Apyx Medical Corporation

Please stand by. Good morning, ladies and gentlemen, and welcome to the second quarter of fiscal year 2020 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 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 factor section of our most recent annual report on the Form 10-K filed with 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 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 conference over to Mr. Charlie Goodwin, Apex Medical's President and Chief Financial Officer. Please go ahead, sir.

Thanks, operator. Welcome everyone to our earnings call for the second quarter of 2020. I am joined on the 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 a review of our revenue results for the second quarter, including a summary of the impact of the COVID-19 pandemic on our second quarter results. Following this discussion, I will provide you with an update on our recent operational highlights and progress we have made on the four initiatives we are pursuing as part of our longer-term growth strategy. Tara will then provide you with a detailed review of our second quarter financial results. Following Tara's remarks, I'll conclude by sharing some thoughts on our near-term and long-term outlook before we open the call for questions. With that, let's get started with the review of our revenue results. We reported total revenue of 4.3 million for the second quarter of 2020 representing a decrease of 35% year-over-year. From a geographic standpoint, our total US sales for the second quarter of 2020 decreased 25% year-over-year to 3.4 million, while our total international sales decreased 57% year-over-year to 0.9 million. In terms of revenue performance in each of our business segments, In our advanced energy business, sales decreased 46% year-over-year to 2.9 million. In our OEM business, sales increased 10% year-over-year to 1.4 million. The sales growth in our OEM business was driven by higher sales to our legacy OEM customers compared to the second quarter of 2019 due to the timing of orders. As anticipated, the revenue performance in our advanced energy business was significantly impacted by the COVID pandemic and the actions taken to slow its spread. As discussed on our first quarter earnings call, the vast majority of procedures performed with our helium plasma technology are elective. During the second quarter, many of our cosmetic surgery customers around the world continued to be affected by government actions requiring elective procedures to be postponed and nonessential businesses to close temporarily, which resulted in slower adoption and utilization. Specifically, the 46% decline in total advanced energy revenue in Q2 was driven by a decline in generator sales of 60% year-over-year and a decline in handpiece revenue of 15% year-over-year. While Q2 was undoubtedly challenging, we were pleased to see improving trends in each month as we progressed through the quarter. We saw the largest impact from COVID in April, with total advanced energy sales decreasing 93% year over year, driven by declines in both the US and OUS markets. In the US, where nearly all Renuvion procedures are performed in outpatient facilities, such as doctors' offices and surgery centers, we estimate that virtually all of our customers' offices were temporarily closed throughout the month of April as a result of state and local restrictions. After a difficult month in April, signs of recovery and trends started in May. Specifically, in May, we were encouraged to see many of our U.S. surgeon customers reopen as restrictions on elective procedures and nonessential businesses begin to be lifted in various regions across the U.S. As of the end of May, we estimate that roughly 70% of our U.S. customers had reopened. As U.S. practices reopened, our customers were focused on rescheduling postponed or canceled procedures from late March and April Many also reported building strong pipelines fueled by successful implementation of virtual consultations while offices were closed. We saw procedure activity increase steadily in May and June and were particularly encouraged to see utilization-based demand for our Renuvion handpieces follow. Specifically, Renuvion handpiece demand increased nearly 80% year-over-year in the month of June. In one of the most challenging quarters for medical device manufacturers, especially those with elective procedure exposure, the number of Renuvion handpieces sold in the United States declined less than 2% year-over-year. The utilization-based demand for Renuvion handpieces continues to demonstrate that our system is not one of the many examples of the aesthetic market technologies that are adopted and rarely used. Instead, the continued demand for our handpieces is the clearest example that our cosmetic surgery customers have incorporated Renuvion into their practice, value the strong clinical efficacy, and compelling patient outcomes and appreciate the strong return on investment that the system offers to cosmetic surgery practices. Turning to a brief discussion on our advanced energy business outside the United States. Unfortunately, the COVID related business disruption in our primary markets was more pronounced than what we experienced in the US during the second quarter. It is hard to characterize the relative improvement of our OUS business overall as the pace of recovery outside the US has varied depending on the region. April was a very challenging month as a result of COVID related restrictions on elective procedures. We did see business trends improve during the quarter with May better than April and June showing a very modest improvement in business trends compared to May. While the OUS environment was extremely challenging in Q2, the progress we made towards one of our strategic growth initiatives in Q2 helped offset some of the COVID-related headwinds in the quarter. As I will discuss in more detail in a minute, we recently secured new product registrations authorizing the sale of our helium plasma technology products in five new countries. We shipped initial orders to two of these countries, Brazil and Australia, which helped offset some of the year-over-year decrease in our international advanced energy sales in Q2. Simply stated, Q2 was a difficult quarter for our business as anticipated given the pact of COVID-19. April represented a very challenging start to the quarter for our global advanced energy business, with total global advanced energy sales declining 93% year over year. In the U.S., we saw material improvement in business trends the latter half of the second quarter while we were encouraged by the 80% growth in handpiece sales we saw in June. They were only partially offset the challenging capital equipment environment and our U.S. sales were down 30% for the month of June. Outside the US, Q2 was particularly challenging, but we were pleased to see the impact of COVID offset partially by the initial orders to Brazil and Australia. We were certainly happy that the quarter ended on a much stronger note than where it began. However, our total advanced energy sales for the month of June still declined 18% year over year and demand trends for generator adoption in both the US and in our primary OUS markets reflect a market that is in the very early stages of recovery. Turning to a discussion of our operational progress during the second quarter. Despite the COVID-related disruption experienced during the second quarter, we continue to make progress with respect to the four strategic initiatives we are pursuing to position Apix Medical for long-term growth in the cosmetic surgery market. I'll take a moment to review our recent progress with respect to each. Starting with our first initiative to pursue specific clinical indications that will enable us to market and sell Renuvion for new targeted procedures. In the US, as a reminder, we are conducting two IDE clinical studies designed to support our pursuit of new indications for use in dermal resurfacing and skin laxity procedures. As discussed on our Q1 call, clinical trial activity across the US was significantly impacted by the disruption created due to COVID-19 beginning in March. Up to that point, enrollment in both of our IDE clinical studies had been progressing but was paused as a result of the COVID-related disruption. In response, our clinical team was focused on working closely with the investigators from both studies to help mitigate the impacts of this disruption. Once restrictions on elective procedures were lifted in May, we were pleased to resume our efforts in both clinical studies. Despite the COVID driven delay, things are progressing now in both our IDE dermal resurfacing study and in phase one of our IDE skin laxity study, which is focused on one month safety data. Outside the US, our regulatory strategy has focused on expanding our commercial footprint by obtaining regulatory clearance for our helium plasma technology in new countries. As part of this strategy, we are focused on owning the product registrations in the countries that we enter. Our team continued to make important progress on this front during the second quarter. As a result, on June 22nd, we were excited to announce that we received regulatory approval to market and sell our products in five new countries. Australia, Brazil, Israel, Taiwan, and Thailand. While we expect the addition of each of these countries to benefit our longer-term growth profile, it's important to note that Brazil represents the second largest cosmetic surgery market in the world, both in terms of total number of procedures performed and the number of surgeons. During the second quarter, we shipped initial commercial orders to our distributors in Australia and Brazil, and we expect to ship initial orders to the remaining three countries during the second half of the year. In connection with our second strategic initiative, we continued our efforts to expand our portfolio of clinical evidence supporting the use of our Renuvion technology. In April, we published a manuscript discussing the results of our first US IDE study on dermal resurfacing in the peer-reviewed journal, Lasers in Surgery and Medicine. In addition to this publication, our team continues to make progress on additional clinical manuscripts, and we expect to complete and submit multiple manuscripts for publication during the second half of 2020. With respect to our third strategic initiative, enhancing physician and practice support for our cosmetic surgery customers, During the second quarter, we shifted our approach to educational programming and began hosting events virtually for the benefit of both current and prospective customers around the world. In the US, our sales and marketing and field clinical teams hosted four virtual physician education events, which drew close to 200 physician attendees. These events included webinars where our leading physician customers discussed a variety of topics, including the factors that drove their decision to adopt Renuvion, their experience with the technology, their strategies for marketing the technology, and their thoughts on pricing and return on investment. Outside the US, our team hosted continuing educational training sessions on J-Plasma and Renuvion with our current international distributors. They also conducted calls with groups of international prospects interested in learning about Renew Beyond Technology. Lastly, let me briefly discuss our fourth strategic initiative, improving our manufacturing capabilities and efficiencies. Our work to identify and implement new lean initiatives continues to progress and remains an important area of focus for our organization, helping us realize continued improvements over the coming years. As a reminder, one of our focus areas with respect to this initiative has been to implement new process improvements in order to reduce the per unit manufacturing cost of our advanced energy products. We have begun to see early evidence of these activities in the form of improving handpiece margins. Given our progress towards this initiative, we continue to move forward with the APR handpiece as our primary Renuvion handpiece. While this decision resulted in a near-term P&L impact related to the write-down of prior generation handpiece inventory in Q2, we expect considerable contributions to our longer term profitability as the APR handpiece becomes a larger portion of our total handpiece sales going forward. This is a clear example of how the progress we are making towards our strategic initiatives is enhancing our long-term growth and profitability profile. Stepping back, despite the impacts of COVID pandemic, I am very pleased with our company's financial and operational performance this quarter and the excellent job done by our team under these challenging circumstances. With that, let me turn the call over to Tara to discuss our second quarter financial results and comments made in our earnings press release this morning. Tara?

Thanks, Charlie. I will begin my review of our financial results across the rest of the P&L as Charlie covered our second quarter revenue performance in detail. Gross profit for the second quarter of 2020 decreased 2.6 million or 55% year-over-year to 2.1 million. Gross profit margin for the second quarter of 2020 was 48.7% compared to 70.3% last year. Our GAAP gross profit in the second quarter of 2020 was impacted by inventory write downs during the period. We reassessed our forecasted product mix due to COVID-19, increased the availability of our newer handpiece designs and benefited from earlier than expected completion of product registrations in certain international markets. As a result, certain products were reduced to a lower carrying value and some components were also written off as it was determined to cease further production of these models. This resulted in an increase in GAAP cost of goods of approximately 0.4 million during the second quarter of 2020. Excluding the increase in cost of goods related to inventory write-downs, the year-over-year change in gross profit margin for the three months ended June 30, 2020 was driven by product mix within both our advanced energy and OEM segments, revenue mix between our segments, geographical revenue mix, and improved product margins in our advanced energy segment as a result of our continued manufacturing efficiency initiatives. operating expenses for the second quarter of 2020 decreased 0.8 million or 9% year-over-year to 8.3 million compared to 9.1 million for the second quarter of 2019. The decrease in operating expenses year-over-year was driven by a 0.8 million decrease in selling general and administrative expenses and a 0.1 million decrease in salaries and related costs partially offset by a 0.1 million increase in research and development expenses. Importantly, the decrease in operating expenses reflects our initiatives to control costs and reduce our discretionary spending in response to the impact of COVID-19 on our financial condition. Specifically, our operating expenses decreased 21% quarter over quarter as a result of our proactive efforts to control costs in the more challenging operating environment. Loss from operations for the second quarter of 2020 was 6.2 million compared to operating loss of 4.4 million last year. Income tax benefit in the second quarter of 2020 was 1.5 million compared to income tax expense of 76,000 in the second quarter of 2019. In the second quarter of 2020, we benefited from a GAAP tax benefit related to the CARES Act, which was enacted by the U.S. government to provide relief from the coronavirus pandemic. As discussed on our Q1 call, the CARES Act includes a Net Operating Loss, or NOL, carryback provision from which we expect to receive a cash tax refund of approximately $3.7 million by the end of 2020. We recognize an income tax benefit of approximately $1.4 million in the second quarter of 2020 which reduced our GAAP effective tax rate. Net loss for the second quarter of 2020 was $4.7 million or 14 cents per share compared to a net loss of $4.3 million or 13 cents per share for the second quarter of 2019. Second quarter 2020 adjusted EBITDA loss was $4.9 million compared to an adjusted EBITDA loss of $3.6 million last year. Excluding the increase in cost of goods related to inventory write downs in the period, our adjusted EBITDA loss increased only 22% year over year compared to a 35% decrease in total revenue year over year. Our Q2 adjusted EBITDA loss decreased 23% quarter over quarter, which represents the company's proactive efforts to lower our OPEX during the challenging operating environment. As a reminder, we provided a detailed reconciliation from gap net loss to adjusted EBITDA in our press release this morning. As of June 30th, 2020, the company had cash and cash equivalents of 46.2 million compared to cash and cash equivalents of 58.8 million as of December 31st, 2019. The company had working capital of $60.2 million as of June 30, 2020, compared to $64.4 million as of December 31, 2019. Lastly, as mentioned in our earnings press release this morning, given the ongoing challenges and uncertainties posed by the 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 third quarter results conference call in November, we plan to provide updated expectations at that time. With that, I'll turn the call back to Charlie for closing remarks. Charlie?