Apyx Medical Corporation

Please stand by. Hello and welcome, ladies and gentlemen, to the third quarter of 2022 earnings conference call for Apex Medical Corporation. At this time, all participants have been placed in 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 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, to 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 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, 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.

Thank you, operator. Welcome, everyone, to our third 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 start by reviewing our third quarter revenue results and the factors that contributed to our performance. Then I'll provide you with an update of our operational progress during the third quarter and in recent months. Tara will then discuss our third quarter financial results in detail, as well as our financial guidance for 2022, which we updated in today's earnings release. I'll conclude with some thoughts on our updated guidance and key areas of focus in the fourth quarter before we open the call for Q&A. Let's get started with a review of our revenue results for Q3. Our total revenue in the third quarter decreased 23% year-over-year to $9.1 million. These results were approximately $1.5 million below the low end of the range of our expectations that we provided on our second quarter earnings call in August. Our softer than anticipated total revenue performance was driven by advanced energy sales, which decreased 31% year over year to $7.1 million, and offset partially by OEM sales, which increased 34% year over year to $2 million. Turning to a more detailed discussion of our performance in our advanced energy business. While it is worth noting that our advanced energy sales results were impacted in part by timing of orders late in the quarter, our softer than anticipated global sales performance in Q3 was largely related to the medical device safety communication posted by the FDA in March. We continue to experience business disruption as a result of the safety communication which impacted global sales of our advanced energy products. This disruption ultimately proved to be more pronounced and prolonged than we had anticipated, both internationally and domestically. In terms of our monthly sales trends in the third quarter, Our global advanced energy sales performance in July saw the largest impact during the quarter. As we continue to experience pronounced headwinds with international and domestic customers not moving forward with the adoption of our technology. Our third quarter expectations had assumed improving adoption trends in August and September following the receipt of two new 510 clearances for our advanced energy products, which we announced on May 26th and July 18th, as well as the corresponding updates to the safety communication on June 2nd and July 21st. We were pleased to see improving trends in the US during August and September. However, the pace and magnitude of these improvements were ultimately lower than we had anticipated. Looking at our advanced energy performance by geographic region in more detail, third quarter sales of our advanced energy products in the U.S. decreased by more than 20% year over year. The year over year decrease in U.S. advanced energy sales was primarily driven by weakness we saw during the month of July. Relative to July, we were pleased to see improved year-over-year performance in both August and September, although as I mentioned, our improved performance remained below the levels that we had anticipated. Outside of the U.S., we experienced slower ordering throughout the quarter in each of our primary markets due to the safety communication. These declines continue to be driven primarily by weaker demand for both generators and hand pieces from distributors in key countries, most notably Latin America and Europe. In the Asia Pacific region, we also experienced lower demand in our largest market, Taiwan, which was driven in part by COVID-related lockdowns. As a result, International sales of our generators and handpieces both decreased by more than 40% year over year. Shifting to a discussion of our operational performance and recent progress. During the quarter, our team was focused on two primary priorities. First, engaging with our new and existing U.S. customers and OUS distributors to provide them with the latest information on important updates related to the safety communication, our two new clearances, and the safety and efficacy profile of our products. And second, continuing to advance our regulatory strategy to secure additional 510 clearances related to the use of our Renuvion technology in cosmetic surgery procedures. With respect to our first priority, we have remained focused on spending as much time as needed with our existing customers and distributors, as well as new prospects, to ensure that they are comfortable with the appropriate use of our products and understand their risk profile. After receiving two new 510 clearances, we updated our portfolio of marketing materials to reflect the incremental specific clinical indications. Our sales team has been focused on sharing these materials and working with our current users and prospects so that they understand our new specific clinical indications as well as the recent updates to the safety communication and how the communication remains focused on the use of Renuvion under our general indication for cutting, coagulation, and ablation of soft tissue. Ultimately, this process is taking time, but we are encouraged by the increasing effectiveness of our sales force in recent weeks as they engage with customers and prospects to address their questions, eliminate potential confusion related to the safety communication. In our international business, we have remained focused on providing our distributor partners with the support and materials needed to engage with and educate their surgeon customers in the same way. Specifically in the third quarter, we have been focused on engaging with our distributors in the many countries where our technology is used to explain our recent US clearances and share our updated portfolio of marketing materials. As a reminder, the process of engaging with, educating, and updating surgeons outside of the United States has been more prolonged as we do not engage directly with the clinicians. The feedback that we have received globally from our customers continues to be positive. with the large majority appreciating our proactiveness and transparency, the portfolio of evidence-based support for Renuvion technology and its strong safety and efficacy profile. With respect to the second priority that I outlined, securing additional 510 clearances related to the use of our Renuvion technology and cosmetic surgery procedures, In Q3, we were very pleased to obtain the second of two new 510 clearances for new specific indications related to the use of our Renuvion technology. As 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. As I mentioned earlier, following the receipt of this clearance, the FDA posted related update to their safety communication. This clearance and the 65-patient multicenter IDE clinical study that supported our 510 application further validates the safety and effectiveness of our Renuvion technology. The clearance also expands our addressable market opportunity in the cosmetic market to include 200,000 neck contouring procedures performed in the US annually. We remain on track to begin the limited commercial launches for our two new 510 clearances by the end of 2022. Having secured two new 510 clearances followed by related updates to the safety communication, there is no question we are better positioned with the important real-world validation and clinical evidence to support our strong safety profile of our technology. With that said, it is apparent that the disruption related to the safety communication has not been fully resolved. It continues to impact our performance and receiving two new 510 clearances this summer, while beneficial to overall demand, has not resulted in the pace of recovery our prior guidance had assumed. Given the slower than anticipated pace of recovery in recent months, our regulatory team have been proactively engaging with the FDA to understand the potential path and or potential new regulatory submission to secure an additional indication which we believe will directly address the remaining limitations of the safety communication. In September, we submitted a pre-submission request for feedback of our proposed submission for specific indication demonstrating the safety of our Renuvion technology when used to improve the appearance of skin in combination with liposuction. Assuming normal timelines, we would expect to receive the FDA's formal response and feedback on our proposed plan in December. Stepping back, we are obviously frustrated with the ongoing challenges related to the FDA safety communication, but our team remains engaged, positive, and productive. Most importantly, we remain convinced in the strong safety and efficacy of our technology. Through our proactive and collaborative engagement with the FDA, we aim to demonstrate our continued commitment as an organization to the responsible business practices and evidence-based therapies that safety improve patient outcomes. This is how we have always thought to distinguish Apix Medical and establish leadership within the industry. We look forward to and support the FDA's continued focus on ensuring that everyone in the industry is adhering to the safe and effective use of cosmetic surgery technologies, especially those used during or after liposuction procedures which to the best of our understanding, there are no products with a specific clearance to do so on the market today. Let me turn it over to Tara to review our quarterly financial results and 2022 guidance. Tara?

Thanks, Charlie. I will start my review of our third quarter results at the gross profit line since Charlie already discussed our revenue results. Gross profit for the third quarter of 2022 decreased 2.3 million dollars or 29 percent year-over-year to 5.8 million dollars gross profit margin was 63.2 percent compared to 68.1 percent in the prior year period the decrease in our gross margin was driven primarily by changes in the sales mix between our two segments with our oem segment comprising a higher percentage of total sales product mix within our advanced energy segment and higher costs to manufacture inventory as we continue to experience increased material and shipping costs. These headwinds to our gross margin performance were partially offset 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 registrations and introduce them into the various countries we serve. Operating expenses decreased $0.5 million or 4% year-over-year to $11.5 million. The decrease in operating expenses year-over-year was driven primarily by a $0.3 million decrease in salaries and related costs, which was primarily due to the elimination of our bonus accrual. Loss from operations for the third quarter of 2022 increased $1.8 million or 46% year-over-year to $5.8 million. Total other income net was $37,000 compared to total other expense of $.2 million last year. The year-over-year change was driven primarily by the wind down of the supply arrangement with Symmetry Surgical related to the divestiture of our core business segment. Income tax expense was $50,000 compared to $73,000 last year. Net loss attributable to stockholders was $0.58 million or 17 cents per share compared to $0.42 million or 12 cents per share for the third quarter of 2021. Adjusted EBITDA loss for the third quarter of 2022 was $3.9 million compared to adjusted EBITDA loss $2.7 million in the prior year period. As a reminder, we provide a detailed reconciliation from net loss attributable to stockholders to non-GAAP adjusted EBITDA loss in our earnings press release. As of September 30th, 2022, the company had cash and cash equivalents of $14.8 million compared to $30.9 million as of December 31st, 2021. Cash used in operations for the first nine months of 2022 was $15.8 million compared to $10.7 million last year. The increase in use of cash from operations is primarily attributable to the year-over-year increase in our net loss and our strategic initiative to increase our inventory levels in order to ensure we are able to meet customer demand in light of the challenging global supply chain environment. Turning to a review of our 2022 financial guidance, which we updated in our earnings press release today, for the 12 months ended December 31, 2022, we expect total revenue in the range of $44.8 to $47.9 million, representing a decline of 1% to 8% year-over-year. This compares to our prior range of $51 million to $56.4 million, or growth of 5 to 16% year-over-year. Our total revenue guidance range assumes advanced energy revenue of $37.3 to $40.3 million, representing a decline of 6 to 13% year-over-year, compared to our prior range of $44.5 to $49.4 million, or growth of 4% to 15% year-over-year. and OEM revenue of approximately $7.5 to $7.7 million, representing growth of approximately 36% to 39% year-over-year compared to our prior range of approximately $6.5 to $7 million, or growth of approximately 17% to 26% year-over-year. With respect to our advanced energy revenue guidance, first, Our guidance range continues to reflect 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 black skin in the neck and submental region. 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 U.S. is driven by demand in existing international markets. In terms of our profitability guidance for fiscal year 2022, we now expect net loss attributable to stockholders in the range of $22 to $19.9 million compared to our prior range of $20.1 to $16.6 million, and adjusted EBITDA loss in the range of $14.1 to $11.9 million compared to our prior range of $11.8 to $8.2 million. Our formal financial guidance for 2022 incorporates the following considerations for modeling purposes. First, gross margins of approximately 66 to 67 percent this year compared to our prior expectation of approximately 67 to 69 percent and 69 percent in fiscal year 2021. Second, operating expenses to increase in the range of eight to nine percent year over year compared to our prior expectation of approximately 14 to 16%. The midpoint of our updated guidance range reflects the reduction in our full year operating expense expectations by approximately $3 million versus what our prior guidance had assumed. Third, net interest and other income of approximately $650,000. Fourth, income tax expense of approximately $300,000 to $400,000 compared to $300,000 to $500,000 previously. And we also expect non-cash depreciation and amortization of approximately $900,000 compared to $1 million previously. Non-cash stock-based compensation expense of approximately $6.8 million compared to $7 million previously. Non-controlling interest of approximately $114,000 and weighted average diluted shares outstanding of approximately 34.6 million shares. Lastly, our 10Q to be filed with the SEC includes language related to our balance sheet condition as of September 30th, 2022. This language raises substantial doubt about the company's ability to continue as a going concern for a period of at least one year. While it is not our practice to provide guidance related to expected cash burn, in light of the revision to our financial guidance for 2022 and today's earnings release, we wanted to provide additional color for consideration when evaluating our balance sheet and financial condition. First, as of September 30th, we had cash and cash equivalents of $14.8 million. Second, As noted in our discussions with analysts and investors in 2022, we have an income tax receivable on our balance sheet which represents incremental liquidity of approximately $7.5 million. Third, the midpoint of our updated financial guidance reflects a $3 million or 6% decrease in total GAAP operating expenses compared to what our prior guidance assumed. And fourth, The low end of our updated guidance range assumes a gap net loss of $4.9 million in Q4, reflecting modest sequential improvement. We now expect working capital use of cash in Q4 to be approximately $5 million, which is offset partially by non-cash depreciation and amortization and stock compensation expense of $2 million. These are expected to result in cash at year end of approximately $7 million. We actively continue to evaluate all potential options to enhance our balance sheet, provide additional flexibility, and to secure the capital needed to run the business in 2023, given the continued uncertain timing of our income tax receivable from the U.S. government. With that, I'll turn the call back to Charlie for closing remarks. Thanks, Tara.