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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
September 30, 2020
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number: 0-12183
apyx-20200930_g1.jpg
APYX MEDICAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware11-2644611
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
5115 Ulmerton Road, Clearwater, FL 33760
(Address of principal executive offices, zip code)
(727) 384-2323
(Registrant’s telephone number)
Securities Registered Pursuant to Section 12 (b) of the Act:
Title of each classTrading symbol(s)Name of each exchange on which registered
Common StockAPYXNasdaq Stock Market, LLC

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes: No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes: No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes: No

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


Table of Contents
APYX MEDICAL CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
For the quarterly period ended September 30, 2020
(Unaudited)
Page
Part I.
Item 1.
Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets at September 30, 2020 and December 31, 2019
Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2020 and 2019
Condensed Consolidated Statements of Changes in Equity for the three and nine months ended September 30, 2020 and 2019
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and 2019
Item 2.
Item 3.
Item 4.
Part II.
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
1

Table of Contents

PART I.     Financial Information

ITEM 1. Condensed Consolidated Financial Statements

APYX MEDICAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data, Unaudited)
September 30,
2020
December 31, 2019
ASSETS
Current assets:
Cash and cash equivalents$43,539 $58,812 
Trade accounts receivable, net of allowance of $760 and $273
6,154 7,987 
Income tax receivables7,238 426 
Other receivables1,158 1,233 
Inventories, net of provision for obsolescence of $537 and $392
5,416 5,068 
Prepaid expenses and other current assets4,159 3,207 
Total current assets67,664 76,733 
Property and equipment, net of accumulated depreciation and amortization of $4,677 and $4,403
6,348 6,618 
Operating lease right-of-use assets266 350 
Finance lease right-of-use assets629 653 
Other assets508 391 
Total assets$75,415 $84,745 
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable$2,479 $2,438 
Accrued expenses and other liabilities6,588 9,396 
Current portion of operating lease liabilities118 108 
Current portion of finance lease liabilities269 229 
Related party note payable140 140 
Total current liabilities9,594 12,311 
Long-term operating lease liabilities153 235 
Long-term finance lease liabilities347 421 
Contract liabilities583 405 
Other liabilities400 114 
Total liabilities11,077 13,486 
EQUITY
Common stock, $0.001 par value; 75,000,000 shares authorized; 34,222,505 issued and outstanding as of September 30, 2020, and 34,312,527 issued and 34,169,952 outstanding as of December 31, 2019
34 34 
Additional paid-in capital60,014 56,708 
Retained earnings4,148 14,517 
Total stockholders' equity64,19671,259
Non-controlling interest 142  
Total equity64,338 71,259 
Total liabilities and equity$75,415 $84,745 

The accompanying notes are an integral part of the condensed consolidated financial statements.
2

Table of Contents
APYX MEDICAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data, Unaudited)
Three Months Ended
September 30,
Nine Months Ended
September 30,
2020201920202019
Sales$6,954 $7,575 $16,247 $19,853 
Cost of sales2,229 2,281 6,444 6,322 
Gross profit4,725 5,294 9,803 13,531 
Other costs and expenses:
Research and development1,047 1,016 3,002 2,634 
Professional services1,835 2,039 5,882 5,818 
Salaries and related costs3,508 3,159 10,258 10,157 
Selling, general and administrative2,706 3,836 8,691 9,830 
Total other costs and expenses9,096 10,050 27,833 28,439 
Loss from operations(4,371)(4,756)(18,030)(14,908)
Interest income10 327 233 1,153 
Interest expense(25) (39) 
Other (loss) income, net(63)230 349 (265)
Total other (loss) income, net(78)557 543 888 
Loss before income taxes(4,449)(4,199)(17,487)(14,020)
Income tax (benefit) expense (715)171 (7,112)253 
Net loss(3,734)(4,370)(10,375)(14,273)
   Net loss attributable to non-controlling interest(6) (6) 
Net loss attributable to Apyx$(3,728)$(4,370)$(10,369)$(14,273)
Earnings (loss) per Share:
Basic and diluted$(0.11)$(0.13)$(0.30)$(0.42)

The accompanying notes are an integral part of the condensed consolidated financial statements.
3

Table of Contents
APYX MEDICAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(In thousands, Unaudited)
Three months ended September 30, 2019 and 2020
Common StockAdditional Paid-In CapitalRetained Earnings Non-controlling InterestTotal Equity
SharesPar Value
Balance
June 30, 2019
33,921 $34 $55,086 $24,320 $ $79,440 
Options exercised for cash21 — 39 — — 39 
Stock based compensation— — 543 — — 543 
Shares issued on net settlement of stock options35 — — — —  
Net loss— — — (4,370)— (4,370)
Balance
September 30, 2019
33,977 $34 $55,668 $19,950 $ $75,652 
Balance
June 30, 2020
34,202 $34 $58,926 $7,876 $ $66,836 
Contributions from non-controlling interest— — — — 148148 
Options exercised for cash10 — 25 — 25 
Stock based compensation— — 1,063 — 1,063 
Shares issued on net settlement of stock options 11 — — —  
Net loss— — — (3,728)(6)(3,734)
Balance
September 30, 2020
34,223 $34 $60,014 $4,148 $142 $64,338 
Nine months ended September 30, 2019 and 2020
Common StockAdditional Paid-In CapitalRetained Earnings Non-controlling InterestTotal
SharesPar Value
Balance
December 31, 2018
33,705 $34 $52,920 $34,223 $ $87,177 
Options exercised for cash51 — 154 — — 154 
Stock based compensation— — 2,594 — — 2,594 
Shares issued on net settlement of stock options 221 — — — —  
Net loss— — — (14,273)— (14,273)
Balance
September 30, 2019
33,977 $34 $55,668 $19,950 $ $75,652 
Balance
December 31, 2019
34,170 $34 $56,708 $14,517 $ $71,259 
Contributions from non-controlling interest— — — — 148 148 
Options exercised for cash20 — 97 — — 97 
Stock based compensation— — 3,209 — — 3,209 
Shares issued on net settlement of stock options 33 — — — —  
Net loss— — — (10,369)(6)(10,375)
Balance
September 30, 2020
34,223 $34 $60,014 $4,148 $142 $64,338 
 



The accompanying notes are an integral part of the condensed consolidated financial statements.
4

Table of Contents
APYX MEDICAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, Unaudited)
Nine Months Ended September 30,
20202019
Cash flows from operating activities
Net loss$(10,375)$(14,273)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization662 510 
Provision for inventory obsolescence427 36 
Loss on disposal of property and equipment 19 
Stock based compensation3,209 2,594 
Net, non cash lease expense 2 
Unrealized gain on short term investments (164)
Provision (benefit) for allowance for doubtful accounts486 (238)
Changes in operating assets and liabilities:
Trade receivables1,389 (2,397)
Income tax receivables, prepaid expenses and other assets(7,793)(1,202)
Inventories(717)(1,772)
Accounts payable15 50 
Accrued and other liabilities(2,352)1,611 
Net cash used in operating activities(15,049)(15,224)
Cash flows from investing activities
Purchases of property and equipment(193)(1,076)
Purchases of marketable securities (18,884)
Proceeds from maturities of marketable securities 80,726 
Net cash (used in) provided by investing activities(193)60,766 
Cash flows from financing activities
Proceeds from stock option exercises97 154 
Repayment of finance lease liabilities(184)(2)
Contributions from non-controlling interests148  
Net cash provided by financing activities61 152 
Effect of exchange rates on cash(92)(18)
Net change in cash and cash equivalents(15,273)45,676 
Cash and cash equivalents, beginning of period58,812 16,596 
Cash and cash equivalents, end of period$43,539 $62,272 
Cash paid for:
Interest$39 $ 
Income taxes54 248 
Non cash activities:
Right-of-use assets capitalized and lease liabilities recognized upon adoption of Topic 842$ $212 
Right-of-use assets capitalized and lease liabilities recognized upon lease remeasurement 207 
Right-of-use assets capitalized and lease liabilities recognized upon execution of lease150 662 
   Transfer of other assets to property and equipment 42 
   Transfer of inventory from property and equipment10 264 

The accompanying notes are an integral part of the condensed consolidated financial statements.
5

Table of Contents
APYX MEDICAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 1.     BASIS OF PRESENTATION

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

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

In March 2020, the World Health Organization recognized the novel strain of coronavirus ("COVID-19"), as a pandemic. This pandemic has severely restricted the level of economic activity around the world. In response, the governments of many countries, states, cities and other geographic regions have taken preventative or protective actions, such as imposing restrictions on travel and business operations and advising or requiring individuals to limit or forego their time outside of their homes. The long-term impact of the COVID-19 pandemic on our business continues to be highly uncertain and difficult to predict as the environment created by the pandemic is rapidly changing. In late February, we began to experience the effects of the pandemic which have been material and adverse on our business. However, starting late in the second quarter and continuing through the third quarter, we started to see positive indications in our business. We believe the severity of the impact of the COVID-19 pandemic on our business will continue to depend on a number of factors, including, but not limited to, the duration and severity of the pandemic and the extent and severity of the impact on our customers and suppliers, all of which are uncertain and cannot be predicted.

Most of the procedures performed using our Helium Plasma Technology are elective, and as a result many of our customers have been affected by the actions taken by various governmental authorities requiring non-essential businesses to shut down temporarily. As these shut-downs have begun to be reversed, we have started to see an increase in demand for elective cosmetic and plastic surgery procedures, resulting in higher than expected revenues in our Advanced Energy segment. In international markets, a greater portion of these procedures are performed in a hospital, and it is less certain when elective procedures will fully return to normal.. While we experienced a significant decline in sales towards the end of our first fiscal quarter, we began to see an increase in sales towards the end of our second fiscal quarter, which continued through the third quarter, as local jurisdictions started to re-open. As cases have started to increase again, it is unknown whether these trends will continue. The full extent to which the COVID-19 pandemic may materially and adversely impact the Company's future financial position, liquidity, or results of operations remains uncertain.

The accompanying unaudited condensed consolidated financial statements have been prepared based upon SEC rules that permit reduced disclosure for interim periods. For a more complete discussion of significant accounting policies and certain other information, please refer to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2019. These condensed consolidated financial statements reflect all adjustments that are necessary for a fair presentation of results of consolidated operations and financial condition for the interim periods shown, including normal recurring accruals and other items. The results for the interim periods are not necessarily indicative of results for the full year.



6

Table of Contents
APYX MEDICAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)


NOTE 2.     CHANGE IN ACCOUNTING POLICY

During 2019, we began granting stock option awards deeper within the organization. We do not have sufficient experience with grants to these employees and we have experienced challenges in developing reliable forfeiture estimates at the grant date. Accounting for revising the forfeiture estimates has been burdensome. Accounting Standards Codification 718, Compensation-Stock Compensation, prescribes two methods for accounting for forfeitures on stock option awards, either the estimation method utilized by the Company previously, or by accounting for forfeitures as they occur. On January 1, 2020, we made an accounting policy election change and began accounting for forfeitures on stock option awards using actual forfeitures. This accounting policy election change was made on a retrospective basis. However, the changes to the current and prior periods were determined to be immaterial and there have been no changes to previously reported results as a result of the change.


NOTE 3.     RECENT ACCOUNTING PRONOUNCEMENTS

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments—Credit Losses (Topic 326). The update changes the impairment model for most financial assets and certain other instruments, including trade and other receivables, contract assets, held-to-maturity debt securities and loans, and requires entities to use a new forward-looking expected loss model that will result in the earlier recognition of allowance for losses. This update, as originally issued, was effective for annual and interim periods beginning after December 15, 2019, with early adoption permitted. In November 2019, the FASB issued ASU 2019-10, Financial Instruments - Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842) Effective Dates, which deferred the effective dates of these standards for Smaller Reporting Companies until fiscal years beginning after December 15, 2022. The Company currently expects to continue to qualify as a Smaller Reporting Company, based upon the current SEC definition, and as a result, will be utilizing the deferred elective date. While we are in the process of determining the effects of the adoption of the standard on the consolidated financial statements, we do not expect the impact to be material.

In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The purpose of this ASU is to reduce the cost and complexity of evaluating goodwill for impairment. It eliminates the need for entities to calculate the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. Under this ASU, an entity will perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge is recognized for the amount by which the carrying value exceeds the reporting unit’s fair value. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company adopted the ASU on January 1, 2020. The amendment did not have an impact on our consolidated financial condition or results of operations.

No other new accounting pronouncement issued or effective during the fiscal year had or is expected to have a material impact on our consolidated financial statements or disclosures.


7

Table of Contents
APYX MEDICAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)





NOTE 4.     DISPOSAL OF BUSINESS

On August 30, 2018, we closed on a definitive asset purchase agreement (the "Asset Purchase Agreement") with Specialty Surgical Instrumentation Inc., a Tennessee Corporation and wholly-owned subsidiary of Symmetry Surgical Inc. (“Symmetry”), pursuant to which the Company divested and sold the Company's electrosurgical "Core" business segment and related intellectual property, including the Bovie® brand and trademarks, to Symmetry for gross proceeds of $97 million in cash.

In connection with the Asset Purchase Agreement, we entered into an Electro Surgical Disposables and Accessories, Cauteries and Other Products Supply Agreement with Symmetry for a four-year term, whereby we will manufacture certain Core products and sell them to Symmetry at agreed upon prices. Any activity resulting from this agreement is netted and reported in our Condensed Consolidated Statements of Operations as other income or (loss). Core activity for the three months ended September 30, 2020 amounted to $1.8 million with cost of sales equivalents of $1.6 million and related other expenses of $0.3 million for net other (loss) of $0.1 million. Core activity for the three months ended September 30, 2019 amounted to $2.5 million with cost of sales equivalents of $2.2 million and related other expenses of $0.1 million for net other income of $0.2 million. Core activity for the nine months ended September 30, 2020 amounted to $6.9 million with cost of sales equivalents of $6.1 million and related other expenses of $0.5 million for net other income of $0.3 million. Core activity for the nine months ended September 30, 2019 amounted to $6.9 million with cost of sales equivalents of $6.6 million and related other expenses of $0.2 million for net other income of $0.1 million.
8

Table of Contents
APYX MEDICAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)


NOTE 5.     INVENTORIES

Inventories are stated at the lower of cost or net realizable values. Cost is determined on a first in, first out basis. Finished goods and work-in-process inventories include material, labor and overhead costs. Factory overhead costs are primarily allocated to inventory manufactured in-house based upon direct labor hours.

Inventories consisted of the following:
(In thousands)September 30,
2020
December 31,
2019
Raw materials$2,487 $2,935 
Work in process1,522 1,209 
Finished goods 1,944 1,316 
Gross inventories5,953 5,460 
Less: provision for obsolescence(537)(392)
Inventories, net$5,416 $5,068 

During the second quarter of 2020, we reassessed our forecasted product mix due to COVID-19, increased availability of our newer handpiece designs, and earlier than expected completion of product registrations in some of our foreign markets.  As a result, certain products were reduced to a lower carrying value, and some components were also written down as we determined to cease further production on these older models. The total impairment was approximately $400,000 and is included in cost of sales in the accompanying consolidated statement of operations for the nine months ended September 30, 2020.


NOTE 6.     ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities consisted of the following:
(in thousands)September 30,
2020
December 31,
2019
Accrued payroll$497 $694 
Accrued bonuses 1,306 
Accrued commissions620 877 
Accrued product warranties471 452 
Accrued insurance632 1,170 
Accrued professional fees744 1,383 
Joint and several payroll liability1,045 1,045 
Uncertain tax positions1,616 1,491 
Other accrued expenses and current liabilities963 978 
Total accrued expenses and other current liabilities$6,588 $9,396 


NOTE 7.     NON-CONTROLLING INTEREST

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

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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)


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

NOTE 8.     EARNINGS (LOSS) PER SHARE

We compute basic earnings per share (“basic EPS”) by dividing the net income or loss by the weighted average number of common shares outstanding for the reporting period adjusted for other units required to be included in basic EPS. Diluted earnings per share (“diluted EPS”) gives effect to all dilutive potential shares outstanding. As we are in a net loss position for all periods presented, all potential shares outstanding are anti-dilutive. The following table provides the computation of basic and diluted earnings per share.
Three Months Ended
September 30,
Nine Months Ended
September 30,
(in thousands, except per share data)2020201920202019
Numerator:
Net loss attributable to Apyx$(3,728)$(4,370)$(10,369)$(14,273)
Denominator:
Weighted average shares outstanding - basic and diluted
34,216 34,078 34,193 34,039 
Earnings (loss) per share:
Basic and diluted$(0.11)$(0.13)$(0.30)$(0.42)
Anti-dilutive instruments excluded from diluted loss per common share:
Restricted stock45 90 45 90 
Options5,028 4,060 5,028 4,060 

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NOTE 9.     STOCK-BASED COMPENSATION

Under our stock option plans, our board of directors may grant restricted stock and options to purchase common shares to our employees, officers, directors and consultants. We account for stock options in accordance with FASB ASC Topic 718, Compensation - Stock Compensation, with stock-based compensation expense recognized over the vesting period based on the fair value on the grant date utilizing a trinomial lattice model through 2018 and the Black Scholes model for grants in 2019 and 2020, both of which include a number of estimates that affect the grant date fair value and the amount of expense to recognize.

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

Stock option activity is summarized as follows:
Number of optionsWeighted average exercise price
Outstanding at December 31, 20193,966,858 $4.67 
Granted1,376,900 7.94 
Exercised(81,131)3.03 
Canceled and forfeited(234,600)7.57 
Outstanding at September 30, 20205,028,027 $5.45 

We allow stock option holders to exercise stock-based awards by surrendering stock-based awards with an intrinsic value equal to the cumulative exercise price of stock-based awards being exercised, referred to as net settlements. These surrenders are included in stock options exercised in the options rollforward above. For the three months ended September 30, 2020 and 2019, respectively, we received 16,140 and 26,572 options as payment in the exercise of 10,610 and 34,928 options. For the nine months ended September 30, 2020 and 2019, respectively, we received 29,149 and 118,170 options as payment in the exercise of 32,637 and 220,879 options.

Common shares required to be issued upon the exercise of stock options would be issued from our authorized and unissued shares. We calculated the grant date fair value of options granted in 2020 ("2020 Grants") utilizing a Black Scholes model with an expected life calculated via the simplified method.
2020 Grants
Strike price$4.98-$8.18 
Risk-free rate0.3%-1.7 %
Expected dividend yield
Expected volatility65.9%-70.1 %
Expected term (in years)6


NOTE 10.     INCOME TAXES

On March 27, 2020, the U.S. government enacted the CARES Act to provide relief from COVID-19. The CARES Act includes a provision that allows companies to carryback net operating losses (NOL’s) generated in the period 2018 through 2020 to prior years. In conjunction with the disposition of the Core business in 2018, we generated a significant amount of taxable income in 2018. Subsequent to this, we generated net losses in 2019 and through the first three quarters of 2020. For the net losses generated in 2019, we previously recorded a full valuation allowance on the deferred tax assets associated with our NOL carryforwards due to realization of the NOL not being probable under then existing tax law. The CARES Act makes these assets realizable, and as of the date of the CARES Act, we have recognized an income tax benefit of approximately $3.7 million associated with the release of the valuation allowance on our Federal NOL carryforward related to 2019. We also recognized income tax benefits of approximately $0.8 million and $3.3 million, related to our loss before income taxes for the three and
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(Unaudited)


nine months ended September 30, 2020, respectively. There are approximately $2.4 million of 2018 Federal income tax payments available to offset against any other 2020 losses that may be incurred.

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

We have gross unrecognized tax benefits of approximately $1,313,000 at September 30, 2020. We recognize accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes in our condensed consolidated financial statements. As of September 30, 2020, we had approximately $300,000 in accrued interest and penalties related to unrecognized tax benefits. Included in the income tax benefit for the three and nine months ended September 30, 2020, respectively are approximately $43,000 and $125,000 of interest and penalties on the Company's uncertain tax positions. If the Company were to prevail on all uncertain tax positions, the resulting impact will be material as the Company will recognize approximately $1,616,000 of income tax benefits in the consolidated statement of operations. It is expected that all of the uncertain tax positions should be resolved by October 2022.


NOTE 11.     COMMITMENTS AND CONTINGENCIES

Litigation

The medical device industry is characterized by frequent claims and litigation, and we are and may become subject to various claims, lawsuits and proceedings in the ordinary course of our business. Such claims may include claims by current or former employees, distributors and competitors, claims concerning the marketing and promotion of our products and product liability claims.

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

On April 17, 2019, a complaint (the “Complaint”) was filed in the United States District Court for the Middle District of Florida, against the Company and Charles D. Goodwin, the Company’s President and Chief Executive Officer and a member of the Company’s Board of Directors, alleging certain violations of the Securities Exchange Act of 1934, as amended.  On July 16, 2019, the Court appointed lead plaintiff for the putative class and approved the lead plaintiff’s selection of counsel. On September 3, 2019, lead plaintiff filed an amended complaint (the “Amended Complaint”) with the Court. 

The Amended Complaint seeks class action status on behalf of all persons and entities that acquired the Company’s securities between December 21, 2018 and April 1, 2019, and alleges violations by the Company and Goodwin of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended and Rule 10b-5 thereunder, primarily related to certain public statements concerning the Premarket Notification 510(k) submission made to the US Food and Drug Administration for a new indication for the Company’s J-Plasma® technology for use in dermal resurfacing procedures.  On October 3, 2019, defendants filed a motion to dismiss the Amended Complaint, and on March 11, 2020, the Court denied that motion.  On July 10, 2020, the parties executed a settlement agreement, which was subject to Court approval. The Court preliminarily approved the settlement on July 21, 2020. The settlement agreement provides for the dismissal of the action with prejudice. On November 6, 2020, the Court issued its final order approving the settlement and dismissing the action and all claims contained in the Amended Complaint with prejudice. At September 30, 2020, we have settled and fully paid all obligations related to this matter.

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(Unaudited)



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

Purchase Commitments

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

China Joint Venture

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

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(Unaudited)


NOTE 12.     RELATED PARTY TRANSACTIONS

Several relatives of Nikolay Shilev, Apyx Bulgaria’s Managing Director, are considered related parties. Teodora Shileva, Mr. Shilev’s spouse, is an employee of the Company working in the accounting department. Antoaneta Dimitrova Shileva-Toromanova, Mr. Shilev’s sister, is the Manager of Production and Human Resources. Svetoslav Shilev, Mr. Shilev’s son, is an engineer in the quality assurance department.

In addition, as part of the purchase of the Bulgaria manufacturing facility, Mr. Shilev was issued a note payable for $140,000 to be paid 5 years after the original purchase date, which came due in October 2020. The note was paid in full on October 20, 2020.

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

NOTE 13.     GEOGRAPHIC AND SEGMENT INFORMATION

Operating segments are aggregated into reportable segments only if they exhibit similar economic characteristics. In addition to similar economic characteristics, we also consider the following factors in determining the reportable segments: the nature of business activities, the management structure directly accountable to our chief operating decision maker for operating and administrative activities, availability of discrete financial information and information presented to the Board of Directors and investors. Asset information is not reviewed by the chief operating decision maker by segment and is not available by segment, accordingly, we have not presented a measure of assets by segment.

Our reportable segments are principally organized and managed as two operating segments: Advanced Energy and OEM. "Corporate & Other" includes certain unallocated corporate and administrative costs which were not specifically attributed to any reportable segment. The OEM segment is primarily development and manufacturing contract and product driven, all related expenses are recorded as cost of sales, therefore no segment specific operating expenses are incurred.

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Summarized financial information with respect to reportable segments is as follows:
Three Months Ended September 30, 2020
(In thousands)Advanced EnergyOEMCorporate & OtherTotal
Sales$5,479 $1,475 $ $6,954 
Income (loss) from operations(1,095)556 (3,832)(4,371)
Interest income  10 10 
Interest expense  (25)(25)
Other loss, net  (63)(63)
Income tax benefit  (715)(715)
Three Months Ended September 30, 2019
(In thousands)Advanced EnergyOEMCorporate & OtherTotal
Sales$6,094 $1,481 $ $7,575 
Income (loss) from operations(1,357)268 (3,667)(4,756)
Interest income  327 327 
Other income, net  230 230 
Income tax expense  171 171 
Nine Months Ended September 30, 2020
(In thousands)Advanced EnergyOEMCorporate & OtherTotal
Sales$12,332 $3,915 $ $16,247 
Income (loss) from operations(8,371)1,387 (11,046)(18,030)
Interest income  233 233 
Interest expense  (39)(39)
Other income, net  349 349 
Income tax benefit  (7,112)(7,112)
Nine Months Ended September 30, 2019
(In thousands)Advanced EnergyOEMCorporate & OtherTotal
Sales$15,815 $4,038 $ $19,853 
Income (loss) from operations(5,653)995 (10,250)(14,908)
Interest income  1,153 1,153 
Other loss, net  (265)(265)
Income tax expense  253 253 

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(Unaudited)



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

Substantially all of our sales are denominated in U.S. dollars. Revenue by geographic region, based on the customer's “ship to” location on the invoice, are as follows:
Three Months Ended
September 30,
Nine Months Ended
September 30,
(In thousands)2020201920202019
Sales by Domestic and International
Domestic$5,214 $5,552 $12,225 $14,002 
International1,740 2,023 4,022 5,851 
Total$6,954 $7,575 $16,247 $19,853 

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS


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

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

Executive Level Overview

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

As discussed in our Annual Report on Form 10-K for the year ended December 31, 2019 ("2019 Form 10-K"), an outbreak of a novel strain of the coronavirus, COVID-19, was identified in China and has subsequently been recognized as a pandemic by the World Health Organization. The COVID-19 outbreak has severely restricted the level of economic activity around the world. In response to the COVID-19 outbreak the governments of many countries, states, cities and other geographic regions have taken preventative or protective actions, such as imposing restrictions on travel and business operations and advising or requiring individuals to limit or forego their time outside of their homes. Temporary closures of businesses in some jurisdictions have been ordered and numerous other businesses have temporarily closed voluntarily. Many other businesses are operating at reduced capacity. Given the variability in measures taken, the uncertainty of any potential resurgence of COVID-19, the overall economic effects of these restrictions and patients' willingness to undergo elective procedures, the related financial impact cannot be reasonably estimated at this time. As a result, there could continue to be significant adverse impacts to the results of our operations into the fourth fiscal quarter and possibly beyond.

Prior to the spread of COVID-19 into the US and international markets, we experienced positive year-over-year growth trends in the sale of our capital and disposable products, indicating increased utilization of our technology. Beginning in late February we began to see declines in the sale of our Helium Plasma Technology in European markets. These declines continued and also spread to the North and Latin American markets in March. Towards the end of the second quarter, and through the third quarter, we began to see improved demand for our products, primarily in the U.S. market, however the sustainability of this improvement remains uncertain.

We source the components used in our products from a variety of suppliers and we have collaborative arrangements with three key foreign suppliers. At this time our suppliers have experienced no significant disruptions as a result of COVID-19. We have experienced minor delays in our procurement from these suppliers as a result of the availability of shipping from third party freight carriers. These delays have not, to date, had a significant impact on our operations.

In response to COVID-19, we have taken action in these key areas:

Protecting the Health and Safety of our Employees: To reduce the risk to our employees and their families to potential
exposure to COVID-19, we have required that all non-essential employees work remotely until further notice. We have also split the shifts of our manufacturing personnel to allow for adequate social distancing, and require all personnel to utilize personal protective equipment while on site at our facilities. We have also significantly reduced business travel and access to our facilities.
Maintaining Engagement of or Sales Team and Our Customers: In addition to the initiatives we have put in place to protect health and safety for all employees, we have focused our direct sales team on remaining in close contact with
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their existing surgeon customers to do everything they can to provide them with support during this difficult time. With this goal in mind, we have implemented additional training for our sales reps in order to sharpen their ability to engage with our customers virtually. In addition to engaging with existing customers via virtual methods, our reps also continue to target and reach out to prospective accounts so that they will be well-positioned when the recovery occurs and surgeons return to conducting elective cosmetic procedures. Outside the U.S., we are closely monitoring the activities of our distributor partners and helping them navigate the challenges they face as a result of the slower demand they are seeing in their respective countries.
Operating Expenses: We continue to take preemptive steps to curtail spending, including implementing hiring restrictions, reducing most discretionary spending, reducing capital expenditures, and delaying certain R&D projects and clinical research studies.
Governmental Policy: On March 27, 2020, the U.S. government enacted the CARES Act to provide relief from COVID-19. We continue to take advantage of certain provisions of the CARES Act which are applicable to us, including utilizing NOL carryback provisions and the deferral of payroll taxes. We expect that utilizing these provisions will significantly help mitigate the working capital impact COVID-19 has had on our sales and operations.

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

During the first two months of 2020, our plans to host new Physician Mentor Programs, or “PMPs,” and expand our presence and educational programming at industry conferences and trade shows proceeded as expected. Our events planned for March, however, were canceled due to COVID-19. In lieu of this in-person programming, our sales, marketing and field clinical teams have been very active in engaging with our customers - and prospects - around the world. We have hosted educational events virtually where we featured some of our leading clinician customers speaking on a wide range of topics, including side-by-side results comparing Renuvion® to a leading competitor technology.

Our virtual educational events have also included case studies to illustrate how our leading clinician customers have adopted Renuvion®, their strategies for marketing and selling to new patients, and their thoughts on pricing and return on investment. We recently hosted the first installment of a planned series of webinars designed to assist our customers and prospects with opening their practices post-COVID 19. We also engaged with clinician customers outside the U.S. including hosting multiple continuing education training sessions on J-Plasma® and Renuvion® with our current international distributors and conducting multiple calls with groups of international prospects interested in learning about our Renuvion® technology.

Operating segments are aggregated into reportable segments only if they exhibit similar economic characteristics. In addition to similar economic characteristics, we also consider the following factors in determining the reportable segments: the nature of business activities, the management structure directly accountable to our chief operating decision maker for operating and administrative activities, availability of discrete financial information and information presented to the Board of Directors and investors. Asset information is not reviewed by the chief operating decision maker by segment and is not available by segment, accordingly, we have not presented a measure of assets by segment.

Our reportable segments are principally organized and managed as two operating segments: Advanced Energy and OEM. "Corporate & Other" includes certain unallocated corporate and administrative costs which were not specifically attributed to any reportable segment. The OEM segment is primarily development and manufacturing contract and product driven, all related expenses are recorded as cost of sales, therefore no segment specific operating expenses are incurred.

We strongly encourage investors to visit our website: www.apyxmedical.com to view the most current news and to review our filings with the Securities and Exchange Commission.

Results of Operations

Sales
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Three Months Ended
September 30,
Nine Months Ended
September 30,
(In thousands)20202019Change20202019Change
Sales by Reportable Segment
Advanced Energy$5,479 $6,094 (10.1)%$12,332 $15,815 (22.0)%
OEM1,475 1,481 (0.4)%3,915 4,038 (3.0)%
Total$6,954 $7,575 (8.2)%$16,247 $19,853 (18.2)%
(632,000)
Sales by Domestic and International
Domestic$5,214 $5,552 (6.1)%$12,225 $14,002 (12.7)%
International1,740 2,023 (14.0)%4,022 5,851 (31.3)%
Total$6,954 $7,575 (8.2)%$16,247 $19,853 (18.2)%

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

International sales represented approximately 25.0% and 24.8% of total revenues for the three and nine months ended September 30, 2020, respectively, as compared with 26.7% and 29.5% of total revenues for the same prior year period. Management estimates our products have been sold in more than 50 countries through local dealers coordinated by sales and marketing personnel through our facilities in Clearwater, Florida and Sofia, Bulgaria.

Gross Profit
Three Months Ended
September 30,
Nine Months Ended
September 30,
(In thousands)20202019Change20202019Change
Cost of sales$2,229 $2,281 (2.3)%$6,444 $6,322 1.9 %
Percentage of sales32.1 %30.1 %39.7 %31.8 %
Gross profit$4,725 $5,294 (10.7)%$9,803 $13,531 (27.6)%
Percentage of sales67.9 %69.9 %60.3 %68.2 %
Gross profit for the three months ended September 30, 2020, decreased (10.7)% to $4.7 million, compared to $5.3 million for the same period in the prior year. Gross margin for the three months ended September 30, 2020, was 67.9%, compared to 69.9% for the same period in 2019. Our decrease in profit margins for the three months ended September 30, 2020 as compared to the same period in the prior year is primarily attributable to product mix within our Advanced Energy segment and higher OEM segment sales as a percentage of total sales. These were partially offset by improved product margins within our Advanced Energy segment as a result of our continued manufacturing efficiency initiatives and improved margins attributable to product mix within our OEM segment.

Gross profit for the nine months ended September 30, 2020, decreased (27.6)% to $9.8 million, compared to $13.5 million for the same period in the prior year. Gross margin for the nine months ended September 30, 2020, was 60.3%, compared to 68.2% for the same period in 2019. During the second quarter, we reassessed our forecasted product mix due to COVID-19, increased availability of our newer handpiece designs, and earlier than expected completion of product registrations in some of our foreign markets. As a result, certain products were reduced to a lower carrying value, and some components were also written off as it was determined to cease further production on these models. This resulted in a decrease in gross profit of approximately $0.4 million during the nine months ended September 30, 2020. The remaining decrease in gross profit margin is
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driven by product mix within our Advanced Energy segment, and higher OEM segment sales as a percentage of total sales. These decreases are partially offset by geographical revenue mix within our Advanced Energy segment and improved product margins in our Advanced Energy segment as a result of our continued manufacturing efficiency initiatives.

Other Costs and Expenses

Our spending in the three and nine months ended September 30, 2020 reflected normal business activities into February and March and then a curtailment of certain costs associated with the impact of COVID-19 through most of the third quarter, including restrictions on travel which are still continuing. While certain spending decreased as a result of a reduction in revenue and activities limited by COVID-19, some of our strategic spending has and will continue. For example, while we have restricted new hirings, we have no plans to reduce our headcount or furlough any employees at this time. Certain costs declined and continue to remain below previously expected levels as the related underlying activities are restricted by COVID-19, including travel, trade shows and related expenses, clinical trials and in-person physician training.

Research and development
Three Months Ended
September 30,
Nine Months Ended
September 30,
(In thousands)20202019Change20202019Change
Research and Development expense$1,047 $1,016 3.1 %$3,002 $2,634 14.0 %
Percentage of sales15.1 %13.4 %18.5 %13.3 %

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

Professional services
Three Months Ended
September 30,
Nine Months Ended
September 30,
(In thousands)20202019Change20202019Change
Professional services expense$1,835 $2,039 (10.0)%$5,882 $5,818 1.1 %
Percentage of sales26.4 %26.9 %36.2 %29.3 %

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

Professional services expense increased 1.1% for the nine months ended September 30, 2020, primarily attributable to an increase in accounting and auditing fees ($0.8 million) related to recent financial statement restatements and continued efforts to remediate our internal control deficiencies and material weaknesses. This increase was partially offset by decreases in legal expense ($0.2 million) associated with the class action lawsuit and a decrease in option expense related to options granted to our partner physicians ($0.5 million), as additional grants did not occur in 2020.

Salaries and related costs
Three Months Ended
September 30,
Nine Months Ended
September 30,
(In thousands)20202019Change20202019Change
Salaries and related expenses$3,508 $3,159 11.0 %$10,258 $10,157 1.0 %
Percentage of sales50.4 %41.7 %63.1 %51.2 %

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

Selling, general and administrative expenses
Three Months Ended
September 30,
Nine Months Ended
September 30,
(In thousands)20202019Change20202019Change
SG&A Expense$2,706 $3,836 (29.5)%$8,691 $9,830 (11.6)%
Percentage of sales38.9 %50.6 %53.5 %49.5 %

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

During the nine months ended September 30, 2020, selling, general and administrative expense decreased approximately (11.6)%, primarily driven by decreases in travel and entertainment expense ($0.6 million), commissions on Advanced Energy sales ($0.4 million), advertising including show fees and related costs ($0.4 million), and a decrease in customer samples ($0.2 million) associated with restricted travel and decreased sales activity from COVID-19. These decreases were partially offset by higher bad debt expense ($0.6 million) related to increased uncertainty on the collection of our receivables due to the economic environment resulting from COVID-19.

Other Income (Expense)
Three Months Ended
September 30,
Nine Months Ended
September 30,
(In thousands)20202019