The Beauty Health pany(SKIN) - 2023 Q4 - Annual Report

Part I Business The Beauty Health Company offers skin health experiences via its Hydrafacial brand and a 'razor/razor blade' model, expanding globally under strict regulatory oversight - The company's brand portfolio includes Hydrafacial (hydradermabrasion), SkinStylus (microneedling), and Keravive (scalp health), with Hydrafacial as the flagship brand boasting over 30,000 delivery systems in more than 90 countries[23] - The business operates on a "razor/razor blade" model, where Delivery Systems (the "razor") create an installed base for recurring sales of Consumables (the "razor blades"), including single-use tips, solutions, and serums[44][46] - The company's growth strategy focuses on five key pillars: expanding its product footprint, investing in providers (especially estheticians), nurturing direct consumer relationships, leveraging its global infrastructure, and making targeted acquisitions[37][41] - As of December 31, 2023, the company employed approximately 881 people, with 56% in the United States, 21% in APAC, 18% in EMEA, and 5% in Canada & Latin America[144] - The company's products are subject to extensive regulation by the FDA in the United States and comparable authorities in foreign jurisdictions, classified as either medical devices or cosmetics under the Federal Food, Drug and Cosmetic Act (FDCA)[70] Risk Factors The company faces significant risks from intense competition, reliance on Syndeo 3.0, supply chain disruptions, a history of operating losses, cybersecurity threats, and ongoing legal proceedings - The business is highly dependent on the commercial success of its Delivery Systems, particularly the Syndeo 3.0 device, and failure to successfully commercialize this product could materially harm financial results[171] - The company has a history of operating losses, reporting a loss from operations of $130.9 million for the year ended December 31, 2023, and expects to incur additional losses for the foreseeable future[198] - Operational risks include reliance on single-source suppliers for key components, third-party delivery services, and manufacturing facilities in California and China, where disruptions could negatively affect production[214][215][220] - The company is increasingly dependent on information technology and is vulnerable to service interruptions, data corruption, and cyber-attacks, which could disrupt operations and e-commerce sales[242] - The company is subject to legal and regulatory risks, including potential product liability claims, enforcement actions for off-label promotion, and compliance with complex data privacy laws like GDPR and CCPA[291][303][316] - The company is involved in a securities class action lawsuit filed in November 2023, alleging misleading statements regarding the performance and demand for Syndeo 1.0 and 2.0 devices[651] Unresolved Staff Comments The company reports that it has no unresolved staff comments from the Securities and Exchange Commission - None[357] Cybersecurity The company maintains an enterprise-wide information security program to manage cybersecurity risks, overseen by the Audit Committee, with management responsible for daily assessment - The company has an enterprise-wide information security program designed to identify, protect, detect, and respond to cybersecurity risks, utilizing both internal and third-party security tools[358] - The Board of Directors has delegated oversight of cybersecurity risk to the Audit Committee, which oversees management's implementation of the program and receives updates on any material incidents[361][362] - The management team responsible for cybersecurity is led by the Vice President - Software, Engineering, and IT, who serves as the Interim Chief Information and Security Officer and has over 24 years of industry experience[363] Properties The company leases its principal executive offices and a large facility in Long Beach, California, for distribution and manufacturing, owning no real property - The company's main facilities are leased in Long Beach, California, including a 23,000 sq. ft. executive office and a 105,000 sq. ft. warehouse for distribution and manufacturing[364][365] - The company does not own any real property and believes its current leased facilities are adequate for its operational needs[366] Legal Proceedings The company is involved in ongoing patent infringement litigation, a securities class action, and a related shareholder derivative action, while a trademark dispute was settled in 2023 - The company is a party to a securities class action lawsuit filed in November 2023, alleging misleading statements about the Syndeo 1.0 and 2.0 devices, and the company believes the claims are without merit[651][653] - A shareholder derivative action was filed in February 2024 against former officers and current directors, based on similar allegations as the securities class action, which the company also believes lack merit[654][655] - The company is engaged in ongoing patent infringement litigation against Cartessa Aesthetics, LLC, with a trial date pending for three of the four patents-in-suit[648][649] - Litigation with Ageless Serums LLC was settled as part of Ageless's bankruptcy reorganization plan in 2023, with Ageless agreeing to pay $1.4 million and adhere to certain marketing restrictions[644][645] Mine Safety Disclosures This item is not applicable to the company's operations - Not Applicable[368] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's Class A Common Stock trades on Nasdaq under 'SKIN', has not paid cash dividends, and repurchased 9.9 million shares for $27.8 million in Q4 2023 under a $100.0 million program - The company's Class A Common Stock is traded on the Nasdaq Capital Market under the symbol "SKIN"[371] - The company has not paid any cash dividends on its Class A Common Stock to date[373] Issuer Purchases of Equity Securities | Period | Total Number of Shares Repurchased | Average Price Paid per Share | | :--- | :--- | :--- | | October 1, 2023 - October 31, 2023 | 1,311,315 | $5.83 | | November 1, 2023 - November 30, 2023 | 6,704,261 | $2.22 | | December 1, 2023 - December 31, 2023 | 1,915,931 | $2.74 | | Total Q4 2023 | 9,931,507 | $2.80 | - A share repurchase program authorizing up to $100.0 million was approved on September 12, 2023, with approximately $69.8 million remaining available for repurchase under this program as of December 31, 2023[375] Management's Discussion and Analysis of Financial Condition and Results of Operations In FY2023, net sales grew 8.8% to $398.0 million, driven by Consumables, but gross margin significantly decreased to 39.0% due to $65.2 million in Syndeo Program charges, resulting in a $130.9 million operating loss, though liquidity remains strong with $523.0 million cash Consolidated Results of Operations | (Dollars in millions) | 2023 | 2022 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $398.0 | $365.9 | $32.1 | 8.8% | | Delivery Systems | $206.6 | $206.2 | $0.4 | 0.2% | | Consumables | $191.4 | $159.6 | $31.7 | 19.9% | | Gross Profit | $155.1 | $248.8 | ($93.7) | (37.7)% | | Gross Margin | 39.0% | 68.0% | - | - | | Loss from Operations | ($130.9) | ($25.8) | ($105.1) | 407.4% | | Net (Loss) Income | ($100.1) | $44.2 | ($144.3) | N/M | - The company initiated the "Syndeo Program" to upgrade or replace older Syndeo 1.0 and 2.0 devices at no cost to customers, resulting in a $19.6 million inventory write-down and $45.6 million in total program charges in 2023, significantly impacting cost of sales and gross margin[384][385][676] - A business transformation program was launched, resulting in $7.2 million of restructuring charges in 2023, primarily from workforce reductions, and is expected to generate approximately $15 million in gross cost savings[386] - As of December 31, 2023, the company had cash and cash equivalents of $523.0 million and an undrawn $50 million revolving credit facility, which management believes is sufficient to meet working capital needs for at least the next 12 months[410][413] - In January 2024, the company redeemed $75.0 million principal amount of its Convertible Senior Notes for $57.8 million, a discount to the principal amount[414][612] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to interest rate, foreign currency, and inflation risks, with a hypothetical 10% adverse currency change impacting income by $8 million and persistent inflation increasing costs - The company's primary market risks are interest rate risk, foreign currency risk, and inflation risk[463][466][469] - A hypothetical 100 basis point increase in interest rates would result in an approximate $5 million increase in the fair market value of the company's investment portfolio as of December 31, 2023[464] - The company has significant foreign currency risk, primarily from the China Renminbi, British pound sterling, Euro, and Australian dollar, where a hypothetical adverse 10% change in exchange rates would have resulted in an $8 million adverse effect on income before taxes as of December 31, 2023[466] - Inflation has adversely affected the company by increasing its overall cost structure, including capital, shipping, and labor costs, and the company expects these effects to persist if inflation continues[469] Financial Statements and Supplementary Data This section presents the audited consolidated financial statements for FY2023, with an unqualified auditor's opinion on financials but an adverse opinion on internal controls due to a material weakness - The independent auditor, Deloitte & Touche LLP, issued an unqualified opinion on the financial statements but an adverse opinion on the company's internal control over financial reporting as of December 31, 2023, due to a material weakness[476][691] - The critical audit matter identified was the Syndeo Program Reserve, due to the significant judgments and estimates made by management regarding customer response rates, remediation methods, and associated costs[479][480] Consolidated Balance Sheets | (in thousands) | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total Assets | $929,113 | $1,003,083 | | Cash and cash equivalents | $523,025 | $568,197 | | Inventories | $91,321 | $109,656 | | Total Liabilities | $869,723 | $836,030 | | Convertible senior notes, net | $738,372 | $734,143 | | Total Stockholders' Equity | $59,390 | $167,053 | Consolidated Statements of Cash Flows | (in thousands) | Year Ended Dec 31, 2023 | Year Ended Dec 31, 2022 | | :--- | :--- | :--- | | Net cash provided by (used for) operating activities | $21,750 | ($106,600) | | Net cash used for investing activities | ($31,507) | ($18,869) | | Net cash (used for) provided by financing activities | ($37,448) | ($205,242) | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[682] Controls and Procedures Management concluded disclosure controls were ineffective due to a material weakness in inventory processes, stemming from insufficient accounting resources, with a remediation plan underway and an adverse auditor opinion - Management identified a material weakness in internal control over financial reporting related to the company's inventory process[683][686] - The weakness was caused by a lack of sufficient resources with appropriate accounting knowledge and experience in inventory operations, leading to inadequate controls over physical existence, excess and obsolete reserves, and pricing arrangements[686][697] - Due to this material weakness, management concluded that disclosure controls and procedures were not effective as of December 31, 2023[683] - A remediation plan is being implemented, which includes hiring additional personnel and enhancing inventory processes and systems[688] Other Information The company reports no other information for this item - None[699] Part III Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the company's 2024 Proxy Statement - Information regarding directors, executive officers, and corporate governance is incorporated by reference from the registrant's definitive proxy statement for the 2024 Annual Meeting of Stockholders[703] Executive Compensation Information regarding executive and director compensation will be provided in the company's 2024 Proxy Statement and is incorporated by reference - Information regarding executive compensation is incorporated by reference from the registrant's definitive proxy statement for the 2024 Annual Meeting of Stockholders[704] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information detailing security ownership by certain beneficial owners and management, along with equity compensation plans, will be provided in the company's 2024 Proxy Statement and is incorporated by reference - Information regarding security ownership and equity compensation plans is incorporated by reference from the registrant's definitive proxy statement for the 2024 Annual Meeting of Stockholders[705] Certain Relationships and Related Transactions, and Director Independence Information concerning related party transactions and director independence will be provided in the company's 2024 Proxy Statement and is incorporated by reference - Information regarding certain relationships, related transactions, and director independence is incorporated by reference from the registrant's definitive proxy statement for the 2024 Annual Meeting of Stockholders[706] Principal Accountant Fees and Services Information detailing fees paid to and services provided by the principal accountant will be provided in the company's 2024 Proxy Statement and is incorporated by reference - Information regarding principal accountant fees and services is incorporated by reference from the registrant's definitive proxy statement for the 2024 Annual Meeting of Stockholders[707] Part IV Exhibit and Financial Statement Schedules This section indexes financial statements in Item 8 and lists exhibits, noting that all financial statement schedules are omitted as not applicable or already included - The financial statements are indexed and located in Item 8 of the Annual Report[710] - All financial statement schedules have been omitted because the information is not required, not applicable, or is included in the financial statements or notes[711] Form 10–K Summary The company reports no summary for this item - None[725]