Business Context and Reporting Period
The filing is The Beauty Health Company’s Form 10-K for the fiscal year ended December 31, 2022, filed March 1, 2023. The registrant trades on Nasdaq under “SKIN”; the provided request metadata refers to Skinhealth Systems Inc., but the filing identifies The Beauty Health Company as the registrant.
The Company is a global beauty-health business centered on the Hydrafacial brand. Its business model combines sales of Delivery Systems, including the Syndeo system launched in the United States in March 2022, with recurring sales of consumables such as tips, solutions and serums. Products are sold in more than 90 countries, with approximately 34% of 2022 revenue generated outside the United States and Canada.
Financial and Operating Metrics
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Net sales | $365.9 million | $260.1 million | +40.7% |
| Delivery Systems sales | $206.2 million | $139.5 million | +47.9% |
| Consumables sales | $159.6 million | $120.6 million | +32.3% |
| Gross profit | $250.3 million | $181.8 million | +37.7% |
| Gross margin | 68.4% | 69.9% | Down 150 bps |
| Loss from operations | $(24.3) million | $(36.6) million | Improved by $12.4 million |
| Net income (loss) | $44.4 million | $(375.1) million | Improved by $419.5 million |
| Adjusted EBITDA | $47.7 million | $32.7 million | +45.8% |
| Adjusted EBITDA margin | 13.0% | 12.6% | Up 40 bps |
| Net cash used in operating activities | $(106.6) million | $(28.4) million | Higher use of $78.2 million |
Operating expenses were $274.6 million, or 75.1% of sales, compared with $218.5 million, or 84.0%, in 2021. Selling and marketing expense increased 43.5% to $160.1 million, reflecting global expansion, Syndeo-related training and increased advertising. General and administrative expense increased 7.5% to $106.1 million, including higher stock-based compensation, personnel, public-company compliance, legal and technology costs.
Net income was substantially affected by non-operating items. The Company recorded a $78.3 million gain from the decrease in the fair value of warrant liabilities, compared with a $277.3 million expense in 2021. Excluding specified non-GAAP items, adjusted net income was $9.1 million versus $4.5 million in 2021. Basic earnings per share were $0.30; diluted earnings per share were $(0.23), reflecting the accounting treatment of warrant income.
Cash and cash equivalents were $568.2 million at December 31, 2022, compared with $901.9 million at year-end 2021. Current assets were $789.1 million and current liabilities were $73.1 million. Inventories increased to $116.4 million from $35.3 million, primarily in connection with the Syndeo launch and supply-chain requirements. Capital expenditures were $17.4 million.
Debt, Liquidity and Capital Allocation
- The Company had $734.1 million of convertible senior notes outstanding, net of issuance costs, with a $750 million principal amount, a 1.25% coupon and an October 1, 2026 maturity.
- The Notes have an initial conversion price of approximately $31.76 per share and represent potential conversion into approximately 23.6 million shares, subject to applicable terms and adjustments.
- The $50 million revolving credit facility was undrawn at year-end and matures November 14, 2027. The Company may seek up to an additional $50 million of commitments or term loans, subject to conditions.
- The Company was in compliance with its debt covenants at December 31, 2022. The credit agreement requires, among other items, a leverage ratio no greater than 3.00 to 1.00 and a fixed-charge coverage ratio of at least 1.15 to 1.00.
- Financing cash outflows included $200 million for accelerated share repurchases. The Company received 18.8 million shares during 2022, reducing shares outstanding to 132.2 million at year-end. A final settlement under one accelerated share repurchase agreement was expected by June 2023.
- Contractual obligations totaled approximately $806.9 million, including $787.6 million of Notes principal and interest and $19.3 million of operating lease payments.
Management stated that available liquidity, including cash on hand and operating cash flows, was sufficient to meet anticipated working-capital requirements and obligations for at least the next 12 months. However, the Company continued to use cash in operations and may require additional financing if operating cash flow remains insufficient or if it pursues acquisitions and other growth investments.
Material Changes, Outlook and Risks
- Revenue growth was driven by stronger Delivery Systems sales globally, including the Syndeo launch, and higher consumables usage from the expanded installed base.
- Gross margin declined because of promotional pricing on trade-up Delivery Systems, premium manufacturing and shipping costs for the connected Syndeo product, supply-chain constraints, inflation and foreign exchange effects.
- Despite positive GAAP net income, the Company remained loss-making at the operating level and generated negative operating cash flow. Management expects continued investment in sales, marketing, research and development, digital capabilities and international expansion.
- COVID-19 restrictions, particularly in China, caused provider closures, travel restrictions and reduced consumer traffic. Management expected recovery to remain gradual, uneven and non-linear.
- Supply-chain constraints, component shortages and transportation delays negatively affected order-fill rates, particularly in Europe and Asia. Management expected these challenges to continue through the first half of 2023.
- Inflation increased raw-material, shipping and labor costs. The Company planned potential price increases and other mitigation measures, but stated that these actions might not fully offset cost pressures.
- Foreign exchange movements, a stronger U.S. dollar and the cessation of sales to a Russian distributor negatively affected reported revenue and profitability.
- The Company expects to launch Syndeo in EMEA and APAC during the first half of 2023. Keravive sales were not expected to become meaningful in the near term.
- On February 27, 2023, the Company agreed to acquire Esthetic Medical Inc. for total consideration of $16.3 million, including $15.0 million of cash and $1.3 million of Company stock, plus potential contingent consideration of up to $3.2 million.
- Key risks include intense competition, uncertain consumer demand for discretionary aesthetic treatments, reliance on providers and third-party suppliers, single-source components, concentration of Delivery System assembly in California, regulatory requirements for medical devices and cosmetics, cybersecurity and privacy exposure, product liability, intellectual-property litigation, foreign currency and geopolitical risks, and the ability to repay or refinance debt.
- The Company is subject to new requirements under the Modernization of Cosmetics Regulation Act of 2022, including facility registration, product listing, adverse-event reporting and future good-manufacturing-practice requirements.
The Company reported pending litigation involving Ageless Serums and Cartessa Aesthetics. In the Ageless matter, the Company filed a $12.6 million unsecured claim following Ageless’s Chapter 11 filing; the filing does not provide a clear estimate of likely recovery or ultimate loss.
Deloitte & Touche LLP issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. The auditors identified accounts receivable allowances and accelerated share repurchases as critical audit matters.
Investor Verification Items
- Verify the sustainability of revenue growth and the conversion of Delivery System placements into recurring consumables revenue.
- Assess whether gross-margin pressure from Syndeo launch costs, promotional pricing, inflation, freight and supply constraints abates.
- Reconcile reported net income with operating loss, negative operating cash flow and non-GAAP adjusted results, particularly the $78.3 million warrant-liability gain.
- Monitor inventory growth, accounts receivable collection periods and the effect of customer payment plans on cash conversion.
- Review liquidity relative to the $750 million convertible Notes maturity in 2026, potential conversion dilution and credit-agreement covenant requirements.
- Confirm the final settlement and total share impact of the accelerated share repurchase agreements.
- Evaluate the financial and integration impact of the Esthetic Medical acquisition and any future acquisitions.
- Track China’s reopening and other COVID-related restrictions, international demand, foreign exchange exposure and the effect of stopping sales to Russia.
- Review regulatory implementation costs and compliance status under MoCRA, EU medical-device rules and other applicable FDA and foreign requirements.