10-Q 1 apyx-20220930.htm 10-Q apyx-20220930
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
September 30, 2022
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-20220930_g1.jpg
APYX MEDICAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware11-2644611
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
5115 Ulmerton Road, Clearwater, FL 33760
(Address of principal executive offices, zip code)
(727) 384-2323
(Registrant’s telephone number)
Securities Registered Pursuant to Section 12 (b) of the Act:
Title of each classTrading symbol(s)Name of each exchange on which registered
Common StockAPYXNasdaq Stock Market, LLC

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes: No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes: No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated 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 November 9, 2022, 34,597,822 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 September 30, 2022

Page
Part I.
Item 1.
Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at September 30, 2022 and December 31, 2021
Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2022 and 2021
Condensed Consolidated Statements of Changes in Equity for the three and nine months ended September 30, 2022 and 2021
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2022 and 2021
Item 2.
Item 3.
Item 4.
Part II.
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
1

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)
September 30, 2022
(Unaudited)
December 31, 2021
ASSETS
Current assets:
Cash and cash equivalents$14,833 $30,870 
   Trade accounts receivable, net of allowance of $634 and $430
9,094 13,038 
Income tax receivables7,545 7,642 
Other receivables19 483 
Inventories, net of provision for obsolescence of $379 and $263
12,042 6,778 
Prepaid expenses and other current assets2,774 1,926 
Total current assets46,307 60,737 
Property and equipment, net of accumulated depreciation and amortization of $5,335 and
   $5,316
6,810 6,575 
Operating lease right-of-use assets774 121 
Finance lease right-of-use assets124 178 
Other assets1,253 1,110 
Total assets$55,268 $68,721 
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable$2,070 $2,631 
Accrued expenses and other current liabilities8,842 10,287 
Current portion of operating lease liabilities240 122 
Current portion of finance lease liabilities42 165 
Total current liabilities11,194 13,205 
Long-term operating lease liabilities454  
Long-term finance lease liabilities78 18 
Long-term contract liabilities1,192 1,323 
Other liabilities133 166 
Total liabilities13,051 14,712 
EQUITY
Common stock, $0.001 par value; 75,000,000 shares authorized; 34,588,398 issued and outstanding as of September 30, 2022, and 34,409,912 issued and outstanding as of December 31, 2021
35 34 
Additional paid-in capital71,641 66,221 
Accumulated deficit(29,686)(12,551)
Total stockholders’ equity
41,99053,704
Non-controlling interest 227 305 
Total equity42,217 54,009 
Total liabilities and equity$55,268 $68,721 

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
September 30,
Nine Months Ended
September 30,
2022202120222021
Sales$9,114 $11,831 $31,899 $31,693 
Cost of sales3,357 3,775 11,009 10,243 
Gross profit5,757 8,056 20,890 21,450 
Other costs and expenses:
Research and development1,061 1,175 3,289 3,374 
Professional services1,936 2,032 6,611 5,442 
Salaries and related costs3,871 4,206 13,944 12,794 
Selling, general and administrative4,671 4,611 14,675 12,596 
Total other costs and expenses11,539 12,024 38,519 34,206 
Loss from operations(5,782)(3,968)(17,629)(12,756)
Interest income73 2 93 9 
Interest expense(1)(3)(12)(9)
Other (loss) income, net(35)(192)551 (188)
Total other income (loss), net37 (193)632 (188)
Loss before income taxes(5,745)(4,161)(16,997)(12,944)
Income tax expense50 73 216 246 
Net loss(5,795)(4,234)(17,213)(13,190)
   Net loss attributable to non-controlling interest(31)(12)(78)(21)
Net loss attributable to stockholders$(5,764)$(4,222)$(17,135)$(13,169)
Loss per share:
Basic and diluted$(0.17)$(0.12)$(0.50)$(0.38)

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 September 30, 2022 and 2021
Common StockAdditional Paid-In CapitalAccumulated DeficitNon-controlling InterestTotal Equity
SharesPar Value
Balance at June 30, 202134,323 $34 $63,650 $(6,326)$324 $57,682 
Shares issued on stock options exercises for cash3 — 28 — 28 
Stock based compensation— — 1,184 — 1,184 
Shares issued on net settlement of stock options14 — — — — 
Net loss— — — (4,222)(12)(4,234)
Balance at September 30, 202134,340 $34 $64,862 $(10,548)$312 $54,660 
Balance at June 30, 202234,493 $34 $69,793 $(23,922)$258 $46,163 
Shares issued on stock options exercises for cash62 1 156 — 157 
Stock based compensation— — 1,692 — 1,692 
Shares issued on net settlement of stock options33 — — — — 
Net loss— — — (5,764)(31)(5,795)
Balance at September 30, 202234,588 $35 $71,641 $(29,686)$227 $42,217 
Nine Months Ended September 30, 2022 and 2021
Common StockAdditional Paid-In CapitalRetained Earnings (Accumulated Deficit)Non-controlling InterestTotal
SharesPar Value
Balance at December 31, 202034,289 $34 $61,066 $2,621 $138 $63,859 
Contributions from non-controlling interest— — — — 195195 
Shares issued on stock options exercises for cash11 — 49 — 49 
Stock based compensation— — 3,747 — 3,747 
Shares issued on net settlement of stock options40 — — — — 
Net loss— — — (13,169)(21)(13,190)
Balance at September 30, 202134,340 $34 $64,862 $(10,548)$312 $54,660 
Balance at December 31, 202134,410 $34 $66,221 $(12,551)$305 $54,009 
Shares issued on stock options exercises for cash106 1 364 — 365 
Stock based compensation— — 5,056 — 5,056 
Shares issued on net settlement of stock options72 — — — — 
Net loss— — — (17,135)(78)(17,213)
Balance at September 30, 202234,588 $35 $71,641 $(29,686)$227 $42,217 
 
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)
Nine Months Ended September 30,
20222021
Cash flows from operating activities
Net loss$(17,213)$(13,190)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization688 674 
Provision for inventory obsolescence158 15 
Loss on disposal of property and equipment76 47 
Stock based compensation5,056 3,747 
Provision for allowance for doubtful accounts283 57 
Changes in operating assets and liabilities:
Trade receivables3,273 (3,168)
Prepaid expenses and other assets(521)(23)
Income tax receivables97  
Inventories(5,672)(1,982)
Accounts payable(439)1,555 
Accrued and other liabilities(1,536)1,605 
Net cash used in operating activities(15,750)(10,663)
Cash flows from investing activities
Purchases of property and equipment(868)(391)
Net cash used in investing activities(868)(391)
Cash flows from financing activities
Proceeds from stock option exercises365 49 
Repayment of finance lease liabilities(138)(181)
Contributions from non-controlling interests 195 
Net cash provided by financing activities227 63 
Effect of exchange rates on cash354 (26)
Net change in cash and cash equivalents(16,037)(11,017)
Cash and cash equivalents, beginning of period30,870 41,915 
Cash and cash equivalents, end of period$14,833 $30,898 
Cash paid for:
Interest$12 $8 
Income taxes128 13 
Non cash activities:
Right-of-use assets capitalized and operating lease liabilities recognized upon lease modification$769 $ 
Right-of-use assets capitalized and finance lease liabilities recognized upon execution of lease$103 $ 
Right-of-use assets and finance lease liabilities derecognized upon execution of lease modification$28 $ 

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, including its Helium Plasma Technology products marketed and sold as Renuvion® in the cosmetic surgery market and J-Plasma® in the hospital surgical market. Renuvion® and J-Plasma® offer surgeons a unique ability to provide controlled heat to tissue to achieve their desired results. The Company also leverages its deep expertise and decades of experience in unique waveforms through OEM agreements with other medical device manufacturers.

As part of its plan to accelerate and fully fund the development of its advanced energy business, with a focus in the cosmetic surgery market, the Company sold its Core business in 2018 for gross proceeds of $97 million. These proceeds were used to launch broad marketing and sales initiatives which resulted in rapid sales growth through December 31, 2021 and into the first quarter of 2022. This planned growth in the business was accompanied by scaled operations, including procurement of components, expanded manufacturing capacity to turn those materials into saleable inventory, additional discretionary expenditures, including increased global participation at trade shows, additional employee trainings, user meetings, increased travel and entertainment expenses, more expansive research and development projects, and additional headcount to support those activities. Additionally, the Company had, and still has, some significant non-recurring discretionary expenditures associated with completing its multi-year marketing initiatives related to its dermal resurfacing and skin laxity clearances.

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 the Company’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 Helium Plasma Technology.

On May 26, 2022, the Company announced that it had received 510(k) clearance from the FDA for the use of the Renuvion® 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 Renuvion® APR Handpiece for certain skin contraction procedures.

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.

While management expected that receiving these clearances would materially mitigate the financial effects of the Safety Communication in future periods, the Company continues to experience reduced demand for the adoption and utilization of its technology and management believes that this may have an adverse effect in future periods.

The accompanying unaudited condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern. The going concern basis of presentation assumes that the Company will continue in operation one year after the date these financial statements are issued and will be able to realize its assets and discharge its liabilities and commitments in the normal course of business.

Pursuant to the requirements of the Financial Accounting Standards Board’s Accounting Standards Codification (“ASC”) Topic 205-40, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, management must evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern for one year from the date these condensed consolidated financial statements are issued. This evaluation does not take into consideration the potential mitigating effect of management’s plans that have not been fully implemented or are not within control of the Company as of the date the condensed consolidated financial statements are issued. When substantial doubt exists under this methodology, management evaluates whether the mitigating effect of its plans sufficiently alleviates substantial doubt about the Company’s ability to continue as a going concern. The mitigating effect of management’s plans, however, is only considered if both (1) it is probable that the plans will be effectively implemented within one year after the date that the financial statements are issued, and (2) it is probable that the plans, when implemented, will mitigate the relevant conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern
6

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


within one year after the date that the financial statements are issued.

While sales were continuing to grow into the first quarter of 2022 prior to the FDA Safety Communication, over the last few years, exclusive of the Company’s sale of the Core business segment to Symmetry Surgical during 2018, it has incurred recurring net losses and cash outflows from operations and the Company anticipates that losses will continue in the near term. During the nine months ended September 30, 2022, the Company incurred an operating loss of $17.6 million and used $15.8 million of cash in operations. As of September 30, 2022, the Company had cash and cash equivalents of $14.8 million. These conditions raise substantial doubt about the Company’s ability to continue as a going concern for a period of at least one year from the date of issuance of these unaudited condensed consolidated financial statements.

In an effort to alleviate these conditions, management is currently evaluating various funding alternatives to improve liquidity and may seek to raise additional capital through debt financing, the sale of equity securities, leveraging its unencumbered real estate, or any combination thereof. In addition, management is actively pursuing collection of the Company’s income tax receivable. Management also continues to re-assess its operating expenditures and cost structure to be commensurate with its expected levels of revenue and has the ability to reduce or delay expenditures to enhance and preserve liquidity. As the Company seeks additional sources of financing, there can be no assurance that such financing would be available to the Company on favorable terms or at all. The Company’s ability to obtain additional financing in the debt and equity capital markets is subject to several factors, including market and economic conditions, the Company’s performance and investor sentiment with respect to the Company and its industry.

Management believes that the actions and efforts it can and will take to manage operating expenditures and, while not assured, arrange alternative financing sources as described above will enable the Company to meet its obligations for a period of at least one year from the date of issuance of these unaudited condensed consolidated financial statements. As a result, management believes its plans alleviate substantial doubt about its ability to continue as a going concern. These unaudited condensed financial statements do not include any adjustments relating to the carrying amounts and classification of assets and liabilities that may be necessary should the Company be unable to continue as a going concern.

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, 2021. 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 period to conform to the current period presentation. These reclassifications had no impact on previously reported net loss, accumulated deficit or net cash used in operating activities 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 continues 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 condensed consolidated financial statements, we do not expect the impact to be material.

7

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


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.
8

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 Companys 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, which expired August 30, 2022, whereby it manufactured certain Core products and sold them to Symmetry at agreed upon prices. Any activity resulting from this agreement was netted and reported in the Condensed Consolidated Statements of Operations as other income (loss). There was no significant Core activity for the three months ended September 30, 2022. Core activity for the three months ended September 30, 2021, amounted to $1.6 million with cost of sales equivalents of $1.3 million and related other expenses of $0.5 million for net other loss of $0.3 million. Core activity for the nine months ended September 30, 2022, amounted to $0.6 million with cost of sales equivalents of $0.5 million and other related expenses of $0.1 million for net other loss of $0.1 million. Core activity for the nine months ended September 30, 2021, amounted to $5.2 million with cost of sales equivalents of $4.4 million and net other related operating expenses of $1.1 million for net other loss of $0.3 million.



9

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 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)September 30,
2022
December 31,
2021
Raw materials$5,078 $3,603 
Work in process2,414 1,441 
Finished goods 4,929 1,997 
Gross inventories12,421 7,041 
Less: provision for obsolescence(379)(263)
Inventories, net$12,042 $6,778 

10

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 computers under non-cancelable operating lease agreements. During the three months ended September 30, 2022, the Company’s leases on the vehicles in Clearwater, Florida expired and the Company purchased the vehicles at fair value. During the three months ended September 30, 2022, the Company entered into a one year extension on one of its leases on computer equipment. This extension resulted in reclassification of the lease from finance to operating. During the nine months ended September 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 nine months ended September 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:
September 30, 2022December 31, 2021
OperatingFinanceOperatingFinance
Weighted average remaining lease term (in years)4.44.11.00.8
Weighted average discount rate2.75%2.64%3.98%4.00%

Maturities of lease liabilities as of September 30, 2022 are as follows:
(In thousands)OperatingFinance
2022$75 $10 
2023218 40 
2024111 21 
2025111 21 
2026111 21 
Thereafter111 12 
Total lease payments737 125 
Less imputed interest(43)(5)
Present value of lease liabilities694 120 
Less current portion of lease liabilities(240)(42)
Long-term portion of lease liabilities$454 $78 


11

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




NOTE 6.     ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities consisted of the following:
(in thousands)September 30,
2022
December 31,
2021
Accrued payroll$879 $546 
Accrued bonuses 2,117 
Accrued commissions877 1,656 
Accrued product warranties616 593 
Accrued product liability claim insurance deductibles1,016 610 
Accrued professional fees and legal related contingent liabilities1,134 421 
Joint and several payroll liability399 1,027 
Short-term contract liabilities1,145 533 
Uncertain tax positions2,024 1,863 
Sales tax payable135 428 
Other accrued expenses and current liabilities617 493 
Total accrued expenses and other current liabilities$8,842 $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 nine months ended September 30, 2022.


NOTE 7.     CHINA JOINT VENTURE

In 2019, the Company executed a joint venture agreement with its Chinese supplier (the “China JV”) whereby the Company has a 51% interest. The China JV has been consolidated in these condensed consolidated financial statements. The agreement required the Company to make capital contributions into the newly formed entity of approximately $357,000, which had been fully funded as of December 31, 2021. As of the date of these condensed consolidated financial statements, the China JV has not commenced principal operations.

Changes in the Companys investment in the China JV were as follows:

Three Months Ended September 30,Nine Months Ended
September 30,
(In thousands)2022202120222021
Beginning interest in China JV$269 $338 $317 $144 
Contributions $ $ $ $203 
Net loss attributable to Apyx$(33)$(13)$(81)$(22)
Ending interest in China JV$236 $325 $236 $325 
12

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



NOTE 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
September 30,
Nine Months Ended
September 30,
(in thousands, except per share data)2022202120222021
Numerator:
Net loss attributable to stockholders$(5,764)$(4,222)$(17,135)$(13,169)
Denominator:
Weighted average shares outstanding - basic and diluted
34,569 34,330 34,488 34,318 
Loss per share:
Basic and diluted$(0.17)$(0.12)$(0.50)$(0.38)
Anti-dilutive instruments excluded from diluted loss per common share:
Options6,635 5,534 6,635 5,534 

13

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


NOTE 9.     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 $1,692,000 and $5,056,000, respectively, in stock-based compensation expense during the three and nine months ended September 30, 2022, as compared with $1,184,000 and $3,747,000, respectively, for the three and nine months ended September 30, 2021.

Stock option activity is summarized as follows:
Number of optionsWeighted average exercise price
Outstanding at December 31, 2021
5,397,691 $5.95 
Granted1,692,419 10.64 
Exercised(299,006)4.57 
Canceled and forfeited(155,697)9.20 
Outstanding at September 30, 2022
6,635,409 $7.13 

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 September 30, 2022 and 2021, respectively, we received 55,853 and 37,049 options as payment in the exercise of 33,313 and 13,285 options. For the nine months ended September 30, 2022 and 2021, respectively, we received 92,520 and 59,104 options as payment in the exercise of 72,313 and 39,312 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 2022 (“2022 Grants”) utilizing a Black-Scholes model.
2022 Grants
Strike price$5.10-$10.56
Risk-free rate1.6%-3.9%
Expected dividend yield
Expected volatility69.6%-78.5%
Expected term (in years)5-6


NOTE 10.     INCOME TAXES

Income tax expense was approximately $50,000 and $73,000 with effective tax rates of (0.9)% and (1.8)% for the three months ended September 30, 2022 and 2021, respectively. Income tax expense was approximately $216,000 and $246,000 with effective tax rates of (1.3)% and (1.9)% for the nine months ended September 30, 2022 and 2021, respectively. For the three and nine months ended September 30, 2022 and 2021, the effective 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 positions.

14

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


The Company has gross unrecognized tax benefits of approximately $1,313,000 at September 30, 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 September 30, 2022, the Company had approximately $711,000 in accrued interest and penalties related to unrecognized tax benefits. Included in the income tax expense for the three months ended September 30, 2022 and 2021, respectively, are approximately $54,000 and $52,000 of interest and penalties on the Company's uncertain tax positions. Included in the income tax expense for the nine months ended September 30, 2022 and 2021, respectively, are approximately $160,000 and $152,000 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 $2,024,000 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 with the completion of the IRS examination.


NOTE 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 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 nine months ended September 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
15

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


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 nine months ended September 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 condensed consolidated financial statements. In most cases, significant judgment is required to estimate the amount and timing of a loss to be recorded, actual results may differ from these estimates.

Purchase Commitments

At September 30, 2022, the Company had purchase commitments totaling approximately $3.1 million, substantially all of which is expected to be purchased within the next fifteen months.

16

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


NOTE 12.     RELATED PARTY TRANSACTIONS

Several relatives of Nikolay Shilev, Apyx Bulgaria’s Managing Director, are considered related parties. Teodora Shileva, Mr. Shilev’s spouse, is an employee of the Company working in the accounting department. Antoaneta Dimitrova Shileva-Toromanova, Mr. Shilev’s sister, is the manager of 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 September 30, 2022 and 2021, the Company made purchases from this supplier of approximately $85,000 and $456,000, respectively. For the nine months ended September 30, 2022 and 2021, the Company made purchases from this supplier of approximately $455,000 and $1,102,000, respectively. At September 30, 2022 and December 31, 2021, respectively, the Company owed this supplier approximately $41,000 and $1,000.

NOTE 13.     GEOGRAPHIC AND SEGMENT INFORMATION

Operating segments are aggregated into reportable segments only if they exhibit similar economic characteristics. In addition to similar economic characteristics, 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 Companys 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 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:
17

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


Three Months Ended September 30, 2022
(In thousands)Advanced EnergyOEMCorporate & OtherTotal
Sales$7,080 $2,034 $ $9,114 
Income (loss) from operations(1,174)356 (4,964)(5,782)
Interest income  73 73 
Interest expense  (1)(1)
Other loss, net  (35)(35)
Income tax expense  50 50 

Three Months Ended September 30, 2021
(In thousands)Advanced EnergyOEMCorporate & OtherTotal
Sales$10,313 $1,518 $ $11,831 
Income (loss) from operations52 328 (4,348)(3,968)
Interest income  2 2 
Interest expense  (3)(3)
Other loss, net  (192)(192)
Income tax expense  73 73 

Nine Months Ended September 30, 2022
(In thousands)Advanced EnergyOEMCorporate & OtherTotal
Sales$26,258 $5,641 $ $31,899 
Income (loss) from operations(3,765)1,142 (15,006)(17,629)
Interest income  93 93 
Interest expense  (12)(12)
Other income, net  551 551 
Income tax expense  216 216 
18

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


Nine Months Ended September 30, 2021
(In thousands)Advanced EnergyOEMCorporate & OtherTotal
Sales$27,951 $3,742 $ $31,693 
Income (loss) from operations(224)588 (13,120)(12,756)
Interest income  9 9 
Interest expense  (9)(9)
Other loss, net  (188)(188)
Income tax expense  246 246 


International sales represented approximately 23.2% and 29.5% of total revenues for the three and nine months ended September 30, 2022, respectively, as compared with approximately 33.1% and 34.2% of total revenues for the three and nine months ended September 30, 2021, respectively.

Revenue by geographic region, based on the customer's “ship to” location on the invoice, are as follows:
Three Months Ended
September 30,
Nine Months Ended
September 30,
(In thousands)2022202120222021
Sales by Domestic and International
Domestic$6,997 $7,911 $22,492 $20,860 
International2,117 3,920 9,407 10,833 
Total$9,114 $11,831 $31,899 $31,693 

19

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, including our Helium Plasma Technology products marketed and sold as Renuvion® in the cosmetic surgery market and J-Plasma® in the hospital surgical market. Renuvion® and J-Plasma® offer surgeons a unique ability to provide controlled heat to tissue to achieve their desired 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.

As part of our plan to accelerate and fully fund the development of our advanced energy business, with a focus in the cosmetic surgery market, we sold our Core business in 2018 for gross proceeds of $97 million. These proceeds were used to launch broad marketing and sales initiatives which resulted in rapid sales growth through December 31, 2021 and into the first quarter of 2022. This planned growth in the business was accompanied by scaled operations, including procurement of components, expanded manufacturing capacity to turn those materials into saleable inventory, additional discretionary expenditures, including increased global participation at trade shows, additional employee trainings, user meetings, increased travel and entertainment expenses, more expansive research and development projects, and additional headcount to support those activities. Additionally, we had and still have, some significant non-recurring discretionary expenditures associated with completing our multi-year marketing initiatives related to our dermal resurfacing and skin laxity clearances.

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.

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.

While we expected that receiving these clearances would materially mitigate the financial effects of the Safety Communication in future periods, we continue to experience reduced demand for the adoption and utilization of our technology and we believe that this may have an adverse effect in future periods.

While sales were continuing to grow into the first quarter of 2022 prior to the FDA Safety Communication, over the last few years, exclusive of our sale of the Core business segment to Symmetry Surgical during 2018, we have incurred recurring net losses and cash outflows from operations and we anticipate that losses will continue in the near term. During the nine months ended September 30, 2022, we incurred an operating loss of $17.6 million and used $15.8 million of cash in operations. As of September 30, 2022, we had cash and cash equivalents of $14.8 million. These conditions raise substantial doubt about our ability to continue as a going concern for a period of at least one year from the date of issuance of these unaudited condensed consolidated financial statements.
20

APYX MEDICAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued


In an effort to alleviate these conditions, we are currently evaluating various funding alternatives to improve liquidity and may seek to raise additional capital through debt financing, the sale of equity securities, leveraging our unencumbered real estate, or any combination thereof. In addition, we are actively pursuing collection of our income tax receivable. We also continue to re-assess our operating expenditures and cost structure to be commensurate with our expected levels of revenue and we have the ability to reduce or delay expenditures to enhance and preserve liquidity. As we seek additional sources of financing, there can be no assurance that such financing would be available to us on favorable terms or at all. Our ability to obtain additional financing in the debt and equity capital markets is subject to several factors, including market and economic conditions, our performance and investor sentiment with respect to us and our industry.

We believe that the actions and efforts we can and will take to manage operating expenditures and, while not assured, arrange alternative financing sources as described above will enable us to meet our obligations for a period of at least one year from the date of issuance of these unaudited condensed consolidated financial statements. As a result, we believe our plans alleviate substantial doubt about our ability to continue as a going concern. These unaudited condensed financial statements do not include any adjustments relating to the carrying amounts and classification of assets and liabilities that may be necessary should we be unable to continue as a going concern.

We continue to focus our efforts to increase the adoption of our Advanced Energy technology and utilization of our handpieces by surgeons in the U.S. and fulfilling demand from distributors in our international markets. Management estimates that our products have been sold in more than 60 countries. As of September 30, 2022, we had a direct sales force of 35 field-based selling professionals and utilized 3 independent sales agencies. We also had 4 sales managers. This selling organization is focused on the use of Renuvion® and J-Plasma® in the cosmetic 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 training programs and marketing-related activities to support accelerated adoption of Renuvion® into 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. 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.

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.


Results of Operations

Sales
21

APYX MEDICAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued

Three Months Ended
September 30,
Nine Months Ended
September 30,
(In thousands)20222021Change20222021Change
Sales by Reportable Segment
Advanced Energy$7,080 $10,313 (31.3)%$26,258 $27,951 (6.1)%
OEM2,034 1,518 34.0 %5,641 3,742 50.7 %
Total$9,114 $11,831 (23.0)%$31,899 $31,693 0.6 %
(632,000)
Sales by Domestic and International
Domestic$6,997 $7,911 (11.6)%$22,492 $20,860 7.8 %
International2,117 3,920 (46.0)%9,407 10,833 (13.2)%
Total$9,114 $11,831