Apyx Medical Corp. (then Bovie Medical Corporation) — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. This is an annual report, not a standalone fourth-quarter filing. The audited statements cover 2016, 2015 and 2014; the filing identifies Bovie Medical Corporation as the registrant.
Business context
Bovie developed, manufactured and sold electrosurgical devices and related medical products, including its J-Plasma helium-plasma surgical system. Core products were primarily distributed through medical distributors; the company also had OEM sales and was building a dedicated sales organization for J-Plasma. At year-end it reported 17 field-based selling professionals and 18 independent representatives.
Financial performance and liquidity
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Revenue | $36.6 million | $29.5 million |
| Gross profit | $17.9 million | $12.6 million |
| Gross margin | 48.9% | 42.5% |
| Operating loss | $3.8 million | $7.0 million |
| Net loss | $4.0 million | $5.4 million |
| Cash used in operating activities | $2.8 million | $5.8 million |
- Revenue grew 24.1%. Electrosurgical sales rose 19.0%, other product sales rose 69.9%, and cautery sales rose 3.1%. By operating category, OEM revenue increased 151.8% to $5.3 million and Growth revenue, primarily J-Plasma, increased 167.3% to $3.5 million.
- Domestic sales increased 30.6% to $32.1 million, while international sales declined 8.1% to $4.6 million. International sales were 12.5% of revenue versus 16.9% in 2015.
- Gross margin improved by 6.4 percentage points, attributed mainly to higher relative margins in Growth and OEM products and lower warranty expense, partly offset by expensing unused product molds.
- Cash and cash equivalents were $14.5 million; restricted cash was $0.8 million. Working capital was $21.3 million, compared with $17.9 million a year earlier. Trade receivables rose to $4.7 million from $2.9 million.
- At year-end, mortgage debt was $2.9 million and a separate note payable was $0.14 million. The mortgage bears interest at LIBOR plus 3.5% (4.272% at year-end), with a $750,000 minimum-liquidity covenant. The company reported no off-balance-sheet arrangements.
- FY 2016 investing activities used $0.3 million; financing activities provided $5.8 million, mainly from the company’s public offering and warrant exercises.
- Fourth-quarter 2016 revenue was $9.5 million, gross profit $4.8 million, and net loss attributable to common shareholders $0.5 million. These quarterly figures are unaudited.
Material changes and unusual items
- The company’s operating loss narrowed by $3.2 million year over year, while revenue and gross profit increased. It nevertheless remained loss-making and used cash in operations.
- The 2016 common-stock offering included 1.625 million primary shares and 1.625 million secondary shares at $4.00 per share. Bovie received approximately $5.8 million net proceeds from its primary issuance; proceeds from the selling-stockholder portion went to those stockholders.
- FY 2015 net loss was $5.4 million, but income attributable to common shareholders was reported as $8.4 million because of a $14.0 million gain associated with conversion of warrants and preferred shares. The 2015 common-shareholder result is therefore not directly comparable with 2016.
- The medical-device excise tax was subject to a statutory moratorium for 2016 and 2017; the filing says Bovie paid no federal excise tax in 2016, compared with $0.5 million in 2015.
Outlook, commentary and risks
- Management said it expected to continue investing in J-Plasma development and marketing, warning that these investments could hurt near-term profitability and cash flow, particularly over the next 12 to 24 months. It reported cumulative J-Plasma development and marketing investment of approximately $19.1 million through 2016.
- No specific 2017 revenue or earnings guidance is provided. The company expected 2017 research and development spending of 6.5% to 7.0% of revenue.
- Management described J-Plasma’s future commercial success as uncertain. Key risks include adoption and reimbursement or purchasing acceptance, competition, regulatory compliance, product safety and liability, and the ability to develop and commercialize new products.
- Other disclosed risks include reliance on major distributors and OEM customers, sole-source suppliers, customer concentration, foreign operations, potential patent disputes, and possible future equity issuance and dilution. The ten largest customers accounted for 54.4% of 2016 revenue; McKesson represented 15.9%.
- The auditor issued an unqualified opinion on the financial statements. Management stated disclosure controls and internal control over financial reporting were effective; the auditor was not engaged to audit internal-control effectiveness.
Important facts for investors to verify
- Whether J-Plasma revenue growth can continue and translate into improved operating results and cash generation.
- Whether receivables growth, customer concentration and distributor dependence create collection or sales risks.
- The mortgage’s covenants, collateral and repayment schedule, including the pledged $0.8 million certificate of deposit.
- Potential dilution from outstanding options and convertible Series B preferred stock; the filing reported 3.75 million options outstanding at December 31, 2016 and Series B preferred shares convertible into approximately 1.95 million common shares.
- How the 2017 R&D spending expectation and ongoing commercialization costs affect liquidity and the path to profitability.