The Beauty Health pany(SKIN) - 2023 Q3 - Quarterly Report

PART I—FINANCIAL INFORMATION Item 1. Financial Statements The financial statements reflect a significant net loss and reduced equity due to substantial charges from the Syndeo Program Condensed Consolidated Balance Sheet Highlights (Unaudited) | (in thousands) | September 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Total Assets | $973,074 | $1,003,083 | | Total Liabilities | $883,117 | $836,030 | | Total Stockholders' Equity | $89,957 | $167,053 | Condensed Consolidated Statements of Comprehensive Income (Loss) Highlights (Unaudited) | (in thousands) | Three Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2023 | | :--- | :--- | :--- | | Net Sales | $97,413 | $301,170 | | Gross (Loss) Profit | $(12,553) | $109,427 | | Loss from Operations | $(82,101) | $(112,557) | | Net (Loss) Income | $(73,818) | $(90,713) | | Net (Loss) Income per Share (Basic) | $(0.56) | $(0.68) | Condensed Consolidated Statements of Cash Flows Highlights (Unaudited) | (in thousands) | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :--- | :--- | :--- | | Net cash provided by (used for) operating activities | $26,920 | $(101,207) | | Net cash used for investing activities | $(29,339) | $(16,045) | | Net cash used for financing activities | $(6,091) | $(102,763) | | Cash and cash equivalents, end of period | $559,444 | $684,208 | Notes to Condensed Consolidated Financial Statements Key notes detail the Syndeo Program's financial impact, a new Business Transformation Program, revenue trends, and a new share repurchase authorization Net Sales by Product Line (in thousands) | Product Line | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :--- | :--- | :--- | | Delivery Systems | $161,986 | $155,524 | | Consumables | $139,184 | $112,219 | | Total net sales | $301,170 | $267,743 | Net Sales by Geographic Region (in thousands) | Geographic Region | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :--- | :--- | :--- | | Americas | $168,325 | $178,330 | | Asia-Pacific (APAC) | $63,525 | $38,397 | | Europe, the Middle East and Africa (EMEA) | $69,320 | $51,016 | | Total net sales | $301,170 | $267,743 | - The company recorded an $18.8 million inventory write-off for obsolete Syndeo 1.0 and 2.0 devices and an additional $11.9 million for other discontinued or excess inventory during the first nine months of 2023[29] - In Q3 2023, the company established the Syndeo Program to upgrade or replace faulty devices, resulting in $44.3 million in program charges with a remaining reserve of $32.1 million as of September 30, 2023[79][81] - A business transformation restructuring program was announced in September 2023 with expected costs of $9 million to $11 million and completion by March 31, 2024[82][83] - On September 12, 2023, the Board of Directors authorized a new share repurchase program for up to $100.0 million of the Company's Class A Common Stock[71] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses sales growth drivers, the significant gross loss from the Syndeo Program, and a new cost-saving transformation initiative Syndeo Program and Business Transformation The company launched a program to replace faulty Syndeo devices and initiated a transformation plan to reduce operating costs - Due to performance interruptions with Syndeo 1.0 and 2.0, management decided to exclusively market Syndeo 3.0 devices and provide free upgrades for existing customers[96][98] - The company recorded an $18.8 million inventory write-off for obsolete Syndeo builds and accrued an additional $32.1 million for the estimated cost to remediate remaining devices[99] - A business transformation program is underway, with Phase 1 expected to cost $9-$11 million and realize over $20 million in annualized savings, and Phase 2 to realize over $15 million in annualized savings[101][103] Results of Operations Q3 net sales grew 9.7% YoY, but Syndeo Program charges of $63.1 million led to a significant gross loss and negative gross margin Q3 2023 vs Q3 2022 Net Sales (in millions) | Category | Q3 2023 | Q3 2022 | Change (%) | | :--- | :--- | :--- | :--- | | Delivery Systems | $51.0 | $49.1 | 4.0% | | Consumables | $46.4 | $39.7 | 16.8% | | Total net sales | $97.4 | $88.8 | 9.7% | Q3 2023 vs Q3 2022 Profitability (in millions) | Metric | Q3 2023 | Q3 2022 | | :--- | :--- | :--- | | Cost of Sales | $110.0 | $27.4 | | Gross (Loss) Profit | $(12.6) | $61.4 | | Gross Margin | (12.9)% | 69.1% | - The increase in Q3 cost of sales was primarily driven by $63.1 million in inventory write-downs and charges associated with the Syndeo Program, plus $7.5 million in other inventory charges[109] - For the nine months ended Sep 30, 2023, total net sales increased 12.5% YoY to $301.2 million, driven by a 24.0% increase in Consumables sales[120] Liquidity and Capital Resources The company maintains a strong liquidity position with sufficient capital to fund operations and the Syndeo Program for the next twelve months - As of September 30, 2023, the company had cash and cash equivalents of $559.4 million and an undrawn $50.0 million revolving credit facility[128] - Management believes current liquidity is sufficient to satisfy working capital requirements, including the costs of the Syndeo Program, for at least the next twelve months[132] Cash Flow Summary (in millions) | Activity | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :--- | :--- | :--- | | Net cash from operating activities | $26.9 | $(101.2) | | Net cash used for investing activities | $(29.3) | $(16.0) | | Net cash used for financing activities | $(6.1) | $(102.8) | Item 3. Quantitative and Qualitative Disclosures About Market Risk The company reports no material changes to its primary market risks related to interest rates, foreign currency, and inflation - There were no material changes to the company's market risks related to interest rates, foreign currency, and inflation since the last Annual Report on Form 10-K[156] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective, with no material changes to internal controls during the quarter - The company's principal executive officer and principal financial officer concluded that disclosure controls and procedures were effective as of September 30, 2023[158] - There were no changes in internal control over financial reporting during the third quarter of 2023 that have materially affected, or are reasonably likely to materially affect, internal controls[160] PART II—OTHER INFORMATION Item 1. Legal Proceedings The report refers to Note 10 of the financial statements for details on material pending legal proceedings - For details on material legal proceedings, the report directs readers to Note 10 of the financial statements[163] Item 1A. Risk Factors Updated risk factors emphasize dependency on the Syndeo 3.0 device, risks of product failures, and exposure to uninsured cash balances - A key risk factor is the business's dependence on the successful commercialization of Syndeo 3.0 devices, as failure could materially harm financial results[167] - The company acknowledges risks associated with product failures and undetected errors, which could lead to negative publicity, loss of market acceptance, and additional costs[166] - The company notes the risk of maintaining cash at financial institutions in balances that exceed FDIC-insured limits, which could result in losses if a banking institution fails[165] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company initiated a new $100 million share repurchase program and bought back $4.8 million worth of shares in the third quarter Share Repurchases in Q3 2023 | Period | Total Shares Repurchased | Average Price Paid per Share | Approx. Dollar Value Remaining | | :--- | :--- | :--- | :--- | | Sep 1 - Sep 30, 2023 | 419,242 | $5.66 | $97,625,260 | - A new share repurchase program was approved on September 12, 2023, authorizing up to $100.0 million in repurchases; during Q3, the company repurchased approximately 0.8 million shares for $4.8 million[71][170] Item 5. Other Information The company provided information on the Syndeo Program in this report in lieu of a separate Form 8-K filing - Information regarding the Syndeo Program is included in this Form 10-Q in lieu of a Form 8-K filing under Item 2.06 Material Impairments[175][176]