Apyx Medical Corporation

Good afternoon, ladies and gentlemen, and welcome to the second quarter of fiscal year 2019 earnings conference call for Apix Medical Corporation. At this time, all participants have been placed in a listen-only mode. 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 Exchange Commission. as well as our most recent 10Q filing. 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 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, Julie. Welcome, everyone, to our second quarter fiscal year 2019 earnings call. I am joined on this afternoon's call by our Chief Financial Officer, Tara Sem. Let me provide you with a quick agenda for today's call. I'll start with an overview of our second quarter revenue performance and the drivers of our growth during the period. Then I'll provide you with an update of our recent operational progress with respect to the four strategic initiatives that represent key components of our longer-term growth strategy. Tara will then discuss our second quarter financial results in greater detail and review our fiscal 2019 guidance, which we updated in our earnings press release this afternoon. I'll then conclude today's prepared remarks with some additional closing thoughts on our outlook before we open the call to questions. At the end of Q2 2019, we reported total revenue of $6.6 million, representing 78% growth year over year. Our total revenue growth in Q2 was driven by performance in our advanced energy business, reflected by strong global demand for our Renuvion cosmetic technology. As a reminder, we're focused on driving growth in our advanced energy business by increasing the adoption and utilization of our Renuvion generators and handpieces in the US cosmetic surgery market, satisfying the increasing demand we are seeing from our OUS distributors, and improving our coverage and penetration of key OUS markets by entering into new distributor partnerships. Our continued execution with respect to each of these items during the second quarter resulted in advanced energy sales of $5.3 million, an increase of $2.2 million or 69% year over year. We also saw impressive growth in our OEM business, which increased by $721,000 or 125% year-over-year. Our OEM growth was primarily driven by contributions from our electrosurgical generator and supply agreement with Symmetry Surgical, which we entered into in August of last year as part of the divestiture and sale of the BOBE core business and brand. Turning to a review of our revenue performance by geography, during the second quarter our U.S. sales increased by 1.6 million or 53% year over year. U.S. sales were primarily driven by a 33% increase in advanced energy sales and a 147% increase in our OEM sales. Our advanced energy growth benefited from growth in sales of our Renuvion generators as well as strong utilization-based demand. We were particularly pleased with our US performance given the challenges that we faced early in the second quarter. After a tough and distracting series of events in April, we rebounded in May and June to post very strong results overall for the quarter. I commend our team for staying focused on execution despite the disruption early in the quarter. We also saw strong growth outside the U.S. with total international sales increasing 1.3 million or 177% year-over-year. Our international growth was driven primarily by strong utilization-related demand for our Renuvion generators and handpieces from distributors in our existing OUS markets. We entered two new countries in the second quarter which contributed very modestly to growth year over year, but the overwhelming majority of our international growth was from distributor relationships that we formed in 2018 and to a lesser extent in early 2019. Turning to an update of our operational progress with respect to our four strategic initiatives. As I've shared with you on prior earnings calls, we're focused on the following four strategic initiatives to position Apix Medical for long-term growth in the cosmetic surgery market. Number one is formalize our regulatory strategy to pursue specific clinical indications that will enable us to market and sell Renuvion for our targeted procedures. Secure new clinical evidence demonstrating the safety and efficacy of our Renuvion technology Enhancing physician and practice support for our cosmetic surgery customers Improving our manufacturing capabilities and efficiencies Starting with our first strategic initiative, formalizing our regulatory strategy, In the US, we're focused on pursuing clinical indications that will enable us to market Renuvion for targeted procedures in the US cosmetic surgery market. The initial procedure that we have been focused on is dermal resurfacing, and I am pleased to report that we have made substantial progress. After withdrawing our initial 510K application for dermal resurfacing procedures on March 29th, We committed publicly to developing a new 510 submission for this clinical indication as quickly and methodically as possible and engaged the help of external resources to advise us on the best path forward. Our clinical and regulatory teams worked diligently during the second quarter to develop a new clinical protocol and secure the necessary support that would enable us to prepare a new IDE application. I'm pleased to report that on July 23rd, we submitted the IDE application for our new dermal resurfacing trial and we're currently awaiting the agency's response and feedback on the materials we submitted. Once we receive and incorporate the agency's feedback and obtain the IDE approval, We expect to initiate a new clinical study to evaluate the use of Renuvion in dermal resurfacing procedures. The results of this trial would be intended to support the creation of a new application for 510 clearance. As discussed on prior earnings calls, our pursuit of new clinical indications for Renuvion has not been limited to our focus on dermal resurfacing. We have also identified other potential clinical indications where we believe our Renuvion technology would address important unmet clinical needs within the US cosmetic surgery market. To that end, we are happy to announce that the indication we intend to pursue will be the treatment of skin laxity via the subdermal use of Renuvion in the neck. We intend to begin building clinical support for our pursuit of this indication in the coming months. Specifically, we expect to conduct a feasibility study consisting of approximately 20 patients to evaluate the safety profile of Renuvion in these procedures. I am very excited to announce that we obtained our IDE approval for this study on July 25th and expect to begin enrolling patients by December. In terms of our OUS regulatory strategy, Apix Medical is focused this year on expanding our geographic footprint by obtaining regulatory clearance for our technology in new countries, particularly those with large and growing cosmetic surgery markets. In doing so, it is important to us that we own the product registrations in the countries that we enter. During the first quarter, we entered Canada and Mexico. As discussed on prior calls, our fiscal 2019 guidance assumes growth will be driven by penetrating into existing countries as we service utilization based demand. To the extent that we enter new countries that we believe may be material contributors to our growth profile this year, We will announce them and incorporate them into our updated guidance expectations accordingly. In recent months, we've also made important additions to the APICS medical team to further bolster our regulatory affairs capabilities and support the development of our long-term regulatory strategy. In July, we appointed Dr. Libet Garber as our Director of Global Regulatory Affairs. We recruited Dr. Garber from the FDA where she worked for 10 years as a master scientific reviewer leading the review of over 700 FDA submissions. Prior to her tenure with the FDA, she also worked as an electrical engineer at John Hopkins University Applied Physics Lab in Maryland and as a researcher in several engineering laboratories. Dr. Garber will help develop our regulatory strategy and direct the day-to-day regulatory activities for all APICS medical sites. She will also support the planning and design of all clinical studies required as part of our strategy to pursue and obtain new regulatory clearances. I'm also excited to announce the appointment of Minnie Baylor Henry, the newest member of our board of directors. Ms. Baylor Henry joins our board with over 20 years of regulatory and affairs and will be chairing a newly formed regulatory and compliance committee. Among her many career highlights, Ms. Baylor Henry spent over 15 years working in regulatory affairs for Johnson & Johnson, and was ultimately promoted to worldwide vice president of medical and regulatory affairs in the company's medical device division. She also spent eight years with the FDA. Turning to our second strategic initiative, in addition to the studies we intend to pursue in support of our regulatory strategy, were also focused on securing new clinical evidence demonstrating the safety and efficacy of our Renuvion technology and cosmetic surgery procedures. In the near term, our clinical team has been working on a retrospective clinical study examining the subdermal use of Renuvion in liposuction procedures, which we expect to publish during the second half of 2019. I am pleased to report that we completed and submitted the manuscript of this study during the second quarter and recently received confirmation that it has been accepted for publication in the open access journal of plastic and reconstructive surgery. The publication timing has not yet been confirmed, but we're looking forward to sharing additional details with you once the study becomes publicly available. On July 15th, we announced the appointment of four new members to our Medical Advisory Board with extensive expertise in plastic and cosmetic surgery. Dr. Brian Kenney, Dr. Paul Ruff, Dr. Richard Gentile, and Dr. Edward Zimmerman. With the addition of these four professionals to our existing board consisting of Dr. Diane Duncan and Dr. Jack Zamora, We believe we've established an impressive team of advisors to evaluate and inform our clinical strategy, including the design of clinical trials to support our pursuit of new regulatory clearances. In July, we also appointed a Senior Director of Clinical Affairs, Ms. Carrie Larson, who will develop and manage our clinical research activities and support the development of our longer-term clinical strategy. Ms. Larson has spent over 15 years of clinical research experience working with both healthcare companies and clinical sites. Importantly, she has developed and managed clinical affairs teams and directed clinical research activities at three aesthetic medical device companies, Lutronic, Ulthera, and Myoscience. With respect to our third strategic initiative, enhancing physician and practice support for our cosmetic surgery customers, we continue to make great progress in developing our training and support for both new and prospective surgeon customers. During the second quarter, we continued to host physician mentor programs, or PMPs, which were attended by both potential surgeon customers in key locations across the U.S. These PMP events include educational sessions and live cases performed by our consulting surgeons. The primary goal of our PMPs is to provide surgeons with the ability to learn directly from their peers in formal educational settings. They've proven very effective in helping us engage with prospective customers and ensure that we are delivering high quality training across the country. To assist in our training efforts, we have also created a small team of clinical specialists charged with supporting our sales team. Following the sale of one of our Renuvion generators, our clinical specialists work closely with the new surgeon customer to deliver one-on-one training and provide support during their first cases. By ensuring that our new customers are well trained on the use of Renuvion, We believe our clinical specialists are able to encourage strong utilization of our technology while also allowing our reps to spend more of their time pursuing new business. In addition to pursuing improving our surgeon training efforts, we also continue to expand our marketing support for the Renuvion brand. During the second quarter, we provided new patient-focused marketing brochures to our surgeon customers that feature before and after photos. We've also received positive feedback from our surging customers on the first series of patient-focused Renuvion marking materials, which we introduced during Q1. And lastly, in connection with our fourth strategic initiative, our Director of Global Operations for Advanced Energy, Laura Iverson, and her team continue to make progress in improving our manufacturing capabilities and efficiencies. She is currently pursuing several new lean initiatives with the input of our board member, Craig Swando. Additionally, we've identified areas to improve the manufacturing cost of our handpieces. We expect to see these improvements evident themselves in our financial results as we continue to sell more handpieces. In addition to our recent progress with respect to our four strategic initiatives, I'd also like to congratulate our regulatory and R&D teams on an important achievement. On Monday, we announced that we received FDA 510 clearance for the next generation version of our J plasma precise laparoscopic handpiece. In recent years, we've received feedback that surgeons in the OUS markets were interested in an upgraded version of our J-plasma precise handpiece for laparoscopic procedures that would enable them to utilize our Cool Coag feature. As a reminder, Cool Coag is a feature that enables our surgeon customers to deliver standard monopolar energy and a non-contact helium plasma spray called plasma beam coagulation. in addition to our precise J plasma energy in a single handpiece. This feature is particularly helpful when surgeons need to coagulate a wide area of tissue. In response to this surgeon demand, we leveraged our expertise in research and development and manufacturing to create this next generation version of our J plasma precise handpiece. In addition to incorporating our cool coag technology, This next generation handpiece is also 39% lighter than its predecessor for improved ergonomics. We're pleased to have enhanced our offering for laparoscopic surgical procedures, and we expect to begin a limited launch of this handpiece by the end of the third quarter. Importantly, the J-Plasma precise handpiece for laparoscopic procedures will be commercialized in the European market where many of our European distributors sell both our Renuvion and J Plasma products, which we believe are used in a variety of surgical procedures. Stepping back, as I mentioned earlier in my prepared remarks, I am very pleased with our company's performance during the second quarter. Despite the unfortunate setback we experienced with the withdrawal of our initial 510 submission for the dermal resurfacing at the end of March, Our team has done an excellent job of exemplifying our core values under difficult circumstances, working together, challenging the status quo, and going the extra mile to create new opportunities for our company. I am also very pleased with the incredible talent that we have added to our team as we continue our journey towards becoming the world's leading innovator in unique energy solutions for the cosmetic surgery market. With that, let me turn the call over to Tara to discuss our second quarter financial results in greater detail and review our fiscal year 2019 financial guidance, which we updated on this afternoon's release. Tara?

Thanks, Charlie. As a reminder, our results are reported on a continuing operations basis for the period ending June 30, 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 second quarter 2019 increased 2.9 million or 78% year over year to 6.6 million compared to 3.7 million last year. By business segment, total revenue growth in the second quarter was driven primarily by advanced energy segment sales which increased 2.2 million or 69% year-over-year to 5.3 million. Total revenue growth in Q2 also benefited from growth in sales from our OEM segment. OEM segment sales increased $721,000 or 125% year-over-year to 1.3 million in the second quarter of 2019 driven primarily by the 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 last August. Advanced energy and OEM sales represented approximately 80% and 20% of total revenue in the second quarter of 2019 respectively, compared to 84% and 16% in the prior year period. Revenue in the United States increased approximately 1.6 million or 53% year over year to 4.5 million and international revenue increased approximately 1.3 million or 177% year over year to 2 million. International revenue represented approximately 31% of total sales in the second quarter of 2019 compared to 20% in the second quarter of 2018. Moving down the P&L, gross profit increased approximately $1.9 million or 76% year-over-year to 4.5 million compared to 2.5 million for the second quarter of 2018. The increase in second quarter 2019 gross profit was driven primarily by strong sales in the company's advanced energy segment. Gross margin for the second quarter of 2019 was 68.1% compared to 68.7% last year. The change in gross margin this quarter was primarily due to revenue mixed by product and geography in our advanced energy segment and higher OEM sales as a percentage of total revenue this year. Operating expenses for second quarter 2019 increased 3.5 million or 63% year over year to 8.9 million compared to 5.5 million for the second quarter of 2018. The year-over-year change in operating expenses was primarily driven by a $1.5 million increase in salaries and related costs, $1 million increase in professional services, and an $870,000 increase in selling general and administrative expenses. Loss from operations for the second quarter of 2019 was $4.5 million compared to the operating loss of $2.9 million last year. Net loss from continuing operations for second quarter 2019 was 4.3 million or 13 cents per diluted share compared to a net loss from continuing operations of 2.9 million or 9 cents per diluted share for the second quarter of 2018. Second quarter 2019 adjusted EBITDA loss was 3.5 million compared to an adjusted EBITDA loss of 2.4 million last year. As a reminder, we have provided a detailed reconciliation from GAAP net loss to adjusted EBITDA in our press release this afternoon. As of June 30, 2019, the company had cash and cash equivalents of $67.4 million and no short-term investments compared to cash and cash equivalents of $16.5 million and short-term investments in U.S. Treasury bills of $61.7 million as of December 31, 2018. The company had working capital of $74.1 million as of June 30, 2019, compared to $81.8 million as of December 31, 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 31, 2019, we now expect total revenue in the range of $26.5 to $27.5 million representing growth of 59% to 65% year over year. This compares to the company's prior total revenue guidance range of 25.5 to 26.5 million. Our updated 2019 total revenue guidance assumes advanced energy revenue in the range of approximately 21.5 to 22.5 million representing growth of 65% to 72% year over year. This compares to our prior advanced energy revenue guidance range of $20.5 to $21.5 million. The $1 million increase in this range is driven by our stronger than expected performance during the second quarter and higher growth expectations from international countries over the balance of 2019. Our OEM revenue remains unchanged at approximately $5 million, representing growth of 38% year over year. In terms of our profitability guidance for fiscal year 2019, we expect gap net loss in the range of 22.4 to 21.4 million compared to our prior guidance range of net loss in the range of 23.5 to 22.5 million. Roughly half of the $1.1 million improvement in our fiscal 2019 net loss guidance range versus our prior guidance is driven by the higher revenue growth expectations and the other half from higher gross margin assumptions for fiscal 2019. Specifically, we now expect 2019 gross margins in a range of approximately 61 to 62.5% this year compared to our prior guidance range of 59 to 61%. The increase in our gross margin range is driven by the stronger than expected gross margins we reported over the first half of 2019 and the early benefits of our focus on improving manufacturing efficiencies on our handpiece margins. While we are pleased to report higher growth margin expectations for 2019, our margins will come in lower than the 64.7% margin reported in 2018. As discussed on prior calls, the largest driver of the expected decline in gross margins this year is the impact of 12 months of contribution from our manufacturing agreement with Symmetry in 2019 compared to only approximately three months of contribution in 2018. Excluding the full year contribution to total revenue from this manufacturing agreement, our 2019 gross margin would be approximately 65%. Finally, we have also increased our adjusted EBITDA loss expectation in this afternoon's release. specifically, we now expect adjusted EBITDA loss in the range of 18.8 to 17.8 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 loss in the range of 19.9 to 18.9 million. As a reminder, we have included a full reconciliation from Gap Net Loss to Non-Gap Adjusted EBITDA in our earnings press release this afternoon. With that, I'll turn the call back to Charlie for closing remarks. Charlie?