Business context and reporting period
Bovie Medical Corporation (the registrant named in this filing; identified in the request as Apyx Medical Corp) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2017. It develops, manufactures and markets electrosurgical and other medical products, including its Advanced Energy product J-Plasma. The company reported Core, OEM and Advanced Energy segments.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Sales | $9.347 million | $10.063 million | $27.535 million | $27.133 million |
| Gross profit | $4.594 million | $5.061 million | $13.862 million | $13.084 million |
| Gross margin | 49.1% | 50.3% | 50.3% | 48.2% |
| Operating loss | $1.134 million | $0.245 million | $4.177 million | $2.748 million |
| Net loss | $1.245 million | $0.965 million | $4.238 million | $3.428 million |
| Loss per share, basic and diluted | $0.04 | $0.04 | $0.14 | $0.13 |
For the nine months, operating cash use was $4.435 million, investing cash use was $0.431 million, and financing cash use was $0.179 million. Cash and cash equivalents fell to $9.411 million from $14.456 million at year-end 2016; an additional $0.779 million was restricted as collateral. Working capital was approximately $17.4 million, down from $21.3 million at December 31, 2016.
At September 30, total assets were $30.699 million and total liabilities were $8.182 million. Mortgage debt was $2.754 million, including $0.239 million current; the company also reported a $0.140 million note payable. The mortgage bears interest at LIBOR plus 3.5% (4.732% at quarter-end), is secured by the Clearwater facility and restricted cash, and includes a minimum-liquidity covenant of $0.750 million.
Changes versus prior comparable periods
- Q3 sales decreased 7.1%; nine-month sales increased 1.5%. Advanced Energy sales rose 52.0% in Q3 and 80.3% year to date, while OEM sales fell 70.2% and 53.3%, respectively. Management attributed the OEM decline largely to a one-time order in the 2016 comparison period.
- Nine-month gross profit increased 5.9%, with margin improving to 50.3%; Q3 gross profit fell 9.2% and margin declined to 49.1%.
- Operating losses widened in both periods. Nine-month SG&A increased 25.1%, reflecting higher sales commissions, administrative and regulatory expenses, and marketing.
- Cash used in operations increased to $4.435 million from $2.293 million in the prior-year nine-month period, including a $1.380 million increase in inventory.
Outlook, commentary, risks and unusual items
- No quantified financial guidance was provided. Management said it continued full-scale commercialization of Advanced Energy, principally J-Plasma, supported by a 31-person selling organization and training and marketing investment.
- Q3 gross margin was adversely affected by an approximately $370,000 write-down of obsolete first-generation J-Plasma inventory following product upgrades. Higher Advanced Energy volume and generator pricing mix partly offset the pressure.
- Management said Hurricanes Harvey and Irma negatively affected revenue, but the impact could not be quantified; no significant damage occurred at the Clearwater facility.
- Inventory purchase commitments were approximately $3.6 million, substantially all expected to be purchased by year-end 2017. Inventory days rose to 152 from 151 a year earlier, and inventory turns declined to 1.92 from 2.30.
- Customer concentration remains relevant: the ten largest customers represented 50.0% of nine-month revenue; McKesson represented 15.7% and NDC 9.3%. The company also cited reliance on major distributors, OEM customers without purchase obligations, and sole-source suppliers.
- On September 20, 2017, all 975,639 outstanding Series B preferred shares were converted into 1,951,278 common shares. The filing reported no material change to previously disclosed risk factors and no off-balance-sheet arrangements. Management stated identified litigation was not expected to have a material adverse effect, while noting outcomes remain uncertain.
- The company began reporting three operating segments in 2017; the filing notes that Q3 segment operating results reflect a revised allocation of certain marketing expenses.
Important facts for investors to verify
- Whether Advanced Energy and J-Plasma adoption can grow enough to offset OEM volatility and continuing operating losses.
- Cash burn, working-capital decline, inventory growth and the ability to meet the $0.750 million minimum-liquidity covenant.
- Whether first-generation inventory write-downs or other obsolescence reserves will recur.
- Customer, distributor and supplier concentration, including OEM customers’ lack of purchase commitments.
- The effect of the preferred-stock conversion and increased common shares on future per-share results.