Apyx Medical Corporation

Good morning, ladies and gentlemen, and welcome to the fourth quarter and fiscal year 2021 earnings conference call for Apix 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, without limitation, those identified in the risk factor section of our most recent annual report on Form 10-K to be filed with the Securities and Exchange Commission, our most recent 10-Q filing, and the company's other filings with the Securities and Exchange Commission. 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. Generally, 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 call over to Mr. Charlie Goodwin, Apex Medical's president and chief executive officer. Please go ahead, sir.

Thanks, operator. Good morning, everyone, and welcome to our fourth quarter and fiscal year earnings call. I am joined on this morning's call by our chief financial officer, Tara Simm. Turning to a quick agenda of what we intend to cover today, I'll begin by discussing our revenue results for the fourth quarter and the key drivers of our performance, followed by an overview of the financial and operational progress that our team made in 2021. I'll then provide some additional commentary on the recent FDA announcement related to our advanced energy products. Tara will cover the fourth quarter financial results in detail and review our financial guidance for 2022, which we introduced in our earnings press release this morning. Following Tara's commentary, I'll share some thoughts on our outlook and key areas of focus for 2022 before we open the call for questions. With that, let's get started with a review of our fourth quarter revenue results. We are very proud to report the total revenue of $16.8 million in the fourth quarter of 2021, representing 47% growth year over year. Our total revenue growth was driven by advanced energy sales that significantly exceeded our expectations, increasing 52% year over year to $15 million. while the OEM sales increased 13% year-over-year to $1.8 million. Looking at our advanced energy results more closely, our outperformance in the fourth quarter was fueled by stronger than anticipated sales of both our advanced energy generators and handpieces in the U.S., reflecting strong new surge in customer adoption and strong utilization by existing surge in customers. Specifically, we saw advanced energy sales in the United States increase by more than 100% year over year, with the U.S. generator and handpiece sales growth in excess of 120% and 90% year over year, respectively. From an execution standpoint, our sales team did an impressive job of engaging with potential new customers in the U.S. and continuing to capitalize on the strong underlying demand that we have seen for our helium plasma technology in recent years. We were also pleased with our advanced energy performance internationally, where we saw strong utilization-based demand from our global customer base in key markets, resulting in international handpiece growth of approximately 40% year over year. Looking back on 2021 as a whole, our performance in the fourth quarter enabled us to solidify 2021 as a year marked by impressive progress, both financially and operationally. We delivered total revenue growth of 75% for the full year 2021 with advanced energy sales growth of 93%. and relatively flat growth in our OEM business as expected. From a geographic standpoint, we were also pleased to see that our total revenue growth was driven by strong global growth with U.S. and international sales each increasing 75% year over year in 2021. We believe our 2021 revenue results offer strong evidence that we are executing well with respect to our commercial strategy and continuing to increase our share of the more than $3 billion global cosmetic market. We sold nearly 50% more generators to new surgeon customers in 2021 than in 2020, including growth of more than 100% in the number of generators sold to new surgeon customers in the US this year. Our continued success in raising awareness among clinicians of Renuvion's differentiated features and benefits is clearly demonstrated in our strong adoption trends this year. Importantly, while we are proud of the market share gains we delivered in 2021, we are even more excited about the strong utilization trends we have seen from both new and existing customers around the world. Simply stated, demand for Renuvion handpieces from our Surgeon customers drove strong sales in 2021, and global handpiece sales represented the largest contributor to total advanced energy growth this year. Our strong commercial execution and impressive revenue growth in 2021 allowed us to achieve important improvements in our profitability profile. Specifically, we delivered approximately 600 basis points of gross margin expansion, reduced our adjusted EBITDA loss by 42%, and lowered our cash burn by 35% compared to 2020. From an operational standpoint, this past year our team continued to drive important progress on each of the following four strategic initiatives we have discussed on our earnings calls over the past few years. One, advance our regulatory strategy to obtain specific clinical indications for our targeted cosmetic surgery procedures. Two, Expand the portfolio of clinical evidence for our Renuvion technology in the cosmetic surgery market. Three, enhance the physician and practice support for our cosmetic surgery customers. And four, improve our manufacturing capabilities and efficiencies. Touching on our progress with respect to each of these initiatives. In 2021, we continue to advance our U.S. regulatory strategy to secure clinical indications for our two targeted procedure categories in the U.S. Specifically, we submitted a 510 for a specific clinical indication, the clearance of which will enable us to market and sell Renuvion for the use in dermal resurfacing procedures. and we completed enrollment in the IDE study intended to support our pursuit of an indication for the use of Renuvion in skin laxity procedures. Internationally, we secured registrations to sell our advanced energy products in 10 new countries, including two countries in the fourth quarter. In terms of clinical evidence generation, the portfolio of clinical evidence for our Renuvion technology continued to expand. In 2021, we saw seven new peer-reviewed clinical articles published in journals such as the American Journal of Cosmetic Surgery, the Journal of Cosmetic Dermatology, and the Journal of Aesthetic and Reconstructive Surgery. These publications further strengthen the compelling body of evidence that we have established for our technology over the last four years, which includes a total of 38 clinical publications. Our physician and practice support efforts in 2021 resulted in the development of 14 physician mentor programs for nearly 600 attendees. and our first multi-day users meeting, featuring informative presentations from our top surgeon users. We also hosted 13 educational training sessions for our international distributors, as well as multiple KOL podium presentations at academic conferences and trade shows. And lastly, from a manufacturing initiative standpoint, we improved our existing handpiece production capabilities and began manufacturing handpieces at our Bulgarian facility, enabling us to nearly double our existing handpiece manufacturing capacity. We also continued to introduce our APR handpiece to our existing international markets, driving improvements in our overall handpiece gross margins. Stepping back for a moment, Since 2018, these four strategic initiatives have been our primary focus as we endeavored to enhance the company's foundation to support a sustainable long-term growth in the cosmetic surgery market. Over the last four years, we have built a solid foundation for future growth, and we look forward to capitalizing on the benefits of our multi-year progress towards these strategic initiatives in 22 and beyond. Before turning it over to Tara for a discussion of our financials and guidance, I'd like to provide some context on the recent FDA safety announcement made this past Monday. I'll begin with some background information on our safety reporting and compliance program as a medical device manufacturer. As part of our program, we routinely submit medical device reports, or MDRs, in order to report serious adverse events to the FDA. These MDRs are submitted when we receive an adverse event report that reasonably suggests one of our devices may have caused or contributed to a serious injury. These MDRs are often submitted before it is confirmed that our device caused or contributed the injury. They are also submitted in situations where the event was caused by user error and in situations where another device has been identified as a possible cause. With this backdrop, in February, we were contacted by the FDA. Through MDRs, they were requesting our assistance to complete an evaluation of post-market safety concerns with our advanced energy devices. After clarifying the request with a member of their team, we provided the FDA with data for adverse events, MDRs, promotional items, and training for our advanced energy products for the requested last five years, beginning with 2017. On Friday, March 11th, we were informed that they intended to publish a safety communication which was posted to the FDA website on Monday, March 14th. The FDA safety communication warns against the use of our advanced energy devices for procedures intended to improve the appearance of skin through dermal resurfacing or skin contraction. As a reminder, our products are cleared for general use in cutting coagulation and ablation of soft tissue during open and laparoscopic surgical procedures, and we market them in accordance with this indication. To be clear, all of our advanced energy products remain on the market, and we intend to continue marketing and selling them for their existing clinical indications for use, most commonly for subdermal coagulation. Importantly, we do not promote our products in the U.S. for derma resurfacing or skin contraction and will not do so until we receive clearance from the FDA. Apix Medical takes the safety of our customers and their patients very seriously. We understand that the FDA's decision to post the safety communication was based on an abundance of caution for patients and we support the agency's focus on ensuring that clinicians and their patients understand the safe and proper use of our products. We believe that the decision to post this safety communication was due in part to the increase in the absolute number of MDRs reported for our advanced energy products in 2021 compared to 2020. Specifically, The MDR data that we provided to the FDA team showed that there were 90 MDRs involving the use of our advanced energy products for subdermal coagulation since the beginning of 2017, 32 of which occurred in 2021 as compared to 15 MDRs in 2020. In terms of the rate of occurrence of these MDRs, our products have been used for subdermal coagulation in over 150,000 procedures globally since 2017, which represents an MDR rate of .06. Importantly, while the .06 MDR rate since 2017 is low, the rate of MDRs has declined over this period and represented approximately 0.04% of global procedures in 2021. Looking more closely at the 32 MDRs reported for subdermal coagulation in 2021, investigation showed the events were either not attributable to the device or the events reported were within the scope of the existing clinical risk included in our product labeling. Fourteen of these 32 MDRs were performed by physicians that had not yet been trained by our global clinical team of skilled nursing staff. This, for us, underlines the importance of our continued outreach to all of our customers and that all surgeons receive our training and fully adhere to our safe and effective use guidelines, which were designed by our medical advisory board to further ensure patient safety. Based on our latest interaction last Friday, it is our understanding that the FDA's post-market team had not completed their review of the MDR data that we provided in response to their February request. The FDA has accepted our request for a meeting with the post-market team and we look forward to working with them to provide any needed assistance as they complete their review. Following our press release Monday morning, our team has engaged with the majority of our top users in the US and distributor partners outside the US to answer questions related to the safety communication. Apix Medical is proud of our commitment to product safety, patient safety, surgeon education and training, and customer support. Based on the feedback we have gathered this week, we believe that any potential disruption related to the FDA safety communication will be transitory. and we will continue to evaluate what effects, if any, the FDA safety communication will have on our business and results of operations. We continue to believe in the long-term outlook for Apix Medical remains compelling. Looking ahead, we will continue to support our customers while working with the FDA to address any questions about the post-market safety profile of our products. As I will discuss later in my remarks, we will also look forward to continuing to engage with the FDA in support of our pending 510 free market notifications, which remain under review. Let me now turn it over to Tara to review our fourth quarter financial results and 2022 guidance. Tara?

Thanks, Charlie, and good morning, everyone. I will begin my review of our financial performance at the gross profit line since Charlie covered our revenue results. Gross profit for the fourth quarter of 2021 increased $4.4 million, or 58% year over year, to $12.2 million. Gross profit margin was 72% compared to 67% in the prior year period and represented a record gross margin for the company. The increase in gross margin in Q4 was driven by sales mix between segments, improved handpiece margins due to continued manufacturing efficiency initiatives, the introduction of newer product models as we obtain registration in various markets, and higher production volumes. The year-over-year increase in gross margin this quarter was partially offset by higher inbound shipping costs related to the expedited sourcing of key component raw material inventories. Operating expenses increased $4.1 million, or 42% year-over-year, to $13.8 million. The increase in operating expenses year-over-year was driven by a $3 million increase in selling general and administrative expenses, a $.7 million increase in professional services, and a $0.4 million increase in salaries and related costs. Loss from operations for the fourth quarter of 2021 decreased 0.4 million or 18% year over year to $1.7 million. We delivered strong operating leverage in Q4 driven by solid operating expense management with our only variable commission expenses coming in higher in Q4 as a result of the better than expected sales results in the period. Total other loss net was $0.2 million compared to total other income of $0.1 million last year. Income tax expense was $0.1 million compared to an income tax benefit of $0.4 million in the fourth quarter of 2020. Net loss attributable to stockholders was $2 million or 6 cents per share compared to $1.5 million or 4 cents per share for the fourth quarter of 2020. Adjusted EBITDA loss for the fourth quarter of 2021 was $0.3 million compared to EBITDA loss of $0.7 million in the prior year period. As a reminder, we provided a detailed reconciliation from our net loss attributable to stockholders to non-GAAP adjusted EBITDA loss in our press release this morning. As of December 31st, 2021, the company had cash and cash equivalents of $30.9 million compared to $41.9 million as of December 31st, 2020. Turning to our review of our financial guidance, which we introduced in our earnings press release this morning, for the 12 months ending December 31st, 2022, we expect Total revenue in the range of $50 million to $63 million, representing growth of 3% to 30% year over year. Our total revenue guidance range assumes that advanced energy revenue has growth of 1% to 30% year over year to $43.5 to $56 million, and OEM revenue growth of approximately 18% to 27% year over year to approximately $6.5 to $7 million. With respect to our advanced energy revenue, our guidance assumes growth in the US is driven by contributions from maneuvering on sales related to its use as a subdermal coagulator following liposuction procedures. And growth outside the US is driven by demand in existing international markets. The low end of our advanced energy revenue range reflects the potential impacts on new customer adoption and on procedure-related demand for handpieces as a result of the recent FDA safety communication. In terms of our profitability guidance for fiscal year 2022, we expect net loss attributable to stockholders in the range of 21.1 to 12.1 million dollars and adjusted EBITDA loss in the range of 12.3 to 3 million dollars. Our formal guidance for 2022 incorporates the following consideration for modeling purposes. First, gross margins of approximately 62% to 67% this year compared to 69% last year, driven primarily by revenue mix shift between our advanced energy and OEM segments and geographic mix within our advanced energy segment. The inflationary headwinds in our cost of goods sold compared to prior year and incremental costs related to manufacturing capacity that was previously attributable to our core segment and transition services agreement with Symmetry Surgical. Second, operating expenses to increase in the range of nine to 14% year over year. Third, net interest and other income of approximately $650,000 in 2022 compared to an expense of approximately $400,000 in 2021. Fourth, income tax expense of approximately $450,000 compared to $380,000 last year. And lastly, we expect non-cash depreciation and amortization of approximately $1.2 million, non-cash stock-based compensation expense of approximately $7.25 million, non-controlling interest of approximately $212,000, and weighted average diluted shares outstanding of approximately 34.6 million shares. With that, I'll turn the call back to Charlie for closing remarks.

Thanks, Tara. Turning to our full year 2022 revenue expectations for our advanced energy business, Our guidance calls for advanced energy revenue growth of 1% to 30% year over year with advanced energy sales growth at the midpoint of approximately 14% in the U.S. and approximately 19% internationally. Our full year 2022 guidance range reflects our expectations for the continued utilization and adoption of our technology as well as the potential impacts related to the FDA safety communication. Let me provide you with some additional thoughts on our supporting assumptions to help you evaluate our growth for the full year. First, our full year revenue guidance assumes that our advanced energy business handpiece revenue will represent the largest driver of our total advanced energy revenue growth again in 2022, reflecting the strong utilization-based demand we expect for our Renuvion handpieces. The high end of our full-year revenue guidance represents our original growth expectations for 2022, based on a continuation of the growth drivers over the last few years. Specifically, strong utilization and adoption by existing and new customers as we continue to increase our share of the over $3 billion global cosmetic surgery market. Importantly, the high end of our guidance range also assumes contributions from the initial commercial launches for new clinical indications in dermal and skin laxity categories based on our current target of receiving these FDA clearances by the end of the third quarter. While the 30% growth implied by the high end of our guidance range reflects a continuation of above market growth for our advanced energy business in 2022, the low end of our 2022 revenue outlook reflects potential impacts on new customer adoption and procedure related demand for hand pieces as a result of the recent FDA safety communication. Specifically, the low end of our 2022 total revenue outlook assumes our total revenue declines in the low single digits year over year the first half of 2022. The low single digit decrease in the total revenue is expected to be driven by high single digit decline in advanced energy revenue offset partially by OEM revenue growth of approximately 48% year over year. For the first quarter of 2022, we anticipate total revenue in the range of $10.5 to $12 million. This total revenue range represents growth of 22 to 39% year over year, driven by advanced energy growth in the range of 18 to 36% year over year, and OEM growth in the range of 53% to 63% year over year. Our Q1 growth expectations show that we are off to a strong start in 2022. In our advanced energy business, we have seen continuation of the strong momentum we experienced in the fourth quarter, despite the challenging operating environment related to Omicron. Meanwhile, our OEM business is benefiting from stronger demand from both Symmetry Surgical as well as other OEM customers. While it is not our typical practice to provide quarterly guidance, we thought it would be helpful to share additional color on our revenue expectations over the first half of 2022 as the underlying assumptions supporting the low end of our 2022 outlook reflect a pronounced decline in our growth trends in the second quarter. The decline in growth trends in Q2 is based on our moderated expectations for utilization-based demand for handpieces and new customer adoption as a result of the recent FDA safety communications. Importantly, we believe this represents a conservative near-term outlook. We are laser-focused on engaging with existing customers and continuing to leverage our strong portfolio of clinical validation, real-world evidence, and KOL support for our advanced energy products. As I mentioned earlier, our advanced energy products remain on the market, They continue to retain their existing FDA 510 clearances, and we intend to continue marketing and selling our products for their existing clinical indications. For the avoidance of doubt, we are confident in our ability to deliver the low end of our guidance range and set our guidance in a fashion in an effort to be approximately appropriately conservative during this admittedly challenging time for our business. We view any potential disruption from the FDA safety communication as transitory, and we will continue to evaluate the effects, if any, that the FDA safety communication will have on our business and results of our operations. we continue to believe the long-term outlook for Apex Medical remains compelling. Looking ahead, our team made considerable progress in recent years on the four strategic initiatives, and as a result, we are well positioned for long-term growth. With this in mind, in 2022, we are focused on the continued execution of our commercial strategy, including... raising the awareness and adoption of our innovative helium plasma technology, driving strong utilization from existing customers, and increasing our share of the more than $3 billion global cosmetic surgery market. In addition, we aim to capitalize on our multi-year regulatory initiatives by securing new U.S. regulatory clearances in 2022 and to further expand our annual addressable market opportunity. We remain actively engaged with the FDA to obtain 510 clearance for indications related to dermal resurfacing and skin laxity procedures. With respect to our focus on dermal resurfacing procedures, our 510 premarket notification intended to obtain a specific clinical indication for treating wrinkles and right tides remains under review by the FDA. Last month, we also announced the submission of an additional 510 to obtain a general indication for the dermal resurfacing procedure category, and we are continuing to engage with the FDA to facilitate their review process for both submissions. And lastly, our clinical and regulatory teams have made strong progress in preparing our 510 to obtain an indication for skin laxity procedures. These efforts have proceeded faster than anticipated, and we now expect to complete and file this submission at the end of March ahead of our prior plan. In conclusion, Our team is committed to increasing the global awareness, adoption, and utilization of our helium plasma technology in 2022 and beyond. We expect to leverage the multi-year progress we have made to deliver strong, sustained growth and drive towards profitability. I'd like to congratulate our entire team on the exciting progress we made in 2021 and and thank them for their dedicated efforts as we continue to revolutionize the way cosmetic surgery procedures are performed. I'd also like to thank our surgeon customers, distributors, and shareholders, along with everyone on today's call for their continued support of Apix 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 1 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 1. Our first question today is coming from Matt Hewitt from Craig Hallam. Your line is now live.

Good morning and congratulations on the strong finish to fiscal 21. And thank you for the incremental details regarding the safety communication. I guess on that front, Charlie, in your prepared remarks, you mentioned that you have reached out and spoken with many of your existing customers. And I'm curious, what are you hearing from them? What are they saying regarding this communication? And does that give you any sense on how things could pan out here over the very near term?

Yeah, thanks, Matt. Yeah, we've obviously as an organization are spending time appropriately reaching out and talking to all of our stakeholders, all of our customers about the safety communication. And obviously it was a surprise to them just like it was to us. And, you know, for the most part, the response has been very supportive, very dogmatic, and very much encouraging. very positive. But, you know, let's face it, anytime something like this happens, there's a natural reaction. And so fortunately, we have our users meeting here at the end of the month where we'll have 200 of our users together to talk about all of this. And right now the team is appropriately talking to and taking care of our existing customers. But the feedback so far has been very positive and very supportive.

That's great. And then I guess as a follow-up, regarding the 510K for dermal resurfacing, I guess to clarify, I think you said that you're anticipating approvals by the end of third quarter. At least that's what would get you to the upper end of your guidance range. So maybe some contribution from dermal resurfacing and skin tightening or skin laxity in the fourth quarter. Is that correct? So dermal resurfacing might take a couple quarters longer?

So we obviously don't know the timing and aren't in control of the timing. And so dermal resurfacing, since it's in, could potentially come earlier. But from a conservative point of view, we just put that both of them would come at the end of the third quarter. And just to make sure that everybody's clear, because sometimes we do confuse the two, we have two 510Ks that are currently in review for the FDA right now for dermal resurfacing. And at the end of this month, March, we will be submitting our data from our skin laxity from our IDE study for that indication. And so we just put as a placeholder in there for the end of the third quarter. That's correct for both of them.

Got it. Thank you very much.

Thank you. As a reminder, it's star one to be placed into question queue. Our next question is coming from Matt O'Brien from Piper Sandler. Your line is now live.

Morning. Thanks for taking the question. Charlie, you know, just to continue down this path on the communication, you know, what are the next kind of steps from here with the agency? And then how long do you think it's going to take to get through all of your users to communicate with them and make them feel comfortable with where things are at and then get on to, you know, getting the Salesforce back to selling into potential new users? Yeah. Yeah.

So the first thing is right now we're engaged with the agency on two different fronts, right? The post-market team is the team that put out the safety notification, and we have reached out to them that we want a meeting with them, and they have accepted that we were trying to work together right now to schedule a meeting date. So that is on the post-market side of things. On the pre-market side of things, we remain engaged with the FDA for our 510K submissions, both dermal submissions at this point, and then obviously at the end of this month, we will be submitting the skin laxity 510K, and so we will be engaged with the pre-market team on that. As far as how long is it going to take for our team to, you know, talk to all our users and get them comfortable and make sure that the people that have supported us all along and at the very beginning, the early adopters, are comfortable, we will actually take as much time as we need with them. They have been incredibly important to this company and we're very grateful to have them. And so, quite frankly, I am willing to take as much time as they need to get them comfortable, to get them, you know, to make sure that they're comfortable with our technology. And when that has happened, then we will continue on with our selling efforts and doing that. But appropriately right now, you know, we are doing exactly what the team is doing, exactly what they should be doing is making sure that everybody's comfortable with everything.

Okay, okay. And then, you know, I just wanted to talk a little bit about the sequential commentary from Q4 to Q1. I mean, Q4 was a monster in advanced energy. And then there's a pretty meaningful step down, which is implied in the guidance for advanced energy into Q1. I don't know if there was some pull forward in Q4 that you saw, maybe on the generator side, but, you know, it's a meaningful step down versus what you've seen over the last, you know, several years in advanced energy. Is there something else going on there, you know, I mean, outside of – The communication, which, you know, again, was just announced a few days ago.

Yeah, so remember, Q1 is always our lowest quarter of the year, and it's usually the lowest quarter of the year because of capital, and the fourth quarter is always the highest, and it's usually the highest because of capital. And so, you know, there's always a seasonality in this business for that. And so that is one of the reasons that you see that. But even if you look at our Q1 total growth, our Q1 total growth still for advanced energy and the guidance that we have is anywhere from 18% to 36% growth. So that growth rate is still there. It's just from a numbers point of view, Q1 is always a lower number.

Yeah, sorry, just to put a little bit finer point on it, you know, and I know with Omicron and COVID and everything, you know, numbers aren't the most pristine, but, you know, you're down about 35% sequentially in advanced energy this year. Last year, you were down about 23%. And I think in previous years, it's been flatter down a little bit. So, again, it's just a bigger, you know, step up in the sequential deceleration, if that makes any sense.

Yeah, well, I think the one thing that could help with that is the low end of our guidance represented the amount of business that we had as of yesterday. So it doesn't – the low end assumes that, and just in the interest of transparency. So that's why the low end is where it is.

Okay. Okay. Makes sense. Thank you. Thank you.

Thank you. Our next question today is coming from Russell Cleveland from REN Capital. Your line is now live.

Hello. Big question on the FDA. The procedure for removing this would be what? You know, the bureaucracy rarely changes things. So are we going to have a near-term meeting and request that they change that? Or what's our procedure here with the FDA?

So our procedure right now with the FDA is to, obviously, we've requested a meeting and to have that meeting. And, you know, we want to make sure that when they issued this warning that they had not even reviewed our data. So we want to make sure that they review the data, that they're comfortable with the data. What the agency does after that, I can't speak to because I don't know what they would or would not do. Our focus is having the meeting, making sure they review the data so they know exactly what's going on and they know how important patient safety is to us as an organization. So that's the goal of that meeting. And then the only other thing that we can control is the fact that we stay vigilant and engaged with the pre-market team in order to get our clearances. And so those are the two things that we control and what we're focused on right now.

Have you set a date with the FDA for a meeting?

We are working with them to get a date that both parties can meet. Yes, we're in discussions for a date, but there is not a date yet. Okay.

Well, our alternative is to go to court, or what's our alternative on this? This is really bizarre for the FDA to do this without more data, and it's a very, very bizarre process. That's what I would call it. So what's our, you know, what legal remedies do we have here?

So our focus is on getting our 510ks and working with the FDA. And I don't know that a legal battle with the FDA is in our best interest since we hope to be working with them for many, many years to come. And so, you know, We will take a look at everything, but I don't know that a legal battle is where we want to be focused on at this point in time.

Yeah, of course not. But they've done enormous damage and have to be responsible for this without having all the data and not meeting with the company about this. So it seems as though we need to take some kind of action here that's different because you just can't do something like this to help ruin the company's stock and everything without some kind of consequences. So I don't know whether the bureaucrats are not thinking or what, but it's very bizarre. And the FDA makes mistakes. And the question is, what can we do? And we're going to have a meeting with them, but after the meeting,

uh you know they rarely uh want to admit a mistake was made so what's our you know give me a little more color on how you see this thing being resolved yeah i i don't i don't know that i can give you any more color at this point in time because until we meet with them and talk to them um you know we we won't know what's uh what's going on and so for us it's it's It's a matter of just focusing on the meeting and focusing on our 510Ks right now, and we'll see what happens in the future.

Okay. Will you attend the meeting personally?

Of course.

Yeah. Okay. Thanks. We'll get past this. Everything does pass. Thanks so much for taking my question.

Thanks, Russ.

Thank you. Our next question today is coming from Dave Turkley from JMP Securities. Your line is now live.

Great. Thanks. Charlie, to your knowledge, do the, uh, the pre and post market teams at the FDA, do they communicate at all?

Um, I'm sure that they do, but there is pretty, there is a, um, you know, there is a pretty good dividing line between the two of them, but I'm sure that they, they, you know, that they do talk at some point. Sure.

So there's a chance when you meet with the post market folks, um, when you have that date and you have that live meeting, I'm assuming it's probably going to be live that, uh, Anything that comes out of that could impact the pre-market side? I mean, if they agree that the safety profile is good or no?

I don't think that that's necessarily the case. I think they look at things differently. And the fact that we have, you know, data to support our 510Ks obviously really helps too. Because remember, we did the IDE studies for both the dermal and for the skin laxity and And so the pre-market team has data to use from those studies to evaluate the safety and efficacy of Nubion for those procedures. And, you know, as far as the data for the dermal resurfacing, remember, because this is taking so long, we've actually published that data, and so everybody has access to that data.

Yeah, the timing is – it's been a while. I guess – you know, when you look at sort of precedent cases where a device was, you know, like a warning was issued like this, I mean, to your knowledge, are there any legal issues with, you know, either hospital administrators or somebody else reading that and saying, hey, do not use this, where they might make the decision and it may not go down to the customers, you know, the surgeons directly, or is that not even a concern?

Well, I think that the issue is every time that you go in for a procedure as a customer, you should be told what the risks are of the technology that you're using. And all of the things that are in the FDA warning are also in our labeling. So there's nothing in there that they said that isn't already in our labeling, and fact now that doctors actually know the incident rate of those of those events is more information than they had before. So quite frankly, when they're talking to a patient, you know, they're, they're always going over the risks of the procedure of the technology, but now they can actually give the patient the rate of occurrence of the 0.04% in 2021. and have the patient actually, in a lot of cases, make a more informed consent than they could have before when they didn't know what the data actually was. So in some cases, you know, they actually have more data to use and are able to have a better conversation with the patient for the patient to make a more informed consent choice of whether they would want to use or do something.

And I guess if I speak to the last one. Go ahead. No, go ahead. I was going to just say, so the specific language that they use, I'm just curious, so you mentioned the 32 MDRs, and we tried to look at a bunch of them, and, you know, it seemed like pretty standard stuff, but, you know, the FDA used language like life-threatening. I mean, of those 32, I think we found one that I guess could qualify as such, but do you have any, like, where do they come from with that, and do you have any numbers surrounding, you know, what you would consider to be life-threatening MDRs of the 32. I mean, I can't imagine a tie. I'm just curious if you – why did they use that?

Yeah, well, I think just to your point is that they found one where the patient was admitted to the ICU, and that was the one that you were looking at. And so, quite honestly, that is life-threatening. Now, in that specific case, it was determined that Renuvion was not the cause of that. But remember, we only have 30 days to do all the investigation from the time that the incident starts to file an MDR. So there are times that we will file an MDR before we know exactly if it was Renuvion or not. In this specific case, it wasn't. And when we talked to the FDA... and give them the details we will talk to them about that but but that is if you know that there was one you are correct um that was the one out of 32. remember too as i just said in the transcript today 14 of the 32 had not been trained by our nursing staff yet on the safe and effective use guidelines and so quite frankly if you take those 14 out of the 32 Now our incident rate is 0.02%. And so now you're starting to get down to, I mean, even 0.04 is incredibly safe. 0.02 is amazing. And so we were very much surprised by this because this has been a major focus for us as an organization in the safety. And over the five years, you have seen our rates of MDRs decline significantly. And the reason that our rates of MDRs have been declining so much is because of the wonderful work that our clinical nurses have been doing all over the world, teaching the safe and effective use guidelines that were developed by our wonderful medical advisory board. So this, you know, this was a surprise to us because it's a focus of us too. And it's something that, you know, we are laser focused on and always trying to improve. And You know, all this does is give us a chance to now tell everybody again all the things that we're doing, showing them all the things that we're doing, and we will deal with the agency, you know, separately. The important thing right now for our customers is that we're making sure that they're comfortable and making sure that they understand exactly the risks when using our technology on their patients.

Thank you very much.

Our next question is a follow-up from Matt Hewitt from Craig Callum. Your line is now live.

Thank you. I just wanted to circle back on gross margins quickly. So the guidance for this year, 62% to 67% down year on year. I'm curious, how much of that is a function of inflationary pressures versus Maybe a little bit of a shift between U.S. versus OUS for the advanced energy products, and then obviously you've got some OEM contribution or impact there as well. But maybe if you could help us understand where the impact is really coming from. Thank you.

Well, I would say, you know, first and foremost, you know, it is driven by the inflation, you know, the inflationary environment that we're seeing along with, you know, all manufacturers. We're not quantifying that specifically. But between that and the fact that we're winding down our core manufacturing products to symmetry, on the high end, that's about 200 basis points. And then on the low end, yeah, it is definitely mixed with AE revenue and then mixed of product within advanced energy.

Got it. All right. Thank you.

Thank you. We're currently showing no remaining questions at this time. That does conclude our conference for today. Thank you for your participation.