Apyx Medical(APYX) - 2021 Q4 - Annual Report

Part I Business Apyx Medical Corporation is an advanced energy technology company focused on cosmetic and surgical markets, leveraging its Helium Plasma Technology - The company's primary focus is on the cosmetic surgery market with its Renuvion® product, which utilizes innovative Helium Plasma Technology[19] - Apyx operates two reportable segments: Advanced Energy and OEM. For fiscal year 2021, the Advanced Energy segment accounted for 88.6% of total consolidated revenue, while the OEM segment accounted for the remaining 11.4%[42] - The company holds a significant intellectual property portfolio, including 44 issued U.S. patents and 25 foreign patents, with numerous pending applications[26] - Manufacturing operations are located in Clearwater, Florida, and Sofia, Bulgaria. The company has faced some supply chain delays for raw materials but has managed to avoid a meaningful backlog of sales orders[27][29] Advanced Energy Segment This segment focuses on Renuvion® and J-Plasma® products utilizing Helium Plasma Technology, primarily targeting the cosmetic surgery market - The segment's core technology, Helium Plasma, is used in the Renuvion® (cosmetic) and J-Plasma® (surgical) product lines for soft tissue procedures[43] - As of year-end 2021, the company had a direct sales force of 31 field-based selling professionals and utilized 2 independent sales agencies, focusing on the cosmetic surgery market[45] - The company's products are regulated as Class II medical devices by the FDA, requiring 510(k) pre-market notification for clearance[55][56] - On March 14, 2022, the FDA issued a Medical Device Safety Communication warning against the use of the company's Advanced Energy products for unapproved indications. The company is evaluating the potential impact of this communication[61] OEM Segment The OEM segment designs and manufactures electrosurgical equipment for other medical device companies, including a significant agreement with Symmetry Surgical - The company designs and manufactures electrosurgical equipment and accessories for other medical device companies under OEM agreements[63] - A significant part of the OEM segment involves a 10-year manufacturing and supply agreement with Symmetry Surgical, originating from a 2018 asset purchase agreement[63] Risk Factors The company faces significant risks related to regulatory compliance, business operations, and market conditions, including an FDA safety communication - The company is subject to extensive and stringent regulations by the FDA and other international bodies. A recent FDA communication warned against using its products outside of cleared indications, which could adversely affect operations[66][70] - Business operations are exposed to risks from supply chain disruptions for raw materials, reliance on sole-source suppliers, and potential manufacturing interruptions at its Florida and Bulgaria facilities[99][100][101] - The company faces risks related to protecting its intellectual property and potential infringement claims from others, which could lead to costly litigation and damage its competitive position[91][93] - The COVID-19 pandemic continues to pose risks to business operations, employee availability, and supply chains, with the full extent of its impact remaining uncertain[95][96] - The energy-based medical device industry for aesthetics is highly competitive, with many well-established competitors possessing greater financial resources[105] Properties Apyx Medical operates facilities in Clearwater, Florida, and Sofia, Bulgaria, for its office, manufacturing, warehousing, and research operations - The company owns a 60,000 sq. ft. facility in Clearwater, Florida[120] - The company's Bulgarian subsidiary leases a 25,000 sq. ft. facility in Sofia, Bulgaria[120] Legal Proceedings The company is involved in legal actions concerning its Helium Plasma technology, which management believes are adequately covered by insurance - The company is involved in legal actions concerning the use of its Helium Plasma technology[283] - Management believes claims are covered by insurance and do not pose a material risk, but acknowledges a potential material impact if damages exceed coverage limits[283] 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', has never paid cash dividends, and shows strong stock performance against market indices - The company's common stock trades on the NASDAQ Stock Market LLC under the symbol "APYX"[125] - The company has never paid cash dividends and does not plan to in the foreseeable future, retaining earnings for business growth[128] Securities Authorized for Issuance Under Equity Compensation Plans | Plan Category | Number of Securities to be Issued Upon Exercise (a) | Weighted Average Exercise Price (b) | Number of Securities Remaining Available for Future Issuance (c) | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 5,337,691 | $5.97 | 3,130,915 | | Equity compensation plans not approved by security holders | 60,000 | $4.18 | — | | Total | 5,397,691 | $5.95 | 3,130,915 | Management's Discussion and Analysis of Financial Condition and Results of Operations In 2021, Apyx Medical experienced a 75.1% revenue increase driven by its Advanced Energy segment, improved gross margin, and a net loss of $15.2 million Sales by Reportable Segment (Year Ended December 31) | (In thousands) | 2021 | 2020 | Change | | :--- | :--- | :--- | :--- | | Advanced Energy | $42,985 | $22,214 | 93.5% | | OEM | $5,532 | $5,497 | 0.6% | | Total | $48,517 | $27,711 | 75.1% | Gross Profit (Year Ended December 31) | (In thousands) | 2021 | 2020 | Change | | :--- | :--- | :--- | :--- | | Gross profit | $33,601 | $17,504 | 92.0% | | Gross profit margin | 69.3% | 63.2% | +6.1 p.p. | - The increase in gross profit margin was primarily due to a favorable sales mix, with the higher-margin Advanced Energy segment comprising a larger portion of total sales, and improved manufacturing efficiencies[151] - Net loss for 2021 was $15.2 million, compared to a net loss of $11.9 million in 2020. The 2020 result included a significant income tax benefit of $7.5 million related to the CARES Act[196][161] - Cash and cash equivalents decreased from $41.9 million at the end of 2020 to $30.9 million at the end of 2021, with net cash used in operating activities amounting to $10.4 million[163] Financial Statements and Supplementary Data This section presents the audited consolidated financial statements for 2021 and 2020, including balance sheets, statements of operations, cash flows, and detailed notes Consolidated Balance Sheets As of December 31, 2021, total assets decreased to $68.7 million, primarily due to reduced cash, while total liabilities increased to $14.7 million Consolidated Balance Sheet Highlights (as of December 31) | (In thousands) | 2021 | 2020 | | :--- | :--- | :--- | | Cash and cash equivalents | $30,870 | $41,915 | | Total current assets | $60,737 | $66,089 | | Total assets | $68,721 | $74,111 | | Total current liabilities | $13,205 | $9,153 | | Total liabilities | $14,712 | $10,252 | | Total equity | $54,009 | $63,859 | Consolidated Statements of Operations For 2021, total sales increased 75% to $48.5 million, leading to a $15.2 million net loss attributable to stockholders Consolidated Statement of Operations Highlights (Year Ended December 31) | (In thousands, except per share data) | 2021 | 2020 | | :--- | :--- | :--- | | Sales | $48,517 | $27,711 | | Gross profit | $33,601 | $17,504 | | Loss from operations | $(14,448) | $(20,083) | | Net loss attributable to stockholders | $(15,172) | $(11,896) | | Loss per share - basic and diluted | $(0.44) | $(0.35) | Consolidated Statements of Cash Flows Net cash used in operating activities improved to $10.4 million in 2021, with overall cash and cash equivalents decreasing by $11.0 million Consolidated Statement of Cash Flows Highlights (Year Ended December 31) | (In thousands) | 2021 | 2020 | | :--- | :--- | :--- | | Net cash used in operating activities | $(10,449) | $(16,066) | | Net cash used in investing activities | $(723) | $(581) | | Net cash provided by (used in) financing activities | $24 | $(73) | | Net change in cash and cash equivalents | $(11,045) | $(16,897) | Notes to Consolidated Financial Statements These notes provide detailed disclosures on accounting policies, segment performance, purchase commitments, and a subsequent FDA safety communication - A subsequent event note discloses that on March 14, 2022, the FDA issued a safety communication warning against the use of the company's products outside of their cleared indications. The company is evaluating the potential impact[308] - As of December 31, 2021, the company had purchase commitments for inventories totaling approximately $4.9 million, expected to be fulfilled by the end of 2022[285] - Sales to one customer in the Advanced Energy segment accounted for 11% of total sales in 2021. In 2020, one OEM customer represented 10% of total sales[286] Segment Performance (Year Ended December 31, 2021) | (In thousands) | Advanced Energy | OEM | Corporate (Other) | Total | | :--- | :--- | :--- | :--- | :--- | | Sales | $42,985 | $5,532 | $— | $48,517 | | Income (loss) from operations | $2,784 | $1,033 | $(18,265) | $(14,448) | Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2021, following a new ERP system implementation - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2021[310] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2021[312] - A new global ERP system was implemented in Q1 2021, leading to changes in internal controls over financial reporting[313] Part III Directors, Executive Officers and Corporate Governance This section details the biographies of directors and executive officers, highlighting the Board's composition, independence, and committee structure - The Board of Directors is composed of individuals with extensive experience in the medical, engineering, and business fields relevant to the company's operations[316] - The Board has seven independent members, and Lawrence J. Waldman serves as the Lead Independent Director to coordinate the activities of the independent directors[338][339] - The Board has four standing committees: Audit, Governance and Nominating, Compensation, and Regulatory Compliance, each composed of independent directors[343][346][347][348] Executive Compensation The executive compensation program is performance-driven, with 2021 bonuses funded at 125% of target despite frozen base salaries due to prior year pandemic impacts - The compensation philosophy is guided by three principles: being performance-driven, competitively-positioned, and responsibly-governed[355] - Due to strong financial performance in 2021, annual incentive bonuses for NEOs were paid out at 125% of their target amounts[368][369] - Base salaries for NEOs were not increased for fiscal 2021 due to the impact of the COVID-19 pandemic[364] - In January 2021, NEOs received equity awards in the form of stock options, granted at levels representing 50% of the eligible shares due to the impact of COVID-19[370] 2021 Summary Compensation Table for NEOs | Name | Year | Salary ($) | Bonus ($) | Option Awards ($) | Total ($) | | :--- | :--- | :--- | :--- | :--- | :--- | | Charles D. Goodwin | 2021 | 450,000 | 421,875 | 701,420 | 1,594,394 | | Moshe Citronowicz | 2021 | 299,000 | 112,125 | 207,828 | 640,320 | | Todd Hornsby | 2021 | 347,000 | 216,875 | 288,650 | 879,310 | | Tara Semb | 2021 | 328,000 | 184,500 | 277,104 | 808,773 | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section details beneficial ownership of common stock, with key institutional holders and officers and directors collectively owning 11.5% of shares - As of March 15, 2022, all officers and directors as a group beneficially owned 11.5% of the company's common stock[413] Beneficial Owners of More Than 5% | Name | Percentage of Ownership | | :--- | :--- | | RTW Investments | 9.9% | | William Weeks Vanderfelt | 9.2% | | Archon Capital Management, LLC | 6.4% | | BlackRock, Inc. | 5.8% | | Cowen Financial Products, LLC | 5.5% | Certain Relationships and Related Transactions and Director Independence The company discloses related party employment and confirms seven independent Board members meeting NASDAQ and SEC requirements - Several relatives of the Managing Director of Apyx Bulgaria are employed by the company[420] - The Board of Directors has seven members who are determined to be independent according to NASDAQ and SEC rules[421] Principal Accountant Fees and Services The company paid its principal accountant, RSM US LLP, a total of $583,000 in fees for 2021, including $485,000 for audit services Accountant Fees (Year Ended December 31) | (In thousands) | 2021 | 2020 | | :--- | :--- | :--- | | Audit fees | $485 | $420 | | Tax fees | $98 | $— | | Total fees billed | $583 | $420 | Part IV Exhibits and Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed as part of the Annual Report on Form 10-K - This section provides a list of all financial statements, schedules, and exhibits filed as part of the Annual Report on Form 10-K[425][426][427]