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spk00: Greetings and welcome to the Strata Skin Sciences fourth quarter 2023 earnings conference call and webcast. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Rich Cockrell, Strata Investor Relations. Thank you, Rich. You may begin.
spk01: Thank you, operator. Good morning, everyone, and thank you for joining us for the Strata Skin Sciences fourth quarter and full year 2023 earnings conference call. Earlier today, we released our financial results for the quarter ended December 31st, 2023. You can find a copy of the press release on the company's website. Before we begin, I'd like to remind everyone that this call may include forward-looking statements. These statements are not guarantees of future performance and involve risks and uncertainties that could cause actual results to differ materially. We encourage you to review the SEC filings, which highlight these risks and uncertainties. The company does not commit to updating any forward-looking statements as new information becomes available. Now, today on the call, we have Dr. Dola Raffaele, our CEO, and Christopher Lesovitz, our CFO. Each will provide an overview of the company's Q4 performance and discuss the strategic outlook. After their remarks, we'll open the floor for questions. And with that, I'd like to turn the call over to Doliff. Go ahead, sir.
spk05: Thank you, Rich, and good afternoon, everyone. Reflecting on 2023, it's evident that it was a pivotal year for Strat. characterized by strategic leadership adjustments, product innovation, and substantial market expansion. The strategic change in leadership at the end of the year, which saw my return to Strata in October, marks a significant commitment to our proven strategic vision that drives growth and operation excellence. The robust reinvigorating of the direct-to-consumer DTC recurring revenue model has been a cornerstone of our strategy, proving to be a vital element of our success, especially evident during my previous tenure as CEO for our core extract business between 2011 and 2015 and from 2018 to 2021. It was remarkable. These periods that marked a transformation in Strata, steering the business towards positive cash flow from operation, expanding our footprint both domestically and internationally, streamlining operations, and sparking innovation through a launch of new products and services. Central to our plan has been the focus on our flagship product, the X-TRAC, the D-TRAC, and the TheraClear X. A key highlight of the year was the success of introduction of our TheraClear X active therapy system in January of 2023. By year's end, we placed 92 devices under the recurring procedure model. During 2023, Strata also significantly increased its domestic and international recurring revenue install base to 964 extract devices as of December 31st, 2023. This expansion underlines our capability to innovate and efficiently respond to market demand. Just last month, we took an important step to secure our future growth through the amendment of our credit facility with MidCap Financial Trust. This adjustment in our financial strategy, ensuring alignment with the company's current and future business projections in supporting operation and capital needs is crucial for our continued growth and further expansion of the efforts. More recently, we have initiated a campaign to extend insurance coverage to essential dermatological conditions. Aligning with our mission to enhance patient access to vital treatments through the improved insurance practices and broadening inclusion of CPT codes initially, our efforts are concentrated on securing payer coverage for extract treatments for multiple indications, including vitiligo, CTCL, alopecia areata, and atopic dermatitis. This initiative is a testament to our commitment not only to increase the accessibility of our treatment, but also to advocate for the well-being and quality of life of those affected by these conditions. I note that not all of these conditions are currently approved indications, but we are in the process of moving forward to see if such use may be approved in the future. Leveraging our VEST database of over 270,000 pest extract patients, we are actively collaborating with prominent patient advocacy groups and the wide dermatology key opinion leader community. Strata also commenced targeted advocacy with legislators to enhance access to the extra treatment. As we continue to ramp up the DTC revenue model in 2024, we remain laser focused on executing our key strategic priorities. First and foremost, We are working diligently to drive utilization and rationalizing placements of both our extract and TheraClearX devices. This involves leveraging our strengthening balance sheet to rebuild and expand the DTC capabilities and stimulate patients' demands. By bringing patients directly to physicians' offices, we can increase procedural holdings and device utilization, thereby generating incremental high-margin recurring revenue. Let's now pivot to the review of our financial landscape from our CFO, Chris Lassovich. And then I will explain a little bit more on the operational side. Chris?
spk03: Thank you, Dolav. Let's dive into our financials for the fourth quarter and full year 2023. Our total revenue for the quarter was $8.7 million and $33.4 million for the full year. This decrease from the prior year is reflective of the decline in recurring revenue for the company, which we are now shifting back to in 2024. A crucial element of our approach involves recentering our efforts on our foundational business, collaborating with doctors' offices and driving customers to them. This is a return to our roots, a strategic maneuver to enhance the utilization rates within our recurring revenue model, and we are confident that these efforts will start to show a tangible impact in 2024. Breaking down the total revenues, our global recurring revenues for the full year 2023 were $21.5 million. as compared to global recurring revenues of $23 million for the full year 2022. Equipment revenues were $11.8 million for the full year 2023, as compared to $13.1 million for the full year 2022. Looking forward to 2024, we are building upon a launch of the TheraClearX system, in which our emphasis on recurring revenue has started to shape our revenue mix. This strategic pivot is designed to enhance long-term sustainability and profitability, with an emphasis on TheraClear X being reimbursed from CBT and continuing our focus on the recurring model for extracts. Turning our attention to our operational efficiencies, particularly within our selling and marketing and G&A areas, I'm pleased to share that we've taken deliberate steps to refine our cost structure. In the latter half of 2023, we implemented reductions in and sales and marketing expenditures, which are expected to come to full fruition in 2024. This is part of our broader strategy to return to the leaner expense structure as previously seen in 2019. In addition to the cost savings above, we intend to eliminate non-productive accounts, not only by reducing the costs associated with servicing, but also repurposing those materials. On the G&A front, we have experienced a slight increase in expenses to $10.5 million, driven largely by one-time legal and accounting costs and transitions within our executive team. Our strategic plan for 2024 will optimize the utilization of our devices, maximize operational efficiency, and ultimately improve our bottom line. These adjustments reflect our proactive stance in ensuring Strata operates at a sustainable and competitive cost base, allowing us to invest more deeply in growth and innovation. The full financial impact of these changes is anticipated by the end of 2024. Finally, despite a net loss for the quarter, which included the $2.3 million goodwill impairment recognition mentioned in our earnings release, we are confident in our strategic direction. Our balance sheet remains strong with a solid cash position to support our growth initiatives. Cash and cash equivalents and restricted cash at December 31st, 2023 were $8.1 million compared to $6.8 million at the year-end 2022. With this stronger position combined with the anticipated revenues from the sale or use of our products, operating expense management, and our amended credit facility with MidCap Financial, we believe we are well positioned to continue growing into 2024. I'll now hand the call back over to Dolev to discuss our strategic outlook and operational priorities.
spk05: Thank you, Chris. As we conclude the fourth quarter, we remain focused on aligning our operations more closely with the evolving market demand and our long-term vision for Strat. This quarter has been a foundational in setting the stage for the reinvigorating of our DTC marketing and business model. an approach we believe is critical for sustainable growth and enhanced profitability. Our journey towards this strategic realignment highlights our commitment to leveraging the inherent strengths of our business, particularly our close relationship with physicians and our robust clinical support infrastructure. These elements are pivotal not only in driving utilization of our devices, but also in creating valuable opportunities for both Strata and the healthcare providers we partner with. Our goal is to significantly improve our margins through heightened device utilization, generating substantial recurring revenue in the process. The core DNA of the DTC approach is providing unparalleled support at every touchpoint. The patient and provider insurance benefit support, the patient co-pay support, and provider clinical support and patient advocacy. It's important to acknowledge that shifts of this magnitude require time to fully manifest in our finances. The previous focus of our efforts, the direct-to-provider marketing, has laid a solid foundation, yet the move towards a more DTC-centric approach marks a return to a proven strategy that has historically driven our growth and success. As we advance, our primary focus will remain on maximizing the economic efficiency of each device plate. In the coming quarters, we anticipate the impact of these strategic shifts to become increasingly evident in our performance metrics. The EXARC partnership represents a cornerstone of our strategy to enhance recurring revenue streams. Usage is driven by both strata, facilitating a patient appointment utilizing DTC, as well as by the provider prescribing their own patients. The DTC approach fosters a halo effect in which patients are driven both directly as well as indirectly to the procedure. As a reminder, the extract procedure benefits all. The patients receive a side effect free clinical effective procedure. the cost for the insurance payer is the lowest of all alternatives, and the partner clinics generate incremental revenue. This slide encapsulates the past ebb and flow of patient engagement within our practices, punctuated by the influence of our DTC marketing efforts. The initial leads, marked in blue, showcases patients' interest in our extramural laser treatment. Dark gray highlights the scheduled appointments, a direct result of our targeted marketing campaigns. The green bars, our RDX charts, reflect the translation of leads and appointments into actual new patient charts ready for the treatment. As we started ramping up our DTC efforts in 2024, we have focused on four geographic areas, New York City, Florida, Texas, and Illinois. We've selected these areas to validate our historical cost per lead, which is around $30 to $40, and our historical cost per in-clinic patient appointment, which is approximately $300. Each of the patients, whether driven by DTC or provided or provider generated, generates a patient chart in Stratus proprietary RDX system, which allows the tracking of insurance benefits and supporting the providers and patients in fully realizing these. As a reminder, during 2019 and 2021, we were able to drive 5,000 and 6,000 patient appointments respectively. contributing about 25% of the overall new patient shots. As the value of full course of treatment of an individual patient to Strata and to the partner clinic is more than $1,200 and $2,900 respectively, the successful capture of these patients in the clinic and into procedures is critical. And our team monitors as these newly generated appointments are under way. For 2023, with DTC underutilized, Strata had a total of 185 leads, 23 appointments, and 11,787 RDX charts. These numbers represent our baseline as we reinstate our DTC initiative. Our DTC campaign started ramping up in the second half of January 2024 and will continue expanding as we increase the number of targeted territories. The unit economics for each individual extract device is best measured by an average revenue per device. Prior to the pandemic in 2018 and 19, when DTC was the core focus, we saw significant growth in the number of extract devices deployed, as well as an increase in the average revenue per device. In 2019, each of the 820 partner clinics generated on average $7,200 per quarter. Post-pandemic, While the business has mostly returned, the company focused its marketing resources on direct-to-provider initiatives, increasing sales and marketing expenses from $12 million to over $15 million, while reducing the DTC initiative and its costs. The impressive 13% growth in domestic install base from 820 in 2019 to 923 in 2023 was coupled with a lack of DTC-driven appointments and its associated halo effect, resulting in a reduction of 28% in the average revenue per device per quarter to approximately $5,200 per device per quarter for 2023. The expansion in the install base lays a robust foundation to revitalize our DTC initiatives aimed at boosting procedure volumes, enhancing device utilization, and driving up the average revenue per device per quarter, all while being able to rationalize the size of the install base. The TheraClear app system represents a parallel success story, with 92 devices already active in clinics focusing on cash-paying patients. Yet, the substantial opportunity lies in integrating the TheraClear apps into our clinical dermatology network, where the focus shifts to insurance-reimbursed treatments. This pivot not only reduces the financial burden on the patients, but also promises improved clinical outcomes, thereby potentially increasing patient volume and device utilization. Late in the fourth quarter of 2023, we have started transitioning existing accounts and adding others to the insurance reimbursed approach. Our insurance benefits team has processed several hundred individual patient charts, resulting in 86% payer preauthorizing a course of treatment for patients and providers all across the country. The CPT treatment code average Medicare payment rate is approximately $120 with private payers varying in Strata already owns approximately 200 TheraClear X devices, and each additional patient represents approximately $500 and $1,200 of potential incremental revenue for Strata and provider respective. Internationally, as we expand into new markets, our installed base of over 1,400 X-TRAC and D-TRAC devices continues to provide a robust and reliable revenue stream. In closing, I want to emphasize the strides we've made in 2023 as we recommit to our DTC model and capitalize on our expanded install base. The strategic efforts are integral to our mission of enhancing the patient and physician experience and are the driving force behind our anticipated growth and margin improvement. Looking ahead, our commitment to operational excellence and strategic marketing will elevate Strava's profitability and shareholder value in the near term. We thank you for your support and look forward to navigating the future with confidence and clarity. Let's now open the floor for questions. Operator?
spk00: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Thank you. Our first question comes from the line of Jeffrey Cohen with Landenberg Thalmann. Please proceed with your question.
spk04: Hi, Delevingne. Chris, how are you? Hey, Jeff. So, firstly, could you talk about how you're planning on defining non-productive accounts and perhaps give us a sense of what percent of accounts out there are are currently falling beneath that non-production line.
spk05: Absolutely. I'll start with that and Chris is going to add on more metrics if you wish. So this initiative is not new. This was already discussed by previous management going into the third and fourth quarter of last year. However, as you've been following this business for several years now, you know that probably the most important metric in how this business becomes profitable is how much revenue we generate per device because almost every other expense is fixed. So for reference, in 2018, our average revenue per device was in the range of $5,000 per device per quarter. And we were able to push that up with all of our initiatives and the DTC to almost $7,500 per device by the end of 2019. So 2019 represented about $30,000 per device. In 2019, we have 820 devices. The same install base met the company at the other end, or almost the same install base met the company at the other end of pandemic coming into 2021, and then companies started extending the install base. Coming out of pandemic in 2021, the business or the year was a story of two halves. In the beginning, offices were coming out of the pandemic and starting their businesses back up. But then by the end of 2021, we were back at the same run rate. So if you look at 2021 as a whole, the average revenue per device for 890 devices by the end of 2021 was approximately $25,000 per device. Now fast forward to 2023, we have over 900 devices in the market, 923. However, the average is about 21,000 for the whole year. And that gives us an opportunity. The opportunity is either reviving existing devices or removing them and using them instead of building new devices when we start expanding again. The threshold metric would be obviously how much revenue this device is generating or how much this device can generate As a whole, if you look at this as an install base, every one of these devices that does not generate on average in excess of $15,000, $16,000 is not contributing to the bottom line. That's the target. The target is going to be to optimize the install base. On the one hand, we have increased utilization on the existing install base. On the other hand, I would not anticipate very strong moves in the install base either way. If you look back into the company disclosures in the past, we have every year removed in the range of 100 to 120 devices. And in the years that the company was extending, we placed more than 100 or 120. And in the years of the company was shrinking, we've placed less than 100 or 120. So it's not going to be it's not going to be the complete stop of extension, but it's going to be somewhat of a of the shrinkage of non-performing devices just in order to replace them with accounts that could be more productive as we reintroduce BTC. Chris, do you want to add something?
spk02: Natho, I think you nailed it pretty much there. As Dole mentioned, the main goal here is to get these non-productives out and use that excess inventory. for us internally at the warehouse, and then, you know, we redeploy them to actual producing dermatology offices. So, yeah, that pretty much sums up pretty good.
spk05: So, Jeff, it's more a movement within the balance sheet. So instead of having to recreate additional devices, new devices, and move them into PP&E, We already have them. We're moving them away from non-productive accounts either into other productive accounts or into the warehouse so that these can be utilized into productive accounts.
spk04: Got it. Okay. Could you talk about alopecia a little bit as far as what's the recommended number of treatments, over what duration, and are there any current data points or studies ongoing
spk05: So great question. Alopecia and some other indications or indications that have extensive clinical data, I will make sure to follow up after this call and send you clinical data for that, where the the eczema laser is used for the treatment of these conditions. Specifically, I was talking about alopecia areata, which is the hair loss patches caused by autoimmune diseases. And I was also talking about CTCL, which is another autoimmune inflicted disease. These conditions are and have been used by clinicians or the extract has been used by clinicians to treat them. And these conditions are being treated from the company's perspective, they're being treated off-label because the FDA labeling of the device is for the treatment of psoriasis, vitiligo, atopic dermatitis, and leukoderma. However, these conditions are being treated, have been treated over multiple years, and are being paid and accepted by the commercial payers. What we're trying to do is we're trying to bridge that gap. We cannot actively promote anything that's not labeled. That's on the FDA front. We're inactively promoting it. We're providing clinical data, but we cannot promote the use of the device. And we can also, it's very hard for us to negotiate with the payers if it's an off-label indication. However, we have very solid track records of these conditions being approved by and paid by the payers, both Medicare as well as the private payers.
spk04: Okay, got it. Next question, could you talk a little bit about some of the clusters out there, OUS, as far as direct and growth in, say, LATAM, Europe, as well as Asia?
spk05: Yes. So our biggest clusters of users have always been in Asia, China, Japan, South Korea. in China, Japan, and South Korea, as well as in the Middle East. These markets are different from each other in the sense that in some markets like Japan and South Korea, this procedure is covered by the insurance company, healthcare insurance companies. And we have been accepted as a brand. We've been accepted as the leading brand in these markets. And we do take a leading position in that market in terms of the market share of providers using this. Where the other markets are either more aesthetically driven, so China where it's mostly cash pay, or states Healthcare insurance driven like the Middle East, mostly the Kingdom of Saudi Arabia and the other countries there. We have north of 1,500 devices in these markets, and we've had them for over 14 years. We started doing this 14 years ago. And the sales into these markets is broken into three components. We sell capital equipment, so we sell new devices, and that is used for replacement of existing devices and going into new accounts. We sell parts and consumables into these markets, which represents about one third of the revenue, where the Exima laser requires gas and other components to maintain it. We've seen this in these markets as well as in the domestic market lifespan of the extract devices is being well north of 10 years. We have devices that have been in the market for 14, 15 years, but it does require maintenance and parts. And the third component, which is something that we've introduced in 2021, is the placement of devices and basing on recurring revenue, which is started at the end of 2020 and grew to a to the extent of about $1.5 million in revenue annually as of last year. This was true for all of the Asian markets. One of the Asian markets, China decided to move away from that, mostly because of their limitations on maintaining devices in the market that are not owned by them. But we continue having placement devices in Korea and as well as in Japan. This allows users to commit to the therapy without having to commit to hundreds of thousands of dollars in the cost of the aircraft equipment.
spk04: Okay, got it. And then lastly for us, if I may, press you a little bit on 2024. So firstly, I'm wondering how many TheraClear devices you aspire to having at the end of the year. And then secondly, no guidance on top or bottom line. You did mention growth. Are you referring to 5% growth or 20% growth or any idea there that you can provide? That does it for us.
spk05: Let me start with the second question. The key initiative in 2024 is to bring the company back into a growth mode on the recurring side while maintaining the other components of the company. I'll parse the recurring side. The recurring side has three components. One I just spoke about, which is the non-US. As I said, it's an existing and growing market. Very stable. We've been in these markets for many years. We are the leading brand, and it's a very, I don't want to say easy, but it's a very efficient transaction for us as well as for the distributors and the customers on that side. And in 2023, as I said, it was, and you can see this in the 10K, but it was approximately $1.5 million for us. The second component, and you've touched upon this, is the air clear. The company owns, in terms of have acquired, about 200 devices. That investment sits in the PP&E, in a balance sheet. The deployment of these devices and getting them to utilization was the prime target of the changes we've made at the end of Q4 2023 when we decided instead of continuing to pursue cash paying patients or cash paying physicians or physicians that are collecting cash for procedures, we have pivoted towards going after clinics where the insurance reimbursement is the main target. As I've explained in the third quarter earning call in November, this is the goal and we're first going to be tracking through, can we get these clinics to use the procedure? Can we get patients cleared through insurance? And then can we get, on the other hand, can we get the clinics to collect on the procedure as they're being reimbursed? As I said in my prepared remarks, by now we've had several hundred patients submitted to insurance. We've had a very high percentage of approval rate, a very nominal non-approval rate. And now we're on the back end of that, looking at providers treating the patients, submitting for reimbursement, and getting paid. And as I said in my remarks, what we see is that the average Medicare rate is about $120, and the private payers are paying On average, that amount, but in some areas, it's much higher than that, and in some areas, it's lower than that. As we stand now, we have hundreds of patients in the process of being treated and of payments being collected, and I would assume that by the end of the first quarter, we'll be able to provide actual guidance on what would we anticipate recurring revenue per device to be or to grow to and what would be the number of devices we will anticipate having by the end of the year. I can say just as a side note for the first quarter, we are seeing a growing acceptance of the usage of the reimbursement code and that is happening in light of two One is there was another device in the market that took a lot of attention in the last couple of years, and there is disappointment from that device, not from its technology. It's a different company. Not from its technology, but from the inability of driving patients for cash pay, and the realization that patients can get covered by insurance and their exposure is their out-of-pocket copay. And having done that now in all regions of the country and with a very large number of payers gives us a lot of confidence that by the end of Q1, we will be able to provide guidance on quantity targets and revenue targets. I hope that explains that. On the extract, I did speak about where we want to be. So we've ended 2023 at just over $5,000. And if we could get by the end of 2024 to be where we were at the end of 2021, which is at the range of $7,000, $7,200 per device for the fourth quarter, This is going to be a great outcome because it's going to provide a meaningful upside on the recurring run rate. Just as a reminder, the recurring revenue for the company has been in decline for the past several quarters. So being able to get to a stop to that decline and then start seeing the decline in my eyes, would be a success.
spk04: Perfect. Okay, that does it for us. Thanks for taking the questions. Thank you.
spk00: Thank you. As a reminder, press star 1 to ask a question at this time. Thank you. Our next question comes from the line of Jonathan Lawrence, with the Onsen and Zanes.
spk06: Hey, John. Hey, Dola. Hey, Dola. Chris, how you doing? One of my questions was answered. Can you hear me? Yes. Okay, great. I was just curious on the direct-to-consumer business, how is that going as far as the traction in both extract and also on TheraClearX? As far as what you saw previously when you were doing this and kind of if anything's changed or it's just spending the dollars and getting the leads.
spk05: Great question. Thank you. I'll just point out to a few things I said through my prepared remarks. When Strata left off DTC, which was at the beginning of 2022, the the DTC spend or the direct consumer spend for the year of 2021 was in the range of approximately $2 million. That $2 million generated about 6,000 appointments, which were approximately 25% of the new patients introduced into the clinics. So if you wish, the company subsidized about 25% of the patient growth into the clinics. In 2022, the company stopped doing DTC, and then in 2023, it moved most of its resources towards direct-to-provider marketing and promoting the new therapy rack. By going back into DTC, we would like to see the restart of getting these leads in, getting these appointments in, and the most important thing first step was to re-establish where are we in terms of costs because two years have gone by. The cost of media has changed. The rules on online advertisement have changed. The available solutions that are being promoted through social media and online have changed through different pharmaceutical companies. So we wanted to see where we stand. We started doing DTC in the second half of January of 2024. with only four territories, as I mentioned in my remarks, in anticipation to see where we stand in terms of results. We were happily surprised to see that our cost per lead in the range of $30 and our cost per appointment in the range of $300 remains stable. We have since expanded to additional peripheries, which I will be happy to provide more details as the first quarter ends. And we're seeing a growing number of leads, a growing number of appointments being scheduled into clinics. And by that, we should see the results of the VTC In the range of two to three months into the campaign, because it takes time from the time the appointment is scheduled, the first appointment happens, the procedure is prescribed, and then the patient starts getting treated, and then there is construction of treatment codes, and we see that coming our way. I would like to be at the end of 2024. at a position to say that in Q4 we spent as much as we spent in Q4 of 2021. And I would also like to be in a position to say that at the end of Q4 2024, we generated as many appointments as we had at the end of 2021. I've provided in my remarks the baseline so that in subsequent conference calls, people will be able to follow through success or the progress of this initiative. But I am confident that with these levels of cost per lead and cost per appointment, we will be able to expand the efforts meaningfully through the end of Q1 and then into Q2.
spk06: OK. Thank you very much. Thank you, John.
spk00: Thank you. There are no further questions at this time. I would like to turn the floor back over to Dr. Raffaele for closing comments.
spk05: I would like to thank everyone for showing up for our earning call. We will be back at the end of the first quarter to provide further updates. Thank you very much.
spk00: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
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