Hello, and welcome, ladies and gentlemen to the Fourth Quarter and Fiscal Year 2023 Earnings Conference Call for Apyx 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 we begin, I'd 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, 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 calculated and presented in accordance with GAAP are available in the earnings press release on the Investor Relations portion of our website. I will now turn the call over to Mr. Charlie Goodwin, Apyx Medical's President and Chief Executive Officer. Please go ahead, sir.

Thanks, operator and welcome, everyone to our fourth quarter and fiscal year 2023 earnings call. I'm joined on today's call by Matt Hill, our Chief Financial Officer. Before we delve in, let me provide a quick outline for the call. First, I'll discuss our quarterly revenue performance as well as some of the notable operational progress we made during the fourth quarter. Matt will then review our quarterly financial results and our 2024 fiscal guidance, which we introduced in today's earnings release. I'll conclude by sharing some additional thoughts on our outlook and priorities for 2024 before we open the call for questions. With this as a backdrop, let's begin with a review of our fourth quarter revenue results. Total revenue in the fourth quarter increased 16% year-over-year to $14.7 million. Our total revenue growth was predominantly driven by sales of our Advanced Energy products, which increased 15% year-over-year to $12.1 million. However, we also saw strong contributions from sales of our OEM products, which increased 22% year-over-year to $2.5 million. Turning to a more detailed discussion of the growth drivers in our Advanced Energy segment. From a product standpoint, our advanced energy sales growth was driven by double-digit growth in sales of both generators and handpieces, which increased by more than 25% and 10%, respectively. And from a geographic standpoint, the majority of our Advanced Energy sales growth was driven by sales to our U.S. customers. In the U.S. specifically, our Advanced Energy sales growth was fueled primarily by sales of our handpieces which increased by more than 35% year-over-year, reflecting an uptick in utilization-based demand. We also saw double-digit growth in U.S. generator sales, which increased by more than 15% year-over-year. Our U.S. generator sales growth benefited from sales of our next-generation generator system, the Apyx One console…

Thank you, Charlie. I'm excited to join the Apyx Medical team during this important stage in the company's development and look forward to continuing to building on the progress made in the recent years. Given that Charlie has discussed our revenue results, I will begin at the gross profit line. Unless noted otherwise, all references to fourth quarter financial results are on a GAAP and year-over-year basis. Gross profit for the fourth quarter of 2023 increased $0.7 million or 8% to $8.9 million. Gross profit margin was 60.9% compared to 65.3% in the prior year period. The decrease in our gross margin was driven primarily by changes in the product mix within our Advanced Energy segment as well as lower average selling prices due to changes in our customer mix, higher material and inbound shipping costs to manufacture our inventory, and additional reserves on inventories as a result of lower-than-expected sales. Operating expenses increased $0.5 million or 4% to $14.7 million. The increase in net operating expenses was primarily driven by selling, general, and administrative expenses as well as salaries and related costs, which increased by $0.9 million and $0.2 million, respectively. These increases were offset partially by professional services expenses, which decreased by $0.6 million. Loss from operations for the fourth quarter of 2023 decreased $0.2 million or 3% to $5.8 million. Total other expense net was $3.8 million compared to income of $19,000 in the fourth quarter of 2023. The change was driven by $3.1 million in expenses recognized in the fourth quarter of 2023 related to the extinguishment of our prior credit agreements. Along with increased net interest expense related to our outstanding debt obligations as we had no outstanding borrowings in the prior year period. Income tax expense decreased $0.1 million or 42% to $0.1 million…

Thanks, Matt. Our total revenue guidance for 2024 reflects a different near-term growth profile as we navigate the continued challenges in the cosmetic surgery capital equipment environment, and we return to a more normalized ordering from our OEM customers. With respect to key assumptions of our Advanced Energy segment, while the environment remains challenging, we are pleased that customer utilization remains strong and we expect growth in sales of our handpieces driven by demand from both existing customers and new users globally will help offset the impact of slower generator sales in 2024. Our full year Advanced Energy revenue range assumes that capital equipment adoption trends in the first half of 2024 remains similar to what we saw in the second half of 2023. We expect to see improving trends in the second half of this year. For avoidance of doubt, our first quarter is challenged by the impact of this dynamic, along with the seasonal purchasing patterns that we have experienced in prior years. To that end, while we expect positive momentum in our generator pipeline over the balance of the first quarter, the low end of our full year Advanced Energy revenue range assumes approximately 40% decrease in the first quarter compared to the fourth quarter of 2023. Despite the continuation of this challenging market environment over the near term, we believe we are better positioned than we have ever been and the level of regulatory, clinical and customer support for our technology has never been higher. Moreover, we believe the longer-term outlook for our addressable market remains compelling. According to the latest global survey report of the International Society of Aesthetic Plastic Surgery, liposuction procedures grew 21% year-over-year to an estimated 2.3 million in 2022 and continue to be the number one aesthetic surgical procedure globally. We…

Thank you. [Operator Instructions]. Our first question comes from the line of Frank Takkinen with Lake Street Capital Markets. Please proceed with your question.

Great, thanks for taking the questions. Was hoping to start by asking a little bit more about the guide, you gave us a lot of different pieces to kind of model up the sequential cadence of revenue. I think the implied number for Q1 is in the high $8 million range to get to that 40% down quarter-over-quarter. But back us into a pretty good sequential ramp throughout the year. So maybe talk about how you envision this playing out, are you starting to see some of the capital equipment overhang lift and you expect that to accelerate to the back end of the year, is the funnel indicating that this should allow you to accelerate into the back end of the year, just maybe give us a little bit more color on the assumptions around how you ramp through 2024?

Yes. Thanks, Frank. Appreciate the question. We believe that the capital equipment purchasing environment continues to be challenging. And really, we have not seen any evidence of sustained improvement so far in Q1, okay. And in the interest of transparency, we said at the low end of our full year revenue guidance contemplated a roughly 40% decrease in Advanced Energy in Q1 versus Q4 of 2023. And we always see that seasonal quarter-over-quarter decline from Q4 to Q1. It's typically about 30% but because of the capital equipment environment, we've brought it down to 40%. And our expectations for Q1 also reflect continued headwinds in this capital purchasing environment that we have there. And as we look out the year, we would see the back half getting a little bit better, but we still see headwinds over the year. We're not forecasting a change or when that's going to really change in the back half. We still believe that our handpiece business is strong, and that will continue to be strong throughout the year. But from a capital purchasing environment, we're not forecasting a huge turnaround this year.

Okay. That's helpful color. And then maybe for my second one, just an update on the GLP-1 dynamic. I know we've talked about it in many of the previous calls and how it's a longer-term tailwind. Is there any chance that it's potentially is causing a little bit of an air pocket right now as those who are on GLP-1 work through the treatment regimen, and then they may become a candidate for skin tightening 6 to 12 months after starting the treatment or is the overhang you're seeing strictly related to the capital equipment market?

Yes. So if you look at what we did, Q4 from a procedure perspective was exactly what we thought and handpieces were up strong, especially in the U.S. But based on the feedback we've heard from surgeons, we continue to believe that this represents a very long -- huge long-term tailwind. And first, if you remember from the GLP-1 drugs, most of those patients were not candidates for Renuvion because of their BMIs before. And so this brings in a whole bunch of new candidates into the funnel. And yes, they do need to lose the weight before they have body contouring, but we're actually starting to see now that these patients are even more inclined to have aesthetic procedures than the traditional patients because they've been through this journey. And there could be some type of lag in -- because they have to lose the weight and have to do that. There's no question about it. But we think in 2024 we will start to see a lot of these patients come through the door.

Perfect, that’s helpful color. I will step down, thanks for taking the questions.

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

Hey, good morning. Thanks for taking the questions. Maybe to start with the gross margin piece, could you just break out the drivers to that OEM gross margin headwind, is this inflation or weaker pricing or some combination of those two? And then how should we think about this on a go-forward basis as a weaker OEM gross margin contribution, the new normal?

Yes, that's a great question. I'm going to give that over to Matt and have him walk you through the puts and takes of the gross margin.

So let's talk about -- by the way, thanks for your question. Good question. We analyze the gross margin very carefully. From a perspective of Q4, our gross margins in Q4 were down to 60.9%. A little more than half of that was related to inventory cleanup at year-end for some slow-moving inventory with additional reserves, and the remainder was associated with -- primarily with mix -- product mix in our AE segment, both product and customer mix. And then in the environment that we're in, we saw some additional material and shipping costs. Now as we look out into 2024, what we're looking at right now is our low end of the guidance assumes gross margin is about 61% in 2024. And the year-over-year margin largely reflects the headwinds related to our anticipated revenue mix. So most of that is going to be revenue mix within our OEM and the other half is going to be a full year impact of rent expense associated with that sale leaseback that we did in 2023. And it will be some geographic revenue mix in our Advanced Energy segment.

Okay. That's really helpful. Thank you for that color. Switching gears, a little bit to the Advanced Energy piece. I'm just curious, could you remind us where you are in converting existing customers to the Apyx One and then when that discounted program will end?

So we are pleased with the progress that we've made this past year in upgrading existing users. Our recently launched Micro Handpiece represents another benefit to adopting Apyx One and for practices though, that are focused on those procedures. And we still see significant room to expand adoption across our existing user base in 2024. That said, our guidance still implies that our generator sales will be slower due to the challenging environment because, obviously, those doctors have to have a capital purchase also. And remember, it's only going to be the doctors that want to use the Micro Handpiece that will be the ones that we'll be adopting first, the ones that are doing a lot of body work, they don't -- and not going to use the Micro right away, they wouldn't need to adopt right away. So we still see these trends as being a little bit slower in 2024 also.

Okay. Okay. Got it. And then as you think about the rest of 2024 and into 2025 as well, is the Micro Handpiece and the other new technologies that you all have in the pipeline are those sort of the key drivers to getting existing customers and then also new customers to adopt the Apyx One or is the improved technology of the Apyx One driving new user adoption as well?

Yes, the new user adoption will be primarily Apyx One for new users, but the growth in our handpieces as a whole is going to be a driver for us in 2024 and 2025 and beyond. Remember, there's 2.3 million liposuction procedures that are done on a worldwide basis every single year. And we've got a long ways to go to make Renuvion the standard of care for liposuction. So the handpieces whether they're Micro, whether they're for the body, whether they're for everything else, that still remains a huge driver of our business as we move forward from 2024 and for many years to come.

Okay, great. I will leave it there. And thanks again for taking the questions.

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

Good morning, thank you for taking the questions. Maybe just a follow-up on your last response there, Charlie. Given the tough macro environment, particularly with the higher interest rates, is there anything that you could do from a pricing perspective that would drive generator sales over the near term? Obviously, you're seeing the utilization grow, but getting those generators into the practices hands, I think, is the key here. And I'm just wondering if there's something you could do from a pricing perspective to encourage and kind of motivate the purchase and get those boxes in place?

Yes. Look, we've obviously talked about programs that we've had to buy down the interest rates for leases and things like that, and we're constantly evaluating what we're doing from a capital perspective in order to make it as easy as possible for new adoption of our generators. And obviously, it's something that we will continue to look out and monitor and drive. And it's obviously a huge focus of the entire organization globally for new customer adoption in 2024. So it's always something that we're evaluating and always something that we're looking at.

Got it. And then I believe at least historically, you have not factored in additional international clearances in to your forecast. Is that still the case and are there still a few countries out there that you think you're hopeful that you could garner approvals in that could be incremental to your guidance?

Yes, our guidance just like always, does not assume any material contributions from any new countries in 2024. As we've talked in the past, the two big ones that we're working on are Korea and China. And I think they're the third and fifth largest cosmetic markets depending on how you look at them or what things you look at. But obviously, until we get those, it doesn't make any sense to talk about them, quite frankly.

Got it, right, thank you.

Thank you. [Operator Instructions]. Our next question comes from the line of Matt O'Brien with Piper Sandler. Please proceed with your question.

Hi, this is Samantha on for Matt. Thanks so much for taking our questions. So you provided a bunch of color on the sales guidance for the year. We were just wondering, what is the higher end of that range you expect and what would it take for you to reach that?

So the delta between the high end and the low end of our guidance basically assumes increased generator sales. So it's just us being more successful with generator sales.

Okay. Got it. Thank you. And then one more on the DTC initiative, I know this has been a really big focus recently, how do you expect this to be a contributor throughout the year?

Yes, I think that we will continue to drive awareness, both from a consumer point of view and a customer point of view, physician point of view to the benefits of Renuvion, what they can do for their practice, not only in traditional body contouring with liposuction, but also to help treat the patient population that is going to be coming through their doors that are on the GLP-1 drugs. And that will be something that you will see from a DTC perspective as we start to talk and to educate both groups.

Perfect, thank you. I know you've mentioned previously that you've had patients come in talking about Renuvion. Are you still seeing that specifically so far early this year?

Yes, so the great thing about awareness and a great thing about building on this is, is every day, every week, every year, awareness of the technology becomes more and more. And that word of mouth helps to spread not only from a patient perspective but also from a physician perspective. And so that will be something that will keep building us as we go throughout the years here for sure.

Great, thank you.

Thank you. Our next question comes from the line of David Turkaly with Citizens JMP. Please proceed with your question.

Hey, good morning. Just one quick one. Given all the progress you made with the label, all the sort of expansion you got there. I'm just curious, what are the conversations like with the docs here domestically specifically? I know you mentioned capital challenges, we talked about that. But does it resonate, let's say, vis-a-vis the competition with these surgeons, are they aware of these labels, are they aware that others don't have it, is there anything -- how often does that come up in conversation, any sort of color you can give us in terms of the benefit from all that work you did?

Yes. No, it's a great question, and I appreciate the question. And yes, it does resonate with doctors. In fact, the frustrating thing is our pipeline has probably never been stronger than it is right now and it's not a function of doctors saying no or saying they don't want it or they don't -- they want us to go away. It's just come back and see me in a little bit. They're just unsure of what the environment is going to be, and it's -- and they're unsure to make capital purchases in this time. And we're seeing it not just here, it's being seen throughout the industry right now. And that's really the thing. But yes, it does resonate with doctors. And yes, they are appreciative of that. And not only is it just the clearances that we've got but we now have over 92 clinical papers that talk about the safe and effective use of our technology. And I don't know if anybody else in what we're doing that's got even close to that body of evidence. And so all of that stuff, that evidence-based medicine definitely resonates with plastic surgeons for sure.

Thank you.

Thank you. We are currently showing no remaining questions at this time. That does conclude our conference for today. Thank you for your participation.