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spk07: Thank you for standing by. This is the conference operator. Welcome to the Strata Skin Sciences third quarter 2021 earnings conference call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the question queue, you may press star then one on your telephone keypad. Should you need assistance during the conference call, You may signal an operator by pressing star and zero. I would now like to turn the conference over to Lee Salvo with Investor Relations. Please go ahead.
spk06: Thank you, and good afternoon, everyone. Joining me today are Bob Moshe, Chief Executive Officer, and Chris Lesovitz, Chief Financial Officer. Earlier today, Strata released financial results for the quarter ended September 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 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 applied 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 factor section of our public filings with the SEC, including our annual report on Form 10-K for the year ended December 31, 2020. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, November 10, 2021. Strategist claims 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 growth recurring billings, which is a non-GAAP financial measure. The reconciliation of this non-GAAP financial measure to the most directly comparable GAAP financial measure is available on the company's earnings release for the third fiscal quarter ended September 30, 2021, which is accessible on the SEC 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.
spk01: Thank you, Lee. Good afternoon, everyone, and thank you for joining us for our third quarter 2021 earnings call. I'd like to start the call this afternoon by welcoming our new Chief Financial Officer, Chris Lesiewicz, who joined Strata in July and was promoted to CFO in early October following the departure of Matt Hill. I've had the opportunity to work closely with Chris in my prior company and have complete confidence in his ability to lead our financial department. Now to our third quarter results. Starting with a few financial highlights, Total revenues in the third quarter increased 37% year-over-year and 4% sequentially. We were also encouraged to see revenues in the quarter exceed pre-COVID levels in the comparable quarter of 2019. Recurring revenue increased 49% over the third quarter of 2020 and 5% sequentially. Our strong results are primarily due to continued recovery of the dermatology offices to pre-COVID operational levels, commercial execution on each of the initiatives we've identified earlier this year, and the shift we are seeing towards improved utilization that drives our recurring revenue model. We exited the third quarter with an installed base of 929 recurring revenue extract devices, including 880 in the US and 49 international placements. This is up from 889 units total, with 848 in the US and 41 internationally at the end of June. We are obviously pleased to see the continued growth of our partner footprint here and abroad. As we noted at the time of our last call, we entered the third quarter in the strongest position since the onset of the pandemic, with patient visits to dermatologist offices increasing for the third quarter in a row. While this trend was encouraging, mid-quarter staffing shortages once again began to resurface in some regions as the pandemic spiked with the Delta variant. This was especially prevalent in larger metropolitan regions, where we see the majority of our business. Despite these challenges, interest in our new extract placements remains strong, especially in group practices. Ultimately, we are confident in our position in the marketplace. We believe that when staffing once again returns to a more normalized patent, and we already are seeing some of that today, we have the right mechanisms in place to grow our installed base at a faster rate. Now to an update on our acquisition of the Rob Medical's Derm business. We have already made significant headway in transitioning current raw customers to our extract system and recurring revenue model. We continue to expect this acquisition to be accretive to EBITDA in the first quarter of 2022. Thus far, in the first six weeks following closing, we've conducted 112 initial meetings with RAS Farrows customers to review options. This yielded 13 comeback placements from Farrows customers by third quarter end with continued progress into the fourth quarter. We are building an exciting pipeline of Ferro's comeback opportunities that we expect will result in migration to extract throughout Q4 and into 2022, representing a tremendous opportunity to further expand our revenue and customer reach. Turning to our commercial execution initiatives, we are making great progress and believe that Strata is well positioned for a strong finish to 2021 and double digit growth in 2022. We recently added a director of business operations. whose responsibilities include centralizing all data sources, analytics, targeting, delivering an overview of the business, and identifying new opportunities for expansion. Our investment in direct consumer marketing continues at 2019 levels. DTC marketing has demonstrated historically to have a positive impact on the business, and we see that in the increase in RDX charts, which continue to trend above 2019 levels. RDX charts are insurance benefit requests for new and existing patients throughout the calendar year and represents patients who have been entered into our system as potential extract patients. High volume accounts, defined as accounts that produce above $40,000 in revenue per year, remain a focus and key metric we track. These high volume customers increased in Q3 from 186 to 214, a 15.7% sequential increase over the previous quarter. and contributed approximately 3.4 million in revenues in Q3, which accounted for 56% of all recurring revenues. The continued growth in the number of high volume customers reflects the focus and execution of our sales force in expanding usage and driving recurring revenues with our customers. Another key metric we track are customers at January 1 of 2021 that had not yet started producing revenues. Bringing these customers back online has been a priority this year, with many of these accounts severely impacted by the pandemic and closed for more than a year. We started 2021 with 198 extract non-revenue regenerating devices, and by the end of Q2, reduced that to 152. By the end of Q3, we further reduced that number to 69. While new non-revenue generating systems have been added throughout the year, our goal is to keep the total percentage of non-revenue generating devices below 15% of our total U.S. install base, with an average startup time of 60 days. Lastly, our new direct dermatology marketing initiative continues to take shape. We will be providing the sales force with updated selling materials that further highlight the features and benefits of the extract laser and the support services we provide. We continue to work with a third party vendor to interact with payers with a goal of improving coverage for the vitiligo indication, which we have discussed in the past is an exciting opportunity for the company in 2022. We are interacting more directly with KOLs and office-based dermatologists to gather further feedback and research that will help fine-tune our messaging going forward. We expect direct dermatologist marketing to be a key driver for the business in 2022 as we continue to seek expanded usage across all indications. Turning to our international business, during the third quarter of 2021, we placed eight units outside of the United States, all under the recurring revenue model. These additional eight placements brings our total to 49, which is a 104% increase over 2020. The OUS opportunity remains an important element in our overall growth goals with eczema laser potential, particularly for the vitiligo indication, as the treatment protocol for vitiligo requires more treatments than psoriasis. This vitiligo opportunity will be a focus as we further expand into additional markets. In summary, I am pleased with our progress so far this year in building the business back to pre-COVID levels and taking important steps to grow our business in 2022 and beyond. We have ramped up investment in sales and marketing and focused our sales force on growing usage while adding additional placements to our install base. The raw acquisition gives us over 400 new potential customers who are sold on the use of eczema lasers and now have limited options going forward. We expect to continue to move more of these accounts to the extract model, further growing our base and recurring revenues. Our international business continues to grow, and we have targeted additional markets in 2022 in which to further expand our reach. Lastly, we are actively looking into additional M&A expansion opportunities and ways to more fully utilize and engage our sales force through the ability to sell complementary products. As we have stated before, we are confident we can return to 2019 recurring revenue levels by the end of the year. We expect our equipment sales to slightly decline as we move more of our installed base to the recurring revenue model, but are confident this model will lead to improved and sustainable value for our shareholders. With that, I will turn the call over to our CFO, Chris Leseditz. Chris?
spk00: Thank you, Bob. Revenues for the third quarter of 2021 were $7.7 million, a 37% increase over the third quarter of 2020, and 4% increase over the second quarter of 2021. Our third quarter revenue was driven primarily by the improved COVID environment as compared to the same period in 2020, including a full return of our sales force and an increase in patients returning to dermatologists' offices. Recurring revenues in the quarter were $5.7 million, a 49% increase over the third quarter of 2020, and a 5% increase over the second quarter of 2021. Similarly, the increase in recurring revenues was driven by the full return of our Salesforce and an increased patient visits to the dermatologist's offices. Equipment revenues were $2 million, an increase of 13% as compared to $1.8 million for the third quarter of 2020, and an increase of 4% as compared to $1.9 million for the second quarter of 2021. These results reflect our strategic shift to a recurring revenue model offset by the service contracts assumed from the raw medical acquisition. 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. It 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-19 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 was $5.8 million as compared to $4.7 million in the third quarter of 2020 and $5.5 million for the second quarter of 2021. Overall gross profit was $5.4 million, or 70% of revenues, as compared to $3.2 million or 58% of revenues for the third quarter of 2020 and $4.8 million or 65% of revenues for the second quarter of 2021. Gross profit for recurring revenues was $4.2 million or 74% of revenues as compared to $2.5 million or 64% of revenues in the third quarter of 2020 and $3.8 million or 70% of revenues for the second quarter of 2021. The reason for the increase in overall gross profit was primarily due to the benefit of a full return of the company's sales force, driving higher margin recurring revenue. Engineering and product development costs remain steady at $400,000 as compared to $400,000 for the third quarter of 2020 and $400,000 in the second quarter of 2021. Selling and marketing expenses were $3.3 million as compared to $2.1 million in the third quarter of 2020 and $3.2 million in the second quarter of 2021. These expenses were sequentially and annually higher primarily because of the increased investment in our sales and marketing teams and increased investment in our direct-to-consumer and direct-to-dermatologist marketing efforts. General and administrative expenses were $2.2 million as compared to $1.9 million in the third quarter of 2020 and $2.1 million in the second quarter of 2021. Net loss for the third quarter 2021 was $521,000, or a loss of $0.02 per basic and diluted common share, as compared to the net loss for the third quarter of 2020 of $1.3 million, or a loss of $0.04 per basic and diluted common share, and net income for the second quarter of 2021 of $1.1 million, or earnings of $0.03 per basic and diluted common share, which was reflective of the impact of our PPP loan forgiveness in Q2 2021. Turning to our balance sheet, on September 30th, we've entered into a new credit and security agreement through MidCap Financial Trust that included a senior secure term loan facility of $8 million with favorable financing terms, including interest-only payments through September 30th, 2024, and extended maturity date. On September 30th, 2021, we also repaid a $7. million note with a commercial bank and $500,000 EDIL loan with the SBA. At September 30th, 2021, cash and cash equivalents was $13.1 million as compared to $17 million at June 30th, 2021. In October, Strata entered into an equity distribution agreement under which we may sell up to $11 million of our shares of common stock and registered at the market offerings. While we do not have a current need for cash, we thought it was prudent to have this vehicle in place should a need arise. Turning to our outlook for the final quarter of 2021. As Bob noted, we expect our equipment sales to slightly decline as we move more of our installed base to a recurring revenue model. As such, we are confident that we can approach 2019 recurring revenue levels by year end. With that, Bob and I would like to open the call for questions.
spk07: Thank you. We will now begin the question and answer session. To join the question queue, you may press star then one on your telephone keypad. You will hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then two. We will pause for a moment as callers join the queue. Our first question is from Suraj Kalia with Oppenheimer. Please go ahead.
spk04: Hey, Bob, Chris, can you hear me all right?
spk07: Yep.
spk01: Good evening, Siraj. How are you tonight?
spk05: Doing well, gentlemen. Hope everyone is safe and healthy. Hey, so Bob, maybe, Chris, maybe I didn't get the numbers. What was the contribution from RA in the quarter, if any?
spk00: So for the Q3, we moved 13 of their comebacks into our business. We also assumed deferred revenue from the acquisition, and we recognized around $336,000 worth of that in a quarter. Got it.
spk05: And Bob, you know, the math is suggesting roughly a little over $6,000 in recurring reps per system. Correct. Currently, um you know just kind of give us a perspective of what do you consider your most active accounts and how do you see them you know doing things differently when you look at the 6 000 plus you know average uh recurring revenues per quarter yeah good questions so you know you know one of the metrics we continue to focus on is high volume customers and those are defined as 40 000
spk01: annually in revenue to us. And, you know, what those folks are doing, I think that, you know, mainly they have gotten over kind of the staffing issues that, you know, we're still seeing in places like New York and L.A., a little bit still in Boston. So although patients are able to get appointments, in some cases they're waiting a little longer in some of those metro areas. So the ones that have come back on strong, you know, have really got past that, are fully staffed. Our reps obviously are focused on them. and seeing them every other week and really trying to drive that, you know, recurring revenue around usage, not only for psoriasis, but for vitiligo. And even now we're starting to talk even more about atopic dermatitis, particularly foot and hand eczema or areas where we're focused. So I think, you know, we continue to force on the recurring revenue model and that driving that usage is going to be quartering into 2022. Sorry, Suraj, you're breaking up.
spk04: I don't know. Bob, if you can hear me, I'm just curious if you could expand on your... Operator, can you... Yeah, I'm sorry.
spk07: Suraj, your line is a bit bad. Do you mind calling back, please? Sure. We can't hear you. Thank you. And the next question is from Jeffrey Cohen with Ladenburg-Talman. Please go ahead.
spk02: Hi, Bob and Chris. How are you?
spk01: Hi, Jeff. How are you tonight?
spk02: Just fine. So, Chris, you gave a little commentary on the margins, and you talked about the sales force returning. So I guess that partially answered my question as far as how should we think about it was strong for the quarter, but it doesn't sound like it's necessarily – a new baseline or a tick up going forward that is sustainable or is it?
spk00: Yeah, I mean, we did have a strong quarter. You know, going forward, we think we will sequentially achieve kind of the growth that we saw from Q2 to Q3 for total revenue perspective.
spk01: I think, Jeff, you know, it's really in line with what we've been saying from the beginning, which is that, you know, we expect to get to 2019 recurring revenue levels by the end of the year, and we're on target for that. You know, and that's going to set us up for double-digit growth in 2022 in recurring revenue, then throw on that, you know, the conversions that we're going to get from Ross. So, you know, we're expecting, you know, good things in 2022 and finishing strong this quarter.
spk02: Okay, got it. Can you give us a sense of – what percent of the business or percent of patients being treated are atopic dermatitis or vitiligo?
spk01: Yeah, so right now it's about 75%, 80% is psoriasis. Another probably 15% is around vitiligo. Atopic dermatitis is the smallest portion. Two reasons. One is coverage. The coverage for psoriasis is much, much better than it is for vitiligo and atopic dermatitis. And as we've talked about in the past, You know, we have a third-party contractor that's working with us to improve coverage with payers for both vitiligo and atopic dermatitis. So that's one. And then two, with atopic dermatitis, you know, with a laser, as you know, it's a more targeted treatment. Typically, atopic dermatitis presents on a large body surface area. So it's not really a first-line therapy for treating atopics. It's more of a cleaning up or a maintenance, if you will, particularly we found on hand and foot eczema, which is where we try to focus the dermatologist when he's thinking about using the laser for atopic dermatitis. So there's opportunity there. We can grow in those two areas, particularly vitiligo. We've talked about the opportunity coming with topicals that will be approved in 2022, and we want to be in a position to grab market share as those vitiligo patients who haven't sought treatment in some time start going back to the dermatologist and looking for treatment. Our treatment is not only already approved, it's safe and effective and we have good clinical studies to support that.
spk02: Got it. And can you talk about the international business a little bit? Look like some nice ads for the quarter. What are the top few territories as far as countries and what's your footprint over there now as far as F2s?
spk01: Yeah. So, you know, China, Japan, South Korea are really where the majority of the business right now is. And, If you remember, China and Japan are really kind of new coming on board, so there's still really some good room to run there, and we're excited about the continued growth there. Placements are up again this quarter. We've been up the last two quarters in international placements. We've identified some additional countries in Asia and the Middle East where we've started registrations, so we'll have some new countries coming on board in 2022. And then we've started to think about expanding into Europe and Latin America. Those are opportunities there, particularly for vitiligo. Vitiligo, as we've talked about, is typically a disease of people of color. And in Latin America, there's an opportunity there, as there is in Asia, to continue to expand with that indication.
spk02: Got it. And then lastly for me, if we could go back to Suraj's question on raw medicals. what you stated was 112 meetings over six weeks. So 13 came back to your technology, and then I imagine out of the 400-some percent are continuing on what you call deferred revenue for service. And what about the others?
spk01: Yeah, sure. So if you remember, we had 280 on service contracts where we completed the acquisition. We had, I think, about 30 come off in Q3. We have additional 54 coming off in Q4. And then we have another, you know, close to 150 coming off in 2022. So, you know, that creates a lot of opportunity for us. We're building a pipeline. You know, I think one of the goals we set on the last call with regards to raw medical was getting out to as many of these 280 as we possibly could. In the first six weeks, we got out to 113. And we've obviously got out to many more since then. We've already converted some in Q4. So, you know, we feel like we're on target to what we set as our goals for conversion for this year. And that momentum we hope will carry right into 2022 and achieve the goals that we've set for conversion, you know, going forward.
spk02: Okay. So they'll convert to your platform or they won't. Or as a third option, can they continue with your service agreements?
spk01: Yeah, we are going to offer a service through the end of 2022. You know, we didn't want to make it a binary decision for these customers. So we have put that on the table as an option. But, you know, eventually, as we've talked about, we want to get out of the raw medical business. We're trying to integrate as fast as we can that business into our strata business. So, you know, we don't want to shove it down their throat, more or less, but they don't have a lot of options. So we want to make a make it a good incentive for the raw customers to come over to Strata, and we're incentivizing our sales force to make that happen well. So I think we have all the right triggers in place to have a successful conversion over the next several months.
spk02: I got it. Thanks, Bob. Thanks, Chris.
spk03: Our pleasure, Jeff. Once again, if you have a question, please press star then one on your telephone.
spk07: There are no further questions registered at this time. I would like to turn the conference back over to Bob Moshe for any closing remarks.
spk01: Thank you, Claudia, and I'd just like to thank everyone for joining us on the call today, and we look forward to speaking to you again in the near future. Thanks.
spk07: This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.
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