Strata Skin Sciences Inc (SSKN) 2016 Q1 法說會逐字稿

Good day and welcome to the STRATA Skin Sciences first-quarter 2016 earnings call. Today's conference is being recorded. (Operator Instructions). I would like to remind everyone that this conference once again is being recorded. And I would now like to turn the conference over to Mr. Bob Yedid of LifeSci Advisors. Please go ahead sir.

Thank you Stephanie and good afternoon everyone. This is Bob Yedid of LifeSci Advisors. 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 words such as expects, contemplates, anticipate, plan, intend, believe, assumes, predicts, and variations of such words or similar expressions that predict or indicate future 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 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 SEC. STRATA Skin Sciences urges you to carefully review, consider the disclosures found in the SEC's filings which are available and at sec.gov and at STRATASciences.com.

I will now turn the call over to STRATA's President and Chief Executive Officer Michael Stewart. Mike?

Thanks Bob. Good afternoon everyone. Welcome to STRATA Skin Sciences' earnings conference call for the first quarter of 2016. I'm pleased to report on the results for the first quarter of 2016. I will update you on our business and Christina will review the financial results for the first quarter in more detail.

To start, I would like to review our summary of financial information. STRATA's total revenue for the first quarter were $7.6 million. Gross margin was 55.1%. Cash on the balance sheet at the end of the first quarter was $3.1 million.

As we discussed on our last quarter we call, sales in the first quarter are typically lower for the domestic XTRAC business as patients' deductibles and co-pays are reset under many health plans in the early part of the year. This first quarter of 2016 was somewhat lower than we expected. The deductible resets typically cause volumes to be softer in the first quarter and we expect volumes to strengthen in the balance of the year as they have in previous years.

The total number of XTRAC systems deployed in the United States as of March 31, 2016 increased to 730, up 14.1% from 640 systems at the end of the first quarter of 2015. Under our recurring revenue program, in excess of 3,000 providers have access to the XTRAC system. In the first quarter of 2016, we added 12 net systems. Since the implementation of the direct-to-patient marketing model in 2012, the number of systems placements has increased by over 170% from 268 systems at the beginning of 2012 to the 730 that we have at the end of the first quarter.

STRATA's sales and marketing approach is highly differentiated. In addition to expanding the base of dermatologist customers under our agreements, our direct-to-patient marketing approach consists of an ongoing advertising campaign comprised of TV, radio, social media, and Web-based initiatives to increase awareness and drive prospective patients our call center or to contact us through the Web.

I would like to highlight STRATA's marketing initiatives that we believe will enhance our historical approach and have a positive impact on our business. First, we've been creating a new TV commercial for the XTRAC system. Our goal for the new commercial is to have more of an emotional appeal to prospective patients rather than a purely consumer-oriented DTC ad. The new commercial emphasizes the positive aspects of psoriasis patients' lives after treatment with the XTRAC. We are optimistic about this new commercial as it represents an important improvement in our direct-to-patient marketing and will start broadcasting in the beginning of June.

In conjunction with the timing of the new ads, we've also been working with our external creative team and internal marketing group in reworking our XTRAC website. The new website will facilitate the patients' learning about XTRAC and how the treatment can help them with their dermatological conditions in much the same way that our patient advocates accomplish this.

We believe it's important to have the ads and the website reflecting the same message in facilitating the approach of bringing the patient into a consultation with one of our physician partners. And immediately following these efforts, STRATA will be implementing a more robust social media approach as part of our marketing that we have had historically, all tied into the same marketing materials and concepts.

The growth of XTRAC revenues will continue to drive the profitability of the Company. Our sales and marketing approach has a compounding impact for STRATA. We seek to grow the number of placements and participating dermatologists, while STRATA's direct-to-patient advertising campaign creates awareness and identifies new potential patients. We funnel these patient leads to our clinical dermatologist customers, which increases their system utilization. We believe these combined strategies have and will continue to generate both revenue and EBITDA growth, including our projected growth for full year 2016.

From a development standpoint, there are two significant initiatives that our R&D group is working on that I believe have the ability to positively impact our business in 2017. First, we are working on technology that would significantly reduce our cost of maintaining and servicing the XTRAC system.

As background, the XTRAC system requires certain service at certain intervals of use, which includes replacing the gas bottle when required. The technology that we are developing we believe will significantly lengthen the time between gas bottle exchanges, thereby reducing the consumption of gas and increasing the mean time between required service visits. Early indications are that this change would add 1.5 to 2 percentage points to our gross margin. We expect to start rolling this out in mid-2017 after completing development and testing in 2016.

The second technology that we have developed involves the ability to measure the maximum dose of ultraviolet light that a psoriasis plaque can absorb painlessly. The ability to safely and painlessly deliver a greater dose of light to the psoriasis would result in a faster time to remission. We are currently conducting a study at the University of California San Francisco with the technology to prove its efficacy. The early results are very positive. We believe this enhancement would increase the attractiveness of our XTRAC treatment for psoriasis to an even larger number of dermatologists and patients. We look forward to giving you updates on both of these initiatives in the coming quarters.

As part of our clinical and marketing efforts this past year, we attended three important trade meetings, the 2016 American Academy of Dermatology meeting in Washington DC in early March, the South Beach Symposium in February, and the Winter Clinical Dermatology Meeting in January. Our presence at these meetings led to another of new business leads for the XTRAC system, consistent with our expectations, and had the added benefit of introducing the STRATA Skin Sciences name to the dermatology community.

In addition to several presentations on STRATA's technologies within these meetings, we were also able to participate in a panel discussion and industry presentations that exposed our Company branding as well. As we discussed on the last quarterly call, we rebranded the Company to reflect changes, including our new senior management team that is now directing the Company, and the acquisition of the XTRAC business that was completed in June of 2015.

At this time, I would like to turn the discussion over to Christina Allgeier, our Chief Financial Officer, to review the first-quarter financials. Christina?

Thanks Mike. Good afternoon everyone.

Revenues for the first quarter were $7.6 million and recurring revenues were up approximately 2.8% from the first quarter of 2015 based on the comparable financial results reported by PhotoMedex. As a reminder, we acquired the XTRAC business last June and therefore Q3 2015 was the first full quarter of activity for the acquired business. The XTRAC generates recurring revenues for STRATA on a per procedure fee. In the first quarter, recurring revenues of $5.5 million accounted for 72.5% of total revenue.

The balance of the revenues was comprised of international sales of both the XTRAC and the VTRAC system and associated parts and maintenance as well as sales of MelaFind products.

As discussed in today's press release, the non-GAAP adjusted EBITDA for the first quarter was a negative $285,000. This includes adding back depreciation and amortization expenses, cash and non-cash interest expense, and income taxes.

Other adjustments include a change in fair value of warrants liability of $2 million and stock-based compensation of $170,000. The fair value of the warrant liability is remeasured each quarter according to the methodology described in the footnotes of our 10-Q and 10-K filings. As our operations include significant non-cash charges, we believe it is relevant for our investors to consider our non-GAAP presentation.

As of March 31, STRATA had a cash balance of $3.1 million. For the first quarter, we made a capital investment of approximately $200,000 related to spikes in service. While the Company used cash operations in the first quarter, primarily to satisfy inventory purchases associated with the acquisition, we expect to generate positive cash flow for the full year of 2016 and we believe that we have sufficient cash resources to fund and grow our operations for the foreseeable future.

As a reminder, looking back at 2015, we generated positive cash flow in both the third and fourth quarters last year.

The main driver of STRATA is our XTRAC business. XTRAC's recurring revenues have significantly grown over the last four years. As Mike mentioned earlier, recurring revenues are seasonally softer in the first quarter as patients' deductibles and co-pays are reset under many health plans in the early part of each year.

Recurring revenues for the XTRAC in the first quarter of 2016 were up 2.8% versus the prior-year period. We expect that both procedures and sales volumes will strengthen in the balance of 2016.

In terms of guidance, we continue to expect year-over-year recurring revenue growth in midteens and we expect positive non-GAAP adjusted EBITDA to increase in 2016 driven by revenue growth and the impact of 2015's and early 2016's cost reduction efforts.

Our 10-Q for the first quarter 2016 will be filed on Monday, May 16. I will turn it back to you Mike.

Thank you Christina. We are enthusiastic about our business. We have a robust business with strong capabilities in sales, an enhanced direct-to-patient marketing program, and a current customer base of 730 placements that reaches over 3,000 providers in clinical dermatology. We believe our infrastructure positions us as a best-in-class player in medical dermatology and a partner of choice for companies with emerging technologies due to STRATA's ability to quickly scale and exploit unmet needs in the medical dermatology market.

We look forward to updating you in the future as we continue to execute on our plan and strategy and we are looking forward to an exciting 2016. With that, let me open the call for questions. Stephanie?

(Operator Instructions). Anthony Vendetti, Maxim Group.

I just wanted to go over a couple of financial things first. The number of shares used to calculate the diluted EPS, what is your total number of diluted shares as of March 31?

The diluted shares arises related to the warrants that the fair value change is calculated on. So you wouldn't normally see diluted per-share on a law. So the add-back is about close to 3 million shares and it relates to the warrants that the fair value change is going through the P&L.

Sure, sure, no, I understand that. I was just wondering if let's say you were profitable, what would be the total diluted share count at this point?

At this point, under the treasury stock method, the total share count is about 57 million.

About 57 million, okay. And then I know XTRAC is driving most of your business at this point. I was wondering if you could give us any update on MelaFind.

Sure. So, as you know, on the last call, Anthony, we had gotten a positive response from the FDA on the inclusion of the classifier score as an output for the MelaFind. That helps us. It doesn't solve all of the problems with the MelaFind yet. We are working on the cost reduction of that product, and we've got some activities surrounding that that we are trying to get to to get the total cost of that system down to an acceptable level.

The biggest problem beyond those two things is the -- is reimbursement. And we need to have a significant road ahead of us relative to reimbursement. So I don't see Mela -- while we continue to sell units, and I think we sold five in the first quarter, I don't expect significant sales from the MelaFind this year. So we are continuing to look at ways with MelaFind to realize the value of that technology.

Okay. And just in terms of what the expectation is for the -- I know there's the full launch commercial here. How much do you believe this new commercial can drive utilization at your current installed base? Is there a goal you are looking for in terms of ROI here?

I don't have a specific goal for ROI. I measure it in terms of number of leads that we can generate with that commercial. Today, we are generating about 3,000 leads a month through the old commercial. It has appeared to get a little bit tired, that old commercial, which is why we are looking to spruce it up and create a little bit different appeal than what's been running for the last four years. So our expectation is that we can drive a greater number of leads through this new approach. And it's not really just the commercial. It's also the commercial tied into having a website that facilitates the patients that see the commercial go to the website. Today, the XTRAC website doesn't really facilitate that patient. It is more of an informational website but not one that helps them drive through to an appointment with one of our partners. So, the new website will launch at the same time with the new commercials and be a completely new experience for the patient that I think will much more effectively walk them through the process. So our expectation is to drive a significantly larger number of leads through this process.

Okay, last question and then I'll jump back in the queue. Right now, your 3,000 leads per month, what is the conversion into an actual appointment at this point?

So from the 3,000 leads, we get about 700 appointments, and then from those 700 appointments, there's about a 60% conversion into an actual EXTRAC treatment.

Okay, great. Thank you.

Jared Cohen, JM Cohen & Company.

You have most of my questions, but how many -- what was your growth rate in procedures year-over-year?

So year-over-year first quarter of last year to first quarter of this year, the number of procedures was about a 3% change year-over-year.

Okay.

Not big. We go through this readjust -- adjustment that happens with insurance policies where deductibles get reset, co-pays get reset, patients go out of the treatment either by the physician's or by the patient's choice until they understand the economics of their new deductibles. And then shortly after that, they start to come back in. So you see a significant drop in the first quarter and then an increase back up going forward.

Okay. Now, do you break down the procedures by age in terms of do you have a particular -- a lot get done with adolescence or not?

So, it's an interesting question because this is one of the few treatments, especially for more severe patients, that is approved for adolescents. So I don't break that down in terms of knowing how many of our patient base is represented by people under the age of 18, but it is a treatment that can be used on adolescents.

Okay, because I was wondering if that is an interesting population base since a lot of adolescents do have -- go ahead, sorry.

No, I'm sorry, I agree with you. And I think that's one of the things that we are trying to achieve with the new creative is to create -- is to get a -- move the average age of the patients that we're driving through the media to a lower age group. We did look at what the average age of the people we are driving through the current media is, and it's high. And I think some of that has to do with the media itself and, to a certain extent, some of the places where we place the media. So with the new ads, we are looking at new media placements as well, trying to drive to a younger audience.

Okay. I guess with adolescents, it would come down also to convincing the parents that it is the right procedure to do also.

Sure, sure. The other -- not just psoriasis either because we also treat vitiligo, which is devastating to children, and we need to see greater uptake in a level of vitiligo treatments that we are doing. Today, only about a half of the insurance companies cover vitiligo as a cover of treatment. We are working on -- we have some efforts underway working on trying to expand that coverage for vitiligo is well. But devastating for children.

Okay. That you very much.

(Operator Instructions). Adam Evertts, LifeSci Capital.

For the initiative to limit gas use and sort of extend service intervals, how long do you think this will take to roll out and logistically, how do you do that? Do you need to bring a new component to each dermatologist maybe during regularly scheduled visits or how do you do that?

So the way we've developed this, or our R&D team developed this, was as a field exchangeable product. So we can go out and as we are doing service on the devices that are placed with our existing customers, we can upgrade that system to incorporate the changes necessary to manage the gas better than it is being managed today. So the roll out will take place once we start implementing it in about mid-2017. It will start to roll out from that point, and it will take us roughly six to nine months to get that placed into the installed base. Maybe -- six to nine months should cover it. So it will take a year to get it fully implemented and start to see the full impact of what the reductions would be but -- so I would look for the change in the gross margin to really be effective more in the late 2017 time frame.

Great. That's helpful. And you mentioned I think the net of maybe 12 new systems placed. I guess my question is how long does it take for a clinical derm that receives an XTRAC device to start producing what you would consider to be meaningful revenues?

It can take a short period of time, and in some cases it takes a longer period of time. The issues that have to be worked out with these individual practices include staffing issues, patient recruitment issues. If we can get everything operated the right way and we have a launch process that we go through that tries to orchestrate all that so that we are getting out of the gate relatively quickly, that works really well in about half of the launches that we do, and the other half have to be improved. So one of the initiatives we have is to put a launch process together that actually tries to drive this new customer up to a higher level in a much faster way than we do today.

Great. And maybe one last one. In terms of the new commercial, what sort of amount of your target customers do you reach with the television? Is it the majority of people who have access to an XTRAC or a smaller portion? Some details there?

So, we do our advertising in a mix of national advertising and local advertising, so we really do cover all of the areas. In fact, we cover areas where unfortunately we don't have XTRACs. And then we track those areas and when there is a significant number of potential patients in an area that we don't have an XTRAC in, we monitor that and then go and target a new customer in that particular area. But we really can reach the entire US with our advertising. But then we take the clusters of accounts where we have significant numbers of accounts in a media market or a geographic area, and we augment that national advertising with local, both television and radio advertising.

Great. Thanks a lot.

And there are no further questions at this time. I would like to turn the call back over to Michael Stewart for closing remarks.

So thank you very much for participating in the call. I look forward to updating you over the next several quarters on the rollout of our new developments and on the business success as we go forward. Thank you very much for the call.

This concludes our conference. Thank you for your participation.