Apyx Medical Corp 10-K

ITEM 5. Market for Registrant ’ s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Our common stock currently is traded on the Nasdaq Global Select Market. As of March 11, 2025, we had approximately 600 stockholders of record. Since many stockholders choose to hold their shares under the name of their brokerage firm, we estimate that the actual number of stockholders was over 3,500. Dividend Policy We have never declared or paid any cash dividends on our common stock and we currently do not anticipate paying cash dividends in the foreseeable future. We currently expect to retain any future earnings to fund the operation and expansion of our business. Five Year Performance Graph The following line graph compares the value of our common shares with the value of the Russell 2000 Stock Index and the Russell 3000 Stock Index. The line graph assumes, in each case, an initial investment of $100 on December 31, 2020, based on the market prices at the end of each fiscal year through and including December 31, 2024, and reinvestment of dividends. December 31, 2020 2021 2022 2023 2024 Apyx Medical Corporation 100 178.06 19.58 36.38 21.94 Russell 2000 Index 100 113.69 89.18 102.64 112.92 Russell 3000 Index 100 124.60 99.08 122.81 150.01 22 Table of Contents APYX MEDICAL CORPORATION ITEM 6. [Reserved] 23 Table of Contents APYX MEDICAL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ITEM 7 . Management ’ s Discussion and Analysis of Financial Condition and Results of Operations You should read the following discussion and analysis in conjunction with our consolidated financial statements and related notes contained elsewhere in this report. This discussion contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a variety of factors discussed in this report and those discussed in other documents we file with the SEC. In light of these risks, uncertainties and assumptions, readers are cautioned not to place undue reliance on such forward-looking statements. These forward-looking statements represent beliefs and assumptions as of the date of this report. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our estimates change. Past performance does not guarantee future results. Executive Level Overview We are a surgical aesthetic company with a passion for elevating people’s lives through innovative products, including our Helium Plasma Platform Technology products marketed and sold as Renuvion in the cosmetic surgery market and J-Plasma in the hospital surgical market. Renuvion and J-Plasma offer surgeons a unique ability to provide controlled heat to tissue to achieve their desired results. We also leverage our deep expertise and decades of experience in unique waveforms through OEM agreements with other medical device manufacturers. Glucagon- like peptide -1 peptide receptor agonists (“GLP-1’s”), such as Mounjaro ® , Wegovy ® and Ozempic ® , are prescribed for the treatment of diabetes and or weight loss in combination with exercise to improve glycemic control. GLP-1’s have also been found to mimic the GLP-1 satiety hormone in our bodies. When one eats, GLP-1 is released in the small intestines regulating blood sugar and sending signals to the brain centers that control appetite. Studies have shown patients taking GLP-1’s have experienced a loss of body weight. Currently, two GLP-1’s are cleared by the FDA for weight loss, but we anticipate a number of additional drug candidates will be cleared as well as, oral versions of these injectable medications. We believe the increased use of GLP-1’s has had an initial negative impact on the revenue for plastic and cosmetic surgeons and created uncertainty in the aesthetic space. However, we believe, as these drugs will have a ripple effect that will eventually drive people towards plastic surgery and may provide a tailwind for sales of our Renuvion products. Rapid weight loss caused by these drugs can contribute to loose skin, particularly in the curvier areas of the body. To address this, the cosmetic surgery market is focusing on body contouring. Body contouring is a customizable treatment for patients to target specific fat deposits, engage in the transfer of fat, and treatments to address loose or lax skin. Renuvion is the only FDA approved device for the treatment of this issue post liposuction. Additionally, Renuvion may be used to treat skin laxity without the use of liposuction, potentially increasing the total available market for our products. 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, 2024, we incurred a loss from operations of $18.8 million and used $18.0 million of cash in operations. As of December 31, 2024, we had cash and cash equivalents of $31.7 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 acceptable to us. The sale of additional equity would result in dilution to our stockholders. Incurring additional debt financing would result in further debt service obligations, and the instruments governing such debt could provide for operating and financing covenants that would restrict our operations. If we are unable to raise additional capital in sufficient amounts or on acceptable terms, 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, cash flows and prospects. In November 2024, we undertook a cost saving restructuring which included an organizational reduction in force to better focus, optimize and streamline operations. As a result of the organizational changes, we reduced our U.S. workforce by nearly 25%. We estimate the annualized future cost savings from the reduction in force to be approximately $4.3 million which we expect to contribute to our goal of decreasing losses and achieving cash-flow breakeven. We incurred pre-tax charges of approximately $0.6 million in the fourth quarter of 2024 representing, for the most part, one-time cash expenditures for severance and other employee termination benefits. In addition to the reduction in force, we eliminated bonuses in 2024, reduced the size of the board of directors from eight to five members and reduced aggregate board cash compensation from $0.5 million annually to $0.1 million, while increasing board stock-based compensation. In addition to the organizational changes, we have identified other direct cost savings we anticipate achieving in 2025. The identified cost savings include reductions in professional fees, lower research and development costs as we complete the development of AYON, lower credit card fees and stock-based compensation. We foresee, in totality, these cost savings will reduce our annual operating expenses below $40 million in 2025. 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 statement included an embedded ATM facility for up to $40 million. To date we have not utilized this facility. 24 Table of Contents APYX MEDICAL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued On November 7, 2024, we entered into an amendment to the Perceptive Credit Agreement. The amendment reduced the financial covenant trailing twelve-month revenue targets relating to its Advanced Energy segment (tested quarterly), with amended year-end targets of $34.4 million, $37.0 million, $52.4 million and $60.3 million for 2024, 2025, 2026 and 2027, respectively. The amendment also introduced a maximum operating expense financial covenant, with full year targets of $40.0 million and $45.0 million for 2025 and 2026, respectively. The Perceptive Credit Agreement, as amended, continues to contain customary affirmative and negative covenants, including covenants limiting the ability of us and our subsidiaries, among other things, to incur debt, grant liens, make distributions, enter certain restrictive agreements, pay or modify subordinated debt, dispose of assets, make investments and acquisitions, enter into certain transactions with affiliates, and undergo certain fundamental changes, in each case, subject to limitations and exceptions set forth in the Perceptive Credit Agreement. Additionally, we must maintain a balance of $3.0 million in cash and cash equivalents during the term of the Perceptive Credit Agreement. As of December 31, 2024, we were in compliance with the financial covenants contained within the Perceptive Credit Agreement, as amended. Our continued compliance with covenants is subject to meeting or exceeding forecasted Advanced Energy revenues, as amended, and reducing operating expenses. For a more in-depth description of the terms of the Perceptive Credit Agreement, as amended, see Note 11 in Item 8 of this Annual Report on Form 10-K. On November 7, 2024, we closed a $7.0 million registered direct offering with a healthcare-focused fund and issued 3,000,000 shares of common stock and 2,934,690 of pre-funded warrants to purchase common stock with an exercise price of $.001 per share. For a more in-depth description of the terms of the registered direct offering, see Note 13 in Item 8 of this Annual Report on Form 10-K. On January 6, 2025, we announced that we had submitted a 510(k) premarket notification to the FDA for AYON. AYON was developed with a focus on versatility and innovation. AYON has been designed to be the only device a surgeon needs for comprehensive body contouring solutions. This all-in-one system integrates advanced modalities to perform multiple functions seamlessly, removing unwanted fat, enhancing tissue contraction and addressing the full range of patient needs from contouring to aesthetic enhancement. The initial submission for AYON includes the following: • Infiltration • Dual aspiration to facilitate simultaneous users • Ultrasound-assisted liposuction • Electrocoagulation to support procedures requiring removal of excess tissue • Volume enhancement capabilities • Renuvion treatment to address loose and lax skin During 2025, we plan to expand the indications with an additional 510(k) submission for AYON to include power assisted liposuction. Other Matters During 2024, we continued to drive sales in our Advanced Energy business by increasing the adoption and utilization of our handpieces in the U.S. cosmetic surgery market and fulfilling demand from distributors in our international markets. Management estimates that our products have been sold in more than 60 countries. Our direct sales force, along with our international network of distributors, is focused on becoming the sole provider of surgical equipment in the cosmetic surgical markets. This sales force is supported by a global team of clinical support specialists, which focuses on supporting our users to ensure optimal outcomes for their patients. In addition, we have invested in training programs and marketing-related activities to support accelerated adoption of our technology into surgeons' practices. We believe that our continued investment and focus on the following strategic initiatives in 2025 and beyond will position the Company for long-term growth in the cosmetic surgery market: • To provide enhanced physician and practice support for our cosmetic surgery customers • To expand our regulatory approvals to expand product availability in new markets worldwide • To execute our regulatory pathway for our AYON in the United States • To successfully launch AYON in the United States and eventually worldwide • To generate consumer interest in the treatment of loose and lax skin through a focused direct-to-consumer advertising strategy, including as a result of the side effects of GLP-1's In regards to our operating segments, our results are aggregated into reportable segments only if they exhibit similar economic characteristics. In addition to similar economic characteristics, we also consider the following factors in determining the reportable segments: the nature of business activities, the management structure directly accountable to our chief operating decision maker for operating and administrative activities, availability of discrete financial information, and information presented to the Board of Directors and investors. Asset information is not reviewed by the chief operating decision maker by segment and is not available by segment and, accordingly, we have not presented a measure of assets by reportable segment. 25 Table of Contents APYX MEDICAL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued e operate in two business segments: OEM and Advanced Energy. The OEM segment is primarily development and manufacturing contract and product driven. The Advanced Energy segment sells both capital equipment and consumables in the form of a single use handpiece. Sales of handpiece units are a substantial portion of our business and for the years ended December 31, 2024 and 2023, we sold approximately 94,000 and 87,000 units, respectively. During 2024, our single-use handpiece unit sales grew 8% overall and 15% in the United States and handpiece revenue currently accounts for more than 60% of our total Advanced Energy revenue. “Corporate & Other” includes certain unallocated corporate and administrative costs which are not specifically attributed to any reportable segment. The OEM segment is primarily development and manufacturing contract and product driven, and all related expenses are recorded as cost of sales, therefore no segment specific operating expenses are incurred. We strongly encourage investors to visit our website: www.apyxmedical.com to view the most current news and to review our filings with the Securities and Exchange Commission. Results of Operations Sales Year Ended December 31, (In thousands) 2024 2023 Change Sales by Reportable Segment Advanced Energy $ 38,606 $ 43,382 (11.0 )% OEM 9,496 8,967 5.9 % Total $ 48,102 $ 52,349 (8.1 )% Sales by Domestic and International Domestic $ 34,022 $ 38,345 (11.3 )% International 14,080 14,004 0.5 % Total $ 48,102 $ 52,349 (8.1 )% Total revenue decreased by 8.1% or approximately $4.2 million for the year ended December 31, 2024 when compared with 2023. Advanced Energy segment sales decreased 11.0% or approximately $4.8 million for the year ended December 31, 2024 when compared with 2023. The Advanced Energy sales decrease was primarily due to lower sales of our generators in both domestic and certain international markets as a result of economic uncertainty in the capital equipment market that is being experienced in the aesthetic space and a lower average selling price of generators to domestic customers as a result of these market conditions. These decreases were partially offset by increased volume of single-use handpieces globally and sales of Apyx One Console upgrades internationally. The OEM product line consists of proprietary products designed specifically for third party equipment manufacturers. Revenue for this product line increased 5.9%, or approximately $0.5 million, when compared to 2023. 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. International sales represented approximately 29.3% and 26.8% of total revenues for the years ended December 31, 2024 and 2023, respectively. 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. Gross Profit Year Ended December 31, (In thousands) 2024 2023 Change Cost of sales $ 18,742 $ 18,590 0.8 % Percentage of sales 39.0 % 35.5 % Gross profit $ 29,360 $ 33,759 (13.0 )% Percentage of sales 61.0 % 64.5 % Our gross profit margin as a percentage of sales decreased by approximately 3.5% during the year ended December 31, 2024, compared with 2023. The decrease in gross profit margins for the year ended December 31, 2024 from the prior year is primarily due to a decrease in the average selling price of generators to domestic customers, changes in the sales mix between our two segments, with our OEM segment comprising a higher percentage of total sales and geographic mix within our Advanced Energy segment, with international sales comprising a higher percentage of total sales. 26 Table of Contents APYX MEDICAL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued Other Costs and Expenses Research and development Year Ended December 31, (In thousands) 2024 2023 Change Research and development expense $ 5,080 $ 5,440 (6.6 )% Percentage of sales 10.6 % 10.4 % Our expenses for research and development related activities decreased by 6.6% or approximately $0.4 million for the year ended December 31, 2024, compared with 2023. This increase was primarily due to lower compensation and benefits costs from the prior year ($0.3 million) and lower spending on our product development initiatives and clinical studies ($0.1 million). Professional services Year Ended December 31, (In thousands) 2024 2023 Change Professional services expense $ 6,914 $ 7,031 (1.7 )% Percentage of sales 14.4 % 13.4 % Professional services expenses decreased 1.7%, or approximately $0.1 million for the year ended December 31, 2024, compared with 2023. This decrease was primarily due to decreases in board of director’s stock-based compensation expense ($0.5 million), recruiting expenses ($0.4 million) and accounting and audit fees ($0.2 million). These decreases were partially offset by increases in physician and marketing consulting ($0.6 million) and legal expenses ($0.4 million), as a result of the reversal of a legal loss contingency in the prior year. Salaries and related costs Year Ended December 31, (In thousands) 2024 2023 Change Salaries and related expenses $ 17,353 $ 19,041 (8.9 )% Percentage of sales 36.1 % 36.4 % Salaries and related expenses decreased 8.9% or approximately $1.7 million for the year ended December 31, 2024, compared to 2023. The decrease was primarily due to a decrease in bonus expense ($1.0 million) as we reversed our entire annual bonus accrual during the third quarter because of economic uncertainty for capital equipment purchases in the aesthetics space. The decrease was also the result of lower stock-based compensation expense ($0.5 million) and temporary labor expenses ($0.2 million). Selling, general and administrative expenses Year Ended December 31, (In thousands) 2024 2023 Change SG&A expense $ 18,858 $ 22,198 (15.0 )% Percentage of sales 39.2 % 42.4 % Selling, general and administrative expense decreased by 15.0% or approximately $3.3 million for the year ended December 31, 2024, compared with 2023. The change is primarily due to decreases in commissions ($2.0 million), insurance expense, including claims on our policies ($1.4 million), advertising expense, including trade show fees and related costs ($0.5 million), travel expense ($0.4 million) and payment processing fees ($0.2 million). These decreases were partially offset by higher meeting and training costs ($0.7 million), building lease expense ($0.2 million), allowances for credit losses ($0.1 million) and regulatory fees ($0.1 million). 27 Table of Contents APYX MEDICAL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued Gain on sale-leaseback Year Ended December 31, (In thousands) 2024 2023 Gain on sale-leaseback $ — $ 2,692 Percentage of sales — % 5.1 % During 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) Year Ended December 31, (In thousands) 2024 2023 Interest income $ 1,606 $ 921 Percentage of sales 3.3 % 1.8 % Interest expense $ (5,907 ) $ (2,478 ) Percentage of sales (12.3 )% (4.7 )% Interest income increased approximately $0.7 million for the year ended December 31, 2024, compared with 2023. This increase is due to a higher average balance in on our investments in money market funds and U.S. Treasury securities included in cash and cash equivalents. Interest expense increased approximately $3.4 million for the year ended December 31, 2024, when compared with the prior year. These increases are due to cash and noncash interest expense on the Perceptive Credit Agreement. Other Income (Loss), net Year Ended December 31, (In thousands) 2024 2023 Other (expense) income, net $ (161 ) $ 622 Percentage of sales (0.3 )% 1.2 % Loss on extinguishment of debt $ — $ (3,088 ) Percentage of sales — % (5.9 )% Other (expense) income, net decreased approximately $0.8 million for the year ended December 31, 2024, compared with 2023. This decrease was primarily due to the current year recording of a joint and several liability for sales taxes related to one customer ($0.2 million), a small insurance recovery in 2023 ($0.2 million) and the release of our joint and several payroll liability due to the lapse of the statute of limitations on a portion of the liability ($0.4 million) in 2023. 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. Income Taxes Year Ended December 31, (In thousands) 2024 2023 Income tax expense (benefit) $ 252 $ (2,432 ) Effective tax rate (1.1 )% 11.4 % Income tax expense (benefit) was approximately $0.3 million and $(2.4 million), with effective tax rates of (1.1)% and 11.4%, respectively, for the years ended December 31, 2024 and 2023, respectively. For the year ended December 31, 2024, the effective tax rate differs from the statutory rate primarily due to the valuation allowance on our Federal and state net operating losses (NOLs) and net deferred tax assets generated during the year. 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. 28 Table of Contents APYX MEDICAL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued Liquidity and Capital Resources At December 31, 2024, we had approximately $31.7 million in cash and cash equivalents as compared to approximately $43.7 million in cash and cash equivalents at December 31, 2023. Our working capital at December 31, 2024 was approximately $45.7 million compared with $57.6 million at December 31, 2023. For the year ended December 31, 2024, net cash used in operating activities was $18.0 million, which principally funded our loss from operations of $18.8 million, compared with net cash used in operating activities, exclusive of the receipt of our $8.1 million final income tax refund, of approximately $13.3 million for 2023. The increase in cash used in operations is primarily due to the payment of accrued bonuses in the first quarter of 2024 (no bonuses were paid in 2023), higher accounts receivable, higher cash interest expense, net of interest income, and the increase in operating loss driven by lower Advanced Energy sales compared to the same period in the prior year. These decreases were partially offset by improvements in our prepaid expenses and inventory positions. Net cash used in investing activities for the year ended December 31, 2024, was $0.7 million related to investments in property and equipment. 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 provided by financing activities for the year ended December 31, 2024, was $6.7 million, which primarily related to proceeds received upon the closing of a registered direct offering ($7.0 million) less costs incurred in the transaction ($0.2 million). 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 with 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). 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. During January 2023, we were notified that the IRS examination process of our 2018, 2019 and 2020 tax returns was complete and that our tax refunds were approved for approximately $0.2 million more than the amount recorded in the Company's Consolidated Balance Sheet at December 31, 2023. 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. 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 provided for a facility of up to $45 million, consisting of senior secured term loans. The Perceptive Credit Agreement provided for (i) an initial loan of $37.5 million and (ii) a delayed draw loan of $7.5 million. The Company's ability to borrow the delayed draw loan of $7.5 million lapsed on December 31, 2024. 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. 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. 29 Table of Contents APYX MEDICAL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued On November 7, 2024, we entered into an amendment to the Perceptive Credit Agreement. The amendment reduced the financial covenant trailing twelve-month revenue targets relating to its Advanced Energy segment (tested quarterly), with amended year-end targets of $34.4 million, $37.0 million, $52.4 million and $60.3 million for 2024, 2025, 2026 and 2027, respectively. The amendment also introduced a maximum operating expense financial covenant, with full year targets of $40.0 million and $45.0 million for 2025 and 2026, respectively. The Perceptive Credit Agreement, as amended, continues to contain customary affirmative and negative covenants, including covenants limiting the ability of us and our subsidiaries, among other things, to incur debt, grant liens, make distributions, enter certain restrictive agreements, pay or modify subordinated debt, dispose of assets, make investments and acquisitions, enter into certain transactions with affiliates, and undergo certain fundamental changes, in each case, subject to limitations and exceptions set forth in the Perceptive Credit Agreement. Additionally, we must maintain a balance of $3.0 million in cash and cash equivalents during the term of the Perceptive Credit Agreement. As of December 31, 2024, we were in compliance with the financial covenants contained within the Perceptive Credit Agreement, as amended. Our continued compliance with covenants is subject to meeting or exceeding forecasted Advanced Energy revenues, as amended and reducing operating expenses. For a more in-depth description of the terms of the Midcap Credit Agreement and the Perceptive Credit Agreement, as amended, see Note 11 in Item 8 of this Annual Report on Form 10-K. On November 7, 2024, we closed a $7.0 million registered direct offering with a healthcare-focused fund and issued 3,000,000 shares of common stock and 2,934,690 of pre-funded warrants to purchase common stock with an exercise price of $.001 per share. For a more in-depth description of the terms of the registered direct offering, see Note 13 in Item 8 of this Annual Report on Form 10-K. At December 31, 2024, we had purchase commitments for inventories totaling approximately $2.6 million, all of which is expected to be purchased by the end of 2025. Critical Accounting Estimates In preparing the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP), we have adopted various accounting policies. Our most significant accounting policies are disclosed in Note 2 in Item 8 of this Annual Report on Form 10-K. The preparation of the consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Our estimates and assumptions, including those related to inventories, legal proceedings, research and development, warranty obligations, product liability, sales returns and discounts, stock-based compensation and income taxes are updated as appropriate, which in most cases is at least quarterly. We base our estimates on historical experience, or various assumptions that are believed to be reasonable under the circumstances and the results form the basis for making judgments about the reported values of assets, liabilities, revenues and expenses. Actual results may materially differ from these estimates. Estimates are considered to be critical if they meet both of the following criteria: (1) the estimate requires assumptions about material matters that are uncertain at the time the accounting estimates are made and (2) other materially different estimates could have been reasonably made or material changes in the estimates are reasonably likely to occur from period to period. Our critical accounting estimates include the following: Accounts Receivable Allowance We maintain a reserve for uncollectible accounts receivable. When evaluating the adequacy of the allowance for credit losses, we analyze historical bad debt experience, the composition of outstanding receivables by customer class, and the age of outstanding balances, and we make estimates in connection with establishing the allowance for credit losses, including the expected impacts of changes in the operating environment in multiple countries as well as the credit terms being offered to customer, to determine where adjustments to historical experience are warranted. The economic uncertainty in the capital equipment market being experienced in the aesthetic space as a result of the disruption from GLP-1's has resulted in the granting of extended credit terms. Accordingly, we believe that there is additional exposure in our outstanding receivables and have adjusted our accounts receivable allowance for this expectation. Changes in estimates are reflected in the period they are made. If the financial condition of our customers deteriorates, resulting in an inability to make payments, additional allowances may be required. 30 Table of Contents APYX MEDICAL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued Litigation Contingencies In accordance with authoritative guidance, we record a liability in our consolidated financial statements for these actions when a loss is known or considered probable and the amount can be reasonably estimated. If the reasonable estimate of a known or probable loss is a range, and no amount within the range is a better estimate than any other, the minimum amount of the range is accrued. If a loss is reasonably possible, but not known or probable, and can be reasonably estimated, the estimated loss or range of loss is disclosed in the notes to the consolidated financial statements. In most cases, significant judgment is required to estimate the amount and timing of a loss to be recorded. We discuss significant judgements with counsel, which include determining the legitimacy of asserted and unasserted claims, the probability that a loss has been incurred, the estimates of the net potential range of losses associated with these claims, the timing of the losses associated with these claims and historical experience with these claims. Additionally, the deductibles on our insurance policies that cover these claims have increased in recent periods, creating additional exposure and losses in excess of historical experience. It is at least reasonably possible that a change in the actual amount of loss will occur in the near term. Inflation The consequences of global supply chain instability, inflationary cost increases, potential and actual tariffs, 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. However, as these trends continue for raw materials, freight, and labor costs, our future financial performance could be adversely impacted. Off-Balance Sheet Arrangements We have no off-balance sheet arrangements at this time. Recent Accounting Pronouncements See Note 3 of the Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K. ITEM 7A . Quantitative and Qualitative Disclosures about Market Risk Not required. 31 Table of Contents APYX MEDICAL CORPORATION