SkinHealth Systems Inc. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following discussion should be read in conjunction with the consolidated financial statements and accompanying notes included in Part II, Item 8 of this Annual Report on Form 10-K. This section of this Annual Report on Form 10-K generally discusses 2022 and 2021 items and year-to-year comparisons between 2022 and 2021. Discussions of 2020 items and year-to-year comparisons between 2021 and 2020 are not included in this Annual Report on Form 10-K, and can be found in Part II, Item 7 of the Company’s Annual Report on Form 10-K filed on March 1, 2022 under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Company Overview The Beauty Health Company is a global category-creating company focused on delivering beauty health experiences that help consumers reinvent their relationship with their skin, bodies and self-confidence. Our flagship brand, Hydrafacial, created the category of hydradermabrasion by using a patented Vortex-Fusion Delivery System to cleanse, extract, and hydrate the skin with proprietary solutions and serums. Hydrafacial provides a non-invasive and approachable skincare experience. Together, with our powerful community of aestheticians, consumers and partners, we are personalizing skin care solutions for all ages, genders, skin tones, and skin types . Factors Affecting Our Performance We remain attentive to economic and geopolitical conditions that may materially impact our business. We continue to explore and implement risk mitigation strategies in the face of these unfolding conditions and remain agile in adopting to changing circumstances. Such conditions have or may have global implications which may impact the future performance of our business in unpredictable ways. Updates on Impact of the COVID-19 Pandemic The COVID-19 pandemic continues to disrupt business for us, our providers, and other companies with which we do business. Although many markets have recently shown encouraging signs of emergence from the pandemic, other markets and regions where we conduct business, particularly in China, have enacted sporadic and/or zero-tolerance COVID-19 policies during certain periods in 2022, leading to prolonged store closures and travel restrictions within those markets and regions. Although we had strong performance during windows of re-opening, these COVID-related restrictions continued to negatively impact consumer traffic for our providers. We anticipate that COVID-19 will continue to cause supply chain challenges and intermittent store closures in certain parts of the world. We are mindful that these trends may continue to impact the pace of recovery, and that such recovery may be non-linear until COVID-19 containment measures are discontinued across all regions and normal consumer traffic resumes on a consistent basis. We currently expect that in the short term, any easing of containment measures and recovery of the impacted sectors of the economy will be gradual and uneven, as regions face resurgence of COVID-19 and related uncertainties. As a result, we anticipate that consumer spending habits and consumer confidence will continue to shift, causing future sales and volume trends to be non-linear. Furthermore, the extent to which the COVID-19 pandemic impacts our business going forward will depend on numerous factors we cannot reliably predict, including but not limited to the duration and scope of the pandemic; businesses and individuals’ actions in response to the pandemic; government actions to certain pandemic impacts; and the impact on economic activity including the possibility of further financial market instability Inflation During the year ended December 31, 2022, we experienced the impact of inflation primarily as an increase to our costs for raw materials, shipping costs, and labor costs. We currently anticipate the impact of inflation to continue into the first quarter of 2023. To offset these trends, we plan to implement a range of mitigation strategies which could include price increases on our Delivery Systems and consumables, and/or accepting revenue in either U.S. dollar and/or local currency, as applicable. However, such measures may not fully offset the impact to our operating performance. After the resumption of more typical business conditions, the economics of developing, producing, launching, supporting and discontinuing products will continue to impact the timing of our sales and operating performance in each period. 64 Foreign Exchange Rates Our operations outside of the United States account for a portion of our revenues and expenses. As a result, a portion of our total revenue and expenses are denominated in currencies other than the U.S. dollar. During the second half of 2022, exchange rates between these currencies and the U.S. dollar have fluctuated significantly and may continue to do so in the future. Fluctuations in foreign exchange rates may have a significant impact on our operating results. During the year ended December 31, 2022, fluctuations in the U.S. dollar relative to certain other foreign currencies – such as the Chinese Renminbi, British pound, Euro, and Australian dollar – reduced our reported revenue and expenses, principally related to net sales, cost of sales, controllable fixed costs, and advertising and promotional costs. Global Supply Chain Issues During the year ended December 31, 2022, we experienced global supply chain challenges resulting from industry-wide component and/or raw material shortages and transportation delays. These challenges have negatively impacted order fill rates for our Delivery Systems and Consumables, particularly in certain European and Asian countries. We continue to take steps to improve order fill rates and mitigate the impact of these constraints by working closely with our suppliers to ensure the availability of components and/or raw materials such as procuring components with longer lead times than typical. We expect these challenges to continue through the first half of 2023. Regulation The FDA and foreign government authorities may, at any time, propose or implement new or additional regulations that could impact the products that we sell. Unforeseen regulatory obstacles or compliance costs may hinder our business in both the short and long-term as well. The uncertainty around the timing, speed, and duration of the recovery from the adverse impacts of the COVID-19 pandemic, including the impacts on our business of the ongoing restrictions in China, and the other macroeconomic challenges we are facing, will continue to affect our ability to grow sales profitably. We believe we can, to some extent, offset the impact of more ordinary challenges by continually developing and pursuing a diversified strategy with multiple engines of growth and by accelerating initiatives focused on areas of strength, discipline, and agility. As the current situation continues to progress, if economic and social conditions or the degree of uncertainty or volatility worsen, or the adverse conditions previously described are further prolonged, there could be a further negative effect on consumer confidence, demand, spending and willingness or ability to travel and, as a result, on our business. We are continuing to monitor these and other risks that may affect our business. Key Operational and Business Metrics In addition to the measures presented in our audited consolidated financial statements, we use the following key operational and business metrics to evaluate our business, measure our performance, develop financial forecasts, and make strategic decisions. Amounts and percentages may not foot due to rounding. Year Ended December 31, (Dollars in millions) 2022 2021 Delivery Systems net sales $ 206.2 $ 139.5 Consumables net sales 159.6 120.6 Total net sales $ 365.9 $ 260.1 Gross profit $ 250.3 $ 181.8 Gross margin 68.4% 69.9% Net income (loss) $ 44.4 $ (375.1) Adjusted net income $ 9.1 $ 4.5 Adjusted EBITDA $ 47.7 $ 32.7 Adjusted EBITDA margin 13.0% 12.6% Adjusted gross profit $ 267.2 $ 192.6 Adjusted gross margin 73.0% 74.1% 65 Adjusted Net Income (Loss), Adjusted EBITDA (Loss) and Adjusted EBITDA Margin Adjusted net income (loss), adjusted EBITDA (loss) and adjusted EBITDA margin are key performance measures that our management uses to assess our operating performance. See the section titled “ Non-GAAP Financial Measures—Adjusted Net Income, Adjusted EBITDA and Adjusted EBITDA Margin ” for information regarding our use of adjusted net income (loss) and adjusted EBITDA (loss) and reconciliations of adjusted net income (loss) and adjusted EBITDA (loss) to net income (loss). Adjusted Gross Profit and Adjusted Gross Margin We use adjusted gross profit and adjusted gross margin to measure our profitability and ability to scale and leverage the costs of our Delivery Systems and Consumables sales. See the section titled “ Non-GAAP Financial Measures—Adjusted Gross Profit and Adjusted Gross Margin ” for information regarding our use of adjusted gross profit and a reconciliation of adjusted gross profit to gross profit. Components of our Results of Operations Net Sales Net sales consists of the sale of products to retail and wholesale customers through e-commerce and distributor sales. Hydrafacial generates revenue through manufacturing and selling its Delivery Systems. In conjunction with the sale of Delivery Systems, Hydrafacial also sells its serum solutions and consumables (collectively “ Consumables ”). Original Consumables are sold solely and exclusively by Hydrafacial (and from authorized retailers) and are available for purchase separately from the purchase of Delivery Systems. For both Delivery Systems and Consumables, revenue is recognized upon transfer of control to the customer, which generally takes place at the point of shipment. Hydrafacial distributes products to customers both through national and international retailers as well as direct-to-consumers through its e-commerce and store channels. Hydrafacial sells to direct customers, including non-corporate customers (such as spas and dermatologist offices), corporate customers, and international distributors. For non-corporate customers, a contract exists when the customer initiates an order by submitting a purchase request. Such requests are accepted by Hydrafacial upon issuance of a corresponding invoice. For corporate customers, a contract exists when the customer submits a purchase order and it is accepted upon issuance of a subsequent invoice. For distributors, a customer submits an order request, which is then processed in the system by a sales representative. The request is considered accepted upon the subsequent issuance of an invoice by Hydrafacial. For all customers, each invoice is considered a separate contract for accounting purposes. Cost of Sales Hydrafacial’s cost of sales consists of Delivery Systems and Consumables product costs, including the cost of materials, labor costs, overhead, depreciation and amortization of developed technology, shipping and handling costs, and the costs associated with excess and obsolete inventory. As we launch new products and expand our presence internationally, we expect to incur higher cost of sales as a percentage of net sales because we have not yet achieved economies of scale for these items. Selling and Marketing Selling and marketing expense consists of personnel-related expenses, sales commissions, travel costs, training, and advertising expenses incurred in connection with the sale of our products. We intend to continue to invest in our sales and marketing capabilities in the future and expect this expense to increase in absolute dollars in future periods as we release new products, grow our global footprint, and drive consumer demand in the ecosystem. Selling and marketing expense as a percentage of net sales may fluctuate from period to period based on net sales, and the timing of our investments in our sales and marketing functions may vary in scope and scale over future periods. Research and Development Research and development expense primarily consists of personnel-related expenses, tooling and prototype materials, technology investments, and other expenses incurred in connection with the development of new products and internal technologies. We expect our research and development expenses to vary from period to period as a percentage of net sales, as Hydrafacial plans to continue to innovate and invest in new technologies and to enhance existing technologies to fuel future growth as a category creator. 66 General and Administrative General and administrative expenses include personnel-related expenses, professional fees, credit card and wire fees and facilities-related costs primarily for our executive, corporate affairs, finance, accounting, legal, human resources, and information technology (“IT”) functions. General and administrative expense also includes fees for professional services principally comprising legal, audit, tax and accounting services and insurance. We expect to continue to incur additional general and administrative expenses as a result of operating as a public company, including expenses related to compliance and reporting obligations of public companies, and increased costs for insurance, investor relations expenses and professional services. In addition, we expect to continue to incur additional IT expenses as we scale Hydrafacial and enhance our e-commerce, digital, and data utilization capabilities. As a result, we expect that our general and administrative expenses will increase in absolute dollars in future periods and vary from period to period as a percentage of net sales. 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. 67 Income Tax Provision (Benefit) The provision for income taxes consists primarily of income taxes related to federal, state and foreign jurisdictions in which we conduct business. Results of Operations The following tables set forth our consolidated results of operations in dollars and as a percentage of net sales for the periods presented. The period-to-period comparisons of our historical results are not necessarily indicative of the results that may be expected in the future. The results of operations data for the year ended December 31, 2022 and December 31, 2021 have been derived from the consolidated financial statements included elsewhere in this Annual Report on Form 10-K. Amounts and percentages may not foot due to rounding. Comparison of Year Ended December 31, 2022 to Year Ended December 31, 2021 Year Ended December 31, (Dollars in millions) 2022 % of Net Sales 2021 % of Net Sales Net sales $ 365.9 100.0 % $ 260.1 100.0 % Cost of sales 115.5 31.6 78.3 30.1 Gross profit 250.3 68.4 181.8 69.9 Operating expenses Selling and marketing 160.1 43.8 111.6 42.9 Research and development 8.4 2.3 8.2 3.2 General and administrative 106.1 29.0 98.7 37.9 Total operating expenses 274.6 75.1 218.5 84.0 Loss from operations (24.3) (6.6) (36.6) (14.1) Other (income) expense, net (69.3) (18.9) 340.7 131.0 Income (loss) before provision for income tax 45.0 12.3 (377.4) (145.1) Income tax expense (benefit) 0.6 0.2 (2.2) (0.9) Net income (loss) $ 44.4 12.1 % $ (375.1) (144.2) % Net Sales Year Ended December 31, Change (Dollars in millions) 2022 2021 Amount % Net sales Delivery Systems $ 206.2 $ 139.5 $ 66.7 47.9% Consumables 159.6 120.6 39.0 32.3% Total net sales $ 365.9 $ 260.1 $ 105.8 40.7% Percentage of net sales Delivery Systems 56.4% 53.6% Consumables 43.6% 46.4% Total 100.0% 100.0% Total net sales for the year ended December 31, 2022 increased $105.8 million, or 40.7%, compared to the year ended December 31, 2021. Delivery Systems sales for the year ended December 31, 2022 increased $66.7 million, or 47.9%, compared to the year ended December 31, 2021. Net sales for the year ended December 31, 2022 increased primarily due to strength in Delivery Systems sales around the globe including the new product launch of Syndeo. Consumables sales for the year ended December 31, 2022 increased $39.0 million, or 32.3%, compared to the year ended December 31, 2021. The increase in Consumables sales was primarily attributable to increased placements of Delivery Systems and the adjoining consumption of Consumables during the year ended December 31, 2022. 68 Cost of Sales, Gross Profit, and Gross Margin Year Ended December 31, Change (Dollars in millions) 2022 2021 Amount % Cost of sales $ 115.5 $ 78.3 $ 37.2 47.6% Gross profit $ 250.3 $ 181.8 $ 68.5 37.7% Gross margin 68.4 % 69.9 % Cost of sales increased by 47.6% driven by increased sales volume and increased product mix weighting toward Hydrafacial Delivery Systems. Gross margin decreased to 68.4% during the year ended December 31, 2022, driven by higher volume of trade-up Delivery Systems sold at promotional pricing from the new product launch, premium paid in manufacturing and shipping for the new IoT product, as well as global supply chain challenges, inflationary pressures and foreign exchange rates. Selling and Marketing Year Ended December 31, Change (Dollars in millions) 2022 2021 Amount % Selling and marketing $ 160.1 $ 111.6 $ 48.5 43.5 % As a percentage of net sales 43.8 % 42.9 % Selling and marketing expense for the year ended December 31, 2022 increased $48.5 million, or 43.5%, compared to the year ended December 31, 2021 primarily due to an increase in salaries and commissions of $27.5 million as we scale globally, and an increase of stock-based compensation expense of $6.9 million. Additionally, personnel-related training and travel expenses increased by $4.5 million due to the launch of Syndeo and advertising/promotional spend increased by $11.7 million due to investments in the Americas and EMEA in key tradeshows and other marketing programs. As a percentage of sales, the inefficiency or higher percentage of 2022 was partially driven by investments made in China, which did not generate significant revenue due to COVID closures. Research and Development Year Ended December 31, Change (Dollars in millions) 2022 2021 Amount % Research and development $ 8.4 $ 8.2 $ 0.2 3.0 % As a percentage of net sales 2.3 % 3.2 % Research and development expense for the year ended December 31, 2022 increased $0.2 million, or 3.0%, compared to the year ended December 31, 2021 primarily due to an increase in salaries and stock-based compensation expense attributable to research and development personnel of $3.0 million and $0.4 million, respectively. There was continued investment into our data infrastructure resulting in an increase of $1.3 million and a write-off of fixed assets of $0.5 million. These increases were offset by a $4.1 million decrease in Syndeo and Glow & Go research and development expenses. General and Administrative Year Ended December 31, Change (Dollars in millions) 2022 2021 Amount % General and administrative $ 106.1 $ 98.7 $ 7.4 7.5 % General and administrative expense for the year ended December 31, 2022 increased $7.4 million, or 7.5%, compared to the year ended December 31, 2021. The increases were attributable to a $9.6 million increase in stock-based compensation awards to executive team members during the year, $14.4 million in personnel-related expenses, $8.8 million in recruiting and other public company-related professional fees from system and SOX implementation and audit fees as we scale globally. The increase was also driven by a $2.9 million increase in legal fees due to litigation cost as we vigorously protect our IP, $1.2 million in directors’ and officers’ insurance as a public company, credit card and bank fees of $1.4 million due to sales growth, and losses on disposal of tangible and intangible assets of $4.7 million as we replace software and write-off certain unused equipment from distributor acquisitions. These were offset by a decrease in transaction costs of $31.2 million related to the consummation of the Business Combination. 69 Interest expense Year Ended December 31, Change (Dollars in millions) 2022 2021 Amount % Interest expense, net $ 13.4 $ 11.8 $ 1.6 13.7 % Interest expense during the year ended December 31, 2022 was related to the $750 million in convertible senior notes compared to the year ended December 31, 2021 in which interest expense was primarily related to borrowings on the company’s term loans and revolving line of credit. The term loan and revolving line of credit were extinguished in May 2021 in connection with the closing of the Business Combination. Interest income Year Ended December 31, Change (Dollars in millions) 2022 2021 Amount % Interest income $ (9.2) $ — $ (9.2) 23425.6 % The Company earned $9.2 million in interest income from its money market accounts for a full year in 2022 compared to two months in 2021. Change in fair value of warrant liabilities Year Ended December 31, Change (Dollars in millions) 2022 2021 Amount % Change in fair value of warrant liabilities $ (78.3) $ 277.3 $ (355.6) (128.3) % During the year ended December 31, 2022, the Company recognized income of $78.3 million due to the change in the fair value of the warrant liabilities versus a $277.3 million expense for year ended December 31, 2021 primarily driven by the fluctuation of the Company’s stock price. Change in fair value of earn-out shares liability Year Ended December 31, Change (Dollars in millions) 2022 2021 Amount % Change in fair value of earn-out shares liability $ — $ 47.1 $ (47.1) (100.0) % During the year ended December 31, 2021 the Company recognized a $47.1 million expense for the change in the fair value of the earn-out shares liability. There was no recurring expense related to the earn out shares, as the liability was paid off during the year ended December 31, 2021. Foreign currency transaction loss, net Year Ended December 31, Change (Dollars in millions) 2022 2021 Amount % Foreign currency transaction loss, net $ 3.2 $ 0.1 $ 3.1 4485.5 % The foreign currency loss increased in 2022 because of the overall weakening of the British Pound and Euro during 2022 relative to the US Dollar. Transaction amounts due to the Company for purchases of inventory by its subsidiaries are remeasured on each balance sheet date. Income Tax Provision Year Ended December 31, Change (Dollars in millions) 2022 2021 Amount % Income tax expense (benefit) $ 0.6 $ (2.2) $ 2.8 (128.9) % Income tax expense increased primarily due to an increase in valuation allowance and various non-deductible expenses, which include the revaluation of the warrants and contingent considerations from the business acquisitions increasing the effective tax rate of the expense from 0.6% for the year ended December 31, 2021 to 1.5% for the year ended December 31, 2022. 70 Liquidity and Capital Resources Our primary sources of capital have been (i) cash flow from operating activities, (ii) net proceeds received from the consummation of the Business Combination, (iii) net proceeds received from the Notes (as defined below), and (iv) net proceeds received from the exercise of Public and Private Placement Warrants. As of December 31, 2022 , we had cash and cash equivalents of approximately $568.2 million. A revolving credit facility of $50 million is also available to us as a source of capital. As of December 31, 2022, the revolving credit facility remains undrawn and there is no outstanding balance thereunder. Our operating cash flows result primarily from cash received from sales of Delivery Systems and Consumables, offset primarily by cash payments made for products and services, employee compensation, payment processing and related transaction costs, operating leases, marketing expenses, and interest payments on our long-term obligations. Cash received from our customers and other activities generally corresponds to our net sales. Our sources of liquidity and cash flows are used to fund ongoing operations, research and development projects for new products, services, and technologies, and provide ongoing support services for our providers and customers. Over the next year, we anticipate that we will use our liquidity and cash flows from our operations to fund our growth. In addition, as part of our business strategy, we occasionally evaluate potential acquisitions of businesses and products and technologies. Accordingly, a portion of our available cash may be used at any time for the acquisition of complementary products, services, or businesses. Such potential transactions may require substantial capital resources, which may require us to seek additional debt or equity financing. We cannot assure you that we will be able to successfully identify suitable acquisition candidates, complete acquisitions, integrate acquired businesses into our current operations, or expand into new markets. Furthermore, we cannot provide assurances that additional financing will be available to us in any required time frame and on commercially reasonable terms, if at all. Capital expenditures for the year ending December 31, 2022 were $17.4 million. Based on our sources of capital (including the cash consideration received from the consummation of the Business Combination and the cash received from the issuance of the Notes), management believes that we have sufficient liquidity to satisfy our anticipated working capital requirements for our ongoing operations and obligations for at least the next 12 months. However, we will continue to evaluate our capital expenditure needs based upon factors including but not limited to our rate of revenue growth, potential acquisitions, the timing and amount of spending on research and development, growth in sales and marketing activities, the timing of new product launches, timing and investments needed for international expansion, the continuing market acceptance of the Company’s products and services, expansion, and overall economic conditions. If cash generated from operations is insufficient to satisfy our capital requirements, we may have to sell additional equity or debt securities or obtain expanded credit facilities to fund our operating expenses. The sale of additional equity would result in additional dilution to our stockholders. Also, the incurrence of additional debt financing would result in debt service obligations and the instruments governing such debt could provide for operating and financing covenants that would restrict our operations. In the event such additional capital is needed in the future, there can be no assurance that such capital will be available to us, or, if available, that it will be in amounts and on terms acceptable to us. If we cannot raise additional funds when we need or want them, our operations and prospects could be negatively affected. However, if cash flows from operations become insufficient to continue operations at the current level, and if no additional capital were obtained, then management would restructure the Company in a way to preserve our business while maintaining expenses within operating cash flows. Amended and Restated Credit Agreement On November 14, 2022, the Company, as successor by assumption to Hydrafacial, entered into an Amended and Restated Credit Agreement (as it may be further amended, restated, supplemented or modified from time to time, the “Credit Agreement”) with JPMorgan Chase Bank, N.A. (the “Administrative Agent”). The Initial Borrower and the Administrative Agent were party to that certain Credit Agreement, dated as of December 30, 2021 (the “Original Credit Agreement”). The Company, Hydrafacial, the other loan parties thereto, the lenders party thereto, and the Administrative Agent agreed to amend and restate the Original Credit Agreement in order to (i) extend the maturity date with respect to the existing revolving credit facility under the Original Credit Agreement to November 14, 2027, (ii) re-evidence the “Obligations” under, and as defined in, the Original Credit Agreement, which shall be repayable in accordance with the terms of the Credit Agreement, (iii) set forth the terms and conditions under which the lenders will, from time to time, make loans and extend other financial accommodations to or for the benefit of the Company (iv) transition from LIBOR to the secured overnight financing rate (SOFR), (vi) provide that the Company shall assume all of the rights and “Obligations” of Hydrafacial under, and as each such term is defined in, the Original Credit Agreement, and (vii) provide that Hydrafacial shall be released and discharged solely 71 from the obligations of the “Borrower” under, and as defined in, the Original Credit Agreement, and shall be a subsidiary guarantor and a loan party thereunder. The Credit Agreement provides for a $50 million revolving credit facility with a maturity date of November 14, 2027. In addition, the Borrower has the ability from time to time to increase the revolving commitments or enter into one or more tranches of term loans up to an additional aggregate amount not to exceed $50 million, subject to receipt of lender commitments and certain conditions precedent. Borrowings under the Credit Agreement are secured by certain collateral of the loan parties and are guaranteed by all of the Company’s domestic subsidiaries, each of which will derive substantial benefit from the revolving credit facility. In specified circumstances, additional guarantors are required to be added. The Amended and Restated Credit Agreement contains various restrictive covenants subject to certain exceptions, including limitations on the Company’s ability to incur indebtedness and certain liens, make certain investments, become liable under contingent obligations in certain circumstances, make certain restricted payments, make certain dispositions within guidelines and limits, engage in certain affiliate transactions, alter its fundamental business or make certain fundamental changes, and requirements to maintain financial covenants, including maintaining a leverage ratio of no greater than 3.00 to 1.00 and maintaining a fixed charge coverage ratio of not less than 1.15 to 1.00. The leverage ratio also determines pricing under the Credit Agreement. At the Company’s option, borrowings under the revolving credit facility accrue interest at a rate equal to either Term SOFR Rate or a specified base rate plus an applicable margin. The applicable margin is linked to the leverage ratio. The margins range from 1.50% to 2.00% per annum for Term SOFR Rate loans and 0.50% to 1.00% per annum for base rate loans. The revolving credit facility is subject to a commitment fee payable on the unused revolving credit facility commitments ranging from 0.25% to 0.35%, depending on the Borrower’s leverage ratio. The Borrower is also required to pay certain fees to the Administrative Agent and letter of credit issuers under the revolving credit facility. During the term of the revolving credit facility, the Company may borrow, repay, and re-borrow amounts available under the revolving credit facility, subject to voluntary reductions of the swing line, letter of credit, and revolving credit commitments. In addition, the Credit Agreement includes events (including, without limitation, a non-payment under the loan, a breach of warranties and representations in any material respect, non-compliance with covenants by a loan party, cross-default for payment defaults and cross-acceleration for other defaults under material debt or a change of control) which, if not cured within the time period specified, if any, would constitute an event of default. Upon the occurrence of such events of default, the Borrower could not request borrowings and the lenders may elect to accelerate the outstanding principal and accrued and unpaid interest under the revolving credit facility. Further, outstanding principal and accrued and unpaid interest thereon automatically accelerate upon the entry of an order for relief with respect to any loan party under any bankruptcy, insolvency or other similar law. Convertible Senior Notes On September 14, 2021, we issued $750 million aggregate principal amount of 1.25% Convertible Senior Notes due 2026 (the “Notes”) in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”). The Notes were issued pursuant to, and are governed by, an indenture, dated as of September 14, 2021, between the Company and U.S. Bank National Association, as trustee. The Notes accrue interest at a rate of 1.25% per annum, payable semi-annually in arrears on April 1 and October 1 of each year, which began on April 1, 2022. The Notes will mature on October 1, 2026, unless earlier repurchased, redeemed or converted. Before April 1, 2026, noteholders have the right to convert their Notes only upon the occurrence of certain events. From and after April 1, 2026, noteholders may convert their Notes at any time at their election until the close of business on the second scheduled trading day immediately before the maturity date. We will settle conversions by paying or delivering, as applicable, cash, shares of our Class A Common Stock or a combination of cash and shares of our Class A Common Stock, at our election. The initial conversion rate is 31.4859 shares of Class A Common Stock per $1,000 principal amount of Notes, which represents an initial conversion price of approximately $31.76 per share of Class A Common Stock. We used $90.2 million of the net proceeds from the sale of the Notes to fund the cost of entering into capped call transactions (described below). The net proceeds from the issuance of the Notes were approximately $638.7 million, net of capped call transaction costs of $90.2 million and debt issuance costs totaling $21.3 million. See Note 10 – Long-term Debt , to the Notes to the Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for additional information. Capped Call Transactions Capped call transactions cover the aggregate number of shares of our Class A Common Stock that will initially underlie the Notes, and generally reduce potential dilution to our outstanding Class A Common Stock upon any conversion of Notes and/or 72 offset any cash payments we may make in excess of the principal amount of the converted Notes, as the case may be, with such reduction and/or offset subject to a cap, based on the cap price of the capped call transactions. See Note 2 – Summary of Significant Accounting Policies, to the Notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for additional information. Known Trends or Uncertainties The majority of our customers are providers within the medical industry (dermatologists, plastic surgeons, and medical spas), aesthetician, and beauty retail industry (spas, hotels, and other retailers). Although we have not seen any significant reduction in revenues to date due to consolidations, we have seen some consolidation in our industry during economic downturns. These consolidations have not had a negative effect on our total sales; however, should consolidations and downsizing in the industry continue to occur, or occur at an increased rate, those events could adversely impact our revenues and earnings going forward. Furthermore, during the year ended December 31, 2022, we have experienced global supply chain disruptions and a significant inflationary impact, including higher interest rates and capital costs, increased shipping costs, supply shortages, increased costs of labor, and a strengthened U.S. dollar. In particular, we have seen increased costs associated with our global operations in foreign countries as a result of weakening exchange rates, as our international sales are primarily denominated in the local currency of such foreign country. Also, as a result of the invasion of Ukraine by Russia, we stopped selling and shipping products to our distributor in Russia, which has negatively impacted our overall net sales in the EMEA region. These impacts have created headwinds for sales of our products and profits that we expect to continue through the first half of 2023. In addition, the extent to which the uncertainty around the timing, speed and recovery from the adverse impacts of the COVID-19 pandemic impacts our business going forward will depend on numerous factors that we cannot reliably predict, including further governmental actions in the countries in which we operate, such as China enacting sporadic and/or zero-tolerance COVID-19 policies in 2022, and the other macro challenges we face, as well as the impact of any governmental actions on the economy, including the possibility of recession or financial market instability. These factors may adversely impact consumer, business, and government spending as well as customers’ ability to pay for our products and services on an ongoing basis. As a result, if economic and social conditions or the degree of uncertainty or volatility worsen, or the adverse conditions previously described are further prolonged, our growth rate could be affected by increased consolidation and downsizing in the medical, aesthetician, and beauty retail industry. We are continuing to monitor these and other risks that may affect our business so that we can respond appropriately. Contractual Obligations and Other Commercial Commitments As of December 31, 2022, our material contractual obligations were approximately $37.5 million in interest-only payments related to the Notes of $750 million, the Notes of $750 million, and $17.6 million in lease obligations. The following table discloses our material cash requirements as of December 31, 2022. In regards to future capital expenditures, we intend to use cash-on-hand and cash from operations to help satisfy future requirements. Payments Due by Fiscal Period (Dollars in millions) Total Less Than 1 Year 1-3 years 3-5 Years More than 5 Years Notes and interest on the Notes (1) $ 787.6 $ 9.4 $ 18.8 $ 759.4 $ — Operating leases 19.3 5.4 6.3 2.5 5.1 Total contractual obligations $ 806.9 $ 14.8 $ 25.1 $ 761.9 $ 5.1 (1) The Notes will mature on October 1, 2026 and are due either in cash or shares of the Company’s Class A Common Stock. From and after April 1, 2026, noteholders may convert their Notes into shares of Class A Common Stock until the close of business on the second scheduled trading day immediately before the maturity date. 73 Cash Flows The following table summarizes the activities from our statements of cash flows. Amounts may not foot due to rounding. Year Ended December 31, (Dollars in millions) 2022 2021 Cash and cash equivalents at beginning of period $ 901.9 $ 9.5 Operating activities: Net income (loss) 44.4 (375.1) Non-cash adjustments (10.7) 365.4 Changes in working capital (140.3) (18.7) Net cash flows (used in) provided by operating activities (106.6) (28.4) Net cash flows (used in) provided by investing activities (18.9) (37.7) Net cash flows (used in) provided by financing activities (205.2) 959.0 Net change in cash and cash equivalents (330.7) 892.9 Effect of foreign currency translation (3.0) (0.5) Cash and cash equivalents at end of period $ 568.2 $ 901.9 Operating Activities Net cash used in operating activities of $106.6 million for the year ended December 31, 2022 was primarily due to investment in inventory in relation to the global launch of Syndeo, the current generation Delivery System, combined with a corresponding shift in the average collection period of receivables related to increased payment plan participation on Delivery Systems globally, as well as continued investments globally in people and systems to fuel future growth. The net income of $44.4 million was driven by non-cash adjustments of $10.7 million, with the largest adjustment being the fair value adjustment to warrant liabilities. The decrease in working capital of $140.3 million was primarily due to the increase in accounts receivable of $32.0 million and the increase in inventory of $82.1 million. Net cash used in operating activities of $28.4 million for the year ended December 31, 2021 was primarily due to an increase in accounts receivable of $31.0 million. The net loss of $375.1 million was driven by non-cash adjustments of $365.4 million, primarily related to fair value adjustments to earn-out shares and warrant liabilities, and a decrease in working capital of $18.7 million. Investing Activities Net cash used in investing activities for the year ended December 31, 2022 of $18.9 million was primarily related to $10.8 million in capital expenditures for property and equipment, $1.5 million in capital expenditures for the asset acquisition of The Personalized Beauty Company, Inc. (“Mxt”) and related developed technology, and $6.5 million in capitalized software. Net cash used in investing activities for the year ended December 31, 2021 of $37.7 million was primarily related to our business acquisitions of distributors in Australia, Germany, Mexico, and France with cash paid of $22.9 million, net of cash acquired, $11.2 million in capital expenditures and $4.4 million in capitalized software. Financing Activities Net cash used in financing activities for the year ended December 31, 2022 was $205.2 million of which $200.0 million was used in relation to the accelerated share repurchase program and $4.3 million in relation to the distributor acquisitions of Wigmore Medical France (“Wigmore”), Ecomedic GmbH (“Ecomedic”) and Sistemas Dermatologicos Internacionales (“Sidermica”). The Company did not withdraw from the line of credit and there were no transactions related to the Public Warrants and Private Placement Warrants during the year ended December 31, 2022. Net cash from financing activities of $959.0 million for the year ended December 31, 2021 was primarily related to proceeds received from the issuance of convertible senior notes and the Business Combination. The proceeds were offset by the payoff of long-term debt of $225.5 million and costs from our issuance of convertible senior notes. 74 Critical Accounting Policies and Estimates Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with GAAP. In preparing the consolidated financial statements, we make estimates and judgments that affect the reported amounts of assets, liabilities, stockholders’ equity, revenue, expenses, and related disclosures. We re-evaluate our estimates on an on-going basis. Our estimates are based on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Because of the uncertainty inherent in these matters, actual results may differ from these estimates and could differ based upon other assumptions or conditions. The critical accounting policies that reflect our more significant judgments and estimates used in the preparation of our consolidated financial statements include those noted below. Revenue Recognition Management’s Policy : We elected to 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 our 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, we determine the amount of revenue to be recognized through application of the following steps: • Identify the customer contract; • Identify the performance obligations in the contract; • Determine the transaction price; • Allocate the transaction price to the performance obligations in the contract; and • Recognize revenue as the performance obligations are satisfied. Subjective Estimates and Judgements : The determination of the reduction of the transaction price for noncash consideration received related to the Company’s trade-in program requires that we make certain estimates and assumptions that affect the timing and amounts of revenue recognized. We estimate the noncash consideration based on the Company’s historical experience of reselling refurbished Delivery Systems. As a result, the noncash consideration represents the estimated selling price, less the cost to refurbish the inventory and the expected margin to be earned on the refurbishment, along with the expected margin to be earned on the selling effort. Impact if Actual Results Differ from Estimates and Judgements : If the actual selling price of the refurbished Delivery Systems are lower or higher than the estimated reselling price, the difference would result in an increase or decrease of net sales in the periods the refurbished Delivery Systems are sold. Stock-Based Compensation Management’s Policy : We measure and recognize compensation expenses for stock options, restricted stock units (“RSUs”), and performance stock units (“PSUs”) to employees on a straight-line basis over the vesting period based on their grant date fair values. Subjective Estimates and Judgements : We estimate the fair value of stock options on the date of grant using the Black-Scholes option pricing model and the fair value of PSUs on the date of grant using a Monte Carlo simulation. The fair value of the RSUs is based on the closing price of our common stock on the grant date. Impact if Actual Results Differ from Estimates and Judgements : If key inputs differ, the fair value of stock options and PSUs will be impacted. A higher fair value of the stock options and PSUs will result in higher share-based compensation expense over the vesting period of the grants and a lower fair value of the options will result in an reduction of share-based compensation expense over the vesting period. Intangible Assets Management’s Policy : Intangible assets are composed of developed technology, customer relationships and trademarks. At initial recognition, intangible assets acquired in a business combination are recognized at their fair value as of the date of acquisition. Following initial recognition, intangible assets are carried at cost less accumulated amortization and impairment 75 losses, if any, and are amortized on a straight-line basis over the estimated useful life of the asset. If the assets have an indefinite life, these assets are assessed for impairment annually. Subjective Estimates and Judgements : We assess the impairment of intangible assets whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If necessary, we will use an industry accepted valuation model to estimate the fair value of the intangible assets. The fair value calculation requires significant judgments in determining both the assets’ estimated cash flows and potentially the appropriate discount and royalty rates applied to those cash flows to determine fair value. Variations in economic conditions or a change in general consumer demands, operating results estimates or the application of alternative assumptions could produce significantly different results. If these assumptions differ materially from future results, we may record impairment charges in the future. Impact if Actual Results Differ from Estimates and Judgements : Changes in qualitative factors assessed, changes to assumptions used in the impairment test, selection and weighting of the various fair value techniques, and downturns in economic or business conditions, could have a significant adverse impact on the carrying value of intangible assets and could result in impairment losses which could have a material impact on our financial condition and earnings. Inventories Management’s Policy : Inventories are stated at the lower of cost (determined by the first-in, first-out method) or net realizable value. Subjective Estimates and Judgements : Obsolete inventory or inventory in excess of management’s estimated usage is written-down to its estimated net realizable value. Inherent in the net realizable value are management’s estimates related to economic trends, future demand for products, and technological obsolescence of our products. Impact if Actual Results Differ from Estimates and Judgements : If the assumptions around future demand for our inventory are more optimistic than actual future results, the net realizable value calculated using these assumptions may be overstated, resulting in an overstatement of the inventory balance. Income Taxes Management’s Policy : We use the asset-and-liability method for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between the consolidated financial statement carrying amounts and tax bases of assets and liabilities and operating loss and tax credit carryforwards and are measured using the enacted tax rates that are expected to be in effect when the differences reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Subjective Estimates and Judgements : Valuation allowances are established when necessary to reduce deferred tax assets to an amount that, in the opinion of management, is more likely than not to be realized. Significant judgement is required to determine if a valuation allowance is needed. As of December 31, 2022, we incurred cumulative pre-tax losses, and as a result, we do not rely on our projections as a source of income that would give us the ability to realize our deferred tax assets. In order to determine the realizability of our deferred income tax assets, we have pointed to the reversal of our taxable temporary differences as a source of income that will result in the realization of our deferred income tax assets. During the year ended December 31, 2020, and due to the pre-tax loss recorded, we began to accrue for a valuation allowance for the portion of deferred income tax assets that will not be realized through the reversal of taxable temporary differences. Our policy for accounting for uncertainty in income taxes requires the evaluation of tax positions taken or expected to be taken in the course of the preparation of tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold would be recorded as a tax expense in the current year. Reevaluation of tax positions considers factors such as changes in facts or circumstances, changes in or interpretations of tax law, effectively settled issues under audit or expiration of statute of limitation and new audit activity. We recognized interest accrued and penalties related to unrecognized tax benefits in our income tax expense. Impact if Actual Results Differ from Estimates and Judgments : Although management believes that the judgments and estimates used are reasonable, should actual factors and conditions differ materially from those considered by management, the actual realization of the net deferred tax asset and tax positions taken could differ materially from the amounts recorded in the 76 financial statements. If we are not able to realize all or part of our net deferred tax asset in the future or if a tax position is overturned by a taxing authority, an adjustment to the deferred tax asset valuation allowance would be charged to income tax expense in the period such determination was made which could have a material impact on our earnings. Warrant Liabilities Management’s Policy : We classify the Public and Private Placement Warrants (“Warrant liabilities”) as liabilities on our Consolidated Balance Sheets as these instruments are precluded from being indexed to our own stock given the terms allow for a settlement adjustment that does not meet the scope of the fixed-for-fixed exception in ASC 815, Derivatives and Hedging . The Warrant liabilities were initially recorded at fair value on the date of the Business Combination and at each reporting date thereafter. There were no Public Warrants outstanding as of December 31, 2022. The value of the Private Placement Warrants was determined at year end using the Monte Carlo simulation model. Changes in the fair value of these instruments are recognized within the Consolidated Statements of Comprehensive Income Loss. Subjective Estimates and Judgements : The valuation technique requires assumptions and judgement around the inputs to be used. Specifically, there is a high degree of subjectivity and judgement in evaluating the determination of the expected share price volatility inputs used in the Monte Carlo model for the warrant derivative liability. Historical, implied, and peer group volatility levels provide a range of possible expected volatility inputs and the fair value estimates are sensitive to the expected volatility inputs. Impact if Actual Results Differ from Estimates and Judgments : Changes around share price volatility and assumptions and inputs used in the Monte Carlo model can result in an increase or decrease in fair value which can substantially impact the outstanding liability and the change in fair value of warrant liabilities in the Consolidated Statements of Comprehensive Loss. Recent Accounting Pronouncements See Note 2 - Summary of Significant Accounting Policies to the Notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for a discussion about new accounting pronouncements adopted and not yet adopted. Non-GAAP Financial Measures In addition to our results determined in accordance with accounting principles generally accepted in the United States of America (GAAP), management utilizes certain non-GAAP performance measures, adjusted net income (loss), adjusted EBITDA (loss), adjusted EBITDA margin, adjusted gross profit, and adjusted gross margin, for purposes of evaluating our ongoing operations and for internal planning and forecasting purposes. We believe that these non-GAAP operating measures, when reviewed collectively with our GAAP financial information, provide useful supplemental information to investors in assessing our operating performance. Adjusted Net Income, Adjusted EBITDA and Adjusted EBITDA Margin Adjusted net income (loss), adjusted EBITDA and adjusted EBITDA margin are key performance measures that we use to assess our operating performance. Because adjusted net income (loss), adjusted EBITDA and adjusted EBITDA margin facilitate internal comparisons of our historical operating performance on a more consistent basis, we use these measures for business planning purposes. We also believe this information will be useful for investors to facilitate comparisons of our operating performance and better identify trends in our business. We expect adjusted EBITDA margin to increase over the long-term as we continue to scale our business and achieve greater operating leverage. We calculate adjusted net income (loss) as net income (loss) adjusted to exclude: change in fair value of the Public Warrants and Private Placement Warrants, change in fair value of earn-out shares liability, other expense (income), net; amortization expense; stock-based compensation expense; management fees incurred from our historical private equity owners; one-time or non-recurring items such as transaction costs (including transactions costs with respect to the Business Combination); restructuring costs (including those associated with COVID-19) and the aggregate adjustment for income taxes for the tax effect of the adjustments described above. 77 We calculate adjusted EBITDA as net income (loss) adjusted to exclude: change in fair value of the Public Warrants and Private Placement Warrants, change in fair value of earn-out shares liability, other expense (income), net; interest expense; income tax benefit (expense); depreciation and amortization expense; stock-based compensation expense; foreign currency (gain) loss; management fees incurred from our historical private equity owners; one-time or non-recurring items such as transaction costs (including transactions costs with respect to the Business Combination); and restructuring costs (including those associated with COVID-19). The following table reconciles our net income (loss) to adjusted net income (loss) and adjusted EBITDA for the periods indicated: Year ended December 31, Unaudited (Dollars in thousands) 2022 2021 Net income (loss) $ 44,384 $ (375,108) Adjusted to exclude the following: Change in fair value of warrant liability (78,343) 277,315 Change in fair value of earn-out shares liability — 47,100 Amortization expense 15,709 13,297 Loss on disposal of assets 5,239 — Stock-based compensation expense 28,495 12,418 Interest income (9,175) (39) Other expense, net 1,650 4,489 Management fees (1) — 209 Transaction related costs (2) 3,051 34,913 Non-recurring patent litigation fees 3,797 — Re-organization fees (3) 3,582 1,997 Other non-recurring and one-time fees (4) 4,905 2,020 Aggregate adjustment for income taxes (14,187) (14,133) Adjusted net income $ 9,107 $ 4,478 Depreciation expense 7,164 4,486 Interest expense 13,392 11,777 Foreign currency (gain) loss, net 3,164 69 Remaining benefit for income taxes $ 14,835 $ 11,891 Adjusted EBITDA $ 47,662 $ 32,701 Adjusted EBITDA margin 13.0% 12.6% _______________ (1) Represents quarterly management fees paid to the majority stockholder of Hydrafacial based on a pre-determined formula. Following the Business Combination, these fees are no longer paid. (2) For the year ended December 31, 2022, such amounts primarily represent direct costs incurred in relation to potential acquisitions. For the year ended December 31, 2021, such amounts primarily represent direct costs incurred with the Business Combination and to prepare Hydrafacial to be marketed for sale by Hydrafacial’s shareholders in previous periods. (3) For the year ended December 31, 2022, such costs primarily represent executing recruiting fees, severance fees and a CEO sign-on bonus. For the year ended December 31, 2021, such costs primarily represent executive recruiting and severance fees. (4) For the year ended December 31, 2022, such costs primarily represent costs associated with Syndeo’s US launch and international launch readiness, including premiums paid on accelerated manufacturing and shipping, and refinancing costs associated with our credit agreement. For the year ended December 31, 2021, such costs primarily represent one-time retention awards related to the distributor acquisitions. Adjusted Gross Profit and Adjusted Gross Margin We use adjusted gross profit and adjusted gross margin to measure profitability and the ability to scale and leverage the costs of Delivery Systems and Consumables. The continued growth of Delivery Systems is expected to improve adjusted gross margin, as additional Delivery Systems sold will increase our recurring Consumables net sales, which has higher margins. We believe adjusted gross profit and adjusted gross margin are useful measures to us and to our investors to assist in evaluating our operating performance because they provide consistency and direct comparability with past financial 78 performance and between fiscal periods, as the metric eliminates the effects of amortization and depreciation and stock-based compensation expense, which are non-cash expenses that may fluctuate for reasons unrelated to overall continuing operating performance. Adjusted gross margin has been and will continue to be affected by a variety of factors, including the product mix, geographic mix, direct vs. indirect mix, the average selling price on Delivery Systems, and new product launches. We expect our adjusted gross margin to fluctuate over time depending on the factors described above. The following table reconciles gross profit to adjusted gross profit for the periods indicated. Amounts and percentages may not foot due to rounding: Year Ended December 31, (Dollars in thousands) 2022 2021 Net sales $ 365,876 $ 260,086 Cost of sales 115,536 78,259 Gross profit $ 250,340 $ 181,827 Gross margin 68.4 % 69.9 % Adjusted to exclude the following: Write-off of discontinued product (1) $ 2,048 $ — Non-recurring Syndeo initial program logistics and service costs 2,400 — Stock-based compensation expense included in cost of sales 839 405 Depreciation and amortization expense included in cost of sales 11,576 10,398 Adjusted gross profit $ 267,203 $ 192,630 Adjusted gross margin 73.0 % 74.1 % ___________________ (1) For the year ended December 31, 2022, such amount represents a one-time write-off primarily related to the discontinued Glow & Go pilot program.