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Item 7. Management’s Discussion and Analysis

2023-03-01 compared with 2022-03-01 · 247 added, 334 removed, 269 unchanged (68% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion should be read in conjunction with the consolidated financial statements and accompanying notes included in Part II, Item 8 of this Form 10-K.

This section of this Form 10-K generally discusses 2021 and 2020 items and year-to-year comparisons between 2021 and 2020.

Discussions of 2019 items and year-to-year comparisons between 2020 and 2019 are not included in this Form 10-K, and can be found in the Company’s Registration Statement on Form S-1 (File No.

333-257995) filed with the Securities and Exchange Commission on July 19, 2021 under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Recent Developments

CEO Transition

On November 9, 2021, by mutual agreement, the Board of Directors and Clinton Carnell, the Company’s Chief Executive Officer and member of the Board, determined that Mr.

Carnell would transition out of his roles as Chief Executive Officer and as a member of the Board, in each case, effective December 31, 2021.

These actions were not related to any matter regarding the Company’s financial condition, reported financial results, internal controls or disclosure controls and procedures.

On January 1, 2022, Brenton L.

Saunders, the Company’s Executive Chairman of the Board, assumed additional responsibilities as its interim Chief Executive Officer.

On January 20, 2022, we announced the appointment of Andrew Stanleick to serve as our President and Chief Executive Officer and as a member of the Board of Directors, effective as of February 7, 2022.

In this capacity, Mr.

Stanleick is serving as our principal executive officer.

Stanleick commencing employment as our Chief Executive Officer, Mr.

Saunders, the Company’s then interim Chief Executive Officer and the Executive Chairman of the Board, ceased to serve as interim Chief Executive Officer.

Saunders continues to serve as the Executive Chairman of the Board.

Warrant Redemption

In connection with Vesper’s initial public offering, the Company issued warrants to purchase 15,333,333 shares of the Company’s common stock for $11.50 per share (the “Public Warrants”).

Simultaneously, with the consummation of Vesper Healthcare Acquisition Corp’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” and, together with the Public Warrants, the “Public and Private Placement Warrants”) to BLS Investor Group LLC (the “Sponsor”).

On October 4, 2021, the Company issued a press release stating that it would redeem all of the Public Warrants that remained outstanding following 5:00 p.m.

New York City time on November 3, 2021 (the “Redemption Date”).

As of December 31, 2021, no Public Warrants were outstanding and approximately 7 million Private Placement Warrants remained outstanding .

Business Combination and Public Company Costs

On May 4, 2021, HydraFacial consummated the previously announced Business Combination pursuant to that certain Merger Agreement, dated December 8, 2020 with Vesper, pursuant to which Vesper acquired, directly or indirectly, 100% of the stock of HydraFacial and its subsidiaries.

Upon closing, the combined entity was renamed The Beauty Health Company and its Class A Common Stock is listed on the Nasdaq Capital Market under the ticker symbol “SKIN”.

Pursuant to the terms of the Merger Agreement, the aggregate merger consideration paid to the HydraFacial stockholders in connection with the Business Combination was approximately $975.0 million, less HydraFacial’s net indebtedness as of the Closing Date, transaction expenses, and net working capital relative to a target.

In connection with the transaction, all of HydraFacial’s existing debt under its credit facilities were repaid and the note receivable from its stockholder was settled.

The merger consideration included both cash consideration and consideration in the form of newly issued Class A Common Stock.

The aggregate cash consideration paid to the former HydraFacial stockholders at the Closing was approximately $368.0 million, consisting of the Vesper’s cash and cash equivalents as of the closing of the Business Combination including proceeds of $350.0 million from Vesper’s Private Placement of an aggregate of 35,000,000 shares of Class A Common Stock, and approximately $433.0 million of cash available to Vesper from the Trust Account that held the proceeds from Vesper’s initial public offering after giving effect to income and franchise taxes payable in respect of interest income earned in the Trust Account, and redemptions that were elected by Vesper’s public stockholders, minus approximately $224.0 million used to repay HydraFacial’s outstanding indebtedness at the Closing, minus approximately $94.0 million of transaction expenses of HydraFacial and Vesper, minus $100.0 million.

The remainder of the consideration paid to the

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HydraFacial stockholders consisted of 35,501,743 newly issued shares of Class A Common Stock.

The foregoing consideration paid to the HydraFacial stockholders also included 7,500,000 earn-out shares of Class A Common Stock pursuant to the terms of the Merger Agreement.

Notwithstanding the legal form of the Business Combination pursuant to the Merger Agreement, the Business Combination was accounted for as a reverse recapitalization in accordance with GAAP.

Under this method of accounting, Vesper was treated as the “acquired” company for financial reporting purposes.

This determination was primarily based on the following:

• HydraFacial’s existing shareholders were expected to have the largest minority interest of the voting power in the combined entity under the minimum and maximum redemption scenarios;

• HydraFacial’s operations prior to the acquisition comprise the only ongoing operations of the combined entity;

• HydraFacial senior management were retained and compose the majority of the senior management of the combined entity;

• HydraFacial’s relative valuation and results of operations compared to Vesper;

• pursuant to the Investor Rights Agreement, HydraFacial was given the right to designate certain initial members of the board of directors of the post-combination company immediately after giving effect to the transactions.

Consideration was given to the fact that Vesper paid a purchase price consisting of a combination of cash and equity consideration and its shareholders would have significant voting power.

However, based on the aforementioned factors of management, board representation, largest minority shareholder, and the continuation of the HydraFacial business as well as 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 combined entity will 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 Vesper, accompanied by a recapitalization.

The net assets of Vesper were stated at historical cost, with no goodwill or other intangible assets recorded.

Following the consummation of the Business Combination, we became an SEC-registered and Nasdaq-listed company, which required us to hire additional staff and implement procedures and processes to address public company regulatory requirements and customary practices.

We have incurred and expect to incur additional annual expenses for, among other things, directors’ and officers’ liability insurance, director fees and additional internal and external accounting, legal and administrative resources and fees.

The following discussion should be read in conjunction with the consolidated financial statements and accompanying notes included in Part II, Item 8 of this Annual Report on Form 10-K.

This section of this Annual Report on Form 10-K generally discusses 2022 and 2021 items and year-to-year comparisons between 2022 and 2021.

Discussions of 2020 items and year-to-year comparisons between 2021 and 2020 are not included in this Annual Report on Form 10-K, and can be found in Part II, Item 7 of the Company’s Annual Report on Form 10-K filed on March 1, 2022 under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Company Overview

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

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

Hydrafacial provides a non-invasive and approachable skincare experience.

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

Factors Affecting Our Performance

Market Trends

HydraFacial is a pioneer in the attractive and growing beauty-health industry and there are several emerging market trends that we believe will play a key role in shaping the future of this industry.

Recent growth in the skincare industry has been driven by an emphasis on skincare rather than cosmetics and HydraFacial is poised to capture a larger share of wallet from consumers.

Further, HydraFacial’s market research conducted in 2019 demonstrated that consumers are increasingly willing to spend on high-end beauty health products.

To the extent disposable income grows, we expect impacts of this trend to be amplified.

We believe these favorable market trends will continue and strengthen going forward.

However, we operate in the beauty health industry, which is highly competitive and changes rapidly.

Our operating results could be significantly affected by our ability to develop new products and find new distribution channels for new and existing product.

Impact of the COVID-19 Pandemic

The COVID-19 pandemic has had, and may continue to have adverse impacts on our business.

As government authorities around the world continue to implement significant measures intended to control the spread of the virus and institute restrictions on commercial operations, while simultaneously implementing policies designed to reopen certain markets, we are working to ensure our compliance and maintain business continuity for essential operations.

The majority of our customers are in the medical, (dermatologists and plastic surgeons), a/esthetician, and beauty retail industry.

During economic downturns, we have seen consolidations in such industries.

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

We remain attentive to economic and geopolitical conditions that may materially impact our business.

We continue to explore and implement risk mitigation strategies in the face of these unfolding conditions and remain agile in adopting to changing circumstances.

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

Updates on Impact of the COVID-19 Pandemic

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

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

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

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

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

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

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

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

businesses and individuals’ actions in response to the pandemic;

and the impact on economic activity including the possibility of recession or financial market instability.

These factors may adversely impact consumer, business, and government spending as well as

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customers’ ability to pay for our products and services on an ongoing basis.

As a result, our growth rate could be affected by consolidation and downsizing in the medical, esthetician, and beauty retail industry.

The COVID-19 pandemic caused us to experience several adverse impacts primarily in the first and second quarters of fiscal year 2020, including extended sales cycles to close new orders for our products, delays in shipping and installing orders due to closed facilities and travel limitations and delays and failures in collecting accounts receivable.

The rapid development and uncertainty of the impacts of the COVID-19 pandemic precludes any prediction as to the ultimate adverse impact of the COVID-19 pandemic on our business.

However, the COVID-19 pandemic, the measures we may be required to implement to contain the virus, and the resulting impact, such as closure of providers, restrictions on performing personal services, consumer perceptions about the safety of HydraFacial’s services, disruption in the supply chain of raw materials and components, and inefficiencies in the manufacturing of products due to social distancing and hygiene protocols, present material uncertainty and risk with respect to our performance and financial results.

Disruptions in the capital markets as a result of the COVID-19 pandemic may also adversely affect our business if these impacts continue for a prolonged period and we need additional liquidity.

During the year ended December 31, 2020, we took and may continue to take, actions to mitigate the impact of the COVID-19 pandemic on our cash flow and results of operations and financial condition.

Starting in April 2020, after the government mandated shutdowns, we experienced a significant decline in sales during the second quarter of 2020, and took certain corrective measures.

HydraFacial furloughed a majority of its workforce and went through a restructuring process, which included the write-off of certain product lines, and incurred costs for assistance provided by third-party consultants to assist in managing the downturn.

Subsequent to the downturn experienced during the second quarter of 2020, our revenues increased, and we returned to having positive Adjusted EBITDA in the latter half of 2020.

This trend continued into and throughout 2021.

We successfully managed the variable portion of our cost structure to better align with revenue, which was significantly reduced during the downturn.

Additionally, all of our furloughed employees have returned to work.

HydraFacial benefits from a large, young and diverse customer base and the ability to serve a large percentage of the population given that HydraFacial’s patented technology addresses all skin, regardless of type, age or gender.

At the intersection of the medical and consumer retail markets, the large potential customer base should provide significant upside to drive top-line growth.

HydraFacial over indexes with males, significantly increasing the Total Addressable Market (TAM) compared to peers and the mix of male customers is growing at two times the rate of female customers.

HydraFacial customers are young;

approximately 50% of HydraFacial customers are Millennials, and approximately 30% of HydraFacial’s beauty retail customers are under the age of 24.

As the Millennial and Gen Z consumers age, they appear to be taking skincare more seriously and willing to invest in premium treatments, such as those offered by HydraFacial.

Effective marketing is vital to our ability to drive growth.

We plan to further our successful demand-generating activities through educational campaigns that focus on our brand, values, and quality, as well as enhancing our digitally integrated media campaigns.

Our strategy involves innovating our current product offering while also diversifying into attractive adjacent categories where we can leverage our strengths, capabilities and community.

We intend to maintain investment in research and development to stay at the forefront of cutting-edge technology.

Our investments in technology enhance the HydraFacial experience for consumers while capturing valuable and leverageable data.

As we expand our capabilities, we hope to enable the world’s largest skin health database.

We believe this data will allow us to drive habituation by enhancing personalization, access, trend identification and consumer education.

Geographic Expansion

HydraFacial’s recent growth has been driven in part by our international strategy.

35% of HydraFacial’s total revenue during the fourth quarter of fiscal year 2021 came from outside the United States and Canada.

Our diverse distribution channels

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create a significant opportunity within our existing retail and wholesale channels, as well as new locations abroad.

We plan to expand our global footprint, building out our team and infrastructure for further penetration across Asia, Europe and Latin America.

It remains unclear how governmental authorities, including the FDA, will regulate the products that we sell, and in the case of the FDA, whether and when it will propose or implement new or additional regulations.

government actions to certain pandemic impacts;

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

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

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

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

dollar and/or local currency, as applicable.

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

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

Foreign Exchange Rates

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

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

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

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

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

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

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

Global Supply Chain Issues

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

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

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

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

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

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

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

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

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

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

Key Operational and Business Metrics

In addition to the measures presented in our consolidated financial statements, we use the following key operational and business metrics to evaluate our business, measure our performance, develop financial forecasts, and make strategic decisions.

In addition to the measures presented in our audited consolidated financial statements, we use the following key operational and business metrics to evaluate our business, measure our performance, develop financial forecasts, and make strategic decisions.

Amounts and percentages may not foot due to rounding.

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Gross margin 68.4% 69.9%

Net loss $ (375.1) $ (29.2)

Net income (loss) $ 44.4 $ (375.1)

Adjusted net income $ 9.1 $ 4.5

Adjusted EBITDA $ 47.7 $ 32.7

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Adjusted gross margin 73.0% 74.1%

Adjusted net income (loss) $ 4.5 $ (12.1)

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

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

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

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

Adjusted Gross Profit and Adjusted Gross Margin

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

HydraFacial generates revenue through manufacturing and selling HydraFacial Delivery Systems (“ Delivery Systems ”).

Hydrafacial generates revenue through manufacturing and selling its Delivery Systems.

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

Consumables are sold solely and exclusively by HydraFacial and are available for purchase separately from the purchase of Delivery Systems.

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

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

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

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

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

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

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

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

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

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

Cost of Sales

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

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

Selling and Marketing

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

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

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

Research and Development

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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, finance, accounting, legal, human resources, and IT functions.

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.

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

In addition, we expect to continue to incur additional IT expenses as we scale HydraFacial and enhance our ecommerce, digital and data utilization capabilities.

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

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

Other Income (Expense), Net

Other income (expense) consists of the change in fair value of both the Public and Private Placement Warrants and earn-out shares liability, interest expense, deferred financing write-off costs and prepayment penalties related to the repayment of our long-term debt, foreign currency transaction gains and losses and investment income.

Interest Expense, Net

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

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

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

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

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

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

Interest Income

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

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

Change in Fair Value of Warrant Liabilities

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

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

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

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

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

Change in Fair Value of Earn-out Shares Liability

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

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

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

Foreign Currency Transaction (Gain) Loss, Net

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

We expect other income (expense) to increase in absolute dollars as we grow internationally and obtain additional financing.

Other income (expense) as a percentage of revenue will fluctuate period to period along with interest rates, exchange rates and other factors not related to normal business operations.

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

Income Tax Provision (Benefit)

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

The results of operations data for the year ended December 31, 2021 and December 31, 2020 have been derived from the consolidated financial statements included elsewhere in this Form 10-K.

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

Amounts and percentages may not foot due to rounding.

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Comparison of Year Ended December 31, 2022 to Year Ended December 31, 2021

Year Ended December 31,

(in millions) 2021 2020

Consolidated Statement of Operations

Net sales $ 260.1 $ 119.1

Cost of sales 78.3 51.9

Gross profit 181.8 67.2

Operating expenses

Selling and marketing 111.6 50.3

Research and development 8.2 3.4

General and administrative 98.7 30.6

Total operating expenses 218.5 84.4

Loss from operations (36.6) (17.2)

Total other expense 340.7 21.3

Loss before provision for income taxes (377.4) (38.5)

Income tax benefit (2.2) (9.3)

Net loss $ (375.1) $ (29.2)

Percentage of Net Sales

(Dollars in millions) 2022 % of Net Sales 2021 % of Net Sales

Net sales $ 365.9 100.0 % $ 260.1 100.0 %

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Loss from operations (24.3) (6.6) (36.6) (14.1)

Other expense, net 131.0 17.9

Loss before provision for income tax (145.1) (32.3)

Income tax benefit (0.9) (7.8)

Net loss (144.2) % (24.5) %

Other (income) expense, net (69.3) (18.9) 340.7 131.0

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

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

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

Year Ended December 31, Change

(in millions) 2021 2020 Amount %

(Dollars in millions) 2022 2021 Amount %

Delivery Systems

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

Delivery Systems units sold for the year ended December 31, 2020 increased primarily due to continued sequential improvement in system sales, with the greatest relative year over year growth coming

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from the Asia-Pacific region.

Similarly, Consumables sales for the year ended December 31, 2021 increased $54.9 million, or 83.5%, compared to the year ended December 31, 2020.

The increase in Consumables sales was primarily attributable to rebounding sales volume and an increase in the number of units sold following slowdowns in relation to the COVID-19 pandemic.

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

Consumables sales for the year ended December 31, 2022 increased $39.0 million, or 32.3%, compared to the year ended December 31, 2021.

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, 2022.

Cost of Sales, Gross Profit, and Gross Margin

Year Ended December 31, Change

(in millions) 2021 2020 Amount %

(Dollars in millions) 2022 2021 Amount %

Cost of sales $ 115.5 $ 78.3 $ 37.2 47.6%

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Gross margin 68.4 % 69.9 %

Cost of sales increased 50.8% driven by increased sales volume and a shift in the product mix to HydraFacial Delivery Systems.

Gross margin increased from 56.4% during the year ended December 31, 2020 to 69.9% during the year ended December 31, 2021 , primarily due to fixed cost leverage from higher sales volumes coupled with cost saving initiatives and margin accretion from distributor acquisitions, partially offset by higher logistics costs.

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

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

Selling and Marketing

Year Ended December 31, Change

(in millions) 2021 2020 Amount %

(Dollars in millions) 2022 2021 Amount %

Selling and marketing $ 160.1 $ 111.6 $ 48.5 43.5 %

As a percentage of net sales 43.8 % 42.9 %

Selling and marketing expense for the year ended December 31, 2021 increased $61.3 million, or 121.7%, compared to the year ended December 31, 2020.

Selling and marketing expenses as a percentage of net sales has remained consistent with the increase in sales.

The overall year-over-year increase was due to an increase in sales commissions of $19.4 million, which includes an increase of $1.8 million in sales commissions from international operations, compared to the year ended December 31, 2020.

In addition, personnel-related expenses increased by $18.6 million, which included a $6.9 million increase from our international operations, which is primarily attributable to increased headcount.

Stock-based compensation expense increased by $3.5 million, personnel-related training and certification expenses increased by $4.2 million and marketing spend increased by $4.8 million.

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

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

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

Research and Development

Year Ended December 31, Change

(in millions) 2021 2020 Amount %

(Dollars in millions) 2022 2021 Amount %

Research and development $ 8.4 $ 8.2 $ 0.2 3.0 %

As a percentage of net sales 2.3 % 3.2 %

Research and development expense for the year ended December 31, 2021 increased $4.8 million, or 140.4%, compared to the year ended December 31, 2020.

The increase was primarily due to increased year-over-year expenses related to investments in new skincare treatment technologies of $3.4 million.

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

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

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

General and Administrative

Year Ended December 31, Change

(in millions) 2021 2020 Amount %

(Dollars in millions) 2022 2021 Amount %

General and administrative $ 106.1 $ 98.7 $ 7.4 7.5 %

As a percentage of net sales 37.9 % 25.7 %

General and administrative expense for the year ended December 31, 2022 increased $7.4 million, or 7.5%, compared to the year ended December 31, 2021.

This increase is primarily attributable to increased transaction costs of $33.0 million related to the consummation of the Business Combination consisting of $21.0 million paid to the former owner of HydraFacial as well as professional fees for financial advisory, legal and accounting services.

The consummation of the Business Combination during the year ended December 31, 2021 also drove an increase of $8.0 million in stock-based compensation which includes $1.4 million related to accelerated vesting due to the Business Combination.

Personnel-related expenses increased by $10.4 million primarily due to increased headcount and higher sales.

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Other (Income) Expense, Net

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

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

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

Interest expense

Year Ended December 31, Change

(in millions) 2021 2020 Amount %

Total other expense $ 340.7 $ 21.3 $ 319.4 1499.5 %

Other expense, net, was $340.7 million for the year ended December 31, 2021 compared to $21.3 million for the year ended December 31, 2020.

The increase was primarily driven by the changes in the fair values of our Warrant liability (as defined below) and earn-out share liability of $277.3 million and $47.1 million, respectively.

In connection with the consummation of the Business Combination, we repaid all long-term borrowings and incurred a total of $4.3 million in prepayment penalties and deferred financing cost write-offs.

(Dollars in millions) 2022 2021 Amount %

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

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

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

Interest income

Year Ended December 31, Change

(Dollars in millions) 2022 2021 Amount %

Interest income $ (9.2) $ — $ (9.2) 23425.6 %

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

Change in fair value of warrant liabilities

Year Ended December 31, Change

(Dollars in millions) 2022 2021 Amount %

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

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

Change in fair value of earn-out shares liability

Year Ended December 31, Change

(Dollars in millions) 2022 2021 Amount %

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

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

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

Foreign currency transaction loss, net

Year Ended December 31, Change

(Dollars in millions) 2022 2021 Amount %

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

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

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

Income Tax Provision

Year Ended December 31, Change

(in millions) 2021 2020 Amount %

Income tax benefit $ (2.2) $ (9.3) $ 7.1 (75.9) %

Income tax benefit decreased primarily due to an increase in valuation allowance and various non-deductible expenses which include the revaluation of the warrants and contingent considerations from the business acquisitions lowering the effective tax rate of the benefit from 24.1% in December 31, 2020 to 0.6% on December 31, 2021.

(Dollars in millions) 2022 2021 Amount %

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

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

Liquidity and Capital Resources

Our primary sources of capital have been funded by (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 Warrants.

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, 2022 , we had cash and cash equivalents of approximately $568.2 million.

On September 14, 2021, we issued $750 million aggregate principal amount of our Notes.

On October 4, 2021, we delivered a Notice of Redemption for all of our outstanding Public Warrants to purchase shares of our Class A Common Stock.

On November 8, 2021, we announced 16.2 million Public Warrants were exercised for total cash proceeds of $185.4 million.

In addition, 0.3 million of Private Placement Warrants were exercised for total cash proceeds of $3.0 million.

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

As of December 31, 2022, the revolving credit facility remains undrawn and there is no outstanding balance thereunder.

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

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

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

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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.

We expect capital expenditures of up to $20.0 million for the year ended December 31, 2022.

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

Capital expenditures for the year ending December 31, 2022 were $17.4 million.

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.

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Also, the incurrence of additional debt financing would result in debt service obligations and the instruments governing such debt could provide for operating and financing covenants that would restrict our operations.

In the event such additional capital is needed in the future, there can be no assurance that such capital will be available to us, or,

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if available, that it will be in amounts and on terms acceptable to us.

In the event such additional capital is needed in the future, there can be no assurance that such capital will be available to us, or, if available, that it will be in amounts and on terms acceptable to us.

If we cannot raise additional funds when we need or want them, our operations and prospects could be negatively affected.

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

Credit Agreement

On December 30, 2021, Edge Systems LLC, a California limited liability company (the “Borrower”) and an indirect wholly owned subsidiary of The Beauty Health Company, as borrower, entered into a Credit Agreement (the “Credit Agreement”) with Edge Systems Intermediate LLC, an indirect wholly owned subsidiary of the Company and the direct parent of the Borrower that holds the Company’s foreign and domestic operating entities, and The Hydrafacial Company Mexico Holdings, LLC, a direct wholly owned subsidiary of the Borrower that conducts the Mexican business operations, as guarantors (the “Guarantors” and, together with the Borrower, the “Loan Parties”), and JPMorgan Chase Bank, N.A., as administrative agent.

The Credit Agreement provides for a $50 million revolving credit facility with a maturity date of December 30, 2026.

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.

As of December 31, 2021, the Credit Agreement remains undrawn and there is no outstanding balance under the revolving credit facility.

Borrowings under the Credit Agreement are secured by certain collateral of the Loan Parties and are guaranteed by the Guarantors, each of whom will derive substantial benefit from the revolving credit facility.

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 Credit Agreement contains various restrictive covenants subject to certain exceptions, including limitations on the Borrower’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 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 Borrower’s option, borrowings under the revolving credit facility accrue interest at a rate equal to either LIBOR or a specified base rate plus an applicable margin.

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 2.00% to 2.50% per annum for LIBOR loans and 1.00% to 1.50% per annum for base rate loans.

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 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.

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 Notes in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended.

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

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

Bank National Association, as trustee.

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

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

The Notes will mature on October 1, 2026, unless earlier repurchased, redeemed or converted.

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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.

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 10 - Debt, to the Notes to Consolidated Financial Statements included elsewhere in this report.

See Note 10 – 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

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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 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 report.

Capped call transactions cover the aggregate number of shares of our Class A Common Stock that will initially underlie the Notes, and generally reduce potential dilution to our outstanding Class A Common Stock upon any conversion of Notes and/or

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

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

Known Trends or Uncertainties

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

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

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

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

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

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

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

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

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

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

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

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

Contractual Obligations and Other Commercial Commitments

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

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

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Payments Due by Fiscal Period

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

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

Notes and interest on the Notes (1)

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Operating leases 19.3 5.4 6.3 2.5 5.1

Purchase commitments (2)

4.2 1.4 2.8 — —

Contingent consideration 0.8 0.8 — — —

Notes payable to seller (3)

2.2 — 2.2 — —

Total contractual obligations $ 806.9 $ 14.8 $ 25.1 $ 761.9 $ 5.1

_______________

(1) The Notes will mature on October 1, 2026 and are due either in cash or shares of the Company’s Class A Common Stock.

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

(2) Includes purchase commitments for software and services.

(3) The following amounts relate to amounts payable to the former owner of Ecomedic.

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.

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

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Year Ended December 31,

(in millions) 2021 2020 2019

(Dollars in millions) 2022 2021

Cash and cash equivalents at beginning of period $ 901.9 $ 9.5

Operating activities:

(375.1) (29.2) (1.6)

Net income (loss)

Non-cash adjustments (10.7) 365.4

Changes in working capital (140.3) (18.7)

Net cash flows used in operating activities (28.4) (12.4) 1.7

Net cash flows used in investing activities (37.7) (3.8) (12.5)

Net cash flows from financing activities 959.0 18.3 14.6

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

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

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

Net change in cash and cash equivalents (330.7) 892.9

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Operating Activities

Net cash used in operating activities of $28.4 million for the year ended December 31, 2021 was primarily due to the net loss of $375.1 million.

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

The total increase in net operating assets and liabilities was primarily due to the increase in accounts receivable of $31.0 million and offset by an increase in accrued payroll and taxes.

Net cash used in operating activities of $12.4 million for the year ended December 31, 2020 was primarily due to the net loss of $29.2 million.

The net loss was impacted by non-cash adjustments of $19.3 million primarily related to depreciation and amortization, partially offset by a decrease in net change in working capital of $2.6 million.

The total increase in net operating

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assets and liabilities was primarily due to a $4.6 million increase in income tax receivables and a $0.1 million decrease in accrued payroll and other expenses offset by a $3.7 million decrease in accounts receivable.

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

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

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

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

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

Investing Activities

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

Cash used in investing activities for the year ended December 31, 2020 of $3.8 million was related to capital expenditures.

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

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

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

Financing Activities

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

In addition, we received $188.4 million in proceeds for the exercise of the warrants as a result of the exercise of the redemption feature for the Public Warrants, and related to the exercise of Private Placement Warrants.

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

Net cash from financing activities of $18.3 million for the year ended December 31, 2020 was primarily related to proceeds from borrowings of $36.5 million, net of debt repayments and issuance costs of $16.8 million.

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

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

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

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

Critical Accounting Policies and Estimates

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

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

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

We re-evaluate our estimates on an on-going basis.

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Subjective Estimates and Judgements :

The determination of the reduction of the transaction price for variable consideration requires that we make certain estimates and assumptions that affect the timing and amounts of revenue recognized.

We estimate the variable consideration by taking into account factors such as historical information, current trends, forecasts, and availability of actual results and expectations of customer and consumer behavior.

The determination of the reduction of the transaction price for noncash consideration received related to the Company’s trade-in program requires that we make certain estimates and assumptions that affect the timing and amounts of revenue recognized.

We estimate the noncash consideration based on the Company’s historical experience of reselling refurbished Delivery Systems.

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

Impact if Actual Results Differ from Estimates and Judgements :

A more optimistic outlook on future demand can result in lower expected returns and reduced likelihood of price adjustments necessary to sell the product.

This outlook will reduce the provision against revenue.

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

Stock-Based Compensation

Management’s Policy :

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

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

Subjective Estimates and Judgements :

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

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

Management’s Policy :

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.

We have one reporting unit and management evaluates the carrying value of goodwill annually at the end of our fiscal year or whenever events or changes in circumstances indicate that an impairment may exist.

Subjective Estimates and Judgements :

When testing goodwill for impairment, we have 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 our qualitative assessment, we consider 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 we conclude that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, we are required to perform a quantitative impairment test.

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, we 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 us to estimate the fair value of our reporting unit using significant estimates and assumptions.

The assumptions made will impact the outcome and ultimate results of the testing.

We 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, as well as our historical operating trends.

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

A revision of these assumptions 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.

We performed a qualitative assessment as of December 31, 2021, based on which we determined that there is no indication of goodwill impairment.

During the second quarter of 2020, our business was substantially impacted by the COVID-19 pandemic, which subsequently recovered and returned to having positive adjusted EBITDA during the third quarter of 2020.

We evaluated our goodwill for impairment during the second quarter of 2020, and as a result of that assessment, concluded that our goodwill was not impaired.

Impact if Actual Results Differ from Estimates and Judgements :

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

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

Intangible Assets

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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.

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

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

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

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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.

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

Impact if Actual Results Differ from Estimates and Judgments :

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

financial statements.

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

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

Changes in the fair value of these instruments are recognized within the Consolidated Statements of Comprehensive Loss.

Changes in the fair value of these instruments are recognized within the Consolidated Statements of Comprehensive Income Loss.

Subjective Estimates and Judgements :

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Impact if Actual Results Differ from Estimates and Judgments :

Changes around share price volatility 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.

Convertible Senior Notes

Management’s Policy :

We consider the Notes in “Long-term liabilities” at face value net of issuance costs in accordance with ASC 470-20, Debt with Conversion and Other Options and Derivatives and Hedging—Contracts in Entity's Own Equity (“ASU 2020-06”).

If any of the conditions to the convertibility of the Notes is satisfied, or the Notes become due within one year, we may be required under applicable accounting standards to reclassify the liability carrying value of the Notes as a current, rather than a long-term, liability.

Subjective Estimates and Judgements :

The Notes required significant judgements around determining if any features of the Notes require bifurcation and whether to be treated as a free standing derivative financial instrument.

Impact if Actual Results Differ From Estimates and Judgments :

If the decisions relating to the conversion option were misinterpreted it can have a material impact on the Consolidated Statement of Stockholder’s Equity.

Capped Call Transactions

Management’s Policy :

We consider the freestanding capped call option contracts to 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 the consolidated balance sheet.

We also determined that the capped call option contracts meet the definition of a derivative under ASC Topic 815, Derivatives and Hedging but are not required to be accounted for as a derivative as they meet the scope exception outlined in ASC 815.

Instead, the capped call options are recorded in APIC and not remeasured.

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Subjective Estimates and Judgements :

The capped call transactions required significant judgement on whether it would qualify as equity or as an asset or liability.

Impact if Actual Results Differ From Estimates and Judgments :

If the decisions relating to the capped call transactions were misinterpreted and required classification as asset or liability, there could be a material impact on the Consolidated Balance Sheets.

Recent Accounting Pronouncements

See Note 2 of the notes to our Consolidated Financial Statements in the section titled “—Recently Issued Accounting Pronouncements” in our Note 2 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for a discussion about new accounting pronouncements adopted and not yet adopted.

Known Trends or Uncertainties

We believe there are several emerging trends that may play a key role in shaping the future of the beauty health industry.

Our market research demonstrated that consumers are increasingly willing to spend on high-end beauty health products.

Some of the key industry trends identified by this market research are:

• Millennials/Gen Z aging :

HydraFacial customers are young;

approximately 50% of HydraFacial customers are Millennials, and approximately 30% of HydraFacial’s beauty retail customers are under the age of 24.

As the Millennial and Gen Z consumers age, they appear to be taking skincare more seriously and willing to invest in premium experiences, such as those offered by HydraFacial.

• Influencers and social media driving purchase decisions :

Social media personalities are increasingly opining and having an effect on skin care, which has gained more prominence in the age of selfies.

• Growth in disposable income :

As the global economy grows, consumers have more disposable income to spend on premium products.

• Shift in spend from makeup to skin care :

There appears to be an increasing movement towards treating underlying skin to make it healthy and reveal it (i.e.:

“clean beauty”), as opposed to using products such as make up to cover it.

Clean beauty places an emphasis on unveiling fresh, naked skin as the star, as opposed to covering it up.

The HydraFacial experience not only physically cleanses skin with vortex suction, exfoliation and extraction, and removal of debris, but it also actively infuses the skin with innovative, clean ingredients to nourish and hydrate the newly cleaned skin canvas.

• Growth in multi-brand and online retailers :

Multi-brand retailers and digital native brands play an important role in captivating the consumer and pushing innovation.

• Consumers shopping across mass and premium brands :

Consumers appear to be willing to shop across mass and premium brands in order to allocate more money towards trending categories and products that help make them look and feel better.

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

Non-GAAP Financial Measures

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

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

Adjusted Net Income, Adjusted EBITDA and Adjusted EBITDA Margin

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

Because adjusted net income (loss), adjusted EBITDA and adjusted EBITDA margin

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facilitate internal comparisons of our historical operating performance on a more consistent basis, we use these measures for business planning purposes.

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

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

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

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

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

amortization expense;

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

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

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

interest expense;

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

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

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

Year ended December 31,

(in thousands)

Net loss $ (375,108) $ (29,175)

Unaudited (Dollars in thousands) 2022 2021

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

Adjusted to exclude the following:

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Amortization expense 15,709 13,297

Loss on disposal of assets 5,239 —

Stock-based compensation expense 28,495 12,418

Other expense (income) 4,450 47

Interest income (9,175) (39)

Other expense, net 1,650 4,489

Management fees (1) — 209

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

Non-recurring patent litigation fees 3,797 —

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

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

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

Adjusted net income (loss) $ 4,478 $ (12,147)

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The following table reconciles our net loss to adjusted EBITDA for the periods indicated:

Year Ended December 31,

(in thousands) 2021 2020

Net loss $ (375,108) $ (29,175)

Adjusted to exclude the following:

Change in fair value of warrant liability 277,315 —

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

Depreciation and amortization expense 17,783 14,533

Stock-based compensation expense 12,418 363

Adjusted net income $ 9,107 $ 4,478

Depreciation expense 7,164 4,486

Interest expense 13,392 11,777

Income tax benefit (2,242) (9,308)

Other expense (income) 4,450 47

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

Management fees (1)

Transaction related costs (2)

Other non-recurring and one-time fees (3)

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

Adjusted EBITDA $ 47,662 $ 32,701

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

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

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

(2) For the year ended December 31, 2021 such amount primarily represents direct costs incurred with the Business Combination, including $21.0 million paid to the former owner of HydraFacial, and to prepare HydraFacial to be marketed for sale by HydraFacial’s shareholders in previous periods .

(3) For the year ended December 31, 2021 such costs primarily represent recruiting fees for executive officers, severance and one-time retention awards related to the distributor acquisitions.

For the year ended December 31, 2020 such costs primarily represent COVID-19 related restructuring cost of $1.2 million and $3.1 million including write-off of expired Consumables, discontinued product lines, human capital and cash management consultants, and, to a lesser extent, costs associated with a former warehouse and assembly facility during the transition period.

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

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

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

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

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

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

Adjusted Gross Profit and Adjusted Gross Margin

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

We believe adjusted gross profit and adjusted gross margin are useful measures to us and to our investors to assist in evaluating our operating performance because they provide consistency and direct comparability with past financial performance and between fiscal periods, as the metric eliminates the effects of amortization and depreciation and stock-based compensation expense, which are non-cash expenses that may fluctuate for reasons unrelated to overall continuing operating performance.

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

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

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Amounts and percentages may not foot due to rounding:

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Year Ended December 31,

(in millions) 2021 2020

(Dollars in thousands) 2022 2021

Net sales $ 365,876 $ 260,086

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Adjusted to exclude the following:

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

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

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

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Adjusted gross margin 73.0 % 74.1 %

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

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

What changed 10-K

Item 7. Management’s Discussion and Analysis