Bovie Medical Corporation (now Apyx Medical Corp.) — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; comparative period is Q1 2012. The filing was submitted under the name Bovie Medical Corporation. Financial statement amounts below are in thousands of dollars, except per-share data.
Business context
Bovie manufactured and marketed electrosurgical devices, battery-operated cauteries, and other medical products through distributors and direct sales contractors. International sales were 20.3% of revenue, up from 16.2% in Q1 2012. Management was investing in J-Plasma, ICON VS and other product development; J-Plasma sales were approximately $5,000 in the quarter.
Financial results and liquidity
| Metric | Q1 2013 | Q1 2012 / comparison |
|---|---|---|
| Sales | $5,696 | $6,733; down 15.4% |
| Gross profit / margin | $2,151 / 37.8% | $2,796 / 41.5% |
| Operating income (loss) | ($665) | $396 |
| Net income (loss) | ($409) | $187 |
| Basic and diluted EPS | ($0.02) | $0.01 |
| Cash from operating activities | ($253) | ($486) |
| Cash and cash equivalents at period end | $3,762 | $4,162 at Dec. 31, 2012 |
| Working capital | $13,200 | $14,000 at Dec. 31, 2012 |
| Total liabilities | $5,524 | $5,288 at Dec. 31, 2012 |
Investing activities used $131; financing activities used $16, including $34 of bond repayments and $18 in stock-option proceeds. Property and equipment purchases were $131. The company reported approximately $3.4 million of outstanding industrial revenue bond debt, bearing fixed interest of 5.6% and ballooning in November 2018. The $4 million secured PNC revolving facility had no balance at March 31; stated availability was approximately $3.1 million. The company reported compliance with its loan covenants and believed cash and expected operating cash flows would cover commitments for the next 12 months.
Material changes and management commentary
- Revenue fell primarily because electrosurgical sales declined 22.1%, including an approximately $1.0 million reduction in OEM generator orders. Domestic sales fell 19.6%; international sales rose 5.7%. Cautery revenue was nearly flat.
- Gross margin declined 3.7 percentage points. Management attributed this mainly to lower sales while labor costs remained similar; material costs fell about 2% as a percentage of sales.
- Operating expenses rose: professional services increased mainly due to litigation; SG&A increased 18.2%, including approximately $87 in medical-device excise tax and $53 in J-Plasma promotion and marketing. R&D rose 11.8% to $333.
- Management cited OEM demand fluctuations and delays in hospital approval and purchasing processes for new technology. It expected continued J-Plasma development and marketing investment, which could weigh on profitability and cash flow over the next 12–24 months; commercial success and returns were not assured.
- Inventory increased to $8,537 from $7,984 at year-end. Management reported inventory coverage of 311 days, up 93 days, primarily reflecting purchases related to J-Plasma. The filing also reports inventory turns of 1.3 versus 1.4 at December 31, 2012.
Outlook, risks and contingencies
No specific revenue or earnings guidance was provided. Management said it did not anticipate material asset purchases over the next 12 months that ordinary cash flow or the credit line could not support. Principal disclosed risks include weaker demand, competition and pricing pressure, dependence on OEM customers and suppliers, inventory obsolescence, product acceptance, and legal costs. Management stated that litigation had adversely affected cash and profitability.
- Livneh/Lican litigation: Plaintiffs seek, among other relief, damages exceeding $10 million. The company disputed the allegations; loss was not estimable and no amount was recorded.
- Stockholder derivative action: Outcome and potential loss were not estimable; no amount was recorded.
- Keen litigation: A May 7, 2013 ruling granted the former executive partial summary judgment on termination without cause, while dismissing certain claims and leaving other claims and counterclaims for trial. The company disclosed a potential loss range of zero to approximately $600,000, plus indeterminate attorney fees; no amount was recorded.
- Other commitments included purchase commitments of $2,574 for 2013 and $858 for 2014, and potential payments of $169 if the Bulgarian supplier agreement is terminated before July 1, 2014.
Important facts for investors to verify
- Track whether OEM generator demand recovers and whether J-Plasma gains hospital adoption and meaningful sales relative to ongoing investment.
- Monitor cash burn, revolver availability and borrowing-base restrictions, covenant compliance, and the 2018 debt balloon.
- Assess inventory levels and obsolescence risk, particularly given the reported 311 days of inventory coverage.
- Follow the outcomes and potential costs of the Livneh/Lican, derivative, and Keen matters, including any developments after the quarter.
- Reconcile filing disclosures: the income statement reports a $345 tax benefit, while the tax note also describes a zero current provision and an approximately $96 current provision; J-Plasma cumulative investment is stated as approximately $1.8 million in one section and $1.7 million in another. The inventory-days comparison is also not fully consistent in its description.