Bob Yedid - IR Frank McCaney - President and CEO Christina Allgeier - CFO

Sean Lee - H.C. Wainwright

Good day and welcome to the STRATA Skin Sciences Third Quarter 2016 Earnings Conference Call. Today’s call is being recorded. At this time, I'd like to turn the call over to Bob Yedid with LifeSci Advisors. Please go ahead.

Thank you, Anna and good afternoon, everyone. This is Bob Yedid of LifeSci Advisors. Before we begin, I would like to remind you that management’s comments today may include forward-looking statements within the meaning of the Securities Litigation Reform Act of 1995. These statements include, but are not limited to our plans, objectives, expectations and intentions and other statements that contain words such as expects, contemplates, anticipate, plan, intend, believes, assumes, predicts and variations of such words or similar expressions that predict or indicate further events or trends, but do not relate to this historical matter. These statements are based on our current beliefs or expectations and are inherently subject to significant known and unknown uncertainties and changes in circumstances, many of which are beyond our control. There can be no assurance that our beliefs or expectations will be achieved. Actual results may differ materially from our beliefs or expectations due to financial, economic, business, competitive, market, regulatory and political factors or conditions affecting the company and the medical device industry in general. Given the uncertainties affecting companies in the medical device industry, any or all of the company’s forward-looking statements may prove to be incorrect. Therefore, you should not rely on any such or on any factors or forward-looking statements. In addition, more specific risks and uncertainties facing the company are set forth in the company’s reports on Forms 10-Q and 10-K filed with the SEC. STRATA Skin Sciences urges you to carefully review and consider the disclosures found in its SEC’s filings, which are available at www.sec.gov and at www.strataskinsciences.com. As announced, Frank McCaney was appointed as President and Chief Executive Officer of STRATA by the board effective November 1, 2016. Mr. McCaney brings to STRATA significant experience as CEO or Senior Executive at Thermo med-tech companies and he will describe his background shortly. It is now my pleasure to turn the call over to STRATA’s President and Chief Executive Officer, Frank McCaney. Frank?

Good afternoon, everyone and welcome to STRATA Skin Sciences earnings conference call for the third quarter of 2016. It is my distinct pleasure to be here today, just eight days into my tenure at STRATA Skin Sciences, but already in front of an incredibly important audience. Upfront, it is my goal to increase the company's value by enhancing our importance to the dermatology community and from that strategy to drive outstanding financial performance. I believe that STRATA already has a lot of the town and infrastructure to create a medical device platform that has ever increasing relevance to dermatologists and patients and from that the potential for robust profitability. First, I want to thank Mike Stewart for his leadership in stabilizing the company and beginning many of the core business improvements that we will see the benefit of over the coming quarters and into the next few years. Mike will remain with the company as a consultant, focused on one of those critical projects. I feel that I’m well suited to this role. I'm a biochemist by training, but I’ve served on the business side of medical device companies for most of my career. I worked in R&D, sales, management, marketing, business development and other key roles in companies that were public, backed by venture capital or backed by private equity. I played an important role in enhancing the value of several businesses, Viasys Healthcare sold to Cardinal Health in 2007 for 1.5 billion was one of those examples. In my last role as CEO of Corpak MedSystems, working with private equity investors, the company more than tripled in value over three years, resulting in a 7.6 times return to fund shareholders. There are great many similarities between my last role at Corpak and the opportunity here at STRATA. At Corpak, we adopted a strategy to dramatically expand our offerings and to help our customers do their jobs easier and more efficiently. Our approach changed from selling products by feature and by benefit to becoming a valued partner. We focused on helping our customers become more productive. Dermatology is changing. It's more difficult for derms to make money and they now need an understanding of not only how product fits into their practice, but how it fits into their business. Derm practices like many medical office practices will continue to consolidate and the focus on high quality on innovation and on being a partner, especially a business model will be more valued than ever before. These changes underscore an opportunity and already at STRATA, we're exploring and prioritizing actions that grow the audience most likely to use the XTRAC. That decreases the cost and time of supporting lasers in the field. That improved the business model for high volume users. That expand applications to drive higher utilization per unit and that investigate opportunities to acquire license or distribute products within our call point. As to the latter, we’ve spent approximately 45% of our revenues on sales and marketing. We have the capacity to double or even triple sales to our call point by improving the capability of the existing products and by adding interesting dermatology products to the bag. We can do this without increasing the number of sales reps. We have substantial field sales organization, a strong field service group, a call center and a reimbursement hotline as well as a large number of solid relationships with dermatology officers that we can leverage. While many discussions inside and outside STRATA need to occur after just a few weeks, my first STRATA vision is that the company will be the dermatology business partner, offering a wide suite of advantaged medical device products and disposables while helping our customers grow their business at every opportunity. Our short term actions are directed to continue the strategies already in place to retain high volume users and increase utilization in underperforming placements. Secondly, dramatically grow the current market by adding proprietary treatment protocols with far fewer patient visits. Please note that this new protocol, while very, very promising is still on trials. We've historically added product that has worked by my estimate on more than a quarter of a million patients with no real side effects or adverse events and we see phototherapy as a more natural therapy than systemic drugs. For shorter treatment protocols, our patent bending technology will enhance the physician’s ability to bring the safe therapy to an even larger and growing market. Third, acquire license or distribute synergistic products, which can leverage our substantial field capabilities and our in-house support. I believe that STRATA already has an organization in place that could support two to three times our current sales volume. And last to build the marketing capabilities at the company. We have substantial advantages over pharmaceutical products for treating psoriasis. We need to expand our reach to patients and clinicians and do that especially prior to the launch of the shorter treatment protocols. I’ve met with most of the employees already and I can say that I'm very encouraged by the outstanding ideas I've already heard and by that, those employees dedication to the company and our mission. Ben Franklin who has find the saying, doing well by doing good. I expect that STRATA will do well for doctors and patients and will have strong financial results, commensurate with this philosophy. At this time, I’d like to turn the discussion over to Christina Allgeier, our Chief Financial Officer to review the third quarter financials. Christina?

Thanks, Frank. Good afternoon, everyone. Total revenues for the third quarter were $7.8 million. Recurring revenues from the XTRAC system of $6.2 million were up 1.8% sequentially from the second quarter of 2016. The XTRAC system generates recurring revenues for STRATA from per procedure fees. In the third quarter, recurring revenues accounted for 79.9% of total revenue. The balance of the revenue is comprised of international sales of both the XTRAC and VTRAC systems and the associated parts and maintenance revenues. Total revenue for the third quarter were just slightly above what we anticipated, although recurring revenues were slightly below. In the quarter, we had 12 net placements of XTRAC systems. The number of new placements was 36 systems, indicating that dermatologists continue to still be interested in adding XTRAC to their practices. For the practices that are not ramping the use of XTRAC to our expectation, the systems are removed, so that to be more productively employed at another practice or region. This is the primary reason for the difference between our gross and net new placements. Another reason for the reduction in net placements, as we mentioned in our second quarter call, is a trend in the dermatology marketplace whereby individual practices are being acquired by the large corporate group. An increasing number of those practices in our base of customers are participating in these buyouts. And as a result, it is necessary for us to enter into contractual discussions with those dermatology groups, following the buyout of our customers. While these discussions do cause re-evaluation of the benefits of the XTRAC system to the dermatology group versus the individual dermatologist. We view this consolidation and the ensuing discussion as an opportunity to ultimately increase the deployment of the XTRAC system in a greater number of practices owned by these groups. We have spent and are continuing to develop innovative hybrid learning offerings of the XTRAC system to these larger practices. Gross margins were 60.5% in the third quarter as compared to 59.4% in the second quarter. The highest level so far in 2016. As discussed in today's press release, the non-GAAP adjusted EBITDA for the third quarter was over $1.2 million, a substantial improvement versus both the second quarter of 2016 and the prior year period. Adjusted EBITDA as a percentage of revenues reached 15.9%. In part this performance reflects our decision to reduce our selling and marketing spending in the third quarter as payback from the investments and TV advertising have had decreasing returns. We are reviewing our current media strategy to determine if including more Internet and social media will be more effective and less expensive. We are working with outside partners to explore how best to use our media dollars. STRATA was cash flow positive in the third quarter and as the September 30, the company had a cash balance of $3 million, up from $2.8 million at June 30. For the third quarter, we made capital investment of approximately $607,000 for lasers placed-in-service. While the company has used a modest amount of cash in the first nine months of 2016, we continue to believe that we have sufficient cash resources to fund our operations for the foreseeable future. The 10-Q for the third quarter 2016 will be filed on Monday, November 14. Now, I'll turn it back to you, Frank.

Thank you, Christina. Turning to guidance, we expect positive non-GAAP adjusted EBITDA to increase in 2016 versus the prior year driven by revenue growth and the impact of 2015 and early 2016 cost reduction efforts. Management had decided not to provide guidance on recurring revenue growth on the second quarter call. And I continue to feel that that is appropriate. It is important to give me and the senior management group some time to have more meetings and detailed discussions with our team and our customers in order to set the course forward. We're focused on how to work on that. In summary, I'm very pleased to have joined STRATA. We have innovative products, talented people and an excellent infrastructure in sales, service and the reimbursement support. We are prioritizing actions to grow the audience of customers most likely to use extract, to reduce our cost of supporting lasers in the field, and to drive higher utilization per unit. Moreover, given our infrastructure, I feel we can grow STRATA’s base of sales substantially. They're improving our existing products and seeking to add dermatology products selectively to the sales bag and leverage our solid base relationships with dermatologists. I'm enthusiastic about positioning STRATA as a valued business partner to dermatology practices. I look forward to reporting to you on our strategy and the execution of current and new initiatives on our upcoming call. With that let me open the call for questions. Operator?

[Operator Instructions] Let's take our first question from Sean Lee with H.C. Wainwright.

Frank, this is Sean standing in for RK. Could you give us a little more color on the challenges with the recurring revenue from extract? Is it - are you looking at lower patient starts or patients not continuing the treatment is long or are dermatologists averse to recommend the treatment. I’m just trying to get a better understand of it.

So that's a very interesting question. I think there's a lot of pieces to that question I would say. One is, when we place new lasers, it takes a while for those to get up and going so that's one thing that we're looking at. Second there are significant consolidation and dermatology practices and that causes a reevaluation, sometimes a restart and changing of how we operate in those facilities. And I think most of all, what we've seen is that the number of treatments required for a practice is fairly significant and it's kind of limited our population. We think that our work on much shorter treatment protocols will really open up the market to far more people because all I have to come in for treatment a couple of times instead of over ten. So I think we understand I think what’s happening right now but I think we also understand how best to make it better going forward.

You mentioned the – this goes to my next question, you mentioned the shorter treatment [indiscernible] I also it will be a good boost to your business because numerous visits is going on patients. So, what timeline are we looking at for the new treatment regimen and will you be presenting the data you have at some conference?

So I think we're you know we're comfortable - well let me answer it this way. Right now we treat about one out of every 240 patients with psoriasis that are in our zone of treatment. So we've obviously got a very large market opportunity in front of us. And as I think as you correctly surmised, the key way to get to that is to make the treatment protocol much easier for patients. We've tested the protocol, the results are very, very promising but we need to do some additional testing to kind tighten up what the doses are for that treatment and for how we want to do it. Then we want to reevaluate, we have outside opinion on how best to deal with FDA. We think it's a very simple approval, but we want to re-evaluate that and make sure that that's exactly what it is. I would say our current thinking is this is probably a mid-2017 launch, but I'd have to put some pretty wide brackets on that, if we can do it before we will. But I can't promise that we’ll deliver by that time either, but more information as we go forward.

That's like barely over like six months from now, so I think it’s very promising. Final question, you mentioned additional dermatology product you’re considering. Is it more towards devices or tertiary treatments like creams and things or you looking more towards oral drugs or anything else?

So right now in our current scope I don't think we want to go into pharmaceutical products. I wouldn't rule it out completely but that's not really our initial efforts. I think you're right on the first two parts, I would like to have another device, we have a very large service organization, a large direct sales organization and a great call center and a reimbursement hotline that's perfect for another person's medical device for the dermatology space. So I think we could add a significant product with adding almost no cost to our organization and handle that. That's a formula for great profitability. I think at the same time, our sales reps, when you're making a call to dermatologists and you get their time and you become a trusted ally of the dermatology practice and the office manager, you should also have a full set of disposable products to sell as well. I think creams, especially anti-inflammatory creams and maybe some of the more common products that dermatologist use was some maybe some unique twist to it, make sense. So we're going to be looking at exploring those. Our asset, 25 direct sales reps in dermatology is a prized asset and we've got hundreds and hundreds of relationships we can leverage.

[Operator Instructions] And at this time, I’d like to turn the call back over to Frank McCaney with any additional or closing remarks.

So I'd like to thank everyone who participated in the call. There's an awful lot that we'd like to do at the company in the near future and we look forward to reporting on that. I think it will be a very exciting time for STRATA moving forward. So thank you all once again and I look forward to meeting you all at some point in the near future. Thank you.

This does conclude today's conference. Thank you for your participation. You may now disconnect.