Apyx Medical Corporation — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; unaudited. The company develops J-Plasma, marketed as Renuvion in cosmetic surgery, and provides OEM products and services. Its former Core electrosurgical business was sold in August 2018; its results are presented as discontinued operations in comparative periods.
Financial performance
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Revenue | $6.6 million | $3.7 million | $12.4 million | $7.1 million |
| Gross profit / margin | $4.5 million / 68.1% | $2.5 million / 68.7% | $8.2 million / 66.1% | $4.7 million / 67.0% |
| Operating loss | $(4.5) million | $(2.9) million | $(9.7) million | $(5.7) million |
| Net loss | $(4.3) million | $(0.3) million | $(9.0) million | $(1.2) million |
| Continuing-operations loss per share, diluted | $(0.13) | $(0.09) | $(0.27) | $(0.17) |
Q2 revenue rose 77.9% year over year; first-half revenue rose 74.8%. Advanced Energy revenue was $5.3 million in Q2 and $9.6 million for the first half, up 69.3% and 67.9%, respectively. OEM revenue was $1.3 million and $2.8 million, up 124.7% and 104.4%, primarily from Symmetry supply-agreement sales. International sales were 30.9% of Q2 revenue and 30.2% of first-half revenue, versus 19.8% and 19.3% in the comparable periods.
The Q2 2018 net loss was substantially offset by $2.7 million of income from discontinued operations; first-half 2018 included $4.5 million of discontinued-operations income. Thus, total net-loss comparisons are affected by the Core divestiture. Gross margin declined as a greater mix of Advanced Energy sales came from outside the U.S. and product mix shifted; management also cited lower OEM margins associated with Symmetry agreements.
Costs, cash flow and liquidity
- First-half operating cash use was $10.1 million, versus $1.7 million in 2018, principally reflecting operating losses and working-capital investment. Investing activities provided $60.9 million, mainly from Treasury maturities and reinvestment in cash equivalents. Financing activities provided $0.1 million.
- At June 30, cash and cash equivalents were $67.4 million; the filing states this included $3.5 million cash and $63.9 million of U.S. Treasury securities with maturities of three months or less. Short-term investments were nil on the balance sheet. Working capital was approximately $74.1 million, down from $81.8 million at year-end 2018.
- Total liabilities were $8.3 million. The company reported a $0.14 million note payable and $0.27 million long-term lease liability; it had repaid the Clearwater facility mortgage in 2018. No off-balance-sheet arrangements were reported.
- First-half R&D expense was $1.7 million, professional services $3.4 million, salaries and related costs $6.6 million, and SG&A $6.2 million. Management attributed increases to clinical and research work, training and marketing, legal and audit fees, expanded headcount and sales commissions. Stock-based compensation was $1.7 million, versus $0.7 million in first-half 2018.
Outlook, developments and risks
- No quantified revenue, earnings or cash-flow guidance is provided. Management said full-scale Renuvion commercialization continued, supported by a 29-person direct field sales force, six independent sales agencies and four sales managers as of June 30, 2019.
- Apyx voluntarily withdrew its 510(k) submission for J-Plasma/Renuvion use in dermal resurfacing on April 1, 2019. Management described this as a commercialization delay and said it remained committed to working with the FDA on a new submission.
- The company reported a putative securities class action concerning statements about the dermal-resurfacing 510(k) submission. The suit seeks unspecified damages; a lead plaintiff was appointed July 16, 2019. The company said it considers the allegations without merit and intends to defend the case. It accrued $0.5 million for initial defense costs; management warned uninsured or excess costs could materially affect results, financial position or cash flows.
- Management cited a worldwide helium shortage. Apyx had arranged additional cylinder and helium supply and maintained a U.S. reserve. It also disclosed approximately $3.4 million of purchase commitments, substantially all expected to be purchased by year-end 2019, and sole-source supplier exposure for many raw materials.
- Disclosure controls were ineffective at June 30, 2019, owing to three material weaknesses: insufficient qualified accounting personnel, deficient documentation and timeliness of business-process controls, and ineffective monitoring. Remediation was underway, including use of a third-party specialist. Management nevertheless stated that the financial statements fairly presented the company’s financial position and results in accordance with GAAP.
- Unrecognized tax benefits were $1.313 million, with approximately $53,000 of related accrued interest and penalties. The filing said uncertain tax positions were expected to be resolved by December 31, 2019; resolution could produce a material tax benefit if the company prevailed.
Important facts for investors to verify
- Progress and timing of FDA engagement and any new dermal-resurfacing 510(k) submission.
- Renuvion sales adoption, revenue mix, gross margins and cash consumption as commercialization expands.
- Developments in the securities litigation, insurance coverage and defense-cost accrual.
- Effectiveness and completion of remediation for the disclosed internal-control material weaknesses.
- Helium and other supplier availability, purchase commitments, and the timing and outcome of uncertain tax positions.