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

Show all filings for BOVIE MEDICAL CORP

Form 10-Q for BOVIE MEDICAL CORP


14-Nov-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 the design, manufacture and sale 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, 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 17.8% of total revenues for the first nine months of 2013, as compared with 18.8% for the first nine 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 $970,000 during the first nine months of 2013 and have invested approximately $2.6 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 third 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, and as a result we currently do not have any new OEM agreements. 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 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 nine months of 2013 the new medical device tax reduced our cash balance and increased our selling, general and administrative expenses by approximately $284,000 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 while we are expanding the launch of our J-Plasma® technology. However, it is necessary that we diligently continue our defenses.


Results of Operations - Three and Nine Months Ended September 30, 2013 Compared to Three and Nine Months Ended September 30, 2012

Sales

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

 Electrosurgical         $    3,110      $ 4,149       (25.0) %   $   9,753     $ 13,417       (27.3) %
 Cauteries                    1,884        1,878          0.3 %       5,218        5,181          0.7 %
 Other                          800          644         24.2 %       2,561        2,245         14.1 %

 Total                   $    5,794      $ 6,671       (13.1) %   $  17,532     $ 20,843       (15.9) %

Sales by Domestic and
International              Three months ended                          Nine months ended
(in thousands)                September 30,            Percent           September 30,            Percent
                           2013           2012         change          2013          2012         change
Domestic                $    4,950      $   5,308         (6.7) %   $   14,358     $  16,865        (14.9) %
International                  844          1,363        (38.1) %        3,174         3,978        (20.2) %

Total                   $    5,794      $   6,671        (13.1) %   $   17,532     $  20,843        (15.9) %

During the three months ended September 30, 2013, we experienced an overall decline in sales of approximately 13% when compared to the same three month period ended in 2012. This decrease in sales was primarily driven by a decrease in sales related to electrosurgical products, currently our primary product line. Our OEM customers, both domestic and international combined, reduced their purchases of generators from us by approximately $1.2 million, however, this was offset by $0.2 million increase in electrodes when compared to the same period in 2012. Cautery sales remained relatively the same for the three month period ended September 30, 2013 and 2012. Other product sales increased 24.2% or approximately $156,000, mainly from increased demand for our third party lighting systems and additional sales of approximately $12,000 in our new J-Plasma™ product Line which we began selling in 2013.

Total sales during the nine months ended September 30, 2013 decreased approximately $3.3 million or 15.9% compared to the same period in 2012. This decline was mainly attributable to generator sales in our electrosurgical product line which decreased approximately $3.8 million or 36.1% due to reduced orders from our OEM customers. Cautery sales increased slightly by approximately $37,000 or 0.7%, and we continued to see a strong demand for our third party lighting systems, amounting to an increase of approximately $445,000 over the same period in 2012. Although we had additional new sales of our J-Plasma™ product line which we released during this year of approximately $28,000, we did experience decreases in various other products amounting to approximately $157,000.

Our ten largest customers accounted for approximately 60.8% of net revenues for the nine months ended September 30, 2013 and 66% for the same period in 2012. At September 30, 2013 and 2012, our ten largest customer's trade receivables accounted for approximately 53% and 62% of our net receivables, respectively. During the first nine months of 2013, our three largest customers accounted for approximately 11.8%, 11.7%, and 10.5% of sales. During the first nine months of 2012, our two largest customers only accounted for greater than 10% of sales at approximately 11.3% and 11% in total sales.


Gross Profit

                         Three months ended                                                        Nine months ended
(in thousands)              September 30,              Percent of sales         Percent              September 30,             Percent of sales         Percent
                       2013              2012          2013          2012       change           2013            2012          2013          2012       change
Cost of sales        $   3,545         $   3,777          61.2 %      56.6 %        (6.2 ) %   $  10,902       $  12,297          62.2 %      59.0 %       (11.3 ) %

Gross profit         $   2,249         $   2,894          38.8 %      43.4 %       (22.3 ) %   $   6,630       $   8,546          37.8 %      41.0 %       (22.4 ) %

Gross profit decreased as a percentage of sales by approximately 4.6% for the three month period ending September 30, 2013 and by approximately 3.2% for the nine month period ending September 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 decreasing by approximately $50,000 for the quarter and increasing approximately $23,000 for the nine month period, however we did experience a reduction in material cost of approximately 0.4% and 1.7% as a percentage of sales for the three month and nine month periods respectively.

Research and Development Expense

Three months ended September Nine months ended September (in thousands) 30, Percent of sales Percent 30, Percent of sales Percent 2013 2012 2013 2012 change 2013 2012 2013 2012 change R & D Expense $ 291 $ 322 5.0 % 4.8 % (9.5 ) % $ 938 $ 969 5.4 % 4.7 % (3.2 ) %

Research and development costs decreased by approximately $31,000 or 9.5% for the three month period ending September 30, 2013 compared to the same period in 2012. During the third 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 nine months ended September 30, 2013, our research and development costs decreased by approximately $31,000 or 3.2% compared to the same period in 2012. We incurred increased consulting costs, but we were able to reduce payroll and materials costs which resulted in an overall decrease to our research and development costs.

Professional Services

                        Three months ended September                                                Nine months ended September
(in thousands)                       30,                     Percent of sales         Percent                   30,                    Percent of sales         Percent
                          2013                2012          2013          2012         change         2013              2012          2013          2012         change
Professional services   $     512           $     408          8.8 %         6.1 %         25.4 %   $   1,348         $   1,061          7.7 %         5.1 %         27.0 %

Our professional fees increased by approximately $104,000 during the three months ended September 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 $4,000 in compensation expense related to consultants however these were offset by and an decrease of approximately $9,000 in accounting and auditing fees and an approximate $5,000 decrease in consulting fees.


Our professional services costs for the nine months ended September 30, 2013 increased by approximately $287,000 mainly due to increased legal fees related to existing lawsuits when compared to the same nine month period in 2012.

Salaries

                    Three months ended September                                                 Nine months ended September
(in thousands)                   30,                    Percent of sales         Percent                     30,                   Percent of sales
                      2013                2012          2013          2012        change           2013              2012          2013          2012       Percent change
Salaries &

related cost $ 751 $ 781 13.0 % 11.7 % (3.8 ) % $ 2,376 $ 2,352 13.6 % 11.3 % 1.0 %

During the three months ended September 30, 2013, our salary and related costs decreased 3.8% or approximately $30,000 when compared to the same period in 2012. The decrease is mainly due to a reduction of a marketing position in the quarter which was filled in the same period in 2012.

We experienced a 1.0% increase in salaries and related costs, or approximately $24,000, during the nine months ending September 30, 2013 as compared to the same period in 2012. The remaining difference is the net result of the addition of a plasma marketing position of approximately $25,000 along with salary costs in our IT department of approximately $30,000, offset by decreases of approximately $10,000, $5,000, and $16,000 in employee procurement costs, overtime payments and vacation accrual costs, respectively.

Selling, General & Administrative Expenses

Three months ended Nine months ended
(in thousands) September 30, Percent of sales September 30, Percent of sales Percent 2013 2012 2013 2012 Percent change 2013 2012 2013 2012 change SG & A costs $ 1,170 $ 1,101 20.2 % 16.5 % 6.3 % $ 3,717 $ 3,246 21.1 % 15.6 % 14.5 %

Selling, general and administrative costs increased approximately $69,000 or 6.3% for the three month period ending September 30, 2013 as compared to the same period in 2012. Our sales and marketing related costs increased by approximately $55,000 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 $101,000 as this tax was not in effect during the same period in 2012. We experienced an increase in our general liability insurance of approximately $13,000. Additional increases in our general costs were approximately $5,000 in bank fees, approximately $28,000 in travel costs and $15,000 in show costs mainly to support J-Plasma™ products. However, we did have a reduction of approximately $49,000 shareholder related expenses due to the timing of the annual meeting and the cost of implementing XBRL in the prior year, a reduction of regulatory costs of approximately $13,000 and commissions decreased by approximately $86,000 mainly due to reduced sales.

For the nine months ending September 30, 2013, selling, general and administrative costs increased approximately $471,000 or 14.5% as compared to the same period in 2012. Our sales and marketing related costs increased by approximately $204,000 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 device excise tax instituted by the Affordable Care Act amounted to an increase of approximately $284,000 for the period 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 $79,000. Additional increases in our general costs amounted to approximately $69,000 which included increases in computer related expenses, regulatory testing related to our effort to become Dash 3 compliant, and various other overhead related costs. However, we did have reductions of approximately $26,000 in amortization expense, approximately $23,000 in shareholder related expenses due to the timing of the annual meeting and the cost of implementing XBRL in the prior year, approximately $68,000 reduction in commission expense due to reduced sales and approximately $48,000 in reduced advertising costs.


Legal award

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 recorded a liability of approximately $1.04 million, of which consisted of around $622,500 for severance, $225,000 for attorneys fees and costs, and $193,000 in additional compensation expense related to the reversal of the stock options.

Other Income

                         Three months ended                                                       Nine months ended
(in thousands)              September 30,             Percent of sales           Percent            September 30,            Percent of sales           Percent
                        2013            2012          2013          2012         change           2013           2012        2013          2012         change
Net interest
expense               $    (54 )     $      (58 )       (0.9 ) %     (0.9 ) %        (6.8 ) %   $    (171 )     $ (175 )       (1.0 ) %     (0.8 ) %        (2.3 ) %
Change in fair
value of
liabilities           $     13       $     (135 )       (0.2 ) %     (2.0 ) %      (109.6 ) %   $      17       $ (108 )        0.1 %       (0.5 )        (115.6 ) %

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 $13,000 for the three months ended September 30, 2013 compared to a non-cash loss of approximately $135,000 for the same three month period in 2012, resulting in a change of approximately $148,000.

During the nine month period ended September 30, 2013 we recorded a non-cash gain of approximately $17,000 compared to a non-cash loss of approximately $108,000 for the same nine month period ended in 2012 related to the change in fair value of the warrants.

The derivative warrant liability was valued at approximately $85,000 at December 31, 2012 and was valued at approximately $68,000 at September 30, 2013.

For the three and nine-month period ended September 30, 2013 as compared to the same period in 2012, net interest expense decreased approximately $4,000 mainly due to a declining principal balance.

Income Taxes

                          Three months ended
(in thousands)              September 30,              Percent of sales          Percent        Nine months ended September 30,        Percent of sales          Percent
                        2013             2012          2013          2012        change            2013                2012            2013          2012        change
Income before
income taxes          $   (516 )       $      89         (8.9 )%       1.3 %       (679.8 ) %   $   (2,944 )       $         635         (16.8 )%      3.0 %       (563.6 )%
Provision for
income taxes, net     $    175         $     (96 )        3.0 %       (1.4 )%      (282.3 ) %   $    1,074         $        (304 )         6.1 %      (1.5 )%      (453.3 )%
Effective tax rate        33.9 %           107.9 %                                                    36.5 %                47.9 %


While we are subject to U.S. federal income tax as well as income tax of certain state jurisdictions, during the three months ended September 30, 2012, our current provision was zero because the net effect of our permanent and temporary differences resulted in us recognizing a loss for tax purposes. However, for the three month period ended September 30, 2012, permanent differences related to fair value adjustments resulted in us recognizing a gain for tax purposes and our current provision was approximately $96,000. At September 30, 2013, we have remaining net operating loss carryforwards and other net deferred income tax assets of approximately $2.9 million to reduce future taxable income. Our effective tax rate of 47.9% for the nine months ended September 30, 2012 was greater than the statuatory tax rates primarily because we recognized certain losses from the fair value adjustments for financial statement purposes that are not expected to reverse (i.e. permanent differences).

Net Income

(in thousands)         Three months ended September 30,        Percent of sales             Percent      Nine months ended September 30,        Percent of sales           Percent
                         2013                   2012           2013          2012          change           2013                2012           2013           2012         change
Net income (loss)     $      (341 )         $         (7 )       (5.9 )%      (0.1 ) %      (4,771)% %   $   (1,870 )       $        331         (10.7 ) %      1.6 %         (665.0 ) %

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 . . .

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