UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, ~~2018~~2019

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

~~BOVIE~~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

(Registrant’s telephone number)

Securities Registered Pursuant to Section 12 (b) of the Act:



Title of each class	Trading symbol(s)	Name of each exchange on which registered
Common Stock	APYX	Nasdaq Stock Market, LLC

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 ~~and posted on its corporate Website, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ 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 ~~and post~~ 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	o ý
Non-accelerated filer	ýo	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

As of ~~October 29, 2018, 33,203,517~~November 11, 2019, 34,168,230 shares of the registrant’s $0.001 par value common stock were outstanding.

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~~BOVIE~~APYX MEDICAL CORPORATION

INDEX TO QUARTERLY REPORT ON FORM 10-Q

For the quarterly period ended September 30, ~~2018~~2019

(Unaudited)



		Page
Part I.	Financial Information	2

Item 1.	Financial Statements	2
	Consolidated Balance Sheets at September 30, ~~2018~~2019 and December 31, ~~2017~~2018	2
	Consolidated Statements of Operations for the three and nine months ended September 30, ~~2018~~2019 and ~~2017~~2018	3
	Consolidated ~~Statement~~Statements of Changes in Stockholders’ Equity for the three and nine months ended September 30, ~~2018~~2019 and ~~2017~~2018	4
	Consolidated Statements of Cash Flows for the nine months ended September 30, ~~2018~~2019 and ~~2017~~ 2018	5
	Notes to Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1620
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	2528
Item 4.	Controls and Procedures	2528

Part II.	Other Information	2630

Item 1.	Legal Proceedings	2630
Item 1A.	Risk Factors	2630
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	2630
Item 3.	Defaults Upon Senior Securities	2631
Item 4.	Mine Safety Disclosures	2631
Item 5.	Other Information	2632
Item 6.	Exhibits	2733
	Signatures	2834

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~~BOVIE~~APYX MEDICAL CORPORATION

PART I. Financial Information

ITEM 1. Financial Statements

CONSOLIDATED BALANCE SHEETS

(In thousands, except share ~~and per share~~ data, Unaudited)


	September 30, 2018		December 31, 2017			September 30, 2019		December 31, 2018
ASSETS
Current assets:
Cash and cash equivalents	$	40,663	$	9,949		$	62,272	$	16,466
Restricted cash	—		719
Short term investments	55,480		—			—		61,678
Trade accounts receivable, net of allowance of $311 and $204	4,080		4,857
Inventories, net	6,037		4,274
Trade accounts receivable, net of allowance of $354 and $428						7,662		5,015
Inventories, net of provision for obsolescence of $439 and $439						7,237		5,212
Prepaid expenses and other current assets	627		433			1,734		1,146
Current assets of discontinued operations	—		2,315
Total current assets	106,887		22,547			78,905		89,517
Property and equipment, net	5,842		6,033			6,645		5,788
Purchased technology and license rights, net	32		67
Goodwill	185		185
Deposits	46		92
Operating lease right-of-use assets						368		—
Finance lease right-of-use assets						638		—
Other assets	122		67			387		305
Non-current assets of discontinued operations	—		1,997
Total assets	$	113,114	$	30,988		$	86,943	$	95,610

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	2,348	$	1,583		$	1,457	$	1,423
Accrued severance and related	95		1,242
Accrued payroll	163		447
Current portion of mortgage note payable	—		239
Accrued taxes and other liabilities	19,066		214
Current liabilities of discontinued operations	—		2,248
Accrued expenses and other liabilities						7,285		6,162
Current portion of operating lease liabilities						101		—
Current portion of finance lease liabilities						196		—
Total current liabilities	21,672		5,973			9,039		7,585
Mortgage note payable, net of current portion	—		2,455
Note payable	140		140			140		140
Deferred tax liability	—		368
Derivative liabilities	—		20
Long-term operating lease liabilities						248		—
Long-term finance lease liabilities						444		—
Contract liabilities						339		—
Total liabilities	$	21,812	$	8,956		10,210		7,725
STOCKHOLDERS’ EQUITY
Common stock, $0.001 par value; 75,000,000 shares authorized; 33,763,019 issued and 33,620,444 outstanding as of September 30, 2018 and 75,000,000 shares authorized; 33,021,170 issued and 32,878,091 outstanding as of December 31, 2017, respectively	33		33
Common stock, $0.001 par value; 75,000,000 shares authorized; 34,120,065 issued and 33,977,490 outstanding as of September 30, 2019, and 33,847,100 issued and 33,704,525 outstanding as of December 31, 2018						34		34
Additional paid-in capital	51,798		50,495			55,668		52,920
Retained earnings (accumulated deficit)	39,471		(28,496		)
Retained earnings						21,031		34,931
Total stockholders’ equity	91,302		22,032			76,733		87,885
Total liabilities and stockholders’ equity	$	113,114	$	30,988		$	86,943	$	95,610

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

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~~BOVIE~~APYX MEDICAL CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data, Unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017			2019			2018			2019			2018
Sales	$	3,672		$	2,651		$	10,760		$	6,576		$	7,575		$	3,672		$	19,772		$	10,760
Cost of sales	1,151			738			3,490			2,314			2,558			1,151			6,757			3,490
Gross profit	2,521			1,913			7,270			4,262			5,017			2,521			13,015			7,270
Other costs and expenses:
Research and development	613			487			1,890			1,600			936			613			2,634			1,890
Professional services	628			421			1,815			1,291			1,996			628			5,756			1,815
Salaries and related costs	2,119			1,826			5,734			6,016			3,020			2,119			9,691			5,734
Selling, general and administrative	1,957			2,012			6,280			6,003			3,762			1,957			9,869			6,280
Total other costs and expenses	5,317			4,746			15,719			14,910			9,714			5,317			27,950			15,719
Loss from operations	(2,796		)	(2,833		)	(8,449		)	(10,648		)	(4,697		)	(2,796		)	(14,935		)	(8,449		)
Interest income (expense), net	105			(36		)	33			(103		)
Other losses	(155		)	—			(155		)	—
Change in fair value of derivative liabilities	—			(69		)	20			57
Total other expense, net	(50		)	(105		)	(102		)	(46		)
Loss from continuing operations before income taxes	(2,846		)	(2,938		)	(8,551		)	(10,694		)
Income tax (benefit) expense	(2,408		)	6			(2,384		)	15
Net loss from continuing operations	$	(438	)	$	(2,944	)	$	(6,167	)	$	(10,709	)
Interest income													327			135			1,153			135
Interest expense													—			(30		)	—			(102		)
Other income (losses), net													230			(155		)	5			(155		)
Change in value of derivative liabilities													—			—			—			20
Total other income (expense), net													557			(50		)	1,158			(102		)
Loss before income taxes													(4,140		)	(2,846		)	(13,777		)	(8,551		)
Income tax expense (benefit)													171			(2,408		)	123			(2,384		)
Loss from continuing operations													(4,311		)	(438		)	(13,900		)	(6,167		)
Income from discontinued operations, net of tax	540			1,699			5,062			6,471			—			540			—			5,062
Gain on sale of the Core Business, net of tax	69,072			—			69,072			—
Gain on sale of Core Business, net of tax													—			69,072			—			69,072
Total income from discontinued operations, net of tax	69,612			1,699			74,134			6,471			—			69,612			—			74,134
Net income (loss)	$	69,174		$	(1,245	)	$	67,967		$	(4,238	)	$	(4,311	)	$	69,174		$	(13,900	)	$	67,967

Loss per share from continuing operations
EPS from continuing operations:
Basic and diluted													$	(0.13	)	$	(0.01	)	$	(0.41	)	$	(0.19	)

EPS from discontinued operations:
Basic	$	(0.01	)	$	(0.09	)	$	(0.19	)	$	(0.35	)	$	—		$	2.09		$	—		$	2.25
Diluted	$	(0.01	)	$	(0.09	)	$	(0.19	)	$	(0.35	)	$	—		$	1.99		$	—		$	2.19

Income per share from discontinued operations
EPS from total operations:
Basic	2.09			0.05			2.25			0.21			$	(0.13	)	$	2.08		$	(0.41	)	$	2.06
Diluted	1.99			0.05			2.19			0.21			$	(0.13	)	$	1.98		$	(0.41	)	$	2.00

Income (loss) per share
Basic	$	2.08		$	(0.04	)	$	2.06		$	(0.14	)
Diluted	$	1.98		$	(0.04	)	$	2.00		$	(0.14	)

Weighted average number of shares outstanding - basic	33,275			31,078			33,014			30,932
Weighted average number of shares outstanding - dilutive	34,934			31,078			33,952			30,932

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

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~~BOVIE~~APYX MEDICAL CORPORATION

CONSOLIDATED ~~STATEMENT~~STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(In thousands, Unaudited)


Three months ended September 30, 2018 and 2019
	Preferred Stock					Common Stock													Common Stock			Additional Paid-In Capital				Retained Earnings (Accumulated deficit)				Total
	Shares		Par Value			Shares		Par Value		Additional Paid-In Capital			Retained Earnings (Accumulated Deficit)			Total			Shares	Par Value						Retained Earnings (Accumulated deficit)				Total
Balance December 31, 2016	976		$	1		30,860		$	31	$	49,625		$	(23,434	)	$	26,223
Balance June 30, 2018																			32,913	$	33	Additional Paid-In Capital		$	51,244			$	(29,703	)		$	21,574
Options exercised	—		—			21		—		275			—			275			28	—		65				—				65
Conversion of Series B convertible preferred to common stock	(976	)	(1		)	1,951		2		(1		)	—			—
Stock based compensation	—		—			—		—		532			—			532			—	—		489				—				489
Stock swap to acquire options and warrants	—		—			—		—		(275		)	—			(275		)
Net loss	—		—			—		—		—			(4,238		)	(4,238		)
Balance September 30, 2017	—		$	—		32,832		$	33	$	50,156		$	(27,672	)	$	22,517
Shares issued on net settlement of stock options																			679	—		—				—				—
Net income																			—	—		—				69,174				69,174
Balance September 30, 2018																			33,620	33		$	51,798			$	39,471			$	91,302

Balance June 30, 2019																			33,921	$	34	$	55,086			$	25,342			$	80,462
Options exercised																			21	—		39				—				39
Stock based compensation																			—	—		543				—				543
Shares issued on net settlement of stock options																			35	—		—				—				—
Net Loss																			—	—		—				(4,311		)		(4,311		)
Balance September 30, 2019																			33,977	$	34	$	55,668			$	21,031			$	76,733

Nine months ended September 30, 2018 and 2019
																			Common Stock			Additional Paid-In Capital				Retained Earnings (Accumulated deficit)				Total
																			Shares	Par Value						Retained Earnings (Accumulated deficit)				Total
Balance December 31, 2017	—		$	—		32,878		$	33	$	50,495		$	(28,496	)	$	22,032		32,878	$	33	Additional Paid-In Capital		$	50,495			$	(28,496	)		$	22,032
Options exercised	—		—			1,278		—		3,103			—			3,103			28	—		65				—				65
Warrants exercised	—		—			40		—		95			—			95
Stock based compensation	—		—			—		—		1,238			—			1,238			—	—		1,238				—				1,238
Stock exercise to acquire options and warrants	—		—			(576	)	—		(3,133		)	—			(3,133		)
Shares issued on net settlement of warrants																			17	—		—				—				—
Shares issued on net settlement of stock options																			697	—		—				—				—
Net income	—		—			—		—		—			67,967			67,967			—	—		—				67,967				67,967
Balance September 30, 2018	—		$	—		33,620		$	33	$	51,798		$	39,471		$	91,302		33,620	$	33	$	51,798			$	39,471			$	91,302

Balance December 31, 2018																			33,705	$	34	$	52,920			$	34,931			$	87,885
Options exercised																			51	—		154				—				154
Stock based compensation																			—	—		2,594				—				2,594
Shares issued on net settlement of stock options																			221	—		—				—				—
Net loss																			—	—		—				(13,900		)		(13,900		)
Balance September 30, 2019																			33,977	$	34	$	55,668			$	21,031			$	76,733

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

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~~BOVIE~~APYX MEDICAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands, Unaudited)


	Nine Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2019			2018
Cash flows from operating activities
Net income (loss)	$	67,967		$	(4,238	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Net (loss) income							$	(13,900	)	$	67,967
Adjustments to reconcile net loss to net cash used in operating activities:
Gain on sale of the Core Business, net of tax	(69,072		)	—			—			(69,072		)
Depreciation and amortization	429			527			510			429
Gain on disposal of property and equipment, net	—			3
Provision for inventory obsolescence							115			—
Unrealized gain on foreign currency remeasurement							(12		)	—
Loss on disposal of property and equipment							19			—
Stock based compensation	1,238			532			2,594			1,238
Change in fair value of derivative liabilities	(20		)	(57		)	—			(20		)
Unrealized gain on short term investments	(47		)	—
Net, non cash lease expense							2			—
Realized and unrealized gains on short term investments							(164		)	(47		)
Provision for allowance for doubtful accounts	123			128			(94		)	123
Benefit of deferred taxes	(368		)	—			—			(368		)
Changes in current assets and liabilities, net of effect of disposition:
Changes in operating assets and liabilities:
Trade receivables	654			528			(2,580		)	654
Prepaid expenses	(188		)	(221		)	(596		)	(188		)
Inventories	(1,706		)	(1,177		)	(2,463		)	(1,706		)
Deposits and other assets	(9		)	9			(131		)	(9		)
Accounts payable	765			(219		)	50			765
Accrued and other liabilities	(2,601		)	(250		)	1,556			(2,601		)
Net cash used in operating activities	(2,835		)	(4,435		)	(15,094		)	(2,835		)
Cash flows from investing activities
Purchases of property and equipment	(203		)	(431		)	(1,076		)	(203		)
Purchases of marketable securities							(18,884		)	(55,433		)
Proceeds from maturities of marketable securities							80,726			—
Proceeds from the disposition of Core business	91,095			—			—			91,095
Purchases of marketable securities	(55,433		)	—
Net cash from investing activities	35,459			(431		)
Net cash provided by investing activities							60,766			35,459
Cash flows from financing activities
Proceeds from stock options/warrants exercised	65			—
Proceeds from stock options							154			65
Repayment of finance lease liabilities							(2		)	—
Repayment of mortgage note payable	(2,694		)	(179		)	—			(2,694		)
Net cash used in financing activities	(2,629		)	(179		)
Net cash provided by (used in) financing activities							152			(2,629		)
Effect of foreign currency translation on cash							(18		)	—
Net change in cash, cash equivalents and restricted cash	29,995			(5,045		)	45,806			29,995
Cash, cash equivalents and restricted cash, beginning of period	10,668			15,235			16,466			10,668
Cash, cash equivalents and restricted cash, end of period	$	40,663		$	10,190		$	62,272		$	40,663

Cash paid for:
Interest (income) expense, net	$	(33	)	$	103
Interest							$	—		$	102

Non cash investing activities:
Non cash financing activities:
Cashless exercise of stock options/warrants	3,133			275			$	957		$	3,133

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

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~~BOVIE~~APYX MEDICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1. BASIS OF PRESENTATION

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

We are a medical technology company and the developer of J-Plasma^® (marketed and sold under the Renuvion^® Cosmetic Technology brand in the cosmetic surgery market), a patented plasma-based surgical product for cutting, coagulation and ablation of soft tissue. J-Plasma^® technology utilizes a helium ionization process to produce a stable, focused beam of plasma that provides surgeons with greater precision and minimal invasiveness. The Company also leverages its expertise 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 J-Plasma^® technology, including the Renuvion^® brand in the cosmetic surgery market. We also entered into with Symmetry a Transition Services Agreement, a Patent Licensing Agreement, a Disposables Supply Agreement, and a Generator Manufacturing and Supply Agreement, the latter of which will establish us as an OEM-provider of generators to Symmetry for a period of at least 10 years from the agreement date.

In connection with the Asset Purchase Agreement, we also entered into an Electro Surgical 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. For the three months ended September 30, 2019, Core sales following the divestiture amounted to $2.5 million with cost of sales of $2.1 million and related operating expenses of $0.2 million, which are included in other income (losses) in the consolidated statements of operations.

For the nine months ended September 30, 2019, Core sales following the divestiture amounted to $6.9 million with cost of sales of $6.6 million and related operating expenses of $0.3 million, which are included in other income (losses) in the consolidated statements of operations.

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.

We reclassified the financial results of the Core business to discontinued operations and from segment results for all periods presented.

Revisions

Throughout 2019, the Company has been making efforts to remediate its material weakness 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, the Company reevaluated its accounting for stock-based compensation expense and during the three months ended September 30, 2019, the Company discovered immaterial 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.

During the three months ended September 30, 2019, the Company re-evaluated 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.

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APYX MEDICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

The Company has determined that the effects of the corrections are not material to the consolidated financial statements as of December 31, 2018, March 31, 2019 or June 30, 2019, but has elected to correct the consolidated financial statements for the three and nine months ended September 30, 2019. Accordingly, the Company has corrected the errors in the periods to which they relate. There were no adjustments to the results of operations for the three months ended June 30, 2019. A summary of the revisions as of each reporting period affected is as follows:

As of and for the year ended December 31, 2018:



(In thousands)	As Reported			Adjustments			As Revised
Balance Sheet
Accrued severance and related	$	727		$	(117	)	$	610		[1], [3]
Additional paid-in capital	52,221			699			52,920			[1]
Retained earnings	35,513			(582		)	34,931			[1]

Statement of Operations
Professional services	$	3,072		$	34		$	3,106		[1]
Salaries and related costs	8,673			548			9,221			[1]

Loss per share from continuing operations
Basic and Diluted	$	(0.29	)	$	(0.01	)	$	(0.30	)

Income per share from discontinued operations
Basic	$	2.21		$	—		$	2.21
Diluted	$	2.14		$	—		$	2.14

Income per share all operations
Basic	$	1.93		$	(0.02	)	$	1.91
Diluted	$	1.86		$	(0.01	)	$	1.85

[1] Adjustments relate to stock-based compensation corrections
[2] Adjustments relate to OEM revenue correction
[3] Financial statement caption has been condensed in accrued expenses and other liabilities in the current interim period

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APYX MEDICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

As of and for the three months ended March 31, 2019:



(In thousands)	As Reported			Adjustments			As Revised
Balance Sheet
Other assets	$	162		$	77		$	239		[1]

Contract liabilities	—			194			194			[1]
Additional paid-in capital	53,147			1,035			54,182			[1]
Retained earnings	30,832			(1,152		)	29,680			[1]

Statement of Operations
Sales	$	5,823		$	(194	)	$	5,629		[2]
Professional services	1,791			336			2,127			[1]
Salaries and related costs	3,221			117			3,338			[1]
Selling, general and administrative	3,101			(77		)	3,024			[2]

Loss per share - basic and diluted	$	(0.14	)	$	(0.02	)	$	(0.16	)

[1] Adjustments relate to stock-based compensation corrections
[2] Adjustments relate to OEM revenue correction

As of and for the six months ended June 30, 2019:



(In thousands)	As Reported			Adjustments			As Revised
Balance Sheet
Other assets	$	368		$	77		$	445		[1]

Contract liabilities	—			194			194			[1]
Additional paid-in capital	54,051			1,035			55,086			[1]
Retained earnings	26,494			(1,152		)	25,342			[1]

Statement of Operations
Sales	$	12,391		$	(194	)	$	12,197		[2]
Professional services	3,424			336			3,760			[1]
Salaries and related costs	6,554			117			6,671			[1]
Selling, general and administrative	6,184			(77		)	6,107			[2]

Loss per share - basic and diluted	$	(0.27	)	$	(0.02	)	$	(0.29	)

[1] Adjustments relate to stock-based compensation corrections
[2] Adjustments relate to OEM revenue correction

The accompanying unaudited consolidated financial statements have been prepared based upon SEC rules that permit reduced disclosure for interim periods. For a more complete discussion of significant accounting policies and certain other information, please refer to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, ~~2017.~~2018. These consolidated financial statements reflect all adjustments that are necessary for a fair presentation of results of consolidated operations and financial condition for the interim periods shown, including normal recurring accruals and other items. The results for the interim periods are not necessarily indicative of results for the full year.

~~NOTE 2. DISPOSITION OF THE CORE BUSINESS~~

On August 30, 2018, we closed on a previously disclosed definitive asset purchase agreement with Specialty Surgical Instrumentation Inc., a Tennessee Corporation and wholly-owned subsidiary of Symmetry Surgical Inc. (“Symmetry”), pursuant to which the Company divested and sold the Company's electrosurgical "Core" business segment and related intellectual property, including the Bovie^® ~~brand and trademarks, to Symmetry for gross proceeds of $97 million in cash.~~

In connection with the asset purchase agreement, we entered into a previously disclosed Electro Surgical Disposables and Accessories, Cauteries and Other Products Supply Agreement with Symmetry for 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.

Additionally, in connection with the asset purchase agreement, we entered into a previously disclosed 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.

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~~BOVIE~~APYX MEDICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

~~We concluded that the divestiture of the Core business met the criteria for discontinued operations set forth in ASC No. 205,~~ ~~Presentation of Financial Statements. The table below summarizes the cash consideration and the carrying values of disposed assets at the disposition date of August 30, 2018 included as part of discontinued operations:~~

(In thousands)
Gross consideration from the sale of the Core Business $ 97,000
Closing and transaction costs 5,905
Net proceeds from sale of the Core Business before taxes $ 91,095

Book value of the Core Business
Current assets:
Inventories, net 2,195
Prepaid expenses and other current assets 57
Total current assets 2,252
Property and equipment, net of depreciation 375
Brand name and trademark 1,510
Purchased technology and license rights, net of depreciation 112
Total non-current assets 1,997
Total assets $ 4,249

Current liabilities:
Accrued inventory liability 2,305
Total current liabilities 2,305
Total book value of the Core Business $ 6,554

Net gain on sale of the Core Business before taxes 84,541
Income tax expense 15,469
Net gain on sale of the Core Business after income taxes $ 69,072

NOTE 3.2. INVENTORIES

Inventories are stated at the lower of cost or ~~market.~~net realizable values. 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 primarily allocated to inventory manufactured in-house based upon labor hours.

Inventories consisted of the following:


(In thousands)	September 30, 2018			December 31, 2017			September 30, 2019			December 31, 2018
Raw materials	$	5,032		$	5,163		$	6,126		$	4,521
Finished goods	1,998			1,024
Finished goods and work-in-process							1,550			1,130
Gross inventories	7,030			6,187			7,676			5,651
Less: reserve for obsolescence	(993		)	(1,913		)	(439		)	(439		)
Net inventories of continuing operations	6,037			4,274
Finished goods of discontinued operations	—			2,252
Net inventories of continuing and discontinued operations	$	6,037		$	6,526
Net inventories							$	7,237		$	5,212

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~~BOVIE MEDICAL CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued~~

~~(Unaudited)~~

NOTE 3. ACCRUED EXPENSES AND OTHER CURRENT LIABILTIES

~~NOTE 4. INTANGIBLE ASSETS~~

~~Intangible assets~~Accrued expenses and other current liabilities consisted of the following:

(In thousands) September 30,
2018 December 31,
2017
Brand name and trademark (life indefinite) of discontinued operations $ —
$ 1,510

Purchased technology (5-17 year lives) $ 1,447
$ 1,401
Purchased technology (5-17 year lives) of discontinued operations, net —
112
Less: accumulated amortization (1,415 ) (1,334 )
Purchased technology, net $ 32
$ 179

Goodwill $ 185
$ 185



(in thousands)	September 30, 2019		December 31, 2018
Accrued severance and related	$	235	$	610
Accrued payroll	289		418
Accrued bonuses	936		972
Accrued commissions	784		379
Accrued legal and insurance	1,649		725
Other accrued expenses and current liabilities	3,392		3,058
Total accrued expenses and other current liabilities	$	7,285	$	6,162

~~The Bovie brand name and trademarks were included in the definitive asset purchase agreement with Specialty Surgical Instrumentation Inc., as previously disclosed.~~

~~Goodwill results from our acquisition of Bovie Bulgaria, EOOD.~~

Amortization of purchased technology was $27,000 and $81,000 for the three and nine months ended September 30, 2018 and 2017, respectively. Amortization expense is classified within selling, general and administration expenses in the consolidated statements of operations.

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~~BOVIE MEDICAL CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued~~

~~(Unaudited)~~

NOTE 5.4. RECENT ACCOUNTING PRONOUNCEMENTS

In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The purpose of this ASU is to reduce the cost and complexity of evaluating goodwill for impairment. It eliminates the need for entities to calculate the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. Under this ASU, an entity will perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge is recognized for the amount by which the carrying value exceeds the reporting unit’s fair value. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted, however we have chosen not to do so. The amendment iswill not ~~expected to~~ have a material impact on our consolidated financial condition or results of operations.

In February 2016, the FASB issued ASU ~~No. 2016-18,~~2016-02, ~~Restricted Cash Flows~~Leases ~~provides guidance~~(Topic 842). Topic 842 establishes a new lease model, referred to as the right-of-use model that brings substantially all leases on the ~~presentation of restricted cash~~balance sheet. This standard requires lessees to recognize leased assets and ~~restricted cash equivalents, which are now included with cash and cash equivalents when reconciling the beginning and ending cash amounts shown~~lease liabilities on the ~~statements~~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 ~~cash flows. Using~~expense recognition in the ~~retrospective transition method required under the standard, the~~statement of operations. The Company has adjusted the presentation of its Condensed Consolidated Statements of Cash Flows for all periods presented. The adoption of ASU No. 2016-18 did not have any other impact on the Company’s Consolidated Financial Statements.

~~The following table provides additional detail by financial statement line item of the ASU 2016-18 impact in our Consolidated Statement of Cash Flows for the nine months ended September 30, 2017:~~

(In thousands)
As Reported
(Pre-Adoption)
ASU 2016-18
Impact
Reported
(Post Adoption)
Nine Months Ended September 30, 2017
Net change in cash, cash equivalents and restricted cash $ (5,045 ) $ —
$ (5,045 )
Cash, cash equivalents and restricted cash, beginning of period 14,456
779
15,235
Cash, cash equivalents and restricted cash, end of period $ 9,411
$ 779
$ 10,190

~~ASU No. 2014-09 (ASC 606),~~ ~~Revenue from Contracts with Customers~~ ~~became~~adopted Topic 842 effective ~~for us beginning with the first quarter of 2018, and adopted the new accounting standard~~January 1, 2019 using the modified retrospective transition ~~approach. The modified retrospective transition~~ approach ~~recognized any changes from~~that allows a reporting entity to use the ~~beginning of the year~~effective date as its date of initial application ~~through retained earnings with no restatement~~and not restate the comparative periods in the period of ~~comparative periods. We record revenue under ASC 606 at a single point in time,~~adoption when ~~control is transferred~~transitioning to the ~~customer, which is consistent with past practice. We will continue to apply our current business processes, policies, systems~~new standard. Consequently, the requisite financial information and ~~controls to support recognition and disclosure~~disclosures under the new ~~standard. Based on~~standard are excluded for dates and periods prior to January 1, 2019. In addition, the ~~results~~Company elected to use a number of optional simplification and practical expedients permitted under the ~~evaluation, we have determined that the adoption of~~transition guidance within the new standard, ~~presents no material impact~~including allowing the Company to combine fixed lease and non-lease components, apply the short-term lease exception to all

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APYX MEDICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

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 13 for a full discussion of the impacts of adoption on ~~our~~the current year consolidated financial statements. Application of the transition requirements of the new standard did not have a material impact on opening retained earnings. We have disaggregated revenue by segment and geography in Note 13 Geographic and Segment Information. Based on the current state of our business, management does not see a material reason to disaggregate further.

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.

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~~BOVIE~~APYX MEDICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

NOTE 6.5. EARNINGS PER SHARE

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


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended September, 30						Nine Months Ended September 30,
(in thousands, except per share data)	2018			2017			2018			2017			2019			2018			2019			2018
Numerator:
Net loss from continuing operations	$	(438	)	$	(2,944	)	$	(6,167	)	$	(10,709	)	$	(4,311	)	$	(438	)	$	(13,900	)	$	(6,167	)
Total income from discontinued operations, net of tax	69,612			1,699			74,134			6,471
Net income (loss)	$	69,174		$	(1,245	)	$	67,967		$	(4,238	)
Net income from discontinued operations, net of tax													$	—		$	69,612		$	—		$	74,134
Net income (loss) from all operations													$	(4,311	)	$	69,174		$	(13,900	)	$	67,967

Denominator:
Weighted average shares used to compute basic income (loss)	33,275			31,078			33,014			30,932
Denominator - basic
Weighted average shares outstanding - basic													33,942			33,275			33,903			33,014
Contingently issuable shares - basic													136			—			136			—
Denominator - basic and diluted from continuing operations													34,078			33,275			34,039			33,014
Effect of dilutive securities:
Stock options	1,659			—			938			—			—			1,659			—			938
Denominator for dilutive income (loss) per share	34,934			31,078			33,952			30,932
Denominator - diluted discontinued and all operations :													34,078			34,934			34,039			33,952

Loss per share from continuing operations
Basic	$	(0.01	)	$	(0.09	)	$	(0.19	)	$	(0.35	)
Diluted	$	(0.01	)	$	(0.09	)	$	(0.19	)	$	(0.35	)
Loss per share from continuing operations:
Basic and diluted													$	(0.13	)	$	(0.01	)	$	(0.41	)	$	(0.19	)

Income per share from discontinued operations
Basic	$	2.09		$	0.05		$	2.25		$	0.21		$	—		$	2.09		$	—		$	2.25
Diluted	$	1.99		$	0.05		$	2.19		$	0.21		$	—		$	1.99		$	—		$	2.19

Income (loss) per share
Income (loss) per share from all operations
Basic	$	2.08		$	(0.04	)	$	2.06		$	(0.14	)	$	(0.13	)	$	2.08		$	(0.41	)	$	2.06
Diluted	$	1.98		$	(0.04	)	$	2.00		$	(0.14	)	$	(0.13	)	$	1.98		$	(0.41	)	$	2.00

Anti-dilutive instruments excluded from diluted loss per common share:
Warrants	—			7			—			13
Restricted stock													90			—			90			—
Options	—			373			—			771			4,060			—			4,060			—

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

NOTE 7.6. STOCK-BASED COMPENSATION

Under our stock option plans, our board of directors may grant restricted stock and options to purchase common shares to our key employees, officers, directors and consultants. We account for stock options in accordance with FASB ASC Topic 718, Compensation - Stock Compensation, with ~~option~~stock-based compensation expense amortized over the vesting period based on the trinomial lattice option-pricing model fair value on the grant date, which includes a number of estimates that affect the amount of our expense. In September 2019, the Company registered 2,000,000 shares under our shareholder approved 2019 Share Incentive Plan.

We ~~expensed~~recognized approximately ~~$489,000~~$543,000 and ~~$1,238,000~~$2,594,000 in stock-based compensation expense during the three and nine months ended September 30, ~~2018,~~2019, respectively, as compared with ~~$191,000~~$489,000 and ~~$532,000~~$1,238,000 for the three and nine months ended September 30, ~~2017,~~2018, respectively.

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


	Number of options		Weighted average exercise price		Number of options		Weighted average exercise price
Outstanding at December 31, 2017	4,860,157		$	3.00
Outstanding at December 31, 2018					3,254,779		$	3.18
Granted	225,000		4.08		1,379,500		7.70
Exercised	(1,277,615	)	2.43		(391,135	)	2.84
Canceled and forfeited	(225,841	)	5.62		(183,500	)	3.41
Outstanding at September 30, 2018	3,581,701		$	3.08
Outstanding at September 30, 2019					4,059,643		$	4.73

The Company allows employees to exercise stock-based awards by surrendering stock-based awards with a fair value of the stock-based awards exercised, referred to as net settlements. These surrenders are included in stock options exercised in the options rollforward above. For the three months ended September 30, 2019 and 2018, respectively, the Company received 26,572 and 532,477 options as payment in the exercise of 34,928 and 680,388 options. For the nine months ended September 30, 2019 and 2018, respectively, the Company received 118,170 and 576,135 options and warrants as payment in the exercise of 220,879 and 713,980 options and warrants.

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


	2018 Grants						2019 Grants
Option value	$	1.46	-	$	3.07		$	7.15	-	$	7.91
Risk-free rate	1.9%		-	2.5		%	1.7%		-	2.6		%
Expected dividend yield	—						—
Expected volatility	60.9%		-	68.8		%	67.6%		-	69.1		%
Expected term (in years)	6						6

During September 2019, the Company determined that it had classified grants of 225,922 in restricted stock as stock options in the consolidated financial statements since the grant date. At September 30, 2019, 135,555 of the shares had vested, with the remaining shares vesting through October 2021. At September 30, 2019, the Company has approximately $94,000 of stock-based compensation expense to be recognized through October 2021.

NOTE 8.7. INCOME TAXES

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APYX MEDICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

The Company’s income tax ~~benefit~~expense from continuing operations was ~~$2.4 million~~approximately $171,000 and ~~$2.4 million~~$123,000 with an effective tax rate of ~~82.9%~~(4.1)% and ~~26.4%~~(0.9)% for the three and nine months ended September 30, ~~2018,~~2019, respectively, as compared to ~~an expense~~a benefit of ~~$6,000~~approximately $2,400,000, and ~~$15,000~~$2,400,000 with an effective tax rate of ~~0.0% for the three~~84.6% and nine months ended September 30, 2017, respectively. The increase in the Company’s tax rate for the three and nine months ended September 30, 2018 as compared to the three months and nine months ended September 30, 2017, is primarily due to the Company’s ability to offset the 2018 operating loss from continuing operations against the taxable income generated by the extraordinary gain recognized by the income and asset sale reflected in discontinued operations.

The Company recognized tax expense of $0.3 million and $1.2 million within net income from discontinued operations for the three and nine months ended September 30, 2018, respectively. The Company recognized tax expense of $13.2 million and $15.5 million within the gain on sale of the Core Business27.9%, for the three and nine months ended September 30, 2018, respectively.

~~Management expects the gain from the sale~~The following is a roll-forward of the ~~Core business segment~~Company's total gross unrecognized tax benefits, not including interest and penalties, for the period ended September 30, 2019.



(in thousands)	Gross Unrealized Tax Benefits
Balance at January 1, 2019	$	1,313
Additions of tax positions related to the current year	—
Additions of tax positions related to the prior year	—
Decreases for tax positions related to the prior year	—
Balance at September 30, 2019	$	1,313

The Company recognizes accrued interest and penalties related to ~~Symmetry will utilize substantially all~~unrecognized tax benefits in the provision for income taxes in the Company’s condensed consolidated financial statements. As of the historical Federal net operating loss carryover of $24.7 million, state(s) net operating loss carryover of $21.2 million, and research and development credit carryover of $1.3 million. As a result, the valuation allowance on these deferred tax assets was released during the third quarter of 2018 andSeptember 30, 2019, the Company ~~recorded a~~had approximately $197,000 in accrued interest and penalties related to unrecognized tax ~~benefit of $7.8 million from~~benefits. Included in the ~~release of~~income tax expense for the ~~valuation allowance. The tax benefit of $7.8 million is netted against the tax expenses within net income from discontinued operations~~three and ~~within the gain from asset sales. Pursuant to guidance under ASC 740, for the~~ nine months ended September 30, ~~2018, continuing operations includes a current benefit~~2019 are approximately $146,000 and $197,000, respectively, of ~~$2.4 million, which reflects~~interest and penalties on the ~~Company’s ability~~Company's uncertain tax positions. If the Company were to ~~fully utilize~~prevail on all uncertain tax positions, the ~~net operating loss expected to~~resulting impact will be ~~generated from continuing operations~~material as the Company will recognize approximately $1,510,000 of tax benefits in the ~~2018~~provision of income taxes. It is expected that all of the uncertain tax ~~year.~~positions should be resolved by October 2022.

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~~BOVIE MEDICAL CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued~~

~~(Unaudited)~~

As a result of historical losses, exclusive of discontinued operations, the Company recorded a valuation allowance on the net deferred tax asset with a finite life and does not anticipate recording an income tax benefit related to these deferred tax assets beyond the 2018 tax year. 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 loss in the foreseeable future after 2018, the Company will continue to record a valuation allowance on the remaining deferred tax assets at the end of 2018.

NOTE 9.8. COMMITMENTS AND CONTINGENCIES

~~Property and Rental Agreements~~

In March 2014, we signed a lease for offices located in Purchase, New York. In December 2017, we decided to consolidate operations in the Purchase, NY office with the facility in Clearwater, Florida. Based on this, we determined the office in Purchase, NY was no longer necessary and decided to cease all activity at the location. In August 2018 we negotiated a termination of the remainder of the lease, releasing us from any future obligation.

In October 2015, pursuant to our acquisition of Bovie Bulgaria, we are obligated to pay a lease of $5,980 per month, expiring in December 2021, for 18,745 square feet of office, research and manufacturing space in Sofia, Bulgaria.

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

(In thousands)
2018 (remaining three months)
$ 18
2019 72
2020 72
2021 72
Total $ 234

~~On August 30, 2018, the Company paid the remaining mortgage balance of $2.5 million, releasing us from any and all obligations to the Bank of Tampa.~~

Litigation

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~~business. Such claims include claims by current or former employees, distributors and competitors, claims concerning the marketing and ~~with respect to~~promotion of our products and product liability ~~claims, lawsuits and proceedings.~~claims.

We are involved in a number of legal actions relating to the use of our ~~J-Plasma~~J-Plasma® technology. The outcomes of these legal actions are not within our complete control and may not be known for prolonged periods of time. InWe 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 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~~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 ~~earnings,~~results of operations, financial position or cash flows.

~~Purchase Commitments~~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.

~~At September 30,~~The Amended Complaint seeks class action status on behalf of all persons and entities that acquired the Company’s securities between December 21, 2018 ~~we had purchase commitments for inventories totaling approximately $5.4 million, substantially all of which is expected to be purchased~~and April 1, 2019 and alleges violations by the ~~end~~Company and Goodwin of ~~2018.~~

~~Our manufacturing services agreements requires Symmetry to provide us with a twelve-month rolling production forecast,~~Sections 10(b) and 20(a) of ~~which four months are binding, non-cancelable orders, subject~~the Securities Exchange Act of 1934, as amended and Rule 10b-5 thereunder, primarily related to certain ~~termination rights.~~

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

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.

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. Under the deductible portion of our insurance coverage, we have accrued $500,000 for initial defense costs.

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.

Purchase Commitments

At September 30, 2019, we had purchase commitments totaling approximately $4,600,000, substantially all of which is expected to be purchased within the next six months.

In response to the current worldwide helium shortage, to support our current and near term customer requirements, we issued purchase orders with two international companies to supply us with helium cylinders and have entered into agreements to purchase additional helium as needed. We also currently maintain our own supply of helium in the United States, which can be utilized for our customer requirements.

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APYX MEDICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

NOTE ~~10.~~9. RELATED PARTY TRANSACTIONS

Several relatives of Nikolay Shilev, ~~Bovie~~Apyx Bulgaria’s Managing Director, are considered related parties. Teodora Shileva, Mr. Shilev’s spouse, is an employee of the Company working in the ~~Accounting~~accounting department. Antoaneta Dimitrova Shileva-Toromanova, Mr. Shilev’s sister, is the ~~Manager~~manager of ~~Production~~production and ~~Human Resources.~~human resources. Svetoslav Shilev, Mr. Shilev’s son, is an ~~Engineer~~engineer in the ~~Quality Assurance~~quality assurance department.

In addition, as part of the purchase of the Bulgaria manufacturing facility, Mr. Shilev was issued a note payable for $140,000 to be paid 5 years after the original purchase date, which is in October 2020.

NOTE ~~11.~~10. FINANCIAL INSTRUMENTS

Cash, Cash Equivalents and Marketable ~~Securities:~~Securities at September 30, 2019, consists of approximately $1,300,000 in cash and $61,000,000 in US Treasury Securities with maturities of 3 months or less.

Cash, Cash Equivalents and Marketable Securities at December 31, 2018:


(In thousands)	Adjusted Cost		Unrealized Gains		Fair Value⁽³⁾		Cash and Cash Equivalents ⁽¹⁾		Short-term Marketable Securities		Adjusted Cost		Unrealized Gains		Fair Value⁽³⁾		Cash and Cash Equivalents ⁽¹⁾		Short-term Marketable Securities
Cash	$	5,774			$	5,774	$	5,774			$	6,337	$	—	$	6,337	$	6,337	$	—

Level 1 ⁽²⁾
U.S. Treasury Securities, maturities less than three months	$	34,889			$	34,889	$	34,889			10,129		—		10,129		10,129		—
U.S. Treasury Securities, maturities greater than three months	$	55,433	$	47	$	55,480			$	55,480	61,431		247		61,678		—		61,678
Total	$	96,096	$	47	$	96,143	$	40,663	$	55,480	$	77,897	$	247	$	78,144	$	16,466	$	61,678

⁽¹⁾The ~~company~~Company considers all highly liquid instruments with maturities of three months or less at the time of purchase to be cash equivalents.

⁽²⁾ The fair value of the debt securities consisting of U.S. Treasury bills is based on their quoted market prices. The fair value of these financial instruments are classified as Level 1 in the fair value hierarchy. The original purchase of U.S. Treasury bills occurred in September 2018, utilizing the proceeds from the sale of our Core business.

⁽³⁾ ASC 825-10, Financial Instruments, allows entities to voluntarily choose to measure certain financial assets and liabilities at fair value (fair value option). The fair value option may be elected on an instrument-by-instrument basis and is irrevocable, unless a new election date occurs. If the fair value option is elected for an instrument, unrealized gains and losses for that instrument should be reported in earnings within interest income at each subsequent reporting date. At the date of purchase, the Company elected the fair value option for all investments with maturities of three months or greater at the time of purchase.

~~NOTE 12. LONG TERM DEBT~~

On June 28, 2016, the Company entered into a transaction with Bank of Tampa, a Florida banking corporation (“Lender”), wherein Lender amended the terms of a mortgage loan (“the Loan”) originally executed on March 20, 2014 with a principal amount of $3,592,000. The Initial Maturity Date of the Loan was extended to July 20, 2019 from March 19, 2017, and the Extended Maturity Date was amended to July 20, 2024 from March 20, 2022.

~~On August 30, 2018, the Company paid the remaining mortgage balance of $2.5 million, releasing us from any and all obligations to the Bank of Tampa.~~

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~~BOVIE~~APYX MEDICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

NOTE ~~13.~~11. GEOGRAPHIC AND SEGMENT INFORMATION

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

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

Summarized financial information with respect to reportable segments is as follows:

Three Months Ended September 30, 2018
(In thousands) Advanced Energy OEM Corporate & Other Total
Sales $ 2,985
$ 687
$ —
$ 3,672

(Loss) income from operations (1,155 ) 368
(2,009 ) (2,796 )

Interest income, net —
—
105
105
Income tax benefit —
—
(2,408 ) (2,408 )
Depreciation and amortization —
—
58
58




	Three Months Ended September 30, 2019
(In thousands)	Advanced Energy			OEM		Corporate & Other			Total
Sales	$	6,094		$	1,481	$	—		$	7,575

Income (loss) from continuing operations	(1,357		)	268		(3,608		)	(4,697		)

Interest income	—			—		327			327
Other income, net	—			—		230			230
Income tax expense	—			—		(171		)	(171		)

Three Months Ended September 30, 2017
(In thousands) Advanced Energy OEM Corporate & Other Total
Sales $ 2,126
$ 525
$ —
$ 2,651

(Loss) income from operations (718 ) 323
(2,438 ) (2,833 )

Interest expense, net —
—
(36 ) (36 )
Change in fair value of derivative liabilities —
—
(69 ) (69 )
Income tax expense —
—
6
6
Depreciation and amortization —
—
171
171




	Three Months Ended September 30, 2018
(In thousands)	Advanced Energy			OEM		Corporate & Other			Total
Sales	$	2,985		$	687	$	—		$	3,672

Income (loss) from continuing operations	(1,155		)	368		(2,009		)	(2,796		)

Interest income, net	—			—		105			105
Income tax benefit	—			—		2,408			2,408



	Nine Months Ended September 30, 2019
(In thousands)	Advanced Energy			OEM		Corporate & Other			Total
Sales	$	15,734		$	4,038	$	—		$	19,772

Income (loss) from continuing operations	(5,756		)	995		(10,174		)	(14,935		)

Interest income	—			—		1,153			1,153
Other income, net	—			—		5			5
Income tax expense	—			—		(123		)	(123		)

1416

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~~BOVIE~~APYX MEDICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

Nine Months Ended September 30, 2018
(In thousands) Advanced Energy OEM Corporate & Other Total
Sales $ 8,727
$ 2,033
$ —
$ 10,760

(Loss) income from operations (2,525 ) 1,076
(7,000 ) (8,449 )

Interest income, net —
—
33
33
Change in fair value of derivative liabilities —
—
20
20
Income tax expense —
—
(2,384 ) (2,384 )
Depreciation and amortization —
—
429
429

Nine Months Ended September 30, 2017
(In thousands) Advanced Energy OEM Corporate & Other Total
Sales $ 4,546
$ 2,030
$ —
$ 6,576

(Loss) income from operations (3,821 ) 1,031
(7,858 ) (10,648 )

Interest expense, net —
—
(103 ) (103 )
Change in fair value of derivative liabilities —
—
57
57
Income tax expense —
—
15
15
Depreciation and amortization —
—
527
527



	Nine Months Ended September 30, 2018
(In thousands)	Advanced Energy			OEM		Corporate & Other			Total
Sales	$	8,727		$	2,033	$	—		$	10,760

Income (loss) from continuing operations	(2,525		)	1,076		(7,000		)	(8,449		)

Interest income, net	—			—		33			33
Change in value of derivative liabilities	—			—		20			20
Income tax benefit	—			—		2,384			2,384

International sales represented approximately 26.7% of total revenues for the three months ended September 30, 2019, as compared with 24.8% ~~and~~of total revenues for the same prior year period. International sales represented approximately 29.2% of total revenues for the nine months ended September 30, 2019, as compared with 21.2% of total revenues for the ~~three and nine months ended September 30, 2018, respectively, as compared with 16.6% and 11.5% of total revenues for the three and nine months ended September 30, 2017, respectively.~~ same prior year period.

Substantially all of these sales are denominated in U.S. dollars. Revenue by geographic region, based on the customer's “ship to” location on the invoice, are as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands)	2018		2017		2018		2017		2019		2018		2019		2018
Sales by Domestic and International
Domestic	$	2,763	$	2,212	$	8,481	$	5,821	$	5,552	$	2,763	$	14,002	$	8,481
International	909		439		2,279		755		2,023		909		5,770		2,279
Total	$	3,672	$	2,651	$	10,760	$	6,576	$	7,575	$	3,672	$	19,772	$	10,760

NOTE 12. FOREIGN CURRENCY TRANSACTIONS

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 of Apyx Bulgaria 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 three and nine months ended September 30, 2019.

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~~BOVIE~~APYX MEDICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

NOTE 13. LEASES

The Company does not recognize leases with terms less than twelve months in duration in our consolidated balance sheet as right-of-use assets and lease liabilities. Leases with an initial term of 12 months or less or that have variable only payments are not recorded on the balance sheet. The Company has adopted the practical expedient which allows for the Company to not separate lease and non-lease components of contracts. Accordingly, non-lease components are included in the measurement of the Company's leases and right-of-use assets. If the Company is aware of the implicit rate in leases, the Company determines the operating lease liability using the implicit rate. For those leases where the Company is not aware of the implicit rate in the lease, the Company utilizes a incremental borrowing rate of 4.00%, which is indicative of our collateralized borrowing rate.

Operating Leases

The Company leases its facility in Sofia, Bulgaria and vehicles in Clearwater, Florida under non-cancelable operating lease agreements. The Company's lease on the Bulgaria facility includes rent escalation over the term of the lease. Rent expense on the lease is accounted for on a straight-line basis over the lease term. During Q2 2019, the Bulgaria facility lease was extended for an additional 2 years. In accordance with operating lease guidance under Topic 842, the extension was accounted for as a lease modification and the right-of-use asset and lease liability were remeasured at the modification date. The Company's operating leases have terms expiring through December 2022.

Finance Leases

During August 2019, the Company entered into a non-cancelable finance leases for certain computer equipment and a vehicle in Clearwater, Florida. The Company's finance leases have terms expiring through August 2023.

Information about the Company’s lease costs are as follows:



	Three Months Ended September 30, 2019		Nine Months Ended September 30, 2019
Lease costs (in thousands):
Operating lease costs	$	30	$	85
Finance lease costs:
Amortization of right-of-use assets	4		4
Interest on lease liabilities	—		—
Variable lease costs	5		11
Total lease costs	$	39	$	100

Cash and non cash information related to our leases are as follows:



	Nine Months Ended September 30, 2019
(in thousands)	Operating		Finance
Non cash information:
Right-of-use assets capitalized and lease liabilities recognized upon adoption of Topic 842	$	212	$	—
Right-of-use assets capitalized and lease liabilities recognized upon lease remeasurement	$	207	$	—
Right-of-use assets capitalized and lease liabilities recognized upon execution of lease	$	20	$	642

Cash information:
Cash paid for lease liabilities	$	85	$	12

Table of Contents

APYX MEDICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

Net, non cash lease expense of $2,000 for the nine months ended September 30, 2019 is comprised of reductions of operating right-of-use assets of $78,000 partially offset by reductions of operating lease liabilities of $90,000, $14,000 of which relates to unrealized gains on foreign currency remeasurement associated with the operating lease liabilities.

Information about the Company’s weighted average remaining lease terms and discount rate assumptions are as follows:



	Nine Months Ended September 30, 2019
	Operating	Finance
Weighted average remaining lease term (in years)	3.2	3.0
Weighted average discount rate	4.04%	4.00%

Maturities of lease liabilities as of September 30, 2019 are as follows:



(In thousands)	Operating			Finance
2019 (remaining 3 months)	$	28		$	55
2020	113			220
2021	117			220
2022	114			170
2023	—			18
Total lease payments	372			683
Less imputed interest	(23		)	(43		)
Present value of lease liabilities	349			640
Less current portion of lease liabilities	(101		)	(196		)
Long-term portion of lease liabilities	$	248		$	444

Table of Contents

APYX MEDICAL CORPORATION

MANAGEMENT'S DISCUSSION AND ANAYLSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM 2. 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

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

We are a medical technology company and the developer of J-Plasma^® (marketed and sold under the ~~Renuvion™~~Renuvion^® Cosmetic Technology brand in the cosmetic surgery market), a patented plasma-based surgical product for cutting, coagulation and ablation of soft tissue. J-Plasma technology utilizes a helium ionization process to produce a stable, focused beam of plasma that provides surgeons with greater precision and minimal invasiveness. ~~The Company~~We also ~~leverages its~~leverage our expertise through original equipment manufacturing (OEM) agreements with other medical device manufacturers.

During 2019, we continue our full-scale commercialization efforts for Renuvion^®. As of September 30, 2019, we had a direct sales force of 29 field-based selling professionals and a network of 6 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.

International sales represented approximately 26.7% of total revenues for the three months ended September 30, 2019, as compared with 24.8% of total revenues in the prior year. International sales represented approximately 29.2% of total revenues for the nine months ended September 30, 2019, as compared with 21.2% of total revenues in the prior year. Management estimates our products have been sold in more than 40 countries through local dealers coordinated by sales and marketing personnel at the Clearwater, Florida facility.

As previously disclosed with the Commission on Form 8-K filed on April 4, 2019, we announced on April 1, 2019, that we voluntarily withdrew our application for premarket notification 510(k) regulatory clearance of our J-Plasma^®/Renuvion^® technology for use in dermal resurfacing procedures. While this is a delay in our commercialization efforts, we remain committed to working with the U.S. Food and Drug Administration relative to the development of a new 510(k) submission for use in dermal resurfacing procedures.

During October 2019, the Company initiated subject enrollment in an FDA approved U.S. Investigational Device Exemption clinical study evaluating the use of its Renuvion technology in skin laxity procedures in the neck and submental region. Also during October 2019, the Company received U.S. Food and Drug Administration 510(k) clearance to market and sell the Apyx Plasma/RF Handpiece, a new addition to the Renuvion product family.

On August 30, 2018, we closed on a ~~previously disclosed~~ definitive asset purchase agreement ("the Asset Purchase Agreement") with Specialty Surgical Instrumentation Inc., a Tennessee Corporation and wholly-owned subsidiary of Symmetry Surgical Inc. (“Symmetry”), pursuant to which ~~the Company~~we divested and sold ~~the Company's~~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 J-Plasma technology, including the Renuvion^TM® brand in the cosmetic surgery market. ~~The Company and Symmetry~~We also entered into a ~~transition services agreement,~~Transition Services Agreement, Patent Licensing Agreement, a ~~patent licensing agreement, a disposables supply agreement~~Disposables Supply Agreement, and a ~~generator manufacturing~~Generator Manufacturing and ~~supply agreement,~~Supply Agreement, the latter of which will establish ~~the Company~~us as an OEM-provider of generators to Symmetry for a period of at least 10 years.

In connection with the ~~asset purchase agreement,~~Asset Purchase Agreement, we entered into ~~a previously disclosed~~an Electro Surgical 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.

Table of Contents

APYX MEDICAL CORPORATION

MANAGEMENT'S DISCUSSION AND ANAYLSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued

In connection with the ~~asset purchase agreement,~~Asset Purchase Agreement, we entered into a ~~previously disclosed~~ 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.

During 2018, we continued our full scale commercialization efforts for Renuvion. We have a direct sales force of 19 field-based selling professionals and a network of 11 independent sales agencies, resulting in a field sales team of more than 40 representatives. 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.

International sales represented approximately 24.8% and 21.2% of total revenues for the three and nine months ended September 30, 2018, respectively, as compared with 16.6% and 11.5% of total revenues for the three and nine months ended September 30, 2017, respectively. Our products are sold in 26 countries through local dealers coordinated by sales and marketing personnel at the Clearwater, Florida facility.

~~Table of Contents~~

~~BOVIE MEDICAL CORPORATION~~

~~MANAGEMENT'S DISCUSSION AND ANAYLSIS OF~~

~~FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued~~

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

~~We reclassified the financial results of the Core business to discontinued operations and from segment results for all periods presented.~~

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

We reclassified the financial results of the Core business to discontinued operations and from segment results for all periods presented. We strongly encourage investors to visit our website: ~~www.boviemedical.com~~www.apyxmedical.com to view the most current news and to review our filings with the Securities and Exchange Commission. ~~Information on our website does not constitute a part of this Quarterly Report on Form 10-Q.~~

Results of Operations

Sales


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended September 30,						Nine Months Ended September 30,
(In thousands)	2018		2017		Change		2018		2017		Change		2019		2018		Change		2019		2018			Change
Sales by Reportable Segment
Advanced Energy	2,985		2,126		40.4	%	8,727		4,546		92.0	%	$	6,094	$	2,985	104.2	%	$	15,734	$	8,727	7,007,000	80.3	%
OEM	687		525		30.9	%	2,033		2,030		0.1	%	1,481		687		115.6	%	4,038		2,033		2,005,000	98.6	%
Total	$	3,672	$	2,651	38.5	%	$	10,760	$	6,576	63.6	%	$	7,575	$	3,672	106.3	%	$	19,772	$	10,760		83.8	%
																					9,012,000
Sales by Domestic and International
Domestic	$	2,763	$	2,212	24.9	%	$	8,481	$	5,821	45.7	%	$	5,552	$	2,763	100.9	%	$	14,002	$	8,481		65.1	%
International	909		439		107.1	%	2,279		755		201.9	%	2,023		909		122.6	%	5,770		2,279			153.2	%
Total	$	3,672	$	2,651	38.5	%	$	10,760	$	6,576	63.6	%	$	7,575	$	3,672	106.3	%	$	19,772	$	10,760		83.8	%

~~Overall sales~~Total revenue from continuing operations ~~increased by 38.5% or approximately $1.0 million~~ for the three months ended September 30, ~~2018 when~~2019, increased $3.9 million, or 106.3%, to $7.6 million, compared to $3.7 million in the prior year. Sales of the Company’s Advanced Energy generators and handpieces drove the increase in total revenue in the third quarter of 2019, with OEM segment sales contributing modestly to the ~~same period of 2017.~~year-over-year increase in total revenue from continuing operations during the third quarter 2019 period. Advanced Energy segment sales ~~were~~increased approximately $3.1 million, or 104.2% year-over-year, to $6.1 million, compared to approximately $3.0 million ~~an increase of 40.4% when compared to the same period of 2017~~last year, as a result of ~~continued focus~~additional sales force in the U.S. and new international distributors. This increase in selling infrastructure has resulted in increases of ~~our selling into the cosmetic surgery market~~generator and handpiece sales, ~~growth~~both domestically and in international markets. ~~The~~ OEM segment ~~consists of proprietary products designed specifically for third party equipment manufacturers; revenue for this product line~~sales increased ~~30.9%~~$0.8 million, or ~~approximately $0.2~~115.6% year-over-year, to $1.5 million, ~~when~~ compared to ~~2017.~~$0.7 million last year, primarily attributable to sales to Symmetry under our Manufacture and Supply Agreement.

~~Overall sales~~Total revenue from continuing operations ~~increased by 63.6% or approximately $4.2 million~~ for the nine months ended September 30, ~~2018 when~~2019, increased $9.0 million, or 83.8%, to $19.8 million, compared ~~with~~to $10.8 million in the ~~same period of 2017.~~prior year. Advanced Energy segment sales ~~were~~increased approximately $7.0 million, or 80.3% year-over-year, to $15.7 million, compared to approximately $8.7 million ~~an increase of approximately 92.0% when compared to the same period of 2017~~last year, as a result of ~~continued focus~~additional sales force in the U.S. and new international distributors. This increase in selling infrastructure has resulted in increases of ~~our selling into the cosmetic surgery market~~generator and handpiece sales, ~~growth~~both domestically and in international markets. ~~The~~ OEM segment ~~consists of proprietary products designed specifically for third party equipment manufacturers; revenue for this product line was approximately the same when compared~~sales increased $2.0 million, or 98.6% year-over-year, to ~~2017.~~

$4.0 mil

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~~BOVIE~~APYX MEDICAL CORPORATION

MANAGEMENT'S DISCUSSION AND ANAYLSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued

lion, compared to $2.0 million last year, resulting mainly from sales to Symmetry under our Manufacture and Supply Agreement.

Gross Profit


	Three Months Ended September 30,								Nine Months Ended September 30,								Three Months Ended September 30,								Nine Months Ended September 30,
(In thousands)	2018			2017			Change		2018			2017			Change		2019			2018			Change		2019			2018			Change
Cost of sales	$	1,151		$	738		56.0	%	$	3,490		$	2,314		50.8	%	$	2,558		$	1,151		122.2	%	$	6,757		$	3,490		93.6	%
Percentage of sales	31.3		%	27.8		%			32.4		%	35.2		%			33.8		%	31.3		%			34.2		%	32.4		%


Gross profit	$	2,521		$	1,913		31.8	%	$	7,270		$	4,262		70.6	%	$	5,017		$	2,521		99.0	%	$	13,015		$	7,270		79.0	%
Percentage of sales	68.7		%	72.2		%			67.6		%	64.8		%			66.2		%	68.7		%			65.8		%	67.6		%	574,500,000.0	%

~~Our gross margin decreased by 3.5% during~~Gross profit for the three months ended September 30, ~~2018, when~~2019, increased approximately $2.5 million, or 99.0% year-over-year, to $5.0 million, compared to $2.5 million in the prior year. Gross margin for the three months ended September 30, 2019 was 66.2%, compared to 68.7% for the same ~~period~~period. The primary drivers of ~~2017. The~~the decrease ~~was driven by lower margins~~in gross profit margin were reallocations of overhead expenses in Bulgaria for manufactured inventory, revenue related to our new Product, Manufacturing, and Supply agreements with Symmetry and increases in Advanced Energy ~~due to product mix and increased~~ sales ~~growth in international markets where we sell at~~outside of the U.S., which have lower margins ~~through~~than U.S. sales and represented a ~~network~~higher mix of ~~distributors, offsetting higher domestic selling prices and manufacturing efficiencies. Additionally, margins decreased~~total sales in ~~the OEM segment when compared to 2017.~~three months ended September 30, 2019.

~~Our gross margin increased by 2.8% during~~Gross profit for the nine months ended September 30, ~~2018, when~~2019, increased approximately $5.7 million, or 79.0% year-over-year, to $13.0 million, compared to $7.3 million in the prior year. Gross margin for the nine months ended September 30, 2019, was 65.8%, compared to 67.6% for the same ~~period~~period. The primary drivers of ~~2017. The increase was driven by~~the decrease in gross profit margin were increases in Advanced Energy sales outside the U.S., which have lower margins than U.S. sales and represented a higher ~~margins~~mix of total sales in ~~the OEM segment when~~2019 compared to ~~2017. Additionally,~~last year, revenue related to our new Product, Manufacturing, and Supply agreements with Symmetry, which did not contribute to revenue results significantly during the ~~Advanced Energy segment margins expanded due to increases~~first three quarters of 2018, and additional allocations of overhead expenses in ~~pricing mix~~Bulgaria for manufactured inventory. These decreases were also partially offset by ~~increased sales growth~~an increase in ~~international markets where we sell at lower~~ margins ~~through a network~~due to reclassification of ~~distributors.~~

~~In conjunction with the previously disclosed divestment~~regulatory salaries from cost of our electrosurgical 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,goods sold in ~~the amount of $62,000. This change in estimate is necessary in order to better reflect the change in operations to our Advanced Energy segment.~~2018.

Other Costs and Expenses

Research and development


	Three Months Ended September 30,								Nine Months Ended September 30,								Three Months Ended September 30,								Nine Months Ended September 30,
(In thousands)	2018			2017			Change		2018			2017			Change		2019			2018			Change		2019			2018			Change
Research and Development expense	$	613		$	487		25.9	%	$	1,890		$	1,600		18.1	%	$	936		$	613		52.7	%	$	2,634		$	1,890		39.4	%
Percentage of sales	16.7		%	18.4		%			17.6		%	24.3		%			12.4		%	16.7		%			13.3		%	17.6		%

~~Spending on~~ Research and development expenses increased ~~25.9%~~52.7% and ~~18.1%~~39.4% for the three and nine months ended September 30, ~~2018,~~2019, respectively, primarily due to focused spending on clinical studies and research projects related to the cosmetic surgery market.

~~Professional services~~

Three Months Ended
September 30, Nine Months Ended
September 30,
(In thousands) 2018 2017 Change 2018 2017 Change
Professional services expense $ 628
$ 421
49.2 % $ 1,815
$ 1,291
40.6 %
Percentage of sales 17.1 % 15.9 % 16.9 % 19.6 %

Professional services expense increased 49.2% and 40.6% for the three and nine months ended September 30, 2018, respectively, versus comparable periods in 2017. The change was primarily attributable to expense increases for training-related physician consulting and honorariums for speaking engagements at professional conferences and trade events.

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~~BOVIE~~APYX MEDICAL CORPORATION

MANAGEMENT'S DISCUSSION AND ANAYLSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued

Professional services



	Three Months Ended September 30,								Nine Months Ended September 30,
(In thousands)	2019			2018			Change		2019			2018			Change
Professional services expense	$	1,996		$	628		217.8	%	$	5,756		$	1,815		217.1	%
Percentage of sales	26.3		%	17.1		%			29.1		%	16.7		%

Professional services expense increased 217.8% and 217.1% for the three and nine months ended September 30, 2019, respectively, primarily attributable to expense increases for training-related physician consulting, medical advisory board stock option grants, marketing expenses, and legal and audit fees.

Salaries and related costs


	Three Months Ended September 30,								Nine Months Ended September 30,								Three Months Ended September 30,								Nine Months Ended September 30,
(In thousands)	2018			2017			Change		2018			2017			Change		2019			2018			Change		2019			2018			Change
Salaries and related expenses	$	2,119		$	1,826		16.0	%	$	5,734		$	6,016		(4.7	)%	$	3,020		$	2,119		42.5	%	$	9,691		$	5,734		69.0	%
Percentage of sales	57.7		%	68.9		%			53.3		%	91.5		%			39.9		%	57.7		%			49.0		%	53.3		%

During the three and nine months ended September 30, ~~2018,~~2019, salaries and related expenses increased approximately ~~16.0%~~42.5% and 69.0%, ~~compared to the prior year. The increase was~~respectively, primarily driven by ~~additional sales-related support personnel compared to the comparable period~~an increase in employee stock option expense, increase in sales force by approximately a dozen, increase in administrative headcount, and reclassification of ~~2017.~~

~~During the nine months ended September 30, 2018,~~regulatory salaries ~~and related expenses decreased approximately 4.7%, respectively, compared to the prior year. The decrease was primarily driven by a reduction~~from cost of goods sold in ~~management and sales related personnel and~~

~~executive compensation compared to the comparable period of 2017.~~

In conjunction with the previously disclosed divestment of our electrosurgical 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 $62,000. This change in estimate is necessary in order to better reflect the change in operations to our Advanced Energy segment.2018.

Selling, general and administrative expenses


	Three Months Ended September 30,								Nine Months Ended September 30,								Three Months Ended September 30,								Nine Months Ended September 30,
(In thousands)	2018			2017			Change		2018			2017			Change		2019			2018			Change		2019			2018			Change
SG&A Expense	$	1,957		$	2,012		(2.7	)%	$	6,280		$	6,003		4.6	%	$	3,762		$	1,957		92.2	%	$	9,869		$	6,280		57.1	%
Percentage of sales	53.3		%	75.9		%			58.4		%	91.3		%			49.7		%	53.3		%			49.9		%	58.4		%

~~Selling, general~~During the three and ~~administrative expense decreased by 2.7% for the three~~nine months ended September 30, ~~2018 when compared to 2017. The decrease was primarily driven by sales commissions and reductions in sample expense, offset by increases from general insurance and marketing.~~

~~Selling,~~2019, selling, general and administrative expense increased by ~~4.6% or approximately $0.3 million for the nine months ended September 30, 2018 when compared to 2017. The increase was~~92.2% and 57.1%, respectively, primarily driven by ~~consulting in the Advanced Energy segment,~~higher sales commissions ~~bank service charges~~ and ~~technology upgrades, slightly offset by reductions in sample~~regulatory expense.

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~~BOVIE~~APYX MEDICAL CORPORATION

MANAGEMENT'S DISCUSSION AND ANAYLSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued

Other Income (Expense)~~, net~~


	Three Months Ended September 30,								Nine Months Ended September 30,								Three Months Ended September 30,								Nine Months Ended September 30,
(In thousands)	2018			2017			Change		2018			2017			Change		2019			2018			Change		2019			2018			Change
Interest income (expense), net	$	105		$	(36	)	(391.7	)%	$	33		$	(103	)	(132.0	)%
Interest income																	$	327		$	135		142.2	%	$	1,153		$	135		754.1	%
Percentage of sales																	4.3		%	3.7		%			5.8		%	1.3		%
Interest expense																	$	—		$	(30	)	(100.0	)%	—		%	$	(102	)	(100.0	)%
Percentage of sales																	—		%	(0.8		)%			—		%	(0.9		)%
Other income (losses), net																	$	230		$	(155	)	(248.4	)%	$	5		$	(155	)	(103.2	)%
Percentage of sales	2.9		%	(1.4		)%			0.3		%	(1.6		)%			3.0		%	(4.2		)%			—		%	(1.4		)%
Change in fair value of derivative liabilities, net	$	—		$	(69	)	(100.0	)%	$	20		$	57		(64.9	)%	$	—		$	—		—	%	$	—		$	20		(100.0	)%
Percentage of sales	—		%	(2.6		)%			0.2		%	0.9		%			—		%	—		%			—		%	0.2		%

Interest income ~~(expense), net~~

~~Net~~Total interest income resulted from realized and unrealized interest on cash, cash equivalents and short-term marketable securities, offset by interest paid on our mortgage to the Bank of Tampa until extinguishment on August 30, 2018.

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

On December 13, 2013, we entered into a securities purchase agreement pursuant to which we issued 3,500,000 shares of our newly designated Series A 6% Convertible Preferred Stock with a stated value of $2.00 per share and 5,250,000 warrants to purchase our common stock, at an exercise price of $2.387 per share. We also issued 525,000 warrants to the placement agent at a strike price of $2.387. As of September 30, 2018, all remaining warrants were converted to common stock and for the nine months ended September 30, 2018 we recognized a net loss of $20,000.

~~Other losses, net~~

~~Other losses of $0.2 million~~was higher for the three and nine months ended September 30, ~~2018 was in connection~~2019, as compared with the ~~asset purchase agreement,~~prior year. This increase is primarily related to short term investments in U.S. Treasury Securities which we ~~entered into a previously disclosed Electro Surgical Disposables and Accessories, Cauteries and Other Products Supply Agreement~~purchased with ~~Symmetry for a four-year term, whereby we will manufacture certain~~the proceeds received from the sale of the Core ~~products and sell them to Symmetry at agreed upon prices. Any revenue, costs and expenses resulting from this agreement are netted and reported~~business in ~~our Consolidated Statements of Operations as Other gains or losses.~~September 2018.

Income Taxes



	Three Months Ended September 30,								Nine Months Ended September 30,
(In thousands)	2019			2018			Change		2019			2018			Change
Income tax expense (benefit	$	171		$	(2,408	)	(107.1	)%	$	123		$	(2,384	)	(105.2	)%
Effective tax rate	(4.1		)%	84.6		%			(0.9		)%	27.9		%

The Company’s income tax ~~benefit from continuing operations~~expense was ~~$2.4 million~~$171,000 and ~~$2.4 million~~$123,000 with an effective tax rate of ~~82.9%~~(4.1)% and ~~26.4%~~(0.9)% for the three and nine months ended September 30, ~~2018,~~2019 respectively, as compared to an expense of ~~$6,000~~$2,400,000, and ~~$15,000~~$2,400,000 with an effective tax rate of ~~0.0% for the three~~84.6% and nine months ended September 30, 2017, respectively. The increase in the Company’s tax rate for the three and nine months ended September 30, 2018 as compared to the three months and nine months ended September 30, 2017, is primarily due to the Company’s ability to offset the 2018 operating loss from continuing operations against the taxable income generated by the extraordinary gain recognized by the income and asset sale reflected in discontinued operations.

~~The Company recognized tax expense of $0.3 million and $1.2 million within net income from discontinued operations~~27.9%, for the three and nine months ended September 30, 2018, respectively. The ~~Company recognized tax expense of $13.2 million and $15.5 million within the gain on sale of the Core Business for the three and nine months ended September 30, 2018, respectively.~~

~~Management expects the gain~~effective rate differs from the ~~sale of~~statutory rate primarily due to the Core business segment to Symmetry will utilize substantially all of the historical Federal net operating loss carryover of $24.7 million, state(s) net operating loss carryover of $21.2 million, and research and development credit carryover of $1.3 million. As a result,change in the valuation allowance on these deferred tax assets was released during the third quarter of 2018 and the Company recorded a tax benefit of $7.8 million from the release of the valuation allowance. The tax benefit of $7.8 million is netted against the tax expenses within net income from discontinued operations and within the gain from asset sales. Pursuant to guidance under ASC 740, for the nine months ended September 30, 2018, continuing operations includes a current benefit of $2.4 million, which reflects the Company’s ~~ability to fully utilize the net operating loss expected to be generated from continuing operations in the 2018 tax year.~~

~~Table of Contents~~

~~BOVIE MEDICAL CORPORATION~~

~~MANAGEMENT'S DISCUSSION AND ANAYLSIS OF~~

~~FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued~~

~~As a result of historical losses, exclusive of discontinued operations, the Company recorded a valuation allowance on the~~ net deferred tax asset with a finite life and does not anticipate recording an income tax benefit related to these deferred tax assets beyond the 2018 tax year. 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 loss in the foreseeable future after 2018, the Company will continue to record a valuation allowance on the remaining deferred tax assets at the end of 2018.assets.

Product Development

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

Reliance on Collaborative, Manufacturing and Selling Arrangements

We manufacture the majority of our products on our premises in Clearwater, Florida and in Sofia, Bulgaria. Labor-intensive sub-assemblies and labor-intensive products may be ~~out-sourced~~outsourced to our specification.

We also perform development services for OEM customers who have no legal obligation to purchase products from us. Should such customers fail to give us purchase orders for the product after development, our future business and value of related assets could be negatively affected. Furthermore, no assurance can be given that such customers will give sufficient high priority to our products. Additionally, we will function as an OEM-provider of generators to Symmetry for a period of at least 10 ~~years.~~years from the date of the Generator Manufacturing and Supply Agreement.

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APYX MEDICAL CORPORATION

MANAGEMENT'S DISCUSSION AND ANAYLSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued

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

Liquidity and Capital Resources

Our working capital at September 30, ~~2018~~2019 was approximately ~~$85.2~~$69.9 million compared with ~~$16.6~~$81.9 (as revised) million at December 31, ~~2017, primarily driven by the gain from the disposition of the Core business. Accounts receivable days sales outstanding were 41 days and 48 days at September~~2018.

On August 30, 2018, we sold our Core business segment and ~~2017, respectively. The number~~other related assets for $97 million in cash. At December 31, 2018, we had approximately $78 million in Cash, Cash Equivalents and Short-Term Investments, after making estimated Federal and State tax payments of days sales in inventory, which is the total inventory available for production divided by the 12-month average cost of materials, increased 6 days to 185 days equating to an inventory turn ratio of 2.23 at September 30, 2018 from 179 days and an inventory turn ratio of 2.00 at September 30, 2017.$13.3 million.

For the nine months ended September 30, ~~2018,~~2019, net cash used in operating activities ~~was~~is approximately ~~$2.8~~$15.1 million, which principally funded our operating loss of $(13.9) million, compared with net cash used byin operating activities of approximately ~~$4.4~~$2.8 million ~~for~~in the same period in 2017. Net income of $68.0 million, non-cash inflows of $1.2 million, accounts receivable of $0.7 million and changes in working capital of $0.3 million, were offset by the gain on the sale of the Core business of $69.1 million and increases of inventory of $1.7 million.for 2018.

Net cash from investing activities ~~was attributed~~is $60.8 million, primarily related to ~~proceeds~~the maturity of short term investments and reinvestment in cash equivalents.

Cash from ~~the disposition~~financing activities of ~~the Core business of $91.1 million, partially offset by purchases of marketable securities of $55.4 million and property and equipment for~~ approximately $0.2 million primarily relates to cash collected for stock options during the nine months ended September 30, ~~2018, compared to approximately $0.4 million cash used for purchases of property and equipment for the same period in 2017.~~

2019. Cash used in 2018 financing activities ~~of approximately~~in 2018 was $2.6 million ~~was attributed~~and primarily related to the extinguishment of the mortgage note payable of $2.7 million, partially offset by proceeds from the exercise of options of $0.1 million during the nine months ended September 30, 2018, compared to cash used in financing activities for the repayment of our mortgage at the ~~mortgage note payable of approximately $179,000 for the same period in 2017.~~

~~Table of Contents~~

~~BOVIE MEDICAL CORPORATION~~

~~MANAGEMENT'S DISCUSSION AND ANAYLSIS OF~~

~~FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued~~

At September 30, ~~2018,~~2019, we had purchase commitments ~~for inventories~~ totaling approximately ~~$5.4~~$4.6 million, substantially all of which is expected to be purchased bywithin the ~~end of 2018.~~next six months.

Our manufacturing services agreements requires Symmetry to provide us with a twelve-month rolling production forecast, of which four months are binding, non-cancelable orders, subject to certain termination rights.

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~~BOVIE~~APYX MEDICAL CORPORATION

MANAGEMENT'S DISCUSSION AND ANAYLSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued

Critical Accounting Estimates

In preparing the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP), we have adopted various accounting policies. Our most significant accounting policies are disclosed in Note 2 to the consolidated financial statements included in our ~~report~~Report on Form 10-K for the year ended December 31, ~~2017,~~2018, filed with the Securities and Exchange Commission on March ~~13, 2018.~~14, 2019.

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

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

Inventory reserves

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

Long-lived assets

We review long-lived assets which are held and used, including property and equipment, ~~and intangible assets,~~ for impairment whenever changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Such evaluations compare the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset over its expected useful life and are significantly impacted by estimates of future prices and volumes for our products, capital needs, economic trends and other factors that are inherently difficult to forecast. If the asset is considered to be impaired, we record an impairment charge equal to the amount by which the carrying value of the asset exceeds its fair value determined by either a quoted market price, if any, or a value determined by utilizing a discounted cash flow technique. To date, no reporting units are at risk of failing an impairment test.

Stock-based Compensation

Under our stock option plan, options to purchase common shares of the Company may be granted to key employees, officers and directors of the Company by the Board of Directors. The Company accounts for stock options in accordance with FASB ASC Topic 718-10, Compensation-Stock Compensation, with compensation expense amortized over the vesting period based on the trinomial lattice option-pricing model fair value on the grant date, which includes a number of estimates that affect the amount of our expense.

Litigation Contingencies

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 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

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~~BOVIE~~APYX MEDICAL CORPORATION

MANAGEMENT'S DISCUSSION AND ANAYLSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued

~~Litigation Contingencies~~

~~The medical device industry is characterized by frequent claims and litigation, and we are and may become subject to various claims, lawsuits and proceedings~~disclosed 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~~notes to the ~~use~~consolidated financial statements. In most cases, significant judgment is required to estimate the amount and timing of ~~our J-Plasma technology. The outcomes of~~a loss to be recorded, actual results may differ from 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.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.

Management expects the gain from the sale of the Core business segment to Symmetry will utilize substantially all of the historical Federal net operating loss carryover of $24.7 million, state(s) net operating loss carryover of $21.2 million, and research and development credit carryover of $1.3 million. As a result, the valuation allowance on these deferred tax assets was released during the third quarter of 2018 and the Company recorded a tax benefit of $7.8 million from the release of the valuation allowance. The tax benefit of $7.8 million is netted against the tax expenses within net income from discontinued operations and within the gain from asset sales. Pursuant to guidance under ASC 740, for the nine months ended September 30, 2018, continuing operations includes a current benefit of $2.4 million, which reflects the Company’s ability to fully utilize the net operating loss expected to be generated from continuing operations in the 2018 tax year.

As a result of historical losses exclusive of discontinued operations and the Company’s expectation to continue to generate losses in the near future, the Company recorded a valuation allowance on the net deferred tax asset ~~with a finite life~~ and does not anticipate recording an income tax benefit related to these deferred tax ~~assets beyond the 2018 tax year.~~assets. The Company will reassess the realization of deferred tax assets each reporting period and will be able to reduce the valuation allowance to the extent 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~~

We assess the ~~Company~~financial statement impact of an uncertain tax position taken or expected to ~~continue~~be taken on an income tax return at the largest amount that is more-likely-than-not to ~~generate loss~~be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized in the ~~foreseeable future after 2018, the Company will continue to record a valuation allowance on the remaining deferred tax assets at the end~~financial statements unless it is more likely than not of ~~2018.~~being sustained.

~~Since inception, we have been~~The Company is subject to ~~tax by both~~U.S. federal and state ~~taxing authorities. Until the respective statutes of limitations expire, we~~income tax examination. The Company’s 2015 through 2018 U.S. federal income tax returns are subject to examination by the Internal Revenue Service. The Company’s state income tax ~~audits in~~returns are subject to examination for the ~~jurisdictions in which we operate.~~tax years 2014 through 2018.

Inflation

Inflation has not materially impacted the operations of our Company.

Off-Balance Sheet Arrangements

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

Recent Accounting Pronouncements

See Note 4 of the Notes to Consolidated Financial Statements.

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~~BOVIE~~APYX MEDICAL CORPORATION

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

For our disclosures about market risk, please see Part II, Item 7A., “Quantitative and Qualitative Disclosures about Market Risk,” in our Annual Report on Form 10-K for the year ended December 31, 2017. We believe there have been no material changes to the information provided therein.Not applicable.

ITEM 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

~~We have carried out an evaluation, under the supervision of~~Our management has established and ~~with the participation of our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of our~~maintains disclosure controls and procedures ~~(as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended), as of September 30, 2018. Based upon~~ that ~~evaluation, our CEO and CFO concluded~~are designed to ensure that ~~as of the end of that period, our disclosure controls and procedures are effective in providing reasonable assurance that (a)~~ the information required to be disclosed by us in ~~the~~ reports that we ~~filed~~file or ~~submitted~~submit under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is recorded, processed, summarized and reported within the time periods specified in the ~~SEC’s~~Securities and Exchange Commission's rules and forms, and ~~(b)~~that such information is accumulated and communicated to ~~our~~ management, including ~~our CEO~~the Chief Executive Officer and ~~CFO,~~Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. ~~In designing~~Management carried out an evaluation, under the supervision and ~~evaluating~~with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on such evaluation, our ~~management recognized~~Chief Executive Officer and Chief Financial Officer have concluded that, ~~any~~as of September 30, 2019, the Company's disclosure controls and procedures ~~no matter how well~~were not effective because of the material weaknesses in our internal control over financial reporting as discussed below.

Notwithstanding such material weaknesses, which is described below in Management’s Report on Internal Control over Financial Reporting, our management has concluded that the consolidated financial statements included in this Form 10-Q present fairly, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with GAAP.

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). The Company's internal control over financial reporting is designed ~~and operated, can~~to provide ~~only~~ reasonable assurance regarding the reliability of ~~achieving~~financial reporting and the ~~desired~~preparation of financial statements for external purposes in accordance with GAAP. Because of its inherent limitations, internal control ~~objectives~~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.

Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, management ~~necessarily~~carried out an evaluation of the effectiveness of the Company's internal control over financial reporting as of December 31, 2018, based on the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (2013). Based on that evaluation, management concluded that, as of December 31, 2018, the Company's internal control over financial reporting was ~~required~~not effective as a result of the material weaknesses described below.

The effectiveness of our internal control over financial reporting as of December 31, 2018 was audited by Frazier & Deeter, LLC, an independent registered public accounting firm, as stated in their report included in Part II, Item 8 of our most recent Form 10-K for the period ended December 31, 2018, contains an adverse opinion on the effectiveness of our internal control over financial reporting.

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 material misstatements of the Company's annual or interim financial statements will not be prevented or detected on a timely basis.

We have identified three material weaknesses: (i) an ineffective control environment due to ~~apply its judgment~~a lack of sufficient qualified accounting personnel with an appropriate level of knowledge and experience with generally accepted accounting principles, (ii) ineffective control activities due to the lack of documentation and timeliness in ~~evaluating the cost-benefit relationship of possible~~executing business process controls, and ~~procedures.~~(iii) ineffective monitoring controls to ascertain whether the components of internal control were present and functioning.

As of September 30, 2019, we continue our remediation efforts related to these deficiencies.

Remediation Efforts to Address Material Weaknesses

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To date, we have implemented and are continuing to implement a number of measures to address the material weaknesses identified. We are also designing additional controls around the identification, documentation and application of technical accounting guidance with particular emphasis on events outside the ordinary course of business. These controls are expected to include the implementation of additional supervision and review activities by qualified personnel, the preparation of formal accounting memoranda to support our conclusions on technical accounting matters, and the development and use of checklists and research tools to assist in compliance with GAAP reporting requirements.

Included in the remediation efforts are investments in new personnel that have expertise in a broad array of accounting topics. As a result of these investments, the Company reevaluated its accounting on a variety of topics. While reevaluating the accounting for stock-based compensation expense during the three months ended September 30, 2019, the Company discovered immaterial 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.

We have also fully engaged a third-party specialist to help us assess and improve our internal controls and to assist in the process of designing and implementing a financial reporting system that is adequate to satisfy our reporting obligations. This has included the establishment of our overall internal control framework and the redesign of controls deemed to be defective in our most recently filed 10-K. As we continue to evaluate and take actions to improve our internal controls over financial reporting, we may find it necessary to take additional actions to address control deficiencies and modify our remediation measures.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rules 13(a)-15(f) and 15(d)-15(f)) during the nine months ended September 30, ~~2018~~2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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~~BOVIE~~APYX MEDICAL CORPORATION

PART II. Other Information

ITEM 1. Legal Proceedings

We are involved in a number of legal actions relating to the use of our ~~J-Plasma~~J-Plasma® technology. The outcomes of these legal actions are not within our complete control and may not be known for prolonged periods of time. InWe 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 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~~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.

$500,000 for initial defense costs.

ITEM 1A. Risk factors

~~Not Applicable.~~There have been no material changes to the Risk Factors described in Part I, Item1A-Risk Factors in our annual report on Form10-K for the year ended December 31, 2018.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

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None.

ITEM 3. Defaults Upon Senior Securities

None.

ITEM 4. Mine Safety Disclosures

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Not Applicable.

ITEM 5. Other Information

None.

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~~BOVIE~~APYX MEDICAL CORPORATION

ITEM 6. Exhibits



~~2.1~~		Asset Purchase Agreement, dated as of July 9, 2018, by and between Bovie Medical Corporation and Specialty Surgical Instrumentation Inc. (Incorporated by reference to the Registrant’s Current Report on Form 8-K file on July 9, 2018)
3.1		Articles of Incorporation of the Registrant (Incorporated by reference to the Registrant’s report on Form 10-K/A filed on March 31, 2011)
3.2		By laws of the Registrant (Incorporated by reference to the Registrant’s ~~report~~Annual Report on Form 10-K/A filed on March 31, 2011)
3.3		Certificate of Amendment of the Certificate of Incorporation of the Registrant (Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q filed on November 3, 2017).
3.4		Certificate of Elimination (Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on May 3, 2018)
~~10.1~~3.5		~~J. Robert Saron Separation Agreement and General Release, dated August 30, 2018~~Certificate of Amendment of the Certificate of Incorporation of the Registrant (Incorporated by reference to the ~~Registrant’s~~Registrant's Current Report onof Form 8-K filed on ~~August 30,~~December 28, 2018)
31.1*		Certification pursuant to Section 302 of Sarbanes-Oxley Act of 202
31.2*		Certification pursuant to Section 302 of Sarbanes-Oxley Act of 202
32.1*		Certification pursuant to Section 906 of Sarbanes-Oxley Act of 202
32.2*		Certification pursuant to Section 906 of Sarbanes-Oxley Act of 202
101.INS**		XBRL Instance Document
101.SCH**		XBRL Taxonomy Extension Schema Document
101.CAL**		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF**		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB**		XBRL Taxonomy Extension Label Linkbase Document
101.PRE**		XBRL Taxonomy Extension Label Presentation Document

* Filed herewith.

** XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended and otherwise is not subject to liability under these sections.

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~~BOVIE~~APYX MEDICAL CORPORATION

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



	~~Bovie~~Apyx Medical Corporation

Date: November ~~2, 2018~~15, 2019	By:	/s/ Charles D. Goodwin II
		Charles D. Goodwin II
		President, Chief Executive Officer and Director
		(Principal Executive Officer)

Date: November ~~2, 2018~~15, 2019	By:	/s/ ~~Jay D. Ewers~~Tara Semb
		~~Jay D. Ewers~~Tara Semb
		Chief Financial Officer,
		Treasurer and Secretary
		(Principal Financial Officer)

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(In thousands)
Gross consideration from the sale of the Core Business	$	97,000
Closing and transaction costs	5,905
Net proceeds from sale of the Core Business before taxes	$	91,095

Book value of the Core Business
Current assets:
Inventories, net	2,195
Prepaid expenses and other current assets	57
Total current assets	2,252
Property and equipment, net of depreciation	375
Brand name and trademark	1,510
Purchased technology and license rights, net of depreciation	112
Total non-current assets	1,997
Total assets	$	4,249

Current liabilities:
Accrued inventory liability	2,305
Total current liabilities	2,305
Total book value of the Core Business	$	6,554

Net gain on sale of the Core Business before taxes	84,541
Income tax expense	15,469
Net gain on sale of the Core Business after income taxes	$	69,072



(In thousands)	As Reported (Pre-Adoption)			ASU 2016-18 Impact		Reported (Post Adoption)
Nine Months Ended September 30, 2017
Net change in cash, cash equivalents and restricted cash	$	(5,045	)	$	—	$	(5,045	)
Cash, cash equivalents and restricted cash, beginning of period	14,456			779		15,235
Cash, cash equivalents and restricted cash, end of period	$	9,411		$	779	$	10,190



(In thousands)
2018 (remaining three months)	$	18
2019	72
2020	72
2021	72
Total	$	234



	Three Months Ended September 30, 2017
(In thousands)	Advanced Energy			OEM		Corporate & Other			Total
Sales	$	2,126		$	525	$	—		$	2,651

(Loss) income from operations	(718		)	323		(2,438		)	(2,833		)

Interest expense, net	—			—		(36		)	(36		)
Change in fair value of derivative liabilities	—			—		(69		)	(69		)
Income tax expense	—			—		6			6
Depreciation and amortization	—			—		171			171