10-Q 1 a2019q310-q.htm 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
or
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number: 0-12183

APYX MEDICAL CORPORATION
(Exact name of registrant as specified in its charter)

Delaware |  | 11-2644611
(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)

5115 Ulmerton Road, Clearwater, FL 33760
(Address of principal executive offices, zip code)
(727) 384-2323
(Registrant’s telephone number)
Securities Registered Pursuant to Section 12 (b) of the Act:

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

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes: ý No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes: ý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act (Check one):

Large accelerated filer | o |  | Accelerated filer | ý
Non-accelerated filer | o |  | Smaller reporting company | ý
|  |  | Emerging growth company | o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. | o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes: o No ý
As of November 11, 2019, 34,168,230 shares of the registrant’s $0.001 par value common stock were outstanding.

Table of Contents
APYX MEDICAL CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
For the quarterly period ended September 30, 2019
(Unaudited)

|  |  |  | Page
Part I. |  | Financial Information |  | 2
Item 1. |  | Financial Statements |  | 2
|  | Consolidated Balance Sheets at September 30, 2019 and December 31, 2018 |  | 2
|  | Consolidated Statements of Operations for the three and nine months ended September 30, 2019 and 2018 |  | 3
|  | Consolidated Statements of Changes in Stockholders’ Equity for the three and nine months ended September 30, 2019 and 2018 |  | 4
|  | Consolidated Statements of Cash Flows for the nine months ended September 30, 2019 and 2018 |  | 5
|  | Notes to Consolidated Financial Statements |  | 6
Item 2. |  | Management’s Discussion and Analysis of Financial Condition and Results of Operations |  | 20
Item 3. |  | Quantitative and Qualitative Disclosures about Market Risk |  | 28
Item 4. |  | Controls and Procedures |  | 28
Part II. |  | Other Information |  | 30
Item 1. |  | Legal Proceedings |  | 30
Item 1A. |  | Risk Factors |  | 30
Item 2. |  | Unregistered Sales of Equity Securities and Use of Proceeds |  | 30
Item 3. |  | Defaults Upon Senior Securities |  | 31
Item 4. |  | Mine Safety Disclosures |  | 31
Item 5. |  | Other Information |  | 32
Item 6. |  | Exhibits |  | 33
|  | Signatures |  | 34

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Table of Contents
APYX MEDICAL CORPORATION
PART I. Financial Information
ITEM 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data, Unaudited)

| September 30, 2019 |  | December 31, 2018
ASSETS |  |  |
Current assets: |  |  |
Cash and cash equivalents | $ | 62,272 |  |  | $ | 16,466 |
Short term investments | — |  |  | 61,678 |
Trade accounts receivable, net of allowance of $354 and $428 | 7,662 |  |  | 5,015 |
Inventories, net of provision for obsolescence of $439 and $439 | 7,237 |  |  | 5,212 |
Prepaid expenses and other current assets | 1,734 |  |  | 1,146 |
Total current assets | 78,905 |  |  | 89,517 |
Property and equipment, net | 6,645 |  |  | 5,788 |
Operating lease right-of-use assets | 368 |  |  | — |
Finance lease right-of-use assets | 638 |  |  | — |
Other assets | 387 |  |  | 305 |
Total assets | $ | 86,943 |  |  | $ | 95,610 |
LIABILITIES AND STOCKHOLDERS’ EQUITY |  |  |
Current liabilities: |  |  |
Accounts payable | $ | 1,457 |  |  | $ | 1,423 |
Accrued expenses and other liabilities | 7,285 |  |  | 6,162 |
Current portion of operating lease liabilities | 101 |  |  | — |
Current portion of finance lease liabilities | 196 |  |  | — |
Total current liabilities | 9,039 |  |  | 7,585 |
Note payable | 140 |  |  | 140 |
Long-term operating lease liabilities | 248 |  |  | — |
Long-term finance lease liabilities | 444 |  |  | — |
Contract liabilities | 339 |  |  | — |
Total liabilities | 10,210 |  |  | 7,725 |
STOCKHOLDERS’ EQUITY |  |  |
Common stock, $0.001 par value; 75,000,000 shares authorized; 34,120,065 issued and 33,977,490 outstanding as of September 30, 2019, and 33,847,100 issued and 33,704,525 outstanding as of December 31, 2018 | 34 |  |  | 34 |
Additional paid-in capital | 55,668 |  |  | 52,920 |
Retained earnings | 21,031 |  |  | 34,931 |
Total stockholders’ equity | 76,733 |  |  | 87,885 |
Total liabilities and stockholders’ equity | $ | 86,943 |  |  | $ | 95,610 |

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 September 30, |  | Nine Months Ended September 30,
| 2019 |  | 2018 |  | 2019 |  | 2018
Sales | $ | 7,575 |  |  | $ | 3,672 |  |  | $ | 19,772 |  |  | $ | 10,760 |
Cost of sales | 2,558 |  |  | 1,151 |  |  | 6,757 |  |  | 3,490 |
Gross profit | 5,017 |  |  | 2,521 |  |  | 13,015 |  |  | 7,270 |
Other costs and expenses: |  |  |  |  |  |  |
Research and development | 936 |  |  | 613 |  |  | 2,634 |  |  | 1,890 |
Professional services | 1,996 |  |  | 628 |  |  | 5,756 |  |  | 1,815 |
Salaries and related costs | 3,020 |  |  | 2,119 |  |  | 9,691 |  |  | 5,734 |
Selling, general and administrative | 3,762 |  |  | 1,957 |  |  | 9,869 |  |  | 6,280 |
Total other costs and expenses | 9,714 |  |  | 5,317 |  |  | 27,950 |  |  | 15,719 |
Loss from operations | (4,697 | ) |  | (2,796 | ) |  | (14,935 | ) |  | (8,449 | )
Interest income | 327 |  |  | 135 |  |  | 1,153 |  |  | 135 |
Interest expense | — |  |  | (30 | ) |  | — |  |  | (102 | )
Other income (losses), net | 230 |  |  | (155 | ) |  | 5 |  |  | (155 | )
Change in value of derivative liabilities | — |  |  | — |  |  | — |  |  | 20 |
Total other income (expense), net | 557 |  |  | (50 | ) |  | 1,158 |  |  | (102 | )
Loss before income taxes | (4,140 | ) |  | (2,846 | ) |  | (13,777 | ) |  | (8,551 | )
Income tax expense (benefit) | 171 |  |  | (2,408 | ) |  | 123 |  |  | (2,384 | )
Loss from continuing operations | (4,311 | ) |  | (438 | ) |  | (13,900 | ) |  | (6,167 | )
Income from discontinued operations, net of tax | — |  |  | 540 |  |  | — |  |  | 5,062 |
Gain on sale of Core Business, net of tax | — |  |  | 69,072 |  |  | — |  |  | 69,072 |
Total income from discontinued operations, net of tax | — |  |  | 69,612 |  |  | — |  |  | 74,134 |
Net income (loss) | $ | (4,311 | ) |  | $ | 69,174 |  |  | $ | (13,900 | ) |  | $ | 67,967 |
EPS from continuing operations: |  |  |  |  |  |  |
Basic and diluted | $ | (0.13 | ) |  | $ | (0.01 | ) |  | $ | (0.41 | ) |  | $ | (0.19 | )
EPS from discontinued operations: |  |  |  |  |  |  |
Basic | $ | — |  |  | $ | 2.09 |  |  | $ | — |  |  | $ | 2.25 |
Diluted | $ | — |  |  | $ | 1.99 |  |  | $ | — |  |  | $ | 2.19 |
EPS from total operations: |  |  |  |  |  |  |
Basic | $ | (0.13 | ) |  | $ | 2.08 |  |  | $ | (0.41 | ) |  | $ | 2.06 |
Diluted | $ | (0.13 | ) |  | $ | 1.98 |  |  | $ | (0.41 | ) |  | $ | 2.00 |

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)

Three months ended September 30, 2018 and 2019 |  |  |  |  |  |  |  |  |
| Common Stock |  | Additional Paid-In Capital |  | Retained Earnings (Accumulated deficit) |  | Total
| Shares |  | Par Value |  |  |
Balance June 30, 2018 | 32,913 |  |  | $ | 33 |  |  | $ | 51,244 |  |  | $ | (29,703 | ) |  | $ | 21,574 |
Options exercised | 28 |  |  | — |  |  | 65 |  |  | — |  |  | 65 |
Stock based compensation | — |  |  | — |  |  | 489 |  |  | — |  |  | 489 |
Shares issued on net settlement of stock options | 679 |  |  | — |  |  | — |  |  | — |  |  | — |
Net income | — |  |  | — |  |  | — |  |  | 69,174 |  |  | 69,174 |
Balance September 30, 2018 | 33,620 |  |  | 33 |  |  | $ | 51,798 |  |  | $ | 39,471 |  |  | $ | 91,302 |
Balance June 30, 2019 | 33,921 |  |  | $ | 34 |  |  | $ | 55,086 |  |  | $ | 25,342 |  |  | $ | 80,462 |
Options exercised | 21 |  |  | — |  |  | 39 |  |  | — |  |  | 39 |
Stock based compensation | — |  |  | — |  |  | 543 |  |  | — |  |  | 543 |
Shares issued on net settlement of stock options | 35 |  |  | — |  |  | — |  |  | — |  |  | — |
Net Loss | — |  |  | — |  |  | — |  |  | (4,311 | ) |  | (4,311 | )
Balance September 30, 2019 | 33,977 |  |  | $ | 34 |  |  | $ | 55,668 |  |  | $ | 21,031 |  |  | $ | 76,733 |
Nine months ended September 30, 2018 and 2019 |  |  |  |  |  |  |  |  |
| Common Stock |  | Additional Paid-In Capital |  | Retained Earnings (Accumulated deficit) |  | Total
| Shares |  | Par Value |  |  |
Balance December 31, 2017 | 32,878 |  |  | $ | 33 |  |  | $ | 50,495 |  |  | $ | (28,496 | ) |  | $ | 22,032 |
Options exercised | 28 |  |  | — |  |  | 65 |  |  | — |  |  | 65 |
Stock based compensation | — |  |  | — |  |  | 1,238 |  |  | — |  |  | 1,238 |
Shares issued on net settlement of warrants | 17 |  |  | — |  |  | — |  |  | — |  |  | — |
Shares issued on net settlement of stock options | 697 |  |  | — |  |  | — |  |  | — |  |  | — |
Net income | — |  |  | — |  |  | — |  |  | 67,967 |  |  | 67,967 |
Balance September 30, 2018 | 33,620 |  |  | $ | 33 |  |  | $ | 51,798 |  |  | $ | 39,471 |  |  | $ | 91,302 |
Balance December 31, 2018 | 33,705 |  |  | $ | 34 |  |  | $ | 52,920 |  |  | $ | 34,931 |  |  | $ | 87,885 |
Options exercised | 51 |  |  | — |  |  | 154 |  |  | — |  |  | 154 |
Stock based compensation | — |  |  | — |  |  | 2,594 |  |  | — |  |  | 2,594 |
Shares issued on net settlement of stock options | 221 |  |  | — |  |  | — |  |  | — |  |  | — |
Net loss | — |  |  | — |  |  | — |  |  | (13,900 | ) |  | (13,900 | )
Balance September 30, 2019 | 33,977 |  |  | $ | 34 |  |  | $ | 55,668 |  |  | $ | 21,031 |  |  | $ | 76,733 |

The accompanying notes are an integral part of the consolidated financial statements.
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APYX MEDICAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, Unaudited)

| Nine Months Ended September 30,
| 2019 |  | 2018
Cash flows from operating activities |  |  |
Net (loss) income | $ | (13,900 | ) |  | $ | 67,967 |
Adjustments to reconcile net loss to net cash used in operating activities: |  |  |
Gain on sale of the Core Business, net of tax | — |  |  | (69,072 | )
Depreciation and amortization | 510 |  |  | 429 |
Provision for inventory obsolescence | 115 |  |  | — |
Unrealized gain on foreign currency remeasurement | (12 | ) |  | — |
Loss on disposal of property and equipment | 19 |  |  | — |
Stock based compensation | 2,594 |  |  | 1,238 |
Change in fair value of derivative liabilities | — |  |  | (20 | )
Net, non cash lease expense | 2 |  |  | — |
Realized and unrealized gains on short term investments | (164 | ) |  | (47 | )
Provision for allowance for doubtful accounts | (94 | ) |  | 123 |
Benefit of deferred taxes | — |  |  | (368 | )
Changes in operating assets and liabilities: |  |  |  |
Trade receivables | (2,580 | ) |  | 654 |
Prepaid expenses | (596 | ) |  | (188 | )
Inventories | (2,463 | ) |  | (1,706 | )
Deposits and other assets | (131 | ) |  | (9 | )
Accounts payable | 50 |  |  | 765 |
Accrued and other liabilities | 1,556 |  |  | (2,601 | )
Net cash used in operating activities | (15,094 | ) |  | (2,835 | )
Cash flows from investing activities |  |  |  |
Purchases of property and equipment | (1,076 | ) |  | (203 | )
Purchases of marketable securities | (18,884 | ) |  | (55,433 | )
Proceeds from maturities of marketable securities | 80,726 |  |  | — |
Proceeds from the disposition of Core business | — |  |  | 91,095 |
Net cash provided by investing activities | 60,766 |  |  | 35,459 |
Cash flows from financing activities |  |  |  |  |
Proceeds from stock options | 154 |  |  | 65 |
Repayment of finance lease liabilities | (2 | ) |  | — |
Repayment of mortgage note payable | — |  |  | (2,694 | )
Net cash provided by (used in) financing activities | 152 |  |  | (2,629 | )
Effect of foreign currency translation on cash | (18 | ) |  | — |
Net change in cash, cash equivalents and restricted cash | 45,806 |  |  | 29,995 |
Cash, cash equivalents and restricted cash, beginning of period | 16,466 |  |  | 10,668 |
Cash, cash equivalents and restricted cash, end of period | $ | 62,272 |  |  | $ | 40,663 |
Cash paid for: |  |  |
Interest | $ | — |  |  | $ | 102 |
Non cash financing activities: |  |  |  |
Cashless exercise of stock options/warrants | $ | 957 |  |  | $ | 3,133 |

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,” and similar terms refer to Apyx Medical Corporation and its consolidated subsidiaries.
We are a medical technology company and the developer of J-Plasma® (marketed and sold under the Renuvion® Cosmetic Technology brand in the cosmetic surgery market), a patented plasma-based surgical product for cutting, coagulation and ablation of soft tissue. J-Plasma® technology utilizes a helium ionization process to produce a stable, focused beam of plasma that provides surgeons with greater precision and minimal invasiveness. The Company also leverages its expertise through original equipment manufacturing (OEM) agreements with other medical device manufacturers.
On August 30, 2018, we closed on a definitive A sset P urchase A greement with Specialty Surgical Instrumentation Inc., a Tennessee Corporation and wholly-owned subsidiary of Symmetry Surgical Inc. (“Symmetry”), pursuant to which we divested and sold our electrosurgical "Core" business segment and related intellectual property, including the Bovie® brand and trademarks, to Symmetry for gross proceeds of $97 million in cash. The divestiture and sale of our Core business segment to Symmetry allows us to further focus on our strategic objective of commercializing our J-Plasma® technology, including the Renuvion® brand in the cosmetic surgery market. We also entered into with Symmetry a T ransition S ervices A greement, a Patent Licensing Agreement, a Disposables Supply Agreement, and a Generator Manufacturing and Supply Agreement, the latter of which will establish us as an OEM-provider of generators to Symmetry for a period of at least 10 years from the agreement date.
In connection with the A sset P urchase A greement, 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 c onsolidated s tatements of o perations as o ther gains or losses. For the three months ended September 30, 2019, Core sales following the divestiture amounted to $2.5 million with cost of sales of $2.1 million and related operating expenses of $0.2 million, which are included in other income (losses) i n the c onsolidated s tatement s of o perations.
For the nine months ended September 30, 2019, Core sales following the divestiture amounted to $6.9 million with cost of sales of $6.6 million and related operating expenses of $0.3 million, which are included in other income (losses) in the c onsolidated s tatement s of o perations.
In connection with the A sset P urchase A greement, 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 c onsolidated s tatements as income or loss from operations of our OEM reporting segment.
We reclassified the financial results of the Core business to discontinued operations and from segment results for all periods presented.
Revisions
Throughout 2019, the Company has been making efforts to remediate its material weakness in internal control as of December 31, 2018, including investing in new personnel that have expertise in a broad array of accounting topics. As a result of these investments, the Company reevaluated its accounting for stock-based compensation expense and during the three months ended September 30, 2019, the Company discovered immaterial errors in its accounting for certain items included in stock-based compensation expense. These errors related to its accounting for forfeitures, the vesting periods over which the expense was recognized, modifications, fair value measurements, and other minor miscellaneous items, all of which relate to the prior year. Additionally, the Company identified an issue relating to grants in the first quarter of 2019, whereby compensation was not recognized over the correct vesting period.
During the three months ended September 30, 2019, the Company re-evaluated its accounting for pre-development activities on certain OEM contracts. In performing the review, the Company determined that the it has not completed its performance obligations on its pre-development activities in these contracts. Accordingly, the Company determined that it had prematurely recognized revenues during the first quarter relating to these activities and did not defer the accompanying costs.
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APYX MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
The Company has determined that the effects of the corrections are not material to the consolidated financial statements as of December 31, 2018, March 31, 2019 or June 30, 2019, but has elected to correct the consolidated financial statements for the three and nine months ended September 30, 2019. Accordingly, the Company has corrected the errors in the periods to which they relate. There were no adjustments to the results of operations for the three months ended June 30, 2019. A summary of the revisions as of each reporting period affected is as follows:
As of and for the year ended December 31, 2018:

(In thousands) | As Reported |  | Adjustments |  | As Revised |  |
Balance Sheet |  |  |  |  |  |  |
Accrued severance and related | $ | 727 |  |  | $ | (117 | ) |  | $ | 610 |  |  | [1], [3]
Additional paid-in capital | 52,221 |  |  | 699 |  |  | 52,920 |  |  | [1]
Retained earnings | 35,513 |  |  | (582 | ) |  | 34,931 |  |  | [1]
Statement of Operations |  |  |  |  |  |  |
Professional services | $ | 3,072 |  |  | $ | 34 |  |  | $ | 3,106 |  |  | [1]
Salaries and related costs | 8,673 |  |  | 548 |  |  | 9,221 |  |  | [1]
Loss per share from continuing operations |  |  |  |  |  |  |
Basic and Diluted | $ | (0.29 | ) |  | $ | (0.01 | ) |  | $ | (0.30 | ) |  |
Income per share from discontinued operations |  |  |  |  |  |  |
Basic | $ | 2.21 |  |  | $ | — |  |  | $ | 2.21 |  |  |
Diluted | $ | 2.14 |  |  | $ | — |  |  | $ | 2.14 |  |  |
Income per share all operations |  |  |  |  |  |  |
Basic | $ | 1.93 |  |  | $ | (0.02 | ) |  | $ | 1.91 |  |  |
Diluted | $ | 1.86 |  |  | $ | (0.01 | ) |  | $ | 1.85 |  |  |
[1] Adjustments relate to stock-based compensation corrections
[2] Adjustments relate to OEM revenue correction
[3] Financial statement caption has been condensed in accrued expenses and other liabilities in the current interim period

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APYX MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
As of and for the three months ended March 31, 2019:

(In thousands) | As Reported |  | Adjustments |  | As Revised |  |
Balance Sheet |  |  |  |  |  |  |
Other assets | $ | 162 |  |  | $ | 77 |  |  | $ | 239 |  |  | [1]
Contract liabilities | — |  |  | 194 |  |  | 194 |  |  | [1]
Additional paid-in capital | 53,147 |  |  | 1,035 |  |  | 54,182 |  |  | [1]
Retained earnings | 30,832 |  |  | (1,152 | ) |  | 29,680 |  |  | [1]
Statement of Operations |  |  |  |  |  |  |
Sales | $ | 5,823 |  |  | $ | (194 | ) |  | $ | 5,629 |  |  | [2]
Professional services | 1,791 |  |  | 336 |  |  | 2,127 |  |  | [1]
Salaries and related costs | 3,221 |  |  | 117 |  |  | 3,338 |  |  | [1]
Selling, general and administrative | 3,101 |  |  | (77 | ) |  | 3,024 |  |  | [2]
Loss per share - basic and diluted | $ | (0.14 | ) |  | $ | (0.02 | ) |  | $ | (0.16 | ) |  |
[1] Adjustments relate to stock-based compensation corrections
[2] Adjustments relate to OEM revenue correction

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

(In thousands) | As Reported |  | Adjustments |  | As Revised |  |
Balance Sheet |  |  |  |  |  |  |
Other assets | $ | 368 |  |  | $ | 77 |  |  | $ | 445 |  |  | [1]
Contract liabilities | — |  |  | 194 |  |  | 194 |  |  | [1]
Additional paid-in capital | 54,051 |  |  | 1,035 |  |  | 55,086 |  |  | [1]
Retained earnings | 26,494 |  |  | (1,152 | ) |  | 25,342 |  |  | [1]
Statement of Operations |  |  |  |  |  |  |
Sales | $ | 12,391 |  |  | $ | (194 | ) |  | $ | 12,197 |  |  | [2]
Professional services | 3,424 |  |  | 336 |  |  | 3,760 |  |  | [1]
Salaries and related costs | 6,554 |  |  | 117 |  |  | 6,671 |  |  | [1]
Selling, general and administrative | 6,184 |  |  | (77 | ) |  | 6,107 |  |  | [2]
Loss per share - basic and diluted | $ | (0.27 | ) |  | $ | (0.02 | ) |  | $ | (0.29 | ) |  |
[1] Adjustments relate to stock-based compensation corrections
[2] Adjustments relate to OEM revenue correction

The accompanying unaudited consolidated financial statements have been prepared based upon SEC rules that permit reduced disclosure for interim periods. For a more complete discussion of significant accounting policies and certain other information, please refer to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2018. These consolidated financial statements reflect all adjustments that are necessary for a fair presentation of results of consolidated operations and financial condition for the interim periods shown, including normal recurring accruals and other items. The results for the interim periods are not necessarily indicative of results for the full year.
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APYX MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
NOTE 2. 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) | September 30, 2019 |  | December 31, 2018
Raw materials | $ | 6,126 |  |  | $ | 4,521 |
Finished goods and work-in-process | 1,550 |  |  | 1,130 |
Gross inventories | 7,676 |  |  | 5,651 |
Less: reserve for obsolescence | (439 | ) |  | (439 | )
Net inventories | $ | 7,237 |  |  | $ | 5,212 |

NOTE 3. ACCRUED EXPENSES AND OTHER CURRENT LIABILTIES
Accrued expenses and other current liabilities consisted of the following:

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

NOTE 4. RECENT ACCOUNTING PRONOUNCEMENTS
In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The purpose of this ASU is to reduce the cost and complexity of evaluating goodwill for impairment. It eliminates the need for entities to calculate the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. Under this ASU, an entity will perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge is recognized for the amount by which the carrying value exceeds the reporting unit’s fair value. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted, however we have chosen not to do so. The amendment will not have a material impact on our consolidated financial condition or results of operations.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). Topic 842 establishes a new lease model, referred to as the right-of-use model that brings substantially all leases on the balance sheet. This standard requires lessees to recognize leased assets and lease liabilities on the balance sheet and disclose key information about the leasing arrangements in their financial statements. Leases are classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the statement of operations. The Company adopted Topic 842 effective January 1, 2019 using the modified retrospective transition approach that allows a reporting entity to use the effective date as its date of initial application and not restate the comparative periods in the period of adoption when transitioning to the new standard. Consequently, the requisite financial information and disclosures under the new standard are excluded for dates and periods prior to January 1, 2019. In addition, the Company elected to use a number of optional simplification and practical expedients permitted under the transition guidance within the new standard, including allowing the Company to combine fixed lease and non-lease components, apply the short-term lease exception to all
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APYX MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
leases of one year or less, and utilize the ‘package of practical expedients’, which permits the Company to not reassess prior accounting conclusions with respect to lease identification, lease classification and initial direct costs under Topic 842. Adoption of this new standard resulted in the recognition of approximately $212,000 of operating lease liabilities and right-of-user assets, which represents the present value of the remaining lease payments at the adoption date of approximately $221,000, discounted using the Company’s incremental borrowing rate of 4.00%. Please see Note 13 for a full discussion of the impacts of adoption on the current year consolidated financial statements.
No other new accounting pronouncement issued or effective during the fiscal year had or is expected to have a material impact on our consolidated financial statements or disclosures.
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APYX MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
NOTE 5. EARNINGS PER SHARE
We compute basic earnings per share (“basic EPS”) by dividing the net income or loss by the weighted average number of common shares outstanding for the reporting period adjusted for other units required to be included in basic EPS. Diluted earnings per share (“diluted EPS”) gives effect to all dilutive potential shares outstanding. The following table provides the computation of basic and diluted earnings per share.

| Three Months Ended September, 30 |  | Nine Months Ended September 30,
(in thousands, except per share data) | 2019 |  | 2018 |  | 2019 |  | 2018
Numerator: |  |  |  |  |  |  |
Net loss from continuing operations | $ | (4,311 | ) |  | $ | (438 | ) |  | $ | (13,900 | ) |  | $ | (6,167 | )
Net income from discontinued operations, net of tax | $ | — |  |  | $ | 69,612 |  |  | $ | — |  |  | $ | 74,134 |
Net income (loss) from all operations | $ | (4,311 | ) |  | $ | 69,174 |  |  | $ | (13,900 | ) |  | $ | 67,967 |
Denominator: |  |  |  |  |  |  |
Denominator - basic |  |  |  |  |  |  |
Weighted average shares outstanding - basic | 33,942 |  |  | 33,275 |  |  | 33,903 |  |  | 33,014 |
Contingently issuable shares - basic | 136 |  |  | — |  |  | 136 |  |  | — |
Denominator - basic and diluted from continuing operations | 34,078 |  |  | 33,275 |  |  | 34,039 |  |  | 33,014 |
Effect of dilutive securities: |  |  |  |  |  |  |
Stock options | — |  |  | 1,659 |  |  | — |  |  | 938 |
Denominator - diluted discontinued and all operations : | 34,078 |  |  | 34,934 |  |  | 34,039 |  |  | 33,952 |
Loss per share from continuing operations: |  |  |  |  |  |  |
Basic and diluted | $ | (0.13 | ) |  | $ | (0.01 | ) |  | $ | (0.41 | ) |  | $ | (0.19 | )
Income per share from discontinued operations |  |  |  |  |  |  |
Basic | $ | — |  |  | $ | 2.09 |  |  | $ | — |  |  | $ | 2.25 |
Diluted | $ | — |  |  | $ | 1.99 |  |  | $ | — |  |  | $ | 2.19 |
Income (loss) per share from all operations |  |  |  |  |  |  |
Basic | $ | (0.13 | ) |  | $ | 2.08 |  |  | $ | (0.41 | ) |  | $ | 2.06 |
Diluted | $ | (0.13 | ) |  | $ | 1.98 |  |  | $ | (0.41 | ) |  | $ | 2.00 |
Anti-dilutive instruments excluded from diluted loss per common share: |  |  |  |  |  |  |
Restricted stock | 90 |  |  | — |  |  | 90 |  |  | — |
Options | 4,060 |  |  | — |  |  | 4,060 |  |  | — |

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APYX MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
NOTE 6. STOCK-BASED COMPENSATION
Under our stock option plans, our board of directors may grant restricted stock and options to purchase common shares to our key employees, officers, directors and consultants. We account for stock options in accordance with FASB ASC Topic 718, Compensation - Stock Compensation, with stock-based compensation expense amortized over the vesting period based on the trinomial lattice option-pricing model fair value on the grant date, which includes a number of estimates that affect the amount of our expense. In September 2019, the Company registered 2,000,000 shares under our shareholder approved 2019 Share Incentive Plan.
We recognized approximately $543,000 and $2,594,000 in stock-based compensation expense during the three and nine months ended September 30, 2019, respectively, as compared with $489,000 and $1,238,000 for the three and nine months ended September 30, 2018, respectively.
The status of our stock options are summarized as follows:

| Number of options |  | Weighted average exercise price
Outstanding at December 31, 2018 | 3,254,779 |  |  | $ | 3.18 |
Granted | 1,379,500 |  |  | 7.70 |
Exercised | (391,135 | ) |  | 2.84 |
Canceled and forfeited | (183,500 | ) |  | 3.41 |
Outstanding at September 30, 2019 | 4,059,643 |  |  | $ | 4.73 |

The Company allows employees to exercise stock-based awards by surrendering stock-based awards with a fair value of the stock-based awards exercised, referred to as net settlements. These surrenders are included in stock options exercised in the options rollforward above. For the three months ended September 30, 2019 and 2018, respectively, the Company received 26,572 and 532,477 options as payment in the exercise of 34,928 and 680,388 options. For the nine months ended September 30, 2019 and 2018, respectively, the Company received 118,170 and 576,135 options and warrants as payment in the exercise of 220,879 and 713,980 options and warrants.
Common shares required to be issued upon the exercise of stock options would be issued from our authorized and unissued shares. We calculated the fair value of issued options utilizing a trinomial lattice with an expected life calculated via the simplified method as we do not have sufficient history to determine actual expected life.

| 2019 Grants
Option value | $ | 7.15 |  | - | $ | 7.91 |
Risk-free rate | 1.7% | - | 2.6 | %
Expected dividend yield | —
Expected volatility | 67.6% | - | 69.1 | %
Expected term (in years) | 6

During September 2019, the Company determined that it had classified grants of 225,922 in restricted stock as stock options in the consolidated financial statements since the grant date. At September 30, 2019, 135,555 of the shares had vested, with the remaining shares vesting through October 2021. At September 30, 2019, the Company has approximately $94,000 of stock-based compensation expense to be recognized through October 2021.
NOTE 7. INCOME TAXES
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APYX MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
The Company’s income tax expense from continuing operations was approximately $171,000 and $123,000 with an effective tax rate of (4.1)% and (0.9)% for the three and nine months ended September 30, 2019, respectively, as compared to a benefit of approximately $2,400,000, and $2,400,000 with an effective tax rate of 84.6% and 27.9%, for the three and nine months ended September 30, 2018, respectively.
The following is a roll-forward of the Company's total gross unrecognized tax benefits, not including interest and penalties, for the period ended September 30, 2019.

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

The Company recognizes accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes in the Company’s condensed consolidated financial statements. As of September 30, 2019, the Company had approximately $197,000 in accrued interest and penalties related to unrecognized tax benefits. Included in the income tax expense for the three and nine months ended September 30, 2019 are approximately $146,000 and $197,000, respectively, 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 $1,510,000 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.
NOTE 8. 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 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 J-Plasma® technology. The outcomes of these legal actions are not within our complete control and may not be known for prolonged periods of time. We believe that such claims are adequately covered by insurance; however, in the case of one of our carriers, we are in a dispute regarding the total level of coverage available. Notwithstanding the foregoing, in the opinion of management, the Company has meritorious defenses and such claims are not expected, individually or in the aggregate, to result in a material, adverse effect on our financial condition. However, in the event that damages exceed the aggregate coverage limits of our policies or if our insurance carriers disclaim coverage, we believe it is possible that costs associated with these claims could have a material adverse impact on our consolidated results of operations, financial position or cash flows.
In addition, as previously disclosed with the U.S. Securities and Exchange Commission on the Company’s Report on Form 8-K filed April 26, 2019, on April 17, 2019, a complaint (the “Complaint”) was filed in the United States District Court for the Middle District of Florida by plaintiff Kyle Pritchard, individually and on behalf of all others similarly situated against the Company and Charles D. Goodwin (“Goodwin”), the Company’s President and Chief Executive Officer and a member of the Company’s Board of Directors, alleging certain violations of the Securities Exchange Act of 1934, as amended. On July 16, 2019, the Court appointed a lead plaintiff for the putative class and approved the lead plaintiff’s selection of counsel. On or about September 3, 2019, Plaintiff filed an amended complaint (the “Amended Complaint”) with the Court.
The Amended Complaint seeks class action status on behalf of all persons and entities that acquired the Company’s securities between December 21, 2018 and April 1, 2019 and alleges violations by the Company and Goodwin of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended and Rule 10b-5 thereunder, primarily related to certain public statements concerning the Premarket Notification 510(k) submission made to the US Food and Drug Administration for a new indication for the Company’s J-Plasma® technology for use in dermal resurfacing procedures. The Amended Complaint seeks an unspecified
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APYX MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
amount of compensatory damages, an award of interest, reasonable attorneys’ fees, expert fees and other costs, and equitable relief as the court may deem just and proper. On October 3, 2019, the Company and Goodwin filed a Motion to Dismiss the Amended Complaint. Plaintiff’s opposition to the motion to dismiss was served on November 4, 2019.
Although the ultimate outcome of this matter cannot be determined with certainty, the Company believes that the allegations stated in the Amended Complaint are entirely without merit. The Company and Goodwin intend to defend themselves vigorously in the suit. In the opinion of management, such claims are adequately covered by insurance, however, in the event that damages exceed the aggregate coverage limits of our policy or if our insurance carriers disclaim coverage, we believe it is possible that costs associated with this claim could have a material adverse impact on our consolidated earnings, financial position or cash flows. Under the deductible portion of our insurance coverage, we have accrued $500,000 for initial defense costs.
W e accrue a liability in our consolidated financial statements for these actions when a loss is known or considered probable and the amount can be reasonably estimated. If the reasonable estimate of a known or probable loss is a range, and no amount within the range is a better estimate than any other, the minimum amount of the range is recorded. If a loss is reasonably possible, but not known or probable, and can be reasonably estimated, the estimated loss or range of loss is disclosed in the notes to the consolidated financial statements. In most cases, significant judgment is required to estimate the amount and timing of a loss to be recorded, actual results may differ from these estimates.
Purchase Commitments
At September 30, 2019, we had purchase commitments totaling approximately $4,600,000, substantially all of which is expected to be purchased within the next six months.
In response to the current worldwide helium shortage, to support our current and near term customer requirements, we issued purchase orders with two international companies to supply us with helium cylinders and have entered into agreements to purchase additional helium as needed. We also currently maintain our own supply of helium in the United States, which can be utilized for our customer requirements.
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APYX MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
NOTE 9. 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 a ccounting department. Antoaneta Dimitrova Shileva-Toromanova, Mr. Shilev’s sister, is the m anager of p roduction and h uman r esources. Svetoslav Shilev, Mr. Shilev’s son, is an e ngineer in the q uality a ssurance department.
In addition, as part of the purchase of the Bulgaria manufacturing facility, Mr. Shilev was issued a note payable for $140,000 to be paid 5 years after the original purchase date, which is in October 2020.
NOTE 10. FINANCIAL INSTRUMENTS
Cash, Cash Equivalents and Marketable Securities at September 30, 2019, consists of approximately $1,300,000 in cash and $61,000,000 in US Treasury Securities with maturities of 3 months or less.
Cash, Cash Equivalents and Marketable Securities at December 31, 2018:

(In thousands) | Adjusted Cost |  | Unrealized Gains |  | Fair Value(3) |  | Cash and Cash Equivalents (1) |  | Short-term Marketable Securities
Cash | $ | 6,337 |  |  | $ | — |  |  | $ | 6,337 |  |  | $ | 6,337 |  |  | $ | — |
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 | $ | 77,897 |  |  | $ | 247 |  |  | $ | 78,144 |  |  | $ | 16,466 |  |  | $ | 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 11. GEOGRAPHIC AND SEGMENT INFORMATION
Operating segments are aggregated into reportable segments only if they exhibit similar economic characteristics. In addition to similar economic characteristics, we also consider the following factors in determining the reportable segments: the nature of business activities, the management structure directly accountable to our chief operating decision maker for operating and administrative activities, availability of discrete financial information and information presented to the Board of Directors and investors.
Our reportable segments are disclosed as principally organized and managed as 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. Net assets are shared, therefore, not allocated to the reportable segments. The OEM segment is primarily development and manufacturing contract and product driven, all related expenses are recorded as cost of sales, therefore no segment specific operating expenses are incurred.
Summarized financial information with respect to reportable segments is as follows:

| Three Months Ended September 30, 2019
(In thousands) | Advanced Energy |  | OEM |  | Corporate & Other |  | Total
Sales | $ | 6,094 |  |  | $ | 1,481 |  |  | $ | — |  |  | $ | 7,575 |
Income (loss) from continuing operations | (1,357 | ) |  | 268 |  |  | (3,608 | ) |  | (4,697 | )
Interest income | — |  |  | — |  |  | 327 |  |  | 327 |
Other income, net | — |  |  | — |  |  | 230 |  |  | 230 |
Income tax expense | — |  |  | — |  |  | (171 | ) |  | (171 | )

| Three Months Ended September 30, 2018
(In thousands) | Advanced Energy |  | OEM |  | Corporate & Other |  | Total
Sales | $ | 2,985 |  |  | $ | 687 |  |  | $ | — |  |  | $ | 3,672 |
Income (loss) from continuing operations | (1,155 | ) |  | 368 |  |  | (2,009 | ) |  | (2,796 | )
Interest income, net | — |  |  | — |  |  | 105 |  |  | 105 |
Income tax benefit | — |  |  | — |  |  | 2,408 |  |  | 2,408 |

| Nine Months Ended September 30, 2019
(In thousands) | Advanced Energy |  | OEM |  | Corporate & Other |  | Total
Sales | $ | 15,734 |  |  | $ | 4,038 |  |  | $ | — |  |  | $ | 19,772 |
Income (loss) from continuing operations | (5,756 | ) |  | 995 |  |  | (10,174 | ) |  | (14,935 | )
Interest income | — |  |  | — |  |  | 1,153 |  |  | 1,153 |
Other income, net | — |  |  | — |  |  | 5 |  |  | 5 |
Income tax expense | — |  |  | — |  |  | (123 | ) |  | (123 | )

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APYX MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)

| Nine Months Ended September 30, 2018
(In thousands) | Advanced Energy |  | OEM |  | Corporate & Other |  | Total
Sales | $ | 8,727 |  |  | $ | 2,033 |  |  | $ | — |  |  | $ | 10,760 |
Income (loss) from continuing operations | (2,525 | ) |  | 1,076 |  |  | (7,000 | ) |  | (8,449 | )
Interest income, net | — |  |  | — |  |  | 33 |  |  | 33 |
Change in value of derivative liabilities | — |  |  | — |  |  | 20 |  |  | 20 |
Income tax benefit | — |  |  | — |  |  | 2,384 |  |  | 2,384 |

International sales represented approximately 26.7% of total revenues for the three months ended September 30, 2019, as compared with 24.8% of total revenues for the same prior year period. International sales represented approximately 29.2% of total revenues for the nine months ended September 30, 2019, as compared with 21.2% of total revenues for the same prior year period.
Substantially all of these sales are denominated in U.S. dollars. Revenue by geographic region, based on the customer's “ship to” location on the invoice, are as follows:

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

NOTE 12. FOREIGN CURRENCY TRANSACTIONS
The functional currency of Apyx Bulgaria is the U.S. dollar. The monetary assets and liabilities that are denominated in a currency other than U.S. dollar of Apyx Bulgaria are remeasured into U.S. dollars at the exchange rate on the balance sheet date, while nonmonetary items are remeasured at historical rates. Revenue and expenses are remeasured at weighted average exchange rates during the period. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in selling, general and administrative expenses in the consolidated statements of operations and were not material for the three and nine months ended September 30, 2019.
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APYX MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
NOTE 13. LEASES
The Company does not recognize leases with terms less than twelve months in duration in our consolidated balance sheet as right-of-use assets and lease liabilities. Leases with an initial term of 12 months or less or that have variable only payments are not recorded on the balance sheet. The Company has adopted the practical expedient which allows for the Company to not separate lease and non-lease components of contracts. Accordingly, non-lease components are included in the measurement of the Company's leases and right-of-use assets. If the Company is aware of the implicit rate in leases, the Company determines the operating lease liability using the implicit rate. For those leases where the Company is not aware of the implicit rate in the lease, the Company utilizes a incremental borrowing rate of 4.00%, which is indicative of our collateralized borrowing rate.
Operating Leases
The Company leases its facility in Sofia, Bulgaria and vehicles in Clearwater, Florida under non-cancelable operating lease agreements. The Company's lease on the Bulgaria facility includes rent escalation over the term of the lease. Rent expense on the lease is accounted for on a straight-line basis over the lease term. During Q2 2019, the Bulgaria facility lease was extended for an additional 2 years. In accordance with operating lease guidance under Topic 842, the extension was accounted for as a lease modification and the right-of-use asset and lease liability were remeasured at the modification date. The Company's operating leases have terms expiring through December 2022.
Finance Leases
During August 2019, the Company entered into a non-cancelable finance leases for certain computer equipment and a vehicle in Clearwater, Florida. The Company's finance leases have terms expiring through August 2023.
Information about the Company’s lease costs are as follows:

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

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

| Nine Months Ended September 30, 2019
(in thousands) | Operating | Finance
Non cash information: |  |
Right-of-use assets capitalized and lease liabilities recognized upon adoption of Topic 842 | $ | 212 |  | $ | — |
Right-of-use assets capitalized and lease liabilities recognized upon lease remeasurement | $ | 207 |  | $ | — |
Right-of-use assets capitalized and lease liabilities recognized upon execution of lease | $ | 20 |  | $ | 642 |
Cash information: |  |
Cash paid for lease liabilities | $ | 85 |  | $ | 12 |

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APYX MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Net, non cash lease expense of $2,000 for the nine months ended September 30, 2019 is comprised of reductions of operating right-of-use assets of $78,000 partially offset by reductions of operating lease liabilities of $90,000, $14,000 of which relates to unrealized gains on foreign currency remeasurement associated with the operating lease liabilities.
Information about the Company’s weighted average remaining lease terms and discount rate assumptions are as follows:

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

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

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

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APYX MEDICAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANAYLSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis in conjunction with our financial statements and related notes contained elsewhere in this report. This discussion contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a variety of factors discussed in this report and those discussed in other documents we file with the SEC. In light of these risks, uncertainties and assumptions, readers are cautioned not to place undue reliance on such forward-looking statements. These forward-looking statements represent beliefs and assumptions as of the date of this report. While we may elect to update forward-looking statements and at some point in the future, we specifically disclaim any obligation to do so, even if our estimates change. Past performance does not guarantee future results.
Executive Level Overview
We are a medical technology company and the developer of J-Plasma® (marketed and sold under the Renuvion® Cosmetic Technology brand in the cosmetic surgery market), a patented plasma-based surgical product for cutting, coagulation and ablation of soft tissue. J-Plasma technology utilizes a helium ionization process to produce a stable, focused beam of plasma that provides surgeons with greater precision and minimal invasiveness. We also leverage our expertise through original equipment manufacturing (OEM) agreements with other medical device manufacturers.
During 2019, we continue our full-scale commercialization efforts for Renuvion®. As of September 30, 2019, we had a direct sales force of 29 field-based selling professionals and a network of 6 independent sales agencies. We also had 4 sales managers. This selling organization is focused on the use of Renuvion in the cosmetic surgery market. In addition, we have invested in training programs and marketing-related activities to support accelerated adoption of Renuvion.
International sales represented approximately 26.7% of total revenues for the three months ended September 30, 2019, as compared with 24.8% of total revenues in the prior year. International sales represented approximately 29.2% of total revenues for the nine months ended September 30, 2019, as compared with 21.2% of total revenues in the prior year. Management estimates our products have been sold in more than 40 countries through local dealers coordinated by sales and marketing personnel at the Clearwater, Florida facility.
As previously disclosed with the Commission on Form 8-K filed on April 4, 2019, we announced on April 1, 2019, that we voluntarily withdrew our application for premarket notification 510(k) regulatory clearance of our J-Plasma®/Renuvion® technology for use in dermal resurfacing procedures. While this is a delay in our commercialization efforts, we remain committed to working with the U.S. Food and Drug Administration relative to the development of a new 510(k) submission for use in dermal resurfacing procedure s.
During October 2019, the Company initiated subject enrollment in an FDA approved U.S. Investigational Device Exemption clinical study evaluating the use of its Renuvion technology in skin laxity procedures in the neck and submental region. Also during October 2019, the Company received U.S. Food and Drug Administration 510(k) clearance to market and sell the Apyx Plasma/RF Handpiece, a new addition to the Renuvion product family.
On August 30, 2018, we closed on a 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® brand in the cosmetic surgery market. We also entered into a T ransition S ervices A greement, 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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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.
Operating segments are aggregated into reportable segments only if they exhibit similar economic characteristics. In addition to similar economic characteristics, we also consider the following factors in determining the reportable segments: the nature of business activities, the management structure directly accountable to our chief operating decision maker for operating and administrative activities, availability of discrete financial information and information presented to the Board of Directors and investors.
Our reportable segments are disclosed as principally organized and managed as two operating segments: Advanced Energy and OEM. "Corporate & Other" includes certain unallocated corporate and administrative costs which are not specifically attributed to any reportable segment. 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 September 30, |  |  |  | Nine Months Ended September 30, |  |
(In thousands) | 2019 |  | 2018 |  | Change |  | 2019 |  | 2018 |  | Change
Sales by Reportable Segment |  |  |  |  |  |  |  |  |  |  |
Advanced Energy | $ | 6,094 |  |  | $ | 2,985 |  |  | 104.2 | % |  | $ | 15,734 |  |  | $ | 8,727 |  | 7,007,000 |  | 80.3 | %
OEM | 1,481 |  |  | 687 |  |  | 115.6 | % |  | 4,038 |  |  | 2,033 |  | 2,005,000 |  | 98.6 | %
Total | $ | 7,575 |  |  | $ | 3,672 |  |  | 106.3 | % |  | $ | 19,772 |  |  | $ | 10,760 |  |  | 83.8 | %
|  |  |  |  |  |  |  |  | 9,012,000 |  |
Sales by Domestic and International |  |  |  |  |  |  |  |  |  |  |
Domestic | $ | 5,552 |  |  | $ | 2,763 |  |  | 100.9 | % |  | $ | 14,002 |  |  | $ | 8,481 |  |  | 65.1 | %
International | 2,023 |  |  | 909 |  |  | 122.6 | % |  | 5,770 |  |  | 2,279 |  |  | 153.2 | %
Total | $ | 7,575 |  |  | $ | 3,672 |  |  | 106.3 | % |  | $ | 19,772 |  |  | $ | 10,760 |  |  | 83.8 | %

Total revenue from continuing operations for the three months ended September 30, 2019, increased $3.9 million, or 106.3%, to $7.6 million, compared to $3.7 million in the prior year. Sales of the Company’s Advanced Energy generators and handpieces drove the increase in total revenue in the third quarter of 2019, with OEM segment sales contributing modestly to the year-over-year increase in total revenue from continuing operations during the third quarter 2019 period. Advanced Energy segment sales increased approximately $3.1 million, or 104.2% year-over-year, to $6.1 million, compared to approximately $3.0 million last year, as a result of additional sales force in the U.S. and new international distributors. This increase in selling infrastructure has resulted in increases of generator and handpiece sales, both domestically and in international markets. OEM segment sales increased $0.8 million, or 115.6% year-over-year, to $1.5 million, compared to $0.7 million last year, primarily attributable to sales to Symmetry under our Manufacture and Supply Agreement.
Total revenue from continuing operations for the nine months ended September 30, 2019, increased $9.0 million, or 83.8%, to $19.8 million, compared to $10.8 million in the prior year. Advanced Energy segment sales increased approximately $7.0 million, or 80.3% year-over-year, to $15.7 million, compared to approximately $8.7 million last year, as a result of additional sales force in the U.S. and new international distributors. This increase in selling infrastructure has resulted in increases of generator and handpiece sales, both domestically and in international markets. OEM segment sales increased $2.0 million, or 98.6% year-over-year, to $4.0 mil
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MANAGEMENT'S DISCUSSION AND ANAYLSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
lion, compared to $2.0 million last year, resulting mainly from sales to Symmetry under our Manufacture and Supply Agreement.
Gross Profit

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

Gross profit | $ | 5,017 |  |  | $ | 2,521 |  |  | 99.0 | % |  | $ | 13,015 |  |  | $ | 7,270 |  |  | 79.0 | %
Percentage of sales | 66.2 | % |  | 68.7 | % |  |  |  |  | 65.8 | % |  | 67.6 | % |  | 574,500,000.0 | %

Gross profit for the three months ended September 30, 2019, increased approximately $2.5 million, or 99.0% year-over-year, to $5.0 million, compared to $2.5 million in the prior year. Gross margin for the three months ended September 30, 2019 was 66.2%, compared to 68.7% for the same period. The primary drivers of the decrease in gross profit margin were reallocations of overhead expenses in Bulgaria for manufactured inventory, revenue related to our new Product, Manufacturing, and Supply agreements with Symmetry and increases in Advanced Energy sales outside of the U.S., which have lower margins than U.S. sales and represented a higher mix of total sales in three months ended September 30, 2019.
Gross profit for the nine months ended September 30, 2019, increased approximately $5.7 million, or 79.0% year-over-year, to $13.0 million, compared to $7.3 million in the prior year. Gross margin for the nine months ended September 30, 2019, was 65.8%, compared to 67.6% for the same period. The primary drivers of the decrease in gross profit margin were increases in Advanced Energy sales outside the U.S., which have lower margins than U.S. sales and represented a higher mix of total sales in 2019 compared to last year, revenue related to our new Product, Manufacturing, and Supply agreements with Symmetry, which did not contribute to revenue results significantly during the first three quarters of 2018, and additional allocations of overhead expenses in Bulgaria for manufactured inventory. These decreases were also partially offset by an increase in margins due to reclassification of regulatory salaries from cost of goods sold in 2018.
Other Costs and Expenses
Research and development

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

Research and development expenses increased 52.7% and 39.4% for the three and nine months ended September 30, 2019, respectively, primarily due to focused spending on clinical studies and research projects related to the cosmetic surgery market.
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MANAGEMENT'S DISCUSSION AND ANAYLSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Professional services

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

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

| Three Months Ended September 30, |  |  |  | Nine Months Ended September 30, |  |
(In thousands) | 2019 |  | 2018 |  | Change |  | 2019 |  | 2018 |  | Change
Salaries and related expenses | $ | 3,020 |  |  | $ | 2,119 |  |  | 42.5 | % |  | $ | 9,691 |  |  | $ | 5,734 |  |  | 69.0 | %
Percentage of sales | 39.9 | % |  | 57.7 | % |  |  |  | 49.0 | % |  | 53.3 | % |  |

During the three and nine months ended September 30, 2019, salaries and related expenses increased approximately 42.5% and 69.0%, respectively, primarily driven by an increase in employee stock option expense, increase in sales force by approximately a dozen, increase in administrative headcount, and reclassification of regulatory salaries from cost of goods sold in 2018.
Selling, general and administrative expenses

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

During the three and nine months ended September 30, 2019, selling, general and administrative expense increased by 92.2% and 57.1%, respectively, primarily driven by higher sales commissions and regulatory expense.
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MANAGEMENT'S DISCUSSION AND ANAYLSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Other Income (Expense)

| Three Months Ended September 30, |  |  |  | Nine Months Ended September 30, |  |
(In thousands) | 2019 |  | 2018 |  | Change |  | 2019 |  | 2018 |  | Change
Interest income | $ | 327 |  |  | $ | 135 |  |  | 142.2 | % |  | $ | 1,153 |  |  | $ | 135 |  |  | 754.1 | %
Percentage of sales | 4.3 | % |  | 3.7 | % |  |  |  | 5.8 | % |  | 1.3 | % |  |
Interest expense | $ | — |  |  | $ | (30 | ) |  | (100.0 | )% |  | — | % |  | $ | (102 | ) |  | (100.0 | )%
Percentage of sales | — | % |  | (0.8 | )% |  |  |  | — | % |  | (0.9 | )% |  |
Other income (losses), net | $ | 230 |  |  | $ | (155 | ) |  | (248.4 | )% |  | $ | 5 |  |  | $ | (155 | ) |  | (103.2 | )%
Percentage of sales | 3.0 | % |  | (4.2 | )% |  |  |  | — | % |  | (1.4 | )% |  |
Change in fair value of derivative liabilities, net | $ | — |  |  | $ | — |  |  | — | % |  | $ | — |  |  | $ | 20 |  |  | (100.0 | )%
Percentage of sales | — | % |  | — | % |  |  |  | — | % |  | 0.2 | % |  |

Interest income
Total interest income was higher for the three and nine months ended September 30, 2019, as compared with the prior year. This increase is primarily related to short term investments in U.S. Treasury Securities which we purchased with the proceeds received from the sale of the Core business in September 2018.
Income Taxes

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

The Company’s income tax expense was $171,000 and $123,000 with an effective tax rate of (4.1)% and (0.9)% for the three and nine months ended September 30, 2019 respectively, as compared to an expense of $2,400,000, and $2,4 00,000 with an effective tax rate of 84.6% and 27.9%, for the three and nine months ended September 30, 2018, respectively. The effective rate differs from the statutory rate primarily due to the change in the valuation allowance on the Company’s net deferred tax assets.
Product Development
We have developed most of our products and product improvements internally. Funds for this development have come primarily from our internal cash flow and equity issuances. We maintain close working relationships with physicians and medical personnel who assist in product research and development. New and improved products play a critical role in our sales growth. We continue to emphasize the development of proprietary products and product improvements to complement and expand our existing product lines. Our research and development team members are based in our Clearwater, Florida office and our facility in Sofia, Bulgaria.
Reliance on Collaborative, Manufacturing and Selling Arrangements
We manufacture the majority of our products on our premises in Clearwater, Florida and in Sofia, Bulgaria. Labor-intensive sub-assemblies and labor-intensive products may be outsourced to our specification.
We also perform development services for OEM customers who have no legal obligation to purchase products from us. Should such customers fail to give us purchase orders for the product after development, our future business and value of related assets could be negatively affected. Furthermore, no assurance can be given that such customers will give sufficient high priority to our products. Additionally, we will function as an OEM-provider of generators to Symmetry for a period of at least 10 years from the date of the Generator Manufacturing and Supply Agreement.
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MANAGEMENT'S DISCUSSION AND ANAYLSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
We also have collaborative arrangements with two key foreign suppliers of certain items and components, and we purchase them pursuant to purchase orders. Our purchase order commitments are never more than one year in duration and are supported by our sales forecasts. The majority of our raw materials are purchased from sole-source suppliers. While we believe we could ultimately procure other sources for these components, should we experience any significant disruptions in this key supply chain, there are no assurances that we could do so in a timely manner which could render us unable to meet the demands of our customers, resulting in a material and adverse effect on our business and operating results.
Liquidity and Capital Resources
Our working capital at September 30, 2019 was approximately $69.9 million compared with $81.9 (as revised) million at December 31, 2018.
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.
For the nine months ended September 30, 2019, net cash used in operating activities is approximately $15.1 million, which principally funded our operating loss of $(13.9) million, compared with net cash used in operating activities of approximately $2.8 million in the same period for 2018.
Net cash from investing activities is $60.8 million, primarily related to the maturity of short term investments and reinvestment in cash equivalents.
Cash from financing activities of approximately $0.2 million primarily relates to cash collected for stock options during the nine months ended September 30, 2019. Cash used in 2018 financing activities in 2018 was $2.6 million and primarily related to the repayment of our mortgage at the Clearwater, FL, facility.
At September 30, 2019, we had purchase commitments totaling approximately $4.6 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 on Form 10-K for the year ended December 31, 2018, filed with the Securities and Exchange Commission on March 14, 2019.
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Our estimates and assumptions, including those related to inventories, intangible assets, property, plant and equipment, legal proceedings, research and development, warranty obligations, product liability, fair valued liabilities, sales returns and discounts, stock-based compensation and income taxes are updated as appropriate, which in most cases is at least quarterly. We base our estimates on historical experience, or various assumptions that are believed to be reasonable under the circumstances and the results form the basis for making judgments about the reported values of assets, liabilities, revenues and expenses. Actual results may materially differ from these estimates.
Estimates are considered to be critical if they meet both of the following criteria: (1) the estimate requires assumptions about material matters that are uncertain at the time the accounting estimates are made and (2) other materially different estimates could have been reasonably made or material changes in the estimates are reasonably likely to occur from period to period. Our critical accounting estimates include the following:
Inventory reserves
We maintain a reserve for excess and obsolete inventory resulting from the potential inability to sell our products at prices in excess of current carrying costs and costs to sell. The markets in which we operate are highly competitive, with new products and surgical procedures introduced on an ongoing basis. Such marketplace changes may cause our products to become obsolete. We make estimates regarding the future recoverability of the costs of these products and record a provision for excess and obsolete inventories based on historical experience and expected future trends. If actual product life cycles, product demand or acceptance of new product introductions are less favorable than projected by management, additional inventory write-downs may be required, which would unfavorably affect future operating results.
Long-lived assets
We review long-lived assets which are held and used, including property and equipment, for impairment whenever changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Such evaluations compare the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset over its expected useful life and are significantly impacted by estimates of future prices and volumes for our products, capital needs, economic trends and other factors that are inherently difficult to forecast. If the asset is considered to be impaired, we record an impairment charge equal to the amount by which the carrying value of the asset exceeds its fair value determined by either a quoted market price, if any, or a value determined by utilizing a discounted cash flow technique. To date, no reporting units are at risk of failing an impairment test.
Stock-based Compensation
Under our stock option plan, options to purchase common shares of the Company may be granted to key employees, officers and directors of the Company by the Board of Directors. The Company accounts for stock options in accordance with FASB ASC Topic 718-10, Compensation-Stock Compensation, with compensation expense amortized over the vesting period based on the trinomial lattice option-pricing model fair value on the grant date, which includes a number of estimates that affect the amount of our expense.
Litigation Contingencies
In accordance with authoritative guidance, we accrue a liability in our consolidated financial statements for these actions when a loss is known or considered probable and the amount can be reasonably estimated. If the reasonable estimate of a known or probable loss is a range, and no amount within the range is a better estimate than any other, the minimum amount of the range is recorded. If a loss is reasonably possible, but not known or probable, and can be reasonably estimated, the estimated loss or range of loss is
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MANAGEMENT'S DISCUSSION AND ANAYLSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
disclosed in the notes to the consolidated financial statements. In most cases, significant judgment is required to estimate the amount and timing of a loss to be recorded, actual results may differ from these estimates.
Income Taxes
The provision for income taxes includes federal, foreign, state and local income taxes currently payable and those deferred because of temporary differences between the financial statement and tax bases of assets and liabilities. Deferred tax assets or liabilities are computed based on the difference between the financial statement and income tax bases of assets and liabilities using enacted marginal tax rates. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. Deferred income tax expenses or credits are based on the changes in the asset or liability from period to period.
As a result of historical losses exclusive of discontinued operations and the Company’s expectation to continue to generate losses in the near future, the Company recorded a valuation allowance on the net deferred tax asset and does not anticipate recording an income tax benefit related to these deferred tax assets. The Company will reassess the realization of deferred tax assets each reporting period and will be able to reduce the valuation allowance to the extent the financial results of continuing operations improve and it becomes more likely than not that the deferred tax assets will be realizable.
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 4 of the Notes to Consolidated Financial Statements.
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ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
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 September 30, 2019, the Company's disclosure controls and procedures were not effective because of the material weaknesses in our internal control over financial reporting as discussed below.
Notwithstanding such material weaknesses, which is described below in Management’s Report on Internal Control over Financial Reporting, our management has concluded that the consolidated financial statements included in this Form 10-Q present fairly, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with GAAP.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). The Company's internal control over financial reporting is designed 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, based on the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (2013). Based on that evaluation, management concluded that, as of December 31, 2018, the Company's internal control over financial reporting was not effective as a result of the material weaknesses described below.
The effectiveness of our internal control over financial reporting as of December 31, 2018 was audited by Frazier & Deeter, LLC, an independent registered public accounting firm, as stated in their report included in Part II, Item 8 of our most recent Form 10-K for the period ended December 31, 2018, contains an adverse opinion on the effectiveness of our internal control over financial reporting.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that material misstatements of the Company's annual or interim financial statements will not be prevented or detected on a timely basis.
We have identified three material weaknesses: (i) an ineffective control environment due to a lack of sufficient qualified accounting personnel with an appropriate level of knowledge and experience with generally accepted accounting principles, (ii) ineffective control activities due to the lack of documentation and timeliness in executing business process controls, and (iii) ineffective monitoring controls to ascertain whether the components of internal control were present and functioning.
As of September 30, 2019, we continue our remediation efforts related to these deficiencies.
Remediation Efforts to Address Material Weaknesses
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To date, we have implemented and are continuing to implement a number of measures to address the material weaknesses identified. We are also designing additional controls around the identification, documentation and application of technical accounting guidance with particular emphasis on events outside the ordinary course of business. These controls are expected to include the implementation of additional supervision and review activities by qualified personnel, the preparation of formal accounting memoranda to support our conclusions on technical accounting matters, and the development and use of checklists and research tools to assist in compliance with GAAP reporting requirements.
Included in the remediation efforts are investments in new personnel that have expertise in a broad array of accounting topics. As a result of these investments, the Company reevaluated its accounting on a variety of topics. While reevaluating the accounting for stock-based compensation expense during the three months ended September 30, 2019, the Company discovered immaterial errors in its accounting for certain items included in stock-based compensation expense. These errors related to its accounting for forfeitures, the vesting periods over which the expense was recognized, modifications, fair value measurements, and other minor miscellaneous items, all of which relate to the prior year. Additionally, the Company identified an issue relating to grants in the first quarter of 2019, whereby compensation was not recognized over the correct vesting period.
During the three months ended September 30, 2019, the Company re-evaluated its accounting for pre-development activities on certain OEM contracts. In performing the review, the Company determined that the it has not completed its performance obligations on its pre-development activities in these contracts. Accordingly, the Company determined that it had prematurely recognized revenues during the first quarter relating to these activities and did not defer the accompanying costs.
The Company has determined that the effects of the corrections are not material to the consolidated financial statements as of December 31, 2018, March 31, 2019 or June 30, 2019, but has elected to correct the consolidated financial statements for the three and nine months ended September 30, 2019. Accordingly, the Company has corrected the errors in the periods to which they relate.
We have also fully engaged a third-party specialist to help us assess and improve our internal controls and to assist in the process of designing and implementing a financial reporting system that is adequate to satisfy our reporting obligations. This has included the establishment of our overall internal control framework and the redesign of controls deemed to be defective in our most recently filed 10-K. As we continue to evaluate and take actions to improve our internal controls over financial reporting, we may find it necessary to take additional actions to address control deficiencies and modify our remediation measures.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13(a)-15(f) and 15(d)-15(f)) during the nine months ended September 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. Other Information
ITEM 1. Legal Proceedings
The medical device industry is characterized by frequent claims and litigation, and we are and may become subject to various claims, lawsuits and proceedings in the ordinary course of our business. Such claims include claims by current or former employees, distributors and competitors, claims concerning the marketing and promotion of our products and product liability claims.
We are involved in a number of legal actions relating to the use of our J-Plasma® technology. The outcomes of these legal actions are not within our complete control and may not be known for prolonged periods of time. We believe that such claims are adequately covered by insurance; however, in the case of one of our carriers, we are in a dispute regarding the total level of coverage available. Notwithstanding the foregoing, in the opinion of management, the Company has meritorious defenses and such claims are not expected, individually or in the aggregate, to result in a material, adverse effect on our financial condition. However, in the event that damages exceed the aggregate coverage limits of our policies or if our insurance carriers disclaim coverage, we believe it is possible that costs associated with these claims could have a material adverse impact on our consolidated results of operations, financial position or cash flows.
In addition, as previously disclosed with the U.S. Securities and Exchange Commission on the Company’s Report on Form 8-K filed April 26, 2019, on April 17, 2019, a complaint (the “Complaint”) was filed in the United States District Court for the Middle District of Florida by plaintiff Kyle Pritchard, individually and on behalf of all others similarly situated against the Company and Charles D. Goodwin (“Goodwin”), the Company’s President and Chief Executive Officer and a member of the Company’s Board of Directors, alleging certain violations of the Securities Exchange Act of 1934, as amended. On July 16, 2019, the Court appointed a lead plaintiff for the putative class and approved the lead plaintiff’s selection of counsel. On or about September 3, 2019, Plaintiff filed an amended complaint (the “Amended Complaint”) with the Court.
The Amended Complaint seeks class action status on behalf of all persons and entities that acquired the Company’s securities between December 21, 2018 and April 1, 2019 and alleges violations by the Company and Goodwin of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended and Rule 10b-5 thereunder, primarily related to certain public statements concerning the Premarket Notification 510(k) submission made to the US Food and Drug Administration for a new indication for the Company’s J-Plasma® technology for use in dermal resurfacing procedures. The Amended Complaint seeks an unspecified amount of compensatory damages, an award of interest, reasonable attorneys’ fees, expert fees and other costs, and equitable relief as the court may deem just and proper. On October 3, 2019, the Company and Goodwin filed a Motion to Dismiss the Amended Complaint. Plaintiff’s opposition to the motion to dismiss was served on November 4, 2019.
Although the ultimate outcome of this matter cannot be determined with certainty, the Company believes that the allegations stated in the Amended Complaint are entirely without merit. The Company and Goodwin intend to defend themselves vigorously in the suit. In the opinion of management, such claims are adequately covered by insurance, however, in the event that damages exceed the aggregate coverage limits of our policy or if our insurance carriers disclaim coverage, we believe it is possible that costs associated with this claim could have a material adverse impact on our consolidated earnings, financial position or cash flows. Under the deductible portion of our insurance coverage, we have accrued
$500,000 for initial defense costs.
W e 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.
ITEM 1A. Risk factors
There have been no material changes to the Risk Factors described in Part I, Item1A-Risk Factors in our annual report on Form10-K for the year ended December 31, 2018.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
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None.
ITEM 3. Defaults Upon Senior Securities
None.
ITEM 4. Mine Safety Disclosures
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Not Applicable.
ITEM 5. Other Information
None.
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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)
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 15, 2019 | By: | /s/ Charles D. Goodwin II |
|  | Charles D. Goodwin II |
|  | President, Chief Executive Officer and Director |
|  | (Principal Executive Officer) |
Date: November 15, 2019 | By: | /s/ Tara Semb |
|  | Tara Semb |
|  | Chief Financial Officer, |
|  | Treasurer and Secretary |
|  | (Principal Financial Officer) |

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