Bovie Medical Corporation (now Apyx Medical Corp.) — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018; unaudited. The filing was made under the name Bovie Medical Corporation.
Business context
The company developed, manufactured and marketed electrosurgical medical devices, including its Core products, OEM products and Advanced Energy products. J-Plasma/Renuvion commercialization was a key growth focus. On July 9, 2018, after quarter-end, the company agreed to sell its Core business, including the Bovie brand and trademarks, to a Symmetry Surgical subsidiary for $97 million gross cash proceeds. The company planned to retain Advanced Energy and OEM, its Clearwater and Sofia facilities, and certain specialty-generator intellectual property. Closing remained subject to shareholder approval, antitrust clearance and other customary conditions.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Sales | $11.475 million | $9.799 million | $21.391 million | $18.188 million |
| Gross profit | $6.277 million | $5.042 million | $11.267 million | $9.268 million |
| Gross margin | 54.7% | 51.5% | 52.7% | 51.0% |
| Operating loss | $0.267 million | $1.306 million | $1.131 million | $3.043 million |
| Net loss | $0.272 million | $1.308 million | $1.207 million | $2.993 million |
| Basic and diluted loss per share | $0.01 | $0.04 | $0.04 | $0.10 |
- Revenue by segment: Q2 Core $7.784 million (+4.0% year over year), Advanced Energy $3.113 million (+71.7%) and OEM $0.578 million (+16.1%). Six-month Advanced Energy sales rose 137.3% to $5.742 million; Core was nearly flat at $14.303 million, while OEM declined 10.6% to $1.346 million.
- Profitability: Higher sales and favorable manufacturing variances improved Q2 gross margin; Advanced Energy product mix partly offset the improvement. For the first half, Advanced Energy growth lifted gross profit, partly offset by unfavorable Core manufacturing variances. Q2 operating loss narrowed despite higher professional-services and R&D costs.
- Cash flow: First-half operating cash use was $1.681 million, versus $3.894 million in 2017. Investing cash use was $0.332 million; financing cash use was $0.120 million. Cash, cash equivalents and restricted cash totaled $8.535 million at June 30, down $2.133 million from year-end.
- Liquidity and debt: Working capital was approximately $16.0 million, versus $16.6 million at December 31, 2017. Cash and cash equivalents were $7.875 million, plus $0.660 million restricted cash pledged as loan collateral. Mortgage debt was $2.574 million and another note payable was $0.140 million. The mortgage bore 5.501% interest and required minimum liquidity of $0.750 million under its covenants.
- Other balance-sheet items: Total assets were $30.654 million and stockholders’ equity was $21.574 million. Net inventory rose to $7.533 million from $6.526 million.
Changes, outlook and risks
- Management attributed growth mainly to J-Plasma/Renuvion generator and handpiece sales and expanded selling efforts in cosmetic surgery. It planned to continue full-scale commercialization during 2018, supported by a 33-person selling organization and training and marketing programs. No quantified revenue or earnings guidance was provided.
- The $97 million Core divestiture was not classified as held for sale or discontinued operations at June 30 because shareholder approval was still required. Management expected the sale gain to use substantially all historical tax-loss carryforwards and anticipated reversing the deferred-tax-asset valuation allowance in Q3, subject to transaction approval.
- Risks include legal actions relating to J-Plasma; management said it believed defenses were meritorious and claims insured or not expected to be material, but costs could materially affect results if coverage were insufficient or disclaimed. The company also disclosed new U.S. tariffs on certain Chinese imports and was assessing their potential impact.
- Other exposures include $5.4 million of inventory purchase commitments, substantially all expected by year-end; reliance on major distributors and OEM customers; and sole-source suppliers for most raw materials. The ten largest customers represented 39.5% of first-half revenue and 36.7% of receivables at June 30.
- Management reported no material change in previously disclosed risk factors, no off-balance-sheet arrangements, and effective disclosure controls as of June 30. The interim results were not necessarily indicative of full-year performance.
Important facts for investors to verify
- Whether the Core-business sale closed, required approvals were obtained, and net proceeds and transaction-related taxes or costs differed from the stated $97 million gross price.
- Whether Advanced Energy growth and J-Plasma/Renuvion adoption continued, and whether commercialization spending translated into improved operating profitability and cash generation.
- The outcome, insurance coverage and potential financial exposure of J-Plasma-related legal actions.
- The realized effect of China-related tariffs, supplier commitments and customer/distributor concentration on margins, deliveries and liquidity.
- Compliance with mortgage covenants and the implications of the loan’s July 2019 initial maturity date.