Strata Skin Sciences Inc (SSKN) 2016 Q2 法說會逐字稿

Good day and welcome to the STRATA Skin Sciences second-quarter 2016 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Bob Yedid with LifeSci Advisors. Please go ahead, sir.

Thank you, Tom, 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 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 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 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 Skin Sciences urges you to carefully review and consider the disclosures found in its SEC filings, which are available at www.sec.gov and at www.strataskinsciences.com.

With those remarks, I would like now -- I would like to turn the call over to STRATA Skin Sciences's President and Chief Executive Officer, Michael Stewart. Mike?

Thanks, Bob, good afternoon, everyone. Welcome to STRATA Skin Sciences earnings conference call for the second quarter of 2016.

To start, let me summarize our financial performance.

STRATA's total revenues for the second quarter were $7.7 million. Recurring revenues for the XTRAC systems were down 8.8% year-over-year in the quarter and were up 10% versus the first quarter of 2016. Gross margin was 59.4% as compared to 55.1% in the first quarter of 2016. We generated positive adjusted EBITDA of $284,000, and improvement on both Q1 2016 and the prior year period. Cash on the balance sheet at the end of the second quarter was $2.8 million.

Total revenues for the quarter were less than we had previously anticipated. In the quarter, we had 18 net placements of XTRAC systems while XTRAC recurring revenues increased sequentially from the [first] quarter by over 10%. We identified several areas where we think there is potential for improvement going forward. Specifically, there are three areas we are targeting that we believe will boost recurring revenue growth back to a level that better reflects our capabilities.

First, the total number of XTRAC systems deployed in the United States as of June 30, 2016 increased to 748, up approximately 13% from the 664 systems in place at the end of the second quarter of 2015.

In the last two quarters, it has become apparent that more of the new XTRAC placements that have been made over the last year are growing at a slower pace than had been previously experienced with new placements. The reason this is occurring is that as the installed base has grown, many of the new accounts have little or no prior experience with phototherapy and are slower to adapt to this new technology in their practice.

Therefore, we will be devoting more resources to training dermatologists and their office staff in practices that have not used phototherapy previously, while the use and the applicability of the XTRAC system to patients with psoriasis as well as vitiligo and atopic dermatitis. We are now utilizing more of our clinical specialist time in training these practices with the goal of shortening the time required to train the practices on the use of the XTRAC system, including identification of the applicable patients for XTRAC therapy.

We think there is an opportunity to drive the launch process more quickly, and reach a higher level and greater consistency of procedures immediately following placement of the XTRAC system in the coming quarters.

Second, our media campaigns are underperforming, and that is an area that we are continuing to address. In the first quarter, we initiated a process to develop new enhancements to our patient awareness and media campaign that we believe we will reach more effectively with psoriasis and vitiligo patient populations in the United States. Those patient populations represent approximately 10 million psoriasis and vitiligo patients. It is even larger with the inclusion of atopic dermatitis, for which marketing has just begun.

The initial step in the media improvement process included the development of new advertising creatives to be used in television, radio and social media platforms. These creatives were finalized in June, and their implementation into the campaign began at the end of the second quarter.

As many of you know, STRATA employs a highly differentiated direct-to-patient marketing approach. Our approach consists of an ongoing advertising campaign across multiple media outlets, as well as web-based initiatives to increase awareness of XTRAC and drive perspective patients to our call center, or to contact us directly through the web.

We are excited about this new enhancements to our advertising campaign, as we believe the new approach will add to the success that was realized over the last several years in our direct-to-patient marketing program. Due to the timing of this deployment, it was too early for us to see sufficient returns in terms of new patient leads from our media spend in the second quarter.

As our new media is deployed in the third and fourth quarters of 2016 and into 2017, we are optimistic that our marketing investments will result in meaningful returns.

The third area we are addressing is the continuing and growing trend in the dermatology marketplace, whereby consolidation of dermatology practices is taking place through the purchase of individual practices by large corporate groups. An increasing number of the practices in our base of customers are participating in these buyouts, and as a result, it is necessary for us to enter into contractual discussions with these dermatology groups following their buyout of our customer.

While these discussions cause reevaluation of the benefits of the XTRAC business model to the group versus the individual dermatologist, we view this consolidation and the ensuing discussions as an opportunity to ultimately increase the deployment of the XTRAC in a greater number of practices owned by these groups. Initially, some of the corporate groups put an emphasis on the ownership of technologies. However, we believe a preference for an ownership model does not take into account the very real benefits that STRATA ultimately brings to its customers.

Specifically, how promotion of the XTRAC system that boosts patient awareness and drives through patient leads, as well as the value add services delivered by our sales and clinical nationals in educating the providers and office staff in order to grow adoption. We have been and are continuing to develop innovative offerings of the XTRAC system to these larger practices. We have been making progress with specific groups and will keep you up-to-date on developments in this area.

I would like to update you on some other important initiatives as well. In conjunction with our new advertisements and media, our external creative team and internal marketing group have dramatically reworked our XTRAC website. The new website facilitates 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.

Since the deployment of the new website in June, the number of web hits has increased appreciably over the former site. And, in our development area, we are continuing our work on important initiatives that I believe have the ability to positively impact our business in 2017.

First, we are working on a technology that would significantly reduce our costs of maintaining and servicing the XTRAC system. As background, the system requires service at certain intervals of use, including the replacement of the gas bottle when required. The new technology that we are developing will, we believe, strengthen -- 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, and we expect to start rolling this out in mid-2017 after completing development and testing in 2016.

Second, our proprietary technology we have developed will focus on the ability to measure the maximum dose of ultraviolet light that a psoriasis plaque can absorb painlessly. Delivering a greater dose of light to psoriasis is known to result in a faster time to remission.

The new technology that we have developed provides the ability to deliver the optimized amount of light painlessly to the patient. We are currently conducting a study at UCSF University of California San Francisco with technology to prove its efficacy. The early results are very promising.

By making our treatment more effective and convenient, we believe this enhance would increase the attractiveness of our XTRAC treatment to an even larger number of patients, dermatologists, and healthcare systems. We believe these specific initiatives would reinvigorate our sales growth into the second half of this year, and into 2017. And our team is hard at work on the implementation of each of these initiatives.

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

Thanks, Mike. Good afternoon everyone. Revenues for the second quarter of $7.7 million and recurring revenues were up 10.2% from the first-quarter 2016. On a year-over-year basis, recurring revenues were lower by 8.8% for the reasons that Mike has outlined earlier.

The XTRAC generates recurring revenues for STRATA from per-procedure fees. In the second quarter, recurring revenues of $6.1 million accounted for 78.7% of our total revenues. The balance of the revenues is comprised of international sales for both the XTRAC and VTRAC systems, and the associated parts to maintenance revenues.

As discussed in today's press release, the non-GAAP adjusted EBITDA for the second quarter was $294,000. Our adjustments included change in the fair value of warrants liability, which decreased by $3.2 million. Fair value of the warrant liability is remeasured each quarter according to the methodology described in our 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-cash presentation.

As of June 30, STRATA had a cash balance of $2.8 million. For the second quarter, we made a capital investment from approximately $120,000 for lasers placed in service. While the Company used a modest amount of cash in the first half of 2016, we expect our business to be cash neutral for the full-year of 2016.

We believe that we have sufficient cash resources to fund operations for the foreseeable future.

As a reminder, looking back to 2015, we generated positive cash flow in both the third and fourth quarters. The main driver of STRATA is our XTRAC business. In addition to the areas of improvement that Mike referenced, it is important to note that the first quarter as discussed in the last conference call is affected by the [resetting] of deductibles and co-pays.

While we believe this impact may have carried into the second quarter as well, we expect that both procedures and sales volumes will strengthen in the second half of the year, consistent with sales patterns of the XTRAC business has followed in the last -- past few years. Our 10-Q for the second quarter ended 2016 will be filed on Friday, August 12.

Now I turn it back to you, Mike.

Thank you, Christina. We are excited about the prospects for our XTRAC system. We address a large market in the United States of approximately 7.5 million psoriatic patients, of which an estimated 80% are mild to moderate patients, and which can be effectively treated with the XTRAC.

Some mild to moderate patients may be started on over-the-counter topicals, which are basically ineffective at addressing the psoriasis, and patients may go on to prescription topicals including steroids, where efficacy declines over time. We think that XTRAC is a logical next up in treatment for many patients, and is an effective treatment that leads to a remission that can often last six months or longer.

With approximately 25,000 patients treated in the last year, we are just scratching the surface of the 5 million-plus mild to moderate patients that we can potentially serve. Even for those moderate to severe patients with psoriatic arthritis, they require other therapies. The XTRAC is able to treat resistant plaques not cleared by those alternative drug and biologic therapies.

Our goal is to make our XTRAC treatment more attractive and convenient to both patients and dermatologists. Earlier, I mentioned that we have two R&D programs that can have a positive, important impact on the attractiveness of our treatment programs and the costs associated with maintaining our systems. Going forward, we believe these improvements will help us to meaningfully increase XTRAC's penetration.

In terms of guidance, 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. Given the lower-than-expected results in XTRAC recurring revenues of the first half of 2016, we are suspending guidance on recurring revenues until we have seen the positive benefits of the actions being taken to return the growth level -- to the growth level that we expect.

We continue to be enthusiastic about our business. STRATA has a robust business with solid capabilities and sales, an enhanced direct-to-patient marketing program, and a current customer base of 748 placements that reaches over 3,000 providers in clinical dermatology. We believe our technological expertise and 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 derm market.

We look forward to updating you on our progress as we continue to execute on our initiatives and strategy, and with that I will open the call for questions. Operator?

(Operator Instructions) Jared Cohen, JM Cohen & Company.

Just a few questions here. I think you mentioned it, but with people who have I guess the older system, now their recurring revenue there, they were -- procedure growth was down 8.8%?

No, overall, recurring revenues were down 8.8%. One of the contributing factors to that was that those newer placed customers with systems that have been placed over the last basically year and a half are performing at a level that is not up to the same par that we have had with former customers. So the (multiple speakers).

Right, that's what I meant. To trying get the former customers who have older systems, who had --

Yes, so there is a mix there. There is accounts that obviously improved in the quarter. We had a subset of accounts that did exactly what we thought would happen, where they get affected by the resetting of deductibles and co-pays in the first quarter, and they rebounded right back in the second quarter.

But I can't say that it was across the board with all accounts. So we had some difficulties across the board in the accounts with a level of utilization.

Okay, so -- but I was trying to get an idea of some of your older accounts, say, that are older than two plus years, what was their procedure growth? Or on par with what you thought, or (multiple speakers) give or take?

(multiple speakers) the detail of each of the accounts or anything like that. But in terms of -- there was a good portion of the accounts that responded extremely well after the anticipated decline in the first quarter came right back into the second quarter. So, we are pleased with how many of the accounts performed, but not pleased with how the new placements have been performing.

All right, can you give us an idea so far in the third quarter overall of your business? It's almost 45 days into it.

Really can't do that, Jared. We can't be -- we can't forecast our revenues.

Okay. On a different topic, because I noticed a well-known hospital in New York, they're advertising that they can do a full body scan for melanoma using 3-D cameras, theoretically in eight minutes, and then go into more detail if they find something. I wonder if you've seen that advertisement and so forth, and how it might relate to the MelaFind and so forth.

I did not see that particular advertisement, but I am very much aware of many of the -- there's alternatives for melanoma detection that are out there. There are full body 3-D camera approaches to this that try to isolate down to the few -- typically few lesions that are questionable, and then additional work has to be done on those few lesions.

But I have not seen that one in particular.

I will tell you, it's Sloan-Kettering, he said says they could do this, and I would assume it's not something like that is not FDA approved or they will have to go to the (multiple speakers)

I'm not sure exactly what system they are referring to. I've been to Sloan-Kettering's facility and I've seen the setup that they have there that really utilizes -- if it's the same thing I'm thinking of, and I'm not sure it is, it utilizes cameras to do a 360-degree picture rendition of the patient's body that isolates down to individual skin lesions. So, that's actually been around for some time. It may be that they just started advertising it, but it's not one that I am particularly familiar with, that advertisement.

No, maybe that is it, that you have to stand up for eight minutes as they do that type of testing those types of pictures?

That's my understanding.

Right. Now I would assume that's not reimbursable or is it?

Jared, that is outside of my scope. I don't know what the reimbursement is related to those procedures. I know there's a few companies out there that offer those types of camera renditions of lesions, but I don't know -- I'm not familiar with the reimbursement specifics to those types of procedures.

All right, I was just wondering because I would think that would add validity to the MelaFind in terms of its value to the dermatological field.

The MelaFind is an interesting technology that is effective at identifying at-risk lesions that could be melanoma. It's a product line that we are continuing to try to find the real value in that product.

But as I've mentioned on previous calls, it's a product line that we are not emphasizing today. It is something that we are trying to create value out of, but most of the emphasis today in the Company is on the XTRAC.

Okay, all right, thank you very much.

Sean Lee, H.C. Wainwright.

I think before you mentioned that your goal was to have about 20 machine placements per quarter. Is that still the goal right now?

Yes, our goal is to do 25 net placements a quarter.

25, okay.

25; so we fell short of that in the second quarter by seven units. I think the demand is still there, it just was a slow quarter. I still think that we are -- have a lot of opportunity to achieve what our placement goals are for the year.

Okay, I see. Great. For the gross margins this quarter, they improved quite a bit compared to the first quarter. Is that mostly because of revenue mix or what kind of trend can we expect going forward?

Yes, the gross margin moves really because the cost associated with the XTRAC recurring revenue are semi-fixed cost, as that recurring revenue growth, and we did grow over the first quarter by about -- a little over 10% in recurring revenue, the gross margin is going to naturally move positive -- more positively as that revenue stream grows.

So going forward, as we continue to get revenue growth in the XTRAC recurring revenues, we should continue to see further improvement in the gross margin.

I see. And one final question. On the higher dose of UV light that you've been testing, that you mentioned, that sounds very interesting. What kind of timelines can we expect from the project? Is that something that's one year out or three years out?

That's a great question. I think we are trying to move the initial study through to its completion. I think, following that, we will probably enhance that said it with a couple of more. I think the secondary studies can be done more quickly.

I expect to be able to start taking those studies and hopefully getting them published within a reasonable period of time. And then from that point, the marketing plan will be fully developed and we will start to figure out how we introduce this into the market.

It's not something that will impact 2016. It's potential that it could impact the latter part of 2017, but we are still working on those marketing plans to develop. There's a few pieces there with the publication of studies in getting onto podiums that their community becomes aware that is not 100% in our control.

So we will be pushing to move that into the marketplace as it makes sense and we do think that it's a phenomenal development and has great potential for this technology.

Okay, so we can expect to see it potentially as early as next year, then?

We are going to look to do it as quickly as it can.

All right, thanks Mike, that's all I have.

(Operator Instructions) Patrick Dolezal, LifeSci Capital.

First one is what time horizon do you anticipate for the new marketing strategy to begin to have an impact on your patient lead conversion as well as kind of the placement of systems?

That's a great question. As you implement these changes to the media strategy, it does take some time to get it out into the marketplace and start to develop the lead. We are going to be -- we have already started to put the new creatives into the market. We started that towards the end of June. We will continue it through the third quarter.

The lead timeframe, though, from when you do the advertisements to when they actually result in an actual patient entering treatment can be as much as several months. So with the activities that we do in the third quarter, I would expect to start seeing results in the fourth quarter and so on. What we do in the fourth, we see the following quarter.

Great, thank you. And then for the newly placed XTRAC systems, how long do you think it will take for the new training programs to begin help ramp up the productivity and revenues of those practices?

Yes, so another good question. We've already made the changes in the organization to get more resources placed on the launch process and have done -- taken several steps to enhance that launch process and training process that goes on. So we are already out there doing that now with the placements that we are implementing that were made in the second quarter.

So I expect in those accounts to see an improvement relatively quickly. And I expect to see it basically every quarter going forward as those new accounts are launched in a better way. You are not successful with every launch, but we should be more successful with the launches than we were in the first and second quarter.

So I do expect to start seeing some improvement in that area in the third quarter.

Great, thank you. That's all I had today.

That concludes today's question-and-answer session. At this time I will turn the conference back to Mr. Michael Stewart for any concluding remarks.

I just want to thank you all for your participation on the call today and I look forward to updating you on our progress following the third quarter. Have a good night. Thank you.

This does conclude today's conference. Thank you for your participation. You may now disconnect.