AIRSCULPT TECHNOLOGIES, INC. Management's Discussion and Analysis of Financial Condition and Resultsof Operations (form 10-Q)

AIRS

The following discussion and analysis of our financial condition and results of operations should be read together with our financial statements and related notes and other financial information appearing in our Prospectus dated October 28, 2021 filed with the Securities and Exchange Commission ("SEC") pursuant to Rule 424(b) of the Securities Act of 1933. This discussion and analysis contains forward-looking statements that involve risk, uncertainties and assumptions. See the section entitled "Cautionary Note Regarding Forward-Looking Statements" in this Quarterly Report on Form 10-Q. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of many factors, including those discussed in "Risk Factors" and elsewhere in this Quarterly Report on Form 10-Q.

Unless otherwise indicated or the context otherwise requires, references in this Quarterly Report on Form 10-Q to the "Company," "Elite Body Sculpture," "we," "us" and "our" refer to EBS Intermediate Parent LLC and its consolidated subsidiaries and the Professional Associations.

Overview

Elite Body Sculpture is an experienced, fast-growing national provider of body contouring procedures delivering a premium consumer experience. We provide custom body contouring using our proprietary AirSculpt® procedure that removes unwanted fat in a minimally invasive procedure, producing dramatic results. In November 2021, we opened two new centers in Miami Beach, FL and Salt Lake City, UT. We now deliver our AirSculpt® procedures through a growing nationwide footprint of 18 centers across 14 states as of December 2, 2021.

For the three and nine months ended September 30, 2021, we performed 2,743 and 8,165 cases, respectively. For the three and nine months ended September 30, 2021, we generated approximately $34.7 million and $95.8 million of revenue, respectively, compared to $17.8 million and $39.9 million for the three and nine months ended September 30, 2020, respectively. This represents approximately 94% growth for the three months ended September 30, 2021 over the same period in prior year and approximately 140% growth for the nine months ended September 30, 2021 over the same period in prior year.

Key Operational and Business Metrics

In addition to the measures presented in our condensed 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:

Three months ended September 30, 2021 and 2020

? Cases performed were 2,743 and 1,710 in 2021 and 2020, respectively;

? Revenue per case was $12,632 and $10,431 in 2021 and 2020, respectively;

? Same-center cases performed were 2,174 and 1,674 in 2021 and 2020,

respectively;

? Same-center revenue per case was $12,519 and $10,408 in 2021 and 2020,

respectively;

? Net income was $8.1 million and $2.9 million in 2021 and 2020, respectively;

? Adjusted EBITDA was $12.1 million and $5.3 million in 2021 and 2020,

respectively; and

? Adjusted EBITDA Margin was 35.0% and 29.9% in 2021 and 2020, respectively.

Nine months ended September 30, 2021 and 2020

? Cases performed were 8,165 and 3,879 in 2021 and 2020, respectively;

? Revenue per case was $11,728 and $10,292 in 2021 and 2020, respectively;

? Same-center cases performed were 6,733 and 3,843 in 2021 and 2020,

respectively;

? Same-center revenue per case was $11,591 and $10,281 in 2021 and 2020,

respectively;

? Net income was $24.7 million and $2.0 million in 2021 and 2020, respectively;

? Adjusted EBITDA was $35.9 million and $9.4 million in 2021 and 2020,

respectively; and

? Adjusted EBITDA Margin was 37.5% and 23.5% in 2021 and 2020, respectively.

Cases Performed and Revenue per Case

Our case volumes in the table below, which are used for calculating revenue per case, represent one patient visit; notwithstanding that, a patient may incur multiple procedures during one visit. We believe this provides the best approach for assessing our revenue performance and trends.

Total Case and Revenue Metrics

For the three months ended September 30, 2021 and 2020, we define same-center case and revenue growth as the growth in each of our cases and revenue at facilities that have been owned and operated since July 1, 2020. We define same-center facilities and procedure rooms as facilities and procedure rooms that have been owned or operated since July 1, 2020.

For the nine months ended September 30, 2021 and 2020, we define same-center case and revenue growth as the growth in each of our cases and revenue at facilities that have been owned and operated since January 1, 2020. We define same-center facilities and procedure rooms as facilities and procedure rooms that have been owned or operated since January 1, 2020.

Same-Center Case and Revenue Metrics

Non-GAAP Financial Measures-Adjusted EBITDA and Adjusted EBITDA Margin

We report our financial results in accordance with GAAP, however, management believes the evaluation of our ongoing operating results may be enhanced by a presentation of Adjusted EBITDA and Adjusted EBITDA Margin, which are non-GAAP financial measures.

We define Adjusted EBITDA as net income 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, and unit-based compensation. We include Adjusted EBITDA because it is an important measure on which our management assesses and believes investors should assess our operating performance. We consider Adjusted EBITDA to be an important measure because it helps illustrate underlying trends in our business and our historical operating performance on a more consistent basis. Adjusted EBITDA has limitations as an analytical tool including: (i) Adjusted EBITDA does not include results from unit-based compensation and (ii) Adjusted EBITDA does not reflect interest expense on our debt or the cash requirements necessary to service interest or principal payments. Adjusted EBITDA increased 127% between the three months ended September 30, 2021 and 2020 and 283% between the nine months ended September 30, 2021 and 2020 due to organic growth, opening de novo centers and the 2020 period being negatively impacted by the COVID-19 pandemic.

We define Adjusted EBITDA Margin as net income 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, and unit-based compensation calculated as a percentage of revenue. We included Adjusted EBITDA Margin because it is an important measure on which our management assesses and believes investors should assess our operating performance. We consider Adjusted EBITDA Margin to be an important measure because it helps illustrate underlying trends in our business and our historical operating performance on a more consistent basis. Adjusted EBITDA Margin increased to 35.0% for the three months ended September 30, 2021 compared to 29.9% for the three months ended September 30, 2020 and to 37.5% for the nine months ended September 30, 2021 compared to 23.5% for the nine months ended September 30, 2020, due to organic growth.

The following table reconciles Adjusted EBITDA and Adjusted EBITDA Margin to net income (loss), the most directly comparable GAAP financial measure:

The COVID-19 global pandemic has significantly affected our centers, employees, customers, communities, business operations and financial performance, as well as the U.S. economy and financial markets. The COVID-19 pandemic materially impacted our financial performance for the year ended December 31, 2020. Through the first nine months of 2021, we have not experienced a negative impact at our centers; however, we continue to monitor the current COVID-19 situation in each market we perform procedures and will react accordingly should events require us to temporarily close.

Our operating structure also allows for some flexibility in the cost structure according to the volume of cases performed, including much of our cost of services. As a result of this flexibility and the return of volumes in the second half of the year, we did not request or receive any proceeds from the CARES Act and other governmental assistance programs. Other than the temporary decrease in revenue and cost of service, we did not incur any significant costs attributable to the pandemic.

Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020

The following tables summarize certain results from the statements of income for each of the periods indicated and the changes between periods. The tables also show the percentage relationship to revenue for the periods indicated:

Selling, general and administrative 11,980 34.6 % 6,199 34.8 % Depreciation and amortization

Overview-Our financial results for the three months ended September 30, 2021 compared to the three months ended September 30, 2020 reflect the addition of three de novo centers which increased our procedure rooms by six.

Revenue-Our revenue increased $16.8 million, or 94.3%, compared to the same period in 2020. The increase is the result of adding three de novo centers which expanded our footprint from 13 centers to 16 centers and our number of procedure rooms from 21 to 27 as of September 30, 2021.

Revenue also increased due to our same-center case volume, which increased to 2,174 cases from 1,674 cases for the three months ended September 30, 2021 compared to the same period in 2020. This increase was primarily due to continued growth at our existing centers as we continue to increase our social media and marketing capabilities to drive our brand awareness and increase consumer acceptance for our procedures.

Cost of Service-Our cost of services increased $4.7 million, or 68.8%, compared to the three months ended September 30, 2020. This increase is primarily attributable to opening three de novo centers. The increase in our cost of service also relates to the increase in our same center volumes and revenue. Cost of service was 32.9% and 37.9% as a percentage of revenue for the three months ended September 30, 2021 and 2020, respectively. This decrease is due to leveraging certain fixed costs, such as rent at our facilities, as well as improved efficiencies with our clinical staff.

Selling, General and Administrative Expenses-Selling, general and administrative expenses increased $5.8 million, or 93.3%, for the three months ended September 30, 2021 compared to the same period in 2020. This increase is related to additional expenses we incurred for marketing and corporate support as we grow our center count through de novo expansion and providing support for our centers. We expect these costs to continue to increase as we continue to open de novo centers and expand the support we provide to our centers. Selling, general and administrative expenses as a percent of revenue remained relatively consistent at 34.6% and 34.8% for the three months ended September 30, 2021 and 2020, respectively.

Selling expenses consist of advertising spend for social, digital and traditional marketing and sales and marketing personnel. Total selling expenses were approximately $6.0 million and $2.6 million for the three months ended September 30, 2021 and 2020, respectively. We intend to continue investing in our sales and marketing capabilities and expect these costs to increase on an absolute dollar basis. Additionally, selling expenses as a percentage of revenue may fluctuate from quarter to quarter based on the timing and scope of our investments.

General and administrative expenses include employee-related expenses, including salaries and related costs (excluding physician and clinical cost included in cost of service), unit-based compensation, technology, operations, finance, legal, corporate office rent and human resources. General and administrative expense were approximately $6.0 million and $3.6 million for the three months ended September 30, 2021 and 2020, respectively. We expect our general and administrative expenses to increase over time in absolute dollars following the closing of our IPO due to the additional legal, accounting, insurance, investor relations and other costs that we will incur as a public company.

Depreciation and Amortization-Depreciation and amortization increased to approximately $1.6 million for the three months ended September 30, 2021 compared to $1.4 million for the same period in 2020. This increase is the result of opening three de novo centers during the 12 months ended September 30, 2021 and having a full three months of depreciation in 2021 for facilities opened during the 2020 period.

Interest Expense, net-Interest expense increased to $1.6 million from $0.5 million for the three months ended September 30, 2021 and 2020, respectively. The increase is the result of adding an incremental $52.0 million of senior secured term loans in May 2021.

Pro Forma Income Tax Expense-As a result of the Reorganization, the Company became subject to taxation as a C corporation for periods after October 28, 2021. Our pro forma effective tax rate is 24.0% and 17.0% for the three months ended September 30, 2021 and 2020, respectively.

Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020

The following tables summarize certain results from the statements of income for each of the periods indicated and the changes between periods. The tables also show the percentage relationship to revenue for the periods indicated:

Overview- Our financial results for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 reflect the addition of three de novo centers which increased our procedure rooms by six. Additionally, our 2020 results were more negatively impacted by the COVID-19 pandemic. Beginning in March 2020, as a result of federal, state, and local guidelines, we cancelled or postponed most procedures scheduled at our facilities during the second half of March 2020, much of the second quarter and a portion of the third quarter of 2020. As a result, case volumes and revenue across most of our centers were significantly impacted during the nine months ended September 30, 2020. For the nine months ended September 30, 2021, we have continued to experience improved case volumes.

Revenue-Our revenue increased $55.8 million, or 139.9%, compared to the same period in 2020. The increase is the result of adding three de novo centers which expanded our footprint from 13 centers to 16 centers and our number of procedure rooms from 21 to 27 as of September 30, 2021.

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Revenue also increased due to our same-center case volume, which increased to 6,733 cases from 3,843 cases for the nine months ended September 30, 2021 compared to the same period in 2020. This increase was primarily due to the lessening effect of the COVID-19 pandemic which decreased case volume primarily in the second and third quarters of 2020. Further, the increase is partially due to our continued investment in social media and marketing capabilities to drive our brand awareness and increase consumer acceptance for our procedures.

Cost of Service-Our cost of service increased $15.6 million, or 98.5%, compared to the nine months ended September 30, 2020. This increase is primarily attributable to opening three de novo centers. The increase in our cost of service also relates to the increase in our same center volume and revenue which was due to the lessening effect of the COVID-19 pandemic during the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020. Cost of service was 32.9% and 39.7% as a percentage of revenue for the nine months ended September 30, 2021 and 2020, respectively. This decrease is due to leveraging certain fixed costs, such as rent at our facilities, as well as improved efficiencies with our clinical staff.

Selling, General and Administrative Expenses-Selling, general and administrative expenses increased $14.8 million, or 91.9%, for the nine months ended September 30, 2021 compared to the same period in 2020. This increase is related to additional expenses we incurred for marketing and corporate support as we grow our center count through de novo expansion and providing support for our centers. We expect these costs to continue to increase as we continue to open de novo centers and expand the support we provide to our centers. Selling, general and administrative expenses as a percent of revenue were 32.3% and 40.4% for the nine months ended September 30, 2021 and 2020, respectively. This decline was due to leveraging some of our fixed general and administrative costs discussed further below.

Selling expenses consist of advertising spend for social, digital and traditional marketing and sales and marketing personnel. Total selling expenses were approximately $13.5 million and $6.3 million for the nine months ended September 30, 2021 and 2020, respectively. We intend to continue investing in our sales and marketing capabilities and expect these costs to increase on an absolute dollar basis. Additionally, selling expenses as a percentage of revenue may fluctuate from quarter to quarter based on the timing and scope of our investments.

General and administrative expenses include employee-related expenses, including salaries and related costs (excluding physician and clinical cost included in cost of service), unit-based compensation, technology, operations, finance, legal, corporate office rent and human resources. General and administrative expense were approximately $17.4 million and $9.8 million for the nine months ended September 30, 2021 and 2020, respectively. We expect our general and administrative expenses to increase over time in absolute dollars following the closing of our IPO due to the additional legal, accounting, insurance, investor relations and other costs that we will incur as a public company.

Depreciation and Amortization-Depreciation and amortization increased to approximately $4.7 million for the nine months ended September 30, 2021 compared to $4.2 million for the same period in 2020. This increase is the result of opening three de novo centers during the 12 months ended September 30, 2021 and having a full nine months of depreciation in 2021 for facilities opened during the 2020 period.

Loss on debt modification-We recognized a $682,000 loss related to amending our existing credit agreement in May 2021, adding an incremental $52.0 million of senior secured term loans.

Interest Expense, net-Interest expense increased to $3.3 million from $1.8 million for the nine months ended September 30, 2021 and 2020, respectively. The increase is the result of adding an incremental $52.0 million of senior secured term loans in May 2021.

Pro Forma Income Tax Expense- As a result of the Reorganization, the Company became subject to taxation as a C corporation for periods after October 28, 2021. Our pro forma effective tax rate is 23.9% and 24.7% for the nine months ended September 30, 2021 and 2020, respectively.

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Liquidity and Capital Resources

We principally rely on cash flows from operations as our primary source of liquidity and, if needed, up to $5.0 million in revolving loans under our revolving credit facility. Our primary cash needs are for payroll, marketing and advertisements, rent, capital expenditures associated with de novo locations, as well as information technology and infrastructure, including our corporate office. We believe that cash expected to be generated from operations and the availability of borrowings under the revolving credit facility will be sufficient for our working capital requirements, liquidity obligations, anticipated capital expenditures relating to the opening of de novo centers, adding new procedure rooms to our existing locations and payments due under our existing credit facilities for at least the next 12 months.

As of September 30, 2021, we had $20.7 million in cash and cash equivalents and an available amount of $5.0 million under our revolving credit facility. We do not have any letters of credit outstanding as of September 30, 2021.

Net increase (decrease) in cash and cash equivalents 10,359 1,786

The primary source of our operating cash flow is the collection of patient payments received prior to performing surgical procedures. For the nine months ended September 30, 2021, our operating cash flow increased by $25.6 million compared to the same period in 2020. This increase is primarily driven by improved income from operations related to opening three new centers in the 12 months ended September 30, 2021 and an increase in same center volumes and revenue which were impacted by the COVID-19 pandemic in the second and third quarters of 2020. At September 30, 2021, we had working capital of $8.5 million compared to $2.1 million at December 31, 2020.

Investing Activities

Net cash used in investing activities for the nine months ended September 30, 2021 and 2020 was $4.7 million and $2.5 million, respectively. These expenditures were used to open new de novo centers and invest in improvements to our medical equipment and technology during the period.

The increase in investing activities during the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020 was partially attributable to the impact of COVID-19 limiting our ability to fully execute our de novo center growth strategy during 2020 and an increased investment in improving our medical equipment and technology.

Financing Activities

Net cash used in financing activities during the nine months ended September 30, 2021 was $17.3 million. During the nine months ended September 30, 2021, we received cash (net of fees) of $50.0 million from amending our existing credit agreement, adding an incremental $52.0 million in senior secured term loans. We used the proceeds from these borrowings plus approximately $10.0 million of cash from our balance sheet to pay $59.7 million of distributions to our member. We had further distributions to our member during the nine months ended September 30, 2021 of $6.9 million and made scheduled principal payments on our debt of $626,000.

Net cash used in financing activities for the nine months ended September 30, 2020 was $2.4 million. For the nine months ended September 30, 2020, we made distributions to our member of $4.6 million and paid scheduled principal payments on our debt of $301,000. This was offset by borrowings on our revolver of $2.5 million during the nine months ended September 30, 2020.

Long-term Debt

The carrying value of our total indebtedness was $83.0 million and $32.5 million, which includes unamortized deferred financing costs and issuance discount of $1.5 million and $0.6 million, as of September 30, 2021 and December 31, 2020, respectively.

Term Loan and Revolving Credit Agreement

In October 2018, we entered into our credit agreement with First Eagle Alternative Capital (formerly known as THL Corporate Finance). Under the terms of the credit agreement, we obtained a $34.0 million term loan and a $5.0 million revolving credit facility. Principal payments on the term loan commenced in January 2019 and are paid quarterly in the amount of $100,000 through the maturity date on October 2, 2023 when all remaining unpaid principal shall be due. The term loan is presented as long-term debt, net of debt issuance costs.

In May 2021, we amended the credit agreement by adding an incremental $52.0 million senior secured term loan to the existing term loan. The proceeds from this incremental loan plus excess cash on our balance sheet were used to pay a distribution to our member of approximately $59.7 million and the related fees for this transaction. Beginning on June 30, 2021, our quarterly principal payments increased from $100,000 to $212,500.

Under the credit agreement, we are obligated to make interest payments on the last day of each month. All outstanding loans bear interest based on either a base rate or LIBOR (in all cases, the LIBOR component has a floor of 1%) plus an applicable per annum margin of 4.5% (base rate) or 5.5% (LIBOR) if our total leverage ratio, as defined in the credit agreement, is equal to or greater than 2.5x and less than 4.25x. If our total leverage ratio is equal to or greater than 4.25x, the interest is based on either a base rate or LIBOR plus an applicable per annum margin of 5.0% (base rate) or 6.0% (LIBOR). If our total leverage ratio is below 2.5x, the interest is based on either a base rate or LIBOR plus an applicable per annum margin of 4.0% (base rate) or 5.0% (LIBOR). At September 30, 2021, the applicable per annum margins under the credit agreement were 4.0% (base rate) and 5.0% (LIBOR). Additionally, we are required to pay an unused credit facility fee equal to 0.5% per annum on the unused amount of the revolving line of credit.

If our total leverage ratio exceeds 4.25x for the preceding twelve-month period the principal payment on the term loan is $250,000 per quarter or, beginning on September 30, 2021, $531,250 per quarter. Also, additional principal prepayments could be required if excess cash flow exists, as defined in the credit agreement.

All borrowings under the credit facility are collateralized by substantially all our assets. We are subject to certain restrictive financial covenants including quarterly total leverage ratio and fixed charge ratio requirements and a limit on capital expenditures. We are in compliance with all covenants and have no letters of credit outstanding as of September 30, 2021 and December 31, 2020.

On October 25, 2021, we amended certain provisions in our credit agreement related to the IPO transaction. The amendment revises certain definitions and covenant requirements but does not change the timing or amount of principal payments or interest due under the agreement. As of October 25, 2021, we were in compliance with all revised covenant requirements. We did not make any payments on our debt with the IPO proceeds received during the period.

Off-Balance Sheet Arrangements

We are an "emerging growth company," as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

Subject to certain conditions set forth in the JOBS Act, if, as an "emerging growth company," we choose to rely on such exemptions we may not be required to, among other things, (i) provide an auditor's attestation report on our system of internal controls over financial reporting pursuant to Section 404, (ii) provide all of the compensation disclosure that may be required of non-emerging growth public companies under the Dodd-Frank Wall Street Reform and Consumer Protection Act, (iii) comply with any requirement that may be adopted by the PCAOB regarding mandatory audit firm rotation or a supplement to the auditor's report providing additional information about the audit and the financial statements (auditor discussion and analysis), and (iv) disclose certain executive compensation related items such as the correlation between executive compensation and performance and comparisons of the CEO's compensation to median employee compensation. These exemptions will apply for a period of five years following the completion of our initial public offering or until we are no longer an "emerging growth company," whichever is earlier.

Critical Accounting Policies and Estimates

A summary of significant accounting policies is disclosed in our Prospectus dated October 28, 2021 filed with the Securities and Exchange Commission ("SEC") pursuant to Rule 424(b) of the Securities Act of 1933 under the caption "Critical Accounting Policies and Estimates" in the Management's Discussion and Analysis of Financial Condition and Results of Operations section. There have been no material changes in the nature of our critical accounting policies and estimates or the application of those policies since October 28, 2021.

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