Apyx Medical Corporation

and gentlemen, and welcome to the first quarter of fiscal year 2019 earnings conference call for Apex Medical Corporation. At this time, all participants have been placed in a listen-only mode. And at the end of the company's prepared remarks, we will conduct a question and answer session. Please note that this conference call is being recorded and that the recording will be available on the company's website for replay shortly. Before we begin, I would like to remind everyone that our remarks and responses to your questions today may contain forward-looking statements that are based on the current expectations of management and involve inherent risks and uncertainties that could cause actual results to differ materially from those indicated, including those identified in the risk factors section of our most recent annual report on Form 10-K filed with the Securities and Exchanges Commission. Such factors may be updated from time to time in our filings with the SEC, which are available on our website. We undertake no obligation to publicly update or revise our forward-looking statements as a result of new information, future events, or otherwise. This call will also include references to certain financial measures that are not calculated in accordance with generally accepted accounting principles or GAAP. We generally refer to these as non-GAAP financial measures. Reconciliations of those non-GAAP financial measures to the most comparable measures calculated and presented in accordance with GAAP are available in the earnings press release on the investor relations portion of our website. I would now like to turn the call over to Mr. Charlie Goodwin, Apex Medical's President and Chief Executive Officer. Please go ahead, sir.

Thanks, operator. Welcome everyone to our first quarter of fiscal year 2019 earnings call. I am joined on this afternoon's call by our Chief Financial Officer Tara Sim. Let me provide you with a quick agenda for today's call. I will start with an overview of our first quarter revenue performance and the drivers of our growth during the period. Then I'll discuss some of the important operational developments in our business during the first quarter, as well as our recent progress with respect to our four strategic initiatives that we have identified as key components of our longer-term growth strategy. Tara will then provide you with a more detailed summary of our first quarter financial results and review our fiscal 2019 guidance, which we updated in our earnings press release this afternoon. I'll then share some additional closing thoughts on our outlook for 2019 before opening the call for questions. In the first quarter of 2019, we achieved total revenue of $5.8 million, which represented 71% growth year over year. Our total revenue growth in the first quarter continues to be driven by strong sales performance in our advanced energy business, which increased by 1.7 million or 66% year over year. These impressive sales results reflected strong global demand for our Renuvion cosmetic technology, which continues to resonate in cosmetic surgery markets around the world. Our first quarter revenue results also demonstrate the successful execution of our strategy to drive growth in our advanced energy business by increasing the adoption and utilization of our Renuvion cosmetic technology generators and handpieces in the U.S., fulfilling the increasing demand we are seeing from distributors in our existing international markets, and expanding our coverage and penetration of key OUS markets by entering into new distributor partnerships. In addition to our advanced energy sales performance, we also saw important contributions to total growth from our OEM business, which increased by $684,000 or 89% year over year. The growth in our OEM business was largely driven by the expected contributions from our electrosurgical generator and supply agreement with Symmetry Surgical. Recall that we entered into this agreement in connection with the divestiture and sale of the Bove Medical Corps business and brand in August of last year. From a geographic standpoint, first quarter total U.S. sales increased by 1.3 million or 49% year-over-year, while total international sales increased by 1.1 million or 169% year-over-year. First quarter sales in the U.S. were driven by a 30% increase in advanced energy sales and a 104% increase in OEM sales. We were especially pleased with our U.S. advanced energy performance in the first quarter as sales only declined mid-single digits compared to the fourth quarter of 2018. This is impressive in light of the fact that the first quarter tends to represent a seasonally weaker quarter due to the capital equipment purchasing trends in the cosmetic surgery market. Our advanced energy growth in the U.S. benefited from strong utilization-based demand for our Renuvion handpieces. First quarter international sales were driven by stronger than expected utilization-based demand for our advanced energy products from distributors in our existing international markets, many of which we entered into partnerships with during the last nine months of 2018. We also added new distributor relationships in new countries in the first quarter, which represented additional upside versus our expectations. Turning to an update of our recent operational progress and operating highlights, in addition to the strong performance of our advanced energy business during the quarter, we also continued to receive strong positive feedback from our new and existing clinician customers in the US cosmetic surgery market. Our new Renuvion customers report that they are motivated to purchase our technology after observing the results that can be achieved and discussing the potential benefits of adoption with members of our sales team as well as their clinician peers. Additionally, many of our existing customers reported seeing a notable uptick in their patient procedure volumes after integrating Renuvion into their practice. As I will discuss later in my remarks, we continue to improve our support for new and existing clinical customers to ensure they are able to effectively integrate the technology into their practices and that they have tools and best practices to market Renuvion cosmetic technology to their patient customers. Before updating you on the recent progress we've made with our strategic initiatives, I would first like to take a moment to discuss an important development during the first quarter with respect to our regulatory strategy. As discussed on recent earnings calls, our team has been focused on pursuing 510 regulatory clearance for Renuvion specifically a new clinical indication for the use in dermal resurfacing procedures. On December 18th of last year, we filed our application for premarket notification 510 regulatory clearance with the FDA. Our application was supported by data from a multi-center, single-arm, evaluator-blind, prospective IDE study which evaluated the safety and efficacy of Renuvion for the reduction of facial wrinkles and right tides. During their review of our application, the FDA raised several questions and concerns regarding three aspects of our IDE clinical study. First, the FDA questions the study's results regarding Renuvion's performance in dermal resurfacing procedures versus its stated primary endpoint. While the IDE study yielded no serious adverse events, it did not meet the primary efficacy endpoint as only 63.64% of the patients were deemed to have experienced an improvement of one point or greater on the Fitzpatrick-Ringle sale at the three-month follow-up visit. The study protocol and statistical analysis plan included a success criteria of 75% of patients. Second, the FDA questioned the variability in treatment outcomes across the three investigational centers in the study, as one of the three investigational centers in the study achieved superior outcomes compared to the other two. And third, the FDA questioned the impact of protocol deviations at this investigational center. Specifically, the FDA questioned how the protocol deviations may have contributed to the superior results obtained at this investigational center. Following the procedures, all but five subjects treated at this clinical center were prescribed with MedDraw, a corticosteroid that can be used to treat inflammation of the skin and increase patient comfort post-procedure. Following discussions with the FDA in late March, we voluntarily withdrew our application on March 29th as we were unlikely to be able to favorably resolve the issue raised within the FDA's congressionally mandated MDUFA 90-day review period that would have otherwise ended on April 1st. While APEX does not share the FDA's view with respect to the three areas in question regarding our clinical study, we understand their focus on these areas. We also appreciate the FDA's engagement with our clinical and regulatory team, which has included many productive and positive interactions through the process. Although we are greatly disappointed by this setback, we remain convinced of both safety and efficacy of our Renuvion technology when used in dermal resurfacing procedures, and we are committed to pursuing 510 clearance for dermal resurfacing. In terms of Renuvion safety profile, our IDE study included no serious adverse events. Additionally, the FDA expressed no comment or concerns regarding the safety of the procedure itself. and from an efficacy standpoint, over 90% of subjects in the study experienced an improvement in appearance as assessed by the study investigators. In addition, the study's independent photographic reviewers were able to correctly identify post-treatment photographs in over 97% of patients. In terms of next steps, We intend to develop and submit a new Investigational Device Exemption or IDE application. Our clinical and regulatory teams are highly focused on developing a new clinical protocol and securing the necessary support for our IDE application. We are taking a methodical approach and have engaged additional external resources to inform our process. Upon receiving an IDE, we will then gather additional clinical data under this new clinical protocol to support our submission of a new application for 510 clearance to market and sell Renuvion for the dermal surfacing procedures. With that, I'll now turn to an update of our recent operational progress with respect to our strategic initiatives. As a reminder, Apex Medical has been focused on the following four strategic initiatives in order to position us for long-term success in the cosmetic surgery market. Number one, we'll formalize our regulatory strategy to pursue specific clinical indications that will enable us to market and sell Renuvion for our target procedures. secure new clinical evidence demonstrating the safety and efficacy of our Renuvion technology. Three, enhance physician and practice support for our cosmetic surgery customers. And four, improve our manufacturing capabilities and efficiencies. With respect to our first strategic initiative, in addition to our efforts to secure a new clinical indication for Renuvion and dermal resurfacing procedures, Our regulatory team is focused this year on expanding our geographic footprint by obtaining regulatory clearance for our technology in new countries outside the US, particularly those with large and growing cosmetic surgery markets. Importantly, while our commercial strategy is to identify a strong distributor partner in each market, We are focused on owning the registrations and licenses in each respective country. Longer term, our team has also identified other potential clinical indications where we believe our Renuvion technology would address important unmet clinical needs within the US cosmetic surgery market. We intend to focus on obtaining these clearances in the years to come in an effort to expand the potential addressable market for Renuvion. Turning to our second strategic initiative, we are continuing to develop a comprehensive portfolio of clinical support demonstrating the safety and efficacy of our Renuvion cosmetic technology. Building on the work we completed in late 2018 to demonstrate how our Renuvion technology's method of action is so unique in the marketplace, we expect to publish a retrospective clinical study examining the subdermal use of Renuvion in liposuction procedures during the second half of 2019. Our third strategic initiative, we continue to make steady progress during the first quarter on enhancing physician and practice support we provide for our cosmetic surgery customers. These efforts began in earnest in late March of last year with the launch of our Renuvion brand, which was designed to enhance our marketing efforts to our customers, more importantly to help our clinicians in the cosmetic surgery market effectively market Renuvion to their patient customers. The Renuvion brand has received strong praise from our clinical customers and overall market response has exceeded our initial expectations. We remain committed to supporting this dedicated branding effort and enhancing its visibility in the marketplace. During the first quarter, we released our first patient marketing materials, which are being shared across our clinical customer base to raise awareness of Renuvion and its potential benefits. In tandem, we also launched a new multi-part video series via our clinician web portal to educate our clinician customers and provide them with actionable tips to optimize their digital marketing of Renuvion via social media. In addition to building support for our Renuvion brand, we continue to improve our marketing programs to train clinician customers on the use of Renuvion and its benefits. We have recently begun hosting formal events which we call physician mentor programs or PMPs. During PMP events, our consulting surgeons educate a small group of prospective clinical customers on the use and benefits of Renuvion and then perform one or more live cases. This program seeks to provide our potential new customers with the ability to learn directly from their peers in a formal education setting. We have also invested in a small team of clinical specialists which are dedicated to educating and training our clinician customers. They provide support for our new clinician customers during their initial procedures with our technology, and additional training for our existing customers as needed. In addition to enhancing our relationships with our customers, our clinical specialists also help our sales reps to be more efficient by allowing them to focus more of their time on their selling efforts. And lastly, in connection with our fourth strategic initiative, under the direction of Laura Iverson, our Director of Global Operations, We are improving our manufacturing capabilities and efficiencies to accommodate the increasing global demand for our generators and handpieces. Over the last year, we have made a number of important operational improvements at both our Clearwater and Bulgaria facilities, including efforts to improve our workflow and vertically integrate our supply chain. During the first quarter specifically, we expanded our manufacturing capacity in our Bulgaria facility. In addition to improving our ability to produce more product, expanding our manufacturing capacity in Bulgaria provides us with a long-term benefit of lowering our manufacturing costs. We are also leveraging our Bulgaria facility to streamline our operations of the U.S. by shipping directly from Bulgaria to our OUS distributor partners. With that, let me turn the call over to Tara to discuss our first quarter financial results in greater detail and review our fiscal 2019 financial guidance which we updated in this afternoon's release. Tara?

Thanks, Charlie. As a reminder, our results are reported on a continuing operations basis for the period ended March 31st, 2019. Any financial impacts related to the divestment and sale of our core segment appear in our financial statements as discontinued operations and are excluded from the commentary that follows. Total revenue for first quarter 2019 increased 2.4 million or 71% year over year to 5.8 million compared to 3.4 million last year. By business segment, total revenue growth in the first quarter was driven primarily by advanced energy segment sales which increased 1.7 million or 66% year over year to 4.4 million. Total revenue growth in Q1 also benefited from growth in sales from our OEM segment. OEM segment sales increased 684,000 or 89% year over year to 1.4 million in Q1. driven primarily by sales of generators related to our 10-year manufacturing and supply agreement with Symmetry entered into as part of the divestiture of the core business. Advanced energy and OEM sales represented approximately 75% and 25% of total revenue in the first quarter of 2019, respectively, compared to 77% and 23% in the prior year period. Revenue in the United States increased approximately 1.3 million or 49% year over year to 4.1 million and international revenue increased approximately 1.1 million or 169% year over year to 1.7 million. International revenue represented approximately 30% of sales in the first quarter of 2019 compared to 19% of total sales in the first quarter of 2018. Moving down the P&L, gross profit increased 1.5 million or 68% year over year to 3.7 million compared to 2.2 million for the first quarter of 2018. The increase in first quarter 2019 gross profit was driven primarily by strong sales in the company's advanced energy segment. Gross margin for the first quarter of 2019 was 63.9% compared to 65.1% last year. The change in gross margin was primarily due to revenue mix by product in our advanced energy segment, advanced energy sales outside the U.S., which represented a higher mix of total sales in the first quarter of 2019 compared to last year, and higher OEM sales as a percentage of total revenue this year. OEM segment gross margins were lower in the first quarter of 2019 when compared to the prior year period, driven primarily by revenue related to our new product, manufacturing, and supply agreements with Symmetry in the first quarter of 2019, which did not contribute to revenue results in the prior year period. Operating expenses for first quarter 2019 increased $4 million, or 81% year-over-year, to $8.9 million, compared to $4.9 million for the first quarter of 2018. The year-over-year change in operating expenses was primarily driven by a $1.4 million increase in salaries and related costs, $1.3 million increase in professional services, a $1 million increase in selling general and administrative expenses, and a $300,000 increase in research and development expenses compared to the first quarter of 2018. Lost from operations for the first quarter of 2019, was $5.2 million compared to operating loss of $2.7 million last year. Net loss from continuing operations for first quarter 2019 was $4.7 million or 14 cents per diluted share compared to a net loss from continuing operations of $2.8 million or 8 cents per diluted share for the first quarter of 2018. First quarter 2019 adjusted EBITDA loss with 4.2 million compared to an adjusted EBITDA loss of 2.1 million last year. We have provided a detailed reconciliation from net loss to adjusted EBITDA in our press release this afternoon. As of March 31st, 2019, the company had cash and cash equivalents of 32.4 million and short-term investments in U.S. Treasury bills of 40.9 million as compared to cash and cash equivalents of 16.5 and short-term investments of $61.7 million as of December 31st, 2018. The company had working capital of $77.8 million as of March 31st, 2019 as compared to $81.8 million as of December 31st, 2018. Turning to a review of our 2019 financial guidance, which we updated in our earnings press release this afternoon, For the 12 months ending December 31st, 2019, we now expect total revenue in the range of 25.5 to 26.5 million, representing growth of 53% to 59% year over year, compared to total revenue from continuing operations of 16.7 million in fiscal year 18. This compares to the company's prior total revenue guidance range of 25 to 26 million. Our updated 2019 total revenue guidance assumes advanced energy revenue in the range of approximately 20.5 to 21.5 million, representing growth of 57% to 65% year over year, compared to advanced energy revenue of 13.1 million in fiscal year 2018. This compares to the company's prior advanced energy revenue guidance range of 20 million to 21 million. OEM revenue of approximately $5 million representing growth of 38% year-over-year compared to $3.6 million for fiscal year 2018. This is unchanged from our prior guidance expectations. As a reminder, we expect approximately 50% of our total OEM segment revenue to come from our legacy OEM activities with the balance coming from our manufacturing agreements with Symmetry. In terms of profitability guidance for fiscal year 2019, we expect gap net loss in the range of 23.5 to 22.5 million compared to gap net loss from continuing operations of 9.5 million in fiscal year 2018. This compares to the company's prior guidance range of net loss in the range of 24 to 23 million, and we expect adjusted EBITDA loss in the range of $19.9 million to $18.9 million compared to adjusted EBITDA loss from continuing operations of $11.7 million in fiscal year 2018. This compares to the company's prior guidance of adjusted EBITDA in the range of $20.4 to $19.4 million. As a reminder, we have included a full reconciliation from GAAP net loss to non-GAAP adjusted EBITDA in our earnings press release this afternoon. Lastly, for modeling purposes for the full year 2019, we expect gross margin of approximately 59% to 61% this year compared to 64.7% last year. The largest driver of the expected decline in gross margins this year is the impact of 12 months' contribution from our manufacturing agreement with Symmetry in 2019 compared to approximately three months contribution in 2018 as reported within our OEM segment. Excluding the full year contributions to total company revenue from this agreement, our total 2019 growth margin would be approximately 63%. Stock-based compensation expense of approximately $4 million, depreciation and amortization of approximately $700,000, and weighted average diluted shares outstanding of approximately 34 million shares. With that, I'll turn the call back to Charlie for closing remarks. Charlie?