Filing summary
Period and identity: This is an unaudited Form 10-Q for the quarter ended March 31, 2017, filed by Bovie Medical Corporation. The request metadata names Apyx Medical Corp.; the filing itself identifies Bovie Medical, so confirm the intended issuer.
Bovie develops, manufactures and markets electrosurgical and related medical products, including its J-Plasma Advanced Energy system. The company continued full-scale commercialization efforts for Advanced Energy during the quarter, supported by a 30-person sales organization. Results are not necessarily indicative of full-year performance.
Financial performance
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Sales | $8.389 million | $7.775 million |
| Gross profit / margin | $4.226 million / 50.4% | $3.323 million / 42.7% |
| Operating loss | $1.737 million | $1.993 million |
| Net loss | $1.685 million | $1.944 million |
| Loss per share, basic / diluted | $0.05 / $0.06 | $0.07 / $0.07 |
| Operating cash used | $2.818 million | $2.267 million |
- Revenue increased 7.9%. Core sales rose 4.6% to $6.775 million, OEM sales rose 7.0% to $1.007 million, and Advanced Energy sales rose 70.5% to $607,000.
- Electrosurgical product sales increased 25.4% to $5.330 million; cautery, lighting and other product sales declined. International sales grew 20.4% to $1.397 million and represented 16.7% of sales.
- Gross margin improved 7.7 percentage points, reflecting Core product and pricing mix and a prior-year $484,000 obsolete-inventory write-down. Management cited lower OEM margins and international Advanced Energy sales at transfer prices as partial offsets.
- Operating expenses totaled $5.963 million, up from $5.316 million. Salaries and related costs rose 17.1%, mainly due to incentive compensation and added administrative and sales personnel.
Financial position and liquidity
- Cash and cash equivalents were $11.508 million, down from $14.456 million at year-end; an additional $779,000 was restricted as mortgage collateral. Working capital was approximately $19.7 million, compared with $21.3 million at December 31, 2016.
- Operating cash use was $2.818 million, including a $1.240 million inventory increase and cash outflow related to 2016 incentive compensation. Investing cash use was $71,000 and financing cash use was $59,000.
- At quarter-end, mortgage debt was $2.874 million and another note payable was $140,000. The mortgage bears interest at LIBOR plus 3.5% (4.284% at March 31, 2017), requires monthly principal payments of about $20,000, and is secured by the Clearwater facility and restricted certificate of deposit.
- The mortgage requires minimum liquidity of $750,000. To extend it beyond July 20, 2019, the company must meet a debt-service coverage ratio of at least 1.0 for the preceding four quarters.
Outlook, risks and notable items
- No quantified revenue, earnings or cash-flow guidance is provided. Management described ongoing J-Plasma commercialization and continued review of marketing, distribution and expense plans.
- Inventory purchase commitments were approximately $4.7 million, substantially all expected by year-end 2017. The inventory balance increased to $7.422 million from $6.158 million.
- Customer concentration remains significant: the ten largest customers accounted for 56.2% of quarterly sales; McKesson represented 16.0%. The company also cites dependence on major distributors, OEM customers and sole-source suppliers.
- Management said identified litigation was not expected to have a material adverse effect, while noting that outcomes could differ and potential losses could affect results. No material changes to previously reported risk factors were disclosed.
- The company recorded a $5,000 income tax expense and maintains a valuation allowance against deferred tax assets due to its history of losses. The $88,000 gain from revaluing warrant derivative liabilities was noncash and used Level 3 valuation inputs.
- Related-party arrangements include employment of relatives of Bovie Bulgaria’s managing director and consulting fees of approximately $28,500 to an executive’s brother’s firm during the quarter; renewal terms were under negotiation.
Key facts for investors to verify
- Confirm the issuer identity: this filing is for Bovie Medical Corporation, notwithstanding the Apyx Medical metadata.
- Assess whether Advanced Energy and J-Plasma sales growth can continue and translate into improved segment economics; Advanced Energy reported a $1.721 million operating loss.
- Track cash burn, inventory growth, the $4.7 million purchase commitments, and compliance with mortgage liquidity and other covenants.
- Evaluate customer, distributor and supplier concentration, as well as the stated related-party arrangements and their ongoing terms.
- Note that diluted loss per share differs from basic loss per share in Q1 2017 ($0.06 versus $0.05); review the warrant dilution calculation and potential dilution from convertible preferred stock.