UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 20172018
 
or
 
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number: 0-12183
bovielogo2017.jpgbovielogoa01.jpg
BOVIE MEDICAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 11-2644611
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
4 Manhattanville5115 Ulmerton Road, Suite 106, Purchase, NY 10577Clearwater, FL 33760
(Address of principal executive offices, zip code)
(914) 468-4009(727) 384-2323
(Registrant’s telephone number)
Indicate by check mark whether the registrant (1) 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: ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§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: ý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and "emerging“emerging growth company"company” in Rule 12b-2 of the Exchange Act (Check one):
Large accelerated filero Accelerated filero
Non-accelerated filero(Do not check if a smaller reporting company)Smaller reporting companyý
   Emerging growth companyo
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes: o No ý
As of July 31, 2017, 30,859,75325, 2018, 33,203,517 shares of the registrant’s $0.001 par value common stock were outstanding.
   
   


Table of Contents
BOVIE MEDICAL CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q

For the quarterly period ended June 30, 20172018
(Unaudited)

    Page
Part I.  
     
Item 1.  
   
   
   
   
   
     
Item 2.  
Item 3.  
Item 4.  
     
Part II.  
     
Item 1.  
Item 1A.  
Item 2.  
Item 3.  
Item 4.  
Item 5.  
Item 6.  
   

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Table of Contents
BOVIE MEDICAL CORPORATION

PART I.     Financial Information

ITEM 1. Financial Statements

CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data, Unaudited)
June 30,
2017
 December 31,
2016
June 30,
2018
 December 31,
2017
ASSETS      
Current assets:      
Cash and cash equivalents$10,292
 $14,456
$7,875
 $9,949
Restricted cash779
 779
660
 719
Trade accounts receivable, net of allowance of $186 and $1184,929
 4,733
Trade accounts receivable, net of allowance of $180 and $2045,592
 4,857
Inventories, net7,582
 6,158
7,533
 6,526
Prepaid expenses and other current assets538
 413
568
 496
Total current assets24,120
 26,539
22,228
 22,547
Property and equipment, net6,240
 6,449
6,314
 6,408
Brand name and trademark1,510
 1,510
1,510
 1,510
Purchased technology and license rights, net217
 215
235
 179
Goodwill185
 185
185
 185
Deposits66
 109
115
 92
Other assets218
 103
67
 67
Total assets$32,556
 $35,110
$30,654
 $30,988
      
LIABILITIES AND STOCKHOLDERS' EQUITY   
LIABILITIES AND STOCKHOLDERS’ EQUITY   
Current liabilities:      
Accounts payable$2,077
 $1,606
$2,745
 $1,583
Accrued severance and related439
 1,242
Accrued payroll416
 419
394
 447
Accrued vacation375
 404
Current portion of mortgage note payable239
 239
239
 239
Accrued and other liabilities2,511
 2,604
2,420
 2,462
Total current liabilities5,618
 5,272
6,237
 5,973
Mortgage note payable, net of current portion2,575
 2,694
2,335
 2,455
Note payable140
 140
140
 140
Deferred rents11
 14
Deferred tax liability564
 564
368
 368
Derivative liabilities77
 203

 20
Total liabilities8,985
 8,887
$9,080
 $8,956
STOCKHOLDERS' EQUITY   
Series B convertible preferred stock, $0.001 par value; 3,588,139 authorized and 975,639 issued and outstanding as of June 30, 2017 and December 31, 20161
 1
Common stock, $0.001 par value; 40,000,000 shares authorized; 31,002,832 issued and 30,859,753 outstanding as of June 30, 2017 and December 31, 201631
 31
STOCKHOLDERS’ EQUITY   
Common stock, $0.001 par value; 75,000,000 shares authorized; 33,055,131 issued and 32,912,556 outstanding as of June 30, 2018 and 75,000,000 shares authorized; 33,021,170 issued and 32,878,091 outstanding as of December 31, 2017, respectively33
 33
Additional paid-in capital49,966
 49,625
51,244
 50,495
Accumulated deficit(26,427) (23,434)(29,703) (28,496)
Total stockholders' equity23,571
 26,223
Total liabilities and stockholders' equity$32,556
 $35,110
Total stockholders’ equity21,574
 22,032
Total liabilities and stockholders’ equity$30,654
 $30,988
The accompanying notes are an integral part of the consolidated financial statements.

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BOVIE MEDICAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data, Unaudited)
Three Months Ended
June 30,
 Six Months Ended
June 30,
Three Months Ended
June 30,
 Six Months Ended
June 30,
2017 2016 2017 20162018 2017 2018 2017
Sales$9,799
 $9,295
 $18,188
 $17,070
$11,475
 $9,799
 $21,391
 $18,188
Cost of sales4,757
 4,595
 8,920
 9,048
5,198
 4,757
 10,124
 8,920
Gross profit5,042
 4,700
 9,268
 8,022
6,277
 5,042
 11,267
 9,268
Other costs and expenses:              
Research and development696
 592
 1,405
 1,259
816
 696
 1,378
 1,405
Professional services480
 396
 870
 753
681
 480
 1,187
 870
Salaries and related costs2,243
 2,200
 4,703
 4,300
2,118
 2,243
 4,234
 4,703
Selling, general and administrative2,929
 2,022
 5,333
 4,213
2,929
 2,929
 5,599
 5,333
Total other costs and expenses6,348
 5,210
 12,311
 10,525
6,544
 6,348
 12,398
 12,311
Loss from operations(1,306) (510) (3,043) (2,503)(267) (1,306) (1,131) (3,043)
Interest expense, net(36) (50) (67) (88)(38) (36) (72) (67)
Change in fair value of derivative liabilities38
 41
 126
 128
46
 38
 20
 126
Total other income (loss), net2
 (9) 59
 40
Total other income (expense), net8
 2
 (52) 59
Loss before income taxes(1,304) (519) (2,984) (2,463)(259) (1,304) (1,183) (2,984)
Income tax expense4
 
 9
 
13
 4
 24
 9
Net loss$(1,308) $(519) $(2,993) $(2,463)$(272) $(1,308) $(1,207) $(2,993)
              
Loss per share              
Basic$(0.04) $(0.02) $(0.10) $(0.09)$(0.01) $(0.04) $(0.04) $(0.10)
Diluted$(0.04) $(0.02) $(0.10) $(0.09)$(0.01) $(0.04) $(0.04) $(0.10)
              
Weighted average number of shares outstanding - basic30,860
 27,051
 30,860
 27,051
32,890
 30,860
 32,884
 30,860
Weighted average number of shares outstanding - dilutive30,860
 27,051
 30,860
 27,051
32,890
 30,860
 32,884
 30,860

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

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BOVIE MEDICAL CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(In thousands, Unaudited)
Preferred Stock Common Stock      
Shares Par Value Shares Par Value Additional Paid-In Capital Accumulated Deficit Total
Balance
December 31, 2015
1,976
 $2
 27,051
 $27
 $42,859
 $(19,484) $23,404
Stock based compensation
 
 
 
 360
 
 360
Net loss
 
 
 
 
 (2,463) (2,463)
Balance
June 30, 2016
1,976
 $2
 27,051
 $27
 $43,219
 $(21,947) $21,301
             Preferred Stock Common Stock      
             Shares Par Value Shares Par Value Additional Paid-In Capital Accumulated Deficit Total
Balance
December 31, 2016
976
 $1
 30,860
 $31
 $49,625
 $(23,434) $26,223
976
 $1
 30,860
 $31
 $49,625
 $(23,434) $26,223
Stock based compensation
 
 
 
 341
 
 341

 
 
 
 341
 
 341
Net loss
 
 
 
 
 (2,993) (2,993)
 
 
 
 
 (2,993) (2,993)
Balance
June 30, 2017
976
 $1
 30,860
 $31
 $49,966
 $(26,427) $23,571
976
 $1
 30,860
 $31
 $49,966
 $(26,427) $23,571
             
Balance
December 31, 2017

 $
 32,878
 $33
 $50,495
 $(28,496) $22,032
Options exercised
 
 37
 
 83
 
 83
Warrants exercised
 
 40
 
 95
 
 95
Stock based compensation
 
 
 
 749
 
 749
Stock swap to acquire options and warrants
 
 (42) 
 (178) 
 (178)
Net loss
 
 
 
 
 (1,207) (1,207)
Balance
June 30, 2018

 $
 32,913
 $33
 $51,244
 $(29,703) $21,574
 

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

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BOVIE MEDICAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands, Unaudited)
Six Months Ended June 30,Six Months Ended June 30,
2017 20162018 2017
Cash flows from operating activities      
Net loss$(2,993) $(2,463)$(1,207) $(2,993)
Adjustments to reconcile net loss to net cash used in operating activities:      
Depreciation and amortization356
 355
371
 356
Provision for inventory obsolescence83
 334
(52) 83
Gain on disposal of property and equipment, net2
 14
(Loss) gain on disposal of property and equipment, net(1) 2
Stock based compensation341
 360
749
 341
Change in fair value of derivative liabilities(126) (128)(20) (126)
Provision for allowance for doubtful accounts159
 159
82
 159
Changes in current assets and liabilities:      
Trade receivables(355) (740)(817) (355)
Prepaid expenses(125) (20)(72) (125)
Inventories(1,507) (792)(955) (1,507)
Deposits and other assets(72) 44
(23) (72)
Accounts payable471
 560
1,162
 471
Accrued and other liabilities(128) (63)(898) (128)
Net cash used in operating activities(3,894) (2,380)(1,681) (3,894)
Cash flows from investing activities      
Purchases of technology, property and equipment(151) (41)(332) (151)
Net cash used in investing activities(151) (41)(332) (151)
Cash flows from financing activities      
Change in restricted cash
 60
Repayment of mortgage note payable(119) (120)(120) (119)
Net cash used in financing activities(119) (60)(120) (119)
Net change in cash and cash equivalents(4,164) (2,481)
Cash and cash equivalents, beginning of period14,456
 11,805
Cash and cash equivalents, end of period$10,292
 $9,324
Net change in cash, cash equivalents and restricted cash(2,133) (4,164)
Cash, cash equivalents and restricted cash, beginning of period10,668
 15,235
Cash, cash equivalents and restricted cash, end of period$8,535
 $11,071
      
Cash paid for:      
Interest paid$67
 $50
$72
 $67

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

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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, 2016.2017. 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.

In the first quarterOn July 9, 2018, we entered into a definitive agreement with Specialty Surgical Instrumentation Inc., a subsidiary of 2017,Symmetry Surgical Inc. (“Symmetry”), pursuant to which the Company adopted a changewill divest and sell the Core business segment, including the Bovie® brand and trademarks to Symmetry for gross proceeds of $97 million in presentation oncash. The asset purchase agreement was approved by the Company’s Board of Directors and is subject to customary closing conditions, including approval by the Company’s stockholders, and expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. The Company is retaining and will continue to operate its Consolidated Statements of Cash FlowsAdvanced Energy and OEM businesses, its facilities in orderClearwater, FL and Sofia, Bulgaria, and certain intellectual property related to present a "Provision for allowance for doubtful accounts". Previously reported information has been modified to conform to this new presentation.specialty generators.

NOTE 2.     INVENTORIES

Inventories are stated at the lower of cost or market. Cost is determined on a first in, first out basis. Finished goods and work-in-process inventories include material, labor and overhead costs. Factory overhead costs are allocated to inventory manufactured in-house based upon labor hours.

Inventories consisted of the following:
(In thousands)June 30,
2017
 December 31,
2016
June 30,
2018
 December 31,
2017
Raw materials$4,887
 $4,521
$6,093
 $5,163
Finished goods4,189
 3,048
3,301
 3,276
Gross inventories9,076
 7,569
9,394
 8,439
Less: reserve for obsolescence(1,494) (1,411)(1,861) (1,913)
Net inventories$7,582
 $6,158
$7,533
 $6,526

NOTE 3.     INTANGIBLE ASSETS 

Intangible assets consisted of the following:
(In thousands)June 30,
2017
 December 31,
2016
June 30,
2018
 December 31,
2017
Brand name and trademark (life indefinite)$1,510
 $1,510
$1,510
 $1,510
      
Purchased technology (5-17 year lives)$1,497
 $1,441
$1,623
 $1,513
Less: accumulated amortization(1,280) (1,226)(1,388) (1,334)
Purchased technology, net$217
 $215
$235
 $179
      
Goodwill$185
 $185
$185
 $185


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BOVIE MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

With respect to our trademark and brand name, we continue to market products, release new products and product extensions and maintain and promote these trademarks and brand name in the marketplace through legal registration and such methods as advertising, medical education and trade shows. It isBased on our belief thatannual impairment testing performed, these trademarks and brand names will generate cash flow for an indefinite period of time. Therefore, we believe our trademarks and brand name intangible assets are not impaired. Goodwill resultedresults from our acquisition of Bovie Bulgaria, EOOD.


Amortization of intangible assetspurchased technology was $27,000 and $54,000 for the three and six months ended June 30, 2018 and 2017, respectively, as compared with $27,000 and $54,000 for the three and six months ended June 30, 2016.respectively. Amortization expense is classified within selling, general and administration expenses in the consolidated statements of operations.

NOTE 4.     RECENT ACCOUNTING PRONOUNCEMENTS

In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The purpose of this ASU is to reduce the cost and complexity of evaluating goodwill for impairment. It eliminates the need for entities to calculate the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. Under this ASU, an entity will perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge is recognized for the amount by which the carrying value exceeds the reporting unit'sunit’s fair value. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted, however we have chosen not to do so. The amendment is not expected to have a material impact on our financial condition or results of operations.

In August 2016,ASU No. 2016-18, Restricted Cash Flows provides guidance on the FASB issued ASU 2016-15, Classificationpresentation of Certain Cash Receiptsrestricted cash and Cash Payments. The new guidance clarifies the classification of certainrestricted cash receiptsequivalents, which are now included with cash and cash payments inequivalents when reconciling the statementbeginning and ending cash amounts shown on the statements of cash flows, including debt prepayment or extinguishment costs, settlementflows. Using the retrospective transition method required under the standard, the Company has adjusted the presentation of contingent consideration arising from a business combination, insurance settlement proceeds, and distributions from certain equity method investees.its Condensed Consolidated Statements of Cash Flows for all periods presented. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted, however weof ASU No. 2016-18 did not have chosen not to do so. The amendment is not expected to have a materialany other impact on our financial condition or results of operations.the Company’s Consolidated Financial Statements.

In March 2016, FASB issued ASU No. 2016-09 Compensation-Stock Compensation - (Topic 718) Improvements to employee share-based payments accounting as part of simplicity initiatives. This update involves several aspectsThe following table provides additional detail by financial statement line item of the accountingASU 2016-18 impact in our Consolidated Statement of Cash Flows for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Some of the areas for simplification apply only to nonpublic entities. For us, the amendments in this Update are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The amendment has not made a material impact on our financial condition or results of operations.

In February 2016, FASB issued ASU No. 2016-02, Leases (Topic 842). The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from leases. ASU 2016-02 is effective for public companies for annual reporting periods beginning after December 15,six months ended June 30, 2018 and interim periods within those fiscal years. The guidance may be adopted prospectively or retrospectively and early adoption is permitted. The Company is currently assessing the impact the adoption of ASU 2016-02 will have on its consolidated financial statements.2017:

(In thousands)
As Reported
(Pre-Adoption)
 ASU 2016-18
Impact
 
Reported
(Post Adoption)
Six Months Ended June 30, 2018     
Cash, cash equivalents and restricted cash, beginning of period$9,949
 $719
 $10,668
      
Six Months Ended June 30, 2017     
Net change in cash, cash equivalents and restricted cash$(4,164) $
 $(4,164)
Cash, cash equivalents and restricted cash, beginning of period14,456
 779
 15,235
Cash, cash equivalents and restricted cash, end of period$10,292
 $779
 $11,071
In May 2014, the FASB issued ASU No. 2014-09 (ASC 606), Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU No. 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is became effective for us beginning with the first quarter of 2018, and adopted the new accounting standard using the modified retrospective transition approach. The modified retrospective transition approach recognized any changes from the beginning of the year of initial application through retained earnings with no restatement of comparative periods. We record revenue under ASC 606 at a single point in time, when control is transferred to the customer, which is consistent with past practice. We will continue to apply our current business processes, policies, systems and controls to support recognition and disclosure under the new standard. Based on January 1, 2018. Earlythe results of the evaluation, we have determined that the adoption isof the new standard presents no material impact on our consolidated financial statements. Application of the transition requirements of the new standard did not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The amendment is not expected to have a material impact on our financial condition or results of operations.opening retained earnings.

No other new accounting pronouncement issued or effective during the fiscal year had or is expected to have a material impact on our consolidated financial statements or disclosures.


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BOVIE MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

NOTE 5.     FAIR VALUE MEASUREMENTS

Certain assets and liabilities that are measured at fair value on a recurring basis are measured in accordance with FASB ASC Topic 820-10-05, 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.

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

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

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

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

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

The following represents a reconciliation of the changes in fair value of warrants measured at fair value using Level 3 inputs during the six months ended June 30, 2017: 
(in thousands)
2013
Placement Agent Warrants
Balance, December 31, 2016$203
Change in fair value(126)
Balance, June 30, 2017 (1)
$77
(1)The warrants are valued using a trinomial lattice valuation methodology because that model embodies all of the relevant assumptions that address the features underlying these instruments. Significant assumptions used in the model at June 30, 2017 included the market price of our common stock, an expected dividend yield of zero, the remaining period to the expiration date of the warrants, expected volatility of our common stock over the remaining life of the warrants of 2.0 years, estimated based on a review of our historical volatility of 55.720% and risk-free rates of return of 1.380% for the 2013 warrants based on constant maturity rates published by the U.S. Federal Reserve, applicable to the remaining life of the warrants. We also take into consideration a probability assumption for anti-dilution.


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BOVIE MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

NOTE 6.5.     EARNINGS PER SHARE

We compute basic earnings per share (“basic EPS”) by dividing the net income or loss by the weighted average number of common shares outstanding for the reporting period. Diluted earnings per share (“diluted EPS”) gives effect to all dilutive potential shares outstanding. The following table provides the computation of basic and diluted earnings per share.
Three Months Ended
June 30,
 Six Months Ended
June 30,
Three Months Ended
June 30,
 Six Months Ended
June 30,
(in thousands, except per share data)2017 2016 2017 20162018 2017 2018 2017
Numerator:              
Net loss available to common shareholders$(1,308) $(519) (2,993) (2,463)$(272) $(1,308) $(1,207) $(2,993)
Effect of dilutive securities:              
Derivative liability - warrants
 
 
 

 
 
 
Numerator for dilutive loss per common share(1,308) (519) (2,993) (2,463)$(272) $(1,308) $(1,207) $(2,993)
              
Denominator:              
Weighted average shares used to compute basic loss per common share30,860
 27,051
 30,860
 27,051
32,890
 30,860
 32,884
 30,860
Effect of dilutive securities:              
Derivative liability - warrants
 
 
 

 
 
 
Denominator for dilutive loss per common share30,860
 27,051
 30,860
 27,051
32,890
 30,860
 32,884
 30,860
              
Basic loss per common share$(0.04) $(0.02) (0.10) (0.09)$(0.01) $(0.04) $(0.04) $(0.10)
Diluted loss per common share$(0.04) $(0.02) (0.10) (0.09)$(0.01) $(0.04) $(0.04) $(0.10)
    
 
Anti-dilutive instruments excluded from diluted loss per common share:       
Warrants14
 3
 10
 16
Options1,061
 500
 821
 805


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BOVIE MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

NOTE 7.6.     STOCK-BASED COMPENSATION

Under our stock option plans, our board of directors may grant options to purchase common shares to our key employees, officers, directors and consultants. We account for stock options in accordance with FASB ASC Topic 718, Compensation - Stock Compensation, with option expense amortized over the vesting period based on the trinomial lattice option-pricing model fair value on the grant date, which includes a number of estimates that affect the amount of our expense. We expensed approximately $182,000$377,000 and $341,000$749,000 in stock-based compensation during the three and six months ended June 30, 2017, respectively,2018, as compared with $184,000$182,000 and $360,000$341,000 for the three and six months ended June 30, 2016.2017, respectively.

The status of our stock options and stock awards are summarized as follows:
Number of options Weighted average exercise priceNumber of options Weighted average exercise price
Outstanding at December 31, 20163,752,209
 $3.04
Outstanding at December 31, 20174,860,157
 $3.00
Granted505,000
 3.32
117,000
 2.95
Exercised(37,250) 2.23
Canceled and forfeited(203,803) 4.84
(57,500) 6.55
Outstanding at June 30, 20174,053,406
 $2.98
Outstanding at June 30, 20184,882,407
 $2.94

Common shares required to be issued upon the exercise of stock options and warrants would be issued from our authorized and unissued shares. We calculated the fair value of issued options utilizing a trinomial lattice with an expected life calculated via the simplified method as we do not have sufficient history to determine actual expected life.

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BOVIE MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

2017 Grants2018 Grants
Option value$1.96
-$2.34
$1.46
-$1.96
Risk-free rate1.5%1.9%
Expected dividend yield—%
Expected volatility68.0%68.8%
Expected term (in years)66

NOTE 8.7.     INCOME TAXES

The Company'sCompany’s income tax provisionexpense was $4,000$13,000 and $24,000 with an effective tax rate of 0.0% for the three and six months ended June 30, 2018, as compared to $4,000 and $9,000 with an effective tax rate of 0.0% for the three and six months ended June 30, 2017, respectively, as compared to $0 with an effective tax rate of 0.0% for both the three and six months ended June 30, 20162017. The Company'sCompany’s effective tax rate differs from the statutory rate primarily due to the change in the valuation allowance on the Company'sCompany’s net deferred tax assets with a finite life.

As a result of historical losses, the Company recorded a valuation allowance on the net deferred tax asset with a finite life and does not anticipate recording an income tax benefit related to these deferred tax assets. The Company will reassess the realization of deferred tax assets each reporting period and will be able to reduce the valuation allowance to the extent that the financial results of these operations improve and it becomes more likely than not that the deferred tax assets are realizable. Management expects the gain from the sale of the Core business segment to Symmetry will utilize substantially all of the historical loss carryforwards and the valuation allowance on the deferred tax asset will be reversed during the third quarter of 2018, when the transaction is approved by the Company’s stockholders.

For the six months ended June 30, 2017,2018, we do not believe we had any significant uncertain tax positions nor did we have any interest or penalties related to any significant uncertain tax positions.

The Company is subject to U.S. federal income tax, state income tax and Bulgarian income tax. Until the respective statutes of limitations expire (which may be as much as 20 years while we have unused NOL's)Net Operating Losses), we are subject to income tax audits in the jurisdictions in which we operate.


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BOVIE MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

NOTE 9.8.     COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS

Property and Rental Agreements

In March 2014, we signed a lease for offices located in Purchase, New York. We decided to consolidate operations in the Purchase, NY office with the facility in Clearwater, Florida. Based on this, we determined the office in Purchase, NY was no longer necessary and decided to cease all activity at the location. The lease is for 3,650 square feetremaining $119,000 of office space with a monthly cost of approximately $9,277 per month for the lease expiringwas expensed in Junethe fourth quarter of 2017 as part of severance and related expense. These remaining payments expensed in 2017 will be operational cash outflows in 2018 and 2019.

In October 2015, pursuant to our acquisition of Bovie Bulgaria, we are obligated to pay a lease of $4,944$6,006 per month, expiring in December 2021, for 16,50018,745 square feet of office, research and manufacturing space in Sofia, Bulgaria.

The following is a schedule of approximate future minimum lease payments under operating leases as of June 30, 2017:2018:
(In thousands)  
2017 (remaining six months)
$87
2018175
2018 (remaining six months)
$36
2019118
72
202059
72
202159
72
Total$498
$252

Rent expense was approximately $43,539 and $85,326 for the three and six months ended June 30, 2017, respectively compared to $37,230 and $82,280 for the three and six months ended June 30, 2016.Litigation

The medical device industry is characterized by frequent claims and litigation, and we are and may become subject to various claims, lawsuits and proceedings in the ordinary course of our business, including claims by current or former employees, distributors and competitors, and with respect to our products and product liability claims, lawsuits and proceedings.

10

TableWe are involved in a number of Contents
BOVIE MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
legal actions relating to the use of our J-Plasma technology. The outcomes of these legal actions are not within our complete control and may not be known for prolonged periods of time. In the opinion of management, the Company has meritorious defenses, and such claims are adequately covered by insurance, or are not expected, individually or in the aggregate, to result in a material, adverse effect on our financial condition. However, in the event that damages exceed the aggregate coverage limits of our policy or if our insurance carriers disclaim coverage, we believe it is possible that costs associated with these claims could have a material adverse impact on our consolidated earnings, financial position or cash flows.

Purchase Commitments

At June 30, 2017,2018, we had purchase commitments for inventories totaling approximately $4.0$5.4 million, substantially all of which is expected to be purchased by the end of 2017.2018.

Concentrations

With respect to receivables, ourOur ten largest customers accounted for approximately 29.2%36.7% and 47.6%29.2% of trade receivables as of June 30, 20172018 and 2016,2017, respectively, and approximately 51.7%39.5% and 56.2%51.7% of net revenues for the six months ended June 30, 20172018 and 2016,2017, respectively. For the six months ended June 30, 2018, McKesson and National Distribution & Contracting Inc. accounted for 15.5% and 7.1% of sales, respectively, while for the same period in 2017, McKesson and National Distribution & Contracting Inc. accounted for 15.5% and 10.1% of sales, while for the same period in 2016, McKesson and National Distribution & Contracting Inc. accounted for 16.5% and 9.6% of sales.respectively.

NOTE 10.9.     RELATED PARTY TRANSACTIONS

Several relatives of Nikolay Shilev, Bovie Bulgaria’s Managing Director, are considered related parties. Teodora Shileva, Mr. Shilev’s spouse, is an employee of the companyCompany working in the Accounting department. Antoaneta Dimitrova Shileva-Toromanova, Mr. Shilev’s sister, is the Manager of Production and Human Resources. Svetoslav Shilev, Mr. Shilev’s son, is an Engineer in the Quality Assurance department.

A relative
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Table of Moshe Citronowicz, Bovie’s Senior Vice President, is considered a related party. Arik Zoran is a consultant of the Company doing business as AR Logic, Inc., a consulting firm owned by Arik Zoran, Mr. Citronowicz’s brother. The Company has been working with AR Logic since 2011 and as of April 14, 2017, the Company agreed to a renewal contract and terms to continue the consulting arrangement, expiring December 31, 2017. AR Logic was paid consulting fees of approximately $67,533 and $96,033 for the three and six months ended June 30, 2017, respectively compared to $46,662 and $76,662 for the three and six months ended June 30, 2016.Contents
BOVIE MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

NOTE 11.10.     LONG TERM DEBT 

On June 28, 2016, the Company entered into a transaction with Bank of Tampa, a Florida banking corporation (“Lender”), wherein Lender amended the terms of a mortgage loan (“the Loan”) originally executed on March 20, 2014 with a principal amount of $3,592,000. The Initial Maturity Date of the Loan was extended to July 20, 2019 from March 19, 2017, and the Extended Maturity Date was amended to July 20, 2024 from March 20, 2022. In addition, the Lender released as collateral to the Loan, the Company’s working capital accounts in exchange for a negative covenant limited to $2,000,000 of the aggregate indebtedness secured by these accounts.

The obligations under the Loan are secured by a first mortgage and security interest in the Company’s Clearwater, Florida facility. In addition, the Company has pledged an interest in a certificate of deposit in the amount of $779,000$660,000 as additional collateral. The amount of the additional collateral required declines on a pro rata basis as principal is paid.

Borrowings under the Loan bear interest at LIBOR plus 3.5%, with a fixed monthly principal payment of $19,956. The interest rate at June 30, 20172018 was 4.560%5.501%.

The Loan documents contain customary financial covenants, including a covenant that the Company maintains a minimum liquidity, as defined, of $750,000. Should we desire to extend the Loan beyond July 20, 2019, we must maintain a Debt Service Coverage Ratio for each of the preceding four quarters of not less than 1.0 to 1.0.

Our future contractual obligations for agreements with initial terms greater than one year are as follows:
(In thousands)Long-term debtLong-term debt
2017 (remaining six months)
$120
2018239
2018 (remaining six months)
$120
20192,455
2,454
Total$2,814
$2,574

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BOVIE MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

NOTE 12.11.     GEOGRAPHIC AND SEGMENT INFORMATION 

Operating segments are aggregated into reportable segments only if they exhibit similar economic characteristics. In addition to similar economic characteristics, we also consider the following factors in determining the reportable segments: the nature of business activities, the management structure directly accountable to our chief operating decision maker for operating and administrative activities, availability of discrete financial information and information presented to the Board of Directors and investors.

Prior to the first quarter of 2017, we disclosed only one reporting segment. Beginning in 2017, ourOur reportable segments are disclosed as principally organized and managed as three operating segments: Core, OEM and Advanced Energy. We adopted reportable segments to align with changes in how we manage our business, review operating performance and allocate resources as a result of the growth in Advanced Energy and the differing behavior of the Core and OEM product lines. The Corporate & Other category includes certain unallocated corporate, operational, research and development and marketing costs which were not specifically attributed to any reportable segment. Net assets are shared, therefore, not allocated to the reportable segments. The OEM segment is primarily development contract and product driven, all related expenses are recorded as cost of sales, therefore no segment specific operating expenses are incurred.


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BOVIE MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

Summarized financial information with respect to reportable segments is as follows:
Three Months Ended June 30, 2017Three Months Ended June 30, 2018
Core OEM Advanced Energy Corporate (Other) Total
(In thousands)Core Advanced Energy OEM Corporate (Other) Total
Sales$7,488
 $498
 $1,813
 $
 $9,799
$7,784
 $3,113
 $578
 $
 $11,475
                  
Income (loss) from operations2,710
 205
 (1,250) (2,971) (1,306)2,666
 (792) 302
 (2,443) (267)
                  
Interest expense, net
 
 
 (36) (36)
 
 
 (38) (38)
Change in fair value of derivative liabilities
 
 
 38
 38

 
 
 46
 46
Income tax expense
 
 
 4
 4

 
 
 13
 13
Depreciation and amortization
 
 
 178
 178

 
 
 172
 172
Three Months Ended June 30, 2016Three Months Ended June 30, 2017
Core OEM Advanced Energy Corporate (Other) Total
(In thousands)Core Advanced Energy OEM Corporate (Other) Total
Sales$6,881
 $1,648
 $766
 $
 $9,295
$7,488
 $1,813
 $498
 $
 $9,799
                  
Income (loss) from operations(1)1,836
 1,151
 (1,090) (2,407) (510)2,559
 (1,284) 205
 (2,786) (1,306)
                  
Interest expense, net
 
 
 (50) (50)
 
 
 (36) (36)
Change in fair value of derivative liabilities
 
 
 41
 41

 
 
 38
 38
Income tax expense
 
 
 
 

 
 
 4
 4
Depreciation and amortization
 
 
 173
 173

 
 
 178
 178
 Six Months Ended June 30, 2018
(In thousands)Core Advanced Energy OEM Corporate (Other) Total
Sales$14,303
 $5,742
 $1,346
 $
 $21,391
          
Income (loss) from operations4,522
 (1,370) 708
 (4,991) (1,131)
          
Interest expense, net
 
 
 (72) (72)
Change in fair value of derivative liabilities
 
 
 20
 20
Income tax expense
 
 
 24
 24
Depreciation and amortization
 
 
 371
 371

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BOVIE MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

Six Months Ended June 30, 2017Six Months Ended June 30, 2017
Core OEM Advanced Energy Corporate (Other) Total
(In thousands)Core Advanced Energy OEM Corporate (Other) Total
Sales$14,263
 $1,505
 $2,420
 $
 $18,188
$14,263
 $2,420
 $1,505
 $
 $18,188
                  
Income (loss) from operations(1)5,023
 708
 (2,971) (5,803) (3,043)4,772
 (3,103) 708
 (5,420) (3,043)
                  
Interest expense, net
 
 
 (67) (67)
 
 
 (67) (67)
Change in fair value of derivative liabilities
 
 
 126
 126

 
 
 126
 126
Income tax expense
 
 
 9
 9

 
 
 9
 9
Depreciation and amortization
 
 
 356
 356

 
 
 356
 356
 Six Months Ended June 30, 2016
 Core OEM Advanced Energy Corporate (Other) Total
Sales$13,359
 $2,589
 $1,122
 $
 $17,070
          
Income (loss) from operations2,958
 1,808
 (2,624) (4,645) (2,503)
          
Interest expense, net
 
 
 (88) (88)
Change in fair value of derivative liabilities
 
 
 128
 128
Income tax expense
 
 
 
 
Depreciation and amortization
 
 
 355
 355

We derive revenues from four major product lines: Electrosurgical, Cauteries, Lighting and Other products. We do not review or analyze our four major product lines below net sales. Sales for the product lines are summarized as follows:
 Three Months Ended
June 30,
 Six Months Ended
June 30,
(In thousands)2017 2016 2017 2016
Sales by Product Line       
Electrosurgical$6,206
 $5,078
 $11,536
 $9,330
Cauteries1,873
 1,720
 3,528
 3,554
Lighting948
 800
 1,393
 1,306
Other772
 1,697
 1,731
 2,880
Total$9,799
 $9,295
 $18,188
 $17,070
(1)During the first and second quarter of 2017, marketing expenses were presented as attributable only to the Corporate (Other) segment in the line Income (loss) from operations. It was subsequently determined that certain marketing expenses are attributable to specific segments. The disclosure of Income (loss) from operations was updated for the first and second quarter of 2017 to reflect marketing expense by segment.

International sales represented approximately 15.5% and 17.4% of total revenues for the three and six months ended June 30, 2018, respectively, as compared with 11.1% and 13.7% of total revenues for the three and six months ended June 30, 2017, respectively, as compared with 16.6% and 15.9% of total revenues for the three and six months ended June 30, 2016.2017. Substantially all of these sales are denominated in U.S. dollars. Revenue by geographic region, based on the "ship to"“ship to” location on the invoice, are as follows:
Three Months Ended
June 30,
 Six Months Ended
June 30,
Three Months Ended
June 30,
 Six Months Ended
June 30,
(In thousands)2017 2016 2017 20162018 2017 2018 2017
Sales by Domestic and International              
Domestic$8,708
 $7,757
 $15,700
 $14,372
$9,700
 $8,708
 $17,673
 $15,700
International1,091
 1,538
 2,488
 2,698
1,775
 1,091
 3,718
 2,488
Total$9,799
 $9,295
 $18,188
 $17,070
$11,475
 $9,799
 $21,391
 $18,188

NOTE 12.     SUBSEQUENT EVENTS

On July 9, 2018, we entered into a definitive agreement with Specialty Surgical Instrumentation Inc., a subsidiary of Symmetry Surgical Inc. (“Symmetry”), pursuant to which the Company will divest and sell the Core business segment, including the Bovie® brand and trademarks to Symmetry for gross proceeds of $97 million in cash. The asset purchase agreement was approved by the Company’s Board of Directors and is subject to customary closing conditions, including approval by the Company’s stockholders, and expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. The Company is retaining and will continue to operate its Advanced Energy and OEM businesses, its facilities in Clearwater, FL and Sofia, Bulgaria, and certain intellectual property related to specialty generators.

As of June 30, 2018, the Company concluded that the planned divestitures did not meet the criteria for assets held for sale – discontinued operations set forth in ASC No. 205–20, “Presentation of Financial Statements,” as stockholder approval is required prior to closing of the planned divestiture. The Company continues to classify these businesses in its continuing operations for all periods presented.


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BOVIE MEDICAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANAYLSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS


ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis in conjunction with our financial statements and related notes contained elsewhere in this report. This discussion contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a variety of factors discussed in this report and those discussed in other documents we file with the SEC. In light of these risks, uncertainties and assumptions, readers are cautioned not to place undue reliance on such forward-looking statements. These forward-looking statements represent beliefs and assumptions as of the date of this report. While we may elect to update forward-looking statements and at some point in the future, we specifically disclaim any obligation to do so, even if our estimates change. Past performance does not guarantee future results.

Executive Level Overview

On July 9, 2018, we entered into a definitive agreement with Specialty Surgical Instrumentation Inc., a subsidiary of Symmetry Surgical Inc. (“Symmetry”), pursuant to which the Company will divest and sell the Core business segment, including the Bovie® brand and trademarks to Symmetry for gross proceeds of $97 million in cash. The asset purchase agreement was approved by the Company’s Board of Directors and is subject to customary closing conditions, including approval by the Company’s stockholders, and expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. The Company is retaining and will continue to operate its Advanced Energy and OEM businesses, its facilities in Clearwater, FL and Sofia, Bulgaria, and certain intellectual property related to specialty generators.

Bovie Medical Corporation (“Company”, “Bovie Medical”, “we”, “us”, or “our”) was incorporated in 1982, under the laws of the State of Delaware and has its principal executive office at 4 Manhattanville5115 Ulmerton Road, Suite 106, Purchase, NY 10577Clearwater, FL 33760.

We are an energy-based medical device company specializing in developing, manufacturing and marketing a range of electrosurgical products and technologies, as well as related medical products used in doctor’s offices, surgery centers and hospitals worldwide. Our medical devices are marketed through Bovie’s own well-respected brands (Bovie®, IDS™ and DERMTM) and on a private label basis to distributors throughout the world. We also leverage our expertise in the design, development and manufacturing of electrosurgical equipment by producing equipment for large, well-known medical device manufacturers through original equipment manufacturing (OEM) agreements, as well as start-up companies with the need for our energy based designs.

We are also the developer of J-Plasma;J-Plasma (rebranded as RenuvionTM Cosmetic Technology for the cosmetic surgery market), a patented plasma-based surgical product for cutting, coagulation and ablation of soft tissue. J-PlasmaJ-Plasma/Renuvion system utilizes a helium ionization process to produce a stable, focused beam of plasma that provides surgeons with greater precision, and minimal invasiveness and an absence of conductive currents through the patient during surgery.invasiveness. The new J-PlasmaJ-Plasma/Renuvion handpieces with Cool-Coag™ technology deliver the precision of helium plasma energy, the power of traditional monopolar coagulation and the efficiency of plasma beam coagulation - enabling thin-layer ablation and dissection and fast coagulation with a single instrument, minimizing instrument exchange and allowing a surgeon to focus on their patient and their procedures. With Cool-Coag technology, the new J-PlasmaJ-Plasma/Renuvion handpieces can deliver three distinctly different energy modalities - further increasing the utility and versatility of the J-Plasma system. J-Plasma has been the subject of ten white papers and has been cited therein for its clinical utility in gynecological and plastic surgery procedures.

On November 10, 2016,During 2018, we entered into an underwriting agreement (the “Underwriting Agreement”) with certainwill continue our full scale commercialization efforts for J-Plasma/Renuvion. We have a direct sales force of 19 field-based selling stockholders of the Company (the “Selling Stockholders”) and Piper Jaffray & Co. (the “Underwriter”) relating to public offerings of our common stock, par value $0.001 per share at a public offering price of $4.00 per share. We made a primary offering of 1,625,000 sharesprofessionals and a secondary offeringnetwork of 1,625,000 shares14 independent manufacturing representatives, resulting in a total sales force of 33. This selling organization is focused on the use of J-Plasma for surgical procedures. In addition, we have invested in training programs and marketing-related activities to support accelerated adoption of J-Plasma.

International sales represented approximately 15.5% and 17.4% of total revenues for the three and six months ended June 30, 2018, respectively, as compared with 11.1% and 13.7% of total revenues for the three and six months ended June 30, 2017. Management estimates our products have been sold in more than 150 countries through local dealers coordinated by sales and marketing personnel at the Selling Stockholders.Clearwater, Florida facility.


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BOVIE MEDICAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANAYLSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued


Operating segments are aggregated into reportable segments only if they exhibit similar economic characteristics. In addition to similar economic characteristics we also consider the following factors in determining the reportable segments: the nature of business activities, the management structure directly accountable to our chief operating decision maker for operating and administrative activities, availability of discrete financial information and information presented to the Board of Directors and investors.

Our net proceeds from the salereportable segments are disclosed as principally organized and managed as three operating segments: Core, OEM and Advanced Energy. We adopted reportable segments to align with changes in how we manage our business, review operating performance and allocate resources as a result of the shares, after deductinggrowth in Advanced Energy and the Underwriter’s discountsdiffering behavior of the Core and commissionsOEM product lines.

The OEM segment is primarily development contract and estimated offeringproduct driven. Related expenses payable by us, were approximately $5.8 million. The offerings closed on November 16, 2016.are recorded as cost of sales, therefore no segment specific operating expenses are incurred.

The majority of our core products are marketed through medical distributors, which distribute to more than 6,000 hospitals, and to doctors and other healthcare facilities. New distributors are contacted through responses to our advertising in international and domestic medical journals and our presence at domestic and international trade shows.

International sales represented approximately 11.1% and 13.7% of total revenues for the three and six months ended June 30, 2017, respectively, as compared with 16.6% and 15.9% of total revenues for the three and six months ended June 30, 2016. The decrease in international sales as a percentage of revenue was driven primarily by higher domestic sales, pending product registration in foreign jurisdictions and large international purchase tenders that did not occur in the current period as compared to the same period of 2016. Management estimates our products have been sold in more than 150 countries through local dealers coordinated by sales and marketing personnel at the Clearwater, Florida facility. Our business is generally not seasonal in nature.


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BOVIE MEDICAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANAYLSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued


During 2017, we continued our full scale commercialization efforts for Advanced Energy technology which includes J-Plasma. We have a direct sales force of 17 field-based selling professionals and a network of 14 independent manufacturing representatives, resulting in a total sales force of 31. This selling organization is focused on the use of Advanced Energy technology, primarily J-Plasma, for operating room procedures. In addition, we have invested in training programs and marketing-related activities to support accelerated adoption of Advanced Energy technology.

The Company continuously reviews and refines its marketing strategies and distribution channels regarding the commercialization of Advanced Energy technology as well as initiatives to manage expenses and costs as appropriate for market conditions.

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

Results of Operations

Sales
Three Months Ended
June 30,
   Six Months Ended
June 30,
  Three Months Ended
June 30,
   Six Months Ended
June 30,
  
(In thousands)2017 2016 Change 2017 2016 Change2018 2017 Change 2018 2017 Change
Sales by Reportable Segment                      
Core$7,488
 $6,881
 8.8 % $14,263
 $13,359
 6.8 %$7,784
 $7,488
 4.0% $14,303
 $14,263
 0.3 %
Advanced Energy3,113
 1,813
 71.7% 5,742
 2,420
 137.3 %
OEM498
 1,648
 (69.8)% 1,505
 2,589
 (41.9)%578
 498
 16.1% 1,346
 1,505
 (10.6)%
Advanced Energy1,813
 766
 136.7 % 2,420
 1,122
 115.7 %
Total$9,799
 $9,295
 5.4 % $18,188
 $17,070
 6.5 %
           
Sales by Product Line           
Electrosurgical$6,206
 $5,078
 22.2 % $11,536
 $9,330
 23.6 %
Cauteries1,873
 1,720
 8.9 % 3,528
 3,554
 (0.7)%
Lighting948
 800
 18.5 % 1,393
 1,306
 6.7 %
Other772
 1,697
 (54.5)% 1,731
 2,880
 (39.9)%
Total$9,799
 $9,295
 5.4 % $18,188
 $17,070
 6.5 %$11,475
 $9,799
 17.1% $21,391
 $18,188
 17.6 %
                      
Sales by Domestic and International                      
Domestic$8,708
 $7,757
 12.3 % $15,700
 $14,372
 9.2 %$9,700
 $8,708
 11.4% $17,673
 $15,700
 12.6 %
International1,091
 1,538
 (29.1)% 2,488
 2,698
 (7.8)%1,775
 1,091
 62.7% 3,718
 2,488
 49.4 %
Total$9,799
 $9,295
 5.4 % $18,188
 $17,070
 6.5 %$11,475
 $9,799
 17.1% $21,391
 $18,188
 17.6 %

Overall sales increased by 5.4%17.1% or approximately $0.5$1.7 million for the three months ended June 30, 20172018 when compared with 2016.the same period of 2017. Sales of J-Plasma/Renuvion generators and handpieces were the primary driver of total revenue growth in the first quarter of 2018. Advanced Energy segment sales were $3.1 million, an increase of approximately 71.7% when compared to the same period of 2017 as a result of continued focus of our selling into the cosmetic surgery market. Core segment revenue,sales, which consists of our brand name electrosurgical devices and accessories, cauteries, penlights, lighting, colposcopes and other similar products, increased 8.8%4.0% or approximately $0.6$0.3 million for the three months ended June 30, 2017,2018, when compared with 2016.2017. The OEM segment consists of proprietary products designed specifically for third party equipment manufacturers; revenue for this product line decreased 69.8%increased 16.1% or approximately $1.2$0.1 million due to a one-time order in the comparable period of 2016. Advanced Energy segment sales were $1.8 million, an increase of approximately 136.7% when compared to 2016.

For the three months ended June 30, 2017, the increase in electrosurgical sales was mainly attributable to an increase in sales of generators of $1.1 million.2017.


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MANAGEMENT'S DISCUSSION AND ANAYLSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued


Overall sales increased by 6.5%17.6% or approximately $1.1$3.2 million for the six months ended June 30, 20172018 when compared with 2016.the same period of 2017. Sales of J-Plasma/Renuvion generators and handpieces were the primary driver of total revenue growth in the first quarter of 2018. Advanced Energy segment sales were $5.7 million, an increase of approximately 137.3% when compared to the same period of 2017 as a result of continued focus of our selling into the cosmetic surgery market. Core segment revenue,sales, which consists of our brand name electrosurgical devices and accessories, cauteries, penlights, lighting, colposcopes and other similar products, increased 6.8%0.3% or approximately $0.9$0.0 million for the six months ended June 30, 2017,2018, when compared with 2016.2017. The OEM segment consists of proprietary products designed specifically for third party equipment manufacturers; revenue for this product line decreased 41.9%10.6% or approximately $1.1$0.2 million duewhen compared to a one-time order2017.

Gross Profit
 Three Months Ended
June 30,
   Six Months Ended
June 30,
  
(In thousands)2018 2017 Change 2018 2017 Change
Cost of sales$5,198
 $4,757
 9.3% $10,124
 $8,920
 13.5%
Percentage of sales45.3% 48.5%   47.3% 49.0%  
Gross profit$6,277
 $5,042
 24.5% $11,267
 $9,268
 21.6%
Percentage of sales54.7% 51.5% 

 52.7% 51.0% 


Our gross profit increased by 24.5% or approximately $1.2 million during the three months ended June 30, 2018 when compared to 2017. The primary drivers of the increase were favorable manufacturing variances partially offset by lower margins in the comparable period of 2016. Advanced Energy segment sales were $2.4 million, an increase of approximately 115.7% when comparedattributable to 2016.product mix.

ForOur gross profit increased by 21.6% or approximately $2.0 million during the six months ended June 30, 2017,2018 when compared to 2017. Increased revenue in the Advanced Energy segment was the primary contributor to the increase in electrosurgical sales was mainly attributable to an increasegross profit.  Partially offsetting these gains is the impact of unfavorable manufacturing variances in sales of generators of $2.0 million and accessories of $0.2 million.

Our ten largest customers accounted for approximately 29.2% and 47.6% of trade receivables as of June 30, 2017 and 2016, respectively and approximately 51.7% and 56.2% of net revenuesthe Core segment for the six months ended June 30, 2017 and 2016, respectively. For the six months ended June 30, 2017, McKesson and National Distribution & Contracting Inc. accounted for 15.5% and 10.1% of sales, while for the same period in 2016, McKesson and National Distribution & Contracting Inc. accounted for 16.5% and 9.6% of sales.

Gross Profit
 Three Months Ended
June 30,
   Six Months Ended
June 30,
  
(In thousands)2017 2016 Change 2017 2016 Change
Cost of sales$4,757
 $4,595
 3.5% $8,920
 $9,048
 (1.4)%
Percentage of revenue48.5% 49.4% 

 49.0% 53.0% 

Gross profit$5,042
 $4,700
 7.3% $9,268
 $8,022
 15.5%
Percentage of revenue51.5% 50.6% 0.9% 51.0% 47.0% 4.0%

Our gross profit increased by 7.3% and 15.5% or approximately $0.3 million and $1.2 million during the three and six months ended June 30, 2017 when compared to 2016. The increase was attributed to higher margins in the Advanced Energy segment, driven by higher volume and pricing mix on generator sales and in the Core segment, due to an improved product and pricing mix. The overall increase in margins was partially offset by lower margins in OEM due to a one time order during the comparable period in 2016. Additionally, comparable margins in the six months ended June 30, 2016 were negatively impacted due to a write down of approximately $484,000 for obsolete inventory.2018.

We do not anticipate any material impacthave components and finished goods manufactured in China and imported to our gross profit, material costs, or other costs as a resultthe United States. The Office of the effectUnited States Trade Representative (“USTR”) has imposed new tariffs on the import of inflation or any material impacta number of changing pricesproducts into the United States from China. Management is currently assessing the potential impacts of the new duties on net revenue.our products and intend to use our best efforts to mitigate the potential impacts and protect our competitive position in the marketplace.

Other Costs and Expenses

Research and development
Three Months Ended
June 30,
   Six Months Ended
June 30,
  Three Months Ended
June 30,
   Six Months Ended
June 30,
  
(In thousands)2017 2016 Change 2017 2016 Change2018 2017 Change 2018 2017 Change
Research and Development expense$696
 $592
 17.6% $1,405
 $1,259
 11.6%$816
 $696
 17.2% $1,378
 $1,405
 (1.9)%
Percentage of revenue7.1% 6.4%   7.7% 7.4% 0.3%
Percentage of sales7.1% 7.1%   6.4% 7.7% 


Bringing new, innovative products to marketResearch and enhancing existing products is a critical component of our strategy. As such, spending in R&D as a percentage of sales was 7.1% and 7.7%development spend increased 17.2% for the three months ended June 30, 2018, due to more focused spending on clinical studies and research projects related to cosmetic surgery market.

Research and development spend decreased 1.9% for the six months ended June 30, 2017, respectively. The increases over the same periods in 2016, were primarily driven2018, due to personnel reductions and discontinuation of Core business related contract design agreements partially offset by necessary casemore focused spending on clinical studies and trials for recently developed products, priorresearch projects related to commercialization.cosmetic surgery market.


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MANAGEMENT'S DISCUSSION AND ANAYLSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued


Professional services
Three Months Ended
June 30,
   Six Months Ended
June 30,
  Three Months Ended
June 30,
   Six Months Ended
June 30,
  
(In thousands)2017 2016 Change 2017 2016 Change2018 2017 Change 2018 2017 Change
Professional services expense$480
 $396
 21.2% $870
 $753
 15.4%$681
 $480
 41.9% $1,187
 $870
 36.4%
Percentage of revenue4.9% 4.3% 0.6% 4.8% 4.4% 0.4%
Percentage of sales5.9% 4.9%   5.5% 4.8% 


Professional services increased 41.9% and 36.4% for the three and six months ended June 30, 2018, respectively, versus comparable periods in 2017.The change was primarily attributable to increases in physician consulting and legalexpenses related to the Advanced Energy segment.

Salaries and related costs
 Six Months Ended
June 30,
   Six Months Ended
June 30,
  
(In thousands)2018 2017 Change 2018 2017 Change
Salaries and related expenses$2,118
 $2,243
 (5.6)% $4,234
 $4,703
 (10.0)%
Percentage of sales18.5% 22.9%   19.8% 25.9%  

During the three and six months ended June 30, 2017, professional services expense increased2018, salaries and related expenses decreased approximately 21.2%5.6% and 15.4%10.0%, respectively, compared to the prior year. The changedecrease was attributable to increasesprimarily driven by a reduction in consulting agreements,management and sales related topersonnel and executive compensation versus the Advanced Energy segment and accounting and auditing expense.

Salaries and related costs
 Three Months Ended
June 30,
   Six Months Ended
June 30,
  
(In thousands)2017 2016 Change 2017 2016 Change
Salaries and related expenses$2,243
 $2,200
 2.0% $4,703
 $4,300
 9.4%
Percentage of revenue22.9% 23.7%   25.9% 25.2%  

During the three months ended June 30, 2017, salaries and related expenses increased approximately 2.0% compared to the prior year. The increase was attributable to approximately $115,000comparable period of incentive compensation, partially offset by approximately $73,000 related to decreases in other administrative expenses.

During the six months ended June 30, 2017, salaries and related expenses increased approximately 9.4% or approximately $0.4 million compared to the prior year. The increase was attributable to approximately $0.3 million of incentive compensation and $0.1 million related to administrative, direct sales force and associated management.2017.

Selling, general and administrative expenses
Three Months Ended
June 30,
   Six Months Ended
June 30,
  Three Months Ended
June 30,
   Six Months Ended
June 30,
  
(In thousands)2017 2016 Change 2017 2016 Change2018 2017 Change 2018 2017 Change
SG&A Expense$2,929
 $2,022
 44.9% $5,333
 $4,213
 26.6%$2,929
 $2,929
 % $5,599
 $5,333
 5.0%
Percentage of revenue29.9% 21.8%   29.3% 24.7%  
Percentage of sales25.5% 29.9%   26.2% 29.3%  

Selling, general and administrative expense was flat for the three months ended June 30, 2018 when compared to 2017. A decrease was primarily driven by reductions in travel and entertainment, general insurance and timing differences in marketing, offset by increases from consulting in the Advanced Energy segment and sales commissions.

Selling, general and administrative expense increased by 44.9%5.0% or approximately $0.9 million for the three months ended June 30, 2017, when compared to 2016. We experienced increases in administrative and marketing expense of $0.6 million and sales commissions of $0.4 million, partially offset by decreases of $0.1 million in regulatory consulting and trade show expenses.

Selling, general and administrative expense increased by 26.6% or approximately $1.1$0.3 million for the six months ended June 30, 2017, respectively,2018 when compared to 2016. We experienced increases2017. The increase was driven by consulting in the Advanced Energy segment and sales commissions, of $0.5 million, administrative, regulatory and trade show expenses of $0.5 million and marketing of $0.3 million, partially offset by decreasesreductions in professional servicetravel and entertainment, general insurance of $0.2 million.and timing differences in marketing.


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MANAGEMENT'S DISCUSSION AND ANAYLSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued


Other Income (Expense), net
 Three Months Ended
June 30,
   Six Months Ended
June 30,
  
(In thousands)2017 2016 Change 2017 2016 Change
Interest expense, net$(36) $(50) (28.0)% $(67) $(88) (23.9)%
Percentage of revenue(0.4)% (0.5)%   (0.4)% (0.5)%  
Change in fair value of derivative liabilities$38
 $41
 (7.3)% $126
 $128
 (1.6)%
Percentage of revenue0.4 % 0.4 %   0.7 % 0.7 %  
 Three Months Ended
June 30,
   Six Months Ended
June 30,
  
(In thousands)2018 2017 Change 2018 2017 Change
Interest expense, net$(38) $(36) 5.6% $(72) $(67) 7.5 %
Percentage of sales(0.3)% (0.4)%   (0.3)% (0.4)%  
Change in fair value of derivative liabilities, net$46
 $38
 21.1% $20
 $126
 (84.1)%
Percentage of sales0.4 % 0.4 %   0.1 % 0.7 %  

Interest expense, net

Total net interest expense decreasedincreased, due to a higher LIBOR rate for the three and six months ended June 30, 20172018 as compared with 2016, due to a declinethe comparable periods in the mortgage note principal balance.2017.

Change in fair value of liabilities, net

On December 13, 2013, we entered into a securities purchase agreement pursuant to which we issued 3,500,000 shares of our newly designated Series A 6% Convertible Preferred Stock with a stated value of $2.00 per share and 5,250,000 warrants to purchase our common stock, at an exercise price of $2.387 per share. We also issued 525,000 warrants to the placement agent, of which 94,37540,000 have a strike price of $2.387 and remain outstanding as of June 30, 2017.2018. The warrants are accounted for as derivative financial instruments at fair value and are re-valued each period.

On March 17, 2015, we completed transactions contemplated under an exchange agreement (the “Exchange Agreement”) entered into on March 11, 2015 with certain investors (the “Investors”) with respectAs of June 30, 2018, all remaining warrants were converted to which Great Point Partners, LLC acts as investment manager. Pursuant to the terms of the Exchange Agreement, we issued 3,588,139 shares of our Series B Convertible Preferred Stock (the “Series B Preferred Stock”) in exchange for 3,500,000 shares of our Series A 6% Convertible Preferred Stock and warrants to purchase up to 5,250,000 shares of our common stock inand for the aggregate which were previously issued in conjunction with the sale of our Series A 6% Convertible Preferred Stock to the Investors in a December 13, 2013 offering, as well as accrued and unpaid preferred dividends. The Series B Preferred Stock issued at that time was convertible into an aggregate of 7,176,298 shares of our common stock, upon the terms set forth in the Certificate of Designation. The remaining Series B Preferred Stock atsix months ended June 30, 2017 is convertible into an aggregate of 1,951,278 shares of our common stock.

At June 30, 2017, the placement agent warrants were valued at $0.1 million and2018 we recognized a gainnet loss of $126,000.$20,000.

Income Taxes

We recorded approximately $4,000The Company’s income tax expense was $13,000 and $9,000$24,000 with an effective tax rate of 0.0% for tax provision during the three and six months ended June 30, 2017, respectively. A2018, as compared to $4,000 and $9,000 with an effective tax rate of 0.0% for the three and six months ended June 30, 2017. The Company’s effective tax rate differs from the statutory rate primarily due to the change in the valuation allowance is required to be provided to reduce the deferred tax assets to a level which, more likely than not, will be realized. Management evaluated the positive and negative evidence in determining the realizability of the net deferred tax asset. In determining the need for valuation allowance, we reviewed historic operating results, the current period operating results, as well as future income forecasts based on the projections, management concluded that it was not more likely that the Company should realize itsCompany’s net deferred tax assets through future operating results and the reversal of taxable temporary differences. If in the future we determine that we will be able to realize any of the net deferred tax assets, we will make adjustment to the valuation allowance, which would increase our income in the period that the determination is made.with a finite life.

Product Development

We have developed most of our products and product improvements internally. Funds for this development have come primarily from our internal cash flow and equity issuances. We maintain close working relationships with physicians and medical personnel in hospitals and universities who assist in product research and development. New and improved products play a critical role in our sales growth. We continue to emphasize the development of proprietary products and product improvements to complement and expand our existing product lines. Our research and development team members are based in our Florida office and our facility in Sofia, Bulgaria.

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MANAGEMENT'S DISCUSSION AND ANAYLSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued


Reliance on Collaborative, Manufacturing and Selling Arrangements

We manufacture the majority of our products on our premises in Clearwater, Florida and in Sofia, Bulgaria. Labor-intensive sub-assemblies and labor-intensive products may be out-sourced to our specification. Although we sell through distributors, we market our products through national trade journal advertising, direct mail, distributor sales representatives and trade shows, under the Bovie name and private label. Major distributors include Cardinal Health, Independent Medical Co-Op Inc. (IMCO), McKesson Medical Surgical, Inc., Medline, National Distribution and Contracting Inc. (NDC) and Owens & Minor. If any of these distributor relationships are terminated or not replaced, our revenue from the territories served by these distributors could be adversely affected.


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MANAGEMENT'S DISCUSSION AND ANAYLSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued


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

We also have collaborative arrangements with three key foreign suppliers under which we request the development of certain items and components and we purchase them pursuant to purchase orders. Our purchase order commitments are never more than one year in duration and are supported by our sales forecasts. The majority of our raw materials are purchased from sole-source suppliers. While we believe we could ultimately procure other sources for these components, should we experience any significant disruptions in this key supply chain, there are no assurances that we could do so in a timely manner which could render us unable to meet the demands of our customers, resulting in a material and adverse effect on our business and operating results.

Liquidity and Capital Resources

Our working capital at June 30, 20172018 was approximately $18.5$16.0 million compared with $21.3$16.6 million at December 31, 2016.2017. Accounts receivable days sales outstanding were 4842 days and 4348 days at June 30, 20172018 and 2016,2017, respectively. The number of days sales in inventory, which is the total inventory available for production divided by the 12-month average cost of materials, increased 12decreased 22 days to 179157 days equating to an inventory turn ratio of 2.002.10 at June 30, 20172018 from 167179 days and an inventory turn ratio of 2.00 at June 30, 2016.2017. The higherlower number of days sales in inventory is mainly attributabledue to an increase in sales against flat inventory build in support of new, extended and improved product lines.balances compared to June 30, 2017.

For the six months ended June 30, 2017,2018, net cash used in operating activities was approximately $3.9$1.7 million compared with net cash used by operating activities of approximately $2.4$3.9 million for the same period in 2016.2017. The net cash used in operating activities was attributed to $3.0$1.2 million of net loss, accounts receivable of $0.8 million and increases of inventory of $1.5$1.0 million, and $1.1 million of 2016 incentive compensation paid in 2017, partially offset by other working capital cash inflows of $0.0 million and non-cash inflows of $0.8$1.0 million and changes in working capital of $0.3 million.

Net cash used in investing activities was attributed to purchases of property and equipment for approximately $151,000$332,000 during the six months ended June 30, 2017,2018, compared to $41,000$151,000 cash used for the same period in 2016.2017.

Cash used in financing activities of approximately $119,000$120,000 during the six months ended June 30, 2017,2018, compared to cash used in financing activities of approximately $60,000$119,000 for the same period in 2016.2017.

On June 28, 2016, the Company entered into a transaction with Bank of Tampa, a Florida banking corporation (“Lender”) wherein Lender amended the terms of a mortgage loan (“the Loan”) originally executed on March 20, 2014 with a principal amount of $3,592,000. The Initial Maturity Date of the Loan was extended to July 20, 2019 from March 19, 2017, and the Extended Maturity Date was amended to July 20, 2024 from March 20, 2022. In addition, the Lender released as collateral to the Loan, the Company’s working capital accounts in exchange for a negative covenant limited to $2,000,000 of the aggregate indebtedness secured by these accounts.

The obligations under the Loan are secured by a first mortgage and security interest in the Company’s Clearwater, Florida facility. In addition, the Company has pledged an interest in a certificate of deposit in the amount of $779,000$660,000 as additional collateral. The amount of the additional collateral required declines on a pro rata basis as principal is paid.

Borrowings under the Loan bear interest at LIBOR plus 3.5%, with a fixed monthly principal payment of $19,956. The interest rate at June 30, 20172018 was 4.560%5.501%.


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MANAGEMENT'S DISCUSSION AND ANAYLSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued


The Loan documents contain customary financial covenants, including a covenant that the Company maintains a minimum liquidity of $750,000. Should we desire to extend the Loan beyond July 20, 2019, we must maintain a Debt Service Coverage Ratio for each of the preceding four quarters of not less than 1.0 to 1.0.

Approximate future expected principal and interest payments under the Loan agreement are as follows as of June 30, 2017:
(In thousands) 
2017 (remaining six months)
$124
2018247
20192,541
Total$2,912

At June 30, 2017, we had purchase commitments for inventories totaling approximately $4.0 million, substantially all of which is expected to be purchased by the end of 2017.

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MANAGEMENT'S DISCUSSION AND ANAYLSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued


Approximate future expected principal and interest payments under the Loan agreement are as follows as of June 30, 2018:
(In thousands) 
2018 (remaining six months)
$128
20192,536
Total$2,664

At June 30, 2018, we had purchase commitments for inventories totaling approximately $5.4 million, substantially all of which is expected to be purchased by the end of 2018.

Critical Accounting Estimates

In preparing the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP), we have adopted various accounting policies. Our most significant accounting policies are disclosed in Note 2 to the consolidated financial statements included in our report on Form 10-K for the year ended December 31, 2016,2017, filed on March 10, 2017.13, 2018.

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

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

Inventory reserves

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

Long-lived assets

We review long-lived assets which are held and used, including property and equipment and intangible assets, for impairment whenever changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Such evaluations compare the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset over its expected useful life and are significantly impacted by estimates of future prices and volumes for our products, capital needs, economic trends and other factors that are inherently difficult to forecast. If the asset is considered to be impaired, we record an impairment charge equal to the amount by which the carrying value of the asset exceeds its fair value determined by either a quoted market price, if any, or a value determined by utilizing a discounted cash flow technique.

Derivative liabilities valued at fair value

We generally do not use derivative financial instruments to hedge exposures to cash-flow risks or market-risks. However, certain financial instruments, such as warrants, which are indexed to our common stock, are classified as liabilities when either (a) the holder possesses rights to net-cash settlement or (b) physical or net-share settlement is not within our control. In such instances, net-cash settlement is assumed for financial accounting and reporting purposes, even when the terms of the underlying contracts do not provide for net-cash settlement. Such financial instruments are initially recorded and continuously carried, at fair value.

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


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Stock-based Compensation

Under our stock option plan, options to purchase common shares of the Company may be granted to key employees, officers and directors of the Company by the Board of Directors. The Company accounts for stock options in accordance with FASB ASC Topic 718-10, Compensation-Stock Compensation, with compensation expense amortized over the vesting period based on the trinomial lattice option-pricing model fair value on the grant date, which includes a number of estimates that affect the amount of our expense.

Litigation Contingencies

From time to time, we are exposed toThe medical device industry is characterized by frequent claims and litigation, arisingand we are and may become subject to various claims, lawsuits and proceedings in the ordinary course of our business, including claims by current or otherwiseformer employees, distributors and use various methodscompetitors, and with respect to resolve these mattersour products and product liability claims, lawsuits and proceedings.

We are involved in a mannernumber of legal actions relating to the use of our J-Plasma technology. The outcomes of these legal actions are not within our complete control and may not be known for prolonged periods of time. In the opinion of management, the Company has meritorious defenses, and such claims are adequately covered by insurance, or are not expected, individually or in the aggregate, to result in a material, adverse effect on our financial condition. However, in the event that damages exceed the aggregate coverage limits of our policy or if our insurance carriers disclaim coverage, we believe serves the best interest of the Company and our stockholders. There can be no assuranceit is possible that costs associated with these actions or other third party assertions will be resolved without costly litigation, or in a manner that is not adverse to our financial position. We do not believe that any of the currently identified claims or litigation matters willcould have a material adverse impact on our results of operations, cash flows or financial condition. However, given uncertainties associated with any litigation, if our assessments prove to be wrong, or if additional information becomes available such that we estimate that there is a possible loss or possible range of loss associated with these contingencies, then we would record the minimum estimated liability, which could materially impact our results of operations,consolidated earnings, financial position andor cash flows.

Income Taxes

The provision for income taxes includes federal, foreign, state and local income taxes currently payable and those deferred because of temporary differences between the financial statement and tax bases of assets and liabilities. Deferred tax assets or liabilities are computed based on the difference between the financial statement and income tax bases of assets and liabilities using enacted marginal tax rates. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. Deferred income tax expenses or credits are based on the changes in the asset or liability from period to period.

We have net operating loss and tax credit carry forwards available in certain jurisdictions to reduce future taxable income. Future tax benefits for net operating loss and tax credit carry forwards are recognized to the extent that realization of these benefits is considered more likely than not. This determination is based on the expectation that related operations will be sufficiently profitable or various tax, business and other planning strategies will enable us to utilize the operating loss and tax credit carry forwards. We cannot be assured that we will be able to realize these future tax benefits or that future valuation allowances will not be required. To the extent that available evidence raises sufficient doubt about the realization of a deferred income tax asset, a valuation allowance is established.

It is our policy to provide for uncertain tax positions and the related interest and penalties based upon management’s assessment of whether a tax benefit is more likely than not to be sustained upon examination by tax authorities. To the extent that the probable tax outcome of these uncertain tax positions changes, such changes in estimate will impact the income tax provision in the period in which such determination is made. At June 30, 2017,2018, we believe we have appropriately accounted for any unrecognized tax positions. To the extent we prevail in matters for which a liability for an unrecognized tax benefit is established or we are required to pay amounts in excess of the liability, our effective tax rate in a given financial statement period may be affected.

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

Inflation

Inflation has not materially impacted the operations of our Company.

Off-Balance Sheet Arrangements

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


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Recent Accounting Pronouncements

See Note 4 of the Notes to Consolidated Financial Statements.


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ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

For our disclosures about market risk, please see Part II, Item 7A., "Quantitative“Quantitative and Qualitative Disclosures about Market Risk," in our Annual Report on Form 10-K for the year ended December 31, 2016.2017. We believe there have been no material changes to the information provided therein.

ITEM 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We have carried out an evaluation, under the supervision of and with the participation of our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended), as of June 30, 2017.2018. Based upon that evaluation, our CEO and CFO concluded that, as of the end of that period, our disclosure controls and procedures are effective in providing reasonable assurance that (a) the information required to be disclosed by us in the reports that we filed or submitted under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (b) such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rules 13(a)-15(f) and 15(d)-15(f)) during the six months ended June 30, 20172018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


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PART II.     Other Information

ITEM 1. Legal Proceedings

From time to time, we are exposed toThe medical device industry is characterized by frequent claims and litigation, arisingand we are and may become subject to various claims, lawsuits and proceedings in the ordinary course of our business, including claims by current or otherwiseformer employees, distributors and use various methodscompetitors, and with respect to resolve these mattersour products and product liability claims, lawsuits and proceedings.

We are involved in a mannernumber of legal actions relating to the use of our J-Plasma technology. The outcomes of these legal actions are not within our complete control and may not be known for prolonged periods of time. In the opinion of management, the Company has meritorious defenses, and such claims are adequately covered by insurance, or are not expected, individually or in the aggregate, to result in a material, adverse effect on our financial condition. However, in the event that damages exceed the aggregate coverage limits of our policy or if our insurance carriers disclaim coverage, we believe serves the best interest of the Company and our stockholders. There can be no assuranceit is possible that costs associated with these actions or other third party assertions will be resolved without costly litigation, or in a manner that is not adverse to our financial position. We do not believe that any of the currently identified claims or litigation matters willcould have a material adverse impact on our results of operations, cash flows or financial condition. However, given uncertainties associated with any litigation, if our assessments prove to be wrong, or if additional information becomes available such that we estimate that there is a possible loss or possible range of loss associated with these contingencies, then we would record the minimum estimated liability, which could materially impact our results of operations,consolidated earnings, financial position andor cash flows.

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

ITEM 1A. Risk factors

There have been no material changes to the risk factors previously disclosed in our Form 10-K for the year ended December 31, 2016,2017, in response to Item 1A to Part 1 of Form 10-K.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

ITEM 3. Defaults Upon Senior Securities

None.

ITEM 4. Mine Safety Disclosures

Not Applicable.

ITEM 5. Other Information

None.


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ITEM 6. Exhibits
3.1 
3.2 
3.3 
3.4 
31.1* 
31.2* 
32.1* 
32.2* 
101.INS** XBRL Instance Document
101.SCH** XBRL Taxonomy Extension Schema Document
101.CAL** XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF** XBRL Taxonomy Extension Definition Linkbase Document
101.LAB** XBRL Taxonomy Extension Label Linkbase Document
101.PRE** XBRL Taxonomy Extension Label Presentation Document

* Filed herewith.

** XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended and otherwise is not subject to liability under these sections.


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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 Bovie Medical Corporation 
    
Date: August 3, 20171, 2018By:/s/ Robert L. GershonCharles D. Goodwin II 
  Robert L. GershonCharles D. Goodwin II 
  Chief Executive Officer and Director 
  (Principal Executive Officer) 
    
Date: August 3, 20171, 2018By:/s/ Jay D. Ewers 
  Jay D. Ewers 
  Chief Financial Officer, 
  Treasurer and Secretary 
  (Principal Financial Officer) 


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