Apyx Medical Corporation

Hello and welcome, ladies and gentlemen, to the third 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 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 can 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 a gap. We generally refer to these as non-gap 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 release, 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.

Thanks, operator, and welcome everyone to our third quarter of 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 by discussing our third quarter revenue results, followed by an update on the operational progress our team has made during the third quarter and in recent months. Tara will discuss our financial results in detail, along with our 2023 financial guidance which we updated in our earnings release today. I'll then share some additional closing remarks before we open the call for questions. With that, let's begin with the review of our revenue results. In the third quarter, we achieved total revenue growth of 31% year over year to $12 million. Our total revenue growth was primarily fueled by sales of our advanced energy products which increased 39% year over year to $9.8 million, while sales of our OEM products increased 5% year over year to $2.1 million. Looking at the year over year performance in our advanced energy segment more closely, of the $2.8 million of total advanced energy revenue growth that we delivered year over year, we were pleased to see notable contributions from both the U.S. and international geographies. Our advanced energy revenue performance was primarily fueled by growth in global sales of our generators, which increased nearly 70% year over year, along with double-digit growth from our sales of handpieces. In the U.S. specifically, Sales of our advanced energy products increased 31% year-over-year, driven by generator sales growth that exceeded 70%. Importantly, a significant majority of our U.S. generator sales in the third quarter was driven by sales to new customers. This was driven by our continued effort to raise awareness of both the safety and efficacy of our Renuvion technology as supported by our new FDA clearances, as well as our next generation system, the Apix-1 console, which we launched at the beginning of this year. In addition to sales to new U.S. customers, we saw important contributions from generator sales to our existing users as well, as they took advantage of our program enabling them to upgrade to the APEX One console at a discounted pricing by trading in their prior generation system. Our generator sales performance more than offset slattish performance in sales of our U.S. handpieces. I'll discuss the factors that contributed to this performance in a minute. With respect to international advanced energy sales, we saw generator sales growth of nearly 70% year over year, with sales of our handpieces increasing more than 40%. Our growth in international generator and handpiece sales was primarily fueled by strong contributions from sales to our distributors in Latin America, although we saw year over year growth in all our other major geographic regions as well. To recap, our advanced energy growth in the third quarter of 39% year over year was due to balanced contributions from both our U.S. and OUS market and driven primarily by global sales of our advanced energy generators. With this as a backdrop, let me now take a few minutes to walk you through the third quarter revenue performance versus expectations. While we delivered strong revenue growth on a year-over-year basis, our total revenue in the third quarter was a little more than $3 million lower than the 15 to 16 million range we expected, range of expectations we provided on our most recent earnings call. This delta was driven by lower than expected sales of our advanced energy generators and hand pieces, primarily in the US. We believe three primary factors contributed to the softer advanced energy performance relative to our expectations in the third quarter. First, with respect to generator sales, the overall market for cosmetic surgery capital equipment proved to be weaker than our guidance had assumed. Specifically, as we progressed through the third quarter, we saw more prospective surgeon customers delaying capital equipment purchases, citing high interest rates and broader economic uncertainty. Second, during the third quarter, we observed strong seasonality related to potential patients and some surgeons taking summer vacations, This seasonal slowness was more pronounced than the trends we observed in recent years, and we experienced primarily in August and early September. This dynamic primarily impacted the sales of our handpieces with more potential patients on vacation and fewer seeking procedures. For surgeons experiencing slower than expected case volumes, It also proved another reason to take a wait-and-see approach to capital equipment purchasing. And third, our sales and marketing execution during the quarter ultimately did not meet our expectations. In response to these issues, we have taken proactive steps to help mitigate their future impact. Beginning in September, we introduced financing options for our potential surge in customers to provide them with further financial flexibility. And subsequent to quarter end, we made several changes in our sales and marketing team. We expect to see improving productivity from this reorganized team in 24 and beyond. Stepping back, while we are ultimately disappointed with the softer than expected sales performance in the quarter, We were pleased to see evidence that our recently secured 510 clearances and our next generation generator system are resonating with the surgeon community. And importantly, we completed the 31% year-over-year revenue growth in the third quarter with continued profitability improvements reducing our net loss attributable stockholders and our adjusted EBITDA by 20% and 21% year-over-year respectively. Turning to a brief discussion of our recent operational highlights, we continued our effort to raise awareness of our Renuvion technology and its benefits at both the surgeon and patient level. With respect to surgeons, we continue to capitalize on the progress made by our regulatory team in recent years, which enabled us to secure new 510K clearances in April for aesthetic body contouring following liposuction. We continue to believe that with the latest 510K clearance, our Renuvion APR handpiece is now the only device on the market with this indication for use following liposuction. During the third quarter, we continued to focus on educating potential new prospects on these developments, along with the extensive body of clinical and real-world evidence that has been established to support the safety and efficacy of our products for use in the cosmetic surgery procedures. In spite of the headwinds I discussed earlier, these developments have helped our team reengage with many new prospects, and we believe they will continue to benefit our growth. And at the patient level, we continue to advance our direct-to-consumer brand awareness campaign through the introduction of new content, including before and after photos, patient video testimonials, and other content leveraging the results achieved by actual patients. In addition to expanding our following and engagement on social media, we have begun to receive more incidental feedback from surgeons seeing patients coming in asking about our Renuvion technology. In terms of new product initiatives, as I mentioned earlier, we remain pleased with the U.S. market reception to our next generation generator, the APEX 1 console, which was an important contributor to our generator sales growth in the quarter. In late July, we also commenced the limited market release of our new Renuvion Micro Handpiece after securing 510 clearance in June. Based on the feedback we have gathered to date, the surgeon customers that are participating in our limited market release appreciate the significantly smaller instrument shaft of our micro handpiece and the benefits it brings to cases where smaller profile handpiece can provide improved access to the target region and ultimately facilitate soft tissue contraction. The feedback attained during the limited market release has proved important insights to enhance our surgeon training and recommendation as we prepare to initiate our full commercial launch by year end. In addition to driving strong profitability improvements in the third quarter, we continue to enhance our balance sheet condition and financial flexibility. In August, we received the $8.1 million payment from the Internal Revenue Service for the cash tax refunds that they approved at the beginning of the year. And we were pleased to announce today that we negotiated and entered into a new five-year agreement with Perceptive Advisors for a facility of up to $45 million in senior secured term loans. This agreement provided us with 37.5 million of proceeds at closing, approximately 11 million of which was used to satisfy all obligations under our prior credit agreement, as well as approximately 2.5 million of transaction fees and other expenses related to the transaction. This new facility provides us with access to additional capital at more favorable terms overall than our prior agreement, significantly strengthening our balance sheet and enhancing our financial flexibility. With our recent profitability improvements in the third quarter, $22.1 million of cash on our balance sheet at the end of the quarter, and the proceeds and additional borrowing capacity under our perceptive credit agreement, we believe we have the requisite capital and financial flexibility to pursue our strategic growth initiatives while driving continued progress towards our longer-term goals of generating sustained profitability and strong free cash flow generation. Before I turn the call over to Tara, I'd like to discuss an important announcement we made in our earnings press release this morning. Specifically, we announced Tara's intention to lead the company in order to pursue other opportunities. As we announced in our earnings press release, the Board of Directors initiated a formal search process that identified her successor. We expect to announce the formal appointment in the near future. In the interim, we appreciate Tara's commitment to continue in her position as Chief Financial Officer until her successor is formally appointed. Since joining Apix Medical in January of 2019, Tara has been an important contributor to our growth as an organization. Her efforts have enabled us to develop a strong financial and accounting team and to improve our analytical and reporting process to support the business. On behalf of the broader team, I'd like to take the opportunity on today's call to thank her for the important contribution she made while at Apex Medical, and I look forward to her continued support amid the smooth transition. I'll now turn it over to Tara to review the third quarter financial results and 2023 guidance, which we updated in today's press release. Tara?

Thanks, Charlie. It has been a privilege to serve as a member of the Apex Medical team and to help develop the organization during my time here. With the financial and operational progress we've made over the last four years and the depth of our financial and accounting teams, I truly believe that Apex Medical is well positioned going forward. I would like to thank my colleagues at Apex for their support and look forward to supporting a successful transition to the incoming CFO. Given that Charlie discussed our revenue results, I will begin at the gross profit line. And let's note it otherwise, all references to third quarter financial results are on a gap and year-over-year basis. Gross profit for the third quarter of 2023 increased $2.2 million or 39% to $8 million. Gross profit margin was 66.6% compared to 63.2% last year. The increase in our gross margin was driven primarily by changes in the sales mix between our two segments with our advanced energy segment comprising a higher percentage of total sales and changes in the product mix within our advanced energy segment offset partially by geographic mix within our advanced energy segment as international sales comprised a higher percentage of total advanced energy sales. Operating expenses increased $1.1 million, or 9%, to $12.6 million. The increase in operating expenses was driven primarily by salaries and related costs, which increased $0.8 million, or 21%, largely due to increases in bonus expense and labor and benefits costs. Lost from operations decreased $1.1 million, or 20%, to $4.6 million. We are pleased with the strong operating leverage we demonstrated in the third quarter despite the softer than expected revenue results. Total other expense net was $.4 million compared to income of $37,000. The change was driven by an increase in net interest expense related to the outstanding debt obligations on our term loan in the third quarter of 2023 compared to no outstanding borrowings in the prior year period. Income tax benefit was $0.3 million compared to income tax expense of $50,000 last year. Net loss attributable to stockholders decreased $1.1 million or 20% to $4.6 million or 13 cents per share compared to $5.8 million or 17 cents per share last year. Adjusted EBITDA loss decreased $0.8 million or 21% to $3.1 million compared to $3.9 million last year. 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. For the three months ended September 30th, 2023, cash generated for operating activities was $3.7 million compared to cash used in operating activities of $5.4 million in the prior year period. The improvement was driven primarily by an increase in cash related to the receipt of payment from the Internal Revenue Service for cash tax refunds, as well as our improvement in net loss. As of September 30th, 2023, we had cash and cash equivalents of $22.1 million compared to $10.2 million as of December 31st, 2022. Turning to our review of our 2023 financial guidance, which we updated in our earnings press release today, for the 12 months ending December 31, 2023, we now expect total revenue in the range of $53 to $54 million, representing growth of approximately 19 to 21%. This compares to our prior range of $59 million to $62 million, or growth of 33% to 39%. Our total revenue guidance assumes advanced energy revenue of $44.5 to $45.5 million, representing an increase of 21% to 24%, which compares to our prior range of $51 to $54 million. and OEM revenue of approximately 8.5 million, representing growth of approximately 10%, which compares to our prior expectation of approximately $8 million. In terms of our profitability guidance for the full year 2023, we now expect net loss attributable to stockholders of approximately $16 million, compared to our prior expectation of approximately $10.5 million. This updated net loss guidance reflects our revised revenue and loss expectations for the second half of 2023, including approximately $2.6 million of other expenses related to our debt transactions and approximately half a million dollars of severance related to our CFO transition. Our formal financial guidance for 2023 incorporates the following consideration for modeling purposes. First, we expect gross margins of approximately 66% compared to the prior guidance range of 66.5 to 67.5%. Second, we now expect 2023 operating expenses to decrease approximately 4% year over year compared to our prior guidance of low to mid single digit growth year over year. Note, excluding the gain on our sale lease pack transaction, GAAP operating expenses are expected to be up 1% year over year in 2023. Third, we expect total other expense net of approximately $3.6 million in 2023 compared to our prior guidance of approximately $900,000. The increase is driven by 2.6 million of non-recurring fees and expenses incurred as part of our debt transactions. Note, we continue to expect interest expense net of approximately $1.6 million for 2023. And lastly, our guidance for 2023 now assumes non-controlling interest of approximately 160,000 compared to 180,000 previously. An income tax benefit of approximately 2.4 million versus 2 million previously. Non-cash depreciation and amortization of approximately 0.7 million unchanged versus our prior assumptions. Non-cash stock-based compensation expense of approximately $5.5 million versus $5.6 million previously, and weighted average diluted shares outstanding of approximately 34.7 million shares. Lastly, our updated guidance for 2023 now implies approximately $39 million in cash and cash equivalents on our balance sheet at December 31st, 2023, compared to our prior guidance of approximately $20 million. This updated target reflects the $24 million of net proceeds from our debt transactions and our revised net loss and cash flow assumptions based on our third quarter results and updated expectations for the fourth quarter. With that, I'll turn the call back to Charlie for closing remarks.