Q2 2021 STRATA Skin Sciences Inc Earnings Call
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Ladies and gentlemen, thank you for standing by the conference will begin shortly please continue to hold and thank you for your patience.
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Okay.
Good day and welcome to the strata skin Sciences second quarter 2021 earnings Conference call.
Participants will be in a listen only mode should you need assistance. Please submit a conference specialist by pressing the star key followed by Europe.
After today's presentation there'll be an opportunity to ask questions.
I'll ask a question Mitra Star then one on a touchtone phone.
Enjoy your question. Please press Star then two please.
Please note. This event is being recorded I would now like to turn the conference over to Leigh Salvo Investor Relations. Please go ahead.
Yeah.
Thank you and good afternoon, everyone.
Joining me today are Bob Moshe Chief Executive Officer, and Matt Hill, Chief Financial Officer.
Or at least a day straddle released financial results for the quarter ended June 32021.
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.
Forward looking statements, including without limitation, those relating to our operating trends and future financial performance.
That's the COVID-19 on our business and prospects, including the distribution and the effectiveness of the COVID-19 vaccine <unk>.
Expense management expectations for hiring migration of customers from the tariff system to extract tend to mute.
And to execute new service to Cleveland to at least portions of the Ferro user base to generate in our organization, including transition.
Capital equipment purchasers into recurring revenue users to integrate the first service business into the company field service offering marketing opportunity guidance for revenue gross margin and operating expenses commercial expansion and product pipeline development.
<unk> future product launches and milestones.
<unk> 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.
The rest of the 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-K for the year ended December 31.2020.
This conference call contains time sensitive information and is accurate only as at the lifeboat yesterday August 16.2021.
Try to skin sciences 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.
The company's earnings release for the second quarter ended June 32021, and is accessible on the SEC's website and posted on the Investor Relations page of Stratus website.
Desktop that strata skin Sciences dotcom.
And with that I'll turn the call over to Bob Moshe.
Thanks, Lee and good afternoon, everyone and thank you for joining us for our second quarter 2021 earnings call.
Our results in the second quarter demonstrate the traction of our strategies are making to best reposition strider for long term growth.
Before addressing the highlights of the quarter I'd like to take a moment to discuss strategies exciting announcement made earlier today regarding its acquisition of the U S. Dermatology business for RA medical systems, and its pharos excimer laser for the treatment of psoriasis vitiligo and atopic dermatitis.
This transaction will give strata some significant advantages that ferrous U S customer base includes more than 280 active service contract customers and approximately 150.50 currently inactive accounts strata will provide the opportunity to the current bureaus customers to join the over 850 dermatology par.
Under the extract recurring business model.
It positions strata is the predominant provider of engineered laser treatments to address the $6 billion U S market for the treatment of chronic diseases.
The transaction immediately provides stratum 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 paths you gain additional placements for <unk>.
<unk> extract excimer laser system.
It delivers an added long term recurring revenue growth potential and prospective customer base for strata.
Australia also gains a sophisticated pipeline of potential customers with expired contracts. These dermatologists are already familiar with the benefits of that just with treatments and have a current pet patient base. This reduces the startup time in training normally associated with the Onboarding of new customers Importantly, this transaction cement strata as a true.
Leader in providing innovative products for the treatment of German what conditions.
Under the terms of the agreement to acquire <unk> Medical's, dermatology business and an asset transaction for consideration consisting of an upfront payment of approximately $3.7 million in cash draw to also assume a service contract obligation of approximately $1.5 million received certain inventories of 250000 and assume certain law.
Liabilities in the amount of 50000, you acquisition is expected to be accretive to strategy EBITDA in the first quarter of 2022.
Now to our second quarter results. We are in the early stages of the rollout on a new strategic plan focused on commercial execution I'm encouraged with the top line improvement are increased investment initiatives, such as marketing directly to potential customers expanding our sales force in order to build stronger relationships with our providers.
With clinics to our support services and delivering a clear and consistent message on the benefits of extract as Malaysia has been successful in driving a greater awareness and instrumental in getting renewed commercial traction star.
Starting with a few financial highlights.
Revenue in the second quarter was $7.4 million and 83, 1% year over year increase sequentially revenues grew 28% over the first quarter largely due to the growth in recurring revenue and equipment revenue shipped at the end of Q1, but recognized in the second quarter.
Recurring revenue was $5.5 million, a 95% increase over the second quarter of 2020, and a 17% increase over the first quarter of 2021, reflecting the shift in focus from capital equipment sales to recurring revenue.
We exited the second quarter 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 second quarter, we believe that most offices or back to 90% to 95% of pre COVID-19 levels more specifically with the increased availability of the vaccine more and more patients are returning for treatments that they had been pre bin.
Pony.
In terms of office staffing limitations with the exception of certain regions most of our customer practices have reinstated normal operations in routine ours overall throughout this quarter. We saw continued improvement in our move.
And we entered the third quarter and the strongest in the best position since the onset of the pandemic with a clear focus on continued commercial execution, which remains our highest priority.
Last quarter identified several key areas of focus for strata and I am pleased to announce that we have made progress across these initiatives.
Starting with increased investment in direct to consumer marketing in the fourth quarter of 2020, we resumed refunding.
Consumer advertising and within the first few months began to see a positive impact in the second quarter. We reached a return in DTC spend into 2019 levels and that increased commitment reaped additional upside in returns validating our market approach Rdx charts. The track the number of patients seeking reimbursement of extra.
GAAP treatment and are largely driven by our direct to consumer advertising I 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.
Second we actively re engaging with our high volume accounts defined as accounts that produce above 40000 in revenue per year.
In the first quarter, we had 148 high volume accounts during the second quarter, we successfully increased the strong base of high volume accounts to 180, 625% sequential increase.
While some of this traction just like related to summer seasonality. The 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 extract across all indications.
I'm excited by the early progress we've made and believe it is a promising indication.
The potential we have to further penetrate these accounts in the near future.
Third targeting customers that have not yet started producing revenues, whether due to COVID-19 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 and.
In the first quarter, we had approximately 23% or 198 extract non revenue generating partners.
We're now at approximately 17% of our 152, our goal is to reduce that percentage to less than 15%.
Yeah.
Our sales force continues to focus on and support these accounts to effect.
To affect a 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 strider were removed. These systems can now.
Get 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 that can best drive awareness among dermatologists.
Increasing spending on direct to dermatologists marketing marketing, thereby creating further awareness of the extract product line and the value it adds to partner clinics and patients.
On that front, we were recently pleased to welcome Brent <unk> as our new Vice President of marketing his 20 year background in health care 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 relaunch of our extract platform for the treatment of vitiligo, a skin disease affecting approximately 5 million 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 destroyed or a 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 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 the in our first quarter 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.
To support our sales organization and driving market initiatives for customers and their patients as well as working through the integration of the RA medical dermatology business.
We will continue to pursue additional M&A opportunities to further accelerate our plans to establish <unk> 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 of approaching 2019 recurring revenue levels by year end as more patients returned to dermatology practices. The latter part of Q3 in Q4 typically represent a seasonal uptick for psoriasis patients seeking treatment and as Lee.
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 second quarter of 2021 were $7.4 million and 83% increase over the second quarter of 2020 and to 28% increase over the first quarter of 2021, our second quarter revenue was particularly strong due to increase.
Recurring revenue in international equipment that was shipped at the end of Q1, but was recognized in Q2.
Recurring revenues were $5.5 million, a 95% increase over the second quarter of 2020 and a seven.
17% increase over the first quarter of 'twenty, 'twenty, one, which as mentioned reflects the opening and staffing of dermatologist offices as the world has opened and people feel comfortable venturing venturing out to see their dorms.
Equipment revenues were $1.9 million, an increase of 56% as compared to the $1.2 million for the second quarter of 2020, and an increase of 65% as compared to the $1.1 million for the first quarter of 2021 as.
As we stated in the first quarter conference call. There were systems that shipped in the first quarter when we could not recognize the revenue until the second quarter, we expect more normalized equipment sales in the third quarter.
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.
<unk> recorded as revenue 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're seeing with our business well.
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 $5.5 million as compared to $1.8 million in the second quarter of 2020 and $4.6 million for the first quarter of 2021.
The impact of deferred revenue and the reconciliation from non-GAAP gross domestic recurring billings to recorded revenue was a negative 128000 as compared to a favorable $1 million in the second quarter of 2020 with.
With increasing and more consistent revenue, we're seeing the normalization of the impact of deferred revenue consistent with pre COVID-19 levels.
Overall gross profit was $4.8 million or 64% of revenues as compared to $2 million or 49% of revenues for the second quarter of 2020, and $3 million or 64% of revenues for the first quarter of 2021.
Gross profit for recurring revenues was $3.8 million or 70% of revenues as compared to $1.4 million or 51% of revenues in the second quarter of 2020, and $3.2 million or 68% of revenues.
For the first quarter of 2021 the.
The primary reason for the increase in overall gross profit was a result of higher sales, partially offset by higher depreciation expense in the second quarter of 2021, and partially offset by an unfavorable impact of deferred revenue in 2020, one as compared to 2020.
Engineering and product development costs were $400000 as compared to $200000 for the second quarter of 2020 and $400000 in the first quarter of 2021. The increase was a result of certain ongoing.
Going engineering projects.
Selling and marketing expenses were $3.2 million as compared to $1.2 million in the second quarter of 2020 and $2.9 million in the first quarter 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 'twenty 'twenty. The company managed its cost as a result of the downturn in business is attributable to the COVID-19 pandemic.
General and administrative expenses were $2.1 million.
As compared to $1.9 million in the second quarter of 2020, and $2.8 million in the first quarter of 2021.
General and administrative expenses were.
Higher as a result of higher compensation severance and stock option cost primarily as the result of CEO transition in the first quarter of 2021.
Other income for the three months ended June 32021 was $2 million as compared to an expense of $18000 for the three months ended June 32020.
In the second quarter of 2021, we received notification that the paycheck protection program loan had been forgiven and we recorded a gain on extinguishment of debt in the amount of the loan of $2 million.
Net income for the second quarter of 2021 was $1.1 million.
Earnings of three per basic and diluted common share as compared to the net loss for the second quarter of $2021.7 million or a loss of five cents per basic and diluted common share and net loss for the first quarter of 2021 of $2.4 million of loss of seven cents per basic and diluted common share.
At June 32021, cash cash equivalents and restricted cash was $17 million as compared to $17.5 million at March 31, 2021, after cutting discretionary spending in 2020 due to the pandemic and the in the fourth quarter of 2020, we began our investment back into DTC advertising.
And in Q1, 2021 reached pre Covid levels. In addition, we're 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 abroad medical we're able to leverage in house resources in sales marketing.
Call Center field service technicians, and after the integration transition costs with increased comebacks.
We see the acquisition of the U S dermatology business abroad in medical.
Accretive to EBITDA in the first quarter of 2022 and now <unk>.
Robin I would like to open the call for questions.
We will now begin the question and our first question to ask a question you May Press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset before pressing the keys.
Is that a new kind of your question, we have been I guess, two I would like to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Our first question comes from Jeffrey Cohen with Ladenburg Thalmann. Please go ahead.
Oh, Hi, Bob and Matt how are you.
Jeff how are you doing today.
Okay, sorry for the background noise so.
Couple of questions. So congratulations on the.
The announcement and I see the upfront 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 on units and arguably some of the other metrics.
How much of this work for an existing term under the the raw platform that's.
That's required or unit over the past year or two and how old are the kind of a transition.
Two are your technology and your model might look like over the coming.
Weeks and months and quarters.
Sure no. Good question. So we obviously want to have a smooth transition as we possibly can there's over 400 Faros uses out there.
Potential users 280, who are active in another 150, who.
As usual the phase Pharos laser at one point in it.
<unk> 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.
Re introduce the extract partnership program to these potential accounts for us a lot of them. Obviously, we're familiar with three Oh wait eczema laser and have a well established patient base. So.
Not going to be a 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 you know the direct to consumer advertising the reimbursement support clinical support technical support all of the services that we bring in that partnership and we think that's the.
The key to bring these people over and establishing more comebacks in placements going forward.
I got it and how might that look like as far as the actual equipment.
You'll have an opportunity over the coming quarters through our to transfer over to your equipment or do you expect them to stick with the existing equipment.
A little bit of both I think.
You kind of put a timeline there anybody who's bought a ferro is probably in the last year or so I wouldn't expect them to transfer over very quickly. So that's why we wanted to give them the opportunity to extend their service agreement if need be.
But you know we're gonna target based on the exploration of some of the agreements are in place and as they expire will be reaching out to these customers and trying to bring them over to the extract and using our equipment. We don't have plans to manufacture the pharos excimer laser 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.
Dissipation as it drives higher than non 19 levels.
Hey, Jeff Good Great question. This is Matt.
Our key is getting back to pre COVID-19 levels and driving the recurring revenue. So when we look at 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 2019, 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 and recurring revenue, but what youll 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 REIT and 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.
Yes.
Got it and lastly from me what about timing or any commentary there on when this may close do you need the shareholder vote or do you expect this to close during the current quarter.
We are signing close so we are closed as of today.
Great.
Thank you. Thank you for taking our questions my absolutely have a great day, Jeff Thanks, Jeff.
Yeah.
Okay.
The next question comes from Suraj Kalia with Oppenheimer. Please go home.
Good afternoon, everyone and Bob can you hear me alright.
Absolutely Suraj How're you doing.
Doing well hope everyone is safe and healthy.
Yes, Thank you Kate.
Hey, Bob so.
Again, just following up on the Ari.
A question.
So by I heard through your commentary and should we think about this is more in terms of.
The net effect would be.
In a sense.
Certain amount of new customers that eventually would transition to straddle.
Is that the way you just think about it or are.
Are there some additional synergies that we might've probably missed in this picture are I might might've missed spectra.
Yeah.
Yeah, I think the way we look we're looking at it Suraj is that you know again, we're picking up the 400 potential extra customers here going forward. You know, we we have a ready made base. There's there's 280 <unk> who are very active and have agreements already in place with rod that we'll be taking.
Oliver in 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 extracts certainly know the excimer laser system very well and it gives us an opportunity again to just to talk to them about our extract partnership and we believe it is.
The most effective way to deliver the excimer laser treatments to both providers and patients with all the support services. We offer you know not only the direct to consumer advertising, which drives the patients in but you know the reimbursement assistance the customer service technical support and so on as you know we think that's a comprehensive way of really did.
Levering these eczema treatment so yeah that's.
That's the potential it obviously gives us the opportunity to you know.
Breaking up some comebacks did you have more placements and more importantly to drive more usage in recruiting the recurring model. So.
That's the key issue. It also cement us as the leader in three O eight excimer laser in the U S. A we are the predominant supplier now there is another small provider out of Korea, but it doesn't have really have much of a foothold in the U S. So.
We do have that position created by this acquisition. So we're really excited about it. These are we've been very successful as you know with come backs over the years.
I believe in 2018, we had 15.2019, we at 19.2020, we had 23 year to date, we have 18 come back. 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 a 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 their question.
If.
Your if the parade of rule holds true out of these 40 accounts are 400 accounts right. So how should we think about the utilization rate or revenues per person practice.
You know over time, how do you all intend to most that I get it in house and what would be the appropriate time for us.
To start measuring the ROI.
Specifically on the transaction not 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 increase them.
From till 186 in the second quarter from 148, so we're making progress in non revenue producing customers in Q1 were a real issue for US. It was 23% of our overall installed base and we reduced that to 17, and we'll get that down below 15, and then the other metrics we didn't talk about it in the call was our revenue.
Per system per quarter in the first quarter, we did 5400 per system per quarter in the second quarter. We were around 6100 for system per quarter and our goal by the end of the year is to be at 7500. So you know I think that will translate across not only or extracts.
Systems, but any of the raw systems that we can bring over so it's 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.
Just ask one more and I'll, let others take the baton So Bob a Korea can you give us a status update on the shared revenue model of the recurring revenue model that was being implemented sometime back gentlemen, Thank you for taking my questions.
Yeah.
Thanks, Josh and 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 the over the last couple of quarters, it slowed down a little bit.
And we've been placing a Japan, primarily Japan and China we.
We still placing in Korea, but we're working on distributor to ensure that they have the level of growth that we both expect out of this very lucrative model for both parties.
Okay.
Thank you.
Yeah.
Oh My God your whole question. Please.
Then one can be in China.
Our next question comes from Joe Cool, but.
Please go ahead.
Great. Good afternoon, guys. This is Matt on for Joe. Thanks for taking my question first I want to extend congrats on the encouraging sales traction bar 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 be.
Being contributors as they come out of the pandemic hopefully other areas of the country that are risks.
Particularly of course being more restrictions coming in place and how this might affect your strategy going forward.
Sure Good question.
You know as we stated in the call we believe that.
Across the country, we're about 90%, 95% back as far as patient visits and Ed staffing and in most of the country I'm. The one that's actually two areas that we've identified and you know this has come mainly to 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 L. A in particular and also in New York City, some of the bigger cities in Boston or a little bit a little bit slower coming back and I think if you look at you know how they came back with maps and people going back into the city, particularly in New York.
It's not hard to explain.
A lot of the patients that visit dermatologists didn't Manhattan in particular, you know come from outside of the borrow if theyre not coming into the Barbara for work, they're not probably going into to see a dermatologist either so that's been a little slower coming back then than some of the other regions, but for instance, we see in the Midwest, We're operating at 95 to one.
100% of capacity.
As a much better picture. So it is a little bit regional it really hasnt affected our strategy too much we are expanding our sales force by a couple of territories and probably would inevitably add somewhere in the northeast and somewhere in the Midwest I would believe and that'll 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 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.
Yeah, no that makes sense and very helpful.
I appreciate the additional details and I'll go back in the queue. Thanks again guys. Thanks.
Yeah.
This concludes our question first question I would like to turn the conference back over to Bob Marshall for any closing remarks.
Thank you operator, and I'd like to thank everyone for joining us today, and we look forward to talking to you again with our Q3 results. Thank you.
The conference has now concluded thank you for income on today's.
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