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

Joe Pantginis - Rodman and Renshaw

Good day and welcome to the STRATA Skin Sciences First Quarter 2017 Earnings Conference Call. Today's conference is being recorded. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session and instructions on how to queue will be provided at that time. At this time, I'd like to turn the conference over to Bob Yedid with LifeSci Advisors. Please go ahead, sir

Thank you, Brian, and good afternoon, everyone. This is Bob Yedid of LifeSci Advisors. Before we begin, I'd 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 www.strataskinsciences.com. It's my pleasure to turn the call over to STRATA's President and Chief Executive Officer, Frank McCaney. Frank?

Good afternoon. Welcome to STRATA Skin Sciences earnings conference call for the first quarter of 2017. I am pleased to discuss the execution of our strategy and progress of STRATA's business plan. As we have discussed our vision for STRATA is to become the dermatology and aesthetic medicine partner of choice, offering highly advantaged, best in class products, while hoping our customers grow their business at every opportunity. Dermaplastic surgery practices like many medical office practices, are continuing to consolidate. Our goal is to position STRATA as a business partner, one that can help practices and physicians be successful. We believe we will have best in class offerings, that present both revenue opportunities and outstanding patient outcomes. Our goal is to offer better treatment methods, better outcomes, better patient service and better practice efficiency and value. To implement our strategy, we are seeking to first expand STRATA's business through disciplined business development activity, that leverages our existing call point and our operational infrastructure. In mid-March, we announced a licensing agreement to be the exclusive U.S. distributor for best in class aesthetic device, sold under the brand name Nordlys from Ellipse USA. Nordlys employs the latest advancement in cosmetic and medical technology and offers a superior patient provider and practice experience. The Nordlys has 24 indications clear to-date by the FDA. It is a single compact platform, that combines three different light based technologies. First, Selective Waveband Technology is the latest advancement in the field of intense pulsed light or IPL. Selective waveband uses a fraction of the energy of comparable products, has less pulses and is less painful for patients. Recent clinical studies have shown superior results to pulsed light lasers and the treatment of rosacea and port wine stains. This enables a practice to eliminate pulsed light lasers for other standalone vascular devices. Second, Nd:YAG laser which is engineered to be more predictable and more comfortable for patients than other lasers. Integrated cooling helps make YAG a technique that can -- can be used reliably to treat facial veins. And third, the Nordlys offers a laser resurfacing device, the Frax 1550 with non-ablative fractionated technology. This Frax laser has two unique features, a roller applicator and an adjustable treatment scan width. These features allow the user to follow the contour of the skin, and avoid the stamping effect, often seen with competing fractional lasers. Because of the better use of power, the Frax 1550 treatment results in less days of skin redness than other treatments. Nordlys users include leading dermatologists, plastic surgeons and cosmetic physicians, with over 6,000 placements worldwide. To date, Nordlys had a relatively small marketing effort in the U.S. We are excited to put differentiated Nordlys laser into the hands of STRATA's 23 sales reps, along with the four sales reps that joined us from Ellipse USA. STRATA's salespeople currently are undergoing training, so they can effectively sell the Nordlys. In addition, we will be adding highly qualified personnel to support the marketing effort. Under the terms of this agreement, STRATA will be the exclusive distributor of Nordlys systems for three years, with an automatic extension out to a five year term, if minimum sales targets are achieved. We will pay an annual license fee as well as a commission for each system sold. We announced the launch of the Nordlys at the American Society for Lasers and Medicine and Surgery meeting, which took place in San Diego on early April. At that meeting, Dr. Vic Ross, a renowned dermatologist made a podium presentation on the Nordlys. Dr. Ross discussed the use of our laser and presented the results of this study, utilizing the Nordlys novel Frax 1550 with rolling applicator head, to improve the effects of aging on facial skin. With effective sales and marketing, using internal and external resources, we see a substantial commercial opportunity for Nordlys. STRATA has forecasted sales of the device and accessories to be in the range of $4 million to $4.5 million from its introduction in April until the end of this calendar year. We estimate Nordlys will contribute between $500,000 and $600,000 in non-GAAP adjusted EBITDA. The immediate contribution or a non-GAAP adjusted EBITDA underscores the inherent leverage of our existing call point in operational infrastructure. As we license or acquire complementary dermatology and aesthetic products. During the first quarter, we also added the STRATAPEN product, which we have licensed from Aesthetic Education, the product's original equipment manufacturer. This is a highly advantaged aesthetic product, specifically being marketed for micro-pigmentation, the FDA approved indication for this device. The STRATAPEN uses both a patent pending Biolock cartridge, which prevents patient fluid and tissue from entering the device, as well as a patent pending removable and autoclavable nosecone. These are tremendous patient features built for safety and are unique in the market. This device is another product that leverages our existing callpoint and infrastructure. Our second strategic goal, is to improve our current business, principally the XTRAC. We have a proven recurring revenue model with XTRAC, with recurring revenue of over $5.7 million or 79% of first quarter sales. This is driven by utilization of the 791 XTRAC systems in place under this program. We have implemented several placement programs to meet customer needs and volumes. Over time, we believe that these programs will grow STRATA's business, especially by retaining the high volume users of XTRAC. We are also focused on increasing utilization of underperforming placements, since we believe a significant portion of our customers are below target utilization levels. Our sales reps are being incentivized to work with our existing customers, to improve the understanding of the value of XTRAC to their practices. As part of this effort, we are developing and our sales reps will be highlighting clinical case studies demonstrating the use of XTRAC in the treatment of vitiligo, scalp psoriasis, nail psoriasis, pediatric eczema, and atopic dermatitis. All these are approved indications for the XTRAC that have not been formally marketed to date. We will use social media and internet marketing in a targeted manner to advertise XTRAC as an effective treatment for these other indications. Then to increase the productivity of our new placements, we are working with dermatologists on bringing their XTRAC systems to full utilization in their practices quickly. Our goal is to help these customers integrate XTRAC into their practices and gain experience in how the XTRAC systems can be applied effectively, to not just psoriasis but to a number of different skin conditions. Our third strategic goal is to expand the market for XTRAC, principally by adding proprietary treatment protocols, which require far fewer patient visits. The optimal therapeutic dose to therapy is in development, and we have selected three clinical sites for a trial, and are in the process of setting up that clinical trial. Our patent pending technology for this new protocol will enhance the physician's ability to bring this therapy safely to a growing market of patients. We believe an optimal dose therapy protocol of just three to four visits, that offers much faster solution of psoriatic plaques and greater convenience to patients has the potential to dramatically increase our market share. In operations, we continue to release product enhancements, to decrease the number of service calls and preventive maintenance visits 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. At this time, I'd like to turn the discussion over to Christina Allgeier, our Chief Financial Officer to review the first quarter financials. Christina?

Thank you, Frank. Good afternoon. Let's discuss the first quarter of 2017. Revenues for the first quarter of 2017, were $7.3 million compared to revenues for the first quarter of 2016, of $7.6 million, a 4% decrease. Domestic revenues were up for the prior year period. However, international sales were lower. We believe that the international sales will come back on track in the second quarter. Our XTRAC business generates recurring revenues from per procedure fees. In the first quarter of 2017, recurring revenues of $5.7 million were up 3.7% from the prior year period. Recurring revenues accounted for 79% of our total revenue. The balance of the revenue is comprised of international sales of both the XTRAC and VTRAC systems, the associated parts and maintenance revenue and a few targeted domestic system sales. For the domestic XTRAC business, based on our experience, revenues in the first quarter are typically the lowest of the year, as patients deductible and co-pays are reset under many health plans in the first few months of each year. The deductible resets typically caused volumes to be softer in the first quarter, and we expect volumes to strengthen in the balance of 2017, as they have in the previous years. Gross margin was 62.4% in the first quarter of 2017, as compared to 55.1% in the first quarter of 2016. This increase in margins is related in part to the product enhancements previously discussed and improved efficiencies in manufacturing. Additionally, the international sales have lower gross margins as we sell through a mass distributor, the changes in the level of international revenues affect the overall gross margin. As stated in today's press release, the non-GAAP adjusted EBITDA for the first quarter of 2017 was $900,000. This represents a significant increase of $1.2 million from the negative $300,000 of non-GAAP adjusted EBITDA in the first quarter of 2016. The company had net placements of 16 XTRAC systems in the first quarter. This is about a third higher compared to the prior year quarter, and higher than the average pace in net placements for the calendar year 2016. At the end of the first quarter 2017, there were 791 XTRAC systems in place versus 775 at the end of 2016 and 730 at the end of the first quarter of 2016. That's an increase of 8.4% year-over-year. As of March 31, 2017, STRATA had a cash balance of $3.8 million compared to $3.9 million at December 31, 2016. For the first quarter 2017, we generated a positive cash flow from operations of $800,000. Positive cash flow is especially notable, as we made an investment of about $600,000 in inventory for the new Nordlys business. We expect to continue to generate positive cash flows for calendar year 2017, and we believe that we have sufficient cash resources to fund and grow our operations for the foreseeable future. The 10-Q for the first quarter of 2017, will be filed on Monday, May 15. Finally, the company affected a 1-for-5 reverse stock split effective April 6, 2017. The purpose of the split was to avoid a listing from the NASDAQ capital markets, because our stock had been trading at a bid price below $1 per share for some time. Since April 7, our stock has traded at closing prices of $2.70 per share or higher. On April 24, NASDAQ notified STRATA, that the company had regained compliance. Now, I will turn the call back to Frank, for closing comments. Frank?

Thank you, Christina. In summary, our team will be focused on current and new initiatives. The first, expand our business, by adding dermatology and aesthetic products selectively to our product offerings, and leveraging both our solid base of relationships with dermatologists, as well as STRATA's operational infrastructure. I believe that STRATA already has its sales and marketing organization in place, that could support two to three times our current sales volume, by adding differentiated derm and plastic surgery products. We are excited about adding the proprietary Nordlys system and the differentiator to STRATAPEN to our product line. The forecast of revenues to non-GAAP EBITDA for the Nordlys laser alone, are substantial, and we believe are indicative of the opportunities which exist, if we can leverage the company's market position. STRATA's team is in the early innings of this game, and we continue to seek other business development opportunities in a disciplined fashion. Second, 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. And then third, expand the market, principally by commercializing the optimal dose therapy, after the completion of clinical testing and regulatory approval, as well as expanding the awareness of our other indications that can be treated effectively with the XTRAC. I am enthusiastic about positioning STRATA as the valued business partner of choice for dermatology and aesthetic medicine practices. I look forward to reporting to investors and analysts on the growth of our new products, and other initiatives in our upcoming calls. With that, let me open the call for questions. Operator?

[Operator Instructions]. And we will take our first question from Joe Pantginis with Rodman and Renshaw.

Hey, good afternoon Frank and Christina. Thanks for taking the question and congrats on the progress. Two questions I want to focus on; first for Nordlys. You have over 6,000 placements worldwide and if my notes are corrected, I believe there is about less than 400 or so in the U.S., and that is an area that you said you wanted to focus on. So what would you consider to be, sort of the primary low hanging fruit in starting to build the U.S. market for Nordlys?

Yeah, so I think there is a couple of ways. There is a significant number of dermatologists in particular, that has large laser medicine practices, and have invested heavily in a number of lasers. The advantage of Nordlys is, it's kind of a three in one system. So it could theoretically take the place of multiple lasers. However, I think the low hanging fruit is for new people in dermatology, and especially in plastic surgery, getting into laser medicine. Plastic surgeons for a long time did nothing but surgery, and now see laser medicines a way to greatly expand their practices and do so profitably. This is an ideal first product for them to have, since it does so many different things. So our strategy, really we are only about a month and a half into this, is to really define the plastic surgery market to go after, to look into dermatologists that have been focused on medical dermatology, and now want to get into aesthetics and be their first laser that they are getting out. The nice thing about the product is, although there are a small number of placements in the U.S., they should really be on a relative medical device basis, probably 3,000 instead of less than 400, is that the current user list for Nordlys is an all star list. So very-very reputable, credible, well respected people using the product, and I think we can use that to our advantage in gaining some traction and market share.

Thank you. That's actually very helpful. And my next question, I guess is a little more on the clinical front. You described a little bit in your prepared comments about an upcoming clinical study. I think you said you had the protocol in hand. Can you take a step back a little bit and say, whether you -- have you met with the FDA yet and they basically gave guidance on this upcoming study, and can you provide any more details on the actual study? Thanks a lot.

Sure. Thanks Joe. We have not met with the FDA yet. We had I'd say better guidance, that said that we would be best served by having prototypes of the products we are going to use in the trials, and we have been refining that to a better and better product. So we have kind of held off going to FDA until we had it. I think we passed the final test just the last week that we wanted to get through, to show that we had the right product working and doing the right things, and we are preparing our submission to FDA to setup that meeting. So this trial, what we are going to do is, just 15 patients in this trial. There is a large body of anecdotal evidence of what we will do in the work. There is preliminary evidence it will work. But we want to do it in a controlled way and multiple sites. So we are going to do 15 patients over three sites, and run our protocol with that. That protocol can rapidly be expanded, if FDA wants more information than that. We are not exactly sure what FDA will want, but the beauty of what we are doing is, this falls -- what we are doing falls exactly within the purview of what the laser is already approved to do. We are just defining how to treat different patients in a safe way. So there is a range of opinions on what FDA will want from us. It could be very-very little, or they could just want a classic study. If they want a classic study, we have got really the protocol in place. We have got IRBs. I think we could expand that study pretty quickly if we needed to.

Great. Thanks a lot Frank. Appreciate the added info.

Thanks.

[Operator Instructions]. And it appears we have no further questions in the queue at this time. And ladies and gentlemen, that does conclude today's conference call. We thank you for your participation.

Thank you.