UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period endedJune 30, 20212022
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number:0-12183
apyx-20220630_g1.jpg
APYX MEDICAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware11-2644611
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
5115 Ulmerton Road, Clearwater, FL 33760
(Address of principal executive offices, zip code)
(727) 384-2323
(Registrant’s telephone number)
Securities Registered Pursuant to Section 12 (b) of the Act:
Title of each classTrading symbol(s)Name of each exchange on which registered
Common StockAPYXNasdaq Stock Market, LLC

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

As of August 10, 2021, 34,322,749 shares2022, 34,573,034 shares of the registrant’s $0.001 par value common stock were outstanding.


Table of Contents
APYX MEDICAL CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
For the quarterly period ended June 30, 20212022

Page
Part I.
Item 1.
Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at June 30, 20212022 and December 31, 20202021
Condensed Consolidated Statements of Operations for the three and six months ended June 30, 20212022 and 20202021
Condensed Consolidated Statements of Changes in Equity for the three and six months ended June 30, 20212022 and 20202021
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 20212022 and 20202021
Item 2.
Item 3.
Item 4.
Part II.
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
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PART I.     Financial Information

ITEM 1. Condensed Consolidated Financial Statements

APYX MEDICAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
June 30, 2021
(Unaudited)
December 31, 2020
June 30, 2022
(Unaudited)
December 31, 2021
ASSETSASSETSASSETS
Current assets:Current assets:Current assets:
Cash and cash equivalentsCash and cash equivalents$34,670 $41,915 Cash and cash equivalents$20,063 $30,870 
Trade accounts receivable, net of allowance of $340 and $3008,985 8,399 
Trade accounts receivable, net of allowance of $629 and $430 Trade accounts receivable, net of allowance of $629 and $43010,340 13,038 
Income tax receivablesIncome tax receivables7,654 7,654 Income tax receivables7,642 7,642 
Other receivablesOther receivables1,386 1,275 Other receivables33 483 
Inventories, net of provision for obsolescence of $387 and $3885,272 4,051 
Inventories, net of provision for obsolescence of $360 and $263Inventories, net of provision for obsolescence of $360 and $2639,677 6,778 
Prepaid expenses and other current assetsPrepaid expenses and other current assets3,615 2,795 Prepaid expenses and other current assets2,770 1,926 
Total current assetsTotal current assets61,582 66,089 Total current assets50,525 60,737 
Property and equipment, net of accumulated depreciation and amortization of $5,120 and
$4,813
6,471 6,541 
Property and equipment, net of accumulated depreciation and amortization of $5,245 and
$5,316
Property and equipment, net of accumulated depreciation and amortization of $5,245 and
$5,316
6,842 6,575 
Operating lease right-of-use assetsOperating lease right-of-use assets182 237 Operating lease right-of-use assets659 121 
Finance lease right-of-use assetsFinance lease right-of-use assets329 437 Finance lease right-of-use assets176 178 
Other assetsOther assets1,033 807 Other assets1,269 1,110 
Total assetsTotal assets$69,597 $74,111 Total assets$59,471 $68,721 
LIABILITIES AND EQUITYLIABILITIES AND EQUITYLIABILITIES AND EQUITY
Current liabilities:Current liabilities:Current liabilities:
Accounts payableAccounts payable$2,799 $1,511 Accounts payable$2,587 $2,631 
Accrued expenses and other current liabilitiesAccrued expenses and other current liabilities7,594 7,278 Accrued expenses and other current liabilities8,570 10,287 
Current portion of operating lease liabilitiesCurrent portion of operating lease liabilities127 126 Current portion of operating lease liabilities110 122 
Current portion of finance lease liabilitiesCurrent portion of finance lease liabilities225 238 Current portion of finance lease liabilities85 165 
Total current liabilitiesTotal current liabilities10,745 9,153 Total current liabilities11,352 13,205 
Long-term operating lease liabilitiesLong-term operating lease liabilities63 129 Long-term operating lease liabilities514 — 
Long-term finance lease liabilitiesLong-term finance lease liabilities76 183 Long-term finance lease liabilities93 18 
Contract liabilities886 621 
Long-term contract liabilitiesLong-term contract liabilities1,207 1,323 
Other liabilitiesOther liabilities145 166 Other liabilities142 166 
Total liabilitiesTotal liabilities11,915 10,252 Total liabilities13,308 14,712 
EQUITYEQUITYEQUITY
Common stock, $0.001 par value; 75,000,000 shares authorized; 34,322,749 issued and outstanding as of June 30, 2021, and 34,289,222 issued and outstanding as of December 31, 202034 34 
Common stock, $0.001 par value; 75,000,000 shares authorized; 34,493,085 issued and outstanding as of June 30, 2022, and 34,409,912 issued and outstanding as of December 31, 2021Common stock, $0.001 par value; 75,000,000 shares authorized; 34,493,085 issued and outstanding as of June 30, 2022, and 34,409,912 issued and outstanding as of December 31, 202134 34 
Additional paid-in capitalAdditional paid-in capital63,650 61,066 Additional paid-in capital69,793 66,221 
(Accumulated deficit) retained earnings(6,326)2,621 
Total stockholders' equity57,35863,721
Accumulated deficitAccumulated deficit(23,922)(12,551)
Total stockholders’ equityTotal stockholders’ equity45,90553,704
Non-controlling interestNon-controlling interest324 138 Non-controlling interest258 305 
Total equityTotal equity57,682 63,859 Total equity46,163 54,009 
Total liabilities and equityTotal liabilities and equity$69,597 $74,111 Total liabilities and equity$59,471 $68,721 

The accompanying notes are an integral part of the condensed consolidated financial statements.
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APYX MEDICAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
Three Months Ended
June 30,
Six Months Ended
June 30,
Three Months Ended
June 30,
Six Months Ended
June 30,
20212020202120202022202120222021
SalesSales$11,224 $4,296 $19,862 $9,293 Sales$10,292 $11,224 $22,785 $19,862 
Cost of salesCost of sales3,690 2,202 6,468 4,215 Cost of sales3,378 3,690 7,652 6,468 
Gross profitGross profit7,534 2,094 13,394 5,078 Gross profit6,914 7,534 15,133 13,394 
Other costs and expenses:Other costs and expenses:Other costs and expenses:
Research and developmentResearch and development1,084 975 2,199 1,955 Research and development1,070 1,084 2,228 2,199 
Professional servicesProfessional services1,889 1,658 3,410 4,047 Professional services2,389 1,889 4,675 3,410 
Salaries and related costsSalaries and related costs4,343 3,439 8,588 6,750 Salaries and related costs4,892 4,343 10,073 8,588 
Selling, general and administrativeSelling, general and administrative4,261 2,189 7,985 5,985 Selling, general and administrative4,539 4,261 10,004 7,985 
Total other costs and expensesTotal other costs and expenses11,577 8,261 22,182 18,737 Total other costs and expenses12,890 11,577 26,980 22,182 
Loss from operationsLoss from operations(4,043)(6,167)(8,788)(13,659)Loss from operations(5,976)(4,043)(11,847)(8,788)
Interest incomeInterest income223 Interest income18 20 
Interest expenseInterest expense(2)(8)(6)(14)Interest expense(3)(2)(11)(6)
Other income (loss), net97 (14)412 
Total other income (loss), net99 (15)621 
Other income, netOther income, net607 97 586 
Total other income, netTotal other income, net622 99 595 
Loss before income taxesLoss before income taxes(3,944)(6,182)(8,783)(13,038)Loss before income taxes(5,354)(3,944)(11,252)(8,783)
Income tax expense (benefit)107 (1,492)173 (6,397)
Income tax expenseIncome tax expense96 107 166 173 
Net lossNet loss(4,051)(4,690)(8,956)(6,641)Net loss(5,450)(4,051)(11,418)(8,956)
Net loss attributable to non-controlling interest Net loss attributable to non-controlling interest(5)(9) Net loss attributable to non-controlling interest(24)(5)(47)(9)
Net loss attributable to stockholdersNet loss attributable to stockholders$(4,046)$(4,690)$(8,947)$(6,641)Net loss attributable to stockholders$(5,426)$(4,046)$(11,371)$(8,947)
Loss per share:Loss per share:Loss per share:
Basic and dilutedBasic and diluted$(0.12)$(0.14)$(0.26)$(0.19)Basic and diluted$(0.16)$(0.12)$(0.33)$(0.26)

The accompanying notes are an integral part of the condensed consolidated financial statements.
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APYX MEDICAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Unaudited)
(In thousands)
Three months ended June 30, 2020 and 2021
Three Months Ended June 30, 2022 and 2021Three Months Ended June 30, 2022 and 2021
Common StockAdditional Paid-In CapitalRetained Earnings (Accumulated Deficit)Non-controlling InterestTotal EquityCommon StockAdditional Paid-In CapitalAccumulated DeficitNon-controlling InterestTotal Equity
SharesPar Value
Balance at March 31, 202034,184 $34 $57,829 $12,566 $$70,429 
Stock based compensation— — 1,097 — 1,097 
Shares issued on net settlement of stock options18 — — — — 
Net loss— — — (4,690)(4,690)
Balance at June 30, 202034,202 $34 $58,926 $7,876 $$66,836 
SharesPar ValueAdditional Paid-In CapitalAccumulated DeficitNon-controlling InterestTotal Equity
Balance at March 31, 2021Balance at March 31, 202134,318 $34 $62,281 $(2,280)$134 $60,169 Balance at March 31, 202134,318 $34 
Contributions from non-controlling interestContributions from non-controlling interest— — — — 195195 Contributions from non-controlling interest— — — — 195195 
Stock based compensationStock based compensation— — 1,369 — 1,369 Stock based compensation— — 1,369 — 1,369 
Shares issued on net settlement of stock optionsShares issued on net settlement of stock options— — — — Shares issued on net settlement of stock options— — — — 
Net lossNet loss— — — (4,046)(5)(4,051)Net loss— — — (4,046)(5)(4,051)
Balance at June 30, 2021Balance at June 30, 202134,323 $34 $63,650 $(6,326)$324 $57,682 Balance at June 30, 202134,323 $34 $63,650 $(6,326)$324 $57,682 
Six months ended June 30, 2020 and 2021
Common StockAdditional Paid-In CapitalRetained Earnings (Accumulated Deficit)Non-controlling InterestTotal
SharesPar Value
Balance at December 31, 201934,170 $34 $56,708 $14,517 $$71,259 
Balance at March 31, 2022Balance at March 31, 202234,453 $34 $68,023 $(18,496)$282 $49,843 
Shares issued on stock options exercises for cashShares issued on stock options exercises for cash10 — 72 — 72 Shares issued on stock options exercises for cash20 — 56 — 56 
Stock based compensationStock based compensation— — 2,146 — 2,146 Stock based compensation— — 1,714 — 1,714 
Shares issued on net settlement of stock optionsShares issued on net settlement of stock options22 — — — — Shares issued on net settlement of stock options20 — — — — 
Net lossNet loss— — — (6,641)(6,641)Net loss— — — (5,426)(24)(5,450)
Balance at June 30, 202034,202 $34 $58,926 $7,876 $$66,836 
Balance at June 30, 2022Balance at June 30, 202234,493 $34 $69,793 $(23,922)$258 $46,163 
Six Months Ended June 30, 2022 and 2021Six Months Ended June 30, 2022 and 2021
Common StockAdditional Paid-In CapitalRetained Earnings (Accumulated Deficit)Non-controlling InterestTotal
SharesPar Value
Balance at December 31, 2020Balance at December 31, 202034,289 $34 $61,066 $2,621 $138 $63,859 Balance at December 31, 202034,289 $34 $61,066 $2,621 $138 $63,859 
Contributions from non-controlling interestContributions from non-controlling interest— — — — 195195 Contributions from non-controlling interest— — — — 195195 
Shares issued on stock options exercises for cashShares issued on stock options exercises for cash— 21 — 21 Shares issued on stock options exercises for cash— 21 — 21 
Stock based compensationStock based compensation— — 2,563 — 2,563 Stock based compensation— — 2,563 — 2,563 
Shares issued on net settlement of stock optionsShares issued on net settlement of stock options26 — — — — Shares issued on net settlement of stock options26 — — — — 
Net lossNet loss— — — (8,947)(9)(8,956)Net loss— — — (8,947)(9)(8,956)
Balance at June 30, 2021Balance at June 30, 202134,323 $34 $63,650 $(6,326)$324 $57,682 Balance at June 30, 202134,323 $34 $63,650 $(6,326)$324 $57,682 
Balance at December 31, 2021Balance at December 31, 202134,410 $34 $66,221 $(12,551)$305 $54,009 
Shares issued on stock options exercises for cashShares issued on stock options exercises for cash44 — 208 — 208 
Stock based compensationStock based compensation— — 3,364 — 3,364 
Shares issued on net settlement of stock optionsShares issued on net settlement of stock options39 — — — — 
Net lossNet loss— — — (11,371)(47)(11,418)
Balance at June 30, 2022Balance at June 30, 202234,493 $34 $69,793 $(23,922)$258 $46,163 
 



The accompanying notes are an integral part of the condensed consolidated financial statements.
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APYX MEDICAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Six Months Ended June 30,Six Months Ended June 30,
2021202020222021
Cash flows from operating activitiesCash flows from operating activitiesCash flows from operating activities
Net lossNet loss(8,956)(6,641)Net loss(11,418)(8,956)
Adjustments to reconcile net loss to net cash used in operating activities:Adjustments to reconcile net loss to net cash used in operating activities:Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortizationDepreciation and amortization440 439 Depreciation and amortization472 440 
Provision for inventory obsolescenceProvision for inventory obsolescence13 413 Provision for inventory obsolescence139 13 
Loss on disposal of property and equipmentLoss on disposal of property and equipment47 — 
Stock based compensationStock based compensation2,563 2,146 Stock based compensation3,364 2,563 
Provision for allowance for doubtful accountsProvision for allowance for doubtful accounts46 486 Provision for allowance for doubtful accounts284 46 
Changes in operating assets and liabilities:Changes in operating assets and liabilities:Changes in operating assets and liabilities:
Trade receivablesTrade receivables(656)1,195 Trade receivables2,236 (656)
Prepaid expenses and other assetsPrepaid expenses and other assets(1,160)(1,410)Prepaid expenses and other assets(549)(1,160)
Income tax receivables(6,017)
InventoriesInventories(1,198)(571)Inventories(3,187)(1,198)
Accounts payableAccounts payable1,296 (232)Accounts payable33 1,296 
Accrued and other liabilitiesAccrued and other liabilities554 (2,241)Accrued and other liabilities(1,811)554 
Net cash used in operating activitiesNet cash used in operating activities(7,058)(12,433)Net cash used in operating activities(10,390)(7,058)
Cash flows from investing activitiesCash flows from investing activitiesCash flows from investing activities
Purchases of property and equipmentPurchases of property and equipment(221)(184)Purchases of property and equipment(680)(221)
Net cash used in investing activitiesNet cash used in investing activities(221)(184)Net cash used in investing activities(680)(221)
Cash flows from financing activitiesCash flows from financing activitiesCash flows from financing activities
Proceeds from stock option exercisesProceeds from stock option exercises21 72 Proceeds from stock option exercises208 21 
Repayment of finance lease liabilitiesRepayment of finance lease liabilities(120)(120)Repayment of finance lease liabilities(108)(120)
Contributions from non-controlling interestsContributions from non-controlling interests195 Contributions from non-controlling interests— 195 
Net cash provided by (used in) financing activities96 (48)
Net cash provided by financing activitiesNet cash provided by financing activities100 96 
Effect of exchange rates on cashEffect of exchange rates on cash(62)Effect of exchange rates on cash163 (62)
Net change in cash and cash equivalentsNet change in cash and cash equivalents(7,245)(12,656)Net change in cash and cash equivalents(10,807)(7,245)
Cash and cash equivalents, beginning of periodCash and cash equivalents, beginning of period41,915 58,812 Cash and cash equivalents, beginning of period30,870 41,915 
Cash and cash equivalents, end of periodCash and cash equivalents, end of period$34,670 $46,156 Cash and cash equivalents, end of period$20,063 $34,670 
Cash paid for:Cash paid for:Cash paid for:
InterestInterest$$Interest$11 $
Income taxesIncome taxes13 54 Income taxes13 
Non cash activities:Non cash activities:
Right-of-use assets capitalized and operating lease liabilities recognized upon lease modificationRight-of-use assets capitalized and operating lease liabilities recognized upon lease modification$600 $— 
Right-of-use assets capitalized and finance lease liabilities recognized upon execution of leaseRight-of-use assets capitalized and finance lease liabilities recognized upon execution of lease$103 $— 

The accompanying notes are an integral part of the condensed consolidated financial statements.
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APYX MEDICAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 1.     BASIS OF PRESENTATION

ApyxApyx Medical Corporation (“Company"Company”, "Apyx"“Apyx”, "it"“it” and similar terms) 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.

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

The Company is subject to risksOn March 14, 2022, the U.S. Food and uncertainties asDrug Administration (“FDA”) posted a resultSafety Communication that warns consumers and health care providers against the use of the COVID-19 pandemicCompany’s Advanced Energy products outside of their FDA-cleared indications for general use in cutting, coagulation, and ablation of soft tissue during open and laparoscopic surgical procedures. Following the Safety Communication, the Company experienced slowed demand for the adoption of its impact onHelium Plasma Technology.

On May 26, 2022, the level of economic activity aroundCompany announced that it had received 510(k) clearance from the world. The extentFDA for the use of the impactRenuvion® Dermal Handpiece for specific dermal resurfacing procedures. On July 18, 2022, the Company announced that it had received 510(k) clearance from the FDA for the use of the pandemic onRenuvion® APR Handpiece for certain skin contraction procedures. Management believes that receiving these clearances should materially mitigate the Company's business is highly uncertainfinancial effects of the Safety Communication in future periods.

On June 2, 2022, and difficultJuly 21, 2022, FDA updated the Medical Device Safety Communication to predict, asrecognize the responsesnew 510(k) clearances for the Renuvion® Dermal handpiece, and information relatedthe expanded indications for the Renuvion® APR handpieces. The 510(k) clearance for the Renuvion® Dermal handpiece allows surgeons to it continueperform dermal resurfacing procedures for the treatment of moderate to change. As elective surgery cases usingsevere wrinkles and rhytides, limited to patients with Fitzpatrick Skin Types I, II or III. The 510(k) clearance for the Company’s Helium Plasma Technology have started to increase again, it is unknown whether these trends will continue. The full extent to whichRenuvion® APR handpieces now addresses improving the COVID-19 pandemic may materiallyappearance of lax (loose) skin in the neck and adversely impact the Company’s future financial position, liquidity, or results of operations remains uncertain.submental region.

The accompanying unaudited condensed consolidated financial statements have been prepared based upon SEC rules that permit reduced disclosure for interim periods. For a more complete discussion of significant accounting policies and certain other information, please refer to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2020. These2021. In the opinion of management these condensed consolidated financial statements reflect all adjustments that are necessary for a fair presentation of results of consolidated operations and financial condition for the interim periods shown, including normal recurring accruals and other items. The results for the interim periods are not necessarily indicative of results for the full year.

Reclassifications

We have reclassified certain amounts presented in the prior yearperiod to conform to the current yearperiod presentation. These reclassifications had no impact on previously reported net income,loss, retained earnings or net cash used in operating cash flowsactivities for the periods presented.



NOTE 2.     RECENT ACCOUNTING PRONOUNCEMENTS

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments—Credit Losses (Topic 326). The update changes the impairment model for most financial assets and certain other instruments, including trade and other receivables, contract assets, held-to-maturity debt securities and loans, and requires entities to use a new forward-looking expected loss model that will result in the earlier recognition of allowance for losses. This update, as originally issued, was effective for annual and interim periods beginning after December 15, 2019, with early adoption permitted. In November 2019, the FASB issued ASU 2019-10, Financial Instruments - Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842) Effective Dates, which deferred the effective dates of these standards for Smaller Reporting Companies until fiscal years beginning after December 15, 2022. The Company currently expects to continue to qualify as a Smaller Reporting Company, based upon the current SEC definition, and as a result, will be
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APYX MEDICAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)


utilizing the deferred elective date. While we are in the process of determining the effects of the adoption of the standard on the condensed consolidated financial statements, we do not expect the impact to be material.

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




NOTE 3.     DISPOSAL OF BUSINESS

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

In connection with the Asset Purchase Agreement, the Company entered into an Electro Surgical Disposables and Accessories, Cauteries and Other Products Supply Agreement with Symmetry for a four-year term, whereby it will manufacture certain Core products and sell them to Symmetry at agreed upon prices. Any activity resulting from this agreement is netted and reported in the Condensed Consolidated Statements of Operations as other income (loss). Core activity for the three months ended June 30, 2022, amounted to $0.0 million with cost of sales equivalents of $0.0 million and other related expenses of $0.1 million for approximately no net other income (loss). Core activity for the three months ended June 30, 2021, amounted to $2.2 million with cost of sales equivalents of $1.8 million and related other related expenses of $0.3 million for net other income of $0.1 million. Core activity for the threesix months ended June 30, 2020,2022, amounted to $2.7$0.6 million with cost of sales equivalents of $2.3$0.5 million and other related other expenses of $0.4$0.1 million for approximately 0 net other income.loss of $0.1 million. Core activity for the six months ended June 30, 2021, amounted to $3.6 million with cost of sales equivalents of $3.0 million and net other related operating expenses of $0.6 million for approximately 0no net other income. Core activity for the six months ended June 30, 2020, amounted to $5.2 million with cost of sales equivalents of $4.6 million and net other related operating expenses of $0.2 million for net other income of $0.4 million.



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


NOTE 4.     INVENTORIES

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

Inventories consisted of the following:
(In thousands)(In thousands)June 30,
2021
December 31,
2020
(In thousands)June 30,
2022
December 31,
2021
Raw materialsRaw materials$3,226 $2,243 Raw materials$4,547 $3,603 
Work in processWork in process1,167 1,109 Work in process2,192 1,441 
Finished goodsFinished goods1,266 1,087 Finished goods3,298 1,997 
Gross inventoriesGross inventories5,659 4,439 Gross inventories10,037 7,041 
Less: provision for obsolescenceLess: provision for obsolescence(387)(388)Less: provision for obsolescence(360)(263)
Inventories, netInventories, net$5,272 $4,051 Inventories, net$9,677 $6,778 

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





NOTE 5.     LEASES

Operating Leases

The Company leases its facility in Sofia, Bulgaria and vehicles in Clearwater, Florida under non-cancelable operating lease agreements. During the three months ended June 30, 2022, the Company entered into a five year extension of its Sofia, Bulgaria facility. These operating leases have terms expiring through December 2027.

Finance Leases

The Company has entered into non-cancelable finance leases for certain computer equipment and a vehicle in Clearwater, Florida. During the three months ended June 30, 2022, the Company entered into a 63 month lease for computer equipment. These finance leases have terms expiring through July 2027.

Information about the Company’s weighted average remaining lease terms and discount rate assumptions are as follows:
June 30, 2022December 31, 2021
OperatingFinanceOperatingFinance
Weighted average remaining lease term (in years)5.53.21.00.8
Weighted average discount rate1.83%3.04%3.98%4.00%

Maturities of lease liabilities as of June 30, 2022 are as follows:
(In thousands)OperatingFinance
2022$61 $70 
2023119 40 
2024119 21 
2025119 21 
2026119 21 
Thereafter119 12 
Total lease payments656 185 
Less imputed interest(32)(7)
Present value of lease liabilities624 178 
Less current portion of lease liabilities(110)(85)
Long-term portion of lease liabilities$514 $93 


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NOTE 5.6.     ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities consisted of the following:
(in thousands)(in thousands)June 30,
2021
December 31,
2020
(in thousands)June 30,
2022
December 31,
2021
Accrued payrollAccrued payroll$1,016 $808 Accrued payroll$621 $546 
Accrued bonusesAccrued bonuses996 811 Accrued bonuses802 2,117 
Accrued commissionsAccrued commissions730 1,001 Accrued commissions1,074 1,656 
Accrued product warrantiesAccrued product warranties527 498 Accrued product warranties611 593 
Accrued product liability claim insurance deductiblesAccrued product liability claim insurance deductibles405 435 Accrued product liability claim insurance deductibles597 610 
Accrued professional fees357 222 
Accrued professional fees and legal related contingent liabilitiesAccrued professional fees and legal related contingent liabilities1,091 421 
Joint and several payroll liabilityJoint and several payroll liability1,027 1,027 Joint and several payroll liability405 1,027 
Short-term contract liabilitiesShort-term contract liabilities821 533 
Uncertain tax positionsUncertain tax positions1,758 1,658 Uncertain tax positions1,970 1,863 
Sales tax payableSales tax payable173 591 Sales tax payable143 428 
Other accrued expenses and current liabilitiesOther accrued expenses and current liabilities605 227 Other accrued expenses and current liabilities435 493 
Total accrued expenses and other current liabilitiesTotal accrued expenses and other current liabilities$7,594 $7,278 Total accrued expenses and other current liabilities$8,570 $10,287 

During April 2022, the Company was relieved of approximately $650,000 of its joint and several payroll liability due to the lapse of the statute of limitations on the liability. This adjustment is included in other income, net for the three and six months ended June 30, 2022.


NOTE 6.7.     CHINA JOINT VENTURE

In 2019, the Company executed a joint venture agreement with its Chinese supplier ("China JV"(the “China JV”) whereby the Company has a 51% interestinterest. The China JV has been consolidated in the China JV.these condensed consolidated financial statements. The agreement required the Company to make capital contributions into the newly formed entity of approximately $357,000, of which approximately $203,000 and $154,000, respectively, were contributed during the three months ended June 30, 2021 and the year endedhad been fully funded as of December 31, 2020.2021. As of the date of these condensed consolidated financial statements, the joint ventureChina JV has not commenced principal operations.

Changes in the Company'sCompanys investment in the China JV were as follows:

Three Months Ended June 30,Six Months Ended
June 30,
(In thousands)2022202120222021
Beginning interest in China JV$294 $140 $317 $144 
Contributions$— $203 $— $203 
Net loss attributable to Apyx$(25)$(5)$(48)$(9)
Ending interest in China JV$269 $338 $269 $338 
8
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(In thousands)Three Months Ended
June 30, 2021
Six Months Ended
June 30, 2021
Beginning interest in China JV$140 $144 
Contributions203 203 
Net loss attributable to Apyx(5)(9)
Ending interest in China JV$338 $338 

NOTE 7.8.     EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per share (“basic EPS”) is computed by dividing the net income or loss by the weighted average number of common shares outstanding for the reporting period. Diluted earnings (loss) per share (“diluted EPS”) gives effect to all dilutive potential shares outstanding. As the Company is in a net loss position for all periods presented, all potential shares outstanding are anti-dilutive. The following table provides the computation of basic and diluted loss per share.
Three Months Ended
June 30,
Six Months Ended
June 30,
Three Months Ended
June 30,
Six Months Ended
June 30,
(in thousands, except per share data)(in thousands, except per share data)2021202020212020(in thousands, except per share data)2022202120222021
Numerator:Numerator:Numerator:
Net loss attributable to stockholdersNet loss attributable to stockholders$(4,046)$(4,690)$(8,947)$(6,641)Net loss attributable to stockholders$(5,426)$(4,046)$(11,371)$(8,947)
Denominator:Denominator:Denominator:
Weighted average shares outstanding - basic and diluted
Weighted average shares outstanding - basic and diluted
34,321 34,186 34,312 34,181 Weighted average shares outstanding - basic and diluted
34,464 34,321 34,447 34,312 
Loss per share:Loss per share:Loss per share:
Basic and dilutedBasic and diluted$(0.12)$(0.14)$(0.26)$(0.19)Basic and diluted$(0.16)$(0.12)$(0.33)$(0.26)
Anti-dilutive instruments excluded from diluted loss per common share:Anti-dilutive instruments excluded from diluted loss per common share:Anti-dilutive instruments excluded from diluted loss per common share:
OptionsOptions5,561 4,986 5,561 4,986 Options6,679 5,561 6,679 5,561 

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NOTE 8.9.     STOCK-BASED COMPENSATION

Under the Company'sCompany’s stock option plans, the boardBoard of directorsDirectors may grant restricted stock and options to purchase common shares to the Company's employees, officers, directors and consultants. The Company accounts for stock options in accordance with FASB ASC Topic 718, Compensation - Stock Compensation, with stock-based compensation expense recognized over the vesting period based on the fair value on the grant date utilizing the Black ScholesBlack-Scholes model, which includes a number of estimates that affect the grant date fair value and the amount of expense to recognize.

The Company recognized approximately $1,369,000$1,714,000 and $2,563,000,$3,364,000, respectively, in stock-based compensation expense during the three and six months ended June 30, 2021,2022, as compared with $1,097,000$1,369,000 and $2,146,000,$2,563,000, respectively, for the three and six months ended June 30, 2020.2021.

Stock option activity is summarized as follows:
Number of optionsWeighted average exercise priceNumber of optionsWeighted average exercise price
Outstanding at December 31, 20204,938,943 $5.46 
Outstanding at December 31, 2021Outstanding at December 31, 20215,397,691 $5.95 
GrantedGranted775,980 9.32 Granted1,478,419 10.96 
ExercisedExercised(55,582)4.56 Exercised(119,840)4.46 
Canceled and forfeitedCanceled and forfeited(98,635)8.05 Canceled and forfeited(76,997)9.81 
Outstanding at June 30, 20215,560,706 $5.96 
Outstanding at June 30, 2022Outstanding at June 30, 20226,679,273 $7.04 

The Company allows stock option holders to exercise stock-based awards by surrendering stock-based awards with an intrinsic value equal to the cumulative exercise price of the stock-based awards being exercised, referred to as net settlements. These surrenders are included in stock options exercised in the options rollforward above. For the three months ended June 30, 20212022 and 2020,2021, respectively, we received 6,61414,013 and 11,0856,614 options as payment in the exercise of 4,88619,987 and 17,6654,886 options. For the six months ended June 30, 20212022 and 2020,2021, respectively, we received 22,05536,667 and 13,00922,055 options as payment in the exercise of 26,02739,000 and 22,02726,027 options.

Common shares required to be issued upon the exercise of stock options would be issued from authorized and unissued shares. The Company calculated the grant date fair value of options granted in 2021 ("2021 Grants"2022 (“2022 Grants”) utilizing a Black Scholes model with an expected life calculated via the simplified method.Black-Scholes model.
2021 Grants
Strike price$9.29-$9.55
Risk-free rate0.6%-0.8%
Expected dividend yield0
Expected volatility70.7%-70.8%
Expected term (in years)4.5-6
2022 Grants
Strike price$10.96
Risk-free rate1.6%
Expected dividend yield
Expected volatility69.6%
Expected term (in years)6


NOTE 9.10.     INCOME TAXES

On March 27, 2020,Income tax expense was approximately $96,000 and $107,000 with effective tax rates of (1.8)% and (2.7)% for the U.S. government enactedthree months ended June 30, 2022 and 2021, respectively. Income tax expense was approximately $166,000 and $173,000 with effective tax rates of (1.5)% and (2.0)% for the CARES Act to provide relief from COVID-19. The CARES Act includes a provision that allows companies to carryback net operating losses (NOL’s) generated in the period 2018 through 2020 to prior years. In conjunction with the disposition of the Core business in 2018, the Company generated a significant amount of taxable income in 2018. Subsequently, the Company generated net losses in 2019six months ended June 30, 2022 and 2020. For the net losses generated in 2019, the Company previously recorded a full valuation allowance on the deferred tax assets associated with its NOL carryforwards due to realization of the NOL not being probable under then existing tax law. The CARES Act makes these assets realizable and, as of the date of the CARES Act, the Company has recognized an income tax benefit of approximately $3.7 million associated with the release of the valuation allowance on its Federal NOL carryforward related to 2019.2021, respectively. For the three and six months ended June 30, 2020,2022 and 2021, the Company also recognized incomeeffective rates differ from the statutory rate primarily due to the full valuation allowance recorded on the net operating loss (“NOL���) generated during the period, combined with interest and penalties on uncertain tax benefits of approximately $1.5 million and $6.4 million, respectively, related to losses before income taxes.positions.

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Income tax expense (benefit) was approximately $107,000 and $(1,492,000) with effective tax rates of (2.7)% and 24.1% for the three months ended June 30, 2021 and 2020, respectively. Income tax expense (benefit) was approximately $173,000 and $(6,397,000) with effective tax rates of (2.0)% and 49.1% for the six months ended June 30, 2021 and 2020, respectively. For the three and six months ended June 30, 2021, the effective rates differ from the statutory rate primarily due to the full valuation allowance recorded on the NOL generated during the period, combined with interest and penalties on uncertain tax positions. For the six months ended June 30, 2020, the effective rate differs from the statutory rate primarily due to the release of the valuation allowance on the NOL carryforward from 2019.

The Company has gross unrecognized tax benefits of approximately $1,313,000 at June 30, 2021.2022. It recognized accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes in the condensed consolidated financial statements. As of June 30, 2021,2022, the Company had approximately $445,000$657,000 in accrued interest and penalties related to unrecognized tax benefits. Included in the income tax expense (benefit) for the three months ended June 30, 20212022 and 2020,2021, respectively, are approximately $51,000$53,000 and $43,000$51,000 of interest and penalties on the Company's uncertain tax positions. Included in the income tax expense (benefit) for the six months ended June 30, 20212022 and 2020,2021, respectively, are approximately $99,000$105,000 and $86,000$99,000 of interest and penalties on the Company's uncertain tax positions.Ifpositions. If the Company were to prevail on all uncertain tax positions, the resulting impact will be material as the Company will recognize approximately $1,758,000$1,970,000 of income tax benefits in the consolidated statement of operations. During June 2022, the Company was notified by the Internal Revenue Service (“IRS”) that it is examining the Company’s 2018, 2019 and 2020 federal income tax returns. The examination is expected to be completed no later than May 2023. It is expected that all of the uncertain tax positions should be resolved by October 2022.with the completion of the IRS examination.


NOTE 10.11.     COMMITMENTS AND CONTINGENCIES

Litigation

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

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

During December 2021, the Company provided notice of contract termination to an international distributor of the Company. In March 2022, the Company received a letter from the former distributor citing improper contract termination and alleging damages. While the matter is still in the early stages, management has determined that a loss is probable and that a range of estimated losses is approximately $250,000 to $1,000,000. The Company has recorded an estimated loss of $250,000 in professional services in the accompanying Condensed Consolidated Statement of Operations for the six months ended June 30, 2022. It is at least possible that a change in the actual amount of loss will occur in the near term, though management expects the actual amount of loss will be within the estimated range of losses.

In addition, as previously disclosed with the U.S. Securities and Exchange Commission on the Company’s Current Report on Form 8-K filed June 7, 2022, on June 6, 2022, a complaint (the “Complaint”) was filed in the United States District Court for the Middle District of Florida by plaintiff William E. Hattaway, individually and on behalf of all others similarly situated against the Company, Charles D. Goodwin (“Goodwin”), the Company’s President and Chief Executive Officer and a member of the Company’s Board of Directors, and Tara Semb (“Semb”), the Company’s Chief Financial Officer, Treasurer and Secretary, alleging violations by the Company, Goodwin and Semb 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 and disclosures concerning the off-label usage of certain of the Company’s Advanced Energy products and the impact such usage would have on the Company’s business, operations and prospects. 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 without merit. The Company, Goodwin and Semb intend to defend themselves vigorously in the suit. In the opinion of management, such claims are adequately covered by insurance, however, in the event that damages exceed the aggregate coverage limits of our policy or if our insurance carriers disclaim coverage, we believe it is possible that costs associated with this claim could have a material adverse impact on our consolidated results of operations, financial
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position or cash flows. While the matter is still in the early stages, management has determined that a loss is probable and that a range of estimated losses is approximately $475,000 to $2,500,000. The Company has recorded an estimated loss of $475,000 in professional services in the accompanying Condensed Consolidated Statement of Operations for the three and six months ended June 30, 2022. It is at least possible that a change in the actual amount of loss will occur in the near term, though management expects the actual amount of loss will be within the estimated range of losses.

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

Purchase Commitments

At June 30, 2021,2022, the Company had purchase commitments totaling approximately $2.3$5.6 million, substantially all of which is expected to be purchased within the next sixeighteen months.

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NOTE 11.12.     RELATED PARTY TRANSACTIONS

Several relatives of Nikolay Shilev, Apyx Bulgaria’s Managing Director, are considered related parties. Teodora Shileva, Mr. Shilev’s spouse, is an employee of the Company working in the accounting department. Antoaneta Dimitrova Shileva-Toromanova, Mr. Shilev’s sister, is the manager of human resources. Svetoslav Shilev, Mr. Shilev’s son, is a quality manager in the quality assurance department.

The partner in the Company's China joint venture is also a supplier to the Company. For the three months ended June 30, 20212022 and 2020,2021, the Company made purchases from this supplier of approximately $529,000$143,000 and $264,000,$529,000, respectively. For the six months ended June 30, 20212022 and 2020,2021, the Company made purchases from this supplier of approximately $646,000$370,000 and $850,000,$646,000, respectively. At June 30, 20212022 and December 31, 2020,2021, respectively, the Company owed this supplier approximately $75,000$99,000 and $38,000.$1,000.

NOTE 12.13.     GEOGRAPHIC AND SEGMENT INFORMATION

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

The Company'sCompanys reportable segments are disclosed as principally organized and managed as 2 operating segments: Advanced Energy and OEM. "CorporateCorporate & Other"Other includes certain unallocated corporate and administrative costs which were not specifically attributed to any reportable segment. The OEM segment is primarily development and manufacturing contract and product driven, all related expenses are recorded as cost of sales, therefore no segment specific operating expenses are incurred.

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


Three Months Ended June 30, 2021Three Months Ended June 30, 2022
(In thousands)(In thousands)Advanced EnergyOEMCorporate & OtherTotal(In thousands)Advanced EnergyOEMCorporate & OtherTotal
SalesSales$9,978 $1,246 $$11,224 Sales$8,364 $1,928 $— $10,292 
Income (loss) from operationsIncome (loss) from operations326 263 (4,632)(4,043)Income (loss) from operations(1,252)469 (5,193)(5,976)
Interest incomeInterest incomeInterest income— — 18 18 
Interest expenseInterest expense(2)(2)Interest expense— — (3)(3)
Other income, netOther income, net97 97 Other income, net— — 607 607 
Income tax expenseIncome tax expense107 107 Income tax expense— — 96 96 

Three Months Ended June 30, 2020Three Months Ended June 30, 2021
(In thousands)(In thousands)Advanced EnergyOEMCorporate & OtherTotal(In thousands)Advanced EnergyOEMCorporate & OtherTotal
SalesSales$2,867 $1,429 $$4,296 Sales$9,978 $1,246 $— $11,224 
Income (loss) from operationsIncome (loss) from operations(3,292)584 (3,459)(6,167)Income (loss) from operations326 263 (4,632)(4,043)
Interest incomeInterest incomeInterest income— — 
Interest expenseInterest expense(8)(8)Interest expense— — (2)(2)
Other loss, net(14)(14)
Other income, netOther income, net— — 97 97 
Income tax benefit(1,492)(1,492)
Income tax expenseIncome tax expense— — 107 107 

Six Months Ended June 30, 2021Six Months Ended June 30, 2022
(In thousands)(In thousands)Advanced EnergyOEMCorporate & OtherTotal(In thousands)Advanced EnergyOEMCorporate & OtherTotal
SalesSales$17,638 $2,224 $$19,862 Sales$19,178 $3,607 $— $22,785 
Income (loss) from operationsIncome (loss) from operations(276)260 (8,772)(8,788)Income (loss) from operations(2,591)786 (10,042)(11,847)
Interest incomeInterest incomeInterest income— — 20 20 
Interest expenseInterest expense(6)(6)Interest expense— — (11)(11)
Other income, netOther income, netOther income, net— — 586 586 
Income tax expenseIncome tax expense173 173 Income tax expense— — 166 166 
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Six Months Ended June 30, 2020Six Months Ended June 30, 2021
(In thousands)(In thousands)Advanced EnergyOEMCorporate & OtherTotal(In thousands)Advanced EnergyOEMCorporate & OtherTotal
SalesSales$6,853 $2,440 $$9,293 Sales$17,638 $2,224 $— $19,862 
Income (loss) from operationsIncome (loss) from operations(7,276)831 (7,214)(13,659)Income (loss) from operations(276)260 (8,772)(8,788)
Interest incomeInterest income223 223 Interest income— — 
Interest expenseInterest expense(14)(14)Interest expense— — (6)(6)
Other income, netOther income, net412 412 Other income, net— — 
Income tax benefit(6,397)(6,397)
Income tax expenseIncome tax expense— — 173 173 


International sales represented approximately 22.8% and 32.0% of total revenues for the three and six months ended June 30, 2022, respectively, as compared with approximately 34.2% and 34.8% of total revenues for the three and six months ended June 30, 2021, respectively, as compared with approximately 21.0% and 24.6% of total revenues for the three and six months ended June 30, 2020, respectively.

Revenue by geographic region, based on the customer's “ship to” location on the invoice, are as follows:
Three Months Ended
June 30,
Six Months Ended
June 30,
Three Months Ended
June 30,
Six Months Ended
June 30,
(In thousands)(In thousands)2021202020212020(In thousands)2022202120222021
Sales by Domestic and InternationalSales by Domestic and InternationalSales by Domestic and International
DomesticDomestic$7,383 $3,393 $12,949 $7,011 Domestic$7,947 $7,383 $15,495 $12,949 
InternationalInternational3,841 903 6,913 2,282 International2,345 3,841 7,290 6,913 
TotalTotal$11,224 $4,296 $19,862 $9,293 Total$10,292 $11,224 $22,785 $19,862 

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


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

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

Executive Level Overview

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

On March 14, 2022, the U.S. Food and Drug Administration (“FDA”) posted a Safety Communication that warns consumers and health care providers against the use of our Advanced Energy products outside of their FDA-cleared indications for general use in cutting, coagulation, and ablation of soft tissue during open and laparoscopic surgical procedures. Following the Safety Communication, we experienced slowed demand for the adoption of our Helium Plasma Technology.

On May 26, 2022, we announced that we received 510(k) clearance from the FDA for the use of the Renuvion Dermal Handpiece for specific dermal resurfacing procedures. On July 18, 2022, we announced that we received 510(k) clearance from the FDA for the use of the Renuvion® APR Handpiece for certain skin contraction procedures. We believe that receiving these clearances should materially mitigate the financial effects of the Safety Communication in future periods.

On June 2, 2022, and July 21, 2022, FDA updated the Medical Device Safety Communication to recognize the new 510(k) clearances for the Renuvion® Dermal handpiece, and the expanded indications for the Renuvion® APR handpieces. The 510(k) clearance for the Renuvion® Dermal handpiece allows surgeons to perform dermal resurfacing procedures for the treatment of moderate to severe wrinkles and rhytides, limited to patients with Fitzpatrick Skin Types I, II or III. The 510(k) clearance for the Renuvion® APR handpieces now addresses improving the appearance of lax (loose) skin in the neck and submental region.

We continue to drive sales in our Advanced Energy business by increasing the adoption and utilization of our handpieces by surgeons in the U.S. cosmetic surgery market and fulfilling demand from distributors in our international markets. Management estimates that our products have been sold in more than 60 countries. As of June 30, 2021, 2022, we had a direct sales force of 3135 field-based selling professionals and utilized 2 independent sales agencies. We also had 5 sales managers. This selling organization is focused on the use of Renuvion® and J-Plasma® in the cosmetic surgery market.and hospital surgical markets, supported by our global medical affairs team. This global team of clinical support specialists focuses on supporting our users to ensure optimal outcomes for their patients. In addition, we have invested in both in-person and virtual training programs and marketing-related activities to support accelerated adoption of Renuvion® into physicians'surgeons' practices.

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

Our reportable segments are disclosed as principally organized and managed as two operating segments: Advanced Energy and OEM. "CorporateCorporate & Other"Other includes certain unallocated corporate and administrative costs which are not specifically attributed to any reportable segment. The OEM segment is primarily development and manufacturing contract and product driven, and all related expenses are recorded as cost of sales, therefore no segment specific operating expenses are incurred.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued


In response to the global supply chain instability and inflationary cost increases, we continue to take action to minimize, as much as possible, any potential adverse impacts by working closely with our suppliers to closely monitor the availability of raw material components (i.e. semiconductors and plastics), lead times, and freight carrier availability.We expect global supply chain instability will continue to have an impact on our business, but to date that has not been material to our financial performance. The consequences of the pandemic, global supply chain instability and inflationary cost increases and their adverse impact to the global economy, continue to evolve. Accordingly, the significance of the future impact to our business and financial statements remains subject to significant uncertainty.

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

Impact of COVID-19

As discussed in our Annual Report on Form 10-K for the year ended December 31, 2020 ("2020 Form 10-K"), an outbreak of a novel strain of the coronavirus, COVID-19, was identified in China and subsequently recognized as a pandemic by the World Health Organization. While the situation shows signs of improvement in certain countries, the COVID-19 outbreak generally continues to severely restrict the level of economic activity around the world. In response to the COVID-19 outbreak the governments of many countries, states, cities and other geographic regions have taken preventative or protective actions, such as imposing restrictions on travel and business operations and advising or requiring individuals to limit or forego their time outside of their homes. Temporary closures of businesses in some jurisdictions were ordered, and numerous other businesses closed permanently. Many other businesses continue to be operated at reduced capacity.

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As vaccines have become more available, the number of COVID-19 cases has declined in the United States and various other countries, and economic conditions have improved. However, uncertainty remains regarding the extent, timing, and duration of the pandemic, including the extent to which the availability of these vaccines will positively impact public health conditions and whether new, potentially more contagious variants may pose additional public health risks. The pandemic continues to cause uncertainty and potential economic volatility, including with regard to the pandemic’s various and unpredictable impacts on our customers and our business.

Any future significant reductions in business-related activities could result in further loss of sales and profits and other material adverse effects. The extent of the impact of COVID-19 on our business, financial results, liquidity and cash flows will depend largely on future developments, including new information that may emerge concerning actions taken to contain or prevent further spread of the virus, or its newly forming variants, within the U.S. and the related impact on consumer confidence and spending, all of which are highly uncertain and cannot be predicted.

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

We were pleased to see overall improvements in our Advanced Energy business trends starting in the latter half of 2020, and continued to see improvements in the first half of 2021 in utilization based global demand for our handpieces and adoption of our generator technology. Demand trends, however, for generator adoption continue to remain in varying stages of recovery in the markets we serve. Although the timing of a return to a more normalized economic environment remains uncertain, we remain optimistic with respect to the continued recovery of the cosmetic and plastic surgery market, and the utilization and adoption of our products globally.

We source the components used in our products from a variety of suppliers and we have collaborative arrangements with three key foreign suppliers. At this time our suppliers have experienced no significant production disruptions as a result of COVID-19. However, we have started to experience longer lead times and increased delays in our deliveries from these suppliers as a result of the availability of shipping from third party freight carriers. While we continue to monitor these delays, they have not, to date, had a significant impact on our manufacturing operations, but have resulted in increased inbound shipping costs and the necessity to increase levels of our key raw material component inventories..

We continue to closely monitor developments related to COVID-19 that may impact our operations and financial performance, and continue our efforts to support our employees and customers in the following areas:

Protecting the Health and Safety of our Employees: To reduce the risk to our employees and their families to potential exposure to COVID-19, we have required that all non-essential employees work remotely until further notice. We also split the shifts of our manufacturing personnel to allow for adequate social distancing, and require all personnel to utilize personal protective equipment while on site at our facilities. We also significantly reduced business travel and outside access to our facilities.
Maintaining Engagement of or Sales Team and Our Customers: In addition to the initiatives we put in place to protect health and safety for all employees, we focused our direct sales team on remaining in close contact with their existing surgeon customers to do everything they can to provide them with support during this difficult time. With this goal in mind, we implemented additional training for our sales reps in order to sharpen their ability to engage with our customers virtually. In addition to engaging with existing customers via virtual methods, our sales representatives also continued to target and reach out to prospective customers, and outside the U.S., we continued to monitor the activities of our distributor partners and helped them navigate the challenges they faced as a result of the slower demand they have seen in their respective countries.
Operating Expenses: Given the uncertainty surrounding the impacts that COVID-19 could have on our business, we took preemptive steps to curtail spending, including implementing hiring restrictions,reducing discretionary spending, reducing capital expenditures, and delaying certain R&D projects and clinical research studies. Taking into account the early signs of improving economic environment and conditions related to COVID-19, we have started to ease these measures in certain areas. However, we will continue to monitor any future developments related to the pandemic and may reinstate them if necessary.
Governmental Policy: On March 27, 2020, the U.S. government enacted the CARES Act to provide relief from COVID-19. We have taken advantage of certain provisions of the CARES Act which are applicable to us, including
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utilizing net operating loss (NOL) carryback provisions. Utilizing these provisions significantly mitigated the working capital impact COVID-19 has had on our sales and operations.


Results of Operations

Sales
Three Months Ended
June 30,
Six Months Ended
June 30,
Three Months Ended
June 30,
Six Months Ended
June 30,
(In thousands)(In thousands)20212020Change20212020Change(In thousands)20222021Change20222021Change
Sales by Reportable SegmentSales by Reportable SegmentSales by Reportable Segment
Advanced EnergyAdvanced Energy$9,978 $2,867 248.0 %$17,638 $6,853 157.4 %Advanced Energy$8,364 $9,978 (16.2)%$19,178 $17,638 8.7 %
OEMOEM1,246 1,429 (12.8)%2,224 2,440 (8.8)%OEM1,928 1,246 54.7 %3,607 2,224 62.2 %
TotalTotal$11,224 $4,296 161.3 %$19,862 $9,293 113.7 %Total$10,292 $11,224 (8.3)%$22,785 $19,862 14.7 %
(632,000)(632,000)
Sales by Domestic and InternationalSales by Domestic and InternationalSales by Domestic and International
DomesticDomestic$7,383 $3,393 117.6 %$12,949 $7,011 84.7 %Domestic$7,947 $7,383 7.6 %$15,495 $12,949 19.7 %
InternationalInternational3,841 903 325.4 %6,913 2,282 202.9 %International2,345 3,841 (38.9)%7,290 6,913 5.5 %
TotalTotal$11,224 $4,296 161.3 %$19,862 $9,293 113.7 %Total$10,292 $11,224 (8.3)%$22,785 $19,862 14.7 %

Total revenue decreased by 8.3%, or approximately $(0.9) million, for the three months ended June 30, 2022 when compared with the three months ended June 30, 2021. Advanced Energy segment sales decreased 16.2%, or approximately $(1.6) million, for the three months ended June 30, 2022 when compared with the three months ended June 30, 2021. The Advanced Energy sales decrease is due to global decreases in utilization based demand for our handpieces and the adoption of our generator technology following the FDA Safety Communication on March 14, 2022. OEM segment sales increased 54.7%, or approximately $0.7 million, for the three months ended June 30, 2022 when compared with the three months ended June 30, 2021. The increase in OEM sales was due to increases in sales volume to existing customers, including Symmetry Surgical, under our 10-year generator manufacturing and supply agreement, as well as incremental new sales upon the commencement of the supply arrangement related to the completion of the development portion of some of our OEM development agreements.

Total revenue increased by 161.3% and 113.7%14.7%, or approximately $6.9 million and $10.6$2.9 million, for the three and six months ended June 30, 20212022 when compared with the three and six months ended June 30, 2020.2021. Advanced Energy segment sales increased 248.0% and 157.4%8.7%, or approximately $7.1$1.5 million and $10.8 million,, for the three and six months ended June 30, 2022 when compared with the six months ended June 30, 2021 when compared with the three and six months ended June 30, 2020. In the first half of 2021, we saw increased. The Advanced Energy sales increase was driven by an increase in global utilization based demand for our handpieces and adoption of our generator technology despite the continued headwindsin international markets for most of the COVID-19 pandemic, whilefirst quarter. This increase was partially offset by global decreases in utilization based demand for our handpieces and the same period in 2020 was severely impacted.adoption of our generator technology following the FDA Safety Communication on March 14, 2022. OEM segmen

Internationalt sales representedincreased 62.2%, or approximately 34.2% and 34.8% of total revenues$1.4 million, for the three and six months ended June 30, 2022 when compared with the six months ended June 30, 2021 respectively, as compared with 21.0% and 24.6% of total revenues for the same prior year period. Management estimates our products have been sold in more than 60 countries through local dealers coordinated by sales and marketing personnel through our facilities in Clearwater, Florida and Sofia, Bulgaria.

Gross Profit
Three Months Ended
June 30,
Six Months Ended
June 30,
(In thousands)20212020Change20212020Change
Cost of sales$3,690 $2,202 67.6 %$6,468 $4,215 53.5 %
Percentage of sales32.9 %51.3 %32.6 %45.4 %
Gross profit$7,534 $2,094 259.8 %$13,394 $5,078 163.8 %
Percentage of sales67.1 %48.7 %67.4 %54.6 %
Gross profit for the three months ended June 30, 2021, increased 259.8% to $7.5 million, compared to $2.1 million for the same period in the prior year. Gross margin for the three months ended June 30, 2021, was 67.1%, compared to 48.7% for the same period in 2020.

Gross profit for the six months ended June 30, 2021, increased 163.8% to $13.4 million, compared to $5.1 million for the same period in the prior year. Gross margin for the six months ended June 30, 2021, was 67.4%, compared to 54.6% for the same period in 2020.

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. The increase in gross profit margins for the threeOEM sales was due to increases in sales volume to existing customers, including Symmetry Surgical, under our 10-year generator manufacturing and six months ended June 30, 2021 from the prior year periods is primarily attributable to sales mix between our two segments, with our Advanced Energy segment comprising a higher percentage of total sales,supply agreement, as well as product mix within our Advanced Energy segment. Our continued manufacturing efficiency initiatives andincremental new sales upon the introductioncommencement of newer product models have continuedthe supply arrangement related to result in improved margins as we obtain registration, allowing these products to be introduced into the markets we serve. Additionally,completion of the strong sales during the three and six months ended June 30, 2021, resulted in reduced product costs as our fixed costs were spread across higher production volumes. This manufacturing efficiency was partially offset by higher inbound shipping costs, as we expedited the sourcingdevelopment portion of key component raw material inventories.

During the second quarter of 2020, we reassessed our forecasted product mix due to COVID-19, increased availabilitysome of our newer handpiece designs, and earlier than expected completion of product registrations in certain international markets. As a result, certain products were reduced to a lower carrying value, and some components were also written off as it was determined to cease further production on these models. This resulted in a decrease in gross profit of approximately $0.4 million during the three and six months ended June 30, 2020.

Other Costs and Expenses
Research and development
Three Months Ended
June 30,
Six Months Ended
June 30,
(In thousands)20212020Change20212020Change
Research and development expense$1,084 $975 11.2 %$2,199 $1,955 12.5 %
Percentage of sales9.7 %22.7 %11.1 %21.0 %

Research andOEM development expenses increased 11.2% and 12.5% for theagreements. three and six months ended June 30, 2021, primarily due to continued spending on our two investigational device exemption (IDE) clinical studies and product development initiatives.

Professional services
Three Months Ended
June 30,
Six Months Ended
June 30,
(In thousands)20212020Change20212020Change
Professional services expense$1,889 $1,658 13.9 %$3,410 $4,047 (15.7)%
Percentage of sales16.8 %38.6 %17.2 %43.5 %

Professional services expense increased 13.9% for the three months ended June 30, 2021, primarily attributable to increases in legal fees ($0.1 million) and professional services for continued consulting expense associated with our implementation of SAP ($0.1 million).

Professional services expense decreased 15.7% for the six months ended June 30, 2021, primarily attributable to decreases in physician consulting fees ($0.2 million), accounting and auditing fee overages ($0.3 million) related to 2019 financial statement restatements and remediation activities that occurred in the three months ended March 31, 2020, and legal fees ($0.1 million). These decreases were partially offset by an increase in professional services for continued consulting expense associated with our implementation of SAP ($0.1 million).

Salaries and related costs
Three Months Ended
June 30,
Six Months Ended
June 30,
(In thousands)20212020Change20212020Change
Salaries and related expenses$4,343 $3,439 26.3 %$8,588 $6,750 27.2 %
Percentage of sales38.7 %80.1 %43.2 %72.6 %

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During the three months ended June 30, 2021, salaries and related expenses increased 26.3%, primarily driven by increases in bonus expense in 2021 ($0.5 million), stock option expense ($0.1 million), and higher headcount ($0.2 million) as compared to the same period in the prior year.

During the six months ended June 30, 2021, salaries and related expenses increased 27.2%, primarily driven by increases in bonus expense in 2021 ($1.0 million), stock option expense ($0.3 million) and higher headcount ($0.3 million) as compared to the same period in the prior year.

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Selling, general and administrative expenses
Three Months Ended
June 30,
Six Months Ended
June 30,
(In thousands)20212020Change20212020Change
SG&A expense$4,261 $2,189 94.7 %$7,985 $5,985 33.4 %
Percentage of sales38.0 %51.0 %40.2 %64.4 %

During the three months ended June 30, 2021, selling, general and administrative expense increased 94.7%, primarily driven by higher commissions on Advanced Energy sales ($1.0 million), travel and entertainment expense ($0.4 million), advertising expense, including trade show fees and related costs ($0.2 million), insurance expense ($0.2 million) and higher credit card processing fees ($0.1 million). These increases were partially offset by lower bad debt expenses ($0.1 million).

During the six months ended June 30, 2021, selling, general and administrative expense increased 33.4%, primarily driven by higher commissions on Advanced Energy sales ($1.6 million), insurance expense ($0.3 million), higher credit card processing fees ($0.2 million) and accrued OEM product recall costs ($0.2 million). These increases were partially offset by lower bad debt expenses ($0.4 million).

Other Income (Expense)
Three Months Ended
June 30,
Six Months Ended
June 30,
(In thousands)20212020Change20212020Change
Interest income$$(42.9)%$$223 (96.9)%
Percentage of sales— %0.2 %— %2.4 %
Other income (loss), net97 $(14)792.9 %$412 (99.0)%
Percentage of sales0.9 %(0.3)%— %4.4 %

Interest income decreased 96.9% for the six months ended June 30, 2021 compared with the same period in the prior year. This decrease is due to a lower yield, as well as a lower average balance, on our investments in U.S. Treasury securities included in cash and cash equivalents.

Other income (loss), net increased 792.9% for the three months ended June 30, 2021, as compared with the same period in the prior year. This increase is primarily due to increased manufacturing volumes which resulted in reduced overhead costs being allocated to the Core business segment.

Other income, net decreased 99.0% for the six months ended June 30, 2021, as compared with the same period in the prior year. This decrease is primarily due to the receipt of refunds in the first quarter 2020 on tariffs paid in 2019.

Income Taxes
Three Months Ended
June 30,
Six Months Ended
June 30,
(In thousands)20212020Change20212020Change
Income tax expense (benefit)$107 $(1,492)107.2 %$173 $(6,397)102.7 %
Effective tax rate(2.7)%24.1 %(2.0)%49.1 %

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Our income tax expense (benefit) wasInternational sales represented approximately $107,00022.8% and $(1,492,000)32.0% of total revenues for the three and six months ended June 30, 2022, respectively, as compared with effective tax rates34.2% and 34.8% of (2.7)%total revenues for the same period in the prior year. Management estimates our products have been sold in more than 60 countries through local dealers coordinated by sales and 24.1%marketing personnel through our facilities in Clearwater, Florida and Sofia, Bulgaria.

Gross Profit
Three Months Ended
June 30,
Six Months Ended
June 30,
(In thousands)20222021Change20222021Change
Cost of sales$3,378 $3,690 (8.5)%$7,652 $6,468 18.3 %
Percentage of sales32.8 %32.9 %33.6 %32.6 %
Gross profit$6,914 $7,534 (8.2)%$15,133 $13,394 13.0 %
Percentage of sales67.2 %67.1 %66.4 %67.4 %
Gross profit for the three months ended June 30, 20212022, decreased 8.2% to $6.9 million, compared to $7.5 million for the same period in the prior year. Gross margin for the three months ended June 30, 2022, was 67.2%, compared to 67.1% for the same period in 2021. The increase in gross profit margins for the three months ended June 30, 2022 from the prior year period is primarily attributable to geographic mix within our Advanced Energy segment, with domestic sales comprising a higher percentage of total sales and 2020,the mix of newer product models as we obtain registrations, allowing these products to be introduced into the markets we serve. These margin improvements were partially offset by decreases resulting from changes in the sales mix between our two segments, with our OEM segment comprising a higher percentage of total sales, and higher costs to manufacture our inventory as we continue to experience higher shipping costs.

Gross profit for the six months ended June 30, 2022, increased 13.0% to $15.1 million, compared to $13.4 million for the same period in the prior year. Gross margin for the six months ended June 30, 2022, was 66.4%, compared to 67.4% for the same period in 2021. The decrease in gross profit margins for the six months ended June 30, 2022 from the prior year period is primarily attributable to product mix within our Advanced Energy segment, changes in the sales mix between our two segments, with our OEM segment comprising a higher percentage of total sales, as well as higher costs to manufacture our inventory as we continue to experience higher shipping costs. These decreases were partially offset by the mix of newer product models as we obtain registrations, allowing these products to be introduced into the markets we serve.

Other Costs and Expenses
Research and development
Three Months Ended
June 30,
Six Months Ended
June 30,
(In thousands)20222021Change20222021Change
Research and development expense$1,070 $1,084 (1.3)%$2,228 $2,199 1.3 %
Percentage of sales10.4 %9.7 %9.8 %11.1 %
Research and development expenses decreased 1.3% for the three months ended June 30, 2022, primarily due to lower spending on our two investigational device exemption (IDE) clinical studies and other product development initiatives ($0.1 million). These decreased costs were partially offset by increased labor and benefit costs from the same period in the prior year ($0.1 million).

Research and development expenses increased 1.3% for thesix months ended June 30, 2022, primarily due to increased labor and benefit costs from the same period in the prior year ($0.2 million). These increased costs were partially offset by lower spending on our two investigational device exemption (IDE) clinical studies and other product development initiatives ($0.2 million).
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Professional services
Three Months Ended
June 30,
Six Months Ended
June 30,
(In thousands)20222021Change20212021Change
Professional services expense$2,389 $1,889 26.5 %$4,675 $3,410 37.1 %
Percentage of sales23.2 %16.8 %20.5 %17.2 %

Professional services expense increased 26.5% for the three months ended June 30, 2022, primarily attributable to increases in legal expenses ($0.5 million), primarily associated with the estimated loss recorded for the class action lawsuit, Board of Directors option expense ($0.1 million) and accounting and auditing fees ($0.1 million). These increases were partially offset by decreases in physician consulting fees ($0.1 million), option expense for our partner physicians ($0.1 million) as we added a new member to our Medical Advisory Board in the second quarter of 2021.

Professional services expense increased 37.1% for the six months ended June 30, 2022, primarily attributable to increases in legal expenses ($0.7 million), primarily associated with the estimated loss recorded for the class action lawsuit, physician consulting fees ($0.3 million), Board of Directors option expense ($0.2 million), employee recruitment expense ($0.1 million) and accounting and auditing fees ($0.1 million). These increases were partially offset by a decrease in option expense for our partner physicians ($0.1 million) as we added a new member to our Medical Advisory Board in the second quarter of 2021.

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Salaries and related costs
Three Months Ended
June 30,
Six Months Ended
June 30,
(In thousands)20222021Change20222021Change
Salaries and related expenses$4,892 $4,343 12.6 %$10,073 $8,588 17.3 %
Percentage of sales47.5 %38.7 %44.2 %43.2 %

During the three months ended June 30, 2022, salaries and related expenses increased 12.6%, primarily driven by higher compensation and benefits ($0.5 million) and stock compensation expense ($0.3 million) as compared to the same period in the prior year. These increases are partially offset by a decrease in bonus expense ($0.3 million) as we reduced our expected 2022 bonus achievement during the second quarter.

During the six months ended June 30, 2022, salaries and related expenses increased 17.3%, primarily driven by higher compensation and benefits ($1.1 million) and stock compensation expense ($0.6 million) as compared to the same period in the prior year. These increases are partially offset by a decrease in bonus expense ($0.2 million) as we reduced our expected 2022 bonus achievement.

Selling, general and administrative expenses
Three Months Ended
June 30,
Six Months Ended
June 30,
(In thousands)20222021Change20222021Change
SG&A expense$4,539 $4,261 6.5 %$10,004 $7,985 25.3 %
Percentage of sales44.1 %38.0 %43.9 %40.2 %

During the three months ended June 30, 2022, selling, general and administrative expense increased 6.5%, primarily driven by higher travel and entertainment expense ($0.3 million), employee training and other meeting expenses ($0.2 million), advertising expense, including trade show fees and related costs ($0.1 million) and bad debt expense ($0.1 million). These increases were partially offset by lower commissions on Advanced Energy sales ($0.4 million).

During the six months ended June 30, 2022, selling, general and administrative expense increased 25.3%, primarily driven by increased advertising expense, including trade show fees and related costs ($0.8 million), higher employee training and other meeting expenses ($0.8 million), travel and entertainment expense ($0.7 million) and higher bad debt expense ($0.2 million). These increases were partially offset by decreases in commissions on Advanced Energy sales ($0.2 million), OEM product recall costs ($0.2 million) as we experienced no product recalls in 2022, and lower regulatory registration expenses ($0.1 million).

Other income (loss)
Three Months Ended
June 30,
Six Months Ended
June 30,
(In thousands)20222021Change20222021Change
Other income, net607 $97 525.8 %586 $14,550.0 %
Percentage of sales5.9 %0.9 %2.6 %— %



Other income, net increased 525.8% and 14,550.0% for the three and six months ended June 30, 2022, as compared with the same periods in the prior year. This increase was primarily attributable to the release of a portion of our joint and several payroll liability due to the lapse of the statute of limitations on a portion of the liability ($0.6 million).
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Income Taxes
Three Months Ended
June 30,
Six Months Ended
June 30,
(In thousands)20222021Change20222021Change
Income tax expense (benefit)$96 $107 10.3 %$166 $173 4.0 %
Effective tax rate(1.8)%(2.7)%(1.5)%(2.0)%

Our income tax expense was approximately $96,000 and $107,000 with effective tax rates of (1.8)% and (2.7)% for the three months ended June 30, 2022 and 2021, respectively. Our income tax expense (benefit) was approximately $173,000$166,000 and $(6,397,000)$173,000 with effective tax rates of (2.0)(1.5)% and 49.1%(2.0)% for the six months ended June 30, 20212022 and 2020,2021, respectively. For the three and six months ended June 30, 2022 and 2021, the effective rates differ from statutory rates primarily due to the full valuation allowance recorded on our NOL generated during the periods, combined with interest and penalties on our uncertain tax positions. For the six months ended June 30, 2020, the effective rate differs from the statutory rate primarily due to the release of the valuation allowance on our NOL carryforward from 2019.

Liquidity and Capital Resources

Our working capital at June 30, 20212022 was approximately $50.8$39.2 million compared with $56.9$47.5 million at December 31, 2020.2021. The decrease in working capital from December 31, 20202021 was primarily due to the net loss incurred by the Company during the first half of 2021,2022, excluding non-cash activity, comprised primarily of stock-based compensation expense.

For the six months ended June 30, 2021,2022, net cash used in operating activities was approximately $7.1$10.4 million, which principally funded our loss from operations of $8.8$11.8 million, compared with net cash used in operating activities of approximately $12.4$7.1 million in the same period for 2020.2021.

Net cash used in investing activities for the six months ended June 30, 20212022 and 2020,2021, was $0.20.7 million and $0.2 million, respectively, related to investments in property and equipment.

At June 30, 2021,2022, we had purchase commitments totaling approximately $2.3$5.6 million, substantially all of which is expected to be purchased within the next sixeighteen months.




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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 20212020 Form 10-K, filed with the SEC on March 31, 2021.17, 2022.

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, sales returns and discounts, stock-based compensation and income taxes are updated as appropriate, which in most cases is at least quarterly. We base our estimates on historical experience, or various assumptions that are believed to be reasonable under the circumstances and the results form the basis for making judgments about the reported values of assets, liabilities, revenues and expenses. Actual results may materially differ from these estimates.

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

Stock-based Compensation

Under our stock option plans, options to purchase common shares of the Company may be granted to employees, officers and directors of the Company by the Board of Directors. We account for stock options in accordance with FASB ASC Topic 718-10, Compensation-Stock Compensation, with compensation expense recognized over the vesting period. Options are valued using the Black-Scholes model, which includes a number of estimates that affect the amount of our expense. We have determined that the most critical of these estimates are the estimates of expected life and volatility used in the calculations.

Expected life

For employee stock-based compensation awards, we estimate the expected life of awards utilizing the SEC's simplified method. We utilize this method, as we have not historically granted stock-based compensation awards to employees in sufficient volumes to determine a reasonable estimate of the life of awards. For awards granted to non-employees, we calculate expected life using a combination of past exercise behavior, the contractual term and expected remaining exercise behavior.

Volatility

We determine the volatility by utilizing the historical volatility of our stock over the period of the awards expected life. The SEC allows us to include periods in excess of the useful life if we determine that they provide a more reasonable basis for the volatility of our stock. Additionally, ASC 718-10 allows us to exclude periods from the volatility if they pertain to events or circumstances that in our judgment are specific to us and if the event or transaction is not reasonably expected to occur again during the expected term of the awards. We have not included any additional periods, nor disregarded any periods, in calculating our volatility.

Accounts Receivable Allowance

We maintain a reserve for uncollectible accounts receivable. When evaluating the adequacy of the allowance for doubtful accounts, we analyze specific unremitted customer balances for known collectability issues, review historical bad debt experience, customer credit worthiness and economic trends, and we make estimates in connection with establishing the allowance for doubtful accounts, including the future impacts of current trends. Changes in estimates are reflected in the period they are made. If the financial condition of our customers deteriorates, resulting in an inability to make payments, additional allowances may be required.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued

Inventory Obsolescence Allowance

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

Litigation Contingencies

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

Income Taxes

The provision for income taxes includes federal, foreign, state and local income taxes currently payable and those deferred because of temporary differences between the financial statement and tax bases of assets and liabilities. Deferred tax assets or liabilities are computed based on the difference between the financial statement and income tax bases of assets and liabilities using enacted marginal tax rates. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. Deferred income tax expenses or credits are based on the changes in the asset or liability from period to period.

As a result of historical losses and our expectation to continue to generate losses in the near future, we recorded a valuation allowance on our net deferred tax assets. Exclusive of the carryback provisions of the CARES Act and the associated income tax benefit recognized in 2020, we do not anticipate recording an income tax benefit related to our deferred tax assets. We will reassess the realization of deferred tax assets each reporting period and will be able to reduce the valuation allowance to the extent the financialour results of continuing operations improve, and it becomes more likely than not that the deferred tax assets will be realizable.realized. As management expectsManagement has not fully determined the Company to continue totiming of when it will generate lossestaxable income in the foreseeable future after 2020,U.S., we will continuecontinued to record a valuation allowance on the net deferred tax assets balance as of June 30, 2021.2022.

We assess the financial statement impact of an uncertain tax position taken or expected to be taken on an income tax return at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized in the financial statements unless it is more likely than not of being sustained.

Inflation

The consequences of the pandemic, global supply chain instability and inflationary cost increases and their adverse impact to the global economy, continue to evolve. Accordingly, the significance of the future impact to our business and financial statements remains subject to significant uncertainty. Inflation has not, to date, materially impacted theour operations ofor financial performance. However, as these trends continue for raw materials, freight, and labor costs, our Company.future financial performance could be adversely impacted.

Off-Balance Sheet Arrangements

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

Recent Accounting Pronouncements

See Note 2 of the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q.

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ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

Not applicable.

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ITEM 4. Controls and Procedures

Disclosure Controls and Procedures

Disclosure Controls and Procedures

Our management has established and maintains disclosure controls and procedures that are designed to ensure that the information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934, as amended (the "Exchange Act"“Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Management carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of June 30, 2021,2022, the Company'sCompany’s disclosure controls and procedures were effective.

Changes in Internal Control Over Financial Reporting

We rely extensively on information systems to manageThere were no changes in our business and summarize and report our financial condition, results of operations and cash flows. In 2020, we began the implementation of a new global enterprise resource planning (“ERP”) system, which replaced much of our existing core financial systems in the first quarter of 2021. The ERP system is designed to accurately maintain our financial records, enhance the flow of financial information, improve data management and provide timely information to our management team.

As a result of this implementation, certain internal controls over financial reporting have been automated, modified or implemented to address the new environment associated with this type of system. While we believe that this new system will strengthen our internal controls, there are inherent risks in implementing any new system, and we will continue to evaluate these control changes as part of our assessment of internal control over financial reporting throughout 2021.during the quarter ended June 30, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II.     Other Information

ITEM 1. Legal Proceedings

See Note 1011 of Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q.


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ITEM 1A. Risk factors

There have been no material changes to the risk factors described under Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, except for the following:2021.

Any disruption in our suppliers’ operations, or timely availability of shipments from our third party freight carriers, could disrupt our production schedule and our ability to provide product to our customers in a timely manner

Our operations and ability to maintain production is dependent upon our suppliers delivering sufficient quantities of components and raw materials on time to manufacture our products and meet our production schedules. The COVID-19 pandemic has adversely impacted worldwide supply chains and the ability to obtain sufficient amounts of component parts, while disruptions and delays in the ability of our third party freight carriers to transport these items to our manufacturing facilities also continues to be a challenge. If the situation worsens, these negative impacts on our supply chain could have a material adverse effect on our business.

Any shortage of components or raw materials could cause us to not be able to meet customer demand, to alter production schedules, to delay product launch schedules, or to suspend production entirely, which could cause a loss of revenues, which could materially and adversely affect our results of operations.
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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.

ITEM 5. Other Information

None.
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ITEM 6. Exhibits
3.1
3.2
3.3
3.4
3.5
31.1*
31.2*
32.1*
32.2*
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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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.
Apyx Medical Corporation
Date: August 12, 202111, 2022By:/s/ Charles D. Goodwin II
Charles D. Goodwin II
President, Chief Executive Officer and Director
(Principal Executive Officer)
Date: August 12, 202111, 2022By:/s/ Tara Semb
Tara Semb
Chief Financial Officer,
Treasurer and Secretary
(Principal Financial Officer)

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