UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act (Check one):

As of October 30, 2017, 32,860,785May 9, 2018, 32,879,970 shares of the registrant’s $0.001 par value common stock were outstanding.

PART I.     Financial Information

ITEM 1. Financial Statements

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

(In thousands, except per share data, Unaudited)

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

(In thousands, Unaudited)

 

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

(In thousands, Unaudited)

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

NOTE 1.     BASIS OF PRESENTATION

Unless the context otherwise indicates, the terms “we,” “our,” “us,” “Bovie,” and similar terms refer to Bovie Medical Corporation and its consolidated subsidiaries.

The accompanying unaudited consolidated financial statements have been prepared based upon SEC rules that permit reduced disclosure for interim periods. For a more complete discussion of significant accounting policies and certain other information, please refer to the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2016.2017. These financial statements reflect all adjustments that are necessary for a fair presentation of results of operations and financial condition for the interim periods shown, including normal recurring accruals and other items. The results for the interim periods are not necessarily indicative of results for the full year.

NOTE 2.     INVENTORIES

Inventories are stated at the lower of cost or market. Cost is determined on a first in, first out basis. Finished goods and work-in-process inventories include material, labor and overhead costs. Factory overhead costs are allocated to inventory manufactured in-house based upon labor hours.

Inventories consisted of the following:

NOTE 3.     INTANGIBLE ASSETS 

Intangible assets consisted of the following:

With respect to our trademark and brand name, we continue to market products, release new products and product extensions and maintain and promote these trademarks and brand name in the marketplace through legal registration and such methods as advertising, medical education and trade shows. It isBased on our belief thatannual impairment testing, these trademarks and brand names will generate cash flow for an indefinite period of time. Therefore, we believe our trademarks and brand name intangible assets are not impaired. Goodwill resultedresults from our acquisition of Bovie Bulgaria, EOOD.

Amortization of intangible assetspurchased technology was $27,000 and $81,000 for the three and nine months ended September 30, 2017, respectively, as compared with $27,000March 31, 2018 and $81,000 for the three and nine months ended September 30, 2016.2017. Amortization expense is classified within selling, general and administration expenses in the consolidated statements of operations.

NOTE 4.     RECENT ACCOUNTING PRONOUNCEMENTS

No other new accounting pronouncement issued or effective during the fiscal year had or is expected to have a material impact on our consolidated financial statements or disclosures.

The statement requires fair value measurement be classified and disclosed in one of the following three categories:

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; and

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to their fair value measurement. Our derivative financial instruments that are measured at fair value on a recurring basis are all measured at fair value using Level 3 inputs. Level 3 inputs are unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

NOTE 6.     EARNINGS PER SHARE

We compute basic earnings per share (“basic EPS”) by dividing the net income or loss by the weighted average number of common shares outstanding for the reporting period. Diluted earnings per share (“diluted EPS”) gives effect to all dilutive potential shares outstanding. The following table provides the computation of basic and diluted earnings per share.

NOTE 7.     STOCK-BASED COMPENSATION

The status of our stock options and stock awards are summarized as follows:

Common shares required to be issued upon the exercise of stock options and warrants would be issued from our authorized and unissued shares. We calculated the fair value of issued options utilizing a trinomial lattice with an expected life calculated via the simplified method as we do not have sufficient history to determine actual expected life.

NOTE 8.     INCOME TAXES

The Company's income tax expense was $6,000 with an effective tax rate of 0.0% and $15,000$11,000 with an effective tax rate of 0.0% for the three and nine months ended September 30, 2017, respectively,March 31, 2018, as compared to $0$5,000 with an effective tax rate of 0.0% for both the three and nine months ended September 30, 2016.March 31, 2017. The Company's effective tax rate differs from the statutory rate primarily due to the change in the valuation allowance on the Company's net deferred tax assets with a finite life.

As a result of historical losses, the Company recorded a valuation allowance on the net deferred tax asset with a finite life and does not anticipate recording an income tax benefit related to these deferred tax assets. The Company will reassess the realization of deferred tax assets each reporting period and will be able to reduce the valuation allowance to the extent that the financial results of these operations improve and it becomes more likely than not that the deferred tax assets are realizable.

For the ninethree months ended September 30, 2017,March 31, 2018, we do not believe we had any significant uncertain tax positions nor did we have any interest or penalties related to any significant uncertain tax positions.

The Company is subject to U.S. federal income tax, state income tax and Bulgarian income tax. Until the respective statutes of limitations expire (which may be as much as 20 years while we have unused NOL's)Net Operating Losses), we are subject to income tax audits in the jurisdictions in which we operate.

NOTE 9.     COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS

Property and Rental Agreements

In March 2014, we signed a lease for offices located in Purchase, New York. We decided to consolidate operations in the Purchase, NY office with the facility in Clearwater, Florida. Based on this, we determined the office in Purchase, NY was no longer necessary and decided to cease all activity at the location. The remaining lease is for 3,650 square feetwas expensed in the fourth quarter of office space with a monthly cost2017 and included as part of approximately $13,916 per month for the lease expiring in Juneseverance and related expense, $147,000 will be operational cash outflows during 2018 and 2019.

In October 2015, pursuant to our acquisition of Bovie Bulgaria, we are obligated to pay a lease of $5,114$6,300 per month, expiring in December 2021, for 18,745 square feet of office, research and manufacturing space in Sofia, Bulgaria.

The following is a schedule of approximate future minimum lease payments under operating leases as of September 30, 2017:March 31, 2018:

Purchase Commitments

At September 30, 2017,March 31, 2018, we had purchase commitments for inventories totaling approximately $3.6$5.4 million, substantially all of which is expected to be purchased by the end of 2017.2018.

Concentrations

With respect to receivables, ourOur ten largest customers accounted for approximately 35.3%27.8% and 41.3%46.2% of trade receivables as of September 30,March 31, 2018 and 2017, and 2016, respectively, and approximately 50.0%41.9% and 56.9%56.2% of net revenues for the ninethree months ended September 30,March 31, 2018 and 2017, and 2016, respectively. For the ninethree months ended September 30,March 31, 2018, McKesson and National Distribution & Contracting Inc. accounted for 14.5% and 5.3% of sales, respectively, while for the same period in 2017, McKesson and National Distribution & Contracting Inc. accounted for 15.7%16.0% and 9.3%8.7% of sales, while for the same period in 2016, McKesson and National Distribution & Contracting Inc. accounted for 15.0% and 9.0% of sales.respectively.

NOTE 10.     RELATED PARTY TRANSACTIONS

Several relatives of Nikolay Shilev, Bovie Bulgaria’s Managing Director, are considered related parties. Teodora Shileva, Mr. Shilev’s spouse, is an employee of the companyCompany working in the Accounting department. Antoaneta Dimitrova Shileva-Toromanova, Mr. Shilev’s sister, is the Manager of Production and Human Resources. Svetoslav Shilev, Mr. Shilev’s son, is an Engineer in the Quality Assurance department.

NOTE 11.     LONG TERM DEBT 

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

The obligations under the Loan are secured by a first mortgage and security interest in the Company’s Clearwater, Florida facility. In addition, the Company has pledged an interest in a certificate of deposit in the amount of $779,000$660,000 as additional collateral. The amount of the additional collateral required declines on a pro rata basis as principal is paid.

Borrowings under the Loan bear interest at LIBOR plus 3.5%, with a fixed monthly principal payment of $19,956. The interest rate at September 30, 2017March 31, 2018 was 4.732%5.170%.

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

Our future contractual obligations for agreements with initial terms greater than one year are as follows:

NOTE 12.     GEOGRAPHIC AND SEGMENT INFORMATION 

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

Prior to the first quarter of 2017, we disclosed only one reporting segment. Beginning in 2017, ourOur reportable segments are disclosed as principally organized and managed as three operating segments: Core, OEM and Advanced Energy. We adopted reportable segments to align with changes in how we manage our business, review operating performance and allocate resources as a result of the growth in Advanced Energy and the differing behavior of the Core and OEM product lines. The Corporate & Other category includes certain unallocated corporate, operational, research and development and marketing costs which were not specifically attributed to any reportable segment. Net assets are shared, therefore, not allocated to the reportable segments. The OEM segment is primarily development contract and product driven, all related expenses are recorded as cost of sales, therefore no segment specific operating expenses are incurred.

You should read the following discussion and analysis in conjunction with our financial statements and related notes contained elsewhere in this report. This discussion contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a variety of factors discussed in this report and those discussed in other documents we file with the SEC. In light of these risks, uncertainties and assumptions, readers are cautioned not to place undue reliance on such forward-looking statements. These forward-looking statements represent beliefs and assumptions as of the date of this report. While we may elect to update forward-looking statements and at some point in the future, we specifically disclaim any obligation to do so, even if our estimates change. Past performance does not guarantee future results.

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 14.6%19.6% and 14.0%16.7% of total revenues forsales in the three and nine months ended September 30,March 31, 2018 and 2017, respectively, as compared with 13.2% and 14.9% of total revenues for the three and nine months ended September 30, 2016, respectively. The decrease in international sales as a percentage of revenue during the nine months ended September 30, 2017, was driven pending product registration in foreign jurisdictions and large international purchase tenders that did not occur in the current period as compared to the same period of 2016. Management estimates our products have been sold in more than 150 countries through local dealers coordinated by sales and marketing personnel at the Clearwater, Florida facility. Our business is generally not seasonal in nature.

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

Our reportable segments are disclosed as principally organized and managed as three operating segments: Core, OEM and Advanced Energy. We adopted reportable segments to align with changes in how we manage our business, review operating performance and allocate resources as a result of the growth in Advanced Energy technology which includes J-Plasma. We have a directand the differing behavior of the Core and OEM product lines. The OEM segment is primarily development contract and product driven, all related expenses are recorded as cost of sales, force of 17 field-based selling professionals and a network of 14 independent manufacturing representatives, resulting in a total sales force of 31. This selling organization is focused on the use of Advanced Energy technology, primarily J-Plasma, fortherefore no segment specific operating room procedures. In addition, we have invested in training programs and marketing-related activities to support accelerated adoption of Advanced Energy technology.

Our gross profit increased by 5.9%18.1% or approximately $0.8 million during the ninethree months ended September 30, 2017March 31, 2018 when compared to 2016.2017. The increase was attributed todriven by higher marginsgross profit in the Advanced Energy segment, driven by higher volumedue to a product and pricing mix. The overall increase in gross profit was partially offset by lower margins in OEM and the Core segment.

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.

Bringing new, innovative products to market and enhancing existing products is a critical component of our strategy. As such,The 20.7% reduction in spending in R&D as a percentage of sales was 6.5% and 7.3% for the three and nine months ended September 30, 2017, respectively.March 31, 2018 of 5.7% is the result of more focused spending in clinical studies and research projects related to cosmetic surgery market.

Selling, general and administrative expense increased by 22.2%11.1% or approximately $0.5$0.3 million for the three months ended September 30, 2017,March 31, 2018 when compared to 2016.2017. We experienced increases from consulting in the Advanced Energy segment and sales commissions, of $0.3 million and administrative and marketing expense of $0.2 million.

Total net interest expense decreasedincreased, due to a higher LIBOR rate for the three and nine months ended September 30, 2017March 31, 2018 as compared with 2016, due to a decline in the mortgage note principal balance.2017.

On December 13, 2013, we entered into a securities purchase agreement pursuant to which we issued 3,500,000 shares of our newly designated Series A 6% Convertible Preferred Stock with a stated value of $2.00 per share and 5,250,000 warrants to purchase our common stock, at an exercise price of $2.387 per share. We also issued 525,000 warrants to the placement agent, of which 94,375 remain outstanding, as of September 30, 2017, and40,000 have a strike price of $2.387.$2.387 and remain outstanding as of March 31, 2018. The warrants are accounted for as derivative financial instruments at fair value and are re-valued each period.

At September 30, 2017,March 31, 2018, the placement agent warrants were valued at $0.1 million$46,000 and for the nine months ended September 30, 2017, we recognized a non-cash gainnet loss of $57,000.

We recorded anThe Company's income tax expense was $11,000 with an effective tax rate of $6,000 and $15,000 during0.0% for the three and nine months ended September 30, 2017, respectively. AMarch 31, 2018, as compared to $5,000 with an effective tax rate of 0.0% for the three months ended March 31, 2017. The Company's effective tax rate differs from the statutory rate primarily due to the change in the valuation allowance is required to be provided to reduce the deferred tax assets to a level which, more likely than not, will be realized. Management evaluated the positive and negative evidence in determining the realizability of the net deferred tax asset. In determining the need for valuation allowance, we reviewed historic operating results, the current period operating results, as well as future income forecasts based on the projections, management concluded that it was not more likely that the Company should realize itsCompany's net deferred tax assets through future operating results and the reversal of taxable temporary differences. If in the future we determine that we will be able to realize any of the net deferred tax assets, we will make adjustment to the valuation allowance, which would increase our income in the period that the determination is made.with a finite life.

Product Development

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

Reliance on Collaborative, Manufacturing and Selling Arrangements

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

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

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

Liquidity and Capital Resources

Our working capital at September 30, 2017March 31, 2018 was approximately $17.4$16.0 million compared with $21.3$16.6 million at December 31, 2016.2017. Accounts receivable days sales outstanding were 4038 days and 4142 days at September 30,March 31, 2018 and 2017, and 2016, respectively. The number of days sales in inventory, which is the total inventory available for production divided by the 12-month average cost of materials, increased 1 daydecreased 34 days to 152 days equating to an inventory turn ratio of 1.922.10 at September 30, 2017March 31, 2018 from 151186 days and an inventory turn ratio of 2.301.80 at September 30, 2016.March 31, 2017. The lower number of days sales in inventory turn ratio is mainly attributabledue to an increase in sales and lower inventory buildbalances compared to the same period in support of new, extended and improved product lines.2017.

For the ninethree months ended September 30, 2017,March 31, 2018, net cash used in operating activities was approximately $4.4$1.1 million compared with net cash used by operating activities of approximately $2.3$2.8 million for the same period in 2016.2017. The net cash used in operating activities was attributed to $4.2$0.9 million of net loss, accounts receivable of $0.3 million, increases of inventory of $1.4$0.1 million and changes in working capital of $0.3 million, partially offset by non-cash inflows of $1.2$0.6 million.

Net cash used in investing activities was attributed to purchases of property and equipment for approximately $431,000$139,000 during the ninethree months ended September 30, 2017,March 31, 2018, compared to $182,000$71,000 cash used for the same period in 2016.2017.

Cash used in financing activities wasof approximately $179,000$60,000 during the ninethree months ended September 30, 2017,March 31, 2018, compared to cash used in financing activities of approximately $1,000 during$59,000 for the same period in 2016.2017.

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