Apyx Medical Corporation

Good morning, ladies and gentlemen, and welcome to the first quarter of fiscal year 2021 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'll 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 uncertainties 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.

Please go ahead, sir. Thanks, operator. Welcome, everyone, to our first quarter earnings call. I'm joined on this call this morning by our Chief Financial Officer, Tara Sim. Let me provide you with a quick agenda for today's call. I'll begin with a review of our first quarter revenue results. Following this discussion, I'll share an update on the operational progress we made during the quarter towards the four strategic initiatives we are pursuing to enhance our long-term growth in the cosmetic surgery market. Tara will then provide a detailed review of our financial results and an overview of our 2021 financial guidance, which we updated in our press release this morning. I will then conclude with some additional closing thoughts before we open the call for questions. With that, let's get started with the review of our revenue results. In the first quarter of 2021, we delivered total revenue of $8.6 million, representing growth of 73% year over year, which was well ahead of our expectations. Our total revenue performance was especially noteworthy given the disruption created by the COVID-19 pandemic, which continued to challenge the overall operating environment, both in the US and internationally. By geographic region, the US sales increased 54% year-over-year to $5.6 million, while total international sales increased 123% year-over-year to $3.1 million. The year-over-year increase in total revenue was driven exclusively by our sales of our advanced energy products, which increased 92% year-over-year to $7.7 million, more than offsetting a modest decline in our OEM business which decreased 3% year-over-year to 1 million. Shifting to a more detailed discussion of our advanced energy business, I am pleased to report that the 92% year-over-year growth we saw in total advanced energy sales was driven by strong global sales of both our generators and handpieces reflecting encouraging adoption and utilization of our technology in our key markets around the world. As we mentioned on our earnings call in March, during the first quarter, we continue to see strong utilization of our handpieces in the U.S., coupled with demand from our distributors internationally, despite the elevated volumes of COVID cases in many countries. Our total advanced energy handpiece sales ultimately grew by over 100% year-over-year. In addition to our strong handpiece growth, the total advanced energy generator sales increased by more than 80% year-over-year. We were especially pleased to see strong sales of our generators both domestically and internationally during the quarter given that the global capital and the equipment purchasing environment continues to remain challenged by the effects and uncertainty created by the COVID pandemic. With respect to our U.S. advanced energy business, utilization-based demand from our existing cosmetic surgeon customers remain strong with handpiece growth of 92% year over year despite the uptick in COVID cases in the month of December which persisted into January and February. Our existing U.S. accounts remained open and active throughout Q1 and we saw improving year-over-year trends in each month of the quarter with growth in the month of March being the strongest. The process of engaging with potential new U.S. customers continued to be challenged by COVID. However, These headwinds did ultimately improve in the first quarter and our direct sales team performed exceptionally well, enabling us to deliver 67% growth in U.S. generator sales year-over-year. Q1 marked our return to year-over-year growth in U.S. generator sales for the first quarter since the onset of the COVID pandemic. Importantly, while our U.S. generator growth in the first quarter was aided in part by an easier comparison in prior year periods given the COVID impacts in March of 2020, our U.S. generator sales results reflect strong growth compared to the first quarter of 2019 as well, with sales up 37% in Q1 21 versus Q1 19. With respect to the underlying utilization-based demand trends in Q1, our U.S. handpiece sales increased 92% year-over-year and were up more than 150% in Q1-21 as compared to the first quarter of 2019. With respect to our advanced energy business outside the U.S., our international advanced energy growth was very strong and was driven by contributions from sales of handpieces and generators, both of which increased more than 120% year over year in the first quarter. The overall pace of recovery in many countries continued to lag behind the U.S. and remains difficult to characterize overall, but we were pleased to see important pockets of strength in certain regions which fueled our strong performance. International handpiece sales growth was largely driven by strong sales to our distributors in Brazil and Taiwan, two countries which we entered during the second quarter of 2020, while international generator sales growth was more evenly distributed across multiple countries. Our international generator sales growth benefited from easier comparisons given the impact of COVID in February and March of last year, but we were pleased to see sales increase 6% compared to the first quarter of 2019. Turning to a review of our operational progress during the first quarter towards our four strategic initiatives to position Apex Medical for continued success and sustainable long-term growth in the cosmetic surgery market. We continue to pursue our regulatory strategy to obtain specific clinical indications for targeted cosmetic surgery procedures in the U.S. while securing product registrations in new countries internationally. In the U.S., our two IDE clinical studies evaluating the use of Renuvion in dermal resurfacing and skin laxity procedures continue to progress as we had anticipated. During the first quarter, we completed the 90-day follow-up visits for patients enrolled in our dermal resurfacing study. Our team is preparing our request for 510 clearance, which we are still on track to submit by the end of this month. We also made important progress in enrollment of patients in Phase 2 of our IDE study evaluating the use of Renuvion in skin laxity procedures in the neck and submental region, which we initiated in December of 2020. We remain on track to complete phase two enrollment in the third quarter of 2021. Turning to our OUS regulatory strategy, our regulatory team continue to expand our global commercial footprint by obtaining regulatory clearance for our helium plasma technology in two new countries in Eastern Europe as well as South Africa during the first quarter. While we saw initial orders from our distributors in two of these countries during the quarter, which modestly benefited our advanced energy growth in Q1, we do not expect them to contribute materially to our performance this year. With that said, we are pleased to achieve continued progress on this aspect of our regulatory strategy and believe our success in driving new customer adoption in international markets is notable given the continued COVID-related disruption in these regions. With respect to our second strategic initiative, we continue to expand the portfolio of clinical evidence for our Renuvion technology in the cosmetic surgery market. In March, we were pleased to see a peer-reviewed article published in the Journal of Cosmetic Dermatology which was authored by Dr. J. David Holcomb. The article focused on the analysis of 22 subjects treated by Dr. Holcomb as part of our initial IDE study focused on the use of Renuvion in dermal resurfacing procedures. Dr. Holcomb performed a quantitative comparison of the number of brown spots and enlarged pores as well as wrinkle area and thickness both prior to and three months following dermal resurfacing with Renuvion. Based on this analysis, he found that a single pass treatment with Renuvion at low energy setting yielded qualitative and quantitative improvements in facial skin appearance. Specifically, the number of brown spots decreased by 45%, the number of enlarged pores decreased by 28%, wrinkle area decreased by 13%, and wrinkle thickness decreased by 5% on average. In short, This new peer review publication provides additional clinical validation which we expect will support our clinical adoption following this receipt of U.S. regulatory clearance for this target procedure. Turning to our third strategic initiative. During the quarter, our commercial team continued to make progress in supporting new and existing cosmetic surgery customers and their practices. Working together with some of our top surgeons and KOLs, we organized and hosted three educational events for our new and potential surgeon customers. These three events were open to both in-person and virtual participation and saw more than 200 clinicians reflecting the strong interest in our technology. Our team also hosted five virtual training sessions to further educate some of our OUS distributors on our helium plasma technology. We also continued to expand and enhance our portfolio of marketing materials for our existing surgeon customers. During the quarter, we introduced an in-office marketing kit, which we are providing to all new customers moving forward. This kit includes a variety of Renuvion branded materials including brochures, wall clings, and scrub caps that can be used to help surgeons raise awareness and educate their customers on the benefits of Renuvion technology. Likewise, we launched an event planning kit that customers can access on our online marketing portal which provides them with everything they need to organize customer focus events and programs. In early April, we hosted our first users meeting, a two-day event with participation from roughly half of our existing customers representing more than 50 countries. The event featured presentations and discussions hosted by 22 key opinion leaders and top surgeon users from around the world, which is now available for our entire customer base to access on demand via our online portal. Lastly, regarding our fourth and final strategic initiative to improve our manufacturing capabilities and efficiencies, our manufacturing team is continuing to drive further improvements in our overall manufacturing capabilities and efficiencies through the introduction of new manufacturing technologies at our Clearwater facility and by approving the handpiece production capabilities of our facility in Sofia, Bulgaria. Importantly, the early benefits of our team's strong execution of this strategic initiative were seen in strong gross margin performance in the first quarter of 2021. Specifically, our focus in recent years on reducing the per unit manufacturing costs of our advanced energy handpieces is expected to drive material improvements in our handpiece gross margin and the adoption of our APR handpieces increases going forward. As a reminder, our efforts in 2020 focused on introducing this product to our customers in North America. In 2021, we are expanding our focus to OUS markets, including where necessary, securing the requisite registrations before commercial introduction in our key international markets in years to come. All in all, the first quarter marked a great start to 2021. We saw encouraging utilization and adoption trends and strong sales growth in our advanced energy business driven by balanced contributions to total year-over-year growth coming from sales of handpieces and generators as well as from customer demand in the U.S. and internationally. Our sales performance translated into strong year-over-year improvements in our total gross margins and improvements in our adjusted EBITDA loss compared to the prior year period. and our activities related to our four strategic initiatives continued to progress smoothly, leaving us better positioned to deliver strong sustained growth over the long term. Our team did an exceptional job this quarter and I would like to take a moment to thank them for their effort and their commitment they've demonstrated to overcoming any obstacles as we revolutionize the cosmetic surgery market with our helium plasma technology. With that, let me turn the call over to Tara to discuss our first quarter financial results and our updated 2021 guidance. Tara?

Thanks, Charlie. Given Charlie's detailed review of our first quarter revenue results, I will begin my discussion of our Q1 financial results by continuing down the P&L. Gross profit for the first quarter of 2021 increased $2.9 million or 96% year-over-year to $5.9 million. gross profit margin for the first quarter of 2021 was 67.8% compared to 59.7% last year. The year-over-year increase in gross profit margins was driven by revenue mix between our two segments and as well as improved product margins in our advanced energy segment due to the continued manufacturing efficiency initiative that Charlie mentioned earlier. The year-over-year increase in gross profit margins was offset partially by revenue mix, by geography, and by product. Operating expenses for the first quarter of 2021 increased 0.1 million, or 1% year-over-year, to 10.6 million, compared to 10.5 million for the first quarter of 2020. The increase in operating expenses year-over-year was driven by a 0.9 million increase in salaries and related costs and a .1 million increase in research and development expenses, partially offset by a .9 million decrease in professional services and a .1 million dollar decrease in selling general and administrative expenses. The very modest year-over-year increase in operating expenses reflects the continued benefits from our initiatives to control costs and reduce our discretionary spending which began in the second quarter of 2020 in response to the impact of COVID-19 on our financial condition. Loss from operations for the first quarter of 2021 was 4.7 million compared to operating loss of 7.5 million last year. Total other loss net was 0.1 million compared to total other income of 0.6 million last year. The year-over-year change was primarily due to a benefit from the receipt of refunds in the first quarter of 2020 on tariffs paid in 2019, which did not benefit our financial results in the first quarter of 2021. Income tax expense for the first quarter of 2021 was .1 million compared to a benefit of 4.9 million in the first quarter of 2020. The year-over-year change in income tax expense was primarily due to the net operating loss carryback claim refund recognized in the first quarter of 2020, which did not benefit our financial results in the first quarter of 2021. Net loss attributable to stockholders for the first quarter of 2021 was 4.9 million, or 14 cents per share, compared to 2 million, or 6 cents per share, for the first quarter of 2020. First quarter 2021 adjusted EBITDA loss was $3.4 million compared to a loss of $5.8 million last year, an improvement of $2.4 million or 41% year over year. As a reminder, we provided a detailed reconciliation from GAAP net loss to adjusted EBITDA loss in our press release this morning. As of March 31st, 2021, the company had cash and cash equivalents of $39.5 million compared to 41.9 million as of December 31st, 2020. As of March 31st, 2021, the company had working capital of 53.3 million, including expected tax refunds of approximately 7.5 million that the company anticipates to receive 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 updated in our earnings press release this morning. For the 12 months ending December 31st, 2021, we now expect total revenue in the range of 37.6 to 39.7 million, representing growth of 36 to 43% year over year. This compares to our prior guidance range of 36.7 to 38.7 million. The updated total revenue guidance range assumes advanced energy revenue in the range of approximately $33.1 to $35.2 million, representing growth of 49 to 59% year-over-year. This compares to our prior guidance range of $32.3 to $34.3 million. The updated advanced energy revenue guidance range continues to assume U.S. growth is only driven by contributions from Renuvion Sales related to its use as a subdermal coagulator following liposuction procedures and international growth driven primarily by demand in existing international markets. OEM revenue of approximately 4.4 million, representing a decline of 20% year over year. This is unchanged from our prior guidance range. In terms of profitability guidance for fiscal year 2021, we expect net loss attributable to stockholders in the range of 20.3 to 18 million. This compares to our prior guidance range of 20.7 to 18.4 million. And we expect adjusted EBITDA loss in the range of 14.1 to 11.5 million. This compares to our prior guidance range of 14.5 to 12 million. As a reminder, we have included a full reconciliation from our gap net loss to non-gap adjusted EBITDA loss in our earnings press release this morning. Our formal financial guidance for 2021 continues to incorporate the following considerations for modeling purposes. First, we assume our total company revenue growth for the full year 2021 period will be driven exclusively by our advanced energy business. We expect strong advanced energy growth both in the U.S. and internationally and the midpoint of our advanced energy guidance now assumes roughly 63% growth in sales to U.S. advanced energy customers in 2021 and roughly 40% growth in sales to international advanced energy customers compared to our prior guidance range which assumed year-over-year growth of 60% and 35% respectively. Second, we continue to expect gross margins in the range of 69 to 71 percent this year, compared to 63.2 percent 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. Our GAAP operating expense assumptions increase as a result of the increase in our revenue guidance expectations. Accordingly, we now expect GAAP operating expenses to increase approximately 23% 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, plus 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. We continue to expect net interest and other expense of approximately $150,000 in 2021 compared to a benefit of approximately $700,000 last year. Fifth, we now expect income tax expense of approximately $250,000 compared to an income tax benefit of $7.5 million last year, which included the aforementioned net operating loss carryback tax benefit from the 2020 CARES Act. and six we expect, non-cash depreciation and amortization of approximately 700,000, non-cash stock-based compensation expense in the range of 5.2 to 5.5 million and weighted average diluted shares outstanding of approximately 35 million shares. Lastly, while it is not our standard practice to provide quarterly expectations, given the significant impact of the COVID pandemic in the second quarter of 2020 and the related benefit to our Q2 21 year over year growth rate for the avoidance of doubt and in the interest of transparency, we expect our total revenue in the second quarter of 2021 to increase approximately 101 to 112% year over year. This total revenue range assumes advanced energy growth of approximately 165 to 180% and a decline in OEM revenue of approximately 27 to 23% year over year. With that, I'll turn the call back to Charlie for closing remarks. Charlie.