The Beauty Health pany(SKIN) - 2021 Q3 - Quarterly Report

PART I—FINANCIAL INFORMATION Item 1. Financial Statements The company's Q3 2021 financial statements reflect significant post-Business Combination changes, impacting assets, liabilities, and profitability Condensed Consolidated Balance Sheets The balance sheet as of September 30, 2021, shows significant asset and liability growth, driven by cash and convertible notes Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $718,622 | $9,486 | | Total current assets | $797,805 | $59,095 | | Goodwill | $122,865 | $98,531 | | Total assets | $997,875 | $222,835 | | Liabilities & Equity | | | | Total current liabilities | $49,468 | $30,930 | | Warrant liabilities | $357,173 | $— | | Convertible senior notes, net | $728,858 | $— | | Total liabilities | $1,139,930 | $252,795 | | Total stockholders' deficit | $(142,055) | $(29,960) | Condensed Consolidated Statements of Comprehensive Loss Q3 2021 net sales grew 97.2%, but a significant net loss was driven by non-cash warrant liability charges Q3 2021 vs Q3 2020 Performance (in thousands, except per share data) | Metric | Q3 2021 | Q3 2020 | | :--- | :--- | :--- | | Net sales | $68,147 | $34,560 | | Gross profit | $46,075 | $20,957 | | Loss from operations | $(5,456) | $2,785 (Income) | | Change in fair value of Warrant liabilities | $199,306 | $— | | Net loss | $(215,145) | $(2,214) | | Net loss per share | $(1.63) | $(0.06) | Nine Months 2021 vs 2020 Performance (in thousands, except per share data) | Metric | Nine Months 2021 | Nine Months 2020 | | :--- | :--- | :--- | | Net sales | $182,197 | $81,212 | | Gross profit | $125,066 | $44,162 | | Loss from operations | $(29,427) | $(12,471) | | Change in fair value of Warrant liabilities | $271,333 | $— | | Net loss | $(357,797) | $(21,682) | | Net loss per share | $(4.10) | $(0.64) | Condensed Consolidated Statements of Cash Flows Nine-month cash flow shows significant financing inflows offsetting operating and investing outflows Nine Months Ended Sep 30, 2021 Cash Flow Summary (in thousands) | Category | 2021 | 2020 | | :--- | :--- | :--- | | Net cash used in operating activities | $(31,640) | $(12,025) | | Net cash used in investing activities | $(29,201) | $(2,697) | | Net cash from financing activities | $770,825 | $19,193 | | Net increase in cash | $709,984 | $4,471 | Notes to Condensed Consolidated Financial Statements Notes detail the reverse recapitalization, distributor acquisitions, convertible note issuance, and warrant redemption - The Business Combination was accounted for as a reverse recapitalization, with HydraFacial as the accounting acquirer and Vesper Healthcare as the acquired company[29][32] - In June and July 2021, the company acquired four of its product distributors in Australia, France, Germany, and Mexico to directly sell into those markets[60] Disaggregated Revenue (in thousands) | Product Line | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | | Delivery Systems | $96,798 | $35,981 | | Consumables | $85,399 | $45,231 | | Total net sales | $182,197 | $81,212 | - On September 14, 2021, the company issued $750 million in 1.25% Convertible Senior Notes due 2026 The initial conversion price is approximately $31.76 per share[83][85] - Subsequent to quarter-end, the company completed a redemption of its public warrants, resulting in cash proceeds of $185.4 million from exercises[147][148] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses strong revenue rebound, improved gross margin, increased operating expenses, and enhanced liquidity post-COVID Results of Operations Q3 2021 net sales increased 97.2%, gross margin improved, but operating expenses surged, leading to an operating loss Q3 2021 vs Q3 2020 Net Sales (in millions) | Category | Q3 2021 | Q3 2020 | Change (%) | | :--- | :--- | :--- | :--- | | Delivery Systems | $36.2 | $15.9 | +127.2% | | Consumables | $32.0 | $18.6 | +71.5% | | Total net sales | $68.1 | $34.6 | +97.2% | - Gross margin improved to 67.6% in Q3 2021 from 60.6% in Q3 2020, attributed to fixed cost leverage from higher sales, improved average selling prices, and cost savings initiatives[190] - Selling and marketing expenses increased 188.9% YoY in Q3, driven by higher sales commissions ($5.2M), personnel-related expenses ($6.8M), training ($1.4M), and marketing spend ($1.4M) as markets reopened[191] - General and administrative expenses rose 172.2% YoY in Q3, primarily due to increased stock-based compensation ($3.9M), personnel costs ($1.3M), public company costs ($1.7M), legal fees ($1.2M), and transaction costs ($0.9M)[194] Liquidity and Capital Resources Liquidity significantly enhanced by $718.6 million cash, primarily from the Business Combination and convertible notes issuance - As of September 30, 2021, the company had cash and cash equivalents of approximately $718.6 million[205] - Primary sources of funding have been cash flow from operations, the Business Combination, and the issuance of $750 million in convertible notes in September 2021[205] - Subsequent to the quarter, the company received $185.4 million in cash proceeds from the exercise of public warrants in connection with a redemption notice issued on October 4, 2021[208] Non-GAAP Financial Measures Management uses non-GAAP measures like Adjusted EBITDA and Adjusted Gross Profit to assess operating performance Reconciliation of Net Loss to Adjusted EBITDA (in thousands) | Line Item | Q3 2021 | Q3 2020 | | :--- | :--- | :--- | | Net loss | $(215,145) | $(2,214) | | Adjustments (e.g., change in warrant FV, D&A, SBC, interest, taxes) | $220,945 | $9,769 | | Adjusted EBITDA | $5,800 | $7,555 | | Adjusted EBITDA margin | 8.5% | 21.9% | Reconciliation of Gross Profit to Adjusted Gross Profit (in millions) | Line Item | Q3 2021 | Q3 2020 | | :--- | :--- | :--- | | Gross profit | $46.1 | $21.0 | | Stock-based compensation | $0.1 | $— | | Depreciation & amortization | $2.6 | $2.7 | | Adjusted gross profit | $48.7 | $23.6 | | Adjusted gross margin | 71.5% | 68.3% | Quantitative and Qualitative Disclosures About Market Risk The company's market risk exposures, including interest rate and foreign currency risks, are currently not material - Interest rate risk is considered minimal as debt obligations carry fixed interest rates[252] - The company has exposure to foreign currency risk from international sales and operating expenses, but believes the impact is not significant at this time[253][254] Controls and Procedures Material weaknesses in internal control over financial reporting were identified, leading to ineffective disclosure controls - Material weaknesses were identified in internal control over financial reporting related to the application of ASC 480 (Distinguishing Liabilities from Equity) and general segregation of duties, lack of sufficient accounting resources, and lack of a formalized risk assessment process[256][257] - As a result of the material weaknesses, management concluded that the company's disclosure controls and procedures were not effective as of September 30, 2021[260] - The company is taking steps to remediate the weaknesses, including designing new review procedures, recruiting additional personnel, and developing a formal risk assessment process[258] PART II—OTHER INFORMATION Legal Proceedings The company is not a party to any material legal proceedings expected to adversely affect its business - As of September 30, 2021, the company was not a party to any legal proceedings expected to have a material adverse effect on the business[121][263] Risk Factors Key risks include potential dilution from future equity offerings and convertible notes, and integration challenges from acquisitions - Future offerings of debt or equity securities may dilute existing shareholders and adversely affect the market price of the common stock[265] - The potential conversion of the company's convertible notes could result in the issuance of approximately 23.6 million additional shares, causing significant potential dilution[267] - The company may not realize the anticipated benefits of acquired businesses and could face significant difficulties integrating them, which could materially harm business operations[268][269] Unregistered Sales of Equity Securities and Use of Proceeds Unregistered shares were issued for distributor acquisitions, earn-out consideration, and working capital adjustment - On July 1, 2021, issued 479,373 shares of Class A Common Stock for the acquisitions of distributors in France, Germany, and Mexico[272] - On July 15, 2021, issued 7,500,000 shares of Class A Common Stock as contingent consideration to former HydraFacial stockholders[273]