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 ) 64 Consolidated Balance Sheets 65 Consolidated Statements of Operations 66 Consolidated Statements of Other Compre h ensiv e ( Loss)/Income 67 Consolidated Statements of Changes in Member’s/Stockholders’ Equity 68 Consolidated Statements of Cash Flows 69 Notes to Consolidated Financial Statements 71 63 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, 2023 and 2022, the related consolidated statements of operations, other comprehensive (loss)/income, changes in member’s / stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2023, 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, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, 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 February 27, 2024 64 Table of Contents AirSculpt Technologies, Inc. and Subsidiaries Consolidated Balance Sheets December 31, 2023 and 2022 ($000s, except for shares) December 31, 2023 December 31, 2022 Assets Current assets Cash and cash equivalents $ 10,262 $ 9,616 Taxes receivable 1,941 2,831 Prepaid expenses and other current assets 3,758 4,229 Total current assets 15,961 16,676 Property and equipment, net 28,908 24,206 Other long-term assets 5,657 3,280 Right of use operating lease assets 25,413 23,764 Intangible assets, net 46,346 51,099 Goodwill 81,734 81,734 Total assets $ 204,019 $ 200,759 Liabilities and Stockholders' Equity Current liabilities Accounts payable $ 3,922 $ 3,844 Accrued payroll and benefits 4,127 2,991 Current portion of long-term debt 2,125 2,125 Deferred revenue and patient deposits 1,463 2,358 Accrued and other current liabilities 3,303 6,644 Current operating lease liabilities 5,375 4,356 Total current liabilities 20,315 22,318 Long-term debt, net 69,503 81,420 Deferred tax liability, net 6,828 5,485 Long-term operating lease liabilities 22,665 19,745 Other long-term liabilities 716 1,025 Total liabilities 120,027 129,993 Commitments and contingent liabilities (Note 9) Stockholders' equity Common stock, $ 0.001 par value; shares authorized - 450,000,000 ; shares issued and outstanding - 57,355,676 and 56,181,689 , respectively 57 56 Additional paid-in capital 103,898 85,858 Accumulated other comprehensive loss ( 412 ) ( 76 ) Accumulated deficit ( 19,551 ) ( 15,072 ) Total stockholders' equity 83,992 70,766 Total liabilities and stockholders' equity $ 204,019 $ 200,759 The accompanying notes are an integral part of these consolidated financial statements. 65 Table of Contents AirSculpt Technologies, Inc. and Subsidiaries Consolidated Statements of Operations For the years ended December 31, 2023, 2022 and 2021 Twelve Months Ended December 31, (in $000s, except for shares and per share figures) 2023 2022 2021 Revenue $ 195,917 $ 168,794 $ 133,315 Operating expenses: Cost of service (exclusive of depreciation and amortization) 74,012 62,781 44,536 Selling, general and administrative 102,381 101,418 65,732 Loss on debt modification — 932 682 Depreciation and amortization 10,253 8,061 6,597 (Gain)/loss on disposal of long-lived assets ( 212 ) 147 — Total operating expenses 186,434 173,339 117,547 Income/(loss) from operations 9,483 ( 4,545 ) 15,768 Interest expense, net 6,485 6,751 4,888 Pre-tax net (loss)/income 2,998 ( 11,296 ) 10,880 Income tax expense 7,477 3,383 329 Net (loss)/income $ ( 4,479 ) $ ( 14,679 ) $ 10,551 Loss per share of common stock Basic $ ( 0.08 ) $ ( 0.26 ) $ ( 0.01 ) Diluted $ ( 0.08 ) $ ( 0.26 ) $ ( 0.01 ) Weighted average shares outstanding Basic 56,778,793 55,684,701 55,640,154 Diluted 56,778,793 55,684,701 55,640,154 The accompanying notes are an integral part of these consolidated financial statements. 66 Table of Contents AirSculpt Technologies, Inc. and Subsidiaries Consolidated Statements of Other Comprehensive (Loss)/Income For the years ended December 31, 2023, 2022 and 2021 Twelve Months Ended December 31, ($000s) 2023 2022 2021 Net (loss)/income $ ( 4,479 ) $ ( 14,679 ) $ 10,551 Other comprehensive (loss)/income: Change in foreign currency translation adjustment ( 336 ) ( 76 ) — Total other comprehensive (loss)/income ( 336 ) ( 76 ) — Comprehensive loss/(income) $ ( 4,815 ) $ ( 14,755 ) $ 10,551 The accompanying notes are an integral part of these consolidated financial statements. 67 Table of Contents AirSculpt Technologies, Inc. and Subsidiaries Consolidated Statements of Changes in Member's/Stockholders' Equity For the years ended December 31, 2023, 2022 and 2021 Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Loss ($000s, except for share data) Member’s Equity Shares Amount Accumulated Deficit Total 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 Equity-based compensation — — — 4,725 — — 4,725 Net loss — — — — — ( 393 ) ( 393 ) Balance at December 31, 2021 — 55,640,154 56 83,865 — ( 393 ) 83,528 Issuance of common stock through unit vesting — 541,535 — — — — — Distributions — — — ( 732 ) — — ( 732 ) Dividends — — — ( 24,701 ) — — ( 24,701 ) Equity-based compensation — — — 29,457 — — 29,457 Payment of taxes withheld through vested equity-based compensation — — — ( 2,031 ) — — ( 2,031 ) Net loss — — — — — ( 14,679 ) ( 14,679 ) Other comprehensive loss — — — — ( 76 ) — ( 76 ) Balance at December 31, 2022 — 56,181,689 56 85,858 ( 76 ) ( 15,072 ) 70,766 Issuance of common stock through unit vesting — 1,173,987 1 — — — 1 Distributions — — — ( 79 ) — — ( 79 ) Dividends — — — 129 — — 129 Equity-based compensation — — — 18,224 — — 18,224 Payment of taxes withheld through vested equity-based compensation — — — ( 234 ) — — ( 234 ) Net loss — — — — — ( 4,479 ) ( 4,479 ) Other comprehensive loss — — — — ( 336 ) — ( 336 ) Balance at December 31, 2023 $ — 57,355,676 $ 57 $ 103,898 $ ( 412 ) $ ( 19,551 ) $ 83,992 The accompanying notes are an integral part of these consolidated financial statements. 68 Table of Contents AirSculpt Technologies, Inc. and Subsidiaries Consolidated Statements of Cash Flows For the years ended December 31, 2023, 2022 and 2021 Twelve Months Ended December 31, ($000s) 2023 2022 2021 Cash flows from operating activities Net (loss)/income $ ( 4,479 ) $ ( 14,679 ) $ 10,551 Adjustments to reconcile net (loss)/income to net cash provided by operating activities: Depreciation and amortization 10,253 8,061 6,597 Equity-based compensation 18,224 29,457 7,185 Non-cash interest expense; amortization of debt costs 207 921 639 Loss on debt modification — 932 682 Deferred income taxes 1,342 1,134 208 (Gain)/loss on disposal of long-lived assets ( 212 ) 147 — Changes in assets and liabilities Taxes receivable 890 ( 2,831 ) — Prepaid expense and other current assets 466 ( 5 ) ( 3,845 ) Other assets ( 3,814 ) ( 7,274 ) ( 1,305 ) Accounts payable ( 206 ) 865 1,576 Deferred revenue and patient deposits ( 896 ) ( 452 ) ( 423 ) Accrued and other liabilities 2,181 8,171 4,768 Net cash provided by operating activities 23,956 24,447 26,633 Cash flows from investing activities Purchases of property and equipment, net ( 9,919 ) ( 12,921 ) ( 7,116 ) Net cash used in investing activities ( 9,919 ) ( 12,921 ) ( 7,116 ) Cash flows from financing activities Payment on term loan ( 12,125 ) ( 84,263 ) ( 838 ) Borrowings on term loan, net — 83,503 49,603 Proceeds from IPO — — 13,542 Distribution to member ( 79 ) ( 1,159 ) ( 66,856 ) Dividends paid to shareholders ( 385 ) ( 23,160 ) — Payment of taxes withheld through vested equity-based compensation ( 233 ) ( 2,031 ) — Other financing activity ( 569 ) ( 147 ) — Net cash used in financing activities ( 13,391 ) ( 27,257 ) ( 4,549 ) Net decrease in cash and cash equivalents 646 ( 15,731 ) 14,968 Cash and cash equivalents Beginning of period 9,616 25,347 10,379 End of period $ 10,262 $ 9,616 $ 25,347 Supplemental disclosure of cash flow information: Cash paid for interest $ 6,277 $ 5,830 $ 4,255 Cash paid for taxes $ 4,663 $ 4,932 $ — Supplemental disclosure of non-cash investing information: Property and equipment included in accounts payable and accrued expenses $ 283 $ 1,113 $ 255 Distributions to member included in accrued expenses $ — $ — $ 427 69 Table of Contents The accompanying notes are an integral part of these consolidated financial statements. 70 Table of Contents 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. 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. The Company's revenues are concentrated in the specialty, minimally invasive liposuction market. The operations of the Company prior to the IPO represent 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. The Company, through its wholly-owned subsidiaries, is a provider of practice management services to professional associations (“PAs”) located throughout the United States, Canada, and the United Kingdom. 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. Pursuant to the MSA, the PA is responsible for all clinical aspects of the medical operations of the practice. Principles of Consolidation These consolidated financial statements present the financial position and results of operations of the Company, its wholly-owned domestic and international subsidiaries, and its variable interest in the managed PAs in the United States ("Domestic PAs"), which are under the control of the Company and are considered variable interest entities in which the Company is the primary beneficiary. All intercompany accounts and transactions have been eliminated in consolidation. Variable Interest Entities The Company has a variable interest in the Domestic PAs where it has a long-term and unilateral controlling financial interest over their assets and operations. The Company has the ability to direct the activities that most significantly affect the Domestic 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 Domestic PAs. Certain key features of the MSAs and related agreements enable the Company to assign the member interests of certain of the Domestic 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 Domestic PAs. The Company consolidates the Domestic PAs into the financial statements. All of the Company’s revenue is earned from services provided by the Domestic PAs and its wholly-owned foreign subsidiaries in the United Kingdom and Canada. The only assets and liabilities held by the Domestic 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. 71 Table of Contents 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 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. 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 are not contingent upon any criteria. 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, 2023 and December 31, 2022 are included in deferred revenue and patient deposits. All of the deferred revenue and patient deposits as of December 31, 2022 were recognized in revenue during the twelve months ended December 31, 2023. For the years ended December 31, 2023, 2022 and 2021, revenue from international locations was $ 5.2 million, $ 0.3 million and $ — million , respectively. 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. Deferred Financing Costs, Net Loan costs and discounts 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 $ 0.2 million, $ 0.9 million, and $ 0.6 million for the twelve months ended December 31, 2023, 2022 and 2021, respectively. Amortization of loan costs and discounts 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. As of December 31, 2023, the Company has $ 1.7 m recorded in other long-term assets related to a software as a service hosting arrangement that has not yet been implemented. Leases 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 or 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 72 Table of Contents 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 but 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. 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”) Accounting Standards Codification (“ASC”) Topic 350, Intangibles – Goodwill and Other and Topic 360, Impairment or Disposal of Long-Lived Assets . These standards require 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 twelve months ended December 31, 2023, 2022 and 2021. 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 73 Table of Contents 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. Earnings Per Share Basic earnings per share of common stock is computed by dividing net income/(loss) attributable to AirSculpt Technologies, Inc. for the twelve months ended December 31, 2023, 2022 and 2021 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 income/(loss) attributable to AirSculpt Technologies, Inc. for the twelve months ended December 31, 2023, 2022 and 2021 by the weighted-average number of shares of common stock adjusted to give effect to potentially dilutive securities. Where the inclusion of potentially dilutive shares would be antidilutive, diluted loss per share equals basic loss per share. Prior to the IPO, the EBS Intermediate Parent, LLC structure included only LLC common units. As a result, the Company does not believe earnings per share to be a meaningful presentation in the accompanying consolidated financial statements for the periods of 2021 prior to the IPO. 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. 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 expenses. Advertising expenses were approximately $ 25.9 million, $ 20.6 million and $ 14.8 million for the twelve months ended December 31, 2023, 2022 and 2021, respectively. Income Taxes Prior to the Reorganization, the Company was organized as a limited liability company and had elected to be treated as a partnership for federal and state income tax purposes. Accordingly, the tax consequences of the Company’s profits and losses were passed through to the members of the Company and were reported in their respective income tax returns. Therefore, historically no provision for income taxes has been provided in the accompanying consolidated financial statements for the periods prior to the Reorganization. As a result of the Reorganization, the Company became subject to taxation as a C corporation for periods after October 28, 2021. The Company applies the provisions of ASC 740-10, Accounting for Uncertain Tax Positions (“ASC 740-10”). Under these provisions, companies must determine and assess all material positions existing as of the reporting date, including all significant uncertain positions, for all tax years that are open to assessment or challenge under tax statutes. Additionally, those positions that have only timing consequences are analyzed and separated based on ASC 740-10’s recognition and measurement model. ASC 740-10 provides guidance related to uncertain tax positions for pass-through entities and tax-exempt not-for profit entities. ASC 740-10 also modifies disclosure requirements related to uncertain tax positions for nonpublic entities and provides that all entities are subject to ASC 740-10 even if the only tax position in question is the entity’s status as a pass-through. As required by the uncertain tax position guidance, the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an 74 Table of Contents audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the condensed consolidated financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. The Company applied the uncertain tax position guidance to all tax positions for which the statute of limitations remained open and determined that there are no uncertain tax positions as of December 31, 2023 or December 31, 2022. The Company is not subject to U.S. federal tax examination prior to 2021, when it was formed. The Company has effective tax rates of approximately 249.4 %, ( 29.9 )% and 3.0 % for the twelve months ended December 31, 2023, 2022 and 2021, respectively, inclusive of all applicable U.S. federal and state income taxes. Prior to the Reorganization, the Company was not subject to federal taxation. 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 2023 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, 2023, 2022 and 2021. The Company had goodwill of $ 81.7 million at December 31, 2023 and December 31, 2022. Intangible assets consisted of the following at December 31, 2023 and December 31, 2022 (in 000’s): December 31, 2023 December 31, 2022 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 ( 18,759 ) ( 15,186 ) Accumulated amortization of tradenames and trademarks ( 6,195 ) ( 5,015 ) Total intangible assets $ 46,346 $ 51,099 Aggregate amortization expense on intangible assets was approximately $ 4.8 million for each of the years ended December 31, 2023, 2022, and 2021. 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, 2024 $ 4,753 2025 4,753 2026 4,753 2027 4,753 2028 4,753 Thereafter 22,581 Total $ 46,346 75 Table of Contents NOTE 3 – PROPERTY AND EQUIPMENT, NET As of December 31, 2023 and December 31, 2022 property and equipment consists of the following: (in 000’s): December 31, 2023 December 31, 2022 Medical equipment $ 11,576 $ 8,906 Office and computer equipment 860 551 Furniture and fixtures 4,280 3,457 Leasehold improvements 21,982 14,614 Construction in progress 1,910 2,854 Less: Accumulated depreciation ( 11,700 ) ( 6,176 ) Property and equipment, net $ 28,908 $ 24,206 Depreciation expense was approximately $ 5.5 million, $ 3.3 million, and $ 1.8 million for the years ended December 31, 2023, 2022, and 2021 respectively. NOTE 4 – DEBT 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 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 2.0 x. If the Company's total leverage ratio is equal to or greater than 1.0 x and less than 2.0 x, 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 1.0 x, 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 %. Total borrowings as of December 31, 2023 and December 31, 2022 were as follows (in 000’s): December 31, 2023 December 31, 2022 Term loan $ 72,875 $ 85,000 Unamortized debt discounts and issuance costs ( 1,247 ) ( 1,455 ) Total debt, net 71,628 83,545 Less: Current portion ( 2,125 ) ( 2,125 ) Long-term debt, net $ 69,503 $ 81,420 As of December 31, 2023 and December 31, 2022, the Company had $ 5.0 million available on the revolving credit facility. The scheduled future maturities of long-term debt as of December 31, 2023 is as follows (in 000’s): Year ending December 31, 2024 $ 2,125 2025 4,250 2026 6,375 2027 60,125 Total maturities $ 72,875 76 Table of Contents 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. The Company is in compliance with all covenants and has no letter of credit outstanding as of December 31, 2023 and December 31, 2022. NOTE 5 – LEASES The Company’s operating leases are primarily for real estate, including medical office suites and corporate offices. For the twelve months ended December 31, 2023, 2022, and 2021, the Company incurred rent expense of $ 5.9 million, $ 4.5 million, and $ 3.3 million, respectively, related to its medical office suites. The Company’s rent expense related to its medical office suites is classified in cost of services within the Company’s consolidated statements of operations. The Company incurred rent expense of $ 364,000 , $ 323,000 , and $ 92,000 for the twelve months ended December 31, 2023, 2022, and 2021, respectively, related to the corporate offices which is classified in selling, general and administrative expenses. 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, 2023, 2022, and 2021: December 31, 2023 December 31, 2022 December 31, 2021 Weighted-average remaining lease term 4.7 years 4.5 years 4.9 years Weight average discount rate 6.4 % 5.1 % 4.6 % The following table presents supplemental cash flow information for the twelve months ended December 31, 2023 and 2022 (in 000’s): December 31, 2023 December 31, 2022 Cash paid for amounts included in the measurement of lease liabilities: Operating cash outflows from operating leases $ 5,240 $ 5,068 Right-of-use assets obtained in exchange for lease obligations: Operating leases $ 9,934 $ 10,913 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, 2024 $ 6,329 2025 6,506 2026 6,228 2027 5,631 2028 4,733 Thereafter 8,901 Total lease payments 38,328 Less: imputed interest ( 10,283 ) Total lease obligations $ 28,045 77 Table of Contents NOTE 6 – STOCKHOLDERS' EQUITY AND EQUITY-BASED COMPENSATION Subsequent to the IPO and Reorganization, AirSculpt 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 twelve months ended December 31, 2023 and 2022, the Company granted 767,261 and 216,421 RSUs, respectively, to certain officers, employees and non-employee directors 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 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 twelve months ended December 31, 2023 and 2022, the Company granted 50,000 and 38,775 PSUs, respectively, 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 condition results as compared to the targets. These PSUs are not considered outstanding until settled. During the twelve months ended December 31, 2021, the Company granted 973,703 PSUs subject to the achievement of certain market-based conditions. 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. During the twelve months ended December 31, 2023 and 2022, the Company granted 624,846 and 103,936 PSUs, respectively, subject to the achievement of market-based conditions ("market-based PSUs"). The vesting is based on achievement of a total shareholder return relative to a specified peer group (“rTSR”). Based on the rTSR, the awards can settle in shares in a range from 0 % to 200 %. 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 during the twelve months ended December 31, 2023, 2022 and 2021. 2023 2022 2021 Expected volatility 89.9 % 82.4 % 66.0 % Expected term 2.83 2.85 3.17 Risk-free interest rate 3.83 % 1.72 % 0.84 % Expected dividend yield 0 % 0 % 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. 78 Table of Contents Restricted and Performance Equity-Based Activity A summary of the Company’s RSU and PSU activity for the twelve months ended December 31, 2023 and 2022 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 Granted 359,132 15.10 Forfeitures ( 503,693 ) 14.13 Vestings ( 1,002,571 ) 14.76 Outstanding at December 31, 2022 3,526,634 14.23 Granted 1,442,107 6.60 Forfeitures ( 30,605 ) 10.83 Vestings ( 1,025,234 ) 13.93 Outstanding at December 31, 2023 3,912,902 $ 11.50 Other information pertaining to equity-based compensation On December 30, 2022, Ronald Zelhof, the Chief Operating Officer, entered into a Separation and General Release Agreement (“Separation Agreement”) with the Company. In connection with confirming that certain restrictive covenants remain in effect, Mr. Zelhof was entitled to remain eligible to earn PSUs through March 31, 2024 and a partial accelerated vesting for 176,388 RSUs. In connection with the Separation Agreement, the Company recognized an additional $ 2.1 million in stock compensation during the twelve months ended December 31, 2022. The Company recorded equity-based compensation expense of $ 18.2 million, $ 29.5 million, and $ 7.2 million for the twelve months ended December 31, 2023, 2022, and 2021, respectively, in selling, general and administrative expenses on the consolidated statements of operations. Forfeitures are recognized as incurred. During the twelve months ended December 31, 2023, the Company had actual vestings with fair market value of $ 12.9 million and $ 0.8 million related to employees and directors, respectively. Unrecognized compensation cost related to unvested time-based shares was approximately $ 10.4 million as of December 31, 2023. Unrecognized compensation cost will be expensed annually based on the number of shares that vest during the year. As of December 31, 2023, the weighted average remaining vesting term on the unvested time-based shares was 0.95 years. Further, the Company has unrecognized compensation cost of $ 10.6 million related to the PSUs as of December 31, 2023, which will be recognized on a graded vesting basis over the requisite service period when it is probable the performance condition will be achieved. As of December 31, 2023, the weighted average remaining vesting term on the unvested PSUs was 1.55 years. On August 10, 2022, the board of directors of the Company approved a $ 0.41 per share special cash dividend. The dividend was paid on September 14, 2022, to shareholders of record at the close of business on August 26, 2022. Cash dividends paid totaled $ 0.4 million for the twelve months ended December 31, 2023. The Company's unvested stock units participate in dividends and as such, the Company had $ 1.0 million in dividends payable as of December 31, 2023, of which $ 0.3 million is current. The Company recognized distributions to EBS Parent, LLC (the "Parent") of approximately $ 0.1 million, $ 1.2 million, and $ 66.9 million for the twelve months ended December 31, 2023, 2022, and 2021, respectively. NOTE 7 – EARNINGS PER SHARE Basic earnings per share of common stock is computed by dividing net income/loss attributable to AirSculpt Technologies, Inc. for the twelve months ended December 31, 2023 and 2022 by the weighted-average number of shares of common 79 Table of Contents stock outstanding during the same period. Diluted earnings per share of common stock is computed by dividing net income/loss attributable to AirSculpt Technologies, Inc. for the twelve months ended December 31, 2023 and 2022 by the weighted-average number of shares of common stock adjusted to give effect to potentially dilutive securities. Where the inclusion of potentially dilutive shares would be antidilutive, diluted loss per share equals basic loss per share. 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, 2023 2022 2021 Numerator: Net (loss)/income $ ( 4,479 ) $ ( 14,679 ) $ 10,551 Less: Net income attributable to EBS Intermediate Parent, LLC prior to Reorganization — — 10,944 Net loss attributable to AirSculpt Technologies, Inc. ( 4,479 ) ( 14,679 ) ( 393 ) Denominator: Weighted average shares of common stock outstanding - basic (1) 56,778,793 55,684,701 55,640,154 Add: Effect of dilutive securities (1) — — — Weighted average shares of common stock outstanding - diluted (1) 56,778,793 55,684,701 55,640,154 Loss per share of common stock outstanding - basic and diluted $ ( 0.08 ) $ ( 0.26 ) $ ( 0.01 ) (1) Basic and diluted weighted average shares outstanding and loss per share for 2021 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, 2023 2022 2021 Restricted stock units 1,047,501 1,367,558 2,364,703 Performance and market-based stock units 1,625,882 2,159,076 2,309,063 80 Table of Contents NOTE 8 – 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 were as follows (in 000’s): Fiscal Year Ended December 31, 2023 2022 2021 Current U.S. Federal $ 4,565 $ 1,235 $ — State and Local 1,570 1,014 121 Total current income tax expense 6,135 2,249 121 Deferred U.S. Federal 1,192 1,109 243 State and Local 431 25 ( 35 ) Foreign ( 281 ) — — Total deferred income tax (benefit) expense 1,342 1,134 208 Total $ 7,477 $ 3,383 $ 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) was as follows: Fiscal Year Ended December 31, 2023 2022 2021 At U.S. Federal statutory tax rate 21.0 % 21.0 % 21.0 % State income taxes 55.7 % ( 7.3 ) % 0.6 % Pass-through income — % — % ( 22.0 ) % Nondeductible Reorganization and IPO costs — % — % 0.6 % Nondeductible officer compensation 159.1 % ( 38.8 ) % — % Valuation allowance and other nondeductible expenses 13.6 % ( 4.8 ) % 2.8 % Total 249.4 % ( 29.9 ) % 3.0 % The effective tax rates for the fiscal years ended December 31, 2023, 2022 and 2021 were 249.4 %, ( 29.9 )% and 3.0 %. The most significant items impacting the effective tax rate during fiscal years 2023, 2022 and 2021 are due to the Reorganization, non-deductible officer compensation expense, 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 Table of Contents The Company’s deferred tax assets (liabilities) consisted of the following (in 000’s): December 31, 2023 2022 Deferred tax assets Accrued liabilities $ 422 $ 272 Net operating loss 827 559 Operating lease liability 6,497 5,449 Equity-based compensation 1,596 1,231 State bonus depreciation 425 558 163(j) limitation 277 912 Other 30 7 Total deferred tax assets 10,074 8,988 Valuation allowance ( 541 ) ( 559 ) Total deferred tax assets, net of valuation allowance 9,533 8,429 Deferred tax liabilities Property, plant and equipment ( 5,566 ) ( 4,998 ) Intangible assets ( 3,881 ) ( 2,993 ) Right-of-use asset ( 6,014 ) ( 5,427 ) Prepaid expenses and other current assets ( 900 ) ( 495 ) Total deferred tax liabilities ( 16,361 ) ( 13,913 ) Net deferred tax liabilities $ ( 6,828 ) $ ( 5,484 ) As of December 31, 2023 and 2022, we had foreign net operating loss carryforwards in the amount of $ 4.0 million and $ 2.1 million, respectively. Of the total carryforwards, $ 1.4 million and $ 1.7 million, respectively, were generated by the Company’s Canadian based subsidiary and $ 2.6 million and $ 0.4 million, respectively, were generated by the Company's United Kingdom based subsidiary. The Canadian-based net operating losses begin to expire in 2039 and the United Kingdom based net operating losses carry forward indefinitely. 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 $ 0.5 million and $ 0.6 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, 2023 and 2022. 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, 2023 and 2022, the Company had no uncertain tax positions. NOTE 9 – 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 82 Table of Contents 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 10 – 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 officer. The CODM 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 Adjusted EBITDA. Gross profit is defined as revenues less cost of service incurred and Adjusted EBITDA as net loss/income excluding depreciation and amortization, net interest expense, income tax expense, restructuring and related severance costs, IPO related costs, loss/(gain) on disposal of long-lived assets, and equity-based compensation.