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
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||||||
For the quarterly period ended | ||||||||
| or | ||||||||
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||||||
| For the transition period from _____ to _____ | ||||||||
| Commission File Number: | ||||||||
 | ||
| (Exact name of registrant as specified in its charter) | ||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
(Address of principal executive offices, zip code)
(727 ) 384-2323
(Registrant’s telephone number)
Securities Registered Pursuant to Section 12 (b) of the Act:
| Title of each class | Trading symbol(s) | Name of each exchange on which registered | ||||||
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 : ☒ No ☐
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 : ☒ No ☐
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.
| Large accelerated filer | ☐ | Accelerated filer | ☐ | |||||||||||
| ☒ | Smaller reporting company | |||||||||||||
| Emerging growth company | ||||||||||||||
| 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. | ☐ | |||||||||||||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes: ☐ No ☒
As of August 10, 2022, 34,573,034 shares of the registrant’s $0.001 par value common stock were outstanding.
For the quarterly period ended June 30, 2022
| Page | ||||||||||||||
| Part I. | ||||||||||||||
| Item 1. | Condensed Consolidated Financial Statements (Unaudited) | |||||||||||||
Condensed Consolidated Balance Sheets at June 30, 2022 and December 31, 2021 | ||||||||||||||
Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2022 and 2021 | ||||||||||||||
Condensed Consolidated Statements of Changes in Equity for the three and six months ended June 30, 2022 and 2021 | ||||||||||||||
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2022 and 2021 | ||||||||||||||
| Item 2. | ||||||||||||||
| Item 3. | ||||||||||||||
| Item 4. | ||||||||||||||
| Part II. | ||||||||||||||
| Item 1. | ||||||||||||||
| Item 1A. | ||||||||||||||
| Item 2. | ||||||||||||||
| Item 3. | ||||||||||||||
| Item 4. | ||||||||||||||
| Item 5. | ||||||||||||||
| Item 6. | ||||||||||||||
1
PART I. Financial Information
ITEM 1. Condensed Consolidated Financial Statements
APYX MEDICAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
June 30, 2022 (Unaudited) | December 31, 2021 | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
Trade accounts receivable, net of allowance of $ | |||||||||||
| Income tax receivables | |||||||||||
| Other receivables | |||||||||||
Inventories, net of provision for obsolescence of $ | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Total current assets | |||||||||||
Property and equipment, net of accumulated depreciation and amortization of $ $ | |||||||||||
| Operating lease right-of-use assets | |||||||||||
| Finance lease right-of-use assets | |||||||||||
| Other assets | |||||||||||
| Total assets | $ | $ | |||||||||
| LIABILITIES AND EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued expenses and other current liabilities | |||||||||||
| Current portion of operating lease liabilities | |||||||||||
| Current portion of finance lease liabilities | |||||||||||
| Total current liabilities | |||||||||||
| Long-term operating lease liabilities | |||||||||||
| Long-term finance lease liabilities | |||||||||||
| Long-term contract liabilities | |||||||||||
| Other liabilities | |||||||||||
| Total liabilities | |||||||||||
| EQUITY | |||||||||||
Common stock, $ | |||||||||||
| Additional paid-in capital | |||||||||||
| Accumulated deficit | ( | ( | |||||||||
Total stockholders’ equity | |||||||||||
| Non-controlling interest | |||||||||||
| Total equity | |||||||||||
| Total liabilities and equity | $ | $ | |||||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
2
(Unaudited)
(In thousands, except per share data)
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Sales | $ | $ | $ | $ | |||||||||||||||||||
| Cost of sales | |||||||||||||||||||||||
| Gross profit | |||||||||||||||||||||||
| Other costs and expenses: | |||||||||||||||||||||||
| Research and development | |||||||||||||||||||||||
| Professional services | |||||||||||||||||||||||
| Salaries and related costs | |||||||||||||||||||||||
| Selling, general and administrative | |||||||||||||||||||||||
| Total other costs and expenses | |||||||||||||||||||||||
| Loss from operations | ( | ( | ( | ( | |||||||||||||||||||
| Interest income | |||||||||||||||||||||||
| Interest expense | ( | ( | ( | ( | |||||||||||||||||||
| Other income, net | |||||||||||||||||||||||
| Total other income, net | |||||||||||||||||||||||
| Loss before income taxes | ( | ( | ( | ( | |||||||||||||||||||
| Income tax expense | |||||||||||||||||||||||
| Net loss | ( | ( | ( | ( | |||||||||||||||||||
| Net loss attributable to non-controlling interest | ( | ( | ( | ( | |||||||||||||||||||
| Net loss attributable to stockholders | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Loss per share: | |||||||||||||||||||||||
| Basic and diluted | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
3
(Unaudited)
(In thousands)
| Three Months Ended June 30, 2022 and 2021 | |||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-In Capital | Accumulated Deficit | Non-controlling Interest | Total Equity | |||||||||||||||||||||||||||||||
| Shares | Par Value | ||||||||||||||||||||||||||||||||||
| Balance at March 31, 2021 | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||
| Contributions from non-controlling interest | — | — | — | — | |||||||||||||||||||||||||||||||
| Stock based compensation | — | — | — | — | |||||||||||||||||||||||||||||||
| Shares issued on net settlement of stock options | — | — | — | — | — | ||||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | ( | ( | |||||||||||||||||||||||||||||
| Balance at June 30, 2021 | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||
| Balance at March 31, 2022 | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||
| Shares issued on stock options exercises for cash | — | — | — | ||||||||||||||||||||||||||||||||
| Stock based compensation | — | — | — | — | |||||||||||||||||||||||||||||||
| Shares issued on net settlement of stock options | — | — | — | — | — | ||||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | ( | ( | |||||||||||||||||||||||||||||
| Balance at June 30, 2022 | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||
| Six Months Ended June 30, 2022 and 2021 | |||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-In Capital | Retained Earnings (Accumulated Deficit) | Non-controlling Interest | Total | |||||||||||||||||||||||||||||||
| Shares | Par Value | ||||||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
| Contributions from non-controlling interest | — | — | — | — | |||||||||||||||||||||||||||||||
| Shares issued on stock options exercises for cash | — | — | — | ||||||||||||||||||||||||||||||||
| Stock based compensation | — | — | — | — | |||||||||||||||||||||||||||||||
| Shares issued on net settlement of stock options | — | — | — | — | — | ||||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | ( | ( | |||||||||||||||||||||||||||||
| Balance at June 30, 2021 | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||
| Balance at December 31, 2021 | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||
| Shares issued on stock options exercises for cash | — | — | — | ||||||||||||||||||||||||||||||||
| Stock based compensation | — | — | — | — | |||||||||||||||||||||||||||||||
| Shares issued on net settlement of stock options | — | — | — | — | — | ||||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | ( | ( | |||||||||||||||||||||||||||||
| Balance at June 30, 2022 | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
4
(Unaudited)
(In thousands)
| Six Months Ended June 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Cash flows from operating activities | |||||||||||
| Net loss | ( | ( | |||||||||
| Adjustments to reconcile net loss to net cash used in operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Provision for inventory obsolescence | |||||||||||
| Loss on disposal of property and equipment | |||||||||||
| Stock based compensation | |||||||||||
| Provision for allowance for doubtful accounts | |||||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Trade receivables | ( | ||||||||||
| Prepaid expenses and other assets | ( | ( | |||||||||
| Inventories | ( | ( | |||||||||
| Accounts payable | |||||||||||
| Accrued and other liabilities | ( | ||||||||||
| Net cash used in operating activities | ( | ( | |||||||||
| Cash flows from investing activities | |||||||||||
| Purchases of property and equipment | ( | ( | |||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Cash flows from financing activities | |||||||||||
| Proceeds from stock option exercises | |||||||||||
| Repayment of finance lease liabilities | ( | ( | |||||||||
| Contributions from non-controlling interests | |||||||||||
| Net cash provided by financing activities | |||||||||||
| Effect of exchange rates on cash | ( | ||||||||||
| Net change in cash and cash equivalents | ( | ( | |||||||||
| Cash and cash equivalents, beginning of period | |||||||||||
| Cash and cash equivalents, end of period | $ | $ | |||||||||
| Cash paid for: | |||||||||||
| Interest | $ | $ | |||||||||
| Income taxes | |||||||||||
| Non cash activities: | |||||||||||
| Right-of-use assets capitalized and operating lease liabilities recognized upon lease modification | $ | $ | |||||||||
| Right-of-use assets capitalized and finance lease liabilities recognized upon execution of lease | $ | $ | |||||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
5
APYX MEDICAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
Apyx Medical Corporation (“Company”, “Apyx”, “it” and similar terms) was incorporated in 1982, under the laws of the State of Delaware and has its principal executive office at 5115 Ulmerton Road, Clearwater, FL 33760.
The Company is an advanced energy technology company with a passion for elevating people’s lives through innovative products, including its Helium Plasma Technology products marketed and sold as Renuvion® in the cosmetic surgery and J-Plasma® in the hospital surgical market. Renuvion® and J-Plasma® offer surgeons a unique ability to provide controlled heat to tissue to achieve their desired results. The Company also leverages its deep expertise and decades of experience in unique waveforms through OEM agreements with other medical device manufacturers.
On March 14, 2022, the U.S. Food and Drug Administration (“FDA”) posted a Safety Communication that warns consumers and health care providers against the use of the Company’s Advanced Energy products outside of their FDA-cleared indications for general use in cutting, coagulation, and ablation of soft tissue during open and laparoscopic surgical procedures. Following the Safety Communication, the Company experienced slowed demand for the adoption of its Helium Plasma Technology.
On May 26, 2022, the Company announced that it had received 510(k) clearance from the FDA for the use of the Renuvion® Dermal Handpiece for specific dermal resurfacing procedures. On July 18, 2022, the Company announced that it had received 510(k) clearance from the FDA for the use of the Renuvion® APR Handpiece for certain skin contraction procedures. Management believes that receiving these clearances should materially mitigate the financial effects of the Safety Communication in future periods.
On June 2, 2022, and July 21, 2022, FDA updated the Medical Device Safety Communication to recognize the new 510(k) clearances for the Renuvion® Dermal handpiece, and the expanded indications for the Renuvion® APR handpieces. The 510(k) clearance for the Renuvion® Dermal handpiece allows surgeons to perform dermal resurfacing procedures for the treatment of moderate to severe wrinkles and rhytides, limited to patients with Fitzpatrick Skin Types I, II or III. The 510(k) clearance for the Renuvion® APR handpieces now addresses improving the appearance of lax (loose) skin in the neck and submental region.
The accompanying unaudited condensed 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, 2021. In the opinion of management these condensed 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.
Reclassifications
We have reclassified certain amounts presented in the prior period to conform to the current period presentation. These reclassifications had no impact on previously reported net loss, retained earnings or net cash used in operating activities for the periods presented.
NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS
6
APYX MEDICAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
utilizing the deferred elective date. While we are in the process of determining the effects of the adoption of the standard on the condensed consolidated financial statements, we do not expect the impact to be material.
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.
7
APYX MEDICAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
NOTE 3. DISPOSAL OF BUSINESS
On August 30, 2018, the Company closed on a definitive asset purchase agreement (the “Asset Purchase Agreement”) with Specialty Surgical Instrumentation Inc., a Tennessee Corporation and wholly owned subsidiary of Symmetry Surgical Inc. (“Symmetry”), pursuant to which the Company divested and sold the Company’s electrosurgical “Core” business segment and related intellectual property, including the Bovie® brand and trademarks, to Symmetry for gross proceeds of $97 million in cash.
In connection with the Asset Purchase Agreement, the Company entered into an Electro Surgical Disposables and Accessories, Cauteries and Other Products Supply Agreement with Symmetry for a four-year term, whereby it will manufacture certain Core products and sell them to Symmetry at agreed upon prices. Any activity resulting from this agreement is netted and reported in the Condensed Consolidated Statements of Operations as other income (loss). Core activity for the three months ended June 30, 2022, amounted to $0.0 million with cost of sales equivalents of $0.0 million and other related expenses of $0.1 million for approximately no net other income (loss). Core activity for the three months ended June 30, 2021, amounted to $2.2 million with cost of sales equivalents of $1.8 million and related other expenses of $0.3 million for net other income of $0.1 million. Core activity for the six months ended June 30, 2022, amounted to $0.6 million with cost of sales equivalents of $0.5 million and other related expenses of $0.1 million for net other loss of $0.1 million. Core activity for the six months ended June 30, 2021, amounted to $3.6 million with cost of sales equivalents of $3.0 million and net other related operating expenses of $0.6 million for approximately no net other income.
8
APYX MEDICAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
NOTE 4. INVENTORIES
Inventories consisted of the following:
| (In thousands) | June 30, 2022 | December 31, 2021 | |||||||||
| Raw materials | $ | $ | |||||||||
| Work in process | |||||||||||
| Finished goods | |||||||||||
| Gross inventories | |||||||||||
| Less: provision for obsolescence | ( | ( | |||||||||
| Inventories, net | $ | $ | |||||||||
9
APYX MEDICAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
NOTE 5. LEASES
Operating Leases
The Company leases its facility in Sofia, Bulgaria and vehicles in Clearwater, Florida under non-cancelable operating lease agreements. During the three months ended June 30, 2022, the Company entered into a five year extension of its Sofia, Bulgaria facility. These operating leases have terms expiring through December 2027.
Finance Leases
The Company has entered into non-cancelable finance leases for certain computer equipment and a vehicle in Clearwater, Florida. During the three months ended June 30, 2022, the Company entered into a 63 month lease for computer equipment. These finance leases have terms expiring through July 2027.
Information about the Company’s weighted average remaining lease terms and discount rate assumptions are as follows:
| June 30, 2022 | December 31, 2021 | ||||||||||||||||
| Operating | Finance | Operating | Finance | ||||||||||||||
| Weighted average remaining lease term (in years) | |||||||||||||||||
| Weighted average discount rate | |||||||||||||||||
Maturities of lease liabilities as of June 30, 2022 are as follows:
| (In thousands) | Operating | Finance | ||||||
| 2022 | $ | $ | ||||||
| 2023 | ||||||||
| 2024 | ||||||||
| 2025 | ||||||||
| 2026 | ||||||||
| Thereafter | ||||||||
| Total lease payments | ||||||||
| Less imputed interest | ( | ( | ||||||
| Present value of lease liabilities | ||||||||
| Less current portion of lease liabilities | ( | ( | ||||||
| Long-term portion of lease liabilities | $ | $ | ||||||
10
APYX MEDICAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
NOTE 6. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consisted of the following:
| (in thousands) | June 30, 2022 | December 31, 2021 | |||||||||
| Accrued payroll | $ | $ | |||||||||
| Accrued bonuses | |||||||||||
| Accrued commissions | |||||||||||
| Accrued product warranties | |||||||||||
| Accrued product liability claim insurance deductibles | |||||||||||
| Accrued professional fees and legal related contingent liabilities | |||||||||||
| Joint and several payroll liability | |||||||||||
| Short-term contract liabilities | |||||||||||
| Uncertain tax positions | |||||||||||
| Sales tax payable | |||||||||||
| Other accrued expenses and current liabilities | |||||||||||
| Total accrued expenses and other current liabilities | $ | $ | |||||||||
During April 2022, the Company was relieved of approximately $650,000 of its joint and several payroll liability due to the lapse of the statute of limitations on the liability. This adjustment is included in other income, net for the three and six months ended June 30, 2022.
NOTE 7. CHINA JOINT VENTURE
In 2019, the Company executed a joint venture agreement with its Chinese supplier (the “China JV”) whereby the Company has a 51 % interest. The China JV has been consolidated in these condensed consolidated financial statements. The agreement required the Company to make capital contributions into the newly formed entity of approximately $357,000 , which had been fully funded as of December 31, 2021. As of the date of these condensed consolidated financial statements, the China JV has not commenced principal operations.
Changes in the Company’s investment in the China JV were as follows:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
| (In thousands) | 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||
| Beginning interest in China JV | $ | $ | $ | $ | ||||||||||||||||||||||
| Contributions | $ | $ | $ | $ | ||||||||||||||||||||||
| Net loss attributable to Apyx | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||||
| Ending interest in China JV | $ | $ | $ | $ | ||||||||||||||||||||||
11
APYX MEDICAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
NOTE 8. EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share (“basic EPS”) is computed by dividing the net income or loss by the weighted average number of common shares outstanding for the reporting period. Diluted earnings (loss) per share (“diluted EPS”) gives effect to all dilutive potential shares outstanding. As the Company is in a net loss position for all periods presented, all potential shares outstanding are anti-dilutive. The following table provides the computation of basic and diluted loss per share.
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
| (in thousands, except per share data) | 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||
| Numerator: | ||||||||||||||||||||||||||
| Net loss attributable to stockholders | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||||
| Denominator: | ||||||||||||||||||||||||||
| Weighted average shares outstanding - basic and diluted | ||||||||||||||||||||||||||
| Loss per share: | ||||||||||||||||||||||||||
| Basic and diluted | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||||
| Anti-dilutive instruments excluded from diluted loss per common share: | ||||||||||||||||||||||||||
| Options | ||||||||||||||||||||||||||
12
APYX MEDICAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
NOTE 9. STOCK-BASED COMPENSATION
The Company recognized approximately $1,714,000 and $3,364,000 , respectively, in stock-based compensation expense during the three and six months ended June 30, 2022, as compared with $1,369,000 and $2,563,000 , respectively, for the three and six months ended June 30, 2021.
Stock option activity is summarized as follows:
| Number of options | Weighted average exercise price | ||||||||||
Outstanding at December 31, 2021 | $ | ||||||||||
| Granted | |||||||||||
| Exercised | ( | ||||||||||
| Canceled and forfeited | ( | ||||||||||
Outstanding at June 30, 2022 | $ | ||||||||||
The Company allows stock option holders to exercise stock-based awards by surrendering stock-based awards with an intrinsic value equal to the cumulative exercise price of the stock-based awards being exercised, referred to as net settlements. These surrenders are included in stock options exercised in the options rollforward above. For the three months ended June 30, 2022 and 2021, respectively, we received 14,013 and 6,614 options as payment in the exercise of 19,987 and 4,886 options. For the six months ended June 30, 2022 and 2021, respectively, we received 36,667 and 22,055 options as payment in the exercise of 39,000 and 26,027 options.
Common shares required to be issued upon the exercise of stock options would be issued from authorized and unissued shares. The Company calculated the grant date fair value of options granted in 2022 (“2022 Grants”) utilizing a Black-Scholes model.
| 2022 Grants | |||||
| Strike price | $ | ||||
| Risk-free rate | |||||
| Expected dividend yield | |||||
| Expected volatility | |||||
| Expected term (in years) | |||||
NOTE 10. INCOME TAXES
13
APYX MEDICAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
NOTE 11. COMMITMENTS AND CONTINGENCIES
Litigation
The medical device industry is characterized by frequent claims and litigation, and the Company may become subject to various claims, lawsuits and proceedings in the ordinary course of our business. Such claims may include claims by current or former employees, distributors and competitors, claims concerning the marketing and promotion of our products and product liability claims.
The Company is 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 the Company’s control and may not be known for prolonged periods of time. It believes that such claims are adequately covered by insurance; however, in the case of one of the Company’s carriers, the Company is 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 its financial condition, results of operations and cash flows. However, in the event that damages exceed the aggregate coverage limits of the Company’s policies or if its insurance carriers disclaim coverage, management believes it is possible that costs associated with these claims could have a material adverse impact on the consolidated financial condition, results of operations and cash flows.
During December 2021, the Company provided notice of contract termination to an international distributor of the Company. In March 2022, the Company received a letter from the former distributor citing improper contract termination and alleging damages. While the matter is still in the early stages, management has determined that a loss is probable and that a range of estimated losses is approximately $250,000 to $1,000,000 . The Company has recorded an estimated loss of $250,000 in professional services in the accompanying Condensed Consolidated Statement of Operations for the six months ended June 30, 2022. It is at least possible that a change in the actual amount of loss will occur in the near term, though management expects the actual amount of loss will be within the estimated range of losses.
In addition, as previously disclosed with the U.S. Securities and Exchange Commission on the Company’s Current Report on Form 8-K filed June 7, 2022, on June 6, 2022, a complaint (the “Complaint”) was filed in the United States District Court for the Middle District of Florida by plaintiff William E. Hattaway, individually and on behalf of all others similarly situated against the Company, Charles D. Goodwin (“Goodwin”), the Company’s President and Chief Executive Officer and a member of the Company’s Board of Directors, and Tara Semb (“Semb”), the Company’s Chief Financial Officer, Treasurer and Secretary, alleging violations by the Company, Goodwin and Semb of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, primarily related to certain public statements and disclosures concerning the off-label usage of certain of the Company’s Advanced Energy products and the impact such usage would have on the Company’s business, operations and prospects. The Complaint seeks an unspecified amount of damages.
Although the ultimate outcome of this matter cannot be determined with certainty, the Company believes that the allegations stated in the Complaint are without merit. The Company, Goodwin and Semb 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 results of operations, financial
14
APYX MEDICAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
position or cash flows. While the matter is still in the early stages, management has determined that a loss is probable and that a range of estimated losses is approximately $475,000 to $2,500,000 . The Company has recorded an estimated loss of $475,000 in professional services in the accompanying Condensed Consolidated Statement of Operations for the three and six months ended June 30, 2022. It is at least possible that a change in the actual amount of loss will occur in the near term, though management expects the actual amount of loss will be within the estimated range of losses.
The Company accrues a liability in its 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 June 30, 2022, the Company had purchase commitments totaling approximately $5.6 million, substantially all of which is expected to be purchased within the next eighteen months.
15
APYX MEDICAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
NOTE 12. 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 human resources. Svetoslav Shilev, Mr. Shilev’s son, is a quality manager in the quality assurance department.
The partner in the Company's China joint venture is also a supplier to the Company. For the three months ended June 30, 2022 and 2021, the Company made purchases from this supplier of approximately $143,000 and $529,000 , respectively. For the six months ended June 30, 2022 and 2021, the Company made purchases from this supplier of approximately $370,000 and $646,000 , respectively. At June 30, 2022 and December 31, 2021, respectively, the Company owed this supplier approximately $99,000 and $1,000 .
NOTE 13. GEOGRAPHIC AND SEGMENT INFORMATION
Operating segments are aggregated into reportable segments only if they exhibit similar economic characteristics. In addition to similar economic characteristics, the Company also considers the following factors in determining the reportable segments: the nature of business activities, the management structure directly accountable to its 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, the Company has not presented a measure of assets by segment.
The Company’s reportable segments are disclosed as principally organized and managed as two
16
APYX MEDICAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
| Three Months Ended June 30, 2022 | |||||||||||||||||||||||
| (In thousands) | Advanced Energy | OEM | Corporate & Other | Total | |||||||||||||||||||
| Sales | $ | $ | $ | $ | |||||||||||||||||||
| Income (loss) from operations | ( | ( | ( | ||||||||||||||||||||
| Interest income | |||||||||||||||||||||||
| Interest expense | ( | ( | |||||||||||||||||||||
| Other income, net | |||||||||||||||||||||||
| Income tax expense | |||||||||||||||||||||||
| Three Months Ended June 30, 2021 | |||||||||||||||||||||||
| (In thousands) | Advanced Energy | OEM | Corporate & Other | Total | |||||||||||||||||||
| Sales | $ | $ | $ | $ | |||||||||||||||||||
| Income (loss) from operations | ( | ( | |||||||||||||||||||||
| Interest income | |||||||||||||||||||||||
| Interest expense | ( | ( | |||||||||||||||||||||
| Other income, net | |||||||||||||||||||||||
| Income tax expense | |||||||||||||||||||||||
| Six Months Ended June 30, 2022 | |||||||||||||||||||||||
| (In thousands) | Advanced Energy | OEM | Corporate & Other | Total | |||||||||||||||||||
| Sales | $ | $ | $ | $ | |||||||||||||||||||
| Income (loss) from operations | ( | ( | ( | ||||||||||||||||||||
| Interest income | |||||||||||||||||||||||
| Interest expense | ( | ( | |||||||||||||||||||||
| Other income, net | |||||||||||||||||||||||
| Income tax expense | |||||||||||||||||||||||
17
APYX MEDICAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
| Six Months Ended June 30, 2021 | |||||||||||||||||||||||
| (In thousands) | Advanced Energy | OEM | Corporate & Other | Total | |||||||||||||||||||
| Sales | $ | $ | $ | $ | |||||||||||||||||||
| Income (loss) from operations | ( | ( | ( | ||||||||||||||||||||
| Interest income | |||||||||||||||||||||||
| Interest expense | ( | ( | |||||||||||||||||||||
| Other income, net | |||||||||||||||||||||||
| Income tax expense | |||||||||||||||||||||||
International sales represented approximately 22.8 % and 32.0 % of total revenues for the three and six months ended June 30, 2022, respectively, as compared with approximately 34.2 % and 34.8 % of total revenues for the three and six months ended June 30, 2021, respectively.
Revenue by geographic region, based on the customer's “ship to” location on the invoice, are as follows:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| (In thousands) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Sales by Domestic and International | |||||||||||||||||||||||
| Domestic | $ | $ | $ | $ | |||||||||||||||||||
| International | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
18
APYX MEDICAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis in conjunction with our financial statements and related notes contained elsewhere in this report. This discussion contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a variety of factors discussed in this report and those discussed in other documents we file with the SEC. In light of these risks, uncertainties and assumptions, readers are cautioned not to place undue reliance on such forward-looking statements. These forward-looking statements represent beliefs and assumptions as of the date of this report. While we may elect to update forward-looking statements and at some point in the future, we specifically disclaim any obligation to do so, even if our estimates change. Past performance does not guarantee future results.
Executive Level Overview
We are an advanced energy technology company with a passion for elevating people’s lives through innovative products, including our Helium Plasma Technology products marketed and sold as Renuvion® in the cosmetic surgery market and J-Plasma® in the hospital surgical market. Renuvion® and J-Plasma® offer surgeons a unique ability to provide controlled heat to tissue to achieve their desired results. We also leverage our deep expertise and decades of experience in unique waveforms through OEM agreements with other medical device manufacturers.
On March 14, 2022, the U.S. Food and Drug Administration (“FDA”) posted a Safety Communication that warns consumers and health care providers against the use of our Advanced Energy products outside of their FDA-cleared indications for general use in cutting, coagulation, and ablation of soft tissue during open and laparoscopic surgical procedures. Following the Safety Communication, we experienced slowed demand for the adoption of our Helium Plasma Technology.
On May 26, 2022, we announced that we received 510(k) clearance from the FDA for the use of the Renuvion Dermal Handpiece for specific dermal resurfacing procedures. On July 18, 2022, we announced that we received 510(k) clearance from the FDA for the use of the Renuvion® APR Handpiece for certain skin contraction procedures. We believe that receiving these clearances should materially mitigate the financial effects of the Safety Communication in future periods.
On June 2, 2022, and July 21, 2022, FDA updated the Medical Device Safety Communication to recognize the new 510(k) clearances for the Renuvion® Dermal handpiece, and the expanded indications for the Renuvion® APR handpieces. The 510(k) clearance for the Renuvion® Dermal handpiece allows surgeons to perform dermal resurfacing procedures for the treatment of moderate to severe wrinkles and rhytides, limited to patients with Fitzpatrick Skin Types I, II or III. The 510(k) clearance for the Renuvion® APR handpieces now addresses improving the appearance of lax (loose) skin in the neck and submental region.
We continue to drive sales in our Advanced Energy business by increasing the adoption and utilization of our handpieces by surgeons in the U.S. and fulfilling demand from distributors in our international markets. Management estimates that our products have been sold in more than 60 countries. As of June 30, 2022, we had a direct sales force of 35 field-based selling professionals and utilized 2 independent sales agencies. We also had 5 sales managers. This selling organization is focused on the use of Renuvion® and J-Plasma® in the cosmetic and hospital surgical markets, supported by our global medical affairs team. This global team of clinical support specialists focuses on supporting our users to ensure optimal outcomes for their patients. In addition, we have invested in training programs and marketing-related activities to support accelerated adoption of Renuvion® into surgeons' practices.
In regards to our operating segments, our results 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 and, accordingly, we have not presented a measure of assets by reportable 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 are not specifically attributed to any reportable segment. The OEM segment is primarily development and manufacturing contract and product driven, and all related expenses are recorded as cost of sales, therefore no segment specific operating expenses are incurred.
19
APYX MEDICAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
In response to the global supply chain instability and inflationary cost increases, we continue to take action to minimize, as much as possible, any potential adverse impacts by working closely with our suppliers to closely monitor the availability of raw material components (i.e. semiconductors and plastics), lead times, and freight carrier availability. We expect global supply chain instability will continue to have an impact on our business, but to date that has not been material to our financial performance. The consequences of the pandemic, global supply chain instability and inflationary cost increases and their adverse impact to the global economy, continue to evolve. Accordingly, the significance of the future impact to our business and financial statements remains subject to significant uncertainty.
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 June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||||||||
| (In thousands) | 2022 | 2021 | Change | 2022 | 2021 | Change | |||||||||||||||||||||||||||||
| Sales by Reportable Segment | |||||||||||||||||||||||||||||||||||
| Advanced Energy | $ | 8,364 | $ | 9,978 | (16.2) | % | $ | 19,178 | $ | 17,638 | 8.7 | % | |||||||||||||||||||||||
| OEM | 1,928 | 1,246 | 54.7 | % | 3,607 | 2,224 | 62.2 | % | |||||||||||||||||||||||||||
| Total | $ | 10,292 | $ | 11,224 | (8.3) | % | $ | 22,785 | $ | 19,862 | 14.7 | % | |||||||||||||||||||||||
| (632,000) | |||||||||||||||||||||||||||||||||||
| Sales by Domestic and International | |||||||||||||||||||||||||||||||||||
| Domestic | $ | 7,947 | $ | 7,383 | 7.6 | % | $ | 15,495 | $ | 12,949 | 19.7 | % | |||||||||||||||||||||||
| International | 2,345 | 3,841 | (38.9) | % | 7,290 | 6,913 | 5.5 | % | |||||||||||||||||||||||||||
| Total | $ | 10,292 | $ | 11,224 | (8.3) | % | $ | 22,785 | $ | 19,862 | 14.7 | % | |||||||||||||||||||||||
Total revenue decreased by 8.3%, or approximately $(0.9) million, for the three months ended June 30, 2022 when compared with the three months ended June 30, 2021. Advanced Energy segment sales decreased 16.2%, or approximately $(1.6) million, for the three months ended June 30, 2022 when compared with the three months ended June 30, 2021. The Advanced Energy sales decrease is due to global decreases in utilization based demand for our handpieces and the adoption of our generator technology following the FDA Safety Communication on March 14, 2022. OEM segment sales increased 54.7%, or approximately $0.7 million, for the three months ended June 30, 2022 when compared with the three months ended June 30, 2021. The increase in OEM sales was due to increases in sales volume to existing customers, including Symmetry Surgical, under our 10-year generator manufacturing and supply agreement, as well as incremental new sales upon the commencement of the supply arrangement related to the completion of the development portion of some of our OEM development agreements.
Total revenue increased by 14.7%, or approximately $2.9 million, for the six months ended June 30, 2022 when compared with the six months ended June 30, 2021. Advanced Energy segment sales increased 8.7%, or approximately $1.5 million, for the six months ended June 30, 2022 when compared with the six months ended June 30, 2021. The Advanced Energy sales increase was driven by an increase in global utilization based demand for our handpieces and adoption of our generator technology in international markets for most of the first quarter. This increase was partially offset by global decreases in utilization based demand for our handpieces and the adoption of our generator technology following the FDA Safety Communication on March 14, 2022. OEM segment sales increased 62.2%, or approximately $1.4 million, for the six months ended June 30, 2022 when compared with the six months ended June 30, 2021. The increase in OEM sales was due to increases in sales volume to existing customers, including Symmetry Surgical, under our 10-year generator manufacturing and supply agreement, as well as incremental new sales upon the commencement of the supply arrangement related to the completion of the development portion of some of our OEM development agreements.
20
APYX MEDICAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
International sales represented approximately 22.8% and 32.0% of total revenues for the three and six months ended June 30, 2022, respectively, as compared with 34.2% and 34.8% of total revenues for the same period in the prior year. Management estimates our products have been sold in more than 60 countries through local dealers coordinated by sales and marketing personnel through our facilities in Clearwater, Florida and Sofia, Bulgaria.
Gross Profit
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||||||||
| (In thousands) | 2022 | 2021 | Change | 2022 | 2021 | Change | |||||||||||||||||||||||||||||
| Cost of sales | $ | 3,378 | $ | 3,690 | (8.5) | % | $ | 7,652 | $ | 6,468 | 18.3 | % | |||||||||||||||||||||||
| Percentage of sales | 32.8 | % | 32.9 | % | 33.6 | % | 32.6 | % | |||||||||||||||||||||||||||
| Gross profit | $ | 6,914 | $ | 7,534 | (8.2) | % | $ | 15,133 | $ | 13,394 | 13.0 | % | |||||||||||||||||||||||
| Percentage of sales | 67.2 | % | 67.1 | % | 66.4 | % | 67.4 | % | |||||||||||||||||||||||||||
Gross profit for the three months ended June 30, 2022, decreased 8.2% to $6.9 million, compared to $7.5 million for the same period in the prior year. Gross margin for the three months ended June 30, 2022, was 67.2%, compared to 67.1% for the same period in 2021. The increase in gross profit margins for the three months ended June 30, 2022 from the prior year period is primarily attributable to geographic mix within our Advanced Energy segment, with domestic sales comprising a higher percentage of total sales and the mix of newer product models as we obtain registrations, allowing these products to be introduced into the markets we serve. These margin improvements were partially offset by decreases resulting from changes in the sales mix between our two segments, with our OEM segment comprising a higher percentage of total sales, and higher costs to manufacture our inventory as we continue to experience higher shipping costs.
Gross profit for the six months ended June 30, 2022, increased 13.0% to $15.1 million, compared to $13.4 million for the same period in the prior year. Gross margin for the six months ended June 30, 2022, was 66.4%, compared to 67.4% for the same period in 2021. The decrease in gross profit margins for the six months ended June 30, 2022 from the prior year period is primarily attributable to product mix within our Advanced Energy segment, changes in the sales mix between our two segments, with our OEM segment comprising a higher percentage of total sales, as well as higher costs to manufacture our inventory as we continue to experience higher shipping costs. These decreases were partially offset by the mix of newer product models as we obtain registrations, allowing these products to be introduced into the markets we serve.
Other Costs and Expenses
Research and development
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||||||||
| (In thousands) | 2022 | 2021 | Change | 2022 | 2021 | Change | |||||||||||||||||||||||||||||
| Research and development expense | $ | 1,070 | $ | 1,084 | (1.3) | % | $ | 2,228 | $ | 2,199 | 1.3 | % | |||||||||||||||||||||||
| Percentage of sales | 10.4 | % | 9.7 | % | 9.8 | % | 11.1 | % | |||||||||||||||||||||||||||
Research and development expenses decreased 1.3% for the three months ended June 30, 2022, primarily due to lower spending on our two investigational device exemption (IDE) clinical studies and other product development initiatives ($0.1 million). These decreased costs were partially offset by increased labor and benefit costs from the same period in the prior year ($0.1 million).
Research and development expenses increased 1.3% for the six months ended June 30, 2022, primarily due to increased labor and benefit costs from the same period in the prior year ($0.2 million). These increased costs were partially offset by lower spending on our two investigational device exemption (IDE) clinical studies and other product development initiatives ($0.2 million).
21
APYX MEDICAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Professional services
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||||||||
| (In thousands) | 2022 | 2021 | Change | 2021 | 2021 | Change | |||||||||||||||||||||||||||||
| Professional services expense | $ | 2,389 | $ | 1,889 | 26.5 | % | $ | 4,675 | $ | 3,410 | 37.1 | % | |||||||||||||||||||||||
| Percentage of sales | 23.2 | % | 16.8 | % | 20.5 | % | 17.2 | % | |||||||||||||||||||||||||||
Professional services expense increased 26.5% for the three months ended June 30, 2022, primarily attributable to increases in legal expenses ($0.5 million), primarily associated with the estimated loss recorded for the class action lawsuit, Board of Directors option expense ($0.1 million) and accounting and auditing fees ($0.1 million). These increases were partially offset by decreases in physician consulting fees ($0.1 million), option expense for our partner physicians ($0.1 million) as we added a new member to our Medical Advisory Board in the second quarter of 2021.
Professional services expense increased 37.1% for the six months ended June 30, 2022, primarily attributable to increases in legal expenses ($0.7 million), primarily associated with the estimated loss recorded for the class action lawsuit, physician consulting fees ($0.3 million), Board of Directors option expense ($0.2 million), employee recruitment expense ($0.1 million) and accounting and auditing fees ($0.1 million). These increases were partially offset by a decrease in option expense for our partner physicians ($0.1 million) as we added a new member to our Medical Advisory Board in the second quarter of 2021.
22
APYX MEDICAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Salaries and related costs
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||||||||
| (In thousands) | 2022 | 2021 | Change | 2022 | 2021 | Change | |||||||||||||||||||||||||||||
| Salaries and related expenses | $ | 4,892 | $ | 4,343 | 12.6 | % | $ | 10,073 | $ | 8,588 | 17.3 | % | |||||||||||||||||||||||
| Percentage of sales | 47.5 | % | 38.7 | % | 44.2 | % | 43.2 | % | |||||||||||||||||||||||||||
During the three months ended June 30, 2022, salaries and related expenses increased 12.6%, primarily driven by higher compensation and benefits ($0.5 million) and stock compensation expense ($0.3 million) as compared to the same period in the prior year. These increases are partially offset by a decrease in bonus expense ($0.3 million) as we reduced our expected 2022 bonus achievement during the second quarter.
During the six months ended June 30, 2022, salaries and related expenses increased 17.3%, primarily driven by higher compensation and benefits ($1.1 million) and stock compensation expense ($0.6 million) as compared to the same period in the prior year. These increases are partially offset by a decrease in bonus expense ($0.2 million) as we reduced our expected 2022 bonus achievement.
Selling, general and administrative expenses
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||||||||
| (In thousands) | 2022 | 2021 | Change | 2022 | 2021 | Change | |||||||||||||||||||||||||||||
| SG&A expense | $ | 4,539 | $ | 4,261 | 6.5 | % | $ | 10,004 | $ | 7,985 | 25.3 | % | |||||||||||||||||||||||
| Percentage of sales | 44.1 | % | 38.0 | % | 43.9 | % | 40.2 | % | |||||||||||||||||||||||||||
During the three months ended June 30, 2022, selling, general and administrative expense increased 6.5%, primarily driven by higher travel and entertainment expense ($0.3 million), employee training and other meeting expenses ($0.2 million), advertising expense, including trade show fees and related costs ($0.1 million) and bad debt expense ($0.1 million). These increases were partially offset by lower commissions on Advanced Energy sales ($0.4 million).
During the six months ended June 30, 2022, selling, general and administrative expense increased 25.3%, primarily driven by increased advertising expense, including trade show fees and related costs ($0.8 million), higher employee training and other meeting expenses ($0.8 million), travel and entertainment expense ($0.7 million) and higher bad debt expense ($0.2 million). These increases were partially offset by decreases in commissions on Advanced Energy sales ($0.2 million), OEM product recall costs ($0.2 million) as we experienced no product recalls in 2022, and lower regulatory registration expenses ($0.1 million).
Other income (loss)
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||||||||
| (In thousands) | 2022 | 2021 | Change | 2022 | 2021 | Change | |||||||||||||||||||||||||||||
| Other income, net | 607 | $ | 97 | 525.8 | % | 586 | $ | 4 | 14,550.0 | % | |||||||||||||||||||||||||
| Percentage of sales | 5.9 | % | 0.9 | % | 2.6 | % | — | % | |||||||||||||||||||||||||||
Other income, net increased 525.8% and 14,550.0% for the three and six months ended June 30, 2022, as compared with the same periods in the prior year. This increase was primarily attributable to the release of a portion of our joint and several payroll liability due to the lapse of the statute of limitations on a portion of the liability ($0.6 million).
23
APYX MEDICAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Income Taxes
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||||||||
| (In thousands) | 2022 | 2021 | Change | 2022 | 2021 | Change | |||||||||||||||||||||||||||||
| Income tax expense (benefit) | $ | 96 | $ | 107 | 10.3 | % | $ | 166 | $ | 173 | 4.0 | % | |||||||||||||||||||||||
| Effective tax rate | (1.8) | % | (2.7) | % | (1.5) | % | (2.0) | % | |||||||||||||||||||||||||||
Our income tax expense was approximately $96,000 and $107,000 with effective tax rates of (1.8)% and (2.7)% for the three months ended June 30, 2022 and 2021, respectively. Our income tax expense was approximately $166,000 and $173,000 with effective tax rates of (1.5)% and (2.0)% for the six months ended June 30, 2022 and 2021, respectively. For the three and six months ended June 30, 2022 and 2021, the effective rates differ from statutory rates primarily due to the full valuation allowance recorded on our NOL generated during the periods, combined with interest and penalties on our uncertain tax positions.
Liquidity and Capital Resources
Our working capital at June 30, 2022 was approximately $39.2 million compared with $47.5 million at December 31, 2021. The decrease in working capital from December 31, 2021 was primarily due to the net loss incurred by the Company during the first half of 2022, excluding non-cash activity, comprised primarily of stock-based compensation expense.
For the six months ended June 30, 2022, net cash used in operating activities was approximately $10.4 million, which principally funded our loss from operations of $11.8 million, compared with net cash used in operating activities of approximately $7.1 million in the same period for 2021.
Net cash used in investing activities for the six months ended June 30, 2022 and 2021, was $0.7 million and $0.2 million, respectively, related to investments in property and equipment.
At June 30, 2022, we had purchase commitments totaling approximately $5.6 million, substantially all of which is expected to be purchased within the next eighteen months.
24
APYX MEDICAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS 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 2021 Form 10-K, filed with the SEC on March 17, 2022.
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, 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 recognized over the vesting period. Options are valued using the Black-Scholes model, 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 estimates of 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 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. The SEC 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.
Accounts Receivable Allowance
We maintain a reserve for uncollectible accounts receivable. When evaluating the adequacy of the allowance for doubtful accounts, we analyze specific unremitted customer balances for known collectability issues, review historical bad debt experience, customer credit worthiness and economic trends, and we make estimates in connection with establishing the allowance for doubtful accounts, including the future impacts of current trends. Changes in estimates are reflected in the period they are made. If the financial condition of our customers deteriorates, resulting in an inability to make payments, additional allowances may be required.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Inventory Obsolescence Allowance
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.
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 taxes includes federal, foreign, state and local income taxes currently payable and those deferred because of temporary differences between the financial statement and tax bases of assets and liabilities. Deferred tax assets or liabilities are computed based on the difference between the financial statement and income tax bases of assets and liabilities using enacted marginal tax rates. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. Deferred income tax expenses or credits are based on the changes in the asset or liability from period to period.
As a result of historical losses and our expectation to continue to generate losses in the near future, we recorded a valuation allowance on our net deferred tax assets. Exclusive of the carryback provisions of the CARES Act and the associated income tax benefit recognized in 2020, we do not anticipate recording an income tax benefit related to our 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 our results of operations improve, and it becomes more likely than not that the deferred tax assets will be realized. As Management has not fully determined the timing of when it will generate taxable income in the U.S., we continued to record a valuation allowance on the net deferred tax assets balance as of June 30, 2022.
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
The consequences of the pandemic, global supply chain instability and inflationary cost increases and their adverse impact to the global economy, continue to evolve. Accordingly, the significance of the future impact to our business and financial statements remains subject to significant uncertainty. Inflation has not, to date, materially impacted our operations or financial performance. However, as these trends continue for raw materials, freight, and labor costs, our future financial performance could be adversely impacted.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements at this time.
Recent Accounting Pronouncements
See Note 2 of the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q.
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ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
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ITEM 4. Controls and Procedures
Disclosure 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 such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) 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 June 30, 2022, the Company’s disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended June 30, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. Other Information
ITEM 1. Legal Proceedings
See Note 11 of Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q.
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ITEM 1A. Risk factors
There have been no material changes to the risk factors described under Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
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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.
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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.
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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: August 11, 2022 | By: | /s/ Charles D. Goodwin II | |||||||||
| Charles D. Goodwin II | |||||||||||
| President, Chief Executive Officer and Director | |||||||||||
| (Principal Executive Officer) | |||||||||||
| Date: August 11, 2022 | By: | /s/ Tara Semb | |||||||||
| Tara Semb | |||||||||||
| Chief Financial Officer, | |||||||||||
| Treasurer and Secretary | |||||||||||
| (Principal Financial Officer) | |||||||||||
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TABLE OF CONTENTS
Part I. Financial InformationItem 1. Condensed Consolidated Financial StatementsNote 1. Basis Of PresentationNote 2. Recent Accounting PronouncementsNote 3. Disposal Of BusinessNote 4. InventoriesNote 5. LeasesNote 6. Accrued Expenses and Other Current LiabilitiesNote 7. China Joint VentureNote 8. Earnings (loss) Per ShareNote 9. Stock-based CompensationNote 10. Income TaxesNote 11. Commitments and ContingenciesNote 12. Related Party TransactionsNote 13. 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