Apyx Medical Corp - Quarter Report: 2010 March (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 March 31, 2010
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 0-12183
BOVIE MEDICAL CORPORATION
(Exact name of registrant as specified in its charter)
|
Delaware
|
|
11-2644611
|
|
(State or other jurisdiction
|
|
(IRS Employer Identification No.)
|
|
of incorporation or organization)
|
|
|
734 Walt Whitman Rd., Melville, New York 11747
(Address of principal executive offices)
(631) 421-5452
(Issuer's telephone number)
|
Title of each Class
|
Name of each Exchange on which registered
|
|
Common Stock, $.001 Par Value
|
NYSE Amex Market
|
Securities registered under Section 12(g) of the Exchange Act
None
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 o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes: o No T
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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
|
Large accelerated filer o
|
Accelerated filer T
|
|
|
Non-accelerated filer o
(Do not check if a smaller reporting company)
|
Smaller reporting company o
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No T
The number of shares of the registrant's $.001 par value common stock outstanding on the NYSE Amex exchange as of April 30, 2010 was 17,685,593.
Company Symbol-BVX
Company SIC (Standard Industrial Code)-3841
BOVIE MEDICAL CORPORATION
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2010
|
Page
|
||
|
Part I.
|
3
|
|
|
Item 1.
|
3 | |
|
3
|
||
|
5
|
||
|
6
|
||
|
7
|
||
|
8
|
||
|
Item 2.
|
13
|
|
|
Item 3.
|
20
|
|
|
Item 4.
|
21
|
|
|
Part II.
|
21
|
|
|
Item 1.
|
21
|
|
|
Item 1A.
|
21
|
|
|
Item 2.
|
21
|
|
|
Item 3.
|
21
|
|
|
Item 4.
|
21
|
|
|
Item 5.
|
21
|
|
|
Item 6.
|
22
|
|
|
22
|
PART I. FINANCIAL INFORMATION
ITEM 1: CONSOLIDATED FINANCIAL STATEMENTS
BOVIE MEDICAL CORPORATION
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2010 AND DECEMBER 31, 2009
Assets
|
(Unaudited)
|
||||||||
|
March 31, 2010
|
December 31, 2009
|
|||||||
|
Current assets:
|
||||||||
|
Cash and cash equivalents
|
$ | 2,639,153 | $ | 2,154,825 | ||||
|
Trade accounts receivable, net
|
1,895,868 | 2,565,734 | ||||||
|
Inventories
|
6,989,508 | 6,774,166 | ||||||
|
Prepaid expenses and other current assets
|
1,070,417 | 919,222 | ||||||
|
Deferred income tax asset, net
|
800,000 | 800,000 | ||||||
|
Total current assets
|
13,394,946 | 13,213,947 | ||||||
|
Property and equipment, net
|
8,677,754 | 8,813,882 | ||||||
|
Other assets:
|
||||||||
|
Brand name and trademark
|
1,509,662 | 1,509,662 | ||||||
|
Purchased technology, net
|
3,217,646 | 3,270,067 | ||||||
|
License rights, net
|
136,768 | 152,549 | ||||||
|
Restricted cash held in escrow
|
- | 35,635 | ||||||
|
Deferred income tax asset, net
|
309,533 | 158,641 | ||||||
|
Deposits
|
441,680 | 430,076 | ||||||
|
Total other assets
|
5,615,289 | 5,556,630 | ||||||
|
Total assets
|
$ | 27,687,989 | $ | 27,584,459 | ||||
The accompanying notes are an integral part of the consolidated financial statements.
BOVIE MEDICAL CORPORATION
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2010 AND DECEMBER 31, 2009
(CONTINUED)
Liabilities and Stockholders' Equity
|
(Unaudited)
|
||||||||
|
March 31, 2010
|
December 31, 2009
|
|||||||
|
Current liabilities:
|
||||||||
|
Accounts payable
|
$ | 605,610 | $ | 589,407 | ||||
|
Deferred revenue
|
2,992 | 3,994 | ||||||
|
Accrued payroll
|
158,173 | 77,779 | ||||||
|
Accrued vacation
|
216,499 | 170,514 | ||||||
|
Customer deposits
|
5,930 | 5,930 | ||||||
|
Current portion of amounts due to Lican
|
50,000 | 50,000 | ||||||
|
Current portion of mortgage note payable to bank
|
135,000 | 135,000 | ||||||
|
Line of credit
|
1,000,000 | 1,000,000 | ||||||
|
Accrued and other liabilities
|
625,170 | 440,253 | ||||||
|
Total current liabilities
|
2,799,374 | 2,472,877 | ||||||
|
Mortgage note payable to bank, net of current portion
|
3,706,250 | 3,740,000 | ||||||
|
Due to Lican, net of current portion
|
218,150 | 218,150 | ||||||
|
Total liabilities
|
6,723,774 | 6,431,027 | ||||||
|
Commitments (see Note 11)
|
||||||||
|
Stockholders' equity:
|
||||||||
|
Preferred stock, par value $.001; 10,000,000 shares authorized; none issued or outstanding
|
-- | -- | ||||||
|
Common stock, par value $.001 par value; 40,000,000 shares authorized; 17,114,163 and 17,094,773 issued and 16,971,085 and 16,951,695 outstanding on March 31, 2010 and December 31, 2009, respectively
|
16,972 | 16,952 | ||||||
|
Additional paid-in capital
|
23,098,570 | 23,056,526 | ||||||
|
Accumulated other comprehensive (loss)
|
(94,474 | ) | (88,967 | ) | ||||
|
Accumulated deficit
|
(2,056,853 | ) | (1,831,079 | ) | ||||
|
Total stockholders' equity
|
20,964,215 | 21,153,432 | ||||||
|
Total Liabilities and Stockholders' Equity
|
$ | 27,687,989 | $ | 27,584,459 | ||||
The accompanying notes are an integral part of the consolidated financial statements.
BOVIE MEDICAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
(UNAUDITED)
|
March 31, 2010
|
March 31, 2009
|
|||||||
|
Sales
|
$ | 5,599,107 | $ | 7,217,324 | ||||
|
Cost of sales
|
3,314,324 | 3,897,510 | ||||||
|
Gross profit
|
2,284,783 | 3,319,814 | ||||||
|
Other costs and expenses:
|
||||||||
|
Research and development
|
499,448 | 480,760 | ||||||
|
Professional services
|
335,625 | 445,154 | ||||||
|
Salaries and related costs
|
747,074 | 774,050 | ||||||
|
Selling, general and administrative
|
1,034,816 | 1,077,192 | ||||||
|
Total other costs
|
2,616,963 | 2,777,156 | ||||||
|
Income (loss) from operations
|
(332,180 | ) | 542,658 | |||||
|
Interest (expense) income, net
|
(43,594 | ) | 67,608 | |||||
|
Income (loss) before income taxes
|
(375,774 | ) | 610,266 | |||||
|
Provision for current income taxes
|
(892 | ) | - | |||||
|
Benefit (provision) for deferred income taxes
|
150,892 | (207,000 | ) | |||||
|
Total benefit (provision) for income taxes - net
|
150,000 | (207,000 | ) | |||||
|
Net income (loss)
|
$ | (225,774 | ) | $ | 403,266 | |||
|
Earnings (loss) per common share
|
||||||||
|
Basic
|
$ | (0.01 | ) | $ | 0.02 | |||
|
Diluted
|
$ | (0.01 | ) | $ | 0.02 | |||
|
Weighted average number of shares outstanding
|
16,962,610 | 16,852,994 | ||||||
|
Weighted average number of shares outstanding adjusted for dilutive securities – * no dilutive shares
|
16,962,610 | * | 17,777,738 | |||||
The accompanying notes are an integral part of the consolidated financial statements.
BOVIE MEDICAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)
FOR THE YEAR ENDED DECEMBER 31, 2009 AND THE PERIOD ENDED MARCH 31, 2010
|
Common Stock
|
Additional Paid-in Capital
|
Accumulated Other Comprehensive Gain (Loss)
|
Deficit
|
Total
|
||||||||||||||||||||
|
Shares
|
Par Value
|
|||||||||||||||||||||||
|
January 1, 2009
|
16,795,269 | $ | 16,796 | $ | 22,841,545 | $ | (88,464 | ) | $ | (2,426,601 | ) | $ | 20,343,276 | |||||||||||
|
Options exercised
|
183,250 | 183 | 286,233 | - | - | 286,416 | ||||||||||||||||||
|
Stock based compensation
|
136,383 | - | - | 136,383 | ||||||||||||||||||||
|
Stock swap to acquire options
|
(26,824 | ) | (27 | ) | (207,635 | ) | - | - | (207,662 | ) | ||||||||||||||
|
Net income
|
- | - | - | - | 595,522 | 595,522 | ||||||||||||||||||
|
Foreign currency re-measurement
|
- | - | - | (503 | ) | - | (503 | ) | ||||||||||||||||
|
Comprehensive income
|
- | - | - | - | - | 595,019 | ||||||||||||||||||
|
December 31, 2009
|
16,951,695 | 16,952 | 23,056,526 | (88,967 | ) | (1,831,079 | ) | 21,153,432 | ||||||||||||||||
|
Options exercised
|
22,000 | 22 | 28,728 | – | – | 28,750 | ||||||||||||||||||
|
Stock based compensation
|
– | – | 33,063 | – | – | 33,063 | ||||||||||||||||||
|
Stock swap to acquire options
|
(2,610 | ) | (2 | ) | (19,747 | ) | – | – | (19,749 | ) | ||||||||||||||
|
Net loss
|
– | – | – | – | (225,774 | ) | (225,774 | ) | ||||||||||||||||
|
Foreign currency re-measurement
|
– | – | – | (5,507 | ) | – | (5,507 | ) | ||||||||||||||||
|
Comprehensive loss
|
– | – | – | – | – | (231,281 | ) | |||||||||||||||||
|
March 31, 2010
|
16,971,085 | $ | 16,972 | $ | 23,098,570 | $ | (94,474 | ) | $ | (2,056,853 | ) | $ | 20,964,215 | |||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
BOVIE MEDICAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
(UNAUDITED)
|
2010
|
2009
|
|||||||
|
Cash flows from operating activities
|
||||||||
|
Net income (loss)
|
$ | (225,774 | ) | $ | 403,266 | |||
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
|
||||||||
|
Depreciation and amortization of property and equipment
|
203,835 | 163,210 | ||||||
|
Amortization of intangible assets
|
68,202 | 68,202 | ||||||
|
Provision for (recovery of) inventory obsolescence
|
(13,845 | ) | (6,007 | ) | ||||
|
Loss on disposal of property and equipment
|
(357 | ) | - | |||||
|
Stock based compensation
|
33,064 | 46,761 | ||||||
|
Benefit (provision) for deferred taxes
|
(150,892 | ) | 207,000 | |||||
|
Changes in current assets and liabilities:
|
||||||||
|
Trade receivables
|
669,724 | 195,180 | ||||||
|
Prepaid expenses
|
(151,195 | ) | (130,694 | ) | ||||
|
Inventories
|
(201,358 | ) | (783,429 | ) | ||||
|
Deposits and other assets
|
(11,605 | ) | (133,592 | ) | ||||
|
Accounts payable
|
16,203 | (217,876 | ) | |||||
|
Accrued and other liabilities
|
12,052 | 183,163 | ||||||
|
Accrued payroll
|
80,394 | 80,969 | ||||||
|
Accrued vacation
|
45,985 | 30,899 | ||||||
|
Insurance premium payable
|
172,865 | 149,951 | ||||||
|
Deferred revenues
|
(1,002 | ) | (5,136 | ) | ||||
|
Net cash provided by operating activities
|
546,296 | 251,867 | ||||||
|
Cash flows from investing activities
|
||||||||
|
Purchases of property and equipment
|
(67,349 | ) | (752,711 | ) | ||||
|
Net cash used in investing activities
|
(67,349 | ) | (752,711 | ) | ||||
|
Cash flows from financing activities
|
||||||||
|
Proceeds from escrow account
|
35,637 | 485,436 | ||||||
|
Payments on mortgage note payable
|
(33,750 | ) | (31,250 | ) | ||||
|
Common shares issued
|
9,001 | 6,500 | ||||||
|
Net cash provided by financing activities
|
10,888 | 460,686 | ||||||
|
Effect of exchange rate changes on cash and cash equivalents
|
(5,507 | ) | 12,538 | |||||
|
Net change in cash equivalents
|
484,328 | (27,620 | ) | |||||
|
Cash and cash equivalents, beginning of period
|
2,154,825 | 2,564,443 | ||||||
|
Cash and cash equivalents, end of period
|
$ | 2,639,153 | $ | 2,536,823 | ||||
Cash paid during the three months ended March 31, 2010 and 2009 for:
|
Interest paid
|
$ | 47,344 | $ | 47,732 | ||||
|
Income taxes
|
$ | 892 | $ | 29,843 |
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
Unless the context otherwise indicates, the terms “we,” “our,” “us,” “Bovie,” and similar terms refer to Bovie Medical Corporation and its consolidated subsidiaries.
The accompanying unaudited consolidated financial statements have been prepared based upon SEC rules that permit reduced disclosure for interim periods. For a more complete discussion of significant accounting policies and certain other information, please refer to the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2009. These financial statements reflect all adjustments that are necessary for a fair presentation of results of operations and financial condition for the interim periods shown, including normal recurring accruals and other items. The results for the interim periods are not necessarily indicative of results for the full year.
Certain amounts in the March 31, 2009 financial statements were reclassified.
NOTE 2. INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined principally on the average cost method. Inventories at March 31, 2010 and December 31, 2009 were as follows:
|
March 31, 2010
|
December 31, 2009
|
|||||||
|
Raw materials
|
$ | 4,231,277 | $ | 4,254,044 | ||||
|
Work in process
|
2,055,972 | 1,944,266 | ||||||
|
Finished goods
|
1,211,145 | 1,116,893 | ||||||
|
Gross inventories
|
7,498,394 | 7,315,203 | ||||||
|
Less: reserve for obsolescence
|
(508,886 | ) | (541,037 | ) | ||||
|
Net inventories
|
$ | 6,989,508 | $ | 6,774,166 | ||||
NOTE 3. INTANGIBLE ASSETS
At March 31, 2010 and December 31, 2009 intangible assets consisted of the following:
|
March 31, 2010
|
December 31, 2009
|
|||||||
|
Trade name (life indefinite)
|
$ | 1,509,662 | $ | 1,509,662 | ||||
|
Purchased technology (9-17 yr life)
|
$ | 3,940,617 | $ | 3,940,618 | ||||
|
Less: Accumulated amortization
|
(722,971 | ) | (670,551 | ) | ||||
|
Net carrying amount
|
$ | 3,217,646 | $ | 3,270,067 | ||||
|
License rights (5 yr life)
|
$ | 315,619 | $ | 315,619 | ||||
|
Less accumulated amortization
|
(178,851 | ) | (163,070 | ) | ||||
|
Net carrying amount
|
$ | 136,768 | $ | 152,549 | ||||
NOTE 4. NEW ACCOUNTING PRONOUNCEMENTS
In March 2010, the FASB issued revised accounting guidance for milestone revenue recognition. The new guidance recognizes the milestone method as an acceptable revenue recognition method for substantive milestones in research or development transactions. It is effective on a prospective basis to milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010. We do not anticipate any material impact on our consolidated financial statements from the adoption of this standard.
In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820) – Improving Disclosures about Fair Value Measurements (“ASU 2010-06”), which amends Topic 820 to add new requirements for disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances, and settlements related to Level 3 measurements. ASU 2010-06 also clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. The ASU is effective for the first reporting period beginning after December 15, 2009, except for the requirements to provide the Level 3 activity of purchases, sales, issuances, and settlements on a gross basis, which will be effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. Adoption of this standard has not had a material impact on our consolidated financial statements.
In September 2009, ASU 2009-13, Revenue Recognition (Topic 605) — Multiple-Deliverable Revenue Arrangements (“ASU 2009-13”) was issued and will change the accounting for multiple-deliverable arrangements to enable vendors to account for products or services (deliverables) separately rather than as a combined unit. Specifically, this guidance amends the criteria in Subtopic 605-25, Revenue Recognition-Multiple-Element Arrangements, for separating consideration in multiple-deliverable arrangements. This guidance establishes a selling price hierarchy for determining the selling price of a deliverable, which is based on: (a) vendor-specific objective evidence; (b) third-party evidence; or (c) estimates. This guidance also eliminates the residual method of allocation and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method. In addition, this guidance significantly expands required disclosures related to a vendor’s multiple-deliverable revenue arrangements. ASU 2009-13 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010 with early adoption permitted. We are currently evaluating the potential impact of this standard on our business, financial condition or results of operations.
In June 2009, the FASB issued FASB ASC Topic 860-10-05, Accounting for Transfers of Financial Assets, an amendment to SFAS No. 140 (SFAS 166). The new standard eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets and requires additional disclosures to enhance information reported to users of financial statements by providing greater transparency about transfers of financial assets, including securitization transactions, and an entity’s continuing involvement in and exposure to the risks related to transferred financial assets. FASB ASC Topic 860-10-05 is effective for fiscal years beginning after November 15, 2009. Adoption of this standard has not had a material impact on our consolidated financial statements.
In December 2007, the FASB issued FASB ASC Topic 810-10-65, Non-controlling Interests in Consolidated Financial Statements, an amendment of ARB No. 51 (SFAS 160). FASB ASC Topic 810-10-65 will change the accounting and reporting for minority interests, which will be recharacterized as non-controlling interests and classified as a component of equity. This new consolidation method will significantly change the accounting for partial and/or step acquisitions. FASB ASC Topic 810-10-65 will be effective for us in the first quarter of fiscal year 2010. Adoption of this standard has no impact on our consolidated financial statements.
NOTE 5. FAIR VALUE MEASUREMENTS
Our assets and liabilities that are measured at fair value on a recurring basis as of March 31, 2010 are measured in accordance with FASB ASC Topic 820-10-05, Fair Value Measurements (FASB 157). FASB ASC Topic 820-10-05 defines fair value, establishes a framework for measuring fair value and expands the disclosure requirements regarding fair value measurements for financial assets and liabilities as well as for non-financial assets and liabilities that are recognized or disclosed at fair value on a recurring basis in the financial statements.
The statement requires fair value measurement be classified and disclosed in one of the following three categories:
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; and
Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).
The following table summarizes our financial instruments measured at fair value as of March 31, 2010 (in thousands):
|
March 31, 2010
Fair Value Measurements
|
||||||||||||||||
|
Total
|
Level 1
|
Level 2
|
Level 3
|
|||||||||||||
|
Assets:
|
||||||||||||||||
|
Cash and equivalents – United States
|
$ | 2,506 | $ | 2,506 | $ | – | $ | – | ||||||||
|
Cash and equivalents - Foreign currency
|
133 | 133 | – | – | ||||||||||||
|
Total
|
$ | 2,639 | $ | 2,639 | $ | – | $ | – | ||||||||
The following table summarizes our financial instruments as of December 31, 2009 (in thousands):
|
December 31, 2009
Fair Value Measurements
|
||||||||||||||||
|
Total
|
Level 1
|
Level 2
|
Level 3
|
|||||||||||||
|
Assets:
|
||||||||||||||||
|
Cash and equivalents – United States
|
$ | 2,073 | $ | 2,073 | $ | – | $ | – | ||||||||
|
Cash and equivalents – Foreign currency
|
82 | 82 | – | – | ||||||||||||
|
Total
|
$ | 2,155 | $ | 2,155 | $ | – | $ | – | ||||||||
NOTE 6. STOCKHOLDERS’ EQUITY
During the three months ended March 31, 2010, we issued 19,390 common shares in exchange for 22,000 employee and non-employee stock options and 2,610 common shares (via a stock swap). Net proceeds from the issuance of common shares along with the shares received in the stock swap exercises were $9,000 for the three month period ended March 31, 2010.
NOTE 7. EARNINGS PER SHARE
We compute basic earnings (loss) per share (“basic EPS”) by dividing net income (loss) by the weighted average number of common shares outstanding for the reporting period. Diluted earnings (loss) per share (“diluted EPS”) gives effect to all dilutive potential shares outstanding (primarily stock options). The following table provides the computation of basic and diluted earnings (loss) per share for the three months ended March 31, 2010 and 2009.
|
March 31, 2010
|
March 31, 2009
|
|||||||
|
Net income (loss)
|
$ | (225,774 | ) | $ | 403,266 | |||
|
Basic-weighted average shares outstanding
|
16,962,610 | 16,852,994 | ||||||
|
Effect of dilutive potential securities
|
- | 924,744 | ||||||
|
Diluted – weighted average shares outstanding
|
16,962,610 | 17,777,738 | ||||||
|
Basic EPS
|
$ | (0.01 | ) | $ | 0.02 | |||
|
Diluted EPS
|
$ | (0.01 | ) | $ | 0.02 | |||
For those periods in which we generate net income the shares used in the calculation of diluted EPS exclude options to purchase shares where the exercise price was greater than the average market price of common shares during the quarter. Such shares aggregated 365,000 for the period ended March 31, 2009.
NOTE 8. STOCK-BASED COMPENSATION
Under our stock option plan, our board of directors may grant options to purchase common shares to our key employees, officers, directors and consultants. We account for stock options in accordance with FASB ASC Topic 718-10-10, Share-Based Payment (SFAS 123R), 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 three months ended March 31, 2010, the Company expensed $33,063 in stock-based compensation.
Activity in our stock options during the quarter ended March 31, 2010 was as follows:
|
Number Of Options
|
Weighted Average Exercise Price
|
|||||||
|
Outstanding at December 31, 2009
|
1,741,525 | $ | 3.61 | |||||
|
Granted
|
100,000 | $ | 7.45 | |||||
|
Exercised
|
( 22,000 | ) | $ | 1.31 | ||||
|
Canceled
|
(2,854 | ) | $ | 7.33 | ||||
|
Outstanding at March 31, 2010
|
1,816,671 | $ | 3.84 | |||||
NOTE 9. INCOME TAXES
For the three months ended March 31, 2010 and 2009, we recorded a tax benefit for income taxes of approximately $150,000 and a deferred tax provision of $207,000, respectively. The effective tax rates for the three months ended March 31, 2010 and 2009 were 40.0% and 33.9%, respectively.
The Company is subject to U.S. federal income tax as well as income tax of certain state jurisdictions. The Company has not been audited by the United States Internal Revenue Service (“the IRS”) or any states in connection with income taxes. The periods from December 31, 2006 to December 31, 2009 remain open to examination by the IRS and state authorities.
NOTE 10. GEOGRAPHIC AND SEGMENT INFORMATION
We have two reportable business segments: Bovie Medical Corporation (located in the United States) and Bovie Canada (located in Windsor, Canada). Because Bovie Canada’s operations resulted in a loss greater than 10% of our consolidated net income (loss) (on an absolute value basis), we are required to report certain information broken out by segment for the periods in the table listed below.
For the three months ended March 31, 2010 and 2009, that information was as follows (in thousands):
|
Three Months Ended March 31,
|
||||||||||||||||
|
2010
|
2009
|
|||||||||||||||
|
(in thousands)
|
USA
|
Canada
|
USA
|
Canada
|
||||||||||||
|
Sales, net
|
$ | 5,567 | $ | 32 | $ | 7,165 | $ | 52 | ||||||||
|
Gross profit
|
$ | 2,333 | $ | (48 | ) | $ | 3,268 | $ | 52 | |||||||
|
Other costs and expenses
|
$ | 2,524 | $ | 93 | $ | 2,541 | $ | 236 | ||||||||
|
Net income (loss)
|
$ | (85 | ) | $ | (141 | ) | $ | 587 | $ | (184 | ) | |||||
We intend to consolidate the Canadian operations to our facility in Florida in the second quarter 2010, which should provide for significant cost savings in the future.
NOTE 11. COMMITMENTS
We are obligated under various operating leases, including a lease for a manufacturing and warehouse facility in St. Petersburg, Florida that requires monthly payments of approximately $12,400 through October 31, 2013. In May 2009, we relocated substantially all operations to our new facility, which we had been renovating since we purchased it in September 2008. We are currently continuing to use the St. Petersburg leased facility for new product lines launching throughout 2010 and 2011. If we abandon this facility in the future and are unable to find a tenant to sublease our space, we will be required to record a charge to operations for the fair value of the net remaining lease rentals (i.e., the future minimum lease payments minus estimated sublease rentals we reasonably can expect to receive) and the carrying value of any leasehold improvements we abandon. Rent expense approximated $30,000 and $28,000 for the periods ending March 31, 2010 and 2009 respectively.
NOTE 12. RELATED PARTY TRANSACTION
During the quarter ended March 31, 2010, we paid consulting fees of approximately $ 21,000, $63,000, and $15,000 to three different entities owned by three different directors of ours. In addition, we paid $7,500 to a fourth director for consulting fees.
NOTE 13. SUBSEQUENT EVENT
On April 18, 2010, we entered into a Securities Purchase Agreement with purchasers to raise in the aggregate approximately $3 million in a private placement of Common Stock and warrants pursuant to Section 4(2) of the Securities Act of 1933, as amended, and/or Regulation D promulgated thereunder, which transaction closed April 28, 2010. At the closing, we entered into a Registration Rights Agreement with the Buyers and issued to the Buyers an aggregate of 571,429 shares of Common Stock at a per share price of $5.25 and warrants to acquire additional shares of Common Stock of up to fifty (50%) percent of the Common Shares acquired by each respective Buyer at an exercise price of $6.00 per share.
We intend to use these funds to ensure and provide additional working capital and to invest a substantial portion of these funds to expand our sales and marketing efforts and infrastructure related to our strategic plan for our new product lines anticipated to go into production in 2010.
The Warrants are immediately exercisable and will terminate on the fifth anniversary of the issuance date. The Exercise Price of the Warrants will be subject to adjustment so that, among other things, if we issue any shares of Common Stock (including options and warrants, with standard exceptions), at a price that is lower than the Exercise Price then in effect, the Exercise Price then in effect will be reduced to such lower price.
In connection with the private placement, we paid certain cash fees and issued a warrant to the placement agent, Rodman & Renshaw, LLC, for the purchase of 42,857 shares of Common Stock at an exercise price of $6.00 per share. In addition, we paid certain cash fees and issued a warrant to Gilford Securities Incorporated for the purchase of 10,000 shares of Common Stock at an exercise price of $6.00 per share.
Pursuant to the Registration Rights Agreement, we are required to file a registration statement on Form S-3 to cover the resale of the Common Shares and shares of Common Stock issuable upon exercise of the Warrants. The failure on our part to satisfy certain deadlines described in the Registration Rights Agreement may subject us to payment of certain monetary penalties. In addition, pursuant to the terms of the Purchase Agreement, we agreed, among other things, not to enter into any financing transactions for the issuance of securities of ours until the date immediately following the sixty (60) Trading Day (as defined in the Warrants) anniversary of the effectiveness of the registration statement we will file for the benefit of the Buyers.
In connection with this private placement we are required to allocate the proceeds to the common stock and the warrants. A preliminary evaluation of the terms of the warrants issued indicates that they will not be afforded equity classification; rather they will be recorded as liabilities at their fair values and changes to such fair values will be reflected in our statement of operations.
End of financial information
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Notes Regarding “Forward-Looking” Statements
This report contains statements that we believe to be “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements give our current expectations or forecasts of future events. Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe,” “project,” or “continue,” or similar words or the negative thereof. From time to time, we also may provide oral or written forward-looking statements in other materials we release to the public. Any or all of our forward-looking statements in this report and in any public statements we make could be materially different from actual results. They can be affected by assumptions we might make or by known or unknown risks or uncertainties. Consequently, we cannot guarantee any forward-looking statements. Investors are cautioned not to place undue reliance on any forward-looking statements. Investors should also understand that it is not possible to predict or identify all such factors and should not consider the following list to be a complete statement of all potential risks and uncertainties. The following factors and those discussed in ITEM 1A, Risk Factors, included in our Annual Report on Form 10-K for the year ended December 31, 2009, may affect the achievement of forward-looking statements:
|
|
●
|
general economic and political conditions, such as political instability, credit market uncertainty, the rate of economic growth or decline in our principal geographic or product markets or fluctuations in exchange rates; continued deterioration in or stabilization of the global economy;
|
|
|
●
|
changes in general economic and industry conditions in markets in which we participate, such as:
|
|
|
§
|
continued deterioration in or destabilization of the global economy;
|
|
|
§
|
the strength of product demand and the markets we serve;
|
|
|
§
|
the intensity of competition, including that from foreign competitors;
|
|
|
§
|
pricing pressures;
|
|
|
§
|
the financial condition of our customers;
|
|
|
§
|
market acceptance of new product introductions and enhancements;
|
|
|
§
|
the introduction of new products and enhancements by competitors;
|
|
|
§
|
our ability to maintain and expand relationships with large customers;
|
|
|
§
|
our ability to source raw material commodities from our suppliers without interruption and at reasonable prices; and
|
|
|
§
|
our ability to source components from third parties, in particular from foreign manufacturers, without interruption and at reasonable prices;
|
|
|
●
|
our ability to access capital markets and obtain anticipated financing under favorable terms;
|
|
|
●
|
our ability to identify, complete and integrate acquisitions successfully and to realize expected synergies on our anticipated timetable;
|
|
|
●
|
changes in our business strategies, including acquisition, divestiture and restructuring activities;
|
|
|
●
|
changes in operating factors, such as continued improvement in manufacturing activities, the achievement of related efficiencies and inventory risks due to shifts in market demand;
|
|
|
●
|
our ability to generate savings from our cost reduction actions;
|
|
|
●
|
unanticipated developments that could occur with respect to contingencies such as litigation, intellectual property matters, product liability exposures and environmental matters; and
|
|
|
●
|
our ability to accurately evaluate the effects of contingent liabilities.
|
The foregoing factors are not exhaustive, and new factors may emerge or changes to the foregoing factors may occur that would impact our business. We assume no obligation, and disclaim any duty, to update the forward-looking statements in this report. Past performance is no guaranty of future results.
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 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 are marketed through medical distributors, which distribute to more than 6,000 hospitals, and to doctors and other health-care facilities. New distributors are contacted through responses to our advertising in international and domestic medical journals and domestic or international trade shows. International sales represented 23.0% of total revenues in for the first three months of 2010 as compared with 18.5% in for the first three months of 2009. 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. Our business is generally not seasonal in nature.
Our ten largest customers accounted for approximately 67.7% and 72.9% of net revenues for the first three months of 2010 and 2009 respectively. At March 31, 2010 and 2009, our ten largest trade receivables accounted for approximately 65.8% and 71.2% of our net receivables, respectively. In the first three months of 2010 and 2009 one customer accounted for 14.2% and 30% of total sales, respectively.
Our business is generally not seasonal in nature.
Results of Operations –
Sales
|
Sales by Product Line
(in thousands)
|
Three months ended March 31,
|
Percent
change
|
||||||||||
|
2010
|
2009
|
|||||||||||
|
Electrosurgical
|
$ | 3,619 | $ | 5,204 | (30.5 | %) | ||||||
|
Cauteries
|
1,520 | 1,441 | 5.5 | % | ||||||||
|
Other
|
460 | 572 | (19.6 | %) | ||||||||
|
Total
|
$ | 5,599 | $ | 7,217 | (22.4 | %) | ||||||
|
Sales by Domestic and
International (in thousands)
|
Three months ended March 31,
|
Percent
change
|
||||||||||
|
2010
|
2009
|
|||||||||||
|
Domestic
|
$ | 4,293 | $ | 5,868 | (26.8 | %) | ||||||
|
International
|
$ | 1,306 | $ | 1,349 | (3.2 | %) | ||||||
|
Total
|
$ | 5,599 | $ | 7,217 | (22.4 | %) | ||||||
Sales for the first quarter 2010 decreased approximately $1.62 million or 22.4% compared to the same period in 2009. This decrease was due to the following reasons:
|
|
●
|
sales of generators were down approximately $487,000 or 15.6% due to lower OEM sales and capital expenditures by domestic hospitals and doctor’s offices in the current economy;
|
|
|
●
|
sales of electrosurgical disposables were down approximately $1.1 million or 49.7% mainly due to a reduction in sales of ablators to a domestic OEM customer; and
|
|
|
●
|
Other product sales decreased by approximately $112,000 or 19.6% mainly due to a reduction in the sale of penlights.
|
These decreases were offset by the sale of cauteries, which increased approximately $79,000 or 5.5%.
Gross Profit
|
(in thousands)
|
Three months ended March 31,
|
Percent of sales
|
Percent
change
|
|||||||||||||||||
|
2010
|
2009
|
2010
|
2009
|
|||||||||||||||||
|
Cost of sales
|
$ | 3,314 | $ | 3,898 | 59.2 | % | 54.0 | % | (15.0 | %) | ||||||||||
|
Gross profit
|
$ | 2,285 | $ | 3,320 | 40.8 | % | 46.0 | % | (31.2 | %) | ||||||||||
Gross profit for the three months ended March 31, 2010 decreased by approximately $ 1.0 million or 31.2% as a percentage of sales as compared to the same period in 2009. This was the result of:
|
|
●
|
an approximate $1.1 million decrease in sales of electrosurgical disposables, mainly due to the decrease in the sale of ablators, which have a higher than average profit margin.
|
|
|
●
|
sales of generators were down approximately $487,000 or 15.6% which have an average profit margin; and
|
|
|
●
|
Capitalized overhead costs for the first three months of 2009 were approximately $145,000 higher than the same period in 2010.
|
Research and Development Expense
|
(in thousands)
|
Three months ended March 31,
|
Percent of sales
|
Percent
change
|
|||||||||||||||||
|
2010
|
2009
|
2010
|
2009
|
|||||||||||||||||
|
R & D Expense
|
$ | 499 | $ | 481 | 8.9 | % | 6.7 | % | 3.9 | % | ||||||||||
Research and development expense increased approximately $18,000 or 3.9% in the first quarter of 2010 from 2009. This increase was primarily a result of:
|
|
●
|
a $38,000 increase in staffing costs to support J-Plasma product line and other new product; and
|
|
|
●
|
a $105,000 increase in consulting costs related to the Seal-N-Cut product line
|
These increases were partially offset by a reduction of approximately $123,000 in R & D costs at our Canadian facility as result of our plan to consolidate the Canadian operation to our Florida facility.
Professional Fees
|
(in thousands)
|
Three months ended March 31,
|
Percent of sales
|
Percent
change
|
|||||||||||||||||
|
2010
|
2009
|
2010
|
2009
|
|||||||||||||||||
|
Professional services
|
$ | 336 | $ | 445 | 6.0 | % | 6.2 | % | (24.6 | %) | ||||||||||
Professional fees decreased approximately $109,000 or 24.6% in the first quarter of 2010 compared to the same period in 2009. This decrease was primarily because:
|
|
●
|
Legal fees decreased by approximately $77,000 mainly due to the settlement of the Erbe lawsuit in late 2009; and
|
|
|
●
|
Consulting fees decreased approximately $32,000 mainly due to a reduction in hours of consultant services attributable to the Erbe lawsuit along with reductions for various other consultants compared to 2009.
|
Salaries
|
(in thousands)
|
Three months ended March 31,
|
Percent of sales
|
Percent
change
|
|||||||||||||||||
|
2010
|
2009
|
2010
|
2009
|
|||||||||||||||||
|
Salaries & related cost
|
$ | 747 | $ | 774 | 13.3 | % | 10.7 | % | (3.5 | %) | ||||||||||
Salaries decreased by approximately $27,000 or 3.5% in the first quarter of 2010 compared to the same period 2009. This decrease was primarily a result of:
|
|
●
|
a decrease of approximately $59,000 in marketing costs due to consolidating the marketing effort for the SEER, MEG and Plasma product lines; and
|
|
|
●
|
a decrease of approximately $9,000 due a reduction of the administrative staff at our Canadian facility;
|
These decreases were offset by:
|
|
●
|
an increase in health insurance of approximately 14,000;
|
|
|
●
|
an increase in Human Resources of approximately $6,000 due to re-classifying one staff position from marketing to HR;
|
|
|
●
|
an increase of approximately $6,000 in administrative costs due to stock option expense related to a new employee; and
|
|
|
●
|
an increase of approximately $15,000 mainly due to the addition of our General Counsel position.
|
Selling, General & Administrative Expenses
|
(in thousands)
|
Three months ended March 31,
|
Percent of sales
|
Percent
change
|
|||||||||||||||||
|
2010
|
2009
|
2010
|
2009
|
|||||||||||||||||
|
SG & A costs
|
$ | 1,035 | $ | 1,077 | 18.5 | % | 14.9 | % | (3.9 | %) | ||||||||||
Selling, general and administrative costs decreased approximately $42,000 or 3.9% in the first quarter of 2010 compared to the same period of 2009. This decrease was primarily a result of:
|
|
●
|
a $28,000 decrease in general insurance costs due to an audit premium credit;
|
|
|
●
|
a $17,000 decrease in electricity costs related to cooler weather and consolidating operations in our new Clearwater facility;
|
|
|
●
|
a $15,000 decrease in telephone cost due to our consolidated operations in our new Clearwater facility;
|
|
|
●
|
a $4,000 decrease in water & sewer costs due to our consolidated operations in our new Clearwater facility;
|
|
|
●
|
a $ 28,000 decrease in commissions related to the lower sales compared to the prior year;
|
|
|
●
|
a $41,000 decrease in marketing consulting fees related to SEER and MEG product lines; and
|
|
|
●
|
a $9,000 decrease in travel related costs due to reduction of sales positions.
|
These decreases were partially offset by:
|
|
●
|
a $27,000 increase in property taxes related to our new facility in Clearwater, Florida;
|
|
|
●
|
a $10,000 increase in bank fees and credit card discount fees due to more customers using credit cards and bank charges related to additional bank accounts;
|
|
|
●
|
a $6,000 increase in royalty payments as a result of the Henvil (MEG) agreement;
|
|
|
●
|
a $4,000 increase in depreciation expense;
|
|
|
●
|
a $13,000 increase in regulatory expenses related to the verification process of our BOSS and Seal-N-Cut product lines;
|
|
|
●
|
a $28,000 increase in building repair and maintenance and computer related expenses attributable to settling into our new facility;
|
|
|
●
|
a $7,000 increase in shareholder and exchange related costs; and
|
|
|
●
|
a $5,000 increase in trade show related costs.
|
Other Income
|
(in thousands)
|
Three months ended March 31,
|
Percent of sales
|
Percent
change
|
|||||||||||||||||
|
2010
|
2009
|
2010
|
2009
|
|||||||||||||||||
|
Interest income (expense)
|
$ | (44 | ) | $ | 68 | (0.8 | %) | 0.9 | % | (165 | %) | |||||||||
Net interest expense increased by $111,000 or 165% in the three months ended March 31, 2010 as compared to the same period in 2009 primarily because interest of approximately $89,000 was capitalized during the quarter ended March 31 due to renovations made to our new facility.
Income Taxes
|
(in thousands)
|
Three months ended March 31,
|
Percent of sales
|
Percent
change
|
|||||||||||||||||
|
2010
|
2009
|
2010
|
2009
|
|||||||||||||||||
|
Income (loss) before income taxes
|
$ | (376 | ) | $ | 610 | (6.7 | %) | 8.5 | % | (161.6 | %) | |||||||||
|
Benefit (Provision) for taxes
|
$ | 150 | $ | (207 | ) | 2.7 | % | (2.9 | %) | 172.4 | % | |||||||||
|
Effective tax rate
|
40.0 | % | 33.9 | % | ||||||||||||||||
For the three months ended March 31, 2010 and 2009, we recorded tax benefit for income taxes of $150,000 and a deferred tax provision of $207,000, respectively. The effective tax rates for the three months ended March 31, 2010 and 2009 were 40.0% and 33.9%, respectively.
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 from the proceeds of the exercise of stock options. 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, with our Florida and Canadian manufacturing locations responsible 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 2010, we continued to invest in ICON GS (J-Plasma technology), ICON VS, vessel sealing technology, Aaron 1450, and BOSS. We intend to pay the ongoing costs for this development 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 depend on certain contractual OEM customers for product development. In these situations, we plan to manufacture the products developed. The customer has no legal obligation, however, to purchase the developed products. If the collaborative customer fails to give us purchase orders for the product after development, our future business and value of related assets could be negatively affected. Furthermore, we can give no assurance that a collaborative customer may give sufficient high priority to our products. In addition, disagreements or disputes may arise between us and our contractual customers, which could adversely affect production of our products. We also have informal collaborative arrangements with two foreign suppliers 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.
Liquidity and Capital Resources
Our working capital at March 31, 2010 remained the same as December 31, 2009 at approximately $10.6 million. Accounts receivable days sales outstanding were 36.8 days and 39.5 days at March 31, 2010 and 2009 respectively. The number of days worth of sales in inventory, which is the total inventory available for production divided by the 12 month average cost of materials, increased 83 days to 260 days equating to an inventory turn ratio of 1.4 at March 31, 2010 from 172 days and an inventory turn ratio of 1.7 at December 31, 2009. The higher number of days worth of sales in inventory which translated into a lower inventory turnover rate is mainly due to the decrease in sales related to our generator product lines which contain a greater number of parts compared to all our other products.
We generated cash from operations of approximately $546,000 for the three months ended March 31, 2010, compared to approximately $252,000 for the same period of 2009, an increase of approximately $294,000.
In the three month period ended March 31, 2010 we used approximately $67,000 for the purchase of property and equipment as compared to purchases amounting to approximately $753,000 for the same period in 2009. The decrease relates to the difference between the amounts expended to refurbish our new facility in the first quarter of 2009.
We generated cash from financing activities of approximately $11,000 during the first three months of 2010, a decrease of approximately $450,000 compared with the same period in 2009. The decrease in cash from financing resulted primarily from receiving and using in 2009 the portion of industrial revenue bonds proceeds that were held in escrow.
During fiscal 2008, we borrowed $4.0 million through the issuance of industrial revenue bonds for the purchase and renovation of our new facility through RBC Bank, of which we received $2.7 million in 2008 and the remaining escrow portion of approximately $1.3 million in 2009. The bonds, which are being amortized over a 20 year term, balloon in 10 years and bear interest at a fixed interest rate of 4.6%. Scheduled maturities of this indebtedness are $135,000, $140,000, $145,000, $155,000 and $165,000 for 2010, 2011, 2012, 2013 and 2014 respectively.
We had approximately $2.6 million in cash and cash equivalents at March 31, 2010. We believe our cash on hand, as well as anticipated cash flows from operations, will be sufficient to meet our operating cash commitments for the next year. Should additional funds be required, we have secured additional borrowing capacity with RBC Bank (USA). (see below)
On December 2, 2009 RBC Bank (USA) increased our secured revolving line of credit facility to $8 million from the previous $5 million and on the same date provided us with a separate additional credit facility for up to $1 million specific to financing new equipment purchases.
Advances under the $8 million line of credit are due on demand and bear interest at a rate of LIBOR plus 2% with a minimum floor rate of 4.0% and are secured by a perfected first security interest in our inventory, accounts receivable, and equipment.
The $1 million facility related to equipment purchases provides for a 2 year draw up period followed by a 5 year term period and bears interest also at LIBOR plus 2% with a minimum floor of 4% and will be secured by a perfected first security interest in the new equipment purchased. This equipment credit facility also allows us the option of financing purchased equipment at 75% of the cost through either a traditional loan or through RBC leasing at the time of purchase.
Subsequent available borrowings for both these credit facilities is subject to a borrowing base utilizing a percentage of eligible receivables, inventories, and any assigned cash along with certain financial ratios, specifically maintaining: a ratio of debt to tangible net worth of less than 2.0 to 1.0, a ratio of total funded debt to EBITDA of less than 3.25 to 1.0 excluding the industrial revenue bond note balance which had an original principal amount of $4.0 million, and a ratio of minimum debt service coverage of 1.5 to 1.0 measured on a rolling four quarter basis.
At March 31, 2010 we were in full compliance with the loan covenants and ratios of both the credit facilities. According to our most recent borrowing base calculation we had approximately $3.6 million total availability under the $8 million credit line, of which we have a current balance of $1.0 million. We also have available all of the $1 million under the equipment line of credit.
On April 18, 2010, we entered into a Securities Purchase Agreement with certain investors who purchased common stock and warrants in a private placement pursuant to Section 4(2) of the Securities Act of 1933, as amended, and/or Regulation D promulgated. This offering, which closed on April 28, 2010, resulted in gross proceeds of approximately $3 million. (See subsequent event in ITEM 5. OTHER INFORMATION)
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,
|
|
|||||||||||||||||||||
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
||||||
|
Operating leases
|
|
|
209
|
|
|
|
252
|
|
|
|
247
|
|
|
|
223
|
|
|
|
11
|
|
|
|
-
|
|
|
Employment agreements
|
|
|
608
|
|
|
|
865
|
|
|
|
871
|
|
|
|
881
|
|
|
|
73
|
|
|
|
-
|
|
|
Purchase Commitments
|
|
|
4,876
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Off Balance Sheet Arrangements
We have no off balance sheet arrangements at this time.
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 filed in March 2010.
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, 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 expected useful life and are significantly impacted by estimates of future prices and volumes for our products, capital needs, economic trends and other factors that 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.
Share-based Compensation
Under the Company’s stock option plan, options to purchase Common Shares of the Company 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 FASB ASC Topic 718, Compensation-Stock Compensation 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.
Income Taxes
The provision for income taxes includes federal, foreign, state and local income taxes currently payable and those deferred because of temporary differences between the financial statement and tax bases of assets and liabilities. Deferred tax assets or liabilities are computed based on the difference between the financial statement and income tax bases of assets and liabilities using enacted marginal tax rates. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. Deferred income tax expenses or credits are based on the changes in the asset or liability from period to period.
We periodically have net operating loss and tax credit carry forwards available to reduce future taxable income. Future tax benefits for net operating loss and tax credit carry forwards are recognized to the extent that realization of these benefits is considered more likely than not. This determination is based on the expectation that related operations will be sufficiently profitable or various tax, business and other planning strategies will enable us to utilize the operating loss and tax credit carry forwards. We cannot be assured that we will be able to realize these future tax benefits or that future valuation allowances will not be required. To the extent that available evidence raises doubt about the realization of a deferred income tax asset, a valuation allowance is established.
It is our policy to provide for uncertain tax positions and the related interest and penalties based upon management’s assessment of whether a tax benefit is more likely than not to be sustained upon examination by tax authorities. To the extent that the probable tax outcome of these uncertain tax positions changes, such changes in estimate will impact the income tax provision in the period in which such determination is made. At March 31, 2010, we believe we have appropriately accounted for any unrecognized tax benefits. To the extent we prevail in matters for which a liability for an unrecognized tax benefit is established or we are required to pay amounts in excess of the liability, our effective tax rate in a given financial statement period may be affected.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
Our short term investments consist of cash, cash equivalents and overnight investments. As such we do not believe we are exposed to significant interest rate risk. 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. If a 10% change in interest rates were to have occurred on March 31, 2010, this change would not have had a material effect on the fair value of our investment portfolio as of that date.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We have carried out an evaluation, under the supervision of and with the participation of our management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended), as of March 31, 2010. Based upon that evaluation, our CEO and CFO concluded that, as of March 31, 2010, our disclosure controls and procedures are effective in providing reasonable assurance that (a) the information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (b) such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Changes in Internal Controls
There were no changes in our internal control over financial reporting during the quarter ended March 31, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We presently are not involved in any material legal proceedings. In the normal course of business, the Company may be subject, from time to time, to legal proceedings, lawsuits and claims. However, no such matter existed as of March 31, 2010.
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, 2009, in response to Item 1A to Part 1 of Form 10K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
See Item 5 below.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. (Removed and Reserved)
ITEM 5. OTHER INFORMATION
Subsequent Event
On April 18, 2010, we entered into a Securities Purchase Agreement with certain investors (the “Buyers”) to raise in the aggregate approximately $3 million in a private placement of Common Stock and warrants pursuant to Section 4(2) of the Securities Act of 1933, as amended, and/or Regulation D promulgated thereunder, which transaction closed April 28, 2010. At the closing, we issued to the Buyers an aggregate of 571,429 shares of Common Stock at a per share price of $5.25 and warrants to acquire additional shares of Common Stock of up to fifty (50%) percent of the Common Shares acquired by each respective Buyer at an exercise price of $6.00 per share.
We intend to use these funds to ensure and provide additional working capital and to invest a substantial portion of these funds to expand our sales and marketing efforts and infrastructure related to our strategic plan for our new product lines anticipated to go into production in 2010.
The Warrants are immediately exercisable and will terminate on the fifth anniversary of the issuance date. Exercise Price of the Warrants will be subject to adjustment so that, among other things, if we issue any shares of Common Stock (including options and warrants, with standard exceptions), at a price that is lower than the Exercise Price then in effect, the Exercise Price then in effect will be reduced to such lower price.
In connection with the private placement, we paid certain cash fees and issued a warrant to the placement agent, Rodman & Renshaw, LLC, for the purchase of 42,857 shares of Common Stock at an exercise price of $6.00 per share. In addition, we paid certain cash fees and issued a warrant to Gilford Securities Incorporated for the purchase of 10,000 shares of Common Stock at an exercise price of $6.00 per share.
At the closing, we entered into a Registration Rights Agreement with the Buyers, pursuant to which we are required to file a registration statement on Form S-3 to cover the resale of the Common Shares and shares of Common Stock issuable upon exercise of the Warrants. The failure on our part to satisfy certain deadlines described in the Registration Rights Agreement may subject us to payment of certain monetary penalties. In addition, pursuant to the terms of the Purchase Agreement, we agreed, among other things, not to enter into any financing transactions for the issuance of securities of ours until the date immediately following the sixty (60) Trading Day (as defined in the Warrants) anniversary of the effectiveness of the registration statement we will file for the benefit of the Buyers.
In connection with this private placement we are required to allocate the proceeds to the common stock and the warrants. A preliminary evaluation of the terms of the warrants issued indicates that they will not be afforded equity classification; rather they will be recorded as liabilities at their fair values and changes to such fair values will be reflected in our statement of operations.
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
|
||
|
Dated: May 10, 2010
|
By:
|
/s/ Andrew Makrides
|
|
Andrew Makrides
Chief Executive Officer
|
||
|
Dated: May 10, 2010
|
By:
|
/s/ Gary D. Pickett
|
|
Gary D. Pickett
Chief Financial Officer
|
||
22