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, 2020
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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)
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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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
As of May 8, 2020,34,184,230 shares of the registrant’s $0.001 par value common stock were outstanding.
For the quarterly period ended March 31, 2020
(Unaudited)
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Page
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||||
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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, 2020 and December 31, 2019
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||||
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Consolidated Statements of Operations for the three
months ended March 31, 2020 and 2019
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||||
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Consolidated Statements of Changes in Stockholders’ Equity for the
three months ended March 31, 2020 and 2019
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Consolidated Statements of Cash Flows for the three months ended March 31, 2020 and 2019
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Item 2.
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||||
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Item 3.
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Item 4.
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||||
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Part II.
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||||
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Item 1.
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||||
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Item 1A.
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||||
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Item 2.
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||||
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Item 3.
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||||
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Item 4.
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||||
1
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Item 5.
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Item 6.
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||||
2
APYX MEDICAL CORPORATION
PART I. Financial Information
ITEM 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data, Unaudited)
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March 31,
2020 |
December 31, 2019
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||||||
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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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51,380
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$
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58,812
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Trade accounts receivable, net of allowance of $595 and $273
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6,122
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7,987
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Income tax receivables
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5,066
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426
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|||
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Other receivables
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1,302
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1,233
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|||
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Inventories, net of provision for obsolescence of $340 and $392
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5,872
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5,068
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|||
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Prepaid expenses and other current assets
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4,427
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3,207
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|||
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Total current assets
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74,169
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76,733
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|||
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Property and equipment, net of accumulated depreciation and amortization of $4,574 and $4,403
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6,543
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6,618
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|||
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Operating lease right-of-use assets
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322
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350
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Finance lease right-of-use assets
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599
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653
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|||
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Other assets
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482
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391
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|||
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Total assets
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$
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82,115
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$
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84,745
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LIABILITIES AND STOCKHOLDERS’ EQUITY
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|||||||
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Current liabilities:
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Accounts payable
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$
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2,535
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$
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2,438
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Accrued expenses and other liabilities
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7,586
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9,396
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|||
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Current portion of operating lease liabilities
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109
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108
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|||
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Current portion of finance lease liabilities
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231
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229
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|||
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Related party note payable
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140
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140
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|||
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Total current liabilities
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10,601
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12,311
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|||
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Long-term operating lease liabilities
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203
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235
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Long-term finance lease liabilities
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362
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421
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Other liabilities
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520
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519
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Total liabilities
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11,686
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13,486
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STOCKHOLDERS’ EQUITY
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Common stock, $0.001 par value; 75,000,000 shares authorized; 34,184,230 issued and outstanding as of March 31, 2020, and 34,312,527 issued and 34,169,952 outstanding as of December 31, 2019
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34
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34
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Additional paid-in capital
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57,829
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56,708
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Retained earnings
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12,566
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14,517
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Total stockholders’ equity
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70,429
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71,259
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Total liabilities and stockholders’ equity
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$
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82,115
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$
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84,745
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The accompanying notes are an integral part of the consolidated financial statements.
3
(In thousands, except per share data, Unaudited)
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Three Months Ended
March 31, |
|||||||
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2020
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2019
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||||||
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Sales
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$
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4,997
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$
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5,629
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Cost of sales
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2,013
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2,066
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|||
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Gross profit
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2,984
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3,563
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|||
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Other costs and expenses:
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|||||||
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Research and development
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980
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730
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Professional services
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2,389
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2,118
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|||
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Salaries and related costs
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3,311
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3,488
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|||
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Selling, general and administrative
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3,796
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2,957
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Total other costs and expenses
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10,476
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9,293
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|||
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Loss from operations
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(7,492
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)
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(5,730
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)
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|||
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Interest income
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216
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423
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Interest expense
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(6
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)
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—
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|||
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Other income (losses), net
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426
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(295
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)
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|||
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Total other income, net
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636
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128
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Loss before income taxes
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(6,856
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)
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(5,602
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)
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Income tax expense (benefit)
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(4,905
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)
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6
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Net loss
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$
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(1,951
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)
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$
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(5,608
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)
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Earnings per Share:
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|||||||
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Basic and diluted
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$
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(0.06
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)
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$
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(0.17
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)
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The accompanying notes are an integral part of the consolidated financial statements.
4
APYX MEDICAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In thousands, Unaudited)
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Three months ended March 31, 2019 and 2020
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||||||||||||||||||
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Common Stock
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Additional Paid-In Capital
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Retained Earnings
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Total
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|||||||||||||||
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Shares
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Par Value
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|||||||||||||||||
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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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52,920
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$
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34,223
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$
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87,177
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||||
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Options exercised for cash
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18
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—
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67
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—
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67
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||||||||
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Stock based compensation
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—
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—
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1,195
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—
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1,195
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Shares issued on net settlement of stock options
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168
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—
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—
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—
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—
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||||||||
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Net loss
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—
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—
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—
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(5,608
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)
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(5,608
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)
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||||||||
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Balance
March 31, 2019 |
33,891
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$
|
34
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|
$
|
54,182
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$
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28,615
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$
|
82,831
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|
||||
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Balance
December 31, 2019 |
34,170
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$
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34
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$
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56,708
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$
|
14,517
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$
|
71,259
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|
||||
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Options exercised for cash
|
10
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—
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72
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—
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72
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|
||||||||
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Stock based compensation
|
—
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|
—
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|
1,049
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|
—
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|
1,049
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|
||||||||
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Shares issued on net settlement of stock options
|
4
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—
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—
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—
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—
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|
||||||||
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Net loss
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—
|
|
—
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|
—
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|
(1,951
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)
|
(1,951
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)
|
||||||||
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Balance
March 31, 2020 |
34,184
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|
$
|
34
|
|
$
|
57,829
|
|
$
|
12,566
|
|
$
|
70,429
|
|
||||
The accompanying notes are an integral part of the consolidated financial statements.
5
(In thousands, Unaudited)
|
Three Months Ended March 31,
|
|||||||
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2020
|
2019
|
||||||
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Cash flows from operating activities
|
|||||||
|
Net loss
|
$
|
(1,951
|
)
|
$
|
(5,608
|
)
|
|
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|||||||
|
Depreciation and amortization
|
214
|
|
194
|
|
|||
|
Provision for inventory obsolescence
|
10
|
|
41
|
|
|||
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Stock based compensation
|
1,049
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|
1,195
|
|
|||
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Unrealized gain on short term investments
|
—
|
|
(164
|
)
|
|||
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Provision (benefit) for allowance for doubtful accounts
|
324
|
|
(238
|
)
|
|||
|
Changes in operating assets and liabilities:
|
|
|
|||||
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Trade receivables
|
1,520
|
|
(85
|
)
|
|||
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Prepaid expenses and other assets
|
(6,024
|
)
|
(349
|
)
|
|||
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Inventories
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(855
|
)
|
(170
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)
|
|||
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Accounts payable
|
107
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|
81
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|
|||
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Accrued and other liabilities
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(1,801
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)
|
14
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|
|||
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Net cash used in operating activities
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(7,407
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)
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(5,089
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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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(90
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)
|
(117
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)
|
|||
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Purchases of marketable securities
|
—
|
|
(18,884
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)
|
|||
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Proceeds from maturities of marketable securities
|
—
|
|
39,842
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|
|||
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Net cash (used in) provided by investing activities
|
(90
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)
|
20,841
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|
|||
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Cash flows from financing activities
|
|
|
|
|
|||
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Proceeds from stock option exercises
|
72
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|
67
|
|
|||
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Repayment of finance lease liabilities
|
(57
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)
|
—
|
|
|||
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Net cash provided by financing activities
|
15
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|
67
|
|
|||
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Effect of exchange rates on cash
|
50
|
|
—
|
|
|||
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Net change in cash, cash equivalents and restricted cash
|
(7,432
|
)
|
15,819
|
|
|||
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Cash, cash equivalents and restricted cash, beginning of period
|
58,812
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|
16,596
|
|
|||
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Cash, cash equivalents and restricted cash, end of period
|
$
|
51,380
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|
$
|
32,415
|
|
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Cash paid for:
|
|||||||
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Interest
|
$
|
6
|
|
$
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—
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|
|
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Non cash financing activities:
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|
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||||
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Cashless exercise of stock options/warrants
|
$
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11
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$
|
710
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Lease adoption
|
—
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|
212
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|
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The accompanying notes are an integral part of the consolidated financial statements.
6
NOTE 1. BASIS OF PRESENTATION
Unless the context otherwise indicates, the terms “Company,” “we,” “our,” “us,” “Apyx,” and similar terms refer to Apyx Medical Corporation and its consolidated subsidiaries.
We are an advanced energy technology company with a passion for elevating people’s lives through innovative products in the cosmetic and surgical markets. Known for our innovative Helium Plasma Technology, Apyx is solely focused on bringing transformative solutions to the physicians and patients it serves. Our Helium Plasma Technology is marketed and sold as Renuvion® in the cosmetic surgery market and J-Plasma® in the hospital surgical market. Renuvion® offers plastic surgeons, fascial plastic surgeons and cosmetic physicians a unique ability to provide controlled heat to the tissue to achieve their desired results. The J-Plasma® system allows surgeons to operate with a high level of precision and virtually eliminating unintended tissue trauma. We also leverage our deep expertise and decades of experience in unique waveforms through original equipment manufacturing (OEM) agreements with other medical device manufacturers.
In March 2020, the World Health Organization recognized the novel strain of coronavirus, COVID-19, as a pandemic. This pandemic has severely restricted the level of economic activity around the world. In response, the governments of many countries, states, cities and other geographic regions have taken preventative or protective actions, such as imposing restrictions on travel and business operations and advising or requiring individuals to limit or forego their time outside of their homes. The long-term impact of the COVID-19 pandemic on our business is highly uncertain and difficult to predict as the environment created by the pandemic is rapidly changing, however, during the last couple of months, the effects of the pandemic has been material and adverse on our business. We currently expect that the severity of the impact of the COVID-19 pandemic on our business will depend on a number of factors, including, but not limited to, the duration and severity of the pandemic and the extent and severity of the impact on the our customers and suppliers, all of which are uncertain and cannot be predicted.
Most of the procedures performed using our Helium Plasma Technology are elective, and as a result many of our customers have been affected by the actions taken by various governmental authorities requiring non-essential businesses to shut down temporarily. There is a significant amount of uncertainty as to when these actions will be lifted and when patients will choose to undergo elective cosmetic procedures once our customers’ practices are allowed to re-open. Substantially all of these procedures are performed outside of hospitals in the US, and it is possible that patients will be responsive to scheduling appointments sooner. In international markets, a greater portion of these procedures are performed in a hospital, and it is less certain when elective procedures will return to normal. Policymakers have also responded to COVID-19 with fiscal policy actions to support companies effected by the pandemic. While we have started to experience a significant decline in sales towards the end of our first fiscal quarter, as of the date of issuance of these consolidated financial statements, the full extent to which the COVID-19 pandemic may materially and adversely impact the Company's financial position, liquidity, or results of operations remains uncertain. We are experiencing a significant decline in sales domestically and internationally, and we expect the decline to continue into the second quarter and possibly beyond.
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 consolidated financial statements included in our Annual Report on Form 10-K for the year ended
December 31, 2019
. These consolidated financial statements reflect all adjustments that are necessary for a fair presentation of results of consolidated 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.
7
APYX MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
NOTE 2. CHANGE IN ACCOUNTING POLICY
During 2019, we began granting stock option awards deeper within the organization. We do not have sufficient experience with grants to these employees and we have experienced challenges in developing reliable forfeiture estimates at the grant date. Accounting for revising the forfeiture estimates has been burdensome. Accounting Standards Codification 718,
Compensation-Stock Compensation,
prescribes two methods for accounting for forfeitures on stock option awards, either the estimation method utilized by the Company previously, or by accounting for forfeitures as they occur. On January 1, 2020 we made an accounting policy election change and began accounting for forfeitures on stock option awards using actual forfeitures. This accounting policy election change was made on a retrospective basis. However, the changes to the current and prior periods were determined to be immaterial and there have been no changes to previously reported results as a result of the change.
NOTE 3
. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13,
Financial Instruments—Credit Losses (Topic 326).
The update changes the impairment model for most financial assets and certain other instruments, including trade and other receivables, contract assets, held-to-maturity debt securities and loans, and requires entities to use a new forward-looking expected loss model that will result in the earlier recognition of allowance for losses. This update, as originally issued, was effective for annual and interim periods beginning after December 15, 2019, with early adoption permitted. In November 2019, the FASB issued ASU 2019-10,
Financial Instruments - Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842) Effective Dates
, which deferred the effective dates of these standards for Smaller Reporting Companies until fiscal years beginning after December 15, 2022. The Company currently expects to continue to qualify as a Smaller Reporting Company, based upon the current SEC definition, and as a result, will be utilizing the deferred elective date. The Company is in the process of determining the effects of the adoption of the standard on the consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04,
Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
. The purpose of this ASU is to reduce the cost and complexity of evaluating goodwill for impairment. It eliminates the need for entities to calculate the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. Under this ASU, an entity will perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge is recognized for the amount by which the carrying value exceeds the reporting unit’s fair value. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company adopted the ASU on January 1, 2020. The amendment did not have an impact on our consolidated financial condition or results of operations.
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 4. INVENTORIES
Inventories are stated at the lower of cost or net realizable values. 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 primarily allocated to inventory manufactured in-house based upon labor hours.
Inventories consisted of the following:
|
(In thousands)
|
March 31,
2020 |
December 31,
2019 |
|||||
|
Raw materials
|
$
|
2,798
|
|
$
|
2,935
|
|
|
|
Work in process
|
2,013
|
|
1,209
|
|
|||
|
Finished goods
|
1,401
|
|
1,316
|
|
|||
|
Gross inventories
|
6,212
|
|
5,460
|
|
|||
|
Less: provision for obsolescence
|
(340
|
)
|
(392
|
)
|
|||
|
Inventories, net
|
$
|
5,872
|
|
$
|
5,068
|
|
|
NOTE 5. ACCRUED EXPENSES AND OTHER CURRENT LIABILTIES
Accrued expenses and other current liabilities consisted of the following:
|
(in thousands)
|
March 31,
2020
|
December 31, 2019
|
|||||
|
Accrued payroll
|
475
|
|
694
|
|
|||
|
Accrued bonuses
|
—
|
|
1,306
|
|
|||
|
Accrued commissions
|
375
|
|
877
|
|
|||
|
Accrued product warranties
|
460
|
|
452
|
|
|||
|
Accrued insurance
|
1,055
|
|
1,170
|
|
|||
|
Accrued professional fees
|
1,499
|
|
1,383
|
|
|||
|
Joint and several payroll liability
|
1,045
|
|
1,045
|
|
|||
|
Uncertain tax positions
|
1,530
|
|
1,491
|
|
|||
|
Other accrued expenses and current liabilities
|
1,147
|
|
978
|
|
|||
|
Total accrued expenses and other current liabilities
|
$
|
7,586
|
|
$
|
9,396
|
|
|
9
APYX MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
NOTE 6. 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 adjusted for other units required to be included in basic EPS. 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)
|
2020
|
2019
|
|||||
|
Numerator:
|
|||||||
|
Net loss
|
$
|
(1,951
|
)
|
$
|
(5,608
|
)
|
|
|
Denominator:
|
|||||||
|
Weighted average shares outstanding - basic and diluted
|
34,176
|
|
33,343
|
|
|||
|
Earnings per share:
|
|||||||
|
Basic and diluted
|
$
|
(0.06
|
)
|
$
|
(0.17
|
)
|
|
|
Anti-dilutive instruments excluded from diluted loss per common share:
|
|||||||
|
Options
|
5,084
|
|
1,908
|
|
|||
10
APYX MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
NOTE 7. STOCK-BASED COMPENSATION
Under our stock option plans, our board of directors may grant restricted stock andoptions 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 stock-based compensation expense amortized over the vesting period based on the fair value on the grant date utilizing a trinomial lattice model through 2018 and the Black Scholes model for grants in 2019 and 2020, both of which include a number of estimates that affect the amount of our expense.
We recognized approximately
$1,049,000
in stock-based compensation expense during the
three months ended March 31, 2020
, as compared with
$1,195,000
for the
three months ended March 31, 2019
.
The status of our stock options are summarized as follows:
|
Number of options
|
Weighted average exercise price
|
|||||
|
Outstanding at December 31, 2019
|
3,966,858
|
|
$
|
4.67
|
|
|
|
Granted
|
1,274,900
|
|
8.18
|
|
||
|
Exercised
|
(15,631
|
)
|
5.42
|
|
||
|
Canceled and forfeited
|
(142,300
|
)
|
7.65
|
|
||
|
Outstanding at March 31, 2020
|
5,083,827
|
|
$
|
5.46
|
|
|
We allow employees to exercise stock-based awards by surrendering stock-based awards with a fair value of the stock-based awards exercised, referred to as net settlements. These surrenders are included in stock options exercised in the options rollforward above. For the three months ended March 31, 2020 and 2019, respectively, we received
1,924
and
83,819
options as payment in the exercise of
4,362
and
168,730
options.
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 Black Scholes model with an expected life calculated via the simplified method as we do not have sufficient history to determine actual expected life.
|
2020 Grants
|
|
|
Option value
|
$8.18
|
|
Risk-free rate
|
1.7%
|
|
Expected dividend yield
|
—
|
|
Expected volatility
|
65.9%
|
|
Expected term (in years)
|
6
|
NOTE 8. INCOME TAXES
On March 27, 2020, the U.S. government enacted the CARES Act to provide relief from the coronavirus pandemic. The CARES Act includes a provision that allows companies to carryback net operating losses (NOL’s) generated in the period 2018 through 2020 to prior years. In conjunction with the disposition of the Core business in 2018, we generated a significant amount of taxable income in 2018. Subsequent to this, we generated net losses in 2019 and through the first quarter of 2020. For the net losses generated in 2019, we previously recorded a valuation allowance to the full value of the deferred tax asset associated with our NOL carryforwards due to realization of the deferred tax assets being improbable. The CARES Act makes these assets realizable, and as of the date of the CARES Act, we have recognized an income tax benefit of approximately
$3.7 million
associated with the release of the valuation allowance on our Federal NOL carryforward related to 2019. We also recognized an income tax benefit of approximately
$1.2 million
related to our net loss before income taxes for the three months ended March 31, 2020. There are approximately an additional
$4.4 million
of 2018 Federal income tax payments available to offset against any other 2020 losses that may be incurred.
11
APYX MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
The Company’s income tax expense (benefit) was approximately
$(4,905,000)
and
$6,000
with an effective tax rate of
71.5%
and
(0.1)%
for the three months ended March 31, 2020 and 2019, respectively. The effective rate differs from the statutory rate primarily due to the release of the valuation allowance on our net operating loss carryforward from 2019.
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, 2020.
|
(in thousands)
|
Gross Unrealized Tax Benefits
|
||
|
Balance at January 1, 2020
|
$
|
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, 2020
|
$
|
1,313
|
|
The Company recognizes accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes in the Company’s condensed consolidated financial statements. As of March 31, 2020, the Company had approximately
$217,000
in accrued interest and penalties related to unrecognized tax benefits. Included in the income tax expense for the three months ended March 31, 2020 is approximately
$39,000
of interest and penalties on the Company's uncertain tax positions. If the Company were to prevail on all uncertain tax positions, the resulting impact will be material as the Company will recognize approximately
$1,530,000
of tax benefits in the provision of income taxes. It is expected that all of the uncertain tax positions should be resolved by October 2022.
NOTE 9. COMMITMENTS AND CONTINGENCIES
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. Such claims include claims by current or former employees, distributors and competitors, claims concerning the marketing and promotion of our products and product liability claims.
We are involved in a number of legal actions relating to the use of our Helium Plasma technology. The outcomes of these legal actions are not within our complete control and may not be known for prolonged periods of time. We believe that such claims are adequately covered by insurance; however, in the case of one of our carriers, we are in a dispute regarding the total level of coverage available. Notwithstanding the foregoing, in the opinion of management, the Company has meritorious defenses and such claims 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 policies 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 results of operations, financial position or cash flows.
In addition, as previously disclosed with the U.S. Securities and Exchange Commission on the Company’s Report on Form 8-K filed April 26, 2019, 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, alleging certain violations of the Securities Exchange Act of 1934, as amended. On July 16, 2019, the Court appointed a lead plaintiff for the putative class and approved the lead plaintiff’s selection of counsel. On or about September 3, 2019, Plaintiff filed an amended complaint (the “Amended Complaint”) with the Court.
The Amended Complaint seeks class action status on behalf of all persons and entities that acquired the Company’s securities between December 21, 2018 and April 1, 2019 and alleges violations by the Company and Goodwin of Sections 10(b) and 20(a)
12
APYX MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
of the Securities Exchange Act of 1934, as amended 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 Amended Complaint seeks an unspecified amount of compensatory damages, an award of interest, reasonable attorneys’ fees, expert fees and other costs, and equitable relief as the court may deem just and proper. On October 3, 2019, the Company and Goodwin filed a Motion to Dismiss the Amended Complaint. Plaintiff’s opposition to the motion to dismiss was served on November 4, 2019. On March 11, 2020, the Court issued an order denying the Company’s motion to dismiss. The Company intends to vigorously defend its interests against the allegations contained in the complaint.
Although the ultimate outcome of this matter cannot be determined with certainty, the Company believes that the allegations stated in the Amended Complaint are entirely without merit. The Company and Goodwin intend to defend themselves vigorously in the suit. In the opinion of management, 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. We initially accrued
$500,000
for defense costs and upon the denial of the motion to dismiss, we accrued an additional
$500,000
, which is our insurance deductible related to the matter.
$820,000
of the
$1,000,000
is still accrued as of March 31, 2020.
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.
Purchase Commitments
At
March 31, 2020
, we had purchase commitments totaling approximately
$700,000
substantially all of which is expected to be purchased within the next six months.
China Joint Venture
In late 2019, we executed a joint venture agreement with our Chinese supplier. The agreement requires the Company to make a capital contribution into the newly formed entity of approximately
$0.4M
. We expect a portion of this capital contribution will be made by the end of 2020.
13
APYX MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
NOTE 10. 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.
In addition, as part of the purchase of the Bulgaria manufacturing facility, Mr. Shilev was issued a note payable for
$140,000
to be paid
5 years
after the original purchase date, which is in October 2020.
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. Asset information is not reviewed by the chief operating decision maker by segment and is not available by segment, accordingly, we have not presented a measure of assets by segment.
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. 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, 2020
|
|||||||||||||||
|
(In thousands)
|
Advanced Energy
|
OEM
|
Corporate & Other
|
Total
|
|||||||||||
|
Sales
|
$
|
3,986
|
|
$
|
1,011
|
|
$
|
—
|
|
$
|
4,997
|
|
|||
|
Income (loss) from operations
|
(3,984
|
)
|
247
|
|
(3,755
|
)
|
(7,492
|
)
|
|||||||
|
Interest income
|
—
|
|
—
|
|
216
|
|
216
|
|
|||||||
|
Interest expense
|
—
|
|
—
|
|
(6
|
)
|
(6
|
)
|
|||||||
|
Other income, net
|
—
|
|
—
|
|
426
|
|
426
|
|
|||||||
|
Income tax benefit
|
—
|
|
—
|
|
(4,905
|
)
|
(4,905
|
)
|
|||||||
|
Three Months Ended March 31, 2019
|
|||||||||||||||
|
(In thousands)
|
Advanced Energy
|
OEM
|
Corporate & Other
|
Total
|
|||||||||||
|
Sales
|
$
|
4,371
|
|
$
|
1,258
|
|
$
|
—
|
|
$
|
5,629
|
|
|||
|
Income (loss) from operations
|
(3,328
|
)
|
591
|
|
(2,993
|
)
|
(5,730
|
)
|
|||||||
|
Interest income
|
—
|
|
—
|
|
423
|
|
423
|
|
|||||||
|
Other losses
|
—
|
|
—
|
|
(295
|
)
|
(295
|
)
|
|||||||
|
Income tax expense
|
—
|
|
—
|
|
6
|
|
6
|
|
|||||||
14
APYX MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
International sales represented approximately
27.6%
of total revenues for the three months ended March 31, 2020, as compared with
30.5%
of total revenues for the same prior year period.
Substantially all of these sales are denominated in U.S. dollars. Revenue by geographic region, based on the customer's “ship to” location on the invoice, are as follows:
|
Three Months Ended
March 31, |
|||||||
|
(In thousands)
|
2020
|
2019
|
|||||
|
Sales by Domestic and International
|
|||||||
|
Domestic
|
$
|
3,618
|
|
$
|
3,910
|
|
|
|
International
|
1,379
|
|
1,719
|
|
|||
|
Total
|
$
|
4,997
|
|
$
|
5,629
|
|
|
15
APYX MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
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 an advanced energy technology company with a passion for elevating people’s lives through innovative products in the cosmetic and surgical markets. Known for our innovative Helium Plasma Technology, Apyx is solely focused on bringing transformative solutions to the physicians and patients it serves. Our Helium Plasma Technology is marketed and sold as Renuvion® in the cosmetic surgery market and J-Plasma® in the hospital surgical market. Renuvion® offers plastic surgeons, fascial plastic surgeons and cosmetic physicians a unique ability to provide controlled heat to the tissue to achieve their desired results. The JPlasma® system allows surgeons to operate with a high level of precision and virtually eliminating unintended tissue trauma. We also leverage our deep expertise and decades of experience in unique waveforms through original equipment manufacturing (OEM) agreements with other medical device manufacturers.
As discussed in our Annual Report on Form 10-K for the year ended December 31, 2019, an outbreak of a novel strain of the coronavirus, COVID-19, was recently identified in China and has subsequently been recognized as a pandemic by the World Health Organization. This coronavirus outbreak has severely restricted the level of economic activity around the world. In response to this coronavirus outbreak the governments of many countries, states, cities and other geographic regions have taken preventative or protective actions, such as imposing restrictions on travel and business operations and advising or requiring individuals to limit or forego their time outside of their homes. Temporary closures of businesses have been ordered and numerous other businesses have temporarily closed voluntarily. These actions expanded significantly in the mid-March to mid-April time frame and continue to the date of the filing. There are indications that these actions are beginning to subside as governmental bodies begin to loosen restrictions. However, given the variability in measures taken, the uncertainty among any potential resurgence of coronavirus, and patients willingness to undergo elective procedures, the related financial impact cannot be reasonably estimated at this time. Therefore we expect significant adverse impacts to the results of our operations into the second fiscal quarter and possibly beyond.
Prior to the spread of COVID-19 into the US and international markets, we experienced positive year-over-year growth trends in the sale of our capital and disposable products, indicating increased utilization of our technology. Beginning in late February we began to see declines in the sale of our Helium Plasma Technology in European markets. These declines continued and also spread to the North and Latin American markets in March. At this time, we have not experienced any recovery in sales of these products in the affected markets.
We source the components used in our products from a variety of suppliers and we have collaborative arrangements with three key foreign suppliers. At this time our suppliers have experienced no significant disruptions as a result of the COVID-19 pandemic. We have experienced minor delays in our procurement from these suppliers as a result of the availability of shipping from third party freight carriers. These delays have not, to date, had a significant impact on our operations.
In response to the COVID-19 pandemic, we have taken action in these key areas:
•
Protecting the Health and Safety of our Employees: To reduce the risk to our employees and their families to potential
exposure to COVID-19, we have required that all non-essential employees work remotely until further notice. We have also split the shifts of our manufacturing personnel to allow for adequate social distancing, and require all personnel to utilize personal protective equipment while on site at our facilities. We have also restricted business travel and access to our facilities.
•
Operating Expenses: We are taking preemptive steps to curtail spending, including implementing hiring restrictions,
reducing most discretionary spending, reducing capital expenditures, and delaying certain R&D projects and clinical research studies.
16
APYX MEDICAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANAYLSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
•
Governmental Policy: On March 27, 2020, the U.S. government enacted the CARES Act to provide relief from the
coronavirus pandemic. We are taking advantage of certain provisions of the CARES Act which are applicable to us including utilizing NOL carryback provisions and the deferral of payroll taxes. We expect that utilizing these provisions will significantly help mitigate the working capital impact the COVID-19 pandemic has had on our sales and operations.
Total revenue decreased by 11.2% or approximately $0.6 million for the three months ended March 31, 2020 when compared with the three months ended March 31, 2019. Advanced Energy segment sales decreased 8.8% or approximately $0.4 million for the three months ended March 31, 2020 when compared with the three months ended March 31, 2019. The coronavirus pandemic resulted in decreased demand for our products, both domestically and internationally in the first quarter of 2020 as many of our customers' businesses have been ordered and numerous others have temporarily closed voluntarily.
International sales represented approximately
27.6%
of total revenues for the three months ended March 31, 2020, as compared with
30.5%
of total revenues in the prior year. Management estimates our products have been sold in more than 45 countries through local dealers coordinated by sales and marketing personnel at the Clearwater, Florida facility.
During 2020, we continue to drive growth in our Advanced Energy business by increasing the adoption and utilization of our generators and handpieces in the U.S. cosmetic surgery market and fulfilling demand from distributors in our international markets. As of March 31, 2019, we had a direct sales force of 31 field-based selling professionals and a network of 4 independent sales agencies. We also had 5 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®.
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. Asset information is not reviewed by the chief operating decision maker by segment and is not available by segment, accordingly, we have not presented a measure of assets by segment.
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. 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 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)
|
2020
|
2019
|
Change
|
||||||||
|
Sales by Reportable Segment
|
|||||||||||
|
Advanced Energy
|
$
|
3,986
|
|
$
|
4,371
|
|
(385,000
|
)
|
(8.8
|
)%
|
|
|
OEM
|
1,011
|
|
1,258
|
|
(247,000
|
)
|
(19.6
|
)%
|
|||
|
Total
|
$
|
4,997
|
|
$
|
5,629
|
|
(11.2
|
)%
|
|||
|
(632,000)
|
|||||||||||
|
Sales by Domestic and International
|
|||||||||||
|
Domestic
|
$
|
3,618
|
|
$
|
3,910
|
|
(7.5
|
)%
|
|||
|
International
|
1,379
|
|
1,719
|
|
(19.8
|
)%
|
|||||
|
Total
|
$
|
4,997
|
|
$
|
5,629
|
|
(11.2
|
)%
|
|||
17
APYX MEDICAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANAYLSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Total revenue decreased by 11.2% or approximately $0.6 million for the three months ended March 31, 2020 when compared with the three months ended March 31, 2019. Advanced Energy segment sales decreased 8.8% or approximately $0.4 million for the three months ended March 31, 2020 when compared with the three months ended March 31, 2019. The coronavirus pandemic resulted in decreased demand for our products, both domestically and internationally, in the first quarter of 2020 as many of our customers' businesses have been ordered to close, while numerous others have closed voluntarily. We expect that the decreased demand will continue into the second quarter of 2020 and possibly beyond.
Gross Profit
|
Three Months Ended
March 31, |
||||||||||
|
(In thousands)
|
2020
|
2019
|
Change
|
|||||||
|
Cost of sales
|
$
|
2,013
|
|
$
|
2,066
|
|
(2.6
|
)%
|
||
|
Percentage of sales
|
40.3
|
%
|
32.4
|
%
|
||||||
|
Gross profit
|
$
|
2,984
|
|
$
|
3,563
|
|
(16.3
|
)%
|
||
|
Percentage of sales
|
59.7
|
%
|
63.3
|
%
|
(3.6
|
)%
|
||||
Gross profit for the three months ended March 31,
2020
, decreased by 16.3% year-over-year, to $3.0 million, compared to $3.6 million in the prior year. Gross margin for the three months ended March 31,
2020
, was
59.7%
, compared to
63.3%
for the same period in 2019. The primary drivers of the change in gross profit margin were product mix within both our Advanced Energy and OEM segments, revenue mix between our segments, geographical revenue mix, and improved product margins in our Advanced Energy segment as a result of our continued manufacturing efficiency initiatives.
Other Costs and Expenses
Our spending in the first quarter of 2020 reflected normal business activities into February and March and then a curtailment of certain costs associated with the impact of the COVID-19 pandemic, including restrictions on travel. While certain spending will decrease in the second quarter of 2020 as a result of a reduction in revenue and activities limited by the COVID-19 pandemic, much of our spending will continue. For example, while we have restricted new hirings, we have no plans to reduce our headcount or furlough any employees at this time. Certain costs will decline as the underlying activities are restricted by the COVID-19 pandemic, including travel and related expenses, clinical trials and physician training.
Research and development
|
Three Months Ended
March 31, |
||||||||||
|
(In thousands)
|
2020
|
2019
|
Change
|
|||||||
|
Research and Development expense
|
$
|
980
|
|
$
|
730
|
|
34.2
|
%
|
||
|
Percentage of sales
|
19.6
|
%
|
13.0
|
%
|
|
|
||||
Research and development expenses increased
34.2%
for the three months ended March 31,
2020
, primarily due to spending on two IDE clinical studies, which had applications submitted to the FDA in late 2019.
18
APYX MEDICAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANAYLSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Professional services
|
Three Months Ended
March 31, |
||||||||||
|
(In thousands)
|
2020
|
2019
|
Change
|
|||||||
|
Professional services expense
|
$
|
2,389
|
|
$
|
2,118
|
|
12.8
|
%
|
||
|
Percentage of sales
|
47.8
|
%
|
37.6
|
%
|
|
|
||||
Professional services expense increased
12.8%
for the three months ended March 31,
2020
, primarily attributable to increased accounting and auditing fees related to recent financial statement restatements and continued efforts to remediate our internal control deficiencies.
Salaries and related costs
|
Three Months Ended
March 31, |
||||||||||
|
(In thousands)
|
2020
|
2019
|
Change
|
|||||||
|
Salaries and related expenses
|
$
|
3,311
|
|
$
|
3,488
|
|
(5.1
|
)%
|
||
|
Percentage of sales
|
66.3
|
%
|
62.0
|
%
|
||||||
During the three months ended
March 31, 2020
, salaries and related expenses decreased approximately
(5.1)%
, primarily driven by a decrease in bonus expense in 2020 partially offset by an increase in headcount at March 31, 2020 as compared to March 31, 2019.
Selling, general and administrative expenses
|
Three Months Ended
March 31, |
||||||||||
|
(In thousands)
|
2020
|
2019
|
Change
|
|||||||
|
SG&A Expense
|
$
|
3,796
|
|
$
|
2,957
|
|
28.4
|
%
|
||
|
Percentage of sales
|
76.0
|
%
|
52.5
|
%
|
||||||
During the three months ended
March 31, 2020
, selling, general and administrative expense increased approximately
28.4%
, primarily driven by higher bad debt expense ($0.6 million) related to increased uncertainty on the collection of our receivables due to the economic environment resulting from the coronavirus pandemic, and an increase in insurance premiums ($0.1 million) from the prior year.
19
APYX MEDICAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANAYLSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Other Income (Expense)
|
Three Months Ended
March 31, |
||||||||||
|
(In thousands)
|
2020
|
2019
|
Change
|
|||||||
|
Interest income
|
$
|
216
|
|
$
|
423
|
|
(48.9
|
)%
|
||
|
Percentage of sales
|
4.3
|
%
|
7.5
|
%
|
||||||
|
Other income (losses), net
|
$
|
426
|
|
$
|
(295
|
)
|
(244.4
|
)%
|
||
|
Percentage of sales
|
8.5
|
%
|
(5.2
|
)%
|
||||||
Total interest income decreased for the three months ended March 31,
2020
, as compared with the prior year. This decrease is due to a lower average balance, as well as a lower yield on our investments in U.S. Treasury Securities included in cash and cash equivalents.
Other income (losses), net increased for the three months ended March 31,
2020
, as compared with the prior year. This increase is primarily due to the receipt of refunds on tariffs paid in the prior year, offset by the recognition of a joint and several liability for failure to collect and remit payroll taxes related to stock option exercises in the prior year.
Income Taxes
|
Three Months Ended
March 31, |
||||||||||
|
(In thousands)
|
2020
|
2019
|
Change
|
|||||||
|
Income tax expense (benefit
|
$
|
(4,905
|
)
|
$
|
6
|
|
(81,850.0
|
)%
|
||
|
Effective tax rate
|
71.5
|
%
|
(0.1
|
)%
|
||||||
Our income tax expense (benefit) was approximately $(4,905,000) and $6,000 with an effective tax rate of 71.5% and (0.1)% for the three months ended March 31, 2020 and 2019, respectively. The effective rate differs from the statutory rate primarily due to the release of the valuation allowance on our net operating loss carryforward from 2019. On March 27, 2020, the U.S. government enacted the CARES Act to provide relief from the coronavirus pandemic. The CARES Act includes a provision that allows companies to carryback net operating losses generated in the period 2018 through 2020 to prior years. We released the full valuation allowance of approximately $3.7M on our Federal net operating loss carryforward associated with the provisions of the CARES Act.
Liquidity and Capital Resources
Our working capital at March 31, 2020 was approximately
$63.6 million
compared with
$64.4 million
at December 31, 2019. The decrease in working capital from December 31, 2019 to March 31, 2020 was primarily due to the net loss incurred by the Company during the first quarter of 2020 partially offset by non cash stock based compensation expense.
For the three months ended March 31, 2020, net cash used in operating activities was approximately $7.4 million, which principally funded our operating loss of $(7.5) million, compared with net cash used in operating activities of approximately $5.1 million in the same period for 2019. Utilizing the provisions of the CARES Act, we recognized an income tax benefit of approximately $4.9 million in Q1 2020, of which we expect to receive a tax refund of approximately $3.7 million by the end of 2020. We expect that utilizing the NOL carryback will significantly help mitigate the working capital impact the COVID-19 pandemic has had on our sales and operations.
The CARES Act also allows us to defer the payment of payroll taxes incurred between March 27, 2020 and December 31, 2020 into 2021 and 2022. Our expected deferral under this program is between $0.4 million and $0.5 million.
As a result of the impact of the COVID-19 pandemic on our customers, we have received multiple requests for extension on the payment of receivables. We are committed to work with our customers to collect the receivables as expeditiously as possible.
Net cash from investing activities is $0.1 million, primarily related to investments in property and equipment.
20
APYX MEDICAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANAYLSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
At
March 31, 2020
, we had purchase commitments totaling approximately $0.7 million, substantially all of which is expected to be purchased within the next six months.
21
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, 2019
, filed with the Securities and Exchange Commission on March 31, 2020.
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:
Stock-based Compensation
Under our stock option plans, options to purchase common shares of the Company may be granted to employees, officers and directors of the Company by the Board of Directors. We account for stock options in accordance with FASB ASC Topic 718-10,
Compensation-Stock Compensation
, with compensation expense amortized over the vesting period. Options are valued using the Black-Scholes model in 2019 and 2020 and the trinomial lattice option-pricing model in prior years, both of which includes a number of estimates that affect the amount of our expense. We have determined that the most critical of these estimates are the expected life and volatility used in the calculations.
Expected life
For employee stock-based compensation awards, we estimate the expected life of awards utilizing the SEC's simplified method. We utilize this method, as the we have not historically granted stock-based compensation awards to employees in sufficient volumes to determine a reasonable estimate of the life of awards. For awards granted to non-employees, we calculate expected life using a combination of past exercise behavior, the contractual term and expected remaining exercise behavior.
Volatility
We determine the volatility by utilizing the historical volatility of our stock over the period of the awards expected life. Relevant guidance allows us to include periods in excess of the useful life if we determine that they provide a more reasonable basis for the volatility of our stock. Additionally, ASC 718-10 allows us to exclude periods from the volatility if they pertain to events or circumstances that in our judgment are specific to us and if the event or transaction is not reasonably expected to occur again during the expected term of the awards. We have not included any additional periods, nor disregarded any periods, in calculating our volatility.
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.
22
APYX MEDICAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANAYLSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Litigation Contingencies
In accordance with authoritative guidance, we record 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 accrued. 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.
Income Taxes
The provision for income tax expense (benefit) includes federal, foreign, state and local income taxes currently payable or receivable 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 the sale of the Core business in 2018, and our expectation to continue to generate losses in the near future, we recorded a valuation allowance on the net deferred tax asset and do not anticipate recording an income tax benefit related to these deferred tax assets. We 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 improve and it becomes more likely than not that the deferred tax assets will be realizable. As management expects the Company to continue to generate losses in 2020 and the foreseeable future after 2020, we will continue to record a valuation allowance on the remaining deferred tax asset balance as of March 31, 2020.
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.
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 3 of the Notes to Consolidated Financial Statements.
23
APYX MEDICAL CORPORATION
ITEM 3
.
Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
ITEM 4. Controls and Procedures
Disclosure Controls and Procedures
Our management has established and maintains disclosure controls and procedures that are designed to ensure that the information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Management carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2019, the Company's disclosure controls and procedures were not effective because of the material weaknesses in our internal control over financial reporting as discussed below.
Notwithstanding such material weaknesses, which is described below in Management’s Report on Internal Control over Financial Reporting, our management has concluded that the consolidated financial statements included in this Form 10-Q present fairly, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with GAAP.
Management’s Report on Internal Control Over Financial Reporting
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, 2019, 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, 2019, 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, 2019 was audited by BDO USA LLP, 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, 2019, 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.
|
•
|
As of December 31, 2019 we had identified the following three material weaknesses:
An ineffective control environment requiring additional qualified accounting personnel with an appropriate level of knowledge and experience with generally accepted accounting principles. This was a deficiency from the prior year that had not been fully remediated.
|
24
APYX MEDICAL CORPORATION
|
•
|
Ineffective control activities due to the lack of documentation and timeliness in executing certain business process controls, specifically related to procure to pay and inventory processes and footnote reporting disclosures related to income tax accounts, primarily related to our United States operations. This was a deficiency from the prior year that had not been fully remediated.
|
|
•
|
Ineffective control environment and control activities over financial reporting in our Bulgarian subsidiary related to the purchasing of goods and services, including the processing and payment of vendor invoices.
|
As of March 31, 2020, we continue our remediation efforts related to these deficiencies.
Remediation Efforts to Address Material Weaknesses
Management is committed to maintaining a strong internal control environment. In response to the identified material weaknesses, management, with the oversight of the Audit Committee of the Board of Directors, has taken actions toward the remediation of the respective material weaknesses in internal control over financial reporting as outlined below.
|
•
|
We are in the process of remediating the material weakness associated with the lack of sufficient qualified accounting personnel with an appropriate level of knowledge and experience with generally accepted accounting principles by hiring a new Chief Financial Officer in January 2019 and, in September 2019, a new Corporate Controller with experience in internal controls and financial reporting. Both have been actively engaged in remediation efforts to address the material weaknesses to date and will continue throughout fiscal year 2020. We will continue to recruit qualified professionals with appropriate levels of knowledge and experience to assist in resolving accounting issues related to non-routine and complex transactions. We have also enhanced our policies, procedures, and controls for all key business processes. In addition, management will continue to train personnel to ensure consistent application of accounting principles and adherence to the Company’s policies, procedures, and controls.
|
|
•
|
We are in the process of remediating the material weakness associated with the ineffective control activities due to the lack of documentation and timeliness in executing business process controls by enhancing our processes and review controls associated with the processes noted above. We have reviewed current financial controls to assess if additional management review controls are necessary and will continue to work with all finance personnel to ensure the appropriate documentation criteria for the existing controls, including evidence of review, timeliness and variance thresholds. We will continue to work with the third-party specialists we engaged to review, document, and enhance the design of our controls, with the goal of designing and implementing controls that address the completeness and accuracy of data used in the performance of certain controls as well as the precision of management's review, but also enhance our ability to manage our business.
|
|
•
|
We have enhanced, or are in the process of enhancing, certain controls over purchasing and disbursements in our Bulgarian subsidiary, including approving and validating vendor invoices received by verifying the related purchase authorization and the receipt of the goods or services.
|
Management believes the steps outlined above, along with the implementation of a new financial reporting system, 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.
As of March 31, 2020, our remediation of these deficiencies is incomplete.
Changes in Internal Control Over Financial Reporting
Except as set forth above, there were no changes in our internal control over financial reporting that occurred during the three months ended March 31, 2020 that materially affected, or that are reasonably likely to materially affect our internal control over financial reporting.
25
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. Such claims include claims by current or former employees, distributors and competitors, claims concerning the marketing and promotion of our products and product liability claims.
We are involved in a number of legal actions relating to the use of our Helium Plasma technology. The outcomes of these legal actions are not within our complete control and may not be known for prolonged periods of time. We believe that such claims are adequately covered by insurance; however, in the case of one of our carriers, we are in a dispute regarding the total level of coverage available. Notwithstanding the foregoing, in the opinion of management, the Company has meritorious defenses and such claims 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 policies 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 results of operations, financial position or cash flows.
In addition, as previously disclosed with the U.S. Securities and Exchange Commission on the Company’s Report on Form 8-K filed April 26, 2019, 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, alleging certain violations of the Securities Exchange Act of 1934, as amended. On July 16, 2019, the Court appointed a lead plaintiff for the putative class and approved the lead plaintiff’s selection of counsel. On or about September 3, 2019, Plaintiff filed an amended complaint (the “Amended Complaint”) with the Court.
The Amended Complaint seeks class action status on behalf of all persons and entities that acquired the Company’s securities between December 21, 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, as amended 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 Amended Complaint seeks an unspecified amount of compensatory damages, an award of interest, reasonable attorneys’ fees, expert fees and other costs, and equitable relief as the court may deem just and proper. On October 3, 2019, the Company and Goodwin filed a Motion to Dismiss the Amended Complaint. Plaintiff’s opposition to the motion to dismiss was served on November 4, 2019. On March 11, 2020, the Court issued an order denying the Company’s motion to dismiss. The Company intends to vigorously defend its interests against the allegations contained in the complaint.
Although the ultimate outcome of this matter cannot be determined with certainty, the Company believes that the allegations stated in the Amended Complaint are entirely without merit. The Company and Goodwin intend to defend themselves vigorously in the suit. In the opinion of management, 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. We initially accrued $500,000 for defense costs and upon the denial of the motion to dismiss, we accrued an additional $500,000, which is our insurance deductible related to the matter. $820,000 of the $1,000,000 is still accrued as of March 31, 2020.
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.
ITEM 1A. Risk factors
There have been no material changes to the Risk Factors described in Part I, Item1A-Risk Factors in our annual report on Form10-K for the year ended December 31, 2019 other than the following:
26
APYX MEDICAL CORPORATION
THE COVID-19 Pandemic has had and continues to have a material and adverse affect on our business
Our global operations expose us to risks associated with public health crises and outbreaks of epidemic, pandemic, or contagious diseases, such as the current outbreak of a novel strain of coronavirus (COVID-19). To date, COVID-19 has had, and may continue to have, a material and adverse impact on our operations. Due to these impacts and measures, we have experienced and may continue to experience significant and unpredictable reductions in the demand for our products as actions taken by governmental bodies have restricted our customers' business activities. There is a significant amount of uncertainty as to when these restrictions will be lifted and when patients will choose to undergo the elective procedures provided by our customers. In addition, our customers may delay, cancel or redirect planned capital expenditures in order to focus resources on COVID-19 or in response to economic disruption related to COVID-19.
As a result of the COVID-19 outbreak, many businesses have experienced temporary closures of facilities as a result of being considered non-essential businesses. As performers of elective procedures, these temporary closures have impacted many of our customers and materially reduced demand for our products. As a medical device company, while we have currently been exempt from these guidelines and have largely continued operations, if we continue to experience materially reduced demand for our products, we may have to scale back our operations. In addition, if the guidelines change, we or our suppliers could be impacted, and we could be adversely affected through supply chain interruptions, manufacturing restrictions or labor restrictions.
In addition, the COVID-19 pandemic has adversely affected, and may continue to adversely affect, the world economy and financial markets , which has resulted in a period of significant global economic slowdown which has curtailed and delayed spending by physicians and affected demand for our products as well as increased risk of customer defaults or delays in payments. COVID-19 and the current financial, economic, and capital markets environment, and future developments in these and other areas present material uncertainty and risk with respect to our performance, financial condition, volume of business, results of operations, and cash flows. Due to the uncertain scope and duration of the pandemic, the and uncertain timing of global recovery and economic normalization, we are unable to estimate the impacts on our operations and financial results, but believe they will be material into the second quarter of 2020 and possibly beyond.
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.
ITEM 5. Other Information
None.
27
APYX MEDICAL CORPORATION
ITEM 6. Exhibits
|
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.
28
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 11, 2020
|
By:
|
/s/ Charles D. Goodwin II
|
|
|
Charles D. Goodwin II
|
|||
|
President, Chief Executive Officer and Director
|
|||
|
(Principal Executive Officer)
|
|||
|
Date: May 11, 2020
|
By:
|
/s/ Tara Semb
|
|
|
Tara Semb
|
|||
|
Chief Financial Officer,
|
|||
|
Treasurer and Secretary
|
|||
|
(Principal Financial Officer)
|
|||
29
TABLE OF CONTENTS
Part I. Financial InformationItem 1. Financial StatementsNote 1. Basis Of PresentationNote 2. Change in Accounting PolicyNote 3. Recent Accounting PronouncementsNote 4. InventoriesNote 5. Accrued Expenses and Other Current LiabiltiesNote 6. Earnings Per ShareNote 7. Stock-based CompensationNote 8. Income TaxesNote 9. Commitments and ContingenciesNote 10. Related Party TransactionsNote 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