Bovie Medical Corporation (now identified in the request as Apyx Medical Corp.) — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013; filed August 14, 2013. The filing registrant is Bovie Medical Corporation. Amounts below are in U.S. dollars; financial-statement amounts are generally shown in millions unless noted.
Financial performance
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Sales | $6.042m | $7.440m | $11.738m | $14.173m |
| Gross profit / margin | $2.230m / 36.9% | $2.856m / 38.4% | $4.381m / 37.3% | $5.652m / 39.9% |
| Operating income (loss) | $(1.650)m | $0.240m | $(2.315)m | $0.636m |
| Net income (loss) | $(1.119)m | $0.152m | $(1.529)m | $0.339m |
| EPS, diluted | $(0.06) | $0.01 | $(0.09) | $0.02 |
For the first half, operating cash flow was $(1.267)m, versus $0.454m provided in the prior-year period. Investing cash use was $0.293m and financing cash use was $0.044m; cash declined $1.604m to $2.558m. First-half interest expense was $0.116m.
At June 30, cash was $2.558m, working capital was approximately $11.8m, and total current assets and liabilities were $14.762m and $2.953m, respectively. Total liabilities were $6.243m; bonds payable were $3.351m, including current maturities. The PNC revolving facility had a $4m limit and no balance outstanding. Reported borrowing-base availability was approximately $3.5m, but the company could not draw while in covenant noncompliance. Total assets were $27.927m and stockholders’ equity was $21.684m.
Material changes and operating drivers
- Sales fell 18.8% in Q2 and 17.2% in the first half year over year. Electrosurgical sales declined 33.8% in Q2 and 28.4% in the first half, mainly because of lower generator orders from OEM customers and the completion of two large multi-year OEM contracts in 2012.
- Cautery sales were nearly flat; “other” sales rose, supported by third-party medical lighting. J-Plasma sales were only $11,000 in Q2 and $16,000 in the first half.
- Gross margin declined 1.5 percentage points in Q2 and 2.6 points in the first half. Management cited lower sales and labor costs up approximately 7.1%; material costs declined as a percentage of sales.
- First-half SG&A increased 18.7% to $2.548m, including approximately $0.184m of medical-device excise tax, higher insurance and marketing costs. Professional services rose 28.0% to $0.836m, primarily due to litigation expenses.
- Inventory increased to $8.242m from $7.543m. Management reported inventory coverage of 263 days, up from 218 days at year-end, partly reflecting J-Plasma-related purchases.
Outlook, risks and unusual items
- Management said it expected cash on hand and anticipated operating cash flows to cover operating commitments for the next 12 months, but noted it might seek additional capital to market and distribute J-Plasma. It gave no quantified revenue or earnings guidance.
- Management plans continued investment in J-Plasma and related products. It reported positive feedback but said hospital purchasing-committee approvals were taking longer than expected; the company had invested approximately $2.2m in J-Plasma since June 2010. Future commercial success and returns are uncertain.
- Following an August 8, 2013 jury verdict in the Keen litigation, the company accrued approximately $1.041m as of June 30. The verdict included $622,500 severance, reinstatement and acceleration of 110,000 options, indemnification obligations, and attorney’s fees to be determined. The accrual caused covenant noncompliance with PNC; the company said it was working to resolve the issue and anticipated resolution before the end of the next quarter. Until resolved, it could not draw on the line.
- Other litigation includes a Livneh/Lican claim seeking, among other relief, damages exceeding $10m; the company said it could not estimate a potential loss and recorded no provision. A stockholder derivative action remained in discovery, also with no estimable loss recorded.
- Other pressures include the 2.3% U.S. medical-device excise tax, estimated by management to cost $375,000–$500,000 annually, OEM/customer concentration, supplier dependence, and substantial purchase commitments. Three customers accounted for about $4.0m of first-half sales, and together represented 35.5% of receivables at quarter-end.
Important facts for investors to verify
- Whether the Keen verdict and related fees, indemnity, and accelerated options result in further charges or affect PNC covenant compliance and access to credit.
- Whether the company resolves the credit-line restriction and how liquidity develops given first-half operating cash use and declining cash.
- Whether OEM generator orders recover and J-Plasma gains hospital approvals and meaningful sales, while monitoring inventory levels and gross margins.
- Developments and potential financial exposure in the Livneh/Lican and derivative litigation, for which the filing provides no clear loss estimate.
- The accuracy and sustainability of management’s 12-month liquidity assessment, including customer concentration, purchase commitments, and possible need for external capital.