Apyx Medical Corporation

Please stand by. Good morning, ladies and gentlemen, and welcome to the third quarter of fiscal year 2020 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'd 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 Form 10-K, filed with the Securities and Exchange Commission, as well as our most recent 10-Q filings. 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 these non-GAAP financial measures to the most comparable measures calculated and presented in accordance with GAAP are available in the earnings press release in 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 executive officer. Please go ahead, sir.

Thanks, operator. Welcome, everyone, to our earnings call for the third quarter of 2020. I am joined on the call this morning by Tara Sem, 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 third quarter, including a summary of the impact of the COVID-19 pandemic on our quarterly results. Following this discussion, I will provide you with an update on our recent operational highlights and the progress we have made on our four initiatives we are pursuing as part of our long-term growth strategy. Tara will then provide you with a detailed review of our financial results as well as some assumptions and considerations for modeling our financial performance in the fourth quarter. Following Tara's remarks, I will conclude with some additional thoughts on our near-term and long-term outlook before we open the call for questions. With that, let's get started with review of our revenue results. We reported total revenue of $7 million for the third quarter of 2020, representing a decrease of 8% year-over-year. From a geographic standpoint, our total US sales for the third quarter of 2020 decreased 6% year-over-year to $5.2 million, while the total international sales decreased 14% year-over-year to $1.7 million. In terms of revenue performance in each of our business segments, In our OEM business, sales were essentially flat year over year at $1.5 million, and in our advanced energy business, sales decreased 10% year over year to $5.5 million. The 10% decline in our total advanced energy revenue in Q3 was driven by a decline in generator sales of 36% year over year, which was partially offset by an increase in handpiece revenue of 48% year-over-year. Despite the continued impact of COVID-19 on our capital sales, we were pleased by the improving trends in our advanced energy business as the global recovery continued to progress. Most notably, the 48% year-over-year growth that we saw in global handpiece sales was driven by strong utilization based demand from our U.S. cosmetic surgery customers. Specifically, we saw 93% growth in U.S. handpiece sales year over year. Looking at our U.S. handpiece trends in more detail, As we entered the third quarter, nearly all of our existing U.S. customers had reported their practices were very busy working to accommodate the backlog in cases caused by the COVID pandemic during this past spring. Many also reported building strong pipelines as a result of employing virtual consultations while offices were closed over this period. As a result of these dynamics, July was an exceptionally strong month for our clinician customers in the U.S. Our performance in July also benefited from a softer prior year growth comparison as we discussed both of these dynamics on our Q2 conference call. By mid-August, we believe that the majority of accounts were able to work through their backlog with many accounts reporting that they were extending their office hours or adding additional days to their schedule in order to accommodate these cases. Importantly, we continue to see strong utilization-based demand for Renuvion handpieces throughout the remaining weeks of the quarter, which we view as a positive sign of improving underlying business trends. This is consistent with recent feedback that we have received from many of our US customers who are reporting increased patient volumes after working through their backlog of cases. Outside the US, given the different rates of recovery in each of our primary geographic regions around the world, it remains difficult to characterize our trends. On the encouraging side, we experienced improved handpiece demand in our primary OUS markets during the third quarter. However, while we saw improving handpiece demand trends in the international market, sales of handpieces were still down year over year in the third quarter and the recovery continues to lag behind the trends that we have seen in the U.S. On the capital equipment front, The overall purchasing environment remains in the early stages of recoveries both in the US and internationally. We continue to see that potential new surgeon customers are reluctant to invest in new technology for their practices given the continued overhang of the COVID related business disruption and the future uncertainty created by the pandemic. More importantly, the COVID restrictions on rep access and the lack of in-person selling opportunities like trade shows and clinician events continue to impact our ability to drive new clinician adoption. While we experienced year-over-year decline in global generator sales during the third quarter, Our OUS performance benefited from the recent success that our team has had in securing product registrations authorizing the sale of our helium plasma technology in new countries. During the second quarter of this year, recall that we announced the receipt of new product registrations in five new countries and shipped initial orders to two of these countries, Brazil and Australia. In Q3, I'm pleased to report that we have shipped additional orders to Brazil and Australia along with initial orders to Taiwan and Thailand. These orders helped offset the year-over-year decrease in our international advanced energy business. In summary, despite the continued impact of COVID-19, We are pleased with the sequential improvements that we saw in our advanced energy business trends overall during the third quarter and are very encouraged by the 48% increase in global handpiece sales in Q3. Our team is doing an excellent job of supporting both our existing U.S. surgeon customers and our OUS distributors. The majority of accounts that we serve in the U.S. are open, seeing evidence of sustained improvement in patient volumes after working through their backlog and becoming more adept at managing their practices efficiently while prioritizing the health and safety of their patients. And lastly, while we remain in the early stages of the global recovery in capital equipment purchasing, We are pleased to see our international advanced energy sales performance continue to benefit from sales in new countries that we added this year. Turning to a discussion of our operational progress during the quarter, our team made considerable progress on our four strategic initiatives to position Apex Medical for long-term growth in the cosmetic surgery market. Starting with our first initiative to pursue specific clinical indications that will enable us to market and sell Renuvion for new targeted procedures. After restrictions on elective procedures were lifted in the U.S. during the second quarter, we continued to make progress on our two IDE clinical studies which are intended to support our pursuit of new indications for the use of dermal resurfacing and skin laxity procedures. Today, we are very pleased to announce the achievement of key milestones with respect to both of these studies. First and foremost, I'm excited to announce that we have completed enrollment last week in our clinical study evaluating the use of Renuvion technology for dermal resurfacing procedures. We also continue to make progress in the first phase of our IDE study evaluating the use of Renuvion in skin laxity procedures in the neck and submental region. As a reminder, phase one is focused on collecting one month safety data to be submitted to the FDA for a safety review. I'm pleased to announce that we completed enrollment in phase one and submitted our one month safety data to the FDA for review. Last week, FDA completed their review of our one-month safety data and concluded that we met the requirements, completing phase one of our study. We look forward to working with the FDA to begin phase two. In addition to our US regulatory strategy, we are focused on expanding our commercial footprint internationally by obtaining regulatory clearance for our helium plasma technology in new countries. As I mentioned earlier during the second quarter, we were pleased to receive regulatory approval to market and sell our products in five new countries, Australia, Brazil, Israel, Taiwan, and Thailand, and expect the addition of each of these five countries to benefit our long-term growth profile. In Q3, we further expanded our international footprint with the addition of new product registrations in both Latvia and Lithuania. While we do not expect either country to contribute materially to the performance in 2020, the addition of these new countries reflect the ability of our regulatory team to drive continued progress despite the global disruption due to COVID. With respect to our second strategic initiative, we continued our efforts to expand the portfolio of clinical evidence supporting the use of our Renuvion technology. This past month, we were pleased to announce the publication of two peer-reviewed articles which were both featured in the journal Dermatological Reviews. The first publication evaluated our Renuvion technology when used independently of liposuction for submental coagulation in the neck. The second publication evaluated Renuvion when used in combination with liposuction for subdermal coagulation in various treatment areas of the body. Each publication featured data from multiple retrospective chart review studies which we believe serves to further strengthen the risk-benefit profile of Renuvion. While we continue to build on this recent progress to further demonstrate the clinical ability of our Renuvion technology and facilitate its broad-based adoption. Moving to our third strategic initiative, enhancing physician and practice support for our cosmetic surgery customers, Given that the COVID pandemic has impacted our ability to host in-person events, our team continues to conduct educational programming virtually. During the third quarter, our sales, marketing, and field clinical teams organized six virtual physician education events, which were attended by approximately 160 physicians. These events were similar to the physician mentoring program, or PMP events, that we have traditionally conducted in person and were led by some of our top physician customers. Our team also organized three virtual training sessions for our international distributors, which were focused on further educating them about the features and benefits of our technology. In addition to our live programming, we have also expanded our platform of online resources for our existing customers to include prerecorded webinars, procedural videos, and user experience videos that are available on demand. Lastly, with respect to our fourth strategic initiative, improving our manufacturing capabilities and efficiencies, As I have discussed in prior quarters, one of our most important focus areas under this initiative has been to implement new process improvements in order to reduce the per unit manufacturing costs of our advanced energy products. These efforts are reflected in improved margins of our APR handpiece, which we launched earlier this year. Our financial results are already benefiting from the gross margin improvement as the APR handpiece becomes a larger portion of our total handpiece sales. We expect the benefits of this fourth strategic initiative to drive continued contributions to our long-term profitability over the remaining months of 2020 and beyond. Stepping back, despite the ongoing challenges of COVID pandemic in Q3, our organization continue to demonstrate their ability to effectively support our customers while also driving progress with respect to our long-term strategy. With that, let me turn the call over to Tara to discuss our third quarter financial results. Tara?

Thanks, Charlie. Since Charlie covered our third quarter revenue performance in detail, I will begin my review of our Q3 financial results by continuing down the P&L. Gross profit for the third quarter of 2020 decreased 0.6 million or 10.7% year-over-year to 4.7 million. Gross profit margin for the second quarter of 2020 was 67.9% compared to 69.9% last year. The year-over-year decrease in gross profit was driven by product mix within our advanced energy segment and revenue mix between our segments. The decrease in gross margin was offset partially by improved product margins within our advanced energy segment as a result of our continued manufacturing efficiency initiatives and by improved margins attributable to product mix within our OEM segment. Operating expenses for the third quarter of 2020 decreased 1 million or 9.5% year over year to 9.1 million compared to 10.1 million for the third quarter of 2019. The decrease in operating expenses year-over-year was driven by a $1.1 million decrease in selling, general, and administrative expenses and a $.2 million decrease in professional services, partially offset by a $.3 million increase in salaries and related costs. It is important to note that the year-over-year 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. Loss from operations for the third quarter of 2020 was 4.4 million compared to operating loss of 4.8 million last year. Income tax benefit in the third quarter of 2020 was 0.7 million compared to income tax expense of approximately 0.2 million in the third quarter of 2019. In the third 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 we discussed on our first quarter 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 also recognized an income tax benefit of approximately $0.8 million in the third quarter of 2020 related to our net loss which reduced our GAAP effective tax rate. There are approximately $2.4 million of 2018 federal income tax payments available to offset against any further losses incurred in 2020. Net loss for the third quarter of 2020 was $3.7 million or $0.11 per share compared to a net loss of $4.4 million or $0.13 per share for the third quarter of 2019. Third quarter 2020 adjusted EBITDA loss was $3.1 million compared to an adjusted EBITDA loss of $3.8 million last year. As a reminder, we provided a detailed reconciliation from gap net loss to adjusted EBITDA in our press release this morning. We are pleased that we reported improvement in our adjusted EBITDA loss of $0.7 million year-over-year despite our revenue decreasing $0.6 million year-over-year in the third quarter. As of September 30, 2020, the company had cash and cash equivalents of $43.5 million compared to cash and cash equivalents of $58.8 million as of December 31, 2019. The company had working capital of $58.1 million as of September 30, 2020 compared to $64.4 million as of December 31, 2019. Turning to our 2020 outlook, as mentioned in our earnings press release this morning, given the ongoing challenges and uncertainties posed by the global COVID-19 pandemic, we will not be providing full 2020 guidance on today's call. In the absence of formal guidance, we have elected to provide additional directional commentary to assist in modeling our business. We continue to expect our OEM revenue to be approximately $5 million in 2020. Overall, we expect continued improvement in trends as we move through Q4. However, we continue to expect total revenue to decline on a year-over-year basis. Importantly, our expectations for revenue results in the fourth quarter have not changed from what we shared on our Q2 call in August, where we had hoped to see a return to growth in the U.S. in the fourth quarter. We expect to report growth in U.S. advanced energy sales on a year-over-year basis in Q4 and a decline in our international advanced energy business on a year-over-year basis. Turning to the P&L, we would expect to see sequential improvement in our gross margins compared to the third quarter of this year, driven primarily by geographic revenue mix but also due to the continued benefit of our recent manufacturing initiatives on our overall handpiece margins. We anticipate our Q4 operating expenses will increase sequentially in the high single digits, driven primarily by higher sales and marketing related expenses as a result of commissions on higher sales. And lastly, we would expect this to translate into similar EBITDA loss quarter over quarter. With that, I'll turn the call back to Charlie for closing remarks. Charlie?