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EX-32.2 - EXHIBIT 32.2 - Apyx Medical Corpex32_2.htm
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EX-31.2 - EXHIBIT 31. - Apyx Medical Corpex31_2.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

FORM 10-Q
 

(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended September 30, 2009
 
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Transition Period from              to             

Commission File Number: 012183

BOVIE MEDICAL CORPORATION
(Exact name of registrant as specified in its charter)

Delaware
 
11-2644611
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
     
734 Walt Whitman Road
Melville, New York
 
11747
(Address of principal executive offices)
 
(Zip Code)

(631) 421-5452
(Registrant’s telephone number, including area code)


(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes  x                 No  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T 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 check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer   o
 
Accelerated filer   x
 
Non-accelerated filer   o
(Do not check if a smaller reporting company)
 
Smaller reporting company   o

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

The number of shares of common stock, par value $0.001 per share, outstanding on October 27, 2009 was 17,094,773.
 


 
 

 
 
BOVIE MEDICAL CORPORATION
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2009
         
         
       
Page
         
Part I.
   
2
         
Item 1.
     
     
2
     
4
     
5
     
6
     
7
Item 2.
   
15
Item 3.
   
24
Item 4.
   
25
         
Part II.
   
25
         
Item 1.
   
25
Item 1A.
   
26
Item 2.
   
26
Item 3.
   
26
Item 4.
   
26
Item 5.
   
26
Item 6.
   
26
     
27
 
1


PART I. FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS


BOVIE MEDICAL CORPORATION
 
CONSOLIDATED BALANCE SHEETS
 
SEPTEMBER 30, 2009 AND DECEMBER 31, 2008
 
   
Assets
 
   
   
(Unaudited)
       
   
September 30,
2009
   
December 31,
2008
 
             
Current assets:
           
             
Cash and cash equivalents
  $ 2,924,655     $ 2,564,443  
Trade accounts receivable, net
    2,244,959       2,991,715  
Inventories
    7,073,591       5,339,983  
Prepaid expenses
    698,237       925,015  
Deferred income tax asset, net
    285,255       216,885  
                 
Total current assets
    13,226,697       12,038,041  
                 
Property and equipment, net
    8,794,896       7,125,943  
                 
Other assets:
               
                 
Brand name/trademark, net
    1,509,662       1,509,662  
Purchased technology, net
    3,322,488       3,479,752  
License rights, net
    168,330       215,673  
Restricted cash held in escrow
    35,635       1,285,117  
Deposits and other assets
    140,777       124,707  
                 
Total other assets
    5,176,892       6,614,911  
                 
Total assets
  $ 27,198,485     $ 25,778,895  
   
The accompanying notes are an integral part of the consolidated financial statements.
 

2


BOVIE MEDICAL CORPORATION
 
CONSOLIDATED BALANCE SHEETS
 
SEPTEMBER 30, 2009 AND DECEMBER 31, 2008
 
(continued)
 
   
Liabilities and Stockholders’ Equity
 
             
   
(Unaudited)
       
   
September 30,
2009
   
December 31,
2008
 
Current liabilities:
           
             
Accounts payable
  $ 761,110     $ 1,317,578  
Deferred revenue
    9,130       24,538  
Accrued payroll
    166,933       61,168  
Accrued vacation
    265,760       237,633  
Current portion of amounts due to Lican
    50,000       50,000  
Current income taxes payable
          77,943  
Current portion of mortgage note payable to bank
    133,000       125,000  
Line of credit
    1,000,382       -  
Accrued litigation settlement
    160,000       -  
Accrued and other liabilities
    550,515       423,109  
                 
Total current liabilities
    3,096,830       2,316,969  
                 
Deferred income taxes payable
    584,500       530,863  
Mortgage note payable to bank, net of current portion
    3,773,250       3,875,000  
Due to Lican, net of current portion
    268,150       268,150  
                 
Total liabilities
    7,722,730       6,990,982  
                 
                 
Commitments and contingency (Note 11)
               
                 
Stockholders’ equity:
               
                 
Preferred stock, par value $.001; 10,000,000 shares authorized; none issued and outstanding
           
Common stock, par value $.001; 40,000,000 shares authorized, 16,948,133 and 16,795,269 issued and outstanding on September 30, 2009 and December 31, 2008, respectively
    16,949       16,796  
Additional paid-in capital
    23,023,478       22,841,545  
Accumulated other comprehensive loss
    (150,844 )     (88,464 )
Deficit
    (3,413,828 )     (3,981,964 )
                 
Total stockholders’ equity
    19,475,755       18,787,913  
                 
Total liabilities and stockholders’ equity
  $ 27,198,485     $ 25,778,895  
                 
The accompanying notes are an integral part of the consolidated financial statements.
 

3


BOVIE MEDICAL CORPORATION
 
CONSOLIDATED STATEMENTS OF OPERATIONS
 
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
 
(unaudited)
 
   
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
                         
Sales
  $ 6,371,371     $ 7,295,793     $ 20,420,272     $ 20,958,672  
Cost of sales
    3,611,482       4,062,424       11,359,427       12,238,925  
                                 
Gross profit
    2,759,889       3,233,369       9,060,845       8,719,747  
                                 
Gain on cancellation of agreement
                      1,495,634  
                                 
Other costs and expenses:
                               
Research and development
    495,818       488,063       1,497,332       1,430,207  
Professional services
    303,415       344,727       1,023,905       667,084  
Salaries and related costs
    759,114       726,761       2,303,807       2,253,066  
Selling, general and administrative
    1,312,033       1,061,135       3,531,874       3,221,433  
                                 
Total other costs and expenses
    2,870,380       2,620,686       8,356,918       7,571,790  
                                 
Income (loss) from operations
    (110,491 )     612,683       703,927       2,643,591  
                                 
Interest (expense) income, net
    (55,013 )     (15,244 )     1,376       15,430  
                                 
Income (loss) before income taxes
    (165,504 )     597,439       705,303       2,659,021  
                                 
Benefit (provision) for income taxes
    127,755       (231,549 )     (137,167 )     (866,000 )
                                 
Net (loss) income
  $ (37,749 )   $ 365,890     $ 568,136     $ 1,793,021  
                                 
Earnings per share
                               
Basic
  $     $ .02     $ .03     $ .11  
Diluted
  $     $ .02     $ .03     $ .10  
                                 
Weighted average number of shares outstanding
    16,912,402       16,067,979       16,881,743       15,998,150  
                                 
Weighted average number of shares outstanding adjusted for dilutive securities
    17,926,404       17,820,155       17,809,845       17,731,492  
   
The accompanying notes are an integral part of the consolidated financial statements.
 


4


BOVIE MEDICAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
FOR THE YEAR ENDED DECEMBER 31, 2008 AND THE PERIOD ENDED SEPTEMBER 30, 2009


   
Common Stock
   
Additional
Paid-in
Capital
   
Accumulated
Other
Comprehensive
Gain (Loss)
   
Deficit
   
Total
 
   
Shares
   
Par Value
                 
January 1, 2008
    15,457,088     $ 15,457     $ 22,435,161     $     $ (5,813,752 )   $ 16,636,866  
                                                 
Options exercised, net of stock  swap
    1,338,181       1,339       221,687                   223,026  
                                                 
Stock based compensation
                184,697                   184,697  
                                                 
Income for year
                            1,831,788       1,831,788  
Foreign currency remeasurement
                            (88,464 )           (88,464 )
Comprehensive income
                                  1,743,324  
                                                 
December 31, 2008
    16,795,269       16,796       22,841,545       (88,464 )     (3,981,964 )     18,787,913  
                                                 
Options exercised, net of stock swap
    152,864       153       78,600                   78,753  
                                                 
Stock based compensation
                103,333                   103,333  
                                                 
Income for period
                            568,136       568,136  
Foreign currency remeasurement
                      (62,380 )           (62,380 )
Comprehensive income
                                  505,756  
                                                 
September 30, 2009
    16,948,133     $ 16,949     $ 23,023,478     $ (150,844 )   $ (3,413,828 )   $ 19,475,755  


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

5


BOVIE MEDICAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(unaudited)
             
   
2009
   
2008
 
Cash flows from operating activities
           
Net income
  $ 568,136     $ 1,420,664  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization of property and equipment:
    562,402       398,163  
Amortization of intangible assets
    204,606       77,467  
Provision for (recovery of) inventory obsolescence
    6,498       (4,711 )
Loss on disposal of property and equipment
    1,628       2,236  
Stock based compensation
    103,333       44,594  
Non-cash reclassification
    -       10,324  
Provision for deferred taxes
    (14,733 )     610,035  
Gain on cancellation of agreement
          (1,495,634 )
Changes in current assets and liabilities:
               
Trade receivables
    746,757       (78,754 )
Prepaid expenses
    226,778       (412,290 )
Inventories
    (1,740,104 )     (357,069 )
Deposits and other assets
    (16,069 )     (36,644 )
Accounts payable
    (556,468 )     200,204  
Accrued and other liabilities
    127,788       297,284  
Accrued payroll
    105,764       3,421  
Accrued vacation
    28,128       44,064  
Income taxes payable
    (77,943 )      
Accrued litigation settlement
    160,000        
Deferred revenues
    (15,408 )     (15,924 )
Net cash provided by operating activities
    421,093       707,430  
                 
Cash flows from investing activities
               
Purchases of property and equipment
    (2,232,983 )     (588,707 )
Proceeds from sale of property and equipment
    -       10,573  
Purchased technology
    -       (57,283 )
Net cash used in investing activities
    (2,232,983       (635,417 )
                 
Cash flows from financing activities
               
Proceeds from escrow account
    1,249,481        
Net increase in line of credit
    1,000,000        
Payments on mortgage note payable
    (93,750 )      
Proceeds from issuance of common shares
    78,750       218,275  
Net cash provided by financing activities
    2,234,481       218,275  
                 
Effect of exchange rate changes on cash and cash equivalents
    (62,379 )     (46,717 )
                 
Net change in cash equivalents
    360,212       243,571  
                 
Cash and cash equivalents, beginning of period
    2,564,443       3,534,759  
                 
Cash and cash equivalents, end of period
  $ 2,924,655     $ 3,778,330  
                 
Cash paid during the nine months ended September 30, 2009 and 2008:
               
Interest paid, net of amounts capitalized
  $ 71,136     $ 948  
Income taxes
  $ 229,843     $ 37,128  

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

6


BOVIE MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED

NOTE 1.  BASIS OF PRESENTATION

Unless the context otherwise indicates, the terms “we,” “our,” “us,” “Bovie,” and similar terms refer to Bovie Medical Corporation and its consolidated subsidiaries.

The accompanying unaudited consolidated financial statements have been prepared based upon SEC rules that permit reduced disclosure for interim periods.  For a more complete discussion of significant accounting policies and certain other information, please refer to the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2008.  These financial statements reflect all adjustments that are necessary for a fair presentation of results of operations and financial condition for the interim periods shown, including normal recurring accruals and other items.  We have evaluated subsequent events through November 9, 2009, the date we filed these consolidated financial statements with the SEC.  The results for the interim periods are not necessarily indicative of results for the full year.

Certain prior year amounts may have been reclassified to conform to the presentation used in 2009, including the item listed below.

Reclassification

During the third quarter 2009, management determined that the gain on cancellation of an agreement that we had recorded in the second quarter 2008 may be better presented within our income from operations section as opposed to the other income section where it was originally presented. Management has decided to reclass the presentation of this gain in the current 10-Q filing as well as future filings within the income from operations section. The treatment of this reclassification has been reviewed by the Company pursuant to SEC Staff Accounting Bulletin No. 99 and  FASB Statement of Financial Accounting Standards Boards’ Accounting Standards Codification No. 250, and we have determined this change in presentation is not material to the overall 2008 financial presentation and related reports. We have revised our September 30, 2008 consolidated statements of operations presented in our third quarter 2009 Form 10-Q to reflect the corrected amounts.  Revising the prior year financial statements for immaterial errors would not require previously filed reports to be amended. The following table reflects the adjustments to the statement of operations for the nine months ended September 30, 2008.
 
(in thousands)
 
Nine months ended September 30, 2008
 
   
As reported
   
Adjustment
   
As revised
 
Sales
  $ 20,959     $ -     $ 20,959  
Cost of sales
    12,239       -       12,239  
Gross profit
    8,720       -       8,720  
                         
Gain on cancellation of agreement
    -       1,496       1,496  
                         
Other costs and expenses
    7,572       -       7,572  
Income from operations
    1,148       1,496       2,644  
Gain on cancellation of agreement
    1,496       (1,496 )     -  
Interest income (expense)
    15       -       15  
Income before taxes
    2,659       -       2,659  
Provision for taxes
    (866 )     -       (866 )
Net income
  $ 1,793     $ -     $ 1,793  

Additionally, to provide a better overall understanding, management has decided to expand the disclosure of this transaction including emphasis on the basis used in determining the value of the received assets and related gain. Our proposed revised Note 13 is provided below:

7


GAIN FROM CONTRACT SETTLEMENT

On April 29, 2008 we signed an agreement with Boston Scientific Corporation to acquire technology, patents, and assets related to the use of conductive sintered steel as an electrode for radio frequency cutting and coagulation, intended to lower blood loss, quicken procedure times and provide cost savings for hospitals. The original development and manufacturing agreement signed in 2007 required us to develop and manufacture certain products using Boston Scientifics’ intellectual property, with which we complied. Boston Scientific terminated the original agreement and through the contract settlement negotiations we acquired the ownership rights to the intellectual property and equipment in consideration for releasing Boston Scientific from any further obligations as outlined in the original development and manufacturing agreement. A new agreement was signed in place of the previous distribution and marketing agreement between the companies for the technology’s use in Boston Scientifics’ oncology business. As part of this new agreement, we granted a limited license to Boston Scientific until 2016 for uses outside of our intended fields listed above, which management feels has no impact on the fair value of the asset received.

Management believed at the time of the transaction that the nonmonetary exchange had ‘commercial substance’, meaning there was an expectation that the future cash flows of the company would change significantly as a result of the exchange. The presence of ‘commercial substance’ determines that the measure of value to be utilized for transactions is fair value. Due to the fact that there was a degree of urgency in the transaction, namely the immediate need for Boston Scientific to terminate the contract due to some internal restructuring, one could not rely on it being an ‘arms length’ transaction. Management first conducted a thorough valuation of the non-monetary exchange and then engaged two independent third party appraisers to ensure that managements valuation was within reasonable limits.. These third party appraisers utilized the three general approaches to appraising assets: the market approach, the cost approach, and the income approach.

Management determined the fair value of the patent a few different ways, first by conducting an analysis of the costs to reproduce, second by reviewing similar market transactions, and lastly modeling expected future cash flows of the patent. Each approach to fair value measurement was analyzed based on the level of inputs and compared against the fair value hierarchy. The income approach utilized numerous Level 3 inputs in its determination of value, including rates of return and projected cash flow. The market approach utilized Level 2 inputs for market rates of royalties on similar technologies. The cost approach was considered, but excluded from the fair value determination as the cost to reproduce the patent does not adequately represent the value of the patent.

Management believes that the resulting valuations were within reasonable limits because the multiple probability weightings reduced the likelihood of uncertainties to the asset valuation and soon after the transaction, we generated revenues and began discussions for possible distribution agreements which allowed us to determine that our estimate of fair value was within reasonable limits when reviewing our projected sales. Management used revenue projections from Boston Scientific, discussions with the inventor (a Bovie employee) as to the market and any competitors, and research and projections from Bovie’s sales and marketing department.  Management then reviewed the work of the third party appraisers to validate that the amount calculated was within reasonable limits. Management was responsible for calculating and recording a gain of approximately $1,496,000 based on the fair values of the assets we received (i.e. intellectual property and molds of approximately   $1,456,000 and $40,000, respectively).

Management utilized in its multiple probability weightings:

 
·
Number of procedures ranging from 30 to 70% of the market (assumed growth rate ranging from 2% to 7%)
 
·
Adoption Rate ranging from 1% to 5%
 
·
Average sales price of $800 based upon the current market price, which we were generating revenue at, with an  assumed 5% growth rate
 
·
Capital investment ranges from $500,000 to $1,100,000
 
·
Discount rate ranges from 10% to 30% (includes Risk Free rate, adjusted equity risk premium, risk premium for size and risk premium for Company specific risk factors)
 
·
SEER device market opportunity projected revenues provided by Boston Scientific.


Third Party appraisers utilized professional data from various sources as Capital IQ, Hoovers Online, OneSource, and Compustat Research Insight database from Standard & Poor’s, along with the SEER device market opportunity projected revenues provided by Boston Scientific.

NOTE 2.  INVENTORIES

8


Inventories are stated at the lower of cost or market.  Cost is determined principally on the average cost method.  Inventories at September 30, 2009 and December 31, 2008 were as follows:

   
September 30,
2009
   
December 31,
2008
 
             
Raw materials
  $ 4,192,556     $ 3,368,800  
Work in process
    2,177,572       1,621,032  
Finished goods
    1,250,864       891,054  
Gross inventories
    7,620,992       5,880,886  
Less: reserve for obsolescence
    (547,401 )     (540,903 )
                 
Net inventories
  $ 7,073,591     $ 5,339,983  

NOTE 3.  INTANGIBLE ASSETS

At September 30, 2009 and December 31, 2008, intangible assets consisted of the following:

   
September 30,
2009
   
December 31,
2008
 
             
Trade name (life indefinite)
  $ 1,509,662     $ 1,509,662  
                 
Purchased technology (9-17 yr life)
  $ 3,940,617     $ 3,940,617  
Less: accumulated amortization
    (618,129 )     (460,865 )
Net carrying amount
  $ 3,322,488     $ 3,479,752  
                 
License rights (5 yr life)
  $ 315,619     $ 315,619  
Less accumulated amortization
    (147,289 )     (99,946 )
Net carrying amount
  $ 168,330     $ 215,673  

NOTE 4.  NEW ACCOUNTING PRONOUNCEMENTS

In June 2009, the Financial Accounting Standards Board, or FASB, issued FASB Statement No. 168, The FASB Accounting Standards CodificationTM and the Hierarchy of Generally Accepted Accounting Principles – a replacement of FASB Statement No. 162, which was titled The Hierarchy of Generally Accepted Accounting Principles (the “Codification”).  The Codification is effective for financial statements issued for interim and annual periods ending after September 15, 2009.  The Codification is the single source of authoritative accounting principles recognized by the FASB to be applied by non-governmental entities in the preparation of financial statements in conformity with GAAP.  Although the adoption of this statement did not materially affect our financial statements, the references to accounting literature within the notes to the condensed consolidated financial statements and elsewhere in this report conform to the Codification.  For convenience, we have also included a corresponding parenthetical reference to the pre-Codification literature.

In June 2009, the FASB issued FASB ASC Topic 810-10-05, Amendments to FASB Interpretation No. 46R (SFAS 167).  FASB ASC Topic 810-10-05 amends certain requirements of FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities, to improve financial reporting by enterprises involved with variable interest entities and to provide more relevant and reliable information to users of financial statements.  FASB ASC Topic 810-10-05 is effective for fiscal years beginning after November 15, 2009.  Because we do not currently have any significant variable interests in unconsolidated entities, we do not anticipate that the adoption of this guidance will affect our consolidated financial statements.

In June 2009, the FASB issued FASB ASC Topic 860-10-05, Accounting for Transfers of Financial Assets, an amendment to SFAS No. 140 (SFAS 166).  The new standard eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets and requires additional disclosures to enhance information reported to users of financial statements by providing greater transparency about transfers of financial assets, including securitization transactions, and an entity’s continuing involvement in and exposure to the risks related to transferred financial assets.  FASB ASC Topic 860-10-05 is effective for fiscal years beginning after November 15, 2009.  We are evaluating the impact it will have on our consolidated financial statements.

9


In May 2009, the FASB issued FASB ASC Topic 855-10-05, Subsequent Events (SFAS 165).  This standard is intended to establish general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued.  Specifically, this standard sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date.  FASB ASC Topic 855-10-05 is effective for fiscal years and interim periods ending after June 15, 2009.  We adopted this standard effective June 15, 2009 and have evaluated any subsequent events through the date of this filing.  We do not believe there are any material subsequent events that would require further disclosure.

In December 2007, the FASB issued FASB ASC Topic 810-10-65, Non-controlling Interests in Consolidated Financial Statements, an amendment of ARB No. 51 (SFAS 160).  FASB ASC Topic 810-10-65 will change the accounting and reporting for minority interests, which will be recharacterized as non-controlling interests and classified as a component of equity.  This new consolidation method will significantly change the accounting for partial and/or step acquisitions.  FASB ASC Topic 810-10-65 will be effective for us in the first quarter of fiscal year 2010.  We do not believe adoption of this standard will have a material impact on our consolidated financial statements.

In April 2009, the FASB issued FASB ASC Topic 158-320-05 and 320-10-05, Recognition and Presentation of Other-Than-Temporary Impairments (FASB Staff Position, or FSP, No. FAS 115-2 and FAS 124-2), to amend the other-than-temporary impairment guidance in debt securities to be based on intent to sell instead of ability to hold the security and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements.  This pronouncement is effective for periods ending after June 15, 2009.  We adopted this standard effective June 15, 2009, and it did not have a material impact on our consolidated financial position and results of operations.

In April 2009, the FASB issued FASB ASC Topic 820-10-05, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (FSP 157-4).  FASB ASC Topic 820-10-05 provides additional authoritative guidance to assist both issuers and users of financial statements in determining whether a market is active or inactive, and whether a transaction is distressed.  This pronouncement is effective for periods ending after June 15, 2009.  We adopted this standard effective June 15, 2009, and it did not have a material impact on our consolidated financial position and results of operations.

In April 2009, the FASB issued FASB ASC Topic 270-10-05, Interim Disclosures about Fair Value of Financial Instruments (FSP FAS 107-1 and APB 28-1).  FASB ASC Topic 270-10-05 enhances consistency in financial reporting by increasing the frequency of fair value disclosures.  This guidance relates to fair value disclosures for any financial instruments that are not currently reflected on the balance sheet of companies at fair value.  Before this guidance was adopted, fair values for these assets and liabilities were disclosed only once a year.  The guidance now requires these disclosures to be made on a quarterly basis, providing qualitative and quantitative information about fair value estimates for all those financial instruments not measured on the balance sheet at fair value.  This pronouncement is effective for periods ending after June 15, 2009.  We adopted this standard effective June 15, 2009, and it did not have a material impact on our consolidated financial position and results of operations.

In April 2009, the FASB issued FASB ASC Topic 805-10-10, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies (SFAS 141(R)-1), to amend the provisions related to the initial recognition and measurement, subsequent measurement and disclosure of assets and liabilities arising from contingencies in a business combination under FASB ASC Topic 805-10-10, Business Combinations (SFAS 141(R)).  Under this guidance, assets acquired and liabilities assumed in a business combination that arise from contingencies should be recognized at fair value on the acquisition date if fair value can be determined during the measurement period.  If fair value cannot be determined, companies should typically account for the acquired contingencies using existing guidance.  We do not believe adoption of FASB ASC Topic 805-10-10 will have a material impact on our consolidated financial statements.

10


NOTE 5.  FAIR VALUE MEASUREMENTS

Our assets and liabilities that are measured at fair value on a recurring basis as of September 30, 2009 are measured in accordance with FASB ASC Topic 820-10-05, Fair Value Measurements (FASB 157).  FASB ASC Topic 820-10-05 defines fair value, establishes a framework for measuring fair value and expands the disclosure requirements regarding fair value measurements for financial assets and liabilities as well as for non-financial assets and liabilities that are recognized or disclosed at fair value on a recurring basis in the financial statements.

The statement requires fair value measurement be classified and disclosed in one of the following three categories:

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; and

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

The following table summarizes our financial instruments as of September 30, 2009 (in thousands):
 
   
September 30, 2009
Fair Value Measurements
 
   
Total
   
Level 1
   
Level 2
   
Level 3
 
Assets:
                       
Cash and equivalents – United States
  $ 2,793     $ 2,793     $     $  
Cash and equivalents - Foreign currency
    132       132              
                                 
Total
  $ 2,925     $ 2,925     $     $  


The following table summarizes our financial instruments as of December 31, 2008 (in thousands):
 
   
December 31, 2008
Fair Value Measurements
 
   
Total
   
Level 1
   
Level 2
   
Level 3
 
Assets:
                       
Cash and equivalents – United States
  $ 2,497     $ 2,497     $     $  
Cash and equivalents – Foreign currency
    67       67              
                                 
Total
  $ 2,564     $ 2,564     $     $  

NOTE 6.  STOCKHOLDERS’ EQUITY

During the nine-month period ended September 30, 2009, we issued 152,864 common shares in exchange for  177,250 employee and non-employee stock options and 24,386 common shares (via a stock swap).    Net proceeds from the issuance of common shares along with the shares received in the stock swap exercises were $70,625 and $78,750 for the three- and nine-month periods ended September 30, 2009, respectively.

NOTE 7.  EARNINGS PER SHARE

We compute basic earnings per share (“basic EPS”) by dividing net income by the weighted average number of common shares outstanding for the reporting period.  Diluted earnings per share (“diluted EPS”) gives effect to all dilutive potential shares outstanding (primarily stock options).  The following table provides the computation of basic and diluted earnings per share for the three-month and nine-month periods ending September 30, 2009 and 2008.

11


   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2009
   
2008
   
2009
    2008  
Net income
  $ (37,749 )   $ 365,890     $ 568,136     $ 1,793,021  
                                 
Basic weighted average shares outstanding
    16,912,402       16,067,979       16,881,743       15,998,150  
Effect of potential dilutive securities
    1,014,002       1,752,176       928,102       1,733,342  
Diluted weighted average shares outstanding
  $ 17,926,404     $ 17,820,155     $ 17,809,845     $ 17,731,492  
                                 
Basic EPS
  $ 0.00     $ 0.02     $ 0.03     $ 0.11  
                                 
Diluted EPS
  $ 0.00     $ 0.02     $ 0.03     $ 0.10  

The shares used in the calculation of diluted EPS exclude options to purchase shares where the exercise price was greater than the average market price of common shares during the respective periods above.  Those shares aggregated 100,000 and 157,500 as of September 30, 2009 and 2008, respectively.

NOTE 8.  STOCK-BASED COMPENSATION

Under our stock option plan, our board of directors may grant options to purchase common shares to our key employees, officers, directors and consultants.  We account for stock options in accordance with FASB ASC Topic 718-10-10, Share-Based Payment (SFAS 123R), with option expense amortized over the vesting period based on the binomial lattice option-pricing model fair value on the grant date, which includes a number of estimates that affect the amount of our expense.  During the nine months ended September 30, 2009, we expensed $103,333 in stock-based compensation.

Activity in our stock options during the quarter ended September 30, 2009 was as follows:

   
Number of
Options
   
Weighted Average
Exercise Price
 
             
Outstanding at December 31, 2008
    1,867,150     $ 3.25  
                 
Granted
    5,500       6.60  
Exercised
    (177,250 )     1.51  
Canceled
    (10,000 )     7.33  
                 
Outstanding at September 30, 2009
    1,685,400     $ 3.42  

Subsequent to September 30, 2009, we granted a total of 72,500 ten year options at an exercise price of $8.32, which options vest over a period of seven years.

NOTE 9.  INCOME TAXES

For the nine months ended September 30, 2009 and 2008, we recorded provisions for income taxes of $137,167 and $866,000, respectively.  The effective tax rates for the nine months ended September 30, 2009 and 2008 were 19.4% and 32.6%, respectively.  The difference between the provision for income taxes and the income tax determined by applying the statutory federal income tax rate of 34% is due primarily to the existence of research and development tax credits and various return to provision adjustments.

12


At September 30, 2009, temporary differences giving rise to deferred income taxes arose primarily from allowances recorded in our financial statements for inventories that are not currently deductible and differences in the lives and methods used to depreciate and/or amortize our property and equipment and intangible assets.

We are subject to U.S. federal income tax as well as income tax of certain state jurisdictions.  We have not been audited by the United States Internal Revenue Service or any states in connection with income taxes.  The periods from December 31, 2005 to December 31, 2008 remain open to examination by the IRS and state authorities.

NOTE 10.  GEOGRAPHIC AND SEGMENT INFORMATION

We have two reportable business segments: Bovie Medical Corporation (located in the United States) and Bovie Canada (located in Windsor, Canada).  Because Bovie Canada’s operations resulted in a loss greater than 10% of our consolidated net income (on an absolute value basis), we are required to report certain information broken out by segment for the periods in the table listed below.

For the three months ended September 30, 2009 and 2008, that information was as follows (in thousands):

   
Three Months Ended September 30,
 
   
2009
   
2008
 
(in thousands)
 
USA
   
Canada
   
USA
   
Canada
 
                         
Sales, net
  $ 6,306     $ 65     $ 7,071     $ 225  
                                 
Gross profit
  $ 2,759     $ -     $ 3,166     $ 67  
                                 
Operating expenses
  $ (2,716 )   $ (154 )   $ (2,346 )   $ (275 )
                                 
Net income (loss)
  $ 116     $ (154 )   $ 574     $ (208 )

For the nine months ended September 30, 2009 and 2008, that information was as follows (in thousands):

   
Nine Months Ended September 30,
 
   
2009
   
2008
 
(in thousands)
 
USA
   
Canada
   
USA
   
Canada
 
                         
Sales, net
  $ 20,014     $ 406     $ 20,551     $ 408  
                                 
Gross profit
    8,935       126       8,746       (26 )
                                 
Operating expenses
    (7,738 )     (619 )     (6,812 )     (760 )
                                 
Net income (loss)
  $ 1,062     $ (494 )   $ 2,579     $ (786 )


NOTE 11.  COMMITMENTS AND CONTINGENCY

We are obligated under various operating leases, including a lease for a manufacturing and warehouse facility in St. Petersburg, Florida that requires monthly payments of approximately $12,400 through October 31, 2013.  In May 2009, we relocated substantially all operations to our new facility, which we had been renovating since we purchased it in September 2008.  We are currently continuing to use the St. Petersburg leased facility for new product lines launching throughout 2009 and 2010.  If we abandon this facility in the future and are unable to find a tenant to sublease our space, we will be required to record a charge to operations for the fair value of the net remaining lease rentals (i.e., the future minimum lease payments minus estimated sublease rentals we reasonably can expect to receive) and the carrying value of any leasehold improvements we abandon.

13


In 2008, Erbe USA, Inc. (“Erbe”) filed a civil action in the U.S. District Court for the Northern District of Georgia, Atlanta Division, against Bovie and a former employee, seeking equitable relief and unspecified damages.  The complaint essentially alleges that the employee, among other things, breached his employment agreement with Erbe by wrongfully taking Erbe’s confidential information and trade secrets for use in his new employment position, with the assistance of Bovie.  As described in Note 13, Subsequent Event, we have entered into a settlement agreement with Erbe to resolve the matter and have accrued a settlement liability of $160,000.

NOTE 12.  RELATED PARTY TRANSACTION

During the three and nine months ended September 30, 2009, we paid consulting fees of approximately $24,000 and $78,000, respectively, to an entity owned by one of our directors.

NOTE 13.  OTHER SUBSEQUENT EVENTS

In 2008, Erbe USA, Inc. (“Erbe”) filed a civil action in the U.S. District Court for the Northern District of Georgia, Atlanta Division, against Bovie and a former employee, seeking equitable relief and unspecified damages.  The complaint essentially alleges that the employee, among other things, breached his employment agreement with Erbe by wrongfully taking Erbe’s confidential information and trade secrets for use in his new employment position, with the assistance of Bovie.  In a mutual effort to resolve the dispute, on November 4, 2009, Bovie and Erbe signed a full and final settlement agreement and mutual general release of all claims.  We continue to deny Erbe’s claims and allegations.  Given that both parties desire to end the litigation and mitigate ongoing legal costs, however, we have agreed to pay Erbe $160,000 as part of the terms of the settlement.  We have accrued for this amount in our financial statements for the third quarter of 2009 included in this report.  We also agreed not to use or disclose, and to destroy, any information that Erbe alleged constituted trade secrets and confidential business information related to Erbe.  Additional terms of the settlement include a two-year period in which we agreed not to solicit (a) Erbe’s current employees and (b) a limited number of dealers and independent representatives who currently market Erbe products (see Note 11  Commitments and Contingency).

In October 2009, we extended the terms of the employment agreements for our President, and two other officers, through January 31, 2014.  These employment agreements require total, base annual compensation of approximately $760,000.

14


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

Cautionary Notes Regarding “Forward-Looking” Statements

This report contains statements that we believe to be “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.  Forward-looking statements give our current expectations or forecasts of future events.  Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe,” “project,” or “continue,” or similar words or the negative thereof.  From time to time, we also may provide oral or written forward-looking statements in other materials we release to the public.  Any or all of our forward-looking statements in this report and in any public statements we make could be materially different from actual results.  They can be affected by assumptions we might make or by known or unknown risks or uncertainties.  Consequently, we cannot guarantee any forward-looking statements.  Investors are cautioned not to place undue reliance on any forward-looking statements.  Investors should also understand that it is not possible to predict or identify all such factors and should not consider the following list to be a complete statement of all potential risks and uncertainties.  The following factors and those discussed in ITEM 1A, Risk Factors, included in our Annual Report on Form 10-K for the year ended December 31, 2008, may affect the achievement of forward-looking statements:

 
·
general economic and political conditions, such as political instability, credit market uncertainty, the rate of economic growth or decline in our principal geographic or product markets or fluctuations in exchange rates; continued deterioration in or stabilization of the global economy;
 
·
changes in general economic and industry conditions in markets in which we participate, such as:
 
§
continued deterioration in or destabilization of the global economy;
 
§
continued deterioration in or destabilization of the North America housing market;
 
§
the strength of product demand and the markets we serve;
 
§
the intensity of competition, including that from foreign competitors;
 
§
pricing pressures;
 
§
the financial condition of our customers;
 
§
market acceptance of new product introductions and enhancements;
 
§
the introduction of new products and enhancements by competitors;
 
§
our ability to maintain and expand relationships with large customers;
 
§
our ability to source raw material commodities from our suppliers without interruption and at reasonable prices; and
 
§
our ability to source components from third parties, in particular from foreign manufacturers, without interruption and at reasonable prices;
 
·
our ability to access capital markets and obtain anticipated financing under favorable terms;
 
·
our ability to identify, complete and integrate acquisitions successfully and to realize expected synergies on our anticipated timetable;
 
·
changes in our business strategies, including acquisition, divestiture and restructuring activities;
 
·
changes in operating factors, such as continued improvement in manufacturing activities, the achievement of related efficiencies and inventory risks due to shifts in market demand;
 
·
our ability to generate savings from our cost reduction actions;
 
·
unanticipated developments that could occur with respect to contingencies such as litigation, intellectual property matters, product liability exposures and environmental matters; and
 
·
our ability to accurately evaluate the effects of contingent liabilities.

The foregoing factors are not exhaustive, and new factors may emerge or changes to the foregoing factors may occur that would impact our business.  We assume no obligation, and disclaim any duty, to update the forward-looking statements in this report.

15


Overview

We are a medical device company engaged in the manufacturing and marketing of electrosurgical devices.  Our medical products include electrosurgical generators and accessories, saline enhanced resection devices, endoscopic disposable and reusable modular instruments, 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 product line sells electrosurgical products that include dessicators, generators, electrodes, electrosurgical pencils and various ancillary disposable products.  These products are used in surgery for the cutting and coagulation of tissue.  Battery operated cauteries are used for precise hemostasis (to stop bleeding) in ophthalmology and in other fields.  Our other revenues are derived from nerve locators, disposable and reusable penlights, medical lighting, license fees, development fees and other miscellaneous income.

We market most of our products through medical distributors, which distribute to more than 6,000 hospitals, as well as doctors and other health-care facilities.  Our products are sold in more than 150 countries through local distributors coordinated by our in-house sales and marketing personnel at our Clearwater, Florida facility.  We have no manufacturing facilities or branch offices other than the Florida and Canadian facilities.

Our ten largest customers accounted for approximately 73% and 69% of net revenues for the first nine months of 2009 and 2008 respectively.  At September 30, 2009 and 2008, our ten largest trade receivables accounted for approximately 62% and 67% of our net receivables, respectively.  In the first nine months of 2009 and 2008, one customer accounted for 25% and 19% of total sales, respectively.

Our business is generally not seasonal in nature.


Recent Developments and Outlook for Remainder of 2009 and Early 2010

We continue to seek growth by developing new technologies.  We are encouraged by the positive surgeon acceptance of our Saline Enhanced Electrosurgical Resection (SEER) tissue resection device.  In the third quarter, we filed with the Food and Drug Administration (FDA) a 510K application for the BOSS orthopedic device.  The BOSS is an expansion of our sintered steel technology and companion to the SEER.  SEER and BOSS are high margin products that address markets exceeding $500 million.  We are establishing a marketing program which includes specialty sales teams to deliver the BOSS and SEER products into the marketplace.

During the early part of the third quarter, we filed with the FDA a 510K application for our Seal-n-Cut™ vessel sealing instrument line as well as a separate application for our ICON VS generator, which is designed to work with the Seal-n-Cut™ instruments.  The vessel sealing market is estimated to exceed $1.0 billion, annually.

In August 2009, we received clearance to market our J-Plasma technology (ICON GS).  J-Plasma includes an improved redesigned system with added features to increase efficiency for the surgeon, while reducing manufacturing costs.  We are developing marketing strategies for J-Plasma, and believe the product will be versatile, with uses in a range of surgical specialties.

We remain focused on maximizing shareholder value through developing new products that provide high margins and growth opportunities.

16


Results of Operations

Sales

Sales by Product Line  
Three months ended September 30,
    Percent change    
Nine months ended September 30,
    Percent change  
(in thousands)  
2009
   
2008
       
2009
   
2008
     
                                     
Electrosurgical
  $ 4,217     $ 5,139       (17.9 %)   $ 14,126     $ 14,480       (2.4 %)
Cauteries
    1,575       1,532       2.8 %     4,623       4,673       (1.1 %)
Other
    579       625       (7.4 %)     1,671       1,806       (7.5 %)
                                                 
Total
  $ 6,371     $ 7,296       (12.7 %)   $ 20,420     $ 20,959       (2.6 %)


Sales by Domestic and   Three months ended September 30,    
Percent change
   
Nine months ended September 30,
   
Percent change
 
International (in thousands)
 
2009
   
2008
       
2009
    2008      
Domestic
  $ 5,506     $ 6,348       (13.3 %)   $ 17,121     $ 17,294       (1.0 %)
International
    865       948       (8.8 %)     3,299       3,665       (10.0 %)
                                                 
Total
  $ 6,371     $ 7,296       (12.7 %)   $ 20,420     $ 20,959       (2.6 %)

Sales for the third quarter 2009 decreased approximately $924,000 or 12.7% compared to the same period in 2008.  This decrease was due to the following reasons:

 
·
sales of generators were down $629,000 or 19.5% due to lower capital expenditures by hospitals and doctor offices in the current economy;
 
·
sales of electrosurgical disposables were down $292,000 or 15.3% because distributors elected to reduce their inventories in the current economy; and
 
·
international sales decreased by $83,000 or 8.7% due to periods of a stronger dollar coupled with the global economic slowdown.

Sales for the nine months ended September 30, 2009 decreased $538,000 or 2.6% compared to the same period in 2008.  This decrease was due to the following reasons:

 
·
international sales decreased by $366,000 or 10.0% due to periods of a stronger dollar coupled with the global economic slowdown;
 
·
sales of generators were down $1,190,000 or 12.1% due to lower capital expenditures by hospitals and doctor offices in the current economy;
 
·
cautery sales were down $50,000 or 1.0%; and
 
·
other products were down $135,000 or 12.1%, mainly due to installment revenue that ended in September 2008.

These decreases were offset by the sale of electrosurgical disposables, which increased $835,000 or 15.3%, mainly due to the sale of ablators.

17


Gross Profit

 (in thousands)  
Three months ended September 30,
   
Percent of sales
   
Percent change
   
Nine months ended September 30,
   
Percent of sales
   
Percent change
 
   
2009
   
2008
   
2009
   
2008
       
2009
   
2008
   
2009
   
2008
     
Cost of  sales
  $ 3,611     $ 4,062       56.7 %     55.7 %     (11.1 %)   $ 11,359     $ 12,239       55.6 %     58.4 %     (7.2 %)
                                                                                 
Gross profit
  $ 2,760     $ 3,233       43.3 %     44.3 %     (14.6 %)   $ 9,061     $ 8,720       44.4 %     41.6 %     3.9 %

The 1.0% decrease in gross profit as a percentage of sales in the third quarter of 2009 from 2008 was primarily a result of increases in international freight cost for parts manufactured overseas and in labor costs as a percentage of sales.

This decrease in gross profit as a percentage of sales in the third quarter of 2009 from 2008 was partially offset by:

 
·
a $35,000 reduction in annual bonuses; and
 
·
a $40,000 reduction of our company match to our employees’ 401(k) contributions.

Gross profit for the nine month period ended September 30, 2009 increased 2.8% as a percentage of sales as compared to the same period in 2008.  This was the result of:

 
·
a $447,000 increase in capitalized manufacturing overhead;
 
·
a $105,000 reduction in annual bonuses;
 
·
a $120,000 reduction of our company match to our employees’ 401(k) contributions; and
 
·
an $835,000 increase in sales of electrosurgical disposables, mainly due to the sale of ablators, which are higher margin products.

These increases were partially offset by a $150,000 increase in international freight cost for parts manufactured overseas.


Gain on Cancellation of Agreement

 (in thousands)  
Three months ended September 30,
   
Percent of sales
      Percent change    
Nine months ended September 30,
   
Percent of sales
    Percent change  
   
2009
   
2008
   
2009
   
2008
       
2009
   
2008
   
2009
   
2008
     
Gain on Cancellation of Agreement
  $     $                       $     $ 1,496             7.1 %      

During the  nine months ended September 30, 2008, we recognized a gain from a cancellation of a contract with Boston Scientific Corporation of approximately $1.5 million.    We had no such activity in 2009.  For an explanation of this gain, please see Note 1, Basis of Presentation, to our unaudited consolidated financial statements included in this report.


Research and Development Expense

(in thousands)
 
Three months ended September 30,
   
Percent of sales
      Percent change    
Nine months ended September 30,
   
Percent of sales
    Percent change  
   
2009
   
2008
   
2009
   
2008
       
2009
   
2008
   
2009
   
2008
     
R & D Expense
  $ 496     $ 488       7.8 %     6.7 %     1.6 %   $ 1,497     $ 1,430       7.3 %     6.8 %     4.7 %

Research and development expense increased $7,755 or 1.6% in the third quarter of 2009 from 2008.  This increase was primarily a result of:

18


 
·
a $34,000 increase in staffing costs to support the J-Plasma product line; and
 
·
a $16,000 increase in validation costs related to our new Icon generators (GS, GP, VS).

These increases were  partially offset because we capitalized various costs incurred  to make test fixtures to support the Seal-n-Cut™ product development at Bovie Canada in the current quarter.  Previously, these costs were expensed.

The $67,000 or 4.7% increase in research and development expense for the nine months ended September 30, 2009 from the same period in 2008 was primarily a result of:

 
·
a $119,000 increase in staffing costs to support the J-Plasma and sintered steel product lines; and
 
·
a $10,000 increase in validation costs related to our new Icon generators (GS, GP, VS).

 These increases were  partially offset because we capitalized various costs incurred  to make test fixtures to support the Seal-n-Cut™ product development at Bovie Canada during the nine month period ended September 30, 2009.  Previously, these costs were expensed.

Professional Fees

( in thousands)  
Three months ended September 30,
   
Percent of sales
      Percent change    
Nine months ended September 30,
   
Percent of sales
    Percent change  
   
2009
   
2008
   
2009
   
2008
       
2009
   
2008
   
2009
   
2008
     
Professional services
  $ 303     $ 345       4.8 %     4.7 %     (12.0 %)   $ 1,024     $ 667       5.0 %     3.2 %     53.5 %


Professional fees decreased $41,000 or 12.0% in the third quarter of 2009 compared to the same period in 2008.  This decrease was primarily because:

 
·
we incurred $36,000 in consulting costs related to the Erbe lawsuit in 2008 that did not recur in 2009; and
 
·
our legal fees for the Erbe lawsuit decreased by $28,000 in the third quarter of 2009 because the parties began working towards a settlement of the dispute.

This decrease was offset by a $23,000 increase in accounting fees for tax-related work for (a) quarterly tax returns and (b) compliance with FASB ASC Topic 740-10-05, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109 (FASB Interpretation No. 48).

Professional fees increased $357,000 or 53.5% for the nine months ended September 30, 2009 from the same period in 2008.  This increase was primarily because:

 
·
accounting fees increased by $65,000 due to tax related work and the timing of auditing fees related to our employee 401(k) plan, which were incurred earlier in 2009; and
 
·
legal fees increased by $267,000 due to work related to the Erbe lawsuit and to responding to the SEC’s periodic review of our Annual Report on Form 10-K for the year ended December 31, 2008.

Salaries

( in thousands)  
Three months ended September 30,
   
Percent of sales
      Percent change    
Nine months ended September 30,
   
Percent of sales
    Percent change  
   
2009
   
2008
   
2009
   
2008
       
2009
   
2008
   
2009
   
2008
     
Salaries & related cost
  $ 759     $ 727       11.9 %     10.0 %     4.5 %   $ 2,304     $ 2,253       11.3 %     10.8 %     2.3 %

Salaries increased by $32,000 or 4.5% in the third quarter of 2009 compared to the same period 2008.  This increase was primarily a result of:

19


 
·
a $25,000 increase in staffing costs to support the domestic direct sales of the SEER product line;
 
·
a $6,000 increase in overall employee benefits and health insurance related costs; and
 
·
an $8,000 increase in the accrual for vacation pay related to higher-level employees.

These increases were offset by:

 
·
a $12,000 reduction in annual bonuses;
 
·
a $14,000 reduction of our company match to our employees’ 401(k) contributions; and
 
·
a $6,000 reduction of a position in Bovie Canada.

Salaries increased by $51,000 or 2.3 % for the nine months ended September 30, 2009 from the same period in 2008.  This increase was primarily a result of:

 
·
a $56,000 increase in staffing costs to support the domestic direct sales of the SEER product line;
 
·
a $25,000 increase in overall employee benefits and health insurance related costs; and
 
·
a $14,000 increase in the accrual for vacation pay related to higher-level employees.

These increases were offset by:

 
·
a $37,000 reduction in annual bonuses;
 
·
a $40,000 reduction of our company match to our employees’ 401(k) contributions; and
 
·
a $6,000 reduction of a position in Bovie Canada.

Selling, General & Administrative Expenses

 
 (in thousands)
 
Three months ended September 30,
   
Percent of sales
      Percent change    
Nine months ended September 30,
   
Percent of sales
    Percent change  
   
2009
   
2008
   
2009
   
2008
       
2009
   
2008
   
2009
   
2008
     
SG & A costs
  $ 1,312     $ 1,061       20.6 %     14.5 %     23.6 %   $ 3,532     $ 3,221       17.3 %     15.4 %     9.6 %


Selling, general and administrative costs increased $251,000 or 23.6% in the third quarter of 2009 compared to the same period of 2008.  This increase was primarily a result of:

 
·
a $160,000 accrual for the settlement of the Erbe lawsuit;
 
·
a $58,000 increase in property taxes related to our new facility in Clearwater, Florida;
 
·
a $33,000 increase in electricity costs related to the new larger facility;
 
·
a $25,000 increase in amortization expense related to new products;