Apyx Medical Corporation

Welcome, ladies and gentlemen, to the second quarter of 2022 earnings conference 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 the current expectations of management and involve inherent risks and uncertainties that could cause actual results that differ materially from those indicated, including, without limitation, those identified in the risk factors section of our most recent annual report on Form 10-K, 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. 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. Welcome, everyone, to our second 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 second quarter revenue results and the drivers of our performance. Then I'll provide you with an update on operational progress and related highlights during the second quarter. Tara will discuss our second quarter financial results in detail and review our financial guidance for 2022 which we updated in our earnings press release today. I'll then discuss our updated outlook and focus areas for the second half of 2022 before we open the call for Q&A. With that, let's begin with a review of our quarterly revenue results. In the second quarter, total revenue decreased 8% year over year to $10.3 million and came in near the low end of our 10 to $12 million range of expectations that we shared on our Q2 earnings call. The decrease in our total revenue was driven by advanced energy sales, which decreased 16% year over year to $8.4 million. The performance in our advanced energy business was offset partially by OEM sales which increased 55% year over year to $1.9 million. Within our advanced energy business, as we had anticipated, our performance during the second quarter continued to be challenged by the medical safety device communication, which was posted on the FDA website on March 14th. The business disruption that resulted from this communication impacted sales of our advanced energy products globally over the course of Q2. Let me take a minute to unpack these dynamics in greater detail. From a geographic perspective, the year-over-year decrease in advanced energy sales was almost exclusively driven by our performance outside of the United States. International sales of our advanced energy products were more impacted than we had anticipated, and we experienced a significant slowdown in ordering and overall demand from OUS distributors due to the safety communication. Specifically, we saw weaker demand for both advanced energy generators and hand pieces from our distributors in select countries. most notably in Latin America. As a result, international sales of generators and handpieces decreased more than 45% and 30% year over year, respectively. From a timing perspective, our international sales performance was most affected in the last two months of the quarter. This aligns with the feedback we received from our distributors indicating that the impact of the safety communication was more delayed internationally as compared to the U.S. In the U.S., we were pleased by the performance of our advanced energy business during the quarter, which exceeded our expectations. As anticipated, we continue to experience slower sales of our advanced energy products in the U.S., most notably generator sales to new customers. However, I'm pleased to report that we saw material improvement in our US business trends during each month of the quarter. As a result, second quarter sales for our advanced energy products in the US decreased in the low single digits on a year-over-year basis. During the second quarter, our direct sales team and clinical support specialists continue to do an excellent job of engaging with our existing surgeon customers to address the safety communication, answer their questions, and provide information about the safety profile of our products. Since the communication was posted, our focus as an organization has been to spend as much time with our existing customers as needed to ensure they are comfortable with the appropriate use of our products and understand their risk profile. As I mentioned on our earnings call in May, we estimate to have connected directly with all of our existing U.S. customers to discuss the safety, communication, and share related resources, 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 event rates of our advanced energy products with other medical devices that our customers may be familiar with. I am extremely proud of the way Apix Medical has responded to this development. The feedback we have received from the US customers has underlying for us their appreciation of our direct, proactive approach to communication and willingness to provide any needed support. We also continue to appreciate our customers' passion for our helium plasma technology and their strong support for it during this challenging period. Internationally, Given that we do not sell directly to surgeons, our focus has been on proactively engaging with and supporting our distributive partners in the same manner. All of the resources used to inform our U.S. customers have been made available to our distributors and in many cases translated to support their interactions with their surgeon customers. In addition, we have also hosted multiple webinars for our distributors to educate them on the safety communication and its implications and keep them updated on our related interactions with the FDA and progress in securing additional 510 clearances for the use of our advanced energy products. Shifting to a discussion of our operational highlights during the quarter. In addition to our customer engagement efforts, we continue to make strong progress during the second quarter in engaging with the FDA, following the safety communication, and addressing their areas of focus. As a reminder, in late March, we requested and held a meeting with the FDA's post-market team to present a detailed analysis of our medical device report data, clarify the reported adverse events, and provide important related context. Following this meeting, we received feedback from the FDA on April 1st with requested revisions, including changes to certain messaging on our website, labeling, and training. Our team worked quickly to incorporate the FDA's requested revisions and submit our response to the agency. In addition to these efforts, our regulatory team also made strong progress in securing specific clinical indications related to the use of our advanced energy products in target procedures. During the second quarter, they continued to engage with the FDA during our 510 pre-market notification to obtain a specific clinical indication for the use in dermal resurfacing procedures. After several interactions with the agency in April and early May, we were pleased to announce 510 clearance for this specific clinical indication on May 26. Our new Renuvion Dermal Handpiece is now indicated for dermatological procedures for the treatment of moderate to severe wrinkles and rye tides limited to patients with Fitzpatrick skin types 1, 2, or 3. We are preparing for full commercial launch of Renuvion Facial Renewal, which we continue to target to begin by the end of 2022. We are now able to market and sell our Renuvion facial renewal to surgeons and potential patients for use in the 200,000 wrinkle reduction procedures in the broader dermal resurfacing market, which we estimate are performed in the U.S. each year. We were also pleased to see the FDA update their safety communication on June 2nd to recognize this new 510 clearance. Together with the data from our related IDE clinical study, the 510 clearance and the updated safety communication represent important validation for the safety and effectiveness of our Renuvion technology. In addition to these efforts, we continue to advance the second objective of our multi-year regulatory strategy, securing an indication for the use of Renuvion in procedures to improve the appearance of lax skin. Our regulatory team submitted our 510 premarket notification for this indication at the beginning of April. As a reminder, this request was supported by the results of a related IDE clinical study which included 65 patients treated at multiple centers. We were pleased to announce the results of the final phase of this study on July 8th, which demonstrated Renuvion's strong safety profile and effectiveness in these procedures. Most notably, both the primary effectiveness and safety endpoints of the study were met. 82.5% of subjects demonstrated improvement in the appearance of lax skin in the neck and submental region at six months post procedure. And 96.9% of subjects experienced no pain to moderate pain in the seven days post-op procedure. The efforts of our regulatory team during the second quarter culminated in our receipt of 510 clearance, which we announced on July 18th. Our Renuvion APR handpiece is now indicated for use in subcutaneous dermatological and aesthetics procedures to improve the appearance of lax or loose skin in the neck and submental region. This 510 clearance was followed shortly by another update by the FDA to their safety communication. Obtaining this clearance further expands our addressable market to include another 200,000 neck contouring procedures performed in the U.S. annually. We continue to expect to begin full commercial launch of our lax skin indication by the end of 2022. Stepping back, as we progress through the remaining months of 2022, we believe that our two new 510 clearances, along with the resulting updates to the FDA's safety communication, will help to mitigate the recent business disruption that we have seen. Given these recent developments, and our proactive engagement with both customers and the FDA, we continue to believe that this disruption related to the FDA safety communication will be transitory. Longer term, these clearances provide us with the expanded addressable market and the enhanced ability to market our products that we have been seeking since we first began to focus on the cosmetic surgery market. Securing these two 510 clearances for Renuvion represents the culmination of many years of focus and dedication from our team towards one of the key strategic initiatives for Apex Medical that we have discussed on each of our earnings calls. A special thanks to our regulatory and clinical teams along with everyone who supported these initiatives for helping Apix Medical to achieve the primary aims of our regulatory strategy through many years of hard work. Let me now turn it over to Tara to review our quarterly financial results and 2022 guidance. Tara?

Thanks, Charlie. I will start my review of our second quarter financial results at the gross profit line since Charlie already discussed our revenue results. Gross profit for the second quarter of 2022 decreased $0.6 million or 8% year over year to $6.9 million. Gross profit margin was 67.2% compared to 67.1% in the prior year period. The slight increase in our gross margin was driven primarily by geographic mix within our advanced energy segment with domestic sales comprising a higher percentage of total sales and by the increased mix of newer product models like our APR handpiece as we obtain registration and introduce them into the various countries we serve. These benefits to our gross margin performance were partially offset by changes in the sales mix between our two segments with our OEM segment comprising a higher percentage of total sales and by higher costs to manufacture inventory as we continued to experience increased shipping costs. Operating expenses increased $1.3 million, or 11% year-over-year, to $12.9 million. The increase in operating expenses year-over-year was driven by an increase in salaries and related costs of $.5 million, which was primarily due to higher compensation and benefits and stock compensation expense. an increase in professional services of $0.5 million, which was primarily due to higher legal fees, and an increase in selling, general, and administrative expenses of 0.3 million, which was primarily due to the return of in-person internal training events and trade shows in 2022. Lost from operations for the second quarter of 2022 increased 1.9 million, or 48% year-over-year, to $6 million. Total other income net was $0.6 million compared to $0.1 million last year. The year-over-year increase was driven by a $650,000 benefit from the relief of a portion of our joint and several payroll liability due to the lapse of the statute of limitations on that liability. Income tax expense was $0.1 million consistent with the prior year period. Net loss attributable to stockholders was $5.4 million or 16 cents per share compared to $4 million or 12 cents per share for the second quarter of 2021. Adjusted EBITDA loss for the second quarter of 2022 was $3.4 million compared to adjusted EBITDA loss of $2.4 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 June 30th, 2022, the company had cash and cash equivalents of $20.1 million compared to $30.9 million as of December 31st, 2021. Cash flow from operations for the first six months of 2022 was $10.4 million compared to $7.1 million last year. The increase in use of cash from operations is attributable to our strategic initiative to increase our inventory to ensure we are able to meet customer demand in light of the challenging global supply chain environment. We anticipate working capital use of cash to improve in the second half of 2022 compared to the first half of 2022. Turning to a review of our 2022 financial guidance, which we updated in our earnings press release today, for the 12 months ending December 31st, 2022, we expect total revenue in the range of $51 to $56.4 million, representing growth of 5 to 16% year-over-year. This compares to our prior range of $52.5 to $59 million, or growth of 8 to 22% year-over-year. Our total revenue guidance range assumes advanced energy revenue growth of 4 to 15% year-over-year to $44.5 to $49.4 million compared to our prior range of $46 to $52 million or growth of 7 to 21% 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 negative impacts on global new customer adoption and procedure-related demand for handpieces as a result of the FDA medical device safety communication on March 14, 2022. Second, our guidance range continues to assume contributions from the initial commercial launches for new specific clinical indications in dermal resurfacing procedures and procedures to improve the appearance of lax skin. We continue to expect to enter full commercial launch for both of these indications by year end 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 $20.1 to $16.6 million compared to our prior range of $19 to $14.7 million. An adjusted EBITDA loss in the range of $11.8 to $8.2 million compared to our prior range of $10.1 to $6.4 million. Our formal financial guidance for 2022 incorporates the following considerations for modeling purposes. First, gross margins of approximately 67% to 69% this year compared to our prior expectation of approximately 66% to 68% and 69% in fiscal year 2021. The year-over-year change in gross margin is driven primarily by revenue mix shifts between our advanced energy and OEM segments and product and geographic mix within our advanced energy segments. 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 14 to 16% year-over-year consistent with our prior guidance assumptions. Third, Net interest and other income of approximately $650,000 in 2022. Fourth, income tax expense of approximately $300,000 to $500,000. And lastly, we expect non-cash depreciation and amortization of approximately $1 million. Non-cash stock-based compensation expense of approximately $7 million. Non-controlling interest of approximately $114,000. compared to our prior expectation of approximately 150,000, and weighted average diluted shares outstanding of approximately 34.6 million shares. Lastly, for the third quarter of 2022, we anticipate total revenue in the range of 10.6 to $13.4 million. In our OEM business, we expect growth of approximately 7% year over year at the midpoint, and in our advanced energy business, We expect approximately 1% growth at the midpoint, although our guidance assumes a wide range from a year-over-year decline of approximately 12% to growth of 13% year-over-year. With that, I'll turn the call back to Charlie for closing remarks.