Business context and reporting period
This is Bovie Medical Corporation’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2012. The filing describes a medical-device business focused on electrosurgical products, battery-operated cauteries, and other products. The company now identified in the request as Apyx Medical filed this report under its then-current name, Bovie Medical Corporation.
Financial performance and liquidity
Amounts below are in millions of dollars unless otherwise indicated.
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Sales | $6.671 | $6.256 | $20.843 | $19.252 |
| Gross profit / margin | $2.894 / 43.4% | $2.606 / 41.7% | $8.546 / 41.0% | $8.085 / 42.0% |
| Operating income | $0.282 | $0.248 | $0.918 | $1.383 |
| Net income (loss) | $(0.007) | $0.063 | $0.331 | $0.984 |
| Operating cash flow | Not separately presented for the quarter | $0.154 | $2.145 |
- Q3 sales increased 6.6%; nine-month sales increased 8.3%. Nine-month domestic sales rose 13.7%, while international sales fell 9.9%; international sales were 18.8% of nine-month revenue versus 22.7% a year earlier.
- Nine-month sales growth was led by “other” products, up 38.0%, cauteries, up 9.8%, and electrosurgical products, up 4.0%. Management attributed the “other” increase largely to medical lighting sales.
- Q3 gross margin improved 1.7 percentage points, which management associated with a more favorable product mix. Nine-month gross margin declined 1.0 point, reflecting product mix, lighting costs, and initial J-Plasma manufacturing and rollout costs.
- Nine-month net income fell 66.4%. Operating income declined, and the prior-year period included a $0.750 million Salient/Medtronic settlement gain. The fair-value change in liabilities was a $0.108 million loss in 2012 versus a $0.181 million gain in 2011.
- Nine-month diluted EPS was $0.02 versus $0.06. Q3 EPS was reported as zero to the nearest cent; the quarter had a $0.007 million net loss.
- Cash and cash equivalents were $4.488 million at September 30, 2012, down from $4.880 million at year-end. Nine-month operating cash flow was $0.154 million; investing outflow was $0.449 million and financing outflow was $0.097 million.
- Working capital was approximately $14.4 million, versus $14.1 million at December 31, 2011. Current assets were $16.342 million and current liabilities $1.930 million.
- Industrial revenue bonds totaled approximately $3.452 million, including current maturities; the bonds carry a fixed 5.6% rate and balloon in November 2018. The $6 million revolving line had no balance, with reported borrowing-base availability of approximately $3.7 million. A separate equipment facility had approximately $1.0 million available. The company reported compliance with covenants.
Outlook, commentary, risks, and unusual items
- No numeric revenue, earnings, or margin guidance is provided. Management said cash on hand and anticipated operating cash flows should cover operating commitments for the next 12 months. It planned to fund continued development of J-Plasma, ICON VS vessel-sealing technology, and Aaron 1450 from operating cash flows.
- Management identified customer demand, competition and pricing, customer and distributor relationships, product acceptance, supplier continuity and costs, inventory obsolescence, and litigation as risks. The ten largest customers generated approximately 66% of nine-month revenue; two customers each represented 11% of sales.
- The company reported a $0.213 million Level 3 warrant liability at September 30, 2012, compared with $0.105 million at year-end. Its remeasurement generated a $0.108 million nine-month loss in earnings.
- Litigation includes a new Livneh-related action seeking unspecified damages exceeding $4 million and other relief; the company said it could not estimate a potential loss and recorded no provision. A shareholder derivative action is proceeding through discovery; the company said any loss was not estimable. In the Keen employment case, the disclosed potential loss range was zero to approximately $0.6 million plus indeterminate legal fees; certain claims were dismissed, while discovery continued on remaining claims.
- The Livneh settlement still required approximately $0.302 million in installments at quarter-end. Other commitments include operating leases and potential supplier-termination liabilities of approximately $0.230 million if the Bulgarian manufacturing arrangement is terminated before July 1, 2014.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It reported no material changes to the risk factors in the prior annual report.
Important facts for investors to verify
- Whether sales growth and the improved quarterly gross margin persist, particularly as J-Plasma costs and the product mix evolve.
- Customer concentration, the decline in international sales, and the durability of the medical-lighting and other-product growth.
- Cash generation relative to operating commitments, capital spending, bond repayments, and the assumptions behind management’s 12-month liquidity assessment.
- Availability and covenant terms of the PNC facilities, and the company’s ability to maintain covenant compliance.
- Developments and potential financial effects of the Livneh, derivative, and Keen litigation, including settlement-related obligations.
- The effect of warrant fair-value changes and the reported difference in the nine-month effective tax rate: the filing cites both 47.7% and 47.9%.