Apyx Medical Corporation — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020; unaudited. Apyx develops and sells helium-plasma medical technology, marketed as Renuvion in cosmetic surgery and J-Plasma in hospital surgery, and provides OEM products and services.
Financial performance
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Revenue | $4.30m | $6.65m | $9.29m | $12.28m |
| Gross profit | $2.09m | $4.67m | $5.08m | $8.24m |
| Gross margin | 48.7% | 70.3% | 54.6% | 67.1% |
| Operating loss | $6.17m | $4.42m | $13.66m | $10.15m |
| Net loss | $4.69m | $4.30m | $6.64m | $9.90m |
| Basic and diluted loss per share | $0.14 | $0.13 | $0.19 | $0.30 |
Q2 revenue fell 35.4% year over year; first-half revenue fell 24.3%. Advanced Energy sales decreased 46.4% in Q2 and 29.5% for the first half; OEM sales increased 10.0% in Q2 but declined 4.6% for the first half. International sales were $0.90m in Q2 and $2.28m for the first half, down 57.2% and 40.4%, respectively.
The first-half income tax benefit was $6.40m, including approximately $3.7m from releasing a valuation allowance on federal net operating losses under the CARES Act. This tax benefit helped reduce the reported net loss despite a higher operating loss.
Liquidity, cash flow and debt
- Cash and cash equivalents were $46.16m at June 30, 2020, down from $58.81m at December 31, 2019. Working capital was approximately $60.2m, versus $64.4m at year-end.
- First-half operating cash use was $12.43m, compared with $10.68m in 2019. Investing cash use was $0.18m; financing cash use was $0.05m.
- Total liabilities were $10.99m. The filing reports no material conventional borrowings; obligations included a $0.14m related-party note due in October 2020 and lease liabilities. The company had no off-balance-sheet arrangements.
- Apyx expected a tax refund of approximately $3.7m by year-end 2020 and had deferred about $0.1m of payroll taxes, with a further $0.3m–$0.4m expected to be deferred by year-end.
Material changes and unusual items
- COVID-19 closures and reduced elective procedures materially weakened demand, especially in the Advanced Energy business and international markets. Sales improved toward the end of Q2, primarily in the U.S., but the recovery’s pace remained uncertain.
- Gross profit included an approximately $0.4m inventory write-down tied to revised product-mix forecasts, newer handpiece designs, and earlier-than-expected foreign product registrations. Cost of sales rose despite lower revenue; management also cited product, segment and geographic mix.
- Higher first-half R&D spending reflected two IDE clinical studies. Professional-services costs included increased accounting and audit work related to prior restatements and remediation of control deficiencies.
- Management cited tariff refunds as a contributor to the improvement in other income for the first half, partly offset by recognition of a joint and several payroll-tax liability.
Outlook, risks and contingencies
Management provided no quantified revenue or earnings guidance. It described the COVID-19 outlook as highly uncertain, noting possible continuing impacts on elective procedures, customer spending and collections, and the potential for renewed restrictions. Suppliers had experienced minor shipping delays but no significant disruption to date. The company curtailed discretionary spending, restricted hiring, reduced travel and capital spending, and delayed some R&D and clinical work; it said it did not plan headcount reductions or furloughs at that time.
- Controls: Disclosure controls were deemed ineffective at June 30, 2020 because previously identified material weaknesses remained unremediated. Weaknesses involved accounting staffing and expertise, documentation and timely execution of process controls, and purchasing and disbursements at the Bulgarian subsidiary.
- Litigation: A securities class action settlement was executed in July 2020 and preliminarily approved by the court; final approval remained pending. Approximately $670,000 of the $1.0m insurance deductible was unpaid at quarter-end, and substantially all of that amount was paid in July. Other helium-plasma-related claims remain, with a dispute over coverage with one insurer; uninsured or excess damages could materially affect results or cash flows.
- Tax uncertainty: Unrecognized tax benefits were $1.31m, with approximately $0.26m of accrued interest and penalties. If all uncertain positions were resolved favorably, the company said the tax benefit would be approximately $1.57m; resolution was expected by October 2022.
- Purchase commitments totaled approximately $0.5m, mostly expected within six months. A China joint-venture capital contribution of approximately $0.36m was required; about $0.15m was funded in July, and the venture had not begun principal operations.
Investor verification points
- Track whether elective procedures and Advanced Energy sales recover, and whether international demand resumes.
- Verify receipt and timing of the expected tax refund and monitor cash burn, receivable collections and allowance adequacy.
- Assess the effect of inventory write-downs and product/segment mix on future gross margins.
- Follow final court approval and payment of the securities settlement, and monitor coverage for other claims.
- Check progress in remediating the material weaknesses and whether disclosure and financial-reporting controls become effective.