Apyx Medical (APYX) 10-Q 2020 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended	September 30, 2020
	or
☐	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, FL 33760

(Address of principal executive offices, zip code)

(727) 384-2323

(Registrant’s telephone number)

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

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

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes: ☒ No ☐

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: ☒ No ☐

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.

Large accelerated filer	☐	Accelerated filer	☒
Non-accelerated filer	☐	Smaller reporting company	☒
		Emerging growth company	☐
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.			☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes: ☐ No ☒

As of November 5, 2020, 34,274,771 shares of the registrant’s $0.001 par value common stock were outstanding.

APYX MEDICAL CORPORATION

INDEX TO QUARTERLY REPORT ON FORM 10-Q

For the quarterly period ended September 30, 2020

(Unaudited)

		Page
Part I.	Financial Information	2
Item 1.	Condensed Consolidated Financial Statements	2
	Condensed Consolidated Balance Sheets at September 30, 2020 and December 31, 2019	2
	Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2020 and 2019	3
	Condensed Consolidated Statements of Changes in Equity for the three and nine months ended September 30, 2020 and 2019	4
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and 2019	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	25
Item 4.	Controls and Procedures	26
Part II.	Other Information	28
Item 1.	Legal Proceedings	28
Item 1A.	Risk Factors	29
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	30
Item 3.	Defaults Upon Senior Securities	30
Item 4.	Mine Safety Disclosures	30
Item 5.	Other Information	30
Item 6.	Exhibits	31
	Signatures	32

1

PART I.     Financial Information

ITEM 1. Condensed Consolidated Financial Statements

APYX MEDICAL CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data, Unaudited)

	September 30, 2020		December 31, 2019
ASSETS
Current assets:
Cash and cash equivalents	$	43,539	$	58,812
Trade accounts receivable, net of allowance of $760 and $273	6,154		7,987
Income tax receivables	7,238		426
Other receivables	1,158		1,233
Inventories, net of provision for obsolescence of $537 and $392	5,416		5,068
Prepaid expenses and other current assets	4,159		3,207
Total current assets	67,664		76,733
Property and equipment, net of accumulated depreciation and amortization of $4,677 and $4,403	6,348		6,618
Operating lease right-of-use assets	266		350
Finance lease right-of-use assets	629		653
Other assets	508		391
Total assets	$	75,415	$	84,745
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	2,479	$	2,438
Accrued expenses and other liabilities	6,588		9,396
Current portion of operating lease liabilities	118		108
Current portion of finance lease liabilities	269		229
Related party note payable	140		140
Total current liabilities	9,594		12,311
Long-term operating lease liabilities	153		235
Long-term finance lease liabilities	347		421
Contract liabilities	583		405
Other liabilities	400		114
Total liabilities	11,077		13,486
EQUITY
Common stock, $0.001 par value; 75,000,000 shares authorized; 34,222,505 issued and outstanding as of September 30, 2020, and 34,312,527 issued and 34,169,952 outstanding as of December 31, 2019	34		34
Additional paid-in capital	60,014		56,708
Retained earnings	4,148		14,517
Total stockholders' equity	64,196		71,259
Non-controlling interest	142		0
Total equity	64,338		71,259
Total liabilities and equity	$	75,415	$	84,745

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

2

APYX MEDICAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data, Unaudited)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Sales	$	6,954	$	7,575	$	16,247	$	19,853
Cost of sales	2,229		2,281		6,444		6,322
Gross profit	4,725		5,294		9,803		13,531
Other costs and expenses:
Research and development	1,047		1,016		3,002		2,634
Professional services	1,835		2,039		5,882		5,818
Salaries and related costs	3,508		3,159		10,258		10,157
Selling, general and administrative	2,706		3,836		8,691		9,830
Total other costs and expenses	9,096		10,050		27,833		28,439
Loss from operations	(4,371)		(4,756)		(18,030)		(14,908)
Interest income	10		327		233		1,153
Interest expense	(25)		0		(39)		0
Other (loss) income, net	(63)		230		349		(265)
Total other (loss) income, net	(78)		557		543		888
Loss before income taxes	(4,449)		(4,199)		(17,487)		(14,020)
Income tax (benefit) expense	(715)		171		(7,112)		253
Net loss	(3,734)		(4,370)		(10,375)		(14,273)
Net loss attributable to non-controlling interest	(6)		0		(6)		0
Net loss attributable to Apyx	$	(3,728)	$	(4,370)	$	(10,369)	$	(14,273)
Earnings (loss) per Share:
Basic and diluted	$	(0.11)	$	(0.13)	$	(0.30)	$	(0.42)

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

3

APYX MEDICAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(In thousands, Unaudited)

Three months ended September 30, 2019 and 2020
		Common Stock				Additional Paid-In Capital		Retained Earnings		Non-controlling Interest		Total Equity
	Shares	Par Value
Balance June 30, 2019		33,921	$	34		$	55,086	$	24,320	$	0	$	79,440
Options exercised for cash		21	—			39		—		—		39
Stock based compensation		—	—			543		—		—		543
Shares issued on net settlement of stock options		35	—			—		—		—		0
Net loss		—	—			—		(4,370)		—		(4,370)
Balance September 30, 2019		33,977	$	34		$	55,668	$	19,950	$	0	$	75,652
Balance June 30, 2020		34,202	$	34		$	58,926	$	7,876	$	0	$	66,836
Contributions from non-controlling interest		—	—			—		—		148		148
Options exercised for cash		10	—			25		—		—		25
Stock based compensation		—	—			1,063		—		—		1,063
Shares issued on net settlement of stock options		11	—			—		—		—		0
Net loss		—	—			—		(3,728)		(6)		(3,734)
Balance September 30, 2020		34,223	$	34		$	60,014	$	4,148	$	142	$	64,338
Nine months ended September 30, 2019 and 2020
	Common Stock		Additional Paid-In Capital			Retained Earnings		Non-controlling Interest		Total
		Shares			Par Value
Balance December 31, 2018		33,705	$	34		$	52,920	$	34,223	$	0	$	87,177
Options exercised for cash		51	—			154		—		—		154
Stock based compensation		—	—			2,594		—		—		2,594
Shares issued on net settlement of stock options		221	—			—		—		—		0
Net loss		—	—			—		(14,273)		—		(14,273)
Balance September 30, 2019		33,977	$	34		$	55,668	$	19,950	$	0	$	75,652
Balance December 31, 2019		34,170	$	34		$	56,708	$	14,517	$	0	$	71,259
Contributions from non-controlling interest		—	—			—		—		148		148
Options exercised for cash		20	—			97		—		—		97
Stock based compensation		—	—			3,209		—		—		3,209
Shares issued on net settlement of stock options		33	—			—		—		—		0
Net loss		—	—			—		(10,369)		(6)		(10,375)
Balance September 30, 2020		34,223	$	34		$	60,014	$	4,148	$	142	$	64,338

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

4

APYX MEDICAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands, Unaudited)

	Nine Months Ended September 30,
	2020		2019
Cash flows from operating activities
Net loss	$	(10,375)	$	(14,273)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	662		510
Provision for inventory obsolescence	427		36
Loss on disposal of property and equipment	0		19
Stock based compensation	3,209		2,594
Net, non cash lease expense	0		2
Unrealized gain on short term investments	0		(164)
Provision (benefit) for allowance for doubtful accounts	486		(238)
Changes in operating assets and liabilities:
Trade receivables	1,389		(2,397)
Income tax receivables, prepaid expenses and other assets	(7,793)		(1,202)
Inventories	(717)		(1,772)
Accounts payable	15		50
Accrued and other liabilities	(2,352)		1,611
Net cash used in operating activities	(15,049)		(15,224)
Cash flows from investing activities
Purchases of property and equipment	(193)		(1,076)
Purchases of marketable securities	0		(18,884)
Proceeds from maturities of marketable securities	0		80,726
Net cash (used in) provided by investing activities	(193)		60,766
Cash flows from financing activities
Proceeds from stock option exercises	97		154
Repayment of finance lease liabilities	(184)		(2)
Contributions from non-controlling interests	148		0
Net cash provided by financing activities	61		152
Effect of exchange rates on cash	(92)		(18)
Net change in cash and cash equivalents	(15,273)		45,676
Cash and cash equivalents, beginning of period	58,812		16,596
Cash and cash equivalents, end of period	$	43,539	$	62,272
Cash paid for:
Interest	$	39	$	0
Income taxes	54		248
Non cash activities:
Right-of-use assets capitalized and lease liabilities recognized upon adoption of Topic 842	$	0	$	212
Right-of-use assets capitalized and lease liabilities recognized upon lease remeasurement	0		207
Right-of-use assets capitalized and lease liabilities recognized upon execution of lease	150		662
Transfer of other assets to property and equipment	0		42
Transfer of inventory from property and equipment	10		264

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

5

APYX MEDICAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1.     BASIS OF PRESENTATION

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

We are an advanced energy technology company with a passion for elevating people’s lives through innovative products in the cosmetic and surgical markets. Known for our innovative Helium Plasma Technology, Apyx is solely focused on bringing transformative solutions to the physicians and patients it serves. Our Helium Plasma Technology is marketed and sold as Renuvion® in the cosmetic surgery market and J-Plasma® in the hospital surgical market. Renuvion® offers plastic surgeons, fascial plastic surgeons and cosmetic physicians a unique ability to provide controlled heat to the tissue to achieve their desired results. The J-Plasma® system allows surgeons to operate with a high level of precision, 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.

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. In late February, we began to experience the effects of the pandemic which have been material and adverse on our business. However, starting late in the second quarter and continuing through the third quarter, we started to see positive indications in our business. We believe the severity of the impact of the COVID-19 pandemic on our business will continue to depend on a 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 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 plastic surgery procedures, resulting in higher than expected revenues in our Advanced Energy segment. In international markets, a greater portion of these procedures are performed in a hospital, and it is less certain when elective procedures will fully return to normal.. While we experienced 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, which continued through the third quarter, as local jurisdictions started to re-open. As cases have started to increase again, it is unknown whether these trends will continue. 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.

The accompanying unaudited condensed 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, 2019. These condensed 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.

6

APYX MEDICAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

NOTE 2.     CHANGE IN ACCOUNTING POLICY

During 2019, we began granting stock option awards deeper within the organization. We do not have sufficient experience with grants to these employees and we have experienced challenges in developing reliable forfeiture estimates at the grant date. Accounting for revising the forfeiture estimates has been burdensome. Accounting Standards Codification 718, Compensation-Stock Compensation, prescribes two methods for accounting for forfeitures on stock option awards, either the estimation method utilized by the 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 made on a retrospective basis. However, the changes to the current and prior periods were determined to be immaterial and there have been no changes to previously reported results as a result of the change.

NOTE 3.     RECENT ACCOUNTING PRONOUNCEMENTS

In June 2016, the 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 allowance for losses. This update, as originally issued, was effective for annual and interim periods beginning after December 15, 2019, with early adoption permitted. In November 2019, the 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 these standards for Smaller Reporting Companies until fiscal years beginning after December 15, 2022. The Company currently expects to continue to qualify as a Smaller Reporting Company, based upon the current SEC definition, and as a result, will be utilizing the deferred elective date. While we are in the process of determining the 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 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 condition or results of operations.

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.

7

APYX MEDICAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

NOTE 4.     DISPOSAL OF BUSINESS

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 the Company divested and sold the Company's electrosurgical "Core" business segment and related intellectual property, including the Bovie® brand and trademarks, to Symmetry for gross proceeds of $97 million in cash.

In connection with the Asset Purchase Agreement, we entered into an Electro Surgical Disposables and Accessories, Cauteries and Other Products Supply Agreement with Symmetry for a four-year term, whereby we will manufacture certain Core products and sell them to Symmetry at agreed upon prices. Any activity resulting from this agreement is netted and reported in our Condensed Consolidated Statements of Operations as other income or (loss). Core activity for the three months ended September 30, 2020 amounted to $1.8 million with cost of sales equivalents of $1.6 million and related other expenses of $0.3 million for net other (loss) of $0.1 million. Core activity for the three months ended September 30, 2019 amounted to $2.5 million with cost of sales equivalents of $2.2 million and related other expenses of $0.1 million for net other income of $0.2 million. Core activity for the nine months ended September 30, 2020 amounted to $6.9 million with cost of sales equivalents of $6.1 million and related other expenses of $0.5 million for net other income of $0.3 million. Core activity for the nine months ended September 30, 2019 amounted to $6.9 million with cost of sales equivalents of $6.6 million and related other expenses of $0.2 million for net other income of $0.1 million.

8

APYX MEDICAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

NOTE 5.     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 direct labor hours.

Inventories consisted of the following:

(In thousands)	September 30, 2020		December 31, 2019
Raw materials	$	2,487	$	2,935
Work in process	1,522		1,209
Finished goods	1,944		1,316
Gross inventories	5,953		5,460
Less: provision for obsolescence	(537)		(392)
Inventories, net	$	5,416	$	5,068

During the second quarter of 2020, 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 down as we determined to cease further production on these older models. The total impairment was approximately $400,000 and is included in cost of sales in the accompanying consolidated statement of operations for the nine months ended September 30, 2020.

NOTE 6.     ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities consisted of the following:

(in thousands)	September 30, 2020		December 31, 2019
Accrued payroll	$	497	$	694
Accrued bonuses	0		1,306
Accrued commissions	620		877
Accrued product warranties	471		452
Accrued insurance	632		1,170
Accrued professional fees	744		1,383
Joint and several payroll liability	1,045		1,045
Uncertain tax positions	1,616		1,491
Other accrued expenses and current liabilities	963		978
Total accrued expenses and other current liabilities	$	6,588	$	9,396

NOTE 7.     NON-CONTROLLING INTEREST

In late 2019, we executed a joint venture agreement with our Chinese supplier ("China JV"). The agreement requires the Company to make a capital contribution into the newly formed entity of approximately $360,000, of which approximately $154,000 was contributed during the three months ended September 30, 2020. As of the date of these condensed consolidated financial statements, the joint venture has not commenced principal operations.

Changes in our ownership interest in our 51% owned China JV were as follows:

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APYX MEDICAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

(In thousands)	Three Months Ended September 30, 2020		Nine Months Ended September 30, 2020
Beginning interest in China JV	$	0		$	0
Contributions	154			154
Net loss attributable to Apyx	(6)			(6)
Ending interest in China JV	$	148		$	148

NOTE 8.     EARNINGS (LOSS) 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 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 September 30,				Nine Months Ended September 30,
(in thousands, except per share data)	2020		2019		2020		2019
Numerator:
Net loss attributable to Apyx	$	(3,728)	$	(4,370)	$	(10,369)	$	(14,273)
Denominator:
Weighted average shares outstanding - basic and diluted	34,216		34,078		34,193		34,039
Earnings (loss) per share:
Basic and diluted	$	(0.11)	$	(0.13)	$	(0.30)	$	(0.42)
Anti-dilutive instruments excluded from diluted loss per common share:
Restricted stock	45		90		45		90
Options	5,028		4,060		5,028		4,060

10

APYX MEDICAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

NOTE 9.     STOCK-BASED COMPENSATION

Under our stock option plans, our board of directors may grant restricted stock and options to purchase common shares to our employees, officers, directors and consultants. We account for stock options in accordance with FASB ASC Topic 718, Compensation - Stock Compensation, with stock-based compensation expense recognized over the vesting period based on the 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 include a number of estimates that affect the grant date fair value and the amount of expense to recognize.

We recognized approximately $1,063,000 and $3,209,000, respectively, in stock-based compensation expense during the three and nine months ended September 30, 2020, as compared with $543,000 and $2,594,000, respectively, for the three and nine months ended September 30, 2019.

Stock option activity is summarized as follows:

	Number of options	Weighted average exercise price
Outstanding at December 31, 2019	3,966,858	$	4.67
Granted	1,376,900	7.94
Exercised	(81,131)	3.03
Canceled and forfeited	(234,600)	7.57
Outstanding at September 30, 2020	5,028,027	$	5.45

We allow stock option holders to exercise stock-based awards by surrendering stock-based awards with an intrinsic value equal to the cumulative exercise price of stock-based awards being exercised, referred to as net settlements. These surrenders are included in stock options exercised in the options rollforward above. For the three months ended September 30, 2020 and 2019, respectively, we received 16,140 and 26,572 options as payment in the exercise of 10,610 and 34,928 options. For the nine months ended September 30, 2020 and 2019, respectively, we received 29,149 and 118,170 options as payment in the exercise of 32,637 and 220,879 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 grant date fair value of options granted in 2020 ("2020 Grants") utilizing a Black Scholes model with an expected life calculated via the simplified method.

	2020 Grants
Strike price	$4.98	-	$	8.18
Risk-free rate	0.3%	-	1.7		%
Expected dividend yield	0
Expected volatility	65.9%	-	70.1		%
Expected term (in years)	6

NOTE 10.     INCOME TAXES

On March 27, 2020, the U.S. government enacted the CARES Act to provide relief from COVID-19. The 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 three quarters of 2020. For the net losses generated in 2019, we previously recorded a full valuation allowance on the deferred tax assets associated with our NOL carryforwards due to realization of the NOL not being probable 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 approximately $0.8 million and $3.3 million, related to our loss before income taxes for the three and

11

APYX MEDICAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

nine months ended September 30, 2020, respectively. There are approximately $2.4 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 approximately $(715,000) and $171,000 with an effective tax rate of 16.1% and (4.1)% for the three months ended September 30, 2020 and 2019, respectively. Our income tax (benefit) expense was approximately $(7,112,000) and $253,000 with an effective tax rate of 40.7% and (1.8)% for the nine months ended September 30, 2020 and 2019, respectively. For the nine months ended September 30, 2020, the effective rate differs from the statutory rate primarily due to the release of the valuation allowance on our NOL carryforward from 2019. For the three months ended September 30, 2020, and the three and nine months ended September 30, 2019, the effective rate differs from the statutory rate primarily due to interest and penalties on our uncertain tax positions.

We have gross unrecognized tax benefits of approximately $1,313,000 at September 30, 2020. 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 September 30, 2020, we had approximately $300,000 in accrued interest and penalties related to unrecognized tax benefits. Included in the income tax benefit for the three and nine months ended September 30, 2020, respectively are approximately $43,000 and $125,000 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 $1,616,000 of income tax benefits in the consolidated statement of operations. It is expected that all of the uncertain tax positions should be resolved by October 2022.

NOTE 11.     COMMITMENTS AND CONTINGENCIES

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. Such claims may include claims by current or former employees, distributors and competitors, claims concerning the marketing and promotion of our products and product liability claims.

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

On April 17, 2019, a complaint (the “Complaint”) was filed in the United States District Court for the Middle District of Florida, against the Company and Charles D. Goodwin, the Company’s President and Chief Executive Officer and a member of the Company’s Board of Directors, alleging certain violations of the Securities Exchange Act of 1934, as amended.  On July 16, 2019, the Court appointed 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. 

The Amended Complaint seeks class action status on behalf of all persons and entities that acquired the Company’s securities between December 21, 2018 and April 1, 2019, and alleges violations by the Company and Goodwin of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended and Rule 10b-5 thereunder, primarily related to certain public statements concerning the Premarket Notification 510(k) submission made to the US Food and Drug Administration for a new indication for the Company’s J-Plasma® technology for use in dermal resurfacing procedures.  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 was subject to Court approval. The Court preliminarily approved the settlement on July 21, 2020. The settlement agreement provides for the dismissal of the action with prejudice. On November 6, 2020, the Court issued its final order approving the settlement and dismissing the action and all claims contained in the Amended Complaint with prejudice. At September 30, 2020, we have settled and fully paid all obligations related to this matter.

12

APYX MEDICAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

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

Purchase Commitments

At September 30, 2020, we had purchase commitments totaling approximately $1,800,000, substantially all of which is expected to be purchased within the next six months.

China Joint Venture

Our agreement in the China joint venture requires the Company to make a capital contribution into the newly formed entity of $357,000. As of the date of these consolidated financial statements, approximately $203,000 of our capital commitment remains to be funded.

13

APYX MEDICAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

NOTE 12.     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 department. Antoaneta Dimitrova Shileva-Toromanova, Mr. Shilev’s sister, is the Manager of Production and Human Resources. Svetoslav Shilev, Mr. Shilev’s son, is an engineer in the quality assurance department.

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 came due in October 2020. The note was paid in full on October 20, 2020.

The partner in our China joint venture is also a supplier of the Company. During the three and nine months ended September 30, 2020, we made purchases from this supplier of approximately $410,000 and $1,250,000, respectively. At September 30, 2020, we owed this supplier approximately $123,000.

NOTE 13.     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 principally organized and managed as 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. 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.

14

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

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

	Three Months Ended September 30, 2020
(In thousands)	Advanced Energy		OEM		Corporate & Other		Total
Sales	$	5,479	$	1,475	$	0	$	6,954
Income (loss) from operations	(1,095)		556		(3,832)		(4,371)
Interest income	0		0		10		10
Interest expense	0		0		(25)		(25)
Other loss, net	0		0		(63)		(63)
Income tax benefit	0		0		(715)		(715)

	Three Months Ended September 30, 2019
(In thousands)	Advanced Energy		OEM		Corporate & Other		Total
Sales	$	6,094	$	1,481	$	0	$	7,575
Income (loss) from operations	(1,357)		268		(3,667)		(4,756)
Interest income	0		0		327		327
Other income, net	0		0		230		230
Income tax expense	0		0		171		171

	Nine Months Ended September 30, 2020
(In thousands)	Advanced Energy		OEM		Corporate & Other		Total
Sales	$	12,332	$	3,915	$	0	$	16,247
Income (loss) from operations	(8,371)		1,387		(11,046)		(18,030)
Interest income	0		0		233		233
Interest expense	0		0		(39)		(39)
Other income, net	0		0		349		349
Income tax benefit	0		0		(7,112)		(7,112)

	Nine Months Ended September 30, 2019
(In thousands)	Advanced Energy		OEM		Corporate & Other		Total
Sales	$	15,815	$	4,038	$	0	$	19,853
Income (loss) from operations	(5,653)		995		(10,250)		(14,908)
Interest income	0		0		1,153		1,153
Other loss, net	0		0		(265)		(265)
Income tax expense	0		0		253		253

15

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

International sales represented approximately 25.0% and 24.8% of total revenues for the three and nine months ended September 30, 2020, respectively, as compared with 26.7% and 29.5% of total revenues for the same prior year period.

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

	Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands)	2020		2019		2020		2019
Sales by Domestic and International
Domestic	$	5,214	$	5,552	$	12,225	$	14,002
International	1,740		2,023		4,022		5,851
Total	$	6,954	$	7,575	$	16,247	$	19,853

16

APYX MEDICAL CORPORATION

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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

Executive Level Overview

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

As discussed in our Annual Report on Form 10-K for the year ended December 31, 2019 ("2019 Form 10-K"), 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 in some jurisdictions have been ordered and numerous other businesses have temporarily closed voluntarily. Many other businesses are operating at reduced capacity. Given the variability in measures taken, the uncertainty of any potential resurgence of COVID-19, the overall economic effects of these restrictions 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 fourth 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, and through the third quarter, we began to see improved demand for our products, primarily in the U.S. market, however the sustainability 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

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued

their existing surgeon customers to do everything they can to provide them with support during this difficult time. With 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 2020, we continue to drive sales in our Advanced Energy business by increasing the adoption and utilization of our generators and handpieces in the U.S. cosmetic surgery market and fulfilling demand from distributors in our international markets. Management estimates that our products have been sold in more than 50 countries. As of September 30, 2020, we had a direct sales force of 31 field-based selling professionals and a network of 4 independent sales agencies, led by 5 sales managers. This selling organization is focused on the use of Renuvion® in the cosmetic surgery market. In addition, we have invested in training programs and marketing-related activities to support accelerated adoption of Renuvion®.

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, marketing and field clinical teams have been very active in engaging with our customers - and prospects - around the world. We have hosted educational events virtually where we featured some of our 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 marketing and selling to new patients, and their thoughts on pricing and return on investment. We recently hosted the first installment of a planned series of webinars designed to assist our customers and prospects with opening their practices post-COVID 19. We also engaged with clinician customers outside the U.S. including hosting multiple continuing education training sessions on J-Plasma® and Renuvion® with our current international distributors and conducting multiple calls with groups of international prospects interested in learning about our Renuvion® technology.

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 principally organized and managed as two operating segments: Advanced Energy and OEM. "Corporate & Other" includes certain unallocated corporate and administrative costs which were not specifically attributed to any reportable segment. 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 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

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued

	Three Months Ended September 30,						Nine Months Ended September 30,
(In thousands)	2020		2019		Change		2020		2019		Change
Sales by Reportable Segment
Advanced Energy	$	5,479	$	6,094	(10.1)	%	$	12,332	$	15,815	(22.0)	%
OEM	1,475		1,481		(0.4)	%	3,915		4,038		(3.0)	%
Total	$	6,954	$	7,575	(8.2)	%	$	16,247	$	19,853	(18.2)	%
									(632,000)
Sales by Domestic and International
Domestic	$	5,214	$	5,552	(6.1)	%	$	12,225	$	14,002	(12.7)	%
International	1,740		2,023		(14.0)	%	4,022		5,851		(31.3)	%
Total	$	6,954	$	7,575	(8.2)	%	$	16,247	$	19,853	(18.2)	%

Total revenue decreased by (8.2)% and (18.2)%, or approximately $(0.6) million and $(3.6) million, for the three and nine months ended September 30, 2020, respectively, when compared with the three and nine months ended September 30, 2019. Advanced Energy segment sales decreased (10.1)% and (22.0)%, or approximately $(0.6) million and $(3.5) million, for the three and nine months ended September 30, 2020, respectively, when compared with the three and nine months ended September 30, 2019. The impact of COVID-19 has resulted in decreased demand for our products, both domestically and internationally in the first three quarters of 2020, although, sales began to recover late in the second quarter, and through the third quarter as many of our customers resumed operations in a limited capacity. However, we continue to see reduced demand for our products, both domestically and internationally, from our pre-COVID-19 levels.

International sales represented approximately 25.0% and 24.8% of total revenues for the three and nine months ended September 30, 2020, respectively, as compared with 26.7% and 29.5% 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 September 30,								Nine Months Ended September 30,
(In thousands)	2020			2019			Change		2020			2019			Change
Cost of sales	$	2,229		$	2,281		(2.3)	%	$	6,444		$	6,322		1.9	%
Percentage of sales	32.1		%	30.1		%			39.7		%	31.8		%

Gross profit	$	4,725		$	5,294		(10.7)	%	$	9,803		$	13,531		(27.6)	%
Percentage of sales	67.9		%	69.9		%			60.3		%	68.2		%

Gross profit for the three months ended September 30, 2020, decreased (10.7)% to $4.7 million, compared to $5.3 million for the same period in the prior year. Gross margin for the three months ended September 30, 2020, was 67.9%, compared to 69.9% for the same period in 2019. Our decrease in profit margins for the three months ended September 30, 2020 as compared to the same period in the prior year is primarily attributable to product mix within our Advanced Energy segment and higher OEM segment sales as a percentage of total sales. These were partially offset by improved product margins within our Advanced Energy segment as a result of our continued manufacturing efficiency initiatives and improved margins attributable to product mix within our OEM segment.

Gross profit for the nine months ended September 30, 2020, decreased (27.6)% to $9.8 million, compared to $13.5 million for the same period in the prior year. Gross margin for the nine months ended September 30, 2020, was 60.3%, compared to 68.2% for the same period in 2019. During the second 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. This resulted in a decrease in gross profit of approximately $0.4 million during the nine months ended September 30, 2020. The remaining decrease in gross profit margin is

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued

driven by product mix within our Advanced Energy segment, and higher OEM segment sales as a percentage of total sales. These decreases are partially offset by geographical revenue mix within our Advanced Energy segment and improved product margins in our Advanced Energy segment as a result of our continued manufacturing efficiency initiatives.

Other Costs and Expenses

Our spending in the three and nine months ended September 30, 2020 reflected normal business activities into February and March and then a curtailment of certain costs associated with the impact of COVID-19 through most of the third quarter, including restrictions on travel which are still continuing. While certain spending decreased as a result of a reduction in revenue and activities limited by COVID-19, some of our strategic spending has and 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 declined and continue to remain below previously expected levels 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 September 30,								Nine Months Ended September 30,
(In thousands)	2020			2019			Change		2020			2019			Change
Research and Development expense	$	1,047		$	1,016		3.1	%	$	3,002		$	2,634		14.0	%
Percentage of sales	15.1		%	13.4		%			18.5		%	13.3		%

Research and development expenses increased 3.1% and 14.0% for the three and nine months ended September 30, 2020, respectively, primarily due to spending on our two investigational device exemption (IDE) clinical studies, which had applications submitted to the FDA in late 2019.

Professional services

	Three Months Ended September 30,								Nine Months Ended September 30,
(In thousands)	2020			2019			Change		2020			2019			Change
Professional services expense	$	1,835		$	2,039		(10.0)	%	$	5,882		$	5,818		1.1	%
Percentage of sales	26.4		%	26.9		%			36.2		%	29.3		%

Professional services expense decreased (10.0)% for the three months ended September 30, 2020, primarily attributable to a decrease in physician consulting fees ($0.3 million), partially offset by an increase in accounting and auditing fees ($0.1 million) related to our change in our independent accounting firm during the quarter.

Professional services expense increased 1.1% for the nine months ended September 30, 2020, primarily attributable to an increase in accounting and auditing fees ($0.8 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 and a decrease in option expense related to options granted to our partner physicians ($0.5 million), as additional grants did not occur in 2020.

Salaries and related costs

	Three Months Ended September 30,								Nine Months Ended September 30,
(In thousands)	2020			2019			Change		2020			2019			Change
Salaries and related expenses	$	3,508		$	3,159		11.0	%	$	10,258		$	10,157		1.0	%
Percentage of sales	50.4		%	41.7		%			63.1		%	51.2		%

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APYX MEDICAL CORPORATION

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued

During the three and nine months ended September 30, 2020, salaries and related expenses increased approximately 11.0% and 1.0%, respectively, primarily driven by higher stock option expense ($0.5 million and $1.2 million, respectively). These increases were partially offset by lower bonus expense in 2020 ($0.4 million and $0.9 million, respectively).

Selling, general and administrative expenses

	Three Months Ended September 30,								Nine Months Ended September 30,
(In thousands)	2020			2019			Change		2020			2019			Change
SG&A Expense	$	2,706		$	3,836		(29.5)	%	$	8,691		$	9,830		(11.6)	%
Percentage of sales	38.9		%	50.6		%			53.5		%	49.5		%

During the three months ended September 30, 2020, selling, general and administrative expense decreased (29.5)%, primarily driven by decreases in travel and entertainment expense ($0.3 million), advertising including show fees and related costs ($0.3 million), commissions on Advanced Energy sales ($0.2 million), training expenses ($0.1 million), and a decrease in regulatory registration and related quality audit expenses associated with reduced governmental activity due to COVID-19 ($0.1 million).

During the nine months ended September 30, 2020, selling, general and administrative expense decreased approximately (11.6)%, primarily driven by decreases in travel and entertainment expense ($0.6 million), commissions on Advanced Energy sales ($0.4 million), advertising including show fees and related costs ($0.4 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.

Other Income (Expense)

	Three Months Ended September 30,								Nine Months Ended September 30,
(In thousands)	2020			2019			Change		2020			2019			Change
Interest income	$	10		$	327		(96.9)	%	$	233		$	1,153		(79.8)	%
Percentage of sales	0.1		%	4.3		%			1.4		%	5.8		%
Other income (loss), net	(63)			$	230		(127.4)	%	349			$	(265)		231.7	%
Percentage of sales	(0.9)		%	3.0		%			2.1		%	(1.3)		%

Interest income decreased (96.9)% and (79.8)% for the three and nine months ended September 30, 2020, respectively, as compared with the same periods in the prior year. This decrease is due to a lower yield, as well as a lower average balance, on our investments in U.S. Treasury securities included in cash and cash equivalents.

Other income (loss), net decreased (127.4)% for the three months ended September 30, 2020, as compared with the same period in the prior year. This decrease is primarily due to a higher volume of orders from Symmetry Surgical in the same period in the prior year under our transition supply agreement with them following the disposition of our Core business in 2018. Other income (loss), net increased 231.7% for the nine months ended September 30, 2020, as compared with the prior year. This increase is primarily due to the receipt of refunds on tariffs paid in the prior year during the first quarter of 2020 combined with the recognition of a joint and several liability for failure to collect and remit payroll taxes related to stock option exercises in the prior year.

Income Taxes

	Three Months Ended September 30,								Nine Months Ended September 30,
(In thousands)	2020			2019			Change		2020			2019			Change
Income tax expense (benefit)	$	(715)		$	171		(518.1)	%	$	(7,112)		$	253		(2,911.1)	%
Effective tax rate	16.1		%	(4.1)		%			40.7		%	(1.8)		%

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APYX MEDICAL CORPORATION

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued

Our income tax (benefit) expense was approximately $(715,000) and $171,000 with an effective tax rate of 16.1% and (4.1)% for the three months ended September 30, 2020 and 2019, respectively. Our income tax (benefit) expense was approximately $(7,112,000) and $253,000 with an effective tax rate of 40.7% and (1.8)% for the nine months ended September 30, 2020 and 2019, respectively. For the nine months ended September 30, 2020, the effective rate differs from the statutory rate primarily due to the release of the valuation allowance on our NOL carryforward from 2019. For the three months ended September 30, 2020, and the three and nine months ended September 30, 2019, the effective rate differs from the statutory rate primarily due to interest and penalties on our uncertain tax positions. On March 27, 2020, the U.S. government enacted the CARES Act to provide relief from COVID-19. The CARES Act includes a provision that allows companies to carryback NOLs generated in the period 2018 through 2020 to prior years. As a result, we released the full valuation allowance of approximately $3.7 million on our Federal NOL carryforward from 2019 during the first quarter of 2020.

Liquidity and Capital Resources

Our working capital at September 30, 2020 was approximately $58.1 million compared with $64.4 million at December 31, 2019. The decrease in working capital from December 31, 2019 to September 30, 2020 was primarily due to the net loss incurred by the Company during the first three quarters of 2020 partially offset by non cash activity including stock-based compensation expense and our provision for allowance for doubtful accounts.

For the nine months ended September 30, 2020, net cash used in operating activities was approximately $15.0 million, which principally funded our operating loss of $18.0 million, compared with net cash used in operating activities of approximately $15.2 million million in the same period for 2019. Utilizing the provisions of the CARES Act, we recognized an income tax benefit of approximately $7.1 million in the first nine months of 2020, of which 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 September 30, 2020, we deferred approximately $0.3 million in taxes utilizing this program. We expect to defer and additional $0.1 million to $0.2 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 committed to 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 for the nine months ended September 30, 2020 was $0.2 million, related to investments in property and equipment. Net cash provided by investing activities for the nine months ended September 30, 2019 was approximately $60.8 million, primarily related to the maturity of short term investments and reinvestment in cash equivalents. This was partially offset by investments in property and equipment of approximately $1.1 million.

At September 30, 2020, we had purchase commitments totaling approximately $1.8 million, substantially all of which is expected to be purchased within the next six months.

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MANAGEMENT'S DISCUSSION AND ANALYSIS 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 2019 Form 10-K, filed with the SEC on March 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, 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 recognized 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 expense to be recognized. 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 Allowance

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 ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued

Inventory Obsolescence Allowance

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

Litigation Contingencies

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

Income Taxes

The provision for income 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 expense or benefit is based on the changes in the deferred tax asset or liability from period to period.

As a result of historical losses exclusive of the sale of the Core business in 2018, and our expectation to continue to generate losses in the near future, we recorded a valuation allowance on the net deferred tax asset and do not anticipate recording an income tax benefit related to these deferred tax assets. We will reassess the realization of deferred tax assets each reporting period and will be able to reduce the valuation allowance to the extent the financial results 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 September 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.

Inflation

Inflation has not materially impacted the operations of our Company.

Off-Balance Sheet Arrangements

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

Recent Accounting Pronouncements

See Note 3 of the Notes to Consolidated Financial Statements.

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ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

Not applicable.

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ITEM 4. Controls and Procedures

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 September 30, 2020, due to the material weaknesses in our internal control over financial reporting previously identified and reported in our 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, 2019, based on the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control- Integrated Framework (2013). Based on that evaluation, management concluded that, as of December 31, 2019, the Company's internal control over financial reporting was not effective as a result of the material weaknesses described below.

The effectiveness of our internal control over financial reporting as of December 31, 2019 was audited by BDO USA LLP, an independent registered public accounting firm, as stated in their report included in Part II, Item 8 of our 2019 Form 10-K, 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 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

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and services, including the processing and payment of vendor invoices.

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 are in the process of remediating the material weakness associated with the lack of sufficient qualified accounting personnel with an appropriate level of knowledge and experience with generally accepted accounting principles 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 review controls associated with the processes noted above. We have reviewed current financial controls to assess if additional management review controls are necessary and will continue to work with all finance personnel to ensure the appropriate documentation criteria for the existing controls, including evidence of review, timeliness and variance thresholds. We will continue to work with the third-party specialists we engaged to review, document, and enhance the design of our controls, with the goal of designing and implementing controls that address the completeness and accuracy 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, 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 are actively monitoring the design and operating effectiveness of enhancement to internal controls in these areas to confirm the successful implementation of these remediation measures.

As of September 30, 2020, we continue our efforts to remediate these deficiencies.

Changes in Internal Control Over Financial Reporting

Except as set forth above, there were no changes in our internal control over financial reporting that occurred during the three months ended September 30, 2020 that 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

See Note 11 of Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q.

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ITEM 1A. Risk factors

There have been no material changes to the Risk Factors described in Part I, Item1A-Risk Factors in our 2019 Form10-K 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 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 fourth quarter of 2020 and possibly beyond.

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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

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)
10.1	Charles D. Goodwin II Amended and Restated Employment Agreement (Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on September 18, 2020).
10.2	Tara Harris Semb Amended and Restated Employment Agreement (Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on September 18, 2020).
10.3	Todd Hornsby Amended and Restated Employment Agreement (Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on September 18, 2020).
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: November 9, 2020	By:	/s/ Charles D. Goodwin II
		Charles D. Goodwin II
		President, Chief Executive Officer and Director
		(Principal Executive Officer)
Date: November 9, 2020	By:	/s/ Tara Semb
		Tara Semb
		Chief Financial Officer,
		Treasurer and Secretary
		(Principal Financial Officer)

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