Apyx Medical Corp. (then Bovie Medical Corporation) — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. The filing is under Bovie Medical Corporation, the company’s name at the time. Financial statements are unaudited; dollar amounts below are in millions unless stated otherwise.
Business context
On August 30, 2018, the company sold its electrosurgical “Core” business, including the Bovie brand and related intellectual property, to Symmetry Surgical for $97.0 million gross cash consideration. The company said the divestiture was intended to focus its business on J-Plasma, marketed as Renuvion in cosmetic surgery, and OEM activities. Core business results are presented as discontinued operations for all periods shown.
Continuing operations comprise Advanced Energy, OEM, and Corporate & Other. The company reported a direct field sales force of 19 and 11 independent sales agencies, with more than 40 representatives in total. Products were sold in 26 countries.
Financial performance and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Continuing-operations sales | $3.672 | $2.651 | $10.760 | $6.576 |
| Gross profit | $2.521 | $1.913 | $7.270 | $4.262 |
| Gross margin | 68.7% | 72.2% | 67.6% | 64.8% |
| Operating loss | $(2.796) | $(2.833) | $(8.449) | $(10.648) |
| Continuing-operations net loss | $(0.438) | $(2.944) | $(6.167) | $(10.709) |
| Net income (loss), including discontinued operations | $69.174 | $(1.245) | $67.967 | $(4.238) |
- Q3 sales rose 38.5%; nine-month sales rose 63.6%. Advanced Energy sales increased 40.4% in Q3 and 92.0% for the nine months. OEM sales grew 30.9% in Q3 and were essentially flat for the nine months.
- Q3 gross margin declined 3.5 percentage points year over year, attributed to product mix, more lower-margin international distributor sales, and lower OEM margins. Nine-month gross margin increased 2.8 percentage points, reflecting improved OEM and Advanced Energy margins.
- Cash used in operating activities was $2.835 million for the nine months, compared with $4.435 million used in 2017. Cash provided by investing activities was $35.459 million, including $91.095 million of net sale proceeds and $55.433 million spent on marketable securities. Financing used $2.629 million, mainly for mortgage repayment.
- At September 30, cash and cash equivalents were $40.663 million and short-term investments were $55.480 million. Working capital was approximately $85.2 million, compared with $16.6 million at year-end 2017. Current assets were $106.887 million and current liabilities $21.672 million.
- Total liabilities were $21.812 million and stockholders’ equity was $91.302 million. The company repaid its remaining $2.5 million mortgage on August 30; a separate $0.140 million note payable remained.
- Accrued taxes and other liabilities were unusually high at $19.066 million, versus $0.214 million at December 31, 2017.
Material changes and unusual items
- The sale generated a pretax gain of $84.541 million and an after-tax gain of $69.072 million. Total discontinued-operations income, including operating results, was $69.612 million in Q3 and $74.134 million for the nine months. Thus, reported net income primarily reflects the disposition, not continuing operating profitability.
- The company recorded a $2.408 million income-tax benefit from continuing operations in Q3 and for the nine months. It also released a $7.8 million valuation allowance on deferred tax assets following its expectation that the sale gain would use substantially all historical federal and state net operating loss carryforwards and research credits.
- After the sale, the company entered a four-year supply agreement for certain Core products and a ten-year manufacturing and supply agreement under which it will manufacture products for Symmetry, including generators. The four-year agreement’s results are netted in “Other gains or losses”; the ten-year agreement is included in OEM operations.
- International sales were 24.8% of Q3 revenue and 21.2% for the nine months, up from 16.6% and 11.5%, respectively, in 2017. Management cited international growth as a sales driver, while noting lower distributor margins.
Outlook, risks, and contingencies
- The filing provides no quantified revenue, earnings, or cash-flow guidance. Management described continued commercialization of Renuvion and said it expected continuing-operations losses in the foreseeable future after 2018.
- Management said historical federal net operating loss carryforwards of $24.7 million, state carryforwards of $21.2 million, and research and development credit carryforwards of $1.3 million were expected to be substantially utilized by the sale gain. It did not expect tax benefits from remaining finite-lived deferred tax assets beyond 2018, given historical continuing-operations losses.
- The company disclosed legal actions relating to J-Plasma. Management considered its defenses meritorious and said claims were insured or not expected to have a material adverse effect; damages beyond insurance limits or denial of coverage could materially affect results, financial position, or cash flows.
- Inventory purchase commitments were approximately $5.4 million at September 30, substantially all expected to be purchased by year-end. The company also cited dependence on sole-source raw-material suppliers and the risk that OEM development customers may not place product orders.
- The Symmetry manufacturing forecast includes four months of binding, non-cancelable orders within a rolling twelve-month forecast, subject to termination rights. The filing notes that forecast commitments do not guarantee demand beyond those orders.
Important facts for investors to verify
- Whether post-sale Advanced Energy growth and Renuvion commercialization can reduce continuing-operations losses.
- The recurring profitability, demand commitments, and termination provisions of the Symmetry supply and manufacturing agreements.
- The final tax consequences of the sale, use of tax attributes, and the unusually large accrued tax balance.
- The scope, insurance coverage, and potential outcomes of J-Plasma-related legal actions.
- Whether inventory commitments and sole-source supplier exposure are consistent with actual demand and production needs.