Waldencast plc(WALD) - 2022 Q4 - Annual Report

Regulatory and Compliance Risks - The company is currently under investigation by the SEC due to material weaknesses in internal control over financial reporting, which may adversely affect investor confidence and the price of its securities [45]. - Material weaknesses identified include insufficient segregation of duties and review procedures, which could lead to misstatements in financial reporting [48]. - The company has restated financial results for previous periods, including misstatements related to the classification of Class A ordinary shares, impacting its financial position [49]. - Legal and regulatory risks could impact the introduction and marketing of products, potentially harming business operations [43]. - The company is subject to various financial covenants under its 2022 Credit Agreement, and failure to comply could result in an event of default, adversely affecting its financial position [69]. - The company received a notice from Nasdaq regarding non-compliance with listing standards due to late filing of its Annual Report, and is currently appealing to avoid delisting [73]. - The company is subject to anti-corruption laws, and violations could lead to significant penalties and operational disruptions [86]. - Non-compliance with FDA and other regulatory requirements could lead to significant penalties and adversely affect business operations [153]. - The company markets certain products, such as eyelash serums and chemical peels, as cosmetics without FDA approval, which may lead to regulatory challenges [157]. - The FDA has issued warning letters to cosmetic companies for improper claims, which could result in reputational damage and legal actions against the company [158]. - The company is subject to FTC rules and state consumer protection laws, and failure to substantiate product claims could result in enforcement actions or penalties [162]. - New government regulations could increase compliance costs and lead to civil remedies, including fines or product recalls, adversely affecting the company's financial condition [164]. - The company markets prescription-only products containing hydroquinone without FDA premarket authorization, which could lead to enforcement actions if required approvals are not obtained [165]. - The unpredictable nature of the FDA approval process could hinder the company's ability to market its products, significantly affecting its business prospects [174]. - The company has not sought regulatory approval for its HQ products in major markets like the U.S., EU, Canada, Australia, and Japan, instead offering alternatives containing arbutin [177]. - Regulatory changes, including the MoCRA, will impose new compliance obligations for cosmetic products, potentially increasing operational costs [156]. - Compliance with the FDA's cGMPs and similar regulations is mandatory for drug product manufacturers, with potential penalties for violations including fines and product recalls [192]. - The MoCRA requires cosmetic manufacturers to register with the FDA and report serious adverse events, with compliance deadlines set for December 2025 [192]. - The company relies on third-party contract manufacturers for compliance with cGMPs, which may increase manufacturing costs and impact net income [194]. Financial Performance and Growth Strategy - Future growth of the Obagi Skincare and Milk Makeup businesses is uncertain, as historical growth may not indicate future performance [53]. - The company faces risks related to customer dependency, particularly in the Obagi Skincare business, which could materially affect financial results [43]. - The company expects capital and operating expenditures to increase as it expands its infrastructure and international footprint, with a recent private placement raising $70 million through the issuance of 14 million Class A ordinary shares at $5.00 each [67]. - The company anticipates that its future funding requirements will depend on its ability to generate sufficient cash flow from operations, which may impact its growth strategy [68]. - The company plans to expand its Obagi Skincare and Milk Makeup businesses, which will increase the number of employees and operational scope, but faces uncertainties in forecasting employee needs and associated costs [57]. - The company generated a significant portion of its revenue from international sales, with a focus on expanding operations in Vietnam and other Southeast Asian countries, requiring initial investments in facilities and personnel [58]. - The company plans to pursue acquisitions or investments in other businesses to complement existing offerings, but faces challenges in identifying suitable candidates and successfully integrating them [76]. - The company may incur significant costs related to the SEC investigation, regardless of the outcome, which could affect financial condition [46]. - The company is investing in research and development to maintain its competitive position in the skincare and makeup markets, which will require significant capital [71]. - The company expects increased competition as it enters new markets and distribution channels, which may affect pricing and market share [125]. - The company is facing risks associated with international expansion, including regulatory compliance, local market conditions, and potential disruptions in supply and distribution chains [65]. - The company may face delisting from The Nasdaq Capital Market if compliance with continued listing standards is not regained, which could materially impair shareholders' ability to trade securities [74]. - If delisted, dividends on Class A ordinary shares may not be eligible for preferential tax rates, impacting shareholder returns [75]. - The company may issue equity or incur debt for acquisitions, potentially diluting shareholder ownership and adversely affecting financial condition [78]. - Successful integration of acquired businesses is uncertain, and failure to do so could negatively impact revenue and operating results [79]. - The company anticipates variability in quarterly operating results due to factors such as consumer spending and manufacturing costs, making future performance difficult to predict [91]. - Historical financial results of the Obagi Skincare and Milk Makeup businesses may not be indicative of future performance due to significant costs incurred from the Business Combination and public company compliance [95]. Market and Competitive Landscape - The competitive landscape for Obagi Skincare is intense, with significant competition from well-established companies in pharmaceuticals and cosmetics [125]. - The cosmetics industry is highly competitive, with pressure from multinational companies that may leverage greater resources for pricing and marketing advantages [211]. - Competitive pricing pressures may force the company to reduce prices, impacting profitability and sales volume [212]. - The company faces challenges in maintaining brand recognition and reputation, which are critical for its financial success, especially as competition increases [219]. - Milk has relatively low brand awareness compared to other cosmetics brands, making it essential to enhance its recognition for future growth [220]. - The company must continuously innovate and respond to beauty trends to maintain competitiveness in the cosmetics industry [214]. - The company relies on third-party suppliers for product manufacturing, which may affect product quality and availability if suppliers do not meet standards [224]. - The company is dependent on third-party logistics providers for storage and distribution, with no long-term contracts in place, posing risks to operational stability [140]. - The management of inventory is critical, as demand forecasts can significantly change, affecting sales and inventory levels [144]. Operational Challenges - The company recorded a non-cash impairment charge of $68.7 million within the Obagi Skincare reportable segment due to actual results being less than projected results at the time of acquisition [101]. - The company relies on third-party contract manufacturers for all Obagi products, which exposes it to risks such as capacity constraints and regulatory compliance issues [131]. - The SA Distributor accounted for a material portion of net revenue for the Obagi Skincare business, but faced delays in product distribution due to COVID-19 restrictions [136]. - The agreement with the SA Distributor was amended to expand distribution rights in Southeast Asia, but the distributor experienced prolonged delays in obtaining product licenses [136]. - The company experienced delays in product imports to Vietnam due to regulatory compliance issues, affecting distribution [181]. - The ongoing conflict between Russia and Ukraine has led to executive orders prohibiting the import of products into Russia, which could affect future sales [182]. - The company relies on third-party CMOs for the production of its products, which are subject to regulatory inspections [191]. - The company modified business practices in response to COVID-19, including launching a redesigned Obagi website and creating an e-commerce platform for physician customers [116]. - Costs of goods sold increased in the 2022 Successor Period due to inventory reserve provisions and write-offs, impacting future financial performance [145]. - The company may encounter difficulties in asserting its intellectual property rights in Vietnam and other Southeast Asian countries, which could impact its operations [63]. - The company may face challenges in expanding sales of Obagi and Milk products in China due to increased tariffs and trade restrictions [112]. - Milk Makeup sources important components from third-party suppliers in China, exposing the company to risks related to cost increases and regulatory changes [118]. - The U.S. government has imposed increased tariffs on imports from China, which may lower the gross margin on affected Milk Makeup products [120]. - The company relies on third-party contract manufacturers for compliance with cGMPs, which may increase manufacturing costs and impact net income [194]. - The company is exposed to unknown or contingent liabilities that could negatively affect its financial condition and results of operations [101]. Shareholder and Equity Considerations - Members of the Sponsor and their affiliates own a combined ownership interest of 50.8% of the Class A ordinary shares, with Cedarwalk Skincare Ltd. holding an additional 28.3% [104]. - The company may issue additional Class A ordinary shares or other equity securities without shareholder approval, which could significantly dilute existing holders' equity interests [100]. - Future resales of Class A ordinary shares may cause the market price of the company's securities to drop significantly, even if the business performs well [106]. - The company has outstanding warrants to purchase an aggregate of 29,533,282 Class A ordinary shares at an exercise price of $11.50 per share, which could result in dilution if exercised [103]. - The average selling prices of Milk Makeup products may decline due to various factors, potentially reducing net sales and operating income [223]. - Milk's strategic plan requires significant investment in product development, marketing, and technology, which may not guarantee accelerated revenue growth [215]. - Milk's ability to provide a high-quality consumer experience is crucial for brand growth, relying on effective e-commerce platforms and product offerings [221]. - The company may face delisting from The Nasdaq Capital Market if compliance with continued listing standards is not regained, which could materially impair shareholders' ability to trade securities [74].