Business context and reporting period
Bovie Medical Corporation’s unaudited Form 10-Q covers the quarter and nine months ended September 30, 2011; it was filed November 14, 2011. The filing identifies the registrant as Bovie Medical Corporation, not Apyx Medical Corp. Bovie manufactures and markets electrosurgical devices, cauteries, medical lighting and related products, primarily through distributors.
Financial performance and liquidity
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Sales | $6.256 million, down 3.8% year over year | $19.252 million, up 7.0% |
| Gross profit / margin | $2.606 million / 41.7% | $8.085 million / 42.0% |
| Operating income (loss) | $248,000 | $1.383 million |
| Net income (loss) | $63,000 | $984,000; diluted EPS $0.06 |
| Operating cash flow | Not separately stated for the quarter | $2.145 million, versus $954,000 used in the comparable 2010 period |
Amounts are in U.S. dollars. At September 30, cash and equivalents were $5.408 million, current assets $16.369 million and current liabilities $1.950 million, for working capital of approximately $14.4 million. Total liabilities were $5.876 million. Bonds payable totaled approximately $3.635 million; a further $112,000 of long-term capital lease obligations was reported. The company had no balance on its revolving credit line at quarter-end.
Material changes versus the prior comparable period
- Nine-month sales rose by $1.255 million, driven mainly by electrosurgical generators and new coated-blade and medical-lighting products. International sales increased 17.3%; they represented 22.9% of nine-month revenue, compared with 20.9% in 2010.
- Third-quarter sales declined, principally reflecting lower replaceable-cautery demand and a large OEM order shipped in the prior-year quarter; higher medical-lighting sales partly offset the decline.
- Nine-month gross margin improved to 42.0% from 40.6%. Management cited lower labor and facility costs and material and freight savings.
- Nine-month operating results included a $750,000 gain from the Salient/Medtronic litigation settlement. Operating cash flow also included this one-time receipt.
- R&D expense fell 37.0% for the nine months, substantially reflecting the suspension of the saline-enhanced RF device business and reduced spending on other development work. Professional services and SG&A also declined.
Outlook, risks and unusual items
- Management said available cash and anticipated operating cash flows should meet operating cash commitments for the next year. It stated that additional borrowing capacity was available if needed; no earnings or revenue guidance was provided.
- On October 31, 2011, after quarter-end, Bovie refinanced its industrial revenue bonds through PNC Bank and established a $6 million revolving credit facility and a separate equipment facility of up to $1 million. The filing reports borrowing-base and financial covenant conditions; quarter-end compliance with the prior RBC facilities was stated.
- The settlement with Salient and Medtronic required Bovie to exit and not re-enter the worldwide monopolar and bipolar saline-enhanced RF device business through February 2015. Bovie also gave notice that its Medtronic OEM generator agreement would terminate December 31, 2011, with final deliveries in 2012; it expects to service previously sold generators for five years and continue accessory and spare-parts sales.
- Pending matters include the Livneh litigation and a stockholder derivative action. Outcomes were described as uncertain, and no potential losses were recorded; the filing does not provide a clear estimate of exposure. Bovie also disclosed settlement of a separate Eisenstein matter for $73,500 plus surrender of options.
- Fair-value changes in warrant and other liabilities affected reported income but were noncash. The interest-rate swap liability was $176,000 at September 30; the post-quarter refinancing was described as eliminating the accumulated other comprehensive loss balance in future periods.
- Key stated risks include economic weakness, competition and pricing pressure, customer and supplier dependence, product acceptance, inventory obsolescence, litigation, and the ability to meet financing covenants. Management reported effective disclosure controls and no material change in internal control over financial reporting during the period.
Important facts for investors to verify
- Confirm the intended issuer: the supplied filing is for Bovie Medical Corporation, although the request metadata names Apyx Medical Corp.
- Assess the quality and repeatability of nine-month earnings and operating cash flow, including the $750,000 settlement gain and noncash fair-value adjustments.
- Review the sales outlook after the Medtronic OEM agreement ends, the required product-line exit, and the company’s reliance on new products and distributors.
- Verify the terms, borrowing availability, borrowing-base limits and covenant headroom under the post-quarter PNC facilities.
- Monitor the Livneh and derivative litigation, inventory reserves, and the conversion of inventory into sales and cash.