Business context and reporting period
Bovie Medical Corporation (the registrant in this filing; the request identifies Apyx Medical Corp) reported unaudited results for the quarter ended March 31, 2014, compared with the quarter ended March 31, 2013. It makes electrosurgical devices, cauteries and related products, and is commercializing J-Plasma. Amounts below are in U.S. dollars; financial-statement figures are generally in thousands.
Financial performance and position
| Metric | Q1 2014 | Q1 2013 / comparison |
|---|---|---|
| Net sales | $6.482 million | $5.696 million; up 13.8% |
| Gross profit / margin | $2.756 million / 42.5% | $2.151 million / 37.8% |
| Operating income (loss) | $58,000 | $(665,000) |
| Net loss | $(9.607) million | $(409,000) |
| Net loss attributable to common shareholders / diluted loss per share | $(9.811) million / $(0.55) | $(409,000) / $(0.02) |
| Cash used in operations | $1.049 million | $253,000 |
| Capital expenditures | $75,000 | $131,000 |
The net loss was dominated by a $9.599 million loss from changes in the fair value of derivative liabilities, primarily warrants; the filing describes this as non-cash. Excluding that item, the reported loss does not represent the underlying operating result. Operating costs totaled $2.698 million, down from $2.816 million; professional services fell to $258,000 from $453,000, while salaries and related costs rose to $907,000 from $818,000.
At March 31, 2014, cash and cash equivalents were $5.816 million, with $898,000 of restricted cash pledged as loan collateral; the cash-flow statement reports ending cash and cash equivalents of $6.714 million, which includes the restricted amount. Current assets were $19.377 million and current liabilities $2.423 million, or approximately $16.954 million of working capital (also described by management as about $17.0 million). The company used $1.210 million of cash overall during the quarter.
The company refinanced in March with a $3.592 million Bank of Tampa mortgage, bearing interest at LIBOR plus 3.5%, with monthly principal payments of $19,956 and an initial maturity in March 2017 (with an option to extend). The loan is secured by the Clearwater facility and accounts receivable; the $898,000 certificate of deposit is also pledged. The company repaid its industrial revenue bonds and settled its prior credit facility and interest-rate swap. Derivative liabilities were $14.927 million at quarter-end, versus $5.749 million at December 31, 2013. Series A preferred stock had a carrying amount of $2.463 million and a $7.126 million liquidation preference.
Material changes and management commentary
- Electrosurgical sales increased 16.6% to $3.965 million; cautery sales declined 2.8% to $1.551 million; other sales rose 38.0% to $966,000. J-Plasma sales were $31,000.
- Domestic sales rose 19.0% to $5.381 million, while international sales declined 6.1% to $1.101 million. Management cited growth in Latin America and improvement in the Middle East and Africa, offset by European product withdrawals related to regulatory testing and requirements; compliant 200- and 300-watt generators had received approval.
- Gross margin improved by 4.7 percentage points, which management attributed to higher sales, product mix and lower labor costs, partly offset by higher manufactured overhead and inventory reserves.
- Management invested $265,000 in J-Plasma during the quarter and reported cumulative development and marketing investment of approximately $3.1 million since June 2010. It expected investment to increase during 2014 and warned that J-Plasma spending could adversely affect profitability and cash flow over the next 12–24 months. No assurance was given that the product will generate substantial revenue or returns.
- The new loan requires minimum liquidity of $750,000. Extending the loan beyond its initial term is subject to debt-service coverage requirements. Management reported no off-balance-sheet arrangements and no material change in previously disclosed risk factors.
Risks, contingencies and unusual items
- A stockholder derivative action remained in court-sanctioned mediation; a potential settlement had been discussed, but no definitive agreement had been signed. The balance sheet included a $100,000 accrued litigation settlement.
- The ten largest customers represented 58.7% of quarterly revenue. Arthrex accounted for 10.1% of sales.
- Purchase commitments were approximately $3.099 million for 2014. The Bulgarian supplier agreement could create a contingent payment of about $36,000 if terminated before July 1, 2014. Management also disclosed reliance on OEM and supplier arrangements, including that collaborative customers generally are not obligated to purchase products developed.
- Derivative warrants are valued using Level 3 inputs, including estimated volatility and other assumptions; changes in these estimates can materially affect reported earnings and liabilities.
- Related-party consultants received approximately $89,000 and $18,700, respectively, during the quarter for engineering and product-related consulting, royalties and services.
Key facts for investors to verify
- Reconcile the $9.599 million derivative fair-value loss and $14.927 million quarter-end derivative liability, including the valuation assumptions and warrant terms.
- Confirm cash availability after considering the $898,000 restricted deposit, the mortgage collateral, and the loan’s liquidity and extension covenants.
- Track operating cash use, receivables (days sales outstanding rose to 37.3 from 29.5 a year earlier), inventory levels and the 2014 purchase commitments.
- Assess J-Plasma commercialization, sales conversion and additional spending against management’s stated uncertainty about timing and returns.
- Follow the derivative action’s mediation and any resulting settlement, and monitor European regulatory approvals and customer concentration.