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Bovie Medical Corp  (NYSEMKT:BVX)
Q4 2018 Earnings Conference Call
March 13, 2019, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon, ladies and gentlemen, and welcome to the Fourth Quarter and Fiscal Year 2018 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 would like to remind everyone that our remarks and responses to your questions today may contain forward-looking statements that are based on 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 as non-GAAP financial measures. Reconciliations of those non-GAAP financial measures to the most complete (ph) 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.

Charles D. Goodwin -- President and Chief Executive Officer

Thank you, operator. Welcome everyone to our fourth quarter and fiscal year 2018 earnings call. I'm joined on this afternoon's call by our Chief Financial Officer, Tara Semb.

Let me provide you with a quick agenda for today's call. I'll begin with a high-level overview of our fourth quarter sales results, along with the commentary on the factors that contributed to our strong performance during the period. Then I'll discuss some notable operating highlights we achieved during the quarter. I will then briefly review the strategic initiatives that we were focused on executing this year as part of our long-term growth strategy, before turning the call over to Tara to discuss our fourth quarter financial results in detail and review our fiscal year 2019 guidance, which we introduced in our earnings press release this afternoon. Following Tara's discussion, I'll close by sharing some additional thoughts on why we believe Apyx is incredibly well-positioned for success in the years to come before opening the call for questions.

Before diving in our fourth quarter review, I thought, I would -- it would be appropriate to start with two notable events that happened during the quarter. Both of these items are very important as investors think about our investment story going forward. First, we announced the addition of a new member of our executive leadership team in December, as Tara Semb joined as our new CFO on January 1st. Tara replaced Jay Ewers, who had announced plans to retire earlier in the fourth quarter. Tara has a strong background in finance and operations having held multiple executive level positions throughout her career. She has experience in helping companies execute rapid growth strategies, as well as helping large multinational companies scale their business and improve profitability across multiple business segments and geographies around the world. I believe, we have added an asset to the executive leadership team and we are very fortunate to have her helping us at such an important time in this company's history.

The second important item I wanted to begin the call with is our corporate rebranding and the company name change to Apyx Medical Corporation effective January 1st, 2019. Many of you will recall that our sale of our companies core segment to symmetry surgery. Last summer included the sale of the Bovie brand name. We had announced plans to rename the surviving NewCo entity and we chose Apyx Medical. The name Apyx reflects our mission. Our mission to continue our journey to the top, the summit, the peak. This is not just about revenue growth, but about a culture of peak performance in all we do. We also announced plans to move our stock exchange listing to the NASDAQ Global Select Market from the NYSE and begin trading on the NASDAQ on January 2nd, 2019 under the ticker APYX.

With that, let's turn the review to our sales performance during the fourth quarter. We achieved total revenue of $5.9 million for the fourth quarter, which represented 62% growth year-over-year. Our total revenue growth in the fourth quarter was driven by strong sales of our Advanced Energy business, which increased by $1.25 million, or 41% year-over-year. We also saw strong contributions of total growth from our OEM business, which increased by $1 million, or 179% year-over-year. From a geographic standpoint, during the fourth quarter, US sales increased by $1.3 million, or 43% year-over-year, while International sales increased by $957,000, or 162% year-over-year.

Fourth quarter Advanced Energy sales in both the US and internationally reflect solid execution of our strategy in 2018, specifically to focus on driving growth by increasing the adoption and utilization of our Renuvion Cosmetic Technology in the US cosmetic surgery market, while also meeting the growing demand from our network of OUS distributors and entering new partnerships with our OUS distributors in new countries. As expected our fourth quarter total sales growth also benefited from strong OEM growth driven primarily by the expected contributions from the electrosurgical generator and supply agreement we signed with Symmetry as part of that divestiture and sale of Bovie's core business last summer.

Turning to a brief review of our fiscal year 2018 performance, we are clearly very proud of our reported results this year with the total revenue growth of 63% year-over-year, well ahead of our original guidance expectations for sales growth that were in the range of 29% to 34% year-over-year. Advanced Energy sales were the largest driver of growth in 2018, as sales increased 71% year-over-year, well ahead of the original guidance expectations of 40% to 45% Advanced Energy sales growth, which we introduced in our Q4 2017 call last year. The 71% revenue growth was driven by 43% growth in the US and 184% growth outside the US, albeit, off (ph) a much lower base of revenue outside the US in 2017. Growth continues to come from sales of both generators and handpieces, which means our Advanced Energy growth in 2018 was fueled by strong adoption of generators and utilization handpieces.

To that end why we are still not disclosing additional details about the composition of Advanced Energy revenue or the installed base overall, we appreciate the markets interest in understanding the utilization dynamic in our business and we are happy to report that we saw more than a three-fold increase in the number of handpieces we sold in 2018, as compared to 2017. Our growth performance in 2018 represents the clearest evidence of our success in executing our strategic plan. We focused the organization on maximizing the opportunity we have in introducing our J-Plasma technology under the Renuvion brand in the US cosmetic surgery market. And after starting the year off, well, the Core segment sale transaction we announced last summer allowed us to further focus our efforts on this strategic plan and deliver strong growth trends over the second half of the year, despite facing tougher comparisons.

We believe our growth performance in 2018 was a result of the powerful combination of an attractive addressable market opportunity having what we believe is the best technology on the market today and our focused commercial strategy. Let me speak to each of these in a little bit more detail.

First, we believe the US cosmetic surgery market represents a large and compelling market opportunity for our company, which will enable us to drive strong and sustained growth. Using Renuvion as a sub-dermal coagulator following liposuction procedures, we estimate that our potential addressable market for generators and handpieces is approximately $1.5 billion in the United States alone. Importantly, this addressable opportunity includes an annual reoccurring revenue component for the sale of our Renuvion handpieces of more than $170 million based on the estimated 400,000 liposuction procedures that happen each and every year.

Second, regarding our J-plasma technology, which powers our Renuvion generators and handpieces, as discussed on prior calls, while the initial decision to shift the commercial focus in the US to the cosmetic surgery market predated might joining the company. The initial decision was well-founded. The decision was due in large part to the incredibly positive feedback we were receiving from some of our earliest adopters of our technology, including plastic surgeons, dermatologist and cosmetic surgeons across the US, who were using it for sub-dermal coagulation of soft tissue following liposuction procedures.

It was clear to me shortly after taking over in December of 2017 that the strategy to focus our commercial efforts for the J-plasma technology in the cosmetic surgery market was found. But I also knew, we had an opportunity to better understand why the clinical feedback and patient outcomes were so positive, which we needed to invest in learning what made our technology so special. We believe that the J-plasma technology which powers our Renuvion generators and handpieces represents a truly unique energy modality that is able to deliver heat to tissue and an incredibly efficient and controlled manner. Specifically, the combination of our proprietary RF energy and helium plasma allows Renuvion to quickly heat sub-dermal tissue to the optimal treatment temperatures and then cool the tissue almost instantaneously. We believe this approach enables physicians to minimize thermal diffusion to the surrounding tissue that is not being treated. Our technology also allows Renuvion to deliver full power to all types of soft tissue and to heat the sub-dermal tissue in a faster and more efficient manner. And lastly, the fact that Renuvion does not rely on direct contact with the tissue being treated provides physicians with more freedom to deliver energy to all desired tissues within the sub-dermal space.

The third contributor to our early commercial success in the US cosmetic surgery market is our focus. This was a company with limited resources, which meant we couldn't afford to be anything other than focused with our commercial efforts. Our targeted approach has paid off so far. We have gained significant market share in 2018, despite having a direct selling infrastructure focused on this market of only 15 direct sales reps coming into the year. Our commercial success over the first half of 2018 was further validation of our strategy and clear evidence of the huge unmet need for a technology like Renuvion.

The Symmetry transaction provided us with the requisite capital to invest in our sales force and expand our coverage of the US cosmetic surgery market. As planned, we identified strong direct sales reps to join our team over the second half of 2018. Our direct team increased from 17 direct reps at the end of Q2 to 27 reps at the end of 2018. We had also identified new agency partners that had demonstrated experience in the cosmetic surgery market, which resulted in the number of agency relationships increasing from three at the end of Q2 to 14 at the end of 2018. Importantly, I believe the compelling revenue growth we've reported this year is only part of the 2018 success story.

We have also made considerable progress toward the four strategic initiatives, I have talked on earnings calls throughout the year. By the way of reminder, they are: number one, to secure new clinical evidence demonstrating the safety and efficacy of our Renuvion technology; two, formalizing our regulatory strategy to pursue specific clinical indications that will enable us to market and sell Renuvion for our target procedures; three, enhance physician and practice support for our cosmetic surgery customers; and four improve our manufacturing capabilities and efficiencies. All four strategic initiatives are focused on establishing a foundation to support the long-term growth of Renuvion in the US cosmetic surgery market and the long-term growth of J-plasma in the markets outside the US.

Let me update you on the progress in each of these areas now. With respect to our first strategic initiative in 2018, we have been primarily focused on securing new clinical evidence for Renuvion Cosmetic Technology by pursuing an IDE clinical study, evaluating the use of Renuvion for dermal resurfacing procedures. We completed enrollment in the spring and worked through follow up and data evaluation this past fall. Dermal resurfacing represents a new target procedure for Renuvion in the cosmetic surgery market, an estimated 200,000 fully ablative dermal resurfacing procedures are performed in the US market each year, representing an annual incremental market opportunity of approximately $85 million from the sales of our handpieces alone.

This IDE clinical study for dermal resurfacing is also an important component of our second strategic initiative formalizing our regulatory strategy to pursue specific clinical indications. Our first new clinical indication we are pursuing is for the use of Renuvion and dermal resurfacing procedures, and we use the data we obtained from our IDE clinical study to support our 510(K) submission, which we announced in December. We have also been developing our multi-year strategy to secure specific clinical indications for our target procedures in the cosmetic surgery market under the direction of Dr. Topaz Kirlew, our VP of Regulatory Affairs.

In accordance with our third strategic initiative, we are continuing to build physician and practice support for our customers in the cosmetic surgery market with our Renuvion cosmetic technology brand. We have made considerable progress in this incredibly important part of our business strategy. As we continue to believe that having the best technology like Renuvion does not guarantee commercial success, in fact, it is our efforts in the area of physician and practice support that may be even more important. We launched this dedicated channel-specific brand for our J-plasma generators and handpieces in late March, and we remain committed to enhancing its visibility in the marketplace in light of the strong reception that it has received from physician community in recent months. We have also been pleased with the response of our tag line Reshaping What's Possible, which really captures the impact of our Renuvion technology can have on a practice from the strong outcomes and satisfaction from the patients to the benefit our clinician customers receive in attracting new patients. We couldn't be happier with the results of our strategic investment in this dedicated branding effort in the cosmetic surgery market.

We also believe -- we also believe, we will be able to leverage the platform and positive name recognition, we have established for the Renuvion brand, when introducing new procedures to the cosmetic surgery market in the future. We have also invested in practice support, including programs to help practices learn how to effectively market to potential patients and programs to help clinicians understand what makes our technology better than existing alternatives. We have also invested in a small team of clinical specialists who are charged with supporting our sales team in educating and training our clinician customers. Not only has this strategy enhanced our relationships with new customers, it has freed up time for our reps to focus on selling. Ultimately, we think this strategy ensures that our relationships with the clinician doesn't end when he or she buys a generator, but that he or she has everything needed to comfortably adopt the technology into the practice, which we believe is key to driving utilization.

And lastly, in connection with our forced strategic initiative, we continue to identify and pursue new ways to improve our manufacturing capabilities. As discussed on prior calls, we welcome two important professionals to our companies leadership team in 2018, with the appointment of Craig Swandal to our board in March and the appointment of Laura Iversen to the position of Director of Global Operations for Advanced Energy in late 2018. Both have been instrumental in developing our strategy for enhancing our readiness to meet the demand we expect for generators and handpieces. The importance of this strategic initiative cannot be understated. And why I'm proud of the progress we have made today, we will continue to prioritize investments in our manufacturing scale to ensure we can deliver the commercial success, we expect as a result of driving, improving adoption and utilization from clinicians around the world. In summary, 2018 was fantastic year for both growth and progress toward our goals of setting up the company for long-term success.

Before turning the call over to Tara for the financial review, I wanted to share my thoughts on a report that was published in an online blog last month. This report was written with the express intent to harm our stock price. And the author disclosed his financial interest in profiting as a result of the stocks decline. This report was incredibly frustrating as it was full of factual and accuracies, including some claims and disparaging commentary about my prior work history and character. The basis of the bloggers claims were tied to my name appearing in the 90-page complaint filed in a lawsuit brought by a whistle blower against Olympus.

Let me state further record. I was not party to the lawsuit, nor was I ever named as a defendant in the case. My name appeared once in a 90-page complaint has part of a list of executives who were alleged to have had knowledge of fraudulent activities. I was employed in various sales and senior leadership roles at Gyrus from 2002 to 2008, when we were acquired by Olympus, where I was a Group Vice President of the global surgical energy group.

Olympus was investigated by the Department of Justice in 2010 as part of that investigation, I was, of course, interviewed. That interview took place over the phone and I was never deposed in the matter. Furthermore, although the Department of Justice conducted a multi-year investigation of Olympus, they never contended that I engaged in or had knowledge of any improper activities. The falsehoods about my prior work history were frustrating, but candidly, the unsubstantiated claims against the safety and efficacy of our J-plasma technology and ablation mischaracterization of our IDE study on dermal resurfacing are among the most troublesome.

As discussed earlier in my prepared remarks, we believe our technology is truly differentiated and we have invested in expanding the clinical support for Renuvion, which we look forward to sharing with the investment community and our clinician customers in 2019 and beyond. As it relates to the result of the IDE study specifically, we have consistently said that the study was launched with the primary goal of demonstrating safety and efficacy to support our FDA 510(K) submission and that following this receipt of this regulatory clearance we would pursue options for showcasing the results.

Finally, I want to thank our employees for not letting their frustration with this short attack distract them from their responsibilities. In fact, I am proud to say, I think the incident was a catalyst for our team of Apyx employees, who already believed in our mission to work with even more conviction toward achieving our strategic objectives.

With that, let me turn the call over to Tara to review our fourth quarter financial results and our fiscal 2019 financial guidance, which we introduced in this afternoon's release. Tara?

Tara H. Semb -- Chief Financial Officer

Thanks, Charlie. As a reminder, our results are reported on a continuing operations basis for the period ended December 31st. 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 fourth quarter 2018 increased $2.3 million, or 62% year-over-year, to $5.9 million, compared to $3.7 million last year. By business segment total revenue growth for the fourth quarter was driven by Advanced Energy segment sales, which increased $1.3 million, or 40.5% year-over-year to $4.3 million. OEM segment sales increased $1 million, or 179% year-over-year to $1.6 million in Q4, driven primarily by higher than expected demand from third-party equipment manufacturers for our proprietary generator products. OEM sales results also benefited from sales of generators related to our 10-year manufacturing and supply agreement with Symmetry entered into as part of a divestiture of the core business.

Revenue in the United States increased approximately $1.3 million, or 43% year-over-year, the $4.4 million and international revenue increased approximately 957,000, or 162% year-over-year, to $1.5 million. International revenue represented approximately 26% of sales in the fourth quarter of 2018, compared to 16% of total sales in the fourth quarter of 2017.

Our fourth quarter reported revenue results for the Advanced Energy segment and total company include a $191,000 impact, which was not included in our preliminary revenue results, which we announced on January 7th, 2019. During our year-end growth, we identified a subsection of accounting standard ASC 606 revenue from contracts with customers that requires (inaudible) paid to group purchasing organizations or GPOs to be reported as a reduction of revenue.

ASC 606 became effective for Apyx in the first quarter of 2018, as such, we were required to record the amount paid for GPO fees as a reduction of revenue when incurred. The $191,000 impact recorded in the fourth quarter of 2018, represents the full year impact from GPO activity that occurred throughout the year. While the full year impact of this correction was $191,000, approximately 61,000 was related to activity in Q4. Excluding the impacts related to our correction of the company's prior treatment of ASC 606 in the fourth quarter, our Advanced Energy segment sales growth year-over-year would have been approximately 430 basis points higher.

Moving down the P&L. Gross profit increased $827,000, or 30.7% year-over-year to $3.5 million, compared to $2.7 million for the fourth quarter of 2017. The increase in fourth quarter 2018 gross profit was driven primarily by strong sales in the company's Advanced Energy segment. Gross margin for the fourth quarter of 2018 was 59.4%, compared to 73.7% last year. The change in gross margin was primarily due to revenue mix in our advanced energy segment and higher OEM sales as a percentage of total revenue this year. OEM segment gross margins were lower in the fourth quarter of 2018, when compared to the prior year period, driven primarily by revenue related to our new product manufacturing and supply agreements with Symmetry in the fourth quarter of 2018, which did not contribute to revenue results in the prior year period.

Fourth quarter 2018 gross margin was also impacted by the correction of the company's prior treatment of ASC 606, which reduced revenue and gross profit by $191,000, or approximately 439 basis points of the total year-over-year decline in gross margin for the period. Operating expenses for fourth quarter 2018 increased $2.7 million, or 46% year-over-year to $8.7 million, compared to $5.9 million for the fourth quarter of 2017. The year-over-year change in operating expenses from continuing operations was primarily driven by a $2 million increase in salaries and related costs, $0.8 million increase in professional services, $0.2 million increase in research and development expenses, and $0.5 million increase in selling general and administrative expenses. Operating expenses from continuing operations for the fourth quarter of 2018, also included severance and related expenses of $741,000 related to the departure of the company's former Chief Financial Officer.

Loss from operations for the fourth quarter of 2018 was $5.2 million, compared to operating loss of $3.2 million last year. Net loss from continuing operations -- excuse me, for fourth quarter 2018 was $3.3 million, or $0.10 per diluted share, compared to a net loss from continuing operations of $3 million, or $0.9 per diluted share for the fourth quarter of 2017. Fourth quarter adjusted 2018 EBITDA loss with $4.8 million, compared to an adjusted EBITDA loss of $2.7 million last year. Excluding the impact of these severance of payments of $741,000 and $1.5 million in the fourth quarters of 2018 and 2017 respectively. Adjusted EBITDA loss was $4.1 million, compared to $1.2 million last year. We have provided a detailed reconciliation from GAAP net loss to adjusted EBITDA in our press release this afternoon.

As of December 31st, 2018, the company had cash and cash equivalents of $16.5 million and short term investments in US treasury bills of $61.7 million, as compared to cash and cash equivalents of $10.7 million, as of 12/31/2017. The company had working capital of $81.8 million as of December 31st, 2018, as compared to $16.6 million, as of December 31st, 2017.

Charles D. Goodwin -- President and Chief Executive Officer

Tara, (inaudible)

Tara H. Semb -- Chief Financial Officer

Yeah.

Charles D. Goodwin -- President and Chief Executive Officer

Turning to a review of our 2019 financial guidance, which we introduced in our earnings press release this afternoon for the 12 months ending December 31st, 2019, we expect total revenue in the range of $25 million to $26 million, representing growth of 50% to 56% year-over-year compared to the total revenue from continuing operations of $16.7 million in the fiscal year 2018. Our 2019 revenue guidance assumes Advanced Energy revenue in the range of $20 million to $21 million representing growth of 53% to 61% year-over-year, compared to Advanced Energy revenue of $13.1 million in fiscal year 2018. OEM revenue of approximately $5 million representing growth of 38% year-over-year, compared to $3.6 million for fiscal year 2018. Now, we expect approximately 50% of our total OEM segment revenue could do come from legacy OEM activities with the balance coming from our manufacturing agreement with Symmetry.

Tara H. Semb -- Chief Financial Officer

In terms of profitability, guidance for fiscal year 2019, we expect GAAP net loss in the range of $24 million to $23 million compared to GAAP net loss from continuing operations of $9.5 million in 2018. And we expect adjusted EBITDA loss in the range of $20.4 million to $19.4 million compared to adjusted EBITDA loss from continuing operations of $11.7 million in fiscal year 2018. 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.

Lastly for modeling purposes for the full year 2019, we expect gross margin of approximately 59% to 61% this year, compared to 64.7% last year. The largest driver of the expected decline in gross margins this year is the impact of 12 months contribution from our manufacturing agreement with Symmetry in 2019, compared to approximately three-month contribution in 2018. Excluding the full year contributions, the total company revenue from this agreement, our gross 2019 margin would be approximately 63%. Stock-based compensation of approximately $4 million. Depreciation and amortization of approximately $700,000, and weighted average diluted shares outstanding of approximately 34 million shares.

Finally, we plan to file our 10-K for the 12 months ending December 31st, 2018 with the SEC this evening. I wanted to make the investment community aware of a disclosure in the filing in Item 9A controls and procedures, that relates to our evaluation of the effectiveness of internal controls over financial reporting and disclosures. Specifically, this evaluation concluded that the company's internal controls and procedures were not effective because of three material weaknesses.

We are committed to maintaining a strong internal control environment and in response to the identified material weaknesses, management with the oversight of the audit committee of the Board of Directors, has already begun to take actions toward the mediation, the details of which are disclosed in our 10-K. It is also important to note that we have also received an unqualified opinion on our 2018 financials from our external auditors.

With that, I'll turn the call back to Charlie for closing remarks. Charlie?

Charles D. Goodwin -- President and Chief Executive Officer

Thanks, Tara. I'd like to conclude today's prepared remarks with some additional thoughts on 2019, specifically in two areas: how we are driving growth this year; and where we are investing in 2019 to drive future growth. Regarding our 2019 growth drivers, our full year revenue guidance assumes total revenue in the range of 50% to 56% year-over-year. Advanced Energy will be the primary driver of total company growth again this year and we expect the segment revenue to increase 53% to 61% year-over-year, driven by continued generator adoption and handpiece utilization at Renuvion in the US and J-plasma outside the US. Our US Advanced Energy growth expectations only assume contributions from Renuvion sales related to its use as a sub-dermal coagulator following liposuction in the US. We plan to update our full year 2019 growth expectations following their seat of our 510(K) clearance for dermal resurfacing.

With respect to Advanced Energy sales, growth expectations outside the US, similar to our practice in 2018, our guidance assumes the contributions from utilization related demand in existing international markets only. To the extent we receive material new OUS regulatory clearances during 2019, we plan to update our guidance accordingly. One final item for consideration when evaluating our 2019 growth expectations, we do not assume a material change in our direct sales infrastructure, which resulted in 27 representatives at year-end. As discussed earlier, we increased our direct sales force from 17 in Q2, 19 in Q3, and 27 at year-end. The primary driver of year-over-year growth in the US this year is the contributions of these 27 reps for 12 months of 2019, as compared to just three months of Q4 of 2018. Additionally, we ended 2018 with multiple independent agency partners that employed an estimated 20 agents to 23 agents, which when combined with our direct reps, gave us a field selling team of nearly 50 agents at year-end.

The majority of these agency relationships were added in late Q3 and early Q4, as part of our hybrid selling model, whereby we supplemented our investment in direct reps with more P&L friendly commission only agents. These agency partners did not produce the results we were expecting and given how important our early commercialization efforts are in the US, we believe it is prudent to focus our sales responsibilities on our direct reps, who are full employees of APAC and thus fully invested in our success. As such, our 2019 guidance assumes, we average approximately 35 to 40 sales professionals this year, of which 27 are direct reps and the balance are our highest performing agency partners.

With respect to the areas where we are investing in 2019 to support our future growth, we expect our operating expenses to increase approximately 70% year-over-year in 2019, faster than our expected growth of 50% to 56%. The majority of this deleverage impact is a result of our targeted investments in enhancing the foundation to support long-term growth for Apyx. The level of investment we are making this year is notable at first glance. However, I think it is important for investors to understand where we are approaching this capital allocation thoughtfully and strategically and that we believe the majority of this step-up in our level of investment in 2019 is transient.

Some of the areas of incremental investment in 2019 include approximately $3 million of investments in R&D initiatives and expanding the clinical validation of our J-plasma Renuvion technology. Approximately $2 million of investment in marketing initiatives, including increased participation at trade shows, advertising and other activities to increase the awareness of our differentiated technology. And approximately $2.5 million in higher stock option expense related to a decision to invest in our employees by expanding our option pools to include grants to many more valuable contributors throughout the organization. An incremental $1 million impact of a full-year of expenses for the increase of our direct sales force compared to only three months of impact last year. And finally, approximately $2 million related to our pursuit of new regulatory clearances.

As discussed on recent calls, we are developing our long-term regulatory strategy under the leadership of Dr. Topaz Kirlew, our VP of Regulatory Affairs. In the US, we have identified other potential clinical indications, where we believe our Renuvion technology would serve an unmet need in the US cosmetic surgery market. We plan to pursue regulatory clearances for specific clinical indication in the years to come and we plan to do so in a strategic and comprehensive manner, meaning that we intend to prepare and submit requests for 510(K) clearance from the FDA that have clinical support demonstrating our technology safe and effective use.

Outside the US, we plan on expanding our geographic footprint. Importantly, we will prioritize owning the registrations and licenses in each respective country. Enclosing with a highly differentiated technology supported by strong physician feedback in the cosmetic surgery market, a focused commercial strategy and expanded direct sales force, multiple strategic initiatives in place and targeted strategic investments plan to support the broad-based adoption of our technology in the years to come. We couldn't be more excited about the future prospects of Apyx Medical.

With that operator, now -- let's now open the call for questions.

Questions and Answers:

Operator

Thank you. (Operator Instructions) And our first question will come from the line of Dave Turkaly with JMP Securities. Your line is open.

David Turkaly -- JMP Securities -- Analyst

Thanks. So just on the 2019 guidance, seems like you mentioned sub-dermal coagulation OEM, and then I think that, the direct reps you may kind of hold where they are. So just love to get your thoughts on productivity again where you see 27, when they mature and how long that takes just to get your thoughts on those right now?

Charles D. Goodwin -- President and Chief Executive Officer

Yeah. So, obviously most of those reps were added in the fourth quarter, and we increased our direct sales force as I said from 17 to 27. It's probably closer to about a six-month to 12-month ramp up for those reps to become fully effective. But yes, our guidance in our revenue, in the United States, assumes only sub-dermal coagulation. And as I stated in the prepared remarks, as we get further clearances, we will update our guidance at that point in time.

David Turkaly -- JMP Securities -- Analyst

And I guess in terms of just a productivity standpoint of some of the guys that have been there for a while, could you just remind us of where they can be after 12 months, or maybe where some of your top guys are today?

Charles D. Goodwin -- President and Chief Executive Officer

Yeah. We've said after 12 months that number is somewhere around $1 million.

David Turkaly -- JMP Securities -- Analyst

And I guess maybe just one for Tara, just the disclosure you mentioned. I'm sure, we'll get to check that out in detail later, but the weaknesses, I'm just curious, are these things that you've typically seen in the past, maybe with some companies that are smaller -- are you familiar with things like this? And I guess, if there's any just sort of commentary you guys can make about any details, that would help us feel like, OK, these are kind of minor things, I know you said you're already taking action, but I'd love to just get your thoughts on --?

Charles D. Goodwin -- President and Chief Executive Officer

Yeah. Hey, Dave, this is Charlie, I'll grab that first. As obviously, we're not happy about the situation, and it was really the former financial team, the great thing for us right now is that Tara has significant experience in this area. She was a Director of our internal audit for Armstead Industries, which was a multinational manufacturing company. And we are very confident that this will all be taken care of and remediated by the end of 2019. And so we're very fortunate to have her because of her experience, and I know she will get this taken care of and this will be the last time we have to talk about this.

David Turkaly -- JMP Securities -- Analyst

All right. Thanks for that.

Operator

Your next question comes from Matt O'Brien with Piper Jaffray. Your line is open.

Kevin -- Piper Jaffray -- Analyst

Thanks, everyone. This is Kevin on for Matt today. I had a quick question on the dermal front as well as guidance. I understand that you're probably going to update us as far as numbers go. But if there's any color that you can provide on how much dermal resurfacing can impact the back half of the year, if you can, and then what an overall sustainable type growth rate looks like in 2020 and beyond in that space with all those new reps getting up the curve?

Charles D. Goodwin -- President and Chief Executive Officer

Yeah. Look, Kevin, obviously, today we're not going to talk about the impact on revenue until we get the clearance from the FDA. But just remember that there's 200,000 of those procedures that are done a year, which represents about another $85 million in annual handpiece utilization and will also help us in generator adoption at some point in time too. But we're not going to get into those until we get the clearance. And we'll give you guys updates when that happens and help you out with that at that point in time.

Kevin -- Piper Jaffray -- Analyst

Okay. That's completely fair. As far as the increased investments go for the year, you spoke to 70% year-over-year and we really appreciate the breakdown there. And you mentioned it was transient. How much do you think in the longer term, if you could frame it up for folks? How quickly does it take down and beyond and where are the leverage points in the model? And I know on the margin side, you've talked historically about manufacturing leverage and it seems like you're consistently increasing pricing for J-plasma, if I'm not mistaken. So can you just give us a frame up for when those start to taper off with the transient and where the leverage points are in the model? Thanks.

Charles D. Goodwin -- President and Chief Executive Officer

Yeah. Look, we've said before that we feel very good about our guidance and our plan for 2019. And obviously sitting here today, we are only going to talk about 2019. We're not going to get too far in the future. And obviously from we've talked a lot, I've talked every call that I've been on about manufacturing efficiencies. And so that is an area of continued focus for us and we will obviously hope to drive and have higher margins in the future, but we're not going to talk about that, maybe today. These are the target of investments that are going to help the foundation to support the long-term growth of this company. And as I mentioned before and some of these key things, these will help set us up for the future and really help take us down a successful path.

Kevin -- Piper Jaffray -- Analyst

Okay, thank you. If I could just sneak one in on 2019 that you can comment on the progress on some of the international markets. Brazil, South Korea, China, and then where it makes sense, if you receive approvals in other regions. Can you just talk about what's going on internationally speaking on 2019, and then I'll turn it over (ph). Thank you.

Charles D. Goodwin -- President and Chief Executive Officer

Yeah, of course. As I stated in the prepared remarks, our guidance assumes only from existing markets that we are currently in. As we get clearances throughout 2019 that we think we'll have a material impact on our numbers. We will obviously upgrade guidance and let you guys know about that at that point in time.

Kevin -- Piper Jaffray -- Analyst

Sounds, great. Thank you.

Operator

Your next question comes from Matt Hewitt with Craig-Hallum Capital. Your line is open.

Matt Hewitt -- Craig-Hallum Capital -- Analyst

Good afternoon. Thank you for taking the questions. First one for me. Once you received approval, a 510(K) approval, is it your plan at that point to add maybe some more sales resources or you going to go it with the twenty seven direct -- even after that approval.

Charles D. Goodwin -- President and Chief Executive Officer

We are happy with the number of reps that we have right now. And we think that the number of reps that we're looking at this point in time is the right number for us to get started and to move down that path.

Matt Hewitt -- Craig-Hallum Capital -- Analyst

Okay. And then with some of the movement on the agency side, is it, as you look at it with your 27 direct reps, are they going to be taking on a little bit more territory or how are you kind of hashing out that aspect of it?

Charles D. Goodwin -- President and Chief Executive Officer

Yeah, obviously they are focused in the major markets of the United States and some of them will have a little bit more territory, but remember, we still do have some of our top performing agencies with us. And so we do have nice coverage throughout the US and all the major markets around and we feel good about where we are and our guidance that we gave you talks about 35 to 40 professionals this year. So that is our coverage within the United States.

Matt Hewitt -- Craig-Hallum Capital -- Analyst

Okay. Thank you.

Charles D. Goodwin -- President and Chief Executive Officer

Thank you.

Operator

Your next question comes from Kyle Bauser with Dougherty & Company. Your line is open.

Kyle Bauser -- Dougherty & Company -- Analyst

Hey, Charlie, and Tara. Thanks for taking the questions, and congrats on the productive 2018 to say the least. So, first on your plans to expand the indications. I appreciate the comments in your prepared remarks. They'd be great to hear more though about the pipeline and how you're thinking about that and other hiring of Dr. Kirlew as a Regulatory Director was a great addition. And you've been working together to formulate a plan for subsequent indications. Can you just kind of talk a little bit more about how she's helped you create this multi-year strategy and potentially some

other indications you're exploring?

Charles D. Goodwin -- President and Chief Executive Officer

Yeah. Look, we're not going to get into potential indications at this point in time. And the only reason being is, we'll wait till we actually announce them and actually do them, as opposed to telling you that we're going to do them and then having you wait and down the road. But Topaz has been instrumental in this strategy and she's been instrumental in helping us throughout this process and guiding our way through our entire regulatory strategy. And don't forget, first, one of the first things that we needed to do was really understand how our technology worked and the importance of how it works and what makes it work so well also is into some of the future things that we need to do. So there were things that we needed to do first to do this, we'll be happy to tell you and let you know when the time is right, it's just not right at this point in time.

Kyle Bauser -- Dougherty & Company -- Analyst

Yeah, understood. Thanks. And you know the follow up, after an expected clearance of the dermal resurfacing indication when it becomes on label and you're able to actually articulate a treatment protocol to guide patients selection and device usage. Can you kind of talk about plans for how you roll-out this new indication so to speak marketing programs, teach-ins, trainings, et cetera. And how quickly you think you'll be able to get users up and running?

Charles D. Goodwin -- President and Chief Executive Officer

Yeah. So when we get clearance, we will talk to you about the plan for a lot of that. We will talk to you about what we expect from a revenue point of view and we'll give you a timeline once that is, it doesn't make sense to give you a timeline right now, because we don't know when we're going to get clearance. And so we'll be a lot more specific when we get that and we can move forward there.

Kyle Bauser -- Dougherty & Company -- Analyst

Okay. Thanks for taking the questions.

Charles D. Goodwin -- President and Chief Executive Officer

Thank you.

Operator

Your next question comes from Russell Cleveland with RENN Capital. Your line is open.

Russell Cleveland -- RENN Capital -- Analyst

Thank you for the complete review, and also mentioning that report and the falsehood of what was happening there. Here's a question that you may not be able to answer, but cash flow, we're investing, of course, in our growth, in our sales force and so forth. Any thoughts when we might be able to cross the line into positive cash flow?

Charles D. Goodwin -- President and Chief Executive Officer

Yeah. We haven't given any words or any guidance yet for future years with that Russ, Just like you mentioned as before, it's a question that I probably can't answer at this point in time. But just know that we like our balance sheet very much. We're in very good position. And as I mentioned a lot of these expenses that we have in 2019 are transient expenses to help set us up for the future.

Russell Cleveland -- RENN Capital -- Analyst

Great. Just one follow on this. The foreign sales are the potential overseas looks bigger than the United States. Are we going to use our own reps overseas or are we going to do joint ventures with other companies?

Charles D. Goodwin -- President and Chief Executive Officer

Yeah. So we use the distributor model overseas, the thing that we did talk about in today's call that was in the prepared remarks and one of the investments that we're making in 2019 is to actually own the registrations ourselves. And so a lot of small companies, unfortunately, have to have the distributor own the relationship. And because of our balance sheet and because we think it's better for the company long-term, we're actually going to own the registrations in the countries that we go into outside the US.

Russell Cleveland -- RENN Capital -- Analyst

Okay. Thanks so much. I appreciate it.

Charles D. Goodwin -- President and Chief Executive Officer

Thank you, Russell.

Operator

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

Duration: 57 minutes

Call participants:

Charles D. Goodwin -- President and Chief Executive Officer

Tara H. Semb -- Chief Financial Officer

David Turkaly -- JMP Securities -- Analyst

Kevin -- Piper Jaffray -- Analyst

Matt Hewitt -- Craig-Hallum Capital -- Analyst

Kyle Bauser -- Dougherty & Company -- Analyst

Russell Cleveland -- RENN Capital -- Analyst

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