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

Jared Cohen - JM Cohen & Company

Good day ladies and gentlemen and welcome to the STRATA Skin Sciences Fourth Quarter and Full-Year 2016 Earnings Conference Call. Please note, today’s conference is being recorded. At this time, I'd like to turn the call over to Bob Yedid with LifeSci Advisors. Please go ahead, sir

Thank you, Hallie, and good afternoon, everyone. This is Bob Yedid of LifeSci Advisors. Before we begin, I'd like to remind you that the 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 www.strataskinsciences.com. With that said, my pleasure to turn the call over to STRATA’s President and Chief Executive Officer, Frank McCaney. Frank? A - Frank McCaney: everyone and welcome to STRATA Skin Sciences earnings conference call for the fourth quarter of 2016. This is my second conference call with investors since I joined STRATA on November 1. And I’m pleased to address this important audience with a well informed view of STRATA's business as well as a strategic plan for the future. Our vision for STRATA is to become the dermatology business partner of choice, offering a wide suite of advantaged medical device products and disposables while helping our customers grow their business at every opportunity. During practices like many medical office practices, are continuing to consolidate and focus on high quality on innovation and on being a partner especially business one will be more valued than ever before. There are three components over near-term strategy there are important to achieving that vision. Our actions are focused on first improving our current business. Second, expanding the market, principally by implementing an optimal therapeutic dose and expanding the use of the XTRAC to other approved indications. And third by expanding STRATA's business with disciplined business development activity that leverages are existing call point and our operational infrastructure. I will review each of these strategies, starting with improving our current business, principally the XTRAC. As you know we’ve a proven recurring revenue model with XTRAC t with over 77% of 2016 full-year sales accounted for by recurring revenue, from utilization of the 775 XTRAC systems in place. Right now we’ve developed and implemented several placement programs to meet customer needs and volumes. We believe that these programs will grow STRATA's business especially by retaining the high volume users of the XTRAC. We also focus on increasing utilization of underperforming placements, since we believe nearly 50% of our customers are below target utilization levels. Just adding a single patient per quarter to the 775 recurring revenue placements that we have would add $2.6 million to the bottom line. This is a 10% increase to our recurring revenue base. We are now incentivizing sales reps to work with our existing customers to improve their understanding of the value of XTRAC to their practices. As part of this effort, we're developing and our sales reps to be highlighting clinical case studies demonstrating the use of XTRAC in the treatment of vitiligo, scalp psoriasis, nail psoriasis, pediatric eczema and atopic dermatitis. We are working with dermatologists on rapidly bring their XTRAC systems due to key [ph] utilization in their practices as part of the programs increased the productivity of our newer placements. Our goal is to help dermatologists integrate XTRAC into their practices and gain experience. Now the XTRAC system can be effectively applied to a number of different skin conditions. Expanding the market, we also seek to grow the current market for XTRAC by dramatically adding proprietary treatment protocols, which require far fewer patient visits. This optimal therapeutic dose therapy is in development we're in discussions with various sites to be part of a clinical trial. Our regulatory team is assembling a detailed data package for pre-submission to the FDA as a perfuse to having a face-to-face meeting with the agency in order to obtain a guidance on what clinical trials and data will be needed for clearance of that optimal therapeutic dose therapy. We anticipate that in the FDA meeting will be scheduled within approximately 60 days, after the filing of the data package. To date, STRATA has a product that has been by my estimate use more than 2.5 million times on patients with no side effects or adverse events. Importantly, these patients see phototherapy as more natural approach to treating psoriasis than systemic drugs. Our patent pending technology for this new protocol will enhance the physician's ability to bring the safe therapy to growing market of patients. In addition, optimal dose therapy STRATA will at the right time start targeting promotions to build use of XTRAC in other indications. In addition, we will use social media and Internet marketing to advertise XTRAC as an effective treatment for vitiligo and for other indications such as pediatric eczema and nail psoriasis. Expanding the business, finally, key part of our strategy is to expand the business through opportunistic business development activities which can leverage our substantial field capabilities and our in-house support. I believe that STRATA already has a sales and marketing organization in place, that you could support 2 to 3 times our current sales volume by adding differentiated derm products to the bag. The great thing about this is we can do this without increasing the number of sales reps. We have a substantial field sales organization, strong field service group, a call center, and a reimbursement hotline as well as a large number solid relationships with derm offices that we can leverage. We’ve update, first we’ve started to release enhancements of several initiatives to decrease the number of service calls and preventive maintenance business on lasers in the field. We are already starting to see benefits such as reduced gas consumption, and fewer service calls. We believe that by the end of the year, we will be at a run rate of 30% to 40% fewer service visits. Second, we just attended the largest industry meeting the American Academy of Dermatology in Orlando. I can say after that meeting that the extract is well understood by thought leaders as a proven, safe, and effective treatment option for patients. As mentioned before, we believe that applying OTD, the optimal therapeutic dose will dramatically enhance the attractiveness of this option for patients and doctors as well. At this time, I’d like to turn the discussion over to Christina Allgeier, our Chief Financial Officer to review the fourth quarter financials. Christina?

Thank you, Frank. Good afternoon, everyone. Let's start with a discussion of the fourth quarter of 2016. Revenues for the fourth quarter 2016 were $8.6 million compared to revenues for the fourth quarter of 2015 of $9.5 million, a decrease of 8.9%. However, revenues were up 11.1% sequentially from the $7.7 million in the third quarter of 2016. Our XTRAC business generates recurring revenues from per procedure fees. In the fourth quarter of 2016, recurring revenues of $6.7 million accounted for 78% of our total revenues. The balance of the revenues is comprised of international sales of both the XTRAC and VTRAC systems and the associated part to maintenance revenue. Gross margin was 65.2% in the fourth quarter of 2016 as compared to 60.5% in the third quarter of 2016 and 63.2% in the fourth quarter of the prior year. As presented in today’s press release, non-GAAP adjusted EBITDA for the quarter ended 2016 was $1.7 million. This represent a significant increase of over 250% from the $468,000 of the same quarter of 2015. This marks three consecutive quarters of positive non-GAAP adjusted EBITDA for the Company. The Company had net placements of 15 XTRAC systems for the fourth quarter and a total of 57 XTRAC systems for the full-year of 2016. At the end of 2016, there were 775 XTRAC systems in place versus 718 at the end of 2015, an increase of 7.9% year-over-year. As Frank mentioned earlier, we’ve rolled out new incentive initiatives and incentive programs for our sales reps to work with lower volume practices to increase their comfort with and utilization of their XTRAC systems. Now let's turn to the full-year of 2016 versus 2015 results. It is important to keep in mind that the financials for 2016 are not directly comparable to 2015, since the Company acquired certain assets of PhotoMedex as of June 22, 2015, which increased the revenue base and change the margin profile of STRATA. Revenues for the full-year of 2016 were $31.8 million compared to revenues of $18.5 for 2015. Recurring revenues from our XTRAC business were $24.6 million in 2016 representing 77% of total revenue. Gross margin were 60.2% in 2016 as compared to 25.8% in 2015. Our net loss for the full-year of 2016 was $3.3 million or $0.75 per diluted share. Net loss for 2015 was $24.9 million or $3.27 per diluted share. Non-GAAP adjusted EBITDA for the full-year of 2016 was $2.9 million. This compares to an adjusted EBITDA of negative $4.4 million for the full-year of 2015. As of December 31, STRATA had a cash balance of $3.9 million. For the fourth quarter of 2016, we generated positive cash flow from operations of $1.4 million and made a capital investment of just over $400,000 into lasers placed-in-service. For the year of 2016, we generated positive cash flow from operations of over $300,000 and made a capital investment of just over a $1 million into lasers placed-in-service. We expect to continue to generate positive cash flow during 2017 and we believe that we’ve sufficient cash resources to fund and grow our operations for the foreseeable future. The 10-K for 2016 will be filed on Monday, March 13. I will now turn back -- the call back to Frank for closing comments. Frank?

Thank you, Christina. In summary, our team will be focused on current and new initiatives to first improve our current business, including retaining our high volume users, driving higher utilization per unit and reducing our cost of supporting lasers in the field. Second, expand the market principally by commercialization of optimal therapeutic dose, and expanding awareness of other indications that can be treated effectively with XTRAC. And third, expanding our business by adding dermatology products selectively to the sales bag and leveraging both our solid base of relationships with dermatologists and our strong operational infrastructure. Moreover, I’m pleased with our financial progress in 2016. We reported three consecutive quarters of positive non-GAAP adjusted EBITDA, positive cash flow for the fourth quarter and full-year of 2016, and our cash balance is up over $600,000 at year-end 2016 as compared to the end of 2015. I'm enthusiastic about positioning STRATA as a valued partner into dermatology practices. I look forward to reporting to investors and analysts on our execution of these initiatives on our upcoming calls. With that, let me open the call for questions. Operator?

Thank you so much. [Operator Instructions] Our first question today will come from [indiscernible] with Rodman & Renshaw.

Hi. Good afternoon, guys. Thanks for taking the question. Frank, I wanted to focus on two things today, if you don’t mind. First, with regard to improving the current business I wanted to focus specifically on the underperforming accounts, is there anything to point to now that is tangible with regard to results from that initiative or is it just too early to say?

So, we rolled out the initiative at the National Sales meeting at the end of January, so as part of that initiative each rep was given a list of their top 10 targets with the volumes of those accounts did and we develop a strategy for each one of those accounts, including what areas they don't work on today. For example, if they don't do scalp psoriasis and so we’re building all the case studies to when and present the doctors how best to do it in the words of other doctors who have done it, and what it meant to their practices. So I’d say it's still very early to tell. We’ve baseline data. We are only one month into the program. It's going to take several months to get going. It is really a critical parameter for the Company. We do on average about 33 patients a year on our systems are 775 recurring revenue systems in the field by simply adding one patient a quarter we go up more than 10% in volume on those accounts. We think this is eminently doable if not even somewhat conservative. It is the first time we focused on this kind of effort, but we believe it will bag big dividends to us. By the way, this generates a lot of profit for the doctor. It’s a lot of profit for us and it costs us absolutely nothing other than commissions.

That’s very helpful. Thank you. And I guess the other thing I wanted to focus on is your initiative regarding the optimal therapeutic dose. Obviously, this -- my question is pre-talking to the FDA, but was wondering if you can maybe provide us with some broad strokes regarding the sort of what you might be looking for in a clinical trial protocol?

Yes, so let me be clear that I'm unclear about it and I don't mean that fictitiously. It's a little difficult to say what FDA would wants in this. We are not going to change any of the parameters of the laser. Right now its improved up to 5,000 millijoules. All we’re doing is saying that certain patients can go higher than a very conservative approach. So there are those who believe that this is nothing more than a letter to file. There are those who believe that because we are directing patients to a certain number that we should do -- have some clinical trial support. We want to do the clinical trials anyway. We think it's good marketing and its good for us to understand better how best to utilize this feature, but -- so we’re not entirely sure and so we wanted to submit the FDA and have a pre-meeting with them to get their guidance, if we should adjust our clinical trials to focus on certain pieces of data. But right now we have had success, one clinical trial site in San Francisco, we’re going to be expanding it to two other sites, one in New York and one in the Southeast. And the goal will be on targeting 5 to 10 patients need site and looking at reducing the average number of treatments from 12 to 13, down to 3 to 4.

Great. That’s very helpful. Thanks a lot.

Thank you. [Operator Instructions] Our next question will come from Jared Cohen with JM Cohen & Company.

Just further -- just to elaborate more on that question, because I guess it relates to how you entered it in terms of the recurring revenues being down year-over-year, in terms of -- was that more just because non-use of the systems or accounts combining or a combination and/or -- and just trying to get people now just to use it more on different applications now just on a go-forward basis? I think you answered it, but …

So not entirely, some of we did. I mean, I think it's important to show doctors different places where they can use the system, so for example, vitiligo or scalp psoriasis or pediatric eczema, all significant upside opportunities for us that have been ignored someone in the past and a lot of that because we focused on our advertising in radio and TV, which really doesn't allow you to target subpopulations of patients. So as we shift Internet and social media, we believe will be a lot more effectively to extend our reach. There's another factor here that we focus on little bit in the call without a lot of detail and I apologize for that, on high volume accounts. So right now because it's a recurring revenue model, a customer is taking [ph] the highest volume of work with us, actually financially could do better by buying a laser from somebody else. In other words, if they spend let's say $100,000 with us on recurring revenue they will pay that every year for the next five years when they could go out and buy a laser with service for maybe $130,000 for five years and save that money. Now most people prefer to stay with us, because our laser is better and our service and support is better. But we do lose some high-volume customers, because as they consolidate and finance becomes more important we will become low hanging fruit. So also at the National Sales Meeting this year we entail a couple programs, we kind of talked about little bit in the session here, meant to keep those customers. And one of those, for example, is a equity building program, so the more somebody uses it, the more I will call it points that they’ve build on [technical difficulty] up for some day or [technical difficulty] we want to negotiate with them in reducing the recurring revenue costs will give them credit [technical difficulty] with us. Basically we think of -- we keep the conversation with us that will retain that customer, and as you can guess if you lose a very high volume customer in that first year, it takes three new customers to make that up. So even though we are growing the number of placements, we weren't growing the volume. We fully expect this year to retain the vast majority of our customers and do better than we’ve done in the past with that, at the same time growing the business and we think that's a good formula for us going forward.

Okay. Just I know you didn’t talk about just -- are you ever going to revive the MelaFind just because there have been articles recently just on melanoma and the use of artificial intelligence in terms of a pre-diagnosing and concerning here is the MelaFind is the only device out there with FDA approval which sort of represents that [indiscernible], so I just was wondering about that.

Yes. So, frankly we’re explaining our options with MelaFind. I think we’re having a very difficult time sourcing the parts for the system. It's creating a lot of problems. We're not actively selling at the moment because of that. And the other problem is the way that the product was approved, the protocol we file to get approved by the FDA requires it to be exactly the same system going forward. So we can't simply replace parts in the system without redoing the trials. And you may or may not know we did 16,000 patients and date on those patients to develop the algorithm and test the algorithm for this, it's how we got approval. The problem is that we start substituting any parts, which we can't find any more, but if we get a substitute then we’ve to start over again. So we're really looking very hard at what we want to do with that. We will have some kind of decision later this month and we will get a press release out in some form to let people know about it one way or another.

Okay. All right. Thank you very much.

Sure.

Thank you. And at this time, we’ve no further questions in our queue. Mr. Yedid, I will turn the conference back over to you for any additional or closing remarks.

Okay. Well, thank you for joining us today on the STRATA Skin Sciences' call. We look forward to keep you informed about the Company and speaking with you on next quarter's call. Thank you very much.

Thank you. And again ladies and gentlemen, it does conclude our conference for today. We thank you for your participation.