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BVX > SEC Filings for BVX > Form 10-Q on 15-May-2014All Recent SEC Filings

Show all filings for BOVIE MEDICAL CORP

Form 10-Q for BOVIE MEDICAL CORP


15-May-2014

Quarterly Report


ITEM 2. 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 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. Past performance is no guaranty of future results.

Executive Level Overview

Bovie Medical Corporation is a leading maker of medical devices and supplies as well as the developer of J-PlasmaŽ, a patented new plasma-based surgical product. J-PlasmaŽ utilizes a gas ionization process that produces a stable, focused beam of ionized gas that provides surgeons with greater precision, minimal invasiveness and an absence of conductive currents during surgery. Bovie Medical Corporation is also a leader in the manufacture of a range of electrosurgical products and technologies, marketed through both private labels and the Company's own well-respected brands (BovieŽ, AaronŽ, IDS™ and ICON™) to distributors worldwide. The Company also leverages its expertise through original equipment manufacturing (OEM) agreements with other medical device manufacturers.

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 approximately 17.0% of total revenues for the first three months of 2014, as compared with 20.6% for the first three months of 2013. 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 over 25 commission-based independent manufacturers' representatives to market these products. Our business is generally not seasonal in nature, but can fluctuate based upon our customers capital and inventory purchasing patterns. While international sales of the company have declined, we did see substantial growth in Latin America, as well as improvement in the Middle East and Africa. The company was negatively impacted in Europe, with some product being withdrawn from the market due to regulatory testing and other requirements. The company has received approval for compliant, new and improved 200 and 300 watt generators which will offset a portion of the withdrawn product losses.


J-Plasma is currently included within the other sales category. We are committed to and will continue to invest in the full commercialization of J-Plasma. During the first quarter of 2014 we invested an additional $265,000 which included the early stages of funding direct sales force, sales training development, surgeon training, marketing-related activities and continued R&D. As we accelerate our commercialization of J-Plasma these investments will increase throughout 2014. 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-PlasmaŽtechnology will produce any substantial revenue or return on investment.

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 -Three Months Ended March 31, 2014 Compared to Three

Months Ended March 31, 2013

Sales

                                         Three months ended
Sales by Product Line (in thousands)          March 31,             Percent
                                          2014         2013         change

Electrosurgical                        $    3,965      $ 3,400          16.6 %
Cauteries                                   1,551        1,596          (2.8 )%
Other                                         966          700          38.0 %

Total                                  $    6,482      $ 5,696          13.8 %



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

Domestic                                             $    5,381      $   4,523           19.0 %
International                                             1,101          1,173           (6.1 )%

Total                                                $    6,482      $   5,696           13.8 %

Sales for the three months ended March 31, 2014 increased 13.8% or approximately $786,000 over the same period in 2013. The increase in sales was mainly attributable to increased OEM generator and electrode sales of approximately $320,000 and $221,000 respectively. In addition, we had increased medical lighting sales, contractor development services and other various products of approximately $163,000 and $101,000 respectively. J-Plasma sales for the three month ended March 31, 2014 amounted to $31,000, an increase of approximately $26,000 over the same period in 2013. Offsetting the increase in sales was a 2.8% or approximately $45,000 decrease in cautery sales, most likely due to increased competition.

Our ten largest customers accounted for approximately 58.7% and 61.3% of net revenues for the three months ended March 31, 2014 and 2013 respectively. For the three months ended March 31, 2014, Arthrex, Inc. accounted for 10.1% of our sales, while for the same three month period ended in 2013, PSS World Medical accounted for 10.8% and McKesson Medical Surgical accounted for 10.6% of our sales.


Gross Profit

                    Three months ended
                         March 31,              Percentage of sales         Percent
(in thousands)       2014         2013           2014           2013        change

Cost of sales       $   3,726     $ 3,545           57.5 %        62.2 %         5.1 %

Gross profit        $   2,756     $ 2,151           42.5 %        37.8 %        28.2 %

Gross profit increased as a percentage of sales by approximately 4.7% for the period ending March 31, 2014 compared to the same period in 2013. The increase in our gross profit percentage was mainly due to higher sales and favorable product mix coupled with a decrease in our labor costs of approximately $184,000 due to reductions in quality and engineering positions in November 2013, or a 6.0% of our labor costs as a percentage of sales for the first three months of 2014 as compared to the same period in 2013. This cost reduction was offset by a 1.3% increase in manufactured overhead as a percentage of sales, which was mainly the result of an increase in our inventory reserve by approximately $53,000.

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.

Research and Development

                                      Three months ended
                                           March 31,                  Percentage of sales          Percent
(in thousands)                       2014             2013           2014             2013          change

Research and development costs    $      332       $      333            5.1 %            5.8 %        (0.3) %

Research and development costs remained relatively constant for the period ending March 31, 2014 compared to the same period in 2013. We have incurred increased consulting and other costs which have been offset by a reduction in labor costs as we continue to develop enhancements and complimentary items to our next generation of J-Plasma products, which at the current time is approximately 35% of our R&D expenses.

Professional Fees

                           Three months ended
                                March 31,                Percentage of sales        Percent
(in thousands)            2014            2013          2014            2013         change

Professional services   $     258       $     453           4.0 %           8.0 %     (43.1) %

Our professional fees decreased by approximately $195,000 during the three months ended March 31, 2014 compared to the same period in 2013, mainly attributable to decreased legal costs of approximately $166,000 as the majority of our ongoing litigation ended or had been settled during 2013. In addition, we had a decrease of approximately $11,000 in compensation expense related to consultants and a reduction in accounting and auditing fees of approximately $18,000.


Salaries and related costs

Three months ended March 31, Percentage of sales Percent (in thousands) 2014 2013 2014 2013 change

Salaries & related cost $ 907 $ 818 14.0 % 14.4 % 10.9 %

During the three months ended March 31, 2014 compared to the same period in 2013, salary costs increased by 10.9% or approximately $89,000. The increase was primarily the result of the additional salary expense related to our new CEO who started in December 2013. In addition, although we experienced a reduction in sales and marketing salary costs related to the elimination of a regional sales manager position in 2013, this was offset by an approximately equal increase in employee procurement costs associated with recruiting for additional staffing to support our growth strategy.

Selling, General & Administrative Expenses

Three months ended
March 31, Percentage of sales Percent
(in thousands) 2014 2013 2014 2013 change

SG & A costs $ 1,201 $ 1,212 18.5 % 21.3 % (0.9 )%

Selling, general and administrative costs decreased slightly by approximately $11,000 or 0.9% for the three month period ending March 31, 2014 as compared to the same period in 2013. This reduction was the result of several increases and decreases in various SG&A costs. Some of the approximate costs reductions we experienced were approximately $38,000 related to trade shows, $22,000 in advertising, $11,000 in travel, and $51,000 in other costs including rent. Some of the offsetting approximate cost increases were $26,000 in increased amortization, $33,000 in our general insurance, $25,000 in additional shareholder related expenses, $11,000 in commissions, $13,000 in Medical Device Excise Tax and $3,000 in bank related costs.

Other Income (expense)

                                      Three months ended
                                           March 31,                 Percentage of sales            Percent
(in thousands)                        2014            2013           2014             2013           change

Interest income (expense), net    $        (28 )    $     (55 )           (0.4 )%        (1.0 )%        (49.1 )%
Change in fair value of
derivative liabilities, net       $     (9,599 )    $     (34 )         (148.0 )%        (0.6 )%     28,132.4 %

Interest Expense

Net interest expense decreased by approximately $27,000 or 49.1% the three months ended March 31, 2014 as compared with the same period in 2013. The decrease in the net interest expense is a result of the debt refinancing which occurred March 20, 2014.


Change in Fair Value of Derivative Liabilities

On December 13, 2013, we entered into a securities purchase agreement pursuant to which we issued 3,500,000 shares of our newly designated Series A 6% Convertible Preferred Stock with a stated value of $2.00 per share (for an aggregate of $7 million) and 5,250,000 warrants to purchase our common stock, at an exercise price of $2.387 per share. We also issued 525,000 warrants to the placement agent. At December 13, 2013, the investor and placement agent warrants were valued at $4,383,750 and $438,375, respectively. The warrants are accounted for as derivative financial instruments at fair value and are re-valued each reporting period. At March 31, 2014, the investor and placement agent warrants were valued at $12,269,250 and $1,226,925, respectively, and we recognized an aggregate loss related to their change in value of $8,437,275.

In 2010, we issued warrants to investors and to our placement agent in connection with an equity offering. The warrants issued to the investors contain anti-dilution protection in the event we issue securities at a price lower than the exercise price of the warrants. As a result of the issuance of our Series A 6% Convertible Preferred Stock on December 13, 2013, the exercise price of the investor warrants issued in 2010 was reduced from $6.00 per share to $2.00 per share and the number of warrants was increased proportionately. The 2010 investor and placement agent warrants, which are accounted for as derivative financial instruments at fair value, were valued at $1,430,932 and $119,000 at March 31, 2014 and March 31, 2013, respectively, and we recognized a non-cash net loss for the period ended March 31, 2014 of $1,161,408 versus a non-cash loss of approximately $34,000 for the three month period ended March 31, 2013, representing a change of approximately $1,127,408.

On March 31, 2014, the Company entered into an agreement with an existing warrant holder from the April 2010 capital raise pursuant to which the Company repurchased warrants exercisable into 142,857 shares of Common Stock for an aggregate purchase price of $420,571.

Income Taxes

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, 2014, 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 March 31, 2014, permanent differences related to fair value adjustments resulted in us recognizing a gain for tax purposes and our current provision of approximately $38,000. At March 31, 2014, we have remaining net operating loss carryforwards and other net deferred income tax assets of approximately $8.4 million to reduce future taxable income. Our effective tax rate of (0.4%) for the three months ended March 31, 2014 differed from the statutory 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 loss

                                      Three months ended
                                          March 31,                  Percent of sales            Percent
(in thousands)                       2014            2013           2014           2013          change
Net loss                          $    (9,607 )    $    (409 )       (148.2 )%        (7.2 )%      2248.9 %
Accretion on convertible
preferred stock                   $      (204 )    $      --           (3.1 )%          --             --
Net loss attributable to common
shareholders                      $    (9,811 )    $    (409 )       (151.4 )%          --             --

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 2014, we continued to invest in expanding our J-Plasma product line and technology. We intend to pay the ongoing costs for this development from operating cash flows.


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. However, the customer generally has no legal obligation 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 may result in certain contingent liabilities on our part if we terminate our arrangement prior to July 1, 2014.

Liquidity and Capital Resources

Our working capital at March 31, 2014 remained relatively the same at approximately $17.0 million when compared to December 31, 2013. Accounts receivable days of sales outstanding were 37.3 days and 29.5 days at March 31, 2014 and 2013, respectively. The increase in receivable days was due to increased volume and timing. 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, decreased 44 days to 267 days equating to an inventory turn ratio of 1.2 at March 31, 2014 from 311 days and an inventory turn ratio of 1.3 at December 31, 2013. The lower number of days worth of sales is mainly due to decreased inventory resulting from the increase in sales of OEM generators and electrodes during the three month period ended March 31, 2014.

We used cash in operations of approximately $1.05 million for the three months ended March 31, 2014, compared to cash used in operations of approximately $0.3 million for the same period in 2013, an increase of cash used in operations of approximately $0.75 million.

During the three month period ended March 31, 2014, we used approximately $75,000 for the purchase of property and equipment as compared to purchases amounting to approximately $131,000 for the same period in 2013.

We used cash in financing activities of approximately $86,000 during the first three months of 2014, an increase of cash used of approximately $70,000 as compared with the same period in 2013. The decrease in cash used was primarily the result of our paying the Industrial Revenue Bonds in the amount of approximately $3.26 million, the redemption of warrants in the amount of approximately $421,000 offset by proceeds from our note payable with the Bank of Tampa for approximately $3.6 million during the three months ended March 31, 2014.

On March 20, 2014, the Company entered into a transaction with The Bank of Tampa, a Florida banking corporation ("Lender") wherein Lender extended to the Company a mortgage loan in the principal amount of $3,592,000 (the "Loan"). The obligations under the Loan are secured by a first mortgage and security interest in the Company's Clearwater, Florida facility as well as an assignment of the Company's accounts receivable. In addition, the Company pledged and interest in a certificate of deposit in the amount of $898,000 as additional collateral which declines on a pro rata basis as principal is paid. The initial maturity date of the Loan is March 20, 2017; however the Company has an option to extend the maturity date until March 20, 2022.

Borrowings under the Loan bear interest at LIBOR plus 3.5%, with a fixed monthly principal payment of $19,956.

The Loan documents contain customary financial covenants, including a covenant that the Company maintains a minimum liquidity of $750,000. Although there is no Debt Service Coverage Ratio (as defined in the Loan Agreement) for the initial term of the Loan, should the Company desire to extend the Loan beyond three years, the Company must maintain a Debt Service Coverage Ratio for each of the preceding four quarters of not less than 1.0 to 1.0. In the event the Loan is extended, the Debt Service Coverage Ratio must not be less than 1.2 to 1.0.


Simultaneously with the closing of the Loan, the Company redeemed those certain Industrial Revenue Bonds issued by the Pinellas County Industrial Development Authority and satisfied its obligations to its prior lender, PNC Bank, N.A ("PNC Bank"). In connection with the redemption of the Bonds, the Company paid PNC Bank $3,188,332 to satisfy its existing credit facility. In connection with the termination of the interest rates swap agreement with PNC Bank, the Company paid PNC Bank an additional $410,275.

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):

Description                                  Years Ending December 31,
                         2014        2015       2016       2017       2018       Thereafter
Operating leases        $    62     $   111     $ 114     $   117     $ 119     $         60
Employment agreements     1,523       1,411       284           -         -                -
Purchase commitments      3,099           -         -           -         -                -
Long-term debt              180         239       239       2,934         -                -
Total                   $ 4,864     $ 1,761     $ 637     $ 3,051     $ 119     $         60

We are continuing to make substantial investments in the development and marketing of our J-PlasmaŽtechnology, 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, 2014, we have invested approximately $3.1 million in the development and marketing of our J-PlasmaŽtechnology, of which $265,000 was invested in the first quarter of 2014.

Critical Accounting Estimates

In preparing the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"), we have adopted various accounting policies. Our most significant accounting policies are disclosed in Note 2 to the consolidated financial statements included in our report on Form 10-K/A for the year ended December 31, 2013, which we filed on March 31, 2014.

The preparation of the consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Our estimates and assumptions, including those related to inventories, intangible assets, property, plant and equipment, legal proceedings, research and development, warranty obligations, product liability, fair valued liabilities, sales returns and discounts, and income taxes are updated as appropriate, which in most cases is at least quarterly. We base our estimates on historical experience, or various assumptions that are believed to be reasonable under the circumstances and the results form the basis for making judgments about the reported values of assets, liabilities, revenues and expenses. Actual results may materially differ from these estimates.

Estimates are considered to be critical if they meet both of the following criteria: (1) the estimate requires assumptions about material matters that are uncertain at the time the accounting estimates are made, and (2) other materially different estimates could have been reasonably made or material changes in the estimates are reasonably likely to occur from period to period. Our critical accounting estimates include the following:

Inventory reserves

When necessary, we maintain reserves for excess and obsolete inventory resulting from the potential inability to sell our products at prices in excess of current carrying costs. The markets in which we operate are highly competitive, with new products and surgical procedures introduced on an ongoing basis. Such marketplace changes may cause our products to become obsolete. We make estimates regarding the future recoverability of the costs of these products and record a provision for excess and obsolete inventories based on historical experience, and expected future trends. If actual product life cycles, product demand or acceptance of new product introductions are less favorable than projected by management, additional inventory write-downs may be required, which would unfavorably affect future operating results.


Long-lived assets

We review long-lived assets which are held and used, including property and equipment and intangible assets, for impairment whenever changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Such evaluations compare the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset over its . . .

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