Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read together with our financial statements and related notes and other financial information appearing elsewhere in this Annual Report on Form 10-K. This discussion and analysis contains forward-looking statements that involve risk, uncertainties and assumptions. See the section entitled “Cautionary Note Regarding Forward-Looking Statements” in this Annual Report on Form 10-K. Our actual results could differ materially from those anticipated in the forward-looking statements.
Unless otherwise indicated or the context otherwise requires, references in this Annual Report on Form 10-K to the “Company,” “AirSculpt,” “we,” “us” and “our” refer to AirSculpt Technologies, Inc. and its consolidated subsidiaries and the Professional Associations.
Key Factors Affecting Our Performance
Our results of operations and financial condition have been, and will continue to be, affected by a number of factors, including the following:
Our Ability to Attract New Patients
The decision to undergo an AirSculpt ® procedure is driven by patient demand, which may be influenced by a number of factors, such as:
• general consumer confidence, which may be impacted by economic and political conditions;
• individual levels of disposable income to pay for our procedures and the continued availability of financing for our patients;
• the cost, safety and efficacy of AirSculpt ® relative to other aesthetic products and alternative treatments;
• the increased market acceptance, availability and customer awareness of safer, more effective, easier to use and less expensive weight loss solutions, including weight loss drugs and other non-surgical weight loss and obesity solutions;
• the success of our sales and marketing programs;
• the perceived advantages or disadvantages of AirSculpt ® compared to other aesthetic products and treatments;
• the extent to which our AirSculpt ® procedure satisfies patient expectations;
• our ability to properly train our surgeons in performing AirSculpt ® procedures such that our patients do not experience excessive discomfort during treatment or adverse side effects; and
• consumer sentiment about the benefits and risks of aesthetic procedures generally and AirSculpt ® in particular.
Our Ability to Successfully Expand our Footprint
Our growth strategy depends, in large part, on growing and expanding our operations, both in existing and new geographic regions, particularly in densely populated and affluent metropolitan and suburban regions, and operating our new centers successfully.
Our ability to successfully open and operate new centers depends on many factors, including, among others, our ability to:
• recruit qualified surgeons for our new centers;
• address regulatory, competitive, marketing, and other challenges encountered in connection with expansion into new markets;
• hire, train and retain surgeons and other personnel;
• maintain adequate information system and other operational system capabilities;
• successfully integrate new centers into our existing management structure and operations, including information system integration;
• negotiate acceptable lease terms at suitable locations;
• source sufficient levels of medical supplies at acceptable costs;
• obtain and maintain necessary permits and licenses;
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• construct and open our centers on a timely basis;
• generate sufficient levels of cash or obtain financing on acceptable terms to support our expansion;
• achieve and maintain brand awareness in new and existing markets; and
• identify and satisfy the needs and preferences of our patients.
Our failure to effectively address challenges such as these could adversely affect our ability to successfully open and operate new centers in a timely and cost-effective manner.
In addition, there can be no assurance that newly-opened centers will achieve net sales or profitability levels comparable to those of our existing centers in the time periods estimated by us, or at all.
Key Operational and Business Metrics
In addition to the measures presented in our consolidated financial statements, we use the following key operational and business metrics to evaluate our business, measure our performance, develop financial forecasts and make strategic decisions:
Twelve months ended December 31, 2023, 2022 and 2021
• Cases performed were 14,932, 13,063 and 11,050 in 2023, 2022 and 2021, respectively;
• Revenue per case was $13,121, $12,922 and $12,065 in 2023, 2022 and 2021, respectively;
• Same-center information;
◦ Same-center revenue per case increased 1.5% and 6.4% in 2023 and 2022, respectively;
◦ Same-center volume changed (1.4)% and 2.7% in 2023 and 2022, respectively;
• Net income (loss) was $(4.5) million, $(14.7) million and $10.6 million in 2023, 2022 and 2021, respectively;
• Adjusted EBITDA* was $43.2 million, $38.9 million and $44.6 million in 2023, 2022 and 2021, respectively;
• Adjusted EBITDA Margin* was 22.1%, 23.0% and 33.4% in 2023, 2022 and 2021, respectively;
• Loss per share (1) was $(0.08), $(0.26) and $(0.01) for 2023, 2022 and 2021, respectively; and
• Adjusted Net Income per share (diluted)* was $0.28, $0.32 and $0.08 in 2023, 2022 and 2021, respectively.
* For a reconciliation of Adjusted EBITDA, Adjusted EBITDA margin, Adjusted Net Income and Adjusted Net Income per share, which are all non-GAAP measures, to the most directly comparable GAAP financial measures, information about why we consider them useful and a discussion of the material risks and limitations of these measures, please see “—Non-GAAP Financial Measures—Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Net Income and Adjusted Net Income per Share.”
(1) 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.
Cases Performed and Revenue per Case
Our case volumes in the table below, which are used for calculating revenue per case, represent one patient visit; notwithstanding that, a patient may have multiple areas treated during one visit. We believe this provides the best approach for assessing our revenue performance and trends.
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Total Case and Revenue Metrics
Twelve Months Ended
December 31,
2023 2022 2021
Cases 14,932 13,063 11,050
Case growth 14.3 % 18.2 % N/A
Revenue per case $ 13,121 $ 12,922 $ 12,065
Revenue per case growth 1.5 % 7.1 % N/A
Number of facilities 27 22 18
Number of total procedure rooms 57 47 32
Same-Center Case and Revenue Metrics
Same-Center Information
For the twelve months ended December 31, 2023 and 2022, we define same-center case and revenue growth as the growth in each of our cases and revenue at facilities that have been owned and operated for at least twelve months as of December 31, 2023. We define same-center facilities and procedure rooms as facilities and procedure rooms that have been owned or operated for at least twelve months as of December 31, 2023.
Twelve Months Ended
December 31,
2023 2022
Cases 12,859 13,041
Case growth (1.4) % N/A
Revenue per case $ 13,114 $ 12,923
Revenue per case growth 1.5 % N/A
Number of facilities 21 21
Number of total procedure rooms 45 45
For the years ended December 31, 2022 and 2021, we define same-center case and revenue growth as the growth in each of our cases and revenue at facilities that have been owned and operated for at least twelve months as of December 31, 2022. We define same-center facilities and procedure rooms as facilities and procedure rooms that have been owned or operated for at least twelve months as of December 31, 2022.
Twelve Months Ended
December 31,
2022 2021
Cases 11,352 11,050
Case growth 2.7 % N/A
Revenue per case $12,836 $12,065
Revenue per case growth 6.4 % N/A
Number of total facilities 18 18
Number of total procedure rooms 38 32
Non-GAAP Financial Measures—Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Net Income, and Adjusted Net Income per Share
We report our financial results in accordance with accounting principles generally accepted in the United States of America ("GAAP"), however, management believes the evaluation of our ongoing operating results may be enhanced by a presentation of Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Net Income and Adjusted Net Income per Share, which are non-GAAP financial measures.
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We define Adjusted EBITDA as net income/(loss) excluding depreciation and amortization, sponsor management fees, loss on debt modification, net interest expense, income tax expense/(benefit), restructuring and related severance costs, IPO related costs, (gain)/loss on disposal of long-lived assets, and equity-based compensation.
We define Adjusted Net Income as net income/(loss) excluding restructuring and related severance costs, IPO related costs, (gain)/loss on disposal of long-lived assets, loss on debt modification, equity-based compensation and the tax effect of these adjustments.
We include Adjusted EBITDA and Adjusted Net Income because they are important measures on which our management assesses and believes investors should assess our operating performance. We consider Adjusted EBITDA and Adjusted Net Income each to be an important measure because they help illustrate underlying trends in our business and our historical operating performance on a more consistent basis. Adjusted EBITDA has limitations as an analytical tool including: (i) Adjusted EBITDA does not include results from equity-based compensation and (ii) Adjusted EBITDA does not reflect interest expense on our debt or the cash requirements necessary to service interest or principal payments. Adjusted Net Income has limitations as an analytical tool because it does not include results from equity-based compensation.
We define Adjusted EBITDA Margin as Adjusted EBITDA as a percentage of revenue. We define Adjusted Net Income per Share as Adjusted Net Income divided by weighted average basic and diluted shares. We included Adjusted EBITDA Margin and Adjusted Net Income per Share because they are important measures on which our management assesses and believes investors should assess our operating performance. We consider Adjusted EBITDA Margin and Adjusted Net Income per Share to be important measures because they help illustrate underlying trends in our business and our historical operating performance on a more consistent basis.
The following table reconciles Adjusted EBITDA and Adjusted EBITDA Margin to net (loss)/income, the most directly comparable GAAP financial measure:
Twelve Months Ended
December 31,
($ in thousands) 2023 2022 2021
Net (loss)/income $ (4,479) $ (14,679) $ 10,551
Plus
Sponsor management fee — — 1,636
Equity-based compensation 18,224 29,457 7,185
Loss on debt modification — 932 682
IPO related costs — 731 11,837
Restructuring and related severance costs 5,488 4,111 850
Depreciation and amortization 10,253 8,061 6,597
(Gain)/loss on disposal of long-lived assets (212) 147 —
Interest expense, net 6,485 6,751 4,888
Income tax expense 7,477 3,383 329
Adjusted EBITDA $ 43,236 $ 38,894 $ 44,555
Adjusted EBITDA Margin 22.1 % 23.0 % 33.4 %
For the twelve months ended December 31, 2023, 2022, and 2021 pre-opening de novo and relocation costs were $3.3 million, $4.3 million, and $1.6 million, respectively.
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The following table reconciles Adjusted Net Income and Adjusted Net Income per Share to net loss, the most directly comparable GAAP financial measure:
Twelve Months Ended
December 31,
($ in thousands) 2023 2022 2021
Net (loss)/income $ (4,479) $ (14,679) $ (393)
Plus
Equity-based compensation 18,224 29,457 4,725
Loss on debt modification — 932 —
IPO related costs — 731 317
Restructuring and related severance costs 5,488 4,111 —
(Gain)/loss on disposal of long-lived assets (212) 147 —
Tax effect of adjustments (2,732) (2,195) (192)
Adjusted net income $ 16,289 $ 18,504 $ 4,457
Adjusted net income per share of common stock (1)(2)
Basic $ 0.29 $ 0.33 $ 0.08
Diluted $ 0.28 $ 0.32 $ 0.08
Weighted average shares outstanding
Basic 56,778,793 55,684,701 55,640,154
Diluted 57,611,469 57,918,005 58,329,428
(1) Diluted Adjusted Net Income Per Share is computed by dividing adjusted net income by the weighted-average number of shares of common stock outstanding adjusted for the dilutive effect of all potential shares of common stock.
(2) In 2021, 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 7).
Our Operating Structure
The Company owns and operates non-clinical assets and provides Management Services, through its wholly-owned subsidiaries, to our affiliated Professional Associations located across the United States under the MSAs. The 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. We do not practice medicine. The Professional Associations, which are all owned by licensed surgeons, are responsible for all clinical aspects of the medical operations that take place in each of our centers.
Our consolidated financial statements present the results of operations and financial position of the Company, its wholly-owned subsidiaries and each of the Professional Associations that we manage under the MSAs.
Even though we do not have voting control over the Professional Associations, we have a long-term and unilateral controlling financial interest over such Professional Associations’ assets and operations under the MSAs. As a result, GAAP require us to consolidate the results of the Professional Associations into our financial statements. All of our revenue is earned from services provided by the Professional Associations we manage. See “Critical Accounting Policies and Estimates—Principles of Consolidation.”
Components of Results of Operations
Revenue
Our revenue is generated from our patented AirSculpt ® procedures performed on our patients. We are 100% self-pay and do not accept payments from the U.S. federal government or payer organizations. We assist patients, as needed, by providing third-party financing options to pay for procedures. We have arrangements with various financing companies to facilitate this option. There is a financing transaction fee based on a set percentage of the amount financed. We recognize revenue based on the expected transaction price which is reduced for financing fees.
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Our policy is to require full payment for services in advance of performing a procedure. Payments received for which services have yet to been performed for all reported periods are included in deferred revenue and patient deposits on our balance sheets.
Cost of Service (excluding depreciation and amortization)
Cost of service is comprised of all service and product costs related to the delivery of procedures, including but not limited to compensation to our physicians and clinical staff, medical supply costs, and facility-related rent expense.
Operating Expense
Selling, General and Administrative
Selling, general and administrative consists of marketing and advertising expenses we incur to market our patented AirSculpt ® procedures to potential patients and general and administrative costs, including rent for our corporate offices.
Selling Expenses
Selling expenses consist of advertising costs for social, digital and traditional marketing and sales and marketing personnel. Our advertising costs include both national and site-based advertising used to generate greater awareness and engagement among our current and potential patients. Our advertising costs include social media, digital marketing and traditional advertising. Selling expenses include salaries and commissions for employees engaged in marketing and sales. We define our customer acquisition costs as the total selling expenses per case.
We generally expect our selling expenses to increase as we continue to grow our brand and expand our national footprint. We evaluate our selling expense as compared to growth in our sales volume and will invest accordingly to the extent we believe we can increase our growth without materially negatively impacting our Adjusted EBITDA Margins.
General and Administrative
General and administrative expenses include employee-related expenses, including salaries and related costs (excluding physician and clinical cost included in cost of service and the salaries and commissions of sales and marketing employees), equity-based compensation, technology, operations, finance, legal, corporate office rent and human resources. We expect our general and administrative expenses to increase over time due to the additional legal, accounting, insurance, investor relations and other costs that we will continue to incur as a public company. We also expect increases from other costs associated with continuing to grow our business. As we continue to expand the number of centers and procedures rooms, we anticipate general and administrative expenses to decrease as a percentage of revenue over time.
Interest Expense
Interest expense, net consists primarily of interest costs on our outstanding borrowings under our debt.
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Results of Operations
The following table and notes summarize certain results from the statements of operations for each of the periods indicated and the changes between periods. The table also shows the percentage relationship to revenue for the periods indicated:
Twelve Months Ended
December 31,
2023 2022 2021
($ in thousands) Amount % of
Revenue Amount % of
Revenue Amount % of
Revenue
Revenue $ 195,917 100.0 % $ 168,794 100.0 % $ 133,315 100.0 %
Operating expenses:
Cost of service 74,012 37.8 % 62,781 37.2 % 44,536 33.4 %
Selling, general and administrative 102,381 52.3 % 101,418 60.1 % 65,732 49.3 %
Loss on debt modification — — % 932 0.6 % 682 0.5 %
Depreciation and amortization 10,253 5.2 % 8,061 4.8 % 6,597 4.9 %
(Gain)/loss on disposal of long-lived assets (212) (0.1) % 147 0.1 % — — %
Total operating expenses 186,434 95.2 % 173,339 102.7 % 117,547 88.2 %
Income/(loss) from operations 9,483 4.8 % (4,545) (2.7) % 15,768 11.8 %
Interest expense, net 6,485 3.3 % 6,751 4.0 % 4,888 3.7 %
Pre-tax net income/(loss) 2,998 1.5 % (11,296) (6.7) % 10,880 8.2 %
Income tax expense 7,477 3.8 % 3,383 2.0 % 329 0.2 %
Net (loss)/income $ (4,479) (2.3) % $ (14,679) (8.7) % $ 10,551 7.9 %
Twelve Months Ended December 31, 2023 Compared to Twelve Months Ended December 31, 2022
Overview— Our financial results for the twelve months ended December 31, 2023 compared to the twelve months ended December 31, 2022 reflect the addition of five de novo centers which increased procedure rooms by 10.
Revenue— Our revenue increased $27.1 million, or 16.1%, compared to the same period in 2022. The increase is the result of adding five de novo centers which increased our footprint from 22 centers to 27 centers as of December 31, 2023.
Cost of Service— Our cost of service increased $11.2 million, or 17.9%, compared to the twelve months ended December 31, 2022. This increase is primarily attributable to opening five de novo centers since the 2022 period. Cost of service was 37.8% and 37.2% as a percentage of revenue for the twelve months ended December 31, 2023 and 2022, respectively.
Selling, General and Administrative Expenses— Selling, general and administrative expenses increased $1.0 million, or 0.9%, for the twelve months ended December 31, 2023 compared to the same period in 2022. This increase is related to additional expenses we incurred for marketing and corporate support as we grow our center count through de novo expansion and providing support for our centers, offset by a decrease in our equity-based compensation expense. We expect our marketing and corporate support costs to continue to increase as we open de novo centers and expand the support we provide to our centers. Selling, general and administrative expenses as a percent of revenue were 52.3% and 60.1% for the twelve months ended December 31, 2023 and 2022, respectively.
Selling expenses consist of advertising costs for social, digital and traditional marketing and sales and marketing personnel. Total selling expenses were approximately $36.8 million and $30.1 million for the twelve months ended December 31, 2023 and 2022, respectively. Our customer acquisition costs were approximately $2,465 and $2,300 per customer in the twelve months ended December 31, 2023 and 2022, respectively. We intend to continue investing in our sales and marketing capabilities as we add new centers and further increase our brand awareness, which will also drive further same-center growth. As a result, we expect these costs to increase on an absolute dollar basis. Additionally, selling expenses as a percentage of revenue may fluctuate from quarter to quarter based on the timing and scope of our initiatives and the related impact to our revenue.
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General and administrative expenses include employee-related expenses, including salaries and related costs (excluding physician and clinical cost included in cost of service), equity-based compensation, technology, operations, finance, legal, corporate office rent and human resources. General and administrative expense were approximately $65.6 million and $71.3 million for the twelve months ended December 31, 2023 and 2022, respectively. This reduction is due to a decrease in equity-based compensation. We expect to continue growing our corporate team to support the opening of new centers and growth at existing facilities.
Depreciation and Amortization— Depreciation and amortization increased to approximately $10.3 million for the twelve months ended December 31, 2023 compared to $8.1 million for the same period in 2022. This increase is the result of having five additional de novo centers during the twelve months ended December 31, 2023 as compared to the 2022 period.
(Gain)/loss on disposal of long-lived assets— For the twelve months ended December 31, 2023, we recognized a $212,000 gain related to the disposal of previous property, plant, and equipment as a result of relocation to expand certain centers.
Interest Expense, net— Interest expense decreased to $6.5 million from $6.8 million for the twelve months ended December 31, 2023 and 2022, respectively. The decrease is due to the lower principal balance resulting from the Company's voluntary $10 million prepayment made in 2023.
Income Tax Expense— Our effective tax rate is 249.4% and (29.9)% for the twelve months ended December 31, 2023 and 2022, respectively. The main driver of the difference between the effective and statutory rate is non-deductible executive compensation under Section 162(m) of the Internal Revenue Code.
Twelve Months Ended December 31, 2022 Compared to Twelve Months Ended December 31, 2021
Overview— Our financial results for the twelve months ended December 31, 2022 compared to the twelve months ended December 31, 2021 reflect the addition of four de novo centers.
Revenue— Our revenue increased $35.5 million, or 26.6%, compared to the same period in 2021. The increase is the result of adding four de novo centers which increased our footprint from 18 centers to 22 centers as of December 31, 2022. We have also experienced strong revenue per case growth over the prior year of 7.1%. This increase is primarily due to patients having more areas treated at one visit as compared to prior periods and we attribute this to our brand awareness focus and more specifically to AirSculpt TV, which allows prospective patients to see live procedures being performed.
Revenue also increased due to our same-center revenue, which increased to $135.4 million from $125.1 million for the twelve months ended December 31, 2022 compared to the same period in 2021. This increase at our existing centers relates to continued expansion of our social media and marketing capabilities to drive further brand awareness and increase consumer acceptance for our procedures.
Cost of Service— Our cost of service increased $18.2 million, or 41.0%, compared to the twelve months ended December 31, 2021. This increase is primarily attributable to opening four de novo centers since the 2021 period and an increase in our same center volumes and revenue. Cost of service was 37.2% and 33.4% as a percentage of revenue for the twelve months ended December 31, 2022 and 2021, respectively. This increase is primarily due to adding four de novo centers over the prior period. Cost of service as a percent of revenue is higher for a de novo center in the first year until the center reaches maturity, which can take up to two years. Cost of service was also impacted by clinical additions to our nursing teams. These investments will further enhance quality and safety for our patients and better prepare us for future growth in both existing centers and the new centers we are developing.
Selling, General and Administrative Expenses— Selling, general and administrative expenses increased $35.7 million, or 54.3%, for the twelve months ended December 31, 2022 compared to the same period in 2021. This increase is primarily related to the addition of public company costs of approximately $6.7 million and an increase in equity-based compensation of $22.3 million. This increase is also related to additional expenses we incurred for marketing and corporate support as we grow our center count through de novo expansion and providing support for our centers. We expect these costs to continue to increase as we continue to open de novo centers and expand the support we provide to our centers. Selling, general and administrative expenses as a percent of revenue were 60.1% and 49.3% for the twelve months ended December 31, 2022 and 2021, respectively. Normalizing the prior year for the increase in equity-based compensation and public company costs, selling, general and administrative expenses as a percent of revenue were 60.1% and 71.1% for the twelve months ended December 31, 2022 and 2021, respectively.
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Selling expenses consist of advertising costs for social, digital and traditional marketing and sales and marketing personnel. Total selling expenses were approximately $30.1 million and $21.0 million for the twelve months ended December 31, 2022 and 2021, respectively. Our customer acquisition costs were approximately $2,300 and $1,902 per customer in the twelve months ended December 31, 2022 and 2021, respectively. We intend to continue investing in our sales and marketing capabilities as we add new centers and further increase our brand awareness, which will also drive further same-center growth. As a result, we expect these costs to increase on an absolute dollar basis. Additionally, selling expenses as a percentage of revenue may fluctuate from quarter to quarter based on the timing and scope of our initiatives and the related impact to our revenue.
General and administrative expenses include employee-related expenses, including salaries and related costs (excluding physician and clinical cost included in cost of service), equity-based compensation, technology, operations, finance, legal, corporate office rent and human resources. General and administrative expense were approximately $71.3 million and $44.7 million for the twelve months ended December 31, 2022 and 2021, respectively. As previously mentioned, equity-based compensation and public company costs were the two main drivers for this increase. We expect our general and administrative expenses to increase over time in absolute dollars due to the additional legal, accounting, insurance, investor relations and other costs that we incur as a public company. We also expect to expand our corporate team to support the opening of new centers and growth at existing facilities.
Loss on debt modification— We recognized a $932,000 loss related to refinancing our existing credit agreement by entering a new agreement in November 2022.
Depreciation and Amortization— Depreciation and amortization increased to approximately $8.1 million for the twelve months ended December 31, 2022 compared to $6.6 million for the same period in 2021. This increase is the result of having four additional de novo centers during the twelve months ended December 31, 2022 as compared to the 2021 period.
Loss on disposal of long-lived assets— We recognized a $147,000 loss related to the disposal of previous leasehold improvements as a result of relocation to expand certain centers.
Interest Expense, net— Interest expense increased to $6.8 million from $4.9 million for the twelve months ended December 31, 2022 and 2021, respectively. The increase is primarily the result of adding an incremental $52.0 million of senior secured term loans in May 2021. Further, the variable component of interest on our debt has increased during 2022.
Income Tax Expense— As a result of the Reorganization, the Company became subject to taxation as a C corporation for periods after October 28, 2021. Our effective tax rate is (29.9)% for the twelve months ended December 31, 2022. The main drivers of the difference between the effective and statutory rates are due to the Reorganization and non-deductible officer compensation expense.
Liquidity and Capital Resources
We principally rely on cash flows from operations as our primary source of liquidity and, if needed, up to $5.0 million in revolving loans under our revolving credit facility. Our primary cash needs are for payroll, marketing and advertisements, rent, capital expenditures associated with de novo locations and new procedure room additions, as well as information technology and infrastructure, including our corporate office. We believe that the cash expected to be generated from operations and the availability of borrowings under the revolving credit facility will be sufficient for our working capital requirements, liquidity obligations, anticipated capital expenditures relating to the opening of de novo centers, and the addition of new procedure rooms to our existing locations, and payments due under our existing credit facilities for at least the next 12 months.
As of December 31, 2023, we had $10.3 million in cash and cash equivalents and an available amount of $5.0 million under our revolving credit facility. We do not have any letters of credit outstanding as of December 31, 2023.
As of December 31, 2022, we had $9.6 million in cash and cash equivalents and an available amount of $5.0 million under our revolving credit facility. We did not have any letters of credit outstanding as of December 31, 2022.
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The following table summarizes the net cash provided by (used for) operating activities, investing activities and financing activities for the periods indicated:
Twelve Months Ended
December 31,
($ in thousands) 2023 2022 2021
Cash Flows Provided By (Used For):
Operating activities $ 23,956 $ 24,447 $ 26,633
Investing activities (9,919) (12,921) (7,116)
Financing activities (13,391) (27,257) (4,549)
Net increase/(decrease) in cash and cash equivalents 646 (15,731) 14,968
Operating Activities
The primary source of our operating cash flow is the collection of patient payments received prior to performing surgical procedures. For the twelve months ended December 31, 2023, our operating cash flow decreased by $0.5 million compared to the same period in 2022. The decrease is related to having more restructuring and related severance costs and the timing of working capital payments primarily related to lease deposits on upcoming de novo projects. At December 31, 2023, we had working capital of $(4.4) million compared to $(5.6) million at December 31, 2022.
For the twelve months ended December 31, 2022, our operating cash flow decreased by $2.2 million compared to the same period in 2021. This decrease is primarily driven by $6.7 million of additional public company costs in the twelve months ended December 31, 2022, which did not exist in the prior year period. Further, we increased spending on our clinical infrastructure and brand awareness to support future growth. At December 31, 2022, we had working capital of $(5.6) million compared to $13.0 million at December 31, 2021. The decrease in working capital is primarily due to paying a special dividend of $23.2 million during the twelve months ended December 31, 2022.
Investing Activities
Net cash used in investing activities for the twelve months ended December 31, 2023 and 2022 was $9.9 million and $12.9 million, respectively. Investing activities during both periods were attributable to the expansion of multiple existing facilities and opening of de novo locations.
Net cash used in investing activities for the twelve months ended December 31, 2022 and 2021 was $12.9 million and $7.1 million, respectively. The increase in investing activities during the twelve months ended December 31, 2022 as compared to the twelve months ended December 31, 2021 was attributable to capital expenditures for adding four de novo centers, construction related to adding procedure rooms to five existing facilities, and investments in improving our medical equipment and technology.
Financing Activities
Net cash used in financing activities during the twelve months ended December 31, 2023 was $13.4 million. During the twelve months ended December 31, 2023, we made principal payments on our debt of $12.1 million, which included a voluntary prepayment of $10.0 million, paid cash dividends to shareholders of $0.4 million, and made payments of taxes withheld through vested equity-based compensation of $0.2 million.
Net cash used in financing activities for the twelve months ended December 31, 2022 was $27.3 million. For the twelve months ended December 31, 2022, we made distributions to our former member of $1.2 million, paid cash dividends to shareholders of $23.2 million, and made payments of taxes withheld through vested equity-based compensation of $2.0 million. Finally, we made principal payments on our debt of $84.3 million offset by borrowings of new debt of $83.5 million.
Net cash used in financing activities for the twelve months ended December 31, 2021 was $4.5 million. For the twelve months ended December 31, 2021, we made distributions to EBS Parent, LLC of $66.9 million, had borrowings under our credit agreement of $49.6 million and paid scheduled principal payments on our debt of $0.8 million. During the twelve months ended December 31, 2021, we received proceeds from our IPO of $13.5 million, net of issuance costs of $10.4 million.
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Material Cash Requirements
The following table summarizes our material cash requirements as of December 31, 2023:
Payments due by Period
($ in thousands) Total Less than 1 Year 1-3 Years 4-5 Years More than 5 Years
Debt – principal
$ 72,875 $ 2,125 $ 10,625 $ 60,125 $ —
Interest expense (1)
19,451 5,644 10,392 3,415 —
Operating lease agreements 38,328 6,329 12,734 10,364 8,901
Total $ 130,654 $ 14,098 $ 33,751 $ 73,904 $ 8,901
___________
(1) Amounts in the table reflect the contractually required interest payable pursuant to borrowings under our debt related to our Credit Agreement. Interest payments in the table above were calculated using an interest rate of 7.85% for the debt which was the interest rate applicable to the borrowing as of December 31, 2023.
Long-Term Debt
The carrying value of our total indebtedness was $71.6 million and $83.5 million, which includes unamortized deferred financing costs and issuance discount of $1.2 million and $1.5 million, as of December 31, 2023 and December 31, 2022, respectively.
On November 7, 2022, the Company entered into a credit agreement with a syndicate of lenders (the "Credit Agreement") maturing November 7, 2027. Pursuant to the Credit Agreement, there is (i) an $85.0 million aggregate principal amount of term loans and (ii) a revolving loan facility in an aggregate principal amount of up to $5.0 million. The proceeds were used, in part, to pay off the Company’s $83.6 million outstanding principal balance under its previous credit facility. On September 29, 2023, the Company voluntarily pre-paid $10.0 million of the principal of the term loans under the Credit Agreement using cash on hand.
Under the Credit Agreement, all outstanding loans bear interest based on either a base rate or SOFR plus an applicable per annum margin. The applicable per annum margin is 2.0% or 3.0% for base rate or SOFR, respectively, if the Company's total leverage ratio is equal to or greater than 2.0x. If the Company's total leverage ratio is equal to or greater than 1.0x and less than 2.0x, the applicable per annum margin is 1.5% or 2.5% for base rate or SOFR, respectively. If the Company's total leverage ratio is below 1.0x, the applicable per annum margin is 1.0% or 2.0% for base rate or SOFR, respectively. As of December 31, 2023, the interest rate was 7.85%.
JOBS Act Accounting Election
We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.
Subject to certain conditions set forth in the JOBS Act, if, as an “emerging growth company,” we choose to rely on such exemptions we may not be required to, among other things, (i) provide an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404, (ii) provide all of the compensation disclosure that may be required of non-emerging growth public companies under the Dodd-Frank Wall Street Reform and Consumer Protection Act, (iii) comply with any requirement that may be adopted by the PCAOB regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (auditor discussion and analysis), and (iv) disclose certain executive compensation related items such as the correlation between executive compensation and performance and comparisons of the CEO’s compensation to median employee compensation. These exemptions will apply for a period of five years following the completion of our IPO or until we are no longer an “emerging growth company,” whichever is earlier.
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Critical Accounting Policies and Estimates
Our management’s discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of our consolidated financial statements and related disclosures requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenue, costs and expenses and the disclosure of contingent assets and liabilities, if applicable, in our consolidated financial statements. We base our estimates on historical experience, known trends and events and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions. While our significant accounting policies are described in greater detail in Note 1— “Organization and Summary of Key Accounting Policies ,” to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our consolidated financial statements. In addition, refer to Note 1—“Organization and Summary of Key Accounting Policies, ” in our consolidated financial statements for a summary of recent and pending accounting standards.
Revenue Recognition
We have adopted ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”). Under ASC 606, revenue is recognized when a customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, we perform the following five steps:
i. Identify the contract(s) with a customer;
ii. Identify the performance obligations in the contract;
iii. Determine the transaction price;
iv. Allocate the transaction price to the performance obligations in the contract; and
v. Recognize revenue as the entity satisfies a performance obligation.
Our revenue consists primarily of revenue 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. Our performance obligations are delivery of specialty, minimally invasive liposuction services.
Revenue for services is recognized over time as the service is delivered, typically over a single day. Payment is typically rendered in advance of the service. Customer contracts generally do not include more than one performance obligation.
Our policy is to require payment for services in advance of performing any procedure. Payments received for which services have yet to been performed were $1.5 million as of December 31, 2023 and $2.4 million as of December 31, 2022, respectively and are included in deferred revenue and patient deposits on our balance sheets.
Variable Interest Entities
Some states have laws that prohibit business entities with non-physician owners from practicing medicine, which are generally referred to as the corporate practice of medicine. States that have corporate practice of medicine laws require only physicians to practice medicine, exercise control over medical decisions or engage in certain arrangements with other physicians, such as fee-splitting. Therefore, we mainly operate by maintaining MSAs with our affiliated Professional Associations, which are owned, directly or indirectly, and operated by a licensed surgeon, and which contract with individual surgeons to provide medical services. Under the MSAs, we provide and perform non-medical Management Services for which we are paid a management fee by each Professional Association. See “Business—Surgeon Practice Structure—Management Services Agreements.”
The surgeons contracted by the Professional Associations are exclusively in control of, and responsible for, all aspects of the practice of medicine. Each surgeon owner of a Professional Association (each a “Surgeon Owner,” and collectively, the “Surgeon Owners”) is also party to a continuity agreement (each, a “Continuity Agreement,” and collectively, the “Continuity Agreements”), which (i) prohibits the applicable surgeons from freely transferring or selling their interests in the Professional Associations, (ii) provides for the ability to add a second surgeon equity holder to help ensure continuity of the Professional Association, and (iii) provides for the automatic transfer of ownership upon the occurrence of certain
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events, save that, due to limitations under New York law, there is no Continuity Agreement in place with respect to the New York Professional Association. See “Business—Surgeon Practice Structure—Continuity Agreements.”
In accordance with relevant accounting guidance, each of these Professional Associations is determined to be a variable interest entity. AirSculpt has the ability, through the Management Services and (with the exception of New York) Continuity Agreements to direct the activities (excluding clinical decisions) that most significantly affect the Professional Associations’ economic performance. Accordingly, we are the primary beneficiary of the Professional Associations, and, in accordance with GAAP, we consolidate the Professional Associations into our financial statements. All management fee revenue and related expenses are eliminated in consolidation, and all of the revenue reflected in our financial statements is revenue from services provided by the affiliated Professional Associations to patients.
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 but is evaluated annually for impairment or sooner if factors occur that would trigger an impairment review. Our judgments regarding the existence of impairment indicators are based on market conditions and operational performance.
Definite-lived, amortizing intangible assets primarily consist of trademarks and tradenames, patents and other intellectual property. We amortize 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 our 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, we determine 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 we were to believe our fair value was more likely lower than our carrying value, then we are required to perform a quantitative analysis.
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. We review goodwill for impairment annually in the month of October.
We performed our annual review of goodwill impairment in October 2023 and 2022 using a qualitative analysis and determined that a quantitative analysis was not required. There were no triggering events during the twelve months ended December 31, 2023 and 2022.
Equity-Based Compensation
We recognize equity-based compensation expense for employees and non-employees based on the grant-date fair value of awards over the applicable service period. See “Note 6 - Stockholders' Equity and Equity-based Compensation” for further discussion of the awards outstanding. The grant date fair value of awards that contain market-based conditions are estimated using a Monte Carlo simulation model.
Determining the fair value of market-based awards requires judgment. The assumptions used in a Monte Carlo simulation 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 market condition.
• 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.
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• 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.
See “Note 6 - Stockholders' Equity and Equity-based Compensation” for further discussion on the valuation of these awards.