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BVX > SEC Filings for BVX > Form 10-Q on 15-May-2013All Recent SEC Filings

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Form 10-Q for BOVIE MEDICAL CORP


15-May-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Notes Regarding "Forward-Looking" Statements

This report contains statements that we believe to be "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange act of 1934, as amended. Forward-looking statements give our current expectations or forecasts of future events. Forward-looking statements generally can be identified by the use of forward-looking terminology such as "may," "will," "expect," "intend," "estimate," "anticipate," "believe," "project," or "continue," or similar words or the negative thereof. From time to time, we also may provide oral or written forward-looking statements in other materials we release to the public. Any or all of our forward-looking statements in this report and in any public statements we make could be materially different from actual results. They can be affected by assumptions we might make or by known or unknown risks or uncertainties. Consequently, we cannot guarantee any forward-looking statements. Investors are cautioned not to place undue reliance on any forward-looking statements. Investors should also understand that it is not possible to predict or identify all such factors and should not consider the following list to be a complete statement of all potential risks and uncertainties. The following factors and those discussed in ITEM 1A, Risk Factors, included in our Annual Report on Form 10-K for the year ended December 31, 2012, may affect the achievement of forward-looking statements:

? general economic and political conditions, such as political instability, credit market uncertainty, the rate of economic growth or decline in our principal geographic or product markets or fluctuations in exchange rates, continued deterioration in or de-stabilization of the global economy;

? changes in general economic and industry conditions in markets in which we participate, such as:

? deterioration in or destabilization of the global economy;

? the strength of product demand and the markets we serve;

? the intensity of competition, including that from foreign competitors;

? pricing pressures;

? the financial condition of our customers;

? market acceptance of new product introductions and enhancements;

? the introduction of new products and enhancements by competitors;

? our ability to maintain and expand relationships with large customers;

? our ability to source raw material commodities from our suppliers without interruption and at reasonable prices; and

? our ability to source components from third parties, in particular from foreign manufacturers, without interruption and at reasonable prices;

? our ability to access capital markets and obtain anticipated financing under favorable terms;

? our ability to identify, complete and integrate acquisitions successfully and to realize expected synergies on our anticipated timetable;

? changes in our business strategies, including acquisition, divestiture and restructuring activities;

? changes in operating factors, such as continued improvement in manufacturing activities, the achievement of related efficiencies and inventory risks due to shifts in market demand;

? our ability to generate savings from our cost reduction actions;

? unanticipated developments that could occur with respect to contingencies such as litigation, intellectual property matters, product liability exposures and environmental matters; and

? our ability to accurately evaluate the effects of contingent liabilities.

The foregoing factors are not exhaustive, and new factors may emerge or changes to the foregoing factors may occur that would impact our business. We assume no obligation, and disclaim any duty, to update the forward-looking statements in this report. Past performance is no guaranty of future results.

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.


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Most of our products currently are marketed through medical distributors, which distribute to more than 6,000 hospitals, and to doctors and other health-care 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 20.3% of total revenues for the first three months of 2013, as compared with 16.2% for the first three months of 2012. Our products are sold in more than 150 countries mainly through local dealers which are coordinated by sales and marketing personnel at the Clearwater, Florida facility. In addition, 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 are committed to investing in research and development, which is essential to our long-term growth strategy, in an effort to produce innovative new proprietary products. Therefore, we expect to continue to make substantial investments in the development and marketing of our J-Plasma™ technology, which we invested an additional $225,000 during the first quarter of 2013 and have invested approximately $1.8 million since June 2010. Although we anticipate that these investments will expand our sales and growth in the future, there can be no assurance on the timeframe or if the J-Plasma™ technology will produce any substantial revenue or return on investment.

Business Challenges

Economic conditions

We experienced a decline in sales for the first quarter of 2013 over the same period in 2012, which we believe was impacted by some anticipated global slowdown by our OEM customers' products in certain related markets. Historically, our OEM sales tend to be cyclical at times and fluctuate in demand. We are actively pursuing other OEM prospects as well as additional third party products to sell through our established distribution chain, although there can be no assurance that we will be successful. While our J-Plasma™ technology continues to get positive feedback and acceptance as we expand the awareness through increased sales and marketing expenditures, there are challenges and time delays in getting a new innovative technology through hospital approval and purchasing channels.

Healthcare reform

In March 2010, the Patient Protection and Affordable Care Act was enacted in the United States. This legislation includes a provision that imposes a 2.3% excise tax on the sale of certain medical devices by a manufacturer, producer or importer of such devices in the United States starting after December 31, 2012. In the first quarter of 2013 the new medical device tax reduced our cash balance and increase our selling, general and administrative expenses by approximately $87,000 and we estimate that it will continue to do so annually by between $375,000 and $500,000.

Legal claims
For various reasons we have been subject to extensive litigation costs over the past several years in an effort to protect and defend the Company and our products, which has negatively impacted our cash position as well as our profitability. The timing and prolonged nature of these legal costs are certainly at a disadvantageous time given the above mentioned other challenges and our attempts to expand the launch of our J-Plasma™ technology, however it is necessary that we diligently continue our defenses.


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Results of Operations -Three Months Ended March 31, 2013 Compared to Three

Months Ended March 31, 2012

Sales

                                           Three months ended
Sales by Product Line (in thousands)           March 31,             Percent change
                                          2013         2012

Electrosurgical                        $   3,400       $  4,362                (22.1 )  %
Cauteries                                  1,596          1,605                 (0.6 )  %
Other                                        700            766                 (8.6 )  %

Total                                  $   5,696       $  6,733                (15.4 )  %



                                                          Three months ended
Sales by Domestic and International (in thousands)            March 31,              Percent change
                                                        2013          2012

Domestic                                             $   4,523       $    5,623                (19.6 ) %
International                                            1,173            1,110                  5.7 %

Total                                                $   5,696       $    6,733                (15.4 ) %

During the three months ended March 31, 2013, while sales of our cautery product line remained relatively stable, we experienced decreases in sales in our electrosurgical and our other product lines. The largest percentage and sales dollar decrease was in our electrosurgical product line where we experienced an approximate $1.0 million decrease in generator orders from our OEM customers. An increase in sales of our electrodes did offset the generator sales decrease along with a reduction in the amount of customer discounts available during the quarter of approximately $88,000. Our other product category sales decreased approximately $66,000 or 8.6% over the same period in 2012. While we still see strong demand for our third party lighting systems, a substantial portion of the decrease in other product sales was the result of delays in shipping the lighting systems of approximately $33,000. Additional decreases in our other products category related to various different products amounting to approximately $38,000, offset by sales of approximately $5,000 in our new J-Plasma product line.

Gross Profit

                   Three months ended                                    Percent
                        March 31,              Percentage of sales       change
(in thousands)      2013          2012          2013          2012

Cost of sales    $    3,545       $ 3,937           62.2 %       58.5 %      (9.9 ) %

Gross profit     $    2,151       $ 2,796           37.8 %       41.5 %     (23.1 ) %

Gross profit decreased as a percentage of sales by approximately 3.7% for the period ending March 31, 2013 compared to the same period in 2012. The decrease in our gross profit percentage was mainly due to lower overall sales coupled with our labor costs remaining similar in dollar amount for the first three months of 2013 as compared to the same period in 2012 for cost of goods sold. We experienced a reduction in material cost of approximately 2% as a percentage of sales.


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Research and Development

                                      Three months ended
                                           March 31,                  Percentage of sales          Percent change
(in thousands)                       2013             2012           2013             2012

Research and development costs    $      333       $      298            5.8 %            4.4 %               11.8 %

Research and development costs increased approximately $35,000 or 11.8% for the period ending March 31, 2013 compared to the same period in 2012. As we continue to develop enhancements and complimentary items to our next generation of J-Plasma products we have incurred increased consulting and other costs.

Professional Fees

                                      Three months ended
                                           March 31,                  Percentage of sales          Percent change
(in thousands)                       2013             2012           2013             2012

Professional services             $      453       $      295            8.0 %            4.4 %               53.6 %

Our professional fees increased by approximately $154,000 during the three months ended March 31, 2013 compared to the same period in 2012, mainly attributable to increased legal cost related to the ongoing litigations as outlined and described in Item 1: Legal Proceedings. In addition, we had an increase of approximately $7,000 in compensation expense related to consultants, which was offset by a reduction in accounting and auditing fees of approximately $3,000.

Salaries

                                      Three months ended
                                           March 31,                  Percentage of sales          Percent change
(in thousands)                       2013             2012           2013             2012

Salaries & related cost           $      818       $      782           14.4 %           11.6 %                4.6 %

During the three months ended March 31, 2013 compared to the same period in 2012, salary cost increased 4.6% or approximately $36,000. The increase was mainly due to one marketing position and one IT position that were vacant in the first quarter of 2012 but later in 2012 were filled and the costs are present in the three month period ended March 31, 2013.


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Selling, General & Administrative Expenses


                                                                                    Percent
(in thousands)      Three months ended March 31,          Percentage of sales       change
                       2013               2012           2013            2012

SG & A costs     $       1,212       $       1,025          21.3 %        15.2 %      18.2 %

Selling, general and administrative costs increased approximately $187,000 or 18.2% for the three month period ending March 31, 2013 as compared to the same period in 2012. Approximately $53,000 of this increase was related to the promotion and marketing of our J-Plasma products for expenses such as travel, commissions, shows and various other marketing costs. The medical supplies excise tax instituted by the Affordable Care Act amounted to approximately $87,000 and was not a cost during the same period in 2012. Other selling and marketing costs which were attributable to the distribution side of our business also increased by approximately $39,000 for such expenses as commissions, travel, and show costs. We also experienced increases in our computer related expenses of approximately $25,000 due to increased software needs. In an effort to become Dash 3 compliant, our regulatory testing increased by approximately $11,000. Lastly, our general liability insurance increased by approximately $13,000.

In addition we did have reductions in expenses of approximately $25,000 in advertising and $16,000 in amortization expense.

Other Income (expense)

                                                                                                              Percent
                                     Three months ended March 31,             Percentage of sales              change
(in thousands)                        2013                  2012             2013              2012

Interest income (expense), net    $         (55 )       $         (58 )         (1.0 ) %          (0.9 ) %         (5.4 ) %
Change in fair value of
liabilities, net                  $         (34 )       $         (17 )         (0.6 ) %          (0.3 ) %        100.0 %

As a result of the change in fair value of the warrants associated with the equity issuance in April of 2010, we recorded a non-cash loss of approximately $34,000 for the three months ended March 31, 2013 verses a non-cash loss of approximately $17,000 for the three month period ended March 31, 2012, representing a change of approximately $17,000. The derivative warrant liability was valued at approximately $85,000 at December 31, 2012 and was valued at approximately $119,000 at March 31, 2013.

Income Taxes

                                                                                                               Percent
(in thousands)                           Three months ended March 31,             Percent of sales             change
                                           2013                2012             2013           2012
Income before income taxes             $        (754 )       $       321          (12.6 ) %         4.8 %        (335.3 ) %
Benefit (provision) for income taxes   $         345         $      (134 )          6.1 %          (2.0 ) %      (358.0 ) %
Effective tax rate                             (45.8 %)             41.7 %

While we are subject to U.S. federal income tax as well as income tax of certain state jurisdictions, during the three months ended March 31, 2013, our current provisions were zero because the net effect of our permanent and temporary differences resulted in us recognizing losses for tax purposes. At March 31, 2013, we have remaining net operating loss carry-forwards of approximately $4.6 million to reduce any future taxable income earned in various years through the tax year 2030. Our effective tax rate of (45.8%) for the three months ended March 31, 2013 was different than the statutory tax rates primarily because we recognized certain temporary and permanent adjustments for financial statement purposes.


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Net Income

                      Three months
                          ended                                     Percent
                        March 31,           Percent of sales         change

(in thousands) 2013 2012 2013 2012 Net income (loss) $ (409 ) $ 187 (6.6 ) % 2.8 % (318.8 ) %

Product Development

We have developed most of our products and product improvements internally. Funds for this development have come primarily from our internal cash flow and equity issuances. We maintain close working relationships with physicians and medical personnel in hospitals and universities who assist in product research and development. New and improved products play a critical role in our sales growth. We continue to emphasize the development of proprietary products and product improvements to complement and expand our existing product lines. We have a centralized research and development focus in Florida for new product development and product improvements. Our research, development and engineering units at the manufacturing locations maintain relationships with distribution locations and customers to provide an understanding of changes in the market and product needs. During the first three months of 2013, we continued to invest in expanding our J-Plasma product line and technology, ICON VS™ and the accompanying vessel sealing technology, and Aaron™ 1450. We intend to pay the ongoing costs for this development from operating cash flows.

At this time, we do not contemplate any material purchase or acquisition of assets during the next twelve months that our ordinary cash flow and/or credit line would be unable to sustain.

Reliance on Collaborative, Manufacturing and Selling Arrangements

We depend on certain contractual OEM customers for product development. In these situations, we plan to manufacture the products developed. The customer has no legal obligation, however, to purchase the developed products. If the collaborative customer fails to give us purchase orders for the product after development, our future business and value of related assets could be negatively affected. Furthermore, we can give no assurance that a collaborative customer may give sufficient high priority to our products. In addition, disagreements or disputes may arise between us and our contractual customers, which could adversely affect production of our products. We also have two collaborative arrangements with foreign suppliers, one informal and one contractual, in which we request the development of certain items and components, and we purchase them pursuant to purchase orders. Our purchase orders are never longer than one year and are supported by orders from our customers. We have a manufacturing agreement with our Bulgarian supplier, which as of March 1, 2012, may result in certain contingent liabilities on our part if we terminate our arrangement prior to July 1, 2014 (see Note 10).

Liquidity and Capital Resources

Our working capital at March 31, 2013 decreased by approximately $0.8 million to $13.2 million compared to approximately $14.0 million at December 31, 2012. This decrease was mainly the result of an increase in inventory, prepaids, and fixed asset purchases coupled with a decrease in receivables and increases in payables and accruals. Accounts receivable days of sales outstanding were 29.5 days and 40.2 days at March 31, 2013 and 2012, respectively. The number of days worth of sales in inventory, which is the total inventory available for production divided by the 12 month average cost of materials, increased 93 days to 311 days equating to an inventory turn ratio of 1.3 at March 31, 2013 from 218 days and an inventory turn ratio of 1.4 at December 31, 2012. The higher number of days worth of sales is mainly due to increased inventory purchases related to our new J-plasma line of products during the three month period ended March 31, 2013.


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We used cash in operations of approximately $0.3 million for the three months ended March 31, 2013, compared to cash used in operations of approximately $0.5 million for the same period in 2012, a decrease of cash used of approximately $0.2 million.

During the three month period ended March 31, 2013, we used approximately $131,000 for the purchase of property and equipment as compared to purchases amounting to approximately $243,000 for the same period in 2012.

We used cash in financing activities of approximately $16,000 during the first three months of 2013, a decrease of cash used of approximately $16,000 as compared with the same period in 2012. The decrease in cash used resulted primarily from our receipt of funds from individuals related to the exercise of stock options during the three months ended March 31, 2013.

We currently have approximately $3.4 million outstanding under industrial revenue bonds which we previously used for the purchase and renovation of our Clearwater, Florida facility. These bonds were refinanced in October 2011 through PNC Bank, N.A. The bonds, which are being amortized over a 20-year term, balloon in November 2018 and bear interest at a fixed interest rate of 5.6%. Scheduled maturities of this indebtedness are approximately $103,000, $146,000, $154,000, $163,000 and $172,000 for 2013, 2014, 2015, 2016 and 2017, respectively and approximately $2.6 million thereafter.

We had approximately $3.8 million in cash and cash equivalents at March 31, 2013. We believe our cash on hand, as well as anticipated cash flows from operations, will be sufficient to meet our operating cash commitments for the next twelve months. Should additional funds be required, we maintain a revolving line of credit with PNC Bank (See below).

We are continuing to make substantial investments in the development and marketing of our J-Plasma™ technology, which may adversely affect our profitability and cash flow in the next 12 to 24 months. While we believe that these investments may generate additional revenues and profits in the future, there can be no assurance that J-Plasma will be successful or that such future revenues and profitability will be realized. Since June 2010 through March 31, 2013, we have invested approximately $1.7 million in the development and marketing of our J-Plasma™ technology.

On April 18, 2013, we entered into an amendment to our revolving line of credit with PNC Bank which is effective as of March 31, 2013. Pursuant to the amendment we have a $4 million secured revolving line of credit facility with PNC Bank, which at March 31, 2013 had a zero balance. Advances under the $4 million line of credit are due on demand and bear interest at a rate of daily LIBOR plus 2.25% and are secured by a perfected first security interest in our inventory and accounts receivable.

Subsequent available borrowings for this credit facility is subject to a borrowing base utilizing a percentage of eligible receivables, inventories, and any assigned cash along with certain financial ratios. Pursuant to the terms of the Amendment to Credit Documents, we are required, among other things, to maintain a minimum Adjusted EBITDA in at least the following amounts, for the following periods: (a) ($525,000) for the three months including March 31, 2013;
(b) ($1,100,000) for the six months ending June 30, 2012; (c) ($1,400,000) for the nine months ended September 30, 2013; and (d) ($1,400,000) for the twelve months ended December 31, 2013. We must also maintain a Fixed Charge Coverage Ratio of at least the following at the end of the following periods: (i) 1.25:1.0 for the three months ended March 31, 2014; (ii) 1.25:1.0 for the six months ended June 30, 2014; (iii) 1.25:1.0 for the nine months ended September 30, 2014; and (iv) 1.25:1.0 for the twelve months ended December 31, 2014 and for the last twelve months ending as of the end of each fiscal quarter thereafter.

In addition, we terminated a separate credit facility we had with PNC Bank which allowed us to finance up to $1 million in new equipment purchases.

At March 31, 2013, we were in full compliance with the amended loan covenants and ratios for the line of credit facility. According to our most recent borrowing base calculation, we had approximately $3.1 million total availability under the $4 million credit line, under which we currently have a zero balance.


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Our future contractual obligations for agreements with initial terms greater than one year and agreements to purchase materials in the normal course of business are summarized as follows (in thousands):

. . .
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