Bovie Medical Corporation (now identified in the request as Apyx Medical Corp.) — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. The filing registrant is Bovie Medical Corporation. Unless otherwise stated, financial amounts below are in U.S. dollars.
Business context
The company develops, manufactures and markets electrosurgical products, OEM products and Advanced Energy products. Its J-Plasma technology was rebranded as Renuvion for the cosmetic surgery market. Management said it would continue full-scale J-Plasma commercialization in 2018, supported by a 33-person selling organization, training and marketing efforts.
Financial results and liquidity
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Sales | $9.916 million | $8.389 million |
| Gross profit / margin | $4.990 million / 50.3% | $4.226 million / 50.4% |
| Operating loss | $0.864 million | $1.737 million |
| Net loss | $0.935 million | $1.685 million |
| Basic and diluted loss per share | $0.03 | $0.05 basic; $0.06 diluted |
| Cash used in operating activities | $1.108 million | $2.818 million |
Revenue increased 18.2%, while gross margin was nearly unchanged. Operating and net losses narrowed. Operating expenses were $5.854 million versus $5.963 million. Q1 2018 included a $26,000 loss from revaluing derivative liabilities; Q1 2017 included an $88,000 gain.
Advanced Energy sales rose 333.1% to $2.629 million, primarily reflecting J-Plasma/Renuvion sales. Core sales declined 3.8% to $6.519 million and OEM sales declined 23.7% to $768,000. International sales increased 39.1% to $1.943 million and were 19.6% of revenue, versus 16.7% a year earlier.
At March 31, 2018, cash and cash equivalents were $8.701 million and restricted cash was $660,000; combined cash, cash equivalents and restricted cash were $9.361 million. Working capital was approximately $16.0 million, down from $16.6 million at year-end 2017. Total assets were $30.112 million and stockholders’ equity was $21.469 million.
Mortgage debt was $2.634 million ($239,000 current and $2.395 million long-term), plus a separate $140,000 note payable. The mortgage bore interest at 5.170% at quarter-end and required fixed monthly principal payments of $19,956. The loan is secured by the Clearwater facility and a $660,000 certificate of deposit; it includes a minimum-liquidity covenant of $750,000. The company repaid $60,000 of mortgage principal during the quarter.
Changes, outlook and risks
- Management attributed revenue growth mainly to Advanced Energy and J-Plasma/Renuvion. Higher Advanced Energy gross profit and product/pricing mix drove gross-profit growth; lower Core and OEM margins partly offset that benefit.
- Research and development expense fell 20.7% to $562,000, reflecting more focused spending on cosmetic-surgery clinical studies and research. SG&A rose 11.1% to $2.670 million, including higher Advanced Energy consulting and sales commissions.
- No quantified financial guidance was provided. Management stated that it planned continued full-scale commercialization of J-Plasma during 2018.
- There are legal actions relating to J-Plasma use. Management said it believes it has meritorious defenses and that claims are insured or not expected to be materially adverse; costs could nevertheless materially affect results, financial position or cash flows if damages exceed coverage or insurers deny coverage.
- Inventory purchase commitments totaled approximately $5.4 million, substantially all expected to be purchased by year-end 2018. The company also cited sole-source suppliers, distributor and OEM customer dependence, and risks that inventory may become obsolete.
- The ten largest customers represented 41.9% of Q1 2018 net revenue, compared with 56.2% in Q1 2017. McKesson accounted for 14.5% of Q1 2018 sales.
- ASC 606 was adopted using the modified retrospective method in Q1 2018; the company reported no material financial-statement or opening-retained-earnings impact. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether Advanced Energy and J-Plasma/Renuvion growth can continue, and whether commercialization spending translates into sustained sales and improved profitability.
- The reasons for declines in Core and OEM sales and the effect of segment mix on future gross margins.
- The status, insurance coverage and potential financial exposure of J-Plasma-related legal actions.
- Liquidity and covenant compliance, debt repayment and refinancing needs ahead of the mortgage’s July 2019 initial maturity date.
- Execution of the $5.4 million inventory commitments, inventory obsolescence exposure, and reliance on major customers, distributors and sole-source suppliers.