The Beauty Health pany(SKIN) - 2023 Q1 - Quarterly Report

PART I—FINANCIAL INFORMATION This section presents the company's unaudited financial statements and management's discussion and analysis of its financial condition and results of operations Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements, including balance sheets, statements of comprehensive income (loss), stockholders' equity (deficit), and cash flows, along with detailed notes explaining accounting policies, revenue recognition, balance sheet components, fair value measurements, debt, equity, and recent accounting pronouncements. It also includes revisions for immaterial prior period misstatements Condensed Consolidated Balance Sheets (Unaudited) This section provides a snapshot of the company's assets, liabilities, and stockholders' equity at specific points in time Condensed Consolidated Balance Sheets (Unaudited) - Key Figures | Metric (in thousands) | March 31, 2023 | December 31, 2022 | Change (vs. Dec 31, 2022) | | :-------------------- | :------------- | :---------------- | :------------------------ | | Total Assets | $994,953 | $1,001,766 | -$6,813 | | Total Liabilities | $847,289 | $837,431 | +$9,858 | | Total Stockholders' Equity | $147,664 | $164,335 | -$16,671 | | Cash and cash equivalents | $532,282 | $568,197 | -$35,915 | | Inventories | $122,081 | $109,656 | +$12,425 | | Warrant liabilities | $24,550 | $15,473 | +$9,077 | Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited) This section details the company's revenues, expenses, and net income or loss over specific reporting periods Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited) - Key Figures | Metric (in thousands) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | Change (YoY) | | :-------------------- | :-------------------------------- | :-------------------------------- | :----------- | | Net sales | $86,278 | $75,415 | +$10,863 | | Cost of sales | $32,174 | $24,530 | +$7,644 | | Gross profit | $54,104 | $50,885 | +$3,219 | | Loss from operations | $(17,310) | $(14,013) | -$3,297 | | Net (loss) income | $(22,285) | $31,455 | -$53,740 | | Basic EPS | $(0.17) | $0.21 | -$0.38 | | Diluted EPS | $(0.17) | $(0.13) | -$0.04 | - The significant shift from net income to net loss year-over-year was primarily influenced by a $61.2 million change in the fair value of warrant liabilities, which was an expense of $9.1 million in Q1 2023 compared to an income of $52.1 million in Q1 2022[10][95] Condensed Consolidated Statements of Stockholders' Equity (Deficit) (Unaudited) This section outlines changes in the company's equity, including net income/loss and share transactions Condensed Consolidated Statements of Stockholders' Equity (Deficit) (Unaudited) - Key Figures | Metric (in thousands) | March 31, 2023 | December 31, 2022 | Change (vs. Dec 31, 2022) | | :-------------------- | :------------- | :---------------- | :------------------------ | | Total Stockholders' Equity (Deficit) | $147,664 | $164,335 | -$16,671 | | Accumulated Deficit | $(403,754) | $(381,469) | -$22,285 | | Additional Paid-in Capital | $555,046 | $550,320 | +$4,726 | | Class A Common Stock Shares Outstanding | 132,626,954 | 132,214,695 | +412,259 | - The company reported a net loss of $22.3 million for the three months ended March 31, 2023, contributing to an increase in the accumulated deficit[11] Condensed Consolidated Statements of Cash Flows (Unaudited) This section categorizes cash inflows and outflows from operating, investing, and financing activities Condensed Consolidated Statements of Cash Flows (Unaudited) - Key Figures | Metric (in thousands) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | Change (YoY) | | :-------------------- | :-------------------------------- | :-------------------------------- | :----------- | | Net cash used in operating activities | $(13,010) | $(38,471) | +$25,461 | | Net cash used in investing activities | $(21,684) | $(3,425) | -$18,259 | | Net cash used in financing activities | $(2,195) | $(783) | -$1,412 | | Net decrease in cash and cash equivalents | $(36,889) | $(42,679) | +$5,790 | | Cash and cash equivalents, end of period | $532,282 | $859,237 | -$326,955 | - Net cash used in operating activities decreased by $25.5 million year-over-year, primarily due to lower working capital usage and the net impact of current year net loss and non-cash adjustments[111] - Net cash used in investing activities significantly increased by $18.3 million, mainly due to a $16.9 million cash payment for asset acquisitions of Esthetic Medical Inc. and Anacapa Aesthetics LLC[112] Notes to Condensed Consolidated Financial Statements (Unaudited) This section provides detailed explanations and disclosures for the condensed consolidated financial statements, covering the company's business, revenue recognition, balance sheet components, fair value measurements, property and equipment, goodwill and intangible assets, long-term debt, income taxes, share-based payments, commitments and contingencies, related-party transactions, stockholders' equity, net loss per share, new accounting pronouncements, and revisions for immaterial misstatements Note 1 – Description of Business The Beauty Health Company is a global skin health company that designs, develops, manufactures, markets, and sells aesthetic technologies and products, including Hydrafacial, SkinStylus, and Keravive. The company was incorporated in Delaware on July 8, 2020, and completed a business combination on May 4, 2021, acquiring Hydrafacial. The financial statements are unaudited and reflect revisions for immaterial prior period misstatements related to intercompany profit in inventory - The Beauty Health Company is a global company focused on skin health experiences, with key brands including Hydrafacial (hydradermabrasion), SkinStylus (microneedling), and Keravive (scalp health)[16][79] - The company identified and revised prior period misstatements related to the elimination of intercompany profit in inventory, which, while not material, resulted in an overstatement of inventory by $6.8 million and an understatement of accumulated deficit by $7.1 million as of December 31, 2022[20][21][72] Note 2 – Revenue The Company generates revenue from the sale of Hydrafacial Delivery Systems and related Consumables, recognizing revenue upon transfer of control at shipment. The business operates as a single reportable segment Net Sales by Product Line (in thousands) | Product Line | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :---------------- | :-------------------------------- | :-------------------------------- | | Delivery Systems | $45,353 | $41,647 | | Consumables | $40,925 | $33,768 | | Total Net Sales | $86,278 | $75,415 | Net Sales by Geographic Region (in thousands) | Geographic Region | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :-------------------------- | :-------------------------------- | :-------------------------------- | | Americas | $52,978 | $44,606 | | Asia-Pacific | $13,620 | $12,901 | | Europe, the Middle East and Africa | $19,680 | $17,908 | | Total Net Sales | $86,278 | $75,415 | Note 3 — Balance Sheet Components This note details the composition of inventories, accrued payroll-related expenses, and other accrued expenses as of March 31, 2023, and December 31, 2022 Inventories (in thousands) | Category | March 31, 2023 | December 31, 2022 | | :-------------- | :------------- | :---------------- | | Raw materials | $40,032 | $38,373 | | Finished goods | $82,049 | $71,283 | | Total Inventories | $122,081 | $109,656 | Accrued Payroll-Related Expenses (in thousands) | Category | March 31, 2023 | December 31, 2022 | | :------------------------ | :------------- | :---------------- | | Accrued compensation | $4,000 | $4,154 | | Accrued payroll taxes | $2,027 | $1,357 | | Accrued benefits | $4,869 | $5,643 | | Accrued sales commissions | $7,826 | $10,523 | | Total | $18,722 | $21,677 | Note 4 — Fair Value Measurements This note outlines the fair value hierarchy (Level 1, 2, and 3) used for measuring assets and liabilities on a recurring basis. As of March 31, 2023, money market funds were classified as Level 1, and Private Placement Warrants were classified as Level 2, with their fair value determined by redemption value Fair Value Measurements (in thousands) - March 31, 2023 | Category | Level 1 | Level 2 | Level 3 | Total | | :------------------------ | :--------- | :--------- | :------ | :--------- | | Money market funds | $475,326 | $— | $— | $475,326 | | Warrant liability — Private Placement Warrants | $— | $24,550 | $— | $24,550 | - The fair value of Private Placement Warrants increased from $15.473 million at December 31, 2022, to $24.550 million at March 31, 2023, and was determined using their redemption value as of March 31, 2023, due to redemption conditions[32][33] Note 5 – Property and Equipment, net This note details the composition of property and equipment, net, including furniture, computers, machinery, autos, tooling, and leasehold improvements, along with accumulated depreciation and construction in progress Property and Equipment, net (in thousands) | Category | March 31, 2023 | December 31, 2022 | | :---------------------------- | :------------- | :---------------- | | Total property and equipment | $31,891 | $29,303 | | Less: accumulated depreciation and amortization | $(14,199) | $(12,494) | | Construction in progress | $668 | $1,375 | | Property and equipment, net | $18,360 | $18,184 | Note 6 – Goodwill and Intangible Assets, net This note provides a breakdown of the company's intangible assets, including developed technology, customer relationships, trademarks, capitalized software, non-compete agreements, and patents, along with their gross carrying amounts, accumulated amortization, and net carrying values. It also details changes in goodwill and recent asset acquisitions Intangible Assets, net (in thousands) - March 31, 2023 | Category | Gross Carrying Value | Accumulated Amortization | Net Carrying Value | | :-------------------- | :------------------- | :----------------------- | :----------------- | | Developed technology | $92,616 | $(56,828) | $35,788 | | Customer relationships | $18,425 | $(8,563) | $9,862 | | Trademarks | $11,395 | $(4,289) | $7,106 | | Capitalized software | $12,285 | $(2,022) | $10,263 | | Non-compete agreement | $5,861 | $(470) | $5,391 | | Patents | $2,832 | $(407) | $2,425 | | Total intangible assets | $143,414 | $(72,579) | $70,835 | - Goodwill increased from $124.593 million at December 31, 2022, to $125.175 million at March 31, 2023, primarily due to foreign currency translation impact[36] - In Q1 2023, the company acquired Esthetic Medical Inc. for $11.8 million cash and 109,625 shares of Class A Common Stock ($1.3 million), allocating $19.9 million to intangible assets, mainly developed technology. Additionally, assets from Anacapa Aesthetics LLC were acquired, recognizing approximately $5 million in intangible assets, primarily non-compete agreements[36][37] Note 7 – Long-term Debt This note details the company's long-term debt, including an undrawn $50 million revolving credit facility and $750 million in 1.25% Convertible Senior Notes due 2026. It also describes the associated Capped Call Transactions designed to reduce dilution Amended and Restated Credit Facility This section describes the terms and conditions of the company's revolving credit facility - The company has a $50 million revolving credit facility with a maturity date of November 14, 2027, which remains undrawn as of March 31, 2023[38][101] - The credit facility includes restrictive covenants, such as maintaining a leverage ratio no greater than 3.00 to 1.00 and a fixed charge coverage ratio of not less than 1.15 to 1.00, with which the company was in compliance as of March 31, 2023[39][102] Convertible Senior Notes This section details the company's outstanding convertible senior notes and their key terms - The company issued $750 million in principal amount of 1.25% Convertible Senior Notes due 2026 on September 14, 2021[40][103] Convertible Senior Notes (in thousands) | Metric | March 31, 2023 | December 31, 2022 | | :-------------------------- | :------------- | :---------------- | | 1.25% Convertible Notes due 2026 | $750,000 | $750,000 | | Unamortized Issuance Costs | $(14,799) | $(15,857) | | Net Carrying Value | $735,201 | $734,143 | - The estimated fair value of the Notes increased from approximately $567 million at December 31, 2022, to $624 million at March 31, 2023, based on actual bid prices and classified as Level 2 in the fair value hierarchy[41] Capped Call Transactions This section explains the company's capped call transactions designed to mitigate dilution from convertible notes - The company entered into Capped Call Transactions to cover the underlying shares of common stock for the Convertible Senior Notes, aiming to reduce potential dilution and/or offset cash payments in excess of the principal amount upon conversion[42][104] - The initial cap price for these transactions is $47.94, representing a 100% premium over the common stock's sale price on September 9, 2021, with a total cost of $90.2 million[42][104] Note 8– Income Taxes This note discusses the company's income tax benefit/expense and effective tax rates, highlighting factors like the revaluation of warrant liabilities and non-deductible expenses. It also mentions the establishment of a valuation allowance against deferred tax assets and the anticipated immaterial impact of the Inflation Reduction Act - The company reported an income tax benefit of $3.7 million for Q1 2023, compared to an expense of $2.6 million for Q1 2022[44] Effective Tax Rate Comparison | Period | Effective Tax Rate | Federal Statutory Rate | Primary Reason for Difference | | :-------------------- | :----------------- | :--------------------- | :---------------------------- | | Three Months Ended March 31, 2023 | 14.1% | 21.0% | Exclusion of book income from warrant liabilities revaluation, non-deductible expenses | | Three Months Ended March 31, 2022 | 7.7% | 21.0% | Forecasted losses adjusted by non-deductible expenses (warrant liabilities revaluation, officer's compensation, meals/entertainment) | - The company has established a valuation allowance against a portion of its deferred tax assets in the U.S. and Singapore, and does not anticipate a material impact from the Inflation Reduction Act[47][49] Note 9 – Share-Based Payments This note outlines the company's stock compensation plans, including stock options, restricted stock units, and an Employee Stock Purchase Plan. It details the share-based compensation expense for the periods and the total unrecognized compensation expense Share-Based Compensation Expense (in thousands) | Category | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Stock options | $1,257 | $3,219 | | Restricted stock units | $3,416 | $2,515 | | Performance-based restricted stock units | $(1,194) | $1,201 | | Employee stock purchase plan | $98 | $114 | | Total | $3,577 | $7,049 | - As of March 31, 2023, total unrecognized compensation expense related to unvested share-based compensation was $75.1 million, expected to be recognized over a weighted-average period of 2.27 years[50] Note 10 – Commitments and Contingencies This note describes the company's legal proceedings, specifically patent and trademark infringement lawsuits against Ageless Serums LLC and Cartessa Aesthetics, LLC, where the company is seeking monetary damages and injunctive relief Ageless This section details the legal proceedings involving Ageless Serums LLC, including bankruptcy and settlement negotiations - Hydrafacial filed lawsuits against Ageless Serums LLC for contributory trademark infringement, false designation of origin, induced breach of contract, tortious interference, unfair competition, and patent infringement[51] - Ageless filed for Chapter 11 bankruptcy, staying the cases. Hydrafacial filed a $12.7 million general unsecured claim. A tentative settlement agreement was reached in mediation on March 8, 2023, but terms are still being negotiated and require court approval[51][52] Cartessa This section outlines the patent infringement lawsuit against Cartessa Aesthetics, LLC - Hydrafacial filed a patent infringement complaint against Cartessa Aesthetics, LLC, alleging infringement of five patents related to its delivery system[53] - The parties are awaiting the New York Court's decision on motions for summary judgment, after which a trial date may be set. Hydrafacial is seeking money damages and injunctive relief[53][54] Note 11 – Related-Party Transactions This note details various agreements and transactions with related parties, including a Registration Rights Agreement for equity securities, an Investor Rights Agreement granting board designation rights to LCP Edge Holdco, LLC, and an Amended and Restated Management Services Agreement with Linden Capital Partners III Registration Rights Agreement This section describes the agreement granting registration rights for certain equity securities to specified investors - The company entered into a Registration Rights Agreement with BLS Investor Group LLC (Sponsor) and Hydrafacial stockholders, granting them registration rights for their Class A Common Stock and other equity securities[55][56] - The agreement includes "piggy-back" registration rights and requires the company to bear expenses for filing registration statements. The Sponsor also agreed to transfer restrictions on certain securities[57][58] Investor Rights Agreement This section outlines the agreement granting LCP Edge Holdco, LLC, rights to designate directors to the company's board - LCP Edge Holdco, LLC (LCP) has the right to designate directors to the company's board based on its ownership percentage of outstanding Class A Common Stock (one director for ≥10%, two for ≥15%, three for ≥40%)[60] - As long as LCP holds at least 10% of Class A Common Stock, it is entitled to have at least one designee on the compensation, nominating, and corporate governance committees[60] Amended and Restated Management Services Agreement This section details the management services agreement with Linden Capital Partners III LP and its expiration - Hydrafacial previously had a Management Services Agreement with Linden Capital Partners III LP and DW Management Services, L.L.C., involving quarterly monitoring fees and other transaction-related fees[61] - An Amended and Restated Management Services Agreement with Linden Manager III LP allowed for advisory services related to M&A for one year post-Business Combination, with a 1% fee on enterprise value, which expired on May 4, 2022. No management fees were recorded in Q1 2023[62][63] Miami Beach Office This section discusses the company's prior reimbursement arrangement for the Miami Beach Office - The company previously reimbursed an entity owned by its Chairman for the Miami Beach Office, but this arrangement was discontinued as of March 2023, with no material expenses in Q1 2023[64][65] Note 12 - Stockholders' Equity This note details the company's common and preferred stock, including authorized and outstanding shares, voting rights, and the common stock repurchase program approved in September 2022 Common Stock This section provides details on the company's authorized and outstanding common stock and voting rights - The company is authorized to issue 320,000,000 shares of Class A Common Stock, with 132,626,954 shares outstanding as of March 31, 2023. Holders are entitled to one vote per share, and no dividends have been declared or paid[66] Common Stock Repurchases This section outlines the company's common stock repurchase program and related transactions - The board approved a $200 million common stock repurchase program on September 26, 2022[67] - The company entered into two accelerated share repurchase agreements in Q4 2022, repurchasing approximately 9.3 million shares for $100 million and receiving initial deliveries of 9.5 million shares for another $100 million. A final settlement payment of approximately $2.2 million for the second agreement was made in Q2 2023[68] Preferred Stock This section describes the company's authorized preferred stock and its issuance status - The company is authorized to issue 1,000,000 shares of preferred stock, but no shares were issued or outstanding as of March 31, 2023, or December 31, 2022[69] Note 13 – Net (Loss) Income Attributable to Common Stockholders This note provides the calculation of basic and diluted net (loss) income per share, explaining the exclusion of certain share-based awards, convertible notes, and Private Placement Warrants from diluted EPS calculations due to their antidilutive effect Net (Loss) Income Per Share Calculation | Metric (in thousands, except share and per share amounts) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :------------------------------------------------------ | :-------------------------------- | :-------------------------------- | | Net (loss) income available to common stockholders - basic | $(22,285) | $31,455 | | Less: Income on Private Placement Warrants | — | $(52,052) | | Net loss available to common stockholders - diluted | $(22,285) | $(20,597) | | Weighted average common shares outstanding - basic | 132,420,762 | 150,598,105 | | Effect of dilutive shares: | | | | Private Placement Warrants | — | 2,113,593 | | Weighted average common shares outstanding - diluted | 132,420,762 | 152,711,698 | | Basic net (loss) income per share | $(0.17) | $0.21 | | Diluted net (loss) income per share | $(0.17) | $(0.13) | - For Q1 2023, all outstanding share-based awards, convertible notes, and Private Placement Warrants were excluded from diluted net loss per common share calculation because their effect would be antidilutive[70] Note 14 – New Accounting Pronouncements This note states that recent accounting pronouncements pending adoption are either not applicable to the company or are not expected to have a material impact on its condensed consolidated financial statements - Recent accounting pronouncements pending adoption are not expected to have a material impact on the company's financial statements[71] Note 15 – Revision for Immaterial Misstatements This note details the revision of previously issued consolidated financial statements to correct immaterial misstatements related to the elimination of intercompany profit in inventory. These revisions impacted inventory, accumulated deficit, cost of goods sold, and net income for prior periods - The company revised prior period financial statements to correct immaterial misstatements related to intercompany profit in inventory. As of December 31, 2022, inventory was overstated by $6.8 million and accumulated deficit was understated by $7.1 million. For Q1 2022, cost of goods sold was understated by $1.1 million[20][21][72] Impact of Revision on Condensed Consolidated Balance Sheet (in thousands) - December 31, 2022 | Metric | As Previously Reported | Adjustment | As Revised | | :-------------------------- | :--------------------- | :--------- | :--------- | | Inventories | $116,430 | $(6,774) | $109,656 | | Total Assets | $1,008,907 | $(7,141) | $1,001,766 | | Accumulated deficit | $(374,328) | $(7,141) | $(381,469) | | Total stockholders' equity | $171,476 | $(7,141) | $164,335 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and operational results, including forward-looking statements, an overview of the business, factors affecting performance (COVID-19, inflation), a detailed comparison of Q1 2023 to Q1 2022 financial results, liquidity and capital resources, known trends and uncertainties, and cash flow analysis Forward-Looking Statements This section highlights the inherent uncertainties and risks associated with the company's future projections and statements - The report contains forward-looking statements subject to risks, uncertainties, and assumptions, including the inability to recognize business combination benefits, debt service risks, growth management, litigation, regulatory changes, economic factors, and the impact of the COVID-19 pandemic[74][75][76] - The company does not undertake to update or revise any forward-looking statements unless required by law[76] Company Overview This section provides a general description of The Beauty Health Company's business and market position - The Beauty Health Company is a global leader in skin health experiences, offering aesthetic technologies and products under brands like Hydrafacial, SkinStylus, and Keravive, aiming to personalize skin health for diverse demographics[79] Factors Affecting Our Performance This section discusses external factors influencing the company's performance, specifically the ongoing impact of the COVID-19 pandemic on business operations, supply chains, and consumer behavior, and the effects of inflation on raw materials, shipping, and labor costs Impact of the COVID-19 Pandemic This section details the ongoing disruptions and challenges posed by the COVID-19 pandemic on the company's operations and market - The COVID-19 pandemic continues to disrupt business, particularly in regions like China with zero-tolerance policies, leading to prolonged store closures and travel restrictions, negatively impacting consumer traffic[82] - The company anticipates intermittent store closures and supply chain challenges, expecting a gradual and uneven recovery, with shifting consumer spending habits and confidence[83] Inflation This section addresses the impact of rising costs on the company's raw materials, shipping, and labor expenses - The company experienced inflation's impact on raw materials, shipping, and labor costs in Q1 2023, expecting it to continue into Q2 2023[85] - Mitigation strategies include potential price increases on Delivery Systems and Consumables, and accepting revenue in U.S. dollar and/or local currency, though these may not fully offset the impact[85] Comparison of Three Months Ended March 31, 2023 to Three Months Ended March 31, 2022 This section provides a detailed comparative analysis of the company's consolidated results of operations for the three months ended March 31, 2023, versus the same period in 2022, covering net sales, cost of sales, gross profit, operating expenses, and other income/expense items Net Sales This section analyzes the company's revenue performance, breaking down sales by product line and geographic region Net Sales Performance (in millions) | Category | 2023 | 2022 | Amount Change | % Change | | :--------------- | :---- | :---- | :------------ | :------- | | Delivery Systems | $45.4 | $41.6 | $3.8 | 8.9% | | Consumables | $40.9 | $33.8 | $7.1 | 21.2% | | Total Net Sales | $86.3 | $75.4 | $10.9 | 14.4% | - Total net sales increased by 14.4% year-over-year, driven primarily by strong Consumable sales in the United States due to increased Delivery System placements and consumption. Delivery Systems sales also increased compared to the prior year's Syndeo launch[89] Cost of Sales, Gross Profit, and Gross Margin This section examines the cost of goods sold, resulting gross profit, and gross margin percentage Cost of Sales, Gross Profit, and Gross Margin (in millions) | Metric | 2023 | 2022 | Amount Change | % Change | | :------------ | :---- | :---- | :------------ | :------- | | Cost of sales | $32.2 | $24.5 | $7.7 | 31.2% | | Gross profit | $54.1 | $50.9 | $3.2 | 6.3% | | Gross margin | 62.7% | 67.5% | -4.8 pp | | - Cost of sales increased by 31.2% due to higher sales volume. Gross margin declined from 67.5% to 62.7% primarily due to charges for discontinued and obsolete products[90] Operating Expenses This section analyzes the changes in the company's operating expenses, including selling and marketing, research and development, and general and administrative costs, for the three months ended March 31, 2023, compared to the same period in 2022 Selling and Marketing This section details the trends and changes in the company's selling and marketing expenditures Selling and Marketing Expense (in millions) | Metric | 2023 | 2022 | Amount Change | % Change | | :-------------------------- | :---- | :---- | :------------ | :------- | | Selling and marketing expense | $38.7 | $36.4 | $2.3 | 6.3% | | As a percentage of net sales | 44.9% | 48.3% | -3.4 pp | | - The increase in selling and marketing expense was primarily driven by higher personnel-related costs, including sales commission expense[91] Research and Development This section outlines the company's investment in research and development activities Research and Development Expense (in millions) | Metric | 2023 | 2022 | Amount Change | % Change | | :-------------------------- | :---- | :---- | :------------ | :------- | | Research and development expense | $2.3 | $2.2 | $0.1 | 4.8% | | As a percentage of net sales | 2.7% | 3.0% | -0.3 pp | | - Research and development expense remained relatively flat year-over-year[92] General and Administrative This section analyzes the company's general and administrative costs, including overhead and professional services General and Administrative Expense (in millions) | Metric | 2023 | 2022 | Amount Change | % Change | | :-------------------------- | :---- | :---- | :------------ | :------- | | General and administrative expense | $30.4 | $26.3 | $4.1 | 15.7% | | As a percentage of net sales | 35.2% | 34.8% | +0.4 pp | | - The increase in general and administrative expense was primarily due to higher software expenses (including contract termination costs) and professional services fees (including patent litigation expenses), partially offset by lower recruiting-related expenses[93] Interest Income and Change in Fair Value of Warrant Liabilities This section discusses the company's interest income and the impact of changes in the fair value of warrant liabilities Interest Income and Warrant Liabilities Change (in millions) | Metric | 2023 | 2022 | Amount Change | | :-------------------------------------- | :---- | :----- | :------------ | | Interest income | $(4.3)| $— | $(4.3) | | Change in fair value of warrant liabilities | $9.1 | $(52.1)| $61.2 | - Interest income increased by $4.3 million due to higher interest earned on money market fund investments[94] - The company recognized a $9.1 million expense from the change in fair value of warrant liabilities in Q1 2023, a significant shift from a $52.1 million income in Q1 2022, primarily driven by stock price fluctuations[95] Liquidity and Capital Resources This section discusses the company's sources and uses of capital, including cash and cash equivalents, a revolving credit facility, and convertible senior notes. Management believes current liquidity is sufficient for the next twelve months, but acknowledges potential needs for additional financing for growth and acquisitions Amended and Restated Credit Facility This section describes the terms and compliance status of the company's revolving credit facility - The company has an undrawn $50 million revolving credit facility maturing on November 14, 2027, with the ability to increase commitments or term loans by an additional $50 million[101] - The company was in compliance with all restrictive and financial covenants of the Credit Agreement as of March 31, 2023, including maintaining a leverage ratio of no greater than 3.00 to 1.00 and a fixed charge coverage ratio of not less than 1.15 to 1.00[102] Convertible Senior Notes This section provides details on the company's outstanding convertible senior notes - The company issued $750 million in 1.25% Convertible Senior Notes due 2026 on September 14, 2021, including an additional $100 million from the initial purchasers' option exercise[103] Capped Call Transactions This section explains the company's capped call transactions designed to mitigate dilution from convertible notes - The company entered into Capped Call Transactions to reduce potential dilution from the conversion of Notes and/or offset cash payments exceeding the principal amount, with an initial cap price of $47.94[104] - These transactions are separate from the Notes and do not affect holders' rights under the Notes[105] Known Trends or Uncertainties This section identifies key market and economic trends or uncertainties that could impact the company's future performance - The company's customer base in the medical, aesthetician, and beauty retail industries has seen some consolidation during economic downturns, which could adversely impact revenues and earnings if it continues[106][108] - Ongoing uncertainties related to the COVID-19 pandemic, including potential future governmental actions (e.g., China's zero-tolerance policy) and broader macro challenges, could affect economic conditions, consumer spending, and the company's growth rate[107][108] Cash Flows This section summarizes the company's cash flow activities for the three months ended March 31, 2023, compared to the same period in 2022, detailing changes in operating, investing, and financing activities Operating Activities This section analyzes cash generated or used by the company's primary business operations Net Cash Flows from Operating Activities (in millions) | Metric | 2023 | 2022 | Change (YoY) | | :------------------------------------ | :----- | :----- | :----------- | | Net cash flows used in operating activities | $(13.0)| $(38.5)| $25.5 | - The decrease in cash used in operating activities was primarily due to lower working capital usage and the net impact of the current year net loss and other non-cash adjustments, particularly the change in fair value of Private Placement Warrants[111] Investing Activities This section details cash flows related to the acquisition and disposal of long-term assets and investments Net Cash Flows from Investing Activities (in millions) | Metric | 2023 | 2022 | Change (YoY) | | :------------------------------------ | :----- | :----- | :----------- | | Net cash flows used in investing activities | $(21.7)| $(3.4) | $(18.3) | - The significant increase in cash used in investing activities was primarily due to a $16.9 million cash payment for the asset acquisitions of Esthetic Medical Inc. and Anacapa Aesthetics LLC[112] Financing Activities This section outlines cash flows from debt, equity, and dividend transactions Net Cash Flows from Financing Activities (in millions) | Metric | 2023 | 2022 | Change (YoY) | | :------------------------------------ | :----- | :----- | :----------- | | Net cash flows used in financing activities | $(2.2) | $(0.8) | $(1.4) | - The increase in cash used in financing activities was primarily related to payments associated with tax withholdings on vested share-based payment awards[113] Critical Accounting Policies and Estimates This section confirms no changes to the company's critical accounting policies and estimates - There have been no changes to the company's critical accounting policies as disclosed in its Annual Report on Form 10-K for the fiscal year ended December 31, 2022[115] Recent Accounting Pronouncements This section refers to the notes for information on new accounting pronouncements - For information on recent accounting pronouncements, refer to Note 14 to the Consolidated Financial Statements[116] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section states that the company's market risks primarily stem from changes in interest rates, foreign currency, and inflation. No material changes to these market risks were disclosed compared to the previous Annual Report on Form 10-K - The company's primary market risks relate to changes in interest rates, foreign currency, and inflation[117] - There were no material changes to the market risks disclosed in the Annual Report on Form 10-K for the fiscal year ended December 31, 2022[117] Item 4. Controls and Procedures This section covers the evaluation of the company's disclosure controls and procedures, acknowledging their effectiveness while also highlighting the inherent limitations of internal controls. It confirms no material changes in internal control over financial reporting during the quarter Evaluation of Disclosure Controls and Procedures This section assesses the effectiveness of the company's controls for timely and accurate financial reporting - The company's management concluded that disclosure controls and procedures were effective as of March 31, 2023, providing reasonable assurance that required information is recorded, processed, summarized, and reported timely[118] Inherent Limitations over Internal Controls This section acknowledges that internal control systems have inherent limitations and cannot guarantee absolute prevention of errors or fraud - Management acknowledges that control systems provide only reasonable, not absolute, assurance and may not prevent or detect all errors and fraud due to resource constraints and inherent limitations[119] Changes in Internal Control over Financial Reporting This section reports on any material changes to the company's internal control over financial reporting during the period - No changes in internal control over financial reporting occurred during Q1 2023 that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[120] PART II—OTHER INFORMATION This section provides additional information not covered in the financial statements, including legal proceedings, risk factors, and equity security sales Item 1. Legal Proceedings This section refers to Note 10 of the condensed consolidated financial statements for a description of the company's material pending legal proceedings - Material pending legal proceedings are detailed in Note 10, "Commitments and Contingencies," to the condensed consolidated financial statements[123] Item 1A. Risk Factors This section directs readers to the Annual Report on Form 10-K for a comprehensive discussion of risk factors, noting no material updates or changes except for a specific risk regarding cash balances exceeding federally insured limits - Readers should consider risk factors discussed in the Annual Report on Form 10-K for the year ended December 31, 2022[124] - A new risk factor highlights that the company maintains cash balances at financial institutions that often exceed federally insured limits, posing a risk of loss if such institutions fail, though the company had no accounts with SVB or Signature Bank during their failures[125] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section reports on unregistered sales of equity securities, specifically the issuance of Class A Common Stock as part of an asset acquisition, and confirms no purchases of equity securities by the issuer or affiliated purchasers during the quarter Unregistered Sales of Equity Securities This section details the issuance of equity securities that were not registered under the Securities Act - On February 28, 2023, the company acquired Esthetic Medical Inc., issuing 109,625 shares of Class A Common Stock as part of the consideration, relying on the Section 4(a)(2) exemption from registration[126][127] Purchase of Equity Securities by Issuer and Affiliated Purchasers This section reports on any repurchases of the company's equity securities by the issuer or its affiliates - No purchases of the company's equity securities were made by the company or any affiliated purchasers during the quarter ended March 31, 2023[128] Item 3. Defaults Upon Senior Securities This section states that there were no defaults upon senior securities - There were no defaults upon senior securities during the period[129] Item 4. Mine Safety Disclosures This section indicates that mine safety disclosures are not applicable to the company - Mine Safety Disclosures are not applicable to the company[130] Item 5. Other Information This section states that there is no other information to report - No other information is reported in this section[131] Item 6. Exhibits This section provides an index of exhibits filed as part of, or incorporated by reference into, the Quarterly Report on Form 10-Q, including merger agreements, certificates of incorporation, bylaws, indenture, and various certifications - The exhibit index lists various documents filed or incorporated by reference, such as the Agreement and Plan of Merger, Stock Purchase Agreement, Certificate of Incorporation, Bylaws, Indenture, and certifications[132][133][135] SIGNATURES This section contains the official signatures of the company's authorized officers, certifying the accuracy of the report - The report is signed by Andrew Stanleick, Chief Executive Officer, and Liyuan Woo, Chief Financial Officer, on May 10, 2023[142]