APYX MEDICAL CORPORATION 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 theSEC . 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 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. Total revenue from continuing operations increased by 70.0% or approximately$11.6 million for the year endedDecember 31, 2019 when compared with 2018. Advanced Energy segment sales increased 74.6% or approximately$9.7 million for the year endedDecember 31, 2019 when compared with 2018. International sales represented approximately 30.6% of total revenues in 2019, 22.6% in 2018 and 13.2% in 2017. Management estimates our products have been sold in more than 40 countries through local dealers coordinated by sales, marketing and logistics personnel at ourClearwater, Florida andSofia, Bulgaria facilities. Throughout 2019, we continued to drive growth in our Advanced Energy business by increasing the adoption and utilization of our generators and handpieces in theU.S. cosmetic surgery market and fulfilling demand from distributors in our international markets. We also saw contributions from our OEM business, which increased$1.9 million , or 53.6%, as compared to last year. This was driven primarily by contributions from our electrosurgical generator and supply agreement with Symmetry Surgical.
We believe that our investment and focus on the following strategic initiatives in 2019 and beyond will position the Company for long-term growth in the cosmetic surgery market:
•To formalize our regulatory strategy to pursue specific clinical indications
that will enable us to sell our
Renuvion® products for targeted procedures
•To secure new clinical evidence demonstrating the safety and efficacy of our
Helium Plasma Technology
•To provide enhanced physician and practice support for our cosmetic surgery
customers
•To improve our manufacturing capabilities and efficiencies
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 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.
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APYX MEDICAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANAYLSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
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 .
As discussed under "Item 1A. Risk Factors," 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
have expanded significantly in the past several weeks and are expected to
continue to expand. Given the uncertainty regarding the spread of this
coronavirus, the related financial impact cannot be reasonably estimated at this
time, although the aforementioned actions and related impacts are expected to
continue and may also significantly affect the Company's business in other
geographic areas in which the coronavirus has spread and may continue to spread.
The Company intends to continue to execute on its strategic plans and
operational initiatives during the coronavirus outbreak. However, the
uncertainties associated with the protective and preventative measures being put
in place or recommended by both governmental entities and other businesses,
among other uncertainties, may result in delays or modifications to these plans
and initiatives.
The following financial statement analysis has been updated for the effects of
the restatement to the results of operations and financial position of the
Company in 2018 as discussed in Note 4 to the consolidated financial statements.
Results of Operations
Sales
Year Ended Year Ended
December 31, December 31,
2018 as 2018 as
(In thousands) 2019 Restated Change Restated 2017 Change
Sales by Reportable
Segment
Advanced Energy $ 22,676 $ 12,987 74.6 % $ 12,987 $ 7,636 70.1 %
OEM 5,559 3,618 53.6 % 3,618 2,598 39.3 %
Total $ 28,235 $ 16,605 70.0 % $ 16,605 $ 10,234 62.3 %
Sales by Domestic and
International
Domestic $ 19,584 $ 12,858 52.3 % $ 12,858 $ 8,887 44.7 %
International 8,651 3,747 130.9 % 3,747 1,347 178.2 %
Total $ 28,235 $ 16,605 70.0 % $ 16,605 $ 10,234 62.3 %
Total revenue from continuing operations increased by 70.0% or approximately
$11.6 million for the year ended December 31, 2019 when compared with 2018.
Advanced Energy segment sales increased 74.6% or approximately $9.7 million for
the year ended December 31, 2019 when compared with 2018. The increase is a
result of the impact made by the additional sales force in the U.S. and new
international distributors. In both the U.S. and internationally, strong sales
growth of generators was coupled with utilization based demand for our
handpieces. In addition, we entered four new markets in 2019, the largest of
which were Mexico and Canada .
The OEM product line consists of proprietary products designed specifically for
third party equipment manufacturers; revenue for this product line increased
53.6% or approximately $1.9 million when compared to 2018. The increase from
2018 is primarily attributable to sales to Symmetry under our Manufacture and
Supply Agreement, which commenced following the disposition of the Core Business
in August 2018 .
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APYX MEDICAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANAYLSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Overall sales from continuing operations increased by 62.3% or approximately
$6.4 million for the year ended December 31, 2018 when compared with 2017.
Advanced Energy segment sales increased 70.1% or approximately $5.4 million for
the year ended December 31, 2018 when compared with 2017. The increase was
primarily driven by a continued focus of our selling into the cosmetic surgery
market and sales growth in international markets. The OEM product line consists
of proprietary products designed specifically for third party equipment
manufacturers; revenue for this product line increased 39.3% or
approximately $1.0 million when compared to 2017.
Gross Profit
Year Ended Year Ended
December 31, December 31,
(In thousands) 2019 2018 as Restated Change 2018 as Restated 2017 Change
Cost of sales $ 9,141 $ 5,779 58.2 % $ 5,779 $ 3,276 76.4 %
Percentage of sales 32.4 % 34.8 % 34.8 % 32.0 %
Gross profit $ 19,094 $ 10,826 76.4 % $ 10,826 $ 6,958 55.6 % Percentage of sales 67.6 % 65.2 % 2.4 % 65.2 % 68.0 % (2.8 )%
Our gross profit margin as a percentage of sales increased by 2.4%, or$8.3 million during the year endedDecember 31, 2019 compared with 2018. The increase was primarily driven by higher Advanced Energy sales as a percentage of total sales in 2019 as well as efficiencies realized in the manufacturing processes in late 2019. These increases were partially offset by an increase in international sales as a percentage of total sales in 2019 as compared to 2018, which typically carry lower margins thatU.S. sales, and OEM sales to Symmetry, which carry lower margins than typical OEM sales. Our gross profit margin as a percentage of sales decreased by 2.8% but increased by approximately$3.9 million during the year endedDecember 31, 2018 , compared with 2017. The decrease was driven by lower year over year margins in Advanced Energy from increased international sales offset by increased year over year margins in the OEM segment. In conjunction with the divestment of our Core business segment in 2018, we performed a review of our standard costs, including the composition of our overhead cost pools. As a result, we reclassified certain overhead costs related to quality and regulatory to Salaries and Related Costs, in the amount of approximately$0.1 million in the third quarter and approximately$0.4 million for the last quarter of 2018. This change in estimate was necessary in order to better reflect the change in operations to our Advanced Energy segment. 21
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APYX MEDICAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANAYLSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Other Costs and Expenses
Research and development
Year Ended Year Ended
December 31, December 31,
(In thousands) 2019 2018 as Restated Change 2018 as Restated 2017 Change
Research and $ 3,731 $ 2,549 46.4 % $ 2,549 $ 1,941 31.3 %
Development expense
Percentage of sales 13.2 % 15.4 % 15.4 % 19.0 %
Our expenditures for R&D related activities increased by 46.4% or approximately$1.2 million for the year endedDecember 31, 2019 , compared with 2018. This was mainly driven by continued spending on clinical studies and research projects related to the cosmetic surgery market, including the development of new handpieces which the Company introduced to the market during 2019 as well as the submission of two IDE applications to the FDA in 2019. Our expenditures for R&D related activities increased by 31.3% or approximately$0.6 million for the year endedDecember 31, 2018 , compared with 2017. This was mainly driven by continued spending on clinical studies and research projects related to the cosmetic surgery market. Professional services Year Ended Year Ended December 31, December 31, (In thousands) 2019 2018 as Restated Change 2018 as Restated 2017 Change Professional services$ 8,507 $ 3,133 171.5 % $ 3,133$ 1,769 77.1 % expense Percentage of sales 30.1 % 18.9 %
18.9 % 17.3 %
Professional services expenses increased 171.5% for the year endedDecember 31, 2019 , compared with 2018. The change was primarily attributable to increases in physician consulting expenses, including stock option grants, related to the Advanced Energy segment (increase of$2.0M ), increased legal fees primarily associated with our class action lawsuit (increase of$1.0M ), our use of third party IT support in 2019 (increase of$0.6M ), third party assistance with internal controls in 2019 (increase of$0.5M ), and accounting and auditing fees for services provided by our independent accountants ($0.3M ).
Professional services costs increased 77.1% for the year ended
Salaries and related costs
Year Ended Year Ended
December 31, December 31,
(In thousands) 2019 2018 as Restated Change 2018 as Restated 2017 Change
Salaries and related $ 14,025 $ 9,272 51.3 % $ 9,272 $ 6,920 34.0 %
expenses
Percentage of sales 49.7 % 55.8 % 55.8 % 67.6 %
During 2019, salaries and related expenses increased approximately 51.3% or approximately$4.8 million compared to 2018. The increase was primarily attributable to additional headcount in 2019 (net increase of 44 employees in 2019), many of whom had a salary in excess of our average salaries in 2018, and employee stock option grants in 2019, which drove an increase in employee stock option expense of$0.6M in 2019.
During 2018, salaries and related expenses increased approximately 34.0% or
approximately
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APYX MEDICAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANAYLSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
In conjunction with the divestment of our Core business segment, we performed a
review of our standard costs, including the composition of our overhead cost
pools. As a result, we reclassified certain overhead costs related to quality
and regulatory to Salaries and Related Costs, in the amount of approximately
$0.1 million in the third quarter and approximately $0.4 million for the last
quarter of 2018. This change in estimate was necessary in order to better
reflect the change in operations to our Advanced Energy segment.
Selling, general and administrative expenses
Year Ended Year Ended
December 31, December 31,
(In thousands) 2019 2018 as Restated Change 2018 as Restated 2017 Change
SG&A Expense $ 13,700 $ 9,407 45.6 % $ 9,407 $ 8,689 8.3 %
Percentage of sales 48.5 % 56.7 % 56.7 % 84.9 %
Selling, general and administrative expense increased by 45.6% or approximately$4.3 million for the year endedDecember 31, 2019 , compared with 2018. The increase is primarily attributable to higher selling and marketing related expenses, including sales commissions (increase of$0.9M ), travel expenses (increase of$0.9M ), and advertising including trade shows (increase of$0.7M ) to support sales growth in the Advanced Energy segment. Additionally, we incurred additional regulatory expenses (increase of$0.7M ) in 2019 associated with obtaining clearance to sell our products, both domestically and internationally.
Selling, general and administrative expense increased by 8.3% or approximately
Severance
Jay D. Ewers , the Chief Financial Officer, resigned as an officer of the Company effectiveDecember 31, 2018 , although he continued on as an employee during the first quarter of 2019. In connection with this departure, the Company andMr. Ewers entered into a separation agreement, datedNovember 12, 2018 . Severance costs incurred included salary, option expense and other benefits of approximately$624,000 , approximately$532,000 is included in operational cash outflows during 2019, the remainder will be included in operational cash outflows during 2020.Jack McCarthy , the Chief Commercialization Officer, was terminated without cause from his position with the Company effectiveNovember 6, 2017 . Severance costs incurred included salary, option expense and other benefits of approximately$582,000 , of which approximately$397,000 was included in operational cash outflows during 2018.Robert L. Gershon , the Chief Executive Officer and a director, resigned from all of his positions with the Company effectiveDecember 15, 2017 . In connection with this departure, the Company andMr. Gershon entered into a separation agreement, datedDecember 15, 2017 . Severance costs incurred included salary, option expense and other benefits of approximately$767,000 , of which approximately$670,000 was included in operational cash outflows during 2018. Other Income (Expense), net Year Ended Year Ended December 31, December 31, (In thousands) 2019 2018 as Restated Change 2018 as Restated 2017 Change Interest income$ 1,392 $ 616 126.0 % $ 616 $ - - % Interest expense (8 ) (104 ) (92.3 )% (104 ) (136 ) (23.5 )% Percentage of sales 4.9 % 3.1 % 3.1 % (1.3 )% 23
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APYX MEDICAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANAYLSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Interest income (expense)
Total net interest income was higher for the year endedDecember 31, 2019 , as compared with 2018. This increase is due to short term investments inU.S. Treasury Securities which we purchased with the proceeds from the sale of the Core business, which were outstanding for all of 2019 as compared to approximately 4 months in 2018. This increase is offset by lower returns due to a lower average yield in 2019 and lower average principal invested. Total net interest income was higher for the year endedDecember 31, 2018 , as compared with 2017. This increase is primarily related to short term investments inU.S. Treasury Securities which we purchased with the proceeds from the sale of the Core business. Income Taxes The income tax benefit was approximately$0.1 million for the year endedDecember 31, 2019 as compared to an income tax benefit from continuing operations of approximately$3.9 million in 2018. In 2019, our income tax benefit is composed primarily of return to provision adjustments related to the 2018 tax year (benefit of approximately$0.3M ), partially offset by the accrual of interest and penalties on our uncertain tax positions (expense of approximately$0.2M ).
During 2018, the Company recorded a large gain on the sale of our Core business to Symmetry Surgical. This gain allowed the Company to utilize deferred tax assets (primarily a net operating loss carryforward) that had been fully reserved through a valuation allowance to offset our taxable position in 2018.
Liquidity and Capital Resources
AtDecember 31, 2019 , we had approximately$58.8 million in Cash and Cash Equivalents as compared to approximately$78.3 in Cash, Cash Equivalents and Short Term Investments atDecember 31, 2018 . Our working capital atDecember 31, 2019 was approximately$64.4 million compared with$81.2 million atDecember 31, 2018 . The decrease in working capital atDecember 31, 2019 fromDecember 31, 2018 was primarily due to the net loss incurred by the Company in 2019. For the year endedDecember 31, 2019 , net cash used in operating activities is approximately$18.5 million compared with net cash used in operating activities of approximately$20.9 million in 2018. This decrease in cash used is primarily driven by a reduction of taxes paid, and partially offset by a higher net loss from continuing operations. Net cash from investing activities for the year endedDecember 31, 2019 , is$60.5 million , primarily related to the maturity of short term investments and reinvestment in cash equivalents. Net cash from investing activities for the year endedDecember 31, 2018 is$29.3 million , primarily related to$91.1 million in net proceeds from the disposition of the Core business, offset by net purchases of marketable securities of$61.4 million . Cash from financing activities of approximately$0.1 million primarily relates to cash collected for stock options during the year endedDecember 31, 2019 . Cash used in 2018 financing activities was$2.5 million and primarily related to the repayment of the mortgage on ourClearwater, FL , facility.
At
Critical Accounting Estimates
In preparing the consolidated financial statements in accordance with accounting principles generally accepted inthe 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. 24
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APYX MEDICAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANAYLSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
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, 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. The Company accounts for stock options in accordance with FASB ASC Topic 718-10, Compensation-Stock Compensation, with compensation expense amortized over the vesting period. Options are valued using the Black-Scholes model in 2019 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. The Company has determined that the most critical of these estimates are the estimates of expected life, forfeiture rate and volatility used in the calculations. Expected life For employee stock-based compensation awards, we estimate the expected life of awards utilizing theSEC'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. Forfeiture rate We estimate forfeiture rates at the time stock-based compensation awards are granted. We utilize historical employee turnover by employee class to estimate these rates. Forfeiture estimates are lower for employees in executive and managerial positions than for other employee groups. At a minimum, we record compensation expense on those awards that have vested. Following the disposition of the Core business, we experienced turnover higher than an our average historical turnover, which resulted in actual results differing from these estimates. During the third quarter of 2019, we determined that our estimates at the grant date were not consistent with actual results and that we had not re-evaluated our original forfeiture estimate or recorded compensation cost for the value of awards that had vested. This resulted in a cumulative difference in the compensation cost that had been recognized on these awards of$0.2 million from the estimated amount, which was corrected in a revision included in our 2019 Q3 10-Q. Volatility The Company determines the volatility by utilizing the historical volatility of our stock over the period of the awards expected life. TheSEC 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. 25
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APYX MEDICAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANAYLSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
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. 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 exclusive of discontinued operations, 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 of continuing operations 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 the foreseeable future after 2019, we will continue to record a valuation allowance on the remaining deferred tax asset balance as ofDecember 31, 2019 .
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.
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