What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2023-03-01 compared with 2022-03-01 · 411 added, 385 removed, 854 unchanged (48% of the section changed)

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Index to Consolidated Financial Statements

Report of Independent Registered Accounting Firm (PCAOB ID No.

Report of Independent Registered Public Accounting Firm (PCAOB ID No.

Consolidated Balance Sheets

Consolidated Statements of Comprehensive Loss

Consolidated Statements of Stockholders’ Deficit

Consolidated Statements of Comprehensive Income (Loss )

Consolidated Statements of Stockholders’ Equity (Deficit )

Consolidated Statements of Cash Flows

Notes to Consolidated Financial Statements

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of The Beauty Health Company and its consolidated subsidiaries ("Company") as of December 31, 2021 and 2020, the related consolidated statements of comprehensive loss, stockholders' equity (deficit), and cash flows, for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the "financial statements").

We have audited the accompanying consolidated balance sheets of The Beauty Health Company and its consolidated subsidiaries (the "Company") as of December 31, 2022 and 2021, the related consolidated statements of comprehensive income (loss), stockholders’ equity (deficit), and cash flows, for each of the three years in the period ended December 31, 2022, and the related notes (collectively referred to as the "financial statements").

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 1, 2023, expressed an unqualified opinion on the Company's internal control over financial reporting.

Basis for Opinion

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Our responsibility is to express an opinion on the Company's financial statements based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

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Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.

Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

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The Company’s common stock was adjusted retroactively to give effect to the exchange ratio.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Convertible Senior Notes and Capped Call Transactions — Refer to Notes 2 and 10 to the financial statements

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Accounts Receivable:

Allowance for Estimated Credit Losses — Refer to Note 2 to the financial statements

Critical Audit Matter Description

In September 2021, the Company issued an aggregate of $750 million in principal amount of its 1.25% Convertible Senior Notes due 2026 (the “Notes”), which, upon conversion, permit the Company to pay or deliver cash, shares of its common stock, or a combination of cash and shares of common stock at the Company’s election.

In connection with the offering of the Notes, the Company entered into separate capped call transactions (the “Capped Call Transactions”), to reduce potential dilution to the Company’s common stock or offset any cash payments the Company may make in excess of the principal amount upon conversion of the Notes.

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Auditing the Company’s accounting for the Notes and Capped Call Transactions was complex due to the significant accounting judgments made by management in determining the balance sheet classification of the Capped Call Transactions, the identification of the features within the Notes that may require bifurcation, and the identification of whether any derivatives that required separate accounting under applicable accounting guidance were present in the Notes and Capped Call Transactions.

Significant audit effort by specialized and experienced individuals was required given the complexity of the accounting guidance.

The allowance for estimated credit losses represents management's best estimate of probable credit losses in accounts receivable.

The allowance is based upon a number of factors, including the length of time accounts receivable are past due, the Company’s previous loss history, the specific customer’s ability to pay its obligation and any other forward-looking data regarding certain customers’ ability to pay which may be available.

Given the significant judgments made by management in estimating its allowance for credit losses related to certain distributors in foreign jurisdictions impacted by COVID-19, performing audit procedures to evaluate the reasonableness of the allowance

for estimated credit losses for certain distributors required a high degree of auditor judgment and an increased extent of effort in evaluating the audit evidence obtained.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to accounting for the Convertible Senior Notes and Capped Call Transactions included the following, among others:

• We read the underlying agreements and evaluated the Company’s accounting analysis of the initial accounting of the Notes and Capped Call Transactions, including the determination of the balance sheet classification, identification of the features requiring bifurcation and separate accounting, and identification of any derivatives included in the arrangements.

• With the assistance of professionals in our firm having expertise in convertible notes, capped call transactions, and Accounting Standards Codification (“ASC”) 815, Derivatives and Hedging , we evaluated the Company’s conclusions regarding the accounting guidance and treatment of the Notes and Capped Call Transactions.

Our audit procedures related to testing the Company's allowance for estimated credit losses for certain distributors in foreign jurisdictions included the following, among others:

• We tested the effectiveness of the control over management’s assessment used to evaluate the allowance for estimated credit losses.

• We evaluated historical payment history and tested the accuracy of payments received from these distributors.

• We confirmed amounts outstanding from these distributors, including confirming their intent and ability to pay.

• We searched for contradictory information regarding the creditworthiness and ability of these distributors to pay outstanding amounts.

Common Stock Repurchases:

Accelerated Share Repurchases — Refer to Note 17 to the financial statements

Critical Audit Matter Description

On September 27, 2022 and November 9, 2022, the Company entered into two accelerated share repurchase agreements with a financial institution to repurchase a total of $200 million of Class A Common Stock.

The total number of shares that will be received under the accelerated share repurchase agreements will be based upon the average daily volume weighted average price of the Company’s Class A Common Stock during the repurchase periods, less an agreed upon discount.

The accelerated share repurchase agreements are accounted for as a repurchase and retirement of shares and as equity forward contracts indexed to the Company’s Class A Common Stock.

The equity forward contracts are classified as an equity instrument under ASC 815-40, Contracts in Entity's Own Equity.

The Company’s evaluation of the classification of the accelerated share repurchases was complex due to the significant accounting judgments made by management in the application of accounting guidance.

Auditing these judgments required specialized knowledge and experienced individuals given the complexity of the accounting treatment associated with the accelerated share repurchases.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the accounting for the accelerated share repurchases included the following, among others:

• We tested the effectiveness of the controls over management's accounting assessment of the accelerated share repurchases and the review of related disclosures.

• With the assistance of professionals in our firm with expertise in accounting in financial instruments and common stock repurchases, we evaluated management's conclusions regarding the application of the appropriate accounting standards and compared the key terms from the accelerated share repurchase agreements to management's analysis.

• We evaluated the Company's disclosures of the accelerated share repurchases, including the related impacts to the financial statements, to ensure the proper recognition and measurement.

/s/ Deloitte & Touche LLP

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We have served as the Company's auditor since 2020.

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THE BEAUTY HEALTH COMPANY

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Cash and cash equivalents $ 568,197 $ 901,886

Accounts receivable, net of allowances for doubtful accounts of $ 2,681 and $ 2,032 at December 31, 2021 and December 31, 2020, respectively

Accounts receivable, net of allowances for estimated credit losses of $ 2,929 and $ 2,681 at December 31, 2022 and December 31, 2021, respectively

76,494 46,824

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TOTAL ASSETS $ 1,008,907 $ 1,218,806

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

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Income tax payable 962 292

Current portion of long-term debt due to related parties — 512

Total current liabilities 73,115 76,437

Other long-term liabilities — 1,854

Lease liabilities, non-current 12,689 12,781

Long-term debt due to related parties, net of current portion — 216,024

Deferred income tax liabilities, net 2,011 3,561

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Commitments (Note 14)

Stockholders’ equity (deficit):

Stockholders’ equity:

Class A Common Stock, $ 0.0001 par value;

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Additional paid-in capital 550,320 722,250

Note receivable from stockholder — ( 554 )

Accumulated other comprehensive (loss) income ( 1,257 ) 242

Accumulated other comprehensive loss ( 4,530 ) ( 1,257 )

Accumulated deficit ( 374,328 ) ( 418,712 )

Total stockholders’ equity (deficit) 302,297 ( 29,960 )

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) $ 1,218,806 $ 222,835

The accompanying notes are an integral part of these financial statements.

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Total stockholders’ equity 171,476 302,297

LIABILITIES AND STOCKHOLDERS’ EQUITY $ 1,008,907 $ 1,218,806

The accompanying notes are an integral part of these consolidated financial statements.

THE BEAUTY HEALTH COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands, except for share and per share amounts)

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Total operating expenses 274,620 218,466 84,381

(Loss) income from operations

Loss from operations

( 24,280 ) ( 36,639 ) ( 17,182 )

Other (income) expense:

Interest expense, net 13,392 11,777 21,275

Other expense (income), net 4,450 47 ( 535 )

Interest income ( 9,175 ) ( 39 ) —

Other expense, net 1,650 4,489 47

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

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

Foreign currency transaction loss (gain), net 69 ( 21 ) ( 160 )

Total other expense 340,711 21,301 16,397

Loss before provision for income taxes

Foreign currency transaction (gain) loss, net 3,164 69 ( 21 )

Income (loss) before provision for income taxes

45,032 ( 377,350 ) ( 38,483 )

Income tax benefit ( 2,242 ) ( 9,308 ) ( 1,297 )

Income tax (benefit) expense 648 ( 2,242 ) ( 9,308 )

Net income (loss)

$ 44,384 $ ( 375,108 ) $ ( 29,175 )

Comprehensive loss, net of tax:

Comprehensive income (loss), net of tax:

Foreign currency translation adjustments ( 3,273 ) ( 1,499 ) 79

Comprehensive loss

Comprehensive income (loss)

$ 41,111 $ ( 376,607 ) $ ( 29,096 )

Net loss per share – basic and diluted

Net income (loss) per share

$ 0.30 $ ( 3.67 ) $ ( 0.85 )

Weighted average common shares outstanding – basic and diluted

Diluted $ ( 0.23 ) $ ( 3.67 ) $ ( 0.85 )

Weighted average common shares outstanding

147,554,090 102,114,949 34,293,271

The accompanying notes are an integral part of these financial statements.

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Diluted 148,506,312 102,114,949 34,293,271

The accompanying notes are an integral part of these consolidated financial statements.

THE BEAUTY HEALTH COMPANY

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Adjusted balance, beginning of period — — — — 32,136,203 3 13,744 ( 554 ) 28 ( 14,429 ) ( 1,208 )

Stock-based compensation — — — — — — 103 — — — 103

Net loss — — — — — — — — — ( 1,638 ) ( 1,638 )

Foreign currency translation adjustment — — — — — — — — 33 — 33

BALANCE, December 31, 2019 — $ — — $ — 32,136,203 $ 3 $ 13,744 $ ( 554 ) $ 28 $ ( 14,429 ) $ ( 1,208 )

Issuance of shares — — — — 3,482,446 1 ( 1 ) — — — —

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Issuance of earn-out shares — — — — 7,500,000 1 136,574 — — — 136,575

Issuance of common stock for settlement of restricted stock units — — — — 30,963 — — — — — —

Issuance of Class A Common Stock pursuant to equity compensation plan — — — — 30,963 — — — — — —

Shares canceled for tax withholdings on vested restricted stock units — — — — ( 6,812 ) — — — — — —

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BALANCE, December 31, 2021 — $ — — $ — 150,598,047 $ 16 $ 722,250 $ — $ ( 1,257 ) $ ( 418,712 ) $ 302,297

The accompanying notes are an integral part of these financial statements.

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The accompanying notes are an integral part of these consolidated financial statements.

THE BEAUTY HEALTH COMPANY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) (Continued)

(in thousands, except for share amounts)

Legacy Common Stock Legacy Preferred Stock Common Stock Additional Paid-in Capital Note Receivable from Stockholder Accumulated other Comprehensive Income (Loss) Accumulated Deficit Total Stockholders’Equity (Deficit)

Shares Amount Shares Amount Shares Amount

BALANCE, December 31, 2021 — $ — — $ — 150,598,047 $ 16 $ 722,250 $ — $ ( 1,257 ) $ ( 418,712 ) $ 302,297

Repurchase and retirement of Class A Common Stock — — — — ( 18,759,243 ) ( 2 ) ( 159,998 ) — — — ( 160,000 )

Equity forward contract in connection with accelerated share repurchase — — — — — — ( 40,000 ) — — — ( 40,000 )

Issuance of Class A Common Stock in connection with asset acquisition — — — — 28,733 — 500 — — — 500

Issuance of Class A Common Stock pursuant to equity compensation plan — — — — 409,565 — — — — — —

Stock-based compensation — — — — — — 28,495 — — — 28,495

Shares withheld for tax withholdings on vested stock awards — — — — ( 62,407 ) — ( 927 ) — — — ( 927 )

Net income — — — — — — — — — 44,384 44,384

Foreign currency translation adjustment — — — — — — — — ( 3,273 ) — ( 3,273 )

BALANCE, December 31, 2022 — $ — — $ — 132,214,695 $ 14 $ 550,320 $ — $ ( 4,530 ) $ ( 374,328 ) $ 171,476

The accompanying notes are an integral part of these consolidated financial statements.

THE BEAUTY HEALTH COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

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Cash flows from operating activities:

Net loss $ ( 375,108 ) $ ( 29,175 ) $ ( 1,638 )

Adjustments to reconcile net loss to net cash from operating

Net income (loss) $ 44,384 $ ( 375,108 ) $ ( 29,175 )

Adjustments to reconcile net income (loss) to net cash from operating activities

Depreciation of property and equipment 7,164 4,486 2,552

Provision for doubtful accounts 854 1,442 659

Amortization of right-of-use assets 3,352 — —

Amortization of capitalized software — — —

Provision for estimated credit losses 1,622 854 1,442

Non-cash lease expense 4,561 3,352 —

Amortization of intangible assets 14,852 13,297 11,849

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Write-off of unfavorable lease — — ( 384 )

(Gain) Loss on sale and disposal of assets — 110 —

Loss on sale and disposal of long-lived assets 5,239 — 110

In-kind interest — 4,130 6,119

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Debt prepayment expense — 2,014 —

Foreign currency transactions 2,410 — —

Changes in operating assets and liabilities:

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Income taxes receivable 3,871 35 ( 4,611 )

Inventory ( 9,443 ) ( 3,211 ) ( 4,769 )

Inventories ( 82,097 ) ( 9,443 ) ( 3,211 )

Other assets ( 8,045 ) ( 6,129 ) ( 2,286 )

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Income taxes payable 198 ( 594 ) ( 2,964 )

Net cash (used in) provided by operating activities ( 28,361 ) ( 12,436 ) 1,728

Net cash used in operating activities ( 106,600 ) ( 28,361 ) ( 12,436 )

Cash flows used in investing activities:

Cash paid for business acquisitions, net of cash acquired ( 22,896 ) — ( 2,058 )

Repayment of notes receivables from shareholders 781 — —

Capital expenditures for intangible assets ( 6,547 ) ( 4,415 ) ( 316 )

Capital expenditures for property and equipment ( 10,847 ) ( 11,201 ) ( 3,501 )

Cash paid for asset acquisition ( 1,475 ) — —

Cash paid for business acquisitions, net of cash acquired — ( 22,896 ) —

Repayment of notes receivables from stockholders — 781 —

Net cash used in investing activities ( 18,869 ) ( 37,731 ) ( 3,817 )

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The accompanying notes are an integral part of these consolidated financial statements

THE BEAUTY HEALTH COMPANY

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Cash flows from financing activities:

Repurchases of Class A Common Shares ( 160,000 ) — ( 154 )

Payment of equity forward contract in connection with accelerated share repurchase ( 40,000 ) — —

Payments of tax withholdings on vested stock awards ( 927 ) — —

Payment of contingent consideration related to acquisitions ( 4,315 ) — —

Proceeds from issuance of convertible senior notes — 750,000 —

Purchase of capped calls related to convertible senior notes — ( 90,150 ) —

Repurchase of shares — ( 154 ) —

Proceeds from exercise of warrants — 188,378 —

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Payment of debt issuance costs — ( 21,341 ) ( 77 )

Repayment of term loan ( 225,486 ) ( 1,772 ) —

Deferred payment for acquisition — ( 901 ) —

Proceeds from Business Combination, net of transaction costs (See Note 3) — 357,634 —

Repayment of term loan — ( 225,486 ) ( 1,772 )

Payments for transaction costs — — ( 323 )

Net cash provided by financing activities 959,035 18,273 14,578

Deferred payment for acquisition — — ( 901 )

Net cash (used in) provided by financing activities ( 205,242 ) 959,035 18,273

Net increase in cash and cash equivalents ( 330,711 ) 892,943 2,020

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Cash paid for interest $ 9,818 $ 10,249 $ 13,536

Cash paid for income taxes 1,700 2,434 861

Common stock issued for asset acquisition 500 — —

Cash (received) paid for income taxes ( 1,339 ) 1,700 2,434

Capital expenditures included in accounts payable 90 321 240

Issuance of earn-out shares — 136,575 —

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Issuance of Class A Common Stock in connection with business acquisitions — 9,341 —

Capital expenditures included in accounts payable 321 240 1,006

Deferred payment due to seller related business acquisition — — 927

Deferred unpaid offering costs — — 2,036

The accompanying notes are an integral part of these financial statements.

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The accompanying notes are an integral part of these consolidated financial statements.

THE BEAUTY HEALTH COMPANY

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The Company was originally formed for the purpose of entering into a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination with one or more businesses.

On May 4, 2021 (the “Closing Date”), the Company consummated the previously announced business combination pursuant to that certain Agreement and Plan of Merger, dated December 8, 2020 (the “Merger Agreement”), by and among Vesper Healthcare Acquisition Corp.

On May 4, 2021, the Company consummated the previously announced business combination pursuant to that certain Agreement and Plan of Merger, dated December 8, 2020 (the “Merger Agreement”), by and among Vesper Healthcare Acquisition Corp.

(“Vesper”), Hydrate Merger Sub I, Inc.

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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.

Related government and private sector responsive actions, as well as changes in consumer spending behaviors, supply chain challenges, and intermittent store closures in certain parts of the world have adversely affected and may continue to adversely affect our business, financial condition and results of operations.

We will continue to monitor mandates, guidelines, and recommendations issued by the U.S.

Department of State, Center for Disease Control (“CDC”) and World Health Organization (“WHO”), and local governments as they are released, and revise our health and safety protocols accordingly.

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;

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

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.

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

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throughout 2021.

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

Note 2 – Summary of Significant Accounting Policies

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• pursuant to that certain Investor Rights Agreement, dated as of May 4, 2021, by and between the Company and Hydrafacial, Hydrafacial was given the right to designate certain initial members of the board of directors of the Company immediately after giving effect to the transactions contemplated by the Merger Agreement.

Consideration was also given to the fact that the Company paid a purchase price consisting of a combination of cash and equity consideration and its shareholders may have a significant amount of voting power, should the Company’s public stockholders be considered in the aggregate.

However, based on the aforementioned factors of management, board representation, largest minority shareholder as noted above, and the continuation of the HydraFacial business as well as its size, it was determined that accounting for the Business Combination as a reverse recapitalization was appropriate.

Consideration was also given to the fact that the Company paid a purchase price consisting of a combination of cash and equity consideration and its stockholders may have a significant amount of voting power, should the Company’s public stockholders be considered in the aggregate.

However, based on the aforementioned factors of management, board representation, largest minority stockholder as noted above, and the continuation of the Hydrafacial business as well as its size, it was determined that accounting for the Business Combination as a reverse recapitalization was appropriate.

Accordingly, for accounting purposes, the financial statements of the Company represent a continuation of the financial statements of Hydrafacial with the acquisition being treated as the equivalent of Hydrafacial issuing stock for the net assets of the Company, accompanied by a recapitalization.

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In connection with the Business Combination each share of Hydrafacial common stock outstanding immediately prior to the Business Combination converted into the right to receive 653.109 shares (the “Exchange Ratio”) of Class A Common Stock of the Company.

The recapitalization of the number of shares of Common Stock attributable to HydraFacial is reflected retroactively to the earliest period presented based upon the Exchange Ratio and is utilized for calculating earnings per share in all prior periods presented.

The recapitalization of the number of shares of Class A Common Stock attributable to Hydrafacial is reflected retroactively to the earliest period presented based upon the Exchange Ratio and is utilized for calculating earnings per share in all prior periods presented.

The Consolidated Financial Statements in this Annual Report on Form 10-K are presented in accordance with GAAP and include the Company’s consolidated domestic and international subsidiaries.

Intercompany accounts and transactions have been eliminated.

T he Consolidated Financial Statements in this Annual Report on Form 10-K and the accompanying footnotes should be read in conjunction with the audited consolidated financial statements of BeautyHealth and HydraFacial as of and for the year ended December 31, 2020 presented in the Company’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission (“SEC”) on July 19, 2021.

Except as described elsewhere in this Note 2, there have been no material changes to the Company’s significant accounting policies as described in HydraFacial’s Consolidated Financial Statements as of and for the year ended December 31, 2021.

Use of estimates and assumptions in preparing consolidated financial statements

In preparing its consolidated financial statements in conformity with GAAP, the Company makes assumptions, estimates, and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the consolidated financial statements and the reported amounts of net sales and expenses during the reported periods.

On an ongoing basis, the Company evaluates its estimates, including, among others, those related to revenue related reserves, allowance for doubtful accounts, the realizability of inventory, fair value measurements including common stock, warrant liabilities and earn-out shares liability valuations, useful lives of property and equipment, goodwill and finite-lived intangible

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assets, accounting for income taxes, stock-based compensation expense and commitments and contingencies.

On an ongoing basis, the Company evaluates its estimates, including, among others, those related to revenue related reserves, allowance for estimated credit losses, the realizability of inventory, fair value measurements including common stock, warrant liabilities and earn-out shares liability valuations, useful lives of property and equipment, goodwill and finite-lived intangible assets, accounting for income taxes, stock-based compensation expense and commitments and contingencies.

The Company’s estimates are based on historical experience and on its future expectations that are believed to be reasonable.

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All highly liquid investments, including credit card receivables due from banks, with original maturities of 90 days or less at date of purchase, are reported at fair value and are considered to be cash equivalents.

The balances of cash at financial institutions may exceed the federally insured limit.

The balances of cash at financial

institutions may exceed the federally insured limit.

The Company has not experienced any losses in such accounts and believes its cash and cash equivalents are not subject to any significant credit risk.

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Typical payment terms provide that customers pay within 30 to 120 days of the invoice.

The allowance for doubtful accounts represents management's best estimate of probable credit losses in accounts receivable.

The allowance for estimated credit losses represents management's best estimate of probable credit losses in accounts receivable.

In addition, management considered other qualitative factors, particularly in relation to the volatility in the economies of certain foreign jurisdictions that arose from the COVID-19 pandemic.

Receivables are written off against the allowance when management believes that the amount receivable will not be recovered.

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

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

Obsolete inventory or inventory in excess of management’s estimated usage is written-down to its estimated net realizable value.

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The amount of the provision is equal to the difference between the cost of the inventory and its net realizable value based upon assumptions about product quality, damages, future demand, selling prices, and market conditions.

If changes in market conditions result in reductions in the estimated net realizable value of its inventory below its previous estimate, the Company would increase its reserve in the period in which it made such a determination.

In addition, the Company provides for inventory shrinkage based on historical trends from actual physical inventory counts.

Inventory shrinkage estimates are made to reduce the inventory value for lost or stolen items.

The Company performs physical inventory counts and cycle counts throughout the year and adjusts the shrink reserve accordingly.

If changes in market conditions result in reductions in the estimated net realizable value of its inventory below its previous estimate, the Company would decrease its basis in the inventory in the period in which it made such a determination.

Business Combinations

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The Company has one reporting unit and management evaluates the carrying value of the Company’s goodwill annually at the end of its fiscal year or whenever events or changes in circumstances indicate that an impairment may exist.

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When testing goodwill for impairment, management has the option of first performing a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as the basis to determine if it is necessary to perform a quantitative goodwill impairment test.

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Reductions in asset values resulting from impairment valuations are recognized in income in the period that the impairment is determined.

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Leased Property and Equipment

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Cash reimbursements received from landlords for leasehold improvements and other cash payments received from landlords as lease incentives were recorded as an asset and depreciated using the straight‑line method over the lease term as an offset to rent expense.

Until December 31, 2021, the Company was an emerging growth company as defined by the JOBS Act.

As the Company no longer qualifies as an emerging growth company this ASU instead became effective for the Company in this Annual Report on Form 10-K for the fiscal year ended December 31, 2021, with an effective date of January 1, 2021.

Subsequent to the adoption of ASC 842 on January 1, 2021, the first day of fiscal 2021, operating and finance lease liabilities are recognized at the lease commencement date based on the present value of the fixed lease payments using the Company’s incremental borrowing rates for its population of leases.

ASC 842 became effective for the Company in the Annual Report on Form 10-K for the fiscal year ended December 31, 2021, with an effective date of January 1, 2021.

Subsequent to the adoption of ASC 842 on January 1, 2021, the first day of

fiscal 2021, operating and finance lease liabilities are recognized at the lease commencement date based on the present value of the fixed lease payments using the Company’s incremental borrowing rates for its population of leases.

The Company uses an incremental borrowing rate to determine the present value of lease payments as the rate implicit in the lease is generally not readily determinable.

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Convertible Senior Notes

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

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

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The Company accounts for the Notes under Accounting Standards Codification (“ASC”) ASC 470-20 - Debt with Conversion and Other Options and Derivatives and Hedging—Contracts in Entity's Own Equity (“ASU 2020-06”), which the Company early adopted in the first quarter of 2021 concurrent with the issuance of the Notes.

The Company records the Notes in “Long-term liabilities” at face value net of issuance costs.

The Company records the Notes as a long-term liability at face value net of issuance costs.

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

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

The Company determined that the freestanding capped call option contracts qualify as equity under the accounting guidance on indexation and equity classification, and recognized the contract by recording an entry to “Additional paid-in capital” (“APIC”) in stockholders’

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equity in its Consolidated Balance Sheet.

The Company also determined that the capped call option contracts meet the definition of a derivative under ASC 815 — Derivatives and Hedging (“ASC 815”), but are not required to be accounted for as a derivative as they meet the scope exception outlined in ASC 815.

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Issuance costs related to our Notes offering were capitalized and offset against proceeds from the Notes.

Issuance costs consist of legal and other costs related to the issuance of the Notes and are amortized to interest expense over the term of the Notes.

Issuance costs consist of legal and other direct costs related to the issuance of the Notes and are amortized to interest expense over the term of the Notes.

Refer to Note 10 – Long-term Debt for further detail.

Warrant Liabilities

During October 2020, in connection with Vesper’s initial public offering, the Company issued 15,333,333 Public Warrants to purchase shares of the Company’s common stock at $ 11.50 per share.

Simultaneously, with the consummation of Vesper’s initial public offering, the Company issued 9,333,333 Private Placement Warrants to purchase shares of the Company’s common stock at $ 11.50 per share, to 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 on the Redemption Date.

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

As of December 31, 2021 the Private Placement Warrants are measured at fair value using a Monte Carlo simulation because these warrants are subject to redemption if the reference value of the common stock, as defined, is between $ 10.00 and $ 18.00 per share.

During October 2020, in connection with Vesper’s initial public offering, the Company issued 15,333,333 warrants to purchase shares of the Company’s common stock at $ 11.50 per share (the “Public Warrants”).

Simultaneously, with the consummation of Vesper’s initial public offering, the Company issued 9,333,333 warrants to purchase shares of the Company’s common stock at $ 11.50 per share (the “Private Placement Warrants”), to BLS Investor Group LLC (the “Sponsor”).

On November 3, 2021 all of the Public Warrants that were outstanding were redeemed (the “Redemption Date”).

As of December 31, 2022 and 2021, no Public Warrants were outstanding and approximately 7 million Private Placement Warrants remain outstanding.

As of December 31, 2022 the Private Placement Warrants are measured at fair value using a Monte Carlo simulation because these warrants are not subject to redemption if the reference value of the common stock, as defined, is between $ 10.00 and $ 18.00 per share.

The Private Placement Warrants are classified as a Level 3 financial instruments as of December 31, 2022.

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

In certain events outside of the Company’s control, the Public Warrant and Private Placement Warrant holders are entitled to receive cash while in certain scenarios the holders of the Company’s common stock are not entitled to receive cash or may receive less than 100% of any proceeds in cash, which precludes these instruments from being classified within equity pursuant to ASC 815-40.

The Private Placement Warrants expire five years after the Business Combination.

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

In certain events outside of the Company’s control, the Private Placement Warrant holders are entitled to receive cash while in certain scenarios the holders of the Company’s common stock are not entitled to receive cash or may receive less than 100% of any proceeds in cash, which precludes these instruments from being classified within equity pursuant to ASC 815-40.

The Public and Private Placement Warrants were initially recorded at fair value on the date of the Business Combination and are subsequently adjusted to fair value at each subsequent reporting date.

Changes in the fair value of these instruments are recognized within change in fair value of warrant liabilities in the Company’s Consolidated Statements of Comprehensive Loss .

Changes in the fair value of these instruments are recognized within change in fair value of warrant liabilities in the Company’s Consolidated Statements of Comprehensive Income (Loss) .

Earn-out Shares Liability

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The liability was included as part of the consideration transferred in the Business Combination and was recorded at its then current fair value.

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

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

Revenue Recognition

Effective January 1, 2019, HydraFacial adopted ASU No.

2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which is the new comprehensive revenue recognition standard that supersedes all existing revenue recognition requirements under Accounting Standards Codification (“ASC”) 605, Revenue Recognition (“ASC 605”), as well as under all subsequently issued amendments to the new revenue recognition standard (“ASC 606”).

HydraFacial elected to

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

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

As such, there were no adjustments to the prior periods

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

• Identify the customer contract;

• Identify the performance obligations in the contract;

• Determine the transaction price;

• Allocate the transaction price to the performance obligations in the contract;

• Recognize revenue as the performance obligations are satisfied.

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

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

The Company generates revenue through manufacturing and selling Hydrafacial Delivery Systems (“Delivery Systems”).

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

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

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

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

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

This is also considered accepted upon the subsequent issuance of an invoice by the Company.

This is also considered accepted upon the subsequent

issuance of an invoice by the Company.

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

Revenue is recognized in an amount that reflects the consideration that the Company expects to receive in exchange for the sale of its products which is determined based upon the sales price per the invoice or contract.

Discounts applied to invoices are not associated with future purchases and solely relate to the product invoiced.

As a result, the invoice and transaction price are recorded net of any discounts.

The Company’s sales terms for its Delivery Systems allow for the right of return within 30 days, subject to a restocking fee.

Estimates for variable consideration, which relate to sales returns associated with Delivery Systems, are based on the expected amount the Company will be entitled to receive, subject to constraint, and is recorded as a reduction against net sales.

Sales returns are estimated based on historical sales and returns data and have not significantly impacted net sales because sales returns are not material.

Depending on the type of Delivery System that was purchased, the Company offers its customers with a one-year or two-year standard type warranty that provides the customer with the assurance that its Delivery Systems will function as intended.

Returns related to warranty have been immaterial.

The Company also has a loyalty program that allows members to receive points based on qualifying Consumable purchases that may be redeemed as a discount on future consumable purchases.

This customer option is a material right and, accordingly, represents a separate performance obligation to the customer.

The related loyalty program deferred revenue included in other accrued expenses on the consolidated balance sheet was approximately $ 0.8 million and $ 1.2 million as of December 31, 2021 and 2022, respectively.

In addition, during fiscal 2022 the Company provided certain customers with the option to trade-in their existing Delivery System and apply the fair value of their old Delivery System towards the transaction price of the Company’s new Syndeo Delivery System.

The Company determined that the trade-in is viewed as a marketing offer due to the fact that it does not constitute the Company’s customary business practice and was not offered at contract inception.

Therefore, the trade-in is accounted for under ASC 606 and represents a type of noncash consideration, which the Company measures at its estimated fair value.

The estimated fair value represents the estimated selling price, less the cost to refurbish the inventory and the expected margin to be earned on the refurbishment, along with the expected margin to be earned on the selling effort.

The estimated selling price is determined based on the Company’s historical experience of reselling refurbished Delivery Systems.

The total value of these refurbished Delivery Systems included in inventory as of December 31, 2022 was $ 8.8 million.

Payment terms vary by customer but typically provide for the customer to pay within 30 to 120 days;

however, the Company provides an option for qualified customers to pay for Delivery Systems over 12 monthly installments.

Therefore, customer payment terms are for 12 months or less and do not include significant financing components.

The Company performs credit evaluations of customers and evaluates the need for allowances for potential credit losses based on historical experience, as well as current and expected general economic conditions.

Cost of Sales

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Advertising costs are expensed in the period in which they are incurred.

Total advertising costs, included in selling and marketing expenses on the Consolidated Statements of Comprehensive Loss , were $ 3.2 million, $ 3.3 million, and $ 4.7 million for each of the three years ending December 31, 2021, 2020, and 2019 respectively.

Total advertising costs, included in selling and marketing expenses on the Consolidated Statements of Comprehensive Income (Loss) , were $ 3.8 million, $ 3.2 million and $ 3.3 million for each of the three years ending December 31, 2022, 2021, and 2020 respectively.

Research and Development Costs

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The Company expects research and development expenses to increase in absolute dollars in future periods and vary from period to period as a percentage of total revenue, as the Company plans to continue to innovate and invest in new technologies and to enhance existing technologies to fuel future growth as a category creator.

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General and Administrative Expense

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As a result, the Company expects that our general and administrative expenses will increase in absolute dollars in future periods and vary from period to period as a percentage of revenue.

Other Expense

Other expense consists of interest expense and foreign currency transaction gains and losses.

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

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

Other 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.

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.

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.

The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets (DTA)s and deferred tax liabilities (DTL)s for the expected future tax consequences of events that have been included in the financial statements.

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Unrealized translation gains and losses are recorded as a foreign currency translation adjustment, which is included in other comprehensive income or loss, which is a component of accumulated other comprehensive income or loss included in stockholders’ equity.

Foreign currency transactions denominated in a currency other than an entity’s functional currency are remeasured into the functional currency with any resulting gains and losses recognized in selling, general and administrative expenses, except for

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gains and losses arising on intercompany foreign currency transactions that are of a long-term investment nature, which are recorded as a foreign currency translation adjustment in other comprehensive income or loss.

Transactions between the parent company and its foreign subsidiaries are denominated in US Dollars.

Accordingly, amounts due to or from the parent company are remeasured from local currency to its US Dollar equivalent on the balance sheet date.

This remeasurement is recorded as a foreign currency transaction gain or loss in the consolidated statements of comprehensive income.

Concentration of Credit Risk

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The consolidated financial statements include amounts that are based on the Company’s best estimates and judgments.

The Company classifies compensation expense related to these awards in the consolidated statements of operations based on the department to which the recipient reports.

The Company classifies compensation expense related to these awards in the Consolidated Statements of Comprehensive Income (Loss) based on the department to which the recipient reports.

The Company’s policy is to account for forfeitures in period that they occur.

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Exchangeable shares are the equivalent of common shares in all material respects.

All classes of stock have in effect the same rights and share equally in undistributed net income.

Diluted earnings per share is calculated by dividing net income available to stockholders for the period by the diluted weighted-average number of shares outstanding during the period.

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In those instances, the fair value measurement is categorized in its entirety in the fair value hierarchy based on the lowest level input that is significant to the fair value measurement.

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The fair value of the Notes that are recorded at historical cost was $ 567 million as of December 31, 2022, and was determined using the last trade price in active markets.

With the exception of the Company’s Notes, the fair value of the Company’s assets and liabilities that are recorded at historical amounts and that qualify as financial instruments under ASC 820, Fair Value Measurement , approximates the carrying amounts represented in the Company’s Consolidated Balance Sheets, primarily due to their short-term nature.

Recently Adopted Accounting Pronouncements

In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No.

2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40):

Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract (ASU 2018-15), which requires implementation costs incurred by customers in cloud computing arrangements (i.e.

hosting arrangements) to be capitalized under the same premises of authoritative guidance for internal-use software, and deferred over the non-cancellable term of the cloud computing arrangements plus any optional renewal periods that are reasonably certain to be exercised by the customer or for which the exercise is controlled by the service provider.

ASU 2018-15 is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted.

The Company adopted ASU 2018-15 on January 1, 2021 and the guidance did not have a material impact on its Consolidated Financial Statements.

In December 2019, FASB issued ASU No.

2019-12, Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes (“ASU 2019-12”).

The amendments in ASU 2019-12 simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740.

The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance.

The Company adopted ASU 2019-12 on January 1, 2021, as the Company no longer qualifies as an emerging growth company.

The adoption did not have a material impact on its Consolidated Financial Statements.

In August 2020, the FASB issued ASU No.

2020-06, Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40) :

Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”).

The amendments eliminate two of the three accounting models that require separate accounting for convertible features of debt securities, simplify the contract settlement assessment for equity classification, require the use of the if-converted method for all convertible instruments in the diluted earnings per share calculation and expand disclosure requirements.

The amendments are effective for our annual and interim reporting periods beginning after December 15, 2021, with early adoption permitted for reporting periods beginning after December 15, 2020.

The guidance can be applied on a full retrospective basis to all periods presented or a modified retrospective basis with a cumulative effect adjustment to the opening balance of retained earnings during the period of adoption.

The Company adopted ASU 2020-06 on January 1, 2021.

There were no changes to the Company’s previously issued financial statements since the Company had no existing convertible notes prior to issuance of the Notes.

With the adoption of ASU 2020-06, the Company recorded the issuance of the Notes at their face value net of issuance costs in long-term liabilities and the value of the capped call options in APIC.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements.

In July 2018, ASU 2018-10, Codification Improvements to Topic 842, Leases, was issued to provide more detailed guidance and additional clarification for implementing ASU 2016-02.

Furthermore, in July 2018, the FASB issued ASU 2018-11, Leases (Topic 842):

Targeted Improvements, which provides an optional transition method in addition to the existing modified retrospective transition method by allowing a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption.

Until December 31, 2021, the Company was an emerging growth company as defined by the JOBS Act.

The Company elected transition-related practical expedients as accounting policies which allowed it to not reassess, as of the adoption date, (1) whether any expired or existing contracts are or contain leases, (2) the classification of any expired or existing leases, and (3) if previously capitalized initial direct costs qualify for capitalization under ASC 842.

The Company elected the practical expedient option to not separate lease and non-lease components for all of its leases and note that variable costs related to triple net leases are not material.

The Company also elected the short-term lease recognition exemption that keeps leases with an initial term of 12 months or less excluded from balance sheet capitalization.

The Company elected to adopt using the optional transition method which allows a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption.

The adoption of this standard resulted in the recognition of Operating Right-of-Use (ROU) assets and Operating ROU lease

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liabilities on the consolidated balance sheet of $ 12.3 million and $ 13.5 million, respectively, and the elimination of deferred rent of $ 1.2 million.

The adoption of this standard did not have an impact on beginning retained earnings.

The adoption of this standard did not have a material impact on the consolidated statements of operations nor the consolidated statements of cash flows.

See Note 6, Leases, for further discussion of the adoption of ASC 842 and related disclosures.

Note 3 – Business Combinations

New Accounting Pronouncements Not Yet Adopted

In October 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) ASU 2021-08, Business Combinations (Topic 805), which primarily relates to the accounting for contract assets and contract liabilities from contracts with customers in a business combination.

The standard will be effective for annual reporting periods beginning after December 31, 2022, including interim reporting periods within those periods, with early adoption permitted.

We are currently evaluating the impact of adopting this new accounting guidance on our consolidated financial statements.

Note 3 – Business Combinations and Asset Acquisitions

Business Combination — Reverse Recapitalization

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• Prior to the Business Combination, the Company issued an aggregate of 11,500,000 shares of the Company’s Class B Common Stock (the “Founder Shares”) to the Sponsor for an aggregate purchase price of $ 25,000 in cash.

All outstanding Founder Shares were automatically converted into shares of the Company’s Class A Common Stock on a one -for-one basis at the Closing and will continue to be subject to the transfer restrictions applicable to such shares of Founder Shares.

• In connection with the Closing, holders of 2,672,690 shares of the Company’s Class A Common Stock exercised their rights for the Company to redeem their respective shares for cash at an approximate price of $ 10.00 per share, for an aggregate of approximately $ 26.7 million, which was paid to such holders at Closing.

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• The aggregate gross cash consideration received by the Company in connection with the Business Combination was $ 783 million, which consisted of proceeds of $ 350 million from the PIPE Investment, plus approximately $ 433 million of cash from the Company’s trust account that held the proceeds from the Company’s initial public offering (the “Trust Account”).

The aggregate gross cash consideration received was reduced by $ 368 million, which consisted of cash payments made to the former shareholders of HydraFacial, and further reduced by an additional $ 57 million for the payment of direct transaction costs incurred by HydraFacial and the Company which were reflected as a reduction of proceeds.

The aggregate gross cash consideration received was reduced by $ 368 million, which consisted of cash payments made to the former stockholders of Hydrafacial, and further reduced by an additional $ 57 million for the payment of direct transaction costs incurred by Hydrafacial and the Company which were reflected as a reduction of proceeds.

The Company used the net proceeds to repay all of its outstanding indebtedness at the Closing.

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Net Cash Received from Business Combination $ 357,634

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The number of shares of Class A Common Stock issued following the consummation of the Business Combination:

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(1) The number of Legacy Hydrafacial shares was determined from the 54,358 shares of Hydrafacial common stock outstanding immediately prior to the closing of the Business Combination multiplied by the Exchange Ratio of 653.109 .

Business Acquisitions

Distributor Acquisitions

On June 4, 2021, the Company acquired High Tech Laser, Australia Pty Ltd (“HTL”), a distributor of the Company’s products in Australia.

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Through these acquisitions, the Company plans to directly sell to the respective markets and improve services for its products.

Cash paid for the four distributors totaled $ 25.7 million.

Subsequent to the purchase price measurement period, the Company made contingent consideration payments totaling $ 1.6 million in connection with the Ecomedic and Sidermica acquisitions which were recorded in other expense, net in the consolidated statements of comprehensive income (loss).

The Company applied the acquisition method of accounting and established a new basis of accounting on the dates of the respective acquisitions.

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The goodwill is not deductible for income tax purposes.

The transaction costs for the acquisitions totaled $ 0.8 million.

The estimated fair values and preliminary purchase price allocation were based on information available at the time of acquisition and the Company continues to evaluate the underlying inputs and assumptions.

Accordingly, these preliminary estimates are subject to retrospective adjustments during the measurement period, not to exceed one year, based upon new information obtained about facts and circumstances that existed as of the date of acquisition.

The Company is currently in the process of finalizing the preliminary fair value allocations, and expects this to be completed prior to June 30, 2022.

The following table summarizes the consideration and estimated preliminary fair values assigned to the assets acquired and liabilities assumed at the dates of acquisition for the Wigmore, Ecomedic and Sidermica acquisitions and summarizes the HTL acquisition after measurement period adjustments.

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The Company finalized the valuation of assets acquired and liabilities assumed for the distributor acquisitions as of June 30, 2022.

The following table summarizes the consideration and fair values assigned to the assets acquired and liabilities assumed at the dates of acquisition for the Wigmore, Ecomedic and Sidermica acquisitions and summarizes the HTL acquisition after measurement period adjustments.

(in thousands) HTL Wigmore (2)

Ecomedic Sidermica

Sidermica (4)

Consideration paid:

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1,557 456 6,513 815

Contingent consideration — 783 — —

Trade receivables due from seller 1,027 2,336 1,679 1,581

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Goodwill was adjusted due to an increase of $ 0.3 million in contingent consideration and a decrease of $ 1.0 million in intangible assets.

Contingent consideration payments for the Wigmore acquisition were paid during the three months ended March 31, 2022.

(3) During the first quarter of 2022, adjustments were made to the Ecomedic valuation pertaining to acquisition date tax liability.

Goodwill was adjusted due to an increase of $ 0.2 million to acquisition date tax liability.

(4) During the second quarter of 2022, adjustments were made to the Sidermica valuation pertaining to contingent consideration.

Goodwill was adjusted due to finalization of the valuation of contingent consideration of $ 1.98 million.

Contingent consideration payments for the Sidermica acquisition were paid during the three months ended June 30, 2022.

Intangible assets acquired included customer relationships and non-compete agreements.

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The weighted average amortization period of customer relationship was 5 years, while the non-compete agreements are amortized over 3 years.

Note 4 – Revenue Recognition

The Company has determined that each of its products is distinct and represents a separate performance obligation.

The customer can benefit from each product on its own or together with other resources that are readily available to the customer.

The products are separately identifiable from other promises in the contract.

Control over the Company’s products generally transfers to the customer upon shipment of the products from the Company’s warehouse facility.

Therefore, revenue associated with product purchases is recognized at a point in time upon shipment to the intended customer.

The operating results of the distributor acquisitions from the dates of acquisitions are included in the Consolidated Statements of Comprehensive Income (Loss).

The historical operating results are not material to the consolidated financial statements, and, therefore, the Company has not presented the unaudited pro forma results of operations for the distributor acquisitions.

Acquisition of The Personalized Beauty Company, Inc.

On April 12, 2022, the Company, through its indirect, wholly-owned subsidiary, Edge Systems Intermediate, LLC, acquired The Personalized Beauty Company, Inc., a Delaware corporation d.b.a.

Consideration paid in the aggregate was $ 1.5 million plus equity consideration of $ 0.5 million or 28,733 shares of the Company’s Class A Common Stock.

Depending on the achievement of certain revenue milestones, the former Mxt shareholders are entitled to receive up to $ 30 million of earnout payments.

The estimated fair value of the earnout was not material as of the acquisition date and as of December 31, 2022.

The Company accounted for this transaction as an asset acquisition based on an evaluation of the U.S.

GAAP guidance for business combinations and concluded that the Company acquired developed technology of $ 1.9 million and inventory of $ 0.1 million.

The Company concluded that the developed technology acquired from Mxt comprised substantially all of the fair value

of the gross assets acquired and that the assets acquired did not meet the definition of a business under the guidance for business combinations.

The developed technology intangible asset is being amortized on a straight-line basis over 3 years and recorded in cost of sales.

Note 4 – Revenue

Disaggregated Revenue

The Company generates revenue through manufacturing and selling Delivery Systems.

In conjunction with the sale of Delivery Systems, the Company also sells Consumables that are used when customers provide a hydradermabrasion facial experience for their customers using a Delivery System.

The Consumables are sold by the Company and are available for purchase separately from the purchase of a Delivery System.

The Company generates revenue through manufacturing and selling Hydrafacial Delivery Systems.

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

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

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

The Company’s revenue disaggregated by major product line consists of the following for the periods indicated:

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Year Ended December 31,

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Total net sales $ 365,876 $ 260,086 $ 119,092

See Note 18 for revenue disaggregated by geographical region.

See Note 18 — Segment Reporting for revenue disaggregated by geographical region.

Note 5 — Balance Sheet Components

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Contingent consideration — 783

Note payable due seller (Note 3) 2,153 —

Note payable due seller 1,819 2,153

Royalty liabilities 2,348 1,074

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The Company does not own any real estate.

The majority of the Company’s liability primarily consists of the Company’s international office spaces and warehouse all of which are classified as operating leases.

The majority of the Company’s lease liability consists of the Company’s international office spaces and warehouses, all of which are classified as operating leases.

The Company’s finance leases relate to leased equipment such as office and warehouse equipment.

The finance lease balances are not material but are included in property and equipment, other accrued liabilities, and other long-term liabilities of the Consolidated Balance Sheets.

The finance lease balances are not material and are included in property and equipment, other accrued expenses, and other long-term liabilities of the Consolidated Balance Sheets.

Lease terms include the non-cancellable portion of the underlying leases along with any reasonably certain lease periods associated with available renewal periods, termination options and purchase options.

The Company's leases do not contain significant restrictive provisions nor residual value guarantees.

Operating and finance lease ROU liabilities are recognized at the lease commencement date based on the present value of the fixed lease payments using the Company’s incremental borrowing rates for its population of leases.

Related operating and finance lease ROU assets are recognized based on the initial present value of the fixed lease payments, reduced by cash

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payments received from landlords as lease incentives, plus any prepaid rent and other direct costs from executing the leases.

The interest expense amortization component of the finance lease ROU liabilities is recorded within interest expense on the Consolidated Statements of Comprehensive Loss.

Operating and finance lease right-of-use (“ROU”) liabilities are recognized at the lease commencement date based on the present value of the fixed lease payments using the Company’s incremental borrowing rates for its population of leases.

Related operating and finance lease ROU assets are recognized based on the initial present value of the fixed lease payments, reduced by cash payments received from landlords as lease incentives, plus any prepaid rent and other direct costs from executing the leases.

The interest expense amortization component of the finance lease ROU liabilities is recorded within interest expense on the Consolidated Statements of Comprehensive Income (Loss).

ROU assets are tested for impairment in the same manner as long-lived assets.

Operating ROU assets and liabilities as of December 31, 2021 comprises the following:

Operating ROU assets and liabilities as of December 31, 2022 and December 31, 2021 comprises the following:

(in thousands)

Assets Balance Sheet Classification December 31, 2021

Assets Balance Sheet Classification December 31, 2022 December 31, 2021

Operating lease assets Right-of-use assets, net $ 15,637 $ 14,992

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Total lease liabilities $ 17,647 $ 16,493

Total lease cost for the year ended December 31, 2021 is below.

Total lease cost for the years ended December 31, 2022 and December 31, 2021 are summarized in the table below.

The variable lease costs were not included in the measurement of the lease liabilities.

These primarily include property taxes, property insurance, and common area maintenance expenses.

(in thousands) Statement of Operations Classification December 31, 2021

(in thousands) Statement of Operations Classification December 31, 2022 December 31, 2021

Operating lease cost

Operating lease cost Cost of sales $ 835 $ 811

Operating lease cost Selling, General and administrative 2,535

Operating lease cost Selling and marketing, general and administrative 4,139 2,535

Short-term lease cost

Short-term lease cost Selling, General and administrative 879

Short-term lease cost Selling and marketing, general and administrative 1,662 879

Variable lease cost

Variable lease cost Cost of sales — 236

Variable lease cost Selling, General and administrative 270

Variable lease cost Selling and marketing, general and administrative — 270

Total operating lease cost $ 6,636 $ 4,731

The following table summarizes future lease payments as of December 31, 2021:

(in thousands) Operating Leases

The following table summarizes future operating lease payments as of December 31, 2022 :

(in thousands) Future Minimum Payments

Thereafter 5,145

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Present value of net lease payments $ 17,647

Prior to the adoption of ASC 842, the future minimum operating lease commitments as of December 31, 2020 under ASC 840 is below.

Prior year rent expense under ASC 840 was $ 3.7 million.

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(in thousands) Operating Lease

Total $ 9,880

The following table includes supplemental lease information:

Supplemental Cash Flow Information (dollars in thousands) Total

Supplemental Cash Flow Information (dollars in thousands) December 31, 2022 December 31, 2021

Cash paid for amounts included in the measurement of lease liabilities

Operating cash flows from operating leases $ 2,981 $ 3,041

Total $ 3,041

Lease liabilities arising from new ROU assets

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Unobservable inputs based on our assessment of the assumptions that market participants would use in pricing the asset or liability.

The following table presents information about the Company’s assets and liabilities that are measured at fair value on a recurring basis at December 31, 2021, and indicates the fair value hierarchy of the valuation inputs the Company utilized to determine such fair value.

As of the Business Combination date, the Private Placement Warrants were valued using the Public Warrant Price, and was considered to be a Level 2 financial instrument as of that date.

As of December 31, 2021, there were no Public Warrants outstanding, and the value of the Private Placement Warrants was determined using a Monte Carlo simulation,

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and as such, were classified as a Level 3 financial instrument as of December 31, 2021.

This was the only valuation level transfer during the year ended December 31, 2021.

Fair Value Measurements on a Recurring Basis

The following table presents information about the Company’s assets and liabilities that are measured at fair value on a recurring basis at December 31, 2022 and 2021, and indicates the fair value hierarchy of the valuation inputs the Company

utilized to determine such fair value.

As of December 31, 2022 and 2021, the value of the Private Placement Warrants was determined using a Monte Carlo simulation.

The Private Placement Warrants are classified as a Level 3 financial instrument.

There was no activity in Warrant liability related to the Private Placement Warrants during the periods presented.

The contingent consideration outstanding as of December 31, 2021 was paid in the second quarter of 2022.

As of December 31, 2022

(in thousands) Level 1 Level 2 Level 3 Total

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Money market funds $ 513,009 $ — $ — $ 513,009

Warrant liability — Private Placement Warrants — — 15,473 15,473

As of December 31, 2021

(in thousands) Level 1 Level 2 Level 3 Total

Cash and cash equivalents:

Money market funds $ 861,943 $ — $ — $ 861,943

Contingent consideration $ — $ — $ 783 $ 783

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Warrant Liabilities

The Public Warrants and Private Placement Warrants (collectively, the “Warrants”) were accounted for as liabilities in accordance with ASC 815-40 and are presented within Warrant liabilities on the Company’s Consolidated Balance Sheets.

The Warrants are measured at fair value at inception and on a recurring basis, with changes in fair value presented within Change in fair value of Warrants in the Company’s Consolidated Statements of Comprehensive Loss .

At December 31, 2021 , the outstanding Private Placement Warrants were valued using a Monte Carlo simulation because these Warrants are subject to redemption if the reference value of the common stock, as defined, is between $ 10.00 and $ 18.00 per share.

The value derived from the Monte Carlo simulation is based on key assumptions such as the fair value of the common stock at the date of the valuation, the strike price of the warrant, a dividend yield of zero , the expected term of the warrant based on the simulation, an assumed risk free rate over the expected term of 1.16 % and an assumed historical volatility of the Company’s common stock of 59.2 %.

The Private Placement Warrants are classified as a Level 3 financial instruments as of December 31, 2021.

There were no Public Warrants outstanding as of December 31, 2021.

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, for a redemption price of $ 0.10 per Public Warrant.

All outstanding Public Warrants totaling 16.2 million warrants were either exercised for cash or on a cashless basis or were redeemed.

These outstanding Public Warrants comprised 15.3 million Public Warrants issued in connection with the Vesper initial public offering and an additional 0.9 million warrants that became Public Warrants due to the sale of Private Warrants.

Public Warrants totaling 16.1 million were exercised for cash at an exercise price of $ 11.50 per share of Class A Common Stock, 74,104 Public Warrants were exercised on a cashless basis in exchange for an aggregate of 26,732 shares of Class A Common Stock, and 75,016 warrants were redeemed for $ 0.10 per warrant, in each case in accordance with the terms of the Warrant Agreement.

Total cash proceeds generated from exercises of the Public Warrants were $ 185.4 million.

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

The Public Warrants and Private Placement Warrants (collectively, the “Warrants”) are accounted for as liabilities in accordance with ASC 815-40 and are presented within Warrant liabilities on the Company’s Consolidated Balance Sheets.

The Warrants are measured at fair value at inception and on a recurring basis, with changes in fair value presented within change in fair value of warrant liabilities in the Company’s Consolidated Statements of Comprehensive Income (Loss) .

On October 4, 2021, the Company issued a press release stating that it would redeem all of the Public Warrants that remained outstanding on November 3, 2021, for a redemption price of $ 0.10 per Public Warrant.

On November 3, 2021, all 16.2 million outstanding Public Warrants were either exercised for cash or on a cashless basis or were redeemed.

These outstanding Public Warrants that were exercised comprised 15.3 million Public Warrants issued in connection with the Vesper initial public offering and an additional 0.9 million warrants that became Public Warrants due to the sale of Private Placement Warrants.

Approximately 16.1 million Public Warrants were exercised for cash at an exercise price of $ 11.50 per share of Class A Common Stock, 74,104 Public Warrants were exercised on a cashless basis in exchange for an aggregate of 26,732 shares of Class A Common Stock, and 75,016 warrants were redeemed for $ 0.10 per warrant, in each case in accordance with the terms of the Warrant Agreement.

In 2021, total cash proceeds generated from exercises of the Public Warrants were $ 185.4 million.

In addition, 0.3 million Private Placement Warrants were exercised in 2021 for total cash proceeds of $ 3.0 million.

Accordingly, as of December 31, 2022 and 2021, there were no Public Warrants outstanding.

At December 31, 2022 and 2021 , the outstanding Private Placement Warrants were valued using a Monte Carlo simulation.

As of December 31, 2022, the Company had approximately 7 million Private Placement Warrants outstanding.

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As of December 31, 2021, the Company accrued the full amount of the contingent consideration as the earn-out revenue targets were met.

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The contingent consideration outstanding as of December 31, 2021 was paid in the second quarter of 2022.

Note 8 – Property and Equipment, net

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Property and equipment, net $ 18,184 $ 16,183

During the year ended December 31, 2022, the Company recorded a loss on the disposal of property and equipment, net of $ 2.0 million.

The loss on disposal of property and equipment, net was recorded in the Consolidated Statements of Comprehensive Income (Loss) primarily in general and administrative expense.

Depreciation expense was as follows for the periods indicated:

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Total intangible assets $ 114,806 $ ( 68,420 ) $ 46,386

During the year ended December 31, 2022, the Company recorded a loss on the disposal of intangible assets of $ 2.5 million.

The loss on disposal of intangible assets was recorded in the Consolidated Statements of Comprehensive Income (Loss) primarily in general and administrative expense.

The gross carrying amount and accumulated amortization of the Company’s intangible assets, net, as of December 31, 2021 were as follows:

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Trademarks $ 10,048 $ ( 3,442 ) $ 6,606 15

Non-compete agreement 809 ( 139 ) 670 3

Customer relationships 18,625 ( 4,391 ) 14,234 5 - 10

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Total intangible assets $ 112,299 $ ( 56,289 ) $ 56,010

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Amortization expense for the years ended December 31, 2021, 2020 and 2019 was $ 13.3 million, $ 11.8 million and $ 12.4 million, respectively.

Amortization expense was as follows for the periods indicated:

Year Ended December 31,

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Cost of sales $ 9,450 $ 9,000 $ 9,465

Selling and marketing 1,820 — —

General and administrative 2,969 2,477 2,384

Selling and marketing 2,433 1,820 —

Total amortization expense $ 14,852 $ 13,297 $ 11,849

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Beginning balance $ 123,694 $ 98,531 $ 98,520

Business acquisitions 26,600 — 347

Measurement period adjustments 2,154 26,600 —

Foreign currency translation impact ( 1,255 ) ( 1,437 ) 11

Ending balance $ 124,593 $ 123,694 $ 98,531

The measurement period adjustments include a $ 0.2 million increase due to adjustment of acquisition date tax liability for Ecomedic and a $ 1.98 million increase due to the finalization of the fair value of contingent consideration related to Sidermica during the year ended December 31, 2022 .

The Company finalized the valuation of assets acquired and liabilities assumed for the Ecomedic acquisition and all other distributor acquisitions as of June 30, 2022.

Note 10 – Long-term Debt

Credit Facility

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 Facility

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

(the “Administrative Agent”).

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

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

term is defined in, the Original Credit Agreement and (vi) provide that Hydrafacial shall be released and discharged solely from the obligations of the “Borrower” under, and as defined in, the Original Credit Agreement, and shall be a subsidiary guarantor and a loan party thereunder.

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

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

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 whom will derive substantial benefit from the revolving credit facility.

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

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

As of December 31, 2022 the Company was in compliance with all restricted and financial covenants of the Credit Agreement.

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

The applicable margin is linked to the leverage ratio.

The margins range from 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.

As of December 31, 2022 the Company’s unused commitment rate was 0.25 %.

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

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

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

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

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

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

Convertible Senior Notes

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In addition, if certain corporate events that constitute a “Make-Whole Fundamental Change” (as defined in the Indenture) occur, then the conversion rate will, in certain circumstances, be increased for a specified period of time.

The conversion price as of December 31, 2022 was $ 31.76 per share of common stock.

The Notes are redeemable, in whole or in part (subject to certain limitations described below), at the Company’s option at any time, and from time to time, on or after October 6, 2024, and on or before the 40 th scheduled trading day immediately before the maturity date, but only if certain liquidity conditions are satisfied and the last reported sale price per share of the Company’s common stock exceeds 130 % of the conversion price on (i) each of at least 20 trading days, whether or not consecutive, during the 30 consecutive trading days ending on, and including, the trading day immediately before the date the Company sends the related redemption notice;

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(vi) certain defaults by the Company or any of its subsidiaries with respect to indebtedness for money borrowed of at least $ 45,000,000 ;

(vii) the rendering

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of certain judgments against the Company or any of its significant subsidiaries for the payment of at least $ 45,000,000 , where such judgments are not discharged or stayed within 60 days after the date on which the right to appeal has expired or on which all rights to appeal have been extinguished and (viii) certain events of bankruptcy, insolvency and reorganization involving the Company or any of its significant subsidiaries.

(vii) the rendering of certain judgments against the Company or any of its significant subsidiaries for the payment of at least $ 45,000,000 , where such judgments are not discharged or stayed within 60 days after the date on which the right to appeal has expired or on which all rights to appeal have been extinguished and (viii) certain events of bankruptcy, insolvency and reorganization involving the Company or any of its significant subsidiaries.

If an Event of Default involving bankruptcy, insolvency or reorganization events with respect to the Company (and not solely with respect to a significant subsidiary of the Company) occurs, then the principal amount of, and all accrued and unpaid interest on, all of the Notes then outstanding will immediately become due and payable without any further action or notice by any person.

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The total amount of debt issuance costs of $ 21.3 million was recorded as a reduction to “Convertible senior notes, net” in the Company’s Consolidated Balance Sheets and are being amortized as interest expense over the term of the Notes using the effective interest method.

During the year ended December 31, 2021, the Company recognized $ 1.3 million in interest expense related to the amortization of the debt issuance costs related to the Notes.

There was no such expense related to the Notes in the year ended December 31, 2020.

During the years ended December 31, 2022 and December 31, 2021, the Company recognized $ 4.2 million and $ 1.3 million in interest expense related to the amortization of the debt issuance costs related to the Notes, respectively.

The following is a summary of the Company’s Notes as of December 31, 2022:

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$ 750,000 $ 15,857 $ 734,143 $ 567,000 Level 2

The following is a summary of the Company’s Notes as of December 31, 2021:

(in thousands) Principal Amount Unamortized Issuance Costs Net Carrying

Value Amount Level

1.25 % Convertible Notes due 2026

$ 750,000 $ 20,086 $ 729,914 $ 794,325 Level 2

The Notes are carried at face value less the unamortized debt issuance costs on the Company’s Consolidated Balance Sheets.

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The estimated fair value of the Notes was determined based on the actual bid price of the Notes on December 31, 2022.

As of December 31, 2021, the remaining life of the Notes is approximately 4.8 years.

The Notes mature on October 2026, and as of December 31, 2022, the remaining life of the Notes is approximately 3.8 years.

Capped Call Transactions

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The cost of the Capped Call Transactions was approximately $ 90.2 million.

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The Capped Call Transactions are separate transactions, each between the Company and the applicable Option Counterparty, and are not part of the terms of the Notes and do not affect any holder’s rights under the Notes or the Indenture.

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In connection with the Closing of the Business Combination, all of Hydrafacial’s existing debt under its credit facilities were repaid and its credit facilities were extinguished.

T he related write-off of the deferred financing costs totaled $ 2.3 million and prepayment penalties totaled $ 2.0 million.

Both are included in the Other expense (income), net on the Company’s Consolidated Statements of Comprehensive Loss.

Defer red financing costs expense for the year ended December 31, 2021 amounted to $ 0.5 million for the existing debt prior to the Business Combination while the amortization of issuance costs for the Notes amounted to $ 1.3 million during 2021 .

Defer red financing costs expense for the years ended December 31, 2020 and December 31, 2019 amounted to $ 1.5 million and $ 1.4 million, respectively, and is included in Interest expense, net on the Company’s Consolidated Statements of Comprehensive Loss.

T he related write-off of the deferred financing costs totaled $ 2.3 million

and prepayment penalties totaled $ 2.0 million in 2021.

Both are included in the Other expense (income), net on the Company’s Consolidated Statements of Comprehensive Income (Loss).

Defer red financing costs expense for the year ended December 31, 2021 amounted to $ 0.5 million for the existing debt prior to the Closing of the Business Combination while the amortization of issuance costs for the Notes amounted to $ 1.3 million during 2021 .

Note 11 – Income Taxes

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On June 29, 2020, the State of California passed Assembly Bill 85 which suspends the California net operating loss deduction for the 2020-2022 tax years and the research and development credit usage for the same period (for credit usages in excess of $5.0 million).

These suspensions were considered in preparation of the year ended December 31, 2021 and 2020 of the Company’s Consolidated Financial Statements.

On March 11, 2021 the United States enacted the American Rescue Plan Act of 2021 (“American Rescue Plan”).

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The Company does not expect a material impact of the American Rescue Plan on the Company’s Consolidated Financial Statements and related disclosures.

The Inflation Reduction Act, signed into law on August 16, 2022, provides tax incentives for certain industries and imposes a 15% minimum tax on the book income of certain large corporations and a 1% excise tax on stock buybacks.

The Company may be subject to the new excise tax on certain stock buybacks that occur after December 31, 2022.

The Company does not anticipate a material impact from the Inflation Reduction Act on the Company's consolidated financial statements.

The following table presents domestic and foreign components of net income (loss) before income taxes as follows for the periods indicated:

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The federal, state and foreign components of the income tax expense (benefit) are summarized as follows:

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Year Ended December 31,

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Federal $ 407 $ ( 727 )

State 306 513

Foreign 1,722 1,735

Total current income tax expense (benefit) 1,521 ( 5,102 )

Total current income tax expense 2,435 1,521

Federal ( 257 ) ( 3,319 )

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( 1,787 ) ( 3,763 )

Total income tax benefit $ ( 2,242 ) $ ( 9,308 )

Total income tax expense (benefit) $ 648 $ ( 2,242 )

The effective tax rate of the provision for income tax differs from the federal statutory rate as follows for the periods indicated:

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State taxes, net of federal benefit ( 1,041 ) ( 2.3 ) ( 1,041 ) 0.3

Officer compensation 2,324 5.2 486 ( 0.1 )

Change in fair value of warrants ( 16,452 ) ( 36.6 ) 58,236 ( 15.4 )

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R&D credit ( 900 ) ( 2.0 ) ( 152 ) —

State rate change, net of federal effect — — ( 465 ) 1.2

Change in valuation allowance 5,914 13.2 4,064 ( 1.1 )

Other 1,477 3.3 1,730 ( 0.5 )

Income tax benefit $ ( 2,242 ) 0.6 % $ ( 9,308 ) 24.1 %

Income tax expense (benefit) $ 648 1.5 % $ ( 2,242 ) 0.6 %

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

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The components of the deferred tax assets are as follows for the periods indicated:

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Year Ended December 31,

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Lease liabilities 4,469 4,104

Other 685 220

Total deferred income tax assets 25,748 21,008

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Net deferred income tax liabilities $ ( 1,196 ) $ ( 3,231 )

The Company’s net deferred tax liability as presented in the consolidated balance sheets consists of the following items as of the periods indicated:

The Company’s net deferred tax liability as presented in the consolidated balance sheets consists of the following items as of the dates indicated:

(in thousands) December 31, 2022 December 31, 2021

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In determining whether deferred tax assets are realizable, the Company considered numerous factors including historical profitability, the amount of future taxable income and the existence of taxable temporary differences that can be used to realize deferred tax assets.

The valuation allowance increased approximately $ 8.5 million in 2021 from 2020 primarily due to recognizing valuation allowances against deferred tax assets of certain state and foreign net operating loss carryforwards, state interest carryforwards, and deferred tax assets for credits.

If the Company were to release the valuation allowance upon management determining that it is more likely than not the deferred tax assets could be recognized, approximately $ 4.5 million of income tax benefit would be recorded to continuing operations and the remaining income tax benefit of $ 4.5 million would be recorded to equity.

The valuation allowance increased approximately $ 5.9 million in 2022 from 2021 primarily due to recognizing valuation allowances against deferred tax assets of certain state and foreign net operating loss carryforwards and federal and state interest carryforwards.

If the Company were to release the valuation allowance upon management determining that it is more likely than not the deferred tax assets could be recognized, approximately $ 14.8 million of income tax benefit would be recorded to continuing operations.

At December 31, 2022, the Company had gross federal, state and foreign net operating loss carryforwards of approximately $ 9.0 million, $ 14.7 million and $ 4.7 million, respectively.

The state losses expire beginning in 2025 and the foreign losses beginning in 2026.

The federal net operating losses carryforward indefinitely.

As of December 31, 2022 and December 31, 2021, the Company had recorded gross unrecognized tax benefits of approximately $ 0.7 million and $ 0.2 million, respectively.

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A reconciliation of the beginning and ending balances of unrecognized tax benefits is as follows:

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(in thousands) December 31, 2022 December 31, 2021

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The Company is not currently under examination by income tax authorities in federal, state or other jurisdictions.

The Company’s tax returns remain open for examination in the U.S for years 2018 through 2020.

The Company’s tax returns remain open for examination in the United States for years 2019 through 2021.

Our foreign subsidiaries are generally subject to examination three years following the year in which the tax obligation originated.

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Note 13 – Equity-Based Compensation

In December 2016, HydraFacial established its 2016 Equity Incentive Award Plan (the “2016 Plan”), the purpose of which was to provide incentives to selected officers and employees, to secure and retain their services, and to strengthen their commitment to HydraFacial.

The 2016 Plan provided for grants of time vesting (“Time Vesting Options”) and performance-based equity awards (“Performance Vesting Options”) to Company employees (together the “Options”).

The vesting of these Options varies based on whether such Time Vesting Options or Performance Vesting Options as described in the grant agreements.

During May 2020, HydraFacial canceled 1,295 of the Time Vesting Options and 4,440 of the Performance Vesting Options outstanding under the 2016 Plan and replaced these awards with 1,295 of new time vested incentive units and 4,440 of performance based incentive units for certain members of management .

All of the time vesting units and performance vesting units immediately vested upon the consummation of the Business Combination.

As a result of the accelerated vesting of options and performance units from the consummation of the Business Combination, the Company recognized $ 1.4 million in stock compensation expense

The Beauty Health Company 2021 Incentive Award Plan (the “2021 Plan”) became effective upon the consummation of the Business Combination.

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The aggregate number of shares of the Company’s Class A Common Stock that may be issued pursuant to awards granted under the 2021 Plan is the sum of (i) 14,839,640 and (ii) an annual increase on January 1 of each calendar year (commencing with January 1, 2022 and ending on and including January 1, 2031) equal to a number of shares equal to 4 % of the aggregate shares outstanding as of December 31 of the immediately preceding calendar year (or such lesser number of shares as is determined by the Company’s Board of Directors), subject to adjustment by the plan administrator in the event of certain changes in our corporate structure.

The annual increase on January 1, 2022 amounted to 6.0 million shares of the Company’s Class A Common Stock.

The maximum number of shares that may be granted with respect to incentive stock options (“ISOs”) under the 2021 Plan is 7,500,000 .

At December 31, 2022 , an aggregate 9.9 million shares of the Company’s Class A Common Stock were reserved for the issuance of awards under the 2021 Plan.

Employee Stock Purchase Plan

The Company maintains the Employee Stock Purchase Plan (the “ESPP”), which became effective upon the consummation of the Business Combination.

The Company maintains the Employee Stock Purchase Plan (the “ESPP”) for employees located in the United States, which became effective upon the consummation of the Business Combination.

The aggregate number of shares of the Company’s Class A Common Stock initially reserved for issuance pursuant to rights granted under the ESPP was 2,000,000 .

In addition, on the first day of each calendar year beginning

Table of Con tents

on January 1, 2022 and ending on (and including) January 1, 2031, the number of shares available for issuance under the ESPP will be increased by a number of shares equal to the lesser of (1) one percent ( 1 %) of the shares outstanding on the final day of the immediately preceding calendar year, and (2) such smaller number of shares as determined by the Company’s Board of Directors.

In addition, on the first day of each calendar year beginning on January 1, 2022 and ending on (and including) January 1, 2031, the number of shares available for issuance under the ESPP will be increased by a number of shares equal to the lesser of (1) one percent ( 1 %) of the shares outstanding on the final day of the immediately preceding calendar year, and (2) such smaller number of shares as determined by the Company’s Board of Directors.

Under the ESPP, eligible employees can have up to 10 % of their earnings withheld, up to certain maximums, to be used to purchase shares of the Company’s Class A Common Stock at certain purchase dates.

The price of the Company’s Class A Common Stock purchased under the ESPP for the offering periods is equal to 85 % of the lesser of the fair market value of a share of Class A Common Stock of the Company on the beginning or the end of the offering period.

As of December 31, 2022, there were 206,112 shares of the Company’s Class A Common Stock that were purchased under the ESPP.

The Company is currently going through its third offering period which ends May 19, 2023.

The Company recognized an immaterial amount of compensation expense related to the ESPP for the year ended December 31, 2022.

As of December 31, 2021, there were no shares of the Company’s Class A Common Stock that were purchased under the ESPP.

The Company is currently going through its first offering period which ends May 19, 2022.

The Company recognized an immaterial amount of compensation expense related to the ESPP for the year ended December 31, 2021.

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Outstanding - January 1, 2022

6,785,020 $ 15.64 9.45 $ 59,482

Granted 10,500 22.68

Forfeited ( 1,144,700 ) 18.60

Expired ( 49,050 ) 15.77

Outstanding - December 31, 2022

5,601,770 15.21 8.34 —

Vested and Exercisable - December 31, 2022

1,446,117 15.31 8.06 —

Options vested and expected to vest - December 31, 2022 5,601,770 $ 15.21 8.34 $ —

The weighted-average grant date fair value of the stock options granted during the year ended December 31, 2021 is $ 7.84 .

The weighted-average grant date fair value of the stock options granted during the year ended December 31, 2022 and 2021 was $ 12.23 and $ 7.84 , respectively.

At December 31, 2022, aggregate unrecognized compensation cost for unvested stock options was $ 27.1 million recognized over a weighted average period of 2.46 years.

The stock options granted generally vest over a 4 year period.

At December 31, 2021, aggregate unrecognized compensation cost for unvested stock options was $ 49.0 million recognized over a weighted average period of 3.48 years.

The stock options granted generally vest over a four year period.

Restricted Stock Units (“RSUs”) and Performance-based Restricted Stock Units (“PSUs”)

The Company reserves the right to grants RSUs to certain employees, executives and directors.

The RSUs granted are eligible to vest over four years , subject to the recipient’s continued employment through each vesting date.

The PSUs awarded to our NEOs pursuant to the 2021 Plan may be earned over a four-year performance period based on each NEO’s continuation in service through the end of the performance period and the attainment of pre-determined goals related to the Company’s stock price.

The actual number of shares of the Company’s Class A Common Stock to be issued, ranging from 0 % to 100 % of the number of PSUs granted, is to be determined based upon the performance of the Company’s Class A Common Stock and will be determined based on the greater of (i) the Company’s average stock price during the 90 -day period ending on the third anniversary of the vesting commencement date and (ii) the Company’s average stock price during the 90 -day period ending on the fourth anniversary of the vesting commencement date.

The Company reserves the right to grant RSUs to certain employees, executives and directors.

The RSUs granted are eligible to vest over the service period, which is generally over three to four years , subject to the recipient’s continued employment through each vesting date.

PSUs are awarded to select executive officers pursuant to the 2021 Plan and vest based on either (i) the performance of the Company’s Class A Common Stock (“Top-hat”) or (ii) the total shareholder return of the Company’s Class A Common Stock relative to a defined peer group (“TSR”).

Top-hat PSUs are earned over a four-year performance period, based on the performance of the Company’s Class A Common Stock, and subject to the recipient’s continued employment through the end of the performance period.

The actual number of shares of the Company’s Class A Common Stock to be issued, ranging from 0 % to 100 % of the number of PSUs granted, will be determined based on the greater of (i) the Company’s average stock price during the 90 -day period ending on the third anniversary of the vesting commencement date and (ii) the Company’s average stock price during the 90 -day period ending on the fourth anniversary of the vesting commencement date.

TSR PSUs are earned over a three-year performance period, based on the attainment of pre-determined goals related to the Company’s total shareholder return relative to a defined peer group, and subject to the recipient’s continued employment through the end of the performance period.

The actual number of shares of the Company’s Class A Common Stock to be issued will range from 0 % to 200 % of the number of PSUs granted.

The fair value of PSU awards is recognized on a straight-line basis over their measurement period as compensation expense, and is not subject to reversal even if the market condition is not achieved.

The fair value of PSUs was determined using a Monte Carlo simulation with the following assumptions:

Input 2021 Grants

The fair value of PSUs was determined using a Monte Carlo simulation subject to the performance conditions of the underlying PSUs with the following assumptions:

Input 2022 Grants 2021 Grants

Risk-free interest rate 1.52 % - 4.23 %

0.50 % - 0.65 %

Expected volatility of the Company’s Class A Common Stock 57.7 % - 66.0 %

Table of Con tents

The following table summarizes the Company’s unvested equity award activity for the year ended December 31, 2021:

The following table summarizes the Company’s equity award activity for the year ended December 31, 2022:

Weighted Average Grant Date Fair Value

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Outstanding - January 1, 2022

380,775 975,000 $ 25.88 $ 11.39

Granted 2,936,252 1,734,864 13.47 8.79

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2,580,152 2,500,126 14.47 9.34

The fair value of equity awards that vested, determined based on their respective fair values at vesting date, was $ 0.7 million in 2021.

The fair value of equity awards that vested, determined based on their respective fair values at vesting date, was $ 2.7 million for the fiscal year ended December 31, 2022, and $ 0.7 million for the fiscal year ended December 31, 2021.

All of the outstanding equity awards are expected to vest.

At December 31, 2022, the aggregate unrecognized compensation cost for unvested RSUs and PSUs was $ 28.6 million and $ 16.4 million, respectively, recognized over a weighted average period of 2.42 years and 2.00 years, respectively.

Stock-based Compensation Expense

Compensation expense attributable to net stock-based compensation was $ 12.4 million, $ 0.4 million and $ 0.1 million for the years ended December 31, 2021, 2020 and 2019, respectively and recorded in the Consolidated Statements of Comprehensive Loss as follows:

Compensation expense attributable to net stock-based compensation was as follows for the periods indicated:

Year Ended December 31,

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Note 14 – Commitments and Contingencies

From time to time the Company may be involved in claims, legal actions and governmental proceedings that arise from its business operations.

As of December 31, 2021 and 2020, the Company was not a party to any legal proceedings or threatened legal proceedings, the adverse outcome of which, individually or in the aggregate, that it believes would have a material adverse effect on its business, financial condition or results of operations.

On October 21, 2020, Hydrafacial filed a complaint against Ageless Serums LLC (“Ageless”) in the United States District Court for the Central District of California, Western Division, captioned Edge Systems LLC v.

Ageless Serums LLC , Case No.

2:20-cv-09669-FMO-PVC (the “California Case”), for contributory trademark infringement, false designation of origin, induced breach of contract, tortious interference with contractual relations, and unfair competition.

In the complaint, Hydrafacial alleges that Ageless is selling its serums to Hydrafacial customers and intentionally encouraging those customers to market treatments performed by such customers as “Hydrafacial Treatments,” in violation of the customers’ license agreements with Hydrafacial and that Ageless improperly markets its products for use as part of the Hydrafacial treatment.

Hydrafacial is seeking monetary damages and injunctive relief.

Additionally, on December 22, 2020, Hydrafacial filed a complaint against Ageless in the United States District Court for the Southern District of Texas, Houston Division, captioned Edge Systems LLC v.

Ageless Serums LLC , Case No.

4:20-cv 04335 (“the Texas Case”), alleging infringement of six of Hydrafacial’s patents.

Hydrafacial is seeking monetary damages and injunctive relief.

Ageless ultimately answered and asserted counterclaims in both actions.

On May 5, 2022, Ageless filed a Chapter 11 bankruptcy petition in the United States Bankruptcy Court for the Southern District of Texas, Houston Division, and the California Case and Texas Case were stayed.

On September 7, 2022, Hydrafacial filed a proof of claim, asserting a $ 12,616,983 general unsecured claim for damages arising from claims alleged in the California Case and Texas Case.

On January 4, 2023, Hydrafacial filed an Objection to the Confirmation of Debtor’s Subchapter V Plan of Reorganization and Brief in Support.

Hydrafacial plans to continue a vigorous pursuit of its claims against Ageless.

On December 14, 2020, Hydrafacial filed a complaint against Cartessa Aesthetics, LLC (“Cartessa”) in the United States District Court for the Eastern District of New York, captioned Edge Systems LLC v.

Cartessa Aesthetics, LLC , Case No.

1:20-cv-6082, for patent infringement arising from Cartessa’s sale of a delivery system that allegedly infringes five of Hydrafacial’s

patents on its device.

Hydrafacial is seeking money damages and injunctive relief and plans to vigorously pursue its claims against Cartessa.

Note 15 – Concentrations

As of December 31, 2021, the Company had no customers that accounted for 10% or more of the Accounts receivable balance.

As of December 31, 2020, the Company had one customer that accounted for 10% or more of the Accounts receivable balance.

This customer accounted for 10.5 %, or $ 1.9 million, of the Accounts receivable balance.

No single customer accounted for 10% or more of consolidated Net sales during the years ended December 31, 2022 and December 31, 2021.

As of December 31, 2022 the Company had one customer that accounted for 12 % of the Company’s accounts receivable balance.

As of December 31, 2021, the Company had no customers that accounted for 10% or more of the accounts receivable balance.

Note 16 – Related-Party Transactions

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In connection with the consummation of the Business Combination, on May 4, 2021, the Company entered into that certain Amended and Restated Registration Rights Agreement (the “Registration Rights Agreement”) with BLS Investor Group LLC and the Hydrafacial stockholders.

Table of Con tents

Pursuant to the terms of the Registration Rights Agreement, (i) any outstanding share of Class A Common Stock or any other equity security (including the Private Placement Warrants and including shares of Class A Common Stock issued or issuable upon the exercise of any other equity security) of the Company held by the Sponsor or the HydraFacial Stockholders (together, the “Restricted Stockholders”) as of the date of the Registration Rights Agreement or thereafter acquired by a Restricted Stockholder (including the shares of Class A Common Stock issued upon conversion of the 11,500,000 Founder Shares that were owned by the Sponsor and converted to shares of Class A Common Stock prior in connection with the Business Combination and upon exercise of any Private Placement Warrants) and shares of Class A Common Stock issued as Earn-out Shares to the HydraFacial Stockholders and (ii) any other equity security of the Company issued or issuable with respect to any such share of Common Stock by way of a stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization or otherwise will be entitled to registration rights.

Pursuant to the terms of the Registration Rights Agreement, (i) any outstanding shares of Class A Common Stock or any other equity securities (including the Private Placement Warrants and including shares of Class A Common Stock issued or issuable upon the exercise of any other equity security) of the Company held by the Sponsor or the Hydrafacial stockholders (together, the “Restricted Stockholders”) as of the date of the Registration Rights Agreement or thereafter acquired by a Restricted Stockholder (including the shares of Class A Common Stock issued upon conversion of the 11,500,000 Founder Shares that were owned by the Sponsor and converted into shares of Class A Common Stock in connection with the Business Combination and upon exercise of any Private Placement Warrants) and shares of Class A Common Stock issued as earn-out shares to the Hydrafacial stockholders and (ii) any other equity security of the Company issued or issuable with respect to any such share of common stock by way of a stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization or otherwise will be entitled to registration rights.

The Registration Rights Agreement provides that the Company will, within 60 days after the consummation of the Business Combination, file with the SEC a shelf registration statement registering the resale of the shares of common stock held by the Restricted Stockholders and will use its reasonable best efforts to have such registration statement declared effective as soon as practicable after the filing thereof, but in no event later than 60 days following the filing deadline.

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The Company and the Restricted Stockholders agree in the Registration Rights Agreement to provide customary indemnification in connection with any offerings of common stock effected pursuant to the terms of the Registration Rights Agreement.

Pursuant to the Registration Rights Agreement, the Sponsor agreed to restrictions on the transfer of their securities issued in the Company’s initial public offering, which (i) in the case of the Founder Shares is one year after the completion of the Business Combination unless (A) the closing price of the Common Stock equals or exceeds $ 12.00 per share for 20 days out of any 30 -trading-day period commencing at least 150 days following the Closing of the Business Combination or (B) the Company completes a liquidation, merger, capital stock exchange, reorganization or other similar transaction that results in all of the Company’s stockholders having the right to exchange their shares of Common Stock for cash, securities or other property, and (ii) in the case of the Private Placement Warrants and the respective Class A Common Stock underlying the Private Placement Warrants is 30 days after the completion of the Business Combination.

Pursuant to the Registration Rights Agreement, the Sponsor agreed to restrictions on the transfer of its securities issued in the Company’s initial public offering, which (i) in the case of the Founder Shares is one year after the completion of the Business Combination unless (A) the closing price of the common stock equals or exceeds $ 12.00 per share for 20 days out of any 30 -trading-day period commencing at least 150 days following the Closing of the Business Combination or (B) the Company completes a liquidation, merger, capital stock exchange, reorganization or other similar transaction that results in all of the Company’s stockholders having the right to exchange their shares of common stock for cash, securities or other property, and (ii) in the case of the Private Placement Warrants and the respective Class A Common Stock underlying the Private Placement Warrants is 30 days after the completion of the Business Combination.

The Sponsor and its permitted transferees will also be required, subject to the terms and conditions in the Registration Rights Agreement, not to transfer their Private Placement Warrants (as defined in the Registration Rights Agreement) or shares of common stock issuable upon the exercise thereof for 30 days following the Closing.

Lock-Up Agreement

In connection with the consummation of the Business Combination, on May 4, 2021, the Company, the Sponsor and the HydraFacial Stockholders entered into a Lock-Up Agreement, pursuant to which the HydraFacial Stockholders agreed, subject to certain exceptions, not to sell, transfer to another or otherwise dispose of, in whole or in part, the Common Stock held by the HydraFacial Stockholders during the period commencing from the closing of the Business Combination and through the earlier of (i) the 180-day anniversary of the date of the closing of the Business Combination and (ii) the date after the closing of the Business Combination on which the Company consummates certain transactions involving a change of control of the Company

Investor Rights Agreement

4 unchanged sentences

Amended and Restated Management Services Agreement

Table of Con tents

Hydrafacial entered into a Management Services Agreement, dated December 1, 2016 with Linden Capital Partners III LP (“Linden Capital Partners III”) and DW Management Services, L.L.C.

7 unchanged sentences

The Company has also agreed to reimburse Linden Manager for certain expenses in connection with such advisory services.

However, pursuant to the Linden Management Services Agreement, the Company’s obligation to pay the 1 % Fee expires twelve months after the consummation of the Business Combination.

HydraFacial recorded approximately $ 0.2 million, $ 1.8 million and $ 1.8 million of charges related to management services fees for th e year ended December 31, 2021, 2020 and 2019, respectively.

These amounts are included in General and administrative expenses on the Company’s Consolidated Statements of Comprehensive Loss.

There were no amounts due to these related parties at December 31, 2021, 2020 and 2019 .

However, pursuant to the Linden Management Services Agreement, the Company’s obligation to pay the 1 % Fee expired twelve months after the consummation of the Business Combination on May 4, 2022.

Hydrafacial recorded approximately $ 0.2 million of charges related to management services fees for th e year ended December 31, 2021.

There were no management fees during the year ended December 31, 2022.

These amounts are included in General and administrative expenses on the Company’s Consolidated Statements of Comprehensive Income (Loss).

In relation to the consummation of the Business Combination, $ 21.0 million in transaction fees was paid to the Former Parent.

These amounts are included in General and administrative expenses on the Company’s Consolidated Statements of Comprehensive Loss.

Former Related Party Note Receivable

HydraFacial issued shares to a key member of management in exchange for a note receivable with a $ 0.6 million face value.

Interest on the note accrues at a rate of 8 % and matures in December 2022.

Interest receivable is presented as a component of other assets on the Company’s Consolidated Balance Sheets.

As there was no intent for the issuer to pay the note within a reasonably short period of time, HydraFacial has presented the note as a deduction of stockholders’ deficit.

In connection with the consummation of the Business Combination, the outstanding note receivable amount was settled .

Former Long-term Debt Due to Related Parties

On April 10, 2020, the Company’s existing Credit Agreement with a bank that is also a related party was amended to include a “PIK” interest component of 2 % that accrues on the outstanding balances of the Term Loan and Revolver.

Additionally, the Company is required to pay an early prepayment fee of 2.00 % of the amount prepaid or repaid on the Term Loan prior to April 10, 2021, and 1.00 % if prepaid between April 11, 2021 and April 10, 2022 .

I n connection with the consummation of the Business Combination, all outstanding debt was paid.

As of December 31, 2021 , there was no amount due to related parties in connection with the Term Loan and Revolver .

On April 10, 2020, HydraFacial also entered into a second credit facility with a related party to provide for borrowings of $ 30.0 million (the “Term A Loan”).

In connection with the consummation of the Business Combination, all outstanding debt was paid.

As of December 31, 2021 , there was no amount due to a related parties in connection with the Term A Loan and related PIK Interest.

Related Party Leases

Signal Hill Office

HydraFacial leases its office in Signal Hill, California, from an entity owned by former minority stockholders of HydraFacial who are no longer active employees.

Lease expense under this lease was $ 0.4 million, $ 0.3 million and $ 0.5 million for the year ended December 31, 2021, 2020 and 2019, respectively.

Table of Con tents

These amounts are included in General and administrative expenses on the Company’s Consolidated Statements of Comprehensive Income (Loss).

Miami Beach Office

The Company maintains an office in Miami Beach, Florida, whereby the Company, on a monthly basis, reimburses an entity owned by the Company’s Executive Chairman that makes such office available to the Company for its employees and affiliates.

Sales to Related Parties

HydraFacial sells to a customer that is owned directly or indirectly by a former key member of management.

Sales for this related party and the outstanding accounts receivable balance are as follows for the periods indicated:

Year Ended December 31,

(in thousands) 2021 2020 2019

Sales to related party $ 551 $ 337 $ 351

(in thousands) December 31, 2021 December 31, 2020

Accounts receivable due from related party $ 394 $ 250

Note 17 - Stockholders’ Deficit

For the year ended December 31, 2022, the Company maintained an office in Miami Beach, Florida, whereby the Company, on a monthly basis, reimbursed an entity owned by the Company’s Executive Chairman that makes such office available to the Company for its employees and affiliates.

Expense for this property was not material for the year ended December 31, 2022.

No such expenses existed for the year ended December 31, 2021 .

Note 17 - Stockholders’ Equity

The Company is authorized to issue 320,000,000 shares of Class A Common Stock, par value of $ 0.0001 per share.

Holders of Class A Common Stock are entitled to one vote for each share.

As of December 31, 2021, 2020 and 2019, there were 150,598,047 , 35,501,743 and 32,136,203 , respectively, of Class A Common Stock issued and outstanding.

The Class A Common Stock is entitled t o one vote pe r share and all shares are outstanding.

As of December 31, 2022 and December 31, 2021, there were 132,214,695 and 150,598,047 , respectively, of Class A Common Stock issued and outstanding.

The Company has not declared or paid any dividends with respect to its Class A Common Stock .

1 unchanged sentence

The Company also issued 35,501,743 shares of Class A Common Stock as partial compensation to the Hydrafacial stockholders for the Business Combination.

Common Stock Repurchases

On September 26, 2022, the Company’s board of directors approved a common stock repurchase program pursuant to which the Company may repurchase up to $ 200 million of its outstanding shares of Class A Common Stock.

Under the share repurchase program, repurchases can be made from time to time using a variety of methods, which may include open market purchases, privately negotiated transactions, or accelerated share repurchase programs.

The Company entered into two accelerated share repurchase agreements on September 27, 2022 and November 9, 2022, respectively, with a financial institution to repurchase a total of $ 200 million of Class A Common Stock.

On September 27, 2022 and November 9, 2022, the Company made a payment of $ 100 million and $ 100 million, respectively, and received initial deliveries of approximately 7.7 million shares and 9.5 million shares, respectively, which represented 80 % of the payment amount divided by the Company’s closing stock price on those respective dates.

Under the September 27, 2022 accelerated share repurchase agreement, the Company received a final settlement of 1.6 million shares on December 16, 2022, which was based upon the average daily volume weighted average price of the Company’s Class A Common Stock during the repurchase period, less agreed upon discount.

The final settlement of the November 9, 2022 accelerated share repurchase agreement is expected to occur no later than June 30, 2023.

The accelerated share repurchase agreements are accounted for as a repurchases and retirements of shares and as equity forward contracts indexed to the Company’s Class A Common Stock.

The equity forward contracts are classified as equity instruments under ASC 815-40, Contracts in Entity's Own Equity .

The par value of the initial shares received is recorded as a reduction to the Company’s Class A Common Stock and the excess of par value is recognized as a reduction to additional paid in capital.

The equity forward stock purchase contracts are classified as equity instruments and are recognized as a reduction to additional paid in capital.

The initial deliveries of 7.7 million shares and 9.5 million shares under the accelerated share repurchase agreements as well as the final settlement of shares reduced the number of Class A Common Stock outstanding on the transaction date and, as a result, reduced the weighted average number of shares of Class A Common Stock outstanding used to calculate basic income per share and diluted income per share for the year ended December 31, 2022.

The Company performed analysis of the average of the daily volume-weighted average price of our Class A Common Stock since the transaction dates and has determined, as of December 31, 2022, that the potential final settlement of shares of Class A Common Stock under the November 9, 2022 accelerated share repurchase agreement is anti-dilutive and therefore excluded from the calculation of diluted earnings per share.

Preferred Stock

The Company is authorized to issue 1,000,000 shares of preferred stock with a par value of $ 0.0001 per share with such designations, voting and other rights and preferences as may be determined from time to time by the Company’s board of directors.

At December 31, 2021, 2020 and 2019, there were no shares of preferred stock issued or outstanding.

At December 31, 2022 and December 31, 2021 , there were no shares of preferred stock issued or outstanding.

Note 18 - Segment Reporting

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Total net sales $ 365,876 $ 260,086 $ 119,092

Table of Con tents

As of December 31, 2021 and 2020 substantially all of the Company’s property, plant and equipment was held in the United States.

Note 19 – Net Loss Attributable to Common Shareholders

Net loss attributable to common stockholders is computed by deducting both the dividend distributions declared in the period on preferred stock and the dividends accumulated for the period on cumulative preferred stock from net loss (“Basic EPS”).

Diluted net loss per share (“Diluted EPS”) is computed by dividing net loss attributable to common stockholders by the total of the weighted average common stock outstanding shares outstanding during the period.

The Conversion Option in the Notes may be settled by Physical Settlement, Cash Settlement or Combination Settlement at the Company’s option.

Pursuant to ASC 260-10-45-40 (as amended by ASU 2020-06), the if-converted method generally must be used to determine the effect a convertible instrument has on diluted EPS unless the two-class method would be more dilutive.

Because the Company has net losses for all periods presented, the impact of the Conversion Option would be anti-dilutive and, as a result, has not had an impact on the Diluted EPS calculation.

Diluted EPS for the years ended December 31, 2021, 2020 and 2019, exclude the dilutive effect of stock option shares because their inclusion would be anti-dilutive for all periods.

The following table sets forth the calculation of both basic and diluted net loss per share as follows for the periods indicated:

As of December 31, 2022 and December 31, 2021 substantially all of the Company’s property and equipment were held in the United States.

Note 19 – Net Income (Loss) Attributable to Common Stockholders

The following table sets forth the calculation of both basic and diluted net income (loss) per share as follows for the periods indicated:

Year Ended December 31,

(in thousands, except share and per share amounts) 2022 2021 2020

Basic and diluted loss per share:

Net income (loss) available to common stockholders - basic

$ 44,384 $ ( 375,108 ) $ ( 29,175 )

Shares used in computation:

Weighted average common shares outstanding

Income on Private placement warrants ( 78,343 ) — —

Net loss available to common stockholders - diluted $ ( 33,959 ) $ ( 375,108 ) $ ( 29,175 )

Weighted average common shares outstanding - basic

147,554,090 102,114,949 34,293,271

Basic and diluted loss per share:

Effect of dilutive shares:

Private placement warrants 952,222 — —

Weighted average common shares outstanding - diluted 148,506,312 102,114,949 34,293,271

Basic net income (loss) per share:

$ 0.30 $ ( 3.67 ) $ ( 0.85 )

The following shares have been excluded from the calculation of the weighted average diluted shares outstanding as the effect would have been anti-dilutive:

December 31, 2021 December 31, 2020 December 31, 2019

Diluted net income (loss) per share $ ( 0.23 ) $ ( 3.67 ) $ ( 0.85 )

The following shares have been excluded from the calculation of the weighted average diluted shares outstanding as the effect would have been anti-dilutive or requisite performance conditions were not met:

Year Ended December 31,

2022 2021 2020

Convertible Notes 23,614,425 23,614,425 —

RSUs 2,580,152 380,775 —

PSUs 2,500,126 975,000 —

Stock Options 5,601,770 6,785,020 542

RSUs and PSUs 1,355,775 — —

Private warrants 6,970,000 — —

Convertible Note Securities 23,614,425 — —

The Company performed analysis of the average of the daily volume-weighted average price of our Class A Common Stock since the transaction date and has determined, as of December 31, 2022, that the potential final settlement of shares of Class A Common Stock under the November 9, 2022 accelerated share repurchase agreement is anti-dilutive and therefore excluded from the calculation of diluted earnings per share.

Note 20 – Subsequent Events

Other than as disclosed elsewhere, no subsequent events have occurred that would require recognition in the consolidated financial statements or disclosure in the accompanying notes.

Table of Con tents

Stock Purchase Agreement - Esthetic Medical Inc.

On February 27, 2023, Edge Systems Intermediate, LLC, an indirect, wholly-owned subsidiary of the Company, entered into a Stock Purchase Agreement with Dr.

Lawrence Groop, Kristin Groop, and Esthetic Education, LLC.

Pursuant to the Stock Purchase Agreement, Edge Systems Intermediate, LLC will purchase all of the outstanding shares of Esthetic Medical Inc.

in exchange for a total consideration of $ 16.3 million, which includes stock equal to $ 1.3 million in the form of Class A common stock of the Company, at par value, and a cash payment equal to $ 15.0 million, which is inclusive of the payment of up to an additional $ 3.2 million in contingent consideration based upon the achievement of certain conditions as described in the Stock Purchase Agreement.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

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 8. Financial Statements and Supplementary Data