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 JuneSeptember 30, 2018
 
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
bovielogoa01.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.)
5115 Ulmerton Road, Clearwater, FL 33760
(Address of principal executive offices, zip code)
(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 growth company” in Rule 12b-2 of the Exchange Act (Check one):
Large accelerated filero Accelerated filero
Non-accelerated fileroý(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 25,October 29, 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 JuneSeptember 30, 2018
(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,
2018
 December 31,
2017
September 30,
2018
 December 31,
2017
ASSETS      
Current assets:      
Cash and cash equivalents$7,875
 $9,949
$40,663
 $9,949
Restricted cash660
 719

 719
Trade accounts receivable, net of allowance of $180 and $2045,592
 4,857
Short term investments55,480
 
Trade accounts receivable, net of allowance of $311 and $2044,080
 4,857
Inventories, net7,533
 6,526
6,037
 4,274
Prepaid expenses and other current assets568
 496
627
 433
Current assets of discontinued operations
 2,315
Total current assets22,228
 22,547
106,887
 22,547
Property and equipment, net6,314
 6,408
5,842
 6,033
Brand name and trademark1,510
 1,510
Purchased technology and license rights, net235
 179
32
 67
Goodwill185
 185
185
 185
Deposits115
 92
46
 92
Other assets67
 67
122
 67
Non-current assets of discontinued operations
 1,997
Total assets$30,654
 $30,988
$113,114
 $30,988
      
LIABILITIES AND STOCKHOLDERS’ EQUITY      
Current liabilities:      
Accounts payable$2,745
 $1,583
$2,348
 $1,583
Accrued severance and related439
 1,242
95
 1,242
Accrued payroll394
 447
163
 447
Current portion of mortgage note payable239
 239

 239
Accrued and other liabilities2,420
 2,462
Accrued taxes and other liabilities19,066
 214
Current liabilities of discontinued operations
 2,248
Total current liabilities6,237
 5,973
21,672
 5,973
Mortgage note payable, net of current portion2,335
 2,455

 2,455
Note payable140
 140
140
 140
Deferred tax liability368
 368

 368
Derivative liabilities
 20

 20
Total liabilities$9,080
 $8,956
$21,812
 $8,956
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
Common stock, $0.001 par value; 75,000,000 shares authorized; 33,763,019 issued and 33,620,444 outstanding as of September 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 capital51,244
 50,495
51,798
 50,495
Accumulated deficit(29,703) (28,496)
Retained earnings (accumulated deficit)39,471
 (28,496)
Total stockholders’ equity21,574
 22,032
91,302
 22,032
Total liabilities and stockholders’ equity$30,654
 $30,988
$113,114
 $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
September 30,
 Nine Months Ended
September 30,
2018 2017 2018 20172018 2017 2018 2017
Sales$11,475
 $9,799
 $21,391
 $18,188
$3,672
 $2,651
 $10,760
 $6,576
Cost of sales5,198
 4,757
 10,124
 8,920
1,151
 738
 3,490
 2,314
Gross profit6,277
 5,042
 11,267
 9,268
2,521
 1,913
 7,270
 4,262
Other costs and expenses:              
Research and development816
 696
 1,378
 1,405
613
 487
 1,890
 1,600
Professional services681
 480
 1,187
 870
628
 421
 1,815
 1,291
Salaries and related costs2,118
 2,243
 4,234
 4,703
2,119
 1,826
 5,734
 6,016
Selling, general and administrative2,929
 2,929
 5,599
 5,333
1,957
 2,012
 6,280
 6,003
Total other costs and expenses6,544
 6,348
 12,398
 12,311
5,317
 4,746
 15,719
 14,910
Loss from operations(267) (1,306) (1,131) (3,043)(2,796) (2,833) (8,449) (10,648)
Interest expense, net(38) (36) (72) (67)
Interest income (expense), net105
 (36) 33
 (103)
Other losses(155) 
 (155) 
Change in fair value of derivative liabilities46
 38
 20
 126

 (69) 20
 57
Total other income (expense), net8
 2
 (52) 59
Loss before income taxes(259) (1,304) (1,183) (2,984)
Income tax expense13
 4
 24
 9
Net loss$(272) $(1,308) $(1,207) $(2,993)
Total other expense, net(50) (105) (102) (46)
Loss from continuing operations before income taxes(2,846) (2,938) (8,551) (10,694)
Income tax (benefit) expense(2,408) 6
 (2,384) 15
Net loss from continuing operations$(438) $(2,944) $(6,167) $(10,709)
Income from discontinued operations, net of tax540
 1,699
 5,062
 6,471
Gain on sale of the Core Business, net of tax69,072
 
 69,072
 
Total income from discontinued operations, net of tax69,612
 1,699
 74,134
 6,471
Net income (loss)$69,174
 $(1,245) $67,967
 $(4,238)
              
Loss per share       
Loss per share from continuing operations       
Basic$(0.01) $(0.09) $(0.19) $(0.35)
Diluted$(0.01) $(0.09) $(0.19) $(0.35)
       
Income per share from discontinued operations       
Basic2.09
 0.05
 2.25
 0.21
Diluted1.99
 0.05
 2.19
 0.21
       
Income (loss) per share       
Basic$(0.01) $(0.04) $(0.04) $(0.10)$2.08
 $(0.04) $2.06
 $(0.14)
Diluted$(0.01) $(0.04) $(0.04) $(0.10)$1.98
 $(0.04) $2.00
 $(0.14)
              
Weighted average number of shares outstanding - basic32,890
 30,860
 32,884
 30,860
33,275
 31,078
 33,014
 30,932
Weighted average number of shares outstanding - dilutive32,890
 30,860
 32,884
 30,860
34,934
 31,078
 33,952
 30,932

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

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Table of Contents
BOVIE MEDICAL CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(In thousands, Unaudited)
Preferred Stock Common Stock      Preferred Stock Common Stock      
Shares Par Value Shares Par Value Additional Paid-In Capital Accumulated Deficit TotalShares Par Value Shares Par Value Additional Paid-In Capital Retained Earnings (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
Options exercised
 
 21
 
 275
 
 275
Conversion of Series B convertible preferred to common stock(976) (1) 1,951
 2
 (1) 
 
Stock based compensation
 
 
 
 341
 
 341

 
 
 
 532
 
 532
Stock swap to acquire options and warrants
 
 
 
 (275) 
 (275)
Net loss
 
 
 
 
 (2,993) (2,993)
 
 
 
 
 (4,238) (4,238)
Balance
June 30, 2017
976
 $1
 30,860
 $31
 $49,966
 $(26,427) $23,571
Balance
September 30, 2017

 $
 32,832
 $33
 $50,156
 $(27,672) $22,517
                          
Balance
December 31, 2017

 $
 32,878
 $33
 $50,495
 $(28,496) $22,032

 $
 32,878
 $33
 $50,495
 $(28,496) $22,032
Options exercised
 
 37
 
 83
 
 83

 
 1,278
 
 3,103
 
 3,103
Warrants exercised
 
 40
 
 95
 
 95

 
 40
 
 95
 
 95
Stock based compensation
 
 
 
 749
 
 749

 
 
 
 1,238
 
 1,238
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
Stock exercise to acquire options and warrants
 
 (576) 
 (3,133) 
 (3,133)
Net income
 
 
 
 
 67,967
 67,967
Balance
September 30, 2018

 $
 33,620
 $33
 $51,798
 $39,471
 $91,302
 

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

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Table of Contents
BOVIE MEDICAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands, Unaudited)
Six Months Ended June 30,Nine Months Ended September 30,
2018 20172018 2017
Cash flows from operating activities      
Net loss$(1,207) $(2,993)
Adjustments to reconcile net loss to net cash used in operating activities:   
Net income (loss)$67,967
 $(4,238)
Adjustments to reconcile net income (loss) to net cash used in operating activities:   
Gain on sale of the Core Business, net of tax(69,072) 
Depreciation and amortization371
 356
429
 527
Provision for inventory obsolescence(52) 83
(Loss) gain on disposal of property and equipment, net(1) 2
Gain on disposal of property and equipment, net
 3
Stock based compensation749
 341
1,238
 532
Change in fair value of derivative liabilities(20) (126)(20) (57)
Unrealized gain on short term investments(47) 
Provision for allowance for doubtful accounts82
 159
123
 128
Changes in current assets and liabilities:   
Benefit of deferred taxes(368) 
Changes in current assets and liabilities, net of effect of disposition:   
Trade receivables(817) (355)654
 528
Prepaid expenses(72) (125)(188) (221)
Inventories(955) (1,507)(1,706) (1,177)
Deposits and other assets(23) (72)(9) 9
Accounts payable1,162
 471
765
 (219)
Accrued and other liabilities(898) (128)(2,601) (250)
Net cash used in operating activities(1,681) (3,894)(2,835) (4,435)
Cash flows from investing activities      
Purchases of technology, property and equipment(332) (151)
Net cash used in investing activities(332) (151)
Purchases of property and equipment(203) (431)
Proceeds from the disposition of Core business91,095
 
Purchases of marketable securities(55,433) 
Net cash from investing activities35,459
 (431)
Cash flows from financing activities      
Proceeds from stock options/warrants exercised65
 
Repayment of mortgage note payable(120) (119)(2,694) (179)
Net cash used in financing activities(120) (119)(2,629) (179)
Net change in cash, cash equivalents and restricted cash(2,133) (4,164)29,995
 (5,045)
Cash, cash equivalents and restricted cash, beginning of period10,668
 15,235
10,668
 15,235
Cash, cash equivalents and restricted cash, end of period$8,535
 $11,071
$40,663
 $10,190
      
Cash paid for:      
Interest paid$72
 $67
Interest (income) expense, net$(33) $103
   
Non cash investing activities:   
Cashless exercise of stock options/warrants3,133
 275

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

5

Table of Contents
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.

We reclassified the financial results of the Core business to discontinued operations and from segment results for all periods presented.

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, 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.

NOTE 2.     DISPOSITION OF THE CORE BUSINESS

On July 9,August 30, 2018, we entered intoclosed on a previously disclosed definitive asset purchase agreement with Specialty Surgical Instrumentation Inc., a Tennessee Corporation and wholly-owned subsidiary of Symmetry Surgical Inc. (“Symmetry”), pursuant to which the Company will divestdivested and sellsold the CoreCompany's electrosurgical "Core" business segment and related intellectual property, including the Bovie® brand and trademarks, to Symmetry for gross proceeds of $97 million in cash. The

In connection with the asset purchase agreement, was approved bywe entered into a previously disclosed Electro Surgical Disposables and Accessories, Cauteries and Other Products Supply Agreement with Symmetry for a four-year term, whereby we will manufacture certain Core products and sell them to Symmetry at agreed upon prices. Any revenue, costs and expenses resulting from this agreement are netted and reported in our Consolidated Statements of Operations as Other gains or losses.

Additionally, in connection with the Company’s Boardasset purchase agreement, we entered into a previously disclosed Manufacture and Supply Agreement with Symmetry for a ten-year term, whereby we will manufacture certain products and sell them to Symmetry at agreed upon prices. Revenue, costs and expenses resulting from this agreement are reported in our Consolidated Statements as income or loss from operations of Directors and is subject to customary closing conditions, including approval byour OEM reporting segment.


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

We concluded that the Company’s stockholders, and expiration or terminationdivestiture of the applicable waiting period underCore business met the Hart-Scott-Rodino Antitrust Improvements Actcriteria for discontinued operations set forth in ASC No. 205, Presentation of 1976.Financial Statements. The Company is retainingtable below summarizes the cash consideration 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.the carrying values of disposed assets at the disposition date of August 30, 2018 included as part of discontinued operations:
(In thousands) 
Gross consideration from the sale of the Core Business$97,000
Closing and transaction costs5,905
Net proceeds from sale of the Core Business before taxes$91,095
  
Book value of the Core Business 
Current assets: 
Inventories, net2,195
Prepaid expenses and other current assets57
Total current assets2,252
Property and equipment, net of depreciation375
Brand name and trademark1,510
Purchased technology and license rights, net of depreciation112
Total non-current assets1,997
Total assets$4,249
  
Current liabilities: 
Accrued inventory liability2,305
Total current liabilities2,305
Total book value of the Core Business$6,554
  
Net gain on sale of the Core Business before taxes84,541
Income tax expense15,469
Net gain on sale of the Core Business after income taxes$69,072

NOTE 2.3.     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,
2018
 December 31,
2017
September 30,
2018
 December 31,
2017
Raw materials$6,093
 $5,163
$5,032
 $5,163
Finished goods3,301
 3,276
1,998
 1,024
Gross inventories9,394
 8,439
7,030
 6,187
Less: reserve for obsolescence(1,861) (1,913)(993) (1,913)
Net inventories$7,533
 $6,526
Net inventories of continuing operations6,037
 4,274
Finished goods of discontinued operations
 2,252
Net inventories of continuing and discontinued operations$6,037
 $6,526


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

NOTE 3.4.     INTANGIBLE ASSETS 

Intangible assets consisted of the following:
(In thousands)June 30,
2018
 December 31,
2017
September 30,
2018
 December 31,
2017
Brand name and trademark (life indefinite)$1,510
 $1,510
Brand name and trademark (life indefinite) of discontinued operations$
 $1,510
      
Purchased technology (5-17 year lives)$1,623
 $1,513
$1,447
 $1,401
Purchased technology (5-17 year lives) of discontinued operations, net
 112
Less: accumulated amortization(1,388) (1,334)(1,415) (1,334)
Purchased technology, net$235
 $179
$32
 $179
      
Goodwill$185
 $185
$185
 $185


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BOVIE MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
The Bovie brand name and trademarks were included in the definitive asset purchase agreement with Specialty Surgical Instrumentation Inc., as previously disclosed.

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. Based on our annual 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 results from our acquisition of Bovie Bulgaria, EOOD.

Amortization of purchased technology was $27,000 and $54,000$81,000 for the three and sixnine months ended JuneSeptember 30, 2018 and 2017, respectively. Amortization expense is classified within selling, general and administration expenses in the consolidated statements of operations.


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

NOTE 4.5.     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’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.

ASU No. 2016-18, Restricted Cash Flows provides guidance on the presentation of restricted cash and restricted cash equivalents, which are now included with cash and cash equivalents when reconciling the beginning and ending cash amounts shown on the statements of cash flows. Using the retrospective transition method required under the standard, the Company has adjusted the presentation of its Condensed Consolidated Statements of Cash Flows for all periods presented. The adoption of ASU No. 2016-18 did not have any other impact on the Company’s Consolidated Financial Statements.

The following table provides additional detail by financial statement line item of the ASU 2016-18 impact in our Consolidated Statement of Cash Flows for the sixnine months ended JuneSeptember 30, 2018 and 2017:
(In thousands)
As Reported
(Pre-Adoption)
 ASU 2016-18
Impact
 
Reported
(Post Adoption)
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     
Nine Months Ended September 30, 2017     
Net change in cash, cash equivalents and restricted cash$(4,164) $
 $(4,164)$(5,045) $
 $(5,045)
Cash, cash equivalents and restricted cash, beginning of period14,456
 779
 15,235
14,456
 779
 15,235
Cash, cash equivalents and restricted cash, end of period$10,292
 $779
 $11,071
$9,411
 $779
 $10,190
ASU No. 2014-09 (ASC 606), Revenue from Contracts with Customers 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 the results of the evaluation, we have determined that the adoption of the new standard presents no material impact on our consolidated financial statements. Application of the transition requirements of the new standard did not have a material impact on opening retained earnings. We have disaggregated revenue by segment and geography in Note 13 Geographic and Segment Information. Based on the current state of our business, management does not see a material reason to disaggregate further.

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 5.6.     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
September 30,
 Nine Months Ended
September 30,
(in thousands, except per share data)2018 2017 2018 20172018 2017 2018 2017
Numerator:              
Net loss available to common shareholders$(272) $(1,308) $(1,207) $(2,993)
Effect of dilutive securities:       
Derivative liability - warrants
 
 
 
Numerator for dilutive loss per common share$(272) $(1,308) $(1,207) $(2,993)
Net loss from continuing operations$(438) $(2,944) $(6,167) $(10,709)
Total income from discontinued operations, net of tax69,612
 1,699
 74,134
 6,471
Net income (loss)$69,174
 $(1,245) $67,967
 $(4,238)
              
Denominator:              
Weighted average shares used to compute basic loss per common share32,890
 30,860
 32,884
 30,860
Weighted average shares used to compute basic income (loss)33,275
 31,078
 33,014
 30,932
Effect of dilutive securities:              
Derivative liability - warrants
 
 
 
Denominator for dilutive loss per common share32,890
 30,860
 32,884
 30,860
Stock options1,659
 
 938
 
Denominator for dilutive income (loss) per share34,934
 31,078
 33,952
 30,932
              
Basic loss per common share$(0.01) $(0.04) $(0.04) $(0.10)
Diluted loss per common share$(0.01) $(0.04) $(0.04) $(0.10)
Loss per share from continuing operations       
Basic$(0.01) $(0.09) $(0.19) $(0.35)
Diluted$(0.01) $(0.09) $(0.19) $(0.35)
       
Income per share from discontinued operations       
Basic$2.09
 $0.05
 $2.25
 $0.21
Diluted$1.99
 $0.05
 $2.19
 $0.21
       
Income (loss) per share       
Basic$2.08
 $(0.04) $2.06
 $(0.14)
Diluted$1.98
 $(0.04) $2.00
 $(0.14)
    
 
       
Anti-dilutive instruments excluded from diluted loss per common share:              
Warrants14
 3
 10
 16

 7
 
 13
Options1,061
 500
 821
 805

 373
 
 771


810

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

NOTE 6.7.     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 $377,000$489,000 and $749,000$1,238,000 in stock-based compensation during the three and sixnine months ended JuneSeptember 30, 2018, respectively, as compared with $182,000$191,000 and $341,000$532,000 for the three and sixnine months ended JuneSeptember 30, 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, 20174,860,157
 $3.00
4,860,157
 $3.00
Granted117,000
 2.95
225,000
 4.08
Exercised(37,250) 2.23
(1,277,615) 2.43
Canceled and forfeited(57,500) 6.55
(225,841) 5.62
Outstanding at June 30, 20184,882,407
 $2.94
Outstanding at September 30, 20183,581,701
 $3.08
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.
2018 Grants2018 Grants
Option value$1.46
-$1.96
$1.46
-$3.07
Risk-free rate1.9%1.9%-2.5%
Expected dividend yield
Expected volatility68.8%60.9%-68.8%
Expected term (in years)66

NOTE 7.8.     INCOME TAXES

The Company’s income tax benefit from continuing operations was $2.4 million and $2.4 million with an effective tax rate of 82.9% and 26.4% for the three and nine months ended September 30, 2018, respectively, as compared to an expense was $13,000of $6,000 and $24,000$15,000 with an effective tax rate of 0.0% for the three and sixnine months ended JuneSeptember 30, 2017, respectively. The increase in the Company’s tax rate for the three and nine months ended September 30, 2018 as compared to $4,000the three months and $9,000 with an effectivenine months ended September 30, 2017, is primarily due to the Company’s ability to offset the 2018 operating loss from continuing operations against the taxable income generated by the extraordinary gain recognized by the income and asset sale reflected in discontinued operations.

The Company recognized tax rateexpense of 0.0%$0.3 million and $1.2 million within net income from discontinued operations for the three and sixnine months ended JuneSeptember 30, 2017.2018, respectively. The Company’s effectiveCompany recognized tax rate differsexpense of $13.2 million and $15.5 million within the gain on sale of the Core Business for the three and nine months ended September 30, 2018, respectively.

Management expects the gain from the statutory rate primarily duesale of the Core business segment to Symmetry will utilize substantially all of the change inhistorical Federal net operating loss carryover of $24.7 million, state(s) net operating loss carryover of $21.2 million, and research and development credit carryover of $1.3 million. As a result, the valuation allowance on the Company’s netthese deferred tax assets withwas released during the third quarter of 2018 and the Company recorded a finite life.tax benefit of $7.8 million from the release of the valuation allowance. The tax benefit of $7.8 million is netted against the tax expenses within net income from discontinued operations and within the gain from asset sales. Pursuant to guidance under ASC 740, for the nine months ended September 30, 2018, continuing operations includes a current benefit of $2.4 million, which reflects the Company’s ability to fully utilize the net operating loss expected to be generated from continuing operations in the 2018 tax year.


11

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

As a result of historical losses, exclusive of discontinued operations, 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.assets beyond the 2018 tax year. 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 thesecontinuing operations improve and it becomes more likely than not that the deferred tax assets arewill be realizable. As Management expects the gain fromCompany to continue to generate loss in the sale offoreseeable future after 2018, the Core business segmentCompany will continue to Symmetry will utilize substantially all of the historical loss carryforwards and therecord a valuation allowance on the remaining deferred tax asset will be reversed duringassets at the third quarterend of 2018, when the transaction is approved by the Company’s stockholders.2018.

For the six months ended June 30, 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 Net Operating Losses), we are subject to income tax audits in the jurisdictions in which we operate.


9

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

NOTE 8.9.     COMMITMENTS CONTINGENCIES AND CONCENTRATIONSCONTINGENCIES

Property and Rental Agreements

In March 2014, we signed a lease for offices located in Purchase, New York. WeIn December 2017, 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 remaining $119,000In August 2018 we negotiated a termination of the remainder of the lease, was expensed in the 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.releasing us from any future obligation.

In October 2015, pursuant to our acquisition of Bovie Bulgaria, we are obligated to pay a lease of $6,006$5,980 per month, expiring in December 2021, for 18,745 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 JuneSeptember 30, 2018:
(In thousands)  
2018 (remaining six months)
$36
2018 (remaining three months)
$18
201972
72
202072
72
202172
72
Total$252
$234

On August 30, 2018, the Company paid the remaining mortgage balance of $2.5 million, releasing us from any and all obligations to the Bank of Tampa.

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.

We are involved in a number 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 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 JuneSeptember 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.

ConcentrationsOur manufacturing services agreements requires Symmetry to provide us with a twelve-month rolling production forecast, of which four months are binding, non-cancelable orders, subject to certain termination rights.

Our ten largest customers accounted for approximately 36.7% and 29.2%
12

Table of trade receivables as of June 30, 2018 and 2017, respectively, and approximately 39.5% and 51.7% of net revenues for the six months ended June 30, 2018 and 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, respectively.Contents
BOVIE MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

NOTE 9.10.     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 Company 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.

10

Table of ContentsNOTE 11.    FINANCIAL INSTRUMENTS
BOVIE MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ContinuedCash, Cash Equivalents and Marketable Securities:
(Unaudited)
(In thousands)Adjusted Cost Unrealized Gains 
Fair Value(3)
 
Cash and Cash Equivalents (1)
 Short-term Marketable Securities
Cash$5,774
   $5,774
 $5,774
  
          
Level 1 (2)
         
U.S. Treasury Securities, maturities less than three months$34,889
 
 $34,889
 $34,889
  
U.S. Treasury Securities, maturities greater than three months$55,433
 $47
 $55,480
 
 $55,480
Total$96,096
 $47
 $96,143
 $40,663
 $55,480

(1) The company considers all highly liquid instruments with maturities of three months or less at the time of purchase to be cash equivalents.

(2) The fair value of the debt securities consisting of U.S. Treasury bills is based on their quoted market prices. The fair value of these financial instruments are classified as Level 1 in the fair value hierarchy.

(3) ASC 825-10 Financial Instruments, allows entities to voluntarily choose to measure certain financial assets and liabilities at fair value (fair value option). The fair value option may be elected on an instrument-by-instrument basis and is irrevocable, unless a new election date occurs. If the fair value option is elected for an instrument, unrealized gains and losses for that instrument should be reported in earnings at each subsequent reporting date. At the date of purchase, the Company elected the fair value option for all investments with maturities of three months or greater at the time of purchase.

NOTE 10.12.     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,

On August 30, 2018, the Lender released as collateralCompany paid the remaining mortgage balance of $2.5 million, releasing us from any and all obligations to the Loan, the Company’s working capital accounts in exchange for a negative covenant limited to $2,000,000Bank of the aggregate indebtedness secured by these accounts.Tampa.

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
13

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

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, 2018 was 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 debt
2018 (remaining six months)
$120
20192,454
Total$2,574

NOTE 11.13.     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.

Our reportable segments are disclosed as principally organized and managed as three operating segments: Core,Advanced Energy, 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.Corporate & Other. The Corporate & Other category includes certain unallocated corporate operational, research and development and marketingadministrative 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 and manufacturing contract and product driven, all related expenses are recorded as cost of sales, therefore no segment specific operating expenses are incurred.


11

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, 2018
(In thousands)Core Advanced Energy OEM Corporate (Other) Total
Sales$7,784
 $3,113
 $578
 $
 $11,475
          
Income (loss) from operations2,666
 (792) 302
 (2,443) (267)
          
Interest expense, net
 
 
 (38) (38)
Change in fair value of derivative liabilities
 
 
 46
 46
Income tax expense
 
 
 13
 13
Depreciation and amortization
 
 
 172
 172
 Three Months Ended September 30, 2018
(In thousands)Advanced Energy OEM Corporate & Other Total
Sales$2,985
 $687
 $
 $3,672
        
(Loss) income from operations(1,155) 368
 (2,009) (2,796)
        
Interest income, net
 
 105
 105
Income tax benefit
 
 (2,408) (2,408)
Depreciation and amortization
 
 58
 58
 Three Months Ended June 30, 2017
(In thousands)Core Advanced Energy OEM Corporate (Other) Total
Sales$7,488
 $1,813
 $498
 $
 $9,799
          
Income (loss) from operations (1)
2,559
 (1,284) 205
 (2,786) (1,306)
          
Interest expense, net
 
 
 (36) (36)
Change in fair value of derivative liabilities
 
 
 38
 38
Income tax expense
 
 
 4
 4
Depreciation and amortization
 
 
 178
 178
Six Months Ended June 30, 2018Three Months Ended September 30, 2017
(In thousands)Core Advanced Energy OEM Corporate (Other) TotalAdvanced Energy OEM Corporate & Other Total
Sales$14,303
 $5,742
 $1,346
 $
 $21,391
$2,126
 $525
 $
 $2,651
                
Income (loss) from operations4,522
 (1,370) 708
 (4,991) (1,131)
(Loss) income from operations(718) 323
 (2,438) (2,833)
                
Interest expense, net
 
 
 (72) (72)
 
 (36) (36)
Change in fair value of derivative liabilities
 
 
 20
 20

 
 (69) (69)
Income tax expense
 
 
 24
 24

 
 6
 6
Depreciation and amortization
 
 
 371
 371

 
 171
 171

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

Six Months Ended June 30, 2017Nine Months Ended September 30, 2018
(In thousands)Core Advanced Energy OEM Corporate (Other) TotalAdvanced Energy OEM Corporate & Other Total
Sales$14,263
 $2,420
 $1,505
 $
 $18,188
$8,727
 $2,033
 $
 $10,760
                
Income (loss) from operations (1)
4,772
 (3,103) 708
 (5,420) (3,043)
(Loss) income from operations(2,525) 1,076
 (7,000) (8,449)
                
Interest expense, net
 
 
 (67) (67)
Interest income, net
 
 33
 33
Change in fair value of derivative liabilities
 
 
 126
 126

 
 20
 20
Income tax expense
 
 
 9
 9

 
 (2,384) (2,384)
Depreciation and amortization
 
 
 356
 356

 
 429
 429
(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.
 Nine Months Ended September 30, 2017
(In thousands)Advanced Energy OEM Corporate & Other Total
Sales$4,546
 $2,030
 $
 $6,576
        
(Loss) income from operations(3,821) 1,031
 (7,858) (10,648)
        
Interest expense, net
 
 (103) (103)
Change in fair value of derivative liabilities
 
 57
 57
Income tax expense
 
 15
 15
Depreciation and amortization
 
 527
 527

International sales represented approximately 15.5%24.8% and 17.4%21.2% of total revenues for the three and sixnine months ended JuneSeptember 30, 2018, respectively, as compared with 11.1%16.6% and 13.7%11.5% of total revenues for the three and sixnine months ended JuneSeptember 30, 2017.2017, respectively. Substantially all of these sales are denominated in U.S. dollars. Revenue by geographic region, based on the “ship to” location on the invoice, are as follows:
 Three Months Ended
June 30,
 Six Months Ended
June 30,
(In thousands)2018 2017 2018 2017
Sales by Domestic and International       
Domestic$9,700
 $8,708
 $17,673
 $15,700
International1,775
 1,091
 3,718
 2,488
Total$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.

 Three Months Ended
September 30,
 Nine Months Ended
September 30,
(In thousands)2018 2017 2018 2017
Sales by Domestic and International       
Domestic$2,763
 $2,212
 $8,481
 $5,821
International909
 439
 2,279
 755
Total$3,672
 $2,651
 $10,760
 $6,576

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Table of Contents
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 5115 Ulmerton Road, Clearwater, FL 33760.

We are an energy-baseda medical devicetechnology company specializing in developing, manufacturing and marketing a rangethe developer 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 (BovieJ-Plasma®, IDS™ (marketed and DERMTM) and on a private label basis to distributors throughoutsold under 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 (rebranded as RenuvionTMRenuvion™ Cosmetic Technology forbrand in the cosmetic surgery market), a patented plasma-based surgical product for cutting, coagulation and ablation of soft tissue. J-Plasma/Renuvion systemJ-Plasma technology utilizes a helium ionization process to produce a stable, focused beam of plasma that provides surgeons with greater precision, and minimal invasiveness. The new J-Plasma/Renuvion handpiecesCompany also leverages its expertise through original equipment manufacturing (OEM) agreements with Cool-Coag™ technology deliverother medical device manufacturers.

On August 30, 2018, we closed on a previously disclosed definitive asset purchase agreement with Specialty Surgical Instrumentation Inc., a Tennessee Corporation and wholly-owned subsidiary of Symmetry Surgical Inc. (“Symmetry”), pursuant to which the precisionCompany divested and sold the Company's electrosurgical "Core" business segment and related intellectual property, including the Bovie® brand and trademarks, to Symmetry for gross proceeds of helium plasma energy, the power$97 million in cash. The divestiture and sale 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 surgeonour Core business segment to Symmetry allows us to further focus on their patientour strategic objective of commercializing our J-Plasma technology, including the RenuvionTM brand in the cosmetic surgery market. The Company and their procedures. With Cool-Coag technology,Symmetry also entered into a transition services agreement, a patent licensing agreement, a disposables supply agreement and a generator manufacturing and supply agreement, the new J-Plasma/Renuvion handpieces can deliver three distinctly different energy modalities - further increasinglatter of which will establish the utilityCompany as an OEM-provider of generators to Symmetry for a period of at least 10 years.

In connection with the asset purchase agreement, we entered into a previously disclosed Electro Surgical Disposables and versatilityAccessories, Cauteries and Other Products Supply Agreement with Symmetry for up to a four-year term, whereby we will manufacture certain Core products and sell them to Symmetry at agreed upon prices. Any revenue, costs and expenses resulting from this agreement are netted and reported in our Consolidated Statements of Operations as Other gains or losses.

In connection with the J-Plasma system. J-Plasma has been the subjectasset purchase agreement, we entered into a previously disclosed Manufacture and Supply Agreement with Symmetry for a ten-year term, whereby we will manufacture certain products and sell them to Symmetry at agreed upon prices. Revenue, costs and expenses resulting from this agreement are reported in our Consolidated Statements as income or loss from operations of ten white papers and has been cited therein for its clinical utility in gynecological and plastic surgery procedures.our OEM reporting segment.

During 2018, we will continuecontinued our full scale commercialization efforts for J-Plasma/Renuvion. We have a direct sales force of 19 field-based selling professionals and a network of 1411 independent manufacturing representatives,sales agencies, resulting in a totalfield sales forceteam of 33.more than 40 representatives. This selling organization is focused on the use of J-Plasma for surgical procedures.Renuvion in the cosmetic surgery market. In addition, we have invested in training programs and marketing-related activities to support accelerated adoption of J-Plasma.Renuvion.

International sales represented approximately 15.5%24.8% and 17.4%21.2% of total revenues for the three and sixnine months ended JuneSeptember 30, 2018, respectively, as compared with 11.1%16.6% and 13.7%11.5% of total revenues for the three and sixnine months ended JuneSeptember 30, 2017. Management estimates our2017, respectively. Our products have beenare sold in more than 15026 countries through local dealers coordinated by sales and marketing personnel at the 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, and availability of discrete financial information and information presented to the Board of Directors and investors.

We reclassified the financial results of the Core business to discontinued operations and from segment results for all periods presented.

Our reportable segments are disclosed as principally organized and managed as three operating segments: Core,Advanced Energy, OEM and Advanced Energy. We adoptedCorporate & Other. The Corporate & Other category includes certain unallocated corporate and administrative costs which were not specifically attributed to any reportable segmentssegment. Net assets are shared, therefore, not allocated 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.

reportable segments. The OEM segment is primarily development and manufacturing contract and product driven. Relateddriven, all related expenses 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.

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. Information on our website does not constitute a part of this Quarterly Report on Form 10-Q.

Results of Operations

Sales
Three Months Ended
June 30,
   Six Months Ended
June 30,
  Three Months Ended
September 30,
   Nine Months Ended
September 30,
  
(In thousands)2018 2017 Change 2018 2017 Change2018 2017 Change 2018 2017 Change
Sales by Reportable Segment                      
Core$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 %2,985
 2,126
 40.4% 8,727
 4,546
 92.0%
OEM578
 498
 16.1% 1,346
 1,505
 (10.6)%687
 525
 30.9% 2,033
 2,030
 0.1%
Total$11,475
 $9,799
 17.1% $21,391
 $18,188
 17.6 %$3,672
 $2,651
 38.5% $10,760
 $6,576
 63.6%
                      
Sales by Domestic and International                      
Domestic$9,700
 $8,708
 11.4% $17,673
 $15,700
 12.6 %$2,763
 $2,212
 24.9% $8,481
 $5,821
 45.7%
International1,775
 1,091
 62.7% 3,718
 2,488
 49.4 %909
 439
 107.1% 2,279
 755
 201.9%
Total$11,475
 $9,799
 17.1% $21,391
 $18,188
 17.6 %$3,672
 $2,651
 38.5% $10,760
 $6,576
 63.6%

Overall sales from continuing operations increased by 17.1%38.5% or approximately $1.7$1.0 million for the three months ended JuneSeptember 30, 2018 when compared with 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 $3.1approximately $3.0 million, an increase of approximately 71.7%40.4% when compared to the same period of 2017 as a result of continued focus of our selling into the cosmetic surgery market. Core segmentmarket and sales which consists of our brand name electrosurgical devices and accessories, cauteries, penlights, lighting, colposcopes and other similar products, increased 4.0% or approximately $0.3 million for the three months ended June 30, 2018, when compared with 2017.growth in international markets. The OEM segment consists of proprietary products designed specifically for third party equipment manufacturers; revenue for this product line increased 16.1%30.9% or approximately $0.1$0.2 million when compared to 2017.

Overall sales from continuing operations increased by 63.6% or approximately $4.2 million for the nine months ended September 30, 2018 when compared with the same period of 2017. Advanced Energy segment sales were approximately $8.7 million, an increase of approximately 92.0% when compared to the same period of 2017 as a result of continued focus of our selling into the cosmetic surgery market and sales growth in international markets. The OEM segment consists of proprietary products designed specifically for third party equipment manufacturers; revenue for this product line was approximately the same when compared to 2017.


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


Overall sales increasedGross Profit
 Three Months Ended
September 30,
   Nine Months Ended
September 30,
  
(In thousands)2018 2017 Change 2018 2017 Change
Cost of sales$1,151
 $738
 56.0% $3,490
 $2,314
 50.8%
Percentage of sales31.3% 27.8%   32.4% 35.2%  
Gross profit$2,521
 $1,913
 31.8% $7,270
 $4,262
 70.6%
Percentage of sales68.7% 72.2% 

 67.6% 64.8% 


Our gross margin decreased by 17.6% or approximately $3.2 million for3.5% during the sixthree months ended JuneSeptember 30, 2018, when compared with 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 sales, which consists of our brand name electrosurgical devices and accessories, cauteries, penlights, lighting, colposcopes and other similar products, increased 0.3% or approximately $0.0 million for the six months ended June 30, 2018, when compared with 2017. The decrease was driven by lower margins in Advanced Energy due to product mix and increased sales growth in international markets where we sell at lower margins through a network of distributors, offsetting higher domestic selling prices and manufacturing efficiencies. Additionally, margins decreased in the OEM segment consists of proprietary products designed specifically for third party equipment manufacturers; revenue for this product line decreased 10.6% or approximately $0.2 million when compared to 2017.

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 profitmargin increased by 24.5% or approximately $1.2 million2.8% during the threenine months ended JuneSeptember 30, 2018, when compared to the same period of 2017. The primary drivers ofincrease was driven by higher margins in the increase were favorable manufacturing variances partially offset by lower margins inOEM segment when compared to 2017. Additionally, the Advanced Energy segment attributablemargins expanded due to product mix.increases in pricing mix partially offset by increased sales growth in international markets where we sell at lower margins through a network of distributors.

Our gross profit increased by 21.6% or approximately $2.0 million duringIn conjunction with the six months ended June 30, 2018 when comparedpreviously disclosed divestment of our electrosurgical Core business segment we performed a review of our standard costs, including the composition of our overhead cost pools. As a result, we reclassified certain overhead costs related to 2017. Increased revenuequality and regulatory to Salaries and Related Costs, in the amount of $62,000. This change in estimate is necessary in order to better reflect the change in operations to our Advanced Energy segment was the primary contributor to the increase in gross profit.  Partially offsetting these gains is the impact of unfavorable manufacturing variances in the Core segment for the six months ended June 30, 2018.

We have components and finished goods manufactured in China and imported to the United States. The Office of the United States Trade Representative (“USTR”) has imposed new tariffs on the import of a number of products into the United States from China. Management is currently assessing the potential impacts of the new duties on our products and intend to use our best efforts to mitigate the potential impacts and protect our competitive position in the marketplace.segment.

Other Costs and Expenses

Research and development
Three Months Ended
June 30,
   Six Months Ended
June 30,
  Three Months Ended
September 30,
   Nine Months Ended
September 30,
  
(In thousands)2018 2017 Change 2018 2017 Change2018 2017 Change 2018 2017 Change
Research and Development expense$816
 $696
 17.2% $1,378
 $1,405
 (1.9)%$613
 $487
 25.9% $1,890
 $1,600
 18.1%
Percentage of sales7.1% 7.1%   6.4% 7.7% 

16.7% 18.4%   17.6% 24.3% 


Spending on Research and development spend increased 17.2%25.9% and 18.1% for the three and nine months ended JuneSeptember 30, 2018, respectively, primarily due to more focused spending on clinical studies and research projects related to the cosmetic surgery market.

ResearchProfessional services
 Three Months Ended
September 30,
   Nine Months Ended
September 30,
  
(In thousands)2018 2017 Change 2018 2017 Change
Professional services expense$628
 $421
 49.2% $1,815
 $1,291
 40.6%
Percentage of sales17.1% 15.9%   16.9% 19.6% 


Professional services expense increased 49.2% and development spend decreased 1.9%40.6% for the sixthree and nine months ended JuneSeptember 30, 2018, duerespectively, versus comparable periods in 2017. The change was primarily attributable to personnel reductionsexpense increases for training-related physician consulting and discontinuation of Core business related contract design agreements partially offset by more focused spending on clinical studieshonorariums for speaking engagements at professional conferences and research projects related to cosmetic surgery market.trade events.


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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,
  
(In thousands)2018 2017 Change 2018 2017 Change
Professional services expense$681
 $480
 41.9% $1,187
 $870
 36.4%
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,
  Three Months Ended
September 30,
   Nine Months Ended
September 30,
  
(In thousands)2018 2017 Change 2018 2017 Change2018 2017 Change 2018 2017 Change
Salaries and related expenses$2,118
 $2,243
 (5.6)% $4,234
 $4,703
 (10.0)%$2,119
 $1,826
 16.0% $5,734
 $6,016
 (4.7)%
Percentage of sales18.5% 22.9%   19.8% 25.9%  57.7% 68.9%   53.3% 91.5%  

During the three and six months ended JuneSeptember 30, 2018, salaries and related expenses increased approximately 16.0%, compared to the prior year. The increase was primarily driven by additional sales-related support personnel compared to the comparable period of 2017.

During the nine months ended September 30, 2018, salaries and related expenses decreased approximately 5.6% and 10.0%4.7%, respectively, compared to the prior year. The decrease was primarily driven by a reduction in management and sales related personnel and
executive compensation versuscompared to the comparable period of 2017.

In conjunction with the previously disclosed divestment of our electrosurgical Core business segment we performed a review of our standard costs, including the composition of our overhead cost pools. As a result, we reclassified certain overhead costs related to quality and regulatory to Salaries and Related Costs, in the amount of approximately $62,000. This change in estimate is necessary in order to better reflect the change in operations to our Advanced Energy segment.

Selling, general and administrative expenses
Three Months Ended
June 30,
   Six Months Ended
June 30,
  Three Months Ended
September 30,
   Nine Months Ended
September 30,
  
(In thousands)2018 2017 Change 2018 2017 Change2018 2017 Change 2018 2017 Change
SG&A Expense$2,929
 $2,929
 % $5,599
 $5,333
 5.0%$1,957
 $2,012
 (2.7)% $6,280
 $6,003
 4.6%
Percentage of sales25.5% 29.9%   26.2% 29.3%  53.3% 75.9%   58.4% 91.3%  

Selling, general and administrative expense was flatdecreased by 2.7% for the three months ended JuneSeptember 30, 2018 when compared to 2017. AThe decrease was primarily driven by sales commissions and reductions in travel and entertainment, general insurance and timing differences in marketing,sample expense, offset by increases from consulting in the Advanced Energy segmentgeneral insurance and sales commissions.marketing.

Selling, general and administrative expense increased by 5.0%4.6% or approximately $0.3 million for the sixnine months ended JuneSeptember 30, 2018 when compared to 2017. The increase was driven by consulting in the Advanced Energy segment, and sales commissions, partiallybank service charges and technology upgrades, slightly offset by reductions in travel and entertainment, general insurance and timing differences in marketing.

sample expense.

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BOVIE MEDICAL CORPORATION
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,
  Three Months Ended
September 30,
   Nine Months Ended
September 30,
  
(In thousands)2018 2017 Change 2018 2017 Change2018 2017 Change 2018 2017 Change
Interest expense, net$(38) $(36) 5.6% $(72) $(67) 7.5 %
Interest income (expense), net$105
 $(36) (391.7)% $33
 $(103) (132.0)%
Percentage of sales(0.3)% (0.4)%   (0.3)% (0.4)%  2.9% (1.4)%   0.3% (1.6)%  
Change in fair value of derivative liabilities, net$46
 $38
 21.1% $20
 $126
 (84.1)%$
 $(69) (100.0)% $20
 $57
 (64.9)%
Percentage of sales0.4 % 0.4 %   0.1 % 0.7 %  % (2.6)%   0.2% 0.9 %  

Interest expense,income (expense), net

Total netNet interest expense increased, dueincome resulted from realized and unrealized interest on cash, cash equivalents and short-term marketable securities, offset by interest paid on our mortgage to a higher LIBOR rate for the three and six months ended JuneBank of Tampa until extinguishment on August 30, 2018 as compared with the comparable periods in 2017.2018.

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 40,000 haveat a strike price of $2.387 and remain outstanding as of June 30, 2018. The warrants are accounted for as derivative financial instruments at fair value and are re-valued each period.

$2.387. As of JuneSeptember 30, 2018, all remaining warrants were converted to common stock and for the sixnine months ended JuneSeptember 30, 2018 we recognized a net loss of $20,000.

Other losses, net

Other losses of $0.2 million for the three and nine months ended September 30, 2018 was in connection with the asset purchase agreement, we entered into a previously disclosed Electro Surgical Disposables and Accessories, Cauteries and Other Products Supply Agreement with Symmetry for a four-year term, whereby we will manufacture certain Core products and sell them to Symmetry at agreed upon prices. Any revenue, costs and expenses resulting from this agreement are netted and reported in our Consolidated Statements of Operations as Other gains or losses.

Income Taxes

The Company’s income tax benefit from continuing operations was $2.4 million and $2.4 million with an effective tax rate of 82.9% and 26.4% for the three and nine months ended September 30, 2018, respectively, as compared to an expense was $13,000of $6,000 and $24,000$15,000 with an effective tax rate of 0.0% for the three and sixnine months ended JuneSeptember 30, 2017, respectively. The increase in the Company’s tax rate for the three and nine months ended September 30, 2018 as compared to $4,000the three months and $9,000 with an effectivenine months ended September 30, 2017, is primarily due to the Company’s ability to offset the 2018 operating loss from continuing operations against the taxable income generated by the extraordinary gain recognized by the income and asset sale reflected in discontinued operations.

The Company recognized tax rateexpense of 0.0%$0.3 million and $1.2 million within net income from discontinued operations for the three and sixnine months ended JuneSeptember 30, 2017.2018, respectively. The Company’s effectiveCompany recognized tax rate differsexpense of $13.2 million and $15.5 million within the gain on sale of the Core Business for the three and nine months ended September 30, 2018, respectively.

Management expects the gain from the statutory rate primarily duesale of the Core business segment to Symmetry will utilize substantially all of the change inhistorical Federal net operating loss carryover of $24.7 million, state(s) net operating loss carryover of $21.2 million, and research and development credit carryover of $1.3 million. As a result, the valuation allowance on these deferred tax assets was released during the third quarter of 2018 and the Company recorded a tax benefit of $7.8 million from the release of the valuation allowance. The tax benefit of $7.8 million is netted against the tax expenses within net income from discontinued operations and within the gain from asset sales. Pursuant to guidance under ASC 740, for the nine months ended September 30, 2018, continuing operations includes a current benefit of $2.4 million, which reflects the Company’s ability to fully utilize the net operating loss expected to be generated from continuing operations in the 2018 tax year.


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


As a result of historical losses, exclusive of discontinued operations, the Company recorded a valuation allowance on the net deferred tax assetsasset with a finite life.life and does not anticipate recording an income tax benefit related to these deferred tax assets beyond the 2018 tax year. 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 the financial results of continuing operations improve and it becomes more likely than not that the deferred tax assets will be realizable. As Management expects the Company to continue to generate loss in the foreseeable future after 2018, the Company will continue to record a valuation allowance on the remaining deferred tax assets at the end of 2018.

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 Clearwater, Florida office and our facility in Sofia, Bulgaria.

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


We are also dependent onperform development services for 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 salesAdditionally, we will function as an OEM-provider of our products.generators to Symmetry for a period of at least 10 years.

We also have collaborative arrangements with threetwo 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 JuneSeptember 30, 2018 was approximately $16.0$85.2 million compared with $16.6 million at December 31, 2017.2017, primarily driven by the gain from the disposition of the Core business. Accounts receivable days sales outstanding were 4241 days and 48 days at JuneSeptember 30, 2018 and 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, decreased 22increased 6 days to 157185 days equating to an inventory turn ratio of 2.102.23 at JuneSeptember 30, 2018 from 179 days and an inventory turn ratio of 2.00 at June 30, 2017. The lower number of days sales in inventory is mainly due to an increase in sales against flat inventory balances compared to JuneSeptember 30, 2017.

For the sixnine months ended JuneSeptember 30, 2018, net cash used in operating activities was approximately $1.7$2.8 million compared with net cash used by operating activities of approximately $3.9$4.4 million for the same period in 2017. The net cash used in operating activities was attributed toNet income of $68.0 million, non-cash inflows of $1.2 million, of net loss, accounts receivable of $0.8 million and increases of inventory of $1.0 million, partially offset by non-cash inflows of $1.0$0.7 million and changes in working capital of $0.3 million, were offset by the gain on the sale of the Core business of $69.1 million and increases of inventory of $1.7 million.

Net cash used infrom investing activities was attributed to proceeds from the disposition of the Core business of $91.1 million, partially offset by purchases of marketable securities of $55.4 million and property and equipment for approximately $332,000$0.2 million during the sixnine months ended JuneSeptember 30, 2018, compared to $151,000approximately $0.4 million cash used for purchases of property and equipment for the same period in 2017.

Cash used in financing activities of approximately $120,000$2.6 million was attributed to the extinguishment of the mortgage note payable of $2.7 million, partially offset by proceeds from the exercise of options of $0.1 million during the sixnine months ended JuneSeptember 30, 2018, compared to cash used in financing activities for the repayment of the mortgage note payable of approximately $119,000$179,000 for the same period in 2017.


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


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,On August 30, 2018, the Lender released as collateralCompany paid off the remaining mortgage balance of $2.5 million, releasing us from any and all obligations to the Loan, the Company’s working capital accounts in exchange for a negative covenant limited to $2,000,000Bank 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 $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, 2018 was 5.501%.

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.


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Table of Contents
BOVIE MEDICAL CORPORATION
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
Tampa.

At JuneSeptember 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.

Our manufacturing services agreements requires Symmetry to provide us with a twelve-month rolling production forecast, of which four months are binding, non-cancelable orders, subject to certain termination rights.


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


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, 2017, filed on March 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.




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


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.


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


Litigation Contingencies

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.

We are involved in a number 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 it is possible that costs associated with these claims could have a material adverse impact on our consolidated earnings, financial position or 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 haveManagement expects the gain from the sale of the Core business segment to Symmetry will utilize substantially all of the historical Federal net operating loss and tax credit carry forwards available in certain jurisdictions to reduce future taxable income. Future tax benefits forcarryover of $24.7 million, state(s) net operating loss carryover of $21.2 million, and research and development credit carryover of $1.3 million. As a result, the valuation allowance on these deferred tax credit carry forwards are recognizedassets was released during the third quarter of 2018 and the Company recorded a tax benefit of $7.8 million from the release of the valuation allowance. The tax benefit of $7.8 million is netted against the tax expenses within net income from discontinued operations and within the gain from asset sales. Pursuant to guidance under ASC 740, for the extent thatnine months ended September 30, 2018, continuing operations includes a current benefit of $2.4 million, which reflects the Company’s ability to fully utilize the net operating loss expected to be generated from continuing operations in the 2018 tax year.

As a result of historical losses, exclusive of discontinued operations, 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 beyond the 2018 tax year. The Company will reassess the 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 variousdeferred tax businessassets each reporting period 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 futurereduce the valuation allowances will not be required. Toallowance to the extent that available evidence raises sufficient doubt about the realizationfinancial results of a deferred income tax asset, a valuation allowance is established.

It is our policy to provide for uncertain tax positionscontinuing operations improve and the related interest and penalties based upon management’s assessment of whether a tax benefit isit becomes more likely than not to be sustained upon examination by tax authorities. To the extent that the probabledeferred tax outcome of these uncertain tax positions changes, such changes in estimateassets will impactbe realizable. As Management expects the income tax provisionCompany to continue to generate loss in the period in which such determination is made. At June 30,foreseeable future after 2018, we believe we have appropriately accounted for any unrecognizedthe Company will continue to record a valuation allowance on the remaining deferred tax positions. Toassets at 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 excessend of the liability, our effective tax rate in a given financial statement period may be affected.2018.

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


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 and Qualitative Disclosures about Market Risk,” in our Annual Report on Form 10-K for the year ended December 31, 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 JuneSeptember 30, 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 sixnine months ended JuneSeptember 30, 2018 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

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.

We are involved in a number 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 it is possible that costs associated with these claims could have a material adverse impact on our consolidated earnings, financial position or cash flows.

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, 2017, in response to Item 1A to Part 1 of Form 10-K.Not Applicable.

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
2.1
3.1 
3.2 
3.3 
3.4 
10.1
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 1,November 2, 2018By:/s/ Charles D. Goodwin II 
  Charles D. Goodwin II 
  President, Chief Executive Officer and Director 
  (Principal Executive Officer) 
    
Date: August 1,November 2, 2018By:/s/ Jay D. Ewers 
  Jay D. Ewers 
  Chief Financial Officer, 
  Treasurer and Secretary 
  (Principal Financial Officer) 


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