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.