Good day, everyone and welcome to the STRATA Skin Sciences Second Quarter 2018 Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Jeremy Feffer. Please go ahead, sir..

Thank you, everyone, and good afternoon. Before we begin, I would like to remind you that management’s comments today may include forward-looking statements within the meaning of the Securities Litigation Reform Act of 1995.

These statements include, but are not limited to our plans, objectives, expectations and intentions and other statements that contain the 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 historic 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 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 Securities and Exchange Commission. STRATA urges you to carefully review and consider the disclosures found in the SEC’s filings, which are available at www.sec.gov and on the Company’s website.

With those prepared remarks, it’s my pleasure to turn the call over to STRATA’s President and Chief Executive Officer, Dr. Dolev Rafaeli.

Dolev?.

Thank you, Jeremy. Good morning, everyone. Welcome to STRATA Skin Sciences earnings and corporate update conference call for the second quarter of 2018. Joining me today is Matthew Hill, STRATA Chief Financial Officer.

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 helping our customers grow their business at every opportunity.

We believe we have and will continue to have best-in-class offerings that present both, revenue opportunities and outstanding patient outcomes. I’m delighted to be able to share with you my first quarterly earnings report as CEO of STRATA.

During the quarter, we completed a $17 million financing, led by Accelmed Growth Partners, which included myself, along with a number of other high-quality investors. We are now well-capitalized and are better positioned to invest more actively in our direct-to-consumer or DTC advertising program.

Just one quarter into this reboot, we’re already seeing tangible results in the form of higher recurring revenues and improved gross margins, as compared to the first quarter. The previously announced business focus of generating value add for our partner clinics has already resulted in a substantial turnaround in the second quarter.

We have stemmed the tide of the six consecutive quarters decline in our installed base. And through focusing on specific markets, dermatology groups and strategic accounts, expect to see noticeable growth in our base, by the end of this year.

We were pleased with the strong sequential progress we achieved with the second quarter as total revenues grew 17% versus the first quarter of 2018. This was driven in part by a 57% increase in our international revenue and a 15% increase in our domestic recurring revenues.

We also saw significant improvement in gross margin due mainly to an increase in quarterly average revenue per consigned domestic XTRAC system from $6,000 in the first quarter to $6,900 in the second quarter. As you might recall, the recurring treatment revenue contribution margin is significantly higher, helping to drive the overall gross margin.

We expect that continued growth in domestic recurring revenue will help us further improve the gross margins.

Scheduled patient appointments with our partner clinics, driven by our DTC awareness campaign, grew dramatically from 250 in the first quarter of 2018 to 870 in the second quarter, and we expect that trajectory to continue through the second half of 2018, as we generate further advertising efficiencies.

Carrying that through the end of the year, we expect third quarter appointments to double sequentially and by the fourth quarter to achieve 2,000 patient appointments.

Based on the DTC investment between 2011 and 2015, and the corresponding subsequent growth of XTRAC revenue, we anticipate the current investment in DTC to carry delayed fruits with comparable results revenues building over the future quarters.

This investment in patient awareness and creation of patient appointment flow into our partner clinics is what differentiates STRATA strategically. Throughout the second quarter of 2018, we took action to strengthen our balance sheet, improve patient clinical outcomes, and to expand awareness of STRATA’s product lines and treatment availability.

Recently, STRATA announced a fully paid exclusive and perpetual license agreement with a strategic entity. This agreement provides the strategic entity with exclusive rights to the de-identified digital images related to STRATA’s discontinued MelaFind.

We continue to look for additional potential similar licensing opportunities in a strategic effort to strengthen our balance sheet. In order to meet the goal of improving patient clinical outcomes, the Company has taken the first step in initiating our plan to introduce the optimal therapeutic dose treatment protocol.

Last week, the Company received a 510(k) clearance for our Multi-Micro Dose MMD tip accessory for the proprietary XTRAC 308 nanometer excimer laser. This accessory enables physicians to optimize treatment of plaque psoriasis, resulting in a shorter treatment regimen and superior patient outcomes.

With major payers, including the Narrow Band -UVB XTRAC treatment in their guidelines as a first line of defense are offering in addition to the current treatment methods of a patented, diagnostic tool and treatment protocol that enables a safe, quick and effective method of treating psoriasis with an optimal dose of light therapy will improve recurring patient treatments and will prove to be a win-win-win for patients, payers, doctors and STRATA.

Increasing awareness of STRATA Skin Sciences remains an important goal of the Company. Participating in leading scientific and banking conferences through presentations and panel discussion has increased our visibility to the medical and dermatological community as well as keeping investors familiar with the STRATA story.

We were pleased to have participated in multiple investor conferences during the quarter, and we expect to maintain a high level of engagement with the investment community going forward. During the quarter, we were successful in eliminating the overhang of nearly 10 million preferred shares held by two hedge funds.

A vast majority of those preferred shares have been converted into common shares and are now held by long-term shareholders and institutional investors which has helped increasing liquidity in the stock. With that I am going to turn it over to Matthew Hill to provide a more detailed view on this past quarter financial. Matt, please.

Thanks, Dolev. Good afternoon, everyone. I’ll provide basic financial metrics for the quarter and provide additional color during the upcoming Q&A. Please note that, unless explicitly stated, all metrics will be compared on a sequential quarter basis against the first quarter of 2018.

Given the significant changes that have occurred this year, most notably with respect to our rebooted direct-to-consumer advertising program, we believe that comparing the second quarter to the first quarter is more accurate representation of the progress we’re making in rebuilding our commercial operation.

In the second quarter of 2018 STRATA generated revenue of $7.5 million, representing an increase of 17% versus the first quarter of 2018. Recurring revenue during the quarter was $5.2 million, up 15% sequentially. We are also pleased with our performance outside the United States as international revenue grew 57% sequentially to $2.1 million.

We’re experiencing increase in purchasing activity in China, which might be driven by the potential tariffs to be imposed on certain products being sold into that market. Such tariffs currently plan to be imposed at the end of August, might impact future performance of that market. Our U.S.

installed base of XTRAC recurring revenue systems was stabilized at 746 units as of June 30, 2018, similar to the first quarter.

As Dolev mentioned, we realized significant operational efficiencies during the quarter, resulting in a 15% or $900 sequential increase in average quarterly treatment revenue per consigned domestic XTRAC system at $6,900 at the end of the quarter. As a result, we improved gross margin by 500 basis points to 54%.

This was driven primarily by 690 basis points improvement in deep dermatology recurring procedures gross margin to 63.6%. Net loss during the quarter on a GAAP basis was $1.4 million or $0.06 per basic and diluted common share. During the quarter, 9.6 million shares of common stock were issued from conversions of series C preferred shares.

There are still 3.7 million shares to be issued upon further conversions. When we compare the three and six months ended June 30, 2018 to the comparable quarters of 2017, we can see the impact of the reduction in the DTC spend on the financials during 2017.

Financials for the three and six months ended June 30, 2017, where spending was reduced, experienced the highest margins and recurring revenue without incurring the expenses associated with driving that revenue, which subsequently, led to declining recurring revenue and margins in later quarters of 2017. We’re now turning that around 2018.

Further, adjusted EBITDA for the quarter was $590,000, due largely to the $17 million equity financing, $14.7 million net of transaction costs that Dolev referenced earlier, we ended the quarter with cash and cash equivalents of $14.4 million, after repayment of $3 million of debt.

We will be managing our cash closely and driving efficiencies throughout the organization while prudently increasing our DTC advertising spend to drive patient awareness of available treatments to create new appointments for our dermatologist partner clinics.

Before we go to questions, our financial statements will be filed on Form 10-Q tomorrow August 14th. With that let me open the call for questions.

Operator?.

[Operator Instructions] Our first question will come from Joe Pantginis with H.C. Wainwright. Please go ahead with your question..

Hey, guys. Good afternoon. Thanks for taking the question. And congrats on the early turnaround. So, first, a logistical question, if you don’t mind. So, real nice to see the sequential increase in international revenue. So, just curious, what percentage of that was coming from China that might be impacted..

Joe, thank you for the question, and thank for the compliments. We don’t provide breakdown. But, the China installed base represents roughly one fourth of our international installed base. So, I’m sure that might help you understand the potential impact..

No, it certainly does. Thank you for that. And then, also, it was real nice to see the outside 510(k) clearance. So, I was just curious, two things, obviously, it’s early with regard to getting that approval.

Are you able to provide any doc feedback or anecdotes yet with regard to treating this new tip? And then, also, as you start to accumulate data, are you looking to provide sort of any compiled data from patients in any particular, say, medical forms or other?.

Great question. Thank you.

The investor presentation that’s out there, includes what you would call as anecdotal references, because -- and we could not say that this -- it comes from these clinical studies before, but -- before and after is that are on the existing clinical study -- sorry existing investor presentation are coming from that study where you can see patients cleared in two, three and four treatments basically two to four weeks.

As to your second part -- the second part of your question, these clinical studies that were conducted over the past, just over a year, are now being compiled into a clinical study that as I updated in a previous call, will be published before the end of this year.

But, again, we need to compile them, we need to write the paper and have it go through all the vetting process needed. But, the anecdotal results are in the investor presentation. And they’re very, very encouraging in terms of the ability to drive the number of treatments down per patient if the doctor adopts the new procedure.

These were done in three clinics. One is, a doctor that is very aggressive with treating patients, and the results show. And on the other hand, another was done with an institution that is very well known for their treatment of psoriasis patients UCSF, and both show the same type of very fast, very good results..

Thank you. Our next question will come from Larry Haimovitch with HMTC. Please go ahead, sir..

Good afternoon. My question relates to your strategy. It appears that your spending on DTC is working very, very well. You are losing money right now.

I’m trying to understand how you balance the spend versus the losses and the fact that obviously you don’t have infinite cash? How you’re going to manage the cash versus the obvious opportunity to drive the business upward with extra spending on the DTC side?.

Larry, thank you for the question. And let me try and connect the dots. And for that purpose, we have provided inside the press release, a table that is of -- that outlines the performance of this Company from the beginning of 2017. And if one wants, you can go back to previous quarters, but we did not do that for sake of space.

The additional treatment of XTRAC in a clinic, the way we do it today which is we place a device in the clinic free of charge and we charge the clinics a fee per use. It has a very, very high contribution margin from STRATA’s perspective. It has over 90% contribution margin.

The same is from the clinics’ perspective because they get a device free of charge, they get all the technology support, they get all of the patient insurance advocacy support as well as getting patients sent to them directly with our DTC advertisement and indirectly through patient awareness and what we call a halo effect.

Now, having said that, every time the company could show growing performance or growing usage, utilization of the devices that are placed in consignment, the gross margin goes up.

And when this company was acquired by STRATA in 2015, the gross margins were up to 70%, and the average utilization per device was on the range of between $10,000 and $11,000 per quarter. This is why Matt, when he discussed the financial data, stressed these two numbers.

When you look at this table, you’ll see that in -- as late as the second quarter of 2017 when the company was -- the utilization of the devices was at the range of $7,500 per quarter, the gross margin was 69%. This business at that level of gross margin makes money, as a net income.

Then, the company started deteriorating and the productivity of these devices starts going down and it went down from $10,000 to $11,000 in 2015 to $7,000 or $7,500 in 2017 and it reached a low of $6,000 in the beginning of 2018.

When this is turned around and more patients are being treated by every single clinic, the net contribution margin for us for these additional treatments pushes the gross margin up very fast. It pushes the top line up very fast.

So, just as a comparison, if you were to take the Q2 ‘15, which was at $10,000 per laser, and you were just to get to this utilization today, with today’s installed base, there is a 9 million -- there is a $9 million difference on the top line in sales.

That $9 million flows down with a contribution margin of over 90% and an investment in advertisement that in 2015 was between $4 million and $5 million on the quarterly average. So, that flows down to the EBITDA line.

So, having said that, if our adjusted EBITDA today is positive and our EBITDA is slightly negative, just by going back to the 2015 utilization of devices with the 2015 advertisement performance, we will be making money, net profit.

If you were following our updates in the last month and a half, our update said that our advertising efficiencies are much better today than they were in 2015. So, our patient acquisition in 2015 ran between $400 and $500 per patient. Today, as our last advertisement -- our last update was, our patient acquisition is sub 200.

And actually when we added an additional indication, vitiligo, our patient acquisition of vitiligo is sub 100. We need to push the right mix of patients into the clinics. We need to be able to have a clinics accept these patients.

And this is why I pointed out in my in my prepared remarks that we’re focusing now on these accounts that are strategic accounts, these accounts that our group accounts where business management is at the top of their mind, and they understand that getting more patients into the clinic, getting them into our first appointment faster, getting them into treatment faster and managing the treatment so that treatment happens faster, patient gets to remission faster, and this way patients come back again into treatment and we don’t need to reacquire them work faster.

All of that has to happen, all of that started to happen. It takes quarters for this to be manifested. So, what you could see from this first quarter of turnaround is we got higher utilization of the devices. We get more patient appointments.

We -- as we mentioned in the press release and an earlier in my remarks, we went from almost no patient appointments in the first quarter of 2017. And we will be at the run rate of 2015 which is over 2,000 patient appointments by the end of this year.

So, within three quarters, we go from zero to full force of pushing these patients into an appointment, into the clinics. When the patient shows up for an appointment, they need to be diagnosed by the doctor, they need to be prescribed. We don’t practice medicine in STRATA, the doctors do.

We help them to improve their business by giving them the right patients with the right benefits and schedule them at the clinic’s convenience.

And this is why we need to work with the right strategic groups inside the dermatology practice, so the groups that understand that getting patients and giving them faster clinical outcomes will result in better business results for the clinics. I hope I gave you a full answer..

You gave me more than a full answer. That’s great. Thank you. So, when you look back at the quarter, obviously there’s a lot to feel very good about.

Was there anything that you weren’t completely happy with or were disappointed and you hope to improve as we go through the second half?.

Sometimes you are unsatisfied that the quarter ends after 90 days..

Okay..

The first quarter, and just remind you, we’ve announced the transaction at the end of March, and I stepped in as a CEO at the second week of April. Evidently -- or not evidently, I was involved with this business for many years. I know the business, and I knew this through the -- since the middle 2007 or 2009.

So, I know the business but I stepped in as a CEO in the middle of April. We closed the transaction, the financing transaction at the end of May. This did not allow us a lot of time to make changes. But, I’m very, very happy with the changes that were done. We see a lot of progress on the sales side. We see a lot of progress with the accounts.

Stopping this deterioration in installed base that has lasted six quarters and doing this basically on a dime.

I mean, stepping in and communicating the right messages and telling them that we’re back here, we’re here to provide value to them, we’re here to make money ourselves, we are here to bring this business back at least to where it was in 2015 and if not more, and we’re here to do this fast. Last time, when we did this, it took us two and half years.

If you want to relate where we are today in comparison to the 2011 to 2015, timeline, then from a perspective of getting the DTC up and running and getting the patients appointments up and running, we are now in the beginning of 2014.

From the perspective of getting the clinics to perform and the utilization of the devices, we are in the early 2013 numbers. We did not provide these numbers here but they’re all publicly available as part of the PhotoMedex previous disclosures where in the beginning of 2013, it is moving fast, it is moving faster than what I anticipated.

But, as I cautioned through my prepared remarks, it takes time from the time you advertise until the time the patients show up for first appointment. And then, until they start showing up for their scheduled -- for their scheduled treatment for that to be realized as revenue on our side..

And then, one more question and I’ll get back in the queue. And then, just talk a little bit about your selling tactics, your sales force, and the progress you have made since you’ve come back on board..

We have an amazing sales force. And the reason is that they have very organized process. They know what the message is to the accounts. And the message is very simple. We are here to help you. And if we help you, you’re going to help us.

The challenge has always been converting these accounts from looking at us as accounts payable to looking at us as accounts receivable. And we are there to provide them help with getting these businesses, these franchises up and running. We run a very complicated, if you wish, franchise network of 746 clinics as we look at the second quarter of 2018.

And each one of them is in a different geographic area. Each one of them has different business practices. And my sales team visits each one of them. And my sales team is not selling capital equipment. They are there to support these partners through growing the business.

I think that this team missed the -- was looking forward to the renewal of the DTC campaign, because this was a -- this year, this was the largest strategic value that we could provide these partner clinics. And by providing that to the partner clinics, we differentiate ourselves.

We are the only way in these clinics as providers, as partners and as suppliers to these clinics. We’re the only ones that do not look for their checks. We look for their participation in the plan. And if they participate in the plan, we can help them grow.

And if we can help them grow and retain more patients in the process, patients get better clinical outcome with no competition, payers get better economic outcome with no competition, and the doctors enough make money..

Thank you. [Operator Instructions] We’ll go next to Mitch Fitter with Aegis Capital. Please go ahead..

I just wanted to get my arms around the share count. It went up fairly dramatically for obvious reasons.

Are there more preferred shares that have to be converted or are there warrants outstanding that we should be looking at?.

Matt, would you provide a description of the cap table as we see it today at the end of the second quarter?.

Absolutely. So, right now, we’ve got about a little north of 29 million shares outstanding, and that was mostly from the 15.7 million shares that we issued as part of the financing transaction. In addition, we have 3.7 million shares still to be issued under series C convertible shares.

As far as looking at which will be filed in the Q tomorrow, there’s another what I would say approximately 15 million shares, including -- on a weighted average basis, including those shares related to the series C convertible shares.

So, in all, we’ve got -- on a weighted average basis, we’ve got 15 million shares to be issued as of the end of June..

Thank you everyone. That will conclude our question-and-answer session for today’s call. At this time, I’d like to turn the conference back over to Rafaeli for any additional or closing remarks..

Thank you everyone for joining in. Thank you, operator. Thank you for joining in today’s call and for your interest in STRATA. I hope to look -- to meet you again on an update call or face to face in the near future, and have a great day. Thank you..

Again, that will conclude today’s conference. Thank you all for your participation, and you may now disconnect..