UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~June 30, 2018~~March 31, 2019

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to _____

Commission File Number: 0-12183

~~BOVIE~~APYX MEDICAL CORPORATION

(Exact name of registrant as specified in its charter)



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

5115 Ulmerton Road, Clearwater, FL 33760

(Address of principal executive offices, zip code)

(727) 384-2323

(Registrant’s telephone number)

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes: ý No o

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Website, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ 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 ~~and post~~ such files). Yes: ý No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act (Check one):



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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes: o No ý

Securities Registered Pursuant to Section 12 (b) of the Act:



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

As of ~~July 25, 2018, 33,203,517~~May 3rd, 2019, 34,041,830 shares of the registrant’s $0.001 par value common stock were outstanding.

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~~BOVIE~~APYX MEDICAL CORPORATION

INDEX TO QUARTERLY REPORT ON FORM 10-Q

For the quarterly period ended ~~June 30, 2018~~March 31, 2019

(Unaudited)



		Page
Part I.	Financial Information	2

Item 1.	Financial Statements	2
	Consolidated Balance Sheets at ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017~~2018	2
	Consolidated Statements of Operations for the three ~~and six~~ months ended ~~June 30,~~March 31, 2019 and 2018 ~~and 2017~~	3
	Consolidated ~~Statement~~Statements of Changes in Stockholders’ Equity for the ~~six~~three months ended ~~June 30,~~March 31, 2019 and 2018 ~~and 2017~~	4
	Consolidated Statements of Cash Flows for the ~~six~~three months ended ~~June 30,~~March 31, 2019 and 2018 ~~and 2017~~	5
	Notes to Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1415
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	23
Item 4.	Controls and Procedures	23

Part II.	Other Information	2425

Item 1.	Legal Proceedings	2425
Item 1A.	Risk Factors	2425
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	2425
Item 3.	Defaults Upon Senior Securities	2425
Item 4.	Mine Safety Disclosures	2425
Item 5.	Other Information	2426
Item 6.	Exhibits	2527
	Signatures	2628

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~~BOVIE~~APYX MEDICAL CORPORATION

PART I. Financial Information

ITEM 1. Financial Statements

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data, Unaudited)


	June 30, 2018			December 31, 2017			March 31, 2019		December 31, 2018
ASSETS
Current assets:
Cash and cash equivalents	$	7,875		$	9,949		$	32,415	$	16,466
Restricted cash	660			719
Trade accounts receivable, net of allowance of $180 and $204	5,592			4,857
Inventories, net	7,533			6,526
Short term investments							40,885		61,678
Trade accounts receivable, net of allowance of $196 and $428							4,931		5,015
Inventories, net of provision for obsolescence of $398 and $439							5,598		5,212
Prepaid expenses and other current assets	568			496			1,411		1,146
Total current assets	22,228			22,547			85,240		89,517
Property and equipment, net	6,314			6,408			6,031		5,788
Brand name and trademark	1,510			1,510
Purchased technology and license rights, net	235			179
Goodwill	185			185
Intangibles							190		191
Deposits	115			92			80		73
Other assets	67			67			162		41
Total assets	$	30,654		$	30,988		$	91,703	$	95,610

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	2,745		$	1,583		$	1,504	$	1,423
Accrued and other liabilities							5,460		5,552
Accrued severance and related	439			1,242			511		727
Accrued payroll	394			447
Current portion of mortgage note payable	239			239
Accrued and other liabilities	2,420			2,462
Total current liabilities	6,237			5,973			7,475		7,702
Mortgage note payable, net of current portion	2,335			2,455
Note payable	140			140			140		140
Deferred tax liability	368			368
Derivative liabilities	—			20
Long term lease liability							75		—
Total liabilities	$	9,080		$	8,956		7,690		7,842
STOCKHOLDERS’ EQUITY
Common stock, $0.001 par value; 75,000,000 shares authorized; 33,055,131 issued and 32,912,556 outstanding as of June 30, 2018 and 75,000,000 shares authorized; 33,021,170 issued and 32,878,091 outstanding as of December 31, 2017, respectively	33			33
Common stock, $0.001 par value; 75,000,000 shares authorized; 34,033,255 issued and 33,891,255 outstanding as of March 31, 2019 and 33,847,100 issued and 33,704,525 outstanding as of December 31, 2018							34		34
Additional paid-in capital	51,244			50,495			53,147		52,221
Accumulated deficit	(29,703		)	(28,496		)
Retained earnings							30,832		35,513
Total stockholders’ equity	21,574			22,032			84,013		87,768
Total liabilities and stockholders’ equity	$	30,654		$	30,988		$	91,703	$	95,610

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

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~~BOVIE~~APYX MEDICAL CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data, Unaudited)


	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended March 31,
	2018			2017			2018			2017			2019			2018
Sales	$	11,475		$	9,799		$	21,391		$	18,188		$	5,823		$	3,397
Cost of sales	5,198			4,757			10,124			8,920			2,103			1,185
Gross profit	6,277			5,042			11,267			9,268			3,720			2,212
Other costs and expenses:
Research and development	816			696			1,378			1,405			810			514
Professional services	681			480			1,187			870			1,791			506
Salaries and related costs	2,118			2,243			4,234			4,703			3,221			1,802
Selling, general and administrative	2,929			2,929			5,599			5,333			3,101			2,110
Total other costs and expenses	6,544			6,348			12,398			12,311			8,923			4,932
Loss from operations	(267		)	(1,306		)	(1,131		)	(3,043		)	(5,203		)	(2,720		)
Interest expense, net	(38		)	(36		)	(72		)	(67		)
Change in fair value of derivative liabilities	46			38			20			126
Interest income													423			—
Interest expense													—			(34		)
Other losses													(25		)	—
Change in value of derivative liabilities													—			(26		)
Total other income (expense), net	8			2			(52		)	59			398			(60		)
Loss before income taxes	(259		)	(1,304		)	(1,183		)	(2,984		)	(4,805		)	(2,780		)
Income tax expense	13			4			24			9
Income tax (benefit) expense													(124		)	11
Loss from continuing operations													(4,681		)	(2,791		)
Income from discontinued operations, net of tax													—			1,856
Net loss	$	(272	)	$	(1,308	)	$	(1,207	)	$	(2,993	)	$	(4,681	)	$	(935	)

Loss per share
EPS from continuing operations:
Basic	$	(0.01	)	$	(0.04	)	$	(0.04	)	$	(0.10	)	$	(0.14	)	$	(0.08	)
Diluted	$	(0.01	)	$	(0.04	)	$	(0.04	)	$	(0.10	)	$	(0.14	)	$	(0.08	)

Weighted average number of shares outstanding - basic	32,890			30,860			32,884			30,860
Weighted average number of shares outstanding - dilutive	32,890			30,860			32,884			30,860
EPS from discontinued operations:
Basic													$	—		$	0.05
Diluted													$	—		$	0.05

EPS from total operations:
Basic													$	(0.14	)	$	(0.03	)
Diluted													$	(0.14	)	$	(0.03	)

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

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~~BOVIE~~APYX MEDICAL CORPORATION

CONSOLIDATED ~~STATEMENT~~STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(In thousands, Unaudited)


	Preferred Stock			Common Stock													Common Stock
	Shares	Par Value		Shares		Par Value		Additional Paid-In Capital			Accumulated Deficit			Total			Shares		Par Value		Additional Paid-In Capital			Retained Earnings (Accumulated deficit)			Total
Balance December 31, 2016	976	$	1	30,860		$	31	$	49,625		$	(23,434	)	$	26,223
Balance December 31, 2017																	32,878		$	33	$	50,495		$	(28,496	)	$	22,032
Stock based compensation	—	—		—		—		341			—			341			—		—		372			—			372
Net loss	—	—		—		—		—			(2,993		)	(2,993		)	—		—		—			(935		)	(935		)
Balance June 30, 2017	976	$	1	30,860		$	31	$	49,966		$	(26,427	)	$	23,571
Balance March 31, 2018																	32,878		$	33	$	50,867		$	(29,431	)	$	21,469

Balance December 31, 2017	—	$	—	32,878		$	33	$	50,495		$	(28,496	)	$	22,032
Balance December 31, 2018																	33,705		$	34	$	52,221		$	35,513		$	87,768
Options exercised	—	—		37		—		83			—			83			271		—		777			—			777
Warrants exercised	—	—		40		—		95			—			95
Stock based compensation	—	—		—		—		749			—			749			—		—		859			—			859
Stock swap to acquire options and warrants	—	—		(42	)	—		(178		)	—			(178		)
Net loss	—	—		—		—		—			(1,207		)	(1,207		)
Balance June 30, 2018	—	$	—	32,913		$	33	$	51,244		$	(29,703	)	$	21,574
Stock exercise to acquire options and warrants																	(85	)	—		(710		)	—			(710		)
Net income																	—		—		—			(4,681		)	(4,681		)
Balance March 31, 2019																	33,891		$	34	$	53,147		$	30,832		$	84,013

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

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~~BOVIE~~APYX MEDICAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands, Unaudited)


	Six Months Ended June 30,						Three Months Ended March 31,
	2018			2017			2019			2018
Cash flows from operating activities
Net loss	$	(1,207	)	$	(2,993	)	$	(4,681	)	$	(935	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	371			356			194			199
Provision for inventory obsolescence	(52		)	83			41			(47		)
(Loss) gain on disposal of property and equipment, net	(1		)	2
Stock based compensation	749			341			859			372
Change in fair value of derivative liabilities	(20		)	(126		)	—			26
Noncash lease expense							(26		)	—
Unrealized gain on short term investments							(164		)	—
Provision for allowance for doubtful accounts	82			159			(238		)	(9		)
Changes in current assets and liabilities:
Trade receivables	(817		)	(355		)	322			(277		)
Prepaid expenses	(72		)	(125		)	(266		)	(26		)
Inventories	(955		)	(1,507		)	(427		)	(136		)
Deposits and other assets	(23		)	(72		)	(129		)	4
Accounts payable	1,162			471			81			514
Accrued severance and related							216			—
Accrued and other liabilities	(898		)	(128		)	(421		)	(793		)
Net cash used in operating activities	(1,681		)	(3,894		)	(4,639		)	(1,108		)
Cash flows from investing activities
Purchases of technology, property and equipment	(332		)	(151		)
Net cash used in investing activities	(332		)	(151		)
Purchases of property and equipment							(437		)	(139		)
Purchases of marketable securities							(18,884		)	—
Proceeds of marketable securities							39,842			—
Net cash provided by (used in) investing activities							20,521			(139		)
Cash flows from financing activities
Proceeds from stock options/warrants exercised							67			—
Repayment of mortgage note payable	(120		)	(119		)	—			(60		)
Net cash used in financing activities	(120		)	(119		)
Net cash provided by (used in) financing activities							67			(60		)
Net change in cash, cash equivalents and restricted cash	(2,133		)	(4,164		)	15,949			(1,307		)
Cash, cash equivalents and restricted cash, beginning of period	10,668			15,235			16,466			10,668
Cash, cash equivalents and restricted cash, end of period	$	8,535		$	11,071		$	32,415		$	9,361

Cash paid for:
Interest paid	$	72		$	67
Interest expense							$	—		34

Non cash investing activities:
Cashless exercise of stock options/warrants							$	710		$	—
Capitalization of Lease							178			—

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

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~~BOVIE~~APYX MEDICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1. BASIS OF PRESENTATION

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

We are a medical technology company and the developer of J-Plasma® (marketed and sold under the Renuvion™ Cosmetic Technology brand in the cosmetic surgery market), a patented plasma-based surgical product for cutting, coagulation and ablation of soft tissue. J-Plasma technology utilizes a helium ionization process to produce a stable, focused beam of plasma that provides surgeons with greater precision and minimal invasiveness. The Company also leverages its expertise through original equipment manufacturing (OEM) agreements with other medical device manufacturers.

On August 30, 2018, we closed on a definitive asset purchase agreement with Specialty Surgical Instrumentation Inc., a Tennessee Corporation and wholly-owned subsidiary of Symmetry Surgical Inc. (“Symmetry”), pursuant to which we divested and sold our electrosurgical "Core" business segment and related intellectual property, including the Bovie® brand and trademarks, to Symmetry for gross proceeds of $97 million in cash. The divestiture and sale of our Core business segment to Symmetry allows us to further focus on our strategic objective of commercializing our J-Plasma technology, including the RenuvionTM brand in the cosmetic surgery market. We also entered into with Symmetry a transition services agreement, a Patent Licensing Agreement, a Disposables Supply Agreement, and a Generator Manufacturing and Supply Agreement, the latter of which will establish us as an OEM-provider of generators to Symmetry for a period of at least 10 years. For the three months ended March 31, 2018, the Core sales amounted to $6.5 million with cost of sales of $3.7 million and related operating expenses of $0.9 million, which are included in income from discontinued operations on the Consolidated Statement of Operations.

In connection with the asset purchase agreement, we also entered into an Electro Surgical Disposables and Accessories, Cauteries and Other Products Supply Agreement with Symmetry for up to a four-year term, whereby we will manufacture certain Core products and sell them to Symmetry at agreed upon prices. Any revenue, costs and expenses resulting from this agreement are netted and reported in our Consolidated Statements of Operations as Other gains or losses. For the three months ended March 31, 2019, Core sales following the divestiture amounted to $2.2 million with cost of sales of $2.1 million and related operating expenses of $0.1 million, which are included in other losses on the Consolidated Statement of Operations.

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.

We reclassified the financial results of the Core business to discontinued operations and from segment results for all periods presented.

The accompanying unaudited consolidated financial statements have been prepared based upon SEC rules that permit reduced disclosure for interim periods. For a more complete discussion of significant accounting policies and certain other information, please refer to the financial statements included in our Annual Report on Form 10-K for the year ended December 31, ~~2017.~~2018. These financial statements reflect all adjustments that are necessary for a fair presentation of results of 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.

On July 9, 2018, we entered into a definitive agreement with Specialty Surgical Instrumentation Inc., a subsidiary of Symmetry Surgical Inc. (“Symmetry”), pursuant to which the Company will divest and sell the Core business segment, including the Bovie^® brand and trademarks to Symmetry for gross proceeds of $97 million in cash. The asset purchase agreement was approved by the Company’s Board of Directors and is subject to customary closing conditions, including approval by the Company’s stockholders, and expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. The Company is retaining and will continue to operate its Advanced Energy and OEM businesses, its facilities in Clearwater, FL and Sofia, Bulgaria, and certain intellectual property related to specialty generators.

NOTE 2. INVENTORIES

Inventories are stated at the lower of cost or market. 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 allocated to inventory manufactured in-house based upon labor hours.

Inventories consisted of the following:

(In thousands) June 30,
2018 December 31,
2017
Raw materials $ 6,093
$ 5,163
Finished goods 3,301
3,276
Gross inventories 9,394
8,439
Less: reserve for obsolescence (1,861 ) (1,913 )
Net inventories $ 7,533
$ 6,526

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APYX MEDICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)



(In thousands)	March 31, 2019			December 31, 2018
Raw materials	$	5,032		$	4,521
Finished goods	964			1,130
Gross inventories	5,996			5,651
Less: reserve for obsolescence	(398		)	(439		)
Net inventories	$	5,598		$	5,212

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APYX MEDICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

NOTE 3. INTANGIBLE ASSETS

Intangible assets consisted of the following:


(In thousands)	June 30, 2018			December 31, 2017
Brand name and trademark (life indefinite)	$	1,510		$	1,510

(in thousands)							March 31, 2019			December 31, 2018
Purchased technology (5-17 year lives)	$	1,623		$	1,513		$	1,447		$	1,448
Less: accumulated amortization	(1,388		)	(1,334		)	(1,442		)	(1,442		)
Purchased technology, net	$	235		$	179		$	5		$	6

Goodwill	$	185		$	185		$	185		$	185
Intangibles							$	190		$	191

~~Table~~Intangible assets and goodwill are the result of ~~Contents~~

~~BOVIE MEDICAL CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued~~

~~(Unaudited)~~

With respect to our trademark and brand name, we continue to market products, release new products and product extensions and maintain and promote these trademarks and brand name in the marketplace through legal registration and such methods as advertising, medical education and trade shows. Based on our annual impairment testing performed, these trademarks and brand names will generate cash flow for an indefinite period of time. Therefore, we believe our trademarks and brand name intangible assets are not impaired. Goodwill results from our acquisition of ~~Bovie~~Apyx (formerly known as Bovie) Bulgaria, ~~EOOD.~~

Amortization of purchased technology was $27,000 and $54,000 for the three and six months ended June 30, 2018 and 2017, respectively. Amortization expense is classified within selling, general and administration expensesEOOD in ~~the consolidated statements of operations.~~2015.

NOTE 4. RECENT ACCOUNTING PRONOUNCEMENTS

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

ASU No. 2016-18, Restricted Cash Flows provides guidance on the presentation of restricted cash and restricted cash equivalents, which are now included with cash and cash equivalents when reconciling the beginning and ending cash amounts shown on the statements of cash flows. Using the retrospective transition method required under the standard, the Company has adjusted the presentation of its Condensed Consolidated Statements of Cash Flows for all periods presented. The adoption of ASU No. 2016-18 did not have any other impact on the Company’s Consolidated Financial Statements.

~~The following table provides additional detail by financial statement line item of the ASU 2016-18 impact in our Consolidated Statement of Cash Flows for the six months ended June 30, 2018 and 2017:~~

(In thousands)
As Reported
(Pre-Adoption)
ASU 2016-18
Impact
Reported
(Post Adoption)
Six Months Ended June 30, 2018
Cash, cash equivalents and restricted cash, beginning of period $ 9,949
$ 719
$ 10,668

Six Months Ended June 30, 2017
Net change in cash, cash equivalents and restricted cash $ (4,164 ) $ —
$ (4,164 )
Cash, cash equivalents and restricted cash, beginning of period 14,456
779
15,235
Cash, cash equivalents and restricted cash, end of period $ 10,292
$ 779
$ 11,071

ASU No. 2014-09 (ASC 606), Revenue from Contracts with Customers became effective for us beginning with the first quarter of 2018, and we adopted the new accounting standard using the modified retrospective transition approach. The modified retrospective transition approach recognized any changes from the beginning of the year of initial application through retained earnings with no restatement of comparative periods. We record revenue under ASC 606 at a single point in time, when control is transferred to the customer, which is consistent with past practice. We will continue to apply our current business processes, policies, systems and controls to support recognition and disclosure under the new standard. Based on the results of the evaluation, we have determined that the adoption of the new standard presents no material impact on our consolidated financial statements. Application of the transition requirements of the new standard did not have a material impact on opening retained earnings. We have disaggregated revenue by segment and geography in Note 11 Geographic and Segment Information.

In February 2016, the FASB issued Accounting Standards Update No. 2016-02 (ASU 2016-02), Leases (Topic 842), which became effective for us beginning with the first quarter of 2019. ASU 2016-02 requires a lessee to record a right-of-use asset and a corresponding lease liability, initially measured at the present value of the lease payments, on the balance sheet for all leases with terms longer than 12 months, as well as the disclosure of key information about leasing arrangements. This new standard requires recognition in the statement of operations of a single lease cost, calculated so that the cost of the lease is allocated over the lease term, generally on a straight-line basis, and classification of all cash payments within operating activities in the statement of cash flows. Disclosures are required to provide the amount, timing and uncertainty of cash flows arising from leases. In accordance with the standard, we took a modified retrospective transition approach and included the $178,000 right of use asset and corresponding liabilities in our property plant and equipment, accrued expenses and long term lease liability on the consolidated balance sheet. The lease is also represented in our consolidated statement of cash flows as a non cash investing activity.

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

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~~BOVIE~~APYX MEDICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

NOTE 5. EARNINGS PER SHARE

We compute basic earnings per share (“basic EPS”) by dividing the net income or loss by the weighted average number of common shares outstanding for the reporting period. Diluted earnings per share (“diluted EPS”) gives effect to all dilutive potential shares outstanding. The following table provides the computation of basic and diluted earnings per share.

Three Months Ended
June 30, Six Months Ended
June 30,
(in thousands, except per share data) 2018 2017 2018 2017
Numerator:
Net loss available to common shareholders $ (272 ) $ (1,308 ) $ (1,207 ) $ (2,993 )
Effect of dilutive securities:
Derivative liability - warrants —
—
—
—
Numerator for dilutive loss per common share $ (272 ) $ (1,308 ) $ (1,207 ) $ (2,993 )

Denominator:
Weighted average shares used to compute basic loss per common share 32,890
30,860
32,884
30,860
Effect of dilutive securities:
Derivative liability - warrants —
—
—
—
Denominator for dilutive loss per common share 32,890
30,860
32,884
30,860

Basic loss per common share $ (0.01 ) $ (0.04 ) $ (0.04 ) $ (0.10 )
Diluted loss per common share $ (0.01 ) $ (0.04 ) $ (0.04 ) $ (0.10 )

Anti-dilutive instruments excluded from diluted loss per common share:
Warrants 14
3
10
16
Options 1,061
500
821
805



	Three Months Ended March 31,
(in thousands, except per share data)	2019			2018
Numerator:
Net (loss) from continuing operations	$	(4,681	)	$	(2,791	)
Numerator for diluted (loss) per common share - continuing operations	(4,681		)	(2,791		)

Net income from discontinued operations, net of tax	—			1,856
Numerator for diluted income per share - discontinued operations	—			1,856

Net (loss) from all operations	(4,681		)	(935		)
Numerator for full diluted (loss) per share - all	(4,681		)	(935		)

Denominator - continuing operations
Weighted average shares used to compute basic (loss)	33,343			32,878
Denominator for diluted (loss) per common share	33,343			32,878

Denominator - discontinued operations:
Weighted average shares used to compute basic (loss)	—			32,878
Denominator for diluted (loss) per common share - discontinued operations	—			32,878

Denominator - all operations:
Weighted average shares used to compute basic (loss)	33,343			32,878
Denominator for diluted (loss) per common share	33,343			32,878

Loss per share from continuing operations:
Basic and diluted	$	(0.14	)	$	(0.08	)

Income per share from discontinued operations
Basic and diluted	$	—		$	0.05

Income per share from all operations
Basic and diluted	$	(0.14	)	$	(0.03	)

Anti-dilutive instruments excluded from diluted loss per common share:
Warrants	—			3
Options	1,908			470

Table of Contents

~~BOVIE~~APYX MEDICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

NOTE 6. STOCK-BASED COMPENSATION

Under our stock option plans, our board of directors may grant options to purchase common shares to our key employees, officers, directors and consultants. We account for stock options in accordance with FASB ASC Topic 718, Compensation - Stock Compensation, with option expense amortized over the vesting period based on the trinomial lattice option-pricing model fair value on the grant date, which includes a number of estimates that affect the amount of our expense. We expensed approximately ~~$377,000 and $749,000~~$859,000 in stock-based compensation during the three ~~and six~~ months ended ~~June 30, 2018,~~March 31, 2019, as compared with ~~$182,000 and $341,000~~$372,000 for the three ~~and six~~ months ended ~~June 30, 2017, respectively.~~March 31, 2018.

The status of our stock options and stock awards are summarized as follows:


	Number of options		Weighted average exercise price		Number of options		Weighted average exercise price
Outstanding at December 31, 2017	4,860,157		$	3.00
Outstanding at December 31, 2018					3,480,701		$	3.10
Granted	117,000		2.95		1,277,500		7.73
Exercised	(37,250	)	2.23		(270,549	)	2.87
Canceled and forfeited	(57,500	)	6.55		(10,500	)	2.10
Outstanding at June 30, 2018	4,882,407		$	2.94
Outstanding at March 31, 2019					4,477,152		$	4.44

Common shares required to be issued upon the exercise of stock options ~~and warrants~~ would be issued from our authorized and unissued shares. We calculated the fair value of issued options utilizing a trinomial lattice with an expected life calculated via the simplified method as we do not have sufficient history to determine actual expected life.


	2018 Grants					2019 Grants
Option value	$	1.46	-	$	1.96	$	7.15	-	$	7.91
Risk-free rate	1.9%					2.6%		-	2.6		%
Expected dividend yield	—					—
Expected volatility	68.8%					69.1%		-	69.1		%
Expected term (in years)	6					6

NOTE 7. INCOME TAXES

The Company’s income tax ~~expense~~benefit was ~~$13,000 and $24,000~~$124,000 with an effective tax rate of ~~0.0%~~-3% for the three ~~and six~~ months ended ~~June 30, 2018,~~March 31, 2019, as compared to ~~$4,000 and $9,000~~an expense of $11,000, with an effective tax rate of 0.0%, for the three ~~and six~~ months ended ~~June 30, 2017.~~March 31, 2018. The ~~Company’s~~ effective ~~tax~~ rate differs from the statutory rate primarily due to the change in the valuation allowance on the Company’s net deferred tax ~~assets with a finite life.~~

~~As a result~~assets., and an adjustment to an over accrual, of ~~historical losses,~~$130,000 in the ~~Company recorded a valuation allowance on the net deferred~~2018 tax ~~asset with a finite life and does not anticipate recording an income tax benefit related to these deferred tax assets. The Company will reassess the realization~~accrual, offset by foreign taxes of deferred tax assets each reporting period and will be able to reduce the valuation allowance to the extent that the financial results of these operations improve and it becomes more likely than not that the deferred tax assets are realizable. Management expects the gain from the sale of the Core business segment to Symmetry will utilize substantially all of the historical loss carryforwards and the valuation allowance on the deferred tax asset will be reversed during the third quarter of 2018, when the transaction is approved by the Company’s stockholders.

~~For the six months ended June 30, 2018, we do not believe we had any significant uncertain tax positions nor did we have any interest or penalties related to any significant uncertain tax positions.~~$6,000.

The ~~Company~~following is ~~subject to U.S. federal income~~a roll-forward of the Company's total gross unrecognized tax ~~state income tax~~benefits, not including interest and ~~Bulgarian income tax. Until~~penalties, for the ~~respective statutes of limitations expire (which may be as much as 20 years while we have unused Net Operating Losses), we are subject to income tax audits in the jurisdictions in which we operate.~~period ended March 31, 2019.



(in thousands)	Gross Unrealized Tax Benefits
Balance at January 1, 2019	$	1,313
Additions of tax positions related to the current year	—
Additions of tax positions related to the prior year	—
Decreases for tax positions related to the prior year	—
Balance at March 31, 2019	$	1,313

910

Table of Contents

~~BOVIE~~APYX MEDICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

NOTE 8. COMMITMENTS ~~CONTINGENCIES~~ AND ~~CONCENTRATIONS~~CONTINGENCIES

Property and Rental Agreements

In March 2014, we signed a lease for offices located in Purchase, New York. We decided to consolidate operations in the Purchase, NY office with the facility in Clearwater, Florida. Based on this, we determined the office in Purchase, NY was no longer necessary and decided to cease all activity at the location. The remaining $119,000 of the lease was expensed in the fourth quarter of 2017 as part of severance and related expense. These remaining payments expensed in 2017 will be operational cash outflows in 2018 and 2019.

In October 2015, pursuant to our acquisition of ~~Bovie~~Apyx Bulgaria, we ~~are~~became obligated to ~~pay a~~make lease payments of ~~$6,006~~approximately $9,000 per month ~~expiring in December 2021,~~ for ~~18,745~~approximately 20,000 square feet of office, research and manufacturing space in Sofia, Bulgaria. This lease expires in December 2020.

The following is a schedule of approximate future minimum lease payments under operating leases as of ~~June 30, 2018:~~March 31, 2019:


(In thousands)
2018 (remaining six months)	$	36
2019	72
2019 (remaining 9 months)			$	80
2020	72		107
2021	72
Total	$	252	$	187

On August 30, 2018, we paid the remaining mortgage balance of $2.5 million on the Clearwater facility, releasing us from any and all obligations to the Bank of Tampa.

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, 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 J-Plasma technology. The outcomes of these legal actions are not within our complete control and may not be known for prolonged periods of time. 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.

In addition, as previously disclosed with the Commission on Form 8-K filed April 26, 2019, we have learned that 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.

The Complaint (which as of the date hereof has not been delivered through formal process to the Company) seeks class action status on behalf of all persons and entities that acquired the Company’s securities between August 1, 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 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 Complaint seeks an unspecified amount of damages.

Although the ultimate outcome of this matter cannot be determined with certainty, the Company believes that the allegations stated in the Complaint are entirely without merit. The Company and Goodwin intend to defend themselves vigorously in the suit. Such claims are adequately covered by insurance, however, in the event that damages exceed the aggregate coverage limits of our policy or if our insurance carriers disclaim coverage, we believe it is possible that costs associated with this claim could have a material adverse impact on our consolidated earnings, financial position or cash flows. Under the deductible portion of our insurance coverage, we have accrued $0.5 million for initial defense costs.

In accordance with authoritative guidance, we accrue a liability in our consolidated financial statements for these actions when a loss is known or considered probable and the amount can be reasonably estimated. If the reasonable estimate of a known or probable loss is a range, and no amount within the range is a better estimate than any other, the minimum amount of the range is recorded. If a loss is reasonably possible, but not known or probable, and can be reasonably estimated, the estimated loss or range of loss is 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.

Table of Contents

APYX MEDICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

Purchase Commitments

At ~~June 30, 2018,~~March 31, 2019, we had purchase commitments for inventories totaling approximately ~~$5.4~~$5.8 million, substantially all of which is expected to be purchased by the end of ~~2018.~~

~~Concentrations~~2019.

Our ~~ten largest customers accounted for approximately 36.7% and 29.2%~~manufacturing services agreements requires Symmetry to provide us with a twelve-month rolling production forecast, of ~~trade receivables as of June 30, 2018 and 2017, respectively, and approximately 39.5% and 51.7% of net revenues for the six~~which four months ended June 30, 2018 and 2017, respectively. For the six months ended June 30, 2018, McKesson and National Distribution & Contracting Inc. accounted for 15.5% and 7.1% of sales, respectively, while for the same period in 2017, McKesson and National Distribution & Contracting Inc. accounted for 15.5% and 10.1% of sales, respectively.are binding, non-cancelable orders, subject to certain termination rights.

Table of Contents

APYX MEDICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

NOTE 9. RELATED PARTY TRANSACTIONS

Several relatives of Nikolay Shilev, ~~Bovie~~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.

10NOTE 10. FINANCIAL INSTRUMENTS

Cash, Cash Equivalents and Marketable Securities at March 31, 2019:



(In thousands)	Adjusted Cost		Unrealized Gains		Fair Value⁽³⁾		Cash and Cash Equivalents ⁽¹⁾		Short-term Marketable Securities
Cash	$	3,802	$	—	$	3,802	$	3,802	$	—

Level 1 ⁽²⁾
U.S. Treasury Securities, maturities less than three months	28,613		—		28,613		28,613		—
U.S. Treasury Securities, maturities greater than three months	40,721		164		40,885				40,885
Total	$	73,136	$	164	$	73,300	$	32,415	$	40,885

Cash, Cash Equivalents and Marketable Securities at December 31, 2018:



(In thousands)	Adjusted Cost		Unrealized Gains		Fair Value⁽³⁾		Cash and Cash Equivalents ⁽¹⁾		Short-term Marketable Securities
Cash	$	6,337	$	—	$	6,337	$	6,337	$	—

Level 1 ⁽²⁾
U.S. Treasury Securities, maturities less than three months	10,129		—		10,129		10,129		—
U.S. Treasury Securities, maturities greater than three months	61,431		247		61,678				61,678
Total	$	77,897	$	247	$	78,144	$	16,466	$	61,678

⁽¹⁾The company considers all highly liquid instruments with maturities of three months or less at the time of purchase to be cash equivalents.

⁽²⁾ The fair value of the debt securities consisting of U.S. Treasury bills is based on their quoted market prices. The fair value of these financial instruments are classified as Level 1 in the fair value hierarchy. The original purchase of U.S. Treasury bills occurred in September 2018, utilizing the proceeds from the sale of our Core business.

⁽³⁾ ASC 825-10 Financial Instruments, allows entities to voluntarily choose to measure certain financial assets and liabilities at fair value (fair value option). The fair value option may be elected on an instrument-by-instrument basis and is irrevocable, unless a new election date occurs. If the fair value option is elected for an instrument, unrealized gains and losses for that instrument should be reported in earnings within interest income at each subsequent reporting date. At the date of purchase, the Company elected the fair value option for all investments with maturities of three months or greater at the time of purchase.

Table of Contents

~~BOVIE~~APYX MEDICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

~~NOTE 10. LONG TERM DEBT~~

On June 28, 2016, the Company entered into a transaction with Bank of Tampa, a Florida banking corporation (“Lender”), wherein Lender amended the terms of a mortgage loan (“the Loan”) originally executed on March 20, 2014 with a principal amount of $3,592,000. The Initial Maturity Date of the Loan was extended to July 20, 2019 from March 19, 2017, and the Extended Maturity Date was amended to July 20, 2024 from March 20, 2022. In addition, the Lender released as collateral to the Loan, the Company’s working capital accounts in exchange for a negative covenant limited to $2,000,000 of the aggregate indebtedness secured by these accounts.

The obligations under the Loan are secured by a first mortgage and security interest in the Company’s Clearwater, Florida facility. In addition, the Company has pledged an interest in a certificate of deposit in the amount of $660,000 as additional collateral. The amount of the additional collateral required declines on a pro rata basis as principal is paid.

~~Borrowings under the Loan bear interest at LIBOR plus 3.5%, with a fixed monthly principal payment of $19,956. The interest rate at June 30, 2018 was 5.501%.~~

The Loan documents contain customary financial covenants, including a covenant that the Company maintains a minimum liquidity, as defined, of $750,000. Should we desire to extend the Loan beyond July 20, 2019, we must maintain a Debt Service Coverage Ratio for each of the preceding four quarters of not less than 1.0 to 1.0.

~~Our future contractual obligations for agreements with initial terms greater than one year are as follows:~~

(In thousands) Long-term debt
2018 (remaining six months)
$ 120
2019 2,454
Total $ 2,574

NOTE 11. GEOGRAPHIC AND SEGMENT INFORMATION

Operating segments are aggregated into reportable segments only if they exhibit similar economic characteristics. In addition to similar economic characteristics, we also consider the following factors in determining the reportable segments: the nature of business activities, the management structure directly accountable to our chief operating decision maker for operating and administrative activities, availability of discrete financial information and information presented to the Board of Directors and investors.

Our reportable segments are disclosed as principally organized and managed as ~~three~~two operating segments: ~~Core, OEM and Advanced Energy. We adopted reportable segments to align with changes in how we manage our business, review operating performance and allocate resources as a result of the growth in~~ Advanced Energy and ~~the differing behavior of the Core and OEM product lines. The Corporate~~OEM. "Corporate & ~~Other category~~Other" includes certain unallocated corporate ~~operational, research~~ and ~~development and marketing~~administrative costs which were not specifically attributed to any reportable segment. Net assets are shared, therefore, not allocated to the reportable segments. The OEM segment is primarily development and manufacturing contract and product driven, all related expenses are recorded as cost of sales, therefore no segment specific operating expenses are incurred.

~~Table of Contents~~

~~BOVIE MEDICAL CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued~~

~~(Unaudited)~~

Summarized financial information with respect to reportable segments is as follows:

Three Months Ended June 30, 2018
(In thousands) Core Advanced Energy OEM Corporate (Other) Total
Sales $ 7,784
$ 3,113
$ 578
$ —
$ 11,475

Income (loss) from operations 2,666
(792 ) 302
(2,443 ) (267 )

Interest expense, net —
—
—
(38 ) (38 )
Change in fair value of derivative liabilities —
—
—
46
46
Income tax expense —
—
—
13
13
Depreciation and amortization —
—
—
172
172

Three Months Ended June 30, 2017
(In thousands) Core Advanced Energy OEM Corporate (Other) Total
Sales $ 7,488
$ 1,813
$ 498
$ —
$ 9,799

Income (loss) from operations ⁽¹⁾
2,559
(1,284 ) 205
(2,786 ) (1,306 )

Interest expense, net —
—
—
(36 ) (36 )
Change in fair value of derivative liabilities —
—
—
38
38
Income tax expense —
—
—
4
4
Depreciation and amortization —
—
—
178
178

Six Months Ended June 30, 2018
(In thousands) Core Advanced Energy OEM Corporate (Other) Total
Sales $ 14,303
$ 5,742
$ 1,346
$ —
$ 21,391

Income (loss) from operations 4,522
(1,370 ) 708
(4,991 ) (1,131 )

Interest expense, net —
—
—
(72 ) (72 )
Change in fair value of derivative liabilities —
—
—
20
20
Income tax expense —
—
—
24
24
Depreciation and amortization —
—
—
371
371

~~Table of Contents~~

~~BOVIE MEDICAL CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued~~

~~(Unaudited)~~

Six Months Ended June 30, 2017
(In thousands) Core Advanced Energy OEM Corporate (Other) Total
Sales $ 14,263
$ 2,420
$ 1,505
$ —
$ 18,188

Income (loss) from operations ⁽¹⁾
4,772
(3,103 ) 708
(5,420 ) (3,043 )

Interest expense, net —
—
—
(67 ) (67 )
Change in fair value of derivative liabilities —
—
—
126
126
Income tax expense —
—
—
9
9
Depreciation and amortization —
—
—
356
356



~~(1)~~	During the first and second quarter of 2017, marketing expenses were presented as attributable only to the Corporate (Other) segment in the line Income (loss) from operations. It was subsequently determined that certain marketing expenses are attributable to specific segments. The disclosure of Income (loss) from operations was updated for the first and second quarter of 2017 to reflect marketing expense by segment.



	Three Months Ended March 31, 2019
(In thousands)	Advanced Energy		OEM	Corporate & Other		Total
Sales	4,371		1,452	—		5,823

Net income (loss) from continuing operations	(3,387	)	785	(2,079	)	(4,681	)

Interest income	—		—	423		423
Other losses	—		—	(25	)	(25	)
Income tax benefit	—		—	(124	)	(124	)



	Three Months Ended March 31, 2018
(In thousands)	Advanced Energy		OEM	Corporate & Other		Total
Sales	2,629		768	—		3,397

Net income (loss) from continuing operations	(578	)	406	(2,619	)	(2,791	)

Interest expense	—		—	(34	)	(34	)
Change in value of derivative liabilities	—		—	(26	)	(26	)
Income tax expense	—		—	11		11

International sales represented approximately ~~15.5% and 17.4%~~29.5% of total revenues for the three ~~and six~~ months ended ~~June 30, 2018, respectively,~~March 31, 2019, as compared with ~~11.1% and 13.7%~~18.8% of total revenues for ~~the~~ three ~~and six~~ months ended ~~June 30, 2017.~~March 31, 2018. Substantially all of these sales are denominated in U.S. dollars. Revenue by geographic region, based on the “ship to” location on the invoice, are as follows:

Three Months Ended
June 30, Six Months Ended
June 30,
(In thousands) 2018 2017 2018 2017
Sales by Domestic and International
Domestic $ 9,700
$ 8,708
$ 17,673
$ 15,700
International 1,775
1,091
3,718
2,488
Total $ 11,475
$ 9,799
$ 21,391
$ 18,188

~~NOTE 12. SUBSEQUENT EVENTS~~

As of June 30, 2018, the Company concluded that the planned divestitures did not meet the criteria for assets held for sale – discontinued operations set forth in ASC No. 205–20, “Presentation of Financial Statements,” as stockholder approval is required prior to closing of the planned divestiture. The Company continues to classify these businesses in its continuing operations for all periods presented.



	Three Months Ended March 31,
(In thousands)	2019		2018
Sales by Domestic and International
Domestic	$	4,104	$	2,758
International	1,719		639
Total	$	5,823	$	3,397

1314

Table of Contents

~~BOVIE~~APYX MEDICAL CORPORATION

MANAGEMENT'S DISCUSSION AND ANAYLSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

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

Executive Level Overview

~~On July 9, 2018, we entered into~~We are a ~~definitive agreement with Specialty Surgical Instrumentation Inc., a subsidiary~~medical technology company and the developer of ~~Symmetry Surgical Inc. (“Symmetry”), pursuant to which the Company will divest and sell the Core business segment, including the Bovie~~J-Plasma^® ~~brand~~(marketed and trademarks to Symmetry for gross proceeds of $97 million in cash. The asset purchase agreement was approved by the Company’s Board of Directors and is subject to customary closing conditions, including approval by the Company’s stockholders, and expiration or termination of the applicable waiting periodsold under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. The Company is retaining and will continue to operate its Advanced Energy and OEM businesses, its facilities in Clearwater, FL and Sofia, Bulgaria, and certain intellectual property related to specialty generators.

Bovie Medical Corporation (“Company”, “Bovie Medical”, “we”, “us”, or “our”) 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 energy-based medical device company specializing in developing, manufacturing and marketing a range of electrosurgical products and technologies, as well as related medical products used in doctor’s offices, surgery centers and hospitals worldwide. Our medical devices are marketed through Bovie’s own well-respected brands (Bovie^®~~, IDS™ and DERM~~^TM) and on a private label basis to distributors throughout the world. We also leverage our expertise in the design, development and manufacturing of electrosurgical equipment by producing equipment 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.

~~We are also the developer of J-Plasma (rebranded as Renuvion~~^TMRenuvion™ Cosmetic Technology ~~for~~brand in the cosmetic surgery market), a patented plasma-based surgical product for cutting, coagulation and ablation of soft tissue. ~~J-Plasma/Renuvion system~~J-Plasma technology utilizes a helium ionization process to produce a stable, focused beam of plasma that provides surgeons with greater precision and minimal invasiveness. ~~The new J-Plasma/Renuvion handpieces~~We also leverage our expertise through original equipment manufacturing (OEM) agreements with Cool-Coag™ technology deliver the precision of helium plasma energy, the power of traditional monopolar coagulation and the efficiency of plasma beam coagulation - enabling thin-layer ablation and dissection and fast coagulation with a single instrument, minimizing instrument exchange and allowing a surgeon to focus on their patient and their procedures. With Cool-Coag technology, the new J-Plasma/Renuvion handpieces can deliver three distinctly different energy modalities - further increasing the utility and versatility of the J-Plasma system. J-Plasma has been the subject of ten white papers and has been cited therein for its clinical utility in gynecological and plastic surgery procedures.other medical device manufacturers.

During ~~2018,~~2019, we will continue our ~~full scale~~full-scale commercialization efforts for ~~J-Plasma/~~Renuvion. ~~We have~~As of March 31, 2019, we had a direct sales force of 1928 field-based selling professionals and a network of 147 independent ~~manufacturing representatives, resulting in a total~~ sales ~~force of 33.~~agencies. We also had 4 sales managers. This selling organization is focused on the use of ~~J-Plasma for surgical procedures.~~Renuvion in the cosmetic surgery market. In addition, we have invested in training programs and marketing-related activities to support accelerated adoption of ~~J-Plasma.~~Renuvion.

International sales represented approximately ~~15.5%~~29.5% and ~~17.4%~~18.8% of total revenues ~~for~~in the three ~~and six~~ months ended ~~June 30,~~March 31, 2019 and 2018, ~~respectively, as compared with 11.1% and 13.7% of total revenues for the three and six months ended June 30, 2017.~~respectively. Management estimates our products have been sold in more than ~~150~~40 countries through local dealers coordinated by sales and marketing personnel at the Clearwater, Florida facility.

As previously disclosed with the Commission on Form 8-K filed on April 4, 2019, we announced on April 1, 2019, that we voluntarily withdrew our application for premarket notification 510(k) regulatory clearance of our J-Plasma/Renuvion technology for use in dermal resurfacing procedures (see Note 8). While this is a delay in our commercialization efforts, we remain committed to working with the U.S. Food and Drug Administration relative to the development of a new 510(k) submission.

On August 30, 2018, we closed on a definitive asset purchase agreement ("the Asset Purchase Agreement") with Specialty Surgical Instrumentation Inc., a Tennessee Corporation and wholly-owned subsidiary of Symmetry Surgical Inc. (“Symmetry”), pursuant to which we divested and sold our electrosurgical "Core" business segment and related intellectual property, including the Bovie^® brand and trademarks, to Symmetry for gross proceeds of $97 million in cash. The divestiture and sale of our Core business segment to Symmetry allows us to further focus on our strategic objective of commercializing our J-Plasma technology, including the Renuvion^TM brand in the cosmetic surgery market. We also entered into with Symmetry a transition services agreement, Patent Licensing Agreement, a Disposables Supply Agreement, and a Generator Manufacturing and Supply Agreement, the latter of which will establish us as an OEM-provider of generators to Symmetry for a period of at least 10 years.

In connection with the Asset Purchase Agreement, we entered into an Electro Surgical Disposables and Accessories, Cauteries and Other Products Supply Agreement with Symmetry for up to a four-year term, whereby we will manufacture certain Core products and sell them to Symmetry at agreed upon prices. Any revenue, costs and expenses resulting from this agreement are netted and reported in our Consolidated Statements of Operations as Other gains or losses.

In connection with the Asset Purchase Agreement, we entered into a Manufacture and Supply Agreement with Symmetry for a ten-year term, whereby we will manufacture certain products and sell them to Symmetry at agreed upon prices. Revenue, costs and expenses resulting from this agreement are reported in our Consolidated Statements as income or loss from operations of our OEM reporting segment.

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MANAGEMENT'S DISCUSSION AND ANAYLSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued

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

~~The majority~~We reclassified the financial results of ~~our core products are marketed through medical distributors, which distribute~~the Core business to ~~more than 6,000 hospitals,~~discontinued operations and to doctors and other healthcare facilities. New distributors are contacted through responses to our advertising in international and domestic medical journals and our presence at domestic and international trade shows.

from segment results for all periods presented. We strongly encourage investors to visit our website: ~~www.boviemedical.com~~www.apyxmedical.com to view the most current news and to review our filings with the Securities and Exchange Commission.

Results of Operations

Sales


	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended March 31,
(In thousands)	2018		2017		Change		2018		2017		Change		2019		2018		Change
Sales by Reportable Segment
Core	$	7,784	$	7,488	4.0	%	$	14,303	$	14,263	0.3	%
Advanced Energy	3,113		1,813		71.7	%	5,742		2,420		137.3	%	4,371		2,629		66.3	%
OEM	578		498		16.1	%	1,346		1,505		(10.6	)%	1,452		768		89.1	%
Total	$	11,475	$	9,799	17.1	%	$	21,391	$	18,188	17.6	%	$	5,823	$	3,397	71.4	%

Sales by Domestic and International
Domestic	$	9,700	$	8,708	11.4	%	$	17,673	$	15,700	12.6	%	4,104		2,758		48.8	%
International	1,775		1,091		62.7	%	3,718		2,488		49.4	%	1,719		639		256.5	%
Total	$	11,475	$	9,799	17.1	%	$	21,391	$	18,188	17.6	%	$	5,823	$	3,397	71.4	%

~~Overall sales~~Total revenue from continuing operations for first quarter 2019 increased ~~by 17.1%~~$2.4 million, or ~~approximately $1.7~~71.4%, to $5.8 million, ~~for the three months ended June 30, 2018 when~~ compared ~~with the same period of 2017. Sales of J-Plasma/Renuvion generators and handpieces were the primary driver of total revenue growth~~to $3.4 million in the first quarter of 2018. Sales of the Company’s Advanced Energy generators and handpieces drove the increase in total revenue in first quarter 2019, with OEM segment sales contributing modestly to the year-over-year increase in total revenue from continuing operations during the first quarter 2019 period. Advanced Energy segment sales ~~were $3.1~~increased approximately $1.7 million, ~~an increase of approximately 71.7% when~~or 66.3% year-over-year, to $4.4 million, compared to ~~the same period of 2017 as a result of continued focus of our selling into the cosmetic surgery market. Core~~approximately $2.6 million last year. OEM segment sales ~~which consists of our brand name electrosurgical devices and accessories, cauteries, penlights, lighting, colposcopes and other similar products,~~ increased ~~4.0%~~$0.7 million, or ~~approximately $0.3~~89.1% year-over-year, to $1.5 million, for the three months ended June 30, 2018, when compared with 2017. The OEM segment consists of proprietary products designed specifically for third party equipment manufacturers; revenue for this product line increased 16.1% or approximately $0.1 million when compared to ~~2017.~~$0.8 million last year.

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MANAGEMENT'S DISCUSSION AND ANAYLSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued

~~Overall sales~~Gross Profit



	Three Months Ended March 31,
(In thousands)	2019			2018			Change
Cost of sales	$	2,103		$	1,185		77.5	%
Percentage of sales	36.1		%	34.9		%



Gross profit	$	3,720		$	2,212		68.2	%
Percentage of sales	63.9		%	65.1		%

Gross profit for the first quarter of 2019 increased ~~by 17.6%~~approximately $1.5 million, or ~~approximately $3.2~~68.2% year-over-year, to $3.7 million, compared to $2.2 million for first quarter of 2018. Gross margin for the ~~six months ended June 30, 2018 when~~first quarter of 2019 was 63.9%, compared ~~with~~to 65.1% last year. The primary drivers of the ~~same period of 2017. Sales of J-Plasma/Renuvion generators~~decrease in gross profit margin were Advanced Energy product mix and ~~handpieces were~~Advanced Energy sales outside the ~~primary driver~~U.S., which represented a higher mix of total ~~revenue growth~~sales in the first quarter of ~~2018. Advanced Energy segment sales~~2019 compared to last year. OEM gross margins were ~~$5.7 million, an increase~~lower in the first quarter of ~~approximately 137.3%~~2019 when compared to the ~~same~~prior year period, ~~of 2017 as a result of continued focus of~~driven primarily by revenue related to our ~~selling into the cosmetic surgery market. Core segment sales,~~new Product, Manufacturing, and Supply agreements with Symmetry, which consists of our brand name electrosurgical devices and accessories, cauteries, penlights, lighting, colposcopes and other similar products, increased 0.3% or approximately $0.0 million for the six months ended June 30, 2018, when compared with 2017. The OEM segment consists of proprietary products designed specifically for third party equipment manufacturers;did not contribute to revenue ~~for this product line decreased 10.6% or approximately $0.2 million when compared to 2017.~~

~~Gross Profit~~

Three Months Ended
June 30, Six Months Ended
June 30,
(In thousands) 2018 2017 Change 2018 2017 Change
Cost of sales $ 5,198
$ 4,757
9.3 % $ 10,124
$ 8,920
13.5 %
Percentage of sales 45.3 % 48.5 % 47.3 % 49.0 %

Gross profit $ 6,277
$ 5,042
24.5 % $ 11,267
$ 9,268
21.6 %
Percentage of sales 54.7 % 51.5 %

52.7 % 51.0 %

Our gross profit increased by 24.5% or approximately $1.2 million during the three months ended June 30, 2018 when compared to 2017. The primary drivers of the increase were favorable manufacturing variances partially offset by lower marginsresults in the ~~Advanced Energy segment attributable to product mix.~~prior period.

Our gross profit increased by 21.6% or approximately $2.0 million during the six months ended June 30, 2018 when compared to 2017. Increased revenue in the Advanced Energy segment was the primary contributor to the increase in gross profit. Partially offsetting these gains is the impact of unfavorable manufacturing variances in the Core segment for the six months ended June 30, 2018.

We have components and finished goods manufactured in China and imported to the United States. The Office of the United States Trade Representative (“USTR”) has imposed new tariffs on the import of a number of products into the United States from China. Management is currently assessing the potential impacts of the new duties on our products and intend to use our best efforts to mitigate the potential impacts and protect our competitive position in the marketplace.

Other Costs and Expenses

Research and development


	Three Months Ended June 30,								Six Months Ended June 30,								Three Months Ended March 31,
(In thousands)	2018			2017			Change		2018			2017			Change		2019			2018			Change
Research and Development expense	$	816		$	696		17.2	%	$	1,378		$	1,405		(1.9	)%	$	810		$	514		57.6	%
Percentage of sales	7.1		%	7.1		%			6.4		%	7.7		%			13.9		%	15.1		%

Spending on Research and development ~~spend~~ increased ~~17.2%~~57.6% for the three months ended ~~June 30, 2018,~~March 31, 2019, primarily due to ~~more~~ focused spending on clinical studies and research projects related to the cosmetic surgery market.

~~Research and development spend decreased 1.9%~~Professional services



	Three Months Ended March 31,
(In thousands)	2019			2018			Change
Professional services expense	$	1,791		$	506		254.0	%
Percentage of sales	30.8		%	14.9		%

Professional services expense increased 254.0% for ~~the six~~three months ended ~~June 30, 2018, due~~March 31, 2019, versus comparable periods in 2018. The change was primarily attributable to ~~personnel reductions~~expense increases for training-related physician consulting, medical advisory board stock option grants, marketing expenses, legal and ~~discontinuation of Core business related contract design agreements partially offset by more focused spending on clinical studies and research projects related to cosmetic surgery market.~~audit fees.

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MANAGEMENT'S DISCUSSION AND ANAYLSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued

~~Professional services~~

Three Months Ended
June 30, Six Months Ended
June 30,
(In thousands) 2018 2017 Change 2018 2017 Change
Professional services expense $ 681
$ 480
41.9 % $ 1,187
$ 870
36.4 %
Percentage of sales 5.9 % 4.9 % 5.5 % 4.8 %

Professional services increased 41.9% and 36.4% for the three and six months ended June 30, 2018, respectively, versus comparable periods in 2017.The change was primarily attributable to increases in physician consulting and legalexpenses related to the Advanced Energy segment.

Salaries and related costs


	Six Months Ended June 30,								Six Months Ended June 30,								Three Months Ended March 31,
(In thousands)	2018			2017			Change		2018			2017			Change		2019			2018			Change
Salaries and related expenses	$	2,118		$	2,243		(5.6	)%	$	4,234		$	4,703		(10.0	)%	$	3,221		$	1,802		78.7	%
Percentage of sales	18.5		%	22.9		%			19.8		%	25.9		%			55.3		%	53.0		%

During the three ~~and six~~ months ended ~~June 30, 2018,~~March 31, 2019, salaries and related expenses ~~decreased~~increased approximately ~~5.6% and 10.0%~~78.7%, ~~respectively,~~ compared to the prior year. The ~~decrease~~increase was primarily driven by ~~a reduction~~an increase in ~~management~~employee stock option expense, increase in sales force, and ~~sales related personnel and executive compensation versus the comparable period~~reclassification of ~~2017.~~regulatory salaries from cost of goods sold.

Selling, general and administrative expenses

Three Months Ended
June 30, Six Months Ended
June 30,
(In thousands) 2018 2017 Change 2018 2017 Change
SG&A Expense $ 2,929
$ 2,929
— % $ 5,599
$ 5,333
5.0 %
Percentage of sales 25.5 % 29.9 % 26.2 % 29.3 %

Selling, general and administrative expense was flat for the three months ended June 30, 2018 when compared to 2017. A decrease was primarily driven by reductions in travel and entertainment, general insurance and timing differences in marketing, offset by increases from consulting in the Advanced Energy segment and sales commissions.



	Three Months Ended March 31,
(In thousands)	2019			2018			Change
SG&A Expense	$	3,101		$	2,110		47.0	%
Percentage of sales	53.3		%	62.1		%

Selling, general and administrative expense increased by ~~5.0% or approximately $0.3 million~~47.0% for the ~~six~~three months ended ~~June 30, 2018~~March 31, 2019 when compared to ~~2017.~~2018. The increase was primarily driven by ~~consulting in the Advanced Energy segment and~~ sales commissions ~~partially~~and product sample expense. These increases are offset by ~~reductions~~an adjustment to our bad debt reserve which had a change in ~~travel and entertainment, general insurance and timing differences~~calculation due to a shift in ~~marketing.~~our customer base following the disposition of our Core business.

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~~BOVIE MEDICAL CORPORATION~~

~~MANAGEMENT'S DISCUSSION AND ANAYLSIS OF~~

~~FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued~~

Other Income (Expense), net


	Three Months Ended June 30,								Six Months Ended June 30,								Three Months Ended March 31,
(In thousands)	2018			2017			Change		2018			2017			Change		2019			2018			Change
Interest expense, net	$	(38	)	$	(36	)	5.6	%	$	(72	)	$	(67	)	7.5	%
Interest income																	$	423		$	—		100.0	%
Percentage of sales																	7.3		%	—		%
Interest expense																	$	—		$	(34	)	(100.0	)%
Percentage of sales																	—		%	1.0		%
Other losses																	$	(25	)	$	—		100.0	%
Percentage of sales	(0.3		)%	(0.4		)%			(0.3		)%	(0.4		)%			0.4		%	—		%
Change in fair value of derivative liabilities, net	$	46		$	38		21.1	%	$	20		$	126		(84.1	)%	$	—		$	(26	)	(100.0	)%
Percentage of sales	0.4		%	0.4		%			0.1		%	0.7		%			—		%	(0.8		)%

Interest ~~expense, net~~income

Total ~~net~~ interest ~~expense increased, due to a~~income was higher ~~LIBOR rate~~ for the three ~~and six~~ months ended ~~June 30, 2018~~March 31, 2019, as compared with ~~the comparable periods~~2018. This increase is primarily related to short term investments in ~~2017.~~

~~Change in fair value of liabilities, net~~

~~On December 13, 2013, we entered into a securities purchase agreement pursuant to~~U.S. Treasury Securities which we ~~issued 3,500,000 shares~~purchased with the proceeds from the sale of our newly designated Series A 6% Convertible Preferred Stock with a stated value of $2.00 per share and 5,250,000 warrants to purchase our common stock, at an exercise price of $2.387 per share. We also issued 525,000 warrants to the ~~placement agent, of which 40,000 have a strike price of $2.387 and remain outstanding as of June 30,~~Core business in September 2018. ~~The warrants are accounted for as derivative financial instruments at fair value and are re-valued each period.~~

~~As of June 30, 2018, all remaining warrants were converted to common stock and for the six months ended June 30, 2018 we recognized a net loss of $20,000.~~

Income Taxes

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APYX MEDICAL CORPORATION

MANAGEMENT'S DISCUSSION AND ANAYLSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued

As a ~~finite life.~~result of historical losses exclusive of discontinued operations and the Company’s expectation to continue to generate losses in the near future, the Company recorded a valuation allowance on its net deferred tax asset and does not anticipate recording an income tax benefit related to these deferred tax assets. The Company will reassess the realization of deferred tax assets each reporting period and will be able to reduce the valuation allowance to the extent the financial results of the operations improve and it becomes more likely than not that the deferred tax assets will be realizable.

Product Development

We have developed most of our products and product improvements internally. Funds for this development have come primarily from our internal cash flow and equity issuances. We maintain close working relationships with physicians and medical personnel ~~in hospitals and universities~~ who assist in product research and development. New and improved products play a critical role in our sales growth. We continue to emphasize the development of proprietary products and product improvements to complement and expand our existing product lines. Our research and development team members are based in our Clearwater, Florida office and our facility in Sofia, Bulgaria.

Reliance on Collaborative, Manufacturing and Selling Arrangements

We manufacture the majority of our products on our premises in Clearwater, Florida and in Sofia, Bulgaria. Labor-intensive sub-assemblies and labor-intensive products may be out-sourced to our specification. Although we sell through distributors, we market our products through national trade journal advertising, direct mail, distributor sales representatives and trade shows, under the Bovie name and private label. Major distributors include Cardinal Health, Independent Medical Co-Op Inc. (IMCO), McKesson Medical Surgical, Inc., Medline, National Distribution and Contracting Inc. (NDC) and Owens & Minor. If any of these distributor relationships are terminated or not replaced, our revenue from the territories served by these distributors could be adversely affected.

~~Table of Contents~~

~~BOVIE MEDICAL CORPORATION~~

~~MANAGEMENT'S DISCUSSION AND ANAYLSIS OF~~

~~FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued~~

We ~~are~~ also ~~dependent on~~perform development services for OEM customers who have no legal obligation to purchase products from us. Should such customers fail to give us purchase orders for the product after development, our future business and value of related assets could be negatively affected. Furthermore, no assurance can be given that such customers will give sufficient high priority to our products. ~~Finally, disagreements or disputes may arise between us and our customers, which could adversely affect production and sales~~Additionally, we will function as an OEM-provider of ~~our products.~~generators to Symmetry for a period of at least 10 years.

We also have collaborative arrangements with ~~three~~two 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.

Liquidity and Capital Resources

On August 30, 2018,we sold our Core business segment and other related assets for $97 million in cash. At December 31, 2018, we had approximately $78 million in Cash, Cash Equivalents and Short-Term Investments, after making estimated Federal and State tax payments of $13.3 million. Our working capital at ~~June 30, 2018~~March 31, 2019 was approximately ~~$16.0~~$77.8 million compared with ~~$16.6~~$81.8 million at December 31, 2017. Accounts receivable days sales outstanding were 42 days and 48 days at June 30, 2018 and 2017, respectively. The number of days sales in inventory, which is the total inventory available for production divided by the 12-month average cost of materials, decreased 22 days to 157 days equating to an inventory turn ratio of 2.10 at June 30, 2018 from 179 days and an inventory turn ratio of 2.00 at June 30, 2017. The lower number of days sales in inventory is mainly due to an increase in sales against flat inventory balances compared to June 30, 2017.2018.

For the ~~six months~~quarter ended ~~June 30, 2018,~~March 31, 2019, net cash used in operating activities ~~was~~is approximately ~~$1.7~~$4.6 million compared with net cash used byin operating activities of approximately ~~$3.9~~$1.1 million ~~for the same period~~ in 2017. The net cash used in operating activities was attributed to $1.2 million of net loss, accounts receivable of $0.8 million and increases of inventory of $1.0 million, partially offset by non-cash inflows of $1.0 million and changes in working capital of $0.3 million.2018.

Net cash ~~used in~~from investing activities ~~was attributed to purchases~~is $20.5 million, primarily related the shift in categorization of ~~property~~short-term investments and ~~equipment for approximately $332,000 during the six months ended June 30, 2018, compared to $151,000~~ cash ~~used for the same period~~equivalents in ~~2017.~~our Treasury Bill investments.

Cash ~~used in~~from financing activities of approximately ~~$120,000~~$0.1 million relates to cash collected for stock options during the ~~six months~~quarter ended ~~June 30,~~March 31, 2019. Cash used in 2018 ~~compared to cash used~~financing activities in financing activities in 2018 was $0.1 million related to the repayment of ~~approximately $119,000 for~~our mortgage at the ~~same period in 2017.~~Clearwater, FL, facility.

On June 28, 2016, the Company entered into a transaction with Bank of Tampa, a Florida banking corporation (“Lender”) wherein Lender amended the terms of a mortgage loan (“the Loan”) originally executed onAt March 20, 2014 with a principal amount of $3,592,000. The Initial Maturity Date of the Loan was extended to July 20, 2019 from March 19, 2017, and the Extended Maturity Date was amended to July 20, 2024 from March 20, 2022. In addition, the Lender released as collateral to the Loan, the Company’s working capital accounts in exchange for a negative covenant limited to $2,000,000 of the aggregate indebtedness secured by these accounts.

~~Borrowings under the Loan bear interest at LIBOR plus 3.5%, with a fixed monthly principal payment of $19,956. The interest rate at June 30, 2018 was 5.501%.~~

~~The Loan documents contain customary financial covenants, including a covenant that the Company maintains a minimum liquidity of $750,000. Should we desire to extend the Loan beyond July 20,~~31, 2019, we ~~must maintain a Debt Service Coverage Ratio~~had purchase commitments for ~~each~~inventories totaling approximately $5.8 million, substantially all of which is expected to be purchased by the ~~preceding four quarters~~end of ~~not less than 1.0 to 1.0.~~

2019.

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~~BOVIE~~APYX MEDICAL CORPORATION

MANAGEMENT'S DISCUSSION AND ANAYLSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued

~~Approximate future expected principal and interest payments under the Loan agreement~~

Our manufacturing services agreements requires Symmetry to provide us with a twelve-month rolling production forecast, of which four months are ~~as follows as of June 30, 2018:~~

(In thousands)
2018 (remaining six months)
$ 128
2019 2,536
Total $ 2,664
binding, non-cancelable orders, subject to certain termination rights.

~~At June 30, 2018, we had purchase commitments for inventories totaling approximately $5.4 million, substantially all~~

Table of ~~which is expected to be purchased by the end of 2018.~~Contents

APYX MEDICAL CORPORATION

MANAGEMENT'S DISCUSSION AND ANAYLSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued

Critical Accounting Estimates

In preparing the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP), we have adopted various accounting policies. Our most significant accounting policies are disclosed in Note 2 to the consolidated financial statements included in our report on Form 10-K for the year ended December 31, ~~2017,~~2018, filed on March ~~13, 2018.~~14, 2019.

The preparation of the consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Our estimates and assumptions, including those related to inventories, intangible assets, property, plant and equipment, legal proceedings, research and development, warranty obligations, product liability, fair valued liabilities, sales returns and discounts, ~~stock based~~stock-based compensation and income taxes are updated as appropriate, which in most cases is at least quarterly. We base our estimates on historical experience, or various assumptions that are believed to be reasonable under the circumstances and the results form the basis for making judgments about the reported values of assets, liabilities, revenues and expenses. Actual results may materially differ from these estimates.

Estimates are considered to be critical if they meet both of the following criteria: (1) the estimate requires assumptions about material matters that are uncertain at the time the accounting estimates are made and (2) other materially different estimates could have been reasonably made or material changes in the estimates are reasonably likely to occur from period to period. Our critical accounting estimates include the following:

Inventory reserves

We maintain a reserve for excess and obsolete inventory resulting from the potential inability to sell our products at prices in excess of current carrying costs. The markets in which we operate are highly competitive, with new products and surgical procedures introduced on an ongoing basis. Such marketplace changes may cause our products to become obsolete. We make estimates regarding the future recoverability of the costs of these products and record a provision for excess and obsolete inventories based on historical experience and expected future trends. If actual product life cycles, product demand or acceptance of new product introductions are less favorable than projected by management, additional inventory write-downs may be required, which would unfavorably affect future operating results.

Long-lived assets

We review long-lived assets which are held and used, including property and equipment, ~~and intangible assets,~~ for impairment whenever changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Such evaluations compare the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset over its expected useful life and are significantly impacted by estimates of future prices and volumes for our products, capital needs, economic trends and other factors that are inherently difficult to forecast. If the asset is considered to be impaired, we record an impairment charge equal to the amount by which the carrying value of the asset exceeds its fair value determined by either a quoted market price, if any, or a value determined by utilizing a discounted cash flow technique.

~~Table of Contents~~

~~BOVIE MEDICAL CORPORATION~~

~~MANAGEMENT'S DISCUSSION AND ANAYLSIS OF~~

~~FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued~~

Stock-based Compensation

Under our stock option plan, options to purchase common shares of the Company may be granted to key employees, officers and directors of the Company by the Board of Directors. The Company accounts for stock options in accordance with FASB ASC Topic 718-10, Compensation-Stock Compensation, with compensation expense amortized over the vesting period based on the trinomial lattice option-pricing model fair value on the grant date, which includes a number of estimates that affect the amount of our expense.

Litigation Contingencies

~~The medical device industry~~In accordance with authoritative guidance, we accrue a liability in our consolidated financial statements for these actions when a loss is ~~characterized by frequent claims~~known or considered probable and ~~litigation,~~the amount can be reasonably estimated. If the reasonable estimate of a known or probable loss is a range, and ~~we are~~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 ~~may become subject to various claims, lawsuits and proceedings~~can be reasonably estimated, the estimated loss or range of loss is

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APYX MEDICAL CORPORATION

MANAGEMENT'S DISCUSSION AND ANAYLSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued

disclosed 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~~notes to the ~~use~~consolidated financial statements. In most cases, significant judgment is required to estimate the amount and timing of ~~our J-Plasma technology. The outcomes of~~a loss to be recorded, actual results may differ from 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.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.

~~We have~~As a result of historical losses exclusive of discontinued operations and the Company’s expectation to continue to generate losses in the near future, the Company recorded a valuation allowance on the net ~~operating loss~~deferred tax asset and does not anticipate recording an income tax ~~credit carry forwards available in certain jurisdictions~~benefit related to ~~reduce future taxable income. Future~~these deferred tax ~~benefits for net operating loss and tax credit carry forwards are recognized to~~assets. The Company will reassess the ~~extent that~~ realization of ~~these benefits is considered more likely than not. This determination is based on the expectation that related operations will be sufficiently profitable or various~~deferred tax ~~business~~assets each reporting period and ~~other planning strategies will enable us to utilize the operating loss and tax credit carry forwards. We cannot be assured that we~~ will be able to ~~realize these future~~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 ~~benefits~~assets will be realizable.

We assess the financial statement impact of an uncertain tax position taken or expected to be taken on an income tax return at the largest amount that ~~future valuation allowances~~is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be ~~required. To~~recognized in the ~~extent that available evidence raises sufficient doubt about the realization of a deferred income tax asset, a valuation allowance is established.~~

~~It is our policy to provide for uncertain tax positions and the related interest and penalties based upon management’s assessment of whether a tax benefit~~financial statements unless it is more likely than not ~~to be sustained upon examination by tax authorities. To the extent that the probable tax outcome~~ of ~~these uncertain tax positions changes, such changes in estimate will impact the income tax provision in the period in which such determination~~being sustained.

The Company is made. At June 30, 2018, we believe we have appropriately accounted for any unrecognized tax positions. To the extent we prevail in matters for which a liability for an unrecognized tax benefit is established or we are required to pay amounts in excess of the liability, our effective tax rate in a given financial statement period may be affected.

~~Since inception, we have been~~ subject to ~~tax by both~~U.S. federal and state ~~taxing authorities. Until the respective statutes of limitations expire (which may be as much as 20 years while we have unused Net Operating Losses), we~~income tax examination. The Company’s 2015 through 2018 U.S. federal income tax returns are subject to examination by the Internal Revenue Service. The Company’s state income tax ~~audits in~~returns are subject to examination for the ~~jurisdictions in which we operate.~~tax years 2014 through 2018.

Inflation

Inflation has not materially impacted the operations of our Company.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements at this time.

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~~BOVIE MEDICAL CORPORATION~~

~~MANAGEMENT'S DISCUSSION AND ANAYLSIS OF~~

~~FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued~~

Recent Accounting Pronouncements

See Note 4 of the Notes to Consolidated Financial Statements.

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~~BOVIE~~APYX MEDICAL CORPORATION

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

For our disclosures about market risk, please see Part II, Item 7A., “Quantitative and Qualitative Disclosures about Market Risk,” in our Annual Report on Form 10-K for the year ended December 31, ~~2017.~~2018. We believe there have been no material changes to the information provided therein.

ITEM 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

~~We have carried out an~~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 ~~under~~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 of and with the participation of our ~~management, including our~~ Chief Executive Officer ~~(“CEO”)~~ and Chief Financial Officer, ~~(“CFO”),~~management carried out an evaluation of the effectiveness of the ~~design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended),~~Company's internal control over financial reporting as of ~~June 30, 2018.~~December 31, 2018, based on the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (2013). Based ~~upon~~on that evaluation, ~~our CEO and CFO~~management concluded that, as of December 31, 2018, the ~~end~~Company's internal control over financial reporting was not effective as a result of the material weaknesses described below.

The effectiveness of our internal control over financial reporting as of December 31, 2018 was audited by Frazier & Deeter, LLC, an independent registered public accounting firm, as stated in their report included in Part II, Item 8 of our most recent Form 10-K for the period ended December 31, 2018, contains an adverse opinion on the effectiveness of our internal control over financial reporting.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that ~~period, our disclosure~~there is a reasonable possibility that material misstatements of the Company's annual or interim financial statements will not be prevented or detected on a timely basis.

We have identified three material weaknesses: (i) an ineffective control environment due to a lack of sufficient qualified accounting personnel with an appropriate level of knowledge and experience with generally accepted accounting principles, (ii) ineffective control activities due to the lack of documentation and timeliness in executing business process controls, and (iii) ineffective monitoring controls to ascertain whether the components of internal control were present and functioning.

As of March 31, 2019, we continue our remediation efforts related to these deficiencies.

Remediation Efforts to Address Material Weaknesses

We continue to make further enhancements to our control environment by improving documentation of internal controls, guidance in the performance of those controls, communication of expectations, and emphasis on the importance of internal controls. In addition, we continue to make improvements to the level of detail in our risk assessment and clarity of the linkage between risks and internal controls.

We continue to improve upon our risk assessment procedures and the timeliness of those procedures and continue to make progress towards addressing the weaknesses in information and communication beginning the process to better identify, document, and assess information used when performing internal controls.

We also are working to further enhance our policies, procedures, and controls for all key processes, which includes the training of personnel to ensure consistent application of accounting principles and adherence to the Company’s policies, procedures, and controls. We will also be implementing enhanced monitoring procedures to allow for more effective ~~in providing reasonable assurance that (a) the information required~~monitoring of compliance.

We will continue to ~~be disclosed by~~work with third-party specialists, and we have retained a firm to assist us in our remediation efforts. We will also review, document, and (as needed) supplement our controls, with the reports that we filed or submitted under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (b) such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. Ingoal of designing and ~~evaluating~~implementing controls that not only better address both the accuracy and precision of management's review, but also enhance our ~~disclosure~~ability to manage our business.

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APYX MEDICAL CORPORATION

Management believes the steps outlined above, when fully implemented, 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 and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.over financial reporting on an ongoing basis.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rules 13(a)-15(f) and 15(d)-15(f)) during the ~~six~~three months ended ~~June 30, 2018~~March 31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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~~BOVIE~~APYX MEDICAL CORPORATION

PART II. Other Information

ITEM 1. Legal Proceedings

ITEM 1A. Risk factors

~~There have been no material changes to the risk factors previously disclosed in our Form 10-K for the year ended December 31, 2017, in response to Item 1A to Part 1 of Form 10-K.~~Not Applicable.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

ITEM 3. Defaults Upon Senior Securities

None.

ITEM 4. Mine Safety Disclosures

Not Applicable.

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APYX MEDICAL CORPORATION

ITEM 5. Other Information

None.

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~~BOVIE~~APYX MEDICAL CORPORATION

ITEM 6. Exhibits



2.1		Asset Purchase Agreement, dated as of July 9, 2018, by and between Bovie Medical Corporation and Specialty Surgical Instrumentation Inc. (Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on July 9, 2018)
3.1		Articles of Incorporation of the Registrant (Incorporated by reference to the Registrant’s report on Form 10-K/A filed on March 31, 2011)
3.2		By laws of the Registrant (Incorporated by reference to the Registrant’s ~~report~~Annual Report on Form 10-K/A filed on March 31, 2011)
3.3		Certificate of Amendment of the Certificate of Incorporation of the Registrant (Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q filed on November 3, 2017).
3.4		Certificate of Elimination (Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on May 3, 2018)
3.5		Certificate of Amendment of the Certificate of Incorporation of the Registrant (Incorporated by reference to the Registrant's Current Report of Form 8-K filed on December 28, 2018)
31.1*		Certification pursuant to Section 302 of Sarbanes-Oxley Act of 202
31.2*		Certification pursuant to Section 302 of Sarbanes-Oxley Act of 202
32.1*		Certification pursuant to Section 906 of Sarbanes-Oxley Act of 202
32.2*		Certification pursuant to Section 906 of Sarbanes-Oxley Act of 202
101.INS**		XBRL Instance Document
101.SCH**		XBRL Taxonomy Extension Schema Document
101.CAL**		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF**		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB**		XBRL Taxonomy Extension Label Linkbase Document
101.PRE**		XBRL Taxonomy Extension Label Presentation Document

* Filed herewith.

** XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended and otherwise is not subject to liability under these sections.

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~~BOVIE~~APYX MEDICAL CORPORATION

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



	~~Bovie~~Apyx Medical Corporation

Date: ~~August 1, 2018~~May 8, 2019	By:	/s/ Charles D. Goodwin II
		Charles D. Goodwin II
		President, Chief Executive Officer and Director
		(Principal Executive Officer)

Date: ~~August 1, 2018~~May 8, 2019	By:	/s/ ~~Jay D. Ewers~~Tara Semb
		~~Jay D. Ewers~~Tara Semb
		Chief Financial Officer,
		Treasurer and Secretary
		(Principal Financial Officer)

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(In thousands)	As Reported (Pre-Adoption)			ASU 2016-18 Impact		Reported (Post Adoption)
Six Months Ended June 30, 2018
Cash, cash equivalents and restricted cash, beginning of period	$	9,949		$	719	$	10,668

Six Months Ended June 30, 2017
Net change in cash, cash equivalents and restricted cash	$	(4,164	)	$	—	$	(4,164	)
Cash, cash equivalents and restricted cash, beginning of period	14,456			779		15,235
Cash, cash equivalents and restricted cash, end of period	$	10,292		$	779	$	11,071



(In thousands)	Long-term debt
2018 (remaining six months)	$	120
2019	2,454
Total	$	2,574



	Three Months Ended June 30, 2018
(In thousands)	Core		Advanced Energy			OEM		Corporate (Other)			Total
Sales	$	7,784	$	3,113		$	578	$	—		$	11,475

Income (loss) from operations	2,666		(792		)	302		(2,443		)	(267		)

Interest expense, net	—		—			—		(38		)	(38		)
Change in fair value of derivative liabilities	—		—			—		46			46
Income tax expense	—		—			—		13			13
Depreciation and amortization	—		—			—		172			172



	Three Months Ended June 30, 2017
(In thousands)	Core		Advanced Energy			OEM		Corporate (Other)			Total
Sales	$	7,488	$	1,813		$	498	$	—		$	9,799

Income (loss) from operations ⁽¹⁾	2,559		(1,284		)	205		(2,786		)	(1,306		)

Interest expense, net	—		—			—		(36		)	(36		)
Change in fair value of derivative liabilities	—		—			—		38			38
Income tax expense	—		—			—		4			4
Depreciation and amortization	—		—			—		178			178