What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-11-09 compared with 2022-08-09 · 157 added, 155 removed, 281 unchanged (53% of the section changed)

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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, 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.

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 Reports on Form 10-Q for the quarters ended March 31, 2022 and June 30, 2022 filed with the U.S.

Securities and Exchange Commission (SEC) on May 10, 2022 and August 9, 2022, respectively, 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.

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.

The Beauty Health Company is a global category-creating company focused on delivering beauty health experiences that help consumers reinvent their relationship with their skin, bodies and self-confidence.

Our flagship brand, Hydrafacial, created the category of hydradermabrasion by using a patented Vortex-Fusion Delivery System to cleanse, extract, and hydrate the skin with proprietary solutions and serums.

Hydrafacial provides a non-invasive and approachable skincare experience.

Together, with our powerful community of aestheticians, consumers and partners, we are personalizing skin care solutions for all ages, genders, skin tones, and skin types.

Recent Developments;

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.

We remain attentive to economic and geopolitical conditions that may materially impact our business.

We continue to explore and implement risk mitigation strategies in the face of these unfolding conditions and remain agile in adopting to changing circumstances.

Such conditions have or may have global implications which may impact the future performance of our business in unpredictable ways.

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.

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.

The COVID-19 pandemic continues to disrupt business for us, our providers, and other companies with which we do business.

Although many markets have recently shown encouraging signs of emergence from the pandemic, other markets and regions where we conduct business, particularly in China, have enacted sporadic and/or zero-tolerance COVID-19 policies leading to prolonged store closures and travel restrictions within those markets and regions.

Although we had strong performance during windows of re-opening, these COVID-related restrictions continued to negatively impact consumer traffic for our providers.

We anticipate that COVID-19 will continue to cause intermittent store closures and supply chain challenges.

We are mindful that these trends may continue to impact the pace of recovery, and that such recovery may 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 in the short term, 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.

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.

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;

Furthermore, the extent to which the COVID-19 pandemic impacts our business going forward will depend on numerous factors we cannot reliably predict, including but not limited to 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.

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, tone, 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 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.

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.

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.

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.

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.

government actions to certain pandemic impacts;

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

During the three months ended September 30, 2022, we experienced the impact of inflation primarily on an increase in raw materials, shipping costs, and labor costs.

We currently anticipate the impact of inflation to continue into the fourth quarter of 2022.

To offset these trends, we plan to implement a range of mitigation strategies which could include price increases on our Delivery Systems and consumables, and/or accepting revenue in either U.S.

dollar and/or local currency, as applicable.

However, such measures may not fully offset the impact to our operating performance.

After the resumption of more typical business conditions, the economics of developing, producing, launching, supporting and discontinuing products will continue to impact the timing of our sales and operating performance each period.

Foreign Exchange Rates

Our operations outside of the United States account for a portion of our revenues and expenses.

As a result, a portion of our total revenue and expenses are denominated in currencies other than the U.S.

Recently, exchange rates between these currencies and the U.S.

dollar have fluctuated significantly and may continue to do so in the future.

Fluctuations in foreign exchange rates may have a significant impact on our operating results.

During the three months ended September 30, 2022, fluctuations in the U.S.

dollar relative to certain other foreign currencies – such as the Chinese Renminbi, British pound, Euro and, Australian dollar – reduced our reported revenue and expenses, principally related to net sales, cost of sales, controllable fixed costs, and advertising and promotional costs.

Global Supply Chain Challenges

During the three months ended September 30, 2022, we experienced global supply chain challenges resulting from industry-wide component and/or raw material shortages and transportation delays.

These challenges have negatively impacted order fill rates for our Delivery Systems and consumables, particularly in certain European and Asian countries.

We continue to take steps to improve order fill rates and mitigate the impact of these constraints by working closely with our suppliers to ensure the availability of components and/or raw materials such as procuring components with longer lead times than typical.

We expect these challenges to continue through the remainder of the fiscal year 2022.

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.

The uncertainty around the timing, speed, and duration of the recovery from the adverse impacts of the COVID-19 pandemic, including the impacts on our business of the ongoing restrictions in China, and the other macroeconomic challenges we are facing, will continue to affect our ability to grow sales profitably.

We believe we can, to some extent, offset the impact of more ordinary challenges by continually developing and pursuing a diversified strategy with multiple engines of growth and by accelerating initiatives focused on areas of strength, discipline, and agility.

As the current situation continues to progress, if economic and social conditions or the degree of uncertainty or volatility worsen, or the adverse conditions previously described are further prolonged, there could be a further negative effect on consumer confidence, demand, spending and willingness or ability to travel and, as a result, on our business.

We are continuing to monitor these and other risks that may affect our business.

Key Operational and Business Metrics

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Amounts and percentages may not foot due to rounding.

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

Three Months Ended September 30, Nine Months Ended September 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 June 30, 2022 to Three Months Ended June 30, 2021

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

The period-to-period comparisons of our historical results are not necessarily indicative of the results that

may be expected in the future.

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

Three Months Ended September 30,

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

12 unchanged sentences

Net income (loss) $ 0.1 0.1 % $ (215.1) (315.7) %

Three Months Ended June 30, Change

Three Months Ended September 30, Change

(in millions) 2022 2021 Amount %

7 unchanged sentences

Total 100.0% 100.0%

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.

Total net sales for the three months ended September 30, 2022 increased $20.7 million, or 30.3%, compared to the three months ended September 30, 2021.

Delivery System sales for the three months ended September 30, 2022 increased $12.9 million, or 35.7%, compared to the three months ended September 30, 2021.

Net sales for the three months ended September 30, 2022 increased primarily due to strength in Delivery Systems sales.

There were 1,860 Delivery Systems units sold for the three months ended September 30, 2022.

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

Consumables sales for the three months ended September 30, 2022 increased $7.7 million, or 24.2%, compared to the three months ended September 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 September 30, 2022.

Cost of Sales, Gross Profit, and Gross Margin

Three Months Ended June 30, Change

Three Months Ended September 30, Change

(in millions) 2022 2021 Amount %

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Cost of sales increased $5.1 million driven by and in conjunction with increased sales volume in delivery systems and consumables.

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.

Gross margin increased from 67.6% during the three months ended September 30, 2021 to 69.3% during the three

months ended September 30, 2022, primarily due to fixed cost leverage associated with higher volume and stronger realized delivery systems pricing.

The improvement in adjusted gross margin was driven by fixed cost leverage associated with higher volume and stronger realized delivery systems pricing, and a one-time write-off primarily related to the discontinued Glow & Go pilot program, partly offset by headwinds from global supply chain challenges, inflationary pressures and foreign exchange rates.

Operating Expenses

Sales and Marketing

Three Months Ended June 30, Change

Three Months Ended September 30, Change

(in millions) 2022 2021 Amount %

1 unchanged sentence

As a percentage of net sales 44.8 % 44.7 %

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.

Selling and marketing expense for the three months ended September 30, 2022 increased $9.3 million , or 30.6%, compared to the three months ended September 30, 2021.

The increase was driven by an increase in personnel-related expenses of $1.1 million resulting from an increase in headcount and commissions, and an increase in s tock-based compensation expense of $2.5 million.

The increase in selling and marketing expense was partially offset by a $2.6 million reduction in the accrual for estimated bonus expenses, which were originally accrued at 200% of target amounts.

In addition, travel expenses increased by $1.5 million and marketing spend increased by $2.8 million due primarily to the investments in Americas and EMEA in key tradeshows and other marketing programs.

Research and Development

Three Months Ended June 30, Change

Three Months Ended September 30, Change

(in millions) 2022 2021 Amount %

1 unchanged sentence

As a percentage of net sales 2.4 % 2.8 %

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.

Research and development expense for the three months ended September 30, 2022 increased $0.3 million , or 15.3%, compared to the three months ended September 30, 2021.

The increase was primarily due to increased spend in personnel of $0.3 million and certain product write-offs during the period.

General and Administrative

Three Months Ended June 30, Change

Three Months Ended September 30, Change

(in millions) 2022 2021 Amount %

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As a percentage of net sales 26.8 % 28.2 %

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 June 30, Change

General and administrative expense for the three months ended September 30, 2022 increased $4.6 million, or 23.9%, compared to the three months ended September 30, 2021.

This increase is primarily attributable to an increase of $0.3 million in stock-based compensation and $2.6 million in recruiting and other professional fees.

The increase in general and administrative expense was partially offset by a $2.9 million reduction in the accrual for estimated bonus expenses, which were originally accrued at 200% of target amounts.

Other (Income) Expense, Net and Income Tax (Benefit) Expense

Three Months Ended September 30, Change

(in millions) 2022 2021 Amount %

Other (income) expense, net $ (3.5) $ 210.8 $ (214.3) (101.6) %

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

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.

Income tax (benefit) expense $ (0.8) $ (1.1) $ 0.3 (27.3) %

Other income, net was $3.5 million for the three months ended September 30, 2022 compared to other expense of $210.8 million for the three months ended September 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

During the three months ended September 30, 2022 the Company recognized other income of $4.3 million due to the change in the fair value of the warrant liabilities compared to an expense of $199.3 million for the three months ended September 30, 2021.

In addition, during the three months ended September 30, 2021 the Company recognized a $10.6 million expense for the change in the fair value of the earn-out shares liability.

Comparison of Nine Months Ended September 30, 2022 to Nine Months Ended September 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.

Amounts and percentages may not foot due to rounding.

Six Months Ended June 30,

Nine Months Ended September 30,

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

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Loss from operations (20.5) (7.7) (29.4) (16.2)

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

Other (income) expense, net (63.0) (23.5) 331.7 182.0

Income (loss) before provision for income tax 42.4 15.9 (361.1) (198.2)

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Net income (loss) $ 40.6 15.2 % $ (357.8) (196.4) %

Six Months Ended June 30, Change

Nine Months Ended September 30, Change

(in millions) 2022 2021 Amount %

7 unchanged sentences

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.

Total net sales for the nine months ended September 30, 2022 increased $85.5 million, or 47.0%, compared to the nine months ended September 30, 2021.

Delivery Systems sales for the nine months ended September 30, 2022 increased $58.7 million, or 60.7%, compared to the nine months ended September 30, 2021.

Net sales for the nine months ended September 30, 2021 increased primarily due to strength in Delivery Systems sales.

Consumables sales for the nine months ended September 30, 2022 increased $26.8 million, or 31.4%, compared to the nine months ended September 30, 2021.

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

Cost of Sales, Gross Profit, and Gross Margin

Six Months Ended June 30, Change

Nine Months Ended September 30, Change

(in millions) 2022 2021 Amount %

2 unchanged sentences

Gross margin 69.2 % 68.6 %

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.

Gross margin improved to 69.2% during the nine months ended September 30, 2022, driven by fixed cost leverage associated with higher volume and stronger realized delivery systems pricing, and a one-time write-off primarily related to the discontinued Glow & Go pilot program, partly offset by headwinds from global supply chain challenges, inflationary pressures and foreign exchange rates.

Selling and Marketing

Six Months Ended June 30, Change

Nine Months Ended September 30, Change

(in millions) 2022 2021 Amount %

1 unchanged sentence

As a percentage of net sales 45.2 % 40.9 %

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.

Selling and marketing expense for the nine months ended September 30, 2022 increased $46.6 million, or 62.4%, compared to the nine months ended September 30, 2021.

Compared to the nine months ended September 30, 2021 the year-over-year increase was due to an increase in sales commissions of $4.1 million, an increase in personnel-related expenses of $12.8 million, and an increase of stock-based compensation expense of $7.0 million.

The increase in personnel-related expenses was partially offset by a $2.6 million reduction in the accrual for estimated bonus expenses, which were originally accrued at 200% of target amounts.

Personnel-related training and travel expenses increased by $6.1 million due to the launch of Syndeo and advertising/promotional spend increased by $10.5 million due to investments in Americas and EMEA in key tradeshows and other marketing programs.

Research and Development

Six Months Ended June 30, Change

Nine Months Ended September 30, Change

(in millions) 2022 2021 Amount %

1 unchanged sentence

As a percentage of net sales 2.6 % 3.5 %

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.

Research and development expense for the nine months ended September 30, 2022 increased $0.7 million, or 10.7%, compared to the nine months ended September 30, 2021.

The increase was primarily due to additional personnel-related expense which increased by $2.3 million year-over-year.

There were additional investments into our data infrastructure which increased by $1.2 million, offset by a $3.5 million decrease in Syndeo research and development expenses.

General and Administrative

Six Months Ended June 30, Change

Nine Months Ended September 30, Change

(in millions) 2022 2021 Amount %

1 unchanged sentence

As a percentage of net sales 29.0 % 40.4 %

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.

General and administrative expense for the nine months ended September 30, 2022 increased $4.0 million, or 5.4%, compared to the nine months ended September 30, 2021.

This increase is primarily attributable to an increase of $5.1 million in stock-based compensation, $5.6 million in personnel-related expenses, $7.7 million in recruiting and other professional fees, $2.7 million in legal fees, and $1.4 million in director and officer insurance, partially offset by a decrease in transaction costs of $28.4 million related to the consummation of the Business Combination.

The increase in personnel-related expenses was partially offset by a $2.9 million reduction in the accrual for estimated bonus expenses, which were originally accrued at 200% of target amounts.

Other (Income) Expense, Net and Income Tax Provision

Six Months Ended June 30, Change

Nine Months Ended September 30, Change

(in millions) 2022 2021 Amount %

1 unchanged sentence

Income tax expense (benefit) $ 1.9 $ (3.3) $ 5.2 (156.6) %

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.

Other income, net, was $63.0 million for the nine months ended September 30, 2022 compared to other expense of $331.7 million for the nine months ended September 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.

During the nine months ended

September 30, 2022, the Company recognized other income of $71.5 million due to the change in the fair value of the warrant liabilities versus a $271.3 million expense for nine months ended September 30, 2021.

In addition, during the nine months ended September 30, 2021 the Company recognized a $47.1 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 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.

As of September 30, 2022 , we had cash and cash equivalents of approximately $684.2 million.

A revolving credit facility of $50 million is also available as a source of capital.

As of September 30, 2022, the revolving credit facility remains undrawn and there is no outstanding balance thereunder.

Our operating cash flows result primarily from cash received from sales of delivery systems and consumables, offset primarily by cash payments made for products and services, employee compensation, payment processing and related transaction costs, operating leases, marketing expenses, and interest payments on our long-term obligations.

Cash received from our customers and other activities generally corresponds to our net sales.

Our sources of liquidity and cash flows are used to fund ongoing operations, research and development projects for new products, services, and technologies, and provide ongoing support services for our providers and customers.

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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.

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 June 30, 2022, the Credit Agreement remains undrawn and there is no outstanding balance under the revolving credit facility.

As of September 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 June 30, 2022 the Company’s unused commitment rate was 0.25%.

As of September 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 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.

As of September 30, 2022, our material contractual obligations are approximately $37.5 million in interest-only payments related to the Notes, the Notes of $750 million, and $16.4 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.

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 :

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.

• 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.

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.

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.

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;

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

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

Although we have not seen any significant reduction in revenues to date due to consolidations, we have seen some consolidation in our industry during economic downturns.

These consolidations have not had a negative effect on our total sales;

however, should consolidations and downsizing in the industry continue to occur, those events could adversely impact our revenues and earnings going forward.

Furthermore, during the nine months ended September 2022, we have experienced global supply chain disruptions and a significant inflationary impact, including higher interest rates and capital costs, increased shipping costs, supply shortages, increased costs of labor and strengthened U.S.

In particular, we have seen increased costs associated with our global operations in foreign countries as a result of weakening exchange rates, as our international sales are primarily denominated in the local currency of such foreign country.

Also, as a result of the invasion of Ukraine by Russia, we stopped selling and shipping products into our distributor in Russia, which has negatively impacted our overall net sales in the EMEA region.

These impacts have created headwinds for our products and profits that we expect to continue through the remainder of the year.

In addition, the extent to which the uncertainty around the timing, speed and recovery from the adverse impacts of the COVID-19 pandemic impacts our business going forward will depend on numerous factors we cannot reliably predict, including further governmental actions in the countries in which we operate, such as China’s ongoing zero COVID policy, and the other macro challenges we are facing, as well as the impact of any governmental actions on the economy, 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 in 2022, specifically higher shipping costs, offset by margin accretion related to the acquired distributor inventory and pricing initiatives aimed at improving our margins.

As a result, if economic and social conditions or the degree of uncertainty or volatility worsen, or the adverse conditions previously described are further prolonged, our growth rate could be affected by consolidation and downsizing in the medical, esthetician, and beauty retail industry.

We are continuing to monitor these and other risks that may affect our business so that we can respond appropriately.

Off-Balance Sheet Arrangements

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Amounts may not foot due to rounding.

Six Months Ended June 30,

Nine Months Ended September 30,

(in millions) 2022 2021

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Operating Activities

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.

Net cash used in operating activities of $101.2 million for the nine months ended September 30, 2022 was primarily due to investment in inventory in relation to the global 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 $40.6 million was driven by

non-cash adjustments of $20.7 million, with the largest adjustment being the fair value adjustment to warrant liabilities.

The decrease in working capital of $121.1 million was primarily due to the increase in accounts receivable of $40.6 million and the increase in inventory of $69.3 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.

Net cash used in operating activities of $31.6 million for the nine months ended September 30, 2021 was primarily due to an increase in accounts receivable of $17.3 million.

The net loss of $357.8 million was driven by non-cash adjustments of $343.5 million, primarily related to fair value adjustments to earn-out shares and warrant liabilities, and a decrease in working capital of $17.4 million.

Investing Activities

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.

Cash used in investing activities for the nine months ended September 30, 2022 of $16.0 million was primarily related to $9.9 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 $4.7 million in capitalized software.

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

Financing Activities

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.

There was $102.8 million used in financing activities for the nine months ended September 30, 2022 of which $100.0 million was used in relation to the accelerated stock repurchase and $2.8 million in relation 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 nine months ended September 30, 2022.

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

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

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 “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.

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

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

Three months ended September 30, Nine months ended September 30,

Unaudited (in thousands) 2022 2021 2022 2021

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Adjusted to exclude the following:

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

Change in fair value of warrant liability (4,284) 199,306 (71,521) 271,333

Change in fair value of earn-out shares liability — 10,575 — 47,100

Amortization expense 3,937 3,521 11,588 9,373

Loss on disposal of assets 4,697 — 4,697 —

Stock-based compensation expense 7,449 5,082 20,876 8,624

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

(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 .

(2) For the nine months ended September 30, 2022, such amounts primarily represent direct costs incurred in relation to potential acquisitions.

For the three months ended September 30, 2021, such amounts primarily represent direct costs incurred in relation to

potential acquisitions.

For the nine months ended September 30, 2021, such amounts primarily represent direct costs incurred in relation to potential acquisitions, 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 September 30, 2022, such costs primarily represent a write-off related to the discontinued Glow & Go pilot program.

For the nine months ended September 30, 2022, such costs include the re-organization severance, other personnel costs related to executive recruiting, executive severance, a loss on fixed asset and Glow & Go-related 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 June 30, Six Months Ended June 30,

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

(in thousands) 2022 2021 2022 2021

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Adjusted to exclude the following:

Write-off of discontinued product (1) $ 2,048 $ — $ 2,048 $ —

Stock-based compensation expense included in cost of sales 191 70 624 222

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Adjusted gross margin 75.1 % 71.5 % 73.3 % 73.0 %

___________________

(1) Represents a one-time write-off primarily related to the discontinued Glow & Go pilot program.

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