Good morning, ladies and gentlemen, and welcome to the Second Quarter 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 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 the Form 10-K filed with 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 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 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 conference over to Mr. Charlie Goodwin, Apyx Medical's President and Chief Executive [ph] Officer. Please go ahead, sir.

Thanks, operator. Welcome, everyone, to our earnings call for the second quarter of 2020. I am joined on the call this morning by Tara Semb, 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 second quarter, including a summary of the impact of the COVID-19 pandemic on our second quarter results. Following this discussion, I will provide you with an update on our recent operational highlights and progress we have made on the four initiatives we are pursuing as part of our longer term growth strategy. Tara, will then provide you with a detailed review of our second quarter financial results. Following Tara’s remarks, I'll conclude by sharing some thoughts on our near term and long term outlook before we open the call for questions. With that, let's get started with a review of our revenue results. We reported total revenue of $4.3 million for the second quarter of 2020, representing a decrease of 35% year-over-year. From a geographic standpoint, our total US sales for the second quarter of 2020 decreased 25% year-over-year to $3.4 million, while our total international sales decreased 57% year-over-year to $0.9 million. In terms of revenue performance in each of our business segments. In our Advanced Energy business sales decreased 46% year-over-year to $2.9 million. In our OEM business sales increased 10% year-over-year to $1.4 million. The sales growth in our OEM business was driven by higher sales to our legacy OEM customers, compared to the second quarter of 2019 due to timing of orders. As anticipated, the revenue performance in our Advanced Energy business was significantly impacted by the COVID pandemic and the actions taken to slow its spread. As discussed on our first quarter earnings call,…

Thanks, Charlie. I will begin my review of our financial results across the rest of the P&L, as Charlie covered our second quarter revenue performance in detail. Gross profit for the second quarter of 2020 decreased $2.6 million or 55% year-over-year to $2.1 million. Gross profit margin for the second quarter of 2020 was 48.7% compared to 70.3% last year. Our GAAP gross profit in the second quarter of 2020 was impacted by inventory writedowns during the period. We reassessed our forecasted product mix, due to COVID-19, increased the availability of our newest - newer handpiece designs, and benefited from earlier than expected completion of product registrations in certain international markets. As a result, certain products were reduced to a lower carrying value and some components were also written-off, as it was determined to cease further production of these models. This resulted in an increase in GAAP cost of goods of approximately $0.4 million during the second quarter of 2020. Excluding the increase in cost of goods related to inventory writedowns, the year-over-year change in gross profit margin for the three months ended June 30, 2020 was driven by product mix within both our Advanced Energy and OEM segments, revenue mix between our segments, three geographical revenue mix, and improved product margins in our Advanced Energy segment, as a result of our continued manufacturing efficiency initiatives. Operating expenses for the second quarter of 2020 decreased $0.8 million or 9% year-over-year to $8.3 million, compared to $9.1 million for the second quarter of 2019. The decrease in operating expenses year-over-year was driven by a $0.8 million decrease in selling, general and administrative expenses, and a $0.1 million decrease in salaries and related costs, partially offset by a $0.1 million increase in research and development expenses. Importantly, the decrease in operating expenses…

Thanks, Tara. As Tara mentioned, the timing of returning to normalized operating environment remains highly uncertain. Given this uncertainty, in July we continue to monitor the business trends and solicit feedback from our customers to determine the ongoing impacts of the pandemic. We saw promising trends in the market where nearly all of our existing customers were open as of the end of June. The feedback we received from our US customers in July indicated that they were very busy working to accommodate the backlog in cases caused by the COVID pandemic. Accounts have reported extending their office hours or adding additional days to their schedule in order to accommodate these cases. Interestingly, some accounts that perform consultations virtually during the second quarter mentioned that they have continued this practice to some extent, in order to free up more of their time in the office to perform procedures. By all accounts, July was a very busy month, and for our clinician customers in the US, fueled by strong backlog of cases that were rescheduled from late March and April, and a strong pipeline of procedures. While procedure volumes have been challenged in some areas of the country that are COVID hotspots, overall, we continue to see strong demand for our Renuvion handpieces from customers in the US cosmetic surgery market in July. On the capital equipment front in July, we saw some initial signs of improving generator adoption in the US. However, the recovery and capital equipment purchasing remains in the early stages overall, and the timing and cadence of the recovery in the capital equipment demand remains uncertain. Outside the US in July, we saw some limited improvements in handpiece demand, and pockets of relative strength in some regions. However, the demand for handpieces in our primary markets continues…

Thank you. [Operator Instructions] And our first question will come from Matt Hewitt of Craig-Hallum. Please proceed with your question.

Good morning, and thank you for taking the questions.

Good morning, Matt.

First one, is there any way to - and I know April and May, it's probably not worth getting in too far into that. But when you look at June and July, where you are seeing pretty rapid recovery, is there any way to parse out how much of that was working through backlog of procedures that have been cancelled versus new demand?

Yeah, Matt. You know, in April, like we mentioned, virtually all the customers were closed. We started to see recovery in May, and customers were doing virtual consultations and getting their practices back to order. And as we got into late June, nearly all the customers were open as of June and the activity in the offices in June and particularly July have been very strong. And, we were obviously in June encouraged to see the utilization demand up nearly 80% year-over-year. And those trends were still strong in the month of July. And, you know, in one of the most challenging quarters of med tech history, our handpiece growth was just down 2% year-over-year. And so, we continue to see that they're very busy, but we're just unsure at this point in time and that's why there's a little uncertainty as we go forward here into the third quarter, about whether this is real demand or just driven by the backlog. The great thing is that our customers are extremely busy, and we just need to continue to see if that will continue or not. And at this point in time, I don't know that we've got a great answer for you there.

That's all right. I understand. And maybe a follow-up question. Regarding the capital equipment, obviously, there's some delays there in purchasing completely understandable. What do you think will be the trigger both domestically and internationally for those customers just to come back and start buying capital equipment? Is it just simple dollars in sense when they've gotten through their backlog and they feel comfortable that things are going to stay open? Or is there something that you could do maybe from a marketing perspective to help them adopt the technology a little bit earlier?

Yeah. So look, we obviously have a lot of programs for them right now to help them. But I think the bigger issue for them quite frankly, is just what do they think is going to happen with the virus in the back half of the year? And I think it is - it's as simple as that. You know, we've got lots of programs that we can help them adopt our technology if necessary, but I think they in their minds, each person's individual, they would like to have some form of confidence about what the virus is going to do in the second half of the year, because obviously, that affects their business in a great way, whether they're going to make a capital investment or not.

Got it. Thank you.

Thank you.

The next question is from Matthew O'Brien of Piper Jaffray. Please proceed with your question.

Morning, Chad. Thanks for – good morning, Charlie and Tara. Thanks for taking the questions. You know, maybe just a little bit more on some of these hotspots. I'm curious how your customers are adjusting right now to mitigate the risk of any potential impact of some of these outbreaks that we're seeing around the country. I mean, it's a very - pretty big state. So what are they doing to make sure that we don't go through another, you know, big round of shutdowns. And then on those virtual events that you talked about, this 200 individuals that you saw, how many of those were new versus existing customers?

Yeah, so for the hotspots, look, the big advantage that we do have where these procedures are done, is they are done in the doctor's office setting or in a small surgery center that they typically own. And so, fortunately for us, the patients in the United States anyway aren't having to go into a hospital and be subject to that. And so the good news for our clinicians is that they control the environment and can you know, space out patients appropriately, whether they have them wait in their car until the next one comes in, it totally depends on the clinician, the state, the guidelines, all of that kind of stuff. So it's a little bit all over the board. But the good news is, is that they themselves have control over how they keep their patients safe. And from what we understand the vast majority obviously are doing a great job, if not all of them. I haven't heard anything of the contrary for that. So that is that is an advantage that they can that do that and they're in control of the situations themselves and are having to rely on bigger institutions where there's a lot more people and all of that kind of stuff. So that part is encouraging from our side. As far as the 200 clinicians and how many of them are brand new versus not, I would say the vast majority of them are new prospects or new clinicians. For the types of events that we've been having to have a customer that already owns the technology on there to listen to it, there's not a lot that they're going to get from these type of events. And so the 200 that we were speaking to there, for the most part, the vast majority of them would be new clinicians.

Okay. That's really helpful. And then as the follow-up, you talked about these five new countries, obviously, Australia and Brazil are large opportunities. I think Brazil is generally soft right now. So can you talk about how - you know, if you can add to sum up the opportunities of those five new countries, how big would all five of those be? And then when can they be meaningful contributors from a, you know, recurring revenue perspective, I know you had some one-time sales here and there are some stock in sales here in Q2. But more, you know, more contributors from a recurring revenue perspective?

Well, look, as I mentioned before, Brazil is the second largest cosmetic surgery market in the world, both in terms of procedures, and physicians. The big question is, is that all of them are going to be contributors as we go forward. The real question is what's happening with the virus in each one of those areas? And so from that perspective, we're basically saying that they're probably not reoccurring revenues until 2021, with respect to just what's happening in the virus in a lot of those different areas. We did ship as I mentioned, Brazil and Australia in Q2, and we do expect to ship initial order to the remaining three countries during the second half of the year. But unfortunately different things are happening in each of those markets with respect to the virus and so that that will determine when those really start to kick in and really become recurring revenue on a regular basis.

Okay, that's helpful. Thank you so much.

Thank you.

The next question is from Dave Turkaly of JMP Securities. Please proceed with your question.

Thanks. Charlie, we spoke about - a bit about the doctors and their practices being reopened. So thanks for all that color. Just curious about the actual customers or patients, I'd love to get your current thoughts on sort of their mindset. You know, you mentioned that these are mostly outpatient or office procedures. But we talked about maybe people having some downtime and being willing to get a procedure done. I'm just curious as to what you're seeing or hearing from, maybe even from the patient base out there. Are things improving, and I guess do you expect that to hold?

Yeah, by all accounts. All our customers in the month of July were busy. In some regards they said it was the busiest July that they've ever seen. As far as do I expect it to hold? I think it's in the early stages right now. And I think it's tough and demand remains uncertain. And so the - you know, that is why in the remarks that we said, we hope for a quarter-over-quarter growth in the fourth quarter. We were obviously extremely pleased by July to be able to grow our business 35% year-over-year, but the big question is, is what happens to demand and what happens in the back half of the year and as we sit here today, we're extremely excited and cautiously optimistic about what that looks like going forward. But I don't have the answer to that. I do know that there was an article just published in Barron's that talked about cosmetic surgery just going crazy right now, but who knows that that lasts? Who knows it's - there's a whole bunch of factors in there and it just remains uncertain.

Got it. And I don't know if I've asked you this in the past, but for your Advanced Energy specifically, is there a median age that you've talked about in terms of the patient that are seeking therapy there?

Well, I don't know if there's a median age, but we've done ages from - our customers have done ages from 20s to 80s. And so, if you're going to probably pick a median age, it probably fits in that 45 to 60 age group is probably the sweet spot for skin tightening, if you will.

Got it. And just quickly, you mentioned the sales team was held steady. I wondered if maybe care to share any details of that sales force, like the size and either, you know, maybe just even domestically?

Yeah, the size hasn't changed from the beginning of the year. We haven't made any – we haven't made any changes in our size. And I quite honestly don't have the exact number on the top of my head of how many we have, because we haven't changed it and since the end of last year, and I think we're - I don't even want to give you the number, I know we're at 30 some direct people, but I don't know what the exact number is right off the top of my head.

No, it's fine. But thank you for that. And thanks for all the detail.

You bet. Thank you.

The next question is from Kyle Bauser of Colliers Securities. Please proceed with your question,

Hey, Charlie, and Tara, thanks for taking the questions. Maybe I'll start off with the skin laxity trial. So as you mentioned, two phases, first phase is 20 patients evaluated for safety, I think one month follow up. And then you can proceed with the subsequent 32 patients, with all 52 evaluated for efficacy. Can you just talk about the status of the trial and the first phase of this for that initial 20 patients and kind of where we are?

Yeah. So look, we're not going to give specific updates on where we are. But as I mentioned, all the activity was impacted by COVID. But thank goodness that all of our sites are back up and running and we're making progress towards that. Therefore that study, in particular, the next milestone that we would give out is after we have received approval to begin phase two of that study. That's the next phase of that study. And until then, you know, we're working towards that goal of being able to proceed to the phase two of that study.

Okay, that's helpful. Thanks. And I know capital equipment sales were pretty minimal in Q2, given the shutdown. Practices just aren't putting up the money for capital equipment right now. But it would, therefore, seem the value proposition that your partner MedShift provides to be pretty compelling right now, since practices can just do a monthly subscription and get access to these. Does this model maybe seem more interesting right now to customers, since they don't have to buy the capital equipment or is it too early to tell?

Yeah, no. Look, it is a very good model, MedShift is - they're very good partner for us. And it is a another way for our customers to adopt that technology. And it's a way that we always have offered that. And so as I mentioned before, we have outright capital purchases, we have leasing programs, we have the MedShift program. And so we definitely try to make it as easy on the practice and tailor an approach to the practice to have them adopt the capital as, you know, whatever fits best into their business model. And so it's wonderful to have MedShift as a partner for that and yes, it is a good approach. The biggest thing though, it still has - the customers still have to have confidence that they're going to be able to stay open and you know, get a return on that investment. And I think that's really still the biggest thing and the reason why there is, why we're cautiously optimistic about the second half is just because of you know, we obviously don't have control of the virus.

Okay, got it. Got it. Well, thanks for taking the questions and appreciate the color on favorable trends in July.

Thanks, Kyle.

[Operator Instructions] Our next question comes from Russell Cleveland of Renn Capital. Please proceed with your question.

Hello, Charles. And a question is on the cash refund, will we be getting actually $3.7 million and that will add to our cash? Or are we already showing that in our cash balances?

Yeah, no. Go ahead, Tara.

Yeah, that's - its approximately 3.7 is an actual refund, because we'll be carrying back the loss to 2018 when we paid income taxes.

So we're going to get $3.7 million more this year, which is of course a big help to us.

Correct. Okay, question…

Russell, hold on one second, I'm sorry to interrupt. Not only will we get $3.7 million back this year, but then we'll get depending on what our losses are, for this year we will get another chunk of it back the following year, too.

Okay. So cash drain is not as bad as we think. That's the point.

Correct.

My other question is, you know, many were surprised that Brazil was the number two cosmetic country, what other countries are, say in the top five or top 10? Do you know, that?

Yeah, the two biggest ones that we do not have registration in right now are China and South Korea.

They're in the top five.

They are. They're both in the top five. And we don't have business in either one of those. Our products aren't registered there yet.

All right. Are we going after those markets or is it a regulatory problem?

No, we have strategies for both of those markets yes,

All right. Okay, that's all. Thanks so much.

Thanks, Russell.

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