Good morning, ladies and gentlemen, and welcome to the Third Quarter of 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 factor 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 as non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most comparable measures calculated and presented in accordance with GAAP are available in the earnings press release in 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 Officer. Please go ahead, sir.
Thanks, operator. Welcome everyone to our earnings call for the third 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 a review of our revenue results for the third quarter, including a summary of the impact of the COVID-19 pandemic on our quarterly results. Following this discussion, I will provide you with an update on our recent operational highlights and the progress we have made on our four initiatives we are pursuing as part of our long-term growth strategy. Tara will then provide you with a detailed review of our financial results, as well as some assumptions and considerations for modeling our financial performance in the fourth quarter.
Following Tara's remarks, I will conclude with some additional thoughts on our near-term and long-term outlook before we open the call for questions. With that, let's get started with a review of our revenue results. We reported total revenue of $7 million for the third quarter of 2020, representing a decrease of 8% year-over-year. From a geographic standpoint, our total U.S. sales for the third quarter of 2020 decreased 6% year-over-year to $5.2 million, while the total international sales decreased 14% year-over-year to $1.7 million. In terms of revenue performance in each of our business segments, in our OEM business, sales were essentially flat year-over-year at $1.5 million. In our Advanced Energy business, sales decreased 10% year-over-year to $5.5 million.
The 10% decline in our total Advanced Energy revenue in Q3 was driven by a decline in generator sales of 36% year-over-year, which was partially offset by an increase in handpiece revenue of 48% year-over-year. Despite the continued impact of COVID-19 on our capital sales, we were pleased by the improving trends in our Advanced Energy business as the global recovery continued to progress. Most notably, the 48% year-over-year growth that we saw in global handpiece sales was driven by strong utilization-based demand from our U.S. cosmetic surgery customers. Specifically, we saw 93% growth in U.S. handpiece sales year-over-year. Looking at our U.S. handpiece trends in more detail, as we entered the third quarter, nearly all of our existing U.S.
customers had reported their practices were very busy working to accommodate the backlog in cases caused by the COVID-19 pandemic during this past spring. Many also reported building strong pipelines as a result of employing virtual consultations while offices were closed over this period. As a result of these dynamics, July was an exceptionally strong month for our clinician customers in the U.S. Our performance in July also benefited from a softer prior year growth comparison as we discussed both of these dynamics on our Q2 conference call. By mid-August, we believed that the majority of accounts were able to work through their backlog, with many accounts reporting that they were extending their office hours or adding additional days to their schedule in order to accommodate these cases.
Importantly, we continued to see strong utilization-based demand for Renuvion handpieces throughout the remaining weeks of the quarter, which we view as a positive sign of improving underlying business trends. This is consistent with recent feedback that we have received from many of our U.S. customers who are reporting increased patient volumes after working through their backlog of cases. Outside the U.S., given the different rates of recovery in each of our primary geographic regions around the world, it remains difficult to characterize our trends. On the encouraging side, we experienced improved handpiece demand in our primary OUS markets during the third quarter. While we saw improving handpiece demand trends in the international market, sales of handpieces were still down year-over-year in the third quarter, and the recovery continues to lag behind the trends that we have seen in the U.S.
On the capital equipment front, the overall purchasing environment remains in the early stages of recoveries, both in the U.S. and internationally. We continue to see that potential new surgeon customers are reluctant to invest in new technology for their practices, given the continued overhang of the COVID-19-related business disruption and the future uncertainty created by the pandemic. More importantly, the COVID-19 restrictions on rep access and the lack of in-person selling opportunities like trade shows and clinician events continue to impact our ability to drive new clinician adoption. While we experienced year-over-year decline in global generator sales during the third quarter, our OUS performance benefited from the recent success that our team has had in securing product registrations authorizing the sale of our helium plasma technology in new countries.
During the second quarter of this year, recall that we announced the receipt of new product registrations in five new countries and shipped initial orders to two of these countries, Brazil and Australia. In Q3, I'm pleased to report that we have shipped additional orders to Brazil and Australia, along with initial orders to Taiwan and Thailand. These orders helped offset the year-over-year decrease in our international Advanced Energy business. In summary, despite the continued impact of COVID-19, we are pleased with the sequential improvements that we saw in our Advanced Energy business trends overall during the third quarter and are very encouraged by the 48% increase in global handpiece sales in Q3. Our team is doing an excellent job of supporting both our existing U.S. surgeon customers and our OUS distributors.
The majority of accounts that we serve in the U.S. are open, seeing evidence of sustained improvement in patient volumes after working through their backlog and becoming more adept at managing their practices efficiently while prioritizing the health and safety of their patients. Lastly, while we remain in the early stages of the global recovery in capital equipment purchasing, we are pleased to see our international Advanced Energy sales performance continue to benefit from sales in new countries that we added this year. Turning to a discussion of our operational progress during the quarter. Our team made considerable progress on our four strategic initiatives to position Apyx Medical for long-term growth in the cosmetic surgery market. Starting with our first initiative to pursue specific clinical indications that will enable us to market and sell Renuvion for new targeted procedures.
After restrictions on elective procedures were lifted in the U.S. during the second quarter, we continued to make progress on our two IDE clinical studies, which are intended to support our pursuit of new indications for the use of dermal resurfacing and skin laxity procedures. Today, we are very pleased to announce the achievement of key milestones with respect to both of these studies. First and foremost, I'm excited to announce that we have completed enrollment last week in our clinical study evaluating the use of Renuvion technology for dermal resurfacing procedures. We also continued to make progress in the phase I of our IDE study evaluating the use of Renuvion in skin laxity procedures in the neck and submental region. As a reminder, phase I is focused on collecting one-month safety data to be submitted to the FDA for a safety review.
I'm pleased to announce that we completed enrollment in phase I and submitted our one-month safety data to the FDA for review. Last week, FDA completed their review of our one-month safety data and concluded that we met the requirements, completing phase I of our study. We look forward to working with the FDA to begin phase II. In addition to our U.S. regulatory strategy, we are focused on expanding our commercial footprint internationally by obtaining regulatory clearance for our helium plasma technology in new countries. As I mentioned earlier, during the second quarter, we were pleased to receive regulatory approval to market and sell our products in five new countries, Australia, Brazil, Israel, Taiwan, and Thailand, and expect the addition of each of these five countries to benefit our long-term growth profile.
In Q3, we further expanded our international footprint with the addition of new product registrations in both Latvia and Lithuania. While we do not expect either country to contribute materially to the performance in 2020, the addition of these new countries reflect the ability of our regulatory team to drive continued progress despite the global disruption due to COVID. With respect to our second strategic initiative, we continued our efforts to expand the portfolio of clinical evidence supporting the use of our Renuvion technology. This past month, we were pleased to announce the publication of two peer-reviewed articles, which were both featured in the journal Dermatological Reviews. The first publication evaluated our Renuvion technology when used independently of liposuction for submental coagulation in the neck. The second publication evaluated Renuvion when used in combination with liposuction for subdermal coagulation in various treatment areas of the body.
Each publication featured data from multiple retrospective chart review studies, which we believe serves to further strengthen the risk-benefit profile of Renuvion. While we continue to build on this recent progress to further demonstrate the clinical ability of our Renuvion technology and facilitate its broad-based adoption. Moving to our third strategic initiative, enhancing physician and practice support for our cosmetic surgery customers. Given that the COVID pandemic has impacted our ability to host in-person events, our team continues to conduct educational programming virtually. During the third quarter, our sales, marketing, and field clinical teams organized six virtual physician education events, which were attended by approximately 160 physicians. These events were similar to the physician mentoring program, or PMP events, that we have traditionally conducted in person and were led by some of our top physician customers.
Our team also organized three virtual training sessions for our international distributors, which were focused on further educating them about the features and benefits of our technology. In addition to our live programming, we have also expanded our platform of online resources for our existing customers to include pre-recorded webinars, procedural videos, and user experience videos that are available on demand. Lastly, with respect to our fourth strategic initiative, improving our manufacturing capabilities and efficiencies, as I have discussed in prior quarters, one of our most important focus areas under this initiative has been to implement new process improvements in order to reduce the per-unit manufacturing cost of our advanced energy products. These efforts are reflected in improved margins of our APR handpiece, which we launched earlier this year.
Our financial results are already benefiting from the gross margin improvement as the APR handpiece becomes a larger portion of our total handpiece sales. We expect the benefits of this fourth strategic initiative to drive continued contributions to our long-term profitability over the remaining months of 2020 and beyond. Stepping back, despite the ongoing challenges of COVID pandemic in Q3, our organization continued to demonstrate their ability to effectively support our customers while also driving progress with respect to our long-term strategy. With that, let me turn the call over to Tara to discuss our third quarter financial results. Tara?
Thanks, Charlie. Since Charlie covered our third quarter revenue performance in detail, I will begin my review of our Q3 financial results by continuing down the P&L. Gross profit for the third quarter of 2020 decreased $0.6 million, or 10.7% year-over-year to $4.7 million. Gross profit margin for the second quarter of 2020 was 67.9% compared to 69.9% last year. The year-over-year decrease in gross profit was driven by product mix within our advanced energy segment and revenue mix between our segments. The decrease in gross margin was offset partially by improved product margins within our advanced energy segment as a result of our continued manufacturing efficiency initiatives and by improved margins attributable to product mix within our OEM segment.
Operating expenses for the third quarter of 2020 decreased $1 million or 9.5% year-over-year to $9.1 million, compared to $10.1 million for the third quarter of 2019. The decrease in operating expenses year-over-year was driven by a $1.1 million decrease in selling general and administrative expenses and a $0.2 million decrease in professional services, partially offset by a $0.3 million increase in salaries and related costs. It is important to note that the year-over-year decrease in operating expenses reflects our initiatives to control costs and reduce our discretionary spending in response to the impact of COVID-19 on our financial condition. Loss from operations for the third quarter of 2020 was $4.4 million, compared to operating loss of $4.8 million last year.
Income tax benefit in the third quarter of 2020 was $0.7 million, compared to income tax expense of approximately $0.2 million in the third quarter of 2019. In the third quarter of 2020, we benefited from a GAAP tax benefit related to the CARES Act, which was enacted by the U.S. government to provide relief from the coronavirus pandemic. As we discussed on our first quarter call, the CARES Act includes a net operating loss, or NOL, carryback provision from which we expect to receive a cash tax refund of approximately $3.7 million by the end of 2020. We also recognized an income tax benefit of approximately $0.8 million in the third quarter of 2020 related to our net loss, which reduced our GAAP effective tax rate. There are approximately $2.4 million of 2018 federal income tax payments available to offset against any further losses incurred in 2020.
Net loss for the third quarter of 2020 was $3.7 million or $0.11 per share, compared to a net loss of $4.4 million or $0.13 per share for the third quarter of 2019. Third quarter 2020 adjusted EBITDA loss was $3.1 million compared to an adjusted EBITDA loss of $3.8 million last year. As a reminder, we provided a detailed reconciliation from GAAP net loss to adjusted EBITDA in our press release this morning. We are pleased that we reported improvement in our adjusted EBITDA loss of $0.7 million year-over-year, despite our revenue decreasing $0.6 million year-over-year in the third quarter. As of September 30th, 2020, the company had cash and cash equivalents of $43.5 million, compared to cash and cash equivalents of $58.8 million as of December 31st, 2019.
The company had working capital of $58.1 million as of September 30th, 2020, compared to $64.4 million as of December 31st, 2019. Turning to our 2020 outlook. As mentioned in our earnings press release this morning, given the ongoing challenges and uncertainties posed by the global COVID-19 pandemic, we will not be providing full 2020 guidance on today's call. In the absence of formal guidance, we have elected to provide additional directional commentary to assist in modeling our business. We continue to expect our OEM revenue to be approximately $5 million in 2020. Overall, we expect continued improvement in trends as we move through Q4.
However, we continue to expect total revenue to decline on a year-over-year basis. Importantly, our expectations for revenue results in the fourth quarter have not changed from what we shared on our Q2 call in August, where we had hoped to see a return to growth in the U.S. in the fourth quarter. We expect to report growth in U.S. advanced energy sales on a year-over-year basis in Q4, and a decline in our international advanced energy business on a year-over-year basis.
Turning to the P&L, we would expect to see sequential improvement in our gross margins compared to the third quarter of this year, driven primarily by geographic revenue mix, but also due to the continued benefit of our recent manufacturing initiatives on our overall handpiece margins. We anticipate our Q4 operating expenses will increase sequentially in the high single digits, driven primarily by higher sales and marketing related expenses as a result of commissions on higher sales. Lastly, we would expect this to translate into similar EBITDA loss quarter-over-quarter. With that, I'll turn the call back to Charlie for closing remarks. Charlie?
Thanks, Tara. Looking ahead, we remain cautiously optimistic with respect to the near-term outlook for our advanced energy business. While the capital equipment environment remains uncertain, we expect to see continued strength in handpiece demand. The strong utilization is a direct result of the impressive clinical results that our surgeons have been able to achieve with our technology. In a market that is crowded with technologies that overpromise and underdeliver, Renuvion allows our surgeons to truly differentiate their practices by delivering the results that their patients are looking for. With $43.5 million of cash at the end of the quarter, we remain very well capitalized to weather the ongoing effects of this pandemic while continuing to execute our growth strategy as recovery progresses.
As we close out the year to prepare for 2021, Apyx Medical is focused on returning to strong, sustainable growth as quickly as possible by continuing to elevate the global cosmetic surgery market with our technology and expand our share of this multi-billion-dollar opportunity that this market represents. Before we open the line for questions, I'd like to commend our employees for helping us achieve this impressive progress this quarter under very difficult circumstances. I'd like to personally thank our customers, distributors, and shareholders for their continued support, and everyone on today's call for their interest in Apyx Medical. With that operator, let's now open the call for questions.
Thank you. If you'd like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. We do ask that you limit yourself to one question and one follow-up. If you'd like to ask additional questions, we invite you to add yourself to the queue again by pressing star one. Our first question will come from David Turkaly from JMP Securities. Your line is now live.
Thanks for all the detail. Charlie, I know you talked a bit about existing customers and their pipelines and how busy they are, and all of us can appreciate some of the difficulties likely with new folks. I guess I'd just like to hear your thoughts. Sounds like fourth quarter could continue to improve. Do you think, as we move into 2021, you're adding more new accounts as well as servicing your existing folks?
Yeah. We are incredibly happy with the U.S. handpiece sales growth of 93% year-over-year. That is definitely a reflection of strong utilization-based demand. In the U.S., that is definitely the case. We see that utilization demand continue as really if you look, physicians are really using this to help differentiate their practice. The before and afters that these doctors are able to get with the technology is incredible. This has been consistent with our Q2 call that we talked about this demand. At the beginning in July and the first half of August, they were working through the backlog of patients. After that, it's just that now we believe it's just a steady state of business and their businesses are strong, and we do expect it to continue.
Got it. Just as a quick follow-up, congrats on the FDA updates. I was wondering if you could give us your latest thoughts on sort of when those final indications could be received for both. Thank you.
When we're talking about the dermal, we completed enrollment last week. Remember that they have a 90 days follow-up that each patient has to go through, meaning that the last patient will be followed up sometime in February. After that, as you remember, we need to gather the information. We need to have it analyzed by third-party reviewers. We need to prepare the 510 submission. With the dermal study, we expect to submit that sometime in May, I believe. With the IDE skin laxity, we're very excited that we just got notification from the FDA that we met the requirements for the safety data, and we're working with them to start phase II of that. When we do start phase II, we will tell everybody because that will be the start of enrollment in phase II. We'll do that via press release when we begin phase II.
Thank you.
Yep.
Thank you. Our next question today is coming from Matthew O'Brien from Piper Sandler. Your line is now live.
Morning. Thanks for taking the questions. I guess Charlie or Tara, just for starters, can you talk about what you're seeing in some of these hotspots that are really breaking out around the U.S., California, Illinois, Texas? With some of these increases we're seeing in COVID cases, I guess what gives you that confidence that you can still get back to growth here in the U.S. in Q4 and OUS in early 2021? I mean, from a generator perspective, I know the handpieces are doing great, but what gives you that confidence?
Yeah. It's a very good question. I think that what we've seen in that confidence is that the hotspots that you're talking about in some of them, Texas, Florida even Arizona and California, that even happened over the summer, that our customers were able to manage their practices, keep their patients safe, and demand was still there. Now that it's the 9th of November, our mindset is that they will be able to keep doing that, and there will not be any major lockdowns between now and the end of the year.
That was really the issue in the spring is that the doctors weren't able to do procedures, and our mindset is that they will between now and the end of the year. In the fourth quarter, even with that thing, we are not assuming any material improvement in the capital environment in Q4. It really is the strength of our handpiece demand and the strength of our existing customers using the technology and the demand from their patients.
Yeah, that's really helpful.
Outside the U.S. becomes obviously a mixed bag, and it's a little bit trickier there. Some of the lockdowns in the countries are a little bit more strict, so it's tougher outside the U.S., and that's why we obviously don't see growth there in the fourth quarter.
Got it. That's helpful. Thank you. As the follow-up, just I think you mentioned to David, the last question, that you're going to be submitting for approval on subderm in May. I'm assuming, just a typical kind of
Not subderm, dermal.
Six-month.
Dermal.
I'm sorry, on dermal in May. Hopefully by the end of next year, is that the expectation that you get the approval? What kind of investments do you anticipate making to ramp up and be prepared for that new indication as we head into 2022?
Yeah. We're targeting that submission in May 2021. Typically, that submission is a 90-day submission with the FDA. It has been, in some cases, been running a little bit more because of COVID, and who knows what it'll be in May, whether it will be back to work or whether they'll still be working remotely at that time. We will let you know publicly when we actually do submit that 510 in May.
As far as investment goes, we will not have a tremendous amount of investment in 2021 with that. The investment really will come more on the back of hopefully getting the indication with the laxity also to be able to talk about that. We're happy with the size of our general sales force right now, and there won't be a huge amount of investment that'll go in that. There'll be some stuff on social media, obviously, but our existing distribution channels will be able to handle that.
Got it. Thank you.
Thank you. Our next question today is coming from Matt Hewitt from Craig-Hallum Capital Group. Your line is now live.
Good morning. Congratulations on all the progress here. First question. Charlie, you mentioned that there is a little bit of a reluctance to buy new technology by some of your customers. Is that a function of them uncertain about how things are going to play out with COVID, I guess, over the winter months? Is that more a function of maybe their balance sheets and they're just kind of getting back to normal business operations, and they don't want to trip themselves up, I guess, here over the next couple of months?
Yeah, I think the answer to that is both. It depends on each individual situation and how they view the pandemic and investing in something new that they don't already have. I think you've got both of those factors that come into play, along with the fact that because there's the COVID pandemic, getting into the office in accounts where you don't have the technology already is a little bit trickier because a lot of the offices have rules about coming into the practice to try to keep their patients safe. We obviously don't have that issue in accounts that have our technology already because they're a business partner of ours. For people trying to acquire the new technology, I think those are all in play.
Got it. Then, obviously, you've had some pretty good successes here, opening up some new international markets despite the ongoing pandemic. How should we be thinking about Q4? Are there any maybe near-term opportunities? Then more importantly, I guess, as you look at fiscal 2021, what kind of targets are you looking for next year on the international front? Thank you.
Yeah. The first thing is we're not, obviously, we've never talked about the places that we're going or the things that we're going to do. The contribution from these countries that we have in here is already baked into the directional outlook that we provided for the fourth quarter and returning to international growth in 2021. All of that is still baked in there. Yes, we are extremely happy with the work that the group has done to get the registrations, even during, obviously, the COVID period, and this has been a major focus of ours, and it will continue to be. We still have countries that we're pursuing and other things that we want to do in this area. When we do, we will let you know when we add different countries.
Got it. Thank you.
Thank you. Our next question is coming from Kyle Bauser, from Colliers Securities. Your line is now live.
Thank you. Hi. Good morning. Congrats on the updates here. Appreciate the color on being able to return to U.S. growth in the advanced energy division in Q4 and in OUS in early 2021. Sorry if I missed this, but just kind of wondering if you're able to provide any updates on how October is trending, similar to last earnings call when you talked a little bit about July. Just any kind of additional thoughts on how things have trended so far this quarter would be great.
Yeah, look, we're not going to give trends into how October was for the quarter. We're going to go back to a more normalized way as we gave directionally what we think is going to happen in the fourth quarter. Obviously November, or excuse me, October is already baked into that direction. We're going to kind of get back to trying to get back to normal as much as we can here. Sure. No, Yeah.
Got it. Regarding the clinical trials, maybe just two quick ones here. Appreciate the updates on the dermal resurfacing, so hope to submit that application in May. I thought there was a six-month safety follow-up on that, but I guess by May, that should be enough time. Does it just take time to kind of put together the efficacy data, and then by the time May hits, you can kind of check to make sure there weren't any adverse events and then just shoot that off? The second question is just kind of timing on how long you think the skin laxity trial might take to enroll the phase II part.
Yeah. For the dermal IDE study, it is a 90-day follow-up for the patients. The six months is on the other study, okay? Just so we're clear on that, the six months is for the skin laxity, 90 days for the dermal resurfacing. One of the things that has to happen is that there's a lot of data that needs to be crunched. There's a lot of evaluations from third-party evaluators that need to have, we need to submit the 510(k). Our plan is to submit it in May. Our plan is to do it as fast as we possibly can, obviously, our plan is to also make sure that we do it right and that we get it done the right way.
We will let you know on the dermal when we do submit that, but that is our plan, and then typically, like I said, it's usually about 90 days after that for the dermal. For the IDE, look, we just got notification from the FDA just late last week, and so we are working to start phase II on that. The next update that we will let you know publicly is when we begin phase II of that study, and then we'll outline everything at that point in time.
Got it. All right, great. Thanks for all the updates today. I'll jump back in queue here.
Thanks, Kyle.
Thank you. Our next question today is Russell Cleveland, and as a reminder, it's star one to be placed into question queue. Our next question is coming from Russell Cleveland with RENN Capital. Your line is now live.
Thanks for the numbers. That 90% plus on the handpiece sale is very encouraging. My question is around margins. Now, the margins on the handpieces, what are our goals there? And as the handpieces increase, it'll become more and more important on our quarterly numbers. Give me some color here on what our objectives are on the margins for the handpieces, as opposed to our equipment sale.
We don't break out the margins between capital equipment and consumables at this point in time. That's just the way it is. The product mix will continue to drive a margin expansion, and the improvements that we're having in our manufacturing will continue to drive gross margins into the fourth quarter and for 2021. We don't break out the margins between capital and disposable.
Obviously, the handpiece sales can have much higher margins over time. Am I interpreting that right?
Well, like I said, we don't break out the capital for disposables, but the overall gross margin of the business, yes, will continue as we move forward into Q4 into 2021.
Okay. Thanks so much for the numbers.
Thanks, Russell.
Thank you. We've reached the end of our question-and-answer session. Ladies and gentlemen, that does conclude today's teleconference. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.