Business context and reporting period
Bovie Medical Corporation’s Form 10-K covers the fiscal year ended December 31, 2013; it is an annual report, not a standalone fourth-quarter filing. Bovie developed, manufactured, and marketed electrosurgical devices, cauteries, medical lighting, and related products. Its J-Plasma technology was in early commercialization. Amounts below are U.S. dollars; financial statement figures are in millions unless noted.
Financial performance and position
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Revenue | $23.660 | $27.671 |
| Gross profit / margin | $9.198 / 38.8% | $11.333 / 41.0% |
| Operating income (loss) | $(3.666) | $1.046 |
| Net income (loss) | $(4.339) | $0.617 |
| Diluted EPS | $(0.25) | $0.03 |
| Cash from (used in) operations | $(2.536) | $0.165 |
| Capital expenditures | $0.588 | $0.753 |
| Cash and cash equivalents at year-end | $7.924 | $4.162 |
| Working capital | Approximately $16.9 | $14.3 |
| Total assets / stockholders’ equity | $33.176 / $19.071 | $28.183 / $22.895 |
FY 2013 revenue fell 14.5%. Electrosurgical sales declined 25.6% to $13.174 million, cautery sales were nearly flat at $6.972 million, and other sales rose 18.7% to $3.514 million. International sales were $4.139 million, or 17.2% of revenue, versus $4.967 million and 17.7% in 2012. Gross margin declined 2.2 percentage points; management cited lower sales and higher labor and manufacturing overhead as factors.
Fourth-quarter 2013 revenue was $6.128 million, gross profit was $2.568 million, net loss was $2.470 million, and diluted loss per share was $0.14. The filing attributes the quarter’s loss principally to legal settlement, financing, and debt-refinancing costs.
At December 31, 2013, bonds payable totaled approximately $3.257 million; the balance sheet also reported $5.749 million of derivative liabilities related to warrants. The company reported $2.912 million of current liabilities and $19.822 million of current assets. Operating cash use and elevated inventory were notable: inventory was $8.415 million, with 297 days of sales in inventory versus 218 days a year earlier.
Material changes and notable items
- Management attributed much of the sales decline to approximately $4.9 million less in generator sales after contracts with two major OEM customers ended. The ten largest customers accounted for 60.9% of revenue, compared with 66.3% in 2012.
- Legal awards and settlements were $1.640 million in 2013. This included approximately $1.1 million related to the Leonard Keen verdict and attorneys’ fees, which the company said had been paid, and approximately $0.5 million related to the Livneh settlement. A separate stockholder derivative action remained in court-sanctioned mediation, with no definitive settlement signed.
- Other expense included $0.664 million in warrant issuance costs, $0.543 million in refinancing-related fees, and an $0.842 million net loss from changes in the fair value of derivative liabilities. The company also recorded a $1.613 million deferred income tax benefit.
- In December 2013, the company raised $7 million gross through 3.5 million shares of 6% convertible preferred stock and warrants. The preferred shares are convertible one-for-one and may be redeemable at the holder’s option beginning in December 2017. Investor warrants covered 5.25 million common shares, with additional placement-agent warrants; warrant accounting and exercise could materially affect reported earnings and dilute common shareholders.
- At year-end, the company had approximately $3.3 million of industrial revenue bonds and had terminated its revolving credit line. It reported compliance with amended loan covenants. On March 20, 2014, after year-end, it refinanced the PNC facility with a $3.592 million Bank of Tampa mortgage loan, secured by the Clearwater facility, accounts receivable, and a certificate of deposit; it paid PNC $3.188 million to redeem the bonds and a further $0.410 million to terminate the interest-rate swap.
Outlook, management commentary, and risks
Management’s strategy was to grow the core device business while accelerating J-Plasma commercialization. J-Plasma sales began in 2013 and were approximately $45,000; by early 2014 the product was in use at more than two dozen U.S. sites. The company planned to expand sales capacity and stated that 2014 research and development spending was expected to remain similar to 2013’s approximately $1.3 million. It did not provide a revenue or earnings forecast.
Management cited pressure in Europe from financial conditions and products withdrawn during regulatory testing, partly offset by growth in Latin America and improvement in the Middle East and Africa. Key risks include continued reliance on distributors, OEM and customer concentration, uncertain adoption of J-Plasma, competition and regulatory requirements, supplier dependence, product liability and intellectual-property claims, litigation, and potential dilution. The company estimated the 2.3% U.S. medical-device excise tax could reduce annual results and cash flows by approximately $0.3–$0.5 million; its 2013 expense was approximately $0.384 million. Management reported effective disclosure controls and internal control over financial reporting as of year-end. The independent auditor gave an unqualified opinion on the financial statements.
Important facts for investors to verify
- Whether lost OEM generator contracts can be replaced and whether customer concentration remains high.
- J-Plasma adoption, sales growth, commercialization costs, and the evidence supporting management’s growth expectations.
- Cash generation, inventory levels, and liquidity under the post-year-end Bank of Tampa loan and its covenants.
- The potential dilution, dividend and redemption obligations, and fair-value volatility associated with preferred stock and warrants.
- Final outcomes and any additional costs from the derivative action and other litigation, plus the effect of the Livneh settlement terms and Seal-N-Cut licenses.