What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-08-10 compared with 2020-05-11 · 107 added, 72 removed, 151 unchanged (54% of the section changed)

12 unchanged sentences

Renuvion® offers plastic surgeons, fascial plastic surgeons and cosmetic physicians a unique ability to provide controlled heat to the tissue to achieve their desired results.

The JPlasma® system allows surgeons to operate with a high level of precision and virtually eliminating unintended tissue trauma.

The J-Plasma® system allows surgeons to operate with a high level of precision and virtually eliminating unintended tissue trauma.

We also leverage our deep expertise and decades of experience in unique waveforms through original equipment manufacturing (OEM) agreements with other medical device manufacturers.

As discussed in our Annual Report on Form 10-K for the year ended December 31, 2019, an outbreak of a novel strain of the coronavirus, COVID-19, was recently identified in China and has subsequently been recognized as a pandemic by the World Health Organization.

This coronavirus outbreak has severely restricted the level of economic activity around the world.

In response to this coronavirus outbreak the governments of many countries, states, cities and other geographic regions have taken preventative or protective actions, such as imposing restrictions on travel and business operations and advising or requiring individuals to limit or forego their time outside of their homes.

As discussed in our Annual Report on Form 10-K for the year ended December 31, 2019, an outbreak of a novel strain of the coronavirus, COVID-19, was identified in China and has subsequently been recognized as a pandemic by the World Health Organization.

The COVID-19 outbreak has severely restricted the level of economic activity around the world.

In response to the COVID-19 outbreak the governments of many countries, states, cities and other geographic regions have taken preventative or protective actions, such as imposing restrictions on travel and business operations and advising or requiring individuals to limit or forego their time outside of their homes.

Temporary closures of businesses have been ordered and numerous other businesses have temporarily closed voluntarily.

These actions expanded significantly in the mid-March to mid-April time frame and continue to the date of the filing.

There are indications that these actions are beginning to subside as governmental bodies begin to loosen restrictions.

However, given the variability in measures taken, the uncertainty among any potential resurgence of coronavirus, and patients willingness to undergo elective procedures, the related financial impact cannot be reasonably estimated at this time.

Therefore we expect significant adverse impacts to the results of our operations into the second fiscal quarter and possibly beyond.

As of the date of this filing, there are strong indications that these actions are beginning to subside as governmental bodies begin to loosen restrictions.

However, given the variability in measures taken, the uncertainty among any potential resurgence of COVID-19, and patients willingness to undergo elective procedures, the related financial impact cannot be reasonably estimated at this time.

As a result, there could continue to be significant adverse impacts to the results of our operations into the third fiscal quarter and possibly beyond.

Prior to the spread of COVID-19 into the US and international markets, we experienced positive year-over-year growth trends in the sale of our capital and disposable products, indicating increased utilization of our technology.

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These declines continued and also spread to the North and Latin American markets in March.

At this time, we have not experienced any recovery in sales of these products in the affected markets.

Towards the end of the second quarter, we began to see improved demand for our products, primarily in the US market, however the extent of this improvement remains uncertain.

We source the components used in our products from a variety of suppliers and we have collaborative arrangements with three key foreign suppliers.

At this time our suppliers have experienced no significant disruptions as a result of the COVID-19 pandemic.

At this time our suppliers have experienced no significant disruptions as a result of COVID-19.

We have experienced minor delays in our procurement from these suppliers as a result of the availability of shipping from third party freight carriers.

These delays have not, to date, had a significant impact on our operations.

In response to the COVID-19 pandemic, we have taken action in these key areas:

In response to COVID-19, we have taken action in these key areas:

Protecting the Health and Safety of our Employees:

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We have also split the shifts of our manufacturing personnel to allow for adequate social distancing, and require all personnel to utilize personal protective equipment while on site at our facilities.

We have also restricted business travel and access to our facilities.

• Operating Expenses:

We are taking preemptive steps to curtail spending, including implementing hiring restrictions,

reducing most discretionary spending, reducing capital expenditures, and delaying certain R&D projects and clinical research studies.

We have also significantly reduced business travel and access to our facilities.

Maintaining Engagement of or Sales Team and Our Customers:

In addition to the initiatives we have put in place to protect health and safety for all employees, we have focused our direct sales team on remaining in close contact with their existing surgeon customers to do everything they can to provide them with support during this difficult time.

APYX MEDICAL CORPORATION

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued

this goal in mind, we have implemented additional training for our sales reps in order to sharpen their ability to engage with our customers virtually.

In addition to engaging with existing customers via virtual methods, our reps also continue to target and reach out to prospective accounts so that they will be well-positioned when the recovery occurs and surgeons return to conducting elective cosmetic procedures.

Outside the U.S., we are closely monitoring the activities of our distributor partners and helping them navigate the challenges they face as a result of the slower demand they are seeing in their respective countries.

Operating Expenses:

We continue to take preemptive steps to curtail spending, including implementing hiring restrictions,

reducing most discretionary spending, reducing capital expenditures, and delaying certain R&D projects and clinical research studies.

Governmental Policy:

On March 27, 2020, the U.S.

government enacted the CARES Act to provide relief from the

coronavirus pandemic.

We are taking advantage of certain provisions of the CARES Act which are applicable to us including utilizing NOL carryback provisions and the deferral of payroll taxes.

We expect that utilizing these provisions will significantly help mitigate the working capital impact the COVID-19 pandemic has had on our sales and operations.

Total revenue decreased by 11.2% or approximately $0.6 million for the three months ended March 31, 2020 when compared with the three months ended March 31, 2019.

Advanced Energy segment sales decreased 8.8% or approximately $0.4 million for the three months ended March 31, 2020 when compared with the three months ended March 31, 2019.

The coronavirus pandemic resulted in decreased demand for our products, both domestically and internationally in the first quarter of 2020 as many of our customers' businesses have been ordered and numerous others have temporarily closed voluntarily.

International sales represented approximately 27.6% of total revenues for the three months ended March 31, 2020, as compared with 30.5% of total revenues in the prior year.

Management estimates our products have been sold in more than 45 countries through local dealers coordinated by sales and marketing personnel at the Clearwater, Florida facility.

During 2020, we continue to drive growth in our Advanced Energy business by increasing the adoption and utilization of our generators and handpieces in the U.S.

government enacted the CARES Act to provide relief from COVID-19.

We continue to take advantage of certain provisions of the CARES Act which are applicable to us including utilizing NOL carryback provisions and the deferral of payroll taxes.

We expect that utilizing these provisions will significantly help mitigate the working capital impact COVID-19 has had on our sales and operations.

During 2020, we continue to drive sales in our Advanced Energy business by increasing the adoption and utilization of our generators and handpieces in the U.S.

cosmetic surgery market and fulfilling demand from distributors in our international markets.

As of March 31, 2019, we had a direct sales force of 31 field-based selling professionals and a network of 4 independent sales agencies.

We also had 5 sales managers.

Management estimates that our products have been sold in more than 50 countries.

As of June 30, 2020, we had a direct sales force of 31 field-based selling professionals and a network of 4 independent sales agencies, led by 5 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®.

During the first two months of 2020, our plans to host new Physician Mentor Programs, or “PMPs,” and expand our presence and educational programming at industry conferences and trade shows proceeded as expected.

Our events planned for March, however, were canceled due to COVID-19.

In lieu of this in-person programming, our sales, marketing and field clinical teams have been very active in engaging with our customers - and prospects - around the world.

We have hosted educational events virtually where we featured some of our leading clinician customers speaking on a wide range of topics, including side-by-side results comparing Renuvion® to a leading competitor technology.

Our virtual educational events have also included case studies to illustrate how our leading clinician customers have adopted Renuvion®, their strategies for marketing and selling to new patients, and their thoughts on pricing and return on investment.

We recently hosted the first installment of a planned series of webinars designed to assist our customers and prospects with opening their practices post-COVID 19.

We also engaged with clinician customers outside the U.S.

including hosting multiple continuing education training sessions on J-Plasma® and Renuvion® with our current international distributors and conducting multiple calls with groups of international prospects interested in learning about our Renuvion® technology.

Operating segments are aggregated into reportable segments only if they exhibit similar economic characteristics.

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Results of Operations

APYX MEDICAL CORPORATION

MANAGEMENT'S DISCUSSION AND ANAYLSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued

Three Months Ended

Six Months Ended

(In thousands)

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International

APYX MEDICAL CORPORATION

MANAGEMENT'S DISCUSSION AND ANAYLSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued

Total revenue decreased by 11.2% or approximately $0.6 million for the three months ended March 31, 2020 when compared with the three months ended March 31, 2019.

Advanced Energy segment sales decreased 8.8% or approximately $0.4 million for the three months ended March 31, 2020 when compared with the three months ended March 31, 2019.

The coronavirus pandemic resulted in decreased demand for our products, both domestically and internationally, in the first quarter of 2020 as many of our customers' businesses have been ordered to close, while numerous others have closed voluntarily.

We expect that the decreased demand will continue into the second quarter of 2020 and possibly beyond.

Total revenue decreased by (35.4)% and (24.3)% , or approximately $(2.4) million and $(3.0) million , for the three and six months ended June 30, 2020 when compared with the three and six months ended June 30, 2019.

Advanced Energy segment sales decreased (46.4)% and (29.5)% , or approximately $(2.5) million and $(2.9) million , for the three and six months ended June 30, 2020 when compared with the three and six months ended June 30, 2019.

The impact of COVID-19 resulted in decreased demand for our products, both domestically and internationally in the first half of 2020 as many of our customers' businesses were ordered closed and numerous others temporarily closed voluntarily.

Sales began to recover late in the second quarter as many of our customers resumed operations in a limited capacity.

International sales represented approximately 21.0% and 24.6% of total revenues for the three and six months ended June 30, 2020, respectively, as compared with 31.7% and 31.2% of total revenues for the same prior year period.

Management estimates our products have been sold in more than 50 countries through local dealers coordinated by sales and marketing personnel through our facilities in Clearwater, Florida and Sofia, Bulgaria.

Three Months Ended

Six Months Ended

(In thousands)

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Percentage of sales

Gross profit for the three months ended March 31, 2020 , decreased by 16.3% year-over-year, to $3.0 million, compared to $3.6 million in the prior year.

Gross margin for the three months ended March 31, 2020 , was 59.7% , compared to 63.3% for the same period in 2019.

The primary drivers of the change in gross profit margin were product mix within both our Advanced Energy and OEM segments, revenue mix between our segments, geographical revenue mix, and improved product margins in our Advanced Energy segment as a result of our continued manufacturing efficiency initiatives.

Gross profit for the three months ended June 30, 2020 , decreased (55.2)% year-over-year, to $2.1 million , compared to $4.7 million in the prior year.

Gross margin for the three months ended June 30, 2020 , was 48.7% , compared to 70.3% for the same period in 2019.

Gross profit for the six months ended June 30, 2020 , decreased (38.4)% year-over-year, to $5.1 million , compared to $8.2 million in the prior year.

Gross margin for the six months ended June 30, 2020 , was 54.6% , compared to 67.1% for the same period in 2019.

During the second fiscal quarter, we reassessed our forecasted product mix due to COVID-19, increased availability of our newer handpiece designs, and earlier than expected completion of product registrations in some of our foreign markets.

As a result, certain products were reduced to a lower carrying value, and some components were also written off as it was determined to cease further production on these models.

This resulted in a decrease in gross profit of approximately $0.4 million during the three and six months ended June 30, 2020.

The remaining change in gross profit margins is driven by product mix within both our Advanced Energy and OEM segments, revenue mix between our segments, geographical revenue mix, and improved product margins in our Advanced Energy segment as a result of our continued manufacturing efficiency initiatives.

APYX MEDICAL CORPORATION

MANAGEMENT'S DISCUSSION AND ANAYLSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued

Other Costs and Expenses

Our spending in the first quarter of 2020 reflected normal business activities into February and March and then a curtailment of certain costs associated with the impact of the COVID-19 pandemic, including restrictions on travel.

While certain spending will decrease in the second quarter of 2020 as a result of a reduction in revenue and activities limited by the COVID-19 pandemic, much of our spending will continue.

Our spending in the three and six months ended June 30, 2020 reflected normal business activities into February and March and then a curtailment of certain costs associated with the impact of COVID-19, including restrictions on travel.

While certain spending decreased in the second quarter of 2020 as a result of a reduction in revenue and activities limited by COVID-19, some of our strategic spending will continue.

For example, while we have restricted new hirings, we have no plans to reduce our headcount or furlough any employees at this time.

Certain costs will decline as the underlying activities are restricted by the COVID-19 pandemic, including travel and related expenses, clinical trials and physician training.

Certain costs will decline as the related underlying activities are restricted by COVID-19, including travel, trade shows and related expenses, clinical trials and in-person physician training.

Research and development

Three Months Ended

Six Months Ended

(In thousands)

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Percentage of sales

Research and development expenses increased 34.2% for the three months ended March 31, 2020 , primarily due to spending on two IDE clinical studies, which had applications submitted to the FDA in late 2019.

APYX MEDICAL CORPORATION

MANAGEMENT'S DISCUSSION AND ANAYLSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued

Research and development expenses increased 9.8% and 20.8% for the three and six months ended June 30, 2020 , respectively, primarily due to spending on our two IDE clinical studies, which had applications submitted to the FDA in late 2019.

Professional services

Three Months Ended

Six Months Ended

(In thousands)

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Percentage of sales

Professional services expense increased 12.8% for the three months ended March 31, 2020 , primarily attributable to increased accounting and auditing fees related to recent financial statement restatements and continued efforts to remediate our internal control deficiencies.

Professional services expense decreased (0.2)% for the three months ended June 30, 2020 , primarily attributable to decreases in physician consulting fees ($0.2 million) associated with the COVID-19 shutdown and a decrease in consulting option expense to our partner physicians ($0.3 million), as we did not grant options to our partner physicians in 2020.

These decreases were partially offset by an increase in accounting and auditing fees ($0.4 million) related to recent financial statement restatements and continued efforts to remediate our internal control deficiencies and material weaknesses.

Professional services expense increased 7.1% for the six months ended June 30, 2020 , primarily attributable to an increase in accounting and auditing fees ($0.7 million) related to recent financial statement restatements and continued efforts to remediate our internal control deficiencies and material weaknesses.

This increase was partially offset by decreases in legal expense ($0.2 million) associated with the class action lawsuit accrual in the first quarter of 2019 and a decrease in consulting option expense to our partner physicians ($0.3 million), as we did not grant options to our partner physicians in 2020.

Salaries and related costs

Three Months Ended

Six Months Ended

(In thousands)

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Percentage of sales

During the three months ended March 31, 2020 , salaries and related expenses decreased approximately (5.1)% , primarily driven by a decrease in bonus expense in 2020 partially offset by an increase in headcount at March 31, 2020 as compared to March 31, 2019.

APYX MEDICAL CORPORATION

MANAGEMENT'S DISCUSSION AND ANAYLSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued

During the three and six months ended June 30, 2020 , salaries and related expenses decreased approximately (2.0)% and (3.5)% , respectively, primarily driven by a decrease in accrued bonus expense in 2020.

This decrease was partially offset by higher stock option expense and an increase in average headcount for the period.

Selling, general and administrative expenses

Three Months Ended

Six Months Ended

(In thousands)

Percentage of sales

During the three months ended March 31, 2020 , selling, general and administrative expense increased approximately 28.4% , primarily driven by higher bad debt expense ($0.6 million) related to increased uncertainty on the collection of our receivables due to the economic environment resulting from the coronavirus pandemic, and an increase in insurance premiums ($0.1 million) from the prior year.

APYX MEDICAL CORPORATION

MANAGEMENT'S DISCUSSION AND ANAYLSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued

During the three months ended June 30, 2020 , selling, general and administrative expense decreased (27.9)% , primarily driven by a decrease in travel and entertainment expense ($0.5 million), a decrease in show fees and related costs ($0.2 million) and a decrease in customer samples ($0.1 million) associated with restricted travel and decreased sales activity from COVID-19.

During the six months ended June 30, 2020 , selling, general and administrative expense decreased approximately (0.2)% , primarily driven by a decrease in travel and entertainment expense ($0.3 million), a decrease in show fees and related costs ($0.2 million), a decrease in commission expense ($0.2 million) and a decrease in customer samples ($0.2 million) associated with restricted travel and decreased sales activity from COVID-19.

These decreases were partially offset by higher bad debt expense ($0.6 million) related to increased uncertainty on the collection of our receivables due to the economic environment resulting from COVID-19 and an increase in insurance premiums ($0.1 million) from the prior year.

Other Income (Expense)

Three Months Ended

Six Months Ended

(In thousands)

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Percentage of sales

Total interest income decreased for the three months ended March 31, 2020 , as compared with the prior year.

Total interest income decreased (98.3)% and (73.0)% for the three and six months ended June 30, 2020 , respectively, as compared with the same periods in the prior year.

This decrease is due to a lower average balance, as well as a lower yield, on our investments in U.S.

Treasury Securities included in cash and cash equivalents.

Other income (losses), net increased for the three months ended March 31, 2020 , as compared with the prior year.

Other income (losses), net increased for the three and six months ended June 30, 2020 , as compared with the prior year.

This increase is primarily due to the receipt of refunds on tariffs paid in the prior year, offset by the recognition of a joint and several liability for failure to collect and remit payroll taxes related to stock option exercises in the prior year.

Three Months Ended

Six Months Ended

(In thousands)

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Effective tax rate

Our income tax expense (benefit) was approximately $(4,905,000) and $6,000 with an effective tax rate of 71.5% and (0.1)% for the three months ended March 31, 2020 and 2019, respectively.

APYX MEDICAL CORPORATION

MANAGEMENT'S DISCUSSION AND ANAYLSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued

Our income tax (benefit) expense was approximately $(1,492,000) and $76,000 with an effective tax rate of 24.1% and (1.8)% for the three months ended June 30, 2020 and 2019, respectively.

Our income tax (benefit) expense was approximately $(6,397,000) and $82,000 with an effective tax rate of 49.1% and (0.8)% for the six months ended June 30, 2020 and 2019, respectively.

The effective rate differs from the statutory rate primarily due to the release of the valuation allowance on our net operating loss carryforward from 2019.

On March 27, 2020, the U.S.

government enacted the CARES Act to provide relief from the coronavirus pandemic.

government enacted the CARES Act to provide relief from COVID-19.

The CARES Act includes a provision that allows companies to carryback net operating losses generated in the period 2018 through 2020 to prior years.

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Liquidity and Capital Resources

Our working capital at March 31, 2020 was approximately $63.6 million compared with $64.4 million at December 31, 2019.

The decrease in working capital from December 31, 2019 to March 31, 2020 was primarily due to the net loss incurred by the Company during the first quarter of 2020 partially offset by non cash stock based compensation expense.

For the three months ended March 31, 2020, net cash used in operating activities was approximately $7.4 million, which principally funded our operating loss of $(7.5) million, compared with net cash used in operating activities of approximately $5.1 million in the same period for 2019.

Utilizing the provisions of the CARES Act, we recognized an income tax benefit of approximately $4.9 million in Q1 2020, of which we expect to receive a tax refund of approximately $3.7 million by the end of 2020.

We expect that utilizing the NOL carryback will significantly help mitigate the working capital impact the COVID-19 pandemic has had on our sales and operations.

The CARES Act also allows us to defer the payment of payroll taxes incurred between March 27, 2020 and December 31, 2020 into 2021 and 2022.

Our expected deferral under this program is between $0.4 million and $0.5 million.

As a result of the impact of the COVID-19 pandemic on our customers, we have received multiple requests for extension on the payment of receivables.

We are committed to work with our customers to collect the receivables as expeditiously as possible.

Net cash from investing activities is $0.1 million, primarily related to investments in property and equipment.

APYX MEDICAL CORPORATION

MANAGEMENT'S DISCUSSION AND ANAYLSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued

At March 31, 2020 , we had purchase commitments totaling approximately $0.7 million, substantially all of which is expected to be purchased within the next six months.

Our working capital at June 30, 2020 was approximately $60.2 million compared with $64.4 million at December 31, 2019.

The decrease in working capital from December 31, 2019 to June 30, 2020 was primarily due to the net loss incurred by the Company during the first half of 2020 partially offset by non cash activity including stock based compensation expense and our provision for allowance for doubtful accounts.

For the six months ended June 30, 2020, net cash used in operating activities was approximately $12.4 million , which principally funded our operating loss of $13.7 million , compared with net cash used in operating activities of approximately $10.7 million million in the same period for 2019.

Utilizing the provisions of the CARES Act, we recognized an income tax benefit of approximately $6.4 million in the first half of 2020, of which we expect to receive a tax refund of approximately $3.7 million by the end of 2020.

We expect that utilizing the NOL carryback will significantly help mitigate the working capital impact COVID-19 has had on our sales and operations.

The CARES Act also allows us to defer the payment of payroll taxes incurred between March 27, 2020 and December 31, 2020, with half of the resulting liability due on December 31, 2021, and the remainder due on December 31, 2022.

As of June 30, 2020 we deferred approximately $0.1 million in taxes utilizing this program.

We expect to defer and additional $0.3 million to $0.4 million under this program by December 31, 2020.

As a result of the impact of COVID-19 on our customers, we have received multiple requests for extension on the payment of receivables.

While we are committed to working with our customers to collect the receivables as expeditiously as possible, collectability of these receivables is more uncertain and we have recorded an increased allowance for doubtful accounts as a result.

A primary focus for the Company in 2020 continues to be maintaining appropriate balance sheet flexibility, including cash on hand, due to the uncertain nature and unpredictable timing of the impacts of COVID-19.

Net cash used in investing activities was $0.2 million, related to investments in property and equipment.

At June 30, 2020 , we had purchase commitments totaling approximately $0.5 million, substantially all of which is expected to be purchased within the next six months.

APYX MEDICAL CORPORATION

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We have not included any additional periods, nor disregarded any periods, in calculating our volatility.

Accounts Receivable Reserves

We maintain a reserve for uncollectible accounts receivable.

When evaluating the adequacy of the allowance for doubtful accounts, we analyze specific unremitted customer balances for known collectability issues, review historical bad debt experience, customer credit worthiness and economic trends, and we make estimates in connection with establishing the allowance for doubtful accounts, including the future impacts of current trends.

Changes in estimates are reflected in the period they are made.

If the financial condition of our customers deteriorates, resulting in an inability to make payments, additional allowances may be required.

APYX MEDICAL CORPORATION

MANAGEMENT'S DISCUSSION AND ANAYLSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued

Inventory Reserves

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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.

APYX MEDICAL CORPORATION

MANAGEMENT'S DISCUSSION AND ANAYLSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued

Litigation Contingencies

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We will reassess the realization of deferred tax assets each reporting period and will be able to reduce the valuation allowance to the extent the financial results improve and it becomes more likely than not that the deferred tax assets will be realizable.

As management expects the Company to continue to generate losses in 2020 and the foreseeable future after 2020, we will continue to record a valuation allowance on the remaining deferred tax asset balance as of March 31, 2020.

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.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis