10-K 1 form10k.htm BOVIE MEDICAL CORPORATION 10-K 12-31-2012 form10k.htm


U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

x ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2012
Commission file number 0-12183

BOVIE MEDICAL CORPORATION

(Exact name of registrant as specified in its charter)
 
Delaware No.
 
11-2644611
(State or other jurisdiction
of incorporation or organization)
 
(IRS Employer Identification No.)

734 Walt Whitman Rd., Melville, New York 11747
(Address of principal executive offices)

(631) 421-5452
(Issuer's telephone number)

Securities registered pursuant to Section 12(b) of the Act:

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 if the Company is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes: o     No x

Indicate by check mark if the Company is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes:  o     No x

Indicate by check mark whether the registrant (I) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the past 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 o

Indicate by check mark whether the registrant submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (para 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 o

Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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 definition of “large accelerated filer”, “accelerated filer” and “small reporting company” in Rule 12b-2 of the Exchange Act (Check one):
 
Large accelerated filer o
Accelerated filer o
Non-accelerated filer o
Smaller reporting company x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes:  o     No x

The aggregate market value of the voting stock held by non-affiliates computed by reference to the price at which the stock was sold, or the average bid and asked prices of such stock, as of June 30, 2012, the registrant’s most recently completed second fiscal quarter, was approximately $46,300,000.

The number of shares of the registrant's $.001 par value common stock outstanding on the NYSE Amex exchange as of March 4, 2013 was 17,788,177

Company Symbol-BVX
Company SIC (Standard Industrial Code)-3841

DOCUMENTS INCORPORATED BY REFERENCE
 
None.
 


 
 

 
 
Bovie Medical Corporation
2012 Form 10-K Annual Report


Part I
 
Page
Item 1
1
Item 1A
6
Item 1B
14
Item 2
15
Item 3
15
Item 4
17
 
 
 
Part II
 
 
Item 5
18
Item 6
20
Item 7
21
Item 7A
32
Item 8
32
Item 9
32
Item 9A
32
Item 9B
33
     
Part III
 
 
Item 10
33
Item 11
38
Item 12
45
Item 13
48
Item 14
49
 
49
 
 
 
Part IV
   
Item 15
F-27
 
 
BOVIE MEDICAL CORPORATION
 
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 risk factors discussed in Item 1A below to be a complete statement of all potential risks and uncertainties.  Past performance is no guaranty of future results.
 
Part I

ITEM 1.

General

Bovie Medical Corporation (“Company”, “Bovie”, “we”, “us”, or “our” ) was incorporated in 1982, under the laws of the State of Delaware and has its principal executive office at 734 Walt Whitman Road, Melville, New York 11747.

We are actively engaged in the business of developing, manufacturing, and marketing medical products and devices with a strong emphasis in electrosurgical generators and electrosurgical disposables. We sell a broad range of products designed for doctor’s offices, surgery centers and hospitals.

Significant Subsidiaries

Aaron Medical Industries, Inc. is a wholly-owned Florida corporation based in Clearwater, Florida. It is principally engaged in the business of marketing our medical products.

Bovie Canada ulc (a wholly-owned subsidiary) is an Alberta, Canada Corporation which, prior to June 2010, operated a facility in Windsor, Ontario. This facility was consolidated into our U.S. operations. There was no activity in this entity during 2012 and 2011.  In December of 2012 Bovie Canada ulc was dissolved.

Industry

Although the medical device industry can be challenging and very competitive, we believe it will continue to have a positive long term growth outlook with the number of surgical procedures performed increasing annually as a result of the aging “baby boomer” population. Additionally, we also anticipate a continued increase in minimally invasive surgical procedures due to ongoing advancements in technology coupled with continued overall pressure to reduce healthcare costs via a reduction in patient trauma and recovery time. Expanding global markets will also continue to provide growth opportunities for the medical device industry.

Business Strategy

We manufacture and market various medical products, both under private label and the Bovie brands (Bovie®, Aaron®, IDS™, and ICON™), to distributors worldwide. Additionally, Bovie has original equipment manufacturing (OEM) agreements with other medical device manufacturers. These OEM and private label arrangements and our use of the Bovie brands allow us to gain greater market share for the distribution of our products.
 
 
Among our goals is that we strive to be a leader in advanced electrosurgical generators which can be used in the different niche markets with minimally invasive surgical instruments as well as a pioneer in plasma technology and its various medical applications. In 2012, we continued the development of our new products Seal-N-Cut™, A1450™ generator, and additional devices for our J-Plasma™ product line.

Overall sales increased by approximately 8.9% from 2011 to 2012.

Our electrosurgery sales continued to trend  upward by approximately 4.7% in 2012 over 2011, mainly  in our generator sales. We also experienced an upward trend in our electrosurgery disposables of approximately 30%, due mainly to increased sales of our coated electrodes line in 2012 over 2011.

We also continue to see an upward trend in 2012 in third party product sales which we have introduced to our distributors as part of our strategic plan to maximize our distribution channels.  In 2011, we introduced a product line of medical room lighting products manufactured by Medical Illuminations International, Inc., a California based corporation. We intend to continue to identify and offer additional new third party products that fit our portfolio of products throughout 2013.

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 December 31, 2012, we have invested approximately $1.6 million in the development and marketing of our J-Plasma™ technology.

Company Products

We group our products into three main categories: electrosurgery, cauteries, and other products. Information regarding sales by product categories and related percentages is included in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of this report and is incorporated by reference herein.

Electrosurgery Products

Electrosurgery is our largest product line and includes desiccators, generators, electrodes, electrosurgical pencils and various ancillary disposable products. These electrosurgical products are used during surgical procedures in gynecology, urology, plastic surgery, dermatology, veterinary, and other surgical markets for the cutting and coagulation of tissue. It is estimated that 80% of all surgical procedures performed worldwide are accomplished by electrosurgery. Our electrosurgery products fall under two categories, monopolar or bipolar. Monopolar products require the use of a grounding pad attached to the patient for the return of the electrical current, while bipolar products consist of two electrodes; one for the inbound current and one for the return current and therefore do not require the use of a grounding pad.

Aaron® 900 and Aaron® 940

These products are low powered (30 and 40 watt) high frequency desiccators. These units were designed primarily for dermatology and family practice physicians. The units are used mainly for removing small skin lesions and growths as well as for office based coagulation.

Aaron® 950

Bovie has developed a high frequency desiccator with cut capacity for outpatient surgical procedures. These generators allow physicians to change the power settings with one action. They were designed mainly for use in doctors’ offices and are utilized in a variety of specialties including dermatology, gynecology, family practice, urology, plastic surgery and ophthalmology.
 
 
Aaron ®1250U

We have also developed a 120-watt multipurpose electrosurgery generator. The unit features monopolar and bipolar functions with pad sensing. This generator was recently redesigned to allow one unit to work with a line voltage ranging from 100 – 240 VAC whereas previously there was a need for three different versions.

Aaron ®2250 / 3250 and IDS 200 / 300 / 400

Given the market interest in more powerful electrosurgical generators, we have developed 200, 300 and 400-watt multipurpose digital electrosurgery generators designed for the rapidly expanding surgi-center market and the hospital market. The digital hardware allows very high parallel data processing throughout the operation. All data is sampled and processed digitally. For the first time in electrosurgery, through digital technology, we are able to measure tissue impedance in real time (5,000 times a second). These units have been designed based on a digital feedback system. Bovie is using dedicated digital hardware instead of a general purpose controller for processing data.  As the impedance varies, the power is adjusted to deliver a consistent clinical effect. The IDS™ 200 / Aaron® 2250 have the capability to do most procedures performed today in the surgi-center or outpatient settings and were introduced in 2003. Although 200 watts is more than enough power to do most procedures in the operating room, 300 watts is considered the standard and believed to be what most hospitals and surgi-centers will require. Therefore, we developed the IDS™ 300/ Aaron® 3250. The Bovie® IDS™ 400 is a 400 watt generator designed primarily for sale in the overseas markets. These units feature both monopolar and bipolar functions, have pad and tissue sensing, plus nine blended cutting settings.

ICON GI and ICON GP

The ICON™ product lines are innovative, custom designed specialty electrosurgical generators that incorporate an easy to use touch-screen interface which provides the user flexibility in achieving a desired effect through different digitally built-in modes.  In addition, the ICON™ product line was designed to improve safety and convenience by requiring the use of only split pads with digital technology to protect against pad burns. It features specialized error messaging to prevent misinterpretation and allows for quicker troubleshooting, and has specialized audible alerts to indicate improper cable connections. The ICON™ line represents a new foundation platform that can be readily expanded thereby reducing the development time and cost for future new specialized generators and also allowing the user to easily upgrade existing units. The ICON™ GI is designed for the gastrointestinal (“GI”) niche market, while the ICON™ GP is designed for a more general purpose market like hospital operating rooms, surgery centers, etc.

ICON VS

This generator expands further on our ICON™ platform which incorporates a flexible and simple user interface and allows for customization of the output modes for a variety of electrosurgical applications. This product, like the ICON™ GI and GP, its predecessor generators, was designed to add safety features and improve convenience in performing general purpose procedures and includes a vessel sealing component. This generator will also be used with our Seal-N-Cut handle and accessories. We have received 510k FDA clearance to market the ICON VS.

Resistick II

Resistick™ II is a coating that is applied to stainless steel which resists eschar (scab or scar tissue caused by burning) during surgery. The coated electrodes continue the expansion of the Bovie® line of electrosurgical disposables.  We have seen a strong demand since the introduction of this product line in 2011.

Disposable Laparoscopic Instruments

Disposable laparoscopic instruments are available in over thirty different jaw patterns and lengths, including ratcheted and non-ratcheted and offer the physician the quality of a reusable instrument with the convenience of a disposable.  These instruments are used by physicians from a diverse group of specialties such as gynecology, general surgery and urology.
 
 
ICON GS (J-Plasma)

Our J-Plasma technology is the foundation for the ICON GS plasma system, which utilizes a gas ionization process producing a stable thin focused beam of ionized gas that can be controlled in a wide range of temperatures and intensities, providing the surgeon greater precision, minimal invasiveness and an absence of conductive currents during surgery. The development of this new gas system generator also includes the design of a new proprietary handpiece.

Prior to our acquiring the J-Plasma™ technology, a German-based company had licensed the same technology.  The license agreement was terminated but the German company has filed its own patent possibly using the J-Plasma™ technology as its basis.  Although we have filed for additional patent applications on enhancements outside of the original licensed technology, our management believes this German company may be infringing on our original patent and as a result, there is no assurance that there will not be future litigation or the possible loss of our competitive advantage.

Cauteries

Battery Operated Cauteries

Battery operated cauteries constitute our second largest product line. Cauteries were originally designed for precise hemostasis (to stop bleeding) in ophthalmology. The current use of cauteries has been substantially expanded to include sculpting woven grafts in bypass surgery, vasectomies, evacuation of subungual hematoma (bleeding from a smashed fingernail) and for arresting bleeding in many types of surgery. Battery operated cauteries are primarily sterile one-time use products. We manufacture one of the broadest lines of cauteries in the world, including but not limited to, a line of replaceable battery and tip cauteries, which are popular in overseas markets.

Other Products

Battery Operated Medical Lights

We manufacture a variety of specialty lighting instruments for use in ophthalmology as well as specialty lighting instruments for general surgery, hip replacement surgery and for the placement of endotracheal tubes in emergency and surgical procedures. We also manufacture and market physicians’ office use penlights.

Nerve Locator Stimulator

We manufacture a nerve locator stimulator primarily used for identifying motor nerves in hand and facial reconstructive surgery. This instrument is a self-contained, battery-operated unit, individually packaged sterile, for one time use.

Research and Development and New Products
 
Our research and development activities are an essential component of our efforts to develop new innovative products for introduction in the marketplace. New and improved products play a critical role in our sales growth. We continue to place emphasis on the development of proprietary products and product improvements to complement and expand our existing product lines. We maintain close working relationships with physicians and medical personnel in hospitals and universities who assist in product research and areas of development. Our research and development activities are primarily carried out internally.

 
Aaron® 1450

The Aaron® 1450-RF is a high frequency generator designed for surgery in the doctor office setting.  This unit operates at 4 MHz, eight times higher frequency than a standard electrosurgical generator which operates at approximately 500 KHz. This unit is intended to be the first in a family of 4MHz generators initially designed for several office based specialties.  The 1450-RF has been designed to include universal power control which allows the unit to be used in any power setting worldwide. In March 2011, the FDA identified deficiencies in the original 510k submission and outlined several unresolved issues that needed to be addressed. We continue to perform additional testing and evaluations to resolve the issues that were raised during the review. We plan to include this information in a new 510k submission.

Seal-N-Cut Handle and Accessories

The Seal-N-Cut™ is a disposable endoscopic surgical handle that supports a plurality of electrical and mechanical modes. This technologically advanced endoscopic device will target the growing vessel and tissue sealing and cutting market. Although we have experienced significant delays in the development of this product for market due to modifications and improvements related to the product design, we anticipate that we will re-submit our application for 510k approval during 2013.

Sales & Marketing

The majority of our products are marketed through medical distributors, which distribute to more than 6,000 hospitals, doctors offices, and other healthcare facilities. New distributors are contacted through responses to our advertising in international and domestic medical journals and domestic or international trade shows. International sales represented approximately 18% of total revenues in 2012 and 21% in both 2011 and 2010. 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.

We have launched our new surgical suite product lines and have established a network of approximately 50 commission-based direct sales contractors to market and sell these products.

Our business is generally not seasonal in nature.

Competition

We compete with numerous manufacturers and distributors of medical supplies and devices, many of which are large and well established. In addition, our products are sold in various ways including private labeling some of our products for major distributors under their label, and selling the majority of our other products through distributors. Private labeling allows us to increase our position in the marketplace and thereby compete from two different approaches, through our Aaron® or Bovie® label, and our customers’ private label. Our private label customers distribute our products under their name through their internal sales force. Selling the majority of our other products through distribution increases our sales potential and helps level the playing field in regards to our larger competitors as most of the companies we compete with sell direct. Domestically, we believe, we have a substantial market share in the field of electrosurgical generator manufacturing which consists of our Company label and OEM units.

Our main competitors in electrosurgical and accessory markets are Valleylab (a division of Covidien), Conmed and Erbe Electromedizine; in the battery operated cautery market is Medtronic Xomed, Inc.; and in the endoscopic instrumentation market is Ethicon and U.S. Surgical. Currently, we are the only company with helium based plasma products. However, there are other argon plasma competitors namely Conmed and Plasmajet, and other CO2 laser product competitors for our target market.  We believe our competitive position did not change in 2012.
 
 
Intellectual Property

We rely on our intellectual property that we have developed or acquired over the years including patents, trade secrets, technical innovations, and various licensing agreements to provide our future growth and build our competitive position. We own 15 patents and 16 trademarks in the U.S.  Some of our early patents are nearing the end of their patent term. We also have filed a number of U.S. and international patent applications for various new products. As we continue to expand our intellectual property portfolio we believe it is critical for us to continue to invest in filing patent applications to protect our technology, inventions, and improvements. However, we can give no assurance that competitors will not infringe on our patent rights or otherwise create similar or non-infringing competing products that are technically patentable in their own right.

Manufacturing and Suppliers

We are committed to producing products of the highest quality and technical advancements. We manufacture the majority of our products on our premises in Clearwater, Florida which is certified under the ISO international quality standards and may be subject to continuing regulation and routine inspections by the FDA to determine compliance with regulations in our quality system, medical device reporting, and FDA restrictions on promoting products for unapproved or off-label uses. In addition, we are also subject to regulations under the Occupational Safety and Health Act, the Environmental Protection Act and other federal, state and local regulations.

We also have collaborative arrangements with three foreign suppliers under which we request the development of certain items and components and we purchase them pursuant to purchase orders. Our purchase order commitments are never more than one year in duration and are supported by orders from our customers.

Customers

We sell the majority of our current products through major distributors which include Cardinal Health, Independent Medical Co-Op Inc. (IMCO), McKesson Medical Surgical, Inc., Medline, National Distribution and Contracting Inc. (NDC) (Abco, Cida and Starline), Owens & Minor, and Physician Sales & Service (PSS) and have manufacturing agreements for private label of certain products with others.

Backlog

The value of unshipped factory orders is not material.

Employees

At December 31, 2012, we had 147 full-time employees consisting of 4 executive officers, 21 supervisory personnel, 12 sales personnel, and 110 technical support, administrative, and production employees. None of our current employees are covered by any collective bargaining agreement and we have never experienced a work stoppage. We consider our employee relations to be good.

ITEM 1A.

In addition to risks and uncertainties in the ordinary course of business, important risk factors that may affect us are discussed below.  Additional risks not presently known to us or that we currently believe are immaterial may also significantly impair our business operations.

Risks Relating to Our Business

We are subject to litigation proceedings that could materially and adversely affect our business.
 
 
Other Litigation

In addition to the litigation risks and proceedings mentioned below, we are currently involved and may in the future become subject to legal claims or proceedings related to securities, employment, customer or third party contracts, environmental regulations, or other matters (see Item 3 – Legal Proceedings). The costs involved in defending these claims have been substantial to date and we anticipate that we will incur substantial additional costs in our defense of these claims, which have had and may continue to have an adverse effect on our profitability.  In addition, if other claims are asserted against us, we may be required to defend against such  claims, or deem it necessary or advisable to initiate a legal proceeding to protect our rights, the expense and distraction of such a claim or proceeding, whether or not resolved in our favor, could materially and adversely affect our business, financial condition and operating results. Further, if a claim or proceeding were resolved against us or if we were to settle any such dispute, we may be required to pay damages and costs or refrain from certain activities, any of which could have a material adverse impact on our business, financial condition and operating results.

Intellectual Property Litigation or Trade Secrets

We have experienced certain allegations of infringement of intellectual property rights and use of trade secrets in the past and may receive other such claims, with or without merit, in the future. Previously, claims of infringement of intellectual property rights have sometimes evolved into litigation against us, and they may continue to do so in the future. It is inherently difficult to assess the outcome of litigation. Although we believe we have adequate defenses to these claims and that the outcome of the litigation will not have a material adverse impact on our business, financial condition, or results of operations, there can be no assurances that we will prevail. Any such litigation could result in substantial cost to us, significantly reduce our cash resources, and create a diversion of the efforts of our technical and management personnel, which could have an adverse effect on our business, financial condition and operating results. If we are unable to successfully defend against such claims, we could be prohibited from future sales of the allegedly infringing product or products, which could materially and adversely affect our future growth.

 Product Liability Litigation
 
Although we carry liability insurance, due to the nature of our products and their use by professionals, we may, from time to time, be subject to litigation from persons who sustain injury during medical procedures in hospitals, physicians offices or in clinics and defending such litigation is expensive, disruptive, time consuming and could adversely affect our business. We currently maintains product liability insurance with combined coverage limits of $10 million on a claims-made basis. There is no assurance that this coverage will be adequate to protect us from any possible liabilities (individually or in the aggregate) we might incur in connection with the sale or testing of our products. In addition, we may need increased product liability coverage as additional products are commercialized. This insurance is expensive and in the future may not be available on acceptable terms, if at all (see Item 3- Legal Proceedings).

Current challenges in the credit and capital markets may adversely affect our business and financial condition.
 
The economic conditions described below should also be considered when reviewing each of the subsequent paragraphs setting forth the various aspects of our business, operations, and products.

The continued global economic uncertainty and previous disruptions in credit markets, among other things, may materially limit credit availability in the credit and capital markets, lower levels of liquidity, cause increases in the rates of default and bankruptcy, and lower consumer and business spending. Although the ultimate outcome of these events cannot be predicted, they may have a material adverse effect on the Company and our ability to raise capital or borrow money in the credit markets and potentially to draw on our revolving credit facility or otherwise obtain financing.  Similarly, current or potential customers and suppliers may no longer be in business, may be unable to fund purchases or may decide to reduce purchases, all of which could lead to reduced demand for our products, reduced gross margins, and increased customer payment delays or defaults. Further, suppliers may not be able to supply us with needed raw materials on a timely basis, may increase prices or go out of business, which could result in our inability to meet customer demand in a timely manner or affect our gross margins. We are also limited in our ability to reduce costs to offset the results of a prolonged or severe economic downturn given certain fixed costs associated with our operations.
 
 
We do a substantial amount of business with certain original equipment manufacturers (“OEM”) which as a group have produced substantial revenues for our Company. Loss of business from a major OEM customer will likely adversely affect our business.
 
We manufacture the majority of our products on our premises in Clearwater, Florida. Labor-intensive sub-assemblies and labor-intensive products may be out-sourced to our specification. Although we sell through distributors, we market our products through national trade journal advertising, direct mail, distributor sales representatives and trade shows, under the Bovie name, the Bovie/Aaron name and private label. Major distributors include Cardinal Health, IMCO, McKesson Medical Surgical, Inc., Medline, NDC (Abco, Cida and Starline), Owens & Minor, and Physician Sales & Service. If any of these distributor relationships are terminated or not replaced, our revenue from the territories served by these distributors could be adversely affected.

We are also dependent on other OEM customers who have no legal obligation to purchase products from us. Should such customers fail to give us purchase orders for the product after development, our future business and value of related assets could be negatively affected. Furthermore, no assurance can be given that such customers will give sufficient high priority to our products. Finally, disagreements or disputes may arise between us and our customers, which could adversely affect production and sales of our products.

We rely on certain suppliers and manufacturers for raw materials and other products and are vulnerable to fluctuations in the availability and price of such products and services.
 
Fluctuations in the price, availability, and quality of the raw materials we use in our manufacturing could have a negative effect on our cost of sales and our ability to meet the demands of our customers. Inability to meet the demands of our customers could result in the loss of future sales. In addition, the costs to manufacture our products depend in part on the market prices of the raw materials used to produce them. We may not be able to pass along to our customers all or a portion of our higher costs of raw materials due to competitive and marketing pressures, which could decrease our earnings and profitability.
 
We also have collaborative arrangements with three key foreign suppliers under which we request the development of certain items and components and we purchase them pursuant to purchase orders. Our purchase order commitments are never more than one year in duration and are supported by orders from our customers. While we believe we could ultimately procure other sources for these components, should we experience any significant disruptions in this key supply chain, it could render us unable to meet the demands of our customers which as a result could adversely affect our earnings.

If we are unable to protect our patents or other proprietary rights, or if we infringe on the patents or other proprietary rights of others, our competitiveness and business prospects may be materially damaged.

We own 15 U.S. patents and 16 registered U.S. trademarks with some of our early patents nearing the expiration of their patent term. We also have several U.S. and international patent applications pending for various new products. We intend to continue to seek legal protection, primarily through patents, for our proprietary technology. Seeking patent protection is a lengthy and costly process, and there can be no assurance that patents will be issued from any pending applications, or that any claims allowed from existing or pending patents will be sufficiently broad or strong to protect our proprietary technology. There is also no guarantee that any patents we hold will not be challenged, invalidated or circumvented, or that the patent rights granted will provide competitive advantages to us. Our competitors have developed and may continue to develop and obtain patents for technologies that are similar or superior to our technologies. In addition, the laws of foreign jurisdictions in which we develop, manufacture or sell our products may not protect our intellectual property rights to the same extent as do the laws of the United States.
 
 
Adverse outcomes in current or future legal disputes regarding patent and other intellectual property rights could result in the loss of our intellectual property rights, subject us to significant liabilities to third parties, require us to seek licenses from third parties on terms that may not be reasonable or favorable to us, prevent us from manufacturing, importing or selling our products, or compel us to redesign our products to avoid infringing third parties’ intellectual property. As a result, our product offerings may be delayed, and we may be unable to meet customers’ requirements in a timely manner. Regardless of the merit of any related legal proceeding, we have incurred in the past and may be required to incur in the future substantial costs to prosecute, enforce or defend our intellectual property rights. Even in the absence of infringement by our products of third parties’ intellectual property rights, or litigation related to trade secrets, we have elected in the past and may in the future elect to enter into settlements to avoid the costs and risks of protracted litigation and the diversion of resources and management’s attention. However, if the terms of settlements entered into with certain of our competitors are not observed or enforced, we may suffer further costs and risks. Any of these circumstances could have a material adverse effect on our business, financial condition and resources or results of operations. (See ITEM 3. Legal Proceedings)

Our ability to develop intellectual property depends in large part on hiring, retaining and motivating highly qualified design and engineering staff with the knowledge and technical competence to advance our technology and productivity goals. To protect our trade secrets and proprietary information, generally we have entered into confidentiality agreements with our employees, as well as with consultants and other parties. If these agreements prove inadequate or are breached, our remedies may not be sufficient to cover our losses.

Divestitures of some of our operations or product lines may materially and adversely affect our business and results of operations.
 
We periodically evaluate the performance of our entire operations and we may sell, consolidate, or close a portion of our business or product lines. Any divestitures may result in significant write-offs, including those related to goodwill and other intangible assets, which could have a material adverse effect on our business and results of operations. Divestitures could involve additional risks, including difficulties in the separation of operations, services, products and personnel, the diversion of management’s attention from other business concerns, the disruption of our business and the potential loss of key employees. We may not be successful in managing these or any other significant risks that we encounter in divesting a business or product line.

Our business is subject to the potential for defects or failures associated with our products which could lead to recalls or safety alerts and negative publicity.

Manufacturing flaws, component failures, design defects, off-label uses or inadequate disclosure of product-related information could result in an unsafe condition or the injury or death of a patient. These problems could lead to a recall of, or issuance of a safety alert relating to, our products and result in significant costs and negative publicity. Due to the strong name recognition of our brands, an adverse event involving one of our products could result in reduced market acceptance and demand for all products within that brand, and could harm our reputation and our ability to market our products in the future. In some circumstances, adverse events arising from or associated with the design, manufacture or marketing of our products could result in the suspension or delay of our current regulatory reviews of our applications for new product approvals. We also may undertake voluntarily to recall products or temporarily shut down certain production lines based on internal safety and quality monitoring and testing data. Any of the foregoing problems could disrupt our business and have a material adverse effect on our business, results of operations, financial condition and cash flows.

We have incurred and may in the future incur impairments to goodwill or long-lived assets.

We review our long-lived assets, including goodwill and other intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. Additionally, if in any period our stock price decreases to the point where our fair value, as determined by our market capitalization, is less than the book value of our assets, this could also indicate a potential impairment and we may be required to record an impairment charge in that period, which could adversely affect our results of operations.
 
 
Our valuation methodology for assessing impairment requires management to make judgments and assumptions based on historical experience and to rely heavily on projections of future operating performance. We operate in highly competitive environments and projections of future operating results and cash flows may vary significantly from actual results. Additionally, if our analysis indicates potential impairment to goodwill or any other long-lived intangible asset, we may be required to record additional charges to earnings in our financial statements, which could negatively impact our results of operations.

Risks Related to Our Industry
 
The medical device industry is highly competitive and we may be unable to compete effectively.
 
The medical device industry is highly competitive. Many competitors in this industry are well-established, do a substantially greater amount of business, and have greater financial resources and facilities than we do.

Domestically, we believe we rank third in the number of units sold in the field of electrosurgical generator manufacturing and we sell our products and compete with other manufacturers in various ways. In addition to advertising, attending trade shows and supporting our distribution channels, we strive to enhance product quality and functionality, improve user friendliness, and expand product exposure.

We have also invested substantial resources to develop our J-Plasma™ technology. If we are unable to gain acceptance in the marketplace of J-Plasma™, our business and results of operations may be materially and adversely affected. Since June of 2010 through December 31, 2012, we have invested approximately $1.6 million in the development and marketing of our J-Plasma™ technology.

We also compete by private labeling our products for major distributors under their label. This allows us to increase our position in the marketplace and thereby compete from two different approaches, our Aaron® or Bovie® label, and our customers’ private label. Our private label customers distribute our products under their name through their internal sales force. We believe our main competitors do not private label their products.

Lastly, at this time we sell the majority of our products through distributors. Many of the companies we compete with sell direct, thus competing directly with distributors they sometimes use.

Our main competitors in electrosurgical and accessory markets are Valleylab (a division of Covidien), Conmed and Erbe Electromedizine; in the battery operated cautery market is Medtronic Xomed, Inc.; and in the endoscopic instrumentation market is Ethicon and U.S. Surgical. Currently, we are the only company with helium based plasma products. However, there are other argon plasma competitors namely Conmed and Plasmajet, and other CO2 laser product competitors for our target market.  We believe our competitive position did not change in 2012.

Our industry is highly regulated by the U.S. Food and Drug Administration and international regulatory authorities, as well as other governmental, state and federal agencies which have substantial authority to establish criteria which must be complied with in order for us to continue in operation.
 
United States

Our products and research and development activities are subject to regulation by the FDA and other regulatory bodies. FDA regulations govern, among other things, the following activities:
 
·
Product development
·
Product testing
·
Product labeling
·
Product storage
·
Pre-market clearance or approval
·
Advertising and promotion
 
 
·
Product traceability, and
·
Product indications.
 
In the United States, medical devices are classified on the basis of control deemed necessary to reasonably ensure the safety and effectiveness of the device. Class I devices are subject to general controls. These controls include registration and listing, labeling, pre-market notification and adherence to the FDA Quality System Regulation. Class II devices are subject to general and special controls. Special controls include performance standards, post market surveillance, patient registries and FDA guidelines. Class III devices are those which must receive pre-market approval by the FDA to ensure their safety and effectiveness. Currently, we only manufacture Class I and Class II devices.  Pre-market notification clearance must be obtained for some Class I and most Class II devices when the FDA does not require pre-market approval. All of our products have been cleared by the pre-market notification process.

A pre-market approval application is required for most Class III devices. A pre-market approval application must be supported by valid scientific evidence to demonstrate the safety and effectiveness of the device. The pre-market approval application typically includes:
 
·
Results of bench and laboratory tests, animal studies, and clinical studies
·
A complete description of the device and its components; and
·
A detailed description of the methods, facilities and controls used to manufacture the device, and proposed labeling.
 
The pre-market approval process can be expensive, uncertain and lengthy. A number of devices for which pre-market approval has been sought by other companies have never been approved for marketing.

International Regulation

To market products in the European Union, our products must bear the “CE” mark.  Manufacturers of medical devices bearing the CE mark have gone through a conformity assessment process that assures that products are manufactured in compliance with a recognized quality system and to comply with the European Medical Devices Directive.

Each device that bears a CE mark has an associated technical file that includes a description of the following:
 
·
Description of the device and its components,
·
A summary of how the device complies with the essential requirements of the medical devices directive,
·
Safety (risk assessment) and performance of the device,
·
Clinical evaluations with respect to the device,
·
Methods, facilities and quality controls used to manufacture the device, and
·
Proposed labeling for the device.
 
Manufacturing and distribution of a device is subject to ongoing surveillance by the appropriate regulatory body to ensure continued compliance with quality system and reporting requirements.

We began CE marking of devices for sale in the European Union in 1999. In addition to the requirement to CE mark, each member country of the European Union maintains the right to impose additional regulatory requirements.

Outside of the European Union, regulations vary significantly from country to country. The time required to obtain approval to market products may be longer or shorter than that required in the United States or the European Union. Certain European countries outside of the European Union do recognize and give effect to the CE mark certification. We are permitted to market and sell our products in those countries.
 
 
If we are unable to successfully introduce new products or fail to keep pace with competitive advances in technology, our business, financial condition and results of operations could be adversely affected. In addition, our research and development efforts rely upon investments and alliances, and we cannot guarantee that any previous or future investments or alliances will be successful.
 
Our research and development activities are an essential component of our efforts to develop new and innovative products for introduction in the marketplace. New and improved products play a critical role in our sales growth. We continue to place emphasis on the development of proprietary products, such as our J-Plasma™ technology,  and product improvements to complement and expand our existing product lines. We maintain close working relationships with physicians and medical personnel in hospitals and universities who assist in product research and areas of development. Our research and development activities are primarily conducted internally and are expensed as incurred. These expenses include direct expenses for wages, materials and services associated with the development of our products net of any reimbursements from customers. Research and development expenses do not include any portion of general and administrative expenses. Our Clearwater, Florida facility has been our flagship research and design location. We expect to continue making future investments to enable us to develop and market new technologies and products to further our strategic objectives and strengthen our existing business.  However, we cannot guarantee that any of our previous or future investments will be successful or that our new products such as J-Plasma™, will gain market acceptance, the failure of which would have a material adverse effect on our business and results of operations.
 
The amount expended by us on research and development of our products during the years 2012, 2011 and 2010, totaled approximately $1.3, $1.2, and $1.9 million respectively. During the past three years, we invested substantial resources in the development and marketing of our J-Plasma technology, including the ICON GS plasma system, Endoscopic Modular Instruments and accompanying new generators, and the Aaron 1450 generator. We have not incurred any direct costs relating to environmental regulations or requirements. For 2013, we expect the amount of our expenditures for research and development activities to remain similar to the level in 2012.

Even if we are successful in developing and obtaining approval for our new product candidates, there are various circumstances that could prevent the successful commercialization of the products.

Our ability to successfully commercialize our products will depend on a number of factors, any of which could delay or prevent commercialization, including:
 
 
 ●
the regulatory approvals of our new products are delayed or we are required to conduct further research and development of our products prior to receiving regulatory approval;
 
 ●
we are unable to build a sales and marketing group to successfully launch and sell our new products;
 
 ●
we are unable to raise the additional funds needed to successfully develop and commercialize our products or acquire additional products for growth;
 
 ●
we are required to allocate available funds to litigation matters;
 
 ●
we are unable to manufacture the quantity of product needed in accordance with current good manufacturing practices to meet market demand, or at all;
 
 ●
our product is determined to be ineffective or unsafe following approval and is removed from the market or we are required to perform additional research and development to further prove the safety and effectiveness of the product before re-entry into the market;
 
 ●
competition from other products or technologies prevents or reduces market acceptance of our products;
 
 ●
we do not have and cannot obtain the intellectual property rights needed to manufacture or market our products without infringing on another company’s patents; or
 
 ●
we are unsuccessful in defending against patent infringement or other intellectual property rights, claims that could be brought against us, our products or technologies;

The failure to successfully acquire or develop and commercialize new products will adversely affect the future growth of our business, financial condition and results of operations.
 
 
Our international operations subject us to foreign currency fluctuations and other risks associated with operating in foreign countries.

We operate internationally and enter into transactions denominated in foreign currencies. To date, we have not hedged our exposure to changes in foreign currency exchange rates, and as a result, we are subject to foreign currency transaction and translation gains and losses. We purchase goods and services in U.S. dollars and Euros. Foreign exchange risk is managed primarily by satisfying foreign denominated expenditures with cash flows or assets denominated in the same currency therefore we are subject to some foreign currency fluctuation risk. Our currency value fluctuations were not material for 2012.

Our operations and cash flows may be adversely impacted by healthcare reform legislation.

The Patient Protection and Affordable Care Act and Health Care and Education Affordability Reconciliation Act were enacted into law in the U.S. in March 2010.  Among other initiatives, this legislation imposes a 2.3% excise tax on domestic sales of class I, II, and III medical devices beginning in 2013. Substantially all of our products are class I or class II medical devices. In the short term we do anticipate that this tax on medical devices will negatively affect our results of operations and cash flows by approximately $300,000 to $500,000 annually. However, since approximately 82% of our 2012 sales were derived in the U.S. we cannot predict if any additional regulations will be implemented at the federal or state level, or the effect of any future legislation or regulation in the U.S. or internationally.
 
Our operations may experience higher costs to produce our products as a result of changes in prices for oil, gasoline, and other commodities.

We use some plastics and other petroleum-based materials along with precious metals contained in electronic components as raw materials in many of our products. Prices of oil and gasoline also significantly affect our costs for freight and utilities. Oil, gasoline and precious metal prices are volatile and may increase, resulting in higher costs to produce and distribute our products. Due to the highly competitive nature of the healthcare industry and the cost-containment efforts of our customers we may be unable to pass along cost increases through higher prices. If we are unable to fully recover these costs through price increases or offset through other cost reductions, our results of operations could be materially and adversely affected.

Our manufacturing facilities are located in Clearwater, Florida and could be affected due to multiple risks from fire, hurricanes, physical changes in the planet due to climate change, and similar phenomena.
 
Our manufacturing facilities are located in Clearwater, Florida and could be affected by multiple weather risks, most notably hurricanes.  Although we carry property and casualty insurance and business interruption insurance, future possible disruptions of operations or damage to property, plant and equipment due to hurricanes or other weather risks could result in impaired production and affect our ability to meet our commitments to our customers and impair important business relationships, the loss of which could adversely affect our operations and profitability. We do however maintain a backup generator at our Clearwater facility and a disaster recovery plan is in place to help mitigate this risk.

We do not produce hazardous materials or emissions that would adversely impact the environment.   We do however, have air conditioning units and consume electricity which could be impacted by climate change in the form of increased rates.  However, we do not believe the increase in expense from any rate increases, as a percentage of sales, would be material in the near term.

Risks related to global natural disasters (whether or not caused by climate change), unusual weather conditions, pandemic outbreaks, terrorist acts, and global political events

The occurrence of one or more natural disasters, such as hurricanes, tsunamis, fires, floods, and earthquakes (whether or not caused by climate change), unusual weather conditions, pandemic outbreaks, terrorist acts or disruptive global political events, such as civil unrest in countries in which our suppliers are located, or similar disruptions could impair our ability to purchase, receive, or replenish inventory which could result in lost sales and otherwise adversely and materially affect our operations and financial performance. These events also can have indirect consequences such as increases in fuel (or other energy) prices or a fuel shortage, or increases in the costs of insurance if they result in significant loss of property or other insurable damage.
 
 
Risks Related to Our Stock

The market price of our stock has been and may continue to be highly volatile.

Our common stock is listed on the NYSE Amex Market under the ticker symbol “BVX.”  The market price of our stock has been and may continue to be highly volatile, and announcements by us or by third parties may have a significant impact on our stock price. These announcements may include:
 
 
our listing status on the NYSE Amex Market;
 
our operating results falling below the expectations of public market analysts and investors;
 
developments in our relationships with or developments affecting our major customers;
 
negative regulatory action or regulatory non-approval with respect to our new products;
 
government regulation, governmental investigations, or audits related to us or to our products;
 
developments related to our patents or other proprietary rights or those of our competitors; and
 
changes in the position of securities analysts with respect to our stock.

The stock market has from time to time experienced extreme price and volume fluctuations, which have particularly affected the market prices for the medical technology sector companies, and which have often been unrelated to their operating performance.  These broad market fluctuations may adversely affect the market price of our common stock.

Historically, when the market price of a stock has been volatile, holders of that stock have often instituted securities class action litigation against the company that issued the stock.  If any of our stockholders brought a lawsuit against us, we could incur substantial costs defending the lawsuit.  The lawsuit could also divert the time and attention of our management.

In addition, future sales by existing stockholders or any new stockholders receiving our shares in any financing transaction may lower the price of our common stock, which could result in losses to our stockholders.  Future sales of substantial amounts of common stock in the public market, or the possibility of such sales occurring, could adversely affect prevailing market prices for our common stock or our future ability to raise capital through an offering of equity securities. Substantially all of our common stock is freely tradable in the public market without restriction under the Securities Act, unless these shares are held by our “affiliates”, as that term is defined in Rule 144 under the Securities Act.

Exercise of warrants and options issued by us will dilute the ownership interest of existing stockholders.

As of December 31, 2012, the warrants issued by us in April 2010 were exercisable for up to approximately 339,000 shares of our common stock, representing approximately 2% of our then outstanding common stock.

As of December 31, 2012, our outstanding stock options to our employees, officers, directors and consultants amounted to approximately 1.9 million shares of our common stock, representing approximately an additional 11% of our then outstanding common stock. 

The exercise of some or all of our warrants and stock options will dilute the ownership interests of existing stockholders. Any sales in the public market of the common stock issuable upon such conversion or exercise could adversely affect prevailing market prices of our common stock.
 

There are no outstanding unresolved comments from the staff of the Securities and Exchange Commission.
 
 
ITEM 2.

Bovie currently maintains the following locations:

 
·
Our executive office at 734 Walt Whitman Road, Melville, New York, which is leased for approximately $1,500 per month.

 
·
A 60,000 square foot facility which consists of office, warehousing, manufacturing and research space located at 5115 Ulmerton Rd., Clearwater, Florida. Monthly principal and interest payments are approximately $29,000 per month.

 
·
A warehousing facility at 3200 Tyrone Blvd., St. Petersburg, Florida which is leased for approximately $14,000 per month under a lease that expires in October 2013.

 
·
A separate warehouse facility in Clearwater, Florida that we lease for approximately $1,600 per month.


Livneh/Lican Development Settlement Agreement and Related Litigation

In December 2011, a settlement related to the then pending actions between the Company and certain affiliates, on the one hand, and Steve Livneh and certain affiliates, on the other hand,  which was the subject of prior disclosures, was structured and subsequently entered into on February 22, 2012. Under the terms of the Settlement Agreement (the “Settlement Agreement”), we agreed, among other things, to perform the following:  (i) make a $250,000 lump sum payment to Livneh ($50,000 of which was previously recorded and expensed), (ii) make 18 installment payments to Livneh in the amount of $23,222.22 per month, (iii) reimburse Livneh for all unpaid expenses that Livneh incurred on behalf of the Company during the period of his employment and/or consultancy (from October 1, 2006 through August 11, 2010), (iv) pay Livneh $14,700, which represents the balance of the amounts due to Henvil Corp. Ltd. under a certain bill of sale, dated April 12, 2010, (v) transfer to Livneh the title of a certain automobile, (vi) transfer to Livneh all of the Company’s right and interest in certain Intellectual Property (as defined in the Settlement Agreement) pertaining to the Modular Ergonomic Grip (“MEG”), Modullion, RF Skin Resurfacing, Scannula, Double Jaw Forceps and Tip-On-Tube designs and trade name (collectively, the “Assigned Patents”), (vi) transfer to Livneh certain parts for the MEG device, (vii) grant Livneh an exclusive license to produce, market and sell the Seal-N-Cut device in the People’s Republic of China, (viii) pay to Livneh royalty payments of 3% on the Company’s Net Sales (as defined in the Settlement Agreement) of the Seal-N-Cut device outside the People’s Republic of China, and (ix) pay to Livneh a one-time royalty payment of 5% upon the closing of any sale by the Company of its right or interest in any Intellectual Property pertaining to the Seal-N-Cut device.  To secure the Company’s obligations, we granted Livneh a security interest in all of our rights and interest of the Company in the Seal-N-Cut device, including all Intellectual Property pertaining thereto. Since the loss was quantifiable and known in December 2011, we recognized this settlement loss in 2011 and all payments hereunder were accrued during the fourth quarter.

In exchange, Livneh agreed, among other things, to perform the following: (i) pay us royalty payments of 3% on Livneh’s Net Sales of the Assigned Patents, excluding any Net Sales of the RF Skin Resurfacing or Tip-On-Tube, (ii) pay us a one-time royalty payment of 5% upon the closing of any sale by Livneh, Henvil or Lican Development Ltd. of their right or interest in any Intellectual Property pertaining to the Assigned Patents, and (iii) pay us royalty payments of 3% on Livneh’s Net Sales of the Seal-N-Cut device in the People’s Republic of China.

As a result of the Settlement Agreement, we recorded an expense in the fourth quarter of 2011 of approximately $737,000 for the transfer of the MEG and the Modullion intellectual property.  We have also accrued expenses in approximate amounts for the transfer of related inventory and molds of $194,000 and an additional $27,000 for other various expenses.
 
 
The Settlement Agreement contained no admission of liability or wrongdoing by us, Mr. Andrew Makrides, the Company’s Chief Executive Officer, Mr. Moshe Citronowicz, the Company’s Senior Vice President, Livneh, Henvil or Lican.  Pursuant to the Settlement Agreement, we, along with Mr. Makrides, Mr. Citronowicz, Livneh, Henvil and Lican agreed to dismiss the litigations with prejudice and they fully and finally released all claims known and unknown, foreseen and unforeseen, which they had against each other through the date of the Settlement Agreement.

In July 2012, Steven Livneh and two of his related entities, Henvil Corp. Ltd. and Lican Development Ltd., commenced a new action against the Company, Andrew Makrides, and Moshe Citronowicz, in the United States District Court for the Middle District of Florida (Tampa Division).  The complaint asserts, among other things, that (i) the defendants breached their obligations to the plaintiffs under the Settlement Agreement by allegedly failing to take certain actions that facilitated the plaintiffs’ marketing and sale of the Seal-N-Cut products in the People’s Republic of China (“PRC”), (ii) that defendants tortiously interfered with plaintiffs’ business relationships and expectations in PRC allegedly by, among other things, refusing to provide plaintiffs with an ICON VS generator and (iii) plaintiffs allegedly suffered damages as a result of defendants’ breaches and misrepresentations.  The complaint seeks, among other things, the following: (i) compensatory damages in excess of $10 million, (ii) an order directing Bovie to provide plaintiffs with an ICON VS generator, (iii) an assignment to plaintiffs of all patents identified in the Settlement Agreement, and (iv) rescission of the Settlement Agreement.  We believe the allegations to be frivolous and without merit, and we intend to defend the action vigorously.  On July 24, 2012, the Company filed a motion to dismiss the complaint and to compel arbitration.  The plaintiffs opposed the motion, and the motion was subsequently withdrawn as moot due to the non-availability of the stipulated arbitrator.  Discovery is now underway.

The outcome of this matter is uncertain, no range of potential loss can be estimated and accordingly no effect has been given to any loss that may result from the resolution of this matter in the accompanying consolidated financial statements.

Stockholder Derivative Action

As previously reported, in September 2011, we were served in a purported stockholder derivative action that was filed in the United States District Court for the Middle District of Florida against the Company and certain of its present and former officers and directors. The complaint asserts, among other things, breach of fiduciary duties and bad faith in relation to the management of the Company. The complaint seeks, among other things, unspecified compensatory damages and various forms of equitable relief. The allegations in the derivative action appear to be based largely on the January 10, 2011 Livneh counterclaim described above.

On March 29, 2012, plaintiffs amended their complaint to remove one of the plaintiffs and replace it with another. The amended complaint asserts essentially the same allegations as the original filing. We believe the allegations to be frivolous and without merit and we intend to defend the action vigorously. We are investigating whether there is a collusive connection between the derivative action and the previously settled lawsuit with Livneh. The outcome of this matter is uncertain, no range of potential loss can be estimated and accordingly no effect has been given to any loss that may result from the resolution of this matter in the accompanying consolidated financial statements.

In May 2012, the Company and the individual defendants filed a motion to dismiss the plaintiff’s complaint based, in part, upon the plaintiff’s failure to make demand upon the board as required by applicable law. The motion was denied and the parties are proceeding with discovery.  The outcome of this matter is uncertain, no range of potential loss can be estimated and accordingly no effect has given to any loss that may result from the resolution of this matter in the accompanying consolidated financial statements.
 
 
Keen Action
 
In February 2012 we received notice that an action had been commenced against us in United States District Court for the Middle District of Florida, by Leonard Keen our former Vice President and General Counsel,  related to his termination on December 9, 2011 and associated employment contract. Mr. Keen is demanding amounts outlined under his employment contract which provided for the payment of a base annual salary of not less than $187,500 as well as certain other payments and benefits. The employment agreement also provided for the payment, under certain circumstances, of a lump sum severance payment equal to three times base compensation plus certain other payments and benefits as set forth in the employment agreement under severance payment. Mr. Keen also asserts a claim concerning an alleged violation of Florida’s “Whistle Blower’s Act” and seeks specific performance of certain indemnification rights under his employment agreement.

On April 27, 2012, we filed an Answer and Counterclaims against Mr. Keen alleging violations of the Computer Fraud and Abuse Act, 18 U.S.C. § 1030(a)(5), breaches of fiduciary duties, conversion, and fraud in the inducement.  The counterclaims seek monetary damages, including attorney’s fees, and a declaration that Mr. Keen’s employment agreement is unenforceable as violative of Florida law and public policy.

On May 21, 2012, plaintiff moved to dismiss our second (breach of fiduciary duty), third (breach of fiduciary duty), and fifth (fraud in the inducement) counterclaims.  That motion was denied as moot on July 3, 2012, due to plaintiff’s filing of an Amended Complaint on the same day.

Plaintiff’s Amended Complaint repeats the same allegations as the original filing and also added Andrew Makrides, the Company’s Chief Executive Officer, as a defendant and asserts additional claims concerning an alleged violation of ERISA and an alleged tortious interference with the plaintiff’s employment contract by Andrew Makrides.

On July 16, 2012, we served our Answer to the Amended Complaint and Counterclaims, which repeated the same counterclaims as our Answer and Counterclaims. On the same date, we also moved to dismiss the Amended Complaint for failure to state a claim upon which relief can be granted and lack of subject matter jurisdiction. Plaintiff opposed the motion and also sought to renew his motion to dismiss our Second and Third Counterclaims (breach of fiduciary duty).

On September 27, 2012, the Court granted our motion in part and denied it in part and also denied Keen’s motion in its entirety.  Specifically, the Court dismissed Keen’s Second (breach of covenant of good faith and fair dealing) and Eighth (tortious interference with employment contract) claims for relief.  Because the Eighth claim was the only one asserted against Andrew Makrides, the Company’s Chief Executive Officer, he is no longer a party to the case.

On February 1, 2013, both parties moved for summary judgment on the surviving claims. The Court has not issued a decision on the motions as of the filing of this report.

We believe we have meritorious defenses against Mr. Keen’s claims and are vigorously defending this action. The outcome of this matter is uncertain and accordingly no effect has been given to any loss that may result from the resolution of this matter in the accompanying consolidated financial statements, however the range of potential loss is zero to approximately $600,000, plus possible attorney fees which are not determinable at this time.

In addition to the above, 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. Consequently, we are unable to ascertain the ultimate aggregate amount of monetary liability or financial impact with respect to these matters as of December 31, 2012. These matters could affect the operating results of any one or more quarter when resolved in future periods.


Not Applicable.

PART II
 
 

Our common stock currently is traded on the NYSE Amex. The table shows the reported high and low bid prices for the common stock during each quarter of the last eight respective quarters. These prices do not represent actual transactions and do not include retail markups, markdowns or commissions.

2012
 
High
   
Low
 
   
 
   
 
 
4th Quarter
  $ 3.79     $ 2.42  
3rd Quarter
    3.83       2.24  
2nd Quarter
    2.99       2.09  
1st Quarter
    3.26       2.16  

2011
 
High
   
Low
 
             
4th Quarter
  $ 3.06     $ 1.90  
3rd Quarter
    3.66       2.02  
2nd Quarter
    3.35       2.55  
1st Quarter
    3.62       2.45  

On March 1, 2013, the closing bid for our common stock as reported by the NYSE Amex exchange was $2.55 per share. As of March 1, 2013, the total number of stockholders of our common stock was approximately 3,500, of which approximately 2,800 are estimated to be stockholders whose shares are held in the name of their broker, stock depository or the escrow agent holding shares for the benefit of our stockholders and the balance are stockholders who keep their shares registered in their own name.

Recent Sales of Unregistered Equity Securities

On April 18, 2010, we entered into a securities purchase agreement with purchasers named therein 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. Upon closing of the transaction, we entered into a registration rights agreement with the purchasers and issued to the purchasers 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 percent of the common shares acquired by each respective purchaser at an exercise price of $6.00 per share.

The warrants are immediately exercisable and will terminate on the fifth anniversary of the issuance date. The exercise price of the warrants is 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 for its activity engaged on behalf of the Company. 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 for its activity engaged on behalf of the Company.

The warrants contain provisions for a net cash settlement in the event that there is a fundamental transaction (contractually defined as a merger, sale of substantially all assets, tender offer or share exchange). Due to this contingent redemption provision, the warrants require liability classification and must be adjusted to fair value each reporting period.
 
 
Securities Authorized for Issuance Under Equity Compensation Plans
 
   
Number of Securities
to be Issued
Upon Exercise of
Outstanding Options,
Warrants and Rights
(a)
   
Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights
(b)
   
Number of Securities
Remaining Available
for Future Issuance Under Equity
Compensation Plans (excluding
securities reflected in column (a))
 (c)
 
Equity compensation plans approved by security holders
    1,815,175     $ 3.71       416,500  
Equity compensation plans not approved by security holders
    64,286 (1)     6.61        
Warrants
    338,571       6.00          
                         
TOTAL
    2,218,032     $ 4.14       416,500  

(1) Includes an issuance during 2010 related to employee inducement stock option grants in the amount of 100,000 stock options to Leonard Keen which subsequently due to Mr. Keen’s termination, 85,714 forfeited and which are presently the subject of litigation. In addition, during 2010, 30,000 stock options were issued to Jeff Rencher related to employee inducement as terms of his employment agreement. An additional 20,000 restricted stock options granted to Howard Stallard pursuant to an employment agreement dated October 1, 2006 and related to the Lican Development asset purchase agreement are also in this total.
 
Dividend Policy
 
We have never declared or paid any cash dividends on our common stock and we do not intend to pay cash dividends in the foreseeable future. We currently expect to retain any future earnings to fund the operation and expansion of our business.
 
 

The following selected consolidated financial data (presented in thousands, except per share amounts and employee data) are derived from our consolidated financial statements. This data should be read in conjunction with the consolidated financial statements and notes thereto, and with Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
Year Ended December 31,
(in thousands, except per share amounts)
 
   
2012
   
2011
   
2010
   
2009
   
2008
 
                               
Sales, net
  $ 27,671     $ 25,411     $ 24,230     $ 26,953     $ 28,097  
Cost of sales
    16,338       14,680       14,242       15,098       16,248  
                                         
Gross Profit
    11,333       10,731       9,988       11,855       11,849  
                                         
Gain on legal settlement and cancellation of agreement
    --       750       --       --       1,496  
                                         
Other costs:
                                       
Research and development
    1,329       1,197       1,854       2,083       2,061  
Professional services
    1,439       1,250       1,556       1,398       991  
Salaries and related costs
    3,178       3,114       3,155       3,003       3,017  
Selling, general and administration
    4,341       4,347       4,889       4,656       4,489  
Legal settlement
    --       1,591       --       --       --  
Asset impairment
    --       --       1,286       --       --  
                                         
Total other costs
    10,287       11,499       12,740       11,140       10,558  
                                         
Income (loss) from operations
    1,046       (18 )     (2,752 )     715       2,787  
                                         
Other income and (expense):
                                       
Interest (expense) income
    (232 )     (237 )     (223 )     (52 )     (10 )
Change in fair value of liabilities, net
    20       287       513       --       --  
Total other income (expense) net
    (212 )     50       290       (52 )     (10 )
                                         
Income (loss) before income taxes
    834       32       (2,462 )     663       2,777  
                                         
Benefit (provision) for income taxes
    (217 )     77       927       (67 )     (945 )
                                         
Net income (loss)
  $ 617     $ 109     $ (1,535 )   $ 596     $ 1,832  
                                         
Earnings (loss) per common share:
                                       
Basic
  $ 0.04     $ 0.01     $ (0.09 )   $ 0.04     $ 0.11  
Diluted
  $ 0.03     $ 0.01     $ (0.09 )   $ 0.03     $ 0.11  
                                         
 
Balance Sheet Information:
                                       
Cash and cash equivalents
  $ 4,162     $ 4,880     $ 3,827     $ 2,155     $ 2,565  
Working capital
  $ 14,049     $ 14,095     $ 13,107     $ 10,741     $ 9,943  
Total assets
  $ 28,183     $ 28,240     $ 27,786     $ 27,462     $ 26,725  
Long-term liabilities
  $ 3,366     $ 3,734     $ 4,216     $ 3,958     $ 4,143  
Stockholders’ equity
  $ 22,895     $ 22,117     $ 21,765     $ 21,031     $ 20,128  
 
 

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 on 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.

Executive Level Overview

We are a medical device company engaged in 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 currently are marketed through medical distributors, which distribute to more than 6,000 hospitals, doctors offices, and other healthcare facilities. New distributors are contacted through responses to our advertising in international and domestic medical journals and domestic or international trade shows.   International sales represented 17.7% of total revenues in 2012 and 21% in 2011 and 2010. Our products are sold in more than 150 countries through local dealers which are coordinated by sales and marketing personnel at the Clearwater, Florida facility. As mentioned previously for the launch of our new surgical suite product lines, we have established the use of a network of approximately 50 commission-based independent direct sales contractors to market these products. Our business is generally not seasonal in nature.

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 –

Sales
 
     
2012 vs. 2011
     
2011 vs. 2010
 
Sales by Product Line (in thousands)
   
2012
     
2011
     
Percent change
     
2011
     
2010
     
Percent change
 
Electrosurgical
  $ 17,697     $ 16,896       4.7%     $ 16,896     $ 15,956       5.9%  
Cauteries
    7,014       6,268       11.9%       6,268       6,383       (1.8)%  
Other
    2,960       2,247       31.7%       2,247       1,891       18.8%  
                                                 
Total
  $ 27,671     $ 25,411       8.9%     $ 25,411     $ 24,230       4.9%  
                                                 
Sales by Domestic and International (in thousands)
                                               
Domestic
  $ 22,704     $ 19,972       13.7%     $ 19,972     $ 19,174       4.2%  
International
    4,967       5,439       (8.7%)       5,439       5,056       7.6%  
                                                 
Total
  $ 27,671     $ 25,411       8.9%     $ 25,411     $ 24,230       4.9%  
 
 
Overall sales increased by 8.9% or approximately $2.3 million for the period ending December 31, 2012 when compared to the same period in 2011.  In 2012, we continued to experience an upward trend in our sales in all three areas of our business. The largest dollar increase of approximately $746,000 was in our cautery product line, which we attribute to us gaining market share due to a reduction in competitors in the marketplace. The next largest dollar increase was in our electrosurgical product line consisting of a $736,000 increase in electrosurgery generators sold primarily to a major OEM customer and approximately $65,000 increased sales of electrodes. We also increased our sales of third party medical lighting products by approximately $593,000 and various other products by approximately $120,000.

Our sales for the twelve months ended December 31, 2011 outpaced sales for the same period in 2010 by approximately $1.2 million, or 4.9%. The increase in sales has been driven mainly by increased demand for our electrosurgical generators both domestically and internationally which amounted to an approximate increase of $690,000 for the year ended December 31, 2011 compared to the same period in 2010. Sales of our new distribution products released this year, coated blades which are categorized as electrosurgical and medical lighting systems which are categorized as other products, amounted to increases of approximately $675,000 and $356,000 respectively for the year ended December 31, 2011 compared to the same period in 2010. However, increases in electrosurgical sales were offset by an approximate decrease of $425,000 related to discontinued sales of an OEM disposable electrosurgical device for the twelve month period compared to the same period in 2010. In addition cautery sales were down by approximately $115,000 for the current year ended compared to the same period in 2010. We continue to see increased demand for our third party medical lighting products and as part of our ongoing business strategy we will be bringing on more third party medical products to offer through our distribution channel.

Our ten largest customers accounted for approximately 66.3%, 64.6%, and 66.5% of net revenues for 2012, 2011, and 2010 respectively. In 2012, National Distribution & Contracting Inc. accounted for 12.4% of our sales, while in 2011, no one customer accounted for over 10% of our sales.  In 2010 two customers, Arthrex, Inc. and National Distribution & Contracting Inc. each separately accounted for approximately  11% of total revenues.

Gross Profit

   
Years ended December 31,
 
(in thousands)
 
2012
   
2011
   
Percent
change
12’vs 11’
   
2010
   
Percent
change
11’vs 10’
 
Cost of  sales
  $ 16,338     $ 14,680     11.3%     $ 14,242     3.1%  
Cost of  sales as a percentage of revenue
    59.0 %     57.8 %           58.8 %      
                                     
Gross profit
  $ 11,333     $ 10,731     5.6%     $ 9,988     7.4%  
Gross profit as a percentage of revenue
    41.0 %     42.2 %   (1.2%)       41.2 %   1.0%  

Our gross profit margin on a dollar basis increased by 5.6% or approximately $603,000 during the year ended December 31, 2012 compared to the same period in 2011 as a result of the increased sales mentioned above. However, our gross profit as a percentage of sales decreased by approximately 1.2%. This decrease in gross profit percent was due to the product mix that was sold, specifically with the increased sales of our lower margin third party medical lighting sales. Additional contributing factors to the lower gross profit percentage were an 0.8% increase in labor costs as a percentage of sales from salary increases, increased medical insurance costs and increased overtime required to meet the increase in sales coupled with slight increases in material costs related to our other products sold.  These increases were partially offset by a 0.1% decrease in manufactured overhead cost.

We improved our gross profit margin on a dollar basis by 7.4% or approximately $742,000 during the year ended December 31, 2011, compared to the same period in 2010 as a result of a combination of increased sales mentioned above and a net reduction in some of our costs attributed to those sales. Our cost of sales as a percentage of sales decreased by 1.0% mainly as a result of reductions approximating $216,000 in direct and indirect labor costs and $141,000 eliminated from our consolidating the Canadian facility. The total of these cost savings was offset by approximately $103,000 due to higher material cost related to our third party medical lighting sales when compared to our manufactured product lines.
 
 
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.

Other Gain (Loss)

Salient/Medtronic Settlement

On March 3, 2011, we entered into a settlement agreement related to the legal action with Salient Surgical Technologies, Inc. and Medtronic, Inc. The settlement called for us and related parties to immediately exit and not enter into the monopolar and bipolar saline-enhanced RF device business (including SEER™ and BOSS™) worldwide through February 2015. In exchange, Salient made a one-time payment to us of $750,000. As a condition, we will not be able to sell certain finished products, which as of the settlement date amounted to approximately $100,000 of our inventory.  We reserved for approximately $87,000 of our inventory related to the products in this settlement in the first quarter of 2011. The terms also include a provision outlining a possible OEM contract manufacturing relationship between Salient and our Company.

Research and development
 
   
Year ended December 31,
 
(in thousands)
 
2012
   
2011
   
Percent change 12’vs 11’
   
2010
   
Percent change 11’vs10’
 
Research and Development expense
  $ 1,329     $ 1,197     11.0%     $ 1,854     (35.4%)  
R&D expense as a percentage of revenue
    4.8 %     4.7 %           7.7 %      

Our expenditures for R & D related activities increased by 11.0% or approximately $132,000 for the year ended December 31, 2012 compared to the same period in 2011.  A large portion of this increase was related to various consulting fees of approximately $72,000, of which $42,000 was incurred for the preliminary development and design phase for a product related to a potential OEM customer and the remaining $30,000 was incurred to expand the plasma product line and other new products. Additional expenditures to support the continued development of the J-Plasma product line included adding a new engineering position which increased costs by approximately $51,000 and increased material and lab costs of approximately $9,000.

We experienced a 35.4% decrease in research and development expense or approximately $657,000 for the year ended 2011 compared to the same period in 2010. This 3% decrease as a percentage of sales, was primarily related to the saline-enhanced RF device business product line and reductions in development costs of approximately $300,000 in engineering costs and approximately $118,000 in product design, testing labs, and material related costs. In March of this year as part of our legal settlement with Salient Surgical Technologies, Inc. we agreed to exit and not enter into the monopolar and bipolar saline-enhanced RF device business (SEER™ and BOSS™) worldwide through February 2015. We also had reductions of approximately $239,000 in consulting fees associated with the development of our vessel sealing product as a result of our consolidating the Canadian operations to Florida.

Professional services

   
Year ended December 31,
 
(in thousands)
 
2012
   
2011
   
Percent
change
12’vs 11’
   
2010
   
Percent
change
11’vs10’
 
Professional services expense
  $ 1,439     $ 1,250     15.1%     $ 1,556     (19.7%)  
Professional services as a percentage of revenue
    5.2 %     4.9 %           6.4 %      
 
 
Professional services costs increased 15.1% or approximately $189,000 for the year ending December 31, 2012 compared to the same period in 2011.  Legal fees, incurred in connection with the current litigations, increased over the prior year by approximately $215,000 and are the main reason for the increase in professional costs. We also had an approximate increase of $25,000 related to stock based compensation costs.   These increases were offset by a reduction in tax consulting fees due to the closing of our IRS audit in early 2011 of approximately $51,000.

Our professional costs decreased by 19.7% or approximately $306,000 for the year ended December 31, 2011 compared to the same period in 2010, due mainly to a reductions in legal fees of approximately $70,000 related to settled cases and $99,000 in tax consulting fees due to the closing of our IRS audit earlier that year. In addition, we had savings of approximately $69,000 in other consulting costs from our nonrenewal of a consulting firm to support marketing of new products which we used in 2010. Various smaller savings were approximately $25,000 in internal control testing costs, $28,000 in patent related costs, and $15,000 in stock based compensation costs.

Salaries and related costs

   
Year ended December 31,
 
(in thousands)
 
2012
   
2011
   
Percent
change
12’vs 11’
   
2010
   
Percent
change 11’vs.10’
 
Salaries and related expenses
  $ 3,178     $ 3,114     2.1%     $ 3,155     (1.3%)  
Salaries & related expenses as a percentage of revenue
    11.5 %     12.3 %           13.0 %      

During 2012 we experienced a net increase of approximately 2.1% in salary and related costs, or approximately $64,000 when compared to the same twelve month period ending at December 31, 2011.  In an effort to expand our sales both for our plasma line products domestically and our distribution products in domestic and international markets, our sales and marketing salaries and related costs increased by approximately $181,000. However, our salaries and related costs related to our in-house legal decreased by approximately $117,000.

Our salaries and related costs decreased overall by approximately $41,000, or 1.3% for the year ended December 31, 2011 when compared to the same period in 2010. Although we experienced an increase in our health insurance premiums of approximately $52,000, this increase was offset by a reduction in salaries related to the elimination of a marketing position for the sintered steel product line that we agreed to exit out of as part of the Salient Surgical Technologies, Inc. settlement.

Selling, general and administrative expenses

   
Year ended December 31,
 
(in thousands)
 
2012
   
2011
   
Percent
change
12’vs 11’
   
2010
   
Percent
change
11’vs10’
 
SG&A expense
  $ 4,341     $ 4,347     (0.1%)     $ 4,889     (11.1%)  
SG&A expense as a percentage of revenue
    15.7 %     17.1 %           20.2 %      
Legal settlement
    --     $ 1,591             --        
Loss on impairment of IP
    --       --           $ 1,286        
                            5.3 %      

Selling, general and administrative costs in dollars remained relatively the same, however it decreased as a percentage of sales by approximately 1.4% for the period ending December 31, 2012 compared to the same period in 2011.  We experienced some substantial decreases in our bank fees, obsolete inventory provisions, building maintenance and utilities, and other various overhead related costs coupled with a gain on disposition of assets all of which amounted to a decrease of approximately $219,000. Additional decreases in our selling, general and administrative costs included a $45,000 decrease in regulatory costs related to both our existing as well as our new products, a $58,000 decrease in amortization costs related to the Meg product line which was written off last year, and a $46,000 decrease in costs related to the 2011 one time legal settlement which was absent for the same period 2012.
 
 
In line with our efforts to expand sales, we increased selling and marketing costs over the prior period by approximately $129,000, which included trade shows costs, sales force travel both for international and domestic markets, and increased advertising for both our existing distribution products and our new J-Plasma line of products. Our increased sales in 2012 versus 2011 also translated into an increase of approximately $75,000 in commission expense. We also experience increases in our selling, general and administrative costs for computer and software upgrades, rental fees, general insurance from increasing our coverage limits, shareholder and stock exchange costs, and various other overhead related costs which all amounted to approximately $160,000.

Our selling, general and administrative costs decreased by 11.1% overall or approximately $542,000 for the year ended December 31, 2011 compared to the same period in 2010. A large portion of our cost savings were from decreases related to the suspension of the sintered steel product line as part of the Salient Surgical Technologies, Inc. settlement for approximate amounts of $131,000 in reduction in travel costs, $95,000 decrease in amortization expense, and a $54,000 reduction in sintered steel marketing costs. Other large cost saving components included in the 11.1% overall reduction mentioned above were related to general overhead costs which included approximate amounts of $240,000 related to reductions from consolidating the Canadian operation to Florida, a $326,000 decrease in loss on disposition of assets incurred on the sale of our old building in late 2010, and $86,000 decrease in utilities and facility maintenance costs. We also experienced some decreases in our manufacturing rep training and other various selling expenses amounting to approximately $71,000.

We continued to increase sales of our new distribution product lines, coated electrodes and medical lighting systems during 2012, and to introduce other new products under development and, as a result, we incurred approximate increases in selling costs of $41,000 for advertising, $99,000 for commission expense, and $21,000 for show and other marketing costs. In addition, during 2011, as our new products approached the completion phase we experienced an increase of approximately $68,000 in regulatory testing costs compared to the prior year. We also saw an increase in our general insurance costs of approximately $71,000 due to increases related to our directors and officer’s coverage and we expect this trend to continue in 2012 as we re-evaluate our coverage in other areas. As a result of settling one of our lawsuits we incurred an approximate increase of $83,000 in settlement expense in 2011 over 2010. Other various increases in cost in our year ended December 31, 2011 over the same period in 2010 include approximate amounts of $25,000 in shareholder and stock exchange related costs, $32,000 in our provision for obsolete inventory, and $21,000 inventory storage costs.

Legal Settlement

In December 2011, a settlement related to the then pending litigation with Steve Livneh and certain affiliated entities, was structured and subsequently signed on February 22, 2012 (the “Settlement Agreement”). Under the terms of the Settlement Agreement, we agreed to, among other things, perform the following:  (i) make a $250,000 lump sum payment to  Livneh  ($50,000 of which was previously recorded and expensed), (ii) make 18 installment payments to Livneh in the amount of $23,222.22 per month, (iii) reimburse Livneh for all unpaid expenses that Livneh incurred on our behalf during the period of his employment and/or consultancy (from October 1, 2006 through August 11, 2010), (iv) pay Livneh $14,700, which represents the balance of the amounts due to Henvil Corp. Ltd. under a certain bill of sale, dated April 12, 2010, (v) transfer to Livneh the title of a certain automobile, (vi) transfer to Livneh all of our rights and interest in certain Intellectual Property (as defined in the Settlement Agreement) pertaining to the Modular Ergonomic Grip (“MEG”), Modullion, RF Skin Resurfacing, Scannula, Double Jaw Forceps and Tip-On-Tube designs and trade name (collectively, the “Assigned Patents”), (vi) transfer to Livneh certain parts for the MEG device, (vii) grant Livneh an exclusive license to produce, market and sell the Seal-N-Cut device in the People’s Republic of China, (viii) pay to Livneh royalty payments of 3% on Net Sales (as defined in the Settlement Agreement) of the Seal-N-Cut device outside the People’s Republic of China, and (ix) pay to Livneh a one-time royalty payment of 5% upon the closing of any sale by us of our right or interest in any Intellectual Property pertaining to the Seal-N-Cut device.  To secure our obligations, we granted Livneh a security interest in all of our rights and interest of the Company in the Seal-N-Cut device, including all Intellectual Property pertaining thereto. Since the loss was quantifiable and known in December 2011, we recognized this settlement loss in 2011 in accordance with GAAP and all payments hereunder were accrued during the fourth quarter.
 
 
In addition, in the fourth quarter of 2011, as a result of the Settlement Agreement, we recorded an  expense of approximately $737,000 for the transfer of the MEG and the Modullion intellectual property.  We have also accrued expenses in approximate amounts for the transfer of related inventory and molds of $194,000 and an additional $27,000 for other various expenses.

The total financial impact of this Settlement Agreement to our consolidated financial statements for the year ended December 31, 2011 was approximately $1.6 million.

Asset Impairment

In December 2010, after evaluating the future outlook of our patent related to our SEER product line, we determined that the asset value was impaired and further calculated the impairment loss to be approximately $1.3 million.  Subsequent to our assessment that the patent was impaired, as a condition of the March 3, 2011 settlement with Salient Surgical Technologies, Inc. and Medtronic, Inc., we are required to immediately exit and not enter into the monopolar and bipolar saline-enhanced RF device business (including SEER™ and BOSS™) worldwide through February 2015 (see Item 3. Legal Proceedings).  As a condition we will not be able to sell certain finished products, which as of the settlement date amounted to approximately $87,000 of our inventory.

Other Income

   
Year ended December 31,
 
(in thousands)
 
2012
   
2011
   
Percent change 12’vs 11’
   
2010
   
Percent change 11’vs.10’
 
Interest income
  $ 7     $ 12     (42.0%)     $ 15     (20.0%)  
Interest expense
  $ (239 )   $ (249 )   (4.0%)     $ (238 )   4.6%  
Total other income (expense)
  $ (232 )   $ (237 )   (2.0%)     $ (223 )   6.3%  
Other income (expense) as a percentage of revenue
    (0.8 %)     (0.9 %)           (0.9 %)      
Change in fair value of liabilities, net
  $ 20     $ 287           $ 513     (44.1%)  
Other gain as a percentage of sales
    0.1 %     1.1 %           2.1 %      

Net interest expense decreased by approximately $5,000 or 2.0% for the year ended December 31, 2012 as compared to the same period in 2011 primarily due to principal reductions during 2012 of our Industrial Revenue Bonds associated with the acquisition of our Clearwater, Florida facility.

Net interest expense increased by approximately $14,000 or 6.3% for the year ended December 31, 2011 as compared to the same period in 2010 primarily due to the refinancing of the Industrial Revenue Bonds in late 2011.

The change in fair value of liabilities was related to the warrants associated with our equity issuance in April of 2010 and adjustment for the fair value of the Lican liability. The derivative warrant liability was valued at approximately $799,000 at the issuance date and was valued at approximately $105,000 and $332,000 at December 31, 2011 and December 31, 2010, respectively.  This resulted in a year-to-date gain of approximately $227,000 and $467,000 for the years ended December 31, 2011 and 2010, respectively. The Lican liability fair value was approximately $111,300 and $172,200 at December 31, 2011 and 2010.  This resulted in a gain of $61,000 for the year ended December 31, 2011.

Interest expense remained relatively similar from 2010 through 2012, with a slight increase in 2011 due to the refinancing of our Industrial Revenue Bonds associated with the acquisition of our Clearwater, Florida facility.  We expect that our interest expense for 2013 should be similar to the amount incurred in 2012.
 
 
Income Taxes

Deferred income taxes reflect the impact of temporary differences between the amount of assets and liabilities recognized for financial reporting purposes and such amounts recognized for income tax purposes. The tax effects of these temporary differences representing the components of deferred tax assets (liabilities) at December 31 were approximately as follows (in thousands):
 
   
2012
   
2011
 
Deferred tax assets, current:
 
 
   
 
 
U.S. net operating loss carryforwards
  $ 1,097     $ 980  
State net operating loss carryforwards
    197       176  
Research and development credits
    774       774  
AMT credits
    73       73  
Accounts receivable
    12       16  
Reserves
    1       --  
Inventory
    --       1  
Charitable
    9       9  
Accrued expenses
    132       56  
Accrued Settlement
    --       593  
Non-current estimate of loss and credit carryforwards
    (2,295 )     (2,178 )
Total deferred tax assets, current
    --       500  
                 
Deferred tax assets, non-current:
               
Investment in subsidiary
    128       --  
Loss and credit carryforwards
    2,295       2,178  
Stock based compensation
    95       70  
Total deferred tax assets, non- current
    2,518       2,248  
                 
Deferred tax liabilities, non-current:
               
Inventory
    (1 )     --  
State taxes (capital)
    (4 )     --  
Property and equipment
    (361 )     (422 )
Intangibles
    (304 )     (254 )
Unrecognized tax benefit liability for non-current temporary differences
    (49 )     (63 )
Total deferred tax liabilities, non-current
    (719 )     (739 )
                 
Net non-current deferred income tax asset
  $ 1,799     $ 1,509  

We consider all positive and negative evidence regarding the realization of deferred tax assets, including past operating results and future sources of taxable income. U.S. net operating losses will begin to expire in years beginning in 2019.

We assess the financial statement impact of an uncertain tax position taken or expected to be taken on an income tax return at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized in the financial statements unless it is more likely than not of being sustained. All of our positions arise from taxable temporary differences and, as such, the liability has been recognized in the net deferred tax asset, current and non-current items to which they relate.  The calculated amount of penalties and interest related to these timing differences were immaterial at December 31, 2012 and 2011.  In addition, because the amounts are related to temporary timing differences, there would be no material impact on our effective tax rate if recognized.
 
 
Below is a reconciliation of the statutory federal income tax rate to our effective tax rate for the fiscal years ended December 31, 2012, 2011 and 2010:

   
2012
   
2011
   
2010
 
Federal tax provision
    34.0 %     34.0 %     34.0 %
State taxes (net of federal benefit)
    4.1 %     (32.0 %)     4.3 %
Stock based compensation*
    -       (27.8 %)     0.5 %
Research and development credits*
    -       (78.0 %)     5.0 %
Warrant gains
    -       (175.9 %)     -  
Meals and entertainment
    -       39.1 %     -  
Other
    (12.2 %)     -       (6.1 %)
      25.9 %     (240.6 %)     37.7 %
 
* Net of IRS Exam adjustments for 2010

Liquidity and Capital Resources

Our working capital at December 31, 2012 was $14.0 million compared with $14.1 million at December 31, 2011. Accounts receivable days sales outstanding were 38 days and 36 days at December 31, 2012 and 2011, 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, decreased 19 days to 218 days equating to an inventory turn ratio of 1.43 at December 31, 2012 from 237 days and an inventory turn ratio of 1.32 at December 31, 2011. The lower number of days worth of sales in inventory which translated into a higher inventory turnover rate is mainly due to the increase in sales related to our generator product lines which contain a greater number of component parts compared to all our other products.

For the year ended December 31, 2012, net cash provided by operating activities was $165,000 compared with net cash provided by operating activities of $1.9 million in 2011.

Net cash used in investing activities was approximately $753,000 for the year ended December 31, 2012 compared to net cash used in investing activities was approximately $542,000 during 2011. The change was due mainly to increased purchases of equipment, molds and test fixtures to support our new products.

We used cash from financing activities of approximately $130,000 during year ended December 31, 2012 compared to cash used from financing activities of approximately $302,000 during year ended December 31, 2011. The change resulted primarily from repayment of principal on our industrial revenue bonds, which totaled approximately $130,000 in 2012 compared to net repayments of long term debt and capital lease of $302,000 in 2011.

We currently have approximately $3.4 million outstanding under industrial revenue bonds which we previously used for the purchase and renovation of our Clearwater, Florida facility. During 2011 these bonds were refinanced through PNC Bank, N.A. The bonds, which are being amortized over a 20-year term, balloon in November 2018 and bear interest at a fixed interest rate of 5.6%.  Scheduled maturities of this indebtedness are approximately $138,000, $146,000, $154,000, $163,000 and $172,000 for 2013, 2014, 2015, 2016 and 2017, respectively and approximately $2.6 million thereafter.

We had approximately $4.2 million in cash and cash equivalents at December 31, 2012. 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 PNC Bank. (See below)
 
 
In addition, we continue 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 of 2010 through December 31, 2012, we have invested approximately $1.6 million in the development and marketing of our J-Plasma™ technology.

We have a $6 million secured revolving line of credit facility with PNC Bank, which at December 31, 2012 had a zero balance. Advances under the $6 million line of credit are due on demand and bear interest at a rate of daily LIBOR plus 1.75% and are secured by a perfected first security interest in our inventory and accounts receivable.

In addition we have a separate additional credit facility with PNC Bank for up to $1 million specific to financing new equipment purchases. This credit facility, as amended, provides for a 1 year draw up to the conversion date of October 31, 2013.  Prior to the conversion dates amounts outstanding bear an interest rate of daily LIBOR plus 2.25%.  Upon conversion, the term is 5 years and will bear an interest rate of daily LIBOR plus 2.50%. The note would be secured by a perfected first security interest in the new equipment purchased. We did not draw on this line during 2012.

Subsequent available borrowings for both these credit facilities are subject to a borrowing base utilizing a percentage of eligible receivables, inventories, and any assigned cash along with certain financial ratios, specifically maintaining: (i) a ratio of tangible net worth of less than 0.75 to 1.0 and (ii) a ratio of minimum fixed charge of 1.25 to 1.0 measured on a rolling four quarter basis.

At December 31, 2012, 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 $4.0 million total availability under the $6.0 million credit line, of which we currently have a zero balance. We also have available approximately $1.0 million under the equipment line of credit.

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,
 
   
2013
   
2014
   
2015
   
2016
   
2017
   
Thereafter
 
Operating leases
  $ 228     $ 12     $ -     $ -     $ -     $ -  
Employment agreements
    966       786       725       -       -       -  
Purchase Commitments
    3,848       -       -       -       -       -  
Long-term debt
    138       146       154       163       172       2,646  
Total
  $ 5,180     $ 944     $ 879     $ 163     $ 172     $ 2,646  

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.

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, stock based compensation 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.

Liabilities valued at fair value

We generally do not use derivative financial instruments to hedge exposures to cash-flow risks or market-risks. However, 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.

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 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 718-10-10, Share-Based Payment, with compensation 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.
 
 
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 shareholders. 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.

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 have net operating loss and tax credit carry forwards available in certain jurisdictions 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 December 31, 2012, we believe we have appropriately accounted for any unrecognized tax positions. 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.

Since inception, we have been subject to tax by both federal and state taxing authorities. Until the respective statutes of limitations expire (which may be as much as 20 years while we have unused NOL’s), we are subject to income tax audits in the jurisdictions in which we operate.

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.

Recent Accounting Pronouncements

See Note 7 of the Notes to Consolidated Financial Statements.
 
 

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 December 31, 2012, this change would not have had a material effect on the fair value of our investment portfolio as of that date.


The information required by this item may be found beginning on page F-1 of this Annual Report on Form 10-K.


There were no disagreements with our current accountants on accounting and financial disclosures.


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 December 31, 2012. 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 Control over Financial Reporting

Section 404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate annually the effectiveness of our internal controls over financial reporting as of the end of each fiscal year, and to include a management report assessing the effectiveness of our internal control over financial reporting in all annual reports. There were no changes in our internal control over financial reporting during the quarter ended December 31, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Management’s Annual Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act as a process designed by, or under the supervision of, a company’s principal executive and principal financial officers and effected by a company’s board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:
 
 
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
 
 
 
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
 
 
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2012. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework. Based on our assessment, our management has concluded that, as of December 31, 2012, our internal control over financial reporting is effective based on those criteria.
 

None.

Part III


BACKGROUND AND EXPERIENCE OF DIRECTORS

When considering whether directors and nominees have the experience, qualifications, attributes or skills, taken as a whole, to enable the Board of Directors (“Board”) to satisfy its oversight responsibilities effectively in light of the Company’s business and structure, the Governance and Nominating Committee focused primarily on each person’s background and experience as reflected in the information discussed in each of the directors’ individual biographies set forth immediately below.  We believe that our directors provide an appropriate mix of experience and skills relevant to the size and nature of our business.  As more specifically described in such person’s individual biographies set forth below, our directors possess relevant and industry-specific experience and knowledge in the medical, engineering and business fields, as the case may be, which we believe enhances the Board’s ability to oversee, evaluate and direct our overall corporate strategy.  The Governance and Nominating Committee annually reviews and makes recommendations to the Board regarding the composition and size of the Board so that the Board consists of members with the proper expertise, skills, attributes, and personal and professional backgrounds needed by the Board, consistent with applicable regulatory requirements.

The Governance and Nominating Committee believes that all directors, including nominees, should possess the highest personal and professional ethics, integrity, and values, and be committed to representing the long-term interests of our stockholders. The Governance and Nominating Committee will consider criteria including the nominee’s current or recent experience as a senior executive officer, whether the nominee is independent, as that term is defined in existing independence requirements of the NYSE Amex Market and the Securities and Exchange Commission, the business, scientific or engineering experience currently desired on the Board, geography, the nominee’s industry experience, and the nominee’s general ability to enhance the overall composition of the Board.

The Governance and Nominating Committee does not have a formal policy on diversity; however, in recommending directors, the Board and the Committee consider the specific background and experience of the Board members and other personal attributes in an effort to provide a diverse mix of capabilities, contributions and viewpoints which the Board believes enables it to function effectively as the Board of Directors of a company with our size and nature of business.
 
 
Set forth below is information regarding the executive officers, directors, and key employees of Bovie Medical Corporation as of March 18, 2013.

 Name
 
Position
Director Since
Andrew Makrides
 
Chairman of the Board and CEO
December 1982
       
J. Robert Saron
 
President,  Chief Sales and Marketing Officer and Director
August 1988
       
George Kromer, Jr.
 
Research Analyst and Director
October 1995
       
Michael Norman
 
Director
September 2004
       
August Lentricchia
 
Director
October 2007
       
Moshe Citronowicz
 
Senior Vice President
N/A
       
Gary D. Pickett
 
Chief Financial Officer, Treasurer, and Secretary
N/A
       
Michael Geraghty
 
Director
March 2011
       
Lawrence J. Waldman
 
Director
March 2011
       
Jeff Rencher
 
Vice President of Sales & Marketing
N/A
       

Directors serve for one-year terms and are elected at the annual stockholders’ meeting.

Andrew Makrides, Esq. age 71, Chairman of the Board and CEO and member of the Board of Directors, received a Bachelor of Arts degree in Psychology from Hofstra University and a Juris Doctor Degree from Brooklyn Law School. He is a member of the Bar of the State of New York and practiced law from 1968 until joining Bovie Medical Corporation as a co-founder and Executive Vice President and director, in 1982. Mr. Makrides became President of the Company in 1985 and the CEO in December 1998 and has served as such until March 18, 2011 at which point he relinquished his position as President, but remained CEO.  Mr. Makrides employment contract extends to December 31, 2015. Mr. Makrides has over 29 years of executive experience in the medical industry.

J. Robert Saron, age 60, President, Chief Sales and Marketing Officer and Director, holds a Bachelor degree in Social and Behavioral Science from the University of South Florida. From 1988 to present Mr. Saron has served as a director of the Company. Mr. Saron has previously served on two industry boards.  He served as both director and president of the Health Care Manufacturing Management Council.  In 2011 Mr. Saron received the Leonard Berke Achievement award for ethics, mentoring, marketing skill, industry knowledge, contributions to the industry and contributions to HMMC.  He also served as a director of the Health Industry Distributors Association Education Foundation. Mr. Saron also received the Health Industry Distributors Association’s highest award in 2008, the Industry Award of Distinction, and in February 2013 was inducted into the Medical Distribution Hall of Fame.  Mr. Saron’s employment contract extends to December 31, 2015. Mr. Saron brings over 34 years of executive marketing and distribution experience in the medical industry.

George Kromer, Jr., age 72, became a director on October 1, 1995. On January 1, 2006, Mr. Kromer accepted an employment position with Bovie Medical Corporation as research analyst for the company in which he still maintains his capacity as a director. Mr. Kromer had been writing for business publications since 1980. In 1976, he received a Master’s Degree in health administration from Long Island University. He was engaged as a Senior Hospital Care Investigator for the City of New York Health & Hospital Corporation from 1966 to 1986. He also holds a Bachelor of Science Degree from Long Island University’s Brooklyn Campus and an Associate in Applied Science Degree from New York City Community College, Brooklyn, New York. Mr. Kromer has over 30 years of business analyst experience with a specialty in the medical industry.
 

Moshe Citronowicz, age 60, Senior Vice President came to the United States in 1978, and has worked in a variety of manufacturing and high technology industries. In October 1993, Mr. Citronowicz joined the Company as Vice President of Operations and served as our Chief Operating Officer until November 2011. Currently, he is serving as the Senior Vice President. Mr. Citronowicz’s employment contract extends to December 31, 2015.

Gary D. Pickett, CPA, age 61, holds an MBA from the University of Tampa, a BS degree in Accounting from Florida State University, and served five years as a field artillery officer in the United States Army.  Mr. Pickett joined as controller of Bovie in March 2006 and became Chief Financial Officer in October 2006.  During the five years prior to joining Bovie, Mr. Pickett held positions of Director of Financial Systems with Progress Energy Services of Raleigh, NC, Vice President and Controller of Progress Rail Services, a subsidiary of Progress Energy Services in Albertville, AL, each of which were non-affiliated with Bovie.  He has had extensive experience in Sarbanes-Oxley implementation as well as GAAP accounting and SEC Reporting. Mr. Pickett’s employment contract extends to June 2014.

Michael Norman, CPA age 55, joined Bovie in 2004.  He manages the CPA firm, Michael Norman, CPA, PC since 1994 specializing in business financial planning as well as governmental and financial auditing. Mr. Norman is a member of the Nassau County Board of Assessors, Treasurer of the Don Monti Memorial Research Foundation and a Glen Cove City Councilman, all located on Long Island, New York. Mr. Norman provides the board with over 20 years of experience as a CPA and also serves as a member of our Audit Committee.

August Lentricchia, age 58, is presently employed by Freedom Tax and Financial Services Bohemia as a Registered Representative since 2001. He is a Series 7 securities licensed Registered Representative and investment consultant of HD Vest Investment Services. Additionally, Mr. Lentricchia is a licensed life, accident and health, and variable annuity agent in New York State, as well as a registered tax return preparer with the IRS. He received a BA degree from the University of Arizona in 1977 and has received a Masters degree in Education from Dowling College in 2004. Mr. Lentricchia has over 25 years of financial and investment experience and also serves on our Audit Committee.

Lawrence J. Waldman, CPA age 66, has served as a director since March 2011 and is certified public accountant. Mr. Waldman is currently the Partner-in-Charge of EisnerAmper LLP Commercial Audit Practice Development of the accounting firm EisnerAmper LLP.  He has over thirty-five years of experience in public accounting, including twenty-five years experience as an audit partner serving a wide range of clients.  Prior to joining EisnerAmper LLP, Mr. Waldman was the Partner-in-Charge of Commercial Audit Practice Development for Holtz Rubenstein Reminick, LLP. Mr. Waldman was the Managing Partner of the Long Island office of KPMG LLP from 1994 through 2006, the accounting firm where he started at in 1972.   Mr. Waldman is also the Chairman of the Board of Trustees of the Long Island Power Authority and serves on the Finance and Audit Committee of the Board of Trustees.  He is currently the Treasurer of the Long Island Association as well as a member of its Board of Directors and Chairman of the Finance Committee.  In addition, Mr. Waldman is a member of the Board of Directors and Treasurer of each of the Long Island Angel Network and the Advanced Energy research Center at Stony Brook University and  a member of the Dean’s Advisory Board of the Hofstra University Frank G. Zarb School of Business.  Mr. Waldman received his bachelor’s degree and MBA from Hofstra University where he is also an adjunct professor. Mr. Waldman also serves on our Audit Committee as its financial expert.

Michael Geraghty, age 65, has served as a director since March 2011 and is the Executive Vice President of Global Sales at Optos, Inc., a developer and manufacturer of retinal imaging devices for screening, detection and diagnosis of eye related conditions.  From 2005 through 2008, he was the President of International Sales at Gyrus Acmi where he first started in 2000 as Senior Vice President of Sales for Gyrus Medical.  Prior to this, Mr. Geraghty was the Vice President of Sales and Marketing for Everest Medical, Inc. and before that was the Director of Marketing for Advanced Products at Arthrocare Corporation.  Mr. Geraghty specializes in building independent direct sales teams in the medical device industry and has extensive domestic and international sales and marketing experience.  He received his bachelor’s degree from St. Mary’s University and graduate degree in Executive Sales Management from the University of Minnesota.
 
 
Jeff Rencher, age 45, has worked in the medical device industry for twenty years.  He began as a surgical device representative in 1993 and in 2000 was promoted to Regional Director for Gyrus Medical (currently Olympus Surgical).  In 2004 he was recruited by the CEO and Board of Directors of Inlet Medical in Minneapolis, MN as Vice President of Sales.  Following the acquisition of Inlet Medical by Cooper Surgical, Mr. Rencher was tasked to head the sales and marketing efforts of Opticon Medical which was acquired in 2010.  He joined Bovie Medical in 2010 as Vice President of Sales and Marketing for Surgical Products.  During his tenure at both Inlet and Opticon, he built a national sales force, created marketing material, coordinated medical studies with leading physicians and generated new sales through the sales channels he has developed over his multiple years in the industry.  He holds a BS in Biology from Tulane University, an Emergency Medical Technician Certificate and has completed a course in Medical Industry Management at St. Thomas University in Minneapolis, MN.

Independent Board Members

The Board currently has four independent members, Michael Norman, August Lentricchia, Michael Geraghty, and Lawrence Waldman, that meet the existing independence requirements of the NYSE Amex Market and the Securities and Exchange Commission and represent a majority of the board.

Board Leadership

The Board has no formal policy with respect to separation of the positions of Chairman and CEO or with respect to whether the Chairman should be a member of management or an independent director, and believes that these are matters that should be discussed and determined by the Board from time to time.  Currently, Andrew Makrides serves as our Chairman and CEO. Given the fact that Mr. Makrides, in his capacity as our CEO is tasked with the responsibility of implementing our corporate strategy, we believe he is best suited for leading discussions, at the Board level, regarding performance relative to our corporate strategy, and this discussion accounts for a significant portion of the time devoted at our Board meetings.

Risk Management

The Board believes that risk management is an important component of the Company’s corporate strategy. While we assess specific risks at our committee levels, the Board, as a whole, oversees our risk management process, and discusses and reviews with management major policies with respect to risk assessment and risk management. The Board is regularly informed through its interactions with management and committee reports about risks we face in the course of our business. Finally, the Board believes the combined Chairman and CEO role assists us in our implementation of major policies addressing our risks. Our Audit Committee also takes an active role in risk assessment and risk management.
 
Audit Committee

The Audit Committee assists the Board in its general oversight of our financial reporting, internal controls, and audit functions, and is directly responsible for the appointment, compensation and oversight of the work of our independent registered public accounting firm. The Audit Committee reviews and discusses with management and our independent accountants the annual audited and quarterly financial statements (including the disclosures under “Management’s Discussion and Analysis of Financial Condition and Results of Operations”), reviews the integrity of the financial reporting processes, both internal and external, reviews the qualifications, performance and independence of our independent accountants, and prepares the Audit Committee Report included in this Annual Report on Form 10-K in accordance with rules and regulations of the Securities and Exchange Commission. The Audit Committee has the power to investigate any matter brought to its attention within the scope of its duties. It also has the authority to retain counsel and advisors to fulfill its responsibilities and duties. The Audit Committee also acts as a qualified legal compliance committee.
 
 
Our Audit Committee consists of three independent members of the Board of Directors, Michael Norman CPA, August Lentricchia, and Lawrence Waldman, CPA. As a smaller reporting company, we are required to have at least two independent members comprising our Audit Committee in accordance with Rule 10A-3 of the Securities Exchange Act of 1934 and the rules of the NYSE Amex Exchange.  During 2012 Lawrence Waldman, CPA served as the Audit Committee Chairman and financial expert. The Audit Committee meets as often as it determines necessary but not less frequently than once every fiscal quarter.

AUDIT COMMITTEE REPORT
 
Our Audit Committee is composed of “independent” directors, as determined in accordance with Rule 10A-3 of the Securities Exchange Act of 1934. The Audit Committee operates pursuant to a written charter adopted by the Board of Directors.
 
As described more fully in its charter, the purpose of the Audit Committee is to assist the Board of Directors with its oversight responsibilities regarding the integrity of our financial statements, our compliance with legal and regulatory requirements, assessing the independent registered public accounting firm’s qualifications, independence and performance for us. Management is responsible for preparation, presentation and integrity of our financial statements as well as our financial reporting process, accounting policies, internal accounting controls and disclosure controls and procedures. The independent registered public accounting firm is responsible for performing an independent audit of our consolidated financial statements in accordance with generally accepted auditing standards and to issue a report thereon. The Audit Committee’s responsibility is to monitor and oversee these processes. The following is the Audit Committee’s report submitted to the Board of Directors for 2012.
 
As part of its oversight of the Company’s financial statements, the Audit Committee reviews and discusses with both management and the Company’s independent register public accountants all annual and quarterly financial statements prior to their issuance.  During fiscal 2012, management advised the Audit Committee that each set of financial statements reviewed had been prepared in accordance with generally accepted accounting principles, and management reviewed significant accounting and disclosure issues with the Audit Committee.  These reviews included discussion with the independent registered public accountants of matters required to be discussed pursuant to Public Account Oversight Board AU 380 (Communication With Audit Committees), including the quality of the Company’s accounting principles, the reasonableness of significant judgments and the clarity of disclosures in financial statements.  The Audit Committee also discussed with Kingery & Crouse, P.A. matters relating to its independence, including a review of audit and non-audit fees and the written disclosures and letter from Kingery & Crouse, P.A. to the Audit Committee pursuant to applicable requirements of the Public Company Accounting Oversight Board regarding the independent accountants’ communications with the Audit Committee concerning independence.
 
In addition, the Audit Committee has met separately with management and with Kingery & Crouse, P. A.
 
Based on the review and discussions referred to above, the Audit Committee recommended to the Board of Directors that the audited financial statements be included in our Annual Report on Form 10-K for the year ended December 31, 2012 for filing with the Securities and Exchange Commission.

The foregoing Audit Committee Report shall not be deemed incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, and shall not otherwise be deemed filed under these acts, except to the extent we specifically incorporate by reference into such filings.

Governance and Nominating Committee

The Governance and Nominating Committee is responsible for matters relating to the corporate governance of our company and the nomination of members of the board and committees thereof. During 2012, our Governance and Nominating Committee consisted of three independent members of the Board of Directors, Michael Norman CPA who serves as Chairman, August Lentricchia, and Michael Geraghty. The Governance and Nominating Committee meets as often as it determines necessary, but not less than once a year.
 
 
Compensation Committee

The Compensation Committee is responsible for overseeing our compensation and employee benefit plans (including those involving the issuance of our equity securities) and practices, including formulating, evaluating, and approving the compensation of our executive officers and reviewing and recommending to the full Board of Directors the compensation of our Chief Executive Officer.  During 2012, our Compensation Committee consisted of three independent members of the Board of Directors, Michael Norman CPA, August Lentricchia who serves as Chairman, and Lawrence Waldman, CPA. The Compensation Committee meets as often as it determines necessary, but not less than once a year.

Code of Ethics

On March 30, 2004 Bovie adopted a Code of Ethics for executive employees.

A copy of the code of ethics which expressly includes the CEO and CFO, will be provided without charge to any person upon request to Bovie Medical Corporation, 734 Walt Whitman Road, Melville, NY 11747, Attn: Andrew Makrides.


General Compensation Philosophy

The primary objective of our compensation program for employees, including our compensation program for executive officers, is to attract, retain, and motivate qualified individuals and reward them in a manner that is fair to all stockholders. We strive to provide incentives for every employee that rewards them for their contribution to the Company.

Our compensation program is designed to be competitive with other employment opportunities and to align the interests of all employees, including executive officers, with the long-term interests of our stockholders. Historically, for our executive officers, we link a much higher percentage of total compensation to incentive compensation such as stock based compensation than we do for other employees.

With these objectives in mind, our Board has built executive and non-executive compensation programs that consist of two principal elements - base salary and grants of stock options and/or shares of restricted stock.

Compensation Program
 
Base Salary
 
We pay base salaries to our Named Executive Officers (as defined below) in order to provide a consistent, minimum level of pay that sustained individual performance warrants. We also believe that a competitive annual base salary is important to attract and retain an appropriate caliber of talent for each position over time.

The annual base salaries of our Named Executive Officers are determined by our Compensation Committee and approved by the Board of Directors. All salary decisions are based on each Named Executive Officer's level of responsibility, experience and recent and past performance, as determined by the Compensation Committee. The Compensation Committee does not benchmark its base salaries in any way, nor do they presently employ the services of a compensation consultant.

Stock Options
 
The second component of executive compensation is equity grants which have mainly come in the form of stock options. We believe that equity ownership in our Company is important to provide our Named Executive Officers with long-term incentives to better align interests of executives with the interests of stockholders and build value for our stockholders. In addition, the equity compensation is designed to attract and retain the executive management team. Stock options have value only if the stock price increases over time and, therefore, provide executives with an incentive to build Bovie's value. This characteristic ensures that the Named Executive Officers have a meaningful portion of their compensation tied to future stock price increases and rewards management for long-term strategic planning through the resulting enhancement of the stock price.
 
 
Stock option awards to Named Executive Officers are entirely discretionary. The CEO and Director of Strategic Development recommend to the Compensation Committee which individuals should be awarded stock options. The Compensation Committee considers the prior contribution of these individuals and their expected future contributions to our growth then formulates and presents the recommended allocation of stock option awards to the Board of Directors for approval. The Board of Directors approves or, if necessary, modifies the Committee’s recommendations.
 
Perquisites and Other Benefits
 
Our Named Executive Officers are eligible for the same health and welfare programs and benefits as the rest of our employees in their respective locations. In addition, our CEO and President and Chief Sales and Marketing Officer, and Senior Vice President each receive an automobile allowance of approximately $6,000, $6,000 and $3,000 per year respectively.
 
Our Named Executive Officers are entitled to participate in and receive employer contributions to Bovie's 401(k) Savings Plan. However, during January of 2009 management made the decision to suspend the employer 401(k) match, which as of December 31, 2012 has not been re-instated. For more information on employer contributions to the 401(k) Savings Plan see the Summary Compensation Table and its footnotes.
 
Tax and Accounting Considerations

Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”), places a limit of $1,000,000 on the amount of compensation that we may deduct as a business expense in any year with respect to each of our most highly paid executives unless, among other things, such compensation is performance-based and has been approved by stockholders. The non-performance-based compensation paid to our executive officers for the 2012 fiscal year did not exceed the $1 million limit per executive officer. Accounting considerations also play an important role in the design of our executive compensation program. Accounting rules, such as FASB ASC Topic 718-10-10, Share-Based Payment, require us to expense the cost of our stock option grants which reduces the amount of our reported profits. Because of option expensing and the impact of dilution on our stockholders, we pay close attention to the number and value of the shares underlying stock options we grant.
 
 
Compensation of Named Executive Officers

The following table sets forth the compensation paid to each of our Named Executive Officers for the three years ended December 31, 2012 for services to our Company in all capacities:
 
Summary Compensation Table

Name
And
Principal
Position
Year
 
Salary
($)
   
Bonus
($)
   
Stock
Awards
($)
   
Option
Awards
($)
*
   
Non-
Equity
Incentive
Plan
Compensa- tion
Earnings
($)
   
Change
in
Pension
Value and
Nonqual-
 ified
Deferred
 compen-
 sation
Earnings
($)
   
All
Other
Compen-
Sation
($)
   
Total
($)
 
(a)
(b)
 
(c)
   
(d)
   
(e)
   
(f)
   
(g)
   
(h)
   
(i)
   
(j)
 
Andrew Makrides
2012
  $ 209,791       --       --     $ 28,500 (18)     --       --     $ 18,876 (1)   $ 257,167  
Chairman of the
2011
  $ 205,252       --       --       --       --       --     $ 18,823 (9)   $ 224,075  
Board and CEO
2010
  $ 205,252       --       --       --       --       --     $ 19,542 (6)   $ 224,794  
                                                                   
Gary D.
2012
  $ 118,380       --       --     $ 9,500 (8)     --       --     $ 397 (2)   $ 128,277  
Pickett
2011
  $ 109,331       --       --       --       --       --     $ 374 (15)   $ 109,705  
CFO, Treasurer, Secretary
2010
  $ 101,970       --       --     $ 9,800 (7)     --       --     $ 374 (10)   $ 112,144  
                                                                   
J. Robert Saron
2012
  $ 297,143       --       --     $ 28,500 (19)     --       --     $ 22,008 (3)   $ 347,651  
President,  
2011
  $ 290,651       --       --       --       --       --     $ 19,321 (12)   $ 309,972  
Chief Sales and Marketing Officer and
Director
2010
  $ 290,651       --       --       --       --       --     $ 9,159 (11)   $ 299,810  
                                                                   
Moshe
2012
  $ 199,922       --       --     $ 28,500 (20)     --       --     $ 14,150 (4)   $ 242,572  
Citronowicz
2011
  $ 212,199       --       --       --       --       --     $ 16,534 (14)   $ 228,733  
Senior Vice President
2010
  $ 213,549       --       --       --       --       --     $ 15,327 (13)   $ 228,876  
                                                                   
Jeff Rencher
2012
  $ 160,064       --       --     $ 164,500 (21)     --       --     $ 15,698 (17)   $ 340,262  
V.P. Sales &
2011
  $ 150,000       --       --       --       --       --     $ 12,982 (5)   $ 162,982  
Marketing
2010
  $ 70,000 (16)     --       --     $ 19,500 (22)     --       --     $ 538 (23)   $ 90,038  


 
* These columns represent the grant date fair value of the awards as calculated in accordance with FASB ASC 718 (Stock Compensation).  Pursuant to SEC rule changes effective February 28, 2010, we are required to reflect the total grant date fair values of the option grants in the year of grant, rather than the portion of this amount that was recognized for financial statement reporting purposes in a given fiscal year which was required under the prior SEC rules, resulting in a change to the amounts reported in prior Annual Reports.

(1) This amount includes: car allowance of $6,310; life insurance premiums of $456; and health insurance premiums of $12,110.

(2) This amount includes: life insurance premiums of $397.

(3) This amount includes: car allowance of $6,310; life insurance premiums of $512; and health insurance premiums of $15,186.
 
 
(4) This amount includes: car allowance of $1,395; life insurance premiums of $512; and health insurance premiums of $12,243.

(5) This amount includes: life insurance premiums of $479; and health insurance premiums of $12,503.

(6) This amount includes: car allowance of $6,310; life insurance premiums of $440; and health insurance premiums of $12,792.

(7) In 2010 a total of 10,000 options were granted to Mr. Pickett on July 8, 2010 with a fair value of $0.98 per option.

(8) On July 12, 2012 a total of 10,000 options were granted to Mr. Pickett with a fair value of $0.95 per option.

(9) This amount includes: car allowance of $6,309; life insurance premiums of $441; and health insurance premiums of $12,073.

(10) This amount includes life insurance premiums of $374.

(11) This amount includes: car allowance of $6,310; life insurance premiums of $479; and health insurance premiums of $2,370.

(12) This amount includes: car allowance of $6,309; life insurance premiums of $479; and health insurance premiums of $12,533.

(13) This amount includes: car allowance of $6,310; life insurance premiums of $479; and health insurance premiums of $8,538.

(14) This amount includes: car allowance of $5,824; life insurance premiums of $479; and health insurance premiums of $10,231.

(15) This amount includes: life insurance premiums of $374.

(16) This amount represents a partial year as Mr. Rencher was hired on June 28, 2010.

(17) This amount includes: life insurance premiums of $511 and health insurance premiums of $15,187.

(18) On July 12, 2012 a total of 30,000 options were granted to Mr. Makrides with a fair value of $0.95 per option.

(19) On July 12, 2012 a total of 30,000 options were granted to Mr. Saron with a fair value of $0.95 per option.

(20) On July 12, 2012 a total of 30,000 options were granted to Mr. Citronowicz with a fair value of $0.95 per option.

(21) On May 21, 2012, July 12, 2012 and October 8, 2012 options of 20,000, 10,000 and 100,000 respectively  were granted to Mr. Rencher.  The three issuances had a fair value per option of $1.05, $0.95 and $1.34 respectively.

(22) On June 25, 2010 a total of 30,000 options were granted to Mr. Rencher with a fair value of $0.65 per option.

(23) This amount includes: life insurance premiums of $538.


Employment Agreements and Potential Payments Upon Termination or Change in Control

At December 31, 2012, employment contracts with Mr. Makrides, Mr. Saron, and Mr. Citronowicz, which are set to expire in December 2015, contain an automatic extension for a period of one year unless we provide the executives with appropriate written notice pursuant to the contracts.  The employment agreements provide, among other things, that the executive may be terminated as follows:

 
(a)
Upon the death of the executive, in which case the executive’s estate shall be paid the basic annual compensation due the employee pro-rated through the date of death.

 
(b)
By the resignation of the executive at any time upon at least thirty (30) days prior written notice to Bovie in which case Bovie shall be obligated to pay the employee the basic annual compensation due him pro-rated to the effective date of termination.

 
(c)
By Bovie, “for cause” if during the term of the employment agreement the employee violates the non-competition provisions of his employment agreement, or is found guilty in a court of law of any crime of moral turpitude in which case the contract would be terminated and provisions for future compensation forfeited.

 
(d)
By Bovie, without cause, with the majority approval of the Board of Directors, for Mr. Makrides, Mr. Saron, and Mr. Citronowicz at any time upon at least thirty (30) days prior written notice to the executive. In this case Bovie shall be obligated to pay the executive compensation in effect at such time, including all bonuses, accrued or prorated, and expenses up to the date of termination. Thereafter for Messrs Makrides, Saron, and Citronowicz for the period remaining under the contract, Bovie shall pay the executive the salary in effect at the time of termination payable weekly until the end of their contract.

 
(e)
If Bovie fails to meet its obligations to the executive on a timely basis, or if there is a change in the control of Bovie, the executive may elect to terminate his employment agreement. Upon any such termination or breach of any of its obligations under the employment agreement, Bovie shall pay the executive a lump sum severance equal to three times the annual salary and bonus in effect the month preceding such termination or breach as well as any other sums which may be due under the terms of the employment agreement up to the date of termination.

We have an employment contract with Mr. Pickett to serve as Chief Financial Officer which has a current expiration date of June 2014.  In the event of a change of control, the contract provides that Mr. Pickett will receive salary and bonus in effect up to the date of the remaining portion of the contract.

Additionally, we have an employment agreement with Mr. Rencher to serve as V.P. of Sales & Marketing which has a current expiration date of September 2013. In the event of a change of control, Mr. Rencher’s contract provides that he receive a lump sum severance payment in the amount of $160,000.

There are no other employment contracts that have non-cancelable terms in excess of one year.
 
 
Grants of Plan-Based Awards
 
Name
Grant Date
 
All Other Option
Awards:
Number of Securities
Underlying Options
   
Exercise or Base
Price of Option
Awards
($/Sh)
***
   
Grant Date Fair Value
of Stock and Option
Awards
($)
 
(a)
(b)
 
(c)
   
(d)
   
(e)
 
Andrew Makrides
July 12, 2012
    30,000     $ 2.54     $ 28,500  
Gary Pickett
July 12, 2012
    10,000     $ 2.54     $ 9,500  
J. Rob Saron
July 12, 2012
    30,000     $ 2.54     $ 28,500  
Moshe Citronowicz
July 12, 2012
    30,000     $ 2.54     $ 28,500  
Jeffery Rencher
July 12, 2012
    10,000     $ 2.54     $ 9,500  
Jeffery Rencher
May 21, 2012
    20,000     $ 2.79     $ 21,000  
Jeffery Rencher
October 8, 2012
    100,000     $ 3.79     $ 134,000  
 
Options Exercises During Fiscal 2012

There were no options exercised during the year ended December 31, 2012 by the Named Executive Officers.
 
Outstanding Equity Awards
 
The following table presents information with respect to each unexercised stock option held by our Named Executive Officers as of December 31, 2012:

 
 
Outstanding Equity Awards at 12/31/12
Name
 
# of Securities
Underlying
Unexercised
Options
(# Exercisable)
   
# of Securities
Underlying
Unexercised
Options
(# Unexercisable)
   
Option
Exercise
Price
($/sh)
 
Option
Expiration
Date 10 Years
After Grant
Date
Andrew Makrides
    25,000       --       3.25  
9/29/2013
      25,000       --       2.13  
9/23/2014
      25,000       --       2.25  
5/5/2015
      --       30,000       2.54  
7/12/2022
J. Robert Saron
    12,500       --       3.25  
9/29/2013
      12,500       --       2.13  
9/23/2014
      12,500       --       2.25  
5/5/2015
      --       30,000       2.54  
7/12/2022
Moshe Citronowicz
    --       30,000       2.54  
7/12/2022
 Gary Pickett
    17,143       2,857       8.66  
1/12/2017
      4,286       714       7.10  
3/29/2017
      5,357       7,143       8.32  
10/26/2019
      2,587       7,413       2.46  
7/08/2020
      --       10,000       2.54  
7/12/2022
Jeff Rencher
    --       30,000       6.00  
6/25/2020
      --       20,000       2.79  
05/21/2022
      --       10,000       2.54  
7/12/2022
      --       100,000       3.79  
10/08/2022
 
 
Compensation of Non-Employee Directors

The following is a table showing the director compensation for the year ended December 31, 2012:

Name
 
Fees
Earned
Or Paid
In Cash
($)
   
Stock
Awards
($)
   
Option
Awards
($)
***
   
Non-Equity
Incentive
Plan
Compensa-
tion
($)
   
Change in Pension
Value and
Nonqualified
Deferred
Compensation
Earnings
($)
   
All
Other
Compensa-
tion
($)
   
Total
($)
 
(a)
 
(b)
   
(c)
   
(d)
   
(e)
   
(f)
   
(g)
   
(h)
 
Lawrence
              $ 6,880 (1)