Strata Skin Sciences Inc (SSKN) 2017 Q4 法說會逐字稿

Good day, everyone, and welcome to the STRATA Skin Sciences Fourth Quarter and Full Year 2017 Earnings Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Bob Yedid. Please go ahead.

Thank you, everyone, and good morning. 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 the 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 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 or all -- or -- any or all of the company's forward-looking statements may prove to be incorrect. Therefore, you should not rely on any such -- or 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 its SEC filings, which are available at www.sec.gov and on the company's website.

With those prepared remarks, I'd like -- my pleasure to turn the call over to STRATA's President and Chief Executive Officer, Frank McCaney. Frank?

Good morning, everyone. Welcome to STRATA Skin Sciences' earnings and corporate update conference call for the fourth quarter of 2017 as well as for the full year 2017.

As we have discussed, our vision for STRATA is to become the dermatology and esthetic 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.

Before discussing the full year 2017 results, I would like to review the important announcements we made this morning. First, a group of new and existing investors, led by Accelmed Growth Partners, have agreed to buy $17 million of common stock in STRATA at $1.08 per share. This sale of new common stock will require a shareholder approval, and a proxy will be circulated in the next several weeks.

Based in the U.S. and Israel, Accelmed is a highly successful investment firm focused on the med-tech industry. They employ a platform model, integrating innovative and market-ready medical device technologies, often from Israeli-based med-tech companies, into existing commercial companies, such as STRATA Skin Sciences, companies that can effectively distribute and commercialize new medical devices. Accelmed's strategy is consistent with STRATA's goal of adding dermatology and esthetic products and leveraging both our solid base of relationships with dermatologists as well as our operational infrastructure.

As I have articulated on our prior calls, I believe that STRATA already has a sales and marketing organization in place that could support 2 to 3x our current sales volume by simply adding differentiated dermatology and plastic surgery products. We look forward to benefiting from Accelmed's experience and record of success in identifying and acquiring further complementary products and technologies.

Second, the investment group is comprised of Accelmed; Dr. Dolev Rafaeli, former CEO of PhotoMedex; and 2 health care-dedicated funds, Broadfin Capital and Sabby Management, which currently own both our common and preferred stock; as well as Gohan Investments, the last investor. Accelmed is the lead investor, investing $13 million of the total. If the stock sale is approved by shareholders, there will be changes made to the board and the management team. Dr. Uri Geiger, the co-founder and managing partner of Accelmed, will join our board as Chairman.

Regardless, effective April 10, Dr. Dolev Rafaeli will become STRATA's interim CEO, and I will become interim CFO. As CEO and board member of PhotoMedex since 2011, Dolev is very familiar with the XTRAC product lines, as they were part of PhotoMedex until the sale of the assets to STRATA in mid-2015. Dr. Rafaeli has over 25 years of experience in building med-tech, dermatology and consumer products companies.

To review the mechanics, the proposed financing will require the approval of at least 51% of a quorum of the votes cast in person or by proxy by shareholders of STRATA at a special meeting expected to be held no later than June 30. Broadfin Capital and Sabby Management have already pledged to vote their shares in favor of the financing.

Third, we have a signed term sheet that allows us, at closing, to enter into a new agreement to replace our loan agreement with our current lender, MidCap Financial. Assuming the final agreements reflect the term sheet, the amount of the loan will be reduced by $3 million by using a portion of the proceeds. Due to the company's stronger financial position, that is with the investment, STRATA will benefit from a lower interest rate as well as covenants, prepayment and exit fees that were more favorable to the company than what exists today.

Now let's review 2017. As we have discussed, our vision for STRATA is to become the dermatology and esthetic medicine partner of choice, offering highly advantaged, best-in-class products, while helping our customers grow their business at every opportunity. Our goal is to position STRATA as a collaborative business partner, one that can help practices and physicians be successful. We believe we have best-in-class offerings that present our customers with both revenue opportunities and outstanding patient outcomes.

Through the course of full year 2017, we took actions to strengthen our balance sheet, to improve procedure volume in a number of our XTRAC placements and to expand the market for XTRAC through development programs and to grow STRATA's product lines and revenues. While we have made progress on all these initiatives, the progress has not been material in all the programs.

One initiative that has already helped the company is the simplification of STRATA's balance sheet, providing the company with greater financial flexibility. Last September, our shareholders approved the exchange of $40.7 million of senior secured convertible debentures due in July 2021 for new shares of convertible preferred stock. The new convertible stock is nonvoting and carries no dividend obligation. This exchange is important to STRATA as it removes our obligation to repay the debt in 2021 and eliminates our obligation to pay approximately $4 million of cash interest payments over the next 4 years.

We ended the year with 753 recurring revenue placements, which is 2.8% lower than the 775 systems in place at the end of December 2016. This is due in large measure to our strategy to remove systems and accounts that were unprofitable for us and for our customers. We intend to refurbish those systems and redeploy them in potentially higher-volume accounts. We also put in place new criteria for placements to increase the likelihood that those placements would become high-volume systems for us.

In our marketing efforts, we have kicked off targeted, lower-cost marketing programs in mid-February of this year using Internet advertising and social media. Some of our social media campaigns will promote XTRAC in approved dermatologic indications that we have not marketed to date, such as hand eczema. This should boost our sales over time. However, most of the advertising effort will be to recruit more psoriasis patients for XTRAC, a modality that is reimbursed in nearly all cases, has minimal side effects and is very effective. We will keep investors apprised of our progress in these new initiatives.

Now I'd like to review the full year financials for 2017. For the year ended December 31, 2017, revenues were $31.4 million, an increase of $700,000 or up 2.4% from full year 2016. Recurring revenues were $22.6 million in 2017, down 3.7% from 2016.

For the full year 2017, gross margin was 57.1%, modestly decreased from 58.8% for 2016. This decrease in margin is due, in large measure, to the product mix shift from lower recurring revenue to more capital equipment sales.

As stated in today's press release, the non-GAAP adjusted EBITDA for full year 2017 was $4.8 million or 15.4% of revenues. This represents an increase of $1.9 million or up 67% from the $2.9 million recorded in the end of 2016. As of December 31, 2017, our cash balance was $4.1 million compared to $3.9 million at the end of 2016.

During the third quarter, the company continued principal repayments of approximately $850,000 against our $10.6 million senior debt. We do expect that with the completion of the transaction that this debt will be restructured favorably as part of the previously mentioned replacement loan with MidCap.

At the end of the year, the company had 753 XTRAC placements, reflecting our strategy of focusing on increasing system revenues in our placements and increasing their profitability. For the third -- fourth quarter, we made 15 new placements and removed 38. For the full year 2017, we had 78 new placements and removed 100. In Q4 of 2017, revenues were $8.6 million, up from $8.3 million or 3.2% from Q4 of 2016.

In light of the changes in our strategy, the company is off to a lower-than-expected start in 2018. For the first quarter of 2018, we expect total revenues will be in the range of approximately $6.3 million to $6.6 million, down 7% to 11% compared to the first quarter of 2017.

In summary, our team has had a focus on current and new initiatives, including improving our current business, expanding the market and expanding our business with new products from external endeavors. The company is very excited about the prospective investment in STRATA by this outstanding group of investors. Current management believes that this influx of capital, along with bringing in leadership that has good outcomes in this business before, will be a positive factor in the company's growth and future success.

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

(Operator Instructions) And our first question comes from Joe Pantginis with H.C. Wainwright.

Busy times as always at STRATA. So first, with regard to the ongoing business, I'm just wondering if you could share any additional information with regard to your redeployment efforts. How that's going? And I -- also you mentioned sort of new criteria for signing accounts. Maybe if you could give any additional color on that as well.

Yes. Thanks, Joe. Yes, so I think we made a decision in 2017 that a number of the units were not profitable for us. And if they weren't profitable for us, it wasn't a good placement for the customer as well. So what we did is we pulled back a number of those units. As you can see for the year, we had a net decrease in placements. And the idea was to take out the ones that we couldn't get an increase in volume in and that weren't going to be profitable, to bring those back in, to refurbish the units and to seek out new accounts that were potentially a lot more profitable for us and better business for our customers. So we did most of those removals in the third and fourth quarter. So we really haven't started a lot of those placements yet or they're just in the process of being started. The goal is -- and the other thing that hurt us a little bit in 2017, but good for the business long term, is we put a more stringent criteria for new placements. What we didn't want to do is take out a low-volume placement and replace with another low-volume placement. So we made it tougher. And the sales reps are now getting used to what that new criteria is. They're focusing on better opportunities. And I think, over the course of 2018, we'll see a higher dollar per unit out in the field than there was in 2017. Did that answer the question?

Yes. No, it certainly does. And then I know this question might be a little early until things are finalized with the -- bolstering the balance sheet and sort of strategies, but if you have that bolstered balance sheet that's approved, I guess, what would be the sort of strategy right now or the balance with regard to further advertising and efforts surrounding XTRAC versus the potential, as you mentioned, to add further complementary products?

Yes. So I don't want to speak too much for the new management team that will be coming in, but I think it's fairly obvious. The business was at a far higher dollar volume revenue when it was advertising a lot. There's a trick to advertising, and Dr. Rafaeli is extremely good at consumer activity. And I think his expertise in helping spend those dollars wisely will really help. We currently have a fairly low market share of psoriasis patients, and this is a great treatment modality. It is almost nearly fully reimbursed. It's highly effective. It does require a number of visits. But the overall time to get resolution of plaque is faster than other modalities. So we think there's really a great opportunity there if more dollars were spent on the advertising world. We did start a program in social media and in Internet advertising that we hadn't done before. It took us a while to get that going, but it started in mid-February of this year. And although it's very early in that program, we're starting to see good results and we're starting to learn how to do that. We expect that with the expertise of Dr. Rafaeli that, that will get even better going forward.

(Operator Instructions) Our next question comes from Gabriel Fung with Life Sciences Capital.

So the first one I have here is I wanted to ask what the net $14 million of investments after the debt repayment. Will the focus be on looking for additional commercial products in the medical terminology -- medical dermatology and plastic surgery sectors?

So I would say there's really -- once again, not wanting to speak for new management, but just from what I understand is the right approach here, there is really 2 main initiatives. One would be to increase advertising. And the second would be to expand the portfolio of products by looking for other things. So I think both of those are exactly the right places where a substantial portion of the capital will be deployed. But once again, the -- I'd leave that fully to the new management team.

Okay. I understand. So I just also wanted to follow up, then. Is the company continuing to pursue the Optimal Therapeutic Dose treatment for XTRAC, which reduces the number of treatments needed to treat psoriasis?

Yes, certainly. I think that's a great opportunity for the company. I think we're looking at it in a couple different ways right now. But clearly, reducing the number of patient treatments will expand the market for the product.

And it appears we have no other questions at this time.

Well, great. Well, I just wanted to thank everybody for their patience. We -- the company is very, very excited about capital. I think, in 2017, we were able to achieve the conversion of debt to stock, which helped improve the financial flexibility of the company. This influx of capital and a highly experienced management team and also the resources of Accelmed, which is also a very successful enterprise, will do a lot for STRATA and can open the door to the future for it. So we're very excited about it. I think it's a great thing for the company. And I'm glad to share with you today and hopefully in the near future. So thank you.

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