Apyx Medical Corporation — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; filed March 31, 2020. The filing also provides unaudited quarterly results, including Q4 2019. Unless indicated otherwise, financial amounts below are in U.S. dollars.
Business context
Apyx develops and sells helium plasma energy technology, marketed as Renuvion in cosmetic surgery and J-Plasma in hospital surgery, and manufactures products for other medical-device companies through its OEM segment. In 2018, it sold its legacy Core electrosurgery business to Symmetry Surgical; those operations are presented as discontinued operations in the comparative financial statements. In 2019, Advanced Energy generated 80.3% of revenue and OEM 19.7%.
Financial results and liquidity
| Metric | FY2019 | FY2018, restated |
|---|---|---|
| Revenue | $28.235 million | $16.605 million |
| Gross profit / gross margin | $19.094 million / 67.6% | $10.826 million / 65.2% |
| Operating loss | $20.869 million | $14.276 million |
| Net loss from continuing operations | $19.706 million; $0.58 per share | $10.784 million; $0.32 per share |
| Operating cash flow | $(18.475) million | $(20.881) million |
| Cash and cash equivalents at year-end | $58.812 million | $16.596 million, plus $61.678 million of short-term investments |
| Working capital | $64.422 million | $81.224 million |
FY2019 revenue rose 70.0% year over year: Advanced Energy increased 74.6% to $22.676 million and OEM increased 53.6% to $5.559 million. International sales were $8.651 million, or 30.6% of revenue, compared with 22.6% in 2018. Gross margin improved 2.4 percentage points, which management attributed principally to a higher Advanced Energy sales mix and manufacturing efficiencies, partly offset by lower-margin international and Symmetry OEM sales.
Q4 2019 revenue was $8.382 million, gross profit was $5.563 million, and net loss was $5.433 million. Q4 2018 revenue was $5.845 million, gross profit was $3.556 million, and net loss was $3.912 million.
Operating expenses rose substantially alongside expansion and commercialization spending: research and development was $3.731 million, professional services $8.507 million, salaries and related costs $14.025 million, and selling, general and administrative expense $13.700 million. Interest income was $1.392 million; interest expense was $8,000. Year-end liabilities included a $140,000 related-party note payable and approximately $993,000 of operating and finance lease liabilities. Management reported no off-balance-sheet arrangements.
Material changes and unusual items
- FY2019 continuing-operations revenue growth reflected additional U.S. sales personnel, stronger generator and utilization-driven handpiece sales, new international distributors, and entry into four markets. OEM growth was primarily associated with the Symmetry manufacturing and supply agreement.
- The 2018 reported net income of $62.719 million included $73.503 million of discontinued-operations income, including a $68.404 million after-tax gain on the Core business sale. It is not comparable to 2019 continuing-operations performance.
- The company restated 2018 results and identified errors in 2019 interim reporting. Corrections included stock-option compensation, payroll taxes on option exercises, OEM development revenue and cost deferrals, intercompany inventory markup, and cutoff items. The filing says affected 2018 statements and certain 2019 quarterly statements were no longer reliable; 2019 interim periods were also revised.
- In connection with option exercises, the company recorded a joint and several payroll-tax liability of approximately $1.045 million at year-end 2019. It also had approximately $1.491 million accrued for uncertain tax positions.
Outlook, risks and contingencies
- Management planned continued investment in Renuvion commercialization, clinical evidence, regulatory strategy, physician support, and manufacturing. It expected 2020 R&D spending of approximately 10%–15% of revenue and cautioned that investment could weigh on near-term profitability and cash flow. No specific revenue or earnings guidance is provided.
- The filing reports that the COVID-19 pandemic had already caused a significant decline in 2020 sales results; the eventual financial impact could not be reasonably estimated. Management also warned of potential operational and supply-chain disruption.
- Regulatory clearance and permitted product indications are material risks. A securities class action alleges misleading statements concerning a 510(k) submission for a J-Plasma dermal-resurfacing indication. The court denied the company’s motion to dismiss on March 11, 2020. The company disputes the allegations, intends to defend the case, and had $820,000 accrued at year-end for the matter. Management also disclosed other helium-plasma-related legal actions and a dispute with an insurer over coverage levels.
- Other identified risks include potential sterilization-service constraints from ethylene oxide facility closures, reliance on suppliers (including China), competition, product safety and liability, and international regulatory requirements. A China joint venture was in an unfunded startup phase; the company expected to contribute approximately $0.4 million in Q1 2020.
- The independent auditor gave an unqualified opinion on the 2019 financial statements but an adverse opinion on internal control over financial reporting. Three material weaknesses remained at year-end: insufficient qualified accounting personnel, inadequate documentation and timeliness of certain U.S. controls, and purchasing/payment controls at the Bulgarian subsidiary. Management said remediation was incomplete.
Important facts for investors to verify
- Review the restated 2018 and revised 2019 quarterly figures, and confirm any subsequent amendments and control-remediation progress.
- Track revenue growth, gross margin, operating cash burn, and liquidity as commercialization spending continues.
- Confirm the status and permitted indications of Renuvion/J-Plasma, including relevant FDA submissions and any resulting market restrictions.
- Monitor COVID-era sales and supply-chain effects, including sterilization capacity and China-related sourcing or joint-venture commitments.
- Follow the securities litigation, insurance coverage dispute, and potential costs beyond accrued amounts.
- Assess potential dilution: 3,966,858 options were outstanding at December 31, 2019, approximately 11.6% of outstanding common shares as disclosed by the company.