Apyx Medical Corporation

Hello and welcome, ladies and gentlemen, to the first quarter of 2022 earnings call for Apex 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 can cause actual results to differ materially from those indicated, including, without limitation, those identified in the risk factor section of our recent annual report form. 10-K filed with Securities and Exchange Commission on 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. We generally refer to these non-GAAP financial measures. Reconciliation 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. Welcome, everyone, to our first quarter earnings call. I'm joined on today's call by our Chief Financial Officer, Tara Sem. Turning to a quick agenda of what we intend to cover today, I'll begin by discussing our first quarter revenue results and the drivers of our performance. I'll then provide you with an update on the recent developments following the FDA safety communication that was posted in mid-March. I'll briefly review some of the recent operational highlights, including an update on the status of each of our 510 submissions. Tara will discuss first quarter financial results in detail and review our financial guidance for 2022 which we updated in our earnings press release today. After Tara's commentary, I'll share some thoughts on our outlook and focus areas for the remaining months of 2022 before we open the call for Q&A. Starting with a review of our first quarter revenue results, total revenue increased 45% year over year to $12.5 million exceeding the expectations of 10.5 million to 12 million, which we shared in our Q4 earnings call. Our total revenue growth was primarily driven by advanced energy sales, which increased 41% year-over-year to 10.8 million. OEM sales contributed to our growth as well, increasing 72% year-over-year to 1.7 million. Within our advanced energy business, strong global handpiece demand was by far the largest contributor to our year-over-year growth in Q1, with handpiece sales increasing by more than 80% year-over-year. We were also pleased to see that handpiece sales growth was driven by strong sales in both US and international customers. As a reminder, our handpiece sales growth is an important indicator of the utilization that we are seeing from our existing surgeon customers, reflecting the underlying demand for our helium plasma technology. With respect to our advanced energy generator sales, our performance during the first quarter was more modest. Generator sales increased 2% year over year, with strong growth in sales to our international customers moderated by year-over-year decline in sales to US-based surgeon customers. As we had anticipated, sales of our advanced energy generators to new customers, particularly in the US, were significantly challenged by the disruption following the safety communication posted to the FDA website on March 14th. The FDA safety communication warned against the use of our advanced energy devices for specific 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, our advanced energy products remain on the market with their existing FDA 510 clearances, and we continue to market and sell them for their existing clinical indications while advancing our regulatory strategy to pursue clearance for new specific indications related to our target procedures. With that context as a backdrop, let me take a minute to review the recent developments related to the FDA safety communication and provide you with an update on our progress since our Q4 earnings call. Remember, as required by FDA regulation, we routinely submit to FDA medical device reports or MDRs for serious adverse events reported to APEX. We submit MDRs when we receive an adverse event report that reasonably suggests that one of our devices may have caused or contributed to a serious injury. We submit an MDR even if the event may have been caused by user error or if another device was also identified as a possible cause in the report. As we discussed on our fourth quarter earnings call in March, we believe that the FDA's decision to post this safety communication was due in part to the increase in the absolute number of MDRs for our advanced energy products in 2021 compared to 2020. with 32 MDRs involving the use of our advanced energy products for subdermal coagulation in 2021 compared to 15 in 2020. Our products have been used for subdermal coagulation in over 150,000 procedures globally since 2017, which represents an MDR rate of 0.06%. In 2021, this rate declined, representing approximately 0.04% of global procedures. In addition, our investigation of the 32 MDRs reported for subdermal coagulation in 2021 showed that the events were either not attributable to our advanced energy device or were within the scope of the existing clinical risks included in our product labeling. Importantly, 14 of these 32 MDRs were performed by physicians that had not yet been trained by our global clinical team of skilled nursing staff. In February, we provided the FDA's post-market team with data related to our adverse events, MDRs, promotional items, and training for our advanced energy products. In our communication with the FDA on March 11th, when we were notified about the intention to post the safety communication, it was our understanding that the FDA post-market team had not completed their review of this data. Following the FDA's safety communication, we requested a meeting with the FDA's post-market team to discuss the safety communication and our MDR data. I'm pleased to report that this meeting was held on March 29. During the meeting, our regulatory and clinical team presented a detailed analysis of our MDR data to clarify the reported adverse events and provide important context. On April 1, we received feedback from the FDA with requested revisions including changes to certain messaging on our website, labeling, and training materials. The requested revisions reaffirmed our belief that the FDA is focused on the use by surgeons of our advanced energy products outside the general indications for use for which they are currently cleared. Surgeons may lawfully do so, but the FDA has requested stronger statements in our labeling to warn of any specific procedure intended to improve the appearance of skin, which has not yet been reviewed or cleared by the agency. The FDA also asked us to remove instances of language or imagery that might imply intended use outside of the cleared general indications. We submitted our response to the FDA and have incorporated the requested revisions. Apix Medical remains committed to product safety, patient safety, surgeon education and training, and customer support. We support the agency's focus on ensuring that clinicians and their patients understand the safe and proper use of our products for their current clinical indications for use. In addition to our engagement with the FDA's post-market team, we have remained focused on securing 510 clearances for new specific clinical indications, enabling us to market and sell our advanced energy products for use in target procedures. Let me take a minute to provide you with a brief update on these efforts. Beginning with our strategies to obtain two 510 clearances to market and sell Renuvion for the use in dermal resurfacing procedures. As a reminder, we submitted our first 510 submission to obtain a specific clinical indication for treating wrinkles and rheotides in 2021. The submission is supported by safety and efficacy data from our US IDE clinical study evaluating our helium plasma technology for dermal resurfacing procedures. I would encourage you all to review the results of this study, which were published in a peer-reviewed article in the journal Lasers in Surgery and Medicine in February. After submitting this 510 in 2021, we have continued to engage with the agency to address their questions and provide any additional data during their review of our submission. Most recently, in late April, we received feedback from the FDA on our 510 submission and had a call with the FDA premarket review team to discuss this feedback, which included proposed modifications to the treatment protocol, as well as a request for information related to the usability testing of our device. We submitted our response to the FDA in early May, accepting their proposed modifications and providing the requested usability information. Turning to our second 510 submission for dermal resurfacing, on February 17th, we announced a new 510 submission which is intended to obtain a general indication for dermal resurfacing procedures. In April, we received a response from the FDA and we're working to address their questions as part of the standard 510 review process. Lastly, our clinical and regulatory teams made strong progress during the quarter in preparing our 510 to obtain an indication to market and sell our Renuvion APR handpiece for the use to improve the appearance of lax or loose skin in the neck and submental region. These efforts proceeded faster than anticipated and we were pleased to announce the submission of this 510 on April 4th. This 510 submission is supported by safety and effectiveness data from our US IDE clinical study evaluating the use of Renuvion technology in the neck and submental region to improve the appearance of lax or loose skin. We look forward to receiving a response from the FDA within their stated goal for all 510 submissions of the first 60 days post submission. I would like to thank our regulatory and clinical teams as well as our advisors, investigators, and study participants for helping us to make this progress possible. We look forward to continuing engagement with the FDA in order to facilitate their review of these three 510 submissions. Before I turn the call over to Tara, I would like to provide a more extensive update on our team's efforts to engage with our existing customers following the FDA safety communication. Our team has been focused on proactively engaging with our US surgeon customers and distributor partners outside the US to address the safety communication, answer related questions, and provide information about the safety profile of our products. We sent a letter to our entire US customer base and reached out proactively to our customers and international distributors, either over the phone or via email. We estimate our team has spoken with all of our existing US customers and international distributors. Our team has been focused on spending as much time with our customers as needed to have their questions answered. To this end, we also created and shared additional resources with our customers and distributors, including a letter from our medical advisory board, an overview of the post-market safety profile of our technology, and a summary comparing the adverse events rates of our advanced energy products with other medical devices that our customers may be familiar with. I am very proud of our organization for the direct way that they have handled this communication, which is consistent with our focus on supporting our customers, making sure they are comfortable with the appropriate use of our products and their understanding of the product's risk profile. We have also been pleased with the strong support we have received from many of our customers and their passion for our Helium Plasma technology. Lastly, in late March, we held our second annual users meeting, which provided another timely opportunity for engaging with our customers. As a reminder, our users' meetings are designed to provide an environment for our surgeon customers to learn from each other by first sharing their experience, advice, and techniques. This was our first year having the event in person, and the agenda featured two days of programming where over 200 physicians came together to exchange scientific information on their clinical experiences with Renuvion. Stepping back, while we continue to carefully evaluate the effects of the FDA safety communication on our business, we continue to believe that disruption related to the FDA safety communication will be transitory and that our long-term outlook remains compelling. Let me now turn it over to Tara to review our first quarter financial results and our 2022 guidance. Tara?

Thanks, Charlie. Since Charlie covered our revenue results, I will begin at the gross profit line. Gross profit for the first quarter of 2022 increased $2.4 million or 40% year over year to 8.2 million. Gross profit margin was 66% compared to 68% in the prior year period. The decrease in gross margin in Q1 was driven by sales mix between segments, product and geographic mix within our advanced energy segment, and higher cost to manufacture inventory as we continue to experience increased shipping costs. The year-over-year decrease in gross margin this quarter was partially offset by the mix of newer product models as we obtain registration and introduce these products into the various markets that we serve. Operating expenses increased $3.5 million or 33% year-over-year to $14.1 million. The increase in operating expense year over year was driven by a $1.7 million increase in selling, general, and administrative expenses, a $.9 million increase in salaries and related costs, and a $.8 million increase in professional services expenses. The increase in selling, general, and administrative expense and professional services was primarily driven by the return of in-person internal training events and trade shows as well as our in-person users meeting in 2022. Loss from operations for the first quarter of 2022 increased $1.1 million or 24% year over year to $5.9 million. Total other loss net was $27,000 compared to $0.1 million last year. Income tax expense was $0.1 million consistent with the first quarter of 2021. Net loss attributable to stockholders was $5.9 million or 17 cents per share compared to $4.9 million or 14 cents per share for the first quarter of 2021. Adjusted EBITDA loss for the first quarter of 2022 was $4 million compared to adjusted EBITDA loss of $3.4 million in the prior year period. As a reminder, we provided a detailed reconciliation from net loss attributable to stockholders to non-GAAP adjusted EBITDA loss in our earnings press release. As of March 31st, 2022, the company had cash and cash equivalents of $26.2 million compared to $30.9 million as of December 31st, 2021. Turning to a review of our 2022 financial guidance, which we updated in our earnings press release today, For the 12 months ending December 31, 2022, we expect total revenue in the range of $52.5 million to $59 million, representing growth of 8% to 22% year-over-year. This compares to our prior range of $50 million to $63 million, or growth of 3% to 30% year-over-year. Our total revenue guidance range assumes Advanced energy revenue growth of 7 to 21% year-over-year to $46 million to $52 million compared to our prior range of $43.5 million to $56 million or growth of 1% to 30% year-over-year. And OEM revenue growth of approximately 18 to 27% year-over-year to approximately $6.5 to $7 million unchanged compared to our prior guidance range. With respect to our advanced energy revenue guidance, first, our guidance range reflects potential impacts in the US on new customer adoption and on procedure-related demand for handpieces as a result of the FDA safety communication. Second, our guidance range continues to assume contributions from the initial commercial launches for new specific clinical indications in dermal resurfacing and skin laxity procedures based on our target of receiving these FDA clearances by the end of the third quarter of 2022. And third, our guidance range continues to assume that growth outside the US is driven by demand in existing international markets. In terms of our profitability guidance for fiscal year 2022, we expect net loss attributable to stockholders in the range of $19 to $14.7 million. compared to our prior range of $21.1 to $12.1 million, and adjusted EBITDA loss in the range of $10.1 million to $6.4 million, compared to our prior range of $12.3 to $3 million. Our formal guidance for 2022 incorporates the following considerations for modeling purposes. First, gross margins of approximately 66% to 68% this year compared to our prior expectation of approximately 62 to 67%, driven primarily by revenue mix shifts between our advanced energy and OEM segments, and product and geographic mix within our advanced energy segment, inflationary headwinds in our cost of goods 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. Second, operating expenses to increase in the range of 12 to 14% year over year compared to our prior expectation of 9 to 14%. Third, net interest and other income of approximately $600,000 in 2022. Fourth, income tax expense of approximately $600,000. And lastly, we expect non-cash depreciation and amortization of approximately $1.2 million, non-cash stock-based compensation expense of approximately $7 million, non-controlling interest of approximately $150,000 compared to our prior expectation of approximately $212,000, and weighted average diluted shares outstanding of approximately 34.6 million shares. Lastly, For the second quarter of 2022, we anticipate total revenue in the range of 10 to $11.9 million. This total revenue range represents a decline of 11% to growth of 6% year over year. In our advanced energy business, we expect a decline of 17% to growth of 1% year over year, and we expect OEM growth in the range of 39 to 49% year over year. With that, I'll turn the call back to Charlie for closing remarks.

Thanks, Tara. Despite the significant challenge we have faced in recent months, we are pleased by our performance and the impressive engagement and support we have seen from our fellow APEX employees, as well as our distributors and customers. Our stated expectations for our advanced energy sales performance in the second quarter reflect our improved outlook for this business in the near term. We have updated our outlook for total revenue in fiscal 2022 based on our better than expected results in the first quarter and our growth expectations for the second quarter and second half of 2022. We continue to believe that the advanced energy handpiece revenue will represent the largest driver of our total advanced energy revenue growth again in 2022 given the strong utilization-based demand we expect for our Renuvion handpieces. 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 cleared clinical indications. We believe that the disruption related to the FDA safety communication will be transitory and that the long-term growth for Apix Medical remains compelling. With this in mind, our team remains focused on engaging with existing customers to facilitate utilization, raising the awareness and adoption of our innovative helium plasma technology, and securing new specific 510 clearances to further expand our annual addressable market opportunity. We believe that our continued execution on these strategic initiatives will position Apix Medical to achieve strong, sustained growth and progress towards profitability. I'd like to thank our employees, surgeon customers, distributors, and shareholders along with everyone on today's call for their continued support of Apix Medical. With that, operator, let's open the call for questions.

Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are 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 question. If you would like to ask additional questions, we invite you to add yourself to the queue again by pressing star 1. And our first question will come from Matt Hewitt with Craig Hallam Capital Group. Please proceed.

Good morning and thank you for the detailed update and for taking our questions. My first question is with the conversations that you've had with your installed base, with your user surgeons, I'm just curious what you're hearing from them from a procedure volume standpoint. Has this impacted or maybe what types of questions are they getting from patients? What types of questions are they asking you regarding that safety communication? Any additional color will be helpful. Thank you.

Yeah, thanks, Matt. First, I want to say that our sales team has done a great job in engaging with customers to address the FDA safety communication and answer all their questions, and I'm very, very happy with the job that they have done. As I mentioned in the call, they have spoken with all of our US customers and international distributors, and we're spending as much time with these customers to answer all of their questions and to make sure that they've got what they need. We've also been very pleased with the level of support that we're seeing from the majority of our customers, which really speaks to their belief in our technology and the technology safety profile. And this has obviously been a significant challenge, but we believe we're managing and supporting our customers as effectively as possible. And the response from the customers as a whole as to their utilization and continued support of the technology has has been remarkable and been great.

Thank you for that. And then maybe shifting gears with this question a little bit for Tara, on the supply chain side, are you seeing any impact there on the ability to obtain handpieces or whatnot? And I guess another component of that is the inflationary pressures you mentioned. You are seeing some of that particularly on the shipping side. Are you able to pass those through to the customer, or are you taking a little bit ahead on that? Thank you.

Yeah, I mean, I think that, you know, the team does a great job in managing the flow of components for our products. You know, we have faced challenges like every company with availability mostly of chips, but the team has continued to work on securing those. As you saw, we had purchase commitments at the end of the quarter. In our queue, we reported $7.5 million. So we do have purchase commitments out for the year for those components. As far as inflation, I mean, we've really seen so far that the bulk of it has been related to the shipping costs and not seen too much related to the components. But obviously, as those, you know, that environment continues to go up as far as inflation, you know, we could see that further on in the year. but so far has not had a material impact.

Got it. All right, thank you.

As a reminder, it is star one on your telephone keypad. If you would like to have a question, we will pause for a brief moment to see if there's any final questions. and we do have a follow-up from that.

Keep going then. I think, Tara, you mentioned that your guidance does contain potential for approvals starting in Q3, if I heard you correctly. How should we be thinking about that guidance or the contribution from those future approvals as we look at the back half of the year? Does that If you remove that, would you still hit the lower end of your range? Any color there would be helpful.

Yeah, we're not going to break out the contribution specifically to the 2022 sales, but we would expect it would be relatively modest because, again, we're anticipating assuming clearances by the end of the third quarter.

Got it. All right, thank you. Maybe one last one here, kind of going back to all of the, sounds like a great job getting to all of your customers, particularly here in the U.S. I guess there's two part questions. One, is there an incremental cost that we should be thinking about to kind of not only get to those, but actually having those conversations and sending out the letters, dealing with all of that, that may be hit here in Q2? that could potentially fall off Q3 and beyond. And then secondly, how is your sales team managing? They've got the calls to make to existing holders or users to make sure that they're comfortable with the communication from the FDA, but then they're also needing to be out actually selling the device. I'm just curious how that process is going. Thank you.

Yeah, to answer your first question, I don't know that there's really anything specific other than the drivers of the cost that Tara had already talked about in the quarter, like having the users meeting in person and having more in-person events compared to the last quarter, or compared to the prior year's quarter. So that's really the big driver in increased expenses there, and that's already there. As far as a time perspective from our sales organization, it does remain challenging, and especially in the back half of March when this first happened, because during that time our focus was on our existing customers and making sure that they were comfortable and had everything that they need. As we've gotten farther away from that safety communication, obviously, and got people comfortable, it has obviously allowed more time for the reps to go out and talk to new prospects and new customers. But we will always prioritize our existing customers first and make sure that they're comfortable and have everything that they need, and then obviously go seek potential new targets.

Understood. Great. Thank you.

Yep.

We are currently not showing any more questions at this time. That does conclude our conference for today. Thank you for your participation.