Apyx Medical Corporation

Hello, and welcome, ladies and gentlemen, to the first quarter of fiscal year 2023 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 the recording will be available on the company's website for replay shortly. Before I 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 factor section of our most recent annual report on Form 10-K, 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. 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, and welcome everyone to our first quarter 2023 earnings call. I'm joined on today's call by our Chief Financial Officer, Tara Sem. Let me provide you with a brief outline of what we intend to cover today. I'll begin with a review of our revenue results and the factors that contributed to our sales performance in the first quarter. I'll then share an update on our operational progress made during the first quarter and in recent weeks. Tara will discuss our first quarter financial results in detail, as well as our financial guidance for 2023, which we updated in our earnings release today. I'll then conclude with some additional thoughts on our outlook and strategic priorities for the remainder of 2023 before we open the call with questions. With that, let's begin with a review of our Q1 revenue results. In the first quarter, our total revenue decreased 3% year-over-year to $12.1 million, exceeding the high end of our expectations that we shared on our fourth quarter earnings call by approximately $900,000. Our stronger than anticipated total revenue performance was largely driven by advanced energy sales, which decreased 10% year-over-year to $9.7 million, exceeding the high end of our expectations by approximately $700,000. OEM sales increased 46% year-over-year to $2.5 million and approximately $200,000 higher than we had anticipated. Looking ahead at our advanced energy sales performance in more detail, as anticipated, during the first quarter, we continued to experience disruption in global sales of our advanced energy products due to the medical device safety communication that was posted by the FDA in March of 2022. The 10% decrease in sales in our advanced energy products was driven by global sales of generators and handpieces, which both decreased by more than 10% year over year. While the year over year decrease in global handpiece sales was largely consistent with the trends observed in the fourth quarter of 2022, we were pleased to see notable improvement in global generator sales trends in Q1. While global generator revenue declined year over year, the trends improved materially when compared to the nearly 50% year over year decline in generator sales reported in Q4. In terms of our advanced energy performance in the U.S., We were pleased to see sales of our advanced energy products in the U.S. increase by nearly 10% year-over-year, with sales of our U.S. generators increasing by approximately 40% year-over-year. Our generator sales performance in the U.S. benefited from the introduction of our Apix-1 console, our next generation generator, which we launched in late January. In connection with the launch, we introduced an upgrade program for all of our existing US users, enabling them to trade in their prior version of our Renuvion generator and receive our APEX 1 console at a discounted rate. We were pleased with the initial demand we had seen from our existing users, which exceeded our expectations in the quarter and drove the majority of our outperformance that we saw versus our expectations. While sales of our generators to new customers continued to remain paced by the confusion related to the safety communication, we were also pleased with the initial sales of our APEX One console to new customers as well, which modestly exceeded our expectations. With respect to our advanced energy sales outside the U.S., international generator sales decreased by more than 60% year over year, which was modestly below what our guidance range had assumed for Q1. Advanced energy generator sales in all markets continued to be impacted by the safety communication with weaker demand from distributors in key countries most notably Europe and the Asia Pacific region. Our international sales results were moderated somewhat by more modest declines in sales of our handpieces. In summary, despite the continued headwinds related from the safety communication, which were largely consistent with our expectations for the first quarter, we were pleased to drive stronger than anticipated sales of our APEX One console both to existing and new U.S. customers. This helped to partially offset the impact of disruption as regulatory and clinical teams continued to work to address the remaining limitations of the safety communication. Shifting to a discussion of our operational performance, During the first quarter, we were pleased to achieve strong progress with respect to our regulatory strategy while raising awareness of our recently obtained clinical indications, including our next generation generator and securing additional capital to strengthen our balance sheet. Let me discuss each of these in turn, beginning with our regulatory strategy. During the first quarter, our regulatory and clinical teams remain focused on securing FDA 510 clearances for specific clinical indications to expand our ability to market and sell our Renuvion technology and address the remaining limitations of the safety communication. Following our submission of a 510 application at the end of 2022, We were pleased to receive clearance in late February for a new clinical indication related to the use of our Renuvion APR handpiece for the contraction of soft tissue, including subcutaneous tissue, where needed. This clearance provides important support for our safety and effectiveness of Renuvion when used for this purpose anywhere on the body. We also completed and submitted our request for additional 510 clearance to obtain an indication for the coagulation of subcutaneous soft tissues following liposuction for aesthetic body contouring. Our 510 submission was supported by a comprehensive portfolio of clinical and real-world evidence demonstrating the safety and efficacy of our Renuvion APR handpiece when used following liposuction procedures, which included data from our IDE clinical study in skin laxity and treatment data from more than 480 patients in 1,180 areas of the body. As a reminder, An analysis we conducted comparing this data to real-world evidence for liposuction treatments gathered in a literature review showed that the use of Renuvion procedures following liposuction procedures demonstrated no new or increased risk when compared to liposuction procedures alone. With this as a backdrop, on April 28th, we were very excited to announce that we received clearance for this indication. With the receipt of this 510 clearance, the Renuvion APR handpiece is now the only device on the market with a 510 clearance for use following liposuction. As we have stated previously, We believe this indication directly addresses the remaining limitations of the safety communication. As last updated on July 21st, 2022, specifically the language stating that the Renuvion APR handpiece has not been cleared for the use in combination with liposuction and advising against the use of our technology in combination with liposuction. To that end, we were pleased to receive confirmation that the FDA posted an update to the safety communication on May 10th, 2023. This update was intended to inform consumers and healthcare providers about the clearance of the Renuvion APR handpiece for use under the skin in certain procedures intended to improve the appearance of skin including for coagulation of subcutaneous soft tissues following liposuction for aesthetic body contouring. The update included revised recommendations for consumers, as well as revised recommendation for healthcare providers, the latter of which highlighted three new specific indications for our Renuvion APR handpiece, including four, soft tissue contraction where needed, following liposuction for aesthetic body contouring, and for dermatological and aesthetics procedures to improve the appearance of lax skin. They also highlighted the new specific indication for our Renuvion dermal handpiece for treatment of moderate to severe wrinkles and wry tides. Importantly, the updated safety communication also included the FDA's intention to continue to monitor reports of adverse events for other minimally invasive soft tissue heating devices in aesthetic skin procedures and work to ensure that consumers and healthcare providers are informed about the intended uses of these devices. We believe that the May 10, 2023 FDA update to the safety communication addresses the issues set forth in the original safety communication from March 14, 2022. I am extremely proud of the hard work and dedication to our strategy from our clinical and regulatory teams in the time since the safety communication was posted in March of 2022. Without their efforts, the significant progress we have made since that time would not have been possible. In addition to our recent regulatory progress, we continue to raise awareness of the two specific clinical indications that we obtained in 2022 for the use of our Renuvion technology in dermatological procedures for the treatment of moderate to severe wrinkles and rite tides and to improve the appearance of lax or loose skin in the neck and the submental regions. We commenced the US commercial launch for these indications at the beginning of January, which was accompanied by This Is Me, our first direct consumer brand campaign. This Is Me is a nationwide integrated brand campaign that includes a new patient-focused website, brochures and online videos, new social media content, and digital advertising across multiple platforms. The overarching goal of this campaign is to grow the awareness of our technology and its potential to help people achieve the results they are looking for through a minimally invasive procedure while preserving the defining physical features that make them who they are. In addition to the response and feedback we have received from our surgeons and patients, which continue to be very positive, our integrated campaign has generated millions of impressions to date, and we have seen an increase in our total social media engagement. We have also continued to see new mentions of our technology across various media outlets including magazines like Marie Claire and New Beauty. And on TV, a procedure with Renuvion to correct a patient's sagging neck was recently demonstrated in a February episode of the Lifetime series, channel series, The Balancing Act, that included an interview between show host Montel Williams and the performing surgeon to discuss the procedure. Although we remain in the initial months of our campaign and launch, we have been very pleased with the response we have seen so far. Turning to an update of our new product innovation, at the end of January, we were pleased to begin the U.S. commercial launch of the APEX One console. As a reminder, this next generation version of our Renuvion generator was redesigned to enhance its functionality and ease of use and improve the overall user experience for our surgeon customers. Its enhanced features include touch screens featuring new and intuitive user interface, presets for specific procedures and areas of the body, an advanced gas system that measures and monitors gas volume and usage, and new cloud connectivity features, including the ability to log and share data, install updates, and troubleshoot the device remotely. The APEX One's design and features were developed in collaboration with a team of surgeons and informed by feedback of our customers. we believe the benefits of this user-centric approach to product development are reflected in the positive initial feedback we have garnered from both new and existing users of our technology. As I mentioned earlier, we have been pleased with the initial market response to our APEX One console from a commercial standpoint as well, which contributed to our stronger than anticipated sales performance in the first quarter. Based on the promising initial response we have seen, we look forward to drive the adoption of our new generator system to both new and existing surgeon customers as we progress through 2023. During the first quarter, we were also pleased to see new clinical and academic publications discussing the use of our Renuvion technology in cosmetic surgery procedures. In January, our technology was featured in multiple chapters of a new textbook focused on body contouring procedures titled The Manual of Cosmetic Surgery and Medicine. The publication features a chapter dedicated to the use of our technology in body contouring and the use of our technology in combination with liposuction is referenced in additional chapters. We were pleased to see Renubion described as one of the best technologies to date in skin tightening. And on March 8th, we saw a new clinical article published in the peer-reviewed Aesthetic Surgery Journal. The article summarized the methodology and the results of our multi-site IDE clinical trial to evaluate the use of Renuvion to improve the appearance of loose skin in the neck and submental region and was authored by the investigators that conducted the trial. These are just a few of recent examples of the growth we continue to see in the body of clinical and academic support for our technology. Lastly, we completed our sales performance and operational progress during the first quarter by completing multiple initiatives to improve our operating efficiency and secure additional capital to further strengthen our balance sheet. In January, we implemented a series of measures to better align our operating expenses with our anticipated needs and priorities. These measures included the consolidation of our handpiece assembly lines in Clearwater, Florida manufacturing facility, which we believe will enable us to reduce our expenses in 2023 without impacting our ability to serve our current and future customers. In February, we entered into a new five-year agreement with MidCap Financial for a credit facility of up to $35 million, consisting of a revolver and a term loan, which provided us with approximately $8.1 million of net proceeds at closing. Subsequent to quarter end, on May 8th, we completed our previously announced sale and leaseback transaction for our Clearwater property, providing us with approximately $6.6 million in proceeds, net of commissions, expenses, taxes, first month's rent and expense fees, and a security deposit equal to one year's rent expense. And we are still waiting to receive the cash tax refunds of at least $7.5 million from the IRS which were approved by the IRS in January. Stepping back, with more than $16 million of cash on our balance sheet at quarter end, along with the $6.6 million of net proceeds received via our recent sale and leaseback transaction, our anticipated cash refunds, and the potential capacity under our credit agreement we continue to believe we have ample liquidity to support our near-term operations and growth initiatives. In tandem, we remain focused on driving progress to achieve our longer-term goals of sustainable profitability and strong free cash flow generation. With that, let me turn it over to Tara to review our first quarter financial results and 2023 guidance which we updated in today's press release. Tara?

Thanks, Charlie. I will begin my review of our first quarter financial performance at the gross profit line since Charlie covered our revenue results. Gross profit for the first quarter of 2023 decreased $0.6 million, or 8% year-over-year, to $7.6 million. Gross profit margin was 62.4% compared to 65.8% 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 and product mix within our advanced energy segment. 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. Operating expenses decreased by $0.9 million, or 6% year-over-year, to $13.2 million. The decrease in operating expenses year-over-year was primarily driven by professional services expenses, selling, general and administrative expenses, and salaries and related costs, which decreased by $0.5 million, $0.2 million, and $0.1 million, respectively. Loss from operations for the first quarter of 2023 decreased 0.26 million or 4% year over year to 5.6 million. Total other loss net increased $161,000 to $188,000. Income tax benefit was 2.3 million compared to an income tax expense of 70,000 in the first quarter of 2022. Net loss attributable to stockholders was $3.5 million or 10 cents per share compared to $5.9 million or 17 cents per share for the first quarter of 2022. Adjusted EBITDA loss for the first quarter of 2023 was $4 million, unchanged compared to the prior year period. As a reminder, we provided a detailed reconciliation from net loss attributable to stockholders to non-GAAP adjusted EBITDA in our earnings press release. As of March 31st, 2023, The company had cash and cash equivalents of $16.3 million compared to $10.2 million as of December 31st, 2022. Cash used from operations for the first three months of 2023 was $1.9 million compared to $4.5 million in the first three months of 2022, driven primarily by the year-over-year improvement in our net loss and improvements in working capital efficiency. Now turning to a review of our 2023 financial guidance, which we updated in our earnings press release today. For the 12 months ending December 31st, 2023, we now expect total revenue in the range of 59 to $62 million, representing growth of approximately 33 to 39% year over year. This compares to our prior range of 58 to $61 million, or growth of 30 to 37% year-over-year. Our total revenue guidance range now assumes advanced energy revenue in the range of 51 to $54 million, representing growth of approximately 39 to 47% year-over-year. This compares to our prior range 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, which is unchanged versus our prior guidance assumption. In terms of our profitability guidance for the full year 2023, we now expect net loss attributable to stockholders of approximately $10.5 million compared to our prior guidance of approximately $14 million. The improvement in our expected net loss for 2023 is driven by the expected gain on sale from our sale-leaseback transaction of approximately $2.8 million, as well as the flow through of better than expected revenue and profitability results in the first quarter. Our formal financial guidance for 2023 incorporates the following considerations for modeling purposes. First, We expect gross margins of approximately 65.5% to 66.5% this year, compared to 65% in 2022. We continue to 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 our 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 recent sale-leaseback transaction. We expect the change in our operating expenses to range from flat to 5% growth year-over-year in 2023. Third, we expect total other income net of approximately $1.4 million in 2023. This compares to our prior guidance which assumed total other expense net of approximately $1.4 million. The change in expectations for total other income versus our prior guidance is a result of the expected gain of $2.8 million from our sale-leaseback transaction in the second quarter, which was not contemplated in our prior guidance. Total other income net in 2023 continues to assume net interest of approximately $1.7 million, as well as a gain of approximately $350,000, and our other income loss line related to the lapse of the statute of limitations on our joint and several payroll liability. Fourth, we now expect non-controlling interest of approximately $150,000 compared to $125,000 previously. And lastly, our guidance for 2023 continues to assume an income tax benefit of approximately 2.2 million, non-cash depreciation and amortization of approximately 0.7 million, non-cash stock-based compensation expense of approximately 6 million, and weighted average diluted shares outstanding of approximately 34.8 million shares. For the second quarter of 2023, we anticipate total revenue in the range of $14.2 to $15 million, driven by an increase in advanced energy sales in the range of approximately 53 to 63% year over year, partially offset by a decrease in OEM sales of approximately 27% year over year. Lastly, our formal guidance for 2023 now assumes we end the year with approximately $20 million in cash and cash equivalents on our balance sheet as of 12-31-2023. This cash projection for year-end 2023 includes a number of key assumptions and discrete items to bear in mind when evaluating our financial condition. First, we expect normalized cash use in operating and investing activities of approximately $12.5 million in 2023 as compared to our prior guidance of $14.5 million. The $2 million improvement in normalized cash use in operating investing activities is driven primarily by the roughly $700,000 of better than expected profitability in Q1 and a $1.2 million decrease in expected use of cash in working capital. Second, our cash projection for year-end 2023 continues to include also 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 $6.6 million related to our sale-leaseback transaction. And lastly, our cash projection for year-end 2023 continues to include the $8.1 million of net proceeds from tranche one of our term loan and continues to assume no additional borrowings on either the term loan or revolver in 2023. With that, I'll turn the call back to Charlie for closing remarks.