Apyx Medical Corporation

Please stand by. Good afternoon, ladies and gentlemen, and welcome to the fourth quarter and fiscal year 2019 earnings conference call for Apex 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 certainties 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 10-Q 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 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. Thank you. Please go ahead.

Welcome everyone to our fourth quarter and 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'll begin with a high level overview of our financial and operational performance in 2019. I'll then discuss our fourth quarter revenue performance and highlight some of our recent operational accomplishments. Tara will then provide you with a detailed review of our financial results for the fourth quarter and fiscal year 2019, as well as our guidance for first quarter 2020, which we introduced in our earnings press release this afternoon. I'll then share some additional closing remarks about our prospects and priorities for 2020, including the four strategic initiatives we are pursuing as part of our long-term growth strategy as well as our current thoughts on the potential business and procedure related disruption as a result of the crisis caused by the spread of the coronavirus, COVID-19. And then we will open the call for questions. With that, let's get started. 2019 was a year of important progress for Apex Medical. We are incredibly pleased to deliver total revenue growth of 69% year over year in 2019 exceeding our initial fiscal year guidance range of 52% to 58% growth year over year. Our exceptional performance was primarily driven by advanced energy revenue growth of 73% year over year in 2019, reflecting the continued success of our commercial strategy to drive growth by increasing the adoption of our Renuvion generators and the utilization of our handpieces in the US cosmetic surgery market. In markets outside the US, we are focused on fulfilling demand from our distributor partners in existing markets and securing product registrations and new distributor partnerships. We are very proud of the commercial success we had in 2019 and believe it reflects both the strong execution of our team this year, as well as the strong global demand for our helium plasma technology. In addition to our strong financial performance this past year, we also continue to make progress with respect to the four strategic initiatives we are pursuing to position Apex Medical for long-term growth in the cosmetic surgery market. I will discuss each of these initiatives later in my prepared remarks. Stepping back for a moment, fiscal 2019 marked the first full year following the sale of our core segment to Symmetry Surgical. The Symmetry Surgical Transaction provided us with the infusion of capital and the ability to focus our efforts on maximizing the potential of our helium plasma technology. We entered 2019 with an enhanced sales team to expand our coverage of the US cosmetic surgery market and a new name, Apex Medical, which we chose to reflect our commitment to peak performance in everything that we do. Throughout the year, we have continued to invest thoughtfully in many key areas of our business in order to transform Apex Medical into a company that is well positioned to capitalize on our addressable market in the US and internationally deliver peak performance over a multi-year period. Our financial and operational performance in 2019 reflect the success of these efforts and perhaps more importantly, We believe we're just getting started and have significant room for continued growth and improving profitability in the years to come. Turning to an update of our financial and operational performance during the fourth quarter, we are pleased to bring fiscal 2019 to a strong close in Q4. We achieved total revenue of $8.4 million, representing 41% growth year over year. Our total revenue growth was driven by global demand for our advanced energy products. In our advanced energy business, we generated sales of $6.9 million, an increase of 58% year-over-year. Our advanced energy revenue growth is primarily fueled by strong utilization-based demand for our handpieces in both the U.S. and OUS markets, along with revenue contributions from the sale of our generators. are impressive advanced energy sales performance more than offset modest declines in our OEM business, which decreased by $64,000 or 4% year over year consistent with our expectations. From a geographic standpoint, our total US sales for the fourth quarter of 2019 increased by 1.2 million or 28% year over year and our international sales increased 1.3 million or 81% year over year. Turning to our operational progress, during the fourth quarter of 2019, we made important progress with respect to our regular storage strategy to pursue clinical indications for the use of Renuvion technology in both dermal resurfacing procedures and skin laxity procedures. Consistent with our stated expectations, we began enrollment during the fourth quarter in two clinical studies designed to support our pursuit of the new clinical indications for these target procedures. Both studies are IDE perspective, multi-center, single arm, evaluator-blinded studies that will be conducted at up to five investigational centers in the United States. In addition to our regulatory progress, we expanded our portfolio of clinical evidence supporting the use of Renuvion technology. In November, a new study was published in the journal Plastic and Reconstructive Surgery Global Open, an open access peer-reviewed journal owned by the American Society of Plastic Surgeons. The study is titled, A Single Site Post-Market Retrospective Chart Review of Subdermal Coagulation Procedures with Renuvion. And it was conducted by Dr. Dulaub, who examined de-identified data for 32 patients. The study's objective was to collect safety and procedural information for patients who had undergone liposuction procedures where Renuvion was used for subdermal coagulation. Dr. Dulaub found that none of the patients required a revision or a secondary procedure suggesting that all had acceptable final outcomes and that no device-related adverse events or complications were noted. Lastly, during the fourth quarter of 2019, we began the limited commercial launch of our Apix Plasma RF or APR Handpiece, the latest addition to our Renuvion product portfolio. As we have shared with you on prior earnings calls, the APR Handpiece is available in multi-configurations and designed to be used percutaneously in order to meet the needs of our cosmetic surgery customers. It features several important enhancements, a smaller diameter instrument shaft, a bullet-shaped instrument tip, a new handle design, and distance indicators to help surgeons minimize unwanted energy application near the incision entry site. The development of our APR handpieces was informed by extensive feedback and input from both our cosmetic surgery customers and members of our medical advisory board. Based on the strong surgeon feedback received in response to our limited launch phase, it is clear that this informed development process resulted in the creation of a handpiece that really resonates with cosmetic surgeons. I'll now turn the call over to Tara to review our fourth quarter and fiscal year 2019 results in detail and discuss our financial guidance for first quarter 2020 which we updated in this afternoon's release. Tara?

Thanks, Charlie. I want to start by providing an overview of the restatements and revisions that we are making to our historical financials as announced in a separate press release after a market closed today and as detailed in the 8-K filed with the FCC this afternoon. Apex Medical is committed to upholding the highest standards of financial reporting. Throughout 2019, we have been working diligently to remediate material weaknesses in internal controls identified in 2018. As discussed on our third quarter earnings call, we identified two items during the preparation of our form 10Q filing for the period ended September 30th, 2019. The first item related to the treatment of certain components included in the calculation of our stock-based compensation expense. the second item related to the accounting for pre-development activities on certain OEM contracts. All revisions related to these items were incorporated into our Q3 three and nine months results and were detailed in separate tables in our Form 10-Q for the period ending September 30th, 2019. During the preparation of our 10-K for fiscal year 2019, We identified two new items, which we described in a separate press release and detailed in our reconciliation table, both of which were filed in an 8-K this afternoon. First, we re-evaluated our subsidiary consolidation process and discovered an error in the accounting for the elimination of markup on intercompany sales. This resulted in the company including intercompany markup in cost of sales and a corresponding understatement of selling general and administrative expenses. Second, we identified errors in tax accounting for employee income and payroll taxes related to the exercise of stock options in 2018 and 2019. Due to the aggregated impact of the errors identified, our audit committee concluded after consulting with management and our prior auditors that the previously filed financial statements for the year ended December 31st, 2018 and the three and nine months ended September 30th, 2018 and the three months ended March 31st, 2019 can no longer be relied upon and will be restated. To complete the restatements, we intend to request a 15 calendar day extension to file our Form 10-K for fiscal 2019 and will make every effort to file within this period. The discussion of our unaudited financial results today reflect the impact of these restatements as well as revisions to our historical financials. We have detailed the impact of these items in a separate press release and reconciliation table, both of which were filed on Form 8K this afternoon and are available on the Investors Relations page of our website. Turning to a review of our fourth quarter and fiscal year 2019 financial results. As a reminder, our results are reported on a continuing operations basis for the period ended December 31st, 2019. Any financial impacts related to the divestment and sale of our core business segment appear in our financial statements for fiscal 2018 as discontinued operations and are excluded from the commentary that follows. Total revenue for fourth quarter 2019 increased 2.5 million or 41% year over year to 8.4 million compared to 5.9 million last year. By business segment, total revenue growth in the fourth quarter was driven primarily by advanced energy segment sales, which increased $2.5 million, or 58% year-over-year, to $6.9 million. OEM segment sales decreased 64,000, or 4% year-over-year, to $1.5 million in the fourth quarter of 2019. Advanced Energy and OEM sales represented approximately 82% and 18% of total revenue in the fourth quarter of 2019, respectively, compared to 73% and 27% in the prior year period. Revenue in the United States increased approximately $1.2 million, or 28% year over year, to $5.6 million, and international revenue increased approximately $1.3 million, or 81% year over year to 2.8 million. International revenue represented approximately 33% of total sales in the fourth quarter of 2019 compared to 26% of total sales in the fourth quarter of 2018. U.S. sales were driven by a 44% increase in advanced energy offset slightly by a 2% decrease in OEM sales. The 44% increase in advanced energy sales in the U.S. in Q4 was driven by strong utilization-based demand for our Renubion handpieces, coupled with contributions from sales of our generators. Our Q4 international sales growth was driven by strong utilization-based demand for our advanced energy handpieces and generators from distributors in our existing international markets, with Latin America and Asia Pacific being the largest contributors to our growth during the quarter. Moving down the P&L, Gross profit increased approximately 2 million or 58% year over year to 5.6 million compared to 3.5 million for the fourth quarter of 2018. The primary drivers of the increase in gross profit margin were higher advanced energy sales as a percentage of total sales as well as efficiencies realized in our manufacturing processes in the fourth quarter of 2019. Gross margin for the fourth quarter of 2019 was 66.4% compared to 59.4% last year. The primary drivers of the gross margin improvement this quarter were higher advanced energy sales as a percentage of total sales, efficiencies realized in our manufacturing processes, which are partially offset by a higher mix of advanced energy sales outside the U.S. in the fourth quarter of 19 compared to the prior year period. Additionally, approximately 330 basis points of the year-over-year change in gross margin was a result of GPO fees included in cost of goods sold in the prior year period which did not impact cost of goods sold in the fourth quarter of 2019. GAAP operating expenses for fourth quarter 2019 increased 2.3 million or 25% year-over-year to 11.5 million compared to 9.3 million for the fourth quarter of 2018. The year-over-year change in operating expenses was primarily driven by a $1.4 million increase in professional services, a $0.7 million increase in selling general and administrative expenses, a $0.5 million increase in salaries and related costs, and a $0.4 million increase in R&D expenses. Total GAAP operating expenses were partially offset by 0.7 million of severance costs related to the departure of the company's former CFO, which impacted Q4 2018 expenses and did not impact Q4 2019 GAAP operating expenses. Excluding the impact of these non-recurring expenses, fourth quarter operating expenses increased 2.9 million or 34% year over year. Loss from operations for the fourth quarter of 2019 was 6 million compared to operating loss of 5.7 million last year. Net loss from continuing operations for fourth quarter 2019 was 5.4 million or 16 cents per diluted share compared to a net loss from continuing operations of 3.9 million or 12 cents per diluted share for the fourth quarter of 2018. Fourth quarter 2019 adjusted EBITDA loss was 4.8 million compared to an adjusted EBITDA loss of 4.6 million last year. Excluding the impact of the non-recurring severance costs in the prior year period, adjusted EBITDA loss increased 1 million or 27% year over year in the fourth quarter of 2019. As a reminder, we have provided a detailed reconciliation from gap net loss to adjusted EBITDA in our earnings press release this afternoon. Turning to a brief summary of our fiscal year 2019 results, total revenue for fiscal year 19 increased 11.5 million or 69% year over year to 28.2 million. By segment, total revenue growth of 11.5 million in fiscal year 2019 was driven by an increase of 9.5 million or 73% year over year in advanced energy sales and an increase of 1.9 million or 54% year over year in OEM sales. Advanced Energy and OEM sales represented 80% and 20% of sales in fiscal year 2019, respectively, compared to 78% and 22% of sales in fiscal year 2018. By geography, total revenue growth of $11.5 million in fiscal year 2019 was driven by an increase of $6.7 million or 52% year-over-year in U.S. sales and an increase of 4.7 million or 124% year over year in international sales. US and international sales represented 70% and 30% of sales in fiscal year 2019 respectively compared to 77% and 23% of sales in fiscal year 2018. Gross margin for fiscal year 2019 was 67.9% compared to 64.7% in fiscal year 2018 and increase of 326 basis points year over year. Operating loss for fiscal year 2019 was 20.9 million compared to 14.2 million in fiscal year 2018. The change in operating loss was driven primarily by an increase in operating expenses of 15 million or 60% year over year offset partially by an increase in gross profit of 8.3 million or 77% year over year. As of December 31, 2019, the company had cash and cash equivalents of $58.8 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 $64.4 million as of December 31, 2019, as compared to $81.2 million as of December 31, 2018. Now turning to review of our guidance for first quarter of fiscal year 2020, for the three months ending March 31, 2020, we expect total revenue in the range of $5 million to $5.6 million, representing a decrease of 11% to 0% year over year. This total revenue guidance assumes advanced energy revenue in the range of 4 to 4.6 million, representing a decrease of 8% to an increase of 6% year-over-year, and OEM revenue of approximately 1 million, representing a decrease of 21% year-over-year. In terms of our profitability guidance for Q1 2020, we expect gap net loss in the range of 9 million to 8.6 million, compared to GAAP net loss of $5.6 million in first quarter of fiscal year 2019 and adjusted EBITDA loss in the range of $7.8 million to $7.4 million compared to adjusted EBITDA loss of $4.7 million in first quarter of fiscal 2019. 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, Our first quarter of 2020 total revenue guidance assumes sales in the U.S. increased in the range of down 7% to up 3% year-over-year and sales to customers outside the U.S. decreased in the range of 17 to 7% year-over-year. We expect Q1 2020 gross margins of approximately 64 to 65% compared to 64.6% in Q1 2019. stock-based compensation expense of approximately $1 million, depreciation and amortization of approximately $165,000, 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?