The Beauty Health pany(SKIN) - 2023 Q2 - Quarterly Report

PART I—FINANCIAL INFORMATION Financial Statements This section presents the unaudited condensed consolidated financial statements for the period ended June 30, 2023, including balance sheets, statements of comprehensive income, stockholders' equity, and cash flows, along with detailed notes Condensed Consolidated Balance Sheets The balance sheet as of June 30, 2023, shows total assets of $1,007.474 million, slightly increased from $1,003.083 million at year-end 2022, with total liabilities at $845.632 million and total stockholders' equity at $161.842 million Condensed Consolidated Balance Sheet Highlights (in thousands) | Balance Sheet Item | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Cash and cash equivalents | $549,728 | $568,197 | | Total current assets | $767,942 | $783,275 | | Total Assets | $1,007,474 | $1,003,083 | | Total current liabilities | $82,789 | $71,714 | | Convertible senior notes, net | $736,257 | $734,143 | | Total Liabilities | $845,632 | $836,030 | | Total Stockholders' Equity | $161,842 | $167,053 | Condensed Consolidated Statements of Comprehensive Income (Loss) For Q2 2023, net sales increased 13.5% year-over-year to $117.5 million, but gross profit slightly decreased, leading to a wider operating loss of $13.1 million and a net income of $3.4 million, down from $6.3 million in Q2 2022 Q2 2023 vs Q2 2022 Performance (in thousands) | Metric | Q2 2023 | Q2 2022 | | :--- | :--- | :--- | | Net sales | $117,479 | $103,536 | | Gross profit | $67,876 | $70,040 | | Loss from operations | $(13,146) | $(5,027) | | Net income (loss) | $3,364 | $6,317 | | Basic EPS | $0.03 | $0.04 | H1 2023 vs H1 2022 Performance (in thousands) | Metric | H1 2023 | H1 2022 | | :--- | :--- | :--- | | Net sales | $203,757 | $178,951 | | Gross profit | $121,980 | $120,925 | | Loss from operations | $(30,456) | $(19,040) | | Net (loss) income | $(16,895) | $37,772 | | Basic EPS | $(0.13) | $0.25 | Condensed Consolidated Statements of Cash Flows For the six months ended June 30, 2023, net cash provided by operating activities significantly improved to $9.0 million, while net cash used in investing activities increased to $24.9 million, resulting in a $19.7 million decrease in cash and cash equivalents Cash Flow Summary for Six Months Ended June 30 (in thousands) | Cash Flow Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net cash provided by (used for) operating activities | $8,956 | $(69,806) | | Net cash used for investing activities | $(24,903) | $(8,304) | | Net cash used for financing activities | $(3,741) | $(2,763) | | Net decrease in cash and cash equivalents | $(19,688) | $(80,873) | | Cash and cash equivalents, end of period | $549,728 | $820,970 | Notes to Condensed Consolidated Financial Statements The notes provide crucial context to the financial statements, detailing revenue by product and geography, recent acquisitions, convertible debt, ongoing legal proceedings, and a revision of prior period financial statements - The company generates revenue from selling Delivery Systems and related Consumables, with Consumables sales growing 28% YoY to $92.8 million and Delivery Systems sales growing 4.2% to $110.9 million for the six months ended June 30, 2023[23][25] Net Sales by Geographic Region (Six Months Ended June 30, in thousands) | Region | 2023 | 2022 | | :--- | :--- | :--- | | Americas | $116,622 | $119,960 | | Asia-Pacific (APAC) | $38,868 | $23,287 | | Europe, the Middle East and Africa (EMEA) | $48,267 | $35,704 | | Total net sales | $203,757 | $178,951 | - In February 2023, the company acquired Esthetic Medical, Inc (EMI) for $11.8 million in cash and $1.3 million in stock, plus potential contingent consideration, contributing to approximately $24.9 million in intangible assets from this and another asset acquisition[35][37] - The company has $750 million in 1.25% Convertible Senior Notes due 2026 and an undrawn $50 million revolving credit facility[39][41] - The company is involved in patent and trademark infringement lawsuits against Ageless Serums LLC and Cartessa Aesthetics, LLC[56][58] - During the six months ended June 30, 2023, the company identified and corrected immaterial misstatements in its previously issued financial statements for fiscal years 2020-2022 and Q1 2023, related to the elimination of intercompany balances and right of return assets[20][74] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the financial results, highlighting a 13.5% year-over-year revenue increase in Q2 2023 driven by strong Consumables sales, despite a decline in gross margin, while maintaining a strong liquidity position Results of Operations For Q2 2023, net sales rose 13.5% to $117.5 million, propelled by a 33.9% increase in Consumables sales, but gross margin declined to 57.8% from 67.6% due to higher product costs and unfavorable mix, leading to a wider operating loss of $13.1 million Q2 2023 vs Q2 2022 Net Sales (in millions) | Product Line | Q2 2023 | Q2 2022 | Change (%) | | :--- | :--- | :--- | :--- | | Delivery Systems | $65.6 | $64.8 | 1.2% | | Consumables | $51.9 | $38.8 | 33.9% | | Total net sales | $117.5 | $103.5 | 13.5% | - Q2 2023 gross margin declined to 57.8% from 67.6% in Q2 2022, primarily due to higher product costs, unfavorable changes in product mix, and higher amortization expense[92] - Q2 2023 General and administrative expense increased by $7.5 million (27.2%) YoY, driven by higher personnel-related compensation, share-based compensation, and severance/restructuring expenses[95] - For the six months ended June 30, 2023, the company reported a net loss of $16.9 million, compared to a net income of $37.8 million in the prior-year period[101] Liquidity and Capital Resources The company ended Q2 2023 with a strong liquidity position, holding $549.7 million in cash and cash equivalents and access to an undrawn $50.0 million revolving credit facility, which management believes is sufficient for future operations - As of June 30, 2023, the company had cash and cash equivalents of $549.7 million[109] - The company has a $50.0 million revolving credit facility, which remained undrawn as of June 30, 2023[109][114] - Net cash provided by operating activities for the first six months of 2023 was $9.0 million, a significant improvement from the $69.8 million used in the same period in 2022, mainly due to lower working capital usage[125][126] Known Trends or Uncertainties Management identifies several key uncertainties, including potential negative impacts from industry consolidation and lingering economic effects from the COVID-19 pandemic, while also disclosing a $5 million expense for a voluntary product update initiative and a $5 million Employee Retention Credit received - The company launched a voluntary initiative in Q3 2023 to replace certain components in Syndeo delivery systems, which is expected to result in an approximate $5 million expense[122] - In July 2023, the company received approximately $5 million for the Employee Retention Credit under the CARES Act[123] - The company faces uncertainty from potential consolidation in the medical, esthetician, and beauty retail industries, and the economic recovery from the COVID-19 pandemic, especially in China[119][120] Quantitative and Qualitative Disclosures About Market Risk The company states that there have been no material changes to its market risks, which primarily relate to changes in interest rates, foreign currency, and inflation, since the disclosure in its Annual Report on Form 10-K - There were no material changes to the company's market risks (interest rates, foreign currency, and inflation) as disclosed in the Annual Report on Form 10-K[132] Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of June 30, 2023, with no material changes in internal control over financial reporting during the second quarter - The company's principal executive officer and principal financial officer concluded that disclosure controls and procedures were effective as of June 30, 2023[134] - There were no changes in internal control over financial reporting during the quarter that have materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[136] PART II—OTHER INFORMATION Legal Proceedings This section refers to Note 10 of the financial statements for details on material pending legal proceedings, primarily involving allegations of trademark and patent infringement against Ageless Serums LLC and Cartessa Aesthetics, LLC - The company is pursuing legal action against Ageless Serums LLC for trademark infringement and other claims, with a tentative settlement reached during mediation pending court approval[56][57] - The company is in a patent infringement lawsuit against Cartessa Aesthetics, LLC, with a trial date pending for three of the patents-in-suit[58][59] Risk Factors The company notes no material changes to the risk factors disclosed in its Annual Report on Form 10-K, except for a newly added risk concerning cash balances held at financial institutions exceeding federally insured limits, highlighted by recent bank failures - A new risk factor was added concerning cash held in financial institutions in balances that may exceed FDIC insurance limits, prompted by the failures of Silicon Valley Bank and Signature Bank[141] Unregistered Sales of Equity Securities and Use of Proceeds During the three months ended June 30, 2023, the company did not issue any unregistered equity securities, nor were any equity securities repurchased by the company or its affiliates - No unregistered sales of equity securities occurred during the three months ended June 30, 2023[142] - No purchases of the company's equity securities were made by the company or any affiliated purchasers during the three months ended June 30, 2023[143] Defaults Upon Senior Securities The company reported no defaults upon senior securities during the period - None[144] Mine Safety Disclosures This section is not applicable to the company - Not Applicable[145] Other Information This section discloses that subsequent to the filing of the 2022 Annual Report, the company identified and corrected immaterial misstatements in prior period financial statements related to intercompany balances and right of return assets, revising affected fiscal years and interim periods accordingly - The company identified and corrected immaterial prior period misstatements related to intercompany balances and right of return assets, electing to revise its previously issued consolidated financial statements for fiscal years 2021 and 2022, and interim periods[147] Exhibits This section provides an index of all exhibits filed as part of the Quarterly Report on Form 10-Q, including certifications by the CEO and CFO, and XBRL data files