Q3 2020 Apyx Medical Corp Earnings Call
Please standby.
Good morning, ladies and gentlemen, and welcome to the third quarter of fiscal year 2020 earnings conference call for Apex Medical Corporation.
At this time, all participants have been placed on a listen only mode. At the end of the company's prepared remarks, we will conduct a question and answer session.
Please note that this conference call is being recorded and that the recording will be available on the company's website for replay shortly.
Before we begin I'd like to remind everyone that our remarks and responses to your questions. Today may contain forward looking statements that are based on the current expectations of management and involve inherent risks and uncertainties that could cause actual results to differ materially from those indicated including those identified in the risk factor section of our most recent annual report on form 10-K.
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That was our most recent 10-Q filing such factors may be updated from time to time in our filings with the FCC, which are available on our website. We undertake no obligation to publicly update or revise our forward looking statements as a result of new information future events or otherwise.
This call will also include references to certain financial measures that are not calculated in accordance with generally accepted accounting principles or GAAP. We generally refer to these as non-GAAP financial measures reconciliations of these non-GAAP financial measures to the most comparable measures calculated and presented in accordance with GAAP or available in the earnings press release in the Investor really.
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I'll now turn the conference over to Mr. Carley Goodwin Capex medical is president and Chief Executive Officer. Please go ahead Sir.
Thanks, Operator, welcome everyone to our earnings call for the third quarter up 2020.
I'm joined on the call. This morning by terrorists them, our Chief Financial Officer.
Let me provide you with a quick agenda for today's call.
I'll begin with the review of our revenue results for the third quarter, including a summary of the impact of the COVID-19 pandemic on our quarterly results.
Following this discussion I will provide you with an update on our recent operational highlights and the progress we have made on our four initiatives, we're pursuing as part of our long term growth strategy.
Terry will then provide you with a detailed review of our financial results as well as some assumptions and considerations for modeling our financial performance in the fourth quarter.
Following terrorists remarks, I will conclude with some additional thoughts on our near term and long term outlook before we open the call for questions.
With that let's get started with the review of our revenue results.
We reported total revenue of 7 million for the third quarter up 2020, representing a decrease of 8% year over year.
From a geographic standpoint, our total U.S. sales for the third quarter up 2020 decreased 6% year over year to 5.2 million why the total international sales decreased 14% year over year to 1.7 million.
In terms of revenue performance in each of our business segments.
In our OEM business sales were essentially flat year over year at 1.5 million and inner advanced energy business sales decreased 10% year over year to 5.5 million.
The 10% decline in our total advanced energy revenue in Q3 was driven by a decline in generator sales up 36% year over year, which was partially offset by an increase in handpiece revenue, a 48% year over year.
Despite the continued impact of COVID-19 on our capital sales, we were pleased by the improving trends in our advanced energy business as the global recovery continue to progress.
Most notably the 48% year over year growth that we saw and global hand piece sales.
Was driven by strong utilization based demand from our U.S. cosmetic surgery customers, specifically, we saw a 93% growth in U.S. hand piece sales year over year.
Looking at our U.S. handpiece trends in more detail.
As we entered the third quarter nearly all of our existing U.S. customers have reported their practices, we're very busy working to accommodate the backlog in cases caused by the cobot pandemic during the this past spring.
Many also reported building strong pipelines as a result of employing virtual consultations why offices were closed over this period.
As a result of these dynamics July wasn't exceptionally strong month for our clinician customers in the U.S.
Our performance in July also benefited from a softer prior year growth comparison as we discussed both of these dynamics on our Q2 conference call.
By mid August we believe that the majority of accounts, we're able to work through their backlog with many accounts reporting that they were extending their office hours for adding additional days to their schedule in order to accommodate these cases.
Importantly, we continue to see strong utilization based demand for renewed be on hand pieces throughout the remaining weeks of the quarter, which we view as a positive sign of improving the underlying business trends.
This is consistent with recent feedback that we have received from many of our U.S. customers, who are reporting increased patient volumes after working through their backlog of cases.
Outside the U.S. given the different rates a recovery in each of our primary geographic regions around the world. It remains difficult to characterize our trends are.
On the encouraging side, we experienced improved handpiece demand in our primary O.U.S. markets during the third quarter. However.
However, while we saw improving handpiece demand trends in the international market sales of hand pieces were still down year over year in the third quarter and the recovery continues to lag behind the trends that we have seen in the U.S.
On the capital equipment fraud, the overall purchasing environment remains in the early stages of recoveries, both in the U.S. and internationally.
We continue to see that potential new surgeon customers are reluctant to invest in new technology for their practices. Given the continued overhang of the kobin related business disruption and the future uncertainty created by the pandemic.
More importantly, the cobot restrictions on rep access and the lack of in person selling opportunities like trade shows and clinician events continue to impact our ability to drive new clinician adoption.
Why we experienced year over year decline in global generator sales during the third quarter. Our O.U.S. performance benefited from the recent success that our team has had in securing product registrations authorizing the sale of our helium plasma technology in new countries.
During the second quarter of this year recall that we announced the receipt of new product registrations in five new countries and shipped initial orders to two of these countries, Brazil and Australia.
In Q3, I'm pleased to report that we ship the additional orders to Brazil, and Australia, along with an initial orders to Taiwan and Thailand. These orders helped offset the year over year decrease in our international advanced energy business.
In summary, despite the continued impact of COVID-19, we are pleased with his sequential improvements that we saw in our advanced energy business trends overall during the third quarter and are very encouraged by the 48% increase in global hand piece sales in Q3.
Our team is doing an excellent job of supporting both our existing U.S. surgeon customers and are all U.S. distributors.
The majority of accounts that we serve in the U.S. Our open seen evidence of sustained improvement in patient volumes after working through their backlog and becoming more adept at managing their practices efficiently, while prioritizing the health health and safety of their patients.
And lastly, why we remain in the early stages of the global recovery and capital equipment purchasing we're pleased to see our international advanced energy sales performance continued to benefit from sales and new countries that we added this year.
Turning to a discussion of our operational progress during the quarter.
Our team made considerable progress on our four strategic initiatives to position apex medical for long term growth in the cosmetic surgery market.
Starting with our first initiative to pursue specific clinical indications that will enable us to market and salary newby on for new targeted procedures.
After restrictions on elective procedures were lifted in the U.S. during the second quarter, we continued to make progress on our two I'd He clinical studies.
Which are intended to support our pursuit of new indications for the use of dermal resurfacing and skin laxity procedures.
Today, we are very pleased to announce the achievement of key milestones with respect to both of these studies.
First and foremost I'm excited to announce that we have completed enrollment last week in our clinical study evaluating the use of renewing on technology for dermal resurfacing procedures.
We also continued to make progress in the first phase of our I'd. Each study evaluating the use of renew the on in skin laxity procedures in the neck and sub mental region.
As a reminder, phase one is focused on collecting one month safety data to be submitted to the FDA for safety review.
I'm pleased to announce that we completed enrollment in phase one and submitted our one month safety data to the FDA for review last week F.D.A. completed their review of our one month safety data and concluded that we met the requirements completing phase one of our study.
We look forward to working with the FDA to begin phase two.
In addition to our U.S. regulatory strategy, we are focused on expanding our commercial footprint internationally by obtaining regulatory clearance for our helium plasma technology in new countries.
As I mentioned earlier during the second quarter, we were pleased to receive regulatory approval to market and sell our products in five new countries, Australia, Brazil, Israel, Taiwan, and Thailand and expect the addition of each of these five countries to benefit our long term growth profile.
In Q3, we further expanded our international footprint with the addition of new product registrations in both Lafayette and Lithuania.
While we do not expect either country to contribute materially to the performance in 2020. The addition of these new countries reflect the ability of our regulatory team to drive continued product grass.
Despite the global disruption due to Covance.
With respect to our second strategic initiative, we continued our efforts to expand the portfolio of clinical evidence supporting the use of our renew the on technology.
This past month, we were pleased to announce the publication of two peer reviewed articles, which were both featured in the journal Dermatological reviews.
The first publication evaluated our renewing on technology when used independently of liposuction for sub mental coagulation in the neck.
The second publication evaluated renewed beyond when used in combination with liposuction for subdermal quite relation in various treatment areas of the body.
Each publication featured data from multiple retrospective chart review studies, which we believe serves to further strengthen the risk benefit profile of renewed beyond.
Why we continue to build on this recent progress to further demonstrate the clinical ability of our renew the on technology and facilitate its broad based adoption.
Moving to our third strategic initiative enhancing physician practice support for our cosmetic surgery customers.
Given that the cobot pandemic has impacted our ability to host in person events. Our team continues to conduct education educational programming virtually.
During the third quarter, our sales marketing and field clinical teams organized six virtual physician education events, which were attended by approximately 160 physicians. These.
These events were similar to the physician mentoring program or PMP events that we have traditionally conducted in person and were led by some of our top physician customers.
Our team also organize three virtual training sessions for our international distributors, which were focused on further educating them about the features and benefits of our technology.
In addition to our live programming, we have also expanded our platform of online resources for our existing customers to include pre recorded webinars procedural videos and user experience videos that are available on demand.
Lastly, with respect to our fourth strategic initiative, improving our manufacturing capabilities and efficiencies as I have discussed in prior quarters. One of our most important focus areas. Under this initiative has been to implement new process improvements in order to reduce the per unit manufacture.
Carrying costs of our advanced energy products.
These efforts are reflected in improved margins of our eighth year hand piece, which we launched earlier this year.
Our financial results are already benefiting from the gross margin improvement as the PR hand piece becomes a larger portion of our total hand piece sales.
We expect the benefits of this fourth strategic initiative to drive continued contributions to our long term profitability over the remaining months of 2020 and beyond.
Stepping back despite the ongoing challenges of cobot pandemic in Q3, our organization continued to demonstrate their ability to effectively support our customers. While also driving progress with respect to our long term strategy.
With that let me turn the call over to Terra to discuss our third quarter financial results Tara.
Thanks, Charlie thank.
Thanks, Charlie covered our third quarter revenue performance in detail I will begin my review of our Q3 financial results by continuing down the piano.
Gross profit for the third quarter of 2020 decreased $8.6 million or 10%, 10.7% year over year to 4.7 million.
Gross profit margin for the second quarter of 2020 was 67.9% compared to 69.9% last year.
The year over year decrease in gross profit was driven by product mix within our advanced energy segment and revenue mix between our segment.
The decrease in gross margin was offset partially by improved product margins within our advanced energy segment as a result of our continued manufacturing efficiency initiatives.
And by improved margins attributable to profit product mix within our OEM segment.
Operating expenses for the third quarter of 2020 decreased 1 million or 9.5% year over year to 9.1 million compared to 10.1 million for the third quarter of 2019.
The decrease in operating expenses year over year was driven by a $1.1 million decrease in selling general and administrative expenses.
And $8.2 million decrease in professional services, partially offset by $8.3 million increase in salaries and related costs. It.
It is important to note that the year over year decrease in operating expenses reflects our initiatives to control costs and reduce our discretionary spending in response to the impact of COVID-19 on our financial condition.
Loss from operations for the third quarter of 2000 24.4 million compared to operating loss of $4.8 million last year.
Income tax benefit in the third quarter of 2020. It was point 7 million compared to income tax expense of approximately $3.2 million in the third quarter of 2019.
In the third quarter of 2020, we benefited from a GAAP tax benefit related to the cares Act, which was enacted by the U.S. government to provide relief from the Corona virus Pandemics.
As we discussed on our first quarter call. The cares that concludes the net operating loss for I know I'll carry back provision from which we expect to receive a tax.
Cash tax refund of approximately $3.7 million by the end of 2020.
We also recognized an income tax benefit of approximately $8.8 million in the third quarter of 2020 related to our net loss, which reduced our GAAP effective tax rate.
There are <unk> are approximately $2.4 million up 2018 federal income tax payments available to offset against any further losses incurred in 2020.
Net loss for the third quarter of 2000, 23.7 million or 11 cents per share compared to a net loss of $4.4 million or 13 cents per share for the third quarter of 2019.
Third quarter 2020, adjusted EBITDA loss was 3.1 million compared to an adjusted EBITDA loss of $3.8 million last year. As a reminder, we provided a detailed reconciliation from GAAP net loss to adjusted EBITDA in our press release this morning.
We are pleased that we reported improvement in our adjusted EBITDA loss, a point $7 million year over year, Despite our revenue decreasing point $6 million year over year in the third quarter.
As of September Thirtyth 2020, the company had cash and cash equivalents of $43.5 million compared to cash and cash equivalents of 58.8 million as of December 30, Onest 2019 the.
The company had working capital of 58.1 million as of September Thirtyth 2020, compared to 64.4 million as of December 31st 2019.
Turning to our 2020 outlook.
As mentioned in our earnings press release. This morning, given the ongoing challenges and uncertainties posed by the global COVID-19 pandemic, we will not be providing full 2020 guidance on today's call.
In the absence of formal guidance, we have elected to provide additional directional commentary to assist in modeling our business.
We continue to expect our OEM revenue to be approximately $5 million in 2020 over.
Overall, we expect continued improvement in trends as we move through Q4. However, we continue to expect total revenue to decline on a year over year basis.
Importantly, our expectations for revenue result in the fourth quarter have not changed from what we shared on our Q2 call in August where we had hoped to see a return to growth in the us in the fourth quarter.
We expect to report growth in U.S. advance energy sales on a year over year basis in Q4, and a decline in our international advanced energy business I know year over year basis.
Turning to the piano, we would expect to see sequential improvement in our gross margins compared to the third quarter of this year driven primarily by geographic revenue mix, but also due to the continued benefit of our recent manufacturing initiatives on our overall handpiece margin.
We anticipate our Q4 operating expenses will increase sequentially in the high single digits, driven primarily by higher higher sales and marketing related expenses as a result of commissions on higher sales.
And lastly, we would expect this to translate into some similar EBITDA last quarter over quarter with.
With that I will turn the call back to Charlie for closing remarks Charlie.
Thanks, Kara looking ahead, we remain cautiously optimistic with respect to the near term outlook for our advanced energy business.
The capital equipment environment remains uncertain, we expect to see continued strength in hand piece demand the.
The strong utilization is a direct result of the impressive clinical results that are surgeons have been able to achieve with our technology.
In a market that is crowded with technologies that over promise and under deliver renewable it allows our surgeons to truly differentiate their practices by delivering the results that their patients are looking for.
With 43 million.
43, and a half million of cash at the end of the quarter, we remain very well capitalized to whether the ongoing effects of this pandemic, while continuing to execute our growth strategy as recovery progresses.
As we close out the year to prepare for 2021 apex medical is focused on returning to strong sustainable growth as quickly as possible by continuing to elevate the global cosmetic surgery market with our technology and expand our share of this multi billion dollar opportunity that this.
Market represents.
Before we open the line for questions I'd like to commend our employees for helping us achieve this impressive progress this quarter under very difficult circumstances.
I'd like to personally thank our customers distributors and shareholders for their continued support and everyone on today's call for their interest in apex medical with that operator, let's now open the call for questions.
Thank you.
I'd like to ask a question. Please signal by pressing star one on your telephone keypad, if we're using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment. We do ask that you limit yourself to one question and one follow up if you'd like to ask additional questions. We invite you to address health to the Q.
Again by pressing star one.
First question will come from David Turkaly from JMP Securities. Your line is now live.
Thanks for all the detail.
Hi, I know you talked a bit about existing customers and their pipelines and how busy they are in.
All of Us can appreciate.
Some of the difficulties lately with new folks, but I guess I just like to hear your thoughts sounds like fourth quarter yeah.
We've continued to improve do you think.
As we move into 2021, you're adding more new accounts as well as service thing your existing folks.
Yes. So we are incredibly happy with the U.S. handpiece sales growth of 93% year over year and that is definitely a reflection of strong utilization based demand and in the U.S. that is.
That is definitely the case and we see that.
That utilization demand continue as really if you look physicians are really using this to help differentiate their practice the before and after is that these doctors are able to get.
With the technology is incredible and this has been consistent with our Q2 call that we talked about this demand and at the beginning in July and the first half of August they were working through the backlog of patients, but after that its just now it's we believe it's just a steady state of a bit.
This in their businesses are strong and we do expect that content to continue.
Got it and just as a quick follow up congrats on the FDIC updates I was wondering if you could.
Give us your latest thoughts on sort of when those final indication could be received for for both thank you.
So when we're talking about the the dermal.
We completed enrollment.
Last week.
And remember that they have a 90 day follow up.
That each patient has to go through meaning that.
The last patient will be followed up some time.
February and then after that as you remember we need to gather the information we need to have an analyzed by third party reviewers we need to prepare the five 10-K submission so with the dermal study, we expect to submit that.
[noise] sometime.
In May I believe.
And then with the skin laxity, we're very excited that we just got a notification from the FDA that we met the requirements for the safety data and we're working with them to start phase two of that and when we do.
To start phase two we will tell everybody because that will be the start of enrollment in phase two so we'll do that via press release, when we when we began phase two.
Thank you.
Yep.
Thank you. Our next question today is coming from Matthew O'brien from Piper Sandler Your line is now live.
Good morning, Thanks for taking the questions.
Yes, Charlie or or Tara just for starters can you talk about what you're seeing in some of these hot spots that are really break it out around the U.S., No, California, Illinois, Texas and then.
With that that some of these increases were Santa cases.
Covert cases, I guess, what gives you that confidence that you can still get back to growth here in the us in Q4, and then ill use an early 21, I mean from a generator perspective, I know the hand pieces are doing great, but what gives you that confidence.
Yes. So that's a very good question I think that what we've seen in that in that confidence is that the hot spots that you are talking about and some of them, Texas, Florida, even Arizona, and California that even happened over the summer that our customers were able to manage their practice.
This keep their patient safe and demand was still there and so now that it's the you know the ninth of November.
Our.
Our.
Mindset is that they will be able to keep doing that and there will not be any major lockdowns between now and the end of the year and that's that that was really the issue in the spring is that they.
That is that the doctors weren't able to do procedures and our mindset is that they will between now and the end of the year end in the fourth quarter.
Even with that thing, we're not assuming any material improvement in the capital environment. In Q4. So it really is the strength of our hand piece demand and the strength of our existing customers using the technology and the demand from their patients.
That's really helpful and then sorry, sorry.
Outside the United States becomes obviously, a mix bag and it's a little bit true.
Trickier there some of the Lockdowns in the countries are a little bit more strict so it's tougher outside the United States and that's why we.
Obviously don't see growth there in the fourth quarter.
Got it and then that's that's helpful. Thank you as a follow up just I think you mentioned to David. The last question that you are going to be submitted for approval on sub term in may Im assuming just a typical kind of.
Thanks, Mike Krimbill dermal I'm sorry.
Thermal.
In may so hopefully by the end of next year is that the expectation that you get the approval and then what kind of what kind of investment do you anticipate making their ramp up and be prepared for.
That new indication as we head into 22, yes.
Yes, so we're targeting that submission.
In May of 2021, and then typically that submission is a 90 day submission with the FDA.
It has been in some cases been running a little bit more because of covet and who knows what it'll be in may whether it will be back to work or whether they'll still be working remotely at that time, and we will let you know publicly when we actually do submit that five 10-K in may as far as investment goes.
We will.
We will not have a tremendous amount of investment in in 2021 with that the investment really will come more on the back of hopefully getting the indication in with the with the laxity also to be able to talk about that but we're happy with the size of our general sales force right now.
And there won't won't be a huge amount of investment that will go in that there will be some stuff on social media, obviously, but our existing distribution channels will be able to handle that.
Got it thank you.
Thank you. Our next question today is coming from Matt Hewitt from Craig Hallum Capital Group. Your line is alive.
Good morning, and congratulations on all the project progress here.
First question, Charlie you mentioned that there is a little bit of a reluctance to buy new technology by some of your customers customers and I'm [noise].
Is that a function of them uncertain about how things are going to play a role with Covidien I guess over the winter months or is that more a function of maybe their balance sheets, and they're just kind of getting back to normal business operations and they don't want to kinda trip themselves up.
I guess here over the next couple of months.
I think the answer to that is both it depends on you know each of each individual situation and how they view the yeah, the pandemic and investing in and something new that they don't already have and so I think you've got both of those factors that come into play along with the fact that.
Because if there is the cobot pandemic getting into the office in accounts, where you don't have the technology already as a little bit trickier, because a lot of the offices have.
Pat have rules about coming into the practice to try to keep their patient said, we obviously don't have that issue in accounts that have our technology already because their business partner of ours, but for people trying to acquire the new technology I think those are those are all in place.
Got it and then obviously you've had some pretty good success. This year I'm opening up some in new international markets. Despite the ongoing pandemic how should we be thinking about Q4 are there any maybe near term opportunities and then more importantly, I guess as you look at fiscal 21, what kind of targets you look.
For next year on the international front. Thank you yeah. So the first thing is whether or not obviously, we've never talked about the places that we are going or the things that we're going to do and the contribution from these countries that we have in here is already baked into the directional outlook that we provided for the fourth quarter.
And returning to international growth in 2021, so all of that is still baked in there and yes. We are extremely happy with the work that the group has done to get the registrations.
Even during the obviously the cobot period and this has been a major focus of ours and it will continue to be we still have we still have countries that we're pursuing and other things that we want to do in this area and when we do we will let you know how how when we add different countries.
Got it thank you.
Thank you next question is coming from Kyle Boller from called Securities. Your line is alive.
Thank you.
Hi, good morning, and congrats on the updates here appreciate the color on being able to return to us growth in the advanced Energy Division in Q4, and L.U.S. and early 21, I'm sorry, if I missed this but just kind of wondering if you're able to provide any updates on how.
October is trending similar to last earnings call me when you talked a little bit about July just any kind of additional thoughts on how things have trended. So far this quarter would be great.
Yeah look the.
We're not going to give trends into how October was for the quarter were going to go back to a more normalized way as you know we gave directionally. What we think is going to happen in the fourth quarter, and obviously November or excuse me October is already baked into that direction. So we're going to kind of get back to.
I'm trying to get back to normal as much as we can here sure.
Sure and now understood Yep.
Got it and.
Regarding the clinical trials, maybe just two quick ones here. So appreciate the updates on the dermal resurfacing. So.
Hope to submit that application in May I I thought there was a six month.
Safety follow up on that but.
I guess by made that should be enough time.
It does it just take time to kind of put together the efficacy data.
And then by the time May hit you can kinda check to make sure there weren't any adverse events and that just shoot that off and then and then the second question is just kind of timing on how long you think the skin laxity child might take 10 rolled up the phase two part yes.
Yes, so so far the dermal I'd. He study it is a 90 day follow up for the patients. The six month is on the other study. Okay. So just so we're clear on that the 90 day is at the six month as for the skin Laxity 90 days for the dermal resurfacing, but one of the things that.
Has to happen is that theres, a lot of data that needs to be crunch theres a lot of evaluations from third party of a value waiters that need to have and then we need to submit the the five 10-K and so our plan is to submitted in May.
And our plan is to do it as fast as we possibly can obviously, but our plan is to also make sure that we do it right and that we that we get it done the right way so.
We will let you know on the dermal when we do submit that but that is our plan and then typically it like I said, it's usually about 90 days after that for the dermal for the I'd look we just got we just got notification from the FDA just late last.
That last week and so we are working to to.
To start phase two on that and the next update that we will let you know publicly is when we began phase two of that study and then well we'll outline everything at that point in time.
Got it alright, great well, thanks for all the updates today I'll jump back in queue. Thanks, Scott.
Thank you. Our next question today is Russell Cleveland and as a reminder, its star one to be placed in the question queue.
Next question is coming from Russell Cleveland with Renn capital. Your line is now live.
Well, thanks for the numbers on the 90% plus.
On the hand piece sales very very encouraging. So my question is around the margins now are the margins on the hand pieces what are our.
Goals, there Oh and has a hand pieces increase it will become more and more you know part of more and more important on our quarterly numbers. So give me some color here on what our objectives are on the margins for the hand pieces as opposed to our equip.
That sale.
So we don't breakout the margins between capital equipment, and and consumables at this point in time and so I.
That's just the way it is but the.
Product mix will continue to drive it.
Margin expansion and the improvements that we're having in our manufacturing will continue to drive gross margins into the fourth quarter and for 2021, but we don't break out the margins between capital and disposable.
But the obviously the hand piece sales Oh.
Can can have much higher margins over time is that that's where as I am I interpreting that right.
Well like I said, we don't break out the capital for disposables, but the overall gross margin of the business. Yes will continue as we move forward into Q4 and the 2021 okay.
Great. Thanks, so much for the numbers. Thanks Russell.
Thank you we reached end of our question and answer session and ladies and gentlemen that does conclude today's teleconference. You may disconnect. Your lines at this time and have a wonderful day, we thank you for your participation today.
Thank you.