XASE:BVX Bovie Medical Corp Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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form10q.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 June 30, 2012
OR
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Period from _________ to _________
 
Commission file number 0-12183
 
BOVIE MEDICAL CORPORATION
(Exact name of registrant as specified in its charter)
 
Delaware
 
11-2644611
(State or other jurisdiction of incorporation or organization)
 
(IRS Employer Identification No.)
 
734 Walt Whitman Rd., Melville, New York 11747
(Address of principal executive offices)
 
(631) 421-5452
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes 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 (§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 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   o
 
 
 
 
Non-accelerated filer   o
Smaller reporting company   x
 
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o    No x
 
The number of shares of the registrant's common stock $.001 par value outstanding as of August 2, 2012 was 17,777,629.
 


 
 

 
 
BOVIE MEDICAL CORPORATION
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2012

 
 
Page
 
 
 
Part I.
3
 
 
 
Item 1.
 
 
3
 
5
 
6
 
7
 
8
Item 2.
16
Item 3.
25
Item 4.
25
 
 
 
Part II.
26
 
 
 
Item 1.
26
Item 1A.
28
Item 2.
28
Item 3.
28
Item 4.
29
Item 5.
29
Item 6.
29
 
29
 
 
2

 
PART I. FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS

BOVIE MEDICAL CORPORATION
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2012 AND DECEMBER 31, 2011
(in thousands)

Assets
 
 
 
 
 
 
 
 
 
 
June 30,
2012
 
 
December 31,
2011
 
 
 
(Unaudited)
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
4,983
 
 
$
4,880
 
Trade accounts receivable, net
 
 
2,625
 
 
 
2,216
 
Inventories, net
 
 
7,355
 
 
 
8,178
 
Prepaid expenses and other current assets
 
 
1,055
 
 
 
710
 
Deferred income tax asset, net
 
 
400
 
 
 
500
 
 
 
 
 
 
 
 
 
 
Total current assets
 
 
16,418
 
 
 
16,484
 
 
 
 
 
 
 
 
 
 
Property and equipment, net
 
 
7,089
 
 
 
7,176
 
Brand name and trademark
 
 
1,510
 
 
 
1,510
 
Purchased technology, net
 
 
708
 
 
 
752
 
License rights, net
 
 
-
 
 
 
26
 
Deferred income tax asset, net
 
 
1,406
 
 
 
1,509
 
Other assets
 
 
906
 
 
 
783
 
 
 
 
 
 
 
 
 
 
Total assets
 
$
28,037
 
 
$
28,240
 
 
The accompanying notes are an integral part of the consolidated financial statements.
 
 
3

 
BOVIE MEDICAL CORPORATION
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2012 AND DECEMBER 31, 2011
(CONTINUED) (in thousands)
 
Liabilities and Stockholders' Equity
 
 
 
 
 
 
 
 
 
 
June 30,
2012
 
 
December 31,
2011
 
Current liabilities:
 
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
Accounts payable
 
$
642
 
 
$
1,085
 
Accrued payroll
 
 
104
 
 
 
88
 
Accrued vacation
 
 
244
 
 
 
149
 
Current portion of mortgage note payable to bank
 
 
134
 
 
 
130
 
Current portion of settlement
 
 
279
 
 
 
587
 
Accrued and other liabilities
 
 
592
 
 
 
350
 
 
 
 
 
 
 
 
 
 
Total current liabilities
 
 
1,995
 
 
 
2,389
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Bonds payable, net of current portion
 
 
3,351
 
 
 
3,420
 
Settlement liability, net of current portion
 
 
93
 
 
 
209
 
Derivative liabilities
 
 
78
 
 
 
105
 
 
 
 
 
 
 
 
 
 
Total liabilities
 
 
5,517
 
 
 
6,123
 
 
 
 
 
 
 
 
 
 
Commitments and Contingencies (see Note 10)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stockholders' equity:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Preferred stock, par value $.001; 10,000,000 shares authorized; none issued or outstanding
 
 
--
 
 
 
--
 
Common stock, par value $.001 par value; 40,000,000 shares authorized; 17,773,419 and 17,760,724 issued and 17,630,340 and 17,617,645 outstanding on June 30, 2012 and December 31, 2011, respectively
 
 
18
 
 
 
18
 
Additional paid-in capital
 
 
25,420
 
 
 
25,356
 
Deficit
 
 
(2,918
)
 
 
(3,257
)
 
 
 
 
 
 
 
 
 
Total stockholders' equity
 
 
22,520
 
 
 
22,117
 
 
 
 
 
 
 
 
 
 
Total liabilities and stockholders' equity
 
$
28,037
 
 
$
28,240
 
 
The accompanying notes are an integral part of the consolidated financial statements.

 
4


BOVIE MEDICAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2012 AND 2011
(unaudited) (in thousands except per share data)
 
   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2012
   
2011
   
2012
   
2011
 
                         
Sales
  $ 7,440     $ 6,841     $ 14,173     $ 12,995  
Cost of sales
    4,584       3,796       8,521       7,517  
                                 
Gross profit
    2,856       3,045       5,652       5,478  
                                 
Gain from settlement of litigation
    --       --       --       750  
                                 
Other costs and expenses:
                               
Research and development
    349       289       647       635  
Professional services
    358       273       653       617  
Salaries and related costs
    788       800       1,570       1,606  
Selling, general and administrative
    1,121       1,134       2,146       2,235  
                                 
Total other costs and expenses
    2,616       2,496       5,016       5,093  
                                 
Income from operations
    240       549       636       1,135  
                                 
Change in fair value of liabilities, net
    44       107       27       248  
Interest expense, net
    (58 )     (46 )     (116 )     (98 )
                                 
Income before income taxes
    226       610       547       1,285  
                                 
Provision for income taxes, net
    (74 )     (181 )     (208 )     (364 )
                                 
Net income
  $ 152     $ 429     $ 339     $ 921  
                                 
Earnings per share
                               
Basic
  $ 0.01     $ 0.02     $ 0.02     $ 0.05  
Diluted
  $ 0.01     $ 0.02     $ 0.02     $ 0.05  
                                 
Weighted average number of shares outstanding- basic
    17,629       17,600       17,625       17,587  
                                 
Weighted average number of shares outstanding – dilutive
    17,768       17,827       17,769       17,829  
 
The accompanying notes are an integral part of the consolidated financial statements.

 
5

 
BOVIE MEDICAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE YEAR ENDED DECEMBER 31, 2011 AND THE PERIOD ENDED JUNE 30, 2012
(in thousands)

 
 
Common Stock
 
 
Additional
 Paid-in
 
 
 
 
 
 
 
 
 
Shares
 
 
Par Value
 
 
Capital
 
 
Deficit
 
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
January 1, 2011
 
 
17,564
 
 
$
18
 
 
$
25,113
 
 
$
(3,366
)
 
$
21,765
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Options exercised
 
 
69
 
 
 
 
 
 
39
 
 
 
 
 
 
39
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stock based compensation
 
 
 
 
 
 
 
 
132
 
 
 
 
 
 
132
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stock swap to acquire options
 
 
(16
)
 
 
 
 
 
(39
)
 
 
 
 
 
(39
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-cash elimination of Lican restricted stock liability
 
 
 
 
 
 
 
 
111
 
 
 
 
 
 
111
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
 
 
 
 
 
 
 
 
 
 
109
 
 
 
109
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2011
 
 
17,617
 
 
 
18
 
 
 
25,356
 
 
 
(3,257
)
 
 
22,117
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Options exercised
 
 
20
 
 
 
 
 
 
14
 
 
 
 
 
 
14
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stock based compensation
 
 
 
 
 
 
 
 
64
 
 
 
 
 
 
64
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stock swap to acquire options
 
 
(7
)
 
 
 
 
 
(14
)
 
 
 
 
 
(14
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
 
 
 
 
 
 
 
 
 
 
339
 
 
 
339
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2012 (unaudited)
 
 
17,630
 
 
$
18
 
 
$
25,420
 
 
$
(2,918
)
 
$
22,520
 
 
The accompanying notes are an integral part of the consolidated financial statements.

 
6

 
BOVIE MEDICAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2012 AND 2011
(UNAUDITED) (in thousands)
 
   
2012
   
2011
 
Cash flows from operating activities
           
Net income
  $ 339     $ 921  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    440       453  
Provision for (recovery of) inventory obsolescence
    (44 )     59  
Loss on disposal of property and equipment, net
    5       1  
Stock based compensation
    64       67  
Change in fair value of liabilities
    (27 )     (248 )
Provision for deferred taxes
    203       363  
Changes in current assets and liabilities:
               
Trade receivables
    (408 )     (107 )
Prepaid expenses
    (346 )     236  
Inventories
    867       331  
Deposits and other assets
    (124 )     (51 )
Accounts payable
    (443 )     (7 )
Accrued and other liabilities
    (72 )     199  
                 
Net cash provided by operating activities
    454       2,217  
                 
Cash flows from investing activities
               
Purchases of property and equipment
    (287 )     (261 )
Net cash used in investing activities
    (287 )     (261 )
                 
Cash flows from financing activities
               
Repayments of long-term bond debt
    (64 )     (69 )
Net cash used in financing activities
    (64 )     (69 )
                 
Net change in cash equivalents
    103       1,887  
                 
Cash and cash equivalents, beginning of period
    4,880       3,827  
                 
Cash and cash equivalents, end of period
  $ 4,983     $ 5,714  
 
Cash paid during the six months ended June 30, 2012 and 2011 for:

             
Interest
  $ 116     $ 98  
Income taxes
  $ --     $ --  

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

 
7

 
BOVIE MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED

NOTE 1.
BASIS OF PRESENTATION

Unless the context otherwise indicates, the terms “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, 2011.  These financial statements reflect all adjustments that are necessary for a fair presentation of results of operations and financial condition for the interim periods shown, including normal recurring accruals and other items.  The results for the interim periods are not necessarily indicative of results for the full year.

Certain amounts in the June 30, 2011 and December 31, 2011 financial statements have been reclassified to conform to the presentation in the June 30, 2012 financial statements.

NOTE 2.
INVENTORIES

Inventories are stated at the lower of cost or market.  Cost is determined principally on the average cost method.  Inventories at June 30, 2012 and December 31, 2011 were as follows (in thousands):

 
 
June 30,
2012
 
 
December 31,
2011
 
 
 
 
 
 
 
 
Raw materials
 
$
4,552
 
 
$
5,043
 
Work in process
 
 
1,503
 
 
 
1,865
 
Finished goods
 
 
1,808
 
 
 
1,822
 
Gross inventories
 
 
7,863
 
 
 
8,730
 
Less: reserve for obsolescence
 
 
(508
)
 
 
(552
)
 
 
 
 
 
 
 
 
 
Net inventories
 
$
7,355
 
 
$
8,178
 

NOTE 3.
INTANGIBLE ASSETS

At June 30, 2012 and December 31, 2011 intangible assets consisted of the following (in thousands):

 
 
June 30,
2012
 
 
December 31,
2011
 
 
 
 
 
 
 
 
Trade name (life indefinite)
 
$
1,510
 
 
$
1,510
 
 
 
 
 
 
 
 
 
 
Purchased technology (9-17 yr life)
 
$
1,441
 
 
$
1,441
 
Less: accumulated amortization
 
 
(733
)
 
 
(689
)
 
 
 
 
 
 
 
 
 
Net carrying amount
 
$
708
 
 
$
752
 
 
 
 
 
 
 
 
 
 
License rights (5 yr life)
 
$
316
 
 
$
316
 
Less accumulated amortization
 
 
(316
)
 
 
(290
)
Net carrying amount
 
$
--
 
 
$
26
 
 
 
8

 
Amortization of intangibles, which is included in depreciation and amortization in the accompanying statements of cash flows was approximately $70,500 and $86,000 during the respective six month periods ended June 30, 2012 and 2011.

 NOTE 4.
NEW ACCOUNTING PRONOUNCEMENTS

In June 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income which requires an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of stockholders’ equity. The amendments in ASU 2011-05 do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. On January 1, 2012, ASU 2011-05 became effective. At this time, we do not have comprehensive income, therefore, the change did not affect our presentation nor our consolidated financial statements.

In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurements and Disclosures (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and International Financial Reporting Standards. ASU 2011-04 changes certain fair value measurement principles and enhances the disclosure requirements, mainly for level 3 fair value measurements. On January 1, 2012, ASU 2011-04 became effective. This amendment did not have a material impact on our consolidated financial statements.
 
In September 2011, the FASB issued ASU No. 2011-08, Intangibles-Goodwill and Other an update that amends the accounting guidance on goodwill impairment testing. The amendments in this accounting standard update are intended to reduce complexity and costs by allowing an entity the option to first assess qualitative factors in its evaluation about the likelihood of goodwill impairment to determine whether it is necessary to perform the two-step quantitative goodwill impairment test of a reporting unit. In addition the amendments include a number of events and circumstances for an entity to consider in conducting the qualitative assessment. On January 1, 2012, ASU No. 2011-08 became effective. This update did not have a material impact on our consolidated financial statements.

In December 2011, the FASB issued ASU No. 2011-11 which amended the disclosure requirements regarding offsetting assets and liabilities of derivatives, sale and repurchase agreements, reverse sale and repurchase agreements, and securities borrowing and securities lending arrangements. The enhanced disclosures will require entities to provide both net and gross information for these assets and liabilities. The amendment is effective for fiscal years beginning on or after January 1, 2013. The Company does not anticipate that this amendment will have a material impact on its financial statements.

In July 2012, the FASB issued ASU No. 2012-02, Intangibles—Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment. This update simplifies the guidance for testing the impairment of indefinite-lived intangible assets other than goodwill. The amendments in ASU 2012-02 allow an organization the option to first assess qualitative factors to determine whether it is necessary to perform the quantitative impairment test. An organization electing to perform a qualitative assessment is no longer required to calculate the fair value of an indefinite-lived intangible asset unless the organization determines, based on a qualitative assessment, that it is “more likely than not” that the asset is impaired. The amendment is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. This amendment will not have a material impact on our consolidated financial statements.
 
NOTE 5.
FAIR VALUE MEASUREMENTS

Certain assets and liabilities that are measured at fair value on a recurring basis as of June 30, 2012 are measured in accordance with FASB ASC Topic 820-10-05, Fair Value Measurements.  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.
 
 
9

 
The statement requires fair value measurement be classified and disclosed in one of the following three categories:
 
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
 
Level 2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; and
 
Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

 The following table summarizes our financial instruments measured at fair value as of June 30, 2012 (in thousands):
 
 
 
June 30, 2012
Fair Value Measurements
 
 
 
Total
 
 
Level 1
 
 
Level 2
 
 
Level 3
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Cash and equivalents – United States
 
$
4,983
 
 
$
4,983
 
 
$
 
 
$
 
Cash and equivalents – Foreign currency
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets
 
$
4,983
 
 
$
4,983
 
 
$
 
 
$
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                 
Warrant liability (1)
 
 $
78
 
 
$
 
 
$
 
 
$
78
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total liabilities
 
$
78
 
 
$
 
 
$
 
 
$
78
 
 
The following table summarizes our financial instruments measured at fair value as of December 31, 2011 (in thousands):
 
 
 
December 31, 2011
Fair Value Measurements
 
 
 
Total
 
 
Level 1
 
 
Level 2
 
 
Level 3
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Cash and equivalents – United States
 
$
4,870
 
 
$
4,870
 
 
$
 
 
$
 
Cash and equivalents - Foreign currency
 
 
10
 
 
 
10
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets
 
$
4,880
 
 
$
4,880
 
 
$
 
 
$
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                 
Warrant liability (1)
 
 $
105
 
 
 $
 
 
$
 
 
 $
105
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total liabilities
 
$
105
 
 
$
 
 
$
 
 
$
105
 

 
(1)
Refer to Warrants and Stockholders’ Equity (Note 6) for valuation assumptions.
 
 
10

 
Activity in our Level 3 Assets was as follows (in thousands):
 
Description
 
June 30,
2012
 
 
December 31,
2011
 
 
 
 
 
 
 
 
Beginning balance
 
$
105
 
 
$
504
 
Purchases, issuances, and settlements (Note 6)
 
 
--
 
 
 
--
 
Reduced Lican liability from settlement
 
 
--
 
 
 
(111
)
Total (gain) included in earnings (3)
 
 
(27)
 
 
 
(288
)
 
 
 
 
 
 
 
 
 
Ending Balance
 
$
78
 
 
$
105
 
 
 
(3)
Gains and losses for the periods related to the revaluation of equity based liabilities. These gains or losses are included in our consolidated statements of operations.

NOTE 6.
WARRANTS AND STOCKHOLDERS’ EQUITY
 
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 (50%) 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 April 18, 2015. 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 us. 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 us.
 
The warrants issued contained 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 according to FASB ASC 480-10, “Distinguishing Liabilities from Equity” and must be recorded at fair value each reporting period. These warrants required classification as liabilities at inception and ongoing measurement at fair value each reporting period thereafter.
 
The warrants are valued using a binomial lattice valuation methodology because that model embodies all of the relevant assumptions that address the features underlying these instruments. Significant assumptions used in this model at inception and as of June 30, 2012 included an expected remaining life of 3 years, an expected dividend yield of zero, estimated volatility range between 42% - 43%, and risk-free rates of return range between  0.39% - 0.40%. For the risk-free rates of return, we use the published yields on zero-coupon Treasury Securities with maturities consistent with the remaining term of the warrants and volatility is based on a weighted average of the historical volatility of our stock price and peer company stock price volatility. We also take into consideration a probability assumption for anti-dilution.
 
During the six months ended June 30, 2012, we issued 14,791 common shares in exchange for 20,000 non-employee stock options (via a stock swap). Net proceeds from the issuance of common shares along with the shares received in the stock swap exercises were zero for the six month period ended June 30, 2012.
 
 
11

 
NOTE 7.
EARNINGS PER SHARE (in thousands, except EPS)

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 six month periods ending June 30, 2012 and 2011.
 
     
Three Months Ended
June 30,
     
Six Months Ended
June 30,
 
     
2012
     
2011
     
2012
     
2011
 
Net income
  $ 152     $ 429     $ 339     $ 921  
                                 
Basic weighted average shares outstanding
    17,629       17,600       17,625       17,587  
Effect of potential dilutive securities
    139       227       144       242  
Diluted weighted average shares outstanding
    17,768       17,827       17,769       17,829  
                                 
Basic EPS
  $ 0.01     $ 0.02     $ 0.02     $ 0.05  
                                 
Diluted EPS
  $ 0.01     $ 0.02     $ 0.02     $ 0.05  
 
For the six months ended June 30, 2012 and 2011, options and warrants to purchase approximately 1.3 million shares of common stock were excluded from the computation of diluted earnings per share because their effects were anti-dilutive.

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, Compensation – Stock Compensation, with option expense amortized over the vesting period based on the binomial lattice option-pricing model fair value on the grant date, which includes a number of estimates that affect the amount of our expense. During the six months ended June 30, 2012, we expensed $64,463 in stock-based compensation.
 
Activity in our stock options during the period ended June 30, 2012 was as follows:
 
 
 
Number Of
Options
(in
thousands)
 
 
Weighted
Average
 Exercise
 Price
 
 
 
 
 
 
 
 
Outstanding at December 31, 2011
 
 
1,533
 
 
$
3.99
 
 
 
 
 
 
 
 
 
 
Granted
 
 
46
 
 
$
2.79
 
Exercised
 
 
(20
)
 
$
0.70
 
Cancelled
 
 
--
 
 
$
--
 
 
 
 
 
 
 
 
 
 
Outstanding at June 30, 2012
 
 
1,559
 
 
$
3.99
 
 
The grant date fair value of options granted during the first six months of 2012 were estimated on the grant date using a binomial lattice option-pricing model and the following assumptions: expected volatility of 43%, expected term of between 3-5 years, risk-free interest rate of 0.4%, and expected dividend yield of 0%.
 
Expected volatility is based on a weighted average of the historical volatility of the Company's stock and peer company volatility. The weighting percentages relative to our stock and the peer group is a 50%/50% weighting. Our peer group has remained relatively the same throughout our calculations year over year, and a peer is only replaced with a similar peer company if it is removed from the public stock exchanges or no longer has significantly traded volume on the open stock options market. The risk-free rate is based on the rate of U.S. Treasury zero-coupon issues with a remaining term equal to the expected life of the options. The Company uses historical data to estimate pre-vesting forfeiture rates.
 
 
12

 
NOTE 9.
INCOME TAXES

While we are subject to U.S. federal income tax as well as income tax of certain state jurisdictions, during the three and six months ended June 30, 2012, our current provisions were zero because the net effect of our permanent and temporary differences resulted in recognizing a loss for tax purposes.  At June 30, 2012, we have remaining net operating loss carryforwards and other net deferred income tax assets of approximately $3.0 million to reduce future taxable income.  Our effective tax rate of 38% for the six months ended June 30, 2012 was less than the statuatory tax rates primarily because we recognized certain gains from fair value adjustments for financial statement purposes that are not expected to reverse (i.e. permanent differences).

NOTE 10.
COMMITMENTS AND CONTINGENCIES

We are obligated under various operating leases for our facilities and certain equipment, most notably a lease for a manufacturing and warehouse facility in St. Petersburg, Florida that requires monthly payments of approximately $13,000 and expires on October 31, 2013.  The following is a schedule of approximate future minimum lease payments under operating leases having remaining terms in excess of one year as of June 30, 2012 for the calendar years ended December 31, 2012, 2013, 2014, and 2015 (in thousands):

2012
 
$
128
 
2013
 
 
228
 
2014
 
 
12
 
2015
 
 
--
 
 
 
 
 
 
Total
 
$
368
 
 
Rent expense approximated $95,000 and $97,500 for the six month periods ending June 30, 2012 and 2011, respectively.

Additionally, we amended the manufacturing agreement with our Bulgarian foreign supplier which, as of March 1, 2012, provides for certain contingent liabilities on our part if we terminate our arrangement prior to July 1, 2014. The table below reflects our approximate contingent liability for the calendar years ended December 31, 2012, 2013, and 2014 (in thousands):

2012
 
$
58
 
2013
 
 
128
 
2014
 
 
73
 
 
 
 
 
 
Total
 
$
259
 

Livneh/Lican Development Settlement
 
On July 9, 2010, we filed a complaint in the United States District for the Middle District of Florida (Tampa division) naming Steven Livneh, (“Livneh”) who at the time was a director of the Company, and two of his related entities as defendants. In our complaint, we were seeking, among other things, a declaratory judgment from the Court concerning our rights under certain agreements entered into with the defendants in 2006 in connection with our acquisition of certain assets and technology, including intellectual property relating to our Seal-N-Cut™
 
 
13

 
NOTE 10.
COMMITMENTS AND CONTINGENCIES (CONTINUED)

product. We were also seeking damages for breach of contract, breach of fiduciary duty by Livneh relating to his service as an officer and director of the Company, tortious interference with contractual relations, defamation, slander of title and injunctive relief. Livneh filed a motion seeking to (a) dismiss the complaint or, in the alternative, to (b) transfer venue. On December 20, 2010, the court issued an order dismissing without prejudice five of our fifteen claims, due to New York being defined in the forum selection clauses in two of the underlying contracts with Livneh.  The Company re-filed these five claims in federal court in New York. Livneh’s motion to dismiss the remaining claims in Florida was denied and the venue was not transferred.
 
On January 10, 2011, defendant Livneh filed a counter-complaint/third party complaint against us, our CEO, and our COO, alleging fraud, fraud in the inducement, fraudulent misrepresentation, breach of fiduciary duty, negligent misrepresentation, innocent misrepresentation, breach of contract, tortuous interference, shareholder derivative, defamation, breach of good faith and fair dealing, violation of the Uniform Trade Secrets Act, and violation of the Florida Whistleblower’s Act, and seeking rescission and a declaratory judgment. In addition to the foregoing relief, defendant also sought reinstatement of Mr. Livneh to the Company’s board of directors, issuance of certain shares of unrestricted stock, compensatory, actual and/or special damages, punitive and/or exemplary damages, and attorney’s fees and costs.

In December 2011, a settlement related to the above Livneh litigation was structured and subsequently entered into on February 22, 2012. Under the terms of the Settlement Agreement (the “Settlement Agreement”), the Company will, 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 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, the Company granted Livneh a security interest in all of its 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 will, among other things, perform the following: (i) pay to the Company 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 to the Company 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 to the Company royalty payments of 3% on Livneh’s Net Sales of the Seal-N-Cut device in the People’s Republic of China.

The Settlement Agreement contains no admission of liability or wrongdoing by the Company, Mr. Andrew Makrides, the Company’s Chief Executive Officer, Mr. Moshe Citronowicz, the Company’s Senior Vice President of Operations, Livneh, Henvil or Lican.  Pursuant to the Settlement Agreement, the Company, Mr. Makrides, Mr. Citronowicz, Livneh, Henvil and Lican agreed to dismiss the litigation 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.
 
 
14

 
NOTE 10.
COMMITMENTS AND CONTINGENCIES (CONTINUED)

Our future installment payment obligations related to this settlement as of June 30, 2012 for the calendar years ended December 31, 2012 and 2013 (in thousands):

Current
 
$
279
 
Long Term
 
 
93
 
 
 
 
 
 
Total
 
$
372
 
 
As previously reported the Company’s position as of June 30, 2012 was that the Company had complied with the agreement by having paid the initial $250,000 lump sum and the $14,700 due to Henvil, transferred the related inventory, initiated the transfer of other assets and patents as outlined in the Settlement Agreement, and by making installment payments commencing on May 1, 2012.

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, the Company’s Chief Executive Officer, and Moshe Citronowicz, the Company’s Senior Vice President of Operations, 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, (ii) that defendants tortiously interfered with plaintiffs’ Chinese business relationships and expectations 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’ misrepresentations.  The complaint seeks, among other things, the following: (i) unspecified compensatory damages in excess of $4 million, (ii) providing plaintiffs with all ICON VS generators, (iii) an assignment to plaintiffs of all patents identified in the Settlement Agreement and (iv) a rescission of the Settlement Agreement.  We believe the allegations to be frivolous and without merit and we intend to defend the action vigorously.  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.

On July 24, 2012, the Company filed a motion to dismiss the complaint and to compel arbitration.  The plaintiffs have opposed the motion to compel arbitration and the issue is before the Court for resolution.

Stockholder Derivative Action

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 is presently subjudice.

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 the Florida “Whistle Blower’s Act” and seeks specific performance of

 
15

 
NOTE 10.
COMMITMENTS AND CONTINGENCIES (CONTINUED)

certain indemnification rights under his employment agreement. On April 27, 2012, we filed our answers with counterclaim in this action.

On July 3, 2012, plaintiff amended the complaint to add Andrew Makrides, the Company’s Chief Executive Officer, as a defendant.  The amended complaint asserts essentially the same allegations as the original filing but asserts additional claims concerning (i) an alleged violation of ERISA and (ii) an alleged tortious interference with the plaintiff’s employment contract by Andrew Makrides.  We believe we have meritorious defenses against Mr. Keen’s claims and will vigorously defend 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.

On July 16, 2012, the Company filed a motion to dismiss the amended complaint.

In addition to the above, in the normal course of business, we are subject, from time to time, to legal proceedings. 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 June 30, 2012. These matters could affect the operating results of any one or more quarters when resolved in future periods.
 
We expense costs of litigation related to contingencies in the periods in which the costs are incurred.

NOTE 11.
RELATED PARTY TRANSACTION

Two of our former board of directors were considered related parties to whom we paid consulting fees during the six months ended June 30, 2012. Both of these directors resigned in March 2012. We paid consulting fees of approximately $20,000 to an entity owned by one of the former directors and $7,500 directly to the other former director during the time period that they were acting as a director.
 

 
End of financial information

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

Cautionary Notes Regarding “Forward-Looking” Statements

This report contains statements that we believe to be “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange act of 1934, as amended.  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, 2011, may affect the achievement of forward-looking statements:
 
 
16

 
 
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:
 
deterioration in or destabilization of the global economy;
 
the strength of product demand and the markets we serve;
 
the intensity of competition, including that from foreign competitors;
 
pricing pressures;
 
the financial condition of our customers;
 
market acceptance of new product introductions and enhancements;
 
the introduction of new products and enhancements by competitors;
 
our ability to maintain and expand relationships with large customers;
 
our ability to source raw material commodities from our suppliers without interruption and at reasonable prices; and
 
our ability to source components from third parties, in particular from foreign manufacturers, without interruption and at reasonable prices;
 
our ability to access capital markets and obtain anticipated financing under favorable terms;
 
our ability to identify, complete and integrate acquisitions successfully and to realize expected synergies on our anticipated timetable;
 
changes in our business strategies, including acquisition, divestiture and restructuring activities;
 
changes in operating factors, such as continued improvement in manufacturing activities, the achievement of related efficiencies and inventory risks due to shifts in market demand;
 
our ability to generate savings from our cost reduction actions;
 
unanticipated developments that could occur with respect to contingencies such as litigation, intellectual property matters, product liability exposures and environmental matters; and
 
our ability to accurately evaluate the effects of contingent liabilities.
 
The foregoing factors are not exhaustive, and new factors may emerge or changes to the foregoing factors may occur that would impact our business.  We assume no obligation, and disclaim any duty, to update the forward-looking statements in this report. Past performance is no guaranty of future results.

Executive Level Overview

We are a medical device company engaged in the manufacturing and marketing of electrosurgical devices. Our medical products include a wide range of devices including electrosurgical generators and accessories, cauteries, medical lighting, nerve locators and other products.

We internally divide our operations into three product lines.  Electrosurgical products, battery-operated cauteries and other products. The electrosurgical 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, Medical Illumination (MII) Lighting, laparoscopic instruments, 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, and to doctors and other health-care facilities. New distributors are contacted through responses to our advertising in international and domestic medical journals and domestic or international trade shows. International sales represented approximately 18.5% of total revenues for the first six months of 2012, as compared with approximately 24.2% for the first six months of 2011.  Our products are sold in more than 150 countries mainly through local dealers which are coordinated by sales and marketing personnel at the Clearwater, Florida facility.  In addition, for the launch of our new surgical suite / J-Plasma 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.

 
17

 
Results of Operations – Three and Six Months Ended June 30, 2012 Compared to Three and Six Months Ended June 30, 2011

Sales
 
Sales by Product Line
(in thousands)
 
Three months ended June 30,
 
 
Percent
 
 
Six months ended June 30,
 
 
Percent
 
 
 
2012
 
 
2011
 
 
change
 
 
2012
 
 
2011
 
 
change
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Electrosurgical
 
$
4,940
 
 
$
4,709
 
 
 
4.9%
 
 
$
9,269
 
 
$
8,916
 
 
 
4.0%
 
Cauteries
 
 
1,698
 
 
 
1,658
 
 
 
2.4%
 
 
 
3,303
 
 
 
3,143
 
 
 
5.1%
 
Other
 
 
802
 
 
 
474
 
 
 
69.2%
 
 
 
1,601
 
 
 
936
 
 
 
71.0%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
7,440
 
 
$
6,841
 
 
 
8.8%
 
 
$
14,173
 
 
$
12,995
 
 
 
9.1%
 

Sales by Domestic and
International (in thousands)
 
Three months ended June 30,
 
 
Percent
 
 
Six months ended June 30,
 
 
Percent
 
 
 
2012
 
 
2011
 
 
change
 
 
2012
 
 
2011
 
 
change
 
Domestic
 
$
5,935
 
 
$
5,027
 
 
 
18.1%
 
 
$
11,558
 
 
$
9,810
 
 
 
17.8%
 
International
 
 
1,505
 
 
 
1,814
 
 
 
(17.0)%
 
 
 
2,615
 
 
 
3,185
 
 
 
(17.9)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
7,440
 
 
$
6,841
 
 
 
8.8%
 
 
$
14,173
 
 
$
12,995
 
 
 
9.1%
 
 
During the three months ended June 30, 2012, we experienced increases in demand along all three of our product line categories. The largest dollar sales increases occurred in our other products category and were related to sales of our new distribution products released last year, medical lighting systems and laproscopic instruments, amounting to increases of approximately $253,000 and $18,000 respectively, along with additional increases in various other products including engineering consulting services of approximately $57,000 for the three months ended June 30, 2012 compared to the same period in 2011. The 4.9% sales increase experienced in our electrosurgical category during the three months ended June 30, 2012 compared to the same period in 2011, was mainly attributable to increased demand for our OEM domestic electrosurgical generators amounting to approximately $133,000 along with an approximate increase of $98,000 in coated electrode product sales. Lastly, demand for our cauteries to domestic customers increased by 2.4% or approximately $40,000 for the three months ended June 30, 2012 when compared to the same period in 2011.

Sales during the six months ended June 30, 2012 increased approximately $1.2 million or 9.1% compared to the same period in 2011. Similar to our experience in the second quarter, our largest dollar sales increase of approximately $665,000 was in our “other products” category. This increase was also related to the continued sales trend of our new medical lighting systems and laproscopic instruments, amounting to increases of approximately $488,000 and $35,000 respectively. Some additional contributing factors to these increases were in various other products as well as engineering consulting services which combined approximated $142,000 for the six months ended June 30, 2012 as compared to the same period in 2011. Stronger demand for our OEM domestic electrosurgical generators continued through the six months ended June 30, 2012 and resulted in a 4.0% sales increase in our electrosurgical category, or approximately $353,000 when compared to the same period in 2011. Another consistent trend for the six months ended June 30, 2012 was the increased demand for our cauteries to domestic customers of approximately $160,000 or 5.1% when compared to the same period in 2011.

Our ten largest customers accounted for approximately 68% of net revenues for the six months ended June 30, 2012 and 67% for the same period in 2011.  At June 30, 2012 and 2011, our ten largest trade receivables accounted for approximately 69% and 66% of our net receivables, respectively.  During the first six months of 2012 one of our customers accounted for 15% of total sales and another customer accounted for 11% of total sales.  No customer accounted for greater than 10% of our sales for the same period ending June 30, 2011.

 
18

 
Gross Profit
 
(in thousands)
 
Three months ended
June 30,
 
 
Percent of sales
 
 
 
 
 
 
Six months ended
June 30,
 
 
Percent of sales
 
 
 
 
 
 
2012
 
 
2011
 
 
2012
 
 
2011
 
 
Percent
change
 
 
 
2012
 
 
2011
 
 
2012
 
 
2011
 
 
Percent
change
 
Cost of  sales
 
$
4,584