What changed in this filing

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Item 7. Management’s Discussion and Analysis

2025-03-12 compared with 2024-03-12 · 133 added, 164 removed, 211 unchanged (58% of the section changed)

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Company Overview

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

The Beauty Health Company is a medtech meets beauty company that delivers 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.

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Hydrafacial in hydradermabrasion;

SkinStylus in microneedling;

SkinStylus in nanoneedling and microneedling;

and Keravive in scalp health.

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

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.

Factors Affecting Our Performance

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

• The imposition of tariffs and/or trade restrictions may impact material costs and pricing;

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

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

The Company evaluated its global distribution strategy to align its go-to-market strategy with in-market partner capabilities and market opportunity.

The Company expects to transition sales in the China market to a distributor partner during the second quarter of 2025, and as a result, the Company intends to discontinue its direct sales presence in China.

The Company has not currently estimated the severance and restructuring and non-cash charges associated with these actions.

The change in go-to-market strategy is expected to be accretive to the Company’s long-term profitability, as reductions in operating spend are partially offset by a reduction to revenue.

Syndeo Program

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

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

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

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

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

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

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

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

Additionally, the Company extended 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.

As a result of the decision to market and sell Syndeo 3.0 devices exclusively, 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.

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

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

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

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

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

Business Transformation Program and Other Restructuring Actions

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

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

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

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

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

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

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

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

As of December 31, 2024, the Syndeo Program is complete.

Components of our Results of Operations

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Cost of Sales

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

Costs of sales primarily 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

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

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

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

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General and Administrative

General and administrative expenses include personnel-related expenses, professional fees, credit card and wire fees and facilities-related costs primarily for our executive, corporate affairs, finance, accounting, legal, human resources, and information technology (“IT”) functions.

General and administrative expense primarily consists of personnel-related expenses, credit card and wire fees and facilities-related costs primarily for our executive, corporate affairs, finance, accounting, legal, human resources, and information technology (“IT”) functions.

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

Interest Expense

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

Interest expense 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.

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Interest Income

Interest income consists of interest earned from investments in money market funds that the Company classifies as cash equivalents.

Interest income primarily consists of interest earned from investments in money market funds that the Company classifies as cash equivalents.

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

Change in Fair Value of Warrant Liabilities

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

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

In October 2020, in connection with Vesper’s initial public offering, the Company issued 9,333,333 warrants to purchase shares of the Company’s Class A common stock at $ 11.50 per share (the “Private Placement Warrants”), to BLS Investor Group LLC, which will expire five years after the Business Combination.

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

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

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

Foreign Currency Transaction (Gain) Loss, Net

Foreign Currency Transaction Loss (Gain), Net

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

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

Income Tax (Benefit) Provision

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

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

Income Tax (Benefit) Expense

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

Results of Operations

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Interest income (16.6) (5.0) (23.2) (5.8)

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

Other income, net

(33.6) (10.0) (5.2) (1.3)

Change in fair value of warrant liabilities (3.1) (0.9) (11.9) (3.0)

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

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

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

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

Foreign currency transaction loss (gain), net 4.6 1.4 (2.4) (0.6)

Loss before provision for income taxes

(29.6) (8.8) (101.9) (25.6)

Income tax benefit

(0.5) (0.1) (1.8) (0.4)

$ (29.1) (8.7) % $ (100.1) (25.2) %

Year Ended December 31, Change

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Total 100.0% 100.0%

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

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

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

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

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

Total net sales for the year ended December 31, 2024, decreased $63.7 million, or 16.0%, compared to the year ended December 31, 2023.

Delivery Systems net sales for the year ended December 31, 2024 decreased $81.2 million, or 39.3%, compared to the year ended December 31, 2023, with decreases across all regions.

The decrease in Delivery Systems net sales reflects a challenging year-over-year comparison due to the prior year international launch of Syndeo, which included net sales from the trade-in program.

Delivery Systems net sales were also negatively impacted globally by unfavorable macroeconomic and credit conditions and as the Company works to strengthen customer confidence in Syndeo.

Consumables net sales for the year ended December 31, 2024, increased $17.5 million, or 9.2%, compared to the year ended December 31, 2023.

The increase in Consumables sales was primarily attributable to increased placements of Delivery Systems and the adjoining consumption of Consumables during the year ended December 31, 2024.

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Gross margin 54.5 % 39.0 %

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

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

Cost of sales for the year ended December 31, 2024 decreased by $90.9 million, or 37.4%, compared to the year ended December 31, 2023.

The decrease is primarily due to the absence of charges and inventory write-downs associated with the Syndeo Program of $65.2 million and lower net sales, partially offset by higher inventory related charges and approximately $8 million of manufacturing optimization related costs incurred in 2024.

Cost of sales for the year ended December 31, 2024 include $28.0 million in charges for discontinued, excess, or obsolete inventory, including the write-down of Delivery System inventory to its net realizable value and the write-off of excess raw materials.

Gross margin increased from 39.0% to 54.5% during the year ended December 31, 2024, primarily due to the prior year’s charges and inventory write-downs associated with the Syndeo Program, partially offset by higher inventory related charges and the manufacturing optimization related costs.

Operating Expenses

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Selling and marketing expense for the year ended December 31, 2024 decreased $26.2 million, or 18.1%, compared to the year ended December 31, 2023.

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

The decrease is primarily driven by lower personnel-related expenses, including sales commission expense and lower marketing related spend.

Research and Development

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As a percentage of net sales 1.9 % 2.5 %

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

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

Research and development expense for the year ended December 31, 2024 decreased $3.8 million, or 37.7%, compared to the year ended December 31, 2023.

The decrease is primarily driven by lower personnel-related expenses, including share-based compensation expense.

General and Administrative

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As a percentage of net sales 37.5 % 33.0 %

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

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

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

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

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

General and administrative expense for the year ended December 31, 2024 decreased $6.0 million, or 4.5%, compared to the year ended December 31, 2023.

The decrease is primarily driven by lower losses on the sale of assets and software expenses.

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

Year Ended December 31, Change

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Interest income $ (16.6) $ (23.2) $ 6.5 (28.2) %

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

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

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

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

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

Change in fair value of warrant liabilities $ (3.1) $ (11.9) $ 8.9 (74.3) %

Other income, net

$ (33.6) $ (5.2) $ (28.4) N/M

N/M - Not meaningful

Interest income for the year ended December 31, 2024 decreased $6.5 million compared to the year ended December 31, 2023, primarily due to lower average invested balances during the year ended December 31, 2024.

During the year ended December 31, 2024, the Company recognized income of $3.1 million related to the change in the fair value of the warrant liabilities, a decrease of $8.9 million, as compared to income of $11.9 million during the year ended

December 31, 2023, driven primarily by the fluctuation of the price of the Class A Common Stock underlying the Private Placement Warrants.

During the year ended December 31, 2024, the Company recognized other income, net of $33.6 million, which includes a net gain of $33.4 million related to the repurchase of the Company’s Notes.

During the year ended December 31, 2023 , the Company recognized other income, net of $5.2 million , which includes $4.9 million related to payments received for the Employee Retention Credit under the Coronavirus Aid, Relief, and Economic Security Act.

Liquidity and Capital Resources

Our primary sources of capital have been (i) cash flow from operating activities, (ii) net proceeds received from the consummation of the Business Combination, (iii) net proceeds received from the Notes (as defined below), and (iv) net proceeds received from the exercise of Public and Private Placement Warrants.

As of December 31, 2023 , we had cash and cash equivalents of approximately $523.0 million.

A revolving credit facility of $50 million is also available to us as a source of capital.

As of December 31, 2023 , the revolving credit facility remains undrawn and there is no outstanding balance thereunder.

Our operating cash flows result primarily from cash received from sales of Delivery Systems and Consumables, offset primarily by cash payments made for products and services, employee compensation, payment processing and related transaction costs, operating leases, marketing expenses, and interest payments on our long-term obligations.

Our primary sources of capital have been (i) cash flow from operating activities, (ii) net proceeds received from the consummation of the Business Combination, (iii) net proceeds received from the Notes, and (iv) net proceeds received from the exercise of public and Private Placement Warrants.

As of December 31, 2024 , we had cash, cash equivalents, and restricted cash of $370.1 million .

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

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

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

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Furthermore, we cannot provide assurances that additional financing will be available to us in any required time frame and on commercially reasonable terms, if at all.

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

Capital expenditures for property and equipment and intangible assets for the year ended December 31, 2024 were $6.8 million.

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

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

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

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

We may, from time to time, seek to redeem or repurchase our outstanding debt or equity securities through cash purchases and/or exchanges for equity or debt, in open-market purchases, privately negotiated transactions or otherwise.

Such repurchases or exchanges, if any, will be upon such terms and at such prices as we may determine, and will depend on prevailing market conditions, our liquidity requirements, contractual restrictions, and other factors.

For information regarding the Company’s repurchases of its Notes during the year ended December 31, 2024, see Note 7, Long-Term Debt, to the Notes to the Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for additional information.

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

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However, if cash flows from operations become insufficient to continue operations at the current level, and if no additional capital were obtained, then management would restructure the Company in a way to preserve our business while maintaining expenses within operating cash flows.

Amended and Restated Credit Agreement

On November 14, 2022, the Company, as successor by assumption to Hydrafacial, entered into an Amended and Restated Credit Agreement (as it may be further amended, restated, supplemented or modified from time to time, the “Credit Agreement”) with JPMorgan Chase Bank, N.A.

(the “Administrative Agent”).

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

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

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

In addition, the Borrower has the ability from time to time to increase the revolving commitments or enter into one or more tranches of term loans up to an additional aggregate amount not to exceed $50 million, subject to receipt of lender commitments and certain conditions precedent.

Borrowings under the Credit Agreement are secured by certain collateral of the loan parties and are guaranteed by all of the Company’s domestic subsidiaries, each of which will derive substantial benefit from the revolving credit facility.

In specified circumstances, additional guarantors are required to be added.

The Amended and Restated Credit Agreement contains various restrictive covenants subject to certain exceptions, including limitations on the Company’s ability to incur indebtedness and certain liens, make certain investments, become liable under contingent obligations in certain circumstances, make certain restricted payments, make certain dispositions within guidelines and limits, engage in certain affiliate transactions, alter its fundamental business or make certain fundamental changes, and requirements to maintain financial covenants, including maintaining a leverage ratio of no greater than 3.00 to 1.00 and maintaining a fixed charge coverage ratio of not less than 1.15 to 1.00.

The leverage ratio also determines pricing under the Credit Agreement.

At the Company’s option, borrowings under the revolving credit facility accrue interest at a rate equal to either Term SOFR Rate or a specified base rate plus an applicable margin.

The applicable margin is linked to the leverage ratio.

The margins range from 1.50% to 2.00% per annum for Term SOFR Rate loans and 0.50% to 1.00% per annum for base rate loans.

The revolving credit facility is subject to a commitment fee payable on the unused revolving credit facility commitments ranging from 0.25% to 0.35%, depending on the Borrower’s leverage ratio.

The Borrower is also required to pay certain fees to the Administrative Agent and letter of credit issuers under the revolving credit facility.

During the term of the revolving credit facility, the Company may borrow, repay, and re-borrow amounts available under the revolving credit facility, subject to voluntary reductions of the swing line, letter of credit, and revolving credit commitments.

In addition, the Credit Agreement includes events (including, without limitation, a non-payment under the loan, a breach of warranties and representations in any material respect, non-compliance with covenants by a loan party, cross-default for payment defaults and cross-acceleration for other defaults under material debt or a change of control) which, if not cured within the time period specified, if any, would constitute an event of default.

Upon the occurrence of such events of default, the Borrower could not request borrowings and the lenders may elect to accelerate the outstanding principal and accrued and unpaid interest under the revolving credit facility.

Further, outstanding principal and accrued and unpaid interest thereon automatically accelerate upon the entry of an order for relief with respect to any loan party under any bankruptcy, insolvency or other similar law.

Convertible Senior Notes

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

On September 14, 2021, the Company issued an aggregate of $750.0 million in principal amount of its Notes.

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

Bank National Association, as trustee.

Bank National Association, as trustee (the “Indenture”).

The Notes accrue interest at a rate of 1.25% per annum, payable semi-annually in arrears on April 1 and October 1 of each year, which began on April 1, 2022.

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The initial conversion rate is 31.4859 shares of Class A Common Stock per $1,000 principal amount of Notes, which represents an initial conversion price of approximately $31.76 per share of Class A Common Stock.

We used $90.2 million of the net proceeds from the sale of the Notes to fund the cost of entering into capped call transactions (described below).

The net proceeds from the issuance of the Notes were approximately $638.7 million, net of capped call transaction costs of $90.2 million and debt issuance costs totaling $21.3 million.

See Note 7 – Long-term Debt, to the Notes to the Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for additional information.

Capped Call Transactions

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

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

Known Tren ds or Uncertainties

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

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

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

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

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

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

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

During the year ended December 31, 2024, t he Company repurchased $ 192.3 million principal amount of the Notes for $ 156.1 million.

Amended and Restated Credit Agreement

On November 14, 2022, the Company, as successor by assumption to Hydrafacial, 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”).

The Credit Agreement provided the Company with a $50.0 million revolving credit facility that had a maturity date of November 14, 2027.

On August 6, 2024, the Company prepaid all obligations and terminated all commitments, liabilities, and other obligations under the Credit Agreement.

There were no material early termination penalties incurred in connection therewith, all outstanding obligations and commitments under the Credit Agreement were satisfied and terminated, and all related security interests and liens securing such obligations and commitments were released.

Known Trends or Uncertainties

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

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

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

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

In addition, we continue to face macroeconomic challenges such as the possibility of recession or financial market instability, and the impact of any governmental actions on the economy, such as tariffs and/or trade restrictions.

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

If economic and social conditions or the degree of uncertainty or volatility worsen, or the adverse conditions previously described are further prolonged, our revenues could be adversely affected.

Macroeconomic challenges and credit conditions have negatively impacted our revenues in 2024.

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

Syndeo Program Costs

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

Business Transformation Program and Other Restructuring Actions

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

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

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

Stock Repurchase Program

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

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

Debt Repurchase

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

Discontinuation of Trade-up Program in 2024

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

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

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

Negative trends in our financial performance or financial condition may result in a sustained decline in our stock price, which may result in a triggering event necessitating an interim goodwill impairment assessment and potential goodwill impairment.

Contractual Obligations and Other Commercial Commitments

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

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

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

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

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(Dollars in millions) 2024 2023

Cash and cash equivalents at beginning of period $ 568.2 $ 901.9

Cash, cash equivalents, and restricted cash at beginning of period

$ 523.0 $ 568.2

Operating activities:

Net (loss) income (100.1) 44.2

(29.1) (100.1)

Non-cash adjustments 72.6 98.5

Changes in working capital (27.4) 23.4

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

Net cash provided by operating activities 16.1 21.8

Net cash used for investing activities (6.8) (31.5)

Net cash used for financing activities (158.3) (37.4)

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

Net change in cash, cash equivalents, and restricted cash

(149.0) (47.2)

Effect of foreign currency translation (4.0) 2.0

Cash and cash equivalents at end of period $ 523.0 $ 568.2

Cash, cash equivalents, and restricted cash at end of period

$ 370.1 $ 523.0

Operating Activities

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

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

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

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

Net cash provided by operating activities for the year ended December 31, 2024 was $16.1 million, as compared to $21.8 million for the year ended December 31, 2023 .

The change in cash provided by operating activities was primarily related to higher working capital usage and changes in net loss and non-cash adjustments.

The current year net loss and non-cash adjustments include a net gain of $33.4 million related to the repurchase of the Company’s Notes.

The prior year net loss, non-cash adjustments, and changes in working capital include the impact of the Syndeo Program charges and inventory write-down.

Investing Activities

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

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

Net cash used for investing activities for the year ended December 31, 2024 was $6.8 million, as compared to $31.5 million for the year ended December 31, 2023 .

The change in cash used for investing activities was primarily related to prior year’s asset acquisitions of Esthetic Medical Inc.

and Anacapa Aesthetics LLC for $18.5 million.

Financing Activities

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

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

Net cash used for financing activities for the year ended December 31, 2024 was $158.3 million, as compared to $37.4 million for the year ended December 31, 2023 .

The change in cash used for financing activities was primarily related to the repurchase of $192.3 million principal amount of the Company’s Notes at a weighted average price equal to 81% for $156.1 million, partially offset by share repurchases of $30.2 million in the prior year.

Critical Accounting Policies and Estimates

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

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

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

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Management’s Policy :

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

In accordance with ASC 606, Revenue from Contracts with Customers , we determine the amount of revenue to be recognized through application of the following steps:

• Identify the customer contract;

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

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.

The Company recognized revenue based on the estimated fair value of such Delivery Systems for the years ended December 31, 2023 and 2022 of approximately $17 million and $9 million, respectively.

No trade-in revenue was recognized for the year ended December 31, 2024.

Impact if Actual Results Differ from Estimates and Judgements :

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

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

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

If changes in market conditions result in reductions in the estimated reselling price below its previous estimates, the Company would decrease its basis in the trade-in Delivery Systems in the period in which it made such a determination.

During the year ended December 31, 2024, the Company recognized approximately $7 million of inventory charges related to the write-down of trade-in Delivery Systems to its net realizable value.

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

Goodwill and Intangible Assets

Management’s Policy :

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

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

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

Intangible assets primarily consist of developed technology, capitalized software, customer relationships and trademarks 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.

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

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

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

Subjective Estimates and Judgements :

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

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

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

We will use industry accepted valuation models to estimate the fair value for impairment testing.

The fair value calculation requires significant judgments in determining the assets’ fair value.

The key estimates and factors used in the valuation models may include, as applicable, revenue growth rates and profit margins based on internal forecasts, weighted average cost of capital used to discount future cash flows, comparable market multiples for the industry segment, and 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.

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We use the asset-and-liability method for income taxes.

Under this method, deferred tax assets and liabilities are determined based on differences between the consolidated financial statement carrying amounts and tax bases of assets and liabilities and operating loss and tax credit carryforwards and are measured using the enacted tax rates that are expected to be in effect when the differences reverse.

The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

Under this approach, deferred tax assets and liabilities arise from differences between the financial statement carrying amounts and tax bases of assets and liabilities, as well as operating loss and tax credit carryforwards.

These are measured using enacted tax rates expected to be in effect when the differences reverse.

Any change in tax rates is recognized in income in the period of enactment.

Subjective Estimates and Judgements :

Valuation allowances are established when necessary to reduce deferred tax assets to an amount that, in the opinion of management, is more likely than not to be realized.

Significant judgement is required to determine if a valuation allowance is needed.

As of December 31, 2023, we incurred cumulative pre-tax losses, and as a result, we do not rely on our projections as a source of income that would give us the ability to realize our deferred tax assets.

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

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

Tax positions not deemed to meet the more-likely-than-not threshold would be recorded as a tax expense in the current year.

Reevaluation of tax positions considers factors such as changes in facts or circumstances, changes in or interpretations of tax law, effectively settled issues under audit or expiration of statute of limitation and new audit activity.

We recognized interest accrued and penalties related to unrecognized tax benefits in our income tax expense.

We assess the need for valuation allowances to reduce deferred tax assets to amounts that are more likely than not to be realized.

This requires significant judgment.

As of December 31, 2024, due to cumulative pre-tax losses, we do not rely on projected income to support the realization of deferred tax assets.

Instead, we consider the reversal of taxable temporary differences as a source of income for realizing these assets.

For uncertain tax positions, we evaluate whether they meet the “more-likely-than-not” threshold for sustaining upon examination by tax authorities.

Positions that do not meet this threshold are recorded as a tax expense.

We reassess these positions based on changes in facts, tax law interpretations, audit outcomes, or statute expirations.

Interest and penalties related to unrecognized tax benefits are recorded in income tax expense.

Impact if Actual Results Differ from Estimates and Judgments :

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

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

While we believe our estimates and judgments are reasonable, actual results may differ.

If we are unable to realize all or part of our deferred tax assets or if a tax position is overturned by a taxing authority, we may need to adjust the valuation allowance, affecting income tax expense and potentially our earnings.

Warrant Liabilities

Management’s Policy :

We classify the Public and Private Placement Warrants (“Warrant liabilities”) as liabilities on our Consolidated Balance Sheets as these instruments are precluded from being indexed to our own stock given the terms allow for a settlement adjustment that does not meet the scope of the fixed-for-fixed exception in ASC 815, Derivatives and Hedging .

The Warrant liabilities were initially recorded at fair value on the date of the Business Combination and at each reporting date thereafter.

There were no Public Warrants outstanding as of December 31, 2023.

We classify the Private Placement Warrants as liabilities on our Consolidated Balance Sheets as these instruments are precluded from being indexed to our own stock given the terms allow for a settlement adjustment that does not meet the scope of the fixed-for-fixed exception in ASC 815, Derivatives and Hedging .

The Private Placement Warrants were initially measured at fair value at inception and are subsequently adjusted to fair value at each subsequent reporting date.

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

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The valuation technique requires assumptions and judgement around the inputs to be used.

Specifically, there is a high degree of subjectivity and judgement in evaluating the determination of the expected share price volatility inputs used in the Monte Carlo model for the warrant derivative liability.

Specifically, there is a high degree of subjectivity and judgement in evaluating the determination of the expected share price volatility inputs used in the Monte Carlo simulation model for the warrant derivative liability.

Historical, implied, and peer group volatility levels provide a range of possible expected volatility inputs and the fair value estimates are sensitive to the expected volatility inputs.

Impact if Actual Results Differ from Estimates and Judgments :

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

Changes around share price volatility and assumptions and inputs used in the Monte Carlo simulation 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 on the Consolidated Statements of Comprehensive Loss.

Syndeo Program Reserves

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

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

Impact if Actual Results Differ from Estimates and Judgments:

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

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

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

As of December 31, 2024, the Syndeo Program is complete.

Recent Accounting Pronouncements

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

What changed 10-K

Item 7. Management’s Discussion and Analysis