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 the
Executive Level Overview
We are an advanced energy technology company with a passion for elevating people's lives through innovative products in the cosmetic and surgical markets. Known for our innovative Helium Plasma Technology, Apyx is solely focused on bringing transformative solutions to the physicians and patients it serves. Our Helium Plasma Technology is marketed and sold as Renuvion® in the cosmetic surgery market and J-Plasma® in the hospital surgical market. Renuvion® offers plastic surgeons, fascial plastic surgeons and cosmetic physicians a unique ability to provide controlled heat to the tissue to achieve their desired results. The JPlasma® system allows surgeons to operate with a high level of precision and virtually eliminating unintended tissue trauma. We also leverage our deep expertise and decades of experience in unique waveforms through original equipment manufacturing (OEM) agreements with other medical device manufacturers.
As discussed in our Annual Report on Form 10-K for the year ended
Prior to the spread of COVID-19 into the US and international markets, we experienced positive year-over-year growth trends in the sale of our capital and disposable products, indicating increased utilization of our technology. Beginning in late February we began to see declines in the sale of our Helium Plasma Technology in European markets. These declines continued and also spread to the North and Latin American markets in March. At this time, we have not experienced any recovery in sales of these products in the affected markets.
We source the components used in our products from a variety of suppliers and we have collaborative arrangements with three key foreign suppliers. At this time our suppliers have experienced no significant disruptions as a result of the COVID-19 pandemic. We have experienced minor delays in our procurement from these suppliers as a result of the availability of shipping from third party freight carriers. These delays have not, to date, had a significant impact on our operations.
In response to the COVID-19 pandemic, we have taken action in these key areas:
•Protecting the Health and Safety of our Employees: To reduce the risk to our
employees and their families to potential
exposure to COVID-19, we have required that all non-essential employees work
remotely until further notice. We have also split the shifts of our
manufacturing personnel to allow for adequate social distancing, and require all
personnel to utilize personal protective equipment while on site at our
facilities. We have also restricted business travel and access to our
facilities.
•Operating Expenses: We are taking preemptive steps to curtail spending,
including implementing hiring restrictions,
reducing most discretionary spending, reducing capital expenditures, and
delaying certain R&D projects and clinical research studies.
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APYX MEDICAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANAYLSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
•Governmental Policy: On
Total revenue decreased by 11.2% or approximately
International sales represented approximately 27.6% of total revenues for the
three months ended
During 2020, we continue to drive growth in our Advanced Energy business by
increasing the adoption and utilization of our generators and handpieces in the
Operating segments are aggregated into reportable segments only if they exhibit similar economic characteristics. In addition to similar economic characteristics, we also consider the following factors in determining the reportable segments: the nature of business activities, the management structure directly accountable to our chief operating decision maker for operating and administrative activities, availability of discrete financial information and information presented to the Board of Directors and investors. Asset information is not reviewed by the chief operating decision maker by segment and is not available by segment, accordingly, we have not presented a measure of assets by segment.
Our reportable segments are disclosed as principally organized and managed as two operating segments: Advanced Energy and OEM. "Corporate & Other" includes certain unallocated corporate and administrative costs which were not specifically attributed to any reportable segment. The OEM segment is primarily development and manufacturing contract and product driven, all related expenses are recorded as cost of sales, therefore no segment specific operating expenses are incurred.
We strongly encourage investors to visit our website: www.apyxmedical.com to view the most current news and to review our filings with theSecurities and Exchange Commission . Results of Operations Sales Three Months Ended March 31, (In thousands) 2020 2019 Change Sales by Reportable Segment Advanced Energy$ 3,986 $ 4,371 (385,000 ) (8.8 )% OEM 1,011 1,258 (247,000 ) (19.6 )% Total$ 4,997 $ 5,629 (11.2 )% (632,000) Sales by Domestic and International Domestic$ 3,618 $ 3,910 (7.5 )% International 1,379 1,719 (19.8 )% Total$ 4,997 $ 5,629 (11.2 )% 17
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APYX MEDICAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANAYLSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Total revenue decreased by 11.2% or approximately
Gross Profit
Three Months Ended
March 31 ,
(In thousands) 2020 2019 Change
Cost of sales
Gross profit
Gross profit for the three months ended
Other Costs and Expenses
Our spending in the first quarter of 2020 reflected normal business activities into February and March and then a curtailment of certain costs associated with the impact of the COVID-19 pandemic, including restrictions on travel. While certain spending will decrease in the second quarter of 2020 as a result of a reduction in revenue and activities limited by the COVID-19 pandemic, much of our spending will continue. For example, while we have restricted new hirings, we have no plans to reduce our headcount or furlough any employees at this time. Certain costs will decline as the underlying activities are restricted by the COVID-19 pandemic, including travel and related expenses, clinical trials and physician training.
Research and development
Three Months Ended
March 31,
(In thousands) 2020 2019 Change
Research and Development expense
19.6 % 13.0 %
Research and development expenses increased 34.2% for the three months ended
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APYX MEDICAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANAYLSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Professional services
Three Months Ended
March 31,
(In thousands) 2020 2019 Change
Professional services expense
47.8 % 37.6 %
Professional services expense increased 12.8% for the three months ended
Salaries and related costs
Three Months Ended
March 31,
(In thousands) 2020 2019 Change
Salaries and related expenses
66.3 % 62.0 %
During the three months ended
Selling, general and administrative expenses
Three Months Ended
March 31,
(In thousands) 2020 2019 Change
SG&A Expense $ 3,796 $ 2,957 28.4 %
Percentage of sales 76.0 % 52.5 %
During the three months ended
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APYX MEDICAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANAYLSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Other Income (Expense)
Three Months Ended
March 31,
(In thousands) 2020 2019 Change
Interest income $ 216 $ 423 (48.9 )%
Percentage of sales 4.3 % 7.5 %
Other income (losses), net $ 426 $ (295 ) (244.4 )%
Percentage of sales 8.5 % (5.2 )%
Total interest income decreased for the three months ended
Other income (losses), net increased for the three months ended
Income Taxes
Three Months Ended
March 31,
(In thousands) 2020 2019 Change
Income tax expense (benefit $ (4,905 ) $ 6 (81,850.0 )%
Effective tax rate 71.5 % (0.1 )%
Our income tax expense (benefit) was approximately
Liquidity and Capital Resources
Our working capital at
For the three months ended
The CARES Act also allows us to defer the payment of payroll taxes incurred
between
As a result of the impact of the COVID-19 pandemic on our customers, we have received multiple requests for extension on the payment of receivables. We are committed to work with our customers to collect the receivables as expeditiously as possible.
Net cash from investing activities is
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MANAGEMENT'S DISCUSSION AND ANAYLSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
At
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APYX MEDICAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANAYLSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Critical Accounting Estimates
In preparing the consolidated financial statements in accordance with accounting
principles generally accepted in
The preparation of the consolidated financial statements in conformity with
Estimates are considered to be critical if they meet both of the following criteria: (1) the estimate requires assumptions about material matters that are uncertain at the time the accounting estimates are made and (2) other materially different estimates could have been reasonably made or material changes in the estimates are reasonably likely to occur from period to period. Our critical accounting estimates include the following:
Stock-based Compensation
Under our stock option plans, options to purchase common shares of the Company may be granted to employees, officers and directors of the Company by the Board of Directors. We account for stock options in accordance with FASB ASC Topic 718-10, Compensation-Stock Compensation, with compensation expense amortized over the vesting period. Options are valued using the Black-Scholes model in 2019 and 2020 and the trinomial lattice option-pricing model in prior years, both of which includes a number of estimates that affect the amount of our expense. We have determined that the most critical of these estimates are the expected life and volatility used in the calculations.
Expected life
For employee stock-based compensation awards, we estimate the expected life of
awards utilizing the
Volatility
We determine the volatility by utilizing the historical volatility of our stock over the period of the awards expected life. Relevant guidance allows us to include periods in excess of the useful life if we determine that they provide a more reasonable basis for the volatility of our stock. Additionally, ASC 718-10 allows us to exclude periods from the volatility if they pertain to events or circumstances that in our judgment are specific to us and if the event or transaction is not reasonably expected to occur again during the expected term of the awards. We have not included any additional periods, nor disregarded any periods, in calculating our volatility.
Inventory reserves
We maintain a reserve for excess and obsolete inventory resulting from the potential inability to sell our products at prices in excess of current carrying costs. The markets in which we operate are highly competitive, with new products and surgical procedures introduced on an ongoing basis. Such marketplace changes may cause our products to become obsolete. We make estimates regarding the future recoverability of the costs of these products and record a provision for excess and obsolete inventories based on historical experience and expected future trends. If actual product life cycles, product demand or acceptance of new product introductions are less favorable than projected by management, additional inventory write-downs may be required, which would unfavorably affect future operating results.
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MANAGEMENT'S DISCUSSION AND ANAYLSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Litigation Contingencies
In accordance with authoritative guidance, we record a liability in our consolidated financial statements for these actions when a loss is known or considered probable and the amount can be reasonably estimated. If the reasonable estimate of a known or probable loss is a range, and no amount within the range is a better estimate than any other, the minimum amount of the range is accrued. If a loss is reasonably possible, but not known or probable, and can be reasonably estimated, the estimated loss or range of loss is disclosed in the notes to the consolidated financial statements. In most cases, significant judgment is required to estimate the amount and timing of a loss to be recorded; actual results may differ from these estimates.
Income Taxes
The provision for income tax expense (benefit) includes federal, foreign, state and local income taxes currently payable or receivable and those deferred because of temporary differences between the financial statement and tax bases of assets and liabilities. Deferred tax assets or liabilities are computed based on the difference between the financial statement and income tax bases of assets and liabilities using enacted marginal tax rates. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. Deferred income tax expenses or credits are based on the changes in the asset or liability from period to period.
As a result of historical losses exclusive of the sale of the Core business in
2018, and our expectation to continue to generate losses in the near future, we
recorded a valuation allowance on the net deferred tax asset and do not
anticipate recording an income tax benefit related to these deferred tax assets.
We will reassess the realization of deferred tax assets each reporting period
and will be able to reduce the valuation allowance to the extent the financial
results improve and it becomes more likely than not that the deferred tax assets
will be realizable. As management expects the Company to continue to generate
losses in 2020 and the foreseeable future after 2020, we will continue to record
a valuation allowance on the remaining deferred tax asset balance as of
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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