10-Q: Apyx Medical Reports Mixed Q2 2024 Results Amidst Economic Headwinds

Apyx Medical Corporation's Q2 2024 results show a decrease in revenue and gross profit compared to the same period last year, alongside increased legal expenses and a net loss.

Summary

• Apyx Medical Corporation reported a net loss of $6.56 million for the three months ended June 30, 2024, compared to a net loss of $0.99 million for the same period in 2023.
• The company's total revenue decreased by 10.5% to $12.15 million in Q2 2024, down from $13.57 million in Q2 2023.
• Gross profit also declined by 19.2% to $7.49 million in Q2 2024, compared to $9.28 million in Q2 2023.
• The Advanced Energy segment experienced a 16.7% decrease in sales, while the OEM segment saw a 29.0% increase in sales for the quarter.
• The company's operating expenses increased, with professional services rising by 31.5% due to higher legal costs.
• Interest expense increased significantly to $1.43 million in Q2 2024, up from $0.54 million in Q2 2023, due to the Perceptive Credit Agreement.
• The company had $32.7 million in cash and cash equivalents at the end of June 2024, down from $43.7 million at the end of 2023.
• Apyx has a $7.5 million delayed draw loan available until December 31, 2024, contingent on achieving a minimum revenue target.
• The company is involved in several product liability lawsuits and has accrued $1.45 million and $1.3 million for estimated losses related to these matters.

Sentiment

Score: 3

Explanation: The document presents a negative outlook due to decreased revenue, gross profit, and increased losses, along with significant legal expenses and product liability issues. While there are some positives, such as growth in the OEM segment, the overall tone is concerning for investors.

Positives

• OEM segment sales increased by 29.0% in Q2 2024, indicating growth in that area.
• International sales remained relatively stable, representing 28.5% of total revenue for the quarter.
• The company has a delayed draw loan of $7.5 million available, providing potential access to additional capital.
• Apyx is working on initiatives to combat inflation, including finding alternative suppliers and streamlining their network.

Negatives

• Total revenue decreased by 10.5% in Q2 2024 compared to the same period last year.
• Gross profit decreased by 19.2% in Q2 2024 compared to the same period last year.
• The Advanced Energy segment experienced a significant decrease in sales of 16.7%.
• The company reported a net loss of $6.56 million for the quarter.
• Professional services expenses increased by 31.5% due to higher legal costs.
• Interest expense increased significantly due to the Perceptive Credit Agreement.
• Cash and cash equivalents decreased by approximately $11 million since the end of 2023.
• The company is facing multiple product liability lawsuits and has accrued significant losses related to these matters.

Risks

• The company's continued compliance with financial covenants is subject to meeting or exceeding forecasted Advanced Energy revenues.
• The company is involved in multiple product liability lawsuits, which could have a material adverse impact on its financial condition.
• The company's ability to raise additional capital is uncertain, and failure to do so could harm its business.
• The increased use of GLP-1s may have an initial negative impact on the number of liposuction procedures, potentially affecting sales of Renuvion products.
• The company is subject to the risks of the medical device industry, including claims, lawsuits, and proceedings.
• The company's future financial performance could be adversely impacted by inflation.

Future Outlook

The company plans to continue funding operations through existing cash, sales of products, and potentially additional equity or debt financing. They anticipate continued losses in the near term and are working to combat inflation. The company believes that the increased use of GLP-1s may have an initial negative impact on the number of liposuction procedures, but in the long term, as these drugs have a ripple effect that will drive people towards plastic surgery, they will provide a tailwind for sales of their Renuvion products.

Management Comments

• Management estimates that our products have been sold in more than 60 countries.
• Management believes the increased use of GLP-1s may have an initial negative impact on the number of liposuction procedures, but in the long term, they will provide a tailwind for sales of our Renuvion products.
• Management has not yet received from carrier-appointed defense counsel the estimates of the net potential range of losses in all of these cases.

Industry Context

The medical device industry is characterized by frequent claims and litigation, and Apyx is facing product liability lawsuits. The company is also navigating the impact of GLP-1 drugs on the cosmetic surgery market, which may initially reduce liposuction procedures but could increase demand for body contouring treatments like Renuvion in the long term. The company is also experiencing economic uncertainty in the capital equipment market that is being experienced in the aesthetic space.

Comparison to Industry Standards

• Apyx's revenue decline of 10.5% in Q2 2024 contrasts with some medical device companies that have reported growth, such as Intuitive Surgical, which saw a 15% increase in revenue in their most recent quarter. However, the aesthetic market is experiencing a slowdown in capital equipment sales.
• The increase in legal expenses for Apyx is notable, and while not uncommon in the medical device industry, it is higher than some of its peers, such as Cutera, which has not reported such a significant increase in legal costs.
• Apyx's gross margin of 61.7% is lower than some of its competitors in the medical aesthetics space, such as InMode, which has reported gross margins above 70%. This difference is partly due to Apyx's OEM segment having lower margins.
• The company's cash burn is a concern, with a decrease of approximately $11 million in cash and cash equivalents since the end of 2023. This is higher than some of its peers, such as Venus Concept, which has been focusing on cost management to reduce cash burn.

Legal Proceedings

• The company is involved in a number of legal actions relating to the use of its Helium Plasma Platform Technology.
• The company has accrued $1.45 million related to product liability matters during 2022.
• The company has accrued $1.3 million related to product liability matters during 2023.
• The company is in a dispute with one of its insurance carriers regarding the total level of coverage available.

Related Party Transactions

• The company made purchases from its Chinese supplier, which is also a partner in the China JV, of approximately $42,000 and $93,000 for the three and six months ended June 30, 2024, respectively.
• Two relatives of Nikolay Shilev, Apyx Bulgaria's Managing Director, are employees of the company.

Stakeholder Impact

• Shareholders are negatively impacted by the decreased revenue, gross profit, and increased losses.
• Employees may be impacted by potential cost-cutting measures if the company's financial situation does not improve.
• Customers may be impacted by potential changes in product availability or pricing due to the company's financial challenges.
• Suppliers may be impacted by potential changes in purchase volumes or payment terms.
• Creditors may be impacted by the company's increased debt and potential need for additional financing.

Next Steps

• The company plans to continue to fund operations and capital funding needs through existing cash, sales of products and if necessary additional equity and/or debt financing.
• The company will continue to work on initiatives to combat inflation.
• The company will continue to defend itself against product liability lawsuits.

Key Dates

Keywords

Apyx Medical, Renuvion, J-Plasma, Advanced Energy, OEM, Helium Plasma Technology, Medical Devices, Cosmetic Surgery, Product Liability, Financial Results, Quarterly Report