Bovie Medical Corporation — Form 10-Q summary
Reporting period: Quarter and six months ended June 30, 2014; filed August 8, 2014. The filing names Bovie Medical Corporation as the registrant; the supplied company metadata identifies Apyx Medical Corp.
Financial performance
Unless otherwise indicated, amounts below are in millions of dollars. Comparisons are with the corresponding 2013 period.
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Sales | $6.945 | $6.042 | $13.427 | $11.738 |
| Gross profit / margin | $1.877 / 27.0% | $2.230 / 36.9% | $4.634 / 34.5% | $4.381 / 37.3% |
| Operating loss | $(1.746) | $(1.650) | $(1.687) | $(2.315) |
| Net income (loss) | $0.251 | $(1.119) | $(9.356) | $(1.529) |
| Net income (loss) attributable to common shareholders | $0.029 | $(1.119) | $(9.782) | $(1.529) |
| Basic EPS | $0.00 | $(0.06) | $(0.55) | $(0.09) |
| Cash used in operations | Not presented quarterly | $(1.313) | $(1.267) |
- First-half sales rose 14.4%, led by OEM generator and electrode sales. Domestic sales grew 21.9%; international sales fell 16.1%. J-Plasma sales were approximately $46,000 for the first half.
- Gross margin fell principally because of an approximately $843,000 inventory charge for early-stage J-Plasma manufacturing costs, European RoHS-related scrap, and other product adjustments. Management said margin excluding that charge was slightly below 40%, broadly in line with expectations.
- Q2 net income included a $1.454 million gain from changes in derivative fair values. The first-half results instead included an $8.145 million derivative fair-value loss, a major contributor to the reported loss. These instruments are valued using Level 3 inputs.
- Cash and cash equivalents were $5.575 million at June 30, down from $7.924 million at year-end; restricted cash was $898,000. Working capital was approximately $15.6 million, versus $17.0 million at year-end.
- Debt was refinanced with a $3.592 million Bank of Tampa mortgage loan; $3.532 million remained outstanding at quarter-end. The loan bears interest at LIBOR plus 3.5%, is secured by the company facility and accounts receivable, and requires minimum liquidity of $750,000. The company also pledged an $898,000 certificate of deposit.
Changes, outlook, and risks
- Management was investing in J-Plasma commercialization, including sales, training, marketing, and R&D. It expected these investments to increase during 2014 and said they could adversely affect profitability and cash flow over the next 12–24 months; meaningful future sales or returns were not assured.
- Salary costs increased with new executive management, direct sales personnel, and CFO transition costs. Lower professional fees and the non-recurrence of a prior legal award reduced other expenses.
- International revenue was pressured by European products withdrawn pending regulatory testing and other requirements, though management reported progress returning products to market. New compliant 200- and 300-watt generators and Derm products had been introduced.
- The top ten customers represented 60.7% of first-half sales. The company cited reliance on OEM and collaborative customers, whose future purchase orders are not assured.
- A shareholder derivative settlement was preliminarily approved after quarter-end and remained subject to final court approval. Required governance changes were contemplated; plaintiff counsel could seek up to $850,000 in fees and expenses, subject to court approval, funded by insurance.
- Purchase commitments were approximately $3.052 million for the remainder of 2014. A Bulgarian supplier agreement could also create a contingent payment of approximately $325,000 if terminated before July 1, 2015.
- No quantitative revenue or earnings guidance was provided. Management stated it had no off-balance-sheet arrangements and reported disclosure controls as effective.
Key facts for investors to verify
- Reconcile the MD&A description of financing cash flows with the cash-flow statement: the statement reports $872,000 of net cash used in financing, while the MD&A describes approximately $26,000 provided by financing activities.
- Assess the size and volatility of warrant-related derivative liabilities, reported at $13.473 million, and the assumptions used in their Level 3 valuation.
- Track J-Plasma commercialization costs and revenue, inventory reserves, and whether gross margins recover after the $843,000 inventory charge.
- Monitor cash burn, restricted collateral, compliance with the mortgage liquidity covenant, and the concentration of sales among major customers.
- Confirm final court approval and implementation of the derivative-action settlement and related governance changes.