# Apyx Medical Corp: Form 10-Q for the period ended Jun 30, 2017

- Company: [Apyx Medical Corp](/companies/apyx.md) (CIK 719135)
- Form: 10-Q
- Filed: 2017-08-03
- Accepted by EDGAR: Aug 3, 2017, 07:17 ET
- Period: 2017-06-30
- Accession: 0000719135-17-000029
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/719135/000071913517000029/a2017q210-q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/719135/000071913517000029/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2017-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2017-04-01 to 2017-06-30 | $9.8m | us-gaap:SalesRevenueNet |
| Revenue | 6 months, 2017-01-01 to 2017-06-30 | $18.2m | us-gaap:SalesRevenueNet |
| Cost of revenue | 3 months, 2017-04-01 to 2017-06-30 | $4.8m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 6 months, 2017-01-01 to 2017-06-30 | $8.9m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2017-04-01 to 2017-06-30 | $5.0m | us-gaap:GrossProfit |
| Gross profit | 6 months, 2017-01-01 to 2017-06-30 | $9.3m | us-gaap:GrossProfit |
| Research and development | 3 months, 2017-04-01 to 2017-06-30 | $696.0k | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 6 months, 2017-01-01 to 2017-06-30 | $1.4m | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2017-04-01 to 2017-06-30 | $2.9m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2017-01-01 to 2017-06-30 | $5.3m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2017-04-01 to 2017-06-30 | −$1.3m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2017-01-01 to 2017-06-30 | −$3.0m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2017-04-01 to 2017-06-30 | $4.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2017-01-01 to 2017-06-30 | $9.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2017-04-01 to 2017-06-30 | −$1.3m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2017-01-01 to 2017-06-30 | −$3.0m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2017-04-01 to 2017-06-30 | −$0.04 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2017-01-01 to 2017-06-30 | −$0.10 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2017-04-01 to 2017-06-30 | −$0.04 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2017-01-01 to 2017-06-30 | −$0.10 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2017-04-01 to 2017-06-30 | 30,860,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2017-01-01 to 2017-06-30 | 30,860,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2017-01-01 to 2017-06-30 | −$3.9m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2017-01-01 to 2017-06-30 | $151.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2017-06-30 | $10.3m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2017-06-30 | $24.1m | us-gaap:AssetsCurrent |
| Total assets | at 2017-06-30 | $32.6m | us-gaap:Assets |
| Current liabilities | at 2017-06-30 | $5.6m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2017-06-30 | $9.0m | us-gaap:Liabilities |
| Long-term debt | at 2017-06-30 | $2.6m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2017-06-30 | $239.0k | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2017-06-30 | $23.6m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 33,296 characters.

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

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™ and DERMTM) and on a private label basis to distributors throughout the world. We also leverage our expertise in the design, development and manufacturing of electrosurgical equipment by producing equipment for large, well-known medical device manufacturers through original equipment manufacturing (OEM) agreements, as well as start-up companies with the need for our energy based designs.

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

On November 10, 2016, 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.

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

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

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

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

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

### Results of Operations

#### Sales

*(In thousands)*

| Sales by Reportable Segment | Three Months Ended June 30, 2017 | 2016 | Change | Six Months Ended June 30, 2017 | 2016 | Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Core | $7,488 | $6,881 | 8.8% | $14,263 | $13,359 | 6.8% |
| OEM | 498 | 1,648 | (69.8)% | 1,505 | 2,589 | (41.9)% |
| Advanced Energy | 1,813 | 766 | 136.7% | 2,420 | 1,122 | 115.7% |
| Total | $9,799 | $9,295 | 5.4% | $18,188 | $17,070 | 6.5% |
| **Sales by Product Line** |  |  |  |  |  |  |
| Electrosurgical | $6,206 | $5,078 | 22.2% | $11,536 | $9,330 | 23.6% |
| Cauteries | 1,873 | 1,720 | 8.9% | 3,528 | 3,554 | (0.7)% |
| Lighting | 948 | 800 | 18.5% | 1,393 | 1,306 | 6.7% |
| Other | 772 | 1,697 | (54.5)% | 1,731 | 2,880 | (39.9)% |
| Total | $9,799 | $9,295 | 5.4% | $18,188 | $17,070 | 6.5% |
| **Sales by Domestic and International** |  |  |  |  |  |  |
| Domestic | $8,708 | $7,757 | 12.3% | $15,700 | $14,372 | 9.2% |
| International | 1,091 | 1,538 | (29.1)% | 2,488 | 2,698 | (7.8)% |
| Total | $9,799 | $9,295 | 5.4% | $18,188 | $17,070 | 6.5% |

Overall sales increased by 5.4% or approximately $0.5 million for the three months ended June 30, 2017 when compared with 2016. Core segment revenue, which consists of our brand name electrosurgical devices and accessories, cauteries, penlights, lighting, colposcopes and other similar products, increased 8.8% or approximately $0.6 million for the three months ended June 30, 2017, when compared with 2016. The OEM segment consists of proprietary products designed specifically for third party equipment manufacturers; revenue for this product line decreased 69.8% or approximately $1.2 million, due to a one-time order in the comparable period of 2016. Advanced Energy segment sales were $1.8 million, an increase of approximately 136.7% when compared to 2016.

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

Overall sales increased by 6.5% or approximately $1.1 million for the six months ended June 30, 2017 when compared with 2016. Core segment revenue, which consists of our brand name electrosurgical devices and accessories, cauteries, penlights, lighting, colposcopes and other similar products, increased 6.8% or approximately $0.9 million for the six months ended June 30, 2017, when compared with 2016. The OEM segment consists of proprietary products designed specifically for third party equipment manufacturers; revenue for this product line decreased 41.9% or approximately $1.1 million, due to a one-time order in the comparable period of 2016. Advanced Energy segment sales were $2.4 million, an increase of approximately 115.7% when compared to 2016.

For the six months ended June 30, 2017, the increase in electrosurgical sales was mainly attributable to an increase in sales of generators of $2.0 million and accessories of $0.2 million.

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

#### Gross Profit

*(In thousands)*

|  | Three Months Ended June 30, 2017 | 2016 | Change | Six Months Ended June 30, 2017 | 2016 | Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Cost of sales | $4,757 | $4,595 | 3.5% | $8,920 | $9,048 | (1.4)% |
| Percentage of revenue | 48.5% | 49.4% |  | 49.0% | 53.0% |  |

|  |  |  |  |  |  |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Gross profit | $5,042 | $4,700 | 7.3% | $9,268 | $8,022 | 15.5% |
| Percentage of revenue | 51.5% | 50.6% | 0.9% | 51.0% | 47.0% | 4.0% |

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

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

*(In thousands)*

|  | Three Months Ended June 30, 2017 | 2016 | Change | Six Months Ended June 30, 2017 | 2016 | Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Research and Development expense | $696 | $592 | 17.6% | $1,405 | $1,259 | 11.6% |
| Percentage of revenue | 7.1% | 6.4% |  | 7.7% | 7.4% | 0.3% |

Bringing new, innovative products to market and enhancing existing products is a critical component of our strategy. As such, spending in R&D as a percentage of sales was 7.1% and 7.7% for the three and six months ended June 30, 2017, respectively. The increases over the same periods in 2016, were primarily driven by necessary case studies and trials for recently developed products, prior to commercialization.

#### Professional services

*(In thousands)*

|  | Three Months Ended June 30, 2017 | 2016 | Change | Six Months Ended June 30, 2017 | 2016 | Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Professional services expense | $480 | $396 | 21.2% | $870 | $753 | 15.4% |
| Percentage of revenue | 4.9% | 4.3% | 0.6% | 4.8% | 4.4% | 0.4% |

During the three and six months ended June 30, 2017, professional services expense increased approximately 21.2% and 15.4%, respectively, compared to the prior year. The change was attributable to increases in consulting agreements, related to the Advanced Energy segment and accounting and auditing expense.

#### Salaries and related costs

*(In thousands)*

|  | Three Months Ended June 30, 2017 | 2016 | Change | Six Months Ended June 30, 2017 | 2016 | Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Salaries and related expenses | $2,243 | $2,200 | 2.0% | $4,703 | $4,300 | 9.4% |
| Percentage of revenue | 22.9% | 23.7% |  | 25.9% | 25.2% |  |

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

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

#### Selling, general and administrative expenses

*(In thousands)*

|  | Three Months Ended June 30, 2017 | 2016 | Change | Six Months Ended June 30, 2017 | 2016 | Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| SG&A Expense | $2,929 | $2,022 | 44.9% | $5,333 | $4,213 | 26.6% |
| Percentage of revenue | 29.9% | 21.8% |  | 29.3% | 24.7% |  |

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

Selling, general and administrative expense increased by 26.6% or approximately $1.1 million for the six months ended June 30, 2017, respectively, when compared to 2016. We experienced increases in sales commissions of $0.5 million, administrative, regulatory and trade show expenses of $0.5 million and marketing of $0.3 million, partially offset by decreases in professional service and general insurance of $0.2 million.

#### Other Income (Expense), net

*(In thousands)*

|  | Three Months Ended June 30, 2017 | 2016 | Change | Six Months Ended June 30, 2017 | 2016 | Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Interest expense, net | $(36) | $(50) | (28.0)% | $(67) | $(88) | (23.9)% |
| Percentage of revenue | (0.4)% | (0.5)% |  | (0.4)% | (0.5)% |  |
| Change in fair value of derivative liabilities | $38 | $41 | (7.3)% | $126 | $128 | (1.6)% |
| Percentage of revenue | 0.4% | 0.4% |  | 0.7% | 0.7% |  |

#### Interest expense

Total net interest expense decreased for the three and six months ended June 30, 2017 as compared with 2016, due to a decline in the mortgage note principal balance.

#### Change in fair value of liabilities

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 have a strike price of $2.387, remain outstanding as of June 30, 2017. 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. The remaining Series B Preferred Stock at June 30, 2017 is convertible into an aggregate of 1,951,278 shares of our common stock.

At June 30, 2017, the placement agent warrants were valued at $0.1 million and we recognized a gain of $126,000.

#### Income Taxes

We recorded approximately $4,000 and $9,000 for tax provision during the three and six months ended June 30, 2017, respectively. 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, the current period operating results, as well as future income forecasts based on the projections, management concluded that it was not more likely that the Company should realize 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 adjustment to the valuation allowance, which would increase our income in the period that the determination is made.

### Product Development

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

### Reliance on Collaborative, Manufacturing and Selling Arrangements

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

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

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

### Liquidity and Capital Resources

Our working capital at June 30, 2017 was approximately $18.5 million compared with $21.3 million at December 31, 2016. Accounts receivable days sales outstanding were 48 days and 43 days at June 30, 2017 and 2016, respectively. The number of days sales in inventory, which is the total inventory available for production divided by the 12-month average cost of materials, increased 12 days to 179 days equating to an inventory turn ratio of 2.00 at June 30, 2017 from 167 days and an inventory turn ratio of 2.00 at June 30, 2016. The higher number of days sales in inventory is mainly attributable to an inventory build in support of new, extended and improved product lines.

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

Net cash used in investing activities was attributed to purchases of property and equipment for approximately $151,000 during the six months ended June 30, 2017, compared to $41,000 cash used for the same period in 2016.

Cash used in financing activities of approximately $119,000 during the six months ended June 30, 2017, compared to cash used in financing activities of approximately $60,000 for the same period in 2016.

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 June 30, 2017 was 4.560%.

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

Approximate future expected principal and interest payments under the Loan agreement are as follows as of June 30, 2017:

*(In thousands)*

|  |  |
| --- | ---: |
| 2017 (remaining six months) | $124 |
| 2018 | 247 |
| 2019 | 2,541 |
| Total | $2,912 |

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

### Critical Accounting Estimates

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

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.

### 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 June 30, 2017, 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.

### Recent Accounting Pronouncements

See Note 4 of the Notes to Consolidated Financial Statements.

## Market risk

As filed, 286 characters.

For our disclosures about market risk, please see Part II, Item 7A., "Quantitative and Qualitative Disclosures about Market Risk," in our Annual Report on Form 10-K for the year ended December 31, 2016. We believe there have been no material changes to the information provided therein.

## Controls and procedures

As filed, 1,792 characters.

### Evaluation of Disclosure Controls and Procedures

We have carried out an evaluation, under the supervision of and with the participation of our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended), as of June 30, 2017. Based upon that evaluation, our CEO and CFO concluded that, as of the end of that period, our disclosure controls and procedures are effective in providing reasonable assurance that (a) the information required to be disclosed by us in the reports that we filed or submitted under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (b) such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

### Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rules 13(a)-15(f) and 15(d)-15(f)) during the six months ended June 30, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 178 characters.

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

Filed Aug 3, 2017.
Source: SEC EDGAR, the filing index for accession 0000719135-17-000029. Last ingested by Listed: Nov 5, 2026, 13:09 ET. No prices; not investment advice.