Apyx Medical Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; filed May 8, 2019. Apyx develops J-Plasma/Renuvion medical technology and provides OEM products and services. Following its August 2018 sale of the Core electrosurgical business, results are presented as continuing operations; the 2018 comparison includes Core results as discontinued operations.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Continuing-operations revenue | $5.823 million | $3.397 million |
| Gross profit / margin | $3.720 million / 63.9% | $2.212 million / 65.1% |
| Operating loss | $5.203 million | $2.720 million |
| Net loss | $4.681 million | $0.935 million |
| Loss per share, total operations | $0.14 | $0.03 |
| Cash used in operating activities | $4.639 million | $1.108 million |
- Revenue rose 71.4%. Advanced Energy sales increased 66.3% to $4.371 million; OEM sales increased 89.1% to $1.452 million.
- International sales were $1.719 million, or 29.5% of revenue, versus 18.8% of revenue in Q1 2018.
- Gross margin declined 1.2 percentage points. Management attributed the change primarily to Advanced Energy product mix and higher international sales mix, as well as lower-margin OEM sales under new Symmetry agreements.
- Operating expenses were $8.923 million, up from $4.932 million. Increases included professional services, salaries and related costs, R&D, and SG&A. Professional services included physician consulting, marketing, legal and audit fees.
- Cash and cash equivalents were $32.415 million and short-term investments were $40.885 million at March 31, 2019, totaling $73.300 million. Working capital was approximately $77.8 million, down from $81.8 million at year-end 2018.
- Investing activities provided $20.521 million, principally reflecting purchases and maturities of Treasury securities; financing activities provided $0.067 million. The quarter-end cash increase should not be read as operating cash generation.
- Total liabilities were $7.690 million. The balance sheet showed a $0.140 million note payable and a $0.075 million long-term lease liability; the company reported no material off-balance-sheet arrangements.
Changes, outlook and key matters
- The higher continuing-operations loss reflects expense growth that exceeded revenue growth. The 2018 total net loss is not directly comparable because it included $1.856 million of after-tax income from discontinued Core operations.
- Apyx said it would continue full-scale Renuvion commercialization in 2019, supported by sales staff, training and marketing. It did not provide numerical revenue or earnings guidance in the supplied filing text.
- On April 1, 2019, the company announced it had voluntarily withdrawn its 510(k) application for J-Plasma/Renuvion use in dermal resurfacing. Management described this as a commercialization delay and said it remained committed to developing a new submission with the FDA.
- The company reported a securities class-action complaint filed April 17, 2019, concerning public statements about the dermal-resurfacing 510(k) submission. Damages sought were unspecified; Apyx said it considered the allegations without merit and intended to defend the case. It accrued $0.5 million for initial defense costs and warned uninsured or excess costs could be material.
- Other litigation involving J-Plasma was disclosed. Management said it believed it had meritorious defenses and that claims were insured or not expected to be material, while noting coverage limits and insurer disputes could create material exposure.
- Inventory purchase commitments totaled approximately $5.8 million, substantially all expected to be purchased by year-end 2019. The company also identified sole-source supplier disruption and OEM customer-order dependency as business risks.
- Management reported three material weaknesses in internal controls identified at December 31, 2018, which remained under remediation as of March 31, 2019. The weaknesses involved accounting staffing and expertise, control documentation and execution, and monitoring. The prior-year auditor had issued an adverse opinion on internal-control effectiveness.
Important facts for investors to verify
- Progress and timing of the replacement FDA 510(k) submission and any related regulatory or commercialization developments.
- Whether revenue growth converts into improved margins and lower operating cash burn as commercialization spending continues.
- Liquidity runway, Treasury investment balances and cash use, including the $5.8 million inventory commitments.
- Developments in the securities class action, insurance coverage, and the adequacy of the $0.5 million defense-cost accrual.
- Whether management remediates the disclosed material weaknesses and provides evidence that controls are operating effectively.
- Revenue, margins and order visibility under Symmetry OEM and manufacturing agreements, including the effect of binding forecast orders and termination rights.