Apyx Medical Corp. (then Bovie Medical Corporation) — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017; filed August 3, 2017. The filing is under the name Bovie Medical Corporation, not Apyx Medical Corp. Financial amounts below are in U.S. dollars.
Business context
Bovie developed, manufactured and marketed electrosurgical and related medical products, including its J-Plasma advanced-energy surgical system. It reported Core, OEM and Advanced Energy segments, reflecting changes in how management reviewed and allocated resources. Advanced Energy commercialization included a 31-person sales organization and investments in training and marketing.
Financial performance and liquidity
| Metric | Q2 2017 | Six months 2017 |
|---|---|---|
| Revenue | $9.80 million, up 5.4% | $18.19 million, up 6.5% |
| Gross profit / margin | $5.04 million / 51.5%, versus 50.6% | $9.27 million / 51.0%, versus 47.0% |
| Operating loss | $1.31 million, versus $0.51 million | $3.04 million, versus $2.50 million |
| Net loss | $1.31 million, or $0.04 per share | $2.99 million, or $0.10 per share |
Operating expenses rose to $6.35 million in Q2 and $12.31 million for the six months. The six-month increases included SG&A, salaries, professional services and R&D. Management attributed stronger gross margins primarily to Advanced Energy volume and pricing mix and improved Core product mix; the prior-year six-month margin was also affected by a $484,000 obsolete-inventory write-down.
For the six months, operating cash use was $3.89 million (versus $2.38 million); investing cash use was $151,000 and financing cash use was $119,000. Cash and cash equivalents fell to $10.29 million from $14.46 million at year-end. Working capital was approximately $18.5 million, down from $21.3 million. Inventory increased to $7.58 million net, with management citing inventory built to support new and extended product lines.
At June 30, total assets were $32.56 million and total liabilities $8.99 million. Mortgage debt was $2.81 million, including current maturities; an additional $140,000 note payable was reported. Restricted cash of $779,000 was pledged as loan collateral. The mortgage rate was 4.56%, with a $750,000 minimum-liquidity covenant.
Material changes and management commentary
- Q2 Advanced Energy revenue rose 136.7% to $1.81 million; six-month revenue rose 115.7% to $2.42 million. Core revenue increased 8.8% in Q2 and 6.8% year to date.
- OEM revenue fell 69.8% in Q2 and 41.9% year to date, mainly because the prior-year comparable periods included a one-time order.
- Electrosurgical sales increased 22.2% in Q2 and 23.6% year to date; “Other” product sales declined 54.5% and 39.9%, respectively.
- Domestic sales increased while international sales declined. International sales represented 11.1% of Q2 revenue and 13.7% of six-month revenue; management cited pending foreign product registrations and large international tenders that did not recur.
- Management said the business is generally not seasonal, continued commercialization of J-Plasma, and was refining marketing, distribution and expense strategies. The filing provides no quantified revenue, earnings or cash-flow guidance.
Risks, contingencies and unusual items
- Customer and channel concentration: the ten largest customers generated 51.7% of six-month sales; McKesson accounted for 15.5% and NDC for 10.1%. Distributor relationships and OEM customers’ voluntary purchasing decisions may affect sales.
- Most raw materials were purchased from sole-source suppliers, creating potential supply interruption risk. Inventory purchase commitments were approximately $4.0 million, substantially all expected by year-end 2017.
- The mortgage is secured by the Clearwater facility and the pledged certificate of deposit; extension beyond July 2019 is subject to a debt-service coverage ratio of at least 1.0 for the preceding four quarters.
- Management did not expect identified litigation to materially affect results or financial condition, but noted outcomes are uncertain. Historical losses resulted in a valuation allowance against relevant deferred tax assets; no tax benefit was anticipated for those assets.
- Placement-agent warrants were Level 3 fair-valued liabilities; a $126,000 six-month gain from the fair-value change reduced reported losses. Series B preferred shares remained convertible into approximately 1.95 million common shares.
Important facts for investors to verify
- Whether Advanced Energy and J-Plasma growth can continue and translate into improved operating results, given increasing commercialization costs and continuing losses.
- Whether the inventory build converts to sales, and whether the $4.0 million purchase commitments and working-capital use remain manageable.
- OEM revenue recovery after the prior-year one-time order, and continued reliance on major customers, distributors and sole-source suppliers.
- Compliance with mortgage liquidity covenants, debt repayment capacity and the implications of restricted cash and the 2019 initial maturity.
- Potential dilution from preferred-stock conversion, options and warrants; the filing reports 30.86 million common shares outstanding at June 30, 2017.