to the net loss for the Q2 of 2020 of $1,700,000 or loss of $0.05 per basic and diluted common share And net loss for the Q1 of 2021 of $2,400,000 or loss of $0.07 per basic and diluted common share. At June 30, 2021, cash, cash equivalents of restricted cash was $17,000,000 as compared to $17,500,000 at March 31, 2021. After cutting discretionary spending in 2020 due to pandemic in the Q4 of 2020, we began our investment back into DTC Advertising and in Q1, 2021 reached pre COVID levels. In addition, we are making investments in sales and marketing to drive our commercial execution, which will increase our cost structure. Lastly, in connection with the acquisition of the U. S. Dermatology business of Ra Medical, we are able to leverage in house resources in sales, marketing, Call center, field service technicians and after the integration transition cost with increased comebacks, We see the acquisition of the U. S. Dermatology business of Raum Medical being accretive to EBITDA in the Q1 of 2022. And now, Bob and I would like to open the call for questions. We will now begin the question and answer session. Our first question comes from Jeffrey Cohen with Ladenburg Thalmann. Please ahead. Hi, Bob and Matt. How are you? Good, Jeff. How are you doing today? Okay. Sorry for the background noise. So, couple of questions. So, congratulations on The announcement, I see the upline. Could you walk us through how kind of a macro standpoint, How this affects the company overall, meaning it sounds like it's a 50% increase across the board On units and arguably some of the other metrics, but how might this work for an existing derm under the ROTH platform That's acquired a unit over the past year or 2 and how that kind of transition to Your technology and your model might look like over the coming weeks months quarters? Sure. No, good question. So we obviously want to have the smooth transition as we possibly can. There's over 400 Pharos users out there or Potential users, 280 who are active and another 150 who had used the Pharos laser at one point and have not Recently, so we think that's a real opportunity for us. So in order to make the transition as smooth as possible, a lot of them are under service contracts. We're going to honor those contracts going forward until they expire. And in some cases, we may extend them for a short period of time, which will also give us time to reintroduce the XTRAC partnership program to these potential accounts for us. A lot of them obviously are familiar with 3 0 8 Eximyr Laser and have a well established patient base. It's not going to be hard to educate these folks on the benefits of using the laser itself. It's really educating them on the benefits that surround our partnership. As you know, the direct to consumer advertising, the reimbursement support, clinical support, technical support, All the services that we bring in that partnership and we think that's the key to bringing these people over and establishing more comebacks and placements going forward. I got it. And how might that look like as far as the actual equipment goes? You'll have an opportunity over the coming quarters To transfer over to your equipment or to expect them to stick with the existing equipment? Little bit of both. I think you kind of put a timeline there. Anybody who's bought a Pharos probably in the last year or so, I wouldn't expect Transfer over very quickly, so that's why we want to give them the opportunity to extend their service agreement if need be. But we're going to target based on the expiration of some of the agreements that are in place. And as they expire, we'll be reaching out to these customers and trying to bring them over to the XTRAC using our equipment, we don't have plans to manufacture the Pharos eximelaser going forward. Okay, got it. And it looks like margins look pretty solid for the quarter. What do you expect on that front? And any thoughts on how Q3 is going or how the Back half may look other than your anticipation that it drives higher than 'nineteen levels. Hey, Jeff, great question. This is Matt. Our key is getting back to pre COVID levels In driving the recurring revenue. So when we look at the revenue going forward, as you know, that as recurring revenue grows, The base cost in COGS is pretty much fixed. So therefore, margins On each incremental dollar, we get around 90% little over 90% in those margins, which is why when you look back in Q4 of 20 'nineteen, we had revenue we had margins on the recurring at about 76.5% and overall almost 74%. So that is our goal is to get to approaching 2019 levels in revenue, in recurring revenue. But what you'll need to look at is that the our capital sales won't be as high as we've been transitioning our international business away from Capital and back into the recurring model as we believe that is favorable to the company's valuation as well as cash flow And driving the overall business. Got it. And lastly for me, what about timing? Any commentary there on when this may close? Do you need a shareholder vote or do you expect it closed during the current quarter? We are signing close. So we are closed as of today. Great. Congratulations. Thank you. Thank you for taking our questions. Absolutely. Have a great day, Jeff. Thanks, Jeff. Yep. The next question comes from Suraj Kalia with Oppenheimer. Please go ahead. Good afternoon, everyone. Bob, can you hear me all right? Absolutely, Suraj. How are you doing? Doing well. Hope everyone is safe and healthy. Yes, thank you. Hey Bob, so again, just following up on the RA Question. So Bob, I heard through your commentary. And should we think about this as more in terms of The net effect would be in essence a certain amount of new customers that eventually would transition to Strata, is that the way to think about it or are there some additional synergies that we might have probably missed in this picture Or I might have missed it, Spitzer. Yes. I think the way we are looking at it, Suraj, is that again, we are picking up 400 Potential extract customers here going forward. We have a ready made base. There is 280 who are very active and have agreements already in place with ROTH that will be taking over and servicing their needs. So it gives our sales force an opportunity And a reason to go in and revisit with these folks who obviously are probably familiar with Xtract, certainly know the Eximera Laser system very well. It gives us an opportunity again to talk to them about our Xtract partnership. We believe it's the most effective way to deliver the eczema laser treatments To both providers and patients, with all the support services we offer, not only the direct to consumer advertising, which drives the patients in, but The reimbursement assistance, the customer service, technical support and so on, as you know, we think that's a comprehensive way Of really delivering these adjuvant treatments. So that's the potential. It obviously gives us the opportunity Bringing some comebacks to have more placements and more importantly to drive more usage in the recurring model. So That's the key issue. It also cements us as the leader in 308 eczema laser in the U. S. We are the predominant supplier now. There is another small provider out of Korea, but doesn't have really much of a foothold in the U. S. So, we do have that position created by this acquisition. So we are really excited about it. We have been very successful as you know with comebacks over the years. I believe in 2018, we had 15. 2019, we had 2019. 2020, we had 23. Year to date, we have 18 comebacks. So this is only going to accelerate that process. So it's a real opportunity for us. And the only thing I would add, Suraj, would be that It allows us to keep the high end users that might have departed from our recurring model to purchase one of their own units. And it allows us to work with those partners in order to keep them in the Strata partnership. So Bob, if I could just belabor on that question. So pick Your if the Pareto rule holds true out of these 40 accounts 400 accounts, right? So How should we think about the utilization rate or revenues per practice Over time, how do you all intend to note that? And what would be the appropriate time for us to start measuring the ROI specifically on the transaction? Good question. I think that goes back to the growth drivers that we described coming out of Q2. We have really made a concerted effort here to focus on commercial execution. High volume customers, we increased them From to 186 in the 2nd quarter from 148. So we're making progress. The non revenue producing customers in Q1 were a real issue for us. It was 23% of our overall installed base, we reduced that to 17% and we will get that down below 15%. And then the other metrics we didn't talk about in the call was Revenue per system per quarter, in the Q1 we did $5,400 per system per quarter. In the Q2, we were around 6,100 per system per quarter and our goal by the end of the year is to be at 7,500. I think that will translate across not only our extract systems, but any of the raw systems that we can bring over. So it's just simple math, Suraj, right? The more systems we have out there, the more we're generating per system, our revenue is going to substantially grow. Bob, I'll just ask one more and I'll let others take the baton. So Bob, Korea, Can you give us a status update on the shared revenue model or the recurring revenue model that was being implemented sometime back? Gentlemen, thank you for taking my questions. Thanks, Suraj. Thanks a lot, Suraj. I appreciate it. When we look at Korea, and Bob alluded to a little bit on the call, we have initially out of the gate, we were very successful In launching our recurring revenue model in Korea, but over the last couple of quarters, it slowed down a little bit And we've been placing in Japan, primarily Japan and China. We're still placing in Korea, but we're working on a distributor to ensure that they have Thank Our next question comes from Joe Permian with H. C. Wingerie. Please go ahead. Great. Good afternoon, guys. This is Matt on for Joe. For taking our question. First, I want to extend congrats on the encouraging sales traction. But our question is more related to the geography and the current ongoing pandemic. I wonder if you guys give any insight about areas or regions that you might see being contributors as they come out of the pandemic and possibly other areas of the country that are risks, Particularly if we're seeing more restrictions coming into place and how this might affect your strategy going forward? Sure. Good question. As we I think stated in the call, we believe that across the country we're about 90% to 95% Back as far as patient visits and staffing in most of the country. The one there's actually 2 areas that we've identified and This has come mainly through our sales force and what they're seeing out there as well as I've spent some time in the field. There has been a slow uptake in some parts of California, around LA in particular, and also in New York City. Some of the bigger cities in Boston are a little bit slower coming back. And I think if you look at how they came back with mass People going back into the city, particularly New York, it's not hard to explain. A lot of the patients that visit dermatologists in Manhattan in particular Come from outside of the borough. If they're not coming into the borough for work, then they're not probably going in there to see a dermatologist either. So That's been a little slower coming back than some of the other regions. But for instance, we see in the Midwest, We are operating at 95% to 100% of capacity. It's a much better picture. So it is a little bit regional. It really hasn't affected our strategy too much. We are expanding our sales force by a couple of territories and probably would inevitably add someone in the Northeast And somewhere in the Midwest, I would believe and that will certainly accelerate our ability to Increase our frequency, which is key to driving usage and that's really what we're focused on. So, Unless the delta really starts to take more of a hold, right now, we don't anticipate any problems, but we're watching it very closely. Yes. No, that makes sense. Very helpful. Again, appreciate the additional details and I'll go back in the queue. Thanks again, guys. Thanks. This concludes our question and answer session. I would like to turn the conference back over to Bob Mosher for any closing remarks. Thank you, operator, and I'd like to thank everyone for joining us today and look forward to talking to you again with our Q3 results. Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.