Apyx Medical Q2 2023 Earnings Call Transcript

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August 10, 2023

There are 7 speakers on the call.

Operator

Hello, and welcome, ladies and gentlemen, to the Second Quarter of Fiscal 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 could cause actual results to differ materially from those indicated, including without limitation, those identified the Risk Factors section of our most recent annual report on Form 10 ks, our most recent 10 Q filing and the company's other filings with the Securities and Exchange Commission.

Operator

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 these 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.

Operator

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.

Speaker 1

Thanks, operator, and welcome everyone to our Q2 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 with a review of our Q2 revenue results and the factors that contributed to our sales performance. Then I'll walk through some of our key operational accomplishments during the quarter.

Speaker 1

Erika will discuss our Financial results in detail along with our 2023 financial guidance, which we've reaffirmed in our earnings release today. I'll then provide some closing remarks before we open the call for questions. With that, let's begin with a review of our revenue results. In the Q2, we achieved total revenue growth of 32% year over year to 13 which increased 40% year over year to $11,700,000 This growth performance was offset partially by OEM sales, which decreased 4% year over year to 1,800,000 Relative to the range of expectations that we provided for the Q2, which we shared on our last earnings call, our OEM sales Seeded our expectations by approximately $400,000 and our advanced energy sales came in approximately 1 from our OUS distributors, which we believe is due in part to timing of orders. Looking at our Advanced Energy sales results in more detail, while our global Advanced Energy sales Performance continued to be impacted by the disruption related to the medical device safety communication that was originally posted by the FDA We were pleased to return to strong sales growth in the 2nd quarter with Advanced Energy sales increasing 40% on a year We were pleased to achieve growth in the global sales of our generators and handpieces, both domestically and internationally.

Speaker 1

In terms of our advanced energy performance in the U. S, Sales of our advanced energy products to U. S. Customers increased 38% year over year, consistent with our expectations for the quarter and represented the primary driver of our Advanced Energy sales performance. Our performance in the U.

Speaker 1

S. Was driven primarily by sales of our generators due to a combination of growth in Sales to both existing and new customers with contributions from handpiece sales as well. Most notably, we continue to see strong demand from our existing users following the U. S. Launch of our next generation Apyx 1 console at the beginning of 2023.

Speaker 1

We introduced an upgrade program that enables existing users to trade in their prior generation Renuvion generator Our generator sales to new U. S. Customers as well, particularly the uptick in adoption that we experienced following Updated safety communication in May. With respect to our advanced energy sales outside the U. S, While sales in all markets continued to be impacted by the safety communication, we were pleased to achieve strong international generator growth, which was the primary driver of our international performance.

Speaker 1

Our generator sales growth outside the U. S. Was driven primarily by the distributor demand in multiple countries across Latin America and the Asia Pacific region, which more than offset the year over year declines in our sales to distributors in Europe and the Middle East. This strong generator performance was moderated somewhat by modest growth in sales of handpieces to our OUS distributors, which we believe was influenced in part by the timing of orders during the quarter. In summary, the 40% growth Advanced Energy growth we achieved in the 2nd quarter was driven primarily by our sales performance In the U.

Speaker 1

S, despite the headwinds we continue to experience related to the safety communication, We were pleased to see strong global sales of our advanced energy generators. And ultimately, I believe we made Important progress both domestically and internationally during the Q2, positioning us for continued improvement as we progress through the remaining months of the year. Moving to a discussion of our operational performance. Indications for our Renuvion technology and address the remaining limitations of the safety communication, Raise awareness of our recently secured clearances among surgeons and potential patients, I'll now take a moment to walk through each of these items in further detail. 1st and most Importantly, we made notable progress on our regulatory strategy to obtain new clinical indications to support our sales and marketing efforts and address the remaining issues outlined in the FDA's original safety communication from March of 2022.

Speaker 1

In April, we secured a new 510 clearance for our Renuvion APR handpiece with an indication for As we shared on our last call, we believe this clearance is significant for 2 primary reasons. First, we believe it directly addressed the remaining limitations of the FDA safety communication, which initially stated that Renuvion APR handpiece had not been cleared for the use in combination with liposuction. And second, with this specific indication, our Renuvion APR handpiece is now the only Device on the market with a 510 clearance for use following liposuction. With this as a backdrop, on May 10, The FDA updated the safety communication. The update informed consumers and healthcare providers about the latest 510 Clarence revised the FDA's recommendations related to the use of our product accordingly And outline the 4 new clinical indications that we have secured for our Renuvion products Since the safety communication was originally posted.

Speaker 1

It has been a little over 3 months since the FDA updated Since the FDA update to the safety communication was posted and we continue to believe it addressed the remaining issues set forth in the original safety communication from March 14, 2022. Since May 10, our efforts have been squarely focused on raising awareness of these recent developments among existing and potential customers. Our team worked quickly to update our sales and marketing materials accordingly and educate our reps, distributors and surgeon customers to effectively communicate these developments and their significance. We also leveraged our presence At recent medical meetings, including the Vegas Cosmetic Surgery and the Aesthetic Show Conferences in June to raise awareness in the industry. While it takes time to bring current and potential customers Up to speed on our new 510 clearances and the resulting FDA updates, we believe this news is being well received In addition to commercializing our APeX-one console, which I discussed earlier, we continue to drive progress with respect For our Renuvion micro handpiece with an indication for the delivery of radiofrequency energy and or helium plasma where coagulation or contraction of soft tissue, including subcutaneous tissue is needed.

Speaker 1

The Renuvion Micro Handpiece features a smaller instrument shaft, which is half the width of our Renuvion APR Handpiece. It's designed to complement our existing product offering by providing surgeons with a new option to achieve soft tissue contraction in cases that may benefit from the use of a smaller profile handpiece. It's also worth noting that our Renuvion Micro Handpiece is designed exclusively for use with our APYX-one console, Providing another compelling reasons for surgeons to update to our latest generation system. After securing 510 clearance, our team has been focused on preparing to commence our limited market release of the I'm pleased to announce today that we have commenced our limited market release at the end of July. During the limited market release phase, we look forward to gaining important feedback from a select group of our existing surgeon users to inform our full commercial launch, which we are targeting for the Q4 of this year.

Speaker 1

And finally, in the Q2, we continued to improve our operating efficiency while securing Capital to enhance our balance sheet condition. We were pleased to deliver stronger than expected margin, Operating leverage and cash flow from operations performance in the 2nd quarter despite the softer than expected total revenue results. $2,700,000 gain from our sale leaseback transaction, we delivered a $2,000,000 reduction in Operating loss year over year in Q2. We expect improvements in operating losses over the balance of 2023 which provided us net proceeds of $6,600,000 And lastly, I'm excited to announce that actually today We received an $8,100,000 payment from the internal revenue service for the cash refunds that they had approved at the beginning of this year. This $8,100,000 refund payment included 7 point And potential capacity under our credit agreement and $18,500,000 of cash on our balance sheet at the end of the second quarter, and growth initiatives as we work towards our longer term goals of achieving sustainable profitability and strong free cash flow generation.

Speaker 1

I'll now turn it over to Tara to review the Q2 financial results and 2023 guidance, which we updated in today's press release. Tara?

Speaker 2

Thanks, Charlie. I will begin my review of our 2nd quarter financial performance at the gross profit line since Charlie covered our revenue results. Gross profit for the Q2 of 2023 increased $2,400,000 or 34% year over year to 9,300,000 Gross profit margin was 68.4% compared to 67.2% in the prior year period. 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 Total sales and within our Advanced Energy segment both by product and by geography as compared to the Q2 of 2022. Operating expenses increased $300,000 or 2.5 percent year over year.

Speaker 2

The increase in operating expenses and salaries and related costs and R and D expenses, which both increased by $100,000 These items were partially offset by $800,000 decrease in professional services expenses. Loss from operations decreased $4,700,000 or 79% year over year to $1,200,000 Included in the loss from operations is the 2 $7,000,000 gain from our sale leaseback transaction that occurred this period. Excluding the gain from our sale leaseback transaction, Our loss from operations decreased $2,000,000 or 34 percent year over year to $3,900,000 Total other income net was $282,000 compared to $622,000 last year. The change in total other income net was driven by an increase in net interest expense related to the outstanding debt obligations on our term loan in $4,400,000 or 82 percent year over year to $1,000,000 or $0.03 per share compared to $5,400,000 or $0.16 per share for the Q2 of 2022. Excluding our non recurring gain, Non GAAP net loss attributable to stockholders decreased $1,700,000 or 32% year over year.

Speaker 2

Adjusted EBITDA loss decreased $1,800,000 or 53 percent year over year to $1,600,000 compared to $3,400,000 in 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 today. Cash used in operations for the 3 months ending June 30 was 4 and higher use of cash and working capital compared to the Q2 of 2022. As of June 30, 2023, The company had cash and cash equivalents of $18,500,000 compared to $10,200,000 as of December 31, 2022. As Charlie mentioned, today we received an $8,100,000 payment from the internal revenue service for the cash tax refunds they approved at the beginning this year.

Speaker 2

This $8,100,000 refund payment includes $7,700,000 of refunds and $400,000 of related interest. Turning to a review of our 2023 financial guidance, which we reaffirmed in our earnings press release today. $59,000,000 to $62,000,000 representing growth of approximately 33% to 39% year over year. Our total revenue guidance range continues to assume Advanced Energy revenue in the range of $51,000,000 to $54,000,000 and OEM revenue of approximately $8,000,000 In terms of our profitability guidance for the full year 2023, We continue to expect net loss attributable to stockholders of approximately $10,500,000 Our formal financial guidance for 2023 incorporates the following considerations for modeling purposes. First, we expect gross margins of approximately 66.5% to 67.5%, up roughly 100 basis points versus our prior guidance assumptions.

Speaker 2

2nd, we now expect low to mid single digit growth in operating expenses year over year. 3rd, we expect total other expense net of approximately $900,000 in 2023 compared to our prior of approximately $1,400,000 The change versus prior guidance is driven by the updated treatment on the gain on our sale leaseback, which we recognized in GAAP operating loss in the Q2 compared to our Prior full year 2023 guidance, which assumed it would be recognized in total other expense net. Note, our updated guidance for total Other expense net in 2023 now assumes interest expense net of approximately $1,600,000 compared to $1,700,000 previously. 4th, we now expect non controlling interests of approximately 180,000 compared to 150,000 previously. And lastly, our guidance for 2023 now assumes an income tax benefit of approximately $2,000,000 Non cash depreciation and amortization of approximately $700,000 non cash stock based compensation expense of 5,600,000 and weighted average diluted shares outstanding of approximately 34,800,000 shares.

Speaker 2

For the Q3 of 2023, we anticipate total revenue in the range of $15,000,000 to $16,000,000 driven by an increase in Advanced Energy sales in the range of approximately 65% to 76% year over year, offset partially by a decrease in OEM sales of approximately 7% year over year. Lastly, Our formal guidance for 2023 continues to assume we end the year with approximately $20,000,000 in cash and cash equivalents on our balance sheet as of Twelvethirty Onetwenty 23. With that, I'll turn the call back to Charlie for closing remarks.

Speaker 1

Thanks, Tara. In conclusion, we are very pleased with our strong U. S. Sales performance during the second quarter, which enabled us to deliver 40% year over year growth in our Advanced Energy business coupled with notable year over year improvements in Our operating loss. From an operational standpoint, we secured a new 510 clearance to address the FDA safety communication and improve our positioning in the market, while continuing to raise awareness of our technologies, expand our product offering and enhance our Having addressed the remaining issues in the safety communication, we have seen Subsequent improvements in the U.

Speaker 1

S. Sales environment for our Advanced Energy Generators and we expect continued improvement globally over the balance of the year. We are reaffirming our guidance today based on our recent progress and continued confidence And the ability to deliver advanced energy sales growth in excess of 38% year over year combined with significant reductions in our net loss in 2023. We believe our growth in the Second half of twenty twenty three will continue to benefit from multiple tailwinds including the 4 510 clearances we obtained for specific clinical indications in 20222023 along with the most recent update made to the safety communication. The U.

Speaker 1

S. Commercialization of our APeX-one console And our efforts to raise awareness of our technologies at both the provider and consumer levels, including our direct to consumer initiatives. And in addition to driving strong growth in the second half of this year, We remain focused on delivering against our remaining strategic initiatives that we outlined at the beginning of the year, Enhancing our Renuvion product portfolio by bringing new technologies to market, expanding our portfolio of clinical evidence Supporting the use of our products and managing our expenses while driving progress towards profitability. By continuing to achieve progress across all of these fronts, we are committed to positioning Apyx Medical for the future So we can continue to expand our share of the multibillion dollar opportunity that lies ahead for Renuvion technology in the global cosmetic surgery market. I'd like to close by thanking our team and distributor partners for their contributions this past quarter as well as our customers, investors and everyone on today's call for their interest and support for our mission.

Speaker 1

With that operator, let's now open the call for questions.

Operator

Thank you. To allow your signal to reach our equipment. We do ask that you limit yourself to one question and to one follow-up. And our first question will come from the line of Matthew O'Brien with Piper Sandler. Please proceed with your question.

Speaker 3

Hey, this is Phil on for Matt. Thanks for taking our questions. I guess just to start, what was the magnitude of the international softness in the quarter? Understanding the stocking dynamic you called out, but what gives you confidence international can return to a source of growth? And just to tack on 1, you called out pockets of weakness versus strength in certain geographies.

Speaker 3

Can you speak to the differences In those individual markets that might be driving those differences?

Speaker 1

Yes, good question and thank you for it. Just let me take a step back for a minute. We saw some really positive developments in our business in Q2. So I want to make sure that everybody understands that we feel really good about where we are. We obtained the 510 clearance for Renuvion following liposuction and saw the communication update from the safety notice as we had expected.

Speaker 1

And percent year over year. Our U. S. Advanced energy sales growth and OUS generator sales growth We're consistent with our expectations. So those were right what we expected.

Speaker 1

Our OUS handpiece sales I'm not going to get into details other than to say that it was not a single distributor and that we expect Those orders in the back half of twenty twenty three. And that's one of the reasons why we're reaffirming our guidance today and we feel good about our

Speaker 3

That's helpful. And I guess just to talk a bit about the Micro Handpiece. What lift can you expect out of that device this year? How big of a deal is that smaller instrument shaft? And How should we think about the interest here as a lift to the ApexOne console?

Speaker 3

Thank you.

Speaker 1

Yes. So remember, as I outlined In the remarks, we have just started our soft launch in Q3. And so right now, the device is in hands of some of our Top surgeon customers and they're using it and we're gaining feedback where we will develop the safe and effective use guidelines and we will have all the information that we need Start to roll out of that in the Q4, okay? And the thing that is important about that, the micro handpiece and the smaller size of it Is now it can go into areas where doctors wanted something smaller and didn't want to take the existing APR in there. And so think about places like the fine areas of the face, think about the hands, think about the knees, think about the ankles, Think about smaller areas where people still want some form of skin contraction.

Speaker 1

And so we believe this will be a nice addition to our portfolio. And the other thing to keep in mind with this too is the micro handpiece, if you're going to use that, it requires an upgrade to the Apyx 1 console. And so we will start to see some of that benefit of the micro handpiece itself in the Q4, But it's really more of going to have an impact in 2024.

Speaker 3

Makes sense. Thanks so much.

Speaker 1

Thank you.

Operator

Thank you. Our next question comes from the line of Matt Hewitt with Craig Hallum. Please proceed with your question.

Speaker 4

Good afternoon. Thank you for taking the questions. Maybe first up, regarding APeX-one, Maybe what's the feedback been from customers? I realize it's still relatively early days, but what has been the conversion rate of your existing users so far?

Speaker 1

Yes. The initial response that we've seen for the APYX-one launch has been positive, and it's been an Important driver for us so far in Q2 of 'twenty three. The feedback has been highlighted by the advanced Which is really proven to be very important because a lot of the doctors were having their staff record this stuff and the Amount of gas and the amount of usage and the amount of jewels, they were recording all this stuff manually on the patient's charts. And now they can just upload this and the generator will do that automatically. And so that's been a really nice feature.

Speaker 1

And we're Really happy with the way it's been resonating with the surgeons and we expect it to remain an important contributor for us for the second half of the year too.

Speaker 4

Got it. And then shifting a little bit here, but regarding the international handpiece sales, understand it's a timing related issue. If I heard you correctly, it sounds like it's more back half. So does that imply we shouldn't anticipate that bouncing back here in Q3, it's going to take a little bit longer? Or Maybe have you received some orders already here in Q3 from international, these specific international distributors?

Speaker 4

Any additional color there would be helpful.

Speaker 1

Yes. Look, I think the important thing to know about that is it was just some orders, some handpieces, it wasn't one distributor and we expect those Orders in the back half of this year and I think that's all the detail that we're going to give on that and that's why we reaffirmed our guidance For the back half of the year because we're confident that we're going to get those in the back half of the year.

Speaker 4

Got it. All right. Thank you.

Speaker 1

Thank you.

Operator

Thank you. Our next question comes from the line of George sellers with Stephens. Please proceed with your question.

Speaker 5

Hey, good afternoon and thanks for taking the question. Maybe to start with the quarter, I'm just curious if you could Give some detail on how utilization trended with liposuction versus standalone and if that trend changed Following the FDA clearance.

Speaker 1

Yes. I don't know that I can speak to that With any trend data or anything else, I mean, remember that the FDA safety communication was just updated in the middle of May And we basically had 6 weeks of time in the quarter where that was behind us. And so in terms of monthly trends or specificity there, We did call out a notable uptick in the U. S. Adoption after the safety commission in May.

Speaker 1

So the only thing that I can tell you is that after that was out there that we started to have A much greater rate of adoption than we did before or after that. And so that obviously has us very encouraged for the rest of the year.

Speaker 5

Okay. That's helpful. And maybe switching to guidance here. You obviously reiterated your revenue guidance, but raised The gross profit expectations, I'm just curious if you could give a little bit more Detail, is there some change maybe in the contribution you're expecting from international versus the U. S?

Speaker 5

Or if you Just give a little bit more detail maybe that would be helpful.

Speaker 2

Yes. So I mean really it's primarily driven by mix And it is favorable mix within our Advanced Energy segment by geography and by product.

Operator

Thank you. Our next question comes from the line of Frank Tantan with Lake Street Capital Markets. Please proceed with your question.

Speaker 6

Great. Thanks for taking the questions. I was hoping to ask one on the guide as well. I was hoping you could parse out a couple of pieces to the growth expectation. The primary question I want to ask is just how are you thinking about growth in handpieces versus consoles, which do you expect to be growing faster or is it kind of broad based Frank, amongst both.

Speaker 1

Yes. Look, we had growth both in generators and in handpieces Globally, right. And we had that for the quarter that we just had, where we had faster growth and more growth Was the adoption of new generators and specifically in the U. S. But also outside the U.

Speaker 1

S. And we expect that to remain Really strong in the back half of the year and that is part of the momentum that we had And we've got that especially in the U. S. Because of multiple tailwinds. We've got the indications that we've talked about.

Speaker 1

We've got the reduced headwinds now that the FDA updated the safety notice. We've got the APeX-one Narrator, which right now remember is only launched in the United States. So that is a U. S. Thing in particular.

Speaker 1

And right now our Direct to consumer marketing is only in the United States too. And so we expect the U. S. To be a bigger driver. If the U.

Speaker 1

S. Is a bigger driver, that means that our gross margins go up, that there's a positive impact on our gross margins.

Speaker 6

Okay. That's fair. And then maybe for my second one, I wanted to ask on Ozempic. Obviously, it's been a hot And all headlines recently, curious if you could kind of illustrate or explain how you think that could positively or negatively impact your business in the future?

Speaker 1

Yes. The first thing is that we see it as a tremendous Tailwind to our business. We think it is going to be very positive for our company. The thing that I want to make sure that everybody Dan, this is just playing out right now and just getting started in real time. And we are working with some of Our clinicians that are actually doing this, they're actually marketing the skinny shot and they've got a whole program For people to come in and lose the weight and then be able to take care of their lax skin after.

Speaker 1

And remember for us, We really don't care how the skin gets lax. What we care about is that people don't like lax skin and they want to get it treated and Renuvion still is the best Technology on the marketplace today to treat that lack skin. And so for us, it's a tremendous benefit. It's a tremendous benefit that we think It's going to continue for many years to come, quite frankly.

Speaker 6

Okay. Maybe I'll squeak One more in here. With the FDA notice that came shortly after the liposuction 510, I think there was an inference in there related to the FDA enforcing on label usage across the industry. Have you seen this play out At all in the field as it relates to your competition? Or is this something that hasn't come to fruition yet?

Speaker 1

Yes. Unfortunately, we have not seen any sign of that. There's still people that are making claims that they shouldn't make and doing things So as of right now, we really have not seen any evidence of that even though it was you are correct. It was stated in the safety notice that they were going to do that. But in fairness to the FDA, that safety notice did just come out on May 10.

Speaker 1

And so we are not that far away from that still.

Operator

Thank you. Our next question is from Matt Hewitt with Craig Hallum. Please proceed with your question.

Speaker 4

Just a follow-up regarding the OUS opportunity, I realize you have a lot on your plate at the moment, but are you still seeking other Our incremental OUS approvals, I believe there's been a few countries in the past that you talked about potentially going after. I'm just curious if those are still in the works. Thanks.

Speaker 1

Yes, for sure. We did not obtain any new registrations in Q2 And our guidance doesn't assume any contributions from any new countries. But as you mentioned, the 2 big markets that we are not in are South Korea And so we are still pursuing both of those markets and We look forward to the day that I can tell you that we got clearance in both of those places. So we'll make sure that everybody knows when that happens for sure.

Operator

We are currently showing no remaining questions at this time. And with that, this does conclude our conference today. Thank you for your

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