Business context and reporting period
This is Bovie Medical Corporation’s unaudited Form 10-Q for the quarter ended March 31, 2012. Although the request identifies Apyx Medical Corp, the filing is under Bovie Medical Corporation, so the entity and corporate-history relationship should be verified. Bovie manufactured and marketed electrosurgical devices, battery-operated cauteries, medical lighting, nerve locators, and related products. Sales were primarily through distributors; international sales were 16.2% of revenue, versus 22.1% a year earlier.
Unless otherwise noted, financial figures below are in millions of dollars; the filing presents the statements in thousands. Interim results are not necessarily indicative of full-year results.
Financial results and liquidity
| Metric | Q1 2012 | Q1 2011 / prior date |
|---|---|---|
| Revenue | $6.733 | $6.154 |
| Gross profit / margin | $2.796 / 41.5% | $2.433 / 39.5% |
| Operating income | $0.396 | $0.585 |
| Net income | $0.187; $0.01 per diluted share | $0.492; $0.03 per diluted share |
| Cash from operating activities | $(0.486) | $0.737 |
| Cash and equivalents | $4.119 at March 31 | $4.880 at December 31, 2011 |
| Working capital | $14.3 | $14.1 at December 31, 2011 |
Capital expenditures were $0.243 million, and cash used in financing was $0.032 million, mainly bond repayments. Cash declined by $0.761 million during the quarter. Current assets were $16.346 million and current liabilities $2.005 million.
Total liabilities were $5.651 million, including approximately $3.5 million of industrial revenue bonds and $0.418 million of remaining Livneh settlement obligations. The bonds bear fixed interest of 5.6%, amortize over 20 years, and balloon in November 2018. The $6 million secured revolving line had no balance and approximately $3.8 million of borrowing availability; an additional equipment facility had approximately $1.0 million available. The company reported compliance with credit covenants at quarter-end, apart from a technical default related to the Livneh asset transfers that the bank waived.
Material changes versus prior period
- Revenue increased 9.4%. Domestic revenue rose 17.5%, while international revenue fell 19.0%. Sales increased in all three product categories: electrosurgical +3.7%, cauteries +8.1%, and other +65.8%.
- Gross margin improved by 2.0 percentage points, which management attributed mainly to lower material costs and labor costs as a percentage of sales.
- Net income declined 62.0%. Q1 2011 included a $0.750 million Salient/Medtronic legal settlement gain; Q1 2012 had no comparable gain. Also, the change in fair value of warrant liabilities shifted from a $0.141 million gain to a $0.017 million loss.
- Operating cash flow shifted from $0.737 million provided to $0.486 million used, with working-capital changes including higher receivables and prepaid expenses contributing to the cash use.
- R&D expense decreased to $0.298 million from $0.347 million, partly reflecting the restriction on developing saline-enhanced RF products. SG&A fell 7.0% to $1.025 million.
Outlook, commentary, risks, and unusual items
No numerical revenue or earnings guidance was provided. Management said it planned to continue developing its plasma product line, ICON VS and vessel-sealing technology, and Aaron 1450, with ongoing development costs expected to be funded from operating cash flow. Management believed cash, expected operating cash flows, and available credit would be sufficient for operating commitments over the next year.
Management cited demand growth in product lines, including new distribution products, medical lighting, and laparoscopic instruments. It also cautioned about competition and pricing pressure, customer and new-product demand, supplier availability and costs, foreign sourcing, and uncertainty in litigation and contingent liabilities. Risks include inventory obsolescence, reliance on OEM and supplier arrangements, and the ability to realize deferred tax assets. The filing reported no material changes to the risk factors in the 2011 Form 10-K and no off-balance-sheet arrangements.
- Livneh/Lican settlement: The settlement was entered in February 2012 after the loss had been accrued in 2011. It includes installment payments, reimbursement and asset transfers, an exclusive China license for Seal-N-Cut, and royalty arrangements. Remaining recorded payments were $0.418 million. The company had paid the initial $0.250 million and $0.0147 million due to Henvil by quarter-end; installments were to begin May 1, 2012.
- Other litigation: A stockholder derivative action remained unresolved; the company said potential loss could not be estimated. A former general counsel’s employment-related action had an estimated potential loss range of zero to approximately $0.600 million, plus undetermined attorney fees; no amount was accrued for either matter.
- Salient/Medtronic agreement: The company agreed to exit and not enter the monopolar and bipolar saline-enhanced RF device business worldwide through February 2015 in exchange for the prior-year $0.750 million payment.
- Supplier commitment: Terminating the amended Bulgarian manufacturing arrangement before July 1, 2014 could trigger contingent liabilities estimated at $0.297 million in total.
Management stated disclosure controls were effective and there were no material changes to internal control over financial reporting during the quarter.
Investor verification points
- Confirm the issuer’s identity and its relationship to Apyx Medical Corp, given the filing is for Bovie Medical Corporation.
- Assess whether operating cash flow can recover after the quarterly cash use, given planned product-development spending and working-capital needs.
- Review the durability of domestic growth and the causes of the 19.0% decline in international sales.
- Track remaining settlement payments, royalty and intellectual-property transfer terms, and the outcome or exposure from the derivative and Keen litigation.
- Verify ongoing covenant compliance, borrowing-base availability, debt maturities, and the effect of the November 2018 bond balloon.