The Beauty Health Company (Nasdaq: SKIN) — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2021. The filing identifies the registrant as The Beauty Health Company, formerly Vesper Healthcare Acquisition Corp.; the company operates primarily through HydraFacial. The May 4, 2021 business combination was accounted for as a reverse recapitalization, so the financial statements principally represent a continuation of HydraFacial’s historical financial statements.
Business Context
The company designs, manufactures, markets and sells aesthetic technologies and products, led by HydraFacial delivery systems and related consumables. It distributes in 87 countries through spas, hotels, dermatologists, plastic surgeons, beauty retailers and other channels. Revenue is generated from upfront delivery-system sales and recurring consumables sales.
Key Financial Metrics
| Metric | Three months ended June 30, 2021 | Three months ended June 30, 2020 | Six months ended June 30, 2021 | Six months ended June 30, 2020 |
|---|---|---|---|---|
| Net sales | $66.5 million | $14.1 million | $114.1 million | $46.7 million |
| Gross profit / margin | $47.3 million / 71.0% | $4.3 million / 30.3% | $79.0 million / 69.3% | $23.2 million / 49.7% |
| Operating loss | $(26.4) million | $(7.9) million | $(24.0) million | $(15.3) million |
| Net loss | $(139.4) million | $(10.4) million | $(142.7) million | $(19.5) million |
| Adjusted EBITDA | $11.4 million | $(1.1) million | $18.4 million | $(3.2) million |
| Adjusted EBITDA margin | 17.1% | (7.7)% | 16.1% | (6.8)% |
| Adjusted net income (loss) | $7.8 million | $(5.7) million | $7.7 million | $(11.0) million |
Revenue mix: Second-quarter delivery-system revenue was $34.9 million and consumables revenue was $31.6 million. Six-month revenue was $60.6 million from delivery systems and $53.4 million from consumables.
Liquidity and capital resources: Cash and cash equivalents were $101.5 million at June 30, 2021, compared with $9.5 million at December 31, 2020. The company generated $133.0 million of financing cash flow, primarily from the business combination, offset by debt repayment. It used $31.9 million in operating activities and $9.1 million in investing activities during the six months. Management stated that available cash and expected operating cash flow should meet working-capital and capital-expenditure needs for at least the next 12 months.
Debt: All outstanding long-term debt was repaid at the business-combination closing. No long-term debt was outstanding at June 30, 2021.
Balance sheet: Total assets were $342.5 million and total liabilities were $326.4 million. Significant liabilities included $157.9 million of warrant liabilities and a $126.0 million earn-out shares liability. Stockholders’ equity was $16.1 million, while accumulated deficit was $186.3 million.
Material Changes Versus the Prior Comparable Period
- Second-quarter net sales increased $52.4 million, or 371.6%; six-month sales increased $67.4 million, or 144.3%. Management attributed the rebound primarily to market reopenings, higher demand and recovery from COVID-19 disruptions in 2020.
- Gross margin improved substantially due to higher volume, fixed-cost leverage, improved delivery-system pricing and cost savings. Product mix shifted toward delivery systems.
- Operating expenses increased materially as the company expanded sales and marketing, invested in research and development, incurred public-company costs and recorded business-combination transaction expenses.
- General and administrative expense included approximately $30.4 million of transaction-related costs in the second quarter and $31.2 million for the six-month period, including a $21.0 million payment to the former owner.
- Net loss was driven disproportionately by non-cash fair-value losses of $72.0 million on warrant liabilities and $36.5 million on the earn-out shares liability.
- The company issued 35.0 million shares in a $350.0 million PIPE investment and 35.5 million shares as part of the business-combination consideration. It also issued 110,726 shares in connection with the Australian distributor acquisition.
- High Tech Laser, an Australian distributor, was acquired on June 4, 2021 for $4.9 million in cash and $1.6 million in equity consideration, resulting in preliminary goodwill of $4.8 million.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal revenue or earnings guidance. Management expects continued investment in sales and marketing, research and development, international expansion, technology and public-company infrastructure. Capital expenditures for 2021 were expected to be up to $15.0 million.
Management expects long-term improvement in Adjusted EBITDA margin as the business scales and operating expenses gain leverage. Growth depends on expansion of the installed delivery-system base, which is expected to support recurring consumables revenue.
- COVID-19: Future outbreaks, facility closures, restrictions on personal services, supply-chain disruption, delayed installations and consumer safety concerns could adversely affect operations and liquidity.
- Acquisition and integration risk: The company completed the Australian acquisition and subsequently closed distributor acquisitions in Mexico, France and Germany. The latter acquisitions involved aggregate cash consideration of $23.4 million plus 479,373 shares, with final allocation and integration risks remaining.
- Equity and fair-value volatility: Warrants are classified as liabilities and remeasured through earnings. The 7.5 million earn-out shares were issued on July 15, 2021 after being recorded as a liability at June 30.
- Internal controls: Management concluded that disclosure controls and procedures were not effective because of previously identified material weaknesses involving complex accounting application, segregation of duties, accounting resources and risk assessment. Remediation was underway, but the company provided no assurance that it would be successful.
- Foreign currency and market risk: International sales and certain operating expenses are denominated in foreign currencies. Management stated that a hypothetical 10% currency movement would not have had a material effect as of June 30, 2021.
- Tax matters: The effective tax rate was 1.32% for the quarter and 1.50% for the six months, with valuation allowances and nondeductible expenses limiting the tax benefit.
Investor Verification Priorities
- Verify the sustainability of the sharp post-COVID revenue rebound, particularly delivery-system demand and recurring consumables growth.
- Reconcile GAAP net losses with Adjusted EBITDA and Adjusted net income, including the substantial transaction costs, stock compensation and warrant and earn-out fair-value adjustments excluded from non-GAAP measures.
- Assess cash-burn requirements, planned capital expenditures, acquisition spending and whether the stated liquidity runway remains adequate.
- Review the effects of the 7.5 million earn-out share issuance and subsequent distributor acquisitions on share count, dilution and goodwill.
- Monitor remediation of material weaknesses in internal control over financial reporting.
- Evaluate COVID-19, supply-chain, international expansion, foreign-currency, competitive and acquisition-integration risks.