SkinHealth Systems Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Forward-Looking Statements This Quarterly Report 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, 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 Beauty Health 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. Important factors, among others, that may affect actual results or outcomes include the inability to recognize the anticipated benefits of the Business Combination; costs related to the Business Combination; 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; The Beauty Health Company’s ability to execute its business plan; potential litigation involving The Beauty Health Company; changes in applicable laws or regulations; 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 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 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 for the fiscal year ended December 31, 2021 filed with the U.S. Securities and Exchange Commission (SEC) on March 1, 2021. 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. Company Overview The Beauty Health Company is a global category-creating company focused on delivering beauty health experiences by reinventing our consumer’s relationship with their skin, their bodies and their self-confidence. Our flagship brand, HydraFacial, created the category of hydradermabrasion by using a patented Vortex-Fusion Delivery System to cleanse, peel, exfoliate, extract, infuse, and hydrate the skin with proprietary solutions and serums. HydraFacial provides a non-invasive and approachable experience with a powerful community of a/estheticians, consumers and partners, bridging medical skin correction to traditional over-the-counter beauty. Our vision is to expand our platform and connected community of providers, consumers, brand partners, and retail partners to democratize and personalize beauty health solutions across ages, genders, skin tones, and skin types. 24 Table of Contents Recent Developments CEO Transition On November 9, 2021, by mutual agreement, the Board of Directors and Clinton Carnell, the Company’s Chief Executive Officer and member of the Board, determined that Mr. Carnell would transition out of his roles as Chief Executive Officer and as a member of the Board, in each case, effective December 31, 2021. These actions were not related to any matter regarding the Company’s financial condition, reported financial results, internal controls or disclosure controls and procedures. On January 1, 2022, Brenton L. Saunders, the Company’s Executive Chairman of the Board, assumed additional responsibilities as its interim Chief Executive Officer. On January 20, 2022, we announced the appointment of Andrew Stanleick to serve as our President and Chief Executive Officer and as a member of the Board of Directors, effective as of February 7, 2022. In this capacity, Mr. Stanleick is serving as our principal executive officer. Upon Mr. Stanleick commencing employment as our Chief Executive Officer, Mr. Saunders, the Company’s then interim Chief Executive Officer and the Executive Chairman of the Board, ceased to serve as interim Chief Executive Officer. Mr. Saunders continues to serve as the Executive Chairman of the Board. Syndeo Launch On March 7, 2022 the Company announced that its new delivery system, HydraFacial Syndeo (“ Syndeo ”), would be available for purchase starting immediately in the United States, with a rolling release in other markets to follow. The Syndeo system is a digitally connected device co-created with our HydraFacialist community to meaningfully enhance the consumer and provider experience. Built with cloud-based software, the upgraded delivery system blends the HydraFacial core treatment with digital capabilities to supply the Company and providers with key learnings and insights. The data retrieval enables the Company to better analyze consumer behavior and aid providers in understanding their clients’ needs. With this data, providers can see consumer history and preferences, allowing them to offer targeted products and experiences personalized to a consumer’s needs. The new system also provides the capability to enhance consumer engagement through branding and gamification. 25 Table of Contents Factors Affecting Our Performance Market Trends HydraFacial is a pioneer in the attractive and growing beauty-health industry and there are several emerging market trends that we believe will play a key role in shaping the future of this industry. Recent growth in the skincare industry has been driven by an emphasis on skincare rather than cosmetics and HydraFacial is poised to capture a larger share of wallet from consumers. Further, HydraFacial’s market research conducted in 2019 demonstrated that consumers are increasingly willing to spend on high-end beauty health products. To the extent disposable income grows, we expect impacts of this trend to be amplified. We believe these favorable market trends will continue and strengthen going forward. However, 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 product. Impact of the COVID-19 Pandemic The COVID-19 pandemic has had, and may continue to have, adverse impacts on our business. Most markets have recently shown encouraging signs of emergence from the pandemic; however, sporadic containment measures and travel restrictions continue to impact volume trends in certain markets. However, the recent loosening of social distancing protocols and the gradual removal or reduction of travel restrictions in certain key markets have contributed to increased demand and sales growth, in most of the countries we operate in. As previously reported, we have implemented several key measures in response to the COVID-19 pandemic which continue to be in place. We have also amplified our measures to address the potentially longer-lasting impacts of the COVID-19 pandemic, the intermittent lockdowns and possible economic uncertainty resulting from COVID-19 that continue in many markets. We anticipate the recovery to be non-linear until COVID-19 containment measures are discontinued across all regions and normal consumer traffic resumes on a consistent basis. We currently expect that any easing of containment measures and recovery of the impacted sectors of the economy will be gradual and uneven, as regions face resurgence of COVID-19 and related uncertainties, and the availability and widespread distribution of a safe and effective vaccine varies across regions. As a result, we anticipate that consumer spending habits and consumer confidence will continue to shift, causing future sales and volume trends to be non-linear. Demographics 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 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. HydraFacial customers are young; approximately 50% of HydraFacial customers are Millennials, and approximately 30% of HydraFacial’s beauty retail customers are under the age of 24. As the Millennial and Gen Z consumers age, they appear to be taking skincare more seriously and willing to invest in premium treatments, such as those offered by HydraFacial. Marketing Effective marketing is vital to our ability to drive growth. We plan to further our successful demand-generating activities through educational campaigns that focus on our brand, values, and quality, as well as enhancing our digitally integrated media campaigns. Innovation Our strategy involves innovating our current product offering while also diversifying into attractive adjacent categories where we can leverage our strengths, capabilities and community. We intend to maintain investment in research and development to stay at the forefront of cutting-edge technology. 26 Table of Contents Technology Our investments in technology enhance the HydraFacial experience for consumers while capturing valuable and leverageable data. As we expand our capabilities, we hope to enable the world’s largest skin health database. We believe this data will allow us to drive habituation by enhancing personalization, access, trend identification and consumer education. Geographic Expansion HydraFacial’s recent growth has been driven in part by our international strategy. 41% of HydraFacial’s total revenue during the first quarter of fiscal year 2022 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. We plan to expand our global footprint, building out our team and infrastructure for further penetration across Asia, Europe and Latin America. Regulation It remains unclear how governmental authorities, including the 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. 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 March 31, (dollars in millions) 2022 2021 Delivery Systems net sales $ 41.6 $ 25.7 Consumables net sales 33.8 21.9 Total net sales $ 75.4 $ 47.5 Gross profit $ 51.9 $ 31.7 Gross margin 68.9% 66.8% Net income (loss) $ 32.5 $ (3.3) Adjusted net income (loss) $ (8.5) $ (0.1) Adjusted EBITDA $ 2.2 $ 7.0 Adjusted EBITDA margin 2.9% 14.8% Adjusted gross profit $ 54.8 $ 34.3 Adjusted gross margin 72.7% 72.2% 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 our management uses to assess our operating performance. See the section titled “ Non-GAAP Financial Measures—adjusted net income (loss), adjusted EBITDA (loss) and adjusted EBITDA margin ” for information regarding our use of adjusted net income (loss) and adjusted EBITDA and reconciliations of adjusted net income (loss) and adjusted EBITDA to net loss. 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 and Consumables sales. See the section titled “ Non-GAAP Financial Measures—adjusted gross profit and adjusted gross margin ” for information regarding our use of adjusted gross profit and a reconciliation of adjusted gross profit to gross profit. 27 Table of Contents Comparison of Three Months Ended March 31, 2022 to Three Months Ended March 31, 2021 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, 2022 and March 31, 2021 have been derived from the condensed consolidated financial statements included elsewhere in this Form 10-Q. Amounts and percentages may not foot due to rounding. Three Months Ended March 31, (in millions) 2022 % of Net Sales 2021 % of Net Sales Net sales $ 75.4 100.0 % $ 47.5 100.0 % Cost of sales 23.5 31.1 % 15.8 33.2 Gross profit 51.9 68.9 % 31.7 66.8 Operating expenses Selling and marketing 36.4 48.3 17.1 36.0 Research and development 2.2 3.0 1.5 3.1 General and administrative 26.3 34.8 10.8 22.7 Total operating expenses 64.9 86.1 29.4 61.8 Income (loss) from operations (13.0) (17.2) 2.4 5.0 Other (income) expense, net (48.1) (63.8) 6.0 12.5 Income (loss) before provision for income tax 35.1 46.6 (3.6) (7.5) Income tax expense (benefit) 2.6 3.5 (0.3) (0.6) Net income (loss) $ 32.5 43.1 % $ (3.3) (6.9) % Net Sales Three Months Ended March 31, Change (in millions) 2022 2021 Amount % Net sales Delivery Systems $ 41.6 $ 25.7 $ 15.9 62.2% Consumables 33.8 21.9 11.9 54.4% Total net sales $ 75.4 $ 47.5 $ 27.9 58.6% Percentage of net sales Delivery Systems 55.2% 54.0% Consumables 44.8% 46.0% Total 100.0% 100.0% 28 Table of Contents Total net sales for the three months ended March 31, 2022 increased $27.9 million, or 58.6%, compared to the three months ended March 31, 2021. Delivery System sales for the three months ended March 31, 2022 increased $15.9 million, or 62.2%, compared to the three months ended March 31, 2021 primarily due to strong trends in the Americas, Europe and Asia as markets remained open as well as the launch of Syndeo Delivery Systems. In the Americas region, n et sales increased to $44.6 million in Q1 2022 compared to $31.3 million in Q1 2021 due to sales growth in the U.S. and Mexico. The strength in the U.S. was driven by the launch of Syndeo and a continued increase in sales productivity fueled by strong conversion from the Company's marketing-driven leads. S ales growth was primarily due to US and Mexico. In the APAC region, n et sales increased to $12.9 million in Q1 2022 compared to $8.8 million in Q1 2021, driven by continued strength in Australia despite the partial offset by closures in China due to COVID-19. In the EMEA region, net sales increased to $17.9 million in Q1 2022 compared to $7.5 million in Q1 2021, due to strength in the United Kingdom, Germany and France. There were 1,849 Delivery Systems units sold for the three months ended March 31, 2022, including 258 trade-ups. Similarly, Consumables sales for the three months ended March 31, 2022 increased $11.9 million, or 54.4%, compared to the three months ended March 31, 2021. The increase in Consumables sales was primarily attributable to increased placements of delivery systems and the adjoining consumption of consumables during the three months ended March 31, 2022. Cost of Sales, Gross Profit, and Gross Margin Three Months Ended March 31, Change (in millions) 2022 2021 Amount % Cost of sales $ 23.5 $ 15.8 $ 7.7 48.6% Gross profit $ 51.9 $ 31.7 $ 20.2 63.6% Gross margin 68.9 % 66.8 % Cost of sales increased $7.7 million driven by and in conjunction with increased sales volume in delivery systems and consumables. Gross margin increased from 66.8% during the three months ended March 31, 2021 to 68.9% during the three months ended March 31, 2022 primarily due to fixed cost leverage from higher sales volumes coupled with cost saving initiatives and margin accretion from distributor acquisitions, partially offset by higher supply chain and logistics costs. The Company expects continued headwinds from global supply chain challenges and inflationary pressures to weigh on gross margin through 2022, specifically higher shipping costs, offset by margin accretion related to the acquired distributor inventory and pricing initiatives. Operating Expenses Sales and Marketing Three Months Ended March 31, Change (in millions) 2022 2021 Amount % Selling and marketing $ 36.4 $ 17.1 $ 19.3 113.0 % As a percentage of net sales 48.3 % 36.0 % Selling and marketing expense for the three months ended March 31, 2022 increased $19.3 million , or 113.0%, compared to the three months ended March 31, 2021. The overall increase as a percentage of net sales was driven by higher sales commissions of $1.1 million. Personnel-related expenses increased by $5.9 million, which included a $3.4 million increase from our international operations, primarily attributable to increased headcount as we scale, and s tock-based compensation expense by $2.8 million. In addition, expenses related to travel and the Global Sales Meeting increased by $3.4 million due primarily to the launch of Syndeo. Personnel-related training expenses increased by $1.0 million and marketing spend increased by $2.4 million as we moved forward with marketing programs after COVID-19 restrictions were lifted and markets reopened. 29 Table of Contents Research and Development Three Months Ended March 31, Change (in millions) 2022 2021 Amount % Research and development $ 2.2 $ 1.5 $ 0.7 53.6 % As a percentage of net sales 3.0 % 3.1 % Research and development expense for the three months ended March 31, 2022 increased $0.7 million , or 53.6%, compared to the three months ended March 31, 2021. The increase was primarily attributable to personnel and professional services related expenses as we accelerate investment into product development and our digital platform. General and Administrative Three Months Ended March 31, Change (in millions) 2022 2021 Amount % General and administrative $ 26.3 $ 10.8 $ 15.5 142.9 % As a percentage of net sales 34.8 % 22.7 % General and administrative expense for the three months ended March 31, 2022 increased $15.5 million, or 142.9%, compared to the three months ended March 31, 2021. Stock-based compensation expense increased by $3.9 million and personnel-related expenses increased by $2.9 million primarily due to increased headcount as we scale. We incurred additional public company costs, which included an increase in directors’ and officers’ liability insurance, Sarbanes-Oxley Act compliance and additional audit and tax and other professional service fees for a total of $2.0 million for the three months ended March 31, 2022. Legal expenses increased by $1.5 million, which includes expenses related to litigating and enforcing patent and trademark infringement claims against third parties, and personnel recruiting and one-time transaction costs increased by $2.4 million. Other (Income) Expense, Net and Income Tax Provision Three Months Ended March 31, Change (in millions) 2022 2021 Amount % Other (income) expense, net $ (48.1) $ 6.0 $ (54.1) (906.5) % Income tax expense (benefit) $ 2.6 $ (0.3) $ 2.9 (954.6) % Other (income) expense, net, was $(48.1) million for the three months ended March 31, 2022 compared to $6.0 million for the three months ended March 31, 2021. The change of $(54.1) million was primarily driven by the change in the fair value of the Warrant liability of $(52.1) million. Liquidity and Capital Resources Our primary sources of capital have been funded by (i) cash flow from operating activities, (ii) net proceeds received from the consummation of the Business Combination, (iii) net proceeds received from the Notes (as defined below), and (iv) net proceeds received from the exercise of Public and Private Placement Warrants. As of March 31, 2022 , we had cash and cash equivalents of approximately $859.2 million. A revolving credit facility of $50 million is also available as a source of capital. 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. Over the next year, we anticipate that we will use our liquidity and cash flows from our operations to fund our growth. In addition, 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. We expect capital expenditures of up to $20.0 million for the year ending December 31, 2022. Based on our sources of capital (including the cash consideration received from the consummation of the Business Combination and the cash received from the issuance of the Notes), management believes that we have sufficient liquidity to satisfy our anticipated working capital 30 Table of Contents requirements for our ongoing operations and obligations for at least the next twelve 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. 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. Credit Agreement On December 30, 2021, Edge Systems LLC, a California limited liability company (the “Borrower”) and an indirect wholly owned subsidiary of The Beauty Health Company, as borrower, entered into a Credit Agreement (the “Credit Agreement”) with Edge Systems Intermediate LLC, an indirect wholly owned subsidiary of the Company and the direct parent of the Borrower that holds the Company’s foreign and domestic operating entities, and The Hydrafacial Company Mexico Holdings, LLC, a direct wholly owned subsidiary of the Borrower that conducts the Mexican business operations, as guarantors (the “Guarantors” and, together with the Borrower, the “Loan Parties”), and JPMorgan Chase Bank, N.A., as administrative agent. The Credit Agreement provides for a $50 million revolving credit facility with a maturity date of December 30, 2026. In addition, the Borrower has the ability from time to time to increase the revolving commitments or enter into one or more tranches of term loans up to an additional aggregate amount not to exceed $50 million, subject to receipt of lender commitments and certain conditions precedent. As of March 31, 2022, the Credit Agreement remains undrawn and there is no outstanding balance under the revolving credit facility. Borrowings under the Credit Agreement are secured by certain collateral of the Loan Parties and are guaranteed by the Guarantors, each of whom will derive substantial benefit from the revolving credit facility. In specified circumstances, additional guarantors are required to be added. The Credit Agreement contains various restrictive covenants subject to certain exceptions, including limitations on the Borrower’s ability to incur indebtedness and certain liens, make certain investments, become liable under contingent obligations in certain circumstances, make certain restricted payments, make certain dispositions within guidelines and limits, engage in certain affiliate transactions, alter its fundamental business or make certain fundamental changes, and requirements to maintain financial covenants, including maintaining a leverage ratio of no greater than 3.00 to 1.00 and maintaining a fixed charge coverage ratio of not less than 1.15 to 1.00. The leverage ratio also determines pricing under the Credit Agreement. At the Borrower’s option, borrowings under the revolving credit facility accrue interest at a rate equal to either LIBOR or a specified base rate plus an applicable margin. The applicable margin is linked to the leverage ratio. The margins range from 2.00% to 2.50% per annum for LIBOR loans and 1.00% to 1.50% per annum for base rate loans. The revolving credit facility is subject to a commitment fee payable on the unused revolving credit facility commitments ranging from 0.25% to 0.35%, depending on the Borrower’s leverage ratio. As of March 31, 2022 the Company’s unused commitment rate was 0.25%.. The Borrower is also required to pay certain fees to the administrative agent and letter of credit issuers under the revolving credit facility. During the term of the revolving credit facility, the Borrower may borrow, repay and re-borrow amounts available under the revolving credit facility, subject to voluntary reductions of the swing line, letter of credit and revolving credit commitments. 31 Table of Contents Convertible Senior Notes On September 14, 2021, we issued $750 million aggregate principal amount of 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 Notes accrue interest at a rate of 1.25% per annum, payable semi-annually in arrears on April 1 and October 1 of each year, beginning on April 1, 2022. The Notes will mature on October 1, 2026, unless earlier repurchased, redeemed or converted. Before April 1, 2026, noteholders have the right to convert their Notes only upon the occurrence of certain events. From and after April 1, 2026, noteholders may convert their Notes at any time at their election until the close of business on the second scheduled trading day immediately before the maturity date. We will settle conversions by paying or delivering, as applicable, cash, shares of our Class A Common Stock or a combination of cash and shares of our Class A Common Stock, at our election. 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 Class A 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 $21.3 million. See Note 10 - Debt, to the Notes to the Condensed Consolidated Financial Statements included elsewhere in this report. Capped Call Transactions Capped call transactions cover the aggregate number of shares of our Class A 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 Consolidated Financial Statements included elsewhere in this report. Contractual Obligations and Other Commercial Commitments As of March 31, 2021, our material contractual obligations is approximately $42.2 million in interest related to the Notes, the Notes of $750 million, and $16.0 million in lease obligations. Known Trends or Uncertainties We believe there are several emerging trends that may play a key role in shaping the future of the beauty health industry. Our market research demonstrated that consumers are increasingly willing to spend on high-end beauty health products. Some of the key industry trends identified by this market research are: • Millennials/Gen Z aging : HydraFacial customers are young; approximately 50% of HydraFacial customers are Millennials, and approximately 30% of HydraFacial’s beauty retail customers are under the age of 24. As the Millennial and Gen Z consumers age, they appear to be taking skincare more seriously and willing to invest in premium experiences, such as those offered by HydraFacial. • Influencers and social media driving purchase decisions : Social media personalities are increasingly opining and having an effect on skin care, which has gained more prominence in the age of selfies. • Growth in disposable income : As the global economy grows, consumers have more disposable income to spend on premium products. • Shift in spend from makeup to skin care : There appears to be an increasing movement towards treating underlying skin to make it healthy and reveal it (i.e.: “clean beauty”), as opposed to using products such as make-up to cover it. Clean beauty places an emphasis on unveiling fresh, naked skin as the star, as opposed to covering it up. The HydraFacial experience not only physically cleanses skin with vortex suction, exfoliation and extraction, and removal of debris, but it also actively infuses the skin with innovative, clean ingredients to nourish and hydrate the newly cleaned skin canvas. • Growth in multi-brand and online retailers : Multi-brand retailers and digital native brands play an important role in captivating the consumer and pushing innovation. 32 Table of Contents • Consumers shopping across mass and premium brands : Consumers appear to be willing to shop across mass and premium brands in order to allocate more money towards trending categories and products that help make them look and feel better. 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. In addition, we expect continued headwinds from global supply chain challenges and inflationary pressures to weigh on gross margin into 2022, specifically higher shipping costs, offset by margin accretion related to the acquired distributor inventory and pricing initiatives. 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. Off-Balance Sheet Arrangements We do not maintain any off-balance sheet arrangements, transactions, obligations or other relationships with unconsolidated entities that would be expected to have a material current or future effect upon our financial condition or results of operations. 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, (in millions) 2022 2021 Cash and cash equivalents at beginning of period $ 901.9 $ 9.5 Operating activities: Net income (loss) 32.5 (3.3) Non-cash adjustments (36.7) 5.4 Changes in working capital (34.3) (0.9) Net cash flows (used in) provided by operating activities (38.5) 1.3 Net cash flows (used in) provided by investing activities (3.4) (1.0) Net cash flows (used in) provided by financing activities (0.8) 4.4 Net change in cash and cash equivalents (42.7) 4.7 Effect of foreign currency translation — — Cash and cash equivalents at end of period $ 859.2 $ 14.1 Operating Activities Net cash used in operating activities of $38.5 million for the three months ended March 31, 2022 was primarily due to investment in inventory in relation to the launch of Syndeo Delivery Systems, combined with a corresponding shift in the average collection period of receivables related to increased payment plan participation on delivery systems globally, as well as continued investments globally in people and systems to fuel future growth. The net income of $32.5 million was driven by non-cash adjustments of $36.7 million, with the largest adjustment being the fair value adjustment to warrant liabilities. The 33 Table of Contents decrease in working capital of $34.3 million was primarily due to the increase in accounts receivable of $14.2 million, the increase in inventory of $11.9 million and the increase in accrued payroll and other expenses of $8.3 million. Net cash from operating activities of $1.3 million for the three months ended March 31, 2021 was primarily due to in-kind interest in the amount of $2.2 million. The net loss of $3.3 million was impacted by non-cash adjustments of $5.4 million primarily related to depreciation and amortization, partially offset by a decrease in net change in working capital of $0.9 million. The total increase in net operating assets and liabilities was primarily due to a $3.1 million increase in accounts payable and a $5.0 million increase in accrued payroll and other expenses offset by a $8.5 million decrease in accounts receivable. Investing Activities Cash used in investing activities for the three months ended March 31, 2022 of $3.4 million was primarily related to $3.1 million in capital expenditures for property and equipment and $0.3 million in capitalized software. Cash used in investing activities for the three months ended March 31, 2021 of $1.0 million was related to capital expenditures. Financing Activities There was $0.8 million used in financing activities for the three months ended March 31, 2022. The Company did not withdraw from the line of credit and there were no transactions related to the warrants during the three months ended March 31, 2022. Net cash from financing activities of $4.4 million for the three months ended March 31, 2021 was primarily related to proceeds from borrowings of $5.0 million, net of debt repayments and issuance costs of $0.4 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. 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 has been no change to our critical accounting policies as included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021. Recent Accounting Pronouncements 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. 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 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 and Adjusted EBITDA Margin Adjusted net income (loss), adjusted EBITDA and adjusted EBITDA margin are key performance measures that we use to assess our operating performance. Because adjusted net income (loss), adjusted EBITDA and adjusted EBITDA margin 34 Table of Contents facilitate 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. We expect adjusted EBITDA margin to increase over the long-term as we continue to scale our business and achieve greater operating leverage. We calculate adjusted net income (loss) as net income (loss) adjusted to exclude: change in fair value of Public and Private Placement Warrants, change in fair value of earn-out shares liability, other expense (income), net; amortization expense; stock-based compensation expense; 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); restructuring costs (including those associated with COVID-19) and the aggregate adjustment for income taxes for the tax effect of the adjustments described above. We calculate adjusted EBITDA as net income (loss) adjusted to exclude: change in fair value of Public and Private Placement Warrants, change in fair value of earn-out shares liability, other expense (income), net; interest expense; income tax benefit (expense); depreciation and amortization expense; stock-based compensation expense; foreign currency (gain) loss; 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); and restructuring costs (including those associated with COVID-19). The following table reconciles our net income (loss) to adjusted net income (loss) and adjusted EBITDA for the periods indicated: Three Months Ended March 31, (in thousands) 2022 2021 Net income (loss) $ 32,507 $ (3,274) Adjusted to exclude the following: Change in fair value of warrant liability (52,052) — Amortization expense 3,713 2,954 Stock-based compensation expense 7,049 34 Other expense (income) 937 7 Management fees (1) — 127 Transaction related costs (2) 1,045 746 Other non-recurring and one-time fees (3) 1,955 87 Aggregate adjustment for income taxes (3,626) (763) Adjusted net income (loss) $ (8,472) $ (82) Depreciation expense 1,416 690 Interest expense 3,400 5,699 Foreign currency (gain) loss, net (368) 256 Remaining benefit for income taxes 6,241 457 Adjusted EBITDA $ 2,217 $ 7,020 Adjusted EBITDA margin 2.9% 14.8 % ___________________ (1) Represents quarterly management fees paid to the majority shareholder of HydraFacial based on a pre-determined formula. Following the Business Combination, these fees are no longer paid. (2) For the three months ended March 31, 2022, such amounts primarily represent direct costs incurred in relation to potential acquisitions. For the three months ended March 31, 2021 such amounts primarily represents direct costs incurred with the Business Combination and to prepare HydraFacial to be marketed for sale by HydraFacial’s shareholders in previous periods . (3) For the three months ended March 31, 2022 such costs primarily represent one-time personnel costs related to executive recruiting, executive severance and a CEO sign-on bonus . For the three months ended March 31, 2021 such costs primarily represent personnel costs associated with restructuring of HydraFacial’s salesforce and costs associated with former warehouse and assembly facility during the transition period offset by a legal settlement received in favor of HydraFacial. 35 Table of Contents Adjusted Gross Profit and Adjusted Gross Margin We use adjusted gross profit and adjusted gross margin to measure profitability and the ability to scale and leverage the costs of Delivery Systems and Consumables. The continued growth of Delivery Systems is expected to improve adjusted gross margin, as additional Delivery Systems sold will increase our recurring Consumables net sales, 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 they provide consistency and direct comparability with past financial performance and between fiscal periods, as the metric eliminates the effects of amortization and depreciation and 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. indirect mix, the average selling price on Delivery Systems, and new product launches. 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 March 31, (in millions) 2022 2021 Net sales $ 75.4 $ 47.5 Cost of sales 23.5 15.8 Gross profit $ 51.9 $ 31.7 Gross margin 68.9% 66.8% Adjusted to exclude the following: Stock-based compensation expense included in cost of sales $ 0.2 $ — Depreciation and amortization expense included in cost of sales 2.7 2.6 Adjusted gross profit $ 54.8 $ 34.3 Adjusted gross margin 72.7% 72.2%