THE BEAUTY HEALTH COMPANY Forward-Looking Statements
This Quarterly Report contains "forward looking statements" within the meaning of the "safe harbor" provisions of theUnited States Private Securities Litigation Reform Act of 1995. When used in this Quarterly Report, the words "estimates," "projected," "expects," "anticipates," "forecasts," "plans," "intends," "believes," "seeks," "may," "will," "should," "future," "propose" and variations of these words or similar expressions (or the negative versions of such words or expressions) are intended to identify forward-looking statements. These forward-looking statements are not guarantees of future performance, conditions or results, and involve a number of known and unknown risks, uncertainties, assumptions and other important factors, many of which are outside TheBeauty Health Company's control, that could cause actual results or outcomes to differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those identified below and those discussed in the section titled Risk Factors of this filing. Important factors, among others, that may affect actual results or outcomes include the inability to recognize the anticipated benefits of the Business Combination; costs related to the Business Combination; TheBeauty Health Company's availability of cash for debt service and exposure to risk of default under debt obligations; TheBeauty Health Company's ability to manage growth; TheBeauty Health Company's ability to execute its business plan; potential litigation involving TheBeauty Health Company ; changes in applicable laws or regulations; the possibility that TheBeauty Health Company may be adversely affected by other economic, business, and/or competitive factors; and the impact of the continuing COVID-19 pandemic on our business. TheBeauty 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 Reports on Form 10-Q for the quarters endedMarch 31, 2022 andJune 30, 2022 filed with theU.S. Securities and Exchange Commission (SEC) onMay 10, 2022 andAugust 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 endedDecember 31, 2021 filed with theSEC onMarch 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 TheBeauty Health Company and its consolidated subsidiaries.
Company Overview
TheBeauty 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. 27 -------------------------------------------------------------------------------- Table of Contents Recent Developments; Factors Affecting Our Performance
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 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 inChina , 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 but not limited to the duration and scope of the pandemic; businesses and individuals' actions in response to the pandemic; government actions to certain pandemic impacts; and the impact on economic activity including the possibility of further financial market instability.
Inflation
During the three months endedSeptember 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 eitherU.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 ofthe 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 theU.S. dollar. Recently, exchange rates between these currencies and theU.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 endedSeptember 30, 2022 , fluctuations in theU.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 endedSeptember 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. 28 -------------------------------------------------------------------------------- Table of Contents Regulation It remains unclear how governmental authorities, including theFood 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 inChina , 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
In addition to the measures presented in our consolidated financial statements, we use the following key operational and business metrics to evaluate our business, measure our performance, develop financial forecasts, and make strategic decisions. Amounts and percentages may not foot due to rounding.
Three Months Ended September 30, Nine Months Ended September 30,
(dollars in millions) 2022 2021 2022 2021
Delivery Systems net sales $ 49.1 $ 36.2 $ 155.5 $ 96.8
Consumables net sales 39.7 32.0 112.2 85.4
Total net sales $ 88.8 $ 68.1 $ 267.7 $ 182.2
Gross profit $ 61.6 $ 46.1 $ 185.2 $ 125.1
Gross margin 69.3% 67.6% 69.2% 68.6%
Net income (loss) $ 0.1 $ (215.1) $ 40.6 $ (357.8)
Adjusted net income (loss) $ 8.0 $ 2.5 $ 1.7 $ 2.8
Adjusted EBITDA $ 16.5 $ 5.8 $ 31.4 $ 24.2
Adjusted EBITDA margin 18.6% 8.5% 11.7% 13.3%
Adjusted gross profit $ 66.6 $ 48.7 $ 196.3 $ 133.0
Adjusted gross margin 75.1% 71.5% 73.3% 73.0%
Adjusted Net Income (Loss), Adjusted EBITDA (Loss) and Adjusted EBITDA Margin
Adjusted net income (loss), adjusted EBITDA (loss) and adjusted EBITDA margin are key performance measures that our management uses to assess our operating performance. See the section titled "Non-GAAP Financial Measures-adjusted net income (loss), adjusted EBITDA (loss) and adjusted EBITDA margin" for information regarding our use of adjusted net income (loss) and adjusted EBITDA and reconciliations of adjusted net income (loss) and adjusted EBITDA to net loss.
Adjusted Gross Profit and Adjusted Gross Margin
We use adjusted gross profit and adjusted gross margin to measure our profitability and ability to scale and leverage the costs of our Delivery Systems and Consumables sales. See the section titled "Non-GAAP Financial Measures-adjusted gross profit and adjusted gross margin" for information regarding our use of adjusted gross profit and a reconciliation of adjusted gross profit to gross profit.
Comparison of Three Months Ended
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
29
--------------------------------------------------------------------------------
Table of Contents
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 September 30,
(in millions) 2022 % of Net Sales 2021 % of Net Sales
Net sales $ 88.8 100.0 % $ 68.1 100.0 %
Cost of sales 27.2 30.7 % 22.1 32.4
Gross profit 61.6 69.3 % 46.1 67.6
Operating expenses
Selling and marketing 39.8 44.8 30.5 44.7
Research and development 2.2 2.4 1.9 2.8
General and administrative 23.8 26.8 19.2 28.2
Total operating expenses 65.7 74.0 51.5 75.6
Income (loss) from operations (4.1) (4.7) (5.5) (8.0)
Other (income) expense, net (3.5) (3.9) 210.8 309.4
Income (loss) before provision for income (0.7) (0.8) (216.3) (317.4)
tax
Income tax expense (benefit) (0.8) (0.9) (1.1) (1.7) Net income (loss)$ 0.1 0.1 %$ (215.1) (315.7) % Net Sales Three Months Ended September 30, Change (in millions) 2022 2021 Amount % Net sales Delivery Systems $ 49.1$ 36.2 $ 12.9 35.7% Consumables 39.7 32.0 7.7 24.2% Total net sales $ 88.8$ 68.1 $ 20.7 30.3%
Percentage of net sales Delivery Systems 55.3% 53.1% Consumables 44.7% 46.9% Total 100.0% 100.0% Total net sales for the three months endedSeptember 30, 2022 increased$20.7 million , or 30.3%, compared to the three months endedSeptember 30, 2021 . Delivery System sales for the three months endedSeptember 30, 2022 increased$12.9 million , or 35.7%, compared to the three months endedSeptember 30, 2021 . Net sales for the three months endedSeptember 30, 2022 increased primarily due to strength in Delivery Systems sales.
There were 1,860 Delivery Systems units sold for the three months ended
Consumables sales for the three months endedSeptember 30, 2022 increased$7.7 million , or 24.2%, compared to the three months endedSeptember 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 endedSeptember 30, 2022 .
Cost of Sales, Gross Profit, and Gross Margin
Three Months Ended September 30, Change
(in millions) 2022 2021 Amount %
Cost of sales $ 27.2 $ 22.1 $ 5.1 23.3%
Gross profit $ 61.6 $ 46.1 $ 15.5 33.6%
Gross margin 69.3 % 67.6 %
Cost of sales increased $5.1 million driven by and in conjunction with increased
sales volume in delivery systems and consumables. Gross margin increased from
67.6% during the three months ended September 30, 2021 to 69.3% during the three
30--------------------------------------------------------------------------------
Table of Contents
months endedSeptember 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 September 30, Change (in millions) 2022 2021 Amount % Selling and marketing $ 39.8$ 30.5 $ 9.3 30.6 % As a percentage of net sales 44.8 % 44.7 % Selling and marketing expense for the three months endedSeptember 30, 2022 increased$9.3 million , or 30.6%, compared to the three months endedSeptember 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 stock-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 inAmericas and EMEA in key tradeshows and other marketing programs. Research and Development Three Months Ended September 30, Change (in millions) 2022 2021 Amount % Research and development $ 2.2$ 1.9 $ 0.3 15.3 % As a percentage of net sales 2.4 % 2.8 %
Research and development expense for the three months ended
General and Administrative
Three Months Ended September 30, Change
(in millions) 2022 2021 Amount %
General and administrative $ 23.8 $ 19.2 $ 4.6 23.9 %
As a percentage of net sales 26.8 % 28.2 %
General and administrative expense for the three months endedSeptember 30, 2022 increased$4.6 million , or 23.9%, compared to the three months endedSeptember 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 (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 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 $10.6 million expense for the change in the fair
value of the earn-out shares liability.
31--------------------------------------------------------------------------------
Table of Contents
Comparison of Nine Months Ended
The following tables set forth our consolidated results of operations in dollars and as a percentage of net sales for the periods presented. The period-to-period comparisons of our historical results are not necessarily indicative of the results that may be expected in the future. The results of operations data for the three and nine months endedSeptember 30, 2022 andSeptember 30, 2021 have been derived from the condensed consolidated financial statements included elsewhere in this Form 10-Q. Amounts and percentages may not foot due to rounding. Nine
Months Ended
(in millions) 2022 % of Net Sales 2021 % of Net Sales Net sales$ 267.7 100.0 %$ 182.2 100.0 % Cost of sales 82.6 30.8 57.1 31.4 Gross profit 185.2 69.2 125.1 68.6 Operating expenses Selling and marketing 121.1 45.2 74.5 40.9 Research and development 7.0 2.6 6.3 3.5 General and administrative 77.6 29.0 73.6 40.4 Total operating expenses 205.7 76.8 154.5 84.8 Loss from operations (20.5) (7.7) (29.4) (16.2) Other (income) expense, net (63.0) (23.5) 331.7 182.0 Income (loss) before provision for income 42.4 15.9 (361.1) (198.2)
tax
Income tax expense (benefit) 1.9 0.7 (3.3) (1.8) Net income (loss)$ 40.6 15.2 %$ (357.8) (196.4) % Net Sales Nine Months Ended September 30, Change (in millions) 2022 2021 Amount % Net sales Delivery Systems $ 155.5$ 96.8 $ 58.7 60.7% Consumables 112.2 85.4 26.8 31.4% Total net sales $ 267.7$ 182.2 $ 85.5 47.0%
Percentage of net sales Delivery Systems 58.1% 53.1% Consumables 41.9% 46.9% Total 100.0% 100.0% Total net sales for the nine months endedSeptember 30, 2022 increased$85.5 million , or 47.0%, compared to the nine months endedSeptember 30, 2021 . Delivery Systems sales for the nine months endedSeptember 30, 2022 increased$58.7 million , or 60.7%, compared to the nine months endedSeptember 30, 2021 . Net sales for the nine months endedSeptember 30, 2021 increased primarily due to strength in Delivery Systems sales. Consumables sales for the nine months endedSeptember 30, 2022 increased$26.8 million , or 31.4%, compared to the nine months endedSeptember 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 endedSeptember 30, 2022 .
Cost of Sales, Gross Profit, and Gross Margin
Nine Months Ended September 30, Change
(in millions) 2022 2021 Amount %
Cost of sales $ 82.6 $ 57.1 $ 25.5 44.5%
Gross profit $ 185.2 $ 125.1 $ 60.1 48.1%
Gross margin 69.2 % 68.6 %
32-------------------------------------------------------------------------------- Table of Contents Gross margin improved to 69.2% during the nine months endedSeptember 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 Nine Months Ended September 30, Change (in millions) 2022 2021 Amount % Selling and marketing $ 121.1$ 74.5 $ 46.6 62.4 % As a percentage of net sales 45.2 %
40.9 %
Selling and marketing expense for the nine months endedSeptember 30, 2022 increased$46.6 million , or 62.4%, compared to the nine months endedSeptember 30, 2021 . Compared to the nine months endedSeptember 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 inAmericas and EMEA in key tradeshows and other marketing programs. Research and Development Nine Months Ended September 30, Change (in millions) 2022 2021 Amount % Research and development $ 7.0$ 6.3 $ 0.7 10.7 %
As a percentage of net sales 2.6 % 3.5 % Research and development expense for the nine months endedSeptember 30, 2022 increased$0.7 million , or 10.7%, compared to the nine months endedSeptember 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 Nine Months Ended September 30, Change (in millions) 2022 2021 Amount % General and administrative $ 77.6$ 73.6 $ 4.0 5.4 % As a percentage of net sales 29.0 % 40.4 % General and administrative expense for the nine months endedSeptember 30, 2022 increased$4.0 million , or 5.4%, compared to the nine months endedSeptember 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
Nine Months Ended September 30, Change
(in millions) 2022 2021 Amount %
Other (income) expense, net $ (63.0) $ 331.7 $ (394.7) (119.0) %
Income tax expense (benefit) $ 1.9 $ (3.3) $ 5.2 (156.6) %
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 nine months ended
33--------------------------------------------------------------------------------
Table of Contents
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 endedSeptember 30, 2021 . In addition, during the nine months endedSeptember 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 ofSeptember 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 ofSeptember 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. Over the next year, we anticipate that we will use our liquidity and cash flows from our operations to fund our growth. In addition, as part of our business strategy, we occasionally evaluate potential acquisitions of businesses and products and technologies. Accordingly, a portion of our available cash may be used at any time for the acquisition of complementary products, services, or businesses. Such potential transactions may require substantial capital resources, which may require us to seek additional debt or equity financing. We cannot assure you that we will be able to successfully identify suitable acquisition candidates, complete acquisitions, integrate acquired businesses into our current operations, or expand into new markets. Furthermore, we cannot provide assurances that additional financing will be available to us in any required time frame and on commercially reasonable terms, if at all. We expect capital expenditures of up to$20.0 million for the year endingDecember 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. If cash generated from operations is insufficient to satisfy our capital requirements, we may have to sell additional equity or debt securities or obtain expanded credit facilities to fund our operating expenses. The sale of additional equity would result in additional dilution to our stockholders. Also, the incurrence of additional debt financing would result in debt service obligations and the instruments governing such debt could provide for operating and financing covenants that would restrict our operations. In the event such additional capital is needed in the future, there can be no assurance that such capital will be available to us, or, if available, that it will be in amounts and on terms acceptable to us. If we cannot raise additional funds when we need or want them, our operations and prospects could be negatively affected. However, if cash flows from operations become insufficient to continue operations at the current level, and if no additional capital were obtained, then management would restructure the Company in a way to preserve our business while maintaining expenses within operating cash flows.
Credit Agreement
OnDecember 30, 2021 ,Hydrafacial LLC , aCalifornia limited liability company f.k.a.Edge Systems LLC (the "Borrower") and an indirect wholly owned subsidiary of TheBeauty Health Company , as borrower, entered into a Credit Agreement (the "Credit Agreement") withEdge 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, andThe 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"), andJPMorgan Chase Bank, N.A ., as administrative agent. 34 -------------------------------------------------------------------------------- Table of Contents The Credit Agreement provides for a$50 million revolving credit facility with a maturity date ofDecember 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 ofSeptember 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. In specified circumstances, additional guarantors are required to be added. The Credit Agreement contains various restrictive covenants subject to certain exceptions, including limitations on the Borrower's ability to incur indebtedness and certain liens, make certain investments, become liable under contingent obligations in certain circumstances, make certain restricted payments, make certain dispositions within guidelines and limits, engage in certain affiliate transactions, alter its fundamental business or make certain fundamental changes, and requirements to maintain financial covenants, including maintaining a leverage ratio of no greater than 3.00 to 1.00 and maintaining a fixed charge coverage ratio of not less than 1.15 to 1.00. The leverage ratio also determines pricing under the Credit Agreement. At the Borrower's option, borrowings under the revolving credit facility accrue interest at a rate equal to either LIBOR or a specified base rate plus an applicable margin. The applicable margin is linked to the leverage ratio. The margins range from 2.00% to 2.50% per annum for LIBOR loans and 1.00% to 1.50% per annum for base rate loans. The revolving credit facility is subject to a commitment fee payable on the unused revolving credit facility commitments ranging from 0.25% to 0.35%, depending on the Borrower's leverage ratio. As ofSeptember 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. During the term of the revolving credit facility, the Borrower may borrow, repay and re-borrow amounts available under the revolving credit facility, subject to voluntary reductions of the swing line, letter of credit and revolving credit commitments.
Convertible Senior Notes
OnSeptember 14, 2021 , we issued$750 million aggregate principal amount of Notes in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. The Notes were issued pursuant to, and are governed by, an indenture, dated as ofSeptember 14, 2021 , between the Company andU.S. Bank National Association , as trustee. The Notes accrue interest at a rate of 1.25% per annum, payable semi-annually in arrears onApril 1 andOctober 1 of each year, beginning onApril 1, 2022 . The Notes will mature onOctober 1, 2026 , unless earlier repurchased, redeemed or converted. BeforeApril 1, 2026 , noteholders have the right to convert their Notes only upon the occurrence of certain events. From and afterApril 1, 2026 , noteholders may convert their Notes at any time at their election until the close of business on the second scheduled trading day immediately before the maturity date. We will settle conversions by paying or delivering, as applicable, cash, shares of our Class A Common Stock or a combination of cash and shares of our Class A Common Stock, at our election. The initial conversion rate is 31.4859 shares of Class A Common Stock per$1,000 principal amount of Notes, which represents an initial conversion price of approximately$31.76 per share of Class A Common Stock. We used$90.2 million of the net proceeds from the sale of the Notes to fund the cost of entering into capped call transactions. The net proceeds from the issuance of the Notes were approximately$638.7 million , net of capped call transaction costs of$90.2 million and debt issuance costs totaling$21.3 million . See Note 10 - Debt, to the Notes to the Condensed Consolidated Financial Statements included elsewhere in this report.
Capped Call Transactions
Capped call transactions cover the aggregate number of shares of our Class A Common Stock that will initially underlie the Notes, and generally reduce potential dilution to our common stock upon any conversion of Notes and/or offset any cash payments we may make in excess of the principal amount of the converted Notes, as the case may be, with such reduction and/or offset subject to a cap, based on the cap price of the capped call transactions. See Note 2 - Summary of Significant Accounting Policies, to the Notes to Consolidated Financial Statements included elsewhere in this report.
Contractual Obligations and Other Commercial Commitments
As of
Known Trends or Uncertainties
35
--------------------------------------------------------------------------------
Table of Contents
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. dollar. 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, 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
We do not maintain any off-balance sheet arrangements, transactions, obligations or other relationships with unconsolidated entities that would be expected to have a material current or future effect upon our financial condition or results of operations.
© Edgar Online, source
