Quarterly Report for Quarter Ending September 30, 2026 (Form 10-Q)

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

The following discussion and analysis should be read in conjunction with our financial statements and related notes contained elsewhere in this report and with the audited consolidated financial statements and footnotes as of and for the year ended December 31, 2025 contained within our Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 10, 2026. 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 a surgical aesthetics company with a passion for elevating people's lives through innovative products, including our Helium Plasma Platform Technology products marketed and sold as Renuvion^® and the AYON Body Contouring System^TM 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 AYON Body Contouring System^TM is an FDA-cleared, surgeon-designed body contouring system that combines precision, versatility, and innovation in an all-in-one platform. It seamlessly integrates fat removal, closed loop contouring, and Renuvion's tissue contraction and electrosurgical capabilities, empowering surgeons to deliver comprehensive body contouring treatments for patients. We also leverage our deep expertise and decades of experience in unique waveforms through OEM agreements with other medical device manufacturers.

We operate in two business segments: OEM and Surgical Aesthetics, formerly known as Advanced Energy. The OEM segment is primarily development and manufacturing contracts and product driven. The Surgical Aesthetics segment sells both capital equipment and consumables in the form of a single-use handpiece. Sales of handpiece units are a substantial portion of our business and for the nine months ended September 30, 2026 and 2025, we sold approximately 68,000 and 63,000 units, respectively. In the U.S., handpiece revenue accounts for more than 50% of our total Surgical Aesthetics revenue.

Glucagon- like peptide -1 receptor agonists ("GLP-1s"), such as Mounjaro^®, Wegovy^® and Ozempic^®, are prescribed for the treatment of diabetes and/or weight loss in combination with exercise to improve glycemic control. GLP-1s have also been found to mimic the GLP-1 satiety hormone in our bodies. When one eats, GLP-1 is released in the small intestines regulating blood sugar and sending signals to the brain centers that control appetite. Studies have shown patients taking GLP-1's have experienced a significant loss of body weight.

The GLP market continues to rapidly evolve from a niche, high priced injectable drug segment to a broad competitive and increasingly accessible metabolic health platform. Recent approvals are expanding indications (beyond diabetes into obesity and cardiovascular risk) are significantly increasing the addressable market, while the emergence of oral versions is lowering barriers to adoption and bringing these therapies into more mainstream, primary care use. At the same time, growing competition and policy pressure are driving prices down, shifting the market from a premium, supply-constrained model to one focused on volume and access. Overall, we believe the landscape is moving toward large-scale, chronic use with wider patient reach, more treatment options, and intensifying competition shaping both innovation and affordability.

We believe the increased use of GLP-1s had an initial negative impact on revenue for plastic and cosmetic surgeons and created uncertainty in the aesthetic space. However, we believe, that the use of these drugs will have a ripple effect which will drive people towards plastic surgery and may provide a tailwind for sales of our Renuvion products. Rapid weight loss caused by these drugs can contribute to loose skin. To address this, the cosmetic surgery market focuses on body contouring. Body contouring is a customizable treatment for patients to target specific fat deposits, engage in the transfer of fat, and treatments to address loose or lax skin. Renuvion is the only FDA-cleared device for the treatment of this issue post liposuction. Additionally, Renuvion may be used to treat skin laxity without the use of liposuction, potentially increasing the total available market for our products.

Recent Activities

On May 11, 2026, we announced that we received expanded 510(k) clearance from the U.S. Food and Drug Administration (the "FDA") for the AYON Body Contouring System™ ("AYON") to include power liposuction, an advanced form of liposuction that uses a reciprocating cannula to enhance efficiency of fat removal to reduce a surgeon's effort and operating room time. We commenced a limited commercial launch of power liposuction at the end of June 2026 and a full launch during the third quarter 2026.

Liquidity

We have incurred recurring net losses and cash outflows from operations and we anticipate that losses will continue in the near term. We plan to continue to fund our operations and capital funding needs through existing cash, sales of our products and, if necessary, additional equity and/or debt financing. However, we cannot be certain that additional financing will be available when needed or that, if available, financing will be obtained on terms acceptable to us. The sale of additional equity would result in dilution to our stockholders. Incurring additional debt financing would result in further debt service obligations, and the instruments governing such debt could provide for operating and financing covenants that would restrict our operations. If we are unable to raise additional capital in sufficient amounts or on acceptable terms, it may be necessary to delay, limit, reduce, or terminate our sales, marketing and product development. Any of these actions could harm our business, prospects and results of operations.

Operating Segments

In regard to our operating segments, 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 CODM 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: Surgical Aesthetics 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. All related expenses are recorded as cost of sales and therefore no segment specific operating expenses are incurred.

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

Results of Operations

Sales

Total revenue increased by 9.0%, or approximately $1.2 million, for the three months ended September 30, 2026 when compared with the three months ended September 30, 2025. Surgical Aesthetics segment sales increased 17.2%, or approximately $1.9 million, for the three months ended September 30, 2026 when compared with the three months ended September 30, 2025. The Surgical Aesthetics sales increase was driven by sales of AYON, as we commenced our commercial launch in the third quarter of 2025 and increased sales of generators internationally. These increases were partially offset by decreases in domestic sales of standalone generators and sales of single-use handpieces globally. OEM segment sales decreased 41.5%, or approximately $0.8 million, for the three months ended September 30, 2026 when compared with the three months ended September 30, 2025. The decrease in OEM sales was due to a decrease in sales volume to existing customers. With the increased focus on Surgical Aesthetics, we expect that OEM segment revenue will decrease for the year.

Total revenue increased by 20.0%, or approximately $6.7 million, for the nine months ended September 30, 2026 when compared with the nine months ended September 30, 2025. Surgical Aesthetics segment sales increased 26.1%, or approximately $7.5 million, for the nine months ended September 30, 2026 when compared with the nine months ended September 30, 2025. The Surgical Aesthetics sales increase was driven by sales of AYON, as we commenced our commercial launch in the third quarter of 2025, increased sales of generators internationally and increased volume of single-use handpieces in both domestic and international markets. These increases were partially offset by decreases in domestic sales of standalone generators. OEM segment sales decreased 14.7%, or approximately $0.7 million, for the nine months ended September 30, 2026 when compared with the nine months ended September 30, 2025. The decrease in OEM sales was due to a decrease in sales volume to existing customers. With the increased focus on Surgical Aesthetics, we expect that OEM segment revenue will decrease for the year.

International sales represented 30.8% and 32.6% of total revenues for the three and nine months ended September 30, 2026 as compared with 27.5% and 29.2% of total revenues for the same periods in the prior year. Management estimates our products have been sold in more than 60 countries through local dealers, coordinated by our sales and marketing personnel through our facilities in Clearwater, Florida and Sofia, Bulgaria.

Gross Profit

Gross profit for the three months ended September 30, 2026, increased 8.5% to $9.0 million, compared to $8.3 million for the same period in the prior year. Gross margin for the three months ended September 30, 2026, was 64.2%, compared to 64.4% for the same period in 2025. The decrease in in gross margin for the three months ended September 30, 2026 from the prior year period is primarily attributable to geographic mix, with international sales comprising a higher percentage of total sales and product mix within both the Surgical Aesthetics and OEM segments. These decreases were partially offset by an increase due to mix between our segments, with Surgical Aesthetics comprising a higher percentage of total sales.

Gross profit for the nine months ended September 30, 2026, increased 22.6% to $25.8 million, compared to $21.0 million for the same period in the prior year. Gross margin for the nine months ended September 30, 2026, was 63.8%, compared to 62.5% for the same period in 2025. The increase in gross margin for the nine months ended September 30, 2026 from the prior year period is primarily attributable to mix between our segments with Surgical Aesthetics comprising a higher percentage of total sales. This was partially offset by geographic mix, with international sales comprising a higher percentage of total sales, product mix within the Surgical Aesthetics segment and tariffs that began affecting us in the second half of 2025.

We are seeking refunds of IEEPA tariffs paid; however, the ultimate amount, timing, and final resolution of any additional refunds remain uncertain pending the outcome of the ongoing litigation and related administrative processes. We did not receive any refund payments during the nine months ended September 30, 2026, and accordingly, given the uncertainty regarding the amount or timing of collection, we will record the refunds as they are received. Any tariff recoveries will be reflected as a reduction of cost of sales for inventory that has already been sold and as a reduction of the carrying value for unsold inventory.

Other Costs and Expenses

Research and development

Research and development expenses increased 6.0% for the three months ended September 30, 2026, primarily due to higher compensation and benefits costs.

Research and development expenses decreased 0.9% for the nine months ended September 30, 2026, primarily due to lower spending on our product development initiatives. This was partially offset by higher compensation and benefits costs.

Professional services

Professional services expense decreased 13.1% for the three months ended September 30, 2026, primarily due to a decrease in physician and marketing consulting expenses ($0.2 million).

Professional services expense decreased 13.6% for the nine months ended September 30, 2026, primarily due to decreases in physician and marketing consulting expenses ($0.6 million) and legal expense ($0.1 million). These decreases were partially offset by an increase in recruiting expense ($0.1 million).

Salaries and related costs

During the three months ended September 30, 2026, salaries and related expenses increased 12.7%, primarily due to increases in salaries and benefits to existing employees and certain additional employees in sales and marketing to support the launch of AYON ($0.3 million) and higher stock-based compensation expense ($0.1 million).

During the nine months ended September 30, 2026, salaries and related expenses increased 9.4%, primarily due to an increase in salaries and benefits to existing employees and certain additional employees in sales and marketing to support the launch of AYON ($1.0 million). This was partially offset by a decrease in stock-based compensation expense ($0.1 million).

Selling, general and administrative expenses

During the three months ended September 30, 2026, selling, general and administrative expense increased 4.3%, primarily due to increases in insurance expense, including claims on our policies ($0.2 million) and Executive Chairman of the Board of Directors stock-based compensation expense ($0.1 million). These increases were partially offset by a decrease in commissions ($0.2 million).

During the nine months ended September 30, 2026, selling, general and administrative expense increased 11.2%, primarily due to increases in Executive Chairman of the Board of Directors compensation stock-based expense ($0.8 million), commissions ($0.2 million), insurance expense, including claims on our policies ($0.1 million) and miscellaneous other expenses ($0.3 million). These increases were partially offset by a decrease in allowances for credit losses ($0.1 million).

Interest Income (Expense)

Interest income was flat at approximately $0.3 million for the three months ended September 30, 2026 and 2025. Interest income decreased approximately $0.1 million for the nine months ended September 30, 2026, when compared with the same period in the prior year. This decrease is due to a lower average yield in our cash equivalents in money market funds and U.S. Treasury securities.

Interest expense was flat at approximately $1.4 million and $4.2 million for the three and nine months ended September 30, 2026 and 2025, respectively.

Income Taxes

Income tax expense was approximately $116,000 and $78,000 with effective tax rates of (6.9)% and (4.2)% for the three months ended September 30, 2026 and 2025, respectively. Income tax expense was approximately $383,000 and $176,000 with effective tax rates of (5.8)% and (1.8)% for the nine months ended September 30, 2026 and 2025, respectively. For the three and nine months ended September 30, 2026 and 2025, the effective rate differs from the statutory rate primarily due to the full valuation allowance recorded on the net operating loss ("NOL") and net deferred tax assets generated during the periods.

Liquidity and Capital Resources

At September 30, 2026, we had approximately $25.8 million in cash and cash equivalents as compared to approximately $31.7 million in cash and cash equivalents at December 31, 2025. Our working capital at September 30, 2026 was approximately $43.0 million compared with $46.8 million at December 31, 2025.

For the nine months ended September 30, 2026, net cash used in operating activities was approximately $5.7 million, compared with net cash used in operating activities of approximately $5.5 million in the nine months ended September 30, 2025. The increase in cash used in operations is primarily due to the payment of 2025 bonuses in the first quarter of 2026 and cash used to procure inventory for our expanded product portfolio. This was partially offset by the reduction in our operating loss, which was driven by an increase in Surgical Aesthetics sales.

Net cash used in investing activities was $0.4 million and $0.8 million for the nine months ended September 30, 2026 and 2025, respectively, related to investments in property and equipment.

Net cash provided by financing activities for the nine months ended September 30, 2026 was $0.1 million and was primarily related to proceeds on the exercise of stock options.

We have incurred recurring net losses and cash outflows from operations and we anticipate that losses will continue in the near term. We plan to continue to fund our operations and capital funding needs through existing cash, sales of our products and if necessary additional equity and/or debt financing. However, we cannot be certain that additional financing will be available when needed or that, if available, financing will be obtained on terms acceptable to us. The sale of additional equity would result in dilution to our stockholders. Incurring additional debt financing would result in further debt service obligations, and the instruments governing such debt could provide for operating and financing covenants that would restrict our operations. If we are unable to raise additional capital in sufficient amounts or on acceptable terms, it may be necessary to delay, limit, reduce, or terminate our sales, marketing and product development. Any of these actions could harm our business, results of operations and prospects.

On November 7, 2024, we entered into an amendment to the Perceptive Credit Agreement. The amendment reduced the financial covenant trailing twelve-month revenue targets relating to its Surgical Aesthetics segment (tested quarterly), with amended year-end targets of $52.4 million and $60.3 million for 2026 and 2027, respectively. The amendment also introduced a maximum operating expense financial covenant, with a full year target of $45.0 million for 2026. The Perceptive Credit Agreement, as amended, continues to contain customary affirmative and negative covenants, including covenants limiting the ability of us and our subsidiaries, among other things, to incur debt, grant liens, make distributions, enter certain restrictive agreements, pay or modify subordinated debt, dispose of assets, make investments and acquisitions, enter into certain transactions with affiliates, and undergo certain fundamental changes, in each case, subject to limitations and exceptions set forth in the Perceptive Credit Agreement. Additionally, we must maintain a balance of $3.0 million in cash and cash equivalents during the term of the Perceptive Credit Agreement. As of September 30, 2026, we were in compliance with the financial covenants contained within the Perceptive Credit Agreement, as amended. Our continued compliance with covenants is subject to meeting or exceeding forecasted Surgical Aesthetics revenues, as amended and controlling operating expenses. Monthly principal payments on the Perceptive Credit Agreement commence in November 2027 at 3% of the outstanding balance through maturity in November 2028.

For a more in-depth description of the terms of the Perceptive Credit Agreement, as amended, see Note 10 in Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2025 and Note 5 of Notes to Condensed Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q.

On December 1, 2025, we filed a shelf registration statement providing us the ability to register and sell our securities in the aggregate amount up to $100 million. This shelf registration statement replaced our previous shelf registration statement that expired during December 2025.

At September 30, 2026, we had purchase commitments totaling approximately $3.9 million, substantially all of which is expected to be purchased within the next twelve months.

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 Annual Report on Form 10-K for the year ended December 31, 2025, filed with the SEC on March 10, 2026.

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, legal proceedings, 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:

Accounts Receivable Allowance

We maintain a reserve for uncollectible accounts receivable. When evaluating the adequacy of the allowance for credit losses, we analyze historical bad debt experience, the composition of outstanding receivables by customer class, and the age of outstanding balances, and we make estimates in connection with establishing the allowance for credit losses, including the expected impacts of changes in the operating environment in multiple countries as well as the credit terms being offered to customers, to determine where adjustments to historical experience are warranted. The economic uncertainty in the capital equipment market being experienced in the aesthetic space as a result of the disruption from GLP-1's has resulted in the granting of extended credit terms. Accordingly, we believe that there is additional exposure in our outstanding receivables and have adjusted our accounts receivable allowance for this expectation. 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.

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. We discuss significant judgements with counsel, which include determining the legitimacy of asserted and unasserted claims, the probability that a loss has been incurred, the estimates of the net potential range of losses associated with these claims, the timing of the losses associated with these claims and historical experience with these claims. Additionally, the deductibles on our insurance policies that cover these claims have increased in recent periods, creating additional exposure and losses in excess of historical experience. It is at least reasonably possible that a change in the actual amount of loss will occur in the near term.

Off-Balance Sheet Arrangements

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

Recent Accounting Pronouncements

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

APYX MEDICAL CORPORATION