What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-03-31 compared with 2020-03-31 · 146 added, 151 removed, 103 unchanged (74% of the section changed)

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.

You should read the following discussion and analysis in conjunction with our consolidated financial statements and related notes contained elsewhere in this report.

This discussion contains forward-looking statements that involve risks, uncertainties and assumptions.

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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.

While we may elect to update forward-looking statements 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.

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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.

Total revenue from continuing operations increased by 70.0% or approximately $11.6 million for the year ended December 31, 2019 when compared with 2018.

Advanced Energy segment sales increased 74.6% or approximately $9.7 million for the year ended December 31, 2019 when compared with 2018.

International sales represented approximately 30.6% of total revenues in 2019 , 22.6% in 2018 and 13.2% in 2017 .

Management estimates our products have been sold in more than 40 countries through local dealers coordinated by sales, marketing and logistics personnel at our Clearwater, Florida and Sofia, Bulgaria facilities.

Throughout 2019, we continued to drive growth in our Advanced Energy business by increasing the adoption and utilization of our generators and handpieces in the U.S.

Renuvion® offers plastic surgeons, fascial plastic surgeons and cosmetic physicians a unique ability to provide controlled heat toe tissue to achieve their desired results.

The J-Plasma® system allows surgeons to operate with a high level of precision, virtually eliminating unintended tissue trauma.

We also leverage our deep expertise and decades of experience in unique waveforms through OEM agreements with other medical device manufacturers.

As discussed in our Annual Report on Form 10-K for the year ended December 31, 2019 ("2019 Form 10-K"), an outbreak of a novel strain of the coronavirus, COVID-19, was identified in China and subsequently recognized as a pandemic by the World Health Organization.

The COVID-19 outbreak continues to severely restrict the level of economic activity around the world.

In response to the COVID-19 outbreak the governments of many countries, states, cities and other geographic regions have taken preventative or protective actions, such as imposing restrictions on travel and business operations and advising or requiring individuals to limit or forego their time outside of their homes.

Temporary closures of businesses in some jurisdictions were ordered, and numerous other businesses closed permanently.

Many other businesses continue to be operated at reduced capacity.

Ongoing significant reductions in business-related activities could result in further loss of sales and profits and other material adverse effects.

The extent of the impact of COVID-19 on our business, financial results, liquidity and cash flows will depend largely on future developments, including new information that may emerge concerning actions taken to contain or prevent further spread of the virus, or its newly forming variants, within the U.S.

and the related impact on consumer confidence and spending, all of which are highly uncertain and cannot be predicted.

While our revenues were affected by the continued impacts of the COVID-19 pandemic, in the latter half of 2020 we saw strong utilization of our Renuvion® handpieces from existing customers in the U.S., along with shipments to several new customers in our international markets, which helped to offset sluggish global demand for capital equipment.

Throughout the year, we continued our efforts to support our customers during this challenging time.

While we were also pleased to see overall improvements in our Advanced Energy business trends during the third and fourth quarters, demand for handpieces remains uneven across, and within, the primary markets that we serve, and global demand trends for generator adoption remain in the early stages of recovery.

Although the timing of a return to a more normalized environment remains uncertain, we remain cautiously optimistic with respect to the continued recovery of the cosmetic and plastic surgery market.

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 took action in these key areas:

APYX MEDICAL CORPORATION

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued

• 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 required that all non-essential employees work remotely until further notice.

We 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 also significantly reduced business travel and outside access to our facilities.

• Maintaining Engagement of or Sales Team and Our Customers:

In addition to the initiatives we put in place to protect health and safety for all employees, we 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 this goal in mind, we 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 continued to target and reach out to prospective customers, and outside the U.S., we continued to monitor the activities of our distributor partners and helped them navigate the challenges they faced as a result of the slower demand they have seen in their respective countries.

• Operating Expenses:

We continued 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 have taken advantage of certain provisions of the CARES Act which are applicable to us, including utilizing net operating loss (NOL) carryback provisions.

We expect that utilizing these provisions will significantly help mitigate the working capital impact COVID-19 has had on our sales and operations.

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, through the present time, however, were canceled or postponed 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's 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 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.

During 2020, we continued to drive sales in our Advanced Energy business by increasing the adoption and utilization of our handpieces in the U.S.

cosmetic surgery market and fulfilling demand from distributors in our international markets.

We also saw contributions from our OEM business, which increased $1.9 million, or 53.6%, as compared to last year.

This was driven primarily by contributions from our electrosurgical generator and supply agreement with Symmetry Surgical.

We believe that our investment and focus on the following strategic initiatives in 2019 and beyond will position the Company for long-term growth in the cosmetic surgery market:

• To formalize our regulatory strategy to pursue specific clinical indications that will enable us to sell our

Renuvion® products for targeted procedures

Management estimates that our products have been sold in more than 55 countries.

As of December 31, 2020, we had a direct sales force of 31 field-based selling professionals and utilized 2 independent sales agencies.

We also had 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® into physicians' practices.

We believe that our continued investment and focus on the following strategic initiatives in 2020 and beyond will position the Company for long-term growth in the cosmetic surgery market:

• To formalize our regulatory strategy to pursue specific clinical indications that will enable us to sell our Renuvion® products for targeted procedures

• To secure new clinical evidence demonstrating the safety and efficacy of our Helium Plasma Technology

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• To improve our manufacturing capabilities and efficiencies

APYX MEDICAL CORPORATION

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued

In regards to our operating segments, our results are aggregated into reportable segments only if they exhibit similar economic characteristics.

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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, and accordingly, we have not presented a measure of assets by segment.

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

Our reportable segments are disclosed as principally organized and managed as two operating segments:

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The OEM segment is primarily development and manufacturing contract and product driven, and all related expenses are recorded as cost of sales, therefore no segment specific operating expenses are incurred.

APYX MEDICAL CORPORATION

MANAGEMENT'S DISCUSSION AND ANAYLSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued

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.

As discussed under "Item 1A.

Risk Factors," an outbreak of a novel strain of the coronavirus, COVID-19, was recently identified in China and has subsequently been recognized as a pandemic by the World Health Organization.

This coronavirus outbreak has severely restricted the level of economic activity around the world.

In response to this coronavirus 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.

These actions have expanded significantly in the past several weeks and are expected to continue to expand.

Given the uncertainty regarding the spread of this coronavirus, the related financial impact cannot be reasonably estimated at this time, although the aforementioned actions and related impacts are expected to continue and may also significantly affect the Company's business in other geographic areas in which the coronavirus has spread and may continue to spread.

The Company intends to continue to execute on its strategic plans and operational initiatives during the coronavirus outbreak.

However, the uncertainties associated with the protective and preventative measures being put in place or recommended by both governmental entities and other businesses, among other uncertainties, may result in delays or modifications to these plans and initiatives.

The following financial statement analysis has been updated for the effects of the restatement to the results of operations and financial position of the Company in 2018 as discussed in Note 4 to the consolidated financial statements.

Results of Operations

(In thousands)

2018 as Restated

(In thousands) 2020 2019 Change

Sales by Reportable Segment

Advanced Energy $ 22,214 $ 22,676 (2.0) %

OEM 5,497 5,559 (1.1) %

Total $ 27,711 $ 28,235 (1.9) %

Sales by Domestic and International

Domestic $ 18,812 $ 19,584 (3.9) %

International 8,899 8,651 2.9 %

Total revenue from continuing operations increased by 70.0% or approximately $11.6 million for the year ended December 31, 2019 when compared with 2018 .

Advanced Energy segment sales increased 74.6% or approximately $9.7 million for the year ended December 31, 2019 when compared with 2018 .

The increase is a result of the impact made by the additional sales force in the U.S.

and new international distributors.

In both the U.S.

and internationally, strong sales growth of generators was coupled with utilization based demand for our handpieces.

In addition, we entered four new markets in 2019, the largest of which were Mexico and Canada.

Total $ 27,711 $ 28,235 (1.9) %

Total revenue decreased by 1.9% or approximately $(0.5) million for the year ended December 31, 2020 when compared with 2019.

Advanced Energy segment sales decreased 2.0% or approximately $(0.5) million for the year ended December 31, 2020 when compared with 2019.

The impact of COVID-19 resulted in decreased demand for our products, both domestically and internationally throughout 2020, although sales began to recover late in the second quarter, and through the end of the year, as many of our customers resumed operations in a limited capacity.

We continue to see improved demand domestically for our products from pre-COVID-19 levels and have experienced improvements internationally, driven primarily by entry into new markets, the largest of which was Brazil.

The OEM product line consists of proprietary products designed specifically for third party equipment manufacturers.

revenue for this product line increased 53.6% or approximately $1.9 million when compared to 2018 .

The increase from 2018 is primarily attributable to sales to Symmetry under our Manufacture and Supply Agreement, which commenced following the disposition of the Core Business in August 2018.

Revenue for this product line decreased (1.1)% or approximately $(0.1) million when compared to 2019.

International sales represented approximately 32.1% and 30.6% of total revenues for the years ended December 31, 2020 and 2019, respectively.

Management estimates our products have been sold in more than 55 countries through local dealers coordinated by sales and marketing personnel through our facilities in Clearwater, Florida and Sofia, Bulgaria.

APYX MEDICAL CORPORATION

MANAGEMENT'S DISCUSSION AND ANAYLSIS OF

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued

Overall sales from continuing operations increased by 62.3% or approximately $6.4 million for the year ended December 31, 2018 when compared with 2017 .

Advanced Energy segment sales increased 70.1% or approximately $5.4 million for the year ended December 31, 2018 when compared with 2017.

The increase was primarily driven by a continued focus of our selling into the cosmetic surgery market and sales growth in international markets.

The OEM product line consists of proprietary products designed specifically for third party equipment manufacturers;

revenue for this product line increased 39.3% or approximately $1.0 million when compared to 2017.

(In thousands)

2018 as Restated

(In thousands) 2020 2019 Change

Cost of sales $ 10,207 $ 9,141 11.7 %

Percentage of sales 36.8 % 32.4 %

Gross profit $ 17,504 $ 19,094 (8.3) %

Percentage of sales 63.2 % 67.6 % (4.4) %

Our gross profit margin as a percentage of sales increased by 2.4% , or $8.3 million during the year ended December 31, 2019 compared with 2018 .

The increase was primarily driven by higher Advanced Energy sales as a percentage of total sales in 2019 as well as efficiencies realized in the manufacturing processes in late 2019.

These increases were partially offset by an increase in international sales as a percentage of total sales in 2019 as compared to 2018, which typically carry lower margins that U.S.

sales, and OEM sales to Symmetry, which carry lower margins than typical OEM sales.

Our gross profit margin as a percentage of sales decreased by 2.8% but increased by approximately $3.9 million during the year ended December 31, 2018 , compared with 2017 .

The decrease was driven by lower year over year margins in Advanced Energy from increased international sales offset by increased year over year margins in the OEM segment.

In conjunction with the divestment of our Core business segment in 2018, we performed a review of our standard costs, including the composition of our overhead cost pools.

As a result, we reclassified certain overhead costs related to quality and regulatory to Salaries and Related Costs, in the amount of approximately $0.1 million in the third quarter and approximately $0.4 million for the last quarter of 2018.

This change in estimate was necessary in order to better reflect the change in operations to our Advanced Energy segment.

Our gross profit margin as a percentage of sales decreased by 4.4% during the year ended December 31, 2020 compared with 2019.

During the second quarter, we reassessed our forecasted product mix due to COVID-19, increased availability of our newer handpiece designs, and improved timing 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 $0.3 million which is reflective of small recoveries on the impairments later in the year through the manufacture and sale of handpieces utilizing the impaired components.

The remaining decrease in gross profit margin is driven by product mix within our Advanced Energy segment , offset by improved product margins in our Advanced Energy segment as a result of our continued manufacturing efficiency initiatives and introduction of newer product models.

APYX MEDICAL CORPORATION

MANAGEMENT'S DISCUSSION AND ANAYLSIS OF

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued

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Research and development

(In thousands)

2018 as Restated

(In thousands) 2020 2019 Change

Research and development expense $ 3,920 $ 3,731 5.1 %

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Our expenditures for R&D related activities increased by 5.1% or approximately $0.2 million for the year ended December 31, 2020, compared with 2019.

This was mainly driven by continued spending on clinical studies and research projects related to the cosmetic surgery market, including the development of new handpieces which the Company introduced to the market during 2019 as well as the submission of two IDE applications to the FDA in 2019.

Our expenditures for R&D related activities increased by 31.3% or approximately $0.6 million for the year ended December 31, 2018 , compared with 2017 .

This was mainly driven by continued spending on clinical studies and research projects related to the cosmetic surgery market.

This increase was primarily due to continued spending on our two investigational device exemption (IDE) clinical studies, which had applications submitted to the FDA in late 2019.

Professional services

(In thousands)

2018 as Restated

(In thousands) 2020 2019 Change

Professional services expense $ 7,350 $ 8,507 (13.6) %

Percentage of sales 26.5 % 30.1 %

Professional services expenses increased 171.5% for the year ended December 31, 2019 , compared with 2018 .

The change was primarily attributable to increases in physician consulting expenses, including stock option grants, related to the Advanced Energy segment (increase of $2.0M), increased legal fees primarily associated with our class action lawsuit (increase of $1.0M), our use of third party IT support in 2019 (increase of $0.6M), third party assistance with internal controls in 2019 (increase of $0.5M), and accounting and auditing fees for services provided by our independent accountants ($0.3M).

Professional services costs increased 77.1% for the year ended December 31, 2018 , compared with 2017 .

The change was attributable to increased legal and non-R&D consulting expenses related to the Advanced Energy segment.

Professional services expenses decreased 13.6% for the year ended December 31, 2020, compared with 2019.

The change was primarily attributable to decreases in legal expense ($0.7 million) associated with our now settled class action lawsuit, a decrease in Medical Advisory Board consulting fees ($0.5 million), and a decrease in option expense related to options granted to our Medical Advisory Board physicians ($0.3 million), as additional grants did not occur in 2020.

These decreases were partially offset by an increase in accounting and auditing fees ($0.5 million) related to recent financial statement restatements, the change in our independent accountants and reaudit of the 2019 consolidated financial statements, and continued efforts to remediate our internal control deficiencies and material weaknesses.

Salaries and related costs

(In thousands)

2018 as Restated

(In thousands) 2020 2019 Change

Salaries and related expenses $ 14,630 $ 14,025 4.3 %

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During 2020, salaries and related expenses increased approximately 4.3% or approximately $0.6 million compared to 2019.

The increase was primarily attributable to additional headcount in 2019 (net increase of 44 employees in 2019), many of whom had a salary in excess of our average salaries in 2018, and employee stock option grants in 2019, which drove an increase in employee stock option expense of $0.6M in 2019.

During 2018 , salaries and related expenses increased approximately 34.0% or approximately $2.4 million compared to 2017.

The increase was primarily attributable to increased incentive compensation of $1.5 million.

APYX MEDICAL CORPORATION

MANAGEMENT'S DISCUSSION AND ANAYLSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued

In conjunction with the divestment of our Core business segment, we performed a review of our standard costs, including the composition of our overhead cost pools.

This change in estimate was necessary in order to better reflect the change in operations to our Advanced Energy segment.

The increase was primarily attributable to additional employee stock option grants in 2020, which drove an increase in employee stock option expense of $1.2 million in 2020.

This increase was partially offset by lower bonus expense during 2020 of approximately $0.6 million.

Selling, general and administrative expenses

(In thousands)

2018 as Restated

(In thousands) 2020 2019 Change

SG&A expenses $ 11,687 $ 13,700 (14.7) %

Percentage of sales 42.2 % 48.5 %

Selling, general and administrative expense increased by 45.6% or approximately $4.3 million for the year ended December 31, 2019 , compared with 2018 .

The increase is primarily attributable to higher selling and marketing related expenses, including sales commissions (increase of $0.9M), travel expenses (increase of $0.9M), and advertising including trade shows (increase of $0.7M) to support sales growth in the Advanced Energy segment.

Additionally, we incurred additional regulatory expenses (increase of $0.7M) in 2019 associated with obtaining clearance to sell our products, both domestically and internationally.

Selling, general and administrative expense increased by 8.3% or approximately $0.7 million for the year ended December 31, 2018 , compared with 2017 .

The increase is primarily attributable to higher sales and marketing related expenses to support sales growth in the Advanced Energy segment.

Ewers, the Chief Financial Officer, resigned as an officer of the Company effective December 31, 2018, although he continued on as an employee during the first quarter of 2019.

In connection with this departure, the Company and Mr.

Ewers entered into a separation agreement, dated November 12, 2018.

Severance costs incurred included salary, option expense and other benefits of approximately $624,000, approximately $532,000 is included in operational cash outflows during 2019, the remainder will be included in operational cash outflows during 2020.

Jack McCarthy, the Chief Commercialization Officer, was terminated without cause from his position with the Company effective November 6, 2017.

Severance costs incurred included salary, option expense and other benefits of approximately $582,000 , of which approximately $397,000 was included in operational cash outflows during 2018.

Gershon, the Chief Executive Officer and a director, resigned from all of his positions with the Company effective December 15, 2017.

In connection with this departure, the Company and Mr.

Gershon entered into a separation agreement, dated December 15, 2017.

Severance costs incurred included salary, option expense and other benefits of approximately $767,000 , of which approximately $670,000 was included in operational cash outflows during 2018.

Other Income (Expense), net

(In thousands)

2018 as Restated

Selling, general and administrative expense decreased by 14.7% or approximately $2.0 million for the year ended December 31, 2020, compared with 2019.

The decrease is primarily related to decreases in travel and entertainment expense ($1.2 million), advertising including show fees and related costs ($0.6 million), regulatory registration and related quality audit expenses ($0.4

APYX MEDICAL CORPORATION

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued

million), and commissions on Advanced Energy sales ($0.2 million), all of which are associated with restricted travel, decreased sales activity, or delayed regulatory activity as a result of COVID-19.

These decreases were partially offset by higher bad debt expense ($0.4 million).

Interest Income

Interest expense

(In thousands) 2020 2019 Change

Interest income $ 241 $ 1,392 (82.7) %

Percentage of sales 0.9 % 4.9 %

Interest income decreased (82.7)% for the year ended December 31, 2020 as compared with the prior year.

This decrease is due to a lower yield, as well as a lower average balance, on our investments in U.S.

Treasury securities included in cash and cash equivalents.

Other Income (Loss), net

(In thousands) 2020 2019 Change

Other income (loss), net $ 479 $ (351) 236.5 %

Percentage of sales 1.7 % (1.2) %

Other income (loss), net increased 236.5% for the year ended December 31, 2020, as compared with the prior year.

This increase is primarily due to the receipt of refunds on tariffs paid in the prior year during the first quarter of 2020, combined with the recognition of a joint and several liability for not collecting and remitting payroll taxes related to stock option exercises in the prior year.

The income tax benefit was approximately $7.5 million, with an effective tax rate of 38.7%, for the year ended December 31, 2020 as compared to an income tax benefit of approximately $0.1 million, with an effective tax rate of 0.7%, in 2019.

For the year ended December 31, 2020, the effective tax rate differs from the statutory rate primarily due to the release of the valuation allowance on our Federal NOL from 2019 as a result of the CARES Act, partially offset by a valuation allowance on our State NOL for 2020 and accrued interest and penalties on our uncertain tax positions.

For the year ended December 31, 2019, the effective tax rate differs from the statutory rate primarily due to the valuation allowance on our Federal and State NOL for 2019 and accrued interest and penalties on our uncertain tax positions.

On March 27, 2020, the U.S.

government enacted the CARES Act to provide relief from COVID-19.

The CARES Act includes a provision that allows companies to carryback NOLs generated in the period 2018 through 2020 to prior years.

As a result, we released the full valuation allowance of approximately $3.7 million on our Federal NOL carryforward from 2019 during the first quarter of 2020.

In 2020, our income tax benefit is composed primarily of a benefit of $3.7 million associated with the current year net loss and $3.7 million associated with the release of the valuation allowance on the net operating loss from 2019 from the CARES Act.

In 2019, our income tax benefit is composed primarily of return to provision adjustments related to the 2018 tax year (benefit of approximately $0.3 million), partially offset by the accrual of interest and penalties on our uncertain tax positions (expense of approximately $0.2 million).

We expect to receive refunds of approximately $7.5 million during 2021 related to the carryback of our 2020 and 2019 pre-tax losses.

APYX MEDICAL CORPORATION

MANAGEMENT'S DISCUSSION AND ANAYLSIS OF

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued

Interest income (expense)

Total net interest income was higher for the year ended December 31, 2019 , as compared with 2018 .

This increase is due to short term investments in U.S.

Treasury Securities which we purchased with the proceeds from the sale of the Core business, which were outstanding for all of 2019 as compared to approximately 4 months in 2018.

This increase is offset by lower returns due to a lower average yield in 2019 and lower average principal invested.

Total net interest income was higher for the year ended December 31, 2018, as compared with 2017.

This increase is primarily related to short term investments in U.S.

Treasury Securities which we purchased with the proceeds from the sale of the Core business.

The income tax benefit was approximately $0.1 million for the year ended December 31, 2019 as compared to an income tax benefit from continuing operations of approximately $3.9 million in 2018.

In 2019, our income tax benefit is composed primarily of return to provision adjustments related to the 2018 tax year (benefit of approximately $0.3M), partially offset by the accrual of interest and penalties on our uncertain tax positions (expense of approximately $0.2M).

During 2018, the Company recorded a large gain on the sale of our Core business to Symmetry Surgical.

This gain allowed the Company to utilize deferred tax assets (primarily a net operating loss carryforward) that had been fully reserved through a valuation allowance to offset our taxable position in 2018.

Liquidity and Capital Resources

At December 31, 2019, we had approximately $58.8 million in Cash and Cash Equivalents as compared to approximately $78.3 in Cash, Cash Equivalents and Short Term Investments at December 31, 2018.

At December 31, 2020, we had approximately $41.9 million in cash and cash equivalents as compared to approximately $58.8 in cash and cash equivalents at December 31, 2019.

Our working capital at December 31, 2020 was approximately $56.9 million compared with $64.4 million at December 31, 2019.

The decrease in working capital at December 31, 2019 from December 31, 2018 was primarily due to the net loss incurred by the Company in 2019.

For the year ended December 31, 2019, net cash used in operating activities is approximately $18.5 million compared with net cash used in operating activities of approximately $20.9 million in 2018.

This decrease in cash used is primarily driven by a reduction of taxes paid, and partially offset by a higher net loss from continuing operations.

Net cash from investing activities for the year ended December 31, 2019, is $60.5 million, primarily related to the maturity of short term investments and reinvestment in cash equivalents.

Net cash from investing activities for the year ended December 31, 2018 is $29.3 million, primarily related to $91.1 million in net proceeds from the disposition of the Core business, offset by net purchases of marketable securities of $61.4 million.

Cash from financing activities of approximately $0.1 million primarily relates to cash collected for stock options during the year ended December 31, 2019.

Cash used in 2018 financing activities was $2.5 million and primarily related to the repayment of the mortgage on our Clearwater, FL, facility.

The decrease in working capital at December 31, 2020 was primarily due to the net loss incurred by the Company in 2020, excluding non-cash activity, comprised primarily of stock-based compensation expense.

For the year ended December 31, 2020, net cash used in operating activities was approximately $16.0 million compared with net cash used in operating activities of approximately $18.5 million in 2019.

Net cash used in investing activities for the year ended December 31, 2020, was $0.6 million, related to purchases of capital equipment.

Net cash from investing activities for the year ended December 31, 2019 was $60.5 million, primarily related to the maturity of short-term investments and reinvestment in cash equivalents, as well as approximately $1.3 million in purchases of capital equipment.

At December 31, 2020, we had purchase commitments for inventories totaling approximately $1.9 million, substantially all of which is expected to be purchased by the end of 2021.

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Our most significant accounting policies are disclosed in Note 2 to the consolidated financial statements.

APYX MEDICAL CORPORATION

MANAGEMENT'S DISCUSSION AND ANAYLSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued

The preparation of the consolidated financial statements in conformity with U.S.

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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.

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.

Options are valued using the Black-Scholes model in 2019 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.

The Company has determined that the most critical of these estimates are the estimates of expected life, forfeiture rate and volatility used in the calculations.

We account for stock options in accordance with FASB ASC Topic 718-10, Compensation-Stock Compensation , with compensation expense recognized over the vesting period.

Options are valued using the Black-Scholes model, 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 estimates of 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.

We utilize this method, as 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.

Forfeiture rate

We estimate forfeiture rates at the time stock-based compensation awards are granted.

We utilize historical employee turnover by employee class to estimate these rates.

Forfeiture estimates are lower for employees in executive and managerial positions than for other employee groups.

At a minimum, we record compensation expense on those awards that have vested.

Following the disposition of the Core business, we experienced turnover higher than an our average historical turnover, which resulted in actual results differing from these estimates.

During the third quarter of 2019, we determined that our estimates at the grant date were not consistent with actual results and that we had not re-evaluated our original forfeiture estimate or recorded compensation cost for the value of awards that had vested.

This resulted in a cumulative difference in the compensation cost that had been recognized on these awards of $0.2 million from the estimated amount, which was corrected in a revision included in our 2019 Q3 10-Q.

The Company determines the volatility by utilizing the historical volatility of our stock over the period of the awards expected life.

APYX MEDICAL CORPORATION

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued

We determine the volatility by utilizing the historical volatility of our stock over the period of the awards expected life.

The SEC 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.

1 unchanged sentence

We have not included any additional periods, nor disregarded any periods, in calculating our volatility.

APYX MEDICAL CORPORATION

MANAGEMENT'S DISCUSSION AND ANAYLSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued

Inventory reserves

Accounts Receivable Allowance

We maintain a reserve for uncollectible accounts receivable.

When evaluating the adequacy of the allowance for doubtful accounts, we analyze specific unremitted customer balances for known collectability issues, review historical bad debt experience, customer credit worthiness and economic trends, and we make estimates in connection with establishing the allowance for doubtful accounts, including the future impacts of current trends.

Changes in estimates are reflected in the period they are made.

If the financial condition of our customers deteriorates, resulting in an inability to make payments, additional allowances may be required.

Inventory Obsolescence Allowance

We maintain a reserve for excess and obsolete inventory resulting from the potential inability to sell our products at prices in excess of current carrying costs.

13 unchanged sentences

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 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.

Exclusive of the carryback provisions of the CARES ACT and the associated income tax benefit recognized in 2020, we 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 of continuing operations improve, and it becomes more likely than not that the deferred tax assets will be realizable.

As management expects the Company to continue to generate losses in the foreseeable future after 2019, we will continue to record a valuation allowance on the remaining deferred tax asset balance as of December 31, 2019.

As management expects the Company to continue to generate losses in the foreseeable future after 2020, we will continue to record a valuation allowance on the net deferred tax assets balance as of December 31, 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.

APYX MEDICAL CORPORATION

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued

Inflation has not materially impacted the operations of our Company.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis