What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-03-16 compared with 2022-03-17 · 134 added, 88 removed, 158 unchanged (58% of the section changed)

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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 physicians and their patients.

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.

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 FDA posted a 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.

We continue to work with the FDA towards securing 510(k) clearance for additional indications.

We are in the process of evaluating what effects, if any, the Communication will have on our results of operations, cash flows and financial position.

On March 14, 2022, the U.S.

Food and Drug Administration (“FDA”) posted a Safety Communication that warns consumers and health care providers against the use of our Advanced Energy products outside of their FDA-cleared indications for general use in cutting, coagulation, and ablation of soft tissue during open and laparoscopic surgical procedures.

Following the Safety Communication, we experienced slowed demand for the adoption of our Helium Plasma Technology.

On May 26, 2022, we announced that we received 510(k) clearance from the FDA for the use of the Renuvion Dermal Handpiece for specific dermal resurfacing procedures.

On July 18, 2022, we announced that we received 510(k) clearance from the FDA for the use of the Renuvion® APR Handpiece for certain skin contraction procedures.

On June 2, 2022, and July 21, 2022, the 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.

On February 1, 2023, we announced we had submitted a 510(k) premarket notification (“510(k) submission”) for the Renuvion APR Handpiece to the FDA, supported by a clinical study and real-world evidence.

The 510(k) submission is intended to expand Renuvion’s indications for use to include a specific indication for the use of the Renuvion APR Handpiece for the coagulation of subcutaneous soft tissues where needed, following liposuction.

On February 27, 2023, we announced that we received 510(k) clearance from the FDA for the use of the Renuvion APR Handpiece for the delivery of radiofrequency energy and/or helium plasma where coagulation/contraction of soft tissue is needed.

Soft tissue includes subcutaneous tissue.

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.

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.

While sales were continuing to grow into the first quarter of 2022 prior to the FDA Safety Communication, over the last few

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued

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.

For the year ended December 31, 2022, we incurred an operating loss of $23.6 million and used $20.3 million of cash in operations.

As of December 31, 2022, we had cash and cash equivalents of $10.2 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 consolidated financial statements.

In an effort to alleviate these conditions, we pursued various funding solutions in order to improve liquidity.

On November 22, 2022, the we filed a shelf registration statement providing us the ability to register securities in the aggregate amount up to $100 million.

The shelf registration included an embedded ATM facility for up to $40 million.

To date we have not utilized this facility.

On February 17, 2023, we entered into a Credit, Security and Guaranty Agreement (the “Credit Agreement”) with MidCap Funding IV Trust (as agent), and MidCap Financial Trust (as term loan servicer), and the lenders party thereto from time to time.

The Credit Agreement provides for an up to $35 million facility, consisting of senior secured term loans and a secured revolving facility.

The Credit Agreement provides for senior secured term loans of up to $25 million, comprised of (i) an initial tranche of $10 million, (ii) a second tranche of $5 million, and (iii) a third tranche of $10 million.

The secured revolving facility provides for loans in an aggregate principal amount of up to $10 million, subject to a borrowing base equal to certain percentages of the Company’s eligible accounts receivable and inventory, as determined in accordance with the terms of the Credit Agreement.

For a more in depth description of the terms of the Credit Agreement see Note 20 in Item 8 of this report on Form 10-K.

On February 27, 2023, our Board of Directors approved a plan to sell and leaseback the our real property located in Clearwater, FL.

On March 14, 2023, we entered into a Purchase and Sale Agreement (the “Purchase Agreement”) with VK Acquisitions VI, LLC (the “Purchaser”), for the sale of our facility located at 5115 Ulmerton Road, Clearwater, Florida, as more fully described in the Purchase Agreement (collectively, the “Property”) for a purchase price of $7,650,000.

The Purchase Agreement is subject to the satisfactory completion of due diligence by the Purchaser.

Upon the closing of the sale of the Property, we will enter into a lease agreement with the Purchaser, pursuant to which the Property will be leased back to us.

For a more in depth description of the terms of the Purchase Agreement see Note 20 in Item 8 of this report on Form 10-K.

During January 2023, we were notified that the IRS examination process of our 2018, 2019 and 2020 tax returns was complete and that the Company's tax refunds were approved for substantially the amount recorded in the Company's Consolidated Balance Sheet at December 31, 2022.

As of the date of this report, we are awaiting receipt of the tax refunds.

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.

We have already reduced some operating expenditures, including a reduction-in-force on January 9, 2023, that reduced our U.S.

headcount by 14%.

We believe that the actions already taken, and additional actions that we intend to take to manage operating expenditures, will enable us to meet our obligations for a period of at least one year from the date of issuance of our audited consolidated financial statements.

As a result, we believe our plans alleviate substantial doubt about our ability to continue as a going concern.

Our audited 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.

Impact of COVID-19, Supply Chain Disruptions and Other Matters

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.

The impact of the COVID-19 outbreak has subsided substantially in the U.S.

but continues to result in reduced activity levels outside of the U.S., such as continued restrictions on travel and business operations and advising or requiring individuals to limit or forego their time outside of their homes or places of business.

Throughout 2021, while our revenues were affected by the continued impacts of the COVID-19 pandemic and its related variants, we saw increased utilization of our Renuvion® handpieces from existing customers in both the U.S.

and outside of the U.S., along with improved demand for capital equipment domestically.

International demand trends for generator adoption are improving but remain in the earlier stages of recovery.

Although the timing of a return to a fully normalized environment remains uncertain, we are cautiously optimistic with respect to the continued recovery of the global cosmetic and plastic surgery markets.

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.

Since the onset of the COVID-19 pandemic, we have taken action in these key 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 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

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued

personal protective equipment while on site at our facilities.

We also significantly reduced business travel and outside access to our facilities.

• Maintaining Engagement of Our Sales Team and Customers:

In addition to engaging with existing customers via virtual methods, our reps 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:

We continued to manage spending, including reducing some discretionary spending, and re-prioritizing certain R&D projects and clinical research studies.

• 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 utilizing net operating loss (NOL) carryback provisions.

We expect that utilizing these provisions will significantly help mitigate the working capital impact COVID-19 has had on our sales and operations.

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 global supply chain instability, inflationary cost increases aand the pandemic, 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.

During 2022, we hosted over 30 Physician Mentor Programs, or “PMPs,” and our efforts to expand our presence and educational programming at industry conferences and trade shows proceeded as expected.

In April 2021 we hosted our first virtual Users’ Meeting and had over 300 people in attendance.

In April 2022, we hosted our first in-person Users’ Meeting and had over 200 people in attendance.

This program consisted of presentations from key Renuvion® users around the world on various applications for the product.

All of the content was recorded and made available on our website portal for reference by all of our users around the world.

Our virtual educational events have also included case studies to illustrate how our leading clinician customers have adopted Renuvion®, their strategies for marketing and selling to new patients, and their thoughts on pricing and return on investment.

Our continued virtual educational events have also included case studies to illustrate how our leading clinician customers have adopted Renuvion®, their strategies for marketing and selling to new patients, and their thoughts on pricing and return on investment.

We also engaged with clinician customers outside the U.S.

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We also had 4 sales managers.

This selling organization is focused on the use of Renuvion® in the cosmetic surgery market, supported by our global medical affairs team.

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 physicians' practices.

In addition, we have invested in training programs and marketing-related activities to support accelerated adoption of Renuvion® into surgeons' practices.

We believe that our continued investment and focus on the following strategic initiatives in 2022 and beyond will position the Company for long-term growth in the cosmetic surgery market:

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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.

APYX MEDICAL CORPORATION

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued

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

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Total $ 44,510 $ 48,517 (8.3) %

Total revenue increased by 75.1% or approximately $20.8 million for the year ended December 31, 2021 when compared with 2020.

Advanced Energy segment sales increased 93.5% or approximately $20.8 million for the year ended December 31, 2021 when compared with 2020.

During 2021, we experienced increased global utilization based demand for our handpieces and adoption of our generator technology despite the continued headwinds of the COVID-19 pandemic in certain geographic regions outside of the U.S., while overall 2020 demand was more severely impacted on a global basis.

Total revenue decreased by 8.3% or approximately $4.0 million for the year ended December 31, 2022 when compared with 2021.

Advanced Energy segment sales decreased 14.4% or approximately $6.2 million for the year ended December 31, 2022 when compared with 2021.

The Advanced Energy sales decrease is due to global decreases in utilization based demand for our handpieces and the adoption of our generator technology following the FDA Safety Communication on March 14, 2022.

The Advanced Energy sales decrease was partially offset by an increase in global utilization based demand for our handpieces and adoption of our generator technology in international markets for most of the first quarter before the FDA Safety Communication.

The OEM product line consists of proprietary products designed specifically for third party equipment manufacturers.

Revenue for this product line increased 0.6% when compared to 2020.

Revenue for this product line increased 39.3%, or approximately $2.2 million, when compared to 2021.

The increase in OEM sales was due to increases in sales volume to existing customers, including Symmetry Surgical, under our 10-year generator manufacturing and supply agreement, as well as incremental new sales upon the commencement of the supply arrangement related to the completion of the development portion of some of our OEM development agreements.

International sales represented approximately 29.9% and 32.0% of total revenues for the years ended December 31, 2022 and 2021, respectively.

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Percentage of sales 65.4 % 69.3 %

Our gross profit margin as a percentage of sales increased by 6.1% during the year ended December 31, 2021 compared with 2020.

The increase in gross profit margin from the prior year 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 year 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 needed to expedite the sourcing of key component raw material inventories and experienced higher market rates for these services.

Our gross profit margin as a percentage of sales decreased by 3.8% during the year ended December 31, 2022 compared with 2021.

The de crease in gross profit margins for the year ended December 31, 2022 from the prior year is primarily attributable to changes in the sales mix between our two segments, with our OEM segment comprising a higher percentage of total sales, product mix within our Advanced Energy Segment and higher material and inbound shipping costs to manufacture our inventory.

These decreases were partially offset by geographic mix within our Advanced Energy segment, with domestic sales comprising a higher percentage of total sales and the mix of newer product models as we obtain registrations, allowing these products to be introduced into the markets we serve.

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued

The prior year margins were also hindered as 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 $0.3 million during the prior year.

Other Costs and Expenses

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Our expenditures for research and development related activities increased by 5.2% or approximately $0.2 million for the year ended December 31, 2022, compared with 2021.

This increase was primarily due to increases in payroll and related benefits of R&D personnel ($0.2 million) and continued spending on our two investigational device exemption (IDE) clinical studies and other research and development projects ($0.2 million).

This increase was primarily due to increases in payroll and related benefits of R&D personnel ($0.3 million) partially offset by lower spending on ou r two investigational device exemption (IDE) clinical studies and other product development initiatives ($0.1 million).

Professional services

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Percentage of sales 20.3 % 15.6 %

Professional services expenses increased 3.3% for the year ended December 31, 2021, compared with 2020.

This increase was primarily due to increases in physician consulting expense associated with the increased sales activity in 2021 ($0.3 million), professional services for continued consulting expense associated with our implementation of SAP ($0.2 million), employee acquisition fees as the labor market has been highly competitive ($0.2 million) and Board of Directors option expense ($0.1 million).

The increases were partially offset by a decrease in accounting and auditing fees ($0.6 million).

In the prior year, we incurred significant fees related to our change in independent auditors and the associated reaudit of the 2019 financial statements.

Professional services expenses increased 19.2%, or approximately $1.5 million for the year ended December 31, 2022, compared with 2021.

This increase was primarily attributable to increases in legal expenses ($0.4 million), primarily associated with the estimated loss recorded for the class action lawsuit, Board of Directors option expense ($0.4 million), marketing consulting expense ($0.3 million), accounting and auditing fees ($0.2 million), physician consulting fees ($0.2 million), and employee recruitment expense ($0.2 million).

These increases were partially offset by a decrease in stock compensation expense for our partner physicians ($0.2 million).

Salaries and related costs

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Percentage of sales 41.8 % 36.1 %

During 2021, salaries and related expenses increased 19.8% or approximately $2.9 million compared to 2020.

The increase was primarily driven by increases in bonus expense ($1.2 million), higher headcount ($0.6 million), higher compensation and benefits ($0.5 million), stock compensation expense ($0.4 million) and temporary labor ($0.2 million) as compared to 2020.

Salaries and related expenses increased 6.3% or approximately $1.1 million for the year ended December 31, 2022, compared to 2021.

The increase was primarily driven by higher compensation and benefits ($1.7 million) and stock compensation expense ($1.2 million) as compared to the same period in the prior year.

These increases are partially offset by a decrease in bonus expense ($1.8 million) as we determined we did not meet our 2022 bonus objectives, and accordingly, we have recorded no annual bonus expense in 2022.

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Selling, general and administrative expense increased by 10.0% or approximately $1.9 million for the year ended December 31, 2022, compared with 2021.

The change is primarily related to higher commissions on Advanced Energy sales ($4.0 million), travel and entertainment expense ($0.8 million), advertising expense, including trade show fees and related costs ($0.5 million), insurance expense associated with higher premiums and increased claims activity ($0.6 million), higher credit card processing fees ($0.3 million), OEM product recall costs ($0.2 million), higher employee training and meeting expenses ($0.2 million), increased Board of Directors compensation including compensation to an additional member ($0.1 million), higher computer supplies and related technology expenses ($0.1 million) and increased office supplies ($0.1 million).

These increases were partially offset by lower bad debt expenses ($0.1 million).

The change is p rimarily driven by higher insurance expense, including product liability claims on our policies ($1.9 million), travel and entertainment expense ($1.1 million), advertising expense, including trade show fees and related costs ($1.0 million), employee training and other meeting expenses ($0.7 million), bad debt expense ($0.2 million), and other public company related costs ($0.1 million).

These increases were partially offset by decreases in commissions on Advanced Energy sales ($2.5 million), OEM product recall costs ($0.2 million) as we experienced no product recalls in 2022, lower technology costs ($0.2 million) and lower regulatory registration expenses ($0.2 million).

Interest Income

(In thousands) 2021 2020 Change

(In thousands) 2022 2021

Interest income $ 157 $ 11

Percentage of sales 0.4 % — %

Interest income decreased 95.4% for the year ended December 31, 2021 as compared with the prior year.

This decrease is due to a lower yield, as well as a lower average balance, on our investments in money market funds and U.S.

Interest income increased approximately $0.1 million for the year ended December 31, 2022, compared with 2021.

This increase is due to higher yields on our investments in money market funds and U.S.

Treasury securities included in cash and cash equivalents.

Other (Loss) Income, net

(In thousands) 2021 2020 Change

Other (losses) income, net $ (373) $ 479 (177.9) %

(In thousands) 2022 2021

Other income (losses), net $ 509 $ (373)

Percentage of sales 1.1 % (0.8) %

Other (losses) income, net decreased 177.9% for the year ended December 31, 2021 as compared with the prior year.

This decrease is primarily due to the receipt of refunds in the first quarter 2020 on tariffs paid in 2019 ($0.3 million), severance expense for employees of the former Core business segment ($0.2 million), anticipated Core business segment inventory losses at the conclusion of our supply agreement with Symmetry Surgical ($0.2 million), and reduced volume under the supply agreement to cover other business expenses associated with the Core business segment ($0.1 million).

Other income (losses), net increased 236.5% for the year ended December 31, 2022, compared with 2021.

This increase was primarily attributable to the release of a portion of our joint and several payroll liability due to the lapse of the statute of limitations on a portion of the liability ($0.6 million) and the wind down of the supply arrangement with Symmetry in the Core business segment ($0.3 million).

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued

The income tax expense was approximately $0.4 million, with an effective tax rate of (2.6)%, for the year ended December 31, 2021 as compared to an income tax benefit of approximately $7.5 million, with an effective tax rate of 38.7%, for the year ended December 31, 2020.

For the year ended December 31, 2021, the effective tax rate differs from the statutory rate primarily due to the valuation allowance on our Federal and State net operating losses (NOLs) for 2021.

For the year ended December 31, 2020, the effective tax rate differs from the statutory rate primarily due to the release of the valuation allowance on our Federal NOL from 2019 as a result of the CARES Act, partially offset by a valuation allowance on our State NOL for 2020.

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 NOLs generated in the period 2018 through 2020 to prior years.

As a result, we released the full valuation allowance of approximately $3.7 million on our Federal NOL carryforward from 2019 during the first quarter of 2020.

In 2020, our income tax benefit is composed primarily of a benefit of $3.7 million associated with the current year net loss and $3.7 million associated with the release of the valuation allowance on the net operating loss from 2019 from the CARES Act.

Twelve Months Ended

(In thousands) 2022 2021 Change

Income tax expense (benefit) $ 367 $ 380 (3.4) %

Effective tax rate (1.6) % (2.6) %

Income tax expense was approximately $0.4 million, with effective tax rates of (1.6)% and (2.6)%, respectively, for the years ended December 31, 2022 and 2021.

For each of the years ended December 31, 2022 and 2021, the effective tax rate differs from the statutory rate primarily due to the valuation allowance on our Federal and State net operating losses (NOLs) combined with interest and penalties on our uncertain tax positions.

Liquidity and Capital Resources

At December 31, 2021, we had approximately $30.9 million in cash and cash equivalents as compared to approximately $41.9 in cash and cash equivalents at December 31, 2020.

At December 31, 2022, we had approximately $10.2 million in cash and cash equivalents as compared to approximately $30.9 million in cash and cash equivalents at December 31, 2021.

Our working capital at December 31, 2022 was approximately $31.1 million compared with $47.5 million at December 31, 2021.

The decrease in working capital at December 31, 2021 was primarily due to the net loss incurred by the Company in 2021, excluding non-cash activity, comprised primarily of stock-based compensation expense.

For the year ended December 31, 2021, net cash used in operating activities was approximately $10.4 million, which principally funded our loss from operations of $14.4 million, compared with net cash used in operating activities of approximately $16.1 million in 2020.

We believe that we have adequate cash to support our operations for the next twelve to eighteen months.

The decrease in working capital at December 31, 2022 was primarily due to the net loss incurred by the Company in 2022 following the Safety Communication on March 14, 2022, excluding non-cash activity, comprised primarily of stock-based compensation expense.

Following the Safety Communication we had cash outflows of $5.6 million related to growth in inventory due to existing non-cancellable purchase orders when the Safety Communication was issued and management's decision to continue to build inventory with these materials through the uncertainty.

The lower sales as a result of the Safety Communication also resulted in operating cash inflows of $1.9 million related to lower accounts receivable balances on the lower sales.

For the year ended December 31, 2022, net cash used in operating activities was approximately $20.3 million , which principally funded our los s from operations of $23.6 million, compared with net cash used in operating activities of approximately $10.4 million in 2021.

As discussed in the Executive Level Overview, our operating loss, cash used in operations and current cash and cash equivalents balance of $10.2 million 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 our consolidated financial statements.

In an effort to alleviate these conditions, we pursued various funding solutions in order to improve liquidity.

On November 22, 2022, the we filed a shelf registration statement providing us the ability to register securities in the aggregate amount up to $100 million.

The shelf registration included an embedded ATM facility for up to $40 million.

To date we have not utilized this facility.

The Credit Agreement provides for an up to $35 million facility, consisting of senior secured term loans and a secured revolving facility.

For a more in depth description of the terms of the Credit agreement see Note 20 in Item 8 of this report on Form 10-K.

For a more in depth description of the terms of the Credit Agreement see Note 20 in Item 8 of this report on Form 10-K.

On February 27, 2023, our Board of Directors approved a plan to sell and leaseback the our real property located in Clearwater, FL.

On March 14, 2023, we entered into a Purchase and Sale Agreement (the “Purchase Agreement”) with VK Acquisitions VI,

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued

LLC (the “Purchaser”), for the sale of our facility located at 5115 Ulmerton Road, Clearwater, Florida, as more fully described in the Purchase Agreement (collectively, the “Property”) for a purchase price of $7,650,000.

The Purchase Agreement is subject to the satisfactory completion of due diligence by the Purchaser.

Upon the closing of the sale of the Property, we will enter into a lease agreement with the Purchaser, pursuant to which the Property will be leased back to us.

For a more in depth description of the terms of the Purchase Agreement see Note 20 in Item 8 of this report on Form 10-K.

As of the date of this report, we are awaiting receipt of the tax refunds.

We have already reduced some operating expenditures, including a reduction-in-force on January 9, 2023, that reduced our U.S.

headcount by 14%.

As a result, we believe our plans alleviate substantial doubt about our ability to continue as a going concern.

Net cash used in investing activities for the years ended December 31, 2022 and 2021, were $1.0 million and $0.7 million , respectively, related to purchases of property and equipment.

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Our critical accounting estimates include the following:

APYX MEDICAL CORPORATION

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued

Stock-Based Compensation

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Expected life

APYX MEDICAL CORPORATION

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued

For employee stock-based compensation awards, we estimate the expected life of awards utilizing the SEC's simplified method.

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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

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued

liabilities are computed based on the difference between the financial statement and income tax bases of assets and liabilities using enacted marginal tax rates.

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.

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We will reassess the realization of deferred tax assets each reporting period and will be able to reduce the valuation allowance to the extent our results of operations improve, and it becomes more likely than not that the deferred tax assets will be realized.

As Management has not fully determined the timing of when it will generate taxable income in the U.S., we continued to record a valuation allowance on the net deferred tax assets balance as of December 31, 2021.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued

Management has not fully determined the timing of when it will generate taxable income in the U.S., we continued to record a valuation allowance on the net deferred tax assets balance as of December 31, 2022.

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

An uncertain income tax position will not be recognized in the financial statements unless it is more likely than not of being sustained.

An uncertain income tax position will not be recognized in the financial statements unless it is more likely than not of being sustained based on the technical merit of the position.

The consequences of the pandemic, global supply chain instability and inflationary cost increases and their adverse impact to the global economy, continue to evolve.

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Recent Accounting Pronouncements

See Note 3 of the Notes to Consolidated Financial Statements.

See Note 3 of the Notes to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K.

Quantitative and Qualitative Disclosures about Market Risk

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis