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EX-32.2 - EXHIBIT 32.2 - CFO - Apyx Medical Corpa201610-kexhibit322.htm
EX-32.1 - EXHIBIT 32.1 - CEO - Apyx Medical Corpa201610-kexhibit321.htm
EX-31.2 - EXHIBIT 31.2 - CFO - Apyx Medical Corpa201610-kexhibit312.htm
EX-31.1 - EXHIBIT 31.1 - CEO - Apyx Medical Corpa201610-kexhibit311.htm
EX-23.1 - EXHIBIT 23.1 - CONSENT OF FRAZIER & DEETER, LLC - Apyx Medical Corpa201610-kexhibit231.htm
EX-21.1 - EXHIBIT 21.1 - SUBSIDIARIES OF REGISTRANT - Apyx Medical Corpa201610-kexhibit211.htm
 
 
 
 
 
 

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

FORM 10-K

ý ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
 
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
boviecolorhighresolution.jpg
BOVIE MEDICAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
 
11-2644611
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
4 Manhattanville Road, Suite 106, Purchase, NY 10577
(Address of principal executive offices, zip code)
(914) 468-4009
(Issuer’s telephone number)
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each Class
 
Name of each Exchange on which registered
Common Stock, $.001 Par Value
 
NYSE MKT Market
Securities registered under Section 12(g) of the Exchange Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes: o No ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes: o No ý
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):
Large accelerated filer
o
 
Accelerated filer
o
Non-accelerated filer
o
(Do not check if a smaller reporting company)
Smaller reporting company
ý
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
The aggregate market value of the common stock held by non-affiliates computed by reference to the price at which the stock was sold, or the average bid and asked prices of such stock on the NYSE MKT exchange, as of June 30, 2016, the registrant’s most recently completed second fiscal quarter, was approximately $44.4 million.
As of March 6, 2017, 30,859,753 shares of the registrant’s $0.001 par value common stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE
None.
 
 
 
 
 
 



BOVIE MEDICAL CORPORATION
INDEX TO ANNUAL REPORT ON FORM 10-K

December 31, 2016

Part I
 
 
 
Page
Item 1
 
 
Item 1A
 
 
Item 1B
 
 
Item 2
 
 
Item 3
 
 
Item 4
 
 
 
 
 
 
 
Part II
 
 
 
 
Item 5
 
 
Item 6
 
 
Item 7
 
 
Item 7A
 
 
Item 8
 
 
Item 9
 
 
Item 9A
 
 
Item 9B
 
 
 
 
 
 
 
Part III
 
 
 
 
Item 10
 
 
Item 11
 
 
Item 12
 
 
Item 13
 
 
Item 14
 
 
 
 
 
 
 
Part IV
 
 
 
 
Item 15
 
 
Signatures
 
 
 
 

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BOVIE MEDICAL CORPORATION


Cautionary Notes Regarding Forward-Looking Statements

This report contains statements that we believe to be “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements give our current expectations or forecasts of future events. Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe,” “project,” or “continue,” or similar words or the negative thereof. From time to time, we also may provide oral or written forward-looking statements in other materials we release to the public. Any or all of our forward-looking statements in this report and in any public statements we make could be materially different from actual results. They can be affected by assumptions we might make or by known or unknown risks or uncertainties. Consequently, we cannot guarantee any forward-looking statements. Investors are cautioned not to place undue reliance on any forward-looking statements. Investors should also understand that it is not possible to predict or identify all such factors and should not consider the risk factors discussed in Item 1A below to be a complete statement of all potential risks and uncertainties. Past performance is no guaranty of future results.

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BOVIE MEDICAL CORPORATION

PART I
 
ITEM 1. Business

General

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

We are an energy-based medical device company specializing in developing, manufacturing and marketing a range of electrosurgical products and technologies, as well as related medical products used in doctor’s offices, surgery centers and hospitals worldwide. Our medical devices are marketed through Bovie’s own well-respected brands (Bovie®, IDS™, ICON™ and DERMTM) and on a private label basis to distributors throughout the world. The Company also leverages its 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; a patented helium-based plasma surgical product which we believe has the potential to be a transformational product for surgeons. J-Plasma has FDA clearance for the cutting, coagulation and ablation of soft tissue. The J-Plasma system consists of an electrosurgical generator unit (ESU), a handpiece and a supply of helium gas. Radiofrequency (RF) energy is delivered to the handpiece by the ESU and used to energize an electrode. When helium gas is passed over the energized electrode, a helium plasma is generated which allows for conduction of the RF energy from the electrode to the patient in the form of a precise helium plasma beam. The energy delivered to the patient via the helium plasma beam is very precise and cooler in temperature in comparison to other surgical energy modalities such as standard RF monopolar energy. J-Plasma has been the subject of ten white papers and has been cited therein for its clinical utility in gynecological and plastic surgery procedures.

Significant Subsidiaries

Aaron Medical Industries, Inc. is a wholly-owned Florida corporation based in Clearwater, Florida. It is principally engaged in the business of marketing our medical products.

Bovie Bulgaria, EOOD is a wholly-owned limited liability company incorporated under Bulgarian law, located in Sofia, Bulgaria. It is engaged in the business of engineering and manufacturing our electrosurgical and OEM products.

Industry

Healthcare reform has caused consolidation among providers, with hospitals merging, physician practices joining hospitals and institutions combining to form Accountable Care Organizations, to manage patients on an interdisciplinary basis. Although the medical device industry can be challenging and very competitive, we believe it will continue to have a positive, long-term growth trajectory with the number of surgical procedures performed increasing annually as a result of the aging “baby boomer” population and other healthcare trends. Additionally, we also anticipate a continued increase in minimally invasive surgical procedures due to ongoing advancements in technology coupled with continued overall pressure to reduce healthcare costs via a reduction in patient trauma and recovery time. Markets will also continue to provide growth opportunities for the medical device industry.

We believe that Bovie Medical has sustainable, competitive advantages in the medical device market for several reasons. We have a long history in electrosurgery. Our inspiration dates back to the first use of an electrosurgical generator in an operating room in the U.S. in 1926 where Dr. William T. Bovie was present. Thus, the Bovie name is recognized by surgeons the world over for having pioneered the electrosurgery field and is recognized for its outstanding product quality supported by strong engineering and research and development capabilities. This history equates to very strong recognition of the Bovie brand. We believe that our equipment and devices have and will continue to provide better experiences for patients at a lower cost to the healthcare system.

Business Strategy

Our objective is to achieve profitable, sustainable growth by increasing our market share in the advanced energy category, including the commercialization of products that have the potential to be transformational with respect to the results they produce for surgeons and patients. In order to achieve this objective, we plan to leverage our long history in the industry, along with the reputation for quality and reliability that the Bovie brand enjoys within the medical community. At the same time, we will expand our product offerings beyond radio frequency devices, move forward with research and developments projects aimed at creating value within our existing product portfolio and build our pipeline of new complementary products and utilize multiple channels to bring new and existing products to market.

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BOVIE MEDICAL CORPORATION

We are working to build our position in advanced electrosurgical generators and disposables, which can be used in diversified niche markets with minimally invasive surgical instruments, while furthering our status as a pioneer in plasma technology and its various medical applications.

Our J-Plasma product initially received FDA clearance in 2012 and a CE mark in December, 2014, which enables us to sell the product in Europe. In 2014, we brought together a new management team and created and trained a direct sales force dedicated to J-Plasma. In 2015, we continued the commercialization process for J-Plasma with a multi-faceted strategy designed to accelerate adoption of the product. This strategy primarily involved deployment of a dedicated sales force, extending and customizing the J-Plasma product line and expanding the surgical specialties in which J-Plasma can become the “standard of care“ for certain procedures.

By the end of 2016, we had 17 field-based selling professionals and a network of 18 independent manufacturing representatives, resulting in a total sales force of 35. This is a hospital based selling organization with its focus on the use of J-Plasma for operating room procedures.

Additionally, in 2015, we launched six new J-Plasma hand piece configurations and the Bovie Ultimate generator, which combines J-Plasma functionality with standard electrosurgery modes in one generator. In 2016, we launched our Precise 360 hand piece, which has an angled and rotating tip that enables surgeons to access structures that are difficult to reach using a straight laparoscopic device. The Precise 360 Handpiece was named “Innovation of the Year” by the Society of Laparoendoscopic Surgeons (SLS) at their annual meeting in September 2016. The Bovie Ultimate Generator received a similar recognition in both 2015 and 2014. As a result of our sales, marketing and product development initiatives in 2016, we have significantly increased the number of surgeons using the product, gained approvals for the sale of J-Plasma from Hospital Value Analysis Committees and signed agreements for the use of J-Plasma by the members of Group Purchasing Organizations that serve the medical community.

In order to assist us in leveraging J-Plasma’s precision and effectiveness in multiple surgical specialties, we launched a Medical Advisory Board in 2015 which is currently comprised of surgeons who are recognized leaders in urology, cardiovascular and cardiothoracic surgery. In 2016, we added an additional surgeon to this board from the GYN surgical specialty.

We are continuing to make substantial investments in the development and marketing of our J-Plasma technology for the long term benefit of the Company and its stakeholders and this may adversely affect our short term profitability and cash flow, particularly over the next 12 to 24 months. While we believe that these investments have the potential to generate additional revenues and profits in the future, there can be no assurance that J-Plasma will be successful or that such future revenues and profitability will be realized. From June of 2010 through December 31, 2015, we invested approximately $11.0 million in the development and marketing of our J-Plasma technology and an additional approximately $8.1 million in 2016, bringing the total investment to approximately $19.1 million since inception.

Company Products

We group our products into three main categories: electrosurgery, battery-operated cauteries and other products. Information regarding sales by product categories and related percentages can be found in our annual and quarterly reports filed with the SEC. We manufacture and market various medical products, both under private label and the Bovie brands (Bovie, IDS, ICON and DERM), to distributors worldwide. Additionally, Bovie has original equipment manufacturing (OEM) agreements with other medical device manufacturers. These OEM and private label arrangements and our use of the Bovie brands enable us to gain greater market share for the distribution of our products.

Electrosurgery Products

Electrosurgery is our largest product line and includes desiccators, generators, electrodes, electrosurgical pencils and various ancillary disposable products. These electrosurgical products are used during surgical procedures in gynecology, urology, plastic surgery, dermatology, veterinary and other surgical markets for the cutting and coagulation of tissue. It is estimated that electrosurgery is used in 80% of all surgical procedures. Our electrosurgery products fall under two categories, monopolar and bipolar. Monopolar products require the use of a grounding pad attached to the patient for the return of the electrical current, while bipolar products consist of two electrodes; one for the inbound current and one for the return current and therefore do not require the use of a grounding pad.


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DERM101 and DERM 102

These effective and economical 10 watt high frequency desiccators provide a low wattage platform for minor in-office skin procedures. We designed these products specifically for family practice physicians, pediatricians and other general practitioners, enabling them to perform simple skin procedures in their offices instead of referring the patient to a specialist saving the patient time and providing additional revenue generating procedures for the physician.

DERM A942, Bantam|Pro A952 and Specialist|Pro A1250S

Bovie’s line of electrosurgical generators has been recently updated to provide a more modern look for today’s physician office with added features.

The new Bovie DERM A942 is a low powered 40-watt high frequency desiccator designed primarily for the dermatology and family practice physicians. These units are used mainly for removing skin lesions and growths as well as for coagulation in office-based procedures. The A942 is an upgrade from the previous version A940.

The Bovie Bantam|Pro A952 is a 50-watt high frequency desiccator with the added feature of a cut capacity for outpatient surgical procedures. In effect, the Bovie Bantam|Pro is two independent surgical devices in one small package. The Bantam|Pro replaces the Aaron A950 but with the added feature of Bovie NEM (neutral electrode monitoring), a safety feature that reduces the potential for alternate site burns. This unit is designed mainly for use in doctors’ offices and is used in a broad range of specialties including dermatology, gynecology, family practice, urology, plastic surgery and ophthalmology.

The Bovie Specialist|Pro A1250S is a 120-watt multipurpose electrosurgery generator. The unit features monopolar and bipolar functions with pad sensing. This product is considered to be ideally suited for office-based procedures in the specialties of gynecology, plastic surgery and urology.

Bovie Surgicenter|Pro A2350 - IDS210, Bovie OR|Pro A3350 - IDS310 and IDS400

To address market demand for more powerful electrosurgical generators, Bovie developed 200, 300 and 400-watt multipurpose digital electrosurgery generators designed for the rapidly expanding surgi-center market and the hospital outpatient and inpatient markets. This equipment includes digital hardware that enables very high parallel data processing throughout the operation or procedure. All data is sampled and processed digitally. For the first time in electrosurgery, generators are able to measure tissue impedance in real time (5,000 times a second) thanks to the utilization of digital technology. The design of these units is based on a digital feedback system. By using dedicated digital hardware in place of a general purpose controller for processing data, our equipment enables the power to be adjusted as the impedance varies, to deliver a consistent clinical effect.

Bovie Surgicenter|Pro A2350 and IDS210 are 200-watt generators that have the capability to be used in the majority of procedures performed today in surgi-center or outpatient settings. Although 200 watts is adequate to do most procedures in the operating room, 300 watts is considered the standard and believed to be what most hospitals and surgi-centers will require. To meet this requirement, we developed Bovie OR|Pro A3350 - IDS310. The Bovie OR|Pro and IDS310 incorporate the best features of the IDS 300 and upgrade its capabilities by providing additional bipolar options, including the 225-watt Bovie bipolar and an auto bipolar feature. The 300 watt units also offer the capability to utilize two pencils with simultaneous activation in fulguration mode. In addition, these newer models meet new standards required to sell these products in many of the global markets. The Bovie IDS 400 is a 400-watt generator designed primarily for sale in markets outside of the United States. These units feature both monopolar and bipolar functions, have pad and tissue sensing and include nine blended cutting setting.

Electrosurgical Disposables

ResistickII

Resistick II is a trademarked and proprietary coating that is applied to stainless steel that resist eschar (scab or scar tissue caused by burning) during surgery. We have experienced strong demand for this product since its introduction in 2011 and it represents our continued expansion of the Bovie line of electrosurgical disposables.


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Disposable Laparoscopic Electrodes

We have introduced a line of disposable laparoscopic electrodes in Resistick coated and stainless steel for use by physicians from a broad group of specialties including gynecology, general surgery and urology. These electrodes are offered in J-hook, L-hook, needle, ball and spatula design and have an adapter included which makes these laparoscopic electrodes usable with a 3/32“ or 4mm plug.

Cauteries

Battery Operated Cauteries

Battery operated cauteries were originally designed for precise hemostasis (to stop bleeding) in ophthalmology. The current use of cauteries has been substantially expanded to include a broad range of applications. Battery operated cauteries are primarily sterile one-time use products. We have continued to improve our offering and recently had a patent issued covering our snap design cautery. It features a switch mechanism that dramatically reduces the potential for accidental activation. We manufacture one of the broadest lines of cauteries in the world, including but not limited to, a line of replaceable battery and replaceable tip cauteries, which are popular in veterinary and overseas markets.

Other Products

Battery Operated Medical Lights

We manufacture and market a variety of specialty lighting instruments for use in ophthalmology as well as distribute specialty lighting instruments for general surgery, hip replacement surgery and for the placement of endotracheal tubes in emergency and surgical procedures. We also manufacture and market physicians’ office use penlights used in physician offices.

Nerve Locator Stimulator

We manufacture a nerve locator stimulator primarily used for identifying motor nerves in hand and facial reconstructive surgery. This instrument is a sterile, self-contained, battery-operated unit, for one time use.

Growth Products

During 2016, Growth Products consisted of the J-Plasma line of products. Bovie’s J-Plasma technology utilizes a helium ionization process producing a stable thin focused beam of ionized gas that can be controlled in a wide range of temperatures and intensities, providing the surgeon greater control and predictability with minimal thermal damage to surrounding tissue. The development of this helium plasma generator also includes the design of a new proprietary handpiece.

In March 2015, we launched The Bovie Ultimate™ generator. The Bovie Ultimate is a high frequency electrosurgical generator that can be used for delivery of RF energy and/or helium gas plasma to cut, coagulate and ablate soft tissue during open and laparoscopic surgical procedures. The generator offers users monopolar, bipolar and J-Plasma features in a single generator. It has both FDA clearance and CE Mark.

J-Plasma Disposable Portfolio

We offer different hand pieces for open and laparoscopic procedures. The helium-based plasma generated from these devices have been shown to cause less thermal damage to tissue than CO2 laser, argon plasma and RF energy products currently available on the market. The technology has a general indication and can be used for cutting, coagulating and ablating soft tissue. The two primary specialties that are targeted in phase one of the product launch are gynecology and plastic surgery. However, given the wide range of tissue applications for J-Plasma, we are now engaged in ongoing development to create products for urology, cardiovascular and cardiothoracic procedures. The advantages of helium plasma continue to be studied throughout the medical and scientific communities. We believe that surgical applications are just one area of opportunity for this technology.

In March 2016, we expanded our offering of laparoscopic hand pieces by introducing the J-Plasma Precise™ 360 configurations to the market. The four new J-Plasma Precise 360 configurations include two new lengths with either a blade or needle electrode with an angled tip that can be rotated 360 degrees by the user. These new configurations expand the procedure base for J-Plasma by providing surgeons with the tools they need to access additional anatomic locations.

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BOVIE MEDICAL CORPORATION

Research and Development and New Products

Our research and development activities are an essential component of our efforts to develop innovative products for introduction in the marketplace to drive sales growth. We continue to emphasize the development of proprietary products and product improvements to complement and expand our existing product lines. In 2016, we spent approximately $2.6 million in R&D versus approximately $2.2 million during 2015, an increase of approximately 21.2%. Bovie products introduced to the market in 2016 as a result of our internal research and development opportunities include: J-Plasma Precise 360 hand pieces, the PlazXact™ arthroscopic ablator, the A952 and DERM 942 office based electrosurgical generators, the RF-1254 4MHz electrosurgical generator, and multiple new electrosurgical generators for OEM customers.

Sales & Marketing

The majority of our core products are marketed through medical distributors, which distribute to more than 6,000 hospitals and to doctors and other healthcare facilities. New distributors are contacted through responses to our advertising in international and domestic medical journals and our presence at domestic and international trade shows. International sales represented approximately 12.5% of total revenues in 2016, compared to approximately 16.9% in 2015. The decrease in international sales as a percentage of revenue is due to the discontinuation of certain international relationships and product offerings versus an increase in domestic sales and channel partnerships in Growth Products. Management estimates our products have been sold in more than 150 countries through local dealers coordinated by sales and marketing personnel at our Clearwater, Florida facility.

Competition

We compete with numerous manufacturers and distributors of medical supplies and devices, many of which are large and well-established. With the exception of J-Plasma and endoscopic instrumentation, which are sold directly to the end-user under our own brand, many of our products are private labeled. The majority of the products in our core business are sold through distributors under the Bovie label. The balance is private labeled for major distributors who sell it under their own name. By having private labeled and branded distribution, we are able to increase our position in the marketplace and compete with much larger organizations. While our private label customers distribute products through their internal sales force, the majority of our products are sold through distributors which increase our sales potential and help level the playing field relative to our large competitors that sell direct. Domestically, we continue to believe that we have a substantial market share in the field of electrosurgical generator manufacturing through our Bovie branded and OEM units.

Our main competitors in electrosurgical and accessory markets are Valleylab (a division of Medtronic), Conmed and Erbe Electromedizine. In the battery-operated cautery market, our main competitor is Beaver Visitec and in the endoscopic instrumentation market, it is Ethicon (a division of Johnson and Johnson) and Covidien Surgical Solutions. Currently, we are the only company with helium-based plasma and retractable blade products. However, there are argon plasma competitors and CO2 laser competitors for our target market. We believe our competitive position did not change in 2016.

Intellectual Property

We rely on our intellectual property that we have developed or acquired over the years including patents, trade secrets, technical innovations and various licensing agreements to provide our future growth and build our competitive position. We have been issued 33 patents in the United States and 19 foreign patents. We have 17 pending patent applications in the United States and 9 pending foreign applications. Our intellectual property portfolio for the technology and products related to Growth products is included in these totals and continues to grow. Specific to Growth products, we have been issued 15 U.S. and five foreign patents and we have 14 U.S. and six foreign applications pending. As we continue to expand our intellectual property portfolio we believe it is critical for us to continue to invest in filing patent applications to protect our technology, inventions and improvements. However, we can give no assurance that competitors will not infringe on our patent rights or otherwise create similar or non-infringing competing products that are technically patentable in their own right.


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Manufacturing and Suppliers

We are committed to producing the most technically advanced and highest quality products of their kind available on the market. We manufacture the majority of our products on our premises in Clearwater, Florida and at our facility located in Sofia, Bulgaria, which are certified under the ISO international quality standards and are subject to continuing regulation and routine inspections by the FDA to ensure compliance with regulations relating to our quality system, medical device complaint reporting and adherence to FDA restrictions on promotion and advertising. In addition, we are subject to regulations under the Occupational Safety and Health Act, the Environmental Protection Act and other federal, state and local regulations.

During the fourth quarter of 2015, we acquired all of the outstanding shares of Bovie Bulgaria, EOOD. Bovie Bulgaria operates a 16,000 square foot ISO13485 certified and FDA registered manufacturing facility located in the capital city of Sofia, which houses manufacturing, development and assembly operations.

We also have collaborative arrangements with three foreign suppliers under which we request the development of certain items and components, which we purchase pursuant to purchase orders. Our purchase order commitments are never more than one year in duration and are supported by our sales forecasts.

Customers

We sell the majority of our current products through major distributors which include Cardinal Health, Independent Medical Co-Op Inc. (IMCO), McKesson Medical Surgical, Inc., Medline, National Distribution and Contracting Inc. (NDC) and Owens & Minor and have manufacturing agreements for private label of certain products with these and others.

During 2016, J-Plasma was named as an Innovative Technology by Vizient, the largest group purchasing organization (GPO) in the United States. In 2015, we signed long-term agreements with three GPO's and believe that partnering with GPO’s is critical to our sales efforts and J-Plasma commercialization efforts.

Backlog

The value of unshipped factory orders is not material.

Employees

At December 31, 2016, we had 217 full-time employees world-wide, of whom 6 were executive officers, 35 supervisory personnel, 17 sales personnel and 159 technical support, administrative and production employees. None of our current employees are covered by a collective bargaining agreement and we have never experienced a work stoppage. We consider our employee relations to be good.


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ITEM 1A. Risk factors

In addition to risks and uncertainties in the ordinary course of business, important risk factors that may affect us are discussed below. Additional risks not presently known to us or that we currently believe are immaterial may also significantly impair our business operations.

Risks Related to Our Industry

The medical device industry is highly competitive and we may be unable to compete effectively.

The medical device industry is highly competitive. Many competitors in this industry are well-established, do a substantially greater amount of business and have greater financial resources and facilities than we do.

Domestically, we believe we rank third in the number of units sold in the field of electrosurgical generator manufacturing and we sell our products and compete with other manufacturers in various ways. In addition to advertising, attending trade shows and supporting our distribution channels, we strive to enhance product quality and functionality, improve user friendliness and expand product exposure.

We have also invested and continue to invest, substantial resources to develop and monetize our J-Plasma technology. If we are unable to gain acceptance in the marketplace of J-Plasma, our business and results of operations may be materially and adversely affected. From June of 2010 through December 31, 2016, we have invested approximately $19.1 million in the development and marketing of our J-Plasma technology.

We also compete by private labeling our products for major distributors under their label. This allows us to increase our position in the marketplace and thereby compete from two different approaches, our Bovie label and our customers’ private label. Our private label customers distribute our products under their name through their internal sales force. We believe our main competitors do not private label their products.

Lastly, at this time, we sell the majority of our products through distributors. Many of the companies we compete with sell direct, thus competing directly with distributors they sometimes use.

Our industry is highly regulated by the U.S. Food and Drug Administration and international regulatory authorities, as well as other governmental, state and federal agencies which have substantial authority to establish criteria which must be complied with in order for us to continue in operation.

United States

Our products and research and development activities are subject to regulation by the FDA and other regulatory bodies. FDA regulations govern, among other things, the following activities:

Product development
Product testing
Product labeling
Product storage
Pre-market clearance or approval
Advertising and promotion
Product traceability and
Product indications.

In the United States, medical devices are classified on the basis of control deemed necessary to reasonably ensure the safety and effectiveness of the device. Class I devices are subject to general controls. These controls include registration and listing, labeling, pre-market notification and adherence to the FDA Quality System Regulation. Class II devices are subject to general and special controls. Special controls include performance standards, post market surveillance, patient registries and FDA guidelines. Class III devices are those which must receive pre-market approval by the FDA to ensure their safety and effectiveness. Currently, we only manufacture Class I and Class II devices. Pre-market notification clearance must be obtained for some Class I and most Class II devices when the FDA does not require pre-market approval. All of our products have been cleared by, or are exempt from, the pre-market notification process.

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A pre-market approval application is required for most Class III devices. A pre-market approval application must be supported by valid scientific evidence to demonstrate the safety and effectiveness of the device. The pre-market approval application typically includes:

Results of bench and laboratory tests, animal studies and clinical studies
A complete description of the device and its components; and
A detailed description of the methods, facilities and controls used to manufacture the device and proposed labeling.

The pre-market approval process can be expensive, uncertain and lengthy. A number of devices for which pre-market approval has been sought by other companies have never been approved for marketing.

International Regulation

To market products in the European Union, our products must bear the “CE” mark. Manufacturers of medical devices bearing the CE mark have gone through a conformity assessment process that assures that products are manufactured in compliance with a recognized quality system and to comply with the European Medical Devices Directive.

Each device that bears a CE mark has an associated technical documentation that includes a description of the following:

Description of the device and its components,
A Summary of how the device complies with the essential requirements of the medical devices directive,
Safety (risk assessment) and performance of the device,
Clinical evaluations with respect to the device,
Methods, facilities and quality controls used to manufacture the device and
Proposed labeling for the device.

Manufacturing and distribution of a device is subject to ongoing surveillance by the appropriate regulatory body to ensure continued compliance with quality system and reporting requirements.

We began CE marking of devices for sale in the European Union in 1999. In addition to the requirement to CE mark, each member country of the European Union maintains the right to impose additional regulatory requirements.

Outside of the European Union, regulations vary significantly from country to country. The time required to obtain approval to market products may be longer or shorter than that required in the United States or the European Union. Certain European countries outside of the European Union do recognize and give effect to the CE mark certification. We are permitted to market and sell our products in those countries.

If we are unable to successfully introduce new products or fail to keep pace with competitive advances in technology, our business, financial condition and results of operations could be adversely affected. In addition, our research and development efforts rely upon investments and alliances and we cannot guarantee that any previous or future investments or alliances will be successful.

Our research and development activities are an essential component of our efforts to develop new and innovative products for introduction in the marketplace. New and improved products play a critical role in our sales growth. We continue to place emphasis on the development of proprietary products, such as our J-Plasma technology, and product improvements to complement and expand our existing product lines. We maintain close working relationships with physicians and medical personnel in hospitals and universities who assist in product research and areas of development. Our research and development activities are primarily conducted internally and are expensed as incurred. These expenses include direct expenses for wages, materials and services associated with the development of our products net of any reimbursements from customers. Research and development expenses do not include any portion of general and administrative expenses. Our research and development activities are conducted at our Clearwater, Florida and Sofia, Bulgaria facilities. We expect to continue making future investments to enable us to develop and market new technologies and products to further our strategic objectives and strengthen our existing business. However, we cannot guarantee that any of our previous or future investments in both facilities will be successful or that our new products such as J-Plasma and PlazXact arthroscopic ablator, will gain market acceptance, the failure of which would have a material adverse effect on our business and results of operations.


8

BOVIE MEDICAL CORPORATION

The amount expended by us on research and development of our products during the years 2016, 2015 and 2014, totaled approximately $2.6 million, $2.2 million and $1.4 million, respectively. During the past three years, we invested substantial resources in the development and marketing of our Growth product technology. We have not incurred any direct costs relating to environmental regulations or requirements. For 2017, we expect to invest 6.5% to 7.0% of revenue for research and development activities.

Even if we are successful in developing and obtaining approval for our new product candidates, there are various circumstances that could prevent the successful commercialization of the products.

Our ability to successfully commercialize our products will depend on a number of factors, any of which could delay or prevent commercialization, including:

the regulatory approvals of our new products are delayed or we are required to conduct further research and development of our products prior to receiving regulatory approval;
we are unable to build a sales and marketing group to successfully launch and sell our new products;
we are unable to raise the additional funds needed to successfully develop and commercialize our products or acquire additional products for growth;
we are required to allocate available funds to litigation matters;
we are unable to manufacture the quantity of product needed in accordance with current good manufacturing practices to meet market demand, or at all;
our product is determined to be ineffective or unsafe following approval and is removed from the market or we are required to perform additional research and development to further prove the safety and effectiveness of the product before re-entry into the market;
competition from other products or technologies prevents or reduces market acceptance of our products;
we do not have and cannot obtain the intellectual property rights needed to manufacture or market our products without infringing on another company’s patents; or
we are unsuccessful in defending against patent infringement or other intellectual property rights, claims that could be brought against us, our products or technologies;

The failure to successfully acquire or develop and commercialize new products will have a material and adverse effect on the future growth of our business, financial condition and results of operations.

Our international operations subject us to foreign currency fluctuations and other risks associated with operating in foreign countries.

We operate internationally and enter into transactions denominated in foreign currencies. To date, we have not hedged our exposure to changes in foreign currency exchange rates and as a result, we are subject to foreign currency transaction and translation gains and losses. We purchase goods and services in U.S. dollars and Euros. Foreign exchange risk is managed primarily by satisfying foreign denominated expenditures with cash flows or assets denominated in the same currency therefore we are subject to some foreign currency fluctuation risk. Our currency value fluctuations were not material for 2016. In addition, political changes or instability throughout the world could adversely affect our business internationally.

Our operations and cash flows may be adversely impacted by healthcare reform legislation.

The Patient Protection and Affordable Care Act and Health Care and Education Affordability Reconciliation Act were enacted into law in the U.S. in March 2010. Among other initiatives, this legislation imposes a 2.3% excise tax on domestic sales of class I, II and III medical devices beginning in 2013. The Consolidated Appropriations Act, 2016, signed into law on Dec. 18, 2015, includes a two year moratorium on the medical device excise tax imposed by Internal Revenue Code section 4191. Thus, the medical device excise tax does not apply to the sale of a taxable medical device by the manufacturer, producer, or importer of the device during the period beginning on Jan. 1, 2016 and ending on Dec. 31, 2017. Substantially all of our products are class I or class II medical devices and in 2016 we paid no federal excise tax and 2015 we paid $0.5 million. As approximately 87.5% of our 2016 sales were derived in the U.S., we cannot predict if any additional regulations will be implemented at the federal or state level, or the effect of any future legislation or regulation in the U.S. or internationally.

We are aware that the Affordable Care Act is under review by Congress and the potential impact of any actions, which may be taken by Congress is unknown.

9

BOVIE MEDICAL CORPORATION

Our operations may experience higher costs to produce our products as a result of changes in prices for oil, gasoline and other commodities.

We use plastics and other petroleum-based materials along with precious metals contained in electronic components as raw materials in many of our products. Prices of oil and gasoline also significantly affect our costs for freight and utilities. Oil, gasoline and precious metal prices are volatile and may increase, resulting in higher costs to produce and distribute our products. Due to the highly competitive nature of the healthcare industry and the cost-containment efforts of our customers we may be unable to pass along cost increases through higher prices. If we are unable to fully recover these costs through price increases or offset through other cost reductions, our results of operations could be materially and adversely affected.

Our manufacturing facilities are located in Clearwater, Florida and Sophia, Bulgaria and could be affected due to multiple weather risks. Specifically, in Clearwater, Florida from hurricanes, physical changes in the planet due to climate change and similar phenomena.

Our manufacturing facilities are located in Clearwater, Florida and Sophia, Bulgaria and could be affected by multiple weather risks. Most notably hurricanes in Clearwater, Florida. Although we carry property and casualty insurance and business interruption insurance, future possible disruptions of operations or damage to property, plant and equipment due to hurricanes or other weather risks could result in impaired production and affect our ability to meet our commitments to our customers and impair important business relationships, the loss of which could adversely affect our operations and profitability. We do however maintain a backup generator at our Clearwater facility and a disaster recovery plan is in place to help mitigate this risk.

We do not produce hazardous materials or emissions that would adversely impact the environment. We do however, have air conditioning units and consume electricity which could be impacted by climate change in the form of increased rates. However, we do not believe the increase in expense from any rate increases, as a percentage of sales, would be material in the near term.

Risks Relating to Our Business

We have historically done a substantial amount of business with seven of our top ten customers, who are also major distributors of our product, which as a group have produced substantial revenues for our Company. Loss of business from a major customer will likely materially and adversely affect our business.

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.

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

We rely on certain suppliers and manufacturers for raw materials and other products and are vulnerable to fluctuations in the availability and price of such products and services.

Fluctuations in the price, availability and quality of the raw materials we use in our manufacturing could have a negative effect on our cost of sales and our ability to meet the demands of our customers. Inability to meet the demands of our customers could result in the loss of future sales.

In addition, the costs to manufacture our products depend in part on the market prices of the raw materials used to produce them. We may not be able to pass along to our customers all or a portion of our higher costs of raw materials due to competitive and marketing pressures, which could decrease our earnings and profitability.


10

BOVIE MEDICAL CORPORATION

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

If we are unable to protect our patents or other proprietary rights, or if we infringe on the patents or other proprietary rights of others, our competitiveness and business prospects may be materially damaged.

We have been issued 33 patents in the United States and 19 foreign patents. We have 17 pending patent applications in the United States and 9 pending foreign applications. Our intellectual property portfolio for the technology and products related to Growth products are included in these totals and continues to grow. Specific to Growth products, we have been issued 15 U.S. and 5 foreign patents and we have 14 U.S. and 6 foreign applications pending. We intend to continue to seek legal protection, primarily through patents, for our proprietary technology. Seeking patent protection is a lengthy and costly process and there can be no assurance that patents will be issued from any pending applications, or that any claims allowed from existing or pending patents will be sufficiently broad or strong to protect our proprietary technology. There is also no guarantee that any patents we hold will not be challenged, invalidated or circumvented, or that the patent rights granted will provide competitive advantages to us. Our competitors have developed and may continue to develop and obtain patents for technologies that are similar or superior to our technologies. In addition, the laws of foreign jurisdictions in which we develop, manufacture or sell our products may not protect our intellectual property rights to the same extent as do the laws of the United States.

Adverse outcomes in current or future legal disputes regarding patent and other intellectual property rights could result in the loss of our intellectual property rights, subject us to significant liabilities to third parties, require us to seek licenses from third parties on terms that may not be reasonable or favorable to us, prevent us from manufacturing, importing or selling our products, or compel us to redesign our products to avoid infringing third parties’ intellectual property. As a result, our product offerings may be delayed and we may be unable to meet customers’ requirements in a timely manner. Regardless of the merit of any related legal proceeding, we have incurred in the past and may be required to incur in the future substantial costs to prosecute, enforce or defend our intellectual property rights. Even in the absence of infringement by our products of third parties’ intellectual property rights, or litigation related to trade secrets, we have elected in the past and may in the future elect to enter into settlements to avoid the costs and risks of protracted litigation and the diversion of resources and management’s attention. However, if the terms of settlements entered into with certain of our competitors are not observed or enforced, we may suffer further costs and risks. Any of these circumstances could have a material adverse effect on our business, financial condition and resources or results of operations.

Our ability to develop intellectual property depends in large part on hiring, retaining and motivating highly qualified design and engineering staff with the knowledge and technical competence to advance our technology and productivity goals. To protect our trade secrets and proprietary information, generally we have entered into confidentiality agreements with our employees, as well as with consultants and other parties. If these agreements prove inadequate or are breached, our remedies may not be sufficient to cover our losses.

We have been and may in the future become subject to litigation proceedings that could materially and adversely affect our business.

Other Litigation

In addition to the litigation risks and proceedings mentioned below, from time to time we may become subject to legal claims or proceedings related to securities, employment, customer or third party contracts, environmental regulations, or other matters. The costs involved in defending these claims could be substantial, which have had an adverse effect on our profitability. In addition, if other claims are asserted against us, we may be required to defend against such claims, or deem it necessary or advisable to initiate a legal proceeding to protect our rights, the expense and distraction of such a claim or proceeding, whether or not resolved in our favor, could materially and adversely affect our business, financial condition and operating results. Further, if a claim or proceeding were resolved against us or if we were to settle any such dispute, we may be required to pay damages and costs or refrain from certain activities, any of which could have a material adverse impact on our business, financial condition and operating results.


11

BOVIE MEDICAL CORPORATION

Product Liability Litigation

Although we carry liability insurance, due to the nature of our products and their use by professionals, we are subject to litigation from persons who claim injury during medical procedures in hospitals, physician’s offices or in clinics and defending such litigation is expensive, disruptive, time consuming and could adversely affect our business. We currently maintain product liability insurance with combined coverage limits of $10 million on a claims-made basis. There is no assurance that this coverage will be adequate to protect us from any possible liabilities (individually or in the aggregate) we might incur in connection with the sale or testing of our products. In addition, we may need increased product liability coverage as additional products are commercialized. This insurance is expensive and in the future may not be available on acceptable terms, if at all.

While it is our policy not to promote off-label unapproved use of our products, and we train our personnel to caution against such use, if health care professionals in their discretion use our products in such a manner, we may be exposed to risk of litigation.

Intellectual Property Litigation or Trade Secrets

We have in the past, experienced certain allegations of infringement of intellectual property rights and use of trade secrets and may receive other such claims, with or without merit, in the future. Previously, claims of infringement of intellectual property rights have sometimes evolved into litigation against us and they may continue to do so in the future. It is inherently difficult to assess the outcome of litigation. Although we believe we have had adequate defenses to these claims and that the outcome of the litigation will not have a material adverse impact on our business, financial condition, or results of operations, there can be no assurances that we will prevail. Any such litigation could result in substantial cost to us, significantly reduce our cash resources and create a diversion of the efforts of our technical and management personnel, which could have a material and adverse effect on our business, financial condition and operating results. If we are unable to successfully defend against such claims, we could be prohibited from future sales of the allegedly infringing product or products, which could materially and adversely affect our future growth.

Our business is subject to the potential for defects or failures associated with our products which could lead to recalls or safety alerts and negative publicity.

Manufacturing flaws, component failures, design defects, off-label uses or inadequate disclosure of product-related information could result in an unsafe condition or the injury or death of a patient. These problems could lead to a recall of, or issuance of a safety alert relating to our products and result in significant costs and negative publicity. Due to the strong name recognition of our brands, an adverse event involving one of our products could result in reduced market acceptance and demand for all products within that brand and could harm our reputation and our ability to market our products in the future. In some circumstances, adverse events arising from or associated with the design, manufacture or marketing of our products could result in the suspension or delay of our current regulatory reviews of our applications for new product approvals. We also may undertake voluntarily to recall products or temporarily shut down certain production lines based on internal safety and quality monitoring and testing data. Any of the foregoing problems could disrupt our business and have a material adverse effect on our business, results of operations, financial condition and cash flows.

We have incurred and may in the future incur impairments to our long-lived assets.

We review our long-lived assets, including intangible assets, for impairment annually or more frequently if events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. Additionally, if in any period our stock price decreases to the point where our fair value, as determined by our market capitalization, is less than the book value of our assets, this could also indicate a potential impairment and we may be required to record an impairment charge in that period which could adversely affect our results of operations.

Our valuation methodology for assessing impairment requires management to make judgments and assumptions based on historical experience and to rely heavily on projections of future operating performance. We operate in highly competitive environments and projections of future operating results and cash flows may vary significantly from actual results. Additionally, if our analysis indicates potential impairment to a long-lived intangible asset, we may be required to record additional charges to earnings in our financial statements, which could negatively impact our results of operations.


12

BOVIE MEDICAL CORPORATION

Risks Related to Our Stock

The market price of our stock has been and may continue to be highly volatile.

Our common stock is listed on the NYSE MKT Market under the ticker symbol “BVX”. The market price of our stock has been and may continue to be highly volatile and announcements by us or by third parties may have a significant impact on our stock price. These announcements may include:

our listing status on the NYSE MKT Market;
our operating results falling below the expectations of public market analysts and investors;
developments in our relationships with or developments affecting our major customers;
negative regulatory action or regulatory non-approval with respect to our new products;
government regulation, governmental investigations, or audits related to us or to our products;
developments related to our patents or other proprietary rights or those of our competitors and
changes in the position of securities analysts with respect to our stock.

The stock market has from time to time experienced extreme price and volume fluctuations, which have particularly affected the market prices for the medical technology sector companies and which have often been unrelated to their operating performance. These broad market fluctuations may adversely affect the market price of our common stock.

Historically, when the market price of a stock has been volatile, holders of that stock have often instituted securities class action litigation against the company that issued the stock. If any of our stockholders brought a lawsuit against us, we could incur substantial costs defending the lawsuit. The lawsuit could also divert the time and attention of our management.

In addition, future sales by existing stockholders, warrant holders receiving shares upon the exercise of warrants, or any new stockholders receiving our shares in any financing transaction may lower the price of our common stock, which could result in losses to our stockholders. Future sales of substantial amounts of common stock in the public market, or the possibility of such sales occurring, could adversely affect prevailing market prices for our common stock or our future ability to raise capital through an offering of equity securities. Substantially all of our common stock is freely tradable in the public market without restriction under the Securities Act, unless these shares are held by our “affiliates”, as that term is defined in Rule 144 under the Securities Act.

We have no present intention to pay dividends on our common stock and, even if we change that policy, we may be unable to pay dividends on our common stock.

We currently do not anticipate paying any dividends on our common stock in the foreseeable future. We currently intend to retain future earnings, if any, to finance operations and invest in our business. Any declaration and payment of future dividends to holders of our common stock will be at the discretion of our board of directors and will depend on many factors, including our financial condition, earnings, capital requirements, level of indebtedness, statutory and contractual restrictions applying to the payment of dividends and other considerations that our board of directors deems relevant.

If we change that policy and commence paying dividends, we will not be obligated to continue paying those dividends and our stockholders will not be guaranteed, or have contractual or other rights, to receive dividends. If we commence paying dividends in the future, our board of directors may decide, in its discretion, at any time, to decrease the amount of dividends, otherwise modify or repeal the dividend policy or discontinue entirely the payment of dividends. Under the Delaware law, our board of directors may not authorize the payment of a dividend unless it is either paid out of our statutory surplus.

The low trading volume of our common stock may adversely affect the price of our shares and their liquidity.

Although our common stock is listed on the NYSE MKT exchange, our common stock has experienced low trading volume. Limited trading volume may subject our common stock to greater price volatility and may make it difficult for investors to sell shares at a price that is attractive to them.


13

BOVIE MEDICAL CORPORATION

We may in the future seek to raise funds through equity offerings, which could have a dilutive effect on our common stock.

In the future we may determine to raise capital through offerings of our common stock, securities convertible into our common stock or rights to acquire these securities or our common stock. For instance, we are authorized to issue up to 40,000,000 shares of common stock and up to 10,000,000 shares of preferred stock, of which 3,588,139 shares have been designated as Series B Convertible Preferred Stock. The result of sales of such securities, or the conversion of the Series B Convertible Preferred Stock into shares of common stock, the exercise of warrants issued in connection with such offering or the triggering of anti-dilution provisions in such securities would ultimately be dilutive to our common stock by increasing the number of shares outstanding. We cannot predict the effect this dilution may have on the price of our common stock. In addition, the shares of preferred stock may have rights which are senior or superior to those of the common stock, such as rights relating to voting, the payment of dividends, redemption or liquidation.

Exercise of warrants and options issued by us will dilute the ownership interest of existing stockholders.

As of December 31, 2016, the warrants issued by us in December 2013 were exercisable for up to approximately 94,375 shares of our common stock, representing approximately 0.3% of our outstanding common stock.

As of December 31, 2016, our outstanding stock options to our employees, officers, directors and consultants amounted to approximately 3,752,209 shares of our common stock, representing approximately 12.2% of our outstanding common stock. 

The exercise of some or all of our warrants and stock options will dilute the ownership interests of existing stockholders. Any sales in the public market of the common stock issuable upon such conversion or exercise could adversely affect prevailing market prices of our common stock.

ITEM 1B. Unresolved Staff Comments

There are no outstanding unresolved comments from the staff of the Securities and Exchange Commission.

ITEM 2. Properties

Bovie currently maintains a 60,000 square foot facility which consists of office, warehousing, manufacturing and research space located at 5115 Ulmerton Rd., Clearwater, Florida. Monthly principal and interest payments relating to the purchase of this facility are approximately $29,000 per month.

In October, 2015, through our Bulgaria acquisition, we acquired a lease for 16,000 square feet of office, warehousing and manufacturing facilities located in Sofia, Bulgaria. The rental cost of the facility is approximately $4,333 per month.

In March 2014, we signed a lease for offices located in Purchase, New York. The lease is for 3,650 square feet of office space with a monthly cost of approximately $9,277 per month. This facility presently houses our executive offices.

ITEM 3. Legal Proceedings

Not Applicable.

Other Matters

In the normal course of business, we are subject, from time to time, to legal proceedings, lawsuits and claims. Such matters are subject to many uncertainties and outcomes are not predictable with assurance. If any of these matters arise in the future, it could affect the operating results of any one or more quarters.

ITEM 4. Mine Safety Disclosures

Not Applicable.


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BOVIE MEDICAL CORPORATION

PART II

ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock currently is traded on the NYSE MKT. The table shows the reported high and low bid prices for the common stock during each quarter of the last eight respective quarters. These prices do not represent actual transactions and do not include retail markups, markdowns or commissions.
 
2016
 
2015
 
High
 
Low
 
High
 
Low
4th Quarter
5.55

 
3.50

 
2.19

 
1.77

3rd Quarter
5.21

 
1.68

 
2.80

 
1.95

2nd Quarter
1.97

 
1.56

 
3.59

 
2.35

1st Quarter
2.44

 
1.60

 
4.01

 
2.20


On March 6, 2017, the closing bid for our common stock as reported by the NYSE MKT exchange was $3.14 per share. As of March 6, 2017, we had 605 stockholders of record. Since many stockholders choose to hold their shares under the name of their brokerage firm, we estimate that the actual number of stockholders was over 3,500 shareholders.

Securities Authorized for Issuance Under Equity Compensation Plans
 
Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights
(a)
 
Weighted Average Exercise Price of Outstanding Options, Warrants and Rights
(b)
 
Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (excluding securities reflected in column (a))
(c)
Equity compensation plans approved by security holders
2,019,922

 
$
2.19

 
730,078

Equity compensation plans not approved by security holders (1)
1,732,287

 
$
4.03

 

Total
3,752,209

 
$
3.04

 
730,078

(1) Represents inducement grants for new hires

Dividend Policy

We have never declared or paid any cash dividends on our common stock and we currently do not anticipate paying cash dividends in the foreseeable future. We currently expect to retain any future earnings to fund the operation and expansion of our business.


15

BOVIE MEDICAL CORPORATION

Five Year Performance Graph

The following line graph compares the cumulative total return of our common shares with the cumulative total return of the Standard & Poor’s Composite 500 Stock Index (the "S&P 500 Index") and the Standard & Poor's Composite 500 Healthcare Sector Index (the "S&P 500 Healthcare Index"). The line graph assumes, in each case, an initial investment of $100 on December 31, 2012, based on the market prices at the end of each fiscal year through and including December 31, 2016, and reinvestment of dividends.

a201610-k_chartx15588.jpg
 
December 31,
 
2012
 
2013
 
2014
 
2015
 
2016
Bovie Medical Corporation
100.00

 
88.84

 
152.06

 
86.77

 
148.34

S&P 500 Index
100.00

 
129.60

 
144.36

 
143.31

 
156.97

S&P 500 Health Care Index
100.00

 
138.74

 
171.07

 
179.98

 
172.13



16

BOVIE MEDICAL CORPORATION

ITEM 6. Selected Financial Data

The following selected consolidated financial data (presented in thousands, except per share amounts and employee data) are derived from our consolidated financial statements. This data should be read in conjunction with the consolidated financial statements and notes thereto and with Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
2016
 
2015
 
2014
 
2013
 
2012
Sales
$
36,627

 
$
29,520

 
$
27,681

 
$
23,660

 
$
27,671

Cost of sales
18,712

 
16,963

 
18,689

 
14,462

 
16,338

Gross profit
17,915

 
12,557

 
8,992

 
9,198

 
11,333

Other costs and expenses:
 
 
 
 
 
 
 
 
 
Research and development
2,618

 
2,160

 
1,416

 
1,260

 
1,329

Professional services
1,486

 
1,484

 
1,016

 
1,835

 
1,439

Salaries and related costs
9,038

 
7,482

 
5,723

 
3,992

 
3,178

Selling, general and administrative
8,565

 
8,417

 
6,686

 
5,777

 
4,341

Total other costs and expenses
21,707

 
19,543

 
14,841

 
12,864

 
10,287

(Loss) income from operations
(3,792
)
 
(6,986
)
 
(5,849
)
 
(3,666
)
 
1,046

Interest expense, net
(158
)
 
(158
)
 
(151
)
 
(237
)
 
(232
)
Investor warrants issuance cost

 

 

 
(664
)
 

Fee associated with refinance

 

 

 
(543
)
 

Change in fair value of derivative liabilities, net
64

 
1,799

 
(7,285
)
 
(842
)
 
20

Total other (expense) income, net
(94
)
 
1,641

 
(7,436
)
 
(2,286
)
 
(212
)
(Loss) income before income taxes
(3,886
)
 
(5,345
)
 
(13,285
)
 
(5,952
)
 
834

Income tax expense (benefit)
64

 
25

 
3,997

 
(1,613
)
 
217

Net (loss) income
$
(3,950
)
 
$
(5,370
)
 
$
(17,282
)
 
$
(4,339
)
 
$
617

Accretion on convertible preferred stock

 
(222
)
 
(932
)
 
(39
)
 

Gain on conversion of warrants and preferred shares, net

 
13,956

 

 

 

Deemed dividend on conversion beneficial conversion feature

 

 

 
(2,616
)
 

Net (loss) income attributable to common shareholders
$
(3,950
)
 
$
8,364

 
$
(18,214
)
 
$
(6,994
)
 
$
617

 
 
 
 
 
 
 
 
 
 
(Loss) income per share attributable to common shareholders
 
 
 
 
 
 
 
 
 
Basic
$
(0.14
)
 
$
0.34

 
$
(1.03
)
 
$
(0.40
)
 
$
0.04

Diluted
$
(0.15
)
 
$
0.24

 
$
(1.03
)
 
$
(0.40
)
 
$
0.03

 
 
 
 
 
 
 
 
 
 
Balance Sheet Information:
 
 
 
 
 
 
 
 
 
Cash and restricted cash
$
15,235

 
$
12,644

 
$
6,632

 
$
7,924

 
$
4,162

Working capital
$
21,267

 
$
17,921

 
$
11,599

 
$
16,910

 
$
14,322

Total assets
$
35,110

 
$
31,448

 
$
24,833

 
$
33,176

 
$
28,183

Long-term liabilities
$
3,615

 
$
3,923

 
$
16,373

 
$
8,934

 
$
3,366

Total stockholders' equity
$
26,223

 
$
23,404

 
$
1,504

 
$
19,071

 
$
22,895


17

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


ITEM 7. 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

We are an energy-based medical device company specializing in developing, manufacturing and marketing a range of electrosurgical products and technologies, as well as related medical products used in doctor’s offices, surgery centers and hospitals worldwide. Our medical products include a wide range of devices including electrosurgical generators and accessories, cauteries, medical lighting, nerve locators and other products.

We internally divide our operations into three product lines; electrosurgery products, battery-operated cauteries and other products. The electrosurgical line includes electrosurgical products which include desiccators, generators, electrodes, electrosurgical pencils and various ancillary disposable products. These products are used in surgery for the cutting and coagulation of tissue. Battery-operated cauteries are used for precise hemostasis (to stop bleeding) in ophthalmology and in other fields. Our other revenues are derived from nerve locators, disposable and reusable penlights, medical lighting, license fees, development fees and other miscellaneous income.

The majority of our core products are marketed through medical distributors, which distribute to more than 6,000 hospitals, and to doctors and other healthcare facilities. New distributors are contacted through responses to our advertising in international and domestic medical journals and our presence at domestic and international trade shows. International sales represented approximately 12.5% of total revenues in 2016, 16.9% in 2015 and 15.8% in 2014. Management estimates our products have been sold in more than 150 countries through local dealers coordinated by sales and marketing personnel at the Clearwater, Florida facility.

On November 10, 2016, we entered into an underwriting agreement (the “Underwriting Agreement”) with certain selling stockholders of the Company (the “Selling Stockholders”) and Piper Jaffray & Co. (the “Underwriter”) relating to public offerings of our common stock, par value $0.001 per share at a public offering price of $4.00 per share. We made a primary offering of 1,625,000 shares and a secondary offering of 1,625,000 shares by the Selling Stockholders.

Our net proceeds from the sale of the shares, after deducting the Underwriter’s discounts and commissions and estimated offering expenses payable by us, were approximately $5.8 million. The offerings closed on November 16, 2016.

In March 2015, we completed an underwritten public offering of approximately 5,219,000 shares of common stock, par value $0.001 per share at a price to the public of $2.50 per share, resulting in net proceeds of approximately $11.5 million, after deducting underwriting discounts and commissions and offering expenses. We used the proceeds from the offering for operating costs, capital expenditures and for general corporate purposes, including working capital. Craig-Hallum Capital Group LLC (“Craig-Hallum”) acted as the sole managing underwriter for the offering.

Concurrently with the March 2015 offering, we completed the transactions contemplated under an exchange agreement with certain investors (the “Investors”) with respect to which Great Point Partners, LLC acts as investment manager. Pursuant to the terms of the exchange agreement, we issued 3,588,139 shares of our Series B Convertible Preferred Stock (the “Series B Preferred Stock”) in exchange for 3,500,000 shares of our Series A 6% Convertible Preferred Stock and warrants to purchase up to 5,250,000 shares of our common stock in the aggregate which were previously issued in conjunction with the sale of our Series A 6% Convertible Preferred Stock to the Investors in a December 13, 2013 offering, as well as accrued and unpaid preferred dividends. At December 31, 2016, the outstanding Series B Preferred Stock is convertible into an aggregate of 1,951,278 shares of our common stock.

In October, 2015 we entered into and consummated a Share Purchase Agreement whereby we acquired all of the outstanding equity interests of Bovie Bulgaria EOOD, a limited liability company incorporated under Bulgarian law.

18

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


Our business is generally not seasonal in nature. Our international sales as a percentage of total revenue decreased to 12.5% in 2016 from 16.9% in 2015; the decrease in international sales as a percentage of revenue is due to the discontinuation of certain international relationships and product offerings versus an increase in domestic sales and channel partnerships in Growth Products.

During 2016, we continued our full scale commercialization efforts for J-Plasma. We have a direct sales force of 17 field-based selling professionals and a network of 18 independent manufacturing representatives, resulting in a total sales force of 35. This selling organization is focused on the use of J-Plasma for operating room procedures. In addition, we have invested in training programs and marketing-related activities to support accelerated adoption of J-Plasma.

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

Results of Operations

Sales
 
Year Ended December 31,
 
 
 
Year Ended December 31,
 
 
(In thousands)
2016
 
2015
 
Change
 
2015
 
2014
 
Change
Sales by Product Line
 
 
 
 
 
 
 
 
 
 
 
Electrosurgical
$
20,901

 
$
17,558

 
19.0
 %
 
$
17,558

 
$
16,706

 
5.1
 %
Cauteries
7,101

 
6,886

 
3.1
 %
 
6,886

 
6,896

 
(0.1
)%
Other
8,625

 
5,076

 
69.9
 %
 
5,076

 
4,079

 
24.4
 %
Total
$
36,627

 
$
29,520

 
24.1
 %
 
$
29,520

 
$
27,681

 
6.6
 %
Sales by Domestic and International
 
 
 
 
 
 
 
 
 
 
 
Domestic
$
32,050

 
$
24,540

 
30.6
 %
 
$
24,540

 
$
23,313

 
5.3
 %
International
4,577

 
4,980

 
(8.1
)%
 
4,980

 
4,368

 
14.0
 %
Total
$
36,627

 
$
29,520

 
24.1
 %
 
$
29,520

 
$
27,681

 
6.6
 %
Sales by Operating Segment
 
 
 
 
 
 
 
 
 
 
 
Core
$
27,808

 
$
26,098

 
6.6
 %
 
$
26,098

 
$
24,322

 
7.3
 %
OEM
5,328

 
2,116

 
151.8
 %
 
2,116

 
3,150

 
(32.8
)%
Growth
3,491

 
1,306

 
167.3
 %
 
1,306

 
209

 
524.9
 %
Total
$
36,627

 
$
29,520

 
24.1
 %
 
$
29,520

 
$
27,681

 
6.6
 %

Overall sales increased by 24.1% or approximately $7.1 million for the year ended December 31, 2016 when compared with 2015. The increase in electrosurgical sales was mainly attributable to an increase in sales of generators of $2.9 million and electrodes of $0.4 million. Other product sales improved due to increases in Growth products of $2.2 million and OEM related products of $0.3 million. OEM related products included a subsequently discontinued pilot program for demonstration product to Hologic for $0.6 million and Arteriocyte for $0.2 million. Additionally, sales increased in coloscope products of $0.2 million, additional sales to distributors of $0.1 million and miscellaneous products for $0.5 million.

Although we have only one reporting segment, beginning in 2014, management began analyzing revenue and other operating metrics across three operating categories. Core product revenue, which consists of our brand name electrosurgical devices and accessories, cauteries, penlights, lighting, colposcopes and other similar products, increased 6.6% or approximately $1.7 million for the year ended December 31, 2016 when compared with 2015. The OEM product line consists of proprietary products designed specifically for third party equipment manufacturers; revenue for this product line increased 151.8% or approximately $3.2 million when compared to 2015. Growth product sales were $3.5 million, an increase of approximately 167.3% when compared to 2015.

Overall sales increased by 6.6%, or approximately $1.8 million, for the year ended December 31, 2015 when compared with 2014. The increase in sales was mainly attributable to an increase in Growth product sales of approximately $1.1 million, electrodes of $0.4 million, lighting of $0.4 million, other products of $0.4 million and a decrease of sales discounts for $0.3 million. Generator sales declined $0.8 million in 2015 due to the expiration of existing OEM contracts.

19

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


Our ten largest customers accounted for approximately 54.4%, 58.3% and 61.0% of net revenues for the years ended December 31, 2016, 2015 and 2014, respectively. In 2016, McKesson accounted for 15.9% and National Distribution & Contracting Inc. accounted for 9.8% of our sales. In 2015, McKesson accounted for 18.6% and National Distribution & Contracting Inc. accounted for 13.3% of our sales. In 2014, National Distribution & Contracting Inc. accounted for 13.9% of our sales.

Gross Profit
 
Year Ended December 31,
 
 
 
Year Ended December 31,
 
 
(In thousands)
2016
 
2015
 
Change
 
2015
 
2014
 
Change
Cost of sales
$
18,712

 
$
16,963

 
10.3
%
 
$
16,963

 
$
18,689

 
(9.2
)%
Percentage of revenue
51.1
%
 
57.5
%
 


 
57.5
%
 
67.5
%
 


Gross profit
$
17,915

 
$
12,557

 
42.7
%
 
$
12,557

 
$
8,992

 
39.6
%
Percentage of revenue
48.9
%
 
42.5
%
 
6.4
%
 
42.5
%
 
32.5
%
 
10.0
%

Our gross profit margin as a percentage of sales increased by 6.4% or approximately $5.4 million during the year ended December 31, 2016 compared with 2015. The increase was driven by higher margins in Growth and OEM products, comparatively. Additionally margins improved due to decreases in the warranty expense partially offset by the expensing of product molds no longer used in production.

Our gross profit margin as a percentage of sales increased by 10.0% or approximately $3.6 million during the year ended December 31, 2015 compared with 2014. This comparable increase was attributable to excess and obsolete inventory write downs of approximately $2.0 million in 2014, which reduced margins in that year.

We do not anticipate any material impact to our gross profit, material costs, or other costs as a result of the effect of inflation or any material impact of changing prices on net revenue.

Other Costs and Expenses

Research and development
 
Year Ended December 31,
 
 
 
Year Ended December 31,
 
 
(In thousands)
2016
 
2015
 
Change
 
2015
 
2014
 
Change
Research and Development expense
$
2,618

 
$
2,160

 
21.2
%
 
$
2,160

 
$
1,416

 
52.5
%
Percentage of revenue
7.1
%
 
7.3
%
 


 
7.3
%
 
5.1
%
 



Our expenditures for R&D related activities increased by 21.2% or approximately $0.5 million for the year ended December 31, 2016 compared with 2015. This was mainly caused by increased labor and material costs of approximately $0.4 million and an increase in consulting costs of approximately $0.1 million as we continue to accelerate our R&D product pipeline.

Our expenditures for R&D related activities increased by 52.5% or approximately $0.7 million for the year ended December 31, 2015 compared with 2014. This was mainly caused by increased labor and material costs of approximately $0.6 million and an increase in consulting costs of approximately $0.1 million.


20

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


Professional services
 
Year Ended December 31,
 
 
 
Year Ended December 31,
 
 
(In thousands)
2016
 
2015
 
Change
 
2015
 
2014
 
Change
Professional services expense
$
1,486

 
$
1,484

 
0.1
%
 
$
1,484

 
$
1,016

 
46.0
%
Percentage of revenue
4.1
%
 
5.0
%
 


 
5.0
%
 
3.7
%
 



Professional services expenses increased 0.1% for the year ended December 31, 2016 compared with 2015. Legal fees decreased over the prior year by approximately $0.1 million due to the acquisition of Bovie Bulgaria and the public offering, which closed in March 2015, partially offset by an increase of $0.1 million in consulting fees.

Professional services costs increased 46.0% or approximately $0.5 million for the year ended December 31, 2015 compared with 2014. Accounting and auditing fees incurred in connection with our acquisition of Bovie Bulgaria increased approximately $0.1 million compared with 2014. Legal fees increased over the prior year by approximately $0.1 million due to the acquisition of Bovie Bulgaria and the public offering, which closed in March 2015. We experienced an increase of approximately $0.2 million related to investor relations and other professional services of $0.1 million compared to 2014.

Salaries and related costs
 
Year Ended December 31,
 
 
 
Year Ended December 31,
 
 
(In thousands)
2016
 
2015
 
Change
 
2015
 
2014
 
Change
Salaries and related expenses
$
9,038

 
$
7,482

 
20.8
%
 
$
7,482

 
$
5,723

 
30.7
%
Percentage of revenue
24.7
%
 
25.3
%
 


 
25.3
%
 
20.7
%
 



During 2016, salaries and related expenses increased approximately 20.8% or approximately $1.6 million compared to the prior year. The increase was attributable to $0.6 million for incentive compensation and $0.3 million related to direct sales force and associated management. Additionally, accounting and marketing each accounted for $0.2 million and regulatory, customer service and human resources of $0.1 million each.

During 2015, salaries and related expenses increased approximately 30.7% or approximately $1.8 million compared to the prior year. The increase was attributable to our hiring of management and production staff and the Growth product direct sales force and incentive compensation.

Selling, general and administrative expenses
 
Year Ended December 31,
 
 
 
Year Ended December 31,
 
 
(In thousands)
2016
 
2015
 
Change
 
2015
 
2014
 
Change
SG&A Expense
$
8,565

 
$
8,417

 
1.8
%
 
$
8,417

 
$
6,686

 
25.9
%
Percentage of revenue
23.4
%
 
28.5
%
 


 
28.5
%
 
24.2
%
 



Selling, general and administrative expense increased by 1.8% or approximately $0.1 million for the year ended December 31, 2016 compared with 2015. We experienced increases in sales commissions of approximately $1.0 million offset by decreases in ACA excise taxes of $0.4 million, sales related travel and entertainment costs of approximately $0.2 million, reduction in the bad debt reserve of $0.2 million and general insurance of $0.1 million.

Selling, general and administrative expense increased by 25.9% or approximately $1.7 million for the year ended December 31, 2015 compared with 2014. We experienced increases in advertising, marketing and trade show costs of approximately $0.5 million related largely to the branding and marketing of Growth products, sales commissions of approximately $0.5 million resulting from the increase in sales, an increase in general insurance of $0.2 million, sales related travel and entertainment costs of approximately $0.7 million, which was expected as we expanded our direct sales force and territory footprint and utilities, rents, maintenance, office and computer supplies of approximately $0.2 million, offset by decreases in professional services of $0.2 million and other costs of $0.2 million.

21

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


Other Income (Expense), net
 
Year Ended December 31,
 
 
 
Year Ended December 31,
 
 
(In thousands)
2016
 
2015
 
Change
 
2015
 
2014
 
Change
Interest expense, net
$
(158
)
 
$
(158
)
 
 %
 
$
(158
)
 
$
(151
)
 
4.6
 %
Percentage of revenue
(0.4
)%
 
(0.5
)%
 


 
(0.5
)%
 
(0.5
)%
 


Change in fair value of derivative liabilities, net
$
64

 
$
1,799

 
(96.4
)%
 
$
1,799

 
$
(7,285
)
 
(124.7
)%
Percentage of revenue
0.2
 %
 
6.1
 %
 
 
 
6.1
 %
 
(26.3
)%
 
 

Interest expense, net

Total net interest expense was flat for the year ended December 31, 2016 as compared with 2015.

Total net interest expense increased by 4.6% for the year ended December 31, 2015 as compared with 2014.

Change in fair value of liabilities, net

On December 13, 2013, we entered into a securities purchase agreement pursuant to which we issued 3,500,000 shares of our newly designated Series A 6% Convertible Preferred Stock with a stated value of $2.00 per share and 5,250,000 warrants to purchase our common stock, at an exercise price of $2.387 per share. We also issued 525,000 warrants to the placement agent, of which 94,375 remain outstanding as of December 31, 2016. The warrants are accounted for as derivative financial instruments at fair value and are re-valued each period.

On March 17, 2015, we completed transactions contemplated under an exchange agreement (the “Exchange Agreement”) entered into on March 11, 2015 with certain investors (the “Investors”) with respect to which Great Point Partners, LLC acts as investment manager. Pursuant to the terms of the Exchange Agreement, we issued 3,588,139 shares of our Series B Convertible Preferred Stock (the “Series B Preferred Stock”) in exchange for 3,500,000 shares of our Series A 6% Convertible Preferred Stock and warrants to purchase up to 5,250,000 shares of our common stock in the aggregate which were previously issued in conjunction with the sale of our Series A 6% Convertible Preferred Stock to the Investors in a December 13, 2013 offering, as well as accrued and unpaid preferred dividends. The Series B Preferred Stock issued at that time was convertible into an aggregate of 7,176,298 shares of our common stock, upon the terms set forth in the Certificate of Designation. During the year ended December 31, 2016, the holders of Series B Preferred Stock exercised their conversion rights on 1,000,000 shares of Series B Preferred Stock. The remaining Series B Stock at December 31, 2016 is convertible into an aggregate of 1,951,278 shares of our common stock.

At December 31, 2016, the placement agent warrants were valued at $0.2 million and we recognized a net gain of $64,000.

At December 31, 2015, the placement agent warrants were valued at $0.3 million and we recognized a net gain of $1.8 million.

Income Taxes

The income tax provision is related to foreign and certain state income taxes. We have recorded a full valuation allowance against the net deferred tax assets with a finite life. A valuation allowance is required to be provided to reduce the deferred tax assets to a level which, more likely than not, will be realized. Management evaluated the positive and negative evidence in determining the realizability of the net deferred tax asset. In determining the need for valuation allowance, we reviewed historic operating results, updated 2016 actual results, as well as future income forecasts based on the projections, management concluded that it was not more likely than not that the Company should realize its net deferred tax assets through future operating results and the reversal of taxable temporary differences. If in the future we determine that we will be able to realize any of the net deferred tax assets, we will make an adjustment to the valuation allowance, which would increase our income in the period that the determination is made.


22

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


Liquidity and Capital Resources

Our working capital at December 31, 2016 was approximately $21.3 million compared with $17.9 million at December 31, 2015. Accounts receivable days sales outstanding were 44 days and 34 days at December 31, 2016 and 2015, 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 17 days to 160 days equating to an inventory turn ratio of 1.99 at December 31, 2016 from 177 days and an inventory turn ratio of 1.85 at December 31, 2015. The lower number of days sales in inventory which translated into a higher inventory turnover rate is mainly due to an increase in sales.

For the year ended December 31, 2016, net cash used in operating activities was approximately $2.8 million compared with net cash used by operating activities of approximately $5.8 million in 2015. The change was mainly attributable to the increase of stock based compensation of $0.8 million and the change in working capital of $0.7 million.

Net cash used in investing activities was approximately $0.3 million for the year ended December 31, 2016 compared to net cash used in investing activities was approximately $0.9 million during 2015. The change was due mainly to the acquisition of Bovie Bulgaria in 2015 and a reduction in purchases of equipment, molds and test fixtures in 2016.

Cash provided by financing activities of approximately $5.8 million during the year ended December 31, 2016, attributable to the proceeds from the public offering and the exercise of warrants, compared to cash provided by similar financing activities of approximately $12.8 million during year ended December 31, 2015.

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

The obligations under the Loan are secured by a first mortgage and security interest in the Company’s Clearwater, Florida facility. In addition, the Company has pledged an interest in a certificate of deposit in the amount of $779,000 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 December 31, 2016 was 4.272%.

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

Approximate future expected principal and interest payments under the Loan agreement are as follows as of December 31, 2016:
(In thousands)
 
2017
$
247

2018
247

2019
2,541

Total
$
3,035


At December 31, 2016, we had purchase commitments for inventories totaling approximately $4.4 million, substantially all of which is expected to be purchased by the end of 2017.

We may choose to access the capital markets to raise additional capital. To facilitate this and to allow us to quickly react should we so decide, we filed a shelf registration statement with the Securities and Exchange Commission in December 2014.


23

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.

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

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

Inventory reserves

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

Long-lived assets

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

Derivative liabilities valued at fair value

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

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


24

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.

Litigation Contingencies

From time to time, we are exposed to claims and litigation arising in the ordinary course of business or otherwise and use various methods to resolve these matters in a manner that we believe serves the best interest of the Company and our stockholders. There can be no assurance these actions or other third party assertions will be resolved without costly litigation, or in a manner that is not adverse to our financial position. We do not believe that any of the currently identified claims or litigation matters will have a material adverse impact on our results of operations, cash flows or financial condition. However, given uncertainties associated with any litigation, if our assessments prove to be wrong, or if additional information becomes available such that we estimate that there is a possible loss or possible range of loss associated with these contingencies, then we would record the minimum estimated liability, which could materially impact our results of operations, financial position and cash flows.

Income Taxes

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

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

It is our policy to provide for uncertain tax positions and the related interest and penalties based upon management’s assessment of whether a tax benefit is more likely than not to be sustained upon examination by tax authorities. To the extent that the probable tax outcome of these uncertain tax positions changes, such changes in estimate will impact the income tax provision in the period in which such determination is made. At December 31, 2016, we believe we have appropriately accounted for any unrecognized tax positions. To the extent we prevail in matters for which a liability for an unrecognized tax benefit is established or we are required to pay amounts in excess of the liability, our effective tax rate in a given financial statement period may be affected.

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


25

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


Recent Accounting Pronouncements

See Note 10 of the Notes to Consolidated Financial Statements.

ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk

Our short-term investments consist of cash, cash equivalents and overnight investments. As such, we do not believe we are exposed to significant interest rate risk. The primary objective of our investment activities is to preserve principal while at the same time maximizing yields without significantly increasing risk. To achieve this objective, we invest in highly liquid overnight money market investments. If a 10% change in interest rates were to have occurred on December 31, 2016, this change would not have had a material effect on the fair value of our investment portfolio as of that date.

26

BOVIE MEDICAL CORPORATION

ITEM 8. Financial Statements and Supplementary Data

INDEX TO FINANCIAL INFORMATION

27



[LETTER HEAD OF FRAZIER & DEETER, LLC]

REPORT OF INDEPENDENT REGISTERED CERTIFIED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of 
Bovie Medical Corporation
Purchase, New York

We have audited the accompanying consolidated balance sheets of Bovie Medical Corporation and subsidiaries (the "Company") as of December 31, 2016 and 2015 and the related consolidated statements of operations, stockholders’ equity, and cash flows for the years ended December 31, 2016, 2015 and 2014. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2016 and 2015, and the results of its operations and its cash flows for the years ended December 31, 2016, 2015 and 2014 in conformity with accounting principles generally accepted in the United States of America.

/s/ Frazier & Deeter, LLC                                            

Frazier & Deeter, LLC 
Tampa, FL

March 10, 2017

28

BOVIE MEDICAL CORPORATION
CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)
 
December 31, 2016
 
December 31, 2015
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
14,456

 
$
11,805

Restricted cash
779

 
839

Trade accounts receivable, net
4,733

 
2,925

Inventories, net
6,158

 
5,957

Prepaid expenses and other current assets
413

 
516

Total current assets
26,539

 
22,042

Property and equipment, net
6,449

 
6,810

Brand name and trademark
1,510

 
1,510

Purchased technology and license rights, net
215

 
323

Goodwill
185

 
185

Deposits
109

 
123

Deferred tax asset

 
25

Other assets
103

 
430

Total assets
$
35,110

 
$
31,448

 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
1,606

 
$
1,214

Accrued payroll
419

 
321

Accrued vacation
404

 
228

Current portion of mortgage note payable
239

 
239

Accrued and other liabilities
2,604

 
2,119

Total current liabilities
5,272

 
4,121

Mortgage note payable, net of current portion
2,694

 
2,934

Note payable
140

 
140

Deferred rents
14

 
18

Deferred tax liability
564

 
564

Derivative liabilities
203

 
267

Total liabilities
8,887

 
8,044

Commitments and Contingencies (see Notes 9 and 11)

 

 
 
 
 
Series A 6% convertible preferred stock, par value $0.001; 3,500,000 shares authorized, zero issued and outstanding as of December 31, 2016 and December 31, 2015

 

STOCKHOLDERS' EQUITY
 
 
 
Series B convertible preferred stock, $0.001 par value; 3,588,139 authorized and 975,639 issued and outstanding as of December 31, 2016 and 3,588,139 authorized and 1,975,639 issued and outstanding as of December 31, 2015, respectively
1

 
2

Common stock, $0.001 par value; 40,000,000 shares authorized; 31,002,832 issued and 30,859,753 outstanding as of December 31, 2016 and 27,194,251 issued and 27,051,172 outstanding as of December 31, 2015, respectively
31

 
27

Additional paid-in capital
49,625

 
42,859

Accumulated deficit
(23,434
)
 
(19,484
)
Total stockholders' equity
26,223

 
23,404

Total liabilities and stockholders' equity
$
35,110

 
$
31,448


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

29

BOVIE MEDICAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)
 
Year Ended December 31,
 
2016
 
2015
 
2014
Sales
$
36,627

 
$
29,520

 
$
27,681

Cost of sales
18,712

 
16,963

 
18,689

Gross profit
17,915

 
12,557

 
8,992

Other costs and expenses:
 
 
 
 
 
Research and development
2,618

 
2,160

 
1,416

Professional services
1,486

 
1,484

 
1,016

Salaries and related costs
9,038

 
7,482

 
5,723

Selling, general and administrative
8,565

 
8,417

 
6,686

Total other costs and expenses
21,707

 
19,543

 
14,841

Loss from operations
(3,792
)
 
(6,986
)
 
(5,849
)
Interest expense, net
(158
)
 
(158
)
 
(151
)
Change in fair value of derivative liabilities, net
64

 
1,799

 
(7,285
)
Total other (expense) income, net
(94
)
 
1,641

 
(7,436
)
Loss before income taxes
(3,886
)
 
(5,345
)
 
(13,285
)
Income tax expense
64

 
25

 
3,997

Net loss
$
(3,950
)
 
$
(5,370
)
 
$
(17,282
)
Accretion on convertible preferred stock

 
(222
)
 
(932
)
Gain on conversion of warrants and preferred shares, net

 
13,956

 

Net (loss) income attributable to common shareholders
$
(3,950
)
 
$
8,364

 
$
(18,214
)
 
 
 
 
 
 
(Loss) income per share attributable to common shareholders
 
 
 
 
 
Basic
$
(0.14
)
 
$
0.34

 
$
(1.03
)
Diluted
$
(0.15
)
 
$
0.24

 
$
(1.03
)
 
 
 
 
 
 
Weighted average number of shares outstanding - basic
27,433

 
24,333

 
17,756

Weighted average number of shares outstanding - dilutive
27,449

 
27,747

 
17,756


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

30

BOVIE MEDICAL CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(In thousands, except share amounts)
 
Preferred Stock
 
Common Stock
 
 
 
 
 
 
 
Shares
 
Par Value
 
Shares
 
Par Value
 
Additional Paid-In Capital
 
Accumulated Deficit
 
Total
Balance
December 31, 2013

 
$

 
17,684

 
$
18

 
$
28,687

 
$
(9,634
)
 
$
19,071

Options exercised

 

 
107

 

 
232

 

 
232

Warrants exercised

 

 
112

 

 
237

 

 
237

Stock based compensation

 

 

 

 
388

 

 
388

Stock swap to acquire options

 

 
(51
)
 

 
(210
)
 

 
(210
)
Accretion on convertible preferred stock

 

 

 

 

 
(932
)
 
(932
)
Net loss

 

 

 

 

 
(17,282
)
 
(17,282
)
Balance
December 31, 2014

 
$

 
17,852

 
$
18

 
$
29,334

 
$
(27,848
)
 
$
1,504

Options exercised

 

 
98

 

 
220

 

 
220

Warrants exercised

 

 
739

 

 
1,519

 

 
1,519

Issuance of common stock

 

 
5,219

 
5

 
11,526

 

 
11,531

Conversion of Series A preferred stock and common warrants to Series B preferred stock
3,588

 
4

 

 

 
(40
)
 
13,956

 
13,920

Conversion of Series B convertible preferred to common stock
(1,612
)
 
(2
)
 
3,225

 
4

 
(2
)
 

 

Stock based compensation

 

 

 

 
575

 

 
575

Stock swap to acquire options and warrants

 

 
(81
)
 

 
(273
)
 

 
(273
)
Accretion on convertible preferred stock

 

 

 

 

 
(222
)
 
(222
)
Net loss

 

 

 

 

 
(5,370
)
 
(5,370
)
Balance
December 31, 2015
1,976

 
$
2

 
27,052

 
$
27

 
$
42,859

 
$
(19,484
)
 
$
23,404

Options exercised

 

 
36

 

 
130

 

 
130

Warrants exercised

 

 
293

 

 
698

 

 
698

Issuance of common stock

 

 
1,625

 
2

 
5,828

 

 
5,830

Conversion of Series B convertible preferred to common stock
(1,000
)
 
(1
)
 
2,000

 
2

 
(1
)
 

 

Stock based compensation

 

 

 

 
809

 

 
809

Stock swap to acquire options and warrants

 

 
(146
)
 

 
(698
)
 

 
(698
)
Net loss

 

 

 

 

 
(3,950
)
 
(3,950
)
Balance
December 31, 2016
976

 
$
1

 
30,860

 
$
31

 
$
49,625

 
$
(23,434
)
 
$
26,223

 

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

31

BOVIE MEDICAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)
 
Year Ended December 31,
 
2016
 
2015
 
2014
Cash flows from operating activities
 
 
 
 
 
Net loss
$
(3,950
)
 
$
(5,370
)
 
$
(17,282
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
 
 
Depreciation and amortization
734

 
812

 
876

Provision for inventory obsolescence
178

 
157

 
733

Gain on disposal of property and equipment, net
21

 
21

 
14

Stock based compensation
809

 
575

 
388

Change in fair value of derivative liabilities
(64
)
 
(1,799
)
 
7,285

Provision for allowance for doubtful accounts
74

 
(59
)
 
(93
)
Provision (benefit) for deferred taxes
25

 
(25
)
 
3,975

Changes in current assets and liabilities:
 
 
 
 
 
Trade receivables
(1,884
)
 
(874
)
 
90

Prepaid expenses
103

 
286

 
(259
)
Inventories
(379
)
 
(102
)
 
1,955

Deposits and other assets
341

 
228

 
952

Accounts payable
392

 
(189
)
 
494

Accrued and other liabilities
763

 
553

 
455

Net cash used in operating activities
(2,837
)
 
(5,786
)
 
(417
)
Cash flows from investing activities
 
 
 
 
 
Purchases of property and equipment
(286
)
 
(421
)
 
(630
)
Acquisition of Bovie Bulgaria, net of cash acquired

 
(500
)
 

Net cash used in investing activities
(286
)
 
(921
)
 
(630
)
Cash flows from financing activities
 
 
 
 
 
Proceeds from stock options/warrants exercised
124

 
1,427

 
259

Change in restricted cash
60

 
60

 
(899
)
Proceeds from (repayment of) mortgage note payable
(240
)
 
(239
)
 
3,173

Proceeds from issuance of common shares, net
5,830

 
11,531

 

Repayment of industrial revenue bonds

 

 
(3,257
)
Repurchase of warrants

 

 
(420
)
Net cash provided by (used in) financing activities
5,774

 
12,779

 
(1,144
)
Net change in cash and cash equivalents
2,651

 
6,072

 
(2,191
)
Cash and cash equivalents, beginning of period
11,805

 
5,733

 
7,924

Cash and cash equivalents, end of period
$
14,456

 
$
11,805

 
$
5,733

 
 
 
 
 
 
Cash paid for:
 
 
 
 
 
Interest paid, net
$
158

 
$
158

 
$
151

 
 
 
 
 
 
Non cash investing activities:
 
 
 
 
 
Note payable for acquisitions
$

 
$
140

 
$


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

32

BOVIE MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1.     DESCRIPTION OF BUSINESS 

Bovie Medical Corporation (“Bovie”) was incorporated in 1982, under the laws of the State of Delaware and is a medical device company engaged in the manufacturing and marketing of electrosurgical devices. Our medical products include a wide range of devices including electrosurgical generators and accessories, cauteries, medical lighting, nerve locators and other products.

NOTE 2.     SIGNIFICANT ACCOUNTING POLICIES 

Consolidated Financial Statements

The accompanying consolidated financial statements include the accounts of Bovie and its wholly owned subsidiaries, Aaron Medical Industries, Inc., Bovie Bulgaria, EOOD, BVX Holdings LLC and Bovie Holdings, Inc., (collectively, the “Company” or “we”, “our” or “us”). All intercompany transactions and balances have been eliminated in consolidation.

Use of Estimates in the Preparation of Financial Statements

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements. The reported amounts of revenues and expenses during the reporting period may be affected by the estimates and assumptions we are required to make.

Cash and Cash Equivalents

Holdings of highly liquid investments with original maturities of three months or less are considered to be cash equivalents.

Fair Values of Financial Instruments and Concentration of Credit Risk

The carrying amounts of our financial instruments included in current assets and liabilities approximate fair value due to their short term nature. In addition, we believe the book values of our mortgage payable and capital lease payable approximates their fair values as the terms of such obligations approximate the terms at which similar types of borrowing arrangements could be currently obtained.

Financial instruments, which potentially subject us to significant concentrations of credit risk, consist primarily of cash and cash equivalents and trade accounts receivable. With respect to cash, we frequently maintain cash and cash equivalent balances in excess of federally insured limits. We have not experienced any losses in such accounts.

Derivative Financial Instruments

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

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

33

BOVIE MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Accounts Receivable and Allowance for Doubtful Accounts

Our credit terms for our billings range from net 10 days to net 60 days, depending on the customer agreement. Accounts receivable are determined to be past due if payments are not made in accordance with such agreements and an allowance is generally recorded for accounts that become three months past due, or sooner if there are other indicators that the receivables may not be recovered. Customary collection efforts are initiated and receivables are written off when we determine they are not collectible and abandon these collection efforts. We gave negotiated sales volume discounts, which amounted to approximately $0.6 million, $0.3 million and $0.6 million for the years ended December 31, 2016, 2015 and 2014, respectively. Sales are reported net of all discounts.

We evaluate the allowance for doubtful accounts on a regular basis for adequacy based upon our periodic review of the collectability of the receivables in light of historical experience, adverse situations that may affect our customers’ ability to pay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. Management believes that the allowances for doubtful accounts of approximately $0.1 million and $0.2 million at December 31, 2016 and 2015, respectively, are, or were, adequate to provide for possible bad debts.

With respect to receivables, our ten largest customers accounted for approximately 42.9% and 48.0% of trade receivables as of December 31, 2016 and 2015, respectively and 54.4%, 58.3% and 61.0% of net revenues for the years ended December 31, 2016, 2015 and 2014, respectively. In 2016, McKesson accounted for 15.9% and National Distribution & Contracting Inc. accounted for 9.8% of our sales. In 2015, McKesson accounted for 18.6% and National Distribution & Contracting Inc. accounted for 13.3% of our sales. In 2014, National Distribution & Contracting Inc. accounted for 13.9% of our sales. No other customer accounted for more than ten percent of our sales in 2014.

Inventories and Repair Parts

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.

We monitor usage reports to determine if the carrying value of any items should be adjusted due to lack of demand for the item and adjust the inventory for estimated obsolescence or unusable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required.

Inventories consisted of the following:
(In thousands)
December 31, 2016
 
December 31, 2015
Raw materials
$
4,521

 
$
5,110

Finished goods
3,048

 
2,080

Gross inventories
7,569

 
7,190

Less: reserve for obsolescence
(1,411
)
 
(1,233
)
Inventories, net
$
6,158

 
$
5,957


The Company recorded changes in excess and obsolete inventory totaling approximately $0.2 million, $0.2 million and $2.0 million during 2016, 2015 and 2014, respectively. The change in 2014 was related to management updates to the commercial plan, book to physical inventory adjustments at both the Clearwater facility and consignments at foreign suppliers and other adjustments.

Property and Equipment

Property and equipment are recorded at cost. Depreciation and amortization are provided for using the straight-line method over the estimated useful lives of the assets. The amortization of leasehold improvements is based on the shorter of the lease term or the life of the improvement. Betterments and large improvements, which extend the life of the asset, are capitalized, whereas maintenance and repairs and small improvements are expensed as incurred. The estimated useful lives are: machinery and equipment, 3-10 years; buildings, 39 years; molds, 7-15 years and furniture and fixtures, 5-10 years.


34

BOVIE MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Intangible Assets

Intangible assets consist of licenses, purchased technology and brand name and trademarks. The licenses and purchased technology are being amortized by the straight-line method over a 5-17 year period commencing with the date they were placed in service.

Brand name and trademark qualifies as an indefinite-lived intangible asset and is not subject to amortization. Intangibles with indefinite lives are analyzed for impairment annually or more frequently if events and circumstances indicate that the asset may be impaired. If impaired, an impairment loss is recognized in an amount equal to the excess of the asset’s carrying value over its fair value. Management concluded that the assigned value at December 31, 2016 of approximately $1.5 million was not impaired and is reasonable.

Other Long-Lived Assets

We review other long-lived assets for recoverability if events or changes in circumstances indicate that the assets may have been impaired. This circumstance exists when the carrying amount of the asset exceeds the sum of the undiscounted cash flows expected to result from its use and eventual disposition. In those cases an impairment loss is recognized to the extent that the assets’ carrying amount exceeds its fair value. Any impairment losses are not restored in the future if the fair value increases. At December 31, 2016, we believe the remaining carrying values of our long-lived assets are recoverable.

Revenue Recognition

Revenue is recognized when title has been transferred to the customer, which is generally at the time of shipment or receipt by customer for FOB destination terms. The following policies apply to our major categories of revenue transactions:

The majority of our sales to customers are evidenced by firm purchase orders. Generally, title and the risks and rewards of ownership are transferred to the customer when the product is shipped. Payment by the customer is due under fixed payment terms.
Product returns are only accepted at our discretion and in accordance with our “Returned Goods Policy”. Historically, the level of product returns has not been significant. We accrue for sales returns, rebates and allowances based upon an analysis of historical customer returns and credits, rebates, discounts and current market conditions.
Our terms of sale to customers generally do not include any obligations to perform future services. Limited warranties are generally provided for sales and provisions for warranty are provided at the time of product sale based upon an analysis of historical data.
Amounts billed to customers related to shipping and handling charges are included in sales. Shipping and handling costs included in cost of sales were approximately $0.2 million, $0.1 million and $0.1 million in 2016, 2015 and 2014, respectively.

Advertising Costs

All advertising costs are expensed as incurred. The amounts of advertising costs were approximately $0.7 million, $0.5 million and $0.5 million for the years ended December 31, 2016, 2015 and