What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-03-12 compared with 2023-03-01 · 153 added, 294 removed, 222 unchanged (67% of the section changed)

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Company Overview

The Beauty Health Company is a global category-creating company focused on delivering beauty health experiences that help consumers reinvent their relationship with their skin, bodies and self-confidence.

Our flagship brand, Hydrafacial, created the category of hydradermabrasion by using a patented Vortex-Fusion Delivery System to cleanse, extract, and hydrate the skin with proprietary solutions and serums.

Hydrafacial provides a non-invasive and approachable skincare experience.

Together, with our powerful community of aestheticians, consumers and partners, we are personalizing skin care solutions for all ages, genders, skin tones, and skin types .

The Beauty Health Company is a global category-creating company delivering skin health experiences that help consumers reinvent their relationship with their skin, bodies and self-confidence.

The Company and its subsidiaries design, develop, manufacture, market, and sell esthetic technologies and products.

The Company’s brands are pioneers:

Hydrafacial in hydradermabrasion;

SkinStylus in microneedling;

and Keravive in scalp health.

Together, with its powerful community of estheticians, partners and consumers, the Company is personalizing skin health for all ages, genders, skin tones, and skin types.

Factors Affecting Our Performance

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Such conditions have or may have global implications which may impact the future performance of our business in unpredictable ways.

Updates on Impact of the COVID-19 Pandemic

The COVID-19 pandemic continues to disrupt business for us, our providers, and other companies with which we do business.

Although many markets have recently shown encouraging signs of emergence from the pandemic, other markets and regions where we conduct business, particularly in China, have enacted sporadic and/or zero-tolerance COVID-19 policies during certain periods in 2022, leading to prolonged store closures and travel restrictions within those markets and regions.

Although we had strong performance during windows of re-opening, these COVID-related restrictions continued to negatively impact consumer traffic for our providers.

We anticipate that COVID-19 will continue to cause supply chain challenges and intermittent store closures in certain parts of the world.

We are mindful that these trends may continue to impact the pace of recovery, and that such recovery may be non-linear until COVID-19 containment measures are discontinued across all regions and normal consumer traffic resumes on a consistent basis.

We currently expect that in the short term, any easing of containment measures and recovery of the impacted sectors of the economy will be gradual and uneven, as regions face resurgence of COVID-19 and related uncertainties.

As a result, we anticipate that consumer spending habits and consumer confidence will continue to shift, causing future sales and volume trends to be non-linear.

Furthermore, the extent to which the COVID-19 pandemic impacts our business going forward will depend on numerous factors we cannot reliably predict, including but not limited to the duration and scope of the pandemic;

businesses and individuals’ actions in response to the pandemic;

government actions to certain pandemic impacts;

and the impact on economic activity including the possibility of further financial market instability

During the year ended December 31, 2022, we experienced the impact of inflation primarily as an increase to our costs for raw materials, shipping costs, and labor costs.

We currently anticipate the impact of inflation to continue into the first quarter of 2023.

To offset these trends, we plan to implement a range of mitigation strategies which could include price increases on our Delivery Systems and consumables, and/or accepting revenue in either U.S.

dollar and/or local currency, as applicable.

However, such measures may not fully offset the impact to our operating performance.

After the resumption of more typical business conditions, the economics of developing, producing, launching, supporting and discontinuing products will continue to impact the timing of our sales and operating performance in each period.

Foreign Exchange Rates

Our operations outside of the United States account for a portion of our revenues and expenses.

As a result, a portion of our total revenue and expenses are denominated in currencies other than the U.S.

During the second half of 2022, exchange rates between these currencies and the U.S.

dollar have fluctuated significantly and may continue to do so in the future.

Fluctuations in foreign exchange rates may have a significant impact on our operating results.

During the year ended December 31, 2022, fluctuations in the U.S.

dollar relative to certain other foreign currencies – such as the Chinese Renminbi, British pound, Euro, and Australian dollar – reduced our reported revenue and expenses, principally related to net sales, cost of sales, controllable fixed costs, and advertising and promotional costs.

Global Supply Chain Issues

During the year ended December 31, 2022, we experienced global supply chain challenges resulting from industry-wide component and/or raw material shortages and transportation delays.

These challenges have negatively impacted order fill rates for our Delivery Systems and Consumables, particularly in certain European and Asian countries.

We continue to take steps to improve order fill rates and mitigate the impact of these constraints by working closely with our suppliers to ensure the availability of components and/or raw materials such as procuring components with longer lead times than typical.

We expect these challenges to continue through the first half of 2023.

The FDA and foreign government authorities may, at any time, propose or implement new or additional regulations that could impact the products that we sell.

Unforeseen regulatory obstacles or compliance costs may hinder our business in both the short and long-term as well.

The uncertainty around the timing, speed, and duration of the recovery from the adverse impacts of the COVID-19 pandemic, including the impacts on our business of the ongoing restrictions in China, and the other macroeconomic challenges we are facing, will continue to affect our ability to grow sales profitably.

We believe we can, to some extent, offset the impact of more ordinary challenges by continually developing and pursuing a diversified strategy with multiple engines of growth and by accelerating initiatives focused on areas of strength, discipline, and agility.

As the current situation continues to progress, if economic and social conditions or the degree of uncertainty or volatility worsen, or the adverse conditions previously described are further prolonged, there could be a further negative effect on consumer confidence, demand, spending and willingness or ability to travel and, as a result, on our business.

We are continuing to monitor these and other risks that may affect our business.

Key Operational and Business Metrics

In addition to the measures presented in our audited 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.

Amounts and percentages may not foot due to rounding.

Year Ended December 31,

(Dollars in millions) 2022 2021

Delivery Systems net sales $ 206.2 $ 139.5

Consumables net sales 159.6 120.6

Total net sales $ 365.9 $ 260.1

Gross profit $ 250.3 $ 181.8

Gross margin 68.4% 69.9%

Net income (loss) $ 44.4 $ (375.1)

Adjusted net income $ 9.1 $ 4.5

Adjusted EBITDA $ 47.7 $ 32.7

Adjusted EBITDA margin 13.0% 12.6%

Adjusted gross profit $ 267.2 $ 192.6

Adjusted gross margin 73.0% 74.1%

Adjusted Net Income (Loss), Adjusted EBITDA (Loss) and Adjusted EBITDA Margin

Adjusted net income (loss), adjusted EBITDA (loss) and adjusted EBITDA margin are key performance measures that our management uses to assess our operating performance.

See the section titled “ Non-GAAP Financial Measures—Adjusted Net Income, Adjusted EBITDA and Adjusted EBITDA Margin ” for information regarding our use of adjusted net income (loss) and adjusted EBITDA (loss) and reconciliations of adjusted net income (loss) and adjusted EBITDA (loss) to net income (loss).

Adjusted Gross Profit and Adjusted Gross Margin

We use adjusted gross profit and adjusted gross margin to measure our profitability and ability to scale and leverage the costs of our Delivery Systems and Consumables sales.

See the section titled “ Non-GAAP Financial Measures—Adjusted Gross Profit and Adjusted Gross Margin ” for information regarding our use of adjusted gross profit and a reconciliation of adjusted gross profit to gross profit.

Business and Macroeconomic Conditions

We continued to execute against our plan to expand our footprint by selling and placing Delivery Systems worldwide, drive Consumables, invest in our community of providers, partners, and consumers, drive brand awareness, and optimize our global infrastructure.

Consumables include serums, solutions, tips, and other consumables.

Although we believe we can be successful in our current operating environment, various factors may impact our business in unpredictable ways such as:

• Disruptions in transportation and other supply chain related constraints, such as labor strife in the transportation industry;

• Global economic conditions, including inflation, recession, changes in foreign currency exchange rates, higher interest rates, and other changes in economic conditions;

• Issues related to older models of Syndeo and our actions to remediate such issues

We may be able to offset cost pressures through increasing the selling prices of some of our products, increasing value engineering efforts to optimize product costs, increasing the diversification of our suppliers and supplier contracts, increasing natural foreign currency hedging, as applicable, and reducing discretionary spending.

However, our pricing actions could have an adverse impact on demand, and may in turn, cause our providers to halt or decrease Delivery Systems and/or Consumables spending, and our actions may not be sufficient to cover unexpected increased costs that we may experience.

Business and macroeconomic factors may also negatively impact, in the short-term or long-term, the global economy, the beauty health industry, our providers and their budgets with us, our business, the Company’s brand reputation, financial condition, and results of operations.

We remain attentive to these business and macroeconomic conditions that may materially impact our business, and we continue to explore and implement reporting and quality management systems and risk mitigation strategies in the face of these unfolding conditions to remain agile in adopting to changing circumstances.

Syndeo Program

To stand behind its commitment to its customers and protect the Company’s brand reputation, during October 2023, the Company’s management decided that, with respect to Syndeo devices, the Company will only market and sell Syndeo 3.0 devices.

The Company will provide, at no cost to the customer, the option of (i) a technician upgrade to their Syndeo 1.0 or 2.0 devices to 3.0 standards in the field;

or (ii) a replacement Syndeo 3.0 device for their existing device (the “Syndeo Program”).

Additionally, the Company will extend the customer’s warranty by one year for each system from the date it was either brought to the 3.0 standards or the customer received a Syndeo 3.0 device.

The Company anticipates that the vast majority of its customers will elect to request a replacement Syndeo 3.0 device.

As a result of the decision to market and sell Syndeo 3.0 devices exclusively, the Company has designated all Syndeo 1.0 and 2.0 builds on-hand as obsolete, resulting in an inventory write-down of $19.6 million during the year ended December 31, 2023.

The Company incurred costs of $24.6 million during the year ended December 31, 2023, associated with the cost to upgrade or replace Syndeo 1.0 or 2.0 devices during the year.

As of December 31, 2023, the Company accrued additional costs of $21.0 million, primarily for the estimated cost to remediate, upgrade or exchange the remaining Syndeo 1.0 and 2.0 builds, which is expected to be completed during the first half of 2024.

Any returning devices with a Syndeo 1.0 or 2.0 device build are expected to be responsibly destroyed.

Syndeo inventory write-down and Syndeo Program charges were recognized in cost of sales for the year ended December 31, 2023.

Business Transformation Program and Other Restructuring Actions

The Company has recognized restructuring charges of $7.2 million primarily related to reductions in workforce of approximately 100 employees and consulting expenses for the year ended December 31, 2023 for the first phase of the Company’s business transformation plan and other restructuring actions.

Outstanding liabilities for consulting expenses was $2.4 million as of the year ended December 31, 2023.

Outstanding liabilities for reductions in force were immaterial as of the year ended December 31, 2023.

Gross cost savings as a result of restructuring actions taken as of the year ended December 31, 2023 are expected to be approximately $15 million.

In the second phase (“Phase 2”), of the Business Transformation Program, the Company expects cost savings to be driven by optimizing manufacturing operations and reduced operating spend.

While the Company believes there are long-term savings to be achieved, as of the date of the issuance of these financial statements, Phase 2 of the restructuring program is not finalized, and the Company is re-evaluating the expected timing and savings.

Gross cost savings from 2023 restructuring actions are expected to be offset in 2024 to support short-term business needs such as the Company’s Syndeo program and investments intended to position the Company for future operational efficiencies.

Investments include the enhancement of information system infrastructure, such as the Company’s customer relationship management tools and the automation of management reporting, and investment into inventory operations in response to the Company’s material weakness over inventory.

Components of our Results of Operations

Net sales consists of the sale of products to retail and wholesale customers through e-commerce and distributor sales.

Hydrafacial generates revenue through manufacturing and selling its Delivery Systems.

In conjunction with the sale of Delivery Systems, Hydrafacial also sells its serum solutions and consumables (collectively “ Consumables ”).

Original Consumables are sold solely and exclusively by Hydrafacial (and from authorized retailers) and are available for purchase separately from the purchase of Delivery Systems.

The Company generates revenue through manufacturing and selling Delivery Systems.

In conjunction with the sale of Delivery Systems, the Company also sells its Consumables.

Original Consumables are sold solely and exclusively by the Company (and from authorized retailers) and are available for purchase separately from the purchase of Delivery Systems.

For both Delivery Systems and Consumables, revenue is recognized upon transfer of control to the customer, which generally takes place at the point of shipment.

Hydrafacial distributes products to customers both through national and international retailers as well as direct-to-consumers through its e-commerce and store channels.

Hydrafacial sells to direct customers, including non-corporate customers (such as spas and dermatologist offices), corporate customers, and international distributors.

For non-corporate customers, a contract exists when the customer initiates an order by submitting a purchase request.

Such requests are accepted by Hydrafacial upon issuance of a corresponding invoice.

For corporate customers, a contract exists when the customer submits a purchase order and it is accepted upon issuance of a subsequent invoice.

For distributors, a customer submits an order request, which is then processed in the system by a sales representative.

The request is considered accepted upon the subsequent issuance of an invoice by Hydrafacial.

For all customers, each invoice is considered a separate contract for accounting purposes.

Cost of Sales

Hydrafacial’s cost of sales consists of Delivery Systems and Consumables product costs, including the cost of materials, labor costs, overhead, depreciation and amortization of developed technology, shipping and handling costs, and the costs associated with excess and obsolete inventory.

As we launch new products and expand our presence internationally, we expect to incur higher cost of sales as a percentage of net sales because we have not yet achieved economies of scale for these items.

Hydrafacial’s cost of sales consists of product costs, including the cost of materials, labor costs, overhead, depreciation and amortization of developed technology, shipping and handling costs, and the costs associated with excess and obsolete inventory.

Selling and Marketing

Selling and marketing expense consists of personnel-related expenses, sales commissions, travel costs, training, and advertising expenses incurred in connection with the sale of our products.

We intend to continue to invest in our sales and marketing capabilities in the future and expect this expense to increase in absolute dollars in future periods as we release new products, grow our global footprint, and drive consumer demand in the ecosystem.

Selling and marketing expense as a percentage of net sales may fluctuate from period to period based on net sales, and the timing of our investments in our sales and marketing functions may vary in scope and scale over future periods.

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Research and development expense primarily consists of personnel-related expenses, tooling and prototype materials, technology investments, and other expenses incurred in connection with the development of new products and internal technologies.

We expect our research and development expenses to vary from period to period as a percentage of net sales, as Hydrafacial plans to continue to innovate and invest in new technologies and to enhance existing technologies to fuel future growth as a category creator.

General and Administrative

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General and administrative expense also includes fees for professional services principally comprising legal, audit, tax and accounting services and insurance.

We expect to continue to incur additional general and administrative expenses as a result of operating as a public company, including expenses related to compliance and reporting obligations of public companies, and increased costs for insurance, investor relations expenses and professional services.

In addition, we expect to continue to incur additional IT expenses as we scale Hydrafacial and enhance our e-commerce, digital, and data utilization capabilities.

As a result, we expect that our general and administrative expenses will increase in absolute dollars in future periods and vary from period to period as a percentage of net sales.

Interest Expense, Net

Interest expense consists of interest accrued on the Company’s Convertible Senior Notes and amortization of debt issuance costs relating to the Notes.

Interest Expense

Interest expense primarily consists of interest accrued on the Company’s Convertible Senior Notes and amortization of debt issuance costs relating to the Notes.

The Notes mature on October 1, 2026 and accrue interest at a rate of 1.25% per annum.

Debt issuance costs are being amortized over the term of the Notes using the effective interest method.

If the Notes are repurchased, redeemed, or converted prior to the maturity date, the interest on the Notes would no longer be accrued and the amortization of debt issuance costs would be accelerated.

The Company expects interest expense to increase in absolute dollars as the Company grows internationally and obtains more financing to support such growth.

Interest expense as a percentage of revenue will fluctuate period to period along with fluctuations in interest rates, which is not related to normal business operations.

If the Notes are repurchased, redeemed, or converted prior to the maturity date, the interest on the Notes would no longer be accrued and the amortization of debt issuance costs would be accelerated for the portion of the Notes which are repurchased, redeemed, or converted.

Interest Income

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Change in Fair Value of Warrant Liabilities

In accordance with ASC 815-40 – Contracts in Entity's Own Equity , the Company’s Public and Private Placement Warrants are accounted for as liabilities in the Consolidated Balance Sheets and measured at fair value at inception and on a recurring basis, with changes in fair value presented within change in fair value of warrant liabilities in the Company’s Consolidated Statements of Comprehensive Income (Loss).

There were no Public Warrants outstanding as of December 31, 2022.

The value of the Private Placement Warrants was determined at year end using the Monte Carlo simulation model.

Changes around share price volatility and assumptions and inputs used in the Monte Carlo model can result in an increase or decrease in fair value which can substantially impact the outstanding liability and the change in fair value of warrant liabilities.

The Company’s Public and Private Placement Warrants are accounted for as liabilities in the Consolidated Balance Sheets and measured at fair value at inception and on a recurring basis.

The value of the Private Placement Warrants was determined using a Monte Carlo simulation model.

Changes in fair value of warrant liabilities as a percentage of revenue will fluctuate period to period along with fluctuations in fair value, which is not related to normal business operations.

Change in Fair Value of Earn-out Shares Liability

In accordance with ASC 480 – Distinguishing Liabilities from Equity , the Company accounted for its Earn-out Shares liability as contingent consideration and recorded an Earn-out Shares liability for the Earn-out Shares.

The Earn-out Shares liability was recorded at fair value and remeasured at the end of each reporting period, with the corresponding gain or loss recorded in the Company’s Consolidated Statements of Comprehensive Income (Loss).

The Earn-out shares were earned and subsequently issued on July 15, 2021.

Foreign Currency Transaction (Gain) Loss, Net

Foreign currency transaction gains and losses are generated by settlements of intercompany balances and invoices denominated in other currencies other than the reporting currency.

Foreign currency transaction gains and losses are generated by intercompany balances and transactions denominated in other currencies other than the functional currency of the entity.

Foreign currency gains and losses as a percentage of revenue will fluctuate period to period along with fluctuations in exchange rates, which is not related to normal business operations.

Income Tax Provision (Benefit)

Income Tax (Benefit) Provision

The provision for income taxes consists primarily of income taxes related to federal, state and foreign jurisdictions in which we conduct business.

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The period-to-period comparisons of our historical results are not necessarily indicative of the results that may be expected in the future.

The results of operations data for the year ended December 31, 2022 and December 31, 2021 have been derived from the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

The results of operations data for the years ended December 31, 2023 and December 31, 2022 have been derived from the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Amounts and percentages may not foot due to rounding.

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Loss from operations (130.9) (32.9) (25.8) (7.1)

Interest expense 13.6 3.4 13.4 3.7

Interest income (23.2) (5.8) (9.2) (2.5)

Other (income) expense, net (5.2) (1.3) 1.7 0.5

Income (loss) before provision for income tax 45.0 12.3 (377.4) (145.1)

Income tax expense (benefit) 0.6 0.2 (2.2) (0.9)

Net income (loss) $ 44.4 12.1 % $ (375.1) (144.2) %

Change in fair value of warrant liabilities (11.9) (3.0) (78.3) (21.4)

Foreign currency transaction (gain) loss, net (2.4) (0.6) 1.3 0.4

(Loss) income before provision for income taxes (101.9) (25.6) 45.3 12.4

Income tax (benefit) expense (1.8) (0.4) 1.1 0.3

Net (loss) income $ (100.1) (25.2) % $ 44.2 12.1 %

Year Ended December 31, Change

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Total net sales for the year ended December 31, 2023 increased $32.1 million, or 8.8%, compared to the year ended December 31, 2022.

Delivery Systems sales for the year ended December 31, 2022 increased $66.7 million, or 47.9%, compared to the year ended December 31, 2021.

Net sales for the year ended December 31, 2022 increased primarily due to strength in Delivery Systems sales around the globe including the new product launch of Syndeo.

Delivery Systems net sales for the year ended December 31, 2023 increased $0.4 million, or 0.2%, compared to the year ended December 31, 2022.

Increased net sales of Delivery Systems in APAC and EMEA were nearly offset by decreases in the Americas, which was impacted by provider experience challenges with Syndeo creating lower than expected demand.

The prior year net sales of Delivery Systems in the Americas included the impact of the launch of Syndeo, which included trade-up net sales.

Consumables sales for the year ended December 31, 2023 increased $31.7 million, or 19.9%, compared to the year ended December 31, 2022.

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Gross margin 39.0 % 68.0 %

Cost of sales increased by 47.6% driven by increased sales volume and increased product mix weighting toward Hydrafacial Delivery Systems.

Gross margin decreased to 68.4% during the year ended December 31, 2022, driven by higher volume of trade-up Delivery Systems sold at promotional pricing from the new product launch, premium paid in manufacturing and shipping for the new IoT product, as well as global supply chain challenges, inflationary pressures and foreign exchange rates.

Cost of sales increased by 107.4% primarily driven by $65.2 million of inventory write-downs and charges associated with the Syndeo Program, $18.3 million in charges for discontinued, excess, or obsolete inventory identified during the year ended December 31, 2023, $7.8 million in charges for contract losses, and higher product costs.

Gross margin decreased from 68.0% to 39.0% during the year ended December 31, 2023, primarily due to reserves and charges associated with the Syndeo Program, higher charges related to other discontinued, excess, and obsolete product costs, and higher product costs.

Operating Expenses

Selling and Marketing

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As a percentage of net sales 36.3 % 43.8 %

Selling and marketing expense for the year ended December 31, 2022 increased $48.5 million, or 43.5%, compared to the year ended December 31, 2021 primarily due to an increase in salaries and commissions of $27.5 million as we scale globally, and an increase of stock-based compensation expense of $6.9 million.

Additionally, personnel-related training and travel expenses increased by $4.5 million due to the launch of Syndeo and advertising/promotional spend increased by $11.7 million due to investments in the Americas and EMEA in key tradeshows and other marketing programs.

As a percentage of sales, the inefficiency or higher percentage of 2022 was partially driven by investments made in China, which did not generate significant revenue due to COVID closures.

Selling and marketing expense for the year ended December 31, 2023 decreased $15.6 million, or 9.7%, compared to the year ended December 31, 2022.

The decrease was primarily driven by lower sales commission expense, lower training and travel expense, lower marketing and advertising expense, and lower personnel related compensation expense, primarily driven by lower share-based compensation expense.

Research and Development

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As a percentage of net sales 2.5 % 2.3 %

Research and development expense for the year ended December 31, 2022 increased $0.2 million, or 3.0%, compared to the year ended December 31, 2021 primarily due to an increase in salaries and stock-based compensation expense attributable to research and development personnel of $3.0 million and $0.4 million, respectively.

There was continued investment into our data infrastructure resulting in an increase of $1.3 million and a write-off of fixed assets of $0.5 million.

These increases were offset by a $4.1 million decrease in Syndeo and Glow & Go research and development expenses.

Research and development expense for the year ended December 31, 2023 increased $1.7 million, or 19.6%, compared to the year ended December 31, 2022.

The increase was primarily driven by higher personnel related compensation expense which includes higher annual cash incentives and higher share-based compensation expense.

General and Administrative

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General and administrative $ 131.4 $ 106.1 $ 25.3 23.9 %

As a percentage of net sales 33.0 % 29.0 %

General and administrative expense for the year ended December 31, 2023 increased $25.3 million, or 23.9%, compared to the year ended December 31, 2022.

The increases were attributable to a $9.6 million increase in stock-based compensation awards to executive team members during the year, $14.4 million in personnel-related expenses, $8.8 million in recruiting and other public company-related professional fees from system and SOX implementation and audit fees as we scale globally.

The increase was also driven by a $2.9 million increase in legal fees due to litigation cost as we vigorously protect our IP, $1.2 million in directors’ and officers’ insurance as a public company, credit card and bank fees of $1.4 million due to sales growth, and losses on disposal of tangible and intangible assets of $4.7 million as we replace software and write-off certain unused equipment from distributor acquisitions.

These were offset by a decrease in transaction costs of $31.2 million related to the consummation of the Business Combination.

Interest expense

Year Ended December 31, Change

(Dollars in millions) 2022 2021 Amount %

Interest expense, net $ 13.4 $ 11.8 $ 1.6 13.7 %

Interest expense during the year ended December 31, 2022 was related to the $750 million in convertible senior notes compared to the year ended December 31, 2021 in which interest expense was primarily related to borrowings on the company’s term loans and revolving line of credit.

The term loan and revolving line of credit were extinguished in May 2021 in connection with the closing of the Business Combination.

Interest income

The increase was primarily driven by higher personnel related compensation, an increase in depreciation and amortization expense, incremental bad debt expense, and higher software and professional fee expenses.

Higher personnel related compensation includes higher annual cash incentives and severance, partially offset by lower share-based compensation expense.

Increased depreciation and amortization expense include the amortization resulting from acquisitions made in 2023 and accelerated depreciation resulting from the decrease in useful lives for certain property and equipment.

Interest Income, Change in Fair Value of Warrant Liabilities, and Other (Income) Expense, Net

Year Ended December 31, Change

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Interest income $ (23.2) $ (9.2) $ (14.0) 152.6 %

The Company earned $9.2 million in interest income from its money market accounts for a full year in 2022 compared to two months in 2021.

Change in fair value of warrant liabilities

Year Ended December 31, Change

(Dollars in millions) 2022 2021 Amount %

Change in fair value of warrant liabilities $ (78.3) $ 277.3 $ (355.6) (128.3) %

During the year ended December 31, 2022, the Company recognized income of $78.3 million due to the change in the fair value of the warrant liabilities versus a $277.3 million expense for year ended December 31, 2021 primarily driven by the fluctuation of the Company’s stock price.

Change in fair value of earn-out shares liability

Year Ended December 31, Change

(Dollars in millions) 2022 2021 Amount %

Change in fair value of earn-out shares liability $ — $ 47.1 $ (47.1) (100.0) %

During the year ended December 31, 2021 the Company recognized a $47.1 million expense for the change in the fair value of the earn-out shares liability.

There was no recurring expense related to the earn out shares, as the liability was paid off during the year ended December 31, 2021.

Foreign currency transaction loss, net

Year Ended December 31, Change

(Dollars in millions) 2022 2021 Amount %

Foreign currency transaction loss, net $ 3.2 $ 0.1 $ 3.1 4485.5 %

The foreign currency loss increased in 2022 because of the overall weakening of the British Pound and Euro during 2022 relative to the US Dollar.

Transaction amounts due to the Company for purchases of inventory by its subsidiaries are remeasured on each balance sheet date.

Income Tax Provision

Year Ended December 31, Change

(Dollars in millions) 2022 2021 Amount %

Income tax expense (benefit) $ 0.6 $ (2.2) $ 2.8 (128.9) %

Income tax expense increased primarily due to an increase in valuation allowance and various non-deductible expenses, which include the revaluation of the warrants and contingent considerations from the business acquisitions increasing the effective tax rate of the expense from 0.6% for the year ended December 31, 2021 to 1.5% for the year ended December 31, 2022.

Change in fair value of warrant liabilities $ (11.9) $ (78.3) $ 66.4 N/M

Other (income) expense, net $ (5.2) $ 1.7 $ (6.9) N/M

Interest income for the year ended December 31, 2023 increased $14.0 million compared to the year ended December 31, 2022 due to higher interest earned on our investment in money market funds and $0.5 million received for the Employee Retention Credit under the Coronavirus Aid, Relief, and Economic Security Act.

During the year ended December 31, 2023, the Company recognized income of $11.9 million related to the change in the fair value of the warrant liabilities, a decrease of $66.4 million, as compared to income of $78.3 million during the year ended December 31, 2022, driven by the fluctuation of the Company’s stock price.

During the year ended December 31, 2023, the Company recognized other income of $5.2 million primarily related to payments received for the Employee Retention Credit under the Coronavirus Aid, Relief, and Economic Security Act.

Liquidity and Capital Resources

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Cash received from our customers and other activities generally corresponds to our net sales.

Our sources of liquidity and cash flows are used to fund ongoing operations, research and development projects for new products, services, and technologies, and provide ongoing support services for our providers and customers.

Over the next year, we anticipate that we will use our liquidity and cash flows from our operations to fund our growth.

In addition, as part of our business strategy, we occasionally evaluate potential acquisitions of businesses and products and technologies.

As part of our business strategy, we occasionally evaluate potential acquisitions of businesses and products and technologies.

Accordingly, a portion of our available cash may be used at any time for the acquisition of complementary products, services, or businesses.

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Capital expenditures for the year ending December 31, 2023 were $3.8 million.

Based on our sources of capital (including the cash consideration received from the consummation of the Business Combination and the cash received from the issuance of the Notes), management believes that we have sufficient liquidity to satisfy our anticipated working capital requirements for our ongoing operations and obligations for at least the next 12 months.

Based on our sources of capital, management believes that we have sufficient liquidity to satisfy our anticipated working capital requirements for our ongoing operations and obligations for at least the next 12 months.

However, we will continue to evaluate our capital expenditure needs based upon factors including but not limited to our rate of revenue growth, potential acquisitions, the timing and amount of spending on research and development, growth in sales and marketing activities, the timing of new product launches, timing and investments needed for international expansion, the continuing market acceptance of the Company’s products and services, expansion, and overall economic conditions.

The Company may also evaluate opportunities to repurchase and retire debt.

In January 2024, t he Company redeemed $75.0 million principal amount of our Notes at a weighted-average redemption price equal to 77% of the principal amount for $57.8 million.

If cash generated from operations is insufficient to satisfy our capital requirements, we may have to sell additional equity or debt securities or obtain expanded credit facilities to fund our operating expenses.

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The Initial Borrower and the Administrative Agent were party to that certain Credit Agreement, dated as of December 30, 2021 (the “Original Credit Agreement”).

The Company, Hydrafacial, the other loan parties thereto, the lenders party thereto, and the Administrative Agent agreed to amend and restate the Original Credit Agreement in order to (i) extend the maturity date with respect to the existing revolving credit facility under the Original Credit Agreement to November 14, 2027, (ii) re-evidence the “Obligations” under, and as defined in, the Original Credit Agreement, which shall be repayable in accordance with the terms of the Credit Agreement, (iii) set forth the terms and conditions under which the lenders will, from time to time, make loans and extend other financial accommodations to or for the benefit of the Company (iv) transition from LIBOR to the secured overnight financing rate (SOFR), (vi) provide that the Company shall assume all of the rights and “Obligations” of Hydrafacial under, and as each such term is defined in, the Original Credit Agreement, and (vii) provide that Hydrafacial shall be released and discharged solely

from the obligations of the “Borrower” under, and as defined in, the Original Credit Agreement, and shall be a subsidiary guarantor and a loan party thereunder.

The Credit Agreement provides for a $50 million revolving credit facility with a maturity date of November 14, 2027.

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Convertible Senior Notes

On September 14, 2021, we issued $750 million aggregate principal amount of 1.25% Convertible Senior Notes due 2026 (the “Notes”) in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”).

On September 14, 2021, we issued $750 million aggregate principal amount of 1.25% Convertible Senior Notes due 2026 in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act.

The Notes were issued pursuant to, and are governed by, an indenture, dated as of September 14, 2021, between the Company and U.S.

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Capped Call Transactions

offset any cash payments we may make in excess of the principal amount of the converted Notes, as the case may be, with such reduction and/or offset subject to a cap, based on the cap price of the capped call transactions.

Capped call transactions cover the aggregate number of shares of our Class A Common Stock that will initially underlie the Notes, and generally reduce potential dilution to our outstanding Class A Common Stock upon any conversion of Notes and/or offset any cash payments we may make in excess of the principal amount of the converted Notes, as the case may be, with such reduction and/or offset subject to a cap, based on the cap price of the capped call transactions.

See Note 2 – Summary of Significant Accounting Policies, to the Notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for additional information.

Known Trends or Uncertainties

The majority of our customers are providers within the medical industry (dermatologists, plastic surgeons, and medical spas), aesthetician, and beauty retail industry (spas, hotels, and other retailers).

Known Tren ds or Uncertainties

The majority of our customers operate within the medical industry (dermatologists and plastic surgeons), esthetician, and beauty retail industry.

Although we have not seen any significant reduction in revenues to date due to consolidations, we have seen some consolidation in our industry during economic downturns.

These consolidations have not had a negative effect on our total sales;

however, should consolidations and downsizing in the industry continue to occur, or occur at an increased rate, those events could adversely impact our revenues and earnings going forward.

Furthermore, during the year ended December 31, 2022, we have experienced global supply chain disruptions and a significant inflationary impact, including higher interest rates and capital costs, increased shipping costs, supply shortages, increased costs of labor, and a strengthened U.S.

In particular, we have seen increased costs associated with our global operations in foreign countries as a result of weakening exchange rates, as our international sales are primarily denominated in the local currency of such foreign country.

Also, as a result of the invasion of Ukraine by Russia, we stopped selling and shipping products to our distributor in Russia, which has negatively impacted our overall net sales in the EMEA region.

These impacts have created headwinds for sales of our products and profits that we expect to continue through the first half of 2023.

In addition, the extent to which the uncertainty around the timing, speed and recovery from the adverse impacts of the COVID-19 pandemic impacts our business going forward will depend on numerous factors that we cannot reliably predict, including further governmental actions in the countries in which we operate, such as China enacting sporadic and/or zero-tolerance COVID-19 policies in 2022, and the other macro challenges we face, as well as the impact of any governmental actions on the economy, including the possibility of recession or financial market instability.

however, should consolidations and downsizing in the industry continue to occur, those events could adversely impact our revenues and earnings going forward.

In addition, we continue to face macro-economic challenges such as the possibility of recession or financial market instability, and the impact of any governmental actions on the economy.

These factors may adversely impact consumer, business, and government spending as well as customers' ability to pay for our products and services on an ongoing basis.

As a result, if economic and social conditions or the degree of uncertainty or volatility worsen, or the adverse conditions previously described are further prolonged, our growth rate could be affected by increased consolidation and downsizing in the medical, aesthetician, and beauty retail industry.

As a result, if economic and social conditions or the degree of uncertainty or volatility worsen, or the adverse conditions previously described are further prolonged, our growth rate could be affected by consolidation and downsizing in the medical, esthetician, and beauty retail industry.

We are continuing to monitor these and other risks that may affect our business so that we can respond appropriately.

Syndeo Program Costs

The Company has accrued $21.0 million as of December 31, 2023 for the estimated cost for its remediation plan to upgrade or exchange customer Syndeo devices to meet the Syndeo 3.0 device standard which is expected to be substantially complete by June 30, 2024.

Business Transformation Program and Other Restructuring Actions

The Company has recognized restructuring charges of $7.2 million primarily related to reductions in workforce and consulting expenses for the year ended December 31, 2023 for the first phase of the Company’s business transformation plan and other restructuring actions.

Outstanding liabilities for consulting expenses was $2.4 million as of the year ended December 31, 2023.

Outstanding liabilities for reductions in force were immaterial as of the year ended December 31, 2023.

Stock Repurchase Program

On September 12, 2023, the Company’s Board of Directors approved a share repurchase program authorizing the Company to repurchase up to $100.0 million of the Company’s Class A Common Stock.

During the year ended December 31, 2023, the Company repurchased approximately 10.4 million shares for $30.2 million, excluding taxes.

Debt Repurchase

In January 2024, the Company redeemed $75.0 million principal amount of our Notes at a weighted-average redemption price equal to 77% for $57.8 million.

Discontinuation of Trade-up Program in 2024

The Company has historically accepted Delivery Systems in trade-up transactions with the intent to refurbish and resale such Delivery Systems received from the customer.

The Company recognized revenue based on the estimated fair value of such Delivery Systems for the fiscal years ended 2023 and 2022 of approximately $17 million and $9 million, respectively.

While the Company still expects to resell Delivery Systems previously received in trade-up transactions, starting in 2024, the Company will discontinue the use of trade-up transactions and the ensuing revenue recognition for noncash consideration.

Contractual Obligations and Other Commercial Commitments

As of December 31, 2022, our material contractual obligations were approximately $37.5 million in interest-only payments related to the Notes of $750 million, the Notes of $750 million, and $17.6 million in lease obligations.

The following table discloses our material cash requirements as of December 31, 2022.

The following table summarizes the Company’s contractual obligations and other commercial commitments as of December 31, 2023.

In regards to future capital expenditures, we intend to use cash-on-hand and cash from operations to help satisfy future requirements.

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(Dollars in millions) Total Less Than 1 Year 1-3 years 3-5 Years More than 5 Years

Notes and interest on the Notes (1)

$ 750.0 $ — $ 750.0 $ — $ —

Interest on Notes (1)

28.1 9.4 18.8 — —

Operating leases 15.1 4.8 3.9 2.3 4.2

Purchase of inventory, service, and other

73.7 73.3 0.4 — —

Total contractual obligations $ 866.9 $ 87.5 $ 773.1 $ 2.3 $ 4.2

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From and after April 1, 2026, noteholders may convert their Notes into shares of Class A Common Stock until the close of business on the second scheduled trading day immediately before the maturity date.

In January 2024, the Company redeemed $75.0 million principal amount of our Notes at a weighted-average redemption price equal to 77% for $57.8 million.

The remaining payments on the Notes and the interest on the Notes will be lower than as indicated in the table above.

The following table summarizes the activities from our statements of cash flows.

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Operating activities:

Net income (loss)

Net (loss) income (100.1) 44.2

Non-cash adjustments 98.5 (5.6)

Changes in working capital 23.4 (145.3)

Net cash flows (used in) provided by operating activities (106.6) (28.4)

Net cash flows (used in) provided by investing activities (18.9) (37.7)

Net cash flows (used in) provided by financing activities (205.2) 959.0

Net cash provided by (used for) operating activities 21.8 (106.6)

Net cash used for investing activities (31.5) (18.9)

Net cash used for financing activities (37.4) (205.2)

Net change in cash and cash equivalents (47.2) (330.7)

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Operating Activities

Net cash used in operating activities of $106.6 million for the year ended December 31, 2022 was primarily due to investment in inventory in relation to the global launch of Syndeo, the current generation Delivery System, combined with a corresponding shift in the average collection period of receivables related to increased payment plan participation on Delivery Systems globally, as well as continued investments globally in people and systems to fuel future growth.

The net income of $44.4 million was driven by non-cash adjustments of $10.7 million, with the largest adjustment being the fair value adjustment to warrant liabilities.

The decrease in working capital of $140.3 million was primarily due to the increase in accounts receivable of $32.0 million and the increase in inventory of $82.1 million.

Net cash used in operating activities of $28.4 million for the year ended December 31, 2021 was primarily due to an increase in accounts receivable of $31.0 million.

The net loss of $375.1 million was driven by non-cash adjustments of $365.4 million, primarily related to fair value adjustments to earn-out shares and warrant liabilities, and a decrease in working capital of $18.7 million.

Net cash provided by operating activities were $21.8 million in 2023, as compared to net cash used for operating activities of $106.6 million in 2022.

The change in cash was primarily related to lower working capital usage, and the net impact of current year net loss and other non-cash adjustments.

The net loss, non-cash adjustments, and change in inventories and other accrued expenses include the impact of the Syndeo Program charges.

The prior year net income and non-cash adjustments include the impact of $78.3 million gain resulting from the change in fair value of the Company’s warrants.

Investing Activities

Net cash used in investing activities for the year ended December 31, 2022 of $18.9 million was primarily related to $10.8 million in capital expenditures for property and equipment, $1.5 million in capital expenditures for the asset acquisition of The Personalized Beauty Company, Inc.

(“Mxt”) and related developed technology, and $6.5 million in capitalized software.

Net cash used in investing activities for the year ended December 31, 2021 of $37.7 million was primarily related to our business acquisitions of distributors in Australia, Germany, Mexico, and France with cash paid of $22.9 million, net of cash acquired, $11.2 million in capital expenditures and $4.4 million in capitalized software.

Net cash used for investing activities were $31.5 million in 2023, as compared to $18.9 million in 2022.

The increase in cash used for investing activities was primarily related to the cash payment associated with the asset acquisitions of Esthetic Medical Inc.

and Anacapa Aesthetics LLC for $18.5 million.

Financing Activities

Net cash used in financing activities for the year ended December 31, 2022 was $205.2 million of which $200.0 million was used in relation to the accelerated share repurchase program and $4.3 million in relation to the distributor acquisitions of Wigmore Medical France (“Wigmore”), Ecomedic GmbH (“Ecomedic”) and Sistemas Dermatologicos Internacionales (“Sidermica”).

The Company did not withdraw from the line of credit and there were no transactions related to the Public Warrants and Private Placement Warrants during the year ended December 31, 2022.

Net cash from financing activities of $959.0 million for the year ended December 31, 2021 was primarily related to proceeds received from the issuance of convertible senior notes and the Business Combination.

The proceeds were offset by the payoff of long-term debt of $225.5 million and costs from our issuance of convertible senior notes.

Net cash used for financing activities were $37.4 million in 2023, as compared to $205.2 million in 2022.

The change in cash was primarily related to higher share repurchases in the prior year.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with GAAP.

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“ GAAP”).

In preparing the consolidated financial statements, we make estimates and judgments that affect the reported amounts of assets, liabilities, stockholders’ equity, revenue, expenses, and related disclosures.

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Management’s Policy :

We elected to adopt the new revenue recognition standard using the full retrospective method as of January 1, 2019.

The adoption of the new standard did not have a significant effect on earnings or on the timing of our transactions and, therefore, the effect of applying the new guidance was not material.

As such, there were no adjustments to the prior periods.

In accordance with ASU 2014-09, we determine the amount of revenue to be recognized through application of the following steps:

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As a result, the noncash consideration represents the estimated selling price, less the cost to refurbish the inventory and the expected margin to be earned on the refurbishment, along with the expected margin to be earned on the selling effort.

Impact if Actual Results Differ from Estimates and Judgements :

If the actual selling price of the refurbished Delivery Systems are lower or higher than the estimated reselling price, the difference would result in an increase or decrease of net sales in the periods the refurbished Delivery Systems are sold.

Stock-Based Compensation

Management’s Policy :

We measure and recognize compensation expenses for stock options, restricted stock units (“RSUs”), and performance stock units (“PSUs”) to employees on a straight-line basis over the vesting period based on their grant date fair values.

Subjective Estimates and Judgements :

We estimate the fair value of stock options on the date of grant using the Black-Scholes option pricing model and the fair value of PSUs on the date of grant using a Monte Carlo simulation.

The fair value of the RSUs is based on the closing price of our common stock on the grant date.

The Company recognized revenue based on the estimated fair value of such Delivery Systems for the fiscal years ended 2023 and 2022 of approximately $17 million and $9 million, respectively.

Impact if Actual Results Differ from Estimates and Judgements :

If key inputs differ, the fair value of stock options and PSUs will be impacted.

A higher fair value of the stock options and PSUs will result in higher share-based compensation expense over the vesting period of the grants and a lower fair value of the options will result in an reduction of share-based compensation expense over the vesting period.

Intangible Assets

If the actual selling price of the refurbished Delivery Systems are lower or higher than the estimated reselling price, the difference would result in an increase or decrease in gross profit in the periods the refurbished Delivery Systems are sold.

As of December 31, 2023, the Company had approximately 1,400 units at an estimated value of approximately $21 million.

A 10% change in the value of noncash consideration would result in an approximate $2 million change in the Company’s estimate.

Goodwill and Intangible Assets

Management’s Policy :

Intangible assets are composed of developed technology, customer relationships and trademarks.

Intangible assets are composed of developed technology, customer relationships, trademarks, and capitalized software.

At initial recognition, intangible assets acquired in a business combination are recognized at their fair value as of the date of acquisition.

Following initial recognition, intangible assets are carried at cost less accumulated amortization and impairment

losses, if any, and are amortized on a straight-line basis over the estimated useful life of the asset.

If the assets have an indefinite life, these assets are assessed for impairment annually.

Following initial recognition, intangible assets are carried at cost less accumulated amortization and impairment losses, if any, and are amortized on a straight-line basis over the estimated useful life of the asset.

Goodwill is recorded as the difference between the aggregate consideration paid for an acquisition and the fair value of the assets acquired and liabilities assumed.

Goodwill is not amortized but is evaluated for impairment annually or more frequently if indicators of impairment are present or changes in circumstances suggest that impairment may exist.

Subjective Estimates and Judgements :

We assess the impairment of intangible assets whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

If necessary, we will use an industry accepted valuation model to estimate the fair value of the intangible assets.

The fair value calculation requires significant judgments in determining both the assets’ estimated cash flows and potentially the appropriate discount and royalty rates applied to those cash flows to determine fair value.

Variations in economic conditions or a change in general consumer demands, operating results estimates or the application of alternative assumptions could produce significantly different results.

We assess the impairment of intangible assets and goodwill whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

If necessary, we will use an industry accepted valuation model to estimate the fair value.

The fair value calculation requires significant judgments in determining the assets’ fair value, such as estimated cash flows, weighted-average cost of capital, comparable market multiples for the industry segment, royalty rates, when applicable, as well as market conditions.

Certain future events and circumstances, including deterioration of market conditions, higher cost of capital, a decline in actual and expected consumer consumption and demands, could result in changes to these assumptions and judgments.

If these assumptions differ materially from future results, we may record impairment charges in the future.

Impact if Actual Results Differ from Estimates and Judgements :

Changes in qualitative factors assessed, changes to assumptions used in the impairment test, selection and weighting of the various fair value techniques, and downturns in economic or business conditions, could have a significant adverse impact on the carrying value of intangible assets and could result in impairment losses which could have a material impact on our financial condition and earnings.

Changes in qualitative factors assessed, changes to assumptions used in the impairment test, selection and weighting of the various fair value techniques, and downturns in economic or business conditions, could have a significant adverse impact on the carrying value of goodwill and intangible assets and could result in impairment losses which could have a material impact on our financial condition and earnings.

Management’s Policy :

Inventories are stated at the lower of cost (determined by the first-in, first-out method) or net realizable value.

Inventories are stated at the lower of cost (determined using the average cost method which approximates the first-in, first-out method) or net realizable value.

Subjective Estimates and Judgements :

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In order to determine the realizability of our deferred income tax assets, we have pointed to the reversal of our taxable temporary differences as a source of income that will result in the realization of our deferred income tax assets.

During the year ended December 31, 2020, and due to the pre-tax loss recorded, we began to accrue for a valuation allowance for the portion of deferred income tax assets that will not be realized through the reversal of taxable temporary differences.

Our policy for accounting for uncertainty in income taxes requires the evaluation of tax positions taken or expected to be taken in the course of the preparation of tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority.

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Impact if Actual Results Differ from Estimates and Judgments :

Although management believes that the judgments and estimates used are reasonable, should actual factors and conditions differ materially from those considered by management, the actual realization of the net deferred tax asset and tax positions taken could differ materially from the amounts recorded in the

financial statements.

If we are not able to realize all or part of our net deferred tax asset in the future or if a tax position is overturned by a taxing authority, an adjustment to the deferred tax asset valuation allowance would be charged to income tax expense in the period such determination was made which could have a material impact on our earnings.

If we are not able to realize all or part of our net deferred tax asset in the future or if a tax position is overturned by a taxing authority, an adjustment to the deferred tax asset valuation allowance would be charged to income tax expense in the period the determination is made which could have a material impact on our earnings.

Warrant Liabilities

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Syndeo Program Reserves

Management’s Policy :

The Company accrues for the estimated cost for its remediation plan to upgrade or exchange customer Syndeo devices to meet the Syndeo 3.0 device standard.

The cost of the remediation program has been recognized in cost of sales, and is based on the Company’s estimates of the cost to upgrade or exchange customer devices.

Subjective Estimates and Judgements :

The accrued cost includes significant judgments regarding customer response rates, the assumed method of remediation, and the cost of remediation, which include considerations such as the material and labor costs of upgrades and the manufacturing and logistics costs for replacement devices.

As of December 31, 2023, the Company has accrued $21.0 million for the estimated cost for its remediation plan to upgrade or exchange Syndeo devices.

Impact if Actual Results Differ from Estimates and Judgments:

Changes around assumptions and estimates used can result in an increase or decrease in the Company’s estimate:

An assumed 10% change in the cost of remediation would result in approximately $2 million change in the Company’s estimate.

Recent Accounting Pronouncements

See Note 2 - Summary of Significant Accounting Policies to the Notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for a discussion about new accounting pronouncements adopted and not yet adopted.

Non-GAAP Financial Measures

In addition to our results determined in accordance with accounting principles generally accepted in the United States of America (GAAP), management utilizes certain non-GAAP performance measures, adjusted net income (loss), adjusted EBITDA (loss), adjusted EBITDA margin, adjusted gross profit, and adjusted gross margin, for purposes of evaluating our ongoing operations and for internal planning and forecasting purposes.

We believe that these non-GAAP operating measures, when reviewed collectively with our GAAP financial information, provide useful supplemental information to investors in assessing our operating performance.

Adjusted Net Income, Adjusted EBITDA and Adjusted EBITDA Margin

Adjusted net income (loss), adjusted EBITDA and adjusted EBITDA margin are key performance measures that we use to assess our operating performance.

Because adjusted net income (loss), adjusted EBITDA and adjusted EBITDA margin facilitate internal comparisons of our historical operating performance on a more consistent basis, we use these measures for business planning purposes.

We also believe this information will be useful for investors to facilitate comparisons of our operating performance and better identify trends in our business.

We expect adjusted EBITDA margin to increase over the long-term as we continue to scale our business and achieve greater operating leverage.

We calculate adjusted net income (loss) as net income (loss) adjusted to exclude:

change in fair value of the Public Warrants and Private Placement Warrants, change in fair value of earn-out shares liability, other expense (income), net;

amortization expense;

stock-based compensation expense;

management fees incurred from our historical private equity owners;

one-time or non-recurring items such as transaction costs (including transactions costs with respect to the Business Combination);

restructuring costs (including those associated with COVID-19) and the aggregate adjustment for income taxes for the tax effect of the adjustments described above.

We calculate adjusted EBITDA as net income (loss) adjusted to exclude:

change in fair value of the Public Warrants and Private Placement Warrants, change in fair value of earn-out shares liability, other expense (income), net;

interest expense;

income tax benefit (expense);

depreciation and amortization expense;

stock-based compensation expense;

foreign currency (gain) loss;

management fees incurred from our historical private equity owners;

one-time or non-recurring items such as transaction costs (including transactions costs with respect to the Business Combination);

and restructuring costs (including those associated with COVID-19).

The following table reconciles our net income (loss) to adjusted net income (loss) and adjusted EBITDA for the periods indicated:

Year ended December 31,

Unaudited (Dollars in thousands) 2022 2021

Net income (loss) $ 44,384 $ (375,108)

Adjusted to exclude the following:

Change in fair value of warrant liability (78,343) 277,315

Change in fair value of earn-out shares liability — 47,100

Amortization expense 15,709 13,297

Loss on disposal of assets 5,239 —

Stock-based compensation expense 28,495 12,418

Interest income (9,175) (39)

Other expense, net 1,650 4,489

Management fees (1) — 209

Transaction related costs (2) 3,051 34,913

Non-recurring patent litigation fees 3,797 —

Re-organization fees (3) 3,582 1,997

Other non-recurring and one-time fees (4) 4,905 2,020

Aggregate adjustment for income taxes (14,187) (14,133)

Adjusted net income $ 9,107 $ 4,478

Depreciation expense 7,164 4,486

Interest expense 13,392 11,777

Foreign currency (gain) loss, net 3,164 69

Remaining benefit for income taxes $ 14,835 $ 11,891

Adjusted EBITDA $ 47,662 $ 32,701

Adjusted EBITDA margin 13.0% 12.6%

_______________

(1) Represents quarterly management fees paid to the majority stockholder of Hydrafacial based on a pre-determined formula.

Following the Business Combination, these fees are no longer paid.

(2) For the year ended December 31, 2022, such amounts primarily represent direct costs incurred in relation to potential acquisitions.

For the year ended December 31, 2021, such amounts primarily represent direct costs incurred with the Business Combination and to prepare Hydrafacial to be marketed for sale by Hydrafacial’s shareholders in previous periods.

(3) For the year ended December 31, 2022, such costs primarily represent executing recruiting fees, severance fees and a CEO sign-on bonus.

For the year ended December 31, 2021, such costs primarily represent executive recruiting and severance fees.

(4) For the year ended December 31, 2022, such costs primarily represent costs associated with Syndeo’s US launch and international launch readiness, including premiums paid on accelerated manufacturing and shipping, and refinancing costs associated with our credit agreement.

For the year ended December 31, 2021, such costs primarily represent one-time retention awards related to the distributor acquisitions.

Adjusted Gross Profit and Adjusted Gross Margin

We use adjusted gross profit and adjusted gross margin to measure profitability and the ability to scale and leverage the costs of Delivery Systems and Consumables.

The continued growth of Delivery Systems is expected to improve adjusted gross margin, as additional Delivery Systems sold will increase our recurring Consumables net sales, which has higher margins.

We believe adjusted gross profit and adjusted gross margin are useful measures to us and to our investors to assist in evaluating our operating performance because they provide consistency and direct comparability with past financial

performance and between fiscal periods, as the metric eliminates the effects of amortization and depreciation and stock-based compensation expense, which are non-cash expenses that may fluctuate for reasons unrelated to overall continuing operating performance.

Adjusted gross margin has been and will continue to be affected by a variety of factors, including the product mix, geographic mix, direct vs.

indirect mix, the average selling price on Delivery Systems, and new product launches.

We expect our adjusted gross margin to fluctuate over time depending on the factors described above.

The following table reconciles gross profit to adjusted gross profit for the periods indicated.

Amounts and percentages may not foot due to rounding:

Year Ended December 31,

(Dollars in thousands) 2022 2021

Net sales $ 365,876 $ 260,086

Cost of sales 115,536 78,259

Gross profit $ 250,340 $ 181,827

Gross margin 68.4 % 69.9 %

Adjusted to exclude the following:

Write-off of discontinued product (1) $ 2,048 $ —

Non-recurring Syndeo initial program logistics and service costs 2,400 —

Stock-based compensation expense included in cost of sales 839 405

Depreciation and amortization expense included in cost of sales 11,576 10,398

Adjusted gross profit $ 267,203 $ 192,630

Adjusted gross margin 73.0 % 74.1 %

___________________

(1) For the year ended December 31, 2022, such amount represents a one-time write-off primarily related to the discontinued Glow & Go pilot program.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis