Apyx Medical Corp. (then Bovie Medical Corporation) — 2015 Form 10-K
Business context and reporting period
Fiscal year ended December 31, 2015. The company develops, manufactures, and markets electrosurgical devices, cauteries, and related products. Its J-Plasma helium-plasma system was in early commercialization; the filing describes FDA clearance and a CE mark. Most products are sold through distributors, with sales in more than 150 countries.
Financial performance and liquidity
| Metric | 2015 | 2014 |
|---|---|---|
| Revenue | $29.52 million | $27.68 million |
| Gross profit / margin | $12.56 million / 42.5% | $8.99 million / 32.5% |
| Operating loss | $(6.99) million | $(5.85) million |
| Net loss | $(5.37) million | $(17.28) million |
| Net income (loss) attributable to common shareholders | $8.36 million | $(18.21) million |
| Operating cash flow | $(5.79) million | $(0.42) million |
| Cash and cash equivalents at year-end | $11.81 million | $5.73 million |
| Working capital | $17.92 million | $11.60 million |
- Revenue rose 6.6%. Core product revenue increased 7.3%, while OEM revenue fell 32.8%; J-Plasma revenue grew to $1.31 million from $0.21 million.
- Gross margin improved mainly because 2014 included approximately $2.0 million of excess and obsolete inventory write-downs. Operating expenses rose to $19.54 million from $14.84 million, including higher R&D, staffing, and selling and marketing costs.
- The company reported a $5.37 million net loss, but a $13.96 million noncash gain tied to the preferred-stock and warrant exchange resulted in $8.36 million of income attributable to common shareholders. Basic and diluted EPS were $0.34 and $0.24, respectively; these figures should not be read as evidence of operating profitability.
- Financing activities provided $12.78 million, primarily from a March 2015 common-stock offering that generated approximately $11.5 million net proceeds, plus warrant exercises. Investing activities used $0.92 million.
- Year-end cash included $0.84 million of restricted cash. Debt included a $3.17 million mortgage and a $0.14 million acquisition note. The mortgage is secured by the Clearwater facility and accounts receivable, bears interest at LIBOR plus 3.5% (3.744% at year-end), and has an initial 2017 maturity with an option to extend, subject to covenants.
Material changes versus the prior comparable period
- Sales growth slowed to 6.6% from 17.0% in 2014. Generator sales declined approximately $0.74 million, partly reflecting expired OEM contracts; J-Plasma, electrodes, lighting, and other products contributed to growth.
- Operating loss widened by approximately $1.14 million despite better gross profit, as total operating costs increased by approximately $4.70 million.
- Operating cash use increased to $5.79 million from $0.42 million. Cash nevertheless increased, primarily because of equity financing and warrant proceeds.
- Derivative liabilities fell to $0.27 million from $12.61 million, and the company recorded a $1.80 million fair-value gain. The preferred-stock and warrant exchange also materially affected reported common-shareholder earnings.
- In October 2015, the company acquired all of Bovie Bulgaria for approximately $0.56 million, adding a manufacturing and engineering facility in Sofia. Common shares outstanding increased from approximately 17.85 million at year-end 2014 to 27.05 million at year-end 2015.
Outlook, commentary, risks, and unusual items
- Management said it would continue investing substantially in J-Plasma commercialization and product development, warning that this could adversely affect near-term profitability and cash flow, particularly over the following 12–24 months. R&D spending was expected to increase modestly in 2016.
- By year-end, the J-Plasma sales organization comprised 13 field-based professionals and 26 independent representatives. The company introduced six handpiece configurations and the Bovie Ultimate generator, and signed agreements with three group purchasing organizations.
- Management cited a strong U.S. dollar, lower oil prices affecting some international markets, and regulatory withdrawals of certain products as challenges. It said compliant replacement 200- and 300-watt generators had received approval.
- Risks include uncertain J-Plasma adoption and commercialization, competition and regulation, reliance on major distributors and OEM customers, sole-source suppliers, product-liability and intellectual-property claims, and potential dilution from preferred shares, options, warrants, or future equity financing. The ten largest customers represented 58.3% of 2015 revenue; McKesson and National Distribution & Contracting accounted for 18.6% and 13.3%, respectively.
- The medical-device excise tax was subject to a two-year moratorium for 2016–2017; the company reported paying approximately $450,000 in 2015. Management reported no material off-balance-sheet arrangements and stated that disclosure controls and internal control over financial reporting were effective.
- The filing identifies no specific material pending legal proceeding; it notes that ordinary-course claims may arise and that outcomes are uncertain. The previously disclosed stockholder derivative action had been settled in 2014.
Important facts for investors to verify
- Whether J-Plasma adoption, revenue growth, and customer utilization justify the significant commercialization investment.
- How much of reported common-shareholder income reflects noncash preferred-stock and warrant accounting rather than recurring operations.
- Whether operating cash burn can be reduced and whether the mortgage can be extended while meeting its liquidity and debt-service covenants.
- The ongoing effects of distributor and customer concentration, declining OEM sales, and the 2015 share issuance and remaining convertible preferred stock.
- Whether product clearances, regulatory compliance, supply availability, and potential litigation or product-liability claims create additional costs or delay growth.