# Apyx Medical Corp: Form 10-Q for the period ended Jun 30, 2018

- Company: [Apyx Medical Corp](/companies/apyx.md) (CIK 719135)
- Form: 10-Q
- Filed: 2018-08-01
- Accepted by EDGAR: Aug 1, 2018, 16:13 ET
- Period: 2018-06-30
- Accession: 0000719135-18-000055
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/719135/000071913518000055/bvx_2018q2x10-q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/719135/000071913518000055/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2018-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Cost of revenue | 3 months, 2018-04-01 to 2018-06-30 | $5.2m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 6 months, 2018-01-01 to 2018-06-30 | $10.1m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2018-04-01 to 2018-06-30 | $6.3m | us-gaap:GrossProfit |
| Gross profit | 6 months, 2018-01-01 to 2018-06-30 | $11.3m | us-gaap:GrossProfit |
| Research and development | 3 months, 2018-04-01 to 2018-06-30 | $816.0k | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 6 months, 2018-01-01 to 2018-06-30 | $1.4m | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2018-04-01 to 2018-06-30 | $2.9m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2018-01-01 to 2018-06-30 | $5.6m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2018-04-01 to 2018-06-30 | −$267.0k | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2018-01-01 to 2018-06-30 | −$1.1m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2018-04-01 to 2018-06-30 | $13.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2018-01-01 to 2018-06-30 | $24.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2018-04-01 to 2018-06-30 | −$272.0k | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2018-01-01 to 2018-06-30 | −$1.2m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2018-04-01 to 2018-06-30 | −$0.01 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2018-01-01 to 2018-06-30 | −$0.04 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2018-04-01 to 2018-06-30 | −$0.01 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2018-01-01 to 2018-06-30 | −$0.04 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2018-04-01 to 2018-06-30 | 32,890,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2018-01-01 to 2018-06-30 | 32,884,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2018-01-01 to 2018-06-30 | −$1.7m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2018-01-01 to 2018-06-30 | $332.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2018-06-30 | $7.9m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2018-06-30 | $22.2m | us-gaap:AssetsCurrent |
| Total assets | at 2018-06-30 | $30.7m | us-gaap:Assets |
| Current liabilities | at 2018-06-30 | $6.2m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2018-06-30 | $9.1m | us-gaap:Liabilities |
| Long-term debt | at 2018-06-30 | $2.3m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2018-06-30 | $239.0k | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2018-06-30 | $21.6m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 30,327 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

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

Bovie Medical Corporation (“Company”, “Bovie Medical”, “we”, “us”, or “our”) was incorporated in 1982, under the laws of the State of Delaware and has its principal executive office at 5115 Ulmerton Road, Clearwater, FL 33760.

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

During 2018, we will continue our full scale commercialization efforts for J-Plasma/Renuvion. We have a direct sales force of 19 field-based selling professionals and a network of 14 independent manufacturing representatives, resulting in a total sales force of 33. This selling organization is focused on the use of J-Plasma for surgical procedures. In addition, we have invested in training programs and marketing-related activities to support accelerated adoption of J-Plasma.

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

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

Our reportable segments are disclosed as principally organized and managed as three operating segments: Core, OEM and Advanced Energy. We adopted reportable segments to align with changes in how we manage our business, review operating performance and allocate resources as a result of the growth in Advanced Energy and the differing behavior of the Core and OEM product lines.

The OEM segment is primarily development contract and product driven. Related expenses are recorded as cost of sales, therefore no segment specific operating expenses are incurred.

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

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

### Results of Operations

#### Sales

*(In thousands)*

| Sales by Reportable Segment | Three Months Ended June 30, 2018 | 2017 | Change | Six Months Ended June 30, 2018 | 2017 | Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Core | $7,784 | $7,488 | 4.0% | $14,303 | $14,263 | 0.3% |
| Advanced Energy | 3,113 | 1,813 | 71.7% | 5,742 | 2,420 | 137.3% |
| OEM | 578 | 498 | 16.1% | 1,346 | 1,505 | (10.6)% |
| Total | $11,475 | $9,799 | 17.1% | $21,391 | $18,188 | 17.6% |
| **Sales by Domestic and International** |  |  |  |  |  |  |
| Domestic | $9,700 | $8,708 | 11.4% | $17,673 | $15,700 | 12.6% |
| International | 1,775 | 1,091 | 62.7% | 3,718 | 2,488 | 49.4% |
| Total | $11,475 | $9,799 | 17.1% | $21,391 | $18,188 | 17.6% |

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

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

#### Gross Profit

*(In thousands)*

|  | Three Months Ended June 30, 2018 | 2017 | Change | Six Months Ended June 30, 2018 | 2017 | Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Cost of sales | $5,198 | $4,757 | 9.3% | $10,124 | $8,920 | 13.5% |
| Percentage of sales | 45.3% | 48.5% |  | 47.3% | 49.0% |  |

|  |  |  |  |  |  |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Gross profit | $6,277 | $5,042 | 24.5% | $11,267 | $9,268 | 21.6% |
| Percentage of sales | 54.7% | 51.5% |  | 52.7% | 51.0% |  |

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

Our gross profit increased by 21.6% or approximately $2.0 million during the six months ended June 30, 2018 when compared to 2017. Increased revenue in the Advanced Energy segment was the primary contributor to the increase in gross profit. Partially offsetting these gains is the impact of unfavorable manufacturing variances in the Core segment for the six months ended June 30, 2018.

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

#### Other Costs and Expenses

#### Research and development

*(In thousands)*

|  | Three Months Ended June 30, 2018 | 2017 | Change | Six Months Ended June 30, 2018 | 2017 | Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Research and Development expense | $816 | $696 | 17.2% | $1,378 | $1,405 | (1.9)% |
| Percentage of sales | 7.1% | 7.1% |  | 6.4% | 7.7% |  |

Research and development spend increased 17.2% for the three months ended June 30, 2018, due to more focused spending on clinical studies and research projects related to cosmetic surgery market.

Research and development spend decreased 1.9% for the six months ended June 30, 2018, due to personnel reductions and discontinuation of Core business related contract design agreements partially offset by more focused spending on clinical studies and research projects related to cosmetic surgery market.

#### Professional services

*(In thousands)*

|  | Three Months Ended June 30, 2018 | 2017 | Change | Six Months Ended June 30, 2018 | 2017 | Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Professional services expense | $681 | $480 | 41.9% | $1,187 | $870 | 36.4% |
| Percentage of sales | 5.9% | 4.9% |  | 5.5% | 4.8% |  |

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

#### Salaries and related costs

*(In thousands)*

|  | Six Months Ended June 30, 2018 | 2017 | Change | Six Months Ended June 30, 2018 | 2017 | Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Salaries and related expenses | $2,118 | $2,243 | (5.6)% | $4,234 | $4,703 | (10.0)% |
| Percentage of sales | 18.5% | 22.9% |  | 19.8% | 25.9% |  |

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

#### Selling, general and administrative expenses

*(In thousands)*

|  | Three Months Ended June 30, 2018 | 2017 | Change | Six Months Ended June 30, 2018 | 2017 | Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| SG&A Expense | $2,929 | $2,929 | —% | $5,599 | $5,333 | 5.0% |
| Percentage of sales | 25.5% | 29.9% |  | 26.2% | 29.3% |  |

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

Selling, general and administrative expense increased by 5.0% or approximately $0.3 million for the six months ended June 30, 2018 when compared to 2017. The increase was driven by consulting in the Advanced Energy segment and sales commissions, partially offset by reductions in travel and entertainment, general insurance and timing differences in marketing.

#### Other Income (Expense), net

*(In thousands)*

|  | Three Months Ended June 30, 2018 | 2017 | Change | Six Months Ended June 30, 2018 | 2017 | Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Interest expense, net | $(38) | $(36) | 5.6% | $(72) | $(67) | 7.5% |
| Percentage of sales | (0.3)% | (0.4)% |  | (0.3)% | (0.4)% |  |
| Change in fair value of derivative liabilities, net | $46 | $38 | 21.1% | $20 | $126 | (84.1)% |
| Percentage of sales | 0.4% | 0.4% |  | 0.1% | 0.7% |  |

#### Interest expense, net

Total net interest expense increased, due to a higher LIBOR rate for the three and six months ended June 30, 2018 as compared with the comparable periods in 2017.

#### Change in fair value of liabilities, net

On December 13, 2013, we entered into a securities purchase agreement pursuant to which we issued 3,500,000 shares of our newly designated Series A 6% Convertible Preferred Stock with a stated value of $2.00 per share and 5,250,000 warrants to purchase our common stock, at an exercise price of $2.387 per share. We also issued 525,000 warrants to the placement agent, of which 40,000 have a strike price of $2.387 and remain outstanding as of June 30, 2018. The warrants are accounted for as derivative financial instruments at fair value and are re-valued each period.

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

#### Income Taxes

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

### Product Development

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

### 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, 2018 was approximately $16.0 million compared with $16.6 million at December 31, 2017. Accounts receivable days sales outstanding were 42 days and 48 days at June 30, 2018 and 2017, respectively. The number of days sales in inventory, which is the total inventory available for production divided by the 12-month average cost of materials, decreased 22 days to 157 days equating to an inventory turn ratio of 2.10 at June 30, 2018 from 179 days and an inventory turn ratio of 2.00 at June 30, 2017. The lower number of days sales in inventory is mainly due to an increase in sales against flat inventory balances compared to June 30, 2017.

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

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

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

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

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

Borrowings under the Loan bear interest at LIBOR plus 3.5%, with a fixed monthly principal payment of $19,956. The interest rate at June 30, 2018 was 5.501%.

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

Approximate future expected principal and interest payments under the Loan agreement are as follows as of June 30, 2018:

*(In thousands)*

|  |  |
| --- | ---: |
| 2018 (remaining six months) | $128 |
| 2019 | 2,536 |
| Total | $2,664 |

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

### Critical Accounting Estimates

In preparing the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP), we have adopted various accounting policies. Our most significant accounting policies are disclosed in Note 2 to the consolidated financial statements included in our report on Form 10-K for the year ended December 31, 2017, filed on March 13, 2018.

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

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

### Inventory reserves

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

### Long-lived assets

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

### 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

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

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

### Income Taxes

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

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

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

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

### Inflation

Inflation has not materially impacted the operations of our Company.

### Off-Balance Sheet Arrangements

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

### 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, 2017. 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, 2018. Based upon that evaluation, our CEO and CFO concluded that, as of the end of that period, our disclosure controls and procedures are effective in providing reasonable assurance that (a) the information required to be disclosed by us in the reports that we filed or submitted under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (b) such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

### Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rules 13(a)-15(f) and 15(d)-15(f)) during the six months ended June 30, 2018 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, 2017, in response to Item 1A to Part 1 of Form 10-K.

Filed Aug 1, 2018.
Source: SEC EDGAR, the filing index for accession 0000719135-18-000055. Last ingested by Listed: Nov 5, 2026, 13:09 ET. No prices; not investment advice.