Apyx Medical(APYX) - 2020 Q4 - Annual Report

Part I Business Apyx Medical focuses on advanced energy technology for cosmetic and surgical markets, centered on its Helium Plasma Technology - The company's primary focus is on its innovative Helium Plasma Technology, sold as Renuvion® in the cosmetic market and J-Plasma® in the surgical market[15] - In 2018, Apyx divested its electrosurgical "Core" business for $97 million to focus on Helium Plasma Technology[16] 2020 Revenue by Business Segment | Segment | Revenue Contribution | |---|---| | Advanced Energy | 80.2% | | OEM | 19.8% | - The company operates ISO certified and FDA registered manufacturing facilities in Clearwater, Florida, and Sofia, Bulgaria[24][25] Advanced Energy Segment The Advanced Energy segment, accounting for 80.2% of 2020 revenue, focuses on Renuvion® and J-Plasma® products for cosmetic and surgical markets - The U.S. commercial strategy focuses on Renuvion® for cosmetic surgery, while international efforts target both cosmetic and surgical oncology markets with J-Plasma®[36] - As of December 31, 2020, the U.S. direct sales force comprised 31 field-based professionals, 2 independent sales agencies, and 5 sales managers focused on cosmetic surgery[34] - In early 2020, the company launched new products, including Renuvion System 3 and J-Plasma System 3 generators and Renuvion® APR handpieces, for improved ergonomics[35][40][41] OEM Segment The OEM segment, contributing 19.8% of 2020 revenue, produces electrosurgical equipment for other medical device manufacturers - The OEM segment produces generators and accessories for other medical device companies, leveraging Apyx's design and manufacturing expertise[43] - A significant part of the OEM business is a ten-year manufacturing and supply agreement with Symmetry Surgical, following the 2018 Core business divestiture[43] Risk Factors The company faces significant regulatory, business, and operational risks, including those related to COVID-19 and intellectual property Regulatory Compliance Risk The company faces extensive and evolving regulatory compliance risks from U.S. and international bodies, including those related to COVID-19 and environmental regulations - The COVID-19 pandemic may impede clinical trials and slow regulatory actions, potentially delaying new product approvals[46][47] - The new EU Medical Device Regulation (EU MDR), effective May 2021, imposes significant additional premarket and postmarket requirements, raising compliance standards[53][54] - Increased EPA regulation of Ethylene oxide (EtO) sterilization could lead to facility closures and potential shortages of sterilized handpieces[58][59] Risks Relating to Our Business Key business risks include reliance on manufacturing facilities and suppliers, intellectual property protection, COVID-19 impacts, and litigation exposure - The company's intellectual property includes 39 issued U.S. patents and 27 foreign patents, but their competitive advantage or protection is not guaranteed[23][69] - The ongoing COVID-19 pandemic may continue to adversely affect business operations, supply chains, manufacturing, and financial results[72][73] - The company relies on sole-source suppliers for most raw materials, and supply chain disruptions could materially impact business and operations[77] - The company is involved in legal actions concerning its Helium Plasma technology, expected to be insurance-covered, but could have a material adverse impact if damages exceed limits[75] General Risks General risks include potential future deficiencies in internal controls, cybersecurity threats, and impacts from changes in U.S. trade policies - The company has remediated material weaknesses in internal controls from 2018 and 2019, but future deficiencies are not assured against[90] - Cybersecurity breaches pose significant risks, potentially exposing confidential data, disrupting operations, and incurring liability under regulations like GDPR[91][92][93] Properties Apyx Medical owns a 60,000 sq ft facility in Florida and leases a 20,000 sq ft facility in Bulgaria for operations - The company owns a 60,000 sq ft facility in Clearwater, Florida[95] - The company's Bulgarian subsidiary leases a 20,000 sq ft facility in Sofia for approximately $10,000 per month[95] Legal Proceedings The company is involved in legal actions regarding its Helium Plasma technology, with a 2019 securities class action lawsuit settled and fully paid - The company is involved in legal actions related to its Helium Plasma technology, believed to be adequately covered by insurance[265] - A securities class action lawsuit filed in April 2019 was settled and fully paid as of November 6, 2020[266][267] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on NASDAQ under 'APYX', with no cash dividends paid or anticipated, as earnings are retained for operations - The company's common stock is traded on the NASDAQ Stock Market LLC under the symbol "APYX"[99] - The company has never paid cash dividends and does not plan to in the foreseeable future, retaining earnings to fund operations[102] Securities Authorized for Issuance Under Equity Compensation Plans | Plan Category | Securities to be Issued Upon Exercise | Weighted Avg. Exercise Price ($) | Securities Remaining for Future Issuance | |---|---|---|---| | Approved by security holders | 4,872,800 | 5.48 | 2,351,369 | | Not approved by security holders | 66,143 | 4.05 | — | | Total | 4,938,943 | 5.46 | 2,351,369 | Management's Discussion and Analysis of Financial Condition and Results of Operations Apyx Medical's 2020 revenue decreased to $27.7 million due to COVID-19, with a net loss of $11.9 million, improved by a $7.5 million tax benefit Results of Operations In 2020, total revenue decreased 1.9% to $27.7 million, gross margin declined to 63.2%, and net loss narrowed to $11.9 million due to a tax benefit Sales by Reportable Segment (in thousands) | Segment | 2020 | 2019 | Change | |---|---|---|---| | Advanced Energy | $22,214 | $22,676 | (2.0)% | | OEM | $5,497 | $5,559 | (1.1)% | | Total | $27,711 | $28,235 | (1.9)% | Gross Profit (in thousands) | Metric | 2020 | 2019 | Change | |---|---|---|---| | Gross Profit | $17,504 | $19,094 | (8.3)% | | Gross Margin | 63.2% | 67.6% | (4.4) p.p. | - Professional services expenses decreased by 13.6% due to lower legal expenses from a settled class action lawsuit and reduced consulting fees[131] - Selling, general and administrative (SG&A) expenses decreased by 14.7% due to reduced travel, advertising, and commission expenses from COVID-19 restrictions[133][134] - The company recorded an income tax benefit of $7.5 million in 2020, up from $0.1 million in 2019, primarily due to releasing a valuation allowance on its 2019 Federal NOL from the CARES Act[137][138] Liquidity and Capital Resources As of December 31, 2020, Apyx had $41.9 million in cash, with net cash used in operations at $16.0 million, and expects $7.5 million in 2021 tax refunds Key Liquidity Metrics (in millions) | Metric | Dec 31, 2020 | Dec 31, 2019 | |---|---|---| | Cash and cash equivalents | $41.9 | $58.8 | | Working capital | $56.9 | $64.4 | - Net cash used in operating activities was approximately $16.0 million in 2020, compared to $18.5 million in 2019[141] - The company anticipates receiving tax refunds of approximately $7.5 million in 2021 due to the carryback of its 2019 and 2020 pre-tax losses under the CARES Act[139] Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for 2020 and 2019, with an unqualified opinion from RSM US LLP Consolidated Statement of Operations Highlights (in thousands) | Metric | 2020 | 2019 | |---|---|---| | Sales | $27,711 | $28,235 | | Gross Profit | $17,504 | $19,094 | | Loss from Operations | $(20,083) | $(20,869) | | Net Loss | $(11,906) | $(19,706) | | Loss Per Share (Basic & Diluted) | $(0.35) | $(0.58) | Consolidated Balance Sheet Highlights (in thousands) | Metric | Dec 31, 2020 | Dec 31, 2019 | |---|---|---| | Cash and cash equivalents | $41,915 | $58,812 | | Total Assets | $74,111 | $84,745 | | Total Liabilities | $10,252 | $13,486 | | Total Equity | $63,859 | $71,259 | Consolidated Statement of Cash Flows Highlights (in thousands) | Metric | 2020 | 2019 | |---|---|---| | Net cash used in operating activities | $(16,066) | $(18,475) | | Net cash (used in) provided by investing activities | $(581) | $60,541 | | Net cash (used in) provided by financing activities | $(73) | $147 | | Net change in cash and cash equivalents | $(16,897) | $42,216 | Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2020, with prior material weaknesses remediated - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2020[291] - The company has remediated previously disclosed material weaknesses in internal control over financial reporting from its 2019 Form 10-K[294] - Remediation efforts included hiring a new CFO and Corporate Controller, enhancing policies, and improving oversight of Bulgarian subsidiary processes[295][296][297] Part III Directors, Executive Officers and Corporate Governance The Board of Directors, comprising six independent members, oversees corporate governance, risk management, and has four standing committees - The Board of Directors has six independent members, including Andrew Makrides and Lawrence J Waldman[320] - The Board has four standing committees: Audit, Governance and Nominating, Compensation, and Regulatory Compliance[326][330][331][332] - Lawrence J Waldman serves as the Lead Independent Director, coordinating independent director activities[321] Executive Compensation Discussion and Analysis Apyx's executive compensation program aligns interests with stockholders through base salary, performance bonuses, and equity grants, with 2020 bonuses revised due to COVID-19 - The executive compensation program comprises base salary, performance bonuses, and long-term equity incentives (stock options)[335] - Due to COVID-19, 2020 performance bonuses were based on non-financial objectives and paid out at 50% of 2019 levels[340] 2020 Executive Compensation Summary | Name | Position | Total Compensation ($) | |---|---|---| | Charles D. Goodwin | CEO and Director | 1,832,880 | | Moshe Citronowicz | Senior Vice President | 720,348 | | Todd Hornsby | Executive Vice President | 954,272 | | Tara Semb | CFO, Treasurer and Secretary | 883,185 | - In September 2020, the company entered into amended employment agreements with CEO Charles Goodwin, CFO Tara Semb, and EVP Todd Hornsby, outlining compensation and termination provisions[354][359][364] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters As of March 29, 2021, the company had 34.3 million shares outstanding, with key beneficial owners and management holding significant stakes - As of March 29, 2021, officers and directors as a group beneficially owned 3,414,409 shares, representing 9.9% of outstanding common stock[384] Beneficial Owners with >5% Ownership (as of March 29, 2021) | Owner | Percentage of Ownership | |---|---| | RTW Investments | 9.9% | | William Weeks Vanderfelt | 9.2% | | Archon Capital Management, LLC | 7.3% | | BlackRock, Inc. | 6.8% | Certain Relationships and Related Transactions and Director Independence The company discloses related party transactions involving its Bulgarian subsidiary's managing director's relatives and a $0.1 million note payable, with six independent board members - Several relatives of the Managing Director of Apyx Bulgaria are employed by the company[391] - A $0.1 million note payable to Nikolay Shilev was paid in full on October 20, 2020[391] - The Board of Directors has six independent members, meeting NASDAQ and SEC requirements[392] Principal Accountant Fees and Services RSM US, LLP served as the principal accountant for 2020 and 2019, with total audit fees of $325,000 and $238,000 respectively Accountant Fees (in thousands) | Fee Type | 2020 | 2019 | |---|---|---| | Audit fees | $325 | $238 | | Audit related fees | — | — | | Tax fees | — | — | | All other fees | — | — | | Total fees billed | $325 | $238 | Part IV Exhibits and Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed with the Form 10-K, including corporate governance documents and certifications - This section provides a comprehensive list of all financial statements, schedules, and exhibits filed with the Form 10-K[396] - Key exhibits include the company's Articles of Incorporation, bylaws, employment agreements, and Sarbanes-Oxley Act certifications[399][400]