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BVX > SEC Filings for BVX > Form 10-Q on 14-Aug-2013All Recent SEC Filings

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Form 10-Q for BOVIE MEDICAL CORP


14-Aug-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.

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 18.8% of total revenues for the first six months of 2013, as compared with 18.5% for the first six 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 $585,000 during the first six months of 2013 and have invested approximately $2.2 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

Second quarter sales were negatively impacted by the completion of two large multi-year OEM contracts in 2012, a new medical device tax imposed under the Affordable Care Act of 2010, legal costs of ongoing litigations and increased costs. 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 purchasing committee approval channels as this process is taking substantially longer than we initially anticipated. These delays, coupled with the substantial investments we have made in J-Plasma™, have had an adverse effect on our revenues and cash flow.

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 six months of 2013 the new medical device tax reduced our cash balance and increased our selling, general and administrative expenses by approximately $184,000 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 occurring at a disadvantageous time given the above mentioned challenges to our business and our attempts to expand the launch of our J-Plasma™ technology, however it is necessary that we diligently continue our defenses. During the three and six months ended June 30, 2013, we accrued $1.041 million of expense related to the jury verdict in favor of Mr. Keen. (See Legal Matter disclosed in Results of Operations)


Results of Operations -Three and Six Months Ended June 30, 2013 Compared to
Three and Six Months Ended June 30, 2012

Sales

                           Three months ended                             Six months ended
Sales by Product Line           June 30,               Percent                June 30,              Percent
(in thousands)             2013           2012          change           2013          2012          change

Electrosurgical         $    3,269      $   4,940          (33.8 ) %   $   6,669     $   9,302          (28.4 ) %
Cauteries                    1,738          1,698            2.4 %         3,334         3,303            1.0 %
Other                        1,035            802           29.1 %         1,735         1,567           10.7 %

Total                   $    6,042      $   7,440          (18.8 ) %   $  11,738     $  14,173          (17.2 ) %



                           Three months ended                             Six months ended
Sales by Domestic and           June 30,               Percent                June 30,              Percent
International (in
thousands)                 2013           2012          change           2013          2012          change

Domestic                $    4,886      $   5,935          (17.7 ) %   $   9,409     $  11,558          (18.6 ) %
International                1,156          1,505          (23.2 ) %       2,329         2,615          (10.9 ) %

Total                   $    6,042      $   7,440          (18.8 ) %   $  11,738     $  14,173          (17.2 ) %

During the three months ended June 30, 2013, sales of our cautery product line increased slightly at 2.4% or approximately $40,000, our other product line sales increased approximately $233,000 or 29.1% and we had a 33.8% decrease in sales in our electrosurgical line of products or approximately $1.7 million. We continue to see strong demand for our third party lighting systems, which is responsible for a substantial portion of the increase in our other product sales amounting to approximately $295,000 over the same period in 2012. The largest percentage and sales dollar decrease was in our electrosurgical product line which was mainly the result of an approximate $1.6 million decrease in generator orders from our OEM customers. Additional decreases in our other products category related to various different products amounting to approximately $73,000, offset by sales of approximately $11,000 in our new J-Plasma product line.

Sales during the six months ended June 30, 2013 decreased approximately $2.4 million or 17.2% compared to the same period in 2012. Sales in our electrosurgical products decreased approximately $2.6 million or 28.4% due mainly to a decrease in generator orders from our OEM customers. Cautery sales increased slightly by approximately $31,000 or 1.0%, and we continued to see a strong demand for our third party lighting systems, amounting to an increase of approximately $279,000 over the same period in 2012. Additional decreases in our other products category related to various different products amounting to approximately $127,000, offset by sales of approximately $16,000 in our new J-Plasma™ product line.


Gross Profit

                         Three months ended                                                    Six months ended
(in thousands)                June 30,                 Percent of sales       Percent              June 30,               Percent of sales         Percent
                       2013              2012         2013           2012      change         2013          2012         2013           2012        change

Cost of sales        $ 3,812         $   4,584         63.1 %        61.6 %     (16.8) %   $   7,357      $ 8,521         62.7 %        60.1 %       (13.7) %

Gross profit         $ 2,230         $   2,856         36.9 %        38.4 %     (21.9) %   $   4,381      $ 5,652         37.3 %        39.9 %       (22.5) %

Gross profit decreased as a percentage of sales by approximately 1.5% for the three month period ending June 30, 2013 and by approximately 2.6% for the six month period ending June 30, 2013 compared to the same respective periods in 2012. The decrease in our gross profit percentages for both of these periods in 2013 when compared to the same periods in 2012 was mainly due to lower overall sales coupled with our labor costs increasing by approximately 7.1%, however we did experience a reduction in material cost of approximately 2.6% as a percentage of sales.

Research and Development

Three months ended Six months ended
(in thousands) June 30, Percent of sales Percent June 30, Percent of sales Percent 2013 2012 2013 2012 change 2013 2012 2013 2012 change

R & D Expense $ 314 $ 349 5.2 % 4.7 % (10.0) % $ 647 $ 647 5.5 % 4.6 % 0.0 %

Research and development costs decreased by approximately $35,000 or 10.0% for the three month period ending June 30, 2013 compared to the same period in 2012. During the second quarter of 2013, although we continue to develop enhancements and complimentary items to our next generation of J-Plasma™ products for which we incurred increased consulting costs, we were able to reduce payroll and materials costs which resulted in an overall decrease to our research and development costs.

During the six months ended June 30, 2013, our research and development costs remained constant when compared to the same period in 2012, as increased consulting costs were offset by an equal reduction in payroll and materials cost.


Professional Fees

                     Three months ended                                                            Six months ended
(in thousands)            June 30,                 Percent of sales                                    June 30,               Percent of sales        Percent
                    2013            2012          2013          2012        Percent change        2013          2012         2013          2012       change

Professional
services          $     383       $     358          6.3 %         4.8 %                7.0 %   $    836       $   653          7.1 %         4.6 %        28.0  %

Our professional fees increased by approximately $25,000 during the three months ended June 30, 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, which has adversely affected our cash position. In addition, we had an increase of approximately $5,000 in compensation expense related to consultants and an increase of approximately $5,000 in accounting and auditing fees, however these were offset by an approximate $3,000 decrease in consulting fees.

Our professional services costs for the six months ended June 30, 2013 increased by approximately $183,000 mainly due to increased legal fees related to existing lawsuits when compared to the same six month period in 2012.

Salaries

                       Three months ended                                                   Six months ended
( in thousands)             June 30,                Percent of sales         Percent            June 30,              Percent of sales         Percent
                      2013            2012          2013          2012        change        2013         2012         2013          2012       change

Salaries &
related cost        $     806       $     788          13.3 %      10.6 %         2.2 %   $   1,624     $ 1,570          13.8 %      11.1 %         3.4 %

During the three months ended June 30, 2013, our salary and related costs increased 2.2% or approximately $18,000 when compared to the same period in 2012. The increase is due to a marketing position and an IT position and their related costs which were vacant in the second quarter of 2012 but both positions were filled later in 2012 resulting in the costs being present in the three month period ended June 30, 2013 but absent in the same period in 2012.

We experienced a 3.4% increase in salaries and related costs, or approximately $54,000, during the six months ending June 30, 2013 as compared to the same period in 2012. This increase was the net result of the addition of a plasma marketing position of approximately $43,000 along with salary costs in our IT department of approximately $34,000, which were offset by decreases of approximately $8,000, $5,000, and $11,000 in employee procurement costs, overtime payments and vacation accrual costs, respectively.

Selling, General & Administrative Expenses

Three months ended Six months ended
(in thousands) June 30, Percent of sales Percent June 30, Percent of sales Percent 2013 2012 2013 2012 change 2013 2012 2013 2012 change

SG & A costs $ 1,336 $ 1,121 22.1 % 15.1 % 19.2 % $ 2,548 $ 2,146 21.7 % 15.1 % 18.7 %


Selling, general and administrative costs increased approximately $215,000 or 19.2% for the three month period ending June 30, 2013 as compared to the same period in 2012. Our sales and marketing related costs increased by approximately $26,000 which included reductions on our distribution side of our business and increased costs diverted to the promotion and marketing of our J-Plasma™ products. The medical supplies excise tax instituted by the Affordable Care Act amounted to an increase of approximately $96,000 as this tax was not in effect during the same period in 2012. We experienced an increase in our general liability insurance of approximately $52,000. Additional increases in our general costs were approximately $21,000 in computer related expenses, approximately $8,000 in our regulatory testing related to our effort to become Dash 3 compliant, and approximately $22,000 in shareholder related expenses due to the timing of the annual meeting. However, we did have a reduction of approximately $10,000 in amortization expense.

For the six months ending June 30, 2013 selling, general and administrative costs increased approximately $402,000 or 18.7% as compared to the same period in 2012. Our sales and marketing related costs increased by approximately $81,000 which included reductions on our distribution side of our business and increased costs diverted to the promotion and marketing of our J-Plasma products. The medical supplies excise tax instituted by the Affordable Care Act amounted to an increase of approximately $184,000 as this tax was not in effect and absent during the same period in 2012. We experienced an increase in our general liability insurance of approximately $66,000. Additional increases in our general costs amounted to approximately $108,000 which included increases in computer related expenses, regulatory testing related to our effort to become Dash 3 compliant, shareholder related expenses, various other overhead related costs, and a reduction in recoveries of obsolesence. However, we did have reductions of approximately $26,000 in amortization expense and $11,000 in royalty fees paid.

Legal matter

In connection with the previously disclosed litigation pending in the United States District Court for the Middle District of Florida between the Company and Leonard Keen, the Company's former Vice President and General Counsel, on August 8, 2013, following a jury trial, the jury returned a verdict in favor of Mr. Keen awarding him $622,500 in severance. In addition, the jury determined that, Mr. Keen's previously issued 110,000 stock options should be reinstated and accelerated, and that the Company must indemnify Mr. Keen for any damages or costs he suffered in his capacity as an employee of Bovie pursuant to the terms of Mr. Keen's prior employment agreement with the Company. Lastly, Mr. Keen was awarded attorney's fees in an amount to be determined by the Court. The Company is presently reviewing its options as they pertain to the verdict.

Because the verdict was received prior to the issuance of this report on Form 10-Q, we have accrued a charge of approximately $1.041 million as of June 30, 2013.

Other Income (expense)

                        Three months ended                                                  Six months ended
                             June 30,                Percent of sales         Percent           June 30,               Percent of sales         Percent
(in thousands)         2013             2012        2013          2012        change       2013           2012        2013          2012        change

Interest income
(expense)            $ (60)         $    (58 )       (1.0) %      (0.8) %         3.4 % $   (116)       $ (116 )       (1.0) %      (0.8) %         0.0 %
Change in fair
value of
derivative
liabilities          $   37         $     44           0.6 %       0.6%        (15.9) % $       4       $   27           0.0 %       0.2%        (85.2) %

As a result of the change in fair value of the warrants associated with the equity issuance in April 2010, we recorded a non-cash gain of approximately $37,000 for the three months ended June 30, 2013 compared to a non-cash gain of approximately $44,000 for the same three month period in 2012, resulting in a change of approximately $7,000. The derivative warrant liability was valued at approximately $85,000 at December 31, 2012 and was valued at approximately $81,000 at June 30, 2013.

For the three and six-month period ended June 30, 2013 as compared to the same period in 2012, net interest expense remained unchanged.


Income Taxes

                        Three months ended                                                   Six months ended
                             June 30,               Percent of sales         Percent             June 30,              Percent of sales         Percent
(in thousands)           2013           2012        2013          2012        change          2013         2012        2012          2011        change

Income (loss)
before income taxes   $    (1,673 )    $  226         (27.7 )%      3.0 %      (839.4 )%   $   (2,427 )   $  547         (20.7 )%      3.9 %      (544.0 ) %
Benefit (provision)
for taxes             $       554      $  (74 )         9.2 %      (1.0 )%     (848.8 )%   $      898     $ (208 )         7.7 %      (1.5 )%     (532.8 ) %
Effective tax rate           33.2 %      32.2 %                                                  37.0 %     37.2 %

While we are subject to U.S. federal income tax as well as income tax of certain state jurisdictions, during the three month and six month periods ended June 30, 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 June 30, 2013, we have remaining net operating loss carry-forwards of approximately $6.7 million to reduce any future taxable income earned in various years through the tax year 2030. Our effective tax rate of (33.2%) for the three months ended June 30, 2013 was different than the statutory tax rates primarily because we recognized certain temporary and permanent adjustments for financial statement purposes.

Net Income

                        Three months ended                                                        Six months ended
(in thousands)               June 30,                Percent of sales         Percent              September 30,                Percent of sales         Percent

2013 2012 2013 2012 change 2013 2012 2013 2012 change

Net income (loss) $ (1,119) $ 152 (18.5) % 2.0 % (834.8) % $ (1,529) $ 339 (13.0) % 2.4 % (550.8) %

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 have historically played 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 our manufacturing location maintain relationships with distribution locations and customers to provide an understanding of changes in the market and product needs. During the first six months of 2013, we continued to invest in expanding and enhancing our J-Plasma™ product line and technology, ICON VS™ and the accompanying vessel sealing technology. 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 . . .

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