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

Pete Stavropoulos - Rodman & Renshaw

Good day and welcome to the STRATA Skin Sciences Second Quarter 2017 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Bob Yedid. Please go ahead, sir

Thank you, and good afternoon, everyone. 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. With those prepared remarks, it's my pleasure to turn the call over to STRATA's President and Chief Executive Officer, Frank McCaney. Frank?

Good afternoon, everyone. Welcome to STRATA Skin Sciences earnings conference call for the second quarter of 2017. I am pleased to discuss the continued execution of our strategy and progress with STRATA's business plan. Like many medical office practices, dermatologists are facing reimbursement challenges and increased costs. As we've discussed our vision for STRATA is to become the dermatology and aesthetic medicine partner of choice offering highly advantaged, best-in-class products, for helping our customers grow their business at every opportunity. Our goal is to position STRATA as a business partner that can help practices and physicians to be successful. We believe we have best-in-class offerings that present both revenue opportunities and outstanding patient outcomes. As we will discuss, we've grown our offering of value added, differentiated dermatology product offerings to recent distribution agreements. To implement our strategy, our first strategic goal is to improve our current business principally the XTRAC. We have a proven recurring revenue model with XTRAC with recurring revenues of $6.2 million or 71% of the total Q2 sales. As the 10-Q indicates this is up 8% sequentially over the last quarter. Our recurring revenue is driven by utilization of the 795 XTRAC systems in place under this program. In the XTRAC business we have proactively shifted our sales reps' attention to grow our revenues and profits by focusing on increased utilization of underperforming placements. This makes sense given a significant portion of our customers are below target utilization levels and attracting new patients at the site generates incremental revenues for both the office and STRATA at essentially zero cost. The sale emphasis on growing treatment volumes rather than just adding new systems will continue to balance - will continue for the balance of 2017. Our sales reps are being incentivized to work with their existing customers, to improve their understanding of the value of XTRAC to their practices. As part of the effort to work with accounts to grow volumes, 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 significantly marketed to date. At the same time, there are officers, for whatever reason were volumes are so low that the placements unprofitable, we will remove the laser, recondition it and redeploy it where there is more patient potential. We're also developing social media and Internet marketing to use in a targeted manner to advertise XTRAC as an effective treatment for these other indications. And speaking of that digital marketing, within two weeks will be launching a new website and highlighting the new branding for the company. We believe in better. The focus will be on showing how and why our offerings are better for the patient, better for the provider, and better for the healthcare system. Over the next few months we will be expanding our Internet and social media presence, backed by the tool that digital platform can now provide website traffic tracking, email blasts, customers specific email, and text targeting et cetera. This will allow us for example to market broadly to all psoriasis patients or narrowly by sending text to Dr. Smith's patients with express and interest in say facial rejuvenation. To increase the productivity of our new placements, we're working with dermatologists on bringing new XTRAC systems to full utilization that practices quickly. Our goal is to help these new customers integrate XTRAC into their practices and gain experience and how the XTRAC system can be applied effectively not just the psoriasis but to a number of other different skin conditions. We've implemented several placement programs to meet customer needs and volumes. Over time we believe that these programs will grow STRATAs business especially by retaining the high-volume customers of XTRAC. Those programs are special or equity program are reward type initiative, allows us to have a more effective sales approach with customers who may want to purchase a laser. Our second strategic goal is to expand the market for XTRAC principally by adding proprietary treatment protocols which require considerably fewer patient visits. The OTD, optimal therapeutic dose protocols is in development and we have selected three sites to conduct a clinical trial with 15 patients. This trial will provide meaningful information on the use of a new treatment protocol for XTRAC, and a complementary prototype device. Our patent pending technology for this new protocol will enhance the physician's ability to bring the safe therapy to growing market of patients. We believe that the OTD protocol of just 3 to 4 visits offers much faster resolution of psoriatic plaques and greater convenience to patients. This new OTD protocol has the potential to dramatically increase our market share. We will be meeting with FDA next week to discuss the requirements for approval. 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 thereby reducing our costs. New software is developed to extend the time between gas consumption of nine months out to 15 months. We're pleased to report that based on our results, this program has been more successful than expected and we may be able to the time of the gas exchange beyond the target of 15 months. In our last conference call, we said we expected by the end of the year we'll be at a run rate of 30% to 40% fewer service visits and we are on track to achieve that goal. Third, we're seeking to expand STRATAs business through disciplined business but development activity that leverages our existing call point and our operational infrastructure. In mid-March, we announced a sub- distribution 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 enhancements 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's a single compact platform that combines three different light based technologies. At the time of the sub- distribution agreement in March, we were informed by Ellipse USA, the U.S. distributor that there was a solid pipeline of sales leads and that the four sales reps that joined us from Ellipse USA would be able to continue selling systems while training at STRATAs 23 reps was ongoing. Our subsequent experience suggested that Ellipses near-term forecast were too optimistic. The three parties involved in this agreement met this week in Chicago and resolved the issues that were holding us back. Those resolutions are being memorialized and we expect signatures this week. Going forward our agreement for distribution of the Nordlys will be directly with Ellipse A/S, the Danish company which manufactures the Nordlys system. We believe the terms of the new agreement will allow us to be more competitive in the gain that benefits inherent in working directly with the manufacturer. Our belief in the commercial potential of Nordlys has not changed. We believe that the sales rep in the U.S. will likely be six months behind our initial expectations. Based on his new information we are drawing our prior guidance of STRATAs forecasted sales Nordlys device and accessories of $4 million to $4.5 million and non-GAAP adjusted EBITDA dollars between 500,000 and 600,000 from April 2017 to the end of the year. We continue to believe that Nordlys is a highly differentiated product and we need to restart selling effort aggressively. We are changing our sales organization to increase our ability to deliver capital sales in the ascetic market, while continuing to improve our value to customers. All of STRATAs 23 sales reps have undergone training in the last few weeks of June. We are hiring or reassigning where appropriate nine experience ascetic sales professionals with a track record in capital sales, as well as a solid reputation geography they serve. This training accomplishes the goal of adding more innovative products such as Nordlys into the sales reps bag and leveraging our current call points including our over 800 recurring revenue and Nordlys sites. In the first quarter we also added STRATAPEN which we licensed from aesthetic education the products OEM. This is a highly advantaged aesthetic product is being specifically marketed for micro-pigmentation which is the FDA approved indication for this device. STRATAPEN features 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 safety features and are total unique in the market. While there is a modest 1.5 month delay in the launch of STRATAPEN, while inventories being received from the manufacturer, we are starting to see sales ramping nicely. We believe this device leverages our existing callpoint and infrastructure and should make a small but growing contribution to our adjusted EBITDA. From a capitalization standpoint, we announced on June 10th that we will dramatically simplify STRATA’s balance sheet as the holders of our 2.25% and 4% senior secured convertible debentures due in July 2021 with an aggregate principal amount of 40.7 million agreed to exchange these debentures for new shares of convertible preferred stock. This exchange has major benefits to our company. First, this exchange removes STRATA’s obligation to repay the convertible debt in 2021 and also eliminates our obligation to pay approximately $4 million of cash interest payments over the next four years. The new convertible preferred stock is nonvoting and carries no dividend obligation. Second, we can potentially invest the interest savings into potential acquisitions or licenses of new products, thereby leveraging our now current sales force of 27 people and leverage our over 800 occur existing recurring revenue dermatology and plastic surgery customers. Implementation of this conversion require shareholder approval, and a resolution in favor of the transaction is on the agenda for upcoming annual shareholder meeting on September 14th. We believe this change to our capital structure is highly beneficial to the company for the reasons I just mentioned, and urge shareholders to vote in favor of this proposal. Finally, I’m pleased to welcome James Coyne to our Board of Directors. Jim has over 20 years of experience as both a CEO and an entrepreneur having successfully guided the development, growth, and exit of several products and companies. He is currently CEO of Modevity LLC, a private company, and has provided leadership in developing the company’s software products including those in the life science and education sectors. Jim was appointed to take the place of Dr. Rox Anderson, a world renowned thought leader in dermatology and photo medicine. I’m pleased that we will retain Rock as a valuable counsel as he’ll head up our newly reconstituted Scientific Advisory Board. Dr. Anderson's experience with XTRAC is back many years, and he led the team that developed the first XTRAC system in Massachusetts General Hospital. At this time, I’d like to turn the discussion over to Christina Allgeier, our Chief Financial Officer to review the second quarter financials. Christina?

Thanks, Frank. Good afternoon, everyone. Let’s discuss the second quarter and sixth months ended June 30, 2017. Starting with the results for the three month period ended June 30, 2017, revenues were $8.7 million which represented an increase of 1 million or 12% over the 7.7 million of revenues recorded in the second quarter of 2016. Sales increased by $1.4 million or 20% compared to the first quarter of 2017. Our XTRAC business generates recurring revenues from per procedure phase. During the second quarter of 2017, recurring revenues were 6.2 million, up approximately 100,000 or 1.8% in the second quarter of 2016, and higher by approximately 500,000 or 8% sequentially from the first quarter. Recurring revenues accounted for 71% of our total revenue. The balance of the revenue is comprised of the international sales of both the XTRAC and VTRAC systems, associated parts and maintenance revenue. A few targeted domestic system sales in the new Nordlys and STRATAPEN product lines. The core STRATA business is on target with our 2017 expectation. However, the Nordlys product line is significantly below the expectation. As Frank mentioned earlier, we've reached agreement with the relevant party to rollout the Nordlys business to get back on track and become a significant part of STRATA’s revenue and profit going forward. We expect this agreement to be filed next week. Gross margin was 63.5% in the second quarter of 2017 as compared to 59.4% in the second quarter of 2016. This increase in margin is related in part to the product enhancement and our improved efficiencies in manufacturing. As stated in today's press release, the non-GAAP adjusted EBITDA for the second quarter 2017 was $2 million or 23% of revenue. This represents a very significant increase compared to $300,000 of non-GAAP adjusted EBITDA reported in the second quarter of 2016. Non-GAAP adjusted EBITDA increased by 121% sequentially compared to the first quarter of 2017. The company had net placements for four XTRAC systems in second quarter reaching a total 795 placements. This is 6% higher than the 748 placements we had at the end of the second quarter of 2016. Through the company’s initiative to improve the usage in our low volume accounts, we have begun to remove systems and locations where the volume isn’t expected to reach those acceptable level. Over the balance of 2017, these systems will be removed and will be placed at a more suitable location. To remind everyone of our strategy, new placements will be a lower priority for our reps. So the overall total number of systems will likely decline throughout the balance of 2017. However, the average revenue per system is expected to increase over the same timeframe. As of June 30, 2017, our cash balance of $3.9 million is in line with the $3.9 million at December 31st, 2016. For the second quarter of 2017, we generated a positive cash flow of operation of $879,000. We expect to continue to have positive cash flows for the calendar year of 2017, and we believe that we have sufficient cash resources to fund and grow our operation for the foreseeable feature. Moving on to the six-month period ended June 30, 2017, revenues were $69 million, an increase of 600,000 or 4% from the same six-month period of 2016. Recurring revenues for the six-months ended June 30, 2017 were $11.9 million, up approximately 300,000 or 2.7% from the same period of 2016. Recurring revenues accounted for 74.7% of our total revenue in the first six months of 2017 compared to 75.7 in the same period of 2016. Gross margin was 63% in the six-months ended June 30, 2017 as compared to 57.3% in the same period of 2016. The increase in margin is related to the product enhancements and improved efficiencies in manufacturing as I stated earlier. As stated in today's press release, the non-GAAP Adjusted EBITDA for the first six months 2017 was $2.9 million or 18.2% of revenue. This represents a dramatic $2.9 million increase from $9,000 of non-GAAP adjusted EBITDA in the same six months period of 2016. With regards to the pending exchange offer for our convertible debentures, we think this is a highly beneficial as it eliminate our cash interest obligation and increases the company's financial flexibility. Each share of the Series C convertible preferred stock has a stated value of $1,000, and it is in convertible into common shares at a conversion price of $2.69. The number of shares of the common stock, the holders would receive upon full conversion into this preferred stock, is would be approximately 15.1 million shares. I’ll turn the call back over to Frank.

Thank you, Christina. In summary, our team is focused on current and new initiatives to first improve our current business including retaining our high volume users, driving higher utilization per unit, to start digital marketing, and, of course, reducing our cost of supporting lasers in the field. Second, expand the market by commercializing, after the completion of clinical testing and regular approval, optimal therapeutic dose protocol as well as expanding awareness of our other indications that can be treated effectively with the XTRAC. And third, expand our business by adding dermatology and aesthetic products, select our product offerings and leveraging our current base of over 800 dermatologists and plastic surgery office practices as well as STRATA’s operational infrastructure. We believe that both Nordlys and STRATAPEN are diamonds in the rough. In both cases, there were some rough to work through, but we believe both of these products will contribute to our value proposition to the market and to our financial success. These products as well each product we can license or acquire to generate solid adjusted EBITDA margins over time as our sales reps are trained and the new products are rolled out to our customer base. I believe that STRATA already has a sales marketing infrastructure in place to support two to three times our current sales volume. STRATA’s team is in early innings of this game and we continue to seek other business development opportunities in a disciplined fashion. I'm 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 operational expansion initiatives on upcoming calls. With that, let me open the call for questions. Operator?

[Operator Instructions] Our first question comes from Joe Pantginis with Rodman & Renshaw.

This is Pete Stavropoulos in for Joe. I have a quick question on the optimal therapeutic dose study, the goal is to reduce the number of treatments for patient. For example, for psoriasis, you want to reduce it from approximately 13 treatments down to about 2 to 5. Will the price for treatment be adjusted after the new protocol as compared to the current protocol?

It is a great question. So we’re making the assumption that it won't be, although we’re making every effort to change the reimbursement for it. So the dynamics of it are such that we will save the healthcare system in awful lot of money if we can do it on far less visits. So we will make a consideration request from CMS and other insurance companies to change their reimbursement level to accurately reflect that. We think we can save them money and make it much more convenient for patients. If there is no change in reimbursement, it will reduce revenues for patients by 50% or more, maybe even as much as two-thirds. So there's two ways of dealing with that. One is obviously, this is going to become a much more convenient, faster because they’ll be treated within a few weeks. Biologics take about four weeks to clear psoriasis. This could take us as little as three weeks and with almost no side effects. So it’s almost a perfect medical therapy. We believe we’ll very rapidly drive a lot of volume and much higher market share in the product. The other strategy though is to position this as one of two treatment protocols, one being very conservative, and one being much more aggressive, and to try subset the market into those two populations. Those who want a more conservative treatment which might reflect kind of the patient population we have today, might be willing to stay on the 12 or 13 treatment protocol at a lower dose. Whereas those who would like to rapidly remove the psoriasis and are willing to take a slightly more painful, maybe slightly more reddening of the skin therapy, would be willing to go with a much shorter protocol. So, we think we can mitigate, especially in the beginning, the pool people into those two different camps. So long answer to your question. I apologize.

[Operator Instructions] And it appears there are no further questions at this time. I’d like to turn the conference back to Frank McCaney for any additional or closing remarks.

Thank you all who listened to the conference call. I think we're well on our way to improving the core business, expanding the market that we’re in, and expanding the business as a whole. I think we’ve made a good progress so far just nine months into this, but certainly expect better things as time goes on. So thank you for paying attention today. Bye, bye.

And that does conclude today’s conference. Thank you for your participation.