# Apyx Medical Corp: Form 10-Q for the period ended Sep 30, 2014

- Company: [Apyx Medical Corp](/companies/apyx.md) (CIK 719135)
- Form: 10-Q
- Filed: 2014-11-10
- Accepted by EDGAR: Nov 10, 2014, 12:43 ET
- Period: 2014-09-30
- Accession: 0001477932-14-005906
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/719135/000147793214005906/bvx_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/719135/000147793214005906/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2014-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 9 months, 2014-01-01 to 2014-09-30 | $20.2m | us-gaap:SalesRevenueNet |
| Cost of revenue | 3 months, 2014-07-01 to 2014-09-30 | $4.9m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2014-01-01 to 2014-09-30 | $13.7m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2014-07-01 to 2014-09-30 | $1.9m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2014-01-01 to 2014-09-30 | $6.6m | us-gaap:GrossProfit |
| Research and development | 3 months, 2014-07-01 to 2014-09-30 | $368.0k | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 9 months, 2014-01-01 to 2014-09-30 | $1.0m | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2014-07-01 to 2014-09-30 | $2.1m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2014-01-01 to 2014-09-30 | $4.9m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2014-07-01 to 2014-09-30 | −$2.4m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2014-01-01 to 2014-09-30 | −$4.1m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2014-07-01 to 2014-09-30 | −$1.4m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2014-01-01 to 2014-09-30 | −$1.9m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2014-07-01 to 2014-09-30 | −$2.7m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2014-01-01 to 2014-09-30 | −$12.1m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2014-07-01 to 2014-09-30 | −$0.17 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2014-01-01 to 2014-09-30 | −$0.72 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2014-07-01 to 2014-09-30 | −$0.17 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2014-01-01 to 2014-09-30 | −$0.72 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2014-07-01 to 2014-09-30 | 17,780 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2014-01-01 to 2014-09-30 | 17,727 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2014-01-01 to 2014-09-30 | −$615.0k | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2014-01-01 to 2014-09-30 | $319.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2014-09-30 | $6.1m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2014-09-30 | $16.4m | us-gaap:AssetsCurrent |
| Total assets | at 2014-09-30 | $31.3m | us-gaap:Assets |
| Current liabilities | at 2014-09-30 | $3.1m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2014-09-30 | $21.5m | us-gaap:Liabilities |
| Shareholders' equity | at 2014-09-30 | $6.8m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 34,340 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 is no guaranty of future results.

### Executive Level Overview

We are a leading maker of medical devices and supplies as well as the developer of J-Plasma®, a patented new plasma-based surgical product. J-Plasma® utilizes a gas ionization process that produces a stable, focused beam of ionized gas that provides surgeons with greater precision, minimal invasiveness and an absence of conductive currents during surgery. We are also a leader in the manufacture of a range of electrosurgical products and technologies, marketed through both private labels and our own well-respected brands (Bovie®, Aaron®, IDS™ and ICON™) to distributors worldwide. We also leverage our expertise through original equipment manufacturing (OEM) agreements with other medical device manufacturers.

We internally divide our operations into three product lines; electrosurgical products, battery-operated cauteries and other products. The electrosurgical line sells 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. J-Plasma is currently included within the other sales category, which also includes revenue from: nerve locators, disposable and reusable penlights, medical lighting, license fees, development fees and other miscellaneous income.

We are committed to and will continue to invest in the full commercialization of J-Plasma. During the first nine months of 2014 we invested approximately $1.8 million which included the early stages of funding our direct sales force, sales training development, surgeon training, and marketing-related activities and continued R&D. As we accelerate our commercialization of J-Plasma, we expect these investments will increase through the end of 2014. Although we anticipate that these investments will expand our sales and growth in the future, there can be no assurance on the timeframe, or if, the J-Plasma® technology will produce any substantial revenue or return on investment.

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Most of our products currently are marketed through medical distributors that distribute to more than 6,000 hospitals, doctors offices, and other healthcare facilities. New distributors are contacted through responses to our advertising in international and domestic medical journals and domestic or international trade shows. International sales represented approximately 14.3% of total revenues for the first nine months of 2014, as compared with 18.1% for the first nine months of 2013. Our products are sold in more than 150 countries through local dealers which are coordinated by sales and marketing personnel at the Clearwater, Florida facility. For the launch of our new surgical suite product lines, J-Plasma®, we are in the process of building a direct sales force that, as of the filing date of this report, had thirteen direct sales representatives and twenty-one commission-based independent manufacturers' representatives to market these products. Our business is generally not seasonal in nature, but can fluctuate based upon our customers’ capital and inventory purchasing patterns. While our international sales have declined, we did see substantial growth in Latin America, as well as improvement in the Middle East and Africa. We were negatively impacted in Europe, with some product being withdrawn from the market due to regulatory testing and other requirements; however, we made progress in the most recent quarter bringing these products back to market. In addition, we have received approval for compliant, new and improved 200 and 300 watt generators which we expect will offset a portion of the withdrawn product losses, as well as launched the new Derm 101 and 102 product lines primarily targeted to office-based physicians.

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 for the Three and Nine Months Ended September 30, 2014 Compared to the Three and Nine Months Ended September 30, 2013

#### Sales

*(in thousands)*

| Sales by Product Line | Three months ended September 30, 2014 | 2013 | Percent Change | Nine Months Ended September 30, 2014 | 2013 | Percent Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Electrosurgical | $4,221 | $3,110 | 35.7% | $12,212 | $9,753 | 25.2% |
| Cauteries | 1,847 | 1,884 | -2.0% | 5,149 | 5,218 | -1.3% |
| Other | 720 | 800 | -10.0% | 2,853 | 2,561 | 11.4% |
| Total | $6,788 | $5,794 | 17.2% | $20,214 | $17,532 | 15.3% |

| Sales by Domestic and International (in thousands) | Three months ended September 30, 2014 | 2013 | Percent Change | Nine Months Ended September 30, 2014 | 2013 | Percent Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Domestic | $5,913 | $4,950 | 19.5% | $17,326 | $14,358 | 20.7% |
| International | 875 | 844 | 3.7% | 2,888 | 3,174 | -9.0% |
| Total | $6,788 | $5,794 | 17.2% | $20,214 | $17,532 | 15.3% |

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Sales for the three months ended September 30, 2014 increased 17.2% or approximately $994,000 over the same period in 2013. The increase in sales was mainly attributable to increased OEM generator and electrode sales of approximately $786,000 and $225,000 respectively. Contracted development services and sales of other various products increased approximately $158,000. J-Plasma sales increased approximately $76,000 over the same period in 2013. These increases were offset by declines in cautery sales and medical lighting sales of approximately $168,600, with sales discounts, allowances and other miscellaneous charges accounting for the remaining approximately $82,400.

Sales for the nine months ended September 30, 2014 increased 15.3% or approximately $2,682,000 over the same period in 2013. The increase in sales was mainly attributable to increased OEM generator and electrode sales of approximately $1,891,000 and $663,000 respectively. In addition, we had increased medical lighting sales, contracted development services and sales of other various products of approximately $128,000. J-Plasma sales for the nine months ended September 30, 2014 amounted to $136,174, an increase of approximately $105,500 over the same period in 2013. Cautery sales declined slightly year over year.

Our ten largest customers accounted for approximately 62.2% and 60.8% of net revenues for the nine months ended September 30, 2014 and 2013 respectively. For the nine months ended September 30, 2014, one customer accounted for 12.2% of our sales, while for the same nine month period ended in 2013, our three largest customers accounted for 11.8%, 11.7% and 10.5% of our sales. At September 30, 2014, three customers accounted for more than 10% of our accounts receivable and accounted for approximately 35.4% of our total accounts receivable in aggregate.

#### Gross Profit

*(in thousands)*

|  | Three months ended September 30, 2014 | 2013 | Percent of sales 2014 | 2013 | Percent change | Nine Months ended September 30, 2014 | 2013 | Percent of sales 2014 | 2013 | Percent Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Cost of sales | $4,869 | $3,545 | 71.7% | 61.2% | 37.3% | $13,662 | $10,902 | 67.6% | 62.2% | 25.3% |
| Gross profit | $1,919 | $2,249 | 28.3% | 38.8% | -14.7% | $6,552 | $6,630 | 32.4% | 37.8% | -1.2% |

Gross profit declined as a percentage of sales by approximately 14.7% for the three month period ending September 30, 2014 and by approximately 1.2% for the nine month period ending September 30, 2014 compared to the same respective periods in 2013. The decline was due primarily to a charge of approximately $607,000 for the write-down in value of consigned inventory at our Bulgarian supplier and $189,000 in excess and obsolete inventory, attributable to scrap associated with RoHS compliance mandates in Europe, and other product line adjustments. Absent the impact of these and other adjustments, margins were in line with management’s expectations of approximately 41%.

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.

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During the third quarter of 2014, a physical count of consigned inventory was conducted at a Bulgarian supplier and identified an adjustment of approximately $607,000. The Company recorded this charge in the current reported period. The Company believes this adjustment was due to calculating raw material consumed during the manufacturing process at less than full cost. Management concluded that the effect of the third quarter adjustment was not material to the Company’s previously reported quarterly and full-year 2013 financial statements, as well as to the current years previously reported results of operations and financial position.

#### Research and Development

*(in thousands)*

|  | Three months ended September 30, 2014 | 2013 | Percent of sales 2014 | 2013 | Percent change | Nine Months ended September 30, 2014 | 2013 | Percent of sales 2014 | 2013 | Percent Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| R & D Expense | $368 | $291 | 5.4% | 5.0% | 26.5% | $1,019 | $938 | 5.0% | 5.4% | 8.6% |

Research and development costs increased approximately $77,000 and $81,000 for the three and nine month periods ended September 30, 2014, compared to the same respective periods in 2013, due primarily to the accelerated commercialization efforts across all businesses, expenses associated with accounting for stock options and increased outside consulting services.

#### Professional Fees

*(in thousands)*

|  | Three months ended September 30, 2014 | 2013 | Percent of sales 2014 | 2013 | Percent change | Nine Months ended September 30, 2014 | 2013 | Percent of sales 2014 | 2013 | Percent Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Professional services | $142 | $512 | 2.1% | 8.8% | -72.3% | $686 | $1,348 | 3.4% | 7.7% | -49.1% |

Our professional fees decreased by approximately $370,000 during the three months ended September 30, 2014 and by approximately $661,000 for the nine month period ended September 30, 2014 compared to the same respective periods in 2013. The decrease was mainly attributable to decreased legal costs of approximately $331,500 and $663,500, for the three and nine month periods respectively, as the majority of our ongoing litigation ended or had been settled during 2013.

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#### Salaries and related costs

*(in thousands)*

|  | Three months ended September 30, 2014 | 2013 | Percent of sales 2014 | 2013 | Percent change | Nine Months ended September 30, 2014 | 2013 | Percent of sales 2014 | 2013 | Percent Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Salaries & related cost | $1,653 | $751 | 24.4% | 13.0% | 120.1% | $3,980 | $2,568 | 19.7% | 14.6% | 55.0% |

During the three months ended September 30, 2014 compared to the same period in 2013, salary costs increased by 120.1% or approximately $902,000, and by 55.0% or approximately $1,411,000, for the nine month period ended September 30, 2014. The increase was primarily the result of additional salary and incentive compensation expenses related to executive management, direct sales and marketing for J-Plasma, and other growth-related headcount.

#### Selling, General & Administrative Expenses

*(in thousands)*

|  | Three months ended September 30, 2014 | 2013 | Percent of sales 2014 | 2013 | Percent change | Nine Months ended September 30, 2014 | 2013 | Percent of sales 2014 | 2013 | Percent Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| SG & A costs | $2,123 | $1,170 | 31.3% | 20.2% | 81.5% | $4,923 | $4,566 | 24.4% | 26.0% | 7.8% |

Selling, general and administrative expenses increased by approximately $953,000 or 81.5% for the three month period ending September 30, 2014 and by 7.8% or approximately $358,000 for the nine months ended September 30, 2014, as compared to the same respective periods in 2013. This increase for the three month period ended September 30, 2014, was the result of J-Plasma related expenses for marketing, sales training and sales commissions of approximately $370,000, a write-off of uncollectible accounts receivable of approximately $175,000, regulatory compliance costs of approximately $92,000, insurance of $79,000, travel of $71,000, sales commission, advertising and show fees of $93,000, rents, utilities, taxes, supplies and other expenses of $73,000.

#### Other Income (expense)

*(in thousands)*

|  | Three months ended September 30, 2014 | 2013 | Percent of sales 2014 | 2013 | Percent change | Nine Months ended September 30, 2014 | 2013 | Percent of sales 2014 | 2013 | Percent Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Interest income (expense) | $(41) | $(54) | -0.6% | -0.9% | -24.1% | $(111) | $(171) | -0.5% | -0.8% | -35.1% |
| Change in fair value of derivative liabilities | $(1,676) | $13 | -24.7% | -0.2% | -12992.3% | $(9,820) | $17 | -48.6% | 0.1% | -57864.7% |

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#### Interest Expense

Net interest expense decreased by approximately $13,000 or 24.1% the three months ended September 30, 2014 and $60,000 for the nine months ended September 30, 2014, as compared with the same respective periods in 2013. The decrease in the net interest expense is a result of the debt refinancing which occurred March 20, 2014.

#### Change in Fair Value of Derivative 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 (for an aggregate of $7 million) and warrants to purchase 5,250,000 of our common stock, at an exercise price of $2.387 per share. We also issued warrants to purchase 525,000 shares of our common stock, at an exercise price of $2.387 per share, to the placement agent. At December 13, 2013, the investor and placement agent warrants were valued at $4,383,750 and $438,375, respectively. The warrants are accounted for as derivative financial instruments at fair value and are re-valued each reporting period. At September 30, 2014, the investor and placement agent warrants were valued at $12,615,750 and $1,261,575 respectively, and we recognized an aggregate loss related to their change in value of $1,507,275.

In April 2010, we issued warrants to investors and to our placement agent in connection with an equity offering. The warrants issued to the investors contain anti-dilution protection in the event we issue securities at a price lower than the exercise price of the warrants. As a result of the issuance of our Series A 6% Convertible Preferred Stock on December 13, 2013, the exercise price of the investor warrants issued in 2010 was reduced from $6.00 per share to $2.00 per share and the number of warrants was increased proportionately. The 2010 investor and placement agent warrants, which are accounted for as derivative financial instruments at fair value, were valued at $1,271,285 and $68,000 at September 30, 2014 and September 30, 2013, respectively, and we recognized a non-cash net loss for the period ended September 30, 2014 of $168,279 versus a non-cash gain of approximately $17,000 for the three month period ended September 30, 2013.

On March 31, 2014, we entered into an agreement with an existing warrant holder from the April 2010 capital raise pursuant to which we repurchased warrants exercisable into 142,857 shares of Common Stock for an aggregate purchase price of $420,571.

On May 22, 2014 and May 29, 2014, a holder of the April 2010 warrants exercised them for 42,855 and 42,858 shares Common Stock respectively.

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#### Income Taxes

*(in thousands)*

|  | Three months ended September 30, 2014 | 2013 | Percent of sales 2014 | 2013 | Percent change | Nine Months ended September 30, 2014 | 2013 | Percent of sales 2014 | 2013 | Percent Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Loss before income taxes | $(4,084) | $(516) | -60.2% | -8.9% | 691.5% | $(13,987) | $(2,944) | -69.2% | -16.8% | 375.1% |
| Benefit for taxes | $1,350 | $175 | 19.9% | 3.0% | 671.4% | $1,895 | $1,074 | 9.4% | 6.1% | 76.4% |
| Effective tax rate | 33.1% | 33.9% |  |  |  | 13.5% | 36.5% |  |  |  |

During the three months ended September 30, 2014, our current benefit for income tax was $1,350,000. Our effective tax rate was 33% and 13.6% for the three and nine months ended September 30, 2014, respectively. The Company’s effective tax rate differs from the statutory rate due primarily to the recognition of certain losses from the fair value adjustments on the financial statements that are not deductible for tax purposes.

#### Net loss

*(in thousands)*

|  | Three months ended September 30, 2014 | 2013 | Percent of sales 2014 | 2013 | Percent change | Nine Months ended September 30, 2014 | 2013 | Percent of sales 2014 | 2013 | Percent Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net Loss | $(2,976) | $(341) | -43.8% | -5.9% | 772.7% | $(12,760) | $(1,870) | -63.1% | -10.7% | 582.4% |

### 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 the proceeds of 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. We have a centralized research and development focus in Florida for new product development and product improvements. Our research, development and engineering units at our manufacturing location maintain relationships with suppliers, distribution locations and customers to provide an understanding of changes in the market and product needs. During the first nine months of 2014, we continued to invest in expanding our J-Plasma product line and technology. We intend to pay the ongoing costs for this development from operating cash flows; however, we continually assess our capital needs on an internal and macro economic basis, and if we deem necessary, may seek additional capital.

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### Reliance on Collaborative, Manufacturing and Selling Arrangements

We depend on certain contractual OEM customers for product development. In these situations, we plan to manufacture the products developed. However, the customer generally has no legal obligation to purchase the developed products. If the collaborative customer fails to give us purchase orders for the product after development, our future business and value of related assets could be negatively affected. Furthermore, we can give no assurance that a collaborative customer may give sufficient high priority to our products. In addition, disagreements or disputes may arise between us and our contractual customers, which could adversely affect production of our products. We also have two collaborative arrangements with foreign suppliers, in which we request the development of certain items and components, and we purchase them pursuant to purchase orders. Our purchase orders are never longer than one year and are supported by orders from our customers. We have a manufacturing agreement with our Bulgarian supplier which may result in certain contingent liabilities on our part if we terminate our arrangement prior to July 1, 2015.

### Liquidity and Capital Resources

Our working capital at September 30, 2014 declined approximately $3.7 million to $13.3 million when compared to the approximately $17.0 million at December 31, 2013. Accounts receivable days of sales outstanding were 35.8 days and 34.0 days at September 30, 2014 and 2013, respectively. The increase in receivable days was due to increased volume and timing. The number of days worth of sales in inventory, which is the total inventory available for production divided by the 12 month average cost of materials, decreased 81 days to 198 days equating to an inventory turn ratio of 1.8 at September 30, 2014 from 280 days and an inventory turn ratio of 1.2 at December 31, 2013. The lower number of days worth of sales is mainly due to decreased inventory resulting from the increase in sales of OEM generators and electrodes and a write down of excess and obsolete inventory during the nine month period ended September 30, 2014.

We used cash in operations of approximately $614,270 for the nine months ended September 30, 2014, compared to cash used in operations of approximately $1.2 million for the same period in 2013. Gains in our core and OEM businesses were more than offset by expenses associated with the increased commercialization efforts surrounding J-Plasma.

During the nine month period ended September 30, 2014, we used approximately $319,419 for the purchase of property and equipment as compared to purchases amounting to approximately $417,000 for the same period in 2013.

Cash used by financing activities of approximately $855,000 during the first nine months of 2014, an increase of cash used of approximately $800,000 as compared with the same period in 2013. The increase in cash used was primarily the result of our paying the Industrial Revenue Bonds in the amount of approximately $3.26 million, the redemption of warrants in the amount of approximately $421,000 offset by proceeds from the exercise of warrants of approximately $248,860, from our note payable with the Bank of Tampa for approximately $3.5 million, and compliance with a loan covenant to restrict $898,000 of cash during the nine months ended September 30, 2014.

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On March 20, 2014, we entered into a transaction with The Bank of Tampa, a Florida banking corporation (“Lender”) wherein Lender extended to us a mortgage loan in the principal amount of $3,592,000 (the “Loan”). The obligations under the Loan are secured by a first mortgage and security interest in the Company’s Clearwater, Florida facility as well as an assignment of our accounts receivable. In addition, we pledged an interest in a certificate of deposit in the amount of $898,000 as additional collateral which declines annually on a pro rata basis as principal is paid. The initial maturity date of the Loan is March 20, 2017; however we have an option to extend the maturity date until March 20, 2022.

Borrowings under the Loan bear interest at LIBOR plus 3.5%, with a fixed monthly principal payment of $19,956.

The Loan documents contain customary financial covenants, including a covenant that we maintain a minimum liquidity of $750,000. Although there is no Debt Service Coverage Ratio (as defined in the Loan Agreement) for the initial term of the Loan, should we desire to extend the Loan beyond three years, we must maintain a Debt Service Coverage Ratio for each of the preceding four quarters of not less than 1.0 to 1.0. In the event the Loan is extended, the Debt Service Coverage Ratio must not be less than 1.2 to 1.0.

Simultaneously with the closing of the Loan, we redeemed those certain Industrial Revenue Bonds issued by the Pinellas County Industrial Development Authority and satisfied its obligations to our prior lender, PNC Bank, N.A (“PNC Bank”). In connection with the redemption of the Bonds, we paid PNC Bank $3,188,332 to satisfy its existing credit facility. In connection with the termination of the interest rates swap agreement with PNC Bank, we paid PNC Bank an additional $410,275.

Our future contractual obligations for agreements with initial terms greater than one year and agreements to purchase materials in the normal course of business are summarized as follows (in thousands):

| Description | Years Ending December 31, 2014 | 2015 | 2016 | 2017 | 2018 | Therafter |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Operating leases | $55 | $104 | $107 | $110 | $112 | $115 |
| Purchase commitments | 3,375 | - | - | - | - | - |
| Long-term debt | 60 | 239 | 239 | 2,934 | - | - |
| Total | $3,490 | $343 | $346 | $3,044 | $112 | $115 |

We are continuing to make substantial investments in the development and marketing of our J-Plasma® technology, which may adversely affect our profitability and cash flow in the next 12 to 24 months. While we believe that these investments may 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. Since June 2010 through September 30, 2014, we have invested approximately $4.7 million in the development and marketing of our J-Plasma® technology, of which $875,000 was invested in the third quarter of 2014.

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### 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/A for the year ended December 31, 2013, which we filed on May 8, 2014.

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, 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

When necessary, we maintain reserves 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. As such, for the quarter ended September 30, 2014, we recorded a charge of approximately $189,000.

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#### 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. For the quarter just ended, the company reviewed such assets and found no impairment indicators.

#### Liabilities valued at fair value

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 (see Note 5).

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 2012 equity incentive plan, options to purchase shares of our common stock may be granted to our key employees, officers, directors and consultants by the Board of Directors. We account for stock options in accordance with FASB ASC Topic 718 *Compensation-Stock Compensation* with option expense amortized over the vesting period based on the trinomial lattice option-pricing model fair value on the grant date, which includes a number of estimates that affect the amount of our expense.

#### Litigation Contingencies

From time to time, we are exposed to claims and litigation arising in the ordinary course of business 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.

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#### Income taxes

We utilize the liability method of accounting for income taxes as set forth in ASC 740. Under the liability method, deferred taxes are determined based on the temporary differences between the financial statement and tax basis of assets and liabilities using tax rates expected to be in effect during the years in which the basis differences reverse. A valuation allowance is recorded when it is more likely than not that some of the deferred tax assets will not be realized. In determining the need for valuation allowances we considered projected future taxable income and availability of tax planning strategies. If in the future we determine that that we would not be able to realize our recorded deferred tax assets, an increase in the valuation allowance would be recorded, decreasing earnings in the period in which such determination is made.

We assess our income tax positions and record tax benefits for all years subject to examination based upon our evaluation of the facts, circumstances and information available as of the reporting date. For those tax positions where there is a greater than a 50% likelihood that a tax benefit will be sustained, we have recorded the largest amount of tax benefit that may potentially be realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where there is less than 50% likelihood that a tax benefit will be sustained, no tax benefit has been recognized in the financial statements.

#### 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.

#### Foreign Currency Exchange

Foreign currency exchange has not materially impacted the operations of our company.

#### Recent Accounting Pronouncements

See Note 4.

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## Market risk

As filed, 577 characters.

Our short-term investments consist of cash and cash equivalents. 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 September 30, 2014, this change would not have had a material effect on the fair value of our investment portfolio as of that date.

## Controls and procedures

As filed, 1,777 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 September 30, 2014. 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 file or submit 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 Controls

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 nine months ended September 30, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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## Risk factors

As filed, 180 characters.

There have been no material changes to the risk factors previously disclosed in our Form 10-K/A for the year ended December 31, 2013, in response to Item 1A to Part 1 of Form 10-K.

Filed Nov 10, 2014.
Source: SEC EDGAR, the filing index for accession 0001477932-14-005906. Last ingested by Listed: Nov 5, 2026, 13:09 ET. No prices; not investment advice.