Bovie Medical Corporation (now Apyx Medical Corp.) — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013; filed November 14, 2013. The filing identifies the issuer as Bovie Medical Corporation. Unless otherwise noted, amounts are in millions of dollars.
Financial results
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Sales | $5.794 | $6.671 | $17.532 | $20.843 |
| Gross profit / margin | $2.249 / 38.8% | $2.894 / 43.4% | $6.630 / 37.8% | $8.546 / 41.0% |
| Operating income (loss) | $(0.475) | $0.282 | $(2.790) | $0.918 |
| Net income (loss) | $(0.341) | $(0.007) | $(1.870) | $0.331 |
| Basic and diluted EPS | $(0.02) | $0.00 | $(0.11) | $0.02 |
| Operating cash flow | Not provided separately | Not provided separately | $(1.189) | $0.154 |
At September 30, cash was $2.501 million, current assets $14.527 million, and current liabilities $3.168 million; reported working capital was approximately $11.3 million. Total assets were $27.687 million and total liabilities $6.266 million. Mortgage debt was approximately $3.316 million, including current maturities. Cash declined $1.661 million from year-end 2012. Investing cash outflow was $0.417 million and financing cash outflow $0.055 million during the first nine months.
Changes versus prior periods
- Sales fell 13.1% in Q3 and 15.9% in the first nine months. Electrosurgical sales declined 25.0% and 27.3%, respectively, chiefly as OEM customers reduced generator orders. Nine-month domestic and international sales fell 14.9% and 20.2%.
- Gross margin contracted 4.6 percentage points in Q3 and 3.2 points year to date, reflecting lower sales and changes in production costs.
- The nine-month operating result included a $1.041 million legal award expense relating to the Keen case. Professional-services expense rose 27.0% year to date, mainly due to litigation; SG&A rose 14.5%, including the medical-device excise tax.
- Cash from operations shifted from $0.154 million provided in the prior-year period to $1.189 million used. Inventory rose to $8.526 million from $7.543 million at year-end; management attributed higher inventory days partly to J-Plasma products.
Outlook, liquidity, risks and unusual items
- Management reported continued investment in J-Plasma, totaling approximately $2.6 million since June 2010, including $0.970 million in the first nine months of 2013. Hospital approval and purchasing timelines were longer than expected, delaying sales; first-nine-month J-Plasma sales were approximately $28,000. Management noted positive feedback but gave no quantified revenue or earnings guidance.
- Management believed cash on hand and anticipated operating cash flows would cover operating commitments for the next 12 months, but was seeking additional financing to accelerate J-Plasma marketing and distribution. It cautioned that financing might not be available on acceptable terms.
- In an October 22, 2013 amendment, the company terminated its revolving credit line, agreed to additional $12,000 monthly principal payments through September 2014 and full redemption of the bonds on October 1, 2014, and pledged property and equipment (excluding patents) as collateral. The company intended to refinance approximately $3.3 million of debt; refinancing could entail an estimated $390,000 exit fee. The company reported compliance with amended covenants at September 30.
- The Keen jury verdict awarded $622,500 severance, reinstated and accelerated 110,000 options, and required indemnification for certain employee-related costs. The company accrued approximately $1.041 million, elected not to appeal, and reported that fee motions remained pending.
- The Livneh/Lican case sought, among other relief, damages exceeding $10 million. Summary judgment motions were denied; trial was scheduled for December 2013. The company said the outcome and any loss range could not be estimated and recorded no related loss. A shareholder derivative action was also pending, with mediation underway and no estimable loss range.
- The Affordable Care Act medical-device excise tax increased SG&A and reduced cash by approximately $284,000 in the first nine months; management estimated an annual impact of $375,000–$500,000. The three largest customers each represented more than 10% of nine-month sales, creating customer concentration exposure.
- Management stated disclosure controls were effective at September 30 and that it had remediated a previously reported material weakness involving failure to classify approximately $3.2 million of debt as current in the original June 2013 filing. No material changes in internal control were reported during Q3.
Key facts for investors to verify
- Whether the sharp decline in OEM generator demand stabilizes and whether J-Plasma secures hospital approvals and meaningful orders.
- Cash burn, inventory levels, and the availability and terms of refinancing before the October 2014 bond redemption deadline, including any exit fee and covenant requirements.
- Final costs and status of the Keen matter, and developments in the Livneh/Lican and shareholder derivative litigation.
- Customer concentration, supplier commitments, and the potential recoverability of inventory and deferred tax assets.