Apyx Medical Corporation
Q4 2020 Earnings Call Transcript

Published: 31 Mar 2021

[Operator:]

Good morning, ladies and gentlemen, and welcome to the Fourth Quarter and Fiscal Year 2020 Earnings Conference Call for Apyx 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 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 Factors section of our most recent annual form on Form 10-K filed with the Securities and Exchange Commission as well as our most recent 10-Q filing. Such factors may be updated from time to time in our filings with the SEC, which are available on our website. We undertake no obligation to publicly update or revise our forward-looking statements as a result of new information, future events or otherwise.

[Charlie Goodwin:]

Thanks, Kevin. Welcome, everyone, to our fourth quarter and full year 2020 earnings call. I'm joined on the call this morning by our Chief Financial Officer, Tara Semb. Let me provide you with a quick agenda for today's call. I'll begin with a review of our strong fourth quarter revenue results. Following this discussion, I will provide you with an update on the operational progress we made during the quarter on our 4 initiatives we are pursuing as part of our longer-term growth strategy. Tara will then provide a detailed review of our fourth quarter financial results and an overview of our 2021 financial guidance, which we introduced in our press release this morning. I will conclude with some additional thoughts on our near-term areas of focus and long-term outlook as we enter 2021. We will then open the call for questions. With that, let's get started with a review of our Q4 revenue results. We were extremely pleased to report total revenue of $11.5 million for the fourth quarter of 2020, an increase of 37% year-over-year. Our total revenue results came in slightly above the high end of the preliminary range we provided in January and greatly exceeded our expectations for the fourth quarter. Recall that at the time of our Q3 earnings call, we expected total revenue to decrease year-over-year in the fourth quarter. We were very pleased with the revenue results we delivered this quarter, especially given the continued challenges related to COVID in our primary markets around the world. By geographic region, our total U.S. sales for the fourth quarter of 2020 increased 18% year-over-year to $6.6 million, while total international sales increased 74% year-over-year to $4.9 million. And by business segment, our Advanced Energy sales increased 44% year-over-year to $9.9 million, and our OEM sales increased 4% year-over-year to $1.6 million. Our impressive Advanced Energy segment performance was largely driven by strong sales of our handpieces, which grew 78% year-over-year coupled with a 25% year-over-year increase in sales of our generators. It's important to note that the 78% year-over-year growth we saw in global sales of our handpieces was primarily driven by strong demand, both domestically and internationally.

[Tara Semb:]

Thanks, Charlie. I will begin my review of our Q4 financial results by continuing down the P&L. Gross profit for the fourth quarter of 2020 increased $2.1 million or 38.4% year-over-year to $7.7 million. Gross profit margin for the fourth quarter of 2020 was 67.2% compared to 66.4% last year. The year-over-year increase in profit margins was driven in part by product mix within our Advanced Energy segment as well as improved product margins in our Advanced Energy segment due to our continued manufacturing efficiency initiatives and the introduction of new products, including the APR handpiece. The increase in profit margins was offset partially by product mix within our OEM segment and geographical revenue mix due to international sales growth outpacing domestic sales growth. Operating expenses for the fourth quarter of 2020 decreased $1.8 million or 15.4% year-over-year to $9.8 million compared to $11.5 million for the fourth quarter of 2019. The decrease in operating expenses year-over-year was driven by a $1.2 million decrease in professional services, a $0.9 million decrease in SG&A expenses and a $0.2 million decrease in R&D expenses, partially offset by a $0.5 million increase in salaries and related costs. The year-over-year decrease in operating expenses reflects the continued benefits from our initiatives to control costs and reduce our discretionary spending early in 2020 in response to the impact of COVID-19 on our financial condition. Loss from operations for the fourth quarter of 2020 was $2.1 million compared to operating loss of $6 million last year. Income tax benefit for the fourth quarter of 2020 was $0.4 million compared to approximately $0.4 million in the fourth quarter of 2019. Net loss attributable to stockholders for the fourth quarter of 2020 was $1.5 million or $0.04 per share compared to $5.4 million or $0.16 per share for the fourth quarter of 2019. Fourth quarter 2020 adjusted EBITDA loss was $0.7 million compared to $4.8 million last year. As a reminder, we provided a detailed reconciliation from GAAP net loss to adjusted EBITDA loss in our press release this morning. As of December 31, 2020, the company had cash and cash equivalents of $41.9 million compared to $58.8 million as of December 31, 2019. As of December 31, 2020, the company had working capital of $56.9 million, including our expected tax refunds of approximately $7.5 million that the company anticipates receiving during 2021 related to the net operating loss carrybacks resulting from the 2020 CARES Act.

[Charlie Goodwin:]

Thanks, Tara. As we enter 2021, we remain optimistic about the prospects of our Advanced Energy business and we are confident in our ability to drive Advanced Energy growth in the range of 45% to 55% year-over-year in 2021. With respect to our Q1 expectations specifically, we have continued to see evidence of strong utilization of our handpieces in the U.S., along with demand from distributors internationally despite the surge in COVID cases in recent months. Meanwhile, the capital equipment environment continues to be impacted and the pace and timing of recovery remains uncertain, both domestically and internationally. As a reminder, we also see trends -- we also tend to experience seasonality in capital equipment purchasing trends, with the first quarter generator sales typically representing the smallest portion of our full year generator sales. Looking ahead, we continue strong global demand for our Advanced Energy handpieces and expanded OUS distribution network and continued clinical and regulatory progress, Apyx Medical is better positioned as a result of our focused execution in 2020. As we move beyond the first quarter, we look forward to recovering from the effects of COVID while continuing to execute against our 4 strategic initiatives to further enhance our opportunities in the years to come. Over the next few years, we believe Apyx Medical is poised to deliver strong, sustained growth and improving profitability with a global multi-billion dollar addressable market opportunity, a strong balance sheet to support our growth initiatives and a truly differentiated technology supported by expanding portfolio of clinical evidence. I'd like to close my remarks by emphasizing that we greatly appreciate the support of our employees, customers, distributors and investors as we continue our mission to elevate the cosmetic surgery market to the next level by enabling surgeons and their patients to achieve the results that they are looking for. With that, operator, let's now open the call for questions.

[Operator:]

Our first question today is coming from Matthew O'Brien from Piper Sandler.

[Matthew O'Brien:]

I guess, Charlie or Tara, based on what you just said about Q1 here and then what we saw in Q4, I mean, you did really well in Advanced Energy, about $10 million. Can you talk about some of the benefit that you saw in Q4? And then when I net out what you said about Q1, Advanced Energy from the guidance for the year, it assumes about $8.5 million for each of the last 3 quarters, which is below what you did in Q4. So it just feels like that's somewhat conservative, again, given all the momentum globally. What are we missing as far as that kind of run rate for the last 3 quarters of the year in Advanced Energy that would be at that kind of lower level versus what you just printed in Q4?

[Charlie Goodwin:]

Well, hi, Matt, thanks for the comment. The first thing, remember, is there's always the seasonality in Q1. Q1 is always our lowest quarter, especially for capital sales and generator sales. And that seasonality did not change at all as we're sitting here today. So there's usually about a 20% to 30% decline in that seasonality from Q4 down to Q1. And so, we would expect Q1, obviously, to be our lowest number in the year.

[Matthew O'Brien:]

Okay. Sorry, just to follow-up, and I didn't ask the question real well. You did $10 million in Advanced Energy in Q4, which is great. You're guiding to 32 to 34 for the year. And so it's well below that annualized rate and I get it at Q4, so it's better than normal. It just seems like it's a conservative outlook for the Advanced Energy business given all the momentum. Is there something new customers, CapEx that you really are trying to call out here? Or are you just trying to be conservative with that number based on what happened in Q4?

[Charlie Goodwin:]

The 37% decline, we did 9.9 in Q4, and then we guided to Advanced Energy in Q1 of 6.8 to 7. So it's right in line with that 30% decline that we typically see from the normal seasonality of our business.

[Matthew O'Brien:]

Got it. Okay. We'll follow-up offline. And then secondly, the international strength was really good to see. And I know this has been a domestic story for a while here, but can you just talk about what you're seeing? And I think it was 5 new countries and 1 of them was Brazil, obviously, but the strength that you're seeing there? And then how much should international contribute to the story going forward? Because I know it's a big component to a lot of other aesthetic companies.

[Charlie Goodwin:]

Yes. So total OUS sales were at $4.9 million, up $2.1 million, which represented that 74% year-over-year growth that you had talked about. And it was obviously much better than our expectations. And we were incredibly impressed by the growth with the strong demand from those customers, especially given the challenges of COVID in some of those markets. And the upside was really driven by a record December. And the largest contributor to that upside was Brazil. They were about half of that, with the other half coming from demand in the Middle East, which actually came back pretty good in the fourth quarter. And then some of the other newer countries that are Thailand and Taiwan, that put in some orders that we had gotten. And so we are very positive on our long-term prospects, especially in Brazil, being the second largest cosmetic market in the world. But if you look at surgical procedures, they actually do more surgical procedures than the United States. I think the only thing that gives us any form of pause in Brazil and one of the things that surprised us in the fourth quarter a little bit, is obviously, they are being ravaged by COVID down there. And how they get past this COVID and what happens once they get past COVID, that's what we're really looking for. And obviously, I don't have a time line of what happens with COVID down in Brazil, but that's the only reason that we have a little bit of pause. But the international sales, once we get through all of this, will continue to be a driver. But we are only forecasting the growth for this year because of those factors, we're only forecasting international to grow 35% this year.

[Operator:]

Next question is coming from Matt Hewitt from Craig-Hallum Capital Group.

[Matt Hewitt:]

Maybe the first up, what do you think it's going to take to kind of reinvigorate the generator sales? Is that -- obviously, we're seeing some progress on the vaccine front. So is it just further rollout of that is going to allow the customers to get comfortable and ultimately start buying generators again? Or is there some other factor at play?

[Charlie Goodwin:]

Yes. No. So I want to be clear that generators keep getting better, okay? Q4 was better than Q3. Q3 was better than Q2. So generators are improving. They're just not at the level they were pre-COVID, and it really comes down to, especially in the United States, is the protocols that offices are putting in place to try to keep everybody safe by not allowing new people in. And so as we get everybody vaccinated and as we get more normalization to trade shows and things like that, we would expect over time for those to get better, I just don't know exactly what that time is going to be. We are starting to see a couple of trade shows that are starting to have people at them, live people instead of everything being done virtually. But even with those live shows, the attendance isn't that great yet. So we expect it to keep getting better as the year goes on, but it's really tough to predict when and -- when that switch flips, if you will.

[Matt Hewitt:]

Got it. And then maybe on the people side, last year, obviously, with everything that happened, expenses were cut across the board, but it was travel. It was headcount, all sorts of areas. As you look at this year, how should we be thinking about the cadence of ramping those expenses back up, particularly as it comes to the travel and some of the incremental expenses? And then I guess tied to that, what are your plans from a hiring perspective, particularly on the sales and marketing side?

[Charlie Goodwin:]

Yes. So let me handle the sales and marketing side first. We're happy with the size of the team that we have today. And so we will continue with that team throughout all of 2021. And Tara will be able to walk you through a very good exercise to show you where the savings were and where we see the growth in expenses. But just figure there's about $4.3 million of COVID-related savings in 2020 that on a normalized basis will go back into the expenses. And then obviously, we're -- got the IDE studies that we're investing in and getting ready for dermal launches and things like that. So she can walk you through all of that when we talk after it, but she's got the whole thing laid out for you.

[Operator:]

Our next question is coming from David Turkaly from JMP Securities.

[Unidentified Analyst:]

It's actually Danny on for Dave. Just had a few quick ones. First of all, handpiece demand domestically was very strong this quarter, but we just wanted to ask more about the broader cosmetic surgery market beyond your own company's execution? Are you seeing any market dynamics that might be driving this growth? Do you think there's a higher willingness from patients to undergo these surgeries, given the remote work, more convenient recovery or maybe even additional stimulus? Any color on the more broader market would be fantastic.

[Charlie Goodwin:]

Yes. No, it's a very good question, Danny, and thank you. Yes, you hit on some of the factors that are driving this. I think what we continue to see and what we continue to hear from our customers is that demand for these procedures continues to be high. I think the thing that is interesting is because of all these different factors, I think our procedure, in particular, is very good because it is a permanent solution, if you will, unlike some of these other less invasive modalities. And so I think you've got the function that you've got people at home. They've got the time to recover. And they would prefer a more permanent solution as opposed something that really doesn't quite get the job done, and that's what our technology does. And I think you can see that by the demand for these procedures given this time. And so, we're encouraged by that. And obviously -- and from the customer point of view, they're very happy from that too and see that continuing.

[Unidentified Analyst:]

Great. And then just one follow-up. You mentioned, obviously, in 3Q, you had a bit of a backlog that customers have worked through by August. I may have missed it, but I just wanted to make sure, was there any backlog that you saw being built up in 4Q with the resurgence in COVID? Or just any color around that, or anything you saw would be great.

[Charlie Goodwin:]

Yes. No, in the U.S., all our customers were open and working in Q4, and we just continue to see strong demand for those customers. Outside the United States, it's been a little trickier, in that some of the countries have been under lockdown in Q4. And so some countries outside the United States are obviously not as strong as we would like it to be. But obviously, overall strength outside the U.S. was obviously great in the fourth quarter, but the -- we're still being affected by some of those countries, for sure, that are having shutdowns and aren't working at 100%.

[Operator:]

Our next question today is coming from Kyle Bauser from Colliers Securities.

[Kyle Bauser:]

Great update. Maybe just following up on seasonality and kind of the strength you've seen internationally. I mean, back to the envelope math, in Q4, OUS sales for Advanced Energy were pretty much the same as U.S. Advanced Energy sales, phenomenal considering a couple of quarters before, it's maybe $1 million versus almost $5 million in Q4. So just kind of wondering about the cadence heading into Q1. I understand there's seasonality, but it's -- in Brazil, particularly, it's a relatively new market. Can you just talk about was there a bolus of demand, pent-up demand heading into getting clearance in that country, and we've seen a lot of nice strength, and we should anticipate that kind of smoothing out a little bit? Or do you still see a pretty massive opportunity for some low-hanging fruit in that geography later this year?

[Charlie Goodwin:]

Yes. So our preliminary revenue expectations that we provided in our remarks assumed our growth Advanced Energy of 71% to 76% in Q1. And with that, we're expecting OUS growth of about 90% year-over-year in Q1, and that is driven by the strong handpiece demand from existing countries. And obviously, a lower comparison as Q1 last year, especially outside the United States, COVID had an impact in the February, March time frame. So it's an easier comparison. And our full year 2021 guidance on international assumes 35% year-over-year. When you're talking about Brazil specifically, you need to remember that, obviously, every time that we have doctors from all over the world doing procedures, they're posted on a Instagram and talking about them. And doctors from all over the world that do these body contouring procedures get to see this. And so when we enter a market like Brazil, there is, obviously, a lot of people that have seen the work of a lot of these doctors and are looking forward to acquiring the technology. In a non-COVID environment, I would expect us to be even doing more than we are in Brazil right now, and to be even growing more. We think that Brazil is a very -- will be a very key market for us in the future. As I mentioned before, they're the second largest cosmetic surgery market in the world, but they actually do more surgical procedures in Brazil than the United States. So if you look at it just from a surgical perspective, it's actually a bigger market in the United States. And we would expect this market to be a big driver for years to come. The reason that we're cautious and the reason that we're not pounding the table on Brazil right now is, as you know, they have COVID going on like crazy down there. And I just don't have -- we just don't have good visibility on how long that's going to last, what's going to happen and all those types of things that go along with that. So that's the only thing that gets us a pause about Brazil. In the long run, it will be a very large market for us as we move forward.

[Kyle Bauser:]

Got it. No, that makes sense. Agreed. I appreciate that. And then in terms of operating expenses, you gave a lot of nice guidance here. Maybe just more specifically in the professional services bucket, step down a decent amount sequentially in Q4. I know that's related to kind of peer-to-peer trainings. And you said that we're going to a decent amount of incremental expenses coming back into 2021. But how should we think about that bucket? Should that step-up commensurate with the nearly $5 million in extra expenses this year? Any color there would be great.

[Tara Semb:]

Yes. I think we have to first look at what the OpEx was in 2020, and we talked about in the prepared remarks that to normalize that, you'd add back about $4.3 million in COVID savings and that it would include that bucket to get to a normalized OpEx of just under $42 million. We're really just looking at an overall year-over-year change to that normalized OpEx amount of 6%, so mid-single-digits. And really, the other 2 big incremental spend items to consider is $1.3 million in additional stock comp expense. And then we're ramping up activities in our China joint venture. So that's about $0.5 million on top of that. But overall, look at to the normalized 6% year-over-year. And then with the incremental, it's a total of 22.

[Operator:]

Our next question is coming from Russell Cleveland with RENN Capital.

[Russell Cleveland:]

Thanks for the good report and congratulations on coming through a really rough period. My question is around the FDA initiatives. We talk about one of the initiatives, the enrollment will be completed in the third quarter. Explain that, what that means? Are the tests ongoing, and we're just enrolling new people in the study -- or give us some color on these when we talk about the third quarter and these initiatives?

[Charlie Goodwin:]

Okay. So remember, there's 2 studies that we're doing, the dermal resurfacing and the IDE for skin laxity. And the IDE for skin laxity is the one that we are currently enrolling patients. And just to remind everybody that there's 65 subjects that will be treated and up to 8 centers. And we actually started enrollment of those patients, of those 65 subjects in December, and we still expect to have all of those subjects enrollment completed sometime at the end of the third quarter. And then at the end of the third quarter, there is a 6-month follow-up on those patients. And then after the 6-month follow-up, we will analyze the data, prepare the submissions and then submit to the FDA at that point in time there. So that's for the skin research -- or excuse me, for the skin laxity study. On the dermal resurfacing study, that has been -- we announced that enrollment is completed on that on November 5, and we are now in the process of following up the patients for their 90-day follow-ups, analyzing the data and everything else. And we have always said that we’re -- our goal was to submit for a 510(k) by the end of May of this year, and we are on track to submit that data to the FDA at the end of May of this year. And then that typically is a 90-day plus process to hear back from the FDA on that.

[Russell Cleveland:]

Well thanks for that clarification. So we’re making progress there on all fronts. So I appreciate that. That’s all I have.

[Charlie Goodwin:]

Yes, thank you, Russell. And if I can just make one comment on top of that to the clinical team and our sites, they did a magnificent job in working through COVID and keeping these studies on track and going. And to be able to sit here and tell you that we're on track to do all the things that we talked about having to navigate through COVID is just a testament to all the people that we have involved in this. And so if they're listening, thank you all very much for all your hard work and keeping that going. So thank you.

[Operator:]

That does conclude our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments.

[Charlie Goodwin:]

No, thank you.

[Operator:]

That does conclude our conference today. We thank you for your participation today.

[Charlie Goodwin:]

Thank you.

[Tara Semb:]

Thank you.