UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q10-Q/A
Amendment No. 1
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ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended JuneSeptember 30, 20192018 |
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or |
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o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _____ to _____ |
Commission File Number: 0-12183 |
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APYX MEDICAL CORPORATION
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(Exact name of registrant as specified in its charter) |
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| | |
Delaware | | 11-2644611 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
5115 Ulmerton Road, Clearwater, FL 33760
(Address of principal executive offices, zip code)
(727) 384-2323
(Registrant’s telephone number)
Securities Registered Pursuant to Section 12 (b) of the Act:
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| | |
Title of each class | Trading symbol(s) | Name of each exchange on which registered |
Common Stock | APYX | Nasdaq Stock Market, LLC |
Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes: ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes: ý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act (Check one):
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Large accelerated filer | o | | Accelerated filer | ý
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Non-accelerated filer | oý | | Smaller reporting company | ý |
| | | Emerging growth company | o |
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. | o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes: o No ý
As of JulyOctober 29, 2019, 33,921,4762018, 33,203,517 shares of the registrant’s $0.001 par value common stock were outstanding.
Explanatory Note
As disclosed in Item 4.02 of the Company’s current report on Form 8-K filed with the U.S Securities and Exchange Commission ("SEC") on March 16, 2020, on March 12, 2020 the Audit Committee of the Board of Directors of Apyx Medical Corporation (formerly known as Bovie Medical Corporation) (the “Company”) concluded, after review and discussion with management, that the Company’s financial statements as of and for the three and nine months ended September 30, 2018 ( the “Financial Statements”) should no longer be relied upon.
This Amendment No. 1 to on the Company’s Form 10-Q (this “Form 10-Q/A") amends and restates certain items noted below in the Quarterly Report on Form 10-Q of the Company for the quarter ended September 30, 2018, as originally filed with the Securities and Exchange Commission on November 2, 2018 (the “Original Filing”). This Form 10-Q/A amends the Original Filing to reflect the correction of an error in the previously reported financial statements related to the Company’s failure to properly collect and remit employee income and payroll taxes, and remit the employer portion of payroll taxes, resulting from the exercise of non-qualified stock options. In addition, the Company has also corrected other minor items primarily related to the appropriate cutoff of transactions at the balance sheet date and the duplicate recording of a State income tax payment.
See Note 2 to the Condensed Consolidated Financial Statements included in Item 1 for additional information and a reconciliation of the previously reported amounts to the restated amounts.
For the convenience of the reader, this Form 10-Q/A sets forth the Original Filing, as amended, in its entirety; however, this Form 10-Q/A amends and restates only the following financial statements and disclosures that were impacted from the correction of the errors:
Part I, Item 1 - Financial Statements
Part I, Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations
Part II, Item 6 - Exhibits
Signatures
The Company’s Chief Executive Officer and Chief Financial Officer have provided new certifications dated as of the date of this filing in connection with this Form 10-Q/A(Exhibits 31.1, 31.2, 32.1 and 32.2),and the Company has provided its revised audited consolidated financial statements formatted in Extensible Business Reporting Language (XBRL) in Exhibit 101.
Except as described above, no other changes have been made to the Original Filing. This Form 10-Q/A speaks as of the date of the Original Filing and does not reflect events that may have occurred after the date of the Original Filing, or modify or update any disclosures that may have been affected by subsequent events.
The Company is also concurrently filing an amended Quarterly Report for the three months ended March 31, 2019 to restate their previously issued interim financial statements due to the accounting errors described above, as well as some additional errors identified with an impact to that period.
APYX MEDICAL CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
For the quarterly period ended JuneSeptember 30, 20192018
(Unaudited)
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Part I. | | | | |
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Item 1. | | | | |
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Item 2. | | | | |
Item 3. | | | | |
Item 4. | | | | |
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Part II. | | | | |
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Item 1. | | | | |
Item 1A. | | | | |
Item 2. | | | | |
Item 3. | | | | |
Item 4. | | | | |
Item 5. | | | | |
Item 6. | | | | |
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PART I. Financial Information
ITEM 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data, Unaudited) | | | June 30, 2019 | | December 31, 2018 | September 30, 2018 as Restated | | December 31, 2017 |
ASSETS | | | | | | |
Current assets: | | | | | | |
Cash and cash equivalents | $ | 67,360 |
| | $ | 16,466 |
| $ | 40,663 |
| | $ | 9,949 |
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Restricted cash | | — |
| | 719 |
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Short term investments | — |
| | 61,678 |
| 55,480 |
| | — |
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Trade accounts receivable, net of allowance of $285 and $428 | 6,218 |
| | 5,015 |
| |
Inventories, net of provision for obsolescence of $402 and $439 | 6,392 |
| | 5,212 |
| |
Trade accounts receivable, net of allowance of $311 and $204 | | 4,139 |
| | 4,857 |
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Inventories, net | | 6,037 |
| | 4,274 |
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Prepaid expenses and other current assets | 1,987 |
| | 1,146 |
| 627 |
| | 433 |
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Current assets of discontinued operations | | — |
| | 2,315 |
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Total current assets | 81,957 |
| | 89,517 |
| 106,946 |
| | 22,547 |
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Property and equipment, net | 6,300 |
| | 5,788 |
| 5,842 |
| | 6,033 |
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Intangibles | 185 |
| | 191 |
| |
Purchased technology and license rights, net | | 32 |
| | 67 |
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Goodwill | | 185 |
| | 185 |
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Deposits | 73 |
| | 73 |
| 46 |
| | 92 |
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Other assets | 368 |
| | 41 |
| 122 |
| | 67 |
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Non-current assets of discontinued operations | | — |
| | 1,997 |
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Total assets | $ | 88,883 |
| | $ | 95,610 |
| $ | 113,173 |
| | $ | 30,988 |
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| | | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | |
Current liabilities: | | | | | | |
Accounts payable | $ | 1,641 |
| | $ | 1,423 |
| $ | 2,348 |
| | $ | 1,583 |
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Accrued and other liabilities | 5,848 |
| | 5,552 |
| |
Accrued severance and related | 408 |
| | 727 |
| 95 |
| | 1,242 |
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Accrued payroll | | 163 |
| | 447 |
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Current portion of mortgage note payable | | — |
| | 239 |
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Accrued expenses and other current liabilities | | 19,830 |
| | 214 |
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Current liabilities of discontinued operations | | — |
| | 2,248 |
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Total current liabilities | 7,897 |
| | 7,702 |
| 22,436 |
| | 5,973 |
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Note payable | 140 |
| | 140 |
| |
Long term lease liability | 267 |
| | — |
| |
Mortgage note payable, net of current portion | | — |
| | 2,455 |
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Related party note payable | | 140 |
| | 140 |
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Deferred tax liability | | — |
| | 368 |
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Derivative liabilities | | — |
| | 20 |
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Total liabilities | 8,304 |
| | 7,842 |
| $ | 22,576 |
| | $ | 8,956 |
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STOCKHOLDERS’ EQUITY |
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Common stock, $0.001 par value; 75,000,000 shares authorized; 33,847,100 issued and 33,704,525 outstanding as of December 31, 2018, and 34,061,360 issued and 33,918,785 outstanding as of June 30, 2019 | 34 |
| | 34 |
| |
Common stock, $0.001 par value; 75,000,000 shares authorized; 33,763,019 issued and 33,620,444 outstanding as of September 30, 2018 and 75,000,000 shares authorized; 33,021,170 issued and 32,878,091 outstanding as of December 31, 2017, respectively | | 33 |
| | 33 |
|
Additional paid-in capital | 54,051 |
| | 52,221 |
| 51,798 |
| | 50,495 |
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Retained earnings | 26,494 |
| | 35,513 |
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Retained earnings (accumulated deficit) | | 38,766 |
| | (28,496 | ) |
Total stockholders’ equity | 80,579 |
| | 87,768 |
| 90,597 |
| | 22,032 |
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Total liabilities and stockholders’ equity | $ | 88,883 |
| | $ | 95,610 |
| $ | 113,173 |
| | $ | 30,988 |
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The accompanying notes are an integral part of the consolidated financial statements.
APYX MEDICAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data, Unaudited)
| | | Three Months Ended June 30, | | Six Months Ended June 30, | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2019 | | 2018 | | 2019 | | 2018 | 2018 as Restated | | 2017 | | 2018 as Restated | | 2017 |
Sales | $ | 6,568 |
| | $ | 3,691 |
| | $ | 12,391 |
| | $ | 7,088 |
| $ | 3,672 |
| | $ | 2,651 |
| | $ | 10,760 |
| | $ | 6,576 |
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Cost of sales | 2,096 |
| | 1,154 |
| | 4,199 |
| | 2,339 |
| 1,151 |
| | 738 |
| | 3,490 |
| | 2,314 |
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Gross profit | 4,472 |
| | 2,537 |
| | 8,192 |
| | 4,749 |
| 2,521 |
| | 1,913 |
| | 7,270 |
| | 4,262 |
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Other costs and expenses: | | | | | | | | | | | | | | |
Research and development | 888 |
| | 763 |
| | 1,698 |
| | 1,277 |
| 613 |
| | 487 |
| | 1,890 |
| | 1,600 |
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Professional services | 1,633 |
| | 681 |
| | 3,424 |
| | 1,187 |
| 628 |
| | 421 |
| | 1,815 |
| | 1,291 |
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Salaries and related costs | 3,333 |
| | 1,813 |
| | 6,554 |
| | 3,615 |
| 2,170 |
| | 1,826 |
| | 5,785 |
| | 6,016 |
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Selling, general and administrative | 3,083 |
| | 2,213 |
| | 6,184 |
| | 4,323 |
| 1,898 |
| | 2,012 |
| | 6,221 |
| | 6,003 |
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Total other costs and expenses | 8,937 |
| | 5,470 |
| | 17,860 |
| | 10,402 |
| 5,309 |
| | 4,746 |
| | 15,711 |
| | 14,910 |
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Loss from operations | (4,465 | ) | | (2,933 | ) | | (9,668 | ) | | (5,653 | ) | (2,788 | ) | | (2,833 | ) | | (8,441 | ) | | (10,648 | ) |
Interest income | 403 |
| | — |
| | 826 |
|
| — |
| |
Interest expense | — |
| | (38 | ) | | — |
| | (72 | ) | |
Interest income (expense), net | | 105 |
| | (36 | ) | | 33 |
| | (103 | ) |
Other losses | (200 | ) | | — |
| | (225 | ) | | — |
| (868 | ) | | — |
| | (868 | ) | | — |
|
Change in value of derivative liabilities | — |
| | 46 |
| | — |
| | 20 |
| |
Total other income (expense), net | 203 |
| | 8 |
| | 601 |
| | (52 | ) | |
Loss before income taxes | (4,262 | ) | | (2,925 | ) | | (9,067 | ) | | (5,705 | ) | |
Income tax expense (benefit) | 76 |
| | 13 |
| | (48 | ) | | 24 |
| |
Loss from continuing operations | (4,338 | ) | | (2,938 | ) | | (9,019 | ) | | (5,729 | ) | |
Change in fair value of derivative liabilities | | — |
| | (69 | ) | | 20 |
| | 57 |
|
Total other expense, net | | (763 | ) | | (105 | ) | | (815 | ) | | (46 | ) |
Loss from continuing operations before income taxes | | (3,551 | ) | | (2,938 | ) | | (9,256 | ) | | (10,694 | ) |
Income tax (benefit) expense | | (2,408 | ) | | 6 |
| | (2,384 | ) | | 15 |
|
Net loss from continuing operations | | $ | (1,143 | ) | | $ | (2,944 | ) | | $ | (6,872 | ) | | $ | (10,709 | ) |
Income from discontinued operations, net of tax | — |
| | 2,666 |
| | — |
| | 4,522 |
| 540 |
| | 1,699 |
| | 5,062 |
| | 6,471 |
|
Net loss | $ | (4,338 | ) | | $ | (272 | ) | | $ | (9,019 | ) |
| $ | (1,207 | ) | |
Gain on sale of the Core Business, net of tax | | 69,072 |
| | — |
| | 69,072 |
| | — |
|
Total income from discontinued operations, net of tax | | 69,612 |
| | 1,699 |
| | 74,134 |
| | 6,471 |
|
Net income (loss) | | $ | 68,469 |
| | $ | (1,245 | ) | | $ | 67,262 |
| | $ | (4,238 | ) |
| | | | | | | | | | | | | | |
EPS from continuing operations: | | | | | | | | |
Loss per share from continuing operations | | | | | | | | |
Basic | $ | (0.13 | ) | | $ | (0.09 | ) | | $ | (0.27 | ) | | $ | (0.17 | ) | $ | (0.03 | ) | | $ | (0.09 | ) | | $ | (0.21 | ) | | $ | (0.35 | ) |
Diluted | $ | (0.13 | ) | | $ | (0.09 | ) | | $ | (0.27 | ) | | $ | (0.17 | ) | $ | (0.03 | ) | | $ | (0.09 | ) | | $ | (0.21 | ) | | $ | (0.35 | ) |
| | | | | | | | | | | | | | |
EPS from discontinued operations: | | | | | | | | |
Income per share from discontinued operations | | | | | | | | |
Basic | $ | — |
| | $ | 0.08 |
| | $ | — |
| | $ | 0.13 |
| 2.09 |
| | 0.05 |
| | 2.25 |
| | 0.21 |
|
Diluted | $ | — |
| | $ | 0.08 |
| | $ | — |
| | $ | 0.13 |
| 1.99 |
| | 0.05 |
| | 2.19 |
| | 0.21 |
|
| | | | | | | | | | | | | | |
EPS from total operations: | | | | | | | | |
Income (loss) per share | | | | | | | | |
Basic | $ | (0.13 | ) | | $ | (0.01 | ) | | $ | (0.27 | ) | | $ | (0.04 | ) | $ | 2.06 |
| | $ | (0.04 | ) | | $ | 2.04 |
| | $ | (0.14 | ) |
Diluted | $ | (0.13 | ) | | $ | (0.01 | ) | | $ | (0.27 | ) | | $ | (0.04 | ) | $ | 1.96 |
| | $ | (0.04 | ) | | $ | 1.98 |
| | $ | (0.14 | ) |
| | | | | | | | |
Weighted average number of shares outstanding - basic | | 33,275 |
| | 31,078 |
| | 33,014 |
| | 30,932 |
|
Weighted average number of shares outstanding - dilutive | | 34,934 |
| | 31,078 |
| | 33,952 |
| | 30,932 |
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The accompanying notes are an integral part of the consolidated financial statements.
APYX MEDICAL CORPORATION
CONSOLIDATED STATEMENTSSTATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(In thousands, Unaudited)
| | Three months ended June 30, 2018 and 2019 | | | | | | | | | | |
| Common Stock | | | | | | | Preferred Stock | | Common Stock | | | | | | |
| Shares | | Par Value | | Additional Paid-In Capital | | Retained Earnings (Accumulated deficit) | | Total | Shares | | Par Value | | Shares | | Par Value | | Additional Paid-In Capital | | Retained Earnings (Accumulated Deficit) | | Total |
Balance March 31, 2018 | 32,878 |
| | $ | 33 |
| | $ | 50,867 |
| | $ | (29,431 | ) | | $ | 21,469 |
| |
Balance December 31, 2016 | | 976 |
| | $ | 1 |
| | 30,860 |
| | $ | 31 |
| | $ | 49,625 |
| | $ | (23,434 | ) | | $ | 26,223 |
|
Options exercised | 37 |
| | — |
| | 83 |
| | — |
| | 83 |
| — |
| | — |
| | 21 |
| | — |
| | 275 |
| | — |
| | 275 |
|
Warrants exercised | 40 |
| | — |
| | 95 |
| | — |
| | 95 |
| |
Conversion of Series B convertible preferred to common stock | | (976 | ) | | (1 | ) | | 1,951 |
| | 2 |
| | (1 | ) | | — |
| | — |
|
Stock based compensation | — |
| | — |
| | 377 |
| | — |
| | 377 |
| — |
| | — |
| | — |
| | — |
| | 532 |
| | — |
| | 532 |
|
Stock swap to acquire options and warrants | (42 | ) | | — |
| | (178 | ) | | — |
| | (178 | ) | — |
| | — |
| | — |
| | — |
| | (275 | ) | | — |
| | (275 | ) |
Net Loss | — |
| | — |
| | — |
| | (272 | ) | | (272 | ) | |
Balance June 30, 2018 | 32,913 |
| | 33 |
| | $ | 51,244 |
| | $ | (29,703 | ) | | $ | 21,574 |
| |
| | | | | | | | | | |
Balance March 31, 2019 | 33,891 |
| | $ | 34 |
| | $ | 53,147 |
| | $ | 30,832 |
| | $ | 84,013 |
| |
Options exercised | 38 |
| | — |
| | — |
| | — |
| | — |
| |
Stock based compensation | — |
| | — |
| | 856 |
| | — |
| | 856 |
| |
Stock exercise to acquire options | (8 | ) | | — |
| | 48 |
| | — |
| | 48 |
| |
Net Loss | — |
| | — |
| | — |
| | (4,338 | ) | | (4,338 | ) | |
Balance June 30, 2019 | 33,921 |
| | $ | 34 |
| | $ | 54,051 |
| | $ | 26,494 |
| | $ | 80,579 |
| |
| | | | | | | | | | |
Six months ended June 30, 2018 and 2019 | | | | | | | | | | |
| Common Stock | | | | | | | |
Net loss | | — |
| | — |
| | — |
| | — |
| | — |
| | (4,238 | ) | | (4,238 | ) |
Balance September 30, 2017 | | — |
| | $ | — |
| | 32,832 |
| | $ | 33 |
| | $ | 50,156 |
| | $ | (27,672 | ) | | $ | 22,517 |
|
| Shares | | Par Value | | Additional Paid-In Capital | | Retained Earnings (Accumulated deficit) | | Total | | | | | | | | | | | | | |
Balance December 31, 2017 | 32,878 |
| | $ | 33 |
| | $ | 50,495 |
| | $ | (28,496 | ) | | $ | 22,032 |
| — |
| | $ | — |
| | 32,878 |
| | $ | 33 |
| | $ | 50,495 |
| | $ | (28,496 | ) | | $ | 22,032 |
|
Options exercised | 37 |
| | — |
| | 83 |
| | — |
| | 83 |
| — |
| | — |
| | 1,278 |
| | — |
| | 3,103 |
| | — |
| | 3,103 |
|
Warrants exercised | 40 |
| | — |
| | 95 |
| | — |
| | 95 |
| — |
| | — |
| | 40 |
| | — |
| | 95 |
| | — |
| | 95 |
|
Stock based compensation | — |
| | — |
| | 749 |
| | — |
| | 749 |
| — |
| | — |
| | — |
| | — |
| | 1,238 |
| | — |
| | 1,238 |
|
Stock swap to acquire options and warrants | (42 | ) | | — |
| | (178 | ) | | — |
| | (178 | ) | |
Net loss | — |
| | — |
| | — |
| | (1,207 | ) | | (1,207 | ) | |
Balance June 30, 2018 | 32,913 |
| | $ | 33 |
| | $ | 51,244 |
| | $ | (29,703 | ) | | $ | 21,574 |
| |
| | | | | | | | | | |
Balance December 31, 2018 | 33,705 |
| | $ | 34 |
| | $ | 52,221 |
| | $ | 35,513 |
| | $ | 87,768 |
| |
Options exercised | 309 |
| | — |
| | 777 |
| | — |
| | 777 |
| |
Stock based compensation | — |
| | — |
| | 1,715 |
| | — |
| | 1,715 |
| |
Stock exercise to acquire options | (93 | ) | | — |
| | (662 | ) | | — |
| | (662 | ) | |
Net loss | — |
| | — |
| | — |
| | (9,019 | ) | | (9,019 | ) | |
Balance June 30, 2019 | 33,921 |
| | $ | 34 |
| | $ | 54,051 |
| | $ | 26,494 |
| | $ | 80,579 |
| |
Stock exercise to acquire options and warrants | | — |
| | — |
| | (576 | ) | | — |
| | (3,133 | ) | | — |
| | (3,133 | ) |
Net income - as Restated | | — |
| | — |
| | — |
| | — |
| | — |
| | 67,262 |
| | 67,262 |
|
Balance September 30, 2018 as Restated | | — |
| | $ | — |
| | 33,620 |
| | $ | 33 |
| | $ | 51,798 |
| | $ | 38,766 |
| | $ | 90,597 |
|
The accompanying notes are an integral part of the consolidated financial statements.
APYX MEDICAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITYCASH FLOWS
(In thousands, Unaudited)
|
| | | | | | | |
| Nine Months Ended September 30, |
| 2018 as Restated | | 2017 |
Cash flows from operating activities | | | |
Net income (loss) | $ | 67,262 |
| | $ | (4,238 | ) |
Adjustments to reconcile net income (loss) to net cash used in operating activities: | | | |
Gain on sale of the Core Business, net of tax | (69,072 | ) | | — |
|
Depreciation and amortization | 429 |
| | 527 |
|
Gain on disposal of property and equipment, net | — |
| | 3 |
|
Stock based compensation | 1,238 |
| | 532 |
|
Change in fair value of derivative liabilities | (20 | ) | | (57 | ) |
Unrealized gain on short term investments | (47 | ) | | — |
|
Provision for allowance for doubtful accounts | 123 |
| | 128 |
|
Benefit of deferred taxes | (368 | ) | | — |
|
Changes in current assets and liabilities, net of effect of disposition: | | | |
Trade receivables | 595 |
| | 528 |
|
Prepaid expenses and other assets | (188 | ) | | (221 | ) |
Inventories | (1,706 | ) | | (1,177 | ) |
Deposits and other assets | (9 | ) | | 9 |
|
Accounts payable | 765 |
| | (219 | ) |
Accrued expenses and other liabilities | (1,837 | ) | | (250 | ) |
Net cash used in operating activities | (2,835 | ) | | (4,435 | ) |
Cash flows from investing activities | | | |
Purchases of property and equipment | (203 | ) | | (431 | ) |
Proceeds from the disposition of Core business | 91,095 |
| | — |
|
Purchases of marketable securities | (55,433 | ) | | — |
|
Net cash from investing activities | 35,459 |
| | (431 | ) |
Cash flows from financing activities | | | |
Proceeds from stock options/warrants exercised | 65 |
| | — |
|
Repayment of mortgage note payable | (2,694 | ) | | (179 | ) |
Net cash used in financing activities | (2,629 | ) | | (179 | ) |
Net change in cash, cash equivalents and restricted cash | 29,995 |
| | (5,045 | ) |
Cash, cash equivalents and restricted cash, beginning of period | 10,668 |
| | 15,235 |
|
Cash, cash equivalents and restricted cash, end of period | $ | 40,663 |
| | $ | 10,190 |
|
| | | |
Cash paid for: | | | |
Interest (income) expense, net | $ | (33 | ) | | $ | 103 |
|
| | | |
Non cash investing activities: | | | |
Cashless exercise of stock options/warrants | 3,133 |
| | 275 |
|
The accompanying notes are an integral part of the consolidated financial statements.
APYX MEDICAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, Unaudited)
|
| | | | | | | |
| Six Months Ended June 30, |
| 2019 | | 2018 |
Cash flows from operating activities | | | |
Net loss | $ | (9,019 | ) | | (1,207 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | | | |
Depreciation and amortization | 316 |
| | 371 |
|
Provision for inventory obsolescence | 36 |
| | — |
|
Gain on disposal of property and equipment, net | — |
| | (1 | ) |
Stock based compensation | 1,715 |
| | 749 |
|
Change in fair value of derivative liabilities | — |
| | (20 | ) |
Non-cash lease expense | 53 |
| | — |
|
Realized gain on short term investments | (164 | ) | | — |
|
Provision for allowance for doubtful accounts | (157 | ) | | 82 |
|
Changes in current assets and liabilities: | | |
|
|
Trade receivables | (1,046 | ) | | (817 | ) |
Prepaid expenses | (841 | ) | | (72 | ) |
Inventories | (1,216 | ) | | (1,007 | ) |
Deposits and other assets | (321 | ) | | (23 | ) |
Accounts payable | 218 |
| | 1,162 |
|
Accrued severance and related | (319 | ) | | — |
|
Accrued and other liabilities | 604 |
| | (898 | ) |
Net cash used in operating activities | (10,141 | ) | | (1,681 | ) |
Cash flows from investing activities |
| |
|
|
Purchases of property and equipment | (922 | ) | | (332 | ) |
Purchases of marketable securities | (18,884 | ) | | — |
|
Proceeds from maturities of marketable securities | 80,726 |
| | — |
|
Net cash provided by (used in) investing activities | 60,920 |
| | (332 | ) |
Cash flows from financing activities |
|
| |
|
|
Proceeds from stock options/warrants exercised | 115 |
| | — |
|
Repayment of mortgage note payable | — |
| | (120 | ) |
Net cash provided by (used in) financing activities | 115 |
| | (120 | ) |
Net change in cash, cash equivalents and restricted cash | 50,894 |
| | (2,133 | ) |
Cash, cash equivalents and restricted cash, beginning of period | 16,466 |
| | 10,668 |
|
Cash, cash equivalents and restricted cash, end of period | $ | 67,360 |
| | $ | 8,535 |
|
| | | |
Cash paid for: | | | |
Interest | $ | — |
| | 72 |
|
| | | |
Non cash investing and financing activities: |
| |
|
|
Cashless exercise of stock options/warrants | $ | 662 |
| | $ | — |
|
Capitalization of lease | 394 |
| | — |
|
The accompanying notes are an integral part of the consolidated financial statements.
APYX MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
Unless the context otherwise indicates, the terms “we,” “our,” “us,” “Apyx,“Bovie,” "Apyx," "Company" and similar terms refer to Apyx Medical Corporation (formerly Bovie Medical Corporation) and its consolidated subsidiaries.
We are a medical technology company and the developer of J-Plasma® (marketed and sold under the Renuvion® Cosmetic Technology brand in the cosmetic surgery market), a patented plasma-based surgical product for cutting, coagulation and ablation of soft tissue. J-Plasma® technology utilizes a helium ionization process to produce a stable, focused beam of plasma that provides surgeons with greater precision and minimal invasiveness. The Company also leverages its expertise through original equipment manufacturing (OEM) agreements with other medical device manufacturers.
On August 30, 2018, we closed on a definitive asset purchase agreement with Specialty Surgical Instrumentation Inc., a Tennessee Corporation and wholly-owned subsidiary of Symmetry Surgical Inc. (“Symmetry”), pursuant to which we divested and sold our electrosurgical "Core" business segment and related intellectual property, including the Bovie® brand and trademarks, to Symmetry for gross proceeds of $97 million in cash. The divestiture and sale of our Core business segment to Symmetry allows us to further focus on our strategic objective of commercializing our J-Plasma® technology, including the Renuvion® brand in the cosmetic surgery market. We also entered into with Symmetry a transition services agreement, a Patent Licensing Agreement, a Disposables Supply Agreement, and a Generator Manufacturing and Supply Agreement, the latter of which will establish us as an OEM-provider of generators to Symmetry for a period of at least 10 years.
In connection with the asset purchase agreement, we also entered into an Electro Surgical Disposables and Accessories, Cauteries and Other Products Supply Agreement with Symmetry for up to a four-year term, whereby we will manufacture certain Core products and sell them to Symmetry at agreed upon prices. Any revenue, costs and expenses resulting from this agreement are netted and reported in our Consolidated Statements of Operations as Other gains or losses. For the three months ended June 30, 2019, Core sales following the divestiture amounted to $2.1 million with cost of sales of $2.3 million and related operating expenses of $0.0 million, which are included in other losses on the Consolidated Statement of Operations.
For the six months ended June 30, 2019, Core sales following the divestiture amounted to $4.4 million with cost of sales of $4.5 million and related operating expenses of $0.1 million, which are included in other losses on the Consolidated Statement of Operations.
In connection with the asset purchase agreement, we also entered into a Manufacture and Supply Agreement with Symmetry for a ten-year term, whereby we will manufacture certain products and sell them to Symmetry at agreed upon prices. Revenue, costs and expenses resulting from this agreement are reported in our Consolidated Statements as income or loss from operations of our OEM reporting segment.
We reclassified the financial results of the Core business to discontinued operations and from segment results for all periods presented.
The accompanying unaudited consolidated financial statements have been prepared based upon SEC rules that permit reduced disclosure for interim periods. For a more complete discussion of significant accounting policies and certain other information, please refer to the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2018.2017. These financial statements reflect all adjustments that are necessary for a fair presentation of results of operations and financial condition for the interim periods shown, including normal recurring accruals and other items. The results for the interim periods are not necessarily indicative of results for the full year.
NOTE 2. RESTATEMENT
Throughout 2019, the Company made efforts to remediate its material weaknesses in internal control as of December 31, 2018, including investing in new personnel that have expertise in a broad array of accounting topics. As a result of these investments and remediation efforts, the Company reevaluated the accounting for a broad array of items and discovered numerous immaterial errors. On March 12, 2020, our Management and the Audit Committee of the Board of Directors, following discussion with our predecessor independent registered public accounting firm, concluded that the Company's previously filed financial statements as of and for three and nine months ended September 30, 2018, were no longer able to be relied upon as the result of the aggregation of errors identified by Management and the Company’s new accounting personnel during 2019 related to the following:
As identified during preparation of the fiscal year 2019 Form 10-K:
During the first quarter of 2020, while reconciling the 2019 income tax provision back to the corresponding records, we determined that when employees exercised non-qualified stock options, we did not collect and remit the employee’s income and payroll taxes on the exercises and did not accrue and remit the employer portion of payroll taxes. Due to statutory requirements, we have joint and several liability on the amounts that we did not withhold from employees and remit to the proper taxing authorities. While further investigating the issue, we determined that during 2018 we did not report the correct amount of income to employees on their form W-2 for both non-qualified and incentive stock option exercises and misclassified some non-qualified stock option exercises as incentive stock option exercises.
| |
◦ | For the three and nine months ended September 30, 2018 and year ended December 31, 2018, the total aggregated impact included an increase of approximately $51,000 to operating expenses, an increase of approximately $713,000 to other losses and an increase to net loss of approximately $764,000. |
Other minor items primarily related to the appropriate cutoff of transactions at the balance sheet date and the duplicate recording of a State income tax payment.
| |
◦ | For the three and nine months ended September 30, 2018, the total aggregated impact included an increase of approximately $59,000 to operating expenses, operating loss and net loss. |
A reconciliation of the originally reported amounts to the restated amounts for the adjustments noted above for each of the affected periods is presented below.
APYX MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Consolidated Balance Sheet as of September 30, 2018:
|
| | | | | | | | | | | |
(In thousands) | As Originally Reported | | Adjustments | | As Restated |
ASSETS | | | | | |
Current assets: | | | | | |
Cash and cash equivalents | $ | 40,663 |
| | $ | — |
| | $ | 40,663 |
|
Short term investments | 55,480 |
| | — |
| | 55,480 |
|
Trade accounts receivable, net | 4,080 |
| | 59 |
| | 4,139 |
|
Inventories, net | 6,037 |
| | — |
| | 6,037 |
|
Prepaid expenses and other current assets | 627 |
| | — |
| | 627 |
|
Total current assets | 106,887 |
| | 59 |
| | 106,946 |
|
Property and equipment, net | 5,842 |
| | — |
| | 5,842 |
|
Purchased technology and license rights, net | 32 |
| | — |
| | 32 |
|
Goodwill | 185 |
| | — |
| | 185 |
|
Deposits | 46 |
| | — |
| | 46 |
|
Other assets | 122 |
| | — |
| | 122 |
|
Total assets | $ | 113,114 |
| | $ | 59 |
| | $ | 113,173 |
|
| | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | |
Current liabilities: | | | | | |
Accounts payable | $ | 2,348 |
| | $ | — |
| | $ | 2,348 |
|
Accrued severance and related | 95 |
| | — |
| | 95 |
|
Accrued payroll | 163 |
| | — |
| | 163 |
|
Accrued expenses and other current liabilities | 19,066 |
| | 764 |
| | 19,830 |
|
Total current liabilities | 21,672 |
| | 764 |
| | 22,436 |
|
Related party note payable | 140 |
| | — |
| | 140 |
|
Total liabilities | 21,812 |
| | 764 |
| | 22,576 |
|
STOCKHOLDERS' EQUITY | | | | | |
Common stock, $0.001 par value; 75,000,000 shares authorized; 33,763,019 issued and 33,620,444 outstanding | 33 |
| | — |
| | 33 |
|
Additional paid-in capital | 51,798 |
| | — |
| | 51,798 |
|
Retained earnings | 39,471 |
| | (705 | ) | | 38,766 |
|
Total stockholders’ equity | 91,302 |
| | (705 | ) | | 90,597 |
|
Total liabilities and stockholders’ equity | $ | 113,114 |
| | $ | 59 |
| | $ | 113,173 |
|
APYX MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Consolidated Statement of Operations for the three months ended September 30, 2018:
|
| | | | | | | | | | | |
(In thousands) | As Originally Reported | | Adjustments | | As Restated |
Sales | $ | 3,672 |
| | $ | — |
| | $ | 3,672 |
|
Cost of sales | 1,151 |
| | — |
| | 1,151 |
|
Gross profit | 2,521 |
| | — |
| | 2,521 |
|
Other costs and expenses: | | | | | |
Research and development | 613 |
| | — |
| | 613 |
|
Professional services | 628 |
| | — |
| | 628 |
|
Salaries and related costs | 2,119 |
| | 51 |
| | 2,170 |
|
Selling, general and administrative | 1,957 |
| | (59 | ) | | 1,898 |
|
Total other costs and expenses | 5,317 |
| | (8 | ) | | 5,309 |
|
Loss from operations | (2,796 | ) | | 8 |
| | (2,788 | ) |
Interest income (expense), net | 105 |
| | — |
| | 105 |
|
Other losses | (155 | ) | | (713 | ) | | (868 | ) |
Total other losses, net | (50 | ) | | (713 | ) | | (763 | ) |
Loss from continuing operations before income taxes | (2,846 | ) | | (705 | ) | | (3,551 | ) |
Income tax benefit | (2,408 | ) | | — |
| | (2,408 | ) |
Net loss from continuing operations | (438 | ) | | (705 | ) | | (1,143 | ) |
Income from discontinued operations, net of tax | 540 |
| | — |
| | 540 |
|
Gain on sale of the Core Business, net of tax | 69,072 |
| | — |
| | 69,072 |
|
Total income from discontinued operations, net of tax | 69,612 |
| | — |
| | 69,612 |
|
Net income (loss) | $ | 69,174 |
| | $ | (705 | ) | | $ | 68,469 |
|
| | | | | |
Loss per share from continuing operations | | | | | |
Basic and Diluted | $ | (0.01 | ) | | $ | (0.02 | ) | | $ | (0.03 | ) |
| | | | | |
Income per share from discontinued operations | | | | | |
Basic | 2.09 |
| | — |
| | 2.09 |
|
Diluted | 1.99 |
| | — |
| | 1.99 |
|
| | | | | |
Income (loss) per share from all operations | | | | | |
Basic | 2.08 |
| | (0.02 | ) | | 2.06 |
|
Diluted | 1.98 |
| | (0.02 | ) | | 1.96 |
|
| | | | | |
Weighted average number of shares outstanding basic | 33,275 |
| | 33,275 |
| | 33,275 |
|
Weighted average number of shares outstanding diluted | 34,934 |
| | 34,934 |
| | 34,934 |
|
APYX MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Consolidated Statement of Operations for the nine months ended September 30, 2018:
|
| | | | | | | | | | | |
(In thousands) | As Originally Reported | | Adjustments | | As Restated |
Sales | $ | 10,760 |
| | $ | — |
| | $ | 10,760 |
|
Cost of sales | 3,490 |
| | — |
| | 3,490 |
|
Gross profit | 7,270 |
| | — |
| | 7,270 |
|
Other costs and expenses: | | | | | |
Research and development | 1,890 |
| | — |
| | 1,890 |
|
Professional services | 1,815 |
| | — |
| | 1,815 |
|
Salaries and related costs | 5,734 |
| | 51 |
| | 5,785 |
|
Selling, general and administrative | 6,280 |
| | (59 | ) | | 6,221 |
|
Total other costs and expenses | 15,719 |
| | (8 | ) | | 15,711 |
|
Loss from operations | (8,449 | ) | | 8 |
| | (8,441 | ) |
Interest income (expense), net | 33 |
| | — |
| | 33 |
|
Other losses | (155 | ) | | (713 | ) | | (868 | ) |
Change in fair value of derivative liabilities | 20 |
| | — |
| | 20 |
|
Total other losses, net | (102 | ) | | (713 | ) | | (815 | ) |
Loss from continuing operations before income taxes | (8,551 | ) | | (705 | ) | | (9,256 | ) |
Income tax benefit | (2,384 | ) | | — |
| | (2,384 | ) |
Net loss from continuing operations | (6,167 | ) | | (705 | ) | | (6,872 | ) |
Income from discontinued operations, net of tax | 5,062 |
| | — |
| | 5,062 |
|
Gain on sale of the Core Business, net of tax | 69,072 |
| | — |
| | 69,072 |
|
Total income from discontinued operations, net of tax | 74,134 |
| | — |
| | 74,134 |
|
Net income (loss) | $ | 67,967 |
| | $ | (705 | ) | | $ | 67,262 |
|
| | | | | |
Loss per share from continuing operations | | | | | |
Basic and Diluted | $ | (0.19 | ) | | $ | (0.02 | ) | | $ | (0.21 | ) |
| | | | | |
Income per share from discontinued operations | | | | | |
Basic | 2.25 |
| | — |
| | 2.25 |
|
Diluted | 2.19 |
| | — |
| | 2.19 |
|
| | | | | |
Income (loss) per share from all operations | | | | | |
Basic | 2.06 |
| | (0.02 | ) | | 2.04 |
|
Diluted | 2.00 |
| | (0.02 | ) | | 1.98 |
|
| | | | | |
Weighted average number of shares outstanding basic | 33,014 |
| | 33,014 |
| | 33,014 |
|
Weighted average number of shares outstanding diluted | 33,952 |
| | 33,952 |
| | 33,952 |
|
NOTE 3. DISPOSITION OF THE CORE BUSINESS
On August 30, 2018, we closed on a previously disclosed definitive 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.
APYX MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
In connection with the asset purchase agreement, we entered into a previously disclosed Electro Surgical Disposables and Accessories, Cauteries and Other Products Supply Agreement with Symmetry for a four-year term, whereby we will manufacture certain Core products and sell them to Symmetry at agreed upon prices. Any revenue, costs and expenses resulting from this agreement are netted and reported in our Consolidated Statements of Operations as Other gains or losses.
Additionally, in connection with the asset purchase agreement, we entered into a previously disclosed Manufacture and Supply Agreement with Symmetry for a ten-year term, whereby we will manufacture certain products and sell them to Symmetry at agreed upon prices. Revenue, costs and expenses resulting from this agreement are reported in our Consolidated Statements as income or loss from operations of our OEM reporting segment.
We concluded that the divestiture of the Core business met the criteria for discontinued operations set forth in ASC No. 205, Presentation of Financial Statements. The table below summarizes the cash consideration and the carrying values of disposed assets at the disposition date of August 30, 2018 included as part of discontinued operations:
|
| | | |
(In thousands) | |
Gross consideration from the sale of the Core Business | $ | 97,000 |
|
Closing and transaction costs | 5,905 |
|
Net proceeds from sale of the Core Business before taxes | $ | 91,095 |
|
| |
Book value of the Core Business | |
Current assets: | |
Inventories, net | 2,195 |
|
Prepaid expenses and other current assets | 57 |
|
Total current assets | 2,252 |
|
Property and equipment, net of depreciation | 375 |
|
Brand name and trademark | 1,510 |
|
Purchased technology and license rights, net of depreciation | 112 |
|
Total non-current assets | 1,997 |
|
Total assets | $ | 4,249 |
|
| |
Current liabilities: | |
Accrued inventory liability | 2,305 |
|
Total current liabilities | 2,305 |
|
Total book value of the Core Business | $ | 6,554 |
|
| |
Net gain on sale of the Core Business before taxes | 84,541 |
|
Income tax expense | 15,469 |
|
Net gain on sale of the Core Business after income taxes | $ | 69,072 |
|
NOTE 4. INVENTORIES
Inventories are stated at the lower of cost or net realizable values.market. Cost is determined on a first in, first out basis. Finished goods and work-in-process inventories include material, labor and overhead costs. Factory overhead costs are allocated to inventory manufactured in-house based upon labor hours.
Inventories consisted of the following:
APYX MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
| | (In thousands) | June 30, 2019 | | December 31, 2018 | September 30, 2018 | | December 31, 2017 |
Raw materials | $ | 5,341 |
| | $ | 4,521 |
| $ | 5,032 |
| | $ | 5,163 |
|
Finished goods and work in progress | 1,453 |
| | 1,130 |
| |
Finished goods | | 1,998 |
| | 1,024 |
|
Gross inventories | 6,794 |
| | 5,651 |
| 7,030 |
| | 6,187 |
|
Less: reserve for obsolescence | (402 | ) | | (439 | ) | (993 | ) | | (1,913 | ) |
Net inventories | $ | 6,392 |
| | $ | 5,212 |
| |
Net inventories of continuing operations | | 6,037 |
| | 4,274 |
|
Finished goods of discontinued operations | | — |
| | 2,252 |
|
Net inventories of continuing and discontinued operations | | $ | 6,037 |
| | $ | 6,526 |
|
APYX MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
NOTE 3.5. INTANGIBLE ASSETS
Intangible assets consisted of the following:
| | (in thousands) | June 30, 2019 | December 31, 2018 | |
(In thousands) | | September 30, 2018 | | December 31, 2017 |
Brand name and trademark (life indefinite) of discontinued operations | | $ | — |
| | $ | 1,510 |
|
| | | | |
Purchased technology (5-17 year lives) | $ | 1,442 |
| $ | 1,448 |
| $ | 1,447 |
| | $ | 1,401 |
|
Purchased technology (5-17 year lives) of discontinued operations, net | | — |
| | 112 |
|
Less: accumulated amortization | (1,442 | ) | (1,442 | ) | (1,415 | ) | | (1,334 | ) |
Purchased technology, net | $ | — |
| $ | 6 |
| $ | 32 |
| | $ | 179 |
|
| | | | |
Goodwill | $ | 185 |
| $ | 185 |
| $ | 185 |
| | $ | 185 |
|
Intangibles | $ | 185 |
| $ | 191 |
| |
Intangible assetsThe Bovie brand name and goodwill aretrademarks were included in the result ofdefinitive asset purchase agreement with Specialty Surgical Instrumentation Inc., as previously disclosed.
Goodwill results from our acquisition of Apyx (formerly known as Bovie)Bovie Bulgaria, EOODEOOD.
Amortization of purchased technology was $27,000 and $81,000 for the three and nine months ended September 30, 2018 and 2017, respectively. Amortization expense is classified within selling, general and administration expenses in 2015.the consolidated statements of operations.
NOTE 4.6. RECENT ACCOUNTING PRONOUNCEMENTS
In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The purpose of this ASU is to reduce the cost and complexity of evaluating goodwill for impairment. It eliminates the need for entities to calculate the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. Under this ASU, an entity will perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge is recognized for the amount by which the carrying value exceeds the reporting unit’s fair value. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted, however we have chosen not to do so. The amendment willis not expected to have a material impact on our financial condition or results of operations.
ASU No. 2016-18, Restricted Cash Flows provides guidance on the presentation of restricted cash and restricted cash equivalents, which are now included with cash and cash equivalents when reconciling the beginning and ending cash amounts shown on the statements of cash flows. Using the retrospective transition method required under the standard, the Company has adjusted the presentation of its Condensed Consolidated Statements of Cash Flows for all periods presented. The adoption of ASU No. 2016-18 did not have any other impact on the Company’s Consolidated Financial Statements.
The following table provides additional detail by financial statement line item of the ASU 2016-18 impact in our Consolidated Statement of Cash Flows for the nine months ended September 30, 2017:
|
| | | | | | | | | | | |
(In thousands) | As Reported (Pre-Adoption) | | ASU 2016-18 Impact | | Reported (Post Adoption) |
Nine Months Ended September 30, 2017 | | | | | |
Net change in cash, cash equivalents and restricted cash | $ | (5,045 | ) | | $ | — |
| | $ | (5,045 | ) |
Cash, cash equivalents and restricted cash, beginning of period | 14,456 |
| | 779 |
| | 15,235 |
|
Cash, cash equivalents and restricted cash, end of period | $ | 9,411 |
| | $ | 779 |
| | $ | 10,190 |
|
APYX MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
ASU No. 2014-09 (ASC 606), Revenue from Contracts with Customers became effective for us beginning with the first quarter of 2018, and we adopted the new accounting standard using the modified retrospective transition approach. The modified retrospective transition approach recognized any changes from the beginning of the year of initial application through retained earnings with no restatement of comparative periods. We record revenue under ASC 606 at a single point in time, when control is transferred to the customer, which is consistent with past practice. We will continue to apply our current business processes, policies, systems and controls to support recognition and disclosure under the new standard. Based on the results of the evaluation, we have determined that the adoption of the new standard presents no material impact on our consolidated financial statements. Application of the transition requirements of the new standard did not have a material impact on opening retained earnings. We have disaggregated revenue by segment and geography in Note 1114 Geographic and Segment Information. Based on the current state of our business, management does not see a material reason to disaggregate further.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02 (ASU 2016-02), Leases (Topic 842), which became effective for us beginning with the first quarter of 2019. ASU 2016-02 requires a lessee to record a right-of-use asset and a corresponding lease liability, initially measured at the present value of the lease payments, on the balance sheet for all leases with terms longer than 12 months, as well as the disclosure of key information about leasing arrangements. This new standard requires recognition in the statement of operations of a single lease cost, calculated so that the cost of the lease is allocated over the lease term, generally on a straight-line basis, and classification of all cash payments within operating activities in the statement of cash flows. The determination of the discount rate used to calculate net present value is based on what we would normally pay to borrow on a collateralized basis over a similar term. Disclosures are required to provide the amount, timing and uncertainty of cash flows arising from leases. In accordance with the standard, we took a modified retrospective transition approach and included the $394,000 right of use asset and corresponding liabilities in our property plant and equipment, accrued expenses and long term lease liability on the consolidated balance sheet. The lease is also represented in our consolidated statement of cash flows as a non-cash investing activity.
No other new accounting pronouncement issued or effective during the fiscal year had or is expected to have a material impact on our consolidated financial statements or disclosures.
APYX MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
NOTE 5.7. EARNINGS PER SHARE
We compute basic earnings per share (“basic EPS”) by dividing the net income or loss by the weighted average number of common shares outstanding for the reporting period. Diluted earnings per share (“diluted EPS”) gives effect to all dilutive potential shares outstanding. The following table provides the computation of basic and diluted earnings per share.
|
| | | | | | | |
| Six Months Ended June 30, |
(in thousands, except per share data) | 2019 | | 2018 |
Numerator: | | | |
Net (loss) from continuing operations | $ | (9,019 | ) | | $ | (5,729 | ) |
Numerator for diluted (loss) per common share - continuing operations | (9,019 | ) | | (5,729 | ) |
| | | |
Net income from discontinued operations, net of tax | — |
| | 4,522 |
|
Numerator for diluted income per share - discontinued operations | — |
| | 4,522 |
|
| | | |
Net (loss) from all operations | (9,019 | ) | | (1,207 | ) |
Numerator for full diluted (loss) per share - all | (9,019 | ) | | (1,207 | ) |
| | | |
Denominator - continuing operations | | | |
Weighted average shares used to compute basic (loss) | 33,363 |
| | 32,890 |
|
Denominator for diluted (loss) per common share | 33,363 |
| | 32,890 |
|
| | | |
Denominator - discontinued operations: | | | |
Weighted average shares used to compute basic (loss) | — |
| | 32,890 |
|
Denominator for diluted (loss) per common share - discontinued operations | — |
| | 32,890 |
|
| | | |
Denominator - all operations: | | | |
Weighted average shares used to compute basic (loss) | 33,363 |
| | 32,890 |
|
Denominator for diluted (loss) per common share | 33,363 |
| | 32,890 |
|
| | | |
Loss per share from continuing operations: | | | |
Basic and diluted | $ | (0.27 | ) | | $ | (0.17 | ) |
| | | |
Income per share from discontinued operations | | | |
Basic and diluted | $ | — |
| | $ | 0.13 |
|
| | | |
Income per share from all operations | | | |
Basic and diluted | $ | (0.27 | ) | | $ | (0.04 | ) |
| | | |
Anti-dilutive instruments excluded from diluted loss per common share: | | | |
Warrants | — |
| | 14 |
|
Options | 1,882 |
| | 1,061 |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(in thousands, except per share data) | 2018 as Restated | | 2017 | | 2018 as Restated | | 2017 |
Numerator: | | | | | | | |
Net loss from continuing operations | $ | (1,143 | ) | | $ | (2,944 | ) | | $ | (6,872 | ) | | $ | (10,709 | ) |
Total income from discontinued operations, net of tax | 69,612 |
| | 1,699 |
| | 74,134 |
| | 6,471 |
|
Net income (loss) | $ | 68,469 |
| | $ | (1,245 | ) | | $ | 67,262 |
| | $ | (4,238 | ) |
| | | | | | | |
Denominator: | | | | | | | |
Weighted average shares used to compute basic income (loss) | 33,275 |
| | 31,078 |
| | 33,014 |
| | 30,932 |
|
Effect of dilutive securities: | | | | | | | |
Stock options | 1,659 |
| | — |
| | 938 |
| | — |
|
Denominator for dilutive income (loss) per share | 34,934 |
| | 31,078 |
| | 33,952 |
| | 30,932 |
|
| | | | | | | |
Loss per share from continuing operations | | | | | | | |
Basic | $ | (0.03 | ) | | $ | (0.09 | ) | | $ | (0.21 | ) | | $ | (0.35 | ) |
Diluted | $ | (0.03 | ) | | $ | (0.09 | ) | | $ | (0.21 | ) | | $ | (0.35 | ) |
| | | | | | | |
Income per share from discontinued operations | | | | | | | |
Basic | $ | 2.09 |
| | $ | 0.05 |
| | $ | 2.25 |
| | $ | 0.21 |
|
Diluted | $ | 1.99 |
| | $ | 0.05 |
| | $ | 2.19 |
| | $ | 0.21 |
|
| | | | | | | |
Income (loss) per share | | | | | | | |
Basic | $ | 2.06 |
| | $ | (0.04 | ) | | $ | 2.04 |
| | $ | (0.14 | ) |
Diluted | $ | 1.96 |
| | $ | (0.04 | ) | | $ | 1.98 |
| | $ | (0.14 | ) |
| | | | | | | |
Anti-dilutive instruments excluded from diluted loss per common share: | | | | | | | |
Warrants | — |
| | 7 |
| | — |
| | 13 |
|
Options | — |
| | 373 |
| | — |
| | 771 |
|
APYX MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
NOTE 6.8. STOCK-BASED COMPENSATION
Under our stock option plans, our board of directors may grant options to purchase common shares to our key employees, officers, directors and consultants. We account for stock options in accordance with FASB ASC Topic 718, Compensation - Stock Compensation, with option expense amortized over the vesting period based on the trinomial lattice option-pricing model fair value on the grant date, which includes a number of estimates that affect the amount of our expense. We expensed approximately $1,715,000$489,000 and $1,238,000 in stock-based compensation during the sixthree and nine months ended JuneSeptember 30, 2019,2018, respectively, as compared with $749,000$191,000 and $532,000 for the sixthree and nine months ended JuneSeptember 30, 2018.2017, respectively.
The status of our stock options and stock awards are summarized as follows:
| | | Number of options | | Weighted average exercise price | Number of options - as Restated | | Weighted average exercise price - as Restated |
Outstanding at December 31, 2018 | 3,480,701 |
| | $ | 3.10 |
| |
Outstanding at December 31, 2017 | | 4,634,235 |
| | $ | 3.10 |
|
Granted | 1,277,500 |
| | 7.73 |
| 225,000 |
| | 4.08 |
|
Exercised | (308,549 | ) | | 2.87 |
| (1,277,615 | ) | | 2.43 |
|
Canceled and forfeited | (50,500 | ) | | 6.70 |
| (225,841 | ) | | 5.62 |
|
Outstanding at June 30, 2019 | 4,399,152 |
| | $ | 4.42 |
| |
Outstanding at September 30, 2018 | | 3,581,701 |
| | $ | 3.25 |
|
Common shares required to be issued upon the exercise of stock options and warrants would be issued from our authorized and unissued shares. We calculated the fair value of issued options utilizing a trinomial lattice with an expected life calculated via the simplified method as we do not have sufficient history to determine actual expected life.
| | | 2019 Grants | 2018 Grants |
Option value | $ | 7.15 |
| - | $ | 7.91 |
| $ | 1.46 |
| - | $ | 3.07 |
|
Risk-free rate | 2.6% | - | 2.6 | % | 1.9% | - | 2.5 | % |
Expected dividend yield | — | — |
Expected volatility | 69.1% | - | 69.1 | % | 60.9% | - | 68.8 | % |
Expected term (in years) | 6 | 6 |
NOTE 7.9. INCOME TAXES
The Company’s income tax expense (benefit)benefit from continuing operations was $76,000$2.4 million and $(48,000)$2.4 million with an effective tax rate of -1.7%67.8% and 0.3%25.8% for the three and sixnine months ended JuneSeptember 30, 2019,2018, respectively, as compared to an expense of $13,000,$6,000 and $24,000$15,000 with an effective tax rate of -3.2% and -1.8%,0.0% for the three and sixnine months ended JuneSeptember 30, 2017, respectively. The increase in the Company’s tax rate for the three and nine months ended September 30, 2018 as compared to the three months and nine months ended September 30, 2017, is primarily due to the Company’s ability to offset the 2018 operating loss from continuing operations against the taxable income generated by the extraordinary gain recognized by the income and asset sale reflected in discontinued operations.
The Company recognized tax expense of $0.3 million and $1.2 million within net income from discontinued operations for the three and nine months ended September 30, 2018, respectively. The Company recognized tax expense of $13.2 million and $15.5 million within the gain on sale of the Core Business for the three and nine months ended September 30, 2018, respectively.
The following is a roll-forwardManagement expects the gain from the sale of the Company's total gross unrecognizedCore business segment to Symmetry will utilize substantially all of the historical Federal net operating loss carryover of $24.7 million, state(s) net operating loss carryover of $21.2 million, and research and development credit carryover of $1.3 million. As a result, the valuation allowance on these deferred tax benefits, not including interestassets was released during the third quarter of 2018 and penalties,the Company recorded a tax benefit of $7.8 million from the release of the valuation allowance. The tax benefit of $7.8 million is netted against the tax expenses within net income from discontinued operations and within the gain from asset sales. Pursuant to guidance under ASC 740, for the periodnine months ended JuneSeptember 30, 2019.2018, continuing operations includes a current benefit of $2.4 million, which reflects the Company’s ability to fully utilize the net operating loss expected to be generated from continuing operations in the 2018 tax year.
|
| | | |
(in thousands) | Gross Unrealized Tax Benefits |
Balance at January 1, 2019 | $ | 1,313 |
|
Additions of tax positions related to the current year | — |
|
Additions of tax positions related to the prior year | — |
|
Decreases for tax positions related to the prior year | — |
|
Balance at June 30, 2019 | $ | 1,313 |
|
The Company recognizes accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes in the Company’s condensed consolidated financial statements. As of June 30, 2019, the Company had approximately $53,000 in accrued interest and penalties related to unrecognized tax benefits. If the Company were to prevail on all uncertain tax positions, the resulting impact will be material as the Company will recognize $1.366 million of tax benefits in the provision of income taxes. It is ex
APYX MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
pectedAs a result of historical losses, exclusive of discontinued operations, the Company recorded a valuation allowance on the net deferred tax asset with a finite life and does not anticipate recording an income tax benefit related to these deferred tax assets beyond the 2018 tax year. The Company will reassess the realization of deferred tax assets each reporting period and will be able to reduce the valuation allowance to the extent the financial results of continuing operations improve and it becomes more likely than not that allthe deferred tax assets will be realizable. As Management expects the Company to continue to generate loss in the foreseeable future after 2018, the Company will continue to record a valuation allowance on the remaining deferred tax assets at the end of the uncertain tax positions should be resolved by December 31, 2019.
2018.
NOTE 8.10. COMMITMENTS AND CONTINGENCIES
Property and Rental Agreements
In March 2014, we signed a lease for offices located in Purchase, New York. In December 2017, we decided to consolidate operations in the Purchase, NY office with the facility in Clearwater, Florida. Based on this, we determined the office in Purchase, NY was no longer necessary and decided to cease all activity at the location. In August 2018 we negotiated a termination of the remainder of the lease, releasing us from any future obligation.
In October 2015, pursuant to our acquisition of ApyxBovie Bulgaria, we becameare obligated to makepay a lease payments of approximately $9,000$5,980 per month, expiring in December 2021, for approximately 20,00018,745 square feet of office, research and manufacturing space in Sofia, Bulgaria. During Q2 2019, the lease was extended for an additional 2 years. The building lease expires in December 2022.
With the adoption of ASC 842 we recognize all leases with terms greater than twelve months in duration on our Consolidated Balance Sheet as right-of-use assets and lease liabilities. The Apyx Bulgaria building lease is disclosed as a right-of-use asset and is included in the property, plant, and equipment totals on the Consolidated Balance Sheet.
The following is a schedule of approximate future minimum lease payments under operating leases as of JuneSeptember 30, 2019:2018:
| | (In thousands) | | |
2019 (remaining 6 months) | $ | 56 |
| |
2018 (remaining three months) | | $ | 18 |
|
2019 | | 72 |
|
2020 | 111 |
| 72 |
|
2021 | 118 |
| 72 |
|
2022 | 118 |
| |
Total | $ | 403 |
| $ | 234 |
|
On August 30, 2018, wethe Company paid the remaining mortgage balance of $2.5 million, on the Clearwater facility, releasing us from any and all obligations to the Bank of Tampa.
Litigation
The medical device industry is characterized by frequent claims and litigation, and we are and may become subject to various claims, lawsuits and proceedings in the ordinary course of our business, including claims by current or former employees, distributors and competitors, and with respect to our products and product liability claims, lawsuits and proceedings.
We are involved in a number of legal actions relating to the use of our J-Plasma® technology. The outcomes of these legal actions are not within our complete control and may not be known for prolonged periods of time. In the opinion of management, the Company has meritorious defenses, and such claims are adequately covered by insurance, or are not expected, individually or in the aggregate, to result in a material, adverse effect on our financial condition. However, in the event that damages exceed the aggregate coverage limits of our policy or if our insurance carriers disclaim coverage, we believe it is possible that costs associated with these claims could have a material adverse impact on our consolidated earnings, financial position or cash flows.
In addition, as previously disclosed with the Commission on Form 8-K filed April 26, 2019, we have learned that on April 17, 2019, a complaint (the “Complaint”) was filed in the United States District Court for the Middle District of Florida by plaintiff Kyle Pritchard, individually and on behalf of all others similarly situated against the Company and Charles D. Goodwin (“Goodwin”), the Company’s President and Chief Executive Officer and a member of the Company’s Board of Directors.
The Complaint (which as of the date hereof has not been delivered through formal process to the Company) seeks class action status on behalf of all persons and entities that acquired the Company’s securities between August 1, 2018 and April 1, 2019 and alleges violations by the Company and Goodwin of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, primarily related to certain public statements concerning the Premarket Notification 510(k) submission made to the US Food and Drug Administration for a new indication for the Company’s J-Plasma® technology for use in dermal resurfacing procedures. The Complaint seeks an unspecified amount of compensatory damages, an award of interest, reasonable attorneys’ fees, expert fees and other costs, and equitable relief as the court may deem just and proper. On July 16, 2019, the court appointed a lead plaintiff for the putative class and approved the lead plaintiff’s selection of counsel.
Although the ultimate outcome of this matter cannot be determined with certainty, the Company believes that the allegations stated in the Complaint are entirely without merit. The Company and Goodwin intend to defend themselves vigorously in the suit. Such claims are adequately covered by insurance, however, in the event that damages exceed the aggregate coverage limits of our policy or if our insurance carriers disclaim coverage, we believe it is possible that costs associated with this claim could have a material adverse impact on our consolidated earnings, financial position or cash flows. Under the deductible portion of our insurance coverage, we have accrued $0.5 million for initial defense costs.
In accordance with authoritative guidance, we accrue a liability in our consolidated financial statements for these actions when a loss is known or considered probable and the amount can be reasonably estimated. If the reasonable estimate of a known or probable loss is a range, and no amount within the range is a better estimate than any other, the minimum amount of the range is recorded. If a loss is reasonably possible, but not known or probable, and can be reasonably estimated, the estimated loss or range of loss is disclosed in the notes to the consolidated financial statements. In most cases, significant judgment is required to estimate the amount and timing of a loss to be recorded, actual results may differ from these estimates.
Purchase Commitments
At JuneSeptember 30, 2019,2018, we had purchase commitments for inventories totaling approximately $3.4$5.4 million, substantially all of which is expected to be purchased by the end of 2019.2018.
In responseOur manufacturing services agreements requires Symmetry to the current worldwide helium shortage, to support our current and near term customer requirements, we issued purchase orders with two international companies to supplyprovide us with helium cylinders and have entered into agreementsa twelve-month rolling production forecast, of which four months are binding, non-cancelable orders, subject to purchase additional helium as needed. We also currently maintain our own supply of helium in the United States which can be utilized for our customer requirements.
certain termination rights.
APYX MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
NOTE 9.11. RELATED PARTY TRANSACTIONS
Several relatives of Nikolay Shilev, ApyxBovie Bulgaria’s Managing Director, are considered related parties. Teodora Shileva, Mr. Shilev’s spouse, is an employee of the Company working in the Accounting department. Antoaneta Dimitrova Shileva-Toromanova, Mr. Shilev’s sister, is the Manager of Production and Human Resources. Svetoslav Shilev, Mr. Shilev’s son, is an Engineer in the Quality Assurance department.
In addition, as part of the purchase of the Bulgaria manufacturing facility, Mr. Shilev was issued a note payable for $140 thousand to be paid 5 years after the original purchase date which is in October 2020.
NOTE 10.12. FINANCIAL INSTRUMENTS
Cash, Cash Equivalents and Marketable Securities at June 30, 2019, consists of $3.5 million in cash and $63.9 million in US Treasury Securities with maturities of 3 months or less.
Cash, Cash Equivalents and Marketable Securities at December 31, 2018:
Securities:
| | (In thousands) | Adjusted Cost | | Unrealized Gains | | Fair Value(3) | | Cash and Cash Equivalents (1) | | Short-term Marketable Securities | Adjusted Cost | | Unrealized Gains | | Fair Value(3) | | Cash and Cash Equivalents (1) | | Short-term Marketable Securities |
Cash | $ | 6,337 |
| | $ | — |
| | $ | 6,337 |
| | $ | 6,337 |
| | $ | — |
| $ | 5,774 |
| | $ | — |
| | $ | 5,774 |
| | $ | 5,774 |
| | $ | — |
|
| | | | | | | | | | | | | | | | | | |
Level 1 (2) | | | | | | | | | | | | | | | | | | |
U.S. Treasury Securities, maturities less than three months | 10,129 |
| | — |
| | 10,129 |
| | 10,129 |
| | — |
| $ | 34,889 |
| | $ | — |
| | $ | 34,889 |
| | $ | 34,889 |
| | $ | — |
|
U.S. Treasury Securities, maturities greater than three months | 61,431 |
| | 247 |
| | 61,678 |
| | — |
| | 61,678 |
| $ | 55,433 |
| | $ | 47 |
| | $ | 55,480 |
| | $ | — |
| | $ | 55,480 |
|
Total | $ | 77,897 |
| | $ | 247 |
| | $ | 78,144 |
| | $ | 16,466 |
| | $ | 61,678 |
| $ | 96,096 |
| | $ | 47 |
| | $ | 96,143 |
| | $ | 40,663 |
| | $ | 55,480 |
|
(1) The Companycompany considers all highly liquid instruments with maturities of three months or less at the time of purchase to be cash equivalents.
(2) The fair value of the debt securities consisting of U.S. Treasury bills is based on their quoted market prices. The fair value of these financial instruments are classified as Level 1 in the fair value hierarchy. The original purchase of U.S. Treasury bills occurred in September 2018, utilizing the proceeds from the sale of our Core business.
(3) ASC 825-10, Financial Instruments, allows entities to voluntarily choose to measure certain financial assets and liabilities at fair value (fair value option). The fair value option may be elected on an instrument-by-instrument basis and is irrevocable, unless a new election date occurs. If the fair value option is elected for an instrument, unrealized gains and losses for that instrument should be reported in earnings within interest income at each subsequent reporting date. At the date of purchase, the Company elected the fair value option for all investments with maturities of three months or greater at the time of purchase.
NOTE 13. LONG TERM DEBT
On June 28, 2016, the Company entered into a transaction with Bank of Tampa, a Florida banking corporation (“Lender”), wherein Lender amended the terms of a mortgage loan (“the Loan”) originally executed on March 20, 2014 with a principal amount of $3,592,000. The Initial Maturity Date of the Loan was extended to July 20, 2019 from March 19, 2017, and the Extended Maturity Date was amended to July 20, 2024 from March 20, 2022.
On August 30, 2018, the Company paid the remaining mortgage balance of $2.5 million, releasing us from any and all obligations to the Bank of Tampa.
APYX MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
NOTE 11.13. GEOGRAPHIC AND SEGMENT INFORMATION
Operating segments are aggregated into reportable segments only if they exhibit similar economic characteristics. In addition to similar economic characteristics, we also consider the following factors in determining the reportable segments: the nature of business activities, the management structure directly accountable to our chief operating decision maker for operating and administrative activities, availability of discrete financial information and information presented to the Board of Directors and investors.
Our reportable segments are disclosed as principally organized and managed astwo three operating segments: Advanced Energy, OEM and OEM. "CorporateCorporate & Other"Other. The Corporate & Other category includes certain unallocated corporate and administrative costs which were not specifically attributed to any reportable segment. Net assets are shared, therefore, not allocated to the reportable segments. The OEM segment is primarily development and manufacturing contract and product driven, all related expenses are recorded as cost of sales, therefore no segment specific operating expenses are incurred. Income (loss) from continuing operations for the first quarter of 2019 was labeled "Net income" instead of "Income (loss) from continuing operations". As a result, income (loss) from continuing operations for the first quarter of 2019 was $(3.4) million for Advanced Energy, $0.8 million for OEM, $(2.6) million for Corporate, and $(5.2) million in total.
Summarized financial information with respect to reportable segments is as follows:
| | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2019 | Three Months Ended September 30, 2018 - as Restated |
(In thousands) | Advanced Energy | | OEM | | Corporate & Other | | Total | Advanced Energy | | OEM | | Corporate & Other | | Total |
Sales | $ | 5,269 |
| | $ | 1,299 |
| | $ | — |
| | $ | 6,568 |
| $ | 2,985 |
| | $ | 687 |
| | $ | — |
| | $ | 3,672 |
|
| | | | | | | | | | | | | | |
Income (loss) from continuing operations | (1,011 | ) | | 136 |
| | (3,590 | ) | | (4,465 | ) | |
(Loss) income from operations | | (1,155 | ) | | 368 |
| | (2,001 | ) | | (2,788 | ) |
| | | | | | | | | | | | | | |
Interest income | — |
| | — |
| | 403 |
| | 403 |
| |
Interest income, net | | — |
| | — |
| | 105 |
| | 105 |
|
Other losses | — |
| | — |
| | (200 | ) | | (200 | ) | — |
| | — |
| | (868 | ) | | (868 | ) |
Income tax (benefit) expense | — |
| | — |
| | 76 |
| | 76 |
| |
Income tax benefit | | — |
| | — |
| | (2,408 | ) | | (2,408 | ) |
Depreciation and amortization | | — |
| | — |
| | 58 |
| | 58 |
|
| | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2018 | Three Months Ended September 30, 2017 |
(In thousands) | Advanced Energy | | OEM | | Corporate & Other | | Total | Advanced Energy | | OEM | | Corporate & Other | | Total |
Sales | $ | 3,113 |
| | $ | 578 |
| | $ | — |
| | $ | 3,691 |
| $ | 2,126 |
| | $ | 525 |
| | $ | — |
| | $ | 2,651 |
|
| | | | | | | | | | | | | | |
Income (loss) from continuing operations | (792 | ) | | 302 |
| | (2,443 | ) | | (2,933 | ) | |
(Loss) income from operations | | (718 | ) | | 323 |
| | (2,438 | ) | | (2,833 | ) |
| | | | | | | | | | | | | | |
Interest expense | — |
| | — |
| | (38 | ) | | (38 | ) | |
Interest expense, net | | — |
| | — |
| | (36 | ) | | (36 | ) |
Change in fair value of derivative liabilities | — |
| | — |
| | 46 |
| | 46 |
| — |
| | — |
| | (69 | ) | | (69 | ) |
Income tax (benefit) expense | — |
| | — |
| | 13 |
| | 13 |
| |
Income tax expense | | — |
| | — |
| | 6 |
| | 6 |
|
Depreciation and amortization | | — |
| | — |
| | 171 |
| | 171 |
|
APYX MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
| | | Six Months Ended June 30, 2019 | Nine Months Ended September 30, 2018 - as Restated |
(In thousands) | Advanced Energy | | OEM | | Corporate & Other | | Total | Advanced Energy | | OEM | | Corporate & Other | | Total |
Sales | 9,640 |
| | 2,751 |
| | — |
| | 12,391 |
| $ | 8,727 |
| | $ | 2,033 |
| | $ | — |
| | $ | 10,760 |
|
| | | | | | | | | | | | | | |
Income (loss) from continuing operations | (4,399 | ) | | 921 |
| | (6,190 | ) | | (9,668 | ) | |
(Loss) income from operations | | (2,525 | ) | | 1,076 |
| | (6,992 | ) | | (8,441 | ) |
| | | | | | | | | | | | | | |
Interest income | — |
| | — |
| | 826 |
| | 826 |
| |
Interest income, net | | — |
| | — |
| | 33 |
| | 33 |
|
Other losses | — |
| | — |
| | (225 | ) | | (225 | ) | — |
| | — |
| | (868 | ) | | (868 | ) |
Income tax (benefit) expense | — |
| | — |
| | (48 | ) | | (48 | ) | |
Change in fair value of derivative liabilities | | — |
| | — |
| | 20 |
| | 20 |
|
Income tax expense | | — |
| | — |
| | (2,384 | ) | | (2,384 | ) |
Depreciation and amortization | | — |
| | — |
| | 429 |
| | 429 |
|
|
| | | | | | | | | | | |
| Six Months Ended June 30, 2018 |
(In thousands) | Advanced Energy | | OEM | | Corporate & Other | | Total |
Sales | 5,742 |
| | 1,346 |
| | — |
| | 7,088 |
|
| | | | | | | |
Income (loss) from continuing operations | (1,370 | ) | | 708 |
| | (4,991 | ) | | (5,653 | ) |
| | | | | | | |
Interest expense | — |
| | — |
| | (72 | ) | | (72 | ) |
Change in value of derivative liabilities | — |
| | — |
| | 20 |
| | 20 |
|
Income tax (benefit) expense | — |
| | — |
| | 24 |
| | 24 |
|
|
| | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2017 |
(In thousands) | Advanced Energy | | OEM | | Corporate & Other | | Total |
Sales | $ | 4,546 |
| | $ | 2,030 |
| | $ | — |
| | $ | 6,576 |
|
| | | | | | | |
(Loss) income from operations | (3,821 | ) | | 1,031 |
| | (7,858 | ) | | (10,648 | ) |
| | | | | | | |
Interest expense, net | — |
| | — |
| | (103 | ) | | (103 | ) |
Change in fair value of derivative liabilities | — |
| | — |
| | 57 |
| | 57 |
|
Income tax expense | — |
| | — |
| | 15 |
| | 15 |
|
Depreciation and amortization | — |
| | — |
| | 527 |
| | 527 |
|
International sales represented approximately 30.9%24.8% and 21.2% of total revenues for the three and nine months ended JuneSeptember 30, 2019,2018, respectively, as compared with 19.8%16.6% and 11.5% of total revenues for the same prior year period. International sales represented approximately 30.2% of total revenues for the sixthree and nine months ended JuneSeptember 30, 2019, as compared with 19.3% of total revenues for the same prior year period.
2017, respectively. Substantially all of these sales are denominated in U.S. dollars. Revenue by geographic region, based on the customer's “ship to” location on the invoice, are as follows:
| | | Three Months Ended June 30, | | Six Months Ended June 30, | Three Months Ended September 30, | | Nine Months Ended September 30, |
(In thousands) | 2019 | | 2018 | | 2019 | | 2018 | 2018 | | 2017 | | 2018 | | 2017 |
Sales by Domestic and International | | | | | | | | | | | | | | |
Domestic | $ | 4,540 |
| | $ | 2,960 |
| | $ | 8,644 |
| | $ | 5,718 |
| $ | 2,763 |
| | $ | 2,212 |
| | $ | 8,481 |
| | $ | 5,821 |
|
International | 2,028 |
| | 731 |
| | 3,747 |
| | 1,370 |
| 909 |
| | 439 |
| | 2,279 |
| | 755 |
|
Total | $ | 6,568 |
| | $ | 3,691 |
| | $ | 12,391 |
| | $ | 7,088 |
| $ | 3,672 |
| | $ | 2,651 |
| | $ | 10,760 |
| | $ | 6,576 |
|
APYX MEDICAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANAYLSIS OFNOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
NOTE 15. JOINT AND SEVERAL PAYROLL LIABILITY
As discussed in the Restatement Note (2), the Company did not report the correct amount of income to employees, nor did we collect and remit the employees' portion of income and payroll taxes, related to stock option exercises as required by the IRS. Due to IRS statutory requirements, we have joint and several liability for the full amount that was not withheld and remitted to the proper taxing authorities. This amount of the liability was approximately $0.7 million at September 30, 2018. The Company has recognized these amounts in other losses in the accompanying Consolidated Statements of Operations. If we can establish that our employees have in fact paid these obligations, either presently or in the future, we will be relieved of our liability.
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
Bovie Medical Corporation (“Company”, “Bovie Medical”, “we”, “us”, or “our”) 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.
We are a medical technology company and the developer of J-Plasma® (marketed and sold under the Renuvion®Renuvion™ Cosmetic Technology brand in the cosmetic surgery market), a patented plasma-based surgical product for cutting, coagulation and ablation of soft tissue. J-Plasma technology utilizes a helium ionization process to produce a stable, focused beam of plasma that provides surgeons with greater precision, and minimal invasiveness. WeThe Company also leverage ourleverages its expertise through original equipment manufacturing (OEM) agreements with other medical device manufacturers.
During 2019, we continue our full-scale commercialization efforts for Renuvion®. As of June 30, 2019, we had a direct sales force of 29 field-based selling professionals and a network of 6 independent sales agencies. We also had 4 sales managers. This selling organization is focused on the use of Renuvion in the cosmetic surgery market. In addition, we have invested in training programs and marketing-related activities to support accelerated adoption of Renuvion.
International sales represented approximately 30.9% of total revenues for the three months ended June 30, 2019, as compared with 19.8% of total revenues in the prior year. International sales represented approximately 30.2% of total revenues for the six months ended June 30, 2019, as compared with 19.3% of total revenues in the prior year. Management estimates our products have been sold in more than 40 countries through local dealers coordinated by sales and marketing personnel at the Clearwater, Florida facility.
As previously disclosed with the Commission on Form 8-K filed on April 4, 2019, we announced on April 1, 2019, that we voluntarily withdrew our application for premarket notification 510(k) regulatory clearance of our J-Plasma®/Renuvion® technology for use in dermal resurfacing procedures. While this is a delay in our commercialization efforts, we remain committed to working with the U.S. Food and Drug Administration relative to the development of a new 510(k) submission for use in dermal resurfacing procedures.
On August 30, 2018, we closed on a previously disclosed 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 wethe Company divested and sold ourthe 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. The divestiture and sale of our Core business segment to Symmetry allows us to further focus on our strategic objective of commercializing our J-Plasma technology, including the Renuvion®TM brand in the cosmetic surgery market. WeThe Company and Symmetry also entered into a transition services agreement, Patent Licensing Agreement, a Disposables Supply Agreement,patent licensing agreement, a disposables supply agreement and a Generator Manufacturinggenerator manufacturing and Supply Agreement,supply agreement, the latter of which will establish usthe Company as an OEM-provider of generators to Symmetry for a period of at least 10 years.
In connection with the Asset Purchase Agreement,asset purchase agreement, we entered into ana previously disclosed Electro Surgical Disposables and Accessories, Cauteries and Other Products Supply Agreement with Symmetry for up to a four-year term, whereby we will manufacture certain Core products and sell them to Symmetry at agreed upon prices. Any revenue, costs and expenses resulting from this agreement are netted and reported in our Consolidated Statements of Operations as Other gains or losses.
In connection with the Asset Purchase Agreement,asset purchase agreement, we entered into a previously disclosed Manufacture and Supply Agreement with Symmetry for a ten-year term, whereby we will manufacture certain products and sell them to Symmetry at agreed upon prices. Revenue, costs and expenses resulting from this agreement are reported in our Consolidated Statements as income or loss from operations of our OEM reporting segment.
During 2018, we continued our full scale commercialization efforts for Renuvion. We have a direct sales force of 19 field-based selling professionals and a network of 11 independent sales agencies, resulting in a field sales team of more than 40 representatives. This selling organization is focused on the use of Renuvion in the cosmetic surgery market. In addition, we have invested in training programs and marketing-related activities to support accelerated adoption of Renuvion.
APYX MEDICAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANAYLSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
International sales represented approximately 24.8% and 21.2% of total revenues for the three and nine months ended September 30, 2018, respectively, as compared with 16.6% and 11.5% of total revenues for the three and nine months ended September 30, 2017, respectively. Our products are sold in 26 countries through local dealers coordinated by sales and marketing personnel at the Clearwater, Florida facility.
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, and availability of discrete financial information and information presented to the Board of Directors and investors.
We reclassified the financial results of the Core business to discontinued operations and from segment results for all periods presented.
Our reportable segments are disclosed as principally organized and managed as twothree operating segments: Advanced Energy, OEM and OEM. "CorporateCorporate & Other"Other. The Corporate & Other category includes certain unallocated corporate and administrative costs which arewere not specifically attributed to any reportable segment. Net assets are shared, therefore, not allocated to the reportable segments. The OEM segment is primarily development and manufacturing contract and product driven, all related expenses are recorded as cost of sales, therefore no segment specific operating expenses are incurred.
We reclassified the financial results of the Core business to discontinued operations and from segment results for all periods presented. We strongly encourage investors to visit our website: www.apyxmedical.comwww.boviemedical.com to view the most current news and to review our filings with the Securities and Exchange Commission. Information on our website does not constitute a part of this Quarterly Report on Form 10-Q.
Results of Operations
Sales
| | | Three Months Ended June 30, | | | | Six Months Ended June 30, | | Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
(In thousands) | 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change | 2018 | | 2017 | | Change | | 2018 | | 2017 | | Change |
Sales by Reportable Segment | | | | | | | | | | | | | | | | | | | | | |
Advanced Energy | 5,269 |
| | 3,113 |
| | 69.3 | % | | 9,640 |
| | 5,742 |
| 3,898,000 |
| 67.9 | % | 2,985 |
| | 2,126 |
| | 40.4 | % | | 8,727 |
| | 4,546 |
| | 92.0 | % |
OEM | 1,299 |
| | 578 |
| | 124.7 | % | | 2,751 |
| | 1,346 |
| 1,405,000 |
| 104.4 | % | 687 |
| | 525 |
| | 30.9 | % | | 2,033 |
| | 2,030 |
| | 0.1 | % |
Total | $ | 6,568 |
| | $ | 3,691 |
| | 77.9 | % | | $ | 12,391 |
| | $ | 7,088 |
| | 74.8 | % | $ | 3,672 |
| | $ | 2,651 |
| | 38.5 | % | | $ | 10,760 |
| | $ | 6,576 |
| | 63.6 | % |
| | | | | | | | | 5,303,000 | | | | | | | | | | | | |
Sales by Domestic and International | | | | | | | | | | | | | | | | | | | | | |
Domestic | 4,540 |
| | 2,960 |
| | 53.4 | % | | $ | 8,644 |
| | $ | 5,718 |
| | 51.2 | % | $ | 2,763 |
| | $ | 2,212 |
| | 24.9 | % | | $ | 8,481 |
| | $ | 5,821 |
| | 45.7 | % |
International | 2,028 |
| | 731 |
| | 177.4 | % | | 3,747 |
| | 1,370 |
| | 173.5 | % | 909 |
| | 439 |
| | 107.1 | % | | 2,279 |
| | 755 |
| | 201.9 | % |
Total | $ | 6,568 |
| | $ | 3,691 |
| | 77.9 | % | | $ | 12,391 |
| | $ | 7,088 |
| | 74.8 | % | $ | 3,672 |
| | $ | 2,651 |
| | 38.5 | % | | $ | 10,760 |
| | $ | 6,576 |
| | 63.6 | % |
Total revenueOverall sales from continuing operations increased by 38.5% or approximately $1.0 million for the three months ended JuneSeptember 30, 2019, increased $2.9 million, or 77.9%, to $6.6 million,2018 when compared to $3.7 million inwith the prior year. Salessame period of the Company’s Advanced Energy generators and handpieces drove the increase in total revenue in 2019, with OEM segment sales contributing modestly to the year-over-year increase in total revenue from continuing operations during the second quarter 2019 period.2017. Advanced Energy segment sales increasedwere approximately $2.2$3.0 million, or 69.3% year-over-year, to $5.3 million,an increase of 40.4% when compared to approximately $3.1 million last year,the same period of 2017 as a result of additionalcontinued focus of our selling into the cosmetic surgery market and sales force including distributors.growth in international markets. The OEM segment salesconsists of proprietary products designed specifically for third party equipment manufacturers; revenue for this product line increased $0.730.9% or approximately $0.2 million or 124.7% year-over-year, to $1.3 million,when compared to $0.6 million last year, primarily attributable to sales to Symmetry under our Manufacture and Supply Agreement.2017.
Total revenueOverall sales from continuing operations increased by 63.6% or approximately $4.2 million for the sixnine months ended JuneSeptember 30, 2019, increased $5.3 million, or 74.8%, to $12.4 million,2018 when compared to $7.1 million inwith the prior year.same period of 2017. Advanced Energy segment sales increasedwere approximately $3.9$8.7 million, or 67.9% year-over-year, to $9.6 million,an increase of approximately 92.0% when compared to approximately $5.7 million last year,the same period of 2017 as a result of additionalcontinued focus of our selling into the cosmetic surgery market and sales force including distributors.growth in international markets. The OEM segment sales increased $1.4 million, or 104.4% year-over-year, to $2.8 million,consists of proprietary products designed specifically for third party equipment manufacturers; revenue for this product line was approximately the same when compared to $1.3 million last year, resulting mainly from sales to Symmetry under our Manufacture and Supply Agreement.
2017.
APYX MEDICAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANAYLSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Gross Profit
|
| | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
(In thousands) | 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change |
Cost of sales | $ | 2,096 |
| | $ | 1,154 |
| | 81.6 | % | | $ | 4,199 |
| | $ | 2,339 |
| | 79.5 | % |
Percentage of sales | 31.9 | % | | 31.3 | % | | | | 33.9 | % | | 33.0 | % | | |
|
| | | | | | | | | | | | | | | | | | | | | |
Gross profit | $ | 4,472 |
| | $ | 2,537 |
| | 76.3 | % | | $ | 8,192 |
| | $ | 4,749 |
| | 72.5 | % |
Percentage of sales | 68.1 | % | | 68.7 | % | |
|
| | 66.1 | % | | 67.0 | % | | 344,300,000.0 | % |
Gross profit for the three months ended June 30, 2019, increased approximately $1.9 million, or 76.3% year-over-year, to $4.5 million, compared to $2.5 million in the prior year. Gross margin for the three months ended June 30, 2019 was 68.1%, compared to 68.7% for the same period. The primary drivers of the decrease in gross profit margin were Advanced Energy product mix and Advanced Energy sales outside the U.S., which represented a higher mix of total sales in 2019. OEM gross margins were lower in the second quarter of 2019 when compared to the prior year, driven primarily by revenue related to our new Product, Manufacturing, and Supply agreements with Symmetry, which did not contribute to revenue results.
Gross profit for the six months ended June 30, 2019, increased approximately $3.4 million, or 72.5% year-over-year, to $8.2 million, compared to $4.7 million in the prior year. Gross margin for the six months ended June 30, 2019, was 66.1%, compared to 67.0% for the same period. The primary drivers of the decrease in gross profit margin were Advanced Energy product mix and Advanced Energy sales outside the U.S., which represented a higher mix of total sales in 2019 compared to last year. OEM gross margins were lower in the second quarter of 2019 when compared to the prior year period, driven primarily by revenue related to our new Product, Manufacturing, and Supply agreements with Symmetry, which did not contribute to revenue results.
Other Costs and Expenses
Research and development
|
| | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
(In thousands) | 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change |
Research and Development expense | $ | 888 |
| | $ | 763 |
| | 16.4 | % | | $ | 1,698 |
| | $ | 1,277 |
| | 33.0 | % |
Percentage of sales | 13.5 | % | | 20.7 | % | | | | 13.7 | % | | 18.0 | % | |
|
|
Spending on Research and development increased 16.4% and 33.0% for the three and six months ended June 30, 2019, respectively, primarily due to focused spending on clinical studies and research projects related to the cosmetic surgery market.
Professional services
|
| | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
(In thousands) | 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change |
Professional services expense | $ | 1,633 |
| | $ | 681 |
| | 139.8 | % | | $ | 3,424 |
| | $ | 1,187 |
| | 188.5 | % |
Percentage of sales | 24.9 | % | | 18.5 | % | | | | 27.6 | % | | 16.7 | % | |
|
|
Professional services expense increased 139.8% and 188.5% for the three and six months ended June 30, 2019, respectively, primarily attributable to expense increases for training-related physician consulting, medical advisory board stock option grants, marketing expenses, and legal and audit fees.
APYX MEDICAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANAYLSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Salaries and related costsGross Profit
|
| | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
(In thousands) | 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change |
Salaries and related expenses | $ | 3,333 |
| | $ | 1,813 |
| | 83.8 | % | | $ | 6,554 |
| | $ | 3,615 |
| | 81.3 | % |
Percentage of sales | 50.7 | % | | 49.1 | % | | | | 52.9 | % | | 51.0 | % | | |
During the three and six months ended June 30, 2019, salaries and related expenses increased approximately 83.8% and 81.3%, respectively, primarily driven by an increase in employee stock option expense, increase in sales force by approximately a dozen, increase in administrative headcount, and reclassification of regulatory salaries from cost of goods sold in 2018.
Selling, general and administrative expenses |
| | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
(In thousands) | 2018 | | 2017 | | Change | | 2018 | | 2017 | | Change |
Cost of sales | $ | 1,151 |
| | $ | 738 |
| | 56.0 | % | | $ | 3,490 |
| | $ | 2,314 |
| | 50.8 | % |
Percentage of sales | 31.3 | % | | 27.8 | % | | | | 32.4 | % | | 35.2 | % | | |
|
| | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
(In thousands) | 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change |
SG&A Expense | $ | 3,083 |
| | $ | 2,213 |
| | 39.3 | % | | $ | 6,184 |
| | $ | 4,323 |
| | 43.0 | % |
Percentage of sales | 46.9 | % | | 60.0 | % | | | | 49.9 | % | | 61.0 | % | | |
|
| | | | | | | | | | | | | | | | | | | | | |
Gross profit | $ | 2,521 |
| | $ | 1,913 |
| | 31.8 | % | | $ | 7,270 |
| | $ | 4,262 |
| | 70.6 | % |
Percentage of sales | 68.7 | % | | 72.2 | % | |
|
| | 67.6 | % | | 64.8 | % | |
|
|
DuringOur gross margin decreased by 3.5% during the three and six months ended JuneSeptember 30, 2019,2018, when compared to the same period of 2017. The decrease was driven by lower margins in Advanced Energy due to product mix and increased sales growth in international markets where we sell at lower margins through a network of distributors, offsetting higher domestic selling generalprices and administrative expensemanufacturing efficiencies. Additionally, margins decreased in the OEM segment when compared to 2017.
Our gross margin increased by 39.3% and 43.0%, respectively, primarily2.8% during the nine months ended September 30, 2018, when compared to the same period of 2017. The increase was driven by higher margins in the OEM segment when compared to 2017. Additionally, the Advanced Energy segment margins expanded due to increases in pricing mix partially offset by increased sales commissionsgrowth in international markets where we sell at lower margins through a network of distributors.
In conjunction with the previously disclosed divestment of our electrosurgical 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 expense.to Salaries and Related Costs, in the amount of $62,000. This change in estimate is necessary in order to better reflect the change in operations to our Advanced Energy segment.
Other Income (Expense)Costs and Expenses
Research and development
| | | Three Months Ended June 30, | | | | Six Months Ended June 30, | | | Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
(In thousands) | 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change | 2018 | | 2017 | | Change | | 2018 | | 2017 | | Change |
Interest income | $ | 403 |
| | $ | — |
| | 100.0 | % | | $ | 826 |
| | $ | — |
| | 100.0 | % | |
Research and Development expense | | $ | 613 |
| | $ | 487 |
| | 25.9 | % | | $ | 1,890 |
| | $ | 1,600 |
| | 18.1 | % |
Percentage of sales | 6.1 | % | | — | % | | | | 6.7 | % | | — | % | | | 16.7 | % | | 18.4 | % | | | | 17.6 | % | | 24.3 | % | |
|
|
Interest expense | $ | — |
| | $ | (38 | ) | | (100.0 | )% | | — | % | | $ | (72 | ) | | (100.0 | )% | |
Percentage of sales | — | % | | 1.0 | % | | | | — | % | | (1.0 | )% | | | |
Other losses | $ | (200 | ) | | $ | — |
| | 100.0 | % | | $ | (225 | ) | | $ | — |
| | 100.0 | % | |
Percentage of sales | (3.0 | )% | | — | % | | | | (1.8 | )% | | — | % | | | |
Change in fair value of derivative liabilities, net | $ | — |
| | $ | 46 |
| | (100.0 | )% | | $ | — |
| | $ | 20 |
| | (100.0 | )% | |
Percentage of sales | — | % | | 1.2 | % | | | | — | % | | 0.3 | % | | | |
Interest income
Total interest income was higherSpending on Research and development increased 25.9% and 18.1% for the three and sixnine months ended JuneSeptember 30, 2019, as compared with the prior year. This increase is2018, respectively, primarily due to focused spending on clinical studies and research projects related to short term investments in U.S. Treasury Securities which we purchased with the proceeds received from the sale of the Core business in September 2018.cosmetic surgery market.
Income TaxesProfessional services
|
| | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
(In thousands) | 2018 | | 2017 | | Change | | 2018 | | 2017 | | Change |
Professional services expense | $ | 628 |
| | $ | 421 |
| | 49.2 | % | | $ | 1,815 |
| | $ | 1,291 |
| | 40.6 | % |
Percentage of sales | 17.1 | % | | 15.9 | % | | | | 16.9 | % | | 19.6 | % | |
|
|
The Company’s income taxProfessional services expense (benefit) was $76,000increased 49.2% and $(48,000) with an effective tax rate of -1.7% and 0.3%40.6% for the three and sixnine months ended June 30, 2019 respectively, as compared to an expense of $13,000, and $24,000 with an effective tax rate of -3.2% and -1.8%, for the three and six months ended JuneSeptember 30, 2018, respectively.respectively, versus comparable periods in 2017. The effective rate differs from the statutory ratechange was primarily dueattributable to the change in the valuation allowance on the Company’s net deferred tax assets.expense increases for training-related physician consulting and honorariums for speaking engagements at professional conferences and trade events.
APYX MEDICAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANAYLSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Salaries and related costs
|
| | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
(In thousands) | 2018 as Restated | | 2017 | | Change | | 2018 as Restated | | 2017 | | Change |
Salaries and related expenses | $ | 2,170 |
| | $ | 1,826 |
| | 18.8 | % | | $ | 5,785 |
| | $ | 6,016 |
| | (3.8 | )% |
Percentage of sales | 57.7 | % | | 68.9 | % | | | | 53.8 | % | | 91.5 | % | | |
During the three months ended September 30, 2018, salaries and related expenses increased approximately 18.8%, compared to the prior year. The increase was primarily driven by additional sales-related support personnel compared to the comparable period of 2017.
During the nine months ended September 30, 2018, salaries and related expenses decreased approximately 3.8%, respectively, compared to the prior year. The decrease was primarily driven by a reduction in management and sales related personnel and
executive compensation compared to the comparable period of 2017.
In conjunction with the previously disclosed divestment of our electrosurgical 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 $62,000. This change in estimate is necessary in order to better reflect the change in operations to our Advanced Energy segment.
Selling, general and administrative expenses
|
| | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
(In thousands) | 2018 as Restated | | 2017 | | Change | | 2018 as Restated | | 2017 | | Change |
SG&A Expense | $ | 1,898 |
| | $ | 2,012 |
| | (5.7 | )% | | $ | 6,221 |
| | $ | 6,003 |
| | 3.6 | % |
Percentage of sales | 50.5 | % | | 75.9 | % | | | | 57.8 | % | | 91.3 | % | | |
Selling, general and administrative expense decreased by 5.7% for the three months ended September 30, 2018 when compared to 2017. The decrease was primarily driven by sales commissions and reductions in sample expense, offset by increases from general insurance and marketing.
Selling, general and administrative expense increased by 3.6% or approximately $0.2 million for the nine months ended September 30, 2018 when compared to 2017. The increase was driven by consulting in the Advanced Energy segment, sales commissions, bank service charges and technology upgrades, slightly offset by reductions in sample expense.
APYX MEDICAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANAYLSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Other Income (Expense), net
|
| | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
(In thousands) | 2018 | | 2017 | | Change | | 2018 | | 2017 | | Change |
Interest income (expense), net | $ | 105 |
| | $ | (36 | ) | | (391.7 | )% | | $ | 33 |
| | $ | (103 | ) | | (132.0 | )% |
Percentage of sales | 2.9 | % | | (1.4 | )% | | | | 0.3 | % | | (1.6 | )% | | |
Change in fair value of derivative liabilities, net | $ | — |
| | $ | (69 | ) | | (100.0 | )% | | $ | 20 |
| | $ | 57 |
| | (64.9 | )% |
Percentage of sales | — | % | | (2.6 | )% | | | | 0.2 | % | | 0.9 | % | | |
Interest income (expense), net
Net interest income resulted from realized and unrealized interest on cash, cash equivalents and short-term marketable securities, offset by interest paid on our mortgage to the Bank of Tampa until extinguishment on August 30, 2018.
Change in fair value of liabilities, net
On December 13, 2013, we entered into a securities purchase agreement pursuant to which we issued 3,500,000 shares of our newly designated Series A 6% Convertible Preferred Stock with a stated value of $2.00 per share and 5,250,000 warrants to purchase our common stock, at an exercise price of $2.387 per share. We also issued 525,000 warrants to the placement agent at a strike price of $2.387. As of September 30, 2018, all remaining warrants were converted to common stock and for the nine months ended September 30, 2018 we recognized a net loss of $20,000.
Other losses, net
Other losses of $0.9 million for the three and nine months ended September 30, 2018 was related to our joint and several payroll tax liability ($0.7 million) and $0.2 million in connection with the asset purchase agreement, we entered into a previously disclosed Electro Surgical Disposables and Accessories, Cauteries and Other Products Supply Agreement with Symmetry for a four-year term, whereby we will manufacture certain Core products and sell them to Symmetry at agreed upon prices. Any revenue, costs and expenses resulting from this agreement are netted and reported in our Consolidated Statements of Operations as Other gains or losses.
Income Taxes
The Company’s income tax benefit from continuing operations was $2.4 million and $2.4 million with an effective tax rate of 67.8% and 25.8% for the three and nine months ended September 30, 2018, respectively, as compared to an expense of $6,000 and $15,000 with an effective tax rate of 0.0% for the three and nine months ended September 30, 2017, respectively. The increase in the Company’s tax rate for the three and nine months ended September 30, 2018 as compared to the three months and nine months ended September 30, 2017, is primarily due to the Company’s ability to offset the 2018 operating loss from continuing operations against the taxable income generated by the extraordinary gain recognized by the income and asset sale reflected in discontinued operations.
The Company recognized tax expense of $0.3 million and $1.2 million within net income from discontinued operations for the three and nine months ended September 30, 2018, respectively. The Company recognized tax expense of $13.2 million and $15.5 million within the gain on sale of the Core Business for the three and nine months ended September 30, 2018, respectively.
Management expects the gain from the sale of the Core business segment to Symmetry will utilize substantially all of the historical Federal net operating loss carryover of $24.7 million, state(s) net operating loss carryover of $21.2 million, and research and development credit carryover of $1.3 million. As a result, the valuation allowance on these deferred tax assets was released during the third quarter of 2018 and the Company recorded a tax benefit of $7.8 million from the release of the valuation allowance. The tax benefit of $7.8 million is netted against the tax expenses within net income from discontinued operations and within the gain from asset sales. Pursuant to guidance under ASC 740, for the nine months ended September 30, 2018, continuing operations includes a current benefit of $2.4 million, which reflects the Company’s ability to fully utilize the net operating loss expected to be generated from continuing operations in the 2018 tax year.
APYX MEDICAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANAYLSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
As a result of historical losses, exclusive of discontinued operations, the Company recorded a valuation allowance on the net deferred tax asset with a finite life and does not anticipate recording an income tax benefit related to these deferred tax assets beyond the 2018 tax year. The Company will reassess the realization of deferred tax assets each reporting period and will be able to reduce the valuation allowance to the extent the financial results of continuing operations improve and it becomes more likely than not that the deferred tax assets will be realizable. As Management expects the Company to continue to generate loss in the foreseeable future after 2018, the Company will continue to record a valuation allowance on the remaining deferred tax assets at the end of 2018.
Product Development
We have developed most of our products and product improvements internally. Funds for this development have come primarily from our internal cash flow and equity issuances. We maintain close working relationships with physicians and medical personnel who assist in product research and development. New and improved products play a critical role in our sales growth. We continue to emphasize the development of proprietary products and product improvements to complement and expand our existing product lines. Our research and development team members are based in our Clearwater, Florida office and our facility in Sofia, Bulgaria.
Reliance on Collaborative, Manufacturing and Selling Arrangements
We manufacture the majority of our products on our premises in Clearwater, Florida and in Sofia, Bulgaria. Labor-intensive sub-assemblies and labor-intensive products may be outsourcedout-sourced to our specification.
We also perform development services for OEM customers who have no legal obligation to purchase products from us. Should such customers fail to give us purchase orders for the product after development, our future business and value of related assets could be negatively affected. Furthermore, no assurance can be given that such customers will give sufficient high priority to our products. Additionally, we will function as an OEM-provider of generators to Symmetry for a period of at least 10 years.
We also have collaborative arrangements with two key foreign suppliers of certain items and components and we purchase them pursuant to purchase orders. Our purchase order commitments are never more than one year in duration and are supported by our sales forecasts. The majority of our raw materials are purchased from sole-source suppliers. While we believe we could ultimately procure other sources for these components, should we experience any significant disruptions in this key supply chain, there are no assurances that we could do so in a timely manner which could render us unable to meet the demands of our customers, resulting in a material and adverse effect on our business and operating results.
Liquidity and Capital Resources
Our working capital at JuneSeptember 30, 20192018 was approximately $74.1$84.5 million compared with $81.8$16.6 million at December 31, 2018.
On August2017, primarily driven by the gain from the disposition of the Core business. Accounts receivable days sales outstanding were 41 days and 48 days at September 30, 2018 we sold our Core business segment and other related assets2017, respectively. The number of days sales in inventory, which is the total inventory available for $97 million in cash. At December 31,production divided by the 12-month average cost of materials, increased 6 days to 185 days equating to an inventory turn ratio of 2.23 at September 30, 2018 we had approximately $78 million in Cash, Cash Equivalentsfrom 179 days and Short-Term Investments, after making estimated Federal and State tax paymentsan inventory turn ratio of $13.3 million.2.00 at September 30, 2017.
For the sixnine months ended JuneSeptember 30, 2019,2018, net cash used in operating activities iswas approximately $10.1 million, which principally funded our operating loss of $(9.7)$2.8 million compared with net cash used inby operating activities of approximately $4.4 million for the same period in 2017. Net income of $67.3 million, non-cash inflows of $1.4 million, accounts receivable of $0.6 million and other changes in working capital of $0.3 million, were offset by the gain on the sale of the Core business of $69.1 million and increases of inventory of $1.7 million in 2018.million.
Net cash from investing activities is $60.9was attributed to proceeds from the disposition of the Core business of $91.1 million, primarily relatedpartially offset by purchases of marketable securities of $55.4 million and property and equipment for approximately $0.2 million during the nine months ended September 30, 2018, compared to approximately $0.4 million cash used for purchases of property and equipment for the maturity of short term investments and reinvestmentsame period in cash equivalents.2017.
Cash fromused in financing activities of approximately $2.6 million was attributed to the extinguishment of the mortgage note payable of $2.7 million, partially offset by proceeds from the exercise of options of $0.1 million relatesduring the nine months ended September 30, 2018, compared to cash collected for stock options during the six months ended June 30, 2019. Cash used in 2018 financing activities in 2018 was $0.1 million related tofor the repayment of ourthe mortgage atnote payable of approximately $179,000 for the Clearwater, FL, facility.same period in 2017.
APYX MEDICAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANAYLSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
On June 28, 2016, the Company entered into a transaction with Bank of Tampa, a Florida banking corporation (“Lender”), wherein Lender amended the terms of a mortgage loan (“the Loan”) originally executed on March 20, 2014 with a principal amount of $3,592,000. The Initial Maturity Date of the Loan was extended to July 20, 2019 from March 19, 2017, and the Extended Maturity Date was amended to July 20, 2024 from March 20, 2022. On August 30, 2018, the Company paid off the remaining mortgage balance of $2.5 million, releasing us from any and all obligations to the Bank of Tampa.
At JuneSeptember 30, 2019,2018, we had purchase commitments for inventories totaling approximately $3.4$5.4 million, substantially all of which is expected to be purchased by the end of 2019.2018.
In responseOur manufacturing services agreements requires Symmetry to the current worldwide helium shortage, to support our current and near term customer requirements, we issued purchase orders with two international companies to supplyprovide us with helium cylinders and have entered into agreementsa twelve-month rolling production forecast, of which four months are binding, non-cancelable orders, subject to purchase additional helium as needed. We also currently maintain our own supply of helium in the United States which can be utilized for our customer requirements.
certain termination rights.
APYX MEDICAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANAYLSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Critical Accounting Estimates
In preparing the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP), we have adopted various accounting policies. Our most significant accounting policies are disclosed in Note 2 to the consolidated financial statements included in our Reportreport on Form 10-K for the year ended December 31, 2018,2017, filed with the Securities and Exchange Commission on March 14, 2019.13, 2018.
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Our estimates and assumptions, including those related to inventories, intangible assets, property, plant and equipment, legal proceedings, research and development, warranty obligations, product liability, fair valued liabilities, sales returns and discounts, stock-basedstock based compensation and income taxes are updated as appropriate, which in most cases is at least quarterly. We base our estimates on historical experience, or various assumptions that are believed to be reasonable under the circumstances and the results form the basis for making judgments about the reported values of assets, liabilities, revenues and expenses. Actual results may materially differ from these estimates.
Estimates are considered to be critical if they meet both of the following criteria: (1) the estimate requires assumptions about material matters that are uncertain at the time the accounting estimates are made and (2) other materially different estimates could have been reasonably made or material changes in the estimates are reasonably likely to occur from period to period. Our critical accounting estimates include the following:
Inventory reserves
We maintain a reserve for excess and obsolete inventory resulting from the potential inability to sell our products at prices in excess of current carrying costs. The markets in which we operate are highly competitive, with new products and surgical procedures introduced on an ongoing basis. Such marketplace changes may cause our products to become obsolete. We make estimates regarding the future recoverability of the costs of these products and record a provision for excess and obsolete inventories based on historical experience and expected future trends. If actual product life cycles, product demand or acceptance of new product introductions are less favorable than projected by management, additional inventory write-downs may be required, which would unfavorably affect future operating results.
Long-lived assets
We review long-lived assets which are held and used, including property and equipment and intangible assets, for impairment whenever changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Such evaluations compare the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset over its expected useful life and are significantly impacted by estimates of future prices and volumes for our products, capital needs, economic trends and other factors that are inherently difficult to forecast. If the asset is considered to be impaired, we record an impairment charge equal to the amount by which the carrying value of the asset exceeds its fair value determined by either a quoted market price, if any, or a value determined by utilizing a discounted cash flow technique. To date, no reporting units are at risk of failing an impairment test.
Stock-based Compensation
Under our stock option plan, options to purchase common shares of the Company may be granted to key employees, officers and directors of the Company by the Board of Directors. The Company accounts for stock options in accordance with FASB ASC Topic 718-10, Compensation-Stock Compensation, with compensation expense amortized over the vesting period based on the trinomial lattice option-pricing model fair value on the grant date, which includes a number of estimates that affect the amount of our expense.
Litigation Contingencies
In accordance with authoritative guidance, we accrue a liability in our consolidated financial statements for these actions when a loss is known or considered probable and the amount can be reasonably estimated. If the reasonable estimate of a known or probable loss is a range, and no amount within the range is a better estimate than any other, the minimum amount of the range is recorded. If a loss is reasonably possible, but not known or probable, and can be reasonably estimated, the estimated loss or range of loss is
APYX MEDICAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANAYLSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
disclosedLitigation Contingencies
The medical device industry is characterized by frequent claims and litigation, and we are and may become subject to various claims, lawsuits and proceedings in the notesordinary course of our business, including claims by current or former employees, distributors and competitors, and with respect to our products and product liability claims, lawsuits and proceedings.
We are involved in a number of legal actions relating to the use of our J-Plasma technology. The outcomes of these legal actions are not within our complete control and may not be known for prolonged periods of time. In the opinion of management, the Company has meritorious defenses, and such claims are adequately covered by insurance, or are not expected, individually or in the aggregate, to result in a material, adverse effect on our financial condition. However, in the event that damages exceed the aggregate coverage limits of our policy or if our insurance carriers disclaim coverage, we believe it is possible that costs associated with these claims could have a material adverse impact on our consolidated earnings, financial 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.position or cash flows.
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.
Management expects the gain from the sale of the Core business segment to Symmetry will utilize substantially all of the historical Federal net operating loss carryover of $24.7 million, state(s) net operating loss carryover of $21.2 million, and research and development credit carryover of $1.3 million. As a result, the valuation allowance on these deferred tax assets was released during the third quarter of 2018 and the Company recorded a tax benefit of $7.8 million from the release of the valuation allowance. The tax benefit of $7.8 million is netted against the tax expenses within net income from discontinued operations and within the gain from asset sales. Pursuant to guidance under ASC 740, for the nine months ended September 30, 2018, continuing operations includes a current benefit of $2.4 million, which reflects the Company’s ability to fully utilize the net operating loss expected to be generated from continuing operations in the 2018 tax year.
As a result of historical losses, exclusive of discontinued operations, and the Company’s expectation to continue to generate losses in the near future, the Company recorded a valuation allowance on the net deferred tax asset with a finite life and does not anticipate recording an income tax benefit related to these deferred tax assets.assets beyond the 2018 tax year. The Company will reassess the realization of deferred tax assets each reporting period and will be able to reduce the valuation allowance to the extent the financial results of continuing operations improve and it becomes more likely than not that the deferred tax assets will be realizable. As Management expects the Company to continue to generate loss in the foreseeable future after 2018, the Company will continue to record a valuation allowance on the remaining deferred tax assets at the end of 2018.
We assess the financial statement impact of an uncertain tax position taken or expected to be taken on an income tax return at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized in the financial statements unless it is more likely than not of being sustained.
The Company isSince inception, we have been subject to U.S.tax by both federal and state income tax examination. The Company’s 2015 through 2018 U.S. federal income tax returnstaxing authorities. Until the respective statutes of limitations expire, we are subject to examination by the Internal Revenue Service. The Company’s state income tax returns are subject to examination foraudits in the tax years 2014 through 2018.jurisdictions in which we operate.
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 46 of the Notes to Consolidated Financial Statements.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
For our disclosures about market risk, please see Part II, Item 7A., “Quantitative and Qualitative Disclosures about Market Risk,” in our Annual Report on Form 10-K for the year ended December 31, 2018.2017. We believe there have been no material changes to the information provided therein.
APYX MEDICAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANAYLSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
ITEM 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
OurWe have carried out an evaluation, under the supervision of and with the participation of our management, has establishedincluding our Chief Executive Officer (“CEO”) and maintainsChief Financial Officer (“CFO”), of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended), as of September 30, 2018. Based upon that evaluation, our CEO and CFO concluded that, as of the end of that period, our disclosure controls and procedures are designed to ensureeffective in providing reasonable assurance that (a) the information required to be disclosed by us in the reports that we filefiled or submitsubmitted 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'sSEC’s rules and forms and that(b) such information is accumulated and communicated to our management, including the Chief Executive Officerour CEO and Chief Financial Officer,CFO, as appropriate to allow timely decisions regarding required disclosure. Management carried out an evaluation, under the supervisionIn designing and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness ofevaluating our disclosure controls and procedures, as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concludedmanagement recognized that as of June 30, 2019, the Company's disclosureany controls and procedures, were not effective becauseno matter how well designed and operated, can provide only reasonable assurance of achieving the material weaknesses in our internaldesired control over financial reporting as discussed below.
Notwithstanding such material weaknesses, which is described below in Management’s Report on Internal Control over Financial Reporting,objectives and our management has concluded thatnecessarily was required to apply its judgment in evaluating the consolidated financial statements included in this Form 10-Q present fairly, in all material respects, our financial position, resultscost-benefit relationship of operations and cash flows for the periods presented in conformity with GAAP.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). The Company's internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, management carried out an evaluation of the effectiveness of the Company's internal control over financial reporting as of December 31, 2018, based on the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (2013). Based on that evaluation, management concluded that, as of December 31, 2018, the Company's internal control over financial reporting was not effective as a result of the material weaknesses described below.
The effectiveness of our internal control over financial reporting as of December 31, 2018 was audited by Frazier & Deeter, LLC, an independent registered public accounting firm, as stated in their report included in Part II, Item 8 of our most recent Form 10-K for the period ended December 31, 2018, contains an adverse opinion on the effectiveness of our internal control over financial reporting.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that material misstatements of the Company's annual or interim financial statements will not be prevented or detected on a timely basis.
We have identified three material weaknesses: (i) an ineffective control environment due to a lack of sufficient qualified accounting personnel with an appropriate level of knowledge and experience with generally accepted accounting principles, (ii) ineffective control activities due to the lack of documentation and timeliness in executing business processpossible controls and (iii) ineffective monitoring controls to ascertain whether the components of internal control were present and functioning.
As of June 30, 2019, we continue our remediation efforts related to these deficiencies.
Remediation Efforts to Address Material Weaknesses
To date, we have implemented and are continuing to implement a number of measures to address the material weaknesses identified. We are also designing additional controls around the identification, documentation and application of technical accounting guidance with particular emphasis on events outside the ordinary course of business. These controls are expected to include the implementation of additional supervision and review activities by qualified personnel, the preparation of formal accounting memoranda to support our conclusions on technical accounting matters, and the development and use of checklists and research tools to assist in compliance with GAAP reporting requirements.
We have also fully engaged a third-party specialist to help us assess and improve our internal controls and to assist in the process of designing and implementing a financial reporting system that is adequate to satisfy our reporting obligations. This has included the establishment of our overall internal control framework and the redesign of controls deemed to be defective in our most recently filed 10-K. As we continue to evaluate and take actions to improve our internal controls over financial reporting, we may find it necessary to take additional actions to address control deficiencies and modify our remediation measures.procedures.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13(a)-15(f) and 15(d)-15(f)) during the sixnine months ended JuneSeptember 30, 20192018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. Other Information
ITEM 1. Legal Proceedings
The medical device industry is characterized by frequent claims and litigation, and we are and may become subject to various claims, lawsuits and proceedings in the ordinary course of our business, including claims by current or former employees, distributors and competitors, and with respect to our products and product liability claims, lawsuits and proceedings.
We are involved in a number of legal actions relating to the use of our J-Plasma® technology. The outcomes of these legal actions are not within our complete control and may not be known for prolonged periods of time. In the opinion of management, the Company has meritorious defenses, and such claims are adequately covered by insurance, or are not expected, individually or in the aggregate, to result in a material, adverse effect on our financial condition. However, in the event that damages exceed the aggregate coverage limits of our policy or if our insurance carriers disclaim coverage, we believe it is possible that costs associated with these claims could have a material adverse impact on our consolidated earnings, financial position or cash flows.
In addition, as previously disclosed with the Commission on Form 8-K filed April 26, 2019, we have learned that on April 17, 2019, a complaint (the “Complaint”) was filed in the United States District Court for the Middle District of Florida by plaintiff Kyle Pritchard, individually and on behalf of all others similarly situated against the Company and Charles D. Goodwin (“Goodwin”), the Company’s President and Chief Executive Officer and a member of the Company’s Board of Directors.
The Complaint (which as of the date hereof has not been delivered through formal process to the Company) seeks class action status on behalf of all persons and entities that acquired the Company’s securities between August 1, 2018 and April 1, 2019 and alleges violations by the Company and Goodwin of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, primarily related to certain public statements concerning the Premarket Notification 510(k) submission made to the US Food and Drug Administration for a new indication for the Company’s J-Plasma® technology for use in dermal resurfacing procedures. The Complaint seeks an unspecified amount of compensatory damages, an award of interest, reasonable attorneys’ fees, expert fees and other costs, and equitable relief as the court may deem just and proper. On July 16, 2019, the court appointed a lead plaintiff for the putative class and approved the lead plaintiff’s selection of counsel.
Although the ultimate outcome of this matter cannot be determined with certainty, the Company believes that the allegations stated in the Complaint are entirely without merit. The Company and Goodwin intend to defend themselves vigorously in the suit. Such claims are adequately covered by insurance, however, in the event that damages exceed the aggregate coverage limits of our policy or if our insurance carriers disclaim coverage, we believe it is possible that costs associated with this claim could have a material adverse impact on our consolidated earnings, financial position or cash flows.
In accordance with authoritative guidance, we accrue a liability in our consolidated financial statements for these actions when a loss is known or considered probable and the amount can be reasonably estimated. If the reasonable estimate of a known or probable loss is a range, and no amount within the range is a better estimate than any other, the minimum amount of the range is recorded. If a loss is reasonably possible, but not known or probable, and can be reasonably estimated, the estimated loss or range of loss is disclosed in the notes to the consolidated financial statements. In most cases, significant judgment is required to estimate the amount and timing of a loss to be recorded.
ITEM 1A. Risk factors
Not Applicable.Applicable.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
ITEM 3. Defaults Upon Senior Securities
None.
ITEM 4. Mine Safety Disclosures
Not Applicable.
ITEM 5. Other Information
None.
ITEM 6. Exhibits
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3.4 | | |
3.510.1 | | |
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.
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.
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| Apyx Medical Corporation | |
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Date: August 7, 2019May 8, 2020 | By: | /s/ Charles D. Goodwin II | |
| | Charles D. Goodwin II | |
| | President, Chief Executive Officer and Director | |
| | (Principal Executive Officer) | |
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Date: August 7, 2019May 8, 2020 | By: | /s/ Tara Semb | |
| | Tara Semb | |
| | Chief Financial Officer, | |
| | Treasurer and Secretary | |
| | (Principal Financial Officer) | |