Q1 2020 Earnings Call
Please standby.
Good morning, ladies and gentlemen, and welcome to the first quarter fiscal year 2020 earnings call for Apex Medical Corporation.
At this time, all participants of Im pleased to 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 in 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 current expectations of management and involve inherent risks and uncertainties that could cause actual results to differ materially from those indicated.
He knows identified and the risk factor section of our most recent annual report on form 10-K filed with the Securities and Exchange Commission as well as are most recent 10-Q finally.
Such factors may be updated from time to time in our filings with the FCC, which are available on our website.
Who takes 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 forget.
We generally referred to these as non-GAAP financial measures.
Installations of those non-GAAP financial measures to the most comparable measures calculated and presented in accordance with gap are available in the earnings press release on Investor Relations portion of our website.
I would now let's turn the call over to Mr., Charlie Good when you fix medicals, President and Chief Executive Officer. Please go ahead Sir.
Thanks, Operator, welcome everyone to our earnings call for the first quarter up 2020.
I'm joined on this call. This morning by terrorists them, our Chief Financial Officer.
Let me provide you with a quick agenda for todays call.
I'll begin with their our review of Q1 results and the factors that impacted our performance during the quarter.
I'll, then turn towards a broader discussion of the business and disruption that we have experienced as a result of the cobot 19 pandemic as well as the actions we have taken in response.
Following this discussion I will briefly review and provide updates on the four strategic initiatives, we're pursuing as part of our longer term growth strategy.
I'll conclude by sharing our current thought on the continued business disruption due to cobot 19, and our long term outlook.
Terrible then provide you with a detailed review of our financial results for the first quarter 2020, before we open the call for questions.
With that let's get started with a review of our financial and operational performance during the first quarter.
We reported total revenue of 5 million, representing an 11% decline year over year.
Our first quarter total revenue results came in at the low end of our guidance range of 5 million to 5.6 million that we provided as part of our fourth quarter earnings report on March 16th 2020.
Despite revenue results that were at the low end of our guidance range, we delivered net loss and adjusted EBITDA results. That's far exceeded the guidance ranges. We provided on our Q4 19 earnings call.
These results were driven by two things first strong execution against our stated objectives to reduced operating expenses in light of the covert related challenges and second a GAAP income tax benefit related to changes in corporate tax provisions as part of the.
Cares Act.
The first item will improve our near term cash flow profile as our op ex initiatives will benefit our reported pino results in the coming quarters.
And the adoption of the provisions under the Cares Act will result in a material tax refund later in 2020.
Turning to review.
Of our revenue results in the first quarter.
From a geographic standpoint, we experienced year over year declines in both our U.S. and O U S business this quarter.
Our total U.S. sales declined 7% year over year to 3.6 million.
While total international sales declined 20% year over year to 1.4 million.
In terms of revenue performance in each of our business segments.
In our advanced energy business sales declined 9% year over year to 4 million in our OEM business sales declined 20% year over year to 1 million.
The OEM sales results were entirely in line with our expectations and were not impacted by the quoted crisis. Rather they were a result of lower revenue generated in our legacy OEM business compared to first quarter 2019, largely attributable to the timing of.
Orders compared to the prior year period.
As discussed in our Q4 call the revenue performance in our advanced energy business in Q1 was impacted by the crisis caused by the spread of the coated pandemic.
We were very pleased with our advanced energy growth over the first two months at the quarter, where total revenue increased 33% year over year, driven by 58% growth and the sales of our hand pieces and 13% growth in sales of generators.
The growth trends over the first two months of 2020 reflects strong utilization based demand for our renewed be on technology hand pieces, while the growth in generators reflects the initial impact of coded related disruption in our business in our international markets beginning in February.
As discussed on our Q4 mid March call, we had already begun to see the business trends show signs of disruption as a result of cobot, specifically, we had seen a slowdown in the adoption and utilization first in our international markets.
And then the U.S. as we move through the first few weeks of March.
Given the high level of uncertainty at that time, providing full year 2020 guidance was not possible.
Instead, we elected to provide only our expectations for financial results in Q1.
We shared that these Q1 expectations were based on the best information, we had at that time and factored in a significant impact to our business from cobot 19 over the balance of the first quarter.
Our business deteriorated sharply in the weeks following our earnings call and candidly that decline we expect variants over the second half of March was modestly sharper than we had contemplated in our Q1 guidance range.
This performance was a direct result of the preventative or protective actions taken by governments in response to the Kobin 19 pandemic.
As a reminder, the overwhelming majority of procedures performed using our helium plasma technology our elective.
And as a result, many of these customers have been affected by government actions, requiring elective procedures to be postponed and non essential businesses to close temporarily.
In the U.S. substantially all renewal beyond procedures are performed in outpatient facilities, including doctors' offices and surgery centers.
During March these businesses begin to temporarily closed as states and cities across the U.S. implemented restrictions.
While the timing of these closures across the U.S. varied by region, we experienced a rapid deterioration in procedural trends over the last two weeks of March as a result.
In March total advanced energy sales declined nearly 50% year over year, driven by sales of our international distributors declining 75% year over year and sales of our U.S. cosmetic surgery customers declining nearly 30% year over year.
Regarding the deterioration in the U.S. market over the last two weeks of March specifically sales declined more than 40% year over year.
Turning to discussion of our response to covert 19.
Apex medical has been monitoring the cobot 19 pandemic closely.
We reacted quickly during the first quarter to protect the health and safety of our employees patients customers and distributor partners around the world.
As a medical device company, we have been able to continue manufacturing operations.
To ensure the safe manufacturing environment, we divided our manufacturing personnel into multiple smaller shifts to allow for adequate social distancing.
We have also made other important improvements to our safety protocols, including requiring all employees to where protective equipment, while onsite and increasing the frequency of facility cleanings.
We have also placed restrictions on employees business travel restricted access to the facilities and required that not all non essential employees worked remotely until further notice.
In addition to the initiatives we have put in place to protect the health and safety. We have focused our direct sales team on remaining in close contact with their existing surgeon customers to do everything they can to provide them with support during this difficult time.
With this goal in mind, we have implemented additional training for our sales reps in order to sharpen their ability to engage with our customers virtually.
In addition to engaging with existing customers via virtual methods. Our reps also continue to target and reach out to perspective accounts. So that they will be well position when the recovery occurs and surgeons returned to conducting elective cosmetic procedures.
Outside the U.S., we're closely monitoring the activities of our distributor partners and helping them navigate the challenges they face as a result of the slower demand they are seen in their respective countries.
Lastly, we have taken important steps to reduce our spending in light of the Cove at 19 crisis.
While our spending during the first two months of 2020 reflected our normal business activities in March we began curtailing our cost in response to the impact of Cobot 19 on the financial condition.
Beginning with reducing business travel expenses and implementing hiring restrictions.
We have identified other areas of our expense plan that can be delayed in order to maximize capital until the business environment outlook becomes more certain.
These include further reductions to our discretionary spending such as spending on trade shows marketing events and professional fees.
Additionally, we have temporarily delayed investment in certain R&D projects and clinical research studies until the environment normalizes and we are able to pursue these activities efficiently.
Lastly, we have eliminated the bonus accrual related to the achievement of our 2020 performance objectives to further reduce the operating expense profile. During this period, an unprecedented uncertainty in the broader elective procedure environment.
Importantly, we continue to invest in key areas of our business that support our future growth. So we are well positioned as the market recovers from this pandemic most notably we have no intention of changing the size of our sales team or furloughing any of our employees at this time we have.
Spent considerable effort building and training a world class sales team and we are focused on ensuring that they are well prepared to drive our returned to strong growth as the crisis subsides.
We have also built a strong leadership team in recent years and I am proud to say that the team remains committed to our mission. Despite these challenging times.
In addition, why we have temporarily delayed investment in certain clinical research studies. We continue support the areas that are most important for our longer term growth, including our U.S. I'd. He clinical studies in dermal resurfacing and skin laxity.
I'd like to now take a minute to update you on our operational progress with respect to the four strategic initiatives, we're pursuing to position a picks medical for long term growth in the cosmetic surgery market.
The first one to pursue specific clinical indications that will enable us to market and salary moving on for new targeted procedures.
In the first two months of 2020, we continued to make progress in enrolling new patients in our two U.S. I'd He clinical studies.
As a reminder, we designed and implemented these studies as part of our long term strategy to pursue new clinical indications for the use of renewing on specifically for derma resurfacing and skin laxity procedures.
Clinical trial activity across the U.S. has been significantly impacted by the disruption created due to covert 19 and enrollment and these two studies have been paused as a result.
Our clinical team is working closely with the investigators from both studies to help mitigate the impacts of this disruption and position us to resume enrollment once it is considered safe to do so.
While we plan to continue with both studies. We are currently unable to estimate when we will be in position to resume enrollment at this time.
In addition to our regulatory progress. We also continued our efforts to expand our portfolio of clinical evidence supporting the use of our renewed the on technology, which is our second strategic initiative.
During the first quarter, we completed and submitted a clinical manuscript for the publication disco discussing the results of our first U.S. I'd East study on dermal resurfacing.
I am pleased to announce that this manuscript was published in April in a peer reviewed journal lasers in surgery in medicine.
In 2020, we remain focused on completing and submitting at least three additional clinical manuscripts for publication.
With respect to our third strategic initiative enhancing physician in practice support for our cosmetic surgery customers.
During the first two months of 2020, our plans to host new physician mentor programs or PMPM and expand our presence and educational programming at industry conferences and trade shows proceeded as expected.
Our events planned for March however were cancelled due to cobot 19 pandemic.
In lieu of this in person programming, our sales and marketing and field clinical teams have been very active in engaging with our customers and prospects around the world.
We have posted educational events virtually where we featured some of our leading clinician customers speaking on a route wide range of topics, including side by side results comparing renewed beyond two leading to a leading competitor technology.
Our virtual education events have also included case studies to illustrate how our leading clinician customers have adopted renew beyond their strategies for marketing and selling to new patients.
And their thoughts on pricing and ROI.
Last week, we hosted the first installment of a plan series of Webinars designed to assist our customers and prospects with opening their practice post Cove it.
We are also engaging with clinical customers outside the U.S., including hosting multiple continuing education training sessions on J plasma and renewing on with our current international distributors and multiple calls with groups of international prospects interested in learning.
And about renew the on technology.
And lastly, with respect to our fourth strategic initiative improve our manufacturing capabilities and efficiencies during the first quarter, we continued to work to implement new lean initiatives.
This work remains an ongoing area focus in order to drive progress in 2020 and the years to come.
Despite the many challenges we have faced and we will continue to face as a result of the cobot 19 pandemic I have been incredibly pleased with the response of our organization and the commitment that our employees have shown to supporting our customers and maintaining our operation during such a dip.
Pickup period and in our company's history.
Ultimately apex medical is well positioned to whether this crisis and return to our record of delivering strong growth as it sides.
First with over 51 million a cash on our balance sheet, we are very well capitalized.
We believe we have adequate resources to fund our operations for multiple years.
Second the strength of our balance sheet and our targeted strategies to control our near term expenses allow us to support and invest in elements of our business that will can that ensures we are poised to recover quickly and continue to drive progress with respect to our long term growth strategy.
And third we are not experiencing any significant disruption to our supply chain as a result of the code that 19 pandemic and our in house manufacturing is progressing under our hands health and safety protocols.
Given the significant uncertainties associated with the cobot 19 pandemic, we recognize the investments community's desire for increase clarity and have elected to provide color on our current quarter trends.
Simply stated the impact that cobot 19 has had on the activity of our customers and their patients has continue to represent an ongoing challenge for our advanced energy business.
Our U.S. and international sales trends during the month of April continue to deteriorate relative to the year over year sales trends, we saw during the month of March.
A significant amount of uncertainty remains in terms of when the restrictions on our customers will be lifted ultimately when the patients will choose to undergo elective cosmetic procedures. Once our customers practices are allowed to reopen.
We are encouraged by the announcements and initial activities related to lifting of the shelter in place restrictions over the past two weeks.
And we expect our cosmetic surgeon customers to begin the process of reopening their offices as soon as their respective state mandates allow.
At this point the pace and timing of when we see an uptick in elective procedure volume and the related increase in demand for our procedure related hand pieces remains highly uncertain.
Naturally we would expect that trends in adoption of renewing the on technology and the related improvement in generation generator sales trends to lag behind the improvement in elective procedure environments again, the timing of which remains difficult to predict at this time.
Importantly, the co bit 19 pandemic has not altered our competitive advantages in the market and the attractive long term opportunities that we are pursuing.
With its ability to deliver heat to tissue and incredibly efficient and controlled manner. Our helium plasma technology continues to represent a unique energy modality with the ability to transform how procedures are performed in the cosmetic surgery market.
We continue to receive strong positive feedback from plastic and cosmetic surgeons highlighting the outcomes they have been able to achieve with our renewed beyond products.
We are focused on leveraging this unique technology to pursuing addressable market opportunity for the cosmetic surgery market that is estimated to be over 1.5 billion in the U.S. alone.
With significant opportunities outside the U.S. as we continued to pursue new registrations in key international cosmetic surgery markets going forward.
And we are pursuing these opportunities with a commercial strategy that has demonstrated strong results over the last two years.
At some at the same time, the four strategic initiatives I have discussed earlier will position us to drive long term growth in the cosmetic surgery market by facilitating the broad based adoption of our technology.
For these reasons and many others as the Cobot 19 crisis subsides, we are poised to continue our work of bringing trance transformative solutions to our customers, we serve and elevating the global cosmetic surgery market for the benefit of our surgeon customers their patients and.
Shareholders.
I'll now turn the call over to Terra to review the first quarter financial results in detail and discuss the comments made in our earnings press release This morning Tara.
Thanks, Charlie.
The discussion of our financial results today includes restatements as well as revisions to our historical financials as reported in our 10-K filed on March 31st 2020, and 10 key ways filed on May eight 2020, we have updated the related reconciliation table with these items, which is available on the Investor relations.
Page of our website.
Given the detailed discussion by Charlie on our revenue performance I will begin my review of our first quarter financial results across the rest of the piano.
Gross profit for the first quarter of 2020 decreased point 6 million or 16% year over year to $3 million.
Gross profit margin for the first quarter of 2020 with 59.7 per cent compared to 63.3% last year.
The primary drivers of the change in gross profit margin where product mix within both our advanced energy and OEM segment.
Revenue mix between our segment.
And geographical revenue mix.
Offset by improved product margins in our advanced energy segment.
As a result of our continued manufacturing efficiency initiative.
Operating expenses for first quarter, 2020 increased 1.2 million or 13% year over year to 10.5 million.
Compared to 9.3 million for the first quarter of 2019.
The year over year change in operating expenses was driven by 8.8 million dollar increase in selling general and administrative expenses 8.3 million dollar increase in professional services.
And a point 3 million dollar increase in R&D expenses.
These increases were offset slightly by a 200000 dollar increase and related salary salaries and related costs.
As Charlie mentioned earlier, our proactive efforts to reduce our operating expenses reflect strong execution specifically in response to the public coded pandemic, we identified more than 1.5 million and operating expense reduction compared to what was implied by our Q1 guidance.
Loss from operations for the first quarter up 2020 was 7.5 million compared to operating loss of 5.7 million last year.
Net loss for the first quarter 2020 was $2 million or six cents per diluted share compared to a net loss of 5.6 million or 17 cents per diluted share for the first quarter of 2019.
Our net loss for the first quarter of 2020 was significantly lower than the guidance range provided on our fourth quarter earnings call.
In addition to the notable progress we made and reducing our operating expenses in the first quarter.
We also benefited from a GAAP tax benefit in the period.
As detailed in our press release. This morning on March 27, 2020, the U.S. government enacted the cares act to provide relief from the Corona virus pandemic.
The Cures Act includes a net operating loss carry brac provision by which the company recognize an income tax benefit of approximately $4.9 million in the first quarter up 2020.
Next received a cash tax refund of approximately $3.7 million by the end of 2020.
Together the significant reduction in our operating expense profile and this provision in the cares Act will hit helped mitigate the financial impact of the Cobot 19 pandemic.
First quarter 2020, adjusted EBITDA loss was $5.8 million compared to an adjusted EBITDA loss of $4.6 million last year.
As a reminder, we provided a detailed reconciliation from GAAP net loss to adjusted EBITDA in our press release this morning.
As of March 30, Onest 2020, the company had cash and cash equivalents of 51.4 million compared to cash and cash equivalent of 58.8 million as of December 30, Onest 2019.
The company had working capital of 63.6 million as of March 31st 2020, compared to 64.4 million as of December 30, Onest 2019.
Lastly, as mentioned in our earnings press release. This morning, given the challenges and uncertainties posed by the ongoing global Coven 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 second quarter results Conference call in August we plan to provide updated expectations at that time.
With that I'll turn the call back to Charlie for closing remarks, Charlie.
Thanks, Terra I'd like to close by once again thanking our employees for their resilience and dedication they've shown under very difficult circumstances. During these past months.
Based on our response to Cobot 19, I'm convinced we have a strong team here at apex medical that can weather any crisis.
I'd also like to thank our distributors customers and shareholders for their continued support and those on the call for their interest in apex medical.
With that operator, let's now open the call for questions.
Thank you if you like to ask a question. Please stand by pressing star one on your telephone keypad.
For using speakerphone, please make sure your mute functions.
Your signals to reach our equipment.
We do actually you limit yourself to one question one follow up.
If you like to ask additional questions. We invite you to add yourselves to the Q again by pressing star one.
And our first question will come from Kyle bouncer with starting company.
Hi, Charlie tear thanks for taking the questions here.
So.
From what I'm seeing the cosmetic practices that are opening back up have been incredibly busy so adding shifts on Saturday coming in early during the week et cetera.
And according to CDC it looks like.
Almost half the state to reopen for elective procedures, so I know it surely.
And there's a lag associated with.
Cosmetic practices as you talked about but just curious if you've seen the same sort of heightened demand from any of your renew the end users that have open back up.
Yeah look at it's obviously not our standard practice to give color on on current quarter trends, but recognize that the need for.
Clarity and transparency as much as we can.
We have started to see handpiece demand pickup in the second half of April. So if you look at the first two weeks of April we did absolutely no business and we've seen very small demand pickup in the second half of April and overall.
In April sales were down 90% year over year as we move into May you are correct. We are starting to see a lot of these restrictions left and we are hearing from our customers that day during the the closures were doing virtual consultations, we're doing a lot to get their business.
As ready to when they could open the doors that they did have a lot of demand and so we are starting to 'em. We are hearing the same trends from them, but we'll see how this plays.
Plays out as its you know as it's unfolding obviously right now.
Got it that's helpful. Thanks.
And I know things have slowed down temporarily but on the supply side of things.
Can you provide some more color on a lean initiatives that loan Craig had been working on in and how things have been going to modify manufacturing to support the higher hand piece volumes once things ramp up again.
Yeah. The good news for US is that we have been deemed obviously an essential business. This this entire time and we focused a lot on protecting the health and safety of our employees number one by making sure that they had.
You know the implementation of smaller shifts they have protective clothing that we're making them, where and then we basically shut down the manufacturing facilities to where only manufacturing can be there and all other.
Non essential people have been asked to work from from home and.
One other things that we talked about in the gross margin that we that we just mentioned is that.
We did see already improved product margins in our advance energy segment as a result of these manufacturing efficiencies. So we have not we have not stopped doing that and we have nots.
Stopped any investment in that area as that is obviously at key for US as we go forward and we get back to the strong growth that we out over the last two years that that will help us in years to come from a gross profit side of things.
Got it okay got it okay. Thanks, I'll jump back in queue that for me. Thanks Scott.
Your next question will come from Matt Hewitt with Craig Hallum capital.
Good morning, and thank you for taking the questions maybe the first one.
Attendance at the virtual event since you started to host when the fifth one than Q Lockdown mode.
What did that look like relative to maybe some of the prior events that you'd hosted obviously those were more in person, but maybe talk a little bit about the makeup of those virtual Vince was that attracting a larger volume on the new maybe would've seen given that these physicians were now essentially waiting for their.
Businesses to reopen.
Yeah, I think thats, a very good point, whether we were doing a events either at trade shows or our PMP programs are just say those are limited by the number of people that travel to there are tend to go to that lecture at the show or at our PMP were limited by the number of.
Doctors that that somebody's facility can can host at a given time, obviously virtually you don't have any of those restraints and people were at home and in some cases looking for things to do themselves and so our virtual events were very well.
Attended and you know the last one that we just did just this.
Last week I think we had 100 than 23 participants clinicians that were on the call. So obviously that as much larger from.
Magnitude of at least 10 times that we would get at a PMP event. So yes, they were very well attended.
Well, that's great and then as a follow up question.
Looking internationally one of the growth opportunities you've previously talked about is expanding renew beyond internationally, how his corona virus Covidien 18, how is that impacted your ability to get.
The device approved in other countries and how quickly do you think that those processes can can open back up thank you.
Yeah.
Thanks, Matt.
It obviously I hate to start out it depends it depends on what's going on with each one of the countries, but as far as a registration point of view, we haven't seen anything that has been too much of a problem in any of the countries that we're working in and trying to get registration on.
As.
As.
We move forward. So we still remain confident that we will be able to get the registrations in the timelines that we had proposed give or take a month or two at the most but other than that.
Not much has been really impacted that we've seen so far on that.
Understood Alright, Thank you Stacy you.
You too.
Thank you if you like to ask additional questions. We invite you to add yourself as acute again by pressing star one.
Our next question is from Mount O'brien with Piper Sandler.
Hi, guys. Good morning. This drew on for Matt. Thank you for taking the questions.
You know just from a customer perspective I just was wondering if you have any sense for what percentage of your customers offices are open today and then maybe could you speak to the economics at renewed.
That product to the practice as relative to some of the other product and services that they provide.
Yeah, well the first thing is that substantially all of these the renewed beyond procedures are all performed an outpatient facilities. So the offices in the surgery centers. So.
From a doctor having control of their own environment and the patients hopefully feeling safe coming into smaller thing. We think that that is a positive for us going going forward.
We are encouraged so far about that from the initial activities in may of lifting the shelter in place, but it's really hard to have what percentage are opened because everything is different from a state and local and then just the clinician being ready to go on so we are seeing these restrictions lifted.
Over the last two weeks and we are.
Encouraged by that and we expect these surgeons to get going as quickly as they can because they are small business owners and they've got Theyve got staff and they've got a business to Ron and so we're confident that one each state respective state.
Lists lifts the restrictions that they will get back to work as soon as a as they possibly can.
Okay.
That's very helpful. Thank you for that and then on the clinical trial front, the skin laxity intermodal service unite I understand.
You said, it's difficult to estimate when you're going to read them there I.
I think other medtech companies have been kind of citing somewhere around the the six month delay for a lot of the clinical trials.
Is there any reason to think years, maybe a little bit faster slower and then I guess, there anything that we need to be thinking about as far as.
Aside from just enrollment, but as far as patient follow up or anything that could that differential that pushed out.
Thank you yeah, Yeah, I don't know I have no comment on what other companies are doing and I don't know about that ours is really a function of of our clinicians opening up their practices again and being able to roll enroll patients. We were we were doing some of virtual follow up on on some.
All of our clinical studies, but I don't know how effective that is at this point in time and so once we get these guys back and going again and they can see the patients in person will be able to have a much better idea of what that timeframe. As it's just really hard to I just can't give a timeframe at this point in time.
Got it thank you.
Thank you.
We are currently showing new participants in the Q.
That does conclude our conference for today. Thank you for your participation.
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