What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-08-09 compared with 2022-05-10 · 155 added, 112 removed, 281 unchanged (49% of the section changed)

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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;

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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.

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, in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2022 filed with the U.S.

Securities and Exchange Commission (SEC) on May 10, 2022 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 SEC on March 1, 2022.

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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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.

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.

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.

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.

Factors Affecting Our Performance

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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.

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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.

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.

Furthermore, 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.

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.

HydraFacial over indexes with males, significantly increasing the Total Addressable Market (TAM) compared to its peers.

Based on a survey we conducted in 2022, we believe HydraFacial resonates strongly with Gen Z and Millennials, with over 50% of our consumers being 37 years old or younger.

Millennial and Gen Z consumers appear to be taking skincare more seriously and are willing to invest in treatments such as those offered by HydraFacial.

Effective marketing is vital to our ability to drive growth.

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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.

27% of HydraFacial’s total revenue during the second 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.

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.

It remains unclear how governmental authorities, including the Food and Drug Administration (“FDA”) and foreign government authorities, 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.

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Amounts and percentages may not foot due to rounding.

Three Months Ended March 31,

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

(dollars in millions) 2022 2021 2022 2021

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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.

Comparison of Three Months Ended March 31, 2022 to Three Months Ended March 31, 2021

Comparison of Three Months Ended June 30, 2022 to Three Months Ended June 30, 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.

The results of operations data for the three and six months ended June 30, 2022 and June 30, 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,

Three Months Ended June 30,

(in millions) 2022 % of Net Sales 2021 % of Net Sales

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Net income (loss) $ 7.9 7.7 % $ (139.4) (209.6) %

Three Months Ended March 31, Change

Three Months Ended June 30, Change

(in millions) 2022 2021 Amount %

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Total 100.0% 100.0%

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.

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.

Total net sales for the three months ended June 30, 2022 increased $37.0 million, or 55.7%, compared to the three months ended June 30, 2021.

Delivery System sales for the three months ended June 30, 2022 increased $29.9 million, or 85.4%, compared to the three months ended June 30, 2021.

Delivery Systems units sold for the three months ended June 30, 2022 increased primarily due to the strong demand for the Company’s new Syndeo delivery system.

There were 2,738 Delivery Systems units sold for the three months ended June 30, 2022, of which 1,203 were trade-ups.

Consumables sales for the three months ended June 30, 2022 increased $7.2 million, or 22.8%, compared to the three months ended June 30, 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 June 30, 2022.

Cost of Sales, Gross Profit, and Gross Margin

Three Months Ended March 31, Change

Three Months Ended June 30, Change

(in millions) 2022 2021 Amount %

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Cost of sales increased $12.6 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.

Gross margin decreased from 71.0% during the three months ended June 30, 2021 to 69.2% during the three months ended June 30, 2022 primarily due to the shift in sales mix of delivery systems from 53% to 63% of sales in the period including lower margin trade-up units, along with 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 fixed cost leverage from higher sales volumes coupled with pricing initiatives, and margin accretion related to the acquired distributor inventory.

Operating Expenses

Sales and Marketing

Three Months Ended March 31, Change

Three Months Ended June 30, Change

(in millions) 2022 2021 Amount %

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As a percentage of net sales 43.3 % 39.4 %

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.

Selling and marketing expense for the three months ended June 30, 2022 increased $18.7 million , or 71.2%, compared to the three months ended June 30, 2021.

The overall increase as a percentage of net sales was driven by an increase in sales commissions of $3.3 million associated with higher revenue, an increase in personnel-related expenses of $5.8 million resulting from an increase in headcount, and an increase in s tock-based compensation expense of $1.7 million.

In addition, expenses related to training and travel expenses increased by $0.5 million due primarily to the launch of Syndeo and marketing spend increased by $5.3 million as we invested forward in Americas and EMEA in key tradeshows, GlowVolution and other marketing programs.

Research and Development

Three Months Ended March 31, Change

Three Months Ended June 30, Change

(in millions) 2022 2021 Amount %

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As a percentage of net sales 2.5 % 4.5 %

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.

Research and development expense for the three months ended June 30, 2022 decreased $0.4 million , or 13.0%, compared to the three months ended June 30, 2021.

The decrease was primarily due to the shifting of investments from outside consultants that were offset by increased investments in personnel of $1.2 million and additional investments into our data infrastructure.

General and Administrative

Three Months Ended March 31, Change

Three Months Ended June 30, Change

(in millions) 2022 2021 Amount %

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As a percentage of net sales 26.6 % 66.8 %

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.

General and administrative expense for the three months ended June 30, 2022 decreased $16.8 million, or 37.9%, compared to the three months ended June 30, 2021.

This decrease is primarily attributable to a decrease in transaction costs of $27.6 million related to the consummation of the Business Combination.

The decrease in transaction costs were offset by an increase of $0.9 million in stock-based compensation, $3.0 million in personnel-related expenses, $3.1 million in recruiting & other professional fees, and $1.1 million in legal fees which includes expenses related to litigating and enforcing patent and trademark infringement claims against third parties.

Other (Income) Expense, Net and Income Tax Provision

Three Months Ended March 31, Change

Three Months Ended June 30, Change

(in millions) 2022 2021 Amount %

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Income tax expense (benefit) $ 0.1 $ (1.9) $ 2.0 (104.1) %

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.

Other income, net was $11.4 million for the three months ended June 30, 2022 compared to other expense of $114.9 million for the three months ended June 30, 2021.

The change was primarily driven by the changes in the fair values of our warrants and earn-out shares issued on July 15, 2021.

During the three months ended June 30, 2022 the Company recognized other income of $15.2 million due to the change in the fair value of the warrant liabilities compared to an expense of $72.0 million for the three months ended June 30, 2021.

In addition, during the three months ended June 30, 2021 the Company recognized a $36.5 million expense for the change in the fair value of the earn-out shares liability.

Comparison of Six Months Ended June 30, 2022 to Six Months Ended June 30, 2021

Amounts and percentages may not foot due to rounding

Six Months Ended June 30,

(in millions) 2022 % of Net Sales 2021 % of Net Sales

Net sales $ 179.0 100.0 % $ 114.1 100.0 %

Cost of sales 55.4 30.9 35.1 30.7

Gross profit 123.6 69.1 79.0 69.3

Operating expenses

Selling and marketing 81.3 45.4 43.3 38.0

Research and development 4.8 2.7 4.4 3.9

General and administrative 53.8 30.1 55.2 48.4

Total operating expenses 140.0 78.2 103.0 90.3

Loss from operations (16.4) (9.1) (24.0) (21.0)

Other expense (income), net (59.5) (33.3) 120.9 106.0

Income (loss) before provision for income tax 43.1 24.1 (144.8) (127.0)

Income tax expense (benefit) 2.7 1.5 (2.2) (1.9)

Net income (loss) $ 40.4 22.6 % $ (142.7) (125.1) %

Six Months Ended June 30, Change

(in millions) 2022 2021 Amount %

Delivery Systems

$ 106.4 $ 60.6 $ 45.8 75.6%

Consumables 72.5 53.4 19.1 35.7%

Total net sales $ 179.0 $ 114.1 $ 64.9 56.9%

Percentage of net sales

Delivery Systems 59.5% 53.1%

Consumables 40.5% 46.9%

Total 100.0% 100.0%

Total net sales for the six months ended June 30, 2022 increased $64.9 million, or 56.9%, compared to the six months ended June 30, 2021.

Delivery Systems sales for the six months ended June 30, 2022 increased $45.8 million, or 75.6%, compared to the six months ended June 30, 2021.

Delivery Systems units sold for the six months ended June 30, 2021 increased primarily due to the strong demand for the Company’s new Syndeo delivery system.

Consumables sales for the six months ended June 30, 2022 increased $19.1 million, or 35.7%, compared to the six months ended June 30, 2021.

The increase in Consumables sales was primarily attributable to increased placements of delivery systems and the adjoining consumption of consumables during the six months ended June 30, 2022.

Cost of Sales, Gross Profit, and Gross Margin

Six Months Ended June 30, Change

(in millions) 2022 2021 Amount %

Cost of sales $ 55.4 $ 35.1 $ 20.3 57.9%

Gross profit $ 123.6 $ 79.0 $ 44.6 56.5%

Gross margin 69.1 % 69.3 %

Cost of sales increased 57.9% driven by increased sales volume and a shift in the product mix to HydraFacial Delivery Systems.

Gross margin decreased from 69.3% during the six months ended June 30, 2021 to 69.1% during the six months ended June 30, 2022 , primarily due to the shift in sales mix of delivery systems from 53% to 59% of sales in the period including lower margin trade-up units, along with 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 fixed cost leverage from higher sales volumes coupled with pricing initiatives, margin accretion related to the acquired distributor inventory.

Selling and Marketing

Six Months Ended June 30, Change

(in millions) 2022 2021 Amount %

Selling and marketing $ 81.3 $ 43.3 $ 38.0 87.7 %

As a percentage of net sales 45.4 % 38.0 %

Selling and marketing expense for the six months ended June 30, 2022 increased $38.0 million, or 87.7%, compared to the six months ended June 30, 2021.

Compared to the six months ended June 30, 2021 the year-over-year increase was due to an increase in sales commissions of $4.4 million, an increase in personnel-related expenses of $11.7 million, and an increase of stock-based compensation expense of $4.5 million, Personnel-related training and travel expenses increased by $5.0 million due to the launch of Syndeo and advertising/promotional spend increased by $7.7 million as we invested forward in Americas and EMEA in key tradeshows, GlowVolution and other marketing programs.

Research and Development

Six Months Ended June 30, Change

(in millions) 2022 2021 Amount %

Research and development $ 4.8 $ 4.4 $ 0.4 8.8 %

As a percentage of net sales 2.7 % 3.9 %

Research and development expense for the six months ended June 30, 2022 increased $0.4 million, or 8.8%, compared to the six months ended June 30, 2021.

The increase was primarily due to additional personnel-related expense in the research and development department which increased by $1.8 million year-over-year.

There were additional investments into our data infrastructure which increased by $0.8 million, offset by a $2.4 million decrease in Syndeo research and development expenses.

General and Administrative

Six Months Ended June 30, Change

(in millions) 2022 2021 Amount %

General and administrative $ 53.8 $ 55.2 $ (1.4) (2.5) %

As a percentage of net sales 30.1 % 48.4 %

General and administrative expense for the six months ended June 30, 2022 decreased $1.4 million, or 2.5%, compared to the six months ended June 30, 2021.

This decrease is primarily attributable to a decrease in transaction costs of $27.2 million related to the consummation of the Business Combination.

The decrease in transaction costs were offset by an increase of $4.8 million in stock-based compensation, $6.2 million in personnel-related expenses, $5.2 million in recruiting & other professional fees, $2.9 million in legal fees, and $1.6 million in director and officer insurance.

Other (Income) Expense, Net and Income Tax Provision

Six Months Ended June 30, Change

(in millions) 2022 2021 Amount %

Other (income) expense, net $ (59.5) $ 120.9 $ (180.4) (149.2) %

Income tax expense (benefit) $ 2.7 $ (2.2) $ 4.9 (223.7) %

Other income, net, was $59.5 million for the six months ended June 30, 2022 compared to other expense of $120.9 million for the six months ended June 30, 2021.

The change was primarily driven by the changes in the fair values of our warrant liabilities and earn-out share liabilities which were issued on July 15, 2021.

During the six months ended June 30, 2022 the Company recognized other income of $67.2 million due to the change in the fair value of the warrant liabilities versus a $72.0 million expense for six months ended June 30, 2021.

In addition, during the six months ended June 30, 2021 the Company recognized a $36.5 million expense for the change in the fair value of the earn-out shares liability.

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.

As of June 30, 2022 , we had cash and cash equivalents of approximately $821.0 million.

A revolving credit facility of $50 million is also available as a source of capital although as of June 30, 2022, the revolving credit facility remains undrawn and there is no outstanding balance thereunder.

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.

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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

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.

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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.

On December 30, 2021, HydraFacial LLC, a California limited liability company f.k.a.

Edge Systems LLC (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.

As of June 30, 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.

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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%..

As of June 30, 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.

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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.

As of June 30, 2022, our material contractual obligations is approximately $39.8 million in interest related to the Notes, the Notes of $750 million, and $17.7 million in lease obligations.

Known Trends or Uncertainties

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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.

We believe HydraFacial resonates strongly with Gen Z and Millennials, with over 50% of our consumers being 37 years old or younger.

As the Millennial and Gen Z consumers age, they appear to be taking skincare more seriously and are willing to invest in premium experiences such as those offered by HydraFacial.

• Influencers and social media driving purchase decisions :

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• 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.

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.

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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.

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 products.

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

Furthermore, 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;

Also, 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;

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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.

In addition, we expect continued headwinds from global supply chain challenges and inflationary pressures to weigh on gross margin in 2022, specifically higher shipping costs, offset by margin accretion related to the acquired distributor inventory and pricing initiatives aimed at improving our margins.

Off-Balance Sheet Arrangements

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Amounts may not foot due to rounding.

Three Months Ended March 31,

Six Months Ended June 30,

(in millions) 2022 2021

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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.

Net cash used in operating activities of $69.8 million for the six months ended June 30, 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 $40.4 million was driven by non-cash adjustments of $37.1 million, with the largest adjustment being the fair value adjustment to warrant liabilities.

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.

The decrease in working capital of $73.2 million was primarily due to the increase in accounts receivable of $34.4 million and the increase in inventory of $39.2 million .

Net cash used in operating activities of $31.9 million for the six months ended June 30, 2021 was primarily due to an increase in accounts receivable of $21.1 million.

The net loss of $142.7 million was driven by non-cash adjustments of $125.6 million related to fair value adjustment of earn-out shares and warrant liabilities, and a decrease in working capital of $14.8 million.

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.

Cash used in investing activities for the six months ended June 30, 2022 of $8.3 million was primarily related to $5.6 million in capital expenditures for property and equipment, $1.5 million in capital expenditures for the asset acquisition of Mxt and related developed technology, and $1.3 million in capitalized software.

Cash used in investing activities for the six months ended June 30, 2021 of $9.1 million was primarily related to capital expenditures of $4.7 million and distributor business acquisition expenditures of $4.9 million.

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.

There was $2.8 million used in financing activities for the six months ended June 30, 2022 related to the distributor acquisitions of Wigmore and Sidermica.

The Company did not withdraw from the line of credit and there were no transactions related to the warrants during the six months ended June 30, 2022.

Net cash from financing activities of $133.0 million for the six months ended June 30, 2021 was primarily related to proceeds from the business combination of $358.5 million, net of debt repayments of $230.5 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.

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.

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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.

See Note 2 of the notes to our Condensed Consolidated Financial Statements in the section titled “Summary of Significant Accounting Policies” 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

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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

facilitate internal comparisons of our historical operating performance on a more consistent basis, we use these measures for business planning purposes.

Because adjusted net income (loss), adjusted EBITDA and adjusted EBITDA margin 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.

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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)

Three months ended June 30, Six months ended June 30,

Unaudited (in thousands) 2022 2021 2022 2021

Net income (loss) $ 7,931 $ (139,378) $ 40,438 $ (142,652)

$ 32,507 $ (3,274)

Adjusted to exclude the following:

Change in fair value of warrant liability

Change in FV of warrant liability (15,185) 72,027 (67,237) 72,027

Change in FV of earn-out shares liability — 36,525 — 36,525

Amortization expense 3,938 2,967 7,651 5,921

Stock-based compensation expense 6,378 3,508 13,427 3,542

Other expense (income) 937 7

Other (income) expense (1,658) 4,307 (721) 4,314

Management fees (1) — 82 — 209

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Adjusted EBITDA $ 12,638 $ 11,393 $ 14,855 $ 18,413

$ 2,217 $ 7,020

Adjusted EBITDA margin 12.2% 17.1% 8.3% 16.1%

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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.

(2) For the three months and six months ended June 30, 2022, such amounts primarily represent direct costs incurred in relation to potential acquisitions.

For the three months and six months ended June 30, 2021, such amounts primarily represent 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 June 30, 2022, such costs primarily represent one-time severance costs due to a Company re-organization .

For the six months ended June 30, 2022, such costs include the re-organization severance, other one-time personnel costs related to executive recruiting, executive severance, a one-time loss on fixed asset write-offs and a CEO sign-on bonus .

Adjusted Gross Profit and Adjusted Gross Margin

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Amounts and percentages may not foot due to rounding:

Three Months Ended March 31,

(in millions) 2022 2021

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

(in thousands) 2022 2021 2022 2021

Net sales $ 103,536 $ 66,508 $ 178,951 $ 114,050

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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