10-K 1 a2019q410-k.htm 10-K Document
 
 
 
 
 
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

ý ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
 
or
 
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number: 0-12183
apyxmedicallogotagline.jpg
APYX MEDICAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
 
11-2644611
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
5115 Ulmerton Road, Clearwater, FL 33760
(Address of principal executive offices, zip code)
(727) 384-2323
(Issuer’s telephone number)
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each Class
 
Trading Symbol
 
Name of each Exchange on which registered
Common Stock, $.001 Par Value
 
APYX
 
NASDAQ Stock Market LLC
Securities registered under Section 12(g) of the Exchange Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes: o No ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes: o No ý
Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes: ý No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes: ý No o

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):
Large accelerated filer
o
 
Accelerated filer
ý
Non-accelerated filer
o
(Do not check if a smaller reporting company)
Smaller reporting company
ý
 
 
 
Emerging growth company
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes: o No ý
The aggregate market value of the common stock held by non-affiliates and non-voting equity held by non-affiliates computed by reference to the price at which the common stock was last sold, or the average bid and asked prices of such common stock as of June 30, 2019, the registrant’s most recently completed second fiscal quarter, was approximately $226.5 million.
As of March 27, 2020, 34,174,314 shares of the registrant’s $.001 par value common stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE
None.
 
 
 
 
 
 



APYX MEDICAL CORPORATION
INDEX TO ANNUAL REPORT ON FORM 10-K

December 31, 2019

Part I
 
 
 
Page
Item 1
 
 
Item 1A
 
 
Item 1B
 
 
Item 2
 
 
Item 3
 
 
Item 4
 
 
 
 
 
 
 
Part II
 
 
 
 
Item 5
 
 
Item 6
 
 
Item 7
 
 
Item 7A
 
 
Item 8
 
 
Item 9
 
 
Item 9A
 
 
Item 9B
 
 
 
 
 
 
 
Part III
 
 
 
 
Item 10
 
 
Item 11
 
 
Item 12
 
 
Item 13
 
 
Item 14
 
 
 
 
 
 
 
Part IV
 
 
 
 
Item 15
 
 
Signatures
 
 
 
 

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APYX MEDICAL CORPORATION

Cautionary Notes Regarding Forward-Looking Statements

We have included or incorporated by reference into this report, and from time to time may make in our public filings, press releases or other public statements, certain statements that may constitute forward-looking statements. These include without limitation those under “Business” in Part I, Item 1, “Risk Factors” in Part I, Item 1A, “Legal Proceedings” in Part I, Item 3, “Management's Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7, and “Quantitative and Qualitative Disclosures about Market Risk” in Part II, Item 7A. In addition, our management my make forward-looking statements to analysts, investors, representatives of the media and others. These forward-looking statements are not historical facts and represent only our beliefs regarding future events, many of which, by their nature, are inherently uncertain and beyond our control. We may, in some cases, use words such as “project”, “believe”, “anticipate”, “plan”, “expect”, “estimate”, “intend”, “should”, “would”, “could”, “potentially”, “may” or other words that convey uncertainty of future events or outcomes to identify these forward-looking statements.

In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, we are identifying important factors that, individually or in the aggregate, could cause actual results to differ materially from those contained in any forward- looking statements made by us. Any such forward-looking statements are qualified by reference to the following cautionary statements.

Forward-looking statements in this report are subject to a number of risks and uncertainties, some of which are beyond our control, including, among other things:

changes in general economic, business or demographic conditions or trends in the U.S. or throughout the world or changes in the political environment, including changes in GDP, interest rates and inflation;
our ability to conclude a sufficient number of attractive growth projects, deploy growth capital in amounts consistent with our objectives in the prosecution of those and achieve targeted risk-adjusted returns on any growth project, including the commercialization of our Helium Plasma technology;
the regulatory environment, including our ability to gain requisite approval from the Food and Drug Administration and other governmental and regulatory bodies, and the ability to estimate compliance costs, comply with any changes thereto, rates implemented by regulators, and our relationships and rights under and contracts with governmental agencies and authorities;
disruptions or other extraordinary or force majeure events and the ability to insure against losses resulting from such events or disruptions, including disruptions caused by the Corona virus;
sudden or extreme volatility in commodity prices and availability;
changes in competitive dynamics affecting our business and the medical device industry as a whole;
technological innovations leading to increased competition in the medical device industry;
changes in healthcare policy;
our ability to make alternate arrangements to account for any disruptions or shutdowns that may affect suppliers’ facilities or the operations upon which our business is dependent;
continued aggressive EPA state regulation of Ethylene oxide sterilization (EtO) commercial plants resulting in additional plant closures, leading to a reduced availability of our handpieces, which are commercially sterilized;
our ability to implement operating and internal growth strategies;
environmental risks, including the impact of climate change and weather conditions;
the impact of weather events, including potentially hurricanes, tornadoes and/or seasonal extremes;
unplanned outages and/or failures of technical and mechanical systems;
cybersecurity breaches impacting critical systems or data;
work interruptions or other labor stoppages;

Our actual results, performance, prospects or opportunities could differ materially from those expressed in or implied by the forward-looking statements. A description of risks that could cause our actual results to differ appears under the caption “Risk Factors” in Part I, Item 1A and elsewhere in this report. It is not possible to predict or identify all risk factors and you should not consider that description to be a complete discussion of all potential risks or uncertainties that could cause actual results to differ.

In light of these risks, uncertainties and assumptions, you should not place undue reliance on any forward-looking statements. The forward-looking events discussed in this report may not occur. These forward-looking statements are made as of the date of this report. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. You should, however, consult further disclosures we may make in future filings with the Securities and Exchange Commission (SEC). Past performance is not an indicator of future results.

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PART I
 
ITEM 1. Business

General

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

We are an advanced energy technology company with a passion for elevating people’s lives through innovative products in the cosmetic and surgical markets. Known for our innovative Helium Plasma Technology, Apyx is solely focused on bringing transformative solutions to the physicians and patients we serve. Our Helium Plasma Technology is marketed and sold as Renuvion® in the cosmetic surgery market and J-Plasma® in the hospital surgical market. Renuvion® offers plastic surgeons, fascial plastic surgeons and cosmetic physicians a unique ability to provide controlled heat to the tissue to achieve their desired results. The J-Plasma® system allows surgeons to operate with a high level of precision and virtually eliminating unintended tissue trauma. We also leverage our deep expertise and decades of experience in unique waveforms through original equipment manufacturing (OEM) agreements with other medical device manufacturers.

On August 30, 2018, we closed on a definitive asset purchase agreement with Specialty Surgical Instrumentation Inc., a Tennessee Corporation and wholly-owned subsidiary of Symmetry Surgical Inc. (“Symmetry”), pursuant to which we divested and sold our electrosurgical "Core" business segment and related intellectual property, including the Bovie® brand and trademarks, to Symmetry for gross proceeds of $97 million in cash. The divestiture and sale of our Core business segment to Symmetry allows us to further focus on our strategic objective of commercializing our Helium Plasma Technology, including the expansion of our Renuvion® brand in the cosmetic surgery market.

In connection with the asset purchase agreement, we also entered into an Electrosurgical Disposables and Accessories, Cauteries and Other Products Supply Agreement with Symmetry for up to a four-year term, whereby we will manufacture certain Core products and sell them to Symmetry at agreed upon prices. Any revenue, costs and expenses resulting from this agreement are netted and reported in our Consolidated Statements of Operations as Other gains or losses.

In connection with the asset purchase agreement, we also entered into a Manufacture and Supply Agreement with Symmetry for a ten-year term, whereby we will manufacture certain products and sell them to Symmetry at agreed upon prices. Revenue, costs and expenses resulting from this agreement are reported in our Consolidated Statements as income or loss from operations of our OEM reporting segment.

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 our brand enjoys within the medical community.

Significant Subsidiaries

Apyx Bulgaria, EOOD, formerly known as Bovie Bulgaria, is a wholly-owned limited liability company incorporated under Bulgarian law, located in Sofia, Bulgaria. It is engaged in the business of development and manufacturing of our advanced energy generators, as well as the manufacturing of disposable hand piece subassemblies and OEM generators and accessories. The facility also distributes products directly to customers in certain international markets and provides warranty and repair services.

Industry

The cosmetic surgery market is a special segment of the medical field which is involved in the restoration, reconstruction, or alteration of the human body so as to enhance the body’s appearance. The market for cosmetic surgery includes surgical, minimally invasive and nonsurgical cosmetic procedures. This market is expected to have steady growth year over year and this growth is driven by social and cultural factors such as influence of social media, peer pressure for appearance and beauty, and increasing disposable income.

We believe that Apyx Medical has sustainable, competitive advantages in the cosmetic market for several reasons: our long history of developing unique energy devices to meet the needs of physicians, our unique Helium Plasma Technology, and our outstanding

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product quality supported by strong engineering and research and development capabilities. We believe that our equipment and devices have and will continue to improve the lives of doctors and their patients.

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 have been issued 37 patents in the United States and 26 foreign patents. We have 16 pending patent applications in the United States and 26 pending foreign applications.   We have 6 US registered trademarks and 2 pending US trademark applications.  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 and at our facility located in Sofia, Bulgaria, which are certified under the ISO international quality standards and are 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.

Our wholly-owned subsidiary, Apyx Bulgaria, EOOD operates an approximately 20,000 square foot ISO13485 certified and FDA registered manufacturing facility located in the capital city of Sofia, which houses manufacturing, development and assembly operations.

We maintain collaborative arrangements with three foreign suppliers, including our contract component manufacturer located in Ningbo, China, under which we request the development of certain products 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. During late 2019, we entered into a joint venture with our Chinese supplier to establish a foundation for the manufacturing and sale of our products into the Chinese market. The joint venture is in an unfunded startup phase, and accordingly, the activity associated with it is not material.

Backlog

The value of unshipped factory orders is not material.

Employees

At December 31, 2019, we had 266 full-time employees world-wide, of whom 4 were executive officers, 27 supervisory personnel, 34 sales personnel and 201 technical support, administrative and production employees. None of our current employees are covered by a collective bargaining agreement and we have never experienced a work stoppage.


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Our Two Business Segments

We currently have two reportable operating segments: Advanced Energy and OEM. The Corporate and Other category includes certain unallocated corporate and administrative costs which are not specifically attributed to any reportable segment. Net assets are shared, therefore, not allocated to the reportable segments.

For the year ended December 31, 2019, our OEM segment contributed 19.7% of our consolidated total revenue and our Advanced Energy segment contributed 80.3% of our consolidated total revenue.

Advanced Energy Segment

Overview

Our product portfolio consists of our Helium Plasma Technology that is marketed and sold as Renuvion® in the cosmetic surgery market and J-Plasma® in the hospital surgical market. Renuvion® offers plastic surgeons, facial plastic surgeons and cosmetic physicians a unique ability to provide controlled heat to the tissue to achieve their desired results. The J-Plasma® system allows surgeons to operate with a high level of precision, virtually eliminating unintended tissue trauma. This technology has US FDA clearance, CE mark, and clearance for sale in multiple other countries and is generally indicated for the cutting, coagulation and ablation of soft tissue. The system consists of an electrosurgical generator unit (ESU), a handpiece and a supply of helium gas. The proprietary radiofrequency (RF) energy is delivered to the handpiece by the ESU and used to energize an electrode. When helium gas passes over the energized electrode, helium plasma is generated which allows for conduction of the RF energy from the electrode to the patient in the form of a precise helium plasma beam. The energy delivered to the patient via the helium plasma beam is very precise and cooler in temperature in comparison to other surgical energy modalities such as standard RF monopolar energy. This technology has been the subject of eight white papers and ten peer-reviewed, published journal articles and book chapters. It also continues to be the subject of numerous presentations at traditional and cosmetic surgery conferences around the world.

This technology initially received FDA clearance in 2012 and a CE mark in December, 2014, which enables us to sell the product in the European Union. In 2014, we created and trained a direct sales force dedicated to sell this technology. In 2015, we continued the commercialization process for our helium plasma technology with a multi-faceted strategy designed to accelerate adoption of the product. This strategy primarily involved deployment of a dedicated sales force, developing product line extensions and expanding the specialties in which this technology can become the “standard of care“ for certain procedures.
During 2019, we continued our full scale commercialization efforts for Renuvion®. As of December 31, 2019 we had a direct sales force of 30 field-based selling professionals and a network of 4 independent sales agencies.  We also had 4 sales managers.  This selling organization is focused on the use of Renuvion® in the cosmetic surgery market. In addition, we have invested in training programs and marketing-related activities to support accelerated adoption of Renuvion® into physicians' practices.

From 2015 through 2019, we launched numerous new extensions to our helium plasma product lines in an effort to target new surgical procedures, users, and markets. As a result of our sales, marketing and product development initiatives, we have significantly increased the number of physicians using our Helium Plasma Technology by expanding usage to include the cosmetic surgery market in the US, and the cosmetic surgery market as well as the surgical oncology market outside the US.

In order to assist us in leveraging our Helium Plasma Technology's precision and effectiveness in multiple surgical specialties, in 2019 we added 4 additional doctors to our Medical Advisory Board, bringing the total number to 6 members representing the plastic surgery, facial plastic surgery, and cosmetic procedure specialties.

In 2019, our commercial strategy in the U.S. was primarily focused on advancing the usage of Renuvion® in the cosmetic surgery market. In our international markets, we focused on both the cosmetic surgery and on our J-Plasma® technology for the surgical oncology market. Also in 2019, we continued a clinical and regulatory strategy to support our market focus. Once complete, we will launch a corresponding marketing campaign.

We are continuing to make substantial investments in the development and marketing of our Renuvion® 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 our Helium Plasma Technology will be successful or that such future revenues and profitability will be realized.

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Customers

In the US, we primarily sell our Renuvion® products through our direct sales force to physicians, cosmetic surgery offices and surgical centers. Outside of the US, all of our products are sold through our distributor network.

Products

During 2019, Advanced Energy Products consisted of our Helium Plasma Technology lines (Renuvion® and J-Plasma®). These product lines consist of a multifunction generator, a handpiece and a supply of helium gas. Radiofrequency (RF) energy is delivered to the handpiece by the generator and used to energize an electrode. When helium gas passes over the energized electrode, helium plasma is generated which allows for conduction of the RF energy from the electrode to the patient in the form of a precise helium plasma beam. The energy delivered to the patient via the helium plasma beam is very precise and cooler in temperature in comparison to other surgical energy modalities such as standard RF monopolar energy.

Helium Plasma Generator

In June 2017, we launched the newest version of the Apyx Ultimate™ generator. The Apyx Ultimate 2.0 is a high frequency electrosurgical generator that can be used for delivery of RF energy and/or helium plasma to cut, coagulate and ablate soft tissue during open and laparoscopic surgical procedures. The generator offers the users monopolar, bipolar and helium plasma energy in a single unit. It also powers the Cool-Coag technology that has been incorporated into the new Precise Open handpieces that were released in December 2017. These new product releases continue to expand the procedure base for our Helium Plasma Technology by providing surgeons with the tools they need to access additional anatomic locations and perform specific procedures.

Disposable Portfolio

We offer a variety of different hand pieces for open and laparoscopic procedures. The helium-based plasma generated from these devices have been shown to provide increased precision and control and cause less thermal damage to tissue than CO2 laser, argon plasma and RF energy products currently available on the market. The technology has a general indication and can be used for cutting, coagulating and ablating soft tissue. The two primary specialties that are targeted are the cosmetic surgery and surgical oncology markets. 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.

Competition

Currently, we are the only company with helium-based plasma and retractable blade products. However, there are RF based competitors, argon plasma competitors, and CO2 laser competitors for our target market. We believe our competitive position did not change in 2019.

OEM Segment

Overview

The Company leverages its expertise in the design, development and manufacturing of electrosurgical equipment by producing generators and related accessories for large, well-known medical device manufacturers through original equipment manufacturing (OEM) agreements, as well as start-up companies with the need for our energy based designs. In connection with the Asset Purchase Agreement with Symmetry Surgical we entered into a Manufacturing and Supply Agreement for a ten-year term, whereby we will manufacture certain products and sell to them at agreed upon prices. Revenue, costs and expenses resulting from this agreement are reported in our Consolidated Statements of Operations as a component of income or loss from operations of our OEM reporting segment.







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ITEM 1A. Risk factors

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 impact or impair our business operations.

Risks Related to Our Industry

The energy-based medical device industry in the aesthetics market is highly competitive and we may be unable to compete effectively.

The energy-based medical device industry for the aesthetics market 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.

We have invested and continue to invest, substantial resources to develop and monetize our J-Plasma®/Renuvion® technology. We believe we must continue to develop new applications for our products and obtain new indications for use in order to stay competitive. If we are unable to gain acceptance of our technology in the marketplace, or obtain new indications for use, our business and results of operations and cash flows may be materially and adversely affected.

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 Apyx 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.

Maintaining strong relationships with plastic surgeons, cosmetic physicians, and other healthcare professionals, is critical to the success of our product commercialization strategy.

Part of our strategy depends on developing strong working relationships with key plastic surgeons, cosmetic physicians and other healthcare professionals. The guidance we get from these relationships is important from both a commercialization strategy and product development standpoint. Without these relationships, the development and commercialization of our products could suffer which could have a material adverse impact on our business.

We rely on our internal sales force and sales partners to market and sell our products. If we are unable to hire, effectively train, and retain these professionals, future sales and profitability may be adversely affected.

The implementation of our growth strategy largely depends on our ability to hire, train, and retain our sales professionals. We train our sales professionals to thoroughly understand our Helium Plasma Technology and the marketplace in which we compete, including how our technologies can increase our customer's revenue and the results they are able to achieve for their patients. It may take time for these sales professionals to become productive and there can be no assurance that recently recruited sales professionals will be adequately trained in a timely manner, that our direct sales productivity will improve, or that we will not experience significant levels of attrition in the future.

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®/Renuvion® 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.

These activities are primarily conducted internally and are expensed as incurred. 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 research and development activities are conducted at our Clearwater, Florida and Sofia, Bulgaria facilities. We expect to continue making future investments to enable

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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 in both facilities will be successful or that our new products will gain market acceptance, the failure of which would have a material adverse effect on our business and results of operations.

The amount expended by us on research and development of our products during the years 2019, 2018 and 2017, totaled approximately $3.7 million, $2.5 million and $1.9 million, respectively. During the past three years, we invested substantial resources in the development and marketing of our Advanced Energy product technology. We have not incurred any direct costs relating to environmental regulations or requirements. For 2020, we expect to invest approximately 10% to 15% of revenue for research and development activities.

Even if we are successful in developing new, or enhancing our existing products, there are various circumstances that could prevent their successful commercialization.

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

our inability to obtain the necessary regulatory clearances or approvals for expanded indications, new products,
or product modifications;
we are unable to demonstrate, if required, the safety and efficacy of new products with data from preclinical
studies and clinical trials;
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;
the regulatory approvals of our new products are delayed (or denied) or we are required to conduct further
research and development of our products prior to receiving regulatory approval;
we are unable to build and maintain a sales and marketing group to successfully launch and sell our new products;
we are required to allocate available funds to litigation matters;
the needs of our physicians or their patients are not sufficiently met;
we are unable to manufacture the quantity of product needed (in accordance with quality manufacturing
standards) to meet market demand, or at all;
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 commercialize products will have a material and adverse effect on the future growth of our business, financial condition and results of operations.

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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
Product indications
Post Market performance (complaints, adverse events, field actions)

In the United States, medical devices are classified by the FDA on the basis of control deemed necessary to reasonably ensure the safety and effectiveness of the device.

Currently, we only manufacture Class I and Class II devices. Our "Class II" devices require Pre-Market Notification, otherwise known as a "510(k) clearance". A 510(k) is a premarket submission made to FDA to demonstrate that the device to be marketed is at least as safe and effective, that is, substantially equivalent, to a legally marketed device that is not subject to PMA. Submitters must compare their device to one or more similar legally marketed devices and make and support their substantial equivalence claims. Before marketing a device, each submitter must receive an order, in the form of a letter, from FDA which finds the device to be substantially equivalent (SE) and states that the device can be marketed in the U.S. This order "clears" the device for commercial distribution.

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 in the areas of design, development and manufacturing requirements and that they comply with the European Medical Devices Directive (MDD).

Each device that bears a CE mark has 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.

The European Union’s (EU) Medical Device Regulation (MDR), officially passed in April 2017, represents the first major changes to the EU medical device regulatory environment in more than 20 years. The new EU MDR has significantly raised the compliance bar for the medical device industry and will cause significant changes to the regulatory obligations of legal manufacturers, importers and distributors involved in the medical device distribution chain. Enforcement of this new regulation will transition in over the next two years. The EU MDR is far more complex than the existing Medical Devices Directive (MDD) and it presents new challenges for manufacturers. Classification has changed for some product categories and strict new requirements have been imposed on clinical data, risk management, post market surveillance, and supplier management.

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Outside of the European Union, regulations vary significantly from country to country and are becoming increasingly stringent and country specific. Territories and countries around the world continue to develop their own unique regulatory requirements and these individual governments are passing laws that enforce these new regulations and also imposing fees to register products in their country. The time and effort 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 and other countries in the world do not recognize the CE mark certification or FDA clearance and have their own regulatory requirements to register and sell products in these territories. We are required to meet regulatory requirements and obtain registrations for our products in all countries that have these regulatory requirements prior to selling our products in that country.

Environmental Regulation

The medical device industry continues to be the subject of intense scrutiny and stringent regulation and the demand for green, sustainable products is rapidly increasing. There are increasing requirements for efficient and accurate processes for hazardous substance handling, supplier disclosures and regulatory reporting in order to comply with numerous global health and environmental regulatory requirements and restrictions, including but not limited to:

Restriction on Hazardous Substances (RoHS) Directive
Packaging and Packing Waste Directive
REACH Regulation
Proposition 65
Hazardous Air Pollutants: Ethylene Oxide

Compliance with existing and future environmental regulations may have an impact on the manufacturing and sterilization of our medical devices. Environmental regulations in the US and EU limit or prohibit the use of certain chemicals, substances and materials in the manufacture of our medical devices such as Prop 65 in California and others in the EU such as REACH, RoHS, and WEEE Directive. With the current global concerns over climate change and the tangible effects human beings are having on the environment, there is no doubt that the amount of environmental legislation is primed to increase still further, with EU being at the forefront of this movement.

Ethylene oxide is used to sterilize approximately 50% of medical devices in the U.S. While some alternative methods currently exist, potential device incompatibility issues exist with these alternatives. The U.S. Environmental Protection Agency (EPA) classified EtO as a carcinogen after linking it to cases of breast cancer, lymphoma and leukemia. Over the course of 2019, public concerns about the emissions from sterilization facilities using EtO resulted recently in the permanent closure of two facilities (one in Illinois and the other in Michigan) as well as temporary closures for at least two facilities in Georgia and a new facility at risk in Illinois. In addition, the Illinois state legislature is considering a bill that would phase out hospital in-house use of EtO and require EtO commercial sterilization facilities operating within the state to relocate to “scarcely populated areas.” Currently, shortages due to current closures are not expected, but any additional commercial sterilization facility closures could result in shortages for certain devices. Our devices are not currently impacted by these closures however, it is unknown if the current EtO facilities utilized by Apyx Medical could be impacted in the future.

The FDA is closely monitoring the supply chain effects of closures and potential closures of certain facilities that use ethylene oxide to sterilize medical devices prior to their use. The Agency is concerned about the future availability of sterile medical devices and the potential for medical device shortages that might impact patient care. However, the FDA does not have oversight authority over ethylene oxide emissions, that responsibility is within the purview of the Environmental Protection Agency.

Anti-Corruption Regulation

As we grow our international presence and global operations, we will be increasingly exposed to statutes, anti-corruption trade policies, economic sanctions and other restrictions imposed by the United States and other foreign governments and organizations, including the U.S. Foreign Corrupt Practices Act, or the FCPA, and other federal statutes and regulations, including those established by the Office of Foreign Assets Control, or OFAC. In addition, other foreign statutes, such as the U.K. Bribery Act of 2010, or the Bribery Act, prohibits both domestic and international bribery, as well as bribery across both private and public sectors.


8

APYX MEDICAL CORPORATION

We have implemented policies and procedures designed to ensure compliance by our directors, officers, employees, representatives, consultants and agents with the FCPA, OFAC restrictions, the Bribery Act and other export control, anti-corruption, anti-money-laundering and anti-terrorism laws and regulations. However, there can be no assurance that our policies and procedures are or will be sufficient to prevent violations from occurring. Violations of the FCPA, OFAC restrictions, the Bribery Act or other export control, anti-corruption, anti-money laundering and anti-terrorism laws or regulations may result in severe criminal or civil sanctions, and we may be subject to other liabilities, which could have a material adverse effect on our reputation, 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 2019.

There are also other risks inherent with operating on a global scale, not limited to the following:

Inability to obtain country-specific product registrations and clearances
Compliance with local regulations
Challenges with staffing our foreign operating facilities
Insufficient commercialization efforts in new countries due to lower than expected distributor performance
Theft or compromise of our intellectual property
Political changes or economic instability

Changes in U.S. trade policies could significantly increase the cost of imported goods into the United States, which may materially reduce our sales or profitability.

Changes in U.S. trade policy could trigger retaliatory actions by affected countries, resulting in "trade wars," in increased costs for goods imported into the United States, which may reduce customer demand for these products if the parties having to pay those tariffs increase their prices, or in trading partners limiting their trade with the United States. If these consequences are realized, the volume of economic activity in the United States, may be materially reduced. Such a reduction may materially and adversely affect our sales volumes. Further, the realization of these matters may increase our cost of goods and, if those costs cannot be passed on to our customers, our business and profits may be materially and adversely affected.

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 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.

Risks Relating to Our Business

We manufacture the majority of our products at our Clearwater, Florida and Sofia, Bulgaria facilities. Components, labor-intensive assemblies and sub-assemblies, and sterilization services are out-sourced to third party manufacturers/services and produced to our specifications.

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 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.

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APYX MEDICAL CORPORATION


The recent Coronavirus outbreak has been declared a pandemic by the World Health Organization and recently has spread to the United States and many other parts of the world and may continue to adversely affect our business operations, employee availability, financial condition, liquidity and cash flow for an extended period of time.

The outbreak of the Coronavirus (“COVID-19”) continues to grow both in the U.S. and globally, and related government and private sector responsive actions may continue to adversely affect our business operations. It is impossible to predict the effect and ultimate impact of the COVID-19 pandemic as the situation is rapidly evolving. 

Ongoing significant reductions in business related activities could result in further loss of sales and profits and other material adverse effects. The extent of the impact of COVID-19 on our business, financial results, liquidity and cash flows will depend largely on future developments, including new information that may emerge concerning the severity and action taken to contain or prevent further spread within the U.S. and the related impact on consumer confidence and spending, all of which are highly uncertain and cannot be predicted.

If the COVID-19 outbreak continues and persists for an extended period of time, we expect there will be significant and material disruptions to our supply chain and operations, and delays in the manufacturing and shipment of our products, which may then have a material adverse effect on our business and results of operations.

These and other potential impacts of COVID-19, could therefore materially and adversely affect our business, financial condition and results of operations.

We rely on certain suppliers, subcontractors, 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 and subcontracting services 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 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. For example, we source certain materials used in the manufacture of our products from China; the coronavirus outbreak or other similar global disruptions could make access to our existing supply chain difficult and could impact our business. 

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 have been issued 37 patents in the United States and 26 foreign patents. We have 16 pending patent applications in the United States and 26 pending foreign applications. Our intellectual property portfolio for our J-Plasma®/Renuvion® products continues to grow on an annual basis. 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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APYX MEDICAL CORPORATION

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, results of operations or cash flows.

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.

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

We are involved in a number of legal actions relating to the use of our technology. The outcomes of these legal actions are not within our complete control and may not be known for prolonged periods of time. In the opinion of management, the Company has meritorious defenses, and such claims are adequately covered by insurance, or are not expected, individually or in the aggregate, to result in a material, adverse effect on our financial condition. However, in the event that damages exceed the aggregate coverage limits of our policy or if our insurance carriers disclaim coverage, we believe it is possible that costs associated with these claims could have a material adverse impact on our consolidated earnings, financial position or cash flows (see below ITEM 3: Legal Proceedings).

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.

Our business is subject to the potential for recalls or safety alerts, litigation and negative publicity associated with defects or failures of our products, or their misuse\off-label use by physicians.

Manufacturing flaws, component failures, design defects, misuse uses by physicians, or inadequate disclosure of product-related information could result in an unsafe condition or the injury or death of a patient. In addition, there may be increased risk of injury if physicians or others attempt to use our products off-label. The FDA does not restrict or regulate a physician's use of a medical device within the practice of medicine, and we cannot prevent a physician from using our products for an off-label use. The use of our products for indications other than for those for which our products have been approved or cleared by the FDA may not effectively treat the conditions not referenced in our product indications. These problems could lead to litigation, a recall of, or issuance of a safety alert relating to our products, either of which could 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

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APYX MEDICAL CORPORATION

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.

Economic conditions could adversely affect our business and financial condition.

Negative conditions in the national or global economy could adversely affect our business and financial condition. During times of an uncertain economy and tight credit markets our customers may be unwilling or unable to borrow money to properly finance their operations. This may include difficulty in obtaining credit lines to purchase our products, or to maintain their business at current levels. The cosmetic procedure market can be particularly vulnerable to negative trends in the local or global economy since the end-user may have less discretionary income or be unsure about spending their discretionary income. This could result in less demand for procedures where our products are used. Additionally, some end users may have difficulty in obtaining financing at an acceptable interest rate that would be necessary to purchase the procedures in which our products are being used.

These factors could result in reduced revenues from the sale of our product, slower adoption of new technologies, longer sales cycles, increased price competition and increased difficulties in the collection of accounts receivables as, in certainly countries, payments by our customers are dependent on the financial stability of the economy. With the current economic state in many countries outside the United States, we will continue to monitor the ability of our customers to pay their obligations to us as any weaknesses in their end-user market could affect their cashflow and results in delays in their payments to us. This would increase the risk in our credit exposure and delay our ability to recognize revenues of current and future sales to these customers. Any of these events could harm our business and have material adverse effects on our financial condition.

There may be circumstances that arise that may cause us to use some of our existing financial assets ineffectively.

As a result of the proceeds received from the sale of our Core business in 2018, we were able to pay off all significant debt obligations and invest in cash and cash equivalents to support our continued growth initiatives over the coming years. Future decisions made to invest in certain initiatives may not have the expected results, which could materially and adversely affect our business and operations and impact overall stockholder value. In addition, due to fluctuations in interest rates, our investments may not always yield a favorable rate of return.

We may, in the future, identify deficiencies in controls over financial reporting.

As disclosed in Part II, Item 9A, we have concluded that two of the three material weaknesses in our internal controls over financial reporting identified during the year ended December 31, 2018 were not fully remediated due to the need for additional qualified accounting personnel and the lack of sufficient documentation or timeliness in completing certain business processes. In 2019 we also identified a material weakness at our subsidiary in Bulgaria related to the purchasing of goods and services and the processing and payment of vendor invoices. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company's annual or interim financial statements will not be prevented or detected on a timely basis.

While we are in the process of identifying and implementing remedial measures to address the control deficiencies that led to these material weaknesses, there can be no assurance that remediation will be fully completed in 2020 or that the remedial measures will prevent future control deficiencies or material weaknesses. If we are unable to remediate these material weaknesses, or we identify additional material weaknesses in our internal controls over financial reporting in the future, our ability to analyze, record and report financial information free of material misstatements, and to prepare our financial statements within the time periods specified by the rules and forms of the SEC will likely be adversely affected.

We are at risk of being the victim of a cyber-attack or a security breach that may expose confidential customer, product and Company data or compromise our internal IT infrastructure. This could lead to liabilities resulting from failure to comply with US and foreign data security and privacy regulations and negative impacts to our business operations.

We store in our computer systems and network various elements of data and information related to our customers, products and company that could be compromised as the result of a cyber-attack or security breach. If an individual or group of individuals, including a Company employee, were to compromise confidential information, or if customer confidential information is

12

APYX MEDICAL CORPORATION

inappropriately disclosed due to a security breach of our computer systems, system failures or otherwise, we may face substantial liabilities or incur penalties in connection with any violation of applicable privacy laws or regulations. We also rely heavily on our internal systems, network and data. Any attacks on our IT infrastructure could have a significant impact on our daily manufacturing and customer service functions which could result in a material adverse impact on our financial results.

Our business is dependent on the security of our IT networks and those of our customers. Internal or external attacks on any of those could disrupt the normal operations of our engagements and impede our ability to provide critical services to our customers, thereby subjecting us to liability under our contracts. Additionally, our business involves the use, storage and transmission of information about our employees, our customers and clients of our customers. While we take measures to protect the security of, and unauthorized access to, our systems, as well as the privacy of personal and proprietary information, it is possible that our security controls over our systems, as well as other security practices we follow or those systems of our customers into which we operate and rely upon, may not prevent the improper access to or disclosure of personally identifiable or proprietary information. Such disclosure could harm our reputation and subject us to liability under our contracts and laws that protect personal data, resulting in increased costs or loss of revenue.

Data privacy is subject to frequently changing rules and regulations, which sometimes conflict among the various jurisdictions and countries in which we provide services and continue to develop in ways which we cannot predict. We are subject to U.S. federal and state laws regarding data privacy and security including Section 5 of the Federal Trade Commission Act, or FTC Act. We are also subject to foreign data privacy and security laws, including the Global Data Protection Regulation, or GDPR, the European Union-wide legal framework to govern data collection, use and sharing and related consumer privacy rights. The GDPR includes significant penalties for non-compliance. Our failure to adhere to or successfully implement processes in response to changing regulatory requirements in this area could result in legal liability or impairment to our reputation in the marketplace, which could have a material adverse effect on our business, financial condition and results of operations.

Our manufacturing facilities are located in Clearwater, Florida and Sophia, Bulgaria and could be affected due to multiple weather risks, including risks to our Florida facility from hurricanes and similar phenomena.

Our manufacturing facilities are located in Clearwater, Florida and Sophia, Bulgaria and could be affected by multiple weather risks. Most notably hurricanes in Clearwater, Florida. 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.

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 NASDAQ Stock Market LLC under the ticker symbol “APYX”. 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 The NASDAQ Stock Market LLC;
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.

In addition, future sales by our security holders 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. Substantially all of our common stock is freely tradable in

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APYX MEDICAL CORPORATION

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.

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.

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

As of December 31, 2019, our outstanding stock options to our employees, officers, directors and consultants amounted to 3,966,858 shares of our common stock, representing approximately 11.6% of our outstanding common stock.

The exercise of some or all of our 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.


ITEM 1B. Unresolved Staff Comments

None

ITEM 2. Properties

We currently own and maintain a 60,000 square foot facility which consists of office, warehousing, manufacturing and research space located at 5115 Ulmerton Rd., Clearwater, Florida.

In October, 2015, through our acquisition of Apyx Bulgaria, we acquired a lease for approximately 20,000 square feet of office, warehousing and manufacturing facilities located in Sofia, Bulgaria. The rental cost of the facility is approximately $9,000 per month.


ITEM 3. Legal Proceedings

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

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

In addition, as previously disclosed with the U.S. Securities and Exchange Commission on the Company’s Report on Form 8-K filed April 26, 2019, on April 17, 2019, a complaint (the “Complaint”) was filed in the United States District Court for the Middle District of Florida by plaintiff Kyle Pritchard, individually and on behalf of all others similarly situated against the Company and Charles D. Goodwin (“Goodwin”), the Company’s President and Chief Executive Officer and a member of the Company’s Board of Directors, alleging certain violations of the Securities Exchange Act of 1934, as amended. On July 16, 2019, the Court appointed a lead plaintiff for the putative class and approved the lead plaintiff’s selection of counsel. On or about September 3, 2019, Plaintiff filed an amended complaint (the “Amended Complaint”) with the Court.

The Amended Complaint seeks class action status on behalf of all persons and entities that acquired the Company’s securities between December 21, 2018 and April 1, 2019 and alleges violations by the Company and Goodwin of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended and Rule 10b-5 thereunder, primarily related to certain public statements concerning the Premarket Notification 510(k) submission made to the US Food and Drug Administration for a new indication for the Company’s J-Plasma® technology for use in dermal resurfacing procedures. The Amended Complaint seeks an unspecified amount of compensatory damages, an award of interest, reasonable attorneys’ fees, expert fees and other costs, and equitable relief as the court may deem just and proper. On October 3, 2019, the Company and Goodwin filed a Motion to Dismiss the Amended Complaint. Plaintiff’s opposition to the motion to dismiss was served on November 4, 2019. On March 11, 2020, the Court issued an order denying the Company’s motion to dismiss.  The Company intends to vigorously defend its interests against the allegations contained in the complaint.



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APYX MEDICAL CORPORATION

Although the ultimate outcome of this matter cannot be determined with certainty, the Company believes that the allegations stated in the Amended Complaint are entirely without merit. The Company and Goodwin intend to defend themselves vigorously in the suit. In the opinion of management, such claims are adequately covered by insurance, however, in the event that damages exceed the aggregate coverage limits of our policy or if our insurance carriers disclaim coverage, we believe it is possible that costs associated with this claim could have a material adverse impact on our consolidated earnings, financial position or cash flows. We initially accrued $500,000 for defense costs and upon the denial of the motion to dismiss, we accrued an additional $500,000, which is our insurance deductible related to the matter. $820,000 of the $1,000,000 is still accrued as of December 31, 2019.

We accrue a liability in our consolidated financial statements for these actions when a loss is known or considered probable and the amount can be reasonably estimated. If the reasonable estimate of a known or probable loss is a range, and no amount within the range is a better estimate than any other, the minimum amount of the range is recorded. If a loss is reasonably possible, but not known or probable, and can be reasonably estimated, the estimated loss or range of loss is disclosed in the notes to the consolidated financial statements. In most cases, significant judgment is required to estimate the amount and timing of a loss to be recorded, actual results may differ from these estimates.


ITEM 4. Mine Safety Disclosures

Not Applicable.


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APYX MEDICAL CORPORATION

PART II

ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock currently is traded on the NASDAQ Stock Market LLC. As of March 27, 2020, we had approximately 600 stockholders of record. Since many stockholders choose to hold their shares under the name of their brokerage firm, we estimate that the actual number of stockholders was over 3,500 shareholders.


Securities Authorized for Issuance Under Equity Compensation Plans
 
Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights
(a)
 
Weighted Average Exercise Price of Outstanding Options, Warrants and Rights
(b)
 
Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (excluding securities reflected in column (a))
(c)
Equity compensation plans approved by security holders
3,770,715

 
$
4.59

 
3,546,035

Equity compensation plans not approved by security holders (1)
196,143

 
$
6.08

 

Total
3,966,858

 
$
4.67

 
3,546,035

(1) Represents inducement grants for new hires

Dividend Policy

We have never declared or paid any cash dividends on our common stock and we currently do not anticipate paying cash dividends in the foreseeable future. We currently expect to retain any future earnings to fund the operation and expansion of our business.


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APYX MEDICAL CORPORATION

Five Year Performance Graph

The following line graph compares the cumulative total return of our common shares with the cumulative total return of the Russell 2000 Stock Index and the Russell 3000 Stock Index. The line graph assumes, in each case, an initial investment of $100 on December 31, 2015, based on the market prices at the end of each fiscal year through and including December 31, 2019, and reinvestment of dividends.

chart-e6732290a2e25e189a9.jpg
 
December 31,
 
2015
 
2016
 
2017
 
2018
 
2019
Apyx Medical Corporation
100.00

 
170.95

 
123.81

 
308.57

 
402.86

Russell 2000 Index
100.00

 
119.48

 
135.18

 
118.72

 
146.88

Russell 3000 Index
100.00

 
110.42

 
131.24

 
122.07

 
156.91



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APYX MEDICAL CORPORATION

ITEM 6. Selected Financial Data

The following selected consolidated financial data (presented in thousands, except per share amounts and employee data) are derived from our consolidated financial statements. On August 30th, 2018, we sold our Core business segment and discontinued those operations. All the information in this table has been restated to reflect this disposition. This data should be read in conjunction with the consolidated financial statements and notes thereto and with Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 
2019
 
2018 as Restated
 
2017
Sales
$
28,235

 
$
16,605

 
$
10,234

Cost of sales
9,141

 
5,779

 
3,276

Gross profit
19,094

 
10,826

 
6,958

Other costs and expenses:
 
 
 
 
 
Research and development
3,731

 
2,549

 
1,941

Professional services
8,507

 
3,133

 
1,769

Salaries and related costs
14,025

 
9,272

 
6,920

Selling, general and administrative
13,700

 
9,407

 
8,689

Severance and related expense

 
741

 
1,524

Total other costs and expenses
39,963

 
25,102

 
20,843

Loss from operations
(20,869
)
 
(14,276
)
 
(13,885
)
Interest income
1,392

 
616

 

Interest expense
(8
)
 
(104
)
 
(136
)
Other losses, net
(351
)
 
(947
)
 

Change in fair value of derivative liabilities

 
20

 
183

Total other income, net
1,033

 
(415
)
 
47

Loss before income taxes
(19,836
)
 
(14,691
)
 
(13,838
)
Income tax benefit
(130
)
 
(3,907
)
 
(156
)
Net loss from continuing operations
(19,706
)
 
(10,784
)
 
(13,682
)
Income from discontinued operations, net of tax

 
5,099

 
8,620

Gain on sale of the Core Business, net of tax

 
68,404

 

Income from discontinued operations, net of tax

 
73,503

 
8,620

Net income (loss)
$
(19,706
)
 
$
62,719

 
$
(5,062
)

 
 
 
 
 
Balance Sheet Information:
 
 
 
 
 
Total current assets
$
76,733

 
$
89,835

 
$
22,547

Short term investments

 
61,678

 

Working Capital
64,422

 
81,224

 
16,574

Total assets
84,745

 
95,928

 
30,988

Long Term Liabilities
1,175

 
140

 
2,983

Total Stockholder's Equity
71,259

 
87,177

 
22,032


18

APYX MEDICAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANAYLSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS


ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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

Executive Level Overview

We are an advanced energy technology company with a passion for elevating people’s lives through innovative products in the cosmetic and surgical markets. Known for our innovative Helium Plasma Technology, Apyx is solely focused on bringing transformative solutions to the physicians and patients it serves. Our Helium Plasma Technology is marketed and sold as Renuvion® in the cosmetic surgery market and J-Plasma® in the hospital surgical market. Renuvion® offers plastic surgeons, fascial plastic surgeons and cosmetic physicians a unique ability to provide controlled heat to the tissue to achieve their desired results. The J-Plasma® system allows surgeons to operate with a high level of precision and virtually eliminating unintended tissue trauma. We also leverage our deep expertise and decades of experience in unique waveforms through original equipment manufacturing (OEM) agreements with other medical device manufacturers.

Total revenue from continuing operations increased by 70.0% or approximately $11.6 million for the year ended December 31, 2019 when compared with 2018. Advanced Energy segment sales increased 74.6% or approximately $9.7 million for the year ended December 31, 2019 when compared with 2018.

International sales represented approximately 30.6% of total revenues in 2019, 22.6% in 2018 and 13.2% in 2017. Management estimates our products have been sold in more than 40 countries through local dealers coordinated by sales, marketing and logistics personnel at our Clearwater, Florida and Sofia, Bulgaria facilities.

Throughout 2019, we continued to drive growth in our Advanced Energy business by increasing the adoption and utilization of our generators and handpieces in the U.S. cosmetic surgery market and fulfilling demand from distributors in our international markets. We also saw contributions from our OEM business, which increased $1.9 million, or 53.6%, as compared to last year. This was driven primarily by contributions from our electrosurgical generator and supply agreement with Symmetry Surgical.

We believe that our investment and focus on the following strategic initiatives in 2019 and beyond will position the Company for long-term growth in the cosmetic surgery market:

To formalize our regulatory strategy to pursue specific clinical indications that will enable us to sell our
Renuvion® products for targeted procedures
To secure new clinical evidence demonstrating the safety and efficacy of our Helium Plasma Technology
To provide enhanced physician and practice support for our cosmetic surgery customers
To improve our manufacturing capabilities and efficiencies

In regards to our operating segments, our results 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. Asset information is not reviewed by the chief operating decision maker by segment and is not available by segment, and accordingly, we have not presented a measure of assets by segment.

Our reportable segments are disclosed as principally organized and managed as two operating segments: Advanced Energy and OEM. "Corporate & Other" includes certain unallocated corporate and administrative costs which are not specifically attributed to any reportable segment. The OEM segment is primarily development and manufacturing contract and product driven, and all related expenses are recorded as cost of sales, therefore no segment specific operating expenses are incurred.


19

APYX MEDICAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANAYLSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued


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

As discussed under "Item 1A. Risk Factors," an outbreak of a novel strain of the coronavirus, COVID-19, was recently identified in China and has subsequently been recognized as a pandemic by the World Health Organization. This coronavirus outbreak has severely restricted the level of economic activity around the world. In response to this coronavirus outbreak the governments of many countries, states, cities and other geographic regions have taken preventative or protective actions, such as imposing restrictions on travel and business operations and advising or requiring individuals to limit or forego their time outside of their homes. Temporary closures of businesses have been ordered and numerous other businesses have temporarily closed voluntarily. These actions have expanded significantly in the past several weeks and are expected to continue to expand. Given the uncertainty regarding the spread of this coronavirus, the related financial impact cannot be reasonably estimated at this time, although the aforementioned actions and related impacts are expected to continue and may also significantly affect the Company's business in other geographic areas in which the coronavirus has spread and may continue to spread. The Company intends to continue to execute on its strategic plans and operational initiatives during the coronavirus outbreak. However, the uncertainties associated with the protective and preventative measures being put in place or recommended by both governmental entities and other businesses, among other uncertainties, may result in delays or modifications to these plans and initiatives.

The following financial statement analysis has been updated for the effects of the restatement to the results of operations and financial position of the Company in 2018 as discussed in Note 4 to the consolidated financial statements.

Results of Operations

Sales
 
Year Ended
December 31,
 
 
 
Year Ended
December 31,
 
 
(In thousands)
2019
 
2018 as Restated
 
Change
 
2018 as Restated
 
2017
 
Change
Sales by Reportable Segment
 
 
 
 
 
 
 
 
 
 
 
Advanced Energy
$
22,676

 
$
12,987

 
74.6
%
 
$
12,987

 
$
7,636

 
70.1
%
OEM
5,559

 
3,618

 
53.6
%
 
3,618

 
2,598

 
39.3
%
Total
$
28,235

 
$
16,605

 
70.0
%
 
$
16,605

 
$
10,234

 
62.3
%
 
 
 
 
 
 
 
 
 
 
 
 
Sales by Domestic and International
 
 
 
 
 
 
 
 
 
 
 
Domestic
$
19,584

 
$
12,858

 
52.3
%
 
$
12,858

 
$
8,887

 
44.7
%
International
8,651

 
3,747

 
130.9
%
 
3,747

 
1,347

 
178.2
%
Total
$
28,235

 
$
16,605

 
70.0
%
 
$
16,605

 
$
10,234

 
62.3
%

Total revenue from continuing operations increased by 70.0% or approximately $11.6 million for the year ended December 31, 2019 when compared with 2018. Advanced Energy segment sales increased 74.6% or approximately $9.7 million for the year ended December 31, 2019 when compared with 2018. The increase is a result of the impact made by the additional sales force in the U.S. and new international distributors. In both the U.S. and internationally, strong sales growth of generators was coupled with utilization based demand for our handpieces. In addition, we entered four new markets in 2019, the largest of which were Mexico and Canada.

The OEM product line consists of proprietary products designed specifically for third party equipment manufacturers; revenue for this product line increased 53.6% or approximately $1.9 million when compared to 2018. The increase from 2018 is primarily attributable to sales to Symmetry under our Manufacture and Supply Agreement, which commenced following the disposition of the Core Business in August 2018.


20

APYX MEDICAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANAYLSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued


Overall sales from continuing operations increased by 62.3% or approximately $6.4 million for the year ended December 31, 2018 when compared with 2017. Advanced Energy segment sales increased 70.1% or approximately $5.4 million for the year ended December 31, 2018 when compared with 2017. The increase was primarily driven by a continued focus of our selling into the cosmetic surgery market and sales growth in international markets. The OEM product line consists of proprietary products designed specifically for third party equipment manufacturers; revenue for this product line increased 39.3% or approximately $1.0 million when compared to 2017.

Gross Profit
 
Year Ended
December 31,
 
 
 
Year Ended
December 31,
 
 
(In thousands)
2019
 
2018 as Restated
 
Change
 
2018 as Restated
 
2017
 
Change
Cost of sales
$
9,141

 
$
5,779

 
58.2
%
 
$
5,779

 
$
3,276

 
76.4
%
Percentage of sales
32.4
%
 
34.8
%
 


 
34.8
%
 
32.0
%
 


Gross profit
$
19,094

 
$
10,826

 
76.4
%
 
$
10,826

 
$
6,958

 
55.6
 %
Percentage of sales
67.6
%
 
65.2
%
 
2.4
%
 
65.2
%
 
68.0
%
 
(2.8
)%

Our gross profit margin as a percentage of sales increased by 2.4%, or $8.3 million during the year ended December 31, 2019 compared with 2018. The increase was primarily driven by higher Advanced Energy sales as a percentage of total sales in 2019 as well as efficiencies realized in the manufacturing processes in late 2019. These increases were partially offset by an increase in international sales as a percentage of total sales in 2019 as compared to 2018, which typically carry lower margins that U.S. sales, and OEM sales to Symmetry, which carry lower margins than typical OEM sales.

Our gross profit margin as a percentage of sales decreased by 2.8% but increased by approximately $3.9 million during the year ended December 31, 2018, compared with 2017. The decrease was driven by lower year over year margins in Advanced Energy from increased international sales offset by increased year over year margins in the OEM segment.

In conjunction with the divestment of our Core business segment in 2018, we performed a review of our standard costs, including the composition of our overhead cost pools. As a result, we reclassified certain overhead costs related to quality and regulatory to Salaries and Related Costs, in the amount of approximately $0.1 million in the third quarter and approximately $0.4 million for the last quarter of 2018. This change in estimate was necessary in order to better reflect the change in operations to our Advanced Energy segment.


21

APYX MEDICAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANAYLSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued



Other Costs and Expenses

Research and development
 
Year Ended
December 31,
 
 
 
Year Ended
December 31,
 
 
(In thousands)
2019
 
2018 as Restated
 
Change
 
2018 as Restated
 
2017
 
Change
Research and Development expense
$
3,731

 
$
2,549

 
46.4
%
 
$
2,549

 
$
1,941

 
31.3
%
Percentage of sales
13.2
%
 
15.4
%
 


 
15.4
%
 
19.0
%
 



Our expenditures for R&D related activities increased by 46.4% or approximately $1.2 million for the year ended December 31, 2019, compared with 2018. This was mainly driven by continued spending on clinical studies and research projects related to the cosmetic surgery market, including the development of new handpieces which the Company introduced to the market during 2019 as well as the submission of two IDE applications to the FDA in 2019.

Our expenditures for R&D related activities increased by 31.3% or approximately $0.6 million for the year ended December 31, 2018, compared with 2017. This was mainly driven by continued spending on clinical studies and research projects related to the cosmetic surgery market.

Professional services
 
Year Ended
December 31,
 
 
 
Year Ended
December 31,
 
 
(In thousands)
2019
 
2018 as Restated
 
Change
 
2018 as Restated
 
2017
 
Change
Professional services expense
$
8,507

 
$
3,133

 
171.5
%
 
$
3,133

 
$
1,769

 
77.1
%
Percentage of sales
30.1
%
 
18.9
%
 


 
18.9
%
 
17.3
%
 



Professional services expenses increased 171.5% for the year ended December 31, 2019, compared with 2018. The change was primarily attributable to increases in physician consulting expenses, including stock option grants, related to the Advanced Energy segment (increase of $2.0M), increased legal fees primarily associated with our class action lawsuit (increase of $1.0M), our use of third party IT support in 2019 (increase of $0.6M), third party assistance with internal controls in 2019 (increase of $0.5M), and accounting and auditing fees for services provided by our independent accountants ($0.3M).

Professional services costs increased 77.1% for the year ended December 31, 2018, compared with 2017. The change was attributable to increased legal and non-R&D consulting expenses related to the Advanced Energy segment.

Salaries and related costs
 
Year Ended
December 31,
 
 
 
Year Ended
December 31,
 
 
(In thousands)
2019
 
2018 as Restated
 
Change
 
2018 as Restated
 
2017
 
Change
Salaries and related expenses
$
14,025

 
$
9,272

 
51.3
%
 
$
9,272

 
$
6,920

 
34.0
%
Percentage of sales
49.7
%
 
55.8
%
 


 
55.8
%
 
67.6
%
 



During 2019, salaries and related expenses increased approximately 51.3% or approximately $4.8 million compared to 2018. The increase was primarily attributable to additional headcount in 2019 (net increase of 44 employees in 2019), many of whom had a salary in excess of our average salaries in 2018, and employee stock option grants in 2019, which drove an increase in employee stock option expense of $0.6M in 2019.

During 2018, salaries and related expenses increased approximately 34.0% or approximately $2.4 million compared to 2017. The increase was primarily attributable to increased incentive compensation of $1.5 million.

22

APYX MEDICAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANAYLSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued



In conjunction with the divestment of our Core business segment, we performed a review of our standard costs, including the composition of our overhead cost pools. As a result, we reclassified certain overhead costs related to quality and regulatory to Salaries and Related Costs, in the amount of approximately $0.1 million in the third quarter and approximately $0.4 million for the last quarter of 2018. This change in estimate was necessary in order to better reflect the change in operations to our Advanced Energy segment.

Selling, general and administrative expenses
 
Year Ended
December 31,
 
 
 
Year Ended
December 31,
 
 
(In thousands)
2019
 
2018 as Restated
 
Change
 
2018 as Restated
 
2017
 
Change
SG&A Expense
$
13,700

 
$
9,407

 
45.6
%
 
$
9,407

 
$
8,689

 
8.3
%
Percentage of sales
48.5
%
 
56.7
%
 


 
56.7
%
 
84.9
%
 



Selling, general and administrative expense increased by 45.6% or approximately $4.3 million for the year ended December 31, 2019, compared with 2018. The increase is primarily attributable to higher selling and marketing related expenses, including sales commissions (increase of $0.9M), travel expenses (increase of $0.9M), and advertising including trade shows (increase of $0.7M) to support sales growth in the Advanced Energy segment. Additionally, we incurred additional regulatory expenses (increase of $0.7M) in 2019 associated with obtaining clearance to sell our products, both domestically and internationally.

Selling, general and administrative expense increased by 8.3% or approximately $0.7 million for the year ended December 31, 2018, compared with 2017. The increase is primarily attributable to higher sales and marketing related expenses to support sales growth in the Advanced Energy segment.

Severance

Jay D. Ewers, the Chief Financial Officer, resigned as an officer of the Company effective December 31, 2018, although he continued on as an employee during the first quarter of 2019. In connection with this departure, the Company and Mr. Ewers entered into a separation agreement, dated November 12, 2018. Severance costs incurred included salary, option expense and other benefits of approximately $624,000, approximately $532,000 is included in operational cash outflows during 2019, the remainder will be included in operational cash outflows during 2020.

Jack McCarthy, the Chief Commercialization Officer, was terminated without cause from his position with the Company effective November 6, 2017. Severance costs incurred included salary, option expense and other benefits of approximately $582,000, of which approximately $397,000 was included in operational cash outflows during 2018.

Robert L. Gershon, the Chief Executive Officer and a director, resigned from all of his positions with the Company effective December 15, 2017. In connection with this departure, the Company and Mr. Gershon entered into a separation agreement, dated December 15, 2017. Severance costs incurred included salary, option expense and other benefits of approximately $767,000, of which approximately $670,000 was included in operational cash outflows during 2018.

Other Income (Expense), net
 
Year Ended
December 31,
 
 
 
Year Ended
December 31,
 
 
(In thousands)
2019
 
2018 as Restated
 
Change
 
2018 as Restated
 
2017
 
Change
Interest income
$
1,392

 
$
616

 
126.0
 %
 
$
616

 
$

 
 %
Interest expense
(8
)
 
(104
)
 
(92.3
)%
 
(104
)
 
(136
)
 
(23.5
)%
Percentage of sales
4.9
%
 
3.1
%
 


 
3.1
%
 
(1.3
)%
 




23

APYX MEDICAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANAYLSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued


Interest income (expense)

Total net interest income was higher for the year ended December 31, 2019, as compared with 2018. This increase is due to short term investments in U.S. Treasury Securities which we purchased with the proceeds from the sale of the Core business, which were outstanding for all of 2019 as compared to approximately 4 months in 2018. This increase is offset by lower returns due to a lower average yield in 2019 and lower average principal invested.

Total net interest income was higher for the year ended December 31, 2018, as compared with 2017. This increase is primarily related to short term investments in U.S. Treasury Securities which we purchased with the proceeds from the sale of the Core business.

Income Taxes
 
The income tax benefit was approximately $0.1 million for the year ended December 31, 2019 as compared to an income tax benefit from continuing operations of approximately $3.9 million in 2018. In 2019, our income tax benefit is composed primarily of return to provision adjustments related to the 2018 tax year (benefit of approximately $0.3M), partially offset by the accrual of interest and penalties on our uncertain tax positions (expense of approximately $0.2M).

During 2018, the Company recorded a large gain on the sale of our Core business to Symmetry Surgical. This gain allowed the Company to utilize deferred tax assets (primarily a net operating loss carryforward) that had been fully reserved through a valuation allowance to offset our taxable position in 2018.

Liquidity and Capital Resources

At December 31, 2019, we had approximately $58.8 million in Cash and Cash Equivalents as compared to approximately $78.3 in Cash, Cash Equivalents and Short Term Investments at December 31, 2018. Our working capital at December 31, 2019 was approximately $64.4 million compared with $81.2 million at December 31, 2018. The decrease in working capital at December 31, 2019 from December 31, 2018 was primarily due to the net loss incurred by the Company in 2019.

For the year ended December 31, 2019, net cash used in operating activities is approximately $18.5 million compared with net cash used in operating activities of approximately $20.9 million in 2018. This decrease in cash used is primarily driven by a reduction of taxes paid, and partially offset by a higher net loss from continuing operations.

Net cash from investing activities for the year ended December 31, 2019, is $60.5 million, primarily related to the maturity of short term investments and reinvestment in cash equivalents. Net cash from investing activities for the year ended December 31, 2018 is $29.3 million, primarily related to $91.1 million in net proceeds from the disposition of the Core business, offset by net purchases of marketable securities of $61.4 million.

Cash from financing activities of approximately $0.1 million primarily relates to cash collected for stock options during the year ended December 31, 2019. Cash used in 2018 financing activities was $2.5 million and primarily related to the repayment of the mortgage on our Clearwater, FL, facility.

At December 31, 2019, we had purchase commitments for inventories totaling approximately $2 million, substantially all of which is expected to be purchased by the end of 2020.

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.


24

APYX MEDICAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANAYLSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued


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, legal proceedings, research and development, warranty obligations, product liability, 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:

Stock-based Compensation

Under our stock option plans, options to purchase common shares of the Company may be granted to employees, officers and directors of the Company by the Board of Directors. The Company accounts for stock options in accordance with FASB ASC Topic 718-10, Compensation-Stock Compensation, with compensation expense amortized over the vesting period. Options are valued using the Black-Scholes model in 2019 and the trinomial lattice option-pricing model in prior years, both of which includes a number of estimates that affect the amount of our expense. The Company has determined that the most critical of these estimates are the estimates of expected life, forfeiture rate and volatility used in the calculations.

Expected life

For employee stock-based compensation awards, we estimate the expected life of awards utilizing the SEC's simplified method. We utilize this method, as the we have not historically granted stock-based compensation awards to employees in sufficient volumes to determine a reasonable estimate of the life of awards. For awards granted to non-employees, we calculate expected life using a combination of past exercise behavior, the contractual term and expected remaining exercise behavior.

Forfeiture rate

We estimate forfeiture rates at the time stock-based compensation awards are granted. We utilize historical employee turnover by employee class to estimate these rates. Forfeiture estimates are lower for employees in executive and managerial positions than for other employee groups. At a minimum, we record compensation expense on those awards that have vested. Following the disposition of the Core business, we experienced turnover higher than an our average historical turnover, which resulted in actual results differing from these estimates. During the third quarter of 2019, we determined that our estimates at the grant date were not consistent with actual results and that we had not re-evaluated our original forfeiture estimate or recorded compensation cost for the value of awards that had vested. This resulted in a cumulative difference in the compensation cost that had been recognized on these awards of $0.2 million from the estimated amount, which was corrected in a revision included in our 2019 Q3 10-Q.

Volatility

The Company determines the volatility by utilizing the historical volatility of our stock over the period of the awards expected life. The SEC allows us to include periods in excess of the useful life if we determine that they provide a more reasonable basis for the volatility of our stock. Additionally, ASC 718-10 allows us to exclude periods from the volatility if they pertain to events or circumstances that in our judgment are specific to us and if the event or transaction is not reasonably expected to occur again during the expected term of the awards. We have not included any additional periods, nor disregarded any periods, in calculating our volatility.


25

APYX MEDICAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANAYLSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued


Inventory reserves

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

Litigation Contingencies

In accordance with authoritative guidance, we record a liability in our consolidated financial statements for these actions when a loss is known or considered probable and the amount can be reasonably estimated. If the reasonable estimate of a known or probable loss is a range, and no amount within the range is a better estimate than any other, the minimum amount of the range is accrued. If a loss is reasonably possible, but not known or probable, and can be reasonably estimated, the estimated loss or range of loss is disclosed in the notes to the consolidated financial statements. In most cases, significant judgment is required to estimate the amount and timing of a loss to be recorded; actual results may differ from these estimates.

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.

As a result of historical losses exclusive of discontinued operations, and our expectation to continue to generate losses in the near future, we recorded a valuation allowance on the net deferred tax asset and do not anticipate recording an income tax benefit related to these deferred tax assets. We will reassess the realization of deferred tax assets each reporting period and will be able to reduce the valuation allowance to the extent the financial results of continuing operations improve and it becomes more likely than not that the deferred tax assets will be realizable. As management expects the Company to continue to generate losses in the foreseeable future after 2019, we will continue to record a valuation allowance on the remaining deferred tax asset balance as of December 31, 2019.

We assess the financial statement impact of an uncertain tax position taken or expected to be taken on an income tax return at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized in the financial statements unless it is more likely than not of being sustained.

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 3 of the Notes to Consolidated Financial Statements.

ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk

Not required.

26

APYX MEDICAL CORPORATION

ITEM 8. Financial Statements and Supplementary Data

INDEX TO FINANCIAL INFORMATION

27




REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Shareholders and Board of Directors
Apyx Medical Corporation
Clearwater, Florida
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheet of Apyx Medical Corporation (the “Company”) as of December 31, 2019, the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for year ended December 31, 2019, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2019, and the results of its operations and its cash flows for year ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated March 31, 2020 expressed an adverse opinion thereon.
Change in Accounting Principle
As discussed in Notes 3 and 9 to the consolidated financial statements, effective January 1, 2019, the Company adopted Accounting Standards Codification Topic 842, Leases.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.


/s/ BDO USA, LLP

We have served as the Company's auditor since 2019.
Tampa, Florida
March 31, 2020

28




REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors and Stockholders of
Apyx Medical Corporation

Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheet of Apyx Medical Corporation (formerly Bovie Medical Corporation) and subsidiaries (the "Company") as of December 31, 2018, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for the years ended December 31, 2018 and 2017, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018, and the results of their operations and cash flows for the years ended December 31, 2018 and 2017, in conformity with accounting principles generally accepted in the United States of America.
Restatement to Correct 2018 Misstatements
As discussed in Note 4 to the consolidated financial statements, the 2018 financial statements have been restated to correct misstatements.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Frazier & Deeter, LLC

Tampa, Florida
March 13, 2019 (March 31, 2020 as to the effects of the restatement discussed in Note 4)
We served as the Company's auditor from 2007 to 2018.


29




REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Shareholders and Board of Directors
Apyx Medical Corporation
Clearwater, Florida
Opinion on Internal Control over Financial Reporting
We have audited Apyx Medical Corporation’s (the “Company’s”) internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). In our opinion, the Company did not maintain, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on the COSO criteria.
We do not express an opinion or any other form of assurance on management’s statements referring to any corrective actions taken by the Company after the date of management’s assessment.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheet of the Company as of December 31, 2019, the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for the year ended December 31, 2019, and the related notes (collectively referred to as “the financial statements”)” and our report dated March 31, 2020 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Item 9A, Controls and Procedures. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weaknesses have been identified and described in management’s assessment: 1) an ineffective control environment requiring additional qualified accounting personnel with an appropriate level of knowledge and experience with generally accepted accounting principles; 2) ineffective control activities due to the lack of documentation and timeliness in executing certain business process controls, specifically related to procure to pay and inventory processes and footnote reporting disclosures related to income tax accounts, primarily related to the Company’s United States Operations; and 3) ineffective control environment and control activities in the Company’s Bulgarian subsidiary relating to the purchasing of goods and services, including the processing and payment of vendor invoices. These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2019 financial statements, and this report does not affect our report dated March 31, 2020 on those financial statements.

30



Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s 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. Also, 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.

/s/ BDO USA, LLP

Tampa, Florida
March 31, 2020


31

APYX MEDICAL CORPORATION
CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)
 
December 31,
2019
 
December 31, 2018 as Restated
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
58,812

 
$
16,596

Short term investments

 
61,678

Trade accounts receivable, net of allowance of $273 and $428
7,987

 
3,721

Other receivables
1,233

 
1,359

Inventories, net of provision for obsolescence of $392 and $439
5,068

 
3,146

Prepaid expenses and other current assets
3,633

 
3,335

Total current assets
76,733

 
89,835

Property and equipment, net
6,618

 
5,788

Operating lease right-of-use assets
350

 

Finance lease right-of-use assets
653

 

Other assets
391

 
305

Total assets
$
84,745

 
$
95,928

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
2,438

 
$
1,423

Accrued expenses and other current liabilities
9,396

 
7,188

Current portion of operating lease liabilities
108

 

Current portion of finance lease liabilities
229

 

Related party note payable
140

 

Total current liabilities
12,311

 
8,611

Related party note payable

 
140

Long-term operating lease liabilities
235

 

Long-term finance lease liabilities
421

 

Other liabilities
519

 

Total liabilities
13,486

 
8,751

COMMITMENTS AND CONTINGENCIES (NOTE 18)

 

STOCKHOLDERS' EQUITY

 

Common stock, $0.001 par value; 75,000,000 shares authorized; 34,312,527 issued and 34,169,952 outstanding as of December 31, 2019, and 33,847,100 issued and 33,704,525 outstanding as of December 31, 2018
34

 
34

Additional paid-in capital
56,708

 
52,920

Retained earnings
14,517

 
34,223

Total stockholders’ equity
71,259

 
87,177

Total liabilities and stockholders’ equity
$
84,745

 
$
95,928


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

32

APYX MEDICAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)
 
Year Ended December 31,
 
2019
 
2018 as Restated
 
2017
Sales
$
28,235

 
$
16,605

 
$
10,234

Cost of sales
9,141

 
5,779

 
3,276

Gross profit
19,094

 
10,826

 
6,958

Other costs and expenses:
 
 
 
 
 
Research and development
3,731

 
2,549

 
1,941

Professional services
8,507

 
3,133

 
1,769

Salaries and related costs
14,025

 
9,272

 
6,920

Selling, general and administrative
13,700

 
9,407

 
8,689

Severance and related expense

 
741

 
1,524

Total other costs and expenses
39,963

 
25,102

 
20,843

Loss from operations
(20,869
)
 
(14,276
)
 
(13,885
)
Interest income
1,392

 
616

 

Interest expense
(8
)
 
(104
)
 
(136
)
Other losses, net
(351
)
 
(947
)
 

Change in fair value of derivative liabilities

 
20

 
183

Total other income, net
1,033

 
(415
)
 
47

Loss from continuing operations before income taxes
(19,836
)
 
(14,691
)
 
(13,838
)
Income tax benefit
(130
)
 
(3,907
)
 
(156
)
Net loss from continuing operations
(19,706
)
 
(10,784
)
 
(13,682
)
Income from discontinued operations, net of tax

 
5,099

 
8,620

Gain on sale of the Core Business, net of tax

 
68,404

 

Total income from discontinued operations, net of tax

 
73,503

 
8,620

Net income (loss)
$
(19,706
)
 
$
62,719

 
$
(5,062
)

 
 
 
 
 
Loss per share from continuing operations
 
 
 
 
 
Basic and Diluted
$
(0.58
)
 
$
(0.32
)
 
$
(0.44
)
 
 
 
 
 
 
Income per share from discontinued operations
 
 
 
 
 
Basic

 
2.21

 
0.27

Diluted

 
2.14

 
0.27

 
 
 
 
 
 
Income (loss) per share from all operations
 
 
 
 
 
Basic
(0.58
)
 
1.89

 
(0.16
)
Diluted
(0.58
)
 
1.83

 
(0.17
)
 
 
 
 
 
 
Weighted average number of shares outstanding basic
34,069

 
33,185

 
31,420

Weighted average number of shares outstanding diluted
34,069

 
34,366

 
31,427


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

33

APYX MEDICAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(In thousands)
 
Preferred Stock
 
Common Stock
 
 
 
 
 
 
 
Shares
 
Par Value
 
Shares
 
Par Value
 
Additional Paid-In Capital
 
Retained Earnings (Accumulated Deficit)
 
Total Stockholders' Equity
Balance
December 31, 2016
976

 
$
1

 
30,860

 
$
31

 
$
49,625

 
$
(23,434
)
 
$
26,223

Conversion of Series B convertible preferred to common stock
(976
)
 
(1
)
 
1,951

 
2

 
(1
)
 

 

Stock based compensation

 

 

 

 
871

 

 
871

Shares issued on net settlement of stock options

 

 
47

 

 

 

 

Shares issued on net settlement of warrants

 

 
20

 

 

 

 

Net loss

 

 

 

 

 
(5,062
)
 
(5,062
)
Balance
December 31, 2017

 
$

 
32,878

 
$
33

 
$
50,495

 
$
(28,496
)
 
$
22,032

Options exercised for cash

 

 
88

 

 
202

 

 
202

Stock based compensation - as Restated

 

 

 

 
2,224

 

 
2,224

Shares issued on net settlement of stock options

 

 
721

 
1

 
(1
)
 

 

Shares issued on net settlement of warrants

 

 
18

 

 

 

 

Net income - as Restated

 

 

 

 

 
62,719

 
62,719

Balance
December 31, 2018 - as Restated

 
$

 
33,705

 
$
34

 
$
52,920

 
$
34,223

 
$
87,177

Options exercised for cash

 

 
61

 

 
207

 

 
207

Stock based compensation

 

 

 

 
3,581

 

 
3,581

Shares issued on net settlement of stock options

 

 
223

 

 

 

 

Vested restricted stock issued

 

 
181

 

 

 

 

Net loss

 

 

 

 

 
(19,706
)
 
(19,706
)
Balance
December 31, 2019

 
$

 
34,170

 
$
34

 
$
56,708

 
$
14,517

 
$
71,259

 

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

34

APYX MEDICAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)
 
Year Ended December 31,
 
2019
 
2018 as Restated
 
2017
Cash flows from operating activities
 
 
 
 
 
Net income (loss)
$
(19,706
)
 
$
62,719

 
$
(5,062
)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
 
 
 
 
 
Gain on sale of the Core Business, net of tax

 
(68,404
)
 

Depreciation and amortization
754

 
669

 
696

Provision for inventory obsolescence
132

 

 

Provision for product warranties
321

 

 

Loss on disposal of property and equipment
89

 

 
5

Stock based compensation
3,581

 
2,224

 
871

Change in fair value of derivative liabilities

 
(20
)
 
(183
)
Realized and unrealized gains on short term investments
(164
)
 
(247
)
 

Provision (benefit) for allowance for doubtful accounts
(163
)
 
224

 
179

Benefit of deferred taxes

 
(368
)
 
(196
)
Changes in current assets and liabilities, net of effect of disposition:

 


 


Receivables
(3,970
)
 
(447
)
 
(303
)
Prepaid expenses and other assets
(406
)
 
(2,851
)
 
(30
)
Inventories
(2,367
)
 
1,185

 
(368
)
Accounts payable
1,054

 
(224
)
 
(23
)
Accrued expenses and other liabilities
2,370

 
(15,341
)
 
710

Net cash used in operating activities
(18,475
)
 
(20,881
)
 
(3,704
)
Cash flows from investing activities

 


 


Purchases of property and equipment
(1,301
)
 
(363
)
 
(624
)
Proceeds from the disposition of Core business

 
91,095

 

Purchases of marketable securities
(18,884
)
 
(87,189
)
 

Proceeds of marketable securities
80,726

 
25,758

 

Net cash provided by (used in) investing activities
60,541

 
29,301

 
(624
)
Cash flows from financing activities

 


 


Proceeds from stock option exercises
207

 
202

 

Repayment of finance lease liabilities
(60
)
 

 

Repayment of mortgage note payable

 
(2,694
)
 
(239
)
Net cash provided by (used in) financing activities
147

 
(2,492
)
 
(239
)
Effect of exchange rates on cash
3

 

 

Net change in cash, cash equivalents and restricted cash
42,216

 
5,928

 
(4,567
)
Cash, cash equivalents and restricted cash, beginning of period
16,596

 
10,668

 
15,235

Cash, cash equivalents and restricted cash, end of period
$
58,812

 
$
16,596

 
$
10,668


 
 
 
 
 
Cash paid for:


 


 


Interest expense
$
8

 
$
104

 
$
136

Income taxes
325

 
13,283

 
32

 
 
 
 
 
 
Non cash operating activities:
 
 
 
 
 
Transfer of other assets to fixed assets
$
42

 
$

 
$

Transfer of inventory to fixed assets
277

 

 

 
 
 
 
 
 
Non cash financing activities:

 


 



35

APYX MEDICAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS

Cashless exercise of stock options/warrants
$
612

 
$
3,237

 
$
557


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

36

APYX MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1.     DESCRIPTION OF BUSINESS 

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

We are an advanced energy technology company with a passion for elevating people’s lives through innovative products in the cosmetic and surgical markets. Known for our innovative Helium Plasma Technology, Apyx is solely focused on bringing transformative solutions to the physicians and patients we serve. Our Helium Plasma Technology is marketed and sold as Renuvion® in the cosmetic surgery market and J-Plasma® in the hospital surgical market. Renuvion® offers plastic surgeons, fascial plastic surgeons and cosmetic physicians a unique ability to provide controlled heat to the tissue to achieve their desired results. The J-Plasma® system allows surgeons to operate with a high level of precision and virtually eliminating unintended tissue trauma. We also leverage our deep expertise and decades of experience in unique waveforms through original equipment manufacturing (OEM) agreements with other medical device manufacturers.



NOTE 2.     SIGNIFICANT ACCOUNTING POLICIES 

Consolidated Financial Statements

The accompanying consolidated financial statements include the accounts of Apyx and its wholly owned subsidiary, Apyx Bulgaria, EOOD, (collectively, the “Company” or “we”, “our” or “us”). All intercompany transactions and balances have been eliminated in consolidation.

On August 30th, 2018, we sold our Core business and discontinued those operations.

The Company concluded that the divestiture of the Core business on August 30th, 2018 met the criteria for discontinued operations set forth in FASB ASC Topic No. 205, " Presentation of Financial Statements. " The Company reclassified its discontinued operations for all periods presented and has excluded the results of its discontinued operations from continuing operations and from segment results for all periods presented.

Use of Estimates in the Preparation of Financial Statements

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements. The reported amounts of revenues and expenses during the reporting period may be affected by the estimates and assumptions we are required to make.

Cash and Cash Equivalents

Holdings of highly liquid investments with original maturities of three months or less from the date of purchase are considered to be cash equivalents.

Short-term Investments
 
Our short-term investments principally consisted of US Treasury Bills, which are classified available-for-sale and are carried at their fair value as of the balance sheet date. The primary objective of our investment activities is to preserve principal while at the same time maximizing yields without significantly increasing risk. Short-term investments generally mature between three months and one year from the purchase date. Marketable securities less than or equal to three months are identified as cash equivalents while marketable securities with a maturity duration over three months are considered short term investments. Currently all of our US Treasury Bills have original maturities of three months or less and are included in cash and cash equivalents.
 
The Treasury Bill investments accrue interest monthly, which is treated as interest income. Realized gains or losses are determined on the specific identification method and are reflected in other income. Net unrealized gains and losses are recorded on a quarterly basis in interest income.

37

APYX MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

 
Fair Values of Financial Instruments and Concentration of Credit Risk

The carrying amounts of our financial instruments included in current assets and liabilities approximate fair value due to their short term nature.

Financial instruments, which potentially subject us to significant concentrations of credit risk, consists primarily of short term investments and trade accounts receivable. With respect to cash, we frequently maintain cash and cash equivalent balances in excess of federally insured limits. We have not experienced any losses in such accounts.

Accounts Receivable and Allowance for Doubtful Accounts

Our standard credit terms for our billings range from net 10 days to net 90 days, depending on the customer agreement. Accounts receivable are determined to be past due if payments are not made in accordance with such agreements and an allowance is generally recorded for accounts that become three months past due, or sooner if there are other indicators that the receivables may not be recovered. Customary collection efforts are initiated, and receivables are written off when we determine they are not collectible and abandon these collection efforts.

We evaluate the allowance for doubtful accounts on a regular basis for adequacy based upon our periodic review of the collectability of the receivables in light of historical experience, adverse situations that may affect our customers’ ability to pay and prevailing economic conditions. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. Management believes that the allowances for doubtful accounts of approximately $0.3 million and $0.4 million at December 31, 2019 and 2018, respectively, are, or were, adequate to provide for possible bad debts.

Inventories

Inventories are stated at the lower of cost or net realizable value. 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.

We monitor usage reports to determine if the carrying value of any items should be adjusted due to lack of demand for the item and adjust the inventory for estimated obsolescence or unusable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required.

Property and Equipment

Property and equipment are recorded at cost. Depreciation and amortization are provided for using the straight-line method over the estimated useful lives of the assets. The amortization of leasehold improvements is based on the shorter of the lease term or the life of the improvement. Betterments and major improvements, which extend the life of the asset, are capitalized, whereas maintenance and repairs and routine improvements are expensed as incurred. The estimated useful lives are: machinery and equipment, 3-10 years; buildings, 39 years; molds, 7-15 years; furniture and fixtures, 5-10 years; and computer equipment and software, 3-5 years.

Goodwill

Goodwill of $0.2 million resulted from our acquisition of Apyx Bulgaria, EOOD and is included in other assets in the Company's consolidated balance sheets.

Valuation of Long-Lived Assets

We review long-lived assets for recoverability if events or changes in circumstances indicate that the assets may have been impaired. This circumstance exists when the carrying amount of the asset exceeds the sum of the undiscounted cash flows expected to result from its use and eventual disposition. In those cases an impairment loss is recognized to the extent that the assets’ carrying amount exceeds its fair value. Any impairment losses are not restored in the future if the fair value increases. At December 31, 2019, we believe the remaining carrying values of our long-lived assets are recoverable.


38

APYX MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Product Warranties

We provide a four years limited warranty on end-user sales of our Renuvion®/J-Plasma® generators, a two years warranty on mounting fixtures, and a one year warranty on some accessories. We estimate and provide for future costs for product warranties in cost of sales at the time revenue is recognized. We base product warranty costs on related material costs, repair labor costs and shipping costs. We estimate the future cost of product warranties by considering historical material, repair labor, and shipping costs, and applying the experience rates to the outstanding warranty period for products sold. It is reasonably possible that actual results could differ from those estimates.

Revenue Recognition

ASU No. 2014-09 (ASC 606), Revenue from Contracts with Customers became effective for us beginning with the first quarter of 2018, and we adopted the new accounting standard using the modified retrospective transition approach. The modified retrospective transition approach recognized any changes from the beginning of the year of initial application through retained earnings with no restatement of comparative periods. Management performed an evaluation to determine the effects of adopting ASC 606 and we determined that the adoption and the application of the transition requirements of the new standard presented no material impact on our consolidated financial statements, and no entry was recorded to opening retained earnings. We have disaggregated revenue by segment and geography in Note 20 Geographic and Segment Information.

Revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration that we expect to receive for those goods or services. To recognize revenue, we (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when, or as, we satisfy the performance obligation(s). For sales of our Advanced Energy products (Renuvion®/J-Plasma®), this is at a point in time when title has been transferred to the customer, which is generally at the time of shipment or receipt by customer for FOB destination terms. For sales of products under our OEM agreements, the Company recognizes revenue over time when no alternative use exists for the manufactured goods and the Company has rights to payment. Presently, the Company does not stock any significant completed goods under our OEM agreements, accordingly, the recognition of revenue under these agreements approximates point in time recognition. The following policies apply to our major categories of revenue transactions:

The majority of our sales to customers are evidenced by firm purchase orders. Generally, title and the risks and rewards of ownership are transferred to the customer when the product is shipped. Payment by the customer is due under fixed payment terms.
Product returns are only accepted at our discretion and in accordance with our “Returned Goods Policy”. Historically, the level of product returns has not been significant. We accrue for sales returns, rebates and allowances as a reduction of revenue based upon an analysis of historical customer returns and credits, rebates, discounts and current market conditions.
Our terms of sale to customers generally do not include any obligations to perform future services. Limited warranties are generally provided for sales and provisions for warranty are provided at the time of product sale based upon an analysis of historical data.
In connection with the execution of our OEM supply agreements, the Company may enter into an accompanying product development agreement. If the Company enters into a product development agreement, and development of the goods does not represent a performance obligation on a standalone basis, the Company defers the development fees billed to customers and the associated costs. Recognition of the revenues and cost of sales occurs as revenue is recognized on the accompanying supply agreement. At December 31, 2019, the Company had recorded approximately $0.4 million of contract liabilities and $0.1 million of contract assets related to the deferral of revenues and expenses under these agreements.

Advertising Costs

All advertising costs are expensed as incurred. The amounts of advertising costs, including trade shows, were approximately $1.5 million, $0.8 million and $1.1 million for the years ended December 31, 2019, 2018 and 2017, respectively.


39

APYX MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Stock-Based Compensation

We account for stock-based compensation in accordance with FASB ASC Topic 718, Compensation-Stock Compensation. FASB ASC 718 requires recognizing compensation costs for all share-based payment awards made to employees, directors and non-employees based upon the awards’ grant date fair value. The Company currently accounts for forfeitures using the estimate method. The standard covers employee stock options, restricted stock and other equity awards. We currently utilize a Black-Scholes model and in prior years utilized a trinomial lattice option-pricing model to estimate the grant date fair value of stock option awards. For employee and director awards compensation cost is recognized on a straight-line basis over the awards’ vesting periods. For non-employee awards, compensation cost is recorded for non-forfeitable fully vested awards at the grant date. For other awards granted to non-employees, compensation cost is recognized as services are provided, which approximates a straight-line basis over the vesting period.

Litigation Contingencies

In accordance with authoritative guidance, we accrue a liability in our consolidated financial statements for these actions when a loss is known or considered probable and the amount can be reasonably estimated. If the reasonable estimate of a known or probable loss is a range, and no amount within the range is a better estimate than any other, the minimum amount of the range is accrued. If a loss is reasonably possible, but not known or probable, and can be reasonably estimated, the estimated loss or range of loss is disclosed in the notes to the consolidated financial statements. In most cases, significant judgment is required to estimate the amount and timing of a loss to be recorded; actual results may differ from those estimates.

Income (Loss) Per Share

We compute basic (loss) earnings attributable to common shareholders per share by dividing net (loss) income attributable to common shareholders by the weighted average number of common shares outstanding for the reporting period. Diluted (loss) earnings per share attributable to common shareholders gives effect to all potential dilutive shares outstanding during the period. The number of dilutive shares is calculated using the treasury stock method which reduces the effective number of shares by the amount of shares we could purchase with the proceeds of assumed exercises.

Research and Development Costs

Research and development expenses are charged to operations as incurred. We have expended approximately $3.7 million and $2.5 million and $1.9 million for the years ended 2019, 2018 and 2017 respectively.

Income Taxes

The Company utilizes the liability method of accounting for income taxes as set forth in FASB ASC Topic 740, "Income Taxes". Under the liability method, deferred taxes are determined based on temporary differences between the financial statement and tax bases of assets and liabilities using tax rates expected to be in effect during the years in which the basis difference. The Company accounts for interest and penalties on income taxes as income tax expense. A valuation allowances is recorded when it is more likely than not that a tax benefit will not be realized. In determining the need for valuation allowances the Company considers projected future taxable income, the timing of reversals of temporary differences, and the availability of tax planning strategies. As of December 31, 2019 and 2018, the Company recorded a valuation allowance on the net deferred tax asset.

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 the financial results of continuing operations improve and it becomes more likely than not that the deferred tax assets will be realizable. As Management expects the Company to continue to generate losses in the foreseeable future after 2019, the Company will continue to record a valuation allowance on the remaining deferred tax assets balance as of December 31, 2019.

We assess the financial statement impact of an uncertain tax position taken or expected to be taken on an income tax return at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized in the financial statements unless it is more likely than not of being sustained.

Foreign Currency Transactions


40

APYX MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

The functional currency of Apyx Bulgaria is the U.S. dollar. The monetary assets and liabilities that are denominated in a currency other than U.S. dollar are remeasured into U.S. dollars at the exchange rate on the balance sheet date, while nonmonetary items are remeasured at historical rates. Revenue and expenses are remeasured at weighted average exchange rates during the period. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in selling, general and administrative expenses in the consolidated statements of operations and were not material for the years ended December 31, 2019, 2018 and 2017.

Reclassifications

We have reclassified certain amounts presented in prior years to conform to the current year presentation. These reclassifications had no impact on previously reported net income, retained earnings or operating cash flows for the periods presented.





41

APYX MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

NOTE 3.     RECENT ACCOUNTING PRONOUNCEMENTS

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). Topic 842 establishes a new lease model, referred to as the right-of-use model that brings substantially all leases on the balance sheet. This standard requires lessees to recognize leased assets and lease liabilities on the balance sheet and disclose key information about the leasing arrangements in their financial statements. Leases are classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the statement of operations. The Company adopted Topic 842 effective January 1, 2019 using the modified retrospective transition approach that allows a reporting entity to use the effective date as its date of initial application and not restate the comparative periods in the period of adoption when transitioning to the new standard. Consequently, the requisite financial information and disclosures under the new standard are excluded for dates and periods prior to January 1, 2019. In addition, the Company elected to use a number of optional simplification and practical expedients permitted under the transition guidance within the new standard, including allowing the Company to combine fixed lease and non-lease components, apply the short-term lease exception to all leases of one year or less, and utilize the ‘package of practical expedients’, which permits the Company to not reassess prior accounting conclusions with respect to lease identification, lease classification and initial direct costs under Topic 842. Adoption of this new standard resulted in the recognition of approximately $212,000 of operating lease liabilities and right-of-user assets, which represents the present value of the remaining lease payments at the adoption date of approximately $221,000, discounted using the Company’s incremental borrowing rate of 4.00%. Please see Note 9 for a full discussion of the impacts of adoption on the current year consolidated financial statements.

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.




42

APYX MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued



NOTE 4.     RESTATEMENTS

Throughout 2019, the Company has been making efforts to remediate its material weaknesses in internal control as of December 31, 2018, including investing in new personnel that have expertise in a broad array of accounting topics. As a result of these investments and remediation efforts, the Company reevaluated the accounting for a broad array of items and discovered numerous immaterial errors. On March 12, 2020, our Management and the Audit Committee of the Board of Directors, following discussion with our predecessor independent registered public accounting firm, concluded that the Company's previously filed financial statements for the twelve months ended December, 31 2018 and the quarterly statements for the three and nine months ended September 30, 2018 and three months ended March 31, 2019, were no longer able to be relied upon as the result of the aggregation of errors identified by Management and the Company’s new accounting personnel during 2019 related to the following:

As identified during preparation of the fiscal year 2019 Form 10-K:
The Company reevaluated its subsidiary consolidation process and discovered an inaccuracy in its accounting for the elimination of markup on intercompany sales. This resulted in the Company incorrectly including the markup in US inventory purchased from Apyx Bulgaria and resulted in an overstatement of cost of sales and a corresponding understatement of other costs and expenses when the inventory was sold, which did not have any impact on net income (loss) or financial position.
For the three months ended March 31, 2019, the total impact included increases to both gross profit and to operating expenses of approximately $113,000.
During the first quarter of 2020, while reconciling the 2019 income tax provision back to the corresponding records, we determined that when employees exercised non-qualified stock options, we did not collect and remit the employee’s income and payroll taxes on the exercises and did not accrue and remit the employer portion of payroll taxes. Due to statutory requirements, we have joint and several liability on the amounts that we did not withhold from employees and remit to the proper taxing authorities. While further investigating the issue, we determined that during 2018 we did not report the correct amount of income to employees on their form W-2 for both non-qualified and incentive stock option exercises and misclassified some non-qualified stock option exercises as incentive stock option exercises.
For the three and nine months ended September 30, 2018 and year ended December 31, 2018, the total aggregated impact included an increase of approximately $51,000 to operating expenses, an increase of approximately $713,000 to other losses and an increase to net loss of approximately $764,000.
For the three months ended March 31, 2019, the total aggregated impact included an increase to operating expenses of $16,000, an increase of approximately $301,000 to other losses and an increase to net loss of approximately $317,000.
Other minor items primarily related to the appropriate cutoff of transactions at the balance sheet date and the duplicate recording of a State income tax payment.
For the three and nine months ended September 30, 2018, the total aggregated impact included an increase of approximately $59,000 to operating expenses, operating loss and net loss.
For the year ended December 31, 2018, the total aggregated impact included a decrease to sales of $81,000, an increase to gross profit of $33,000, a decrease to operating income from continuing operations of $74,000 and a decrease to net loss from continuing operations of $56,000.
For the three months ended March 31, 2019, the total aggregated impact included a decrease to operating loss of $90,000 and an increase to net loss of $40,000.


43

APYX MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued



As previously disclosed and adjusted in Form 10-Q for the three and nine months ended September 2019 filed on November 11, 2019:
The Company reevaluated its accounting for stock-based compensation expense and during the three months ended September 30, 2019, the Company discovered errors in its accounting for certain items included in stock-based compensation expense. These errors related to its accounting for forfeitures, the vesting periods over which the expense was recognized, modifications, fair value measurements, and other minor miscellaneous items, all of which relate to the prior year. Additionally, the Company identified an issue relating to grants in the first quarter of 2019, whereby compensation was not recognized over the correct vesting period.
For the year ended December 31, 2018, the total impact included increases to operating expenses, operating loss and net loss of approximately $582,000 each.
For the three months ended March 31, 2019, the total impact included increases to operating expenses, operating loss and net loss of approximately $453,000 each.
During the three months ended September 30, 2019, the Company reevaluated its accounting for pre-development activities on certain OEM contracts. In performing the review, the Company determined that the it has not completed its performance obligations on its pre-development activities in these contracts. Accordingly, the Company determined that it had prematurely recognized revenues during the first quarter relating to these activities and did not defer the accompanying costs.
For the three months ended March 31, 2019, the total impact included decreases to sales of approximately $194,000, decreases to operating expenses of approximately $77,000 and increases to both operating loss and net loss of approximately $117,000.

The Company has made all of the restatement adjustments as of and for the year ending December 31, 2018 in the accompanying consolidated financial statements presented here. The Company will file 10-Q/A's for the three and nine months ended September 30, 2018 and the three months ended March 31, 2019 as soon as practicable.

A reconciliation of the originally reported amounts to the restated amounts for the adjustments noted above for each of the affected periods is presented below.

44

APYX MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued



Consolidated Balance Sheet as of September 30, 2018:
 
(In thousands)
As Originally Reported
 
Adjustments
 
As Restated
 
ASSETS
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
   Cash and cash equivalents
$
40,663

 
$

 
$
40,663

 
   Short term investments
55,480

 

 
55,480

 
   Trade accounts receivable, net
4,080

 
59

 
4,139

 
   Inventories, net
6,037

 

 
6,037

 
   Prepaid expenses and other current assets
627

 

 
627

 
     Total current assets
106,887

 
59

 
106,946

 
Property and equipment, net
5,842

 

 
5,842

 
Other assets*
385

 

 
385

 
     Total assets
$
113,114

 
$
59

 
$
113,173

 
 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
   Accounts payable
$
2,348

 
$

 
$
2,348

 
   Accrued expenses and other current liabilities
19,324

 
764

 
20,088

 
     Total current liabilities
21,672

 
764

 
22,436

 
Related party note payable
140

 

 
140

 
   Total liabilities
21,812

 
764

 
22,576

 
STOCKHOLDERS' EQUITY
 
 
 
 
 
 
Common stock, $0.001 par value; 75,000,000 shares authorized; 33,763,019 issued and 33,620,444 outstanding
33

 

 
33

 
Additional paid-in capital
51,798

 

 
51,798

 
Retained earnings
39,471

 
(705
)
 
38,766

 
   Total stockholders’ equity
91,302

 
(705
)
 
90,597

 
     Total liabilities and stockholders’ equity
$
113,114

 
$
59

 
$
113,173

 
 
 
 
 
 
 
 
* The Company has condensed the presentation of amounts presented in the balance sheet to conform to presentation guidelines.
 


45

APYX MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued



Consolidated Statement of Operations for the three months ended September 30, 2018:
(In thousands)
As Originally Reported
 
Adjustments
 
As Restated
Sales
$
3,672

 
$

 
$
3,672

Cost of sales
1,151

 

 
1,151

Gross profit
2,521

 

 
2,521

Other costs and expenses:
 
 
 
 

Research and development
613

 

 
613

Professional services
628

 

 
628

Salaries and related costs
2,119

 
51

 
2,170

Selling, general and administrative
1,957

 
(59
)
 
1,898

Total other costs and expenses
5,317

 
(8
)
 
5,309

Loss from operations
(2,796
)
 
8

 
(2,788
)
Interest income (expense), net
105

 

 
105

Other losses
(155
)
 
(713
)
 
(868
)
Total other losses, net
(50
)
 
(713
)
 
(763
)
Loss from continuing operations before income taxes
(2,846
)
 
(705
)
 
(3,551
)
Income tax benefit
(2,408
)
 

 
(2,408
)
Net loss from continuing operations
(438
)
 
(705
)
 
(1,143
)
Income from discontinued operations, net of tax
540

 

 
540

Gain on sale of the Core Business, net of tax
69,072

 

 
69,072

Total income from discontinued operations, net of tax
69,612