STRATA Skin Sciences, Inc. is a medical technology company dedicated to developing, commercializing, and marketing innovative products for the treatment of dermatologic conditions. The company's journey has been marked by its ability to navigate various challenges, including the COVID-19 pandemic, supply chain disruptions, and legal battles, while continuing to drive innovation and growth in the dermatology market.
Business Overview and History
STRATA Skin Sciences has established itself as a leader in the dermatology industry since its founding in 1994. The company's flagship product, the XTRAC excimer laser system, received FDA clearance in 2000 and has become a widely recognized treatment for conditions such as psoriasis and vitiligo. As of September 30, 2024, there were 873 XTRAC systems placed in dermatologists' offices in the United States under the company's recurring revenue business model. STRATA has expanded its product portfolio to include the VTRAC Excimer Lamp system, which provides targeted therapeutic efficacy demonstrated by excimer technology with the simplicity of design and reliability of a lamp system. The company also offers the Pharos excimer laser system, which holds FDA clearance to treat chronic skin diseases.
In January 2022, STRATA acquired the TheraClear Acne Therapy System, broadening its opportunities with expansion potential in the acne care market. The TheraClear device combines intense pulse light with vacuum suction for the treatment of mild to moderate inflammatory acne. This acquisition has further solidified STRATA's position in the dermatology market. As of September 30, 2024, the company had placed 135 TheraClear devices in dermatologists' offices in the United States under the recurring procedures model.
The company has faced significant challenges in recent years. The COVID-19 pandemic in 2020 negatively impacted business conditions, disrupted global supply chains, and led to the temporary closure of many physician practices, which are STRATA's primary customers. While most physician offices have since reopened, some of the company's partner physician practices closed permanently. Additionally, the Russia-Ukraine war has impacted the supply and price of noble gases essential to the proper functioning of the company's lasers, forcing STRATA to navigate these disruptions as part of its operations.
Financials
Financial Performance
In the latest quarter reported (Q3 2024), STRATA Skin Sciences generated revenue of $8.8 million, a slight decrease of 1% compared to the same period in the prior year. The company's gross profit increased to $5.3 million, with a gross profit margin of 60.3%, up from 56% in the same quarter of 2023. This improvement in gross margin was primarily driven by lower amortization costs and the sale of refurbished units, which have a lower cost of revenue than building new units.
For the three months ended September 30, 2024, STRATA's total revenues were $8.80 million, with the Dermatology Recurring Procedures segment contributing $5.38 million and the Dermatology Procedures Equipment segment contributing $3.42 million. The recognized recurring treatment revenue of $5.38 million is estimated to represent approximately 64,000 XTRAC treatments with prices between $65 to $95 per treatment.
For the nine months ended September 30, 2024, total revenues were $23.99 million, with the Dermatology Recurring Procedures segment contributing $15.42 million and the Dermatology Procedures Equipment segment contributing $8.57 million. The recognized recurring treatment revenue of $15.42 million is estimated to represent approximately 188,000 XTRAC treatments.
However, the company's financial performance has not been without its challenges. STRATA has experienced recurring losses in recent years, with a net loss of $5.59 million for the nine months ended September 30, 2024. The company's net profit margin stood at -28.7% for the same period. In the most recent quarter (Q3 2024), STRATA reported a net loss of $2,122,000.
The company's operating cash flow (OCF) for Q3 2024 was negative $302,000, while free cash flow (FCF) was negative $364,000. Despite these challenges, several key metrics have shown improvement. Revenue per XTRAC device grew 2% year-over-year, compared to flat growth in Q2 2023 and a 10% decline in fiscal 2023. Gross margin improved for the third consecutive quarter, reaching 60.3% in Q3 2024 compared to 56% in Q2 2023.
Liquidity
Liquidity and Capital Structure
As of September 30, 2024, STRATA Skin Sciences had a cash and cash equivalents position of $7,064,000, with an additional $1,333,000 in restricted cash related to a sales tax accrual. The company's current ratio, a measure of liquidity, stood at 1.13, indicating a stable financial position. The quick ratio, which excludes inventory from current assets, was 0.94.
STRATA's debt-to-equity ratio was 1.7636, reflecting the company's leverage. In June 2023, STRATA amended its credit facility with MidCap Financial Trust, refinancing its existing $8 million term loan, borrowing an additional $7 million, and securing a $5 million tranche that can be drawn under certain conditions in 2024. As of September 30, 2024, $15 million of the $20 million senior term loan facility was drawn. The amended facility matures in June 2028 and bears interest at a rate per annum equal to the sum of a) the greater of i) the sum of (A) the 30-day forward-looking term rate of one-month SOFR, plus (B) 0.10, and ii) the applicable floor rate of 3.50%, with such sum reset monthly, and b) 7.50%.
Operational Highlights and Challenges
During the third quarter of 2024, STRATA's global net recurring revenue for the XTRAC system increased by 2% year-over-year to $5.4 million. However, the company's domestic XTRAC recurring billings decreased by 2% compared to the same period in the prior year. This decline was attributed to a reduction in the company's direct-to-patient advertising efforts, which had previously driven increased patient awareness and demand.
In the Dermatology Procedures Equipment segment, for the three months ended September 30, 2024, the company sold 20 systems internationally (20 XTRAC, 0 VTRAC) and 7 XTRAC systems domestically. For the nine months ended September 30, 2024, the company sold 60 systems internationally (56 XTRAC, 4 VTRAC) and 12 XTRAC systems domestically. In addition to equipment sales, the company recognized approximately $53,000 of previously deferred service revenue associated with assumed service contracts during the nine months ended September 30, 2024.
The company has also faced legal challenges, as it filed a complaint in August 2024 against LaserOptek, Monarch Laser Services, and The Pinnacle Health Group, citing unfair competition under federal and state laws. In November 2024, the United States District Court for the Eastern District of Pennsylvania entered a court order in favor of STRATA, preventing the defendants from making certain material misrepresentations in their sales efforts.
To address these operational challenges, STRATA has implemented a strategic plan focused on stabilizing its financial performance and driving growth. This includes initiatives such as expanding its direct-to-consumer marketing efforts, improving the performance of its TheraClear X Acne Therapy System, and continuing to defend its intellectual property and market position. The company's domestic installed base of XTRAC devices decreased slightly from 882 units at the end of Q2 2024 to 873 units at the end of Q3 2024, which is consistent with their strategy to remove underperforming units. Conversely, the installed base of TheraClearX devices increased from 117 at the end of Q2 2024 to 135 at the end of Q3 2024.
Outlook and Future Prospects
Despite the challenges faced, STRATA Skin Sciences remains committed to its mission of developing and commercializing innovative products for the treatment of dermatologic conditions. The company's recent equity raise of $2.1 million, which saw participation from both existing shareholders and insiders, highlights the confidence in STRATA's strategic plan and path to profitability.
Looking ahead, the company's focus will be on executing its strategic initiatives, maintaining a strong balance sheet, and leveraging its product portfolio to drive growth and profitability. With a renewed emphasis on direct-to-consumer marketing and the continued adoption of its TheraClear X system, STRATA is well-positioned to navigate the evolving dermatology market and deliver value to its shareholders.
The company has stated that it sees a "path to profitability and sustainable cash flow generation, which are clear objectives of our corporate strategy and actions." This is supported by recent improvements in financial metrics, such as the company reporting its first operating profit since 2018 (excluding a one-time $1.8 million accrual) and a reduction in non-GAAP operating expenses to $5.2 million in Q3 2024 from $5.6 million in Q3 2023 and $5.4 million in Q2 2024.
Conclusion
STRATA Skin Sciences has demonstrated resilience and adaptability in the face of various industry challenges. The company's commitment to innovation, combined with its strategic initiatives and strong financial position, suggests that it is poised to continue its journey as a leading player in the dermatology space. As STRATA navigates the path ahead, investors will be closely watching the company's ability to capitalize on its strengths and overcome the obstacles that come its way, particularly its efforts to achieve sustainable profitability and positive cash flow generation.