Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 1 – ORGANIZATION AND SUMMARY OF KEY ACCOUNTING POLICIES
AirSculpt Technologies, Inc. (“AirSculpt” or the "Company"), was formed as a Delaware corporation on June 30, 2021. On October 28, 2021, AirSculpt completed an initial public offering (“IPO”) of 8,050,000 shares of common stock at an initial public offering price of $11.00 per share. Immediately following the IPO, AirSculpt’s total outstanding shares were 55,640,154. Pursuant to a reorganization (the “Reorganization”) among entities under common control immediately prior to the IPO, AirSculpt became a holding company with its principal asset being 100% of the ownership interests in EBS Intermediate Parent LLC. The Company’s revenues are concentrated in the specialty, minimally invasive liposuction market. The operations of the Company prior to the IPO represent the predecessor to AirSculpt. The Company and its consolidated subsidiaries are referred to collectively in this Quarterly Report on Form 10-Q (“10-Q Report”) as “we,” “our,” and “us.” Solely for convenience, some of the copyrights, trade names and trademarks referred to in this 10-Q Report are listed without their ©, ® and ™ symbols, but we will assert, to the fullest extent under applicable law, our rights to our copyrights, trade names and trademarks.
The Company, through its wholly-owned subsidiaries, is a provider of practice management services to professional associations (“PAs”) located throughout the United States. The Company owns and operates non-clinical assets and provides its management services to the PAs through management services agreements (“MSAs”). Management services provide for the administration of the non-clinical aspects of the medical operations and include, but are not limited to, financial, administrative, technical, marketing, and personnel services. Pursuant to the MSA, the PA is responsible for all clinical aspects of the medical operations of the practice.
Principles of Consolidation
These consolidated financial statements present the financial position and results of operations of the Company, its wholly-owned subsidiaries, and the PAs, which are under the control of the Company and are considered variable interest entities in which the Company is the primary beneficiary.
All intercompany accounts and transactions have been eliminated in consolidation.
Variable Interest Entities
The Company has a variable interest in the managed PAs where it has a long-term and unilateral controlling financial interest over such PAs’ assets and operations. The Company has the ability to direct the activities that most significantly affect the PAs’ economic performance via the MSAs and related agreements. The Company is a practice management service organization and does not engage in the practice of medicine. These services are provided by licensed professionals at each of the PAs. Certain key features of the MSAs and related agreements enable the Company to assign the member interests of certain of the PAs to another member designated by the Company (i.e., “nominee shareholder”) for a nominal value in certain circumstances at the Company’s sole discretion. The MSA does not allow the Company to be involved in, or provide guidance on, the clinical operations of the PAs. The Company consolidates the PAs into the financial statements. All of the Company’s revenue is earned from services provided by the PAs. The only assets and liabilities held by the PAs included in the accompanying consolidated balance sheets are clinical related. The clinical assets and liabilities are not material to the Company as a whole.
Basis of Presentation
The condensed consolidated balance sheet as of March 31, 2022, and the condensed consolidated statements of operations, member’s/stockholders' equity, and cash flows for the three months ended March 31, 2022 and 2021 are unaudited. The unaudited condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and reflect, in the opinion of management, all adjustments of a normal and recurring nature that are necessary for the fair statement of the Company’s financial position as of March 31, 2022 and the results of operations and cash flows for the three months ended March 31, 2022 and 2021. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. The financial data and the other financial information disclosed in these notes to the condensed consolidated financial statements related to the three months ended March 31, 2022 and 2021 are also unaudited. The consolidated results of operations for the three
months ended March 31, 2022 are not necessarily indicative of results to be expected for the year ending December 31, 2022 or for any other future annual or interim period.
The condensed consolidated balance sheet as of December 31, 2021 is derived from the Company’s annual audited consolidated financial statements for the year ended December 31, 2021, which should be read in conjunction with these condensed consolidated financial statements and which are included in the Company’s Annual Report dated March 11, 2022 filed with the Securities and Exchange Commission (“SEC”) pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, as well as interests in PAs controlled by the Company through rights granted to the Company by contract to manage and control the affiliate’s business (as described in “Variable Interest Entities” above). All significant intercompany balances and transactions are eliminated in consolidation.
Revenue Recognition
Revenue consists primarily of revenue earned for the provision of the Company’s patented AirSculpt® procedures. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account for revenue recognition. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The Company’s performance obligations are delivery of specialty, minimally invasive liposuction services.
The Company assists patients, as needed, by providing third-party financing options to pay for procedures. The Company has arrangements with various financing companies to facilitate this option. There is a financing transaction fee based on a set percentage of the amount financed and the Company recognizes revenue based on the expected transaction price which is reduced for financing fees.
Revenue for services is recognized when the service is performed. Payment is typically rendered in advance of the service. Customer contracts generally do not include more than one performance obligation.
The Company’s policy is to require payment for services in advance. Payments received for services that have yet to be performed as of March 31, 2022 and December 31, 2021 are included in deferred revenue and patient deposits.
Deferred Financing Costs, Net
Loan costs and discounts are capitalized in the period in which they are incurred and amortized on the straight-line basis over the term of the respective financing agreement which approximates the effective interest method. These costs are included as a reduction of long-term debt on the condensed consolidated balance sheets. Total amortization of deferred financing costs was approximately $0.2 million and $0.1 million for the three months ended March 31, 2022 and 2021, respectively. Amortization of loan costs and discounts is included as a component of interest expense.
Long-Lived Assets
The Company accounts for impairment of long-lived assets in accordance with the provisions of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 350, Intangibles – Goodwill and Other. This standard requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-lived assets to be held and used is measured by a comparison of the carrying amount of an asset to future estimated cash flows expected to arise as a direct result of the use and eventual disposition of the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less costs to sell. No impairment charges were recognized for the three months ended March 31, 2022 and 2021.
Fair Value
ASC Topic 820, Fair Value Measurements and Disclosures, defines fair value, establishes a framework for measuring fair value in accordance with accounting principles generally accepted in the United States, and expands disclosure requirements about fair value measurements.
ASC Topic 820 defines three categories for the classification and measurement of assets and liabilities carried at fair value:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market-based inputs or observable inputs that are corroborated by market data.
Level 3: Unobservable inputs reflecting the reporting entity’s own assumptions.
The fair value of financial instruments is generally estimated through the use of public market prices, quotes from financial institutions and other available information. Judgment is required in interpreting data to develop estimates of market value and, accordingly, amounts are not necessarily indicative of the amounts that could be realized in a current market exchange.
Short-term financial instruments, including cash, prepaid expenses and other current assets, accounts payable, and other liabilities, consist primarily of instruments without extended maturities, for which the fair value, based on management’s estimates, approximates their carrying values. Borrowings bear interest at what is estimated to be current market rates of interest, accordingly, carrying value approximates fair value.
Earnings Per Share
Basic earnings per share of common stock is computed by dividing net loss attributable to AirSculpt Technologies, Inc. for the three months ended March 31, 2022 by the weighted-average number of shares of common stock outstanding during the same period. Diluted earnings per share of common stock is computed by dividing net loss attributable to AirSculpt Technologies, Inc. for the three months ended March 31, 2022 by the weighted-average number of shares of common stock adjusted to give effect to potentially dilutive securities. Diluted loss per share for the three months ended March 31, 2022 is the same as basic loss per share as the inclusion of potentially dilutive shares would be antidilutive.
Prior to the IPO, the EBS Intermediate Parent, LLC structure included only LLC common units. As a result, the Company does not believe earnings per share to be a meaningful presentation in the accompanying condensed consolidated financial statements for the three months ended March 31, 2021.
Advertising Costs
Advertising costs are expensed in the period when the costs are incurred and are included as a component of selling, general and administrative costs. Advertising expenses were approximately $4.8 million and $2.5 million for the three months ended March 31, 2022 and 2021, respectively.
Income Taxes
Prior to the Reorganization, the Company was organized as a limited liability company and had elected to be treated as a partnership for federal and state income tax purposes. Accordingly, the tax consequences of the Company’s profits and losses were passed through to the members of the Company and were reported in their respective income tax returns. Therefore, historically no provision for income taxes has been provided in the accompanying condensed consolidated financial statements for periods prior to the Reorganization.
As a result of the Reorganization, the Company became subject to taxation as a C corporation for periods after October 28, 2021.
The Company applies the provisions of ASC 740-10, Accounting for Uncertain Tax Positions (“ASC 740-10”). Under these provisions, companies must determine and assess all material positions existing as of the reporting date, including all significant uncertain positions, for all tax years that are open to assessment or challenge under tax statutes. Additionally, those positions that have only timing consequences are analyzed and separated based on ASC 740-10’s recognition and measurement model.
ASC 740-10 provides guidance related to uncertain tax positions for pass-through entities and tax-exempt not-for profit entities. ASC 740-10 also modifies disclosure requirements related to uncertain tax positions for nonpublic entities and provides that all entities are subject to ASC 740-10 even if the only tax position in question is the entity’s status as a pass-through.
As required by the uncertain tax position guidance, the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the condensed consolidated financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. The Company applied the uncertain tax position guidance to all tax positions for which the statute of limitations remained open and determined that there are no uncertain tax positions as of March 31, 2022 or December 31, 2021. The Company is not subject to U.S. federal tax examination prior to 2021, when it was formed.
The Company has an effective tax rate of approximately 74.0% for the three months ended March 31, 2022, inclusive of all applicable U.S. federal and state income taxes. Prior to the Reorganization, the Company was not subject to federal taxation.
NOTE 2 – GOODWILL AND INTANGIBLES, NET
The annual review of goodwill impairment will be performed in October 2022. There were no triggering events during the three months ended March 31, 2022 and 2021.
The Company had goodwill of $81.7 million at March 31, 2022 and December 31, 2021.
Intangible assets consisted of the following at March 31, 2022 and December 31, 2021 (in 000’s):
| | | | | | | | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 | | Useful Life |
Technology and know-how | $ | 53,600 | | | $ | 53,600 | | | 15 years |
Trademarks and tradenames | 17,700 | | | 17,700 | | | 15 years |
| 71,300 | | | 71,300 | | | |
Accumulated amortization of technology and know-how | (12,506) | | | (11,613) | | | |
Accumulated amortization of tradenames and trademarks | (4,130) | | | (3,835) | | | |
Total intangible assets | $ | 54,664 | | | $ | 55,852 | | | |
Aggregate amortization expense on intangible assets was approximately $1.2 million for both of the three months ended March 31, 2022 and 2021.
NOTE 3 - PROPERTY AND EQUIPMENT, NET
As of March 31, 2022 and December 31, 2021 property and equipment consists of the following (in 000’s):
| | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
Medical equipment | $ | 4,452 | | | $ | 3,753 | |
Office and computer equipment | 236 | | | 207 | |
Furniture and fixtures | 2,364 | | | 1,976 | |
Leasehold improvements | 10,492 | | | 7,726 | |
Construction in progress | 3,363 | | | 2,873 | |
Less: Accumulated depreciation | (3,601) | | | (2,908) | |
Property and equipment, net | $ | 17,306 | | | $ | 13,627 | |
Depreciation expense was approximately $0.7 million and $0.3 million for the three months ended March 31, 2022 and 2021, respectively.
NOTE 4 – DEBT
In October 2018, the Company entered into a credit agreement (the “Credit Agreement”) with a lender. Under the terms of the Credit Agreement, we obtained a $34.0 million term loan. In May 2021, the Company amended the Credit Agreement
by adding an incremental $52.0 million senior secured term loan, resulting in an $84.1 million term loan in aggregate. The proceeds from this loan plus excess cash on the balance sheet were used to pay a distribution to EBS Parent, LLC (the "Parent") of approximately $59.7 million and the related fees for this transaction. Beginning on June 30, 2021, the quarterly principal payments increased from $100,000 to $212,500.
There were no changes in the terms of the Credit Agreement during the three months ended March 31, 2022.
Total borrowings as of March 31, 2022 and December 31, 2021 were as follows (in 000’s):
| | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
Term loan | $ | 84,050 | | | $ | 84,262 | |
Unamortized debt discounts and issuance costs | (1,450) | | | (1,657) | |
Total debt, net | 82,600 | | | 82,605 | |
Less: Current portion | (850) | | | (850) | |
Long-term debt, net | $ | 81,750 | | | $ | 81,755 | |
As of March 31, 2022, the Company had $5.0 million available on the revolving credit facility.
The scheduled future maturities of long-term debt as of March 31, 2022 is as follows (in 000’s):
| | | | | |
2022 | $ | 638 | |
2023 | 83,412 | |
| |
Total maturities | $ | 84,050 | |
All borrowings under the Credit Agreement are cross collateralized by substantially all assets of the Company and are subject to certain restrictive covenants including quarterly total leverage ratio, fixed charge ratio requirements and a limit on capital expenditures. The Company is in compliance with all covenants and has no letter of credit outstanding as of March 31, 2022.
NOTE 5 – LEASES
The Company’s operating leases are primarily for real estate, including medical office suites and corporate offices. For the three months ended March 31, 2022 and 2021, the Company incurred rent expense of $1.0 million and $0.8 million, respectively, for its medical office suites. The Company’s rent expense related to its medical office suites is classified in cost of services within the Company’s condensed consolidated statements of operations. The Company incurred rent expense of $45,000 and $22,000 for the three months ended March 31, 2022 and 2021, respectively, related to the corporate offices which is classified in selling, general and administrative expenses. The Company currently does not have any finance leases.
Real estate lease agreements typically have initial terms of five to ten years and may include one or more options to renew. The useful life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise. The Company’s lease agreements do not contain any material residual value guarantees, restrictions or covenants.
The following table presents supplemental cash flow information for the three months ended March 31, 2022 and 2021 (in 000’s):
| | | | | | | | | | | |
| March 31, 2022 | | March 31, 2021 |
Cash paid for amounts included in the measurement of lease liabilities: | | | |
Operating cash outflows from operating leases | $ | 978 | | | $ | 728 | |
Right-of-use assets obtained in exchange for lease obligations: | | | |
Operating leases | $ | 2,073 | | | $ | — | |
Future minimum rental payments under all non-cancellable operating lease agreements for the succeeding five years are as follows, excluding common area maintenance charges that may be required by the agreements (in 000’s):
| | | | | |
Year ended December 31, | |
| |
2022 (excluding the three months ended March 31, 2022) | $ | 3,170 | |
2023 | 4,278 | |
2024 | 4,179 | |
2025 | 4,150 | |
2026 | 3,737 | |
Thereafter | 4,530 | |
Total lease payments | 24,044 | |
Less: imputed interest | (4,890) | |
Total lease obligations | $ | 19,154 | |
NOTE 6 – STOCKHOLDERS' EQUITY AND EQUITY-BASED COMPENSATION
Subsequent to the IPO and Reorganization, AirSculpt established the 2021 Equity Incentive Plan. During the three months ended March 31, 2022, the Company granted 215,873 restricted stock units to executive officers and employees. These RSUs are not considered outstanding until vested. Vesting is subject to both time and performance conditions. Of the total restricted stock units granted 103,936 had market-based vesting conditions and 4,000 had performance-based conditions. The market vesting criteria is based on the Company’s actual performance and/or market condition results as compared to the targets. In addition to the achievement of the performance conditions, these PSUs are generally subject to the continuing service of the employee over the ratable vesting period from the earned date continuing through the settlement of the shares. For these PSUs, the shares settle in the first quarter of the year following the year in which the vesting criteria is met. The time-based and company performance vesting units fair values were determined based on the closing price of the Company’s common stock on the trading date immediately prior to the grant date. The fair values of restricted stock units with a market-based vesting condition were estimated using a Monte Carlo simulation model.
The Company recorded equity-based compensation expense of $7.3 million and $0.1 million for the three months ended March 31, 2022 and 2021, respectively, in selling, general and administrative expenses on the condensed consolidated statements of operations. Forfeitures are recognized as incurred.
The Company paid distributions to the Parent of approximately $0.3 million and $3.7 million for the three months ended March 31, 2022 and 2021, respectively.
NOTE 7 – EARNINGS PER SHARE
Basic earnings per share of common stock is computed by dividing net loss attributable to AirSculpt Technologies, Inc. for the three months ended March 31, 2022 by the weighted-average number of shares of common stock outstanding during the same period. Diluted earnings per share of common stock is computed by dividing net loss attributable to AirSculpt Technologies, Inc. for the three months ended March 31, 2022 by the weighted-average number of shares of common stock adjusted to give effect to potentially dilutive securities. Diluted loss per share for the three months ended March 31, 2022 is the same as basic loss per share as the inclusion of potentially dilutive shares would be antidilutive.
Prior to the IPO, the EBS Intermediate Parent, LLC structure included only LLC common units issued and outstanding to pre-IPO LLC members. The Company analyzed the calculation of earnings per unit for periods prior to the IPO and determined that it resulted in values that would not be meaningful to the users of these consolidated financial statements. Therefore, earnings per share information has not been presented for periods prior to the IPO on October 28, 2021.
A reconciliation of the numerator and denominator used in the calculation of basic and diluted net loss per share of common stock is as follows (in 000’s except for shares and per share figures):
| | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2022 | 2021 | | | |
Numerator: | | | | | |
Net loss | $ | (693) | | N/A | | | |
Denominator: | | | | | |
Weighted average shares of common stock outstanding - basic | 55,640,154 | | N/A | | | |
Add: Effect of dilutive securities | — | | N/A | | | |
Weighted average shares of common stock outstanding - diluted | 55,640,154 | | N/A | | | |
Loss per share of common stock outstanding - basic and diluted | $ | (0.01) | | N/A | | | |
The following number of potentially dilutive shares were excluded from the calculation of diluted loss per share because the effect of including such potentially dilutive shares would have been antidilutive.
| | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2022 | 2021 | | | |
Restricted stock units | 2,472,640 | | N/A | | | |
Performance and market-based stock units | 2,417,001 | | N/A | | | |
NOTE 8 – INCOME TAXES
As a result of the Reorganization, the Company became subject to taxation as a C corporation for periods after October 28, 2021. The Company's income tax expense/(benefit) for the three months ended March 31, 2022 was $(2.0) million, and the effective tax rates was 74.0%. The main driver of the difference between the effective and statutory rate is non-deductible executive compensation under Section 162(m) of the Internal Revenue Code. There are no uncertain tax positions as of March 31, 2022 or December 31, 2021.
NOTE 9 – RELATED PARTY TRANSACTIONS
The Company entered into a professional services agreements, effective October 2, 2018, with Vesey Street Capital Partners, LLC, JCBI II, LLC, and Dr. Aaron Rollins (collectively the “Advisors”), where the Advisors provided certain managerial and advisory services to the Company. Each of the Advisors had an ownership interest in the Parent. Under the professional services agreements, the Company agreed to pay the Advisors an aggregate annual fee (also referred to as the sponsor management fee) of the greater of $500,000 or 2% of consolidated earnings before interest, tax, depreciation and amortization, payable in advance quarterly installments, and the fee was allocated between the Advisors based on the outstanding Parent Class A Units held. Under the agreements, the Company also reimbursed the Advisors for any out-of-pocket expenses incurred related to providing their services. In conjunction with the IPO and Reorganization, the professional services agreements with the Advisors were terminated. During the three months ended March 31, 2021, the Company incurred sponsor management fees of approximately $125,000.
NOTE 10 – COMMITMENTS AND CONTINGENCIES
Professional Liability
In the ordinary course of business, the Company becomes involved in pending and threatened legal actions and proceedings, most of which involve claims of medical malpractice related to medical services provided by the PAs employed and affiliated physicians. The Company may also become subject to other lawsuits which could involve large claims and significant costs. The Company believes, based upon a review of pending actions and proceedings, that the outcome of such legal actions and proceedings will not have a material adverse effect on its business, financial condition, results of operations, and cash flows. The outcome of such actions and proceedings, however, cannot be predicted with certainty and an unfavorable resolution of one or more of them could have a material adverse effect on the Company’s business, financial condition, results of operations, and cash flows.
Although the Company currently maintains liability insurance coverage intended to cover professional liability and certain other claims, the Company cannot assure that its insurance coverage will be adequate to cover liabilities arising out of claims asserted against it in the future where the outcomes of such claims are unfavorable. Liabilities in excess of the Company’s insurance coverage, including coverage for professional liability and certain other claims, could have a material adverse effect on the Company’s business, financial condition, results of operations, and cash flows.
NOTE 11 – SEGMENT INFORMATION
The Company has one reportable segment: direct medical procedure services. This segment is made up of facilities and medical staff that provide the Company’s patented AirSculpt® procedures to patients. Segment information is presented in the same manner that the Company’s chief operating decision maker (“CODM”) reviews the operating results in assessing performance and allocating resources. The Company’s CODM is the Company’s chief executive and chief operating officers. This committee reviews financial information presented on a consolidated basis for purposes of making operating decisions, assessing financial performance and allocating resources. The Company’s CODM reviews revenue, gross profit and Adjusted EBITDA. Gross profit is defined as revenues less cost of service incurred and Adjusted EBITDA as net income/loss excluding depreciation and amortization, net interest expense, loss on debt modification, sponsor management fee, pre-opening de novo and relocation costs, restructuring and related severance costs, IPO related costs, and equity-based compensation.