Company Quick10K Filing
Quick10K
Bovie Medical
10-Q 2019-06-30 Quarter: 2019-06-30
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-08-07 Officers, Shareholder Vote, Other Events, Exhibits
8-K 2019-08-07 Earnings, Exhibits
8-K 2019-06-03 Accountant, Exhibits
8-K 2019-05-08 Earnings, Exhibits
8-K 2019-04-26
8-K 2019-04-01 Earnings, Other Events, Exhibits
8-K 2019-03-13 Earnings, Exhibits
8-K 2019-01-23 Enter Agreement
8-K 2019-01-07 Earnings, Exhibits
8-K 2018-12-28 Amend Bylaw, Exhibits
8-K 2018-12-17 Officers, Other Events, Exhibits
8-K 2018-12-12 Other Events, Exhibits
8-K 2018-11-13 Officers, Other Events, Exhibits
8-K 2018-11-01 Earnings, Exhibits
8-K 2018-09-05 Other Events, Exhibits
8-K 2018-08-30 M&A, Officers, Shareholder Vote, Other Events, Exhibits
8-K 2018-08-01 Earnings, Exhibits
8-K 2018-07-09 Enter Agreement, Earnings, Officers, Other Events, Exhibits
8-K 2018-05-14 Earnings, Exhibits
8-K 2018-05-03 Amend Bylaw, Exhibits
8-K 2018-03-14 Officers, Other Events, Exhibits
8-K 2018-03-12 Earnings, Exhibits
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RRR Red Rock Resorts 2,950
MDC MDC Holdings 1,970
SAIL Sailpoint Technologies Holdings 1,710
ELOX Eloxx Pharmaceuticals 426
AIPT Precision Therapeutics 21
BRN Barnwell Industries 11
VYST VyStar 0
BVX 2019-06-30
Part I. Financial Information
Item 1. Financial Statements
Note 1. Basis of Presentation
Note 2. Inventories
Note 3. Intangible Assets
Note 4. Recent Accounting Pronouncements
Note 5. Earnings per Share
Note 6. Stock-Based Compensation
Note 7. Income Taxes
Note 8. Commitments and Contingencies
Note 9. Related Party Transactions
Note 10. Financial Instruments
Note 11. Geographic and Segment Information
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.1 a2019q2apyx10-qexhibit311.htm
EX-31.2 a2019q2apyx10-qexhibit312.htm
EX-32.1 a2019q2apyx10-qexhibit321.htm
EX-32.2 a2019q2apyx10-qexhibit322.htm

Bovie Medical Earnings 2019-06-30

BVX 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 a2019q210-q.htm 10-Q Document
 
 
 
 
 
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
 
or
 
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
apyxmedicallogotagline.jpg
APYX MEDICAL CORPORATION
(Exact name of registrant as specified in its charter)
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:
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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes: ý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act (Check one):
Large accelerated filer
o
 
Accelerated filer
ý

Non-accelerated filer
o
 
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 July 29, 2019, 33,921,476 shares of the registrant’s $0.001 par value common stock were outstanding.
 
 
 
 
 
 


APYX MEDICAL CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q

For the quarterly period ended June 30, 2019
(Unaudited)

 
 
 
 
Page
Part I.
 
 
 
 
 
 
 
Item 1.
 
 
 
 
Consolidated Balance Sheets at June 30, 2019 and December 31, 2018
 
 
 
Consolidated Statements of Operations for the three and six months ended June 30, 2019 and 2018
 
 
 
Consolidated Statements of Changes in Stockholders’ Equity for the three and six months ended June 30, 2019 and 2018
 
 
 
Consolidated Statements of Cash Flows for the six months ended June 30, 2019 and 2018
 
 
 
 
 
 
 
 
 
Item 2.
 
 
Item 3.
 
 
Item 4.
 
 
 
 
 
 
 
Part II.
 
 
 
 
 
 
 
Item 1.
 
 
Item 1A.
 
 
Item 2.
 
 
Item 3.
 
 
Item 4.
 
 
Item 5.
 
 
Item 6.
 
 
 
 
 

1

APYX MEDICAL CORPORATION

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
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
67,360

 
$
16,466

Short term investments

 
61,678

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

Prepaid expenses and other current assets
1,987

 
1,146

Total current assets
81,957

 
89,517

Property and equipment, net
6,300

 
5,788

Intangibles
185

 
191

Deposits
73

 
73

Other assets
368

 
41

Total assets
$
88,883

 
$
95,610

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
1,641

 
$
1,423

Accrued and other liabilities
5,848

 
5,552

Accrued severance and related
408

 
727

Total current liabilities
7,897

 
7,702

Note payable
140

 
140

Long term lease liability
267

 

Total liabilities
8,304

 
7,842

STOCKHOLDERS’ EQUITY


 


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

Additional paid-in capital
54,051

 
52,221

Retained earnings
26,494

 
35,513

Total stockholders’ equity
80,579

 
87,768

Total liabilities and stockholders’ equity
$
88,883

 
$
95,610

The accompanying notes are an integral part of the consolidated financial statements.

2

APYX MEDICAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data, Unaudited)
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Sales
$
6,568

 
$
3,691

 
$
12,391

 
$
7,088

Cost of sales
2,096

 
1,154

 
4,199

 
2,339

Gross profit
4,472

 
2,537

 
8,192

 
4,749

Other costs and expenses:
 
 
 
 
 
 
 
Research and development
888

 
763

 
1,698

 
1,277

Professional services
1,633

 
681

 
3,424

 
1,187

Salaries and related costs
3,333

 
1,813

 
6,554

 
3,615

Selling, general and administrative
3,083

 
2,213

 
6,184

 
4,323

Total other costs and expenses
8,937

 
5,470

 
17,860

 
10,402

Loss from operations
(4,465
)
 
(2,933
)
 
(9,668
)
 
(5,653
)
Interest income
403

 

 
826



Interest expense

 
(38
)
 

 
(72
)
Other losses
(200
)
 

 
(225
)
 

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
)
Income from discontinued operations, net of tax

 
2,666

 

 
4,522

Net loss
$
(4,338
)
 
$
(272
)
 
$
(9,019
)

$
(1,207
)
 
 
 
 
 
 
 
 
EPS from continuing operations:
 
 
 
 
 
 
 
Basic
$
(0.13
)
 
$
(0.09
)
 
$
(0.27
)
 
$
(0.17
)
Diluted
$
(0.13
)
 
$
(0.09
)
 
$
(0.27
)
 
$
(0.17
)
 
 
 
 
 
 
 
 
EPS from discontinued operations:
 
 
 
 
 
 
 
Basic
$

 
$
0.08

 
$

 
$
0.13

Diluted
$

 
$
0.08

 
$

 
$
0.13

 
 
 
 
 
 
 
 
EPS from total operations:
 
 
 
 
 
 
 
Basic
$
(0.13
)
 
$
(0.01
)
 
$
(0.27
)
 
$
(0.04
)
Diluted
$
(0.13
)
 
$
(0.01
)
 
$
(0.27
)
 
$
(0.04
)

The accompanying notes are an integral part of the consolidated financial statements.

3

APYX MEDICAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(In thousands, Unaudited)
Three months ended June 30, 2018 and 2019
 
 
 
 
 
 
 
 
 
 
Common Stock
 
 
 
 
 
 
 
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

Options exercised
37

 

 
83

 

 
83

Warrants exercised
40

 

 
95

 

 
95

Stock based compensation

 

 
377

 

 
377

Stock swap to acquire options and warrants
(42
)
 

 
(178
)
 

 
(178
)
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
 
 
 
 
 
 
 
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

Options exercised
37

 

 
83

 

 
83

Warrants exercised
40

 

 
95

 

 
95

Stock based compensation

 

 
749

 

 
749

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

 


4

APYX MEDICAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY



The accompanying notes are an integral part of the consolidated financial statements.

5

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.

6

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,” and similar terms refer to Apyx 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. 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.     INVENTORIES

Inventories are stated at the lower of cost or net realizable values. Cost is determined on a first in, first out basis. Finished goods and work-in-process inventories include material, labor and overhead costs. Factory overhead costs are allocated to inventory manufactured in-house based upon labor hours.

Inventories consisted of the following:

7

APYX MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

(In thousands)
June 30,
2019
 
December 31,
2018
Raw materials
$
5,341

 
$
4,521

Finished goods and work in progress
1,453

 
1,130

Gross inventories
6,794

 
5,651

Less: reserve for obsolescence
(402
)
 
(439
)
Net inventories
$
6,392

 
$
5,212



8

APYX MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

NOTE 3.     INTANGIBLE ASSETS

Intangible assets consisted of the following:

(in thousands)
June 30, 2019
December 31, 2018
Purchased technology (5-17 year lives)
$
1,442

$
1,448

Less: accumulated amortization
(1,442
)
(1,442
)
Purchased technology, net
$

$
6

 
 
 
Goodwill
$
185

$
185

Intangibles
$
185

$
191


Intangible assets and goodwill are the result of our acquisition of Apyx (formerly known as Bovie) Bulgaria, EOOD in 2015.

NOTE 4.     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 will not have a material impact on our financial condition or results of operations.

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 11 Geographic and Segment Information.

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.



9

APYX MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

NOTE 5.     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



10

APYX MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

NOTE 6.     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 in stock-based compensation during the six months ended June 30, 2019, as compared with $749,000 for the six months ended June 30, 2018.

The status of our stock options and stock awards are summarized as follows:
 
Number of options
 
Weighted average exercise price
Outstanding at December 31, 2018
3,480,701

 
$
3.10

Granted
1,277,500

 
7.73

Exercised
(308,549
)
 
2.87

Canceled and forfeited
(50,500
)
 
6.70

Outstanding at June 30, 2019
4,399,152

 
$
4.42

Common shares required to be issued upon the exercise of stock options would be issued from our authorized and unissued shares. We calculated the fair value of issued options utilizing a 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
Option value
$
7.15

-
$
7.91

Risk-free rate
2.6%
-
2.6
%
Expected dividend yield
Expected volatility
69.1%
-
69.1
%
Expected term (in years)
6

NOTE 7.     INCOME TAXES

The Company’s income tax expense (benefit) was $76,000 and $(48,000) with an effective tax rate of -1.7% and 0.3% for the three and six 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 June 30, 2018, respectively.

The following is a roll-forward of the Company's total gross unrecognized tax benefits, not including interest and penalties, for the period ended June 30, 2019.

(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

11

APYX MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

pected that all of the uncertain tax positions should be resolved by December 31, 2019.


NOTE 8.     COMMITMENTS AND CONTINGENCIES

Property and Rental Agreements

In October 2015, pursuant to our acquisition of Apyx Bulgaria, we became obligated to make lease payments of approximately $9,000 per month for approximately 20,000 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 June 30, 2019:
(In thousands)
 
2019 (remaining 6 months)
$
56

2020
111

2021
118

2022
118

Total
$
403


On August 30, 2018, we 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 June 30, 2019, we had purchase commitments totaling approximately $3.4 million, substantially all of which is expected to be purchased by the end of 2019.

In response to the current worldwide helium shortage, to support our current and near term customer requirements, we issued purchase orders with two international companies to supply us with helium cylinders and have entered into agreements 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.




12

APYX MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

NOTE 9.     RELATED PARTY TRANSACTIONS

Several relatives of Nikolay Shilev, Apyx Bulgaria’s Managing Director, are considered related parties. Teodora Shileva, Mr. Shilev’s spouse, is an employee of the Company working in the Accounting department. Antoaneta Dimitrova Shileva-Toromanova, Mr. Shilev’s sister, is the Manager of Production and Human Resources. Svetoslav Shilev, Mr. Shilev’s son, is an Engineer in the Quality Assurance department.

In addition, as part of the purchase of the Bulgaria manufacturing facility, Mr. Shilev was issued a note payable for $140 thousand to be paid 5 years after the original purchase date which is in October 2020.

NOTE 10.    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:

(In thousands)
Adjusted Cost
 
Unrealized Gains
 
Fair Value(3)
 
Cash and Cash Equivalents (1)
 
Short-term Marketable Securities
Cash
$
6,337

 
$

 
$
6,337

 
$
6,337

 
$

 
 
 
 
 
 
 
 
 
 
Level 1 (2)
 
 
 
 
 
 
 
 
 
U.S. Treasury Securities, maturities less than three months
10,129

 

 
10,129

 
10,129

 

U.S. Treasury Securities, maturities greater than three months
61,431

 
247

 
61,678

 

 
61,678

Total
$
77,897

 
$
247

 
$
78,144

 
$
16,466

 
$
61,678


(1) The Company 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.


13

APYX MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

NOTE 11.     GEOGRAPHIC AND SEGMENT INFORMATION

Operating segments are aggregated into reportable segments only if they exhibit similar economic characteristics. In addition to similar economic characteristics, we also consider the following factors in determining the reportable segments: the nature of business activities, the management structure directly accountable to our chief operating decision maker for operating and administrative activities, availability of discrete financial information and information presented to the Board of Directors and investors.

Our reportable segments are disclosed as principally organized and managed as two operating segments: Advanced Energy and OEM. "Corporate & Other" includes certain unallocated corporate and administrative costs which were not specifically attributed to any reportable segment. 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
(In thousands)
Advanced Energy
 
OEM
 
Corporate & Other
 
Total
Sales
$
5,269

 
$
1,299

 
$

 
$
6,568

 
 
 
 
 
 
 
 
Income (loss) from continuing operations
(1,011
)
 
136

 
(3,590
)
 
(4,465
)
 
 
 
 
 
 
 
 
Interest income

 

 
403

 
403

Other losses

 

 
(200
)
 
(200
)
Income tax (benefit) expense

 

 
76

 
76

 
 
 
 
 
 
 
 
 
Three Months Ended June 30, 2018
(In thousands)
Advanced Energy
 
OEM
 
Corporate & Other
 
Total
Sales
$
3,113

 
$
578

 
$

 
$
3,691

 
 
 
 
 
 
 
 
Income (loss) from continuing operations
(792
)
 
302

 
(2,443
)
 
(2,933
)
 
 
 
 
 
 
 
 
Interest expense

 

 
(38
)
 
(38
)
Change in fair value of derivative liabilities

 

 
46

 
46

Income tax (benefit) expense

 

 
13

 
13


14

APYX MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

 
Six Months Ended June 30, 2019
(In thousands)
Advanced Energy
 
OEM
 
Corporate & Other
 
Total
Sales
9,640

 
2,751

 

 
12,391

 
 
 
 
 
 
 
 
Income (loss) from continuing operations
(4,399
)
 
921

 
(6,190
)
 
(9,668
)
 
 
 
 
 
 
 
 
Interest income

 

 
826

 
826

Other losses

 

 
(225
)
 
(225
)
Income tax (benefit) expense

 

 
(48
)
 
(48
)
 
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


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 for the same prior year period. 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 for the same prior year period.

Substantially all of these sales are denominated in U.S. dollars. Revenue by geographic region, based on the customer's “ship to” location on the invoice, are as follows:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(In thousands)
2019
 
2018
 
2019
 
2018
Sales by Domestic and International
 
 
 
 
 
 
 
Domestic
$
4,540

 
$
2,960

 
$
8,644

 
$
5,718

International
2,028

 
731

 
3,747

 
1,370

Total
$
6,568

 
$
3,691

 
$
12,391

 
$
7,088


15

APYX MEDICAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANAYLSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS


ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis in conjunction with our financial statements and related notes contained elsewhere in this report. This discussion contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a variety of factors discussed in this report and those discussed in other documents we file with the SEC. In light of these risks, uncertainties and assumptions, readers are cautioned not to place undue reliance on such forward-looking statements. These forward-looking statements represent beliefs and assumptions as of the date of this report. While we may elect to update forward-looking statements and at some point in the future, we specifically disclaim any obligation to do so, even if our estimates change. Past performance does not guarantee future results.

Executive Level Overview

We are 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. We also leverage our 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 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 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 a transition services agreement, 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 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.

In connection with the Asset Purchase Agreement, we 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.


16

APYX MEDICAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANAYLSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued


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 as two operating segments: Advanced Energy and OEM. "Corporate & Other" includes certain unallocated corporate and administrative costs which are not specifically attributed to any reportable segment. 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.com to view the most current news and to review our filings with the Securities and Exchange Commission.

Results of Operations

Sales
 
Three Months Ended
June 30,
 
 
 
Six Months Ended
June 30,
 
 
(In thousands)
2019
 
2018
 
Change
 
2019
 
2018
 
Change
Sales by Reportable Segment
 
 
 
 
 
 
 
 
 
 
 
Advanced Energy
5,269

 
3,113

 
69.3
%
 
9,640

 
5,742

3,898,000

67.9
%
OEM
1,299

 
578

 
124.7
%
 
2,751

 
1,346

1,405,000

104.4
%
Total
$
6,568

 
$
3,691

 
77.9
%
 
$
12,391

 
$
7,088

 
74.8
%
 
 
 
 
 
 
 
 
 
5,303,000
 
 
Sales by Domestic and International
 
 
 
 
 
 
 
 
 
 
 
Domestic
4,540

 
2,960

 
53.4
%
 
$
8,644

 
$
5,718

 
51.2
%
International
2,028

 
731

 
177.4
%
 
3,747

 
1,370

 
173.5
%
Total
$
6,568

 
$
3,691

 
77.9
%
 
$
12,391

 
$
7,088

 
74.8
%

Total revenue from continuing operations for the three months ended June 30, 2019, increased $2.9 million, or 77.9%, to $6.6 million, compared to $3.7 million in the prior year. Sales 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. Advanced Energy segment sales increased approximately $2.2 million, or 69.3% year-over-year, to $5.3 million, compared to approximately $3.1 million last year, as a result of additional sales force including distributors. OEM segment sales increased $0.7 million, or 124.7% year-over-year, to $1.3 million, compared to $0.6 million last year, primarily attributable to sales to Symmetry under our Manufacture and Supply Agreement.

Total revenue from continuing operations for the six months ended June 30, 2019, increased $5.3 million, or 74.8%, to $12.4 million, compared to $7.1 million in the prior year. Advanced Energy segment sales increased approximately $3.9 million, or 67.9% year-over-year, to $9.6 million, compared to approximately $5.7 million last year, as a result of additional sales force including distributors. OEM segment sales increased $1.4 million, or 104.4% year-over-year, to $2.8 million, compared to $1.3 million last year, resulting mainly from sales to Symmetry under our Manufacture and Supply Agreement.


17

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.




18

APYX MEDICAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANAYLSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued



Salaries and related costs
 
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
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
%
 
 

During the three and six months ended June 30, 2019, selling, general and administrative expense increased by 39.3% and 43.0%, respectively, primarily driven by higher sales commissions and regulatory expense.

Other Income (Expense)
 
Three Months Ended
June 30,
 
 
 
Six Months Ended
June 30,
 
 
(In thousands)
2019
 
2018
 
Change
 
2019
 
2018
 
Change
Interest income
$
403

 
$

 
100.0
 %
 
$
826

 
$

 
100.0
 %
Percentage of sales
6.1
 %
 
%
 
 
 
6.7
 %
 
 %
 
 
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 higher for the three and six months ended June 30, 2019, as compared with the prior year. This increase is primarily 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.

Income Taxes

The Company’s income tax expense (benefit) was $76,000 and $(48,000) with an effective tax rate of -1.7% and 0.3% for the three and six 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 June 30, 2018, respectively. The effective rate differs from the statutory rate primarily due to the change in the valuation allowance on the Company’s net deferred tax assets.

19

APYX MEDICAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANAYLSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued



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 outsourced 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 June 30, 2019 was approximately $74.1 million compared with $81.8 million at December 31, 2018.
On August 30, 2018, we sold our Core business segment and other related assets for $97 million in cash. At December 31, 2018, we had approximately $78 million in Cash, Cash Equivalents and Short-Term Investments, after making estimated Federal and State tax payments of $13.3 million.

For the six months ended June 30, 2019, net cash used in operating activities is approximately $10.1 million, which principally funded our operating loss of $(9.7) million, compared with net cash used in operating activities of approximately $1.7 million in 2018.

Net cash from investing activities is $60.9 million, primarily related to the maturity of short term investments and reinvestment in cash equivalents.

Cash from financing activities of approximately $0.1 million relates 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 to the repayment of our mortgage at the Clearwater, FL, facility.

At June 30, 2019, we had purchase commitments totaling approximately $3.4 million, substantially all of which is expected to be purchased by the end of 2019.

In response to the current worldwide helium shortage, to support our current and near term customer requirements, we issued purchase orders with two international companies to supply us with helium cylinders and have entered into agreements 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.



20

APYX MEDICAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANAYLSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued


Critical Accounting Estimates

In preparing the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP), we have adopted various accounting policies. Our most significant accounting policies are disclosed in Note 2 to the consolidated financial statements included in our Report on Form 10-K for the year ended December 31, 2018, filed with the Securities and Exchange Commission on March 14, 2019.

The preparation of the consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Our estimates and assumptions, including those related to inventories, intangible assets, property, plant and equipment, legal proceedings, research and development, warranty obligations, product liability, fair valued liabilities, sales returns and discounts, stock-based compensation and income taxes are updated as appropriate, which in most cases is at least quarterly. We base our estimates on historical experience, or various assumptions that are believed to be reasonable under the circumstances and the results form the basis for making judgments about the reported values of assets, liabilities, revenues and expenses. Actual results may materially differ from these estimates.

Estimates are considered to be critical if they meet both of the following criteria: (1) the estimate requires assumptions about material matters that are uncertain at the time the accounting estimates are made and (2) other materially different estimates could have been reasonably made or material changes in the estimates are reasonably likely to occur from period to period. Our critical accounting estimates include the following:

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, 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

21

APYX MEDICAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANAYLSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued


disclosed in the notes to the consolidated financial statements. In most cases, significant judgment is required to estimate the amount and timing of a loss to be recorded, actual results may differ from these estimates.

Income Taxes

The provision for income taxes includes federal, foreign, state and local income taxes currently payable and those deferred because of temporary differences between the financial statement and tax bases of assets and liabilities. Deferred tax assets or liabilities are computed based on the difference between the financial statement and income tax bases of assets and liabilities using enacted marginal tax rates. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. Deferred income tax expenses or credits are based on the changes in the asset or liability from period to period.

As a result of historical losses exclusive of discontinued operations and 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 and does not anticipate recording an income tax benefit related to these deferred tax assets. 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.

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 is subject to U.S. federal and state income tax examination. The Company’s 2015 through 2018 U.S. federal income tax returns are subject to examination by the Internal Revenue Service. The Company’s state income tax returns are subject to examination for the tax years 2014 through 2018.

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 4 of the Notes to Consolidated Financial Statements.


22

APYX MEDICAL CORPORATION

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. We believe there have been no material changes to the information provided therein.

ITEM 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management has established and maintains disclosure controls and procedures that are designed to ensure that the information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Management carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of June 30, 2019, the Company's disclosure controls and procedures were not effective because of the material weaknesses in our internal control over financial reporting as discussed below.

Notwithstanding such material weaknesses, which is described below in Management’s Report on Internal Control over Financial Reporting, our management has concluded that the consolidated financial statements included in this Form 10-Q present fairly, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with GAAP.

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). The Company's internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, management carried out an evaluation of the effectiveness of the Company's internal control over financial reporting as of December 31, 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 process 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

23

APYX MEDICAL CORPORATION


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.

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 six months ended June 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


24

APYX MEDICAL CORPORATION

PART II.     Other Information

ITEM 1. Legal Proceedings

The medical device industry is characterized by frequent claims and litigation, and we are and may become subject to various claims, lawsuits and proceedings in the ordinary course of our business, 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.

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.

25

APYX MEDICAL CORPORATION

ITEM 6. Exhibits
2.1
 
3.1
 
3.2
 
3.3
 
3.4
 
3.5
 
31.1*
 
31.2*
 
32.1*
 
32.2*
 
101.INS**
 
XBRL Instance Document
101.SCH**
 
XBRL Taxonomy Extension Schema Document
101.CAL**
 
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF**
 
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB**
 
XBRL Taxonomy Extension Label Linkbase Document
101.PRE**
 
XBRL Taxonomy Extension Label Presentation Document

* Filed herewith.

** XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended and otherwise is not subject to liability under these sections.


26

APYX MEDICAL CORPORATION

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
Apyx Medical Corporation
 
 
 
 
 
Date: August 7, 2019
By:
/s/ Charles D. Goodwin II
 
 
 
Charles D. Goodwin II
 
 
 
President, Chief Executive Officer and Director
 
 
 
(Principal Executive Officer)
 
 
 
 
 
Date: August 7, 2019
By:
/s/ Tara Semb
 
 
 
Tara Semb
 
 
 
Chief Financial Officer,
 
 
 
Treasurer and Secretary
 
 
 
(Principal Financial Officer)
 


27