Apyx Medical - Earnings Call - Q2 2021
August 12, 2021
Transcript
Speaker 0
Good morning, ladies and gentlemen, and welcome to the Second Quarter of Fiscal Year twenty twenty one Earnings Conference Call for Apex Medical Corporation. At this time, all participants have been placed in a listen only mode. At the end of the company's prepared remarks, we will conduct a question and answer session. Please note 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 annual report on Form 10 ks 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.
Speaker 1
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 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. Perra 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 $11,200,000 exceeding the 101% to 112% growth expectations that we communicated on our earnings call in May.
By geographic region, total U. S. Sales grew by 118% year over year to $7,400,000 and total international sales grew by 325% year over year to $3,800,000 By segment, our total revenue growth was fueled by strong sales of our Advanced Energy products, which increased 248% year over year to $10,000,000 while sales in our OEM business decreased 13% year over year to $1,200,000 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 U.
S. 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-nineteen 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 remained challenged by the effects of COVID-nineteen, 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 U. S. Specifically, the process of engaging with potential new customers remain 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 2021 compared to the 2019 as well, with Advanced Energy sales up 87% over 2019. 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 Apyx 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 U. S.
And securing product registrations in new countries. In The U. S, we were pleased to achieve an important milestone during the quarter with the submission of a five ten premarket notification to the FDA on May 28. As a reminder, this submission is supported by data from our U. S.
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 multiyear 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 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 five ten submission for skin laxity procedures in the 2022.
Outside of The U. S, we secured product registrations enabling Apyx 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 expanding our global commercial footprint given the continued COVID related headwinds. The progress we have made in recent years will position Apyx 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 continue 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 by 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, Apyx 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?
Speaker 2
Thanks, Charlie, and good morning, everyone. Since Charlie covered our revenue results, I will begin at the gross profit line. Gross profit for the 2021 increased $5,400,000 or 260% year over year to $7,500,000 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 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 $3,300,000 or 40% year over year to $11,600,000 The increase in operating expenses year over year was driven by $2,100,000 increase in selling, general and administrative expenses, 2 a $900,000 increase in salaries and related costs, a $100,000 increase in research and development expense and a $200,000 increase in professional services. Loss from operations for the 2021 decreased $2,100,000 or 34 percent year over year to 4,000,000 Income tax expense was $100,000 compared to an income tax benefit of $1,500,000 in the 2020. Net loss attributable to stockholders was $4,000,000 or $0.12 per share compared to $4,700,000 or $0.14 per share for the 2020. Adjusted EBITDA loss decreased $2,500,000 or 51% year over year to $2,400,000 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 06/30/2021, the company had cash and cash equivalents of $34,700,000 compared to $41,900,000 as of 12/31/2020. Turning to a review of our 2021 financial guidance, which we updated in our earnings press release this morning. For the twelve months ending 12/31/2021, we now expect total revenue in the range of $40,600,000 to $42,600,000 representing growth of 46% to 54% year over year. This compares to our prior guidance range, which assumes growth of 36% to 43% year over year. The updated total revenue guidance range assumes Advanced Energy revenue growth of 62% to 71% year over year.
This compares to our prior guidance range, which assumed growth of 49% to 59% 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 twenty twenty one, we expect net loss attributable to stockholders in the range of $19,300,000 to $18,000,000 This compares to our prior guidance range of $20,300,000 to $18,000,000 And we expect adjusted EBITDA loss in the range of $13,100,000 This compares to our prior guidance range of $14,100,000 to $11,500,000 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 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 6340%, respectively. Second, we now expect gross margins in the range of 68 compared to 63.2 last year, driven primarily by continued mix benefits by segment, by geography and by product.
Third, we continue to expect GAAP operating expense to increase approximately 25% year over year, driven by 9% growth in our normalized operating expenses. This normalized OpEx growth expectation excludes 4,300,000 of COVID related expense reductions, including discretionary travel and entertainment and other compensation related expenses that benefited our 2020 GAAP operating expense and $1,100,000 of incremental stock based compensation expense in 2021 as well as approximately $200,000 of initial expenses related to our joint
Speaker 0
in China, which we established last year.
Speaker 2
Initial Fourth, we expect net interest and other expense of approximately $140,000 in 2021 compared to a benefit of approximately $700,000 last year. Fifth, we expect income tax expense of approximately $350,000 compared to an income tax benefit of $7,500,000 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 5,100,000.0 to $5,300,000 non controlling interest of $100,000 compared to $250,000 previously and weighted average diluted shares outstanding of approximately 35,000,000 shares. With that, I'll turn the call back to Charlie for closing remarks.
Speaker 1
Thanks, Tara. Our exceptional results this past quarter give us the increased confidence in the ability to continue our recent momentum and deliver strong financial and operational performance for the full year. Given this increased confidence, we are raising our 2021 revenue guidance today to reflect both our stronger than expected sales performance during the second quarter and our improved expectations for the second half of the year. Specifically, we expect to achieve strong sales of our Advanced Energy handpieces during the remaining months of the year, driven primarily by a continuation of the healthy utilization based demand that we saw during the second quarter. On the capital equipment front, while we expect to see improvement in global generator sales over the 2021, the overall pace of recovery in global capital equipment environment remains uncertain.
Looking ahead, we remain focused on executing on the near and longer term elements of our strategy to facilitate the widespread adoption of our technology in the cosmetic surgery market and build a strong foundation for what we believe one day to be the largest pure play cosmetic surgery company in our industry. We believe our helium plasma technology represents the best technology on the market with the potential to revolutionize how procedures are performed with its ability to bring rapid heating and cooling to tissue through a truly innovative approach. And with a solid balance sheet and a focused strategy to drive long term growth, we are well positioned to establish ourselves as the market leader by continuing to raise awareness of our technology and expand our share of the multibillion dollar addressable market opportunity in front of us. I'd like to conclude my remarks today by congratulating our entire team of employees for enabling Apyx Medical to deliver a great quarter and thanking our customers, distributors and investors for their continued support for our company and its mission. With that, operator, let's now open the call for questions.
Thank
Speaker 0
And our first question will come from Matt Hewitt, Craig Hallum.
Speaker 3
Good morning and congratulations on the strong quarter.
Speaker 1
Thanks, Matt. Good morning.
Speaker 3
I guess the first question for me is, I noticed in your press release and you've commented it here on the call, but you're anticipating a pretty strong second half. Your increase in guidance was more than just the Q2 beat. And I'm curious, given what's going on with the pandemic, what are you hearing from your customers as far as their expectations in the back half from a utilization standpoint?
Speaker 1
Yes. So our total revenue our upside was better than expected for the first second quarter and the first half of the year given our handpiece growth. We increased our handpieces 270% year over year,
Speaker 0
and that was basically 2,100,000 above the high end of stated expectations. And the contributions were balanced from both The U. S. And the OUS. And so it reflects the strong
Speaker 1
utilization increased based demand from our technology. And we're encouraged that this is a sign of healthy procedure trends. And all of the offices in The United States remain opened and busy and booked. And outside The United States, it's a little bit spotty country by country, but that's been what we've been expecting the entire time. So really the back half of the year assumes a healthy utilization based demand of our technology.
And that's why we're confident in the back half of the year.
Speaker 3
That's great. And then I guess shifting gears real quickly for my second question. As you prepare for hopefully an approval news from the FDA here soon on the dermal resurfacing five ten, what
Speaker 0
steps are
Speaker 3
you taking from a marketing and sales perspective so that as soon as you receive that approval, can kind of hit the ground running? And how should we be thinking about that ramp for that business upon approval? Thank you.
Speaker 1
Okay. Thank you. Yes. As I said, we submitted our five ten on May 28. It will obviously take more than ninety days probably, but ninety days we're out of we don't have control over the timeline of that.
Our guidance our 2021 guidance does not include contributions for sales for the dermal resurfacing. We are actually getting the sales force together next week to plan and prepare for a potential limited launch during Q4. And we're excited about the potential growth opportunities and contributions as we enter full year commercial launch in 2022. So that's we've got the team together next week, and we're looking forward to seeing everybody there.
Speaker 3
Got it. All right. Thank you.
Speaker 1
Thank you.
Speaker 0
Next question comes from Matt O'Brien with Piper Sandler.
Speaker 4
Hi. This is Corine on for Matt. Thanks for taking the questions and congrats on a great quarter. So just more broadly speaking, there's been a lot of talk in the broader aesthetic space around this shift in consumer focus on broader wellness. How do you think Apex is positioned to benefit from this shift in mindset?
And what are some of the things you're doing internally to best meet this perspective?
Speaker 1
Yes. No, that's a great question. Thank you very much. We actually believe in the shift to wellness ourselves. We think that this market is going to transform into that.
And one of the other things that you see in the market with the wellness category is this reluctance of people to put wanting to put foreign substances or foreign things into their body. We believe that our technology is very well suited for this trend because the skin is the largest organ on the body. And as you get older, your collagen starts to stretch out and causes your skin to sag. And for us using just heat in order to reformat your natural collagen, we're not adding anything into that. And there's nothing that makes you look older or feel older than saggy loose skin.
And so we believe that as we continue down the path of getting our specific indication for skin laxity and our ability to really start talking about this directly to the consumer really opens this market for us. And as I stated many times, we believe we have the best technology on the marketplace to be able to take care of this. And it's the forward facing thing that everybody sees when you walk into the room is your skin. And so we think we're in great position to be able to capitalize on this trend for many years to come.
Speaker 4
Got it. Thank you so much. And then just one last one, a quick one on margin. So gross margin took a bit of a step down this quarter sequentially, and it does sound like we'll stay below that 70% for the year. How should we think about margin progression beyond 2021?
Do we think you think we'll get to around the 70% range in 'twenty two? Or what are your thoughts there?
Speaker 1
Yeah. So if you look at just the margin, the big thing is the adoption of the APR and the APR handpiece. As we and we're just started on that runway outside The United States. And so we've got a long ways to go outside The United States to get everybody adopted onto the APR because of registrations and things like that. And so this will be a multiyear story of getting all of those things done out there where we'll continue to see expansion going forward.
Tara can talk to you specifically about the margin this year, but it was really because of mix and some higher inbound shipping costs for the quarter in particular.
Speaker 4
Thank you.
Speaker 1
Thank you.
Speaker 0
Your next question is from the line of Russell Cleveland with REN Capital.
Speaker 5
Thanks so much for these great numbers. I think we're all just really pleased. One question, the international sales, what areas are they mostly or procedures mostly doing? Are they doing, you know, tummy tucks? Are they doing facelifts and stuff?
What give me a feeling about this. And, we have all these new procedures coming on. So give me some color here on where the real growth is right now overseas.
Speaker 1
It's not just overseas, but it's also in The United States. Our business is really from the using Renuvion as a subdermal coagulator in body contouring procedures. So that is where our revenue comes from both internationally and in The U. S. And it's exclusively driven off of that.
As far as the dermal resurfacing, which we submitted the five ten for on May 28. That would be a new indication for us. And if that is being done now in The U. S. And outside The United States, it is being done off label by the physicians.
And so that is that would be a very small volume at this point. But getting the indication for dermal resurfacing would allow us to be able to go market that and sell that in the registration outside The U. S. For dermal resurfacing. But right now, it's almost all as a subdermal coagulator for body contouring procedures.
Speaker 5
Would you say that the resurfacing, that appears to some of us to be a bigger market than our what we're doing now. What do you think No.
Speaker 1
Actually, laxity is a much bigger market than the dermal resurfacing market. And that is the dermal resurfacing IDE will be important for us to get because it will be a new indication. But the one that has the largest amount is the skin laxity indication because that market is billions of dollars in size.
Speaker 5
Great. Thanks so much. I appreciate it. Thanks for the numbers.
Speaker 1
Thanks, Rob. Thank you.
Speaker 0
Our next question comes from the line of Kyle Bauser with Collier Securities.
Speaker 6
Great, thanks. Good morning. Congrats on an incredible quarter here. Thank you, Maybe just a question on the overall market, in The U. S.
And OUS. I'm just kind of curious, presumably, you've kind of mapped it out and have maybe ranked sites that you're going to go after with sales reps and distributors. But can you, Charlie, just talk a little bit about how many addressable sites there are in The U. S? I know you don't give numbers yet on your installed base, but just kind of curious on the overall number of sites that you're targeting, maybe you're ranking them by tier, both in The U.
S. And OUS?
Speaker 1
Yes. So when you're talking about sites, you're talking about actual physicians, correct, that are doing body contouring procedures?
Speaker 6
Exactly, yes.
Speaker 1
Okay. Yes. In The U. S, we talk about 15,000 clinicians that are made up of plastic surgeons, dermatologists and cosmetic surgeons that are doing liposuction. And that's really where we focus and where driving.
And obviously, we're focused on those clinicians that are doing the most body contouring work is where our focus is on them both in The U. S. And outside The United States. And so that's really the group that we are going after. And quite frankly, I would say that we're actually doing a very good job of that because you can see it in our utilization numbers from the handpieces that our growth is so high that they're adopting the technology and doing a lot of the procedures.
And we will always look to see what we're doing as far as giving more milestones and more numbers as we move into 2022 as we get close clearance to give you a little bit more clarity on some of that. But really, it's those high volume users, those early adopters are the ones that we're after right now.
Speaker 6
Got it. I appreciate that. And my second question, it sounds like you're going to get the sales force, you're going to huddle up with them and kind of prep ahead of a dermal resurfacing clearance here. Will you also do this for an eventual skin laxity or skin tightening label indication? I know that the sales force is already selling for subdermal coagulation, but do you anticipate there being extra marketing efforts to talk about how you'll frame that next opportunity with the new language in the enhanced label?
Speaker 1
Yes. So as I mentioned earlier, we're getting the sales force together to talk about dermal resurfacing next week and getting prepared for a post clearance environment. And remember the importance of the dermal resurfacing is it will allow us to be able to talk directly to consumers about Renuvion technology for dermal resurfacing procedures and we find that obviously very important. From the skin laxity point of view, we just did enroll our last patient, like I said last week. And so enrollment is now closed.
And remember now we've got the six month follow-up that goes on for that. And we're looking to we'd be looking to submit the five ten for that in the 2022. And in doing that, we would then get the sales force together before the launch of Skin Laxity because now our message would be completely different in what we're doing to the direct to consumer portion of this. And so we would want to make sure that we've got everybody on the same page and to get everybody together to make sure we're all singing from the same hymn book of how we're going to go at and talk about this huge opportunity that exists on the skin laxity side of things. So yes, we would get everybody together again.
Speaker 6
That's great. Well, appreciate all the updates and congrats on the quarter again.
Speaker 0
Thanks, Kyle. I'm showing no remaining questions at this time. That does conclude our conference for today. Thank you for your participation.