Apyx Medical Corporation

Good morning, ladies and gentlemen, and welcome to the fourth quarter and 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 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 form 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 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, Kevin. Welcome, everyone, to our fourth quarter and full year 2020 earnings call. I'm joined on the call this morning by our Chief Financial Officer, Tara Sam. Let me provide you with a quick agenda for today's call. I'll begin with a review of our strong fourth quarter revenue results. Following this discussion, I will provide you with an update on the operational progress we made during the quarter on our four initiatives we are pursuing as part of our longer-term growth strategy. Tara will then provide a detailed review of our fourth quarter financial results and an overview of our 2021 financial guidance, which we introduced in our press release this morning. I will conclude with some additional thoughts on our near-term areas of focus and long-term outlook as we enter 2021. We will then open the call for questions. With that, let's get started with a review of our Q4 revenue results. We were extremely pleased to report total revenue of $11.5 million for the fourth quarter of 2020, an increase of 37% year-over-year. Our total revenue results came in slightly above the high end of the preliminary range we provided in January and greatly exceeded our expectations for the fourth quarter. Recall that at the time of our Q3 earnings call, we expected total revenue to decrease year over year in the fourth quarter. We were very pleased with the revenue results we delivered this quarter, especially given the continued challenges related to COVID-19 and our primary markets around the world. By geographic region, our total US sales for the fourth quarter of 2020 increased 18% year over year to 6.6 million, while total international sales increased 74% year over year to 4.9 million. And by business segment, our advanced energy sales increased 44% year over year to 9.9 million and our OEM sales increased 4% year-over-year to $1.6 million. Our impressive advanced energy segment performance was largely driven by strong sales of our handpieces, which grew 78% year-over-year, coupled with a 25% year-over-year increase in sales of our generators. It's important to note that the 78% year-over-year growth we saw in global sales of our handpieces was primarily driven by strong demand both domestically and internationally. Looking at our advanced energy sales performance more closely, in the U.S., we saw handpiece sales increase 80% year-over-year. Our U.S. handpiece sales were primarily driven by strong utilization-based demand from our existing surgeon customers. Nearly all of our existing U.S. customers were open and active throughout the quarter. After working through their case backlogs during Q3, many reported they continued to see increased patient volumes throughout the fourth quarter, reflecting strong underlying procedure demand. While our access to prospective new customers improved during the fourth quarter, the capital equipment environment in the U.S. remained challenging. As a result, U.S. generator sales declined high single digits on a year-over-year basis in the fourth quarter. Outside the U.S., international sales were the largest driver of the upside that we saw in our advanced energy business during the fourth quarter. I'm pleased to report that we saw year-over-year growth in international sales of both handpieces and generators, which increased 75% and 88% respectively in Q4. Our handpiece growth was surprisingly strong given the environment, fueled in part by orders from our distributor in Brazil. However, even excluding that demand, Our international handpiece sales increased 45% year-over-year. Importantly, our growth in international sales of generators was predominantly fueled by orders from countries that we entered over the first nine months of 2020, most notably orders from our distributor in Brazil. Overall trends in our international advanced energy business remain difficult to generalize given that the pace of recovery continues to vary by both region and country. Our performance in Latin America during the fourth quarter was bolstered by strong sales in Brazil and we saw pockets of strength in the Middle East while performance in Europe, Canada, and APEC regions continued to lag. Turning to a discussion of our operational progress, We complimented our strong fourth quarter sales performance with notable 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, we were pleased to achieve multiple milestones during the fourth quarter with respect to our two IDE clinical studies. As a reminder, we are conducting these studies to support the pursuit of new indications for the use in dermal resurfacing and skin laxity procedures. In early November, we completed patient enrollment in our clinical study evaluating the use of Renuvion technology for dermal resurfacing procedures. Following the completion of enrollment, our team has been focused on completing the 90-day follow-up visits for the enrolled patients and collecting, aggregating, and analyzing the data from this study with the goal of submitting our request for 510 pay clearance by the end of May 2021. We also submitted one month safety data to the FDA from phase one of our IDE study evaluating the use of Renuvion in skin laxity procedures in the neck and submental regions. After reviewing the safety data, the FDA concluded that we met the requirements, completing the phase one portion of the study. On November 23rd, we announced that the FDA approved our supplement enabling us to move forward with phase two of this study. Our approved supplement included changes to the treatment protocol based on feedback from our investigators during phase one as well as an updated statistical analysis plan and an increase in the number of investigational sites. I am pleased to report that we initiated enrollment in phase two in December as anticipated and we will continue to expect to complete enrollment in the third quarter of 2021. In terms of our OUS regulatory strategy, we continue to pursue regulatory clearance of our helium plasma technology in new countries with the goal of expanding our global commercial footprint. During the fourth quarter, I'm pleased to report that our regulatory team was able to obtain new product registrations in four new countries in Latin America and Eastern Europe. We do not expect these four countries to contribute materially to our performance in 2021, but remain pleased by our rapid pace of progress in obtaining new product registrations despite the global disruptions due to COVID. Turning to our second strategic initiative, we continue to expand our portfolio of clinical evidence for Renuvion with several new publications during the fourth quarter. On October 20th, we announced the publication of two peer-reviewed articles, which were both featured in the journal Dermatological Reviews. Each publication included data on our Renuvion technology, from multiple retrospective chart review studies. One evaluated the independent use of Renuvion for subdermal coagulation in the neck, while the other evaluated its use in combination with liposuction for subdermal coagulation in various parts of the body. On October 26th, another peer-reviewed article was published in the Aesthetic Surgery Journal Open Forum which focused on the use of Renuvion for subdermal coagulation following the contouring the upper and middle back regions with ultrasound assisted liposuction. We were also pleased to see two additional publications during the quarter in the Biomedical Journal of Scientific and Technical Research which focused on the use of our technologies in areas outside of cosmetic surgery procedures. Collectively, these publications continue to bolster our portfolio of evidence supporting the risk-benefit profile of our technology when used across multiple areas of the body. With respect to our third strategic initiative, enhancing physician and practice support for our cosmetic surgery customers, in lieu of in-person events, our team continued to organize and conduct educational programs virtually. In the U.S., we hosted four virtual physician education events, which were similar in format to our in-person physician mentoring programs. These virtual events drew attendance from approximately 60 physicians. Outside the U.S., we hosted two virtual training sessions to educate some of our distributors on the features and benefits of our helium plasma technology. Our team continued to develop new marketing materials which are now available for our existing Renuvion customers to use via our online marketing portal. On our fourth and final strategic initiative, improving our manufacturing capabilities and efficiencies, our efforts to reduce the per unit manufacturing cost of our advanced energy products continues to demonstrate progress as a result of the expanding commercial adoption of our APR handpiece. Following the launch of our APR handpiece in early 2020, we have focused on introducing this next generation product to our existing customer base. I'm pleased to report that by the end of 2020, nearly all of our North American customers had begun using our new handpiece for a portion of their procedures. Importantly, the adoption of our APR handpiece was the primary driver of the improvement that we saw in our total gross margins during the fourth quarter, which increased approximately 80 basis points year over year. In summary, as a result of our strong sales performance in Q4, in spite of the continued headwinds created by the COVID pandemic, We were ultimately pleased to see sales decline by only 2% for the full year after experiencing a 24% decline in year-over-year sales during the first half of 2020. As Tara will discuss further, we complemented our exceptional sales performance during the fourth quarter with strong year-over-year improvements in our total gross margins, net loss, and adjusted EBITDA. and lastly, we continue to drive important progress on all of our long-term strategic initiatives. The impressive financial and operating performance that we achieved is a direct result of our team's execution and their dedication to supporting our customers and their patients. I'd like to congratulate them on a great quarter and a strong conclusion to a very challenging year. With that, let me turn the call over to Tara to discuss our fourth quarter financial results and 2021 guidance. Tara?

Thanks, Charlie. I will begin my review of our Q4 financial results by continuing down the P&L. Growth profit for the fourth quarter of 2020 increased $2.1 million, or 38.4% year-over-year, to $7.7 million. Gross profit margin for the fourth quarter of 2020 was 67.2% compared to 66.4% last year. The year-over-year increase in profit margins was driven in part by product mix within our advanced energy segment, as well as improved product margins in our advanced energy segment due to our continued manufacturing efficiency initiative and the introduction of new products, including the APR handpiece. The increase in profit margins was offset partially by product mix within our OEM segment and geographical revenue mix due to international sales growth outpacing domestic sales growth. Operating expenses for the fourth quarter of 2020 decreased $1.8 million or 15.4% year-over-year to $9.8 million compared to $11.5 million for the fourth quarter of 2019. The decrease in operating expenses year-over-year was driven by a $1.2 million decrease in professional services, a $.9 million decrease in SG&A expenses, and a $.2 million decrease in R&D expenses, partially offset by a $.5 million increase in salaries and related costs. The year-over-year decrease in operating expenses reflects the continued benefits from our initiatives to control costs and reduce our discretionary spending early in 2020 in response to the impact of COVID-19 on our financial condition. Loss from operations for the fourth quarter of 2020 was 2.1 million compared to operating loss of 6 million last year. Income tax benefit for the fourth quarter of 2020 was 0.4 million compared to approximately 0.4 million in the fourth quarter of 2019. Net loss attributable to stockholders for the fourth quarter of 2020 was $1.5 million or $0.04 per share compared to $5.4 million or $0.16 per share for the fourth quarter of 2019. Fourth quarter 2020 adjusted EBITDA loss was $0.7 million compared to $4.8 million last year. As a reminder, we provided a detailed reconciliation from DAPNET loss to adjusted EBITDA loss in our press release this morning. As of December 31st, 2020, the company had cash and cash equivalents of $41.9 million compared to $58.8 million as of December 31st, 2019. As of December 31st, 2020, the company had working capital of $56.9 million including our expected tax refunds of approximately $7.5 million that the company anticipates receiving during 2021 related to the net operating loss carrybacks resulting from the 2020 CARES Act. Turning to a review of our 2021 financial guidance, which we introduced in our earnings press release this morning, we expect total revenue in the range of $36.7 million to $38.7 million, representing growth of 32% to 40% year-over-year Thank you. Thank you. Thank you. assumed that U.S. growth is only driven by contributions from Renuvion sales related to its use as a subdermal coagulator following liposuction procedures, and that international growth is driven primarily by demand in existing international markets. OEM revenue of approximately $4.4 million, representing a decline of 20% year-over-year, compared to $5.5 million in fiscal year 2020. In terms of profitability guidance for fiscal year 2021, we expect net loss attributable to stockholders in the range of $18.4 to $20.7 million compared to $11.9 million in fiscal year 2020. And we expect adjusted EBITDA loss in the range of $12 million to $14.6 million compared to adjusted EBITDA loss of $14.5 million in fiscal year 2020. As a reminder, we have included a full reconciliation from GAAP net loss to non-GAAP adjusted EBITDA loss in our earnings press release this morning. In addition to our formal financial guidance for 2021, we are providing some considerations for modeling purposes. First, our total company revenue growth will be driven exclusively by our advanced energy business, which at the midpoint of guidance range assumes growth of 50% year over year. More than offsetting the 20% decline we expect in OEM sales in 2021, driven primarily by COVID-related recovery trends and the impact on demand from our OEM customers. Second, the 50% growth at the midpoint in our advanced energy business this year will be driven by strong growth in both U.S. and in international markets. However, we expect roughly 60% growth in sales to U.S. advanced energy customers and roughly 35% growth in sales to international advanced energy customers. Third, we expect growth margins in the range of 69% to 71% this year compared to 63.2% last year, driven primarily by continued mixed benefits by segment, by geography, and by product, specifically our continued manufacturing efficiency initiatives for our handpieces, including the APR handpiece. We expect GAAP operating expense to increase approximately 22% year-over-year, driven by mid-single-digit growth in our normalized operating expenses, which excludes roughly $4.3 million of COVID-related expense reductions, including discretionary, travel and entertainment, and other compensation-related expenses that benefited our 2020 GAAP operating expense. incremental stock-based compensation expense in 2021 of approximately 1.3 million and approximately $500,000 of initial expenses related to our joint venture partnership in China, which we established last year. Fifth, net interest and other expense of approximately $150,000 in 2021 compared to a benefit of approximately $700,000 last year. Six, income tax expense of approximately $180,000 in 2021 compared to an income tax benefit of $7.5 million in 2020, which included the aforementioned net operating loss carryback tax benefit from the 2020 CARES Act. Finally, we expect non-cash depreciation and amortization of approximately $700,000, non-cash stock-based compensation expense and a range of 5.2 to 5.5 million and weighted average diluted shares outstanding of approximately 35 million shares. In addition to our formal financial guidance for 2021, while it is not our practice to provide quarterly guidance, given that we are recording in the last week of the fiscal, first fiscal quarter of 2021, we thought it would be helpful to share a range of expectations for total revenue in the interest of transparency. We anticipate total revenue for the first quarter of 2021 in the range of $7.8 to $8 million, representing growth of 55 to 60% year-over-year. This total revenue range assumes advanced energy revenue in the range of approximately $6.8 to $7 million, representing growth of 71 to 76%, and OEM revenue of approximately $950,000, representing a decrease of 6% year-over-year. With that, I'll turn the call back to Charlie for closing remarks. Charlie?