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Table of Contents
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 quarterly period ended September 30, 2021 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
For the transition period from __________ to __________.
Commission File Number: 001-39565 
The Beauty Health Company
(Exact name of registrant as specified in its charter)
Delaware85-1908962
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer Identification No.)
2165 Spring Street
Long Beach, CA 90806
(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 classTrading Symbol(s)Name of each exchange on which registered
Class A Common Stock, par value $0.0001 per shareSKINThe Nasdaq Stock Market LLC
Indicate by check mark whether the 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 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 filerAccelerated filer
Non-accelerated filerSmaller 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 November 9, 2021, there were 149,639,553 shares of Class A Common Stock, par value $0.0001 per share issued and outstanding.



Table of Contents
THE BEAUTY HEALTH COMPANY
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2021
TABLE OF CONTENTS

Page
PART I—FINANCIAL INFORMATION
Item 1.
Item 2.
Item 3.
Item 4.
PART II—OTHER INFORMATION
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
SIGNATURES




















2

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)

September 30, 2021December 31, 2020
Current assets:
Cash and cash equivalents$718,622$9,486
Accounts receivable, net of allowances for doubtful accounts of $2,677 and $2,032 at September 30, 2021 and December 31, 2020, respectively
38,38618,576
Prepaid expenses7,7453,220
Income tax receivable 4,9474,611
Inventories 28,10523,202
Total current assets797,80559,095
Property and equipment, net12,0709,191
Intangible assets, net 59,34950,935
Goodwill122,86598,531
Deferred tax assets, net1,028270
Other assets 4,7584,813
Total assets$997,875$222,835
Liabilities and Shareholders’ Equity (Deficit)
Current liabilities:
Accounts payable$18,118$18,485
Accrued payroll-related expenses21,2749,475
Other accrued expenses7,8962,458
Income tax payable2,180
Current portion of long-term debt due to related parties512
Total current liabilities 49,46830,930
Other long-term liabilities1,7551,854
Long-term debt due to related parties, net of current portion216,024
Deferred tax liabilities, net 2,6763,987
Warrant liabilities 357,173
Convertible senior notes, net728,858
Total liabilities1,139,930252,795
Commitments (Note 12)
Stockholders’ equity (deficit)
Class A Common Stock, $0.0001 par value; 320,000,000 shares authorized; 133,490,012 and 35,501,743 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively
14 4 
Preferred Stock, $0.0001 par value; 1,000,000 shares authorized; no shares issued and outstanding at September 30, 2021 and December 31, 2020
  
Additional paid-in capital 260,908 13,952 
Note receivable from stockholder (554)
Accumulated other comprehensive (loss) income (1,576)242 
Accumulated deficit(401,401)(43,604)
Total stockholders’ deficit(142,055)(29,960)
Total liabilities and stockholders’ deficit$997,875 $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 LOSS
(in thousands, except for share and per share amounts)
(Unaudited)

Three Months Ended September 30,Nine Months Ended September 30,
2021202020212020
Net sales$68,147 $34,560 $182,197 $81,212 
Cost of sales22,072 13,603 57,131 37,050 
Gross profit46,075 20,957 125,066 44,162 
Operating expenses:
Selling and marketing30,451 10,541 74,530 34,425 
Research and development1,880 577 6,320 2,549 
General and administrative19,200 7,054 73,643 19,659 
Total operating expenses51,531 18,172 154,493 56,633 
(Loss) income from operations
(5,456)2,785 (29,427)(12,471)
Other (income) expense:
Interest expense, net530 5,629 8,289 15,447 
Other (income) expense, net (24)(23)4,290 (84)
Change in fair value of Warrant liabilities199,306  271,333  
Change in fair value of Earn-out Shares liability10,575  47,100  
Foreign currency loss (gain), net431 (14)663 108 
Total other expense210,818 5,592 331,675 15,471 
Loss before provision for income taxes
(216,274)(2,807)(361,102)(27,942)
Income tax benefit(1,129)(593)(3,305)(6,260)
Net loss
$(215,145)$(2,214)$(357,797)$(21,682)
Comprehensive loss, net of tax:
Foreign currency translation adjustments(1,537)108 (1,818)20 
Comprehensive loss
$(216,682)$(2,106)$(359,615)$(21,662)
Net loss per share - basic and diluted$(1.63)$(0.06)$(4.10)$(0.64)
Weighted average common shares outstanding - basic and diluted132,306,346 35,392,316 87,219,681 33,870,903 







The accompanying notes are an integral part of these unaudited financial statements.
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THE BEAUTY HEALTH COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
(in thousands, except for share amounts)
(Unaudited)
Legacy Common StockLegacy Preferred StockCommon StockAdditional Paid-in CapitalNote Receivable from StockholderAccumulated other Comprehensive Income (Loss)Accumulated DeficitTotal Stockholders’Equity (Deficit)
SharesAmountSharesAmountSharesAmount
BALANCE, December 31, 201949,205 $ 935 $  $ $13,747 $(554)$28 $(14,429)$(1,208)
Retroactive application of recapitalization(49,205) (935) 32,136,203 3 (3)    
Adjusted balance, beginning of period    32,136,203 3 13,744 (554)28 (14,429)(1,208)
Stock-based compensation— — — — — — 26 — — — 26 
Net loss— — — — — — — — — (9,070)(9,070)
Foreign currency translation adjustment— — — — — — — — (72)— (72)
BALANCE, March 31, 2020— — — — 32,136,203 3 13,770 (554)(44)(23,499)(10,324)
Stock-based compensation— — — — — — 224 — — — 224 
Net loss— — — — — — — — — (10,397)(10,397)
Foreign currency translation adjustment— — — — — — — — (16)— (16)
BALANCE, June 30, 2020— — — — 32,136,203 3 13,994 (554)(60)(33,896)(20,513)
Issuance of Shares— — — 3,482,446 1 (1)— — —  
Stock-based compensation— — — — — — 76 — — — 76 
Net loss— — — — — — — — — (2,214)(2,214)
Foreign currency translation adjustment— — — — — — — — 108 — 108 
BALANCE, September 30, 2020— $— — $— $35,618,649 $4 $14,069 $(554)$48 $(36,110)$(22,543)








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

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THE BEAUTY HEALTH COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) (continued)
(in thousands, except for share amounts)
(Unaudited)
Common StockAdditional Paid-in CapitalNote Receivable from StockholderAccumulated other Comprehensive Income (Loss)Accumulated DeficitTotal Stockholders’Equity (Deficit)
SharesAmount
BALANCE, December 31, 202035,501,743 $4 $13,952 $(554)$242 $(43,604)$(29,960)
Stock-based compensation— — 34 — — — 34 
Net loss— — — — — (3,274)(3,274)
Foreign currency translation adjustment— — — — (5)— (5)
BALANCE, March 31, 202135,501,743 4 13,986 (554)237 (46,878)(33,205)
Reverse recapitalization transaction, net89,827,310 9 183,301 554 — — 183,864 
Issuance of Class A Common Stock in connection with business acquisition110,726 — 1,557 — — — 1,557 
Stock-based compensation— — 3,508 — — — 3,508 
Net loss— — — — — (139,378)(139,378)
Foreign currency translation adjustment— — — — (276)— (276)
BALANCE, June 30, 2021125,439,779 $13 $202,352 $ $(39)$(186,256)$16,070 
Issuance of Class A Common Stock in connection with business acquisitions479,373 — 7,784 — — — 7,784 
Issuance of Earn-out Shares7,500,000 1 136,574 — — — 136,575 
Reverse recapitalization transaction, net70,860 — (734)— — — (734)
Purchase of capped calls related to Convertible Senior Notes— — (90,150)— — — (90,150)
Stock-based compensation— — 5,082 — — — 5,082 
Net loss— — — — — (215,145)(215,145)
Foreign currency translation adjustment— — — — (1,537)— (1,537)
BALANCE, September 30, 2021133,490,012 $14 $260,908 $ $(1,576)$(401,401)$(142,055)






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)
Nine Months Ended September 30,
20212020
Cash flows from operating activities:
Net loss$(357,797)$(21,682)
Adjustments to reconcile net loss to net cash from operating
Depreciation of property and equipment2,446 1,441 
Amortization of capitalized software956 802 
Provision for doubtful accounts758 1,899 
Amortization of intangible assets8,384 8,665 
Amortization of other assets99 99 
Amortization of deferred financing costs3,005 1,055 
Stock-based compensation8,624 326 
Amortization of unfavorable lease terms (36)
Write-off of unfavorable lease (384)
(Gain) Loss on sale and disposal of assets (23)
In-kind interest that compounds into debt 4,130 3,938 
Deferred income taxes (5,330)(952)
Fair value adjustment of Earn-out Shares liability47,100  
Fair value adjustment of Warrant liabilities271,333  
Debt prepayment expense2,014  
Changes in operating assets and liabilities:
Accounts receivables(17,290)4,055 
Prepaid expense and other current assets(4,503)230 
Income taxes receivable(336)(5,118)
Inventory(2,499)(1,140)
Other assets(2,009)(224)
Accounts payable(8,048)(1,398)
Accrued payroll and other expenses15,624 (1,823)
Other long-term liabilities(100)913 
Income taxes payable1,799 (2,668)
Net cash used in operating activities(31,640)(12,025)
Cash flows used in investing activities:
Cash paid for business acquisition, net of cash acquired(22,896) 
Repayment of notes receivables from shareholders781  
Capital expenditures for intangible assets(2,229)(108)
Capital expenditures for property and equipment(4,857)(2,589)
Net cash used in investing activities(29,201)(2,697)
Cash flows from financing activities:
Proceeds from issuance of convertible senior notes750,000  
Purchase of capped calls related to convertible senior notes(90,150) 
Proceeds from revolving facility5,000 6,500 
Repayment of revolving facility(5,000)(15,000)
Proceeds from term loan 30,000 
Payment of debt issuance costs(21,341)(77)
Repayment of term loan(225,486)(1,329)
Proceeds from Business Combination, net of transaction costs (See Note 3)357,802  
Deferred payment for acquisition (901)
Net cash from financing activities770,825 19,193 
Net increase in cash and cash equivalents709,984 4,471 
Effect of foreign currency translation on cash(848)70 
Cash and cash equivalents, beginning of period9,486 7,307 
Cash and cash equivalents, end of period$718,622 $11,848 
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Supplemental disclosures of cash flow information and non-cash investing and financing activities:
Cash paid for interest$10,249 $10,432 
Cash paid for income taxes188 2,399 
Issuance of Earn-out shares136,575  
Trade receivables due from seller6,623  
Notes payable to seller2,153  
Change in deferred tax liability due to reverse recapitalization90  
Capital expenditures included in accounts payable512 739 

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 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”), the Company consummated the previously announced business combination pursuant to that certain Agreement and Plan of Merger, dated December 8, 2020 (the “Merger Agreement”), 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”), 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 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”. Following the Closing, on May 6, 2021, the Company’s Class A Common Stock and publicly traded warrants were listed on the Nasdaq Capital Market (“Nasdaq”) under the symbols, “SKIN” and “SKINW”, respectively. The transactions set forth in the Merger Agreement constitute a “Business Combination” as contemplated by Vesper Healthcare’s Second Amended and Restated Certificate of Incorporation.

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 and the business of the combined company and its subsidiaries following the Closing.

BeautyHealth is a category-creating beauty health company focused on bringing innovative products to market. The Company and its subsidiaries design, develop, manufacture, market, and sell aesthetic technologies and products. The Company’s flagship brand, HydraFacial, is a non-invasive and approachable beauty health platform and ecosystem. HydraFacial uses a unique delivery system to cleanse, extract, and hydrate with their patented hydradermabrasion technology and super serums that are made with nourishing ingredients.

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:

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the stockholders of LCP Edge Intermediate, Inc., the indirect parent of Edge Systems LLC d/b/a The HydraFacial Company 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 contemplated by the Merger Agreement.

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.

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 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 in this report on Form 10-Q 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, the interim Condensed Consolidated Financial Statements in this report on Form 10-Q and the 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 with the Securities and Exchange Commission (“SEC” or “Commission”) on July 19, 2021.

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

In the opinion of management, all adjustments, of a normal recurring nature, considered necessary for a fair presentation have been included in the Condensed Consolidated Financial Statements in this report on Form 10-Q. The Company believes that the disclosures provided herein are adequate to prevent the information presented from being misleading. However, the results of operations for the three and nine months ended September 30, 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.

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Emerging Growth Company

The Company is an “emerging growth company,” as defined in Section 2(a) of the Securities Act of 1933, as amended (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 of 2002, as amended (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 Securities Exchange Act of 1934, as amended (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.

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 Exchange Act. 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 annual report on 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.

Cash and Cash Equivalents
All highly liquid investments, including credit card receivables due from banks, with original maturities of 90 days or less at date of purchase, are reported at fair value and are considered to be cash equivalents.

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”) in a private placement to qualified institutional buyers pursuant to Rule 144 under the Securities Act of 1933, as amended. 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 (the “Trustee”). The Company accounts for the Notes under Accounting Standards Codification (“ASC”) ASC 470-20 - Debt with Conversion and Other Options and Derivatives and Hedging—Contracts in Entity's Own Equity (“ASU 2020-06”), which the Company early adopted in the first quarter of 2021 concurrent with the issuance of the Notes. The Company records the Notes in “Long-term liabilities” at face value net of issuance costs. If any of the conditions to the convertibility of the Notes is satisfied, or the Notes become due within one year, then the Company may be required under applicable accounting standards to reclassify the carrying value of the Notes as a current, rather than a long-term, liability. Refer to Note 9 - Long-term Debt for further detail.

Capped Call Transactions
Capped call transactions cover the aggregate number of shares of the Company’s common stock that will initially underlie the Notes, and generally reduce potential dilution to the Company’s common stock upon any conversion of Notes and/or offset any cash payments the Company 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. The Company determined that the freestanding capped call option contracts qualify as equity under the accounting guidance on indexation and equity classification, and recognized the contract by recording an entry to “Additional paid-in capital” (“APIC”) in stockholders’ equity in its Condensed Consolidated Balance Sheet. The Company also determined that the capped call option contracts meet the definition of a derivative under ASC 815 - Derivatives and Hedging (“ASC 815”), but are not required to be accounted for as a derivative as they meet the scope exception outlined in ASC 815. The capped call options are recorded in APIC and not remeasured.
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Issuance Costs
Issuance costs related to our Notes offering were capitalized and offset against proceeds from the Notes. Issuance costs consist of legal and other costs related to the issuance of the Notes and are amortized to interest expense over the term of the Notes. Refer to Note 9 - Long-term Debt for further detail.

Warrant Liabilities

During October 2020, in connection with Vesper Healthcare Acquisition Corp’s initial public offering, the Company issued 15,333,333 warrants (the “Public Warrants”) to purchase shares of the Company’s common stock at $11.50 per share. Simultaneously, with the consummation of Vesper Healthcare Acquisition Corp’s initial public offering, 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 the Company’s 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 September 30, 2021. Subsequent to September 30, 2021, the Company delivered a Notice of Redemption (the “Notice of Redemption”) calling for the redemption of all of its outstanding Public Warrants to purchase shares of the Company’s Class A Common Stock, par value $0.0001 per share. Refer to Note 18 - Subsequent Events for further detail.

The Company classifies the Public and Private Placement Warrants as liabilities on its Condensed 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 the Company’s control, the Public Warrant and Private Placement Warrant holders are entitled to receive cash while in certain scenarios the holders of the Company’s 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 Company’s 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 the Company’s Class A Common Stock (the “Earn-out Shares”) as a result of the Company’s completion of the acquisitions of four target businesses, as contemplated by the Merger Agreement, in June and July 2021 that were identified by HydraFacial. With the closing of these four distributor acquisitions in Australia, France, Germany and Mexico, the 7.5 million Earn-out Shares were earned and subsequently issued on July 15, 2021.

The Company accounted for the Earn-out Shares liability as contingent consideration and 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 was recorded at fair value and remeasured at the end of each reporting period, with the corresponding gain or loss recorded in the Company’s Condensed Consolidated Statements of Comprehensive Loss as a component of Other (income) expense, net.

Fair Value of Financial Instruments

The fair value of the Notes that are recorded at historical cost was $833 million as of September 30, 2021, and was determined using the last trade price in active markets. With the exception of the Company’s Notes, the fair value of the Company’s assets and liabilities that are recorded at historical amounts and that qualify as financial instruments under ASC 820, Fair Value Measurement, approximates the carrying amounts represented in the Company’s 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:
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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

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

In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract (ASU 2018-15), which requires implementation costs incurred by customers in cloud computing arrangements (i.e. hosting arrangements) to be capitalized under the same premises of authoritative guidance for internal-use software, and deferred over the non-cancellable term of the cloud computing arrangements plus any optional renewal periods that are reasonably certain to be exercised by the customer or for which the exercise is controlled by the service provider. ASU 2018-15 is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted. The Company adopted ASU 2018-15 on January 1, 2021 and the guidance did not have a material impact on its Condensed Consolidated Financial Statements.

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

In August 2020, the FASB issued ASU No. 2020-06, Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”). The amendments eliminate two of the three accounting models that require separate accounting for convertible features of debt securities, simplify the contract settlement assessment for equity classification, require the use of the if-converted method for all convertible instruments in the diluted earnings per share calculation and expand disclosure requirements. The amendments are effective for our annual and interim reporting periods beginning after December 15, 2021, with early adoption permitted for reporting periods beginning after December 15, 2020. The guidance can be applied on a full retrospective basis to all periods presented or a modified retrospective basis with a cumulative effect adjustment to the opening balance of retained earnings during the period of adoption. The Company adopted ASU 2020-06 on January 1, 2021. There were no changes to the Company’s previously issued financial statements since the Company had no existing convertible notes prior to issuance of the Notes. With the adoption of ASU 2020-06, the Company recorded the issuance of the Notes at their face value net of issuance costs in long-term liabilities and the value of the capped call options in APIC.

Accounting Pronouncements Not Yet Adopted

In February 2016, FASB issued ASU 2016–02, Leases (Topic 842). ASU 2016–02 requires lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by all leases with terms of more than 12 months. The Company will adopt this guidance on December 31, 2021 and expects to recognize approximately $17 million to $21 million of operating lease liabilities and related right-of-use assets on the Company’s Condensed Consolidated Balance Sheets upon adoption.


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Note 3 – Business Combinations

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 an aggregate purchase price of $350,000,000 (the “PIPE Investment”). The PIPE Investment was consummated substantially concurrently with the 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 (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 one-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 their respective shares for cash at an approximate price of $10.00 per share, for an aggregate of approximately $26,737,737, which was paid to such holders at Closing.

Immediately after giving effect to the Merger and the PIPE Investment, there were 125,329,053 shares of the 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 was subject to a working capital adjustment of $0.7 million. The Company also issued 70,860 shares related to the working capital adjustment.

The following table reconciles the elements of the Business Combination to the Company’s Condensed Consolidated Statements of Cash Flows and the Condensed Consolidated Statements of Stockholders’ Equity (Deficit) for the nine months ended September 30, 2021:
(in thousands)Recapitalization
Cash in, trust net of redemptions$433,382 
Cash - PIPE350,000 
Less: Cash paid out to Former Parent(367,870)
Less: transaction costs and advisory fees(56,976)
Less: Cash paid out from net working capital adjustment related to acquisitions$(734)
Net Cash Received from Business Combination$357,802 

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The number of shares of Class A Common Stock issued following the consummation of the Business Combination:
Number of Shares
Class A common stock outstanding prior to Business Combination46,000,000 
Less: Redemption of Vesper Class A Common Stock(2,672,690)
Class A common stock of Vesper43,327,310 
Founder shares (Vesper Class B Common Stock)11,500,000 
PIPE Shares35,000,000 
Business Combination and PIPE shares89,827,310 
Legacy HydraFacial shares (1)
35,501,743 
Working capital adjustment Class A Common Stock issued70,860 
Total Shares of Class A Common Stock after Business Combination125,399,913 
_______________
(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.

Business Acquisitions

On June 4, 2021, the Company acquired High Tech Laser, Australia Pty Ltd (“HTL”), a distributor of the Company’s products in Australia. On July 1, 2021, the Company 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 directly sell to the respective markets and improve services for its products.
The Company applied the acquisition method of accounting and established a new basis of accounting on the dates of the respective acquisitions. The assets acquired by the Company are accordingly measured at their estimated fair values as of the acquisition date. The goodwill arising from the 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 transaction costs for the acquisitions totaled $0.8 million.

The following table summarizes the consideration and estimated preliminary fair values assigned to the assets acquired and liabilities assumed at the dates of acquisition for the Wigmore, Ecomedic and Sidermica acquisitions and summarizes the HTL acquisition after measurement period adjustments.
(in thousands)HTLWigmoreEcomedicSidermica
Consideration paid:
Cash, net of cash acquired$4,920 $1,757 $11,338 $4,881 
Class A Common Stock issued(1)
1,557 456 6,513 815 
Contingent consideration 535   
Trade receivables due from seller1,027 2,336 1,679 1,581 
Notes payable to seller  2,153  
$7,504 $5,084 $21,683 $7,277 
Identifiable assets acquired and liabilities assumed
Accounts receivable$1,110 $2,079 $15 $1,657 
Non-compete agreement100 72 588 100 
Customer relationships2,696 3,312 5,487 2,700 
Inventory and other assets354 341 1,262 454 
Accounts payable(45)(456)(772) 
Deferred tax liabilities, net(675)(842)(1,834) 
Accrued and other liabilities(802)(317)(340) 
Total identifiable net assets2,738 4,189 4,406 4,911 
Goodwill$4,766 $895 $17,277 $2,366 
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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.
Intangible assets acquired included customer relationships 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 weighted average amortization period of customer relationship was 5 years, while the non-compete agreements are amortized over 3 years. The Company is currently in the process of finalizing the preliminary fair value allocations, and expects this to be completed prior to December 31, 2021.

Note 4 – Revenue Recognition

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

Disaggregated Revenue
The Company generates revenue through manufacturing and selling HydraFacial and Perk Delivery Systems (collectively, the “Delivery Systems”). In conjunction with the sale of Delivery Systems, the Company also sells consumable single- and multi-use serum solutions, tips and boosters (the “Consumables”) that are used when customers provide a hydradermabrasion facial experience for their customers using a Delivery System. The Consumables are sold by the Company and are available for purchase separately from the purchase of a Delivery System.

The Company’s revenue disaggregated by major product line consists of the following for the periods indicated:
Three Months Ended September 30,Nine Months Ended September 30,
(in thousands)2021202020212020
Net Sales
Delivery Systems
$36,182 $15,925 $96,798 $35,981 
Consumables31,965 18,635 85,399 45,231 
Total net sales$68,147 $34,560 $182,197 $81,212 

See Note 16 for revenue disaggregated by geographical region.

Note 5 – Balance Sheet Components
Inventories consist of the following as of the periods indicated:
(in thousands)September 30, 2021December 31, 2020
Raw materials$11,693 $9,335 
Finished goods16,412 13,867 
Total inventories $28,105 $23,202 

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

(in thousands)September 30, 2021December 31, 2020
Accrued compensation$10,561 $3,535 
Accrued payroll taxes1,218 1,388 
Accrued benefits1,881