SkinHealth Systems Inc. 10-K

Item 8. Financial Statements and Supplementary Data. Index to Consolidated Financial Statements Page Report of Independent Registered Public Accounting Firm (PCAOB ID No. 34 ) 84 Consolidated Balance Sheets 86 Consolidated Statements of Comprehensive Income (Loss ) 87 Consolidated Statements of Stockholders’ Equity (Deficit ) 88 Consolidated Statements of Cash Flows 90 Notes to Consolidated Financial Statements 92 83 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and the Board of Directors of The Beauty Health Company Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of The Beauty Health Company and its subsidiaries (the "Company") as of December 31, 2023 and 2022, the related consolidated statements of comprehensive income (loss), stockholders’ equity (deficit), and cash flows, for each of the three years in the period ended December 31, 2023, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 12, 2024, expressed an adverse opinion on the Company's internal control over financial reporting because of a material weakness. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Syndeo Program Reserve — Refer to Note 18 to the financial statements Critical Audit Matter Description The Company has accrued $21 million as of December 31, 2023, for the estimated cost for its remediation plan to upgrade or replace customer Syndeo 1.0 or 2.0 devices to meet the Syndeo 3.0 device standard. The cost of the remediation program is based upon a number of estimates, including the customer response rate, 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. Given the significant judgments made by management in estimating the Syndeo Program Reserve, performing audit procedures to evaluate the reasonableness of the assumptions and estimates used by management required a high degree of auditor judgment and an increased extent of effort in evaluating the audit evidence obtained. 84 How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to testing the Company's Syndeo Program Reserve included the following, among others: • We tested the effectiveness of the controls over management’s methodology and assumptions used in the Syndeo Program Reserve. • We tested the completeness and accuracy of the underlying data, including the total devices subject to the program, actual customer participation to-date activity, including the method of remediation, and the costs used in the computation of management’s estimate. • We obtained information from Company personnel who are responsible for monitoring the status of Syndeo Program Reserve with customers to assess the reasonableness of assumptions used in the calculations. • We evaluated the Company’s ability to estimate by comparing actual results to previous estimates and judgments made by management. /s/ Deloitte & Touche LLP Los Angeles, California March 12, 2024 We have served as the Company's auditor since 2020. 85 THE BEAUTY HEALTH COMPANY CONSOLIDATED BALANCE SHEETS (in thousands, except for share amounts) December 31, 2023 December 31, 2022 ASSETS Current assets: Cash and cash equivalents $ 523,025 $ 568,197 Accounts receivable, net of allowances for estimated credit losses of $ 6,604 and $ 2,929 at December 31, 2023 and December 31, 2022, respectively 54,697 76,494 Inventories 91,321 109,656 Income tax receivable 332 1,280 Prepaid expenses and other current assets 28,877 27,648 Total current assets 698,252 783,275 Property and equipment, net 14,226 18,184 Right-of-use assets, net 12,120 15,637 Intangible assets, net 62,123 46,386 Goodwill 125,818 124,593 Deferred income tax assets, net 531 815 Other assets 16,043 14,193 TOTAL ASSETS $ 929,113 $ 1,003,083 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 44,768 $ 28,467 Accrued payroll-related expenses 22,028 21,677 Syndeo Program reserves 21,009 — Lease liabilities, current 4,598 4,958 Income tax payable 2,759 1,429 Other accrued expenses 19,846 15,183 Total current liabilities 115,008 71,714 Lease liabilities, non-current 9,319 12,689 Deferred income tax liabilities, net 702 2,011 Warrant liabilities 3,555 15,473 Convertible senior notes, net 738,372 734,143 Other long-term liabilities 2,767 — Total liabilities 869,723 836,030 Commitments (Note 14) Stockholders’ equity: Class A Common Stock, $ 0.0001 par value; 320,000,000 shares authorized; 122,899,002 and 132,214,695 shares issued and outstanding at December 31, 2023 and December 31, 2022, respectively 12 14 Additional paid-in capital 541,281 550,320 Accumulated other comprehensive loss ( 3,036 ) ( 4,530 ) Accumulated deficit ( 478,867 ) ( 378,751 ) Total stockholders’ equity 59,390 167,053 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 929,113 $ 1,003,083 The accompanying notes are an integral part of these consolidated financial statements. 86 THE BEAUTY HEALTH COMPANY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (in thousands, except for share and per share amounts) Year Ended December 31, 2023 2022 2021 Net sales $ 397,991 $ 365,876 $ 260,086 Cost of sales 242,878 117,097 81,548 Gross profit 155,113 248,779 178,538 Operating expenses: Selling and marketing 144,496 160,076 111,583 Research and development 10,102 8,444 8,195 General and administrative 131,432 106,100 98,688 Total operating expenses 286,030 274,620 218,466 Loss from operations ( 130,917 ) ( 25,841 ) ( 39,928 ) Interest expense 13,649 13,392 11,777 Interest income ( 23,173 ) ( 9,175 ) ( 39 ) Other (income) expense, net ( 5,200 ) 1,650 4,489 Change in fair value of warrant liabilities ( 11,919 ) ( 78,343 ) 277,315 Change in fair value of earn-out shares — — 47,100 Foreign currency transaction (gain) loss, net ( 2,385 ) 1,296 69 (Loss) income before provision for income taxes ( 101,889 ) 45,339 ( 380,639 ) Income tax (benefit) expense ( 1,773 ) 1,115 ( 1,875 ) Net (loss) income ( 100,116 ) 44,224 ( 378,764 ) Comprehensive (loss) income, net of tax: Foreign currency translation adjustments 1,494 ( 3,273 ) ( 1,499 ) Comprehensive (loss) income $ ( 98,622 ) $ 40,951 $ ( 380,263 ) Net (loss) income per share Basic $ ( 0.76 ) $ 0.30 $ ( 3.71 ) Diluted $ ( 0.76 ) $ ( 0.23 ) $ ( 3.71 ) Weighted average common shares outstanding Basic 131,680,605 147,554,090 102,114,949 Diluted 131,680,605 148,506,312 102,114,949 The accompanying notes are an integral part of these consolidated financial statements. 87 THE BEAUTY HEALTH COMPANY CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) (in thousands, except for share amounts) Common Stock Additional Paid-in Capital Note Receivable from Stockholder Accumulated other Comprehensive Income (Loss) Accumulated Deficit Total Stockholders’ Equity (Deficit) Shares Amount BALANCE, December 31, 2020 35,501,743 $ 4 $ 13,952 $ ( 554 ) $ 242 $ ( 44,211 ) $ ( 30,567 ) Net loss — — — — — ( 378,764 ) ( 378,764 ) Issuance of Class A Common Stock in connection with business acquisitions 590,099 — 9,341 — — — 9,341 Issuance of earn-out shares 7,500,000 1 136,574 — — — 136,575 Issuance of Class A Common Stock pursuant to equity compensation plan 30,963 — — — — — — Shares withheld for tax withholdings on vested stock awards ( 6,812 ) — — — — — — Reverse recapitalization transaction, net 89,898,170 9 182,397 554 — — 182,960 Purchase of capped calls related to Convertible Senior Notes — — ( 90,150 ) — — — ( 90,150 ) Issuance of Class A Common Stock in connection with the Warrant Redemptions 17,083,884 2 457,718 — — — 457,720 Share-based compensation — — 12,418 — — — 12,418 Foreign currency translation adjustment — — — — ( 1,499 ) — ( 1,499 ) BALANCE, December 31, 2021 150,598,047 $ 16 $ 722,250 $ — $ ( 1,257 ) $ ( 422,975 ) $ 298,034 Net income — — — — — 44,224 44,224 Issuance of Class A Common Stock in connection with asset acquisition 28,733 — 500 — — — 500 Issuance of Class A Common Stock pursuant to equity compensation plan 409,565 — — — — — — Repurchase and retirement of Class A Common Stock ( 18,759,243 ) ( 2 ) ( 159,998 ) — — — ( 160,000 ) Equity forward contract in connection with accelerated share repurchase — — ( 40,000 ) — — — ( 40,000 ) Shares withheld for tax withholdings on vested stock awards ( 62,407 ) — ( 927 ) — — — ( 927 ) Share-based compensation — — 28,495 — — — 28,495 Foreign currency translation adjustment — — — — ( 3,273 ) — ( 3,273 ) BALANCE, December 31, 2022 132,214,695 $ 14 $ 550,320 $ — $ ( 4,530 ) $ ( 378,751 ) $ 167,053 The accompanying notes are an integral part of these consolidated financial statements. 88 THE BEAUTY HEALTH COMPANY CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) (Continued) (in thousands, except for share amounts) Common Stock Additional Paid-in Capital Note Receivable from Stockholder Accumulated other Comprehensive Income (Loss) Accumulated Deficit Total Stockholders’ Equity (Deficit) Shares Amount BALANCE, December 31, 2022 132,214,695 $ 14 $ 550,320 $ — $ ( 4,530 ) $ ( 378,751 ) $ 167,053 Net loss — — — — — ( 100,116 ) ( 100,116 ) Issuance of Class A Common Stock in connection with asset acquisition 109,625 — 1,310 — — — 1,310 Issuance of Class A Common Stock pursuant to equity compensation plan 1,039,176 — — — — — — Issuance of Class A Common Stock relating to employee stock purchase plan 241,342 — 3,036 — — — 3,036 Shares withheld for tax withholdings on vested stock awards ( 355,087 ) — ( 3,234 ) — — — ( 3,234 ) Accelerated share repurchase payment — — ( 2,240 ) — — — ( 2,240 ) Repurchase and retirement of Class A Common Stock ( 10,350,749 ) ( 2 ) ( 30,455 ) — — — ( 30,457 ) Share-based compensation — — 22,544 — — — 22,544 Foreign currency translation adjustment — — — — 1,494 — 1,494 BALANCE, December 31, 2023 122,899,002 $ 12 $ 541,281 $ — $ ( 3,036 ) $ ( 478,867 ) $ 59,390 The accompanying notes are an integral part of these consolidated financial statements. 89 THE BEAUTY HEALTH COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Year Ended December 31, 2023 2022 2021 Cash flows from operating activities: Net (loss) income $ ( 100,116 ) $ 44,224 $ ( 378,764 ) Adjustments to reconcile net (loss) income to net cash from operating activities Share-based compensation 22,544 28,495 12,418 Amortization of intangible assets 20,907 14,852 13,297 Depreciation of property and equipment 11,332 7,164 4,486 Amortization of other assets 2,436 857 147 Amortization of debt issuance costs 4,229 4,229 4,061 Syndeo inventory write-down 19,568 — — Inventory write-down 18,272 5,144 1,134 Provision for estimated credit losses 5,153 1,622 854 Change in fair value adjustment of warrant liabilities ( 11,919 ) ( 78,343 ) 277,315 Change in fair value adjustment of earn-out shares — — 47,100 Other, net 5,988 10,423 5,733 Changes in operating assets and liabilities: Accounts receivable 16,520 ( 32,025 ) ( 31,013 ) Inventories ( 22,617 ) ( 84,363 ) ( 7,288 ) Income taxes receivable ( 3,666 ) 3,871 35 Prepaid expenses and other current assets ( 3,285 ) ( 17,718 ) ( 5,067 ) Accounts payable 15,783 ( 262 ) 10,523 Accrued payroll and other expenses 26,936 ( 3,357 ) 24,784 Income taxes payable 1,282 665 ( 594 ) Other, net ( 7,597 ) ( 12,078 ) ( 7,522 ) Net cash provided by (used for) operating activities 21,750 ( 106,600 ) ( 28,361 ) Cash flows used in investing activities: Cash paid for intangible assets ( 9,224 ) ( 6,547 ) ( 4,415 ) Cash paid for property and equipment ( 3,825 ) ( 10,847 ) ( 11,201 ) Cash paid for asset acquisitions ( 18,458 ) ( 1,475 ) — Cash paid for business acquisition — — ( 22,896 ) Other, net — — 781 Net cash used for investing activities ( 31,507 ) ( 18,869 ) ( 37,731 ) Cash flows from financing activities: Repurchases of Class A Common Shares ( 30,155 ) ( 160,000 ) — Payment of accelerated share repurchases ( 2,240 ) — — Payment of tax withholdings on vested stock awards ( 3,234 ) ( 927 ) — Payment of contingent consideration related to acquisitions ( 1,819 ) — — Proceeds from issuance of convertible senior notes — — 750,000 Purchase of capped calls related to convertible senior notes — — ( 90,150 ) Proceeds from exercise of warrants — — 188,378 Proceeds from revolving facility — — 5,000 Repayment of revolving facility — — ( 5,000 ) The accompanying notes are an integral part of these consolidated financial statements 90 THE BEAUTY HEALTH COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (in thousands) Year Ended December 31, 2023 2022 2021 Payment of debt issuance costs — — ( 21,341 ) Repayment of term loan — — ( 225,486 ) Proceed from Business Combination — — 357,634 Advanced payment for equity forward contract — ( 40,000 ) — Other, net — ( 4,315 ) — Net cash (used for) provided by financing activities ( 37,448 ) ( 205,242 ) 959,035 Net change in cash and cash equivalents ( 47,205 ) ( 330,711 ) 892,943 Effect of foreign currency translation on cash 2,033 ( 2,978 ) ( 543 ) Cash and cash equivalents, beginning of period 568,197 901,886 9,486 Cash and cash equivalents, end of period $ 523,025 $ 568,197 $ 901,886 Supplemental disclosures of cash flow information and non-cash investing and financing activities: Cash paid for interest $ 9,375 $ 9,818 $ 10,249 Class A Common Stock issued for asset acquisition 1,310 500 — Cash paid (received) for income taxes 2,269 ( 1,339 ) 1,700 Issuance of earn-out shares — — 136,575 Trade receivables due from seller — — 6,623 Notes payable to seller — — 2,153 Contingent consideration — — 783 Issuance of Class A Common Stock in connection with business acquisitions — — 9,341 The accompanying notes are an integral part of these consolidated financial statements. 91 THE BEAUTY HEALTH COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 — Description of Business The Beauty Health Company (the “Company”) is a global category-creating company focused on 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 global community of estheticians, partners, and consumers, the Company is personalizing skin health for all ages, genders, skin tones, and skin types. Historical Information The Company (f.k.a. Vesper Healthcare Acquisition Corp.) was incorporated in the State of Delaware on July 8, 2020. On May 4, 2021, we consummated the previously announced business combination pursuant to that certain Agreement and Plan of Merger, dated December 8, 2020, by and among Vesper Healthcare Acquisition Corp. (“Vesper Healthcare”), Hydrate Merger Sub I, Inc. (“Merger Sub I”), Hydrate Merger Sub II, LLC (“Merger Sub II”), LCP Edge Intermediate, Inc., the indirect parent of HydraFacial LLC, f.k.a. Edge Systems LLC (“Hydrafacial”), and LCP Edge Holdco, LLC (“LCP,” or “Former Parent,” and, in its capacity as the stockholders’ representative, the “Stockholders’ Representative”) (the “Merger Agreement”), which provided for: (a) the merger of Merger Sub I with and into Hydrafacial, with Hydrafacial continuing as the surviving corporation (the “First Merger”), and (b) immediately following the First Merger and as part of the same overall transaction as the First Merger, the merger of Hydrafacial with and into Merger Sub II, with Merger Sub II continuing as the surviving entity (the “Second Merger” and, together with the First Merger, the “Mergers” and, together with the other transactions contemplated by the Merger Agreement, the “Business Combination”). As a result of the First Merger, the Company owns 100 % of the outstanding common stock of Hydrafacial and each share of common stock and preferred stock of Hydrafacial was cancelled and converted into the right to receive a portion of the consideration payable in connection with the Mergers. As a result of the Second Merger, the Company owns 100 % of the outstanding interests in Merger Sub II. In connection with the closing of the Business Combination, the Company owns, directly or indirectly, 100 % of the stock of Hydrafacial and its subsidiaries and the stockholders of Hydrafacial as of immediately prior to the effective time of the First Merger (the “Hydrafacial Stockholders”) hold a portion of the Company’s Class A common stock, par value $ 0.0001 per share (the “Class A Common Stock”). Basis of Presentation The Consolidated Financial Statements in this Annual Report on Form 10-K are presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and include the Company’s consolidated domestic and international subsidiaries. Intercompany accounts and transactions have been eliminated. Subsequent to the issuance of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022, during the six months ended June 30, 2023, the Company identified prior period misstatements related to the elimination of intercompany balances and right of return assets. Although the Company concluded that these misstatements were not material, either individually or in the aggregate, the Company elected to revise its previously issued consolidated financial statements to correct for these misstatements. These misstatements impacted the fiscal years 2020 to 2022. The revision of the previously issued consolidated financial statements is presented in the accompanying consolidated financial statements and related disclosures. For further detail, refer to Note 19 – Revision for Immaterial Misstatements. Certain prior period amounts have been reclassified to conform to the current period presentation, including previously reported inventories in the consolidated statement of cash flows which were disclosed net of $ 5.1 million and $ 1.1 million inventory write-down for the years ended December 31, 2022 and December 31, 2021, respectively. We reclassified the inventory write-down in the prior period to conform to the current period presentation of inventory write-down as an adjustment to reconcile net income to net cash from operating activities. This reclassification had no effect on the previously reported net cash used for operating activities. 92 Note 2 — Summary of Significant Accounting Policies Business Combination The Business Combination was accounted for as a reverse recapitalization in accordance with GAAP. Under this method of accounting, the Company is treated as the “acquired” company for financial reporting purposes and Hydrafacial is treated as the accounting acquirer. This determination was primarily based on the following: • the Hydrafacial stockholders as of immediately prior to the effective time of the First Merger considered in the aggregate have the largest minority interest of the voting power in the combined entity after taking into account actual redemptions; • the operations of Hydrafacial prior to the acquisition comprise the only ongoing operations of the post-combination company; • senior management of Hydrafacial comprises the senior management of the post-combination company; • the relative size and valuation of Hydrafacial compared to the Company; and • pursuant to that certain Investor Rights Agreement, dated as of May 4, 2021, by and between the Company and Hydrafacial, Hydrafacial was given the right to designate certain initial members of the Board of Directors of the Company immediately after giving effect to the transactions contemplated by the Merger Agreement. Consideration was also given to the fact that the Company paid a purchase price consisting of a combination of cash and equity consideration and its stockholders may have a significant amount of voting power, should the Company’s public stockholders be considered in the aggregate. However, based on the aforementioned factors of management, board representation, largest minority stockholder as noted above, and the continuation of the Hydrafacial business as well as its size, it was determined that accounting for the Business Combination as a reverse recapitalization was appropriate. Accordingly, for accounting purposes, the financial statements of the Company represent a continuation of the financial statements of Hydrafacial with the acquisition being treated as the equivalent of Hydrafacial issuing stock for the net assets of the Company, accompanied by a recapitalization. The net assets of the Company are stated at historical cost, with no goodwill or other intangible assets recorded. In connection with the Business Combination each share of Hydrafacial common stock outstanding immediately prior to the Business Combination converted into the right to receive 653.109 shares (the “Exchange Ratio”) of Class A Common Stock of the Company. The recapitalization of the number of shares of Class A Common Stock attributable to Hydrafacial is reflected retroactively to the earliest period presented based upon the Exchange Ratio and is utilized for calculating earnings per share in all prior periods presented. Use of estimates and assumptions in preparing consolidated financial statements In preparing its consolidated financial statements in conformity with GAAP, the Company makes assumptions, estimates, and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the consolidated financial statements and the reported amounts of net sales and expenses during the reported periods. On an ongoing basis, the Company evaluates its estimates, including, among others, those related to revenue related reserves, allowance for estimated credit losses, the realizability of inventory, fair value measurements including common stock, warrant liabilities and earn-out shares liability valuations, useful lives of property and equipment, goodwill and finite-lived intangible assets, accounting for income taxes, stock-based compensation expense and commitments and contingencies. The Company’s estimates are based on historical experience and on its future expectations that are believed to be reasonable. The combination of these factors forms the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from current estimates and those differences may be material. Cash and Cash Equivalents All highly liquid investments, including credit card receivables due from banks, with original maturities of 90 days or less at date of purchase, are reported at fair value and are considered to be cash equivalents. The balances of cash at financial institutions may exceed the federally insured limit. 93 Accounts Receivable Accounts receivable primarily arise out of product purchases by customers and from various distribution channels. Typical payment terms provide that customers pay within less than a year of the invoice. The allowance for estimated credit losses represents management's best estimate of probable credit losses in accounts receivable. The allowance is based upon a number of factors, including the length of time accounts receivable are past due, the Company’s previous loss history, the specific customer’s ability to pay its obligation and any other forward-looking data regarding customers’ ability to pay which may be available, and other qualitative factors. Receivables are written off against the allowance when management believes that the amount receivable will not be recovered. Inventories 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. 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. Cost is determined using weighted-average costs, and includes all costs incurred to deliver inventory to the Company’s distribution centers including freight, non-refundable taxes, duty, and other landing costs. The Company periodically reviews its inventories and makes a provision as necessary to appropriately value goods that are obsolete, have quality issues, or are damaged. The amount of the provision is equal to the difference between the cost of the inventory and its net realizable value based upon assumptions about product quality, damages, future demand, selling prices, and market conditions. If changes in market conditions result in reductions in the estimated net realizable value of its inventory below its previous estimate, the Company would decrease its basis in the inventory in the period in which it made such a determination. During the quarter ended December 31, 2023, the Company determined with respect to Syndeo devices, to market and sell Syndeo 3.0 devices exclusively, and as such, the Company 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. Refer to Note 18 – Restructuring Charges for further detail. Business Combinations The purchase price of an acquisition is measured as the aggregate of the fair value of the consideration transferred including the acquisition-date fair value of the Company’s previously held equity interests. The purchase price is allocated to the fair values of the tangible and intangible assets acquired and liabilities assumed, with any excess recorded as goodwill. These fair value determinations require judgment and may involve the use of significant estimates and assumptions. The purchase price allocation may be provisional during a measurement period of up to one year to provide reasonable time to obtain the information necessary to identify and measure the assets acquired and liabilities assumed. Any such measurement period adjustments are recognized in the period in which the adjustment amount is determined. Transaction costs associated with the acquisition are expensed as incurred. Goodwill Goodwill is recorded as the difference, if any, 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. The Company has one reporting unit and management evaluates the carrying value of the Company’s goodwill annually at the end of its fiscal year or whenever events or changes in circumstances indicate that an impairment may exist. When testing goodwill for impairment, management has the option of first performing a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as the basis to determine if it is necessary to perform a quantitative goodwill impairment test. In performing the qualitative assessment, management considers the extent to which unfavorable events or circumstances identified, such as changes in economic conditions, industry and market conditions or company specific events, could affect the comparison of the reporting unit’s fair value with its carrying amount. If management concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, management is required to perform a quantitative impairment test. 94 Quantitative impairment testing for goodwill is based upon the fair value of a reporting unit as compared to its carrying value. Under a quantitative impairment test, management will make certain judgments and assumptions in allocating assets and liabilities to determine carrying values for our reporting unit. The impairment loss recognized would be the difference between a reporting unit’s carrying value and fair value in an amount not to exceed the carrying value of the reporting unit’s goodwill. Testing goodwill for impairment requires management to estimate fair values of reporting units using significant estimates and assumptions. The assumptions made will impact the outcome and ultimate results of the testing. Management will use industry accepted valuation models and set criteria that are reviewed and approved by various levels of management and, in certain instances, we will engage independent third-party valuation specialists for advice. The key estimates and factors used in the valuation models would include revenue growth rates and profit margins based on our internal forecasts, our specific weighted-average cost of capital used to discount future cash flows, and comparable market multiples for the industry segment, when applicable, as well as our historical operating trends. 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 and could cause the fair values of the reporting units to fall below their respective carrying values, resulting in a non-cash impairment charge. Such charge could have a material effect on the consolidated financial statements. Intangible Assets Intangible assets are composed of developed technology, customer relationships and trademarks. 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. 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 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. If these assumptions differ materially from future results, we may record impairment charges in the future. Property and Equipment Property and equipment is stated at cost less accumulated depreciation. Repair and maintenance costs are expensed as incurred. Depreciation commences when an asset is ready for its intended use. Depreciation is recorded on a straight-line basis over each asset’s estimated useful life. Leasehold improvements are depreciated on a straight-line basis over the lesser of the length of the lease and the estimated useful life of the improvement. Leased Property and Equipment Right-of-use assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. The Company uses an incremental borrowing rate to determine the present value of lease payments as the rate implicit in the lease is generally not readily determinable. The Company excludes right-of-use assets and lease liabilities for leases with an initial term of 12 months or less from the balance sheet,and combines lease and non-lease components for property leases, which primarily relate to ancillary expenses such as common area maintenance expenses, property taxes, property insurance, and management fees. The Company determines if an arrangement is a lease at inception by assessing whether it conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Renewal and termination options are included in the lease term when it is reasonably certain that the Company will exercise the option. Certain of these leases include escalation clauses that adjust rental expense to reflect changes in price indices, as well as renewal and termination options. Operating lease costs are recognized on a straight-line basis over the lease term. 95 Impairment of Long-lived Assets Long-lived assets, including intangible assets with finite lives and right-of-use assets, are evaluated for impairment when the occurrence of events or a change in circumstances indicates that the carrying value of the assets may not be recoverable as measured by comparing their carrying value to the estimated undiscounted future cash flows generated by their use and eventual disposition. Impaired assets are recorded at fair value, determined principally by discounting the future cash flows expected from their use and eventual disposition. Reductions in asset values resulting from impairment valuations are recognized in income in the period that the impairment is determined. Warrant Liabilities During October 2020, in connection with Vesper’s initial public offering, the Company issued 15,333,333 warrants to purchase shares of the Company’s common stock at $ 11.50 per share (the “Public Warrants”). Simultaneously, with the consummation of Vesper’s initial public offering, the Company issued 9,333,333 warrants to purchase shares of the Company’s common stock at $ 11.50 per share (the “Private Placement Warrants”), to BLS Investor Group LLC (the “Sponsor”). On November 3, 2021 all of the Public Warrants that were outstanding were redeemed (the “Redemption Date”). As of December 31, 2023 and 2022, no Public Warrants were outstanding and approximately 7 million Private Placement Warrants remain outstanding. As of December 31, 2023 and 2022, the Private Placement Warrants are measured at fair value using a Monte Carlo simulation model because these warrants are not subject to redemption if the reference value of the common stock, as defined, is between $ 10.00 and $ 18.00 per share. The Private Placement Warrants are classified as a Level 3 financial instruments as of December 31, 2023 and 2022. The Private Placement Warrants expire five years after the Business Combination. The Company classified the Public Warrants and currently classifies the Private Placement Warrants as liabilities on its 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 . In certain events outside of the Company’s control, the Private Placement Warrant holders are entitled to receive cash while in certain scenarios the holders of the Company’s common stock are not entitled to receive cash or may receive less than 100% of any proceeds in cash, which precludes these instruments from being classified within equity pursuant to ASC 815-40. The Public and Private Placement Warrants were initially recorded at fair value on the date of the Business Combination and are subsequently adjusted to fair value at each subsequent reporting date. Changes in the fair value of these instruments are recognized within change in fair value of warrant liabilities in the Company’s Consolidated Statements of Comprehensive Income (Loss) . Earn-out Shares Liability In addition to the consideration paid at the closing of the Business Combination, the former stockholders of Hydrafacial received contingent consideration in the form of an aggregate of 7.5 million shares of the Company’s Class A Common Stock (the “Earn-out Shares”) as a result of the Company’s completion of the acquisitions of four target businesses, as contemplated by the Merger Agreement, in June and July 2021 that were identified by Hydrafacial. With the closing of these four distributor acquisitions in Australia, France, Germany and Mexico, the 7.5 million Earn-out Shares were earned and subsequently issued on July 15, 2021. The Company accounted for the Earn-out Shares liability as contingent consideration and recorded an Earn-out Shares liability for the Earn-out Shares in accordance with ASC 480 – Distinguishing Liabilities from Equity . The liability was included as part of the consideration transferred in the Business Combination and was recorded at its then current fair value. 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) as change in the fair value of earn-out shares liability. 96 Convertible Senior Notes On September 14, 2021, the Company issued an aggregate of $ 750 million in principal amount of its 1.25 % Convertible Senior Notes due 202 6 (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”). The Notes were issued pursuant to, and are governed by, an indenture (the “Indenture”), dated as of September 14, 2021, between the Company and U.S. Bank National Association, as trustee (the “Trustee”). The Company accounts for the Notes under Accounting Standards Codification (“ASC”) ASC 470-20 - Debt with Conversion and Other Options and Derivatives and Hedging—Contracts in Entity's Own Equity (“ASU 2020-06”), which the Company early ad opted in the first quarter of 2021 concurrent with the issuance of the Notes. The Company records the Notes as a long-term liability at face value net of issuance costs. If any of the conditions to the convertibility of the Notes is satisfied, or the Notes become due within one year, then the Company may be required under applicable accounting standards to reclassify the carrying value of the Notes as a current, rather than a long-term liability. Refer to Note 9— Long-term Debt for further detail. Capped Call Transactions Capped call transactions cover the aggregate number of shares of the Company’s common stock that will initially underlie the Notes, and generally reduce potential dilution to the Company’s common stock upon any conversion of Notes and/or offset any cash payments the Company 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. The Company determined that the freestanding capped call option contracts qualify as equity under the accounting guidance on indexation and equity classification, and recognized the contract by recording an entry to additional paid-in capital (“APIC”) in stockholders’ equity in its Consolidated Balance Sheets. The Company also determined that the capped call option contracts meet the definition of a derivative under ASC 815 — Derivatives and Hedging (“ASC 815”), but are not required to be accounted for as a derivative as they meet the scope exception outlined in ASC 815. The capped call options are recorded in APIC and not remeasured. Issuance Costs Issuance costs related to our Notes offering were capitalized and offset against proceeds from the Notes. Issuance costs consist of legal and other direct costs related to the issuance of the Notes and are amortized to interest expense over the term of the Notes using the effective interest method. Refer to Note 9 – Long-term Debt for further detail. Revenue Recognition Net sales consist of the sale of products to retail and wholesale customers through e-commerce and distributor sales. The Company generates revenue through manufacturing and selling its patented hydradermabrasion delivery systems (“Delivery Systems”). In conjunction with the sale of Delivery Systems, the Company also sells single-use tips, solutions, and serums used to provide a Hydrafacial treatment (collectively “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. The Company distributes products to customers both through national and international retailers as well as direct-to-consumers through its e-commerce and store channels. The Company 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 the Company upon issuance of a corresponding invoice. For corporate customers, a contract exists when the customer submits a purchase order and is accepted upon issuance of a subsequent invoice. For distributors, a customer submits an order request which is processed in the system by a sales representative. This is also considered accepted upon the subsequent issuance of an invoice by the Company. For all customers, each invoice is considered a separate contract for accounting purposes. Revenue is recognized in an amount that reflects the consideration that the Company expects to receive in exchange for the sale of its products which is determined based upon the sales price per the invoice or contract and the estimated fair market value of any non-cash consideration, if applicable. Discounts applied to invoices are not associated with future purchases and solely relate to the product invoiced. As a result, the invoice and transaction price are recorded net of any discounts. 97 The Company’s sales terms for its Delivery Systems generally allow for the right of return within 30 days, subject to a restocking fee. Estimates for variable consideration, which relate to sales returns associated with Delivery Systems, are based on the expected amount the Company will be entitled to receive, subject to constraint, and is recorded as a reduction against net sales. Sales returns are estimated based on historical sales and returns data and have not significantly impacted net sales because sales returns are not material. Depending on the type of Delivery System that was purchased, the Company offers its customers with a one -year or two -year standard type warranty that provides the customer with the assurance that its Delivery Systems will function as intended. During the fourth quarter of 2023, the Company announced a one year extension of warranty for certain Syndeo systems from the date it was either brought to the 3.0 standards or the customer received a Syndeo 3.0 device. The warranty reserve is assessed periodically, and the reserve is adjusted as necessary based on a review of historical warranty experience as well as the length and actual terms of the warranties. Total warranty reserve was approximately $ 6 million and $ 2 million as of December 31, 2023 and 2022, respectively. As of December 31, 2023, approximately $ 4 million was included in other accrued expenses and approximately $ 2 million was included in other long-term liabilities on the Consolidated Balance Sheets. As of December 31, 2022, approximately $ 2 million was included in other accrued expenses on the Consolidated Balance Sheets. The Company also has a loyalty program that allows members to receive points based on qualifying Consumable purchases that may be redeemed as a discount on future consumable purchases. This customer option is a material right and, accordingly, represents a separate performance obligation to the customer. The related loyalty program deferred revenue included in other accrued expenses on the Consolidated Balance Sheets was approximately $ 1 million as of December 31, 2023 and 2022. In addition, during the fiscal years 2023 and 2022 the Company provided certain customers with the option to trade-in their existing Delivery System and apply the fair value of their old Delivery System towards the transaction price of a Syndeo device, the Company’s current generation Delivery System (“Syndeo”). The Company determined that the trade-in is viewed as a marketing offer due to the fact that it does not constitute the Company’s customary business practice and was not offered at contract inception. Therefore, the trade-in is accounted for under ASC 606 and represents a type of noncash consideration, which the Company measures at its estimated fair value. The estimated fair value 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 estimated selling price is determined based on the Company’s historical experience of reselling refurbished Delivery Systems. 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. Payment terms vary by customer but typically provide for the customer to pay within less than a year; however, the Company provides options for qualified customers through third party financing companies, generally without recourse to the Company, or through internal financing to pay for Delivery Systems over 12 monthly installments or less. Under certain limited arrangements, which are not material, the customer’s receivable balance is with recourse whereby we are responsible for repaying the financing company should the customer default. The Company performs credit evaluations of customers and evaluates the need for allowances for potential credit losses based on historical experience, as well as current and expected general economic conditions. The Company does not evaluate contracts of one year or less for the existence of a significant financing component. Cost of Sales The Company’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. Selling and Marketing Expense 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. Advertising costs are expensed in the period in which they are incurred. Total advertising costs were $ 2.3 million, $ 3.8 million and $ 3.2 million for the years ending December 31, 2023, 2022, and 2021 respectively. 98 Research and Development Expense 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. General and Administrative Expense 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 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. 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, 2023 and 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. 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. Income Taxes The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets (“DTAs”) and deferred tax liabilities (“DTLs”) for the expected future tax consequences of events that have been included in the financial statements. Under this method, it determines DTAs and DTLs on the basis of the differences between the financial statement and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on DTAs and DTLs is recognized in income in the period that includes the enactment date. 99 The Company recognizes DTAs to the extent that it believes these assets are more likely than not to be realized. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, carryback potential if permitted under the tax law, and results of recent operations. A valuation allowance is established, when necessary, to reduce deferred tax assets to the amount that is more likely than not to be realized based on currently available evidence. If the Company determines that it would be able to realize our DTAs in the future in excess of the net recorded amount, it would make an adjustment to the DTA valuation allowance, which would reduce the provision for income taxes. The Company records uncertain tax positions in accordance with ASC 740 on the basis of a two-step process in which (1) it determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, the Company recognizes the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority. If any, the Company recognizes interest and penalties on unrecognized tax benefits in income tax expense. Foreign Currency The Company’s reporting currency is the U.S. Dollars. The functional currency for each entity included in these consolidated financial statements that is domiciled outside of the United States is generally the applicable local currency. Assets and liabilities of each foreign entity are translated into U.S. dollars at the exchange rate in effect on the balance sheet date. Net revenue and expenses are translated at the average rate in effect during the period. The resulting currency translation adjustments are recorded as a component of accumulated other comprehensive loss within stockholders' equity. Transactions between the parent company and its foreign subsidiaries are denominated in U.S. Dollars or in local currency. Accordingly, amounts are remeasured on the balance sheet date and recorded as a foreign currency transaction gain or loss in the Consolidated Statements of Comprehensive Income (Loss). 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. Concentration of Credit Risk Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. The Company primarily maintains its operating cash balance with a major financial institution. At times, cash balances may be in excess of Federal Deposit Insurance Corporation insurance limits. The Company has not experienced any losses in these accounts and does not believe it is exposed to any significant credit risk in this area. Accounts receivable are unsecured and the Company is at risk to the extent such amounts become uncollectible. Concentration of credit risk with respect to accounts receivable is generally mitigated by the Company performing ongoing credit evaluations of its customers. Stock-based Compensation The Company accounts for stock-based compensation transactions using a fair-value method and recognizes the fair value of each award as an expense over the service period. The Company estimates the fair value of stock options granted using the Black-Scholes option-pricing model. The use of the Black-Scholes model requires a number of estimates, including the expected option term, the expected volatility in the price of the Company’s common stock, the risk-free rate of interest and the dividend yield on the Company’s common stock. The fair value of the Company’s restricted stock units is the closing price of the Company’s common stock on the grant date. The fair value of the Company’s performance-based restricted stock units is estimated using a Monte Carlo simulation model. The consolidated financial statements include amounts that are based on the Company’s best estimates and judgments. The Company classifies compensation expense related to these awards in the Consolidated Statements of Comprehensive Income (Loss) based on the department to which the recipient reports. The Company’s policy is to account for forfeitures in period that they occur. 100 Earnings per Share Earnings per share is calculated using the weighted-average number of common and exchangeable shares outstanding during the period. Exchangeable shares are the equivalent of common shares in all material respects. Diluted earnings per share is calculated by dividing net income available to stockholders for the period by the diluted weighted-average number of shares outstanding during the period. Diluted earnings per share reflects the potential dilution from common shares issuable through stock options, performance-based restricted stock units, and restricted stock units using the treasury stock method and the "if-converted" met hod related to the Notes . Fair Value of Financial Instruments The fair value of the Company’s financial assets and liabilities reflects management’s estimate of amounts that the Company would have received in connection with the sale of the assets or paid in connection with the transfer of the liabilities in an orderly transaction between market participants at the measurement date. In connection with measuring the fair value of its assets and liabilities, the Company seeks to maximize the use of observable inputs (market data obtained from independent sources) and to minimize the use of unobservable inputs (internal assumptions about how market participants would price assets and liabilities). The following fair value hierarchy is used to classify assets and liabilities based on the observable inputs and unobservable inputs used in order to value the assets and liabilities: Level 1: Quoted prices in active markets for identical assets or liabilities. An active market for an asset or liability is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis. Level 2: Observable inputs other than Level 1 inputs. Examples of Level 2 inputs include quoted prices in active markets for similar assets or liabilities and quoted prices for identical assets or liabilities in markets that are not active. Level 3: Unobservable inputs based on our assessment of the assumptions that market participants would use in pricing the asset or liability. New Accounting Pronouncements Not Yet Adopted In November 2023, the Financial Standards Accounting Board (“FASB”) issued Accounting Standards Update 2023-07 "Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures" which expands annual and interim disclosure requirements for reportable segments, primarily through enhanced disclosures about significant segment expenses. ASU 2023-07 is effective for annual periods beginning January 1, 2024, and for interim periods beginning January 1, 2025, with early adoption permitted. The Company is currently evaluating the potential effect that the updated standard will have on its financial statement disclosures. In December 2023, the FASB issued ASU 2023-09 "Income Taxes (Topic 740): Improvements to Income Tax Disclosures" to expand the disclosure requirements for income taxes, specifically related to the rate reconciliation and income taxes paid. ASU 2023-09 is effective for annual periods beginning January 1, 2025, with early adoption permitted. The Company is currently evaluating the potential effect that the updated standard will have on its financial statement disclosures. Note 3 — Business Combinations Business Combination — Reverse Recapitalization The closing of the Business Combination occurred on May 4, 2021. In connection with the Business Combination: • Certain accredited investors (the “PIPE Investors”) entered into subscription agreements (the “PIPE Subscription Agreements”) pursuant to which the PIPE Investors agreed to purchase 35,000,000 shares (the “PIPE Shares”) of the Company’s Class A Common Stock at a purchase price per share of $ 10.00 for an aggregate purchase price of $ 350.0 million (the “PIPE Investment”). The PIPE Investment was consummated substantially concurrently with the Closing of the Business Combination. 101 • Prior to the Business Combination, the Company issued an aggregate of 11,500,000 shares of the Company’s Class B Common Stock (the “Founder Shares”) to the Sponsor for an aggregate purchase price of $ 25,000 in cash. All outstanding Founder Shares were automatically converted into shares of the Company’s Class A Common Stock on a one -for-one basis at the Closing and will continue to be subject to the transfer restrictions applicable to such shares. • In connection with the Closing, holders of 2,672,690 shares of the Company’s Class A Common Stock exercised their rights for the Company to redeem their respective shares for cash at an approximate price of $ 10.00 per share, for an aggregate of approximately $ 26.7 million, which was paid to such holders at Closing. • Immediately after giving effect to the Merger and the PIPE Investment, there were 125,329,053 shares of the Company’s Class A Common Stock issued and outstanding. • The aggregate gross cash consideration received by the Company in connection with the Business Combination was $ 783 million, which consisted of proceeds of $ 350 million from the PIPE Investment, plus approximately $ 433 million of cash from the Company’s trust account that held the proceeds from the Company’s initial public offering (the “Trust Account”). The aggregate gross cash consideration received was reduced by $ 368 million, which consisted of cash payments made to the former stockholders of Hydrafacial, and further reduced by an additional $ 57 million for the payment of direct transaction costs incurred by Hydrafacial and the Company which were reflected as a reduction of proceeds. The Company used the net proceeds to repay all of its outstanding indebtedness at the Closing. The remainder of the consideration paid to the Hydrafacial stockholders consisted of 35,501,743 newly issued shares of Class A Common Stock (the “Stock Consideration”). The net cash received from the Business Combination was subject to a working capital adjustment of $ 0.9 million. The Company also issued 70,860 shares related to the working capital adjustment. The following table reconciles the elements of the Business Combination to the Company’s Consolidated Statements of Cash Flows and the Consolidated Statements of Stockholders’ Equity (Deficit) for the year ended December 31, 2021: (in thousands) Recapitalization Cash in trust, net of redemptions $ 433,382 Cash — PIPE 350,000 Less: Cash paid out to Former Parent ( 367,870 ) Less: Transaction costs and advisory fees ( 56,976 ) Less: Cash paid out from net working capital adjustment related to acquisitions ( 902 ) Net Cash Received from Business Combination $ 357,634 The number of shares of Class A Common Stock issued following the consummation of the Business Combination: Number of Shares Class A common stock outstanding prior to Business Combination 46,000,000 Less: Redemption of Vesper Class A Common Stock ( 2,672,690 ) Class A common stock of Vesper 43,327,310 Founder shares (Vesper Class B Common Stock) 11,500,000 PIPE Shares 35,000,000 Business Combination and PIPE shares 89,827,310 Legacy Hydrafacial shares (1) 35,501,743 Working capital adjustment Class A Common Stock issued 70,860 Total Shares of Class A Common Stock after Business Combination 125,399,913 _______________ (1) The number of Legacy Hydrafacial shares was determined from the 54,358 shares of Hydrafacial common stock outstanding immediately prior to the closing of the Business Combination multiplied by the Exchange Ratio of 653.109 . 102 Distributor Acquisitions On June 4, 2021, the Company acquired High Tech Laser, Australia Pty Ltd (“HTL”), a distributor of the Company’s products in Australia. On July 1, 2021, the Company acquired Wigmore Medical France (“Wigmore”), Ecomedic GmbH (“Ecomedic”) and Sistemas Dermatologicos Internacionales (“Sidermica”), distributors of the Company’s products in France, Germany and Mexico, respectively. Through these acquisitions, the Company plans to directly sell to the respective markets and improve services for its products. Cash paid for the four distributors totaled $ 25.7 million. Subsequent to the purchase price measurement period, the Company made contingent consideration payments totaling $ 1.6 million in connection with the Ecomedic and Sidermica acquisitions which were recorded in other expense, net in the Consolidated Statements of Comprehensive Income (Loss) . The Company applied the acquisition method of accounting and established a new basis of accounting on the dates of the respective acquisitions. The assets acquired by the Company are accordingly measured at their estimated fair values as of the acquisition date. The goodwill arising from the acquisitions consists largely of the business reputation of the acquired company in the marketplace and its assembled workforce. The goodwill is not deductible for income tax purposes. The Company finalized the valuation of assets acquired and liabilities assumed for the distributor acquisitions as of June 30, 2022. The following table summarizes the consideration and fair values assigned to the assets acquired and liabilities assumed at the dates of acquisition for the Wigmore, Ecomedic and Sidermica acquisitions and summarizes the HTL acquisition after measurement period adjustments. (in thousands) HTL Wigmore (2) Ecomedic (3) Sidermica (4) Consideration paid: Cash, net of cash acquired $ 4,920 $ 2,540 $ 11,338 $ 6,861 Class A Common Stock issued (1) 1,557 456 6,513 815 Trade receivables due from seller 1,027 2,336 1,679 1,581 Notes payable to seller — — 2,153 — $ 7,504 $ 5,332 $ 21,683 $ 9,257 Identifiable assets acquired and liabilities assumed Accounts receivable $ 1,110 $ 2,079 $ 15 $ 1,657 Non-compete agreement 100 60 588 100 Customer relationships 2,696 2,276 5,487 2,700 Inventory and other assets 354 341 1,262 454 Accounts payable ( 45 ) ( 456 ) ( 772 ) — Deferred tax liabilities, net ( 675 ) ( 842 ) ( 2,008 ) — Accrued and other liabilities ( 802 ) ( 317 ) ( 340 ) — Total identifiable net assets 2,738 3,141 4,232 4,911 Goodwill $ 4,766 $ 2,191 $ 17,451 $ 4,346 ___________ (1) Class A Common Stock issued as consideration for the acquisitions was 110,726 , 28,157 , 401,021 and 50,195 shares for HTL, Wigmore, Ecomedic and Sidermica, respectively. (2) During the fourth quarter of 2021, adjustments were made to the Wigmore valuation pertaining to contingent consideration and intangible assets. Goodwill was adjusted due to an increase of $ 0.3 million in contingent consideration and a decrease of $ 1.0 million in intangible assets. Contingent consideration payments for the Wigmore acquisition were paid during the three months ended March 31, 2022. (3) During the first quarter of 2022, adjustments were made to the Ecomedic valuation pertaining to acquisition date tax liability. Goodwill was adjusted due to an increase of $ 0.2 million to acquisition date tax liability. (4) During the second quarter of 2022, adjustments were made to the Sidermica valuation pertaining to contingent consideration. Goodwill was adjusted due to finalization of the valuation of contingent consideration of $ 1.98 million. Contingent consideration payments for the Sidermica acquisition were paid during the three months ended June 30, 2022. 103 Intangible assets acquired included customer relationships and non-compete agreements. The valuation of the acquired intangible asset was estimated by performing projections of discounted cash flows, whereby revenues and costs associated with each intangible asset are forecasted to derive expected cash flow which is discounted to present value at discount rates commensurate with perceived risk. The valuation and projection process is inherently subjective and relies on significant unobservable inputs (Level 3 inputs). The weighted average amortization period of customer relationship was 5 years, while the non-compete agreements are amortized over 3 years. The operating results of the distributor acquisitions from the dates of acquisitions are included in the Consolidated Statements of Comprehensive Income (Loss). The historical operating results are not material to the consolidated financial statements, and, therefore, the Company has not presented the unaudited pro forma results of operations for the distributor acquisitions. Note 4 — Revenue The Company manages its business on the basis of one operating segment and one reportable segment. As a result, the chief operating decision maker, who is the Chief Executive Officer, reviews financial information presented on a consolidated basis for purposes of making operating decisions, allocating resources and evaluating financial performance. The Company’s revenue disaggregated by major product line consists of the following for the periods indicated: Year Ended December 31, (in thousands) 2023 2022 2021 Net Sales Delivery Systems $ 206,630 $ 206,235 $ 139,464 Consumables 191,361 159,641 120,622 Total net sales $ 397,991 $ 365,876 $ 260,086 Net sales by geographic region were as follows for the periods indicated: Year Ended December 31, (in thousands) 2023 2022 2021 Americas $ 227,709 $ 243,243 $ 169,426 Asia-Pacific 82,193 54,306 43,701 Europe, the Middle East and Africa 88,089 68,327 46,959 Total net sales $ 397,991 $ 365,876 $ 260,086 No single customer accounted for 10% or more of consolidated net sales during the years ended December 31, 2023, 2022, and 2021. As of December 31, 2023, the Company had no customers that accounted for 10% or more of the Company’s accounts receivable balance. As of December 31, 2022, the Company had one customer that accounted for 12 % of the Company’s accounts receivable balance. The changes in allowance for estimated credit losses are as follows: (in thousands) Year Ended December 31, 2023 Beginning balance $ 2,929 Provision for estimated credit losses 5,153 Write-offs, recoveries of previous write-offs, and foreign currency translation impact ( 1,478 ) Ending balance $ 6,604 104 Note 5 — Balance Sheet Components Inventories consist of the following as of the periods indicated: (in thousands) December 31, 2023 December 31, 2022 Raw materials $ 24,406 $ 38,373 Finished goods 66,915 71,283 Total inventories $ 91,321 $ 109,656 As a result of the Company’s decision, with respect to Syndeo devices, 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. Refer to Note 18 – Restructuring Charges for further detail. The Company also identified $ 18.3 million in discontinued, excess, or obsolete inventory during the year ended December 31, 2023. Accrued payroll-related expenses consist of the following as of the periods indicated: (in thousands) December 31, 2023 December 31, 2022 Accrued compensation and payroll taxes $ 10,458 $ 5,511 Accrued sales commissions 7,565 10,523 Accrued benefits 4,005 5,643 Total accrued payroll-related expenses $ 22,028 $ 21,677 Other accrued expenses consist of the following as of the periods indicated: (in thousands) December 31, 2023 December 31, 2022 Sales and VAT tax payables $ 4,971 $ 4,904 Royalty liabilities 3,914 2,348 Accrued interest 2,344 2,344 Note payable due seller — 1,819 Other 8,617 3,768 Total other accrued expenses $ 19,846 $ 15,183 Long-lived assets, which includes property and equipment, net and right-of-use assets, net, by geographic region were as follows for the periods indicated: (in thousands) December 31, 2023 December 31, 2022 U.S. $ 13,937 $ 19,974 United Kingdom 4,174 3,577 China 3,398 4,620 Rest of World 4,837 5,650 Total long-lived assets $ 26,346 $ 33,821 As of December 31, 2023 and 2022, the Company has approximately $ 15 million and $ 6 million, respectively, of non-trade receivables from certain of its manufacturing vendors resulting from the sale of components to these vendors who manufacture or assemble final products for the Company, which is included in prepaid expenses and other current assets on the Consolidated Balance Sheets. The Company purchases components directly from suppliers and do not reflect the sale of these components to the manufacturing vendors in net sales. 105 Note 6 — Leases Operating right-of-use assets and lease liabilities as of December 31, 2023 and December 31, 2022 comprises the following: (in thousands) December 31, 2023 December 31, 2022 Right-of-use assets, net $ 12,120 $ 15,637 Lease liabilities, current $ 4,598 $ 4,958 Lease liabilities, non-current 9,319 12,689 Total lease liabilities $ 13,917 $ 17,647 Operating lease costs for the years ended December 31, 2023, 2022, and 2021 were $ 5.2 million, $ 5.0 million, and $ 3.3 million, respectively. Short-term lease cost and variable lease costs were immaterial for the years ended December 31, 2023, 2022, and 2021. The following table summarizes future operating lease payments as of December 31, 2023 : (in thousands) Future Minimum Payments 2024 $ 4,816 2025 2,110 2026 1,744 2027 1,228 2028 1,056 Thereafter 4,162 Total 15,116 Less: Imputed Interest ( 1,199 ) Present value of net lease payments $ 13,917 The following table includes supplemental operating lease information: Year Ended December 31, Supplemental Cash Flow Information (dollars in thousands) 2023 2022 2021 Cash paid for amounts included in the measurement of lease liabilities $ 5,419 $ 2,981 $ 3,041 Lease liabilities arising from new right-of-use assets $ 1,181 $ 4,476 $ 5,707 Weighted average remaining lease term (in years) 6.1 6.0 6.3 Weighted average discount rate 3.18 % 2.98 % 2.75 % Finance lease balances are not material and are included in property and equipment and other accrued expenses on the Consolidated Balance Sheets. 106 Note 7 — Property and Equipment, net Property and equipment consist of the following as of the periods indicated: (in thousands) Useful life (years) December 31, 2023 December 31, 2022 Furniture and fixtures 2 - 7 $ 5,903 $ 5,364 Computers and equipment 3 - 5 5,479 4,901 Machinery and equipment 2 - 5 8,597 6,427 Autos and trucks 5 242 161 Tooling 5 887 638 Leasehold improvements Shorter of remaining lease term or estimated useful life 12,323 11,812 Construction in progress 748 1,375 Total property and equipment 34,179 30,678 Less: accumulated depreciation and amortization ( 19,953 ) ( 12,494 ) Property and equipment, net $ 14,226 $ 18,184 Note 8 — Goodwill and Intangible Assets, net Goodwill The changes in the carrying value of goodwill are as follows: Year Ended December 31, (in thousands) 2023 2022 2021 Beginning balance $ 124,593 $ 123,694 $ 98,531 Measurement period adjustments — 2,154 26,600 Foreign currency translation impact 1,225 ( 1,255 ) ( 1,437 ) Ending balance $ 125,818 $ 124,593 $ 123,694 The Company performed its annual impairment test and determined that goodwill was not impaired since the reporting unit's fair value exceeded its carrying value. Intangible Assets, Net The gross carrying amount and accumulated amortization of the Company’s intangible assets, net, as of December 31, 2023 were as follows: (in thousands) Gross Carrying Value Accumulated Amortization Net Carrying Value Estimated Useful Life (Years) Developed technology $ 91,629 $ ( 64,453 ) $ 27,176 3 - 10 Customer relationships 18,809 ( 11,317 ) 7,492 5 - 10 Capitalized software 18,423 ( 4,078 ) 14,345 3 - 5 Trademarks 11,521 ( 5,367 ) 6,154 15 Non-compete agreement 5,878 ( 1,530 ) 4,348 3 Patents 3,132 ( 524 ) 2,608 3 - 19 Total intangible assets $ 149,392 $ ( 87,269 ) $ 62,123 107 Acquisition of Esthetic Medical, Inc. and Anacapa Aesthetics LLC In February 2023, Edge Systems Intermediate, LLC, an indirect, wholly-owned subsidiary of the Company, acquired all of the outstanding shares of Esthetic Medical, Inc. (“EMI”) in exchange for (i) a cash payment of $ 11.8 million and (ii) 109,625 shares of Class A Common Stock of the Company ($ 1.3 million). In addition, Dr. Lawrence Groop (the “Seller”) is entitled to receive up to an additional $ 3.2 million in contingent consideration based upon the achievement of certain conditions defined in the purchase agreement, of which $ 1.9 million was considered probable as of the acquisition date. Applicable tax guidance was used to apply the simultaneous equation method to incrementally assign $ 4.6 million to the book value of the intangible asset in excess of the purchase price. The Company accounted for this transaction as an asset acquisition and allocated substantially all of the purchase price and the tax basis difference totaling $ 19.9 million to intangible assets, primarily related to developed technology. In July 2023, EMI obtained clearance from the U.S. Food and Drug Administration that the SkinStylus Sterilock MicroSystem is cleared for use as a treatment to improve the appearance of facial acne scars in Fitzpatrick skin types I, II, and III in adults aged 22 years and older (the “Facial Indication Approval”). Obtaining the Facial Indication Approval triggered a $ 1.3 million contingent payment made in July 2023 by the Company to the Seller, which was previously not considered probable of payment. In March 2023, the Company acquired assets from Anacapa Aesthetics LLC and recognized approximately $ 5 million of intangible assets, primarily related to non-compete agreements. The gross carrying amount and accumulated amortization of the Company’s intangible assets, net, as of December 31, 2022 were as follows: (in thousands) Gross Carrying Value Accumulated Amortization Net Carrying Value Estimated Useful Life (Years) Developed technology $ 73,188 $ ( 54,422 ) $ 18,766 3 - 8 Customer relationships 18,089 ( 7,602 ) 10,487 5 - 10 Trademarks 10,907 ( 4,119 ) 6,788 15 Capitalized software 9,620 ( 1,507 ) 8,113 3 - 5 Non-compete agreement 776 ( 395 ) 381 3 Patents 2,226 ( 375 ) 1,851 3 - 19 Total intangible assets $ 114,806 $ ( 68,420 ) $ 46,386 Acquisition of The Personalized Beauty Company, Inc. (“Mxt”) On April 12, 2022, the Company, through its indirect, wholly-owned subsidiary, Edge Systems Intermediate, LLC, acquired The Personalized Beauty Company, Inc., a Delaware corporation d.b.a. Mxt. Consideration paid in the aggregate was $ 1.5 million plus equity consideration of $ 0.5 million or 28,733 shares of the Company’s Class A Common Stock. Depending on the achievement of certain revenue milestones, the former Mxt shareholders are entitled to receive up to $ 30 million of earn-out payments. The estimated fair value of the earn-out was not material as of the acquisition date and as of December 31, 2022. The Company accounted for this transaction as an asset acquisition based on an evaluation of the U.S. GAAP guidance for business combinations and concluded that the Company acquired developed technology of $ 1.9 million and inventory of $ 0.1 million. The Company concluded that the developed technology acquired from Mxt comprised substantially all of the fair value of the gross assets acquired and that the assets acquired did not meet the definition of a business under the guidance for business combinations. During the year ended December 31, 2023, Mxt was sold, resulting in a loss on sale of $ 2.8 million. 108 The estimated future amortization expense for the next five years is as follows: (in thousands) Amortization Expense 2024 $ 19,698 2025 10,356 2026 9,029 2027 6,703 2028 4,526 Thereafter 11,811 $ 62,123 The Company tests its amortizable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. As of December 31, 2023 and 2022, the Company’s amortizable intangible assets were not impaired. Note 9 — Long-term Debt Amended and Restated Credit Facility On November 14, 2022, the Company, as successor by assumption to Hydrafacial (formerly known as Edge Systems LLC), a California limited liability company, 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”). Hydrafacial 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 and (iv) transition from LIBOR to the secured overnight financing rate (SOFR), (v) 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 (vi) 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 whom will derive substantial benefit from the revolving credit facility. In specified circumstances, additional guarantors are required to be added. The 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. As of December 31, 2023 the Company was in compliance with all restricted and financial covenants of the Credit Agreement. 109 The leverage ratio also determines pricing under the Credit Agreement. At the Borrower’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. As of December 31, 2023 the Company’s unused commitment rate was 0.25 %. 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 Borrower 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, if any, specified would constitute an event of default. Upon the occurrence of such events of default, the Company 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. As of December 31, 2023 the Credit Agreement remains undrawn and there is no outstanding balance under the revolving credit facility. Convertible Senior Notes On September 14, 2021, the Company issued an aggregate of $ 750 million in principal amount of its 1.25 % Convertible Senior Notes due 2026. The Notes were issued pursuant to, and are governed by, the Indenture between the Company and U.S. Bank National Association, as trustee. Pursuant to the purchase agreement between the Company and the initial purchasers of the Notes, the Company granted the initial purchasers an option to purchase, for settlement within a period of 13 days from, and including, the date the Notes were first issued, up to an additional $ 100 million principal amount of Notes. The Notes issued on September 14, 2021 include the $ 100 million principal amount of Notes issued pursuant to the full exercise by the initial purchasers of such option. The Notes are the Company’s senior, unsecured obligations and are (i) equal in right of payment with the Company’s existing and future senior, unsecured indebtedness; (ii) senior in right of payment to the Company’s existing and future indebtedness that is expressly subordinated to the Notes; (iii) effectively subordinated to the Company’s existing and future secured indebtedness, to the extent of the value of the collateral securing that indebtedness; and (iv) structurally subordinated to all existing and future indebtedness and other liabilities, including trade payables, and (to the extent the Company is not a holder thereof) preferred equity, if any, of the Company’s subsidiaries. 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, beginning on April 1, 2022. The Notes 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. The Company will settle conversions by paying or delivering, as applicable, cash, shares of its common stock or a combination of cash and shares of its common stock, at the Company’s election. The initial conversion rate is 31.4859 shares of common stock per $1,000 principal amount of Notes, which represents an initial conversion price of approximately $ 31.76 per share of common stock. The conversion rate and conversion price will be subject to customary adjustments upon the occurrence of certain events. In addition, if certain corporate events that constitute a “Make-Whole Fundamental Change” (as defi ned in the Indenture) occur, then the conversion rate will, in certain circumstances, be increased for a specified period of time. The conversion price as of December 31, 2023 was $ 31.76 per share of common stock. 110 The Notes are redeemable, in whole or in part (subject to certain limitations described below), at the Company’s option at any time, and from time to time, on or after October 6, 2024, and on or before the 40 th scheduled trading day immediately before the maturity date, but only if certain liquidity conditions are satisfied and the last reported sale price per share of the Company’s common stock exceeds 130 % of the conversion price on (i) each of at least 20 trading days, whether or not consecutive, during the 30 consecutive trading days ending on, and including, the trading day immediately before the date the Company sends the related redemption notice; and (ii) the trading day immediately before the date the Company sends such notice. However, the Company may not redeem less than all of the outstanding notes unless at least $ 100.0 million aggregate principal amount of notes are outstanding and not called for redemption as of the time the Company sends the related redemption notice. The redemption price will be a cash amount equal to the principal amount of the Notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. In addition, calling any Note for redemption will constitute a Make-Whole Fundamental Change with respect to that Note, in which case the conversion rate applicable to the conversion of that Note will be increased in certain circumstances if it is converted after it is called for redemption. If certain corporate events that constitute a “Fundamental Change” (as defined in the Indenture) occur, then, subject to a limited exception for certain cash mergers, noteholders may require the Company to repurchase their Notes at a cash repurchase price equal to the principal amount of the Notes to be repurchased, plus accrued and unpaid interest, if any, to, but excluding, the fundamental change repurchase date. The definition of Fundamental Change includes certain business combination transactions involving the Company and certain de-listing events with respect to the Company’s common stock. The Notes have customary provisions relating to the occurrence of “Events of Default” (as defined in the Indenture), which include the following: (i) certain payment defaults on the Notes (which, in the case of a default in the payment of interest on the Notes, will be subject to a 30-day cure period); (ii) the Company’s failure to send certain notices under the Indenture within specified periods of time; (iii) the Company’s failure to convert a Note upon the exercise of the conversion right with respect to such Note, subject to a three business-day cure period; (iv) the Company’s failure to comply with certain covenants in the Indenture relating to the Company’s ability to consolidate with or merge with or into, or sell, lease or otherwise transfer, in one transaction or a series of transactions, all or substantially all of the assets of the Company and its subsidiaries, taken as a whole, to another person; (v) a default by the Company in its other obligations or agreements under the Indenture or the Notes if such default is not cured or waived within 60 days after notice is given in accordance with the Indenture; (vi) certain defaults by the Company or any of its subsidiaries with respect to indebtedness for money borrowed of at least $ 45.0 million; (vii) the rendering of certain judgments against the Company or any of its significant subsidiaries for the payment of at least $ 45.0 million, where such judgments are not discharged or stayed within 60 days after the date on which the right to appeal has expired or on which all rights to appeal have been extinguished and (viii) certain events of bankruptcy, insolvency and reorganization involving the Company or any of its significant subsidiaries. If an Event of Default involving bankruptcy, insolvency or reorganization events with respect to the Company (and not solely with respect to a significant subsidiary of the Company) occurs, then the principal amount of, and all accrued and unpaid interest on, all of the Notes then outstanding will immediately become due and payable without any further action or notice by any person. If any other Event of Default occurs and is continuing, then, the Trustee, by notice to the Company, or noteholders of at least 25 % of the aggregate principal amount of Notes then outstanding, by notice to the Company and the Trustee, may declare the principal amount of, and all accrued and unpaid interest on, all of the Notes then outstanding to become due and payable immediately. However, notwithstanding the foregoing, the Company may elect, at its option, that the sole remedy for an Event of Default relating to certain failures by the Company to comply with certain reporting covenants in the Indenture consists exclusively of the right of the noteholders to receive special interest on the Notes for up to 180 days at a specified rate per annum not exceeding 1.00 % on the principal amount of the Notes. The Notes were issued to the initial purchasers of such Notes in transactions not involving any public offering in reliance upon Section 4(a)(2) of the Securities Act. The Notes were resold by the initial purchasers to persons whom the initial purchasers reasonably believe are “qualified institutional buyers,” as defined in, and in accordance with, Rule 144A under the Securities Act. The total amount of debt issuance costs of $ 21.3 million was recorded as a reduction to “Convertible senior notes, net” in the Company’s Consolidated Balance Sheets and are being amortized as interest expense over the term of the Notes using the effective interest method. During the years ended December 31, 2023, 2022, and 2021, the Company recognized $ 4.2 million, $ 4.2 million, and $ 1.3 million, respectively, in interest expense related to the amortization of the debt issuance costs related to the Notes. 111 The following is a summary of the Company’s Notes for the periods indicated: (in thousands) December 31, 2023 December 31, 2022 1.25 % Convertible Notes due 2026 $ 750,000 $ 750,000 Unamortized debt issuance costs ( 11,628 ) ( 15,857 ) Net carrying value $ 738,372 $ 734,143 The Notes are carried at face value less the unamortized debt issuance costs on the Company’s Consolidated Balance Sheets. Capped Call Transactions On September 9, 2021, in connection with the pricing of the offering of Notes, the Company entered into privately negotiated capped call transactions (the “Base Capped Call Transactions”) with Bank of Montreal, Credit Suisse Capital LLC, Deutsche Bank AG, London Branch, Goldman Sachs & Co. LLC, JPMorgan Chase Bank, National Association, Mizuho Markets Americas LLC and Wells Fargo Bank, National Association (the “Option Counterparties”). In addition, on September 10, 2021, in connection with the initial purchasers’ exercise of their option to purchase additional Notes, the Company entered into additional capped call transactions (the “Additional Capped Call Transactions,” and, together with the Base Capped Call Transactions, the “Capped Call Transactions”) with each of the Option Counterparties. The Capped Call Transactions cover, subject to customary anti-dilution adjustments, the aggregate number of shares of the Company’s common stock that initially underlie the Notes, and are expected generally to reduce potential dilution to the Company’s common stock upon any conversion of Notes and/or offset any cash payments the Company is required to make in excess of the principal amount of 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. The cap price of the Capped Call Transactions is initially $ 47.94 , which represents a premium of 100 % over the last reported sale price of the Company’s common stock on September 9, 2021. The cost of the Capped Call Transactions was approximately $ 90.2 million. The Capped Call Transactions are separate transactions, each between the Company and the applicable Option Counterparty, and are not part of the terms of the Notes and do not affect any holder’s rights under the Notes or the Indenture. Holders of the Notes will not have any rights with respect to the Capped Call Transactions. Business Combination In connection with the Closing of the Business Combination, all of Hydrafacial’s existing debt under its credit facilities were repaid and its credit facilities were extinguished. T he related write-off of the deferred financing costs totaled $ 2.3 million and prepayment penalties totaled $ 2.0 million for the year ended December 31, 2021. Both are included in the Other (income) expense, net on the Company’s Consolidated Statements of Comprehensive Income (Loss). Defer red financing costs expense for the year ended December 31, 2022 amounted to $ 0.5 million for the existing debt prior to the Closing of the Business Combination while the amortization of issuance costs for the Notes amounted to $ 1.3 million for the year ended December 31, 2021 . 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. Note 10 — Fair Value Measurements The following table presents information about the Company’s assets and liabilities that are measured at fair value on a recurring basis at December 31, 2023 and 2022, and indicates the fair value hierarchy of the valuation inputs the Company utilized to determine such fair value. 112 113 As of December 31, 2023 (in thousands) Level 1 Level 2 Level 3 Total Assets Cash and cash equivalents: Money market funds $ 458,676 $ — $ — $ 458,676 International treasuries $ — $ 3,777 $ — $ 3,777 Liabilities Warrant liability — Private Placement Warrants $ — $ — $ 3,555 $ 3,555 As of December 31, 2022 (in thousands) Level 1 Level 2 Level 3 Total Assets Cash and cash equivalents: Money market funds $ 513,009 $ — $ — $ 513,009 Liabilities Warrant liability — Private Placement Warrants $ — $ — $ 15,473 $ 15,473 Money Market Funds The Company’s investment in money market funds that are classified as cash equivalents hold underlying investments with a weighted average maturity of 90 days or less and are recognized at fair value. The valuations of these securities are based on quoted prices in active markets for identical assets, when available, or pricing models whereby all significant inputs are observable or can be derived from or corroborated by observable market data. The Company reviews security pricing and assesses liquidity on a quarterly basis. As of December 31, 2023 , the Company’s U.S. portfolio had no material exposure to money market funds with a fluctuating net asset value. Warrant Liabilities The Public Warrants and Private Placement Warrants (collectively, the “Warrants”) are accounted for as liabilities in accordance with ASC 815-40 and are presented within Warrant liabilities on the Company’s Consolidated Balance Sheets. The Warrants are 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) . On October 4, 2021, the Company issued a press release stating that it would redeem all of the Public Warrants that remained outstanding on November 3, 2021, for a redemption price of $ 0.10 per Public Warrant. On November 3, 2021, all 16.2 million outstanding Public Warrants were either exercised for cash or on a cashless basis or were redeemed. These outstanding Public Warrants that were exercised comprised 15.3 million Public Warrants issued in connection with the Vesper initial public offering and an additional 0.9 million warrants that became Public Warrants due to the sale of Private Placement Warrants. Approximately 16.1 million Public Warrants were exercised for cash at an exercise price of $ 11.50 per share of Class A Common Stock, 74,104 Public Warrants were exercised on a cashless basis in exchange for an aggregate of 26,732 shares of Class A Common Stock, and 75,016 warrants were redeemed for $ 0.10 per warrant, in each case in accordance with the terms of the Warrant Agreement. In 2021, total cash proceeds generated from exercises of the Public Warrants were $ 185.4 million. In addition, 0.3 million Private Placement Warrants were exercised in 2021 for total cash proceeds of $ 3.0 million. Accordingly, as of December 31, 2023 and 2022, there were no Public Warrants outstanding. As of December 31, 2023 and 2022, the Company had approximately 7 million Private Placement Warrants outstanding, for which the fair value was determined using a Monte Carlo simulation model. Long-Term Debt As of December 31, 2023 and 2022 , the estimated fair value of the Notes were approximately $ 558 million and $ 567 million, respectively. The estimated fair value of the Notes was determined based on the actual bid price of the Notes on December 31, 2023 and 2022. The estimated fair values have been calculated based on broker quotes or rates for the same or similar instruments and are classified as Level 2 within the fair value hierarchy. 114 Note 11 — Income Taxes The Inflation Reduction Act, signed into law on August 16, 2022, provides tax incentives for certain industries and imposes a 15% minimum tax on the book income of certain large corporations and a 1% excise tax on stock buybacks. The Company is subjected to the new excise tax on certain stock buybacks that occur after December 31, 2023. The Company does not anticipate a material impact from the Inflation Reduction Act on the Company's consolidated financial statements. The following table presents domestic and foreign components of (loss) income before income taxes as follows for the periods indicated: Year Ended December 31, (in thousands) 2023 2022 2021 Domestic $ ( 104,161 ) $ 42,080 $ ( 378,831 ) Foreign 2,272 3,259 ( 1,808 ) (Loss) income before taxes $ ( 101,889 ) $ 45,339 $ ( 380,639 ) The federal, state and foreign components of the income tax (benefit) expense are summarized as follows: Year Ended December 31, (in thousands) 2023 2022 2021 Current: Federal $ 34 $ 407 $ ( 727 ) State 216 306 513 Foreign 3,793 2,189 1,735 Total current income tax expense 4,043 2,902 1,521 Deferred: Federal ( 4,137 ) ( 257 ) ( 2,952 ) State ( 633 ) ( 166 ) ( 80 ) Foreign ( 1,046 ) ( 1,364 ) ( 364 ) Total deferred tax benefit ( 5,816 ) ( 1,787 ) ( 3,396 ) Total income tax (benefit) expense $ ( 1,773 ) $ 1,115 $ ( 1,875 ) The effective tax rate of the provision for income tax differs from the federal statutory rate as follows for the periods indicated: Year Ended December 31, (in thousands) 2023 2022 2021 Federal statutory income tax rate $ ( 21,398 ) 21.0 % $ 9,521 21.0 % $ ( 79,935 ) 21.0 % State taxes, net of federal benefit ( 3,083 ) 3.0 ( 1,041 ) ( 2.3 ) ( 1,041 ) 0.3 Officer compensation 844 ( 0.8 ) 2,323 5.1 486 ( 0.1 ) Change in fair value of warrants ( 2,503 ) 2.5 ( 16,452 ) ( 36.3 ) 58,236 ( 15.3 ) Change in fair value of earn-out shares — — — — 9,891 ( 2.6 ) Transaction costs — — ( 32 ) ( 0.1 ) 3,312 ( 0.9 ) Share-based compensation 2,922 ( 2.9 ) — — — — Foreign rate differential 338 ( 0.3 ) ( 10 ) — 475 ( 0.1 ) R&D credit ( 824 ) 0.8 ( 900 ) ( 2.0 ) ( 152 ) — Permanent differences 2,183 ( 2.1 ) — — — — Change in valuation allowance 18,400 ( 18.1 ) 6,242 13.8 4,755 ( 1.2 ) Other 1,348 ( 1.3 ) 1,464 3.2 2,098 ( 0.6 ) Income tax (benefit) expense $ ( 1,773 ) 1.7 % $ 1,115 2.4 % $ ( 1,875 ) 0.5 % 115 Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is established when necessary to reduce deferred tax assets to the amounts more likely than not to be realized. The components of the deferred tax assets are as follows for the periods indicated: (in thousands) December 31, 2023 December 31, 2022 Deferred income tax assets State taxes $ 23 $ 55 Accrued expenses 5,807 1,608 Inventories 4,944 4,772 Accounts receivable 1,563 625 Section 163(j) limitation 6,031 4,782 Net operating loss carryforwards 12,379 3,680 Share-based compensation 4,032 5,072 Lease liabilities 3,191 4,469 Capitalized research 5,305 1,730 Other 1,611 685 Total deferred income tax assets 44,886 27,478 Deferred income tax liabilities Goodwill and intangibles ( 6,713 ) ( 5,582 ) Prepaid expenses ( 434 ) ( 435 ) Right-of-use assets ( 2,506 ) ( 3,966 ) Property and equipment ( 2,165 ) ( 3,852 ) Total deferred tax liabilities ( 11,818 ) ( 13,835 ) Valuation allowance ( 33,239 ) ( 14,839 ) Net deferred income tax liabilities $ ( 171 ) $ ( 1,196 ) The Company’s net deferred tax liability as presented in the consolidated balance sheets consists of the following items as of the dates indicated: (in thousands) December 31, 2023 December 31, 2022 Deferred income tax assets $ 531 $ 815 Deferred income tax liabilities ( 702 ) ( 2,011 ) Net deferred income tax liabilities $ ( 171 ) $ ( 1,196 ) The Company has established a valuation allowance against a portion of its remaining deferred tax assets because it is more likely than not that certain deferred tax assets will not be realized. In determining whether deferred tax assets are realizable, the Company considered numerous factors including historical profitability, the amount of future taxable income and the existence of taxable temporary differences that can be used to realize deferred tax assets. The valuation allowance increased $ 18.4 million in 2023 from 2022 primarily due to recognizing valuation allowances against deferred tax assets of certain state and foreign net operating loss carryforwards and federal and state interest carryforwards. If the Company were to release the valuation allowance upon management determining that it is more likely than not the deferred tax assets could be recognized, $ 33.2 million of income tax benefit would be recorded to continuing operations. At December 31, 2023, the Company had gross federal, state and foreign net operating loss carryforwards of $ 42.6 million, $ 57.3 million and $ 1.8 million, respectively. The state losses expire beginning in 2030 and the foreign losses beginning in 2028. 116 As of December 31, 2023 and December 31, 2022, the Company had recorded gross unrecognized tax benefits of $ 1.1 million and $ 0.7 million, respectively. All of the unrecognized tax benefits as of December 31, 2023, if recognized, would not materially impact the effective tax rate. As of December 31, 2023, there were no unrecognized tax benefits that the Company expects would change significantly over the next twelve months. The Company recognizes interest expense and penalties associated with uncertain tax positions as a component of income tax expense. The Company has not recognized any interest or penalties because of losses. A reconciliation of the beginning and ending balances of unrecognized tax benefits is as follows: (in thousands) December 31, 2023 December 31, 2022 Unrecognized tax benefits at beginning of period $ 674 $ 210 Increases for tax positions in prior periods 230 260 Decreases for tax positions in prior periods ( 112 ) ( 36 ) Increases for tax positions in current period 312 240 Total unrecognized tax benefits $ 1,104 $ 674 The Company is subject to taxation and files income tax returns in the United States federal jurisdiction and many state and foreign jurisdictions. The Company is not currently under examination by income tax authorities in federal, state or other jurisdictions. The Company’s tax returns remain open for examination in the United States for years 2020 through 2022. Its foreign subsidiaries are generally subject to examination three years following the year in which the tax obligation originated. The years subject to audit may be extended if the entity substantially understates corporate income tax. APB 23 (codified as FASB ASC 740-10-25-3) allows an exception to the general rule that a U.S. multinational company must accrue U.S. taxes on foreign earnings of its controlled non-U.S. subsidiaries. Under this exception, a U.S. multinational company is not required to accrue U.S. taxes on foreign earnings that are indefinitely reinvested in its foreign subsidiaries. The Company will continue to indefinitely reinvest earnings from its foreign subsidiaries, which are not significant. During the year ended December 31, 2023, the Company received $ 5.4 million for the Employee Retention Credit under the Coronavirus Aid, Relief, and Economic Security Act, of which $ 4.9 million was recorded in other (income) expense, net and $ 0.5 million was recorded in interest income on the Company’s Consolidated Statements of Comprehensive Income (Loss). Note 12 — Employee Benefit Plan The Company sponsors a defined contribution 401(k) plan that all regular domestic employees are eligible to participate in after one month of service. Contributions to the 401(k) plan include voluntary contributions by eligible employees and employer matching contributions by the Company. Certain international employees participate in other defined contribution retirement plans with varying vesting and contribution provisions. Defined contributions expense was $ 3.0 million, $ 2.2 million and $ 1.4 million for the years ended December 31, 2023, 2022 and 2021, respectively. 117 Note 13 — Equity-Based Compensation The Beauty Health Company 2021 Incentive Award Plan (the “2021 Plan”) became effective upon the consummation of the Business Combination. Pursuant to the 2021 Plan, the Company may grant stock options, stock appreciation rights, restricted stock, restricted stock units, dividend equivalents, other stock or cash based awards to eligible service providers. The aggregate number of shares of the Company’s Class A Common Stock that may be issued pursuant to awards granted under the 2021 Plan is the sum of (i) 14,839,640 and (ii) an annual increase on January 1 of each calendar year (commencing with January 1, 2022 and ending on and including January 1, 2031) equal to a number of shares equal to 4 % of the aggregate shares outstanding as of December 31 of the immediately preceding calendar year (or such lesser number of shares as is determined by the Company’s Board of Directors), subject to adjustment by the plan administrator in the event of certain changes in our corporate structure. The maximum number of shares that may be granted with respect to incentive stock options (“ISOs”) under the 2021 Plan is 7,500,000 . At December 31, 2023 , approximately 15 million shares of the Company’s Class A Common Stock were reserved for the issuance of awards under the 2021 Plan. Stock Options The following table summarizes the Company’s stock option activity: Number of Options Weighted Average Exercise Price Weighted Average Remaining Contractual Term (in years) Aggregate Intrinsic Value (in thousands) Outstanding - January 1, 2023 5,601,770 $ 15.21 8.34 $ — Granted — — Exercised ( 31,000 ) 12.85 Forfeited ( 1,431,038 ) 17.34 Expired ( 407,312 ) 18.97 Outstanding - December 31, 2023 3,732,420 14.00 6.73 — Vested and Exercisable - December 31, 2023 2,071,735 13.94 6.20 — Options vested and expected to vest - December 31, 2023 3,732,420 $ 14.00 6.73 $ — The weighted-average grant date fair value of the stock options granted during the years ended December 31, 2022 and 2021 was $ 12.23 and $ 7.84 , respectively. At December 31, 2023, aggregate unrecognized compensation cost for unvested stock options was $ 8.6 million recognized over a weighted average period of 1.4 years. The stock options granted generally vest over a four year period. Restricted Stock Units (“RSUs”) and Performance-based Restricted Stock Units (“PSUs”) The Company reserves the right to grant RSUs to certain employees, executives and directors. The RSUs granted are eligible to vest over the service period, which is generally over three to four years , subject to the recipient’s continued employment through each vesting date. PSUs are awarded to select executive officers pursuant to the 2021 Plan and vest based on either (i) the performance of the Company’s Class A Common Stock (“Top-hat”) or (ii) the total shareholder return of the Company’s Class A Common Stock relative to a defined peer group (“TSR”). Top-hat PSUs are earned over a four-year performance period, based on the performance of the Company’s Class A Common Stock, and subject to the recipient’s continued employment through the end of the performance period. The actual number of shares of the Company’s Class A Common Stock to be issued, ranging from 0 % to 100 % of the number of PSUs granted, will be determined based on the greater of (i) the Company’s average stock price during the 90 -day period ending on the third anniversary of the vesting commencement date and (ii) the Company’s average stock price during the 90 -day period ending on the fourth anniversary of the vesting commencement date. TSR PSUs are earned over a three-year performance period, based on the attainment of pre-determined goals related to the Company’s total shareholder return relative to a defined peer group, and subject to the recipient’s continued employment through the end of the performance period. The actual number of shares of the Company’s Class A Common Stock to be issued will range from 0 % to 200 % of the number of PSUs granted. 118 The fair value of PSU awards is recognized on a straight-line basis over their measurement period as compensation expense, and is not subject to reversal even if the market condition is not achieved. The fair value of PSUs was determined using a Monte Carlo simulation subject to the performance conditions of the underlying PSUs with the following assumptions: Input 2023 Grants 2022 Grants 2021 Grants Risk-free interest rate 3.5 % 1.5 % - 4.2 % 0.5 % - 0.7 % Expected volatility of the Company’s Class A Common Stock 74.9 % 57.7 % - 66.0 % 55.0 % The following table summarizes the Company’s equity award activity for the year ended December 31, 2023: Weighted Average Grant Date Fair Value RSUs PSUs RSUs PSUs Outstanding - January 1, 2023 2,580,152 2,500,126 $ 14.47 $ 9.34 Granted 5,572,679 402,518 8.58 17.54 Vested ( 1,007,176 ) — 12.57 — Forfeited ( 1,902,975 ) ( 1,596,086 ) 13.35 11.58 Outstanding - December 31, 2023 5,242,680 1,306,558 $ 8.77 $ 9.13 The fair value of equity awards that vested, determined based on their respective fair values at vesting date, during the years ended December 31, 2023, 2022, and 2021 was $ 9.7 million, $ 2.7 million, and $ 0.7 million, respectively. All of the outstanding equity awards are expected to vest. At December 31, 2023, the aggregate unrecognized compensation cost for unvested RSUs and PSUs was $ 33.1 million and $ 5.8 million, respectively, recognized over a weighted average period of 1.9 years and 1.1 years, respectively. Employee Stock Purchase Plan (“ESPP”) The Company maintains the ESPP for employees located in the United States, which became effective upon the consummation of the Business Combination. The aggregate number of shares of the Company’s Class A Common Stock initially reserved for issuance pursuant to rights granted under the ESPP was 2,000,000 . In addition, on the first day of each calendar year beginning on January 1, 2022 and ending on (and including) January 1, 2031, the number of shares available for issuance under the ESPP will be increased by a number of shares equal to the lesser of (1) one percent ( 1 %) of the shares outstanding on the final day of the immediately preceding calendar year, and (2) such smaller number of shares as determined by the Company’s Board of Directors. As of December 31, 2023, approximately 4 million shares were reserved for the future issuance under the ESPP. Under the ESPP, eligible employees can have up to 10 % of their earnings withheld, up to certain maximums, to be used to purchase shares of the Company’s Class A Common Stock at certain purchase dates. The price of the Company’s Class A Common Stock purchased under the ESPP for the offering periods is equal to 85 % of the lesser of the fair market value of a share of Class A Common Stock of the Company on the beginning or the end of the offering period. Share-based compensation expense was as follows for the periods indicated: Year Ended December 31, (in thousands) 2023 2022 2021 Cost of sales $ 1,513 $ 839 405 Selling and marketing 7,962 9,363 3,547 Research and development 1,425 602 195 General and administrative 11,644 17,691 8,271 Total share-based compensation $ 22,544 $ 28,495 $ 12,418 119 Note 14 — Commitments and Contingencies Ageless On October 21, 2020, Hydrafacial filed a complaint (the “California Complaint”) against Ageless Serums LLC (“Ageless”) in the United States District Court for the Central District of California, Western Division, captioned Edge Systems LLC v. Ageless Serums LLC, Case No. 2:20-cv-09669-FMO-PVC (the “California Case”), for various claims, including contributory trademark infringement, false designation of origin, induced breach of contract, tortious interference with contractual relations, and unfair competition. In the California Complaint, Hydrafacial alleged that Ageless is selling its serums to Hydrafacial customers and intentionally encouraging those customers to market treatments performed by such customers as “Hydrafacial Treatments,” in violation of the customers’ license agreements with Hydrafacial and that Ageless is improperly marketing its products for use as part of the Hydrafacial treatment. Hydrafacial sought monetary damages and injunctive relief from Ageless in the California Case. Additionally, on December 22, 2020, Hydrafacial filed a complaint (the “Texas Complaint”) against Ageless in the United States District Court for the Southern District of Texas, Houston Division, captioned Edge Systems LLC v. Ageless Serums LLC, Case No. 4:20-cv 04335 (the “Texas Case”), alleging infringement of six of Hydrafacial’s patents. Hydrafacial sought monetary damages and injunctive relief from Ageless in the Texas Case. On November 30, 2020, Ageless answered the California Complaint and asserted counterclaims for violation of antitrust, California statutory and common law unfair competition, false advertising, defamation, and tortious interference with prospective and actual economic advantage. On July 12, 2021, Ageless answered the Texas Complaint and asserted similar counterclaims as those in the California Case. On May 5, 2022, Ageless filed a Chapter 11 bankruptcy petition in the United States Bankruptcy Court for the Southern District of Texas, Houston Division (the “Houston Bankruptcy Court”), and the California Case and Texas Case were thus stayed under 11 U.S.C. Section 362(a)(1). On September 7, 2022, Hydrafacial filed a proof of claim, asserting general unsecured claim for damages arising from claims alleged in the California Case and Texas Case. On January 4, 2023, Hydrafacial filed an Objection to the Confirmation of Debtor’s Subchapter V Plan of Reorganization and Brief in Support. On March 8, 2023, Hydrafacial and Ageless engaged in mediation to settle the claims alleged in the California Case and Texas Case. Ultimately, Hydrafacial and Ageless reached a tentative settlement agreement of all claims alleged in the California Case and Texas Case. On September 18, 2023, Ageless filed the Debtor’s Third Amended Subchapter V Plan of Reorganization (the “Plan”). The Plan incorporated the material terms of the settlement that Hydrafacial and Ageless reached at the mediation. Under the Plan, Ageless was required to pay to Hydrafacial $ 0.1 million on or before October 15, 2023 and tender thirteen (13) subsequent quarterly payments, each consisting of $ 0.1 million, for a total of $ 1.4 million. Ageless also agreed to various sales and marketing conditions that restrict Ageless from selling to Hydrafacial’s customers that use its service mark to provide hydradermabrasion treatments. Ageless agreed to other covenants that are contained in Article VIII of the Plan. The Plan also includes mutual releases between Hydrafacial and Ageless. The Plan includes remedies for Hydrafacial’s benefit in the event that Ageless defaults on any of its material obligations under the Plan. The Houston Bankruptcy Court considered confirmation of the Plan at a hearing held on September 22, 2023, and Hydrafacial expressed its support of the Plan at the hearing. The Houston Bankruptcy Court entered the Findings of Fact, Conclusions of Law, and Order Confirming Debtor’s Third Amended Plan of Reorganization on September 22, 2023. The Plan contains various conditions precedent to the effectiveness of the Plan that are contained in Article X of the Plan. The Plan required Hydrafacial to dismiss the California Case and the Texas Case within ten (10) days of the occurrence of the effective date of the Plan. On October 13, 2023, Ageless tendered its initial payment of $ 0.1 million to Hydrafacial pursuant to the terms and conditions of the Plan. On February 2, 2024, all claims, counterclaims, and defenses in the California Case and the Texas Case were dismissed with prejudice. Cartessa On December 14, 2020, Hydrafacial filed a complaint (the “Cartessa Complaint”) against Cartessa Aesthetics, LLC (“Cartessa”) in the United States District Court for the Eastern District of New York (the “New York Court”), captioned Edge Systems LLC v. Cartessa Aesthetics, LLC, Case No. 1:20-cv-6082, for patent infringement arising from Cartessa’s sale of Cartessa’s hydradermabrasion system that Hydrafacial alleged has infringed five of Hydrafacial’s patents on its device. Hydrafacial narrowed its allegation in the Cartessa Complaint to assert infringement of just four of its patents. On September 15, 2022, the New York Court granted Hydrafacial’s Motion for Summary Judgment of No Unclean Hands and denied 120 Cartessa’s Motion for Summary Judgment of non-infringement on three of the four patents-in-suit. On June 6, 2023, the New York Court granted Hydrafacial’s Motion for Summary Judgment of No Invalidity of the fourth patent-in-suit and granted Cartessa’s Motion for Summary Judgment of non-infringement of that same patent. As of the date of this report, Hydrafacial and Cartessa are awaiting the New York Court to set a trial date on Hydrafacial’s remaining three patents-in-suit in the Cartessa Complaint. Hydrafacial is seeking monetary damages and plans to vigorously pursue its claims against Cartessa. Hydrafacial also plans to appeal the New York Court’s grant of Cartessa’s Motion for Summary Judgment. Securities Class Action On November 16, 2023, a putative class action was filed in the United States District Court for the Central District of California against the Company, its then-current president and chief executive officer, Andrew Stanleick, its former chief financial officer, Liyuan Woo, and its current chief financial officer, Michael Monahan. The complaint, styled, Abduladhim A. Alghazwi, individually and on behalf of all others similarly situated, v. The Beauty Healthy Company, Andrew Stanleick, Liyuan Woo, and Michael Monahan, Case No. 2:23-cv-09733 (C.D. Ca.) (the “Securities Class Action”), asserts claims for violation of Section 10(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Rule 10b-5 promulgated thereunder against all defendants (First Claim), and violation of Section 20(a) of the Exchange Act against the individual defendants (Second Claim). The complaint alleges that, between May 10, 2022 and November 13, 2023, defendants materially misled the investing public by publicly issuing false and/or misleading statements and/or omissions relating to Hydrafacial's business, operations, and prospects, specifically with respect to the performance of and demand for the Syndeo 1.0 and 2.0 devices. The relief sought in the complaint includes a request for compensatory damages suffered by the plaintiff and other members of the putative class for damages allegedly sustained as a result of the alleged securities violations. On January 16, 2024, putative class members Jeff and Kevin Brown (the “Browns”), Priscilla and Martjn Dijkgraaf (the “Dijkgraafs”), and Joseph Jue filed three competing motions for appointment as lead plaintiff under the Private Securities Litigation Reform Act (“PSLRA”), 17 U.S.C. § 78u-4(a)(3). On January 31, 2024, Joseph Jou filed a notice of non-opposition to the Browns’ and Dijkgraafs’ motions for appointment as lead plaintiff. The court is currently deciding the motions for appointment of lead counsel and lead plaintiff.. Within ten days of entry of the order appointing lead plaintiff and approving lead counsel, the court-appointed lead plaintiff and defendants shall confer and submit a proposed schedule for the filing of an amended complaint and defendants’ response(s) thereto. The Securities Class Action case is assigned to U.S. District Judge Sherilyn Peace Garnett. The Company believes that the claims asserted in the Securities Class Action have no merit and intends to vigorously defend them. The Company is unable to reasonably estimate the possible loss or range of loss, if any, associated with these claims, and, accordingly, it has not accrued any liability associated with the Securities Class Action. Derivative Action On February 8, 2024, a derivative complaint was filed in the Delaware Court of Chancery against the Company’s former president and chief executive officer, Andrew Stanleick; its former chief financial officer, Liyuan Woo, and current members of the Company’s Board of Directors: Brenton Saunders, Marla Beck, Michael Capellas, Julius Few, Desiree Gruber, Michelle Kerrick, Brian Miller, and Doug Schillinger, with the Company as the nominal defendant. The complaint, styled Margie Elstein, derivatively on behalf of The Beauty Health Company v. Brenton Saunders, Marla Beck, Michael Capellas, Julius Few, Desiree Gruber, Michelle C. Kerrick, Brian Miller, Doug Schillinger Andrew Stanleick, and Liyuan Woo, C.A. No. 2024-0114-LWW (Del. Ch.) (the “Derivative Action”), asserts a single claim for breach of fiduciary duty against the individual defendants based on the alleged disclosure of knowingly false information and/or the alleged failure to respond to red flags relating to Hydrafacial’s business, operations, and prospects, specifically with respect to the performance of and demand for the Syndeo 1.0 and 2.0 devices. The plaintiff-stockholder further maintains that no demand was made upon the Company’s board prior to the initiation of the Derivative Action based on allegations that a majority of the board was not disinterested or independent with respect to the fiduciary duty claim, such that demand should be excused as futile. The relief sought in the complaint includes a finding of demand futility, a finding that the individual defendants are liable for breaching their fiduciary duties (as current/former officers and directors), and an award of compensatory damages for harm suffered by the Company and its stockholders for harm allegedly sustained as a result of the alleged fiduciary duty violation. The Derivative Action has been assigned to Vice Chancellor Lori Will. The Company believes that the claims asserted in the Derivative Action have no merit and intends to vigorously defend them. The Company is unable to reasonably estimate the possible loss or range of loss, if any, associated with these claims, and, accordingly, it has not accrued any liability associated with the Derivative Action. 121 Contractual Obligations and Other Commercial Commitments As of December 31, 2023, the Company has $ 73.7 million of non-cancelable contractual obligations and other commercial commitments related to the purchase of inventory, service, other items, of which the majority will be paid within the next twelve months. Note 15 — Related-Party Transactions Registration Rights Agreement In connection with the consummation of the Business Combination, on May 4, 2021, the Company entered into that certain Amended and Restated Registration Rights Agreement (the “Registration Rights Agreement”) with BLS Investor Group LLC and the Hydrafacial stockholders. Pursuant to the terms of the Registration Rights Agreement, (i) any outstanding shares of Class A Common Stock or any other equity securities (including the Private Placement Warrants and including shares of Class A Common Stock issued or issuable upon the exercise of any other equity security) of the Company held by the Sponsor or the Hydrafacial stockholders (together, the “Restricted Stockholders”) as of the date of the Registration Rights Agreement or thereafter acquired by a Restricted Stockholder (including the shares of Class A Common Stock issued upon conversion of the 11,500,000 Founder Shares that were owned by the Sponsor and converted into shares of Class A Common Stock in connection with the Business Combination and upon exercise of any Private Placement Warrants) and shares of Class A Common Stock issued as earn-out shares to the Hydrafacial stockholders and (ii) any other equity security of the Company issued or issuable with respect to any such share of common stock by way of a stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization or otherwise will be entitled to registration rights. The Registration Rights Agreement provides that the Company will, within 60 days after the consummation of the Business Combination, file with the SEC a shelf registration statement registering the resale of the shares of common stock held by the Restricted Stockholders and will use its reasonable best efforts to have such registration statement declared effective as soon as practicable after the filing thereof, but in no event later than 60 days following the filing deadline. The Company filed such registration statement on July 19, 2021 and it was declared effective by the SEC on July 26, 2021. The Hydrafacial stockholders are entitled to make up to an aggregate of two demands for registration, excluding short form demands, that the Company register shares of common stock held by these parties. In addition, the Restricted Stockholders have certain “piggy-back” registration rights. The Company will bear the expenses incurred in connection with the filing of any registration statements filed pursuant to the terms of the Registration Rights Agreement. The Company and the Restricted Stockholders agree in the Registration Rights Agreement to provide customary indemnification in connection with any offerings of common stock effected pursuant to the terms of the Registration Rights Agreement. Pursuant to the Registration Rights Agreement, the Sponsor agreed to restrictions on the transfer of its securities issued in the Company’s initial public offering, which (i) in the case of the Founder Shares is one year after the completion of the Business Combination unless (A) the closing price of the common stock equals or exceeds $ 12.00 per share for 20 days out of any 30 -trading-day period commencing at least 150 days following the Closing of the Business Combination or (B) the Company completes a liquidation, merger, capital stock exchange, reorganization or other similar transaction that results in all of the Company’s stockholders having the right to exchange their shares of common stock for cash, securities or other property, and (ii) in the case of the Private Placement Warrants and the respective Class A Common Stock underlying the Private Placement Warrants is 30 days after the completion of the Business Combination. The Sponsor and its permitted transferees will also be required, subject to the terms and conditions in the Registration Rights Agreement, not to transfer their Private Placement Warrants (as defined in the Registration Rights Agreement) or shares of common stock issuable upon the exercise thereof for 30 days following the Closing. 122 Investor Rights Agreement In connection with the consummation of the Business Combination, on May 4, 2021, the Company and LCP Edge Holdco, LLC entered into that certain Investor Rights Agreement (the “Investor Rights Agreement”). Pursuant to the Investor Rights Agreement, LCP has the right to designate a number of directors for appointment or election to the Company’s Board of Directors as follows: (i) one director for so long as LCP holds at least 10 % of the outstanding Class A Common Stock, (ii) two directors for so long as LCP holds at least 15 % of the outstanding Class A Common Stock, and (iii) three directors for so long as LCP holds at least 40 % of the outstanding Class A Common Stock. Pursuant to the Investor Rights Agreement, for so long as LCP holds at least 10 % of the outstanding Class A Common Stock, LCP will be entitled to have at least one of its designees represented on the compensation committee and nominating committee and corporate governance committee of the Company’s Board of Directors. Amended and Restated Management Services Agreement Hydrafacial entered into a Management Services Agreement, dated December 1, 2016, with Linden Capital Partners III LP (“Linden Capital Partners III”) and DW Management Services, L.L.C. (“DW Management Services”) pursuant to which the parties received quarterly monitoring fees of the greater of (a) $ 125,000 and (b) 1.25 % of Last Twelve Months EBITDA multiplied by the quotient of (x) the aggregate capital invested by the investors of DW Healthcare Partners IV (B), L.P. (“DWHP Investors”) into LCP and/or its subsidiaries as of such date, divided by (y) the sum of (i) the aggregate capital invested by the DWHP Investors into LCP and/or its subsidiaries, plus (ii) the aggregate capital invested by Linden Capital Partners III into LCP and/or its subsidiaries as of the date of payment. In addition, the management services agreement provided for other fees in relation to services that may be provided in connection with equity and/or debt financing, acquisition of any other business, company, product line or enterprise, or divestiture of any division, business, and product or material assets. The fees varied between 1 % and 2 % of the related transaction amount. Linden Capital Partners III also received a transaction fee upon the consummation of the Business Combination. In connection with the consummation of the Business Combination, on May 4, 2021, the Company, its subsidiary, Edge Systems LLC, and Linden Capital III LLC, the general partner of Linden Manager III LP (the “Linden Manager”) entered into an Amended and Restated Management Services Agreement (the “Linden Management Services Agreement”) pursuant to which the Linden Manager may continue to provide advisory services at the request of the Company related to mergers and acquisitions for one year following the Business Combination. As consideration for such services, the Company would pay a fee, equal to 1 % of enterprise value of the target acquired, to the Linden Manager upon the consummation of any such transaction (the “ 1 % Fee”). The Company had also agreed to reimburse Linden Manager for certain expenses in connection with such advisory services. However, pursuant to the Linden Management Services Agreement, the Company’s obligation to pay the 1 % Fee expired twelve months after the consummation of the Business Combination on May 4, 2022. Hydrafacial recorded approximately $ 0.2 million of charges related to management services fees for the year ended December 31, 2021. There were no management fees during the years ended December 31, 2022 and 2023. These amounts are included in General and administrative expenses on the Company’s Consolidated Statements of Comprehensive Income (Loss). In relation to the consummation of the Business Combination, $ 21.0 million in transaction fees was paid to the Former Parent during the year ended December 31, 2021. These amounts are included in General and administrative expenses on the Company’s Consolidated Statements of Comprehensive Income (Loss). Note 16 — Stockholders’ Equity Common Stock The Company is authorized to issue 320,000,000 shares of Class A Common Stock, par value of $ 0.0001 per share. Holders of Class A Common Stock are entitled to one vote for each share. As of December 31, 2023 and December 31, 2022, there were 122,899,002 and 132,214,695 , respectively, of Class A Common Stock issued and outstanding. The Company has not declared or paid any dividends with respect to its Class A Common Stock . In connection with the Business Combination on May 4, 2021, the Company issued 35,000,000 shares of Class A Common Stock to certain qualified institutional buyers and accredited investors that agreed to purchase such shares in connection with the Business Combination for aggregate consideration of $ 350 million. The Company also issued 35,501,743 shares of Class A Common Stock as partial compensation to the Hydrafacial stockholders for the Business Combination. 123 Common Stock Repurchases 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. Under the share repurchase program, repurchases can be made from time to time using a variety of methods, which may include open market purchases, privately negotiated transactions, transactions structured through investment banking institutions, or a combination of the foregoing. Under this share repurchase program, for the year ended December 31, 2023, the Company repurchased and retired 10.4 million shares for $ 30.2 million excluding taxes. On September 26, 2022, the Company’s Board of Directors approved a common stock repurchase program pursuant to which the Company may repurchase up to $ 200.0 million of its outstanding shares of Class A Common Stock. Under the share repurchase program, repurchases can be made from time to time using a variety of methods, which may include open market purchases, privately negotiated transactions, or accelerated share repurchase programs. The Company entered into two accelerated share repurchase agreements on September 27, 2022 and November 9, 2022, respectively, with a financial institution to repurchase a total of $ 200.0 million of Class A Common Stock. Under the September 27, 2022 accelerated share repurchase agreement, the Company repurchased and retired 9.3 million shares for $ 100.0 million. Under the November 9, 2022 accelerated share repurchase agreement, the Company made a payment of $ 100.0 million and received initial deliveries of 9.5 million shares, which were also retired, which represented 80 % of the payment amount divided by the Company’s closing stock price on that date. During the three months ended June 30, 2023, the Company paid $ 2.2 million as the final settlement of the November 9, 2022 accelerated share repurchase agreement, which was based upon the average daily volume weighted average price of the Company’s Class A Common Stock during the repurchase period, less an agreed upon discount. The accelerated share repurchase agreements are accounted for as a repurchases and retirements of shares and as equity forward contracts indexed to the Company’s Class A Common Stock. The equity forward contracts are classified as equity instruments under ASC 815-40, Contracts in Entity's Own Equity. The par value of the initial shares received is recorded as a reduction to the Company’s Class A Common Stock and the excess of par value is recognized as a reduction to additional paid in capital. The equity forward stock purchase contracts are classified as equity instruments and are recognized as a reduction to additional paid in capital. Preferred Stock The Company is authorized to issue 1,000,000 shares of preferred stock with a par value of $ 0.0001 per share with such designations, voting and other rights and preferences as may be determined from time to time by the Company’s Board of Directors. At December 31, 2023 and December 31, 2022 , there were no shares of preferred stock issued or outstanding. Note 17 — Net Income (Loss) Attributable to Common Stockholders The following table sets forth the calculation of both basic and diluted net income (loss) per share as follows for the periods indicated: Year Ended December 31, (in thousands, except share and per share amounts) 2023 2022 2021 Net (loss) income available to common stockholders - basic $ ( 100,116 ) $ 44,224 $ ( 378,764 ) Less: Income on Private placement warrants — ( 78,343 ) — Net loss available to common stockholders - diluted $ ( 100,116 ) $ ( 34,119 ) $ ( 378,764 ) Weighted average common shares outstanding - basic 131,680,605 147,554,090 102,114,949 Effect of dilutive shares: Private placement warrants — 952,222 — Weighted average common shares outstanding - diluted 131,680,605 148,506,312 102,114,949 Basic net (loss) income per share: $ ( 0.76 ) $ 0.30 $ ( 3.71 ) Diluted net (loss) per share $ ( 0.76 ) $ ( 0.23 ) $ ( 3.71 ) 124 The following shares have been excluded from the calculation of the weighted average diluted shares outstanding as the effect would have been anti-dilutive or requisite performance conditions were not met: Year Ended December 31, 2023 2022 2021 Convertible Notes 23,614,425 23,614,425 23,614,425 RSUs 5,242,680 2,580,152 380,775 PSUs 1,306,558 2,500,126 975,000 Stock Options 3,732,420 5,601,770 6,785,020 In addition, the potential final settlement of shares related to the November 9, 2022 accelerated share repurchase agreement was excluded from the calculation of the weighted average diluted shares outstanding for the year ended December 31, 2022 as the effect would have been anti-dilutive. For the years ended December 31, 2023 and 2021, income and shares related to the Private Placement Warrants were excluded from the calculation of diluted net loss per common share because their effect would be antidilutive. Note 18 — Restructuring Charges Syndeo Program The Company launched Syndeo in March 2022, the first new Delivery System model in five years. Subsequent to launch, many customers with Syndeo 1.0 and Syndeo 2.0 builds began to experience frequent treatment interruptions and unacceptable device conditions. In addition to issues such as distractive noise and difficult bottle insertion, a significant issue was low flow and clogs in the system, due to recommended maintenance requiring overly rigorous levels to prevent serum build-up inside the system’s fluidics manifold. Throughout 2022 and the first half of 2023, the Company made several enhancements to each version of the Syndeo in an effort to address and remediate these issues, but despite these efforts, performance interruptions that negatively impacted customer productivity and satisfaction continued to persist. In July 2023 the Company developed Syndeo 3.0 and has noted a significant improvement in user experience and a substantial decline in initial return rates, primarily due to hardware and software enhancements that automate and force effective rinse cycles and manifold cleaning with an air blast procedure that reduce build-up and clogging as well as improvements in the connector to the handpiece to facilitate user cleaning. During the third quarter of 2023, the Company announced its Syndeo Enhancement Program (the “Syndeo Program”) to upgrade devices to Syndeo 3.0 build standards via field service. 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. 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. With respect to Syndeo devices, 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 in cost of sales of $ 19.6 million during the year ended December 31, 2023. The following table summarizes the Syndeo Program charges and usage: (in thousands) Year Ended December 31, 2023 Program charges $ 45,638 Program usage ( 24,629 ) Ending balance $ 21,009 Syndeo inventory write-down and Syndeo Program charges were recognized in cost of sales for the year ended December 31, 2023. 125 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 employee reductions in force were immaterial as of the year ended December 31, 2023. 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. Note 19 — Revision for Immaterial Misstatements As disclosed in Note 1 – Description of Business, subsequent to the issuance of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022, during the six months ended June 30, 2023, the Company identified misstatements related to the elimination of intercompany balances and right of return assets. Although the Company concluded that these misstatements were not material, either individually or in the aggregate, the Company elected to revise its previously issued consolidated financial statements to correct for these misstatements. The revision to the accompanying Consolidated Balance Sheets, Consolidated Statements of Comprehensive Income (Loss), and Consolidated Statements of Cash Flows and related disclosures in Note 5 – Balance Sheet Components and Note 17 – Net Income (Loss) Attributable to Common Stockholders are detailed in the tables below. As of December 31, 2021, accumulated deficit was understated by $ 4.3 million, and as such, previously reported stockholders’ equity of $ 302.3 million was revised to $ 298.0 million. There were no other changes to the consolidated statements of stockholders’ equity that have not otherwise been reflected in the Consolidated Balance Sheets and Consolidated Statements of Comprehensive Income (Loss) as detailed in the tables below. Year Ended December 31, 2021 Consolidated Statement of Comprehensive Income (Loss) (in thousands, except per share amounts) As Previously Reported Adjustment As Revised Cost of sales $ 78,259 $ 3,289 $ 81,548 Gross profit $ 181,827 $ ( 3,289 ) $ 178,538 Loss from operations $ ( 36,639 ) $ ( 3,289 ) $ ( 39,928 ) Loss before provision for income taxes $ ( 377,350 ) $ ( 3,289 ) $ ( 380,639 ) Income tax benefit $ ( 2,242 ) $ 367 $ ( 1,875 ) Net loss $ ( 375,108 ) $ ( 3,656 ) $ ( 378,764 ) Comprehensive loss $ ( 376,607 ) $ ( 3,656 ) $ ( 380,263 ) Net loss per share - Basic $ ( 3.67 ) $ ( 0.04 ) $ ( 3.71 ) Net loss per share - Diluted $ ( 3.67 ) $ ( 0.04 ) $ ( 3.71 ) Year Ended December 31, 2021 Consolidated Statement of Cash Flows (in thousands) As Previously Reported Adjustment As Revised Net loss $ ( 375,108 ) $ ( 3,656 ) $ ( 378,764 ) Change in operating assets and liabilities: Inventories $ ( 10,577 ) $ 3,289 $ ( 7,288 ) Prepaid expenses and other current assets $ ( 5,434 ) 367 $ ( 5,067 ) 126 As of December 31, 2022 Consolidated Balance Sheet (in thousands) As Previously Reported Adjustment As Revised Inventories $ 116,430 $ ( 6,774 ) $ 109,656 Prepaid expenses and other current assets $ 26,698 $ 950 $ 27,648 Total current assets $ 789,099 $ ( 5,824 ) $ 783,275 TOTAL ASSETS $ 1,008,907 $ ( 5,824 ) $ 1,003,083 Accounts payable $ 30,335 $ ( 1,868 ) $ 28,467 Income tax payable $ 962 $ 467 $ 1,429 Total current liabilities $ 73,115 $ ( 1,401 ) $ 71,714 TOTAL LIABILITIES $ 837,431 $ ( 1,401 ) $ 836,030 Accumulated deficit $ ( 374,328 ) $ ( 4,423 ) $ ( 378,751 ) Total stockholders' equity $ 171,476 $ ( 4,423 ) $ 167,053 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,008,907 $ ( 5,824 ) $ 1,003,083 Year Ended December 31, 2022 Consolidated Statement of Comprehensive Income (Loss) (in thousands) As Previously Reported Adjustment As Revised Cost of sales $ 115,536 $ 1,561 $ 117,097 Gross profit $ 250,340 $ ( 1,561 ) $ 248,779 Loss from operations $ ( 24,280 ) $ ( 1,561 ) $ ( 25,841 ) Foreign currency transaction loss, net $ 3,164 $ ( 1,868 ) $ 1,296 Income before provision for income taxes $ 45,032 $ 307 $ 45,339 Income tax expense $ 648 $ 467 $ 1,115 Net income $ 44,384 $ ( 160 ) $ 44,224 Comprehensive income $ 41,111 $ ( 160 ) $ 40,951 Year Ended December 31, 2022 Consolidated Statement of Cash Flows (in thousands) As Previously Reported Adjustment As Revised Net income $ 44,384 $ ( 160 ) $ 44,224 Change in operating assets and liabilities: Inventories $ ( 87,241 ) $ 2,878 $ ( 84,363 ) Prepaid expenses and other current assets $ ( 16,401 ) $ ( 1,317 ) $ ( 17,718 ) Accounts payable $ 1,606 $ ( 1,868 ) $ ( 262 ) Income taxes payable $ 198 $ 467 $ 665 127 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None.