Bovie Medical Corporation (now Apyx Medical Corp.) — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016; unaudited. The filing reports Bovie Medical Corporation, an energy-based medical-device company selling electrosurgical products, OEM products, and J-Plasma technology. Financial amounts below are in millions of dollars unless noted.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Sales | $10.063 | $7.823 | $27.133 | $21.226 |
| Gross profit | $5.062 | $3.229 | $13.084 | $9.043 |
| Gross margin | 50.3% | 41.3% | 48.2% | 42.6% |
| Operating loss | $(0.245) | $(1.813) | $(2.748) | $(5.635) |
| Net loss | $(0.964) | $(1.587) | $(3.428) | $(3.963) |
| Net income (loss) attributable to common shareholders | $(0.964) | $(1.587) | $(3.428) | $9.771 |
| Basic and diluted EPS | $(0.04) | $(0.06) | $(0.13) | $0.42 basic; $0.31 diluted |
- Sales grew 28.6% in Q3 and 27.8% year to date. Nine-month sales by operating category were Core $20.261 million, OEM $4.351 million, and J-Plasma $2.521 million.
- Cash used in operations was $2.293 million for the first nine months, versus $4.765 million a year earlier. Investing used $0.182 million; financing used $0.001 million. Cash and equivalents ended at $9.329 million, down from $11.805 million at December 31, 2015.
- At September 30, current assets were $20.471 million and current liabilities $4.225 million, yielding working capital of about $16.2 million. Restricted cash of $0.779 million was separately reported.
- Debt included a $2.993 million mortgage balance and $0.140 million of notes payable. The mortgage rate was 4.025% at quarter-end; monthly principal payments were $19,956.
Material changes and drivers
- Q3 and nine-month gross margins improved by 9.0 and 5.6 percentage points, respectively. Management attributed the improvement mainly to product mix, including greater J-Plasma generator and OEM sales.
- Nine-month Core, OEM, and J-Plasma sales increased 9.1%, 156.7%, and 163.2%, respectively. Management cited existing-customer demand, animal-health growth, new products, expanded OEM contracts, J-Plasma adoption, and sales-channel partnerships.
- Operating losses narrowed versus 2015 as sales and gross profit rose while expense growth moderated. R&D expense increased 21.0% year to date, reflecting product-development investment; salaries and related costs rose 12.9%, partly from expanded sales, quality, HR, and R&D staffing.
- Year-to-date 2015 common-shareholder income included a $13.956 million gain on conversion of warrants and preferred shares, as well as preferred-stock accretion. The 2015 reported EPS and common-shareholder result therefore are not directly indicative of underlying operating performance.
- The 2016 nine-month results included a $0.555 million noncash loss from the fair-value change in warrant liabilities, compared with a $1.800 million noncash gain in 2015. The warrant liability was $0.822 million at September 30, 2016 and was valued using Level 3 inputs.
Outlook, risks, and contingencies
- The filing provides no numerical revenue or earnings guidance. Management said investment in J-Plasma development and marketing could weigh on near-term profitability and cash flow, particularly over the next 12 to 24 months; commercial success and future returns are not assured.
- The mortgage maturity was extended to July 20, 2019, with an extended maturity date of July 20, 2024. Covenants include minimum liquidity of $0.750 million; extending beyond 2019 requires a debt-service coverage ratio of at least 1.0 to 1.0 for each of the prior four quarters. A $0.779 million certificate of deposit is pledged as collateral.
- Purchase commitments totaled $3.617 million for 2016. Management identified reliance on major distributors, OEM customers, and sole-source suppliers as business risks. The ten largest customers represented 56.9% of nine-month revenue.
- International sales were 14.9% of nine-month revenue. Management cited currency strength, lower oil prices affecting some government-funded healthcare markets, and political and civil unrest as sources of volatility.
- Routine legal claims may arise; outcomes are uncertain, but the company said it did not believe currently identified matters would materially adversely affect results, cash flows, or financial condition. No material changes to previously disclosed risk factors were reported.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The company recorded no income-tax provision, citing a valuation allowance against deferred tax assets.
Important facts for investors to verify
- Whether J-Plasma adoption and channel partnerships can sustain growth and ultimately offset the stated near-term investment burden.
- Whether improved gross margins and lower operating cash use continue, given ongoing losses and cash declining to $9.329 million.
- The effects of customer and distributor concentration, OEM order variability, and dependence on sole-source suppliers.
- The assumptions behind the Level 3 warrant valuation and the potential effect of future share-price changes on reported earnings.
- Compliance with mortgage liquidity and debt-service covenants, including the pledged certificate of deposit and upcoming contractual commitments.