Strata Skin Sciences, Inc.

Good afternoon and welcome to the STRATA Skin Sciences First Quarter 2025 Financial Results Conference Call. All participants will be in a listen-only mode. If you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star and then one. To withdraw your questions, you may press star and two. It is also noted today's event is being recorded. At this time, I would like to turn the floor over to Jules Abraham from the company's investor relations firm, Core IR. Sir, please go ahead.

Thank you, operator. Good afternoon and thank you for participating in today's conference call. Earlier this afternoon, the company released its financial results for the quarter ended March 31, 2025. A copy of that press release can be found on the company's website at .strataskinsciences.com under the investors tab. Joining me on today's earnings call from STRATA Skin Sciences management team are Dr. Dola Raffaelli, Chief Executive Officer, and John Gillies, Vice President, Finance. During this call, management will be making forward-looking statements, including statements that address STRATA Skin Sciences' expectations for future performance or operational results. Forward-looking statements involve risks and other factors that may cause actual results to differ materially from those statements. For more information about these risks, please refer to the risk factors described in STRATA Skin Sciences' most recently filed annual report on Form 10K and subsequent periodic reports filed with the FCC and STRATA Skin Sciences' press release that accompanies this call, particularly the cautionary statements within. The content of this call contains time-sensitive information that is accurate only as of today, May 14, 2025. Except as required by law, STRATA Skin Sciences disclaims any obligation to publicly update or revise any information to reflect events or circumstances that occur after this call. It's now my pleasure to turn the call over to CEO Dr. Dola Raffaelli. Dola.

Thank you, Jules, and good afternoon to everyone on the call. During the first quarter of 2025, we continue to execute on the multifaceted turnaround strategy we introduced a little over a year ago. Our strategy focuses on generating higher per-device recurring revenue by optimizing extract device placement and use in our partnership model-driven physician practice. We are succeeding in assisting our installed base, achieving higher numbers of procedures, and optimally utilizing the resources we provide. Through our Elevate 360 consulting model, facilitating higher patient conversion and increased device utilization in underperforming dermatology partner clinics. We are also seeing strong performance generated from our expanding -to-consumer marketing efforts, which have achieved increased extract leads and thereby more robust patient appointments, volume, and higher device utilization. These efforts coalesce with strong performance, growing recurring revenue per device across our domestic install base of approximately 850 devices. This approach is building a more efficient, more profitable business for our stakeholders with growth in recurring revenue and higher margins with lower operating expenses. We are helping our partner clinics that seize upon the opportunity to grow with us, create better opportunities and better experiences for those patients who are more likely to be treated at a more dedicated and experienced clinic. The opportunity to increase utilization of extract devices is significant. Moreover, we are seeing positive results from the refocus of our DTC strategy. We generated over 1,000 appointments in the first quarter with a number of unique patients for which Strata has handled insurance benefits being up 33% versus Q1 of 2024, combining both organic and DTC growth. In addition, we continue to expand our Elevate 360 consulting program, which we began rolling out in Q4 2024. By providing deeper analytics, we are helping physicians understand and realize the financial opportunities associated with patients they already see in their clinic and those they have prescribed but did not follow through with extract scheduling. The process helps implement better practices in their clinic operations. In addition, Elevate 360 provides them with comprehensive resources and hands-on assistance to execute those best practices, resulting in significant improvement within their clinics in just about every facet of their operations. While we are still in the early stages of implementation, initial results have shown dramatic increases in existing device utilization within the small number of clinics already affected as well as growing demand for expanding the number of clinics utilizing extract from physicians who previously struggled to fully utilize the device. Dovetailing with this, our discipline in removing underutilizing devices ensure we can supply these additional devices in the most capital-efficient way, often with only very minor refurbishment work. Our Elevate 360 consulting program does require significant time from our sales and clinical staff, so broad expansion across our domestic market is expected to be a multi-quarter effort, but the potential payoff is significant. As a framework of reference, average revenue of extract device in the US in 2024 was roughly $22,000. In 2019, average revenue per extract device in the US was nearly $30,000. On 850 devices, roughly our current US install base, this would generate an additional $6.8 million of revenue with only very modest increase in the cost of sales from depreciation of any refurbishment work. Our Q1 2025 marks the fourth consecutive quarter of a -over-year growth in average net recurring revenue per device in the US, a strong indication that our strategy is delivering the intended results. The last time the company had four quarters in a row of -over-year growth in net recurring revenue per device in the US was 2019. We're actively tackling the headwinds of our gross domestic recurring billing has experienced caused by combination of changes in reimbursement rates and challenges in broader indication coverage beyond psoriasis by working with KOLs, the American Academy of Dermatology, the American Medical Association, as well as the legislature in an effort to expand coverage. The AMA has recently held a CPT editorial panel discussion that reviewed the potential indication expansion of the eczema laser CPT codes, and Strata anticipates favorable outcomes in the near future, building on the same panel decision to narrow the use of these codes to only eczema laser technology earlier in 2024. Turning briefly to the TheraClear X device, we reached an install base of 160 TheraClear X devices in the US at the end of the first quarter, up from 104 devices at the end of Q1 2024. In addition, while TheraClear remains a smaller portion of our revenue, it is steadily gaining traction, having grown in excess of 50% on a -over-year basis in six of our last seven quarters, including Q1 2025. As mentioned previously, Strata focuses on partner clinics that adopt the billing of the insurance-reimbursed CPT codes for use of the TheraClear X device over clinics that opt for cash payments, and the 1,000 patients submitted for reimbursement in Q1 2025 show a 138% increase over the 438 submitted just a year ago, with pre-authorized one-year reimbursements rates exceeding 85%. Our international business achieved another strong quarter, with sales of $2.5 million, up 8% versus the prior year period, with equipment sales up 13% and recurring treatment revenue up 27%, partially offset by a decline of 5% in parts and maintenance. Performance in the first quarter was strong. We are pleased with the traction our turnaround strategy has gained and the increase in demand for cost-efficient and effective treatments in international markets. Anecdotally, we have shared over social media an image of one of our devices in China that has treated in nine years 9,876 patients with just over 6.8 million doses. The same clinic now uses four new devices in two locations. While we are cautiously eyeing the potential negative impact of tariffs on near-term sales, we look forward to the expansion of the number of clinics and devices used in all of our international markets as we deploy recurring revenue placements in addition to the traditional capital sales model. Now I'd like to turn the call over to John, who will review our financial results in more detail. John?

Thank you, Dolis. Our total revenue for the first quarter of 2025 was 6.8 million, up 1% compared to Q1 2024. Global recurring revenue for the first quarter of 2025 was 4.7 million, also up 1% versus the prior year period. Excluding deferred billings and other gap adjustments, extract gross domestic recurring billings were 4.1 million in the first quarter of 2025, as compared to 4.6 million in the first quarter of 2024. Equipment revenue was 2.1 million in the first quarter of 2025, up .4% versus the first quarter of 2024. Gross profit increased to 3.6 million for the three months ended March 31, 2025, up from 3.1 million during the same period in 2024. This resulted in gross margin of .5% for the first quarter of 2025, compared to .6% for the same period in 2024. The increase in gross margin was driven primarily by continued efficiency gains in our recurring revenue business and the absence of a one-time inventory write-off that impacted the equipment margins in Q1 2024, but did not recur in Q1 2025. Total operating expenses in the first quarter of 2025 were 5.7 million versus 6 million in the first quarter of 2024, a reduction of 5% year over year. Engineering and product development expenses declined 60% due primarily to reduced headcount and project-specific consulting expense that did not recur in Q1 2025. Selling and marketing expenses declined 1%, driven by reductions in compensation and consulting expenses, which more than offset planned increases in DTC spending. Finally, G&A expenses declined 5% versus the prior year period due to reduced compensation expense more than offsetting modest increases in accounting, legal, and consulting expenses. Given the seasonally lower revenue we consistently experience in the first quarter of each year, it tends to be the most challenging quarter for margins, EBITDA, and cash flow. Our focus on expanding margins and controlling costs resulted in an improvement of $732,000 in -GAAP-adjusted EBITDA. Our best first quarter adjusted EBITDA since Q1 of 2022. Turning to the cash flow statement, our cash burn in the first quarter was $749,000, an improvement of roughly $800,000 versus cash burn of $1.55 million in the prior year period. We exited Q1 2025 with cash, cash equivalents, and restricted cash of $7.8 million. This total cash balance includes $1.3 million of restricted cash related to the sales tax audit accrual we made in Q3 of last year. As of March 31, 2025, the company had ,171,161 common shares outstanding. That concludes my prepared remarks, and I'd like to turn the call back over to Dolez for any remaining comments. Dolez?

Thank you, John. Our consistent execution and focus on cost containment continues to drive improvements in our results. That said, despite a strong start of the year, we believe it is important to caution investors about the potential impact of tariffs on our international business. The rhetoric and posture that took place during the first quarter had no meaningful impact on our international business, and it is too early in the second quarter to reasonably assess the potential impact. But if the situation is not resolved, we would expect to see meaningful reduction in international revenue. We hope to be able to offer greater clarity on the second quarter call, which we expect to hold in mid-August. Now I'd like to turn the call over to the operator so that we can begin the question and answer session.

Operator? Ladies and gentlemen, at this time, we'll begin that question and answer session. To ask a question, you may press star and then one on your touch-tone phones. You are using a speakerphone. We do ask that you please pick up the handset prior to pressing the keys to ensure the best sound quality. To withdraw your questions, you may press and two. Once again, that is star and then one. To join the question queue, we'll pause momentarily to assemble the roster. Our first question today comes from Jeffrey Cohen from Latinburg-Falman. Please go ahead with your question.

Hi, Gulev and John. Thanks for taking our questions. We're wondering if you could talk about fair and clear a little bit as far as the pipeline numbers as far as Q2 or maybe full year aspirational numbers where you plan to get to on the fleet and any learnings out there in the marketplace.

Hi, Jeff. Good afternoon. I'm not sure I understand the question. You want the pipeline of numbers for what?

If you could talk about fair and clear placements, what your finding out there in the marketplace and how that looks for the year?

Absolutely. I'll touch on three items. One, our install base keeps growing. As you know, we own about 250 devices. We have about 160 of them deployed. That was part of the prepared remarks. About just over half of these are deployed with accounts that are billing insurance. We provided in the prepared remarks the number of patients that went through our reinvestment support team. That is up 138% as compared to Q1 2024. We're at about 1,000 as compared to just over 400 last year. That keeps on growing. We anticipate, we said in previous calls, we anticipate to be able to have full deployment of our install base towards the end of 2025 or the beginning of 2026. At which point we can put more into CAPEX. We're utilizing our existing CAPEX. Once we get to a point where that CAPEX is stretched to its extent, then we're going to increase the CAPEX investment. The individual patients, the value of a patient to us is somewhere in the range of $50 to $60 per treatment, PIES 6 treatments. If you take 1,000 patients that went through our reimbursement team in the first quarter and you multiply it by six and then you multiply it by 50, you get to the value of these patients. This is in addition to patients that have been in the pipeline previously. That is in addition to the accounts that are paying for non-insurance reimbursements. These are the numbers we share. It keeps on going in the right direction. We want to have full deployment of the capital equipment we own, that we invested in. We want to have that fully deployed and then we want to have as many of these billing insurance and extending the usage. Our usage, which was very focused on a small number of groups of clinics in the northeast in the beginning of 2024, is now expanding geographically. We have now groups of clinics up and down the East Coast, in the Midwest, as well as in the West Coast. Each one of these groups are utilizing it successfully, which means that within the group we start seeing expansion. Again, going back to the example I used before, when we started doing this in the beginning of 2024, we had a small number of groups in the northeast. One of these groups that started with one in January of 2024 is now up to 14 devices. The other one is going to actually be surpassing that number in devices. It takes a few quarters, not only for the group of clinics to adopt the billing process from a compliance and regulatory perspective, but also for the providers to prescribe and to get the patient flow coming in. We're very happy with the number of patients that are being submitted for reimbursement support. We're very happy with the preauthorization, preapproval of these patients, which is at the level of about 85%. Every 100 patients were to get preauthorization for over 85 of them. This is true across hairs, across the different regions. It's true across many insurance companies. I hope I answered the question.

That's helpful, Deleuze. Could you talk any about utilization trends or time that you're seeing as far as analysis for an account to become mature out there for TheraClear?

Yes. As I mentioned, one patient is worth for us six treatments times approximately $50. That's the cost of goods of a TheraClear is about half as much as extract. The extract break even is at about $18,000. The TheraClear break even is at about $9,000 a year. It's somewhere in the $2,500 a quarter revenue per device where we break even on the device. If you divide $2,500 by $50, that's 50 procedures per quarter or $200 per year. If we had 1,000 patients in Q1 and each one did six procedures, that's 6,000 procedures in Q1 or 24,000 in the year. I hope that helps. You can use these numbers for your analysis.

Yes, that's perfect. One more question. Timing on your queue.

John, please confirm. I think we're going to be filing tonight. John?

I apologize. Can you repeat the question? I couldn't hear it clearly.

The timing on the queue. Timing on filing of the

queue. Oh, yes. That should go through later tonight.

Perfect. Okay. Thanks for taking our questions. Thank you,

John. Once again, if you would like to ask a question, please press star and 1. Our next question comes from Jeremy Perlman from Maxim Group. Please go ahead with your question.

Okay. Thank you. Good evening. So the first question is related back to tariffs. You know, we said it could have a depending how it plays out, could have an impact in second quarter in international business. Is there any potential impact on your domestic business? I know you have cold air install base, so you do have those devices out there. So I guess those wouldn't come under if you produce those manufacturing outside of the US. You just have them in inventory, so that wouldn't be. But is there any other potential tariff impact on your domestic business?

First of all, good afternoon. Thank you, Jeremy, for asking the question. The our supply chain is very mildly impacted by tariff because we because we manufacture and source most of the most of the material locally. We will have some or we do have some peripheral impacts because suppliers take advantage of the tariff situation to raise prices. But that also happened in 2024. It's not tariff specific. We are not directly impacted by the tariff on the supply chain side. We are impacted by the tariff on the outbound into non-US markets, most specifically the Asian markets. And that is that impact is not only on new sales, but it's also on service and warranty support because even in a situation where we have warranty obligations that we provide the parts free of charge, the entity on the ground, the distributor, would have to import them. And in a situation where there is a hundred and forty-five percent tariff, our free of charge part is going to cost them a hundred and forty-five percent, the list price, where it was six or eight percent previously. So that is an impact that we cannot quantify at this point. We are not clear yet on what is the meaning of the 90-day reprieve per cube, which is mostly straddling Q2. But we are definitely not clear on what is going to happen beyond that. I hope I answered the question.

Okay. Yes, I understand. Thank you for that. And then moving to the extract, it seems like the install base was flat sequentially. You had roughly 864 at the end of this quarter and at the end of 2024. Is it fair to say that basically we have hit a bottom of your install base and now is the focus going to be on the current install base increasing the utilization? Or you are going to also look to sign on new clinics as well while you are focusing on the, how should we look at your focus going forward in the rest of 2025?

You are going to see both. So if you look at high points versus low points in terms of install base, we own on our balance sheet and in our warehouse approximately 100 devices that can be redeployed tomorrow morning because we are in them. The redeployment, the one part you can't see is the net difference. So the removal versus redeployment of devices. So what you see is the net number. The net number of devices out there represents some removals, some redeployments. And I would look at this as a low point. I would look at this as we would try to start expanding. But while we expand, we are still removing non-performing accounts and expanding into more productive accounts. Let me point out one thing that was in the prepared remarks, I want to make sure the point comes across. We started implementing in Q4 of 2024 a process that we call Elevate 360. Most specifically what we do there is we go into accounts that we believe are strategically positioned to grow. However, they are in a point in time in which if they don't grow, we are going to remove them and we offer them the following steps. First, we help them with the analytics. We show them how many patients with the conditions they have seen over the last year. Now, we have done this now for multiple offices and the average number is approximately 1,000. That's a lot of patients. Then we show them how many of these 1,000 patients on average they have in 1,000 patients in one year. How many of these 1,000 patients have they prescribed for extract? Which means how much of the available market they have in the clinic have they captured into prescriptions? The average there is about 15%. So call it 150 patients. Let me just remind you that one patient is worth about $3,000 for that doctor. So if they converted all of these 150 patients into procedures and billing and revenue, that means $450,000 for them. That individual patient is worth $1,000 for us. So if they had converted all of these 150 patients into procedures and paid us for the procedures, that individual patient is worth approximately $1,000 to us. So $150,000. However, when you look at the average revenue per device, we are very far from that number. So what we show them on the third line is how many patients they actually have in treatment. Now, why do we need to show them? Because they are not equipped at being able to look at these numbers. They see throughput numbers. They see how many patients, how many individual patients they have seen in the clinic that day, how many procedures they have built. But they cannot see the numbers the way we look at them. Then we have a discussion with the person in charge. And the person in charge would be either an owner of an individual clinic or a private equity that owns a much bigger group of clinics. We show them what is the upside and we say, okay, here is what needs to happen. You need to have a champion, someone who is going to lead it, someone who is going to consolidate this on your side, someone who is going to see that as many patients as possible are prescribed. And then of those that are prescribed, even though we do most of the reimbursement and reimbursement supports, we get them to preauthorization, as many of those that got the preauthorization would be scheduled into procedure and then would be followed on. For those clinics that we were able to go through the whole process starting in 2004, we have seen tremendous upside. The tremendous upside is not only reflected in that individual account, but also across other clinics they own. I will use one example. We have an account that was on its way to be removed. We have done Elevate 360 in October of 2024. And that which used to be in our terms a $30,000 to $40,000 account which was in 2021-2022, went down to a $13,000 revenue until October of that year and generated to us $28,000 in Q4 2024, which means it was very successful in that individual clinic. However, the owner of that now has deployed the same approach across seven more clinics. Now we have eight. That comes into a partial answer to your previous question. We have now redeployed seven devices that were sitting in our inventory into seven new clinics that are going to be more productive just because we have done that process. It is not only that one individual account that was there since 2019 and was good in 2021-2022, but was not good in 2023-2024. This account was not removed. It became very productive account. In addition to that, we have seven more accounts that over Q1 and Q2 of 2025 have shown to be very productive. We will be able in the coming quarters to share more information about that as this becomes more systemic and not just individual accounts. As I said in the prepared remarks, we are now deploying this across dozens of accounts where in Q4 we were in a small number of accounts and now we are approaching 100 accounts in which we utilize this. This gives us a better ability to either make them better, deploy across more clinics that they own, or remove faster. Just show them what is the potential, get a clear answer why they are not utilizing it, and if they are not utilizing it, remove it. But if they are willing to put the efforts into, and it is a range of things, but put a lead person on the business, make sure that the front desk schedules people, make sure that we can do online scheduling for the patients, make sure that billing goes out according to instructions and many other details, then it becomes very productive. I hope I answered the

question. Yeah, that was very helpful. Then just one quick follow-up question. You said now you are roughly doing this to 100 accounts, this L of A 360. What is a quick percentage of clinics in your install base that you think this would be helpful for?

The number 100 represents, we have 25 territory managers and it represents four per territory. We went from having five accounts in October of 2024. We wanted to see it work, so we went with five. We selected five. We operated in three regions, but it was one per region and then one region had more accounts. Then once we saw that working, we selected four accounts per each territory manager. We have 25 territory managers and if you take our 850 plus or minus 850 net accounts, divide this by 25, you will see that each territory manager has approximately 35, 37 accounts. That is a 10% penetration. If you go back to the prepared remarks, you will realize that it is a lot of consulting work. We have to go in and not only collect the data and analyze it, but we need to present it to them. They need to put in effort. Just for the sake of explanation, last night we had a dinner meeting with one of these accounts. The owner had to collect 13 providers. 13 doctors had to be there. We were there. We presented the numbers. We showed them what they need to do. They had to make their own decisions. We cannot tell them how to practice medicine. They need to make their own decisions whether they want to do this and how they want to do this and how they want to implement the procedures internally. If they do this, we will handhold the execution in the clinic. We will be providing them with reporting, with top line numbers and analytics of what they do. That is why we went from five to 100. Once we see this at 100, which means four per territory or approximately 35 per region, then we will be able to expand beyond that. That is why in the prepared remarks we say we put a lot of resources into that.

Okay. Great. Thank you for all that information. I will hop back into the queue.

Thank you. At this time, and showing no additional questions, I would like to turn the floor back over for any closing remarks.

Thank you everyone for participating in today's call. We look forward to seeing all of you again in mid-August when we will be presenting the results of the second quarter. Thank you so much and have a great evening.

Ladies and gentlemen, with that we will conclude today's conference call and presentation. We do thank you for joining. You may now disconnect your lines.