Apyx Medical(APYX) - 2020 Q3 - Quarterly Report

Part I. Financial Information Presents the company's condensed consolidated financial statements and management's analysis for the reporting period Condensed Consolidated Financial Statements Provides an overview of the company's financial position, operational performance, and cash flows for the nine months ended September 30, 2020 Condensed Consolidated Balance Sheets Details the company's assets, liabilities, and equity as of September 30, 2020, showing a decrease in total assets and cash Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $43,539 | $58,812 | | Total current assets | $67,664 | $76,733 | | Total assets | $75,415 | $84,745 | | Liabilities & Equity | | | | Total current liabilities | $9,594 | $12,311 | | Total liabilities | $11,077 | $13,486 | | Total equity | $64,338 | $71,259 | Condensed Consolidated Statements of Operations Reports the company's sales and net loss for the third quarter and nine months ended September 30, 2020, highlighting the impact of an income tax benefit Consolidated Statements of Operations Highlights (in thousands, except per share data) | Metric | Q3 2020 | Q3 2019 | 9 Months 2020 | 9 Months 2019 | | :--- | :--- | :--- | :--- | :--- | | Sales | $6,954 | $7,575 | $16,247 | $19,853 | | Gross Profit | $4,725 | $5,294 | $9,803 | $13,531 | | Loss from operations | $(4,371) | $(4,756) | $(18,030) | $(14,908) | | Net loss attributable to Apyx | $(3,728) | $(4,370) | $(10,369) | $(14,273) | | Basic and diluted EPS | $(0.11) | $(0.13) | $(0.30) | $(0.42) | Condensed Consolidated Statements of Cash Flows Summarizes cash flows from operating, investing, and financing activities for the nine months ended September 30, 2020, showing a net decrease in cash Cash Flow Summary for Nine Months Ended Sep 30 (in thousands) | Cash Flow Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net cash used in operating activities | $(15,049) | $(15,224) | | Net cash (used in) provided by investing activities | $(193) | $60,766 | | Net cash provided by financing activities | $61 | $152 | | Net change in cash and cash equivalents | $(15,273) | $45,676 | | Cash and cash equivalents, end of period | $43,539 | $62,272 | Notes to Condensed Consolidated Financial Statements Provides detailed disclosures on the financial statements, including the impact of COVID-19, tax benefits, and segment performance - The COVID-19 pandemic materially and adversely affected the business, as most procedures using the company's technology are elective. While sales declined significantly at the end of Q1, a recovery was observed starting late in Q2 and continuing through Q3 as local jurisdictions began to re-open[15][16] - The company recognized a significant income tax benefit of approximately $7.1 million for the nine months ended September 30, 2020. This was primarily due to the CARES Act, which allowed the carryback of Net Operating Losses (NOLs) from 2019, leading to the release of a $3.7 million valuation allowance[39][40][41] - A securities class action lawsuit filed in 2019 was settled, and the court issued a final order approving the settlement and dismissing the action on November 6, 2020. As of September 30, 2020, all obligations related to this matter were settled and fully paid[46] - An inventory impairment of approximately $400,000 was recorded during the nine months ended September 30, 2020. This was due to a reassessment of the product mix forecast, influenced by COVID-19 and the availability of newer handpiece designs[28] Sales by Reportable Segment (in thousands) | Segment | Q3 2020 | Q3 2019 | 9 Months 2020 | 9 Months 2019 | | :--- | :--- | :--- | :--- | :--- | | Advanced Energy | $5,479 | $6,094 | $12,332 | $15,815 | | OEM | $1,475 | $1,481 | $3,915 | $4,038 | | Total | $6,954 | $7,575 | $16,247 | $19,853 | Management's Discussion and Analysis of Financial Condition and Results of Operations Discusses the financial results, liquidity, and critical accounting estimates, emphasizing the COVID-19 pandemic's impact Executive Level Overview Provides a high-level summary of the company's business and management's response to the COVID-19 pandemic's impact on elective procedures - The COVID-19 pandemic has severely restricted economic activity and led to a material adverse impact on the business, with declines in product sales beginning in late February 2020[65][66] - In response to the pandemic, the company has implemented cost-saving measures, including hiring restrictions, reduced discretionary spending, and delayed R&D projects. It is also leveraging the CARES Act by utilizing NOL carryback provisions and deferring payroll taxes to mitigate the impact on working capital[69] Results of Operations Analyzes revenue, gross margin, operating expenses, and net loss, detailing the financial impact of COVID-19 and the CARES Act tax benefit Sales by Reportable Segment - YoY Change | Segment | Q3 2020 Change | 9 Months 2020 Change | | :--- | :--- | :--- | | Advanced Energy | (10.1)% | (22.0)% | | OEM | (0.4)% | (3.0)% | | Total | (8.2)% | (18.2)% | - Gross margin for the nine months ended Sep 30, 2020, was 60.3%, down from 68.2% in 2019. The decrease was driven by a $0.4 million inventory write-down, product mix within the Advanced Energy segment, and a higher proportion of lower-margin OEM sales[79][80] - Selling, general and administrative (SG&A) expenses decreased by 29.5% in Q3 and 11.6% in the nine-month period, primarily due to reductions in travel, advertising, show fees, and sales commissions as a result of COVID-19 restrictions[87][88] - The company recorded an income tax benefit of $7.1 million for the nine months of 2020, compared to an expense of $253,000 in the prior year. The benefit was primarily due to releasing a valuation allowance on NOL carryforwards, as permitted by the CARES Act[92] Liquidity and Capital Resources Assesses the company's working capital, cash flow from operations, and strategies to maintain liquidity, including leveraging the CARES Act - Working capital decreased from $64.4 million at Dec 31, 2019 to $58.1 million at Sep 30, 2020, primarily due to the net loss incurred during the period[93] - The company is utilizing CARES Act provisions to bolster liquidity, including an expected tax refund of ~$3.7 million from an NOL carryback and deferring ~$0.3 million in payroll taxes as of Sep 30, 2020[94][95] - The company has purchase commitments of approximately $1.8 million as of September 30, 2020, expected to be fulfilled within the next six months[98] Critical Accounting Estimates Identifies key accounting estimates requiring significant judgment, such as stock-based compensation and inventory valuation - Key critical accounting estimates include Stock-based Compensation, Accounts Receivable Allowance, Inventory Obsolescence Allowance, Litigation Contingencies, and Income Taxes[101] - For stock-based compensation, the most critical estimates are the expected life of options (calculated using the SEC's simplified method) and stock volatility (based on historical data)[101][102][103] Quantitative and Qualitative Disclosures about Market Risk States that there are no applicable market risk disclosures for the current reporting period - The company has indicated that there are no applicable quantitative and qualitative disclosures about market risk for this period[111] Controls and Procedures Concludes on the ineffectiveness of disclosure controls and procedures due to identified material weaknesses and ongoing remediation efforts - Management concluded that disclosure controls and procedures were not effective as of September 30, 2020, due to ongoing material weaknesses in internal control over financial reporting[113] - The three identified material weaknesses are: 1) an ineffective control environment lacking sufficient qualified accounting personnel, 2) ineffective control activities in areas like procure-to-pay and inventory, and 3) ineffective control activities over financial reporting in the Bulgarian subsidiary[119][120] - Remediation efforts are underway, including hiring a new CFO and Corporate Controller, enhancing policies and review controls, and improving processes at the Bulgarian subsidiary. These efforts are ongoing as of September 30, 2020[122][123] Part II. Other Information Contains disclosures on legal proceedings, risk factors, equity sales, and exhibits for the reporting period Legal Proceedings Refers to detailed disclosures regarding a settled class-action lawsuit and other legal actions in the financial statement notes - For information on legal proceedings, the report refers to Note 11 of the Notes to Condensed Consolidated Financial Statements[126] Risk Factors Highlights the material and adverse effects of the COVID-19 pandemic, including demand reduction and supply chain disruptions - A new risk factor was added to address the material and adverse effects of the COVID-19 pandemic on the business[128] - Key risks from the pandemic include significant reductions in demand for products used in elective procedures, potential supply chain interruptions, and the impact of a global economic slowdown on customer spending and payment ability[128][129][130] Unregistered Sales of Equity Securities and Use of Proceeds Confirms no unregistered sales of equity securities or use of proceeds occurred during the period Exhibits Lists all documents filed as exhibits with the Form 10-Q, including certifications and XBRL data - A list of exhibits filed with the report is provided, including Sarbanes-Oxley certifications and XBRL data[134]