What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2023-03-16 compared with 2022-03-17 · 243 added, 86 removed, 601 unchanged (35% of the section changed)

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Report of Independent Registered Public Accounting Firm

To the Stockholders and the Board of Directors of Apyx Medical Corporation

Stockholders and the Board of Directors

Apyx Medical Corporation

Opinion on the Financial Statements

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We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that:

(1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

We determined that there are no critical audit matters.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective or complex judgments.

The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which they relate.

Going Concern

As described in Note 1 to the consolidated financial statements, the Company disclosed certain adverse conditions that 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 the consolidated financial statements.

The Company further disclosed certain plans identified by management, which involve the use of significant judgment, that management believes it can implement that alleviate the conditions that raise substantial doubt about the Company’s ability to continue as a going concern.

We identified the Company’s ability to continue as a going concern as a critical audit matter because of certain significant assumptions management made in concluding management’s plans alleviate the conditions that raise substantial doubt about the Company’s ability to continue as a going concern, including the reasonableness of the assumptions underlying management’s cash flow forecast for a period of one year from the date of issuance of the consolidated financial statements.

Auditing management’s assumptions involved a high degree of auditor judgment and an increase in audit effort, including the use of an internal specialist, due to the impact these assumptions have on the conclusion that management’s plans alleviate the conditions that raise substantial doubt about the Company’s ability to continue as a going concern.

Our audit procedures related to the Company’s ability to continue as a going concern included the following, among others:

• We obtained management’s going concern assessment and evaluated the reasonableness of the conclusion that management’s plans alleviate the conditions that raise substantial doubt about the Company’s ability to continue as a going concern by considering both the likelihood that management could implement its plans and how the implementation of those plans impacted the identified adverse conditions.

• We evaluated management’s cash flow forecast by performing the following procedures, among others:

◦ We evaluated the reasonableness of the forecasted nature, amount and timing of operating expenditures expected to be reduced or delayed over the course of a year from the date of issuance of the consolidated financial statements based on our understanding of the Company’s operations, cost structure, historical expenditures and actions taken to date by management.

◦ We evaluated the Company’s ability to comply with its debt covenants under the Company’s new credit agreement, which was executed in February 2023.

◦ We obtained and read correspondence between the Internal Revenue Service and the Company evidencing approval of the amount of the Company’s income tax receivable.

◦ We obtained and read the purchase and sale agreement between the Company and a third party for the sale and leaseback of the Company’s building.

◦ We considered the Company’s current shelf registration and the embedded at-the-market facility by evaluating management’s intent and ability to execute on a public offering.

• With the assistance of an internal specialist, we evaluated the accuracy and completeness of the Company’s financial statement disclosure and their compliance with accounting principles generally accepted in the United States of America.

/s/ RSM US LLP

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(In thousands, except share and per share data)

December 31, 2021

December 31, 2020

December 31, 2022 December 31, 2021

Current assets:

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Trade accounts receivable, net of allowance of $ 668 and $ 430

10,602 13,038

Income tax receivables 7,545 7,642

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Commitments and Contingencies (Note 17)

Preferred Stock, $ 0.001 par value;

10,000,000 shares authorized;

0 issued and outstanding as of December 31, 2022 and 2021

Common stock, $ 0.001 par value;

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Additional paid-in capital 73,282 66,221

(Accumulated deficit) retained earnings ( 12,551 ) 2,621

Accumulated deficit ( 35,735 ) ( 12,551 )

Total stockholders' equity 37,582 53,704

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Interest expense ( 15 ) ( 10 )

Other (losses) income, net ( 373 ) 479

Total other (loss) income, net ( 372 ) 674

Other income (losses), net 509 ( 373 )

Total other income (loss), net 651 ( 372 )

Loss from operations before income taxes ( 22,911 ) ( 14,820 )

Income tax expense (benefit) 380 ( 7,503 )

Income tax expense 367 380

Net loss ( 23,278 ) ( 15,200 )

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Shares issued on net settlement of stock options 108 — — — — —

Vested restricted stock issued 45 — — — — —

Net loss — — — ( 15,172 ) ( 28 ) ( 15,200 )

Balance at December 31, 2021 34,410 $ 34 $ 66,221 $ ( 12,551 ) $ 305 $ 54,009

Contributions from non-controlling interest — — — — 195 195

Shares issued on stock options exercises for cash 106 1 364 — — 365

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Proceeds from stock option exercises 365 67

Repayment of related party note payable — ( 140 )

Repayment of finance lease liabilities ( 148 ) ( 238 )

Contributions from non-controlling interests — 195

Net cash provided by (used in) financing activities 24 ( 73 )

Net cash provided by financing activities 217 24

Effect of exchange rates on cash 395 103

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Income taxes 128 111

Non cash operating and investing activities:

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 $ —

Transfer of right-of-use assets to property and equipment on exercise of purchase option $ — $ 43

Transfer of inventory to property and equipment — 23

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

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Apyx Medical Corporation (“Company", "Apyx", "it" and similar terms) was incorporated in 1982, under the laws of the State of Delaware and has its principal executive office at 5115 Ulmerton Road, Clearwater, FL 33760.

The Company is an advanced energy technology company with a passion for elevating people’s lives through innovative products in the cosmetic and surgical markets.

Known for its innovative Helium Plasma Technology, Apyx is solely focused on bringing transformative solutions to physicians and their patients.

Its Helium Plasma Technology is marketed and sold as Renuvion® in the cosmetic surgery market and J-Plasma® in the hospital surgical market.

Renuvion® offers plastic surgeons, fascial plastic surgeons and cosmetic physicians a unique ability to provide controlled heat to tissue to achieve their desired results.

The 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, 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 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 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

APYX MEDICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

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

As of December 31, 2022, the Company 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, the Company pursued various funding solutions in order to improve liquidity.

On November 22, 2022, the Company filed a shelf registration statement providing it 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 the Company has not utilized this facility.

On February 17, 2023, the Company 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.

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

On March 14, 2023, the Company entered into a Purchase and Sale Agreement (the “Purchase Agreement”) with VK Acquisitions VI, LLC (the “Purchaser”), for the sale of the Company's 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, the Company will enter into a lease agreement with the Purchaser, pursuant to which the Property will be leased back to the Company.

For a more in depth description of the terms of the Purchase Agreement see Note 20.

During January 2023, the Company was 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, the Company is awaiting receipt of the tax refunds.

The Company also continues to re-assess its operating expenditures and cost structure to be commensurate with expected levels of revenue and management has the ability to reduce or delay expenditures to enhance and preserve liquidity.

Management has already reduced some operating expenditures, including a reduction-in-force on January 9, 2023, that reduced the Company's U.S.

headcount by 14 %.

APYX MEDICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Management believes that the actions already taken, and additional actions that it intends to take to manage operating expenditures, will enable the Company to meet its obligations for a period of at least one year from the date of issuance of these audited consolidated financial statements.

As a result, management believes its plans alleviate substantial doubt about the Company's ability to continue as a going concern.

These audited 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.

SIGNIFICANT ACCOUNTING POLICIES

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Management believes that the allowances for doubtful accounts of approximately $ 0.7 million and $ 0.4 million at December 31, 2022 and 2021, respectively, are adequate to provide for probable bad debts.

APYX MEDICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Inventories are stated at the lower of cost or net realizable value.

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Factory overhead costs are allocated to manufactured inventory based upon labor hours.

APYX MEDICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

The Company monitors inventory usage to determine if the carrying value of any items should be adjusted due to lack of demand for the item and adjusts inventory for estimated obsolescence or unusable inventory equal to the difference between the cost of inventory and the estimated net realizable value based upon assumptions about future demand and market conditions.

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Payment by the customer is due under fixed payment terms.

APYX MEDICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

• Product returns are only accepted at the Company's discretion and in accordance with its “Returned Goods Policy”.

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Accruals for sales returns, rebates and allowances are made as a reduction of revenue based upon an analysis of historical customer returns and credits, rebates, discounts and current market conditions.

APYX MEDICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

• The terms of sale to customers generally do not include any obligations to perform future services.

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If the Company enters into a product development agreement, and development of the goods does not represent a performance obligation on a standalone basis, the Company defers the development fees billed to customers and the associated costs.

Recognition of the deferred billings and costs will occur as the Company performs on the accompanying supply arrangements.

Recognition of the deferred billings and costs occurs as the Company performs on the accompanying supply arrangements.

Advertising Costs

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The Company utilizes the liability method of accounting for income taxes as set forth in FASB ASC Topic 740, Income Taxes .

Under the liability method, deferred taxes are determined based on temporary differences between the financial statement and

APYX MEDICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

tax bases of assets and liabilities using tax rates expected to be in effect during the years in which the deferred taxes reverse.

Under the liability method, deferred taxes are determined based on temporary differences between the financial statement and tax bases of assets and liabilities using tax rates expected to be in effect during the years in which the deferred taxes reverse.

The Company accounts for interest and penalties on income taxes as income tax expense.

A valuation allowances is recorded when it is more likely than not that a tax benefit will not be realized.

In determining the need for valuation allowances the Company considers projected future taxable income, the timing of reversals of temporary differences, and the availability of tax planning strategies.

In determining the need for valuation allowances the Company considers projected future taxable income, the timing of reversals of temporary differences, and the availability of tax

APYX MEDICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

planning strategies.

As of December 31, 2022 and 2021, the Company recorded a valuation allowance on the net deferred tax assets.

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

As a result of the CARES Act, during 2020, the Company released the valuation allowance on the Federal NOLs 2019 and 2020 that have been carried back to prior taxable years.

The Company assesses 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.

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Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in selling, general and administrative expenses in the Consolidated Statements of Operations and were not material for the years ended December 31, 2022 and 2021.

Reclassifications

We have reclassified certain amounts presented in the prior year to conform to the current year presentation.

These reclassifications had no impact on previously reported net income, retained earnings or operating cash flows for the periods presented.

APYX MEDICAL CORPORATION

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(“Symmetry”), pursuant to which the Company divested and sold the Company’s electrosurgical “Core” business segment and related intellectual property, including the Bovie ® brand and trademarks, to Symmetry for gross proceeds of $ 97 million in cash.

In connection with the Asset Purchase Agreement, the Company entered into an Electro Surgical Disposables and Accessories, Cauteries and Other Products Supply Agreement with Symmetry for a four-year term, whereby it will manufacture certain Core products and sell them to Symmetry at agreed upon prices.

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 pro ducts and sold them to Symmetry at agreed upon prices.

Any activity resulting from this agreement is netted and reported in the Consolidated Statements of Operations as other income (loss).

Core activity for 2022 amounted to $ 0.6 million with cost of sales equivalents of $ 0.6 million and other related expenses of $ 0.1 million for net other loss of $ 0.1 million.

Core activity for 2020 amounted to $ 9.4 million with cost of sales equivalents of $ 8.1 million and other related expenses of $ 0.8 million for net other income of $ 0.5 million.

Core activity for 2021 amounted to $ 6.5 million with cost of sales equivalents of $ 5.5 million and other related expenses of $ 1.5 million for net other loss of $ 0.4 million.

APYX MEDICAL CORPORATION

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INTEREST IN JOINT VENTURE INVESTMENT

In 2019, the Company executed a joint venture agreement with its Chinese supplier (China JV) whereby the Company has a 51 % interest in the China JV.

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 consolidated financial statements.

The agreement required the Company to make capital contributions into the newly formed entity of approximately $ 357,000 , of which approximately $ 203,000 and $ 154,000 , respectively, were contributed during the years ended December 31, 2021 and 2020.

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Inventories, net $ 11,797 $ 6,778

During 2020, the Company reassessed its forecasted product mix due to COVID-19, increased availability of newer handpiece designs, and improved timing of product registrations in some of our foreign markets.

As a result, certain products were reduced to a lower carrying value, and some components were also written down as the Company determined to cease further production on these older models.

The total impairment was approximately $ 0.4 million and is included in cost of sales in the accompanying Consolidated Statement of Operations for 2020.

Later in 2020, the Company’s forecasts were revised, and it subsequently utilized a portion of the written down components and approximately $ 0.1 million of the impairment was recovered through the sale of the corresponding manufactured handpieces.

There were no such impairments in 2021.

APYX MEDICAL CORPORATION

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If the Company is aware of the implicit rate in leases, the Company determines the operating lease liability using the implicit rate.

For those leases where the Company is not aware of the implicit rate in the lease, the Company utilizes an incremental borrowing rate of 4.00 %, which is indicative of its collateralized borrowing rate.

For those leases where the Company is not aware of the implicit rate in the lease, the Company utilizes an incremental borrowing rate, which is indicative of its collateralized borrowing rate.

We utilized rates of 1.83 % to 6.49 % for our outstanding leases at December 31, 2022.

Operating Leases

The Company leases its facility in Sofia, Bulgaria and vehicles in Clearwater, Florida under non-cancelable operating lease agreements.

The Company’s lease on the Bulgaria facility includes rent escalation over the term of the lease.

Rent expense on the Bulgaria facility lease is accounted for on a straight-line basis over the lease term.

The Company leases its facility in Sofia, Bulgaria and computers under non-cancelable operating lease agreements.

During the year ended December 31, 2022, the Company’s leases on the vehicles in Clearwater, Florida expired and the Company purchased the vehicles at fair value.

During the year ended December 31, 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 year ended December 31, 2022, the Company entered into a five year extension of its Sofia, Bulgaria facility.

These operating leases have terms expiring through December 2027.

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The Company has entered into non-cancelable finance leases for certain computer equipment and a vehicle in Clearwater, Florida.

These finance leases have terms expiring through August 2023.

During the year ended December 31, 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 lease costs are as follows:

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Accrued product liability claim insurance deductibles 1,825 610

Accrued professional fees and legal related contingent liabilities 901 421

Joint and several payroll liability 345 1,027

Short-term contract liabilities 853 533

Uncertain tax positions 2,079 1,863

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Provision for product warranties 196 318

Change in estimate to fulfill prior-year warranty obligations ( 198 ) —

Product warranty costs incurred ( 200 ) ( 223 )

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Due to IRS statutory requirements, the Company has joint and several liability for the full amount that was not withheld and remitted to the proper taxing authorities.

This amount of the liability was approximately $ 1.0 million at December 31, 2021 and 2020.

The Company will be relieved of this liability as the statute of limitations on the liability expires, which the Company expects to occur during April 2022 and April 2023, or once the Company can establish that its employees have in fact paid these obligations.

During 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 (losses), net in the accompany Consolidated Statement of Operations for the year ended December 31, 2022.

This amount of the liability was approximately $ 0.3 million and $ 1.0 million at December 31, 2022 and 2021, respectively.

The Company will be relieved of the remainder of the liability as the statute of limitations on the liability expires, which the Company expects to occur during April 2023, or once the Company can establish that its employees have in fact paid these obligations.

APYX MEDICAL CORPORATION

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At December 31, 2022, $ 0.9 million of the contract liabilities and $ 0.1 million of the contract assets are presented as current in the accompanying Consolidated Balance Sheet within accrued expenses and other current liabilities and prepaid expenses and other current assets, respectively.

At December 31, 2020, 0 contract assets or liabilities were current in the accompanying Consolidated Balance Sheet.

At December 31, 2021, $ 0.5 million of the contract liabilities and $ 0.1 million of the contract assets are presented as current in the accompanying Consolidated Balance Sheet within accrued expenses and other current liabilities and prepaid expenses and other current assets, respectively.

During 2022, the Company recognized approximately $ 0.2 million of contract liabilities and $ 0.1 million of contract assets that existed as of December 31, 2021 in sales and cost of sales, respectively, in the accompanying Consolidated Statement of Operations for the year ended December 31, 2022.

During 2021, the Company did not recognize any significant contract liabilities or contract assets that existed as of December 31, 2020 in sales or cost of sales in the accompanying Consolidated Statement of Operations for the year ended December 31, 2021.

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Options 6,520 5,398

Components of income tax expense (benefit) are as follows:

Components of income tax expense are as follows:

(In thousands) December 31,

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Federal $ 214 $ 217

State 54 ( 120 )

Foreign 124 109

380 ( 3,839 )

Release of valuation allowance due to CARES Act — ( 3,664 )

380 ( 7,503 )

Federal ( 4,096 ) ( 2,518 )

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Valuation allowance 5,100 3,131

Total income tax expense (benefit) $ 380 $ ( 7,503 )

Total income tax expense $ 367 $ 380

Below is a reconciliation of the statutory federal income tax rate to the Company's effective tax rate:

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GILTI ( 0.9 ) % ( 1.2 ) %

NOL carryback from CARES Act — % 18.9 %

Other ( 0.5 ) % 0.5 %

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Stock-based compensation 2,381 1,701

Research and development capitalization 982 —

Accrued insurance deductibles 400 70

Inventory 263A adjustment 394 —

Deferred revenue 339 163

Accrued bonus — 555

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Net deferred tax assets $ — $ —

On March 27, 2020, the U.S.

government enacted the CARES Act to provide relief from COVID-19.

The CARES Act includes a provision that allows companies to carryback net operating losses (NOL’s) generated in the period 2018 through 2020 to prior years.

In conjunction with the disposition of the Core business in 2018, the Company generated a significant amount of taxable income in 2018.

Subsequent to this, the Company generated NOLs in 2019 and 2020.

For the NOLs generated in 2019, the Company previously recorded a full valuation allowance on the deferred tax assets associated with the NOL due to realization not being probable under then existing tax law.

The CARES Act makes these assets realizable and, as of the date of the CARES Act, the Company recognized an income tax benefit of approximately $ 3.7 million associated with the release of the valuation allowance on its Federal NOL deferred tax asset from 2019.

Additionally, using the provisions of the CARES Act, the Company carried back its 2020 Federal NOL of approximately $ 3.7 million.

The Company considers all positive and negative evidence regarding the realization of deferred tax assets, including past operating results and future sources of taxable income.

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If it decides to repatriate the foreign earnings, the Company will need to adjust its income tax provision in the period it determines that the earnings will no longer be indefinitely invested outside the United States.

APYX MEDICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

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As of December 31, 2022 and 2021, the Company has recorded a liability of approximately $ 1.3 million related to uncertain tax positions and accrued approximately $ 0.8 million and $ 0.6 million, respectively, of interest and penalties on these positions.

All unrecognized tax benefits are expected to be resolved within the next 12 months.

APYX MEDICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

The following is a roll-forward of the Company's total gross unrecognized tax benefits, not including interest and penalties, for the years ended December 31:

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The Company’s 2019 through 2021 U.S.

federal income tax returns are subject to examination by the Internal Revenue Service.

federal income tax returns are subject to examination by the Internal Revenue Service (“IRS”).

The Company’s state income tax returns are subject to examination for the 2018 through 2021 tax years.

During 2022, the Company was notified by the IRS that it is examining the Company’s 2018, 2019 and 2020 federal income tax returns.

During January 2023, the Company was notified that the examination process 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.

In the examination, the Company's uncertain tax positions were accepted by the IRS as submitted on our income tax returns and the Company reversed its uncertain tax position in January 2023.

RETIREMENT PLAN

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The Company makes matching contributions of 50 % of the employee contributions up to a total of 3 % of participant payroll.

Matching contributions made by the Company totaled approximately $ 0.4 million and $ 0.3 million for each of the years ended December 31, 2021 and 2020, respectively.

Matching contributions made by the Company totaled approximately $ 0.4 million for each of the years ended December 31, 2022 and 2021.

RELATED PARTY TRANSACTIONS

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Shilev’s son, is a quality manager in the quality assurance department.

In addition, as part of the purchase of the Apyx Bulgaria manufacturing facility, Mr.

Shilev was issued a note payable for $ 0.1 million, which was paid in full on October 20, 2020.

The partner in the Company’s China joint venture is also a supplie r of the Company.

For the years ended December 31, 2022 and 2021, the Company made purchases from this supplier of approximately $ 0.6 million and $ 1.3 million, respectively.

At December 31, 2021 and 2020, respectively, the Company owed this supplier approximately $ 1,000 and $ 38,000 , respective ly.

At December 31, 2022 and 2021, the Company had net receivables from and payables to this supplier of approximately $ 8,000 and $ 1,000 , respective ly.

COMMITMENTS AND CONTINGENCIES

The medical device industry is characterized by frequent claims and litigation, and the Company may become subject to various

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.

APYX MEDICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

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.

4 unchanged sentences

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 Consolidated Statement of Operations for the year ended December 31, 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.

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 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 Consolidated Statement of Operations for the year ended December 31, 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.

During 2022, the Company was notified of certain procedures alleged to have been performed by the same physician and which are currently the subject of two related products liability cases within the courts.

Subsequent to year end, the Company was notified by its insurance carriers that all or most of the ten individual plaintiff’s allegations could be subject to separate deductibles notwithstanding the commonality of each underlying occurrence.

The Company has determined that a loss is probable and that a range of estimated losses is approximately $ 1,450,000 to $ 2,400,000 .

The Company has recorded an estimated loss of $ 1,450,000 in selling, general and administrative expenses associated with the insurance deductibles in the accompanying Consolidated Statement of Operations for the year ended December 31, 2022.

It is at least possible that a change in the actual amount of loss will occur in the near term, though management expects the actual amount of loss will be within the estimated range of losses.

The Company accrues a liability in its consolidated financial statements for these actions when a loss is known or considered probable and the amount can be reasonably estimated.

If the reasonable estimate of a known or probable loss is a range, and no amount within the range is a better estimate than any other, the minimum amount of the range is recorded.

If a loss is reasonably possible, but not known or probable, and can be reasonably estimated, the estimated loss or range of loss is disclosed in the notes to the consolidated financial statements.

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.

APYX MEDICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Purchase Commitments

1 unchanged sentence

Concentrations

There were no significant sales concentrations for the year ended December 31, 2022.

Sales to one customer within the Advanced Energy segment represented 11 % of total sales for the year ended December 31, 2021.

Sales to one customer within the OEM segment represented 10 % of total sales for the year ended December 31, 2020.

There were no other significant sales concentrations for the years ended December 31, 2021 and 2020.

Receivables from two customers within the Advanced Energy segment represented 22 % and 31 %, respectively, of trade accounts receivable at December 31, 2021 and December 31, 2020.

Receivables from one customer and two customers within the Advanced Energy segment represented 13 % and 22 %, respectively, of trade accounts receivable at December 31, 2022 and December 31, 2021.

APYX MEDICAL CORPORATION

16 unchanged sentences

On January 11, 2023, the Company granted employees appro ximately 1,400,000 options to purchase common shares of the Company's stock.

All options granted were pursuant to the 2015 and 2019 Plans noted above.

All options granted were pursuant to the plans noted above.

The options ves t over a period of three years .

41 unchanged sentences

The weighted average fair value of options granted during the years ended December 31, 2022 and 2021, was $ 6.71 and $ 5.76 , respectively.

The total fair value of option shares vested during the years ended December 31, 2021 and 2020, was approximately $ 4,270,000 and $ 2,510,000 , respectively.

The total fair value of options vested during the years ended December 31, 2022 and 2021, was approximately $ 5,260,000 and $ 4,270,000 , respectively.

The Company allows employees 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.

20 unchanged sentences

Sales $ 36,803 $ 7,707 $ — 44,510

Income (loss) from operations 2,784 1,033 ( 18,265 ) ( 14,448 )

(Loss) income from operations ( 4,103 ) 1,641 ( 21,100 ) ( 23,562 )

Interest income — — 157 157

Interest expense — — ( 15 ) ( 15 )

Other losses, net — — ( 373 ) ( 373 )

Other income, net — — 509 509

Income tax expense — — 367 367

5 unchanged sentences

Interest expense — — ( 10 ) ( 10 )

Other income, net — — 479 479

Other losses, net — — ( 373 ) ( 373 )

Income tax benefit — — 380 380

10 unchanged sentences

SUBSEQUENT EVENTS

On March 14, 2022, the FDA posted a Medical Device Safety Communication ("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.

Execution of Credit Agreement

On February 17, 2023, the Company entered into a Credit, Security and Guaranty Agreement (the “Credit Agreement”), by and among the Company (as borrower) and Apyx China Holding Corp., the Company’s wholly-owned subsidiary (as guarantor), and 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 matures on February 1, 2028.

The initial tranche of $ 10 million was fully funded on February 17, 2023, with approximately $ 2 million of the proceeds used to pay for transaction fees and other costs incurred in connection with the Credit Agreement.

Subject to certain terms and conditions of the Credit Agreement, the second tranche would be available between June 30, 2023 and December 31, 2023 and the third tranche would be available between January 1, 2024 and September 30, 2024, respectively.

The Company’s ability to access these additional tranches is conditioned upon, among other things, the achievement of certain minimum revenue targets.

The net proceeds of these term loans are to be used for working capital and general corporate purposes.

Each term loan bears interest at a floating rate based on an Adjusted Term SOFR (as defined in the Credit Agreement), subject to a floor of 2.5 %, plus 7.35 %.

The first twenty-four ( 24 ) months of the term loans constitute an interest-only period (with a possible twelve ( 12 ) month extension), with interest payable monthly on the first day of each month.

Subsequent to the interest-only period, the outstanding principal amount of the term loans is repayable in thirty-six ( 36 ) equal monthly payments (or twenty-four ( 24 ) with the extension of the interest-only period).

All remaining outstanding principal, together with all accrued and unpaid interest, is due at maturity.

The term loans may be voluntarily prepaid in full, or in part, at any time, subject to terms and conditions set forth in the Credit Agreement.

Additionally, the term loans are subject to mandatory prepayment obligations, pursuant to the terms of the Credit Agreement.

Prepayments of the term loans are subject to fees of 3 %, 2 %, and 1 % of the prepayment amounts made during the first year, second year, and thereafter, respectively.

At the time of the final payment of the term loans, the Company is also obligated to pay an exit fee of 4 % of the total amount funded thereunder.

Revolving Facility

The Company may borrow, repay and reborrow under the revolving facility until February 1, 2028, at which time the facility will terminate and all outstanding amounts thereunder, including all accrued and unpaid interest, must be repaid.

The proceeds of the revolving facility may be used for working capital needs and general corporate purposes.

Loans made under the revolving facility bear interest at a floating rate based on an Adjusted Term SOFR (as defined in the Credit Agreement), subject to a floor of 2.5 %, plus 4 %.

The Company is obligated to pay a fee equal to 0.5 % per annum on the outstanding balance of the revolving loans and the average unused portion of the available revolving commitments, respectively.

Additionally, if the revolving facility is terminated or reduced before maturity, the Company is subject to a deferred origination fee pursuant to the terms of the Credit Agreement.

Terminations and reductions of the commitments are subject to fees of 3 %, 2 %, and 1 % of the terminated or reduced commitments during the first year, second year, and thereafter, respectively.

The Company is required to maintain a minimum balance of 30 % of the lesser of the borrowing base or $ 10 million under the revolving facility.

If the average outstanding balance for a month is less than the minimum balance, the Company will pay a minimum balance fee for the difference between the minimum balance and the average outstanding balance for the month at the highest rate for the revolving loans during the month.

For such loans, interest and fees are payable monthly on the first day of each month.

The obligations of the Company under the Credit Agreement are secured by first priority liens on substantially all of its assets.

APYX MEDICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

The Credit Agreement contains customary affirmative and negative covenants, including covenants limiting the ability of the Company and its 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 Credit Agreement.

The Credit Agreement also requires the Company to satisfy certain financial covenants, including minimum trailing twelve (12) month net revenue targets relating to its Advanced Energy segment (tested quarterly), with year-end targets of $ 49 million, $ 60 million and $ 70 million for 2023, 2024, and 2025, respectively.

Additionally, the Company must maintain a balance of $ 10 million in cash and cash equivalents during the duration of the Credit Agreement’s term.

Events of Default

The Credit Agreement also contains customary Events of Default (as defined in the Credit Agreement) that include, among other things, certain payment defaults, cross defaults to certain other contracts and indebtedness, covenant defaults, inaccuracy of representations and warranties, bankruptcy and insolvency defaults, judgment defaults, change of control defaults, defaults related to the failure to remain registered with the Securities and Exchange Commission and listed for trading on the Nasdaq Stock Market, and any material adverse change.

Upon the occurrence and during the continuance of an Event of Default under the Credit Agreement, the respective administrative agent, if requested by the respective lenders, may, among other things, (i) suspend or terminate commitments, as well as obligations of the relevant administrative agent and lenders, (ii) declare all outstanding obligations under the agreement (including principal and accrued and unpaid interest) immediately due and payable, and (iii) exercise the other rights and remedies provided for under the agreement.

The Credit Agreement provides that, under certain circumstances, a default interest rate will apply on all obligations under such agreement during the existence of an Event of Default, at a per annum rate equal to 2 % in excess of the applicable interest rate.

Issuance of Warrants

In connection with the Company’s obligations under the Credit Agreement, the Company issued to a statutory trust of MidCap Financial warrants to purchase up to 250,000 shares of its common stock, par value $ 0.001 , with an exercise price of $ 3.40 per share.

Sale Leaseback of Clearwater, FL Real Property

In an effort to improve liquidity and the balance sheet condition of the Company, management has been exploring options to leverage the Company's unencumbered real property.

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

On March 14, 2023, Apyx Medical Corporation (the “Company”) entered into a Purchase and Sale Agreement (the “Purchase Agreement”) with VK Acquisitions VI, LLC (the “Purchaser”), for the sale of the Company’s 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 within thirty ( 30 ) days from the date of execution, during which time the Purchaser retains the right to cancel the Purchase Agreement.

The closing shall occur five ( 5 ) days following the expiration of the due diligence period.

Upon execution of the Purchase Agreement, the Purchaser paid a down payment of $ 400,000 into escrow, which shall be held in accordance with the Purchase Agreement.

Pursuant to the terms of the Purchase Agreement, the transaction is not conditioned upon Purchaser obtaining any form of financing.

The Purchase Agreement contains customary representations, warranties and covenants.

In accordance with the terms of the Purchase Agreement, upon the closing of the sale of the Property, the Company will enter into a Single Tenant Industrial Building Lease (the “Lease”) with the Purchaser, pursuant to which the Property will be leased back to the Company.

The Lease will have an initial term of ten ( 10 ) years commencing from the closing (the “Initial Term”), and a renewal term of five ( 5 ) years, exercisable at the Company’s option.

The annual fixed rent will be $ 619,500 for the first year of the Initial Term, and will be subject to a 4 % escalation every year thereafter through the Initial Term.

Rent will be reset to the current market rate should the Company exercise the renewal option.

The Lease provides for a 3 % management fee on rent payments throughout the Initial Term and optional renewal term.

APYX MEDICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

The Lease is a triple net lease, pursuant to which all costs, expenses, and obligations relating to the Property, including, repair and maintenance charges, utility charges, real estate taxes or other taxes that may be imposed that relate to the Property, shall be paid by the Company.

In addition, the Lease contains other customary terms and provisions generally contained within leases of this type.

The net cash proceeds the Company expects to receive following closing is approximately $ 6,700,000 after taxes, expenses, and fees.

This estimate is subject to the consummation of the transaction and the finalization of the Company’s obligations associated with the sale.

The Company anticipates that the net cash proceeds will be used to strengthen its balance sheet and provide working capital

On March 1, 2023, Shiva Stein as plaintiff filed a derivative complaint in the Court of Chancery of the State of Delaware, captioned Stein v.

Makrides, et al., C.A.

2023-0239-MTZ (the “Stein Suit”) against individual members of the Company’s board of directors and naming the Company as a nominal defendant, primarily concerning the facts at issue in a previously disclosed federal securities class action lawsuit filed in 2019 and settled in 2020, captioned Pritchard v.

Apyx Medical Corporation, et al., Case No.

8:19-cv-00919 (M.D.

Fla.) (the “Pritchard Case”).

The Stein Suit seeks unspecified damages alleged to have resulted from purported breaches of fiduciary duty, unjust enrichment and related claims based on the same set of allegedly misleading statements and material omissions described in the settled Pritchard Case, which concerned the 2018-2019 clinical study conducted by the Company to evaluate the safety and efficacy of its J-Plasma technology for dermal resurfacing.

The Company believes that the claims are subject to procedural and substantive defenses, anticipates defense and indemnity coverage to be made available by the relevant insurer, and expects the individual defendants to defend all of the allegations vigorously.

The outcome of the action is not within the Company’s control and may not be known for a prolonged period of time.

In the opinion of management, neither the alleged claims against the individual defendants nor the defense thereof are expected to result in a material, adverse effect on the Company’s financial condition, results of operations and cash flows.

APYX MEDICAL CORPORATION

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

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 8. Financial Statements and Supplementary Data