Strata Skin Sciences Inc (SSKN) 2015 Q2 法說會逐字稿

Good day and welcome to the MELA Sciences second-quarter corporate update call. Today's conference is being recorded. (Operator Instructions)

I'd like to remind everyone that this conference is being recorded and would now like to turn the conference over to Mr. Paul Arndt, Managing Director at LifeSci Advisors. Please go ahead, sir.

Thank you, Jessica. Before we begin, we'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 factors or forward-looking statements. In addition, more specific risks and uncertainties facing the Company are set forth in the Company's reports on Form 10-Q and 10-K filed with the SEC. MELA Sciences urges you to carefully review and consider the disclosures found in its SEC filings, which are available at www.sec.gov and www.melasciences.com.

I will now turn the call over to MELA Sciences President and Chief Executive Officer, Michael Stewart.

Thanks, Paul. Good afternoon, everyone. With me today is Bob Cook, the CFO for the Company, and Christina Allgeier, the Chief Accounting Officer. This is the first report that includes the results of our recent acquisition of the XTRAC and VTRAC businesses that were acquired on June 22.

And therefore, since this was an asset acquisition, only eight days of the operations of those businesses are included in the second-quarter results. The results do set the opening balance sheet for the business and Bob Cook will run through the important numbers to know a little later in this call. Our 10-Q for the second quarter will be filed tomorrow morning.

I'd like to give you a brief update on the transitions and the business. First, in regard to the XTRAC and VTRAC platform on the therapeutic side of the business, the revenues reported include only eight days, as I said, of activity for the acquired business, with total revenues from those businesses of $553,721.

The full-quarter results had we owned the businesses from the beginning of the second quarter showed total XTRAC and VTRAC business revenues of $7,745,967. This number breaks down into $6.678 million in recurring high-margin XTRAC revenues, $544,000 in international XTRAC and VTRAC sales in the quarter, and $523,285 in parts and maintenance revenues.

Importantly, average recurring revenue per account for the recurring XTRAC revenues in the domestic market for the second quarter was $10,206 compared to $9,898, up 3.1% from the same quarter of 2014. Recurring revenues grew 24% in the quarter, ahead of the expectations that I had set in the conference call announcing the acquisition for the full-year growth targets. That is annual recurring revenue growth in the mid-to high teens. This guidance remains unchanged.

The number of XTRAC systems deployed in the US at June 30 was 664. This is up from 554 at the end of the second quarter 2014. 24 systems were placed in the second quarter 2015. We're looking forward to including the full quarter's actual results in the third-quarter financials, which will begin to show the transformational aspects of the acquisition that was made.

The transitions required of the acquisition to consolidate all of the back-office operations is progressing well and according to plan. The sales forces have been integrated and all sales activities are now under the same leadership.

Our US sales organization consists of 32 individuals, of which 24 our sales managers. Importantly, we have kept essentially all of the team that we wanted. Additional major assets that were acquired in the transaction were our call center operation and reimbursement assistance group, both tied to our domestic XTRAC operations and housed in our Carlsbad, California, facility.

These operations continue to execute our patient advocacy program and refer patients to our physician partners. These operations are highly valued by our customers and will continue to play a significant part of our patient-focused and customer-focused marketing activities.

On the legacy diagnostic side of the business, the efforts to continue to reduce the expenses on the melanoma product, MelaFind, are progressing well. And the organization will be reduced to the go-forward level by the end of August.

The team will have been reduced from approximately 35 employees when I joined in December 2014 to less than 10 by the end of the integration process. Total headcount for the combined Company at that time should be approximately 105.

We are consolidating the operations side of our imaging business into the Irvington, New York, and Horsham, Pennsylvania, facilities and reducing our dependence on outside vendors. We're in the process of installing a repair operation in the Horsham office as well. These activities and continuing cost reduction activities were begun in the second quarter as a result of the acquisition and are expected to be completed in the third quarter.

On the product side, a new cost-reduced version of the MelaFind system is in development and expected to be completed in the first half of 2016. With this new design, it is expected that international markets can be approached through distribution partners. Domestically, the Company is continuing its efforts toward establishing reimbursement for the MelaFind, a process that is expected to take several years to complete.

In relation to these activities, the Company has reassessed its MelaFind inventory position and the impact of these decisions are included in the second-quarter results. And Bob will go through those as well.

So at this time, I'd like to turn the mic over to Bob Cook to address the financials and the impact of the acquisition accounting. Bob?

Thanks, Mike. The acquisition of the XTRAC and VTRAC businesses closed on June 22. So from a financial statement perspective, we incorporated the assets of the business on our balance sheet as of that date.

The $42.5 million purchase price was preliminarily allocated among current assets, property plant and equipment, and intangibles. We have initially recorded goodwill of $8 million. We began recognizing the results of operations from the business as of June 23. And therefore for the second quarter of 2015, we include only eight days of revenues and expenses.

Second-quarter 2015 revenues totaled approximately $0.6 million compared with $0.2 million recorded in the second quarter 2014. $0.5 million of the second-quarter revenues are attributable to the revenues from the XTRAC and VTRAC. With the inclusion of only eight days of operations after the closing of the acquisition, most of the second-quarter expenses were generated by old MELA.

During the second quarter, we wrote off a substantial portion of the MelaFind system inventory in anticipation of launching a new and improved version next year. The amount we wrote off was approximately $5.7 million and resulted in a charge to cost of goods sold of $4.8 million in the quarter.

We also recorded an impairment charge of almost $1 million related to units in the field, as we concluded that these units would not provide a financial return to us through the balance of the lease periods. These charges will significantly reduce our MelaFind cost of goods going forward and position us to recognize the full benefits of the new version once it is ready to be commercialized. We are maintaining a small stock of the current version for sale until the new version is ready for rollout.

Our engineering and product and development and our selling and marketing expenses both declined compared with the second quarter and the first half of 2014, even with the inclusion of some XTRAC and VTRAC expenses. And while general and administrative expense increased slightly in the second quarter 2015 versus 2014, that is attributable to transaction-related expenses of $0.5 million that we incurred in closing the acquisition.

In this year's second quarter, we recorded interest expense of $0.8 million, of which $0.25 million was in cash. Interest expense in the quarter related primarily to the 4% senior convertible debentures issued in July 2014 and which includes amortization of the related debt discount and deferred financing fees. We also recorded other income of $2 million, representing the change in fair value of our warrant liability, which is inversely driven by changes in the stock price.

The XTRAC acquisition was funded by debt, totaling $42.5 million, and consisted of $32.5 million of convertible debentures and $10 million of senior notes, both of which are secured with the Company's assets. In accounting for the convertible debentures, we determined that beneficial conversion feature was created in an amount of $27.3 million and recorded this as a discount to the debentures that will be amortized over the life of the financing.

The $10 million in senior notes were issued with warrants to purchase 3 million shares of the Company's common stock. These warrants were fair valued at $2.9 million and booked as a liability with an offset to the notes as a debt discount. This discount will be recognized over the life of the notes, which is approximately five months.

As a result of these factors, the net loss for the quarter was approximately $7.8 million or $0.97 per share compared with net income of $0.6 million or $0.12 per share in the same period of 2014. At June 30, we had cash and cash equivalents of approximately $5.6 million compared with $11.4 million at the end of last year.

Going forward, we are anticipating that the revenues from the XTRAC and VTRAC products will, beginning in the third quarter of 2015, support our normal operating activities. We expect to refinance the $10 million in notes with long-term debt prior to their maturity. And beyond that, we are not anticipating any additional financing at this time.

We expect that our future statement of operations will include significant amounts of non-cash charges, including depreciation and amortization of certain assets, stock compensation, and charges related to the treatment of our debt warrants. These charges will negatively impact our ability to report a profit in future quarters and will also disguise to some extent the Company's cash flow being generated by its products.

For this reason, we are adopting certain non-GAAP measurements that we will use in future quarters to measure cash flow from operations and to demonstrate our ability to generate cash from the business. We have outlined in today's press release and in the 10-Q we will file tomorrow the methodology we will use going forward to measure the Company's cash flow generated each quarter.

I'll now hand the call back to Mike for his closing remarks.

Thanks, Bob. So the transformation of the Company has begun. We are very excited about the prospects of the Company. And I think, operator, now will be a good time to open up for questions.

(Operator Instructions)

Swayampakula Ramakanth, HC Wainwright.

Good afternoon, Michael. Good afternoon, Robert. Thanks for taking my questions.

No problem, RK.

So on MelaFind, how should we think about this new unit -- the new version of the unit coming up that -- and can you help us understand a little bit more of this charge that you are taking. Does that mean that you are not going to promote any more of the old MELA until the new MELA comes on board?

Sure. No, we will continue to market the existing MelaFind product, but we have excess from what we currently need. So we reserve the inventory associated with that existing design.

The benefits of the new design -- and really, the existing design had a cost basis that just made the sale of that product prohibitive. There wasn't enough margin in the product to be able to sell through distribution. Really made it difficult to create a market that would create a profitable venture with that product.

So we've looked at the design of the product and cost reduced it significantly to the point where we believe we can get it to the level where we can work through a distribution channel network that's already in place on the XTRAC side of the business to start to be able to take advantage of some of the international markets that are out there with a sufficient margin to make it viable.

So the design will be different. Some of the components -- and these components have nothing to do with the actual way that the MelaFind works. That stays intact. All we're doing is taking the stand, the computer, the monitor, and basically value engineering that to the point where we can get the cost to a reasonable level.

We expect that we'll have that new product. It will have to go through the approval process, but not an approval process like the original MelaFind did. This is just manufacturing changes to the product.

So we're excited about getting that product ultimately available in 2016 and then being able to build while we're getting reimbursement in the US market be able to take advantage of the existing distribution network internationally that we're associated with.

So if you have this new version completed by first half of 2016, as you say in the press release, how long -- you just announced that the approval process is not as onerous as the first version had. What is management's idea of timeline in terms of getting it into the market?

So the expectations of the approval process through the FDA is that it's a 60- to 90-day process. So I think we'll have it in the market in 2016.

Okay. And that CPT core just basically doesn't have anything to do with what version of MelaFind you are going to be placing in the market, correct?

No, it doesn't. The CPT Code is specific to the diagnostic procedure of image guided diagnostics. So multispectral imaging. So the product itself doesn't affect that.

Okay. I just wanted to double check it. I think that that's [all PH] is. So on the XTRAC and the VTRAC business part of it, you are keeping all the commercial infrastructure around the XTRAC, VTRAC as it was in the hands of PhotoMedex. Is that right?

Yes, that's right. That's right. So the sales force is intact. The clinical support in the field is intact. The really important assets to that business, which include the call center operations and the advertising -- that handle the patients calling in from the advertising campaign that goes on and then the reimbursement group that communicates to the patients what their insurance coverage is and make sure that they are covered under their policy, those are real key assets to the business. And I think they are extremely highly valued by the customer base. So all of that is intact and will remain intact.

So you reported that in the second quarter, the revenues came in much higher than what was anticipated. But however for the year, you still maintain the same growth rate as what you said few weeks ago. Why are you trying to be conservative? Is there something that we really don't understand or is there something that's making you want to be conservative?

No, it's a good question. There's two different ways that I describe this. One of the things that you have to be aware of is that when I talk about the annual growth rate, a lot of times I'm talking about the recurring revenue stream because that's the high margin revenue stream that's the domestic placement of the XTRAC systems that drives the per-procedure fee. That growth rate sometimes exceeds the overall growth rate of the revenues because the remaining revenues are capital sales or parts and maintenance revenues that don't drive the same level of margin and revenue growth rate.

So I am comfortable in the guidance that I've stated right after we did the acquisition and continue to state today is that overall revenues on an annual basis should be mid to high teens. And but within that, the recurring revenue may grow greater than that. Did that explanation make sense?

One last question on MelaFind. I apologize for reverting back to MelaFind. In terms of costs, how much -- if you can do quantitative number that's fine. But qualitatively, what kind of improved gross margin are we talking about?

So the gross margin on the product really historically hasn't existed because the costs to get the MelaFind in the field versus the revenue stream it's been realizing has really a negative. So what this new design -- what we'll be able to create -- we'll be able to reduce the cost by something in the neighborhood of 75%.

It seems like a big number, but I already know that that can happen. So we're in the process of doing it. Some of the costs that were originally incurred with the MelaFind product were, in my view, extremely high and unnecessary and caused the product to be very difficult to ship, to move around.

All of those issues that existed with the current product will go away. This will -- the new product will be smaller; it will be able to be shipped very easily through a UPS or FedEx type of delivery anywhere around the world. That's a very expensive operation today with the way the design of the MelaFind system is. It's a very nice-looking design; it's just not very practical. So I think we can keep it looking very nice, but make it much more practical and significantly reduce the cost base of that product.

Thank you very much, gentlemen.

(Operator Instructions)

Jared Cohen, JM Cohen & Company.

My questions have been answered. Thank you.

Okay. Thank you, Jared.

(Operator Instructions)

I'd like to turn the conference back to Mike Stewart for any additional or closing remarks.

Sure. Thank you very much for the questions and for listening to the call. I think this is an exciting time at MELA Sciences: the significant assets that we've acquired; a recurring revenue stream; large and capable sales and marketing organization, including the patient advocacy call center and reimbursement group; manufacturing capability. All combine to create what we believe is a platform for continued growth. I thank you for your participation in the call and look forward to addressing you again with our third-quarter results.

This does conclude today's conference. Thank you for your participation.