The Beauty Health pany(SKIN) - 2024 Q2 - Quarterly Report

PART I—FINANCIAL INFORMATION This section provides the company's financial statements, management's analysis, market risk disclosures, and internal controls Financial Statements The financial statements show decreased assets and sales, a reduced net loss due to note repurchase gains, and a shift to cash usage from operations Condensed Consolidated Balance Sheets Total assets and liabilities decreased significantly by June 30, 2024, primarily due to reduced cash and note repurchases, while equity increased Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2024 (in thousands) | December 31, 2023 (in thousands) | | :--- | :--- | :--- | | Total Current Assets | $489,626 | $698,252 | | Total Assets | $711,833 | $929,113 | | Total Current Liabilities | $75,426 | $115,008 | | Convertible senior notes, net | $550,625 | $738,372 | | Total Liabilities | $642,644 | $869,723 | | Total Stockholders' Equity | $69,189 | $59,390 | Condensed Consolidated Statements of Comprehensive Income (Loss) Net sales declined for both the quarter and six-month period, but a significant gain on note repurchase substantially reduced the net loss Statement of Comprehensive Income (Loss) Summary (in thousands) | Metric | Q2 2024 (in thousands) | Q2 2023 (in thousands) | Six Months 2024 (in thousands) | Six Months 2023 (in thousands) | | :--- | :--- | :--- | :--- | :--- | | Net sales | $90,594 | $117,479 | $171,997 | $203,757 | | Gross profit | $40,900 (est.) | $67,876 | $89,301 | $121,980 | | Loss from operations | $(22,122) (est.) | $(13,146) | $(39,102) | $(30,456) | | Net income (loss) | $202 (est.) | $3,364 | $(477) | $(16,895) | | Diluted EPS | $(0.10) | $0.03 | $(0.20) | $(0.13) | - A significant contributor to the financial results for the six months ended June 30, 2024, was a $33.4 million gain from the repurchase of convertible senior notes, which is included in 'Other income, net'[9][41] Condensed Consolidated Statements of Stockholders' Equity (Deficit) Total stockholders' equity increased to $69.2 million by June 30, 2024, driven by share-based compensation despite a net loss Changes in Stockholders' Equity (in thousands) | Account | Dec 31, 2023 (in thousands) | June 30, 2024 (in thousands) | | :--- | :--- | :--- | | Total Stockholders' Equity | $59,390 | $69,189 | Condensed Consolidated Statements of Cash Flows Cash flow from operations shifted to a use of $10.7 million, with significant cash used in financing for note repurchases Cash Flow Summary (in thousands) | Activity | Six Months Ended June 30, 2024 (in thousands) | Six Months Ended June 30, 2023 (in thousands) | | :--- | :--- | :--- | | Net cash (used for) provided by operating activities | $(10,653) | $8,950 | | Net cash used for investing activities | $(3,840) | $(24,900) | | Net cash used for financing activities | $(157,367) | $(3,740) | | Net change in cash, cash equivalents, and restricted cash | $(171,860) | $(19,689) | Notes to Condensed Consolidated Financial Statements Notes detail revenue trends, debt repurchases, legal proceedings, and the near completion of the Syndeo Program Net Sales by Product Line (in thousands) | Product Line | Six Months 2024 (in thousands) | Six Months 2023 (in thousands) | | :--- | :--- | :--- | | Delivery Systems | $70,992 | $110,943 | | Consumables | $101,005 | $92,814 | | Total net sales | $171,997 | $203,757 | Net Sales by Geographic Region (in thousands) | Region | Six Months 2024 (in thousands) | Six Months 2023 (in thousands) | | :--- | :--- | :--- | | Americas | $108,057 | $116,622 | | Asia-Pacific (APAC) | $25,607 | $38,868 | | Europe, the Middle East and Africa (EMEA) | $38,333 | $48,267 | | Total net sales | $171,997 | $203,757 | - During the six months ended June 30, 2024, the company recognized $19.3 million of inventory charges for discontinued, excess, and obsolete inventory, a significant increase from $4.4 million in the same period of 2023[22] - The company repurchased $192.3 million principal amount of its Convertible Senior Notes for $156.1 million during the first six months of 2024, resulting in a net gain of $33.4 million[41] - The company is facing a securities class action lawsuit and has received a subpoena from the SEC's Division of Enforcement. The company believes the lawsuit has no merit and is cooperating with the SEC investigation[59][61][66] - The Syndeo Program, established to upgrade or replace Syndeo 1.0 and 2.0 devices, is substantially complete as of June 30, 2024. The remaining program liability has been reduced from $21.0 million at year-end 2023 to $0.9 million[82][83] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses sales decline due to market conditions and Syndeo issues, reduced gross margin from inventory charges, and strong liquidity despite note repurchases Results of Operations Net sales decreased by 15.6% due to lower Delivery Systems sales, while gross margin declined due to significant inventory charges Net Sales Change: Six Months Ended June 30, 2024 vs 2023 (in millions) | Product Line | 2024 (in millions) | 2023 (in millions) | Change Amount (in millions) | Change % | | :--- | :--- | :--- | :--- | :--- | | Delivery Systems | $71.0 | $110.9 | $(40.0) | (36.0)% | | Consumables | $101.0 | $92.8 | $8.2 | 8.8% | | Total net sales | $172.0 | $203.8 | $(31.8) | (15.6)% | - The decrease in Delivery Systems net sales was attributed to a challenging year-over-year comparison due to the prior year's international launch of Syndeo, unfavorable macroeconomic and credit conditions, and efforts to strengthen customer confidence in Syndeo[96][108] - Gross margin for the six months ended June 30, 2024, decreased to 51.9% from 59.9% in the prior year, primarily due to $19.3 million of inventory charges for discontinued, excess, and obsolete inventory[110] - Selling and marketing expenses for the six months decreased by $17.6 million (21.5%) due to lower personnel-related expenses, including sales commissions, and reduced marketing spend[111] Liquidity and Capital Resources The company maintains strong liquidity with $349.5 million in cash, despite significant cash usage for convertible note repurchases and credit facility termination - Primary sources of capital include cash flow from operations and proceeds from the Business Combination and Notes issuance. As of June 30, 2024, the company held approximately $349.5 million in cash, cash equivalents, and restricted cash[117] Cash Flow Summary: Six Months Ended June 30 (in millions) | Activity | 2024 (in millions) | 2023 (in millions) | | :--- | :--- | :--- | | Net cash (used for) provided by operating activities | $(10.7) | $9.0 | | Net cash used for investing activities | $(3.8) | $(24.9) | | Net cash used for financing activities | $(157.4) | $(3.7) | - The significant use of cash in financing activities in H1 2024 was primarily due to the repurchase of $192.3 million principal amount of its Notes for $156.1 million[137][123] - On August 6, 2024, the company terminated its $50.0 million revolving credit facility, which was undrawn. No material early termination penalties were incurred[128][45] Quantitative and Qualitative Disclosures About Market Risk No material changes to market risks related to interest rates, foreign currency, and inflation have occurred since the 2023 Annual Report - There were no material changes to the company's market risks related to interest rates, foreign currency, and inflation as disclosed in the 2023 Annual Report on Form 10-K[140] Controls and Procedures Disclosure controls were ineffective due to an inventory-related material weakness, for which a remediation plan is actively underway - The company's principal executive and financial officers concluded that disclosure controls and procedures were not effective as of June 30, 2024, due to a material weakness in internal control over the inventory process[141] - A remediation plan is in process to address the inventory material weakness, focusing on hiring experienced personnel and enhancing controls over physical inventory, excess and obsolete inventory, and purchasing arrangements[142] - The material weakness cannot be considered remediated until the new controls have operated effectively for a sufficient period and have been tested by management[143] PART II—OTHER INFORMATION This section covers legal proceedings, risk factors, equity sales, and other significant corporate information Legal Proceedings Material pending legal proceedings, including lawsuits and an SEC subpoena, are detailed in Note 10 of the financial statements - For a description of material pending legal proceedings, the report refers to Note 10, Commitments and Contingencies, in Part I, Item 1[146] Risk Factors No material updates or changes to previously disclosed risk factors have occurred since the Annual Report on Form 10-K - There have been no material updates or changes to the risk factors disclosed in the company's Annual Report on Form 10-K[147] Unregistered Sales of Equity Securities and Use of Proceeds The company did not issue or repurchase any unregistered equity securities during the second quarter of 2024 - The company did not issue any unregistered shares of its Class A Common Stock or other equity securities during Q2 2024[148] - The company and its affiliates did not repurchase any of the company's equity securities during Q2 2024[148] Other Information Key disclosures include a CFO performance bonus tied to material weakness remediation and the termination of the credit agreement - On August 6, 2024, the company approved a $300,000 cash performance bonus for CFO Michael Monahan, contingent on the successful implementation of a remediation plan for the company's inventory-related material weakness by April 15, 2025[149][150] - On August 6, 2024, the company prepaid all obligations and terminated its Credit Agreement. There were no material early termination penalties[151] - No director or officer adopted, modified, or terminated a Rule 10b5-1 trading arrangement during the second quarter of 2024[148] Exhibits This section lists all exhibits filed, including the CFO bonus letter and required Sarbanes-Oxley Act certifications - A Bonus Opportunity Letter for Michael Monahan, dated August 6, 2024, was filed as Exhibit 10.5[153] - The report includes required certifications from the Principal Executive Officer and Principal Financial Officer pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act[155]