Apyx Medical(APYX) - 2019 Q1 - Quarterly Report

Part I. Financial Information Item 1. Financial Statements The unaudited consolidated financial statements for the quarter ended March 31, 2019, detail the company's financial position and performance Consolidated Balance Sheets Consolidated Balance Sheet Highlights (in thousands) | Metric | March 31, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Cash and cash equivalents | $32,415 | $16,466 | | Short term investments | $40,885 | $61,678 | | Total current assets | $85,240 | $89,517 | | Total assets | $91,703 | $95,610 | | Total current liabilities | $7,475 | $7,702 | | Total liabilities | $7,690 | $7,842 | | Total stockholders' equity | $84,013 | $87,768 | Consolidated Statements of Operations Consolidated Statements of Operations Highlights (in thousands, except per share data) | Metric | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :--- | :--- | :--- | | Sales | $5,823 | $3,397 | | Cost of sales | $2,103 | $1,185 | | Gross profit | $3,720 | $2,212 | | Loss from operations | $(5,203) | $(2,720) | | Net loss | $(4,681) | $(935) | | Basic EPS from continuing operations| $(0.14) | $(0.08) | | Diluted EPS from continuing operations| $(0.14) | $(0.08) | | Basic EPS from total operations | $(0.14) | $(0.03) | | Diluted EPS from total operations | $(0.14) | $(0.03) | Consolidated Statements of Changes in Stockholders' Equity Changes in Stockholders' Equity (in thousands) | Metric | Balance Dec 31, 2018 | Options Exercised | Stock Based Compensation | Stock Exercise to Acquire Options and Warrants | Net Income | Balance Mar 31, 2019 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Additional Paid-In Capital | $52,221 | $777 | $859 | $(710) | — | $53,147 | | Retained earnings | $35,513 | — | — | — | $(4,681) | $30,832 | | Total | $87,768 | $777 | $859 | $(710) | $(4,681) | $84,013 | Consolidated Statements of Cash Flows Consolidated Statements of Cash Flows Highlights (in thousands) | Activity Type | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :--- | :--- | :--- | | Net cash used in operating activities | $(4,639) | $(1,108) | | Net cash provided by (used in) investing activities | $20,521 | $(139) | | Net cash provided by (used in) financing activities | $67 | $(60) | | Net change in cash, cash equivalents and restricted cash | $15,949 | $(1,307) | | Cash, cash equivalents and restricted cash, end of period | $32,415 | $9,361 | Notes to Consolidated Financial Statements NOTE 1. BASIS OF PRESENTATION - Apyx Medical Corporation is a medical technology company focused on J-Plasma® (Renuvion™) for cutting, coagulation, and ablation of soft tissue, and also engages in OEM agreements[13] - The company divested its electrosurgical "Core" business segment on August 30, 2018, for $97 million in cash to focus on J-Plasma technology, reclassifying Core business financial results to discontinued operations[14][17] - Apyx entered into a 10-year OEM agreement with Symmetry Surgical Inc to manufacture generators, with revenue and expenses reported in the OEM segment[14][16] NOTE 2. INVENTORIES Inventories (in thousands) | Category | March 31, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Raw materials | $5,032 | $4,521 | | Finished goods | $964 | $1,130 | | Gross inventories | $5,996 | $5,651 | | Less: reserve for obsolescence | $(398) | $(439) | | Net inventories | $5,598 | $5,212 | NOTE 3. INTANGIBLE ASSETS Intangible Assets (in thousands) | Category | March 31, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Purchased technology, net| $5 | $6 | | Goodwill | $185 | $185 | | Total Intangibles | $190 | $191 | - Intangible assets and goodwill resulted from the acquisition of Apyx (formerly Bovie) Bulgaria, EOOD in 2015[22] NOTE 4. RECENT ACCOUNTING PRONOUNCEMENTS - Adopted ASU No 2016-18 (Restricted Cash Flows) retrospectively, adjusting cash flow statement presentation without other financial statement impact[23] - Adopted ASU No 2014-09 (Revenue from Contracts with Customers) using a modified retrospective approach, with no material impact on consolidated financial statements[24] - Adopted ASU No 2016-02 (Leases) in Q1 2019, recognizing a $178k right-of-use asset and corresponding lease liability on the balance sheet[25] NOTE 5. EARNINGS PER SHARE Earnings Per Share (in thousands, except per share data) | Metric | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :--- | :--- | :--- | | Net (loss) from continuing operations | $(4,681) | $(2,791) | | Net income from discontinued operations, net of tax | — | $1,856 | | Net (loss) from all operations | $(4,681) | $(935) | | Weighted average shares used to compute basic (loss) | 33,343 | 32,878 | | Basic and diluted loss per share from continuing operations | $(0.14) | $(0.08) | | Basic and diluted income per share from discontinued operations | — | $0.05 | | Basic and diluted loss per share from all operations | $(0.14) | $(0.03) | - Anti-dilutive instruments excluded from diluted loss per common share for Q1 2019 included 1,908k options[29] NOTE 6. STOCK-BASED COMPENSATION Stock-Based Compensation Expense (in thousands) | Period | Stock-Based Compensation Expense | | :--- | :--- | | Three months ended March 31, 2019 | $859 | | Three months ended March 31, 2018 | $372 | Stock Option Activity | Activity | Number of Options | Weighted Average Exercise Price | | :--- | :--- | :--- | | Outstanding at Dec 31, 2018 | 3,480,701 | $3.10 | | Granted | 1,277,500 | $7.73 | | Exercised | (270,549) | $2.87 | | Canceled and forfeited | (10,500) | $2.10 | | Outstanding at Mar 31, 2019 | 4,477,152 | $4.44 | NOTE 7. INCOME TAXES Income Tax (Benefit) Expense (in thousands) | Metric | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :--- | :--- | :--- | | Income tax (benefit) expense | $(124) | $11 | | Effective tax rate | -3% | 0.0% | Gross Unrecognized Tax Benefits (in thousands) | Period | Gross Unrealized Tax Benefits | | :--- | :--- | | Balance at January 1, 2019 | $1,313 | | Balance at March 31, 2019 | $1,313 | - The effective tax rate differs from the statutory rate primarily due to a change in the valuation allowance on net deferred tax assets and a $130k adjustment to the 2018 tax accrual, offset by foreign taxes[34] NOTE 8. COMMITMENTS AND CONTINGENCIES Future Minimum Lease Payments (in thousands) | Year | Amount | | :--- | :--- | | 2019 (remaining 9 months) | $80 | | 2020 | $107 | | Total | $187 | - The company is involved in legal actions related to its J-Plasma technology and a class-action lawsuit filed April 17, 2019, alleging securities law violations regarding 510(k) submission statements for dermal resurfacing procedures[40][42] - Management believes it has meritorious defenses and claims are adequately covered by insurance, but potential costs could materially impact financial condition; $0.5 million has been accrued for initial defense costs for the class-action suit[40][43] - Purchase commitments for inventories totaled approximately $5.8 million as of March 31, 2019, with most expected to be purchased by the end of 2019[45] NOTE 9. RELATED PARTY TRANSACTIONS - Several relatives of Nikolay Shilev, Apyx Bulgaria's Managing Director, are company employees and considered related parties: Teodora Shileva (spouse), Antoaneta Dimitrova Shileva-Toromanova (sister), and Svetoslav Shilev (son)[48] NOTE 10. FINANCIAL INSTRUMENTS Cash, Cash Equivalents and Marketable Securities (in thousands) | Category | March 31, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Cash and Cash Equivalents | $32,415 | $16,466 | | Short-term Marketable Securities | $40,885 | $61,678 | | Total | $73,300 | $78,144 | - The company elected the fair value option for investments with maturities of three months or greater at the time of purchase, reporting unrealized gains and losses in earnings[52] NOTE 11. GEOGRAPHIC AND SEGMENT INFORMATION Segment Sales and Net Income (Loss) from Continuing Operations (in thousands) | Segment | Sales (Q1 2019) | Sales (Q1 2018) | Net Income (Loss) (Q1 2019) | Net Income (Loss) (Q1 2018) | | :--- | :--- | :--- | :--- | :--- | | Advanced Energy | $4,371 | $2,629 | $(3,387) | $(578) | | OEM | $1,452 | $768 | $785 | $406 | | Corporate & Other | — | — | $(2,079) | $(2,619) | | Total | $5,823 | $3,397 | $(4,681) | $(2,791) | Sales by Geographic Region (in thousands) | Region | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :--- | :--- | :--- | | Domestic | $4,104 | $2,758 | | International | $1,719 | $639 | | Total | $5,823 | $3,397 | - The company operates in two reportable segments: Advanced Energy and OEM, with 'Corporate & Other' covering unallocated costs[54] - International sales represented approximately 29.5% of total revenues for Q1 2019, up from 18.8% for Q1 2018[55] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial condition, results of operations, and strategic focus on J-Plasma technology Executive Level Overview - Apyx Medical is a medical technology company focused on commercializing J-Plasma® (Renuvion™) in the cosmetic surgery market, supported by a direct sales force of 28 professionals and 7 independent sales agencies[59][60] - International sales increased to 29.5% of total revenues in Q1 2019, up from 18.8% in Q1 2018, with products sold in over 40 countries[61] - The company voluntarily withdrew its 510(k) application for J-Plasma/Renuvion in dermal resurfacing but remains committed to working with the FDA on a new submission[62] - The divestiture of the electrosurgical "Core" business segment for $97 million in August 2018 allows the company to focus on J-Plasma technology and includes a 10-year OEM agreement to supply generators to Symmetry Surgical Inc[63][65] Results of Operations Sales Sales by Reportable Segment (in thousands) | Segment | March 31, 2019 | March 31, 2018 | Change | | :--- | :--- | :--- | :--- | | Advanced Energy | $4,371 | $2,629 | 66.3% | | OEM | $1,452 | $768 | 89.1% | | Total | $5,823 | $3,397 | 71.4% | Sales by Domestic and International (in thousands) | Region | March 31, 2019 | March 31, 2018 | Change | | :--- | :--- | :--- | :--- | | Domestic | $4,104 | $2,758 | 48.8% | | International | $1,719 | $639 | 256.5% | | Total | $5,823 | $3,397 | 71.4% | - Total revenue from continuing operations increased by $2.4 million, or 71.4%, to $5.8 million in Q1 2019, driven by Advanced Energy generators and handpieces, with modest contribution from OEM segment sales[70] Gross Profit Gross Profit (in thousands) | Metric | March 31, 2019 | March 31, 2018 | Change | | :--- | :--- | :--- | :--- | | Cost of sales | $2,103 | $1,185 | 77.5% | | Percentage of sales | 36.1% | 34.9% | | | Gross profit | $3,720 | $2,212 | 68.2% | | Percentage of sales | 63.9% | 65.1% | | - Gross profit increased by $1.5 million, or 68.2%, to $3.7 million in Q1 2019, but gross margin decreased to 63.9% from 65.1% due to product mix, higher international sales, and lower OEM margins[72] Other Costs and Expenses Research and development Research and Development Expense (in thousands) | Metric | March 31, 2019 | March 31, 2018 | Change | | :--- | :--- | :--- | :--- | | R&D expense | $810 | $514 | 57.6% | | Percentage of sales | 13.9% | 15.1% | | - R&D spending increased by 57.6% in Q1 2019, primarily due to focused spending on clinical studies and research projects related to the cosmetic surgery market[74] Professional services Professional Services Expense (in thousands) | Metric | March 31, 2019 | March 31, 2018 | Change | | :--- | :--- | :--- | :--- | | Professional services expense | $1,791 | $506 | 254.0% | | Percentage of sales | 30.8% | 14.9% | | - Professional services expense increased by 254.0% in Q1 2019, mainly due to increases in training-related physician consulting, medical advisory board stock option grants, marketing expenses, and legal and audit fees[75] Salaries and related costs Salaries and Related Costs (in thousands) | Metric | March 31, 2019 | March 31, 2018 | Change | | :--- | :--- | :--- | :--- | | Salaries and related expenses | $3,221 | $1,802 | 78.7% | | Percentage of sales | 55.3% | 53.0% | | - Salaries and related expenses increased by 78.7% in Q1 2019, driven by higher employee stock option expense, an increase in the sales force, and reclassification of regulatory salaries[78] Selling, general and administrative expenses Selling, General and Administrative Expense (in thousands) | Metric | March 31, 2019 | March 31, 2018 | Change | | :--- | :--- | :--- | :--- | | SG&A Expense | $3,101 | $2,110 | 47.0% | | Percentage of sales | 53.3% | 62.1% | | - SG&A expense increased by 47.0% in Q1 2019, primarily due to sales commissions and product sample expense, partially offset by an adjustment to the bad debt reserve following the Core business disposition[80] Other Income (Expense), net Other Income (Expense), net (in thousands) | Metric | 2019 | 2018 | Change | | :--- | :--- | :--- | :--- | | Interest income | $423 | $0 | 100.0% | | Interest expense | $0 | $(34)| (100.0)% | | Other losses | $(25)| $0 | 100.0% | | Change in fair value of derivative liabilities, net | $0 | $(26)| (100.0)% | - Interest income increased significantly in Q1 2019 due to short-term investments in U.S Treasury Securities purchased with proceeds from the Core business sale in September 2018[82] Income Taxes Income Tax (Benefit) Expense (in thousands) | Metric | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :--- | :--- | :--- | | Income tax (benefit) expense | $(124) | $11 | | Effective tax rate | -3% | 0.0% | - The effective tax rate differs from the statutory rate primarily due to a change in the valuation allowance on net deferred tax assets and a $130k adjustment to the 2018 tax accrual[83] - A valuation allowance is maintained on net deferred tax assets due to historical losses and the expectation of continued losses from continuing operations in the near future[84] Product Development - The company primarily develops products and improvements internally, funded by internal cash flow and equity issuances, with a focus on proprietary products to expand existing lines[85] - R&D teams are located in Clearwater, Florida, and Sofia, Bulgaria, maintaining close relationships with physicians and medical personnel[85] Reliance on Collaborative, Manufacturing and Selling Arrangements - The majority of products are manufactured in-house in Clearwater, Florida, and Sofia, Bulgaria, with labor-intensive sub-assemblies potentially outsourced[86] - The company functions as an OEM-provider of generators to Symmetry for at least 10 years[87] - Reliance on sole-source suppliers for the majority of raw materials poses a risk of significant disruptions in the supply chain, potentially impacting the ability to meet customer demands[88] Liquidity and Capital Resources - Working capital was approximately $77.8 million at March 31, 2019, a decrease from $81.8 million at December 31, 2018[89] - Net cash used in operating activities was approximately $4.6 million in Q1 2019, compared to $1.1 million in Q1 2018[90] - Net cash from investing activities was $20.5 million in Q1 2019, primarily due to the shift in categorization of short-term investments and cash equivalents in Treasury Bill investments[90] - Purchase commitments for inventories totaled approximately $5.8 million at March 31, 2019, expected to be purchased by the end of 2019[91] Critical Accounting Estimates Inventory reserves - The company maintains a reserve for excess and obsolete inventory, with estimates based on historical experience and expected future trends, acknowledging that actual product life cycles or demand could lead to additional write-downs[97] Long-lived assets - Long-lived assets are reviewed for impairment when circumstances indicate that their carrying amount may not be recoverable, with evaluations significantly impacted by estimates of future prices, volumes, capital needs, and economic trends[98] Stock-based Compensation - Stock options are expensed over the vesting period based on the trinomial lattice option-pricing model fair value on the grant date, which involves a number of estimates affecting the expense amount[99] Litigation Contingencies - A liability for legal actions is accrued when a loss is known or considered probable and the amount can be reasonably estimated, with significant judgment required to estimate the amount and timing of a loss[100][101] Income Taxes - The provision for income taxes includes federal, foreign, state, and local taxes, with deferred tax assets or liabilities computed based on temporary differences and valuation allowances recorded when a tax benefit is not likely to be realized[102][103] - Uncertain tax positions are assessed at the largest amount that is more-likely-than-not to be sustained upon audit[104] Item 3. Quantitative and Qualitative Disclosures about Market Risk The company's market risk disclosures remain materially unchanged from the previous Annual Report on Form 10-K - For disclosures about market risk, the company refers to Part II, Item 7A of its Annual Report on Form 10-K for the year ended December 31, 2018[108] - Management believes there have been no material changes to the market risk information provided in the Annual Report on Form 10-K[108] Item 4. Controls and Procedures Management identifies material weaknesses in internal controls and outlines ongoing remediation efforts Evaluation of Disclosure Controls and Procedures - Management concluded that the company's internal control over financial reporting was not effective as of December 31, 2018, due to identified material weaknesses[110] - An independent registered public accounting firm issued an adverse opinion on the effectiveness of internal control over financial reporting for the period ended December 31, 2018[111] - Three material weaknesses were identified: an ineffective control environment, ineffective control activities, and ineffective monitoring controls[113] Remediation Efforts to Address Material Weaknesses - The company is continuing remediation efforts by improving documentation of internal controls, guidance, communication, and emphasizing their importance[114] - Improvements are being made to risk assessment procedures, timeliness, and the identification, documentation, and assessment of information used in performing internal controls[115] - The company is enhancing policies, procedures, and controls for all key processes, including personnel training and implementing enhanced monitoring procedures, with assistance from third-party specialists[116][117] Changes in Internal Control over Financial Reporting - There were no changes in internal control over financial reporting during the three months ended March 31, 2019, that materially affected, or are reasonably likely to materially affect, internal control over financial reporting[120] Part II. Other Information Item 1. Legal Proceedings The company is involved in legal actions related to its J-Plasma technology and a class-action lawsuit - The company is involved in legal actions relating to the use of its J-Plasma technology, with management believing it has meritorious defenses and that such claims are adequately covered by insurance[123] - A class-action complaint was filed on April 17, 2019, alleging securities law violations related to public statements concerning the Premarket Notification 510(k) submission for J-Plasma® technology for dermal resurfacing procedures[124][125] - The company and its CEO intend to vigorously defend against the class-action suit, believing the allegations are without merit, and accrue liabilities for actions when a loss is probable and estimable[126][127] Item 1A. Risk Factors No material changes to risk factors are reported for the period - This section is marked as 'Not Applicable'[128] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities or use of proceeds occurred during the reporting period - There were no unregistered sales of equity securities and use of proceeds[128] Item 3. Defaults Upon Senior Securities No defaults upon senior securities occurred during the reporting period - There were no defaults upon senior securities[128] Item 4. Mine Safety Disclosures This section is not applicable as the company is not involved in mining operations - This section is marked as 'Not Applicable'[128] Item 5. Other Information There is no other information to report under this item - There is no other information to report under this item[129] Item 6. Exhibits This section lists all exhibits filed as part of the Form 10-Q - Exhibits include the Asset Purchase Agreement, Articles of Incorporation, By-laws, Certificates of Amendment/Elimination, and certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act[131] - XBRL (Extensible Business Reporting Language) information, including Instance Document and Taxonomy Extension Documents, is furnished[131][132] Signatures The report is certified by the registrant's authorized officers - The report is signed by Charles D Goodwin II, President, Chief Executive Officer and Director (Principal Executive Officer)[134] - The report is also signed by Tara Semb, Chief Financial Officer, Treasurer and Secretary (Principal Financial Officer)[134][136]