APYX MEDICAL CORP
10-Ks and 10-Qs
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended March 31, 2019
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or
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o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from _____ to _____
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Commission File Number: 0-12183
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APYX MEDICAL CORPORATION
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(Exact name of registrant as specified in its charter)
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Delaware
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11-2644611
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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5115 Ulmerton Road, Clearwater, FL 33760
(Address of principal executive offices, zip code)
(727) 384-2323
(Registrant’s telephone number)
Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes:
ý
No
o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes:
ý
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act (Check one):
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Large accelerated filer
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o
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Accelerated filer
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ý
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Non-accelerated filer
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o
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Smaller reporting company
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ý
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Emerging growth company
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o
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
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o
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes:
o
No
ý
Securities Registered Pursuant to Section 12 (b) of the Act:
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Title of each class
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Trading symbol(s)
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Name of each exchange on which registered
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Common Stock
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APYX
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Nasdaq Stock Market, LLC
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As of May 3rd, 2019,
34,041,830
shares of the registrant’s
$0.001
par value common stock were outstanding.
For the quarterly period ended March 31, 2019
(Unaudited)
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Page
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Part I.
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||||
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Item 1.
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||||
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Consolidated Balance Sheets at
March 31, 2019 and December 31, 2018
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Consolidated Statements of Operations for the three
months ended March 31, 2019 and 2018
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Consolidated Statements of Changes in Stockholders’ Equity for the
t
hree months ended March 31, 2019 and 2018
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Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018
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Item 2.
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Item 3.
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Item 4.
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Part II.
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Item 1.
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||||
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Item 1A.
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Item 2.
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Item 3.
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Item 4.
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Item 5.
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Item 6.
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1
APYX MEDICAL CORPORATION
PART I. Financial Information
ITEM 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data, Unaudited)
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March 31,
2019 |
December 31,
2018 |
||||||
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ASSETS
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|||||||
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Current assets:
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|||||||
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Cash and cash equivalents
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$
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32,415
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$
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16,466
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Short term investments
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40,885
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61,678
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|||
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Trade accounts receivable, net of allowance of $196 and $428
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4,931
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5,015
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Inventories, net of provision for obsolescence of $398 and $439
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5,598
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5,212
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Prepaid expenses and other current assets
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1,411
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1,146
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Total current assets
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85,240
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89,517
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Property and equipment, net
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6,031
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5,788
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Intangibles
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190
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191
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Deposits
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80
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73
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|||
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Other assets
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162
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41
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Total assets
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$
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91,703
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$
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95,610
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LIABILITIES AND STOCKHOLDERS’ EQUITY
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Current liabilities:
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Accounts payable
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$
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1,504
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$
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1,423
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Accrued and other liabilities
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5,460
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5,552
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Accrued severance and related
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511
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727
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Total current liabilities
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7,475
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7,702
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Note payable
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140
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140
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Long term lease liability
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75
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—
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Total liabilities
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7,690
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7,842
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STOCKHOLDERS’ EQUITY
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Common stock, $0.001 par value; 75,000,000 shares authorized; 34,033,255 issued and 33,891,255 outstanding as of March 31, 2019 and 33,847,100 issued and 33,704,525 outstanding as of December 31, 2018
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34
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34
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Additional paid-in capital
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53,147
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52,221
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Retained earnings
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30,832
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35,513
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Total stockholders’ equity
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84,013
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87,768
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Total liabilities and stockholders’ equity
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$
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91,703
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$
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95,610
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The accompanying notes are an integral part of the consolidated financial statements.
2
(In thousands, except per share data, Unaudited)
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Three Months Ended
March 31, |
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2019
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2018
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Sales
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$
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5,823
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$
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3,397
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Cost of sales
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2,103
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1,185
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Gross profit
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3,720
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2,212
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Other costs and expenses:
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Research and development
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810
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514
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Professional services
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1,791
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506
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Salaries and related costs
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3,221
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1,802
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Selling, general and administrative
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3,101
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2,110
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Total other costs and expenses
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8,923
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4,932
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Loss from operations
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(5,203
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)
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(2,720
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)
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Interest income
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423
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—
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Interest expense
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—
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(34
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)
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Other losses
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(25
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)
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—
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Change in value of derivative liabilities
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—
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(26
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)
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Total other income (expense), net
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398
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(60
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)
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Loss before income taxes
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(4,805
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)
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(2,780
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)
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Income tax (benefit) expense
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(124
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)
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11
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Loss from continuing operations
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(4,681
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)
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(2,791
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)
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Income from discontinued operations, net of tax
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—
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1,856
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Net loss
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$
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(4,681
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)
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$
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(935
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)
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EPS from continuing operations:
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Basic
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$
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(0.14
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)
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$
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(0.08
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)
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Diluted
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$
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(0.14
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)
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$
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(0.08
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)
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EPS from discontinued operations:
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Basic
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$
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—
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$
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0.05
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Diluted
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$
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—
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$
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0.05
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EPS from total operations:
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Basic
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$
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(0.14
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)
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$
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(0.03
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)
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Diluted
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$
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(0.14
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)
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$
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(0.03
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)
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The accompanying notes are an integral part of the consolidated financial statements.
3
APYX MEDICAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In thousands, Unaudited)
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Common Stock
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||||||||||||||||||
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Shares
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Par Value
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Additional Paid-In Capital
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Retained Earnings (Accumulated deficit)
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Total
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||||||||||||||
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Balance
December 31, 2017 |
32,878
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$
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33
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$
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50,495
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$
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(28,496
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)
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$
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22,032
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||||
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Stock based compensation
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—
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—
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372
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—
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372
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Net loss
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—
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—
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—
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(935
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)
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(935
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)
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Balance
March 31, 2018 |
32,878
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$
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33
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|
$
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50,867
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$
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(29,431
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)
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$
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21,469
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Balance
December 31, 2018 |
33,705
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$
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34
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$
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52,221
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$
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35,513
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$
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87,768
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||||
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Options exercised
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271
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—
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|
777
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—
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777
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||||||||
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Stock based compensation
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—
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—
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|
859
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—
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|
859
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|
||||||||
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Stock exercise to acquire options and warrants
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(85
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)
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—
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(710
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)
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—
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(710
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)
|
||||||||
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Net income
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—
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|
—
|
|
—
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|
(4,681
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)
|
(4,681
|
)
|
||||||||
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Balance
March 31, 2019 |
33,891
|
|
$
|
34
|
|
$
|
53,147
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|
$
|
30,832
|
|
$
|
84,013
|
|
||||
The accompanying notes are an integral part of the consolidated financial statements.
4
(In thousands, Unaudited)
|
Three Months Ended March 31,
|
|||||||
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2019
|
2018
|
||||||
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Cash flows from operating activities
|
|||||||
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Net loss
|
$
|
(4,681
|
)
|
$
|
(935
|
)
|
|
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|||||||
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Depreciation and amortization
|
194
|
|
199
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|
|||
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Provision for inventory obsolescence
|
41
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|
(47
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)
|
|||
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Stock based compensation
|
859
|
|
372
|
|
|||
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Change in fair value of derivative liabilities
|
—
|
|
26
|
|
|||
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Noncash lease expense
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(26
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)
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—
|
|
|||
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Unrealized gain on short term investments
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(164
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)
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—
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|
|||
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Provision for allowance for doubtful accounts
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(238
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)
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(9
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)
|
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Changes in current assets and liabilities:
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|
||||
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Trade receivables
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322
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(277
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)
|
|||
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Prepaid expenses
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(266
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)
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(26
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)
|
|||
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Inventories
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(427
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)
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(136
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)
|
|||
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Deposits and other assets
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(129
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)
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4
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|
|||
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Accounts payable
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81
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|
514
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|
|||
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Accrued severance and related
|
216
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|
—
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|
|||
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Accrued and other liabilities
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(421
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)
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(793
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)
|
|||
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Net cash used in operating activities
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(4,639
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)
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(1,108
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)
|
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Cash flows from investing activities
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||||
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Purchases of property and equipment
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(437
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)
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(139
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)
|
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Purchases of marketable securities
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(18,884
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)
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—
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|
|||
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Proceeds of marketable securities
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39,842
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|
—
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|
|||
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Net cash provided by (used in) investing activities
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20,521
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(139
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)
|
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Cash flows from financing activities
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Proceeds from stock options/warrants exercised
|
67
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—
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|
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Repayment of mortgage note payable
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—
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(60
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)
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|||
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Net cash provided by (used in) financing activities
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67
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(60
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)
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Net change in cash, cash equivalents and restricted cash
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15,949
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(1,307
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)
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|||
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Cash, cash equivalents and restricted cash, beginning of period
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16,466
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10,668
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Cash, cash equivalents and restricted cash, end of period
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$
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32,415
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$
|
9,361
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Cash paid for:
|
|||||||
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Interest expense
|
$
|
—
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|
34
|
|
||
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Non cash investing activities:
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|
|
||||
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Cashless exercise of stock options/warrants
|
$
|
710
|
|
$
|
—
|
|
|
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Capitalization of Lease
|
178
|
|
—
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|
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The accompanying notes are an integral part of the consolidated financial statements.
5
NOTE 1. BASIS OF PRESENTATION
Unless the context otherwise indicates, the terms “we,” “our,” “us,” “Apyx,” and similar terms refer to Apyx Medical Corporation and its consolidated subsidiaries.
We are a medical technology company and the developer of J-Plasma® (marketed and sold under the Renuvion™ Cosmetic Technology brand in the cosmetic surgery market), a patented plasma-based surgical product for cutting, coagulation and ablation of soft tissue. J-Plasma technology utilizes a helium ionization process to produce a stable, focused beam of plasma that provides surgeons with greater precision and minimal invasiveness. The Company also leverages its expertise through original equipment manufacturing (OEM) agreements with other medical device manufacturers.
On August 30, 2018, we closed on a definitive asset purchase agreement with Specialty Surgical Instrumentation Inc., a Tennessee Corporation and wholly-owned subsidiary of Symmetry Surgical Inc. (“Symmetry”), pursuant to which we divested and sold our electrosurgical "Core" business segment and related intellectual property, including the Bovie® brand and trademarks, to Symmetry for gross proceeds of
$97 million
in cash. The divestiture and sale of our Core business segment to Symmetry allows us to further focus on our strategic objective of commercializing our J-Plasma technology, including the RenuvionTM brand in the cosmetic surgery market. We also entered into with Symmetry a transition services agreement, a Patent Licensing Agreement, a Disposables Supply Agreement, and a Generator Manufacturing and Supply Agreement, the latter of which will establish us as an OEM-provider of generators to Symmetry for a period of at least
10 years
. For the three months ended March 31, 2018, the Core sales amounted to
$6.5 million
with cost of sales of
$3.7 million
and related operating expenses of
$0.9 million
, which are included in income from discontinued operations on the Consolidated Statement of Operations.
In connection with the asset purchase agreement, we also entered into an Electro Surgical Disposables and Accessories, Cauteries and Other Products Supply Agreement with Symmetry for up to a
four
-year term, whereby we will manufacture certain Core products and sell them to Symmetry at agreed upon prices. Any revenue, costs and expenses resulting from this agreement are netted and reported in our Consolidated Statements of Operations as Other gains or losses. For the three months ended March 31, 2019, Core sales following the divestiture amounted to
$2.2 million
with cost of sales of
$2.1 million
and related operating expenses of
$0.1 million
, which are included in other losses on the Consolidated Statement of Operations.
In connection with the asset purchase agreement, we also entered into a Manufacture and Supply Agreement with Symmetry for a ten-year term, whereby we will manufacture certain products and sell them to Symmetry at agreed upon prices. Revenue, costs and expenses resulting from this agreement are reported in our Consolidated Statements as income or loss from operations of our OEM reporting segment.
We reclassified the financial results of the Core business to discontinued operations and from segment results for all periods presented.
The accompanying unaudited consolidated financial statements have been prepared based upon SEC rules that permit reduced disclosure for interim periods. For a more complete discussion of significant accounting policies and certain other information, please refer to the financial statements included in our Annual Report on Form 10-K for the year ended
December 31, 2018
. These financial statements reflect all adjustments that are necessary for a fair presentation of results of operations and financial condition for the interim periods shown, including normal recurring accruals and other items. The results for the interim periods are not necessarily indicative of results for the full year.
NOTE 2. INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined on a first in, first out basis. Finished goods and work-in-process inventories include material, labor and overhead costs. Factory overhead costs are allocated to inventory manufactured in-house based upon labor hours.
Inventories consisted of the following:
6
APYX MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
|
(In thousands)
|
March 31,
2019 |
December 31,
2018 |
|||||
|
Raw materials
|
$
|
5,032
|
|
$
|
4,521
|
|
|
|
Finished goods
|
964
|
|
1,130
|
|
|||
|
Gross inventories
|
5,996
|
|
5,651
|
|
|||
|
Less: reserve for obsolescence
|
(398
|
)
|
(439
|
)
|
|||
|
Net inventories
|
$
|
5,598
|
|
$
|
5,212
|
|
|
7
APYX MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
NOTE 3. INTANGIBLE ASSETS
Intangible assets consisted of the following:
|
(in thousands)
|
March 31, 2019
|
December 31, 2018
|
||||
|
Purchased technology (5-17 year lives)
|
$
|
1,447
|
|
$
|
1,448
|
|
|
Less: accumulated amortization
|
(1,442
|
)
|
(1,442
|
)
|
||
|
Purchased technology, net
|
$
|
5
|
|
$
|
6
|
|
|
Goodwill
|
$
|
185
|
|
$
|
185
|
|
|
Intangibles
|
$
|
190
|
|
$
|
191
|
|
Intangible assets and goodwill are the result of our acquisition of Apyx (formerly known as Bovie) Bulgaria, EOOD in 2015.
NOTE 4
. RECENT ACCOUNTING PRONOUNCEMENTS
ASU No. 2016-18,
Restricted Cash Flows
provides guidance on the presentation of restricted cash and restricted cash equivalents, which are now included with cash and cash equivalents when reconciling the beginning and ending cash amounts shown on the statements of cash flows. Using the retrospective transition method required under the standard, the Company has adjusted the presentation of its Condensed Consolidated Statements of Cash Flows for all periods presented. The adoption of ASU No. 2016-18 did not have any other impact on the Company’s Consolidated Financial Statements.
ASU No. 2014-09 (ASC 606),
Revenue from Contracts with Customers
became effective for us beginning with the first quarter of 2018, and we adopted the new accounting standard using the modified retrospective transition approach. The modified retrospective transition approach recognized any changes from the beginning of the year of initial application through retained earnings with no restatement of comparative periods. We record revenue under ASC 606 at a single point in time, when control is transferred to the customer, which is consistent with past practice. We will continue to apply our current business processes, policies, systems and controls to support recognition and disclosure under the new standard. Based on the results of the evaluation, we have determined that the adoption of the new standard presents no material impact on our consolidated financial statements. Application of the transition requirements of the new standard did not have a material impact on opening retained earnings. We have disaggregated revenue by segment and geography in Note 11 Geographic and Segment Information.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02 (ASU 2016-02), Leases (Topic 842), which became effective for us beginning with the first quarter of 2019. ASU 2016-02 requires a lessee to record a right-of-use asset and a corresponding lease liability, initially measured at the present value of the lease payments, on the balance sheet for all leases with terms longer than 12 months, as well as the disclosure of key information about leasing arrangements. This new standard requires recognition in the statement of operations of a single lease cost, calculated so that the cost of the lease is allocated over the lease term, generally on a straight-line basis, and classification of all cash payments within operating activities in the statement of cash flows. Disclosures are required to provide the amount, timing and uncertainty of cash flows arising from leases. In accordance with the standard, we took a modified retrospective transition approach and included the
$178,000
right of use asset and corresponding liabilities in our property plant and equipment, accrued expenses and long term lease liability on the consolidated balance sheet. The lease is also represented in our consolidated statement of cash flows as a non cash investing activity.
No other new accounting pronouncement issued or effective during the fiscal year had or is expected to have a material impact on our consolidated financial statements or disclosures.
8
APYX MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
NOTE 5. EARNINGS PER SHARE
We compute basic earnings per share (“basic EPS”) by dividing the net income or loss by the weighted average number of common shares outstanding for the reporting period. Diluted earnings per share (“diluted EPS”) gives effect to all dilutive potential shares outstanding. The following table provides the computation of basic and diluted earnings per share.
|
Three Months Ended
March 31, |
|||||||
|
(in thousands, except per share data)
|
2019
|
2018
|
|||||
|
Numerator:
|
|||||||
|
Net (loss) from continuing operations
|
$
|
(4,681
|
)
|
$
|
(2,791
|
)
|
|
|
Numerator for diluted (loss) per common share - continuing operations
|
(4,681
|
)
|
(2,791
|
)
|
|||
|
Net income from discontinued operations, net of tax
|
—
|
|
1,856
|
|
|||
|
Numerator for diluted income per share - discontinued operations
|
—
|
|
1,856
|
|
|||
|
Net (loss) from all operations
|
(4,681
|
)
|
(935
|
)
|
|||
|
Numerator for full diluted (loss) per share - all
|
(4,681
|
)
|
(935
|
)
|
|||
|
Denominator - continuing operations
|
|||||||
|
Weighted average shares used to compute basic (loss)
|
33,343
|
|
32,878
|
|
|||
|
Denominator for diluted (loss) per common share
|
33,343
|
|
32,878
|
|
|||
|
Denominator - discontinued operations:
|
|||||||
|
Weighted average shares used to compute basic (loss)
|
—
|
|
32,878
|
|
|||
|
Denominator for diluted (loss) per common share - discontinued operations
|
—
|
|
32,878
|
|
|||
|
Denominator - all operations:
|
|||||||
|
Weighted average shares used to compute basic (loss)
|
33,343
|
|
32,878
|
|
|||
|
Denominator for diluted (loss) per common share
|
33,343
|
|
32,878
|
|
|||
|
Loss per share from continuing operations:
|
|||||||
|
Basic and diluted
|
$
|
(0.14
|
)
|
$
|
(0.08
|
)
|
|
|
Income per share from discontinued operations
|
|||||||
|
Basic and diluted
|
$
|
—
|
|
$
|
0.05
|
|
|
|
Income per share from all operations
|
|||||||
|
Basic and diluted
|
$
|
(0.14
|
)
|
$
|
(0.03
|
)
|
|
|
Anti-dilutive instruments excluded from diluted loss per common share:
|
|||||||
|
Warrants
|
—
|
|
3
|
|
|||
|
Options
|
1,908
|
|
470
|
|
|||
9
APYX MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
NOTE 6. STOCK-BASED COMPENSATION
Under our stock option plans, our board of directors may grant options to purchase common shares to our key employees, officers, directors and consultants. We account for stock options in accordance with FASB ASC Topic 718,
Compensation - Stock Compensation
, with option expense amortized over the vesting period based on the trinomial lattice option-pricing model fair value on the grant date, which includes a number of estimates that affect the amount of our expense. We expensed approximately
$859,000
in stock-based compensation during the
three months ended March 31, 2019
, as compared with
$372,000
for the
three months ended March 31, 2018
.
The status of our stock options and stock awards are summarized as follows:
|
Number of options
|
Weighted average exercise price
|
|||||
|
Outstanding at December 31, 2018
|
3,480,701
|
|
$
|
3.10
|
|
|
|
Granted
|
1,277,500
|
|
7.73
|
|
||
|
Exercised
|
(270,549
|
)
|
2.87
|
|
||
|
Canceled and forfeited
|
(10,500
|
)
|
2.10
|
|
||
|
Outstanding at March 31, 2019
|
4,477,152
|
|
$
|
4.44
|
|
|
Common shares required to be issued upon the exercise of stock options would be issued from our authorized and unissued shares. We calculated the fair value of issued options utilizing a trinomial lattice with an expected life calculated via the simplified method as we do not have sufficient history to determine actual expected life.
|
2019 Grants
|
|||||||
|
Option value
|
$
|
7.15
|
|
-
|
$
|
7.91
|
|
|
Risk-free rate
|
2.6%
|
-
|
2.6
|
%
|
|||
|
Expected dividend yield
|
—
|
||||||
|
Expected volatility
|
69.1%
|
-
|
69.1
|
%
|
|||
|
Expected term (in years)
|
6
|
||||||
NOTE 7. INCOME TAXES
The Company’s income tax benefit was
$124,000
with an effective tax rate of
-3%
for the three months ended March 31, 2019, as compared to an expense of
$11,000
, with an effective tax rate of
0.0%
, for the three months ended March 31, 2018. The effective rate differs from the statutory rate primarily due to the change in the valuation allowance on the Company’s net deferred tax assets., and an adjustment to an over accrual, of
$130,000
in the 2018 tax accrual, offset by foreign taxes of
$6,000
.
The following is a roll-forward of the Company's total gross unrecognized tax benefits, not including interest and penalties, for the period ended March 31, 2019.
|
(in thousands)
|
Gross Unrealized Tax Benefits
|
||
|
Balance at January 1, 2019
|
$
|
1,313
|
|
|
Additions of tax positions related to the current year
|
—
|
|
|
|
Additions of tax positions related to the prior year
|
—
|
|
|
|
Decreases for tax positions related to the prior year
|
—
|
|
|
|
Balance at March 31, 2019
|
$
|
1,313
|
|
10
APYX MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
NOTE 8. COMMITMENTS AND CONTINGENCIES
Property and Rental Agreements
In October 2015, pursuant to our acquisition of Apyx Bulgaria, we became obligated to make lease payments of approximately
$9,000
per month for approximately
20,000
square feet of office, research and manufacturing space in Sofia, Bulgaria. This lease expires in December 2020.
The following is a schedule of approximate future minimum lease payments under operating leases as of
March 31, 2019
:
|
(In thousands)
|
|||
|
2019
(remaining 9 months)
|
$
|
80
|
|
|
2020
|
107
|
|
|
|
Total
|
$
|
187
|
|
On August 30, 2018, we paid the remaining mortgage balance of
$2.5 million
on the Clearwater facility, releasing us from any and all obligations to the Bank of Tampa.
Litigation
The medical device industry is characterized by frequent claims and litigation, and we are and may become subject to various claims, lawsuits and proceedings in the ordinary course of our business, including claims by current or former employees, distributors and competitors, and with respect to our products and product liability claims, lawsuits and proceedings.
We are involved in a number of legal actions relating to the use of our J-Plasma technology. The outcomes of these legal actions are not within our complete control and may not be known for prolonged periods of time. In the opinion of management, the Company has meritorious defenses, and such claims are adequately covered by insurance, or are not expected, individually or in the aggregate, to result in a material, adverse effect on our financial condition. However, in the event that damages exceed the aggregate coverage limits of our policy or if our insurance carriers disclaim coverage, we believe it is possible that costs associated with these claims could have a material adverse impact on our consolidated earnings, financial position or cash flows.
In addition, as previously disclosed with the Commission on Form 8-K filed April 26, 2019, we have learned that on April 17, 2019, a complaint (the “Complaint”) was filed in the United States District Court for the Middle District of Florida by plaintiff Kyle Pritchard, individually and on behalf of all others similarly situated against the Company and Charles D. Goodwin (“Goodwin”), the Company’s President and Chief Executive Officer and a member of the Company’s Board of Directors.
The Complaint (which as of the date hereof has not been delivered through formal process to the Company) seeks class action status on behalf of all persons and entities that acquired the Company’s securities between August 1, 2018 and April 1, 2019 and alleges violations by the Company and Goodwin of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, primarily related to certain public statements concerning the Premarket Notification 510(k) submission made to the US Food and Drug Administration for a new indication for the Company’s J-Plasma® technology for use in dermal resurfacing procedures. The Complaint seeks an unspecified amount of damages.
Although the ultimate outcome of this matter cannot be determined with certainty, the Company believes that the allegations stated in the Complaint are entirely without merit. The Company and Goodwin intend to defend themselves vigorously in the suit. Such claims are adequately covered by insurance, however, in the event that damages exceed the aggregate coverage limits of our policy or if our insurance carriers disclaim coverage, we believe it is possible that costs associated with this claim could have a material adverse impact on our consolidated earnings, financial position or cash flows. Under the deductible portion of our insurance coverage, we have accrued
$0.5 million
for initial defense costs.
In accordance with authoritative guidance, we accrue a liability in our consolidated financial statements for these actions when a loss is known or considered probable and the amount can be reasonably estimated. If the reasonable estimate of a known or probable loss is a range, and no amount within the range is a better estimate than any other, the minimum amount of the range is recorded. If a loss is reasonably possible, but not known or probable, and can be reasonably estimated, the estimated loss or range of loss is disclosed in the notes to the consolidated financial statements. In most cases, significant judgment is required to estimate the amount and timing of a loss to be recorded, actual results may differ from these estimates.
11
APYX MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Purchase Commitments
At
March 31, 2019
, we had purchase commitments for inventories totaling approximately
$5.8 million
, substantially all of which is expected to be purchased by the end of
2019
.
Our manufacturing services agreements requires Symmetry to provide us with a twelve-month rolling production forecast, of which four months are binding, non-cancelable orders, subject to certain termination rights.
12
APYX MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
NOTE 9. RELATED PARTY TRANSACTIONS
Several relatives of Nikolay Shilev, Apyx Bulgaria’s Managing Director, are considered related parties. Teodora Shileva, Mr. Shilev’s spouse, is an employee of the Company working in the Accounting department. Antoaneta Dimitrova Shileva-Toromanova, Mr. Shilev’s sister, is the Manager of Production and Human Resources. Svetoslav Shilev, Mr. Shilev’s son, is an Engineer in the Quality Assurance department.
NOTE 10. FINANCIAL INSTRUMENTS
Cash, Cash Equivalents and Marketable Securities at March 31, 2019:
|
(In thousands)
|
Adjusted Cost
|
Unrealized Gains
|
Fair Value
(3)
|
Cash and Cash Equivalents
(1)
|
Short-term Marketable Securities
|
||||||||||||||
|
Cash
|
$
|
3,802
|
|
$
|
—
|
|
$
|
3,802
|
|
$
|
3,802
|
|
$
|
—
|
|
||||
|
Level 1
(2)
|
|||||||||||||||||||
|
U.S. Treasury Securities, maturities less than three months
|
28,613
|
|
—
|
|
28,613
|
|
28,613
|
|
—
|
|
|||||||||
|
U.S. Treasury Securities, maturities greater than three months
|
40,721
|
|
164
|
|
40,885
|
|
|
40,885
|
|
||||||||||
|
Total
|
$
|
73,136
|
|
$
|
164
|
|
$
|
73,300
|
|
$
|
32,415
|
|
$
|
40,885
|
|
||||
Cash, Cash Equivalents and Marketable Securities at December 31, 2018:
|
(In thousands)
|
Adjusted Cost
|
Unrealized Gains
|
Fair Value
(3)
|
Cash and Cash Equivalents
(1)
|
Short-term Marketable Securities
|
||||||||||||||
|
Cash
|
$
|
6,337
|
|
$
|
—
|
|
$
|
6,337
|
|
$
|
6,337
|
|
$
|
—
|
|
||||
|
Level 1
(2)
|
|||||||||||||||||||
|
U.S. Treasury Securities, maturities less than three months
|
10,129
|
|
—
|
|
10,129
|
|
10,129
|
|
—
|
|
|||||||||
|
U.S. Treasury Securities, maturities greater than three months
|
61,431
|
|
247
|
|
61,678
|
|
61,678
|
|
|||||||||||
|
Total
|
$
|
77,897
|
|
$
|
247
|
|
$
|
78,144
|
|
$
|
16,466
|
|
$
|
61,678
|
|
||||
(1)
The company considers all highly liquid instruments with maturities of three months or less at the time of purchase to be cash equivalents.
(2)
The fair value of the debt securities consisting of U.S. Treasury bills is based on their quoted market prices. The fair value of these financial instruments are classified as Level 1 in the fair value hierarchy. The original purchase of U.S. Treasury bills occurred in September 2018, utilizing the proceeds from the sale of our Core business.
(3)
ASC 825-10 Financial Instruments, allows entities to voluntarily choose to measure certain financial assets and liabilities at fair value (fair value option). The fair value option may be elected on an instrument-by-instrument basis and is irrevocable, unless a new election date occurs. If the fair value option is elected for an instrument, unrealized gains and losses for that instrument should be reported in earnings within interest income at each subsequent reporting date. At the date of purchase, the Company elected the fair value option for all investments with maturities of three months or greater at the time of purchase.
13
APYX MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
NOTE 11. GEOGRAPHIC AND SEGMENT INFORMATION
Operating segments are aggregated into reportable segments only if they exhibit similar economic characteristics. In addition to similar economic characteristics, we also consider the following factors in determining the reportable segments: the nature of business activities, the management structure directly accountable to our chief operating decision maker for operating and administrative activities, availability of discrete financial information and information presented to the Board of Directors and investors.
Our reportable segments are disclosed as principally organized and managed as
two
operating segments: Advanced Energy and OEM. "Corporate & Other" includes certain unallocated corporate and administrative costs which were not specifically attributed to any reportable segment. Net assets are shared, therefore, not allocated to the reportable segments. The OEM segment is primarily development and manufacturing contract and product driven, all related expenses are recorded as cost of sales, therefore no segment specific operating expenses are incurred.
Summarized financial information with respect to reportable segments is as follows:
|
Three Months Ended March 31, 2019
|
|||||||||||
|
(In thousands)
|
Advanced Energy
|
OEM
|
Corporate & Other
|
Total
|
|||||||
|
Sales
|
4,371
|
|
1,452
|
|
—
|
|
5,823
|
|
|||
|
Net income (loss) from continuing operations
|
(3,387
|
)
|
785
|
|
(2,079
|
)
|
(4,681
|
)
|
|||
|
Interest income
|
—
|
|
—
|
|
423
|
|
423
|
|
|||
|
Other losses
|
—
|
|
—
|
|
(25
|
)
|
(25
|
)
|
|||
|
Income tax benefit
|
—
|
|
—
|
|
(124
|
)
|
(124
|
)
|
|||
|
Three Months Ended March 31, 2018
|
|||||||||||
|
(In thousands)
|
Advanced Energy
|
OEM
|
Corporate & Other
|
Total
|
|||||||
|
Sales
|
2,629
|
|
768
|
|
—
|
|
3,397
|
|
|||
|
Net income (loss) from continuing operations
|
(578
|
)
|
406
|
|
(2,619
|
)
|
(2,791
|
)
|
|||
|
Interest expense
|
—
|
|
—
|
|
(34
|
)
|
(34
|
)
|
|||
|
Change in value of derivative liabilities
|
—
|
|
—
|
|
(26
|
)
|
(26
|
)
|
|||
|
Income tax expense
|
—
|
|
—
|
|
11
|
|
11
|
|
|||
International sales represented approximately
29.5%
of total revenues for the
three months ended March 31, 2019
, as compared with
18.8%
of total revenues for
three months ended March 31, 2018
. Substantially all of these sales are denominated in U.S. dollars. Revenue by geographic region, based on the “ship to” location on the invoice, are as follows:
|
Three Months Ended
March 31, |
|||||||
|
(In thousands)
|
2019
|
2018
|
|||||
|
Sales by Domestic and International
|
|||||||
|
Domestic
|
$
|
4,104
|
|
$
|
2,758
|
|
|
|
International
|
1,719
|
|
639
|
|
|||
|
Total
|
$
|
5,823
|
|
$
|
3,397
|
|
|
14
APYX MEDICAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANAYLSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 2
.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis in conjunction with our financial statements and related notes contained elsewhere in this report. This discussion contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a variety of factors discussed in this report and those discussed in other documents we file with the SEC. In light of these risks, uncertainties and assumptions, readers are cautioned not to place undue reliance on such forward-looking statements. These forward-looking statements represent beliefs and assumptions as of the date of this report. While we may elect to update forward-looking statements and at some point in the future, we specifically disclaim any obligation to do so, even if our estimates change. Past performance does not guarantee future results.
Executive Level Overview
We are a medical technology company and the developer of J-Plasma
®
(marketed and sold under the Renuvion™ Cosmetic Technology brand in the cosmetic surgery market), a patented plasma-based surgical product for cutting, coagulation and ablation of soft tissue. J-Plasma technology utilizes a helium ionization process to produce a stable, focused beam of plasma that provides surgeons with greater precision and minimal invasiveness. We also leverage our expertise through original equipment manufacturing (OEM) agreements with other medical device manufacturers.
During 2019, we will continue our full-scale commercialization efforts for Renuvion. As of March 31, 2019, we had a direct sales force of 28 field-based selling professionals and a network of 7 independent sales agencies. We also had 4 sales managers. This selling organization is focused on the use of Renuvion in the cosmetic surgery market. In addition, we have invested in training programs and marketing-related activities to support accelerated adoption of Renuvion.
International sales represented approximately 29.5% and 18.8% of total revenues in the three months ended March 31, 2019 and 2018, respectively. Management estimates our products have been sold in more than 40 countries through local dealers coordinated by sales and marketing personnel at the Clearwater, Florida facility.
As previously disclosed with the Commission on Form 8-K filed on April 4, 2019, we announced on April 1, 2019, that we voluntarily withdrew our application for premarket notification 510(k) regulatory clearance of our J-Plasma/Renuvion technology for use in dermal resurfacing procedures (see Note 8). While this is a delay in our commercialization efforts, we remain committed to working with the U.S. Food and Drug Administration relative to the development of a new 510(k) submission.
On August 30, 2018, we closed on a definitive asset purchase agreement ("the Asset Purchase Agreement") with Specialty Surgical Instrumentation Inc., a Tennessee Corporation and wholly-owned subsidiary of Symmetry Surgical Inc. (“Symmetry”), pursuant to which we divested and sold our electrosurgical "Core" business segment and related intellectual property, including the Bovie
®
brand and trademarks, to Symmetry for gross proceeds of $97 million in cash. The divestiture and sale of our Core business segment to Symmetry allows us to further focus on our strategic objective of commercializing our J-Plasma technology, including the Renuvion
TM
brand in the cosmetic surgery market. We also entered into with Symmetry a transition services agreement, Patent Licensing Agreement, a Disposables Supply Agreement, and a Generator Manufacturing and Supply Agreement, the latter of which will establish us as an OEM-provider of generators to Symmetry for a period of at least 10 years.
In connection with the Asset Purchase Agreement, we entered into an Electro Surgical Disposables and Accessories, Cauteries and Other Products Supply Agreement with Symmetry for up to a four-year term, whereby we will manufacture certain Core products and sell them to Symmetry at agreed upon prices. Any revenue, costs and expenses resulting from this agreement are netted and reported in our Consolidated Statements of Operations as Other gains or losses.
In connection with the Asset Purchase Agreement, we entered into a Manufacture and Supply Agreement with Symmetry for a ten-year term, whereby we will manufacture certain products and sell them to Symmetry at agreed upon prices. Revenue, costs and expenses resulting from this agreement are reported in our Consolidated Statements as income or loss from operations of our OEM reporting segment.
15
APYX MEDICAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANAYLSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Operating segments are aggregated into reportable segments only if they exhibit similar economic characteristics. In addition to similar economic characteristics, we also consider the following factors in determining the reportable segments: the nature of business activities, the management structure directly accountable to our chief operating decision maker for operating and administrative activities, availability of discrete financial information and information presented to the Board of Directors and investors.
Our reportable segments are disclosed as principally organized and managed as two operating segments: Advanced Energy and OEM. "Corporate & Other" includes certain unallocated corporate and administrative costs which are not specifically attributed to any reportable segment. Net assets are shared, therefore, not allocated to the reportable segments. The OEM segment is primarily development and manufacturing contract and product driven, all related expenses are recorded as cost of sales, therefore no segment specific operating expenses are incurred.
We reclassified the financial results of the Core business to discontinued operations and from segment results for all periods presented. We strongly encourage investors to visit our website:
www.apyxmedical.com
to view the most current news and to review our filings with the Securities and Exchange Commission.
Results of Operations
Sales
|
Three Months Ended
March 31, |
||||||||||
|
(In thousands)
|
2019
|
2018
|
Change
|
|||||||
|
Sales by Reportable Segment
|
||||||||||
|
Advanced Energy
|
4,371
|
|
2,629
|
|
66.3
|
%
|
||||
|
OEM
|
1,452
|
|
768
|
|
89.1
|
%
|
||||
|
Total
|
$
|
5,823
|
|
$
|
3,397
|
|
71.4
|
%
|
||
|
Sales by Domestic and International
|
||||||||||
|
Domestic
|
4,104
|
|
2,758
|
|
48.8
|
%
|
||||
|
International
|
1,719
|
|
639
|
|
256.5
|
%
|
||||
|
Total
|
$
|
5,823
|
|
$
|
3,397
|
|
71.4
|
%
|
||
Total revenue from continuing operations for
first
quarter
2019
increased
$2.4 million
, or
71.4%
, to
$5.8 million
, compared to
$3.4 million
in the
first
quarter of
2018
. Sales of the Company’s Advanced Energy generators and handpieces drove the increase in total revenue in
first
quarter
2019
, with OEM segment sales contributing modestly to the year-over-year increase in total revenue from continuing operations during the
first
quarter
2019
period. Advanced Energy segment sales
increased
approximately
$1.7 million
, or
66.3%
year-over-year, to
$4.4 million
, compared to approximately
$2.6 million
last year. OEM segment sales
increased
$0.7 million
, or
89.1%
year-over-year, to
$1.5 million
, compared to
$0.8 million
last year.
16
APYX MEDICAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANAYLSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Gross Profit
|
Three Months Ended
March 31, |
||||||||||
|
(In thousands)
|
2019
|
2018
|
Change
|
|||||||
|
Cost of sales
|
$
|
2,103
|
|
$
|
1,185
|
|
77.5
|
%
|
||
|
Percentage of sales
|
36.1
|
%
|
34.9
|
%
|
||||||
|
Gross profit
|
$
|
3,720
|
|
$
|
2,212
|
|
68.2
|
%
|
||
|
Percentage of sales
|
63.9
|
%
|
65.1
|
%
|
|
|
||||
Gross profit for the
first
quarter of
2019
increased
approximately
$1.5 million
, or
68.2%
year-over-year, to
$3.7 million
, compared to
$2.2 million
for
first
quarter of
2018
. Gross margin for the
first
quarter of
2019
was
63.9%
, compared to
65.1%
last year. The primary drivers of the decrease in gross profit margin were Advanced Energy product mix and Advanced Energy sales outside the U.S., which represented a higher mix of total sales in the
first
quarter of
2019
compared to last year. OEM gross margins were lower in the first quarter of 2019 when compared to the prior year period, driven primarily by revenue related to our new Product, Manufacturing, and Supply agreements with Symmetry, which did not contribute to revenue results in the prior period.
Other Costs and Expenses
Research and development
|
Three Months Ended
March 31, |
||||||||||
|
(In thousands)
|
2019
|
2018
|
Change
|
|||||||
|
Research and Development expense
|
$
|
810
|
|
$
|
514
|
|
57.6
|
%
|
||
|
Percentage of sales
|
13.9
|
%
|
15.1
|
%
|
||||||
Spending on Research and development
increased
57.6%
for the
three months ended March 31, 2019
, primarily due to focused spending on clinical studies and research projects related to the cosmetic surgery market.
Professional services
|
Three Months Ended
March 31, |
||||||||||
|
(In thousands)
|
2019
|
2018
|
Change
|
|||||||
|
Professional services expense
|
$
|
1,791
|
|
$
|
506
|
|
254.0
|
%
|
||
|
Percentage of sales
|
30.8
|
%
|
14.9
|
%
|
||||||
Professional services expense
increased
254.0%
for
three months ended March 31, 2019
, versus comparable periods in
2018
. The change was primarily attributable to expense increases for training-related physician consulting, medical advisory board stock option grants, marketing expenses, legal and audit fees.
17
APYX MEDICAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANAYLSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Salaries and related costs
|
Three Months Ended
March 31, |
||||||||||
|
(In thousands)
|
2019
|
2018
|
Change
|
|||||||
|
Salaries and related expenses
|
$
|
3,221
|
|
$
|
1,802
|
|
78.7
|
%
|
||
|
Percentage of sales
|
55.3
|
%
|
53.0
|
%
|
||||||
During the three months ended
March 31, 2019
, salaries and related expenses
increased
approximately
78.7%
, compared to the prior year. The increase was primarily driven by an increase in employee stock option expense, increase in sales force, and reclassification of regulatory salaries from cost of goods sold.
Selling, general and administrative expenses
|
Three Months Ended
March 31, |
||||||||||
|
(In thousands)
|
2019
|
2018
|
Change
|
|||||||
|
SG&A Expense
|
$
|
3,101
|
|
$
|
2,110
|
|
47.0
|
%
|
||
|
Percentage of sales
|
53.3
|
%
|
62.1
|
%
|
||||||
Selling, general and administrative expense
increased
by
47.0%
for the three months ended
March 31, 2019
when compared to
2018
. The increase was primarily driven by sales commissions and product sample expense. These increases are offset by an adjustment to our bad debt reserve which had a change in calculation due to a shift in our customer base following the disposition of our Core business.
Other Income (Expense), net
|
Three Months Ended
March 31, |
||||||||||
|
(In thousands)
|
2019
|
2018
|
Change
|
|||||||
|
Interest income
|
$
|
423
|
|
$
|
—
|
|
100.0
|
%
|
||
|
Percentage of sales
|
7.3
|
%
|
—
|
%
|
||||||
|
Interest expense
|
$
|
—
|
|
$
|
(34
|
)
|
(100.0
|
)%
|
||
|
Percentage of sales
|
—
|
%
|
1.0
|
%
|
||||||
|
Other losses
|
$
|
(25
|
)
|
$
|
—
|
|
100.0
|
%
|
||
|
Percentage of sales
|
0.4
|
%
|
—
|
%
|
||||||
|
Change in fair value of derivative liabilities, net
|
$
|
—
|
|
$
|
(26
|
)
|
(100.0
|
)%
|
||
|
Percentage of sales
|
—
|
%
|
(0.8
|
)%
|
||||||
Interest income
Total interest income was higher for the three months ended March 31, 2019, as compared with 2018. This increase is primarily related to short term investments in U.S. Treasury Securities which we purchased with the proceeds from the sale of the Core business in September 2018.
Income Taxes
The Company’s income tax benefit was $124,000 with an effective tax rate of -3% for the three months ended March 31, 2019, as compared to an expense of
$11,000
, with an effective tax rate of
0.0%
, for the three months ended March 31, 2018. The effective rate differs from the statutory rate primarily due to the change in the valuation allowance on the Company’s net deferred tax assets, and an adjustment to an over accrual, of $130,000 in the 2018 tax accrual, offset by foreign taxes of $6,000.
18
APYX MEDICAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANAYLSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
As a result of historical losses exclusive of discontinued operations and the Company’s expectation to continue to generate losses in the near future, the Company recorded a valuation allowance on its net deferred tax asset and does not anticipate recording an income tax benefit related to these deferred tax assets. The Company will reassess the realization of deferred tax assets each reporting period and will be able to reduce the valuation allowance to the extent the financial results of the operations improve and it becomes more likely than not that the deferred tax assets will be realizable.
Product Development
We have developed most of our products and product improvements internally. Funds for this development have come primarily from our internal cash flow and equity issuances. We maintain close working relationships with physicians and medical personnel who assist in product research and development. New and improved products play a critical role in our sales growth. We continue to emphasize the development of proprietary products and product improvements to complement and expand our existing product lines. Our research and development team members are based in our Clearwater, Florida office and our facility in Sofia, Bulgaria.
Reliance on Collaborative, Manufacturing and Selling Arrangements
We manufacture the majority of our products on our premises in Clearwater, Florida and in Sofia, Bulgaria. Labor-intensive sub-assemblies and labor-intensive products may be out-sourced to our specification.
We also perform development services for OEM customers who have no legal obligation to purchase products from us. Should such customers fail to give us purchase orders for the product after development, our future business and value of related assets could be negatively affected. Furthermore, no assurance can be given that such customers will give sufficient high priority to our products. Additionally, we will function as an OEM-provider of generators to Symmetry for a period of at least 10 years.
We also have collaborative arrangements with two key foreign suppliers of certain items and components, and we purchase them pursuant to purchase orders. Our purchase order commitments are never more than one year in duration and are supported by our sales forecasts. The majority of our raw materials are purchased from sole-source suppliers. While we believe we could ultimately procure other sources for these components, should we experience any significant disruptions in this key supply chain, there are no assurances that we could do so in a timely manner which could render us unable to meet the demands of our customers, resulting in a material and adverse effect on our business and operating results.
Liquidity and Capital Resources
On August 30, 2018,we sold our Core business segment and other related assets for $97 million in cash. At December 31, 2018, we had approximately $78 million in Cash, Cash Equivalents and Short-Term Investments, after making estimated Federal and State tax payments of $13.3 million. Our working capital at March 31, 2019 was approximately $
77.8 million
compared with $81.8 million at December 31, 2018.
For the quarter ended March 31, 2019, net cash used in operating activities is approximately $4.6 million compared with net cash used in operating activities of approximately $1.1 million in 2018.
Net cash from investing activities is $20.5 million, primarily related the shift in categorization of short-term investments and cash equivalents in our Treasury Bill investments.
Cash from financing activities of approximately $0.1 million relates to cash collected for stock options during the quarter ended March 31, 2019. Cash used in 2018 financing activities in financing activities in 2018 was $0.1 million related to the repayment of our mortgage at the Clearwater, FL, facility.
At
March 31, 2019
, we had purchase commitments for inventories totaling approximately $5.8 million, substantially all of which is expected to be purchased by the end of
2019
.
19
APYX MEDICAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANAYLSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Our manufacturing services agreements requires Symmetry to provide us with a twelve-month rolling production forecast, of which four months are binding, non-cancelable orders, subject to certain termination rights.
20
APYX MEDICAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANAYLSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Critical Accounting Estimates
In preparing the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP), we have adopted various accounting policies. Our most significant accounting policies are disclosed in Note 2 to the consolidated financial statements included in our report on Form 10-K for the year ended
December 31, 2018
, filed on March 14, 2019.
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Our estimates and assumptions, including those related to inventories, intangible assets, property, plant and equipment, legal proceedings, research and development, warranty obligations, product liability, fair valued liabilities, sales returns and discounts, stock-based compensation and income taxes are updated as appropriate, which in most cases is at least quarterly. We base our estimates on historical experience, or various assumptions that are believed to be reasonable under the circumstances and the results form the basis for making judgments about the reported values of assets, liabilities, revenues and expenses. Actual results may materially differ from these estimates.
Estimates are considered to be critical if they meet both of the following criteria: (1) the estimate requires assumptions about material matters that are uncertain at the time the accounting estimates are made and (2) other materially different estimates could have been reasonably made or material changes in the estimates are reasonably likely to occur from period to period. Our critical accounting estimates include the following:
Inventory reserves
We maintain a reserve for excess and obsolete inventory resulting from the potential inability to sell our products at prices in excess of current carrying costs. The markets in which we operate are highly competitive, with new products and surgical procedures introduced on an ongoing basis. Such marketplace changes may cause our products to become obsolete. We make estimates regarding the future recoverability of the costs of these products and record a provision for excess and obsolete inventories based on historical experience and expected future trends. If actual product life cycles, product demand or acceptance of new product introductions are less favorable than projected by management, additional inventory write-downs may be required, which would unfavorably affect future operating results.
Long-lived assets
We review long-lived assets which are held and used, including property and equipment, for impairment whenever changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Such evaluations compare the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset over its expected useful life and are significantly impacted by estimates of future prices and volumes for our products, capital needs, economic trends and other factors that are inherently difficult to forecast. If the asset is considered to be impaired, we record an impairment charge equal to the amount by which the carrying value of the asset exceeds its fair value determined by either a quoted market price, if any, or a value determined by utilizing a discounted cash flow technique.
Stock-based Compensation
Under our stock option plan, options to purchase common shares of the Company may be granted to key employees, officers and directors of the Company by the Board of Directors. The Company accounts for stock options in accordance with FASB ASC Topic 718-10,
Compensation-Stock Compensation
, with compensation expense amortized over the vesting period based on the trinomial lattice option-pricing model fair value on the grant date, which includes a number of estimates that affect the amount of our expense.
Litigation Contingencies
In accordance with authoritative guidance, we accrue a liability in our consolidated financial statements for these actions when a loss is known or considered probable and the amount can be reasonably estimated. If the reasonable estimate of a known or probable loss is a range, and no amount within the range is a better estimate than any other, the minimum amount of the range is recorded. If a loss is reasonably possible, but not known or probable, and can be reasonably estimated, the estimated loss or range of loss is
21
APYX MEDICAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANAYLSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
disclosed in the notes to the consolidated financial statements. In most cases, significant judgment is required to estimate the amount and timing of a loss to be recorded, actual results may differ from these estimates.
Income Taxes
The provision for income taxes includes federal, foreign, state and local income taxes currently payable and those deferred because of temporary differences between the financial statement and tax bases of assets and liabilities. Deferred tax assets or liabilities are computed based on the difference between the financial statement and income tax bases of assets and liabilities using enacted marginal tax rates. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. Deferred income tax expenses or credits are based on the changes in the asset or liability from period to period.
As a result of historical losses exclusive of discontinued operations and the Company’s expectation to continue to generate losses in the near future, the Company recorded a valuation allowance on the net deferred tax asset and does not anticipate recording an income tax benefit related to these deferred tax assets. The Company will reassess the realization of deferred tax assets each reporting period and will be able to reduce the valuation allowance to the extent the financial results of continuing operations improve and it becomes more likely than not that the deferred tax assets will be realizable.
We assess the financial statement impact of an uncertain tax position taken or expected to be taken on an income tax return at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized in the financial statements unless it is more likely than not of being sustained.
The Company is subject to U.S. federal and state income tax examination. The Company’s 2015 through 2018 U.S. federal income tax returns are subject to examination by the Internal Revenue Service. The Company’s state income tax returns are subject to examination for the tax years 2014 through 2018.
Inflation
Inflation has not materially impacted the operations of our Company.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements at this time.
Recent Accounting Pronouncements
See Note 4 of the Notes to Consolidated Financial Statements.
22
APYX MEDICAL CORPORATION
ITEM 3
.
Quantitative and Qualitative Disclosures about Market Risk
For our disclosures about market risk, please see Part II, Item 7A., “Quantitative and Qualitative Disclosures about Market Risk,” in our Annual Report on Form 10-K for the year ended
December 31, 2018
. We believe there have been no material changes to the information provided therein.
ITEM 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). The Company's internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, management carried out an evaluation of the effectiveness of the Company's internal control over financial reporting as of December 31, 2018, based on the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (2013). Based on that evaluation, management concluded that, as of December 31, 2018, the Company's internal control over financial reporting was not effective as a result of the material weaknesses described below.
The effectiveness of our internal control over financial reporting as of December 31, 2018 was audited by Frazier & Deeter, LLC, an independent registered public accounting firm, as stated in their report included in Part II, Item 8 of our most recent Form 10-K for the period ended December 31, 2018, contains an adverse opinion on the effectiveness of our internal control over financial reporting.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that material misstatements of the Company's annual or interim financial statements will not be prevented or detected on a timely basis.
We have identified three material weaknesses: (i) an ineffective control environment due to a lack of sufficient qualified accounting personnel with an appropriate level of knowledge and experience with generally accepted accounting principles, (ii) ineffective control activities due to the lack of documentation and timeliness in executing business process controls, and (iii) ineffective monitoring controls to ascertain whether the components of internal control were present and functioning.
As of March 31, 2019, we continue our remediation efforts related to these deficiencies.
Remediation Efforts to Address Material Weaknesses
We continue to make further enhancements to our control environment by improving documentation of internal controls, guidance in the performance of those controls, communication of expectations, and emphasis on the importance of internal controls. In addition, we continue to make improvements to the level of detail in our risk assessment and clarity of the linkage between risks and internal controls.
We continue to improve upon our risk assessment procedures and the timeliness of those procedures and continue to make progress towards addressing the weaknesses in information and communication beginning the process to better identify, document, and assess information used when performing internal controls.
We also are working to further enhance our policies, procedures, and controls for all key processes, which includes the training of personnel to ensure consistent application of accounting principles and adherence to the Company’s policies, procedures, and controls. We will also be implementing enhanced monitoring procedures to allow for more effective monitoring of compliance.
We will continue to work with third-party specialists, and we have retained a firm to assist us in our remediation efforts. We will also review, document, and (as needed) supplement our controls, with the goal of designing and implementing controls that not only better address both the accuracy and precision of management's review, but also enhance our ability to manage our business.
23
APYX MEDICAL CORPORATION
Management believes the steps outlined above, when fully implemented, will remediate the material weaknesses described above. The Audit Committee of the Board of Directors and management will continue to monitor the implementation of these remediation measures and the effectiveness of our internal controls over financial reporting on an ongoing basis.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13(a)-15(f) and 15(d)-15(f)) during the
three months ended March 31, 2019
that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
24
APYX MEDICAL CORPORATION
PART II. Other Information
ITEM 1. Legal Proceedings
The medical device industry is characterized by frequent claims and litigation, and we are and may become subject to various claims, lawsuits and proceedings in the ordinary course of our business, including claims by current or former employees, distributors and competitors, and with respect to our products and product liability claims, lawsuits and proceedings.
We are involved in a number of legal actions relating to the use of our J-Plasma technology. The outcomes of these legal actions are not within our complete control and may not be known for prolonged periods of time. In the opinion of management, the Company has meritorious defenses, and such claims are adequately covered by insurance, or are not expected, individually or in the aggregate, to result in a material, adverse effect on our financial condition. However, in the event that damages exceed the aggregate coverage limits of our policy or if our insurance carriers disclaim coverage, we believe it is possible that costs associated with these claims could have a material adverse impact on our consolidated earnings, financial position or cash flows.
In addition, as previously disclosed with the Commission on Form 8-K filed April 26, 2019, we have learned that on April 17, 2019, a complaint (the “Complaint”) was filed in the United States District Court for the Middle District of Florida by plaintiff Kyle Pritchard, individually and on behalf of all others similarly situated against the Company and Charles D. Goodwin (“Goodwin”), the Company’s President and Chief Executive Officer and a member of the Company’s Board of Directors.
The Complaint (which as of the date hereof has not been delivered through formal process to the Company) seeks class action status on behalf of all persons and entities that acquired the Company’s securities between August 1, 2018 and April 1, 2019 and alleges violations by the Company and Goodwin of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, primarily related to certain public statements concerning the Premarket Notification 510(k) submission made to the US Food and Drug Administration for a new indication for the Company’s J-Plasma® technology for use in dermal resurfacing procedures. The Complaint seeks an unspecified amount of damages.
Although the ultimate outcome of this matter cannot be determined with certainty, the Company believes that the allegations stated in the Complaint are entirely without merit. The Company and Goodwin intend to defend themselves vigorously in the suit. Such claims are adequately covered by insurance, however, in the event that damages exceed the aggregate coverage limits of our policy or if our insurance carriers disclaim coverage, we believe it is possible that costs associated with this claim could have a material adverse impact on our consolidated earnings, financial position or cash flows.
In accordance with authoritative guidance, we accrue a liability in our consolidated financial statements for these actions when a loss is known or considered probable and the amount can be reasonably estimated. If the reasonable estimate of a known or probable loss is a range, and no amount within the range is a better estimate than any other, the minimum amount of the range is recorded. If a loss is reasonably possible, but not known or probable, and can be reasonably estimated, the estimated loss or range of loss is disclosed in the notes to the consolidated financial statements. In most cases, significant judgment is required to estimate the amount and timing of a loss to be recorded.
ITEM 1A. Risk factors
Not Applicable
.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
ITEM 3. Defaults Upon Senior Securities
None.
ITEM 4. Mine Safety Disclosures
Not Applicable.
25
APYX MEDICAL CORPORATION
ITEM 5. Other Information
None.
26
APYX MEDICAL CORPORATION
ITEM 6. Exhibits
|
2.1
|
||
|
3.1
|
||
|
3.2
|
||
|
3.3
|
||
|
3.4
|
||
|
3.5
|
||
|
31.1*
|
||
|
31.2*
|
||
|
32.1*
|
||
|
32.2*
|
||
|
101.INS**
|
XBRL Instance Document
|
|
|
101.SCH**
|
XBRL Taxonomy Extension Schema Document
|
|
|
101.CAL**
|
XBRL Taxonomy Extension Calculation Linkbase Document
|
|
|
101.DEF**
|
XBRL Taxonomy Extension Definition Linkbase Document
|
|
|
101.LAB**
|
XBRL Taxonomy Extension Label Linkbase Document
|
|
|
101.PRE**
|
XBRL Taxonomy Extension Label Presentation Document
|
|
* Filed herewith.
** XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended and otherwise is not subject to liability under these sections.
27
APYX MEDICAL CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
Apyx Medical Corporation
|
|||
|
Date: May 8, 2019
|
By:
|
/s/ Charles D. Goodwin II
|
|
|
Charles D. Goodwin II
|
|||
|
President, Chief Executive Officer and Director
|
|||
|
(Principal Executive Officer)
|
|||
|
Date: May 8, 2019
|
By:
|
/s/ Tara Semb
|
|
|
Tara Semb
|
|||
|
Chief Financial Officer,
|
|||
|
Treasurer and Secretary
|
|||
|
(Principal Financial Officer)
|
|||
28
TABLE OF CONTENTS
Part I. Financial InformationItem 1. Financial StatementsNote 1. Basis Of PresentationNote 2. InventoriesNote 3. Intangible AssetsNote 4. Recent Accounting PronouncementsNote 5. Earnings Per ShareNote 6. Stock-based CompensationNote 7. Income TaxesNote 8. Commitments and ContingenciesNote 9. Related Party TransactionsNote 10. Financial InstrumentsNote 11. Geographic and Segment InformationItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II. Other InformationItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Mine Safety DisclosuresItem 5. Other InformationItem 6. Exhibits