Apyx Medical Corp 10-Q

ITEM 2 . Management’s Discussion and Analysis of Financial Condition and Results of Operations You should read the following discussion and analysis in conjunction with our financial statements and related notes contained elsewhere in this report. This discussion contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a variety of factors discussed in this report and those discussed in other documents we file with the SEC. In light of these risks, uncertainties and assumptions, readers are cautioned not to place undue reliance on such forward-looking statements. These forward-looking statements represent beliefs and assumptions as of the date of this report. While we may elect to update forward-looking statements and at some point in the future, we specifically disclaim any obligation to do so, even if our estimates change. Past performance does not guarantee future results. Executive Level Overview We are an advanced energy technology company with a passion for elevating people’s lives through innovative products in the cosmetic and surgical markets. Known for our innovative Helium Plasma Technology, Apyx is solely focused on bringing transformative solutions to the physicians and patients it serves. Our Helium Plasma Technology is marketed and sold as Renuvion® in the cosmetic surgery market and J-Plasma® in the hospital surgical market. Renuvion® offers plastic surgeons, fascial plastic surgeons and cosmetic physicians a unique ability to provide controlled heat to the tissue to achieve their desired results. The J-Plasma® system allows surgeons to operate with a high level of precision and virtually eliminating unintended tissue trauma. We also leverage our deep expertise and decades of experience in unique waveforms through original equipment manufacturing (OEM) agreements with other medical device manufacturers. As discussed in our Annual Report on Form 10-K for the year ended December 31, 2019, an outbreak of a novel strain of the coronavirus, COVID-19, was identified in China and has subsequently been recognized as a pandemic by the World Health Organization. The COVID-19 outbreak has severely restricted the level of economic activity around the world. In response to the COVID-19 outbreak the governments of many countries, states, cities and other geographic regions have taken preventative or protective actions, such as imposing restrictions on travel and business operations and advising or requiring individuals to limit or forego their time outside of their homes. Temporary closures of businesses have been ordered and numerous other businesses have temporarily closed voluntarily. As of the date of this filing, there are strong indications that these actions are beginning to subside as governmental bodies begin to loosen restrictions. However, given the variability in measures taken, the uncertainty among any potential resurgence of COVID-19, and patients willingness to undergo elective procedures, the related financial impact cannot be reasonably estimated at this time. As a result, there could continue to be significant adverse impacts to the results of our operations into the third fiscal quarter and possibly beyond. Prior to the spread of COVID-19 into the US and international markets, we experienced positive year-over-year growth trends in the sale of our capital and disposable products, indicating increased utilization of our technology. Beginning in late February we began to see declines in the sale of our Helium Plasma Technology in European markets. These declines continued and also spread to the North and Latin American markets in March. Towards the end of the second quarter, we began to see improved demand for our products, primarily in the US market, however the extent of this improvement remains uncertain. We source the components used in our products from a variety of suppliers and we have collaborative arrangements with three key foreign suppliers. At this time our suppliers have experienced no significant disruptions as a result of COVID-19. We have experienced minor delays in our procurement from these suppliers as a result of the availability of shipping from third party freight carriers. These delays have not, to date, had a significant impact on our operations. In response to COVID-19, we have taken action in these key areas: • Protecting the Health and Safety of our Employees: To reduce the risk to our employees and their families to potential exposure to COVID-19, we have required that all non-essential employees work remotely until further notice. We have also split the shifts of our manufacturing personnel to allow for adequate social distancing, and require all personnel to utilize personal protective equipment while on site at our facilities. We have also significantly reduced business travel and access to our facilities. • Maintaining Engagement of or Sales Team and Our Customers: In addition to the initiatives we have put in place to protect health and safety for all employees, we have focused our direct sales team on remaining in close contact with their existing surgeon customers to do everything they can to provide them with support during this difficult time. With 18 Table of Contents APYX MEDICAL CORPORATION MANAGEMENT'S DISCUSSION AND ANAYLSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued this goal in mind, we have implemented additional training for our sales reps in order to sharpen their ability to engage with our customers virtually. In addition to engaging with existing customers via virtual methods, our reps also continue to target and reach out to prospective accounts so that they will be well-positioned when the recovery occurs and surgeons return to conducting elective cosmetic procedures. Outside the U.S., we are closely monitoring the activities of our distributor partners and helping them navigate the challenges they face as a result of the slower demand they are seeing in their respective countries. • Operating Expenses: We continue to take preemptive steps to curtail spending, including implementing hiring restrictions, reducing most discretionary spending, reducing capital expenditures, and delaying certain R&D projects and clinical research studies. • Governmental Policy: On March 27, 2020, the U.S. government enacted the CARES Act to provide relief from COVID-19. We continue to take advantage of certain provisions of the CARES Act which are applicable to us including utilizing NOL carryback provisions and the deferral of payroll taxes. We expect that utilizing these provisions will significantly help mitigate the working capital impact COVID-19 has had on our sales and operations. During 2020, we continue to drive sales in our Advanced Energy business by increasing the adoption and utilization of our generators and handpieces in the U.S. cosmetic surgery market and fulfilling demand from distributors in our international markets. Management estimates that our products have been sold in more than 50 countries. As of June 30, 2020, we had a direct sales force of 31 field-based selling professionals and a network of 4 independent sales agencies, led by 5 sales managers. This selling organization is focused on the use of Renuvion® in the cosmetic surgery market. In addition, we have invested in training programs and marketing-related activities to support accelerated adoption of Renuvion®. During the first two months of 2020, our plans to host new Physician Mentor Programs, or “PMPs,” and expand our presence and educational programming at industry conferences and trade shows proceeded as expected. Our events planned for March, however, were canceled due to COVID-19. In lieu of this in-person programming, our sales, marketing and field clinical teams have been very active in engaging with our customers - and prospects - around the world. We have hosted educational events virtually where we featured some of our leading clinician customers speaking on a wide range of topics, including side-by-side results comparing Renuvion® to a leading competitor technology. Our virtual educational events have also included case studies to illustrate how our leading clinician customers have adopted Renuvion®, their strategies for marketing and selling to new patients, and their thoughts on pricing and return on investment. We recently hosted the first installment of a planned series of webinars designed to assist our customers and prospects with opening their practices post-COVID 19. We also engaged with clinician customers outside the U.S. including hosting multiple continuing education training sessions on J-Plasma® and Renuvion® with our current international distributors and conducting multiple calls with groups of international prospects interested in learning about our Renuvion® technology. Operating segments are aggregated into reportable segments only if they exhibit similar economic characteristics. In addition to similar economic characteristics, we also consider the following factors in determining the reportable segments: the nature of business activities, the management structure directly accountable to our chief operating decision maker for operating and administrative activities, availability of discrete financial information and information presented to the Board of Directors and investors. Asset information is not reviewed by the chief operating decision maker by segment and is not available by segment, accordingly, we have not presented a measure of assets by segment. Our reportable segments are 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. The OEM segment is primarily development and manufacturing contract and product driven, all related expenses are recorded as cost of sales, therefore no segment specific operating expenses are incurred. We strongly encourage investors to visit our website: www.apyxmedical.com to view the most current news and to review our filings with the Securities and Exchange Commission. Results of Operations Sales 19 Table of Contents APYX MEDICAL CORPORATION MANAGEMENT'S DISCUSSION AND ANAYLSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued Three Months Ended June 30, Six Months Ended June 30, (In thousands) 2020 2019 Change 2020 2019 Change Sales by Reportable Segment Advanced Energy $ 2,867 $ 5,350 (46.4 )% $ 6,853 $ 9,721 (29.5 )% OEM 1,429 1,299 10.0 % 2,440 2,557 (4.6 )% Total $ 4,296 $ 6,649 (35.4 )% $ 9,293 $ 12,278 (24.3 )% (632,000) Sales by Domestic and International Domestic $ 3,393 $ 4,540 (25.3 )% $ 7,011 $ 8,450 (17.0 )% International 903 2,109 (57.2 )% 2,282 3,828 (40.4 )% Total $ 4,296 $ 6,649 (35.4 )% $ 9,293 $ 12,278 (24.3 )% Total revenue decreased by (35.4)% and (24.3)% , or approximately $(2.4) million and $(3.0) million , for the three and six months ended June 30, 2020 when compared with the three and six months ended June 30, 2019. Advanced Energy segment sales decreased (46.4)% and (29.5)% , or approximately $(2.5) million and $(2.9) million , for the three and six months ended June 30, 2020 when compared with the three and six months ended June 30, 2019. The impact of COVID-19 resulted in decreased demand for our products, both domestically and internationally in the first half of 2020 as many of our customers' businesses were ordered closed and numerous others temporarily closed voluntarily. Sales began to recover late in the second quarter as many of our customers resumed operations in a limited capacity. International sales represented approximately 21.0% and 24.6% of total revenues for the three and six months ended June 30, 2020, respectively, as compared with 31.7% and 31.2% of total revenues for the same prior year period. Management estimates our products have been sold in more than 50 countries through local dealers coordinated by sales and marketing personnel through our facilities in Clearwater, Florida and Sofia, Bulgaria. Gross Profit Three Months Ended June 30, Six Months Ended June 30, (In thousands) 2020 2019 Change 2020 2019 Change Cost of sales $ 2,202 $ 1,975 11.5 % $ 4,215 $ 4,041 4.3 % Percentage of sales 51.3 % 29.7 % 45.4 % 32.9 % Gross profit $ 2,094 $ 4,674 (55.2 )% $ 5,078 $ 8,237 (38.4 )% Percentage of sales 48.7 % 70.3 % 54.6 % 67.1 % (12.5 )% Gross profit for the three months ended June 30, 2020 , decreased (55.2)% year-over-year, to $2.1 million , compared to $4.7 million in the prior year. Gross margin for the three months ended June 30, 2020 , was 48.7% , compared to 70.3% for the same period in 2019. Gross profit for the six months ended June 30, 2020 , decreased (38.4)% year-over-year, to $5.1 million , compared to $8.2 million in the prior year. Gross margin for the six months ended June 30, 2020 , was 54.6% , compared to 67.1% for the same period in 2019. During the second fiscal quarter, we reassessed our forecasted product mix due to COVID-19, increased availability of our newer handpiece designs, and earlier than expected completion of product registrations in some of our foreign markets. As a result, certain products were reduced to a lower carrying value, and some components were also written off as it was determined to cease further production on these models. This resulted in a decrease in gross profit of approximately $0.4 million during the three and six months ended June 30, 2020. The remaining change in gross profit margins is driven by product mix within both our Advanced Energy and OEM segments, revenue mix between our segments, geographical revenue mix, and improved product margins in our Advanced Energy segment as a result of our continued manufacturing efficiency initiatives. 20 Table of Contents APYX MEDICAL CORPORATION MANAGEMENT'S DISCUSSION AND ANAYLSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued Other Costs and Expenses Our spending in the three and six months ended June 30, 2020 reflected normal business activities into February and March and then a curtailment of certain costs associated with the impact of COVID-19, including restrictions on travel. While certain spending decreased in the second quarter of 2020 as a result of a reduction in revenue and activities limited by COVID-19, some of our strategic spending will continue. For example, while we have restricted new hirings, we have no plans to reduce our headcount or furlough any employees at this time. Certain costs will decline as the related underlying activities are restricted by COVID-19, including travel, trade shows and related expenses, clinical trials and in-person physician training. Research and development Three Months Ended June 30, Six Months Ended June 30, (In thousands) 2020 2019 Change 2020 2019 Change Research and Development expense $ 975 $ 888 9.8 % $ 1,955 $ 1,618 20.8 % Percentage of sales 22.7 % 13.4 % 21.0 % 13.2 % Research and development expenses increased 9.8% and 20.8% for the three and six months ended June 30, 2020 , respectively, primarily due to spending on our two IDE clinical studies, which had applications submitted to the FDA in late 2019. Professional services Three Months Ended June 30, Six Months Ended June 30, (In thousands) 2020 2019 Change 2020 2019 Change Professional services expense $ 1,658 $ 1,661 (0.2 )% $ 4,047 $ 3,779 7.1 % Percentage of sales 38.6 % 25.0 % 43.5 % 30.8 % Professional services expense decreased (0.2)% for the three months ended June 30, 2020 , primarily attributable to decreases in physician consulting fees ($0.2 million) associated with the COVID-19 shutdown and a decrease in consulting option expense to our partner physicians ($0.3 million), as we did not grant options to our partner physicians in 2020. These decreases were partially offset by an increase in accounting and auditing fees ($0.4 million) related to recent financial statement restatements and continued efforts to remediate our internal control deficiencies and material weaknesses. Professional services expense increased 7.1% for the six months ended June 30, 2020 , primarily attributable to an increase in accounting and auditing fees ($0.7 million) related to recent financial statement restatements and continued efforts to remediate our internal control deficiencies and material weaknesses. This increase was partially offset by decreases in legal expense ($0.2 million) associated with the class action lawsuit accrual in the first quarter of 2019 and a decrease in consulting option expense to our partner physicians ($0.3 million), as we did not grant options to our partner physicians in 2020. Salaries and related costs Three Months Ended June 30, Six Months Ended June 30, (In thousands) 2020 2019 Change 2020 2019 Change Salaries and related expenses $ 3,439 $ 3,510 (2.0 )% $ 6,750 $ 6,998 (3.5 )% Percentage of sales 80.1 % 52.8 % 72.6 % 57.0 % 21 Table of Contents APYX MEDICAL CORPORATION MANAGEMENT'S DISCUSSION AND ANAYLSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued During the three and six months ended June 30, 2020 , salaries and related expenses decreased approximately (2.0)% and (3.5)% , respectively, primarily driven by a decrease in accrued bonus expense in 2020. This decrease was partially offset by higher stock option expense and an increase in average headcount for the period. Selling, general and administrative expenses Three Months Ended June 30, Six Months Ended June 30, (In thousands) 2020 2019 Change 2020 2019 Change SG&A Expense $ 2,189 $ 3,037 (27.9 )% $ 5,985 $ 5,994 (0.2 )% Percentage of sales 51.0 % 45.7 % 64.4 % 48.8 % During the three months ended June 30, 2020 , selling, general and administrative expense decreased (27.9)% , primarily driven by a decrease in travel and entertainment expense ($0.5 million), a decrease in show fees and related costs ($0.2 million) and a decrease in customer samples ($0.1 million) associated with restricted travel and decreased sales activity from COVID-19. During the six months ended June 30, 2020 , selling, general and administrative expense decreased approximately (0.2)% , primarily driven by a decrease in travel and entertainment expense ($0.3 million), a decrease in show fees and related costs ($0.2 million), a decrease in commission expense ($0.2 million) and a decrease in customer samples ($0.2 million) associated with restricted travel and decreased sales activity from COVID-19. These decreases were partially offset by higher bad debt expense ($0.6 million) related to increased uncertainty on the collection of our receivables due to the economic environment resulting from COVID-19 and an increase in insurance premiums ($0.1 million) from the prior year. Other Income (Expense) Three Months Ended June 30, Six Months Ended June 30, (In thousands) 2020 2019 Change 2020 2019 Change Interest income $ 7 $ 403 (98.3 )% $ 223 $ 826 (73.0 )% Percentage of sales 0.2 % 6.1 % 2.4 % 6.7 % Other income (losses), net $ (14 ) $ (200 ) (93.0 )% $ 412 $ (495 ) (183.2 )% Percentage of sales (0.3 )% (3.0 )% 4.4 % (4.0 )% Total interest income decreased (98.3)% and (73.0)% for the three and six months ended June 30, 2020 , respectively, as compared with the same periods in the prior year. This decrease is due to a lower average balance, as well as a lower yield, on our investments in U.S. Treasury Securities included in cash and cash equivalents. Other income (losses), net increased for the three and six months ended June 30, 2020 , as compared with the prior year. This increase is primarily due to the receipt of refunds on tariffs paid in the prior year, offset by the recognition of a joint and several liability for failure to collect and remit payroll taxes related to stock option exercises in the prior year. Income Taxes Three Months Ended June 30, Six Months Ended June 30, (In thousands) 2020 2019 Change 2020 2019 Change Income tax expense (benefit) $ (1,492 ) $ 76 (2,063.2 )% $ (6,397 ) $ 82 (7,901.2 )% Effective tax rate 24.1 % (1.8 )% 49.1 % (0.8 )% 22 Table of Contents APYX MEDICAL CORPORATION MANAGEMENT'S DISCUSSION AND ANAYLSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued Our income tax (benefit) expense was approximately $(1,492,000) and $76,000 with an effective tax rate of 24.1% and (1.8)% for the three months ended June 30, 2020 and 2019, respectively. Our income tax (benefit) expense was approximately $(6,397,000) and $82,000 with an effective tax rate of 49.1% and (0.8)% for the six months ended June 30, 2020 and 2019, respectively. The effective rate differs from the statutory rate primarily due to the release of the valuation allowance on our net operating loss carryforward from 2019. On March 27, 2020, the U.S. government enacted the CARES Act to provide relief from COVID-19. The CARES Act includes a provision that allows companies to carryback net operating losses generated in the period 2018 through 2020 to prior years. We released the full valuation allowance of approximately $3.7M on our Federal net operating loss carryforward associated with the provisions of the CARES Act. Liquidity and Capital Resources Our working capital at June 30, 2020 was approximately $60.2 million compared with $64.4 million at December 31, 2019. The decrease in working capital from December 31, 2019 to June 30, 2020 was primarily due to the net loss incurred by the Company during the first half of 2020 partially offset by non cash activity including stock based compensation expense and our provision for allowance for doubtful accounts. For the six months ended June 30, 2020, net cash used in operating activities was approximately $12.4 million , which principally funded our operating loss of $13.7 million , compared with net cash used in operating activities of approximately $10.7 million million in the same period for 2019. Utilizing the provisions of the CARES Act, we recognized an income tax benefit of approximately $6.4 million in the first half of 2020, of which we expect to receive a tax refund of approximately $3.7 million by the end of 2020. We expect that utilizing the NOL carryback will significantly help mitigate the working capital impact COVID-19 has had on our sales and operations. The CARES Act also allows us to defer the payment of payroll taxes incurred between March 27, 2020 and December 31, 2020, with half of the resulting liability due on December 31, 2021, and the remainder due on December 31, 2022. As of June 30, 2020 we deferred approximately $0.1 million in taxes utilizing this program. We expect to defer and additional $0.3 million to $0.4 million under this program by December 31, 2020. As a result of the impact of COVID-19 on our customers, we have received multiple requests for extension on the payment of receivables. While we are committed to working with our customers to collect the receivables as expeditiously as possible, collectability of these receivables is more uncertain and we have recorded an increased allowance for doubtful accounts as a result. A primary focus for the Company in 2020 continues to be maintaining appropriate balance sheet flexibility, including cash on hand, due to the uncertain nature and unpredictable timing of the impacts of COVID-19. Net cash used in investing activities was $0.2 million, related to investments in property and equipment. At June 30, 2020 , we had purchase commitments totaling approximately $0.5 million, substantially all of which is expected to be purchased within the next six months. 23 Table of Contents APYX MEDICAL CORPORATION MANAGEMENT'S DISCUSSION AND ANAYLSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued Critical Accounting Estimates In preparing the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP), we have adopted various accounting policies. Our most significant accounting policies are disclosed in Note 2 to the consolidated financial statements included in our Report on Form 10-K for the year ended December 31, 2019 , filed with the Securities and Exchange Commission on March 31, 2020. The preparation of the consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Our estimates and assumptions, including those related to inventories, intangible assets, property, plant and equipment, legal proceedings, research and development, warranty obligations, product liability, fair valued liabilities, sales returns and discounts, stock-based compensation and income taxes are updated as appropriate, which in most cases is at least quarterly. We base our estimates on historical experience, or various assumptions that are believed to be reasonable under the circumstances and the results form the basis for making judgments about the reported values of assets, liabilities, revenues and expenses. Actual results may materially differ from these estimates. Estimates are considered to be critical if they meet both of the following criteria: (1) the estimate requires assumptions about material matters that are uncertain at the time the accounting estimates are made and (2) other materially different estimates could have been reasonably made or material changes in the estimates are reasonably likely to occur from period to period. Our critical accounting estimates include the following: Stock-based Compensation Under our stock option plans, options to purchase common shares of the Company may be granted to employees, officers and directors of the Company by the Board of Directors. We account for stock options in accordance with FASB ASC Topic 718-10, Compensation-Stock Compensation , with compensation expense amortized over the vesting period. Options are valued using the Black-Scholes model in 2019 and 2020 and the trinomial lattice option-pricing model in prior years, both of which includes a number of estimates that affect the amount of our expense. We have determined that the most critical of these estimates are the expected life and volatility used in the calculations. Expected life For employee stock-based compensation awards, we estimate the expected life of awards utilizing the SEC's simplified method. We utilize this method, as the we have not historically granted stock-based compensation awards to employees in sufficient volumes to determine a reasonable estimate of the life of awards. For awards granted to non-employees, we calculate expected life using a combination of past exercise behavior, the contractual term and expected remaining exercise behavior. Volatility We determine the volatility by utilizing the historical volatility of our stock over the period of the awards expected life. Relevant guidance allows us to include periods in excess of the useful life if we determine that they provide a more reasonable basis for the volatility of our stock. Additionally, ASC 718-10 allows us to exclude periods from the volatility if they pertain to events or circumstances that in our judgment are specific to us and if the event or transaction is not reasonably expected to occur again during the expected term of the awards. We have not included any additional periods, nor disregarded any periods, in calculating our volatility. Accounts Receivable Reserves We maintain a reserve for uncollectible accounts receivable. When evaluating the adequacy of the allowance for doubtful accounts, we analyze specific unremitted customer balances for known collectability issues, review historical bad debt experience, customer credit worthiness and economic trends, and we make estimates in connection with establishing the allowance for doubtful accounts, including the future impacts of current trends. Changes in estimates are reflected in the period they are made. If the financial condition of our customers deteriorates, resulting in an inability to make payments, additional allowances may be required. 24 Table of Contents APYX MEDICAL CORPORATION MANAGEMENT'S DISCUSSION AND ANAYLSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued Inventory Reserves We maintain a reserve for excess and obsolete inventory resulting from the potential inability to sell our products at prices in excess of current carrying costs. The markets in which we operate are highly competitive, with new products and surgical procedures introduced on an ongoing basis. Such marketplace changes may cause our products to become obsolete. We make estimates regarding the future recoverability of the costs of these products and record a provision for excess and obsolete inventories based on historical experience and expected future trends. If actual product life cycles, product demand or acceptance of new product introductions are less favorable than projected by management, additional inventory write-downs may be required, which would unfavorably affect future operating results. Litigation Contingencies In accordance with authoritative guidance, we record a liability in our consolidated financial statements for these actions when a loss is known or considered probable and the amount can be reasonably estimated. If the reasonable estimate of a known or probable loss is a range, and no amount within the range is a better estimate than any other, the minimum amount of the range is accrued. If a loss is reasonably possible, but not known or probable, and can be reasonably estimated, the estimated loss or range of loss is disclosed in the notes to the consolidated financial statements. In most cases, significant judgment is required to estimate the amount and timing of a loss to be recorded; actual results may differ from these estimates. Income Taxes The provision for income tax expense (benefit) includes federal, foreign, state and local income taxes currently payable or receivable and those deferred because of temporary differences between the financial statement and tax bases of assets and liabilities. Deferred tax assets or liabilities are computed based on the difference between the financial statement and income tax bases of assets and liabilities using enacted marginal tax rates. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. Deferred income tax expenses or credits are based on the changes in the asset or liability from period to period. As a result of historical losses exclusive of the sale of the Core business in 2018, and our expectation to continue to generate losses in the near future, we recorded a valuation allowance on the net deferred tax asset and do not anticipate recording an income tax benefit related to these deferred tax assets. We will reassess the realization of deferred tax assets each reporting period and will be able to reduce the valuation allowance to the extent the financial results improve and it becomes more likely than not that the deferred tax assets will be realizable. As management expects the Company to continue to generate losses in 2020 and the foreseeable future after 2020, we will continue to record a valuation allowance on the remaining deferred tax asset balance as of June 30, 2020. We assess the financial statement impact of an uncertain tax position taken or expected to be taken on an income tax return at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized in the financial statements unless it is more likely than not of being sustained. Inflation Inflation has not materially impacted the operations of our Company. Off-Balance Sheet Arrangements We have no off-balance sheet arrangements at this time. Recent Accounting Pronouncements See Note 3 of the Notes to Consolidated Financial Statements. 25 Table of Contents APYX MEDICAL CORPORATION ITEM 3 . Quantitative and Qualitative Disclosures about Market Risk Not applicable.