Apyx Medical Corporation

Good morning, ladies and gentlemen, and welcome to the second quarter of fiscal year 2021 earnings conference call for Apex Medical Corporation. At this time, all participants have been placed in 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 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. Reconciliation 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.

Thanks operator. Good morning everyone and welcome to our second quarter earnings call. I'm joined on the line by Tara Sam, our Chief Financial Officer. Let me provide you with a quick agenda for what we intend to cover today. I'll begin with a review of our strong revenue results and the key drivers of performance in the second quarter. Then I'll provide you with an update on our operational progress we made during the quarter with regard to the four strategic initiatives we are pursuing to enhance our long-term growth in the cosmetic surgery market. Tara will then review our second quarter financial results in detail, as well as our financial guidance for 2021, which we updated in this morning's press release. I will then conclude with some additional closing thoughts on our outlook before we open the call for questions. With that, let's get started with a review of our revenue results. In the second quarter, we were proud to achieve total revenue growth of 161% year over year to $11.2 million, exceeding the 101% to 112% growth expectations that we communicated on our earnings call in May. By geographic region, Total US sales grew by 118% year-over-year to $7.4 million, and total international sales grew by 325% year-over-year to $3.8 million. By segment, our total revenue growth was fueled by strong sales of our advanced energy products which increased 248% year over year to $10 million, while sales in our OEM business decreased 13% year over year to $1.2 million. We delivered second quarter growth in each of our segments that exceeded the expectations we outlined on our Q1 call. The performance in our advanced energy business showed particularly impressive strength with growth nearly 70 percentage points above the high end of our guidance expectations. We believe our second quarter sales performance reflected the solid execution of our team and the continued improvement in the broader operating environment, which enabled us to achieve better than expected sales results, both in the US and internationally. Shifting to a more detailed discussion of our advanced energy sales performance, we were able to achieve growth of 248% year-over-year in spite of lingering effects of the COVID-19 pandemic. Most notably, we saw strong growth in global sales of our handpieces, which was the primary driver of our outperformance during the second quarter. Global sales of advanced energy handpieces increased more than 270% year over year. We were pleased to see balanced contributions to global handpiece growth from sales to both U.S. customers and international distributors. It's important to note that our handpiece sales growth is largely a reflection of strong utilization-based demand from our existing global customer base. With this in mind, we view our handpiece sales performance as a strong indication that procedure trends are healthy and our technology is continuing to resonate in the marketplace. While the global capital equipment purchasing environment remains challenged by the effects of COVID-19, We were also pleased to see improving trends in sales of our advanced energy generators in certain global markets, which resulted in global sales of generators increasing more than 210% year over year, though that number obviously benefited from easy comparison in the prior year period. In the US specifically, the process of engaging with potential new customers remained challenged by COVID, but we saw continued improvement in this dynamic throughout the quarter aided in part by our virtual engagement efforts and participation in trade shows. We were pleased to see continued improvements in Q2 with U.S. generator sales increasing in the high teens on a quarter-over-quarter basis. Internationally, the environment for capital equipment purchasing continued to vary by country and region. However, we saw continued improvement overall and strong demand from distributors in several key geographies, most notably in Brazil and Taiwan. Given the ongoing challenges that Brazil is facing with respect to the pandemic, we are pleased to see that the demand from our distributor has remained strong ever since we began selling into this market second quarter of last year. Stepping back, we couldn't be more pleased with the efforts of our team during the second quarter and with the performance that we saw in our advanced energy business overall, especially our global handpiece sales growth. It's important to note that our advanced energy sales growth is not just a result of easier year-over-year comparison. We saw notable improvements across all aspects of our advanced energy business in the second quarter of 2021, compared to the second quarter of 2019 as well, with advanced energy sales up 87% over quarter two of 19. We are encouraged by the continued evidence that our business trends are continuing to improve, which gives us further confidence in our outlook for 2021. In addition to our exceptional sales performance in Q2, I'm pleased to report that we also delivered material improvements in both net loss to common shareholders and adjusted EBITDA loss as well. Turning to a review of our operating progress. During the second quarter, we continued our efforts to position Apix Medical for sustainable long-term growth in the cosmetic surgery market by continuing to advance our four strategic initiatives. First, we made important progress with respect to our regulatory strategy, which is focused on obtaining specific clinical indications for our targeted cosmetic surgery procedures in the US and securing product registrations in new countries. In the US, We were pleased to achieve an important milestone during the quarter with the submission of a 510 pre-market notification to the FDA on May 28th. As a reminder, this submission is supported by data from our US IDE clinical study evaluating the use of our Renuvion technology in dermal resurfacing procedures and is intended to obtain a specific clinical indication for these procedures. As we look forward to the FDA's decision, I'd like to thank our clinical and regulatory teams for their multi-year effort in making this submission a reality. In addition to achieving this important milestone, we continue to make progress in the phase two of our IDE study evaluating the use of Renuvion in skin laxity procedures in the neck and submental region. We initiated patient enrollment for this phase in December of 2020, and I am pleased to announce today that we enrolled our last patient this past week. We intend to use the results of this study to support a 510 submission for skin laxity procedures in the second quarter of 2022. Outside of the U.S., we secured product registrations enabling Apix Medical to sell our advanced energy products in three new countries located in Asia and Central America. We shipped a small initial order to one of these three countries during the second quarter, and it's important to note that our revised guidance does not assume that these new countries will contribute materially to our performance in 2021. With that said, we are pleased by the steady progress that we've made expanding our global commercial footprint given the continued COVID-related headwinds. The progress we have made in recent years will position Apix Medical to drive global adoption of our helium plasma technology in the years to come. With respect to our second initiative, our team continued their efforts to expand our portfolio of clinical evidence for our Renuvion technology in the cosmetic surgery market. During the quarter, two clinical manuscripts were submitted for publication in medical journals. One has been accepted for publication, while the other clinical manuscript remains under review. Turning to our third strategic initiative, enhancing physician and practice support for our cosmetic surgery customers, as I mentioned on our Q1 earnings call, we hosted our first users meeting in early April. This two-day event was attended by approximately half of our existing customers with participants from more than 50 countries around the world. During the event, 22 of our key opinion leaders and top surgeon users hosted presentations and discussions over the course of these two days, which we have now made available on demand via our online surgeon portal. By all accounts, this inaugural event was a huge success and we look forward to hosting it on an annual basis. In addition to supporting our existing users, we continue to educate our new and potential surgeon customers on the benefits and proper use of our technology by hosting four physician mentor programs or PMP events during the second quarter. These hybrid events were attended both virtually and in person and collectively drew participation from over 120 clinicians. We continued to host virtual training sessions for our international distributors as well, helping them develop the knowledge to better educate and support their customers. We also resumed our in-person participation at academic conferences and trade shows in the second quarter. We participated in three events in Q2, which featured multiple podium presentations by some of our surgeon KOLs and a workshop that we sponsored. These are just a few of the ways we continue to support our potential new and existing surgeon customers, ensuring their success with our technology, but providing them opportunities to learn directly from their peers. Lastly, regarding our fourth and final strategic initiative to improve our manufacturing capabilities and efficiencies, in 2021, we are focused on securing the requisite product registrations to enable the commercial introduction of our APR handpiece to our international customers. As a reminder, the APR handpiece is the first product to benefit from our manufacturing team's efforts to reduce the per-unit manufacturing costs of our advanced energy handpieces, and its continued adoption is expected to drive material improvements in our handpiece gross margins over time. We have made important progress during the first half of this year, but still have plenty of runway ahead of us with respect to this aspect of our strategy. Our manufacturing team is working to lay the groundwork for our future success by integrating new technologies into our production facilities as part of our lean manufacturing initiatives and improving the handpiece production capabilities of our Bulgaria facility. In summary, Apix Medical has been executing well on all fronts, and we are very pleased to deliver strong financial and operational progress in the second quarter. Tara will now provide you with a review of our second quarter financial results and updated 2021 guidance. Tara?

Thanks, Charlie, and good morning, everyone. Since Charlie covered our revenue results, I will begin at the gross profit line. Gross profit for the second quarter of 2021 increased $5.4 million, or 260% year-over-year, to $7.5 million. Gross profit margin was 67.1% compared to 48.7% last year. The year-over-year increase in gross profit margins was driven primarily by revenue mix between our advanced energy and OEM segments partially offset by geographic mix within our advanced energy segment and higher inbound shipping costs. Gross margin in the second quarter of 2020 was impacted by inventory write downs that did not impact the current quarter. Our gross margin performance continued to benefit from improved product margins in our advanced energy segment related to our continued manufacturing efficiency initiatives and customer adoption of the APR handpiece. Operating expenses increased $3.3 million, or 40% year over year, to $11.6 million. The increase in operating expenses year over year was driven by a $2.1 million increase in selling general and administrative expenses, a $.9 million increase in salaries and related costs, a $0.1 million increase in research and development expense, and a $0.2 million increase in professional services. Loss from operations for the second quarter of 2021 decreased $2.1 million, or 34% year over year, to $4 million. Income tax expense was $0.1 million compared to an income tax benefit of $1.5 million in the second quarter of 2020. Net loss attributable to stockholders was $4 million, or 12 cents per share, compared to $4.7 million, or 14 cents per share, for the second quarter of 2020. Adjusted EBITDA loss decreased $2.5 million, or 51% year over year, to $2.4 million. As a reminder, we provided a detailed reconciliation from net loss attributable to stockholders to non-GAAP adjusted EBITDA loss in our press release this morning. As of June 30th, 2021, the company had cash and cash equivalents of $34.7 million compared to $41.9 million as of December 31st, 2020. 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 $40.6 to $42.6 million, representing growth of 46 to 54% year over year. This compares to our prior guidance range, which assumed growth of 36 to 43% year over year. The updated total revenue guidance range assumes advanced energy revenue growth of 62 to 71 percent year-over-year. This compares to our prior guidance range, which assumed growth of 49 to 59 percent year-over-year. 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 is driven primarily by demand in existing international markets. Our updated total revenue guidance range also assumes an OEM revenue decline of approximately 16% year-over-year compared to our prior guidance, which assumed a decline of approximately 20% year-over-year. In terms of profitability guidance for fiscal year 2021, we expect... Net loss attributable to stockholders in the range of 19.3 to 18 million dollars. This compares to our prior guidance range of 20.3 million to 18 million dollars. And we expect adjusted EBITDA loss in the range of 13.1 to 11.5 million dollars. This compares to our prior guidance range of 14.1 million to 11.5 million dollars. Note, the decrease in both our net loss and our adjusted EBITDA loss guidance ranges is driven by the stronger than expected profitability performance in Q2. Our formal 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 70% growth year-over-year in sales to U.S. advanced energy customers and nearly 60% growth in sales to international customers in 2021, compared to our prior guidance range, which assumed year-over-year growth of 63% and 40%, respectively. Second, We now expect growth margins in the range of 68 to 69 percent this year, compared to 63.2 percent last year, driven primarily by continued mixed benefits by segment, by geography, and by product. Third, we continue to expect GAAP operating expense to increase approximately 25 percent year-over-year, driven by 9 percent growth in our normalized operating expenses. This normalized OPEX growth expectation excludes $4.3 million of COVID related expense reductions, including discretionary travel and entertainment and other compensation related expenses that benefited our 2020 gap operating expense. And $1.1 million of incremental stock based compensation expense in 2021 as well as approximately $200,000 of initial expenses related to our joint venture partnership in China, which we established last year. Fourth, we expect net interest and other expense of approximately $140,000 in 2021 compared to a benefit of approximately $700,000 last year. we expect income tax expense of approximately $350,000 compared to an income tax benefit of $7.5 million last year, which was driven by a net operating loss carryback tax benefit from the 2020 CARES Act. And lastly, we expect non-cash depreciation and amortization of approximately $750,000 to $850,000 non-cash stock-based compensation expense in a range of approximately $5.1 to $5.3 million, non-controlling interest of $100,000 compared to $250,000 previously, and weighted average diluted shares outstanding of approximately 35 million shares. With that, I'll turn the call back to Charlie for closing remarks.