# Apyx Medical Corp: Form 10-K for the period ended Dec 31, 2019 - Company: [Apyx Medical Corp](/companies/apyx.md) (CIK 719135) - Form: 10-K - Filed: 2020-03-31 - Accepted by EDGAR: Mar 31, 2020, 15:25 ET - Period: 2019-12-31 - Accession: 0000719135-20-000029 - Inline XBRL: yes - Main document: https://www.sec.gov/Archives/edgar/data/719135/000071913520000029/a2019q410-k.htm - All documents and exhibits: https://www.sec.gov/Archives/edgar/data/719135/000071913520000029/ ## Figures reported in this filing Standardized XBRL line items for the period ended 2019-12-31. | Line item | Period | Value | XBRL concept | | --- | --- | ---: | --- | | Revenue | 3 months, 2019-10-01 to 2019-12-31 | $8.4m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax | | Revenue | 12 months, 2019-01-01 to 2019-12-31 | $28.2m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax | | Cost of revenue | 12 months, 2019-01-01 to 2019-12-31 | $9.1m | us-gaap:CostOfGoodsAndServicesSold | | Gross profit | 3 months, 2019-10-01 to 2019-12-31 | $5.6m | us-gaap:GrossProfit | | Gross profit | 12 months, 2019-01-01 to 2019-12-31 | $19.1m | us-gaap:GrossProfit | | Research and development | 12 months, 2019-01-01 to 2019-12-31 | $3.7m | us-gaap:ResearchAndDevelopmentExpense | | Selling, general and administrative | 12 months, 2019-01-01 to 2019-12-31 | $13.7m | us-gaap:SellingGeneralAndAdministrativeExpense | | Operating income | 12 months, 2019-01-01 to 2019-12-31 | −$20.9m | us-gaap:OperatingIncomeLoss | | Interest expense | 12 months, 2019-01-01 to 2019-12-31 | $8.0k | us-gaap:InterestExpense | | Income tax | 12 months, 2019-01-01 to 2019-12-31 | −$130.0k | us-gaap:IncomeTaxExpenseBenefit | | Net income | 12 months, 2019-01-01 to 2019-12-31 | −$19.7m | us-gaap:NetIncomeLoss | | Diluted EPS | 12 months, 2019-01-01 to 2019-12-31 | −$0.58 | us-gaap:EarningsPerShareDiluted | | Basic EPS | 12 months, 2019-01-01 to 2019-12-31 | −$0.58 | us-gaap:EarningsPerShareBasic | | Diluted shares (weighted) | 12 months, 2019-01-01 to 2019-12-31 | 34,069,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding | | Operating cash flow | 12 months, 2019-01-01 to 2019-12-31 | −$18.5m | us-gaap:NetCashProvidedByUsedInOperatingActivities | | Capital expenditure | 12 months, 2019-01-01 to 2019-12-31 | $1.3m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment | | Cash and equivalents | at 2019-12-31 | $58.8m | us-gaap:CashAndCashEquivalentsAtCarryingValue | | Current assets | at 2019-12-31 | $76.7m | us-gaap:AssetsCurrent | | Total assets | at 2019-12-31 | $84.7m | us-gaap:Assets | | Current liabilities | at 2019-12-31 | $12.3m | us-gaap:LiabilitiesCurrent | | Total liabilities | at 2019-12-31 | $13.5m | us-gaap:Liabilities | | Shareholders' equity | at 2019-12-31 | $71.3m | us-gaap:StockholdersEquity | ## Business As filed, 16,432 characters. ### General Apyx Medical Corporation (“Company”, “Apyx Medical”, “we”, “us”, or “our”), formerly known as Bovie Medical Corporation, was incorporated in 1982, under the laws of the State of Delaware and has its principal executive office at 5115 Ulmerton Road, Clearwater, FL 33760. 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 we serve. 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. On August 30, 2018, we closed on a definitive 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 Helium Plasma Technology, including the expansion of our Renuvion® brand in the cosmetic surgery market. In connection with the asset purchase agreement, we also entered into an Electrosurgical 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. In connection with the asset purchase agreement, we also entered into a Manufacture and Supply Agreement with Symmetry for a ten-year term, whereby we will manufacture certain products and sell them to Symmetry at agreed upon prices. Revenue, costs and expenses resulting from this agreement are reported in our Consolidated Statements as income or loss from operations of our OEM reporting segment. Our objective is to achieve profitable, sustainable growth by increasing our market share in the advanced energy category, including the commercialization of products that have the potential to be transformational with respect to the results they produce for surgeons and patients. In order to achieve this objective, we plan to leverage our long history in the industry, along with the reputation for quality and reliability that our brand enjoys within the medical community. ### Significant Subsidiaries Apyx Bulgaria, EOOD, formerly known as Bovie Bulgaria, is a wholly-owned limited liability company incorporated under Bulgarian law, located in Sofia, Bulgaria. It is engaged in the business of development and manufacturing of our advanced energy generators, as well as the manufacturing of disposable hand piece subassemblies and OEM generators and accessories. The facility also distributes products directly to customers in certain international markets and provides warranty and repair services. ### Industry The cosmetic surgery market is a special segment of the medical field which is involved in the restoration, reconstruction, or alteration of the human body so as to enhance the body’s appearance. The market for cosmetic surgery includes surgical, minimally invasive and nonsurgical cosmetic procedures. This market is expected to have steady growth year over year and this growth is driven by social and cultural factors such as influence of social media, peer pressure for appearance and beauty, and increasing disposable income. We believe that Apyx Medical has sustainable, competitive advantages in the cosmetic market for several reasons: our long history of developing unique energy devices to meet the needs of physicians, our unique Helium Plasma Technology, and our outstanding product quality supported by strong engineering and research and development capabilities. We believe that our equipment and devices have and will continue to improve the lives of doctors and their patients. ### Intellectual Property We rely on our intellectual property that we have developed or acquired over the years including patents, trade secrets, technical innovations and various licensing agreements to provide our future growth and build our competitive position. We have been issued 37 patents in the United States and 26 foreign patents. We have 16 pending patent applications in the United States and 26 pending foreign applications. We have 6 US registered trademarks and 2 pending US trademark applications. As we continue to expand our intellectual property portfolio we believe it is critical for us to continue to invest in filing patent applications to protect our technology, inventions and improvements. However, we can give no assurance that competitors will not infringe on our patent rights or otherwise create similar or non-infringing competing products that are technically patentable in their own right. ### Manufacturing and Suppliers We are committed to producing the most technically advanced and highest quality products of their kind available on the market. We manufacture the majority of our products on our premises in Clearwater, Florida and at our facility located in Sofia, Bulgaria, which are certified under the ISO international quality standards and are subject to continuing regulation and routine inspections by the FDA to ensure compliance with regulations relating to our quality system, medical device complaint reporting and adherence to FDA restrictions on promotion and advertising. In addition, we are subject to regulations under the Occupational Safety and Health Act, the Environmental Protection Act and other federal, state and local regulations. Our wholly-owned subsidiary, Apyx Bulgaria, EOOD operates an approximately 20,000 square foot ISO13485 certified and FDA registered manufacturing facility located in the capital city of Sofia, which houses manufacturing, development and assembly operations. We maintain collaborative arrangements with three foreign suppliers, including our contract component manufacturer located in Ningbo, China, under which we request the development of certain products which we purchase pursuant to purchase orders. Our purchase order commitments are never more than one year in duration and are supported by our sales forecasts. During late 2019, we entered into a joint venture with our Chinese supplier to establish a foundation for the manufacturing and sale of our products into the Chinese market. The joint venture is in an unfunded startup phase, and accordingly, the activity associated with it is not material. ### Backlog The value of unshipped factory orders is not material. ### Employees At December 31, 2019, we had 266 full-time employees world-wide, of whom 4 were executive officers, 27 supervisory personnel, 34 sales personnel and 201 technical support, administrative and production employees. None of our current employees are covered by a collective bargaining agreement and we have never experienced a work stoppage. ### Our Two Business Segments We currently have two reportable operating segments: Advanced Energy and OEM. The Corporate and Other category 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. For the year ended December 31, 2019, our OEM segment contributed 19.7% of our consolidated total revenue and our Advanced Energy segment contributed 80.3% of our consolidated total revenue. ### Advanced Energy Segment ### Overview Our product portfolio consists of our Helium Plasma Technology that is marketed and sold as Renuvion® in the cosmetic surgery market and J-Plasma® in the hospital surgical market. Renuvion® offers plastic surgeons, facial plastic surgeons and cosmetic physicians a unique ability to provide controlled heat to the tissue to achieve their desired results. The J-Plasma® system allows surgeons to operate with a high level of precision, virtually eliminating unintended tissue trauma. This technology has US FDA clearance, CE mark, and clearance for sale in multiple other countries and is generally indicated for the cutting, coagulation and ablation of soft tissue. The system consists of an electrosurgical generator unit (ESU), a handpiece and a supply of helium gas. The proprietary radiofrequency (RF) energy is delivered to the handpiece by the ESU and used to energize an electrode. When helium gas passes over the energized electrode, helium plasma is generated which allows for conduction of the RF energy from the electrode to the patient in the form of a precise helium plasma beam. The energy delivered to the patient via the helium plasma beam is very precise and cooler in temperature in comparison to other surgical energy modalities such as standard RF monopolar energy. This technology has been the subject of eight white papers and ten peer-reviewed, published journal articles and book chapters. It also continues to be the subject of numerous presentations at traditional and cosmetic surgery conferences around the world. This technology initially received FDA clearance in 2012 and a CE mark in December, 2014, which enables us to sell the product in the European Union. In 2014, we created and trained a direct sales force dedicated to sell this technology. In 2015, we continued the commercialization process for our helium plasma technology with a multi-faceted strategy designed to accelerate adoption of the product. This strategy primarily involved deployment of a dedicated sales force, developing product line extensions and expanding the specialties in which this technology can become the “standard of care“ for certain procedures. During 2019, we continued our full scale commercialization efforts for Renuvion®. As of December 31, 2019 we had a direct sales force of 30 field-based selling professionals and a network of 4 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® into physicians' practices. From 2015 through 2019, we launched numerous new extensions to our helium plasma product lines in an effort to target new surgical procedures, users, and markets. As a result of our sales, marketing and product development initiatives, we have significantly increased the number of physicians using our Helium Plasma Technology by expanding usage to include the cosmetic surgery market in the US, and the cosmetic surgery market as well as the surgical oncology market outside the US. In order to assist us in leveraging our Helium Plasma Technology's precision and effectiveness in multiple surgical specialties, in 2019 we added 4 additional doctors to our Medical Advisory Board, bringing the total number to 6 members representing the plastic surgery, facial plastic surgery, and cosmetic procedure specialties. In 2019, our commercial strategy in the U.S. was primarily focused on advancing the usage of Renuvion® in the cosmetic surgery market. In our international markets, we focused on both the cosmetic surgery and on our J-Plasma® technology for the surgical oncology market. Also in 2019, we continued a clinical and regulatory strategy to support our market focus. Once complete, we will launch a corresponding marketing campaign. We are continuing to make substantial investments in the development and marketing of our Renuvion® technology for the long-term benefit of the Company and its stakeholders and this may adversely affect our short term profitability and cash flow, particularly over the next 12 to 24 months. While we believe that these investments have the potential to generate additional revenues and profits in the future, there can be no assurance that our Helium Plasma Technology will be successful or that such future revenues and profitability will be realized. ### Customers In the US, we primarily sell our Renuvion® products through our direct sales force to physicians, cosmetic surgery offices and surgical centers. Outside of the US, all of our products are sold through our distributor network. ### Products During 2019, Advanced Energy Products consisted of our Helium Plasma Technology lines (Renuvion® and J-Plasma®). These product lines consist of a multifunction generator, a handpiece and a supply of helium gas. Radiofrequency (RF) energy is delivered to the handpiece by the generator and used to energize an electrode. When helium gas passes over the energized electrode, helium plasma is generated which allows for conduction of the RF energy from the electrode to the patient in the form of a precise helium plasma beam. The energy delivered to the patient via the helium plasma beam is very precise and cooler in temperature in comparison to other surgical energy modalities such as standard RF monopolar energy. #### Helium Plasma Generator In June 2017, we launched the newest version of the Apyx Ultimate™ generator. The Apyx Ultimate 2.0 is a high frequency electrosurgical generator that can be used for delivery of RF energy and/or helium plasma to cut, coagulate and ablate soft tissue during open and laparoscopic surgical procedures. The generator offers the users monopolar, bipolar and helium plasma energy in a single unit. It also powers the Cool-Coag technology that has been incorporated into the new Precise Open handpieces that were released in December 2017. These new product releases continue to expand the procedure base for our Helium Plasma Technology by providing surgeons with the tools they need to access additional anatomic locations and perform specific procedures. #### Disposable Portfolio We offer a variety of different hand pieces for open and laparoscopic procedures. The helium-based plasma generated from these devices have been shown to provide increased precision and control and cause less thermal damage to tissue than CO2 laser, argon plasma and RF energy products currently available on the market. The technology has a general indication and can be used for cutting, coagulating and ablating soft tissue. The two primary specialties that are targeted are the cosmetic surgery and surgical oncology markets. The advantages of helium plasma continue to be studied throughout the medical and scientific communities. We believe that surgical applications are just one area of opportunity for this technology. ### Competition Currently, we are the only company with helium-based plasma and retractable blade products. However, there are RF based competitors, argon plasma competitors, and CO2 laser competitors for our target market. We believe our competitive position did not change in 2019. ### OEM Segment ### Overview The Company leverages its expertise in the design, development and manufacturing of electrosurgical equipment by producing generators and related accessories for large, well-known medical device manufacturers through original equipment manufacturing (OEM) agreements, as well as start-up companies with the need for our energy based designs. In connection with the Asset Purchase Agreement with Symmetry Surgical we entered into a Manufacturing and Supply Agreement for a ten-year term, whereby we will manufacture certain products and sell to them at agreed upon prices. Revenue, costs and expenses resulting from this agreement are reported in our Consolidated Statements of Operations as a component of income or loss from operations of our OEM reporting segment. ## Risk factors As filed, 44,755 characters. In addition to risks and uncertainties in the ordinary course of business, important risk factors that may affect us are discussed below. Additional risks not presently known to us or that we currently believe are immaterial may also significantly impact or impair our business operations. ### Risks Related to Our Industry ***The energy-based medical device industry in the aesthetics market is highly competitive and we may be unable to compete effectively.*** The energy-based medical device industry for the aesthetics market is highly competitive. Many competitors in this industry are well-established, do a substantially greater amount of business and have greater financial resources and facilities than we do. We have invested and continue to invest, substantial resources to develop and monetize our J-Plasma®/Renuvion® technology. We believe we must continue to develop new applications for our products and obtain new indications for use in order to stay competitive. If we are unable to gain acceptance of our technology in the marketplace, or obtain new indications for use, our business and results of operations and cash flows may be materially and adversely affected. We also compete by private labeling our products for major distributors under their label. This allows us to increase our position in the marketplace and thereby compete from two different approaches, our Apyx label and our customers’ private label. Our private label customers distribute our products under their name through their internal sales force. We believe our main competitors do not private label their products. ***Maintaining strong relationships with plastic surgeons, cosmetic physicians, and other healthcare professionals, is critical to the success of our product commercialization strategy.*** Part of our strategy depends on developing strong working relationships with key plastic surgeons, cosmetic physicians and other healthcare professionals. The guidance we get from these relationships is important from both a commercialization strategy and product development standpoint. Without these relationships, the development and commercialization of our products could suffer which could have a material adverse impact on our business. ***We rely on our internal sales force and sales partners to market and sell our products. If we are unable to hire, effectively train, and retain these professionals, future sales and profitability may be adversely affected.*** The implementation of our growth strategy largely depends on our ability to hire, train, and retain our sales professionals. We train our sales professionals to thoroughly understand our Helium Plasma Technology and the marketplace in which we compete, including how our technologies can increase our customer's revenue and the results they are able to achieve for their patients. It may take time for these sales professionals to become productive and there can be no assurance that recently recruited sales professionals will be adequately trained in a timely manner, that our direct sales productivity will improve, or that we will not experience significant levels of attrition in the future. ***If we are unable to successfully introduce new products or fail to keep pace with competitive advances in technology, our business, financial condition and results of operations could be adversely affected. In addition, our research and development efforts rely upon investments and alliances and we cannot guarantee that any previous or future investments or alliances will be successful.*** Our research and development activities are an essential component of our efforts to develop new and innovative products for introduction in the marketplace. New and improved products play a critical role in our sales growth. We continue to place emphasis on the development of proprietary products, such as our J-Plasma®/Renuvion® technology, and product improvements to complement and expand our existing product lines. We maintain close working relationships with physicians and medical personnel in hospitals and universities who assist in product research and areas of development. These activities are primarily conducted internally and are expensed as incurred. Expenses include direct expenses for wages, materials and services associated with the development of our products net of any reimbursements from customers. Research and development expenses do not include any portion of general and administrative expenses. Our research and development activities are conducted at our Clearwater, Florida and Sofia, Bulgaria facilities. We expect to continue making future investments to enable us to develop and market new technologies and products to further our strategic objectives and strengthen our existing business. However, we cannot guarantee that any of our previous or future investments in both facilities will be successful or that our new products will gain market acceptance, the failure of which would have a material adverse effect on our business and results of operations. The amount expended by us on research and development of our products during the years 2019, 2018 and 2017, totaled approximately $3.7 million, $2.5 million and $1.9 million, respectively. During the past three years, we invested substantial resources in the development and marketing of our Advanced Energy product technology. We have not incurred any direct costs relating to environmental regulations or requirements. For 2020, we expect to invest approximately 10% to 15% of revenue for research and development activities. ***Even if we are successful in developing new, or enhancing our existing products, there are various circumstances that could prevent their successful commercialization.*** Our ability to successfully commercialize our products will depend on a number of factors, any of which could delay or prevent commercialization, including: - our inability to obtain the necessary regulatory clearances or approvals for expanded indications, new products, or product modifications; - we are unable to demonstrate, if required, the safety and efficacy of new products with data from preclinical studies and clinical trials; - our product is determined to be ineffective or unsafe following approval and is removed from the market or we are required to perform additional research and development to further prove the safety and effectiveness of the product before re-entry into the market; - the regulatory approvals of our new products are delayed (or denied) or we are required to conduct further research and development of our products prior to receiving regulatory approval; - we are unable to build and maintain a sales and marketing group to successfully launch and sell our new products; - we are required to allocate available funds to litigation matters; - the needs of our physicians or their patients are not sufficiently met; - we are unable to manufacture the quantity of product needed (in accordance with quality manufacturing standards) to meet market demand, or at all; - competition from other products or technologies prevents or reduces market acceptance of our products; - we do not have and cannot obtain the intellectual property rights needed to manufacture or market our products without infringing on another company’s patents; or - we are unsuccessful in defending against patent infringement or other intellectual property rights, claims that could be brought against us, our products or technologies; The failure to successfully commercialize products will have a material and adverse effect on the future growth of our business, financial condition and results of operations. ***Our industry is highly regulated by the U.S. Food and Drug Administration and international regulatory authorities, as well as other governmental, state and federal agencies which have substantial authority to establish criteria which must be complied with in order for us to continue in operation.*** ### United States Our products and research and development activities are subject to regulation by the FDA and other regulatory bodies. FDA regulations govern, among other things, the following activities: - Product development - Product testing - Product labeling - Product storage - Pre-market clearance or approval - Advertising and promotion - Product traceability - Product indications - Post Market performance (complaints, adverse events, field actions) In the United States, medical devices are classified by the FDA on the basis of control deemed necessary to reasonably ensure the safety and effectiveness of the device. Currently, we only manufacture Class I and Class II devices. Our "Class II" devices require Pre-Market Notification, otherwise known as a "510(k) clearance". A 510(k) is a premarket submission made to FDA to demonstrate that the device to be marketed is at least as safe and effective, that is, substantially equivalent, to a legally marketed device that is not subject to PMA. Submitters must compare their device to one or more similar legally marketed devices and make and support their substantial equivalence claims. Before marketing a device, each submitter must receive an order, in the form of a letter, from FDA which finds the device to be substantially equivalent (SE) and states that the device can be marketed in the U.S. This order "clears" the device for commercial distribution. ### International Regulation To market products in the European Union, our products must bear the “CE” mark. Manufacturers of medical devices bearing the CE mark have gone through a conformity assessment process that assures that products are manufactured in compliance with a recognized quality system in the areas of design, development and manufacturing requirements and that they comply with the European Medical Devices Directive (MDD). Each device that bears a CE mark has associated technical documentation that includes a description of the following: - Description of the device and its components, - A Summary of how the device complies with the essential requirements of the Medical Devices Directive, - Safety (risk assessment) and performance of the device, - Clinical evaluations with respect to the device, - Methods, facilities and quality controls used to manufacture the device and - Proposed labeling for the device. Manufacturing and distribution of a device is subject to ongoing surveillance by the appropriate regulatory body to ensure continued compliance with quality system and reporting requirements. The European Union’s (EU) Medical Device Regulation (MDR), officially passed in April 2017, represents the first major changes to the EU medical device regulatory environment in more than 20 years. The new EU MDR has significantly raised the compliance bar for the medical device industry and will cause significant changes to the regulatory obligations of legal manufacturers, importers and distributors involved in the medical device distribution chain. Enforcement of this new regulation will transition in over the next two years. The EU MDR is far more complex than the existing Medical Devices Directive (MDD) and it presents new challenges for manufacturers. Classification has changed for some product categories and strict new requirements have been imposed on clinical data, risk management, post market surveillance, and supplier management. Outside of the European Union, regulations vary significantly from country to country and are becoming increasingly stringent and country specific. Territories and countries around the world continue to develop their own unique regulatory requirements and these individual governments are passing laws that enforce these new regulations and also imposing fees to register products in their country. The time and effort required to obtain approval to market products may be longer or shorter than that required in the United States or the European Union. Certain European countries outside of the European Union and other countries in the world do not recognize the CE mark certification or FDA clearance and have their own regulatory requirements to register and sell products in these territories. We are required to meet regulatory requirements and obtain registrations for our products in all countries that have these regulatory requirements prior to selling our products in that country. ### Environmental Regulation The medical device industry continues to be the subject of intense scrutiny and stringent regulation and the demand for green, sustainable products is rapidly increasing. There are increasing requirements for efficient and accurate processes for hazardous substance handling, supplier disclosures and regulatory reporting in order to comply with numerous global health and environmental regulatory requirements and restrictions, including but not limited to: - Restriction on Hazardous Substances (RoHS) Directive - Packaging and Packing Waste Directive - REACH Regulation - Proposition 65 - Hazardous Air Pollutants: Ethylene Oxide Compliance with existing and future environmental regulations may have an impact on the manufacturing and sterilization of our medical devices. Environmental regulations in the US and EU limit or prohibit the use of certain chemicals, substances and materials in the manufacture of our medical devices such as Prop 65 in California and others in the EU such as REACH, RoHS, and WEEE Directive. With the current global concerns over climate change and the tangible effects human beings are having on the environment, there is no doubt that the amount of environmental legislation is primed to increase still further, with EU being at the forefront of this movement. Ethylene oxide is used to sterilize approximately 50% of medical devices in the U.S. While some alternative methods currently exist, potential device incompatibility issues exist with these alternatives. The U.S. Environmental Protection Agency (EPA) classified EtO as a carcinogen after linking it to cases of breast cancer, lymphoma and leukemia. Over the course of 2019, public concerns about the emissions from sterilization facilities using EtO resulted recently in the permanent closure of two facilities (one in Illinois and the other in Michigan) as well as temporary closures for at least two facilities in Georgia and a new facility at risk in Illinois. In addition, the Illinois state legislature is considering a bill that would phase out hospital in-house use of EtO and require EtO commercial sterilization facilities operating within the state to relocate to “scarcely populated areas.” Currently, shortages due to current closures are not expected, but any additional commercial sterilization facility closures could result in shortages for certain devices. Our devices are not currently impacted by these closures however, it is unknown if the current EtO facilities utilized by Apyx Medical could be impacted in the future. The FDA is closely monitoring the supply chain effects of closures and potential closures of certain facilities that use ethylene oxide to sterilize medical devices prior to their use. The Agency is concerned about the future availability of sterile medical devices and the potential for medical device shortages that might impact patient care. However, the FDA does not have oversight authority over ethylene oxide emissions, that responsibility is within the purview of the Environmental Protection Agency. ### Anti-Corruption Regulation As we grow our international presence and global operations, we will be increasingly exposed to statutes, anti-corruption trade policies, economic sanctions and other restrictions imposed by the United States and other foreign governments and organizations, including the U.S. Foreign Corrupt Practices Act, or the FCPA, and other federal statutes and regulations, including those established by the Office of Foreign Assets Control, or OFAC. In addition, other foreign statutes, such as the U.K. Bribery Act of 2010, or the Bribery Act, prohibits both domestic and international bribery, as well as bribery across both private and public sectors. We have implemented policies and procedures designed to ensure compliance by our directors, officers, employees, representatives, consultants and agents with the FCPA, OFAC restrictions, the Bribery Act and other export control, anti-corruption, anti-money-laundering and anti-terrorism laws and regulations. However, there can be no assurance that our policies and procedures are or will be sufficient to prevent violations from occurring. Violations of the FCPA, OFAC restrictions, the Bribery Act or other export control, anti-corruption, anti-money laundering and anti-terrorism laws or regulations may result in severe criminal or civil sanctions, and we may be subject to other liabilities, which could have a material adverse effect on our reputation, financial condition and results of operations. ***Our international operations subject us to foreign currency fluctuations and other risks associated with operating in foreign countries.*** We operate internationally and enter into transactions denominated in foreign currencies. To date, we have not hedged our exposure to changes in foreign currency exchange rates and as a result, we are subject to foreign currency transaction and translation gains and losses. We purchase goods and services in U.S. dollars and Euros. Foreign exchange risk is managed primarily by satisfying foreign denominated expenditures with cash flows or assets denominated in the same currency therefore we are subject to some foreign currency fluctuation risk. Our currency value fluctuations were not material for 2019. There are also other risks inherent with operating on a global scale, not limited to the following: - Inability to obtain country-specific product registrations and clearances - Compliance with local regulations - Challenges with staffing our foreign operating facilities - Insufficient commercialization efforts in new countries due to lower than expected distributor performance - Theft or compromise of our intellectual property - Political changes or economic instability ***Changes in U.S. trade policies could significantly increase the cost of imported goods into the United States, which may materially reduce our sales or profitability.*** Changes in U.S. trade policy could trigger retaliatory actions by affected countries, resulting in "trade wars," in increased costs for goods imported into the United States, which may reduce customer demand for these products if the parties having to pay those tariffs increase their prices, or in trading partners limiting their trade with the United States. If these consequences are realized, the volume of economic activity in the United States, may be materially reduced. Such a reduction may materially and adversely affect our sales volumes. Further, the realization of these matters may increase our cost of goods and, if those costs cannot be passed on to our customers, our business and profits may be materially and adversely affected. ***Our operations may experience higher costs to produce our products as a result of changes in prices for oil, gasoline and other commodities.*** We use plastics and other petroleum-based materials along with precious metals contained in electronic components as raw materials in many of our products. Prices of oil and gasoline also significantly affect our costs for freight and utilities. Oil, gasoline and precious metal prices are volatile and may increase, resulting in higher costs to produce and distribute our products. Due to the highly competitive nature of the healthcare industry and the cost-containment efforts of our customers we may be unable to pass along cost increases through higher prices. If we are unable to fully recover these costs through price increases or offset through other cost reductions, our results of operations could be materially and adversely affected. ### Risks Relating to Our Business We manufacture the majority of our products at our Clearwater, Florida and Sofia, Bulgaria facilities. Components, labor-intensive assemblies and sub-assemblies, and sterilization services are out-sourced to third party manufacturers/services and produced to our specifications. We are also dependent on 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 could be negatively affected. Furthermore, no assurance can be given that such customers will give sufficient high priority to our products. Finally, disagreements or disputes may arise between us and our customers, which could adversely affect production and sales of our products. ***The recent Coronavirus outbreak has been declared a pandemic by the World Health Organization and recently has spread to the United States and many other parts of the world and may continue to adversely affect our business operations, employee availability, financial condition, liquidity and cash flow for an extended period of time.*** The outbreak of the Coronavirus (“COVID-19”) continues to grow both in the U.S. and globally, and related government and private sector responsive actions may continue to adversely affect our business operations. It is impossible to predict the effect and ultimate impact of the COVID-19 pandemic as the situation is rapidly evolving. 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 the severity and action taken to contain or prevent further spread within the U.S. and the related impact on consumer confidence and spending, all of which are highly uncertain and cannot be predicted. If the COVID-19 outbreak continues and persists for an extended period of time, we expect there will be significant and material disruptions to our supply chain and operations, and delays in the manufacturing and shipment of our products, which may then have a material adverse effect on our business and results of operations. These and other potential impacts of COVID-19, could therefore materially and adversely affect our business, financial condition and results of operations. ***We rely on certain suppliers, subcontractors, and manufacturers for raw materials and other products and are vulnerable to fluctuations in the availability and price of such products and services.*** Fluctuations in the price, availability and quality of the raw materials and subcontracting services we use in our manufacturing could have a negative effect on our cost of sales and our ability to meet the demands of our customers. Inability to meet the demands of our customers could result in the loss of future sales. In addition, the costs to manufacture our products depend in part on the market prices of the raw materials used to produce them. We may not be able to pass along to our customers all or a portion of our higher costs of raw materials due to competitive and marketing pressures, which could decrease our earnings and profitability. We also have collaborative arrangements with three key foreign suppliers under which we request the development 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. For example, we source certain materials used in the manufacture of our products from China; the coronavirus outbreak or other similar global disruptions could make access to our existing supply chain difficult and could impact our business. ***If we are unable to protect our patents or other proprietary rights, or if we infringe on the patents or other proprietary rights of others, our competitiveness and business prospects may be materially damaged.*** We have been issued 37 patents in the United States and 26 foreign patents. We have 16 pending patent applications in the United States and 26 pending foreign applications. Our intellectual property portfolio for our J-Plasma®/Renuvion® products continues to grow on an annual basis. We intend to continue to seek legal protection, primarily through patents, for our proprietary technology. Seeking patent protection is a lengthy and costly process and there can be no assurance that patents will be issued from any pending applications, or that any claims allowed from existing or pending patents will be sufficiently broad or strong to protect our proprietary technology. There is also no guarantee that any patents we hold will not be challenged, invalidated or circumvented, or that the patent rights granted will provide competitive advantages to us. Our competitors have developed and may continue to develop and obtain patents for technologies that are similar or superior to our technologies. In addition, the laws of foreign jurisdictions in which we develop, manufacture or sell our products may not protect our intellectual property rights to the same extent as do the laws of the United States. Adverse outcomes in current or future legal disputes regarding patent and other intellectual property rights could result in the loss of our intellectual property rights, subject us to significant liabilities to third parties, require us to seek licenses from third parties on terms that may not be reasonable or favorable to us, prevent us from manufacturing, importing or selling our products, or compel us to redesign our products to avoid infringing third parties’ intellectual property. As a result, our product offerings may be delayed and we may be unable to meet customers’ requirements in a timely manner. Regardless of the merit of any related legal proceeding, we have incurred in the past and may be required to incur in the future substantial costs to prosecute, enforce or defend our intellectual property rights. Even in the absence of infringement by our products of third parties’ intellectual property rights, or litigation related to trade secrets, we have elected in the past and may in the future elect to enter into settlements to avoid the costs and risks of protracted litigation and the diversion of resources and management’s attention. However, if the terms of settlements entered into with certain of our competitors are not observed or enforced, we may suffer further costs and risks. Any of these circumstances could have a material adverse effect on our business, financial condition, results of operations or cash flows. Our ability to develop intellectual property depends in large part on hiring, retaining and motivating highly qualified design and engineering staff with the knowledge and technical competence to advance our technology and productivity goals. To protect our trade secrets and proprietary information, generally we have entered into confidentiality agreements with our employees, as well as with consultants and other parties. If these agreements prove inadequate or are breached, our remedies may not be sufficient to cover our losses. ***We have been and may in the future become subject to litigation proceedings that could materially and adversely affect our business.*** The medical device industry is characterized by frequent claims and litigation, and we are and may become subject to various claims, lawsuits and proceedings in the ordinary course of our business, including claims by current or former employees, distributors and competitors, and with respect to our products and product liability claims, lawsuits and proceedings. We are involved in a number of legal actions relating to the use of our technology. The outcomes of these legal actions are not within our complete control and may not be known for prolonged periods of time. In the opinion of management, the Company has meritorious defenses, and such claims are adequately covered by insurance, or are not expected, individually or in the aggregate, to result in a material, adverse effect on our financial condition. However, in the event that damages exceed the aggregate coverage limits of our policy or if our insurance carriers disclaim coverage, we believe it is possible that costs associated with these claims could have a material adverse impact on our consolidated earnings, financial position or cash flows (see below ITEM 3: Legal Proceedings). #### Intellectual Property Litigation or Trade Secrets We have in the past, experienced certain allegations of infringement of intellectual property rights and use of trade secrets and may receive other such claims, with or without merit, in the future. Previously, claims of infringement of intellectual property rights have sometimes evolved into litigation against us and they may continue to do so in the future. It is inherently difficult to assess the outcome of litigation. Although we believe we have had adequate defenses to these claims and that the outcome of the litigation will not have a material adverse impact on our business, financial condition, or results of operations, there can be no assurances that we will prevail. Any such litigation could result in substantial cost to us, significantly reduce our cash resources and create a diversion of the efforts of our technical and management personnel, which could have a material and adverse effect on our business, financial condition and operating results. If we are unable to successfully defend against such claims, we could be prohibited from future sales of the allegedly infringing product or products, which could materially and adversely affect our future growth. ***Our business is subject to the potential for recalls or safety alerts, litigation and negative publicity associated with defects or failures of our products, or their misuse\\off-label use by physicians.*** Manufacturing flaws, component failures, design defects, misuse uses by physicians, or inadequate disclosure of product-related information could result in an unsafe condition or the injury or death of a patient. In addition, there may be increased risk of injury if physicians or others attempt to use our products off-label. The FDA does not restrict or regulate a physician's use of a medical device within the practice of medicine, and we cannot prevent a physician from using our products for an off-label use. The use of our products for indications other than for those for which our products have been approved or cleared by the FDA may not effectively treat the conditions not referenced in our product indications. These problems could lead to litigation, a recall of, or issuance of a safety alert relating to our products, either of which could result in significant costs and negative publicity. Due to the strong name recognition of our brands, an adverse event involving one of our products could result in reduced market acceptance and demand for all products within that brand and could harm our reputation and our ability to market our products in the future. In some circumstances, adverse events arising from or associated with the design, manufacture or marketing of our products could result in the suspension or delay of our current regulatory reviews of our applications for new product approvals. We also may undertake voluntarily to recall products or temporarily shut down certain production lines based on internal safety and quality monitoring and testing data. Any of the foregoing problems could disrupt our business and have a material adverse effect on our business, results of operations, financial condition and cash flows. ### Economic conditions could adversely affect our business and financial condition. Negative conditions in the national or global economy could adversely affect our business and financial condition. During times of an uncertain economy and tight credit markets our customers may be unwilling or unable to borrow money to properly finance their operations. This may include difficulty in obtaining credit lines to purchase our products, or to maintain their business at current levels. The cosmetic procedure market can be particularly vulnerable to negative trends in the local or global economy since the end-user may have less discretionary income or be unsure about spending their discretionary income. This could result in less demand for procedures where our products are used. Additionally, some end users may have difficulty in obtaining financing at an acceptable interest rate that would be necessary to purchase the procedures in which our products are being used. These factors could result in reduced revenues from the sale of our product, slower adoption of new technologies, longer sales cycles, increased price competition and increased difficulties in the collection of accounts receivables as, in certainly countries, payments by our customers are dependent on the financial stability of the economy. With the current economic state in many countries outside the United States, we will continue to monitor the ability of our customers to pay their obligations to us as any weaknesses in their end-user market could affect their cashflow and results in delays in their payments to us. This would increase the risk in our credit exposure and delay our ability to recognize revenues of current and future sales to these customers. Any of these events could harm our business and have material adverse effects on our financial condition. ***There may be circumstances that arise that may cause us to use some of our existing financial assets ineffectively.*** As a result of the proceeds received from the sale of our Core business in 2018, we were able to pay off all significant debt obligations and invest in cash and cash equivalents to support our continued growth initiatives over the coming years. Future decisions made to invest in certain initiatives may not have the expected results, which could materially and adversely affect our business and operations and impact overall stockholder value. In addition, due to fluctuations in interest rates, our investments may not always yield a favorable rate of return. ***We may, in the future, identify deficiencies in controls over financial reporting.*** As disclosed in Part II, Item 9A, we have concluded that two of the three material weaknesses in our internal controls over financial reporting identified during the year ended December 31, 2018 were not fully remediated due to the need for additional qualified accounting personnel and the lack of sufficient documentation or timeliness in completing certain business processes. In 2019 we also identified a material weakness at our subsidiary in Bulgaria related to the purchasing of goods and services and the processing and payment of vendor invoices. 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 a material misstatement of a company's annual or interim financial statements will not be prevented or detected on a timely basis. While we are in the process of identifying and implementing remedial measures to address the control deficiencies that led to these material weaknesses, there can be no assurance that remediation will be fully completed in 2020 or that the remedial measures will prevent future control deficiencies or material weaknesses. If we are unable to remediate these material weaknesses, or we identify additional material weaknesses in our internal controls over financial reporting in the future, our ability to analyze, record and report financial information free of material misstatements, and to prepare our financial statements within the time periods specified by the rules and forms of the SEC will likely be adversely affected. ***We are at risk of being the victim of a cyber-attack or a security breach that may expose confidential customer, product and Company data or compromise our internal IT infrastructure. This could lead to liabilities resulting from failure to comply with US and foreign data security and privacy regulations and negative impacts to our business operations.*** We store in our computer systems and network various elements of data and information related to our customers, products and company that could be compromised as the result of a cyber-attack or security breach. If an individual or group of individuals, including a Company employee, were to compromise confidential information, or if customer confidential information is inappropriately disclosed due to a security breach of our computer systems, system failures or otherwise, we may face substantial liabilities or incur penalties in connection with any violation of applicable privacy laws or regulations. We also rely heavily on our internal systems, network and data. Any attacks on our IT infrastructure could have a significant impact on our daily manufacturing and customer service functions which could result in a material adverse impact on our financial results. Our business is dependent on the security of our IT networks and those of our customers. Internal or external attacks on any of those could disrupt the normal operations of our engagements and impede our ability to provide critical services to our customers, thereby subjecting us to liability under our contracts. Additionally, our business involves the use, storage and transmission of information about our employees, our customers and clients of our customers. While we take measures to protect the security of, and unauthorized access to, our systems, as well as the privacy of personal and proprietary information, it is possible that our security controls over our systems, as well as other security practices we follow or those systems of our customers into which we operate and rely upon, may not prevent the improper access to or disclosure of personally identifiable or proprietary information. Such disclosure could harm our reputation and subject us to liability under our contracts and laws that protect personal data, resulting in increased costs or loss of revenue. Data privacy is subject to frequently changing rules and regulations, which sometimes conflict among the various jurisdictions and countries in which we provide services and continue to develop in ways which we cannot predict. We are subject to U.S. federal and state laws regarding data privacy and security including Section 5 of the Federal Trade Commission Act, or FTC Act. We are also subject to foreign data privacy and security laws, including the Global Data Protection Regulation, or GDPR, the European Union-wide legal framework to govern data collection, use and sharing and related consumer privacy rights. The GDPR includes significant penalties for non-compliance. Our failure to adhere to or successfully implement processes in response to changing regulatory requirements in this area could result in legal liability or impairment to our reputation in the marketplace, which could have a material adverse effect on our business, financial condition and results of operations. ***Our manufacturing facilities are located in Clearwater, Florida and Sophia, Bulgaria and could be affected due to multiple weather risks, including risks to our Florida facility from hurricanes and similar phenomena.*** Our manufacturing facilities are located in Clearwater, Florida and Sophia, Bulgaria and could be affected by multiple weather risks. Most notably hurricanes in Clearwater, Florida. Although we carry property and casualty insurance and business interruption insurance, future possible disruptions of operations or damage to property, plant and equipment due to hurricanes or other weather risks could result in impaired production and affect our ability to meet our commitments to our customers and impair important business relationships, the loss of which could adversely affect our operations and profitability. We do however maintain a backup generator at our Clearwater facility and a disaster recovery plan is in place to help mitigate this risk. ### Risks Related to Our Stock ### The market price of our stock has been and may continue to be highly volatile. Our common stock is listed on The NASDAQ Stock Market LLC under the ticker symbol “APYX”. The market price of our stock has been and may continue to be highly volatile and announcements by us or by third parties may have a significant impact on our stock price. These announcements may include: - our listing status on the The NASDAQ Stock Market LLC; - our operating results falling below the expectations of public market analysts and investors; - developments in our relationships with or developments affecting our major customers; - negative regulatory action or regulatory non-approval with respect to our new products; - government regulation, governmental investigations, or audits related to us or to our products; - developments related to our patents or other proprietary rights or those of our competitors and - changes in the position of securities analysts with respect to our stock. The stock market has from time to time experienced extreme price and volume fluctuations, which have particularly affected the market prices for the medical technology sector companies and which have often been unrelated to their operating performance. These broad market fluctuations may adversely affect the market price of our common stock. In addition, future sales by our security holders may lower the price of our common stock, which could result in losses to our stockholders. Future sales of substantial amounts of common stock in the public market, or the possibility of such sales occurring, could adversely affect prevailing market prices for our common stock. Substantially all of our common stock is freely tradable in the public market without restriction under the Securities Act, unless these shares are held by our “affiliates”, as that term is defined in Rule 144 under the Securities Act. ***We have no present intention to pay dividends on our common stock and, even if we change that policy, we may be unable to pay dividends on our common stock.*** We currently do not anticipate paying any dividends on our common stock in the foreseeable future. We currently intend to retain future earnings, if any, to finance operations and invest in our business. Any declaration and payment of future dividends to holders of our common stock will be at the discretion of our board of directors and will depend on many factors, including our financial condition, earnings, capital requirements, level of indebtedness, statutory and contractual restrictions applying to the payment of dividends and other considerations that our board of directors deems relevant. If we change that policy and commence paying dividends, we will not be obligated to continue paying those dividends and our stockholders will not be guaranteed, or have contractual or other rights, to receive dividends. If we commence paying dividends in the future, our board of directors may decide, in its discretion, at any time, to decrease the amount of dividends, otherwise modify or repeal the dividend policy or discontinue entirely the payment of dividends. Under the Delaware law, our board of directors may not authorize the payment of a dividend unless it is either paid out of our statutory surplus. ***Exercise of options issued by us will dilute the ownership interest of existing stockholders.*** As of December 31, 2019, our outstanding stock options to our employees, officers, directors and consultants amounted to 3,966,858 shares of our common stock, representing approximately 11.6% of our outstanding common stock. The exercise of some or all of our stock options will dilute the ownership interests of existing stockholders. Any sales in the public market of the common stock issuable upon such conversion or exercise could adversely affect prevailing market prices of our common stock. ## Properties As filed, 447 characters. We currently own and maintain a 60,000 square foot facility which consists of office, warehousing, manufacturing and research space located at 5115 Ulmerton Rd., Clearwater, Florida. In October, 2015, through our acquisition of Apyx Bulgaria, we acquired a lease for approximately 20,000 square feet of office, warehousing and manufacturing facilities located in Sofia, Bulgaria. The rental cost of the facility is approximately $9,000 per month. ## Legal proceedings As filed, 4,929 characters. 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 Helium Plasma technology. The outcomes of these legal actions are not within our complete control and may not be known for prolonged periods of time. We believe that such claims are adequately covered by insurance; however, in the case of one of our carriers, we are in a dispute regarding the total level of coverage available. Notwithstanding the foregoing, in the opinion of management, the Company has meritorious defenses and such claims are not expected, individually or in the aggregate, to result in a material, adverse effect on our financial condition. However, in the event that damages exceed the aggregate coverage limits of our policies or if our insurance carriers disclaim coverage, we believe it is possible that costs associated with these claims could have a material adverse impact on our consolidated results of operations, financial position or cash flows. 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. On March 11, 2020, the Court issued an order denying the Company’s motion to dismiss. The Company intends to vigorously defend its interests against the allegations contained in the complaint. 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. We initially accrued $500,000 for defense costs and upon the denial of the motion to dismiss, we accrued an additional $500,000, which is our insurance deductible related to the matter. $820,000 of the $1,000,000 is still accrued as of December 31, 2019. We accrue a liability in our consolidated financial statements for these actions when a loss is known or considered probable and the amount can be reasonably estimated. If the reasonable estimate of a known or probable loss is a range, and no amount within the range is a better estimate than any other, the minimum amount of the range is recorded. If a loss is reasonably possible, but not known or probable, and can be reasonably estimated, the estimated loss or range of loss is disclosed in the notes to the consolidated financial statements. In most cases, significant judgment is required to estimate the amount and timing of a loss to be recorded, actual results may differ from these estimates. ## Management's discussion and analysis As filed, 29,919 characters. 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. 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. 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 - To secure new clinical evidence demonstrating the safety and efficacy of our Helium Plasma Technology - To provide enhanced physician and practice support for our cosmetic surgery customers - To improve our manufacturing capabilities and efficiencies In regards to our operating segments, our results 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, and 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 are not specifically attributed to any reportable segment. 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. 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 #### Sales *(In thousands)* | Sales by Reportable Segment | Year Ended December 31, 2019 | 2018 as Restated | Change | Year Ended December 31, 2018 as Restated | 2017 | Change | | --- | ---: | ---: | ---: | ---: | ---: | ---: | | Advanced Energy | $22,676 | $12,987 | 74.6% | $12,987 | $7,636 | 70.1% | | OEM | 5,559 | 3,618 | 53.6% | 3,618 | 2,598 | 39.3% | | Total | $28,235 | $16,605 | 70.0% | $16,605 | $10,234 | 62.3% | | **Sales by Domestic and International** | | | | | | | | Domestic | $19,584 | $12,858 | 52.3% | $12,858 | $8,887 | 44.7% | | International | 8,651 | 3,747 | 130.9% | 3,747 | 1,347 | 178.2% | | Total | $28,235 | $16,605 | 70.0% | $16,605 | $10,234 | 62.3% | 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. 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. 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. #### Gross Profit *(In thousands)* | | Year Ended December 31, 2019 | 2018 as Restated | Change | Year Ended December 31, 2018 as Restated | 2017 | Change | | --- | ---: | ---: | ---: | ---: | ---: | ---: | | Cost of sales | $9,141 | $5,779 | 58.2% | $5,779 | $3,276 | 76.4% | | Percentage of sales | 32.4% | 34.8% | | 34.8% | 32.0% | | | | | | | | | | | --- | ---: | ---: | ---: | ---: | ---: | ---: | | Gross profit | $19,094 | $10,826 | 76.4% | $10,826 | $6,958 | 55.6% | | Percentage of sales | 67.6% | 65.2% | 2.4% | 65.2% | 68.0% | (2.8)% | 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. #### Other Costs and Expenses #### Research and development *(In thousands)* | | Year Ended December 31, 2019 | 2018 as Restated | Change | Year Ended December 31, 2018 as Restated | 2017 | Change | | --- | ---: | ---: | ---: | ---: | ---: | ---: | | Research and Development expense | $3,731 | $2,549 | 46.4% | $2,549 | $1,941 | 31.3% | | Percentage of sales | 13.2% | 15.4% | | 15.4% | 19.0% | | Our expenditures for R&D related activities increased by 46.4% or approximately $1.2 million for the year ended December 31, 2019, compared with 2018. 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. #### Professional services *(In thousands)* | | Year Ended December 31, 2019 | 2018 as Restated | Change | Year Ended December 31, 2018 as Restated | 2017 | Change | | --- | ---: | ---: | ---: | ---: | ---: | ---: | | Professional services expense | $8,507 | $3,133 | 171.5% | $3,133 | $1,769 | 77.1% | | Percentage of sales | 30.1% | 18.9% | | 18.9% | 17.3% | | 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. #### Salaries and related costs *(In thousands)* | | Year Ended December 31, 2019 | 2018 as Restated | Change | Year Ended December 31, 2018 as Restated | 2017 | Change | | --- | ---: | ---: | ---: | ---: | ---: | ---: | | Salaries and related expenses | $14,025 | $9,272 | 51.3% | $9,272 | $6,920 | 34.0% | | Percentage of sales | 49.7% | 55.8% | | 55.8% | 67.6% | | During 2019, salaries and related expenses increased approximately 51.3% or approximately $4.8 million compared to 2018. 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. 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. 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. #### Selling, general and administrative expenses *(In thousands)* | | Year Ended December 31, 2019 | 2018 as Restated | Change | Year Ended December 31, 2018 as Restated | 2017 | Change | | --- | ---: | ---: | ---: | ---: | ---: | ---: | | SG&A Expense | $13,700 | $9,407 | 45.6% | $9,407 | $8,689 | 8.3% | | Percentage of sales | 48.5% | 56.7% | | 56.7% | 84.9% | | 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. #### Severance Jay D. 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. Robert L. 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)* | | Year Ended December 31, 2019 | 2018 as Restated | Change | Year Ended December 31, 2018 as Restated | 2017 | Change | | --- | ---: | ---: | ---: | ---: | ---: | ---: | | Interest income | $1,392 | $616 | 126.0% | $616 | $— | —% | | Interest expense | (8) | (104) | (92.3)% | (104) | (136) | (23.5)% | | Percentage of sales | 4.9% | 3.1% | | 3.1% | (1.3)% | | 23 #### 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. #### Income Taxes 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. Our working capital at December 31, 2019 was approximately $64.4 million compared with $81.2 million at December 31, 2018. 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. At December 31, 2019, we had purchase commitments for inventories totaling approximately $2 million, substantially all of which is expected to be purchased by the end of 2020. ### 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. 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, legal proceedings, research and development, warranty obligations, product liability, sales returns and discounts, stock based compensation and income taxes are updated as appropriate, which in most cases is at least quarterly. We base our estimates on historical experience, or various assumptions that are believed to be reasonable under the circumstances and the results form the basis for making judgments about the reported values of assets, liabilities, revenues and expenses. Actual results may materially differ from these estimates. Estimates are considered to be critical if they meet both of the following criteria: (1) the estimate requires assumptions about material matters that are uncertain at the time the accounting estimates are made and (2) other materially different estimates could have been reasonably made or material changes in the estimates are reasonably likely to occur from period to period. Our critical accounting estimates include the following: ### Stock-based Compensation Under our stock option plans, options to purchase common shares of the Company may be granted to employees, officers and directors of the Company by the Board of Directors. 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. #### 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. #### 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. #### Volatility The Company determines 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. 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. ### 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 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 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 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. 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. ## Controls and procedures As filed, 9,171 characters. ### 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 December 31, 2019, the Company's disclosure controls and procedures were not effective because of the material weakness 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-K present fairly, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with GAAP. ### Management’s Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). The Company's internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, management carried out an evaluation of the effectiveness of the Company's internal control over financial reporting as of December 31, 2019, based on the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (2013). Based on that evaluation, management concluded that, as of December 31, 2019, the Company's internal control over financial reporting was not effective as a result of the material weaknesses described below. 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. Our management has determined that the following previously reported material weaknesses that existed as of December 31, 2018 have not been remediated and continue to constitute material weaknesses as of December 31, 2019: - An ineffective control environment requiring additional qualified accounting personnel with an appropriate level of knowledge and experience with generally accepted accounting principles. - Ineffective control activities due to the lack of documentation and timeliness in executing certain business process controls, specifically related to procure to pay and inventory processes and footnote reporting disclosures related to income tax accounts, primarily related to our United States operations. Additionally, our management has determined the following material weakness also exists as of December 31, 2019: - Ineffective control environment and control activities over financial reporting in our Bulgarian subsidiary related to the purchasing of goods and services, including the processing and payment of vendor invoices. ### Remediation Efforts to Address Material Weaknesses Management is committed to maintaining a strong internal control environment. In response to the identified material weaknesses, management, with the oversight of the Audit Committee of the Board of Directors, has taken actions toward the remediation of the respective material weaknesses in internal control over financial reporting as outlined below. - We are in the process of remediating the material weakness associated with the lack of sufficient qualified accounting personnel with an appropriate level of knowledge and experience with generally accepted accounting principles by hiring a new Chief Financial Officer in January 2019 and, in September 2019, a new Corporate Controller with experience in internal controls and financial reporting. Both have been actively engaged in remediation efforts to address the material weaknesses to date and will continue throughout fiscal year 2020. We will continue to recruit qualified professionals with appropriate levels of knowledge and experience to assist in resolving accounting issues related to non-routine and complex transactions. We have also enhanced our policies, procedures, and controls for all key business processes. In addition, management will continue to train personnel to ensure consistent application of accounting principles and adherence to the Company’s policies, procedures, and controls. - We are in the process of remediating the material weakness associated with the ineffective control activities due to the lack of documentation and timeliness in executing business process controls by enhancing our processes and review controls associated with the processes noted above. We have reviewed current financial controls to assess if additional management review controls are necessary and will continue to work with all finance personnel to ensure the appropriate documentation criteria for the existing controls, including evidence of review, timeliness and variance thresholds. We will continue to work with the third-party specialists we engaged to review, document, and enhance the design of our controls, with the goal of designing and implementing controls that address the completeness and accuracy of data used in the performance of certain controls as well as the precision of management's review, but also enhance our ability to manage our business. - We have enhanced, or are in the process of enhancing, certain controls over purchasing and disbursements in our Bulgarian subsidiary, including approving and validating vendor invoices received by verifying the related purchase authorization and the receipt of the goods or services. Management believes the steps outlined above, along with the implementation of a new financial reporting system, will remediate the material weaknesses described above. The Audit Committee of the Board of Directors and management will continue to monitor the implementation of these remediation measures and the effectiveness of our internal controls over financial reporting on an ongoing basis. As of December 31, 2019, our remediation of these deficiencies is incomplete. The effectiveness of our internal control over financial reporting as of December 31, 2019 has been audited by BDO USA LLP, an independent registered public accounting firm, as stated in their reports included in this Annual Report on Form 10-K. This report, which appears in Part II, Item 8 of this Annual Report on Form 10-K, contains an adverse opinion on the effectiveness of our internal control over financial reporting. ### Remediation of Prior Material Weaknesses We have remediated the material weakness previously reported in our Annual Report on Form 10-K for the year ended December 31, 2018 associated with ineffective monitoring controls to ascertain whether the components of internal control were present and functioning by (i) the hiring of additional resources with an appropriate level of knowledge and expertise, (ii) supplementing the monitoring staff with qualified co-sourcing resources to ensure an adequate level of technical competency, (iii) evaluating deficiencies objectively in accordance with the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (2013) and (iv) better reporting of results to management, the Audit Committee and the Board of Directors. ### Changes in Internal Control Over Financial Reporting Except as set forth above, there were no changes in our internal control over financial reporting that occurred during the three months ended December 31, 2019 that materially affected, or that are reasonably likely to materially affect our internal control over financial reporting. Filed Mar 31, 2020. Source: SEC EDGAR, the filing index for accession 0000719135-20-000029. Last ingested by Listed: Nov 5, 2026, 13:09 ET. No prices; not investment advice.