Apyx Medical Corp - Quarter Report: 2008 June (Form 10-Q)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
_____________
FORM
10-Q
_____________
(Mark
One)
|
T
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the Quarterly Period Ended June 30, 2008
OR
|
£
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the Period from ________ to ________
Commission file number
012183
BOVIE
MEDICAL CORPORATION
(Exact
name of registrant as specified in its charter)
|
Delaware
|
11-2644611
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|
(State
or other jurisdiction Of incorporation or organization)
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(IRS
Employer Identification No.)
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734
Walt Whitman Rd., Melville, New York 11747
(Address
of principal executive offices)
(631)
421-5452
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. YES T NO £
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company. See definitions of “accelerated filer and large accelerated filer” and
smaller reporting company in Rule 12b-2 of the Exchange Act. (check
one):
|
Large
Accelerated filer £
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Accelerated
filer £
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Non-accelerated
filer T
|
Smaller
reporting company £
|
Indicate
by check mark whether the registrant is a shell company (as defined in the Rule
12b-2 of the Exchange Act). YES £ NO T
The
number of shares of common stock, par value $0.001 per share, outstanding on
July 31, 2008 was 16,209,781.
1
BOVIE MEDICAL CORPORATION
INDEX
TO FORM 10-Q
FOR
THE QUARTER ENDED JUNE 30, 2008
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PART I. FINANCIAL INFORMATION
ITEM 1: CONSOLIDATED FINANCIAL STATEMENTS
BOVIE MEDICAL CORPORATION
CONSOLIDATED
BALANCE SHEETS
JUNE
30, 2008 AND DECEMBER 31, 2007
Assets
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(Unaudited)
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(Audited)
|
|||||||
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June 30,2008
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December 31, 2007
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|||||||
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Current
assets:
|
||||||||
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Cash
and cash equivalents
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$ | 3,778,330 | $ | 3,534,759 | ||||
|
Trade
accounts receivable, net of allowance for doubtful accounts of
approximately $8,645 and $8,734, respectively
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2,604,205 | 2,525,451 | ||||||
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Inventories
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4,938,995 | 4,521,992 | ||||||
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Prepaid
expenses
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675,481 | 278,262 | ||||||
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Deferred
income tax asset, net
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223,000 | 603,223 | ||||||
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Total
current assets
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12,220,011 | 11,463,687 | ||||||
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Property
and equipment, net
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3,599,191 | 3,421,455 | ||||||
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Other
assets:
|
||||||||
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Brand
name/trademark, net
|
1,509,662 | 1,509,662 | ||||||
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Purchased
technology, net
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3,559,381 | 2,102,844 | ||||||
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License
rights, net
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247,235 | 278,797 | ||||||
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Deposits
(including restricted cash of $50,000 at June 30, 2008)
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81,082 | 44,438 | ||||||
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Total
other assets
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5,397,360 | 3,935,741 | ||||||
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Total
Assets
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$ | 21,216,562 | $ | 18,820,883 | ||||
The
accompanying notes are an integral part of the consolidated financial
statements.
BOVIE
MEDICAL CORPORATION
CONSOLIDATED
BALANCE SHEETS
JUNE
30, 2008 AND DECEMBER 31, 2007
(CONTINUED)
Liabilities
and Stockholders' Equity
|
(Unaudited)
|
(Audited)
|
|||||||
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June 30, 2008
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December 31, 2007
|
|||||||
|
Current
liabilities:
|
||||||||
|
Accounts
payable
|
$ | 1,007,641 | $ | 807,437 | ||||
|
Accrued
payroll
|
116,729 | 113,308 | ||||||
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Accrued
vacation
|
273,655 | 229,591 | ||||||
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Current
portion due to Lican
|
50,000 | 50,000 | ||||||
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Customer
deposits
|
168 | 36,077 | ||||||
|
Deferred
revenue
|
40,462 | 56,386 | ||||||
|
Accrued
expenses and other liabilities
|
743,076 | 409,880 | ||||||
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Total
current liabilities
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2,231,731 | 1,702,679 | ||||||
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Deferred
income taxes payable, net
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38,000 | 8,188 | ||||||
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Due
to Lican, net of current portion
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318,150 | 318,150 | ||||||
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Total
liabilities
|
2,587,881 | 2,029,017 | ||||||
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Commitments
and Contingencies (Note 12)
|
||||||||
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Stockholders'
equity:
|
||||||||
|
Preferred
stock, par value $.001; 10,000,000 shares authorized; none issued and
outstanding
|
- | - | ||||||
|
Common
stock par value $.001; 40,000,000 shares authorized, 16,054,904 and
15,457,088 issued and outstanding on June 30, 2008 and December 31, 2007,
respectively
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16,055 | 15,457 | ||||||
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Additional
paid in capital
|
22,697,431 | 22,435,161 | ||||||
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Accumulated
deficit
|
(4,038,088 | ) | (5,658,752 | ) | ||||
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Other
accumulated comprehensive loss
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(46,717 | ) | - | |||||
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Total
stockholders' equity
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18,628,681 | 16,791,866 | ||||||
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Total
Liabilities and Stockholders' Equity
|
$ | 21,216,562 | $ | 18,820,883 | ||||
The
accompanying notes are an integral part of the consolidated financial
statements.
BOVIE MEDICAL CORPORATION
CONSOLIDATED
STATEMENTS OF OPERATIONS
FOR
THE THREE AND SIX MONTHS ENDED JUNE 30, 2008 AND 2007
(UNAUDITED)
|
Three
Months Ended June 30,
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Six
Months Ended June 30,
|
|||||||||||||||
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2008
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2007
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2008
|
2007
|
|||||||||||||
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Sales
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$ | 6,985,312 | $ | 7,439,380 | $ | 13,662,879 | $ | 14,142,243 | ||||||||
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Cost
of sales
|
4,084,859 | 4,401,413 | 8,176,501 | 8,599,192 | ||||||||||||
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Gross
profit
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2,900,453 | 3,037,967 | 5,486,378 | 5,543,051 | ||||||||||||
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Other
costs and expenses:
|
||||||||||||||||
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Research
and development
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584,444 | 435,851 | 942,144 | 816,593 | ||||||||||||
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Professional
services
|
159,224 | 199,355 | 322,356 | 389,847 | ||||||||||||
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Salaries
and related costs
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793,904 | 738,571 | 1,526,305 | 1,468,510 | ||||||||||||
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Selling,
general and administrative
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1,117,439 | 1,083,522 | 2,161,178 | 1,891,633 | ||||||||||||
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Total
costs and expenses
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2,655,011 | 2,457,299 | 4,951,983 | 4,566,583 | ||||||||||||
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Income
from operations
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245,442 | 580,668 | 534,395 | 976,468 | ||||||||||||
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Other
income, net:
|
||||||||||||||||
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Interest,
net
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8,946 | 33,649 | 30,673 | 72,236 | ||||||||||||
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Gain
on cancellation of agreement
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1,495,634 | - | 1,495,634 | - | ||||||||||||
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Total
other income, net
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1,504,580 | 33,649 | 1,526,307 | 72,236 | ||||||||||||
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Income
before income taxes
|
1,750,022 | 614,317 | 2,060,702 | 1,048,704 | ||||||||||||
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Benefit
(provision for income taxes)
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(319,802 | ) | 453,674 | (440,038 | ) | 599,473 | ||||||||||
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Net
income
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$ | 1,430,220 | $ | 1,067,991 | $ | 1,620,664 | $ | 1,648,177 | ||||||||
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Earnings
per share
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||||||||||||||||
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Basic
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$ | .09 | $ | .07 | $ | .10 | $ | .11 | ||||||||
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Diluted
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$ | .08 | $ | .06 | $ | .09 | $ | .09 | ||||||||
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Weighted
average number of shares outstanding
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16,002,841 | 15,346,673 | 15,962,852 | 15,317,816 | ||||||||||||
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Weighted
average number of shares outstanding adjusted for dilutive
securities
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17,803,069 | 17,752,431 | 17,708,156 | 17,781,383 | ||||||||||||
The
accompanying notes are an integral part of the consolidated financial
statements.
BOVIE MEDICAL CORPORATION
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR
THE YEAR ENDED DECEMBER 31, 2007 AND THE PERIOD
ENDED
JUNE 30, 2008 (UNAUDITED)
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Other
|
||||||||||||||||||||||||||||
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Additional
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Accumulated
|
|||||||||||||||||||||||||||
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Options
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Common
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Paid-in
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Accumulated
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Comprehensive
|
||||||||||||||||||||||||
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Outstanding
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Shares
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Par Value
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Capital
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Deficit
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Loss
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Total
|
||||||||||||||||||||||
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January
1, 2007
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3,263,700 | 15,223,538 | $ | 15,241 | $ | 22,104,399 | $ | (8,059,343 | ) | $ | -- | $ | 14,060,297 | |||||||||||||||
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Options
granted
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137,500 | -- | -- | -- | -- | -- | -- | |||||||||||||||||||||
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Options
exercised, net of stock swaps
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(225,300 | ) | 216,121 | 216 | 253,684 | -- | -- | 253,900 | ||||||||||||||||||||
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Options
forfeited
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(42,500 | ) | -- | -- | -- | -- | -- | -- | ||||||||||||||||||||
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Stock
based compensation
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-- | -- | -- | 72,089 | -- | -- | 72,089 | |||||||||||||||||||||
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Other
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-- | 17,429 | -- | 4,989 | -- | -- | 4,989 | |||||||||||||||||||||
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Income
for the year
|
-- | -- | -- | -- | 2,400,591 | -- | 2,400,591 | |||||||||||||||||||||
|
December
31, 2007
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3,133,400 | 15,457,088 | 15,457 | 22,435,161 | (5,658,752 | ) | -- | 16,791,866 | ||||||||||||||||||||
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Options
exercised, net of stock swaps
|
(678,050 | ) | 597,859 | 598 | 217,677 | -- | -- | 218,275 | ||||||||||||||||||||
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Options
granted at market price
|
50,000 | -- | -- | -- | -- | -- | -- | |||||||||||||||||||||
|
Stock
based compensation
|
-- | -- | -- | 44,593 | -- | -- | 44,593 | |||||||||||||||||||||
|
Options
forfeited
|
-- | -- | -- | -- | -- | -- | -- | |||||||||||||||||||||
|
Income
for the period
|
-- | -- | -- | -- | 1,620,664 | -- | 1,620,664 | |||||||||||||||||||||
|
Currency
translation adjustment
|
-- | -- | -- | -- | -- | (46,717 | ) | (46,717 | ) | |||||||||||||||||||
|
Comprehensive
income
|
-- | -- | -- | -- | -- | -- | 1,573,947 | |||||||||||||||||||||
|
June
30, 2008
|
2,505,350 | 16,054,947 | $ | 16,055 | $ | 22,697,431 | $ | (4,038,088 | ) | $ | (46,717 | ) | $ | 18,628,681 | ||||||||||||||
The
accompanying notes are an integral part of the consolidated financial
statements.
BOVIE MEDICAL CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE SIX MONTHS ENDED JUNE 30, 2008 AND 2007
(UNAUDITED)
|
2008
|
2007
|
|||||||
|
Cash
flows from operating activities:
|
||||||||
|
Net
income
|
$ | 1,620,664 | $ | 1,648,177 | ||||
|
Adjustments
to reconcile net income to net cash provided
by operating activities:
|
||||||||
|
Depreciation
and amortization of property and equipment
|
398,163 | 322,303 | ||||||
|
Amortization
of intangible assets
|
77,467 | 25,191 | ||||||
|
Provision
for (recovery of ) inventory obsolescence
|
(4,711 | ) | (60,784 | ) | ||||
|
Loss
on disposal of property and equipment
|
2,236 | -- | ||||||
|
Stock
based compensation
|
44,594 | 33,588 | ||||||
|
Non
cash re-class adjustment
|
10,324 | 4,989 | ||||||
|
Benefit
for deferred income taxes
|
410,035 | (629,473 | ) | |||||
|
Gain
on cancellation of agreement
|
(1,495,634 | ) | -- | |||||
|
Changes
in current assets and liabilities:
|
||||||||
|
Receivables
|
(78,754 | ) | 28,483 | |||||
|
Inventories
|
(412,290 | ) | (800,830 | ) | ||||
|
Prepaid
expenses
|
(357,069 | ) | 117,106 | |||||
|
Deposits
|
(36,644 | ) | -- | |||||
|
Accounts
payable
|
200,204 | 86,849 | ||||||
|
Accrued
expenses and other liabilities
|
380,678 | 88,355 | ||||||
|
Customer
deposits
|
(35,909 | ) | (40,271 | ) | ||||
|
Deferred
revenue
|
(15,924 | ) | (96,300 | ) | ||||
|
Net
cash provided by operating activities
|
707,430 | 727,383 | ||||||
|
Cash
flows from investing activities :
|
||||||||
|
Purchases
of property and equipment
|
(588,707 | ) | (541,917 | ) | ||||
|
Proceeds
from sale of assets
|
10,573 | (512,404 | ) | |||||
|
Purchased
technology
|
(57,283 | ) | (315,620 | ) | ||||
|
Net
cash used in investing activities
|
(635,417 | ) | (1,369,941 | ) | ||||
|
Cash
provided by financing activities -
|
||||||||
|
Common
shares issued
|
218,275 | 191,075 | ||||||
|
Effect
of exchange rate changes on cash and cash equivalents
|
(46,717 | ) | -- | |||||
|
Net
change in cash and cash equivalents
|
243,571 | (451,483 | ) | |||||
|
Cash
and cash equivalents, beginning of period
|
3,534,759 | 2,952,892 | ||||||
|
Cash
and cash equivalents, end of period
|
$ | 3,778,330 | $ | 2,501,409 | ||||
|
Cash
paid during the six months ended June 30, 2008 and 2007:
|
||||||||
|
Interest
|
$ | 948 | $ | 2,439 | ||||
|
Income
taxes
|
$ | 37,128 | $ | 25,344 | ||||
Supplemental disclosure of non-cash
investing and financing activities - During the six months ended June 30,
2007, purchased technology increased by $115,000 upon the acquisition of a
minority interest in a joint venture.
The
accompanying notes are an integral part of the consolidated financial
statements
BOVIE MEDICAL CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
NOTE
1. BASIS OF PRESENTATION AND CONSOLIDATION
The
accompanying condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America (U.S.) for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information necessary for a fair presentation of results of
operations, financial position, and cash flows in conformity with accounting
principles generally accepted in the U.S. In the opinion of
management, the condensed consolidated financial statements reflect all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation of the results of Bovie Medical Corporation and its
subsidiaries (collectively, the “Company” or “we”, “us”, “our”) for the periods
presented. Operating results for interim periods are not necessarily
indicative of results that may be expected for the fiscal year as a
whole.
The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make certain estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements. The reported
amounts of revenues and expenses during the reporting period may be affected by
the estimates and assumptions management is required to make. Estimates that are
critical to the accompanying consolidated financial statements relate
principally to the adequacy of our accounts receivable and inventory allowances
and the recoverability of long-lived assets. The markets for the
Company’s products are characterized by intense price competition, rapid
technological development, evolving standards and short product life cycles, all
of which could impact the future realization of its assets. Estimates and
assumptions are reviewed periodically and the effects of revisions are reflected
in the period that they are determined to be necessary. It is at least
reasonably possible that the Company’s estimates could change in the near term
with respect to these matters.
For
further information, refer to the consolidated financial statements and notes
thereto included in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2007. Certain prior year amounts may have been
reclassified to conform to the presentation used in 2008.
NOTE
2. INVENTORIES
Inventories
are stated at the lower of cost or market. Cost is determined
principally on the average cost method. Inventories at June 30, 2008
and December 31, 2007 were as follows:
|
June 30, 2008
|
December 31, 2007
|
|||||||
|
Raw
materials
|
$ | 2,860,658 | $ | 2,447,090 | ||||
|
Work
in process
|
1,243,706 | 1,230,172 | ||||||
|
Finished
goods
|
834,631 | 844,730 | ||||||
|
Total
|
$ | 4,938,995 | $ | 4,521,992 | ||||
NOTE
3. INTANGIBLE ASSETS
At June
30, 2008 and December 31, 2007 intangible assets consisted of the
following:
|
June 30, 2008
|
December 31, 2007
|
|||||||
|
Trade
name (life indefinite)
|
$ | 1,509,662 | $ | 1,509,662 | ||||
|
Purchased
technology (9-17 yr life)
|
$ | 3,940,617 | $ | 2,438,175 | ||||
|
Less: Accumulated
amortization
|
(381,236 | ) | (335,331 | ) | ||||
|
Net
carrying amount
|
$ | 3,559,381 | $ | 2,102,844 | ||||
|
(continued)
|
||||||||
|
License
rights (5 yr life)
|
$ | 315,619 | $ | 315,619 | ||||
|
Less
accumulated amortization
|
(68,384 | ) | (36,822 | ) | ||||
|
Net
carrying amount
|
$ | 247,235 | $ | 278,797 | ||||
NOTE
4. NEW ACCOUNTING PRONOUNCEMENTS
SFAS
No. 141 (revised 2007), “Business Combinations” (SFAS No. 141(R)
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” (SFAS No. 141(R)), which replaces SFAS No. 141, “Business
Combinations.” SFAS No. 141(R) retains the underlying concepts of SFAS No. 141
in that all business combinations are still required to be accounted for at fair
value under the acquisition method of accounting, but SFAS No. 141(R) changes
the method of applying the acquisition method in a number of significant
aspects. Acquisition costs will generally be expensed as incurred;
non-controlling interests will be valued at fair value at the acquisition date;
in-process research and development will be recorded at fair value as an
indefinite-lived intangible asset at the acquisition date; restructuring costs
associated with a business combination will generally be expensed subsequent to
the acquisition date; and changes in deferred tax asset valuation allowances and
income tax uncertainties after the acquisition date generally will affect income
tax expense. SFAS No. 141(R) is effective on a prospective basis for all
business combinations for which the acquisition date is on or after the
beginning of the first annual period subsequent to December 15, 2008, with an
exception related to the accounting for valuation allowances on deferred taxes
and acquired contingencies related to acquisitions completed before the
effective date. SFAS No. 141(R) amends SFAS No. 109 to require adjustments, made
after the effective date of this statement, to valuation allowances for acquired
deferred tax assets and income tax positions to be recognized as income tax
expense. The impact of our adoption of SFAS 141R will depend upon the nature and
terms of business combinations, if any, that we consummate on or after January
1, 2009.
SFAS
157 – Fair Value Measurement
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements (“FAS
157”). This standard defines fair value, establishes a framework and gives
guidance regarding the methods used for measuring fair value, and expands
disclosures about fair value measurements. This standard is effective for
financial statements issued for fiscal years beginning after November 15, 2007.
In February 2008, the FASB released a FASB Staff Position (FSP FAS 157-2—
Effective Date of FASB Statement No. 157) which delays the effective date of
SFAS No. 157 for all non-financial assets and non-financial liabilities, except
those that are recognized or disclosed at fair value in the financial statements
on a recurring basis (at least annually) to fiscal years beginning after
November 15, 2008. The partial adoption of SFAS No. 157 on January 1, 2008, for
financial assets and liabilities did not have a material impact on the Company’s
consolidated financial position or results of operations.
SFAS
158 – Employers’ Accounting for Defined Benefit Pension and Other Postretirement
Plans, an amendment of FASB Statement Nos. 87, 88, 106, and 132(R)
In
September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans, an amendment of FASB Statement
Nos. 87, 88, 106, and 132(R), or (“FAS 158”). This Statement requires an
employer that is a business entity and sponsors one or more single-employer
defined benefit plans to (a) recognize the funded status of a benefit
plan—measured as the difference between plan assets at fair value (with limited
exceptions) and the benefit obligation—in its statement of financial position;
(b) recognize, as a component of other comprehensive income, net of tax, the
gains or losses and prior service costs or credits that arise during the period
but are not recognized as components of net periodic benefit cost pursuant to
FAS 87, Employers’ Accounting for Pensions, or FAS 106, Employers’ Accounting
for Postretirement Benefits Other Than Pensions; (c) measure defined benefit
plan assets and obligations as of the date of the employer’s fiscal year-end
statement of financial position (with limited exceptions); and (d) disclose in
the notes to financial statements additional information about certain effects
on net periodic benefit cost for the next fiscal year that arise from delayed
recognition of the gains or losses, prior service costs or credits, and
transition assets or obligations. An employer with publicly traded
equity securities is required to initially recognize the funded status of a
defined benefit postretirement plan and to provide the required disclosures as
of the end of the fiscal year ending after December 15, 2006. Adoption of this
statement did not have a material effect on the Company’s consolidated financial
position or results of operations.
SFAS
159 – The Fair Value Option for Financial Assets and Financial
Liabilities—Including an amendment of FASB Statement No. 115
In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities - Including an amendment of FASB
Statement No. 115," which provides a fair value option election that permits
entities to irrevocably elect to measure certain financial assets and
liabilities (exceptions are specifically identified in the Statement) at fair
value as the initial and subsequent measurement attribute, with changes in fair
value recognized in earnings as they occur. SFAS No. 159 permits the fair value
option election on an instrument-by-instrument basis at initial recognition of
an asset or liability or upon an event that gives rise to a new basis of
accounting for that instrument. The adoption of SFAS No. 159 on
January 1, 2008, for financial assets and liabilities did not have a material
impact on the Company’s consolidated financial position or results of
operations.
SFAS
No. 160 - Non-controlling Interests in Consolidated Financial Statements, an
amendment of ARB No. 51
In
December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51” (“SFAS No. 160").
SFAS No. 160 will change the accounting and reporting for minority interests,
which will be recharacterized as non-controlling interests (NCI) and classified
as a component of equity. This new consolidation method will significantly
change the accounting for partial and/or step acquisitions. SFAS No. 160 will be
effective for the Company in the first quarter of fiscal year 2010. The Company
is currently evaluating the impact that the adoption of SFAS No. 160 will have,
but does not believe it will be material to the consolidated financial
statements.
SFAS
161 – Disclosures about Derivative Instruments and Hedging Activities — an
amendment of FASB Statement No. 133
In March
2008, the FASB issued Statement of Financial Accounting Standards No. 161,
Disclosures about Derivative Instruments and Hedging Activities — an amendment
of FASB Statement No. 133 (“FAS 161”). This Standard requires enhanced
disclosures regarding derivatives and hedging activities, including: (a) the
manner in which an entity uses derivative instruments; (b) the manner in which
derivative instruments and related hedged items are accounted for under
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities; and (c) the effect of derivative instruments
and related hedged items on an entity’s financial position, financial
performance, and cash flows. The Standard is effective for financial statements
issued for fiscal years and interim periods beginning after November 15, 2008.
As FAS 161 relates specifically to disclosures, the Standard will have no impact
on our consolidated financial position or results of operations.
EITF
Issue No. 07-3, Accounting for Nonrefundable Advance Payments for Goods or
Services Received to Be Used in Future Research and Development Activities”
(EITF No. 07-3)
In June
2007, the Emerging Issues Task Force (EITF) reached a consensus on EITF Issue
No. 07-3, “Accounting for Nonrefundable Advance Payments for Goods or Services
Received to Be Used in Future Research and Development Activities” (EITF No.
07-3). EITF No. 07-3 requires companies that are involved in research and
development activities to defer nonrefundable advance payments for future
research and development activities and to recognize those payments as goods and
services are delivered. The Company will be required to assess on an ongoing
basis whether or not the goods or services will be delivered and to expense the
nonrefundable advance payments immediately if it is determined that delivery is
unlikely. EITF No. 07-3 is effective for new arrangements entered into
subsequent to the beginning of the Company’s fiscal year 2009. The Company is
currently evaluating the impact that the adoption of EITF No. 07-3 will have,
but does not believe it will be material to the consolidated financial position
or results of operations.
FASB
Staff Position (“FSP”) FSP FAS 142-3, Determination of the Useful Life of
Intangible Assets or FSP FAS 142-3.
In April
2008, the FASB issued FSP FAS 142-3, Determination of the Useful Life of
Intangible Assets or FSP FAS 142-3. FSP FAS 142-3 amends the factors that should
be considered in developing renewal or extension assumptions used to determine
the useful life of a recognized intangible asset under SFAS No. 142, Goodwill
and Other Intangible Assets. The intent of the position is to improve the
consistency between the useful life of a recognized intangible asset under SFAS
No. 142 and the period of expected cash flows used to measure the fair value of
the intangible asset. FSP FAS 142-3 is effective for fiscal years beginning
after December 15, 2008. The
Company is currently evaluating the impact that the adoption of FSP FAS
142-3 will have, but does not believe it will be material to the
consolidated financial position or results of operations.
SFAS
No. 162 - The Hierarchy of Generally Accepted Accounting
Principles
In May
2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles or SFAS No. 162. SFAS No. 162 identifies the sources of
accounting principles and the framework for selecting the principles used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with GAAP. This statement shall be effective 60 days
following the Securities and Exchange Commission’s approval of the Public
Company Accounting Oversight Board amendments to AU Section 411, The Meaning of
Present Fairly in Conformity With Generally Accepted Accounting Principles. The
Company does not believe that implementation of this standard will have a
material impact on its consolidated financial position, results of operations or
cash flows.
FASB
Staff Position (“FSP”) Accounting Principles Board (“APB”) 14-1, Accounting for
Convertible Debt Instruments That May Be Settled in Cash upon Conversion
(Including Partial Cash Settlement)
In May
2008, the FASB issued FASB Staff Position (“FSP”) Accounting Principles Board
(“APB”) 14-1, “Accounting for Convertible Debt Instruments That May Be Settled
in Cash upon Conversion (Including Partial Cash Settlement).” FSP APB 14-1
applies to convertible debt instruments that, by their stated terms, may be
settled in cash (or other assets) upon conversion, including partial cash
settlement of the conversion option. FSP APB 14-1 requires bifurcation of the
instrument into a debt component that is initially recorded at fair value and an
equity component. The difference between the fair value of the debt component
and the initial proceeds from issuance of the instrument is recorded as a
component of equity. The liability component of the debt instrument is accreted
to par using the effective yield method; accretion is reported as a component of
interest expense. The equity component is not subsequently re-valued as long as
it continues to qualify for equity treatment. FSP APB 14-1 must be applied
retrospectively to previously issued cash-settleable convertible instruments as
well as prospectively to newly issued instruments. FSP APB 14-1 is effective for
fiscal years beginning after December 15, 2008, and interim periods within those
fiscal years. We are currently evaluating the impact of FSP APB 14-1 to our
consolidated financial statements.
FASB
Staff Position (“FSP”) No. EITF 03-6-1, Determining Whether Instruments Granted
in Share-Based Payment Transactions Are Participating Securities
In June
2008, the FASB issued FASB Staff Position (“FSP”) No. EITF 03-6-1, Determining
Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities. This FASB Staff Position (FSP) addresses whether
instruments granted in share-based payment transactions are participating
securities prior to vesting and, therefore, need to be included in the earnings
allocation in computing earnings per share (EPS) under the two-class method
described in paragraphs 60 and 61 of FASB Statement No. 128, Earnings per Share. Unvested
share-based payment awards that contain nonforfeitable rights to dividends or
dividend equivalents (whether paid or unpaid) are participating securities and
shall be included in the computation of EPS pursuant to the two-class method. At
this time, the Company does not believe FSP EITF 03-6-1 will have any impact on
our earnings per share calculations.
NOTE
5. STOCKHOLDERS’ EQUITY
During
the six month period ended June 30, 2008, we issued 597,859 common shares on the
exercise of employee and non-employee options. As consideration for
such issuances, we received 80,191 common shares in stock swaps and cash of
$218,275.
NOTE
6. EARNINGS PER SHARE
We
compute basic earnings per share (“basic EPS”) by dividing net income by the
weighted average number of common shares outstanding for the reporting
period. Diluted earnings per share (“Diluted EPS”) gives effect to
all potential dilutive shares outstanding (in our case, employee stock options)
during the period. There were 1,745,307 and 2,463,567 potentially
dilutive shares outstanding during the six month periods ended June 30, 2008 and
2007, respectively. The shares used in the calculation of Diluted EPS exclude
options to purchase shares where the exercise price was greater than the market
close price on June 30, 2008. Such shares aggregated 157,500 and
150,000 during the six months ended June 30, 2008 and 2007,
respectively.
NOTE
7. FOREIGN CURRENCY TRANSLATION
The
United States dollar is the functional currency of the Company’s operations in
the United States and in line with determining guidance outlined in FASB 52, has
also been determined to be the functional currency for the Company’s Canadian
subsidiary. FASB 52 provides for using the remeasurement method in translating
the foreign subsidiary’s financial statements into U.S.
dollars. Monetary assets and liabilities denominated in foreign
currency are translated at the current rate, while nonmonetary assets,
liabilities, and shareholder equity accounts are translated at the
appropriate historical rate. Revenue and expenses are translated at the
weighted-average exchange rate for the period. The calculated remeasurement gain
or loss adjustment is then recorded as either other accumulated comprehensive
income or loss in the shareholders’ equity section of the balance
sheet.
NOTE
8. STOCK-BASED COMPENSATION
Under the
Company’s stock option plan, options to purchase Common Shares may be granted to
key employees, officers and directors of the Company by the Board of Directors.
The Company accounts for stock options in accordance with SFAS Statement 123 (R)
with option expense amortized over the vesting period based on the binomial
lattice option-pricing model fair value on the grant date, which includes a
number of estimates that affect the amount of our expense. During the six months
ended June 30, 2008 the Company recorded a stock option expense in the amount of
$44,593. This amount was the net result from an increase in stock option expense
for the six month period in the amount of $64,634 less a recapture of previously
expensed costs in the amount of $20,040 related to stock options that were fully
vested prior to the adoption of SFAS Statement 123 (R). A summary of stock-based
award activities during the six months ended June 30, 2008 is presented
below:
|
Stock Options
|
||||
|
Outstanding
at January 1, 2008
|
3,133,400 | |||
|
Granted
at market price
|
50,000 | |||
|
Exercised
|
(678,050 | ) | ||
|
Forfeited/expired
|
-- | |||
|
Outstanding
at June 30, 2008
|
2,505,350 | |||
NOTE
9. INCOME TAXES
During
the six months ended June 30, 2008, the Company used its remaining net operating
loss carryforwards and research and development tax credits to completely offset
current income taxes that would otherwise be due (other than alternative minimum
taxes of approximately $30,000). As a result, future taxable income
(assuming no offset by future losses) will result in the Company paying income
taxes at statutory rates.
NOTE
10. SIGNIFICANT CURRENT QUARTER EVENTS
On April
29, we signed an agreement with Boston Scientific Corporation to acquire
technology, patents, and assets related to the use of conductive sintered steel
as an electrode for radio frequency (RF) cutting and coagulation, intended to
lower blood loss, quicken procedure times and provide cost savings for
hospitals. Potential fields of therapy for the technology acquired include
liver, pancreatic and kidney tumor therapies along with orthopedic and blood
vessel sealing. The process involves delivery of RF current and sterile saline
for resection, haemostatic sealing and coagulation in open and laparoscopic
surgery. The worldwide market size for the liver and orthopedic market is
expected to total $500 million in 2009.
The
original development and manufacturing agreement signed in 2007 required us to
develop and manufacture certain products using Boston Scientifics’ intellectual
property, with which we complied. Boston Scientific terminated the original
agreement and through the contract settlement negotiations we acquired the
rights to the intellectual property and equipment in consideration for releasing
Boston Scientific from any further obligations as outlined in the original
development and manufacturing agreement. We intend to finalize the development
and commercialization of the technology. A new agreement was signed in place of
the previous distribution and marketing agreement between the companies for the
technology’s use in Boston Scientifics’ oncology business. As part of this new
agreement, we granted a limited license to Boston Scientific until 2016 for uses
outside of our intended fields listed above. The estimated fair value of the
intellectual property and molds we acquired under this contract settlement
approximated $1,455,000 and $40,000,
respectively. The total of these amounts has been
reflected as other income, and included in purchased technology and prepaid
expenses, respectively in the accompanying consolidated financial
statements.
In June
2008, we committed ourselves to purchase a new facility in Largo, Florida for
$3,000,000. We have deposited $50,000 in escrow and anticipate that
we will complete the purchase in September 2008. We made the decision
to relocate in order to consolidate our operations under one roof and for
additional manufacturing space needed to accommodate the anticipated new product
lines currently under development as they near completion. In July 2008, the
Company applied for an Industrial Revenue Bond through Pinellas County, Florida
to use as financing for the purchase of the facility. We intend to sell our
facility located at 7100 30th Avenue
N., St. Petersburg, FL.
The lease
on one of the facilities that we currently occupy expires on October 31,
2013. Upon our relocation to our new facility (which we anticipate
will occur in the first quarter of 2009), we will be required to record an
expense and liability for the lesser of a lease termination fee we hope to
negotiate, or the fair value of the net remaining lease rentals (i.e. the
present value of future minimum lease payments of approximately $780,000 due
under the lease minus estimated sublease rentals we reasonably can expect to
receive). We may also incur an additional expense for the carrying value of
leasehold improvements (approximately $144,000 at June 30, 2008) related to the
facility we are abandoning.
NOTE
11. OTHER SIGNIFICANT SUBSEQUENT EVENT
The Company has secured a commitment
for a $5.0 million line of credit from RBC Centura Bank. This new
revolving line of credit will replace the prior $1.5 million unused credit line
with Bank of America.
NOTE
12. CONTINGENCY
A civil
action has been instituted by Erbe USA, Inc. (“Erbe”) in the US District Court
for the Northern District of Georgia, Atlanta Division, against Bovie and a
recently hired employee, seeking equitable relief and unspecified
damages. The complaint essentially alleges that the newly hired
employee, among other things, breached his employment agreement with Erbe USA,
Inc., (“Erbe”) by wrongfully taking Erbe’s confidential information and trade
secrets for use in his new employment with the assistance of
Bovie. Bovie denies the allegations and pursuant to a Consent and
Protective Order, the action has been stayed pending mutual discovery by the
parties. It is too early in the proceeding to determine the extent,
if any, of Bovie’s possible exposure in the lawsuit. As such, no
effect has been given herein to any loss that may result from the resolution of
this matter in the accompanying consolidated financial statements.
NOTE
13. RELATED PARTY TRANSACTION
During
the quarter ended June 30, 2008, we paid consulting fees of approximately
$21,000 to an entity owned by one of our directors.
End
of financial statements
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Executive
Level Overview
We are a
medical device company engaged in the 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 segment sells electrosurgical products which
include dessicators, 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.
Domestic
sales accounted for approximately 80% of total revenues in the first six months
of 2008 as compared to approximately 85% in the first six months of
2007. Most of the Company’s products are marketed through medical
distributors, which distribute to more than 6,000 hospitals, as well as doctors
and other health-care facilities. The Company’s products are sold in more than
150 countries through local distributors coordinated by our in-house sales and
marketing personnel at the St. Petersburg, Florida facility. We have no
manufacturing facilities or branch offices other than the Florida and Canadian
facilities.
Our ten
largest customers accounted for approximately 66% and 71% of net revenues for
the first six months of 2008 and 2007 respectively. At June 30, 2008
and 2007, our ten largest trade receivables accounted for approximately 79% and
71% of our net receivables, respectively. In the first six months of
2008 and 2007 one customer accounted for 14% and 19% of total sales,
respectively. In addition, for the first six months of 2007 a second customer
accounted for 11% of total sales.
Our
business is generally not seasonal in nature.
Outlook
We
continue to make significant investments in our company with the goal to be less
reliant on OEM contracts while increasing sales of our proprietary products,
evidenced by the milestones we have achieved during fiscal 2008:
|
§
|
CE
Mark for our Modular Ergonomic Instruments (MEG laparoscopic line)
allowing marketing and sales in
Europe.
|
|
§
|
Appointment
of a sales director for Europe and the Middle East for the MEG line and
other proprietary Bovie products.
|
|
§
|
510(k)
clearance to market MEG line in the United
States.
|
|
§
|
Initiated
marketing of the Canady Argon Plasma Coagulation probes
(APC).
|
|
§
|
Continued
progress on development of the Polarian vessel sealing instruments, with a
510(k) application submitted for the ICON GP generator to be used in
conjunction with Polarian.
|
|
§
|
Advances
in development of the SEER device, (acquired from Boston Scientific), for
initial uses in liver surgery procedures, and additional future
applications in other surgeries with significant market
potential.
|
These
investments in new products should position Bovie to operate in markets that
offer both attractive growth and high profit margins and should benefit our
shareholders over the long term.
Although,
revenues were negatively impacted in the first half of fiscal 2008 as a result
of a decline in OEM business, based on early indications, we expect this segment
of our business to show an improvement in the second half of 2008.
The
outlook is based on a number of assumptions, which are subject to change; some
of which are outside our control. A variation in our assumptions may
result in a change in this outlook.
Result
of Operations (to be read in conjunction with the consolidated statements of
operations)
The table
below outlines the components of the consolidated statements of operations as a
percentage of net sales and the year-to-year percentage change in dollar amounts
for the quarters ended June 30, 2008 and 2007:
|
2nd
Quarter
|
Percentage
Change
in
|
Six
Months
|
Percentage
Change
in
|
|||||||||||||||||||||
|
2008
|
2007
|
Dollar Amounts
|
2008
|
2007
|
Dollar Amounts
|
|||||||||||||||||||
|
%
|
%
|
%
|
%
|
%
|
%
|
|||||||||||||||||||
|
Sales
|
100.0 | 100.0 | (6.1 | ) | 100.0 | 100.0 | (3.4 | ) | ||||||||||||||||
|
Cost
of sales
|
58.5 | 59.2 | (7.2 | ) | 59.8 | 60.8 | (4.9 | ) | ||||||||||||||||
|
Gross
profit
|
41.5 | 40.8 | (4.5 | ) | 40.2 | 39.2 | (1.0 | ) | ||||||||||||||||
|
Other
costs:
|
||||||||||||||||||||||||
|
Research
& development
|
8.4 | 5.9 | 34.1 | 6.9 | 5.8 | 15.4 | ||||||||||||||||||
|
Professional
services
|
2.3 | 2.7 | (20.1 | ) | 2.4 | 2.8 | (17.3 | ) | ||||||||||||||||
|
Salaries
and related costs
|
11.3 | 9.9 | 7.5 | 11.2 | 10.4 | 3.9 | ||||||||||||||||||
|
Selling,
general and administrative
|
16.0 | 14.5 | 3.1 | 15.8 | 13.3 | 14.2 | ||||||||||||||||||
|
Total
other costs
|
38.0 | 33.0 | 8.0 | 36.3 | 32.3 | 8.4 | ||||||||||||||||||
|
Income
from operations
|
3.5 | 7.8 | (57.7 | ) | 3.9 | 6.9 | (45.3 | ) | ||||||||||||||||
|
Interest
income, net
|
0.1 | 0.5 | (73.4 | ) | 0.2 | 0.5 | (57.5 | ) | ||||||||||||||||
|
Other
Income
|
21.5 | 0.0 | 100.0 | 11.0 | 0.0 | 100.0 | ||||||||||||||||||
|
Income
before income tax
|
25.1 | 8.3 | 184.9 | 15.1 | 7.4 | 96.5 | ||||||||||||||||||
|
Benefit
(provision) for income taxes
|
(4.6 | ) | 6.1 | (170.5 | ) | (3.2 | ) | 4.2 | (173.4 | ) | ||||||||||||||
|
Net
income
|
20.5 | 14.4 | 33.9 | 11.9 | 11.6 | (1.7 | ) | |||||||||||||||||
Results
of Operations – Six months ended June 30, 2008 compared to six months ended June
30, 2007
The table
below sets forth domestic/international and product line sales information for
the first six months of 2008 and 2007:
|
%age
change
|
Increase/
|
|||||||||||||||
|
2008
|
2007
|
2008/2007
|
(Decrease)
|
|||||||||||||
|
Net
Sales (in thousands):
|
||||||||||||||||
|
Domestic
|
$ | 10,946 | $ | 12,036 | (9.0 | ) | $ | (1,090 | ) | |||||||
|
International
|
2,717 | 2,106 | 29.0 | 611 | ||||||||||||
|
Total
net sales
|
$ | 13,663 | $ | 14,142 | (3.0 | ) | $ | (479 | ) | |||||||
|
Product
line sales:
|
||||||||||||||||
|
Electrosurgical
|
$ | 9,341 | $ | 9,869 | (5.0 | ) | $ | (528 | ) | |||||||
|
Cauteries
|
3,141 | 3,050 | 3.0 | 91 | ||||||||||||
|
Other
|
1,181 | 1,223 | (3.0 | ) | (42 | ) | ||||||||||
|
Total
net sales
|
$ | 13,663 | $ | 14,142 | (3.0 | ) | $ | (479 | ) | |||||||
The
results of operations for the six months ended June 30, 2008 show a decrease in
sales as compared to the first six months of 2007. Sales of electrosurgical
products decreased by 5.0% or approximately $528,000 compared to the same six
month period of 2007 while sales of cauteries increased by 3.0% from $3.0
million to $3.1 million. Other sales decreased by 3.0% from $1.2
million to $1.1 million. This decrease was mainly the result of a decrease in
contracted development services revenue as OEM developed products went into
production. No sales of one particular electrosurgical product
dominated the number of units sold.
Arthrex
sales of generators and accessories decreased by approximately $850,000 or 31%
to $1.9 million for the six months ended June 30, 2008 from $2.8 million for the
six months ended June 30, 2007.
Domestic
sales were $11.0 million for six months ended June 30, 2008, representing a
decrease of 9.0% from the same period last year. The decrease was the
mainly the result of lower OEM generator sales. International sales were $2.7
million for the six months ended June 30, 2008, representing an increase of
29.0% over the same period in 2007.
Cost of
sales represented 59.8% of sales during the six months ended June 30, 2008 as
compared to 60.8% of sales during the same period in 2007, a total of $8.2
million and $8.6 million, respectively, a decrease of $0.4
million. The net decrease in cost of sales is the result of a 9%
decrease in direct material costs plus a 4% decrease in direct labor costs,
offset by a 12% increase in manufactured overhead. Manufactured overhead
increased in the first six months of 2008 by approximately $85,000 over the same
six month period in 2007 mainly due to increases in freight costs, depreciation
expense, and tooling costs associated with the production of new product
lines.
Research
and development expenses were 6.9% and 5.8% of sales for the six months ended
June 30, 2008 and 2007, respectively. These expenses increased 15.4%
in 2008 to approximately $942,000 over the corresponding period in 2007 which
amounted to approximately $816,600. This increase is largely due to costs
related to our Canadian facility preparing to launch the modular forceps
instrument (MEG), as well as continued development of our Polarian vessel
sealing technology. We received our CE mark for the MEG and commenced
production and sales in June 2008. We have also filed for and received 510K
clearance to market the MEG on July 24, 2008. In addition, in June of 2008 we
started production and sales of our new plasma probe.
Professional
services decreased from approximately $390,000 in the first six months of 2007
to approximately $322,000 in the first six months of 2008, a decrease of
approximately $67,000 or 17.3%. This decrease is mainly attributable
to a reduction in legal costs related both to manufacturing and development
contracts and patent related filings for the six months ended June 30, 2008
compared to the same period in 2007.
Salaries
and related costs increased in the first six months of 2008 by 3.9% to $1.53
million as compared to the first six months of 2007 at $1.47
million. The increase was mainly attributable to additional employees
needed to foster our growth in various areas coupled with annual salary
increases.
Selling,
general and administrative expenses increased in the first six months of 2008 by
14.2% to $2.2 million as compared to the first six months of 2007 at $1.9
million. This was mainly attributable to increased costs related to
establishing a sales and distribution channel in Europe to distribute our MEG
instruments and other future devices, sales commissions, increases in insurance
and regulatory costs, and an increase in amortization for intellectual property
recently placed in production.
We have
agreements with various sales representatives to develop markets for our new
products and to maintain customer relations. Our current
representatives receive an average commission of approximately 4% of sales in
their market areas. In the first six months of 2008 and 2007,
commissions paid approximated $371,000 and $277,000 respectively, an increase of
33.7%. The increase in sales commissions was a result of a difference
in product mix. We had more commission based sales in 2008 than in
2007, which also offset the reduction in sales to OEM customers.
Net
interest earned decreased by approximately $41,600 during the first six months
of 2008 when compared to the same period in 2007 primarily as a result of our
invested cash balances yielding lower interest rates.
For the
six months ended June 30, 2008 we realized other income in the amount of
approximately $1.5 million. The increase was the result of our acquiring
intellectual property from a contract settlement with Boston Scientific
Corporation.
Our
income tax provision for the six months ended June 30, 2008 was approximately
$440,000 as compared to a net tax benefit of approximately $599,000 during the
six months ended June 30, 2007. The significant benefit in 2007
resulted from the reversal of a valuation allowance that had reduced our net
deferred income tax asset at December 31, 2006. Our effective tax
rate was approximately 21.4% for the first six months of 2008, which differs
from statutory rates because we realized certain research and development tax
credit carryforwards that were fully reserved by a valuation allowance at
December 31, 2007. We estimate that our annual effective tax rate is
approximately 38.7% and we adjust our income tax provision for both temporary
and permanent differences between GAAP net taxable income and net taxable income
pursuant to the Internal Revenue Service Code and other state revenue agency
code.
Results
of Operations - Three months ended June 30, 2008 compared to three months ended
June 30, 2007
The table
below sets forth domestic/international and product line sales information for
the second quarter of 2008 and 2007:
|
%age
change
|
Increase/
|
|||||||||||||||
|
2008
|
2007
|
2008/2007
|
(Decrease)
|
|||||||||||||
|
Net
Sales (in thousands)
|
||||||||||||||||
|
Domestic
|
$ | 5,708 | $ | 6,330 | (9.0 | ) | (622 | ) | ||||||||
|
International
|
1,277 | 1,109 | 15.0 | 168 | ||||||||||||
|
Total
net sales
|
$ | 6,985 | $ | 7,439 | (6.0 | ) | (454 | ) | ||||||||
|
Product
line sales:
|
||||||||||||||||
|
Electrosurgical
|
$ | 4,807 | $ | 5,216 | (7.0 | ) | (409 | ) | ||||||||
|
Cauteries
|
1,606 | 1,588 | 1.0 | 18 | ||||||||||||
|
Other
|
572 | 635 | (9.0 | ) | (63 | ) | ||||||||||
|
Total
net sales
|
$ | 6,985 | $ | 7,439 | (6.0 | ) | (454 | ) | ||||||||
Sales for
the three month period ended June 30, 2008 were approximately $7.0 million as
compared to $7.4 million for the same period in 2007, a decrease of $0.4 million
or 6.0%. The decrease was mainly attributed to a decrease in OEM
sales offset by higher international sales.
Cost of
goods sold decreased from $4.4 million to $4.1 million a decrease of $0.3
million or 7.2% for the three month period ended June 30, 2008 as compared to
the same period in 2007.
Gross
profit, as a dollar amount, decreased $0.1 million or 3.4% from $3.0 million in
the second quarter 2007 to $2.9 million for the second quarter
2008.. The gross profit as a percentage of sales, however, increased
from 40.8% in 2007 to 41.5% in 2008. The reason for the increase was
mainly attributed to sales product mix. We had an increase in sales
of higher margin products as opposed to OEM sales which have a lower
gross margin.
Research
and development increased by approximately $148,500 or 34.1% from $435,900 to
$584,400 for the quarters ended June 30, 2007 and June 30, 2008,
respectively. The increase is due to costs for new products that were
under development as they approach completion (i.e. modular forceps instruments,
Plasma Probe and SEER device).
Professional
fees decreased by approximately $40,200 or 20.1% from $199,400 to $159,200 for
the quarters ended June 30, 2007 to June 30, 2008, respectively. This decrease
is mainly attributed to decreased legal costs in contract and patent related
fees.
Salaries
and related costs increased from approximately $739,000 to $794,000 for the
quarters ended June 30, 2007 to June 30, 2008, respectively, an increase of
approximately $55,000 or 7.5%. This increase was mainly attributable to the
addition of a new sales representative to foster sales growth in the plasma
probe and ICON GI product lines along
with additional quality department and engineering staff
to support new product lines.
Selling,
general and administrative expenses increased by approximately $33,000 or 3.1%
from $1,084,000 to $1,117,000 for the quarters ended June 30, 2007 to June 30,
2008, respectively. The increase was mainly attributable to costs in
establishing a sales and distribution channel in Europe, and higher sales
commissions, insurance, regulatory costs, and amortization.
Net
interest income decreased by approximately $24,700 or 73.4%, from $33,600 for
the quarter ended June 30, 2007 as compared to $8,950 for the quarter ended June
30, 2008. The decrease is a direct result from the investment of our
cash balances yielding lower interest rates.
Total
other costs went from approximately $2.5 million, for the three months ended
June 30, 2007 to $2.7 million for the same period in 2008, an increase of
approximately $0.2 million or 8.0%.
We
realized other income in the amount of approximately $1.5 million in the second
quarter 2008. The increase was the result of our acquiring intellectual property
and molds from a contract settlement with Boston Scientific
Corporation.
As a
result of the above, income before income taxes for the three months ended June
30, 2008 was $1,750,022 compared to $614,317 for the same three
months period in 2007.
Our
income tax provision for the three months ended June 30, 2008 was approximately
$320,000 as compared to a net tax benefit of approximately $454,000 during the
six months ended June 30, 2007. The significant benefit in 2007
resulted from the reversal of a valuation allowance that had reduced our net
deferred income tax asset at March 31, 2007. Our effective tax rate was
approximately 18.3% for the quarter, which differs from statutory rates because
we realized certain research and development tax credit carryforwards that were
fully reserved by a valuation allowance at March 31, 2008. We estimate that our
annual effective tax rate is approximately 38.7% and we adjust our income tax
provision for both temporary and permanent differences between GAAP net taxable
income and net taxable income pursuant to the Internal Revenue Service Code and
other state revenue agency code.
Marketing
and Sales
We sell
our products through distributors both overseas and in U.S.
markets. New distributors are contacted through responses to our
advertising in domestic and international medical journals and domestic or
international trade shows.
An
adequate supply of raw materials is available from both domestic and
international suppliers. The relationship between us and our
suppliers is generally limited to individual purchase order agreements,
supplemented by contractual arrangements with key vendors to ensure availability
of certain products. We have developed multiple sources of supply
where possible.
Product
Development
Most of
the Company’s products and product improvements have been developed internally.
Funds for this development have resulted primarily from internal cash flow and
the issuance of common stock upon the exercise of stock options. The Company
maintains 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 the Company’s sales growth. The
Company continues to place emphasis on the development of proprietary products
and product improvements to compliment and expand its existing product lines.
The Company has a centralized research and development focus, with its Florida
and Canadian manufacturing locations responsible for new product development and
product improvements. Our research, development and engineering units at the
manufacturing location maintain relationships with distribution locations and
customers in order to provide an understanding of changes in the market and
product needs. During 2007 and into 2008 we invested in the ICON GS (J-Plasma
technology), modular laparoscopic and Endoscopic instruments, and the
Gastrointestinal “GI” device and undertook development of Cardio and Urological
Electrosurgical devices for a contractual partner. The ongoing cost for this
development will be paid from operating cash flows.
In the
next year we do not contemplate any material purchase or acquisition of assets
that our ordinary cash flow and or credit line would be unable to
sustain.
Reliance
on Collaborative, Manufacturing and Selling Arrangements
We are
dependent on certain contractual OEM customers for product development, wherein
we are to provide the manufacturing of the product developed. However, the
customer has no legal obligation to purchase the developed products. Should the
collaborative customer fail to give us purchase orders for the product after
development, our future business and value of related assets could be negatively
affected. Furthermore, no assurance can be given that a collaborative customer
may give sufficient high priority to our products. In addition, disagreements or
disputes may arise between Bovie and its contractual customers, which could
adversely affect production of our products. We also have informal collaborative
arrangements with two foreign suppliers where in we request the development of
certain items and components and we purchase them pursuant to purchase orders.
Our purchase orders are never more than one year and are supported by orders
from our customers.
Liquidity
and Capital Resources
Our
working capital at June 30, 2008 and 2007 remained stable at approximately $10.0
million. Accounts receivable day sales outstanding were 37.9 days and 41.0 days
at June 30, 2008 and 2007 respectively.
We
generated cash from operations of approximately $0.7 million both for the six
months ended June 30, 2008 and 2007.
In the
first six months ended June 30, 2008 we used approximately $589,000 for the
purchase of property and equipment, and used approximately $57,000 on legal and
other fees to acquire purchased technology.
We had
approximately $3.8 million in cash and cash equivalents at June 30, 2008. We
believe our cash on hand, as well as anticipated cash flows from operations, and
the proceeds from a $3,500,000 industrial revenue bond we anticipate securing to
purchase certain real estate, will be sufficient to fund future
operating capital requirements, future manufacturing facility purchase and
construction, and other capital expenditures and future acquisitions to
supplement our current product offerings. Should additional funds be required,
the Company has secured a commitment for a $5.0 million line of credit from RBC
Centura Bank. This new revolving line of credit will replace the
prior $1.5 million unused credit line with Bank of America. As of
June 30, 2008 there were no outstanding balances on either of the line of
credits mentioned above.
At June
30, 2008, the Company has non-cancelable purchase commitments of approximately
$1,931,000 (exclusive of the aforementioned commitment to purchase certain real
estate). In addition, the Company’s future contractual obligations
for agreements with initial terms greater than one year, are summarized as
follows (in thousands):
|
Years ended
December 31,
|
||||||||||||||||||||
|
2009
|
2010
|
2011
|
2012
|
Thereafter
|
||||||||||||||||
|
Operating
leases
|
208 | 199 | 172 | 167 | 143 | |||||||||||||||
|
Employment
Agreement
|
1,022 | 799 | 858 | 72 | - | |||||||||||||||
Our
future results of operations and the other forward-looking statements contained
herein, particularly the statements regarding growth in the medical products
industry, capital spending, research and development, and marketing and general
and administrative expenses, involve a number of risks and uncertainties. In
addition to the factors discussed above, there are other factors that could
cause actual results to differ materially, such as business conditions and the
general economies, competitive factors including rival manufacturers’
availability of components at reasonable prices, risk of nonpayment of accounts
receivable, risks associated with foreign operations and litigation involving
intellectual property and consumer issues.
Critical
Accounting Estimates
We have
adopted various accounting policies to prepare+ the consolidated financial
statements in accordance with accounting principles generally accepted in the
United States of America (U.S. GAAP). Our most significant accounting policies
are disclosed in Note 1 to the consolidated financial statements.
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 bad debts, inventories,
intangible assets, property, plant and equipment, legal proceedings, research
and development, warranty obligations, product liability, 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:
Allowance for doubtful
accounts
We
maintain an allowance for doubtful accounts for estimated losses in the
collection of accounts receivable. We make estimates regarding the future
ability of our customers to make required payments based on historical credit
experience and expected future trends. If actual customer financial conditions
are less favorable than projected by management, additional accounts receivable
write-offs may be necessary, which could unfavorably affect future operating
results.
Inventory
Reserves
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 could unfavorably affect
future operating results.
Impairment of goodwill and
other long-lived assets
We review
long-lived assets which are held and used, including property and equipment and
purchased 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 expected useful life
and are significantly impacted by estimates of future prices and volumes for our
products, capital needs, economic trends and other factors which are inherently
difficult to forecast. If the asset is considered to be impaired, we record an
impairment charge equal to the amount by which the carrying value of the asset
exceeds its fair value determined by either a quoted market price, if any, or a
value determined by utilizing a discounted cash flow technique.
We test
our goodwill for impairment, at a minimum, annually. The
goodwill impairment test is a two-step process. The first step of the impairment
analysis compares the fair value of the goodwill to its carrying amount. In
determining fair value, the accounting guidance allows for the use of several
valuation methodologies, although it states quoted market prices are the best
evidence of fair value. If the fair value is less than the assets’ carrying
amount, we recognize an impairment loss equal to that excess
amount.
Income
Taxes
We
operate in multiple tax jurisdictions both inside and outside the United States.
Accordingly, management must determine the appropriate allocation of income to
each of these jurisdictions. Tax audits associated with the allocation of this
income and other complex issues may require an extended period of time to
resolve and may result in income tax adjustments if changes to the income
allocation are required between jurisdictions with different tax rates. Because
tax adjustments in certain jurisdictions can be significant, we record accruals
representing our best estimate of the probable resolution of these matters. To
the extent additional information becomes available, such accruals are adjusted
to reflect the revised estimated probable outcome.
Other
Matters
We
distribute our products throughout the world. As a result, our financial results
could be significantly affected by factors such as changes in foreign currency
exchange rates or weak economic conditions in foreign markets. Our operating
results are primarily exposed to changes in exchange rates among the United
States dollar and European currencies, in particular the euro and the British
pound. When the United States dollar weakens against foreign currencies, the
dollar value of sales denominated in foreign currencies increases. When the
United States dollar strengthens, the opposite situation occurs. We manufacture
our products in the United States, China, Canada and Bulgaria and incur the
costs to manufacture in US dollars. This worldwide deployment of factories
serves to partially mitigate the impact of the high costs of manufacturing in
the US.
ITEM 3. Quantitative and Qualitative
Disclosures About Market Risk
Interest
rate risk
Our
financial instruments include cash, cash equivalents and short-term investments.
We are exposed to interest rate risk on our short-term investments. The primary
objective of our investment activities is to preserve principal while at the
same time maximizing yields without significantly increasing risk. To achieve
this objective, we invest in highly liquid overnight money market investments.
To minimize our exposure due to adverse shifts in interest rates, we invest in
short-term overnight securities. If a 10% change in interest rates were to have
occurred on June 30, 2008, this change would not have had a material effect on
the fair value of our investment portfolio as of that date. Due to the short
holding period of our investments, we have concluded that we do not have a
material financial market risk exposure.
Foreign
Currency Risk
We
operate internationally and enter into transactions denominated in foreign
currencies. As such, our financial results are subject to the variability that
arises from exchange rate movements in relation to the U.S. dollar. Our foreign
currency exposures are minimal and are not a material financial risk and are
currently limited to the Canadian dollar and the Euro. We recorded a $46,717
loss to accumulated other comprehensive loss for the first six months of 2008 as
a result of changes in the relationship of the U.S. to the Canadian dollar using
the remeasurement method of translating the Canadian subsidiary’s financial
statements into U.S. dollars. Other foreign currency losses amounted to
$2,269.
To date,
we have not hedged our exposure to changes in foreign currency exchange rates,
and as a result, we are subject to foreign currency transaction and translation
gains and losses. We purchase goods and services in U.S. and Canadian dollars
and have recently begun to invoice certain product sales in Euros. Foreign
exchange risk is managed primarily by satisfying foreign denominated
expenditures with cash flows or assets denominated in the same
currency.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation
of disclosure controls and procedures
An
evaluation of the effectiveness of the design and operation of the Company’s
disclosure controls and procedures [as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)] as of June 30, 2008 was carried out under the supervision and
with the participation of the Company’s management, including the President and
Chief Executive Officer and the Chief Financial Officer (“the Certifying
Officers”). Based on that evaluation, the Certifying Officers
concluded that the Company’s disclosure controls and procedures are
effective.
Disclosure
controls and procedures are designed to ensure that information required to be
disclosed in our reports filed or submitted under the Securities Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the SEC’s rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed in our reports filed or submitted under the Securities
Exchange Act is accumulated and communicated to management, including our
President and Chief Financial Officer, as appropriate, to allow timely decisions
and timely reporting regarding required disclosure.
(b) Changes
in internal controls
There
were no changes to the Company’s internal control over financial reporting
during the quarter ended June 30, 2008 that materially affected, or are
reasonably likely to materially affect, the Company’s internal control over
financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
A civil
action has been instituted by Erbe USA, Inc. (“Erbe”) in the US District Court
for the Northern District of Georgia, Atlanta Division, against Bovie and a
recently hired employee, seeking equitable relief and damages. The
complaint essentially alleges that the newly hired employee, among other things,
breached his employment agreement with Erbe USA, Inc., (“Erbe”) by wrongfully
taking Erbe’s confidential information and trade secrets for use in his new
employment with the assistance of Bovie. Bovie denies the allegations
and pursuant to a Consent and Protective Order, the action has been stayed
pending mutual discovery by the parties. It is too early in the
proceeding to determine the extent, if any, of Bovie’s possible exposure in the
lawsuit.
ITEM 1A. RISK FACTORS
There
have been no material changes to the Risk Factors previously disclosed in our
Form 10K for the year ended December 31, 2007, in response to Item 1A to Part 1
of Form 10K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND
USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
None
ITEM 5. OTHER INFORMATION
(a) The
Company filed a Form 510-K application on the MEG Laparoscopic Devices on May
19, 2008. The Company received 510K clearance to market the MEG
Laparoscopic Devices on July 24, 2008.
The
Company filed a Form 510-K for the ICON GP generator on July 22,
2008.
(b) Since
our last proxy statement disseminated to our shareholders in connection with our
last annual meeting of shareholders held on October 30, 2007, there have been no
changes in the procedures by which our security holders or 5% holders may
recommend nominees to our Board of Directors.
ITEM 6. EXHIBITS
|
|
Certifications
of Andrew Makrides, President and Chief Executive Officer of Registrant
pursuant to Rule 13a-14 adopted under the Securities Exchange Act of 1934,
as amended, and Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
Certifications
of Gary D. Pickett, Chief Financial Officer of Registrant pursuant to Rule
13a-14 adopted under the Securities Exchange Act of 1934, as amended, and
Section 302 of the Sarbanes-Oxley act of
2002.
|
|
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
|
|
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
|
SIGNATURES:
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Bovie
Medical Corporation.
(Registrant)
Date: August
13, 2008
/s/Andrew
Makrides
Chief
Executive Officer - Andrew Makrides
/s/Gary D.
Pickett
Chief
Financial Officer- Gary D. Pickett
23