Apyx Medical Corporation — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. The company develops and sells J-Plasma/Renuvion surgical technology and provides OEM products and services. Its former electrosurgical Core business was sold in August 2018; results are presented as discontinued operations, although certain post-sale supply activity continues.
Financial performance
- Revenue: Q3 continuing-operations sales were $7.6 million, up 106.3% year over year; nine-month sales were $19.8 million, up 83.8%. Q3 Advanced Energy revenue rose 104.2% to $6.1 million and OEM revenue rose 115.6% to $1.5 million. Growth reflected expanded sales capacity, new international distributors, and Symmetry-related OEM sales.
- Profit and margins: Q3 gross profit was $5.0 million, with a 66.2% gross margin versus 68.7% a year earlier. Nine-month gross profit was $13.0 million and margin was 65.8%, versus 67.6%. Operating losses widened to $4.7 million in Q3 and $14.9 million for nine months. Net losses were $4.3 million and $13.9 million, respectively; continuing-operations diluted loss per share was $0.13 and $0.41.
- Prior-period comparison: 2018 reported net income of $69.2 million for Q3 and $68.0 million for nine months, largely reflecting the $69.1 million after-tax gain on sale of the Core business. The 2018 continuing-operations losses were $2.8 million for Q3 and $8.4 million for nine months, making total net income comparisons non-recurring and not representative of ongoing performance.
- Costs: Nine-month R&D was $2.6 million, professional services $5.8 million, salaries and related costs $9.7 million, and SG&A $9.9 million. Management attributed increases primarily to commercialization, sales-force and administrative expansion, physician training and consulting, marketing, regulatory work, and legal and audit fees.
- Cash flow and liquidity: Nine-month operating cash use was $15.1 million, versus $2.8 million in 2018. Investing activities provided $60.8 million, mainly from maturities of short-term investments; this is not operating cash generation. Cash, cash equivalents and short-term investments totaled $62.3 million at September 30. Working capital was approximately $69.9 million, down from revised $81.9 million at year-end 2018.
- Debt and obligations: The company reported a $140,000 note payable, due in October 2020, and approximately $989,000 of lease liabilities. Purchase commitments were approximately $4.6 million, mostly expected within six months. No off-balance-sheet arrangements were reported.
Material changes, outlook and risks
- Gross margin declined year over year, which management attributed to a higher mix of lower-margin international sales, Symmetry supply activity, and increased Bulgarian manufacturing overhead allocations.
- The company continued full-scale Renuvion commercialization and reported a 29-person direct sales force and six independent sales agencies at quarter-end. International sales were 26.7% of Q3 revenue and 29.2% of nine-month revenue.
- No numerical revenue, earnings, or cash-flow guidance is provided. Management said it remained committed to working with the FDA on a new dermal-resurfacing 510(k) submission after voluntarily withdrawing its prior application. Subsequent to quarter-end, the company began enrollment in an FDA-approved IDE study for skin-laxity procedures and received 510(k) clearance for the Apyx Plasma/RF Handpiece.
- Key risks include adoption and commercialization of Renuvion, regulatory outcomes, reliance on OEM customers and suppliers, and supply-chain disruption. Management cited a worldwide helium shortage and identified sole-source suppliers for many raw materials; it reported securing additional helium supplies.
- The company faces legal actions involving J-Plasma use and a securities class action relating primarily to statements about the dermal-resurfacing 510(k) submission. Management disputes the allegations; the securities matter seeks unspecified damages. The company accrued $500,000 for initial defense costs and noted potential material exposure if insurance coverage is inadequate or disclaimed; it also reported a dispute with one carrier over coverage levels.
- Disclosure controls were not effective at September 30, 2019 because of three previously identified material weaknesses in accounting expertise, documented and timely controls, and monitoring. Remediation was ongoing. The filing also describes corrections for immaterial stock-compensation errors and premature recognition of $194,000 of OEM revenue in Q1 2019; the company stated prior-period impacts were not material.
- Unrecognized tax benefits were $1.3 million, plus $197,000 of accrued interest and penalties; resolution is expected by October 2022. Management said a favorable resolution of all uncertain tax positions could result in approximately $1.5 million of tax benefits.
Important facts for investors to verify
- Whether rapid revenue growth translates into improved margins, lower operating losses, and sustainable cash generation.
- Progress on FDA studies, regulatory submissions, and commercialization of cleared products, including any subsequent developments.
- Resolution and insurance coverage of the securities class action and other J-Plasma-related claims.
- Progress in remediating material weaknesses and maintaining reliable revenue recognition and stock-compensation accounting.
- Availability of helium and other critical components, and the timing and cash impact of purchase commitments and lease obligations.