What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-11-12 compared with 2021-08-13 · 173 added, 127 removed, 374 unchanged (45% of the section changed)

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the inability to maintain the listing of The Beauty Health Company’s shares on Nasdaq;

The Beauty Health Company’s availability of cash for debt service and exposure to risk of default under debt obligations;

The Beauty Health Company’s ability to manage growth;

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the possibility that The Beauty Health Company may be adversely affected by other economic, business, and/or competitive factors;

and the impact of the continuing COVID-19 pandemic on the Company’s business.

and the impact of the continuing COVID-19 pandemic on our business.

The Beauty Health 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 the Company’s financial condition and results of operations should be read in conjunction with the Company’s consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q.

Unless the context otherwise requires, references to “ 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.

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The expansion of the number of Delivery Systems installed, or “install base,” increases the foundation for future revenue by creating a larger base to drive consumable sales.

We believe that as the installed base grows and Delivery Systems become more productive, recurring revenue will grow to become a larger share of the business.

We believe that as the install base grows and Delivery Systems become more productive, recurring revenue will grow to become a larger share of the business.

HydraFacial has more than tripled Net Sales from $48 million for the year ended December 31, 2016 to $166 million for the year ended December 31, 2019, growing its footprint both in the US and internationally.

Net sales decreased in 2020 as a result of COVID-19 restrictions, but have rebounded since the onset of the pandemic, as Net sales increased $52.4 million, or 371.6%, for the three months ended June 30, 2021 when compared with the Net sales for the three months ended June 30, 2020.

For the six months ended June 30, 2021 compared to June 30, 2020, Net sales increased $67.4 million, or 144.3%.

Net sales decreased in 2020 as a result of COVID-19 restrictions, but have rebounded since the onset of the pandemic, as Net sales increased $33.5 million, or 97.2%, for the three months ended September 30, 2021 when compared with the Net sales for the three months ended September 30, 2020.

For the nine months ended September 30, 2021 compared to September 30, 2020, Net sales increased $101.0 million, or 124.3%.

Financial metrics we use to track our goals include revenue growth, Adjusted gross profit and Adjusted EBITDA.

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Recent Developments

Convertible Senior Notes

On September 14, 2021, we issued $750 million aggregate principal amount of our 1.25% Convertible Senior Notes due 2026 (the “ Notes”) in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended.

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 initial conversion rate is 31.4859 shares of Class A Common Stock per $1,000 principal amount of Notes, which represents an initial conversion price of approximately $31.76 per share of common stock.

We used $90.2 million of the net proceeds from the sale of the Notes to fund the cost of entering into capped call transactions.

The net proceeds from the issuance of the Notes were approximately $638.7 million, net of capped call transaction costs of $90.2 million and debt issuance costs totaling $21.1 million.

See Note 9 - Debt, to the Notes to Condensed Consolidated Financial Statements included elsewhere in this report.

Capped Call Transactions

Capped call transactions cover the aggregate number of shares of our common stock that will initially underlie the Notes, and generally reduce potential dilution to our common stock upon any conversion of Notes and/or offset any cash payments we may make in excess of the principal amount of the converted Notes, as the case may be, with such reduction and/or offset subject to a cap, based on the cap price of the capped call transactions.

See Note 2 - Summary of Significant Accounting Policies, to the Notes to Condensed Consolidated Financial Statements included elsewhere in this report.

Impact of the COVID-19 Pandemic

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Subsequent to the downturn experienced during the second quarter of 2020, our revenues increased, and we returned to having positive Adjusted EBITDA in the latter half of 2020.

This trend continued into the second quarter of 2021.

This trend continued into the third quarter of 2021.

We successfully managed the variable portion of our cost structure to better align with revenue, which was significantly reduced during the downturn.

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Business Combination and Public Company Costs

On May 4, 2021 (the “Closing Date”), HydraFacial consummated the previously announced Business Combination pursuant to that certain Merger Agreement, dated December 8, 2020 (the “Merger Agreement”) with Vesper Healthcare Acquisition Corp.

On May 4, 2021, HydraFacial consummated the previously announced Business Combination pursuant to that certain Merger Agreement, dated December 8, 2020 with Vesper Healthcare Acquisition Corp.

(“Vesper"), pursuant to which Vesper acquired, directly or indirectly, 100% of the stock of HydraFacial and its subsidiaries.

Upon closing, the combined entity was renamed The Beauty Health Company (“BeautyHealth” or the “Company”) and trades on the Nasdaq Capital Market under the ticker symbol “SKIN”.

Upon closing, the combined entity was renamed The Beauty Health Company and trades on the Nasdaq Capital Market under the ticker symbol “SKIN”.

Pursuant to the terms of the Merger Agreement, the aggregate merger consideration paid to the HydraFacial stockholders in connection with the Business Combination was approximately $975.0 million less HydraFacial’s net indebtedness as of the Closing Date, transaction expenses, and net working capital relative to a target.

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The merger consideration included both cash consideration and consideration in the form of newly issued Class A Common Stock.

The aggregate cash consideration paid to the former HydraFacial stockholders at the Closing was approximately $368.0 million, consisting of the Vesper’s cash and cash equivalents as of the closing of the Business Combination including proceeds of $350.0 million from Vesper’s Private Placement of an aggregate of 35,000,000 shares of Class A Common Stock, and approximately $433.0 million of cash available to Vesper from the trust account that held the proceeds from Vesper’s initial public offering (the "Trust Account") after giving effect to income and franchise taxes payable in respect of interest income earned in the Trust Account), and redemptions that were elected by Vesper’s public stockholders, minus approximately $224.0 million used to repay HydraFacial’s outstanding indebtedness at the Closing, minus approximately $94.0 million of transaction expenses of HydraFacial and Vesper, minus $100.0 million.

The aggregate cash consideration paid to the former HydraFacial stockholders at the Closing was approximately $368.0 million, consisting of the Vesper’s cash and cash equivalents as of the closing of the Business Combination including proceeds of $350.0 million from Vesper’s Private Placement of an aggregate of 35,000,000 shares of Class A Common Stock, and approximately $433.0 million of cash available to Vesper from the Trust Account that held the proceeds from Vesper’s initial public offering after giving effect to income and franchise taxes payable in respect of interest income earned in the Trust Account), and redemptions that were elected by Vesper’s public stockholders, minus approximately $224.0 million used to repay HydraFacial’s outstanding indebtedness at the Closing, minus approximately $94.0 million of transaction expenses of HydraFacial and Vesper, minus $100.0 million.

The remainder of the consideration paid to the HydraFacial stockholders consisted of 35,501,743 newly issued shares of Class A Common Stock.

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The net assets of Vesper were stated at historical cost, with no goodwill or other intangible assets recorded.

Following the consummation of the Business Combination, we became an SEC-registered and NASDAQ- listed company, which requires us to hire additional staff and implement procedures and processes to address public company regulatory requirements and customary practices.

Following the consummation of the Business Combination, we became an SEC-registered and NASDAQ-listed company, which required us to hire additional staff and implement procedures and processes to address public company regulatory requirements and customary practices.

We have incurred and expect to incur additional annual expenses for, among other things, directors’ and officers’ liability insurance, director fees and additional internal and external accounting, legal and administrative resources and fees.

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HydraFacial benefits from a large, young and diverse customer base and the ability to serve a large percentage of the population given that HydraFacial’s patented technology addresses all skin, regardless of type, age or gender.

At the intersection of the medical and consumer retail markets, the large potential customer base should provide significant upside to drive topline growth.

At the intersection of the medical and consumer retail markets, the large potential customer base should provide significant upside to drive top-line growth.

HydraFacial over indexes with males, significantly increasing the Total Addressable Market (TAM) compared to peers and the mix of male customers is growing at two times the rate of female customers.

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HydraFacial’s recent growth has been driven in part by our international strategy.

37.4% of HydraFacial’s total revenue during the second quarter of fiscal year 2021 came from outside the United States and Canada.

34% of HydraFacial’s total revenue during the third quarter of fiscal year 2021 came from outside the United States and Canada.

Our diverse distribution channels create a significant opportunity within our existing retail and wholesale channels, as well as new locations abroad.

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Key Operational and Business Metrics

In addition to the measures presented in our consolidated financial statements, we use the following key operational and business metrics to evaluate our business, measure our performance, develop financial forecasts, and make strategic decisions (amounts and percentages may not foot due to rounding):

Three Months Ended June 30, Six Months Ended June 30,

Amounts and percentages may not foot due to rounding.

Three Months Ended September 30, Nine Months Ended September 30,

(dollars in millions) 2021 2020 2021 2020

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Consumables net sales 32.0 18.6 85.4 45.2

Total Sales $ 66.5 $ 14.1 $ 114.1 $ 46.7

Total net sales $ 68.1 $ 34.6 $ 182.2 $ 81.2

Consolidated gross profit $ 46.1 $ 21.0 $ 125.1 $ 44.2

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Net loss $ (215.1) $ (2.2) $ (357.8) $ (21.7)

Adjusted EBITDA (loss) $ 11.4 $ (1.1) $ 18.4 $ (3.2)

Adjusted EBITDA $ 5.8 $ 7.6 $ 24.2 $ 4.2

Adjusted EBITDA margin 8.5% 21.9% 13.3% 5.1%

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HydraFacial’s cost of sales consists of Delivery System and Consumables product costs, including the cost of materials, labor costs, overhead, depreciation and amortization of developed technology, shipping and handling costs, and the costs associated with excess and obsolete inventory.

As we launch new products and expand our presence internationally, we expect to incur higher cost of sales as a percentage of sales because we have not yet achieved economies of scale with these items.

Operating Expenses

As we launch new products and expand our presence internationally, we expect to incur higher cost of sales as a percentage of net sales because we have not yet achieved economies of scale with these items.

Selling and Marketing

Selling and marketing expense consists of personnel-related expenses, sales commissions, travel costs, training and advertising expenses incurred in connection with the sale of our products.

We intend to continue to invest in our sales and marketing capabilities in the future and expect this expense to increase in absolute dollars in future periods as we release new

products, grow our global footprint, and drive consumer demand in the ecosystem.

Selling and marketing expense as a percentage of total revenue may fluctuate from period to period based on total revenue and the timing of our investments in our sales and marketing functions as these investments may vary in scope and scale over future periods.

We intend to continue to invest in our sales and marketing capabilities in the future and expect this expense to increase in absolute dollars in future periods as we release new products, grow our global footprint, and drive consumer demand in the ecosystem.

Selling and marketing expense as a percentage of net sales may fluctuate from period to period based on net sales and the timing of our investments in our sales and marketing functions as these investments may vary in scope and scale over future periods.

Research and Development

Research and development expense primarily consists of personnel-related expenses, tooling and prototype materials, technology investments, and other expenses incurred in connection with the development of new products and internal technologies.

We expect our research and development expenses to vary from period to period as a percentage of total revenue, as HydraFacial plans to continue to innovate and invest in new technologies and to enhance existing technologies to fuel future growth as a category creator.

We expect our research and development expenses to vary from period to period as a percentage of net sales, as HydraFacial plans to continue to innovate and invest in new technologies and to enhance existing technologies to fuel future growth as a category creator.

General and Administrative

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In addition, we expect to continue to incur additional IT expenses as we scale HydraFacial and enhance our ecommerce, digital and data utilization capabilities.

As a result, we expect that our general and administrative expenses will increase in absolute dollars in future periods and vary from period to period as a percentage of revenue.

As a result, we expect that our general and administrative expenses will increase in absolute dollars in future periods and vary from period to period as a percentage of net sales.

Other Income (Expense), Net

Other income (expense) consists of the change in fair value of both the public and private placement warrants and earn-out shares liability, interest expense, deferred financing write-off costs and prepayment penalties related to the repayment of our long-term debt, and foreign currency transaction gains and losses.

Foreign currency transaction gains and losses are generated by settlements of intercompany balances and invoices denominated in other currencies other than the reporting currency.

We expect other income (expense) to increase in absolute dollars as HydraFacial grows internationally and obtains more financing.

We expect other income (expense) to increase in absolute dollars as we grow internationally and obtain additional financing.

Other income (expense) as a percentage of revenue will fluctuate period to period along with interest rates, exchange rates and other factors not related to normal business operations.

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Results of Operations

The following tables set forth our consolidated results of operations in dollars and as a percentage of total revenue for the periods presented.

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 and six months ended June 30, 2021 and June 30, 2020 have been derived from the interim consolidated financial statements included elsewhere in this Form 10-Q.

The results of operations data for the three and nine months ended September 30, 2021 and September 30, 2020 have been derived from the interim condensed consolidated financial statements included elsewhere in this Form 10-Q.

Amounts and percentages may not foot due to rounding.

Comparison of Three Months Ended June 30, 2021 to Three Months Ended June 30, 2020

Three Months Ended June 30,

Comparison of Three Months Ended September 30, 2021 to Three Months Ended September 30, 2020

Three Months Ended September 30,

(in millions) 2021 % of Net Sales 2020 % of Net Sales

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Total operating expenses 51.5 75.6 18.2 52.6

Loss from operations (26.4) (39.7) (7.9) (56.0)

Income (loss) from operations (5.5) (8.0) 2.8 8.1

Other expense, net 210.8 309.4 5.6 16.2

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Net loss $ (215.1) (315.7) % $ (2.2) (6.4) %

Three Months Ended June 30, Change

Three Months Ended September 30, Change

(in millions) 2021 2020 Amount %

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Total 100.0% 100.0%

Total net sales for the three months ended June 30, 2021 increased $52.4 million, or 371.6%, compared to the three months ended June 30, 2020.

Delivery System sales for the three months ended June 30, 2021 increased $28.9 million, or 481.7%, compared to the three months ended June 30, 2020.

Delivery Systems units sold for the three months ended June 30, 2021 increased primarily due to both domestic and international growth as sales as markets reopened and consumer demand accelerated.

Similarly, Consumables sales for the three months ended June 30, 2021 increased 23.5 million, or 290.1%, compared to the three months ended June 30, 2020.

The increase in Consumables sales was primarily attributable to rebounding sales volume following the COVID-19 pandemic, as domestic and international stay-at-home orders were lifted and commercial operations were allowed to resume with social distancing restrictions during the three months ended June 30, 2021.

Total net sales for the three months ended September 30, 2021 increased $33.5 million, or 97.2%, compared to the three months ended September 30, 2020.

Delivery System sales for the three months ended September 30, 2021 increased $20.3 million, or 127.2%, compared to the three months ended September 30, 2020.

Delivery Systems units sold for the three months ended September 30, 2021 increased primarily due to strong trends in the U.S.

and Mexico as markets reopened and consumer demand accelerated, as well as continued strength in China and Australia despite partial closures due to the Delta variant.

Similarly, Consumables sales for the three months ended September 30, 2021 increased $13.4 million, or 71.5%, compared to the three months ended September 30, 2020.

Cost of Sales, Gross Profit, and Gross Margin

Three Months Ended June 30, Change

Three Months Ended September 30, Change

(in millions) 2021 2020 Amount %

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Cost of sales increased 62.3% driven by increased sales volume and a shift in the product mix to HydraFacial Delivery Systems.

Gross margin increased from 30.3% during the three months ended June 30, 2020 to 71.0% during the three months ended June 30, 2021.

The improvement in gross profit was due to fixed cost leverage from higher than expected sales, improved average selling prices for Delivery Systems, as well as cost savings initiatives.

Gross margin increased from 60.6% during the three months ended September 30, 2020 to 67.6% during the three months ended September 30, 2021.

The improvement in gross profit was due to fixed cost leverage from higher sales, improved average selling prices for Delivery Systems, as well as cost savings initiatives.

Operating Expenses

Sales and Marketing

Three Months Ended June 30, Change

Three Months Ended September 30, Change

(in millions) 2021 2020 Amount %

Selling and marketing $ 30.5 $ 10.5 $ 20.0 188.9 %

As a percentage of total net sales 39.4 % 44.0 %

Selling and marketing expense for the three months ended June 30, 2021 increased $20.0 million , or 322.6%, compared to the three months ended June 30, 2020.

The overall improvement as a percentage of total net sales was driven by normalized sales volume versus low sales volume during 2020 due to negative COVID-19 impact and related shut down in the second quarter of 2020.

The dollar increase is due to higher sales commissions of $6.8 million, which included $0.8 million in sales commissions from international operations, primarily attributable to the overall increase in sales, and personnel-related expenses increased by $7.1 million, which included a $1.5 million increase from our international operations, primarily attributable to increased headcount.

As a percentage of net sales 44.7 % 30.5 %

Selling and marketing expense for the three months ended September 30, 2021 increased $20.0 million , or 188.9%, compared to the three months ended September 30, 2020.

The overall increase as a percentage of net sales was driven by higher sales commissions of $5.2 million, which included $0.3 million in sales commissions from international operations, primarily attributable to the overall increase in sales.

Personnel-related expenses increased by $6.8 million, which included a $2.3 million increase from our international operations, primarily attributable to increased headcount, and stock-based compensation expense of $1.1 million.

In addition, personnel-related training expenses increased by $1.4 million and marketing spend increased by $1.4 million as we moved forward with marketing programs after COVID-19 restrictions were lifted and markets reopened.

Research and Development

Three Months Ended June 30, Change

Three Months Ended September 30, Change

(in millions) 2021 2020 Amount %

Research and development $ 1.9 $ 0.6 $ 1.3 225.8 %

As a percentage of total net sales 4.5 % 4.3 %

Research and development expense for the three months ended June 30, 2021 increased $2.4 million , or 400.0%, compared to the three months ended June 30, 2020.

The increase was due to increased expenses related to investments in new skincare treatment technologies of $1.6 million and $0.5 million increase in professional services fees

As a percentage of net sales 2.8 % 1.7 %

Research and development expense for the three months ended September 30, 2021 increased $1.3 million , or 225.8%, compared to the three months ended September 30, 2020.

The increase was due to increased expenses related to investments in new skincare treatment technologies of $1.0 million.

General and Administrative

Three Months Ended June 30, Change

Three Months Ended September 30, Change

(in millions) 2021 2020 Amount %

General and administrative $ 19.2 $ 7.1 $ 12.1 172.2 %

As a percentage of total net sales 66.8 % 38.3 %

General and administrative expense for the three months ended June 30, 2021 increased $39.0 million, or 722.2%, compared to the three months ended June 30, 2020.

Transaction costs increased by $29.6 million related to the consummation of the Business Combination, primarily consisting of $21.0 million paid to the former owner of HydraFacial as well as professional fees for financial advisory, legal and accounting services.

The consummation of the Business Combination during the three months ended June 30, 2021 also drove an increase of $1.4 million in stock-based compensation expense related to accelerated vesting and $1.8 million in stock-based compensation expense related to options granted.

Personnel-related expenses increased by $2.5 million primarily due to increased headcount and higher sales.

As a percentage of net sales 28.2 % 20.4 %

General and administrative expense for the three months ended September 30, 2021 increased $12.1 million, or 172.2%, compared to the three months ended September 30, 2020.

Stock-based compensation expense increased by $3.9 million and personnel-related expenses increased by $1.3 million primarily due to increased headcount and higher sales.

We incurred additional public company costs, which included directors’ and officers’ liability insurance, Sarbanes-Oxley Act compliance and additional audit and tax related services of $1.7 million, increased legal fees of $1.2 million, and one-time transaction costs of $0.9 million.

Other (Income) Expense, Net and Income Tax Provision

Three Months Ended June 30, Change

Three Months Ended September 30, Change

(in millions) 2021 2020 Amount %

Other expense, net $ 210.8 $ 5.6 $ 205.2 3670.0 %

Income tax (benefit) expense $ (1.9) $ (3.1) $ 1.2 (38.7) %

Other expense, net, was $114.9 million for the three months ended June 30, 2021 compared to $5.5 million for the three months ended June 30, 2020.

Income tax benefit $ (1.1) $ (0.6) $ (0.5) 90.4 %

Other expense, net, was $210.8 million for the three months ended September 30, 2021 compared to $5.6 million for the three months ended September 30, 2020.

The increase was primarily driven by the changes in the fair values of the Warrant liability and Earn-out Shares liability of $199.3 million and $10.6 million, respectively.

In connection with the consummation of the Business Combination, we repaid all long-term borrowings and incurred a total of $4.3 million in deferred financing cost write-offs and prepayment penalties.

Comparison of Six Months Ended June 30, 2021 to Six Months Ended June 30, 2020

(amounts and percentages may not foot due to rounding)

Six Months Ended June 30,

Comparison of Nine Months Ended September 30, 2021 to Nine Months Ended September 30, 2020

Nine Months Ended September 30,

(in millions) 2021 % of Net Sales 2020 % of Net Sales

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Net loss $ (357.8) (196.4) % $ (21.7) (26.7) %

Six Months Ended June 30, Change

Nine Months Ended September 30, Change

(in millions) 2021 2020 Amount %

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Total 100.0% 100.0%

Total net sales for the six months ended June 30, 2021 increased $67.4 million, or 144.3%, compared to the six months ended June 30, 2020.

Delivery System sales for the six months ended June 30, 2021 increased $40.5 million, or 201.5%, compared to the six months ended June 30, 2020.

Delivery Systems units sold for the six months ended June 30, 2021 increased primarily due to both increased consumer demand and continued strength in the Asia-Pacific region.

Similarly, Consumables sales for the six months ended June 30, 2021 increased $26.8 million, or 100.8%, compared to the six months ended June 30, 2020.

Total net sales for the nine months ended September 30, 2021 increased $101.0 million, or 124.3%, compared to the nine months ended September 30, 2020.

Delivery System sales for the nine months ended September 30, 2020 increased $60.8 million, or 169.0%, compared to the nine months ended September 30, 2020.

Delivery Systems units sold for the nine months ended September 30, 2020 increased primarily due to both increased consumer demand and continued strength in the Asia-Pacific region.

Similarly, Consumables sales for the nine months ended September 30, 2021 increased $40.2 million, or 88.8%, compared to the nine months ended September 30, 2020.

The increase in Consumables sales was primarily attributable to rebounding sales volume following the COVID-19 pandemic.

Cost of Sales, Gross Profit, and Gross Margin

Six Months Ended June 30, Change

Nine Months Ended September 30, Change

(in millions) 2021 2020 Amount %

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Cost of sales increased 54.2% driven by increased sales volume and a shift in the product mix to HydraFacial Delivery Systems.

Gross margin increased from 49.7% during the six months ended June 30, 2021 to 69.3% during the six months ended June 30, 2021, primarily due to fixed cost leverage from higher sales volumes coupled with cost saving initiatives.

Operating Expenses

Gross margin increased from 54.4% during the nine months ended September 30, 2021 to 68.6% during the nine months ended September 30, 2020, primarily due to fixed cost leverage from higher sales volumes coupled with cost saving initiatives, partially offset by higher logistics costs.

Sales and Marketing

Six Months Ended June 30, Change

Nine Months Ended September 30, Change

(in millions) 2021 2020 Amount %

Selling and marketing $ 74.5 $ 34.4 $ 40.1 116.5 %

As a percentage of total net sales 37.9 % 51.2 %

Selling and marketing expense for the six months ended June 30, 2021 increased $19.4 million, or 81.2%, compared to the six months ended June 30, 2020.

The increase is due to higher sales commissions of $9.6 million, which included $0.9 million in sales commissions from international operations, primarily attributable to overall increases in sales, and personnel-related expenses increased by $6.5 million, which included a $1.5 million increase from our international operations, primarily attributable to increased headcount.

In addition, personnel-related training and certification expenses increased by $2.1 million.

As a percentage of net sales 40.9 % 42.4 %

Selling and marketing expense for the nine months ended September 30, 2021 increased $40.1 million, or 116.5%, compared to the nine months ended September 30, 2020.

The overall decrease as a percentage of net sales was due to higher sales commissions of $14.8 million, which included $1.3 million in sales commissions from international operations, primarily attributable to overall increases in sales.

Personnel-related expenses increased by $14.5 million, which included a $3.9 million increase from our international operations, primarily attributable to increased headcount, and stock-based compensation expense of $1.4 million.

In addition, personnel-related training and certification expenses increased by $3.0 million and increased marketing spend of $2.7 million.

Research and Development

Six Months Ended June 30, Change

Nine Months Ended September 30, Change

(in millions) 2021 2020 Amount %

Research and development $ 6.3 $ 2.5 $ 3.8 147.9 %

As a percentage of total net sales 3.9 % 4.3 %

Research and development expense for the six months ended June 30, 2021 increased $2.4 million, or 120.0%, compared to the six months ended June 30, 2020.

As a percentage of net sales 3.5 % 4.3 %

Research and development expense for the nine months ended September 30, 2021 increased $3.8 million, or 147.9%, compared to the nine months ended September 30, 2020.

The increase was due to increased expenses related to investments in new skincare treatment technologies of $3.5 million.

General and Administrative

Six Months Ended June 30, Change

Nine Months Ended September 30, Change

(in millions) 2021 2020 Amount %

General and administrative $ 73.6 $ 19.7 $ 53.9 274.6 %

As a percentage of total net sales 48.4 % 27.0 %

General and administrative expense for the six months ended June 30, 2021 increased $42.6 million, or 338.0%, compared to the six months ended June 30, 2020.

As a percentage of net sales 40.4 % 24.3 %

General and administrative expense for the nine months ended September 30, 2021 increased $53.9 million, or 274.6%, compared to the nine months ended September 30, 2020.

Transaction costs increased by $32.3 million related to the consummation of the Business Combination, primarily consisting of $21.0 million paid to the former owner of HydraFacial as well as professional fees for financial advisory, legal and accounting services.

The consummation of the Business Combination during the six months ended June 30, 2021 also drove an increase of $1.4 million in stock-based compensation expense related to the accelerated vesting and $1.8 million in stock-based compensation related to options granted.

The consummation of the Business Combination during the nine months ended September 30, 2021 also drove an increase of $6.7 million in stock-based compensation which includes $1.4 million in related to the accelerated vesting due to Business Combination.

Personnel-related expenses increased by $5.8 million primarily due to increased headcount and higher sales.

Other (Income) Expense, Net and Income Tax Provision

Six Months Ended June 30, Change

Nine Months Ended September 30, Change

(in millions) 2021 2020 Amount %

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Income tax benefit $ (3.3) $ (6.3) $ 3.0 (47.2) %

Other expense, net, was $120.9 million for the six months ended June 30, 2021 compared to $9.9 million for the six months ended June 30, 2020.

The increase was primarily driven by the changes in the fair values of the Company’s warrant liability and earn-out share liability of $36.5 million and $72.0 million, respectively.

Other expense, net, was $331.7 million for the nine months ended September 30, 2021 compared to $15.5 million for the nine months ended September 30, 2020.

The increase was primarily driven by the changes in the fair values of our Warrant liability and Earn-out Share liability of $271.3 million and $47.1 million, respectively.

In connection with the consummation of the Business Combination, we repaid all long-term borrowings and incurred a total of $4.3 million in prepayment penalties and deferred financing cost write-offs.

Income tax benefit decreased primarily due to an increase in valuation allowance and various non-deductible expenses.

Liquidity and Capital Resources

Our operations have been funded primarily through cash flow from operating activities and net proceeds received from the consummation of the Business Combination.

As of December 31, 2020, we had cash and cash equivalents of approximately $9.5 million and as of June 30, 2021, we had cash and cash equivalents of approximately $101.5 million.

We believe our existing cash and cash equivalent balances (including the cash consideration received from the consummation of the Business Combination) and cash flow from operations will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months.

As of September 30, 2021, we had cash and cash equivalents of approximately $718.6 million.

On September 14, 2021, we issued $750 million aggregate principal amount of our 1.25% Notes due 2026.

We believe our existing cash and cash equivalent balances (including the cash consideration received from the consummation of the Business Combination and the cash received from the issuance of the Notes) and cash flow from operations will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months.

Our future capital requirements may vary materially from those currently planned and will depend on many factors, including 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, expansion and overall economic conditions.

We expect capital expenditures of up to $15.0 million for the year ended December 31, 2021.

We anticipate using cash from the Business Combination and cash generated through the normal course of operations to fund these items.

We anticipate using cash from the Business Combination, cash from the issuance of the Notes and cash generated through the normal course of operations to fund these items.

To the extent that current and anticipated future sources of liquidity are insufficient to fund our future business activities and requirements, we may be required to seek additional equity or debt financing.

The sale of additional equity would result in additional dilution to our stockholders.

The incurrence of 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.

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.

There can be no assurances that we will be able to raise additional capital.

The inability to raise capital would adversely affect our ability to achieve our business objectives.

Cash Flow (amounts and percentages may not foot due to rounding)

Six Months Ended June 30,

Subsequent to September 30, 2021, on October 4, 2021, we delivered a Notice of Redemption for all of our outstanding public warrants to purchase shares of BeautyHealth's Class A common stock.

On November 8, 2021, BeautyHealth announced 16,123,235 public warrants were exercised for total cash proceeds of $185.4 million.

Convertible Senior Notes

On September 14, 2021, we issued $750 million aggregate principal amount of our 1.25% Notes due 2026.

The net proceeds from the issuance of the Notes were approximately $638.7 million, net of capped call transaction costs of $90.2 million and debt issuance costs totaling $21.1 million.

See Note 9 - Debt, to the Notes to Condensed Consolidated Financial Statements included elsewhere in this report.

The following table summarizes the activities from our statements of cash flows.

Amounts may not foot due to rounding.

Nine Months Ended September 30,

(in millions) 2021 2020

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Operating Activities

Net cash used in operating activities of $31.9 million for the six months ended June 30, 2021 was primarily due to the net loss of $142.7 million.

Net cash used in operating activities of $31.6 million for the nine months ended September 30, 2021 was primarily due to the net loss of $357.8 million.

The net loss was impacted by non-cash adjustments of $343.5 million, primarily related to fair value adjustments to Earn-out shares liability and Warrant liabilities, partially offset by a decrease in net change in working capital of $17.4 million.

The total increase in net operating assets and liabilities was primarily due to the increase in accounts receivable of $17.3 million and offset by an increase in accrued payroll and taxes.

Net cash used in operating activities of $11.6 million for the six months ended June 30, 2020 was primarily due to the net loss of $19.5 million.

The net loss was impacted by non-cash adjustments of $10.5 million related to depreciation and amortization, partially offset by a decrease in net change in working capital of $2.7 million.

The total increase in net operating assets and liabilities was primarily due to a $9.2 million decrease in accounts receivable and a $6.8 million decrease in accrued payroll and other expenses.

Net cash used in operating activities of $12.0 million for the nine months ended September 30, 2020 was primarily due to the net loss of $21.7 million.

The net loss was impacted by non-cash adjustments of $16.8 million primarily related to depreciation and amortization, partially offset by a decrease in net change in working capital of $7.2 million.

The total increase in net operating assets and liabilities was primarily due to a $5.1 million increase in income tax receivables and a $1.8 million decrease in accrued payroll and other expenses offset by a $4.1 million decrease in accounts receivable

Investing activities

Cash used in investing activities for the six months ended June 30, 2021 of $9.1 million was primarily related to $4.7 million in capital expenditures and our business acquisition of a distributor in Australia with cash paid of $4.9 million, net of cash acquired.

Cash used in investing activities for the six months ended June 30, 2020 of $1.4 million was primarily related to capital expenditures.

Cash used in investing activities for the nine months ended September 30, 2021 of $29.2 million was primarily related to our business acquisitions of distributors in Australia, Germany, Mexico and France with cash paid of $22.9 million, net of cash acquired, $4.9 million in capital expenditures and $2.2 million in capitalized software.

Cash used in investing activities for the nine months ended September 30, 2020 of $2.7 million was primarily related to capital expenditures.

Financing activities

Net cash from financing activities of $133.0 million for the six months ended June 30, 2021 was primarily related to the proceeds received from the Business Combination offset by the payoff of long-term debt of $225.5 million.

Net cash from financing activities of $20.5 million for the six months ended June 30, 2020 was primarily related to proceeds from borrowings of $36.5 million, net of debt repayments and issuance costs of $16.0 million.

Net cash from financing activities of $770.8 million for the nine months ended September 30, 2021 was primarily related to the proceeds received from the issuance of convertible senior notes and Business Combination.

The proceeds were offset by the payoff of long-term debt of $225.5 million and proceeds from our issuance of convertible senior notes.

Net cash from financing activities of $19.2 million for the nine months ended September 30, 2020 was primarily related to proceeds from borrowings of $36.5 million, net of debt repayments and issuance costs of $16.4 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.

Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with GAAP.

In preparing the condensed 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.

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Because of the uncertainty inherent in these matters, actual results may differ from these estimates and could differ based upon other assumptions or conditions.

The critical accounting policies that reflect our more significant judgments and estimates used in the preparation of our consolidated financial statements include those noted below.

The critical accounting policies that reflect our more significant judgments and estimates used in the preparation of our condensed consolidated financial statements include those noted below.

Revenue Recognition

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• Recognize revenue as the performance obligations are satisfied.

Share-Based Compensation

We measure and recognize compensation expenses for stock options and performance-based stock units (“PSUs”) to employees on a straight-line basis over the vesting period based on their grant date fair values.

Stock-Based Compensation

We measure and recognize compensation expenses for stock options, RSUs, and PSUs to employees on a straight-line basis over the vesting period based on their grant date fair values.

We estimate the fair value of stock options on the date of grant using the Black-Scholes option pricing model and the fair value of PSUs on the date of grant using a Monte Carlo simulation.

For stock options, we estimate forfeitures at the time of grant and revise these estimates in subsequent periods if actual forfeitures differ from those estimates.

The fair value of the RSUs is based on the closing price of our common stock on the grant date.

Goodwill is recorded as the difference, if any, between the aggregate consideration paid for an acquisition and the fair value of the assets acquired and liabilities assumed.

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The assumptions made will impact the outcome and ultimate results of the testing.

We will use industry accepted

valuation models and set criteria that are reviewed and approved by various levels of management and, in certain instances, we will engage independent third-party valuation specialists for advice.

We will use industry accepted valuation models and set criteria that are reviewed and approved by various levels of management and, in certain instances, we will engage independent third-party valuation specialists for advice.

The key estimates and factors used in the valuation models would include revenue growth rates and profit margins based on our internal forecasts, our specific weighted average cost of capital used to discount future cash flows, and comparable market multiples for the industry segment, when applicable, as well as our historical operating trends.

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Significant judgement is required to determine if a valuation allowance is needed.

As of June 30, 2021, HydraFacial had incurred cumulative pre-tax losses, and as a result, does not rely on its projections as a source of income that would give us the ability to realize our deferred tax assets.

As of September 30, 2021, HydraFacial had incurred cumulative pre-tax losses, and as a result, does not rely on its projections as a source of income that would give us the ability to realize our deferred tax assets.

In order to determine the realizability of our deferred income tax assets, we have pointed to the reversal of our taxable temporary differences as a source of income that will result in the realization of our deferred income tax assets.

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Warrant Liabilities

We classify the Public and Private Placement Warrants (“Warrant liabilities”) as liabilities on our consolidated balance sheets as these instruments are precluded from being indexed to our own stock given the terms allow for a settlement adjustment that does not meet the scope of the fixed-for-fixed exception in ASC 815, Derivatives and Hedging .

We classify the Public and Private Placement Warrants (“Warrant liabilities”) as liabilities on our Condensed Consolidated Balance Sheets as these instruments are precluded from being indexed to our own stock given the terms allow for a settlement adjustment that does not meet the scope of the fixed-for-fixed exception in ASC 815, Derivatives and Hedging .

In certain events outside of our control, the Public Warrant and Private Placement Warrant holders are entitled to receive cash while in certain scenarios the holders of the common stock are not entitled to receive cash or may receive less than 100% of any proceeds in cash, which precludes these instruments from being classified within equity pursuant to ASC 815-40.

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Contingent consideration that is classified as a liability in accordance with the requirements under ASC 480, Distinguishing Liabilities from Equity, is remeasured at subsequent reporting dates, with the corresponding gain or loss recognized in profit or loss.

With the closing of the four distributor acquisitions in Australia, France, Germany and Mexico, the 7.5 million Earn-out Shares were earned and subsequently issued on July 15, 2021.

Convertible Senior Notes

We consider the Notes in “Long-term liabilities” at face value net of issuance costs in accordance with ASC 470-20, Debt with Conversion and Other Options and Derivatives and Hedging—Contracts in Entity's Own Equity (“ASU 2020-06”).

If any of the conditions to the convertibility of the Notes is satisfied, or the Notes become due within one year, we may be required under applicable accounting standards to reclassify the liability carrying value of the Notes as a current, rather than a long-term, liability.

Capped Call Transactions

We consider the freestanding capped call option contracts qualify as equity under the accounting guidance on indexation and equity classification, and recognized the contract by recording an entry to “Additional paid-in capital” (“APIC”) in stockholders’ equity in its condensed consolidated balance sheet.

We also determined that the capped call option contracts meet the definition of a derivative under ASC Topic 815, Derivatives and Hedging but are not required to be accounted for as a derivative as they meet the scope exception outlined in ASC 815.

Instead the capped call options are recorded in APIC and not remeasured.

Recent Accounting Pronouncements

See Note 2 of the notes to our consolidated financial statements in the section titled “—Recently Issued Accounting Pronouncements” in our Note 2 to our consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for a discussion about new accounting pronouncements adopted and not yet adopted.

See Note 2 of the notes to our Condensed Consolidated Financial Statements in the section titled “—Recently Issued Accounting Pronouncements” in our Note 2 to our consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for a discussion about new accounting pronouncements adopted and not yet adopted.

Off Balance Sheet Arrangements

Known Trends or Uncertainties

We operate in the beauty health industry, which is highly competitive and changes rapidly.

Our operating results could be significantly affected by our ability to develop new products and find new distribution channels for new and existing products.

The majority of our customers are in the medical, (dermatologists and plastic surgeons), esthetician, and beauty retail industry.

During economic downturns, we have seen consolidations in such industries.

The extent to which the COVID-19 pandemic impacts our business going forward will depend on numerous factors we cannot reliably predict, including the duration and scope of the pandemic;

businesses and individuals' actions in response to the pandemic;

and the impact on economic activity including the possibility of recession or financial market instability.

These factors may adversely impact consumer, business, and government spending as well as customers' ability to pay for our products and services on an ongoing basis.

As a result, our growth rate could be affected by consolidation and downsizing in the medical, esthetician, and beauty retail industry.

Furthermore, it remains unclear how governmental authorities, including the Food and Drug Administration (“FDA”), will regulate the products that we sell, and in the case of the FDA, whether and when it will propose or implement new or additional regulations.

Unforeseen regulatory obstacles or compliance costs may hinder our business in both the short and long-term as well.

Non-GAAP Financial Measures

In addition to our results determined in accordance with accounting principles generally accepted in the United States of America (GAAP), management utilizes certain non-GAAP performance measures, Adjusted Net Income (Loss), Adjusted EBITDA (Loss), Adjusted EBITDA Margin, Adjusted Gross Profit, and Adjusted Gross Margin, for purposes of evaluating the Company’s ongoing operations and for internal planning and forecasting purposes.

In addition to our results determined in accordance with accounting principles generally accepted in the United States of America (GAAP), management utilizes certain non-GAAP performance measures, Adjusted net income (loss), Adjusted EBITDA (loss), Adjusted EBITDA margin, Adjusted gross profit, and Adjusted gross margin, for purposes of evaluating our ongoing operations and for internal planning and forecasting purposes.

We believe that these non-GAAP operating measures, when reviewed collectively with our GAAP financial information, provide useful supplemental information to investors in assessing our operating performance.

Adjusted Net Income (Loss), Adjusted EBITDA (Loss) and Adjusted EBITDA Margin

Adjusted Net Income (Loss), Adjusted EBITDA (Loss) and Adjusted EBITDA Margin are key performance measures that management uses to assess its operating performance.

Because Adjusted Net Income (Loss), Adjusted EBITDA (Loss) and Adjusted EBITDA Margin facilitates internal comparisons of our historical operating performance on a more consistent basis, we use these measures for business planning purposes.

Adjusted Net Income (Loss), Adjusted EBITDA and Adjusted EBITDA Margin

Adjusted net income (loss), Adjusted EBITDA and Adjusted EBITDA margin are key performance measures that management uses to assess its operating performance.

Because Adjusted net income (loss), Adjusted EBITDA and Adjusted EBITDA margin facilitates internal comparisons of our historical operating performance on a more consistent basis, we use these measures for business planning purposes.

We also believe this information will be useful for investors to facilitate comparisons of our operating performance and better identify trends in our business.

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management fees incurred from our historical private equity owners;

one-time or non-recurring items such as transaction costs

(including transactions costs with respect to the Business Combination);

one-time or non-recurring items such as transaction costs (including transactions costs with respect to the Business Combination);

and restructuring costs (including those associated with COVID-19).

The following table reconciles our net income (loss) to Adjusted net income (loss) for the periods indicated:

Three Months Ended June 30, Six Months Ended June 30,

The following table reconciles our Net loss to Adjusted net income (loss) for the periods indicated:

Three Months Ended September 30, Nine Months Ended September 30,

Unaudited (in thousands) 2021 2020 2021 2020

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Management fees (1)

— 217 209 953

Transaction related costs (2)

1,156 204 32,313 1,011

Other non-recurring and one-time fees (3)

452 569 590 3,334

Aggregate adjustment for income taxes (2,437) (992) (13,252) (3,620)

Adjusted net income (loss) $ 2,486 $ 905 $ 2,783 $ (10,294)

The following table reconciles our net income (loss) to Adjusted EBITDA for the periods indicated:

Three Months Ended June 30, Six Months Ended June 30,

The following table reconciles our net loss to Adjusted EBITDA for the periods indicated:

Three Months Ended September 30, Nine Months Ended September 30,

Unaudited (in thousands) 2021 2020 2021 2020

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Management fees (1)

— 217 209 953

Transaction related costs (2)

1,156 204 32,313 1,011

Other non-recurring and one-time fees (3)

452 569 590 3,334

Adjusted EBITDA $ 5,800 $ 7,555 $ 24,213 $ 4,160

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Following the Business Combination, these fees are no longer paid.

(2) Such amounts primarily represent direct costs incurred with the Business Combination, including $21.0 million paid to the former owner of HydraFacial, and to prepare HydraFacial to be marketed for sale by HydraFacial’s shareholders in previous periods .

(3) Such costs primarily represent COVID-19 related restructuring cost of $2.0 million and $2.1 million for the three and six months ended June 30, 2020, respectively, including write-off of expired Consumables, discontinued product lines, human capital and cash management consultants, and, to a lesser extent, costs associated with a former warehouse and assembly facility during the transition period.

(2) For the nine months ended September 30, 2021 such amount primarily represents direct costs incurred with the Business Combination, including $21.0 million paid to the former owner of HydraFacial, and to prepare HydraFacial to be marketed for sale by HydraFacial’s shareholders in previous periods .

(3) For the three and nine months ended September 30, 2021 such costs primarily represent one-time retention awards related to the distributor acquisitions.

For the three and nine months ended September 30, 2020, respectively, such costs primarily represent COVID-19 related restructuring cost of $0.2 million and $2.3 million including write-off of expired Consumables, discontinued product lines, human capital and cash management consultants, and, to a lesser extent, costs associated with a former warehouse and assembly facility during the transition period.

Adjusted Gross Profit and Adjusted Gross Margin

We use Adjusted Gross Profit and Adjusted Gross Margin to measure our profitability and ability to scale and leverage the costs of our Delivery Systems (as defined below) and Consumables sales (as defined below).

We use Adjusted gross profit and Adjusted gross margin to measure our profitability and ability to scale and leverage the costs of our Delivery Systems and Consumables sales.

The continued growth of our Delivery Systems installed will allow us to improve our Adjusted gross margin, as additional Delivery System units sold will increase our recurring Consumables revenue, which has higher margins.

We believe Adjusted Gross Profit and Adjusted Gross Margin are useful measures to us and to our investors to assist in evaluating our operating performance because it provides consistency and direct comparability with our past financial performance and between fiscal periods, as the metric eliminates the effects of amortization and depreciation, which are non-cash expenses that may fluctuate for reasons unrelated to overall continuing operating performance.

We believe Adjusted gross profit and Adjusted gross margin are useful measures to us and to our investors to assist in evaluating our operating performance because it provides consistency and direct comparability with our past financial performance and between fiscal periods, as the metric eliminates the effects of amortization and depreciation as well as stock-based compensation expense, which are non-cash expenses that may fluctuate for reasons unrelated to overall continuing operating performance.

Adjusted gross margin has been and will continue to be affected by a variety of factors, including the product mix, geographic mix, direct vs.

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We expect our Adjusted gross margin to fluctuate over time depending on the factors described above.

The following table reconciles gross profit to Adjusted Gross Profit for the periods indicated (amounts and percentages may not foot due to rounding) :

Three Months Ended June 30, Six Months Ended June 30,

The following table reconciles Gross profit to Adjusted gross profit for the periods indicated.

Amounts and percentages may not foot due to rounding.

Three Months Ended September 30, Nine Months Ended September 30,

(in millions) 2021 2020 2021 2020

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Adjusted to exclude the following:

Depreciation and amortization expense relating to cost of sales $ 2.6 $ 2.9 $ 5.2 $ 5.6

Stock-based compensation expense included in cost of sales $ 0.1 $ — $ 0.2 $ —

Depreciation and amortization expense included in cost of sales 2.6 2.7 7.7 8.2

Adjusted gross profit $ 48.7 $ 23.6 $ 133.0 $ 52.4

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis