Apyx Medical Corporation — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; filed March 13, 2019. Although the request refers to 2018 Q4, this is an annual report. Quarterly figures below are unaudited. Comparative results were recast to present the divested Core business as discontinued operations.
Business context
Apyx develops helium-plasma surgical technology, sold as Renuvion in cosmetic surgery and J-Plasma in hospital surgery, and provides medical-device OEM manufacturing. On August 30, 2018, it sold its electrosurgical Core business, including the Bovie brand, to Symmetry Surgical. The sale refocused the company on Advanced Energy and OEM operations; agreements include a 10-year generator manufacturing and supply arrangement with Symmetry.
Financial performance and liquidity
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Revenue from continuing operations | $16.7 million | $10.2 million |
| Gross profit / gross margin | $10.8 million / 64.7% | $7.0 million / 68.0% |
| Operating loss | ($13.6 million) | ($13.9 million) |
| Continuing-operations net loss | ($9.5 million) | ($13.7 million) |
| Net income (loss), including discontinued operations | $64.0 million | ($5.1 million) |
| Cash used in operating activities | ($21.0 million) | ($3.7 million) |
- Continuing-operations revenue rose 63.0%. Advanced Energy revenue grew 71.1% to $13.1 million; OEM revenue grew 39.3% to $3.6 million. International revenue was $3.8 million, or 22.9% of sales.
- Gross margin declined 3.3 percentage points, with management citing lower Advanced Energy margins associated with increased international sales, partly offset by improved OEM margins.
- FY 2018 net income included a $68.4 million after-tax gain on the Core-business sale and $5.1 million of income from discontinued operations. Continuing operations remained loss-making.
- Fourth-quarter continuing-operations revenue was $5.9 million, gross profit $3.5 million, and net loss $3.3 million. The quarter included approximately $0.7 million of non-recurring severance and related expense.
- At year-end, cash and cash equivalents were $16.5 million and short-term investments were $61.7 million, totaling approximately $78.1 million. Working capital was $81.8 million, versus $16.6 million a year earlier.
- The company reported $91.1 million of net sale proceeds before taxes, paid $13.3 million of income taxes in 2018, and used $87.2 million to purchase marketable securities. The Clearwater facility mortgage was repaid; remaining note payable was $0.14 million.
Changes, outlook, risks and unusual items
- The Core-business divestiture materially changed the business mix and financial statements. Continuing-operations sales figures exclude the Core business; the filing reports $19.6 million of Core sales before the sale in 2018 as discontinued operations.
- Management plans to focus U.S. commercialization on Renuvion in cosmetic surgery and international activity on cosmetic surgery and surgical oncology. It expects 2019 R&D spending of approximately 10%–15% of revenue and says substantial Renuvion development and marketing investment may weigh on profitability and cash flow over the next 12–24 months. No specific revenue or earnings guidance is provided.
- Management expects continuing-operations losses in the foreseeable future. Success depends on Renuvion adoption, clinical and regulatory work, competition, manufacturing and supplier capacity, and protecting intellectual property.
- The company disclosed multiple legal actions relating to J-Plasma use. Management said it believes it has meritorious defenses and insurance coverage, while warning that uncovered damages could materially affect earnings, financial position or cash flows.
- Management and the auditor identified three material weaknesses in internal controls: insufficient qualified accounting personnel, inadequate documentation and timely execution of controls, and ineffective monitoring. Management’s remediation was incomplete at year-end, and the auditor issued an adverse opinion on internal control effectiveness. The auditor separately gave an unqualified opinion on the financial statements.
- Other notable items include $741,000 of 2018 severance expense related to the CFO’s departure, approximately $3.0 million of inventory purchase commitments, and a $1.3 million reserve for uncertain tax benefits.
Investor verification priorities
- Verify continuing-operations revenue growth, segment profitability, and the effect of international sales on gross margins.
- Separate recurring operating performance from the divestiture gain and discontinued-operations income; review sale costs, taxes, and ongoing Symmetry supply-agreement economics.
- Assess operating cash burn and the use, liquidity, and preservation of the sale proceeds, including short-term Treasury investments.
- Track Renuvion clinical, regulatory and commercial progress against elevated R&D and marketing spending, without relying on undisclosed formal guidance.
- Monitor remediation of the material weaknesses and any developments in J-Plasma-related litigation and insurance coverage.