# Apyx Medical Corp: Form 10-K for the period ended Dec 31, 2014

- Company: [Apyx Medical Corp](/companies/apyx.md) (CIK 719135)
- Form: 10-K
- Filed: 2015-02-27
- Accepted by EDGAR: Feb 27, 2015, 14:13 ET
- Period: 2014-12-31
- Accession: 0001477932-15-001424
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/719135/000147793215001424/bvx_10k.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/719135/000147793215001424/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2014-12-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2014-10-01 to 2014-12-31 | $7.5m | us-gaap:Revenues |
| Revenue | 12 months, 2014-01-01 to 2014-12-31 | $27.7m | us-gaap:SalesRevenueNet |
| Cost of revenue | 12 months, 2014-01-01 to 2014-12-31 | $18.7m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2014-10-01 to 2014-12-31 | $2.4m | us-gaap:GrossProfit |
| Gross profit | 12 months, 2014-01-01 to 2014-12-31 | $9.0m | us-gaap:GrossProfit |
| Research and development | 12 months, 2014-01-01 to 2014-12-31 | $1.4m | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 12 months, 2014-01-01 to 2014-12-31 | $6.7m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 12 months, 2014-01-01 to 2014-12-31 | −$5.8m | us-gaap:OperatingIncomeLoss |
| Income tax | 12 months, 2014-01-01 to 2014-12-31 | $4.0m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2014-10-01 to 2014-12-31 | −$5.5m | us-gaap:NetIncomeLoss |
| Net income | 12 months, 2014-01-01 to 2014-12-31 | −$17.3m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2014-10-01 to 2014-12-31 | −$0.31 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 12 months, 2014-01-01 to 2014-12-31 | −$1.03 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 12 months, 2014-01-01 to 2014-12-31 | −$1.03 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 12 months, 2014-01-01 to 2014-12-31 | 17,756 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 12 months, 2014-01-01 to 2014-12-31 | −$417.0k | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 12 months, 2014-01-01 to 2014-12-31 | $630.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2014-12-31 | $5.7m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2014-12-31 | $15.4m | us-gaap:AssetsCurrent |
| Total assets | at 2014-12-31 | $24.8m | us-gaap:Assets |
| Current liabilities | at 2014-12-31 | $3.8m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2014-12-31 | $20.1m | us-gaap:Liabilities |
| Shareholders' equity | at 2014-12-31 | $1.5m | us-gaap:StockholdersEquity |

## Business

As filed, 25,601 characters.

### General

Bovie Medical Corporation (“Company”, “Bovie Medical”, “we”, “us”, or “our”) was incorporated in 1982, under the laws of the State of Delaware and has its principal executive office at 4 Manhattanville Road, Suite #106, Purchase, New York 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®, Aaron®, IDS™ and ICON™) and on a private label basis to distributors throughout the world. The Company also leverages its expertise in the design, development and manufacturing of electrosurgical equipment by producing equipment for large, well-known medical device manufacturers through original equipment manufacturing (OEM) agreements.

We are also the developer of J-Plasma®; a patented new plasma-based surgical product which we believe has the potential to be a transformational product for surgeons. J-Plasma utilizes a helium 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. While currently in the early stages of commercialization, J-Plasma has been the subject of five independent white papers and has been cited therein for its clinical utility in gynecological surgeries and dermatologic/facial plastic surgery procedures.

### Significant Subsidiaries

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

### Industry

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

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

### Business Strategy

In December 2013, Robert L. Gershon was appointed as Chief Executive Officer and a member of our Board of Directors and was charged with developing a growth strategy for Bovie and bringing together a management team comprised of existing and new executives. Over the course of 2014, the leadership team at Bovie has taken shape, and we have devoted significant time to evaluating the Company’s competitive positioning, product pricing, sales and marketing programs and research and development portfolio. Through these efforts, we have been able to fine-tune our business strategy and work toward building a platform for long-term success.

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

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

Additionally, we completed the development of our new DERM™ 101, DERM™ 102, and IDS™ 310 products, which represented the first new product launch in our core portfolio in several years and demonstrated Bovie’s commitment to leadership in this space. Also in October 2014, we submitted a 510(k) application for the Bovie Ultimate™, a generator that combines J-Plasma technology with the advanced features of the highest wattage operating room electrosurgical generator. On December 12, 2014 the 510(k) was cleared for marketing by FDA.

Our J-Plasma product initially received FDA clearance in 2012, and a CE mark in December, 2014 which will enable us to sell the product in Europe. While J-Plasma is currently in the commercialization process, several important milestones have been achieved in 2014 notably, sales of J-Plasma have increased almost five-fold versus 2013, while gaining momentum for 2015. At the end of 2014, we had 28 ordering accounts and our systems were being evaluated by over 20 Hospital Value Analysis Committees (VACs). We also had a direct sales force of 16, dedicated to driving adoption of J-Plasma, and supplemented by a cadre of 20 independent manufacturers’ representatives, compared to zero direct sales and approximately 56 independent manufacturers’ representatives at the beginning of 2014.

J-Plasma was recognized by the Society of Laparoendoscopic Surgeons (SLS) as an Innovative Product of the Year at their annual meeting in September 2014. SLS is an educational, non-profit organization established to ensure the highest standards for the practice of laparoscopic, endoscopic and minimally invasive surgery. Each year, SLS recognizes the most innovative products of the last 12 months that have a broad application in minimally invasive surgery.

We are continuing to make substantial investments in the development and marketing of our J-Plasma technology for the long term benefit of the Company and its stakeholders, and this may adversely affect our short term profitability and cash flow, particularly over the next 12 to 24 months. While we believe that these investments have the potential to generate additional revenues and profits in the future, there can be no assurance that J-Plasma will be successful or that such future revenues and profitability will be realized. From June of 2010 through December 31, 2013, we invested approximately $2.9 million in the development and marketing of our J-Plasma technology and an additional approximately $2.6 million through 2014, bringing the total investment to approximately $5.5 million since inception, this includes approximately $1.8 million in R&D and approximately $3.7 million invested in sales and marketing.

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### Company Products

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

### Electrosurgery Products

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

#### DERM 101 and DERM 102

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

#### Aaron 940/ Aaron 950 / Aaron 1250U

The Aaron 940 is a Bovie developed, low powered 40-watt high frequency desiccator designed primarily for dermatology and family practice physicians. The units are used mainly for removing small skin lesions and growths as well as for coagulation for office based procedures.

The Aaron 950 is a 60-watt high frequency desiccator with the added feature of a cut capacity for outpatient surgical procedures. In effect, the 950 is two independent surgical devices in one small package. It is designed mainly for use in doctors’ offices and is utilized in a broad range of specialties including dermatology, gynecology, family practice, urology, plastic surgery and ophthalmology.

The Aaron 1250U is a 120-watt multipurpose electrosurgery generator. The unit features monopolar and bipolar functions with pad sensing. This product is considered to be ideally suited for office-based procedures in the specialties of gynecology, plastic surgery and urology.

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#### Aaron2250 / 3250 and IDS 200 / 300 / 400

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

The IDS 200/ Aaron 2250 are 200-watt generators that have the capability to be used in the majority of procedures performed today in surgi-center or outpatient settings. Although 200 watts is adequate to do most procedures in the operating room, 300 watts is considered the standard and believed to be what most hospitals and surgi-centers will require. To meet this requirement, we developed the IDS 300/ Aaron 3250.

IDS 310/210 and Aaron 3350/2350 are the next generation of surgi-center and operating room generators. These units incorporate the best features of the IDS 300 and upgrade its capabilities by providing additional bipolar options, including the 225-watt Bovie bipolar feature and an auto bipolar feature. The 300 watt units also offer two pencils with simultaneous activation in fulguration mode.

The Bovie IDS 400 is a 400-watt generator designed primarily for sale in markets outside of the United States. These units feature both monopolar and bipolar functions, have pad and tissue sensing, and include nine blended cutting settings.

#### The ICON Platform

The ICON product lines are innovative, custom designed specialty electrosurgical generators that incorporate an easy to use touch-screen interface that provides the user with added flexibility through various digitally built-in modes. In addition, the ICON product line was designed to enhance safety and convenience by protecting against pad burns by using split pads. It features specialized error messaging to prevent misinterpretation, allows for rapid troubleshooting, and has specialized audible alerts to indicate improper cable connections. The ICON line represents a platform for Bovie, which we can leverage in the future to expand our portfolio of specialized generators as well as to offer upgrades to our existing units, with shorter times-to-market and lower development costs.

The *ICON GI, ICON GP*

The ICON GI is designed for the gastrointestinal (“GI”) market, while the ICON GP is designed for a more general purpose operations and procedures performed in hospital operating rooms, surgery centers, etc.

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### Electrosurgical Disposables

*Resistick™ II*

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

#### Disposable Laparoscopic Electrodes

We are introducing a line of disposable laparoscopic electrodes in the first quarter of 2015 in Resitick coated and stainless steel for use by physicians from a broad group of specialties including gynecology, general surgery and urology. These electrodes will be offered in J-hook, L-hook, needle, ball and spatula design and have an adapter included which makes these laparoscopic electrodes usable with a 3/32” or 4mm plug.

### Cauteries

#### Battery Operated Cauteries

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

### Other Products

#### Battery Operated Medical Lights

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

#### Nerve Locator Stimulator

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

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### J-Plasma Products

#### ICON GS

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

The 510(k) cleared and CE mark approved Bovie Ultimate generator will eventually replace the ICON GS plasma system. In addition to the J-Plasma technology, the Bovie Ultimate will have the IDS 310 capability, offering users monopolar, bipolar and plasma features, all in one generator.

#### J-Plasma Disposable Portfolio

We offer different hand pieces for open and laparoscopic procedures. The helium-based plasma generated from these devices have been shown to cause less thermal damage to tissue than C02 laser, argon plasma and RF energy products currently available on the market.

The most recent product launched in the J-plasma portfolio is the Pistol Grip handpiece. This product offers improved ergonomics and is providing an increased rate of adoption of the technology. Bovie will continue to launch products from a rich pipeline that will allow surgeons to treat from a variety of surgical specialties.

The technology has a general indication and can be used for cutting, coagulating and ablating soft tissue. The three primary specialties that are targeted in phase one of the product launch are gynecology, dermatology and plastic surgery. However, given the wide range of tissue applications for J-Plasma we are engaged in ongoing development to create products for the gastrointestinal, general, urology, ear, nose & throat, and cardiovascular surgery specialties as well as wound management.

The advantages of helium plasma continue to be studied throughout the medical and scientific communities. We believe that surgical applications are just one area of opportunity for this technology.

### Research and Development and New Products

Our research and development activities are an essential component of our efforts to develop innovative products for introduction in the marketplace to drive sales growth. We continue to emphasize the development of proprietary products and product improvements to complement and expand our existing product lines. In 2014, we spent approximately $1,416,000 in R&D versus approximately $1,260,000 during the same period of 2013, an increase of approximately 12.4%. In 2014, we hired a Director of Research and Development (R&D), and we maintain close working relationships with physicians and medical personnel in hospitals and universities who assist in product research and areas of development. Bovie products produced in 2014 thanks to our internal research and development activities include: the J-Plasma Pistol Grip, the DERM 101 and DERM 102, the IDS 310 and 210 and the Aaron 3350 and 2350. Approximately one-third of our R&D spending is related to further developing our J-Plasma product line.

### Sales & Marketing

The majority of our core products are marketed through medical distributors, which distribute to more than 6,000 hospitals and to doctors and other healthcare facilities. New distributors are contacted through responses to our advertising in international and domestic medical journals and our presence at domestic and international trade shows. International sales represented approximately 16% of total revenues in 2014, compared to approximately 17% in 2013. Management estimates our products have been sold in more than 150 countries through local dealers coordinated by sales and marketing personnel at our Clearwater, Florida facility.

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During 2014, we commenced full scale commercialization efforts for J-Plasma. As of this date we have increased our direct sales force to 16 field-based selling professionals, and coupled with our independent manufacturer's representatives give us a total sales force of 36. This is a hospital focused selling organization with its focus on the use of J-Plasma for operating room procedures. In addition, we have invested in training programs and marketing-related activities to support accelerated adoption of J-Plasma.

### Competition

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

Our main competitors in electrosurgical and accessory markets are Valleylab (a division of Covidien), Conmed and Erbe Electromedizine. In the battery operated cautery market, our main competitor is Beaver Visitec, and in the endoscopic instrumentation market, it is Ethicon (a division of Johnson and Johnson) and Covidien Surgical Solutions (formally U.S. Surgical, a division of Covidien). Currently, we are the only company with helium-based plasma and retractable blade products. However, there are argon plasma competitors, Conmed and Plasmajet, and CO2 laser competitors for our target market. We believe our competitive position did not change in 2014.

### Intellectual Property

We rely on our intellectual property that we have developed or acquired over the years including patents, trade secrets, technical innovations, and various licensing agreements to provide our future growth and build our competitive position. We own 23 patents and 9 registered trademarks in the U.S. and have had 13 patents issued outside the U.S. Some of our early patents are nearing the end of their patent term. Of those 23 patents, 15 are related to J-Plasma, with 8 issued and 7 pending. We also have filed a number of U.S. and international patent applications for various new products. As we continue to expand our intellectual property portfolio we believe it is critical for us to continue to invest in filing patent applications to protect our technology, inventions, and improvements. However, we can give no assurance that competitors will not infringe on our patent rights or otherwise create similar or non-infringing competing products that are technically patentable in their own right.

### Manufacturing and Suppliers

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

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We also have collaborative arrangements with four foreign suppliers under which we request the development of certain items and components, which we purchase pursuant to purchase orders. Our purchase order commitments are never more than one year in duration and are supported by our sales forecasts. Over the past few years we have expanded the use of our Bulgarian supplier who manufactures a substantial number of our generator and accessory components. We anticipate expanding this relationship further to include manufacturing a large number of our J-Plasma components

### Customers

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

### Backlog

The value of unshipped factory orders is not material.

### Employees

At December 31, 2014, we had 152 full-time employees of whom 6 were executive officers, 28 supervisory personnel, 19 sales personnel, and 99 technical support, administrative, and production employees. None of our current employees is covered by a collective bargaining agreement, and we have never experienced a work stoppage. We consider our employee relations to be good.

## Risk factors

As filed, 34,307 characters.

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

### Risks Related to Our Industry

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

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

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

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We have also invested, and continue to invest, substantial resources to develop and monetize, our J-Plasma technology. If we are unable to gain acceptance in the marketplace of J-Plasma, our business and results of operations may be materially and adversely affected. From June of 2010 through December 31, 2014, we have invested approximately $5.5 million in the development and marketing of our J-Plasma technology.

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

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

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

### United States

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

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

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

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

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

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

### International Regulation

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

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

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

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

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

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

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

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

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The amount expended by us on research and development of our products during the years 2014, 2013, and 2012, totaled approximately $1.4, $1.3, and $1.3 million respectively. During the past three years, we invested substantial resources in the development and marketing of our J-Plasma technology, including the ICON GS plasma system, Endoscopic Modular Instruments and accompanying new generators. We have not incurred any direct costs relating to environmental regulations or requirements. For 2015, we expect the amount of our expenditures for research and development activities to remain similar to the level in 2014.

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

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

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

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

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

We operate internationally and enter into transactions denominated in foreign currencies. To date, we have not hedged our exposure to changes in foreign currency exchange rates, and as a result, we are subject to foreign currency transaction and translation gains and losses. We purchase goods and services in U.S. dollars and Euros. Foreign exchange risk is managed primarily by satisfying foreign denominated expenditures with cash flows or assets denominated in the same currency therefore we are subject to some foreign currency fluctuation risk. Our currency value fluctuations were not material for 2014.

14

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

The Patient Protection and Affordable Care Act and Health Care and Education Affordability Reconciliation Act were enacted into law in the U.S. in March 2010. Among other initiatives, this legislation imposes a 2.3% excise tax on domestic sales of class I, II, and III medical devices beginning in 2013. Substantially all of our products are class I or class II medical devices. In 2014 and 2013 we paid medical device excise tax of approximately $435,926 and $384,438, respectively. As approximately 84% of our 2014 sales were derived in the U.S. we cannot predict if any additional regulations will be implemented at the federal or state level, or the effect of any future legislation or regulation in the U.S. or internationally.

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

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

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

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

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

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### Risks Relating to Our Business

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

We manufacture the majority of our products on our premises in Clearwater, Florida. 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, the Bovie/Aaron 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), Owens & Minor, and Physician Sales & Service (PSS) now a division of McKesson. If any of these distributor relationships are terminated or not replaced, our revenue from the territories served by these distributors could be adversely affected.

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

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

Fluctuations in the price, availability, and quality of the raw materials we use in our manufacturing could have a negative effect on our cost of sales and our ability to meet the demands of our customers. Inability to meet the demands of our customers could result in the loss of future sales. In addition, the costs to manufacture our products depend in part on the market prices of the raw materials used to produce them. We may not be able to pass along to our customers all or a portion of our higher costs of raw materials due to competitive and marketing pressures, which could decrease our earnings and profitability.

We also have collaborative arrangements with four 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. Over the past few years we have expanded the use of our Bulgarian supplier who manufactures a substantial number of our generator and accessory components. We anticipate expanding this relationship further to include manufacturing a large number of our J-Plasma components.

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

We own 23 patents and 9 registered trademarks in the U.S. and have had 13 patents issued outside the U.S. with some of our early patents nearing the expiration of their patent term. Of those 23 patents, 15 are related to J-Plasma, with 8 issued and 7 pending. We also have several U.S. and international patent applications pending for various new products. We intend to continue to seek legal protection, primarily through patents, for our proprietary technology. Seeking patent protection is a lengthy and costly process, and there can be no assurance that patents will be issued from any pending applications, or that any claims allowed from existing or pending patents will be sufficiently broad or strong to protect our proprietary technology. There is also no guarantee that any patents we hold will not be challenged, invalidated or circumvented, or that the patent rights granted will provide competitive advantages to us. Our competitors have developed and may continue to develop and obtain patents for technologies that are similar or superior to our technologies. In addition, the laws of foreign jurisdictions in which we develop, manufacture or sell our products may not protect our intellectual property rights to the same extent as do the laws of the United States.

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

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

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

#### Other Litigation

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

#### Intellectual Property Litigation or Trade Secrets

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

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#### Product Liability Litigation

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

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

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

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

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

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

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### Risks Related to Our Stock

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

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

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

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

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

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

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

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

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

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

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

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

In the future we may determine to raise capital through offerings of our common stock, securities convertible into our common stock or rights to acquire these securities or our common stock. For instance, we are authorized to issue up to 40,000,000 shares of common stock and up to 10,000,000 shares of preferred stock, of which 3,500,000 shares have been designated as Series A 6% Convertible Preferred Stock. To facilitate a potential capital raise, we filed a shelf-registration with the Securities and Exchange Commission in December 2014, although there is no guarantee we will utilize such registration statement. The result of sales of such securities, or the conversion of the Series A 6% Convertible Preferred Stock into shares of common stock, the exercise of warrants issued in connection with such offering or the triggering of anti-dilution provisions in such securities would ultimately be dilutive to our common stock by increasing the number of shares outstanding. We cannot predict the effect this dilution may have on the price of our common stock. In addition, the shares of preferred stock may have rights which are senior or superior to those of the common stock, such as rights relating to voting, the payment of dividends, redemption or liquidation.

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

As of December 31, 2014, the warrants issued by us in April 2010 were exercisable for up to approximately 672,858 shares of our common stock, representing approximately 3.8% of our then outstanding common stock.

As of December 31, 2014, the warrants issued by us in December 2013 were exercisable for up to approximately 5,746,875 shares of our common stock, representing approximately 32% of our then outstanding common stock.

As of December 31, 2014, our outstanding stock options to our employees, officers, directors and consultants amounted to approximately 2,864,189 shares of our common stock, representing approximately an additional 16% of our then outstanding common stock.

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

## Properties

As filed, 693 characters.

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

In February 2014, we closed our executive offices located in Melville, New York. This facility had previously been leased for approximately $1,500 per month.

In March 2014, we signed a lease for offices located in Purchase, New York. The lease is for 3,650 square feet of office space with a monthly cost of approximately $8,500 per month.

## Legal proceedings

As filed, 1,688 characters.

### Stockholder Derivative Action

In September 2011, the Company was served in a purported stockholder derivative action (the “Derivative Action”) that was filed in the United States District Court for the Middle District of Florida (the “Court”) against the Company and certain of its present and former officers and directors. The complaint asserted, among other things, breach of fiduciary duties and bad faith in relation to the management of the Company’s business. The complaint sought, among other things, unspecified compensatory damages and various forms of equitable relief. The allegations in the Derivative Action appear to be based largely on counterclaims previously asserted by Steven Livneh, a former director of the Company, in a prior litigation between the Company and Mr. Livneh which was settled.

On June 26, 2014, the Company entered into a Stipulation and Agreement of Settlement (“Stipulation of Settlement”) setting forth the terms of the settlement of the claims asserted against the Company in the Derivative Action. On July 7, 2014, the Court issued an Amended Order Preliminarily Approving Derivative Settlement and Providing for Notice (“Preliminary Order”) preliminarily approving the Stipulation of Settlement. On October 2, 2014, the Court entered an order and final judgment approving the Stipulation of Settlement.

### Other Matters

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

## Management's discussion and analysis

As filed, 33,005 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 on 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.

### Executive Level Overview

We are a medical device company engaged in manufacturing and marketing of electrosurgical devices. Our medical products include a wide range of devices including electrosurgical generators and accessories, cauteries, medical lighting, nerve locators and other products.

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

The majority of our core products are marketed through medical distributors, which distribute to more than 6,000 hospitals, and to doctors and other healthcare facilities. New distributors are contacted through responses to our advertising in international and domestic medical journals and our presence at domestic and international trade shows. International sales represented approximately 16% of total revenues in 2014, 17% in 2013, and 18% in 2012. Management estimates our products have been sold in more than 150 countries through local dealers which are coordinated by sales and marketing personnel at the Clearwater, Florida facility.

During 2014, we commenced full scale commercialization efforts for J-Plasma. As such; as of this date we have increased our direct sales force to 16 field-based selling professionals, and coupled with our independent manufacturing representatives give us a total sales force of 36. This is a hospital based selling organization with its focus on the use of J-Plasma for operating room procedures. In addition, we have invested in training programs and marketing-related activities to support accelerated adoption of J-Plasma.

Our business is generally not seasonal in nature. Our international sales increased 5.5% in 2014 compared to 2013, with substantial growth in Latin America, as well as improvement in the Middle East and Asia. The company was negatively impacted in Europe with some product being withdrawn from the market due to regulatory testing and requirements. The company has received approval for compliant, new and improved 200 and 300-watt generators. This will fill a portion of the lost product opportunity.

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.

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### Results of Operations

#### Sales

| Sales by Product Line (in thousands) | 2014 vs. 2013 2014 | 2013 | Percent Change | 2013 vs. 2012 December 31, 2013 | 2012 | Percent Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Electrosurgical | $16,706 | $13,174 | 26.8% | $13,174 | $17,697 | -25.6% |
| Cauteries | 6,896 | 6,972 | -1.1% | 6,972 | 7,014 | -0.6% |
| Other | 4,079 | 3,514 | 16.1% | 3,514 | 2,960 | 18.7% |
| Total | $27,681 | $23,660 | 17.0% | $23,660 | $27,671 | -14.5% |
| **Sales by Domestic and Internatonal (in thousands)** |  |  |  |  |  |  |
| Domestic | $23,313 | $19,521 | 19.4% | $19,521 | $22,704 | -14.0% |
| International | $4,368 | 4,139 | 5.5% | 4,139 | 4,967 | -16.7% |
| Total | $27,681 | $23,660 | 17.0% | $23,660 | $27,671 | -14.5% |
| **Sales by Operating Segment (in thousands)** |  |  |  |  |  |  |
| Core | $24,322 | $22,134 | 9.9% | $22,135 | $22,160 | -0.1% |
| OEM | 3,150 | 1,484 | 112.3% | 1,484 | 5,509 | -73.1% |
| J-Plasma | 209 | 42 | 404.2% | 42 | 2 | 1976.4% |
| Total | $27,681 | $23,660 | 17.0% | $23,660 | $27,671 | -14.5% |

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Overall sales increased by 17% or approximately $4.0 million for the period ended December 31, 2014 when compared with the same period in 2013. The increase in sales was mainly attributable to an increase in generator sales of approximately $2.7 million, electrodes of approximately $1.1 million, and lighting and other products of approximately $226,840. Cautery sales declined slightly or approximately $75,000 in 2014.

Although we have only one reporting segment, beginning in 2014, management began analyzing revenue and other operating metrics across three operating segments. Core product revenue, which consists of our brand name electrosurgical devices and accessories, cauteries, penlights, eye bubbles, hand instruments and other similar products, increased 9.9% or approximately $2.2 million for the period ended December 31, 2014 when compared with the same period in 2013. The OEM product line consists of our private label business and consulting services, and revenue for this product line increased 112.3% or approximately $1.67 million when compared to the same period in 2013. J-Plasma sales were $209,368 an almost five-fold increase compared to sales of $41,528 in 2013.

Overall sales decreased by 14.5% or approximately $4.0 million for the period ended December 31, 2013 when compared with the same period in 2012. The decrease in sales was mainly attributable to a reduction in generator sales of approximately $4.9 million to two major OEM customers, which resulted from the contracts ending. In addition, cautery sales decreased slightly or approximately $42,000 in 2013. These decreases were partially offset by an increase of approximately $296,000 in the sale of electrodes, an increase of approximately $548,000 in our medical lighting sales, an increase of approximately $42,000 in the sale of J-Plasma products and a net increase in other sales of approximately $66,000 mainly the result of contractor development services.

Our ten largest customers accounted for approximately 61.0%, 60.9%, and 66.3%, of net revenues for 2014, 2013, and 2012, respectively. In 2014, National Distribution & Contracting Inc. accounted for 13.9% of our sales. In 2013, National Distribution & Contracting Inc. accounted for 13.1%, PSS World Medical accounted for 10.9% and McKesson Medical Surgical accounted for 10.3% of our sales. In 2012, National Distribution & Contracting Inc. accounted for 12.4% of our sales.

#### Gross Profit

*(in thousands)*

|  | Years ended December 31, 2014 | 2013 | Percent Change 2014 vs. 2013 | 2012 | Percent Change 2013 vs. 2012 |
| --- | ---: | ---: | ---: | ---: | ---: |
| Cost of sales | $18,689 | $14,462 | 29.2% | $16,338 | -11.5% |
| Cost of sales as a percentage of revenue | 67.5% | 61.1% |  | 59.0% |  |
| Gross profit | $8,992 | $9,198 | -2.2% | $11,333 | -18.8% |
| Gross profit as a percentage of revenue | 32.5% | 38.9% | -6.4% | 41.0% | -2.1% |

Our gross profit margin as a percentage of sales decreased by 6.4% or approximately $206,000 during the year ended December 31, 2014 compared with the same period in 2013. This decrease was mainly attributed to a write down of excess and obsolete inventory.

Our gross profit margin as a percentage of sales decreased by 18.8% or approximately $2.1 million during the year ended December 31, 2013 compared with the same period in 2012. This decrease was mainly attributable to the above mentioned decrease in overall sales, along with a 2.6% increase in labor costs as a percentage of sales, and a 1.6% increase in manufactured overhead as a percentage of sales. These increases were offset by a 2% decrease in material costs as a percentage of sales.

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 Gain (Loss)

#### Research and development

*(in thousands)*

|  | Years ended December 31, 2014 | 2013 | Percent Change 2014 vs. 2013 | 2012 | Percent Change 2013 vs. 2012 |
| --- | ---: | ---: | ---: | ---: | ---: |
| Research and Development expense | $1,416 | $1,260 | 12.4% | $1,329 | -5.2% |
| R&D expense as a percentage of revenue | 5.1% | 5.3% |  | 4.8% |  |

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Our expenditures for R&D related activities increased by 12.4% or approximately $156,673 for the year ended December 31, 2014 compared with the same period in 2013. This was mainly caused by an increase in R&D consulting costs of approximately $117,400 and increased labor and material costs of approximately $39,273, as we accelerate our R&D product pipeline.

Our expenditures for R&D related activities decreased by 5.2% or approximately $69,000 for the year ended December 31, 2013 compared with the same period in 2012. The decrease was mainly caused by a reduction of labor and material costs of approximately $68,000 and $37,000 respectively. These decreases were partially offset by an increase of approximately $36,000 in R&D consulting costs.

#### Professional services

*(in thousands)*

|  | Years ended December 31, 2014 | 2013 | Percent Change 2014 vs. 2013 | 2012 | Percent Change 2013 vs. 2012 |
| --- | ---: | ---: | ---: | ---: | ---: |
| Professional services expense | $1,016 | $1,835 | -44.6% | $1,439 | 27.5% |
| Professional services as a percentage of revenue | 3.7% | 7.8% |  | 5.2% |  |

Professional services costs decreased 44.6% or approximately $819,000 for the year ended December 31, 2014 compared with the same period in 2013. Legal fees, incurred in connection with litigation, decreased over the prior year by approximately $896,500 and are the main reason for the decrease in professional costs. We saw an increase of approximately $77,500 related to investor relations and accounting and tax consulting fees compared to the same period in 2013.

Professional services costs increased 27.5% or approximately $396,000 for the year ended December 31, 2013 compared with the same period in 2012. Legal fees, incurred in connection with litigation, increased over the prior year by approximately $321,000 and are the main reason for the increase in professional costs. We also had an approximate increase of $75,000 related to stock based compensation costs due to the immediate vesting of options for the independent Board members that resigned as part of the equity raise in December 2013.

#### Salaries and related costs

*(in thousands)*

|  | Years ended December 31, 2014 | 2013 | Percent Change 2014 vs. 2013 | 2012 | Percent Change 2013 vs. 2012 |
| --- | ---: | ---: | ---: | ---: | ---: |
| Salaries and related expenses | $5,723 | $3,991 | 43.4% | $3,178 | 25.6% |
| Salaries and related expenses as a percentage of revenue | 20.7% | 16.9% |  | 11.5% |  |

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During 2014 salaries and related expenses increased approximately 43.4% or approximately $1.7 million compared to with the prior year. The increase was primarily the result of hiring in executive management, the J-Plasma direct sales force, and incentive compensation.

During 2013 we experienced a net increase of approximately 25.6% in salary and related costs, or approximately $813,000 when compared with the same period in 2012. The increase was primarily the result of severance costs associated with the legal award related to the Keen litigation and the additional salary related to our new CEO who started in December 2013.

#### Selling, general and administrative expenses

*(in thousands)*

|  | Years ended December 31, 2014 | 2013 | Percent Change 2014 vs. 2013 | 2012 | Percent Change 2013 vs. 2012 |
| --- | ---: | ---: | ---: | ---: | ---: |
| SG&A Expense | $6,686 | $5,777 | 15.7% | $4,341 | 33.1% |
| SG&A expense as a percentage of revenue | 24.2% | 24.4% |  | 15.7% |  |

Selling, general and administrative costs increased by 15.7% or approximately $909,000 for the period ended December 31, 2014 compared with the same period in 2013. We experienced increases in advertising, marketing, shows and travel costs of approximately $385,000 related largely to the branding and marketing of J-Plasma, sales commissions of approximately $165,000 resulting from the increase in sales, an increase in general insurance of $126,000, regulatory costs of approximately $175,000, non-sales related travel and administrative costs of approximately $292,000, and utilities, rents, maintenance, office and computer supplies of approximately $142,000. Professional service expenses declined approximately $602,000 on a reduction in litigation related legal costs.

Selling, general and administrative costs increased by 33.1% or approximately $1,436,000 for the period ended December 31, 2013 compared with the same period in 2012. One of the main reasons for the increase in cost was the 2.3% excise tax related to the Affordable Care Act instituted in the year 2013 which amounted to approximately $384,000. In addition, we had an increase in other marketing, shows and travel costs of approximately $266,000 related to our new J-Plasma line of products, an increase in general insurance of approximately $127,000, and an increase related to computers, data security, and other internal infrastructure of approximately $56,000. However, we experienced decreases in commissions, stockholder expense, advertising, amortization, rent expense, building maintenance, utilities, and other various overhead related costs all of which amounted to an offsetting decrease of approximately $205,000. In addition, although we had increased selling and marketing costs related to J-Plasma mentioned above, we experienced decreases in travel and marketing costs related to our distribution product lines of approximately $77,000.

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#### Other Income

*(in thousands)*

|  | Years ended December 31, 2014 | 2013 | Percent Change 2014 vs. 2013 | 2012 | Percent Change 2013 vs. 2012 |
| --- | ---: | ---: | ---: | ---: | ---: |
| Interest income | $4 | $7 | -42.9% | $7 | 0.0% |
| Interest expense | $(155) | $(244) | -36.5% | $(239) | 2.1% |
| Issuance cost | $- | $(664) |  | $- |  |
| Fees associated with refinance | $- | $(543) |  | $- |  |
| Total other income (expense) | $(151) | $(1,444) | -89.5% | $(232) | 522.4% |
| Other income (expense) as a percentage of revenue | -0.5% | -6.1% |  | -0.8% |  |
| Change in fair value of derivative liabilities, net | $(7,285) | (842) |  | $20 | -4310.0% |
| Other gain as a percentage of sales | -26.3% | -3.6% |  | 0.1% |  |

#### Interest Expense

Total other income (expense) decreased by approximately $1.3 million or 89.5% for the year ended December 31, 2014 as compared with the same period in 2013. The decrease was mainly caused by the non-recurring issuance costs and fees related the warrants issued as part of the equity financing transaction mentioned below.

Net interest expense increased by approximately $1.2 million or 507.1% for the year ended December 31, 2013 as compared with the same period in 2012. The increase was mainly caused by the recognition of the issuance costs of approximately $664,000 related to the warrants issued as part of the equity financing transaction mentioned below. In addition, as a result the high probability of refinancing our PNC debt, we accrued for the required amount of approximately $422,000, as of December 31, 2013, to pay off an embedded swap interest rate collar position and the accrued refinancing charges of approximately $121,000 for our previous refinancing. This interest rate collar was the result of our previous refinancing of the industrial revenue bonds on October 31, 2011 with PNC Bank.

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#### 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 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. At December 31, 2013, the investor and placement agent warrants were valued at $4,599,000 and $459,900, respectively. The warrants are accounted for as derivative financial instruments at fair value and are re-valued each period. At December 31, 2014, the investor and placement agent warrants were valued at $10,547,250 and $998,222, respectively, and we recognized an aggregate loss related to their change in value of $6,486,572.

At December 31, 2013, the investor and placement agent warrants were valued at $4,599,000 and $459,900, respectively, and we recognized an aggregate loss related to their change in value of $236,775.

In 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 $1,067,954 and $689,535 at December 31, 2014 and December 31, 2013, respectively, and we recognized a net loss for the year ended December 31, 2014 of $378,419.

#### Income Taxes

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. During the fourth quarter 2014, based on our review of historic operating results, updated 2014 actual results, as well as future income forecasts based on the projections provided by the newly established commercial team, 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. The Company established a full valuation allowance against its net deferred tax assets with finite life. The effect of the valuation allowance and its related impact on the Company’s overall tax rate was to increase the Company’s provision for income taxes by $6.0 million for the year ended December 31, 2014.

### Liquidity and Capital Resources

Our working capital at December 31, 2014 was approximately $11.6 million compared with $17.0 million at December 31, 2013. Accounts receivable days sales outstanding were 36 days and 33 days at December 31, 2014 and 2013, respectively. 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 84 days to 213 days equating to an inventory turn ratio of 1.53 at December 31, 2014 from 297 days and an inventory turn ratio of 1.26 at December 31, 2013. The lower number of days worth of sales in inventory which translated into a higher inventory turnover rate is mainly due to the write off of excess and obsolete inventory, along with an increase in sales related to our generator product lines which contain a greater number of component parts compared to all our other products.

For the year ended December 31, 2014, net cash used in operating activities was approximately $417,000 compared with net cash used by operating activities of approximately $2.5 million in 2013.

Net cash used in investing activities was approximately $630,000 for the year ended December 31, 2014 compared to net cash used in investing activities was approximately $588,000 during 2013. The change was due mainly to an increase in overall purchases of equipment, molds and test fixtures.

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Cash used by financing activities of approximately $1.14 million during the year ended December 31, 2014 compared to cash was provided from financing activities of approximately $6.9 million during year ended December 31, 2013. The change resulted primarily from restrictions on cash of $898,679 pursuant to loan covenants contained in our $3.1 million mortgage loan financing from Bank of Tampa on March 20, 2014 and repayment of industrial revenue bonds of approximately $3.26 million. In addition we received approximately $249,000 from the exercise of warrants and stock options. Reductions to our cash related to financing activities included purchase of warrants in the amount of $420,571.

On March 20, 2014, the Company entered into a transaction with The Bank of Tampa, a Florida banking corporation (“Lender”) wherein Lender extended to the Company a mortgage loan in the principal amount of $3,592,000 (the “Loan”). The obligations under the Loan are secured by a first priority mortgage and security interest in the Company’s Clearwater, Florida facility as well as an assignment of the Company’s accounts receivable. In addition, the Company pledged an interest in a certificate of deposit in the amount of $898,000 as additional collateral which declines on a pro rata basis as principal is paid. The initial maturity date of the Loan is March 20, 2017; however the Company has 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 the Company 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 the Company desire to extend the Loan beyond three years, the Company 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, the Company redeemed those certain Industrial Revenue Bonds issued by the Pinellas County Industrial Development Authority and satisfied its obligations to its prior lender, PNC Bank, N.A (“PNC Bank”). In connection with the redemption of the Bonds, the Company paid PNC Bank $3,188,332.51 to satisfy its existing credit facility. In connection with the termination of the interest rates swap agreement with PNC Bank, the Company 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, 2015 | 2016 | 2017 | 2018 | 2019 | Thereafter |
| --- | ---: | ---: | ---: | ---: | --- | ---: |
| Purchase commitments | $2,840 | $- | $- | $- | - $ | $- |
| Long-term debt | 239 | 239 | 2,934 | - | - | - |
| Total | $3,079 | $239 | $2,934 | $0 | - $ | $- |

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

### 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.

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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

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.

### 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 718-10-10, *Share-Based Payment*, 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 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

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

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

It is our policy to provide for uncertain tax positions and the related interest and penalties based upon management’s assessment of whether a tax benefit is more likely than not to be sustained upon examination by tax authorities. To the extent that the probable tax outcome of these uncertain tax positions changes, such changes in estimate will impact the income tax provision in the period in which such determination is made. At December 31, 2014, 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 7 of the Notes to Consolidated Financial Statements.

## Market risk

As filed, 599 characters.

Our short-term investments consist of cash, cash equivalents and overnight investments. As such we do not believe we are exposed to significant interest rate risk. The primary objective of our investment activities is to preserve principal while at the same time maximizing yields without significantly increasing risk. To achieve this objective, we invest in highly liquid overnight money market investments. If a 10% change in interest rates were to have occurred on December 31, 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, 4,353 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 December 31, 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 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

Section 404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate annually the effectiveness of our internal controls over financial reporting as of the end of each fiscal year, and to include a management report assessing the effectiveness of our internal control over financial reporting in all annual reports. There were no changes in our internal control over financial reporting during the quarter ended December 31, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

### Management’s Annual Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act as a process designed by, or under the supervision of, a company’s principal executive and principal financial officers and effected by a company’s board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:

- pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
- provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
- provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2014. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework (2013). Based on our assessment, our management has concluded that, as of December 31, 2014, our internal control over financial reporting was effective.

Filed Feb 27, 2015.
Source: SEC EDGAR, the filing index for accession 0001477932-15-001424. Last ingested by Listed: Nov 5, 2026, 13:09 ET. No prices; not investment advice.