The Beauty Health Company (Nasdaq: SKIN) — Q2 2022 Form 10-Q Summary
Business context and reporting period
The filing covers the quarter and six months ended June 30, 2022. The Beauty Health Company develops, manufactures, markets and sells aesthetic technologies and products, primarily through its HydraFacial platform, delivery systems and consumables. The company operates as one reportable segment. The filing identifies the registrant as The Beauty Health Company, formerly Vesper Healthcare Acquisition Corp.; the provided metadata refers to “Skinhealth Systems Inc.”
Key financial metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Net sales | $103.5 million, up 55.7% | $179.0 million, up 56.9% |
| Gross profit | $71.7 million | $123.6 million |
| Gross margin | 69.2%, versus 71.0% | 69.1%, versus 69.3% |
| Operating income (loss) | $(3.4) million | $(16.4) million |
| Net income (loss) | $7.9 million, or $0.05 basic EPS | $40.4 million, or $0.27 basic EPS |
| Adjusted EBITDA | $12.6 million; 12.2% margin | $14.9 million; 8.3% margin |
| Adjusted net income (loss) | $2.2 million | $(6.3) million |
| Cash flow from operations | Not separately presented for the quarter | $(69.8) million |
Delivery Systems revenue increased 85.4% to $64.8 million in the quarter, while Consumables revenue increased 22.8% to $38.8 million. The company sold 2,738 Delivery Systems units during the quarter, including 1,203 trade-up units. Six-month revenue comprised $106.4 million of Delivery Systems sales and $72.5 million of Consumables sales.
At June 30, 2022, cash and cash equivalents were $821.0 million, compared with $901.9 million at December 31, 2021. Accounts receivable increased to $79.9 million from $46.8 million, and inventory increased to $73.5 million from $35.3 million, primarily reflecting growth investments and the Syndeo launch. Stockholders’ equity was $352.3 million.
The company had $732.0 million of net convertible senior notes outstanding, representing $750.0 million principal amount of 1.25% notes due October 2026. The $50.0 million revolving credit facility was undrawn, and the company reported compliance with its covenants. The notes had an estimated fair value of approximately $602.3 million at June 30, 2022.
Material changes versus the prior comparable period
- Revenue growth was driven by strong demand for the new Syndeo Delivery System and increased consumables usage from the larger installed base.
- Gross margin declined because Delivery Systems, including lower-margin trade-up units, represented a larger share of sales and because of higher supply-chain, logistics and inflationary costs.
- Selling and marketing expense increased 71.2% in the quarter and 87.7% for the six-month period, reflecting higher commissions, headcount, stock-based compensation, training, travel and marketing investment.
- General and administrative expense declined 37.9% in the quarter, primarily because prior-year expenses included substantial Business Combination transaction costs. For the six-month period, G&A declined 2.5% for the same reason, partially offset by higher personnel, professional, legal, insurance and stock-based compensation costs.
- Reported net income benefited materially from non-cash changes in warrant fair value: $15.2 million of income in the quarter and $67.2 million of income for the six months. The prior-year periods included warrant losses and a $36.5 million earn-out liability expense.
- Adjusted EBITDA declined from $11.4 million to $12.6 million in the quarter but declined from $18.4 million to $14.9 million for the six-month period; the six-month adjusted EBITDA margin fell from 16.1% to 8.3%.
- Operating cash flow was negative despite reported net income. Working capital usage included a $34.4 million increase in accounts receivable and a $39.2 million increase in inventory.
Outlook, risks, contingencies and unusual items
Management expects continued revenue growth from market expansion, new products, increased Delivery System placements and related recurring Consumables sales. The company expects to continue investing in marketing, research and development, technology, personnel and international expansion. It expects capital expenditures of up to $20.0 million for full-year 2022 and stated that existing liquidity should fund anticipated requirements for at least the next twelve months.
Management expects global supply-chain constraints, higher shipping costs and inflationary pressures to weigh on gross margin through 2022, partially offset by pricing initiatives, higher-volume fixed-cost leverage and margin benefits from acquired distributor inventory. COVID-19-related restrictions, uneven regional recovery, recession risk and changes in consumer spending remain uncertainties.
The company completed the acquisition of Mxt in April 2022 for $1.5 million of cash and $0.5 million of stock, with potential earn-out payments of up to $30.0 million based on revenue milestones. It also recorded acquisition-related and reorganization costs, including executive recruiting and severance items.
Management stated that no legal proceedings were expected to have a material adverse effect as of June 30, 2022. However, disclosure controls and procedures were not effective because a previously identified material weakness related to insufficient accounting resources continued to exist. Remediation efforts include hiring personnel, using third-party specialists and strengthening review and information-technology controls.
After quarter-end, the company disclosed a separation agreement with its former APAC president. The agreement provides for salary, leave, severance, benefits and other payments denominated in Singapore dollars; the filing text does not provide a consolidated U.S.-dollar amount.
Important facts for investors to verify
- Whether Delivery System growth and Syndeo placements convert into sustained, higher-margin Consumables revenue.
- The effect of trade-up mix, pricing actions, inflation and supply-chain costs on gross margin.
- Whether operating cash flow improves as inventory and receivables normalize.
- The company’s ability to fund growth, acquisitions and the $750.0 million convertible-note maturity or refinancing requirements.
- Progress in remediating the material weakness in internal control over financial reporting.
- The non-GAAP reconciliation and the extent to which reported earnings depend on warrant fair-value changes and other unusual items.
- Potential dilution from approximately 7 million outstanding private-placement warrants, convertible notes, stock options, RSUs and PSUs.
- COVID-19, regulatory, foreign-currency, competitive, recession and consumer-spending risks affecting international operations.