Apyx Medical Corporation

Please stand by. Hello and welcome ladies and gentlemen to the fourth quarter and fiscal year 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 to 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, 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, APICS Medical's President and Chief Executive Officer. Please go ahead, sir.

Thanks, operator. Welcome everyone to our fourth quarter and fiscal year 2022 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 fourth quarter revenue results and the factors that contributed to our performance. Then I'll provide you with an update on our operational progress during the fourth quarter and in recent months. Tara will then discuss our fourth quarter fiscal results in detail, as well as our financial guidance for 2023, which we introduced in our earnings release today. I'll conclude with some thoughts on our outlook and key areas of focus in 2023 before we open the call for Q&A. Let's get started with a review of our fourth quarter revenue results. Our total revenue in the fourth quarter decreased 25% year over year to $12.6 million. These results were approximately 300,000 below the low end of our guidance range we provided in our November earnings call. Our total revenue performance was driven by softer than anticipated advanced energy sales, which decreased 30% year-over-year to $10.5 million, and offset partially by better-than-expected OEM sales, which increased 15% year-over-year to $2.1 million. Looking at the performance in our advanced energy business in more detail, global sales of our advanced energy products continue to be impacted by business disruption related to the medical safety device communication, which was posted by the FDA in March of 2022. While we anticipated continued disruption throughout the fourth quarter, the level of impact was higher than we anticipated, most notably as it relates to global sales of our advanced energy generators. In the fourth quarter, global generator sales decreased nearly 50% year over year, driven by declines both domestically and internationally. These declines were moderated by a 10% decrease in global handpiece sales. As we have discussed in prior quarters, generator sales are primarily a reflection of sales to new users of our technology. This aspect of our advanced energy business has seen the most notable impact from the safety communication. While the pace of recovery in global generator sales was slower than our guidance had assumed, it is important to recognize that overall demand trends improved versus Q3, with generator sales increasing nearly 40% on a sequential basis. Looking at our advanced energy performance by geographic region in more detail, sales of our advanced energy generators in all markets continued to be more difficult than we had anticipated. In the U.S. specifically, sales of our advanced energy products decreased by more than 30% year over year, with sales of our U.S. generators decreasing by more than 40% year over year. Given the confusion in the market related to the safety communication, Our reps have continued to find that more time and effort has been required to help potential new customers understand the communication and the safety and efficacy profile of our technology, which has elongated our historical sales cycle. While generator sales to new customers remained impacted in 2022, we were pleased to grow both our total installed base and our active installed base in the U.S. by 20% year over year, which speaks to the success of our U.S. sales team has had in engaging with and educating customers since the safety communication was initially posted. Outside the U.S., sales of our advanced energy generators decreased by more than 60% year over year, as we continue to experience weaker than anticipated demand for generators from distributors in key countries, most notably in Europe and Latin America. While distributor demand for handpieces in the fourth quarter varied across international markets we serve, we were pleased to see stronger than anticipated handpiece demand from our distributors in several countries in Latin America Europe and APAC, which resulted in year-over-year growth in international handpiece sales in Q4. Shifting to a discussion of our operational performance in the fourth quarter and recent months, during the fourth quarter, our team remained focused on the two primary objectives that we outlined on our most recent earnings call. First, we remain focused on engaging with potential U.S. customers and our existing OUS distributors to clarify potential confusion related to the safety communication. As a reminder, in 2022, we obtained two new specific clinical indications, an indication for use in dermatological procedures for the treatment of moderate to severe wrinkles and rye tides, and an indication to approve the appearance of lax or loose skin in the neck and submental region. Following our receipt of these two 510 clearances, the FDA issued updates to the safety communication with revisions to reflect each new indication. With this as a backdrop, during the fourth quarter, our team continued to their work to communicate these important developments, leveraging our updated marketing and educational materials, ensure prospective customers understand the overall safety and efficacy profile of our products as supported by our IDE clinical studies, real-world evidence, and over 50 clinical publications. and address any questions related to the safety communication. The process has been more prolonged outside of the U.S. given our indirect commercial model. With this in mind, we were pleased to host our first Latin America users meeting in early November, which I was able to attend personally. This in-person meeting provided us with the opportunity to directly address the topic of the safety communication, clarify any potential misconceptions, and explain clinical and real-world data supporting our advanced energy products. The event also included a series of presentations and discussion panels with our KOLs, which proved to be very interactive providing our customers in Latin America region with the opportunity to learn from their peers. Overall, the meeting was very productive and well attended, contributing to our strong handpiece sales in Latin America during the fourth quarter. With respect to our second primary objective, we continued to advance our regulatory strategy to secure additional 510 clearances related to the use of our Renuvion technology in cosmetic surgery procedures. During the fourth quarter, our team engaged with the FDA to obtain their feedback on a proposed 510 submission for a specific clinical indication for the use of the Renuvion APR handpiece for the coagulation of subcutaneous soft tissues where needed following liposuction. We believe receiving clearance for this indication will address the remaining limitations of the safety communication. We submitted our related pre-submission request to the FDA in September and received the agency's formal response and feedback in December. This feedback was incorporated into our request for 510 clearance which we submitted at the end of January and announced via press release on February 1st. Our request for 510 clearance is supported by substantial evidence demonstrating the safety and of our Renuvion APR handpiece when used following liposuction procedures, including data from our IDE clinical study in skin laxity as well as real-world evidence. As it relates to our real-world evidence, we were able to conduct an analysis of the use of Renuvion following liposuction leveraging data from a large set of retrospective chart reviews. Our dataset included treatment data from more than 480 patients and 1,180 areas of the body. Importantly, when this data was compared to real-world evidence for liposuction treatments gathered in literature review, our analysis demonstrated that there were no new or increased risks for Renuvion procedures following liposuction procedures compared to liposuction alone. During the fourth quarter, we also completed and submitted our request for an additional 510 clearance to obtain an indication related to the use of the Renuvion APR handpiece for the contraction of soft tissue, including subcutaneous tissue, where needed on the body. On February 27th, we were pleased to receive clearance for this indication, further demonstrating the safety and effectiveness of our Renuvion technology when used to contract soft tissue. We were pleased with the strong progress our regulatory team has made in this past year and in recent months as we continue to secure clearances supporting the safe and effective use of our advanced energy products. In addition to these efforts, I'd like to share an update on the important operational progress we have made on several other fronts to position Apex Medical for improved financial performance in 2023. During the fourth quarter, our sales and marketing teams continued their efforts to prepare for the commercial launch related to the use of our Renuvion technology for the two new clinical indications that we secured in 2022. As a reminder, these two new clinical indications enable us to market our technology to both surgeons and potential patients for use in approximately 200,000 neck contouring procedures and 200,000 wrinkle reduction procedures we estimate are performed in the U.S. each year. I am very pleased to announce that we began our launch for both indications on January 3rd. In tandem with this launch, we introduced our first direct-to-consumer brand campaign titled This Is Me. Our launch and direct to consumer brand campaign are supported by a nationwide campaign featuring digital advertising on multiple platforms, social media initiatives, and a dedicated patient-focused website, all designed to raise awareness of Renuvion and highlight the benefits of our technology. While we remain in the early months of this launch, the feedback we have received from surgeons and patients has been very positive. In advance of launch, we were also pleased to see our technology featured in two popular television series focused on cosmetic procedures during the fourth quarter. The E Channel Series Botched and TLC Series Awake Surgery. On the new product front, we completed preparations for the commercialization of our next generation Renuvion generator, the Apix1 console. In designing the Apix1 console, our product development team worked closely with members of the surgeon community. Our overarching goal was to enhance the functionality, ease of use, and overall experience for our surgeon customers. With this in mind, the Apix-1 console features key enhancements, including adaptive and intuitive touchscreens, procedural presets for specific parts of the body, cloud connectivity, data logging and sharing, remote upgrade capabilities and system diagnostics, and an advanced gas system that measures and monitors gas volume and usage. In addition to these features, APEX One is also designed to be compatible with future generations of our Renuvion handpieces. Following our launch in late January, the APEX One is now available in the U.S. and we have introduced an upgrade program for all of our existing U.S. users. Lastly, in addition to our progress on the commercial, regulatory, and new product development fronts, we have made important progress in recent months to enhance our balance sheet. In January, we were notified that the IRS had completed their examination of our federal income tax returns for 2018, 19, and 20 and approved that our cash tax refunds of at least $7.5 million be processed. We continue to await the receipt of these funds. On February 21st, we announced a new five-year agreement with MidCap Financial for a credit facility of up to $35 million. The facility includes a senior secured term loan of up to $25 million and a revolving line of credit up to $10 million. At closing, tranche one of the term loan provided us with approximately $8 million of net proceeds. On March 15th, we filed an 8K disclosing our entry into a sale and leaseback agreement, which further strengthens our balance sheet and financial condition. Under the terms of the agreement, the company sold our property located in Clearwater, Florida including the building that houses our offices and manufacturing facility, to VK Acquisitions LLC for gross proceeds of $7.65 million. The agreement is subject to customary due diligence and inspection period over the next 35 days. Upon closing, we would expect to receive cash of approximately $6.7 million in proceeds from the sale transaction, net of commissions, expenses, and first-year deposit of our rent expense. We believe the $8 million of net proceeds from tranche one of our term loan the 6.7 of cash from our sale and leaseback transaction, and the expected seven and a half million in tax refunds, together with potential future borrowings from our term loan and available borrowings on our revolver facility, provide ample liquidity to fund our strategic growth initiatives over the near term. As we work to achieve our longer term goals of generating sustainable profitability and strong free cash flow generation in the future. Stepping back. While 2022 ultimately provided to be more challenging than we had anticipated, we remain pleased with the continued passion we have seen for our technology from our customers. Despite difficult circumstances, our team has achieved notable progress across many key aspects of our strategy, as I just discussed. We believe these achievements position Apex Medical for a return to driving strong sales growth and important improvements in our profitability profile with the ample liquidity to fund our strategic growth initiatives in the near term as we progress towards our longer term financial goals. I will discuss our 2023 outlook and related priorities further in a minute. But first, let me turn it over to Tara to review our quarterly financial results and 2023 guidance. Tara?

Thanks, Charlie. 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 2022 decreased $3.9 million, or 32% year-over-year, to $8.2 million. Gross profit margin was 65.3% compared to 72.2% in the prior year period. The decrease in our gross margin was driven primarily by changes in the sales mix between our two segments, 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. Operating expenses increased $0.3 million, or 2% year over year, to $14.2 million. The increase in operating expenses year over year was driven by professional services expenses and research and development expenses, which each increased by $0.3 million. These increases were partially offset by a $0.2 million decrease in SG&A and a $0.1 million decrease in salaries and related costs. Our operating expenses came in approximately $0.7 million above what our low end of guidance had assumed. driven by higher than anticipated SG&A and professional service expenses related to higher insurance and legal expenses and higher consulting fees, respectively. Loss from our operations for the fourth quarter of 2022 increased $4.2 million, or 251% year-over-year, to $5.9 million. Total other income net was $19,000 compared to total other expense of $0.2 million in the fourth quarter of 2021. Income tax expense was $0.2 million compared to $0.1 million in the fourth quarter of 2021. Net loss attributable to stockholders was $6 million or 17 cents per share compared to $2 million or 6 cents per share for the fourth quarter of 2021. Adjusted EBITDA loss for the fourth quarter of 2022 was $4.1 million compared to $0.3 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 this morning. As of December 31st, 2022, The company had cash and cash equivalents of $10.2 million compared to $30.9 million as of December 31, 2021. Cash used in operations in 2022 was $20.3 million compared to $10.4 million last year. The increase in use of cash from operations is primarily attributable to the year-over-year increase in net loss, and a roughly $3.5 million increase in cash used for working capital, driven primarily by strategic investments in our inventory to ensure our ability to meet demand amidst the challenging global supply chain environment, offset partially by better accounts receivable collections compared to the prior year period. Turning to a review of our 2023 financial guidance, which we introduced in our earnings press release today, For the 12 months ending December 31st, 2023, we expect total revenue in the range of 58 to $61 million, representing growth of 30 to 37% year over year. Our total revenue guidance range assumes advanced energy revenue of 50 to $53 million, representing growth of approximately 36 to 44% year over year, and OEM revenue of approximately $8 million, representing growth of approximately 4% year-over-year. In terms of our profitability guidance for fiscal year 2023, we expect net loss attributable to stockholders of approximately $14 million compared to $23.2 million last year. Our formal financial guidance for 2023 incorporates the following considerations for modeling purposes. gross margins of approximately 65% to 67% this year compared to 65% last year. We expect tailwinds to our gross margin as our revenue mix favors the advanced energy segment and our U.S. growth exceeds growth in sales to customers outside the U.S. We also expect continued margin tailwinds related to product mix within our advanced energy segment. These tailwinds are expected to be partially or fully offset by year-over-year headwinds related to raw materials inflation, changes in foreign currency exchange rates against the U.S. dollar, and to a lesser extent, incremental rent expense related to our sale-leaseback transaction. Second, the year-over-year change in operating expenses to range between a decrease of 1% to growth of 5%. Third, total interest and other loss of approximately $1.4 million in 2023 compared to total interest and other income of approximately $0.7 million last year. Total interest and other loss in 2023 includes net interest expense of approximately $1.7 million and a $350,000 gain in our other income loss line related to the lapse of the statute of limitations on our joint and several payroll liability. Fourth, income tax benefit of approximately $2.2 million compared to an expense of $0.4 million last year. We also expect non-cash depreciation and amortization of approximately $0.7 million, non-cash stock-based compensation of approximately $6 million, non-controlling interest of approximately $125,000, and weighted average diluted shares outstanding of approximately 34.8 million shares. And for the first quarter of 2023, we anticipate total revenue in the range of $10.8 to $11.2 million, driven by a decrease in advanced energy sales in the range of approximately 21 to 17% year over year, offset partially by growth in OEM sales of approximately 34% year over year. Finally, our formal financial guidance for 2023 assumes we end the year with at least $18 million in cash and cash equivalents and restricted cash on our balance sheet as of December 31, 2023. This cash projection for the year ended 2023 includes a number of key assumptions and discrete items to bear in mind when evaluating our financial condition. First, we expect normalized cash used in operating and investing activities of approximately $14.5 million in 2023. This reflects our expectation for gap net loss of $14 million, .5 million of CapEx, and that our non-cash items, including depreciation and amortization and stock comp expense, as well as non-cash amortization related to our debt facilities, are offset by cash used in working capital this year. Second, our cash projection for the year ended 2023 includes a one-time benefit to working capital of $7.5 million related to the tax refund discussed earlier and a one-time benefit to cash flow from investing activities of $6.7 million related to the sale-leaseback transaction. Third, our cash projection for the year ended 2023 includes the $8 million of net proceeds we received from tranche one of our term loan, but assumes no additional borrowings on either the term loan or the revolver in 2023. With that, I'll turn the call back to Charlie for closing remarks.