|
| | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2017 |
(In thousands) | Core | | OEM | | Advanced Energy | | Corporate (Other) | | Total |
Sales | $ | 20,959 |
| | $ | 2,030 |
| | $ | 4,546 |
| | $ | — |
| | $ | 27,535 |
|
| | | | | | | | | |
Income (loss) from operations (1) | 6,471 |
| | 1,031 |
| | (3,821 | ) | | (7,858 | ) | | (4,177 | ) |
| | | | | | | | | |
Interest expense, net | — |
| | — |
| | — |
| | (103 | ) | | (103 | ) |
Change in fair value of derivative liabilities | — |
| | — |
| | — |
| | 57 |
| | 57 |
|
Income tax expense | — |
| | — |
| | — |
| | 15 |
| | 15 |
|
Depreciation and amortization | — |
| | — |
| | — |
| | 527 |
| | 527 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2016 |
(In thousands) | Core | | OEM | | Advanced Energy | | Corporate (Other) | | Total |
Sales | $ | 20,261 |
| | $ | 4,351 |
| | $ | 2,521 |
| | $ | — |
| | $ | 27,133 |
|
| | | | | | | | | |
Income (loss) from operations | 5,047 |
| | 2,498 |
| | (3,331 | ) | | (6,962 | ) | | (2,748 | ) |
| | | | | | | | | |
Interest expense, net | — |
| | — |
| | — |
| | (125 | ) | | (125 | ) |
Change in fair value of derivative liabilities | — |
| | — |
| | — |
| | (555 | ) | | (555 | ) |
Income tax expense | — |
| | — |
| | — |
| | — |
| | — |
|
Depreciation and amortization | — |
| | — |
| | — |
| | 355 |
| | 556 |
|
| |
(1) | During the first and second quarter of 2017, marketing expenses were considered as attributable only to the Corporate (Other) segment in the line Income (loss) from operations. Beginning with the third quarter of 2017, it was determined that certain marketing expenses are attributable to specific segments. The disclosure of Income (loss) from operations was updated for the third quarter of 2017 to reflect marketing expense by segment. |
We derive revenues from four major product lines: Electrosurgical, Cauteries, Lighting and Other products. We do not review or analyze our four major product lines below net sales. Sales for the product lines are summarized as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(In thousands) | 2017 | | 2016 | | 2017 | | 2016 |
Sales by Product Line | | | | | | | |
Electrosurgical | $ | 6,205 |
| | $ | 5,690 |
| | $ | 17,741 |
| | $ | 15,020 |
|
Cauteries | 1,696 |
| | 1,863 |
| | 5,224 |
| | 5,417 |
|
Lighting | 573 |
| | 740 |
| | 1,966 |
| | 2,046 |
|
Other | 873 |
| | 1,770 |
| | 2,604 |
| | 4,650 |
|
Total | $ | 9,347 |
| | $ | 10,063 |
| | $ | 27,535 |
| | $ | 27,133 |
|
BOVIEAPYX MEDICAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Six Months Ended June 30, 2020 |
(In thousands) | | | Advanced Energy | | OEM | | Corporate & Other | | Total |
Sales | | | $ | 6,853 | | | $ | 2,440 | | | $ | 0 | | | $ | 9,293 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Income (loss) from operations | | | (7,276) | | | 831 | | | (7,214) | | | (13,659) | |
| | | | | | | | | |
Interest income | | | 0 | | | 0 | | | 223 | | | 223 | |
Interest expense | | | 0 | | | 0 | | | (14) | | | (14) | |
Other income, net | | | 0 | | | 0 | | | 412 | | | 412 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Income tax benefit | | | 0 | | | 0 | | | (6,397) | | | (6,397) | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
International sales represented approximately 14.6%34.2% and 14.0%34.8% of total revenues for the three and ninesix months ended SeptemberJune 30, 2017,2021, respectively, as compared with 13.2%approximately 21.0% and 14.9%24.6% of total revenues for the three and ninesix months ended SeptemberJune 30, 2016. Substantially all of these sales are denominated in U.S. dollars. 2020, respectively.
Revenue by geographic region, based on the "ship to"customer's “ship to” location on the invoice, are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(In thousands) | 2021 | | 2020 | | 2021 | | 2020 |
Sales by Domestic and International | | | | | | | |
Domestic | $ | 7,383 | | | $ | 3,393 | | | $ | 12,949 | | | $ | 7,011 | |
International | 3,841 | | | 903 | | | 6,913 | | | 2,282 | |
Total | $ | 11,224 | | | $ | 4,296 | | | $ | 19,862 | | | $ | 9,293 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(In thousands) | 2017 | | 2016 | | 2017 | | 2016 |
Sales by Domestic and International | | | | | | | |
Domestic | $ | 7,978 |
| | $ | 8,730 |
| | $ | 23,678 |
| | $ | 23,102 |
|
International | 1,369 |
| | 1,333 |
| | 3,857 |
| | 4,031 |
|
Total | $ | 9,347 |
| | $ | 10,063 |
| | $ | 27,535 |
| | $ | 27,133 |
|
BOVIEAPYX MEDICAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANAYLSISANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis in conjunction with our financial statements and related notes contained elsewhere in this report. This discussion contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a variety of factors discussed in this report and those discussed in other documents we file with the SEC. In light of these risks, uncertainties and assumptions, readers are cautioned not to place undue reliance on such forward-looking statements. These forward-looking statements represent beliefs and assumptions as of the date of this report. While we may elect to update forward-looking statements and at some point in the future, we specifically disclaim any obligation to do so, even if our estimates change. Past performance does not guarantee future results.
Executive Level Overview
Bovie Medical Corporation (“Company”, “Bovie”, “we”, “us”, or “our”) was incorporated in 1982, under the laws of the State of Delaware and has its principal executive office at 4 Manhattanville Road, Suite 106, Purchase, NY 10577.
We are an energy-based medical deviceadvanced energy technology company specializingwith a passion for elevating people’s lives through innovative products in developing, manufacturingthe cosmetic and marketingsurgical markets. Known for our innovative Helium Plasma Technology, Apyx is solely focused on bringing transformative solutions to the physicians and patients it serves. Our Helium Plasma Technology is marketed and sold as Renuvion® in the cosmetic surgery market and J-Plasma® in the hospital surgical market. Renuvion® offers plastic surgeons, fascial plastic surgeons and cosmetic physicians a rangeunique ability to provide controlled heat to tissue to achieve their desired results. The J-Plasma® system allows surgeons to operate with a high level of electrosurgical products and technologies, as well as related medical products used in doctor’s offices, surgery centers and hospitals worldwide. Our medical devices are marketed through Bovie’s own well-respected brands (Bovie®, IDS™ and DERMTM) and on a private label basis to distributors throughout the world.precision, virtually eliminating unintended tissue trauma. We also leverage our deep expertise and decades of experience in unique waveforms through OEM agreements with other medical device manufacturers.
We continue to drive sales in our Advanced Energy business by increasing the adoption and utilization of our handpieces in the design, developmentU.S. cosmetic surgery market and manufacturing of electrosurgical equipment by producing equipment for large, well-known medical device manufacturers through original equipment manufacturing (OEM) agreements, as well as start-up companies with the need forfulfilling demand from distributors in our energy based designs.
We are also the developer of J-Plasma; a patented plasma-based surgical product for cutting, coagulation and ablation of soft tissue. J-Plasma utilizes a helium ionization process to produce a stable, focused beam of plasma that provides surgeons with greater precision, minimal invasiveness and an absence of conductive currents through the patient during surgery. The new J-Plasma handpieces with Cool-Coag™ technology deliver the precision of helium plasma energy, the power of traditional monopolar coagulation and the efficiency of plasma beam coagulation - enabling thin-layer ablation and dissection and fast coagulation with a single instrument, minimizing instrument exchange and allowing a surgeon to focus on their patient and their procedures. With Cool-Coag technology, the new J-Plasma handpieces can deliver three distinctly different energy modalities - further increasing the utility and versatility of the J-Plasma system. J-Plasma has been the subject of ten white papers and has been cited therein for its clinical utility in gynecological and plastic surgery procedures.
The majority of our core products are marketed through medical distributors, which distribute to more than 6,000 hospitals, and to doctors and other healthcare facilities. New distributors are contacted through responses to our advertising in international and domestic medical journals and our presence at domestic and international trade shows.
International sales represented approximately 14.6% and 14.0% of total revenues for the three and nine months ended September 30, 2017, respectively, as compared with 13.2% and 14.9% of total revenues for the three and nine months ended September 30, 2016, respectively. The decrease in international sales as a percentage of revenue during the nine months ended September 30, 2017, was driven pending product registration in foreign jurisdictions and large international purchase tenders that did not occur in the current period as compared to the same period of 2016.markets. Management estimates that our products have been sold in more than 150 countries through local dealers coordinated by sales and marketing personnel at the Clearwater, Florida facility. Our business is generally not seasonal in nature.
During 2017,60 countries. As of June 30, 2021, we continued our full scale commercialization efforts for Advanced Energy technology which includes J-Plasma. We havehad a direct sales force of 1731 field-based selling professionals and a network of 14utilized 2 independent manufacturing representatives, resulting in a total sales force of 31.agencies. We also had 5 sales managers. This selling organization is focused on the use of Advanced Energy technology, primarily J-Plasma, for operating room procedures.Renuvion® in the cosmetic surgery market. In addition, we have invested in both in-person and virtual training programs and marketing-related activities to support accelerated adoption of Renuvion® into physicians' practices.
In regards to our operating segments, our results are aggregated into reportable segments only if they exhibit similar economic characteristics. In addition to similar economic characteristics, we also consider the following factors in determining the reportable segments: the nature of business activities, the management structure directly accountable to our chief operating decision maker for operating and administrative activities, availability of discrete financial information, and information presented to the Board of Directors and investors. Asset information is not reviewed by the chief operating decision maker by segment and is not available by segment and, accordingly, we have not presented a measure of assets by reportable segment.
Our reportable segments are disclosed as principally organized and managed as two operating segments: Advanced Energy technology.and OEM. "Corporate & Other" includes certain unallocated corporate and administrative costs which are not specifically attributed to any reportable segment. The OEM segment is primarily development and manufacturing contract and product driven, and all related expenses are recorded as cost of sales, therefore no segment specific operating expenses are incurred.
The Company continuously reviews and refines its marketing strategies and distribution channels regarding the commercialization of Advanced Energy technology as well as initiatives to manage expenses and costs as appropriate for market conditions.
We strongly encourage investors to visit our website: www.boviemedical.comwww.apyxmedical.com to view the most current news and to review our filings with the Securities and Exchange Commission.
Impact of COVID-19
As discussed in our Annual Report on Form 10-K for the year ended December 31, 2020 ("2020 Form 10-K"), an outbreak of a novel strain of the coronavirus, COVID-19, was identified in China and subsequently recognized as a pandemic by the World Health Organization. While the situation shows signs of improvement in certain countries, the COVID-19 outbreak generally continues to severely restrict the level of economic activity around the world. In response to the COVID-19 outbreak the governments of many countries, states, cities and other geographic regions have taken preventative or protective actions, such as imposing restrictions on travel and business operations and advising or requiring individuals to limit or forego their time outside of their homes. Temporary closures of businesses in some jurisdictions were ordered, and numerous other businesses closed permanently. Many other businesses continue to be operated at reduced capacity.
BOVIEAPYX MEDICAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANAYLSISANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
As vaccines have become more available, the number of COVID-19 cases has declined in the United States and various other countries, and economic conditions have improved. However, uncertainty remains regarding the extent, timing, and duration of the pandemic, including the extent to which the availability of these vaccines will positively impact public health conditions and whether new, potentially more contagious variants may pose additional public health risks. The pandemic continues to cause uncertainty and potential economic volatility, including with regard to the pandemic’s various and unpredictable impacts on our customers and our business.
Results
Any future significant reductions in business-related activities could result in further loss of Operationssales and profits and other material adverse effects. The extent of the impact of COVID-19 on our business, financial results, liquidity and cash flows will depend largely on future developments, including new information that may emerge concerning actions taken to contain or prevent further spread of the virus, or its newly forming variants, within the U.S. and the related impact on consumer confidence and spending, all of which are highly uncertain and cannot be predicted.
Sales
|
| | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
(In thousands) | 2017 | | 2016 | | Change | | 2017 | | 2016 | | Change |
Sales by Reportable Segment | | | | | | | | | | | |
Core | $ | 6,696 |
| | $ | 6,902 |
| | (3.0 | )% | | $ | 20,959 |
| | $ | 20,261 |
| | 3.4 | % |
OEM | 525 |
| | 1,762 |
| | (70.2 | )% | | 2,030 |
| | 4,351 |
| | (53.3 | )% |
Advanced Energy | 2,126 |
| | 1,399 |
| | 52.0 | % | | 4,546 |
| | 2,521 |
| | 80.3 | % |
Total | $ | 9,347 |
| | $ | 10,063 |
| | (7.1 | )% | | $ | 27,535 |
| | $ | 27,133 |
| | 1.5 | % |
| | | | | | | | | | | |
Sales by Product Line | | | | | | | | | | | |
Electrosurgical | $ | 6,205 |
| | $ | 5,690 |
| | 9.1 | % | | $ | 17,741 |
| | $ | 15,020 |
| | 18.1 | % |
Cauteries | 1,696 |
| | 1,863 |
| | (9.0 | )% | | 5,224 |
| | 5,417 |
| | (3.6 | )% |
Lighting | 573 |
| | 740 |
| | (22.6 | )% | | 1,966 |
| | 2,046 |
| | (3.9 | )% |
Other | 873 |
| | 1,770 |
| | (50.7 | )% | | 2,604 |
| | 4,650 |
| | (44.0 | )% |
Total | $ | 9,347 |
| | $ | 10,063 |
| | (7.1 | )% | | $ | 27,535 |
| | $ | 27,133 |
| | 1.5 | % |
| | | | | | | | | | | |
Sales by Domestic and International | | | | | | | | | | | |
Domestic | $ | 7,978 |
| | $ | 8,730 |
| | (8.6 | )% | | $ | 23,678 |
| | $ | 23,102 |
| | 2.5 | % |
International | 1,369 |
| | 1,333 |
| | 2.7 | % | | 3,857 |
| | 4,031 |
| | (4.3 | )% |
Total | $ | 9,347 |
| | $ | 10,063 |
| | (7.1 | )% | | $ | 27,535 |
| | $ | 27,133 |
| | 1.5 | % |
Overall sales decreasedWhile our revenues were affected by 7.1% or approximately $0.7 million for the three months ended September 30, 2017, when compared with 2016. Core segment revenue, which consistscontinued impacts of the COVID-19 pandemic, starting in the latter half of 2020 we saw strong utilization of our brand name electrosurgical devicesRenuvion® handpieces from existing customers in the U.S., along with shipments to several new customers in our international markets, which helped to offset sluggish global demand for capital equipment. Throughout this event, we continued our efforts to support our customers during this challenging time.
We were pleased to see overall improvements in our Advanced Energy business trends starting in the latter half of 2020, and accessories, cauteries, penlights, lighting, colposcopescontinued to see improvements in the first half of 2021 in utilization based global demand for our handpieces and other similaradoption of our generator technology. Demand trends, however, for generator adoption continue to remain in varying stages of recovery in the markets we serve. Although the timing of a return to a more normalized economic environment remains uncertain, we remain optimistic with respect to the continued recovery of the cosmetic and plastic surgery market, and the utilization and adoption of our products decreased 3.0% or approximately $0.2 million forglobally.
We source the components used in our products from a variety of suppliers and we have collaborative arrangements with three months ended September 30, 2017, when compared with 2016. The OEM segment consistskey foreign suppliers. At this time our suppliers have experienced no significant production disruptions as a result of proprietary products designed specifically forCOVID-19. However, we have started to experience longer lead times and increased delays in our deliveries from these suppliers as a result of the availability of shipping from third party equipment manufacturers; revenue for this product line decreased 70.2% or approximately $1.2 million forfreight carriers. While we continue to monitor these delays, they have not, to date, had a significant impact on our manufacturing operations, but have resulted in increased inbound shipping costs and the three months ended September 30, 2017, when compared with 2016, duenecessity to a one-time orderincrease levels of our key raw material component inventories..
We continue to closely monitor developments related to COVID-19 that may impact our operations and financial performance, and continue our efforts to support our employees and customers in the comparable period of 2016. Advanced Energy segment sales were $2.1 million, an increase of approximately 52.0% forfollowing areas:
•Protecting the three months ended September 30, 2017, when compared to 2016.
For the three months ended September 30, 2017, the increase in electrosurgical sales was mainly attributable to an increase in sales of generators of $0.6 million.
Overall sales increased by 1.5% or approximately $0.4 million for the nine months ended September 30, 2017, when compared with 2016. Core segment revenue, which consistsHealth and Safety of our brand name electrosurgical devicesEmployees: To reduce the risk to our employees and accessories, cauteries, penlights, lighting, colposcopestheir families to potential exposure to COVID-19, we have required that all non-essential employees work remotely until further notice. We also split the shifts of our manufacturing personnel to allow for adequate social distancing, and other similar products, increased 3.4%require all personnel to utilize personal protective equipment while on site at our facilities. We also significantly reduced business travel and outside access to our facilities.
•Maintaining Engagement of or approximately $0.7 millionSales Team and Our Customers: In addition to the initiatives we put in place to protect health and safety for all employees, we focused our direct sales team on remaining in close contact with their existing surgeon customers to do everything they can to provide them with support during this difficult time. With this goal in mind, we implemented additional training for our sales reps in order to sharpen their ability to engage with our customers virtually. In addition to engaging with existing customers via virtual methods, our sales representatives also continued to target and reach out to prospective customers, and outside the nine months ended September 30, 2017, when compared with 2016. The OEM segment consistsU.S., we continued to monitor the activities of proprietary products designed specifically for third party equipment manufacturers; revenue for this product line decreased 53.3% or approximately $2.3 million forour distributor partners and helped them navigate the nine months ended September 30, 2017, when comparedchallenges they faced as a result of the slower demand they have seen in their respective countries.
•Operating Expenses: Given the uncertainty surrounding the impacts that COVID-19 could have on our business, we took preemptive steps to 2016, duecurtail spending, including implementing hiring restrictions,reducing discretionary spending, reducing capital expenditures, and delaying certain R&D projects and clinical research studies. Taking into account the early signs of improving economic environment and conditions related to a one-time orderCOVID-19, we have started to ease these measures in certain areas. However, we will continue to monitor any future developments related to the comparable periodpandemic and may reinstate them if necessary.
•Governmental Policy: On March 27, 2020, the U.S. government enacted the CARES Act to provide relief from COVID-19. We have taken advantage of 2016. Advanced Energy segment sales were $4.5 million, an increasecertain provisions of approximately 80.3% for the nine months ended September 30, 2017, when comparedCARES Act which are applicable to 2016.
For the nine months ended September 30, 2017, the increase in electrosurgical sales was mainly attributable to an increase in sales of generators of $2.6 million and accessories of $0.1 million.
us, including
BOVIEAPYX MEDICAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANAYLSISANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
utilizing net operating loss (NOL) carryback provisions. Utilizing these provisions significantly mitigated the working capital impact COVID-19 has had on our sales and operations.
Our ten largest customers accounted
Results of Operations
Sales
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | Six Months Ended June 30, | | | |
(In thousands) | 2021 | | 2020 | | Change | | 2021 | | 2020 | | Change | |
Sales by Reportable Segment | | | | | | | | | | | | |
Advanced Energy | $ | 9,978 | | | $ | 2,867 | | | 248.0 | % | | $ | 17,638 | | | $ | 6,853 | | | 157.4 | % | |
OEM | 1,246 | | | 1,429 | | | (12.8) | % | | 2,224 | | | 2,440 | | | (8.8) | % | |
Total | $ | 11,224 | | | $ | 4,296 | | | 161.3 | % | | $ | 19,862 | | | $ | 9,293 | | | 113.7 | % | |
| | | | | | | | | (632,000) | | | |
Sales by Domestic and International | | | | | | | | | | | | |
Domestic | $ | 7,383 | | | $ | 3,393 | | | 117.6 | % | | $ | 12,949 | | | $ | 7,011 | | | 84.7 | % | |
International | 3,841 | | | 903 | | | 325.4 | % | | 6,913 | | | 2,282 | | | 202.9 | % | |
Total | $ | 11,224 | | | $ | 4,296 | | | 161.3 | % | | $ | 19,862 | | | $ | 9,293 | | | 113.7 | % | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Total revenue increased by 161.3% and 113.7%, or approximately $6.9 million and $10.6 million, for the three and six months ended June 30, 2021 when compared with the three and six months ended June 30, 2020. Advanced Energy segment sales increased 248.0% and 157.4%, or approximately 35.3%$7.1 million and 41.3%$10.8 million, for the three and six months ended June 30, 2021 when compared with the three and six months ended June 30, 2020. In the first half of trade receivables as2021, we saw increased global utilization based demand for our handpieces and adoption of September 30, 2017our generator technology despite the continued headwinds of the COVID-19 pandemic, while the same period in 2020 was severely impacted.
International sales represented approximately 34.2% and 2016, respectively and approximately 50.0% and 56.9%34.8% of nettotal revenues for the ninethree and six months ended SeptemberJune 30, 20172021, respectively, as compared with 21.0% and 2016, respectively. For24.6% of total revenues for the ninesame prior year period. Management estimates our products have been sold in more than 60 countries through local dealers coordinated by sales and marketing personnel through our facilities in Clearwater, Florida and Sofia, Bulgaria.
Gross Profit
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
(In thousands) | 2021 | | 2020 | | Change | | 2021 | | 2020 | | Change |
Cost of sales | $ | 3,690 | | | $ | 2,202 | | | 67.6 | % | | $ | 6,468 | | | $ | 4,215 | | | 53.5 | % |
Percentage of sales | 32.9 | % | | 51.3 | % | | | | 32.6 | % | | 45.4 | % | | |
| | | | | | | | | | | |
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| | | | | | | |
| | | | | | | | | | | |
Gross profit | $ | 7,534 | | | $ | 2,094 | | | 259.8 | % | | $ | 13,394 | | | $ | 5,078 | | | 163.8 | % |
Percentage of sales | 67.1 | % | | 48.7 | % | | | | 67.4 | % | | 54.6 | % | | |
| | | | | | | | | | | |
Gross profit for the three months ended SeptemberJune 30, 2017, McKesson and National Distribution & Contracting Inc. accounted for 15.7% and 9.3% of sales, while2021, increased 259.8% to $7.5 million, compared to $2.1 million for the same period in 2016, McKesson and National Distribution & Contracting Inc. accountedthe prior year. Gross margin for 15.0% and 9.0% of sales.
During August and September 2017, we were impacted by Hurricanes Harvey in Texas and Irma in Florida. We derive a portion of our revenue from these two states and management believes we were negatively impacted, however we cannot quantify with certainty the amount of the financial impact. There was no significant asset damage at our facility in Clearwater, FL as a result of Hurricane Irma.
Gross Profit
|
| | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
(In thousands) | 2017 | | 2016 | | Change | | 2017 | | 2016 | | Change |
Cost of sales | $ | 4,753 |
| | $ | 5,002 |
| | (5.0 | )% | | $ | 13,673 |
| | $ | 14,049 |
| | (2.7 | )% |
Percentage of revenue | 50.9 | % | | 49.7 | % | |
|
| | 49.7 | % | | 51.8 | % | |
|
|
|
| | | | | | | | | | | | | | | | | | | | | |
Gross profit | $ | 4,594 |
| | $ | 5,061 |
| | (9.2 | )% | | $ | 13,862 |
| | $ | 13,084 |
| | 5.9 | % |
Percentage of revenue | 49.1 | % | | 50.3 | % | | (1.2 | )% | | 50.3 | % | | 48.2 | % | | 2.1 | % |
Our gross profit decreased by 9.2% or approximately $0.5 million during the three months ended SeptemberJune 30, 2017 when2021, was 67.1%, compared to 2016. Margins were negatively impacted due48.7% for the same period in 2020.
Gross profit for the six months ended June 30, 2021, increased 163.8% to a write down of approximately $370,000$13.4 million, compared to $5.1 million for obsolete inventory related to our first generation J-Plasma products that have been substantially upgraded to our current generation. The overall decrease in margins was partially offset by higher marginsthe same period in the Advanced Energy segment, driven by higher volume and pricing mix on generator sales.
Our gross profit increased by 5.9% or approximately $0.8 million duringprior year. Gross margin for the ninesix months ended SeptemberJune 30, 2017 when2021, was 67.4%, compared to 2016. The increase was attributed to higher margins in the Advanced Energy segment, driven by higher volume and pricing mix.
We do not anticipate any material impact to our gross profit, material costs, or other costs as a result of the effect of inflation or any material impact of changing prices on net revenue.
Other Costs and Expenses
Research and development
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| Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
(In thousands) | 2017 | | 2016 | | Change | | 2017 | | 2016 | | Change |
Research and Development expense | $ | 610 |
| | $ | 681 |
| | (10.4 | )% | | $ | 2,015 |
| | $ | 1,941 |
| | 3.8 | % |
Percentage of revenue | 6.5 | % | | 6.8 | % | | | | 7.3 | % | | 7.2 | % | | 0.1 | % |
Bringing new, innovative products to market and enhancing existing products is a critical component of our strategy. As such, spending in R&D as a percentage of sales was 6.5% and 7.3%54.6% for the three and nine months ended September 30, 2017, respectively.same period in 2020.
BOVIEAPYX MEDICAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANAYLSISANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
The increase in gross profit margins for the three and six months ended June 30, 2021 from the prior year periods is primarily attributable to sales mix between our two segments, with our Advanced Energy segment comprising a higher percentage of total sales, as well as product mix within our Advanced Energy segment. Our continued manufacturing efficiency initiatives and the introduction of newer product models have continued to result in improved margins as we obtain registration, allowing these products to be introduced into the markets we serve. Additionally, the strong sales during the three and six months ended June 30, 2021, resulted in reduced product costs as our fixed costs were spread across higher production volumes. This manufacturing efficiency was partially offset by higher inbound shipping costs, as we expedited the sourcing of key component raw material inventories.
During the second quarter of 2020, we reassessed our forecasted product mix due to COVID-19, increased availability of our newer handpiece designs, and earlier than expected completion of product registrations in certain international markets. As a result, certain products were reduced to a lower carrying value, and some components were also written off as it was determined to cease further production on these models. This resulted in a decrease in gross profit of approximately $0.4 million during the three and six months ended June 30, 2020.
Other Costs and Expenses
Research and development
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| Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
(In thousands) | 2021 | | 2020 | | Change | | 2021 | | 2020 | | Change |
Research and development expense | $ | 1,084 | | | $ | 975 | | | 11.2 | % | | $ | 2,199 | | | $ | 1,955 | | | 12.5 | % |
Percentage of sales | 9.7 | % | | 22.7 | % | | | | 11.1 | % | | 21.0 | % | | |
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Research and development expenses increased 11.2% and 12.5% for the three and six months ended June 30, 2021, primarily due to continued spending on our two investigational device exemption (IDE) clinical studies and product development initiatives.
Professional services
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| Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
(In thousands) | 2021 | | 2020 | | Change | | 2021 | | 2020 | | Change |
Professional services expense | $ | 1,889 | | | $ | 1,658 | | | 13.9 | % | | $ | 3,410 | | | $ | 4,047 | | | (15.7) | % |
Percentage of sales | 16.8 | % | | 38.6 | % | | | | 17.2 | % | | 43.5 | % | | |
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| Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
(In thousands) | 2017 | | 2016 | | Change | | 2017 | | 2016 | | Change |
Professional services expense | $ | 421 |
| | $ | 292 |
| | 44.2 | % | | $ | 1,291 |
| | $ | 1,045 |
| | 23.4 | % |
Percentage of revenue | 4.5 | % | | 2.9 | % | | 1.6 | % | | 4.7 | % | | 3.9 | % | | 0.8 | % |
DuringProfessional services expense increased 13.9% for the three and nine months ended SeptemberJune 30, 2017, professional services expense increased approximately 44.2% and 23.4%, respectively, compared to the prior year. The change was2021, primarily attributable to increases in legal fees ($0.1 million) and regulatoryprofessional services for continued consulting expensesexpense associated with our implementation of SAP ($0.1 million).
Professional services expense decreased 15.7% for the six months ended June 30, 2021, primarily attributable to decreases in physician consulting fees ($0.2 million), accounting and auditing fee overages ($0.3 million) related to 2019 financial statement restatements and remediation activities that occurred in the Advanced Energy segment.three months ended March 31, 2020, and legal fees ($0.1 million). These decreases were partially offset by an increase in professional services for continued consulting expense associated with our implementation of SAP ($0.1 million).
Salaries and related costs
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| Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
(In thousands) | 2021 | | 2020 | | Change | | 2021 | | 2020 | | Change |
Salaries and related expenses | $ | 4,343 | | | $ | 3,439 | | | 26.3 | % | | $ | 8,588 | | | $ | 6,750 | | | 27.2 | % |
Percentage of sales | 38.7 | % | | 80.1 | % | | | | 43.2 | % | | 72.6 | % | | |
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| Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
(In thousands) | 2017 | | 2016 | | Change | | 2017 | | 2016 | | Change |
Salaries and related expenses | $ | 2,080 |
| | $ | 2,192 |
| | (5.1 | )% | | $ | 6,783 |
| | $ | 6,492 |
| | 4.5 | % |
Percentage of revenue | 22.3 | % | | 21.8 | % | | | | 24.6 | % | | 23.9 | % | | |
During the three months ended September 30, 2017, salaries and related expenses decreased approximately 5.1% compared to the prior year. The change was attributable to decreases in administrative and personnel expenses, partially offset by increases in international salary expense.
During the nine months ended September 30, 2017, salaries and related expenses increased approximately 4.5% or approximately $0.3 million compared to the prior year. The increase was attributable to approximately $0.2 million of incentive compensation and $0.1 million related to administrative, direct sales force and associated management.
Selling, general and administrative expenses
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| Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
(In thousands) | 2017 | | 2016 | | Change | | 2017 | | 2016 | | Change |
SG&A Expense | $ | 2,617 |
| | $ | 2,141 |
| | 22.2 | % | | $ | 7,950 |
| | $ | 6,354 |
| | 25.1 | % |
Percentage of revenue | 28.0 | % | | 21.3 | % | | | | 28.9 | % | | 23.4 | % | | |
Selling, general and administrative expense increased by 22.2% or approximately $0.5 million for the three months ended September 30, 2017, when compared to 2016. We experienced increases in sales commissions of $0.3 million and administrative and marketing expense of $0.2 million.
Selling, general and administrative expense increased by 25.1% or approximately $1.6 million for the nine months ended September 30, 2017, when compared to 2016. We experienced increases in sales commissions of $0.8 million, administrative and regulatory expenses of $0.7 million and marketing of $0.4 million, partially offset by decreases in trade shows and general insurance of $0.3 million.
BOVIEAPYX MEDICAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANAYLSISANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Other Income (Expense), net
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| Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
(In thousands) | 2017 | | 2016 | | Change | | 2017 | | 2016 | | Change |
Interest expense, net | $ | (36 | ) | | $ | (37 | ) | | (2.7 | )% | | $ | (103 | ) | | $ | (125 | ) | | (17.6 | )% |
Percentage of revenue | (0.4 | )% | | (0.4 | )% | | | | (0.4 | )% | | (0.5 | )% | | |
Change in fair value of derivative liabilities | $ | (69 | ) | | $ | (683 | ) | | (89.9 | )% | | $ | 57 |
| | $ | (555 | ) | | (110.3 | )% |
Percentage of revenue | (0.7 | )% | | (6.8 | )% | | | | 0.2 | % | | (2.0 | )% | | |
Interest expense
Total net interest expense decreased forDuring the three and nine months ended SeptemberJune 30, 20172021, salaries and related expenses increased 26.3%, primarily driven by increases in bonus expense in 2021 ($0.5 million), stock option expense ($0.1 million), and higher headcount ($0.2 million) as compared with 2016, due to a declinethe same period in the mortgage note principal balance.prior year.
ChangeDuring the six months ended June 30, 2021, salaries and related expenses increased 27.2%, primarily driven by increases in fair value of liabilities
On December 13, 2013, we entered into a securities purchase agreement pursuant to which we issued 3,500,000 shares of our newly designated Series A 6% Convertible Preferred Stock with a stated value of $2.00 per sharebonus expense in 2021 ($1.0 million), stock option expense ($0.3 million) and 5,250,000 warrants to purchase our common stock, at an exercise price of $2.387 per share. We also issued 525,000 warrantshigher headcount ($0.3 million) as compared to the placement agent, of which 94,375 remain outstanding, as of September 30, 2017, and have a strike price of $2.387. The warrants are accounted for as derivative financial instruments at fair value and are re-valued each period. At September 30, 2017, the placement agent warrants were valued at $0.1 million and for the nine months ended September 30, 2017, we recognized a non-cash gain of $57,000.
On March 17, 2015, we completed transactions under an exchange agreement (the “Exchange Agreement”) entered into on March 11, 2015 with certain investors (the “Investors”) with respect to which Great Point Partners, LLC acts as investment manager. Pursuant to the terms of the Exchange Agreement, we issued 3,588,139 shares of our Series B Convertible Preferred Stock (the “Series B Preferred Stock”) in exchange for 3,500,000 shares of our Series A 6% Convertible Preferred Stock and warrants to purchase up to 5,250,000 shares of our common stocksame period in the aggregate which were previously issued in conjunction with the sale of our Series A 6% Convertible Preferred Stock to the Investors in a December 13, 2013 offering, as well as accrued and unpaid preferred dividends. The Series B Preferred Stock issued at that time was convertible into an aggregate of 7,176,298 shares of our common stock, upon the terms set forth in the Certificate of Designation. On September 20, 2017, 975,639 shares of Series B Preferred Stock were converted into 1,951,278 shares of our common stock.prior year.
Income Taxes
We recorded an income tax expense of $6,000 and $15,000 during the three and nine months ended September 30, 2017, respectively. A valuation allowance is required to be provided to reduce the deferred tax assets to a level which, more likely than not, will be realized. Management evaluated the positive and negative evidence in determining the realizability of the net deferred tax asset. In determining the need for valuation allowance, we reviewed historic operating results, the current period operating results, as well as future income forecasts based on the projections, management concluded that it was not more likely that the Company should realize its net deferred tax assets through future operating results and the reversal of taxable temporary differences. If in the future we determine that we will be able to realize any of the net deferred tax assets, we will make adjustment to the valuation allowance, which would increase our income in the period that the determination is made.
Product Development
We have developed most of our products and product improvements internally. Funds for this development have come primarily from our internal cash flow and equity issuances. We maintain close working relationships with physicians and medical personnel in hospitals and universities who assist in product research and development. New and improved products play a critical role in our sales growth. We continue to emphasize the development of proprietary products and product improvements to complement and expand our existing product lines. Our research and development team members are based in our Clearwater, Florida facility and our facility in Sofia, Bulgaria.
BOVIEAPYX MEDICAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANAYLSISANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
RelianceSelling, general and administrative expenses
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| Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
(In thousands) | 2021 | | 2020 | | Change | | 2021 | | 2020 | | Change |
SG&A expense | $ | 4,261 | | | $ | 2,189 | | | 94.7 | % | | $ | 7,985 | | | $ | 5,985 | | | 33.4 | % |
Percentage of sales | 38.0 | % | | 51.0 | % | | | | 40.2 | % | | 64.4 | % | | |
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During the three months ended June 30, 2021, selling, general and administrative expense increased 94.7%, primarily driven by higher commissions on Collaborative, ManufacturingAdvanced Energy sales ($1.0 million), travel and Selling Arrangementsentertainment expense ($0.4 million), advertising expense, including trade show fees and related costs ($0.2 million), insurance expense ($0.2 million) and higher credit card processing fees ($0.1 million). These increases were partially offset by lower bad debt expenses ($0.1 million).
We manufactureDuring the majority of our productssix months ended June 30, 2021, selling, general and administrative expense increased 33.4%, primarily driven by higher commissions on our premises in Clearwater, FloridaAdvanced Energy sales ($1.6 million), insurance expense ($0.3 million), higher credit card processing fees ($0.2 million) and in Sofia, Bulgaria. Labor-intensive sub-assemblies and labor-intensive products may be out-sourced to our specification. Although we sell through distributors, we market our products through national trade journal advertising, direct mail, distributor sales representatives and trade shows, under the Bovie name and private label. Major distributors include Cardinal Health, Independent Medical Co-Op Inc. (IMCO), McKesson Medical Surgical, Inc., Medline, National Distribution and Contracting Inc. (NDC) and Owens & Minor. If any of these distributor relationships are terminated or not replaced, our revenue from the territories servedaccrued OEM product recall costs ($0.2 million). These increases were partially offset by these distributors could be adversely affected.lower bad debt expenses ($0.4 million).
We are also dependent on OEM customers who have no legal obligation to purchase products from us. Should such customers fail to give us purchase ordersOther Income (Expense)
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| Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
(In thousands) | 2021 | | 2020 | | Change | | 2021 | | 2020 | | Change |
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Interest income | $ | 4 | | | $ | 7 | | | (42.9) | % | | $ | 7 | | | $ | 223 | | | (96.9) | % |
Percentage of sales | — | % | | 0.2 | % | | | | — | % | | 2.4 | % | | |
Other income (loss), net | 97 | | | $ | (14) | | | 792.9 | % | | 4 | | | $ | 412 | | | (99.0) | % |
Percentage of sales | 0.9 | % | | (0.3) | % | | | | — | % | | 4.4 | % | | |
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Interest income decreased 96.9% for the product after development, our future business and value of related assets could be negatively affected. Furthermore, no assurance can be given that such customers will give sufficient high priority to our products. Finally, disagreements or disputes may arise between us and our customers, which could adversely affect production and sales of our products.
We also have collaborative arrangements with three key foreign suppliers under which we request the development of certain items and components and we purchase them pursuant to purchase orders. Our purchase order commitments are never more than one year in duration and are supported by our sales forecasts. The majority of our raw materials are purchased from sole-source suppliers. While we believe we could ultimately procure other sources for these components, should we experience any significant disruptions in this key supply chain, there are no assurances that we could do so in a timely manner which could render us unable to meet the demands of our customers, resulting in a material and adverse effect on our business and operating results.
Liquidity and Capital Resources
Our working capital at Septembersix months ended June 30, 2017 was approximately $17.4 million2021 compared with $21.3 million at December 31, 2016. Accounts receivable days sales outstanding were 40 days and 41 days at September 30, 2017 and 2016, respectively. The number of days sales in inventory, which is the total inventory available for production divided by the 12-month average cost of materials, increased 1 day to 152 days equating to an inventory turn ratio of 1.92 at September 30, 2017 from 151 days and an inventory turn ratio of 2.30 at September 30, 2016. The lower inventory turn ratio is mainly attributable to an inventory build in support of new, extended and improved product lines.
For the nine months ended September 30, 2017, net cash used in operating activities was approximately $4.4 million compared with net cash used by operating activities of approximately $2.3 million for the same period in 2016. Thethe prior year. This decrease is due to a lower yield, as well as a lower average balance, on our investments in U.S. Treasury securities included in cash and cash equivalents.
Other income (loss), net cash used in operating activities was attributed to $4.2 million of net loss, increases of inventory of $1.4 million, partially offset by non-cash inflows of $1.2 million.
Net cash used in investing activities was attributed to purchases of property and equipmentincreased 792.9% for approximately $431,000 during the ninethree months ended SeptemberJune 30, 2017,2021, as compared to $182,000 cash used forwith the same period in 2016.the prior year. This increase is primarily due to increased manufacturing volumes which resulted in reduced overhead costs being allocated to the Core business segment.
Cash used in financing activities was approximately $179,000 duringOther income, net decreased 99.0% for the ninesix months ended SeptemberJune 30, 2017,2021, as compared to cash used in financing activities of approximately $1,000 duringwith the same period in 2016.
On June 28, 2016, the Company entered into a transaction with Bank of Tampa, a Florida banking corporation (“Lender”) wherein Lender amended the terms of a mortgage loan (“the Loan”) originally executed on March 20, 2014 with a principal amount of $3,592,000. The Initial Maturity Date of the Loan was extended to July 20, 2019 from March 19, 2017, and the Extended Maturity Date was amended to July 20, 2024 from March 20, 2022. In addition, the Lender released as collateralprior year. This decrease is primarily due to the Loan, the Company’s working capital accounts in exchange for a negative covenant limited to $2,000,000receipt of the aggregate indebtedness secured by these accounts.
The obligations under the Loan are secured by a first mortgage and security interestrefunds in the Company’s Clearwater, Florida facility. In addition, the Company has pledged an interestfirst quarter 2020 on tariffs paid in a certificate of deposit in the amount of $779,000 as additional collateral. The amount of the additional collateral required declines on a pro rata basis as principal is paid.2019.
Borrowings under the Loan bear interest at LIBOR plus 3.5%, with a fixed monthly principal payment of $19,956. The interest rate at September 30, 2017 was 4.732%.Income Taxes
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| Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
(In thousands) | 2021 | | 2020 | | Change | | 2021 | | 2020 | | Change |
Income tax expense (benefit) | $ | 107 | | | $ | (1,492) | | | 107.2 | % | | $ | 173 | | | $ | (6,397) | | | 102.7 | % |
Effective tax rate | (2.7) | % | | 24.1 | % | | | | (2.0) | % | | 49.1 | % | | |
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BOVIEAPYX MEDICAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANAYLSISANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Our income tax expense (benefit) was approximately $107,000 and $(1,492,000) with effective tax rates of (2.7)% and 24.1% for the three months ended June 30, 2021 and 2020, respectively. Our income tax expense (benefit) was approximately $173,000 and $(6,397,000) with effective tax rates of (2.0)% and 49.1% for the six months ended June 30, 2021 and 2020, respectively. For the three and six months ended June 30, 2021, the effective rates differ from statutory rates primarily due to the full valuation allowance recorded on our NOL generated during the periods, combined with interest and penalties on our uncertain tax positions. For the six months ended June 30, 2020, the effective rate differs from the statutory rate primarily due to the release of the valuation allowance on our NOL carryforward from 2019.
Liquidity and Capital Resources
Our working capital at June 30, 2021 was approximately $50.8 million compared with $56.9 million at December 31, 2020. The Loan documents contain customary financial covenants, including a covenant thatdecrease in working capital from December 31, 2020 was primarily due to the net loss incurred by the Company maintains a minimum liquidityduring the first half of $750,000. Should we desire2021, excluding non-cash activity, comprised primarily of stock-based compensation expense.
For the six months ended June 30, 2021, net cash used in operating activities was approximately $7.1 million, which principally funded our loss from operations of $8.8 million, compared with net cash used in operating activities of approximately $12.4 million in the same period for 2020.
Net cash used in investing activities for the six months ended June 30, 2021 and 2020, was $0.2 million, related to extend the Loan beyond July 20, 2019, we must maintain a Debt Service Coverage Ratio for each of the preceding four quarters of not less than 1.0 to 1.0.investments in property and equipment.
Approximate future expected principal and interest payments under the Loan agreement are as follows as of September 30, 2017:
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(In thousands) | |
2017 (remaining three months) | $ | 62 |
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2018 | 247 |
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2019 | 2,541 |
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Total | $ | 2,850 |
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At SeptemberJune 30, 2017,2021, we had purchase commitments for inventories totaling approximately $3.6$2.3 million, substantially all of which is expected to be purchased bywithin the end of 2017.next six months.
BOVIEAPYX MEDICAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANAYLSISANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Critical Accounting Estimates
In preparing the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP), we have adopted various accounting policies. Our most significant accounting policies are disclosed in Note 2 to the consolidated financial statements included in our report on2020 Form 10-K for, filed with the year ended December 31, 2016, filedSEC on March 10, 2017.31, 2021.
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Our estimates and assumptions, including those related to inventories, intangible assets, property, plant and equipment, legal proceedings, research and development, warranty obligations, product liability, fair valued liabilities, sales returns and discounts, stock basedstock-based compensation and income taxes are updated as appropriate, which in most cases is at least quarterly. We base our estimates on historical experience, or various assumptions that are believed to be reasonable under the circumstances and the results form the basis for making judgments about the reported values of assets, liabilities, revenues and expenses. Actual results may materially differ from these estimates.
Estimates are considered to be critical if they meet both of the following criteria: (1) the estimate requires assumptions about material matters that are uncertain at the time the accounting estimates are made and (2) other materially different estimates could have been reasonably made or material changes in the estimates are reasonably likely to occur from period to period. Our critical accounting estimates include the following:
Stock-based Compensation
Under our stock option plans, options to purchase common shares of the Company may be granted to employees, officers and directors of the Company by the Board of Directors. We account for stock options in accordance with FASB ASC Topic 718-10, Compensation-Stock Compensation, with compensation expense recognized over the vesting period. Options are valued using the Black-Scholes model, which includes a number of estimates that affect the amount of our expense. We have determined that the most critical of these estimates are the estimates of expected life and volatility used in the calculations.
Expected life
For employee stock-based compensation awards, we estimate the expected life of awards utilizing the SEC's simplified method. We utilize this method, as we have not historically granted stock-based compensation awards to employees in sufficient volumes to determine a reasonable estimate of the life of awards. For awards granted to non-employees, we calculate expected life using a combination of past exercise behavior, the contractual term and expected remaining exercise behavior.
Volatility
We determine the volatility by utilizing the historical volatility of our stock over the period of the awards expected life. The SEC allows us to include periods in excess of the useful life if we determine that they provide a more reasonable basis for the volatility of our stock. Additionally, ASC 718-10 allows us to exclude periods from the volatility if they pertain to events or circumstances that in our judgment are specific to us and if the event or transaction is not reasonably expected to occur again during the expected term of the awards. We have not included any additional periods, nor disregarded any periods, in calculating our volatility.
Accounts Receivable Allowance
We maintain a reserve for uncollectible accounts receivable. When evaluating the adequacy of the allowance for doubtful accounts, we analyze specific unremitted customer balances for known collectability issues, review historical bad debt experience, customer credit worthiness and economic trends, and we make estimates in connection with establishing the allowance for doubtful accounts, including the future impacts of current trends. Changes in estimates are reflected in the period they are made. If the financial condition of our customers deteriorates, resulting in an inability to make payments, additional allowances may be required.
APYX MEDICAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Inventory reservesObsolescence Allowance
We maintain a reserve for excess and obsolete inventory resulting from the potential inability to sell our products at prices in excess of current carrying costs. The markets in which we operate are highly competitive, with new products and surgical procedures introduced on an ongoing basis. Such marketplace changes may cause our products to become obsolete. We make estimates regarding the future recoverability of the costs of these products and record a provision for excess and obsolete inventories based on historical experience and expected future trends. If actual product life cycles, product demand or acceptance of new product introductions are less favorable than projected by management, additional inventory write-downs may be required, which would unfavorably affect future operating results.
Long-lived assetsLitigation Contingencies
We review long-lived assets which are heldIn accordance with authoritative guidance, we record a liability in our consolidated financial statements for these actions when a loss is known or considered probable and used, including propertythe amount can be reasonably estimated. If the reasonable estimate of a known or probable loss is a range, and equipment and intangible assets, for impairment whenever changes in circumstances indicate thatno amount within the carryingrange is a better estimate than any other, the minimum amount of the assets may not be recoverable. Such evaluations compare the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset over its expected useful life and are significantly impacted by estimates of future prices and volumes for our products, capital needs, economic trends and other factors that are inherently difficult to forecast.range is accrued. If the asseta loss is considered to be impaired, we record an impairment charge equal to the amount by which the carrying value of the asset exceeds its fair value determined by either a quoted market price, if any, or a value determined by utilizing a discounted cash flow technique.
Derivative liabilities valued at fair value
We generally do not use derivative financial instruments to hedge exposures to cash-flow risks or market-risks. However, certain financial instruments, such as warrants, which are indexed to our common stock, are classified as liabilities when either (a) the holder possesses rights to net-cash settlement or (b) physical or net-share settlement is not within our control. In such instances, net-cash settlement is assumed for financial accounting and reporting purposes, even when the terms of the underlying contracts do not provide for net-cash settlement. Such financial instruments are initially recorded and continuously carried, at fair value.
Determining the fair value of these instruments involves judgment and the use of certain relevant assumptions including,reasonably possible, but not limited to, interest rate risk, historical volatilityknown or probable, and stock price,can be reasonably estimated, life of the derivative, anti-dilution provisions and conversion/redemption privileges. The use of different assumptions or changes in those assumptions could have a material effect on the estimated fair value amounts.
BOVIE MEDICAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANAYLSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Stock-based Compensation
Under our stock option plan, options to purchase common shares of the Company may be granted to key employees, officers and directors of the Company by the Board of Directors. The Company accounts for stock options in accordance with FASB ASC Topic 718-10, Compensation-Stock Compensation, with compensation expense amortized over the vesting period based on the trinomial lattice option-pricing model fair value on the grant date, which includes a number of estimates that affect the amount of our expense.
Litigation Contingencies
From time to time, we are exposed to claims and litigation arising in the ordinary course of business or otherwise and use various methods to resolve these matters in a manner that we believe serves the best interest of the Company and our stockholders. There can be no assurance these actions or other third party assertions will be resolved without costly litigation, or in a manner that is not adverse to our financial position. We do not believe that any of the currently identified claims or litigation matters will have a material adverse impact on our results of operations, cash flows or financial condition. However, given uncertainties associated with any litigation, if our assessments prove to be wrong, or if additional information becomes available such that we estimate that there is a possible loss or possible range of loss associated withis disclosed in the notes to the consolidated financial statements. In most cases, significant judgment is required to estimate the amount and timing of a loss to be recorded; actual results may differ from these contingencies, then we would record the minimum estimated liability, which could materially impact our results of operations, financial position and cash flows.estimates.
Income Taxes
The provision for income taxes includes federal, foreign, state and local income taxes currently payable and those deferred because of temporary differences between the financial statement and tax bases of assets and liabilities. Deferred tax assets or liabilities are computed based on the difference between the financial statement and income tax bases of assets and liabilities using enacted marginal tax rates. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. Deferred income tax expenses or credits are based on the changes in the asset or liability from period to period.
As a result of historical losses, and our expectation to continue to generate losses in the near future, we recorded a valuation allowance on our net deferred tax assets. Exclusive of the carryback provisions of the CARES Act and the associated income tax benefit recognized in 2020, we do not anticipate recording an income tax benefit related to deferred tax assets. We have net operating loss and tax credit carry forwards available in certain jurisdictions to reduce future taxable income. Future tax benefits for net operating loss and tax credit carry forwards are recognized towill reassess the extent that realization of these benefits is considered more likely than not. This determination is based on the expectation that related operations will be sufficiently profitable or variousdeferred tax businessassets each reporting period and other planning strategies will enable us to utilize the operating loss and tax credit carry forwards. We cannot be assured that we will be able to realize thesereduce the valuation allowance to the extent the financial results of continuing operations improve, and it becomes more likely than not that the deferred tax assets will be realizable. As management expects the Company to continue to generate losses in the foreseeable future after 2020, we will continue to record a valuation allowance on the net deferred tax benefitsassets balance as of June 30, 2021.
We assess the financial statement impact of an uncertain tax position taken or expected to be taken on an income tax return at the largest amount that future valuation allowancesis more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be required. Torecognized in the extent that available evidence raises doubt about the realization of a deferred income tax asset, a valuation allowance is established.
It is our policy to provide for uncertain tax positions and the related interest and penalties based upon management’s assessment of whether a tax benefitfinancial statements unless it is more likely than not to be sustained upon examination by tax authorities. To the extent that the probable tax outcome of these uncertain tax positions changes, such changes in estimate will impact the income tax provision in the period in which such determination is made. At September 30, 2017, we believe we have appropriately accounted for any unrecognized tax positions. To the extent we prevail in matters for which a liability for an unrecognized tax benefit is established or we are required to pay amounts in excess of the liability, our effective tax rate in a given financial statement period may be affected.being sustained.
Since inception, we have been subject to tax by both federal and state taxing authorities. Until the respective statutes of limitations expire (which may be as much as 20 years while we have unused NOL’s), we are subject to income tax audits in the jurisdictions in which we operate.
Inflation
Inflation has not materially impacted the operations of our Company.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements at this time.
BOVIE MEDICAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANAYLSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Recent Accounting Pronouncements
BOVIEAPYX MEDICAL CORPORATION
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
For our disclosures about market risk, please see Part II, Item 7A., "Quantitative and Qualitative Disclosures about Market Risk," in our Annual Report on Form 10-K for the year ended December 31, 2016. We believe there have been no material changes to the information provided therein.Not applicable.
ITEM 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We have carried out an evaluation, under the supervision ofOur management has established and with the participation of our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of ourmaintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended), as of September 30, 2017. Based upon that evaluation, our CEO and CFO concludedare designed to ensure that as of the end of that period, our disclosure controls and procedures are effective in providing reasonable assurance that (a) the information required to be disclosed by us in the reports that we filedfile or submittedsubmit under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is recorded, processed, summarized and reported within the time periods specified in the SEC’sSecurities and Exchange Commission's rules and forms, and (b)that such information is accumulated and communicated to our management, including our CEOthe Chief Executive Officer and CFO,Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designingManagement carried out an evaluation, under the supervision and evaluatingwith the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on such evaluation, our management recognizedChief Executive Officer and Chief Financial Officer have concluded that anyas of June 30, 2021, the Company's disclosure controls and procedures no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.were effective.
Changes in Internal Control overOver Financial Reporting
There were noWe rely extensively on information systems to manage our business and summarize and report our financial condition, results of operations and cash flows. In 2020, we began the implementation of a new global enterprise resource planning (“ERP”) system, which replaced much of our existing core financial systems in the first quarter of 2021. The ERP system is designed to accurately maintain our financial records, enhance the flow of financial information, improve data management and provide timely information to our management team.
As a result of this implementation, certain internal controls over financial reporting have been automated, modified or implemented to address the new environment associated with this type of system. While we believe that this new system will strengthen our internal controls, there are inherent risks in implementing any new system, and we will continue to evaluate these control changes inas part of our assessment of internal control over financial reporting (as defined in Rules 13(a)-15(f) and 15(d)-15(f)) during the nine months ended September 30, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.throughout 2021.
BOVIEAPYX MEDICAL CORPORATION
PART II. Other Information
ITEM 1. Legal Proceedings
APYX MEDICAL CORPORATION
We expense costs of litigation related to contingencies in the periods in which the costs are incurred.
ITEM 1A. Risk factors
There have been no material changes to the risk factors previously disclosed indescribed under Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016,2020, except for the following:
Any disruption in responseour suppliers’ operations, or timely availability of shipments from our third party freight carriers, could disrupt our production schedule and our ability to Item 1Aprovide product to Part 1our customers in a timely manner
Our operations and ability to maintain production is dependent upon our suppliers delivering sufficient quantities of Form 10-K.components and raw materials on time to manufacture our products and meet our production schedules. The COVID-19 pandemic has adversely impacted worldwide supply chains and the ability to obtain sufficient amounts of component parts, while disruptions and delays in the ability of our third party freight carriers to transport these items to our manufacturing facilities also continues to be a challenge. If the situation worsens, these negative impacts on our supply chain could have a material adverse effect on our business.
Any shortage of components or raw materials could cause us to not be able to meet customer demand, to alter production schedules, to delay product launch schedules, or to suspend production entirely, which could cause a loss of revenues, which could materially and adversely affect our results of operations.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
ITEM 3. Defaults Upon Senior Securities
None.
ITEM 4. Mine Safety Disclosures
Not Applicable.
ITEM 5. Other Information
None.
BOVIEAPYX MEDICAL CORPORATION
ITEM 6. Exhibits
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101.INS** | | XBRL Instance Document |
101.SCH** | | XBRL Taxonomy Extension Schema Document |
101.CAL** | | XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF** | | XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB** | | XBRL Taxonomy Extension Label Linkbase Document |
101.PRE** | | XBRL Taxonomy Extension Label Presentation Document |
* Filed herewith.
** XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended and otherwise is not subject to liability under these sections.
BOVIEAPYX MEDICAL CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| Apyx Medical Corporation | |
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Date: August 12, 2021 | Bovie Medical CorporationBy: | /s/ Charles D. Goodwin II | |
| | Charles D. Goodwin II | |
Date: November 3, 2017 | By: | /s/ Robert L. Gershon | |
| | Robert L. Gershon | |
| | President, Chief Executive Officer and Director | |
| | (Principal Executive Officer) | |
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Date: November 3, 2017August 12, 2021 | By: | /s/ Jay D. EwersTara Semb | |
| | Jay D. EwersTara Semb | |
| | Chief Financial Officer, | |
| | Treasurer and Secretary | |
| | (Principal Financial Officer) | |