Apyx Medical Corp. (then Bovie Medical Corporation) — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. This is an annual report; fourth-quarter figures are unaudited. Dollar amounts below are in U.S. dollars.
Business context
The company develops, manufactures and markets electrosurgical and other medical devices. It reports Core, OEM and Advanced Energy segments; Advanced Energy primarily comprises its J-Plasma helium-plasma surgical technology. In 2017, Core, OEM and Advanced Energy represented 73.7%, 6.7% and 19.6% of consolidated revenue, respectively.
Financial performance and liquidity
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Revenue | $38.883 million | $36.627 million |
| Gross profit / margin | $19.761 million / 50.8% | $17.915 million / 48.9% |
| Operating loss | $5.265 million | $3.792 million |
| Net loss | $5.062 million | $3.950 million |
| Basic loss per share | $0.16 | $0.14 |
| Cash used in operating activities | $3.704 million | $2.837 million |
| Cash and restricted cash at year-end | $10.668 million | $15.235 million |
| Working capital | $16.574 million | $21.267 million |
Revenue rose 6.2%, while gross margin improved 1.9 percentage points. Higher operating costs, including increased SG&A and $1.524 million of severance and related expense, drove a larger operating and net loss. SG&A increased 32.7% to $11.370 million, including higher commissions, marketing, bad-debt provision, travel and insurance.
Revenue by segment: Core grew 3.0% to $28.649 million; OEM fell 51.2% to $2.598 million, largely because 2016 included a large non-recurring order; Advanced Energy grew 118.7% to $7.636 million. The company attributed the higher gross margin principally to improved margins in Advanced Energy and several Core product lines.
Fourth-quarter revenue was $11.348 million versus $9.494 million in Q4 2016. Q4 net loss was $824,000 versus $523,000; the 2017 quarter included approximately $1.5 million of non-recurring executive-separation and office-closure expenses.
Year-end liabilities included a mortgage balance of approximately $2.694 million and a separate $140,000 note payable. The mortgage bears interest at LIBOR plus 3.5% (5.64% at year-end), is secured by the Clearwater facility and a $719,000 certificate of deposit, and includes a $750,000 minimum-liquidity covenant. Cash and restricted cash declined by $4.507 million during 2017. Inventory increased, with days in inventory rising to 167 from 160; management cited slower-moving Advanced Energy and Core inventory. Inventory-obsolescence provision was $502,000.
Outlook, commentary and material risks
- Management planned to focus 2018 U.S. J-Plasma commercialization on cosmetic surgery, while pursuing cosmetic surgery and surgical oncology internationally, particularly in hospitals. It also planned clinical and regulatory work to support the strategy.
- The company expects 2018 R&D spending of 6.5%–7.0% of revenue. It cautioned that continued J-Plasma investment could adversely affect near-term profitability and cash flow, particularly over the following 12–24 months. No overall revenue or earnings guidance is provided.
- Management reported J-Plasma had FDA clearance and a CE mark and described product launches and sales-force expansion; it cautioned that market acceptance and future profitability are not assured.
- CEO Robert Gershon resigned and Chief Commercialization Officer Jack McCarthy was terminated in late 2017; Charles Goodwin became CEO in December. Associated severance and office-closure costs were recorded, with some cash payments expected in 2018 and 2019.
- The company disclosed multiple legal actions relating to J-Plasma use. Management said it believed it had meritorious defenses and insurance coverage, but warned that uncovered or excess damages could materially affect earnings, financial position or cash flows.
- Key risks include reliance on major distributors and sole-source suppliers, intense competition, regulatory requirements, product safety and liability claims, intellectual-property disputes, inventory obsolescence, weather-related manufacturing disruption, and the ability to commercialize J-Plasma. Ten largest customers generated 48.3% of 2017 sales; McKesson alone represented 15.7%.
- The filing gives inconsistent descriptions of ASC 606 adoption: one passage says adoption will have a material impact on the consolidated financial statements, while another says it will not materially affect financial condition or results. Both state that opening retained earnings impact is not expected to be material.
Most important facts for investors to verify
- Whether Advanced Energy and J-Plasma sales growth can continue and translate into improved segment economics and lower cash burn.
- Whether working-capital consumption, slower inventory turnover and the $4.3 million of inventory purchase commitments affect liquidity or require further write-downs.
- The timing and terms of the 2019 mortgage maturity, compliance with loan covenants, and the availability of the pledged certificate of deposit.
- The status, insurance coverage and potential financial exposure of J-Plasma-related legal actions.
- The actual accounting and disclosure impact of ASC 606, given the filing’s inconsistent statements.
- The effect of leadership changes and the disclosed severance payments on execution and 2018 cash needs.