SkinHealth Systems Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Cautionary Note Regarding Forward-Looking Statements This Quarterly Report on Form 10-Q for the three months ended March 31, 2025 (the “Quarterly Report on Form 10-Q”) contains “forward looking statements” within the meaning of the “safe harbor” provisions of the United States Private Securities Litigation Reform Act of 1995. When used in this Quarterly Report on Form 10-Q, the words “estimates,” “projected,” “expects,” “anticipates,” “forecasts,” “plans,” “intends,” “believes,” “seeks,” “may,” “will,” “should,” “future,” “propose” and variations of these words or similar expressions (or the negative versions of such words or expressions) are intended to identify forward-looking statements. These forward-looking statements are not guarantees of future performance, conditions or results, and involve a number of known and unknown risks, uncertainties, assumptions and other important factors, many of which are outside the Company’s control, that could cause actual results or outcomes to differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those identified below and those discussed in the section titled Risk Factors of this filing and our Annual Report on Form 10-K for the fiscal year ended December 31, 2024 filed with the Securities and Exchange Commission (the “SEC”) on March 12, 2025 (the “Annual Report on Form 10-K”). Important factors, among others, that may affect actual results or outcomes include the inability to recognize the benefits of the business combination consummated on May 4, 2021 pursuant to a certain Agreement and Plan of Merger entered into by and among the Company and other parties (the “Business Combination”); costs related to the Business Combination; the Company’s availability of cash for debt service and exposure to risk of default under debt obligations; the Company’s ability to manage growth; the Company’s ability to execute its business plan; potential litigation involving the Company; changes in applicable laws or regulations; and the possibility that the Company may be adversely affected by other economic, business, and/or competitive factors. The Company does not undertake any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and also with our audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K. Unless the context otherwise requires, references to the “Company”, “Hydrafacial”, “we”, “us”, and “our” in this section are intended to mean the business and operations of The Beauty Health Company and its consolidated subsidiaries. Company Overview The Beauty Health Company is a medtech meets beauty company that delivers skin health experiences that help consumers reinvent their relationship with their skin, bodies and self-confidence. The Company and its subsidiaries design, develop, manufacture, market, and sell esthetic technologies and products. The Company’s brands are pioneers: Hydrafacial in hydradermabrasion; SkinStylus in nanoneedling and microneedling; and Keravive in scalp health. Together, with its powerful global community of estheticians, partners and consumers, the Company is personalizing skin health for all ages, genders, skin tones, and skin types. 24 Business and Macroeconomic Conditions During the three months ended March 31, 2025 , we continued to execute against our plan to expand our footprint by selling and placing our patented hydradermabrasion delivery systems (“Delivery Systems”) worldwide, drive consumables, which consist of single-use tips, solutions, serums and other consumables used to provide a Hydrafacial treatment that cleanses, extracts, and hydrates the skin (collectively “Consumables”), invest in our community of providers, partners, and consumers, drive brand awareness, and optimize our global infrastructure. Although we believe we can be successful in our current operating environment, various factors may impact our business in unpredictable ways such as: • Global economic conditions, including inflation, recession, changes in foreign currency exchange rates, higher interest rates, and other changes in economic conditions; • The imposition of tariffs and/or trade restrictions may impact material costs and pricing; • Disruptions in transportation and other supply chain related constraints, such as labor strife in the transportation industry; and • Issues related to older models of Syndeo and our actions to remediate such issues. We may be able to offset cost pressures through increasing the selling prices of some of our products, increasing value engineering efforts to optimize product costs, increasing the diversification of our suppliers and supplier contracts, increasing natural foreign currency hedging, as applicable, and reducing discretionary spending. However, our pricing actions could have an adverse impact on demand, and may in turn, cause our providers to halt or decrease Delivery Systems and/or Consumables spending, and our actions may not be sufficient to cover unexpected increased costs that we may experience. Business and macroeconomic factors may also negatively impact, in the short-term or long-term, the global economy, the beauty health industry, our providers and their budgets with us, our business, the Company’s brand reputation, financial condition, and results of operations. We remain attentive to these business and macroeconomic conditions that may materially impact our business, and we continue to explore and implement reporting and quality management systems and risk mitigation strategies in the face of these unfolding conditions to remain agile in adopting to changing circumstances. China Market The Company evaluated its global distribution strategy to align its go-to-market strategy with in-market partner capabilities and market opportunity. The Company expects to transition sales in the China market to a distributor partner during the second quarter of 2025, and as a result, the Company intends to discontinue its direct sales presence in China. During the three months ended March 31, 2025, the Company recognized approximately $3 million and $1 million, respectively, of severance and restructuring and other non-cash charges associated with these actions. The change in go-to-market strategy is expected to be accretive to the Company’s long-term profitability, as reductions in operating spend are partially offset by a reduction to revenue. 25 Comparison of Three Months Ended March 31, 2025 to Three Months Ended March 31, 2024 The following tables set forth our consolidated results of operations in dollars and as a percentage of net sales for the periods presented. The period-to-period comparisons of our historical results are not necessarily indicative of the results that may be expected in the future. The results of operations data for the three months ended March 31, 2025 and March 31, 2024, have been derived from the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. Amounts and percentages may not foot due to rounding. Three Months Ended March 31, (in millions) 2025 % of Net Sales 2024 % of Net Sales Net sales $ 69.6 100.0 % $ 81.4 100.0 % Cost of sales 21.0 30.2 33.0 40.6 Gross profit 48.6 69.8 48.4 59.4 Operating expenses Selling and marketing 26.0 37.4 33.7 41.4 Research and development 1.0 1.4 2.8 3.4 General and administrative 33.6 48.2 28.9 35.5 Total operating expenses 60.6 87.1 65.4 80.3 Loss from operations (12.0) (17.3) (17.0) (20.9) Interest expense 2.5 3.6 3.0 3.7 Interest income (3.0) (4.4) (5.4) (6.6) Other income, net (0.1) (0.1) (16.1) (19.8) Change in fair value of warrant liabilities (0.3) (0.5) 1.5 1.8 Foreign currency transaction (gain) loss, net (1.9) (2.7) 1.3 1.6 Loss before provision for income taxes (9.2) (13.2) (1.3) (1.6) Income tax expense (benefit) 0.9 1.3 (0.7) (0.8) Net loss $ (10.1) (14.5) % $ (0.7) (0.8) % Net Sales Three Months Ended March 31, Change (in millions) 2025 2024 Amount % Net sales Delivery Systems $ 20.2 $ 35.8 $ (15.6) (43.5) % Consumables 49.4 45.6 3.7 8.2 % Total net sales $ 69.6 $ 81.4 $ (11.8) (14.5) % Three Months Ended March 31, Percentage of net sales 2025 2024 Delivery Systems 29.1% 44.0% Consumables 70.9% 56.0% Total 100.0% 100.0% Total net sales for the three months ended March 31, 2025 decreased $11.8 million, or 14.5%, compared to the three months ended March 31, 2024. Delivery Systems net sales for the three months ended March 31, 2025 decreased $15.6 million, or 43.5%, compared to the three months ended March 31, 2024, with decreases across all regions. Delivery Systems net sales were negatively impacted globally by unfavorable macroeconomic and credit conditions. Consumables net sales for the three months ended March 31, 2025 increased $3.7 million, or 8.2%, compared to the three months ended March 31, 2024. The increase in Consumables net sales was primarily attributable to increased placements of Delivery Systems and the adjoining consumption of Consumables during the three months ended March 31, 2025. 26 Cost of Sales, Gross Profit, and Gross Margin Three Months Ended March 31, Change (in millions) 2025 2024 Amount % Cost of sales $ 21.0 $ 33.0 $ (12.0) (36.4)% Gross profit $ 48.6 $ 48.4 $ 0.2 0.5% Gross margin 69.8 % 59.4 % Cost of sales for the three months ended March 31, 2025 decreased $12.0 million, compared to the three months ended March 31, 2024 primarily due to lower net sales and inventory related charges. Gross margin increased to 69.8% for the three months ended March 31, 2025 from 59.4% for the three months ended March 31, 2024 primarily due to lower inventory related charges and favorable mix shift towards consumable net sales, partially offset by lower average selling price of equipment net sales. Operating Expenses Selling and Marketing Three Months Ended March 31, Change (in millions) 2025 2024 Amount % Selling and marketing $ 26.0 $ 33.7 $ (7.6) (22.7) % As a percentage of net sales 37.4 % 41.4 % Selling and marketing expense for the three months ended March 31, 2025 decreased $7.6 million, or 22.7%, compared to the three months ended March 31, 2024. The decrease is primarily driven by lower personnel-related expenses, including share-based compensation expense and lower sales commission expense and marketing spend. Research and Development Three Months Ended March 31, Change (in millions) 2025 2024 Amount % Research and development $ 1.0 $ 2.8 $ (1.8) (64.4) % As a percentage of net sales 1.4 % 3.4 % Research and development expense for the three months ended March 31, 2025 decreased $1.8 million, or 64.4%, compared to the three months ended March 31, 2024. The decrease is primarily driven by lower personnel-related expenses, including share-based compensation expense. General and Administrative Three Months Ended March 31, Change (in millions) 2025 2024 Amount % General and administrative $ 33.6 $ 28.9 $ 4.7 16.3 % As a percentage of net sales 48.2 % 35.5 % General and administrative expense for the three months ended March 31, 2025 increased $4.7 million, or 16.3%, compared to the three months ended March 31, 2024. The increase is primarily driven by higher legal fees and severance and restructuring expense, partially offset by lower personnel-related expenses, including share-based compensation expense and bad debt recoveries. Interest Income, Change in Fair Value of Warrant Liabilities, and Other Income, Net Three Months Ended March 31, Change (in millions) 2025 2024 Amount % Interest income $ (3.0) $ (5.4) $ 2.3 (43.5) % Change in fair value of warrant liabilities $ (0.3) $ 1.5 $ (1.8) N/M Other income, net $ (0.1) $ (16.1) $ 16.0 N/M N/M - Not meaningful 27 Interest income for the three months ended March 31, 2025 decreased $2.3 million, compared to the three months ended March 31, 2024, primarily due to lower average invested balances during the three months ended March 31, 2025. During the three months ended March 31, 2025, the Company recognized expense of $0.3 million related to the change in the fair value of the warrant liabilities as compared to income of $1.5 million for the three months ended March 31, 2024, driven primarily by the fluctuation of the price of the Company’s Class A common stock (the “Class A Common Stock”). Other income, net for the three months ended March 31, 2024 included $16.1 million net gain related to the repurchase of the 1.25% Convertible Senior Notes due October 1, 2026 (the “Notes”). Liquidity and Capital Resources Our primary sources of capital have been (i) cash flow from operating activities, (ii) net proceeds received from the consummation of the Business Combination, (iii) net proceeds received from the Notes, and (iv) net proceeds received from the exercise of public and private placement warrants. As of March 31, 2025, we had cash, cash equivalents, and restricted cash of $373.0 million. Our operating cash flows result primarily from cash received from sales of Delivery Systems and Consumables, offset primarily by cash payments made for products and services, employee compensation, payment processing and related transaction costs, operating leases, marketing expenses, and interest payments for our Notes. Cash received from our customers and other activities generally corresponds to our net sales. Our sources of liquidity and cash flows are used to fund ongoing operations, research and development projects for new products, services, and technologies, and provide ongoing support services for our providers and customers. As part of our business strategy, we occasionally evaluate potential acquisitions of businesses and products and technologies. Accordingly, a portion of our available cash may be used at any time for the acquisition of complementary products, services, or businesses. Such potential transactions may require substantial capital resources, which may require us to seek additional debt or equity financing. We cannot assure you that we will be able to successfully identify suitable acquisition candidates, complete acquisitions, integrate acquired businesses into our current operations, or expand into new markets. Furthermore, we cannot provide assurances that additional financing will be available to us in any required time frame and on commercially reasonable terms, if at all. Based on our sources of capital, management believes that we have sufficient liquidity to satisfy our anticipated working capital requirements for our ongoing operations and obligations for at least the next 12 months. However, we will continue to evaluate our capital expenditure needs based upon factors including but not limited to our rate of revenue growth, potential acquisitions, the timing and amount of spending on research and development, growth in sales and marketing activities, the timing of new product launches, timing and investments needed for international expansion, the continuing market acceptance of the Company’s products and services, expansion, and overall economic conditions. We may, from time to time, seek to redeem or repurchase our outstanding debt or equity securities through cash purchases and/or exchanges for equity or debt, in open-market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will be upon such terms and at such prices as we may determine, and will depend on prevailing market conditions, our liquidity requirements, contractual restrictions, and other factors. If cash generated from operations is insufficient to satisfy our capital requirements, we may have to sell additional equity or debt securities or obtain expanded credit facilities to fund our operating expenses. The sale of additional equity would result in additional dilution to our stockholders. Also, the incurrence of additional debt financing would result in debt service obligations and the instruments governing such debt could provide for operating and financing covenants that would restrict our operations. In the event such additional capital is needed in the future, there can be no assurance that such capital will be available to us, or, if available, that it will be in amounts and on terms acceptable to us. If we cannot raise additional funds when we need or want them, our operations and prospects could be negatively affected. However, if cash flows from operations become insufficient to continue operations at the current level, and if no additional capital were obtained, then management would restructure the Company in a way to preserve our business while maintaining expenses within operating cash flows. 28 Notes On September 14, 2021, the Company issued an aggregate of $750.0 million in principal amount of its Notes. The Notes were issued pursuant to, and are governed by, an indenture dated as of September 14, 2021, between the Company and U.S. Bank National Association, as trustee (the “Indenture”). Pursuant to the purchase agreement between the Company and the initial purchasers of the Notes, the Company granted the initial purchasers an option to purchase, for settlement within a period of 13 days from, and including, the date the Notes were first issued, up to an additional $100.0 million principal amount of Notes. The Notes issued on September 14, 2021 include the $100.0 million principal amount of Notes issued pursuant to the full exercise by the initial purchasers of such option. During the three months ended March 31, 2024, the Company repurchased $75.0 million principal amount of the Notes for $57.8 million. During the year ended December 31, 2024, the Company repurchased $192.3 million principal amount of the Notes for $156.1 million. During the three months ended March 31, 2025, there were no repurchases related to the Notes. Known Trends or Uncertainties The majority of our customers operate within the medical industry (dermatologists and plastic surgeons), esthetician industry, and beauty retail industry. Although we have not seen any significant reduction in revenues to date due to consolidations, we have seen some consolidation in these industries during economic downturns. These consolidations have not had a negative effect on our total net sales; however, should consolidations and downsizing in the industries continue to occur, those events could adversely impact our revenues and earnings going forward. In addition, we continue to face macroeconomic challenges such as the possibility of recession or financial market instability, and the impact of any governmental actions on the economy, such as tariffs and/or trade restrictions. These factors may adversely impact consumers, business, and government spending as well as our customers' ability to pay for our products and services on an ongoing basis. If economic and social conditions or the degree of uncertainty or volatility worsen, or the adverse conditions previously described are further prolonged, our revenues could be adversely affected. Macroeconomic challenges and credit conditions have negatively impacted our revenues in 2025. We are continuing to monitor these and other risks that may affect our business so that we can respond appropriately. Negative trends in our financial performance or financial condition may result in a sustained decline in our stock price, which may result in a triggering event necessitating an interim goodwill impairment assessment and potential goodwill impairment. 29 Cash Flows The following table summarizes the activities from our statements of cash flows. Amounts may not foot due to rounding. Three Months Ended March 31, (Dollars in millions) 2025 2024 Cash, cash equivalents, and restricted cash at beginning of period $ 370.1 $ 523.0 Operating activities: Net loss (10.1) (0.7) Non-cash adjustments 10.2 9.8 Changes in working capital 2.9 (26.0) Net cash provided by (used for) operating activities 3.0 (16.9) Net cash used for investing activities (1.1) (1.8) Net cash used for financing activities (0.3) (58.6) Net change in cash, cash equivalents, and restricted cash 1.6 (77.3) Effect of foreign currency translation 1.4 (1.1) Cash, cash equivalents, and restricted cash at end of period $ 373.0 $ 444.6 Operating Activities Net cash provided by operating activities for the three months ended March 31, 2025 was $3.0 million, as compared to net cash used for operating activities of $16.9 million for the three months ended March 31, 2024. The change in cash provided by operating activities was primarily related to lower working capital usage and changes in net loss and non-cash adjustments. The prior year net loss and non-cash adjustments include the gain on the repurchase of the Company’s Notes and the prior year changes in working capital includes the impact of the Syndeo Program. Investing Activities Net cash used for investing activities for the three months ended March 31, 2025 was $1.1 million, as compared to $1.8 million for the three months ended March 31, 2024. The change in cash used for investing activities was due to lower capital expenditures during the three months ended March 31, 2025. Financing Activities Net cash used for financing activities for the three months ended March 31, 2025 was $0.3 million, as compared to $58.6 million for the three months ended March 31, 2024. The change in cash used for financing activities was primarily related to prior year’s repurchase of $75.0 million principal amount of the Company’s Notes at a weighted average price equal to 77% for $57.8 million. Critical Accounting Policies and Estimates Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with GAAP. In preparing the consolidated financial statements, we make estimates and judgments that affect the reported amounts of assets, liabilities, stockholders’ equity/deficit, revenue, expenses, and related disclosures. We re-evaluate our estimates on an on-going basis. Our estimates are based on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Because of the uncertainty inherent in these matters, actual results may differ from these estimates and could differ based upon other assumptions or conditions. There have been no changes to our critical accounting policies since our Annual Report on Form 10-K for the fiscal year ended December 31, 2024. Recent Accounting Pronouncements See Part I, Item 1 "Financial Statements—Note 15 to the Consolidated Financial Statements—New Accounting Pronouncements" of this Quarterly Report on Form 10-Q. 30 Item 3. Quantitative and Qualitative Disclosures About Market Risk. Market risks relating to our operations result primarily from changes in interest rates, foreign currency, and inflation risk. There were no material changes to our market risks disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2024.