Apyx Medical (APYX) 10-Q 2021 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended	June 30, 2021
	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 MEDICAL CORPORATION

(Exact name of registrant as specified in its charter)

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

5115 Ulmerton Road, Clearwater, FL 33760

(Address of principal executive offices, zip code)

(727) 384-2323

(Registrant’s telephone number)

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

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

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes: ☒ No ☐

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

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

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

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

APYX MEDICAL CORPORATION

INDEX TO QUARTERLY REPORT ON FORM 10-Q

For the quarterly period ended June 30, 2021

		Page
Part I.	Financial Information	2
Item 1.	Condensed Consolidated Financial Statements (Unaudited)	2
	Condensed Consolidated Balance Sheets at June 30, 2021 and December 31, 2020	2
	Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2021 and 2020	3
	Condensed Consolidated Statements of Changes in Equity for the three and six months ended June 30, 2021 and 2020	4
	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2021 and 2020	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	24
Item 4.	Controls and Procedures	25
Part II.	Other Information	26
Item 1.	Legal Proceedings	26
Item 1A.	Risk Factors	27
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	28
Item 3.	Defaults Upon Senior Securities	28
Item 4.	Mine Safety Disclosures	28
Item 5.	Other Information	28
Item 6.	Exhibits	29
	Signatures	30

1

PART I.     Financial Information

ITEM 1. Condensed Consolidated Financial Statements

APYX MEDICAL CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

	June 30, 2021 (Unaudited)		December 31, 2020
ASSETS
Current assets:
Cash and cash equivalents	$	34,670	$	41,915
Trade accounts receivable, net of allowance of $340 and $300	8,985		8,399
Income tax receivables	7,654		7,654
Other receivables	1,386		1,275
Inventories, net of provision for obsolescence of $387 and $388	5,272		4,051
Prepaid expenses and other current assets	3,615		2,795
Total current assets	61,582		66,089
Property and equipment, net of accumulated depreciation and amortization of $5,120 and    $4,813	6,471		6,541
Operating lease right-of-use assets	182		237
Finance lease right-of-use assets	329		437
Other assets	1,033		807
Total assets	$	69,597	$	74,111
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	2,799	$	1,511
Accrued expenses and other current liabilities	7,594		7,278
Current portion of operating lease liabilities	127		126
Current portion of finance lease liabilities	225		238
Total current liabilities	10,745		9,153
Long-term operating lease liabilities	63		129
Long-term finance lease liabilities	76		183
Contract liabilities	886		621
Other liabilities	145		166
Total liabilities	11,915		10,252
EQUITY
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, 2020	34		34
Additional paid-in capital	63,650		61,066
(Accumulated deficit) retained earnings	(6,326)		2,621
Total stockholders' equity	57,358		63,721
Non-controlling interest	324		138
Total equity	57,682		63,859
Total liabilities and equity	$	69,597	$	74,111

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

2

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,
	2021		2020		2021		2020
Sales	$	11,224	$	4,296	$	19,862	$	9,293
Cost of sales	3,690		2,202		6,468		4,215
Gross profit	7,534		2,094		13,394		5,078
Other costs and expenses:
Research and development	1,084		975		2,199		1,955
Professional services	1,889		1,658		3,410		4,047
Salaries and related costs	4,343		3,439		8,588		6,750
Selling, general and administrative	4,261		2,189		7,985		5,985
Total other costs and expenses	11,577		8,261		22,182		18,737
Loss from operations	(4,043)		(6,167)		(8,788)		(13,659)
Interest income	4		7		7		223
Interest expense	(2)		(8)		(6)		(14)
Other income (loss), net	97		(14)		4		412
Total other income (loss), net	99		(15)		5		621
Loss before income taxes	(3,944)		(6,182)		(8,783)		(13,038)
Income tax expense (benefit)	107		(1,492)		173		(6,397)
Net loss	(4,051)		(4,690)		(8,956)		(6,641)
Net loss attributable to non-controlling interest	(5)		0		(9)		0
Net loss attributable to stockholders	$	(4,046)	$	(4,690)	$	(8,947)	$	(6,641)
Loss per share:
Basic and diluted	$	(0.12)	$	(0.14)	$	(0.26)	$	(0.19)

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

3

APYX MEDICAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Unaudited)

(In thousands)

Three months ended June 30, 2020 and 2021
	Common Stock			Additional Paid-In Capital		Retained Earnings (Accumulated Deficit)		Non-controlling Interest		Total Equity
	Shares	Par Value
Balance at March 31, 2020	34,184	$	34	$	57,829	$	12,566	$	0	$	70,429
Stock based compensation	—	—		1,097		—		—		1,097
Shares issued on net settlement of stock options	18	—		—		—		—		—
Net loss	—	—		—		(4,690)		—		(4,690)
Balance at June 30, 2020	34,202	$	34	$	58,926	$	7,876	$	0	$	66,836
Balance at March 31, 2021	34,318	$	34	$	62,281	$	(2,280)	$	134	$	60,169
Contributions from non-controlling interest	—	—		—		—		195		195
Stock based compensation	—	—		1,369		—		—		1,369
Shares issued on net settlement of stock options	5	—		—		—		—		—
Net loss	—	—		—		(4,046)		(5)		(4,051)
Balance at June 30, 2021	34,323	$	34	$	63,650	$	(6,326)	$	324	$	57,682
Six months ended June 30, 2020 and 2021
	Common Stock			Additional Paid-In Capital		Retained Earnings (Accumulated Deficit)		Non-controlling Interest		Total
	Shares	Par Value
Balance at December 31, 2019	34,170	$	34	$	56,708	$	14,517	$	0	$	71,259
Shares issued on stock options exercises for cash	10	—		72		—		—		72
Stock based compensation	—	—		2,146		—		—		2,146
Shares issued on net settlement of stock options	22	—		—		—		—		—
Net loss	—	—		—		(6,641)		—		(6,641)
Balance at June 30, 2020	34,202	$	34	$	58,926	$	7,876	$	0	$	66,836
Balance at December 31, 2020	34,289	$	34	$	61,066	$	2,621	$	138	$	63,859
Contributions from non-controlling interest	—	—		—		—		195		195
Shares issued on stock options exercises for cash	8	—		21		—		—		21
Stock based compensation	—	—		2,563		—		—		2,563
Shares issued on net settlement of stock options	26	—		—		—		—		—
Net loss	—	—		—		(8,947)		(9)		(8,956)
Balance at June 30, 2021	34,323	$	34	$	63,650	$	(6,326)	$	324	$	57,682

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

4

APYX MEDICAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

	Six Months Ended June 30,
	2021		2020
Cash flows from operating activities
Net loss	(8,956)		(6,641)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	440		439
Provision for inventory obsolescence	13		413
Stock based compensation	2,563		2,146
Provision for allowance for doubtful accounts	46		486
Changes in operating assets and liabilities:
Trade receivables	(656)		1,195
Prepaid expenses and other assets	(1,160)		(1,410)
Income tax receivables	0		(6,017)
Inventories	(1,198)		(571)
Accounts payable	1,296		(232)
Accrued and other liabilities	554		(2,241)
Net cash used in operating activities	(7,058)		(12,433)
Cash flows from investing activities
Purchases of property and equipment	(221)		(184)
Net cash used in investing activities	(221)		(184)
Cash flows from financing activities
Proceeds from stock option exercises	21		72
Repayment of finance lease liabilities	(120)		(120)
Contributions from non-controlling interests	195		0
Net cash provided by (used in) financing activities	96		(48)
Effect of exchange rates on cash	(62)		9
Net change in cash and cash equivalents	(7,245)		(12,656)
Cash and cash equivalents, beginning of period	41,915		58,812
Cash and cash equivalents, end of period	$	34,670	$	46,156
Cash paid for:
Interest	$	4	$	8
Income taxes	13		54

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

5

APYX MEDICAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1.     BASIS OF PRESENTATION

Apyx Medical Corporation (“Company", "Apyx", "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 for 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 is marketed and sold as Renuvion® in the cosmetic surgery market and J-Plasma® in the hospital surgical market. Renuvion® offers plastic surgeons, fascial plastic surgeons and cosmetic physicians a unique ability to provide controlled heat to the tissue to achieve their desired results. The J-Plasma® system allows surgeons to operate with a high level of precision, virtually eliminating unintended tissue trauma. The Company also leverages its deep expertise and decades of experience in unique waveforms through original equipment manufacturing (OEM) agreements with other medical device manufacturers.

The Company is subject to risks and uncertainties as a result of the COVID-19 pandemic and its impact on the level of economic activity around the world. The extent of the impact of the pandemic on the Company's business is highly uncertain and difficult to predict, as the responses and information related to it continue to change. As elective surgery cases using the Company’s Helium Plasma Technology have started to increase again, it is unknown whether these trends will continue. The full extent to which the COVID-19 pandemic may materially and adversely impact the Company’s future financial position, liquidity, or results of operations remains uncertain.

The accompanying unaudited condensed consolidated financial statements have been prepared based upon SEC rules that permit reduced disclosure for interim periods. For a more complete discussion of significant accounting policies and certain other information, please refer to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2020. 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 year to conform to the current year presentation. These reclassifications had no impact on previously reported net income, retained earnings or operating cash flows 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 utilizing the deferred elective date. While we are in the process of determining the effects of the adoption of the standard on the consolidated financial statements, we do not expect the impact to be material.

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.

6

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

In connection with the Asset Purchase Agreement, 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, 2021, amounted to $2.2 million with cost of sales equivalents of $1.8 million and other related expenses of $0.3 million for net other income of $0.1 million. Core activity for the three months ended June 30, 2020, amounted to $2.7 million with cost of sales equivalents of $2.3 million and related other expenses of $0.4 million for approximately 0 net other income. 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 other related expenses of $0.6 million for approximately 0 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.

7

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. 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)	June 30, 2021		December 31, 2020
Raw materials	$	3,226	$	2,243
Work in process	1,167		1,109
Finished goods	1,266		1,087
Gross inventories	5,659		4,439
Less: provision for obsolescence	(387)		(388)
Inventories, net	$	5,272	$	4,051

NOTE 5.     ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities consisted of the following:

(in thousands)	June 30, 2021		December 31, 2020
Accrued payroll	$	1,016	$	808
Accrued bonuses	996		811
Accrued commissions	730		1,001
Accrued product warranties	527		498
Accrued product liability claim insurance deductibles	405		435
Accrued professional fees	357		222
Joint and several payroll liability	1,027		1,027
Uncertain tax positions	1,758		1,658
Sales tax payable	173		591
Other accrued expenses and current liabilities	605		227
Total accrued expenses and other current liabilities	$	7,594	$	7,278

NOTE 6.     CHINA JOINT VENTURE

In 2019, the Company executed a joint venture agreement with its Chinese supplier ("China JV") whereby the Company has a 51% interest in the China JV. 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 ended December 31, 2020. As of the date of these condensed consolidated financial statements, the joint venture has not commenced principal operations.

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

8

APYX MEDICAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

(In thousands)	Three Months Ended June 30, 2021		Six Months Ended June 30, 2021
Beginning interest in China JV	$	140		$	144
Contributions	203			203
Net loss attributable to Apyx	(5)			(9)
Ending interest in China JV	$	338		$	338

NOTE 7.     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,
(in thousands, except per share data)	2021		2020		2021		2020
Numerator:
Net loss attributable to stockholders	$	(4,046)	$	(4,690)	$	(8,947)	$	(6,641)
Denominator:
Weighted average shares outstanding - basic and diluted	34,321		34,186		34,312		34,181
Loss per share:
Basic and diluted	$	(0.12)	$	(0.14)	$	(0.26)	$	(0.19)
Anti-dilutive instruments excluded from diluted loss per common share:
Options	5,561		4,986		5,561		4,986

9

APYX MEDICAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

NOTE 8.     STOCK-BASED COMPENSATION

Under the Company's stock option plans, the board of directors 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 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 and $2,563,000, respectively, in stock-based compensation expense during the three and six months ended June 30, 2021, as compared with $1,097,000 and $2,146,000, respectively, for the three and six months ended June 30, 2020.

Stock option activity is summarized as follows:

	Number of options	Weighted average exercise price
Outstanding at December 31, 2020	4,938,943	$	5.46
Granted	775,980	9.32
Exercised	(55,582)	4.56
Canceled and forfeited	(98,635)	8.05
Outstanding at June 30, 2021	5,560,706	$	5.96

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, 2021 and 2020, respectively, we received 6,614 and 11,085 options as payment in the exercise of 4,886 and 17,665 options. For the six months ended June 30, 2021 and 2020, respectively, we received 22,055 and 13,009 options as payment in the exercise of 26,027 and 22,027 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") utilizing a Black Scholes model with an expected life calculated via the simplified method.

	2021 Grants
Strike price	$9.29	-	$9.55
Risk-free rate	0.6%	-	0.8%
Expected dividend yield	0
Expected volatility	70.7%	-	70.8%
Expected term (in years)	4.5	-	6

NOTE 9.     INCOME TAXES

On March 27, 2020, the U.S. government enacted the CARES Act to provide relief from COVID-19. The CARES Act includes a provision that allows companies to carryback net operating losses (NOL’s) generated in the period 2018 through 2020 to prior years. In conjunction with the disposition of the Core business in 2018, the Company generated a significant amount of taxable income in 2018. Subsequently, the Company generated net losses in 2019 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. For the three and six months ended June 30, 2020, the Company also recognized income tax benefits of approximately $1.5 million and $6.4 million, respectively, related to losses before income taxes.

10

APYX MEDICAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

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. 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, the Company had approximately $445,000 in accrued interest and penalties related to unrecognized tax benefits. Included in the income tax expense (benefit) for the three months ended June 30, 2021 and 2020, respectively, are approximately $51,000 and $43,000 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, 2021 and 2020, respectively, are approximately $99,000 and $86,000 of interest and penalties on the Company's uncertain tax positions.If the Company were to prevail on all uncertain tax positions, the resulting impact will be material as the Company will recognize approximately $1,758,000 of income tax benefits in the consolidated statement of operations. It is expected that all of the uncertain tax positions should be resolved by October 2022.

NOTE 10.     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.

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, the Company had purchase commitments totaling approximately $2.3 million, substantially all of which is expected to be purchased within the next six months.

11

APYX MEDICAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

NOTE 11.     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, 2021 and 2020, the Company made purchases from this supplier of approximately $529,000 and $264,000, respectively. For the six months ended June 30, 2021 and 2020, the Company made purchases from this supplier of approximately $646,000 and $850,000, respectively. At June 30, 2021 and December 31, 2020, respectively, the Company owed this supplier approximately $75,000 and $38,000.

NOTE 12.     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's reportable segments are disclosed as principally organized and managed as 2 operating segments: Advanced Energy and OEM. "Corporate & Other" includes certain unallocated corporate and administrative costs which were not specifically attributed to any reportable segment. The OEM segment is primarily development and manufacturing contract and product driven, all related expenses are recorded as cost of sales, therefore no segment specific operating expenses are incurred.

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

12

APYX MEDICAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

	Three Months Ended June 30, 2021
(In thousands)	Advanced Energy		OEM		Corporate & Other		Total
Sales	$	9,978	$	1,246	$	0	$	11,224
Income (loss) from operations	326		263		(4,632)		(4,043)
Interest income	0		0		4		4
Interest expense	0		0		(2)		(2)
Other income, net	0		0		97		97
Income tax expense	0		0		107		107

	Three Months Ended June 30, 2020
(In thousands)	Advanced Energy		OEM		Corporate & Other		Total
Sales	$	2,867	$	1,429	$	0	$	4,296
Income (loss) from operations	(3,292)		584		(3,459)		(6,167)
Interest income	0		0		7		7
Interest expense	0		0		(8)		(8)
Other loss, net	0		0		(14)		(14)
Income tax benefit	0		0		(1,492)		(1,492)

	Six Months Ended June 30, 2021
(In thousands)	Advanced Energy		OEM		Corporate & Other		Total
Sales	$	17,638	$	2,224	$	0	$	19,862
Income (loss) from operations	(276)		260		(8,772)		(8,788)
Interest income	0		0		7		7
Interest expense	0		0		(6)		(6)
Other income, net	0		0		4		4
Income tax expense	0		0		173		173

13

APYX MEDICAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Unaudited)

	Six Months Ended June 30, 2020
(In thousands)	Advanced Energy		OEM		Corporate & Other		Total
Sales	$	6,853	$	2,440	$	0	$	9,293
Income (loss) from operations	(7,276)		831		(7,214)		(13,659)
Interest income	0		0		223		223
Interest expense	0		0		(14)		(14)
Other income, net	0		0		412		412
Income tax benefit	0		0		(6,397)		(6,397)

International sales represented 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,
(In thousands)	2021		2020		2021		2020
Sales by Domestic and International
Domestic	$	7,383	$	3,393	$	12,949	$	7,011
International	3,841		903		6,913		2,282
Total	$	11,224	$	4,296	$	19,862	$	9,293

14

APYX MEDICAL CORPORATION

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

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

Executive Level Overview

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

We continue to drive sales in our Advanced Energy business by increasing the adoption and utilization of our handpieces in the U.S. cosmetic surgery market and fulfilling demand from distributors in our international markets. Management estimates that our products have been sold in more than 60 countries. As of June 30, 2021, we had a direct sales force of 31 field-based selling professionals and utilized 2 independent sales agencies. We also had 5 sales managers. This selling organization is focused on the use of Renuvion® in the cosmetic surgery market. In addition, we have invested in both in-person and virtual training programs and marketing-related activities to support accelerated adoption of Renuvion® into physicians' 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. "Corporate & Other" includes certain unallocated corporate and administrative costs which are not specifically attributed to any reportable segment. The OEM segment is primarily development and manufacturing contract and product driven, and all related expenses are recorded as cost of sales, therefore no segment specific operating expenses are incurred.

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

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.

15

APYX MEDICAL CORPORATION

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued

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

16

APYX MEDICAL CORPORATION

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued

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,
(In thousands)	2021		2020		Change		2021		2020		Change
Sales by Reportable Segment
Advanced Energy	$	9,978	$	2,867	248.0	%	$	17,638	$	6,853	157.4	%
OEM	1,246		1,429		(12.8)	%	2,224		2,440		(8.8)	%
Total	$	11,224	$	4,296	161.3	%	$	19,862	$	9,293	113.7	%
									(632,000)
Sales by Domestic and International
Domestic	$	7,383	$	3,393	117.6	%	$	12,949	$	7,011	84.7	%
International	3,841		903		325.4	%	6,913		2,282		202.9	%
Total	$	11,224	$	4,296	161.3	%	$	19,862	$	9,293	113.7	%

Total revenue increased by 161.3% and 113.7%, or approximately $6.9 million and $10.6 million, for the three and six months ended June 30, 2021 when compared with the three and six months ended June 30, 2020. Advanced Energy segment sales increased 248.0% and 157.4%, or approximately $7.1 million and $10.8 million, for the three and 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 global utilization based demand for our handpieces and adoption of our generator technology despite the continued headwinds of the COVID-19 pandemic, while the same period in 2020 was severely impacted.

International sales represented approximately 34.2% and 34.8% of total revenues for the three and 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)	2021			2020			Change		2021			2020			Change
Cost of sales	$	3,690		$	2,202		67.6	%	$	6,468		$	4,215		53.5	%
Percentage of sales	32.9		%	51.3		%			32.6		%	45.4		%

Gross profit	$	7,534		$	2,094		259.8	%	$	13,394		$	5,078		163.8	%
Percentage of sales	67.1		%	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.

17

APYX MEDICAL CORPORATION

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued

The increase in gross profit margins for the three 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, as well as product mix within our Advanced Energy segment. Our continued manufacturing efficiency initiatives and the introduction of newer product models have continued to result in improved margins as we obtain registration, allowing these products to be introduced into the markets we serve. Additionally, 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 sourcing of key component raw material inventories.

During the second quarter of 2020, we reassessed our forecasted product mix due to COVID-19, increased availability of our newer handpiece designs, and earlier than expected completion of product registrations in 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)	2021			2020			Change		2021			2020			Change
Research and development expense	$	1,084		$	975		11.2	%	$	2,199		$	1,955		12.5	%
Percentage of sales	9.7		%	22.7		%			11.1		%	21.0		%

Research and development expenses increased 11.2% and 12.5% for the 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)	2021			2020			Change		2021			2020			Change
Professional services expense	$	1,889		$	1,658		13.9	%	$	3,410		$	4,047		(15.7)	%
Percentage of sales	16.8		%	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)	2021			2020			Change		2021			2020			Change
Salaries and related expenses	$	4,343		$	3,439		26.3	%	$	8,588		$	6,750		27.2	%
Percentage of sales	38.7		%	80.1		%			43.2		%	72.6		%

18

APYX MEDICAL CORPORATION

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued

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.

19

APYX MEDICAL CORPORATION

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued

Selling, general and administrative expenses

	Three Months Ended June 30,								Six Months Ended June 30,
(In thousands)	2021			2020			Change		2021			2020			Change
SG&A expense	$	4,261		$	2,189		94.7	%	$	7,985		$	5,985		33.4	%
Percentage of sales	38.0		%	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)	2021			2020			Change		2021			2020			Change
Interest income	$	4		$	7		(42.9)	%	$	7		$	223		(96.9)	%
Percentage of sales	—		%	0.2		%			—		%	2.4		%
Other income (loss), net	97			$	(14)		792.9	%	4			$	412		(99.0)	%
Percentage of sales	0.9		%	(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)	2021			2020			Change		2021			2020			Change
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		%

20

APYX MEDICAL CORPORATION

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued

Our 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. Our 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 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, 2021 was approximately $50.8 million compared with $56.9 million at December 31, 2020. The decrease in working capital from December 31, 2020 was primarily due to the net loss incurred by the Company during the first half of 2021, excluding non-cash activity, comprised primarily of stock-based compensation expense.

For the six months ended June 30, 2021, net cash used in operating activities was approximately $7.1 million, which principally funded our loss from operations of $8.8 million, compared with net cash used in operating activities of approximately $12.4 million in the same period for 2020.

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

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

21

APYX MEDICAL CORPORATION

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued

Critical Accounting Estimates

In preparing the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP), we have adopted various accounting policies. Our most significant accounting policies are disclosed in Note 2 to the consolidated financial statements included in our 2020 Form 10-K, filed with the SEC on March 31, 2021.

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.

22

APYX MEDICAL CORPORATION

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 deferred tax assets. We will reassess the realization of deferred tax assets each reporting period and will be able to reduce the valuation allowance to the extent the financial results of continuing operations improve, and it becomes more likely than not that the deferred tax assets will be realizable. As management expects the Company to continue to generate losses in the foreseeable future after 2020, we will continue to record a valuation allowance on the net deferred tax assets balance as of June 30, 2021.

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

Inflation

Inflation has not materially impacted the operations of our Company.

Off-Balance Sheet Arrangements

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

Recent Accounting Pronouncements

See Note 2 of the Notes to Condensed Consolidated Financial Statements.

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APYX MEDICAL CORPORATION

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

Not applicable.

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APYX MEDICAL CORPORATION

ITEM 4. 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"), 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, the Company's disclosure controls and procedures were effective.

Changes in Internal Control Over Financial Reporting

We rely extensively on information systems to manage 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.

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APYX MEDICAL CORPORATION

PART II.     Other Information

ITEM 1. Legal Proceedings

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APYX MEDICAL CORPORATION

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:

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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APYX MEDICAL CORPORATION

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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APYX MEDICAL CORPORATION

ITEM 6. Exhibits

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

* Filed herewith.

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

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APYX MEDICAL CORPORATION

SIGNATURES

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

	Apyx Medical Corporation
Date: August 12, 2021	By:	/s/ Charles D. Goodwin II
		Charles D. Goodwin II
		President, Chief Executive Officer and Director
		(Principal Executive Officer)
Date: August 12, 2021	By:	/s/ Tara Semb
		Tara Semb
		Chief Financial Officer,
		Treasurer and Secretary
		(Principal Financial Officer)

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