Business Overview and History
STRATA Skin Sciences, Inc. (NASDAQ:SSKN) is a medical technology company dedicated to developing, commercializing, and marketing innovative products for the treatment of dermatologic conditions. The company's diverse portfolio includes the XTRAC and Pharos excimer lasers, VTRAC lamp systems, and the TheraClear X Acne Therapy System, all of which have been instrumental in addressing a wide range of skin ailments.
STRATA Skin Sciences has established itself as a leader in the dermatology industry, with a focus on innovative treatments for various skin conditions. The company's flagship product, the XTRAC excimer laser, received FDA clearance in 2000 and has become a widely recognized treatment for psoriasis and other skin diseases. The XTRAC system delivers targeted 308nm ultraviolet light to affected areas, leading to improved outcomes for patients, including psoriasis clearing and vitiligo repigmentation.
As of December 31, 2023, there were 923 XTRAC systems placed in dermatologists' offices in the United States under the company's dermatology recurring procedures model. This model has provided STRATA with a stable revenue stream, although it has faced some challenges in recent years.
In addition to the XTRAC, STRATA offers the VTRAC Excimer Lamp system, which provides a lamp-based alternative to excimer laser technology. The VTRAC system is offered internationally alongside the XTRAC and provides targeted therapeutic efficacy with the simplicity of design and reliability of a lamp system. The company also markets the Pharos excimer laser system, which holds FDA clearance to treat chronic skin diseases, including psoriasis, vitiligo, atopic dermatitis, and leukoderma.
In January 2022, STRATA expanded its portfolio by acquiring certain assets related to the TheraClear Acne Therapy System. This system combines intense pulse light with vacuum suction for the treatment of mild to moderate inflammatory acne, allowing the company to enter the growing acne care market.
Financial Performance and Liquidity
STRATA's financial performance has been mixed in recent years, with the company reporting annual net losses ranging from $2.7 million in 2021 to $10.8 million in 2023. The company's revenue has also fluctuated, declining from $36.2 million in 2022 to $33.4 million in 2023.
For the most recent fiscal year ended December 31, 2023, STRATA reported revenue of $33.36 million, with a net loss of $10.83 million. The company's operating cash flow (OCF) was negative $519,000, and free cash flow (FCF) was negative $5.54 million.
In the most recent quarter ended September 30, 2024, STRATA reported revenue of $8.8 million, a slight decrease of 1% compared to the same period in 2023. The net loss for the quarter was $2.12 million, with OCF at negative $302,000 and FCF at negative $364,000. The decrease in revenue was primarily driven by a 2% decrease in domestic recurring XTRAC billings, partially offset by growth in international equipment sales. The decrease in net income, OCF, and FCF was primarily due to a $1.8 million accrual related to a New York state sales tax audit.
Despite these challenges, STRATA has maintained a relatively strong liquidity position. As of September 30, 2024, the company had $8.4 million in cash, cash equivalents, and restricted cash, including $1.3 million in restricted cash related to a sales tax accrual. The company's debt-to-equity ratio stood at 1.66 as of December 31, 2023. STRATA has a $20 million senior secured term loan facility, of which $15 million was drawn as of the latest quarter, with an additional $5 million borrowing capacity available under certain conditions.
The company's current ratio was 1.13, and its quick ratio was 0.94 as of September 30, 2024, indicating a relatively stable short-term liquidity position.
In July 2024, STRATA bolstered its cash position by raising $2.1 million through a direct offering, with participation from both existing shareholders and insiders. This infusion of capital has helped the company weather the challenges it has faced and provided resources to execute its strategic plan.
Operational Highlights and Challenges
During the third quarter of 2024, STRATA reported revenue of $8.8 million, a slight decline of 1% compared to the same period in 2023. However, the company's gross profit increased to $5.3 million, with a gross margin of 60.3%, compared to 56% in the third quarter of 2023. This improvement was primarily due to lower amortization costs and the sale of refurbished units, which have a lower cost of revenue than building new units.
The company's domestic recurring revenue, which is derived from its XTRAC procedures, declined by 2% year-over-year in the third quarter. This trend is consistent with STRATA's strategy of removing underperforming XTRAC units from dermatology clinics, a move intended to realign the company's device placement and improve the overall performance of the recurring revenue business.
One of the key challenges STRATA has faced in recent years is the impact of the COVID-19 pandemic, which led to the suspension of elective procedures and the temporary closure of many of the company's partner physician practices. While most offices have since reopened, some have closed permanently, and the pandemic's lingering effects continue to impact STRATA's operational and financial performance.
Additionally, the company has dealt with supply chain disruptions and rising costs, particularly related to the procurement of noble gases, such as neon, which are essential for the proper functioning of its laser systems. The ongoing Russia-Ukraine war and the Creating Helpful Incentives to Produce Semiconductors and Science Act of 2022 have further exacerbated these challenges.
STRATA has been involved in ongoing sales tax audit disputes with the states of New York and California, which resulted in a $1.8 million accrual in the latest quarter. This accrual has significantly impacted the company's financial results for the period.
Segment Performance
STRATA's business is divided into two main segments: Dermatology Recurring Procedures and Dermatology Procedures Equipment.
The Dermatology Recurring Procedures segment is a key revenue driver, generating $15.42 million in the first nine months of 2024, or 64.3% of total revenues. This segment derives its revenues from the usage of the company's XTRAC and TheraClear equipment by dermatologists to perform treatments. As of September 30, 2024, there were 873 XTRAC systems placed in dermatologists' offices in the United States under STRATA's recurring revenue model, a decrease from 923 systems as of December 31, 2023.
The company estimates that approximately 64,000 XTRAC treatments were performed during the three months ended September 30, 2024, with prices ranging from $65 to $95 per treatment. For the nine months ended September 30, 2024, approximately 188,000 XTRAC treatments were performed.
In addition to the XTRAC system, STRATA has placed 135 TheraClear devices in dermatologists' offices in the United States as of September 30, 2024, up from 76 devices a year earlier. However, revenue from the TheraClear devices has been nominal so far, as there is little insurance reimbursement coverage for acne treatments.
Gross profit for the Dermatology Recurring Procedures segment increased to $9.52 million, or 61.8% of segment revenues, for the nine months ended September 30, 2024, compared to $9.49 million, or 59.5% of segment revenues, for the same period in the prior year.
The Dermatology Procedures Equipment segment generates revenues from the sale of the company's laser and lamp products. For the nine months ended September 30, 2024, this segment generated $8.57 million in revenues, or 35.7% of total revenues. Internationally, STRATA sold 60 systems (56 XTRAC and 4 VTRAC) during this period, compared to 51 systems in the same period of the prior year. Domestically, the company sold 12 XTRAC systems during the first nine months of 2024, compared to 20 in the prior-year period.
Gross profit for the Dermatology Procedures Equipment segment decreased to $3.80 million, or 44.4% of segment revenues, for the nine months ended September 30, 2024, compared to $4.17 million, or 47.8% of segment revenues, for the same period in the prior year.
Geographic Performance
STRATA sells its products globally, with the majority of revenue coming from the US market. International sales, primarily in Asia, accounted for 37% of total revenue in the most recent quarter. This diversification helps to mitigate some of the risks associated with reliance on a single market.
Litigation and Regulatory Matters
In August 2024, STRATA filed a complaint against a competitor, LaserOptek America Corp., Monarch Aesthetic Services, Inc., and The Pinnacle Health Group, alleging unfair competition and misrepresentation of the technical merits and reimbursement potential of their laser devices compared to STRATA's XTRAC excimer laser. On November 8, 2024, the United States District Court of the Eastern District of Pennsylvania issued a court order in favor of STRATA, preventing the competitor from making these alleged misrepresentations in its sales efforts.
This legal victory is a significant win for STRATA, as it underscores the company's commitment to protecting the integrity of its products and the interests of its dermatology clinic partners and patients. The company continues to pursue monetary damages from the defendants, demonstrating its resolve to defend its market position and prevent unfair competition.
Strategic Initiatives and Outlook
STRATA's management team has been proactive in addressing the company's challenges and implementing a strategic turnaround plan. Key elements of this plan include:
1. Increasing direct-to-consumer marketing efforts to raise awareness of XTRAC treatments and drive patient demand. The company's direct-to-consumer initiatives have scheduled over 1,900 new patient appointments year-to-date in 2024, surpassing the 1,643 appointments in all of fiscal 2019 before the COVID-19 pandemic.
2. Realigning the company's device placement strategy by removing underperforming XTRAC units from dermatology clinics. Despite the reduction in the number of placed devices, revenue per XTRAC device grew 2% year-over-year in Q3 2024, compared to flat growth in Q2 2023 and a 10% decline in fiscal 2023.
3. Focusing on the adoption of insurance-reimbursed billing for the TheraClear X Acne Therapy System to drive growth in this segment. STRATA has secured pre-authorizations for over 2,000 acne patients for insurance-reimbursed non-cash billing for the TheraClearX device.
4. Maintaining a disciplined approach to cost management, including reducing operating expenses and optimizing the company's workforce. Excluding the one-time $1.8 million accrual, non-GAAP operating expenses decreased from $5.6 million in Q3 2023 to $5.2 million in Q3 2024.
5. Strengthening the company's balance sheet through strategic financing initiatives, such as the recent $2.1 million direct offering.
These strategic initiatives, combined with the company's legal victory against its competitor, have laid the foundation for STRATA to chart a path to profitability and sustainable cash flow generation. While the company continues to navigate a challenging operating environment, its focus on execution and innovation positions it well to capitalize on the significant opportunities in the dermatology market.
Conclusion
STRATA Skin Sciences has demonstrated resilience in the face of various headwinds, including the COVID-19 pandemic, supply chain disruptions, and legal challenges. The company's diverse product portfolio, recurring revenue model, and strategic turnaround plan have laid the groundwork for a potential return to profitability.
Recent financial results show signs of improvement, with gross margin as a percentage of revenue improving for the third consecutive quarter, reaching 60.3% in Q3 2024 versus 56% in Q2 2023. Notably, STRATA achieved its first operating profit since 2018, excluding the one-time accrual related to the sales tax audit.
As STRATA continues to execute on its initiatives, investors will be closely monitoring the company's ability to grow its customer base, drive revenue, and maintain a strong financial position. With a renewed focus on innovation, cost management, and market expansion, STRATA Skin Sciences appears poised to navigate the challenges ahead and emerge as a stronger player in the dermatology industry.