UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM ~~10-Q/A~~

~~Amendment No. 1~~10-Q



ý ☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended ~~March 31, 2019~~	June 30, 2020

	or

o ☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from _____ to _____
	Commission File Number:	0-12183

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, FL33760

(Address of principal executive offices, zip code)

~~(727)~~ (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:~~ ýYes: ☒ No o☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ~~Yes:~~ ýYes: ☒ 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):~~Act.



Large accelerated filer	o☐	Accelerated filer	ý ☒
Non-accelerated filer	o☐	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☒

~~Securities registered pursuant to Section 12(b) of the Act:~~



~~Title of each Class~~	~~Trading Symbol~~	~~Name of each Exchange on which registered~~
~~Common Stock, $.001 Par Value~~	~~APYX~~	~~NASDAQ Stock Market LLC~~

As of ~~May 3rd, 2019, 34,041,830~~August 6, 2020, 34,216,349 shares of the registrant’s $0.001 par value common stock were outstanding.

~~Explanatory Note~~

As disclosed in Item 4.02 of Form 8-K filed with the U.S Securities and Exchange Commission ("SEC") on March 16, 2020, on March 12, 2020 the Audit Committee of the Board of Directors of Apyx Medical Corporation (formerly known as Bovie Medical Corporation) (the “Company”) concluded, after review and discussion with management, that the Company’s financial statements as of and for the three months ended March 31, 2019 ( the “Financial Statements”) should no longer be relied upon.

Amendment No. 1 on Form 10-Q/A (this “Form 10-Q/A") amends and restates certain items noted below in the Quarterly Report on Form 10-Q of the Company for the quarter ended March 31, 2019, as originally filed with the Securities and Exchange Commission on May 8, 2019 (the “Original Filing”). This Form 10-Q/A amends the Original Filing to reflect the correction of an error in the previously reported financial statements related to the Company’s failure to properly collect and remit employee income and payroll taxes, and remit the employer portion of payroll taxes, resulting from the exercise of non-qualified stock options. In addition, the Company has also corrected other minor items primarily related to the appropriate cutoff of transactions at the balance sheet date and the duplicate recording of a State income tax payment, and has corrected its cost of sales and other operating expenses as a result of reevaluating its subsidiary consolidation process and discovering an inaccuracy in its accounting for the elimination of markup on intercompany sales.

As previously disclosed and adjusted in Form 10-Q for the three and nine months ended September 2019 filed on November 11, 2019, the Company reevaluated its accounting for stock-based compensation expense and during the three months ended September 30, 2019, the Company discovered errors in its accounting for certain items included in stock-based compensation expense. These errors related to its accounting for forfeitures, the vesting periods over which the expense was recognized, modifications, fair value measurements, and other minor miscellaneous items, all of which relate to the prior year. Additionally, the Company identified an issue relating to grants in the first quarter of 2019, whereby compensation was not recognized over the correct vesting period.

The Company also re-evaluated its accounting for pre-development activities on certain OEM contracts determined that it had 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 of 2019 relating to these activities and did not defer the accompanying costs.

~~See Note 2 to the Condensed Consolidated Financial Statements included in Item 1 for additional information and a reconciliation of the previously reported amounts to the restated amounts.~~

For the convenience of the reader, this form 10-Q/A sets forth the Original Filing, as amended, in its entirety; however, this Form 10-Q/A amends and restates only the following financial statements and disclosures that were impacted from the correction of the errors:

~~Part I, Item 1 - Financial Statements~~

~~Part I, Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations~~

~~Part II, Item 6 - Exhibits~~

~~Signatures~~

The Company’s Chief Executive Officer and Chief Financial Officer have provided new certifications dated as of the date of this filing in connection with this Form 10-Q/A(Exhibits 31.1, 31.2, 32.1 and 32.2),and the Company has provided its revised audited consolidated financial statements formatted in Extensible Business Reporting Language (XBRL) in Exhibit 101.

Except as described above, no other changes have been made to the Original Filing. This Form 10-Q/A speaks as of the date of the Original Filing and does not reflect events that may have occurred after the date of the Original Filing, or modify or update any disclosures that may have been affected by subsequent events.

The Company is also concurrently filing an amended Quarterly Report for the three and nine months ended September 31, 2018 to restate their previously issued interim financial statements due to several of the same accounting errors described above.

Table of Contents

APYX MEDICAL CORPORATION

INDEX TO QUARTERLY REPORT ON FORM 10-Q

For the quarterly period ended ~~March 31, 2019~~June 30, 2020

(Unaudited)



		Page
Part I.	Financial Information	23

Item 1.	Financial Statements	2
	~~Consolidated Balance Sheets at~~ ~~March 31, 2019 and December 31, 2018~~	2
	~~Consolidated Statements of Operations for the three~~ ~~months ended March 31, 2019 and 2018~~	3
	Consolidated Balance Sheets at June 30, 2020 and December 31, 2019	3
	Consolidated Statements of Operations for the three and six months ended June 30, 2020 and 2019	4
	Consolidated Statements of Changes in Stockholders’ Equity for the t~~hree~~three and six months ended ~~March 31,~~June 30, 2020 and 2019 ~~and 2018~~	45
	Consolidated Statements of Cash Flows for the ~~three~~six months ended ~~March 31,~~June 30, 2020 and 2019 ~~and 2018~~	56
	Notes to Consolidated Financial Statements	67

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	2526
Item 4.	Controls and Procedures	2526

Part II.	Other Information	2628

Item 1.	Legal Proceedings	2628
Item 1A.	Risk Factors	2728
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	2729
Item 3.	Defaults Upon Senior Securities	2729
Item 4.	Mine Safety Disclosures	27
~~Item 5.~~	~~Other Information~~	27
~~Item 6.~~	~~Exhibits~~	27
	~~Signatures~~	29

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APYX MEDICAL CORPORATION

INDEX TO QUARTERLY REPORT ON FORM 10-Q



Item 5.	Other Information	29
Item 6.	Exhibits	30
	Signatures	31

Table of Contents

APYX MEDICAL CORPORATION

PART I. Financial Information

ITEM 1. Financial Statements

CONSOLIDATED BALANCE SHEETS

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


	March 31, 2019 as Restated		December 31, 2018		June 30, 2020		December 31, 2019
ASSETS
Current assets:
Cash and cash equivalents	$	32,415	$	16,596	$	46,156	$	58,812
Short term investments	40,885		61,678
Trade accounts receivable, net of allowance of $196 and $428	4,969		5,080
Inventories, net of provision for obsolescence of $398 and $439	5,598		5,297
Trade accounts receivable, net of allowance of $760 and $273					6,306		7,987
Income tax receivables					6,443		426
Other receivables					1,671		1,233
Inventories, net of provision for obsolescence of $685 and $392					5,257		5,068
Prepaid expenses and other current assets	1,449		1,184		4,008		3,207
Total current assets	85,316		89,835		69,841		76,733
Property and equipment, net	6,031		5,788
Intangibles	190		191
Deposits	80		73
Property and equipment, net of accumulated depreciation and amortization of $4,702 and $4,403					6,440		6,618
Operating lease right-of-use assets					295		350
Finance lease right-of-use assets					691		653
Other assets	239		41		560		391
Total assets	$	91,856	$	95,928	$	77,827	$	84,745

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,504	$	1,423	$	2,206	$	2,438
Accrued and other liabilities	5,587		5,865
Joint and several payroll tax liability	1,014		713
Accrued severance and related	511		610
Accrued expenses and other liabilities					6,911		9,396
Current portion of operating lease liabilities					112		108
Current portion of finance lease liabilities					266		229
Related party note payable					140		140
Total current liabilities	8,616		8,611		9,635		12,311
Note payable	140		140
Long term lease liability	75		—
Other long-term liabilities	194		—
Long-term operating lease liabilities					177		235
Long-term finance lease liabilities					414		421
Other liabilities					765		519
Total liabilities	9,025		8,751		10,991		13,486
STOCKHOLDERS’ EQUITY
Common stock, $0.001 par value; 75,000,000 shares authorized; 34,033,255 issued and 33,891,255 outstanding as of March 31, 2019 and 33,847,100 issued and 33,704,525 outstanding as of December 31, 2018	34		34
Common stock, $0.001 par value; 75,000,000 shares authorized; 34,201,895 issued and outstanding as of June 30, 2020, and 34,312,527 issued and 34,169,952 outstanding as of December 31, 2019					34		34
Additional paid-in capital	54,182		52,920		58,926		56,708
Retained earnings	28,615		34,223		7,876		14,517
Total stockholders’ equity	82,831		87,177		66,836		71,259
Total liabilities and stockholders’ equity	$	91,856	$	95,928	$	77,827	$	84,745

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

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APYX MEDICAL CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data, Unaudited)

Three Months Ended
March 31,
2019 as Restated 2018
Sales $ 5,629
$ 3,397
Cost of sales 2,066
1,185
Gross profit 3,563
2,212
Other costs and expenses:
Research and development 730
514
Professional services 2,118
506
Salaries and related costs 3,488
1,802
Selling, general and administrative 2,957
2,110
Total other costs and expenses 9,293
4,932
Loss from operations (5,730 ) (2,720 )
Interest income 423

—
Interest expense —
(34 )
Other losses (295 ) —
Change in value of derivative liabilities —
(26 )
Total other income (expense), net 128
(60 )
Loss before income taxes (5,602 ) (2,780 )
Income tax expense 6
11
Loss from continuing operations (5,608 ) (2,791 )
Income from discontinued operations, net of tax —
1,856
Net loss $ (5,608 )
$ (935 )

EPS from continuing operations:
Basic $ (0.17 ) $ (0.08 )
Diluted $ (0.17 ) $ (0.08 )

EPS from discontinued operations:
Basic $ —
$ 0.05
Diluted $ —
$ 0.05

EPS from total operations:
Basic $ (0.17 ) $ (0.03 )
Diluted $ (0.17 ) $ (0.03 )



	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
Sales	$	4,296		$	6,649		$	9,293		$	12,278
Cost of sales	2,202			1,975			4,215			4,041
Gross profit	2,094			4,674			5,078			8,237
Other costs and expenses:
Research and development	975			888			1,955			1,618
Professional services	1,658			1,661			4,047			3,779
Salaries and related costs	3,439			3,510			6,750			6,998
Selling, general and administrative	2,189			3,037			5,985			5,994
Total other costs and expenses	8,261			9,096			18,737			18,389
Loss from operations	(6,167		)	(4,422		)	(13,659		)	(10,152		)
Interest income	7			403			223			826
Interest expense	(8		)	—			(14		)	—
Other (loss) income, net	(14		)	(200		)	412			(495		)
Total other (loss) income, net	(15		)	203			621			331
Loss before income taxes	(6,182		)	(4,219		)	(13,038		)	(9,821		)
Income tax (benefit) expense	(1,492		)	76			(6,397		)	82
Net loss	$	(4,690	)	$	(4,295	)	$	(6,641	)	$	(9,903	)

Earnings (loss) per Share:
Basic and diluted	$	(0.14	)	$	(0.13	)	$	(0.19	)	$	(0.30	)

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

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APYX MEDICAL CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(In thousands, Unaudited)

Common Stock
Shares Par Value Additional Paid-In Capital Retained Earnings (Accumulated deficit) Total
Balance
December 31, 2017 32,878
$ 33
$ 50,495
$ (28,496 ) $ 22,032
Stock based compensation —
—
372
—
372
Net loss —
—
—
(935 ) (935 )
Balance
March 31, 2018 32,878
$ 33
$ 50,867
$ (29,431 ) $ 21,469

Balance
December 31, 2018 33,705
$ 34
$ 52,920
$ 34,223
$ 87,177
Options exercised 271
—
777
—
777
Stock based compensation - as Restated —
—
1,195
—
1,195
Stock exercise to acquire options and warrants (85 ) —
(710 ) —
(710 )
Net loss - as Restated —
—
—
(5,608 ) (5,608 )
Balance
March 31, 2019 - as Restated 33,891
$ 34
$ 54,182
$ 28,615
$ 82,831



Three months ended June 30, 2019 and 2020
	Common Stock			Additional Paid-In Capital		Retained Earnings			Total
	Shares	Par Value		Additional Paid-In Capital		Retained Earnings			Total
Balance March 31, 2019	33,891	$	34	$	54,182	$	28,615		$	82,831
Options exercised for cash	11	—		48		—			48
Stock based compensation	—	—		856		—			856
Shares issued on net settlement of stock options	17	—		—		—			—
Net loss	—	—		—		(4,295		)	(4,295		)
Balance June 30, 2019	33,919	34		$	55,086	$	24,320		$	79,440

Balance March 31, 2020	34,184	$	34	$	57,829	$	12,566		$	70,429
Stock based compensation	—	—		1,097		—			1,097
Shares issued on net settlement of stock options	18	—		—		—			—
Net Loss	—	—		—		(4,690		)	(4,690		)
Balance June 30, 2020	34,202	$	34	$	58,926	$	7,876		$	66,836

Six months ended June 30, 2019 and 2020
	Common Stock			Additional Paid-In Capital		Retained Earnings			Total
	Shares	Par Value		Additional Paid-In Capital		Retained Earnings			Total
Balance December 31, 2018	33,705	$	34	$	52,920	$	34,223		$	87,177
Options exercised for cash	29	—		115		—			115
Stock based compensation	—	—		2,051		—			2,051
Shares issued on net settlement of stock options	185	—		—		—			—
Net loss	—	—		—		(9,903		)	(9,903		)
Balance June 30, 2019	33,919	$	34	$	55,086	$	24,320		$	79,440

Balance December 31, 2019	34,170	$	34	$	56,708	$	14,517		$	71,259
Options exercised for cash	10	—		72		—			72
Stock based compensation	—	—		2,146		—			2,146
Shares issued on net settlement of stock options	22	—		—		—			—
Net loss	—	—		—		(6,641		)	(6,641		)
Balance June 30, 2020	34,202	$	34	$	58,926	$	7,876		$	66,836

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

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APYX MEDICAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands, Unaudited)


	Three Months Ended March 31,						Six Months Ended June 30,
	2019 as Restated			2018			2020			2019
Cash flows from operating activities
Net loss	$	(5,608	)	$	(935	)	$	(6,641	)	$	(9,903	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	194			199			439			316
Provision for inventory obsolescence	41			(47		)	413			36
Stock based compensation	1,195			372			2,146			2,051
Change in fair value of derivative liabilities	—			26
Unrealized gain on short term investments	(164		)	—			—			(164		)
Provision (benefit) for allowance for doubtful accounts	(238		)	(9		)	486			(238		)
Changes in current assets and liabilities:
Changes in operating assets and liabilities:
Trade receivables	349			(277		)	1,195			(1,333		)
Prepaid expenses	(265		)	(26		)
Prepaid expenses and other assets							(7,427		)	(879		)
Inventories	(342		)	(136		)	(571		)	(1,015		)
Deposits and other assets	(346		)	4
Accounts payable	81			514			(232		)	218
Accrued severance and related	(99		)	—
Accrued expenses and other liabilities	113			(793		)
Accrued and other liabilities							(2,241		)	236
Net cash used in operating activities	(5,089		)	(1,108		)	(12,433		)	(10,675		)
Cash flows from investing activities
Purchases of property and equipment	(117		)	(139		)	(184		)	(518		)
Purchases of marketable securities	(18,884		)	—			—			(18,884		)
Proceeds of marketable securities	39,842			—
Net cash provided by (used in) investing activities	20,841			(139		)
Proceeds from maturities of marketable securities							—			80,726
Net cash (used in) provided by investing activities							(184		)	61,324
Cash flows from financing activities
Proceeds from stock options exercised	67			—
Repayment of mortgage note payable	—			(60		)
Net cash provided by (used in) financing activities	67			(60		)
Proceeds from stock option exercises							72			115
Repayment of finance lease liabilities							(120		)	—
Net cash (used in) provided by financing activities							(48		)	115
Effect of exchange rates on cash							9			—
Net change in cash, cash equivalents and restricted cash	15,819			(1,307		)	(12,656		)	50,764
Cash, cash equivalents and restricted cash, beginning of period	16,596			10,668			58,812			16,596
Cash, cash equivalents and restricted cash, end of period	$	32,415		$	9,361		$	46,156		$	67,360

Cash paid for:
Interest expense	$	—		34
Interest							$	8		$	14
Taxes							54			248

Non cash investing activities:
Cashless exercise of stock options/warrants	$	710		$	—
Capitalization of Lease	178			—
Non cash activities:
Cashless exercise of stock options							$	49		$	757
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							150			—
Transfer of other assets to fixed assets							—			42
Transfer of inventory (to) from fixed assets							(34		)	262

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

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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,” “Apyx,” ~~"Company"~~ and similar terms refer to Apyx Medical Corporation and its consolidated subsidiaries.

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

~~On August 30, 2018,~~In March 2020, the World Health Organization recognized the novel strain of coronavirus ("COVID-19"), as a pandemic. This pandemic has severely restricted the level of economic activity around the world. In response, the governments of many countries, states, cities and other geographic regions have taken preventative or protective actions, such as imposing restrictions on travel and business operations and advising or requiring individuals to limit or forego their time outside of their homes. The long-term impact of the COVID-19 pandemic on our business continues to be highly uncertain and difficult to predict as the environment created by the pandemic is rapidly changing. Starting in late February, the effects of the pandemic have been material and adverse on our business. While we ~~closed~~experienced positive indications in our business late in the second quarter, we continue to expect that the severity of the impact of the COVID-19 pandemic on our business will depend on a ~~definitive asset purchase agreement with Specialty Surgical Instrumentation Inc.,~~number of factors, including, but not limited to, the duration and severity of the pandemic and the extent and severity of the impact on our customers and suppliers, all of which are uncertain and cannot be predicted.

Most of the procedures performed using our Helium Plasma Technology are elective, and as a ~~Tennessee Corporation~~result many of our customers have been affected by the actions taken by various governmental authorities requiring non-essential businesses to shut down temporarily. As these shut-downs have begun to be reversed, we have started to see an increase in demand for elective cosmetic and ~~wholly-owned subsidiary~~plastic surgery procedures, resulting in higher than expected revenues in our Advanced Energy segment. In international markets, a greater portion of ~~Symmetry Surgical Inc. (“Symmetry”), pursuant~~these procedures are performed in a hospital, and it is less certain when elective procedures will fully return to normal.. While we started to experience a significant decline in sales towards the end of our first fiscal quarter, we began to see an increase in sales towards the end of our second fiscal quarter as local jurisdictions started to re-open. However, the full extent to which the COVID-19 pandemic may materially and adversely impact the Company's future financial position, liquidity, or results of operations remains uncertain. While we ~~divested~~began to experience an improvement in sales, domestically and ~~sold our electrosurgical "Core" business segment and related intellectual property, including~~internationally, towards the ~~Bovie® brand and trademarks, to Symmetry for gross proceeds of $97 million in cash. The divestiture and sale~~end of our ~~Core business segment to Symmetry allows us to further focus on our strategic objective of commercializing our J-Plasma technology, including~~second fiscal quarter, the ~~RenuvionTM brand in~~pace at which this continues into the ~~cosmetic surgery market. We also entered into with Symmetry a transition services agreement, a Patent Licensing Agreement, a Disposables Supply Agreement,~~third quarter 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. For the three months ended March 31, 2018, the Core sales amounted to $6.5 million with cost of sales of $3.7 million and related operating expenses of $0.9 million, which are included in income from discontinued operations on the Consolidated Statement of Operations.beyond is still highly uncertain.

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 March 31, 2019, Core sales following the divestiture amounted to $2.2 million with cost of sales of $2.1 million and related operating expenses of $0.1 million, which are included in other losses on the Consolidated Statement 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.~~

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, ~~2018.~~2019. 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. RESTATEMENT~~

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

~~As identified during preparation of the fiscal year 2019 Form 10-K:~~

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APYX MEDICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

~~The Company reevaluated its subsidiary consolidation process and discovered an inaccuracy in its accounting for~~

NOTE 2. CHANGE IN ACCOUNTING POLICY

During 2019, we began granting stock option awards deeper within the elimination of markup on intercompany sales. This resulted in the Company incorrectly including the markup in US inventory purchased from Apyx Bulgaria and resulted in an overstatement of cost of sales and a corresponding understatement of other costs and expenses when the inventory was sold, which didorganization. We do not have ~~any impact on net income (loss) or financial position.~~


◦	~~For the three months ended March 31, 2019, the total impact included increases to both gross profit~~sufficient experience with grants to these employees and ~~to operating expenses of approximately $113,000.~~

During the first quarter of 2020, while reconciling the 2019 income tax provision back to the corresponding records, we determined that when employees exercised non-qualified stock options, we did not collect and remit the employee’s income and payroll taxes on the exercises and did not accrue and remit the employer portion of payroll taxes. Due to statutory requirements, we have joint and several liability on the amounts that we did not withhold from employees and remit to the proper taxing authorities. While further investigating the issue, we determined that during 2018 we did not report the correct amount of income to employees on their form W-2 for both non-qualified and incentive stock option exercises and misclassified some non-qualified stock option exercises as incentive stock option exercises.


◦	For the three months ended March 31, 2019, the total aggregated impact included an increase to operating expenses of $16,000, an increase of approximately $301,000 to other losses and an increase to net loss of approximately $317,000.

~~Other minor items primarily related to the appropriate cutoff of transactions~~experienced challenges in developing reliable forfeiture estimates at the ~~balance sheet date and~~grant date. Accounting for revising the ~~duplicate recording of a State income tax payment.~~


◦	~~For the three months ended March 31, 2019, the total aggregated impact included a decrease to operating loss of $90,000 and an increase to net loss of $40,000.~~

~~As previously disclosed and adjusted in Form 10-Q~~forfeiture estimates has been burdensome. Accounting Standards Codification 718, Compensation-Stock Compensation, prescribes two methods for ~~the three and nine months ended September 2019 filed on November 11, 2019:~~

The Company reevaluated its accounting for stock-based compensation expense and during the three months ended September 30, 2019, the Company discovered errors in its accounting for certain items included in stock-based compensation expense. These errors related to its accounting for forfeitures on stock option awards, either the ~~vesting periods over which~~estimation method utilized by the ~~expense~~Company previously, or by accounting for forfeitures as they occur. On January 1, 2020 we made an accounting policy election change and began accounting for forfeitures on stock option awards using actual forfeitures. This accounting policy election change was ~~recognized, modifications, fair value measurements, and other minor miscellaneous items, all of which relate~~made on a retrospective basis. However, the changes to the current and prior ~~year. Additionally, the Company identified an issue relating~~periods were determined to ~~grants in the first quarter of 2019, whereby compensation was not recognized over the correct vesting period.~~


◦	~~For the three months ended March 31, 2019, the total impact included increases to operating expenses, operating loss and net loss of approximately $453,000 each.~~

During the three months ended September 30, 2019, the Company reevaluated its accounting for pre-development activities on certain OEM contracts. In performing the review, the Company determined that the it has not completed its performance obligations on its pre-development activities in these contracts. Accordingly, the Company determined that it had prematurely recognized revenues during the first quarter relatingbe immaterial and there have been no changes to ~~these activities and did not defer the accompanying costs.~~


◦	For the three months ended March 31, 2019, the total impact included decreases to sales of approximately $194,000, decreases to operating expenses of approximately $77,000 and increases to both operating loss and net loss of approximately $117,000.

~~A reconciliation~~previously reported results as a result of the ~~originally reported amounts to the restated amounts for the adjustments noted above for each of the affected periods is presented below.~~

~~Table of Contents~~

~~APYX MEDICAL CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued~~

~~(Unaudited)~~

~~Consolidated Balance Sheet as of March 31, 2019:~~

(In thousands) As Originally Reported Adjustments As Restated
ASSETS
Current assets:
   Cash and cash equivalents $ 32,415
$ —
$ 32,415
   Short term investments 40,885
—
40,885
   Trade accounts receivable, net 4,931
38
4,969
   Inventories, net 5,598
—
5,598
   Prepaid expenses and other current assets 1,411
38
1,449
     Total current assets 85,240
76
85,316
Property and equipment, net 6,031
—
6,031
Intangibles 190
—
190
Deposits 80
—
80
Other assets 162
77
239
     Total assets $ 91,703
$ 153
$ 91,856

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
   Accounts payable $ 1,504
$ —
$ 1,504
   Accrued expenses and other liabilities 5,460
127
5,587
Joint and several payroll tax liability —
1,014
1,014
Accrued severance and related 511
—
511
     Total current liabilities 7,475
1,141
8,616
Related party note payable 140
—
140
Long-term portion of operating lease liabilities 75
—
75
Other long-term liabilities —
194
194
   Total liabilities 7,690
1,335
9,025
STOCKHOLDERS' EQUITY
Common stock, $0.001 par value; 75,000,000 shares authorized; 34,033,255 issued and 33,891,255 outstanding 34
—
34
Additional paid-in capital 53,147
1,035
54,182
Retained earnings 30,832
(2,217 ) 28,615
   Total stockholders’ equity 84,013
(1,182 ) 82,831
     Total liabilities and stockholders’ equity
$ 91,703
$ 153
$ 91,856

~~Table of Contents~~

~~APYX MEDICAL CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued~~

~~(Unaudited)~~

~~Consolidated Statement of Operations for the three months ended March 31, 2019:~~

(In thousands) As Originally Reported Adjustments As Restated
Sales $ 5,823
$ (194 ) $ 5,629
Cost of sales 2,103
(37 ) 2,066
Gross profit 3,720
(157 ) 3,563
Other costs and expenses:
Research and development 810
(80 ) 730
Professional services 1,791
327
2,118
Salaries and related costs 3,221
267
3,488
Selling, general and administrative 3,101
(144 ) 2,957
Total other costs and expenses 8,923
370
9,293
Loss from operations (5,203 ) (527 ) (5,730 )
Interest income 423
—
423
Other losses (25 ) (270 ) (295 )
Total other losses, net 398
(270 ) 128
Loss from continuing operations before income taxes (4,805 ) (797 ) (5,602 )
Income tax (benefit) expense (124 ) 130
6
Net loss $ (4,681 ) $ (927 ) $ (5,608 )

Loss per share
Basic and Diluted $ (0.14 ) $ (0.03 ) $ (0.17 )

Weighted average number of shares outstanding basic and diluted 33,343
33,343
33,343

change.

~~NOTE 3. INVENTORIES~~

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

~~Inventories consisted of the following:~~

(In thousands) March 31, 2019 as Restated December 31,
2018
Raw materials $ 5,032
$ 4,521
Finished goods 964
1,215
Gross inventories 5,996
5,736
Less: reserve for obsolescence (398 ) (439 )
Net inventories $ 5,598
$ 5,297

~~Table of Contents~~

~~APYX MEDICAL CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued~~

~~(Unaudited)~~

~~NOTE 4. INTANGIBLE ASSETS~~

~~Intangible assets consisted of the following:~~

(in thousands)
March 31, 2019
as Restated
December 31, 2018
Purchased technology (5-17 year lives) $ 1,447
$ 1,448
Less: accumulated amortization (1,442 ) (1,442 )
Purchased technology, net $ 5
$ 6

Goodwill $ 185
$ 185
Intangibles $ 190
$ 191

~~Intangible assets and goodwill are the result of our acquisition of Apyx (formerly known as Bovie) Bulgaria, EOOD in 2015.~~

NOTE 5.3. RECENT ACCOUNTING PRONOUNCEMENTS

~~ASU No. 2016-18,~~ ~~Restricted Cash Flows~~ ~~provides guidance on~~In June 2016, the ~~presentation~~Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments—Credit Losses (Topic 326). The update changes the impairment model for most financial assets and certain other instruments, including trade and other receivables, contract assets, held-to-maturity debt securities and loans, and requires entities to use a new forward-looking expected loss model that will result in the earlier recognition of restricted cash and restricted cash equivalents, which are now included with cash and cash equivalents when reconciling the beginning and ending cash amounts shown on the statements of cash flows. Using the retrospective transition method required under the standard, the Company has adjusted the presentation of its Condensed Consolidated Statements of Cash Flowsallowance for ~~all periods presented. The adoption of ASU No. 2016-18 did not have any other impact on the Company’s Consolidated Financial Statements.~~

~~ASU No. 2014-09 (ASC 606),~~ ~~Revenue from Contracts with Customers~~ ~~became~~losses. This update, as originally issued, was effective for usannual and interim periods beginning after December 15, 2019, with early adoption permitted. In November 2019, the ~~first quarter~~FASB issued ASU 2019-10, Financial Instruments - Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842) Effective Dates, which deferred the effective dates of ~~2018, and we adopted the new accounting standard using the modified retrospective transition approach.~~these standards for Smaller Reporting Companies until fiscal years beginning after December 15, 2022. The modified retrospective transition approach recognized any changes from the beginning of the year of initial application through retained earnings with no restatement of comparative periods. We record revenue under ASC 606 at a single point in time, when control is transferredCompany currently expects to ~~the customer, which is consistent with past practice. We will~~ continue to ~~apply our~~qualify as a Smaller Reporting Company, based upon the current ~~business processes, policies, systems~~SEC definition, and ~~controls to support recognition and disclosure under~~as a result, will be utilizing the ~~new standard. Based on~~deferred elective date. While we are in the ~~results~~process of determining the ~~evaluation, we have determined that~~effects of the adoption of the standard on the consolidated financial statements, we do not expect the impact to be material.

In January 2017, the FASB issued 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 ~~presents no material~~is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company adopted the ASU on January 1, 2020. The amendment did not have an impact on our consolidated financial ~~statements. Application~~condition or results 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 12 Geographic and Segment Information.operations.

In February 2016, the FASB issued Accounting Standards Update No. 2016-02 (ASU 2016-02), Leases (Topic 842), which became effective for us beginning with the first quarter of 2019. ASU 2016-02 requires a lessee to record a right-of-use asset and a corresponding lease liability, initially measured at the present value of the lease payments, on the balance sheet for all leases with terms longer than 12 months, as well as the disclosure of key information about leasing arrangements. This new standard requires recognition in the statement of operations of a single lease cost, calculated so that the cost of the lease is allocated over the lease term, generally on a straight-line basis, and classification of all cash payments within operating activities in the statement of cash flows. Disclosures are required to provide the amount, timing and uncertainty of cash flows arising from leases. In accordance with the standard, we took a modified retrospective transition approach and included the $178,000 right of use asset and corresponding liabilities in our property plant and equipment, accrued expenses and long term lease liability on the consolidated balance sheet. The lease is also represented in our consolidated statement of cash flows as a non cash investing activity.

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.

108

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APYX MEDICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

NOTE 4. INVENTORIES

Inventories are stated at the lower of cost or 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)	June 30, 2020			December 31, 2019
Raw materials	$	2,441		$	2,935
Work in process	1,504			1,209
Finished goods	1,997			1,316
Gross inventories	5,942			5,460
Less: provision for obsolescence	(685		)	(392		)
Inventories, net	$	5,257		$	5,068

During the second fiscal quarter, we reassessed our forecasted product mix due to COVID-19, increased availability of our newer handpiece designs and earlier than expected completion of product registrations in some of our foreign markets. As a result, certain products were reduced to a lower carrying value, and some components were also written off as it was determined to cease further production on these models. The total associated impairment was approximately $400,000 and is included in cost of sales in the accompanying consolidated statements of income for the three and six months ended June 30, 2020.

NOTE 5. ACCRUED EXPENSES AND OTHER CURRENT LIABILTIES

Accrued expenses and other current liabilities consisted of the following:



(in thousands)	June 30, 2020		December 31, 2019
Accrued payroll	726		694
Accrued bonuses	—		1,306
Accrued commissions	531		877
Accrued product warranties	439		452
Accrued insurance	626		1,170
Accrued professional fees	1,043		1,383
Joint and several payroll liability	1,045		1,045
Uncertain tax positions	1,573		1,491
Other accrued expenses and current liabilities	928		978
Total accrued expenses and other current liabilities	$	6,911	$	9,396

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APYX MEDICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

NOTE 6. EARNINGS PER SHARE

We compute basic earnings per share (“basic EPS”) by dividing the net income or loss by the weighted average number of common shares outstanding for the reporting ~~period.~~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. As we are in a net loss position for all periods presented, all potential shares outstanding are anti-dilutive. The following table provides the computation of basic and diluted earnings per share.



	Three Months Ended June 30,						Six Months Ended June 30,
(in thousands, except per share data)	2020			2019			2020			2019
Numerator:
Net loss	$	(4,690	)	$	(4,295	)	$	(6,641	)	$	(9,903	)

Denominator:
Weighted average shares outstanding - basic and diluted	34,186			33,384			34,181			33,363

Earnings (loss) per share:
Basic and diluted	$	(0.14	)	$	(0.13	)	$	(0.19	)	$	(0.30	)

Anti-dilutive instruments excluded from diluted loss per common share:
Options	4,986			1,882			4,986			1,882

Three Months Ended
March 31,
(in thousands, except per share data) 2019 as Restated 2018
Numerator:
Net (loss) from continuing operations $ (5,608 ) $ (2,791 )
Numerator for diluted (loss) per common share - continuing operations (5,608 ) (2,791 )

Net income from discontinued operations, net of tax —
1,856
Numerator for diluted income per share - discontinued operations —
1,856

Net (loss) from all operations (5,608 ) (935 )
Numerator for full diluted (loss) per share - all (5,608 ) (935 )

Denominator - continuing operations
Weighted average shares used to compute basic (loss) 33,343
32,878
Denominator for diluted (loss) per common share 33,343
32,878

Denominator - discontinued operations:
Weighted average shares used to compute basic (loss) —
32,878
Denominator for diluted (loss) per common share - discontinued operations —
32,878

Denominator - all operations:
Weighted average shares used to compute basic (loss) 33,343
32,878
Denominator for diluted (loss) per common share - all operations 33,343
32,878

Loss per share from continuing operations:
Basic and diluted $ (0.17 ) $ (0.08 )

Income per share from discontinued operations
Basic and diluted $ —
$ 0.05

Loss per share from all operations
Basic and diluted $ (0.17 ) $ (0.03 )

Anti-dilutive instruments excluded from diluted loss per common share:
Warrants —
3
Options 1,908
470

1110

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APYX MEDICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

NOTE 7. 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 utilizing a trinomial lattice model through 2018 and the Black Scholes model for grants in 2019 and 2020, both of which ~~includes~~include a number of estimates that affect the amount of our expense.

We ~~expensed~~recognized approximately ~~$1,195,000~~$1,097,000 and $2,146,000, respectively, in stock-based compensation expense during the three and six months ended ~~March 31, 2019,~~June 30, 2020, as compared with ~~$372,000~~$856,000 and $2,051,000, respectively, for the three and six months ended ~~March 31, 2018.~~June 30, 2019.

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



	Number of options		Weighted average exercise price
Outstanding at December 31, 2019	3,966,858		$	4.67
Granted	1,274,900		8.18
Exercised	(44,381	)	3.23
Canceled and forfeited	(211,433	)	7.51
Outstanding at June 30, 2020	4,985,944		$	5.46

Number of options - as Restated Weighted average exercise price - as Restated
Outstanding at December 31, 2018 3,254,799
$ 3.18
Granted 1,277,500
7.73
Exercised (270,549 ) 2.87
Canceled and forfeited (10,500 ) 2.10
Outstanding at March 31, 2019 4,251,250
$ 4.57

We allow stock option holders 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 June 30, 2020 and 2019, respectively, we received 11,085 and 7,779 options as payment in the exercise of 17,665 and 17,221 options. For the six months ended June 30, 2020 and 2019, respectively, we received 13,009 and 91,598 options as payment in the exercise of 22,027 and 185,951 options.

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



	2020 Grants
Option value	$8.18
Risk-free rate	1.7%
Expected dividend yield	—
Expected volatility	65.9%
Expected term (in years)	6

2019 Grants
Option value $ 7.15
- $ 7.91
Risk-free rate 2.6% - 2.6 %
Expected dividend yield —
Expected volatility 69.1% - 69.1 %
Expected term (in years) 6

NOTE 8. INCOME TAXES

On March 27, 2020, the U.S. government enacted the CARES Act to provide relief from COVID-19. The ~~Company’s~~CARES Act includes a provision that allows companies to carryback net operating losses (NOL’s) generated in the period 2018 through 2020 to prior years. In conjunction with the disposition of the Core business in 2018, we generated a significant amount of taxable income in 2018. Subsequent to this, we generated net losses in 2019 and through the first half of 2020. For the net losses generated in 2019, we previously recorded a valuation allowance on the full value of the deferred tax assets associated with our NOL carryforwards due to realization of the NOL being improbable under then existing tax law. The CARES Act makes these assets realizable, and as of the date of the CARES Act, we have recognized an income tax benefit of approximately $3.7 million associated with the release of the valuation allowance on our Federal NOL carryforward related to 2019. We also recognized income tax benefits of

Table of Contents

APYX MEDICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

approximately $1.5 million and $1.2 million, related to our net loss before income taxes for the three and six months ended June 30, 2020, respectively. There are approximately an additional $3.2 million of 2018 Federal income tax payments available to offset against any other 2020 losses that may be incurred.

Our income tax (benefit) expense was ~~$6,000~~approximately $(1,492,000) and $76,000 with an effective tax rate of ~~-0.1%~~24.1% and (1.8)% for the three months ended ~~March 31,~~June 30, 2020 and 2019, ~~as compared to an~~respectively. Our income tax (benefit) expense ~~of $11,000,~~was approximately $(6,397,000) and $82,000 with an effective tax rate of ~~-0.4%,~~49.1% and (0.8)% for the ~~three~~six months ended ~~March 31, 2018.~~June 30, 2020 and 2019, respectively. The effective rate differs from the statutory rate primarily due to athe release of the valuation allowance on our net operating loss ~~carry forward and foreign taxes of $6,000.~~carryforward from 2019.

The following is a roll-forward of the Company's total gross unrecognized tax benefits, not including interest and penalties, for the period ended ~~March 31, 2019.~~June 30, 2020.



(in thousands)	Gross Unrealized Tax Benefits
Balance at January 1, 2020	$	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 June 30, 2020	$	1,313

(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 March 31, 2019 $ 1,313

We recognize accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes in our condensed consolidated financial statements. As of June 30, 2020, we had approximately $260,000 in accrued interest and penalties related to unrecognized tax benefits. Included in the income tax benefit for the three months and six ended June 30, 2020, respectively are approximately $43,000 and $82,000 of interest and penalties on the Company's uncertain tax positions. If the Company were to prevail on all uncertain tax positions, the resulting impact will be material as the Company will recognize approximately $1,573,000 of tax benefits in the provision of income taxes. It is expected that all of the uncertain tax positions should be resolved by October 2022.

~~Table of Contents~~

~~APYX MEDICAL CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued~~

~~(Unaudited)~~

NOTE 9. COMMITMENTS AND CONTINGENCIES

~~Property and Rental Agreements~~

In October 2015, pursuant to our acquisition of Apyx Bulgaria, we became obligated to make lease payments of approximately $9,000 per month for approximately 20,000 square feet of office, research and manufacturing space in Sofia, Bulgaria. This lease expires in December 2020.

~~The following is a schedule of approximate future minimum lease payments under operating leases as of March 31, 2019:~~

(In thousands)
2019 (remaining 9 months)
$ 80
2020 107
Total $ 187

~~On August 30, 2018, we paid the remaining mortgage balance of $2.5 million on the Clearwater facility, 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 may 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~~Helium Plasma technology. The outcomes of these legal actions are not within our complete control and may not be known for prolonged periods of time. 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.

~~In addition, as previously disclosed with the Commission on Form 8-K filed April 26, 2019, we have learned that on~~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.~~Directors, alleging certain violations of the Securities Exchange Act of 1934, as amended. On July 16, 2019, the Court appointed lead plaintiff for the putative class and approved the lead plaintiff’s selection of counsel. On September 3, 2019, lead plaintiff filed an amended complaint (the “Amended Complaint”) with the Court.

Table of Contents

APYX MEDICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

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. On October 3, 2019, defendants filed a motion to dismiss the Amended Complaint, and on March 11, 2020, the Court denied that motion. On July 10, 2020, the parties executed a settlement agreement, which is subject to Court approval. The ~~Complaint seeks an unspecified amount~~Court preliminarily approved the settlement on July 21, 2020. The settlement agreement provides for the dismissal of ~~damages.~~

~~Although~~ the ~~ultimate outcome~~action with prejudice. At June 30, 2020, approximately $670,000 of ~~this matter cannot be determined with certainty,~~ the ~~Company believes that the allegations stated~~$1,000,000 insurance deductible is unpaid and is included in accrued expenses and other current liabilities in the ~~Complaint are entirely without merit. The Company and Goodwin intend to defend themselves vigorously in~~accompanying consolidated balance sheets. During July 2020, substantially all of the suit. 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 theunpaid deductible ~~portion of our insurance coverage, we have accrued $0.5 million for initial defense costs.~~was paid.

~~In accordance with authoritative guidance, we~~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 June 30, 2020, we had purchase commitments totaling approximately $500,000 substantially all of which is expected to be purchased within the next six months.

China Joint Venture

In late 2019, we executed a joint venture agreement with our Chinese supplier. The agreement requires the Company to make a capital contribution into the newly formed entity of approximately $360,000. During July 2020, we funded approximately $150,000 of the commitment. As of the date of these consolidated financial statements, the joint venture has not commenced principal operations.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

~~Purchase Commitments~~

~~At March 31, 2019, we had purchase commitments for inventories totaling approximately $5.8 million, substantially all of which is expected to be purchased by the end of 2019.~~

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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~~APYX MEDICAL CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued~~

~~(Unaudited)~~

NOTE 10. RELATED PARTY TRANSACTIONS

Several relatives of Nikolay Shilev, 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 of Production and 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.

The partner in our China joint venture is also a supplier of the Company. During the six months ended June 30, 2020, we made purchases from this supplier of approximately $850,000. At June 30, 2020, we owed this supplier approximately $4,000.

~~NOTE 11. FINANCIAL INSTRUMENTS~~

~~Cash, Cash Equivalents and Marketable Securities at March 31, 2019:~~

(In thousands) Adjusted Cost Unrealized Gains
Fair Value⁽³⁾

Cash and Cash Equivalents ⁽¹⁾
Short-term Marketable Securities
Cash $ 3,802
$ —
$ 3,802
$ 3,802
$ —

Level 1 ⁽²⁾

U.S. Treasury Securities, maturities less than three months 28,613
—
28,613
28,613
—
U.S. Treasury Securities, maturities greater than three months 40,721
164
40,885
—
40,885
Total $ 73,136
$ 164
$ 73,300
$ 32,415
$ 40,885

~~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
Cash $ 6,467
$ —
$ 6,467
$ 6,467
$ —

Level 1 ⁽²⁾

U.S. Treasury Securities, maturities less than three months 10,129
—
10,129
10,129
—
U.S. Treasury Securities, maturities greater than three months 61,431
247
61,678
—
61,678
Total $ 78,027
$ 247
$ 78,274
$ 16,596
$ 61,678

⁽¹⁾~~The 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.

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~~APYX MEDICAL CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued~~

~~(Unaudited)~~

NOTE ~~12.~~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. Asset information is not reviewed by the chief operating decision maker by segment and is not available by segment, accordingly, we have not presented a measure of assets by segment.

Our reportable segments are disclosed as principally organized and managed as~~two~~ 2 operating segments: Advanced Energy and OEM. "Corporate & 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

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



	Three Months Ended June 30, 2020
(In thousands)	Advanced Energy			OEM		Corporate & Other			Total
Sales	$	2,867		$	1,429	$	—		$	4,296

Income (loss) from operations	(3,292		)	584		(3,459		)	(6,167		)

Interest income	—			—		7			7
Interest expense	—			—		(8		)	(8		)
Other losses, net	—			—		(14		)	(14		)
Income tax benefit	—			—		(1,492		)	(1,492		)


	Three Months Ended March 31, 2019 - as Restated							Three Months Ended June 30, 2019
(In thousands)	Advanced Energy		OEM	Corporate & Other		Total		Advanced Energy			OEM		Corporate & Other			Total
Sales	4,371		1,258	—		5,629		$	5,350		$	1,299	$	—		$	6,649

Net income (loss) from continuing operations	(3,328	)	591	(2,993	)	(5,730	)
Income (loss) from operations								(968		)	136		(3,590		)	(4,422		)

Interest income	—		—	423		423		—			—		403			403
Other losses	—		—	(295	)	(295	)
Other losses, net								—			—		(200		)	(200		)
Income tax expense	—		—	6		6		—			—		76			76


	Three Months Ended March 31, 2018							Six Months Ended June 30, 2020
(In thousands)	Advanced Energy		OEM	Corporate & Other		Total		Advanced Energy			OEM		Corporate & Other			Total
Sales	2,629		768	—		3,397		$	6,853		$	2,440	$	—		$	9,293

Net income (loss) from continuing operations	(578	)	406	(2,548	)	(2,720	)
Income (loss) from operations								(7,276		)	831		(7,214		)	(13,659		)

Interest income								—			—		223			223
Interest expense	—		—	(34	)	(34	)	—			—		(14		)	(14		)
Change in value of derivative liabilities	—		—	(26	)	(26	)
Income tax expense	—		—	11		11
Other income, net								—			—		412			412
Income tax benefit								—			—		(6,397		)	(6,397		)

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)



	Six Months Ended June 30, 2019
(In thousands)	Advanced Energy			OEM		Corporate & Other			Total
Sales	$	9,721		$	2,557	$	—		$	12,278

Income (loss) from operations	(4,296		)	727		(6,583		)	(10,152		)

Interest income	—			—		826			826
Other losses, net	—			—		(495		)	(495		)
Income tax expense	—			—		82			82

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

International sales represented approximately ~~30.5%~~21.0% and 24.6% of total revenues for the three and six months ended ~~March 31, 2019,~~June 30, 2020, respectively, as compared with ~~18.8%~~31.7% and 31.2% of total revenues for ~~three months ended March 31, 2018.~~ the 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 June 30,				Six Months Ended June 30,
(In thousands)	2020		2019		2020		2019
Sales by Domestic and International
Domestic	$	3,393	$	4,540	$	7,011	$	8,450
International	903		2,109		2,282		3,828
Total	$	4,296	$	6,649	$	9,293	$	12,278

1617

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

Three Months Ended
March 31,
(In thousands) 2019 2018
Sales by Domestic and International
Domestic $ 3,910
$ 2,758
International 1,719
639
Total $ 5,629
$ 3,397

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~~APYX MEDICAL CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued~~

~~(Unaudited)~~

~~NOTE 13. JOINT AND SEVERAL PAYROLL LIABILITY~~

As discussed in the Restatement Note (2), the Company did not report the correct amount of income to employees, nor did we collect and remit the employees' portion of income and payroll taxes, related to stock option exercises as required by the IRS. Due to IRS statutory requirements, we have joint and several liability for the full amount that was not withheld and remitted to the proper taxing authorities. This amount of the liability was approximately $1.0 million and $0.7 million at March 31, 2019 and December 31, 2018 respectively. The Company has recognized these amounts in other losses in the accompanying Consolidated Statements of Operations. If we can establish that our employees have in fact paid these obligations, either presently or in the future, we will be relieved of our liability.

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

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

As discussed in our Annual Report on Form 10-K for the year ended December 31, 2019, an outbreak of a novel strain of the coronavirus, COVID-19, was identified in China and has subsequently been recognized as a pandemic by the World Health Organization. The COVID-19 outbreak has severely restricted the level of economic activity around the world. In response to the COVID-19 outbreak the governments of many countries, states, cities and other geographic regions have taken preventative or protective actions, such as imposing restrictions on travel and business operations and advising or requiring individuals to limit or forego their time outside of their homes. Temporary closures of businesses have been ordered and numerous other businesses have temporarily closed voluntarily. As of the date of this filing, there are strong indications that these actions are beginning to subside as governmental bodies begin to loosen restrictions. However, given the variability in measures taken, the uncertainty among any potential resurgence of COVID-19, and patients willingness to undergo elective procedures, the related financial impact cannot be reasonably estimated at this time. As a result, there could continue to be significant adverse impacts to the results of our operations into the third fiscal quarter and possibly beyond.

Prior to the spread of COVID-19 into the US and international markets, we experienced positive year-over-year growth trends in the sale of our capital and disposable products, indicating increased utilization of our technology. Beginning in late February we began to see declines in the sale of our Helium Plasma Technology in European markets. These declines continued and also spread to the North and Latin American markets in March. Towards the end of the second quarter, we began to see improved demand for our products, primarily in the US market, however the extent of this improvement remains uncertain.

We source the components used in our products from a variety of suppliers and we have collaborative arrangements with three key foreign suppliers. At this time our suppliers have experienced no significant disruptions as a result of COVID-19. We have experienced minor delays in our procurement from these suppliers as a result of the availability of shipping from third party freight carriers. These delays have not, to date, had a significant impact on our operations.

In response to COVID-19, we have taken action in these key areas:

Protecting the Health and Safety of our Employees: To reduce the risk to our employees and their families to potential

exposure to COVID-19, we have required that all non-essential employees work remotely until further notice. We have also split the shifts of our manufacturing personnel to allow for adequate social distancing, and require all personnel to utilize personal protective equipment while on site at our facilities. We have also significantly reduced business travel and access to our facilities.

Maintaining Engagement of or Sales Team and Our Customers: In addition to the initiatives we have put in place to protect health and safety for all employees, we have focused our direct sales team on remaining in close contact with their existing surgeon customers to do everything they can to provide them with support during this difficult time. With

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APYX MEDICAL CORPORATION

MANAGEMENT'S DISCUSSION AND ANAYLSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued

this goal in mind, we have implemented additional training for our sales reps in order to sharpen their ability to engage with our customers virtually. In addition to engaging with existing customers via virtual methods, our reps also continue to target and reach out to prospective accounts so that they will be well-positioned when the recovery occurs and surgeons return to conducting elective cosmetic procedures. Outside the U.S., we are closely monitoring the activities of our distributor partners and helping them navigate the challenges they face as a result of the slower demand they are seeing in their respective countries.

Operating Expenses: We continue to take preemptive steps to curtail spending, including implementing hiring restrictions,

reducing most discretionary spending, reducing capital expenditures, and delaying certain R&D projects and clinical research studies.

Governmental Policy: On March 27, 2020, the U.S. government enacted the CARES Act to provide relief from COVID-19. We continue to take advantage of certain provisions of the CARES Act which are applicable to us including utilizing NOL carryback provisions and the deferral of payroll taxes. We expect that utilizing these provisions will significantly help mitigate the working capital impact COVID-19 has had on our sales and operations.

During ~~2019,~~2020, we ~~will~~ continue to drive sales in our ~~full-scale commercialization efforts for Renuvion.~~Advanced Energy business by increasing the adoption and utilization of our generators and handpieces in the U.S. cosmetic surgery market and fulfilling demand from distributors in our international markets. Management estimates that our products have been sold in more than 50 countries. As of ~~March 31, 2019,~~June 30, 2020, we had a direct sales force of 2831 field-based selling professionals and a network of 74 independent sales ~~agencies. We also had 4~~agencies, led by 5 sales managers. This selling organization is focused on the use of ~~Renuvion~~Renuvion® in the cosmetic surgery market. In addition, we have invested in training programs and marketing-related activities to support accelerated adoption of ~~Renuvion.~~Renuvion®.

~~International~~During the first two months of 2020, our plans to host new Physician Mentor Programs, or “PMPs,” and expand our presence and educational programming at industry conferences and trade shows proceeded as expected. Our events planned for March, however, were canceled due to COVID-19. In lieu of this in-person programming, our sales, ~~represented approximately 29.5%~~marketing and ~~18.8% of total revenues in the three months ended March 31, 2019 and 2018, respectively. Management estimates our products~~field clinical teams have been ~~sold~~very active in ~~more than 40 countries through local dealers coordinated by sales~~engaging with our customers - and ~~marketing personnel at~~prospects - around the ~~Clearwater, Florida facility.~~

~~As previously disclosed with the Commission on Form 8-K filed on April 4, 2019,~~world. We have hosted educational events virtually where we ~~announced on April 1, 2019, that we voluntarily withdrew our application for premarket notification 510(k) regulatory clearance~~featured some of our ~~J-Plasma/Renuvion technology~~leading clinician customers speaking on a wide range of topics, including side-by-side results comparing Renuvion® to a leading competitor technology.

Our virtual educational events have also included case studies to illustrate how our leading clinician customers have adopted Renuvion®, their strategies for ~~use in dermal resurfacing procedures (see Note 9). While this is~~marketing and selling to new patients, and their thoughts on pricing and return on investment. We recently hosted the first installment of a ~~delay in~~planned series of webinars designed to assist our ~~commercialization efforts, we remain committed to working~~customers and prospects with opening their practices post-COVID 19. We also engaged with clinician customers outside the U.S. ~~Food~~including hosting multiple continuing education training sessions on J-Plasma® and ~~Drug Administration relative to the development~~Renuvion® with our current international distributors and conducting multiple calls with groups of ~~a new 510(k) submission.~~international prospects interested in learning about our Renuvion® technology.

On August 30, 2018, we closed on a 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 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^TM brand in the cosmetic surgery market. We also entered into with Symmetry a transition services agreement, 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.

In connection with the Asset Purchase Agreement, we 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.

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~~APYX MEDICAL CORPORATION~~

~~MANAGEMENT'S DISCUSSION AND ANAYLSIS OF~~

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

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

Our reportable segments are disclosed as principally organized and managed as two operating segments: Advanced Energy and OEM. "Corporate & Other" includes certain unallocated corporate and administrative costs which ~~are~~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.

~~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.apyxmedical.com to view the most current news and to review our filings with the Securities and Exchange Commission.

Results of Operations

Sales

Three Months Ended
March 31,
(In thousands) 2019 as Restated 2018 Change
Sales by Reportable Segment
Advanced Energy 4,371
2,629
66.3 %
OEM 1,258
768
63.8 %
Total $ 5,629
$ 3,397
65.7 %

Sales by Domestic and International
Domestic 3,910
2,758
41.8 %
International 1,719
639
169.0 %
Total $ 5,629
$ 3,397
65.7 %

Total revenue from continuing operations for first quarter 2019 increased $2.2 million, or 65.7%, to $5.6 million, compared to $3.4 million in the first quarter of 2018. Sales of the Company’s Advanced Energy generators and handpieces drove the increase in total revenue in first quarter 2019, with OEM segment sales contributing modestly to the year-over-year increase in total revenue from continuing operations during the first quarter 2019 period. Advanced Energy segment sales increased approximately $1.7 million, or 66.3% year-over-year, to $4.4 million, compared to approximately $2.6 million last year. OEM segment sales increased $0.5 million, or 63.8% year-over-year, to $1.3 million, compared to $0.8 million last year.

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MANAGEMENT'S DISCUSSION AND ANAYLSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued



	Three Months Ended June 30,						Six Months Ended June 30,
(In thousands)	2020		2019		Change		2020		2019		Change
Sales by Reportable Segment
Advanced Energy	$	2,867	$	5,350	(46.4	)%	$	6,853	$	9,721	(29.5	)%
OEM	1,429		1,299		10.0	%	2,440		2,557		(4.6	)%
Total	$	4,296	$	6,649	(35.4	)%	$	9,293	$	12,278	(24.3	)%
									(632,000)
Sales by Domestic and International
Domestic	$	3,393	$	4,540	(25.3	)%	$	7,011	$	8,450	(17.0	)%
International	903		2,109		(57.2	)%	2,282		3,828		(40.4	)%
Total	$	4,296	$	6,649	(35.4	)%	$	9,293	$	12,278	(24.3	)%

Total revenue decreased by (35.4)% and (24.3)%, or approximately $(2.4) million and $(3.0) million, for the three and six months ended June 30, 2020 when compared with the three and six months ended June 30, 2019. Advanced Energy segment sales decreased (46.4)% and (29.5)%, or approximately $(2.5) million and $(2.9) million, for the three and six months ended June 30, 2020 when compared with the three and six months ended June 30, 2019. The impact of COVID-19 resulted in decreased demand for our products, both domestically and internationally in the first half of 2020 as many of our customers' businesses were ordered closed and numerous others temporarily closed voluntarily. Sales began to recover late in the second quarter as many of our customers resumed operations in a limited capacity.

International sales represented approximately 21.0% and 24.6% of total revenues for the three and six months ended June 30, 2020, respectively, as compared with 31.7% and 31.2% of total revenues for the same prior year period. Management estimates our products have been sold in more than 50 countries through local dealers coordinated by sales and marketing personnel through our facilities in Clearwater, Florida and Sofia, Bulgaria.

Gross Profit


	Three Months Ended March 31,								Three Months Ended June 30,								Six Months Ended June 30,
(In thousands)	2019 as Restated			2018			Change		2020			2019			Change		2020			2019			Change
Cost of sales	$	2,066		$	1,185		74.3	%	$	2,202		$	1,975		11.5	%	$	4,215		$	4,041		4.3	%
Percentage of sales	36.7		%	34.9		%			51.3		%	29.7		%			45.4		%	32.9		%


Gross profit	$	3,563		$	2,212		61.1	%	$	2,094		$	4,674		(55.2	)%	$	5,078		$	8,237		(38.4	)%
Percentage of sales	63.3		%	65.1		%			48.7		%	70.3		%			54.6		%	67.1		%	(12.5	)%

Gross profit for the ~~first quarter of 2019 increased approximately $1.4 million, or 61.1%~~three months ended June 30, 2020, decreased (55.2)% year-over-year, to ~~$3.6~~$2.1 million, compared to ~~$2.2~~$4.7 million for first quarter of 2018. Gross margin for the first quarter of 2019 was 63.3%, compared to 65.1% last year. The primary drivers of the decrease in gross profit margin were Advanced Energy product mix and Advanced Energy sales outside the U.S., which represented a higher mix of total sales in the first quarter of 2019 compared to last year. OEM gross margins were lower in the first quarter of 2019 when compared to the prior year period, driven primarily by revenue related to our new Product, Manufacturing, and Supply agreements with Symmetry, which did not contribute to revenue results in the prior ~~period.~~

~~Other Costs and Expenses~~

~~Research and development~~

Three Months Ended
March 31,
(In thousands) 2019 as Restated 2018 Change
Research and Development expense $ 730
$ 514
42.0 %
Percentage of sales 13.0 % 15.1 %

~~Spending on Research and development increased 42.0%~~year. Gross margin for the three months ended ~~March 31, 2019, primarily~~June 30, 2020, was 48.7%, compared to 70.3% for the same period in 2019. Gross profit for the six months ended June 30, 2020, decreased (38.4)% year-over-year, to $5.1 million, compared to $8.2 million in the prior year. Gross margin for the six months ended June 30, 2020, was 54.6%, compared to 67.1% for the same period in 2019.

During the second fiscal quarter, we reassessed our forecasted product mix due to ~~focused spending~~COVID-19, increased availability of our newer handpiece designs, and earlier than expected completion of product registrations in some of our foreign markets. As a result, certain products were reduced to a lower carrying value, and some components were also written off as it was determined to cease further production on ~~clinical studies~~these models. This resulted in a decrease in gross profit of approximately $0.4 million during the three and ~~research projects related to the cosmetic surgery market.~~

~~Professional services~~

Three Months Ended
March 31,
(In thousands) 2019 as Restated 2018 Change
Professional services expense $ 2,118
$ 506
318.6 %
Percentage of sales 37.6 % 14.9 %

~~Professional services expense increased 318.6% for three~~six months ended ~~March 31, 2019, versus comparable periods~~June 30, 2020. The remaining change in ~~2018. The change was primarily attributable to expense increases for training-related physician consulting, medical advisory board stock option grants, marketing expenses, legal~~gross profit margins is driven by product mix within both our Advanced Energy and ~~audit fees.~~OEM segments, revenue mix between our segments, geographical revenue mix, and improved product margins in our Advanced Energy segment as a result of our continued manufacturing efficiency initiatives.

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MANAGEMENT'S DISCUSSION AND ANAYLSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued

Other Costs and Expenses

Our spending in the three and six months ended June 30, 2020 reflected normal business activities into February and March and then a curtailment of certain costs associated with the impact of COVID-19, including restrictions on travel. While certain spending decreased in the second quarter of 2020 as a result of a reduction in revenue and activities limited by COVID-19, some of our strategic spending will continue. For example, while we have restricted new hirings, we have no plans to reduce our headcount or furlough any employees at this time. Certain costs will decline as the related underlying activities are restricted by COVID-19, including travel, trade shows and related expenses, clinical trials and in-person physician training.

Research and development



	Three Months Ended June 30,								Six Months Ended June 30,
(In thousands)	2020			2019			Change		2020			2019			Change
Research and Development expense	$	975		$	888		9.8	%	$	1,955		$	1,618		20.8	%
Percentage of sales	22.7		%	13.4		%			21.0		%	13.2		%

Research and development expenses increased 9.8% and 20.8% for the three and six months ended June 30, 2020, respectively, primarily due to spending on our two IDE clinical studies, which had applications submitted to the FDA in late 2019.

Professional services



	Three Months Ended June 30,								Six Months Ended June 30,
(In thousands)	2020			2019			Change		2020			2019			Change
Professional services expense	$	1,658		$	1,661		(0.2	)%	$	4,047		$	3,779		7.1	%
Percentage of sales	38.6		%	25.0		%			43.5		%	30.8		%

Professional services expense decreased (0.2)% for the three months ended June 30, 2020, primarily attributable to decreases in physician consulting fees ($0.2 million) associated with the COVID-19 shutdown and a decrease in consulting option expense to our partner physicians ($0.3 million), as we did not grant options to our partner physicians in 2020. These decreases were partially offset by an increase in accounting and auditing fees ($0.4 million) related to recent financial statement restatements and continued efforts to remediate our internal control deficiencies and material weaknesses.

Professional services expense increased 7.1% for the six months ended June 30, 2020, primarily attributable to an increase in accounting and auditing fees ($0.7 million) related to recent financial statement restatements and continued efforts to remediate our internal control deficiencies and material weaknesses. This increase was partially offset by decreases in legal expense ($0.2 million) associated with the class action lawsuit accrual in the first quarter of 2019 and a decrease in consulting option expense to our partner physicians ($0.3 million), as we did not grant options to our partner physicians in 2020.

Salaries and related costs

Three Months Ended
March 31,
(In thousands) 2019 as Restated 2018 Change
Salaries and related expenses $ 3,448
$ 1,802
93.6 %
Percentage of sales 62.0 % 53.0 %

During the three months ended March 31, 2019, salaries and related expenses increased approximately 93.6%, compared to the prior year. The increase was primarily driven by an increase in employee stock option expense, increase in sales force, and reclassification of regulatory salaries from cost of goods sold.

~~Selling, general and administrative expenses~~


	Three Months Ended March 31,								Three Months Ended June 30,								Six Months Ended June 30,
(In thousands)	2019 as Restated			2018			Change		2020			2019			Change		2020			2019			Change
SG&A Expense	$	2,957		$	2,110		40.1	%
Salaries and related expenses									$	3,439		$	3,510		(2.0	)%	$	6,750		$	6,998		(3.5	)%
Percentage of sales	52.5		%	62.1		%			80.1		%	52.8		%			72.6		%	57.0		%

Selling, general and administrative expense increased by 40.1% for the three months ended March 31, 2019 when compared to 2018. The increase was primarily driven by sales commissions and product sample expense. These increases are offset by an adjustment to our bad debt reserve which had a change in calculation due to a shift in our customer base following the disposition of our Core business.

~~Other Income (Expense), net~~

Three Months Ended
March 31,
(In thousands) 2019 as Restated 2018 Change
Interest income $ 423
$ —
100.0 %
Percentage of sales 7.3 % — %
Interest expense $ —
$ (34 ) (100.0 )%
Percentage of sales — % 1.0 %
Other losses $ (295 ) $ —
100.0 %
Percentage of sales (5.2 )% — %
Change in fair value of derivative liabilities, net $ —
$ (26 ) (100.0 )%
Percentage of sales — % (0.8 )%

~~Interest income~~

Total interest income was higher for the three months ended March 31, 2019, as compared with 2018. This increase is primarily related to short term investments in U.S. Treasury Securities which we purchased with the proceeds from the sale of the Core business in September 2018.

~~Income Taxes~~

The Company’s income tax expense was $6,000 with an effective tax rate of -0.1% for the three months ended March 31, 2019, as compared to an expense of $11,000, with an effective tax rate of -0.4%, for the three months ended March 31, 2018. The effective

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MANAGEMENT'S DISCUSSION AND ANAYLSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued

~~rate differs~~During the three and six months ended June 30, 2020, salaries and related expenses decreased approximately (2.0)% and (3.5)%, respectively, primarily driven by a decrease in accrued bonus expense in 2020. This decrease was partially offset by higher stock option expense and an increase in average headcount for the period.

Selling, general and administrative expenses



	Three Months Ended June 30,								Six Months Ended June 30,
(In thousands)	2020			2019			Change		2020			2019			Change
SG&A Expense	$	2,189		$	3,037		(27.9	)%	$	5,985		$	5,994		(0.2	)%
Percentage of sales	51.0		%	45.7		%			64.4		%	48.8		%

During the three months ended June 30, 2020, selling, general and administrative expense decreased (27.9)%, primarily driven by a decrease in travel and entertainment expense ($0.5 million), a decrease in show fees and related costs ($0.2 million) and a decrease in customer samples ($0.1 million) associated with restricted travel and decreased sales activity from COVID-19.

During the six months ended June 30, 2020, selling, general and administrative expense decreased approximately (0.2)%, primarily driven by a decrease in travel and entertainment expense ($0.3 million), a decrease in show fees and related costs ($0.2 million), a decrease in commission expense ($0.2 million) and a decrease in customer samples ($0.2 million) associated with restricted travel and decreased sales activity from COVID-19. These decreases were partially offset by higher bad debt expense ($0.6 million) related to increased uncertainty on the collection of our receivables due to the economic environment resulting from COVID-19 and an increase in insurance premiums ($0.1 million) from the ~~statutory rate~~prior year.

Other Income (Expense)



	Three Months Ended June 30,								Six Months Ended June 30,
(In thousands)	2020			2019			Change		2020			2019			Change
Interest income	$	7		$	403		(98.3	)%	$	223		$	826		(73.0	)%
Percentage of sales	0.2		%	6.1		%			2.4		%	6.7		%
Other income (losses), net	$	(14	)	$	(200	)	(93.0	)%	$	412		$	(495	)	(183.2	)%
Percentage of sales	(0.3		)%	(3.0		)%			4.4		%	(4.0		)%

Total interest income decreased (98.3)% and (73.0)% for the three and six months ended June 30, 2020, respectively, as compared with the same periods in the prior year. This decrease is due to a lower average balance, as well as a lower yield, on our investments in U.S. Treasury Securities included in cash and cash equivalents.

Other income (losses), net increased for the three and six months ended June 30, 2020, as compared with the prior year. This increase is primarily due to ~~a valuation allowance~~the receipt of refunds on ~~our net operating loss carry forward and foreign taxes of $6,000.~~

~~As a result of historical losses exclusive of discontinued operations and the Company’s expectation to continue to generate losses~~tariffs paid in the ~~near future,~~prior year, offset by the ~~Company recorded~~recognition of a ~~valuation allowance on its net deferred tax asset~~joint and ~~does not anticipate recording an income tax benefit~~several liability for failure to collect and remit payroll taxes related to ~~these deferred tax assets. The Company will reassess~~stock option exercises in 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 the operations improve and it becomes more likely than not that the deferred tax assets will be realizable.prior year.

~~Product Development~~Income Taxes

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.



	Three Months Ended June 30,								Six Months Ended June 30,
(In thousands)	2020			2019			Change		2020			2019			Change
Income tax expense (benefit)	$	(1,492	)	$	76		(2,063.2	)%	$	(6,397	)	$	82		(7,901.2	)%
Effective tax rate	24.1		%	(1.8		)%			49.1		%	(0.8		)%

~~Reliance on Collaborative, Manufacturing and Selling Arrangements~~

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

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.

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~~

On August 30, 2018, we sold our Core business segment and 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 $13.3 million. Our working capital at March 31, 2019 was approximately $76.7 million compared with $81.2 million at December 31, 2018.

~~For the quarter ended March 31, 2019, net cash used in operating activities is approximately $5.1 million compared with net cash used in operating activities of approximately $1.1 million in 2018.~~

~~Net cash from investing activities is $20.8 million, primarily related the shift in categorization of short-term investments and cash equivalents in our Treasury Bill investments.~~

Cash from financing activities of approximately $0.1 million relates to cash collected for stock options during the quarter ended March 31, 2019. Cash used in 2018 financing activities in financing activities in 2018 was $0.1 million related to the repayment of our mortgage at the Clearwater, FL, facility.

~~At March 31, 2019, we had purchase commitments for inventories totaling approximately $5.8 million, substantially all of which is expected to be purchased by the end of 2019.~~

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MANAGEMENT'S DISCUSSION AND ANAYLSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued

Our ~~manufacturing services agreements requires Symmetry~~income tax (benefit) expense was approximately $(1,492,000) and $76,000 with an effective tax rate of 24.1% and (1.8)% for the three months ended June 30, 2020 and 2019, respectively. Our income tax (benefit) expense was approximately $(6,397,000) and $82,000 with an effective tax rate of 49.1% and (0.8)% for the six months ended June 30, 2020 and 2019, respectively. The effective rate differs from the statutory rate primarily due to the release of the valuation allowance on our net operating loss carryforward from 2019. On March 27, 2020, the U.S. government enacted the CARES Act to provide usrelief from COVID-19. The CARES Act includes a provision that allows companies to carryback net operating losses generated in the period 2018 through 2020 to prior years. We released the full valuation allowance of approximately $3.7M on our Federal net operating loss carryforward associated with ~~a twelve-month rolling production forecast,~~the provisions of the CARES Act.

Liquidity and Capital Resources

Our working capital at June 30, 2020 was approximately $60.2 million compared with $64.4 million at December 31, 2019. The decrease in working capital from December 31, 2019 to June 30, 2020 was primarily due to the net loss incurred by the Company during the first half of 2020 partially offset by non cash activity including stock based compensation expense and our provision for allowance for doubtful accounts.

For the six months ended June 30, 2020, net cash used in operating activities was approximately $12.4 million, which principally funded our operating loss of $13.7 million, compared with net cash used in operating activities of approximately $10.7 million million in the same period for 2019. Utilizing the provisions of the CARES Act, we recognized an income tax benefit of approximately $6.4 million in the first half of 2020, of which ~~four months~~we expect to receive a tax refund of approximately $3.7 million by the end of 2020. We expect that utilizing the NOL carryback will significantly help mitigate the working capital impact COVID-19 has had on our sales and operations.

The CARES Act also allows us to defer the payment of payroll taxes incurred between March 27, 2020 and December 31, 2020, with half of the resulting liability due on December 31, 2021, and the remainder due on December 31, 2022. As of June 30, 2020 we deferred approximately $0.1 million in taxes utilizing this program. We expect to defer and additional $0.3 million to $0.4 million under this program by December 31, 2020.

As a result of the impact of COVID-19 on our customers, we have received multiple requests for extension on the payment of receivables. While we are ~~binding, non-cancelable orders, subject~~committed to ~~certain termination rights.~~working with our customers to collect the receivables as expeditiously as possible, collectability of these receivables is more uncertain and we have recorded an increased allowance for doubtful accounts as a result. A primary focus for the Company in 2020 continues to be maintaining appropriate balance sheet flexibility, including cash on hand, due to the uncertain nature and unpredictable timing of the impacts of COVID-19.

Net cash used in investing activities was $0.2 million, related to investments in property and equipment.

At June 30, 2020, we had purchase commitments totaling approximately $0.5 million, substantially all of which is expected to be purchased within the next six months.

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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, ~~2018,~~2019, filed with the Securities and Exchange Commission on March ~~14, 2019.~~31, 2020.

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

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

Stock-based Compensation

Under our stock option plans, options to purchase common shares of the Company may be granted to employees, officers and directors of the Company by the Board of Directors. We account for stock options in accordance with FASB ASC Topic 718-10, Compensation-Stock Compensation, with compensation expense amortized over the vesting period. Options are valued using the Black-Scholes model in 2019 and 2020 and the trinomial lattice option-pricing model in prior years, both of which includes a number of estimates that affect the amount of our expense. We have determined that the most critical of these estimates are the expected life and volatility used in the calculations.

Expected life

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

Volatility

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

Accounts Receivable Reserves

We maintain a reserve for uncollectible accounts receivable. When evaluating the adequacy of the allowance for doubtful accounts, we analyze specific unremitted customer balances for known collectability issues, review historical bad debt experience, customer credit worthiness and economic trends, and we make estimates in connection with establishing the allowance for doubtful accounts, including the future impacts of current trends. Changes in estimates are reflected in the period they are made. If the financial condition of our customers deteriorates, resulting in an inability to make payments, additional allowances may be required.

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MANAGEMENT'S DISCUSSION AND ANAYLSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued

Inventory ~~reserves~~Reserves

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

~~Long-lived assets~~

We review long-lived assets which are held and used, including property and equipment, 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.

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

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~~MANAGEMENT'S DISCUSSION AND ANAYLSIS OF~~

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

Income Taxes

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

As a result of historical losses exclusive of ~~discontinued operations~~the sale of the Core business in 2018, and ~~the Company’s~~our expectation to continue to generate losses in the near future, ~~the Company~~we recorded a valuation allowance on the net deferred tax asset and ~~does~~do not anticipate recording an income tax benefit related to these deferred tax assets. ~~The Company~~We will reassess the realization of deferred tax assets each reporting period and will be able to reduce the valuation allowance to the extent the financial results ~~of continuing operations~~ improve and it becomes more likely than not that the deferred tax assets will be realizable. As management expects the Company to continue to generate losses in 2020 and the foreseeable future after 2020, we will continue to record a valuation allowance on the remaining deferred tax asset balance as of June 30, 2020.

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

The Company is subject to U.S. federal and state 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 returns are subject to examination for the 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 53 of the Notes to Consolidated Financial Statements.

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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, 2018. 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

Our management has established and maintains disclosure controls and procedures that are designed to ensure that the information required to be disclosed by us in reports that we file or 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 Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Management carried out an evaluation, under the supervision and 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 Chief Executive Officer and Chief Financial Officer have concluded that, as of June 30, 2020, due to the material weaknesses in our internal control over financial reporting previously identified and reported in our 2019 Annual Report on Form 10-K ("2019 Form 10-K") which, as described below, continue to exist, our disclosure controls and procedures were not effective.

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 to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, management carried out an evaluation of the effectiveness of the Company's internal control over financial reporting as of December 31, ~~2018,~~2019, based on the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal ~~Control-Integrated~~Control- Integrated Framework (2013). Based on that evaluation, management concluded that, as of December 31, ~~2018,~~2019, the Company's internal control over financial reporting was not effective as a result of the material weaknesses described below.

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~~MANAGEMENT'S DISCUSSION AND ANAYLSIS OF~~

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

The effectiveness of our internal control over financial reporting as of December 31, ~~2018~~2019 was audited by ~~Frazier & Deeter, LLC,~~BDO USA LLP, 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,~~2019, 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.


•	As of December 31, 2019 we had identified the following three material weaknesses:An ineffective control environment requiring additional qualified accounting personnel with an appropriate level of knowledge and experience with generally accepted accounting principles. This was a deficiency from the prior year that had not been fully

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remediated.

Ineffective control activities due to the lack of documentation and timeliness in executing certain business process controls, specifically related to procure to pay and inventory processes and footnote reporting disclosures related to income tax accounts, primarily related to our United States operations. This was a deficiency from the prior year that had not been fully remediated.

Ineffective control activities over financial reporting in our Bulgarian subsidiary related to the purchasing of goods and services, including the processing and payment of vendor invoices.

As of June 30, 2020, we continue our remediation efforts related to these deficiencies.

Remediation Efforts to Address Material Weaknesses

Management is committed to maintaining a strong internal control environment. In response to the identified material weaknesses, management, with the oversight of the Audit Committee of the Board of Directors, has taken actions toward the remediation of the respective material weaknesses in internal control over financial reporting as outlined below.

We ~~have identified three~~are in the process of remediating the material ~~weaknesses: (i) an ineffective control environment due to a~~weakness associated with the lack of sufficient qualified accounting personnel with an appropriate level of knowledge and experience with generally accepted accounting principles ~~(ii)~~by hiring a new Chief Financial Officer in January 2019 and, in September 2019, a new Corporate Controller with experience in internal controls and financial reporting. Both have been actively engaged in remediation efforts to address the material weaknesses to date and will continue throughout fiscal year 2020. We will continue to recruit qualified professionals with appropriate levels of knowledge and experience to assist in resolving accounting issues related to non-routine and complex transactions. We have also enhanced our policies, procedures, and controls for all key business processes. In addition, management will continue to train personnel to ensure consistent application of accounting principles and adherence to the Company’s policies, procedures, and controls.

We are in the process of remediating the material weakness associated with the ineffective control activities due to the lack of documentation and timeliness in executing business process controls by enhancing our processes and ~~(iii) ineffective monitoring~~review controls associated with the processes noted above. We have reviewed current financial controls to ~~ascertain whether the components of internal control were present~~assess if additional management review controls are necessary and ~~functioning.~~

~~As of March 31, 2019, we continue our remediation efforts related to these deficiencies.~~

~~Remediation Efforts to Address Material Weaknesses~~

Wewill continue to make further enhancements to our control environment by improving documentation of internal controls, guidance in the performance of those controls, communication of expectations, and emphasis on the importance of internal controls. In addition, we continue to make improvements to the level of detail in our risk assessment and clarity of the linkage between risks and internal controls.

We continue to improve upon our risk assessment procedures and the timeliness of those procedures and continue to make progress towards addressing the weaknesses in information and communication beginning the process to better identify, document, and assess information used when performing internal controls.

~~We also are working to further enhance our policies, procedures, and controls for~~work with all ~~key processes, which includes the training of~~finance personnel to ensure ~~consistent application~~the appropriate documentation criteria for the existing controls, including evidence of ~~accounting principles~~review, timeliness and ~~adherence to the Company’s policies, procedures, and controls. We will also be implementing enhanced monitoring procedures to allow for more effective monitoring of compliance.~~

variance thresholds. We will continue to work with the third-party specialists ~~and~~ we ~~have retained a firm~~engaged to ~~assist us in our remediation efforts. We will also~~ review, document, and ~~(as needed) supplement~~enhance the design of our controls, with the goal of designing and implementing controls that ~~not only better~~ address ~~both~~ the completeness and accuracy ~~and~~of data used in the performance of certain controls as well as the precision of management's review, but also enhance our ability to manage our business.

We have enhanced, or are in the process of enhancing, certain controls over purchasing and disbursements in our Bulgarian subsidiary, including approving and validating vendor invoices received by verifying the related purchase authorization and the receipt of the goods or services.

Management believes the steps outlined above, ~~when fully implemented,~~along with the implementation of a new financial reporting system, will remediate the material weaknesses described above. The Audit Committee of the Board of Directors and management will continue to monitor the implementation of these remediation measures and the effectiveness of our internal controls over financial reporting on an ongoing basis.

As of June 30, 2020, our remediation of these deficiencies is incomplete.

Changes in Internal Control ~~over~~Over Financial Reporting

~~There~~Except as set forth above, there were no changes in our internal control over financial reporting ~~(as defined in Rules 13(a)-15(f) and 15(d)-15(f))~~that occurred during the three months ended ~~March 31, 2019~~June 30, 2020 that ~~have~~ materially affected, or that are reasonably likely to materially affect our internal control over financial reporting.

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PART II. Other Information

ITEM 1. Legal Proceedings

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~~APYX MEDICAL CORPORATION~~

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.

The Amended Complaint ~~(which as of the date hereof has not been delivered through formal process to the Company)~~ seeks class action status on behalf of all persons and entities that acquired the Company’s securities between ~~August 1,~~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. On October 3, 2019, defendants filed a motion to dismiss the Amended Complaint, and on March 11, 2020, the Court denied that motion. On July 10, 2020, the parties executed a settlement agreement, which is subject to Court approval. The ~~Complaint seeks an unspecified amount~~Court preliminarily approved the settlement on July 21, 2020. The settlement agreement provides for the dismissal of ~~damages.~~

~~Although~~ the ~~ultimate outcome~~action with prejudice. At June 30, 2020, approximately $670,000 of ~~this matter cannot be determined with certainty,~~ the ~~Company believes that the allegations stated~~$1,000,000 insurance deductible is unpaid and is included in accrued expenses and other current liabilities in the ~~Complaint are entirely without merit. The Company and Goodwin intend to defend themselves vigorously in~~accompanying consolidated balance sheet. During July 2020, substantially all of the suit. 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.unpaid deductible was paid.

~~In accordance with authoritative guidance, we~~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.~~recorded, actual results may differ from these estimates.

ITEM 1A. Risk ~~Factors~~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, 2019 other than the following:

THE COVID-19 Pandemic has had and continues to have a material and adverse affect on our business

Our global operations expose us to risks associated with public health crises and outbreaks of epidemic, pandemic, or contagious diseases, such as the current outbreak of COVID-19. To date, COVID-19 has had, and may continue to have, a material and adverse impact on our operations. Due to these impacts and measures, we have experienced and may continue to experience significant and unpredictable reductions in the demand for our products as actions taken by governmental bodies have restricted our customers' business activities. There continues to be a significant amount of uncertainty as to when these restrictions will be lifted and when patients will choose to undergo the elective procedures provided by our customers. While many of our customers have begun to

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APYX MEDICAL CORPORATION

experience positive trends in these restrictions being lifted and some patients have started elective procedures again, there is no guarantee that restrictions won't be reinstated or that patients will not choose to forgo elective procedures. In addition, our customers may delay, cancel or redirect planned capital expenditures in order to focus resources on COVID-19 or in response to continued economic disruption related to COVID-19.

As a result of the COVID-19 outbreak, many businesses experienced temporary closures of facilities as a result of being considered non-essential businesses. As performers of elective procedures, these temporary closures have impacted many of our customers and materially reduced demand for our products. As a medical device company, while we have currently been exempt from these guidelines and have largely continued operations, if we continue to experience future materially reduced demand for our products, we may have to scale back our operations. In addition, if the guidelines change, we or our suppliers could be impacted, and we could be adversely affected through supply chain interruptions, manufacturing restrictions or labor restrictions.

In addition, the COVID-19 pandemic has adversely affected, and may continue to adversely affect, the world economy and financial markets , which has resulted in a period of significant global economic slowdown which has curtailed and delayed spending by physicians and affected demand for our products as well as increased risk of customer defaults or delays in payments. COVID-19 and the current financial, economic, and capital markets environment, and future developments in these and other areas present material uncertainty and risk with respect to our performance, financial condition, volume of business, results of operations, and cash flows. Due to the uncertain scope and duration of the pandemic, the and uncertain timing of global recovery and economic normalization, we are unable to estimate the impacts on our operations and financial results, but believe they will be material into the second quarter of 2020 and possibly beyond.

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

None.

ITEM 3. Defaults Upon Senior Securities

None.

ITEM 4. Mine Safety Disclosures

Not Applicable.

ITEM 5. Other Information

None.

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ITEM 6. Exhibits

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~~APYX MEDICAL CORPORATION~~



~~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 filed 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 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)
3.5		Certificate of Amendment of the Certificate of Incorporation of the Registrant (Incorporated by reference to the Registrant's Current Report of Form 8-K filed on 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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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.



	Apyx Medical Corporation

Date: ~~May 8,~~August 10, 2020	By:	/s/ Charles D. Goodwin II
		Charles D. Goodwin II
		President, Chief Executive Officer and Director
		(Principal Executive Officer)

Date: ~~May 8,~~August 10, 2020	By:	/s/ Tara Semb
		Tara Semb
		Chief Financial Officer,
		Treasurer and Secretary
		(Principal Financial Officer)

2931



(In thousands)	As Originally Reported		Adjustments			As Restated
ASSETS
Current assets:
Cash and cash equivalents	$	32,415	$	—		$	32,415
Short term investments	40,885		—			40,885
Trade accounts receivable, net	4,931		38			4,969
Inventories, net	5,598		—			5,598
Prepaid expenses and other current assets	1,411		38			1,449
Total current assets	85,240		76			85,316
Property and equipment, net	6,031		—			6,031
Intangibles	190		—			190
Deposits	80		—			80
Other assets	162		77			239
Total assets	$	91,703	$	153		$	91,856

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,504	$	—		$	1,504
Accrued expenses and other liabilities	5,460		127			5,587
Joint and several payroll tax liability	—		1,014			1,014
Accrued severance and related	511		—			511
Total current liabilities	7,475		1,141			8,616
Related party note payable	140		—			140
Long-term portion of operating lease liabilities	75		—			75
Other long-term liabilities	—		194			194
Total liabilities	7,690		1,335			9,025
STOCKHOLDERS' EQUITY
Common stock, $0.001 par value; 75,000,000 shares authorized; 34,033,255 issued and 33,891,255 outstanding	34		—			34
Additional paid-in capital	53,147		1,035			54,182
Retained earnings	30,832		(2,217		)	28,615
Total stockholders’ equity	84,013		(1,182		)	82,831
Total liabilities and stockholders’ equity	$	91,703	$	153		$	91,856



(in thousands)	March 31, 2019 as Restated			December 31, 2018
Purchased technology (5-17 year lives)	$	1,447		$	1,448
Less: accumulated amortization	(1,442		)	(1,442		)
Purchased technology, net	$	5		$	6

Goodwill	$	185		$	185
Intangibles	$	190		$	191



	Number of options - as Restated		Weighted average exercise price - as Restated
Outstanding at December 31, 2018	3,254,799		$	3.18
Granted	1,277,500		7.73
Exercised	(270,549	)	2.87
Canceled and forfeited	(10,500	)	2.10
Outstanding at March 31, 2019	4,251,250		$	4.57



	2019 Grants
Option value	$	7.15	-	$	7.91
Risk-free rate	2.6%		-	2.6		%
Expected dividend yield	—
Expected volatility	69.1%		-	69.1		%
Expected term (in years)	6



(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 March 31, 2019	$	1,313



(In thousands)	Adjusted Cost		Unrealized Gains		Fair Value⁽³⁾		Cash and Cash Equivalents ⁽¹⁾		Short-term Marketable Securities
Cash	$	3,802	$	—	$	3,802	$	3,802	$	—

Level 1 ⁽²⁾
U.S. Treasury Securities, maturities less than three months	28,613		—		28,613		28,613		—
U.S. Treasury Securities, maturities greater than three months	40,721		164		40,885		—		40,885
Total	$	73,136	$	164	$	73,300	$	32,415	$	40,885