Apyx Medical Corporation — Q3 2020 Form 10-Q
Business and period: Apyx develops and sells helium plasma technology as Renuvion in cosmetic surgery and J-Plasma in hospital surgery, alongside OEM products. This unaudited report covers the quarter and nine months ended September 30, 2020; comparisons are with the corresponding 2019 periods. COVID-19 materially affected demand, particularly for elective procedures.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Sales | $7.0 million | $7.6 million | $16.2 million | $19.9 million |
| Gross profit / margin | $4.7 million / 67.9% | $5.3 million / 69.9% | $9.8 million / 60.3% | $13.5 million / 68.2% |
| Operating loss | $4.4 million | $4.8 million | $18.0 million | $14.9 million |
| Net loss attributable to Apyx | $3.7 million | $4.4 million | $10.4 million | $14.3 million |
| Loss per share, diluted | $0.11 | $0.13 | $0.30 | $0.42 |
Q3 sales declined 8.2% year over year; nine-month sales declined 18.2%. Advanced Energy sales fell 10.1% in Q3 and 22.0% year to date, while OEM sales were nearly flat in Q3 and down 3.0% year to date. Nine-month domestic sales declined 12.7% and international sales 31.3%. Q3 gross margin fell 2.0 percentage points; the nine-month decline was 7.9 points, reflecting product mix, a higher OEM share of sales, and a roughly $0.4 million inventory write-down in the first half.
Operating expenses totaled $9.1 million in Q3 and $27.8 million year to date. Q3 SG&A fell 29.5%, but salaries rose 11.0%; nine-month R&D increased 14.0% and SG&A decreased 11.6%. The nine-month net loss improved year over year in part because of a $7.1 million income tax benefit, including release of a $3.7 million valuation allowance following the CARES Act; this benefit is not equivalent to operating earnings.
Cash, liquidity, and obligations
At September 30, cash and cash equivalents were $43.5 million, down from $58.8 million at December 31, 2019. Working capital was $58.1 million, versus $64.4 million. Operating activities used $15.0 million over the first nine months, compared with $15.2 million a year earlier; capital expenditures were $0.2 million. Total liabilities were $11.1 million, including $0.6 million of lease liabilities and a $0.14 million related-party note payable. The note was paid in full on October 20, 2020. The filing reports no off-balance-sheet arrangements.
The company expected a tax refund of approximately $3.7 million by year-end 2020 and had deferred $0.3 million in payroll taxes under the CARES Act, with a further $0.1–$0.2 million expected to be deferred by year-end. Purchase commitments totaled approximately $1.8 million, substantially all expected within six months. Approximately $0.2 million remained to be contributed to the China joint venture.
Outlook, risks, and notable items
- Management reported that demand improved from late Q2 through Q3 as customers resumed operations, chiefly in the U.S., but remained below pre-pandemic levels. The sustainability of the recovery was uncertain, and the company said COVID-19 could materially affect results into Q4 2020 and beyond. The filing provides no numerical revenue or earnings guidance.
- Elective-procedure restrictions, renewed outbreaks, patient willingness, customer spending and payment delays, and possible supplier or operating disruptions were identified as significant risks. A higher allowance for doubtful accounts reflected increased collection uncertainty. Suppliers had experienced minor shipping delays, without significant operating impact to date.
- Two IDE clinical studies were in development; spending on R&D increased. Management said it was restricting hiring, discretionary spending and capital expenditures and delaying certain R&D and clinical research activities, while having no plans at the time to reduce headcount or furlough employees.
- Helium Plasma-related legal actions remained a risk; management said it believed the claims were adequately insured, but disclosed a coverage dispute with one carrier and the possibility of material exposure if coverage were unavailable or damages exceeded limits. A securities class action settlement was finally approved on November 6, 2020, after quarter-end; the filing said related obligations had been settled and fully paid by September 30.
- Gross unrecognized tax benefits were approximately $1.3 million, with about $0.3 million of accrued interest and penalties. Management said uncertain tax positions were expected to be resolved by October 2022; prevailing on all could produce approximately $1.6 million of tax benefits.
- Disclosure controls were deemed ineffective at September 30 because previously reported material weaknesses in financial reporting controls remained unremediated. Management was pursuing remediation, including personnel, process and system improvements.
Investor facts to verify
- Whether sales recovery continued after Q3, especially in international markets, and the extent of any renewed COVID-19 disruption.
- Cash burn, working-capital needs, collection of receivables, and receipt of the anticipated tax refund.
- Whether gross margins recover and whether further inventory write-downs or bad-debt provisions are required.
- Progress in remediating internal-control material weaknesses and the status of product-related litigation and insurance coverage.
- Funding and operating progress of the China joint venture, including the remaining capital contribution.