Good afternoon, ladies and gentlemen, and welcome to the second quarter of fiscal year 2019 earnings conference call for Apyx Medical Corporation. [Operator Instructions]. 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 would like to remind everyone that our remarks and responses to your questions today may contain forward-looking statements that are based on the current expectations of management and involve inherent risks and uncertainties that could cause actual results to differ materially from those indicated, including those identified in the risk factors section of our most recent annual report on Form 10-K filed with the Securities and Exchange Commission, as well as our most recent 10-Q filing.

Such factors may be updated from time to time in our filings with the SEC, which are available on our website. We undertake no obligation to publicly update or revise our forward-looking statements as a result of new information, future events, or otherwise.

This call will also include references to certain financial measures that are not calculated in accordance with Generally Accepted Accounting Principles, or GAAP. We generally refer to these non-GAAP financial measures.

Reconciliations 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, Apyx Medical's President and Chief Executive Officer.

Please go ahead, sir..

working together, challenging the status quo, and going the extra mile to create new opportunities for our Company. I am also very pleased with the incredible talent that we have added to our team as we continue our journey towards becoming the world's leading innovator in unique energy solutions for the cosmetic surgery market.

With that, let me turn the call over to Tara to discuss our second-quarter financial results in greater detail and review our fiscal year 2019 financial guidance, which we updated on this afternoon's release.

Tara?.

Thanks, Charlie. As a reminder, our results are reported on a continuing operations basis for the period ending June 30, 2019. Any financial impacts related to the divestment and sale of our core segment appear in our financial statements as discontinued operations and are excluded from the commentary that follows.

Total revenue for second-quarter 2019 increased $2.9 million or 78% year-over-year to $6.6 million compared to $3.7 million last year. By business segment, total revenue growth in the second quarter was driven primarily by Advanced Energy segment sales, which increased $2.2 million or 69% year-over-year to $5.3 million.

Total revenue growth in Q2 also benefited from growth in sales from our OEM segment.

OEM segment sales increased $721,000 or 125% year-over-year to $1.3 million in the second quarter of 2019, driven primarily by the sales of generators related to our 10-year manufacturing and supply agreement with Symmetry, entered into as part of the divestiture of the core business last August.

Advanced Energy and OEM sales represented approximately 80% and 20% of total revenue in the second quarter of 2019, respectively, compared to 84% and 16% in the prior-year period.

Revenue in the United States increased approximately $1.6 million or 53% year-over-year to $4.5 million, and international revenue increased approximately $1.3 million or 177% year-over-year to $2 million. International revenue represented approximately 31% of total sales in the second quarter of 2019 compared to 20% in the second quarter of 2018.

Moving down the P&L. Gross profit increased approximately $1.9 million or 76% year-over-year to $4.5 million compared to $2.5 million for the second quarter of 2018. The increase in second-quarter 2019 gross profit was driven primarily by strong sales in the Company's Advanced Energy segment.

Gross margin for the second quarter of 2019 was 68.1% compared to 68.7% last year. The change in gross margin this quarter was primarily due to revenue mix by product and geography in our Advanced Energy segment, and higher OEM sales as a percentage of total revenue this year.

Operating expenses for second-quarter 2019 increased $3.5 million or 63% year-over-year to $8.9 million compared to $5.5 million for the second quarter of 2018.

The year-over-year change in operating expenses was primarily driven by a $1.5 million increase in salaries and related costs; $1 million increase in professional services; and an $870,000 increase in selling, general, and administrative expenses.

Loss from operations for the second quarter of 2019 was $4.5 million compared to operating loss of $2.9 million last year. Net loss from continuing operations for second-quarter 2019 was $4.3 million or $0.13 per diluted share compared to a net loss from continuing operations of $2.9 million or $0.09 per diluted share for the second quarter of 2018.

Second-quarter 2019 adjusted EBITDA loss was $3.5 million compared to an adjusted EBITDA loss of $2.4 million last year. As a reminder, we have provided a detailed reconciliation from GAAP net loss to adjusted EBITDA in our press release this afternoon.

As of June 30, 2019, the Company had cash and cash equivalents of $67.4 million and no short-term investments compared to cash and cash equivalents of $16.5 million and short-term investments in US Treasury bills of $61.7 million as of December 31, 2018.

The Company had working capital of $74.1 million as of June 30, 2019, compared to $81.8 million as of December 31, 2018. Turning to a review of 2019 financial guidance, which we updated in our earnings press release this afternoon.

For the 12 months ending December 31, 2019, we now expect total revenue in the range of $26.5 million to $27.5 million, representing growth of 59% to 65% year-over-year. This compares to the Company's prior total revenue guidance range of $25.5 million to $26.5 million.

Our updated 2019 total revenue guidance assumes Advanced Energy revenue in the range of approximately $21.5 million to $22.5 million, representing growth of 65% to 72% year-over-year. This compares to our prior Advanced Energy revenue guidance range of $20.5 million to $21.5 million.

The $1 million increase in this range is driven by our stronger-than-expected performance during the second quarter, and higher growth expectations from international countries over the balance of 2019. Our OEM revenue remains unchanged at approximately $5 million, representing growth of 38% year-over-year.

In terms of our profitability guidance for fiscal year 2019, we expect GAAP net loss in the range of $22.4 million to $21.4 million compared to our prior guidance range of net loss in the range of $23.5 million to $22.5 million.

Roughly half of the $1.1 million improvement in our fiscal 2019 net loss guidance range versus our prior guidance is driven by the higher revenue growth expectations, and the other half from higher gross margin assumptions for fiscal 2019.

Specifically, we now expect 2019 gross margins in a range of approximately 61% to 62.5% this year compared to our prior guidance range of 59% to 61%.

The increase in our gross margin range is driven by the stronger-than-expected gross margins we reported over the first half of 2019, and the early benefits of our focus on improving manufacturing efficiencies on our handpiece margins.

While we are pleased to report higher gross margin expectations for 2019, our margins will come in lower than the 64.7% margin we reported in 2018.

As discussed on prior calls, the largest driver of the expected decline in gross margins this year is the impact of 12 months of contribution from our manufacturing agreement with Symmetry in 2019 compared to only approximately 3 months of contribution in 2018.

Excluding the full-year contribution to total revenue from this manufacturing agreement, our 2019 gross margin would be approximately 65%. Finally, we have also increased our adjusted EBITDA loss expectation in this afternoon's release.

Specifically, we now expect adjusted EBITDA loss in the range of $18.8 million to $17.8 million compared to adjusted EBITDA loss from continuing operations of $11.7 million in fiscal year 2018. This compares to the Company's prior guidance of adjusted EBITDA loss in the range of $19.9 million to $18.9 million.

As a reminder, we have included a full reconciliation from GAAP net loss to non-GAAP adjusted EBITDA in our earnings press release this afternoon. With that, I will turn the call back to Charlie for closing remarks.

Charlie?.

Thanks, Tara. In summary, we are very pleased with our performance in the first half of 2019, and we are raising our guidance today to account for our stronger-than-anticipated results in the second quarter.

We look forward to driving impressive growth in our Advanced Energy business through the remaining months of the year as we continue to increase our share of the $1.5 billion cosmetic market in the United States, penetrate our existing international markets, and expand our distributor network into new countries.

We will also remain focused on our strategic initiatives that comprise our longer-term growth strategy, and continue to allocate capital appropriately through targeted investments.

Based on our strong performance to date, we remain convinced that our current and future opportunities we are pursuing in the cosmetic surgery market will ultimately position us to deliver sustained, profitable growth and strong returns for our shareholders as we establish Apyx Medical as a leader in the cosmetic surgery market.

I'd like to close my prepared remarks today by thanking our employees for their hard work this quarter and their commitment to reshaping what's possible in this market by delivering game-changing solutions to our surgeon customers and improving the lives of their patients. With that, operator, let's now open the call for questions..

[Operator Instructions]. Our first question will come from Matt Hewitt from Craig-Hallum Capital. Your line is open..

Congratulations on the strong quarter and progress on your strategic initiatives. First question for me, could you give us an update on the size of your sales team today? I think last quarter it was approximately 40, with 28 of them being internal.

Where does that sit, and do you have any plans to add to that team as the year progresses?.

Yes, so at the end of Q2, we had actually 29 direct sales reps and six independent agencies. So think of it roughly about 40 feet on the street in the United States, and that's -- and we're happy with that size for the rest of the year..

That's great.

And then implied within the guidance and just working through some of the initial math here, and given some of the comments you made regarding the IDE submission, some of the clinical data that you're going to be working towards, what kind of a step-up should we be anticipating from an R&D perspective? And is that going to -- is there any timing-related issues there, like where maybe Q3 would be lumpier or heavier than Q4? Just how should we thinking about the back half from an R&D expense perspective?.

Yes, you're talking about total OpEx. If you notice that we haven't changed. We're still committed to spending about $40 million to $41 million, but most of that will be in the third and fourth quarter. I think we spent about $18 million in the first half. And the rest will be in the back half of the year..

Okay, that's great. And maybe one last one, if I can. And you commented on this a little bit; but gross margins, obviously a strong quarter there, better than we had expected and up sequentially. You are making some enhancements and improvements there to drive further growth.

How should we be thinking about that over, say, the medium term, over the next 3 to 5 years? Where do you think that can go? Without giving a specific range, but just help us understand where you see that going. Thank you..

Yes, thank you. And obviously the manufacturing capabilities have been a strategic focus since I've gotten here and it's been one of our core building blocks. And over 3 to 5 years, we would not only see this as an expanding revenue story but also an expanding gross margin story.

But obviously we're not going to get into specifics at this time, as we're just really in the early stages of starting to see some benefit from that..

Understood. Thank you..

Our next question will come from Kyle Bauser from Dougherty & Company..

Good evening, and some great updates here. Congratulations on the IDE approval for the skin laxity trial.

Can you speak a little bit more about this? Will you have a skin tightening claim in it? How many sites will you have for it? And will there be any overlap with these sites and the dermal resurfacing trial?.

Yes. So we're not going to get into a lot of specifics today with the skin laxity trial, other than we are very pleased and very excited that we got approval to move forward with these 20 patients. We don't see -- anticipate any overlap between the sites for the skin laxity site at the dermal sites; they will be separate sites.

But we're obviously excited that we received IDE approval, and we're looking forward to enrolling patients towards the end of this year..

Got it. And so you mentioned still about 40 reps, or feet on the street, 29 of which are dedicated reps. So if we do back-of-the-envelope math using your current Advanced Energy run rate, we're looking at maybe $500,000 of sales that a rep is generating per year.

What's the goal for rep productivity? And maybe what are your competitors doing? And at what point do you envision needing to add more dedicated reps?.

Yes. So I think it depends on obviously how long the rep has been here. And they probably need a good six months to a year to get really up to speed and really start contributing. But after a year you would expect them to generate, in their second year, somewhere around $1 million in sales.

So if you think about that as a ballpark, that's a pretty good rule of thumb..

Got it. And quickly just lastly, I didn't catch it if you did mention it, but I know Mexico and Canada came online in Q1.

What were the two new countries in Q2?.

Yes. We're not going to -- we had mentioned that we would give out countries if they were material for us. And the countries that we added in Q2 were smaller countries; and they are really not material, and really didn't have any effect in our guidance..

Okay. Thanks for taking the questions. I'll jump back in queue here..

[Operator Instructions]. Our next question will come from Russell Cleveland from RENN Capital..

So, graduations on all of the progress here with the FDA, both in the dermal and the other, the throat area. I got a longer-term question here. It looks like we're making a lot of progress in moving the business forward, and we are positioned ourselves.

But some kind of indication here, a little longer-term -- I don't want any numbers or anything, but the philosophy. We have about $67 million -- $60 million. There is a limit to what we can spend and create business.

So what's the longer -- give me some long-term here about what we're going to do here to make sure that our financial position remains a really strong, along with growing the business..

Yes. Well, look, we've stated publicly that we are committed to making this a long-term profitable company. And we've also stated publicly that the cash that we have currently is plenty for us to achieve that goal. And so that still remains our goal. We haven't changed from there.

We're looking at our investments and we're investing wisely but we're not investing foolishly. And we're making sure that our investments are going to have long-term growth for the Company. And so that still remains our goal, and that hasn't changed..

Great. Well, thanks again and congratulations on the regulatory progress. It's really great. Thanks so much..

Our next question will come from Matt O'Brien from Piper Jaffray..

This is Drew on for Matt. Thanks for taking the questions here, and congrats on a nice quarter. On the 510(k) approval this week, how your commentary reads, it sounds a little bit like a pivot a little bit away from the cosmetics market back towards the surgical market.

I mean, is that the right interpretation of it at all? And what have you heard -- that prompted you in that direction? And does that open up any new markets that you are not currently targeting?.

Yes. So no, that does not represent any pivot or anything like that. We are still 100% focused on the cosmetic surgery market in the United States, and that has not changed. As we have stated before, in Europe, we are actually selling both J-Plasma and Renuvion, because a lot of the Renuvion procedures are done in the hospital.

And we had an open device that also -- a J-Plasma open device that had Cool-Coag on it, but we were getting a lot of requests from the surgeons that were doing the procedures to add that for a laparoscopic version also.

So what we did is we took their feedback, we took the R&D team -- it is a core competency of what we do, is to be able to design and manufacture these types of devices. And we just took the strength that we have to add an important tool to the bag for those distributors in Europe..

Okay, that makes a lot of sense. I appreciate the clarification. And then obviously a very good quarter internationally for you guys. I believe you are still working through distributors there. I know you had discussed in the past about some of the larger cosmetic markets, including Brazil, China, South Korea.

And I know you added two international markets this quarter.

But what are the hurdles mainly to enter those big markets? What's the stopping factor for you guys going after those?.

Well, it's not a stopping factor. It's just a time factor in that all of -- any market, it doesn't matter if it's those three -- but any of the markets all have different regulatory requirements that you have to do in order to have your products registered to be able to sell. And it's just going through that process and getting the things done.

And so each one is a little bit unique. Each one is a little bit different. And the timing on the different markets is all a little bit unique. So it's just a matter of us doing the work.

And that's one of the reasons that we've invested so much into the regulatory this year is because we've got a lot of these countries that we are going to be going after and getting the registration for. So it's -- each country is a little bit different and we're just working through the process..

Okay, very helpful. Thank you..

[Operator Instructions]. Our next question will come from Matt Hewitt from Craig-Hallum Capital..

Just a quick follow-up for me regarding the next skin laxity trial. If you are successful and get a label for that, how should we be thinking about market size? And will it be just for the neck, or will doctors have the ability to use that as they see fit on patients? But how should we be thinking about a market size I guess is the big question..

Yes. It's very good question and I appreciate the question, but I'm not going to enter into the answer of that question right now, Matt. And just for the main reason of, look, we've got to go out and get the indication. And once we get the indication, we will totally then update you on all the market size and everything else for it.

Obviously we think that it's very important, and we think it has a lot of potential for us. But until we actually get the indication and until we can actually go out and do that, it doesn't do us a lot of good to talk about.

Because remember, we're still a $20 million business in a $1.5 billion opportunity in the United States, and so we've got plenty of stuff to do right now to keep executing and grow our share there. This is just something that we're letting you know that we're doing because we got the approval. And it's something that we're excited about.

But at the end of the day, we need to wait until we get everything done before we really start talking about the opportunity to add on there..

Fair enough. Thank you..

Our next question will come from Jeffrey Bernstein from Cowen Prime..

Just a couple. Glad to hear you are starting to put some lean disciplines in there. And it sounds like you're already going to have some benefit on some redesign of the handpiece. How much low-hanging fruit is there in efficiency overall and manufacturing in particular? I'm only looking for a qualitative kind of answer..

Yes. Look, I think that any time that you are an organization, when you're a smaller organization and you're looking to really be able to scale and grow a business, I think there is some things that you could potentially do, because there's definitely opportunity. And so we've been focused on it.

As you know, it takes time, especially with manufacturing and we think we've got the right people in here to help do it. And we look forward over the next 3 to 5 years of seeing the fruits of our labor, for sure..

And then just on the dermal resurfacing application, part two.

Is there any reason to think that this trial would be significantly bigger in terms of enrollment than the prior?.

No. I think you could think about it as about the same size and everything else. And obviously we don't have -- we just submitted, so we don't have approval back from the FDA and we don't have their comments yet. So to talk about anything specific really doesn't matter. But you could think of it about the same size..

Got you..

That's fair..

That does conclude our conference for today. Thank you for your participation..