Trade accounts receivable, net of allowance of $750 and $608
13,036
14,023
Inventories, net of provision for obsolescence of $930 and $875
9,000
9,923
Prepaid expenses and other current assets
2,109
2,764
Total current assets
52,158
70,362
Property and equipment, net of accumulated depreciation and amortization of $3,889 and $3,522
1,905
1,915
Operating lease right-of-use assets
4,820
5,162
Finance lease right-of-use assets
53
69
Other assets
1,785
1,732
Total assets
$
60,721
$
79,240
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable
$
1,914
$
2,712
Accrued expenses and other current liabilities
7,291
9,661
Current portion of operating lease liabilities
330
347
Current portion of finance lease liabilities
20
20
Total current liabilities
9,555
12,740
Long-term debt, net of debt discounts and issuance costs
33,853
33,185
Long-term operating lease liabilities
4,606
4,896
Long-term finance lease liabilities
38
53
Long-term contract liabilities
1,271
1,246
Other liabilities
201
198
Total liabilities
49,524
52,318
EQUITY
Preferred stock, $0.001 par value; 10,000,000 shares authorized; 0 issued and outstanding as of September 30, 2024 and December 31, 2023
—
—
Common stock, $0.001 par value; 75,000,000 shares authorized; 34,643,926 issued and outstanding as of September 30, 2024, and 34,643,888 issued and outstanding as of December 31, 2023
35
35
Additional paid-in capital
84,289
81,114
Accumulated deficit
(73,283
)
(54,448
)
Total stockholders’ equity
11,041
26,701
Non-controlling interest
156
221
Total equity
11,197
26,922
Total liabilities and equity
$
60,721
$
79,240
The accompanying notes are an integral part of the condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1.BASIS OF PRESENTATION
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, including its 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. The Company also leverages its deep expertise and decades of experience in unique waveforms through OEM agreements with other medical device manufacturers.
The accompanying unaudited condensed consolidated financial statements have been prepared based upon SEC rules that permit reduced disclosure for interim periods. For a more complete discussion of significant accounting policies and certain other information, please refer to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023. In the opinion of management these condensed consolidated financial statements reflect all adjustments that are necessary for a fair presentation of results of consolidated operations and financial condition for the interim periods shown, including normal recurring accruals and other items. The results for the interim periods are not necessarily indicative of results for the full year.
Reclassifications
The Company has reclassified certain amounts presented in the prior period to conform to the current period presentation. These amounts primarily relate to management salaries that were previously included within salaries and related costs and are now included within research and development. These reclassifications had no impact on previously reported net loss, accumulated deficit or cash flows for the periods presented.
Liquidity
The Company has incurred recurring net losses and cash outflows from operations and anticipates that losses will continue, at least, in the near term. The Company plans to continue to fund operations and capital funding needs through existing cash, sales of its products and, if necessary, additional equity and/or debt financing. However, the Company cannot be certain that additional financing will be available when needed or that, if available, financing will be obtained on terms acceptable. The sale of additional equity would result in dilution to its 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 operations. If the Company is unable to raise additional capital in sufficient amounts or on acceptable terms, it may be required to delay, limit, reduce, or terminate sales, marketing and product development. Any of these actions could harm the business, results of operations and prospects. In November 2024, the Company 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 change, the Company reduced its US workforce by nearly 25%. The estimated annualized future cost savings from the reduction in force is approximately $4.3 million, which is expected to contribute to the goal of decreasing loss and achieving cash-flow breakeven. The Company will incur 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, the Company has eliminated bonuses in 2024, reduced the board of directors from eight to five members and reduced board cash compensation from $0.5 million annually to approximately $0.1 million.
In addition to the organizational changes, the Company has identified other direct cost savings it anticipates achieving in 2025. The identified cost savings include reductions in professional fees, lower research and development costs as we complete the development of Ayon, credit card fees and stock-based compensation. The Company foresees, in totality, these cost savings will reduce our annual operating expenses below $40 million.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
NOTE 2.RECENT ACCOUNTING PRONOUNCEMENTS
In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-07,Segment Reporting (Topic 280), to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. Amongst other amendments, the standard requires annual and interim disclosures of significant segment expenses that are regularly provided to the chief operating decision maker (“CODM”), and interim disclosures about a reportable segment’s profit or loss and assets that are currently required annually. This standard does not change how an entity identifies its operating segments, aggregates those operating segments, or applies the quantitative thresholds to determine its reportable segments. The standard is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. The Company is currently evaluating the impact of adoption of this standard on its consolidated financial statements.
In December 2023, the FASB issued ASU 2023-09,Income Taxes (Topic 740) to improve income tax disclosures primarily related to the rate reconciliation and income taxes paid information. The amendments in this ASU are effective for fiscal years beginning after December 15, 2024. The Company is currently evaluating the impact of adoption of this standard on its consolidated financial statements.
No other new accounting pronouncement issued or effective during the fiscal year are expected to have a material impact on the Company’s condensed consolidated financial statements or disclosures.
NOTE 3.INVENTORIES
Inventories consisted of the following:
September 30,
December 31,
(In thousands)
2024
2023
Raw materials
$
4,078
$
4,112
Work in process
2,434
2,257
Finished goods
3,418
4,429
Gross inventories
9,930
10,798
Less: provision for obsolescence
(930
)
(875
)
Inventories, net
$
9,000
$
9,923
NOTE 4.ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consisted of the following:
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
NOTE 5.DEBT
The Company’s outstanding debt with Perceptive Credit Holdings IV, LP (“Perceptive”) (as initial lender and administrative agent) (“Perceptive Credit Agreement”) at September 30, 2024 and December 31, 2023 bears interest at a floating rate based on one-month SOFR, subject to a floor of 5.0%, plus 7.0% (12.2% at September 30, 2024). Included in interest expense for the three and nine months ended September 30, 2024 are $66,000 and $195,000, respectively, of amortization of the debt issuance costs and $159,000 and $473,000, respectively, of amortization of debt discounts. Included in interest expense for the three and nine months ended September 30, 2023 are $61,000 and $149,000, respectively, of amortization of the debt issuance costs and $84,000 and $205,000, respectively, of amortization of the debt discounts, including accretion of the exit fee on the Company’s prior credit agreement.
A $7.5 million delayed draw loan is available until December 31, 2024, conditioned upon, among other things, the achievement of a minimum revenue target.
On November 7, 2024, the Company 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, and a target of $38.3 million for the quarter ended September 30, 2024. 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 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 Perceptive Credit Agreement. Additionally, the Company must maintain a balance of $3.0 million in cash and cash equivalents during the term of the Perceptive Credit Agreement. As of September 30, 2024, the Company was in compliance with the financial covenants contained within the Perceptive Credit Agreement, as amended. The Company’s continued compliance with covenants is subject to meeting or exceeding forecasted Advanced Energy revenues, as amended, and reducing operating expenses.
In connection with the amendment to the Perceptive Credit Agreement, the Company issued Perceptive 150,000 shares of its common stock. The Company is in the process of determining the proper accounting treatment for the amendment to the Perceptive Credit Agreement, including the issuance of the shares of common stock.
In connection with the Company’s initial loan under the Perceptive Credit Agreement, the Company issued Perceptive warrants to purchase up to 1,250,000 shares of its common stock, with an exercise price of $2.43 per share.
The Company’s term loan under the Perceptive Credit Agreement, net consists of the following:
September 30,
December 31,
(In thousands)
2024
2023
Term loan
$
37,500
$
37,500
Unamortized debt issuance costs
(1,045
)
(1,240
)
Unamortized debt discount
(2,602
)
(3,075
)
Term loan, net
$
33,853
$
33,185
As of September 30, 2024, principal repayments on the debt are as follows:
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
NOTE 6.CHINA JOINT VENTURE
In 2019, the Company executed a joint venture agreement with its Chinese supplier (the “China JV”) whereby the Company has a 51% ownership interest. The China JV has been consolidated in these condensed consolidated financial statements. The agreement required the Company to make capital contributions into the newly formed entity of approximately $357,000, which were made in prior years. In June 2023, the Company executed an amendment to the joint venture agreement to increase the amount of its registered capital. The amendment requires the Company to make additional capital contributions to the China JV of $255,000, of which $153,000 has been made as of September 30, 2024.
Changes in the Company’s ownership investment in the China JV were as follows:
Three Months Ended
Nine Months Ended
September 30,
September 30,
(In thousands)
2024
2023
2024
2023
Beginning interest in China JV
$
184
$
142
$
229
$
219
Contributions
—
153
—
153
Net loss attributable to Apyx
(22
)
(48
)
(67
)
(125
)
Ending interest in China JV
$
162
$
247
$
162
$
247
NOTE 7.EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share (“basic EPS”) is computed by dividing the net income or loss by the weighted average number of common shares outstanding for the reporting period. Diluted earnings (loss) per share (“diluted EPS”) gives effect to all dilutive potential shares outstanding. As the Company is in a net loss position for all periods presented, all potential shares outstanding are anti-dilutive. The following table provides the computation of basic and diluted loss per share.
Three Months Ended
Nine Months Ended
September 30,
September 30,
(in thousands, except per share data)
2024
2023
2024
2023
Numerator:
Net loss attributable to stockholders
$
(4,703
)
$
(4,629
)
$
(18,835
)
$
(9,106
)
Denominator:
Weighted average shares outstanding - basic and diluted
34,644
34,642
34,644
34,614
Loss per share:
Basic and diluted
$
(0.14
)
$
(0.13
)
$
(0.54
)
$
(0.26
)
Anti-dilutive instruments excluded from diluted loss per common share:
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
NOTE 8.STOCK-BASED COMPENSATION
Under the Company’s stock option plans, the Board of Directors may grant restricted stock and options to purchase common shares to the Company’s employees, officers, directors and consultants. The Company accounts for stock options in accordance with FASB ASC Topic 718,Compensation - Stock Compensation, with stock-based compensation expense recognized over the vesting period based on the fair value on the grant date utilizing the Black-Scholes model, which includes a number of estimates that affect the grant date fair value and the amount of expense to recognize.
The Company recognized approximately $997,000 and $3,175,000, respectively, in stock-based compensation expense during the three and nine months ended September 30, 2024, as compared with $1,351,000 and $4,200,000, respectively, for the three and nine months ended September 30, 2023.
Stock option activity is summarized as follows:
Weighted average
Number of options
exercise price
Outstanding at December 31, 2023
7,342,883
$
6.31
Granted
1,587,929
2.26
Exercised
(569
)
2.50
Canceled and forfeited
(673,653
)
6.61
Outstanding at September 30, 2024
8,256,590
$
5.51
The Company allows stock option holders 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. These surrenders are included in stock options exercised in the options rollforward above. There were no such exercises for the three months ended September 30, 2024. For the three months ended September 30, 2023, the Company received 6,662 options as payment in the exercise of 5,338 options. For the nine months ended September 30, 2024 and 2023, respectively, the Company received 531 and 10,967 options as payment in the exercise of 38 and 11,033 options.
Common shares required to be issued upon the exercise of stock options would be issued from authorized and unissued shares. The Company calculated the grant date fair value of options granted in 2024 (“2024 Grants”) utilizing a Black-Scholes model.
2024 Grants
Strike price
1.02 - 2.42
Risk-free rate
3.9% - 4.2%
Expected dividend yield
—
Expected volatility
92.1% - 95.1%
Expected term (in years)
6
NOTE 9.INCOME TAXES
Income tax expense (benefit) was approximately $60,000 and $(318,000) with effective tax rates of (1.3)% and 6.4% for the three months ended September 30, 2024 and 2023, respectively. For the three months ended September 30, 2024, the effective rate differs from the statutory rate primarily due to the full valuation allowance recorded on the net operating loss (“NOL”) and net deferred tax assets generated during the period. For the three months ended September 30,2023, the effective rate differs from the statutory rate primarily due to interest income on the Company's income tax refund that it received during the quarter, partially offset by the full valuation allowance recorded on the NOL generated during the period.
Income tax expense (benefit) was approximately $163,000 and $(2,519,000) with effective tax rates of (0.9)% and 21.4% for the nine months ended September 30, 2024 and 2023, respectively. For the nine months ended September 30, 2024, the effective rate differs from the statutory rate primarily due to the full valuation allowance recorded on the NOL and net deferred tax assets generated during the period. For the nine months ended September 30, 2023, the effective rate differs from the statutory rate primarily due to the reversal of the Company’s liability for uncertain tax positions, including accrued interest and penalties, of approximately $2.1 million, which were sustained upon the completion in January 2023 of the IRS examination of the Company’s 2018 through 2020 income tax returns and interest income on the Company’s income tax refund, partially offset by the valuation allowance on the NOL and net deferred tax assets generated during the period.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
NOTE 10.COMMITMENTS AND CONTINGENCIES
Litigation
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 the Company’s products and product liability claims.
The Company is involved in a number of legal actions relating to the use of its Helium Plasma Platform Technology, which actions are being defended by the Company’s insurance carrier-appointed counsel. The outcomes of these legal actions are not within the Company’s control and may not be known for prolonged periods of time. Management has not yet received from carrier-appointed defense counsel the estimates of the net potential range of losses in all of these cases, as would be required to confirm whether all of the claims in total are adequately covered by the varying levels of aggregate insurance coverage available for each relevant insurance policy period; further, in the case of one of the Company’s carriers, the Company is in a dispute regarding the total level of coverage available. Notwithstanding the foregoing, in the opinion of management, the Company has meritorious defenses, and such claims are not expected, individually or in the aggregate, to result in a material, adverse effect on its financial condition, results of operations and cash flows. 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.
The Company accrues a liability in its condensed 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. 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.
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. During 2023, 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. During March 2024, two of the plaintiffs claims were dismissed by the courts. The Company has determined that a loss, comprised of estimated costs to defend the Company against the lawsuits, is probable and that the range of estimated losses is approximately $1,450,000 to $1,950,000. The Company recorded an estimated loss of $1,450,000 related to the matters during 2022. It is at least reasonably 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 March 2024, the Company was named as a defendant in a number of product liability lawsuits filed under the direction of a single plaintiff’s tort firm alleging off-label use of Renuvion products and the Company’s mismarketing of the same. The suits are venued predominantly in Florida and nearly all involve procedures conducted prior to 2023, which was before the Company received FDA 510k clearance for the use of Renuvion in the types of procedures at issue. The Company denies liability and intends to vigorously defend these suits and believes that it has applicable substantive and procedural defenses. The Company has determined that a loss, comprised of estimated costs to defend the Company against the lawsuits, is probable and currently estimates the range of losses in connection with these matters to be between $1,300,000 and $1,500,000. The Company recorded an estimated loss of $1,300,000 related to these matters during 2023. The Company has also determined that there is a reasonable possibility that there will be an additional loss related to the matters, but the Company is unable to provide an estimate of the range of such additional loss at this time.
Purchase Commitments
At September 30, 2024, the Company had purchase commitments totaling approximately $2.7 million, substantially all of which is expected to be purchased within the next twelve months.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
NOTE 11.RELATED PARTY TRANSACTIONS
Two relatives of Nikolay Shilev, Apyx Bulgaria’s Managing Director, are considered related parties. Teodora Shileva, Mr. Shilev’s spouse, is an employee of the Company working in the accounting department. Svetoslav Shilev, Mr. Shilev’s son, is a quality manager in the quality assurance department.
The partner in the Company’s China JV is also a supplier to the Company. For the three months ended September 30, 2024 and 2023, the Company made purchases from this supplier of approximately $189,000 and $50,000, respectively. For the nine months ended September 30, 2024 and 2023, the Company made purchases from this supplier of approximately $282,000 and $501,000, respectively. At September 30, 2024 and December 31, 2023, respectively, the Company had net payables to this supplier of approximately $30,000 and $82,000, respectively.
NOTE 12.GEOGRAPHIC AND SEGMENT INFORMATION
Operating segments are aggregated into reportable segments only if they exhibit similar economic characteristics. In addition to similar economic characteristics, the Company also considers the following factors in determining the reportable segments: the nature of business activities, the management structure directly accountable to its 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, accordingly, the Company has not presented a measure of assets by segment.
The Company’s reportable segments are disclosed as principally organized and managed as two operating segments: Advanced Energy and OEM. “Corporate & Other” includes certain unallocated corporate and administrative costs which were not specifically attributed to any reportable segment. The OEM segment is primarily development and manufacturing contract and product driven. As a result, all related expenses are recorded as cost of sales and, therefore, there are no segment specific operating expenses incurred.
Summarized financial information with respect to reportable segments is as follows:
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Nine Months Ended September 30, 2024
(In thousands)
Advanced Energy
OEM
Corporate & Other
Total
Sales
$
26,507
$
7,373
$
—
$
33,880
(Loss) income from operations
(5,105
)
1,566
(12,258
)
(15,797
)
Interest income
—
—
1,312
1,312
Interest expense
—
—
(4,254
)
(4,254
)
Other income, net
—
—
2
2
Income tax expense
—
—
163
163
Nine Months Ended September 30, 2023
(In thousands)
Advanced Energy
OEM
Corporate & Other
Total
Sales
$
31,248
$
6,439
$
—
$
37,687
(Loss) income from operations
(950
)
1,795
(12,328
)
(11,483
)
Interest income
—
—
478
478
Interest expense
—
—
(1,362
)
(1,362
)
Other income, net
—
—
622
622
Income tax benefit
—
—
(2,519
)
(2,519
)
International sales represented approximately 32.2% and 30.8% of total revenues for the three and nine months ended September 30, 2024, respectively, as compared with approximately 27.8% and 26.6% of total revenues for the three and nine months ended September 30, 2023, respectively.
Sales by geographic region, based on the customer's “ship to” location on the invoice, are as follows:
Three Months Ended
Nine Months Ended
September 30,
September 30,
(In thousands)
2024
2023
2024
2023
Sales by Domestic and International
Domestic
$
7,793
$
8,652
$
23,459
$
27,660
International
3,694
3,324
10,421
10,027
Total
$
11,487
$
11,976
$
33,880
$
37,687
NOTE 13.SUBSEQUENT EVENTS
On November 7, 2024, the Company 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 prefunded warrants to purchase shares of common stock with an exercise price of $.001 per share.
On November 7, 2024, the Company executed an amendment to the Perceptive Credit Agreement. See Note 5.
During November 2024, the Company reduced its US workforce by nearly 25%, reduced the board of directors from eight to five members and reduced board cash compensation. See Note 1.
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis in conjunction with our financial statements and related notes contained elsewhere in this report and with the audited consolidated financial statements and footnotes as of and for the year ended December 31, 2023 contained within our Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 21, 2024. This discussion contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a variety of factors discussed in this report and those discussed in other documents we file with the SEC. In light of these risks, uncertainties and assumptions, readers are cautioned not to place undue reliance on such forward-looking statements. These forward-looking statements represent beliefs and assumptions as of the date of this report. While we may elect to update forward-looking statements and at some point in the future, we specifically disclaim any obligation to do so, even if our estimates change. Past performance does not guarantee future results.
Executive Level Overview
We are an advanced energy technology 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.
We 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 nine months ended September 30, 2024 and 2023, we sold approximately 64,000 and 59,000 units, respectively. In the third quarter, our handpiece revenue grew 9% overall and 15% in the United States and handpiece revenue now accounts for more than 60% of our total Advanced Energy revenue.
Recent activities:
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 may have had an initial negative impact on the number of liposuction procedures 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 will 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 fat transfer, 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.
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Liquidity:
We have incurred recurring net losses and cash outflows from operations and we anticipate that losses will continue in the near term. We plan to continue to fund our operations and capital funding needs through existing cash, sales of our products and, if necessary, additional equity and/or debt financing. However, we cannot be certain that additional financing will be available when needed or that, if available, financing will be obtained on terms acceptable to us. The sale of additional equity would result in dilution to our stockholders. Incurring additional debt financing would result in further debt service obligations, and the instruments governing such debt could provide for operating and financing covenants that would restrict our operations. If we are unable to raise additional capital in sufficient amounts or on acceptable terms, 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. 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 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 loss and achieving cash-flow breakeven. We will incur 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 have eliminated bonuses in 2024, reduced the board of directors from eight to five members and reduced board cash compensation from $0.5 million annually to $0.1 million.
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, 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.
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.
Our reportable segments are disclosed as principally organized and managed as two operating segments: Advanced Energy and OEM. “Corporate & Other” includes certain unallocated corporate and administrative costs which are not specifically attributed to any reportable segment. The OEM segment is primarily development and manufacturing contract and product driven, 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.
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Results of Operations
Sales
Three Months Ended
Nine Months Ended
September 30,
September 30,
(In thousands)
2024
2023
Change
2024
2023
Change
Sales by Reportable Segment
Advanced Energy
$
9,288
$
9,836
(5.6
)%
$
26,507
$
31,248
(15.2
)%
OEM
2,199
2,140
2.8
%
7,373
6,439
14.5
%
Total
$
11,487
$
11,976
(4.1
)%
$
33,880
$
37,687
(10.1
)%
Sales by Domestic and International
Domestic
$
7,793
$
8,652
(9.9
)%
$
23,459
$
27,660
(15.2
)%
International
3,694
3,324
11.1
%
10,421
10,027
3.9
%
Total
$
11,487
$
11,976
(4.1
)%
$
33,880
$
37,687
(10.1
)%
Total revenue decreased by 4.1%, or approximately $0.5 million, for the three months ended September 30, 2024 when compared with the three months ended September 30, 2023. Advanced Energy segment sales decreased 5.6%, or approximately $0.5 million, for the three months ended September 30, 2024 when compared with the three months ended September 30, 2023. The Advanced Energy sales decrease was driven by a lower average selling price of generators to domestic customers, fewer domestic customer upgrades to the Apyx One Console and a decrease in international sales of new generators. These decreases were partially offset by an increased volume of single-use handpieces domestically and sales of upgrades to the Apyx One Console internationally. OEM segment sales increased 2.8%, or approximately $0.1 million, for the three months ended September 30, 2024 when compared with the three months ended September 30, 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.
Total revenue decreased by 10.1%, or approximately $3.8 million, for the nine months ended September 30, 2024 when compared with the nine months ended September 30, 2023. Advanced Energy segment sales decreased 15.2%, or approximately $4.7 million, for the nine months ended September 30, 2024 when compared with the nine months ended September 30, 2023. The Advanced Energy sales decrease was driven by lower sales of our generators in both domestic and some 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 this market. These decreases were partially offset by increased volume of single-use handpieces globally and sales of Apyx One Console upgrades internationally. OEM segment sales increased 14.5%, or approximately $0.9 million, for the nine months ended September 30, 2024 when compared with the nine months ended September 30, 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 32.2% and 30.8% of total revenues for the three and nine months ended September 30, 2024, respectively, as compared with 27.8% and 26.6% of total revenues for the same period in the prior year. 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.
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Gross Profit
Three Months Ended
Nine Months Ended
September 30,
September 30,
(In thousands)
2024
2023
Change
2024
2023
Change
Cost of sales
$
4,533
$
3,998
13.4
%
$
13,484
$
12,857
4.9
%
Percentage of sales
39.5
%
33.4
%
39.8
%
34.1
%
Gross profit
$
6,954
$
7,978
(12.8
)%
$
20,396
$
24,830
(17.9
)%
Percentage of sales
60.5
%
66.6
%
60.2
%
65.9
%
Gross profit for the three months ended September 30, 2024, decreased 12.8% to $7.0 million, compared to $8.0 million for the same period in the prior year. Gross margin for the three months ended September 30, 2024, was 60.5%, compared to 66.6% for the same period in 2023. The decrease in gross profit margins for the three months ended September 30, 2024 from the prior year period is primarily attributable 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.
Gross profit for the nine months ended September 30, 2024, decreased 17.9% to $20.4 million, compared to $24.8 million for the same period in the prior year. Gross margin for the nine months ended September 30, 2024, was 60.2%, compared to 65.9% for the same period in 2023. The decrease in gross profit margins for the nine months ended September 30, 2024 from the prior year period is primarily attributable 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.
Other Costs and Expenses
Research and development
Three Months Ended
Nine Months Ended
September 30,
September 30,
(In thousands)
2024
2023
Change
2024
2023
Change
Research and development expense
$
1,142
$
1,409
(18.9
)%
$
3,963
$
4,037
(1.8
)%
Percentage of sales
9.9
%
11.8
%
11.7
%
10.7
%
Research and development expenses decreased 18.9% for the three months ended September 30, 2024, primarily due to lower compensation and benefits costs ($0.2 million) and lower spending on our product development initiatives and clinical studies ($0.1 million).
Research and development expenses decreased 1.8% for the nine months ended September 30, 2024, primarily due to lower compensation and benefits costs ($0.1 million).
Professional services
Three Months Ended
Nine Months Ended
September 30,
September 30,
(In thousands)
2024
2023
Change
2024
2023
Change
Professional services expense
$
1,648
$
1,831
(10.0
)%
$
5,318
$
5,165
3.0
%
Percentage of sales
14.3
%
15.3
%
15.7
%
13.7
%
Professional services expense decreased 10.0% for the three months ended September 30, 2024, primarily due to decreases in accounting and audit fees ($0.1 million), board of director’s stock-based compensation expense ($0.1 million) and recruiting expenses ($0.2 million). These decreases were partially offset by an increase in physician and marketing consulting ($0.2 million).
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Professional services expense increased 3.0% for the nine months ended September 30, 2024, primarily due to increases in physician and marketing consulting ($0.4 million) and legal expenses ($0.4 million), as a result of the reversal of a legal loss contingency in the prior year period. These decreases were partially offset by decreases in board of director’s stock-based compensation expense ($0.4 million), accounting and audit fees ($0.2 million) and recruiting expenses ($0.1 million).
Salaries and related costs
Three Months Ended
Nine Months Ended
September 30,
September 30,
(In thousands)
2024
2023
Change
2024
2023
Change
Salaries and related expenses
$
3,508
$
4,534
(22.6
)%
$
12,886
$
14,329
(10.1
)%
Percentage of sales
30.5
%
37.9
%
38.0
%
38.0
%
During the three months ended September 30, 2024, salaries and related expenses decreased 22.6%, primarily due to a decrease in bonus expense ($0.8 million) as we, based on the continued impact to the business as a result of economic uncertainty in the capital equipment market that is being experienced in the aesthetic space, reversed our entire annual bonus accrual during the quarter and lower stock based compensation expense ($0.2 million).
During the nine months ended September 30, 2024, salaries and related expenses decreased 10.1%, primarily due to a decrease in bonus expense ($0.7 million) as we, based on the continued impact to the business as a result of economic uncertainty in the capital equipment market that is being experienced in the aesthetic space, reversed our entire annual bonus accrual during the third quarter, lower stock based compensation expense ($0.6 million) and temporary labor expenses ($0.2 million). These decreases were partially offset by an increase in salaries and related taxes and benefits ($0.1 million).
Selling, general and administrative expenses
Three Months Ended
Nine Months Ended
September 30,
September 30,
(In thousands)
2024
2023
Change
2024
2023
Change
SG&A expense
$
4,291
$
4,841
(11.4
)%
$
14,026
$
15,474
(9.4
)%
Percentage of sales
37.4
%
40.4
%
41.4
%
41.1
%
During the three months ended September 30, 2024, selling, general and administrative expense decreased 11.4%, primarily due to decreases in commissions ($0.3 million), advertising expense, including trade show fees and related costs ($0.1 million), insurance expense, including claims on our policies ($0.1 million) and foreign currency gains and losses ($0.1 million). These decreases were partially offset by higher meeting and training costs ($0.1 million).
During the nine months ended September 30, 2024, selling, general and administrative expense decreased 9.4%, primarily due to decreases in commissions ($1.6 million), advertising expense, including trade show fees and related costs ($0.3 million), insurance expense, including claims on our policies ($0.2 million), travel expense ($0.1 million) and payment processing fees ($0.1 million). These decreases were partially offset by higher meeting and training costs ($0.7 million) and building lease expense ($0.2 million).
Gain on sale-leaseback
Three Months Ended
Nine Months Ended
September 30,
September 30,
(In thousands)
2024
2023
2024
2023
Gain on sale-leaseback
$
—
$
—
$
—
$
2,692
Percentage of sales
—
%
—
%
—
%
7.1
%
Gain on sale-leaseback for the nine months ended September 30, 2023 was approximately $2.7 million as a result of the gain on the sale and leaseback of our Clearwater, FL facility in May 2023.
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Interest Income (Expense)
Three Months Ended
Nine Months Ended
September 30,
September 30,
(In thousands)
2024
2023
2024
2023
Interest income
$
378
$
248
$
1,312
$
478
Percentage of sales
3.3
%
2.1
%
3.9
%
1.3
%
Interest expense
$
(1,431
)
$
(585
)
$
(4,254
)
$
(1,362
)
Percentage of sales
(12.5
)%
(4.9
)%
(12.6
)%
(3.6
)%
Interest income increased approximately $0.1 million and $0.8 million, respectively, for the three and nine months ended September 30, 2024, when compared with the same periods the prior year. These increases are due to a higher average balance in our investments in money market funds and U.S. Treasury securities included in cash and cash equivalents.
Interest expense increased approximately $0.8 million and $2.9 million, respectively, for the three and nine months ended September 30, 2024, when compared with the same periods in the prior year. These increases are due to cash and noncash interest expense on the Perceptive Credit Agreement.
Other Income (Loss), net
Three Months Ended
Nine Months Ended
September 30,
September 30,
(In thousands)
2024
2023
2024
2023
Other income (expense), net
$
24
$
(19
)
$
2
$
622
Percentage of sales
0.2
%
(0.2
)%
0.0
%
1.7
%
Other income, net decreased approximately $0.6 million for the nine months ended September 30, 2024, compared with the same period in the prior year. These decreases were primarily attributable to an 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 in the prior year ($0.4 million).
Income Taxes
Three Months Ended
Nine Months Ended
September 30,
September 30,
(In thousands)
2024
2023
2024
2023
Income tax expense (benefit)
$
60
$
(318
)
$
163
$
(2,519
)
Effective tax rate
(1.3
)%
6.4
%
(0.9
)%
21.4
%
Our income tax expense (benefit) was approximately $60,000 and $(318,000) with effective tax rates of (1.3)% and 6.4% for the three months ended September 30, 2024 and 2023, respectively. For the three months ended September 30, 2024, the effective rate differs from the statutory rate primarily due to the full valuation allowance recorded on the net operating loss (“NOL”) and net deferred tax assets generated during the period. For the three months ended September 30, 2023, the effective rate differs from the statutory rate primarily due to interest income on our income tax refund that we received during the quarter, partially offset by the full valuation allowance recorded on the NOL generated during the period.
Our income tax expense (benefit) was approximately $163,000 and $(2,519,000) with effective tax rates of (0.9)% and 21.4% for the nine months ended September 30, 2024 and 2023, respectively. For the nine months ended September 30, 2024, the effective rate differs from the statutory rate primarily due to the full valuation allowance recorded on the NOL and net deferred tax assets generated during the period. For the nine months ended September 30, 2023, the effective rate differs from the statutory rate primarily due to the reversal of our liability for uncertain tax positions, including accrued interest and penalties, of approximately $2.1 million, which were sustained upon the completion in January 2023 of the IRS examination of our 2018 through 2020 income tax returns and interest income on our income tax refund, partially offset by the valuation allowance on the NOL and net deferred tax assets generated during the period.
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Liquidity and Capital Resources
At September 30, 2024, we had approximately $28.0 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 September 30, 2024 was approximately $42.6 million compared with $57.6 million at December 31, 2023.
For the nine months ended September 30, 2024, net cash used in operating activities was approximately $15.1 million, which principally funded our loss from operations of $15.8 million, compared with net cash used in operating activities, exclusive of the receipt of our $8.1 million final income tax refund, of approximately $11.1 million in the nine months ended September 30, 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 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 accounts receivable, prepaid expenses and inventory positions.
Net cash used in investing activities nine months ended September 30, 2024 was $0.5 million related to investments in property and equipment. Net cash provided by investing activities for the nine months ended September 30, 2023 was $6.8 million related to proceeds from the sale of our Clearwater, FL facility ($7.3 million), partially offset by investments in property and equipment ($0.4 million).
Net cash provided by financing activities for the nine months ended September 30, 2023 was $8.3 million and was primarily related to proceeds received upon the execution of the prior debt agreement ($9.9 million) less debt issuance costs incurred in the transaction ($1.8 million). This prior debt was paid off in November 2023 with proceeds from the Perceptive Credit Agreement.
We have incurred recurring net losses and cash outflows from operations and we anticipate that losses will continue in the near term. We plan to continue to fund our operations and capital funding needs through existing cash, sales of our products and if necessary additional equity and/or debt financing. However, we cannot be certain that additional financing will be available when needed or that, if available, financing will be obtained on terms acceptable to us. The sale of additional equity would result in dilution to our stockholders. Incurring additional debt financing would result in further debt service obligations, and the instruments governing such debt could provide for operating and financing covenants that would restrict our operations. If we are unable to raise additional capital in sufficient amounts or on acceptable terms, 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 statement included an embedded ATM facility for up to $40 million. To date we have not utilized this facility.
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, and a target of $38.3 million for the quarter ended September 30, 2024. 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 September 30, 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.
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
In connection with the amendment to the Perceptive Credit Agreement, we issued Perceptive 150,000 shares of our common stock. We are in the process of determining the proper accounting treatment for the amendment to the Perceptive Credit Agreement, including the issuance of the shares of common stock.
For a more in-depth description of the terms of the Perceptive Credit Agreement, as amended, see Note 11 in Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2023 and Note 5 of Notes to Condensed Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q.
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 prefunded warrants to purchase common stock with an exercise price of $.001 per share.
At September 30, 2024, we had purchase commitments totaling approximately $2.7 million, substantially all of which is expected to be purchased within the next twelve months.
Critical Accounting Estimates
In preparing the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP), we have adopted various accounting policies. Our most significant accounting policies are disclosed in Note 2 to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2023, filed with the SEC on March 21, 2024.
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, intangible assets, property, plant and equipment, 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:
Stock-Based Compensation
Under our stock option plans, options to purchase common shares may be granted to employees, officers and directors by our Board of Directors. We account for stock options in accordance with FASB ASC Topic 718-10, Compensation-Stock Compensation, with compensation expense recognized over the vesting period. Options are valued using the Black-Scholes model, which includes a number of estimates that affect the amount of our expense. We have determined that the most critical of these estimates are the estimates of expected life and volatility used in the calculations.
Expected life
For employee stock-based compensation awards, we estimate the expected life of awards utilizing the SEC's simplified method. We utilize this method, as we have not historically granted stock-based compensation awards to employees in sufficient volumes to determine a reasonable estimate of the life of awards. For awards granted to non-employees, we calculate expected life using a combination of past exercise behavior, the contractual term and expected remaining exercise behavior.
Volatility
We determine the volatility by utilizing the historical volatility of our stock over the period of the awards expected life. The SEC allows us to include periods in excess of the useful life if we determine that they provide a more reasonable basis for the volatility of our stock. Additionally, ASC 718-10 allows us to exclude periods from the volatility if they pertain to events or circumstances that in our judgment are specific to us and if the event or transaction is not reasonably expected to occur again during the expected term of the awards. We have not included any additional periods, nor disregarded any periods, in calculating our volatility.
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
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 and other trends. 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.
Inventory Obsolescence Allowance
We maintain a reserve for excess and obsolete inventory resulting from the potential inability to sell our products at prices in excess of current carrying costs. The markets in which we operate are highly competitive, with new products and surgical procedures introduced on an ongoing basis. Such marketplace changes may cause our products to become obsolete. We make estimates regarding the future recoverability of the costs of these products and record a provision for excess and obsolete inventories based on historical experience and expected future trends. If actual product life cycles, product demand or acceptance of new product introductions are less favorable than projected by management, additional inventory write-downs may be required, which would unfavorably affect future operating results.
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; actual results may differ from these estimates.
Income Taxes
The provision for income taxes includes federal, foreign, state and local income taxes currently payable and those deferred because of temporary differences between the financial statement and tax bases of assets and liabilities. Deferred tax assets or liabilities are computed based on the difference between the financial statement and income tax bases of assets and liabilities using enacted marginal tax rates. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. Deferred income tax expenses or credits are based on the changes in the asset or liability from period to period.
As a result of historical losses and our expectation to continue to generate losses in the near future, we recorded a valuation allowance on our net deferred tax assets. Exclusive of the carryback provisions of the CARES Act and the associated income tax benefit recognized in 2020, we do not anticipate recording an income tax benefit related to our deferred tax assets. We will reassess the realization of deferred tax assets each reporting period and will be able to reduce the valuation allowance to the extent our results of operations improve, and it becomes more likely than not that the deferred tax assets will be realized. As management has not fully determined the timing of when it will generate taxable income in the U.S., we continued to record a valuation allowance on the net deferred tax assets balance as of September 30, 2024.
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.
Inflation
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. However, as these trends continue for raw materials, freight, and labor costs, our future financial performance could be adversely impacted.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
ITEM 4. Controls and Procedures
Disclosure Controls and Procedures
Our management has established and maintains disclosure controls and procedures that are designed to ensure that the information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Management carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of September 30, 2024, the Company’s disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by the Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
There have been no material changes to the risk factors described under Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
* Filed herewith.
** XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended and otherwise is not subject to liability under these sections.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
