Airsculpt Technologies, Inc. 10-K

Item 8. Financial Statements and Supplementary Data INDEX TO FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm (PCAOB ID Number 248 ) 63 Consolidated Balance Sheets 64 Consolidated Statements of Operations 65 Consolidated Statement of Changes in Member ’ s /Stockholder s ’ Equity 66 Consolidated Statements of Cash Flows 67 Notes to Consolidated Financial Statements 67 62 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Stockholders AirSculpt Technologies, Inc. Opinion on the financial statements We have audited the accompanying consolidated balance sheets of AirSculpt Technologies, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2021 and 2020, the related consolidated statements of operations, changes in member’s / stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as 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 each of the three years in the period ended December 31, 2021, 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 the 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. /s/ GRANT THORNTON LLP We have served as the Company’s auditor since 2018. Miami, Florida March 11, 2022 63 AirSculpt Technologies, Inc. and Subsidiaries Consolidated Balance Sheets December 31, 2021 and 2020 ($000s) 2021 2020 Assets Current assets Cash and cash equivalents $ 25,347 $ 10,379 Prepaid expenses and other current assets 4,093 1,184 Total current assets 29,440 11,563 Property and equipment, net 13,627 7,108 Other long-term assets 1,742 1,544 Right of use operating lease assets 18,159 17,053 Intangible assets, net 55,852 60,608 Goodwill 81,734 81,734 Total assets $ 200,554 $ 179,610 Liabilities and Member’s/Stockholders’ Equity Current liabilities Accounts payable $ 2,670 $ 1,095 Accrued payroll and benefits 2,509 1,258 Current portion of long-term debt 850 400 Deferred revenue and patient deposits 2,810 3,233 Accrued and other current liabilities 4,103 581 Current right of use operating lease liabilities 3,473 2,890 Total current liabilities 16,415 9,457 Long-term debt, net 81,755 32,119 Deferred tax liability 4,351 — Long-term right of use operating lease liability 14,505 14,358 Total liabilities 117,026 55,934 Commitments and contingent liabilities (Note 11) Member’s equity — 123,676 Common stock, $ 0.001 par value; shares authorized - 450,000,000 ; shares issued and outstanding - 55,640,154 and zero , respectively 56 — Additional paid-in capital 83,865 — Accumulated deficit ( 393 ) — Total member’s/stockholders’ equity 83,528 123,676 Total liabilities and member’s/stockholders’ equity $ 200,554 $ 179,610 The accompanying notes are an integral part of these consolidated financial statements. 64 AirSculpt Technologies, Inc. and Subsidiaries Consolidated Statements of Operations For the years ended December 31, 2021, 2020 and 2019 ($000s) 2021 2020 2019 Revenue $ 133,315 $ 62,766 $ 41,236 Operating expenses: Cost of service (exclusive of depreciation and amortization shown below) 44,536 23,471 15,488 Selling, general and administrative 65,732 23,621 20,125 Loss on debt modification 682 — — Depreciation and amortization 6,597 5,641 4,960 Total operating expenses 117,547 52,733 40,573 Income from operations 15,768 10,033 663 Interest expense, net 4,888 2,456 2,875 Pre-tax net income (loss) 10,880 7,577 ( 2,212 ) Income tax expense 329 — — Net income (loss) $ 10,551 $ 7,577 $ ( 2,212 ) Earnings (loss) per share of common stock (1) Basic $ ( 0.01 ) N/A N/A Diluted $ ( 0.01 ) N/A N/A Weighted average shares outstanding (1) Basic 55,640,154 N/A N/A Diluted 55,640,154 N/A N/A The accompanying notes are an integral part of these consolidated financial statements. (1) Basic and diluted weighted average shares outstanding and loss per share represent only the period from October 28, 2021 to December 31, 2021 (see Note 8). 65 AirSculpt Technologies, Inc. and Subsidiaries Consolidated Statement of Changes in Member’s/Stockholders’ Equity For the years ended December 31, 2021, 2020 and 2019 Common Stock ($000s) Member’s Equity Shares Amount Additional Paid-in Capital Accumulated Deficit Total Balance at December 31, 2018 $ 122,548 — $ — $ — $ — $ 122,548 Distributions ( 283 ) — — — — ( 283 ) Equity-based compensation 341 — — — — 341 Net loss ( 2,212 ) — — — — ( 2,212 ) Other ( 3 ) — — — — ( 3 ) Balance at December 31, 2019 120,391 — — — — 120,391 Distributions ( 4,617 ) — — — — ( 4,617 ) Equity-based compensation 325 — — — — 325 Net income 7,577 — — — — 7,577 Balance at December 31, 2020 123,676 — — — — 123,676 Activity prior to Reorganization and IPO Distributions ( 67,283 ) — — — — ( 67,283 ) Equity-based compensation 2,460 — — — — 2,460 Net income 10,944 — — — — 10,944 Effect of Reorganization and IPO Reorganization transaction ( 69,797 ) 53,466,241 54 69,743 — — Recognition of deferred tax liability in connection with Reorganization — — — ( 4,143 ) — ( 4,143 ) Issuance of common stock in connection with the IPO, net of issuance costs of $ 10,372 — 2,173,913 2 13,540 — 13,542 Activity subsequent to IPO Share-based compensation — — — 4,725 — 4,725 Net loss — — — — ( 393 ) ( 393 ) Balance at December 31, 2021 $ — 55,640,154 $ 56 $ 83,865 $ ( 393 ) $ 83,528 The accompanying notes are an integral part of these consolidated financial statements. 66 AirSculpt Technologies, Inc. and Subsidiaries Consolidated Statements of Cash Flows For the years ended December 31, 2021, 2020 and 2019 ($000s) 2021 2020 2019 Cash flows from operating activities Net income (loss) $ 10,551 $ 7,577 $ ( 2,212 ) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 6,597 5,641 4,960 Equity-based compensation 7,185 325 341 Loss on debt modification 682 — — Non-cash interest expense; amortization of debt costs 639 211 226 Deferred income taxes 208 — — Changes in assets and liabilities Prepaid expense and other current assets ( 3,845 ) 275 ( 1,841 ) Other assets ( 1,305 ) ( 204 ) ( 635 ) Accounts payable 1,576 ( 1,019 ) 1,872 Deferred revenue and patient deposits ( 423 ) 45 1,835 Accrued and other liabilities 4,768 1,106 392 Net cash provided by operating activities 26,633 13,957 4,938 Cash flows from investing activities Purchases of property and equipment, net ( 7,116 ) ( 3,689 ) ( 4,439 ) Net cash used in investing activities ( 7,116 ) ( 3,689 ) ( 4,439 ) Cash flows from financing activities Payment on term loan ( 838 ) ( 2,900 ) ( 500 ) Borrowings on term loan 49,603 2,500 — Proceeds from IPO 13,542 — — Distributions to member ( 66,856 ) ( 4,617 ) ( 283 ) Net cash used in financing activities ( 4,549 ) ( 5,017 ) ( 783 ) Net increase (decrease) in cash and cash equivalents 14,968 5,251 ( 284 ) Cash and cash equivalents Beginning of period 10,379 5,128 5,412 End of period $ 25,347 $ 10,379 $ 5,128 Supplemental disclosure of cash flow information: Cash paid for interest $ 4,255 $ 2,293 $ 2,683 Supplemental disclosure of non-cash investing and financing information: Property and equipment included in accounts payable and accrued expenses $ 255 $ — $ — Distributions to member included in accrued expenses 427 — — The accompanying notes are an integral part of these consolidated financial statements. 67 AirSculpt Technologies, Inc. and Subsidiaries Notes to Consolidated Financial Statements NOTE 1— ORGANIZATION AND SUMMARY OF KEY ACCOUNTING POLICIES AirSculpt Technologies, Inc. (“AirSculpt” or the “Company”), was formed as a Delaware corporation on June 30, 2021. On October 28, 2021, AirSculpt completed an initial public offering (“IPO”) of 8,050,000 shares of common stock at an initial public offering price of $ 11.00 per share. Of the 8,050,000 shares, AirSculpt offered 2,173,913 , while 5,876,087 shares were offered by AirSculpt stockholders. The 8,050,000 shares, includes 1,050,000 shares purchased from AirSculpt stockholders upon the full execution of the underwriter's option to purchase additional shares. Immediately following the IPO, AirSculpt’s total outstanding shares were 55,640,154 . Pursuant to a reorganization (the “Reorganization”) among entities under common control immediately prior to the IPO, AirSculpt became a holding company with its principal asset being 100% of the ownership interests in EBS Intermediate Parent LLC (“EBS Intermediate”). The operations of the Company prior to the IPO represent the operations of EBS Intermediate, the predecessor to AirSculpt. The Company and its consolidated subsidiaries are referred to collectively in these consolidated financial statements as “we,” “our,” and “us.” Solely for convenience, some of the copyrights, trade names and trademarks referred to in these consolidated financial statements are listed without their ©, ® and ™ symbols, but we will assert, to the fullest extent under applicable law, our rights to our copyrights, trade names and trademarks. EBS Intermediate was formed as a limited liability company under the laws of the state of Delaware pursuant to an agreement effective October 2, 2018 to facilitate the acquisition of EBS Enterprises, LLC f/k/a Rollins Enterprises, LLC. Prior to the Reorganization, EBS Intermediate was a wholly-owned subsidiary of EBS Parent, LLC (the “Parent”). The Company’s revenues are concentrated in the specialty, minimally invasive liposuction market. The Company, through its wholly-owned subsidiaries, is a provider of practice management services to professional associations (“PAs”) located throughout the United States. The Company owns and operates non-clinical assets and provides its management services to the PAs through management services agreements (“MSAs”). Management services provide for the administration of the non-clinical aspects of the medical operations and include, but are not limited to, financial, administrative, technical, marketing, and personnel services. At December 31, 2021 and 2020, the Company is providing management services to eighteen and fourteen medical practices, respectively. Pursuant to the MSA, the PA is responsible for all clinical aspects of the medical operations of the practice. Impact of COVID-19 The COVID-19 global pandemic has significantly affected the Company’s centers, employees, customers, communities, business operations and financial performance, as well as the U.S. economy and financial markets. The COVID-19 pandemic materially impacted the Company’s financial performance for the year ended December 31, 2020. The Company’s facilities were shutdown for two to three months during 2020. The Company’s operating structure allows for some flexibility in the cost structure according to the volume of cases performed, including much of cost of services. As a result of this flexibility and the return of volumes in the second half of 2020, the Company did not request or receive any proceeds from the CARES Act and other governmental assistance programs. Other than the temporary decrease in revenue and cost of service, the Company did not incur any significant costs attributable to the pandemic. The Company did not experience any facility shutdowns during the year ended December 31, 2021 due to COVID-19. However, the Company will continue to monitor the current COVID-19 situation in each market the Company operates in and will react accordingly should events require us to temporarily close. Principles of Consolidation These consolidated financial statements present the financial position and results of operations of the Company, its wholly-owned subsidiaries, and the PAs, which are considered variable interest entities in which the Company is the primary beneficiary. All intercompany accounts and transactions have been eliminated in consolidation. 68 AirSculpt Technologies, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Variable Interest Entities The Company has a variable interest in the managed PAs where it has a long-term and unilateral controlling financial interest over such PAs’ assets and operations. The Company has the ability to direct the activities that most significantly affect the PAs’ economic performance via the MSAs and related agreements. The Company is a practice management service organization and does not engage in the practice of medicine. These services are provided by licensed professionals at each of the PAs. Certain key features of the MSAs and related agreements enable the Company to assign the member interests of certain of the PAs to another member designated by the Company (i.e., “nominee shareholder”) for a nominal value in certain circumstances at the Company’s sole discretion. The MSA does not allow the Company to be involved in, or provide guidance on, the clinical operations of the PAs. The Company consolidates the PAs into the financial statements. All of the Company’s revenue is earned from services provided by the PAs. The only assets and liabilities held by the PAs included in the accompanying consolidated balance sheets are clinical related. The clinical assets and liabilities are not material to the Company as a whole. Accounting Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Concentration of Credit Risk The Company considers all highly liquid investments with original maturities of three months or less when purchased to be cash equivalents. The Company’s revenues are concentrated in the specialty, minimally invasive liposuction market. The Company maintains cash balances at financial institutions which may at times exceed the amount covered by the Federal Deposit Insurance Corporation. The Company has not experienced any losses in such accounts. Revenue Recognition Revenues consist primarily of revenues earned for the provision of the Company’s patented AirSculpt ® procedures. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account for revenue recognition. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The Company’s performance obligations are delivery of specialty, minimally invasive liposuction services. The Company assists patients, as needed, by providing third-party financing options to pay for procedures. The Company has arrangements with various financing companies to facilitate this option. There is a financing transaction fee based on a set percentage of the amount financed and the Company recognizes revenue based on the expected transaction price which is reduced for financing fees. Revenue for services is recognized when the service is performed. Payment is typically rendered in advance of the service. Customer contracts generally do not include more than one performance obligation. The Company’s policy is to require payment for services in advance. Payments received for services that have yet to be performed as of December 31, 2021 and 2020 are included in deferred revenue and patient deposits. Cost of Service Cost of service is comprised of all service and product costs related to the delivery of procedures, including but not limited to compensation to doctors, nurses and clinical staff, supply costs, and facility rent expense. 69 AirSculpt Technologies, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Deferred Financing Costs, Net Loan costs are capitalized in the period in which they are incurred and amortized on the straight-line basis over the term of the respective financing agreement which approximates the effective interest method. These costs are included as a reduction of long-term debt on the consolidated balance sheets. Total amortization of deferred financing costs was approximately $ 0.6 million, $ 0.2 million and $ 0.2 million for the years ended December 31, 2021, 2020 and 2019, respectively, and is included as a component of interest expense. Property and Equipment, Net Property and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method of accounting over the assets’ estimated useful lives. Depreciation of leasehold improvements is based on the shorter of the estimated useful life of the improvement or the remaining lease term. Leases On January 1, 2019, the Company adopted the Accounting Standards Codification (“ASC”) 842 - Leases using the modified retrospective transition approach by applying the new standard to all leases existing at that date. Results and disclosure requirements for reporting periods beginning after January 1, 2019 are presented under the new guidance. The Company determines if an arrangement is a lease at inception. Right-of-use assets represent the right to use the underlying assets for the lease term and the lease liabilities represent the obligation to make lease payments arising from the leases. Right-of-use assets and liabilities are recognized at commencement date based on the present value of future lease payments over the lease term, which includes only payments that are fixed and determinable at the time of commencement. When readily determinable, the Company uses the interest rate implicit in a lease to determine the present value of future lease payments. For leases where the implicit rate is not readily determinable, the Company’s incremental borrowing rate is used. The Company calculates its incremental borrowing rate on a periodic basis using a third-party financial model that estimates the rate of interest the Company would have to pay to borrow an amount equal to the total lease payments on a collateralized basis over a term similar to the lease. The Company applies its incremental borrowing rate using a portfolio approach. The right-of-use assets also include any lease payments made prior to commencement and is recorded net of any lease incentives received. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise such options. Goodwill and Intangible Assets Indefinite-lived, non-amortizing intangible assets include goodwill. Goodwill represents the excess of the fair value of the consideration conveyed in the acquisition over the fair value of net assets acquired. Goodwill is not amortized and is evaluated annually for impairment or sooner if factors occur that would trigger an impairment review. Judgments regarding the existence of impairment indicators are based on market conditions and operational performance. Definite-lived, amortizing intangible assets primarily consist of patents, tradenames and other intellectual property. The Company amortizes definite-lived identifiable intangible assets on a straight-line basis over their estimated useful life of 15 years. Impairment of goodwill Goodwill represents the excess of purchase price over the fair value of net assets acquired in a business combination. Goodwill is not amortized but evaluated for impairment at least annually at the reporting unit level or whenever events or changes in circumstances indicate that the value may not be recoverable. Events or changes in circumstances which could trigger an impairment review include significant adverse changes in the business climate, unanticipated competition, a loss of key personnel, or the strategy for the overall business, significant industry or economic trends, or significant underperformance relevant to expected historical or projected future results of operations. Goodwill is assessed for possible impairment by performing a qualitative analysis to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the events or circumstances, the Company determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then additional impairment testing is not required. However, if the Company were to believe the fair value was more likely than not lower than the carrying value, then the Company is required to perform a quantitative analysis. 70 AirSculpt Technologies, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) The quantitative analysis involves comparing the estimated fair value of a reporting unit with its respective book value, including goodwill. If the estimated fair value exceeds book value, goodwill is considered not to be impaired and no additional steps are necessary. If, however, the fair value of the reporting unit is less than its book value, then the carrying amount of the goodwill is reduced by recording an impairment loss in an amount equal to the excess. The Company reviews goodwill for impairment annually on October 1. See “Note 2—Goodwill and Intangibles, Net” for further discussion. Long-Lived Assets The Company accounts for impairment of long-lived assets in accordance with the provisions of the Financial Accounting Standards Board (“FASB”) ASC Topic 350, Intangibles— Goodwill and Other . This standard requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-lived assets to be held and used is measured by a comparison of the carrying amount of an asset to future estimated cash flows expected to arise as a direct result of the use and eventual disposition of the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less costs to sell. No impairment charges were recognized for the years ended December 31, 2021, 2020 or 2019. Fair Value ASC Topic 820, Fair Value Measurements and Disclosure s, defines fair value, establishes a framework for measuring fair value in accordance with accounting principles generally accepted in the United States, and expands disclosure requirements about fair value measurements. ASC Topic 820 defines three categories for the classification and measurement of assets and liabilities carried at fair value: Level 1: Quoted market prices in active markets for identical assets or liabilities. Level 2: Observable market-based inputs or observable inputs that are corroborated by market data. Level 3: Unobservable inputs reflecting the reporting entity’s own assumptions. The fair value of financial instruments is generally estimated through the use of public market prices, quotes from financial institutions and other available information. Judgment is required in interpreting data to develop estimates of market value and, accordingly, amounts are not necessarily indicative of the amounts that could be realized in a current market exchange. Short-term financial instruments, including cash, prepaid expenses and other current assets, accounts payable, and other liabilities, consist primarily of instruments without extended maturities, for which the fair value, based on management’s estimates, approximates their carrying values. Borrowings bear interest at what is estimated to be current market rates of interest, accordingly, carrying value approximates fair value. Equity-Based Compensation Unit-based Compensation Prior to the IPO and Reorganization, EBS Parent, LLC had outstanding Profit Interest Units (“PIUs”) under the Parent’s 2018 incentive unit plan. In conjunction with the IPO and Reorganization, all of the outstanding PIUs were settled. Share-based Compensation Subsequent to the IPO and Reorganization, the Company established the 2021 Equity Incentive Plan. Under the 2021 Equity Incentive Plan, 3,950,450 stock units were awarded to AirSculpt’s executive officers and directors and 728,880 stock units were awarded to employees on November 4, 2021 and November 10, 2021, respectively. These stock units were granted in the form of Restricted Stock Units (“RSUs”) and Performance Stock Units (“PSUs”). See “Note 6 - Equity-based Compensation” for further discussion of the Company’s share-base award structure. 71 AirSculpt Technologies, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) The Company recognizes share-based compensation expense for employees and non-employees based on the grant-date fair value of RSU and PSU awards over the applicable service period. For awards that vest based on continued service, share-based compensation cost is recognized on a straight-line basis over the requisite service period, which is generally the vesting period of the awards. For PSUs vesting based on the achievement of a specified performance condition, share-based compensation cost is recognized on a graded vesting basis over the requisite service period when it is probable the performance condition will be achieved. The performance conditions represent a combination of the Company’s actual financial performance and market based conditions. Once it is probable that the performance condition will be achieved, the Company recognizes unit-based compensation cost over the remaining requisite service period under a graded vesting model, with a cumulative adjustment for the portion of the service period that occurred for the period prior to the performance condition becoming probable of being achieved. The grant date fair value of RSUs and PSUs based on the Company’s financial performance, are based on the underlying value of the Company’s stock on the grant date. Determining the fair value of PSUs with market-based vesting conditions requires judgment. The Company uses a Monte Carlo simulation model to estimate the fair value of PSUs that have market-based vesting conditions. See “Note 6—Equity-Based Compensation” for further discussion. The determination of share-based compensation cost is inherently uncertain and subjective and involves the application of valuation models and assumptions requiring the use of judgment. If factors change and different assumptions are used, share-based compensation expense or results of operations could be significantly different. Advertising Costs Advertising costs are expensed in the period when the costs are incurred and are included as a component of selling, general and administrative costs. Advertising costs were approximately $ 14.8 million, $ 7.0 million and $ 7.2 million for the years ended December 31, 2021, 2020 and 2019, respectively. Income Taxes Prior to the Reorganization, EBS Intermediate was organized as a limited liability company and elected to be treated as a partnership for federal and state income tax purposes. Accordingly, the tax consequences of EBS Intermediate’s profits and losses were passed through to the members of EBS Intermediate and were reported in their respective income tax returns. Therefore, prior to the Reorganization no provision for income taxes was provided. As of October 28, 2021 and pursuant the Reorganization, the Company became a Corporation and is now subject to being taxed as a C corporation. Income taxes consist of U.S. federal, state and international taxes for jurisdictions in which we conduct business. Deferred income taxes arise from temporary differences between the financial statement carrying amount and the tax basis of assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. In evaluating our ability to recover our deferred tax assets within the jurisdiction from which they arise, we consider all available positive and negative evidence including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent results of operations. If based upon all available positive and negative evidence, it is more likely than not that the deferred tax assets will not be realized, a valuation allowance is established. The valuation allowance may be reversed in a subsequent reporting period if the Company determines that it is more likely than not that all or part of the deferred tax asset will become realizable. In accordance with ASC 740 , Income Taxes , the Company evaluated the technical merits of its income tax positions and has established income tax reserves for uncertain tax positions for the fiscal year ended December 31, 2021. See “Note 9 - Income Taxes” for further information. 72 AirSculpt Technologies, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Recently Issued Accounting Pronouncements In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (“Topic 606”) which outlines a single comprehensive model for recognizing revenue and supersedes most existing revenue recognition guidance. On January 1, 2019, the Company adopted the standard using the modified retrospective approach. Under the modified retrospective approach, the Company was required to recognize the cumulative effect of initially applying Topic 606 as an adjustment to the opening balance of member’s equity as of January 1, 2019, the date of initial application. The cumulative effect of initially applying Topic 606 had no impact on the consolidated financial statements. In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes Topic 840, Leases (“ASU 2016-02”). ASU 2016- 02 requires a lessee to recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. The Company adopted ASU 2016-02 effective January 1, 2019, using a modified retrospective transition approach. The most prominent of the changes resulting from ASU 2016-02 is the recognition of right-of-use assets and lease liabilities by lessees for those leases classified as operating leases. Upon adoption of ASU 2016-02 , the Company recorded $ 14.3 million of operating lease liabilities and $ 14.2 million in right-of-use assets on January 1, 2019. The cumulative effect of the accounting change recognized upon adoption had an immaterial impact to the consolidated balance sheets. 73 AirSculpt Technologies, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) NOTE 2— GOODWILL AND INTANGIBLES, NET On October 2, 2018, EBS Intermediate acquired a controlling interest in EBS Enterprises, LLC in exchange for total consideration of $ 151.0 million. The fair value of the net identifiable assets at transaction date was $ 69.3 million, comprised primarily of $ 17.7 million in intangible assets related to the AirSculpt and Elite trademarks and tradenames and $ 53.6 million in intangible assets related to the AirSculpt technology and know-how. The resulting excess consideration over fair value of identifiable net assets was recorded to goodwill in the amount of $ 81.7 million. The annual review of goodwill impairment was performed in October 2021 and 2020 using a qualitative analysis and the Company determined that a quantitative analysis was not required. There were no triggering events during the years ended December 31, 2021, 2020 or 2019. The Company had goodwill of $ 81.7 million at December 31, 2021 and 2020. Intangible assets consisted of the following at December 31, 2021 and 2020 (in 000’s): 2021 2020 Useful Life Technology and know-how $ 53,600 $ 53,600 15 years Trademarks and tradenames 17,700 17,700 15 years 71,300 71,300 Accumulated amortization of technology and know-how ( 11,613 ) ( 8,038 ) Accumulated amortization of tradenames and trademarks ( 3,835 ) ( 2,654 ) Total intangible assets, net $ 55,852 $ 60,608 Aggregate amortization expense on intangible assets was approximately $ 4.8 million for all of the years ended December 31, 2021, 2020 and 2019. The estimated aggregate amortization expense on intangible assets for each of the next five years and thereafter is estimated to be as follows (in 000’s): Year ending December 31, 2022 $ 4,753 2023 4,753 2024 4,753 2025 4,753 2026 4,753 Thereafter 32,087 Total $ 55,852 NOTE 3— PROPERTY AND EQUIPMENT, NET As of December 31, 2021 and 2020 property and equipment consists of the following: (in 000’s): 2021 2020 Medical equipment $ 3,753 $ 1,955 Office and computer equipment 207 137 Furniture and fixtures 1,976 741 Leasehold improvements 7,726 5,374 Construction in progress 2,873 — Less: Accumulated depreciation and amortization ( 2,908 ) ( 1,099 ) Property and equipment, net $ 13,627 $ 7,108 74 AirSculpt Technologies, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Depreciation expense was approximately $ 1.8 million, $ 0.9 million and $ 0.2 million for the years ended December 31, 2021, 2020 and 2019, respectively. NOTE 4— DEBT In October 2018, the Company entered into a credit agreement (the “Credit Agreement”) with a lender. Under the terms of the Credit Agreement, the Company obtained a $ 34 million term loan and a $ 5 million revolving credit facility. In May 2021, the Company amended the Credit Agreement by adding an incremental $ 52.0 million senior secured term loan. The proceeds from this loan plus excess cash on the balance sheet were used to pay a distribution to the Parent of approximately $ 59.7 million and the related fees for this transaction. Beginning on June 30, 2021, the quarterly principal payments increased from $ 100,000 to $ 212,500 . As a result of the amendment, the Company recognized a loss on debt modification of $ 682,000 in its consolidated statements of operations for the twelve months ended December 31, 2021. Under the Credit Agreement, the Company is obligated to make interest payments on the last day of each month. All outstanding loans bear interest based on either a base rate or LIBOR plus an applicable per annum margin of 4.5 % (base rate) or 5.5 % (LIBOR) if the Company’s total leverage is equal to or greater than 2.5 x and less than 4.25 x. If the Company’s total leverage ratio is equal to or greater than 4.25 x, the interest is based on either a base rate or LIBOR plus an applicable per annum margin of 5.0 % (base rate) or 6.0 % (LIBOR). If the Company’s total leverage ratio is below 2.5 x, the interest is based on either a base rate or LIBOR plus an applicable per annum margin of 4.0 % (base rate) or 5.0 % (LIBOR). At December 31, 2021, the applicable per annum margins under the Credit Agreement were 4.0 % (base rate) and 5.0 % (LIBOR). At December 31, 2021, the borrowings under the Credit Agreement bore interest at approximately 6.0 %. Additionally, the Company is required to pay an unused credit facility fee equal to 0.5 % per annum on the unused amount of the revolving line of credit. Total borrowings as of December 31, 2021 and 2020 were as follows (in 000’s): 2021 2020 Term loan $ 84,262 $ 33,100 Unamortized debt issuance costs ( 1,657 ) ( 581 ) Total debt, net 82,605 32,519 Less: Current portion ( 850 ) ( 400 ) Long-term debt, net $ 81,755 $ 32,119 As of December 31, 2021, the Company had $ 5.0 million available on the revolving credit facility. The scheduled future maturities of long-term debt as of December 31, 2021 is as follows (in 000’s): 2022 $ 850 2023 83,412 Total maturities $ 84,262 All borrowings under the Credit Agreement are cross collateralized by substantially all assets of the Company and are subject to certain restrictive covenants including quarterly total leverage ratio and fixed charge ratio requirements, a limit on capital expenditures and excess cash flow. The Company is in compliance with all covenants and has no letters of credit outstanding as of December 31, 2021. 75 NOTE 5— LEASES The Company’s operating leases are primarily for real estate, including suites in medical office buildings and corporate offices. The Company incurred rent expense of $ 3.3 million, $ 2.8 million and $ 1.5 million for its suites in medical office buildings for the years ended December 31, 2021, 2020 and 2019, respectively. The Company incurred rent expense of $ 92,000 , $ 143,000 and $ 78,000 related to the corporate offices for the years ended December 31, 2021, 2020 and 2019, respectively. Rent expense related to suites in medical office buildings is included in cost of services while rent expense for the corporate offices is included in selling, general and administrative on the consolidated statements of operations. The Company currently does not have any finance leases. Real estate lease agreements typically have initial terms of five to ten years and may include one or more options to renew. The useful life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise. The Company’s lease agreements do not contain any material residual value guarantees, restrictions or covenants. The following table presents the weighted-average lease terms and discount rates at December 31, 2021, 2020 and 2019: 2021 2020 2019 Weighted-average remaining lease term 4.9 years 5.0 years 4.8 years Weight average discount rate 4.6 % 4.6 % 4.1 % The following table presents supplemental cash flow information for the years ended December 31, 2021, 2020 and 2019 (in 000’s): 2021 2020 2019 Cash paid for amounts included in the measurement of lease liabilities: Operating cash outflows from operating leases $ 3,348 $ 2,540 $ 1,325 Right-of-use assets obtained in exchange for lease obligations: Operating leases $ 3,856 $ 6,447 $ 8,910 Future minimum rental payments under all non-cancellable operating lease agreements for the succeeding five years are as follows, excluding common area maintenance charges that may be required by the agreements (in 000’s): Year ending December 31, 2022 $ 3,858 2023 3,863 2024 3,741 2025 3,792 2026 3,390 Thereafter 3,903 Total lease payments 22,547 Less: imputed interest ( 4,569 ) Total lease obligations $ 17,978 NOTE 6— EQUITY-BASED COMPENSATION Subsequent to the IPO and Reorganization, the Company established the 2021 Equity Incentive Plan (the “2021 Plan”). Prior to the IPO and Reorganization, EBS Parent, LLC had outstanding PIUs under the Parent’s 2018 incentive unit plan. In conjunction with the IPO and Reorganization, all of the outstanding PIUs were settled. Profit Interest Awards Under the legacy Parent 2018 incentive unit plan, the Parent was authorized to issue approximately 14,000 PIUs (the “Class B units”) that represent non-voting interest in the Parent and that may only be issued in return for services provided to the Parent or its subsidiaries. Immediately prior to the Reorganization and IPO, Parent had approximately 12,000 PIUs outstanding that had been granted to employees and directors under the 2018 incentive unit plan. 76 AirSculpt Technologies, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) The Company recognizes unit-based compensation expense based on the grant-date fair value of Profit Interest Unit (“PIU”) awards over the applicable service period. Half of the PIUs had time-based vesting, and the remainder vest upon achievement of a specified return for the Parent's initial investors. Vesting of these PIUs is generally subject to continuing service over the vesting periods. For awards that vest based on continued service, unit-based compensation cost is recognized on a straight-line basis over the requisite service period, which is generally the vesting period of the awards. The vesting period is five years . For awards with performance vesting conditions, unit-based compensation cost is recognized on a graded vesting basis over the requisite service period when it is probable the performance condition will be achieved. Once it is probable that the performance condition will be achieved, the Company recognizes unit-based compensation cost over the remaining requisite service period under a graded vesting model, with a cumulative adjustment for the portion of the service period that occurred for the period prior to the performance condition becoming probable of being achieved. The grant date fair value of PIU awards that contain service or performance conditions was estimated using the Black-Scholes pricing model. In connection with the IPO and Reorganization, the PIUs outstanding under the Parent’s 2018 incentive unit plan were settled with either vested shares or restricted stock awards of AirSculpt. A summary of the Company’s profit interest unit activity for the years ended December 31, 2021 and 2020 follows: Unvested Units Weighted Average Grant Date Fair Value of Units Unvested at December 31, 2019 12,016 $ 278.99 Granted — Vested ( 1,167 ) 278.99 Unvested at December 31, 2020 10,849 $ 278.99 Settled ( 9,255 ) 278.99 Converted to share-based awards ( 1,594 ) 278.99 Unvested at December 31, 2021 — $ — The Company converted 1,594 units held by an officer into 578,051 restricted stock awards (“RSAs”) in connection with the Reorganization and IPO. These RSAs are subject to continuing service of the officer over the ratable vesting periods beginning six months from the date of grant to one year after the date of grant. The exchange of these PIUs for RSAs was recognized as a modification. The Company will recognize the share-based compensation, including the previously unrecognized compensation costs and any incremental fair value, over the new requisite service period of the modified award. There was no incremental fair value recognized in this transaction as the fair value of both the predecessor awards immediately before modification and the RSAs immediately after modification was the same. The fair value in both instances was based on the underlying price of AirSculpt shares on the date of modification. Share-based Awards Subsequent to the IPO and Reorganization, the Company established the 2021 Equity Incentive Plan. The Company may issue a maximum of 5,564,015 shares under the 2021 Equity Incentive Plan. This amount will automatically increase on January 1 of each year for a period of ten years starting on January 1, 2023, in an amount equal to the lesser of (i) four percent of the total Common Stock outstanding on December 31 of the preceding year and (ii) such smaller number of shares as determined by the Company’s Board. Under the 2021 Equity Incentive Plan, 3,950,450 stock units were awarded to AirSculpt’s executive officers and directors and 728,880 stock units were awarded to employees on November 4, 2021 and November 10, 2021, respectively. These stock units were granted in the form of RSUs and PSUs. During the year ended December 31, 2021, the Company granted 2,367,485 RSUs to certain officers, employees and non-employee directors in connection with the IPO and in accordance with the 2021 Plan. Vesting and payment of these RSUs are generally subject to continuing service of the employee or non-employee director over the ratable vesting periods beginning one year from the date of grant to one or three years after the date of grant. The fair values of these RSUs were 77 AirSculpt Technologies, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) determined based on the closing price of the Company’s common stock on the trading date immediately prior to the grant date. These RSUs are not considered outstanding until vested. During the year ended December 31, 2021, the Company granted 2,311,845 PSUs subject to the achievement of a combination of performance conditions. In addition to the achievement of the performance conditions, these PSUs are generally subject to the continuing service of the employee over the ratable vesting period from the earned date continuing through the settlement of the shares. For these PSUs, the shares settle in the first quarter of the year following the year in which the vesting criteria is met. The performance criteria is based on the Company’s actual performance and/or market condition results as compared to the targets. These PSUs are not considered outstanding until settled. Of the 2,311,845 total PSUs granted, 973,703 PSUs have a market-based vesting condition (“market-based PSUs”). The vesting is based on achievement of a specified 60 -day volume weighted average share price (“VWAP”) in relation to a specified base price in the award agreement. These awards are structured with one-third vesting at 120 % VWAP, one-third vesting at 145 % VWAP and the final one-third vesting at 175 % VWAP. Determining the fair value of the market-based PSU awards requires judgment. The Company uses a Monte Carlo simulation model to estimate the fair value of the market-based PSU awards. The assumptions used in this pricing model requires the input of subjective assumptions and are as follows: • Expected volatility—Expected volatility is based on historical volatilities of a publicly traded peer group based on daily price observations over a period equivalent to the expected term of the market-based PSU awards. • Expected term—The term is estimated in consideration of the time period expected to achieve the performance. • Risk-free interest rate—The risk-free interest rate is based on the U.S. Treasury yield of treasury bonds with a maturity that approximates the expected term of the market-based PSU awards. • Expected dividend yield—The dividend yield is based on the current expectations of dividend payouts. The Company does not anticipate paying any cash dividends in the foreseeable future. The following table sets forth the assumptions that were used to calculate the fair value of the market-based PSU awards granted on November 4, 2021. 2021 Expected volatility 66.0 % Expected term 3.17 Risk-free interest rate 0.84 % Expected dividend yield 0 % The fair values of the PSUs not subject to a market conditions were determined based on the closing price of the Company’s common stock on the trading date immediately prior to the grant date. Restricted and Performance Share-Based Activity A summary of the Company’s RSU and PSU activity for the years ended December 31, 2021 follows: Unvested Units Weighted Average Grant Date Fair Value of Units Outstanding at December 31, 2020 — $ — Granted 4,679,330 14.27 Forfeitures ( 5,564 ) 14.71 Outstanding at December 31, 2021 4,673,766 $ 14.27 78 AirSculpt Technologies, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Other information pertaining to equity-based compensation At December 31, 2021, unrecognized compensation cost related to unvested time-based shares was approximately $ 33.2 million. Unrecognized compensation cost will be expensed annually based on the number of shares that vest during the year. Further the Company has unrecognized compensation cost of $ 29.1 million related to the PSUs, which will be recognized on a graded vesting basis over the requisite service period when it is probable the performance condition will be achieved. The Company recorded equity-based compensation expense of $ 7.2 million, $ 0.3 million and $ 0.3 million for the years ended December 31, 2021, 2020 and 2019, respectively, in selling, general and administrative expenses on the consolidated statements of operations. Forfeitures are recognized as incurred. NOTE 7— EQUITY Prior to the Reorganization and IPO, the Parent had approximately 124,785 Class A units outstanding. The rights of all such units are governed by the amended and restated limited liability agreements of the Company and the Parent both dated October 2, 2018. The Company paid distributions to the Parent of approximately $ 66.9 million, $ 4.6 million and $ 0.3 million for the twelve months ended December 31, 2021, 2020 and 2019, respectively. In conjunction with the IPO and Reorganization, AirSculpt filed an Amended and Restated Certificate of Incorporation authorizing 450,000,000 shares of $ 0.001 par value common stock and 50,000,000 shares of $ 0.001 par value preferred stock. On October 28, 2021, AirSculpt completed an initial public offering of 8,050,000 shares of common stock at an initial public offering price of $ 11.00 per share. Of the 8,050,000 shares, AirSculpt offered 2,173,913 , while 5,876,087 shares were offered by AirSculpt stockholders. The 8,050,000 shares, includes 1,050,000 shares purchased from AirSculpt stockholders upon the full execution of the underwriter’s option to purchase additional shares. Pursuant to the Reorganization among entities under common control immediately prior to the IPO, AirSculpt became a holding company with its principal asset being 100% of the ownership interests in EBS Intermediate Parent LLC (the “Company”). Immediately following the IPO, AirSculpt's total outstanding shares were 55,640,154 . AirSculpt’s common stock began trading on the NASDAQ Exchange on October 29, 2021 under the symbol “AIRS”. 79 AirSculpt Technologies, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) NOTE 8— EARNINGS PER SHARE Basic earnings per share of common stock is computed by dividing net loss attributable to AirSculpt Technologies, Inc. for the period subsequent to the IPO by the weighted-average number of shares of common stock outstanding during the same period. Diluted earnings per share of common stock is computed by dividing net loss attributable to AirSculpt Technologies, Inc. for the period subsequent to the IPO by the weighted-average number of shares of common stock adjusted to give effect to potentially dilutive securities. Diluted loss per share for the period subsequent to the IPO is the same as basic loss per share as the inclusion of potentially dilutive shares would be antidilutive. Prior to the IPO, the EBS Intermediate Parent, LLC structure included only LLC common units issued and outstanding to pre-IPO LLC members. The Company analyzed the calculation of earnings per unit for periods prior to the IPO and determined that it resulted in values that would not be meaningful to the users of these consolidated financial statements. Therefore, earnings per share information has not been presented for periods prior to the IPO on October 28, 2021. Thus, the basic and diluted earnings (loss) per share represent only the period from October 28, 2021 to December 31, 2021. A reconciliation of the numerator and denominator used in the calculation of basic and diluted net loss per share of common stock is as follows (in 000’s except for shares and per share figures): Fiscal Year Ended December 31, 2021 Numerator: Net income $ 10,551 Less: Net income attributable to EBS Intermediate Parent, LLC prior to Reorganization 10,944 Net loss attributable to AirSculpt Technologies, Inc. ( 393 ) Denominator: Weighted average shares of common stock outstanding - basic (1) 55,640,154 Add: Effect of dilutive securities (1) — Weighted average shares of common stock outstanding - diluted (1) 55,640,154 Loss per share of common stock outstanding - basic and diluted $ ( 0.01 ) (1) Basic and diluted weighted average shares outstanding and loss per share represent only the period from October 28, 2021 to December 31, 2021. The following number of potentially dilutive shares were excluded from the calculation of diluted loss per share because the effect of including such potentially dilutive shares would have been antidilutive. Fiscal Year Ended December 31, 2021 Restricted stock units 2,364,703 Performance stock units 2,309,063 80 AirSculpt Technologies, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) NOTE 9— INCOME TAXES Prior to the Reorganization and IPO, EBS Intermediate was structured as a partnership and therefore, was subject to certain LLC entity-level taxes but generally not subject to U.S. federal and state income taxes. As part of the Reorganization Transactions described in Note 1, the Company created a C Corporation, and is now subject to U.S. federal and state taxes. Significant components of income tax expense (benefit) were as follows (in 000’s): Fiscal Year Ended December 31, 2021 Current U.S. Federal $ — State and Local 121 Total current income tax expense 121 Deferred U.S. Federal 243 State and Local ( 35 ) Total deferred income tax (benefit) expense 208 Total $ 329 A reconciliation of income taxes computed at the U.S. federal statutory income tax rate of 21% to the Company’s income tax (expense) benefit was as follows: Fiscal Year Ended December 31, 2021 At U.S. Federal statutory tax rate 21.0 % State income taxes 0.6 % Pass-through income ( 22.0 ) % Nondeductible Reorganization and IPO costs 0.6 % Valuation allowance and other nondeductible expenses 2.8 % Total 3.0 % The effective tax rate for the fiscal year ended December 31, 2021, was 3.0 %. The most significant items impacting the effective tax rate during fiscal year 2021 are due to the Reorganization and the items below. Pass-through income Prior to the Reorganization, EBS Intermediate Parent, LLC was the reporting entity, which is treated as a flow-through entity for federal income tax purposes. The income or losses generated were not taxed at the LLC level. As required by U.S. tax law, income or loss generated by the LLC flows through to various partners of the LLC. The tax impact of the pre-tax book income attributable to EBS Intermediate Parent, LLC prior to the execution of the reorganization and IPO was $( 2.4 ) million for the fiscal year ended December 31, 2021. 81 AirSculpt Technologies, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) The Company’s deferred tax assets (liabilities) consisted of the following (in 000’s): December 31, 2021 Deferred tax assets Accrued liabilities $ 278 Net operating loss 254 Operating lease liability 4,567 Equity-based compensation 964 Total deferred tax assets 6,063 Valuation allowance ( 246 ) Total deferred tax assets net of valuation allowance 5,817 Deferred tax liabilities Property, plant and equipment ( 2,555 ) Intangible assets ( 2,117 ) Right-of-use asset ( 4,613 ) Prepaid expenses and other current assets ( 883 ) Total deferred tax liabilities ( 10,168 ) Net deferred tax liabilities $ ( 4,351 ) As of December 31, 2021, the Company had US federal net operating loss carryforwards in the amount of $ 37.5 thousand. These carryforwards do not have an expiration date. As of December 31, 2021, we had foreign net operating loss carryforwards in the amount of $ 0.9 million. These carryforwards were generated by the Company’s Canadian based subsidiary and begin to expire in 2039. The Company recognizes deferred tax assets to the extent it believes these assets are more likely than not to be realized. Valuation allowances have been established with regard to the tax benefits of our foreign net operating losses. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent results of operations. After considering all of those factors, management recorded a $ 0.2 million valuation allowance for the deferred tax assets related to the foreign net operating losses which are not more likely than not to be realized as of December 31, 2021. Uncertain Tax Positions ASC 740 prescribes a recognition threshold of more-likely-than not to be sustained upon examination as it relates to the accounting for uncertainty in income tax benefits recognized in an enterprise’s financial statements. As of December 31, 2021, the Company had no unrecognized tax positions. The Company will begin filing income tax returns for the period ended December 31, 2021 in federal and in many state and local jurisdictions as well. However, no such income tax returns have been filed to date. 82 AirSculpt Technologies, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) NOTE 10— RELATED PARTY TRANSACTIONS EBS Intermediate entered into a professional services agreements, effective October 2, 2018, with Vesey Street Capital Partners, L.L.C., JCBI II, LLC, and Dr. Aaron Rollins (collectively the “Advisors”), where the Advisors provide certain managerial and advisory services to the Company. Each of the Advisors has an ownership interest in the Parent. Under the professional services agreements, EBS Intermediate agreed to pay the Advisors an aggregate annual fee of the greater of $ 500,000 or 2 % of consolidated earnings before interest, tax, depreciation and amortization, payable in advance quarterly installments, and the fee is allocated between the Advisors based on the outstanding Parent Class A Units held. Under the agreements, EBS Intermediate also reimbursed the Advisors for any out-of-pocket expenses incurred related to providing their services. During the years ended December 31, 2021, 2020 and 2019, the Company incurred management fees of approximately $ 1.6 million, $ 0.5 million and $ 0.5 million, respectively. Management fees for the year ended December 31, 2021 included a $ 1.0 million fee paid by the Company related to the termination of this management and advisory agreement in connection with the IPO and Reorganization. NOTE 11— COMMITMENTS AND CONTINGENCIES Professional Liability In the ordinary course of business, the Company becomes involved in pending and threatened legal actions and proceedings, most of which involve claims of medical malpractice related to medical services provided by the PAs employed and affiliated physicians. The Company may also become subject to other lawsuits which could involve large claims and significant costs. The Company believes, based upon a review of pending actions and proceedings, that the outcome of such legal actions and proceedings will not have a material adverse effect on its business, financial condition, results of operations, and cash flows. The outcome of such actions and proceedings, however, cannot be predicted with certainty and an unfavorable resolution of one or more of them could have a material adverse effect on the Company’s business, financial condition, results of operations, and cash flows. Although the Company currently maintains liability insurance coverage intended to cover professional liability and certain other claims, the Company cannot assure that its insurance coverage will be adequate to cover liabilities arising out of claims asserted against it in the future where the outcomes of such claims are unfavorable. Liabilities in excess of the Company’s insurance coverage, including coverage for professional liability and certain other claims, could have a material adverse effect on the Company’s business, financial condition, results of operations, and cash flows. NOTE 12— SEGMENT INFORMATION The Company has one reportable segment: direct medical procedure services. This segment is made up of facilities and medical staff that provide the Company’s patented AirSculpt ® procedures to patients. Segment information is presented in the same manner that the Company’s chief operating decision maker (“CODM”) reviews the operating results in assessing performance and allocating resources. The Company’s CODM is the Company’s chief executive and chief operating officers. This committee reviews financial information presented on a consolidated basis for purposes of making operating decisions, assessing financial performance and allocating resources. The Company’s CODM reviews revenue, gross profit and EBITDA. Gross profit is defined as revenues less cost of service incurred and EBITDA as net income excluding other income (net), interest expense, sponsor management fee, depreciation and amortization, unit-based compensation, pre-opening de novo costs and other non-ordinary course items. 83 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosures None.