The following is a mixture of further research of mine on Bovie Medical Corporation with my thoughts, ideas, and analysis included. My plan had been to finish this up and publish it as an article on Seeking Alpha; however, I simply don't have the time to do this. Rather than have this work go to waste, I'm turning it into an Instablog post. Any enterprising readers who have the time and interest can then pick up the work and investigate further, such as where some loose ends exist in legal and accounting issues.
Bovie Medical Corporation created a subsidiary, Bovie Canada, using assets purchased from two Canadian medical companies. Bovie Canada was to both manufacture products and perform R&D to develop more.
Bovie Canada apparently produced millions of dollars of product. However, this has not shown up on Bovie Medical's balance sheet, either as inventory or sales.
Substantial circumstantial evidence has arisen concerning the fate of the missing inventory and suggesting Bovie Medical is non-compliant with Sarbanes-Oxley. Achieving compliance will require disclosing information positively impacting share price.
Although a very small company by Wall Street standards, Bovie Medical Corporation (NYSEMKT:BVX) has been developing very promising new medical device technologies that could have major impacts on some important areas in the healthcare industry, such as surgery and wound care.
For a time, Bovie Medical had a subsidiary, Bovie Canada, in the Windsor, Ontario area that focused on product manufacturing and R&D of new products. Bovie Canada was created in late 2006 and was in operation until 2010 when its operations were transferred to Florida, where Bovie had set up a new, larger facility.
To the relatively few people who follow a small company like Bovie and are aware of its long and convoluted history, an ongoing mystery has been the question of what happened to the products manufactured at the Bovie Canada facility. The impact of Bovie Canada's operations on Bovie's balance sheet were very minor and discordant with its apparent level of manufacturing output.
This article examines the Bovie Canada enigma and provides evidence suggesting that Bovie has not disclosed significant information to shareholders regarding Bovie Canada's operations. Consequently it is entirely possible that Bovie is not in compliance with the requirements of the Sarbanes-Oxley Act and in order to come into compliance will need to disclose information related (but not limited) to Bovie Canada operations that will be of considerable interest to shareholders.
Should Bovie prove to be in a state of non-compliance and should it remedy this by disclosing all information required to bring it back into Sarbanes-Oxley compliance, it is likely that the new information will present the company in a much better light (e.g., by positively impacting the balance sheet and by revealing that Bovie has stronger connections to one or more major medical device companies than is now apparent). In turn one would naturally this would have a positive impact on the share price.
Bovie Canada Formed to Manufacture Products
Bovie Canada was formed as a wholly owned subsidiary of Bovie Medical Corporation, being mostly created using assets purchased from two companies in Windsor, Ontario, Canada that were owned and headed up by Mr. Steve Livneh, namely Henvil Corp. LTD and Lican Developments LTD. As part of the two asset purchase agreements, Mr. Livneh became an important member of the Bovie team. A number of his employees also followed him to Bovie Canada.
The first agreement was announced on January 12, 2006 and involved Bovie purchasing ergonomic modular forceps technology from Henvil.
The second asset purchase agreement, announced on November 13, 2006, involved the sale of a range of medical technologies (e.g., patents and patents pending, prototypes, etc.), production equipment, and other assets by Lican Developments. This was also when Bovie Canada was formally created, with Mr. Livneh and many of his employees joining the new company. The press release reads in part:
The assets acquired include proprietary patent pending technologies, working prototypes in various stages of development and production equipment. Lican is a product development and manufacturing company focused on endoscopic devices.
Technologies in development include:
- Tip-On-Tube® a disposable tip technology complementary to Bovie's previously acquired and announced Modular Ergonomic Grip (MEG) forceps. Bovie acquired the MEG technology in January 2006 and recently received Food and Drug Administration (FDA) clearance to market the product.
- A new surgical handle platform called the Modullion® that allows a plurality of electrical and mechanical modes to be used in conjunction with reusable and disposable mono and bipolar cartridges and is applicable to most endoscopic surgeries.
- Seal-N-Cut® a family of endoscopic instruments used in monopolar and bipolar vessel and tissue cutting and sealing.
Bovie will be forming a wholly owned subsidiary, Bovie Canada, that will continue the further development of these technologies as well as manufacturing the new devices and other Bovie products. Mr. Steve Livneh, president and founder of Lican, will assume the position of President of Bovie Canada. Mr. Livneh, a mechanical engineer and inventor has over 20 years experience in the endoscopic market. He has been a consultant to the Company since January 2006 and is assisted by Howard Stallard, vice president of operations together with nine full-time employees.
Bovie Canada features state of the art manufacturing equipment such as computerized multi-axis machinery, micro-laser welding equipment and electro-discharge drilling machinery.
Commenting on the acquisition, Andrew Makrides, president of Bovie Medical stated, "Steve Livneh and his team are a welcome addition to the Bovie family. We anticipate that his expertise in engineering and developing medical device instrumentation together with his demonstrated manufacturing capabilities should contribute to Bovie's product offerings and growth."
Notice that at the time of its formation, Bovie Canada owned "state of the art manufacturing equipment" and that the company would be "manufacturing the new devices and other Bovie products," in addition to R&D related to the company's expanding product pipeline.
Bovie clearly signaled it intended for its Canadian subsidiary to manufacture products, not just perform R&D that might lead to products at some point in the future.
Ramp-Up in Bovie Canada Product Manufacturing
As mentioned in Bovie's press release on the asset purchase agreement, in addition to Mr. Steve Livneh becoming President of Bovie Canada, Mr. Howard Stallard became Vice President of Operations, with nine other full-time employees under him. Mr. Stallard's description on this LinkedIn page of his work while at Bovie Canada is very interesting. Although the screen capture below was taken several years ago, activities he had already performed obviously would not change.
Looking over Mr. Stallard's duties at Bovie Canada, it can be seen that while he was involved in product development, he very likely had heavy involvement in the actual manufacturing of products for sale.
Before very long, Jeff Stallard, Howard Stallard's brother, also joined Bovie Canada. As can be seen in this screen capture of his LinkedIn page, some of Mr. Jeff Stallard activities include "design(ing) and implement(ing) manufacturing and assembly fixtures for ((a)) handheld modular laparoscopic instrument," "establish(ing) assembly operations for laparoscopic instrument," "train(ing) assembly personnel," etc. Again, this is consistent with the manufacturing of products.
Bovie Canada owned an 11 axis lathe designed for high production throughput. At the December 29, 2009 Annual Shareholders' Meeting, management acknowledged that a second such lathe had been purchased and suggested they were of the Citizen Cincom A20-A32 class. These lathes are very advanced devices designed for automatic high throughput production of complex products and cost $300,000 or more each. The obvious reason for buying a second lathe is to enable the company to produce goods at a rate that is too high for a single lathe to meet.
Several weeks prior to management's admission that a second lathe had been purchased, Bovie announced that its Line of Credit with RBC Bank (USA), a subsidiary of the Royal Bank of Canada, had been increased from $5 million to $8 million and a separate additional $1 million credit line had been created to finance new equipment purchases. Was the purpose of this to enable Bovie Canada to purchase the second 11 axis high throughput lathe, other equipment, raw materials, etc. to manufacture enough product to meet customer demand? It would make sense.
Bovie Product #1: The Modular Ergonomic Grip
In its January 12, 2006 press release regarding the purchase of "ergonomic modular forceps" technology from Henvil, Bovie described them in this way:
...innovative modular forceps are ergonomically designed to provide surgeons added comfort and improved safety while reducing per-procedure costs. The modular forceps offer a unique and simpler assembly process for laparoscopic procedures and is the first modular design for the arthroscopy market. Commercial prototypes have been developed and based on current projections the Company expects to commence marketing during fiscal 2006.
Bovie's November 13, 2006 press release made it clear that the "modular forceps" referred to in the January 12, 2006 press release were the MEG and stated that the company was now cleared by the FDA to market the product, to wit:
…Bovie's previously acquired and announced Modular Ergonomic Grip forceps. Bovie acquired the MEG technology in January 2006 and recently received Food and Drug Administration (FDA) clearance to market the product.
So we see that in 2006, the MEG was: (1) ready to go to market, (2) cleared to go to market; and (3) planned to be taken to market.
The LinkedIn profiles of Howard Stallard and his brother Jeff (see earlier for both), who joined Bovie Canada in 2007, both describe their work at the company in a way that is consistent with it being a manufacturing enterprise (in addition to conducting R&D). More specifically, some of the terms used align very well with manufacturing of the MEG.
Bovie concluded an OEM manufacturing agreement with Boston Scientific Corporation (NYSE:BSX) on October 6, 2006 and announced this in a press release on October 11, 2006. As mentioned earlier, the very next day, October 12th, Bovie announced it had received FDA clearance for the MEG. The back-to-back timing of these announcements could be viewed as a strong hint that the OEM manufacturing agreement with Boston Scientific was predicated on receiving FDA clearance for the MEG, in which case the MEG would logically have been the subject (or at least an important element) of the agreement. The press release states the agreement concerned "exclusive distribution and marketing by Boston Scientific of an electrosurgical device for use in Boston Scientific's Oncology business," a rather vague and open-ended description. As the MEG has application to a wide range of surgical applications, including oncology, it would certainly fall within the range of what could be covered by this description.
So if we were to review the details of the October 6, 2006 Bovie - Boston Scientific OEM manufacturing agreement, we ought to be able to confirm that the MEG was the subject (or at least a subject) of this agreement.
As it turns out, we can't see the agreement as it is the subject of an SEC confidentiality order and is under wraps until January 1, 2016.
We do however have another reason for concluding the MEG was most likely the subject of the OEM manufacturing agreement. The agreement stated that "Under the agreement, Bovie will manufacture the product... Additionally, Bovie will receive funding from Boston Scientific as part of its manufacturing start up." Since Bovie Canada had both the personnel responsible for inventing and developing the MEG and the necessary manufacturing equipment (such as the 11 axis Citizen Cincom lathe), it was the logical location for producing the MEG. The financial support of Boston Scientific, a major medical devices company with deep pockets, would have enabled Bovie Canada to manufacture the MEG in large quantities without any concerns over funding availability.
Bovie went on to develop a series of MEG add-ons and variants. As can be seen below, the MEG is more or less a platform technology and is not at all limited to one specific design or a small number of designs. This was touched upon in the company's 2007 Annual Report in which Bovie informed us MEG development was continuing at the Bovie Canada facility.
Besides comments in reports, Bovie press releases referred to continuing development of the MEG. For example, on May 4, 2007 Bovie informed us of both further expansion of the MEG product line and of the development of the Polaris line of vessel sealers, the Polaris being part of this expansion:
Resources directed to Bovie Canada operations are producing anticipated results. The aggressive integration of Bovie Canada has resulted in the further development of the MEG (Modular Ergonomic Grip) line. The advanced monopolar instruments provide ergonomic comfort with interchangeability of working cartridges, targeting both the arthroscopic and endoscopic fields of laparoscopy, gynecology and general surgery. Marketing is expected to begin in the fourth quarter of 2007.
Bovie Canada, through an expansion of the MEG line, has developed the Polaris™ vessel sealing line, which accepts monopolar and bipolar disposable and reusable cartridges. In conjunction with the Polaris™ instruments, Bovie is currently developing an advanced electrosurgical generator to support the proprietary Polaris™ line. The combined market opportunity for arthroscopy, laparoscopy and bipolar instruments is estimated at over $500 million, worldwide. Subject to 510K FDA clearance, the Company expects to commence marketing the Polaris™ line with its advanced supporting generators during the first half of 2008. Additionally, the Company is exploring possible collaborations with a larger company.
An August 10, 2007 press release echoed these sentiments:
Management considers the advances in Bovie's MEG and Polaris™ hand held instrument product lines as playing a key role in the Company's future growth. Marketing of the MEG is anticipated in late 2007 and Polaris™ in the first half of 2008. The Company is having ongoing discussions with potential strategic partners for these and other products, which may lead to beneficial collaborative manufacturing and marketing agreements.
Bovie announced on May 5, 2008 that the MEG laparoscopic line had received a CE Mark, enabling it to be marketed and sold in the EU. With the MEG product line continuing to expand, another FDA 510(k) clearance was sought and subsequently granted on August 5, 2008. In a March 13, 2009 press release on its 2008 annual results, Bovie stated that Bovie Canada "continues to direct efforts to finalize development of its MEG line." Since the MEG line was already quite extensive, many product designs were complete, and product was being sold (as we will discuss later), the wording (whose meaning is ambiguous) should presumably be taken to mean that Bovie was working on completing the development of the final instruments to be included in the (already extensive) MEG product line.
Bovie Product #2: Vessel Sealing Instruments
Vessel sealing is an application in which Bovie has had an intense interest for some years. The "Company Products" section of the Investor Relations page on Bovie's website gives vessel sealing a prominent place in the list, coming second after J-Plasma. Here's what is said about it:
Vessel Sealing Instruments - Approximate worldwide market $1 billion
The patent pending vessel sealing instruments allow for monopolar and bipolar energy combined with intelligent feedback from an electrosurgical generator. The vessel sealing instrument handle will accommodate a wide array of possible applications in either monopolar or bipolar surgeries serving the endoscopic needs. The Endoscopy market is the fastest growing market in electrosurgery. The vessel sealing instruments are subject to FDA 510k clearance to market.
Bovie's original reference to a vessel sealing product was in the November 13, 2006 press release on the subject of the asset purchase agreement with Lican Developments, Steve Livneh's company. Bovie stated that one of the technologies in development that it obtained was "Seal-N-Cut® a family of endoscopic instruments used in monopolar and bipolar vessel and tissue cutting and sealing."
Tracking the progress of Bovie's vessel sealing technology has sometimes been difficult and confusing, as at various points in its history it has been known by different names and described in different ways.
Instruments for vessel sealing along with instruments that provided capabilities beyond those given by the MEG (e.g., by allowing larger cartridge sizes) became collectively known as the Polaris product line. Polaris was viewed as an extension of the MEG product line, rather than a different one. This is evident, for example, in a Bovie press release dated March 12, 2007, which reads in part:
Bovie Medical Corporation… a manufacturer and marketer of electrosurgical products, today announced that it's Canadian subsidiary has completed the prototypes of the Company's Polaris™ line of monopolar and bipolar modular forceps. The patent pending Polaris™ line offers all the benefits of the Company's recently FDA cleared Modular Ergonomic Grip forceps line while expanding the cartridge offerings to bipolar endoscopic cartridges (jaws and electrodes), between 4-12 mm in diameter.
The new Polaris™ line for the first time offers advantages to the end user that allow for monopolar and bipolar energy combined with intelligent feedback from an electrosurgical generator. The Polaris™ handle will also accommodate a wide array of possible applications in either monopolar or bipolar surgeries, thus serving endoscopic needs in multiple endoscopic fields. Bipolar vessel sealing and coagulation is one of the fastest, most lucrative growing markets in Endoscopy, estimated to be over $500 million in revenues worldwide.
The Bovie May 4, 2007 press release explicitly described "the Polaris™ vessel sealing line" as "an expansion of the MEG line." The press release also said, Subject to 510K FDA clearance, the Company expects to commence marketing the Polaris™ line with its advanced supporting generators during the first half of 2008. Additionally, the Company is exploring possible collaborations with a larger company."
As previously mentioned, speaking of the MEG and Polaris in its August 10, 2007 press release, Bovie said that "The Company is having ongoing discussions with potential strategic partners for these and other products, which may lead to beneficial collaborative manufacturing and marketing agreements."
A Bovie presentation from 2008 further elucidates some of these relationships.
What we see below is that Polaris is strongly associated with the MEG, supporting the idea they were viewed as two parts of a whole. Notice that Polaris is once again associated with vessel sealing.
Next we are given more details of the vessel sealer, including its "seal and cut" design. The modular design and ability of the handle to accommodate a range of instrument tips are key design features of the MEG.
Finally we are shown that the Polaris vessel sealer (are at least one model thereof) was to be known as the Polarion. (Note that it has also been referred to elsewhere by Bovie as the Polarian.)
A later investor presentation from 2011 shows pictures of two completed vessel sealing devices. The two devices have different types of triggers and modular designs that enable different types of tips to be used (one tip in the photo is quite different from the other tip). This is interesting for several reasons; in particular the similarity of their features to the MEG and, along with that, the lack of visible device names on the instruments.
The same presentation included the following slide on vessel sealing.
A graphical representation of Bovie's product lines from an investor presentation shows vessel sealing instruments as being closely related to the MEG.
On July 22, 2009, Bovie announced a 510(k) submission to the FDA for its vessel sealing product line. It is interesting to note the change in terminology; e.g., "Polarian" rather than "Polaris" (or even "Polarion," which was evidently meant to be a specific instrument within the Polaris product line) and the reappearance of the "Seal-N-Cut" terminology. Part of the text of the press release reads:
Bovie Medical Corporation… today announced a 510K submission to the Food & Drug Administration seeking pre-market clearance for Bovie's Polarian Seal-N-Cut™ vessel sealing line of hybrid monopolar and bipolar forceps. The new Seal-N-Cut™ line of instruments provides for monopolar and bipolar energy combined with intelligent feedback from Bovie's Hybrid VS electrosurgical generator. Furthermore, the Seal-N-Cut™ devices accommodate a wide array of possible applications in either monopolar or bipolar surgeries thereby serving endoscopic needs in multiple endoscopic fields including Endo GYN, General Surgery, Pediatric surgery, Thoracic Endoscopy and Urology. Bipolar vessel sealing and coagulation is one of the fastest growing markets in Endoscopy, estimated to exceed $1 billion in revenues worldwide. Andrew Makrides, president of Bovie Medical stated, "Vessel sealing during surgery especially in the field of gynecology has become a rapidly expanding growth market. The added features of our Seal-N-Cut™ instrumentation allows the Company to actively compete in this market."
On August 3, 2009, Bovie announced a 510(k) submission to the FDA for its ICON VS electrosurgical generator. The ICON VS was developed to work with what Bovie now termed the "Seal-N-Cut™ line of vessel instruments," the Polaris / Polarian / Polarion terminology having apparently been dropped. On March 12, 2010, Bovie announced that FDA approval had been granted and went on to say that "the clearance of the ICON VS generator allows the Company to complete testing required in support of the previously filed vessel sealing instrument 510(k) application."
The initial 510(k) filing for the vessel sealing instrument was apparently turned down by the FDA for lack of supporting test data, leading Bovie to seek to remedy this deficiency and make a 510(k) resubmission. This is apparent in statements made in a number of press releases. On May 10, 2010, Bovie stated that "Pre-clinical testing for the Seal-N-Cut™ vessel sealing instrument line has been scheduled to collect data for a 510k submission, while plans for marketing the product are moving forward." By August 9, 2010, the scheduled testing was evidently now underway: "The Company continues to progress with the testing necessary to complete the 510(k) submission process." Testing was still ongoing on November 9, 2010: "The Company continues necessary preparatory testing in order to complete the 510(k) submission process." By March 31, 2011, design changes had further extended testing duration: "The Seal-N-Cut™ is going through additional testing and due to recent device design improvements and we currently anticipate that we will be re-submitting an application for 510k clearance in the third quarter of 2011." On August 12, 2011, Bovie stated that it was "in the final stages of completing the necessary testing and paperwork in order to submit new vessel sealing" 510(k) application.
Bovie Product #3: SEER and BOSS
On May 1, 2008, Bovie announced it had signed an agreement with Boston Scientific in which Boston Scientific transferred ownership of patents, technology, and other assets related to electrodes using radio frequency (RF) current and sterile saline for cutting and coagulation. Bovie stated its intent to "finalize the development and commercialization of the technology" and informed us that "As part of the agreement, Bovie granted a license to Boston Scientific limited until 2016 to uses outside of those fields listed above."
At the same time, Mr. Robert (Bob) Rioux, technical leader of Boston's tissue resection program, joined Bovie as vice president for R&D. (Note that some company statements and materials also described him as VP of Advanced Resection Technologies.) Mr. David Uffer, another senior technical employee at Boston Scientific, left and joined Bovie as Vice President for Advanced Technologies the following year.
Although not referred to as such in the press release, the medical device technology obtained by Bovie from Boston Scientific became known as the BOSS™ (Bipolar Orthopedic Surgical Sealer) and SEER™ (Saline Enhanced Electrosurgical Resection), a smaller version of the BOSS™ that includes both regular and laparoscopic versions.
Bovie announced FDA 510(k) clearance for the SEER on November 19, 2008. (The SEER had already received a CE Mark, enabling it to be marketed and sold in Europe. This had been announced a couple of weeks earlier on October 28) The press release describes the SEER as a
…tissue resection device intended for initial use in liver oncology surgery. The SEER device uses conductive sintered steel as an electrode for radio frequency for cutting and coagulation. The process involves delivery of RF current and sterile saline for resection and coagulation in surgical procedures. The Company anticipates developing additional products based on the SEER technology for use in orthopedic and blood vessel sealing procedures. The worldwide market size for the liver and orthopedic market is expected to total $500 million in 2009.
Notice the mention of SEER being used for "liver oncology surgery." This effectively confirms that the technology intended for "use in Boston Scientifics' oncology business" referred to in the April 29, 2008 amendment to the August 23, 2007 agreement between Bovie and Boston Scientific (technically this was actually an amendment to the earlier agreement from 2006) is the SEER.
FDA clearance for the BOSS™ was announced on March 19, 2010. Bovie identified its primary target market as orthopedic surgeons performing hip and knee arthroplasty (e.g., replacements); around 1.1 million such procedures are performed annually in the US alone. Other markets mentioned include spine, endoscopic, abdominal, and thoracic surgeries. World market size was estimated as being in excess of $500 million in 2010.
Bovie's "It Depends upon What the Meaning of the Word 'Is' Is" Moment
For many years, Bovie press releases and company reports regularly spoke of "discussions" and other actions regarding "potential strategic partners," "possible collaborations," and other similar items. Here are some selected examples:
- March 29, 2006: "Fiscal 2006 should be marked by significant progress due to our anticipated new product introductions, either by Bovie alone and/or in collaboration with other larger medical companies."
- September 11, 2006: "The Company is… entering into discussions with potential strategic marketing and distribution partners."
- November 7, 2006: "Great effort continues to be directed towards the designing, manufacturing and marketing of proprietary products while exploring potential strategic collaborative agreements."
- May 4, 2007: "Additionally, the Company is exploring possible collaborations with a larger company."
- August 10, 2007: "The Company is having ongoing discussions with potential strategic partners for these and other products, which may lead to beneficial collaborative manufacturing and marketing agreements."
- November 12, 2007: "We continue having ongoing discussions with potential strategic partners at the same time we are establishing our own distribution channels."
- October 28, 2008: "As previously stated, discussions continue with larger companies regarding possible strategic partnerships involving some of the Company's new product efforts."
Bovie's press release on 2008 results (issued on March 13, 2009) included stated that "while no agreements have concluded to date, discussions continue with other companies regarding the possibility of strategic partnerships." (Emphasis mine.)
What the list above shows is that Boston Scientific and Bovie have a distribution agreement that was amended on August 23, 2007. Despite the contents of this amendment to the agreement being important enough for Bovie to obtain a Confidential Treatment order from the SEC (putting in under wraps under 2016, nine years later), Bovie apparently did not consider it important enough to disclose its existence to shareholders.
Similarly, an amendment to a manufacturing and development agreement between Arthrex, Inc. and Bovie on August 24, 2007 was considered important enough by the SEC to be granted Confident Treatment (thus preventing shareholders from seeing it) but not considered important enough by Bovie to have its existence mentioned in a press release.
It is also interesting to note that the amendments to these two agreements happened on sequential days; Boston Scientific on August 23 and Arthrex on August 24. This suggests they could very well be linked.
The Boston Scientific agreements with Bovie that did get announced were actually quite important, as will be seen later on. The statement that "no agreements have concluded to date" is arguably incorrect unless it is pointed out that these "agreements" either are of a different nature or involve a different company (or both) than the Boston Scientific agreement.
It appears that Bovie has used broad latitude in determining what constitutes sufficient disclosure of important corporate events to shareholders.
It also possible that the wording of "no agreements have concluded to date" could have been chosen by Bovie's lawyer to reflect a secondary meaning of the phrase while leaving the reader to assume it actually refers to its primary meaning when in fact it doesn't, thus providing a statement that is technically accurate but misleading to most readers. The secondary meaning comes from the word "concluded" which in this context can mean ended and thus no longer in effect. In this sense, the phrase would mean that agreements are in fact in place and are still in effect, having not yet reached the time at which they end.
Is this Bovie's "It depends upon what the meaning of the word 'is' is" moment?
Inventory Resulting From Bovie Canada Product Manufacturing
Thus far we have examined three product lines that could have been manufactured at Bovie Canada: the MEG, vessel sealing instruments, and SEER and BOSS. The wording of some Bovie press releases has been ambiguous at certain points (in my opinion at least), leaving some key details uncertain. A historical tendency to run lean on details when issuing press releases and other company documents has also contributed to this uncertainty.
What we have not established is which of the three products listed earlier were likely to have been manufactured at Bovie Canada and in what quantities, these not being questions to which Bovie has given definitive answers. We will examine these two areas.
Earlier in this article, it was shown that a key reason for the establishment of Bovie Canada was to product manufacturing. Clues such as the LinkedIn resumes of Howard and Jeff Stallard, brothers and Bovie Canada employees, indicate production levels were substantial.
Bovie's October 11, 2006 press release on its agreement with Boston Scientific pertained to an "exclusive distribution and marketing by Boston Scientific of an electrosurgical device for use in Boston Scientific's Oncology business. Under the agreement, Bovie will manufacture the product. The product will be co-labeled with both the Boston Scientific and Bovie names displayed. Additionally, Bovie will receive funding from Boston Scientific as part of its manufacturing start up." The FDA 510(k) approval for the MEG was announced the very next day, suggesting the agreement with Boston Scientific had to do with the MEG and was only to be implemented once the FDA clearance arrived. (Note that Bovie would have had significant advance notice of the approval prior to notification of the public by the FDA, giving Bovie and Boston Scientific time to sign an agreement before Bovie first announced the 510(k) approval.)
As the MEG can be used in all kinds of surgical procedures, it would certainly be useful for oncology applications. The Stallard resumes contain wording that points to the MEG as one of the products made at Bovie Canada.
Less than a month later, on November 7, 2006, a Bovie press release included the statement that "Great effort continues to be directed towards the designing, manufacturing and marketing of proprietary products while exploring potential strategic collaborative agreements." (Emphasis added.)
Another agreement between Bovie and Boston Scientific announced on May 1, 2008 via a press release referred to a development and manufacturing agreement between Bovie and Boston Scientific that was signed in 2007 but not disclosed to shareholders at that time. As part of this agreement (actually listed as the "First Amendment to Distribution Agreement" as mentioned earlier), Bovie acquired "technology, patents, and assets related to the use of conductive sintered steel as an electrode for radio frequency cutting and coagulation." The press release went on to say that "Potential fields of therapy for the technology acquired include liver, pancreatic and kidney tumor therapies along with orthopedic and blood vessel sealing. The process involves delivery of RF current and sterile saline for resection, hemostatic sealing and coagulation in open and laparoscopic surgery." Speaking again of the previously unannounced 2007 agreement, the press release disclosed that "The original development and manufacturing agreement signed in 2007 required Bovie to develop and manufacture certain products using Boston Scientifics' intellectual property."
As mentioned earlier, the SEER and BOSS technologies came to Bovie as part of the 2008 agreement with Boston Scientific, with Bovie to manufacture products for distribution through Boston Scientific.
The inclusion of "blood vessel sealing" in the list of possible applications could be a hint that Bovie some of the technology obtained from Boston Scientific was to be used in Bovie's vessel sealing instrument (known variously as the Polaris, Polarian, Seal-N-Cut, etc.). This would be consistent with the statement in a March 16, 2010 Bovie press release that "As part of the planning for the manufacturing and the commercialization of the Company's Seal-N-Cut™ product line, all Canadian operations are being transferred to our new Florida facility."
Before further delving into the question of Bovie Canada's output, some historical background is in order.
Bovie is a micro-cap company and has a history of being ignored by analysts. Although several analysts have recently begun following the company, what material I have seen has been largely a regurgitation of easily uncovered information (e.g., high level information from the annual report) with only modest analysis applied to this information.
For example, by reading the fine print in the accounting section of the annual reports, I discovered that another company (probably a large medical devices firm) was matching Bovie's R&D spending on a one-for-one basis; this is first discussed in the article "Bovie Medical: Little Bovie May Be Running With The Big Dogs" and more details are given in the Instablog post "Boston Scientific May Be The Sugar Daddy Of Bovie Medical." To the best of my knowledge, no other analyst has even showed any awareness of this fact, much less discussed its possible implications
Bovie has a complex history and many recent company events are best understood in the context of what has happened in the past.
For quite a few years, Interventional Analysis (IA), a financial newsletter that covered some major markets (e.g., stocks, certain currencies, certain commodities) and a small number of selected stocks, was the main source of detailed, independent research on Bovie. The author of the publication has a background in optics, the medical devices industry, and financial analysis. My understanding is that he has been retired for several years and the newsletter is no longer published. (Quite some time back he did write two articles for Seeking Alpha, the newer one available here and the older here.)
IA was well aware of both the operations at the Bovie Canada facility and the lack of any corresponding changes to the company's balance sheet (e.g., inventory, sales, etc.). IA performed a detailed investigation and concluded that the Modular Ergonomic Grip product line was being produced in quantity at Bovie Canada.
IA's conclusion is consistent with Bovie's statements about how Bovie Canada was to fit into their production and sales plans, as has been previously discussed. Taking a second look at Bovie's January 12, 2006 press release on its purchase of the MEG from Henvil, we notice it states that "Commercial prototypes have been developed and based on current projections the Company expects to commence marketing during fiscal 2006."
As part of their detailed investigation, IA uncovered evidence that Bovie Canada produced over 200,000 MEG units. IA also estimated the wholesale value of these units as being in the neighborhood of $400 each (and perhaps more). Assuming IA is correct (and they more than likely are), this is $80 million worth of product at a minimum.
The SEER and BOSS are also candidates to have been produced in substantial quantities, as shown earlier in this article.
Vessel sealing instruments (including generators for powering handheld instruments) may also may have been manufactured.
The Disappearing Inventory: Balance Sheet
Despite the apparently very substantial production levels coming out of the Bovie Canada plant, Bovie's balance sheets from this time period are lacking in appropriately sized entries on the balance sheet, whether in the form of sales or of inventory. Production was seemingly vanishing into thin air.
Thus we are left with two key questions. How was this massive amount of MEG production kept from showing up on Bovie's books? Why would Bovie either want to hide it or consent to hiding it at someone else's behest?
Back before IA ceased publication, the author / publisher spent considerable time looking into why the activities at Bovie Canada had no discernible effect on the company's sales and inventory figures. His conclusion was that escrow accounts were being used for both production and the funds used to pay for it. (Expenses such as raw materials and labor costs would presumably have been paid for out of such accounts.) The accounting argument would then have been that assets (e.g., money, inventory) in such escrow accounts should not appear on the corporate books as they were encumbered by the agreements covering the escrow accounts and thus were neither actually owned by the company nor readily accessible to it.
Although this tactic strikes me as dubious (although granted, I am not an accountant) due to the way it would keep knowledge of important corporate developments from shareholders, if it was actually what was done then Bovie's accountants at the time apparently must have felt it passed muster. (However, it is worth noting that the company has since moved on to an entirely new set of accountants.)
There are at least two very plausible reasons for hiding the production from the Bovie Canada facility. They are not at all mutually exclusive.
The first possibility is that Boston Scientific wanted to have a large inventory on hand when bringing the MEG and / or other products to market. This would make sense if they expected rapid sales growth and wanted to avoid any risk of delays in meeting customer demand, something they could feel strongly about if for example they believed that delays in product delivery to customers could create a solid opening for their competitors. Creating a large hidden inventory would alleviate this danger while keeping their competitors in the dark as to what was coming, provided they could keep everything hush-hush until product launch.
The second possibility is that a larger medical devices company had plans to purchase Bovie, something considered likely by IA. (This is discussed in "Bovie Medical: Prelude to Acquisition?" referenced earlier in this article, as well as previous articles and Instablog posts of mine.) Although Boston Scientific is an obvious suspect, it is also possible that another large company was considering acquiring both Boston Scientific and Bovie Medical and both companies were cooperating with the would-be purchaser in advance of the actual planned purchase. (Note that such plans could still be in effect; research described in some of my previous writings on Seeking Alpha suggests that Medtronic may yet make a bid for one or both of Bovie Medical and Boston Scientific.) In such a case, the would-be purchaser might want to see to it that important events leading up to the purchase (e.g., milestones that had to first be met) be kept as low-profile as possible, particularly when such events could give a strong indication of a forthcoming takeover bid.
The Disappearing Inventory: Physical Location
It is one thing to find a way to keep production off the books. It is quite another to physically hide a substantial inventory of components and / or finished goods where they would be safe from both nature and discovery by the "wrong" people while remaining quickly and easily accessible.
At around the same time Bovie Canada was manufacturing products that seemingly vanished into a black hole, an import / export company that was based in Jiangyin, China and had over 120 customers stated that it had a "long-term and stable cooperation with BOVIE GROUP in Canada" (emphasis theirs); in other words, Bovie Canada. (As can be seen, the English on their website was less than perfect.)
IA did an extensive investigation of the missing output from Bovie Canada and concluded it was most likely being sent to a Covidien factory in Jiangyin, China. (On a side note, this facility now belongs to Medtronic due to their buyout of Covidien. Along with Boston Scientific, Medtronic seems to show up a lot when performing detailed research into Bovie.)
Holding the inventory in the same hypothesized escrow account arrangement would have let Bovie and Boston Scientific continue to keep them off the books. Storing the finished goods at a facility in China would minimize the risk that their existence and location would come to light.
It is worth noting that the closing lines of Bovie's press release of November 12, 2007 were:
Additionally, the Company reported that it has received approval for the marketing and sale of its products in China. Management believes that the China market could become its largest contributor to overseas sales.
If Bovie believed that a sizeable chunk of the products that needed to be discretely stored would eventually be needed in China, this would be a reason in favor of selecting China as a storage location.
Of course, it's also possible that not all of the Bovie Canada production that is unaccounted for went to China. Some could have gone to other locations, both in the North America and elsewhere.
Legal Entanglements Gave Bovie Additional Cover
For a time, Bovie was subject to two important legal entanglements that both began in the early summer of 2010. Both gave the company additional cover (from legal and accounting standpoints) for keeping product inventory from Bovie Canada out of the public eye.
On June 9, 2010, Medtronic and Salient Surgical, Inc. (subsequently purchased by Medtronic) sued Bovie, alleging SEER infringed US Patent 7,364,579, owned by Medtronic and licensed to Salient Surgical. In the suit, Medtronic and Salient Surgical sought "a judgment that the patent-in-suit is valid, enforceable and infringed; a permanent injunction barring Bovie from infringing; and unspecified damages."
The two parties reached a settlement in which Bovie was to immediately exit the monopolar and bipolar saline-enhanced RF device business worldwide through February 2015 and Medtronic was to make a one-time payment of $750,000 to Bovie. Interestingly, the settlement also called for Bovie to store its entire finished inventory of goods thus affected "in a secure, offsite storage facility" that could be located "abroad."
If any output from Bovie Canada was covered by this (and at a minimum, the SEER and BOSS surely were), such output could have been kept off Bovie's balance sheet due to legal encumbrance.
The second legal entanglement was a lawsuit that was actually initiated by Bovie Medical. On July 9, 2010 Bovie sued Steve Livneh and his companies over alleged misconduct and related issues. Mr. Livneh fought back aggressively and at first the legal winds blew in his favor, culminating in a settlement announced on February 28, 2012 in which Mr. Livneh was granted ownership of multiple Bovie technologies and products and was to be paid several hundred thousand dollars. This peace did not last however, and the two parties were soon back in court. A final resolution was reached on November 21, 2012 in which Bovie received back nearly everything it had lost in the February settlement.
The Bovie-Livneh litigation involved ownership of intellectual property used in the MEG, RF Skin Resurfacing, and Seal-N-Cut vessel sealing. This would have given Bovie cover (again due to legal encumbrance issues) for keeping any inventory associated with these products off its balance sheet up until November 2012.
Bovie May Be In Violation of Sarbanes-Oxley
The justification for keeping certain inventory off Bovie's balance sheet due to legal encumbrance ended in February when its non-compete agreement with Medtronic expired.
If the Bovie-Livneh litigation was used in the same way, that justification actually expired several years ago.
If escrow accounts were being used for both production and the funds used to pay for it, then presumably they could still in place. However, I do have to wonder if such a strategy would actually pass legal and / or accounting muster in the face of such legislation as Sarbanes-Oxley that is meant to ensure company management does not withhold important information from shareholders.
Possible Consequences of Achieving Sarbanes-Oxley Compliance
If Bovie is out of compliance with Sarbanes-Oxley and is to come back into compliance, it will probably have to either add the missing inventory to its balance sheet or (if escrow accounts have been used) instead add whatever payments have made for that inventory that are currently held in escrow accounts. It may also have to disclose the identity of other companies that have been involved in these transactions.
Were these events to occur, it would probably lead to a major improvement in the appearance of Bovie's balance sheet, which one would expect to be positive for the share price. The disclosure of one or more major medical device companies also having been involved in hidden transactions ought to also be positive.
If this kind of situation is indeed the case, it would not be surprising to see it reflected in the behavior of company management, and in fact, we have seen what is arguably such behavior.
In the spring, Bovie made a public offering of shares at a surprisingly large discount to the then prevailing share price. A member of Bovie's Board of Directors bought what was literally a huge chunk of this offering. If Bovie was going to eventually have to release information to the public that would likely catalyze a large upwards move in the stock, those in the know would have a strong incentive to buy more shares. My Instablog post of April 1 ("Company Director: BIG Purchase in Public Offering; Company to SEC: "Decline to Disclose" Revenues") was followed by the Director in question resigning and his replacement arriving on May 6, 2015. Although these two events may not have been related, it's quite possible they could have been (the timing is definitely suggestive). The motive for the Director's resignation could have been to avoid a possible stink if the share price shot up too soon after he bought a lot of cheap shares in a heavily discounted offering.
In a June 12, 2015 Instablog post ("Bovie Medical Short Takes"), I briefly discussed several topics, including the possibility that Bovie was out of compliance with Sarbanes-Oxley. Only three days later (June 15), Bovie announced the abrupt resignation of its CFO and the appointment of an interim CFO with "extensive experience with Sarbanes Oxley, inventory management, Oracle modules and financial planning & analysis." (Emphasis added.)
It is interesting that two key management figures have recently taken actions that are very much consistent with the idea that Bovie Medical may be out of compliance with Sarbanes-Oxley and in order to come back into compliance will need to disclose some very positive information. If this proves to be so, it will be the only instance I know of when a company was found to be out of compliance and coming into compliance showed that the company's situation (financial and otherwise) to be much better than previously believed.
A final word of caution: Bovie Medical has a history of share price volatility (particularly between 2006 and 2010) and as a micro-cap company is naturally particularly prone to price swings, even apart from any change in the company's business, financial condition, etc. Caution is encouraged.
Disclosure: I am/we are long BVX.
Additional disclosure: I'm also short BSX via put options.