Apyx Medical Corporation — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Unaudited results; filed November 12, 2021.
Business context
Apyx develops and sells helium plasma technology, marketed as Renuvion in cosmetic surgery and J-Plasma in hospital surgery, and has an OEM business. Its reportable segments are Advanced Energy and OEM. The company said its products had been sold in more than 60 countries.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Sales | $11.8m | $7.0m | $31.7m | $16.2m |
| Gross profit | $8.1m | $4.7m | $21.5m | $9.8m |
| Gross margin | 68.1% | 67.9% | 67.7% | 60.3% |
| Operating loss | $(4.0)m | $(4.4)m | $(12.8)m | $(18.0)m |
| Net loss | $(4.2)m | $(3.7)m | $(13.2)m | $(10.4)m |
| Loss per share, basic and diluted | $(0.12) | $(0.11) | $(0.38) | $(0.30) |
Q3 sales grew 70.1% year over year; nine-month sales grew 95.1%. Advanced Energy sales rose 88.2% in Q3 and 126.7% year to date. OEM sales increased 2.9% in Q3 but declined 4.4% year to date. International sales were 33.1% of Q3 revenue and 34.2% of nine-month revenue, up from 25.0% and 24.8%, respectively.
For the nine months, operating loss improved despite higher operating expenses, while net loss increased. The comparison is affected by a $7.1m income tax benefit recorded in the 2020 period, primarily from CARES Act NOL carryback provisions; 2021 recorded $0.2m of income tax expense. Q3 operating expenses included higher selling costs, commissions, advertising and compensation. Gross-margin improvement reflected sales and product mix, manufacturing efficiencies, higher production volumes and newer product models, partly offset by increased inbound freight costs.
Cash, liquidity and obligations
Cash and cash equivalents were $30.9m at September 30, 2021, down from $41.9m at December 31, 2020. Nine-month operating cash outflow was $10.7m, compared with $15.0m in 2020; investing outflow was $0.4m. Working capital was $48.2m, versus $56.9m at year-end 2020. The balance sheet lists no conventional borrowings; lease liabilities totaled approximately $0.4m. Purchase commitments were $5.2m, substantially all expected within 12 months.
Outlook, risks and unusual items
- Outlook: No numerical revenue, earnings or cash-flow guidance is provided. Management was optimistic about continued recovery in cosmetic and plastic surgery markets and global product utilization and adoption, while noting that generator demand remained at varying stages of recovery.
- COVID-19 and supply chain: Management reported longer freight lead times, delivery delays, higher inbound shipping costs and tighter availability and rising costs for some components. These had not materially affected results to date, but shortages could disrupt production, launches and customer deliveries.
- Legal and insurance: The company faces legal actions relating to helium plasma technology. Management considered its defenses meritorious and did not expect a material adverse effect, but disclosed a dispute with one insurer over coverage; uncovered damages could materially affect results and cash flows.
- Tax uncertainties: Gross unrecognized tax benefits were $1.3m, with $0.5m of accrued interest and penalties. If the company prevailed on all uncertain positions, it could recognize approximately $1.8m of tax benefits. Resolution was expected by October 2022.
- Other items: Q3 other loss included accrued Core-segment severance and expected inventory losses as the Symmetry supply agreement approaches its conclusion. Nine-month SG&A included $0.2m of OEM product recall costs. The China joint venture had not begun principal operations.
Key facts for investors to verify
- Whether strong Advanced Energy sales growth and international demand continue, and how generator adoption develops.
- Whether supplier and freight constraints, component costs and inventory levels affect fulfillment, gross margin or cash flow.
- How quickly cash is consumed while the company remains loss-making, and whether working capital remains adequate against commitments.
- Developments in helium plasma litigation and the insurer coverage dispute, including any changes to expected exposure.
- Resolution of uncertain tax positions and the actual timing and amount of any resulting tax benefit.