Waldencast plc(WALD) - 2025 Q2 - Quarterly Report

WALDENCAST'S OPERATING AND FINANCIAL REVIEW AND PROSPECTS This section provides a comprehensive review of Waldencast's financial performance, liquidity, and critical accounting policies Overview Waldencast plc operates as a global multi-brand beauty and wellness platform, structured into two reportable segments: Obagi Medical and Milk Makeup. The company aims to build a leading platform by acquiring and accelerating high-growth, purpose-driven brands - Waldencast plc is a global multi-brand beauty and wellness platform, organized into two reportable segments: Obagi Medical and Milk Makeup[5] - Obagi Medical is an industry-leading, advanced skin care line with over 35 years of experience, offering over 130 products through physicians and its website in the U.S. and over 65 countries[5] - Milk Makeup is known for innovative, clean, vegan, and cruelty-free formulas, offering over 300 products through its U.S. website and retail partners like Sephora, Lyko, Amazon, Cult Beauty, and ASOS online[6] Recent Events Waldencast Finco Limited, a subsidiary of Waldencast, entered into the Third Amendment to its 2022 Credit Agreement on April 26, 2024. This amendment waived historical financial covenant breaches, modified existing covenants, reduced revolving commitments to $45 million, lowered the minimum liquidity covenant to $10 million, and extended the Covenant Relief Period until December 31, 2024. The company was in compliance with all financial covenants post-amendment - On April 26, 2024, Waldencast Finco Limited entered into the Third Amendment to the 2022 Credit Agreement[7] - Waived certain historical breaches of financial covenants - Modified existing financial covenants - Reduced revolving commitments by $5 million to $45 million - Lowered minimum liquidity covenant to $10.0 million - Extended the Covenant Relief Period until December 31, 2024 - As of the report date, the Company was in compliance with all financial covenants after the Third Amendment[8] Components of Results of Operations This section details the primary components of Waldencast's financial results, including net revenue generation from product sales and royalties across its Obagi Medical and Milk Makeup segments. It also outlines the composition of cost of goods sold, selling, general, and administrative expenses (SG&A), research and development (R&D) costs, and depreciation and amortization, highlighting key drivers and expected trends for each - Net revenue is generated through product sales (Obagi Medical and Milk Makeup) and royalties (Obagi Medical)[9] - Obagi Medical's revenue sources include direct sales to physicians and e-commerce, and distributor sales in the U.S. and internationally[10][11] - Milk Makeup generates revenue from direct sales to retailers and consumers via e-commerce, and distributor sales to retailers[12] - Related party revenue includes royalties from Obagi Hong Kong ($0.1 million in H1 2024) and product supply to Obagi Hong Kong ($1.1 million in H1 2024)[13][15] - Cost of goods sold primarily includes inventory, promotional product costs, and product-related intangible asset amortization[16] - SG&A expenses cover personnel, marketing, office, legal, and professional fees, expected to increase with business growth and public company compliance[17] - R&D expenses are mainly for new product development and design improvements, consisting of employee-related costs and clinical/consumer validation testing[18] Results of Operations (Six Months Ended June 30, 2024 and 2023) Waldencast reported a significant improvement in net loss for the six months ended June 30, 2024, reducing it to $12.9 million from $36.8 million in the prior year period. This was driven by a 20.3% increase in net revenue to $131.6 million, primarily from direct sales growth, and a decrease in cost of goods sold. Operating loss also narrowed, despite increased SG&A expenses, largely due to a favorable change in the fair value of derivative warrant liabilities Net Revenue Net revenue increased significantly, driven by growth in e-commerce and international direct sales Net Revenue (Six Months Ended June 30) | Metric | H1 2024 ($ thousands) | H1 2023 ($ thousands) | Change ($ thousands) | Change (%) | | :----- | :-------------------- | :-------------------- | :------------------- | :--------- | | Net Revenue | 131,582 | 109,338 | 22,244 | 20.3% | | Direct Sales | 107,233 | 84,853 | 22,380 | 26.4% | | Distributors | 21,948 | 22,134 | (186) | -0.8% | | Net Product Sales | 129,181 | 106,987 | 22,194 | 20.7% | | Royalties | 2,401 | 2,351 | 50 | 2.1% | - Increase in direct sales primarily attributable to growth in e-commerce product sales and through retailers internationally - Distributor sales remained flat - Royalty revenue remained flat Net Revenue by Geographic Region (Six Months Ended June 30) | Geographic Region | H1 2024 ($ thousands) | H1 2023 ($ thousands) | Change ($ thousands) | Change (%) | | :---------------- | :-------------------- | :-------------------- | :------------------- | :--------- | | North America | 95,469 | 75,326 | 20,143 | 26.7% | | Rest of the World | 33,712 | 31,661 | 2,051 | 6.5% | | Net Product Sales | 129,181 | 106,987 | 22,194 | 20.7% | | Royalties | 2,401 | 2,351 | 50 | 2.1% | | Total Net Revenue | 131,582 | 109,338 | 22,244 | 20.3% | - Overall net revenue increase driven by e-commerce growth and key domestic and international distributors[25] Cost of Goods Sold Cost of goods sold decreased due to lower amortization of fair value step-up and reduced inventory write-downs Cost of Goods Sold (Six Months Ended June 30) | Metric | H1 2024 ($ thousands) | H1 2023 ($ thousands) | Change ($ thousands) | Change (%) | | :----- | :-------------------- | :-------------------- | :------------------- | :--------- | | Cost of Goods Sold | 37,404 | 41,158 | (3,754) | -9.1% | | As a percentage of net revenue | 28.4% | 37.6% | -9.2 pp | | - Decrease primarily attributable to a decrease in the amortization of the fair value step-up and a decrease in inventory write-downs - H1 2024 components: standard cost of goods sold ($30.8 million), depreciation and amortization ($5.6 million), freight and inventory inspection ($0.5 million), inventory reserve provisions and write-offs ($0.5 million) - H1 2023 components: standard cost of goods sold ($28.9 million), depreciation and amortization ($5.6 million), freight and inventory inspection ($1.5 million), amortization of inventory fair value step-up ($1.7 million), inventory reserve provisions and write-offs ($3.0 million) Selling, General and Administrative SG&A expenses increased due to higher compensation and marketing, but improved as a percentage of net revenue Selling, General and Administrative Expenses (Six Months Ended June 30) | Metric | H1 2024 ($ thousands) | H1 2023 ($ thousands) | Change ($ thousands) | Change (%) | | :----- | :-------------------- | :-------------------- | :------------------- | :--------- | | SG&A Expense | 119,879 | 100,687 | 19,192 | 19.1% | | As a percentage of net revenue | 91.1% | 92.1% | -1.0 pp | | - Increase primarily attributable to higher employee-related compensation (including stock-based compensation) and increased marketing costs - SG&A as a percentage of revenue decreased, indicating improved efficiency relative to revenue growth Research and Development R&D expenses decreased, primarily reflecting lower employee-related and product development costs Research and Development Expenses (Six Months Ended June 30) | Metric | H1 2024 ($ thousands) | H1 2023 ($ thousands) | Change ($ thousands) | Change (%) | | :----- | :-------------------- | :-------------------- | :------------------- | :--------- | | R&D Expense | 1,805 | 2,720 | (915) | -33.6% | | As a percentage of net revenue | 1.4% | 2.5% | -1.1 pp | | - Decrease in R&D expense, with H1 2024 primarily consisting of salaries and employee-related costs ($0.7 million) and product development/licensing costs ($1.1 million) - H1 2023 R&D included salaries and employee-related costs ($1.5 million) and product development/licensing costs ($1.2 million) Interest Expense, net Interest expense remained relatively stable, reflecting the company's debt structure and weighted average interest rates Interest Expense, Net (Six Months Ended June 30) | Metric | H1 2024 ($ thousands) | H1 2023 ($ thousands) | Change ($ thousands) | Change (%) | | :----- | :-------------------- | :-------------------- | :------------------- | :--------- | | Interest Expense, net | 8,711 | 8,850 | (139) | -1.6% | | As a percentage of net revenue | 6.6% | 8.1% | -1.5 pp | | - Interest expense, net remained relatively flat between the periods[34] - As of June 30, 2024, unpaid principal on 2022 Term Loan was $159.7 million (weighted average interest rate 8.5%) and 2022 Revolving Credit Facility was $15.0 million (weighted average interest rate 8.9%) - As of December 31, 2023, unpaid principal on 2022 Term Loan was $161.9 million (weighted average interest rate 8.6%) and no balance drawn on 2022 Revolving Credit Facility (weighted average interest rate 8.7%) Change in Fair Value of Derivative Warrant Liabilities A significant gain was recognized from the change in fair value of derivative warrant liabilities, driven by a decrease in stock price Change in Fair Value of Derivative Warrant Liabilities (Six Months Ended June 30) | Metric | H1 2024 ($ thousands) | H1 2023 ($ thousands) | Change ($ thousands) | | :----- | :-------------------- | :-------------------- | :------------------- | | Change in fair value of derivative warrant liabilities | (20,673) | (1,122) | (19,551) | - The significant increase in gain was primarily attributed to a decrease in the stock price of Waldencast[36] Other Income, Net Other income, net decreased, primarily due to foreign currency translation losses offsetting prior period financing component income Other Income, Net (Six Months Ended June 30) | Metric | H1 2024 ($ thousands) | H1 2023 ($ thousands) | Change ($ thousands) | | :----- | :-------------------- | :-------------------- | :------------------- | | Other income, net | (285) | (1,666) | 1,381 | - Other income, net decreased from $1.7 million in H1 2023 to $0.3 million in H1 2024, primarily due to losses related to foreign currency translation offset by income from a significant financing component with a former Obagi distributor recognized in H1 2023[36] Income Tax Benefit The income tax benefit decreased, influenced by changes in pre-tax earnings and the valuation allowance Income Tax Benefit (Six Months Ended June 30) | Metric | H1 2024 ($ thousands) | H1 2023 ($ thousands) | Change ($ thousands) | Change (%) | | :----- | :-------------------- | :-------------------- | :------------------- | :--------- | | Income tax benefit | (2,353) | (4,509) | 2,156 | -47.8% | | Effective tax rate | 15.4% | 10.9% | 4.5 pp | | - The change in effective tax rate was driven by the change in pre-tax earnings and the change in valuation allowance[37] Non-GAAP Financial Measures Waldencast utilizes several non-GAAP financial measures, including Comparable Net Revenue, Comparable Growth, Adjusted Gross Profit, Adjusted Gross Margin, Adjusted EBITDA, and Adjusted EBITDA Margin, to provide additional insights into its financial and operational performance. These measures exclude certain non-recurring or non-cash items to better reflect core business trends and facilitate comparisons, though they are not substitutes for GAAP measures - Non-GAAP measures (Comparable Net Revenue, Comparable Growth, Adjusted Gross Profit, Adjusted Gross Margin, Adjusted EBITDA) are used to evaluate financial and operational performance, identify trends, and aid strategic decisions[38][39] - These non-GAAP metrics are not intended as substitutes for GAAP financial measures and may not be comparable to other companies' similarly titled measures[39][40] Comparable Net Revenue and Comparable Growth This section presents comparable net revenue by excluding sales from the former Obagi China business for better performance comparison - Comparable Net Revenue excludes sales related to the former Obagi China business, which had below-market sales prices due to a related party liability[41] Comparable Net Revenue and Growth (Six Months Ended June 30) | Metric | H1 2024 ($ thousands) | H1 2023 ($ thousands) | Change ($ thousands) | Change (%) | | :----- | :-------------------- | :-------------------- | :------------------- | :--------- | | Net Revenue | 131,582 | 109,338 | 22,244 | 20.3% | | Obagi Medical China Business | 1,074 | 3,363 | (2,289) | -68.1% | | Comparable Net Revenue | 130,508 | 105,976 | 24,532 | 23.1% | | Comparable Growth | 23.1% | N/A | N/A | | Adjusted Gross Profit and Adjusted Gross Margin Adjusted gross profit excludes specific non-recurring items to provide a clearer view of core operational profitability - Adjusted Gross Profit excludes inventory fair value adjustments, amortization of supply agreement and formulation intangible assets, discontinued product write-offs, and amortization of related party liability to Obagi China[43] Adjusted Gross Profit and Margin by Segment (Six Months Ended June 30) | Segment/Metric | H1 2024 Net Revenue ($ thousands) | H1 2024 Gross Profit ($ thousands) | H1 2024 Gross Margin % | H1 2024 Adjusted Gross Profit ($ thousands) | H1 2024 Adjusted Gross Margin % | | :------------- | :-------------------------------- | :--------------------------------- | :--------------------- | :------------------------------------------ | :------------------------------ | | Obagi Medical | 68,364 | 49,570 | 72.5% | 54,921 | 80.3% | | Milk Makeup | 63,218 | 44,608 | 70.6% | 44,608 | 70.6% | | Waldencast (Total) | 131,582 | 94,178 | 71.6% | 99,529 | 75.6% | | Segment/Metric | H1 2023 Net Revenue ($ thousands) | H1 2023 Gross Profit ($ thousands) | H1 2023 Gross Margin % | H1 2023 Adjusted Gross Profit ($ thousands) | H1 2023 Adjusted Gross Margin % | | :------------- | :-------------------------------- | :--------------------------------- | :--------------------- | :------------------------------------------ | :------------------------------ | | Obagi Medical | 57,014 | 35,340 | 62.0% | 38,452 | 67.4% | | Milk Makeup | 52,324 | 32,840 | 62.8% | 34,531 | 66.0% | | Waldencast (Total) | 109,338 | 68,180 | 62.4% | 72,983 | 66.7% | Adjusted EBITDA and Adjusted EBITDA Margin Adjusted EBITDA provides a measure of operational performance by excluding non-cash and non-recurring expenses from net income - Adjusted EBITDA is GAAP net income (loss) before interest, taxes, depreciation, and amortization, further adjusted for non-cash expenses and non-recurring items like legal/advisory costs related to financial restatement and regulatory investigation[45] Adjusted EBITDA and Margin by Segment (Six Months Ended June 30) | Segment/Metric | H1 2024 Net (Loss) Income ($ thousands) | H1 2024 Adjusted EBITDA ($ thousands) | H1 2024 Adjusted EBITDA Margin % | | :------------- | :-------------------------------------- | :------------------------------------ | :------------------------------- | | Obagi Medical | (11,435) | 13,194 | 19.3% | | Milk Makeup | 4,926 | 15,724 | 24.9% | | Central costs | (6,397) | (11,234) | N/A | | Waldencast (Total) | (12,906) | 17,684 | 13.4% | | Segment/Metric | H1 2023 Net (Loss) Income ($ thousands) | H1 2023 Adjusted EBITDA ($ thousands) | H1 2023 Adjusted EBITDA Margin % | | :------------- | :-------------------------------------- | :------------------------------------ | :------------------------------- | | Obagi Medical | (12,237) | 9,645 | 16.9% | | Milk Makeup | (676) | 12,719 | 24.3% | | Central costs | (23,867) | (8,460) | N/A | | Waldencast (Total) | (36,780) | 13,904 | 12.7% | Liquidity and Capital Resources Waldencast's liquidity is primarily supported by bank borrowings and cash flows from operations. The company utilized a $175.0 million term loan and a $45.0 million revolving credit facility, maturing in July 2026. In September 2023, a PIPE investment raised $70.0 million. The company's cash and cash equivalents decreased slightly to $19.7 million as of June 30, 2024. Operating activities used $11.4 million in cash, while financing activities provided $11.3 million, mainly from the revolving credit facility - Principal sources of capital and liquidity are bank borrowings and cash flows from operations[47] - 2022 Term Loan: $175.0 million, maturing July 27, 2026[9] - 2022 Revolving Credit Facility: Current borrowing capacity up to $45.0 million, maturing July 27, 2026[54] - In September 2023, a PIPE Investment raised $70.0 million through the issuance of 14,000,000 Class A ordinary shares at $5.00 per share[49] Cash and Cash Equivalents | Metric | June 30, 2024 ($ millions) | December 31, 2023 ($ millions) | | :----- | :------------------------- | :----------------------------- | | Cash and cash equivalents | 19.7 | 21.1 | Cash Flow Summary (Six Months Ended June 30) | Metric | H1 2024 ($ thousands) | H1 2023 ($ thousands) | | :----- | :-------------------- | :-------------------- | | Net cash used in operating activities | (11,382) | (16,365) | | Net cash used in investing activities | (1,396) | (1,384) | | Net cash provided by financing activities | 11,314 | 29,282 | - Operating cash outflows in H1 2024 were driven by net loss, non-recurring legal and advisory costs, and changes in operating assets and liabilities (decrease in accounts payable, increase in accounts receivable)[57] - Financing cash inflows in H1 2024 primarily from $15.0 million proceeds from the 2022 Revolving Credit Facility, partially offset by term loan repayments[60] Critical Accounting Estimates There have been no significant changes to Waldencast's critical accounting policies and estimates since the 2023 Annual Report - No significant changes to critical accounting policies and estimates from the 2023 Annual Report[61] Emerging Growth Company Accounting Election Waldencast has elected to take advantage of the extended transition period for complying with new or revised financial accounting standards as an 'emerging growth company' under the JOBS Act. This allows the company to adopt new standards at the same time as private companies, which may affect comparability with other public companies - Waldencast is an 'emerging growth company' and has elected to use the extended transition period for new or revised financial accounting standards[62] - This election means the company adopts new standards at the time private companies are required to, potentially impacting comparability with other public companies[62][76] Quantitative and Qualitative Disclosures About Market Risk There have been no material changes to Waldencast's primary risk exposures or management of market risks since the disclosures in the 2023 Annual Report - No material changes to primary risk exposures or management of market risks from those disclosed in the 2023 Annual Report[63] FINANCIAL INFORMATION This section presents the unaudited condensed consolidated financial statements and their supporting notes for the reporting period UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS Waldencast's unaudited condensed consolidated balance sheets show total assets decreased from $1,042.7 million at December 31, 2023, to $1,013.6 million at June 30, 2024. This was primarily due to a decrease in intangible assets and derivative warrant liabilities. Total liabilities also decreased from $273.4 million to $253.2 million, while total shareholders' equity slightly decreased from $769.3 million to $760.4 million Condensed Consolidated Balance Sheets (Selected Data, in thousands) | Metric | June 30, 2024 | December 31, 2023 | | :----- | :------------ | :---------------- | | Total Assets | $1,013,646 | $1,042,710 | | Total Liabilities | $253,212 | $273,437 | | Total Shareholders' Equity | $760,434 | $769,273 | | Cash and cash equivalents | $19,691 | $21,089 | | Accounts receivable, net | $29,207 | $21,330 | | Inventories | $50,696 | $55,684 | | Intangible assets, net | $554,683 | $582,863 | | Derivative warrant liabilities | $7,974 | $28,647 | | Current portion of long-term debt | $26,237 | $8,529 | - Total assets decreased by $29.1 million (2.8%) from December 31, 2023, to June 30, 2024 - Total liabilities decreased by $20.2 million (7.4%) over the same period, largely due to a significant reduction in derivative warrant liabilities - Total shareholders' equity decreased by $8.8 million (1.1%) from December 31, 2023, to June 30, 2024 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS For the six months ended June 30, 2024, Waldencast significantly reduced its net loss to $12.9 million from $36.8 million in the prior year. This improvement was driven by a 20.3% increase in net revenue to $131.6 million and a substantial gain from the change in fair value of derivative warrant liabilities, which offset increased selling, general, and administrative expenses Condensed Consolidated Statements of Operations (Selected Data, in thousands) | Metric | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :----- | :----------------------------- | :----------------------------- | | Net revenue | $131,582 | $109,338 | | Cost of goods sold | $37,404 | $41,158 | | Gross profit | $94,178 | $68,180 | | Selling, general and administrative | $119,879 | $100,687 | | Research and development | $1,805 | $2,720 | | Operating loss | $(27,506) | $(35,227) | | Interest expense, net | $8,711 | $8,850 | | Change in fair value of derivative warrant liabilities | $(20,673) | $(1,122) | | Net loss | $(12,906) | $(36,780) | | Basic and Diluted Net loss per share attributable to Class A shareholders | $(0.09) | $(0.34) | - Net revenue increased by $22.2 million (20.3%) YoY - Gross profit increased by $25.9 million (37.9%) YoY - Operating loss decreased by $7.7 million (21.9%) YoY - Net loss decreased by $23.9 million (65.0%) YoY UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Waldencast's total shareholders' equity decreased slightly from $769.3 million at December 31, 2023, to $760.4 million at June 30, 2024. This change reflects a net loss of $12.9 million, partially offset by $4.5 million in stock-based compensation and a positive foreign currency translation adjustment Condensed Consolidated Statements of Shareholders' Equity (Selected Data, in thousands) | Metric | June 30, 2024 | December 31, 2023 | | :----- | :------------ | :---------------- | | Total Shareholders' Equity | $760,434 | $769,273 | | Additional Paid-In Capital | $875,522 | $871,527 | | Retained Earnings (Accumulated Deficit) | $(256,836) | $(246,761) | | Net loss | $(12,906) | $(36,780) (for H1 2023) | | Stock-based compensation | $4,526 | $5,476 (for H1 2023) | - Total shareholders' equity decreased by $8.8 million from December 31, 2023, to June 30, 2024 - Net loss for the six months ended June 30, 2024, was $12.9 million - Stock-based compensation contributed $4.5 million to additional paid-in capital during the period UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS For the six months ended June 30, 2024, Waldencast experienced a net decrease in cash, cash equivalents, and restricted cash of $1.5 million, ending the period with $21.2 million. Operating activities used $11.4 million, primarily due to net loss and changes in working capital, while financing activities provided $11.3 million, mainly from the revolving credit facility Condensed Consolidated Statements of Cash Flows (Selected Data, in thousands) | Metric | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :----- | :----------------------------- | :----------------------------- | | Net cash used in operating activities | $(11,382) | $(16,365) | | Net cash used in investing activities | $(1,396) | $(1,384) | | Net cash provided by financing activities | $11,314 | $29,282 | | Change in cash, cash equivalents and restricted cash | $(1,464) | $11,533 | | Cash, cash equivalents and restricted cash—End of period | $21,185 | $21,670 | - Net cash used in operating activities decreased by $5.0 million (30.4%) YoY - Net cash provided by financing activities decreased by $17.9 million (61.3%) YoY, primarily due to lower proceeds from the revolving credit facility NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The notes provide detailed disclosures supporting the unaudited condensed consolidated financial statements, covering significant accounting policies, revenue disaggregation, intangible assets, debt, leases, financial instruments, and related party transactions. Key updates include the adoption of ASU 2021-08, ongoing SEC investigation, and a subsequent event regarding the Obagi Vietnam acquisition 1. ORGANIZATION AND DESCRIPTION OF BUSINESS This note outlines the basis of financial statement preparation and the company's operational structure - The condensed consolidated financial statements are prepared in accordance with U.S. GAAP and SEC rules, omitting certain annual disclosures[72] - Results for the six months ended June 30, 2024, are not necessarily indicative of the full fiscal year[72] 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This note details the company's key accounting principles, estimates, and adoption of new accounting standards - The Company consolidates entities where it holds a majority voting interest, eliminating intercompany transactions[74] - Waldencast, as an 'emerging growth company,' has elected to use the extended transition period for new accounting standards, which may affect comparability[75][76] - Significant estimates include revenue recognition, stock-based compensation, goodwill valuation, inventory valuation, and valuation allowance for deferred tax assets[77] - Credit risk concentrations exist in cash balances (major U.S. banks) and accounts receivable (distributors, retailers), with two U.S. customers accounting for 22% and 11% of accounts receivable as of June 30, 2024[78][79] - The Company adopted ASU 2021-08 on January 1, 2024, for business combinations, with no material effect on current financial statements[81] - ASU 2023-09 (Income Tax Disclosures) and ASU 2023-07 (Segment Reporting) are issued but not yet adopted; the Company is assessing their impact[82][83] 3. REVENUE This note disaggregates revenue by sales channel and geographic region, highlighting customer concentration - Revenue is disaggregated by sales channel (direct sales, distributors) and geographic region (North America, Rest of the World)[84][85][87] Revenue by Sales Channel (Six Months Ended June 30, in thousands) | Sales Channel | H1 2024 Obagi Medical | H1 2024 Milk Makeup | H1 2024 Total | H1 2023 Obagi Medical | H1 2023 Milk Makeup | H1 2023 Total | | :------------ | :-------------------- | :------------------ | :------------ | :-------------------- | :------------------ | :------------ | | Direct sales | $46,300 | $60,933 | $107,233 | $33,766 | $51,087 | $84,853 | | Distributors | $19,663 | $2,285 | $21,948 | $20,897 | $1,237 | $22,134 | | Net product sales | $65,963 | $63,218 | $129,181 | $54,663 | $52,324 | $106,987 | | Royalties | $2,401 | — | $2,401 | $2,351 | — | $2,351 | | Net revenue | $68,364 | $63,218 | $131,582 | $57,014 | $52,324 | $109,338 | - Two customers accounted for 22% and 20% of total revenue in H1 2024, and 26% and 22% in H1 2023[85] - The United States accounted for $90.0 million (H1 2024) and $71.2 million (H1 2023) of net product sales, exceeding 10% of total revenues[88] 4. INTANGIBLE ASSETS—NET This note provides a breakdown of intangible assets, their carrying amounts, and amortization expenses Intangible Assets, Net (in thousands) | Asset Type | June 30, 2024 Net Carrying Amount | December 31, 2023 Net Carrying Amount | | :--------- | :-------------------------------- | :------------------------------------ | | Trademark and trade name | $478,692 | $499,655 | | Customer relationships | $29,876 | $31,468 | | Supply agreement | $23,905 | $27,795 | | Formulations | $22,011 | $23,799 | | Patents | $199 | $146 | | Total | $554,683 | $582,863 | - Total intangible assets, net decreased by $28.2 million from December 31, 2023, to June 30, 2024 - Amortization expense was $28.3 million for H1 2024 and $28.0 million for H1 2023 5. DEBT This note details the company's debt structure, including term loans, revolving credit, and recent amendment terms Debt Summary (in thousands) | Debt Type | Maturity Date | June 30, 2024 | December 31, 2023 | | :-------- | :------------ | :------------ | :---------------- | | 2022 Term Loan | July 2026 | $159,688 | $161,875 | | Note Payable | May 2024 | — | $968 | | 2022 Revolving Credit Facility | July 2026 | $15,000 | — | | Unamortized debt issuance costs | | $(3,162) | $(3,050) | | Net carrying amount | | $171,526 | $159,793 | | Current portion of long-term debt | | $(26,237) | $(8,529) | | Total long-term portion | | $145,289 | $151,264 | - The Note Payable for D&O insurance ($2.4 million) was fully repaid by June 30, 2024 - The 2022 Credit Agreement (Term Loan and Revolving Credit Facility) matures on July 27, 2026 - As of June 30, 2024, the 2022 Term Loan had an unpaid principal of $159.7 million and the 2022 Revolving Credit Facility had $15.0 million outstanding - Weighted average interest rates were 8.5% for the Term Loan and 8.9% for the Revolving Credit Facility as of June 30, 2024 - The Third Amendment to the 2022 Credit Agreement (April 26, 2024) waived historical breaches, modified covenants, reduced revolving commitments to $45 million, and lowered minimum liquidity to $10 million - The Covenant Relief Period was extended until December 31, 2024 6. LEASES This note describes the company's operating lease arrangements, related cash flows, and impairment charges - The Company has operating leases for real estate (office and warehouse) with initial terms of 8-11 years, and options to extend up to 5 years[101] - Lease liabilities are recognized at the present value of future lease payments using the Company's incremental borrowing rate[102][103] Operating Lease Cash Flows (in thousands) | Metric | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :----- | :----------------------------- | :----------------------------- | | Cash paid for operating lease liabilities | $1,882 | $1,686 | | Right-of-use assets obtained | $131 | $199 | - The Company recorded impairment charges of $0.8 million (warehouse) and $2.7 million (office) in 2023 related to Texas leases that were vacated and subleased[105][107] 7. FINANCIAL INSTRUMENTS This note discusses the company's use of an interest rate collar and the valuation of derivative warrant liabilities - The Company uses an interest rate collar with Wells Fargo to mitigate interest rate risk on variable rate loans, with a notional value of $160.0 million[108] - The interest rate collar is not designated for hedge accounting; changes in fair value are recognized in current period earnings[109] - As of June 30, 2024, 29,533,282 warrants (Public, Sponsor, FPA, Sponsor Loan) remained issued and outstanding[111] - The Company recognized a gain of $20.7 million from the change in fair value of warrant liabilities in H1 2024, compared to $1.1 million in H1 2023, primarily due to a decrease in Waldencast's stock price[111] 8. FAIR VALUE MEASUREMENTS This note categorizes financial instruments by their fair value measurement levels based on input observability Fair Value Measurements (in thousands) | Instrument | Level | June 30, 2024 Fair Value | December 31, 2023 Fair Value | | :--------- | :---- | :----------------------- | :--------------------------- | | Interest rate collar | Level 2 | $172 | $61 | | Derivative warrant liabilities - Public | Level 1 | $3,149 | $11,155 | | Derivative warrant liabilities - Private | Level 2 | $4,825 | $17,492 | - Private derivative warrants are classified as Level 2, with fair value measured based on Public Warrant liabilities. The interest rate collar is also Level 2, measured using discounted future cash flows with market-based observable inputs 9. SUPPLEMENTAL BALANCE SHEET DISCLOSURES This note provides detailed breakdowns of selected balance sheet accounts, including receivables, inventories, and liabilities Accounts Receivable, Net (in thousands) | Metric | June 30, 2024 | December 31, 2023 | | :----- | :------------ | :---------------- | | Accounts receivable | $29,500 | $22,900 | | Allowance for doubtful accounts | $(300) | $(1,600) | | Accounts receivable, net | $29,207 | $21,330 | Inventories (in thousands) | Component | June 30, 2024 | December 31, 2023 | | :-------- | :------------ | :---------------- | | Work in process | $8,242 | $10,336 | | Finished goods | $42,454 | $45,348 | | Total inventories | $50,696 | $55,684 | Property and Equipment, Net (in thousands) | Component | June 30, 2024 | December 31, 2023 | | :-------- | :------------ | :---------------- | | Total property and equipment | $13,323 | $12,036 | | Less accumulated depreciation | $(7,755) | $(6,105) | | Property and equipment, net | $5,568 | $5,931 | Other Current Liabilities (in thousands) | Component | June 30, 2024 | December 31, 2023 | | :-------- | :------------ | :---------------- | | Accrued salaries and related expenses | $9,191 | $8,702 | | Accrued sales returns and damages | $1,751 | $2,527 | | Accrued interest | $1,453 | $1,357 | | Accrued distribution fees | $690 | $590 | | Related party liability | $4,901 | $5,856 | | Accrued professional services | $4,035 | $2,901 | | Other | $1,808 | $1,765 | | Total | $23,829 | $23,698 | - The related party liability reflects the remaining unamortized fair value of the inventory contract with Obagi China Business, to be amortized into related party revenue[122] 10. STOCK-BASED COMPENSATION This note details the company's incentive award plan, stock option, and restricted stock unit activity - The 2022 Incentive Award Plan authorizes 23,023,952 ordinary shares, with an evergreen increase on January 1st each year[124] - As of June 30, 2024, 7,795,605 ordinary shares remained available for future issuances under the Plan[124] - In April 2024, 48,880 restricted stock units (RSUs) were granted to non-employees - In May 2024, 662,634 RSUs were granted to employees and 312,830 RSUs to Founders, with one-third vesting immediately - Strategic Growth Incentive (SGI) awards (SGI 2025 and SGI 2027) are performance-vested share units based on net revenue and EBITDA targets[125] Stock Option Activity (Six Months Ended June 30, 2024) | Metric | Number of Common Stock Options | Weighted Average Exercise Price | | :----- | :----------------------------- | :------------------------------ | | Balance as of December 31, 2023 | 18,915,358 | $9.10 | | Exercised | 150,000 | $0.68 | | Forfeited | (439,085) | $5.39 | | Balance as of June 30, 2024 | 18,626,273 | $9.22 | Restricted Stock Activity (Six Months Ended June 30, 2024) | Metric | Shares | Weighted Average Grant Date Fair Value per Share | | :----- | :----- | :----------------------------------------------- | | Outstanding as of December 31, 2023 | 2,296,831 | $9.16 | | Granted | 1,191,011 | $5.34 | | Vested | (741,789) | $9.28 | | Forfeited | (594,607) | $7.15 | | Outstanding as of June 30, 2024 | 2,151,446 | $7.36 | - Unrecognized compensation cost for stock options was $18.6 million (over 4.0 years) and for restricted stock was $6.3 million (over 1.6 years) as of June 30, 2024[129] 11. SHAREHOLDERS' EQUITY This note outlines the authorized and outstanding share capital, including Class A and Class B ordinary shares - Authorized share capital includes 1,000,000,000 Class A ordinary shares, 100,000,000 Class B ordinary shares, and 25,000,000 Preferred Shares, all with $0.0001 par value[130] - As of June 30, 2024: 110,451,097 Class A ordinary shares and 12,053,331 Class B ordinary shares were outstanding - No Preferred Shares were issued or outstanding - Class A shares have one vote per share and are entitled to dividends and pro rata asset distribution upon liquidation[130] - Class B shares are non-economic, non-dividend shares with one vote per share, convertible to Class A shares on a one-to-one basis at the holder's option[131][132] 12. NET LOSS PER SHARE This note presents the calculation of basic and diluted net loss per share, identifying anti-dilutive items Net Loss Per Share (Six Months Ended June 30) | Metric | H1 2024 | H1 2023 | | :----- | :------ | :------ | | Net loss attributable to Class A shareholders - basic and diluted EPS | $(10,075) | $(29,414) | | Weighted-average basic shares outstanding | 107,366,433 | 86,876,187 | | Basic and diluted net loss per share | $(0.09) | $(0.34) | - Potential ordinary shares (warrants, stock options, restricted stock) totaling 50.3 million in H1 2024 and 52.0 million in H1 2023 were excluded from diluted EPS computation as their effect would have been anti-dilutive[134] 13. INCOME TAX BENEFIT This note explains the income tax benefit and the factors influencing the effective tax rate Income Tax Benefit (Six Months Ended June 30) | Metric | H1 2024 ($ thousands) | H1 2023 ($ thousands) | Change ($ thousands) | Change (%) | | :----- | :-------------------- | :-------------------- | :------------------- | :--------- | | Income tax benefit | $(2,353) | $(4,509) | $2,156 | -47.8% | | Effective tax rate | 15.4% | 10.9% | 4.5 pp | | - The change in effective tax rate was primarily due to changes in pre-tax earnings and valuation allowance[135] 14. RELATED PARTY TRANSACTIONS This note discloses transactions with related parties, including the PIPE investment and Obagi China business - In September 2023, a PIPE Investment of $70.0 million was made by certain investors, including existing shareholders and a stakeholder in Beauty Ventures[136] - The Company has indemnification agreements with its directors and executive officers[137] - Obagi China Business (Cedarwalk): - IP License Agreement: Granted exclusive license for Obagi brand IP in China Region; royalties of $0.1 million in H1 2024 (less than $0.1 million in H1 2023)[138][139] - Supply Agreement: Supplied products to Obagi China Business, generating $1.1 million net revenue (H1 2024) and $3.4 million (H1 2023)[140] - Related party accounts receivable from Obagi China Business was $0.5 million as of June 30, 2024 (down from $1.1 million at Dec 31, 2023)[141] - Transition Services Agreement expired July 27, 2023, with no fees received as Threshold Amount was not reached - No reimbursements were made to Waldencast Ventures LP (controlled by Michel Brousset) in H1 2024, compared to $0.3 million in H1 2023[142] - Milk Makeup: - Subleases office/studio space from Milk Studios Los Angeles LLC; incurred $0.2 million in administrative fees in both H1 2024 and H1 2023[143] - Paid $0.1 million in influencer fees to a cofounder in both H1 2024 and H1 2023[144] 15. COMMITMENTS AND CONTINGENCIES This note details the company's purchase commitments, potential litigation, and ongoing SEC investigation - The Company has purchase commitments, including $0.7 million for Skintrinsiq devices over the next 12-18 months[146] - No material litigation is currently threatened against the Company[147] - The Company is cooperating with an SEC investigation following a self-reported review of accounting practices; the outcome and potential impact are uncertain[148] 16. SEGMENT REPORTING This note presents financial information for the company's two reportable segments, Obagi Medical and Milk Makeup - Waldencast has two operating and reportable segments: Obagi Medical and Milk Makeup[149] - Central costs, including corporate overhead, personnel, professional fees, interest expense, and change in fair value of derivatives, are not allocated to segments[150] Segment Gross Profit (Six Months Ended June 30, in thousands) | Segment | H1 2024 Net Revenue | H1 2024 Cost of Goods Sold | H1 2024 Gross Profit | H1 2023 Net Revenue | H1 2023 Cost of Goods Sold | H1 2023 Gross Profit | | :------ | :------------------ | :------------------------- | :------------------- | :------------------ | :------------------------- | :------------------- | | Obagi Medical | $68,364 | $18,794 | $49,570 | $57,014 | $21,674 | $35,340 | | Milk Makeup | $63,218 | $18,610 | $44,608 | $52,324 | $19,484 | $32,840 | | Total | $131,582 | $37,404 | $94,178 | $109,338 | $41,158 | $68,180 | - The Company does not evaluate performance or allocate resources based on segment asset data; all long-lived assets are in the U.S[152] 17. SUBSEQUENT EVENTS This note describes significant events occurring after the reporting period, such as the Obagi Vietnam acquisition - In August 2024, Obagi's subsidiaries entered into a purchase agreement with SA Distributor, resulting in Obagi Vietnam becoming a 100% owned subsidiary of Waldencast[154] - The SA Distributor forfeited earnout payments and compensation claims, and its minority stake was retired, with no material impact on financial statements[154] 18. CONDENSED FINANCIAL INFORMATION OF WALDENCAST PLC (PARENT COMPANY ONLY) This note provides separate financial statements for the parent company, reflecting investments in subsidiaries under the equity method - Parent company financial statements are presented on a 'parent-only' basis, with investment in subsidiaries recorded under the equity method[155][156] - Waldencast plc has no material operations of its own, conducting activities through wholly-owned subsidiaries[155] - The 2022 Credit Agreement limits the ability of Waldencast plc's wholly-owned subsidiaries to make certain distributions or dividends, restricting substantially all of the successor period net assets[155] Parent Company Only Balance Sheet (Selected Data, in thousands) | Metric | June 30, 2024 | December 31, 2023 | | :----- | :------------ | :---------------- | | Total Assets | $768,409 | $797,920 | | Derivative warrant liabilities | $7,974 | $28,647 | | Total Liabilities | $7,974 | $28,647 | | Total Shareholders' Equity | $760,435 | $769,273 | Parent Company Only Statement of Operations (Selected Data, in thousands) | Metric | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :----- | :----------------------------- | :----------------------------- | | Total operating loss | $(6,655) | $(615) | | Change in fair value of derivative warrant liabilities | $(20,673) | $(1,122) | | Net loss | $(10,075) | $(29,414) | SIGNATURE This section contains the formal attestation and certification of the financial report by authorized personnel