SkinHealth Systems Inc. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following discussion should be read in conjunction with the consolidated financial statements and accompanying notes included in Part II, Item 8 of this Annual Report on Form 10-K. This section of this Annual Report on Form 10-K generally discusses 2023 and 2022 items and year-to-year comparisons between 2023 and 2022. Discussions of 2021 items and year-to-year comparisons between 2022 and 2021 are not included in this Annual Report on Form 10-K, and can be found in Part II, Item 7 of the Company’s Annual Report on Form 10-K filed on March 1, 2023 under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Company Overview 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 We remain attentive to economic and geopolitical conditions that may materially impact our business. We continue to explore and implement risk mitigation strategies in the face of these unfolding conditions and remain agile in adopting to changing circumstances. Such conditions have or may have global implications which may impact the future performance of our business in unpredictable ways. 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; and • 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. 69 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 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. Cost of Sales 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. 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. Research and Development 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. 70 General and Administrative General and administrative expenses include personnel-related expenses, professional fees, credit card and wire fees and facilities-related costs primarily for our executive, corporate affairs, finance, accounting, legal, human resources, and information technology (“IT”) functions. General and administrative expense also includes fees for professional services principally comprising legal, audit, tax and accounting services and insurance. 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 for the portion of the Notes which are repurchased, redeemed, or converted. Interest Income Interest income consists of interest earned from investments in money market funds that the Company classifies as cash equivalents. Interest income as a percentage of revenue will fluctuate period to period along with fluctuations in interest rates, which is not related to normal business operations. 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. Foreign Currency Transaction (Gain) Loss, Net 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 (Benefit) Provision The provision for income taxes consists primarily of income taxes related to federal, state and foreign jurisdictions in which we conduct business. Results of Operations The following tables set forth our consolidated results of operations in dollars and as a percentage of net sales for the periods presented. 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 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. 71 Comparison of Year Ended December 31, 2023 to Year Ended December 31, 2022 Year Ended December 31, (Dollars in millions) 2023 % of Net Sales 2022 % of Net Sales Net sales $ 398.0 100.0 % $ 365.9 100.0 % Cost of sales 242.9 61.0 117.1 32.0 Gross profit 155.1 39.0 248.8 68.0 Operating expenses Selling and marketing 144.5 36.3 160.1 43.8 Research and development 10.1 2.5 8.4 2.3 General and administrative 131.4 33.0 106.1 29.0 Total operating expenses 286.0 71.9 274.6 75.1 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 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 % Net Sales Year Ended December 31, Change (Dollars in millions) 2023 2022 Amount % Net sales Delivery Systems $ 206.6 $ 206.2 $ 0.4 0.2% Consumables 191.4 159.6 31.7 19.9% Total net sales $ 398.0 $ 365.9 $ 32.1 8.8% Percentage of net sales Delivery Systems 51.9% 56.4% Consumables 48.1% 43.6% Total 100.0% 100.0% 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 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. The increase in Consumables sales was primarily attributable to increased placements of Delivery Systems and the adjoining consumption of Consumables during the year ended December 31, 2023. Cost of Sales, Gross Profit, and Gross Margin Year Ended December 31, Change (Dollars in millions) 2023 2022 Amount % Cost of sales $ 242.9 $ 117.1 $ 125.8 107.4% Gross profit $ 155.1 $ 248.8 $ (93.7) (37.7)% Gross margin 39.0 % 68.0 % 72 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 Year Ended December 31, Change (Dollars in millions) 2023 2022 Amount % Selling and marketing $ 144.5 $ 160.1 $ (15.6) (9.7) % As a percentage of net sales 36.3 % 43.8 % 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 Year Ended December 31, Change (Dollars in millions) 2023 2022 Amount % Research and development $ 10.1 $ 8.4 $ 1.7 19.6 % As a percentage of net sales 2.5 % 2.3 % 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 Year Ended December 31, Change (Dollars in millions) 2023 2022 Amount % 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 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 (Dollars in millions) 2023 2022 Amount % Interest income $ (23.2) $ (9.2) $ (14.0) 152.6 % 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. 73 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 Our primary sources of capital have been (i) cash flow from operating activities, (ii) net proceeds received from the consummation of the Business Combination, (iii) net proceeds received from the Notes (as defined below), and (iv) net proceeds received from the exercise of Public and Private Placement Warrants. As of December 31, 2023 , we had cash and cash equivalents of approximately $523.0 million. A revolving credit facility of $50 million is also available to us as a source of capital. As of December 31, 2023 , the revolving credit facility remains undrawn and there is no outstanding balance thereunder. Our operating cash flows result primarily from cash received from sales of Delivery Systems and Consumables, offset primarily by cash payments made for products and services, employee compensation, payment processing and related transaction costs, operating leases, marketing expenses, and interest payments on our long-term obligations. 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, including liabilities associated with the Syndeo Program . 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. Such potential transactions may require substantial capital resources, which may require us to seek additional debt or equity financing. We cannot assure you that we will be able to successfully identify suitable acquisition candidates, complete acquisitions, integrate acquired businesses into our current operations, or expand into new markets. Furthermore, we cannot provide assurances that additional financing will be available to us in any required time frame and on commercially reasonable terms, if at all. Capital expenditures for the year ending December 31, 2023 were $3.8 million. 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. The sale of additional equity would result in additional dilution to our stockholders. Also, the incurrence of additional debt financing would result in debt service obligations and the instruments governing such debt could provide for operating and financing covenants that would restrict our operations. In the event such additional capital is needed in the future, there can be no assurance that such capital will be available to us, or, if available, that it will be in amounts and on terms acceptable to us. If we cannot raise additional funds when we need or want them, our operations and prospects could be negatively affected. However, if cash flows from operations become insufficient to continue operations at the current level, and if no additional capital were obtained, then management would restructure the Company in a way to preserve our business while maintaining expenses within operating cash flows. Amended and Restated Credit Agreement On November 14, 2022, the Company, as successor by assumption to Hydrafacial, entered into an Amended and Restated Credit Agreement (as it may be further amended, restated, supplemented or modified from time to time, the “Credit Agreement”) with JPMorgan Chase Bank, N.A. (the “Administrative Agent”). The Initial Borrower and the Administrative Agent were party to that certain Credit Agreement, dated as of December 30, 2021 (the “Original Credit Agreement”). 74 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. In addition, the Borrower has the ability from time to time to increase the revolving commitments or enter into one or more tranches of term loans up to an additional aggregate amount not to exceed $50 million, subject to receipt of lender commitments and certain conditions precedent. Borrowings under the Credit Agreement are secured by certain collateral of the loan parties and are guaranteed by all of the Company’s domestic subsidiaries, each of which will derive substantial benefit from the revolving credit facility. In specified circumstances, additional guarantors are required to be added. The Amended and Restated Credit Agreement contains various restrictive covenants subject to certain exceptions, including limitations on the Company’s ability to incur indebtedness and certain liens, make certain investments, become liable under contingent obligations in certain circumstances, make certain restricted payments, make certain dispositions within guidelines and limits, engage in certain affiliate transactions, alter its fundamental business or make certain fundamental changes, and requirements to maintain financial covenants, including maintaining a leverage ratio of no greater than 3.00 to 1.00 and maintaining a fixed charge coverage ratio of not less than 1.15 to 1.00. The leverage ratio also determines pricing under the Credit Agreement. At the Company’s option, borrowings under the revolving credit facility accrue interest at a rate equal to either Term SOFR Rate or a specified base rate plus an applicable margin. The applicable margin is linked to the leverage ratio. The margins range from 1.50% to 2.00% per annum for Term SOFR Rate loans and 0.50% to 1.00% per annum for base rate loans. The revolving credit facility is subject to a commitment fee payable on the unused revolving credit facility commitments ranging from 0.25% to 0.35%, depending on the Borrower’s leverage ratio. The Borrower is also required to pay certain fees to the Administrative Agent and letter of credit issuers under the revolving credit facility. During the term of the revolving credit facility, the Company may borrow, repay, and re-borrow amounts available under the revolving credit facility, subject to voluntary reductions of the swing line, letter of credit, and revolving credit commitments. In addition, the Credit Agreement includes events (including, without limitation, a non-payment under the loan, a breach of warranties and representations in any material respect, non-compliance with covenants by a loan party, cross-default for payment defaults and cross-acceleration for other defaults under material debt or a change of control) which, if not cured within the time period specified, if any, would constitute an event of default. Upon the occurrence of such events of default, the Borrower could not request borrowings and the lenders may elect to accelerate the outstanding principal and accrued and unpaid interest under the revolving credit facility. Further, outstanding principal and accrued and unpaid interest thereon automatically accelerate upon the entry of an order for relief with respect to any loan party under any bankruptcy, insolvency or other similar law. 75 Convertible Senior Notes 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. Bank National Association, as trustee. The Notes accrue interest at a rate of 1.25% per annum, payable semi-annually in arrears on April 1 and October 1 of each year, which began on April 1, 2022. The Notes will mature on October 1, 2026, unless earlier repurchased, redeemed or converted. Before April 1, 2026, noteholders have the right to convert their Notes only upon the occurrence of certain events. From and after April 1, 2026, noteholders may convert their Notes at any time at their election until the close of business on the second scheduled trading day immediately before the maturity date. We will settle conversions by paying or delivering, as applicable, cash, shares of our Class A Common Stock or a combination of cash and shares of our Class A Common Stock, at our election. The initial conversion rate is 31.4859 shares of Class A Common Stock per $1,000 principal amount of Notes, which represents an initial conversion price of approximately $31.76 per share of Class A Common Stock. We used $90.2 million of the net proceeds from the sale of the Notes to fund the cost of entering into capped call transactions (described below). The net proceeds from the issuance of the Notes were approximately $638.7 million, net of capped call transaction costs of $90.2 million and debt issuance costs totaling $21.3 million. See Note 9 – Long-term Debt , to the Notes to the Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for additional information. 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 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, 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 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. 76 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 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. Payments Due by Fiscal Period (Dollars in millions) Total Less Than 1 Year 1-3 years 3-5 Years More than 5 Years 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 (1) The Notes will mature on October 1, 2026 and are due either in cash or shares of the Company’s Class A Common Stock. 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. 77 Cash Flow The following table summarizes the activities from our statements of cash flows. Amounts may not foot due to rounding. Year Ended December 31, (Dollars in millions) 2023 2022 Cash and cash equivalents at beginning of period $ 568.2 $ 901.9 Operating activities: Net (loss) income (100.1) 44.2 Non-cash adjustments 98.5 (5.6) Changes in working capital 23.4 (145.3) 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) Effect of foreign currency translation 2.0 (3.0) Cash and cash equivalents at end of period $ 523.0 $ 568.2 Operating Activities 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 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 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 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. We re-evaluate our estimates on an on-going basis. Our estimates are based on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Because of the uncertainty inherent in these matters, actual results may differ from these estimates and could differ based upon other assumptions or conditions. The critical accounting policies that reflect our more significant judgments and estimates used in the preparation of our consolidated financial statements include those noted below. Revenue Recognition Management’s Policy : In accordance with ASU 2014-09, we determine the amount of revenue to be recognized through application of the following steps: • Identify the customer contract; • Identify the performance obligations in the contract; 78 • Determine the transaction price; • Allocate the transaction price to the performance obligations in the contract; and • Recognize revenue as the performance obligations are satisfied. Subjective Estimates and Judgements : The determination of the reduction of the transaction price for noncash consideration received related to the Company’s trade-in program requires that we make certain estimates and assumptions that affect the timing and amounts of revenue recognized. We estimate the noncash consideration based on the Company’s historical experience of reselling refurbished Delivery Systems. 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. 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 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, 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. 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 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 goodwill and intangible assets and could result in impairment losses which could have a material impact on our financial condition and earnings. Inventories Management’s Policy : 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 : Obsolete inventory or inventory in excess of management’s estimated usage is written-down to its estimated net realizable value. Inherent in the net realizable value are management’s estimates related to economic trends, future demand for products, and technological obsolescence of our products. Impact if Actual Results Differ from Estimates and Judgements : If the assumptions around future demand for our inventory are more optimistic than actual future results, the net realizable value calculated using these assumptions may be overstated, resulting in an overstatement of the inventory balance. 79 Income Taxes Management’s Policy : We use the asset-and-liability method for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between the consolidated financial statement carrying amounts and tax bases of assets and liabilities and operating loss and tax credit carryforwards and are measured using the enacted tax rates that are expected to be in effect when the differences reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Subjective Estimates and Judgements : Valuation allowances are established when necessary to reduce deferred tax assets to an amount that, in the opinion of management, is more likely than not to be realized. Significant judgement is required to determine if a valuation allowance is needed. As of December 31, 2023, we incurred cumulative pre-tax losses, and as a result, we do not rely on our projections as a source of income that would give us the ability to realize our deferred tax assets. 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. 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. Tax positions not deemed to meet the more-likely-than-not threshold would be recorded as a tax expense in the current year. Reevaluation of tax positions considers factors such as changes in facts or circumstances, changes in or interpretations of tax law, effectively settled issues under audit or expiration of statute of limitation and new audit activity. We recognized interest accrued and penalties related to unrecognized tax benefits in our income tax expense. 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 the determination is made which could have a material impact on our earnings. Warrant Liabilities Management’s Policy : We classify the Public and Private Placement Warrants (“Warrant liabilities”) as liabilities on our Consolidated Balance Sheets as these instruments are precluded from being indexed to our own stock given the terms allow for a settlement adjustment that does not meet the scope of the fixed-for-fixed exception in ASC 815, Derivatives and Hedging . The Warrant liabilities were initially recorded at fair value on the date of the Business Combination and at each reporting date thereafter. There were no Public Warrants outstanding as of December 31, 2023. The value of the Private Placement Warrants was determined at year end using the Monte Carlo simulation model. Changes in the fair value of these instruments are recognized within the Consolidated Statements of Comprehensive Income Loss. Subjective Estimates and Judgements : The valuation technique requires assumptions and judgement around the inputs to be used. Specifically, there is a high degree of subjectivity and judgement in evaluating the determination of the expected share price volatility inputs used in the Monte Carlo model for the warrant derivative liability. Historical, implied, and peer group volatility levels provide a range of possible expected volatility inputs and the fair value estimates are sensitive to the expected volatility inputs. Impact if Actual Results Differ from Estimates and Judgments : 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 in the Consolidated Statements of Comprehensive Loss. 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. 80 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.