Apyx Medical Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited. Apyx develops and sells Helium Plasma Technology products, including Renuvion for cosmetic procedures and J-Plasma for hospital surgery, and provides OEM products and services.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Sales | $5.0 million | $5.6 million; down 11.2% |
| Gross profit / margin | $3.0 million / 59.7% | $3.6 million / 63.3% |
| Operating loss | $7.5 million | $5.7 million |
| Net loss | $2.0 million; loss per share $0.06 | $5.6 million; loss per share $0.17 |
| Operating cash flow | $(7.4) million | $(5.1) million |
| Cash and cash equivalents | $51.4 million at March 31 | $58.8 million at December 31, 2019 |
| Working capital | $63.6 million | $64.4 million at December 31, 2019 |
The smaller net loss primarily reflects a $4.9 million income tax benefit, including release of a $3.7 million valuation allowance following the CARES Act; it does not indicate improved operating performance. Gross margin declined 3.6 percentage points. Cash used in investing activities was $0.1 million, primarily for property and equipment. Total liabilities were $11.7 million; the filing reports lease liabilities and a $140,000 related-party note due in October 2020, but no conventional borrowings.
Changes and management commentary
- Advanced Energy sales fell 8.8% to $4.0 million; OEM sales fell 19.6% to $1.0 million. Domestic sales declined 7.5%, while international sales declined 19.8%.
- Management attributed weaker demand to COVID-19-related closures and restrictions affecting elective procedures. Sales began declining in European markets in late February and spread to North and Latin America in March; management reported no recovery as of the filing.
- The company expected significant adverse effects to continue into Q2 2020 and possibly beyond, but said the duration and financial impact could not be reasonably estimated. It reported minor shipping delays from suppliers, with no significant operational impact at that point.
- Management was restricting hiring, discretionary spending and capital expenditures, and delaying some R&D and clinical work. It had no plans at the time to reduce headcount or furlough employees. The company expected a $3.7 million tax refund by year-end and payroll-tax deferrals of $0.4–$0.5 million under the CARES Act.
Risks, contingencies and unusual items
- COVID-19 creates material uncertainty around demand, elective procedures, customer payment delays or defaults, and potential supply-chain or operating restrictions. The company received customer requests for extended receivables payment terms and recorded $0.6 million of increased bad-debt expense.
- A securities class action concerning statements about an FDA submission survived the company’s motion to dismiss in March 2020. The company disputes the allegations; $820,000 remained accrued toward a $1.0 million defense-cost and deductible accrual. Management said insurance coverage could be insufficient or disputed.
- Other Helium Plasma-related legal actions are ongoing. Management considers the claims insured and not expected to materially affect the company, but notes potential material exposure if coverage is inadequate.
- Unrecognized tax benefits were $1.3 million, with $217,000 of accrued interest and penalties. The company said uncertain tax positions were expected to be resolved by October 2022.
- Material weaknesses in internal control over financial reporting remained unremediated as of March 31, 2020, involving accounting expertise, process-control documentation and timeliness, and controls at the Bulgarian subsidiary. Management stated that the financial statements nevertheless fairly present the company’s results and position.
Important facts for investors to verify
- Whether sales and elective procedure demand recovered after Q1, and the resulting effects on revenue, margins and cash burn.
- Customer collections, receivables quality and the expected timing and receipt of the CARES Act tax refund.
- Progress in remediating internal-control weaknesses and any further restatements or related costs.
- Developments in the securities and product-related litigation, including insurance coverage and potential costs beyond recorded accruals.
- Funding and timing of the approximately $0.4 million China joint-venture contribution and the $140,000 related-party note due in October 2020.