UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(MARK ONE)

☒

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarter ended March 31, 2021

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                to                

Commission file number: 001-39565

The Beauty Health Company

(Exact Name

Table of Registrant as Specified in Its Charter)

Contents



Delaware
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
85-1908962

FORM 10-Q
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 2021
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to
Commission file number: 001-39565
The Beauty Health Company
(Exact name of registrant as specified in its charter)
Delaware85-1908962
(State or other jurisdiction of


incorporation or organization)

(I.R.S. Employer

Identification No.)

2165 Spring Street

Long Beach, CA 90806

(Address of principal executive offices)

(800) 603-4996

(Issuer’s telephone number)

2165 Spring Street
Long Beach, CA 90806
(800) 603-4996
(Address of principal executive offices, including zip code)Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading
Symbol(s)

Name of each exchange
on which registered

Class A Common Stock, par value $0.0001 per shareSKINThe Nasdaq Stock Market LLC
Warrants, each exercisable for one share of Class A Common Stock, at a price of $11.50 per shareSKINWThe Nasdaq Stock Market LLC

Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☐☒ No ☒

☐


Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer☐☐Accelerated filer☐
Non-accelerated filer☐☒Smaller reporting company☒
Non-accelerated filer☒Smaller reporting company☒
Emerging growth company☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒


As of July 1,August 10, 2021, there were 125,919,152133,419,152 shares of Class A common stock,Common Stock, par value $0.0001 per share issued and outstanding.

THE BEAUTY HEALTH COMPANY

FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2021

TABLE OF CONTENTS


Page
Part I. Financial Information

Item 1. Financial Statements (Unaudited)

Condensed Balance Sheets as of March 31, 2021 and December  31, 2020

2

Condensed Statement of Operations for the three months ended March  31, 2021

3

Condensed Statement of Changes in Stockholder’s Equity for the three months ended March 31, 2021

4

Condensed Statement of Cash Flows for the three months ended March  31, 2021

5

Notes to Unaudited Condensed Financial Statements

6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

25

Item 3. Quantitative and Qualitative Disclosures Regarding Market Risk

29

Item 4. Controls and Procedures

29
Part II. Other Information

Item 1. Legal Proceedings

31

Item 1A. Risk Factors

31

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

31

Item 3. Defaults Upon Senior Securities

32

Item 4. Mine Safety Disclosures

32

Item 5. Other Information

32

Item 6. Exhibits

33
Part III. Signatures34

i


Table of Contents



EXPLANATORY NOTE


On May 4, 2021 (the “Closing Date”), the registrant consummated the previously announced business combination pursuant to that certain Agreement and Plan of Merger, dated December 8, 2020, by and among Vesper Healthcare Acquisition Corp. (“Vesper Healthcare”), Hydrate Merger Sub I, Inc. (“Merger Sub I”), Hydrate Merger Sub II, LLC (“Merger Sub II”), LCP Edge Intermediate, Inc., the indirect parent of Edge Systems LLC d/b/a The HydraFacial Company (“HydraFacial”), and LCP Edge Holdco, LLC (“LCP,” or “Former Parent,” and, in its capacity as the stockholders’ representative, the “Stockholders’ Representative”) (the “Merger Agreement”), which provided for: (a) the merger of Merger Sub I with and into HydraFacial, with HydraFacial continuing as the surviving corporation (the “First Merger”), and (b) immediately following the First Merger and as part of the same overall transaction as the First Merger, the merger of HydraFacial with and into Merger Sub II, with Merger Sub II continuing as the surviving entity (the “Second Merger” and, together with the First Merger, the “Mergers” and, together with the other transactions contemplated by the Merger Agreement, the “Business Combination”). As a result of the First Merger, the registrant owns 100% of the outstanding common stock of HydraFacial and each share of common stock and preferred stock of HydraFacial has been cancelled and converted into the right to receive a portion of the consideration payable in connection with the Mergers. As a result of the Second Merger, the registrant owns 100% of the outstanding interests in Merger Sub II. In connection with the closing of the Business Combination (the “Closing”), the registrant owns, directly or indirectly, 100% of the stock of HydraFacial and its subsidiaries and the stockholders of HydraFacial as of immediately prior to the effective time of the First Merger (the “HydraFacial Stockholders”) hold a portion of the Class A Common Stock, par value $0.0001 per share, of the registrant (the “Class A Common Stock”).


In connection with the Closing, the registrant changed its name from “Vesper Healthcare Acquisition Corp.” to “The Beauty Health Company.”Company” (“BeautyHealth” or the “Company”). Unless the context otherwise requires, in this Quarterly Report on Form 10-Q, the “registrant” and the “Company” refer to Vesper Healthcare Acquisition Corp. prior to the Closingclosing of the Business Combination and to the combined company and its subsidiaries following the Closing and “HydraFacial” refers to the business of LCP Edge Intermediate, Inc. and its subsidiaries prior to the Closing and the business of the combined company and its subsidiaries following the Closing.

The Company noted an error in its application



2
Table of guidance associated with “ASC 480: Distinguishing Liabilities from Equity” which needed to be modified to appropriately present the impact on the accounting treatment of the temporary equity as a result of the private investment in public equity transaction that is subject of the Subscription Agreements entered into by the Company with certain investors on December 8, 2021 (the “PIPE Investment”) in connection with the Company’s business combination with LCP Edge Intermediate, Inc., a Delaware corporation and indirect parent of Edge Systems LLC d/b/a The HydraFacial Company, and LCP Edge Holdco, LLC, as previously disclosed in the Company’s Form 10-K/A filed on May 27, 2021. This modification to the accounting treatment of equity required the Company’s common stock to be reclassified from permanent equity to temporary equity in the form of common stock subject to possible redemption. The Audit Committee, in consultation with the Company’s management, concluded that all Class A ordinary shares that were sold to the public in our IPO are to be classified as temporary equity, thereby correcting an error of classification within the Condensed Balance Sheet. In the financial statements filed in the Company’s Form 10-K/A, the Company incorrectly classified 8,351,205 Class A ordinary shares as permanent equity as of December 31, 2020, whereas no Class A ordinary shares should have been so classified. The 8,351,205 Class A ordinary shares that were originally incorrectly classified as permanent equity have been reclassified as temporary equity in this Form 10-Q, thereby yielding a total of 46,000,000 Class A ordinary shares (the shares sold to the public in our IPO, which are subject to redemption) as temporary equity. Further detail on the impact of the revision can be found in Note 10 of the Interim Financial Statements.

Contents

PART I—FINANCIAL INFORMATION

Item 1. Interim Financial Statements.




THE BEAUTY HEALTH COMPANY

(FORMERLY KNOWN AS VESPER HEALTHCARE ACQUISITION CORP.)

FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2021
TABLE OF CONTENTS

Page
PART I—FINANCIAL INFORMATION
Item 1.
4
4
5
6
7
8
Item 2.
23
Item 3.
37
Item 4.
38
PART II—OTHER INFORMATION
Item 1.
39
Item 1A.
39
Item 2.
39
Item 3.
39
Item 4.
39
Item 5.
39
Item 6.
40
SIGNATURES




















3
Table of Contents



PART I— FINANCIAL INFORMATION
Item 1. Financial Statements.
THE BEAUTY HEALTH COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS

   March 31,
2021		  December 31,
2020		 
   (Unaudited)  (As Revised) 

ASSETS

   

Current assets

   

Cash

  $2,753,154  $3,265,075 

Prepaid expenses

   595,589   638,013 
  

 

 

  

 

 

 

Total Current Assets

   3,348,743   3,903,088 

Marketable securities held in Trust Account

   460,184,400   460,098,212 
  

 

 

  

 

 

 

TOTAL ASSETS

  $463,533,143  $464,001,300 
  

 

 

  

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

   

Current Liabilities

   

Accrued expenses

  $801,521  $753,547 

Accrued offering costs

   11,950   11,950 
  

 

 

  

 

 

 

Total Current Liabilities

   813,471   765,497 

Warrant liability

   51,493,331   65,646,664 

Deferred underwriting payable

   16,100,000   16,100,000 
  

 

 

  

 

 

 

Total Liabilities

   68,406,802   82,512,161 
  

 

 

  

 

 

 

Commitments

   

Class A common stock subject to possible redemption, 46,000,000 shares at redemption value as of March 31, 2021 and December 31, 2020,

   460,037,629   460,001,441 

Stockholders’ Equity

   

Preferred stock, $0.0001 par value; 1,000,000 shares authorized; none issued and outstanding

   —     —   

Class A common stock, $0.0001 par value; 200,000,000 shares authorized; none issued and outstanding (excluding 46,000,000 shares subject to possible redemption) as of March 31, 2021 and December 31, 2020

   —     —   

Class B common stock, $0.0001 par value; 20,000,000 shares authorized; 11,500,000 shares issued and outstanding as of March 31, 2021 and December 31, 2020

   1,150   1,150 

Additional paid-in capital

   3,103,850   3,103,850 

Accumulated deficit

   (68,016,288)   (81,617,302) 
  

 

 

  

 

 

 

Total Stockholders’ Equity

   (64,911,288)   (78,512,302) 
  

 

 

  

 

 

 

Total Liabilities and Stockholders’ Equity

  $463,533,143  $464,001,300 
  

 

 

  

 

 

 

(in thousands, except for share amounts)
(Unaudited)

As of June 30,As of December 31,
20212020
Current assets:
Cash and cash equivalents$101,467$9,486
Accounts receivable, net of allowances for doubtful accounts of $2,681 and $2,032 at June 30, 2021 and December 31, 2020, respectively40,12818,576
Prepaid expenses4,8043,220
Income tax receivable4,2794,611
Inventories23,76223,202
Total current assets174,44059,095
Property and equipment, net10,1139,191
Intangible assets, net51,88450,935
Goodwill103,10098,531
Deferred tax assets, net482270
Other assets2,4894,813
Total assets$342,508$222,835
Liabilities and Shareholders’ Equity (Deficit)
Current liabilities:
Accounts payable$17,328$18,485
Accrued payroll related expenses18,3279,475
Other accrued expenses3,0732,458
Income tax payable7640
Current portion of long-term debt due to related parties0512
Total current liabilities39,49230,930
Earn-out shares liability126,0000
Other long-term liabilities1,7671,854
Long-term debt due to related parties, net of current portion0216,024
Deferred tax liabilities, net1,3133,987
Warrant liabilities157,8660
Total liabilities326,438252,795
Commitments (Note 11)00
Stockholders’ equity (deficit)
Class A Common Stock, $0.0001 par value; 320,000,000 shares authorized; 125,439,779 and 35,501,743 shares issued and outstanding at June 30, 2021 and December 31, 2020, respectively13 4 
Preferred Stock, $0.0001 par value; 1,000,000 shares authorized; 0 shares issued and outstanding at June 30, 2021 and December 31, 20200 0 
Additional paid-in capital202,352 13,952 
Note receivable from stockholder0 (554)
Accumulated other comprehensive (loss) income(39)242 
Accumulated deficit(186,256)(43,604)
Total stockholders’ equity (deficit)16,070 (29,960)
Total liabilities and stockholders’ equity (deficit)$342,508 $222,835 
The accompanying notes are an integral part of thethese unaudited condensed financial statements.

4
Table of Contents



THE BEAUTY HEALTH COMPANY

(FORMERLY KNOWN AS VESPER HEALTHCARE ACQUISITION CORP.)

CONDENSED STATEMENTCONSOLIDATED STATEMENTS OF OPERATIONS

THREE MONTHS ENDED MARCH 31, 2021

(UNAUDITED)

Formation and operating costs

  $602,319 
  

 

 

 

Loss from operations

   (602,319) 

Other income:

  

Interest earned on marketable securities held in Trust Account

   85,152 

Unrealized gain on marketable securities held in Trust Account

   1,036 

Change in fair value of warrants

   14,153,333 
  

 

 

 

Other income

   14,239,521 
  

 

 

 

Income before benefit from income taxes

   13,637,202 

Benefit from income taxes

   —   

Net income

  $13,637,202 
  

 

 

 

Basic and diluted weighted average shares outstanding, Common stock subject to possible redemption

   46,000,000 
  

 

 

 

Basic and diluted net income per share, Common stock subject to possible redemption

  $0.00 
  

 

 

 

Weighted average shares outstanding, basic and diluted

   11,500,000 
  

 

 

 

Basic and diluted net loss per common share

  $1.18 
  

 

 

 

COMPREHENSIVE LOSS

(in thousands, except for share and per share amounts)
(Unaudited)

Three Months Ended June 30,Six Months Ended June 30,
2021202020212020
Net sales$66,508 $14,116 $114,050 $46,652 
Cost of sales19,257 9,840 35,059 23,447 
Gross profit47,251 4,276 78,991 23,205 
Operating expenses:
Selling and marketing26,214 6,186 43,309 23,883 
Research and development2,988 597 4,440 1,972 
General and administrative44,402 5,412 55,213 12,605 
Total operating expenses73,604 12,195 102,962 38,460 
Loss from operations(26,353)(7,919)(23,971)(15,255)
Other (income) expense:
Interest expense, net2,060 5,667 7,759 9,817 
Other expense (income), net4,307 (56)4,314 (61)
Change in fair value of warrant liabilities72,027 0 72,027 0 
Change in fair value of earn-out shares liability36,525 0 36,525 0 
Foreign currency (gain) loss, net(24)(81)232 122 
Total other expense114,895 5,530 120,857 9,878 
Loss before provision for income taxes(141,248)(13,449)(144,828)(25,133)
Income tax benefit(1,870)(3,052)(2,176)(5,667)
Net loss$(139,378)$(10,397)$(142,652)$(19,466)
Comprehensive loss, net of tax:
Foreign currency translation adjustments(276)(16)(281)(88)
Comprehensive loss$(139,654)$(10,413)$(142,933)$(19,554)
Net loss per share - basic and diluted$(1.52)$(0.30)$(2.24)$(0.58)
Weighted average common shares outstanding - basic and diluted91,798,837 34,482,179 63,805,807 33,309,191 







The accompanying notes are an integral part of thethese unaudited condensed financial statements.

5
Table of Contents



THE BEAUTY HEALTH COMPANY

(FORMERLY KNOWN AS VESPER HEALTHCARE ACQUISITION CORP.)

CONDENSED STATEMENTCONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER’SSTOCKHOLDERS’ EQUITY

THREE MONTHS ENDED MARCH 31, 2021

(UNAUDITED)

  Class B
Common Stock		  Additional
Paid-in
Capital		  Accumulated
Deficit		  Total
Stockholders’
Equity		 
  Shares  Amount 

Balance – January 1, 2021

  11,500,000  $1,150  $3,103,850  $(81,617,302)  $(78,512,302) 

Change in value of Class A common stock subject to possible redemption

  —     —     —     (36,188)   (36,188) 

Net income

  —     —     —     13,637,202   13,637,202 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance – March 31, 2021

  11,500,000  $1,150  $3,103,850  $(68,016,288)  $(64,911,288) 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

(DEFICIT)

(in thousands, except for share amounts)
(Unaudited)
Legacy Common StockLegacy Preferred StockCommon StockAdditional Paid-in CapitalNote Receivable from StockholderAccumulated other Comprehensive Income (Loss)Accumulated DeficitTotal Stockholders’Equity (Deficit)
SharesAmountSharesAmountSharesAmount
BALANCE, December 31, 201949,205 $0 935 $0 0 $0 $13,747 $(554)$28 $(14,429)$(1,208)
Retroactive application of recapitalization(49,205)0 (935)0 32,136,203 3 (3)0 0 0 0 
Adjusted balance, beginning of period0 0 0 0 32,136,203 3 13,744 (554)28 (14,429)(1,208)
Stock-based compensation— — — — — — 26 — — — 26 
Net loss— — — — — — — — — (9,070)(9,070)
Foreign currency translation adjustment— — — — — — — — (72)— (72)
BALANCE, March 31, 2020— — — — 32,136,203 3 13,770 (554)(44)(23,499)(10,324)
Stock-based compensation— — — — — — 224 — — — 224 
Net loss— — — — — — — — — (10,397)(10,397)
Foreign currency translation adjustment— — — — — — — — (16)— (16)
BALANCE, June 30, 2020— $— — $— 32,136,203 $3 $13,994 $(554)$(60)$(33,896)$(20,513)
BALANCE, December 31, 2020— $— — $— 35,501,743 $4 $13,952 $(554)$242 $(43,604)$(29,960)
Stock-based compensation— — — — — — 34 — — — 34 
Net loss— — — — — — — — — (3,274)(3,274)
Foreign currency translation adjustment— — — — — — — — (5)— (5)
BALANCE, March 31, 2021— — — — 35,501,743 4 13,986 (554)237 (46,878)(33,205)
Reverse recapitalization transaction, net— — — — 89,827,310 9 183,301 554 — — 183,864 
Issuance of Class A Common Stock in connection with business acquisition— — — — 110,726 — 1,557 — — — 1,557 
Stock-based compensation— — — — — — 3,508 — — — 3,508 
Net loss— — — — — — — — — (139,378)(139,378)
Foreign currency translation adjustment— — — — — — — — (276)— (276)
BALANCE, June 30, 2021— $— — $— 125,439,779 $13 $202,352 $0 $(39)$(186,256)$16,070 
The accompanying notes are an integral part of thethese unaudited condensed financial statements.

6
Table of Contents



THE BEAUTY HEALTH COMPANY

(FORMERLY KNOWN AS VESPER HEALTHCARE ACQUISITION CORP.)

CONDENSED STATEMENTCONSOLIDATED STATEMENTS OF CASH FLOWS

THREE MONTHS ENDED MARCH 31, 2021

(UNAUDITED)

Net income

  $13,637,202 

Adjustments to reconcile net income to net cash used in operating activities:

  

Change in fair value of warrant liability

   (14,153,333) 

Interest earned on marketable securities held in Trust Account

   (85,152) 

Unrealized gain on marketable securities held in Trust Account

   (1,036) 

Changes in operating assets and liabilities:

  

Prepaid expenses

   42,424 

Accrued expenses

   47,974 
  

 

 

 

Net cash used in operating activities

   (511,921) 
  

 

 

 

Net Change in Cash

   (511,921) 

Cash – Beginning of period

   3,265,075 
  

 

 

 

Cash – End of period

  $2,753,154 
  

 

 

 

Non-Cash investing and financing activities:

  

Change in value of Class A common stock subject to possible redemption

  $36,188 
  

 

 

 

(in thousands, unaudited)
Six Months Ended June 30,
20212020
Cash flows from operating activities:
Net loss$(142,652)$(19,466)
Adjustments to reconcile net loss to net cash from operating
Depreciation of property and equipment1,4181,273
Amortization of capitalized software626349
Provision for doubtful accounts646874
Amortization of intangible assets5,2295,616
Amortization of other assets6666
Amortization of deferred financing costs2,806701
Share-based compensation3,542250
Amortization of unfavorable lease terms0(36)
Write-off of unfavorable lease0(383)
Gain/Loss on sale and disposal of assets025
In-kind interest that compounds into debt4,1301,855
Deferred income taxes(3,471)(47)
Fair value adjustment of earn-out shares liability36,525 0
Fair value adjustment of warrant liability72,027 0
Debt prepayment expense2,014 0
Changes in operating assets and liabilities:
Accounts receivables(21,089)9,193 
Prepaid expense and other current assets(1,562)636
Income taxes receivable333(3,393)
Inventory(229)(1,821)
Other assets730(167)
Accounts payable(2,369)2,191 
Accrued payroll and other expenses9,047(6,768)
Other long-term liabilities(87)382
Income taxes payable382 (2,963)
Net cash used in operating activities(31,938)(11,633)
Cash flows used in investing activities:
Cash paid for business acquisition, net of cash acquired(4,920)0 
Repayment of notes receivables from shareholders7810
Capital expenditures for intangible assets(273)(105)
Capital expenditures for property and equipment(4,707)(1,320)
Net cash used in investing activities(9,119)(1,425)
Cash flows from financing activities:
Proceeds from revolving facility5,000 6,500
Repayment of revolving facility(5,000)(15,000)
Proceeds from term loan0 30,000
Payment of debt issuance costs0 (77)
Repayment of term loan(225,487)(886)
Proceeds from Business Combination, net of transaction costs (See Note 3)358,536 0
Net cash from financing activities133,049 20,537
Net increase in cash and cash equivalents91,9927,479 
Effect of foreign currency translation on cash(11)(164)
Cash and cash equivalents, beginning of period9,486 7,307
Cash and cash equivalents, end of period$101,467 $14,622
Supplemental disclosures of cash flow information and non-cash investing and financing activities:
Cash paid for interest$10,249 $7,261 
Cash paid for income taxes96 97
Capital expenditures included in accounts payable1,440 1,242
Change in deferred tax liability due to reverse recapitalization90 0

The accompanying notes are an integral part of thethese unaudited condensed financial statements.

7
Table of Contents




THE BEAUTY HEALTH COMPANY

(FORMERLY KNOWN AS VESPER HEALTHCARE ACQUISITION CORP.)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2021

(in thousands, except share and per share amounts)
(Unaudited)

NOTE 1. DESCRIPTION OF ORGANIZATION AND BUSINESS OPERATIONS

Note 1 – Description of Business

The Beauty Health Company (formerly known as Vesper Healthcare Acquisition Corp.) (the “Company”) was incorporated in Delaware on July 8, 2020. The Company was formed for the purpose of entering into a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination with one or more businesses.

Merger and PIPE Investment


On May 4, 2021 (the “Closing Date”), LCP Edge Intermediate, Inc. (“HydraFacial”) consummated a merger with the registrant consummated the previously announced business combinationCompany pursuant to that certainthe Agreement and Plan of Merger, dated December 8, 2020 by and among Vesper Healthcare Acquisition Corp. (“Vesper Healthcare”(the “Merger Agreement”), Hydratewhich provided for, among other things, the merger with and into the Company. Upon closing, the surviving entity was renamed The Beauty Health Company (“BeautyHealth”) and began to trade on the Nasdaq Capital Market under the ticker symbol “SKIN.” The transactions set forth in the Merger Sub I, Inc.Agreement constitute a “Business Combination” as contemplated by Vesper’s Amended & Restated Certificate of Incorporation.

BeautyHealth is a category-creating beauty health company focused on bringing innovative products to market. The Company and its subsidiaries design, develop, manufacture, market, and sell aesthetic technologies and products. The Company’s flagship brand, HydraFacial, is a non-invasive and approachable beauty health platform and ecosystem. HydraFacial offers hydradermabrasion systems that enhance the skin to cleanse, exfoliate, extract, and hydrate simultaneously; HydraFacial® Daily Essentials, which provides detoxification, rejuvenation, and protection of skin; crystal microdermabrasion systems; and light emitting diode systems. The premiere system is the HydraFacial MD® liquid based skin exfoliation system.

Note 2 – Summary of Significant Accounting Policies

Basis of presentation and consolidation

The Business Combination was accounted for as a reverse recapitalization in accordance with accounting principles generally accepted in the United States of America (“Merger Sub I”GAAP”), Hydrate Merger Sub II, LLC (“Merger Sub II”), LCP. Under this method of accounting, the Company is treated as the “acquired” company for financial reporting purposes and HydraFacial is treated as the accounting acquirer. This determination was primarily based on the following:

•the stockholders of Edge Intermediate, Inc., the indirect parent of Edge Systems LLC d/b/a The HydraFacial Company (“HydraFacial”), and LCP Edge Holdco, LLC (“LCP,” and, in its capacity as the stockholders’ representative, the “Stockholders’ Representative”) (the “Merger Agreement”), which provided for: (a) the merger of Merger Sub I with and into HydraFacial, with HydraFacial continuing as the surviving corporation (the “First Merger”), and (b) immediately following the First Merger and as part of the same overall transaction as the First Merger, the merger of HydraFacial with and into Merger Sub II, with Merger Sub II continuing as the surviving entity (the “Second Merger” and, together with the First Merger, the “Mergers” and, together with the other transactions contemplated by the Merger Agreement, the “Business Combination”). As a result of the First Merger, the registrant owns 100% of the outstanding common stock of HydraFacial and each share of common stock and preferred stock of HydraFacial has been cancelled and converted into the right to receive a portion of the consideration payable in connection with the Mergers. As a result of the Second Merger, the registrant owns 100% of the outstanding interests in Merger Sub II. In connection with the closing of the Business Combination (the “Closing”), the registrant owns, directly or indirectly, 100% of the stock of HydraFacial and its subsidiaries and the stockholders of HydraFacial as of immediately prior to the effective time of the First Merger (the “HydraFacial Stockholders”) holdconsidered in the aggregate have the largest minority interest of the voting power in the combined entity after taking into account actual redemptions;
•the operations of HydraFacial prior to the acquisition comprise the only ongoing operations of the post-combination company;
•senior management of HydraFacial comprises the senior management of the post-combination company;
•the relative size and valuation of HydraFacial compared to the Company; and
•pursuant to that certain Investor Rights Agreement, dated as of May 4, 2021, by and between the Company and HydraFacial, HydraFacial was given the right to designate certain initial members of the board of directors of the Company immediately after giving effect to the transactions.

Consideration was also given to the fact that the Company paid a portionpurchase price consisting of a combination of cash and equity consideration and its shareholders may have a significant amount of voting power, should the Company’s public stockholders be considered in the aggregate. However, based on the aforementioned factors of management, board representation, largest minority shareholder as noted above, and the continuation of the HydraFacial business as well as its size, it was determined that accounting for the Business Combination as a reverse recapitalization was appropriate.

Accordingly, for accounting purposes, the financial statements of the Company represent a continuation of the financial statements of HydraFacial with the acquisition being treated as the equivalent of HydraFacial issuing stock for the net assets of the Company, accompanied by a recapitalization. The net assets of the Company are stated at historical cost, with no goodwill or other intangible assets recorded.

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In connection with the Business Combination each share of HydraFacial common stock outstanding immediately prior to the Business Combination converted into the right to receive 653.109 shares (the “Exchange Ratio”) of Class A Common Stock, par value $0.0001 per share, of the registrant (the “Class A Common Stock”).

Pursuant, of the Company. The recapitalization of the number of shares of Common Stock attributable to HydraFacial is reflected retroactively to the terms of the Merger Agreement and customary adjustments set forth therein, the aggregate merger consideration paid to the HydraFacial Stockholders in connection with the Business Combination was approximately $975,000,000 less HydraFacial’s net indebtedness as of the Closing Date, and subject to further adjustments for transaction expenses, and net working capital relative to a target. The merger consideration included both cash consideration and consideration in the form of newly issued Class A Stock. The aggregate cash consideration paid to the HydraFacial Stockholders at the Closing was approximately $368 million, consisting of the Company’s cash and cash equivalents as of the Closing (including proceeds of $350 million from the Company’s private placement of an aggregate of 35,000,000 shares of Class A Stock (the “Private Placement”) with a limited number of accredited investors (as defined by Rule 501 of Regulation D) without any form of general solicitation or general advertising pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”), and approximately $433 million of cash available to the Company from the trust account that held the proceeds from the Company’s initial public offering (the “Trust Account”) after giving effect to income and franchise taxes payable in respect of interest income earned in the Trust Account and redemptions that were elected by the Company’s public stockholders, minus approximately $224 million used to repay HydraFacial’s outstanding indebtedness at the Closing, minus approximately $94 million of transaction expenses of HydraFacial and the Company, minus $100 million. The remainder of the consideration paid to the HydraFacial Stockholders consisted of 35,501,743 newly issued shares of Class A Stock (the “Stock Consideration”).

THE BEAUTY HEALTH COMPANY

(FORMERLY KNOWN AS VESPER HEALTHCARE ACQUISITION CORP.)

NOTES TO CONDENSED FINANCIAL STATEMENTS

MARCH 31, 2021

(Unaudited)

The foregoing consideration paid to the HydraFacial Stockholders may be further increased by up to $75.0 million payable as earn-out shares of Class A Stockearliest period presented based upon the completion of certain acquisitions within one year of Closing pursuant to the terms of the Merger Agreement.

All outstanding shares of Class B Stock were automatically converted into shares of Class A Stock on a one-for-one basis at the ClosingExchange Ratio and will continue to be subject to the transfer restrictions applicable to such shares of Class B Stock.

In connection with the Merger Agreement, certain accredited investors (the “PIPE Investors”) entered into subscription agreements (the “PIPE Subscription Agreements”) pursuant to which the PIPE Investors agreed to purchase 35,000,000 shares (the “PIPE Shares”) of The Beauty Health Company Class A Common Stock at a purchase priceis utilized for calculating earnings per share of $10.00 and an aggregate purchase price of $350,000,000 (the “PIPE Investment”). in all prior periods presented.


The PIPE Investment was consummated substantially concurrently with the Closing.

In connection with the Closing, holders of 2,672,690 shares of Class A Stock exercised their rights to redeem those shares for cash at an approximate price of $10.00 per share, for an aggregate of approximately $26,737,737, which was paid to such holders at Closing.

Immediately after giving effect to the Merger and the PIPE Investment, there were 125,329,053 shares of The Beauty Health Company Class A Common Stock.

In connection with the Closing, the registrant changed its name from “Vesper Healthcare Acquisition Corp.” to “The Beauty Health Company”.

Business Prior to the Business Combination

Prior to the Business Combination, the Company had two subsidiaries, Hydrate Merger Sub I, Inc., a wholly owned subsidiary of the Company incorporated in Delaware on December 7, 2020 (“Merger Sub I”) and Hydrate Merger Sub II, LLC, a wholly owned subsidiary of the Company incorporated in Delaware on December 7, 2020 (“Merger Sub II”).

As of March 31, 2021, the Company had not commenced any operations. All activity for the period from July 8, 2020 (inception) through March 31, 2021 relates to the Company’s formation and the initial public offering (“Initial Public Offering”), which is described below. The Company will not generate any operating revenues until after the completion of a Business Combination, at the earliest. The Company will generate non-operating income in the form of interest income from the proceeds derived from the Initial Public Offering.

The registration statement for the Company’s Initial Public Offering was declared effective on September 29, 2020. On October 2, 2020, the Company consummated the Initial Public Offering of 46,000,000 units (the “Units” and, with respect to the shares of Class A common stock included in the Units sold, the “Public Shares”), which includes the full exercise by the underwriters of the over-allotment option to purchase an additional 6,000,000 Units, at $10.00 per Unit, generating gross proceeds of $460,000,000, which is described in Note 3.

Simultaneously with the closing of the Initial Public Offering, the Company consummated the sale of 9,333,333 warrants (the “Private Placement Warrants”) at a price of $1.50 per Private Placement Warrant in a private placement to BLS Investor Group LLC (the “Sponsor”), generating gross proceeds of $14,000,000, which is described in Note 4.

THE BEAUTY HEALTH COMPANY

(FORMERLY KNOWN AS VESPER HEALTHCARE ACQUISITION CORP.)

NOTES TO CONDENSED FINANCIAL STATEMENTS

MARCH 31, 2021

(Unaudited)

Transaction costs amounted to $25,777,859 consisting of $9,200,000 of underwriting fees, $16,100,000 of deferred underwriting fees and $477,859 of other offering costs.

Liquidity

As of March 31, 2021, the Company had $2,753,154 in its operating bank accounts, $460,184,400 in securities held in the Trust Account to be used for a Business Combination or to repurchase or redeem its ordinary shares in connection therewith and current liabilities of $813,471.

Until the consummation of a Business Combination, the Company used the funds not held in the Trust Account for identifying and evaluating prospective acquisition candidates, performing due diligence on prospective target businesses, paying for travel expenditures, selecting the target business to acquire, and structuring, negotiating and consummating the Business Combination.

As noted above (Merger and PIPE Investment), on May 4, 2021, the Company consummated the Merger and the PIPE investment.

Risks and Uncertainties

Management continues to evaluate the impact of the COVID-19 pandemic and has concluded that while it is reasonably possible that the virus could have a negative effect on the Company’s financial position, results of its operations and/or search for a target company, the specific impact is not readily determinable as of the date of these consolidated financial statements. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited condensed financial statements have been preparedinterim Condensed Consolidated Financial Statements are presented in accordance with accounting principles generally accepted inGAAP and include the United States of America (“GAAP”) for interim financial informationCompany’s consolidated domestic and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X of the SEC.international subsidiaries. Certain information or footnoteand disclosures normally included in consolidated financial statements prepared in accordance with GAAP have been condensed or omitted, pursuant to the rulesomitted. Accordingly, these interim Condensed Consolidated Financial Statements and regulations of the SEC for interim financial reporting. Accordingly, they do not include all the information andaccompanying footnotes necessary for a complete presentation of financial position, results of operations, or cash flows. In the opinion of management, the accompanying unaudited condensed financial statements include all adjustments, consisting of a normal recurring nature, which are necessary for a fair presentation of the financial position, operating results and cash flows for the periods presented.

The accompanying unaudited condensed financial statements should be read in conjunction with the audited consolidated financial statements of BeautyHealth and HydraFacial as of and for the year ended December 31, 2020 presented in the Company’s Annual ReportRegistration Statement on Form 10-K/AS-1 filed on July 19, 2021.


Except as filed withdescribed elsewhere in this Note 2, there have been no material changes to the SEC on May 27, 2021.Company’s significant accounting policies as described in HydraFacial’s Consolidated Financial Statements as of and for the year ended December 31, 2020.

In the opinion of management, all adjustments, of a normal recurring nature, considered necessary for a fair presentation have been included in the Condensed Consolidated Financial Statements. The interimCompany believes that the disclosures provided herein are adequate to prevent the information presented from being misleading. The results of operations for the three and six months ended March 31,June 30, 2021 are not necessarily indicative of the results of operations to be expected for period endedthe full year ending December 31, 2021 or2021.

Use of estimates and assumptions in preparing consolidated financial statements

In preparing its consolidated financial statements in conformity with GAAP, the Company makes assumptions, estimates, and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the consolidated financial statements and the reported amounts of net sales and expenses during the reported periods. On an ongoing basis, the Company evaluates its estimates, including, among others, those related to revenue related reserves, allowance for anydoubtful accounts, the realizability of inventory, fair value measurements including common stock, warrant liabilities and earn-out shares liability valuations, useful lives of property and equipment, goodwill and finite-lived intangible assets, accounting for income taxes, stock-based compensation expense and commitments and contingencies. The Company’s estimates are based on historical experience and on its future periods.

expectations that are believed to be reasonable. The combination of these factors forms the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from its current estimates and those differences may be material.

THE BEAUTY HEALTH COMPANY

(FORMERLY KNOWN AS VESPER HEALTHCARE ACQUISITION CORP.)

NOTES TO CONDENSED FINANCIAL STATEMENTS

MARCH 31, 2021

(Unaudited)


Emerging Growth Company


The Company is an “emerging growth company,” as defined in Section 2(a) of the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and it may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the independent registered public accounting firm attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in its periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.


Further, Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. The Company has elected not to opt out of such extended transition period which means that when a standard is issued or revised and it has different application dates for public or private companies, the Company, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make comparison of the Company’s financial statements with another public company which is neither an emerging growth company nor an emerging growth company which has opted out of using the extended transition period difficult or impossible because of the potential differences in accounting standards used.

Use


9
Table of Estimates

Contents




The preparationCompany will lose its emerging growth company status on December 31, 2021, at which point, it will qualify as a large accelerated filer based on its market capitalization as of June 30, 2021, according to Rule 12b-2 of the condensed financial statementsSecurities Exchange Act of 1934, as amended. As a result, the Company will adopt all accounting pronouncements currently deferred under the emerging growth company election according to public company standards at December 31, 2021 on the Company’s Form 10-K for the year ended December 31, 2021. The adoption dates for the new accounting pronouncements disclosed below have been presented as such.

Warrant Liabilities

During October 2020, in conformityconnection with GAAP requires managementthe Vesper Healthcare Acquisition Corp IPO, the Company issued 15,333,333 warrants (the “Public Warrants”) to make estimates and assumptions that affectpurchase shares of Common Stock at $11.50 per share. Simultaneously, with the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dateconsummation of the financial statementsVesper Healthcare Acquisition Corp IPO, the Company issued 9,333,333 warrants (the “Private Placement Warrants” and, together with the reported amountsPublic Warrants, the “Public and Private Placement Warrants”) to purchase shares of revenues and expenses during the reporting period.

Making estimates requires managementCommon Stock at $11.50 per share, to exercise significant judgment. It is at least reasonably possible that the estimateBLS Investor Group LLC (the “Sponsor”).All of the effectPublic and Private Placement Warrants were outstanding as of June 30, 2021.


We classify the Public and Private Placement Warrants as liabilities on our consolidated balance sheets as these instruments are precluded from being indexed to our own stock given the terms allow for a condition, situation or set of circumstancessettlement adjustment that existed atdoes not meet the datescope of the financial statements, which management considered in formulating its estimate, could change in the near term due to one or more future confirming events. Accordingly, the actual results could differ significantly from those estimates.

Cash and Cash Equivalents

The Company considers all short-term investments with an original maturity of three months or less when purchased to be cash equivalents. The Company did not have any cash equivalents as of March 31, 2021 and December 31, 2020.

Marketable Securities Held in Trust Account

At March 31, 2021 and December 31, 2020, substantially all of the assets held in the Trust Account were held in U.S. Treasury Bills. The Company accounts for its securities held in the trust account in accordance with

THE BEAUTY HEALTH COMPANY

(FORMERLY KNOWN AS VESPER HEALTHCARE ACQUISITION CORP.)

NOTES TO CONDENSED FINANCIAL STATEMENTS

MARCH 31, 2021

(Unaudited)

the guidancefixed-for-fixed exception in Accounting Standards Codification (“ASC”) Topic 320 “Debt815, Derivatives and Equity Securities.” These securitiesHedging. In certain events outside of our control, the Public Warrant and Private Placement Warrant holders are classified as trading securities with unrealized gains/losses recognized through income.

Class A Common Stock Subjectentitled to Possible Redemption

The Company accounts for its Class Areceive cash while in certain scenarios the holders of the common stock subjectare not entitled to possible redemptionreceive cash or may receive less than 100% of any proceeds in accordance with the guidance in Accounting Standards Codification (“ASC”) Topic 480 “Distinguishing Liabilitiescash, which precludes these instruments from Equity.” Class A common stock subject to mandatory redemption isbeing classified as a liability instrument and is measured at fair value. Conditionally redeemable common stock (including common stock that features redemption rights that is either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within the Company’s control) is classified as temporary equity. At all other times, common stock is classified as stockholders’ equity. The Company’s Class A common stock features certain redemption rights that are considered to be outside of the Company’s control and subject to occurrence of uncertain future events. Accordingly, Class A common stock subject to possible redemption is presented at redemption value as temporary equity outside of the stockholders’ equity section of the Company’s consolidated balance sheets.

Warrant Liability

The Company accounts for warrants as either equity-classified or liability-classified instruments based on an assessment of the warrant’s specific terms and applicable authoritative guidance in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 480, Distinguishing Liabilities from Equity (“ASC 480”) and ASC 815, Derivatives and Hedging (“ASC 815”). The assessment considers whether the warrants are freestanding financial instruments pursuant to ASC 480, meet the definition of a liability pursuant to ASC 480,815-40. The Public and whether the warrants meet all of the requirements for equity classification under ASC 815, including whether the warrants are indexed to the Company’s own common shares and whether the warrant holders could potentially require “net cash settlement” in a circumstance outside of the Company’s control, among other conditions for equity classification. This assessment, which requires the use of professional judgment, is conducted at the time of warrant issuance and as of each subsequent quarterly period end date while the warrants are outstanding.

For issued or modified warrants that meet all of the criteria for equity classification, the warrants are required to be recorded as a component of additional paid-in capital at the time of issuance. For issued or modified warrants that do not meet all the criteria for equity classification, the warrants are required to bePrivate Placement Warrants were initially recorded at their initial fair value on the date of issuance,the Business Combination and are subsequently adjusted to fair value at each balance sheet date thereafter.subsequent reporting date. Changes in the estimated fair value of the warrantsthese instruments are recognized within change in fair value of warrant liabilities in the Condensed Consolidated Statements of Comprehensive Loss.


Earn-out Shares Liability

In addition to the consideration paid at the closing of the Business Combination, the former stockholders of HydraFacial received contingent consideration in the form of an aggregate of 7.5 million shares of Class A Common Stock (the “Earn-out Shares”) as a non-cashresult of the Company’s completion in June and July 2021 of the acquisition of certain target businesses identified by HydraFacial as contemplated by the Merger Agreement. With the closing of the 4 distributor acquisitions in Australia, France, Germany and Mexico, the 7.5 million Earn-out Shares were earned and subsequently issued on July 15, 2021.

We account for the earn-out shares liability as contingent consideration and have recorded an earn-out shares liability for the earn-out shares in accordance with ASC 480 – Distinguishing Liabilities from Equity. The liability was included as part of the consideration transferred in the Business Combination and was recorded at its then current fair value. The earn-out shares liability is recorded at fair value and remeasured at the end of each reporting period, with the corresponding gain or loss on the statements of operations. The fair value of the warrants issuedrecorded in the IPO has been estimated usingCondensed Consolidated Statements of Comprehensive Loss as a Monte Carlo simulation methodology ascomponent of the date of the IPO and such warrants’ quoted market price as of December 31, 2020 and March 31, 2021. The private placement warrants were valued using a Monte Carlo simulation methodology.

Income Taxes

The Company follows the asset and liability method of accounting for income taxes under ASC 740, “Income Taxes.” Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

Other (income) expense, net.

THE BEAUTY HEALTH COMPANY

(FORMERLY KNOWN AS VESPER HEALTHCARE ACQUISITION CORP.)

NOTES TO CONDENSED FINANCIAL STATEMENTS

MARCH 31, 2021

(Unaudited)

Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) 740 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities. The Company recognizes accrued interest and penalties related to unrecognized tax benefits as income tax expense. There were no unrecognized tax benefits and no amounts accrued for interest and penalties as of December 31, 2020. The Company is currently not aware of any issues under review that could result in significant payments, accruals or material deviation from its position. The Company is subject to income tax examinations by major taxing authorities since inception.

Net Income Per Common Share

Net income (loss) per share is computed by dividing net income by the weighted-average number of shares of common stock outstanding during the period. The Company has not considered the effect of the warrants sold in the Public Offering and Private Placement to purchase an aggregate of 24,666,666 shares in the calculation of diluted loss per share, since the exercise of the warrants are contingent upon the occurrence of future events and the inclusion of such warrants would be anti-dilutive.

The Company’s statement of operations includes a presentation of income (loss) per share for common shares subject to possible redemption in a manner similar to the two-class method of income (loss) per share. Net income (loss) per common share, basic and diluted, for Common stock subject to possible redemption is calculated by dividing the proportionate share of income or loss on marketable securities held by the Trust Account, net of applicable franchise and income taxes, by the weighted average number of Common stock subject to possible redemption outstanding since original issuance.

Net loss per share, basic and diluted, for non-redeemable common stock is calculated by dividing the net income (loss), adjusted for income or loss on marketable securities attributable to Class A common stock subject to possible redemption, by the weighted average number of non-redeemable common stock outstanding for the period.

Non-redeemable common stock includes Founder Shares and non-redeemable Class A shares as these shares do not have any redemption features. Non-redeemable common stock participates in the income or loss on marketable securities based on Class A non-redeemable share’s proportionate interest.


THE BEAUTY HEALTH COMPANY

(FORMERLY KNOWN AS VESPER HEALTHCARE ACQUISITION CORP.)

NOTES TO CONDENSED FINANCIAL STATEMENTS

MARCH 31, 2021

(Unaudited)

The following table reflects the calculation of basic and diluted net income (loss) per common share (in dollars, except per share amounts):

   For the Three
Months ended
March 31,
2021		 

Common stock subject to possible redemption

  

Numerator: Earnings allocable to Common stock subject to possible redemption

  

Interest earned on marketable securities held in Trust Account

  $72,209 

Unrealized gain on marketable securities held in Trust Account

   878 

Less: Company’s portion available to pay taxes

   (42,400) 
  

 

 

 

Net Income allocable to shares subject to redemption

  $30,687 
  

 

 

 

Denominator: Weighted Average Class A common stock subject to possible redemption

  

Basic and diluted weighted average shares outstanding

   46,000,000 
  

 

 

 

Basic and diluted net income per share

  $0.00 
  

 

 

 

Non-Redeemable Common Stock

  

Numerator: Net income minus Net Earnings

  

Net income

  $13,637,202 

Less: Net income allocable to Class A common stock subject to possible redemption

   (30,687) 
  

 

 

 

Non-Redeemable Net Income

  $13,606,515 
  

 

 

 

Denominator: Weighted Average Non-Redeemable Common Stock

  

Basic and diluted weighted average shares outstanding

   11,500,000 
  

 

 

 

Basic and diluted net income per share

  $1.18 
  

 

 

 

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist of a cash account in a financial institution, which, at times, may exceed the Federal Depository Insurance Coverage of $250,000. The Company has not experienced losses on this account.

Fair Value of Financial Instruments


The fair value of the Company’s assets and liabilities, which qualify as financial instruments under ASC Topic 820, “FairFair Value Measurement”, approximates the carrying amounts represented in the condensed balance sheets,Condensed Consolidated Balance Sheets, primarily due to their short-term nature.


Fair Value Measurements


Fair value is defined as the price that would be received for sale of an asset or paid for transfer of a liability, in an orderly transaction between market participants at the measurement date. GAAP establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority

THE BEAUTY HEALTH COMPANY

(FORMERLY KNOWN AS VESPER HEALTHCARE ACQUISITION CORP.)

NOTES TO CONDENSED FINANCIAL STATEMENTS

MARCH 31, 2021

(Unaudited)

to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). These tiers include:

•Level 1, defined as observable inputs such as quoted prices (unadjusted) for identical instruments in active markets;


•Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and


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•Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.


In some circumstances, the inputs used to measure fair value might be categorized within different levels of the fair value hierarchy. In those instances, the fair value measurement is categorized in its entirety in the fair value hierarchy based on the lowest level input that is significant to the fair value measurement.

Derivative


Recently Adopted Accounting Pronouncements

Income Taxes. In December 2019, the Financial Instruments

Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”). The amendments in ASU 2019-12 simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The Company evaluatesadopted ASU 2019-12 on January 1, 2021, which did not have a material impact on its financial instrumentsCondensed Consolidated Financial Statements.


Accounting Pronouncements Not Yet Adopted

Leases—In February 2016, FASB issued ASU 2016–02, Leases (Topic 842). ASU 2016–02 requires lessees to determine if such instruments are derivatives or contain features that qualify as embedded derivatives in accordance with ASC Topic 815, “Derivativesrecognize assets and Hedging”. For derivative financial instruments that are accounted for as liabilities the derivative instrument is initially recorded at its fair value on the grant date and is then re-valued at each reporting date, with changes in the fair value reported in the statements of operations. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement or conversionfor the rights and obligations created by all leases with terms of more than 12 months. The Company is evaluating the impact of the instrument could be required within 12 months of the balance sheet date.

Recent Accounting Standards

Management does not believe that any recently issued, but not yet effective, accounting standards, if currently adopted, would have a material effectamended lease guidance on the Company’s condensedits consolidated financial statements.

NOTE 3. INITIAL PUBLIC OFFERING

Pursuant to the Initial Public Offering, the Company sold 46,000,000 Units, which includes the full exercise by the underwriters of their option to purchase an additional 6,000,000 Units, at a purchase price of $10.00 per Unit. Each Unit consists of one share of Class A common stockstatements, and one-third of one redeemable warrant (“Public Warrant”). Each whole Public Warrant entitles the holder to purchase one share of Class A common stock at an exercise price of $11.50 per share (see will adopt this guidance on December 31, 2021.


Note 7).

NOTE 4. PRIVATE PLACEMENT

Simultaneously with the closing of the Initial Public Offering, the Sponsor purchased an aggregate of 9,333,333 Private Placement Warrants at a price of $1.50 per private Placement Warrant, for an aggregate purchase price of $14,000,000. Each Private Placement Warrant is exercisable to purchase one share of Class A common stock at a price of $11.50 per share. The proceeds from the Private Placement Warrants were added to the proceeds from the Initial Public Offering held in the Trust Account.

3 – Business Combinations

THE BEAUTY HEALTH COMPANY

(FORMERLY KNOWN AS VESPER HEALTHCARE ACQUISITION CORP.)

NOTES TO CONDENSED FINANCIAL STATEMENTS

MARCH 31, 2021

(Unaudited)

NOTE 5. RELATED PARTY TRANSACTIONS

Founder Shares

On August 5, 2020, the Company issued an aggregate of 11,500,000 shares of Class B common stock (the “Founder Shares”) to the Sponsor for an aggregate purchase price of $25,000 in cash. The Founder Shares included an aggregate of up to 1,500,000 shares of Class B common stock subject to forfeiture by the Sponsor to the extent that the underwriters’ over-allotment option was not exercised in full or in part, so that the Sponsor would own, on an as-converted basis, 20% of the Company’s issued and outstanding shares after the Initial Public Offering (assuming the Sponsor did not purchase any Public Shares in the Initial Public Offering). As a result of the underwriter’s election to fully exercise its over-allotment option, 1,500,000 Founder Shares are no longer subject to forfeiture.

The Sponsor has agreed that, subject to certain limited exceptions, the Founder Shares will not be transferred, assigned, sold or released from escrow until the earlier of (A) one year after the completion of a

Business Combination or (B) the date subsequent to the Company’s initial Business Combination on which the Company completes a liquidation, merger, capital stock exchange or other similar transaction that results in all of the Company’s stockholders having the right to exchange their shares of common stock for cash, securities or other property. Notwithstanding the foregoing, if the last reported sale price of the shares of our Class A common stock equals or exceeds $12.00 per share (as adjusted for stock splits, stock capitalizations, reorganizations, recapitalizations and the like) for any 20 trading days within any 30-trading day period commencing at least 150 days after a Business Combination, the converted Class A common stock will be released from the lock-up.

Due from Sponsor

At the closing of the Initial Public Offering on October 2, 2020, a portion of the proceeds from the sale of the Private Placement Warrants in the amount of $4,800,000 was due to the Company to be held outside of the Trust Account for working capital purposes. Such amount was paid by the Sponsor to the Company on October 6, 2020.

Advances from Related Party

- Reverse Recapitalization


The Sponsor paid for certain offering costs on behalf of the Company in connection with the Initial Public Offering. The outstanding balance of $229,886 under these advances was repaid subsequent to the closing of the Initial Public Offering, on October 6, 2020.

Promissory Note — Related Party

On July 23, 2020, the Company issued an unsecured promissory note to the Sponsor (the “Promissory Note”), pursuant to which the Company could borrow up to an aggregate principal amount of $300,000. The Promissory Note was non-interest bearing and payable on the earlier of (i) January 31, 2021 or (i) the consummation of the Initial Public Offering. The outstanding balance under the Promissory Note of $261,386 was repaid subsequent to the closing of the Initial Public Offering on October 6, 2020.

Administrative Support Agreement

The Company entered into an agreement, commencing on September 30, 2020 through the earlier of the Company’s consummation of a Business Combination and its liquidation, to pay an affiliate of the Company’s

THE BEAUTY HEALTH COMPANY

(FORMERLY KNOWN AS VESPER HEALTHCARE ACQUISITION CORP.)

NOTES TO CONDENSED FINANCIAL STATEMENTS

MARCH 31, 2021

(Unaudited)

Chief Executive Officer, a total of up to $10,000 per month for office space and administrative support services. For the three months ended March 31, 2021, the Company incurred and paid $30,000 in fees for these services.

Related Party Loans

In order to finance transaction costs in connection with a Business Combination, the Sponsor or an affiliate of the Sponsor or certain of the Company’s directors and officers may, but are not obligated to, loan the Company funds as may be required (“Working Capital Loans”). If the Company completes a Business Combination, the Company would repay the Working Capital Loans out of the proceeds of the Trust Account released to the Company. Otherwise, the Working Capital Loans would be repaid only out of funds held outside the Trust Account. In the event that a Business Combination does not close, the Company may use a portion of proceeds held outside the Trust Account to repay the Working Capital Loans, but no proceeds held in the Trust Account would be used to repay the Working Capital Loans. Except for the foregoing, the terms of such Working Capital Loans, if any, have not been determined and no written agreements exist with respect to such loans. The Working Capital Loans would either be repaid upon consummation of a Business Combination, without interest, or, at the lender’s discretion, up to $1,500,000 of such Working Capital Loans may be convertible into warrants of the post-Business Combination entity at a price of $1.50 per warrant. The warrants would be identical to the Private Placement Warrants.

NOTE 6. COMMITMENTS

Registration and Stockholder Rights Agreement

Pursuant to a registration and stockholder rights agreement entered into on September 29, 2020, the holders of the Founder Shares, Private Placement Warrants and warrants that may be issued upon conversion of Working Capital Loans (and any Class A common stock issuable upon the exercise of the Private Placement Warrants and warrants issued upon conversion of the Working Capital Loans) are entitled to registration rights. The holders of these securities are entitled to make up to three demands, excluding short form demands, that the Company register such securities. In addition, the holders have certain “piggy-back” registration rights with respect to registration statements filed subsequent to consummation of a Business Combination. However, the registration rights agreement provides that the Company will not permit any registration statement filed under the Securities Act to become effective until termination of the applicable lockup period. The Company will bear the expenses incurred in connection with the filing of any such registration statements.

Underwriting Agreement

The underwriters are entitled to a deferred fee of $0.35 per Unit, or $16,100,000 in the aggregate. Subject to the terms of the underwriting agreement, (i) the deferred fee will be placed in the Trust Account and released to the underwriters only upon the completion of a Business Combination and (ii) the deferred fee will be waived by the underwriters in the event that the Company does not complete a Business Combination. The deferred fee was paid upon completion of the Business Combination described in Note 1.

Merger Agreement

On May 4, 2021 (the “Closing Date”), the registrant consummated the previously announced business combination pursuant to that certain Agreement and Plan of Merger, dated December 8, 2020, by and among

THE BEAUTY HEALTH COMPANY

(FORMERLY KNOWN AS VESPER HEALTHCARE ACQUISITION CORP.)

NOTES TO CONDENSED FINANCIAL STATEMENTS

MARCH 31, 2021

(Unaudited)

Vesper Healthcare Acquisition Corp. (“Vesper Healthcare”), Hydrate Merger Sub I, Inc. (“Merger Sub I”), Hydrate Merger Sub II, LLC (“Merger Sub II”), LCP Edge Intermediate, Inc., the indirect parent of Edge Systems LLC d/b/a The HydraFacial Company (“HydraFacial”), and LCP Edge Holdco, LLC (“LCP,” and, in its capacity as the stockholders’ representative, the “Stockholders’ Representative”) (the “Merger Agreement”), which provided for: (a) the merger of Merger Sub I with and into HydraFacial, with HydraFacial continuing as the surviving corporation (the “First Merger”), and (b) immediately following the First Merger and as part of the same overall transaction as the First Merger, the merger of HydraFacial with and into Merger Sub II, with Merger Sub II continuing as the surviving entity (the “Second Merger” and, together with the First Merger, the “Mergers” and, together with the other transactions contemplated by the Merger Agreement, the “Business Combination”). As a result of the First Merger, the registrant owns 100% of the outstanding common stock of HydraFacial and each share of common stock and preferred stock of HydraFacial has been cancelled and converted into the right to receive a portion of the consideration payable in connection with the Mergers. As a result of the Second Merger, the registrant owns 100% of the outstanding interests in Merger Sub II. In connection with the closing of the Business Combination (the “Closing”), the registrant owns, directly or indirectly, 100% of the stock of HydraFacial and its subsidiaries and the stockholders of HydraFacial as of immediately prior to the effective time of the First Merger (the “HydraFacial Stockholders”) hold a portion of the Class A Common Stock, par value $0.0001 per share, of the registrant (the “Class A Stock”).

Pursuant to the terms of the Merger Agreement and customary adjustments set forth therein, the aggregate merger consideration paid to the HydraFacial Stockholders inoccurred on May 4, 2021. In connection with the Business Combination was approximately $975,000,000 less HydraFacial’s net indebtedness as of the Closing Date, and subject to further adjustments for transaction expenses, and net working capital relative to a target. The merger consideration included both cash consideration and consideration in the form of newly issued Class A Stock. The aggregate cash consideration paid to the HydraFacial Stockholders at the Closing was approximately $368 million, consisting of the Company’s cash and cash equivalents as of the Closing (including proceeds of $350 million from the Company’s private placement of an aggregate of 35,000,000 shares of Class A Stock (the “Private Placement”) with a limited number of accredited investors (as defined by Rule 501 of Regulation D) without any form of general solicitation or general advertising pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”), and approximately $433 million of cash available to the Company from the trust account that held the proceeds from the Company’s initial public offering (the “Trust Account”) after giving effect to income and franchise taxes payable in respect of interest income earned in the Trust Account and redemptions that were elected by the Company’s public stockholders, minus approximately $224 million used to repay HydraFacial’s outstanding indebtedness at the Closing, minus approximately $94 million of transaction expenses of HydraFacial and the Company, minus $100 million. The remainder of the consideration paid to the HydraFacial Stockholders consisted of 35,501,743 newly issued shares of Class A Stock (the “Stock Consideration”).

The foregoing consideration paid to the HydraFacial Stockholders may be further increased by up to $75.0 million payable as earn-out shares of Class A Stock upon the completion of certain acquisitions within one year of Closing pursuant to the terms of the Merger Agreement.

All outstanding shares of Class B Stock were automatically converted into shares of Class A Stock on a one-for-one basis at the Closing and will continue to be subject to the transfer restrictions applicable to such shares of Class B Stock.

In connection with the Merger Agreement, certainCombination:


Certain accredited investors (the “PIPE Investors”) entered into subscription agreements (the “PIPE Subscription Agreements”) pursuant to which the PIPE Investors agreed to

THE BEAUTY HEALTH COMPANY

(FORMERLY KNOWN AS VESPER HEALTHCARE ACQUISITION CORP.)

NOTES TO CONDENSED FINANCIAL STATEMENTS

MARCH 31, 2021

(Unaudited)

purchase 35,000,000 shares (the “PIPE Shares”) of The Beauty Health Companythe Company’s Class A Common Stock at a purchase price per share of $10.00 and an aggregate purchase price of $350,000,000 (the “PIPE Investment”). The PIPE Investment was consummated substantially concurrently with the Closing.


Prior to the Business Combination, the Company issued an aggregate of 11,500,000 shares of Class B common stock (the “Founder Shares”) to the Sponsor for an aggregate purchase price of $25,000 in cash. All outstanding Founder Shares were automatically converted into shares of Class A Common Stock on a 1-for-one basis at the Closing and will continue to be subject to the transfer restrictions applicable to such shares of Founder Shares.

In connection with the Closing, holders of 2,672,690 shares of Class A Common Stock exercised their rights to redeem those shares for cash at an approximate price of $10.00 per share, for an aggregate of approximately $26,737,737, which was paid to such holders at Closing.


Immediately after giving effect to the Merger and the PIPE Investment, there were 125,329,053 shares of The Beauty Health Company Class A Common Stock outstanding.

The aggregate gross cash consideration received by the Company in connection with the Business Combination was $783 million, which consisted of proceeds of $350 million from the PIPE Investment, plus approximately $433 million of cash from the Company’s trust account that held the proceeds from the Company’s initial public offering (the “Trust Account”). The aggregate cash consideration received was reduced by $368 million of cash payments made to the former shareholders of HydraFacial, and reduced by $57 million for the payment of direct transaction costs incurred by HydraFacial and the Company which were reflected as a reduction of proceeds. The Company used the net proceeds to repay all of its outstanding indebtedness at the Closing. The remainder of the consideration paid to the HydraFacial Stockholders consisted of 35,501,743 newly issued shares of Class A Common Stock (the “Stock Consideration”). The net cash received from the Business Combination is subject to a net capital working adjustment.

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The following table reconciles the elements of the Business Combination to the Condensed Consolidated Statements of Cash Flows and the Condensed Consolidated Statements of Stockholders’ Equity (Deficit) for the six months ended June 30, 2021:
(in thousands)Recapitalization
Cash in, trust net of redemptions$433,382 
Cash - PIPE350,000 
Less: Cash paid out to Former Parent(367,870)
Less: transaction costs and advisory fees(56,976)
Net Cash Received from Business Combination$358,536 

The number of shares of common stock issued immediately following the consummation of the Business Combination:
Number of Shares
Class A common stock outstanding prior to Business Combination46,000,000 
Less: Redemption of Vesper Class A common stock(2,672,690)
Class A common stock of Vesper43,327,310 
Vesper Founder shares11,500,000 
PIPE Shares35,000,000 
Business Combination and PIPE shares89,827,310 
Legacy HydraFacial shares (1)
35,501,743 
Total Shares of Class A Common Stock Immediately after Business Combination125,329,053 
_______________
(1)The number of Legacy HydraFacial shares was determined from the 54,358 shares of HydraFacial common stock outstanding immediately prior to the closing of the Business Combination multiplied by the Exchange Ratio of 653.109.


Acquisition of High Tech Laser

On June 4, 2021 the Company purchased substantially all assets of High Tech Laser, Australia Pty Ltd (“HTL”), a distributor in Australia. The fair value of the consideration transferred to the selling members was $4.9 million in cash consideration and $1.6 million of equity consideration consisting of 110,726 shares of the Company’s Class A Common Stock.

The Company incurred certain costs related to this transaction that were not material.

The Company applied the acquisition method of accounting and established a new basis of accounting on the date of the acquisition. The assets acquired by the Company are accordingly measured at their estimated fair values.

The following table summarizes the consideration paid and estimated preliminary fair values assigned to the assets acquired and liabilities assumed at the date of acquisition:
(in thousands)
Consideration Paid:
Cash, net of cash acquired$4,920 
Class A Common Stock issued1,557 
$6,477 
Identifiable assets acquired and liabilities assumed
Accounts receivable$1,110 
Non-compete agreement100 
Customer relationships2,696 
Inventory and other assets354 
Accounts payable(1,072)
Deferred tax liabilities, net(675)
Accrued and other liabilities(802)
Total identifiable net assets1,711 
Goodwill$4,766 
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The primary purpose of the acquisition was to expand the Company’s operations in the Australia market. The goodwill arising from the acquisition consists largely of the business reputation of the acquired company in the marketplace and its assembled workforce. The goodwill is not deductible for income tax purposes.
Intangible assets consist of customer relationships with a weighted average amortization period of 5 years. The valuation of the acquired intangible asset was estimated by performing projections of discounted cash flows, whereby revenues and costs associated with each intangible asset are forecasted to derive expected cash flow which is discounted to present value at discount rates commensurate with perceived risk. The valuation and projection process is inherently subjective and relies on significant unobservable inputs (Level 3 inputs). The unaudited pro forma financial information assuming these fiscal 2021 acquisitions had occurred as of the beginning of the fiscal year prior to the fiscal year of acquisition, as well as the revenue and earnings generated during the current fiscal year, were not material for disclosure purposes. The Company is currently in the process of finalizing the preliminary fair value allocation, and expects this to be completed prior to December 31, 2021.

Note 4 – Revenue Recognition

The Company has determined that each of its products is distinct and represents a separate performance obligation. The customer can benefit from each product on its own or together with other resources that are readily available to the customer. The products are separately identifiable from other promises in the contract. Control over the Company’s products generally transfers to the customer upon shipment of the products from the Company’s warehouse facility. Therefore, revenue associated with product purchases is recognized at a point in time upon shipment to the intended customer.

Disaggregated Revenue
The Company generates revenue through manufacturing and selling HydraFacial and Perk Delivery Systems (the “Delivery Systems”). In conjunction with the sale of Delivery Systems, the Company also sells its serum solutions and consumables (the “Consumables”). The Consumables are sold by the Company and are available for purchase separately from the purchase of the Delivery System.

The Company’s revenue disaggregated by major product line consists of the following for the periods indicated:
Three Months EndedSix Months Ended
(in thousands)June 30, 2021June 30, 2020June 30, 2021June 30, 2020
Net Sales
Delivery Systems$34,944 $5,975 $60,616 $20,056 
Consumables31,564 8,141 53,434 26,596 
Total net sales$66,508 $14,116 $114,050 $46,652 

See Note 16 for revenue disaggregated by geographical region.

Note 5 – Inventories
Inventories consist of the following as of the periods indicated:
(in thousands)June 30, 2021December 31, 2020
Raw materials$8,816 $9,335 
Finished goods14,946 13,867 
Total inventories$23,762 $23,202 

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Note 6 – Property and Equipment, net

Property and equipment consist of the following as of the periods indicated:
(in thousands)
Useful life
(years)
June 30, 2021December 31, 2020
Furniture and fixtures2-7$3,500$3,265 
Computers and equipment3-53,9463,502 
Autos and trucks51,129413 
Tooling51,1501,150 
Leasehold improvementsShorter of remaining lease
term or estimated useful life		4,5214,097 
Total Property and equipment14,24612,427 
Less: accumulated depreciation and amortization(5,818)(4,407)
Construction in progress1,6851,171 
Property and equipment, net$10,113$9,191

Depreciation expense was $0.7 million and $0.6 million for the three months ended June 30, 2021 and 2020, respectively. Depreciation expense was $1.4 million and $1.3 million for the six months ended June 30, 2021 and 2020, respectively. Of the total depreciation for the three months ended June 30, 2021 and 2020, $0.3 million and $0.3 million were recorded in Cost of sales and $0.4 million and $0.3 million were recorded in General and administrative expenses, respectively. For the six months ended June 30, 2021 and 2020 the total depreciation recorded in Cost of sales was $0.6 million and $0.6 million and the depreciation recorded in General and administrative were $0.8 million and $0.7 million, respectively.

Note 7 – Goodwill and Intangible Assets, net
The gross carrying amount and accumulated amortization of the Company’s intangible assets, net, as of June 30, 2021 were as follows:
(in thousands)Gross
Carrying
Value		Accumulated
Amortization		Net Carrying
Value		Estimated
Useful Life
(Years)
Trademarks$9,480 $(3,104)$6,376 15
Non-compete agreement100 (3)97 3
Customer relationships8,647 (2,687)5,960 5-10
Developed technology70,900 (40,620)30,280 8
Patents1,677 (189)1,488 3-19
Capitalized software9,978 (2,295)7,683 3-5
Total intangible assets$100,782 $(48,898)$51,884 
The gross carrying amount and accumulated amortization of the Company’s intangible assets, net, as of December 31, 2020 were as follows:
(in thousands)Gross
Carrying
Value		Accumulated
Amortization		Net Carrying
Value		Estimated
Useful Life
(Years)
Trademarks$9,480 $(2,765)$6,71515
Customer relationships6,003 (2,263)3,740 5-10
Developed technology70,900 (36,189)34,711 8
Patents1,423 (158)1,265 4-19
Capitalized software6,172 (1,668)4,504 3-5
Total intangible assets$93,978 $(43,043)$50,935 

Amortization expense for the three months ended June 30, 2021 and 2020, was $3.0 million and $3.2 million, respectively. Amortization expense for the six months ended June 30, 2021 and 2020, was $5.9 million and $6.4 million, respectively. Of the total amortization expense for three months ended June 30, 2021 and 2020, $2.3 million and $2.7 million, respectively, were recorded in Cost of sales and $0.7 million and $0.5 million, respectively, were recorded in General and administrative expenses
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in the Consolidated Statements of Comprehensive Loss. For the six months ended June 30, 2021 and 2020, $4.5 million and $5.4 million, respectively, were recorded in Cost of sales and $1.4 million and $1.0 million, respectively, were recorded in General and administrative expenses in the Consolidated Statements of Comprehensive Loss.
The changes in the carrying value of goodwill are as follows:
Six Months Ended June 30,
(in thousands)20212020
Beginning balance$98,531 $98,520 
Acquisition of HTL4,766 0 
Foreign currency translation impact(197)(27)
Ending balance$103,100 $98,493 

Note 8 – Long-term Debt

In connection with the Closing of the registrant changedBusiness Combination, all of HydraFacial’s existing debt under its namecredit facilities were repaid and its credit facilities were extinguished. As of June 30, 2021, there is no long-term debt outstanding. The related write-off of the deferred financing costs and prepayment penalties totaled $4.3 million and are included in the Other expense (income), net on the Condensed Consolidated Statements of Comprehensive Loss. Deferred financing costs expense for the three and six months ended June 30, 2021 amounted to $0.1 million and $0.5 million, respectively. Deferred financing costs expense for the three and six months ended June 30, 2020 amounted to $0.4 million and $0.7 million, respectively, and is included in Interest expense, net on the Condensed Consolidated Statements of Comprehensive Loss.


Note 9 – Income Taxes

The income tax benefit for the three months and six months ended June 30, 2021 is $1.9 million and $2.2 million, respectively, and the income tax benefit for the three and six months ended June 30, 2020 is $3.1 million and $5.7 million, respectively. The effective tax rate for the three and six months ended June 30, 2021 is 1.32% and 1.50%, respectively, which is lower than the federal statutory rate of 21.0% primarily due to the increase in valuation allowance and non-deductible expenses related to stock-based compensation, transaction costs and meals and entertainment.

The effective tax rate for the three and six months ended June 30, 2020 is 22.7% and 22.5%, respectively, which is greater than the federal statutory rate of 21.0% primarily due to state taxes based on apportioned income, research and development credits, and the net operating loss carryback applied to the 2017 tax year which benefited the tax rate. The increased benefit was partially offset by decreases in the rate for foreign taxes based on local country statutory rates, increase in valuation allowance and non-deductible expenses related to stock-based compensation and meals and entertainment.

The Company has established a valuation allowance against a portion of its remaining deferred tax assets because it is more likely than not that certain deferred tax assets will not be realized. In determining whether deferred tax assets are realizable, the Company considered numerous factors including historical profitability, the amount of future taxable income and the existence of taxable temporary differences that can be used to realize deferred tax assets.

Additionally, the Company follows an accounting standard addressing the accounting for uncertainty in income taxes that prescribes rules for recognition, measurement and classification in the financial statements of tax positions taken or expected to be taken in a tax return. The Company has gross unrecognized tax benefits of $0.1 million for the six months ended June 30, 2021. The Company did 0t have any gross unrecognized tax benefits for the three months ended June 30, 2020.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law. The CARES Act provides numerous tax provisions and other stimulus measures, including temporary changes regarding the prior and future utilization of net operating losses, temporary changes to the prior and future limitations on interest deductions, temporary suspension of certain payment requirements for the employer portion of Social Security taxes, the creation of certain refundable employee retention credits, and technical corrections from “Vesper Healthcare Acquisition Corp.”prior tax legislation for tax depreciation of certain qualified improvement property (“QIP”).
The Company believes it will be able to “Theobtain federal tax refunds by carrying back its net operating loss for the year ended December 31, 2020. The net operating loss will be increased due to the changes in QIP and favorable interest expense limitation changes. The anticipated impact to the ETR is an income tax benefit of approximately $0.2 million for the year ended
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December 31, 2020. The Company estimates the net operating loss carryback will result in a federal refund of approximately $4.5 million. Additionally, the favorable interest expense limitations will reduce its 2019 federal tax payable by approximately $1.2 million.

On December 27, 2020, the United States enacted the Consolidated Appropriations Act which extended many of the benefits of the CARES Act that were scheduled to expire. The Company does not expect a material impact of Consolidated Appropriations Act on its Condensed Consolidated Financial Statements and related disclosures.

On March 11, 2021 the United States enacted the American Rescue Plan Act of 2021 (“American Rescue Plan”). The American Rescue Plan includes various income and payroll tax measures. The Company does not expect a material impact of the American Rescue Plan on its Condensed Consolidated Financial Statements and related disclosures.

In June 29, 2020, the State of California passed Assembly Bill 85 which suspends the California net operating loss deduction for the 2020-2022 tax years and the R&D credit usage for the same period (for credit usages in excess of $5.0 million). These suspensions were considered in preparation of the year ended December 31, 2020 and three months ended June 30, 2021 of its Condensed Consolidated Financial Statements.

Note 10 – Equity-Based Compensation
Equity Incentive Award Plans
In December 2016, HydraFacial established its 2016 Plan, the purpose of which was to provide incentives to selected officers and employees, to secure and retain their services, and to strengthen their commitment to HydraFacial. The Plan provided for grants of time vesting (“Time Vesting Options”) and performance-based equity awards (“Performance Vesting Options”) to Company employees (together the “Options”). The vesting of these Options varies based on whether they are Time Vesting Options or Performance Vesting Options as described in the grant agreements.

During May 2020, HydraFacial canceled 1,295 of the time vested stock options and 4,440 of the performance based stock options outstanding under the 2016 Plan and replaced these awards with 1,295 of new time vested incentive units and 4,440 of performance based incentive units for certain members of management. All of the Time Vesting Units and Performance Vesting Units immediately vested upon the consummation of the Business Combination. As a result of the accelerated vesting on options and performance units from the consummation of the Business Combination, the Company recognized $1.4 million in stock compensation expense.
At the Company’s special meeting of stockholders held on April 29, 2021, the stockholders approved The Beauty Health Company”Company 2021 Incentive Award Plan (the “2021 Plan”) and The Beauty Health Company 2021 Employee Stock Purchase Plan (the “ESPP”), which become effective upon the consummation of the Business Combination. The aggregate number of shares of the Company’s Class A Common Stock that may be issued pursuant to awards granted under the 2021 Plan will be the sum of (i) 14,839,640 and (ii) an annual increase on January 1 of each calendar year (commencing with January 1, 2022 and ending on and including January 1, 2031) equal to a number of shares equal to 4% of the aggregate shares outstanding as of December 31 of the immediately preceding calendar year (or such lesser number of shares as is determined by the Company’s Board of Directors), subject to adjustment by the plan administrator in the event of certain changes in our corporate structure, as described below. The maximum number of shares that may be granted with respect to incentive stock options (“ISOs”) under the 2021 Plan is equal to 7,500,000. The aggregate number of shares of the Company’s Class A Common Stock that may be issued pursuant to rights granted under the ESPP will be 2,000,000. In addition, on the first day of each calendar year beginning on January 1, 2022 and ending on (and including) January 1, 2031, the number of shares available for issuance under the ESPP will be increased by a number of shares equal to the lesser of (1) one percent (1%) of the shares outstanding (on an as-converted basis) on the final day of the immediately preceding calendar year, and (2) such smaller number of shares as determined by the Company’s Board of Directors.
Stock Options
Following the closing of the Business Combination the Company granted stock options to certain employees. During the three month and six month period ended June 30, 2021, the Company granted 7,793,600 options with a weighted-average exercise price of $13.41. There were no exercises or forfeitures of stock options during the three and six month period ended June 30, 2021.

Performance-based restricted stock units (“PSUs”)
PSUs are granted to certain executives, with respect to shares reserved under the 2021 Plan. The PSUs are subject to both a service condition and market condition. Following the end of the four-year service period for the PSUs, the recipients of PSUs who remain employed will vest in, and be issued a number of shares of the Company's Class A Common Stock, ranging from
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0% to 100% of the number of PSUs granted, to be determined based upon the performance of the Company's Class A Common Stock over a three-year period. During the three and six month period ended June 30, 2021, the Company granted 210,000 PSUs with a weighted-average grant date fair value of $6.10 per unit. There were no exercises and forfeitures during the three and six month period ended June 30, 2021. As of June 30, 2021, all 210,000 units were outstanding.

The fair value of PSU awards is recognized on a straight-line basis over their measurement period as compensation expense, and is not subject to reversal even if the market condition is not achieved. The fair value of PSUs was determined using a Monte Carlo simulation with the following assumptions:

Input
Risk-free interest rate0.56 %
Expected volatility of the Company’s Class A Common Stock55.0 %

Stock-based Compensation Expense
Compensation expense attributable to net stock-based compensation was $3.5 million for both the three and six months ended June 30, 2021, respectively.

Note 11 – Commitments and Contingencies

From time to time the Company is involved in claims, legal actions and governmental proceedings that arise from its business operations. As of June 30, 2021 and December 31, 2020, the Company was not party to any legal proceedings or threatened legal proceedings, the adverse outcome of which, individually or in the aggregate, it believes would have a material adverse effect on its business, financial condition or results of operations.

As a result of the consummation of the Business Combination, the former stockholders of HydraFacial were, as of June 30, 2021, entitled to receive earn-out consideration consisting of 7.5 million shares of Class A Common Stock from the Company (the “Earn-out Shares”) as a result of the Company’s completion in June and July 2021 of the acquisition of certain target businesses identified by HydraFacial as contemplated by the Merger Agreement. Subsequent to June 30, 2021, the 7.5 million Earn-out Shares were issued on July 15, 2021. See Note 15 - Fair Value Measurements.

Note 12 – Concentrations

As of June 30, 2021, the Company had no customers that accounted for 10% or more of the Accounts receivable balance.

As of December 31, 2020, the Company had one customer that accounted for 10% or more of the Accounts receivable balance. This customer accounted for 10.5%, or $1.9 million, of the Accounts receivable balance.

No single customer accounted for 10% or more of consolidated Net sales during the three and six months ended June 30, 2021 and December 31, 2020.

Note 13 – Related-Party Transactions

Registration Rights Agreement
In connection with the consummation of the Business Combination, on May 4, 2021, the Company entered into that certain Amended and Restated Registration Rights Agreement (the “Registration Rights Agreement”) with BLS Investor Group LLC (the “Sponsor”) and the HydraFacial Stockholders.

Pursuant to the terms of the Registration Rights Agreement, (i) any outstanding share of Class A Common Stock or any other equity security (including the Private Placement Warrants and including shares of Class A Common Stock issued or issuable upon the exercise of any other equity security) of the Company held by the Sponsor or the HydraFacial Stockholders (together, the “Restricted Stockholders”) as of the date of the Registration Rights Agreement or thereafter acquired by a Restricted Stockholder (including the shares of Class A Common Stock issued upon conversion of the 11,500,000 Founder Shares that were owned by the Sponsor and converted to shares of Class A Common Stock prior in connection with the Business Combination and upon exercise of any Private Placement Warrants) and shares of Class A Common Stock issued as Earn-out Shares to the HydraFacial Stockholders and (ii) any other equity security of the Company issued or issuable with
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respect to any such share of Common Stock by way of a stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization or otherwise will be entitled to registration rights.

The Registration Rights Agreement provides that the Company will, within 60 days after the consummation of the Business Combination, file with the SEC a shelf registration statement registering the resale of the shares of Common Stock held by the Restricted Stockholders and will use its reasonable best efforts to have such registration statement declared effective as soon as practicable after the filing thereof, but in no event later than 60 days following the filing deadline. The Company filed such registration statement on July 19, 2021 and it was declared effective by the Securities and Exchange Commission on July 26, 2021. The HydraFacial Stockholders are entitled to make up to an aggregate of two demands for registration, excluding short form demands, that the Company register shares of Common Stock held by these parties. In addition, the Restricted Stockholders have certain “piggy-back” registration rights. The Company will bear the expenses incurred in connection with the filing of any registration statements filed pursuant to the terms of the Registration Rights Agreement. The Company and the Restricted Stockholders agree in the Registration Rights Agreement to provide customary indemnification in connection with any offerings of Common Stock effected pursuant to the terms of the Registration Rights Agreement.

Pursuant to the Registration Rights Agreement, the Sponsor agreed to restrictions on the transfer of their securities issued in the Company’s IPO, which (i) in the case of the Founder Shares is one year after the completion of the Business Combination unless (A) the closing price of the Common Stock equals or exceeds $12.00 per share for 20 days out of any 30-trading-day period commencing at least 150 days following the Closing or (B) the Company completes a liquidation, merger, capital stock exchange, reorganization or other similar transaction that results in all of the Company’s stockholders having the right to exchange their shares of Common Stock for cash, securities or other property, and (ii) in the case of the Private Placement Warrants and the respective Class A Common Stock underlying the Private Placement Warrants is 30 days after the completion of the Business Combination. The Sponsor and its permitted transferees will also be required, subject to the terms and conditions in the Registration Rights Agreement, not to transfer their Private Placement Warrants (as defined in the Registration Rights Agreement) or shares of Common Stock issuable upon the exercise thereof for 30 days following the Closing.

Lock-Up Agreement
In connection with the consummation of the Business Combination, on May 4, 2021, the Company, the Sponsor and the HydraFacial Stockholders entered into a Lock-Up Agreement, pursuant to which the HydraFacial Stockholders agreed, subject to certain exceptions, not to sell, transfer to another or otherwise dispose of, in whole or in part, the Common Stock held by the HydraFacial Stockholders during the period commencing from the closing of the Business Combination and through the earlier of (i) the 180-day anniversary of the date of the closing of the Business Combination and (ii) the date after the closing of the Business Combination on which the Company consummates certain transactions involving a change of control of the Company

Investor Rights Agreement
In connection with the consummation of the Business Combination, on May 4, 2021, the Company and LCP Edge Holdco, LLC (“LCP”) entered into that certain Investor Rights Agreement (the “Investor Rights Agreement”).

NOTE 7. STOCKHOLDER’S EQUITY

Pursuant to the Investor Rights Agreement, LCP will have the right to designate a number of directors for appointment or election to the Company’s board of directors as follows: (i) one director for so long as LCP holds at least 10% of the outstanding Class A Common Stock, (ii) two directors for so long as LCP holds at least 15% of the outstanding Class A Common Stock, and (iii) three directors for so long as LCP holds at least 40% of the outstanding Class A Common Stock. Pursuant to the Investor Rights Agreement, for so long as LCP holds at least 10% of the outstanding Class A Common Stock, LCP will be entitled to have at least one of its designees represented on the compensation committee and nominating committee and corporate governance committee of the Company’s board of directors.


Amended and Restated Management Services Agreement
HydraFacial entered into a Management Services Agreement, dated December 1, 2016 with Linden Capital Partners III LP (“Linden Capital Partners III”) and DW Management Services, L.L.C. (“DW Management Services”) pursuant to which the parties receive quarterly monitoring fees of the greater of (a) $125,000 and (b) 1.25% of Last Twelve Months EBITDA multiplied by the quotient of (x) the aggregate capital invested by the DWHP Investors into LCP and/or its subsidiaries as of such date, divided by (y) the sum of (i) the aggregate capital invested by the DWHP Investors into LCP and/or its subsidiaries, plus (ii) the aggregate capital invested by the Linden Capital Partners III into LCP and/or its subsidiaries as of the date of payment. In addition, the management services agreement provides for other fees in relation to services that may be provided in connection with equity and/or debt financing, acquisition of any other business, company, product line or enterprise, or divestiture of any division, business, and product or material assets. The fees vary between 1% and 2% of the related transaction amount. Linden Capital Partners III also received a transaction fee upon the consummation of the Business Combination. In connection with the consummation of the Business Combination, HydraFacial and Linden Capital Partners III
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amended the Management Services Agreement such that Linden Capital Partners III will continue to provide advisory services to HydraFacial related to mergers and acquisitions. As consideration for such services, HydraFacial will pay a fee, equal to 1% of enterprise value of the target acquired, to Linden Capital Partners III upon the consummation of any such transaction. The Company has also agreed to reimburse Linden Capital Partners III for certain expenses in connection with such advisory services.

In connection with the consummation of the Business Combination, on May 4, 2021, the Company, its subsidiary, Edge Systems LLC, and the Linden Manager (as defined below) entered into an Amended and Restated Management Services Agreement pursuant to which the Linden Manager may continue to provide advisory services at the request of the Company related to mergers and acquisitions. As consideration for such services, the Company will pay a fee, equal to 1% of enterprise value of the target acquired, to the Linden Manager upon the consummation of any such transaction. The Company has also agreed to reimburse Linden Manager for certain expenses in connection with such advisory services.

HydraFacial recorded approximately $0.2 million and $1.0 million of charges related to management services fees for the six months ended June 30, 2021 and 2020, respectively. These amounts are included in General and administrative expenses on the Consolidated Statements of Comprehensive Loss. There were immaterial amounts due to these related parties at June 30, 2021 and December 31, 2020. In relation to the consummation of the Business Combination, $21.0 million in transaction fees was paid to the Former Parent. These amounts are included in General and administrative expenses on the Condensed Consolidated Statements of Comprehensive Loss.

Former Related Party Note Receivable
HydraFacial issued shares to a key member of management in exchange for a note receivable with a $0.6 million face value. Interest on the note accrues at a rate of 8% and matures in December 2022. Interest receivable is presented as a component of other assets on the Condensed Consolidated Balance Sheets. As there was no intent for the issuer to pay the note within a reasonably short period of time, HydraFacial has presented the note as a deduction of stockholders’ deficit. During the three months ended June 30, 2021, in connection with the consummation of the Business Combination, the outstanding note receivable amount was settled.

Former Long-term Debt Due to Related Parties
On April 10, 2020, the Company’s existing Credit Agreement with a bank that is also a related party was amended to include a “PIK” interest component of 2% that accrues on the outstanding balances of the Term Loan and Revolver. Additionally, the Company is required to pay an early prepayment fee of 2.00% of the amount prepaid or repaid on the Term Loan prior to April 10, 2021, and 1.00% if prepaid between April 11, 2021 and April 10, 2022. During the three months ended June 30, 2021, in connection with the consummation of the Business Combination, all outstanding debt was paid. As of June 30, 2021, there was no amount due to related parties in connection with the Term Loan and Revolver.
On April 10, 2020, HydraFacial also entered into a second credit facility with a related party to provide for borrowings of $30.0 million under the Term A Loan. During the three months ended June 30, 2021, in connection with the consummation of the Business Combination, all outstanding debt was paid. As of June 30, 2021, there was no amount due to a related parties in connection with the Term A Loan and related PIK Interest.
Related Party Lease
HydraFacial leases its office in Signal Hill, California, from an entity owned by former minority stockholders of HydraFacial who are no longer active employees. Lease expense under this lease was $103 thousand and $315 thousand for the six months ended June 30, 2021 and 2020, respectively.

Sales to Related Parties
HydraFacial sells to a customer that is owned directly or indirectly by a key member of management. Sales for this related party and the outstanding accounts receivable balance are as follows for the periods indicated:
Three Months EndedSix Months Ended
(in thousands)June 30, 2021June 30, 2020June 30, 2021June 30, 2020
Sales to related party$147 $7 $247 $103 
(in thousands)June 30, 2021December 31, 2020
Accounts receivable due from related party$374 $250 

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Note 14 - Stockholders’ Deficit

Common Stock
The Company is authorized to issue 320,000,000 shares of Class A Common Stock with par value of $0.0001 per share. Holders of Class A Common Stock are entitled to one vote for each share. As of June 30, 2021 and December 31, 2020, there were 125,439,779 and 35,501,743, respectively, of Class A Common Stock issued and outstanding. The Class A Common Stock is entitled to 1 vote per share and all shares are outstanding. The Company has not declared or paid any dividends with respect to its Common Stock.
In connection with the Business Combination May 4, 2021, the Company issued 35,000,000 shares of Class A Common Stock to certain qualified institutional buyers and accredited investors that agreed to purchase such shares in connection with the Business Combination for aggregate consideration of $350 million. The Company also issued 35,501,743 shares of Class A Common Stock as partial compensation to the HydraFacial Stockholders for the Business Combination.

Preferred Stock—

The Company is authorized to issue 1,000,000 shares of preferred stock with a par value of $0.0001 per share with such designations, voting and other rights and preferences as may be determined from time to time by the Company’s board of directors. At March 31,June 30, 2021 and December 31, 2020, there were no0 shares of preferred stock issued or outstanding.

Class A Common Stock—The Company is authorized to issue 200,000,000 shares of Class A common stock with a par value of $0.0001 per share. Holders of Class A common stock are entitled to one vote for each share. At March 31, 2021 and December 31, 2020, there were no shares of Class A common stock issued or outstanding, excluding 46,000,000 shares of Class A common stock subject to possible redemption.

Class B Common Stock—The Company is authorized to issue 20,000,000 shares of Class B common stock with a par value of $0.0001 per share. Holders of Class B common stock are entitled to one vote for each share. At March 31, 2021 and December 31, 2020, there were 11,500,000 shares of Class B common stock issued and outstanding.

Holders of Class B common stock will have the right to elect all of the Company’s directors prior to a Business Combination. Holders of Class A common stock and Class B common stock will vote together as a single class on all other matters submitted to a vote of stockholders except as required by law.

The shares of Class B common stock will automatically convert into shares of Class A common stock upon the consummation of a Business Combination at a ratio such that the number of shares of Class A common stock issuable upon conversion of all Founder Shares will equal, in the aggregate, on an as-converted basis, 20% of the sum of (i) the total number of shares of common stock issued and outstanding upon completion of the Initial Public Offering, plus (ii) the sum of (a) all shares of common stock issued or deemed issued or issuable upon conversion or exercise of any equity-linked securities or deemed issued by the Company in connection with or in relation to the completion of a Business Combination, excluding (1) any shares of Class A common stock or equity-linked securities exercisable for or convertible into shares of Class A common stock issued, or to be issued, to any seller in a Business Combination and any (2) Private Placement Warrants issued to the Sponsor or any of its affiliates upon conversion of Working Capital Loans minus (b) the number of Public Shares redeemed by Public Stockholders in connection with a Business Combination. In no event will the shares of our Class B common stock convert into shares of our Class A common stock at a rate of less than one to one.

THE BEAUTY HEALTH COMPANY

(FORMERLY KNOWN AS VESPER HEALTHCARE ACQUISITION CORP.)

NOTES TO CONDENSED FINANCIAL STATEMENTS

MARCH 31, 2021

(Unaudited)

NOTE 8. WARRANT LIABILITY

Warrants—Public Warrants may only be exercised for a whole number of shares. No fractional shares will be issued upon exercise of the Public Warrants. The Public Warrants will become exercisable on the later of (a) 30 days after the completion of a Business Combination or (b) one year from the closing of the Initial Public Offering. The Public Warrants will expire five years after the completion of a Business Combination or earlier upon redemption or liquidation.

The Company will not be obligated to deliver any Class A common stock pursuant to the exercise of a warrant and will have no obligation to settle such warrant exercise unless a registration statement under the Securities Act with respect to the Class A common stock underlying the warrants is then effective and a prospectus relating thereto is current, subject to the Company satisfying its obligations with respect to registration, or a valid exemption from registration is available. No warrant will be exercisable and the Company will not be obligated to issue a share of Class A common stock upon exercise of a warrant unless the share of Class A common stock issuable upon such warrant exercise has been registered, qualified or deemed to be exempt under the securities laws of the state of residence of the registered holder of the warrants.

The Company has agreed that as soon as practicable, but in no event later than twenty business days after the closing of a Business Combination, the Company will use its commercially reasonable efforts to file with the SEC a registration statement for the registration, under the Securities Act, of the Class A common stock issuable upon exercise of the warrants. The Company will use its commercially reasonable efforts to cause the same to become effective and to maintain the effectiveness of such registration statement, and a current prospectus relating thereto, until the expiration or redemption of the warrants in accordance with the provisions of the warrant agreement. If a registration statement covering the issuance of the Class A common stock issuable upon exercise of the warrants is not effective by the 60th business day after the closing of a Business Combination, warrant holders may, until such time as there is an effective registration statement and during any period when the Company will have failed to maintain an effective registration statement, exercise warrants on a “cashless basis” in accordance with Section 3(a)(9) of the Securities Act or another exemption. In addition, if the Class A common stock is at the time of any exercise of a warrant not listed on a national securities exchange such that they satisfy the definition of a “covered security” under Section 18(b)(1) of the Securities Act, the Company may, at its option, require holders of Public Warrants who exercise their warrants to do so on a “cashless basis” in accordance with Section 3(a)(9) of the Securities Act and, in the event the Company elects to do so, it will not be required to file or maintain in effect a registration statement, but it will use its best efforts to register or qualify the shares under applicable blue sky laws to the extent an exemption is not available.

Redemption of warrants when the price per share of Class A common stock equals or exceeds $18.00. Once the Public Warrants become exercisable, the Company may redeem the Public Warrants (except with respect to the Private Placement Warrants):


in whole and not in part;

at a price of $0.01 per warrant;

upon not less than 30 days’ prior written notice of redemption to each warrant holder; and

if, and only if, the reported last reported sale price of the Class A common stock for any 20 trading days within a 30-trading day period ending three business days before the Company sends the notice of redemption to the warrant holders (the “Reference Value”) equals or exceeds $18.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like).

THE BEAUTY HEALTH COMPANY

(FORMERLY KNOWN AS VESPER HEALTHCARE ACQUISITION CORP.)

NOTES TO CONDENSED FINANCIAL STATEMENTS

MARCH 31, 2021

(Unaudited)

If and when the warrants become redeemable by the Company, the Company may exercise its redemption right even if the Company are unable to register or qualify the underlying securities for sale under all applicable state securities laws. However, in this case, the Company will not redeem the warrants unless an effective registration statement under the Securities Act covering the Class A common stock issuable upon exercise of the warrants is effective and a current prospectus relating to those shares of our Class A common stock is available throughout the 30-day redemption period.

Redemption of warrants when the price per share of Class A common stock equals or exceeds $10.00. Once the Public Warrants become exercisable, the Company may redeem the Public Warrants:

in whole and not in part;

at $0.10 per warrant upon a minimum of 30 days’ prior written notice of redemption; provided that holders will be able to exercise their warrants on a cashless basis prior to redemption and receive that number of shares based on the redemption date and the fair market value of the Class A common stock;

if, and only if, the ReferenceNote 15 - Fair Value equals or exceeds $10.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like); and

Measurements

if the Reference Value is less than $18.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like), the Private Placement Warrants must also be concurrently called for redemption on the same terms as the outstanding Public Warrants, as described above.


If the Company calls the Public Warrants for redemption, management will have the option to require all holders that wish to exercise the Public Warrants to do so on a “cashless basis,” as described in the warrant agreement. The exercise price and number of shares of Class A common stock issuable upon exercise of the warrants may be adjusted in certain circumstances including in the event of a stock dividend, or recapitalization, reorganization, merger or consolidation. However, except as described below, the warrants will not be adjusted for issuance of Class A common stock at a price below its exercise price. Additionally, in no event will the Company be required to net cash settle the warrants. If the Company is unable to complete a Business Combination within the Combination Period and the Company liquidates the funds held in the Trust Account, holders of warrants will not receive any of such funds with respect to their warrants, nor will they receive any distribution from the Company’s assets held outside of the Trust Account with the respect to such warrants. Accordingly, the warrants may expire worthless.

In addition, if (x) the Company issues additional shares of Class A common stock or equity-linked securities for capital raising purposes in connection with the closing of a Business Combination at an issue price or effective issue price of less than $9.20 per Class A common (with such issue price or effective issue price to be determined in good faith by the Company’s board of directors and, in the case of any such issuance to the Sponsor or its affiliates, without taking into account any Founder Shares held by the Sponsor or such affiliates, as applicable, prior to such issuance) (the “Newly Issued Price”), (y) the aggregate gross proceeds from such issuances represent more than 60% of the total equity proceeds, and interest thereon, available for the funding of a Business Combination on the date of the consummation of a Business Combination (net of redemptions), and (z) the volume weighted average trading price of the Company’s Class A common stock during the 20 trading day period starting on the trading day prior to the day on which the Company consummates a Business Combination (such price, the “Market Value”) is below $9.20 per share, the exercise price of the warrants will be adjusted (to the nearest cent) to be equal to 115% of the higher of the Market Value and the Newly Issued Price,

THE BEAUTY HEALTH COMPANY

(FORMERLY KNOWN AS VESPER HEALTHCARE ACQUISITION CORP.)

NOTES TO CONDENSED FINANCIAL STATEMENTS

MARCH 31, 2021

(Unaudited)

and the $10.00 and $18.00 per share redemption trigger prices will be adjusted (to the nearest cent) to be equal to 100% and 180% of the higher of the Market Value and the Newly Issued Price, respectively.

The Private Placement Warrants are identical to the Public Warrants underlying the Units sold in the Initial Public Offering, except that the Private Placement Warrants and the Class A common stock issuable upon the exercise of the Private Placement Warrants will not be transferable, assignable or salable until 30 days after the completion of a Business Combination, subject to certain limited exceptions. Additionally, the Private Placement Warrants will be exercisable on a cashless basis and be non-redeemable so long as they are held by the initial purchasers or their permitted transferees. If the Private Placement Warrants are held by someone other than the initial purchasers or their permitted transferees, the Private Placement Warrants will be redeemable by the Company and exercisable by such holders on the same basis as the Public Warrants.

NOTE 9. FAIR VALUE MEASUREMENTS

The Company follows the guidance in ASC Topic 820 for its financial assets and liabilities that are re-measured and reported at fair value at each reporting period, and non-financial assets and liabilities that are re-measured and reported at fair value at least annually.


The fair value of the Company’s financial assets and liabilities reflects management’s estimate of amounts that the Company would have received in connection with the sale of the assets or paid in connection with the transfer of the liabilities in an orderly transaction between market participants at the measurement date. In connection with measuring the fair value of its assets and liabilities, the Company seeks to maximize the use of observable inputs (market data obtained from independent sources) and to minimize the use of unobservable inputs (internal assumptions about how market participants would price assets and liabilities). The following fair value hierarchy is used to classify assets and liabilities based on the observable inputs and unobservable inputs used in order to value the assets and liabilities:

Level 1:

Quoted prices in active markets for identical assets or liabilities. An active market for an asset or liability is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.

Level 2:

Observable inputs other than Level 1 inputs. Examples of Level 2 inputs include quoted prices in active markets for similar assets or liabilities and quoted prices for identical assets or liabilities in markets that are not active.

Level 3:

Unobservable inputs based on our assessment of the assumptions that market participants would use in pricing the asset or liability.


Level 1: Quoted prices in active markets for identical assets or liabilities. An active market for an asset or liability is a     
market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing
information on an ongoing basis.

Level 2: Observable inputs other than Level 1 inputs. Examples of Level 2 inputs include quoted prices in active     
markets for similar assets or liabilities and quoted prices for identical assets or liabilities in markets that are not active.

Level 3: Unobservable inputs based on our assessment of the assumptions that market participants would use in
pricing the asset or liability.

As HydraFacial was the accounting acquirer the Company did 0t have Warrant liabilities at December 31, 2020. The following table presents information about the Company’s assets and liabilities that are measured at fair value on a recurring basis at March 31,June 30, 2021, and December 31, 2020, and indicates the fair value hierarchy of the valuation inputs the Company utilized to determine such fair value:

Description

  Level   March 31,
2021		   December 31,
2020		 

Assets:

      

Marketable securities held in Trust Account

   1    460,184,400    460,098,212 

Liabilities:

      

Warrant Liability – Public Warrants

   1    31,893,332    40,633,332 

Warrant Liability – Private Placement Warrants

   3    19,599,999    25,013,332 
value.

THE BEAUTY HEALTH COMPANY

(FORMERLY KNOWN AS VESPER HEALTHCARE ACQUISITION CORP.)

NOTES TO CONDENSED FINANCIAL STATEMENTS

MARCH 31, 2021

(Unaudited)

Fair Value Measurements on a Recurring Basis
(in thousands)Level 1Level 2Level 3Total
Warrant Liability - Public Warrants$59,733 $0 $— $59,733 
Warrant Liability - Private Placement Warrants0 98,133 0 98,133 
Earn-out shares liability126,000 0 0 126,000 


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Warrant Liabilities
The Public Warrants and Private Placement Warrants (the “Warrants”) were accounted for as liabilities in accordance with ASC 815-40 and are presented within warrantWarrant liabilities on our consolidated balance sheet.the Company’s Condensed Consolidated Balance Sheets. The warrant liabilitiesWarrants are measured at fair value at inception and on a recurring basis, with changes in fair value presented within Change in fair value of warrants in the Condensed Consolidated Statements of Comprehensive Loss.

The Public Warrant Liability associated with the Public Warrants as of June 30, 2021 is classified as a Level 1 fair value measurement due to the use of an observable market quote in an active market. The Private Placement Warrant Liability associated with the Private Warrants as of June 30, 2021 is classified as a Level 2 fair value measurement. Because the transfer of the Private Warrants to anyone outside of the Sponsor of Vesper Healthcare Acquisition Corp. would result in the Private Warrants having substantially the same terms as the Public Warrants, management determined that the fair value of each Private Warrant is the same as that of a Public Warrant, with an insignificant adjustment for short-term marketability restrictions. Accordingly, the Private Warrants are classified as Level 2 financial instruments..

Earn-out Shares Liability
The earn-out shares liability is measured at fair value at inception and on a recurring basis, with changes in fair value presented within change in fair value of warrant liabilitiesearn-out share liability in the consolidated statementCondensed Consolidated Statements of operations.

Comprehensive Loss. The Company established the initial fair value forof the Warrants on October 2, 2020, the dateearn-out shares liability was measured using quoted market prices of the Company’s Initial Public Offering, using a Monte Carlo simulation model forClass A Common Stock and was based on the warrants.probability of the completion of certain acquisition targets. The Company allocated the proceeds received from (i) the salemaximum earn-out amount as of Units (which is inclusive of one shareJune 30, 2021 was considered to be reasonably certain. The liability was settled with 7.5 million shares of Class A common sharesCommon Stock issued on July 15, 2021.


Note 16 - Segment Reporting
The Company manages its business on the basis of 1 operating segment and one-third of one Public Warrant), (ii)1 reportable segment. As a result, the sale of Private Placement Warrants,chief operating decision maker, who is the Chief Executive Officer, decides how to allocate resources and (iii) the issuance of Class B common shares, first to the Warrants based on their fair values as determined at initial measurement, with the remaining proceeds allocated to Class A common shares subject to possible redemption, Class A common shares and Class B common shares based on their relative fair values at the initial measurement date. The Warrants were classified as Level 3 at the initial measurement date due to the use of unobservable inputs.

Subsequently, the Warrants are measured at fair valueassess performance, reviews financial information presented on a recurring basis. The subsequent measurementconsolidated basis for purposes of making operating decisions, allocates resources and evaluates financial performance.

Net sales by geographic region were as follows for the Public Warrants asperiods indicated (in thousands):
Three Months EndedSix Months Ended
(in thousands)June 30, 2021June 30, 2020June 30, 2021June 30, 2020
Americas$42,660 $9,469 $73,940 $33,382 
Asia Pacific12,440 2,583 21,231 4,318 
EMEA11,408 2,064 18,879 8,952 
Total net sales$66,508 $14,116 $114,050 $46,652 
As of June 30, 2021 and December 31, 2020, substantially all of HydraFacial’s property, plant and equipment was held in the United States.

Note 17 – Net Loss Attributable to Common Shareholders
Net loss attributable to common stockholders is classified as Level 1 due tocomputed by deducting both the use of an observable market quotedividend distributions declared in an active market.

The key inputs into the Monte Carlo simulation modelperiod on preferred stock and the dividends accumulated for the Private Placement Warrants at March 31,period on cumulative preferred stock from net income (“Basic EPS”). Diluted net loss per share (“Diluted EPS”) is computed by dividing net loss attributable to common stockholders by the total of the weighted-average common stock outstanding shares outstanding during the period.

Diluted EPS for the three and six months ended June 30, 2021 were as follows:

Input  March 31,
2021		 

Risk-free interest rate

   0.92% 

Expected term (years)

   5.08 

Expected volatility

   14.9% 

Exercise price

  $11.50 

Fair value of Units

  $10.03 

and 2020, respectively exclude the dilutive effect of stock option shares because their inclusion would be anti-dilutive for both periods.

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The following table presentssets forth the changescalculation of both basic and diluted net loss per share as follows for the periods indicated (in thousands, except share and per share amounts):
Three Months EndedSix Months Ended
(in thousands, except share and per share amounts)June 30, 2021June 30, 2020June 30, 2021June 30, 2020
Basic and Diluted loss per share:
Net loss$(139,378)$(10,397)$(142,652)$(19,466)
Shares used in computation:
Weighted-average common shares outstanding91,798,837 34,482,179 63,805,807 33,309,191 
Basic and diluted loss per share:$(1.52)$(0.30)$(2.24)$(0.58)

The following potentially dilutive weighted average shares were not included in the fair value of warrant liabilities:

   Private
Placement		  Level   Public  Level   Warrant
Liabilities		 

Fair value as of December 31, 2020

  $25,013,332    $40,633,332    $65,646,664 

Change in valuation inputs or other assumptions

   (5,413,333)   3    (8,740,000)   1    (14,153,333) 
  

 

 

    

 

 

    

 

 

 

Fair value as of March 31, 2021

  $19,599,999    $31,893,332    $51,493,331 
  

 

 

    

 

 

    

 

 

 

Level 3 financial liabilities consistcalculation of the Private Placement Warrant liabilityweighted average diluted shares outstanding as the effect would have been anti-dilutive for which there is no current market for these securities such that the determination of fair value requires significant judgment or estimation. Changes in fair value measurements categorized within Level 3 of the fair value hierarchy are analyzed each period based on changes in estimates or assumptions and recorded as appropriate.

NOTE 10. PRIOR PERIODS’ FINANCIAL STATEMENT REVISION

The Company noted an error in its application of guidance associated with “ASC 480: Distinguishing Liabilities from Equity.” Which needed to be modified to approximately present he impact on the accounting

periods indicated:

THE BEAUTY HEALTH COMPANY

(FORMERLY KNOWN AS VESPER HEALTHCARE ACQUISITION CORP.)

NOTES TO CONDENSED FINANCIAL STATEMENTS

MARCH 31, 2021

(Unaudited)

treatment of the temporary equity as a result of the private investment in public equity transaction that is subject of the subscription Agreements
Three Months EndedSix Months Ended
June 30, 2021June 30, 2020June 30, 2021June 30, 2020
Stock Options4,796,062 0 2,411,280 0 
PSUs129,231 0 64,972 0 
Public and Private Warrants15,450,549 0 7,767,956 0 


Note 18 – Subsequent Events
Acquisitions
HydraFacial entered into bydefinitive agreements to acquire 3 distributors across Mexico, France and Germany to sell and distribute the Company with certain investorsHydraFacial line of products within their respective regions. The 3 acquisitions closed on December 8, 2021 (the “ PIPE Investment”) in connection with the Compan y’s business combination with LCP Edge Intermediate, Inc., a Delaware corporation and indirect parent of Edge Systems LLC d/b/a The HydraFacial Company, and LCP Edge Holdco, LLC, as previously disclosedJuly 1, 2021. Cash consideration paid in the Company’ s Form 10-K/A filed on May 27, 2021. This modificationaggregate, prior to the accounting treatment of equity required the Compan y’ s common stock to be reclassified from permanent equity to temporary equity in the form of common stock subject to possible redemption. The Audit Committee, in consultation with the Compan y’s management, concluded that all Class A ordinary shares that were sold to the public in our IPO are to be classified as temporary equity, thereby correcting an error of classification within the Condensed Balance Sheet. In the financial statements filed in the Compan y’s Form 10- K/A, the Company incorrectly classified 8,351,205 Class A ordinary shares as permanent equity as of 12/31/20, whereas no Class A ordinary shares should have been so classified. The 8,351,205 Class A ordinary shares that were originally incorrectly classified as permanent equity have been reclassified as temporary equity in this Form 10-Q, thereby yielding a total of 46,000,000 Class A ordinary shares (the shares sold to the public in our IPO, which are subject to redemption) as temporary equity.

THE BEAUTY HEALTH COMPANY

(FORMERLY KNOWN AS VESPER HEALTHCARE ACQUISITION CORP.)

NOTES TO CONDENSED FINANCIAL STATEMENTS

MARCH 31, 2021

(Unaudited)

The following tables present the effect of the correction of the misstatement that impacted the year ended December 31, 2020, as described in Note 1, and the relatedany working capital adjustments, to reflectacquire the revision on the Condensed Balance Sheet.

   As Previously
Reported		  Adjustments  As Revised 

Balance sheet as of December 31, 2020 (audited)

    

Commitments

    

Number of Class A common shares at redemption value

   37,648,795   8,351,205   46,000,000 

Class A common stock subject to possible redemption

  $376,489,130  $83,512,311  $460,001,441 

Stockholders’ Equity

    

Number of Class A common shares issued and outstanding

   8,351,205   (8,351,205)   —   

Class A common shares

  $835  $(835)  $—   

Additional paid-in capital

   43,911,821   (40,807,971)   3,103,850 

Accumulated deficit

   (38,913,797)   (42,703,505)   (81,617,302) 

Total stockholders’ equity

   5,000,009   (83,512,311)   (78,512,302) 

Statement of operations for the period from July 8, 2020 (inception) through December 31, 2020 (as Restated)

    

Basic and diluted weighted average shares outstanding, Common stock subject to possible redemption

   41,438,497   1,165,717   42,604,214 

Weighted average shares outstanding, basic and diluted

   13,388,418   (651,643)   12,736,775 

Basic and diluted net loss per common share

  $(2.91)  $(0.15)  $(3.06) 

Statement of changes in stockholders’ equity for the period from July 8, 2020 (inception) through December 31, 2020

    

Class A common stock

    

Shares of Class A common stock subject to possible redemption

   (37,648,795)   (8,351,205)   (46,000,000) 

Class A common stock subject to possible redemption

  $(3,765)  $(835)  $(4,600) 

Additional paid-in capital

    

Class A common stock subject to possible redemption

   (376,485,365)   (40,807,971)   (417,293,336) 

Accumulated deficit

    

Net loss

   (38,913,797)   (42,703,505)   (81,617,302) 

Total stockholders’ equity

    

Class A common stock subject to possible redemption

   (376,489,130)   (40,808,806)   (417,297,936) 

Net loss

   (38,913,797)   (42,703,505)   (81,617,302) 

NOTE 11. SUBSEQUENT EVENTS

The Company evaluates subsequent events and transactions that occur after the balance sheet date up to the date that the consolidated financial statements were issued. Based upon this review, other than as described below, the Company did not identify any subsequent events that would have required adjustment or disclosure in the consolidated financial statements.

THE BEAUTY HEALTH COMPANY

(FORMERLY KNOWN AS VESPER HEALTHCARE ACQUISITION CORP.)

NOTES TO CONDENSED FINANCIAL STATEMENTS

MARCH 31, 2021

(Unaudited)

On April 19, 2021, Elstein v. Saunders et al., No. 21-3028CA01 (Fla. 11th Cir. Ct.)3 distributors was voluntarily dismissed. On April 26, 2021, Purvance v. Vesper Healthcare Acquisition Corp., et al., Index No. 650365/2021 (N.Y. Sup. Ct.) was voluntarily discontinued. On May 12, 2021, Watkins v. Vesper Healthcare Acquisition Corp., et al., No. 1:21-cv-00713 (S.D.N.Y.) was voluntarily dismissed. On May 17, 2021, Ciccotelli v. Vesper Healthcare Acquisition Corp., et al., Index No. 650346/2021 (N.Y. Sup. Ct.) was voluntarily discontinued.

On May 4, 2021, the Company completed the Business Combination and PIPE Investment as described in Note 1.

On June 8, 2021 and July 1, 2021, the Company completed acquisitions$23.4 million plus equity consideration consisting of four international third-party distributors for HydraFacial. The total purchase price for the four distributors is approximately $28 million in cash and 590,099479,373 shares of the Company’s Class A Common Stock. The equity consideration for the acquisitions will be issued by August 1, 2021.


Earn-out Shares
In addition to the consideration paid at the closing of the Business Combination, the former stockholders of HydraFacial received contingent consideration from the Company if certain acquisition targets identified by HydraFacial within one year after the closing of the Business Combination were to be completed. As a result of the closingCompany’s completion of the HTL acquisition during the second quarter ended June 30, 2021 and the completion of the 3 acquisitions in July 2021, the Company will also be required to issue up to 7.5 million shares ofissued 7,500,000 in Class A Common Stock to the former ownersstockholders on July 15, 2021.
22
Table of HydraFacial pursuant to the earnout provision in the Merger Agreement related to the Company’s Business Combination, which closed on May 4, 2021.

Contents




Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

ReferencesOperations.


Forward-Looking Statements
This Quarterly Report contains “forward looking statements” within the meaning of the “safe harbor” provisions of the United States Private Securities Litigation Reform Act of 1995. When used in this report (the “Quarterly Report”)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 The Beauty 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 “registrant,” “we,” “us,” “our”Business Combination; the inability to maintain the listing of The Beauty Health Company’s shares on Nasdaq; The Beauty Health Company’s ability to manage growth; The Beauty Health Company’s ability to execute its business plan; potential litigation involving The Beauty Health Company; changes in applicable laws or regulations; the “Company” refer topossibility that The Beauty Health Company (formerly known as Vesper Healthcare Acquisition Corp.). Unless the context otherwise requires, in this Quarterly Report on Form 10-Q, the “registrant”may be adversely affected by other economic, business, and/or competitive factors; and the “Company” refer to Vesper Healthcare Acquisition Corp. prior to the Closing and to the combined company and its subsidiaries following the Closing and “HydraFacial” refers to the business of LCP Edge Intermediate, Inc. and its subsidiaries prior to the Closing and the businessimpact of the combined company and its subsidiaries followingcontinuing COVID-19 pandemic on the Closing. ReferencesCompany’s business. The Beauty Health Company does not undertake any obligation to our “management”update or our “management team” refer to our officers and directors, and references to the “Sponsor” refer to BLS Investor Group LLC. 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 the Company’s financial condition and results of operations should be read in conjunction with the Company’s consolidated financial statements and therelated notes thereto containedappearing elsewhere in this Quarterly Report. Certain information contained inReport on Form 10-Q.
Unless the discussioncontext otherwise requires, references to “HydraFacial”, “we”, “us”, and analysis set forth below includes forward-looking statements that involve risks and uncertainties.

Special Note Regarding Forward-Looking Statements

This Quarterly Report includes “forward-looking statements” that are not historical facts and involve risks and uncertainties that could cause actual results to differ materially from those expected and projected. All statements, other than statements of historical fact included“our” in this Quarterly Report including, without limitation, statements in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” regarding the Company’s financial position, business strategy and the plans and objectives of management for future operations, are forward-looking statements. Words such as “expect,” “believe,” “anticipate,” “intend,” “estimate,” “seek” and variations and similar words and expressionssection are intended to identify such forward-looking statements. Such forward-looking statements relatemean the business and operations of The Beauty Health Company and its consolidated subsidiaries.


Overview
Founded in 1997, HydraFacial is a category-creating beauty health company. Its offerings in skin care and scalp health occupy a position at the intersection of medical aesthetics and traditional skin and personal care products. HydraFacial treatments are convenient, affordable, personalized and have demonstrated effectiveness. HydraFacial distributes its products in 87 countries through multiple channels including day spas, hotels, dermatologists, plastic surgeons and beauty retail.
HydraFacial’s business model has two predominant revenue streams: Delivery Systems (as defined below) and Consumables (as defined below). Delivery Systems are purchased up-front. Consumable single- and multi-use serums, tips and boosters or “Consumables” to future events or future performance, but reflect management’s current beliefs, basedprovide treatments using our Delivery Systems are purchased on information currently available. Aa recurring basis. The expansion of the number of factors could cause actual events, performanceDelivery Systems installed, or results“install base,” increases the foundation for future revenue by creating a larger base to differ materiallydrive consumable sales. We believe that as the installed base grows and Delivery Systems become more productive, recurring revenue will grow to become a larger share of the business.
HydraFacial has more than tripled Net Sales from $48 million for the events, performance and results discussedyear ended December 31, 2016 to $166 million for the year ended December 31, 2019, growing its footprint both in the forward-looking statements. For information identifying important factors that could cause actual results to differ materially from those anticipatedUS and internationally. Net sales decreased in the forward-looking statements, please refer to the Risk Factors section of the Annual Report on Form 10-K/A filed with the SEC. The Company’s securities filings can be accessed on the EDGAR section of the SEC’s website at www.sec.gov. Except as expressly required by applicable securities law, the Company disclaims any intention or obligation to update or revise any forward-looking statements whether2020 as a result of new information, future events or otherwise.

Overview

We are a blank check company formed underCOVID-19 restrictions, but have rebounded since the lawsonset of the State of Delaware on July 8, 2020,pandemic, as Net sales increased $52.4 million, or 371.6%, for the purposethree months ended June 30, 2021 when compared with the Net sales for the three months ended June 30, 2020. For the six months ended June 30, 2021 compared to June 30, 2020, Net sales increased $67.4 million, or 144.3%. Financial metrics we use to track our goals include revenue growth, Adjusted gross profit and Adjusted EBITDA. For a definition of effectingKey Performance Indicators (“KPIs”) see the section titled “—Key Operational and Business Metrics”.


Recent Developments

Impact of the COVID-19 Pandemic
The COVID-19 pandemic has had, and we expect will continue to have adverse impacts on our business. As government authorities around the world continue to implement significant measures intended to control the spread of the virus and institute restrictions on commercial operations, while at the same time implementing multi-step policies with the goal of re-opening certain markets, we are working to ensure our compliance while also maintaining business continuity for essential operations in our facilities.
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The COVID-19 pandemic caused us to experience several adverse impacts primarily in the first and second quarters of fiscal year 2020, including extended sales cycles to close new orders for our products, delays in shipping and installing orders due to closed facilities and travel limitations and delays and failures in collecting accounts receivable. The rapid development and uncertainty of the impacts of the COVID-19 pandemic precludes any prediction as to the ultimate adverse impact of the COVID-19 pandemic on our business. However, the COVID-19 pandemic, and the measures taken to contain it, present material uncertainty and risk with respect to our performance and financial results. In particular, closure of providers, restrictions on performing personal services, consumer perceptions about the safety of HydraFacial’s services, disruption in the supply chain of raw materials and components, and inefficiencies in the manufacturing of products due to social distancing and hygiene protocols. Disruptions in the capital markets as a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or other similarresult of the COVID-19 pandemic may also adversely affect our business combinationif these impacts continue for a prolonged period and we need additional liquidity.
During the year ended December 31, 2020, we took and may continue to take, actions to mitigate the impact of the COVID-19 pandemic on our cash flow and results of operations and financial condition. Starting in April 2020, after the government mandated shutdowns, we experienced a significant decline in sales during the second quarter of 2020, and took certain corrective measures. HydraFacial furloughed a majority of its workforce and went through a restructuring process, which included the write-off of certain product lines, and costs incurred for assistance provided by third-party consultants to assist in managing the downturn. Subsequent to the downturn experienced during the second quarter of 2020, our revenues increased, and we returned to having positive Adjusted EBITDA in the latter half of 2020. This trend continued into the second quarter of 2021. We successfully managed the variable portion of our cost structure to better align with one or more businesses.

Recent Developments

revenue, which was significantly reduced during the downturn. Additionally, nearly all of our furloughed employees have returned to work.


Business Combination and Public Company Costs

On May 4, 2021 (the “Closing Date”), the registrantHydraFacial consummated the previously announced business combinationBusiness Combination pursuant to that certain Merger Agreement, and Plan of Merger, dated December 8, 2020 by and among(the “Merger Agreement”) with Vesper Healthcare Acquisition Corp. (“Vesper Healthcare”Vesper"), Hydrate Merger Sub I, Inc. (“Merger Sub I”), Hydrate Merger Sub II, LLC (“Merger Sub II”), LCP Edge Intermediate, Inc., the indirect parent of Edge Systems LLC d/b/a The HydraFacial Company (“HydraFacial”), and LCP Edge Holdco, LLC (“LCP,” and, in its capacity as the stockholders’ representative, the “Stockholders’ Representative”) (the “Merger Agreement”),pursuant to which provided for: (a) the merger of Merger Sub I with and into HydraFacial, with HydraFacial continuing as the surviving corporation (the “First Merger”), and (b) immediately following the First Merger and as part of the same overall transaction as the First Merger, the merger of HydraFacial with and into Merger Sub II, with Merger Sub II continuing as the surviving entity (the “Second Merger” and, together with the First Merger, the “Mergers” and, together with the other transactions contemplated by the Merger Agreement, the “Business

Combination”). As a result of the First Merger, the registrant owns 100% of the outstanding common stock of HydraFacial and each share of common stock and preferred stock of HydraFacial has been cancelled and converted into the right to receive a portion of the consideration payable in connection with the Mergers. As a result of the Second Merger, the registrant owns 100% of the outstanding interests in Merger Sub II. In connection with the closing of the Business Combination (the “Closing”), the registrant owns,Vesper acquired, directly or indirectly, 100% of the stock of HydraFacial and its subsidiariessubsidiaries. Upon closing, the combined entity was renamed The Beauty Health Company (“BeautyHealth” or the “Company”) and trades on the Nasdaq Capital Market under the ticker symbol “SKIN”.


Pursuant to the terms of the Merger Agreement, the aggregate merger consideration paid to the HydraFacial stockholders in connection with the Business Combination was approximately $975.0 million less HydraFacial’s net indebtedness as of the Closing Date, transaction expenses, and net working capital relative to a target. In connection with the transaction, all of HydraFacial’s existing debt under its credit facilities were repaid and the note receivable from its stockholder was settled.

The merger consideration included both cash consideration and consideration in the form of newly issued Class A Common Stock. The aggregate cash consideration paid to the former HydraFacial stockholders at the Closing was approximately $368.0 million, consisting of HydraFacialthe Vesper’s cash and cash equivalents as of immediately prior to the effective timeclosing of the First Merger (the “HydraFacial Stockholders”) hold a portionBusiness Combination including proceeds of the$350.0 million from Vesper’s Private Placement of an aggregate of 35,000,000 shares of Class A Common Stock, par value $0.0001 per share,and approximately $433.0 million of cash available to Vesper from the trust account that held the proceeds from Vesper’s initial public offering (the "Trust Account") after giving effect to income and franchise taxes payable in respect of interest income earned in the Trust Account), and redemptions that were elected by Vesper’s public stockholders, minus approximately $224.0 million used to repay HydraFacial’s outstanding indebtedness at the Closing, minus approximately $94.0 million of transaction expenses of HydraFacial and Vesper, minus $100.0 million. The remainder of the registrant (the “Classconsideration paid to the HydraFacial stockholders consisted of 35,501,743 newly issued shares of Class A Stock”).

In connection withCommon Stock. The foregoing consideration paid to the Merger Agreement, certain accredited investors (the “PIPE Investors”) entered into subscription agreements (the “PIPE Subscription Agreements”) pursuant to which the PIPE Investors agreed to purchase 35,000,000HydraFacial stockholders may be further increased by amounts payable as earn-out shares (the “PIPE Shares”) of The Beauty Health Company Class A Common Stock atpursuant to the terms of the Merger Agreement.


Notwithstanding the legal form of the Business Combination pursuant to the Merger Agreement, the Business Combination was accounted for as a reverse recapitalization in accordance with GAAP. Under this method of accounting, Vesper was treated as the “acquired” company for financial reporting purposes. This determination was primarily based on the following:
•HydraFacial’s existing shareholders were expected to have the largest minority interest of the voting power in the combined entity under the minimum and maximum redemption scenarios;
•HydraFacial’s operations prior to the acquisition comprise the only ongoing operations of the combined entity;
•HydraFacial senior management were retained and compose the majority of the senior management of the combined entity;
•HydraFacial’s relative valuation and results of operations compared to Vesper; and
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•pursuant to the Investor Rights Agreement, HydraFacial was given the right to designate certain initial members of the board of directors of the post-combination company immediately after giving effect to the transactions.
Consideration was given to the fact that Vesper paid a purchase price per shareconsisting of $10.00a combination of cash and an aggregate purchase priceequity consideration and its shareholders would have significant voting power. However, based on the aforementioned factors of $350,000,000 (the “PIPE Investment”). The PIPE Investmentmanagement, board representation, largest minority shareholder, and the continuation of the HydraFacial business as well as size it was consummated substantially concurrently with the Closing.

In connection with the Closing, holders of 2,672,690 shares of Class A Stock exercised their rights to redeem those shares for cash at an approximate price of $10.00 per share, for an aggregate of approximately $26,737,737, which was paid to such holders at Closing.

In connection with the Closing, the registrant changed its name from “Vesper Healthcare Acquisition Corp.” to “The Beauty Health Company”.

Results of Operations

Through March 31, 2021, we had neither engaged in any operations nor generated any revenues. Our only activities through March 31, 2021 were organizational activities, those necessary to prepare for the Initial Public Offering, described below, and, after our Initial Public Offering, identifying and preparingdetermined that accounting for the Business Combination. We did not generate any operating revenues until afterCombination as a reverse recapitalization was appropriate. Accordingly, for accounting purposes, the completionfinancial statements of the Business Combination. Prior tocombined entity will represent a continuation of the financial statements of HydraFacial with the acquisition being treated as the equivalent of HydraFacial issuing stock for the net assets of Vesper, accompanied by a recapitalization. The net assets of Vesper were stated at historical cost, with no goodwill or other intangible assets recorded.

Following the consummation of the Business Combination, we generated non-operating incomebecame an SEC-registered and NASDAQ- listed company, which requires us to hire additional staff and implement procedures and processes to address public company regulatory requirements and customary practices. We have incurred and expect to incur additional annual expenses for, among other things, directors’ and officers’ liability insurance, director fees and additional internal and external accounting, legal and administrative resources and fees.

Factors Affecting Our Performance
Market Trends
HydraFacial is a pioneer in the formattractive 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 interest income on marketable securities heldthis industry. Recent growth in the Trust Account.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.
Demographics
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, age or gender. At the intersection of the medical and consumer retail markets, the large potential customer base should provide significant upside to drive topline growth. HydraFacial over indexes with males, significantly increasing the Total Addressable Market (TAM) compared to peers and the mix of male customers is growing at two times the rate of female customers. HydraFacial customers are young; approximately 50% of HydraFacial customers are Millennials, and approximately 30% of HydraFacial’s beauty retail customers are under the age of 24. As the Millennial and Gen Z consumers age, they appear to be taking skincare more seriously and willing to invest in premium treatments, such as those offered by HydraFacial.
Marketing
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.
Innovation
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.
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. 37.4% of HydraFacial’s total revenue during the second quarter of fiscal year 2021 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.
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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 June 30,Six Months Ended June 30,
(dollars in millions)2021202020212020
Delivery Systems Net Sales$34.9 $6.0 $60.6 $20.1 
Consumables Net Sales$31.6 $8.1 $53.4 $26.6 
Total Sales$66.5 $14.1 $114.1 $46.7 
Consolidated Gross Profit$47.3 $4.3 $79.0 $23.2 
Consolidated Gross Margin71.0%30.3%69.3%49.7%
Net Loss$(139.4)$(10.4)$(142.7)$(19.5)
Adjusted EBITDA (loss)$11.4 $(1.1)$18.4 $(3.2)
Adjusted EBITDA margin17.1%(7.7)%16.1%(6.8)%
Adjusted gross profit$49.8 $7.2 $84.1 $28.8 
Adjusted gross margin74.9%51.0%73.8%61.7%
Adjusted net income (loss)$7.8$(5.7)$7.7$(11.0)
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.
Components of our Results of Operations
Net Sales
Net sales consists of the sale of products to retail and wholesale customers through e-commerce and distributor sales. HydraFacial generates revenue through manufacturing and selling HydraFacial and Perk Delivery Systems (“Delivery Systems”). In conjunction with the sale of Delivery Systems, HydraFacial also sells its serum solutions and consumables (collectively “Consumables”). Consumables are sold solely and exclusively by HydraFacial and are available for purchase separately from the purchase of Delivery Systems. For both Delivery Systems and Consumables, revenue is recognized upon transfer of control to the customer, which generally takes place at the point of shipment.
Cost of Sales
HydraFacial’s cost of sales consists of Delivery System and Consumables product costs, including the cost of materials, labor costs, overhead, depreciation and amortization of developed technology, shipping and handling costs, and the costs associated with excess and obsolete inventory. As we launch new products and expand our presence internationally, we expect to incur higher cost of sales as a percentage of sales because we have not yet achieved economies of scale with these items.
Operating Expenses
Selling and Marketing
Selling and marketing expense consists of personnel-related expenses, sales commissions, travel costs, training and advertising expenses incurred in connection with the sale of our products. We intend to continue to invest in our sales and marketing capabilities in the future and expect this expense to increase in absolute dollars in future periods as we release new
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products, grow our global footprint, and drive consumer demand in the ecosystem. Selling and marketing expense as a percentage of total revenue may fluctuate from period to period based on total revenue and the timing of our investments in our sales and marketing functions as these investments may vary in scope and scale over future periods.
Research and Development
Research and development expense primarily consists of personnel-related expenses, tooling and prototype materials, technology investments, and other expenses incurred in connection with the development of new products and internal technologies. We expect our research and development expenses to vary from period to period as a percentage of total revenue, as HydraFacial plans to continue to innovate and invest in new technologies and to enhance existing technologies to fuel future growth as a category creator.
General and Administrative
General and administrative expenses include personnel-related expenses, professional fees, credit card and wire fees and facilities-related costs primarily for our executive, finance, accounting, legal, human resources, and IT functions. General and administrative expense also includes fees for professional services principally comprising legal, audit, tax and accounting services and insurance.
We expect to continue to incur additional general and administrative expenses as a result of beingoperating as a public company, (for legal,including expenses related to compliance and reporting obligations of public companies, and increased costs for insurance, investor relations expenses, and professional services. In addition, we expect to continue to incur additional IT expenses as we scale HydraFacial and enhance our ecommerce, digital and data utilization capabilities. As a result, we expect that our general and administrative expenses will increase in absolute dollars in future periods and vary from period to period as a percentage of revenue.
Other Income (Expense), Net
Other income (expense) consists of the change in fair value of both the public and private placement warrants and earn-out shares liability, interest expense, deferred financing write-off costs and prepayment penalties related to the repayment of our long-term debt, and foreign currency transaction gains and losses. Foreign currency transaction gains and losses are generated by settlements of intercompany balances and invoices denominated in other currencies other than the reporting currency. We expect other income (expense) to increase in absolute dollars as HydraFacial grows internationally and obtains more financing. Other income (expense) as a percentage of revenue will fluctuate period to period along with interest rates, exchange rates and other factors not related to normal business operations.
Income Tax Provision (Benefit)
The provision for income taxes consists primarily of income taxes related to federal, state and foreign jurisdictions in which we conduct business.

Results of Operations
The following tables set forth our consolidated results of operations in dollars and as a percentage of total revenue 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, 2021 and June 30, 2020 have been derived from the interim consolidated financial reporting, accountingstatements included elsewhere in this Form 10-Q. Amounts and auditing compliance), as well aspercentages may not foot due to rounding.

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Comparison of Three Months Ended June 30, 2021 to Three Months Ended June 30, 2020
Three Months Ended June 30,
(in millions)2021% of Net Sales2020% of Net Sales
Net sales$66.5 100.0 %$14.1 100.0 %
Cost of sales19.3 29.0 9.8 69.5 
Gross profit47.3 71.0 4.3 30.5 
Operating expenses
Selling and marketing26.2 39.4 6.2 44.0 
Research and development3.0 4.5 0.6 4.3 
General and administrative44.4 66.8 5.4 38.3 
Total operating expenses73.6 110.7 12.2 86.5 
Loss from operations(26.4)(39.7)(7.9)(56.0)
Other expense, net114.9 172.8 5.5 39.0 
Loss before provision for income tax(141.3)(212.5)(13.4)(95.0)
Income tax benefit(1.9)(2.9)(3.1)(22.0)
Net loss$(139.4)(209.6)%$(10.4)(73.0)%
Net Sales
Three Months Ended June 30,Change
(in millions)20212020Amount%
Net Sales
Delivery Systems$34.9 $6.0 $28.9 481.7%
Consumables31.6 8.1 23.5 290.1%
Total net sales$66.5 $14.1 $52.4 371.6%
Percentage of net sales
Delivery Systems52.5%42.6%
Consumables47.5%57.4%
Total100.0%100.0%
Total net sales for due diligence expenses.

For the three months ended MarchJune 30, 2021 increased $52.4 million, or 371.6%, compared to the three months ended June 30, 2020. Delivery System sales for the three months ended June 30, 2021 increased $28.9 million, or 481.7%, compared to the three months ended June 30, 2020. Delivery Systems units sold for the three months ended June 30, 2021 increased primarily due to both domestic and international growth as sales as markets reopened and consumer demand accelerated. Similarly, Consumables sales for the three months ended June 30, 2021 increased 23.5 million, or 290.1%, compared to the three months ended June 30, 2020. The increase in Consumables sales was primarily attributable to rebounding sales volume following the COVID-19 pandemic, as domestic and international stay-at-home orders were lifted and commercial operations were allowed to resume with social distancing restrictions during the three months ended June 30, 2021.

Cost of Sales, Gross Profit, and Gross Margin
Three Months Ended June 30,Change
(in millions)20212020Amount%
Cost of sales$19.3 $9.8 $9.5 96.9%
Gross profit$47.3 $4.3 $43.0 1000.0%
Gross margin71.0 %30.3 %
Cost of sales increased 96.9% driven by increased sales volume and a shift in the product mix to HydraFacial Delivery Systems. Gross margin increased from 30.3% during the three months ended June 30, 2020 to 71.0% during the three months ended June 30, 2021. The improvement in gross profit was due to fixed cost leverage from higher than expected sales, improved average selling prices for Delivery Systems, as well as cost savings initiatives.
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Operating Expenses

Sales and Marketing
Three Months Ended June 30,Change
(in millions)20212020Amount%
Selling and marketing$26.2 $6.2 $20.0 322.6 %
As a percentage of total net sales39.4 %44.0 %
Selling and marketing expense for the three months ended June 30, 2021 increased $20.0 million, or 322.6%, compared to the three months ended June 30, 2020. The overall improvement as a percentage of total net sales was driven by normalized sales volume versus low sales volume during 2020 due to negative COVID-19 impact and related shut down in the second quarter of 2020. The dollar increase is due to higher sales commissions of $6.8 million, which included $0.8 million in sales commissions from international operations, primarily attributable to the overall increase in sales, and personnel-related expenses increased by $7.1 million, which included a $1.5 million increase from our international operations, primarily attributable to increased headcount. In addition, personnel-related training expenses increased by $2.0 million and marketing spend increased by $0.9 million as we moved forward with marketing programs after COVID-19 restrictions were lifted and markets reopened.
Research and Development
Three Months Ended June 30,Change
(in millions)20212020Amount%
Research and development$3.0 $0.6 $2.4 400.0 %
As a percentage of total net sales4.5 %4.3 %
Research and development expense for the three months ended June 30, 2021 increased $2.4 million, or 400.0%, compared to the three months ended June 30, 2020. The increase was due to increased expenses related to investments in new skincare treatment technologies of $1.6 million and $0.5 million increase in professional services fees
General and Administrative
Three Months Ended June 30,Change
(in millions)20212020Amount%
General and administrative$44.4 $5.4 $39.0 722.2 %
As a percentage of total net sales66.8 %38.3 %
General and administrative expense for the three months ended June 30, 2021 increased $39.0 million, or 722.2%, compared to the three months ended June 30, 2020. Transaction costs increased by $29.6 million related to the consummation of the Business Combination, primarily consisting of $21.0 million paid to the former owner of HydraFacial as well as professional fees for financial advisory, legal and accounting services. The consummation of the Business Combination during the three months ended June 30, 2021 also drove an increase of $1.4 million in stock-based compensation expense related to accelerated vesting and $1.8 million in stock-based compensation expense related to options granted. Personnel-related expenses increased by $2.5 million primarily due to increased headcount and higher sales.
Other (Income) Expense, Net and Income Tax Provision
Three Months Ended June 30,Change
(in millions)20212020Amount%
Other expense, net$114.9 $5.5 $109.4 1989.1 %
Income tax (benefit) expense$(1.9)$(3.1)$1.2 (38.7)%
Other expense, net, was $114.9 million for the three months ended June 30, 2021 compared to $5.5 million for the three months ended June 30, 2020. The increase was primarily driven by the changes in the fair values of the warrant liability and Earn-out shares liability of $36.5 million and $72.0 million, respectively. In connection with the consummation of the Business Combination, we repaid all long-term borrowings and incurred a total of $4.3 million in deferred financing cost write-offs and prepayment penalties.

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Comparison of Six Months Ended June 30, 2021 to Six Months Ended June 30, 2020
(amounts and percentages may not foot due to rounding)
Six Months Ended June 30,
(in millions)2021% of Net Sales2020% of Net Sales
Net sales$114.1 100.0 %$46.7 100.0 %
Cost of sales35.1 30.8 23.4 50.1 
Gross profit79.0 69.3 23.2 49.9 
Operating expenses
Selling and marketing43.3 37.9 23.9 51.2 
Research and development4.4 3.9 2.0 4.3 
General and administrative55.2 48.4 12.6 27.0 
Total operating expenses103.0 90.3 38.5 82.4 
Loss from operations(24.0)(21.0)(15.3)(32.5)
Other expense, net120.9 106.0 9.9 21.2 
Loss before provision for income tax(144.9)(127.0)(25.1)(53.7)
Income tax benefit(2.2)(1.9)(5.7)(12.2)
Net loss$(142.7)(125.1)%$(19.5)(41.5)%
Net Sales
Six Months Ended June 30,Change
(in millions)20212020Amount%
Net Sales
Delivery Systems$60.6 $20.1 $40.5 201.5%
Consumables53.4 26.6 26.8 100.8%
Total net sales$114.1 $46.7 $67.4 144.3%
Percentage of net sales
Delivery Systems53.1%43.0%
Consumables46.9%57.0%
Total100.0%100.0%

Total net sales for the six months ended June 30, 2021 increased $67.4 million, or 144.3%, compared to the six months ended June 30, 2020. Delivery System sales for the six months ended June 30, 2021 increased $40.5 million, or 201.5%, compared to the six months ended June 30, 2020. Delivery Systems units sold for the six months ended June 30, 2021 increased primarily due to both increased consumer demand and continued strength in the Asia-Pacific region. Similarly, Consumables sales for the six months ended June 30, 2021 increased $26.8 million, or 100.8%, compared to the six months ended June 30, 2020. The increase in Consumables sales was primarily attributable to rebounding sales volume following the COVID-19 pandemic.
Cost of Sales, Gross Profit, and Gross Margin
Six Months Ended June 30,Change
(in millions)20212020Amount%
Cost of sales$35.1 $23.4 $11.6 49.5%
Gross profit$79.0 $23.2 $55.8 240.4%
Gross margin69.3 %49.7 %
Cost of sales increased 49.5% driven by increased sales volume and a shift in the product mix to HydraFacial Delivery Systems. Gross margin increased from 49.7% during the six months ended June 30, 2021 to 69.3% during the six months ended June 30, 2021, primarily due to fixed cost leverage from higher sales volumes coupled with cost saving initiatives.


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Operating Expenses

Sales and Marketing
Six Months Ended June 30,Change
(in millions)20212020Amount%
Selling and marketing$43.3 $23.9 $19.4 81.2 %
As a percentage of total net sales37.9 %51.2 %
Selling and marketing expense for the six months ended June 30, 2021 increased $19.4 million, or 81.2%, compared to the six months ended June 30, 2020. The overall improvement as a percentage of total net sales was driven by normalized sales volume versus low sales volume during 2020 due to negative COVID-19 impact and related shut down in the second quarter of 2020. The increase is due to higher sales commissions of $9.6 million, which included $0.9 million in sales commissions from international operations, primarily attributable to overall increases in sales, and personnel-related expenses increased by $6.5 million, which included a $1.5 million increase from our international operations, primarily attributable to increased headcount. In addition, personnel-related training and certification expenses increased by $2.1 million.
Research and Development
Six Months Ended June 30,Change
(in millions)20212020Amount%
Research and development$4.4 $2.0 $2.4 120.0 %
As a percentage of total net sales3.9 %4.3 %
Research and development expense for the six months ended June 30, 2021 increased $2.4 million, or 120.0%, compared to the six months ended June 30, 2020. The increase was due to increased expenses related to investments in new skincare treatment technologies of $2.5 million.
General and Administrative
Six Months Ended June 30,Change
(in millions)20212020Amount%
General and administrative$55.2 $12.6 $42.6 338.0 %
As a percentage of total net sales48.4 %27.0 %
General and administrative expense for the six months ended June 30, 2021 increased $42.6 million, or 338.0%, compared to the six months ended June 30, 2020. Transaction costs increased by $30.7 million related to the consummation of the Business Combination, primarily consisting of $21.0 million paid to the former owner of HydraFacial as well as professional fees for financial advisory, legal and accounting services. The consummation of the Business Combination during the six months ended June 30, 2021 also drove an increase of $1.4 million in stock-based compensation expense related to the accelerated vesting and $1.8 million in stock-based compensation related to options granted. Personnel-related expenses increased by $4.2 million primarily due to increased headcount and higher sales.
Other (Income) Expense, Net and Income Tax Provision
Six Months Ended June 30,Change
(in millions)20212020Amount%
Other expense, net$120.9 $9.9 $111.0 1121.2 %
Income tax benefit$(2.2)$(5.7)$3.5 (61.4)%
Other expense, net, was $120.9 million for the six months ended June 30, 2021 compared to $9.9 million for the six months ended June 30, 2020. The increase was primarily driven by the changes in the fair values of the Company’s warrant liability and earn-out share liability of $36.5 million and $72.0 million, respectively. In connection with the consummation of the Business Combination, we repaid all long-term borrowings and incurred a total of $4.3 million in prepayment penalties and deferred financing cost write-offs.

Liquidity and Capital Resources
Our operations have been funded primarily through cash flow from operating activities and net proceeds received from the consummation of the Business Combination. As of December 31, 2020, we had cash and cash equivalents of approximately $9.5 million and as of June 30, 2021, we had cash and cash equivalents of approximately $101.5 million.
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We believe our existing cash and cash equivalent balances (including the cash consideration received from the consummation of the Business Combination) and cash flow from operations will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months. Our future capital requirements may vary materially from those currently planned and will depend on many factors, including 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, expansion and overall economic conditions. We expect capital expenditures of up to $15.0 million for the year ended December 31, 2021. We anticipate using cash from the Business Combination and cash generated through the normal course of operations to fund these items.
To the extent that current and anticipated future sources of liquidity are insufficient to fund our future business activities and requirements, we may be required to seek additional equity or debt financing. The sale of additional equity would result in additional dilution to our stockholders. The incurrence of 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. There can be no assurances that we will be able to raise additional capital. The inability to raise capital would adversely affect our ability to achieve our business objectives.
Cash Flow (amounts and percentages may not foot due to rounding)
Six Months Ended June 30,
(in millions)20212020
Cash and cash equivalents at beginning of period$9.5 $7.3 
Operating activities:
Net loss(142.7)(19.5)
Non-cash adjustments125.6 10.5 
Changes in working capital(14.8)(2.7)
Net cash flows used in operating activities(31.9)(11.6)
Net cash flows used in investing activities(9.1)(1.4)
Net cash flows from financing activities133.0 20.5 
Net change in cash and cash equivalents92.0 7.5 
Effect of foreign currency translation— (0.2)
Cash and cash equivalents at end of period$101.5 $14.6 
Operating Activities
Net cash used in operating activities of $31.9 million for the six months ended June 30, 2021 was primarily due to the net loss of $142.7 million. The net loss was impacted by non-cash adjustments of $125.6 million, primarily related to fair value adjustments to Earn-out shares liability and Warrant liabilities, partially offset by a decrease in net incomechange in working capital of $13,637,202, which consisted$14.8 million. The total increase in net operating assets and liabilities was primarily due to the increase in accounts receivable of $21.1 million and offset by an increase in accrued payroll and taxes.
Net cash used in operating activities of $11.6 million for the six months ended June 30, 2020 was primarily due to the net loss of $19.5 million. The net loss was impacted by non-cash adjustments of $10.5 million related to depreciation and amortization, partially offset by a decrease in net change in working capital of $2.7 million. The total increase in net operating assets and liabilities was primarily due to a $9.2 million decrease in accounts receivable and a $6.8 million decrease in accrued payroll and other expenses.
Investing activities
Cash used in investing activities for the six months ended June 30, 2021 of $9.1 million was primarily related to $4.7 million in capital expenditures and our business acquisition of a distributor in Australia with cash paid of $4.9 million, net of cash acquired.
Cash used in investing activities for the six months ended June 30, 2020 of $1.4 million was primarily related to capital expenditures.
Financing activities
Net cash from financing activities of $133.0 million for the six months ended June 30, 2021 was primarily related to the proceeds received from the Business Combination offset by the payoff of long-term debt of $225.5 million.
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Net cash from financing activities of $20.5 million for the six months ended June 30, 2020 was primarily related to proceeds from borrowings of $36.5 million, net of debt repayments and issuance costs of $602,319, offset by interest income$16.0 million.

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. We re-evaluate our estimates on marketable securities heldan on-going basis. Our estimates are based on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Because of the uncertainty inherent in these matters, actual results may differ from these estimates and could differ based upon other assumptions or conditions. The critical accounting policies that reflect our more significant judgments and estimates used in the Trust Accountpreparation of $85,152,our consolidated financial statements include those noted below.

Revenue Recognition
We elected to adopt the new revenue recognition standard using the full retrospective method as of January 1, 2019. The adoption of the new standard did not have a significant effect on earnings or on the timing of our transactions and, therefore, the effect of applying the new guidance was not material. As such, there were no adjustments to the prior periods. In accordance with ASU 2014-09, we determine the amount of revenue to be recognized through application of the following steps:
•Identify the customer contract;
•Identify the performance obligations in the contract;
•Determine the transaction price;
•Allocate the transaction price to the performance obligations in the contract; and
•Recognize revenue as the performance obligations are satisfied.

Share-Based Compensation

We measure and recognize compensation expenses for stock options and performance-based stock units (“PSUs”) to employees on a straight-line basis over the vesting period based on their grant date fair values. We estimate the fair value of stock options on the date of grant using the Black-Scholes option pricing model and the fair value of PSUs on the date of grant using a Monte Carlo simulation. For stock options, we estimate forfeitures at the time of grant and revise these estimates in subsequent periods if actual forfeitures differ from those estimates.

Goodwill
Goodwill is recorded as the difference, if any, between the aggregate consideration paid for an acquisition and the fair value of the assets acquired and liabilities assumed. Goodwill is not amortized but is evaluated for impairment annually or more frequently if indicators of impairment are present or changes in circumstances suggest that impairment may exist. We have one reporting unit and management evaluates the carrying value of HydraFacial’s goodwill annually at the end of its fiscal year or whenever events or changes in circumstances indicate that an impairment may exist.

When testing goodwill for impairment, we have the option of first performing a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as the basis to determine if it is necessary to perform a quantitative goodwill impairment test. In performing our qualitative assessment, we consider the extent to which unfavorable events or circumstances identified, such as changes in economic conditions, industry and market conditions or company specific events, could affect the comparison of the reporting unit’s fair value with its carrying amount. If we conclude that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, we are required to perform a quantitative impairment test.

Quantitative impairment testing for goodwill is based upon the fair value of a reporting unit as compared to its carrying value. Under a quantitative impairment test, we will make certain judgments and assumptions in allocating assets and liabilities to determine carrying values for our reporting unit. The impairment loss recognized would be the difference between a reporting unit’s carrying value and fair value in an amount not to exceed the carrying value of the reporting unit’s goodwill.
Testing goodwill for impairment requires us to estimate fair values of reporting units using significant estimates and assumptions. The assumptions made will impact the outcome and ultimate results of the testing. We will use industry accepted
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valuation models and set criteria that are reviewed and approved by various levels of management and, in certain instances, we will engage independent third-party valuation specialists for advice.

The key estimates and factors used in the valuation models would include revenue growth rates and profit margins based on our internal forecasts, our specific weighted-average cost of capital used to discount future cash flows, and comparable market multiples for the industry segment, when applicable, as well as our historical operating trends. Certain future events and circumstances, including deterioration of market conditions, higher cost of capital, a decline in actual and expected consumer consumption and demands, could result in changes to these assumptions and judgments. A revision of these assumptions could cause the fair values of the reporting units to fall below their respective carrying values, resulting in a non-cash impairment charge. Such charge could have a material effect on the consolidated financial statements.

We performed a qualitative assessment as of December 31, 2020, based on which we determined that there is no indication of goodwill impairment. During the second quarter of 2020, our business was substantially impacted by the COVID-19 pandemic, which subsequently recovered and returned to having positive Adjusted EBITDA during the 3rd quarter of 2020. We evaluated our goodwill for impairment during the second quarter of 2020, and as a result of that assessment, concluded that our goodwill was not impaired.

Intangible Assets
Intangible assets are composed of developed technology, customer relationships and trademarks. At initial recognition, intangible assets acquired in a business combination are recognized at their fair value as of the date of acquisition. Following initial recognition, intangible assets are carried at cost less accumulated amortization and impairment losses, if any, and are amortized on a straight-line basis over the estimated useful life of the asset. We assess the impairment of intangible assets whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If necessary, we will use an industry accepted valuation model to estimate the fair value of the intangible assets. The fair value calculation requires significant judgments in determining both the assets’ estimated cash flows potentially the appropriate discount and royalty rates applied to those cash flows to determine fair value. Variations in economic conditions or a change in general consumer demands, operating results estimates or the application of alternative assumptions could produce significantly different results. If these assumptions differ materially from future results, we may record impairment charges in the future.

Inventories
Inventories are stated at the lower of cost (determined by the first-in, first-out method) or net realizable value. Obsolete inventory or inventory in excess of management’s estimated usage is written-down to its estimated net realizable value. Inherent in the net realizable value are management’s estimates related to economic trends, future demand for products, and technological obsolescence of our products.

Income Taxes
We use the asset-and-liability method for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between the consolidated financial statement carrying amounts and tax bases of assets and liabilities and operating loss and tax credit carryforwards and are measured using the enacted tax rates that are expected to be in effect when the differences reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

Valuation allowances are established when necessary to reduce deferred tax assets to an amount that, in the opinion of management, is more likely than not to be realized. Significant judgement is required to determine if a valuation allowance is needed. As of June 30, 2021, HydraFacial had incurred cumulative pre-tax losses, and as a result, does not rely on its projections as a source of income that would give us the ability to realize our deferred tax assets. In order to determine the realizability of our deferred income tax assets, we have pointed to the reversal of our taxable temporary differences as a source of income that will result in the realization of our deferred income tax assets. During the year ended December 31, 2020, and due to the pre-tax loss recorded, we began to accrue for a valuation allowance for the portion of deferred income tax assets that will not be realized through the reversal of taxable temporary differences.

Our policy for accounting for uncertainty in income taxes requires the evaluation of tax positions taken or expected to be taken in the course of the preparation of tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold would be recorded as a tax expense in the current year. Reevaluation of tax positions considers factors such as changes in facts or circumstances, changes in or interpretations of tax law, effectively settled issues under audit or expiration of statute of limitation and new audit activity.
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We recognized interest accrued and penalties related to unrecognized tax benefits in our income tax expense.

Warrant Liabilities

We classify the Public and Private Placement Warrants (“Warrant liabilities”) as liabilities on our consolidated balance sheets as these instruments are precluded from being indexed to our own stock given the terms allow for a settlement adjustment that does not meet the scope of the fixed-for-fixed exception in ASC 815, Derivatives and Hedging. In certain events outside of our control, the Public Warrant and Private Placement Warrant holders are entitled to receive cash while in certain scenarios the holders of the common stock are not entitled to receive cash or may receive less than 100% of any proceeds in cash, which precludes these instruments from being classified within equity pursuant to ASC 815-40. The Warrant liabilities were initially recorded at fair value on the date of the Business Combination and are subsequently adjusted to fair value at each subsequent reporting date. Changes in the fair value of warrant liabilities of $14,153,333 and an unrealized gain on marketable securities held in the Trust Account of $1,036.

Liquidity and Capital Resources

On October 2, 2020, we consummated the Initial Public Offering of 46,000,000 Units, which includes the full exercise by the underwriters of the over-allotment option of 6,000,000 Units, at $10.00 per unit, generating gross proceeds of $460,000,000. Simultaneously with the closing of the Initial Public Offering, we consummated the sale of 9,333,333 Private Placement Warrants to the Sponsor at a price of $1.50 per warrant, generating gross proceeds of $14,000,000.

Following the Initial Public Offering, the exercise of the over-allotment option and the sale of the Private Placement Warrants, a total of $460,000,000 was placed in the Trust Account. We incurred $25,777,859 in transaction costs, including $9,200,000 of underwriting fees, $16,100,000 of deferred underwriting fees and $477,859 of other costs.

For the three months ended March 31, 2021, cash used in operating activities was $511,921. Net income of $13,637,202 was offset by interest income on marketable securities held in the Trust Account of $85,152, athese instruments are recognized within change in the fair value of warrant liabilities of $14,153,333 and an unrealized gain on marketable securities held in the Trust AccountCondensed Consolidated Statements of $1,036. ChangesComprehensive Loss.


Earn-out Shares Liability

We consider earn-out shares liability as contingent consideration, which is measured at its acquisition-date fair value and included as part of the consideration transferred in operating assets and liabilities used $90,398a business combination. Contingent consideration that is classified as a liability in accordance with the requirements under ASC 480, Distinguishing Liabilities from Equity, is remeasured at subsequent reporting dates, with the corresponding gain or loss recognized in profit or loss.

Recent Accounting Pronouncements
See Note 2 of cash from operating activities.

As of March 31, 2021, we had marketable securities heldthe notes to our consolidated financial statements in the Trust Account of $460,184,400. We intendsection titled “—Recently Issued Accounting Pronouncements” in our Note 2 to use substantially all of the funds held in the Trust Account, including any amounts representing interest earned on the Trust Account (less deferred underwriting commissions and income taxes payable), to complete our Business Combination. To the extent that our capital stock or debt is used, in whole or in part, as consideration to complete our Business Combination, the remaining proceeds held in the Trust Account will be used as working capital to finance the operations of the target business or businesses, make other acquisitions and pursue our growth strategies.

As of March 31, 2021, we had $2,753,154 of cash held outside of the Trust Account. We used the funds held outside the Trust Account primarily to identify and evaluate target businesses, perform business due diligence on prospective target businesses, travel to and from the offices, plants or similar locations of prospective target businesses or their representatives or owners, review corporate documents and material agreements of prospective target businesses, and structure, negotiate and complete the Business Combination.

In order to fund working capital deficiencies or finance transaction costs in connection with a Business Combination, the Sponsor or an affiliate of the Sponsor or certain of our directors and officers could have, but were not obligated to, loan us funds as may be required. We did not need to raise additional funds in order to meet the expenditures required for operating our business.

We used substantially all of the funds held in the Trust Account to complete the Business Combination on May 4, 2021. Of the funds held in the Trust Account, we used $26,737,737 to fund the redemption of 2,672,690 shares of Class A Stock.

Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements as of March 31, 2021.

Contractual Obligations

We do not have any long-term debt, capital lease obligations, operating lease obligations or long-term liabilities, other than an agreement to pay affiliate of the our Chief Executive Officer a monthly fee of $10,000 for office space, administrative and support services. We began incurring these fees on September 30, 2020 and continued to incur these fees monthly until the completion of the Business Combination.

The underwriters were entitled to a deferred fee of $0.35 per Unit, or $16,100,000 in the aggregate, which was paid upon completion of the Business Combination.

Critical Accounting Policies

The preparation of condensedconsolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for a discussion about new accounting pronouncements adopted and related disclosuresnot yet adopted.


Non-GAAP Financial Measures

In addition to our results determined in conformityaccordance with accounting principles generally accepted in the United States of America requires(GAAP), management to make estimatesutilizes certain non-GAAP performance measures, Adjusted Net Income (Loss), Adjusted EBITDA (Loss), Adjusted EBITDA Margin, Adjusted Gross Profit, and assumptionsAdjusted Gross Margin, for purposes of evaluating the Company’s ongoing operations and for internal planning and forecasting purposes. We believe that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and income and expenses during the periods reported. Actual results could materially differ from those estimates.

Warrant Liability

We account for the warrants issued in connectionthese non-GAAP operating measures, when reviewed collectively with our Initial Public OfferingGAAP financial information, provide useful supplemental information to investors in assessing our operating performance.


Adjusted Net Income (Loss), Adjusted EBITDA (Loss) and Private Placement WarrantsAdjusted EBITDA Margin

Adjusted Net Income (Loss), Adjusted EBITDA (Loss) and Adjusted EBITDA Margin are key performance measures that management uses to assess its operating performance. Because Adjusted Net Income (Loss), Adjusted EBITDA (Loss) and Adjusted EBITDA Margin facilitates internal comparisons of our historical operating performance on a more consistent basis, we use these measures for business planning purposes.

We also believe this information will be useful for investors to facilitate comparisons of our operating performance and better identify trends in accordance withour business. We expect Adjusted EBITDA Margin to increase over the guidance containedlong-term as we continue to scale our business and achieve greater leverage in ASC 815-40, under which the warrants do not meet the criteria for equity treatment and must be recordedour operating expenses.

We calculate adjusted net income as liabilities. Accordingly, we classify the warrants as liabilities at their fair value and adjust the warrantsnet income (loss) adjusted to fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until exercised, and anyexclude: change in fair value is recognizedof public and private placement warrants, change in our statement of operations. The fair value of earn-out shares liability, other expense (income), net; amortization expense; stock-based compensation expense; management fees incurred from our historical private equity owners; one-time or non-recurring items such as transaction costs (including transactions costs with respect to the Business Combination); restructuring costs (including those associated with COVID-19) and the aggregate adjustment for income taxes for the tax effect of the adjustments described above.

We calculate adjusted EBITDA as net income (loss) adjusted to exclude: change in fair value of public and private placement warrants, issuedchange in fair value of earn-out shares liability, other expense (income), net; interest expense; provision for income taxes; depreciation and amortization expense; stock-based compensation expense; foreign currency gain/loss; management fees incurred from our historical private equity owners; one-time or non-recurring items such as transaction costs
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(including transactions costs with respect to the IPOBusiness Combination); and restructuring costs (including those associated with COVID-19).

The following table reconciles our net income (loss) to Adjusted net income (loss) for the periods indicated:
Three Months Ended June 30,Six Months Ended June 30,
Unaudited (in thousands)2021202020212020
Net loss$(139,378)$(10,397)$(142,652)$(19,466)
Adjusted to exclude the following:
Change in fair value of warrant liability72,027 — 72,027 — 
Change in fair value of earn-out shares liability36,525 — 36,525 — 
Amortization expense2,952 3,201 5,852 6,399 
Stock-based compensation expense3,508 224 3,542 250 
Other expense (income)4,307 (56)4,314 (61)
Management fees (1)82 437 209 967 
Transaction related costs (2)30,411 144 31,157 807 
Other non-recurring and one-time fees (3)51 2,223 138 2,765 
Aggregate adjustment for income taxes$(2,671)$(1,497)$(3,434)$(2,700)
Adjusted net income (loss)$7,814$(5,721)$7,678$(11,039)

The following table reconciles our net income (loss) to Adjusted EBITDA for the periods indicated:
Three Months Ended June 30,Six Months Ended June 30,
Unaudited (in thousands)2021202020212020
Net loss$(139,378)$(10,397)$(142,652)$(19,466)
Adjusted to exclude the following:
Change in fair value of warrant liability72,027—72,027—
Change in fair value of earn-out shares liability36,525—36,525—
Depreciation and amortization expense3,6943,8037,3387,304
Stock-based compensation expense3,5082243,542250
Interest expense2,0605,6677,7599,817
Income tax benefit(1,870)(3,052)(2,176)(5,667)
Other expense (income)4,307(56)4,314(61)
Foreign currency (gain) loss, net(24)(81)232122
Management fees (1)82437209967
Transaction related costs (2)30,41114431,157807
Other non-recurring and one-time fees (3)512,2231382,765
Adjusted EBITDA$11,393$(1,088)$18,413$(3,162)
Adjusted EBITDA Margin17.1%(7.7)%16.1%(6.8)%
____________________
(1) Represents quarterly management fees paid to the majority shareholder of HydraFacial based on a pre-determined formula. Following the Business Combination, these fees are no longer paid.
(2) Such amounts primarily represent direct costs incurred with the Business Combination, including $21.0 million paid to the former owner of HydraFacial, and to prepare HydraFacial to be marketed for sale by HydraFacial’s shareholders in previous periods.
(3) Such costs primarily represent COVID-19 related restructuring cost of $2.0 million and $2.1 million for the three and six months ended June 30, 2020, respectively, including write-off of expired Consumables, discontinued product lines, human capital and cash management consultants, and, to a lesser extent, costs associated with a former warehouse and assembly facility during the transition period.

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 (as defined below) and Consumables sales (as defined below). The continued growth of our Delivery Systems installed will allow us to improve our Adjusted Gross Margin, as additional Delivery System units sold will increase our recurring Consumables revenue, which has higher margins.
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We believe Adjusted Gross Profit and Adjusted Gross Margin are useful measures to us and to our investors to assist in evaluating our operating performance because it provides consistency and direct comparability with our past financial performance and between fiscal periods, as the metric eliminates the effects of amortization and depreciation, which are non-cash expenses that may fluctuate for reasons unrelated to overall continuing operating performance. Adjusted Gross Margin has been estimated using a Monte Carlo simulation methodology as of the date of the IPO and such warrants’ quoted market price as of March 31, 2021 and December 31, 2020. The Private Placement Warrants were valued using a Monte Carlo simulation model as of the date of the IPO, December 31, 2020, and March 31, 2021. In each case, the model reflected the specific features of the warrants, including redemption considerations.

Class A Common Stock Subject to Possible Redemption

We account for our shares of Class A common stock subject to possible redemption in accordance with the guidance in Accounting Standards Codification (“ASC”) Topic 480 “Distinguishing Liabilities from Equity.” Shares of Class A common stock subject to mandatory redemption is classified as a liability instrument and is measured at fair value. Conditionally redeemable common stock (including common stock that features redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within our control) is classified as temporary equity. At all other times, common stock is classified as stockholders’ equity. Our common stock features certain redemption rights that are consideredwill continue to be outsideaffected by a variety of factors, including the product mix, geographic mix, direct vs. indirect mix, the average selling price on Delivery Systems, and new product launches. We expect our control and subjectAdjusted Gross Margin to occurrence of uncertain future events. Accordingly,fluctuate over time depending on the Class A common stock subjectfactors described above.


The following table reconciles gross profit to possible redemption is presented as temporary equity, outside of the stockholders’ equity section of our consolidated balance sheets.

Net Income (Loss) per Common Share

The Company’s statement of operations includes a presentation of income (loss) per share for common shares subject to possible redemption in a manner similar to the two-class method of income (loss) per share. Net income (loss) per common share, basic and diluted, for Common stock subject to possible redemption is calculated by dividing the proportionate share of income or loss on marketable securities held by the Trust Account, net of applicable franchise and income taxes, by the weighted average number of Common stock subject to possible redemption outstanding since original issuance.

Net loss per share, basic and diluted, for non-redeemable common stock is calculated by dividing the net income (loss), adjusted for income or loss on marketable securities attributable to Class A common stock subject to possible redemption, by the weighted average number of non-redeemable common stock outstandingAdjusted Gross Profit for the period.

Non-redeemable common stock includes Founder Sharesperiods indicated (amounts and non-redeemable Class A shares as these shares dopercentages may not have any redemption features. Non-redeemable common stock participates in the income or loss on marketable securities based on Class A non-redeemable share’s proportionate interest.

Recent Accounting Standards

Management does not believe that any recently issued, but not yet effective, accounting standards, if currently adopted, would have a material effect on our condensed financial statements.

foot due to rounding):

Three Months Ended June 30,Six Months Ended June 30,
(in millions)2021202020212020
Net sales$66.5$14.1$114.1$46.7
Cost of sales$19.3$9.8$35.1$23.4
Gross profit$47.3$4.3$79.0$23.2
Gross margin71.0%30.3%69.3%49.7%
Adjusted to exclude the following:  
Depreciation and amortization expense relating to cost of sales$2.6$2.9$5.2$5.6
Adjusted gross profit$49.8$7.2$84.1$28.8
Adjusted gross margin74.9%51.0%73.8%61.7%


Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Interest Rate Risk


We had cash and cash equivalents of approximately $101.5 million as of June 30, 2021. We do not enter into investments for trading or speculative purposes. We have not been exposed, nor do we anticipate being exposed to material risks due to changes in interest rates. During the three months ended June 30, 2021, we repaid our indebtedness in full.

Foreign Currency Risk

To date, all of our inventory purchases have been denominated in U.S. dollars. Our international sales are primarily denominated in foreign currencies and any unfavorable movement in the exchange rate between U.S. dollars and the currencies in which we conduct sales in foreign countries could have an adverse impact on our revenue. A portion of our operating expenses are incurred outside the United States and are denominated in foreign currencies, which are also subject to fluctuations due to changes in foreign currency exchange rates.

While we are not currently contractually obligated to pay increased costs due to changes in exchange rates, to the extent that exchange rates move unfavorably for our suppliers, they may seek to pass these additional costs on to us, which could have a material impact on our gross margins. Our operating results and cash flows are, therefore, subject to fluctuations due to changes in foreign currency exchange rates. However, we believe that the exposure to foreign currency fluctuation from operating expenses is relatively small at this time as the related costs do not constitute a significant portion of our total expenses. As of March 31,June 30, 2021, we werethe effect of a hypothetical 10% change in foreign currency exchange rates would not have had a material impact to our consolidated results of operations.

Inflation Risk

We do not believe that inflation has had a material effect on our business, financial condition, or results of operations. If our costs become subject to any marketsignificant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or interest rate risk. Following the consummationfailure to do so could harm our business, financial condition, and operating results.

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Table of our Initial Public Offering, the net proceeds of our Initial Public Offering, including amounts in the Trust Account, have been invested in U.S. government treasury bills, notes or bonds with a maturity of 185 days or less or in certain money market funds that invest solely in U.S. treasuries. Due to the short-term nature of these investments, we believe there will be no associated material exposure to interest rate risk.

Contents




Item 4. Controls and Procedures

Restatement Procedures.

Background

On April 12, 2021, the Staff of the U.S. Securities and Exchange Commission (the “SEC”) released the Staff Statement on Accounting and Reporting Considerations for Warrants Issued by Special Purpose Acquisition Companies (“SPACs”) (the “Staff Statement”). The Staff Statement sets forth the conclusion of the SEC’s Office of the Chief Accountant that certain provisions included in the warrant agreements entered into by many SPACs, including the Company’s, require such warrants to be accounted for as liabilities measured at fair value, rather than as equity securities, with changes in fair value during each financial reporting period reported in earnings. The Company has previously classified its private placement warrants and public warrants as equity (for a full description of the Company’s private placement warrants and public warrants (collectively, the “Warrants”), refer to the registration statement on Form S-1 (File No. 333-248717), filed inMaterial Weakness


In connection with the Company’s initial public offering, declared effective by the SEC on September 30, 2020. The Company’s management further evaluated the warrants under Accounting Standards Codification (“ASC”) Subtopic 815-40, Contracts in Entity’s Own Equity. ASC Section 815-40-15 addresses equity versus liability treatment and classificationaudit of equity-linked financial instruments, including warrants, and states that a warrant may be classified as a component of equity only if, among other things, the warrant is indexed to the issuer’s common stock. Under ASC Section 815-40-15, a warrant is not indexed to the issuer’s common stock if the terms of the warrant require an adjustment to the exercise price upon a specified event and that event is not an input to the standard option pricing model. The Company and the audit committee concluded that the Company’s warrants are not indexed to the Company’s common shares in the manner contemplated by ASC Section 815-40-15 because the holder of the instrument is not an input into the pricing of a fixed-for-fixed option on equity shares. In addition, based on management’s evaluation, the Company’s audit committee, in consultation with management, concluded the tender offer provision included in the warrant agreement fails the “classified in shareholders’ equity” criteria as contemplated by ASC Section 815-40-25.

As a result of the above, the Company should have classified the warrants as derivative liabilities in its previously issued financial statements. Under this accounting treatment, the Company is required to measure the fair value of the warrants at the end of each reporting period and recognize changes in the fair value from the prior period in the Company’s operating results for the current period.

On May 9, 2021, we concluded our warrants should be accounted for as liabilities on the balance sheet and measured at fair value at inception and on a recurring basis in accordance with ASC 820, Fair Value Measurement, with changes in fair value recognized in the statement of operations. Therefore, our previously issuedconsolidated financial statements as of and for the years ended December 31, 2020 and the audit of HydraFacial as of and for the period from July 8, 2020 (inception) throughyear ended December 31, 2020 (the “Affected Periods”) shouldand 2019, we identified material weaknesses in our internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be relied upon because ofprevented or detected on a misapplication in the guidance on warrant accounting. Similarly, any previously furnished or filed reports, including the audited balance sheet filed with the SEC on Form 8-K on October 8, 2020,timely basis.


The material weaknesses are related earnings releases, investor presentations or similar communications of the Company describing the Company’s financial results for the Affected Periods should no longer be relied upon based on the correction of an error as described above and such financial statements were restated.

Additionally, the Company notedto 1) an error in itsour application of guidance associated with “ASC 480: Distinguishing Liabilities from Equity,” which needed to be modified to appropriately present the impact on the

accounting treatment of the temporary equity as a result of the private investment in public equity transaction that is subject of the Subscription Agreementssubscription agreements entered into by the Company with certain investors on December 8, 2021 (the “ PIPE Investment”) in connection withand 2) HydraFacial’s general segregation of duties, including the Compan y’ s business combination with LCP Edge Intermediate, Inc.,review and approval of journal entries, our lack of sufficient accounting resources and the lack of a Delaware corporationformalized risk assessment process. These material weaknesses may not allow for us to have proper segregation of duties and indirect parent of Edge Systems LLC d/b/the ability to close our books and records and report our results, including required disclosures and complex accounting matters, on a The HydraFacial Company, and LCP Edge Holdco, LLC, as previously disclosed in the Compan y’ s Form 10-K/A filed on May 27, 2021. This modification to the accounting treatment of equity required the Compan y’ s common stock to be reclassified from permanent equity to temporary equity in the form of common stock subject to possible redemption. The Audit Committee, in consultation with the Compan y’ s management, concluded that all Class A ordinary shares that were sold to the public in our IPO are to be classified as temporary equity, thereby correcting an error of classification within the Condensed Balance Sheet. In the financial statements filed in the Compan y’s Form 10-K/A, the Company incorrectly classified 8,351,205 Class A ordinary shares as permanent equity as of December 31, 2020, whereas no Class A ordinary shares should have been so classified. The 8,351,205 Class A ordinary shares that were originally incorrectly classified as permanent equity have been reclassified as temporary equity in this Form 10-Q, thereby yielding a total of 46,000,000 Class A ordinary shares (the shares sold to the public in our IPO, which are subject to redemption) as temporary equity.

timely basis.


Evaluation of Disclosure Controls and Procedures


Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.


As required by Rules 13a-15 and 15d-15 under the Exchange Act, our Chief Executive Officer and Chief Financial Officer carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31,June 30, 2021. Based upon their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, solely due to the eventsmaterial weaknesses that led toexisted as of December 31, 2020 accordingly disclosed in our Annual Report on Form 10-K/A for the Company’s restatementyear ended December 31, 2020 and revision of itsalso disclosed in the HydraFacial audited financial statements described above, as of March 31,in our Definitive Proxy Statement filed on April 7, 2021, a material weakness existed and our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were not effective.


Changes in Internal Control over Financial Reporting


There was no change in our internal control over financial reporting that occurred during the second fiscal quarter of 20202021 covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. In light of the Restatement,restatement and revision of the Company’s financial statements as of December 31, 2020 and for the period from July 8, 2020 (inception) through December 31, 2020, we plan to enhance our processes to identify and appropriately apply applicable accounting requirements to better evaluate and understand the nuances of the complex accounting standards that apply to our financial statements. Our plans at this time include providing enhanced access to accounting literature, research materials and documents and increased communication among our personnel and third-party professionals with whom we consult regarding complex accounting applications. We are actively recruiting additional personnel, in addition to engaging and utilizing third party consultants and specialists to supplement our internal resources and segregate key functions within our business processes. The elements of our remediation plan can only be accomplished over time, and we can offer no assurance that these initiatives will ultimately have the intended effects.



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PART II—OTHER INFORMATION


Item 1. Legal Proceedings

A lawsuit was filed


There have been no new material legal proceedings and no material developments in any of our previously disclosed legal proceedings reported in our Annual Report on Form 10-K for the Supreme Court ofyear ended December 31, 2020 and our Quarterly Report on Form 10-Q for the State of New York on January 18,quarter ended March 31, 2021, and amended on March 24, 2021, by a purported Company stockholder in connection withother than the Business Combination: Ciccotelli v. Vesper Healthcare Acquisition Corp., et al., Index No. 650346/2021 (N.Y. Sup. Ct.). An additional lawsuit was filed by a different purported Company stockholder on January 19, 2021, and amended on March 22, 2021, in the Supreme Court of the State of New York in connection with the Business Combination: Purvance v. Vesper Healthcare Acquisition Corp., et al., Index No. 650365/2021 (N.Y. Sup. Ct.). On January 26, 2021, a lawsuit was filed in the United States District Court, Southern District of New York by a different purported Company stockholder in connection with the Business Combination: Watkins v. Vesper Healthcare Acquisition Corp., et al., No. 1:21-cv-00713 (S.D.N.Y.). On February 8, 2021, a lawsuit was filed in the Eleventh Judicial Circuit, in and for Miami-Dade County, Florida, by a different purported Company stockholder in connection with the Business Combination: Elstein v. Saunders et al., No. 21-3028CA01 (Fla. 11th Cir. Ct.). The complaints name the Company and some or all of the current members of the Board as defendants. The complaints allege, among other things, breach of fiduciary duty claims against the Board in connection with the Business Combination. The complaints also allegefact that the Preliminary Proxy Statement is misleading and/or omits material information concerning the Business Combination. The complaints generally seek, among other things, injunctive relief, damages, and an award of attorneys’ fees. On March 2, 2021, counseldemand letters from counsels for Jordan Rosenblatt, a purported The Beauty Health Company shareholder, sent a demand lettershareholders alleging that The Beauty Health Company and its board had breached their fiduciary duties and violated federal securities laws in connection with the Preliminary Proxy Statement. Also on March 2, 2021, counsel for Patrick Plumley,Statement have been resolved as part of a purported The Beauty Health Company shareholder, sent a demand letter alleging that The Beauty Health Company and its board had breached their fiduciary duties and/or violated federal securities laws in connection with the Preliminary Proxy Statement. Both letters sought additional disclosures.

The Company believes these allegations are without merit and intends to defend against them; however, the Company cannot predict with certainty the ultimate resolution of any proceedings that may be brought in connection with these allegations.

On April 19, 2021, Elstein v. Saunders et al., No. 21-3028CA01 (Fla. 11th Cir. Ct.) was voluntarily dismissed. On April 26, 2021, Purvance v. Vesper Healthcare Acquisition Corp., et al., Index No. 650365/2021 (N.Y. Sup. Ct.) was voluntarily discontinued. On May 12, 2021, Watkins v. Vesper Healthcare Acquisition Corp., et al., No. 1:21-cv-00713 (S.D.N.Y.) was voluntarily dismissed. On May 17, 2021, Ciccotelli v. Vesper Healthcare Acquisition Corp., et al., Index No. 650346/2021 (N.Y. Sup. Ct.) was voluntarily discontinued.

settlement agreement.


Item 1A. Risk Factors


Factors that could cause our actual results to differ materially from those in this Quarterly Report are any of the risks described in our Annual ReportRegistration Statement on Form 10-K/AS-1 filed with the SEC on May 27,July 19, 2021. Any of these factors could result in a significant or material adverse effect on our results of operations or financial condition. Additional risk factors not presently known to us or that we currently deem immaterial may also impair our business or results of operations. As of the date of this Quarterly Report, there have been no material changes with respect to the risk factors disclosed in our Registration Statement on Form 10-K/AS-1 filed with the SEC on May 27,July 19, 2021.


Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Proceeds.


On October 2, 2020,May 4, 2021, we consummatedissued35,000,000 sharesof ClassA Common Stock to certainqualifiedinstitutional buyersand accreditedinvestorsthatagreedto purchasesuch sharesin connectionwith the Initial Public Offering BusinessCombination foraggregateconsiderationof 46,000,000 Units, which includes the full exercise by the underwriters $350 million.

On May 4, 2021, we issued35,501,743 sharesof their over-allotment option of 6,000,000 Units. The Units sold in the Initial Public Offering, including pursuant ClassA Common Stock as partialcompensationto the over-allotment option, were sold at an offering price of $10.00 per unit, generating total gross proceeds of $460,000,000. Goldman Sachs & Co, LLC and J.P. Morgan Securities

HydraFacialStockholdersfortheBusinessCombination.

LLC acted at joint book-running of managers the Initial Public Offering. The securities in the offering were registered under the Securities Act on registration statements on Form S-1 (No. 333-248717). The Securities and Exchange Commission declared the registration statements effective on September 29, 2020.

Simultaneous with the consummation of the Initial Public Offering and the exercise of the over-allotment option in full, we consummated the private placement of an aggregate of 9,333,333 Private Placement Warrants to the Sponsor at a price of $1.50 per Private Placement Warrant, generating total proceeds of $14,000,000. The issuance was made pursuant to the exemption from registration contained in Section 4(a)(2) of the Securities Act.

The Private Placement Warrants are identical to the warrants underlying the Units sold in the Initial Public Offering, except that the Private Placement Warrants are not transferable, assignable or salable until 30 days after the completion of a Business Combination, subject to certain limited exceptions.

Of the gross proceeds received from the Initial Public Offering including the exercise of the over-allotment option in full and the Private Placement Warrants, $460,000,000 was placed in the Trust Account.

We paid a total of $9,200,000 in underwriting discounts and commissions and $477,859 for other costs and expenses related to the Initial Public Offering. In addition, the underwriters agreed to defer up to $16,100,000 in underwriting discounts and commissions.

For a description of the use of the proceeds generated in our Initial Public Offering, see Part I, Item 2 of this Form 10-Q.


Item 3. Defaults Upon Senior Securities

Securities.


None.


Item 4. Mine Safety Disclosures

Disclosures.


Not Applicable.


Item 5. Other Information

Information.


None.


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Item 6. Exhibits

Exhibits.

The following exhibits are filed as part of, or incorporated by reference into, this Quarterly Report on Form 10-Q.

No.

Description of Exhibit

    3.2
  31.1*
  31.2*
  32.1**
  32.2**
101.INS*
101.INS*XBRL Instance Document
101.SCH*
101.SCH*XBRL Taxonomy Extension Schema Document
101.CAL*
101.CAL*XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*
101.DEF*XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*
101.LAB*XBRL Taxonomy Extension Labels Linkbase Document
101.PRE*
101.PRE*XBRL Taxonomy Extension Presentation Linkbase Document

*

Filed herewith.

**

Furnished.

________

*    Filed herewith.

**    Furnished.
#    Management contract or compensatory plan or arrangement.
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SIGNATURES

In accordance with


Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


THE BEAUTY HEALTH COMPANY
Date: July 1,August 13, 2021By:By:/s/ Clinton E. Carnell
Name:Name:Clinton E. Carnell
Title:Title:Chief Executive Officer
(Principal Executive Officer)
Date: July 1,August 13, 2021By:By:/s/ Liyuan Woo
Name:Name:Liyuan Woo
Title:Title:Chief Financial Officer
(Principal Accounting Officer and Financial Officer)

34

41