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BVX > SEC Filings for BVX > Form 10-K on 1-Apr-2013All Recent SEC Filings

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Form 10-K for BOVIE MEDICAL CORP


1-Apr-2013

Annual Report


ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis in conjunction with our financial statements and related notes contained elsewhere in this report. This discussion contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a variety of factors discussed in this report and those discussed in other documents we file with the SEC. In light of these risks, uncertainties and assumptions, readers are cautioned not to place undue reliance on such forward-looking statements. These forward-looking statements represent beliefs and assumptions on as of the date of this report. While we may elect to update forward-looking statements and at some point in the future, we specifically disclaim any obligation to do so, even if our estimates change.

Executive Level Overview

We are a medical device company engaged in manufacturing and marketing of electrosurgical devices. Our medical products include a wide range of devices including electrosurgical generators and accessories, cauteries, medical lighting, nerve locators and other products.

We internally divide our operations into three product lines; electrosurgical products, battery-operated cauteries and other products. The electrosurgical line sells electrosurgical products which include desiccators, generators, electrodes, electrosurgical pencils and various ancillary disposable products. These products are used in surgery for the cutting and coagulation of tissue. Battery-operated cauteries are used for precise hemostasis (to stop bleeding) in ophthalmology and in other fields. Our other revenues are derived from nerve locators, disposable and reusable penlights, medical lighting, license fees, development fees and other miscellaneous income.

Most of our products currently are marketed through medical distributors, which distribute to more than 6,000 hospitals, doctors offices, and other healthcare facilities. New distributors are contacted through responses to our advertising in international and domestic medical journals and domestic or international trade shows. International sales represented 17.7% of total revenues in 2012 and 21% in 2011 and 2010. Our products are sold in more than 150 countries through local dealers which are coordinated by sales and marketing personnel at the Clearwater, Florida facility. As mentioned previously for the launch of our new surgical suite product lines, we have established the use of a network of approximately 50 commission-based independent direct sales contractors to market these products. Our business is generally not seasonal in nature.

We strongly encourage investors to visit our website: www.boviemedical.com to view the most current news and to review our filings with the Securities and Exchange Commission.

Results of Operations -

Sales

                                     2012 vs. 2011                             2011 vs. 2010
Sales by Product                                      Percent                                   Percent
Line (in thousands)        2012          2011         change         2011          2010         change
Electrosurgical         $  17,697     $  16,896        4.7%       $  16,896     $  15,956        5.9%
Cauteries                   7,014         6,268        11.9%          6,268         6,383       (1.8)%
Other                       2,960         2,247        31.7%          2,247         1,891        18.8%

Total                   $  27,671     $  25,411        8.9%       $  25,411     $  24,230        4.9%

Sales by Domestic and
International (in
thousands)
Domestic                $  22,704     $  19,972        13.7%      $  19,972     $  19,174        4.2%
International               4,967         5,439       (8.7%)          5,439         5,056        7.6%

Total                   $  27,671     $  25,411        8.9%       $  25,411     $  24,230        4.9%


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Overall sales increased by 8.9% or approximately $2.3 million for the period ending December 31, 2012 when compared to the same period in 2011. In 2012, we continued to experience an upward trend in our sales in all three areas of our business. The largest dollar increase of approximately $746,000 was in our cautery product line, which we attribute to us gaining market share due to a reduction in competitors in the marketplace. The next largest dollar increase was in our electrosurgical product line consisting of a $736,000 increase in electrosurgery generators sold primarily to a major OEM customer and approximately $65,000 increased sales of electrodes. We also increased our sales of third party medical lighting products by approximately $593,000 and various other products by approximately $120,000.

Our sales for the twelve months ended December 31, 2011 outpaced sales for the same period in 2010 by approximately $1.2 million, or 4.9%. The increase in sales has been driven mainly by increased demand for our electrosurgical generators both domestically and internationally which amounted to an approximate increase of $690,000 for the year ended December 31, 2011 compared to the same period in 2010. Sales of our new distribution products released this year, coated blades which are categorized as electrosurgical and medical lighting systems which are categorized as other products, amounted to increases of approximately $675,000 and $356,000 respectively for the year ended December 31, 2011 compared to the same period in 2010. However, increases in electrosurgical sales were offset by an approximate decrease of $425,000 related to discontinued sales of an OEM disposable electrosurgical device for the twelve month period compared to the same period in 2010. In addition cautery sales were down by approximately $115,000 for the current year ended compared to the same period in 2010. We continue to see increased demand for our third party medical lighting products and as part of our ongoing business strategy we will be bringing on more third party medical products to offer through our distribution channel.

Our ten largest customers accounted for approximately 66.3%, 64.6%, and 66.5% of net revenues for 2012, 2011, and 2010 respectively. In 2012, National Distribution & Contracting Inc. accounted for 12.4% of our sales, while in 2011, no one customer accounted for over 10% of our sales. In 2010 two customers, Arthrex, Inc. and National Distribution & Contracting Inc. each separately accounted for approximately 11% of total revenues.

Gross Profit

                                                      Years ended December 31,
                                                               Percent                     Percent
                                                               change                      change
(in thousands)                         2012          2011     12'vs 11'          2010     11'vs 10'
Cost of sales                     $  16,338     $  14,680       11.3%       $  14,242       3.1%
Cost of sales as a percentage
of revenue                             59.0 %        57.8 %                      58.8 %

Gross profit                      $  11,333     $  10,731       5.6%        $   9,988       7.4%
Gross profit as a percentage of
revenue                                41.0 %        42.2 %    (1.2%)            41.2 %     1.0%

Our gross profit margin on a dollar basis increased by 5.6% or approximately $603,000 during the year ended December 31, 2012 compared to the same period in 2011 as a result of the increased sales mentioned above. However, our gross profit as a percentage of sales decreased by approximately 1.2%. This decrease in gross profit percent was due to the product mix that was sold, specifically with the increased sales of our lower margin third party medical lighting sales. Additional contributing factors to the lower gross profit percentage were an 0.8% increase in labor costs as a percentage of sales from salary increases, increased medical insurance costs and increased overtime required to meet the increase in sales coupled with slight increases in material costs related to our other products sold. These increases were partially offset by a 0.1% decrease in manufactured overhead cost.

We improved our gross profit margin on a dollar basis by 7.4% or approximately $742,000 during the year ended December 31, 2011, compared to the same period in 2010 as a result of a combination of increased sales mentioned above and a net reduction in some of our costs attributed to those sales. Our cost of sales as a percentage of sales decreased by 1.0% mainly as a result of reductions approximating $216,000 in direct and indirect labor costs and $141,000 eliminated from our consolidating the Canadian facility. The total of these cost savings was offset by approximately $103,000 due to higher material cost related to our third party medical lighting sales when compared to our manufactured product lines.


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We do not anticipate any material impact to our gross profit, material costs, or other costs as a result of the effect of inflation or any material impact of changing prices on net revenue.

Other Gain (Loss)

Salient/Medtronic Settlement

On March 3, 2011, we entered into a settlement agreement related to the legal action with Salient Surgical Technologies, Inc. and Medtronic, Inc. The settlement called for us and related parties to immediately exit and not enter into the monopolar and bipolar saline-enhanced RF device business (including SEER™ and BOSS™) worldwide through February 2015. In exchange, Salient made a one-time payment to us of $750,000. As a condition, we will not be able to sell certain finished products, which as of the settlement date amounted to approximately $100,000 of our inventory. We reserved for approximately $87,000 of our inventory related to the products in this settlement in the first quarter of 2011. The terms also include a provision outlining a possible OEM contract manufacturing relationship between Salient and our Company.

Research and development

                                                      Year ended December 31,
                                                              Percent
                                                               change                    Percent
                                                               12'vs                      change
(in thousands)                      2012          2011          11'          2010        11'vs10'
Research and Development
expense                           $   1,329     $   1,197      11.0%       $   1,854     (35.4%)
R&D expense as a percentage of
revenue                                 4.8 %         4.7 %                      7.7 %

Our expenditures for R & D related activities increased by 11.0% or approximately $132,000 for the year ended December 31, 2012 compared to the same period in 2011. A large portion of this increase was related to various consulting fees of approximately $72,000, of which $42,000 was incurred for the preliminary development and design phase for a product related to a potential OEM customer and the remaining $30,000 was incurred to expand the plasma product line and other new products. Additional expenditures to support the continued development of the J-Plasma product line included adding a new engineering position which increased costs by approximately $51,000 and increased material and lab costs of approximately $9,000.

We experienced a 35.4% decrease in research and development expense or approximately $657,000 for the year ended 2011 compared to the same period in 2010. This 3% decrease as a percentage of sales, was primarily related to the saline-enhanced RF device business product line and reductions in development costs of approximately $300,000 in engineering costs and approximately $118,000 in product design, testing labs, and material related costs. In March of this year as part of our legal settlement with Salient Surgical Technologies, Inc. we agreed to exit and not enter into the monopolar and bipolar saline-enhanced RF device business (SEER™ and BOSS™) worldwide through February 2015. We also had reductions of approximately $239,000 in consulting fees associated with the development of our vessel sealing product as a result of our consolidating the Canadian operations to Florida.

Professional services

                                                      Year ended December 31,
                                                               Percent                    Percent
                                                               change                      change
(in thousands)                      2012          2011        12'vs 11'       2010        11'vs10'
Professional services expense     $   1,439     $   1,250       15.1%       $   1,556     (19.7%)
Professional services as a
percentage of revenue                   5.2 %         4.9 %                       6.4 %


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Professional services costs increased 15.1% or approximately $189,000 for the year ending December 31, 2012 compared to the same period in 2011. Legal fees, incurred in connection with the current litigations, increased over the prior year by approximately $215,000 and are the main reason for the increase in professional costs. We also had an approximate increase of $25,000 related to stock based compensation costs. These increases were offset by a reduction in tax consulting fees due to the closing of our IRS audit in early 2011 of approximately $51,000.

Our professional costs decreased by 19.7% or approximately $306,000 for the year ended December 31, 2011 compared to the same period in 2010, due mainly to a reductions in legal fees of approximately $70,000 related to settled cases and $99,000 in tax consulting fees due to the closing of our IRS audit earlier that year. In addition, we had savings of approximately $69,000 in other consulting costs from our nonrenewal of a consulting firm to support marketing of new products which we used in 2010. Various smaller savings were approximately $25,000 in internal control testing costs, $28,000 in patent related costs, and $15,000 in stock based compensation costs.

Salaries and related costs

                                                       Year ended December 31,
                                                               Percent                     Percent
                                                               change                      change
(in thousands)                      2012          2011        12'vs 11'       2010        11'vs.10'
Salaries and related expenses     $   3,178     $   3,114       2.1%        $   3,155      (1.3%)
Salaries & related expenses as
a percentage of revenue                11.5 %        12.3 %                      13.0 %

During 2012 we experienced a net increase of approximately 2.1% in salary and related costs, or approximately $64,000 when compared to the same twelve month period ending at December 31, 2011. In an effort to expand our sales both for our plasma line products domestically and our distribution products in domestic and international markets, our sales and marketing salaries and related costs increased by approximately $181,000. However, our salaries and related costs related to our in-house legal decreased by approximately $117,000.

Our salaries and related costs decreased overall by approximately $41,000, or 1.3% for the year ended December 31, 2011 when compared to the same period in 2010. Although we experienced an increase in our health insurance premiums of approximately $52,000, this increase was offset by a reduction in salaries related to the elimination of a marketing position for the sintered steel product line that we agreed to exit out of as part of the Salient Surgical Technologies, Inc. settlement.

Selling, general and administrative expenses

                                                      Year ended December 31,
                                                               Percent                    Percent
                                                               change                      change
(in thousands)                      2012          2011        12'vs 11'       2010        11'vs10'
SG&A expense                      $   4,341     $   4,347      (0.1%)       $   4,889     (11.1%)
SG&A expense as a percentage of
revenue                                15.7 %        17.1 %                      20.2 %
Legal settlement                         --     $   1,591                          --
Loss on impairment of IP                 --            --                   $   1,286
                                                                                  5.3 %

Selling, general and administrative costs in dollars remained relatively the same, however it decreased as a percentage of sales by approximately 1.4% for the period ending December 31, 2012 compared to the same period in 2011. We experienced some substantial decreases in our bank fees, obsolete inventory provisions, building maintenance and utilities, and other various overhead related costs coupled with a gain on disposition of assets all of which amounted to a decrease of approximately $219,000. Additional decreases in our selling, general and administrative costs included a $45,000 decrease in regulatory costs related to both our existing as well as our new products, a $58,000 decrease in amortization costs related to the Meg product line which was written off last year, and a $46,000 decrease in costs related to the 2011 one time legal settlement which was absent for the same period 2012.


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In line with our efforts to expand sales, we increased selling and marketing costs over the prior period by approximately $129,000, which included trade shows costs, sales force travel both for international and domestic markets, and increased advertising for both our existing distribution products and our new J-Plasma line of products. Our increased sales in 2012 versus 2011 also translated into an increase of approximately $75,000 in commission expense. We also experience increases in our selling, general and administrative costs for computer and software upgrades, rental fees, general insurance from increasing our coverage limits, shareholder and stock exchange costs, and various other overhead related costs which all amounted to approximately $160,000.

Our selling, general and administrative costs decreased by 11.1% overall or approximately $542,000 for the year ended December 31, 2011 compared to the same period in 2010. A large portion of our cost savings were from decreases related to the suspension of the sintered steel product line as part of the Salient Surgical Technologies, Inc. settlement for approximate amounts of $131,000 in reduction in travel costs, $95,000 decrease in amortization expense, and a $54,000 reduction in sintered steel marketing costs. Other large cost saving components included in the 11.1% overall reduction mentioned above were related to general overhead costs which included approximate amounts of $240,000 related to reductions from consolidating the Canadian operation to Florida, a $326,000 decrease in loss on disposition of assets incurred on the sale of our old building in late 2010, and $86,000 decrease in utilities and facility maintenance costs. We also experienced some decreases in our manufacturing rep training and other various selling expenses amounting to approximately $71,000.

We continued to increase sales of our new distribution product lines, coated electrodes and medical lighting systems during 2012, and to introduce other new products under development and, as a result, we incurred approximate increases in selling costs of $41,000 for advertising, $99,000 for commission expense, and $21,000 for show and other marketing costs. In addition, during 2011, as our new products approached the completion phase we experienced an increase of approximately $68,000 in regulatory testing costs compared to the prior year. We also saw an increase in our general insurance costs of approximately $71,000 due to increases related to our directors and officer's coverage and we expect this trend to continue in 2012 as we re-evaluate our coverage in other areas. As a result of settling one of our lawsuits we incurred an approximate increase of $83,000 in settlement expense in 2011 over 2010. Other various increases in cost in our year ended December 31, 2011 over the same period in 2010 include approximate amounts of $25,000 in shareholder and stock exchange related costs, $32,000 in our provision for obsolete inventory, and $21,000 inventory storage costs.

Legal Settlement

In December 2011, a settlement related to the then pending litigation with Steve Livneh and certain affiliated entities, was structured and subsequently signed on February 22, 2012 (the "Settlement Agreement"). Under the terms of the Settlement Agreement, we agreed to, among other things, perform the following: (i) make a $250,000 lump sum payment to Livneh ($50,000 of which was previously recorded and expensed), (ii) make 18 installment payments to Livneh in the amount of $23,222.22 per month, (iii) reimburse Livneh for all unpaid expenses that Livneh incurred on our behalf during the period of his employment and/or consultancy (from October 1, 2006 through August 11, 2010), (iv) pay Livneh $14,700, which represents the balance of the amounts due to Henvil Corp. Ltd. under a certain bill of sale, dated April 12, 2010, (v) transfer to Livneh the title of a certain automobile, (vi) transfer to Livneh all of our rights and interest in certain Intellectual Property (as defined in the Settlement Agreement) pertaining to the Modular Ergonomic Grip ("MEG"), Modullion, RF Skin Resurfacing, Scannula, Double Jaw Forceps and Tip-On-Tube designs and trade name (collectively, the "Assigned Patents"), (vi) transfer to Livneh certain parts for the MEG device, (vii) grant Livneh an exclusive license to produce, market and sell the Seal-N-Cut device in the People's Republic of China, (viii) pay to Livneh royalty payments of 3% on Net Sales (as defined in the Settlement Agreement) of the Seal-N-Cut device outside the People's Republic of China, and
(ix) pay to Livneh a one-time royalty payment of 5% upon the closing of any sale by us of our right or interest in any Intellectual Property pertaining to the Seal-N-Cut device. To secure our obligations, we granted Livneh a security interest in all of our rights and interest of the Company in the Seal-N-Cut device, including all Intellectual Property pertaining thereto. Since the loss was quantifiable and known in December 2011, we recognized this settlement loss in 2011 in accordance with GAAP and all payments hereunder were accrued during the fourth quarter.


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In addition, in the fourth quarter of 2011, as a result of the Settlement Agreement, we recorded an expense of approximately $737,000 for the transfer of the MEG and the Modullion intellectual property. We have also accrued expenses in approximate amounts for the transfer of related inventory and molds of $194,000 and an additional $27,000 for other various expenses.

The total financial impact of this Settlement Agreement to our consolidated financial statements for the year ended December 31, 2011 was approximately $1.6 million.

Asset Impairment

In December 2010, after evaluating the future outlook of our patent related to our SEER™ product line, we determined that the asset value was impaired and further calculated the impairment loss to be approximately $1.3 million. Subsequent to our assessment that the patent was impaired, as a condition of the March 3, 2011 settlement with Salient Surgical Technologies, Inc. and Medtronic, Inc., we are required to immediately exit and not enter into the monopolar and bipolar saline-enhanced RF device business (including SEER™ and BOSS™) worldwide through February 2015 (see Item 3. Legal Proceedings). As a condition we will not be able to sell certain finished products, which as of the settlement date amounted to approximately $87,000 of our inventory.

Other Income

                                                        Year ended December 31,
                                                                Percent
                                                                 change                      Percent
                                                                 12'vs                       change
(in thousands)                      2012           2011           11'          2010         11'vs.10'
Interest income                   $       7      $      12      (42.0%)      $      15       (20.0%)
Interest expense                  $    (239 )    $    (249 )     (4.0%)      $    (238 )      4.6%
Total other income (expense)      $    (232 )    $    (237 )     (2.0%)      $    (223 )      6.3%
Other income (expense) as a
percentage of revenue                  (0.8 %)        (0.9 %)                     (0.9 %)
Change in fair value of
liabilities, net                  $      20      $     287                   $     513       (44.1%)
Other gain as a percentage of
sales                                   0.1 %          1.1 %                       2.1 %

Net interest expense decreased by approximately $5,000 or 2.0% for the year ended December 31, 2012 as compared to the same period in 2011 primarily due to principal reductions during 2012 of our Industrial Revenue Bonds associated with the acquisition of our Clearwater, Florida facility.

Net interest expense increased by approximately $14,000 or 6.3% for the year ended December 31, 2011 as compared to the same period in 2010 primarily due to the refinancing of the Industrial Revenue Bonds in late 2011.

The change in fair value of liabilities was related to the warrants associated with our equity issuance in April of 2010 and adjustment for the fair value of the Lican liability. The derivative warrant liability was valued at approximately $799,000 at the issuance date and was valued at approximately $105,000 and $332,000 at December 31, 2011 and December 31, 2010, respectively. This resulted in a year-to-date gain of approximately $227,000 and $467,000 for the years ended December 31, 2011 and 2010, respectively. The Lican liability fair value was approximately $111,300 and $172,200 at December 31, 2011 and 2010. This resulted in a gain of $61,000 for the year ended December 31, 2011.

Interest expense remained relatively similar from 2010 through 2012, with a slight increase in 2011 due to the refinancing of our Industrial Revenue Bonds associated with the acquisition of our Clearwater, Florida facility. We expect that our interest expense for 2013 should be similar to the amount incurred in 2012.


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Income Taxes

Deferred income taxes reflect the impact of temporary differences between the
amount of assets and liabilities recognized for financial reporting purposes and
such amounts recognized for income tax purposes. The tax effects of these
. . .
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