Bob Yedid – Investor Relations-LifeSci Advisors Frank McCaney – President and Chief Executive Officer Christina Allgeier – Chief Financial Officer

Joe Pantginis – H.C. Wainwright Jacque Lofranc – Whiteside Capital

Good day and welcome to the STRATA Skin Sciences’ Third 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. 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 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 medtech industry, any or all of the company’s forward-looking statements may prove to be incorrect. Therefore, you should not rely on any such factor 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 the SEC’s filings, which are available at www.sec.gov and the company’s website. With those prepared remarks completed, it’s 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 2017. I’m pleased to discuss the continued education – execution of our strategy and progress with STRATA’s business. As we have discussed, our vision for STRATA is to become the dermatology and esthetic medicine partner of choice, offering highly advantaged best-in-class products, while helping our customers grow their businesses at every opportunity. Like many medical office practices, dermatologists are facing reimbursement challenges and increased costs. Our goal is to position STRATA as a collaborative business partner, one that can help practices and physicians be successful. We believe we’ve best-in-class offerings that present both revenue opportunities and outstanding patient outcomes. To implement our strategy, our first goal is to improve our current business, principally the XTRAC. Critical to this improvement are changes we proactively made to enhance the long-term health of the business. There are a number of these initiatives underway, all designed to improve our long-term performance despite short-term negative impacts. We will highlight two of them here. These factors affected our XTRAC business, which declined by 7.8% in the third quarter year-over-year. There is also an external factor affecting Q3, which I’ll discuss shortly. First, in our XTRAC business, we have proactively shifted our sales reps’ attention to grow our revenues and profits by focusing on increasing the utilization of underperforming placements. This makes sense given that a material portion of our customers are below target utilization levels and attracting new patient at the site generates incremental revenues for both the office and STRATA at essentially zero cost. Our sales reps are being incentivized to work with our 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 XTRAC that have not been significantly marketed to date. Earlier this year, we targeted more than 100 OR accounts with the lowest volume of treatments. Approximately, half of those accounts responded positively to our initiatives and saw material growth in a number of procedures. Where our efforts to increase volume were ineffective and where the volumes were so low that the placement wasn’t profitable, we removed the laser. In these cases, we will recondition the laser and redeploy it in other dermatology practices, which are expected to have greater revenue potential. During Q3, we removed 26 systems and anticipate removing another 20 in the fourth quarter. While volumes were low in these removed accounts, the actual and scheduled removal of the 46 systems resulted in a loss of most of the revenues from those systems in Q3. In addition, there was a cost and sales time, service personnel time and in shipping and removing these units. In Q3, while we added 10 new systems, we tightened the criteria for new placements in order to better predict high volume utilization. The combination of the new qualification criteria for placements and the removal of low-volume units resulted in lower revenues for the third quarter. We ended September with 776 systems, which is up 2% year-over-year, but 2.3% lower sequentially due, in large measure, to the removal of those systems. Second, we suspended our adverting programs for the last month of second quarter and all the third quarter. The funds normally used for advertising were allocated to the development of a comprehensive digital marketing platform, which will promote our, we believe in better campaign. The suspension confirmed to us that advertising is indeed valuable. Despite the fact that the suspension had a clear impact on revenues in Q3, it was critical for us to make the shift from TV and radio to a full Internet and social media effort as soon as possible. Just after the close of the quarter, we did our first test of social media, and early results have been positive. A single Facebook advertisement at a very modest cost attracted over 39,000 hits in the New York Metro area. The social media and Internet marketing, which can target specific patient populations very precisely as compared to traditional media outlets will be used to advertise XTRAC as an effective treatment for psoriasis and other specific indications, such as scalp psoriasis, vitiligo and hand eczema. Despite the efficacy of XTRAC for the treatment of vitiligo and eczema, a form of atopic dermatitis, the company had never addressed – advertised to the general population for those indications. Our digital platform will allow us to target those populations effectively. Hand eczema, for example, is a large market opportunity. Market estimates, including one from the American Academy of Dermatology, approximately 10% of the U.S. population has hand eczema. The severity of the disease is varied, but at any level is a significant opportunity. A former President of the American Academy of Dermatology recently gave a well-attended lecture at a dermatology conference on the use of XTRAC to treat hand and foot eczema. As part of this digital marketing effort, in August, we launched a new website, which highlighted the new branding for the company, we believe in better. The focus is on showing how and why our offerings are better for the patient, better for the provider and better for the health care system. In our last conference call, we spoke about expanding our Internet and social media presence backed by the tools that a digital platform can now provide. Website traffic tracking, e-mail blasts, customer-specific e-mail and text targeting, this will allow us, for example, to market broadly to all psoriasis patients or narrowly by, for example, sending texts to Dr. Smith’s patients, who have expressed an interest in facial rejuvenation. That work is continuing and will be deployed in stages beginning now through the end of Q1 2018. However, our systems will change as digital marketing platforms evolve. The external factor we wanted to know is the effect of the two hurricanes on our business. Florida, Texas and Georgia were all affected as offices were closed and patients were not being treated in this time period. We believe this amounted to about 2% of our quarterly recurring revenue. Our second strategic goal is to expand the market for XTRAC, principally by adding proprietary treatment protocols, which require considerably fewer patient visits. The Optimal Therapeutic Dose, or OTD protocol, is in development. We have selected three sites to conduct a clinical trial with 15 patients and are making good progress on our work with OTD. 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 physicians’ ability to bring this safe therapy to a growing market of patients. We believe that the OTD protocol of just three to four visits offers much faster resolution of psoriatic plaque and greater convenience to patients. We met with the FDA last quarter to discuss potential pass for approval of the OTD protocol and related device, and we are, internally as well as with the outside expert advice, evaluating the optimal course of action. Third, we’re seeking to expand STRATA’s business through disciplined business development activity that leverages our existing call point and our operational infrastructure. To date, we have initiated two distribution or licensing agreements for excellent products, the Nordlys laser and the STRATAPEN. The Nordlys Laser is a single compact platform that combines three different light-based technologies and employs the latest advancements in cosmetic and medical technology and offers a superior patient, provider and practice experience. The Nordlys has 16 indications cleared to date by the FDA. In the third quarter, we revised the distribution agreement for this product so that STRATA has a direct relationship with Ellipse, the Danish company, which manufactures the Nordlys system. The terms of the new agreement will allow us to be more competitive and to gain the benefits inherent in working directly with the manufacturer. We continue to believe that Nordlys is a highly differentiated product, and we have restarted the selling effort aggressively. We’ve hired seven experienced esthetic sales professionals and reassigned another salesperson, each with a track record in capital sales as well as a solid reputation in the geography they serve. We anticipate hiring another capital salesperson by the end of the year to complete our staffing for this role. In addition, by the end of September, all of STRATA’s other sales reps completed sales training for the Nordlys system. This training accomplishes the goal of allowing our reps to sell, qualify leads for all of our products. Adding more innovative products into the sales reps bags leverages our current call points, including our current customer base. We’ve also launched STRATAPEN, an OEM product. This is a highly advantaged esthetic product that is specifically being marketed for micropigmentation, the FDA-approved indication for this class of device. The STRATAPEN features both the patent-pending Biolock cartridge, which prevents patients’ fluid and tissue from entering the device as well as a patent-pending removable and autoclavable nosecone. These features minimize contamination, which is important to both practitioners and patients, and these features are unique in the market. STRATAPEN is a perfect fit for our strategy, as we believe this device leverages our existing call point and infrastructure and should make a small but growing contribution to our adjusted EBITDA. Also late in Q3, STRATA announced an agreement with MedResults Network, MRN, a group purchasing organization for the esthetic marketplace. MRN has 3,300 subscribers, who rely on them for product recommendations and prenegotiated pricing. MRN selects and promotes one product per category, which we believe is highly advantageous. As a complement to our operational progress, one of the most important accomplishments of the third quarter and the year was simplification of our balance sheet, providing greater financial flexibility to STRATA. On September 14, our shareholders approved the exchange of $40.7 million of senior secured convertible debentures due in July 2021 for new shares of convertible preferred stock. The new convertible preferred stock is nonvoting and carries no dividend obligation. This exchange has major benefits to our company. First, it removes STRATA’s obligation to repay the debt in 2021 and also eliminates our obligation to pay approximately $4 million of cash interest payments over the period of the next four years. Second, we can potentially invest the interest savings into acquisitions or licenses of new products. Finally, the improvement in our balance sheet opens STRATA to a broader range of transactions, which can expand our business by leveraging our current sales force in our dermatology and plastic surgery customers. Over time, these growth initiatives may increase shareholder value and the possibility that the preferred will be converted into common stock further improving STRATA’s balance sheet and float. 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?

Thank you, Frank. Good afternoon. Let’s discuss the third quarter and 9 months ended September 30, 2017. Starting with the results for the three months period ended September 30, 2017. Revenues were $7.5 million which represented an decrease of 4% as compared to the $7.8 million of revenues recorded in the third quarter of 2016. Sales decreased by $1.2 million or 14% compared to the second quarter of 2017. As Frank discussed, as a result of the company’s initiatives to improve the usage in our low-volume accounts, we’ve begun to remove XTRAC systems from office locations, where the treatment volume isn’t expected to reach acceptable levels. Over the balance of 2017, these systems will be removed and will be placed at new office locations with greater revenue and profit potential for STRATA. New systems will be a lower priority for our reps, so the overall total number of systems will likely continue to decline by the end of 2017. Moreover, we expect, over the intermediate term, that the average revenue per system will increase and XTRAC’s profitability will be improved. Our XTRAC business generates recurring revenues from our per procedure fees. During the third quarter of 2017, recurring revenues were $5.7 million lower by approximately $500,000 or 8% from the third quarter of 2016. Recurring revenues accounted for 76% of our total revenues. The balance of the revenue is comprised of international sales of both the XTRAC and VTRAC system, associated parts and maintenance revenue, a few targeted domestic system sales and our new Nordlys and STRATAPEN products. Because of the actions mentioned above, gross margin was 56.2% in the third quarter of 2017 as compared to 60.5% in the third quarter of 2016. This decrease was due to the mix of revenues as recurring revenues carried higher gross margins as compared to equipment sales. As stated in today’s press release, the non-GAAP adjusted EBITDA for the third quarter of 2017 was $1.1 million or 15% of revenue. This is about 11% lower as compared to the $1.2 million of non-GAAP adjusted EBITDA reported in the third quarter of 2016. The company has 776 XTRAC placements at the end of third quarter. While this is a modest 2% increase year-over-year, it is 2.3% below the second quarter of 2017 due to our strategy of focusing on system revenues and profitability. As of September 30, 2017, our cash balance of $3.1 million as compared to $3.9 million at June 30, 2017. During the third quarter, the company has started principal repayments of approximately $850,000 against $12 million senior debt, which will continue through the maturity date of December 2020. In light of these planned debt repayments, we continue to believe that we’ve sufficient cash resources to fund and grow our operations for the foreseeable future. Moving on to the nine months period ended September 30, 2017. Revenues were $23.5 million, an increase of $327,000 or up 1% from the same nine months period in 2016. Recurring revenues for the nine months ended September 30, 2017 were $17.6 million, down approximately $200,000 or 1% from the same period of 2016. Recurring revenues accounted for 75.3% of our total revenue for the first nine months of 2017 compared to 77.1% in the same period of 2016. Gross margin was 60.9% in the nine months ended September 30, 2017 as compared to 58.4% in the same period of 2016. This increase in margin is related to product enhancements and improved efficiencies in manufacturing that have been made throughout the year, as we have discussed in previous conference calls. As stated in today’s press release, the non-GAAP Adjusted EBITDA for the first nine months of 2017 was $4 million or 17.1% of revenue. This represents a sharp $2.8 million increase from $1.2 million in the same nine months period of 2016. We were pleased to complete the exchange offer of our convertible debentures to convertible preferred stock. We think this exchange is highly beneficial as it eliminates our cash interest obligation and increases the company’s financial flexibility. As a result of the extinguishment of these debentures, we reported a non-cash charge of $11.8 million in the third quarter, which has lowered our net income and earnings per share, but had no impact on our cash flow. The 10-Q for the third quarter of 2017 will be filed on Tuesday, November 14. Now I’ll turn the call back to Frank for closing comments.

Thank you, Christina. In summary, our team has a focus on current and new initiatives to: first, improve our current business, including driving higher utilization for XTRAC unit by marketing other approved indications as well as psoriasis by redeploying units to practices with higher revenue and profit potential, by expanding our digital marketing and by reducing our cost of supporting lasers in the field; second, expand the market by commercializing Optimal Therapeutic Dose therapy after the completion of clinical testing and regulatory approval as well as expanding awareness of other indications that can be treated effectively with the XTRAC. And third, expand our business by adding dermatology and esthetic products selectively to 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 continue to make progress with both Nordlys and STRATAPEN. After making some enhancements to our infrastructure, we believe we’re now getting out of the starting blocks with both of those products. Nordlys and STRATAPEN will contribute to our value proposition to the market and to our financial success. These innovative products as well as each product we can license or acquire should generate solid EBITDA margins over time as our sales reps are trained and new products are rolled out to our customer base. I believe that STRATA already has a sales and marketing infrastructure in place to support 2 to 3 times our current sales volume. STRATA’s team is in the early innings of this game, and we continue to seek other business development opportunities in a disciplined fashion. In Q3, we took on some of the initiatives that were painful, but they needed to be done to strengthen the business and improve profitability. I’m enthusiastic about positioning STRATA as the valued business partner of choice for dermatology and esthetic 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?

Thank you. [Operator Instructions] And we’ll go first to Joe Pantginis with H.C. Wainwright.

Hey, guys good afternoon. Thanks for taking the question. Two questions I want to focus on, primarily. First, I know it’s very, very early since you signed the MRN collaboration. But are there any early successes that you can point to yet? And if not, since it’s so early, what would you look to as the definitions of early success? Thanks.

Yes, thanks for the question, Joe. So we’re pretty excited about the MRN opportunity. It gives us reach in the places that we don’t normally go to and strengthens us in places that we do. We’ve really just started with them. They brought on a couple new vendors at the beginning of the fourth quarter. We just actually launched our very first promotion yesterday. So that’s a Q4 promotion for STRATAPEN. And what it is – is previously there was another competitive pen that was on contract with them, that pen had some problems, and now we are offering a trade-in for that product if you’re purchasing a STRATAPEN from us. So we really haven’t gotten any feedback yet, but we are expecting some tomorrow. And then, early next week, we’ll get a feel for it. Hard to quantify what it’s going to mean. I know a person we brought on to run our clinical marketing department ran the program at another company and was very successful with it. He was quite bullish on the program. And I hesitate to throw any numbers out there. But we’re pretty excited about the program. We think it will be good for us, especially STRATAPEN, some for Nordlys, not quite as much for XTRAC based on the constituency and their subscriber base.

Got it. No, that’s very helpful though. Thank you. And then the second question I just wanted to focus on your initiatives regarding OTD. So you do have your FDA guidance, and I know you said you’re still in internal evaluations as to which path you might go down. So I guess, I would ask, are you guys leaning towards a particular path with regard to a new study? Or making no new claims and maybe increasing patent protections on the flip side? And when do you think we can expect to see this decision?

Yes. So we’re getting closer to a decision there. First, on patent protection, we are working with other outside counsels and our existing outside counsel to look at other possibilities. We found someone who is an expert in lasers – in medical lasers and an expert in helping round out a patent portfolio in a product. And he is helping us think through other things we could do with that. So that’s kind of one part of that question. The pass that FDA gave us was one we could get a technical approval, which would be very fast if we get the product into the market. But if we wanted to claim, we’d have to do a clinical trial. I see this us wanting to do three separate things: one is to get approval, one is to do a clinical trial to make – get claims, and the third is to do a series of economic studies to help show the value proposition for not only hospital chains and hospital groups, dermatology groups but also insurance companies. We think there’s a great opportunity for this to become – for XTRAC to become an OTD, to become a mandate for first-line therapy for psoriasis in the moderate category. So I guess, the primary question that we’re going to answer that comes down to is, do we do a technical approval and a clinical approval at the same time? Or do we do them separately? And there’s advantages. There is pros and cons to anything you do, but – to that as well. And we’re trying to make sure we completely understand the pros and cons of each before we make that decision. That does not mean we haven’t started the work. We’re moving very, very rapidly. We have to do the technical component no matter what, and that work is well, well underway.

Okay, great. Thanks for the additional color.

Sure. Thanks Joe.

[Operator Instructions] And we’ll go next to Jacque Lofranc with Whiteside Capital.

Hi, guys. Thanks for taking my question. You had mentioned that you were seeking to increase the productivity of certain XTRAC systems. So have you seen any early results with respect to the productivity per system?

So we have. So we identified a little bit more than 100 of our lowest volumes users. And – some of this is an artifact of placing units without a big qualification process. So we mentioned that going forward, we slow down placements to improve qualification. We don’t think it will slow it down forever, but enough to teach the reps what they needed to do to make sure that there’s a high probability of a higher volume user than a lower volume user. So we took those first 100 accounts. We incentivized the sales reps to go in and encourage people to look for other types of patients. To help with that, we started talking about other types of patients that doctors may not do. So they may do psoriasis on the body, but don’t think about using it for scalp psoriasis. They may not use it for eczema or pediatric dermatitis. There’s a lot of other things you can use the XTRAC for, which, by the way, one of the things of switching from TV and radio to Internet and social media is that it allows us to sub-target different categories of people. So of those 100, we’ve done about – roughly about half of them were somewhat unresponsive to increasing the volume, while the other half was, I would say, material responses. And I think, in those units, we’re still – it’s a little bit volatile in the early part of the year. But I would say, we’re up as much as an average something like 10% in those 50 accounts. So going forward, if you think about where we’re headed going forward is, we’d like to take that program to all of our users, we’ve got another 700 or so accounts out there that if we ran this program with and half of them went up, 10%, that would be a materially positive impact, almost all in profit. So if you think about it, the beauty of an XTRAC placement in increasing the volume is it costs us and it costs the doctor nothing to add new patients, yet the revenue stream goes up. So if we can get good at first using social media and the Internet to drive more patients to the doctors, the reason we’re taking the pain of stopping advertising, most have the money to do that as fast as possible. And the second part, of course, is as the doctors get used to doing other types, they look for those kind of patients, and that also drives more patients in as well. So we think this is a great set of opportunities for us. It was somewhat painful this quarter to make some of the moves we had to make, but most of those are, in large part, done. I won’t say the effect is completely over. But all good for pointing forward and the company being more successful in the future.

Got it. Thank you for the additional color there. So also the second question follow-up is, how do you see the rollout of the Nordlys laser system, now that you’ve restarted the sales effort?

Yes. So I think that’s a great question as well. We’ve restructured our sales organization. And maybe it’s worth taking a second to go into that. So most folks who’ve worked in sales and marketing have used either generalist models or generalists with specialists. And the big problem is usually we can’t afford the specialists because there is no business underwriting them. And so you have only a couple and they have huge travel requirements. You might have 10 of them that cover five states each and you never have the chance for them to really get in deep with customers. So we’ve developed pods of three people. So we have nine pods of three people in our sales organization. And in each pod, there is two normal STRATA reps and one esthetic capital rep with a small XTRAC territory. So the idea is you’ve got – a specialist is in very close and tight but who also understands the XTRAC business and is a good complement to the other two reps in his pod. So we’ve hired in eight of those nine positions, we have one more to go. We’ve trained five of those reps and three more in training now. The last person should be hired shortly and he will get into training. And as we get to the end of this year and into early next year, each of those are people starting to build their own pipelines. For Q4, we have a number of the opportunities that existed with the old Ellipse USA sales organization that we assumed when we took over the business. And we didn’t feel that, for the most part, we got anywhere with those. So we’ve now taken those over inside our structure. We look to close a number of them this quarter. And then, in 2018, we’ll really fully up the speed with a full complement of experienced proven capital equipment reps that have esthetic backgrounds and Rolodexes in their territories.

All right. Okay, thank you so much. Appreciate it.

Sure.

[Operator Instructions] And that concludes our question-and-answer session. I’d like to turn things back to our speakers for closing remarks.

Very well, thank you. I appreciate everyone being on the call today. We know that it was not a particularly strong numerical quarter, but we think in terms of progress for the company, it was actually a tremendous quarter. And we look forward to the benefits of that coming, unfortunately not in this quarter, but in quarters yet to come and maybe for a long time. So thank you for your participation in the call today, and I look forward to talking to you on the next call.

Thank you, everyone. That does conclude today’s conference. We thank you for your participation. You may now disconnect.