Bovie Medical Corporation (now Apyx Medical Corp.) — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016; unaudited. Financial amounts below are in U.S. dollars, generally millions unless noted. The filing is under the name Bovie Medical Corporation.
Business context
Bovie develops, manufactures and markets electrosurgical and related medical products, including its J-Plasma plasma-based surgical system. Sales include core products, OEM products and J-Plasma; products are sold through distributors, direct sales and channel partners.
Financial performance
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Revenue | $9.295 | $7.274 | $17.070 | $13.402 |
| Gross profit / margin | $4.700 / 50.6% | $3.140 / 43.2% | $8.022 / 47.0% | $5.814 / 43.4% |
| Operating loss | $(0.510) | $(1.548) | $(2.503) | $(3.821) |
| Net loss | $(0.519) | $(1.497) | $(2.463) | $(2.375) |
Q2 revenue increased 27.8% year over year; first-half revenue rose 27.4%. First-half sales by operating category were core $13.359 million (+12%), OEM $2.589 million (+155%) and J-Plasma $1.122 million (+147%). Management attributed gross-margin improvement primarily to product mix, including J-Plasma generators and OEM contracts. First-half R&D was $1.259 million, up 32.4%; salaries and related costs rose 12.5%, while SG&A was essentially flat.
First-half 2015 common-shareholder income of $11.359 million included a $13.956 million gain on conversion of warrants and preferred shares and a $1.534 million gain from derivative fair-value changes; it is not directly comparable with the 2016 loss. The 2016 first-half derivative fair-value gain was $0.128 million.
Cash, liquidity and debt
- Cash and cash equivalents were $9.324 million at June 30, 2016, down from $11.805 million at December 31, 2015; an additional $0.779 million of restricted cash was pledged as loan collateral.
- Working capital was approximately $15.9 million, down about $2.0 million from year-end. Current assets were $20.560 million and current liabilities $4.615 million.
- Operating cash outflow was $2.380 million for the first half, versus $4.121 million a year earlier. Investing cash outflow was $0.041 million, mainly equipment purchases; financing cash outflow was $0.060 million, reflecting mortgage principal payments.
- Mortgage debt totaled approximately $3.053 million, plus $0.140 million of notes payable. The mortgage was amended to extend its initial maturity to July 20, 2019 and extended maturity to July 20, 2024. It bears interest at LIBOR plus 3.5% (3.965% at quarter-end) and requires monthly principal payments of $19,956.
- The loan includes a minimum-liquidity covenant of $0.750 million. A debt-service coverage ratio of at least 1.0:1.0 is required for each of the four preceding quarters to extend the loan beyond July 2019. Purchase commitments totaled $3.482 million for the remainder of 2016.
Outlook, risks and notable items
- No quantified revenue or earnings guidance was provided. Management said continued J-Plasma development and marketing investment may weigh on short-term profitability and cash flow, particularly over the next 12–24 months; success and future returns are not assured.
- On June 30, 2016, Bovie entered a J-Plasma sales-channel partnership with Arteriocyte, which agreed to an initial purchase of ten generators for demonstrations. The agreement also granted 240,000 ten-year options with performance-based vesting over four years.
- Management cited currency strength, lower oil prices affecting some government-funded healthcare markets, and political or civil unrest as international-market risks. It also disclosed reliance on distributors, OEM customers and sole-source suppliers. The ten largest customers generated 56.2% of first-half revenue; McKesson and NDC accounted for 16.5% and 9.6%, respectively.
- Inventory obsolescence reserves rose to $1.567 million from $1.233 million at year-end; inventory was $6.415 million net. The filing notes that weaker product demand or acceptance could require further write-downs.
- The company reported no material change to previously disclosed risk factors, no off-balance-sheet arrangements, and no material impact expected from inflation. Disclosure controls were assessed as effective; no material internal-control changes were reported.
- Revenue recognition standard ASU 2014-09 was scheduled to take effect for the company January 1, 2017; management was evaluating its impact.
Investor facts to verify
- Whether J-Plasma adoption, the Arteriocyte channel and OEM growth translate into sustained sales and improved operating results.
- Cash burn, working-capital needs, the $3.482 million purchase commitments and compliance with the mortgage liquidity covenant.
- Customer and supplier concentration, distributor/OEM contract continuity, and the adequacy of inventory-obsolescence reserves.
- Mortgage amendment terms, collateral and restrictions, and the effects of derivative fair-value estimates and preferred-stock dilution.
- Related-party consulting and royalty arrangements, including the disclosed notice to terminate one consultant’s contract effective January 31, 2017.