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Apyx Medical Corp - Quarter Report: 2014 September (Form 10-Q)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended September 30, 2014

 

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 of incorporation or organization)

 

(IRS Employer Identification No.)

 

5115 Ulmerton Rd., Clearwater, Florida 33760

(Address of principal executive offices)

 

(800) 537-2790

 (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 x No ¨

 

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 x 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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

¨

Accelerated filer

¨

       

Non-accelerated filer

¨

Smaller reporting company

x

(Do not check if a smaller reporting company)

   

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

 

The number of shares of the registrant's common stock $.001 par value outstanding as of November 10, 2014 was 17,954,214.

 

 

 

 

BOVIE MEDICAL CORPORATION

 

INDEX TO FORM 10-Q

 

FOR THE QUARTER ENDED SEPTEMBER 30, 2014

 

     

Page

 
         

Part I.

Financial Information

   

3

 
           

Item 1.

Financial Statements

   

3

 
 

Consolidated Balance Sheets – September 30, 2014 and December 31, 2013

   

3

 
 

Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2014 and 2013

   

5

 
 

Consolidated Statement of Stockholders' Equity for the Year Ended December 31, 2013 and the Nine Months Ended September 30, 2014

   

6

 
 

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2014 and 2013

   

7

 
 

Notes to Consolidated Financial Statements

   

8

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   

14

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

   

26

 

Item 4.

Controls and Procedures

   

26

 
           

Part II.

Other Information

   

27

 
           

Item 1.

Legal Proceedings

   

27

 

Item 1A.

Risk Factors

   

27

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

   

27

 

Item 3.

Defaults Upon Senior Securities

   

27

 

Item 4.

Mine Safety Disclosures

   

27

 

Item 5.

Other Information

   

27

 

Item 6.

Exhibits

   

28

 
 

Signatures

   

29

 

 

 
2

 

PART I. FINANCIAL INFORMATION

 

ITEM 1.   FINANCIAL STATEMENTS

 

BOVIE MEDICAL CORPORATION

CONSOLIDATED BALANCE SHEETS

SEPTEMBER 30, 2014 AND DECEMBER 31, 2013

(in thousands)

 

Assets

 

 

  September 30,
2014
    December 31,
2013
 

 

  (Unaudited)      

Current assets:

       
         

Cash and cash equivalents

 

$

6,135

   

$

7,924

 

Restricted cash

   

898

     

--

 

Trade accounts receivable, net

   

2,045

     

1,990

 

Inventories, net

   

6,483

     

8,415

 

Current portion of deposits

   

226

     

948

 

Prepaid expenses and other current assets

   

603

     

545

 
               

Total current assets

   

16,390

     

19,822

 
               

Property and equipment, net

   

6,833

     

7,063

 

Brand name and trademark

   

1,510

     

1,510

 

Purchased technology and license rights, net

   

458

     

575

 

Deferred income tax asset, net

   

5,312

     

3,412

 

Deposits, net of current portion

   

163

     

120

 

Other assets

   

625

     

674

 
               

Total assets

 

$

31,291

   

$

33,176

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 
3

 

BOVIE MEDICAL CORPORATION

CONSOLIDATED BALANCE SHEETS

SEPTEMBER 30, 2014 AND DECEMBER 31, 2013

(CONTINUED) (in thousands)

 

Liabilities and Stockholders' Equity

 

 

  September 30,
2014
    December 31,
2013
 

 

  (Unaudited)      

Current liabilities:

       
         

Accounts payable

 

$

1,371

   

$

1,060

 

Accrued payroll

   

186

     

172

 

Accrued vacation

   

169

     

200

 

Current portion of bonds payable

   

--

     

72

 

Current portion of mortgage note payable

   

239

     

--

 

Current portion of settlement

   

--

     

541

 

Accrued and other liabilities

   

1,156

     

867

 
               

Total current liabilities

   

3,121

     

2,912

 
               

Mortgage note payable, net of current portion

   

3,232

     

--

 

Bonds payable, net of current portion

   

--

     

3,185

 

Deferred rents

   

24

     

--

 

Derivative liabilities

   

15,149

     

5,749

 
               

Total liabilities

   

21,526

     

11,846

 
               

Commitments and Contingencies (see Notes 9 and 11)

               
               

Stockholders' equity:

               
               

Series A 6% convertible preferred stock, par value $0.001; 3,500,000 shares authorized and issued; preference in liquidation - $7,336,000

   

2,927

     

2,259

 

Common stock, par value $.001 par value; 40,000,000 shares authorized; 17,978,946 issued and 17,835,867 outstanding on September 30, 2014 and 17,826,336 issued and 17,683,257 outstanding on December 31, 2013, respectively

   

18

     

18

 

Additional paid-in capital

   

29,214

     

28,687

 

Deficit

 

(22,394

)

 

(9,634

)

               

Total stockholders' equity

   

6,838

     

19,071

 
               

Total liabilities and stockholders' equity

 

$

31,291

   

$

33,176

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 
4

 

BOVIE MEDICAL CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013

(UNAUDITED) (in thousands except per share data)

 

    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2014     2013     2014     2013  
                 

Sales

 

$

6,788

   

$

5,794

   

$

20,214

   

$

17,532

 

Cost of sales

   

4,869

     

3,545

     

13,662

     

10,902

 
                               

Gross profit

   

1,919

     

2,249

     

6,552

     

6,630

 
                               

Other costs and expenses:

                               

Research and development

   

368

     

291

     

1,019

     

938

 

Professional services

   

142

     

512

     

686

     

1,348

 

Salaries and related costs

   

1,653

     

751

     

3,980

     

2,376

 

Selling, general and administrative

   

2,123

     

1,170

     

4,923

     

3,717

 

Legal award

   

-

     

-

     

-

     

1,041

 
                               

Total other costs and expenses

   

4,286

     

2,724

     

10,608

     

9,420

 
                               

Loss from operations

 

(2,367

)

 

(475

)

 

(4,056

)

 

(2,790

)

                               

Interest expense, net

 

(41

)

 

(54

)

 

(111

)

 

(171

)

Change in fair value of liabilities, net

 

(1,676

)

   

13

   

(9,820

)

   

17

 
                               

Loss before income taxes

 

(4,084

)

 

(516

)

 

(13,987

)

 

(2,944

)

                               

Benefit for income taxes, net

   

1,350

     

175

     

1,895

     

1,074

 
                               

Net loss

 

$

(2,734

)

 

$

(341

)

 

$

(12,092

)

 

$

(1,870

)

                               

Accretion on convertible preferred stock

 

(242

)

   

-

   

(668

)

   

-

 
                               

Net loss attributable to common shareholders

 

$

(2,976

)

 

$

(341

)

 

$

(12,760

)

 

$

(1,870

)

                               

Loss per share

                               

Basic

 

(0.17

)

 

(0.02

)

 

(0.72

)

 

(0.11

)

Diluted

 

(0.17

)

 

(0.02

)

 

(0.72

)

 

(0.11

)

                               

Weighted average number of shares outstanding- basic

   

17,780

     

17,678

     

17,727

     

17,666

 
                               

Weighted average number of shares outstanding - dilutive

   

17,780

     

17,678

     

17,727

     

17,666

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 
5

 

 BOVIE MEDICAL CORPORATION

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

FOR THE YEAR ENDED DECEMBER 31, 2013 AND THE NINE MONTHS ENDED SEPTEMBER 30, 2014

(in thousands)

 

            Additional          
    Common Stock     Paid-in          
    Shares     Par Value     Capital     Deficit     Total  
                     

January 1, 2013

 

17,639

   

$

18

   

$

25,517

   

$

(2,640

)

 

$

22,895

 
                                       

Options exercised

   

51

     

-

     

70

     

-

     

70

 
                                       

Stock based compensation

   

-

     

-

     

506

     

-

     

506

 
                                       

Stock swap to acquire options

 

(6

)

   

-

   

(22

)

   

-

   

(22

)

                                       

Convertible preferred stock - beneficial conversion feature

   

-

     

-

     

2,616

     

-

     

2,616

 
                                       

Deemed dividend on convertible preferred stock

   

-

     

-

     

-

   

(2,616

)

 

(2,616

)

                                       

Accretion on convertible preferred stock

   

-

     

-

     

-

   

(39

)

 

(39

)

                                       

Net loss

   

-

     

-

     

-

   

(4,339

)

 

(4,339

)

                                       

December 31, 2013

   

17,684

     

18

     

28,687

   

(9,634

)

   

19,071

 
                                       

Options/Warrants exercised

   

183

     

-

     

381

     

-

     

381

 
                                       

Stock based compensation

   

-

     

-

     

279

     

-

     

279

 
                                       

Stock swap to acquire options

 

(31

)

   

-

   

(133

)

   

-

   

(133

)

                                       

Accretion on convertible preferred stock

   

-

     

-

     

-

   

(668

)

 

(668

)

                                       

Net loss

   

-

     

-

     

-

   

(12,092

)

 

(12,092

)

                                       

September 30, 2014 (unaudited)

   

17,836

   

$

18

   

$

29,214

   

$

(22,394

)

 

$

6,838

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 
6

 

BOVIE MEDICAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013

(UNAUDITED) (in thousands)

 

    2014     2013  

Cash flows from operating activities

       

Net loss

 

$

(12,092

)

 

$

(1,870

)

Adjustments to reconcile net loss to net cash

               

used in operating activities:

               

Depreciation and amortization

   

656

     

620

 

Provision for inventory obsolescence

   

985

     

40

 

Gain on disposal of property and equipment, net

   

11

   

(3

)

Stock based compensation

   

278

     

348

 

Change in fair value of liabilities

   

9,820

   

(17

)

(Benefit) for deferred taxes

 

(1,900

)

 

(1,075

)

Changes in current assets and liabilities:

               

Trade receivables

 

(56

)

   

778

 

Prepaid expenses

 

(58

)

   

277

 

Inventories

   

947

   

(1,022

)

Deposits and other assets

   

729

   

(363

)

Accounts payable

   

311

     

368

 

Accrued and other liabilities

 

(246

)

   

730

 
               

Net cash used in operating activities

 

(615

)

 

(1,189

)

               

Cash flows from investing activities

               

Purchases of property and equipment

 

(319

)

 

(417

)

Net cash used in investing activities

 

(319

)

 

(417

)

               

Cash flows from financing activities

               

Proceeds from stock options/warrants exercised

   

249

     

48

 

Change in restricted cash

 

(898

)

   

--

 

Proceeds from mortgage note payable

   

3,472

   

(103

)

Repayment of industrial revenue bonds

 

(3,257

)

   

--

 

Repurchase of warrants

 

(421

)

   

--

 

Net cash used in financing activities

 

(855

)

 

(55

)

               

Net change in cash and cash equivalents

 

(1,789

)

 

(1,661

)

               

Cash and cash equivalents, beginning of period

   

7,924

     

4,162

 
               

Cash and cash equivalents, end of period

 

$

6,135

   

$

2,501

 

 

   

 

     

 

 

Cash paid during the nine months ended September 30, 2014 and 2013 for:

   

 

     

 

 

Interest

 

$

111

   

$

171

 

Income taxes

 

$

-

   

$

-

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 
7

 

BOVIE MEDICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

 

NOTE 1. 

BASIS OF PRESENTATION

 

Unless the context otherwise indicates, the terms “Company”, “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/A for the year ended December 31, 2013. 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.

 

NOTE 2.

INVENTORIES

 

Inventories are stated at the lower of cost or market. Cost is determined principally on the average cost method. Inventories at September 30, 2014 and December 31, 2013 were as follows (in thousands):

 

    September 30,     December 31,  
    2014     2013  
         

Raw materials

 

$

4,444

   

$

5,470

 

Work in process

   

1,634

     

882

 

Finished goods

   

1,734

     

2,455

 

Gross inventories

   

7,812

     

8,807

 

Less: reserve for obsolescence

 

(1,329

)

 

(392

)

               

Net inventories

 

$

6,483

   

$

8,415

 

 

For the period ended September 30, 2014, we recorded a charge of approximately $189,000 to excess and obsolete inventory, attributable to scrap associated with RoHS compliance mandates in the European Union, and other product line adjustments.

 

During the third quarter of 2014, a physical count of consigned inventory was conducted at a Bulgarian supplier and identified an adjustment of approximately $607,000. The Company recorded this charge in the current reported period. The Company believes this adjustment was due to calculating raw material consumed during the manufacturing process at less than full cost. Management concluded that the effect of the third quarter adjustment was not material to the Company’s previously reported quarterly and full-year 2013 financial statements, as well as to the current years previously reported results of operations and financial position.

  

NOTE 3.

INTANGIBLE ASSETS

 

At September 30, 2014 and December 31, 2013 intangible assets consisted of the following (in thousands):

 

    September 30,     December 31,  
    2014     2013  
         

Trade name (life indefinite)

 

$

1,510

   

$

1,510

 
               

Purchased technology (9-17 yr life)

 

$

1,441

   

$

1,441

 

Less: accumulated amortization

 

(984

)

 

(866

)

               

Net carrying amount

 

$

458

   

$

575

 
               

License rights (5 yr life)

 

$

316

   

$

316

 

Less accumulated amortization

 

(316

)

 

(316

)

Net carrying amount

 

$

-

   

$

-

 

 

Amortization of intangibles, which is included in depreciation and amortization in the accompanying statements of cash flows, was approximately $118,000 and $66,300 during the respective nine month periods ended September 30, 2014 and 2013.

 

 
8

 

NOTE 4.

NEW ACCOUNTING PRONOUNCEMENTS

 

We have reviewed recently issued standards and have determined they will not have a material impact on our consolidated financial statements, or do not apply to our operations.

 

NOTE 5. 

FAIR VALUE MEASUREMENTS

 

Certain assets and liabilities that are measured at fair value on a recurring basis are measured in accordance with FASB ASC Topic 820, Fair Value Measurements. FASB ASC Topic 820 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).

 

Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to their fair value measurement. Our derivative financial instruments that are measured at fair value on a recurring basis are all measured at fair value using Level 3 inputs. Level 3 inputs are unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

The following represents a reconciliation of the changes in fair value of warrants measured at fair value using Level 3 inputs during the nine months ended September 30, 2014: 

 

(in $ thousands)

  2013 Investor Warrants     2013 Placement Agent Warrants     2010 Investor Warrants     2010 Placement Agent Warrants     Total  
                     

Balance, December 31, 2013

 

$

4,599

   

$

460

   

$

689

   

$

1

   

$

5,749

 
                                       

Issuances

   

-

     

-

     

-

     

-

     

-

 
                                       

Repurchase of warrants (1)

   

-

     

-

   

(421

)

   

-

   

(421

)

                                       

Change in fair value

   

8,017

     

801

     

996

     

7

     

9,821

 
                                       

Balance, September 30, 2014 (2)

 

$

12,616

   

$

1,261

   

$

1,264

   

$

8

   

$

15,149

 

 

 

(1)

Represents amount paid to repurchase warrants exercisable into 142,857 shares of common stock, which were initially issued in the April 2010 capital raise transaction.

      
 

(2)

The warrants are valued using a trinomial lattice valuation methodology because that model embodies all of the relevant assumptions that address the features underlying these instruments. Significant assumptions used in the model at September 30, 2014 included the market price of our common stock, an expected dividend yield of zero, the remaining period to the expiration date of the warrants, expected volatility of our common stock over the remaining life of the warrants of 55.17%, estimated based on a review of our historical volatility, and risk-free rates of return of 0.6% based on constant maturity rates published by the U.S. Federal Reserve, applicable to the remaining life of the warrants. We also take into consideration a probability assumption for anti-dilution.

 

 
9

 

NOTE 6.

EARNINGS PER SHARE (in thousands, except EPS)

 

We compute basic earnings per share (“basic EPS”) by dividing the net loss by the weighted average number of common shares outstanding for the reporting period. Diluted earnings per share (“diluted EPS”) gives effect to all dilutive potential shares outstanding (warrants and stock options). The following table provides the computation of basic and diluted earnings per share for the three and nine month periods ending September 30, 2014 and 2013.

 

    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  

(in thousands, except EPS)

  2014     2013     2014     2013  
                 

Net loss attributable to common shareholders

 

$

(2,976

)

 

$

(341

)

 

$

(12,760

)

 

$

(1,870

)

                               

Basic weighted average shares outstanding

   

17,780

     

17,678

     

17,727

     

17,666

 
                               

Effect of potential dilutive securities

   

-

     

-

     

-

     

-

 

Diluted weighted average shares outstanding

   

17,780

     

17,678

     

17,727

     

17,666

 
                               

Basic EPS

 

(0.17

)

 

(0.02

)

 

(0.72

)

 

(0.11

)

                               

Diluted EPS

 

(0.17

)

 

(0.02

)

 

(0.72

)

 

(0.11

)

 

For the nine months ended September 30, 2014, and 2013, options and warrants to purchase approximately 2,945,591 and 1,000,000 shares of common stock, respectively, were excluded from the computation of diluted earnings per share because their effect were anti-dilutive.

 

NOTE 7. 

STOCK-BASED COMPENSATION

 

Under our 2012 equity incentive 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, Compensation – Stock Compensation, with option expense amortized over the vesting period based on the trinomial 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 and nine months ended September 30, 2014, we expensed $127,612 and $278,166, respectively, in stock-based compensation.

 

Activity in our stock options during the period ended September 30, 2014 was as follows:

 

 

  Number of Options (in thousands)     Weighted Average Exercise Price  

 

       

Outstanding at December 31, 2013

 

2,467

   

$

3.55

 
               

Granted

   

467

   

$

3.88

 

Exercised

 

(97

)

 

$

2.16

 

Cancelled

 

(163

)

 

$

4.97

 

Outstanding at September 30, 2014

   

2,674

   

$

3.66

 

 

 
10

 

The grant date fair value of options granted during the first nine months of 2014 were estimated on the grant date using a trinomial lattice option-pricing model and the following assumptions: expected volatility of between 53% and 54%, expected term of between 3-5 years, risk-free interest rate of 0.6%, and expected dividend yield of 0%.

 

Expected volatility is based on a five year average of the historical volatility of the Company's stock. Previous to December 2013 we used a weighted average of our historical volatility combined with a peer group of companies’ volatility, which had openly traded stock options on the options market and weighted to percentages relative to our stock and the peer group at a 50%/50% weighting. The risk-free rate is based on the rate of U.S. Treasury zero-coupon issues with a remaining term equal to the expected life of the options. The Company uses historical data to estimate pre-vesting forfeiture rates.

 

During the nine months ended September 30, 2014, we issued 25,518 common shares in exchange for 50,000 non-employee stock options and 24,482 common shares (via a stock swap). We issued 6,379 common shares in exchange for 12,500 employee stock options and 6,121 common shares (via a stock swap). We issued 35,000 common shares in exchange for 35,000 non-employee stock options. Net proceeds from the issuance of common shares along with the shares received in the stock swap exercises were $77,350 for the nine months ended September 30, 2014.

 

NOTE 8.

INCOME TAXES

 

The Company’s income benefit was approximately $1.35 million and $1.90 million with an effective income tax rate of 33% and 13.6% for three and nine months ended September 30, 2014, respectively. The Company’s effective tax rate differs from the statutory rate due primarily to the recognition of certain losses from the fair value adjustments on the financial statements that are not deductible for tax purposes.

 

The Company is subject to U.S. federal income tax as well as income tax in multiple state jurisdictions. The 2011 through 2013 U.S. federal income tax returns are subject to IRS examination. State income tax returns are subject to examination for the 2010 through 2013 tax years. 

 

NOTE 9.

COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS

 

We are obligated under various operating leases for our facilities and certain equipment. The following is a schedule of approximate future minimum lease payments under operating leases having remaining terms in excess of one year as of September 30, 2014 for the calendar years ended December 31, 2014 and 2015 (in thousands):

 

2014

 

$

55

 

2015

   

104

 

Therafter

   

444

 

Total

 

$

603

 

 

 
11

 

Rent expense approximated $41,000 and $117,000 for the nine month periods ending September 30, 2014 and 2013 respectively.

 

Other future contractual obligations for agreements with initial terms greater than one year and agreements to purchase materials in the normal course of business are summarized as follows (in thousands):

 

Description

  Years Ending December 31,  
    2014     2015     2016     2017     2018     Thereafter  

Purchase commitments

 

$

3,375

   

$

-

   

$

-

   

$

-

   

$

-

   

$

-

 

Long-term debt

   

60

     

239

     

239

     

2,934

     

-

     

-

 

Total

 

$

3,435

   

$

239

   

$

239

   

$

2,934

   

$

-

   

$

-

 

 

We have a manufacturing agreement with our Bulgarian supplier which provides for certain contingent payments on our part if we terminate our arrangement prior to July 1, 2015. The remaining contingent liability for the calendar year ending December 31, 2014 is approximately $226,676. The agreement requires one year advance written notice of non-renewal.

 

Litigation

 

Stockholder Derivative Action

 

In September 2011, the Company was served in a purported stockholder derivative action (the “Derivative Action”) that was filed in the United States District Court for the Middle District of Florida (the “Court”) against the Company and certain of its present and former officers and directors. The complaint asserted, among other things, breach of fiduciary duties and bad faith in relation to the management of the Company’s business. The complaint sought, among other things, unspecified compensatory damages and various forms of equitable relief. The allegations in the Derivative Action appear to be based largely on counterclaims previously asserted by Steven Livneh, a former director of the Company, in a prior litigation between the Company and Mr. Livneh which was settled.

 

On June 26, 2014, the Company entered into a Stipulation and Agreement of Settlement (“Stipulation of Settlement”) setting forth the terms of the settlement of the claims asserted against the Company in the Derivative Action. On July 7, 2014, the Court issued an Amended Order Preliminarily Approving Derivative Settlement and Providing for Notice (“Preliminary Order”) preliminarily approving the Stipulation of Settlement. On October 2, 2014, the Court entered an order and final judgement approving the Stipulation of Settlement.

 

In the normal course of business, we are subject, from time to time, to legal proceedings, lawsuits and claims. Such matters are subject to many uncertainties, and outcomes are not predictable with assurance. If any of these matters arise in the future, it could affect the operating results of any one or more quarters.

 

We expense costs of litigation related to contingencies in the periods in which the costs are incurred.

 

 
12

 

Concentrations

 

Our ten largest customers accounted for approximately 62.2% and 60.8% of net revenues for the nine months ended September 30, 2014 and 2013 respectively. For the nine months ended September 30, 2014, one customer accounted for 12.2% of our sales, while for the same nine month period ended in 2013, our three largest customers accounted for 11.8%, 11.7% and 10.5% of our sales. At September 30, 2014, three customers accounted for more than 10% of our accounts receivable and accounted for approximately 35.4% of our total accounts receivable in aggregate.

 

NOTE 10.

RELATED PARTY TRANSACTIONS

 

A relative of Moshe Citronowicz, Bovie’s Senior Vice President, is considered a related party. Arik Zoran is a consultant of the Company doing business as AR Logic, Inc., which is a consulting firm, owned by Arik Zoran, Mr. Citronowicz’s brother. On March 1, 2013 the Company amended the Consulting Services Agreement dated January 2011, extending the term of the existing agreement until December 31, 2014. The agreement shall automatically renew for additional one year periods, unless either party gives written notice of its desire not to renew at least one year prior to the expiration of the initial Term or renewal term. The agreement with AR Logic provides for a monthly retainer for engineering support for our existing generator product line and a separate hourly based fee structure for additional consulting related to new product lines. AR Logic was paid consulting fees of approximately $213,100 and $188,100 during the nine months ended September 30, 2014 and 2013, respectively.

 

A second relative of Mr. Citronowicz is considered a related party. Yechiel Tsitrinovich is also a brother of Mr. Citronowicz, and acts as a consultant to the Company related to research and development of certain products. Mr. Tsitrinovich has a royalty contract with us related to the creation and design of a proprietary technology that is used in some of our generators. Mr. Tsitrinovich was paid a combination of consulting fees and royalties on previous product designs approximating $56,760 and $57,000 for the nine months ended September 30, 2014 and 2013, respectively.

 

NOTE 11.

LONG TERM DEBT

 

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

 

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

 

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

 

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

 

 
13

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

You should read the following discussion and analysis in conjunction with our financial statements and related notes contained elsewhere in this report. This discussion contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a variety of factors discussed in this report and those discussed in other documents we file with the SEC. In light of these risks, uncertainties and assumptions, readers are cautioned not to place undue reliance on such forward-looking statements. These forward-looking statements represent beliefs and assumptions as of the date of this report. While we may elect to update forward-looking statements and at some point in the future, we specifically disclaim any obligation to do so, even if our estimates change. Past performance is no guaranty of future results.

 

Executive Level Overview

 

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

 

We internally divide our operations into three product lines; electrosurgical products, battery-operated cauteries and other products. The electrosurgical line sells electrosurgical products which include desiccators, generators, electrodes, electrosurgical pencils and various ancillary disposable products. These products are used in surgery for the cutting and coagulation of tissue. Battery-operated cauteries are used for precise hemostasis (to stop bleeding) in ophthalmology and in other fields. J-Plasma is currently included within the other sales category, which also includes revenue from: nerve locators, disposable and reusable penlights, medical lighting, license fees, development fees and other miscellaneous income.

 

We are committed to and will continue to invest in the full commercialization of J-Plasma. During the first nine months of 2014 we invested approximately $1.8 million which included the early stages of funding our direct sales force, sales training development, surgeon training, and marketing-related activities and continued R&D. As we accelerate our commercialization of J-Plasma, we expect these investments will increase through the end of 2014. Although we anticipate that these investments will expand our sales and growth in the future, there can be no assurance on the timeframe, or if, the J-Plasma® technology will produce any substantial revenue or return on investment.

 

 
14

 

Most of our products currently are marketed through medical distributors that distribute to more than 6,000 hospitals, doctors offices, and other healthcare facilities. New distributors are contacted through responses to our advertising in international and domestic medical journals and domestic or international trade shows. International sales represented approximately 14.3% of total revenues for the first nine months of 2014, as compared with 18.1% for the first nine months of 2013. Our products are sold in more than 150 countries through local dealers which are coordinated by sales and marketing personnel at the Clearwater, Florida facility. For the launch of our new surgical suite product lines, J-Plasma®, we are in the process of building a direct sales force that, as of the filing date of this report, had thirteen direct sales representatives and twenty-one commission-based independent manufacturers' representatives to market these products. Our business is generally not seasonal in nature, but can fluctuate based upon our customers’ capital and inventory purchasing patterns. While our international sales have declined, we did see substantial growth in Latin America, as well as improvement in the Middle East and Africa. We were negatively impacted in Europe, with some product being withdrawn from the market due to regulatory testing and other requirements; however, we made progress in the most recent quarter bringing these products back to market. In addition, we have received approval for compliant, new and improved 200 and 300 watt generators which we expect will offset a portion of the withdrawn product losses, as well as launched the new Derm 101 and 102 product lines primarily targeted to office-based physicians.

 

We strongly encourage investors to visit our website: www.boviemedical.com to view the most current news and to review our filings with the Securities and Exchange Commission.

 

Results of Operations for the Three and Nine Months Ended September 30, 2014 Compared to the Three and Nine Months Ended September 30, 2013

 

Sales

 

Sales by Product Line

  Three months ended         Nine Months Ended      

(in thousands)

  September 30,     Percent     September 30,     Percent  
    2014     2013     Change     2014     2013     Change  
                         

Electrosurgical

 

$

4,221

   

$

3,110

   

35.7

%

 

$

12,212

   

$

9,753

   

25.2

%

Cauteries

   

1,847

     

1,884

     

-2.0

%

   

5,149

     

5,218

     

-1.3

%

Other

   

720

     

800

     

-10.0

%

   

2,853

     

2,561

     

11.4

%

                                               

Total

 

$

6,788

   

$

5,794

     

17.2

%

 

$

20,214

   

$

17,532

     

15.3

%

 

Sales by Domestic and

  Three months ended         Nine Months Ended      

International (in thousands)

  September 30,     Percent     September 30,     Percent  
    2014     2013     Change     2014     2013     Change  

Domestic

 

$

5,913

   

$

4,950

   

19.5

%

 

$

17,326

   

$

14,358

   

20.7

%

International

   

875

     

844

     

3.7

%

   

2,888

     

3,174

     

-9.0

%

                                               

Total

 

$

6,788

   

$

5,794

     

17.2

%

 

$

20,214

   

$

17,532

     

15.3

%

 

 
15

 

Sales for the three months ended September 30, 2014 increased 17.2% or approximately $994,000 over the same period in 2013. The increase in sales was mainly attributable to increased OEM generator and electrode sales of approximately $786,000 and $225,000 respectively. Contracted development services and sales of other various products increased approximately $158,000. J-Plasma sales increased approximately $76,000 over the same period in 2013. These increases were offset by declines in cautery sales and medical lighting sales of approximately $168,600, with sales discounts, allowances and other miscellaneous charges accounting for the remaining approximately $82,400.

 

Sales for the nine months ended September 30, 2014 increased 15.3% or approximately $2,682,000 over the same period in 2013. The increase in sales was mainly attributable to increased OEM generator and electrode sales of approximately $1,891,000 and $663,000 respectively. In addition, we had increased medical lighting sales, contracted development services and sales of other various products of approximately $128,000. J-Plasma sales for the nine months ended September 30, 2014 amounted to $136,174, an increase of approximately $105,500 over the same period in 2013. Cautery sales declined slightly year over year.

 

Our ten largest customers accounted for approximately 62.2% and 60.8% of net revenues for the nine months ended September 30, 2014 and 2013 respectively. For the nine months ended September 30, 2014, one customer accounted for 12.2% of our sales, while for the same nine month period ended in 2013, our three largest customers accounted for 11.8%, 11.7% and 10.5% of our sales. At September 30, 2014, three customers accounted for more than 10% of our accounts receivable and accounted for approximately 35.4% of our total accounts receivable in aggregate.

 

Gross Profit

 

    Three months                 Nine Months              

(in thousands)

  ended September 30,     Percent of sales     Percent     ended September 30,     Percent of sales     Percent  
    2014     2013     2014     2013     change     2014     2013     2014     2013     Change  

Cost of sales

 

$

4,869

   

$

3,545

   

71.7

%

 

61.2

%

 

37.3

%

 

$

13,662

   

$

10,902

   

67.6

%

 

62.2

%

 

25.3

%

                                                                               

Gross profit

 

$

1,919

   

$

2,249

     

28.3

%

   

38.8

%

   

-14.7

%

 

$

6,552

   

$

6,630

     

32.4

%

   

37.8

%

   

-1.2

%

 

Gross profit declined as a percentage of sales by approximately 14.7% for the three month period ending September 30, 2014 and by approximately 1.2% for the nine month period ending September 30, 2014 compared to the same respective periods in 2013. The decline was due primarily to a charge of approximately $607,000 for the write-down in value of consigned inventory at our Bulgarian supplier and $189,000 in excess and obsolete inventory, attributable to scrap associated with RoHS compliance mandates in Europe, and other product line adjustments. Absent the impact of these and other adjustments, margins were in line with management’s expectations of approximately 41%.

 

We do not anticipate any material impact to our gross profit, material costs, or other costs as a result of the effect of inflation or any material impact of changing prices on net revenue.

 

 
16

 

During the third quarter of 2014, a physical count of consigned inventory was conducted at a Bulgarian supplier and identified an adjustment of approximately $607,000. The Company recorded this charge in the current reported period. The Company believes this adjustment was due to calculating raw material consumed during the manufacturing process at less than full cost. Management concluded that the effect of the third quarter adjustment was not material to the Company’s previously reported quarterly and full-year 2013 financial statements, as well as to the current years previously reported results of operations and financial position.

 

Research and Development

 

    Three months                 Nine Months              

(in thousands)

  ended September 30,     Percent of sales     Percent     ended September 30,     Percent of sales     Percent  
    2014     2013     2014     2013     change     2014     2013     2014     2013     Change  

R & D Expense

 

$

368

   

$

291

   

5.4

%

 

5.0

%

 

26.5

%

 

$

1,019

   

$

938

   

5.0

%

 

5.4

%

 

8.6

%

 

Research and development costs increased approximately $77,000 and $81,000 for the three and nine month periods ended September 30, 2014, compared to the same respective periods in 2013, due primarily to the accelerated commercialization efforts across all businesses, expenses associated with accounting for stock options and increased outside consulting services.

 

Professional Fees

 

    Three months                 Nine Months              

(in thousands)

  ended September 30,     Percent of sales     Percent     ended September 30,     Percent of sales     Percent  
    2014     2013     2014     2013     change     2014     2013     2014     2013     Change  

Professional services

 

$

142

   

$

512

   

2.1

%

 

8.8

%

 

-72.3

%

 

$

686

   

$

1,348

   

3.4

%

 

7.7

%

 

-49.1

%

 

Our professional fees decreased by approximately $370,000 during the three months ended September 30, 2014 and by approximately $661,000 for the nine month period ended September 30, 2014 compared to the same respective periods in 2013. The decrease was mainly attributable to decreased legal costs of approximately $331,500 and $663,500, for the three and nine month periods respectively, as the majority of our ongoing litigation ended or had been settled during 2013.

 

 
17

 

Salaries and related costs

 

    Three months                 Nine Months              

(in thousands)

  ended September 30,     Percent of sales     Percent     ended September 30,     Percent of sales     Percent  
    2014     2013     2014     2013     change     2014     2013     2014     2013     Change  

Salaries & related cost

 

$

1,653

   

$

751

   

24.4

%

 

13.0

%

 

120.1

%

 

$

3,980

   

$

2,568

   

19.7

%

 

14.6

%

 

55.0

%

 

During the three months ended September 30, 2014 compared to the same period in 2013, salary costs increased by 120.1% or approximately $902,000, and by 55.0% or approximately $1,411,000, for the nine month period ended September 30, 2014. The increase was primarily the result of additional salary and incentive compensation expenses related to executive management, direct sales and marketing for J-Plasma, and other growth-related headcount.

 

Selling, General & Administrative Expenses

 

    Three months                 Nine Months              

(in thousands)

  ended September 30,     Percent of sales     Percent     ended September 30,     Percent of sales     Percent  
    2014     2013     2014     2013     change     2014     2013     2014     2013     Change  

SG & A costs

 

$

2,123

   

$

1,170

   

31.3

%

 

20.2

%

 

81.5

%

 

$

4,923

   

$

4,566

   

24.4

%

 

26.0

%

 

7.8

%

 

Selling, general and administrative expenses increased by approximately $953,000 or 81.5% for the three month period ending September 30, 2014 and by 7.8% or approximately $358,000 for the nine months ended September 30, 2014, as compared to the same respective periods in 2013. This increase for the three month period ended September 30, 2014, was the result of J-Plasma related expenses for marketing, sales training and sales commissions of approximately $370,000, a write-off of uncollectible accounts receivable of approximately $175,000, regulatory compliance costs of approximately $92,000, insurance of $79,000, travel of $71,000, sales commission, advertising and show fees of $93,000, rents, utilities, taxes, supplies and other expenses of $73,000.

 

Other Income (expense)

 

    Three months                 Nine Months              

(in thousands)

  ended September 30,     Percent of sales     Percent     ended September 30,     Percent of sales     Percent  
    2014     2013     2014     2013     change     2014     2013     2014     2013     Change  

Interest income (expense)

 

$

(41

)

 

$

(54

)

 

-0.6

%

 

-0.9

%

 

-24.1

%

 

$

(111

)

 

$

(171

)

 

-0.5

%

 

-0.8

%

 

-35.1

%

                                                                               

Change in fair value of derivative liabilities

 

$

(1,676

)

 

$

13

     

-24.7

%

   

-0.2

%

   

-12992.3

%

 

$

(9,820

)

 

$

17

     

-48.6

%

   

0.1

%

   

-57864.7

%

 

 
18

 

Interest Expense

 

Net interest expense decreased by approximately $13,000 or 24.1% the three months ended September 30, 2014 and $60,000 for the nine months ended September 30, 2014, as compared with the same respective periods in 2013. The decrease in the net interest expense is a result of the debt refinancing which occurred March 20, 2014.

 

Change in Fair Value of Derivative Liabilities

 

On December 13, 2013, we entered into a securities purchase agreement pursuant to which we issued 3,500,000 shares of our newly designated Series A 6% Convertible Preferred Stock with a stated value of $2.00 per share (for an aggregate of $7 million) and warrants to purchase 5,250,000 of our common stock, at an exercise price of $2.387 per share. We also issued warrants to purchase 525,000 shares of our common stock, at an exercise price of $2.387 per share, to the placement agent. At December 13, 2013, the investor and placement agent warrants were valued at $4,383,750 and $438,375, respectively. The warrants are accounted for as derivative financial instruments at fair value and are re-valued each reporting period. At September 30, 2014, the investor and placement agent warrants were valued at $12,615,750 and $1,261,575 respectively, and we recognized an aggregate loss related to their change in value of $1,507,275.

 

In April 2010, we issued warrants to investors and to our placement agent in connection with an equity offering. The warrants issued to the investors contain anti-dilution protection in the event we issue securities at a price lower than the exercise price of the warrants. As a result of the issuance of our Series A 6% Convertible Preferred Stock on December 13, 2013, the exercise price of the investor warrants issued in 2010 was reduced from $6.00 per share to $2.00 per share and the number of warrants was increased proportionately. The 2010 investor and placement agent warrants, which are accounted for as derivative financial instruments at fair value, were valued at $1,271,285 and $68,000 at September 30, 2014 and September 30, 2013, respectively, and we recognized a non-cash net loss for the period ended September 30, 2014 of $168,279 versus a non-cash gain of approximately $17,000 for the three month period ended September 30, 2013.

 

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

 

On May 22, 2014 and May 29, 2014, a holder of the April 2010 warrants exercised them for 42,855 and 42,858 shares Common Stock respectively.

 

 
19

 

Income Taxes

 

    Three months                 Nine Months              

(in thousands)

  ended September 30,     Percent of sales     Percent     ended September 30,     Percent of sales     Percent  
    2014     2013     2014     2013     change     2014     2013     2014     2013     Change  

Loss before income taxes

 

$

(4,084

)

 

$

(516

)

 

-60.2

%

 

-8.9

%

 

691.5

%

 

$

(13,987

)

 

$

(2,944

)

 

-69.2

%

 

-16.8

%

 

375.1

%

                                                                               

Benefit for taxes

 

$

1,350

   

$

175

     

19.9

%

   

3.0

%

   

671.4

%

 

$

1,895

   

$

1,074

     

9.4

%

   

6.1

%

   

76.4

%

Effective tax rate

   

33.1

%

   

33.9

%

                           

13.5

%

   

36.5

%

                       

 

During the three months ended September 30, 2014, our current benefit for income tax was $1,350,000. Our effective tax rate was 33% and 13.6% for the three and nine months ended September 30, 2014, respectively. The Company’s effective tax rate differs from the statutory rate due primarily to the recognition of certain losses from the fair value adjustments on the financial statements that are not deductible for tax purposes.  

 

Net loss

 

    Three months                 Nine Months              

(in thousands)

  ended September 30,     Percent of sales     Percent     ended September 30,     Percent of sales     Percent  
    2014     2013     2014     2013     change     2014     2013     2014     2013     Change  

Net Loss

 

$

(2,976

)

 

$

(341

)

 

-43.8

%

 

-5.9

%

 

772.7

%

 

$

(12,760

)

 

$

(1,870

)

 

-63.1

%

 

-10.7

%

 

582.4

%

 

Product Development

 

We have developed most of our products and product improvements internally. Funds for this development have come primarily from our internal cash flow and the proceeds of equity issuances. We maintain close working relationships with physicians and medical personnel in hospitals and universities who assist in product research and development. New and improved products play a critical role in our sales growth. We continue to emphasize the development of proprietary products and product improvements to complement and expand our existing product lines. We have a centralized research and development focus in Florida for new product development and product improvements. Our research, development and engineering units at our manufacturing location maintain relationships with suppliers, distribution locations and customers to provide an understanding of changes in the market and product needs. During the first nine months of 2014, we continued to invest in expanding our J-Plasma product line and technology. We intend to pay the ongoing costs for this development from operating cash flows; however, we continually assess our capital needs on an internal and macro economic basis, and if we deem necessary, may seek additional capital.

 

 
20

 

Reliance on Collaborative, Manufacturing and Selling Arrangements

 

We depend on certain contractual OEM customers for product development. In these situations, we plan to manufacture the products developed. However, the customer generally has no legal obligation to purchase the developed products. If the collaborative customer fails to give us purchase orders for the product after development, our future business and value of related assets could be negatively affected. Furthermore, we can give no assurance that a collaborative customer may give sufficient high priority to our products. In addition, disagreements or disputes may arise between us and our contractual customers, which could adversely affect production of our products. We also have two collaborative arrangements with foreign suppliers, in which we request the development of certain items and components, and we purchase them pursuant to purchase orders. Our purchase orders are never longer than one year and are supported by orders from our customers. We have a manufacturing agreement with our Bulgarian supplier which may result in certain contingent liabilities on our part if we terminate our arrangement prior to July 1, 2015.

 

Liquidity and Capital Resources

 

Our working capital at September 30, 2014 declined approximately $3.7 million to $13.3 million when compared to the approximately $17.0 million at December 31, 2013. Accounts receivable days of sales outstanding were 35.8 days and 34.0 days at September 30, 2014 and 2013, respectively. The increase in receivable days was due to increased volume and timing. The number of days worth of sales in inventory, which is the total inventory available for production divided by the 12 month average cost of materials, decreased 81 days to 198 days equating to an inventory turn ratio of 1.8 at September 30, 2014 from 280 days and an inventory turn ratio of 1.2 at December 31, 2013. The lower number of days worth of sales is mainly due to decreased inventory resulting from the increase in sales of OEM generators and electrodes and a write down of excess and obsolete inventory during the nine month period ended September 30, 2014.

 

We used cash in operations of approximately $614,270 for the nine months ended September 30, 2014, compared to cash used in operations of approximately $1.2 million for the same period in 2013. Gains in our core and OEM businesses were more than offset by expenses associated with the increased commercialization efforts surrounding J-Plasma.

 

During the nine month period ended September 30, 2014, we used approximately $319,419 for the purchase of property and equipment as compared to purchases amounting to approximately $417,000 for the same period in 2013.

 

Cash used by financing activities of approximately $855,000 during the first nine months of 2014, an increase of cash used of approximately $800,000 as compared with the same period in 2013. The increase in cash used was primarily the result of our paying the Industrial Revenue Bonds in the amount of approximately $3.26 million, the redemption of warrants in the amount of approximately $421,000 offset by proceeds from the exercise of warrants of approximately $248,860, from our note payable with the Bank of Tampa for approximately $3.5 million, and compliance with a loan covenant to restrict $898,000 of cash during the nine months ended September 30, 2014.

 

 
21

 

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

 

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

 

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

 

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

 

Our future contractual obligations for agreements with initial terms greater than one year and agreements to purchase materials in the normal course of business are summarized as follows (in thousands):

 

Description

  Years Ending December 31,  
    2014     2015     2016     2017     2018     Therafter  

Operating leases

 

$

55

   

$

104

   

$

107

   

$

110

   

$

112

   

$

115

 

Purchase commitments

   

3,375

     

-

     

-

     

-

     

-

     

-

 

Long-term debt

   

60

     

239

     

239

     

2,934

     

-

     

-

 

Total

 

$

3,490

   

$

343

   

$

346

   

$

3,044

   

$

112

   

$

115

 

 

We are continuing to make substantial investments in the development and marketing of our J-Plasma® technology, which may adversely affect our profitability and cash flow in the next 12 to 24 months. While we believe that these investments may generate additional revenues and profits in the future, there can be no assurance that J-Plasma will be successful or that such future revenues and profitability will be realized. Since June 2010 through September 30, 2014, we have invested approximately $4.7 million in the development and marketing of our J-Plasma® technology, of which $875,000 was invested in the third quarter of 2014.

 

 
22

 

Critical Accounting Estimates

 

In preparing the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), we have adopted various accounting policies. Our most significant accounting policies are disclosed in Note 2 to the consolidated financial statements included in our report on Form 10-K/A for the year ended December 31, 2013, which we filed on May 8, 2014.

 

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

 

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

 

Inventory reserves

 

When necessary, we maintain reserves for excess and obsolete inventory resulting from the potential inability to sell our products at prices in excess of current carrying costs. The markets in which we operate are highly competitive, with new products and surgical procedures introduced on an ongoing basis. Such marketplace changes may cause our products to become obsolete. We make estimates regarding the future recoverability of the costs of these products and record a provision for excess and obsolete inventories based on historical experience and expected future trends. If actual product life cycles, product demand or acceptance of new product introductions are less favorable than projected by management, additional inventory write-downs may be required, which would unfavorably affect future operating results. As such, for the quarter ended September 30, 2014, we recorded a charge of approximately $189,000.

 

 
23

 

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. For the quarter just ended, the company reviewed such assets and found no impairment indicators.

 

Liabilities valued at fair value

 

Certain financial instruments, such as warrants, which are indexed to our common stock, are classified as liabilities when either: (a) the holder possesses rights to net-cash settlement or (b) physical or net-share settlement is not within our control. In such instances, net-cash settlement is assumed for financial accounting and reporting purposes, even when the terms of the underlying contracts do not provide for net-cash settlement. Such financial instruments are initially recorded, and continuously carried, at fair value (see Note 5).

 

Determining the fair value of these instruments involves judgment and the use of certain relevant assumptions including, but not limited to, interest rate risk, historical volatility and stock price, estimated life of the derivative, anti-dilution provisions, and conversion/redemption privileges. The use of different assumptions or changes in those assumptions could have a material effect on the estimated fair value amounts.

 

Stock-based compensation

 

Under our 2012 equity incentive plan, options to purchase shares of our common stock may be granted to our key employees, officers, directors and consultants by the Board of Directors. We account for stock options in accordance with FASB ASC Topic 718 Compensation-Stock Compensation with option expense amortized over the vesting period based on the trinomial lattice option-pricing model fair value on the grant date, which includes a number of estimates that affect the amount of our expense.

 

Litigation Contingencies

 

From time to time, we are exposed to claims and litigation arising in the ordinary course of business and use various methods to resolve these matters in a manner that we believe serves the best interest of the Company and our stockholders. There can be no assurance these actions or other third party assertions will be resolved without costly litigation, or in a manner that is not adverse to our financial position. We do not believe that any of the currently identified claims or litigation matters will have a material adverse impact on our results of operations, cash flows or financial condition. However, given uncertainties associated with any litigation, if our assessments prove to be wrong, or if additional information becomes available such that we estimate that there is a possible loss or possible range of loss associated with these contingencies, then we would record the minimum estimated liability, which could materially impact our results of operations, financial position and cash flows.

 

 
24

 

Income taxes

 

We utilize the liability method of accounting for income taxes as set forth in ASC 740. Under the liability method, deferred taxes are determined based on the temporary differences between the financial statement and tax basis of assets and liabilities using tax rates expected to be in effect during the years in which the basis differences reverse. A valuation allowance is recorded when it is more likely than not that some of the deferred tax assets will not be realized. In determining the need for valuation allowances we considered projected future taxable income and availability of tax planning strategies. If in the future we determine that that we would not be able to realize our recorded deferred tax assets, an increase in the valuation allowance would be recorded, decreasing earnings in the period in which such determination is made.

 

We assess our income tax positions and record tax benefits for all years subject to examination based upon our evaluation of the facts, circumstances and information available as of the reporting date. For those tax positions where there is a greater than a 50% likelihood that a tax benefit will be sustained, we have recorded the largest amount of tax benefit that may potentially be realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where there is less than 50% likelihood that a tax benefit will be sustained, no tax benefit has been recognized in the financial statements.

 

Inflation

 

Inflation has not materially impacted the operations of our company.

 

Off-Balance Sheet Arrangements

 

We have no off-balance sheet arrangements at this time.

 

Foreign Currency Exchange

 

Foreign currency exchange has not materially impacted the operations of our company.

 

Recent Accounting Pronouncements

 

See Note 4.

 

 
25

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Our short-term investments consist of cash and cash equivalents. 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 September 30, 2014, 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 September 30, 2014. Based upon that evaluation, our CEO and CFO concluded that, as of the end of that period, 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 (as defined in Rules 13(a)-15(f) and 15(d)-15(f)) during the nine months ended September 30, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 
26

 

PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

Stockholder Derivative Action

 

In September 2011, the Company was served in a purported stockholder derivative action (the “Derivative Action”) that was filed in the United States District Court for the Middle District of Florida (the “Court”) against the Company and certain of its present and former officers and directors. The complaint asserted, among other things, breach of fiduciary duties and bad faith in relation to the management of the Company’s business. The complaint sought, among other things, unspecified compensatory damages and various forms of equitable relief. The allegations in the Derivative Action appear to be based largely on counterclaims previously asserted by Steven Livneh, a former director of the Company, in a prior litigation between the Company and Mr. Livneh which was settled.

 

On June 26, 2014, the Company entered into a Stipulation and Agreement of Settlement (“Stipulation of Settlement”) setting forth the terms of the settlement of the claims asserted against the Company in the Derivative Action. On July 7, 2014, the Court issued an Amended Order Preliminarily Approving Derivative Settlement and Providing for Notice (“Preliminary Order”) preliminarily approving the Stipulation of Settlement. On October 2, 2014, the Court entered an order and final judgement approving the Stipulation of Settlement.

 

In the normal course of business, we are subject, from time to time, to legal proceedings, lawsuits and claims. Such matters are subject to many uncertainties, and outcomes are not predictable with assurance. If any of these matters arise in the future, it could affect the operating results of any one or more quarters.

 

We expense costs of litigation related to contingencies in the periods in which the costs are incurred.

 

ITEM 1A. RISK FACTORS

 

There have been no material changes to the risk factors previously disclosed in our Form 10-K/A for the year ended December 31, 2013, in response to Item 1A to Part 1 of Form 10-K.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

None.

 

 
27

 

ITEM 6. EXHIBITS

 

31.1

Certifications of Robert L. Gershon, 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.

   

31.2

Certifications of Peter L. Donato, 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.

   

32.1

Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

   

32.2

Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

   

101.1

Financial Statements from the Quarterly Report on Form 10-Q of Bovie Medical Corporation for the three and nine months ended September 30, 2014, filed on November 10, 2014, formatted in XBRL.

 

 
28

 

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: November 10, 2014

By:

/s/ Robert L. Gershon

 
   

Robert L. Gershon

 
   

Chief Executive Officer and

 
   

(Principal Executive Officer)

 
       

Dated: November 10, 2014

By:

/s/ Peter L. Donato

 
   

Peter L. Donato

 
   

Executive Vice President,Chief Financial Officer,

Treasurer, and Secretary (Principal Financial Officer)

 

 

 

 

29