What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-03-21 compared with 2023-03-16 · 126 added, 118 removed, 174 unchanged (58% of the section changed)

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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.

Food and Drug Administration (“FDA”) posted a Safety Communication that warned 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 reduced 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.

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 handpiece.

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.

The 510(k) clearance for the Renuvion APR handpiece now addresses improving the appearance of lax (loose) skin in the neck and submental region.

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.

On April 28, 2023, we announced that we received 510(k) clearance from the FDA for the use of the Renuvion APR handpiece for coagulation of subcutaneous soft tissues following liposuction for aesthetic body contouring.

On May 10, 2023, the FDA updated the Safety Communication to inform consumers and healthcare providers about the clearance for the Renuvion APR handpiece for use under the skin in certain procedures intended to improve the appearance of the skin, including for coagulation of subcutaneous soft tissues following liposuction for aesthetic body contouring.

While we expected that receiving these clearances would 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 the current and potentially future periods.

On June 14, 2023, we announced that we received 510(k) clearance from the FDA for the Renuvion Micro handpiece, a new addition to the Renuvion production family.

The Renuvion Micro handpiece was cleared with an indication for the delivery of radiofrequency energy and/or helium plasma where coagulation/contraction of soft tissue is needed.

Soft tissue includes subcutaneous tissue.

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

These proceeds were used to launch broad

APYX MEDICAL CORPORATION

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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.

marketing and sales initiatives which resulted in rapid sales growth through December 31, 2021 and into the first quarter of 2022.

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, 2023, we incurred a loss from operations of $17.3 million and used $5.2 million of cash in operations, which is inclusive of the receipt of our tax refund of approximately $8.1 million.

As of December 31, 2023, we had cash and cash equivalents of $43.7 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.

We plan to continue to fund our operations and capital funding needs through existing cash, sales of our products and, if necessary, additional equity and/or debt financing.

However, we cannot be certain that additional financing will be available when needed or that, if available, financing will be obtained on terms favorable to us or our existing stockholders.

The sale of additional equity would result in dilution to our stockholders.

Incurring additional debt financing would result in further debt service obligations, and the instruments governing such debt could provide for operating and financing covenants that would restrict our operations.

If we are unable to raise additional capital in sufficient amounts or on acceptable terms, we may be required to delay, limit, reduce, or terminate our sales, marketing and product development.

Any of these actions could harm our business, results of operations and prospects.

On November 22, 2022, we filed a shelf registration statement providing us the ability to register and sell our 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 February 17, 2023, we entered into a Credit, Security and Guaranty Agreement (the “MidCap 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 MidCap Credit Agreement provided for an up to $35 million facility, consisting of senior secured term loans and a secured revolving facility.

The MidCap Credit Agreement provided 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 provided 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 MidCap Credit Agreement.

The MidCap Credit Agreement was extinguished when, on November 8, 2023, we entered into a Credit and Guaranty Agreement (the “Perceptive Credit Agreement”), by and among Apyx Medical (as borrower), Apyx China Holding Corp.

and Apyx Bulgaria EOOD, our wholly-owned subsidiaries (as subsidiary guarantors), and Perceptive Credit Holdings IV, LP (as initial lender and administrative agent) (“Perceptive”), and the lenders from time to time party thereto.

The Perceptive Credit Agreement provides for a facility of up to $45 million, consisting of senior secured term loans.

The Perceptive Credit Agreement provides for (i) an initial loan of $37.5 million and (ii) a delayed draw loan of $7.5 million.

For a more in-depth description of the terms of the Midcap Credit Agreement and the Perceptive Credit Agreement, see Note 11 in Item 8 of this Annual Report on Form 10-K.

On February 27, 2023, our Board of Directors approved a plan to sell and leaseback 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

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.

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

On May 8, 2023 we closed the Purchase Agreement and concurrently executed a 10-year agreement to leaseback the underlying Property from the Purchaser.

For a more in-depth description of the terms of the Purchase Agreement see Notes 6 and 7 in Item 8 of this Annual 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 approximately $0.2 million more than the amount recorded in the Company's Consolidated Balance Sheet at December 31, 2022.

On August 10, 2023, we received $8.1 million from the IRS, which included approximately $0.4 million of interest on the $7.7 of million income tax refunds.

APYX MEDICAL CORPORATION

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued

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 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 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.

including hosting multiple continuing education training sessions on Renuvion® with our current international distributors and conducting multiple calls with groups of international prospects interested in learning about our Renuvion® technology.

We believe that the actions already taken, including replacing the MidCap Credit Agreement with the Perceptive Credit Agreement, alleviated the conditions that previously raised 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.

Other Matters

During 2023, we continued to drive sales in our Advanced Energy business by increasing the adoption and utilization of our handpieces in the U.S.

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We also had 4 sales managers.

This selling organization is focused on the use of Renuvion® and J-Plasma® in the cosmetic and hospital surgical markets, supported by our global medical affairs team.

This selling organization, along with our international network of distributors, 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.

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Total $ 52,349 $ 44,510 17.6 %

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.

Total revenue increased by 17.6% or approximately $7.8 million for the year ended December 31, 2023 when compared with 2022.

Advanced Energy segment sales increased 17.9% or approximately $6.6 million for the year ended December 31, 2023 when compared with 2022.

The Advanced Energy sales increase was driven primarily by domestic customers who upgraded their generators to our new Apyx One Console, which we launched in January 2023, a higher average selling price on sales of new generators due to the introduction of the Apyx One Console and an increase in volume of single-use handpieces, domestically.

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

Revenue for this product line increased 16.3%, or approximately $1.3 million, when compared to 2022.

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.

T he increase in O EM sales was due to increases in sales volume to existing customers 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 26.8% and 29.9% of total revenues for the years ended December 31, 2023, and 2022, respectively.

Management estimates our products have been sold in more than 60 countries through local dealers coordinated by sales and marketing personnel through our facilities in Clearwater, Florida and Sofia, Bulgaria.

Management estimates our products have been sold in more than 60 countries through local distributors coordinated by sales and marketing personnel through our facilities in Clearwater, Florida and Sofia, Bulgaria.

(In thousands) 2023 2022 Change

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Percentage of sales 64.5 % 65.4 %

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.

Our gross profit margin as a percentage of sales decreased by approximately 1.0% during the year ended December 31, 2023, compared with 2022.

The decrease in gross profit margins for the year ended December 31, 2023 from the prior year is primarily attributable to changes in product mix within our Advanced Energy Segment, customer mix, higher material and inbound shipping costs to manufacture our inventory and additional reserves on inventories as a result of lower than expected sales.

These decreases were partially offset by geographic mix within our Advanced Energy segment, with higher margin 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.

APYX MEDICAL CORPORATION

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Percentage of sales 9.3 % 10.2 %

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 ($0.3 million) partially offset by lower spending on ou r two investigational device exemption (IDE) clinical studies and other product development initiatives ($0.1 million).

Our expenses for research and development related activities increased by 6.6% or approximately $0.3 million for the year ended December 31, 2023, compared with 2022.

This increase was primarily due to higher spending on our product development initiatives and clinical studies ($0.2 million) and increased labor and benefits costs from the same period in the prior year ($0.1 million).

Professional services

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Percentage of sales 13.4 % 20.3 %

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).

Professional services expenses decreased 22.3%, or approximately $2.0 million for the year ended December 31, 2023, compared with 2022.

This decrease was primarily attributable to decreases in legal expenses ($1.2 million) associated with the estimated loss recorded in the prior year for certain legal actions and current year reversal of a legal loss contingency, physician consulting fees ($0.5 million), accounting and audit fees ($0.2 million) and board of director’s option expense ($0.2 million).

Salaries and related costs

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Salaries and related expenses increased 5.5% or approximately $1.0 million for the year ended December 31, 2023, compared to 2022.

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.

APYX MEDICAL CORPORATION

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued

The increase was p rimarily driven by increases in bonus expense ($1.3 million), labor and benefits costs ($0.6 million) and temporary labor expenses ($0.3 million).

These increases are partially offset by lower stock based compensation expense ($1.3 million).

Selling, general and administrative expenses

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Selling, general and administrative expense increased by 8.4% or approximately $1.7 million for the year ended December 31, 2023, compared with 2022.

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

The change is primarily driven by increases in commissions ($1.1 million), insurance expense, as a result of increased product liability claims on our policies ($0.9 million), travel expense ($0.3 million), regulatory costs ($0.2 million), building lease expense ($0.2 million) and payment processing fees ($0.1 million).

These increases were partially offset

APYX MEDICAL CORPORATION

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued

by decreases in advertising expense, including trade show fees and related costs ($0.5 million), employee meeting and training costs ($0.3 million), foreign currency gains and losses ($0.2 million) and depreciation expense ($0.1 million).

Gain on sale-leaseback

(In thousands) 2023 2022

Gain on sale-leaseback $ 2,692 $ —

Percentage of sales 5.1 % — %

Durin g the year ended December 31, 2023, gain on sale-leaseback was approximately $2.7 million as a result of the gain on the sale and leaseback of our Clearwater, FL facility in May 2023.

Interest Income (Expense)

(In thousands) 2023 2022

Interest income $ 921 $ 157

Percentage of sales 1.8 % 0.4 %

Interest expense $ (2,478) $ (15)

Percentage of sales (4.7) % — %

Interest income increased approximately $0.8 million for the year ended December 31, 2023, compared with 2022.

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

Treasury securities included in cash and cash equivalents combined with a higher average balance.

Interest expense increased approximately $2.5 million for the year ended December 31, 2023, when compared with the prior year.

These increases are due to cash and noncash interest expense on the MidCap Credit Agreement executed on February 17, 2023, and the Perceptive Credit Agreement executed on November 8, 2023.

Other Income (Loss), net

(In thousands) 2023 2022

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

Other income, net $ 622 $ 509

Percentage of sales 1.2 % 1.1 %

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).

Loss on extinguishment of debt $ (3,088) $ —

Percentage of sales (5.9) % — %

Other income, net increased approximately $0.1 million for the year ended December 31, 2023, compared with 2022.

This increase was primarily attributable to a small insurance recovery in 2023 ($0.2 million).

This increase was partially offset by a decrease in the release of our joint and several payroll liability due to the lapse of the statute of limitations on a portion of the liability ($0.1 million).

During the year ended December 31, 2023, loss on extinguishment of debt was approximately $3.1 million as a result of the extinguishment of the MidCap Credit Agreement upon execution of the Perceptive Credit Agreement.

APYX MEDICAL CORPORATION

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(In thousands) 2023 2022 Change

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

Income tax (benefit) expense $ (2,432) $ 367 (762.7) %

Effective tax rate 11.4 % (1.6) %

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.

Income tax (benefit) expense was approximately $2.4 million and $0.4 million, with effective tax rates of 11.4% and (1.6)%, respectively, for the years ended December 31, 2023 and 2022, respectively.

For the year ended December 31, 2023, 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 the reversal of our uncertain tax positions upon completion of the IRS audit of our tax return for the 2018, 2019 and 2020 years in January 2023.

For the year ended December 31, 2022, 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

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Our working capital at December 31, 2023 was approximately $57.6 million compared with $31.1 million at December 31, 2022.

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 increase in working capital at December 31, 2023, was primarily due to proceeds received from the execution of the Perceptive Credit Agreement, less the proceeds used to payoff the MidCap Credit Agreement, the proceeds received upon the sale-leaseback of our Clearwater, FL facility in May 2023 and the reversal of our liability for uncertain tax positions upon the completion in January 2023 of the IRS examination of our 2018, 2019 and 2020 income tax returns.

This increase was partially offset by the net loss we experienced in 2023, excluding non-cash activity, comprised primarily of stock-based compensation.

For the year ended December 31, 2023 , net cash used in operating activities was $5.2 million, which is inclusive of the receipt of our tax refund of approximately $8.1 million , which principally funded our loss from operations of $17.3 million, compared with net cash used in operating activities of approximately $20.3 million for 2022.

We have incurred recurring net losses and cash outflows from operations and we anticipate that losses will continue in the near term.

We plan to continue to fund our operations and capital funding needs through existing cash, sales of our products and if necessary additional equity and/or debt financing.

However, we cannot be certain that additional financing will be available when needed or that, if available, financing will be obtained on terms favorable to us or our existing stockholders.

The sale of additional equity would result in dilution to our stockholders.

If we are unable to raise additional capital in sufficient amounts or on acceptable terms, we may be required to delay, limit, reduce, or terminate our sales, marketing and product development.

Any of these actions could harm our business, results of operations and prospects.

On November 22, 2022, we filed a shelf registration statement providing us the ability to register and sell our 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,

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

APYX MEDICAL CORPORATION

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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.

the MidCap Credit Agreement.

The Perceptive Credit Agreement provides for a facility of up to $45 million, consisting of senior secured term loans.

The Perceptive Credit Agreement provides for (i) an initial loan of $37.5 million and (ii) a delayed draw loan of $7.5 million.

For a more in-depth description of the terms of the Midcap Credit Agreement and the Perceptive Credit Agreement see Note 11 in Item 8 of this Annual Report on Form 10-K.

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

On May 8, 2023, we closed the Purchase Agreement and concurrently executed a 10-year agreement to leaseback the underlying Property from the Purchaser.

For a more in-depth description of the terms of the Purchase Agreement see Notes 6 and 7 in Item 8 of this Annual Report on Form 10-K.

On August 10, 2023, we received $8.1 million from the IRS, which included approximately $0.4 million of interest on the $7.7 million of income tax refunds.

We believe that the actions already taken, including replacing the MidCap Credit Agreement with the Perceptive Credit Agreement, alleviate the conditions that raised 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.

Net cash provided by investing activities for the year ended December 31, 2023, was $6.7 million related to the sale of our Clearwater, FL facility ($7.3 million), partially offset by investments in property and equipment ($0.5 million).

Net cash used in investing activities for the year ended December 31, 2022, was $1.0 million related to investments in property and equipment.

Net cash provided by financing activities for the year ended December 31, 2023, was $32.2 million, which primarily related to proceeds received upon the execution of the Perceptive Credit Agreement ($36.4 million) less debt issuance costs incurred in the transactions for both the Perceptive Credit Agreement and MidCap Credit Agreement ($3.1 million) and fees, premiums and costs to extinguish the MidCap Credit Agreement ($1.3 million).

At December 31, 2023, we had purchase commitments for inventories totaling approximately $3.8 million , all of which is expected to be purchased by the end of 2024.

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GAAP), we have adopted various accounting policies.

Our most significant accounting policies are disclosed in Note 2 to the consolidated financial statements.

Our most significant accounting policies are disclosed in Note 2 in Item 8 of this Annual Report on Form 10-K.

The preparation of the consolidated financial statements in conformity with U.S.

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Actual results may materially differ from these estimates.

APYX MEDICAL CORPORATION

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued

Estimates are considered to be critical if they meet both of the following criteria:

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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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We maintain a reserve for uncollectible accounts receivable.

When evaluating the adequacy of the allowance for doubtful accounts, we analyze specific unremitted customer balances for known collectability issues, review historical bad debt experience, customer credit worthiness and economic trends, and we make estimates in connection with establishing the allowance for doubtful accounts, including the future impacts of current trends.

When evaluating the adequacy of the allowance for doubtful accounts, we analyze historical bad debt experience, the composition of outstanding receivables by customer class, and the age of outstanding balances, and we make estimates in connection with establishing the allowance for doubtful accounts, including the expected impacts of changes in the operating environment and other trends.

Changes in estimates are reflected in the period they are made.

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actual results may differ from these estimates.

APYX MEDICAL CORPORATION

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued

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.

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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.

APYX MEDICAL CORPORATION

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.

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, 2023 .

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 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.

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

Accordingly, the significance of the future impact to our business and financial statements remains subject to significant uncertainty.

We continue to work on initiatives to combat inflation, including finding alternative suppliers that meet our quality standards, streamlining our supplier network to reduce the use of middlemen and redesigning some components to achieve better volume purchase prices.

Inflation has not, to date, materially impacted our operations or financial performance.

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Recent Accounting Pronouncements

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

See Note 3 of the Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report on 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