Bovie Medical Corporation — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2014; filed November 10, 2014. The filing identifies the issuer as Bovie Medical Corporation (now associated with Apyx Medical), not Apyx Medical Corp. Financial amounts below are in U.S. dollars; tables in the filing generally report amounts in thousands unless noted.
Business context and operating results
Bovie manufactured electrosurgical products and battery-operated cauteries and was commercializing J-Plasma, a plasma-based surgical technology. Products were sold through distributors, OEM arrangements, and a developing direct sales force for J-Plasma.
| Metric | Three months ended Sep. 30, 2014 | Three months ended Sep. 30, 2013 | Nine months ended Sep. 30, 2014 | Nine months ended Sep. 30, 2013 |
|---|---|---|---|---|
| Sales | $6.788 million | $5.794 million | $20.214 million | $17.532 million |
| Gross profit | $1.919 million | $2.249 million | $6.552 million | $6.630 million |
| Gross margin | 28.3% | 38.8% | 32.4% | 37.8% |
| Operating loss | $2.367 million | $0.475 million | $4.056 million | $2.790 million |
| Net loss | $2.734 million | $0.341 million | $12.092 million | $1.870 million |
| Net loss attributable to common shareholders | $2.976 million | $0.341 million | $12.760 million | $1.870 million |
| Basic and diluted loss per share | $0.17 | $0.02 | $0.72 | $0.11 |
Financial position, cash flow and liquidity
- At September 30, cash and cash equivalents were $6.135 million, plus $898,000 of restricted cash. Current assets were $16.390 million and current liabilities $3.121 million, for working capital of about $13.3 million, down from about $17.0 million at December 31, 2013.
- Total assets were $31.291 million and total liabilities $21.526 million. Stockholders’ equity was $6.838 million, down from $19.071 million at year-end 2013. The balance sheet included $15.149 million of derivative liabilities, measured using Level 3 inputs.
- Debt was refinanced in March 2014. The new Bank of Tampa mortgage had $3.471 million outstanding at quarter-end, secured by the company’s facility and assigned receivables, with an additional $898,000 certificate of deposit pledged. It bears interest at LIBOR plus 3.5%, requires monthly principal payments of $19,956, and has a stated 2017 maturity with an extension option.
- For the first nine months, operating cash use was $615,000, investing cash use $319,000, and financing cash use $855,000. Cash declined $1.789 million from $7.924 million at year-end 2013 to $6.135 million.
- The mortgage includes a minimum-liquidity covenant of $750,000. The company reported no material off-balance-sheet arrangements.
Changes versus the prior comparable period
- Sales rose 17.2% in the quarter and 15.3% year to date, driven principally by OEM generator and electrode sales. Electrosurgical sales increased 35.7% for the quarter and 25.2% year to date; cautery sales were slightly lower year to date.
- International sales fell 9.0% year to date and represented 14.3% of revenue versus 18.1% in 2013. Management cited European product withdrawals related to regulatory requirements, while noting progress in returning products to market.
- Gross margin declined, especially in the third quarter, primarily due to a $607,000 consigned-inventory adjustment at a Bulgarian supplier and $189,000 of excess and obsolete inventory charges. Management said margins excluding these and other adjustments were in line with expectations of approximately 41%.
- Operating expenses increased, including higher salaries and related costs (up 55.0% year to date) and higher quarterly SG&A. Management attributed much of the increase to J-Plasma commercialization, direct sales and marketing, and growth-related staffing. Lower legal and professional costs partly offset these increases.
- The $9.820 million year-to-date loss from changes in fair value of liabilities was largely non-cash and related to warrant valuation; it contributed substantially to the increase in reported net loss. The company also recorded a $1.895 million income tax benefit year to date.
Outlook, risks and unusual items
- Management planned to continue investing in J-Plasma commercialization and expected those investments to increase through the end of 2014. It cautioned that they could adversely affect profitability and cash flow over the next 12 to 24 months and that there was no assurance of substantial future revenue or return. J-Plasma sales were $136,174 for the first nine months of 2014.
- The company said it had invested approximately $4.7 million in J-Plasma development and marketing since June 2010, including $875,000 in the third quarter of 2014. No specific revenue or earnings guidance was provided.
- Customer concentration was significant: the ten largest customers accounted for 62.2% of nine-month revenue, and three customers represented 35.4% of receivables at quarter-end. Management also identified reliance on OEM and supplier arrangements; a Bulgarian supplier agreement could require approximately $227,000 of contingent payments if terminated before July 1, 2015.
- Remaining 2014 purchase commitments were $3.375 million. These near-term obligations, J-Plasma spending, and the restricted cash balance are relevant to liquidity monitoring.
- A stockholder derivative action was settled, with final court approval entered October 2, 2014, after quarter-end. The filing stated no material changes to previously disclosed risk factors. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether sales growth and the launch of compliant replacement products can sustain or improve gross margins after the inventory charges.
- J-Plasma adoption, sales productivity, commercialization spending, and cash requirements relative to management’s stated outlook.
- The assumptions driving the $15.149 million Level 3 derivative liability and the sensitivity of reported earnings to warrant revaluation.
- Available liquidity after accounting for restricted cash, the mortgage covenants and payments, and the $3.375 million of 2014 purchase commitments.
- Exposure to major customers, the Bulgarian supplier relationship and inventory controls, and the status and consequences of the derivative-action settlement.