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 an advanced energy technology company with a passion for elevating people’s lives through innovative products in the cosmetic and surgical markets. Known for our innovative Helium Plasma Technology, Apyx is solely focused on bringing transformative solutions to physicians and their patients. Our Helium Plasma Technology is marketed and sold as Renuvion® in the cosmetic surgery market and J-Plasma® in the hospital surgical market. Renuvion® offers plastic surgeons, fascial plastic surgeons and cosmetic physicians a unique ability to provide controlled heat to tissue to achieve their desired results. We also leverage our deep expertise and decades of experience in unique waveforms through OEM agreements with other medical device manufacturers.

On March 14, 2022, the FDA posted a Communication that warns consumers and health care providers against the use of our Advanced Energy products outside of their FDA-cleared indications for general use in cutting, coagulation, and ablation of soft tissue during open and laparoscopic surgical procedures. We continue to work with the FDA towards securing 510(k) clearance for additional indications. We are in the process of evaluating what effects, if any, the Communication will have on our results of operations, cash flows and financial position.

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

As discussed in our Annual Report on Form 10-K for the year ended December 31, 2020 ("2020 Form 10-K"), an outbreak of a novel strain of the coronavirus, COVID-19, was identified in China and subsequently recognized as a pandemic by the World Health Organization. The impact of the COVID-19 outbreak has subsided substantially in the U.S. but continues to result in reduced activity levels outside of the U.S., such as continued restrictions on travel and business operations and advising or requiring individuals to limit or forego their time outside of their homes or places of business.

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

International demand trends for generator adoption are improving but remain in the earlier stages of recovery. Although the timing of a return to a fully normalized environment remains uncertain, we are cautiously optimistic with respect to the continued recovery of the global cosmetic and plastic surgery markets.

In response to the global supply chain instability and inflationary cost increases, we continue to take action to minimize, as much as possible, any potential adverse impacts by working closely with our suppliers to closely monitor the availability of raw material components (i.e., semiconductors and plastics), lead times, and freight carrier availability.We expect global supply chain instability will continue to have an impact on our business, but to date that has not been material to our financial performance. The consequences of the pandemic, global supply chain instability and inflationary cost increases and their adverse impact to the global economy, continue to evolve. Accordingly, the significance of the future impact to our business and financial statements remains subject to significant uncertainty.

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

•Protecting the Health and Safety of our Employees: To reduce the risk to our employees and their families to potential exposure to COVID-19, we required that all non-essential employees work remotely until further notice. We also split the shifts of our manufacturing personnel to allow for adequate social distancing, and require all personnel to utilize

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personal protective equipment while on site at our facilities. We also significantly reduced business travel and outside access to our facilities.

•Maintaining Engagement of Our Sales Team and Customers: In addition to engaging with existing customers via virtual methods, our reps also continued to target and reach out to prospective customers, and outside the U.S., we continued to monitor the activities of our distributor partners and helped them navigate the challenges they faced as a result of the slower demand they have seen in their respective countries.

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

•Governmental Policy: On March 27, 2020, the U.S. government enacted the CARES Act to provide relief from COVID-19. We have taken advantage of certain provisions of the CARES Act which are applicable to us, including utilizing net operating loss (NOL) carryback provisions. We expect that utilizing these provisions will significantly help mitigate the working capital impact COVID-19 has had on our sales and operations.

During 2021, we hosted over 15 Physician Mentor Programs, or “PMPs,” and our efforts to expand our presence and educational programming at industry conferences and trade shows proceeded as expected. In April 2021 we hosted our first virtual Users’ Meeting and had over 300 people in attendance. This program consisted of presentations from key Renuvion® users around the world on various applications for the product. All of the content was recorded and made available on our website portal for reference by all of our users around the world.

Our virtual educational events have also included case studies to illustrate how our leading clinician customers have adopted Renuvion®, their strategies for marketing and selling to new patients, and their thoughts on pricing and return on investment. We also engaged with clinician customers outside the U.S. including hosting multiple continuing education training sessions on Renuvion® with our current international distributors and conducting multiple calls with groups of international prospects interested in learning about our Renuvion® technology.

During 2021, 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. As of December 31, 2021, we had a direct sales force of 31 field-based selling professionals and utilized 2 independent sales agencies. We also had 5 sales managers. This selling organization is focused on the use of Renuvion® in the cosmetic surgery market, supported by our global medical affairs team. This global team of clinical support specialists focuses on supporting our users to ensure optimal outcomes for their patients. In addition, we have invested in training programs and marketing-related activities to support accelerated adoption of Renuvion® into physicians' practices.

We believe that our continued investment and focus on the following strategic initiatives in 2021 and beyond will position the Company for long-term growth in the cosmetic surgery market:

•To formalize our regulatory strategy to pursue specific clinical indications that will enable us to sell our Renuvion® products for targeted procedures

•To secure new clinical evidence demonstrating the safety and efficacy of our Helium Plasma Technology

•To provide enhanced physician and practice support for our cosmetic surgery customers

•To improve our manufacturing capabilities and efficiencies

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.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued

We strongly encourage investors to visit our website: www.apyxmedical.com to view the most current news and to review our filings with the Securities and Exchange Commission.

Results of Operations

Sales

Year EndedDecember 31,

Sales by Reportable Segment

Sales by Domestic and International

Total revenue increased by 75.1% or approximately $20.8 million for the year ended December 31, 2021 when compared with 2020. Advanced Energy segment sales increased 93.5% or approximately $20.8 million for the year ended December 31, 2021 when compared with 2020. During 2021, we experienced increased global utilization based demand for our handpieces and adoption of our generator technology despite the continued headwinds of the COVID-19 pandemic in certain geographic regions outside of the U.S., while overall 2020 demand was more severely impacted on a global basis.

The OEM product line consists of proprietary products designed specifically for third party equipment manufacturers. Revenue for this product line increased 0.6% when compared to 2020.

International sales represented approximately 32.0% and 32.1% of total revenues for the years ended December 31, 2021 and 2020, respectively. Management estimates our products have been sold in more than 60 countries through local dealers coordinated by sales and marketing personnel through our facilities in Clearwater, Florida and Sofia, Bulgaria.

Gross Profit

Year EndedDecember 31,

Percentage of sales 30.7 % 36.8 %

Percentage of sales 69.3 % 63.2 %

Our gross profit margin as a percentage of sales increased by 6.1% during the year ended December 31, 2021 compared with 2020. The increase in gross profit margin from the prior year is primarily attributable to sales mix between our two segments, with our Advanced Energy segment comprising a higher percentage of total sales, as well as product mix within our Advanced Energy segment. Our continued manufacturing efficiency initiatives and the introduction of newer product models have continued to result in improved margins as we obtain registration, allowing these products to be introduced into the markets we serve. Additionally, the strong sales during the year resulted in reduced product costs as our fixed costs were spread across higher production volumes. This manufacturing efficiency was partially offset by higher inbound shipping costs, as we needed to expedite the sourcing of key component raw material inventories and experienced higher market rates for these services.

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The prior year margins were also hindered as we reassessed our forecasted product mix due to COVID-19, increased availability of our newer handpiece designs, and earlier than expected completion of product registrations in certain international markets. As a result, certain products were reduced to a lower carrying value, and some components were also written off as it was determined to cease further production on these models. This resulted in a decrease in gross profit of approximately $0.3 million during the prior year.

Other Costs and Expenses

Research and development

Year EndedDecember 31,

Percentage of sales 8.9 % 14.1 %

Our expenditures for research and development related activities increased by 10.2% or approximately $0.4 million for the year ended December 31, 2021, compared with 2020. This increase was primarily due to increases in payroll and related benefits of R&D personnel ($0.2 million) and continued spending on our two investigational device exemption (IDE) clinical studies and other research and development projects ($0.2 million).

Professional services

Year EndedDecember 31,

Percentage of sales 15.6 % 26.5 %

Professional services expenses increased 3.3% for the year ended December 31, 2021, compared with 2020. This increase was primarily due to increases in physician consulting expense associated with the increased sales activity in 2021 ($0.3 million), professional services for continued consulting expense associated with our implementation of SAP ($0.2 million), employee acquisition fees as the labor market has been highly competitive ($0.2 million) and Board of Directors option expense ($0.1 million). The increases were partially offset by a decrease in accounting and auditing fees ($0.6 million). In the prior year, we incurred significant fees related to our change in independent auditors and the associated reaudit of the 2019 financial statements.

Salaries and related costs

Year EndedDecember 31,

Percentage of sales 36.1 % 52.8 %

During 2021, salaries and related expenses increased 19.8% or approximately $2.9 million compared to 2020. The increase was primarily driven by increases in bonus expense ($1.2 million), higher headcount ($0.6 million), higher compensation and benefits ($0.5 million), stock compensation expense ($0.4 million) and temporary labor ($0.2 million) as compared to 2020.

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued

Selling, general and administrative expenses

Year EndedDecember 31,

Percentage of sales 38.4 % 42.2 %

Selling, general and administrative expense increased by 59.3% or approximately $6.9 million for the year ended December 31, 2021, compared with 2020. The change is primarily related to higher commissions on Advanced Energy sales ($4.0 million), travel and entertainment expense ($0.8 million), advertising expense, including trade show fees and related costs ($0.5 million), insurance expense associated with higher premiums and increased claims activity ($0.6 million), higher credit card processing fees ($0.3 million), OEM product recall costs ($0.2 million), higher employee training and meeting expenses ($0.2 million), increased Board of Directors compensation including compensation to an additional member ($0.1 million), higher computer supplies and related technology expenses ($0.1 million) and increased office supplies ($0.1 million). These increases were partially offset by lower bad debt expenses ($0.1 million).

Interest Income

Year EndedDecember 31,

Percentage of sales — % 0.9 %

Interest income decreased 95.4% for the year ended December 31, 2021 as compared with the prior year. This decrease is due to a lower yield, as well as a lower average balance, on our investments in money market funds and U.S. Treasury securities included in cash and cash equivalents.

Other (Loss) Income, net

Year EndedDecember 31,

Percentage of sales (0.8) % 1.7 %

Other (losses) income, net decreased 177.9% for the year ended December 31, 2021 as compared with the prior year. This decrease is primarily due to the receipt of refunds in the first quarter 2020 on tariffs paid in 2019 ($0.3 million), severance expense for employees of the former Core business segment ($0.2 million), anticipated Core business segment inventory losses at the conclusion of our supply agreement with Symmetry Surgical ($0.2 million), and reduced volume under the supply agreement to cover other business expenses associated with the Core business segment ($0.1 million).

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APYX MEDICAL CORPORATION

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued

Income Taxes

The income tax expense was approximately $0.4 million, with an effective tax rate of (2.6)%, for the year ended December 31, 2021 as compared to an income tax benefit of approximately $7.5 million, with an effective tax rate of 38.7%, for the year ended December 31, 2020. For the year ended December 31, 2021, the effective tax rate differs from the statutory rate primarily due to the valuation allowance on our Federal and State net operating losses (NOLs) for 2021. For the year ended December 31, 2020, the effective tax rate differs from the statutory rate primarily due to the release of the valuation allowance on our Federal NOL from 2019 as a result of the CARES Act, partially offset by a valuation allowance on our State NOL for 2020.

On March 27, 2020, the U.S. government enacted the CARES Act to provide relief from COVID-19. The CARES Act includes a provision that allows companies to carryback NOLs generated in the period 2018 through 2020 to prior years. As a result, we released the full valuation allowance of approximately $3.7 million on our Federal NOL carryforward from 2019 during the first quarter of 2020. In 2020, our income tax benefit is composed primarily of a benefit of $3.7 million associated with the current year net loss and $3.7 million associated with the release of the valuation allowance on the net operating loss from 2019 from the CARES Act.

Liquidity and Capital Resources

At December 31, 2021, we had approximately $30.9 million in cash and cash equivalents as compared to approximately $41.9 in cash and cash equivalents at December 31, 2020. Our working capital at December 31, 2021 was approximately $47.5 million compared with $56.9 million at December 31, 2020. The decrease in working capital at December 31, 2021 was primarily due to the net loss incurred by the Company in 2021, excluding non-cash activity, comprised primarily of stock-based compensation expense.

For the year ended December 31, 2021, net cash used in operating activities was approximately $10.4 million, which principally funded our loss from operations of $14.4 million, compared with net cash used in operating activities of approximately $16.1 million in 2020. We believe that we have adequate cash to support our operations for the next twelve to eighteen months.

Net cash used in investing activities for the years ended December 31, 2021 and 2020, were $0.7 million and $0.6 million, respectively, related to purchases of property and equipment.

At December 31, 2021, we had purchase commitments for inventories totaling approximately $4.9 million, all of which is expected to be purchased by the end of 2022.

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.

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:

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued

Stock-Based Compensation

Under our stock option plans, options to purchase common shares of the Company may be granted to employees, officers and directors of the Company by the 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.

Accounts Receivable Allowance

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

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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 December 31, 2021.

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.

Inflation

The consequences of the pandemic, global supply chain instability and inflationary cost increases and their adverse impact to the global economy, continue to evolve. Accordingly, the significance of the future impact to our business and financial statements remains subject to significant uncertainty. 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.

ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk

Not required.

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APYX MEDICAL CORPORATION

ITEM 8. Financial Statements and Supplementary Data

INDEX TO FINANCIAL INFORMATION

Page

Report of Independent Registered Public Accounting Firm (PCAOB ID: 49) 32

Notes to Consolidated Financial Statements 37

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Report of Independent Registered Public Accounting Firm

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

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Apyx Medical Corporation and its subsidiaries (the Company) as of December 31, 2021 and 2020, the related consolidated statements of operations, changes in equity and cash flows for the years then ended, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters.

/s/ RSM US LLP

We have served as the Company's auditor since 2020.

Orlando, Florida

March 17, 2022

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APYX MEDICAL CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

ASSETS

Current assets:

Inventories, net of provision for obsolescence of $263 and $388 6,778 4,051

Prepaid expenses and other current assets 1,926 2,795

Operating lease right-of-use assets 121 237

Finance lease right-of-use assets 178 437

LIABILITIES AND EQUITY

Current liabilities:

Accrued expenses and other current liabilities 10,287 7,278

Current portion of operating lease liabilities 122 126

Current portion of finance lease liabilities 165 238

Long-term operating lease liabilities — 129

Long-term finance lease liabilities 18 183

Long-term contract liabilities 1,323 621

COMMITMENTS AND CONTINGENCIES (NOTE 17)

EQUITY

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

Non-controlling interest 305 138

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

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APYX MEDICAL CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

Year Ended December 31,

Other costs and expenses:

Interest expense (10) (46)

Other (losses) income, net (373) 479

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

Loss from operations before income taxes (14,820) (19,409)

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

Net loss attributable to non-controlling interest (28) (10)

Net loss attributable to stockholders $ (15,172) $ (11,896)

Loss per share - basic and diluted $ (0.44) $ (0.35)

Weighted average number of shares outstanding - basic and diluted 34,332 34,212

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

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CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(In thousands)

Shares Par Value Total Equity

Contributions from non-controlling interest — — — — 148 148

Shares issued on stock options exercises for cash 27 — 148 — — 148

Stock based compensation — — 4,210 — — 4,210

Shares issued on net settlement of stock options 47 — — — — —

Vested restricted stock issued 45 — — — — —

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

Shares issued on stock options exercises for cash 13 — 67 — — 67

Stock based compensation — $ — $ 5,088 $ — $ — $ 5,088

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

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

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APYX MEDICAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

Year Ended December 31,

Cash flows from operating activities

Adjustments to reconcile net loss to net cash used in operating activities:

Depreciation and amortization 903 887

Provision for inventory obsolescence 109 506

Provision for product warranties 318 215

Loss on disposal of property and equipment 48 13

Provision for allowance for doubtful accounts 128 262

Changes in current assets and liabilities:

Income tax receivables 12 (7,228)

Prepaid expenses and other assets 1,355 (27)

Accrued expenses and other liabilities 3,396 (2,090)

Net cash used in operating activities (10,449) (16,066)

Cash flows from investing activities

Purchases of property and equipment (723) (581)

Net cash used in investing activities (723) (581)

Cash flows from financing activities

Proceeds from stock option exercises 67 148

Repayment of related party note payable — (140)

Repayment of finance lease liabilities (238) (229)

Contributions from non-controlling interests 195 148

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

Effect of exchange rates on cash 103 (177)

Net change in cash and cash equivalents (11,045) (16,897)

Cash and cash equivalents, beginning of year 41,915 58,812

Cash and cash equivalents, end of year $ 30,870 $ 41,915

Cash paid for:

Interest expense $ 10 $ 46

Non cash operating and investing activities:

Transfer of inventory to property and equipment — 23

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

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APYX MEDICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. DESCRIPTION OF BUSINESS

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

The Company is an advanced energy technology company with a passion for elevating people’s lives through innovative products in the cosmetic and surgical markets. Known for its innovative Helium Plasma Technology, Apyx is solely focused on bringing transformative solutions to physicians and their patients. Its Helium Plasma Technology is marketed and sold as Renuvion® in the cosmetic surgery market and J-Plasma® in the hospital surgical market. Renuvion® offers plastic surgeons, fascial plastic surgeons and cosmetic physicians a unique ability to provide controlled heat to tissue to achieve their desired results. The Company also leverages its deep expertise and decades of experience in unique waveforms through OEM agreements with other medical device manufacturers.

NOTE 2. SIGNIFICANT ACCOUNTING POLICIES

Consolidated Financial Statements

The accompanying consolidated financial statements include the accounts of Apyx, its wholly owned subsidiary, Apyx Bulgaria, EOOD, and its 51% owned subsidiary, Apyx SY Medical Devices (Ningbo) Co., Ltd. (collectively, "Apyx," or the “Company”). All significant intercompany transactions and balances have been eliminated in consolidation.

Use of Estimates in the Preparation of Financial Statements

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements. The reported amounts of revenues and expenses during the reporting period may be affected by the estimates and assumptions the Company is required to make.

Cash and Cash Equivalents

Holdings of highly liquid investments with original maturities of three months or less from the date of purchase are considered to be cash equivalents. As of December 31, 2021 and 2020, all of the Company’s investments are in money market funds or in Treasury Bills with original maturities of three months or less and are included in cash and cash equivalents.

Concentration of Credit Risk

Financial instruments, which potentially subject the Company to significant concentrations of credit risk, consist primarily of trade accounts receivable. With respect to cash, the Company frequently maintains cash and cash equivalent balances in excess of federally insured limits; it has not experienced any losses in such accounts.

Trade Accounts Receivable and Allowance for Doubtful Accounts

The Company's standard credit terms for billings range from net 30 days to net 120 days, depending on the customer agreement. Accounts receivable are determined to be past due if payments are not made in accordance with such agreements and an allowance is generally recorded for accounts that become three months past due, or sooner if there are other indicators that the receivables may not be recovered. Customary collection efforts are initiated, and receivables are written off when the Company determines they are not collectible and abandons these collection efforts.

The Company evaluates the allowance for doubtful accounts on a regular basis for adequacy based upon its periodic review of the collectability of the receivables in light of historical experience, adverse situations that may affect its customers’ ability to pay and prevailing economic conditions. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. Management believes that the allowances for doubtful accounts of approximately $0.4 million and $0.3 million at December 31, 2021 and 2020, respectively, are adequate to provide for probable bad debts.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Inventories

Inventories are stated at the lower of cost or net realizable value. Cost is determined on a first in, first out basis. Finished goods and work-in-process inventories include material, labor and overhead costs. Factory overhead costs are allocated to manufactured inventory based upon labor hours.

The Company monitors inventory usage to determine if the carrying value of any items should be adjusted due to lack of demand for the item and adjusts inventory for estimated obsolescence or unusable inventory equal to the difference between the cost of inventory and the estimated net realizable value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required.

Property and Equipment

Property and equipment are recorded at cost. Depreciation and amortization are provided for using the straight-line method over the estimated useful lives of the assets. The amortization of leasehold improvements is based on the shorter of the lease term or the life of the improvement. Betterments and major improvements, which extend the life of the asset, are capitalized, whereas maintenance and repairs and routine improvements are expensed as incurred. The estimated useful lives are: buildings and improvements, 39 years; machinery and equipment, 3-10 years; furniture and fixtures, 5-10 years; computer equipment and software, 3-5 years; and molds, 7-15 years.

Valuation of Long-Lived Assets

The Company reviews long-lived assets for recoverability if events or changes in circumstances indicate that the assets may have been impaired. This circumstance exists when the carrying amount of the asset exceeds the sum of the undiscounted cash flows expected to result from its use and eventual disposition. In those cases, an impairment loss is recognized to the extent that the assets’ carrying amount exceeds its fair value. Any impairment losses are not restored in the future if the fair value increases. At December 31, 2021 and 2020, the Company believes the remaining carrying values of its long-lived assets are recoverable.

Product Warranties

The Company provides a four year limited warranty on end-user sales of its Renuvion®/J-Plasma® generators, a two year warranty on mounting fixtures, and a one-year warranty on certain accessories. The Company estimates and provides for future costs for product warranties in cost of sales at the time revenue is recognized. The Company bases its product warranty costs on related material costs, repair labor costs and shipping costs. The Company estimates the future cost of product warranties by considering historical material, repair labor, and shipping costs, and applying the experience rates to the outstanding warranty period for products sold. It is reasonably possible that actual results could differ from those estimates.

Revenue Recognition

Revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration that the Company expects to receive for those goods or services. To recognize revenue, the Company (i) identifies the contract(s) with a customer; (ii) identifies the performance obligations in the contract; (iii) determines the transaction price; (iv) allocates the transaction price to the performance obligations in the contract; and (v) recognizes revenue when, or as, it satisfies the performance obligation(s). For sales of the Company's Advanced Energy products (Renuvion®/J-Plasma®), this is at a point in time when title has been transferred to the customer, which is generally at the time of shipment or receipt by customer for FOB destination terms. For sales of products under its OEM agreements, the Company recognizes revenue over time when no alternative use exists for the manufactured goods and the Company has rights to payment. Presently, the Company does not stock any significant completed goods under its OEM agreements, accordingly, the recognition of revenue under these agreements approximates point in time recognition. The following policies apply to its major categories of revenue transactions:

•The majority of sales to customers are evidenced by firm purchase orders. Generally, title and the risks and rewards of ownership are transferred to the customer when the product is shipped. Payment by the customer is due under fixed payment terms.

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•Product returns are only accepted at the Company's discretion and in accordance with its “Returned Goods Policy”. Historically, the level of product returns has not been significant. Accruals for sales returns, rebates and allowances are made as a reduction of revenue based upon an analysis of historical customer returns and credits, rebates, discounts and current market conditions.

•The terms of sale to customers generally do not include any obligations to perform future services. Limited warranties are generally provided for sales and provisions for warranty are provided at the time of product sale based upon an analysis of historical data.

•In connection with the execution of OEM supply agreements, the Company may enter into an accompanying product development agreement. If the Company enters into a product development agreement, and development of the goods does not represent a performance obligation on a standalone basis, the Company defers the development fees billed to customers and the associated costs. Recognition of the deferred billings and costs will occur as the Company performs on the accompanying supply arrangements.

Advertising Costs

Advertising costs are expensed as incurred. The amounts of advertising costs, including trade shows, were approximately $1.3 million and $0.8 million for the years ended December 31, 2021 and 2020, respectively.

Stock-Based Compensation

The Company accounts for stock-based compensation in accordance with FASB ASC Topic 718, Compensation-Stock Compensation. FASB ASC 718 requires recognizing compensation expense for all share-based payment awards made to employees, directors and non-employees based upon the grant date fair value of such awards. It accounts for forfeitures as they occur. The standard covers employee stock options, restricted stock and other equity awards. The Company utilizes a Black-Scholes model to estimate the grant date fair value of stock option awards. For employee and director awards, compensation expense is recognized on a straight-line basis over the vesting periods. For non-employee awards, compensation expense is recorded for non-forfeitable, fully vested awards at the grant date. For other awards granted to non-employees, compensation cost is recognized as services are provided, which approximates a straight-line basis over the vesting period.

Litigation Contingencies

In accordance with authoritative guidance, the Company accrues a liability in its consolidated financial statements for these actions when a loss is known or considered probable and the amount can be reasonably estimated. If the reasonable estimate of a known or probable loss is a range, and no amount within the range is a better estimate than any other, the minimum amount of the range is 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 those estimates.

Earnings (Loss) Per Share

The Company computes basic (loss) earnings attributable to common stockholders per share by dividing net (loss) income attributable to common stockholders by the weighted average number of common shares outstanding for the reporting period. Diluted (loss) earnings per share attributable to common stockholders gives effect to all potential dilutive shares outstanding during the period. The number of dilutive shares is calculated using the treasury stock method which reduces the effective number of shares by the amount of shares the Company could purchase with the proceeds of assumed exercises. Anti-dilutive units are excluded from the calculation of diluted shares. In periods of loss, all potentially dilutive units are anti-dilutive and are excluded from the calculation of diluted income (loss) per share.

Research and Development Costs

Research and development expenses are charged to operations as incurred.

Income Taxes

The Company utilizes the liability method of accounting for income taxes as set forth in FASB ASC Topic 740, Income Taxes. Under the liability method, deferred taxes are determined based on temporary differences between the financial statement and

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tax bases of assets and liabilities using tax rates expected to be in effect during the years in which the deferred taxes reverse. The Company accounts for interest and penalties on income taxes as income tax expense. A valuation allowances is recorded when it is more likely than not that a tax benefit will not be realized. In determining the need for valuation allowances the Company considers projected future taxable income, the timing of reversals of temporary differences, and the availability of tax planning strategies. As of December 31, 2021 and 2020, the Company recorded a valuation allowance on the net deferred tax assets.

The Company assesses the realizability of deferred tax assets each reporting period and will be able to reduce the valuation allowance to the extent the financial results of continuing 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., the Company will continue to record a full valuation allowance on the net deferred tax assets as of December 31, 2021. As a result of the CARES Act, during 2020, the Company released the valuation allowance on the Federal NOLs 2019 and 2020 that have been carried back to prior taxable years.

Foreign Currency Transactions

The functional currency of Apyx Bulgaria is the U.S. dollar. The monetary assets and liabilities that are denominated in a currency other than U.S. dollar are remeasured into U.S. dollars at the exchange rate on the balance sheet date, while nonmonetary items are remeasured at historical rates. Revenue and expenses are remeasured at weighted average exchange rates during the period. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in selling, general and administrative expenses in the Consolidated Statements of Operations and were not material for the years ended December 31, 2021 and 2020.

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NOTE 3. RECENT ACCOUNTING PRONOUNCEMENTS

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326). The update changes the impairment model for most financial assets and certain other instruments, including trade and other receivables, contract assets, held-to-maturity debt securities and loans, and requires entities to use a new forward-looking expected loss model that will result in the earlier recognition of allowance for losses. This update, as originally issued, was effective for annual and interim periods beginning after December 15, 2019, with early adoption permitted. In November 2019, the FASB issued ASU 2019-10, Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842) Effective Dates, which deferred the effective dates of these standards for Smaller Reporting Companies until fiscal years beginning after December 15, 2022. The Company currently expects to continue to qualify as a Smaller Reporting Company, based upon the current SEC definition and, as a result, will be utilizing the deferred elective date. While the Company is in the process of determining the effects of the adoption of the standard on the consolidated financial statements, it does not expect the impact to be material.

No other new accounting pronouncement issued or effective during the fiscal year had or is expected to have a material impact on the Company's consolidated financial statements or disclosures.

NOTE 4. DISPOSITION OF THE CORE BUSINESS

On August 30, 2018, the Company closed on a definitive asset purchase agreement (the Asset Purchase Agreement) with Specialty Surgical Instrumentation Inc., a Tennessee Corporation and wholly owned subsidiary of Symmetry Surgical Inc. (Symmetry), pursuant to which the Company divested and sold the Company’s electrosurgical Core business segment and related intellectual property, including the Bovie® brand and trademarks, to Symmetry for gross proceeds of $97 million in cash.

In connection with the Asset Purchase Agreement, the Company entered into an Electro Surgical Disposables and Accessories, Cauteries and Other Products Supply Agreement with Symmetry for a four-year term, whereby it will manufacture certain Core products and sell them to Symmetry at agreed upon prices. Any activity resulting from this agreement is netted and reported in the Consolidated Statements of Operations as other income (loss). Core activity for 2021 amounted to $6.5 million with cost of sales equivalents of $5.5 million and other related expenses of $1.5 million for net other loss of $0.4 million. Core activity for 2020 amounted to $9.4 million with cost of sales equivalents of $8.1 million and other related expenses of $0.8 million for net other income of $0.5 million.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

NOTE 5. INTEREST IN JOINT VENTURE INVESTMENT

In 2019, the Company executed a joint venture agreement with its Chinese supplier (China JV) whereby the Company has a 51% interest in the China JV. The agreement required the Company to make capital contributions into the newly formed entity of approximately $357,000, of which approximately $203,000 and $154,000, respectively, were contributed during the years ended December 31, 2021 and 2020. As of the date of these consolidated financial statements, the joint venture has not commenced principal operations.

Changes in the Company’s ownership investment in the China JV were as follows:

Year Ended December 31,

Beginning interest in China JV $ 144 $ —

Net loss attributable to Apyx (30) (10)

Ending interest in China JV $ 317 $ 144

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NOTE 6. INVENTORIES

Inventories consisted of the following:

Less: provision for obsolescence (263) (388)

During 2020, the Company reassessed its forecasted product mix due to COVID-19, increased availability of newer handpiece designs, and improved timing of product registrations in some of our foreign markets. As a result, certain products were reduced to a lower carrying value, and some components were also written down as the Company determined to cease further production on these older models. The total impairment was approximately $0.4 million and is included in cost of sales in the accompanying Consolidated Statement of Operations for 2020. Later in 2020, the Company’s forecasts were revised, and it subsequently utilized a portion of the written down components and approximately $0.1 million of the impairment was recovered through the sale of the corresponding manufactured handpieces. There were no such impairments in 2021.

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NOTE 7. PROPERTY AND EQUIPMENT

Property and equipment consisted of the following:

Computer equipment and software 1,535 1,505

Less: accumulated depreciation and amortization (5,316) (4,813)

Property and equipment in service 5,921 6,118

Construction in progress 654 423

Property and equipment, net $ 6,575 $ 6,541

Total depreciation expense was $0.7 million for the years ended December 31, 2021 and 2020. Depreciation expense is included within cost of goods sold and selling, general and administrative expense in the Consolidated Statements of Operations.

NOTE 8. LEASES

The Company does not recognize leases with terms less than twelve months in duration, or that have variable only payments, in its Consolidated Balance Sheet as right-of-use assets and lease liabilities. The Company has adopted the practical expedient which allows for the Company to not separate lease and non-lease components of contracts. Accordingly, non-lease components are included in the measurement of the Company’s lease liabilities and right-of-use assets. If the Company is aware of the implicit rate in leases, the Company determines the operating lease liability using the implicit rate. For those leases where the Company is not aware of the implicit rate in the lease, the Company utilizes an incremental borrowing rate of 4.00%, which is indicative of its collateralized borrowing rate.

Operating Leases

The Company leases its facility in Sofia, Bulgaria and vehicles in Clearwater, Florida under non-cancelable operating lease agreements. The Company’s lease on the Bulgaria facility includes rent escalation over the term of the lease. Rent expense on the Bulgaria facility lease is accounted for on a straight-line basis over the lease term. These operating leases have terms expiring through December 2022.

Finance Leases

The Company has entered into non-cancelable finance leases for certain computer equipment and a vehicle in Clearwater, Florida. These finance leases have terms expiring through August 2023.

Information about the Company’s lease costs are as follows:

Year Ended December 31,

Operating lease costs $ 134 $ 124

Finance lease costs:

Amortization of right-of-use assets 216 216

Interest on lease liabilities 12 22

Variable lease costs 12 13

Cash information related to our leases are as follows:

(in thousands) Operating Finance Operating Finance

Information about the Company’s weighted average remaining lease terms and discount rate assumptions are as follows:

Operating Finance Operating Finance

Weighted average remaining lease term (in years) 1.0 0.8 2.0 1.7

Maturities of lease liabilities as of December 31, 2021 are as follows:

(In thousands) Operating Finance

Less imputed interest (3) (3)

Present value of lease liabilities 122 183

Less current portion of lease liabilities (122) (165)

Long-term portion of lease liabilities $ — $ 18

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NOTE 9. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities consisted of the following:

Accrued product warranties 593 498

Accrued product liability claim insurance deductibles 610 435

Joint and several payroll liability 1,027 1,027

Other accrued expenses and current liabilities 1,447 449

Total accrued expenses and other current liabilities $ 10,287 $ 7,278

NOTE 10. PRODUCT WARRANTIES

Product warranty activity consisted of the following for the years ended:

Provision for product warranties 318 215

Product warranty costs incurred (223) (169)

Accrued product warranties $ 593 $ 498

NOTE 11. JOINT AND SEVERAL PAYROLL LIABILITY

During 2018 and 2019, the Company improperly calculated and reported the amount of income to certain employees, and did not collect and remit the correct amount of its employees' portion of income and payroll taxes, related to stock option exercises as required by the IRS. Due to IRS statutory requirements, the Company has joint and several liability for the full amount that was not withheld and remitted to the proper taxing authorities. This amount of the liability was approximately $1.0 million at December 31, 2021 and 2020. The Company will be relieved of this liability as the statute of limitations on the liability expires, which the Company expects to occur during April 2022 and April 2023, or once the Company can establish that its employees have in fact paid these obligations.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

NOTE 12. CONTRACT ASSETS AND LIABILITIES

The Company’s contracts with customers may result in the Company having contract assets and liabilities. These contract assets and liabilities arise primarily from OEM development and supply agreements where the development of the goods does not represent a performance obligation on a standalone basis. The Company defers the development fees billed to customers, and the associated costs, and recognizes them as it completes performance obligations on the supply portion of the agreement. Other contract liabilities may be recognized when a customer prepays for goods or services. At December 31, 2021 and 2020, respectively, the Company had recorded approximately $1.9 million and $0.6 million of contract liabilities and $0.5 million and $0.2 million of contract assets related to customer prepayments and the deferral of revenues and expenses under these agreements. At December 31, 2021, $0.5 million of the contract liabilities and $0.1 million of the contract assets are presented as current in the accompanying Consolidated Balance Sheet within accrued expenses and other current liabilities and prepaid expenses and other current assets, respectively. At December 31, 2020, 0 contract assets or liabilities were current in the accompanying Consolidated Balance Sheet. During 2021, the Company did not recognize any significant contract liabilities or contract assets that existed as of December 31, 2020 in sales or cost of sales in the accompanying Consolidated Statement of Operations for the year ended December 31, 2021.

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NOTE 13. 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 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 earnings (loss) per share.

Year Ended December 31,

(in thousands, except per share data) 2021 2020

Numerators:

Net loss attributable to stockholders $ (15,172) $ (11,896)

Weighted average shares outstanding - basic and diluted 34,332 34,212

Loss per share - basic and diluted $ (0.44) $ (0.35)

Anti-dilutive instruments excluded from diluted loss per common share:

NOTE 14. INCOME TAXES

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

Current:

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

Deferred:

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

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

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Year Ended December 31,

Federal tax provision 21.0 % 21.0 %

State taxes (net of federal benefit) 3.8 % 5.1 %

Valuation allowance (21.1) % (5.3) %

Incentive stock compensation expense (1.8) % (1.7) %

Section 162(m) compensation (3.8) % — %

GILTI (1.2) % — %

NOL carryback from CARES Act — % 18.9 %

Major components of the Company’s deferred tax assets (liabilities) are as follows:

Deferred tax assets:

Loss and credit carryforwards $ 4,256 $ 1,888

Accrued bonus 555 —

Total deferred tax assets, net of valuation allowance 430 399

Deferred tax liabilities:

Property and equipment (205) (278)

Total deferred tax liabilities (430) (399)

Net deferred tax assets $ — $ —

On March 27, 2020, the U.S. government enacted the CARES Act to provide relief from COVID-19. The CARES Act includes a provision that allows companies to carryback net operating losses (NOL’s) generated in the period 2018 through 2020 to prior years. In conjunction with the disposition of the Core business in 2018, the Company generated a significant amount of taxable income in 2018. Subsequent to this, the Company generated NOLs in 2019 and 2020. For the NOLs generated in 2019, the Company previously recorded a full valuation allowance on the deferred tax assets associated with the NOL due to realization not being probable under then existing tax law. The CARES Act makes these assets realizable and, as of the date of the CARES Act, the Company recognized an income tax benefit of approximately $3.7 million associated with the release of the valuation allowance on its Federal NOL deferred tax asset from 2019. Additionally, using the provisions of the CARES Act, the Company carried back its 2020 Federal NOL of approximately $3.7 million.

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

The Company considers the earnings of Apyx Bulgaria, EOOD to be indefinitely invested outside the United States on the basis of estimates that future domestic cash generation will be sufficient to meet future domestic cash needs and our specific plans for reinvestment of those subsidiary earnings. It has not recorded a deferred tax liability related to the U.S. Federal and State income taxes and foreign withholding taxes on the undistributed earnings of Apyx Bulgaria, EOOD indefinitely invested outside the United States. If it decides to repatriate the foreign earnings, the Company will need to adjust its income tax provision in the period it determines that the earnings will no longer be indefinitely invested outside the United States.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

The Company assesses the financial statement impact of an uncertain tax position taken or expected to be taken on an income tax return at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized in the financial statements unless it is more likely than not of being sustained. As of December 31, 2021 and 2020, the Company has recorded a liability of approximately $1.3 million related to uncertain tax positions and accrued approximately $0.6 million and $0.4 million, respectively, of interest and penalties on these positions. All unrecognized tax benefits are expected to be resolved within the next 12 months.

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

(in thousands) Gross Unrealized Tax Benefits

Beginning of year balance $ 1,313 $ 1,313

Additions of tax positions related to the current year — —

Additions of tax positions related to the prior year — —

Decreases for tax positions related to prior year — —

The Company is subject to U.S. federal and state income tax examination. The Company’s 2018 through 2020 U.S. federal income tax returns are subject to examination by the Internal Revenue Service. The Company’s state income tax returns are subject to examination for the 2017 through 2020 tax years.

NOTE 15. RETIREMENT PLAN

The Company provides a tax-qualified profit-sharing retirement plan under section 401(k) of the Internal Revenue Code for the benefit of eligible employees with an accumulation of funds for retirement on a tax-deferred basis and provides for annual discretionary contribution to individual trust funds.

All employees are eligible to participate upon completing three months of service. The employees may make voluntary contributions to the plan up to the maximum percentage allowed by the Internal Revenue Code. Vesting in employee matching contributions is graded and depends on the years of service. After three years from their date of hire, the employees are 100% vested. The Company makes matching contributions of 50% of the employee contributions up to a total of 3% of participant payroll. Matching contributions made by the Company totaled approximately $0.4 million and $0.3 million for each of the years ended December 31, 2021 and 2020, respectively.

NOTE 16. RELATED PARTY TRANSACTIONS

Several 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. Antoaneta Dimitrova Shileva-Toromanova, Mr. Shilev’s sister, is the manager of human resources. Svetoslav Shilev, Mr. Shilev’s son, is a quality manager in the quality assurance department.

In addition, as part of the purchase of the Apyx Bulgaria manufacturing facility, Mr. Shilev was issued a note payable for $0.1 million, which was paid in full on October 20, 2020.

The partner in the Company’s China joint venture is also a supplier of the Company. For the years ended December 31, 2021 and 2020, the Company made purchases from this supplier of approximately $1.3 million and $1.4 million, respectively. At December 31, 2021 and 2020, respectively, the Company owed this supplier approximately $1,000 and $38,000, respectively.

NOTE 17. COMMITMENTS AND CONTINGENCIES

Litigation

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

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claims, lawsuits and proceedings in the ordinary course of our business. Such claims may include claims by current or former employees, distributors and competitors, claims concerning the marketing and promotion of our products and product liability claims.

The Company is involved in a number of legal actions relating to the use of our Helium Plasma technology. The outcomes of these legal actions are not within the Company’s control and may not be known for prolonged periods of time. It believes that such claims are adequately covered by insurance; however, 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 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.

Purchase Commitments

At December 31, 2021, the Company has purchase commitments for inventories totaling approximately $4.9 million, all of which is expected to be purchased by the end of 2022.

Concentrations

Sales to one customer within the Advanced Energy segment represented 11% of total sales for the year ended December 31, 2021. Sales to one customer within the OEM segment represented 10% of total sales for the year ended December 31, 2020. There were no other significant sales concentrations for the years ended December 31, 2021 and 2020.

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

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NOTE 18. STOCK OPTIONS

On October 30, 2007, the Company’s stockholders approved, and the Board of Directors adopted an amendment to the 2003 Executive and Employee Stock Option Plan (the “Plan”) to increase the maximum aggregate number of shares of common stock reserved for issuance under the Plan from 1.2 million shares (already reserved against outstanding options) to 1.7 million shares. Except for the increase in the number of shares covered by the Plan, the Plan remained otherwise unchanged. In 2001, the Board of Directors adopted the 2001 Executive and Employee Stock Option Plan which reserved for issuance 1.2 million stock options. Stock options to employees typically have a ten-year life and currently vest over periods between one and seven years.

In July 2012, the Company’s stockholders approved the 2012 Share Incentive Plan covering a total of 750,000 shares of common stock issuable upon exercise of options to be granted under the plan. At December 31, 2021 approximately 70,000 are available to be issued in this plan.

In July 2015, the Company’s stockholders approved the 2015 Executive and Employee Stock Option Plan covering a total of 2,000,000 shares of common stock issuable upon exercise of options to be granted under the plan. At December 31, 2021 approximately 240,000 are available to be issued in this plan.

In August 2017, the Company’s stockholders approved the 2017 Executive and Employee Stock Option Plan covering a total of 3,000,000 shares of common stock issuable upon exercise of options to be granted under the plan. At December 31, 2021 approximately 80,000 are available to be issued in this plan.

In August 2019, the Company’s stockholders approved the 2019 Share Incentive Plan covering a total of 2,000,000 shares of common stock issuable upon exercise of options to be granted under the plan. At December 31, 2021, all 1,370,000 are available to be issued in this plan.

In August 2021, the Company’s stockholders approved the 2021 Share Incentive Plan covering a total of 1,375,000 shares of common stock issuable upon exercise of options to be granted under the plan. At December 31, 2021, all 1,375,000 are available to be issued in this plan.

On January 19, 2022, the Company granted employees approximately 1,500,000 options to purchase common shares of the Company's stock. All options granted were pursuant to the 2015 and 2019 Plans noted above. The options vest over a period of three years.

The status of the Company’s stock options is summarized as follows:

Number of options Weighted average exercise price

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Number of options Weighted average grant date fair value

Common shares required to be issued upon the exercise of stock options would be issued from authorized and unissued shares. Options are valued using the Black-Scholes model. For employee grants, the Company calculates expected life via the simplified method as it does not have sufficient history to determine actual expected life. For non-employee grants, the Company calculates expected life using a combination of past exercise behavior, the contractual term and expected remaining exercise behavior. Inputs used in the valuation models are as follows:

Expected dividend yield —% —%

Expected term (in years) 4.5 - 6 6

The Company recognized approximately $5,088,000 and $4,210,000 in stock-based compensation expense during the years ended December 31, 2021 and 2020, respectively.

The intrinsic value of each option share is the difference between the fair value of our common stock and the exercise price of such option share to the extent it is “in-the-money”. Aggregate intrinsic value represents the value that would have been received by the holders of in-the-money options had they exercised their options on the last trading day of the year and sold the underlying shares at the closing stock price on such day. The intrinsic value calculation at December 31, 2021 is based on the $12.82 closing stock price of the Company's common stock on December 31, 2021, the last trading day of 2021.

As of December 31, 2021, there were 5,037,248 stock options outstanding and expected to vest with an aggregate intrinsic value of approximately $35,560,000. These options have a weighted average exercise price of $5.76 and a weighted average remaining contractual term of approximately 6 years.

As of December 31, 2021, there were 3,595,475 stock options outstanding and exercisable with an aggregate intrinsic value of approximately $29,460,000. These options have a weighted average exercise price of $4.63 and a weighted average remaining contractual term of approximately 6 years.

The total intrinsic value of in the money options exercised during the years ended December 31, 2021 and 2020, was approximately $1,600,000 and $200,000, respectively. Intrinsic value of exercised shares is the total value of such shares on the date of exercise less the cash received from the option holder to exercise the options or other consideration paid.

The total fair value of options granted during the years ended December 31, 2021 and 2020, was approximately $5,150,000 and $6,580,000, respectively. The weighted average fair value of options granted during the years ended December 31, 2021 and 2020, was $5.76 and $4.78, respectively. The total fair value of option shares vested during the years ended December 31, 2021 and 2020, was approximately $4,270,000 and $2,510,000, respectively.

The Company allows employees to exercise stock-based awards by surrendering stock-based awards with an intrinsic value equal to the cumulative exercise price of the stock-based awards being exercised, referred to as net settlements. These surrenders are included in stock options exercised in the options rollforward above. During the years ended December 31, 2021 and 2020, the Company received 111,831 and 39,448 options as payment in the exercise of 107,357 and 47,088 options, respectively.

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APYX MEDICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

As of December 31, 2021, there was approximately $5,010,000 of total unrecognized stock-based compensation expense, related to unvested stock options granted under the plans above. This expense is expected to be recognized over a weighted-average period of approximately 1 year.

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APYX MEDICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

NOTE 19. 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 astwo 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, all related expenses are recorded as cost of sales, therefore no segment specific operating expenses are incurred.

Summarized financial information with respect to reportable segments is as follows:

(In thousands) Advanced Energy OEM Corporate (Other) Total

Interest income — — 11 11

Interest expense — — (10) (10)

Other losses, net — — (373) (373)

(In thousands) Advanced Energy OEM Corporate (Other) Total

Interest expense — — (46) (46)

International sales in 2021 and 2020, were 32.0% and 32.1% of sales, respectively. Revenue by geographic region, based on the "ship to" location on the invoice are as follows:

Year Ended December 31,

Sales by Domestic and International

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APYX MEDICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

NOTE 20. SUBSEQUENT EVENTS

On March 14, 2022, the FDA posted a Medical Device Safety Communication ("Communication") that warns consumers and health care providers against the use of our Advanced Energy products outside of their FDA-cleared indications for general use in cutting, coagulation, and ablation of soft tissue during open and laparoscopic surgical procedures. We continue to work with the FDA towards securing 510(k) clearance for additional indications. We are in the process of evaluating what effects, if any, the Communication will have on our results of operations, cash flows and financial position.

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APYX MEDICAL CORPORATION

ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

ITEM 9A. 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 December 31, 2021, the Company's disclosure controls and procedures were effective.

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as such term is defined in Exchange Act Rule 13a-15(f) and 15d-15(f) under the Exchange Act). The Company's internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, management carried out an evaluation of the effectiveness of the Company's internal control over financial reporting as of December 31, 2021, based on the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission Internal Control Integrated Framework (2013). Based on that evaluation, management concluded that the Company's internal control over financial reporting was effective as of December 31, 2021.

Changes in Internal Control Over Financial Reporting

We rely extensively on information systems to manage our business and summarize and report our financial condition, results of operations and cash flows. In 2020, implemented a new global enterprise resource planning (“ERP”) system, which replaced much of our existing core financial systems in the first quarter of 2021. The ERP system is designed to accurately maintain our financial records, enhance the flow of financial information, improve data management and provide timely information to our management team.

As a result of this implementation, certain internal controls over financial reporting have been automated, modified or implemented to address the new environment associated with this type of system.

Other than the ERP system implementation noted above, there has not been any change in our internal control over financial reporting (as that term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our quarter ended December 31, 2021, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B. Other Information

None.

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APYX MEDICAL CORPORATION

Part III

ITEM 10. Directors, Executive Officers and Corporate Governance

BACKGROUND AND EXPERIENCE OF DIRECTORS

When considering whether directors and nominees have the experience, qualifications, attributes or skills, taken as a whole, to enable the Board of Directors (“Board”) to satisfy its oversight responsibilities effectively in light of the Company’s business and structure, the Governance and Nominating Committee focused primarily on each person’s background and experience as reflected in the information discussed in each of the directors’ individual biographies set forth immediately below. We believe that our directors provide an appropriate mix of experience and skills relevant to the size and nature of our business. As more specifically described in such person’s individual biographies set forth below, our directors possess relevant and industry-specific experience and knowledge in the medical, engineering and business fields, as the case may be, which we believe enhances the Board’s ability to oversee, evaluate and direct our overall corporate strategy. The Governance and Nominating Committee annually reviews and makes recommendations to the Board regarding the composition and size of the Board so that the Board consists of members with the proper expertise, skills, attributes and personal and professional backgrounds needed by the Board, consistent with applicable regulatory requirements.

The Governance and Nominating Committee believes that all directors, including nominees, should possess the highest personal and professional ethics, integrity and values and be committed to representing the long-term interests of our stockholders. The Governance and Nominating Committee will consider criteria including the nominee’s current or recent experience as a senior executive officer, whether the nominee is independent, as that term is defined in existing independence requirements of The NASDAQ Stock Market LLC, the business, scientific or engineering experience currently desired on the Board, geography, the nominee’s industry experience and the nominee’s general ability to enhance the overall composition of the Board.

The Governance and Nominating Committee does not have a formal policy on diversity; however, in recommending directors, the Board and the Committee consider the specific background and experience of the Board members and other personal attributes in an effort to provide a diverse mix of capabilities, contributions and viewpoints which the Board believes enables it to function effectively as the Board of Directors of a company with our size and nature of business.. Moreover, our corporate governance guidelines commit the Company to maintaining a Board with a strong and diverse membership as set forth below.

Directors serve for one-year terms and are elected at the annual stockholders’ meeting. Set forth below is information regarding the executive officers, directors and key employees of Apyx Medical Corporation as of March 15, 2022.

Name Age Position Director Since

Charles D. Goodwin 55 Chief Executive Officer and Director December 2017

Tara Semb 52 Chief Financial Officer, Treasurer and Secretary N/A

Todd Hornsby 45 Executive Vice President N/A

Moshe Citronowicz 69 Senior Vice President N/A

Andrew Makrides 80 Chairman of the Board December 1982

Lawrence J. Waldman 75 Director March 2011

Michael Geraghty 74 Director March 2011

John Andres 64 Vice-Chairman of the Board July 2014

Craig Swandal 61 Director March 2018

Minnie Baylor-Henry 74 Director August 2019

Wendy Levine 49 Director August 2021

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Board Diversity Summary as of December 31, 2021

Makrides Goodwin Waldman Andres Geraghty Swandal Baylor-Henry Levine

Gender Identity

Male X X X X X X

Female X X

Non-Binary

Did Not Disclose Gender

Demographic Background

African American or Black X

Alaskan Native or Native American

Asian

Hispanic or Latinx

Native Hawaiian or Pacific Islander

White X X X X X X X

LGBTQ+

APYX US Equity

APYX · 10-K · period ended 2021-12-31

ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk

ITEM 8. Financial Statements and Supplementary Data

ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

ITEM 9A. Controls and Procedures

ITEM 9B. Other Information

ITEM 10. Directors, Executive Officers and Corporate Governance

APYX US Equity☆

APYX · 10-K · period ended 2021-12-31

ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk

ITEM 8. Financial Statements and Supplementary Data

ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

ITEM 9A. Controls and Procedures

ITEM 9B. Other Information

ITEM 10. Directors, Executive Officers and Corporate Governance

APYX US Equity