Strata Skin Sciences Inc (SSKN) 2017 Q1 法說會逐字稿

Good day, and welcome to the STRATA Skin Sciences' First Quarter 2017 Earnings Conference Call. Today's conference is being recorded. (Operator Instructions)

At this time, I would like to turn the conference over to Mr. Bob Yedid with LifeSci Advisors. Please go ahead, sir.

Thank you, Brian, 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, assume, 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, are inherently subject to significant known and unknown uncertainties and changes in circumstances, many of which are beyond our control. There can be no assurant that our -- 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 SEC. STRATA Skin Sciences urging you -- urges you to carefully review and consider the disclosures found in its SEC filings, which are available at www.sec.gov and the company's website.

It's my pleasure to turn the call over to Frank -- STRATA's President and Chief Executive Officer, Frank McCaney. Frank?

Good afternoon. Welcome to STRATA Skin Sciences' Earnings Conference Call for the First Quarter of 2017. I'm pleased to discuss the execution of our strategy and progress of STRATA's business plan.

As we've 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. Derma and plastic surgery, like many medical office practices, are continuing to consolidate. Our goal is to position STRATA as a business partner, one that can help practices and physicians be successful. We believe we will have best-in-class offerings that present both revenue opportunities and outstanding patient outcomes. Our goal is to offer better treatment methods, better outcomes, better patient service and better practice efficiency and value.

To implement our strategy, we're seeking to, first, expand STRATA's business through disciplined business development activity that leverages our existing call point and our operational infrastructure. In mid-March, we announced a licensing agreement to be the exclusive U.S. distributor for best-in-class aesthetic device sold under the brand-name Nordlys from Ellipse USA. Nordlys employs the latest advancement in cosmetic and medical technology and offers a superior patient, provider and practice experience.

The Nordlys has 24 indications cleared to date by the FDA. It is a single compact platform that combines 3 different light-based technologies. First, Selective Waveband Technology is the latest advancement in the field of intense pulsed light, or IPL. Selective Waveband uses a fraction of the energy of comparable products, has less pulses and is less painful for patients. Recent clinical studies have shown superior results to pulsed-style lasers in the treatment of rosacea and Port Wine Stains. This enables a practice to eliminate pulsed-style lasers or other standalone vascular devices.

Second, Nd:YAG laser, which is engineered to be more predictable and more comfortable for patients than other lasers. Integrated cooling helps make Nd:YAG a technique that can, once again, be used reliably to treat facial veins.

And third, the Nordlys offers a laser resurfacing device, the Frax 1550, with non-ablative, fractionated technology. This Frax laser has 2 unique features, a roller applicator and an adjustable treatment scan width. These features allow the user to follow the contour of the skin and avoid the stamping effect often seen with competing fractional lasers. And because of the better use of power, the Frax 1550 treatment results in less days of skin redness than other treatments.

Nordlys users include leading dermatologist, plastic surgeons and cosmetic physicians with over 6,000 placements worldwide. To date, Nordlys had a relatively small marketing effort in the U.S. We're excited to put the differentiated Nordlys laser into the hands of STRATA's 23 sales reps, along with the 4 sales reps that joined us from Ellipse USA. STRATA salespeople currently are undergoing training so they can effectively sell the Nordlys. In addition, we will be adding highly qualified personnel to support the marketing effort.

Under the terms of this agreement, STRATA will be the exclusive distributor of Nordlys systems for 3 years with an automatic extension out to a 5-year term if minimum sales targets are achieved. We will pay an annual license fee as well as a commission for each system sold.

We now also launched the Nordlys at the American Society for Lasers in Medicine and Surgery meeting, which took place in San Diego in early April. At that meeting, Dr. Vic Ross, a renowned dermatologist, made a podium presentation on the Nordlys. Dr. Ross discussed the use of our laser, presented the results of his study utilizing the Nordlys novel Frax 1550 with the rolling applicator head to improve the effects of aging on facial skin.

With effective sales and marketing using internal and external resources, we see a substantial commercial opportunity for Nordlys. STRATA's forecasted sales of the device and accessories to be in the range of $4 million to $4.5 million from its introduction in April until the end of this calendar year. We estimate Nordlys will contribute between $500,000 and $600,000 in non-GAAP adjusted EBITDA. Immediate contribution to our non-GAAP adjusted EBITDA underscores the inherent leverage of our existing call point and operational infrastructure as we license our acquired complementary dermatology and aesthetic products.

During the first quarter, we also added the STRATAPEN product, which we have licensed from Esthetic Education, the product's original equipment manufacturer. This is a highly advantaged aesthetic product that is specifically being marketed for micropigmentation, the FDA-approved indication for this device. The STRATAPEN uses both the patent-pending Biolock cartridge, which prevents patient fluid and tissue from entering the device as well as a patent-pending removable and autoclavable nosecone. These are tremendous patient features built for safety and are unique in the market. This device is another product that leverages our existing call point and infrastructure.

Our second strategic goal is to improve our current business, principally the XTRAC. We have a proven recurring revenue model with XTRAC with recurring revenue of over $5.7 million or 79% of first quarter sales. This is driven by utilization of the 791 XTRAC systems in place under this program. We've implemented several placement programs to meet customer needs and volumes. Over time, we believe that these programs will grow STRATA's business, especially by retaining the high-volume users of XTRAC. We are also focused on increasing utilization of underperforming placements, since we believe a significant portion of our customers are below target utilization levels.

Our sales reps are being incentivized to work with our existing customers to improve the understanding of the value of XTRAC to their practices. As part of this effort, we're 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 of these are proved indications for the XTRAC that have not been formally marketed to date. We will use social media and Internet marketing in a targeted manner to advertise XTRAC as an effective treatment for these other indications.

And to increase the productivity of our new placements, we're working with dermatologists on bringing their XTRAC systems to full utilization in their practices, quickly. Our goal is to help these new customers integrate XTRAC into the practices and gain experience in how the XTRAC system can be applied effectively to not just psoriasis, but to a number of different skin conditions.

Our third strategic goal is to expand the market for XTRAC, principally by adding proprietary treatment protocols, which require far fewer patient visits. The Optimal Therapeutic Dose therapy is in development, and we have selected 3 clinical sites for trial. We're in the process of setting up that clinical trial. Our patent-pending technology for this new protocol will enhance the physician's ability to bring this therapy safely to a growing market of patients. We believe an optimal dose therapy protocol of just 3 to 4 visits that offers much faster resolution of psoriatic plaques and greater convenience to patients has the potential to dramatically increase our market share.

In operations, we continue to release product enhancements to decrease the number of service calls and preventive maintenance visits on lasers in the field. We are already starting to see benefits, such as reduced gas consumption and fewer service calls. We believe that by the end of the year, we will be at a run rate of 30% to 40% fewer service visits.

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

Thank you, Frank. Good afternoon. Let's discuss the first quarter of 2017. Revenues for the first quarter of 2017 were $7.3 million compared to revenues for the first quarter of 2016 of $7.6 million, a 4% decrease. Domestic revenues were up from the prior year period. However, international sales were lower. We believe that the international sales will come back on track in the second quarter.

Our XTRAC business generates recurring revenues from per procedure fees. In the first quarter of 2017, recurring revenues of $5.7 million were up 3.7% from the prior year period. Recurring revenues accounted for 79% of our total revenue. The balance of the revenue is comprised of international sales of both the XTRAC and VTRAC systems, the associated parts and maintenance revenue and a few targeted domestic system sales.

For the domestic XTRAC business, based on our experience, revenues in the first quarter are typically the lowest of the year as patients deductibles and co-pays are reset under many health plans in the first few months of each year. The deductible reset typically cause volumes to be softer in the first quarter, and we expect volumes to strengthen in the balance of 2017 as they have in the previous years.

Gross margin was 62.4% in the first quarter of 2017 as compared to 55.1% in the first quarter of 2016. This increase in margin is related in part to the products enhancements previously discussed and improved efficiencies in manufacturing. Additionally, the international sales have lower gross margins as we sell through a mass distributor. The changes in the level of international revenues affect the overall gross margin.

As stated in today's press release, the non-GAAP adjusted EBITDA for the first quarter of 2017 was $900,000. This represents a significant increase of $1.2 million from the negative $300,000 of non-GAAP adjusted EBITDA in the first quarter of 2016.

The company had net placements of 16 XTRAC systems in the first quarter. It's about 1/3 higher compared to prior year quarter and higher than the average pace of net placements for the calendar year of 2016. At the end of the first quarter 2017, there were 791 XTRAC systems in place versus the 775 at the end of 2016 and 730 at the end of the first quarter of 2016. That's an increase of 8.4%, year-over-year.

As of March 31, 2017, STRATA had a cash balance of $3.8 million compared to $3.9 million at December 31, 2016. So first quarter of 2017, we generated positive cash flow from operations of $800,000. Positive cash flow is especially notable as we made an investment of about $600,000 in the inventory for the new Nordlys business. We expect to continue to generate positive cash flows for calendar year 2017, and we believe that we have sufficient cash resources to fund and grow our operations for the foreseeable future. The 10-Q for the first quarter of 2017 will be filed on Monday, May 15.

Finally, the company affected a 1 of 5 reverse stock split effective April 6, 2017. The purpose of the split was to avoid delisting from the NASDAQ Capital Market because our stock had been trading at a bid price below $1 per share for some time. Since April 7, our stock has traded at closing prices of $2.70 per share or higher. On April 24, NASDAQ notified STRATA that the company had regained compliance.

Now I'll turn the call back to Frank for closing comments. Frank?

Thank you, Christina. In summary, our team will be focused on current and new initiatives to, first, expand our business by adding dermatology and aesthetic products selectively to our product offerings and leveraging both our solid base of relationships with dermatologists as well as STRATA's operational infrastructure. I believe that STRATA already has a sales and marketing organization in place that could support 2x to 3x our current sales volume by adding differentiated derm and plastic surgery products.

We're excited about adding the proprietary Nordlys system and the differentiated STRATAPEN to our product line. The forecasted revenues and non-GAAP EBITDA for the Nordlys laser alone are substantial and, we believe, are indicative of the opportunities which exist so we can leverage the company's market position. STRATA's team is in the early innings of this game, and we continue to seek other business development opportunities in a disciplined fashion.

Second, improve our current business, including retaining our high-volume users, driving higher utilization per unit and reducing our cost of supporting lasers in the field.

And then third, expand the market principally by commercializing the optimal dose therapy after the completion of clinical testing and regulatory approval as well as expanding the awareness of our other indications that can be treated effectively with the XTRAC.

I'm enthusiastic about positioning STRATA as the valued business partner of choice for dermatology and aesthetic medicine practices. I look forward to reporting to investors and analysts on the growth of our new products and other initiatives in our upcoming calls.

With that, let me open the call for questions. Operator?

(Operator Instructions) And we'll take our first question from Joe Pantginis with Rodman & Renshaw.

Two questions I want to focus on. First, for Nordlys. You have over 6,000 placements worldwide. And if my notes are corrected, I believe there's about less than 400 or so in the U.S., and that is an area you said you wanted to focus on. So what would you consider to be sort of the primary low-hanging fruit in starting to build the U.S. market for Nordlys?

Yes. So I think there's a couple ways to this. There's a significant number of dermatologists, in particular, that has large laser medicine practices and have invested heavily in a number of lasers. The advantage of Nordlys is it's a kind of a 3-in-1 system. So it could, theoretically, take the place of multiple lasers. However, I think the low-hanging fruit is for new people in dermatology and especially in plastic surgery getting into laser medicine. Plastic surgeons, for a long time, did nothing but surgery and now see laser medicine as a way to greatly expand their practices and do so profitably. This is an ideal first product for them to have since it does so many different things. So our strategy, and really, we're only about a 1.5 month into this, is to really -- to find the plastic surgery market to go after, to look into dermatologists that have been focused on medical dermatology and now want to get into aesthetics and be their first laser that they get -- getting out. The nice thing about the product is although there's a small number of placements in the U.S. -- there should really be, on a relative medical device basis, probably 3,000 instead of less than 400 -- is that the current user list for Nordlys is an all-star list, so very, very reputable, credible, well-respected people using the product, and I think we can use that to our advantage in gaining some traction and market share.

That's actually very helpful. And my next question, I guess, is a little more on the clinical front. You described a little bit in your prepared comments about an upcoming clinical study. I think you said you had the protocol in hand. Can you take a step back a little bit and say whether you -- have you met with the FDA yet and they basically gave guidance on this upcoming study? And can you provide any more details on the actual study?

Sure. Thank you, Joe. We have not met with the FDA yet. We had, I'd say, better guidance that said that we would be best served by having prototypes of the product we're going to use in the trials, and we've been refining that to a better and better product. So we've kind of held off going to the FDA until we had it. I think we passed the final test just last week that we wanted to get through to show that we had the right product working and doing the right things, and we are preparing our submission to FDA to set up that meeting. So this trial, what we're going to do is just 15 patients in this trial. There's a large body of anecdotal evidence of what we're doing will work. There's preliminary evidence that it will work. But we want to do it in a controlled way and multiple sites. So we're going to do 15 patients over 3 sites and run our protocol with that. That protocol can rapidly be expanded if FDA wants more information than that. We're not exactly sure what FDA will want. But the beauty of what we're doing is this falls -- what we're doing falls exactly within the purview of what the lasers are already approved to do. We're just defining how to treat different patients in a safe way. So there's a range of opinions on what FDA will want from us. It could be very, very little, or they could just want a classic study. If they want a classic study, we've got, really, the protocol in place. We've got IRBs. I think we could expand that study pretty quickly, if we needed to.

(Operator Instructions) And it appears we have no further questions in the queue at this time. And ladies and gentlemen, that does conclude today's conference call. We thank you for your participation.

Thank you.