Bovie Medical Corporation (now identified in the request as Apyx Medical Corp.) — Q1 2016 Form 10-Q
Period: Three months ended March 31, 2016; filed May 11, 2016. The filing registrant is Bovie Medical Corporation, so the company-name relationship should be verified. Financial amounts below are in U.S. dollars, generally thousands unless noted.
Business context and performance
Bovie developed, manufactured and marketed electrosurgical and related medical products, including its early-commercialization J-Plasma product. It sold through distributors and OEM arrangements. Management reported a 39-person sales force, including 17 field-based positions.
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Sales | $7,775 | $6,128 |
| Gross profit / margin | $3,323 / 42.7% | $2,674 / 43.6% |
| Operating loss | $(1,993) | $(2,272) |
| Net loss | $(1,944) | $(876) |
| Net income (loss) attributable to common shareholders | $(1,944) | $12,858 |
| Basic and diluted EPS | $(0.07) | $0.69 basic; $0.57 diluted |
| Cash used in operating activities | $(2,267) | $(1,791) |
Financial condition and material changes
- Sales rose 26.9% year over year. Core category sales increased to $6,478 from $5,525; OEM to $941 from $320; and J-Plasma to $356 from $283, a reported 25.8% increase. International sales were $1,160, or 14.9% of revenue, versus $903, or 14.7%.
- Gross margin declined about 0.9 percentage points. R&D expense increased to $668 from $446, primarily for labor, consulting and development of J-Plasma and core-product enhancements. Salaries rose to $2,100 from $1,952; SG&A decreased slightly to $2,191 from $2,217.
- Q1 2015 included a $13,956 gain related to conversion of warrants and preferred shares and a $1,444 gain from derivative fair-value changes. In Q1 2016, the derivative fair-value gain was $87. These items materially affect the year-over-year comparison of common-shareholder results and EPS.
- Cash and cash equivalents were $9,456 at March 31, down from $11,805 at December 31, 2015; restricted cash was $839. Working capital was approximately $13.3 million, down approximately $4.6 million from year-end. Operating cash use increased by about $0.5 million, which management mainly attributed to inventory build for product launches. Investing cash use was $21; financing cash use was $61.
- Total assets were $29,745 and total liabilities $8,109. Net inventory was $6,561, including a $1,642 obsolescence reserve, up from $1,233 at year-end. The company reported 212 days of inventory versus 241 a year earlier and receivable days of 35.5 versus 35.8.
- The mortgage balance of $3,113 was classified as current because management concluded the company would not meet the debt-service coverage requirement to extend the loan beyond its March 20, 2017 initial maturity. The loan bears interest at LIBOR plus 3.5% (3.941% at quarter-end), is secured by the Clearwater facility and assigned receivables, and also has $839 of restricted cash pledged as collateral. Management reported a $750 minimum-liquidity covenant; the filing does not state a breach of that covenant.
Outlook, risks and other notable disclosures
- No specific revenue or earnings guidance was provided. Management said continued investment in J-Plasma development and marketing could adversely affect short-term profitability and cash flow, particularly over the next 12–24 months; commercial success and future returns are not assured.
- Management attributed flat international sales to the stronger U.S. dollar and cited lower oil prices affecting some government-funded healthcare markets, along with political and civil unrest in certain countries.
- Customer concentration remained significant: the ten largest customers represented 61.1% of revenue, with McKesson at 20.2%, NDC at 10.5% and Medline at 9.5%. The company also cited dependence on distributors, OEM purchasers and certain sole-source suppliers.
- Purchase commitments were $3,539 for 2016. Operating-lease obligations totaled approximately $568. Management reported no off-balance-sheet arrangements and no material changes to previously disclosed risk factors. Routine legal proceedings and claims were described; outcomes are uncertain, and no material adverse impact from currently identified matters was expected.
- The company recorded no income-tax provision in Q1 2016 and maintained a valuation allowance against finite-lived deferred tax assets. It was evaluating the effect of the revenue-recognition standard scheduled to become effective for it January 1, 2017.
Important facts for investors to verify
- Confirm the entity identity: this 2016 filing is for Bovie Medical Corporation, not under the name Apyx Medical Corp.
- Review the mortgage’s March 2017 maturity, extension requirements, covenant status and refinancing or repayment plans, including the restricted-cash collateral.
- Assess whether J-Plasma sales growth can support the stated development and commercialization spending without further worsening cash use or liquidity.
- Track gross margin, inventory growth and reserves, as well as customer concentration and reliance on key distributors and suppliers.
- Separate recurring operating performance from the large prior-year warrant and preferred-share conversion gains when comparing earnings.