Apyx Medical Corporation

Good morning, ladies and gentlemen, and welcome to the first quarter of fiscal year 2020 earnings 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 Thank you for joining us. 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 earnings call for the first quarter of 2020. I am joined on this call this morning by Tara Sim, our Chief Financial Officer. Let me provide you with a quick agenda for today's call. I'll begin with our review of Q1 results and the factors that impacted our performance during the quarter. I'll then turn towards a broader discussion of the business and disruption that we have experienced as a result of the COVID-19 pandemic as well as the actions we have taken in response. Following this discussion, I will briefly review and provide updates on the four strategic initiatives we are pursuing as part of our longer term growth strategy. I'll conclude by sharing our current thoughts on the continued business disruption due to COVID-19 and our long term outlook. Tara will then provide you with a detailed review of our financial results for the first quarter 2020 before we open the call for questions. With that, let's get started with the review of our financial and operational performance during the first quarter. We reported total revenue of $5 million, representing an 11% decline year over year. Our first quarter total revenue results came in at the low end of our guidance range of $5 million to $5.6 million that we provided as part of our fourth quarter earnings report on March 16, 2020. Despite revenue results that were at the low end of our guidance range, we delivered net loss and adjusted EBITDA results that far exceeded the guidance ranges we provided on our Q4-19 earnings call. These results were driven by two things. First, strong execution against our stated objectives to reduce operating expenses in light of the COVID-related challenges. And second, a GAAP income tax benefit related to changes in corporate tax provisions as part of the CARES Act. The first item will improve our near-term cash flow profile as our OpEx initiatives will benefit our reported P&L results in the coming quarters. And the adoption of the provisions under the CARES Act will result in a material tax refund later in 2020. Turning to review of our revenue results in the first quarter. From a geographic standpoint, we experienced year-over-year declines in both our U.S. and OUS business this quarter. Our total U.S. sales declined 7% year-over-year to $3.6 million, while total international sales declined 20% year-over-year to $1.4 million. In terms of revenue performance in each of our business segments, in our advanced energy business, sales declined 9% year-over-year to $4 million. In our OEM business, sales declined 20% year-over-year to $1 million. The OEM sales results were entirely in line with our expectations and were not impacted by the COVID crisis. Rather, they were a result of lower revenue generated in our legacy OEM business compared to first quarter 2019, largely attributable to the timing of orders compared to the prior year period. As discussed in our Q4 call, the revenue performance in our advanced energy business in Q1 was impacted by the crisis caused by the spreads of the COVID pandemic. We were very pleased with our advanced energy growth over the first two months of the quarter, where total revenue increased 33% year-over-year, driven by 58% growth in the sales of our handpieces, and 13% growth in sales of generators. The growth trends over the first two months of 2020 reflects strong utilization-based demand for our Renuvion Technology handpieces, while the growth in generators reflects the initial impact of COVID-related disruption in our business in our international markets beginning in February. As discussed on our Q4 mid-March call, We had already begun to see the business trend show signs of disruption as a result of COVID. Specifically, we had seen a slowdown in the adoption and utilization first in our international markets and then the U.S. as we moved through the first few weeks of March. Given the high level of uncertainty at that time, providing full year 2020 guidance was not possible. Instead, we elected to provide only our expectations for financial results in Q1. We shared that these Q1 expectations were based on the best information we had at that time and factored in a significant impact to our business from COVID-19 over the balance of the first quarter. Our business deteriorated sharply in the weeks following our earnings call and candidly, the decline we experienced experienced over the second half of March was modestly sharper than we had contemplated in our Q1 guidance range. This performance was a direct result of the preventative or protective actions taken by governments in response to the COVID-19 pandemic. As a reminder, the overwhelming majority of procedures performed using our helium plasma technology are elective. and as a result, many of these customers have been affected by government actions requiring elective procedures to be postponed and non-essential businesses to close temporarily. In the U.S., substantially all Renuvion procedures are performed in outpatient facilities, including doctors' offices and surgery centers. During March, these businesses began to temporarily close as states and cities across the U.S. implemented restrictions. While the timing of these closures across the U.S. varied by region, we experienced a rapid deterioration in procedural trends over the last two weeks of March as a result. In March, total advanced energy sales declined nearly 50% year over year, driven by sales of our international distributors declining 75% year over year and sales of our U.S. cosmetic surgery customers declining nearly 30% year over year. Regarding the deterioration in the U.S. market over the last two weeks of March specifically, sales declined more than 40% year over year. Turning to a discussion of our response to COVID-19. Apix Medical has been monitoring the COVID-19 pandemic closely. We reacted quickly during the first quarter to protect the health and safety of our employees, patients, customers, and distributor partners around the world. As a medical device company, we have been able to continue manufacturing operations. To ensure the safe manufacturing environment, we divided our manufacturing personnel into multiple smaller shifts to allow for adequate social distancing. We have also made other important improvements to our safety protocols, including requiring all employees to wear protective equipment while on site and increasing the frequency of facility cleanings. We have also placed restrictions on employees' business travel, restricted access to the facilities, and required that all non-essential employees work remotely until further notice. In addition to the initiatives we have put in place to protect the health and safety, we have focused our direct sales team on remaining in close contact with their existing surgeon customers to do everything they can to provide them with support during this difficult time. With this goal in mind, we have implemented additional training for our sales reps in order to sharpen their ability to engage with our customers virtually. In addition to engaging with existing customers via virtual methods, our reps also continue to target and reach out to prospective accounts so that they will be well positioned when the recovery occurs and surgeons return to conducting elective cosmetic procedures. Outside the US, we are closely monitoring the activities of our distributor partners and helping them navigate the challenges they face as a result of the slower demand they are seeing in their respective countries. Lastly, we have taken important steps to reduce our spending in light of the COVID-19 crisis. While our spending during the first two months of 2020 reflected our normal business activities, In March, we began curtailing our costs in response to the impact of COVID-19 on the financial condition, beginning with reducing business travel expenses and implementing hiring restrictions. We have identified other areas of our expense plan that can be delayed in order to maximize capital until the business environment outlook becomes more certain. These include further reductions to our discretionary spending, such as spending on trade shows, marketing events, and professional fees. Additionally, we have temporarily delayed investment in certain R&D projects and clinical research studies until the environment normalizes and we are able to pursue these activities efficiently. Lastly, we have eliminated the bonus accrual related to the achievement of our 2020 performance objectives to further reduce the operating expense profile during this period of unprecedented uncertainty in the broader elective procedure environment. Importantly, we continue to invest in key areas of our business that support our future growth so we are well positioned as the market recovers from this pandemic. Most notably, we have no intention of changing the size of our sales team or furloughing any of our employees at this time. We have spent considerable effort building and training a world-class sales team, and we are focused on ensuring that they are well prepared to drive our return to strong growth as the crisis subsides. We have also built a strong leadership team in recent years, and I am proud to say that the team remains committed to our mission despite these challenging times. In addition, while we have temporarily delayed investment in certain clinical research studies We continue to support the areas that are most important for our longer-term growth, including our U.S. IDE clinical studies in dermal resurfacing and skin laxity. I'd like to now take a minute to update you on our operational progress with respect to the four strategic initiatives we are pursuing to position Apix Medical for long-term growth in the cosmetic surgery market. The first one to pursue specific clinical indications that will enable us to market Encel Renuvion for new targeted procedures. In the first two months of 2020, we continued to make progress in enrolling new patients in our two US IDE clinical studies. As a reminder, we designed and implemented these studies as part of our long-term strategy to pursue new clinical indications for the use of Renuvion, specifically for dermal resurfacing and skin laxity procedures. Clinical trial activity across the U.S. has been significantly impacted by the disruption created due to COVID-19, and enrollment in these two studies have been paused as a result. Our clinical team is working closely with the investigators from both studies to help mitigate the impacts of this disruption and position us to resume enrollment once it is considered safe to do so. While we plan to continue with both studies, we are currently unable to estimate when we will be in position to resume enrollment at this time. In addition to our regulatory progress, We also continued our efforts to expand our portfolio of clinical evidence supporting the use of our Renuvion technology, which is our second strategic initiative. During the first quarter, we completed and submitted a clinical manuscript for the publication discussing the results of our first U.S. IDE study on dermal resurfacing. I am pleased to announce that this manuscript was published in April in a peer-reviewed journal, Lasers in Surgery and Medicine. In 2020, we remain focused on completing and submitting at least three additional clinical manuscripts for publication. With respect to our third strategic initiative, enhancing physician and practice support for our cosmetic surgery customers, During the first two months of 2020, our plans to host new physician mentor programs, or PMPs, and expand our presence and educational programming at industry conferences and trade shows proceeded as expected. Our events planned for March, however, were canceled due to COVID-19 pandemic. In lieu of this in-person programming, our sales and marketing and field clinical teams have been very active in engaging with our customers and prospects around the world. We have hosted educational events virtually, where we featured some of our leading clinician customers speaking on a wide range of topics, including side-by-side results comparing Renuvion to a leading competitor technology. Our virtual education events have also included case studies to illustrate how our leading clinician customers have adopted Renuvion, their strategies for marketing and selling to new patients, and their thoughts on pricing and ROI. Last week, we hosted the first installment of a planned series of webinars designed to assist our customers and prospects with opening their practice post-COVID. We are also engaging with clinical customers outside the US, including hosting multiple continuing education training sessions on J-Plasma and Renuvion with our current international distributors, and multiple calls with groups of international prospects interested in learning about Renuvion technology. And lastly, with respect to our fourth strategic initiative, improve our manufacturing capabilities and efficiencies, During the first quarter, we continued to work to implement new mean initiatives. This work remains an ongoing area of focus in order to drive progress in 2020 and the years to come. Despite the many challenges we have faced and we will continue to face as a result of the COVID-19 pandemic, I have been incredibly pleased with the response of our organization and the commitment that our employees have shown to supporting our customers and maintaining our operation during such a difficult period in our company's history. Ultimately, Apex Medical is well positioned to weather this crisis and return to our record of delivering strong growth as it subsides. First, with over $51 million of cash on our balance sheet, we are very well capitalized. We believe we have adequate resources to fund our operations for multiple years. Second, the strength of our balance sheet and our targeted strategies to control our near-term expenses allow us to support and invest in elements of our business that ensures we are poised to recover quickly and continue to drive progress with respect to our long-term growth strategy. And third, We are not experiencing any significant disruption to our supply chain as a result of the COVID-19 pandemic and our in-house manufacturing is progressing under our enhanced health and safety protocols. Given the significant uncertainties associated with the COVID-19 pandemic, we recognize the investment community's desire for increased clarity and have elected to provide color on our current quarter trends. Simply stated, the impact that COVID-19 has had on the activity of our customers and their patients has continued to represent an ongoing challenge for our advanced energy business. Our U.S. and international sales trends during the month of April continue to deteriorate. relative to the year-over-year sales trends we saw during the month of March. A significant amount of uncertainty remains in terms of when the restrictions on our customers will be lifted, ultimately when the patients will choose to undergo elective cosmetic procedures once our customers' practices are allowed to reopen. We are encouraged by the announcements and initial activities related to lifting of the shelter-in-place restrictions over the past two weeks, and we expect our cosmetic surgeon customers to begin the process of reopening their offices as soon as the respective state mandates allow. At this point, the pace and timing of when we see an uptick in elective procedure volume and the related increase in demand for our procedure-related handpieces remains highly uncertain. Naturally, we would expect the trends in adoption of Renuvion technology and the related improvement in generator sales trends to lag behind the improvement in elective procedure environments, again, the timing of which remains difficult to predict at this time. Importantly, the COVID-19 pandemic has not altered our competitive advantages in the market and the attractive long-term opportunities that we are pursuing. With its ability to deliver heat to tissue in incredibly efficient and controlled manner, our helium plasma technology continues to represent a unique energy modality with the ability to transform how procedures are performed in the cosmetic surgery market. We continue to receive strong positive feedback from plastic and cosmetic surgeons highlighting the outcomes they have been able to achieve with our Renuvion products. We are focused on leveraging this unique technology to pursue an addressable market opportunity for the cosmetic surgery market that is estimated to be over 1.5 billion in the U.S. alone with significant opportunities outside the U.S. as we continue to pursue new registrations in key international cosmetic surgery markets going forward. And we are pursuing these opportunities with a commercial strategy that has demonstrated strong results over the last two years. At the same time, the four strategic initiatives I have discussed earlier will position us to drive long-term growth in the cosmetic surgery market by facilitating the broad-based adoption of our technology. For these reasons and many others, as the COVID-19 crisis subsides, Thanks, Charlie.

Thank you. Thank you. Given the detailed discussion by Charlie on our revenue performance, I will begin my review of our first quarter financial results across the rest of the P&L. Gross profit for the first quarter of 2020 decreased $0.6 million or 16% year-over-year to $3 million. Gross profit margin for the first quarter of 2020 was 59.7% compared to 63.3% last year. The primary drivers of the change in gross profit margin were product mix within both our advanced energy and OEM segments, revenue mix between our segments, and geographical revenue mix, offset by improved product margins in our advanced energy segments as a result of our continued manufacturing efficiency initiatives. Operating expenses for first quarter 2020 increased $1.2 million, or 13% year-over-year, to $10.5 million, compared to $9.3 million for the first quarter of 2019. The year-over-year change in operating expenses was driven by a $.8 million increase in selling, general, and administrative expenses, a $.3 million increase in professional services, and a $.3 million increase in R&D expenses. These increases were offset slightly by a $200,000 increase and related salaries and related costs. As Charlie mentioned earlier, our proactive efforts to reduce our operating expenses reflects strong execution, specifically in response to the COVID pandemic, we identified more than 1.5 million in operating expense reductions compared to what was implied by our Q1 guidance. Loss from operations for the first quarter of 2020 was $7.5 million compared to operating loss of $5.7 million last year. Net loss for the first quarter 2020 was $2 million or $0.06 per diluted share compared to a net loss of $5.6 million or $0.17 per diluted share for the first quarter of 2019. Our net loss for the first quarter of 2020 was significantly lower than the guidance range provided on our fourth quarter earnings call. In addition to the notable progress we made in reducing our operating expenses in the first quarter, we also benefited from a gap tax benefit in the period. As detailed in our press release this morning, on March 27, 2020, the U.S. government enacted the CARES Act to provide relief from the coronavirus pandemic. The CARES Act includes a net operating loss carryback provision, by which the company recognized an income tax benefit of approximately $4.9 million in the first quarter of 2020 and expects to receive a cash tax refund of approximately $3.7 million by the end of 2020. Together, the significant reduction in our operating expense profile and this provision in the CARES Act will help mitigate the financial impact of the COVID-19 pandemic. First quarter 2020 adjusted EBITDA loss was $5.8 million compared to an adjusted EBITDA loss of $4.6 million last year. As a reminder, we provided a detailed reconciliation from gap net loss to adjusted EBITDA in our press release this morning. As of March 31, 2020, the company had cash and cash equivalents of $51.4 million compared to cash and cash equivalents of $58.8 million as of December 31st, 2019. The company had working capital of 63.6 million as of March 31st, 2020 compared to 64.4 million as of December 31st, 2019. Lastly, as mentioned in our earnings press release this morning, given the challenges and uncertainties posed by the ongoing global COVID-19 pandemic, the company will not be providing full year 2020 financial guidance on today's call. Assuming a more normalized business environment prevails at the time of our second quarter results conference call in August, we plan to provide updated expectations at that time. With that, I'll turn the call back to Charlie for closing remarks. Charlie?