UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the ~~quarter~~quarterly period ended June 30, ~~2021~~2022

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

For the transition period from __________ to __________.

Commission ~~file number:~~File Number: 001-39565

The Beauty Health Company

(Exact name of registrant as specified in its charter)


Delaware						85-1908962
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)


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 share

SKIN

The Nasdaq ~~Stock~~Capital Market ~~LLC~~

~~Warrants, each exercisable for one share of Class A Common Stock, at a price of $11.50 per share~~

~~SKINW~~

~~The Nasdaq Stock Market LLC~~

~~Check~~Indicate by check mark whether the ~~issuer~~registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the ~~past~~preceding 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

☒☐

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 August ~~10, 2021,~~5, 2022, there were ~~133,419,152~~150,877,489 shares of Class A Common Stock, par value $0.0001 per share issued and outstanding.

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~~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” (“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 closing 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.

~~Table of Contents~~

THE BEAUTY HEALTH COMPANY

FORM 10-Q FOR THE QUARTER ENDED JUNE 30, ~~2021~~2022

TABLE OF CONTENTS


		Page
PART I—FINANCIAL INFORMATION
Item 1.	Financial Statements	43
	Condensed Consolidated Balance Sheets (Unaudited)	3
	Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)	4
	Condensed Consolidated Statements of ~~Comprehensive Loss~~Stockholders’ Equity (Deficit ) (Unaudited)	5
	Condensed Consolidated Statements of ~~Stockholder’s Deficit~~Cash Flows (Unaudited)	6
	~~Condensed Consolidated Statements of Cash Flows (Unaudited)~~	7
	Notes to Condensed Consolidated Financial Statements (Unaudited)	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2325
Item 3.	Quantitative and Qualitative Disclosures ~~Regarding~~About Market Risk	3738
Item 4.	Controls and Procedures	3839
PART II—OTHER INFORMATION
Item 1.	Legal Proceedings	3941
Item 1A.	Risk Factors	3941
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3941
Item 3.	Defaults Upon Senior Securities	3941
Item 4.	Mine Safety Disclosures	3941
Item 5.	Other Information	3941
Item 6.	Exhibits	4043
SIGNATURES

Table of Contents

PART I— FINANCIAL INFORMATION

Item 1. Financial Statements.

THE BEAUTY HEALTH COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except for share amounts)

(Unaudited)


	June 30, 2022		December 31, 2021
ASSETS
Current assets:
Cash and cash equivalents	$	820,970	$	901,886

Accounts receivable, net of allowances for doubtful accounts of $2,482 and $2,681 at June 30, 2022 and December 31, 2021, respectively	79,918		46,824
Prepaid expenses and other current assets	20,336		12,322
Income tax receivable	1,008		4,599
Inventories	73,526		35,261

Total current assets	995,758		1,000,892
Property and equipment, net	18,041		16,183
Right-of-use assets, net	15,791		14,992
Intangible assets, net	51,202		56,010
Goodwill	124,033		123,694
Deferred income tax assets, net	312		330
Other assets	9,823		6,705
TOTAL ASSETS	$	1,214,960	$	1,218,806
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	36,830	$	29,049
Accrued payroll-related expenses	27,786		28,662
Other accrued expenses	15,385		14,722
Lease liabilities, current	4,547		3,712
Income tax payable	2,510		292


Total current liabilities	87,058		76,437



Lease liabilities, non-current	13,116		12,781

Deferred income tax liabilities, net	3,844		3,561
Warrant liabilities	26,579		93,816
Convertible senior notes, net	732,028		729,914
TOTAL LIABILITIES	862,625		916,509
Commitments (Note 13)	0		0
Stockholders’ equity:
Class A Common Stock, $0.0001 par value; 320,000,000 shares authorized; 150,855,025 and 150,598,047 shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively	16		16
Preferred Stock, $0.0001 par value; 1,000,000 shares authorized; no shares issued and outstanding at June 30, 2022 and December 31, 2021	—		—
Additional paid-in capital	735,682		722,250

Accumulated other comprehensive income (loss)	(5,089)		(1,257)
Accumulated deficit	(378,274)		(418,712)
Total stockholders’ equity	352,335		302,297
LIABILITIES AND STOCKHOLDERS’ EQUITY	$	1,214,960	$	1,218,806

As of June 30, As of December 31,
2021 2020
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, respectively 40,128 18,576
Prepaid expenses 4,804 3,220
Income tax receivable 4,279 4,611
Inventories 23,762 23,202
Total current assets 174,440 59,095
Property and equipment, net 10,113 9,191
Intangible assets, net 51,884 50,935
Goodwill 103,100 98,531
Deferred tax assets, net 482 270
Other assets 2,489 4,813
Total assets $ 342,508 $ 222,835
Liabilities and Shareholders’ Equity (Deficit)
Current liabilities:
Accounts payable $ 17,328 $ 18,485
Accrued payroll related expenses 18,327 9,475
Other accrued expenses 3,073 2,458
Income tax payable 764 0
Current portion of long-term debt due to related parties 0 512
Total current liabilities 39,492 30,930
Earn-out shares liability 126,000 0
Other long-term liabilities 1,767 1,854
Long-term debt due to related parties, net of current portion 0 216,024
Deferred tax liabilities, net 1,313 3,987
Warrant liabilities 157,866 0
Total liabilities 326,438 252,795
Commitments (Note 11) 0 0
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, respectively 13 4
Preferred Stock, $0.0001 par value; 1,000,000 shares authorized; 0 shares issued and outstanding at June 30, 2021 and December 31, 2020 0 0
Additional paid-in capital 202,352 13,952
Note receivable from stockholder 0 (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 these unaudited financial statements.

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THE BEAUTY HEALTH COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

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

(Unaudited)


	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
Net sales	$	103,536	$	66,508	$	178,951	$	114,050
Cost of sales	31,882		19,257		55,360		35,059
Gross profit	71,654		47,251		123,591		78,991
Operating expenses:
Selling and marketing	44,881		26,214		81,288		43,309
Research and development	2,601		2,988		4,831		4,440
General and administrative	27,585		44,402		53,846		55,213
Total operating expenses	75,067		73,604		139,965		102,962
Loss from operations	(3,413)		(26,353)		(16,374)		(23,971)
Other (income) expense:
Interest expense, net	3,217		2,060		6,617		7,759
Other (income) expense, net	(1,658)		4,307		(721)		4,314
Change in fair value of warrant liabilities	(15,185)		72,027		(67,237)		72,027
Change in fair value of earn-out shares liability	—		36,525		—		36,525
Foreign currency transaction loss (gain), net	2,206		(24)		1,838		232
Total other (income) expense	(11,420)		114,895		(59,503)		120,857
Income (loss) before provision for income taxes	8,007		(141,248)		43,129		(144,828)
Income tax expense (benefit)	76		(1,870)		2,691		(2,176)
Net income (loss)	$	7,931	$	(139,378)	$	40,438	$	(142,652)
Comprehensive income (loss), net of tax:
Foreign currency translation adjustments	(3,687)		(276)		(3,832)		(281)
Comprehensive income (loss)	$	4,244	$	(139,654)	$	36,606	$	(142,933)
Net income (loss) per share
Basic	$	0.05	$	(1.52)	$	0.27	$	(2.24)
Diluted	$	(0.05)	$	(1.52)	$	(0.18)	$	(2.24)
Weighted average common shares outstanding
Basic	150,731,491		91,798,837		150,665,166		63,805,807
Diluted	151,719,451		91,798,837		152,274,394		63,805,807

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

Table of Contents

~~THE BEAUTY HEALTH COMPANY~~

~~CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS~~

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

~~(Unaudited)~~

Three Months Ended June 30, Six Months Ended June 30,
2021 2020 2021 2020
Net sales $ 66,508 $ 14,116 $ 114,050 $ 46,652
Cost of sales 19,257 9,840 35,059 23,447
Gross profit 47,251 4,276 78,991 23,205
Operating expenses:
Selling and marketing 26,214 6,186 43,309 23,883
Research and development 2,988 597 4,440 1,972
General and administrative 44,402 5,412 55,213 12,605
Total operating expenses 73,604 12,195 102,962 38,460
Loss from operations (26,353) (7,919) (23,971) (15,255)
Other (income) expense:
Interest expense, net 2,060 5,667 7,759 9,817
Other expense (income), net 4,307 (56) 4,314 (61)
Change in fair value of warrant liabilities 72,027 0 72,027 0
Change in fair value of earn-out shares liability 36,525 0 36,525 0
Foreign currency (gain) loss, net (24) (81) 232 122
Total other expense 114,895 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 diluted 91,798,837 34,482,179 63,805,807 33,309,191

~~The accompanying notes are an integral part of these unaudited financial statements.~~

~~Table of Contents~~

THE BEAUTY HEALTH COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

(in thousands, except for share amounts)

(Unaudited)


		Legacy Common Stock			Legacy Preferred Stock			Common Stock			Additional Paid-in Capital				Note Receivable from Stockholder		Accumulated other Comprehensive Income (Loss)			Accumulated Deficit				Total Stockholders’Equity (Deficit)					Legacy Common Stock								Legacy Preferred Stock							Common Stock					Additional Paid-in Capital				Note Receivable from Stockholder					Accumulated other Comprehensive Income (Loss)					Accumulated Deficit					Total Stockholders’Equity (Deficit)
		Shares	Amount		Shares	Amount		Shares	Amount										Shares								Amount				Shares				Amount			Shares				Amount
BALANCE, December 31, 2019		49,205	$	0	935	$	0	0	$	0			$	13,747			$	(554)				$	28			$	(14,429)			$	(1,208)
BALANCE, December 31, 2020																										BALANCE, December 31, 2020		54,358				$	—			931			$	—			—		$	—		$			13,956				$	(554)				$	242				$	(43,604)				$	(29,960)
Retroactive application of recapitalization	Retroactive application of recapitalization	(49,205)	0		(935)	0		32,136,203	3		(3)				0		0			0				0			Retroactive application of recapitalization		(54,358)				—				(931)			—				35,501,743		4			(4)				—					—					—					—
Adjusted balance, beginning of period	Adjusted balance, beginning of period	0	0		0	0		32,136,203	3		13,744				(554)		28			(14,429)				(1,208)			Adjusted balance, beginning of period		—				—				—			—				35,501,743		4			13,952				(554)					242					(43,604)					(29,960)
Stock-based compensation	Stock-based compensation	—	—		—	—		—	—		26				—		—			—				26			Stock-based compensation		—				—				—			—				—		—			34				—					—					—					34
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)
Net income (loss)																										Net income (loss)		—				—				—			—				—		—			—				—					—					(3,274)					(3,274)
Foreign currency translation adjustment	Foreign currency translation adjustment	—	—		—	—		—	—		—				—		(5)			—				(5)			Foreign currency translation adjustment		—				—				—			—				—		—			—				—					(5)					—					(5)
BALANCE, March 31, 2021	BALANCE, March 31, 2021	—	—		—	—		35,501,743	4		13,986				(554)		237			(46,878)				(33,205)			BALANCE, March 31, 2021		—				$	—			—			$	—			35,501,743		$	4		$	13,986			$	(554)				$	237				$	(46,878)				$	(33,205)
Reverse recapitalization transaction, net	Reverse recapitalization transaction, net	—	—		—	—		89,827,310	9		183,301				554		—			—				183,864			Reverse recapitalization transaction, net		—				—				—			—				89,827,310		9			183,301				554					—					—					183,864
Issuance of Class A Common Stock in connection with business acquisition																										Issuance of Class A Common Stock in connection with business acquisition		—				—				—			—				110,726		—			1,557				—					—					—					1,557
Stock-based compensation																										Stock-based compensation		—				—				—			—				—		—			3,508				—					—					—					3,508
Net income (loss)																										Net income (loss)		—				—				—			—				—		—			—				—					—					(139,378)					(139,378)
Foreign currency translation adjustment																										Foreign currency translation adjustment		—				—				—			—				—		—			—				—					(276)					—					(276)
BALANCE, June 30, 2021																										BALANCE, June 30, 2021		—				$	—			—			$	—			125,439,779		$	13		$	202,352			$	—				$	(39)				$	(186,256)				$	16,070

Issuance of Class A Common Stock in connection with business acquisition		—	—		—	—		110,726	—		1,557				—		—			—				1,557

BALANCE, December 31, 2021																										BALANCE, December 31, 2021		—				$	—			—			$	—			150,598,047		$	16		$	722,250			$	—				$	(1,257)				$	(418,712)				$	302,297
Issuance of common stock for vesting of restricted stock units																										Issuance of common stock for vesting of restricted stock units		—				—				—			—				5,184		—			—				—					—					—					—
Stock-based compensation	Stock-based compensation	—	—		—	—		—	—		3,508				—		—			—				3,508			Stock-based compensation		—				—				—			—				—		—			7,049				—					—					—					7,049
Net income (loss)																										Net income (loss)		—				—				—			—				—		—			—				—					—					32,507					32,507
Foreign currency translation adjustment																										Foreign currency translation adjustment		—				—				—			—				—		—			—				—					(145)					—					(145)
BALANCE, March 31, 2022																										BALANCE, March 31, 2022		—				$	—			—			$	—			150,603,231		$	16		$	729,299			$	—				$	(1,402)				$	(386,205)				$	341,708

Net loss		—	—		—	—		—	—		—				—		—			(139,378)				(139,378)
Issuance of Class A Common Stock in connection with asset acquisition																										Issuance of Class A Common Stock in connection with asset acquisition		—				—				—			—				28,733		—			500				—					—					—					500
Issuance of common stock pursuant to equity compensation plan																										Issuance of common stock pursuant to equity compensation plan		—				—				—			—				252,536		—			—				—					—					—					—
Stock-based compensation																										Stock-based compensation		—				—				—			—				—		—			6,378				—					—					—					6,378
Shares withheld for tax withholdings on vested stock awards																										Shares withheld for tax withholdings on vested stock awards		—				—				—			—				(29,475)		—			(495)				—					—					—					(495)
Net income (loss)																										Net income (loss)		—				—				—			—				—		—			—				—					—					7,931					7,931
Foreign currency translation adjustment	Foreign currency translation adjustment	—	—		—	—		—	—		—				—		(276)			—				(276)			Foreign currency translation adjustment		—				—				—			—				—		—			—				—					(3,687)					—					(3,687)
BALANCE, June 30, 2021		—	$	—	—	$	—	125,439,779	$	13	$	202,352			$	0	$	(39)		$	(186,256)			$	16,070
BALANCE, June 30, 2022																										BALANCE, June 30, 2022		—				$	—			—			$	—			150,855,025		$	16		$	735,682			$	—				$	(5,089)				$	(378,274)				$	352,335

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

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THE BEAUTY HEALTH COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)


	Six Months Ended June 30,
	2022		2021

Cash flows from operating activities:
Net income (loss)	$	40,438	$	(142,652)
Adjustments to reconcile net income (loss) to net cash from operating
Depreciation of property and equipment	3,268		1,418
Amortization of capitalized software	903		626
Provision for doubtful accounts	435		646
Non-cash lease expense	2,282		—
Amortization of intangible assets	6,468		5,229
Amortization of other assets	280		66
Amortization of deferred financing costs	—		2,806
Stock-based compensation	13,427		3,542


Loss on sale and disposal of assets	988		—
In-kind interest	—		4,130
Deferred income tax benefit	—		(3,471)
Change in fair value of earn-out shares liability	—		36,525
Change in fair value adjustment of warrant liabilities	(67,237)		72,027
Debt prepayment expense	—		2,014
Amortization of debt issuance costs	2,114		—
Changes in operating assets and liabilities:
Accounts receivable	(34,410)		(21,089)
Prepaid expense and other current assets	(9,374)		(1,562)
Income taxes receivable	4,165		333
Inventory	(39,234)		(229)
Other assets	(2,634)		730
Accounts payable	7,675		(2,369)
Accrued payroll and other expenses	385		9,047
Other long-term liabilities	—		(87)
Lease liabilities	(1,972)		—
Income taxes payable	2,227		382
Net cash used in operating activities	(69,806)		(31,938)
Cash flows used in investing activities:
Cash paid for business acquisitions, net of cash acquired	—		(4,920)
Cash paid for asset acquisition	(1,475)		—
Repayment of notes receivables from shareholders	—		781
Capital expenditures for intangible assets	(1,252)		(273)
Capital expenditures for property and equipment	(5,577)		(4,707)
Net cash used in investing activities	(8,304)		(9,119)
Cash flows from financing activities:



Payment of contingent consideration related to acquisitions	(2,763)		—
Proceeds from revolving facility	—		5,000
Repayment of revolving facility	—		(5,000)


Proceeds from Business Combination, net of transaction costs (See Note 3)	—		358,536
Repayment of term loan	—		(225,487)


Net cash (used in) provided by financing activities	(2,763)		133,049
Net (decrease) increase in cash and cash equivalents	(80,873)		91,992
Effect of foreign currency translation on cash	(43)		(11)
Cash and cash equivalents, beginning of period	901,886		9,486
Cash and cash equivalents, end of period	$	820,970	$	101,467

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

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THE BEAUTY HEALTH COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(in ~~thousands, unaudited)~~thousands)

Six Months Ended June 30,
2021 2020
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 equipment 1,418 1,273
Amortization of capitalized software 626 349
Provision for doubtful accounts 646 874
Amortization of intangible assets 5,229 5,616
Amortization of other assets 66 66
Amortization of deferred financing costs 2,806 701
Share-based compensation 3,542 250
Amortization of unfavorable lease terms 0 (36)
Write-off of unfavorable lease 0 (383)
Gain/Loss on sale and disposal of assets 0 25
In-kind interest that compounds into debt 4,130 1,855
Deferred income taxes (3,471) (47)
Fair value adjustment of earn-out shares liability 36,525 0
Fair value adjustment of warrant liability 72,027 0
Debt prepayment expense 2,014 0
Changes in operating assets and liabilities:
Accounts receivables (21,089) 9,193
Prepaid expense and other current assets (1,562) 636
Income taxes receivable 333 (3,393)
Inventory (229) (1,821)
Other assets 730 (167)
Accounts payable (2,369) 2,191
Accrued payroll and other expenses 9,047 (6,768)
Other long-term liabilities (87) 382
Income taxes payable 382 (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 shareholders 781 0
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 facility 5,000 6,500
Repayment of revolving facility (5,000) (15,000)
Proceeds from term loan 0 30,000
Payment of debt issuance costs 0 (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 activities 133,049 20,537
Net increase in cash and cash equivalents 91,992 7,479
Effect of foreign currency translation on cash (11) (164)
Cash and cash equivalents, beginning of period 9,486 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 taxes 96 97
Capital expenditures included in accounts payable 1,440 1,242
Change in deferred tax liability due to reverse recapitalization 90 0
(Unaudited)


	Six Months Ended June 30,
	2022		2021



























































Supplemental disclosures of cash flow information and non-cash investing and financing activities:
Cash paid for interest	$	5,130	$	10,249
Common stock issued for asset acquisition	500		—
Common stock issued for business acquisitions	—		1,557
Cash (received) paid for income taxes	(2,967)		96





Capital expenditures included in accounts payable	404		1,440
Change in deferred tax liability due to reverse recapitalization	—		90

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

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THE BEAUTY HEALTH COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

Note 1 – Description of Business

The Beauty Health Company, ~~(formerly~~formerly known as Vesper Healthcare Acquisition Corp.) (the “Company” or “BeautyHealth”), was incorporated in Delaware on July 8, 2020. The Company was originally 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.

On May 4, 2021 (the “Closing Date”), ~~LCP Edge Intermediate, Inc. (“HydraFacial”) consummated a merger with~~ the Company consummated the previously announced business combination pursuant to ~~the~~that certain Agreement and Plan of Merger, dated December 8, 2020 (the “Merger Agreement”), by and among Vesper Healthcare Acquisition Corp. (“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,” or “Former Parent,” and, in its capacity as the stockholders’ representative, the “Stockholders’ Representative”), which provided ~~for, among other things,~~for: (a) the merger of Merger Sub I with and into HydraFacial, with HydraFacial continuing as the ~~Company. Upon closing,~~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 ~~was renamed The~~(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 Company 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 Company owns 100% of the outstanding interests in Merger Sub II. In connection with the closing of the Business Combination (the “Closing”), the Company 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 Company’s Class A Common Stock, par value $0.0001 per share (the “Class A Common Stock”).

In connection with the Closing, the Company changed its name from “Vesper Healthcare Acquisition Corp.” to “The Beauty Health ~~Company (“BeautyHealth”)~~Company.” Following the Closing, on May 6, 2021, the Company’s Class A Common Stock and ~~began to trade~~publicly traded warrants were listed on the Nasdaq Capital Market (“Nasdaq”) under the ~~ticker symbol “SKIN.”~~symbols, “SKIN” and “SKINW”, respectively. The transactions set forth in the Merger Agreement constitute a “Business Combination” as contemplated by Vesper’s Second Amended &and Restated Certificate of Incorporation.

~~BeautyHealth~~Unless the context otherwise requires, in this Quarterly Report on Form 10-Q, the “Company” refers to Vesper Healthcare Acquisition Corp. prior to the closing 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. References to “Vesper” refer to Vesper Healthcare Acquisition Corp. prior to the consummation of the Business Combination.

The Company 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~~a/esthetic 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~~uses a unique delivery system to cleanse, ~~exfoliate,~~ extract, and hydrate ~~simultaneously; HydraFacial® Daily Essentials, which provides detoxification, rejuvenation,~~with their patented hydradermabrasion technology and ~~protection of skin; crystal microdermabrasion systems; and light emitting diode systems. The premiere system is the HydraFacial MD® liquid based skin exfoliation system.~~serums that are made with nourishing ingredients.

The COVID-19 pandemic has had, and may 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 simultaneously implementing policies designed to reopen certain markets, we are working to ensure our compliance and maintain business continuity for essential operations. The extent to which the COVID-19 pandemic impacts our business going forward will depend on numerous factors we cannot reliably predict, including the duration and scope of the pandemic; businesses and individuals’ actions in response to the pandemic; and the impact on economic activity including the possibility of recession or financial market instability.

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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 (“GAAP”). 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”) as of immediately prior to the effective time of the First Merger (the “HydraFacial Stockholders”) considered 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 purchase 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 (the “Class A Common Stock”), of the Company. The recapitalization of the number of shares of Common Stock attributable to HydraFacial is reflected retroactively to the earliest period presented based upon the Exchange Ratio and is utilized for calculating earnings per share in all prior periods presented.

The interim Condensed Consolidated Financial Statements are presented in accordance with GAAP and include the Company’s consolidated domestic and international subsidiaries. Certain information and disclosures normally included in consolidated financial statements prepared in accordance with GAAP have been condensed or omitted. Accordingly, these interim Condensed Consolidated Financial Statements and accompanying footnotes 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 Registration Statement on Form S-1 filed on July 19, 2021.

~~Except as described elsewhere in this Note 2, there have been no material changes to~~Information regarding the Company’s significant accounting policies ~~as described~~is contained in ~~HydraFacial’s Consolidated Financial Statements as~~Note 2, “Summary of ~~and for~~Significant Accounting Policies”, to the ~~year ended December 31, 2020.~~consolidated financial statements included in the Company’s Annual Report on Form 10-K filed with the SEC on March 1, 2022.

New Accounting Pronouncements Not Yet Adopted

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 Company 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 June 30,October 2021, ~~are not necessarily indicative of the results of operations to be expected for the full year ending December 31, 2021.~~

~~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 doubtful 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 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.

~~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.

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The Company 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 Securities 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 connection with the Vesper Healthcare Acquisition Corp IPO, the Company issued~~ ~~15,333,333~~ ~~warrants (the “Public Warrants”) to purchase shares of Common Stock at $11.50 per share. Simultaneously, with the consummation of the Vesper Healthcare Acquisition Corp IPO, the Company issued~~ ~~9,333,333~~ warrants (the “Private Placement Warrants” and, together with the Public Warrants, the “Public and Private Placement Warrants”) to purchase shares of Common Stock at $11.50 per share, to BLS Investor Group LLC (the “Sponsor”).~~All of the Public 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 settlement adjustment that does not meet the scope of the fixed-for-fixed exception in Accounting Standards Codification (“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 Public and Private Placement Warrants 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 these 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 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. 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 recorded in the Condensed Consolidated Statements of Comprehensive Loss as a component of ~~Other (income) expense, net.~~

~~Fair Value of Financial Instruments~~

~~The fair value of the Company’s assets and liabilities, which qualify as financial instruments under ASC 820,~~ ~~Fair Value Measurement, approximates the carrying amounts represented in the 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 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.

~~Recently Adopted Accounting Pronouncements~~

~~Income Taxes.~~ ~~In December 2019,~~ the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) ~~No. 2019-12,~~ ~~Income Taxes~~ASU 2021-08, Business Combinations (Topic ~~740): Simplifying the Accounting for Income Taxes~~ ~~(“ASU 2019-12”). The amendments in ASU 2019-12 simplify~~805), which primarily relates to 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 adopted ASU 2019-12 on January 1, 2021, which did not have a material impact on its Condensed 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 recognize~~contract assets and contract liabilities ~~on the balance sheet~~from contracts with customers in a business combination. The standard will be effective for ~~the rights and obligations created by all leases~~annual reporting periods beginning after December 31, 2022, including interim reporting periods within those periods, with ~~terms of more than 12 months. The Company is~~early adoption permitted. We are currently evaluating the impact of ~~the amended lease~~adopting this new accounting guidance on ~~its~~our consolidated financial ~~statements, and will adopt this guidance on December 31, 2021.~~statements.

Note 3 – Business Combinations and Asset Acquisitions

Business Combination -— Reverse Recapitalization

The closing of the Business Combination occurred on May 4, 2021. In connection with the Business Combination:

•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 Company’s Class A Common Stock at a purchase price per share of $10.00 ~~and~~for an aggregate purchase price of ~~$350,000,000~~$350.0 million (the “PIPE Investment”). The PIPE Investment was consummated substantially concurrently with the ~~Closing.~~Closing of the Business Combination.

•Prior to the Business Combination, the Company issued an aggregate of 11,500,000 shares of the Company’s Class B ~~common stock~~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 the Company’s 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 the Company’s Class A Common Stock exercised their rights for the Company to redeem ~~those~~their respective shares for cash at an approximate price of $10.00 per share, for an aggregate of approximately ~~$26,737,737,~~$26.7 million, 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~~the Company’s Class A Common Stock issued and 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 gross cash consideration received was reduced by $368 million, which consisted of cash payments made to the former shareholders of HydraFacial, and further reduced by an additional $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 iswas subject to a ~~net~~working capital adjustment of $0.9 million. The Company also issued 70,860 shares related to the working capital adjustment.

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The following table reconciles the elements of the Business Combination to the ~~Condensed~~Company’s Consolidated Statements of Cash Flows and the ~~Condensed~~ Consolidated Statements of Stockholders’ Equity (Deficit) for the ~~six months~~year ended ~~June 30,~~December 31, 2021:

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(in thousands)	Recapitalization
Cash in trust, net of redemptions	$	433,382
Cash -— PIPE	350,000
Less: Cash paid out to Former Parent	(367,870)
Less: ~~transaction~~Transaction costs and advisory fees	(56,976)
Less: Cash paid out from net working capital adjustment related to acquisitions	(902)
Net Cash Received from Business Combination	$	~~358,536~~357,634

The number of shares of ~~common stock~~Class A Common Stock issued ~~immediately~~ following the consummation of the Business Combination:


			Number of Shares
Class A common stock outstanding prior to Business Combination			46,000,000
Less: Redemption of Vesper Class A ~~common stock~~Common Stock			(2,672,690)
Class A common stock of Vesper			43,327,310
~~Vesper~~ Founder shares (Vesper Class B Common Stock)			11,500,000
PIPE Shares			35,000,000
Business Combination and PIPE shares			89,827,310
Legacy HydraFacial shares (1)			35,501,743
Working capital adjustment Class A Common Stock issued			70,860
Total Shares of Class A Common Stock ~~Immediately~~ after Business Combination			~~125,329,053~~125,399,913

_______________

(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.

Distributor Acquisitions

~~Acquisition of High Tech Laser~~

On June 4, 2021, the Company ~~purchased substantially all assets of~~ acquired 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~~products in Australia. On July 1, 2021, the Company ~~incurred certain costs related~~acquired Wigmore Medical France (“Wigmore”), Ecomedic GmbH (“Ecomedic”) and Sistemas Dermatologicos Internacionales (“Sidermica”), distributors of the Company’s products in France, Germany and Mexico, respectively. Through these acquisitions, the Company plans to ~~this transaction that were not material.~~directly sell to the respective markets and improve services for its products. Cash paid for the four distributors totaled $23.7 million.

The Company applied the acquisition method of accounting and established a new basis of accounting on the ~~date~~dates of the ~~acquisition.~~respective acquisitions. 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 issued~~	~~1,557~~
	$	~~6,477~~
~~Identifiable assets acquired and liabilities assumed~~
~~Accounts receivable~~	$	~~1,110~~
~~Non-compete agreement~~	~~100~~
~~Customer relationships~~	~~2,696~~
~~Inventory and other assets~~	~~354~~
~~Accounts payable~~	~~(1,072)~~
~~Deferred tax liabilities, net~~	~~(675)~~
~~Accrued and other liabilities~~	~~(802)~~
~~Total identifiable net assets~~	~~1,711~~
~~Goodwill~~	$	~~4,766~~

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~~The primary purpose~~as of the acquisition ~~was to expand the Company’s operations in the Australia market.~~date. The goodwill arising from the ~~acquisition~~acquisitions 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.

The Company finalized the valuation of assets acquired and liabilities assumed for the distributor acquisitions as of June 30, 2022. The following table summarizes the consideration and fair values assigned to the assets acquired and liabilities

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assumed at the dates of acquisition for the Wigmore, Ecomedic and Sidermica acquisitions and summarizes the HTL acquisition after measurement period adjustments.


(in thousands)	HTL		Wigmore (2)		Ecomedic (3)		Sidermica (4)
Consideration paid:
Cash, net of cash acquired	$	4,920	$	2,540	$	11,338	$	6,861
Class A Common Stock issued (1)	1,557		456		6,513		815

Trade receivables due from seller	1,027		2,336		1,679		1,581
Notes payable to seller	—		—		2,153		—
	$	7,504	$	5,332	$	21,683	$	9,257
Identifiable assets acquired and liabilities assumed
Accounts receivable	$	1,110	$	2,079	$	15	$	1,657
Non-compete agreement	100		60		588		100
Customer relationships	2,696		2,276		5,487		2,700
Inventory and other assets	354		341		1,262		454
Accounts payable	(45)		(456)		(772)		—
Deferred tax liabilities, net	(675)		(842)		(2,008)		—
Accrued and other liabilities	(802)		(317)		(340)		—
Total identifiable net assets	2,738		3,141		4,232		4,911
Goodwill	$	4,766	$	2,191	$	17,451	$	4,346

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(1) Class A Common Stock issued as consideration for the acquisitions was 110,726, 28,157, 401,021 and 50,195 shares for HTL, Wigmore, Ecomedic and Sidermica, respectively.

(2) During the fourth quarter of 2021, adjustments were made to the Wigmore valuation pertaining to contingent consideration and intangible assets. Goodwill was adjusted due to an increase of $0.3 million in contingent consideration and a decrease of $1.0 million in intangible assets. Contingent consideration payments for the Wigmore acquisition were paid during the three months ended March 31, 2022.

(3) During the first quarter of 2022, adjustments were made to the Ecomedic valuation pertaining to acquisition date tax liability. Goodwill was adjusted due to an increase of $0.2 million to acquisition date tax liability.

(4) During the second quarter of 2022, adjustments were made to the Sidermica valuation pertaining to contingent consideration. Goodwill was adjusted due to an increase in contingent consideration of $1.98 million. Contingent consideration payments for the Sidermica acquisition were paid during the three months ended June 30, 2022.

Intangible assets ~~consist of~~acquired included customer relationships ~~with a weighted average amortization period of 5 years.~~and non-compete agreements. 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~~weighted average amortization period of customer relationship was 5 years, while the non-compete agreements are amortized over 3 years.

The operating results of the distributor acquisitions from the dates of acquisitions through June 30, 2022 are included in the Condensed Consolidated Statements of Comprehensive Income (Loss). The operating results are not material to the consolidated financial statements, and, therefore, the Company has not presented pro forma ~~financial information assuming these fiscal 2021 acquisitions had occurred as~~results of operations for 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.distributor acquisitions.

Acquisition of The Personalized Beauty Company, Inc. (“Mxt”)

On April 12, 2022, the Company, through its indirect, wholly-owned subsidiary, Edge Systems Intermediate, LLC, acquired The Personalized Beauty Company, Inc., a Delaware corporation d.b.a. Mxt. Consideration paid in the aggregate was $1.5 million plus equity consideration of $0.5 million or 28,733 shares of the Company’s Class A Common Stock. Depending on the achievement of certain revenue milestones, the former Mxt shareholders are entitled to receive up to $30 million of earnout payments. The estimated fair value of the earnout was not material as of the acquisition date.

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The Company accounted for this transaction as an asset acquisition based on an evaluation of the U.S. GAAP guidance for business combinations and concluded that the Company acquired developed technology of $1.9 million and inventory of $0.1 million. The Company concluded that the developed technology acquired from Mxt comprised substantially all of the fair value of the gross assets acquired and that the assets acquired did not meet the definition of a business under the guidance for business combinations. The developed technology intangible asset is being amortized on a straight-line basis over 3 years and recorded in cost of sales.

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. Typical payment terms provide for the customer to pay within 30 to 120 days, however, we provide an option for qualified customers to pay for delivery systems over 12 monthly installments.

Disaggregated Revenue

The Company generates revenue through manufacturing and selling HydraFacial ~~and Perk~~ Delivery Systems ~~(the “Delivery Systems”~~(“Delivery Systems”). In conjunction with the sale of Delivery Systems, ~~the Company~~HydraFacial also sells its serum solutions and consumables ~~(the “Consumables”~~(collectively “Consumables”). ~~The~~ Consumables are sold solely and exclusively by ~~the Company~~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 ~~Delivery System.~~customer, which generally takes place at the point of shipment.

The Company’s revenue disaggregated by major product line consists of the following for the periods indicated:


		Three Months Ended				Six Months Ended					Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	(in thousands)	June 30, 2021		June 30, 2020		June 30, 2021		June 30, 2020		(in thousands)	2022		2021		2022		2021
Net Sales	Net Sales									Net Sales
Delivery Systems	Delivery Systems	$	34,944	$	5,975	$	60,616	$	20,056	Delivery Systems	$	64,783	$	34,944	$	106,430	$	60,616
Consumables	Consumables	31,564		8,141		53,434		26,596		Consumables	38,753		31,564		72,521		53,434
Total net sales	Total net sales	$	66,508	$	14,116	$	114,050	$	46,652	Total net sales	$	103,536	$	66,508	$	178,951	$	114,050

See Note 1617 for revenue disaggregated by geographical region.

Note 5 ~~– Inventories~~— Balance Sheet Components

Inventories consist of the following as of the periods indicated:

(in thousands) June 30, 2021 December 31, 2020
Raw materials $ 8,816 $ 9,335
Finished goods 14,946 13,867
Total inventories $ 23,762 $ 23,202


(in thousands)	June 30, 2022		December 31, 2021
Raw materials	$	19,008	$	12,024

Finished goods	54,518		23,237
Total inventories	$	73,526	$	35,261

Accrued payroll-related expenses consist of the following as of the periods indicated:


(in thousands)	June 30, 2022		December 31, 2021
Accrued compensation	$	10,935	$	15,262
Accrued payroll taxes	2,448		922
Accrued benefits	3,976		3,022
Accrued sales commissions	10,427		9,456
Total accrued payroll-related expenses	$	27,786	$	28,662

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Other accrued expenses consist of the following as of the periods indicated:


(in thousands)	June 30, 2022		December 31, 2021
Sales and VAT tax payables	$	5,840	$	5,817
Accrued interest	2,344		2,786
Contingent consideration	—		783
Note payable due seller	2,125		2,153
Royalty liabilities	1,024		1,074
Other	4,052		2,109
Total other accrued expenses	$	15,385	$	14,722

Note 6 — Leases

The Company does not own any real estate. The majority of the Company’s lease liability consists of the Company’s international office spaces and warehouses, all of which are classified as operating leases. The Company’s finance leases relate to leased equipment such as office and warehouse equipment. The finance lease balances are not material but are included in property and equipment, other accrued expenses, and other long-term liabilities of the Condensed Consolidated Balance Sheets. During the three months ended June 30, 2022 the Company entered into leases for a new experience center in Paris for a right-of-use asset and lease liability of $1.1 million and an office in Frankfurt for a right-of-use asset and lease liability of $1.6 million.

Note 7 — Fair Value Measurements

The Company follows the guidance in ASC 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.

The following table presents information about the Company’s assets and liabilities that are measured at fair value on a recurring basis at June 30, 2022, and indicates the fair value hierarchy of the valuation inputs the Company utilized to determine such fair value. As of the Business Combination date, the Private Placement Warrants were valued using the Public Warrant Price, and was considered to be a Level 2 financial instrument as of that date. As of June 30, 2022, the value of the Private Placement Warrants was determined using their redemption value because these Private Placement Warrants are subject to redemption if the reference value of the common stock, as defined, is between $10.00 and $18.00 per share. The Private Placement Warrants are classified as a Level 2 financial instrument. There were no Public Warrants outstanding as of June 30, 2022. There were no valuation level transfers during the six months ended June 30, 2022.

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	Fair Value Measurements on a Recurring Basis
(in thousands)	Level 1		Level 2		Level 3		Total
Assets
Cash and cash equivalents:
Money market funds	$	768,575	$	—	$	—	$	768,575
Liabilities

Warrant liability — Private Placement Warrants	—		26,579		—		26,579

Money Market Funds

The Company’s investment in money market funds that are classified as cash equivalents hold underlying investments with a weighted average maturity of 90 days or less and are recognized at fair value. The valuations of these securities are based on quoted prices in active markets for identical assets, when available, or pricing models whereby all significant inputs are observable or can be derived from or corroborated by observable market data. The Company reviews security pricing and assesses liquidity on a quarterly basis. As of June 30, 2022, the Company’s U.S. portfolio had no material exposure to money market funds with a fluctuating net asset value.

Warrant Liabilities

The Public Warrants and Private Placement Warrants (collectively, the “Warrants”) were accounted for as liabilities in accordance with ASC 815-40 and are presented within Warrant liabilities on the Company’s Condensed Consolidated Balance Sheets. The Warrants are measured at fair value at inception and on a recurring basis, with changes in fair value presented within change in fair value of warrant liabilities in the Company’s Condensed Consolidated Statements of Comprehensive Income (Loss). At June 30, 2022, the outstanding Private Placement Warrants was determined using their redemption value because these Warrants are subject to redemption if the reference value of the common stock, as defined, is between $10.00 and $18.00 per share.The Private Placement Warrants are classified as a Level 2 financial instruments as of June 30, 2022. There were no Public Warrants outstanding as of June 30, 2022.

On October 4, 2021, the Company issued a press release stating that it would redeem all of the Public Warrants that remained outstanding following 5:00 p.m. New York City time on November 3, 2021, for a redemption price of $0.10 per Public Warrant. All 16.2 million outstanding Public Warrants were either exercised for cash or on a cashless basis or were redeemed. These outstanding Public Warrants that were exercised comprised 15.3 million Public Warrants issued in connection with the Vesper initial public offering and an additional 0.9 million warrants that became Public Warrants due to the sale of Private Placement Warrants. Approximately 16.1 million Public Warrants were exercised for cash at an exercise price of $11.50 per share of Class A Common Stock, 74,104 Public Warrants were exercised on a cashless basis in exchange for an aggregate of 26,732 shares of Class A Common Stock, and 75,016 warrants were redeemed for $0.10 per warrant, in each case in accordance with the terms of the Warrant Agreement. In 2021, total cash proceeds generated from exercises of the Public Warrants were $185.4 million. In addition, 0.3 million Private Placement Warrants were exercised in 2021 for total cash proceeds of $3.0 million. As of June 30, 2022, the Company had approximately 7 million Private Placement Warrants outstanding.

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Note 68 – Property and Equipment, net

Property and equipment consist of the following as of the periods indicated:


(in thousands)	(in thousands)	Useful life (years)	June 30, 2021		December 31, 2020		(in thousands)	Useful life (years)	June 30, 2022		December 31, 2021
Furniture and fixtures	Furniture and fixtures	2-7	$	3,500	$	3,265	Furniture and fixtures	2-7	$	4,891	$	4,074
Computers and equipment	Computers and equipment	3-5	3,946		3,502		Computers and equipment	3-5	4,975		4,010
Machinery and equipment							Machinery and equipment	2-5	5,288		3,669
Autos and trucks	Autos and trucks	5	1,129		413		Autos and trucks	5	1,184		1,163
Tooling	Tooling	5	1,150		1,150		Tooling	5	1,837		1,389
Leasehold improvements	Leasehold improvements	Shorter of remaining lease term or estimated useful life	4,521		4,097		Leasehold improvements	Shorter of remaining lease term or estimated useful life	10,438		5,086
Total Property and equipment			14,246		12,427
Total property and equipment							Total property and equipment		28,613		19,391
Less: accumulated depreciation and amortization	Less: accumulated depreciation and amortization		(5,818)		(4,407)		Less: accumulated depreciation and amortization		(11,434)		(8,561)
Construction in progress	Construction in progress		1,685		1,171		Construction in progress		862		5,353
Property and equipment, net	Property and equipment, net		$	10,113	$	9,191	Property and equipment, net		$	18,041	$	16,183

Depreciation expense was ~~$0.7 million and $0.6 million~~as follows 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.periods indicated:


	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	2022		2021		2022		2021
Cost of sales	$	591	$	321	$	1,005	$	626
General and administrative	861		407		1,536		792
Selling and marketing	400		—		727		—
Total depreciation expense	$	1,852	$	728	$	3,268	$	1,418

Note 79 – Goodwill and Intangible Assets, net

The gross carrying amount and accumulated amortization of the Company’s intangible assets, net, as of June 30, ~~2021~~2022 were as follows:


(in thousands)	(in thousands)	Gross Carrying Value		Accumulated Amortization		Net Carrying Value		Estimated Useful Life (Years)	(in thousands)	Gross Carrying Value		Accumulated Amortization		Net Carrying Value		Estimated Useful Life (Years)
Trademarks	Trademarks	$	9,480	$	(3,104)	$	6,376	15	Trademarks	$	10,012	$	(3,781)	$	6,231	15
Non-compete agreement	Non-compete agreement	100		(3)		97		3	Non-compete agreement	758		(538)		220		3
Customer relationships	Customer relationships	8,647		(2,687)		5,960		5-10	Customer relationships	17,821		(5,607)		12,214		5-10
Developed technology	Developed technology	70,900		(40,620)		30,280		8	Developed technology	73,188		(49,610)		23,578		3-8
Patents	Patents	1,677		(189)		1,488		3-19	Patents	2,034		(355)		1,679		3-19
Capitalized software	Capitalized software	9,978		(2,295)		7,683		3-5	Capitalized software	11,154		(3,874)		7,280		3-5
Total intangible assets	Total intangible assets	$	100,782	$	(48,898)	$	51,884		Total intangible assets	$	114,967	$	(63,765)	$	51,202

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The gross carrying amount and accumulated amortization of the Company’s intangible assets, net, as of December 31, ~~2020~~2021 were as follows:


(in thousands)	(in thousands)	Gross Carrying Value		Accumulated Amortization		Net Carrying Value		Estimated Useful Life (Years)	(in thousands)	Gross Carrying Value		Accumulated Amortization		Net Carrying Value		Estimated Useful Life (Years)
Trademarks	Trademarks	$	9,480	$	(2,765)	$	6,715	15	Trademarks	$	10,048	$	(3,442)	$	6,606	15
Non-compete agreement									Non-compete agreement	809		(139)		670		3
Customer relationships	Customer relationships	6,003		(2,263)		3,740		5-10	Customer relationships	18,625		(4,391)		14,234		5-10
Developed technology	Developed technology	70,900		(36,189)		34,711		8	Developed technology	70,900		(45,051)		25,849		8
Patents	Patents	1,423		(158)		1,265		4-19	Patents	2,050		(295)		1,755		3-19
Capitalized software	Capitalized software	6,172		(1,668)		4,504		3-5	Capitalized software	9,867		(2,971)		6,896		3-5
Total intangible assets	Total intangible assets	$	93,978	$	(43,043)	$	50,935		Total intangible assets	$	112,299	$	(56,289)	$	56,010

Amortization expense was as follows 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 expensesperiods indicated:

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	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	2022		2021		2022		2021
Cost of sales	$	2,378	$	2,233	$	4,619	$	4,464
General and administrative	796		466		1,498		968
Selling and marketing	619		235		1,254		423
Total amortization expense	$	3,793	$	2,934	$	7,371	$	5,855

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,					Six Months Ended June 30,
(in thousands)	(in thousands)	2021		2020		(in thousands)	2022		2021
Beginning balance	Beginning balance	$	98,531	$	98,520	Beginning balance	$	123,694	$	98,531
Acquisition of HTL		4,766		0
Measurement period adjustments						Measurement period adjustments	2,154		4,766
Foreign currency translation impact	Foreign currency translation impact	(197)		(27)		Foreign currency translation impact	(1,815)		(197)
Ending balance	Ending balance	$	103,100	$	98,493	Ending balance	$	124,033	$	103,100

The measurement period adjustments include a $0.2 million increase due to adjustment of acquisition date tax liability for Ecomedic and a $1.98 million increase due to contingent consideration paid to former owner of Sidermica during the six months endedJune 30, 2022.

Note 810 – Long-term Debt

Credit Facility

On December 30, 2021, Edge Systems LLC, a California limited liability company (the “Borrower”) and an indirect wholly owned subsidiary of The Beauty Health Company, as borrower, entered into a Credit Agreement (the “Credit Agreement”) with Edge Systems Intermediate LLC, an indirect wholly owned subsidiary of the Company and the direct parent of the Borrower that holds the Company’s foreign and domestic operating entities, and The Hydrafacial Company Mexico Holdings, LLC, a direct wholly owned subsidiary of the Borrower that conducts the Mexican business operations , as guarantors (the “Guarantors” and, together with the Borrower, the “Loan Parties”), and JPMorgan Chase Bank, N.A., as administrative agent.

The Credit Agreement provides for a $50 million revolving credit facility with a maturity date of December 30, 2026. In addition, the Borrower has the ability from time to time to increase the revolving commitments or enter into one or more tranches of term loans up to an additional aggregate amount not to exceed $50 million, subject to receipt of lender commitments and certain conditions precedent. As of June 30, 2022 the Credit Agreement remains undrawn and there is no outstanding balance under the revolving credit facility.

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become liable under contingent obligations in certain circumstances, make certain restricted payments, make certain dispositions within guidelines and limits, engage in certain affiliate transactions, alter its fundamental business or make certain fundamental changes, and requirements to maintain financial covenants, including maintaining a leverage ratio of no greater than 3.00 to 1.00 and maintaining a fixed charge coverage ratio of not less than 1.15 to 1.00. As of June 30, 2022 the Company was in compliance with all restricted and financial covenants.

The leverage ratio also determines pricing under the Credit Agreement. At the Borrower’s option, borrowings under the revolving credit facility accrue interest at a rate equal to either LIBOR or a specified base rate plus an applicable margin. The applicable margin is linked to the leverage ratio. The margins range from 2.00% to 2.50% per annum for LIBOR loans and 1.00% to 1.50% per annum for base rate loans. The revolving credit facility is subject to a commitment fee payable on the unused revolving credit facility commitments ranging from 0.25% to 0.35%, depending on the Borrower’s leverage ratio. As of June 30, 2022 the Company’s unused commitment rate was 0.25%. The Borrower is also required to pay certain fees to the administrative agent and letter of credit issuers under the revolving credit facility. During the term of the revolving credit facility, the Borrower may borrow, repay and re-borrow amounts available under the revolving credit facility, subject to voluntary reductions of the swing line, letter of credit and revolving credit commitments.

Convertible Senior Notes

On September 14, 2021, the Company issued an aggregate of $750 million in principal amount of its 1.25% Convertible Senior Notes due 2026 (the “Notes”). The Notes were issued pursuant to, and are governed by, an indenture (the “Indenture”), dated as of September 14, 2021, between the Company and U.S. Bank National Association, as trustee. Pursuant to the purchase agreement between the Company and the initial purchasers of the Notes, the Company granted the initial purchasers an option to purchase, for settlement within a period of 13 days from, and including, the date the Notes were first issued, up to an additional $100 million principal amount of Notes. The Notes issued on September 14, 2021 include the $100 million principal amount of Notes issued pursuant to the full exercise by the initial purchasers of such option.

The Notes are the Company’s senior, unsecured obligations and are (i) equal in right of payment with the Company’s existing and future senior, unsecured indebtedness; (ii) senior in right of payment to the Company’s existing and future indebtedness that is expressly subordinated to the Notes; (iii) effectively subordinated to the Company’s existing and future secured indebtedness, to the extent of the value of the collateral securing that indebtedness; and (iv) structurally subordinated to all existing and future indebtedness and other liabilities, including trade payables, and (to the extent the Company is not a holder thereof) preferred equity, if any, of the Company’s subsidiaries.

The Notes accrue interest at a rate of 1.25% per annum, payable semi-annually in arrears on April 1 and October 1 of each year, beginning on April 1, 2022. The Notes mature on October 1, 2026, unless earlier repurchased, redeemed or converted. Before April 1, 2026, noteholders have the right to convert their Notes only upon the occurrence of certain events. From and after April 1, 2026, noteholders may convert their Notes at any time at their election until the close of business on the second scheduled trading day immediately before the maturity date. The Company will settle conversions by paying or delivering, as applicable, cash, shares of its common stock or a combination of cash and shares of its common stock, at the Company’s election. The initial conversion rate is 31.4859 shares of common stock per $1,000 principal amount of Notes, which represents an initial conversion price of approximately $31.76 per share of common stock. The conversion rate and conversion price will be subject to customary adjustments upon the occurrence of certain events. In addition, if certain corporate events that constitute a “Make-Whole Fundamental Change” (as defined in the Indenture) occur, then the conversion rate will, in certain circumstances, be increased for a specified period of time.

The Notes are redeemable, in whole or in part (subject to certain limitations described below), at the Company’s option at any time, and from time to time, on or after October 6, 2024, and on or before the 40th scheduled trading day immediately before the maturity date, but only if certain liquidity conditions are satisfied and the last reported sale price per share of the Company’s common stock exceeds 130% of the conversion price on (i) each of at least 20 trading days, whether or not consecutive, during the 30 consecutive trading days ending on, and including, the trading day immediately before the date the Company sends the related redemption notice; and (ii) the trading day immediately before the date the Company sends such notice. However, the Company may not redeem less than all of the outstanding notes unless at least $100.0 million aggregate principal amount of notes are outstanding and not called for redemption as of the time the Company sends the related redemption notice. The redemption price will be a cash amount equal to the principal amount of the Notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. In addition, calling any Note for redemption will constitute a Make-Whole Fundamental Change with respect to that Note, in which case the conversion rate applicable to the conversion of that Note will be increased in certain circumstances if it is converted after it is called for redemption.

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If certain corporate events that constitute a “Fundamental Change” (as defined in the Indenture) occur, then, subject to a limited exception for certain cash mergers, noteholders may require the Company to repurchase their Notes at a cash repurchase price equal to the principal amount of the Notes to be repurchased, plus accrued and unpaid interest, if any, to, but excluding, the fundamental change repurchase date. The definition of Fundamental Change includes certain business combination transactions involving the Company and certain de-listing events with respect to the Company’s common stock.

The Notes have customary provisions relating to the occurrence of “Events of Default” (as defined in the Indenture), which include the following: (i) certain payment defaults on the Notes (which, in the case of a default in the payment of interest on the Notes, will be subject to a 30-day cure period); (ii) the Company’s failure to send certain notices under the Indenture within specified periods of time; (iii) the Company’s failure to convert a Note upon the exercise of the conversion right with respect to such Note, subject to a three business-day cure period; (iv) the Company’s failure to comply with certain covenants in the Indenture relating to the Company’s ability to consolidate with or merge with or into, or sell, lease or otherwise transfer, in one transaction or a series of transactions, all or substantially all of the assets of the Company and its subsidiaries, taken as a whole, to another person; (v) a default by the Company in its other obligations or agreements under the Indenture or the Notes if such default is not cured or waived within 60 days after notice is given in accordance with the Indenture; (vi) certain defaults by the Company or any of its subsidiaries with respect to indebtedness for money borrowed of at least $45,000,000; (vii) the rendering of certain judgments against the Company or any of its significant subsidiaries for the payment of at least $45,000,000, where such judgments are not discharged or stayed within 60 days after the date on which the right to appeal has expired or on which all rights to appeal have been extinguished and (viii) certain events of bankruptcy, insolvency and reorganization involving the Company or any of its significant subsidiaries.

If an Event of Default involving bankruptcy, insolvency or reorganization events with respect to the Company (and not solely with respect to a significant subsidiary of the Company) occurs, then the principal amount of, and all accrued and unpaid interest on, all of the Notes then outstanding will immediately become due and payable without any further action or notice by any person. If any other Event of Default occurs and is continuing, then, the Trustee, by notice to the Company, or noteholders of at least 25% of the aggregate principal amount of Notes then outstanding, by notice to the Company and the Trustee, may declare the principal amount of, and all accrued and unpaid interest on, all of the Notes then outstanding to become due and payable immediately. However, notwithstanding the foregoing, the Company may elect, at its option, that the sole remedy for an Event of Default relating to certain failures by the Company to comply with certain reporting covenants in the Indenture consists exclusively of the right of the noteholders to receive special interest on the Notes for up to 180 days at a specified rate per annum not exceeding 1.00% on the principal amount of the Notes.

The Notes were issued to the initial purchasers of such Notes in transactions not involving any public offering in reliance upon Section 4(a)(2) of the Securities Act. The Notes were resold by the initial purchasers to persons whom the initial purchasers reasonably believe are “qualified institutional buyers,” as defined in, and in accordance with, Rule 144A under the Securities Act.

The total amount of debt issuance costs of $21.3 million was recorded as a reduction to “Convertible senior notes, net” in the Company’s Condensed Consolidated Balance Sheets and are being amortized as interest expense over the term of the Notes using the effective interest method. During the three and six months ended June 30, 2022, the Company recognized $1.1 million and $2.1 million in interest expense related to the amortization of the debt issuance costs related to the Notes, respectively. There was no such expense related to the Notes in the three and six months ended June 30, 2021.

The following is a summary of the Company’s Notes as of June 30, 2022:


							Fair Value
(in thousands)	Principal Amount		Unamortized Issuance Costs		Net Carrying Value		Amount		Level
1.25% Convertible Notes due 2026	$	750,000	$	17,972	$	732,028	$	602,250	Level 2

The Notes are carried at face value less the unamortized debt issuance costs on the Company’s Consolidated Balance Sheets. As of June 30, 2022, the estimated fair value of the Notes was approximately $602 million. The estimated fair value of the Notes was determined based on the actual bid price of the Notes on June 30, 2022.

As of June 30, 2022, the remaining life of the Notes is approximately 4.3 years.

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Capped Call Transactions

On September 9, 2021, in connection with the pricing of the offering of Notes, the Company entered into privately negotiated capped call transactions (the “Base Capped Call Transactions”) with Bank of Montreal, Credit Suisse Capital LLC, Deutsche Bank AG, London Branch, Goldman Sachs & Co. LLC, JPMorgan Chase Bank, National Association, Mizuho Markets Americas LLC and Wells Fargo Bank, National Association (the “Option Counterparties”). In addition, on September 10, 2021, in connection with the initial purchasers’ exercise of their option to purchase additional Notes, the Company entered into additional capped call transactions (the “Additional Capped Call Transactions,” and, together with the Base Capped Call Transactions, the “Capped Call Transactions”) with each of the Option Counterparties. The Capped Call Transactions cover, subject to customary anti-dilution adjustments, the aggregate number of shares of the Company’s common stock that initially underlie the Notes, and are expected generally to reduce potential dilution to the Company’s common stock upon any conversion of Notes and/or offset any cash payments the Company is required to make in excess of the principal amount of converted Notes, as the case may be, with such reduction and/or offset subject to a cap, based on the cap price of the Capped Call Transactions. The cap price of the Capped Call Transactions is initially $47.94, which represents a premium of 100% over the last reported sale price of the Company’s common stock on September 9, 2021. The cost of the Capped Call Transactions was approximately $90.2 million.

The Capped Call Transactions are separate transactions, each between the Company and the applicable Option Counterparty, and are not part of the terms of the Notes and do not affect any holder’s rights under the Notes or the Indenture. Holders of the Notes will not have any rights with respect to the Capped Call Transactions.

Business Combination

In connection with the Closing of the Business Combination, all of HydraFacial’s existing debt under its credit 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 totaled $2.3 million and prepayment penalties totaled $~~4.3~~2.0 million in 2021. Both ~~and~~ are included in the Other expense (income), net on the ~~Condensed~~Company’s Consolidated Statements of Comprehensive ~~Loss.~~ Income (Loss).

Deferred financing costs expense prior to the Closing of the Business Combination 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~~Company’s Consolidated Statements of Comprehensive ~~Loss.~~

Income (Loss).

Note 911 – Income Taxes

The income tax expense for the three months and six months ended June 30, 2022 is $0.1 million and $2.7 million, respectively

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~~respectively.

The effective tax ~~benefit~~rate for the three and six months ended June 30, ~~2020~~2022 is ~~$3.1 million~~0.95% and ~~$5.7 million, respectively.~~ 6.24%, which is lower than the federal statutory rate of 21.0% primarily due to the exclusion of book income from the revaluation of warrant liabilities and adjustments for various non-deductible expenses for officer’s compensation and meals and entertainment.

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 expensesexpense 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~~applies ASC 740, the accounting standard ~~addressing the accounting for~~governing 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 $0.2 million and $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~~2022 and June 30, ~~2020.~~2021, respectively.

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 prior tax legislation for tax depreciation of certain qualified improvement property (“QIP”).

The Company believes it will be able to obtain 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~~the Company’s 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 1012 – 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 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 rate~~	~~0.56~~	%
~~Expected volatility of the Company’s Class A Common Stock~~	~~55.0~~	%

~~Stock-based Compensation Expense~~

Compensation expense attributable to net stock-based compensation was ~~$3.5 million~~as follows for ~~both~~ the ~~three~~periods indicated:


	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	2022		2021		2022		2021
Cost of sales	207		150		433		152
Selling and marketing	2,019		343		4,833		349
Research and development	277		33		387		33
General and administrative	3,875		2,982		7,774		3,008
Stock-based compensation expense	$	6,378	$	3,508	$	13,427	$	3,542

Restricted Stock Units (“RSUs”) andPerformance-based restricted stock units (“PSUs”)

The following table summarizes the Company’s equity award activity for the six months ended June 30, ~~2021, respectively.~~2022:


			Weighted Average Grant Date Fair Value
	RSUs	PSUs	RSUs		PSUs
Outstanding - January 1, 2022	380,775	975,000	$	25.88	$	11.39
Granted	2,501,324	1,488,770	13.82		10.02
Vested	(122,952)	—	24.27		—
Forfeited	(227,889)	(209,738)	15.76		14.30
Outstanding - June 30, 2022	2,531,258	2,254,032	14.95		10.22

The following table summarizes the Company’s stock option activity for the six months ended June 30, 2022:


	Number of Options	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in thousands)
Outstanding - January 1, 2022	6,785,020	$	15.64
Granted	10,500	22.68
Exercised	—	—

Unvested Forfeited	(813,850)	17.78
Outstanding - June 30, 2022	5,981,670	$	15.36	8.89	$	(14,967)
Options Exercisable	1,227,750	$	13.45	8.60	$	(727)
Options vested and expected to vest - June 30, 2022	5,981,670	$	15.36	8.89	$	(14,967)

Note 1113 – Commitments and Contingencies

From time to time the Company ismay be involved in claims, legal actions and governmental proceedings that arise from its business operations. As of June 30, ~~2021 and December 31, 2020,~~2022, the Company was not a party to any legal proceedings or threatened legal proceedings, the adverse outcome of which, individually or in the aggregate, that 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 1214 – Concentrations

As of June 30, ~~2021,~~2022, the Company had no customers that accounted for 10% or more of the Accounts receivable balance.

As of December 31, ~~2020,~~2021, the Company had ~~one customer~~no customers that accounted for 10% or more of the Accounts receivable balance. ~~This customer accounted for 10.5%, or $1.9 million,~~

Table of ~~the Accounts receivable balance.~~Contents

No single customer accounted for 10% or more of consolidated Net sales during the three and six months ended June 30, ~~2021~~2022 and ~~December 31, 2020.~~June 30, 2021.

Note 1315 – 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~~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~~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~~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~~SEC 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~~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~~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,~~initial public offering, 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~~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 of the Business Combination 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~~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~~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”). Pursuant to the Investor Rights Agreement, LCP ~~will have~~has 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.

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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 investors of DW Healthcare Partners IV (B), L.P. (“DWHP ~~Investors~~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 Linden Capital III LLC, the general partner of Linden Manager ~~(as defined below)~~III LP (the “Linden Manager”) entered into an Amended and Restated Management Services Agreement (the “Linden 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.~~acquisitions for one year following the Business Combination. 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.~~transaction (the “1% Fee”). The Company has also agreed to reimburse Linden Manager for certain expenses in connection with such advisory services. However, pursuant to the Linden Management Services Agreement, the Company’s obligation to pay the 1% Pursuant to the terms of the agreement, the fee expired twelve months after the consummation of the Business Combination on May 4, 2022.

HydraFacial recorded approximately ~~$0.2 million and $1.0~~$0.1 million of charges related to management services fees for the six months ended June 30, ~~2021~~2021. There were no management fees during the three and ~~2020, respectively.~~six months ended June 30, 2022. These amounts are included in General and administrative expenses on the Company’s Consolidated Statements of Comprehensive ~~Loss.~~Income (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~~Company’s Consolidated Statements of Comprehensive ~~Loss.~~Income (Loss).

~~Former Related Party Note Receivable~~

Miami Beach Office

~~HydraFacial issued shares~~

The Company maintains an office in Miami Beach, Florida, whereby the Company, on a monthly basis, reimburses an entity owned by the Company’s Executive Chairman that makes such office available to ~~a key member of management in exchange~~the Company for ~~a note receivable with a $0.6 million face value. Interest on the note accrues at a rate of 8%~~its employees and ~~matures in December 2022. Interest receivable is presented as a component of other assets on the Condensed Consolidated Balance Sheets. As there~~affiliates. Expense for this property was ~~no intent~~not material for the ~~issuer to pay~~six months ended June 30, 2022. No such expenses existed for the ~~note within a reasonably short period of time, HydraFacial has presented the note as a deduction of stockholders’ deficit. During the three~~six 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 Ended Six Months Ended
(in thousands) June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020
Sales to related party $ 147 $ 7 $ 247 $ 103

(in thousands) June 30, 2021 December 31, 2020
Accounts receivable due from related party $ 374 $ 250

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Note 1416 - 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~~1 vote for each share. As of June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, there were ~~125,439,779~~150,855,025 and ~~35,501,743,~~150,598,047, 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 Class A Common Stock.

In connection with the Business Combination on 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.

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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 June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, there were 0no shares of preferred stock issued or outstanding.

~~Note 15 - Fair Value Measurements~~

~~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 June 30, 2021, and indicates the fair value hierarchy of the valuation inputs the Company utilized to determine such fair value.

Fair Value Measurements on a Recurring Basis
(in thousands) Level 1 Level 2 Level 3 Total
Warrant Liability - Public Warrants $ 59,733 $ 0 $ — $ 59,733
Warrant Liability - Private Placement Warrants 0 98,133 0 98,133
Earn-out shares liability 126,000 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 Warrant liabilities on the Company’s Condensed Consolidated Balance Sheets. The Warrants 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 earn-out share liability in the Condensed Consolidated Statements of Comprehensive Loss. The fair value of the earn-out shares liability was measured using quoted market prices of the Company’s Class A Common Stock and was based on the probability of the completion of certain acquisition targets. The maximum earn-out amount as of June 30, 2021 was considered to be reasonably certain. The liability was settled with 7.5 million shares of Class A Common Stock issued on July 15, 2021.

Note 1617 - Segment Reporting

The Company manages its business on the basis of 1 operating segment and 1 reportable segment. As a result, the chief operating decision maker, who is the Chief Executive Officer, decides how to allocate resources and assess performance, reviews financial information presented on a consolidated basis for purposes of making operating decisions, allocates resources and evaluates financial performance.

Net sales by geographic region were as follows for the periods ~~indicated (in thousands):~~indicated:


		Three Months Ended				Six Months Ended					Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	(in thousands)	June 30, 2021		June 30, 2020		June 30, 2021		June 30, 2020		(in thousands)	2022		2021		2022		2021
Americas	Americas	$	42,660	$	9,469	$	73,940	$	33,382	Americas	$	75,354	$	42,660	$	119,960	$	73,940
Asia Pacific		12,440		2,583		21,231		4,318
EMEA		11,408		2,064		18,879		8,952
Asia-Pacific										Asia-Pacific	10,386		12,440		23,287		21,231
Europe, the Middle East and Africa										Europe, the Middle East and Africa	17,796		11,408		35,704		18,879
Total net sales	Total net sales	$	66,508	$	14,116	$	114,050	$	46,652	Total net sales	$	103,536	$	66,508	$	178,951	$	114,050

As of June 30, ~~2021~~2022 and December 31, ~~2020,~~2021 substantially all of ~~HydraFacial’s~~the Company’s property, plant and equipment ~~was~~were held in the United States.

Note 1718 – Net ~~Loss~~Income (Loss) Attributable to Common Shareholders

Net loss attributable to common stockholders is computed by deducting both the dividend distributions declared in the period on preferred stock and the dividends accumulated for the 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 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 sets forth the calculation of both basic and diluted net ~~loss~~income (loss) per share as follows for the periods ~~indicated (in thousands, except share and per share amounts):~~indicated:

Three Months Ended Six Months Ended
(in thousands, except share and per share amounts) June 30, 2021 June 30, 2020 June 30, 2021 June 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 outstanding 91,798,837 34,482,179 63,805,807 33,309,191
Basic and diluted loss per share: $ (1.52) $ (0.30) $ (2.24) $ (0.58)


	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands, except share and per share amounts)	2022		2021		2022		2021
Net income (loss) available to common shareholders - basic	$	7,931	$	(139,378)	$	40,438	$	(142,652)
Plus: Income on Private placement warrants	(15,185)		—		(67,237)		—
Net income (loss) available to common shareholders - diluted	$	(7,254)	$	(139,378)	$	(26,799)	$	(142,652)

Weighted average common shares outstanding - basic	150,731,491		91,798,837		150,665,166		63,805,807
Effect of dilutive shares:



Private placement warrants	987,960		—		1,609,228		—
Weighted average common shares outstanding - diluted	151,719,451		91,798,837		152,274,394		63,805,807

Basic net income (loss) per share:	$	0.05	$	(1.52)	$	0.27	$	(2.24)
Diluted net income (loss) per share	$	(0.05)	$	(1.52)	$	(0.18)	$	(2.24)

The following ~~potentially dilutive weighted average~~ shares ~~were not included in~~have been excluded from the calculation of the weighted average diluted shares outstanding as the effect would have been ~~anti-dilutive for the periods indicated:~~anti-dilutive:


		Three Months Ended		Six Months Ended			Three Months Ended June 30,		Six Months Ended June 30,
		June 30, 2021	June 30, 2020	June 30, 2021	June 30, 2020		2022	2021	2022	2021
Convertible Notes						Convertible Notes	23,614,425	—	23,614,425	—
RSUs						RSUs	2,531,258	—	2,531,258	—
PSUs						PSUs	2,254,032	129,231	2,254,032	64,972
Stock Options	Stock Options	4,796,062	0	2,411,280	0	Stock Options	5,981,670	4,769,062	5,981,670	2,411,280
PSUs		129,231	0	64,972	0
Public and Private Warrants	Public and Private Warrants	15,450,549	0	7,767,956	0	Public and Private Warrants	—	15,450,549	—	7,767,956

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Note 1819 – Subsequent Events

~~Acquisitions~~

HydraFacial entered into definitive agreements to acquire 3 distributors across Mexico, France and Germany to sell and distribute the HydraFacial line of products within their respective regions. The 3 acquisitions closed on July 1, 2021. Cash consideration paidOther than as disclosed elsewhere, no subsequent events have occurred that would require recognition in the ~~aggregate, prior to any working capital adjustments, to acquire~~condensed consolidated financial statements or disclosure in the 3 distributors was $23.4 million plus equity consideration consisting of 479,373 shares of the Company’s Class A Common Stock. The equity consideration for the acquisitions will be issued by August 1, 2021.accompanying notes.

~~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 Company’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 issued 7,500,000 in Class A Common Stock to the former stockholders on July 15, 2021.

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

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 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 Business Combination; ~~the inability to maintain the listing of~~ The Beauty Health Company’s ~~shares on Nasdaq;~~availability of cash for debt service and exposure to risk of default under debt obligations; 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 possibility that The Beauty Health Company may be adversely affected by other economic, business, and/or competitive factors; and the impact of the continuing COVID-19 pandemic on ~~the Company’s~~our business. The Beauty Health Company does not undertake any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

The following discussion and analysis of ~~the Company’s~~our financial condition and results of operations should be read in conjunction with ~~the Company’s~~our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form ~~10-Q.~~10-Q, in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2022 filed with the U.S. Securities and Exchange Commission (SEC) on May 10, 2022 and also with our audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 filed with the SEC on March 1, 2022.

Unless the context otherwise requires, references to “HydraFacial”, “we”, “us”, and “our” in this section are intended to mean the business and operations of The Beauty Health Company and its consolidated subsidiaries.

Company Overview

~~Founded in 1997, HydraFacial~~

The Beauty Health Company is a global category-creating company focused on delivering beauty health ~~company. Its offerings in~~experiences by reinventing our consumer’s relationship with their skin, ~~care~~their bodies and ~~scalp~~their self-confidence. Our flagship brand, HydraFacial, created the category of hydradermabrasion by using a patented Vortex-Fusion Delivery System to cleanse, peel, exfoliate, extract, infuse, and hydrate the skin with proprietary solutions and serums. HydraFacial provides a non-invasive and approachable experience with a powerful community of a/estheticians, consumers and partners, bridging medical skin correction to traditional over-the-counter beauty. Our vision is to expand our platform and connected community of providers, consumers, brand partners, and retail partners to democratize and personalize beauty health ~~occupy a position at the intersection of medical aesthetics~~solutions across ages, genders, skin tones, 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 provide treatments using our Delivery Systems are purchased on a recurring basis. The expansion of the number of Delivery Systems installed, or “install base,” increases the foundation for future revenue by creating a larger base to drive 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 year ended December 31, 2016 to $166 million for the year ended December 31, 2019, growing its footprint both in the US and internationally. Net sales decreased in 2020 as a result of COVID-19 restrictions, but have rebounded since the onset of the pandemic, as Net sales increased $52.4 million, or 371.6%, for the three 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 Key Performance Indicators (“types. ~~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 result of the COVID-19 pandemic may also adversely affect our business if 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 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”), HydraFacial consummated the previously announced Business Combination pursuant to that certain Merger Agreement, dated December 8, 2020 (the “Merger Agreement”) with Vesper Healthcare Acquisition Corp. (“Vesper"), pursuant to which Vesper acquired, directly or indirectly, 100% of the stock of HydraFacial and its subsidiaries. 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 the Vesper’s cash and cash equivalents as of the closing of the Business Combination including proceeds of $350.0 million from Vesper’s Private Placement of an aggregate of 35,000,000 shares of Class A Common Stock, 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 consideration paid to the HydraFacial stockholders consisted of 35,501,743 newly issued shares of Class A Common Stock. The foregoing consideration paid to the HydraFacial stockholders may be further increased by amounts payable as earn-out shares of Class A Common Stock pursuant 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 consisting of a combination of cash and equity consideration and its shareholders would have significant voting power. However, based on the aforementioned factors of management, board representation, largest minority shareholder, and the continuation of the HydraFacial business as well as 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 combined 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 became 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 attractive 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 this industry. Recent growth in the 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. However, we operate in the beauty health industry, which is highly competitive and changes rapidly. Our operating results could be significantly affected by our ability to develop new products and find new distribution channels for new and existing product.

Impact of the COVID-19 Pandemic

The COVID-19 pandemic has had, and may continue to have, adverse impacts on our business. Most markets have recently shown encouraging signs of emergence from the pandemic; however, sporadic containment measures and travel restrictions continue to impact volume trends in certain markets.

As previously reported, we have implemented several key measures in response to the COVID-19 pandemic which continue to be in place. We have also amplified our measures to address the potentially longer-lasting impacts of the COVID-19 pandemic, the intermittent lockdowns and possible economic uncertainty resulting from COVID-19 that continue in many markets. We anticipate the recovery to be non-linear until COVID-19 containment measures are discontinued across all regions and normal consumer traffic resumes on a consistent basis. We currently expect that any easing of containment measures and recovery of the impacted sectors of the economy will be gradual and uneven, as regions face resurgence of COVID-19 and related uncertainties, and the availability and widespread distribution of a safe and effective vaccine varies across regions. As a result, we anticipate that consumer spending habits and consumer confidence will continue to shift, causing future sales and volume trends to be non-linear.

Furthermore, the extent to which the COVID-19 pandemic impacts our business going forward will depend on numerous factors we cannot reliably predict, including the duration and scope of the pandemic; businesses and individuals’ actions in response to the pandemic; and the impact on economic activity including the possibility of recession or financial market instability.

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, tone, 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~~top-line growth. HydraFacial over indexes with males, significantly increasing the Total Addressable Market (TAM) compared to ~~peers~~its peers. Based on a survey we conducted in 2022, we believe HydraFacial resonates strongly with Gen Z and ~~the mix of male customers is growing at two times the rate of female customers. HydraFacial customers are young; approximately~~Millennials, with over 50% of ~~HydraFacial customers are Millennials, and approximately 30% of HydraFacial’s beauty retail customers are under the age of 24. As the~~our consumers being 37 years old or younger. Millennial and Gen Z consumers ~~age, they~~ appear to be taking skincare more seriously and are 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.

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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%~~27% of HydraFacial’s total revenue during the second quarter of fiscal year ~~2021~~2022 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.

~~Table of Contents~~Regulation

It remains unclear how governmental authorities, including the Food and Drug Administration (“FDA”) and foreign government authorities, will regulate the products that we sell, and in the case of the FDA, whether and when it will propose or implement new or additional regulations. Unforeseen regulatory obstacles or compliance costs may hinder our business in both the short and long-term as well.

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~~decisions. Amounts and percentages may not foot due to ~~rounding):~~rounding.
Three Months Ended June 30, Six Months Ended June 30,
(dollars in millions) 2021 2020 2021 2020
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 Margin 71.0% 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 margin 17.1% (7.7)% 16.1% (6.8)%
Adjusted gross profit $ 49.8 $ 7.2 $ 84.1 $ 28.8
Adjusted gross margin 74.9% 51.0% 73.8% 61.7%
Adjusted net income (loss) $ 7.8 $ (5.7) $ 7.7 $ (11.0)


	Three Months Ended June 30,				Six Months Ended June 30,
(dollars in millions)	2022		2021		2022		2021
Delivery Systems net sales	$	64.8	$	34.9	$	106.4	$	60.6
Consumables net sales	38.8		31.6		72.5		53.4
Total net sales	$	103.5	$	66.5	$	179.0	$	114.1
Gross profit	$	71.7	$	47.3	$	123.6	$	79.0
Gross margin	69.2%		71.0%		69.1%		69.3%
Net income (loss)	$	7.9	$	(139.4)	$	40.4	$	(142.7)
Adjusted net income (loss)	$	2.2	$	7.8	$	(6.3)	$	7.7
Adjusted EBITDA	$	12.6	$	11.4	$	14.9	$	18.4
Adjusted EBITDA margin	12.2%		17.1%		8.3%		16.1%
Adjusted gross profit	$	74.8	$	49.8	$	129.6	$	84.1
Adjusted gross margin	72.3%		74.9%		72.4%		73.8%

Adjusted Net Income (Loss), Adjusted EBITDA (Loss) and Adjusted EBITDA Margin

Adjusted ~~Net Income (Loss)~~net income (loss), ~~Adjusted~~adjusted EBITDA ~~(Loss)~~(loss) and ~~Adjusted~~adjusted EBITDA ~~Margin~~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 net income (loss), ~~Adjusted~~adjusted EBITDA ~~(Loss)~~(loss) and ~~Adjusted~~adjusted EBITDA ~~Margin~~margin” for information regarding our use of ~~Adjusted Net Income (Loss)~~adjusted net income (loss) and ~~Adjusted~~adjusted EBITDA and reconciliations of ~~Adjusted Net Income (Loss)~~adjusted net income (loss) and ~~Adjusted~~adjusted EBITDA to net loss.

Adjusted Gross Profit and Adjusted Gross Margin

We use ~~Adjusted Gross Profit~~adjusted gross profit and ~~Adjusted Gross Margin~~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~~adjusted gross profit and ~~Adjusted Gross Margin~~adjusted gross margin” for information regarding our use of ~~Adjusted Gross Profit~~adjusted gross profit and a reconciliation of ~~Adjusted Gross Profit~~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~~Comparison of ~~total revenue may fluctuate from period~~Three Months Ended June 30, 2022 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 operating as a public company, 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.~~Three Months Ended June 30, 2021

~~Results of Operations~~

The following tables set forth our consolidated results of operations in dollars and as a percentage of ~~total revenue~~net sales for the periods presented. The period-to-period comparisons of our historical results are not necessarily indicative of the results that may be expected in the future. The results of operations data for the three and six months ended June 30, ~~2021~~2022 and June 30, ~~2020~~2021 have been derived from the ~~interim~~condensed consolidated financial statements included elsewhere in this Form 10-Q. Amounts and percentages may not foot due to rounding.

~~Table of Contents~~

~~Comparison of Three Months Ended June 30, 2021 to Three Months Ended June 30, 2020~~


		Three Months Ended June 30,									Three Months Ended June 30,
(in millions)	(in millions)	2021		% of Net Sales		2020		% of Net Sales		(in millions)	2022		% of Net Sales		2021		% of Net Sales
Net sales	Net sales	$	66.5	100.0	%	$	14.1	100.0	%	Net sales	$	103.5	100.0	%	$	66.5	100.0	%
Cost of sales	Cost of sales	19.3		29.0		9.8		69.5		Cost of sales	31.9		30.8	%	19.3		29.0
Gross profit	Gross profit	47.3		71.0		4.3		30.5		Gross profit	71.7		69.2	%	47.3		71.0
Operating expenses	Operating expenses									Operating expenses
Selling and marketing	Selling and marketing	26.2		39.4		6.2		44.0		Selling and marketing	44.9		43.3		26.2		39.4
Research and development	Research and development	3.0		4.5		0.6		4.3		Research and development	2.6		2.5		3.0		4.5
General and administrative	General and administrative	44.4		66.8		5.4		38.3		General and administrative	27.6		26.6		44.4		66.8
Total operating expenses	Total operating expenses	73.6		110.7		12.2		86.5		Total operating expenses	75.1		72.5		73.6		110.7
Loss from operations		(26.4)		(39.7)		(7.9)		(56.0)
Other expense, net		114.9		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)	%
Income (loss) from operations										Income (loss) from operations	(3.4)		(3.3)		(26.4)		(39.6)
Other (income) expense, net										Other (income) expense, net	(11.4)		(11.0)		114.9		172.8
Income (loss) before provision for income tax										Income (loss) before provision for income tax	8.0		7.7		(141.2)		(212.4)
Income tax expense (benefit)										Income tax expense (benefit)	0.1		0.1		(1.9)		(2.8)
Net income (loss)										Net income (loss)	$	7.9	7.7	%	$	(139.4)	(209.6)	%

Net Sales


		Three Months Ended June 30,				Change				Three Months Ended June 30,				Change
(in millions)	(in millions)	2021		2020		Amount		%	(in millions)	2022		2021		Amount		%
Net Sales
Net sales									Net sales
Delivery Systems	Delivery Systems	$	34.9	$	6.0	$	28.9	481.7%	Delivery Systems	$	64.8	$	34.9	$	29.9	85.4%
Consumables	Consumables	31.6		8.1		23.5		290.1%	Consumables	38.8		31.6		7.2		22.8%
Total net sales	Total net sales	$	66.5	$	14.1	$	52.4	371.6%	Total net sales	$	103.5	$	66.5	$	37.0	55.7%
Percentage of net sales	Percentage of net sales								Percentage of net sales
Delivery Systems	Delivery Systems	52.5%		42.6%					Delivery Systems	62.6%		52.5%
Consumables	Consumables	47.5%		57.4%					Consumables	37.4%		47.5%
Total	Total	100.0%		100.0%					Total	100.0%		100.0%

Total net sales for the three months ended June 30, ~~2021~~2022 increased ~~$52.4~~$37.0 million, or ~~371.6%~~55.7%, compared to the three months ended June 30, ~~2020.~~2021. Delivery System sales for the three months ended June 30, ~~2021~~2022 increased ~~$28.9~~$29.9 million, or ~~481.7%~~85.4%, compared to the three months ended June 30, ~~2020.~~2021. Delivery Systems units sold for the three months ended June 30, ~~2021~~2022 increased primarily due to ~~both domestic and international growth as sales as markets reopened and consumer~~the strong demand ~~accelerated. Similarly,~~for the Company’s new Syndeo delivery system.

There were 2,738 Delivery Systems units sold for the three months ended June 30, 2022, of which 1,203 were trade-ups. Consumables sales for the three months ended June 30, ~~2021~~2022 increased ~~23.5~~$7.2 million, or ~~290.1%~~22.8%, compared to the three months ended June 30, ~~2020.~~2021. The increase in Consumables sales was primarily attributable to ~~rebounding sales volume following~~increased placements of delivery systems and 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~~adjoining consumption of consumables during the three months ended June 30, ~~2021.~~2022.

Table of Contents

Cost of Sales, Gross Profit, and Gross Margin


		Three Months Ended June 30,						Change				Three Months Ended June 30,						Change
(in millions)	(in millions)	2021			2020			Amount		%	(in millions)	2022			2021			Amount		%
Cost of sales	Cost of sales	$	19.3		$	9.8		$	9.5	96.9%	Cost of sales	$	31.9		$	19.3		$	12.6	65.6%
Gross profit	Gross profit	$	47.3		$	4.3		$	43.0	1000.0%	Gross profit	$	71.7		$	47.3		$	24.4	51.6%
Gross margin	Gross margin	71.0		%	30.3		%				Gross margin	69.2		%	71.0		%

Cost of sales increased $12.6 million driven by and in conjunction with increased sales volume in delivery systems and consumables. Gross margin decreased from 71.0% during the three months ended June 30, 2021 to 69.2% during the three months ended June 30, 2022 primarily due to the shift in sales mix of delivery systems from 53% to 63% of sales in the period including lower margin trade-up units, along with higher supply chain and logistics costs. The Company expects continued headwinds from global supply chain challenges and inflationary pressures to weigh on gross margin through 2022, specifically higher shipping costs, offset by fixed cost leverage from higher sales volumes coupled with pricing initiatives, and margin accretion related to the acquired distributor inventory.

Operating Expenses

Sales and Marketing


	Three Months Ended June 30,						Change
(in millions)	2022			2021			Amount		%
Selling and marketing	$	44.9		$	26.2		$	18.7	71.2	%
As a percentage of net sales	43.3		%	39.4		%

Selling and marketing expense for the three months ended June 30, 2022 increased $18.7 million, or 71.2%, compared to the three months ended June 30, 2021. The overall increase as a percentage of net sales was driven by an increase in sales commissions of $3.3 million associated with higher revenue, an increase in personnel-related expenses of $5.8 million resulting from an increase in headcount, and an increase in stock-based compensation expense of $1.7 million. In addition, expenses related to training and travel expenses increased by $0.5 million due primarily to the launch of Syndeo and marketing spend increased by $5.3 million as we invested forward in Americas and EMEA in key tradeshows, GlowVolution and other marketing programs.

Research and Development


	Three Months Ended June 30,						Change
(in millions)	2022			2021			Amount		%
Research and development	$	2.6		$	3.0		$	(0.4)	(13.0)	%
As a percentage of net sales	2.5		%	4.5		%

Research and development expense for the three months ended June 30, 2022 decreased $0.4 million, or 13.0%, compared to the three months ended June 30, 2021. The decrease was primarily due to the shifting of investments from outside consultants that were offset by increased investments in personnel of $1.2 million and additional investments into our data infrastructure.

General and Administrative


	Three Months Ended June 30,						Change
(in millions)	2022			2021			Amount		%
General and administrative	$	27.6		$	44.4		$	(16.8)	(37.9)	%
As a percentage of net sales	26.6		%	66.8		%

General and administrative expense for the three months ended June 30, 2022 decreased $16.8 million, or 37.9%, compared to the three months ended June 30, 2021. This decrease is primarily attributable to a decrease in transaction costs of $27.6 million related to the consummation of the Business Combination. The decrease in transaction costs were offset by an increase of $0.9 million in stock-based compensation, $3.0 million in personnel-related expenses, $3.1 million in recruiting & other professional fees, and $1.1 million in legal fees which includes expenses related to litigating and enforcing patent and trademark infringement claims against third parties.

Table of Contents

Other (Income) Expense, Net and Income Tax Provision


	Three Months Ended June 30,				Change
(in millions)	2022		2021		Amount		%
Other (income) expense, net	$	(11.4)	$	114.9	$	(126.3)	(109.9)	%
Income tax expense (benefit)	$	0.1	$	(1.9)	$	2.0	(104.1)	%

Other income, net was $11.4 million for the three months ended June 30, 2022 compared to other expense of $114.9 million for the three months ended June 30, 2021. The change was primarily driven by the changes in the fair values of our warrants and earn-out shares issued on July 15, 2021. During the three months ended June 30, 2022 the Company recognized other income of $15.2 million due to the change in the fair value of the warrant liabilities compared to an expense of $72.0 million for the three months ended June 30, 2021. In addition, during the three months ended June 30, 2021 the Company recognized a $36.5 million expense for the change in the fair value of the earn-out shares liability.

Comparison of Six Months Ended June 30, 2022 to Six Months Ended June 30, 2021

Amounts and percentages may not foot due to rounding


	Six Months Ended June 30,

















(in millions)	2022		% of Net Sales		2021		% of Net Sales

Net sales	$	179.0	100.0	%	$	114.1	100.0	%
Cost of sales	55.4		30.9		35.1		30.7
Gross profit	123.6		69.1		79.0		69.3
Operating expenses
Selling and marketing	81.3		45.4		43.3		38.0
Research and development	4.8		2.7		4.4		3.9
General and administrative	53.8		30.1		55.2		48.4
Total operating expenses	140.0		78.2		103.0		90.3
Loss from operations	(16.4)		(9.1)		(24.0)		(21.0)
Other expense (income), net	(59.5)		(33.3)		120.9		106.0
Income (loss) before provision for income tax	43.1		24.1		(144.8)		(127.0)
Income tax expense (benefit)	2.7		1.5		(2.2)		(1.9)
Net income (loss)	$	40.4	22.6	%	$	(142.7)	(125.1)	%

Net Sales


	Six Months Ended June 30,				Change
(in millions)	2022		2021			Amount		%
Net sales
Delivery Systems	$	106.4	$	60.6		$	45.8	75.6%
Consumables	72.5		53.4			19.1		35.7%
Total net sales	$	179.0	$	114.1		$	64.9	56.9%
Percentage of net sales
Delivery Systems	59.5%		53.1%
Consumables	40.5%		46.9%
Total	100.0%		100.0%

Total net sales for the six months ended June 30, 2022 increased $64.9 million, or 56.9%, compared to the six months ended June 30, 2021. Delivery Systems sales for the six months ended June 30, 2022 increased $45.8 million, or 75.6%, compared to the six months ended June 30, 2021. Delivery Systems units sold for the six months ended June 30, 2021 increased primarily due to the strong demand for the Company’s new Syndeo delivery system. Consumables sales for the six months ended June 30, 2022 increased $19.1 million, or 35.7%, compared to the six months ended June 30, 2021. The increase in Consumables sales was primarily attributable to increased placements of delivery systems and the adjoining consumption of consumables during the six months ended June 30, 2022.

Table of Contents

Cost of Sales, Gross Profit, and Gross Margin


	Six Months Ended June 30,						Change
(in millions)	2022			2021				Amount		%
Cost of sales	$	55.4		$	35.1			$	20.3	57.9%
Gross profit	$	123.6		$	79.0			$	44.6	56.5%
Gross margin	69.1		%	69.3		%

Cost of sales increased ~~96.9%~~57.9% driven by increased sales volume and a shift in the product mix to HydraFacial Delivery Systems. Gross margin ~~increased~~decreased 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.~~

~~Table of Contents~~

~~Operating Expenses~~

~~Sales and Marketing~~
Three Months Ended June 30, Change
(in millions) 2021 2020 Amount %
Selling and marketing $ 26.2 $ 6.2 $ 20.0 322.6 %
As a percentage of total net sales 39.4 % 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) 2021 2020 Amount %
Research and development $ 3.0 $ 0.6 $ 2.4 400.0 %
As a percentage of total net sales 4.5 % 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) 2021 2020 Amount %
General and administrative $ 44.4 $ 5.4 $ 39.0 722.2 %
As a percentage of total net sales 66.8 % 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) 2021 2020 Amount %
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.

~~Table of Contents~~

~~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 Sales 2020 % of Net Sales
Net sales $ 114.1 100.0 % $ 46.7 100.0 %
Cost of sales 35.1 30.8 23.4 50.1
Gross profit 79.0 69.3 23.2 49.9
Operating expenses
Selling and marketing 43.3 37.9 23.9 51.2
Research and development 4.4 3.9 2.0 4.3
General and administrative 55.2 48.4 12.6 27.0
Total operating expenses 103.0 90.3 38.5 82.4
Loss from operations (24.0) (21.0) (15.3) (32.5)
Other expense, net 120.9 106.0 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) 2021 2020 Amount %
Net Sales
Delivery Systems $ 60.6 $ 20.1 $ 40.5 201.5%
Consumables 53.4 26.6 26.8 100.8%
Total net sales $ 114.1 $ 46.7 $ 67.4 144.3%
Percentage of net sales
Delivery Systems 53.1% 43.0%
Consumables 46.9% 57.0%
Total 100.0% 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) 2021 2020 Amount %
Cost of sales $ 35.1 $ 23.4 $ 11.6 49.5%
Gross profit $ 79.0 $ 23.2 $ 55.8 240.4%
Gross margin 69.3 % 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%~~69.3% during the six months ended June 30, 2021 to ~~69.3%~~69.1% during the six months ended June 30, ~~2021,~~2022, primarily due to the shift in sales mix of delivery systems from 53% to 59% of sales in the period including lower margin trade-up units, along with higher supply chain and logistics costs. The Company expects continued headwinds from global supply chain challenges and inflationary pressures to weigh on gross margin through 2022, specifically higher shipping costs, offset by fixed cost leverage from higher sales volumes coupled with ~~cost saving initiatives.~~

~~Table of Contents~~pricing initiatives, margin accretion related to the acquired distributor inventory.

Selling and Marketing


	Six Months Ended June 30,						Change
(in millions)	2022			2021			Amount		%
Selling and marketing	$	81.3		$	43.3		$	38.0	87.7	%
As a percentage of net sales	45.4		%	38.0		%

~~Operating Expenses~~

~~Sales and Marketing~~
Six Months Ended June 30, Change
(in millions) 2021 2020 Amount %
Selling and marketing $ 43.3 $ 23.9 $ 19.4 81.2 %
As a percentage of total net sales 37.9 % 51.2 %

Selling and marketing expense for the six months ended June 30, ~~2021~~2022 increased ~~$19.4~~$38.0 million, or ~~81.2%~~87.7%, compared to the six months ended June 30, ~~2020. The overall improvement~~2021. Compared to the six months ended June 30, 2021 the ~~as a percentage of total net sales~~year-over-year increase was ~~driven by normalized sales volume versus low sales volume during 2020~~ due to ~~negative COVID-19 impact and related shut down~~an increase in ~~the second quarter of 2020. The increase is due to higher~~ sales commissions of ~~$9.6~~$4.4 million, ~~which included $0.9~~an increase in personnel-related expenses of $11.7 million, ~~in sales commissions from international operations, primarily attributable to overall increases in sales,~~ and ~~personnel-related~~an increase of stock-based compensation expense of $4.5 million, Personnel-related training and travel expenses increased by ~~$6.5~~$5.0 million ~~which included a $1.5 million increase from our international operations, primarily attributable~~due to ~~increased headcount. In addition, personnel-related training~~the launch of Syndeo and ~~certification expenses~~advertising/promotional spend increased by ~~$2.1 million.~~$7.7 million as we invested forward in Americas and EMEA in key tradeshows, GlowVolution and other marketing programs.

Research and Development


		Six Months Ended June 30,						Change					Six Months Ended June 30,						Change
(in millions)	(in millions)	2021			2020			Amount		%		(in millions)	2022			2021				Amount		%
Research and development	Research and development	$	4.4		$	2.0		$	2.4	120.0	%	Research and development	$	4.8		$	4.4			$	0.4	8.8	%
As a percentage of total net sales		3.9		%	4.3		%
As a percentage of net sales												As a percentage of net sales	2.7		%	3.9		%

Research and development expense for the six months ended June 30, ~~2021~~2022 increased ~~$2.4~~$0.4 million, or ~~120.0%~~8.8%, compared to the six months ended June 30, ~~2020.~~2021. The increase was primarily due to additional personnel-related expense in the research and development department which increased ~~expenses related to~~by $1.8 million year-over-year. There were additional investments into our data infrastructure which increased by $0.8 million, offset by a $2.4 million decrease in ~~new skincare treatment technologies of $2.5 million.~~Syndeo research and development expenses.

General and Administrative


		Six Months Ended June 30,						Change					Six Months Ended June 30,						Change
(in millions)	(in millions)	2021			2020			Amount		%		(in millions)	2022			2021			Amount		%
General and administrative	General and administrative	$	55.2		$	12.6		$	42.6	338.0	%	General and administrative	$	53.8		$	55.2		$	(1.4)	(2.5)	%
As a percentage of total net sales		48.4		%	27.0		%
As a percentage of net sales												As a percentage of net sales	30.1		%	48.4		%

General and administrative expense for the six months ended June 30, ~~2021 increased $42.6~~2022 decreased $1.4 million, or ~~338.0%~~2.5%, compared to the six months ended June 30, ~~2020. Transaction~~2021. This decrease is primarily attributable to a decrease in transaction costs ~~increased by $30.7~~of $27.2 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.~~Combination. The ~~consummation of the Business Combination during the six months ended June 30, 2021 also drove~~decrease in transaction costs were offset by an increase of ~~$1.4~~$4.8 million in stock-based compensation, ~~expense related to the accelerated vesting and $1.8~~$6.2 million in ~~stock-based compensation related to options granted. Personnel-related~~personnel-related expenses, ~~increased by $4.2~~$5.2 million ~~primarily due to increased headcount~~in recruiting & other professional fees, $2.9 million in legal fees, and ~~higher sales.~~$1.6 million in director and officer insurance.

Table of Contents

Other (Income) Expense, Net and Income Tax Provision
Six Months Ended June 30, Change
(in millions) 2021 2020 Amount %
Other expense, net $ 120.9 $ 9.9 $ 111.0 1121.2 %
Income tax benefit $ (2.2) $ (5.7) $ 3.5 (61.4) %


	Six Months Ended June 30,				Change
(in millions)	2022		2021		Amount		%
Other (income) expense, net	$	(59.5)	$	120.9	$	(180.4)	(149.2)	%
Income tax expense (benefit)	$	2.7	$	(2.2)	$	4.9	(223.7)	%

Other ~~expense,~~income, net, was $59.5 million for the six months ended June 30, 2022 compared to other expense of $120.9 million for the six months ended June 30, ~~2021 compared to $9.9 million for the six months ended June 30, 2020.~~2021. The ~~increase~~change was primarily driven by the changes in the fair values of ~~the Company’s~~our warrant ~~liability~~liabilities and earn-out share ~~liability~~liabilities which were issued on July 15, 2021. During the six months ended June 30, 2022 the Company recognized other income of $67.2 million due to the change in the fair value of the warrant liabilities versus a $72.0 million expense for six months ended June 30, 2021. In addition, during the six months ended June 30, 2021 the Company recognized a $36.5 million ~~and $72.0 million, respectively. In connection with~~expense for the ~~consummation~~change in the fair value 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.~~earn-out shares liability.

Liquidity and Capital Resources

Our ~~operations~~primary sources of capital have been funded ~~primarily through~~by (i) cash flow from operating activities, ~~and~~(ii) net proceeds received from the consummation of the Business ~~Combination.~~Combination, (iii) net proceeds received from the Notes (as defined below), and (iv) net proceeds received from the exercise of Public and Private Placement Warrants. As of ~~December 31, 2020,~~June 30, 2022, we had cash and cash equivalents of approximately ~~$9.5~~$821.0 million. A revolving credit facility of $50 million ~~and~~is also available as a source of capital although as of June 30, ~~2021, we had cash~~2022, the revolving credit facility remains undrawn and ~~cash equivalents of approximately $101.5 million.~~

~~Table of Contents~~there is no outstanding balance thereunder.

Our sources of liquidity and cash flows are used to fund ongoing operations, research and development projects for new products, services, and technologies, and provide ongoing support services for our providers and customers. Over the next year, we anticipate that we will use our liquidity and cash flows from our operations to fund our growth. In addition, as part of our business strategy, we occasionally evaluate potential acquisitions of businesses and products and technologies. Accordingly, a portion of our available cash may be used at any time for the acquisition of complementary products, services, or businesses. Such potential transactions may require substantial capital resources, which may require us to seek additional debt or equity financing. We cannot assure you that we will be able to successfully identify suitable acquisition candidates, complete acquisitions, integrate acquired businesses into our current operations, or expand into new markets. Furthermore, we cannot provide assurances that additional financing will be available to us in any required time frame and on commercially reasonable terms, if at all.

We ~~believe~~expect capital expenditures of up to $20.0 million for the year ending December 31, 2022. Based on our ~~existing cash and cash equivalent balances~~sources of capital (including the cash consideration received from the consummation of the Business ~~Combination)~~Combination and the cash ~~flow~~received from ~~operations will be~~the issuance of the Notes), management believes that we have sufficient liquidity to ~~meet~~satisfy our anticipated working capital requirements for our ongoing operations and ~~capital expenditure needs~~obligations for at least the next 12twelve months. ~~Our future~~However, we will continue to evaluate our capital ~~requirements may vary materially from those currently planned and will depend on many~~expenditure needs based upon factors including but not limited to our rate of revenue growth, potential acquisitions, the timing and amount of spending on research and development, growth in sales and marketing activities, the timing of new product launches, timing and investments needed for international expansion, the continuing market acceptance of the Company’s products and services, expansion, and overall economic conditions. ~~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~~

If cash generated ~~through the normal course of~~from operations ~~to fund these items.~~

~~To the extent that current and anticipated future sources of liquidity are~~is insufficient to ~~fund~~satisfy our ~~future business activities and~~capital requirements, we may ~~be required~~have to ~~seek~~sell additional equity or debt ~~financing.~~securities or obtain expanded credit facilities to fund our operating expenses. The sale of additional equity would result in additional dilution to our stockholders. ~~The~~Also, the incurrence of additional debt financing would result in debt service obligations and the instruments governing such debt could provide for operating and financing covenants that would restrict our operations. ~~There~~In the event such additional capital is needed in the future, there can be no ~~assurances~~assurance that wesuch capital will be ~~able~~available to us, or, if available, that it will be in amounts and on terms acceptable to us. If we cannot raise additional ~~capital.~~funds when we need or want them, our operations and prospects could be negatively affected. However, if cash flows from operations become insufficient to continue operations at the current level, and if no additional capital were obtained, then management would restructure the Company in a way to preserve our business while maintaining expenses within operating cash flows.

Credit Agreement

On December 30, 2021, HydraFacial LLC, a California limited liability company f.k.a. Edge Systems LLC (the “Borrower”) and an indirect wholly owned subsidiary of The ~~inability~~Beauty Health Company, as borrower, entered into a Credit Agreement (the

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“Credit Agreement”) with Edge Systems Intermediate LLC, an indirect wholly owned subsidiary of the Company and the direct parent of the Borrower that holds the Company’s foreign and domestic operating entities, and The Hydrafacial Company Mexico Holdings, LLC, a direct wholly owned subsidiary of the Borrower that conducts the Mexican business operations, as guarantors (the “Guarantors” and, together with the Borrower, the “Loan Parties”), and JPMorgan Chase Bank, N.A., as administrative agent.

The Credit Agreement provides for a $50 million revolving credit facility with a maturity date of December 30, 2026. In addition, the Borrower has the ability from time to ~~raise capital would adversely affect~~time to increase the revolving commitments or enter into one or more tranches of term loans up to an additional aggregate amount not to exceed $50 million, subject to receipt of lender commitments and certain conditions precedent. As of June 30, 2022, the Credit Agreement remains undrawn and there is no outstanding balance under the revolving credit facility.

Borrowings under the Credit Agreement are secured by certain collateral of the Loan Parties and are guaranteed by the Guarantors, each of whom will derive substantial benefit from the revolving credit facility. In specified circumstances, additional guarantors are required to be added. The Credit Agreement contains various restrictive covenants subject to certain exceptions, including limitations on the Borrower’s ability to incur indebtedness and certain liens, make certain investments, become liable under contingent obligations in certain circumstances, make certain restricted payments, make certain dispositions within guidelines and limits, engage in certain affiliate transactions, alter its fundamental business or make certain fundamental changes, and requirements to maintain financial covenants, including maintaining a leverage ratio of no greater than 3.00 to 1.00 and maintaining a fixed charge coverage ratio of not less than 1.15 to 1.00.

Convertible Senior Notes

On September 14, 2021, we issued $750 million aggregate principal amount of Notes in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. The Notes were issued pursuant to, and are governed by, an indenture, dated as of September 14, 2021, between the Company and U.S. Bank National Association, as trustee. The Notes accrue interest at a rate of 1.25% per annum, payable semi-annually in arrears on April 1 and October 1 of each year, beginning on April 1, 2022. The Notes will mature on October 1, 2026, unless earlier repurchased, redeemed or converted. Before April 1, 2026, noteholders have the right to convert their Notes only upon the occurrence of certain events. From and after April 1, 2026, noteholders may convert their Notes at any time at their election until the close of business on the second scheduled trading day immediately before the maturity date. We will settle conversions by paying or delivering, as applicable, cash, shares of our Class A Common Stock or a combination of cash and shares of our Class A Common Stock, at our election. The initial conversion rate is 31.4859 shares of Class A Common Stock per $1,000 principal amount of Notes, which represents an initial conversion price of approximately $31.76 per share of Class A Common Stock. We used $90.2 million of the net proceeds from the sale of the Notes to fund the cost of entering into capped call transactions. The net proceeds from the issuance of the Notes were approximately $638.7 million, net of capped call transaction costs of $90.2 million and debt issuance costs totaling $21.3 million. See Note 10 - Debt, to the Notes to the Condensed Consolidated Financial Statements included elsewhere in this report.

Capped Call Transactions

Capped call transactions cover the aggregate number of shares of our Class A Common Stock that will initially underlie the Notes, and generally reduce potential dilution to our common stock upon any conversion of Notes and/or offset any cash payments we may make in excess of the principal amount of the converted Notes, as the case may be, with such reduction and/or offset subject to a cap, based on the cap price of the capped call transactions. See Note 2 - Summary of Significant Accounting Policies, to the Notes to Consolidated Financial Statements included elsewhere in this report.

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Contractual Obligations and Other Commercial Commitments

As of June 30, 2022, our material contractual obligations is approximately $39.8 million in interest related to the Notes, the Notes of $750 million, and $17.7 million in lease obligations.

Known Trends or Uncertainties

We believe there are several emerging trends that may play a key role in shaping the future of the beauty health industry. Our market research demonstrated that consumers are increasingly willing to spend on high-end beauty health products. Some of the key industry trends identified by this market research are:

•Millennials/Gen Z aging: HydraFacial customers are young. We believe HydraFacial resonates strongly with Gen Z and Millennials, with over 50% of our consumers being 37 years old or younger. As the Millennial and Gen Z consumers age, they appear to be taking skincare more seriously and are willing to invest in premium experiences such as those offered by HydraFacial.

•Influencers and social media driving purchase decisions: Social media personalities are increasingly opining and having an effect on skin care, which has gained more prominence in the age of selfies.

•Growth in disposable income: As the global economy grows, consumers have more disposable income to spend on premium products.

•Shift in spend from makeup to skin care: There appears to be an increasing movement towards treating underlying skin to make it healthy and reveal it (i.e., “clean beauty”), as opposed to using products such as make-up to cover it. Clean beauty places an emphasis on unveiling fresh, naked skin as the star, as opposed to covering it up. The HydraFacial experience not only physically cleanses skin with vortex suction, exfoliation and extraction, and removal of debris, but it also actively infuses the skin with innovative, clean ingredients to nourish and hydrate the newly cleaned skin canvas.

•Growth in multi-brand and online retailers: Multi-brand retailers and digital native brands play an important role in captivating the consumer and pushing innovation.

•Consumers shopping across mass and premium brands: Consumers appear to be willing to shop across mass and premium brands in order to allocate more money towards trending categories and products that help make them look and feel better.

However, we operate in the beauty health industry, which is highly competitive and changes rapidly. Our operating results could be significantly affected by our ability to ~~achieve~~develop new products and find new distribution channels for new and existing products.

Furthermore, the majority of our customers are in the medical, (dermatologists and plastic surgeons), esthetician, and beauty retail industry. During economic downturns, we have seen consolidations in such industries. Also, the extent to which the COVID-19 pandemic impacts our business ~~objectives.~~going forward will depend on numerous factors we cannot reliably predict, including the duration and scope of the pandemic; businesses and individuals' actions in response to the pandemic; and the impact on economic activity including the possibility of recession or financial market instability. These factors may adversely impact consumer, business, and government spending as well as customers' ability to pay for our products and services on an ongoing basis. As a result, our growth rate could be affected by consolidation and downsizing in the medical, esthetician, and beauty retail industry.

In addition, we expect continued headwinds from global supply chain challenges and inflationary pressures to weigh on gross margin in 2022, specifically higher shipping costs, offset by margin accretion related to the acquired distributor inventory and pricing initiatives aimed at improving our margins.

Off-Balance Sheet Arrangements

We do not maintain any off-balance sheet arrangements, transactions, obligations or other relationships with unconsolidated entities that would be expected to have a material current or future effect upon our financial condition or results of operations.

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Cash ~~Flow~~ Flows

~~(amounts and percentages~~

The following table summarizes the activities from our statements of cash flows. Amounts may not foot due to ~~rounding)~~rounding.


		Six Months Ended June 30,				Six Months Ended June 30,
(in millions)	(in millions)	2021		2020			(in millions)	2022		2021
Cash and cash equivalents at beginning of period	Cash and cash equivalents at beginning of period	$	9.5	$	7.3		Cash and cash equivalents at beginning of period	$	901.9	$	9.5
Operating activities:	Operating activities:						Operating activities:
Net loss		(142.7)		(19.5)
Net income (loss)							Net income (loss)	40.4		(142.7)
Non-cash adjustments	Non-cash adjustments	125.6		10.5			Non-cash adjustments	(37.1)		125.6
Changes in working capital	Changes in working capital	(14.8)		(2.7)			Changes in working capital	(73.2)		(14.8)
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 activities		133.0		20.5
Net cash flows (used in) provided by operating activities							Net cash flows (used in) provided by operating activities	(69.8)		(31.9)
Net cash flows (used in) provided by investing activities							Net cash flows (used in) provided by investing activities	(8.3)		(9.1)
Net cash flows (used in) provided by financing activities							Net cash flows (used in) provided by financing activities	(2.8)		133.0
Net change in cash and cash equivalents	Net change in cash and cash equivalents	92.0		7.5			Net change in cash and cash equivalents	(80.9)		92.0
Effect of foreign currency translation	Effect of foreign currency translation	—		(0.2)			Effect of foreign currency translation	—		—
Cash and cash equivalents at end of period	Cash and cash equivalents at end of period	$	101.5	$	14.6		Cash and cash equivalents at end of period	$	821.0	$	101.5

Operating Activities

Net cash used in operating activities of $69.8 million for the six months ended June 30, 2022 was primarily due to investment in inventory in relation to the launch of Syndeo Delivery Systems, combined with a corresponding shift in the average collection period of receivables related to increased payment plan participation on delivery systems globally, as well as continued investments globally in people and systems to fuel future growth. The net income of $40.4 million was driven by non-cash adjustments of $37.1 million, with the largest adjustment being the fair value adjustment to warrant liabilities. The decrease in working capital of $73.2 million was primarily due to the increase in accounts receivable of $34.4 million and the increase in inventory of $39.2 million .

Net cash used in operating activities of $31.9 million for the six months ended June 30, 2021 was primarily due to ~~the~~an increase in accounts receivable of $21.1 million. The net loss of $142.7 ~~million. The net loss~~million was ~~impacted~~driven by non-cash adjustments of $125.6 million ~~primarily~~ related to fair value ~~adjustments to Earn-out~~adjustment of earn-out shares ~~liability~~ and ~~Warrant~~warrant liabilities, ~~partially offset by~~and a decrease ~~in net change~~ in working capital of $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~~

Investing Activities

Cash used in ~~operating~~investing activities ~~of $11.6 million~~ for the six months ended June 30, ~~2020~~2022 of $8.3 million 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~~$5.6 million in capital expenditures for property and ~~amortization, partially offset by a decrease~~equipment, $1.5 million in ~~net change~~capital expenditures for the asset acquisition of Mxt and related developed technology, and $1.3 million 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.capitalized software.

~~Investing activities~~

Cash used in investing activities for the six months ended June 30, 2021 of $9.1 million was primarily related to capital expenditures of $4.7 million ~~in capital expenditures~~ and ~~our~~distributor business acquisition ~~of a distributor in Australia with cash paid~~expenditures of $4.9 ~~million, net of cash acquired.~~million.

~~Cash~~

Financing Activities

There was $2.8 million used in ~~investing~~financing activities for the six months ended June 30, ~~2020 of $1.4 million was primarily~~2022 related to ~~capital expenditures.~~the distributor acquisitions of Wigmore and Sidermica. The Company did not withdraw from the line of credit and there were no transactions related to the warrants during the six months ended June 30, 2022.

~~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~~business combination 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~~$358.5 million, net of debt repayments ~~and issuance costs~~ of ~~$16.0~~$230.5 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,

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and related disclosures. We re-evaluate our estimates on an 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~~

There has been no change to our critical accounting policies ~~that reflect~~as included in our ~~more significant judgments and estimates used in the preparation of 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~~Annual Report 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 multiplesForm 10-K 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 thefiscal 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.2021.

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 these instruments are recognized within change in fair value of warrant liabilities in the Condensed Consolidated Statements of Comprehensive 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 a 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 the notes to our ~~consolidated financial statements~~Condensed Consolidated Financial Statements in the section titled ~~“—Recently Issued~~“Summary of Significant Accounting ~~Pronouncements”~~Policies” in our Note 2 to our consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for a discussion about new accounting pronouncements adopted and not yet adopted.

Non-GAAP Financial Measures

In addition to our results determined in accordance with accounting principles generally accepted in the United States of America (GAAP), management utilizes certain non-GAAP performance measures, ~~Adjusted Net Income (Loss)~~adjusted net income (loss), ~~Adjusted~~adjusted EBITDA ~~(Loss)~~(loss), ~~Adjusted~~adjusted EBITDA ~~Margin, Adjusted Gross Profit,~~margin, adjusted gross profit, and ~~Adjusted Gross Margin,~~adjusted gross margin, for purposes of evaluating ~~the Company’s~~our ongoing operations and for internal planning and forecasting purposes. We believe that these non-GAAP operating measures, when reviewed collectively with our GAAP financial information, provide useful supplemental information to investors in assessing our operating performance.

Adjusted Net Income (Loss), Adjusted EBITDA ~~(Loss)~~ and Adjusted EBITDA Margin

Adjusted ~~Net Income (Loss)~~net income (loss), ~~Adjusted~~adjusted EBITDA ~~(Loss)~~ and ~~Adjusted~~adjusted EBITDA ~~Margin~~margin are key performance measures that ~~management uses~~we use to assess ~~its~~our operating performance. Because ~~Adjusted Net Income (Loss)~~adjusted net income (loss), ~~Adjusted~~adjusted EBITDA ~~(Loss)~~ and ~~Adjusted~~adjusted EBITDA ~~Margin facilitates~~margin facilitate 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 our business. We expect ~~Adjusted~~adjusted EBITDA ~~Margin~~margin to increase over the long-term as we continue to scale our business and achieve greater ~~leverage in our~~ operating ~~expenses.~~leverage.

We calculate adjusted net income (loss) as net income (loss) adjusted to exclude: change in fair value of ~~public~~Public and ~~private placement warrants,~~Private Placement Warrants, change in 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~~Public and ~~private placement warrants,~~Private Placement Warrants, change in fair value of earn-out shares liability, other expense (income), net; interest expense; ~~provision for~~ income ~~taxes;~~tax benefit (expense); depreciation and amortization expense; stock-based compensation expense; foreign currency ~~gain/~~(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~~ (including transactions costs with respect to the Business Combination); and restructuring costs (including those associated with COVID-19).

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The following table reconciles our net income (loss) to ~~Adjusted~~adjusted net income (loss) and adjusted EBITDA for the periods indicated:


		Three Months Ended June 30,				Six Months Ended June 30,					Three months ended June 30,				Six months ended June 30,
Unaudited (in thousands)	Unaudited (in thousands)	2021		2020		2021		2020		Unaudited (in thousands)	2022		2021		2022		2021
Net loss		$	(139,378)	$	(10,397)	$	(142,652)	$	(19,466)
Net income (loss)										Net income (loss)	$	7,931	$	(139,378)	$	40,438	$	(142,652)
Adjusted to exclude the following:	Adjusted to exclude the following:									Adjusted to exclude the following:
Change in fair value of warrant liability		72,027		—		72,027		—
Change in fair value of earn-out shares liability		36,525		—		36,525		—
Change in FV of warrant liability										Change in FV of warrant liability	(15,185)		72,027		(67,237)		72,027
Change in FV of earn-out shares liability										Change in FV of earn-out shares liability	—		36,525		—		36,525
Amortization expense	Amortization expense	2,952		3,201		5,852		6,399		Amortization expense	3,938		2,967		7,651		5,921
Stock-based compensation expense	Stock-based compensation expense	3,508		224		3,542		250		Stock-based compensation expense	6,378		3,508		13,427		3,542
Other expense (income)		4,307		(56)		4,314		(61)
Other (income) expense										Other (income) expense	(1,658)		4,307		(721)		4,314
Management fees (1)	Management fees (1)	82		437		209		967		Management fees (1)	—		82		—		209
Transaction related costs (2)	Transaction related costs (2)	30,411		144		31,157		807		Transaction related costs (2)	1,986		30,411		3,031		31,157
Other non-recurring and one-time fees (3)	Other non-recurring and one-time fees (3)	51		2,223		138		2,765		Other non-recurring and one-time fees (3)	1,897		50		3,852		137
Aggregate adjustment for income taxes	Aggregate adjustment for income taxes	$	(2,671)	$	(1,497)	$	(3,434)	$	(2,700)	Aggregate adjustment for income taxes	(3,097)		(2,671)		(6,723)		(3,434)
Adjusted net income (loss)	Adjusted net income (loss)	$	7,814	$	(5,721)	$	7,678	$	(11,039)	Adjusted net income (loss)	$	2,190	$	7,828	$	(6,282)	$	7,746
Depreciation expense										Depreciation expense	1,852		728		3,268		1,418
Interest expense										Interest expense	3,217		2,060		6,617		7,759
Foreign currency (gain) loss, net										Foreign currency (gain) loss, net	2,206		(24)		1,838		232
Remaining benefit for income taxes										Remaining benefit for income taxes	3,173		801		$	9,414	$	1,258
Adjusted EBITDA										Adjusted EBITDA	$	12,638	$	11,393	$	14,855	$	18,413
Adjusted EBITDA margin										Adjusted EBITDA margin	12.2%		17.1%		8.3%		16.1%

~~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) 2021 2020 2021 2020
Net loss $ (139,378) $ (10,397) $ (142,652) $ (19,466)
Adjusted to exclude the following:
Change in fair value of warrant liability 72,027 — 72,027 —
Change in fair value of earn-out shares liability 36,525 — 36,525 —
Depreciation and amortization expense 3,694 3,803 7,338 7,304
Stock-based compensation expense 3,508 224 3,542 250
Interest expense 2,060 5,667 7,759 9,817
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) 232 122
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
Adjusted EBITDA $ 11,393 $ (1,088) $ 18,413 $ (3,162)
Adjusted EBITDA Margin 17.1% (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~~For the three months and six months ended June 30, 2022, such amounts primarily represent direct costs incurred in relation to potential acquisitions. For the three months and six months ended June 30, 2021, 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~~For the three months ended June 30, 2022, such costs primarily represent ~~COVID-19 related restructuring cost of $2.0 million and $2.1 million for~~one-time severance costs due to a Company re-organization. For the ~~three and~~ six months ended June 30, ~~2020, respectively, including write-off of expired Consumables, discontinued product lines, human capital~~2022, such costs include the re-organization severance, other one-time personnel costs related to executive recruiting, executive severance, a one-time loss on fixed asset write-offs and ~~cash management consultants, and, to~~ a ~~lesser extent, costs associated with a former warehouse and assembly facility during the transition period.~~CEO sign-on bonus.

Adjusted Gross Profit and Adjusted Gross Margin

We use ~~Adjusted Gross Profit~~adjusted gross profit and ~~Adjusted Gross Margin~~adjusted gross margin to measure ~~our~~ profitability and the ability to scale and leverage the costs of ~~our~~ Delivery Systems ~~(as defined below)~~ and ~~Consumables sales (as defined below).~~Consumables. The continued growth of ~~our~~ Delivery Systems ~~installed will allow us~~is expected to improve ~~our Adjusted Gross Margin,~~adjusted gross margin, as additional Delivery ~~System units~~Systems sold will increase our recurring Consumables ~~revenue,~~net sales, which has higher margins.

~~Table of Contents~~

We believe ~~Adjusted Gross Profit~~adjusted gross profit and ~~Adjusted Gross Margin~~adjusted gross margin are useful measures to us and to our investors to assist in evaluating our operating performance because ~~it provides~~they provide consistency and direct comparability with ~~our~~ past financial performance and between fiscal periods, as the metric eliminates the effects of amortization and depreciation and stock-based compensation expense, which are non-cash expenses that may fluctuate for reasons unrelated to overall continuing operating performance. Adjusted ~~Gross Margin~~gross margin has been and will continue to be affected 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 ~~Adjusted Gross Margin~~adjusted gross margin to fluctuate over time depending on the factors described above.

The following table reconciles gross profit to ~~Adjusted Gross Profit~~adjusted gross profit for the periods ~~indicated~~indicated. ~~(amounts~~Amounts and percentages may not foot due to ~~rounding)~~rounding::

Three Months Ended June 30, Six Months Ended June 30,
(in millions) 2021 2020 2021 2020
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 margin 71.0% 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 margin 74.9% 51.0% 73.8% 61.7%

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	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	2022		2021		2022		2021
Net sales	$	103,536	$	66,508	$	178,951	$	114,050
Cost of sales	31,882		19,257		55,360		35,059
Gross profit	$	71,654	$	47,251	$	123,591	$	78,991
Gross margin	69.2%		71.0%		69.1%		69.3%
Adjusted to exclude the following:
Stock-based compensation expense included in cost of sales	$	207	$	—	$	433	$	—
Depreciation and amortization expense included in cost of sales	2,969		2,567		5,624		5,158
Adjusted gross profit	$	74,830	$	49,818	$	129,648	$	84,149
Adjusted gross margin	72.3%		74.9%		72.4%		73.8%

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Interest Rate Risk

We had cash and cash equivalents of approximately $~~101.5~~821.0 million as of June 30, ~~2021.~~2022. 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~~A hypothetical 10% increase in interest rates during any of the ~~three months ended June 30, 2021,~~periods presented would not have had a material impact on our consolidated financial statements.

We are primarily potentially exposed to changes in short-term interest rates with respect to our cost of borrowing under our Credit Agreement, from which we ~~repaid~~have yet to draw on. Our debt obligations related to the Notes are long-term in nature with fixed interest rates. We monitor our ~~indebtedness~~cost of borrowing, taking into account our funding requirements, and our expectations for short-term rates in ~~full.~~the future. A hypothetical 10% change in the interest rate on our Credit Agreement for all periods presented would not have a material impact on our consolidated financial statements.

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 June 30, 2021, the 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~~Inflation has the potential to adversely affect our liquidity, business, financial condition, and results of operations by increasing our overall cost structure, particularly if we are unable to achieve commensurate increases in the prices we charge our customers. The existence of inflation in the economy has resulted in, and may continue to result in, higher interest rates and capital costs, shipping costs, supply shortages, increased costs of labor, weakening exchange rates, and other similar effects. As a result of inflation, we have experienced and may continue to experience, cost increases. Although we may take measures to mitigate the impact of this inflation, if these measures are not ~~believe that inflation has had a material effect on~~effective, our business, financial condition, or results of ~~operations. If~~operations, and liquidity could be materially adversely affected. Even if such measures are effective, there could be a difference between the timing of when these beneficial actions impact our costs become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition,results of operations and ~~operating results.~~when the cost of inflation is incurred.

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Item 4. Controls and Procedures.

~~Background of Material Weakness~~

In connection with the audit of our consolidated financial statements as of and for the years ended December 31, 2020 and the audit of HydraFacial as of and for the year ended December 31, 2020 and 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 prevented or detected on a timely basis.

The material weaknesses are related to 1) an error in our 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 agreements entered into by the Company with certain investors on December 8, 2021 and 2) HydraFacial’s general segregation of duties, including the review and approval of journal entries, our lack of sufficient accounting resources and the lack of a formalized risk assessment process. These material weaknesses may not allow for us to have proper segregation of duties and the ability to close our books and records and report our results, including required disclosures and complex accounting matters, on a 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 June 30, ~~2021.~~2022. Based upon their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, due to the material weaknesses that existed as of December 31, 2020 ~~accordingly disclosed in our Annual Report on Form 10-K/A for the year ended December 31, 2020~~ and ~~also disclosed in the HydraFacial audited financial statements in our Definitive Proxy Statement filed on April 7, 2021,~~continued to exist as of June 30, 2022, our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were not effective. This was accordingly disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021, Form 10-K/A for the year ended December 31, 2020 and in our Definitive Proxy Statement filed on April 7, 2021.

~~Changes~~Previously Identified Material Weaknesses in Internal Control over Financial Reporting

~~There was no change~~In connection with the audit of HydraFacial as of and for the year ended December 31, 2020, we previously identified material weaknesses in our internal control over financial reporting. The material weaknesses were related to segregation of duties, including the review and approval of journal entries, our lack of sufficient accounting resources and the lack of a formalized risk assessment process. These material weaknesses may not allow for us to have proper segregation of duties and the ability to close our books and records and report our results on a timely basis.

In response to the material weaknesses, management completed the following remediation actions:

•We established a formal risk assessment process to identify and evaluate risks relevant to financial reporting objectives

•We implemented segregation of duties around the approval of journal entries and accounting processes

•We implemented a training program addressing internal control over financial reporting, including educating control owners regarding the requirements of each control

We determined that ~~occurred during~~ the ~~second fiscal quarter~~material weakness around lack of ~~2021 covered by this Quarterly Report~~sufficient accounting resources continued to exist as of December 31, 2021. This material weakness may not allow for us to have proper segregation of duties and the ability to close our books and report our results on ~~Form 10-Q that has materially affected, or is reasonably likely~~a timely basis.

We have begun the process of, and we are focused on, designing and implementing effective internal controls measures to ~~materially affect,~~improve our internal control over financial ~~reporting. In light~~reporting and remediate the material weakness. Our efforts include a number of the 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. actions:

•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~~processes, if appropriate;

•We are designing and implementing additional review procedures within our accounting and finance department to provide more robust and comprehensive internal controls over financial reporting that address the relative financial statement assertions and risks of material misstatement within our business processes;

•We are designing and implementing information technology and application controls in our financially significant systems to address our relative information processing objectives

While these actions and planned actions are subject to ongoing management evaluation and will require validation and testing of the design and operating effectiveness of internal controls over a sustained period of financial reporting cycles, we are committed to the continuous improvement of our internal controls over financial reporting and will continue to diligently review our internal control over financial reporting.

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Changes in Internal Control over Financial Reporting

Other than the remediation ~~plan can only be accomplished~~efforts described in this Item 4, there have been no changes in our internal control over ~~time, and we can offer no assurance~~financial reporting during the quarter ended June 30, 2022 covered by this Quarterly Report on Form 10-Q that ~~these initiatives will ultimately have the intended effects.~~has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II— OTHER INFORMATION

Item 1. Legal ~~Proceedings~~Proceedings.

~~There have been no new~~For a description of our material pending legal proceedings, see Note 13, Commitments and ~~no material developments~~Contingencies, to our consolidated financial statements included in ~~any~~Part I, Item 1 of ~~our previously disclosed legal proceedings reported in our Annual Report on Form 10-K for the year ended December 31, 2020 and our~~this Quarterly Report on Form 10-Q for the quarter ended March 31, 2021, other than the fact that the demand letters from counsels for purported The Beauty Health Company shareholders 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 have been resolved as part of a settlement agreement..

Item 1A. Risk Factors

~~Factors that could cause our actual results to differ materially from those~~Please carefully consider the information set forth in this Quarterly Report ~~are any of~~on Form 10-Q and the ~~risks described~~risk factors discussed in Part I, “Item 1A. Risk Factors” in our ~~Registration Statement~~Annual Report on Form ~~S-1~~10-K for the year ended December 31, 2021, filed with the SEC on ~~July 19, 2021. Any of these factors~~March 1, 2022 (the “Annual Report”) and Part II “Item 1A. Risk Factors” in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2022 (the “Q1 Quarterly Report”), which could ~~result~~materially affect our business, financial condition, or future results. The risks described in ~~a significant or material adverse effect on~~ our Annual Report and Q1 Quarterly Report, as well as other risks and uncertainties, could materially and adversely affect our business, results of operations, orand financial ~~condition. Additional risk factors not presently known to us or that we currently deem immaterial may also impair~~condition, which in turn could materially and adversely affect the trading price of shares of our ~~business or results of operations. As of the date of this Quarterly Report, there~~Class A Common Stock. There have been no material updates or changes ~~with respect~~ to the risk factors previously disclosed in our ~~Registration Statement on Form S-1 filed with the SEC on July 19, 2021.~~Annual Report and Q1 Quarterly Report; provided, however, additional risks not currently known or currently material to us may also harm our business.

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

On ~~May 4, 2021,~~April 12, 2022, we issued~~35,000,000~~ an aggregate of 28,733 restricted sharesof our ClassA Common Stock to ~~certainqualifiedinstitutional buyersand accreditedinvestorsthatagreed~~shareholders of Mxt on a pro rata basis as partial consideration of our acquisition of Mxt (the “Mxt Shares”). The Mxt Shares were valued at $17.40 per share, which was the price per share based on the average closing price of our Class A Common Stock for the thirty (30) trading days immediately preceding our acquisition of Mxt. For additional information about the Mxt transaction please see our description in Note 3, Business Combinations, to ~~purchasesuch shares~~our consolidated financial statements included in ~~connectionwith theBusinessCombination foraggregateconsideration~~Part I, Item 1 of ~~$350 million.~~this Quarterly Report on Form 10-Q.

The Mxt Shares were not registered under the Securities Act of 1933, as amended. However, the Mxt Shares were issued in reliance upon the exemption from registration provided for under Section 4(a)(2) of the Securities Act of 1933, as amended, and/or Section 506 of Regulation D promulgated thereunder.

~~On May 4, 2021,~~

Except as set forth above, we ~~issued35,501,743 sharesof ClassA Common Stock as partialcompensation~~todid not sell any other unregistered equity securities during the ~~HydraFacialStockholdersfortheBusinessCombination.~~period covered by this report that were not otherwise disclosed in a Current Report on Form 8-K.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not Applicable.

Item 5. Other Information.

~~None.~~The information included in this Item 5 is provided in lieu of filing such information on a Current Report on Form 8-K under Item 5.02. Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers:

On August 3, 2022, the Company’s indirect, wholly-owned subsidiary, HydraFacial LLC, f.k.a. Edge Systems, LLC, and Indra Pamamull, the former President of APAC of the Company, entered into a Separation Agreement (the “Separation Agreement”) in connection with Ms. Pamamull’s transition out of the Company. The Separation Agreement is effective as of June 8, 2022 (the “Separation Date”).

Pursuant to the terms of the Separation Agreement, HydraFacial has agreed to (i) pay to Ms. Pamamull cash consideration of (a) $12,641 Singapore dollars, which represents the prorated monthly salary for the month of June up to the Separation Date, (b) $21,392 Singapore dollars, which represents the prorated, accrued and unutilized paid annual leave up to the Separation Date, (c) $278,100 Singapore dollars, which represents severance payment equivalent to six months’ salary, (d) $18,180 Singapore dollars, which represents the amounts owed had Ms. Pamamull taken part in the Central Provident Fund in

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Singapore, (e) an amount equal to Ms. Pamamull’s monthly base salary for up to six (6) months, or such shorter period thereof in the event that Ms. Pamamull commences paid employment with any other entity, and (f) an amount equal to the pro-rata target bonus up to the Separation Date, and (ii) continue Ms. Pamamull’s current health benefits for up to six (6) months after the Separation Date (collectively, the “Severance Payments”).

In consideration for the Severance Payments, Ms. Pamamull has agreed to customary general releases and waivers in favor of the Company and HydraFacial, and customary post-employment covenants with respect to confidential information of the Company and HydraFacial.

The foregoing description of the Separation Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the Separation Agreement, a copy of which is attached hereto as Exhibit 10.3 and is incorporated herein by reference.

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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~~
~~3.1~~						Second Amended and Restated Certificate of Incorporation of The Beauty Health Company (filed as Exhibit 3.1 to the Current Report on Form 8-K of the Company on May 10, 2021 and incorporated herein by reference).
~~3.2~~						~~Amended and Restated Bylaws of The Beauty Health Company (filed as Exhibit 3.2 to the Current Report on Form 8-K of the Company on May 10, 2021 and incorporated herein by reference).~~
~~10.1~~						Amended and Restated Registration Rights Agreement dated as of May 4, 2021, by and among the Company, BLS Investor Group LLC and the stockholders of LCP Edge Intermediate, Inc. (filed as Exhibit 10.2 to the Current Report on Form 8-K of the Company on May 10, 2021 and incorporated herein by reference).
~~10.2~~						Investor Rights Agreement dated as of May 4, 2021, by and between the Company and LCP Edge Holdco, LLC (filed as Exhibit 10.3 to the Current Report on Form 8-K of the Company on May 10, 2021 and incorporated herein by reference).
~~10.3~~						~~The Beauty Health Company 2021 Incentive Award Plan (filed as Exhibit 10.1 to the Current Report on Form 8-K of the Company on April 30, 2021 and incorporated herein by reference).~~
~~10.4#~~						~~The Beauty Health Company 2021 Employee Stock Purchase Plan (filed as Exhibit 10.2 to the Current Report on Form 8-K of the Company on April 30, 2021 and incorporated herein by reference).~~
~~10.5#~~						Employment Agreement, dated as of May 4, 2021, between Clinton E. Carnell, Edge Systems LLC d/b/a The HydraFacial Company and The Beauty Health Company (filed as Exhibit 10.6 to the Current Report on Form 8-K of the Company on May 10, 2021 and incorporated herein by reference).
~~10.6#~~						Employment Agreement, dated as of May 4, 2021, between Liyuan Woo, Edge Systems LLC d/b/a The HydraFacial Company and The Beauty Health Company (filed as Exhibit 10.7 to the Current Report on Form 8-K of the Company on May 10, 2021 and incorporated herein by reference).
~~10.7#~~						Offer Letter dated as of April 29, 2021, between Daniel Watson, Edge Systems LLC d/b/a The HydraFacial Company and The Beauty Health Company (filed as Exhibit 10.8 to the Current Report on Form 8-K of the Company on May 10, 2021 and incorporated herein by reference).
~~10.8#~~						~~Form of Stock Option Award Agreement (CEO and CFO) (filed as Exhibit 10.9 to the Current Report on Form 8-K of the Company on May 10, 2021 and incorporated herein by reference).~~
~~10.9#~~						~~Form of Stock Option Award Agreement Form (Non-CEO and CFO) (filed as Exhibit 10.10 to the Current Report on Form 8-K of the Company on May 10, 2021 and incorporated herein by reference).~~
~~10.10#~~						~~Form of Performance-Based Restricted Stock Unit Agreement (filed as Exhibit 10.11 to the Current Report on Form 8-K of the Company on May 10, 2021 and incorporated herein by reference).~~
~~10.11#~~						~~The Beauty Health Company Executive Severance Plan (filed as Exhibit 10.12 to the Current Report on Form 8-K of the Company on May 10, 2021 and incorporated herein by reference).~~
~~10.12#~~						~~Form of Indemnity Agreement (filed as Exhibit 10.13 to the Current Report on Form 8-K of the Company on May 10, 2021 and incorporated herein by reference).~~
~~10.13~~						Amended and Restated Management Services Agreement dated as of May 4, 2021, by and among Linden Manager III LP, Edge Systems LLC d/b/a The HydraFacial Company and The Beauty Health Company (filed as Exhibit 10.14 to the Current Report on Form 8-K of the Company on May 10, 2021 and incorporated herein by reference).
31.1*						~~Certification of Principal Executive Officer Pursuant to Securities Exchange Act Rules 13a-14(a), as adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002~~
31.2*						~~Certification of Principal Financial Officer Pursuant to Securities Exchange Act Rules 13a-14(a), as adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002~~
32.1**						~~Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002~~
32.2**						~~Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002~~
101.INS*						~~XBRL Instance Document~~
101.SCH*						~~XBRL Taxonomy Extension Schema Document~~
101.CAL*						~~XBRL Taxonomy Extension Calculation Linkbase Document~~
101.DEF*						~~XBRL Taxonomy Extension Definition Linkbase Document~~
101.LAB*						~~XBRL Taxonomy Extension Labels Linkbase Document~~
101.PRE*						~~XBRL Taxonomy Extension Presentation Linkbase Document~~

~~________~~

* Filed herewith.

EXHIBIT INDEX

No.

Description of Exhibit

Form

File No.

Exhibit

Filing Date

Filed Herewith

2.1

Agreement and Plan of Merger, dated as of December 8, 2020, by and among Vesper Healthcare Acquisition Corp., Hydrate Merger Sub I, Inc., Hydrate Merger Sub II, LLC, LCP Edge Intermediate, Inc. and LCP Edge Holdco, LLC, in its capacity as the Stockholders’ Representative

8-K

001-39565

2.1

December 9, 2020

3.1

Second Amended and Restated Certificate of Incorporation of The Beauty Health Company

8-K

001-39565

3.1

May 10, 2021

3.2

Amended and Restated Bylaws of The Beauty Health Company

8-K

001-39565

3.2

May 10, 2021

4.1

Indenture, dated as of September 14, 2021, between The Beauty Health Company and U.S. Bank National Association, as trustee

8-K

001-39565

4.1

September 14, 2021

4.2

Form of certificate representing the 1.25% Convertible Senior Notes due 2026 (included as Exhibit A to Exhibit 4.1)

8-K

001-39565

4.2

September 14, 2021

10.1

Form of Confirmation for Capped Call Transactions

8-K

001-39565

10.1

September 14, 2021

10.2#

Retention Agreement, dated May 7, 2022, between Daniel Watson and The Beauty Health Company

10.3***

Separation Agreement, dated as of August 3, 2022, between Hyrdrafacial LLC and Indra Pamamull

31.1*

Certification of Principal Executive Officer Pursuant to Securities Exchange Act Rules 13a-14(a), as adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2*

Certification of Principal Financial Officer Pursuant to Securities Exchange Act Rules 13a-14(a), as adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1*

Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2*

Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS**

Inline XBRL Instance Document

101.SCH**

Inline XBRL Taxonomy Extension Schema Document

101.CAL**

Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF**

Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB**

Inline XBRL Taxonomy Extension Labels Linkbase Document

101.PRE**

Inline XBRL Taxonomy Extension Presentation Linkbase Document

104**

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101 attachments

** Furnished.

# ~~Management contract or compensatory plan or arrangement.~~_______________

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* These certifications are being furnished solely to accompany this annual report pursuant to 18 U.S.C. Section 1350, and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934 and are not to be incorporated by reference into any filing of the registrant, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

** The XBRL related information in Exhibit 101 shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability of that section and shall not be incorporated by reference into any filing or other document pursuant to the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing or document.

*** Portions of this exhibit have been redacted in compliance with Regulation S-K Item 601(b)(10)

# Management contract or compensatory plan or arrangement.

SIGNATURES

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:	August ~~13, 2021~~9, 2022	By:	/s/ ~~Clinton E. Carnell~~Andrew Stanleick
		Name:	~~Clinton E. Carnell~~Andrew Stanleick
		Title:	Chief Executive Officer
			(Principal Executive Officer)

Date:	August ~~13, 2021~~9, 2022	By:	/s/ Liyuan Woo
		Name:	Liyuan Woo
		Title:	Chief Financial Officer
			(Principal Accounting Officer and Financial Officer)


	As of June 30,		As of December 31,
	2021		2020
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, respectively	40,128		18,576
Prepaid expenses	4,804		3,220
Income tax receivable	4,279		4,611
Inventories	23,762		23,202
Total current assets	174,440		59,095
Property and equipment, net	10,113		9,191
Intangible assets, net	51,884		50,935
Goodwill	103,100		98,531
Deferred tax assets, net	482		270
Other assets	2,489		4,813
Total assets	$	342,508	$	222,835
Liabilities and Shareholders’ Equity (Deficit)
Current liabilities:
Accounts payable	$	17,328	$	18,485
Accrued payroll related expenses	18,327		9,475
Other accrued expenses	3,073		2,458
Income tax payable	764		0

Current portion of long-term debt due to related parties	0		512
Total current liabilities	39,492		30,930

Earn-out shares liability	126,000		0
Other long-term liabilities	1,767		1,854
Long-term debt due to related parties, net of current portion	0		216,024
Deferred tax liabilities, net	1,313		3,987
Warrant liabilities	157,866		0
Total liabilities	326,438		252,795
Commitments (Note 11)	0		0
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, respectively	13		4
Preferred Stock, $0.0001 par value; 1,000,000 shares authorized; 0 shares issued and outstanding at June 30, 2021 and December 31, 2020	0		0
Additional paid-in capital	202,352		13,952
Note receivable from stockholder	0		(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