UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
| 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:
Venus Concept Inc.
(Exact Name of Registrant as Specified in its Charter)
| |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer |
( (Address including zip code, and telephone number including area code, of registrant’s principal executive offices) |
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol | Name of each exchange on which registered | ||
| | The |
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.
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).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the 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 | ☐ |
| ☒ | 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
As of November 10, 2023 the registrant had
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Part I. |
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Item 1. |
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Condensed Consolidated Statements of Stockholders’ Equity (Deficit) |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. |
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Item 4. |
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PART II. |
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Item 1. |
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Item 1A. |
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Item 2. |
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Item 3. |
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Item 4. |
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Item 5. |
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Item 6. |
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ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets
(Unaudited)
(in thousands, except share and per share data)
September 30, | December 31, | |||||||
2023 | 2022 | |||||||
ASSETS | ||||||||
CURRENT ASSETS: | ||||||||
Cash and cash equivalents | $ | $ | ||||||
Accounts receivable, net of allowance of $ and $ as of September 30, 2023, and December 31, 2022, respectively | ||||||||
Inventories | ||||||||
Prepaid expenses | ||||||||
Advances to suppliers | ||||||||
Other current assets | ||||||||
Total current assets | ||||||||
LONG-TERM ASSETS: | ||||||||
Long-term receivables, net | ||||||||
Deferred tax assets | ||||||||
Severance pay funds | ||||||||
Property and equipment, net | ||||||||
Operating right-of-use assets, net | ||||||||
Intangible assets | ||||||||
Total long-term assets | ||||||||
TOTAL ASSETS | $ | $ | ||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
CURRENT LIABILITIES: | ||||||||
Trade payables | $ | $ | ||||||
Accrued expenses and other current liabilities | ||||||||
Current portion of long-term debt | ||||||||
Income taxes payable | ||||||||
Unearned interest income | ||||||||
Warranty accrual | ||||||||
Deferred revenues | ||||||||
Operating lease liabilities | ||||||||
Total current liabilities | ||||||||
LONG-TERM LIABILITIES: | ||||||||
Long-term debt | ||||||||
Income tax payable | ||||||||
Deferred tax liabilities | ||||||||
Accrued severance pay | ||||||||
Unearned interest revenue | ||||||||
Warranty accrual | ||||||||
Operating lease liabilities | ||||||||
Other long-term liabilities | ||||||||
Total long-term liabilities | ||||||||
TOTAL LIABILITIES | ||||||||
Commitments and Contingencies (Note 9) | ||||||||
STOCKHOLDERS’ EQUITY (DEFICIT) (Note 14): | ||||||||
Common Stock, $ par value: shares authorized as of September 30, 2023 and December 31, 2022; and issued and outstanding as of September 30, 2023, and December 31, 2022, respectively | ||||||||
Additional paid-in capital | ||||||||
Accumulated deficit | ( | ) | ( | ) | ||||
TOTAL STOCKHOLDERS’ EQUITY (DEFICIT) | ( | ) | ||||||
Non-controlling interests | ||||||||
( | ) | |||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | $ | $ |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Condensed Consolidated Statements of Operations
(Unaudited)
(in thousands, except per share data)
Three Months Ended September 30, |
Nine Months Ended September 30, |
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2023 |
2022 |
2023 |
2022 |
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Revenue |
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Leases |
$ | $ | $ | $ | ||||||||||||
Products and services |
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Cost of goods sold: |
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Leases |
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Products and services |
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Gross profit |
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Operating expenses: |
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Selling and marketing |
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General and administrative |
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Research and development |
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Total operating expenses |
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Loss from operations |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
Other expenses: |
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Foreign exchange loss |
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Finance expenses |
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Loss on disposal of subsidiaries |
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Loss before income taxes |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
Income tax (benefit) expense |
( |
) | ( |
) | ||||||||||||
Net loss |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
Net loss attributable to stockholders of the Company |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
Net income attributable to non-controlling interest |
$ | $ | $ | $ | ||||||||||||
Net loss per share: |
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Basic |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
Diluted |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
Weighted-average number of shares used in per share calculation: |
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Basic |
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Diluted |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Condensed Consolidated Statements of Comprehensive Loss
(Unaudited)
(in thousands)
Three Months Ended September 30, |
Nine Months Ended September 30, |
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2023 |
2022 |
2023 |
2022 |
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Net loss |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
Loss attributable to stockholders of the Company |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
Income attributable to non-controlling interest |
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Comprehensive loss |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Condensed Consolidated Statements of Stockholders’ Equity (Deficit)
(Unaudited)
(in thousands, except share data)
2022 Private Placement |
2023 Multi-Tranche Private Placement |
Common Stock |
Additional Paid- |
Accumulated |
Non- controlling |
Total Stockholders’ |
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Shares* |
Shares* |
Shares |
Amount |
in-Capital |
Deficit |
Interest |
Equity (Deficit) |
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Balance — January 1, 2023 |
$ | $ | $ | ( |
) | $ | $ | |||||||||||||||||||||||||
Restricted share units vested |
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Issuance of common stock |
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Adoption of ASC 326 |
— | — | — | ( |
) | ( |
) | |||||||||||||||||||||||||
Net loss — the Company |
— | — | — | ( |
) | ( |
) | |||||||||||||||||||||||||
Net income — non-controlling interest |
— | — | — | |||||||||||||||||||||||||||||
Stock-based compensation |
— | — | — | |||||||||||||||||||||||||||||
Balance — March 31, 2023 |
$ | $ | $ | ( |
) | $ | $ | ( |
) | |||||||||||||||||||||||
2023 Private Placement shares, net of costs |
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Beneficial conversion feature |
— | — | — | |||||||||||||||||||||||||||||
Issuance of common stock |
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Net loss — the Company |
— | — | — | ( |
) | ( |
) | |||||||||||||||||||||||||
Net income — non-controlling interest |
— | — | — | |||||||||||||||||||||||||||||
Dividends from subsidiaries |
— | — | — | ( |
) | ( |
) | |||||||||||||||||||||||||
Stock-based compensation |
— | — | — | |||||||||||||||||||||||||||||
Balance — June 30, 2023 |
$ | $ | $ | ( |
) | $ | $ | ( |
) | |||||||||||||||||||||||
Restricted share units vested |
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2023 Private Placement shares, net of costs |
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Beneficial conversion feature |
— | — | — | |||||||||||||||||||||||||||||
Net loss — the Company |
— | — | — | ( |
) | ( |
) | |||||||||||||||||||||||||
Net income — non-controlling interest |
— | — | — | |||||||||||||||||||||||||||||
Stock-based compensation |
— | — | — | |||||||||||||||||||||||||||||
Balance — September 30, 2023 |
$ | $ | $ | ( |
) | $ | $ | ( |
) |
Series A |
Common Stock |
Additional Paid- |
Accumulated |
Non-controlling |
Total |
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Shares* |
Shares |
Amount |
in-Capital |
Deficit |
Interest |
Equity |
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Balance — January 1, 2022 |
$ | $ | $ | ( |
) | $ | $ | |||||||||||||||||||||
Options exercised |
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Net loss — the Company |
— | — | ( |
) | ( |
) | ||||||||||||||||||||||
Net loss — non-controlling interest |
— | — | — | ( |
) | ( |
) | |||||||||||||||||||||
Stock-based compensation |
— | — | — | |||||||||||||||||||||||||
Balance — March 31, 2022 |
$ | $ | $ | ( |
) | $ | $ | |||||||||||||||||||||
Net loss — the Company |
— | — | ( |
) | ( |
) | ||||||||||||||||||||||
Net loss — non-controlling interest |
— | — | ||||||||||||||||||||||||||
Issuance of common stock |
||||||||||||||||||||||||||||
Stock-based compensation |
— | — | ||||||||||||||||||||||||||
Dividends from subsidiaries |
— | — | ( |
) | ( |
) | ||||||||||||||||||||||
Balance — June 30, 2022 |
$ | $ | $ | ( |
) | $ | $ | |||||||||||||||||||||
Net loss — the Company |
— | — | ( |
) | ( |
) | ||||||||||||||||||||||
Net loss — non-controlling interest |
— | — | ||||||||||||||||||||||||||
Equity issuance |
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Stock-based compensation |
— | — | ||||||||||||||||||||||||||
Balance — September 30, 2022 |
$ | $ | $ | ( |
) | $ | $ |
Note: Share amounts have been retroactively adjusted to reflect the impact of a 1-for-15 reverse stock split effected in May 2023, as discussed in Note 2.
*: Amounts associated with Private Placement and Preferred shares round to $nil.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
Nine Months Ended September 30, |
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2023 |
2022 |
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CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net loss |
$ | ( |
) | $ | ( |
) | ||
Adjustments to reconcile net loss to net cash used in operating activities: |
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Depreciation and amortization |
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Stock-based compensation |
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Provision for expected credit losses |
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Provision for inventory obsolescence |
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Finance expenses and accretion |
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Deferred tax expense (recovery) |
( |
) | ||||||
Loss on disposal of subsidiary |
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Loss (gain) on disposal of property and equipment |
( |
) | ||||||
Changes in operating assets and liabilities: |
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Accounts receivable short-term and long-term |
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Inventories |
( |
) | ( |
) | ||||
Prepaid expenses |
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Advances to suppliers |
( |
) | ||||||
Other current assets |
||||||||
Operating right-of-use assets, net |
||||||||
Other long-term assets |
( |
) | ||||||
Trade payables |
( |
) | ( |
) | ||||
Accrued expenses and other current liabilities |
( |
) | ( |
) | ||||
Current operating lease liabilities |
( |
) | ( |
) | ||||
Severance pay funds |
||||||||
Unearned interest income |
( |
) | ( |
) | ||||
Long-term operating lease liabilities |
( |
) | ( |
) | ||||
Other long-term liabilities |
( |
) | ( |
) | ||||
Net cash used in operating activities |
( |
) | ( |
) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
Purchases of property and equipment |
( |
) | ( |
) | ||||
Net cash used in investing activities |
( |
) | ( |
) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
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Proceeds from issuance of common stock, net of costs |
||||||||
2023 Multi-Tranche Private Placement, net of costs of $491 |
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Proceeds from exercise of options |
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Repayment of government assistance loans |
( |
) | ||||||
Dividends from subsidiaries paid to non-controlling interest |
( |
) | ( |
) | ||||
Net cash (used in) provided by financing activities |
( |
) | ||||||
NET DECREASE IN CASH AND CASH EQUIVALENTS AND RESTRICTED CASH |
( |
) | ( |
) | ||||
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH — Beginning of period |
||||||||
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH — End of period |
$ | $ | ||||||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |
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Cash paid for income taxes |
$ | $ | ||||||
Cash paid for interest |
$ | $ |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(in thousands, unless otherwise noted, except share and per share data)
1. NATURE OF OPERATIONS
Venus Concept Inc. is a global medical technology company that develops, commercializes, and sells minimally invasive and non-invasive medical aesthetic and hair restoration technologies and related services. The Company's systems have been designed on cost-effective, proprietary and flexible platforms that enable it to expand beyond the aesthetic industry’s traditional markets of dermatology and plastic surgery, and into non-traditional markets, including family and general practitioners and aesthetic medical spas. The Company was incorporated in the state of Delaware on November 22, 2002. In these notes to the unaudited condensed consolidated financial statements, the “Company” and “Venus Concept,” refer to Venus Concept Inc. and its subsidiaries on a consolidated basis.
Going Concern
The accompanying unaudited condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business for the foreseeable future, and, as such, the unaudited condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence.
The Company has had recurring net operating losses and negative cash flows from operations. As of September 30, 2023 and December 31, 2022, the Company had an accumulated deficit of $
In order to continue its operations, the Company must achieve profitable operations and/or obtain additional equity or debt financing. Until the Company achieves profitability, management plans to fund its operations and capital expenditures with cash on hand, borrowings, and issuance of capital stock. Until the Company generates revenue at a level to support its cost structure, the Company expects to continue to incur substantial operating losses and net cash outflows from operating activities.
Given the economic uncertainty in U.S. and international markets, the Company cannot anticipate the extent to which the current economic turmoil and financial market conditions will continue to adversely impact the Company’s business and the Company may need additional capital to fund its future operations and to access the capital markets sooner than planned. There can be no assurance that the Company will be successful in raising additional capital or that such capital, if available, will be on terms that are acceptable to the Company. If the Company is unable to raise sufficient additional capital, it may be compelled to reduce the scope of its operations and planned capital expenditures or sell certain assets, including intellectual property assets. These unaudited condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might result from the uncertainty. Such adjustments could be material.
The accompanying unaudited condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business for the foreseeable future, and, as such, the unaudited condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2022, filed with the Securities and Exchange Commission (the “SEC”) on March 27, 2023. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for fair presentation have been included. Operating results for the nine months ended September 30, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023. For further information, refer to the consolidated financial statements and footnotes thereto included in Item 8 of the Company’s most recent Annual Report on Form 10-K.
The preparation of these consolidated financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ materially from those estimates. The Company assessed certain accounting matters that generally require consideration of forecasted financial information in context with the information reasonably available to the Company as of September 30, 2023 and through the date of this report filing. The accounting matters assessed included, but were not limited to, the allowance for expected credit losses and the carrying value of intangible and long-lived assets.
At the annual and special meeting of the Company’s shareholders held on May 10, 2023, the Company’s shareholders granted the Company’s Board of Directors discretionary authority to implement a consolidation of the issued and outstanding common shares of the Company (a "Reverse Stock Split") and to fix the specific ratio within a range of one-for-five (1-for-
Amounts reported in thousands within this report are computed based on the amounts in U.S. dollars. As a result, the sum of the components reported in thousands may not equal the total amount reported in thousands due to rounding. Certain columns and rows within tables may not add due to the use of rounded numbers. Percentages presented are calculated from the underlying numbers in dollars.
Accounting Policies
The accounting policies the Company follows are set forth in the Company’s audited consolidated financial statements for fiscal year 2022. For further information, refer to the consolidated financial statements and footnotes thereto included in Item 8 of the Company’s most recent Annual Report on Form 10-K. There have been no material changes to these accounting policies.
Recently Adopted Accounting Standards
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Board Update (“ASU”) 2016-13, Financial Instruments – Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments, and also issued subsequent amendments to the initial guidance: ASU 2018-19, ASU 2019-04, ASU 2019-05, ASU 2019-10, ASU 2019-11, and ASU 2020-02, which replace the existing incurred loss impairment model with an expected credit loss model and require a financial asset measured at amortized cost to be presented at the net amount expected to be collected. This guidance was adopted as of January 1, 2023. The Company recognized a charge of $
Recently Issued Accounting Standards Not Yet Adopted
In August 2020, the FASB issued ASU No. 2020-06 (“ASU 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). ASU 2020-06 reduces the number of accounting models for convertible debt instruments by eliminating the cash conversion and beneficial conversion models. The diluted net income per share calculation for convertible instruments will require the Company to use the if-converted method. For contracts in an entity’s own equity, the type of contracts primarily affected by this update are freestanding and embedded features that are accounted for as derivatives under the current guidance due to a failure to meet the settlement conditions of the derivative scope exception. This update simplifies the related settlement assessment by removing the requirements to (i) consider whether the contract would be settled in registered shares, (ii) consider whether collateral is required to be posted, and (iii) assess shareholder rights. ASU 2020-06 is effective for the Company on January 1, 2024, with early adoption permitted. ASU No. 2020-06 can be adopted on either a fully retrospective or modified retrospective basis. The Company is currently assessing the impact of applying this guidance as well as when to adopt this guidance.
3. NET LOSS PER SHARE
Net Loss Per Share
Basic net loss per share is calculated by dividing net loss by the weighted-average number of shares of common stock outstanding during the period, without consideration for common stock equivalents. Diluted net loss per share is computed by dividing net loss by the weighted-average number of common stock equivalents outstanding for the period determined using the treasury-stock method. For purposes of this calculation, common stock warrants and stock options are considered to be common stock equivalents and are only included in the calculation of diluted net loss per share when their effect is dilutive.
The following table sets forth the computation of basic and diluted net loss and the weighted average number of shares used in computing basic and diluted net loss per share (in thousands, except per share data):
Three Months Ended September 30, |
Nine Months Ended September 30, |
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2023 |
2022 |
2023 |
2022 |
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Numerator: |
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Net loss |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
Net loss allocated to stockholders of the Company |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
Denominator: |
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Weighted-average shares of common stock outstanding used in computing net loss per share, basic |
||||||||||||||||
Weighted-average shares of common stock outstanding used in computing net loss per share, diluted |
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Net loss per share: |
||||||||||||||||
Basic |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
Diluted |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) |
Due to the net loss, all the outstanding shares of common stock equivalents were excluded from the calculation of diluted net loss per share attributable to common stockholders for the quarters ended September 30, 2023 and 2022 because including them would have been antidilutive:
September 30, 2023 |
September 30, 2022 |
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Options to purchase common stock and restricted stock units ("RSUs") |
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Preferred stock |
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Restricted share units |
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Shares reserved for convertible notes |
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Warrants for common stock |
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Total potential dilutive shares |
4. FAIR VALUE MEASUREMENTS
Financial assets and financial liabilities are initially recognized at fair value when the Company becomes a party to the contractual provisions of the financial instrument. Subsequently, all financial instruments are measured at amortized cost using the effective interest method.
The financial instruments of the Company consist of cash and cash equivalents, restricted cash, accounts receivable, long-term receivables, lines of credit, trade payables, government assistance loans, accrued expenses and other current liabilities, other long-term liabilities and long-term debt. In view of their nature, the fair value of these financial instruments approximates their carrying amounts.
The Company measures the fair value of its financial assets and financial liabilities using the fair value hierarchy. A financial instrument’s classification within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The accounting guidance establishes a three-tiered hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:
Level 1 – Quoted prices in active markets for identical assets or liabilities.
Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Guaranteed investment certificates are classified within Level 2 as the Company uses alternative pricing sources and models utilizing market observable inputs for valuation. The following tables set forth the fair value of the Company’s Level 1, Level 2 and Level 3 financial assets and liabilities within the fair value hierarchy:
Fair Value Measurements as of September 30, 2023 |
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Quoted Prices in Active Markets using Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
Total |
|||||||||||||
Assets |
||||||||||||||||
Guaranteed Investment Certificates |
$ | $ | $ | $ | ||||||||||||
Total assets |
$ | $ | $ | $ |
Fair Value Measurements as of December 31, 2022 |
||||||||||||||||
Quoted Prices in Active Markets using Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
Total |
|||||||||||||
Assets |
||||||||||||||||
Guaranteed Investment Certificates |
$ | $ | $ | $ | ||||||||||||
Total assets |
$ | $ | $ | $ |
5. ACCOUNTS RECEIVABLE
The Company’s products may be sold under subscription agreements with unencumbered title passing to the customer at the end of the lease term, which is generally
A financing receivable is a contractual right to receive money, on demand or on fixed or determinable dates, that is recognized as an asset on the Company's unaudited condensed consolidated balance sheets. The Company's financing receivables, consisting of sales-type leases, totaled $
The Company performed an assessment of the allowance for expected credit losses as of September 30, 2023 and December 31, 2022. Based upon such assessment, the Company recorded an allowance for expected credit losses totaling $
A summary of the Company’s accounts receivables is presented below:
September 30, |
December 31, |
|||||||
2023 |
2022 |
|||||||
Gross accounts receivable |
$ | $ | ||||||
Unearned income |
( |
) | ( |
) | ||||
Allowance for expected credit losses |
( |
) | ( |
) | ||||
$ | $ | |||||||
Reported as: |
||||||||
Current trade receivables |
$ | $ | ||||||
Current unearned interest income |
( |
) | ( |
) | ||||
Long-term trade receivables |
||||||||
Long-term unearned interest income |
( |
) | ( |
) | ||||
$ | $ |
Current subscription agreements are reported as part of accounts receivable. The following are the contractual commitments, net of allowance for expected credit losses, to be received by the Company over the next 5 years:
September 30, | ||||||||||||||||||||||||
Total | 2023 | 2024 | 2025 | 2026 | 2027 | |||||||||||||||||||
Current financing receivables, net of allowance of $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
Long-term financing receivables, net of allowance of $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
$ | $ | $ | $ | $ | $ |
Accounts receivable do not bear interest and are typically not collateralized. The Company performs credit evaluations on new and existing customers’ financial condition and maintains an allowance for expected credit losses. Uncollectible accounts are charged to expense when deemed uncollectible, and accounts receivable are presented net of an allowance for expected credit losses. Accounts receivable are deemed past due in accordance with the contractual terms of the agreement. Actual losses may differ from the Company’s estimates and could be material to its unaudited condensed consolidated financial position, results of operations and cash flows.
The allowance for expected credit losses consisted of the following activity:
Balance at January 1, 2022 |
$ | |||
Write-offs |
( |
) | ||
Provision |
||||
Balance at December 31, 2022 |
$ | |||
Write-offs |
( |
) | ||
Provision |
||||
Balance at March 31, 2023 |
$ | |||
Write-offs |
( |
) | ||
Provision |
||||
Balance at June 30, 2023 |
$ | |||
Write-offs |
( |
) | ||
Provision |
||||
Balance at September 30, 2023 |
$ |
6. SELECT BALANCE SHEET AND STATEMENT OF OPERATIONS INFORMATION
Inventory
Inventory consists of the following:
September 30, |
December 31, |
|||||||
2023 |
2022 |
|||||||
Raw materials |
$ | $ | ||||||
Work-in-progress |
||||||||
Finished goods |
||||||||
Total inventory |
$ | $ |
Additions to inventory are primarily comprised of newly produced units and applicators, refurbishment cost from demonstration units and used equipment which were reacquired during the period from upgraded sales. The Company expensed $
The Company provides for excess and obsolete inventories when conditions indicate that the inventory cost is not recoverable due to physical deterioration, usage, obsolescence, reductions in estimated future demand and reductions in selling prices. Inventory provisions are measured as the difference between the cost of inventory and net realizable value to establish a lower cost basis for the inventories. As of September 30, 2023 and December 31, 2022, a provision for obsolescence of $
Property and Equipment, Net
Property and equipment, net consist of the following:
Useful Lives |
September 30, |
December 31, |
||||||||||
(in years) |
2023 |
2022 |
||||||||||
Lab equipment tooling and molds |
$ | $ | ||||||||||
Office furniture and equipment |
||||||||||||
Leasehold improvements |
|
|||||||||||
Computers and software |
||||||||||||
Vehicles |
||||||||||||
Demo units |
||||||||||||
Total property and equipment |
||||||||||||
Less: Accumulated depreciation |
( |
) | ( |
) | ||||||||
Total property and equipment, net |
$ | $ |
Depreciation expense amounted to $
Other Current Assets
September 30, |
December 31, |
|||||||
2023 |
2022 |
|||||||
Government remittances (1) |
$ | $ | ||||||
Consideration receivable from subsidiaries sale |
||||||||
Deferred financing costs |
||||||||
Sundry assets and miscellaneous |
||||||||
Total other current assets |
$ | $ |
(1) Government remittances are receivables from the local tax authorities for refunds of sales taxes and income taxes.
Accrued Expenses and Other Current Liabilities
September 30, |
December 31, |
|||||||
2023 |
2022 |
|||||||
Payroll and related expense |
$ | $ | ||||||
Accrued expenses |
||||||||
Commission accrual |
||||||||
Sales and consumption taxes |
||||||||
Total accrued expenses and other current liabilities |
$ | $ |
Warranty Accrual
The following table provides the details of the change in the Company’s warranty accrual:
September 30, |
December 31, |
|||||||
2023 |
2022 |
|||||||
Balance as of the beginning of the period |
$ | $ | ||||||
Warranties issued during the period |
||||||||
Warranty costs incurred during the period |
( |
) | ( |
) | ||||
Balance at the end of the period |
$ | $ | ||||||
Current |
||||||||
Long-term |
||||||||
Total |
$ | $ |
Finance Expenses
The following table provides the details of the Company’s finance expenses:
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2023 |
2022 |
2023 |
2022 |
|||||||||||||
Interest expense |
$ | $ | $ | $ | ||||||||||||
Accretion on long-term debt and amortization of fees |
||||||||||||||||
Total finance expenses |
$ | $ | $ | $ |
7. LEASES
The following presents the various components of lease costs.
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2023 |
2022 |
2023 |
2022 |
|||||||||||||
Operating lease cost |
$ | $ | $ | $ | ||||||||||||
Short-term lease cost |
||||||||||||||||
Total lease cost |
$ | $ | $ | $ |
The following table presents supplemental information relating to the cash flows arising from lease transactions. Cash payments related to short-term leases are not included in the measurement of operating lease liabilities, and as such, are excluded from the amounts below.
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2023 |
2022 |
2023 |
2022 |
|||||||||||||
Operating cash outflows from operating leases |
$ | $ | $ | $ |
The following table presents the weighted-average lease term and discount rate for operating leases.
At September 30, |
||||||||
2023 |
2022 |
|||||||
Operating leases |
||||||||
Weighted-average remaining lease term |
||||||||
Weighted-average discount rate |
% | % |
The following table presents a maturity analysis of expected undiscounted cash flows for operating leases on an annual basis for the next five years and thereafter.
Years ending December 31, |
Operating leases |
|||
2023 |
$ | |||
2024 |
||||
2025 |
||||
2026 |
||||
2027 |
||||
Thereafter |
||||
Imputed Interest (1) |
( |
) | ||
Total |
$ |
(1) Imputed interest represents the difference between undiscounted cash flows and cash flows.
8. INTANGIBLE ASSETS
Intangible assets net of accumulated amortization and goodwill were as follows:
At September 30, 2023 | ||||||||||||
Gross Amount | Accumulated Amortization | Net Amount | ||||||||||
Customer relationships | $ | $ | ( | ) | $ | |||||||
Brand | ( | ) | ||||||||||
Technology | ( | ) | ||||||||||
Supplier agreement | ( | ) | ||||||||||
Total intangible assets | $ | $ | ( | ) | $ |
At December 31, 2022 | ||||||||||||
Gross Amount | Accumulated Amortization | Net Amount | ||||||||||
Customer relationships | $ | $ | ( | ) | $ | |||||||
Brand | ( | ) | ||||||||||
Technology | ( | ) | ||||||||||
Supplier agreement | ( | ) | ||||||||||
Total intangible assets | $ | $ | ( | ) | $ |
For the three months ended September 30, 2023 and 2022, amortization expense was $
Estimated amortization expense for the next five fiscal years and all years thereafter are as follows:
Years ending December 31, | ||||
2023 | $ | |||
2024 | ||||
2025 | ||||
2026 | ||||
2027 | ||||
Thereafter | ||||
Total | $ |
9. COMMITMENTS AND CONTINGENCIES
Commitments
As of September 30, 2023, the Company has non-cancellable purchase orders placed with its contract manufacturers in the amount of $
Aggregate future service and purchase commitments with manufacturers as of September 30, 2023 are as follows:
Years ending December 31, |
Purchase and Service Commitments |
|||
2023 |
$ | |||
2024 and Thereafter |
||||
Total |
$ |
Legal Proceedings
Purported Shareholder Class Actions
On July 11, 2019, a verified shareholder derivative complaint was filed in the United States District Court for the Northern District of California, captioned Mason v. Rhodes, No. 5:19-cv-03997-NC. The complaint alleges that certain of Restoration Robotics’ former officers and directors breached their fiduciary duties, have been unjustly enriched and violated Section 14(a) of the Exchange Act in connection with the IPO and Restoration Robotics’ 2018 proxy statement. The complaint seeks unspecified damages, declaratory relief, other equitable relief and attorneys’ fees and costs. On August 21, 2019, the District Court granted the parties’ joint stipulation to stay the Mason action. On June 21, 2021, the District Court granted the parties’ further stipulation to stay the Mason action. On March 2, 2023, Plaintiff filed a stipulation voluntarily dismissing the action. The District Court has not yet entered the stipulation.
10. MAIN STREET TERM LOAN
On December 8, 2020, the Company executed a loan and security agreement (the "MSLP Loan Agreement"), a promissory note (the "MSLP Note"), and related documents for a loan in the aggregate amount of $
As of September 30, 2023 and December 31, 2022, the Company was in compliance with all required covenants.
The scheduled payments, inclusive of principal and estimated interest, on the outstanding borrowings as of September 30, 2023 are as follows:
As of September 30, 2023 | ||||
2023 |
$ | |||
2024 |
||||
2025 |
||||
Total |
$ |
On October 4, 2023, the Company, Venus Concept USA Inc. ("Venus USA"), Venus Concept Canada Corp., Venus Concept Ltd., a wholly owned subsidiary of the Company ("Venus Ltd.") entered into a Loan Modification Agreement with CNB (the "MSLP Loan Modification"), which modified certain terms of the MSLP Loan Agreement (as so modified by the MSLP Loan Modification, the "MSLP Facility"). Refer to Note 18 "Subsequent Events" for additional details.
11. MADRYN LONG-TERM DEBT AND CONVERTIBLE NOTES
On October 11, 2016, Venus Ltd. entered into a credit agreement as a guarantor with Madryn Health Partners, LP, as administrative agent, and certain of its affiliates as lenders (collectively, “Madryn”), as amended (the “Madryn Credit Agreement”), pursuant to which Madryn agreed to make certain loans to certain of Venus Concept’s subsidiaries.
On December 9, 2020, contemporaneously with the MSLP Loan Agreement (Note 10), the Company and its subsidiaries, Venus USA, Venus Ltd., Venus Concept Canada, Corp. ("Venus Canada"), and the Madryn Noteholders (as defined below), entered into a Securities Exchange Agreement (the "Exchange Agreement") dated as of December 8, 2020, pursuant to which the Company (i) repaid on December 9, 2020, $
As of September 30, 2023, the Company had approximately $
The Notes will accrue interest at a rate of
The scheduled payments, inclusive of principal and interest, on the outstanding borrowings as of September 30, 2023 are as follows:
As of September 30, 2023 | ||||
2023 | $ | |||
2024 | ||||
2025 | ||||
Total | $ |
For the three and nine months ended September 30, 2023, the Company did
make any principal repayments. Pursuant to consent agreements entered into by and between the Company and certain of its subsidiaries as guarantors, Madryn and CNB as of June 30, 2023, July 28, 2023, and September 29, 2023, the Company paid the Q2 2023 interest payable under the Notes on June 30, 2023 and the Q3 2023 interest payable under the Notes on September 30, 2023 by adding such Q2 2023 and Q3 2023 interest to the outstanding principal of the applicable Notes. Cash payment of the Q2 2023 and Q3 2023 interest under the Notes, was deferred until October 15, 2023 or such later date as the Madryn Noteholders may confirm from time to time in writing in their sole discretion.
On October 4, 2023, the Company entered into an Exchange Agreement (the "2023 Exchange Agreement") with the Madryn Noteholders, pursuant to which the Madryn Noteholders agreed to exchange $
12. CREDIT FACILITY
On August 29, 2018, Venus Ltd. entered into an Amended and Restated Loan Agreement as a guarantor with CNB, as amended on March 20, 2020, December 9, 2020 and August 26, 2021 (the “CNB Loan Agreement”), pursuant to which CNB agreed to make certain loans and other financial accommodations to certain of Venus Ltd.’s subsidiaries to be used to finance working capital requirements. In connection with the CNB Loan Agreement, Venus Ltd. also entered into a guaranty agreement with CNB dated as of August 29, 2018, as amended on March 20, 2020, December 9, 2020 and August 26, 2021 (the “CNB Guaranty”), pursuant to which Venus Ltd. agreed to guaranty the obligations of its subsidiaries under the CNB Loan Agreement. On March 20, 2020, the Company also entered into a Security Agreement with CNB (the “CNB Security Agreement”), as amended on December 9, 2020 and August 26, 2021, pursuant to which it agreed to grant CNB a security interest in substantially all of our assets to secure the obligations under the CNB Loan Agreement.
The CNB Loan Agreement contains various covenants that limit the Company’s ability to engage in specified types of transactions. Subject to limited exceptions, these covenants limit the Company’s ability, without CNB’s consent, to, among other things, sell, lease, transfer, exclusively license or dispose of the Company’s assets, incur, create, or permit to exist additional indebtedness, or liens, to make dividends and certain other restricted payments, and to make certain changes to its management and/or ownership structure. The Company is required to maintain $
On August 26, 2021, the Company, Venus USA and Venus Canada entered into a Fourth Amended and Restated Loan Agreement (the “Amended CNB Loan Agreement”) with CNB, pursuant to which, among other things, (i) the maximum principal amount the revolving credit facility was reduced from $
As of September 30, 2023, and December 31, 2022, the Company was in compliance with all required covenants. An event of default under this agreement would cause a default under the MSLP Loan (see Note 10).
In connection with the Amended CNB Loan Agreement, the Company, Venus USA and Venus Canada issued a promissory note dated August 26, 2021, in favor of CNB (the “CNB Note”) in the amount of $
13. COMMON STOCK RESERVED FOR ISSUANCE
The Company is required to reserve and keep available out of its authorized but unissued shares of common stock a number of shares sufficient to affect the exercise of all options granted and available for grant under the incentive plans and warrants to purchase common stock.
September 30, 2023 |
December 31, 2022 |
|||||||
Outstanding common stock warrants |
||||||||
Outstanding stock options and RSUs |
||||||||
Preferred shares |
||||||||
Shares reserved for conversion of future non-voting preferred share issuance |
||||||||
Shares reserved for conversion of future voting preferred share issuance |
||||||||
Shares reserved for future option grants and RSUs |
||||||||
Shares reserved for Lincoln Park |
||||||||
Shares reserved for Madryn Noteholders |
||||||||
Total common stock reserved for issuance |
14. STOCKHOLDERS' EQUITY
Common Stock
The Company’s common stock confers upon its holders the following rights:
• | The right to participate and vote in the Company’s stockholder meetings, whether annual or special. Each share will entitle its holder, when attending and participating in the voting in person or via proxy, to one vote; |
• | The right to a share in the distribution of dividends, whether in cash or in the form of bonus shares, the distribution of assets or any other distribution pro rata to the par value of the shares held by them; and |
• | The right to a share in the distribution of the Company’s excess assets upon liquidation pro rata to the par value of the shares held by them. |
Reverse Stock Split
At the annual and special meeting of the Company’s shareholders held on May 10, 2023, the Company’s shareholders granted the Company’s Board of Directors discretionary authority to implement the Reverse Stock Split and to fix the specific consolidation ratio within a range of one-for-five (1-for-
Equity Purchase Agreement with Lincoln Park
On June 16, 2020, the Company entered into the Equity Purchase Agreement with Lincoln Park, which provides that, upon the terms and subject to the conditions and limitations set forth therein, the Company may sell to Lincoln Park up to $
From commencement to expiry on July 1, 2022, the Company issued and sold to Lincoln Park
2022 LPC Purchase Agreement with Lincoln Park
On July 12, 2022, the Company entered into the 2022 LPC Purchase Agreement with Lincoln Park, as the Equity Purchase Agreement expired on July 1, 2022. The 2022 LPC Purchase Agreement provides that, upon the terms and subject to the conditions and limitations set forth therein, the Company may sell to Lincoln Park up to $
The 2021 Private Placement
On December 15, 2021, we entered into a securities purchase agreement pursuant to which we issued and sold to certain investors (collectively the "2021 Investors") an aggregate of
Preferred Stock issued in December 2021
As noted above, in December 2021, the Company issued and sold to the 2021 Investors an aggregate of
The 2022 Private Placement
In November 2022, we entered into a securities purchase agreement with certain investors (collectively, the “2022 Investors”) pursuant to which the Company issued and sold to the 2022 Investors an aggregate of
Voting Preferred Stock issued in November 2022
As noted above, in November 2022, the Company issued and sold to certain 2022 Investors an aggregate of
• |
Voting Rights. The Voting Preferred Stock votes with the Common Stock on an as-converted basis. |
• |
Liquidation. Each share of Voting Preferred Stock carries a liquidation preference, senior to the Common Stock in an amount equal to the greater of (a) $ |
• |
Conversion. The Voting Preferred Stock will convert into shares of Common Stock on a one for |
• |
Dividends. Each share of Voting Preferred Stock is entitled to participate in dividends and other non-liquidating distributions (if, as and when declared by the Board of the Company) on an as-converted basis, pari passu with the Common Stock. |
• |
Redemption. The Voting Preferred Stock is not redeemable at the election of the Company or at the election of the holder. |
• |
Maturity. The Voting Preferred Stock shall be perpetual unless converted. |
The 2023 Multi-Tranche Private Placement
In May 2023, we entered into a securities purchase agreement (the "2023 Multi-Tranche Private Placement Stock Purchase Agreement") with certain investors (collectively, the "2023 Investors") pursuant to which the Company may issue and sell to the 2023 Investors up to $
• |
Voting Rights. The Senior Preferred Stock has aggregate number of votes equal to the product of (a) the quotient of (i) the aggregate purchase price paid under the Stock Purchase Agreement for all shares of Senior Preferred Stock issued and outstanding as of such time, divided by (ii) the highest purchase price paid by a holder for a share of Senior Preferred Stock prior to or as of such time, multiplied by (b) two. Such formula ensures that no share of senior preferred stock will ever have more than two votes per share, with such number of votes subject to reduction (but not increase) depending on the pricing of future sales of Senior Preferred Stock in the Private Placement. The Senior Preferred Stock votes with the Company’s common stock on all matters submitted to holders of common stock and does not vote as a separate class. |
• |
Liquidation. Each share of Senior Preferred Stock carries a liquidation preference, senior to the Common Stock and Voting Preferred Stock, in an amount equal to the product of the Purchase Price for such share, multiplied by |
|
• |
Conversion. The Senior Preferred Stock will convert into shares of Common Stock on a one for |
• |
Dividends. Each share of Senior Preferred Stock is entitled to participate in dividends and other non-liquidating distributions (if, as and when declared by the Board of the Company) on an as-converted basis, pari passu with the Common Stock and Voting Preferred Stock. |
|
• |
Redemption. The Senior Preferred Stock is not redeemable at the election of the Company or at the election of the holder. |
• |
Maturity. The Senior Preferred Stock shall be perpetual unless converted. |
On July 6, 2023, the Company and the 2023 Investors entered into an amendment to the 2023 Multi-Tranche Private Placement Stock Purchase Agreement (the “Multi-Tranche Amendment”). The Multi-Tranche Amendment (a) clarifies the appropriate date pursuant to which the purchase price for each share of Senior Preferred Stock to be sold in the Private Placement is determined (such that the purchase price shall be equal to the “Minimum Price” as set forth in Nasdaq Listing Rule 5635(d)) and (b) permits the Company to specify a desired closing date (subject to approval by the 2023 Investors) for each sale in the 2023 Multi-Tranche Private Placement.
On July 12, 2023, the Company and the 2023 Investors consummated the second tranche in the 2023 Multi-Tranche Private Placement, under which the Company sold the 2023 Investors
On September 8, 2023, the Company and the 2023 Investors consummated the third tranche in the 2023 Multi-Tranche Private Placement, under which the Company sold the 2023 Investors
2010 Share Option Plan
In November 2010, the Board adopted a share option plan (the “2010 Share Option Plan”) pursuant to which shares of the Company’s common stock are reserved for issuance upon the exercise of options to be granted to directors, officers, employees and consultants of the Company. The 2010 Share Option Plan is administered by the Board, which designates the options and dates of grant. Options granted vest over a period determined by the Board, originally had a contractual life of
2019 Incentive Award Plan
The 2019 Incentive Award Plan (the “2019 Plan”) was originally established under the name Restoration Robotics, Inc., as the 2017 Incentive Award Plan. It was adopted by the Board on September 12, 2017 and approved by the Company’s stockholders on September 14, 2017. The 2017 Incentive Award Plan was amended, restated, and renamed as set forth above, and was approved by the Company’s stockholders on October 4, 2019.
Under the 2019 Plan,
The Company recognized stock-based compensation for its employees and non-employees in the accompanying unaudited condensed consolidated statements of operations as follows:
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2023 |
2022 |
2023 |
2022 |
|||||||||||||
Cost of sales |
$ | $ | $ | $ | ||||||||||||
Selling and marketing |
||||||||||||||||
General and administrative |
||||||||||||||||
Research and development |
||||||||||||||||
Total stock-based compensation |
$ | $ | $ | $ |
Stock Options
The fair value of each option is estimated at the date of grant using the Black-Scholes option pricing formula with the following assumptions:
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2023 |
2022 |
2023 |
2022 |
|||||||||||||
Expected term (in years) |
||||||||||||||||
Risk-free interest rate |
% | % | - | % | - | % | ||||||||||
Expected volatility |
% | % | % | % | ||||||||||||
Expected dividend rate |
% | % | % | % |
Expected Term—The expected term represents management’s best estimate for the options to be exercised by option holders.
Volatility—Since the Company does not have a trading history for its common stock, the expected volatility was derived from the historical stock volatilities of comparable peer public companies within its industry that are considered to be comparable to the Company’s business over a period equivalent to the expected term of the stock-based awards.
Risk-Free Interest Rate—The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the date of grant for zero-coupon U.S. Treasury notes with maturities approximately equal to the stock-based awards’ expected term.
Dividend Rate—The expected dividend is
Fair Value of Common Stock— Prior to the Merger, Venus Ltd. used the price per share in its latest sale of securities as an estimate of the fair value of its ordinary shares. After the closing of the Merger, the fair value of the Company’s common stock is used to estimate the fair value of the stock-based awards at grant date.
The following table summarizes stock option activity under the Company’s stock option plans:
Number of Shares |
Weighted- Average Exercise Price per Share, $ |
Weighted- Average Remaining Contractual Term |
Aggregate Intrinsic Value |
|||||||||||||
Outstanding – January 1, 2023 |
$ | $ | ||||||||||||||
Options granted |
- | |||||||||||||||
Options exercised |
- | |||||||||||||||
Options forfeited/cancelled |
( |
) | - | |||||||||||||
Outstanding – September 30, 2023 |
$ | |||||||||||||||
Exercisable – September 30, 2023 |
$ | |||||||||||||||
Expected to vest – after September 30, 2023 |
$ | $ |
The following tables summarize information about stock options outstanding and exercisable at September 30, 2023:
Options Outstanding | Options Exercisable | |||||||||||||||||||||||
Exercise Price Range | Number | Weighted average remaining contractual term (years) | Weighted average Exercise Price | Options exercisable | Weighted average remaining contractual term (years) | Weighted average Exercise Price | ||||||||||||||||||
$1.90 - $54.60 | $ | $ | ||||||||||||||||||||||
$63.90 - $119.25 | ||||||||||||||||||||||||
$186.75 - $382.50 | ||||||||||||||||||||||||
$405.00 - $438.75 | ||||||||||||||||||||||||
$540.00 - $958.50 | ||||||||||||||||||||||||
$ | $ |
The aggregate intrinsic value of options is calculated as the difference between the exercise price of the stock options and the fair value of the Company’s common stock for those options that had exercise prices lower than the fair value of the Company’s common stock. The total intrinsic value of options exercised were and for the three months ended September 30, 2023 and 2022, respectively. The total intrinsic value of options exercised were and for the nine months ended September 30, 2023 and 2022, respectively.
The weighted-average grant date fair value of options granted was $
Restricted Stock Units
The following table summarizes information about RSUs outstanding at September 30, 2023:
Number of Shares |
Weighted- Average Grant Date Fair Value per Share, $ |
|||||||
Outstanding – January 1, 2023 |
$ | |||||||
RSUs forfeited/cancelled |
( |
) | ||||||
RSUs exercised |
( |
) | ||||||
Outstanding - September 30, 2023 |
$ |
15. INCOME TAXES
The Company generated a loss and recognized $
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2023 |
2022 |
2023 |
2022 |
|||||||||||||
Loss before income taxes |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
Theoretical tax expense at the statutory rate (21% in 2023 and 2022) |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
Differences in jurisdictional tax rates |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
Valuation allowance |
||||||||||||||||
Non-deductible expenses |
||||||||||||||||
Other |
( |
) | ( |
) | ||||||||||||
Total income tax provision (recovery) |
( |
) | ( |
) | ||||||||||||
Net loss |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) |
Income tax expense or benefit is recognized based on the actual loss incurred during the three and nine months ended September 30, 2023 and 2022, respectively.
16. SEGMENT AND GEOGRAPHIC INFORMATION
Operating segments are defined as components of an entity for which separate financial information is available and that is regularly reviewed by the Chief Operating Decision Maker (“CODM”) in deciding how to allocate resources to an individual segment and in assessing performance. The Company's CODM is its Chief Executive Officer. The Company has determined it operates in a single operating segment and has
reportable segment, as the CODM reviews financial information presented on a consolidated basis accompanied by disaggregated information about revenues by geography and type for purposes of making operating decisions, allocating resources, and evaluating financial performance. The Company does not assess the performance of individual product lines on measures of profit or loss, or asset-based metrics. Therefore, the information below is presented only for revenues by geography and type.
Revenue by geographic location, which is based on the product shipped to location, is summarized as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||
United States | $ | $ | $ | $ | ||||||||||||
International | ||||||||||||||||
Total revenue | $ | $ | $ | $ |
As of September 30, 2023, long-lived assets in the amount of $
Revenue by type is a key indicator for providing management with an understanding of the Company’s financial performance, which is organized into four different categories:
1. Lease revenue – includes all system sales with typical lease terms of
2. System revenue – includes all systems sales with payment terms within
3. Product revenue – includes skincare, hair and other consumables payable upon receipt.
4. Service revenue – includes NeoGraft technician services, ad agency services and extended warranty sales.
The following table presents revenue by type:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||
Lease revenue | $ | $ | $ | $ | ||||||||||||
System revenue | ||||||||||||||||
Product revenue | ||||||||||||||||
Service revenue | ||||||||||||||||
Total revenue | $ | $ | $ | $ |
17. RELATED PARTY TRANSACTIONS
All amounts were recorded at the exchange amount, which is the amount established and agreed to by the related parties. The following are transactions between the Company and parties related through employment.
Distribution agreements
On January 1, 2018, the Company entered into a Distribution Agreement with Technicalbiomed Co., Ltd. (“TBC”), pursuant to which TBC will continue to distribute the Company’s products in Thailand. A former senior officer of the Company is a
In 2020, the Company made several strategic decisions to divest itself of underperforming direct sales offices and sold its share in several subsidiaries, including its
18. SUBSEQUENT EVENTS
Debt Restructuring
On October 4, 2023, the Company entered into the 2023 Exchange Agreement with the Madryn Noteholders. Pursuant to the 2023 Exchange Agreement, the Madryn Noteholders agreed to exchange (the “Exchange”) $
On October 4, 2023, the Company filed a Certificate of Designations with respect to the Series X Preferred Stock with the Secretary of State of the State of Delaware, thereby creating the Series X Preferred Stock. The Certificate of Designations authorizes the issuance of up to
On October 4, 2023, the Company, Venus USA, Venus Canada and Venus Ltd. entered into the Loan Modification Agreement with CNB, which modified certain terms of the MSLP Loan Agreement. The primary modifications of the MSLP Loan Modification were (i) the principal payment in the amount of
Appointment of Chief Operating Officer
Dr. Varghese, age 48, served as the Company’s President and Chief Business & Innovation Officer from February 2023 until his appointment as President and Chief Operating Officer. Dr. Varghese joined the Company as its President and Chief Business Officer in October 2022. Before joining the Company, Dr. Varghese served as Senior Vice President of Strategy & Operations at HLS Therapeutics from 2017 until 2022. He previously worked for Endo International Plc, a multinational healthcare company, from 2014 until 2017, as President of International Pharmaceuticals and Executive Vice President of Corporate Development & Strategy. From 2009 until 2014, Dr. Varghese served as General Manager of Vision Care at Bausch & Lomb and Senior Vice President of Corporate Development at Valeant Pharmaceuticals (now Bausch Health). He has also held leadership roles in venture capital and corporate development enterprises with a specialization in healthcare technology, medical devices, and imaging modalities. Dr. Varghese has an Honors BSc and a PhD in Medical Biophysics from Western University and is a CFA charter holder.
In connection with his appointment as President and Chief Operating Officer, Dr. Varghese received a $
Fourth Placement under the 2023 Multi-Tranche Private Placement
On October 20, 2023, the Company and the 2023 Investors consummated the fourth tranche in the 2023 Multi-Tranche Private Placement, under which the Company sold the 2023 Investors
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995 that reflect our plans, estimates and beliefs and involve numerous risks and uncertainties, including but not limited to those described in in Part I, Item IA “Risk Factors” of our Annual Report on Form 10-K. Any statements contained in this Quarterly Report on Form 10-Q that are not historical facts may be deemed to be forward-looking statements. In some cases, you can identify these statements by words such as such as “anticipates,” “believes,” “plans,” “expects,” “projects,” “future,” “intends,” “may,” “should,” “could,” “estimates,” “predicts,” “potential,” “continue,” “guidance,” and other similar expressions that are predictions of or indicate future events and future trends.
The factors which we currently believe could have a material adverse effect on our business operations and financial performance and condition include, but are not limited to, the following risks and uncertainties:
• our dependency on the subscription-based model, which exposes us to the credit risk of our customers over the life of each subscription agreement;
• our customers’ failure to make payments under their subscription agreements;
• our customers’ ability to secure third party financing due to tightened credit markets and higher interest rates;
• our need to obtain, maintain and enforce our intellectual property rights;
• the extensive governmental regulation and oversight in the countries in which we operate and our ability to comply with the applicable requirements;
• the possibility that our systems may cause or contribute to adverse medical events that could harm our reputation, business, financial condition and results of operations;
• a significant portion of our operations are located in Israel and therefore our business, financial condition and results of operations may be adversely affected by political, economic and military conditions there;
• our ability to come into, and remain in, compliance with the listing requirements of the Nasdaq Capital Market;
• the volatility of our stock price;
• our dependency on one major contract manufacturer in Israel exposes us to supply disruptions should that facility be subject to a strike, shutdown, fire flood or other natural disaster;
• our reliance on the expertise and retention of management;
• our ability to access the capital markets and/or obtain credit on favorable terms;
• inflation, currency fluctuations and currency exchange rates;
• global supply disruptions;
• global economic and political conditions and uncertainties, including but not limited to the Russia-Ukraine and Israel-Hamas conflicts; and
• the expected timing, proceeds and other details with respect to future sales of senior preferred stock, if any, in the 2023 Multi-Tranche Private Placement.
You are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on these statements. The forward-looking statements are based on information available to us as of the filing date of this Quarterly Report on Form 10-Q. Unless required by law, we do not intend to publicly update or revise any forward-looking statements to reflect new information or future events or otherwise. You should, however, review the factors and risks we describe in the reports we will file from time to time with the SEC after the date of this Quarterly Report on Form 10-Q.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion contains management’s discussion and analysis of our financial condition and results of operations and should be read together with the unaudited condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q for the quarter ended September 30, 2023 (“Form 10-Q”), with our audited consolidated financial statements and notes thereto in our Annual Report on Form 10-K for the year ended December 31, 2022 (“Form 10-K”) and other filings we have made with the SEC.
Overview
We are an innovative global medical technology company that develops, commercializes and delivers minimally invasive and non-invasive medical aesthetic and hair restoration technologies and related services. Our systems have been designed on cost-effective, proprietary and flexible platforms that enable us to expand beyond the aesthetic industry’s traditional markets of dermatology and plastic surgery, and into non-traditional markets, including family and general practitioners and aesthetic medical spas. In the three and nine months ended September 30, 2023 and 2022, respectively, a substantial majority of our systems delivered in North America were in non-traditional markets. As we grow our ARTAS hair restoration business and expand robotics offerings through the AI.ME™ platform we expect our penetration into the core practices of dermatology and plastic surgery to increase.
We have had recurring net operating losses and negative cash flows from operations. As of September 30, 2023 and December 31, 2022, we had an accumulated deficit of $250.8 million and $224.1 million, respectively. Until we generate revenue at a level to support our cost structure, we expect to continue to incur substantial operating losses and negative cash flows from operations. In order to continue our operations, we must achieve profitability and/or obtain additional equity investment or debt financing. Until we achieve profitability, we plan to fund our operations and capital expenditures with cash on hand, borrowings and issuances of capital stock. As of September 30, 2023 and December 31, 2022, we had cash and cash equivalents of $4.9 million and $11.6 million, respectively.
The global economy, including the financial and credit markets, has recently experienced extreme volatility and disruptions, including increases to inflation rates, rising interest rates, foreign currency impacts and declines in consumer confidence, and declines in economic growth. All these factors point to uncertainty about economic stability, and the severity and duration of these conditions on our business cannot be predicted.
Venus Viva®, Venus Viva® MD, Venus Legacy®, Venus Concept®, Venus Versa®, Venus Fiore®, Venus Freedom™, Venus Bliss™, Venus Bliss Max™, NeoGraft®, Venus Glow™, ARTAS®, ARTAS iX®, and AIME™, are trademarks of the Company and its subsidiaries. Our logo and our other trade names, trademarks and service marks appearing in this document are our property. Other trade names, trademarks and service marks appearing in this document are the property of their respective owners. Solely for convenience, our trademarks and trade names referred to in this document appear without the TM or the ® symbol, but those references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights, or the rights of the applicable licensor to these trademarks and trade names.
Equity Purchase Agreement with Lincoln Park
On June 16, 2020, we entered into a purchase agreement (the "Equity Purchase Agreement") with Lincoln Park Capital Fund LLC ("Lincoln Park"), which provided that, upon the terms and subject to the conditions and limitations set forth therein, we may sell to Lincoln Park up to $31.0 million of shares of our common stock pursuant to our shelf registration statement. The purchase price of shares of common stock related to a future sale was based on the then prevailing market prices of such shares at the time of sales as described in the Equity Purchase Agreement. Concurrently with entering into the Equity Purchase Agreement, we also entered into the Registration Rights Agreement. The Equity Purchase Agreement expired on July 1, 2022 and was replaced by the 2022 LPC Purchase Agreement.
The 2022 LPC Purchase Agreement
On July 12, 2022, we entered into a subsequent purchase agreement (the "2022 LPC Purchase Agreement") with Lincoln Park, which will enhance our balance sheet and financial condition to support our future growth initiatives. As part of the 2022 LPC Purchase Agreement, we issued and sold to Lincoln Park 0.05 million shares of our common stock as a commitment fee in connection with entering into the 2022 LPC Purchase Agreement with the total value of $0.3 million. Subsequent to execution of the 2022 LPC Purchase Agreement the Company issued 0.43 million shares of common stock to Lincoln Park at an average price of $4.54 per share, for a total value of $1.97 million through December 31, 2022. During the nine months ended September 30, 2023, the Company issued an additional 0.34 million shares of common stock to Lincoln Park at an average price of $3.23 per share, for a total value of $1.1 million. For additional information regarding the 2022 LPC Purchase Agreement, see Note 14 “Stockholders Equity” in the notes to our unaudited condensed consolidated financial statements included elsewhere in this report.
On December 15, 2021, the Company consummated the 2021 Private Placement whereby we entered into a securities purchase agreement pursuant to which we issued and sold to the 2021 Investors an aggregate of 653,894 shares of our common stock and 252,717 shares of our Non-Voting Preferred Stock. The gross proceeds from the securities sold in the 2021 Private Placement was $17.0 million. The costs incurred with respect to the 2021 Private Placement totaled $0.3 million and were recorded as a reduction of the 2021 Private Placement proceeds in the consolidated statements of stockholders’ equity. The accounting effects of the 2021 Private Placement transaction are discussed in Note 14 "Stockholders Equity" in the notes to our consolidated financial statements included elsewhere in this report. These Non-Voting Preferred Stock shares were subsequently converted to common stock upon issuance of the 2022 Private Placement described below.
On November 18, 2022, we entered into a securities purchase agreement pursuant to which we issued and sold to the 2022 Investors an aggregate of 116,668 shares of our common stock and 3,185,000 shares of our Voting Preferred Stock. The gross proceeds from the securities sold in the 2022 Private Placement totaled $6.7 million before offering expenses. The costs incurred with respect to the 2022 Private Placement totaled $0.2 million and were recorded as a reduction of the 2022 Private Placement proceeds in the consolidated statements of stockholders’ equity. The accounting effects of the 2022 Private Placement transaction are discussed in Note 14 "Stockholders Equity" in the notes to our consolidated financial statements included elsewhere in this report.
The 2023 Multi-Tranche Private Placement
In May 2023, the Company entered into the 2023 Multi-Tranche Private Placement Stock Purchase Agreement with the 2023 Investors pursuant to which the Company may issue and sell to the 2023 Investors up to $9.0 million in shares of the Senior Preferred Stock in multiple tranches from time to time until December 31, 2025, subject to a minimum aggregate purchase amount of $0.5 million in each tranche. The Initial Placement occurred on May 15, 2023, under which the Company sold the 2023 Investors 280,899 shares of Senior Preferred Stock for an aggregate purchase price of $2.0 million.
On July 6, 2023, the Company and the 2023 Investors entered into the Multi-Tranche Amendment. The Multi-Tranche Amendment (a) clarifies the appropriate date pursuant to which the purchase price for each share of Senior Preferred Stock to be sold in the Private Placement is determined (such that the purchase price shall be equal to the “Minimum Price” as set forth in Nasdaq Listing Rule 5635(d)) and (b) permits the Company to specify a desired closing date (subject to approval by the 2023 Investors) for each sale in the 2023 Multi-Tranche Private Placement.
On July 12, 2023, the Company and the 2023 Investors consummated the Second Placement under the 2023 Multi-Tranche Private Placement, under which the Company sold the 2023 Investors 500,000 shares of Senior Preferred Stock for an aggregate purchase price of $2.0 million.
On September 8, 2023, the Company and the 2023 Investors consummated the Third Placement under the 2023 Multi-Tranche Private Placement, under which the Company sold the 2023 Investors 292,398 shares of Senior Preferred Stock for an aggregate purchase price of $1.0 million.
The Company expects to use the proceeds of the Placements, after the payment of transaction expenses, for general working capital purposes. The accounting effects of the 2023 Multi-Tranche Private Placement transaction are discussed in Note 14 "Stockholders Equity" in the notes to our consolidated financial statements included elsewhere in this report.
Products and Services
We derive revenue from the sale of products and services. Product revenue includes revenue from the following:
• |
the sale, including traditional sales and subscription-based sales, of systems, inclusive of the main console and applicators/handpieces (referred to as system revenue); |
• |
marketing supplies and kits; |
• |
consumables and disposables; |
• |
service revenue; and |
• |
replacement applicators/handpieces. |
Service revenue includes revenue derived from our extended warranty service contracts provided to our existing customers.
Systems are sold through traditional sales contracts directly, through our subscription model, and through distributors. In the third quarter of 2022 we commenced an initiative to reduce our reliance on system sales sold under subscription agreements in the United States. This strategic shift is designed to improve cash generation and reduce our exposure to defaults and increased bad debt expense given the increasingly challenging economic environment caused by the coexistence of high inflation and high interest rates.
We generate revenue from traditional system sales and from sales under our subscription-based business model, which is available to customers in North America and select international markets. Approximately 30% and 47% of our total system revenues were derived from our subscription model in the nine months ended September 30, 2023 and 2022, respectively. We currently do not offer the ARTAS iX system under the subscription model. For additional details related to our subscription model, see Item 1. Business – Subscription-Based Business Model as filed in our Form 10-K for the year ended December 31, 2022.
We have developed and received regulatory clearance for 12 novel aesthetic technology platforms, including our ARTAS and NeoGraft systems. We believe our ARTAS and NeoGraft systems are complementary and give us a hair restoration product offering that can serve a broad segment of the market. Our medical aesthetic technology platforms have received regulatory clearance for a variety of indications, including treatment of facial wrinkles in certain skin types, temporary reduction of appearance of cellulite, non-invasive fat reduction (lipolysis) in the abdomen and flanks for certain body types and relief of minor muscle aches and pains in jurisdictions around the world. In addition, our technology pipeline is focused on the development of robotically assisted minimally invasive solutions for aesthetic procedures that are primarily treated by surgical intervention, including the AI.ME platform for which we received FDA 510(k) clearance for fractional skin resurfacing in December 2022.
In the United States, we have obtained 510(k) clearance from the FDA for our Venus Viva, Venus Viva MD, Venus Legacy, Venus Versa, Venus Versa Pro, Venus Velocity, Venus Bliss, Venus Bliss Max, Venus Epileve, Venus Fiore, ARTAS, ARTAS iX and AI.ME systems. Outside the United States, we market our technologies in over 60 countries across Europe, the Middle East, Africa, Asia-Pacific and Latin America. Because each country has its own regulatory scheme and clearance process, not every device is cleared or authorized for the same indications in each market in which a particular system is marketed.
As of September 30, 2023, we operated directly in 14 international markets through our 11 direct offices in the United States, Canada, United Kingdom, Japan, Mexico, Spain, Germany, Australia, China, Hong Kong, and Israel.
Our revenues for the three months ended September 30, 2023, and 2022 were $17.6 million and $21.5 million, respectively. Our revenues for the nine months ended September 30, 2023, and 2022 were $58.2 million and $75.2 million, respectively. We had a net loss attributable to Venus Concept of $9.1 million and $14.6 million in the three months ended September 30, 2023, and 2022, respectively. We had a net loss attributable to Venus Concept of $26.4 million and $33.8 million in the nine months ended September 30, 2023, and 2022, respectively. We had an Adjusted EBITDA loss of $4.6 million and $7.7 million for the three months ended September 30, 2023, and 2022, respectively. We had an Adjusted EBITDA loss of $14.3 million and $19.0 million for the nine months ended September 30, 2023, and 2022, respectively.
Use of Non-GAAP Financial Measures
Adjusted EBITDA is a non-GAAP measure defined as net income (loss) before foreign exchange loss, financial expenses, income tax expense (benefit), depreciation and amortization, stock-based compensation and non-recurring items for a given period. Adjusted EBITDA is not a measure of our financial performance under U.S. GAAP and should not be considered an alternative to net income or any other performance measures derived in accordance with U.S. GAAP. Accordingly, you should consider Adjusted EBITDA along with other financial performance measures, including net income, and our financial results presented in accordance with U.S. GAAP. Other companies, including companies in our industry, may calculate Adjusted EBITDA differently or not at all, which reduces its usefulness as a comparative measure. We understand that although Adjusted EBITDA is frequently used by securities analysts, lenders and others in their evaluation of companies, Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under U.S. GAAP. Some of these limitations are: Adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments; Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; and although depreciation and amortization are non-cash charges, the assets being depreciated will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements.
We believe that Adjusted EBITDA is a useful measure for analyzing the performance of our core business because it facilitates operating performance comparisons from period to period and company to company by backing out potential differences caused by changes in foreign exchange rates that impact financial assets and liabilities denominated in currencies other than the U.S. dollar, tax positions (such as the impact on periods or companies of changes in effective tax rates), the age and book depreciation of fixed assets (affecting relative depreciation expense), amortization of intangible assets, stock-based compensation expense (because it is a non-cash expense) and non-recurring items as explained below.
The following is a reconciliation of net loss to Adjusted EBITDA for the periods presented:
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2023 |
2022 |
2023 |
2022 |
|||||||||||||
Reconciliation of net loss to adjusted EBITDA |
(in thousands) |
(in thousands) |
||||||||||||||
Net loss |
$ | (8,956 | ) | $ | (14,496 | ) | $ | (25,900 | ) | $ | (33,644 | ) | ||||
Foreign exchange loss |
909 | 2,014 | 379 | 4,389 | ||||||||||||
Loss on disposal of subsidiaries |
1 | — | 77 | — | ||||||||||||
Finance expenses |
1,605 | 1,219 | 4,666 | 3,176 | ||||||||||||
Income tax (benefit) expense |
(321 | ) | (162 | ) | 103 | 92 | ||||||||||
Depreciation and amortization |
1,010 | 1,081 | 3,042 | 3,293 | ||||||||||||
Stock-based compensation expense |
364 | 551 | 1,214 | 1,552 | ||||||||||||
Inventory Provision (1) |
— | 1,388 | — | 1,388 | ||||||||||||
Other adjustments (2) |
752 | 726 | 2,082 | 726 | ||||||||||||
Adjusted EBITDA |
$ | (4,636 | ) | $ | (7,679 | ) | $ | (14,337 | ) | $ | (19,028 | ) |
(1) For the three and nine months ended September 30, 2022, the inventory provision represents a strategic review of our product offerings which culminated in a decision to discontinue production and sale of certain models and component parts, resulting in an inventory adjustment of $1.4 million.
(2) For the three and nine months ended September 30, 2023, the other adjustments primarily represent restructuring activities designed to improve the Company's operations and cost structure. For the three and nine months ended September 30, 2022, the other adjustments are represented by severance payments associated with a workforce reduction in Venus Concept S.L. (Spain) and Venus Canada of $0.7 million.
Key Factors Impacting Our Results of Operations
Our results of operations are impacted by several factors, but we consider the following to be particularly significant to our business:
Number of systems delivered. The majority of our revenue is generated from the delivery of systems, both under traditional sales contracts and subscription agreements. The following table sets forth the number of systems we have delivered in the geographic regions indicated:
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2023 |
2022 |
2023 |
2022 |
|||||||||||||
United States |
104 | 95 | 325 | 325 | ||||||||||||
International |
150 | 255 | 584 | 908 | ||||||||||||
Total systems delivered |
254 | 350 | 909 | 1,233 |
Mix between traditional sales, subscription model sales and distributor sales. We deliver systems through (1) traditional direct system sales contracts to customers, (2) our subscription model, and (3) system sales through distribution agreements. Unit deliveries under direct system sales contracts and subscription agreements have higher per unit revenues and gross margins, while revenues and gross margins on systems sold through distributors are lower. However, distributor sales do not require significant selling and marketing support as these expenses are borne by the distributors. In addition, while traditional system sales and subscription agreements have similar gross margins, cash collections on subscription agreements generally occur over a three-year period, with approximately 40% to 45% collected in the first year and the balance collected evenly over the remaining two years of the subscription agreement. In the third quarter of 2022 we commenced an initiative to reduce our reliance on system sales sold under subscription. This strategic shift is designed to improve cash generation and reduce our exposure to defaults and increased bad debt expense given the increasingly challenging economic environment caused by the coexistence of high inflation and high interest rates.
Investment in Sales, Marketing and Operations. In recent years, we made a strategic decision to penetrate the global market by investing in sales and marketing expenses across all geographic segments. This included the opening of direct offices and hiring experienced sales, marketing, and operational staff. While we generated incremental product sales in these new markets, these revenues and the related margins did not fully offset the startup investments made in certain countries. We continue to evaluate our profitability and growth prospects in these countries and have taken and will continue to take steps to exit countries which we do not believe will produce sustainable results. Since June 2020 we have ceased direct sales operations in 13 countries across Europe, Asia Pacific, Latin America and Africa and have increased our investment and focus in the United States market.
In the three and nine months ended September 30, 2023, and 2022, respectively, we did not open any direct sales offices.
Bad Debt Expense. We maintain an allowance for expected credit losses for estimated losses that may primarily arise from subscription customers that are unable to make the remaining payments required under their subscription agreements. We continue to focus our selling efforts on cash sales and subscription customers with a stronger credit profile, thereby reducing our exposure to credit losses. We incurred a bad debt expense of $0.3 million and $1.2 million during the three and nine months ended September 30, 2023. This compares favorably to $2.4 million and $5.9 million for the three and nine months ended September 30, 2022. As of September 30, 2023, our allowance for expected credit losses was $12.8 million which represents 27.3% of the gross outstanding accounts receivable as of this date. As of September 30, 2022, our allowance for expected credit losses was $13.1 million which represented 17.0% of the gross outstanding accounts receivable as of this date.
Outlook
The global economy, including the financial and credit markets, has recently experienced extreme volatility and disruptions, including increases to inflation rates, rising interest rates, foreign currency impacts, declines in consumer confidence, and declines in economic growth. All these factors point to uncertainty about economic stability, and the severity and duration of these conditions on our business cannot be predicted. The bulk of the third quarter revenue decline was due to an acceleration of our international strategy to wind down underperforming countries as we transition to third party distributors and our shift to prioritize cash deals over subscription deals in order to improve cash generation. We continue to focus on quality of revenue and despite the revenue decline, our cash used in operations was $11.5 million lower than the same period in 2022. We remain focused on adapting to the challenges presented by the current macro-economic environment.
Israel – Hamas conflict. Following the October 7, 2023 attack by Hamas on Israeli citizens and the declaration of war that followed, we have taken steps to mitigate exposure to risks related to our Israeli operations, the risks of which are further described in Item 1a) Risk Factors in this Quarterly Report on Form 10-Q. These efforts include but are not limited to, working with our contract manufacturers to accelerate inventory build, contingency planning with respect to alternative manufacturing sites within their network, and relocating larger amounts of finished goods to warehouses in North America to protect our ability to distribute products. Alongside the Company's continuity plan, we maintain daily contact with our employees in Israel and have instituted a wellness program designed to provide access to healthcare practitioners/consultants for short term counselling for colleagues and family members in order to provide assistance during the conflict.
Supply chain. We did not experience significant supply issues during the three and nine months ended September 30, 2023 as we continue to actively work with our suppliers and third-party manufacturers to mitigate supply issues and manage inventory of key component parts. While we have seen recent improvements in global supply chain reliability we anticipate some supply challenges throughout the remainder of 2023, including those possible supply challenges related to the Israel-Hamas conflict noted above, long production lead times and shortages of certain materials or components that may impact our ability to manufacture the number of systems required to meet customer demand. Our finished product requirements to meet our expected demand in the fourth quarter of 2023 have already been secured, and we have made substantial progress in securing much of our first quarter of 2024 demand. In addition, since the second quarter of 2021 we have experienced significant inflationary pressures throughout our supply chain. While such inflationary pressures have moderated in the first nine months of 2023, we expect to mitigate any future inflation impacts where possible through price increases and margin management.
Global economic conditions. General global economic downturns and macroeconomic trends, including heightened inflation, capital markets volatility, interest rate and currency rate fluctuations, and economic slowdown or recession, have resulted and may continue to result in unfavorable conditions that negatively affect demand for our products and exacerbate some of the other risks that affect our business, financial condition and results of operations. Both domestic and international markets experienced significant inflationary pressures in fiscal year 2022 and inflation rates in the U.S., as well as in other countries in which we operate, are currently expected to continue at elevated levels for the near-term, impacting our cost of sales as well as selling, general and administrative expenses. In addition, the Federal Reserve in the U.S. and other central banks in various countries have raised, and may again raise, interest rates in response to concerns about inflation. Interest rate increases or other government actions taken to reduce inflation have resulted in recessionary pressures in many parts of the world and has had, and may continue to have, the effect of further increasing economic uncertainty and heightening these risks.
Sales markets. We are a global business, having established a commercial presence in more than 60 countries during our history. While the continued economic recovery in individual countries during the first nine months of 2023 progressed well in most countries in which we operate, we continue to evaluate our direct operations, particularly any loss-making markets outside of North America. As a result, our international revenues declined in the first nine months of 2023 as we operated in three fewer direct markets when compared to the same prior year period. We are in the process of appointing distributors in these markets and look to recover revenues in fiscal 2024.
Accounts receivable collections. As of September 30, 2023, our allowance for expected credit losses stands at $12.8 million, which represents 27.3% of the gross outstanding accounts receivable as of that date. This represents a decrease of $0.8 million from our December 31, 2022 allowance for expected credit losses balance of $13.6 million.
Basis of Presentation
Revenues
We generate revenue from (1) sales of systems through our subscription model, traditional system sales to customers and distributors, (2) other product revenues from the sale of ARTAS kits, Viva tips, other consumables, marketing supplies, and (3) service revenue from our extended warranty service contracts provided to existing customers.
System Revenue
For the three and nine months ended September 30, 2023, approximately 31% and 30%, respectively, of our total system revenues were derived from our subscription model. For the three and nine months ended September 30, 2022, approximately 41% and 47%, respectively, of our system revenues were derived from our subscription model. The relative decrease in subscription revenues in the first nine months of 2023 is in line with our strategy to prioritize cash deals over subscription deals in order to improve cash generation and preserve liquidity. For accounting purposes, our subscription arrangements are considered to be sales-type finance leases, where the present value of all cash flows to be received under the subscription agreement is recognized as revenue upon shipment to the customer and achievement of the required revenue recognition criteria.
For the three and nine months ended September 30, 2023, approximately 61% and 61%, respectively, of our total system revenues were derived from traditional sales. For the three and nine months ended September 30, 2022, approximately 48% and 43%, respectively, of our system revenues were derived from traditional sales. The increased focus on traditional sales is in line with our strategy to prioritize cash deals over subscription deals in order to improve cash generation and preserve liquidity.
Customers generally demand higher discounts in connection with traditional sales. We recognize revenues from products sold to customers based on the following five steps: (1) identification of the contract(s) with the customer; (2) identification of the performance obligations in the contract; (3) determination of the transaction price; (4) allocation of the transaction price to the separate performance obligations in the contract; and (5) recognition of revenue when (or as) the entity satisfies a performance obligation.
We do not grant rights of return or early termination rights to our customers under either our traditional sales or subscription models. These traditional sales are generally made through our sales team in the countries in which the team operates.
For the three and nine months ended September 30, 2023, approximately 8% and 9%, respectively, of our total system revenues were derived from distributor sales. For the three and nine months ended September 30, 2022, approximately 11% of our system revenues were derived from distributor sales. Under the traditional distributor relationship, we do not sell directly to the end customer and, accordingly, achieve a lower overall margin on each system sold compared to our direct sales. These sales are non-refundable, non-returnable and without any rights of price protection or stock rotation. Accordingly, we consider distributors as end customers, and are accounted for using the sell-in method.
Procedure Based Revenue
We generate revenue from the harvesting, site making, and implantation procedures performed with our ARTAS system. The harvesting procedure, as the name suggests, is the act of harvesting hair follicles from the patient’s scalp for implantation in the prescribed areas. To perform these procedures, a disposable clinical kit is required. These kits can be large (with an unlimited number of harvests) or small (with a maximum of 1,100 harvests). The customer must place an online order with us for the number and type of kits desired and make a payment. Upon receipt of the order and the related payment, we ship the kit(s), and the customer must scan the barcode on the kit label in order to perform the procedure. Once the kits are exhausted, the customer must purchase additional kits. The site making procedure uses the ARTAS system to create a recipient site (i.e., site making) in the patient’s scalp affected by androgenic alopecia (or male pattern baldness). The site making procedure also requires a disposable site making kit. The site making kits are sold to customers in the same manner as the kits for harvesting procedures. The implantation procedure utilizes the same disposal kit that is used for site making and involves immediately implanting follicles into the created recipient site. The implantation kits are sold to customers in the same manner as the harvesting and site making kits.
Other Product Revenue
We also generate revenue from our customer base by selling Viva tips, Glide (a cooling/conductive gel which is required for use with many of our systems), marketing supplies and kits, various consumables and disposables, replacement applicators and handpieces, and ARTAS system training.
Service Revenue
We generate ancillary revenue from our existing customers by selling additional services including extended warranty service contracts.
Cost of Goods Sold and Gross Profit
Cost of goods sold consists primarily of costs associated with manufacturing our different systems, including direct product costs from third-party manufacturers, warehousing and storage costs and fulfillment and supply chain costs inclusive of personnel-related costs (primarily salaries, benefits, incentive compensation and stock-based compensation). Cost of goods sold also includes the cost of upgrades, technology amortization, royalty fees, parts, supplies, and cost of product warranties.
Operating Expenses
Selling and Marketing
We currently sell our products and services using direct sales representatives in North America and in select international markets. Our sales costs primarily consist of salaries, commissions, benefits, incentive compensation and stock-based compensation. Costs also include expenses for travel and other promotional and sales-related activities as well as clinical training costs.
Our marketing costs primarily consist of salaries, benefits, incentive compensation and stock-based compensation. They also include expenses for travel, trade shows, and other promotional and marketing activities, including direct and online marketing. As the business environment improves, we expect sales and marketing expenses to continue to increase, but at a rate slightly below our rate of revenue growth.
General and Administrative
Our general and administrative costs primarily consist of expenses associated with our executive, accounting and finance, information technology, legal, regulatory affairs, quality assurance and human resource departments, direct office rent/facilities costs, and intellectual property portfolio management. These expenses consist of personnel-related expenses (primarily salaries, benefits, incentive compensation and stock-based compensation), audit fees, legal fees, consultants, travel, insurance, and expected credit losses. During the normal course of operations, we may incur expected credit losses on accounts receivable balances that are deemed to be uncollectible.
Research and Development
Our research and development costs primarily consist of personnel-related costs (primarily salaries, benefits, incentive compensation, and stock-based compensation), material costs, amortization of intangible assets, clinical costs, and facilities costs in our Yokneam, Israel and San Jose, California research centers. Our ongoing research and development activities are primarily focused on improving and enhancing our current technologies, products, and services, and on expanding our current product offering with the introduction of new products and expanded indications.
We expense all research and development costs in the periods in which they are incurred. We expect our research and development expenses to increase in absolute dollars as we continue to invest in research, clinical studies, and development activities, but to decline as a percentage of revenue as our revenue increases over time.
Finance Expenses
Foreign Exchange Loss
Foreign currency exchange loss changes reflect foreign exchange gains or losses related to the change in value of assets and liabilities denominated in currencies other than the U.S. dollar.
Income Tax Expense
We estimate our current and deferred tax liabilities based on current tax laws in the statutory jurisdictions in which we operate. These estimates include judgments about liabilities resulting from temporary differences between assets and liabilities recognized for financial reporting purposes and such amounts recognized for tax purposes. In certain jurisdictions, only the payments invoiced in the current period are subject to tax, but for accounting purposes, the discounted value of the total subscription contract is reported and tax affected. This results in a deferred tax credit which is settled in the future period when the monthly installment payment is issued and settled with the customer. Since our inception, we have not recorded any tax benefits for the net operating losses we have incurred in each year or for the research and development tax credits we generated in the United States. We believe, based upon the weight of available evidence, that it is more likely than not that all of our net operating loss carryforwards and tax credits will not be realized. Income tax expense is recognized based on the actual taxable income or loss incurred during the three and nine months ended September 30, 2023.
Non-Controlling Interests
We have minority shareholders in one jurisdiction in which we have direct operations. For accounting purposes, these minority partners are referred to as non-controlling interests, and we record the non-controlling interests’ share of earnings in our subsidiaries as a separate balance within stockholders’ equity in the consolidated balance sheets and consolidated statements of stockholders’ equity.
Results of Operations
The following tables set forth our consolidated results of operations in U.S. dollars and as a percentage of revenues for the periods indicated:
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2023 |
2022 |
2023 |
2022 |
|||||||||||||
Consolidated Statements of Loss: |
(dollars in thousands) |
(dollars in thousands) |
||||||||||||||
Revenues: |
||||||||||||||||
Leases |
$ | 4,368 | $ | 7,193 | $ | 14,440 | $ | 29,490 | ||||||||
Products and services |
13,248 | 14,346 | 43,782 | 45,721 | ||||||||||||
Total revenue |
17,616 | 21,539 | 58,222 | 75,211 | ||||||||||||
Cost of goods sold |
||||||||||||||||
Leases |
1,183 | 2,608 | 3,633 | 8,069 | ||||||||||||
Products and services |
4,248 | 5,558 | 14,485 | 16,960 | ||||||||||||
5,431 | 8,166 | 18,118 | 25,029 | |||||||||||||
Gross profit |
12,185 | 13,373 | 40,104 | 50,182 | ||||||||||||
Operating expenses: |
||||||||||||||||
Selling and marketing |
6,907 | 9,369 | 23,319 | 30,976 | ||||||||||||
General and administrative |
10,115 | 12,405 | 30,933 | 36,814 | ||||||||||||
Research and development |
1,925 | 3,024 | 6,527 | 8,379 | ||||||||||||
Total operating expenses |
18,947 | 24,798 | 60,779 | 76,169 | ||||||||||||
Loss from operations |
(6,762 | ) | (11,425 | ) | (20,675 | ) | (25,987 | ) | ||||||||
Other expenses: |
||||||||||||||||
Foreign exchange loss |
909 | 2,014 | 379 | 4,389 | ||||||||||||
Finance expenses |
1,605 | 1,219 | 4,666 | 3,176 | ||||||||||||
Loss on disposal of subsidiaries |
1 | — | 77 | — | ||||||||||||
Loss before income taxes |
(9,277 | ) | (14,658 | ) | (25,797 | ) | (33,552 | ) | ||||||||
Income tax (benefit) expense |
(321 | ) | (162 | ) | 103 | 92 | ||||||||||
Net loss |
$ | (8,956 | ) | $ | (14,496 | ) | $ | (25,900 | ) | $ | (33,644 | ) | ||||
Net loss attributable to stockholders of the Company |
(9,068 | ) | (14,605 | ) | (26,134 | ) | (33,783 | ) | ||||||||
Net income attributable to non-controlling interest |
112 | 109 | 234 | 139 | ||||||||||||
As a % of revenue: |
||||||||||||||||
Revenues |
100 | % | 100 | % | 100 | % | 100 | % | ||||||||
Cost of goods sold |
30.8 | 37.9 | 31.1 | 33.3 | ||||||||||||
Gross profit |
69.2 | 62.1 | 68.9 | 66.7 | ||||||||||||
Operating expenses: |
||||||||||||||||
Selling and marketing |
39.2 | 43.5 | 40.1 | 41.2 | ||||||||||||
General and administrative |
57.4 | 57.6 | 53.1 | 48.9 | ||||||||||||
Research and development |
10.9 | 14.0 | 11.2 | 11.1 | ||||||||||||
Total operating expenses |
107.6 | 115.1 | 104.4 | 101.3 | ||||||||||||
Loss from operations |
(38.4 | ) | (53.0 | ) | (35.5 | ) | (34.6 | ) | ||||||||
Foreign exchange loss |
5.2 | 9.4 | 0.7 | 5.8 | ||||||||||||
Finance expenses |
9.1 | 5.7 | 8.0 | 4.2 | ||||||||||||
Loss before income taxes |
(52.7 | ) | (68.1 | ) | (44.3 | ) | (44.6 | ) |
The following tables set forth our revenue by region and by product type for the periods indicated:
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2023 |
2022 |
2023 |
2022 |
|||||||||||||
(dollars in thousands) |
(dollars in thousands) |
|||||||||||||||
Revenues by region: |
||||||||||||||||
United States |
$ | 11,167 | $ | 11,774 | $ | 31,665 | $ | 38,319 | ||||||||
International |
6,449 | 9,765 | 26,557 | 36,892 | ||||||||||||
Total revenue |
$ | 17,616 | $ | 21,539 | $ | 58,222 | $ | 75,211 |
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2023 |
2022 |
2023 |
2022 |
|||||||||||||
(dollars in thousands) |
(dollars in thousands) |
|||||||||||||||
Revenues by product: |
||||||||||||||||
Subscription—Systems |
$ | 4,368 | $ | 7,193 | $ | 14,440 | $ | 29,490 | ||||||||
Products—Systems |
9,834 | 10,416 | 33,212 | 33,838 | ||||||||||||
Products—Other (1) |
2,487 | 3,125 | 8,019 | 9,702 | ||||||||||||
Services |
927 | 805 | 2,551 | 2,181 | ||||||||||||
Total revenue |
$ | 17,616 | $ | 21,539 | $ | 58,222 | $ | 75,211 |
(1) |
Products-Other include ARTAS procedure kits, Viva tips, Glide and other consumables. |
Comparison of the three months ended September 30, 2023 and 2022 |
Revenues
Three Months Ended September 30, |
||||||||||||||||||||||||
2023 |
2022 |
Change |
||||||||||||||||||||||
(in thousands, except percentages) |
$ |
% of Total |
$ |
% of Total |
$ |
% |
||||||||||||||||||
Revenues: |
||||||||||||||||||||||||
Subscription—Systems |
$ | 4,368 | 24.8 | $ | 7,193 | 33.4 | $ | (2,825 | ) | (39.3 | ) | |||||||||||||
Products—Systems |
9,834 | 55.8 | 10,416 | 48.4 | (582 | ) | (5.6 | ) | ||||||||||||||||
Products—Other |
2,487 | 14.1 | 3,125 | 14.5 | (638 | ) | (20.4 | ) | ||||||||||||||||
Services |
927 | 5.3 | 805 | 3.7 | 122 | 15.2 | ||||||||||||||||||
Total |
$ | 17,616 | 100.0 |
$ | 21,539 | 100.0 | $ | (3,923 | ) | (18.2 | ) |
Total revenue decreased by $3.9 million, or 18%, to $17.6 million for the three months ended September 30, 2023 from $21.5 million for the three months ended September 30, 2022. The decrease in revenue is primarily attributed to an acceleration in exiting unprofitable direct markets, and an initiative to reduce our reliance on system sales sold under subscription agreements. Our international business was impacted by the Company's decision to exit three unprofitable direct markets in the past year, as well as general macroeconomic headwinds that impacted customer access to capital. We are in the process of appointing distributors in those loss-making markets that we have exited. The strategic shift to minimize subscription sales is designed to improve cash generation and reduce our exposure to defaults and increased expected credit losses given the increasingly challenging economic environment caused by the coexistence of high inflation and high interest rates. Despite the revenue reduction, these initiatives have improved the company’s cash generation in 2023.
We sold an aggregate of 254 systems in the three months ended September 30, 2023 compared to 350 systems in the three months ended September 30, 2022. The percentage of systems revenue derived from our subscription model was approximately 31% and 41% during the three months ended September 30, 2023 and 2022, respectively. The relative decrease in subscription revenues is in line with our strategy to prioritize cash deals over subscription deals in the U.S. market in order to improve cash generation and preserve liquidity. Specific to the U.S. market, systems revenue derived from our subscription model was approximately 30% and 39% during the three months ended September 30, 2023 and 2022, respectively.
Other product revenue decreased by $0.6 million, or 20%, to $2.5 million in the three months ended September 30, 2023 compared to $3.1 million in the three months ended September 30, 2022. This reduction is in line with the overall revenue decline in the quarter.
Services revenue increased by $0.1 million, or 15%, to $0.9 million in the three months ended September 30, 2023, compared to $0.8 million in the three months ended September 30, 2022. The increase was driven by higher warranty sales through various chain accounts.
Cost of Goods Sold and Gross Profit
Cost of goods sold decreased by $2.7 million, or 33%, to $5.4 million in the three months ended September 30, 2023, compared to $8.2 million in the three months ended September 30, 2022. Gross profit decreased by $1.2 million, or 9%, to $12.2 million in the three months ended September 30, 2023, compared to $13.4 million in the three months ended September 30, 2022. The decrease in gross profit is primarily due to a decrease in revenue in our international markets driven by the accelerated exit from unprofitable direct markets as discussed above. Gross margin was 69.2% of revenue in the three months ended September 30, 2023, compared to 62.1% of revenue in the three months ended September 30, 2022. The increase was primarily due to excessive inventory write-offs in the third quarter of 2022 which did not repeat this quarter.
Operating expenses
Three Months Ended September 30, |
||||||||||||||||||||||||
2023 |
2022 |
Change |
||||||||||||||||||||||
(in thousands, except percentages) |
$ |
% of Revenues |
$ |
% of Revenues |
$ |
% |
||||||||||||||||||
Operating expenses: |
||||||||||||||||||||||||
Selling and marketing |
$ | 6,907 | 39.2 | $ | 9,369 | 43.5 | $ | (2,462 | ) | (26.3 | ) | |||||||||||||
General and administrative |
10,115 | 57.4 | 12,405 | 57.6 | (2,290 | ) | (18.5 | ) | ||||||||||||||||
Research and development |
1,925 | 10.9 | 3,024 | 14.0 | (1,099 | ) | (36.3 | ) | ||||||||||||||||
Total operating expenses |
$ | 18,947 | 107.6 |
$ | 24,798 | 115.1 | $ | (5,851 | ) | (23.6 | ) |
Selling and Marketing
Selling and marketing expenses decreased by $2.5 million or 26.3% in the three months ended September 30, 2023 compared to the three months ended September 30, 2022. This decrease is largely due to lower revenues and reduced marketing expenditures as we consolidate some of these activities. As a percentage of total revenues, our selling and marketing expenses decreased by 4.3%, from 43.5% in the three months ended September 30, 2022 to 39.2% in the three months ended September 30, 2023. As the business environment improves, we expect selling and marketing expenses to increase in absolute terms, but at a rate slightly below our rate of revenue growth.
General and Administrative
General and administrative expenses decreased by $2.3 million or 18.5% in the three months ended September 30, 2023 compared to the three months ended September 30, 2022, primarily due to exiting certain unprofitable direct markets, partially offset by inflationary pressures associated with salaries and other cost elements. As a percentage of total revenues, our general and administrative expenses decreased by 0.2%, from 57.6% in the three months ended September 30, 2022, to 57.4% in the three months ended September 30, 2023, primarily due to the decrease in year over year total revenues.
Research and Development
Research and development expenses decreased by $1.1 million or 36.3% in the three months ended September 30, 2023 compared to the three months ended September 30, 2022. We experienced significant cost savings through the consolidation of activities between our Israel and United States sites, partially offset by a reinvestment in research and development efforts directed at scaling our robotic technology across other aesthetic platforms. As a percentage of total revenues, our research and development expenses decreased by 3.1%, from 14.0% in the three months ended September 30, 2022, to 10.9% in the three months ended September 30, 2023.
Foreign Exchange Loss
We had $0.9 million of foreign exchange loss in the three months ended September 30, 2023 and foreign exchange loss of $2.0 million in the three months ended September 30, 2022. It decreased by $1.1 million in the three months ended September 30, 2023 compared to the three months ended September 30, 2022. Changes in foreign exchange are driven mainly by the effect of foreign exchange on accounts receivable balances denominated in currencies other than the US dollar. We do not currently hedge against foreign currency risk.
Finance Expenses
Finance expenses increased by $0.4 million or 31.2%, to $1.6 million in the three months ended September 30, 2022, compared to $1.2 million in the three months ended September 30, 2023, mostly due to an increase in the LIBOR rate under our CNB Loan Agreement. See “Liquidity and Capital Resources” below.
Income Tax Expense/Benefit
We had an income tax benefit of $321 thousand in the three months ended September 30, 2023 compared to a $162 thousand income tax benefit in the three months ended September 30, 2022. The tax provision is driven by profitable sales and the actual effective tax rates where the sale took place or losses were incurred. In 2023, we had changes in timing of deductible expenses, tax accrual reversals and recognized tax losses in specific judications, which resulted in $321 thousand of income tax benefit.
Comparison of the nine months ended September 30, 2023 and 2022 |
Revenues
Nine Months Ended September 30, |
||||||||||||||||||||||||
2023 |
2022 |
Change |
||||||||||||||||||||||
(in thousands, except percentages) |
$ |
% of Total |
$ |
% of Total |
$ |
% |
||||||||||||||||||
Revenues: |
||||||||||||||||||||||||
Subscription—Systems |
$ | 14,440 | 24.8 | $ | 29,490 | 39.2 | $ | (15,050 | ) | (51.0 | ) | |||||||||||||
Products—Systems |
33,212 | 57.0 | 33,838 | 45.0 | (626 | ) | (1.8 | ) | ||||||||||||||||
Products—Other |
8,019 | 13.8 | 9,702 | 12.9 | (1,683 | ) | (17.3 | ) | ||||||||||||||||
Services |
2,551 | 4.4 | 2,181 | 2.9 | 370 | 17.0 | ||||||||||||||||||
Total |
$ | 58,222 | 100.0 | $ | 75,211 | 100.0 | $ | (16,989 | ) | (22.6 | ) |
Total revenue decreased by $17.0 million, or 22.6%, to $58.2 million for the nine months ended September 30, 2023 from $75.2 million for the nine months ended September 30, 2022. The decrease in revenue is primarily attributed to an initiative to reduce our reliance on system sales sold under subscription agreements, and an acceleration in exiting unprofitable direct markets in our international business. This strategic shift to minimize subscription sales is designed to improve cash generation and reduce our exposure to defaults and expected credit losses given the increasingly challenging economic environment caused by the coexistence of high inflation and high interest rates. Our international business was impacted by the Company's decision to exit three unprofitable direct markets in the past year, as well as general macroeconomic headwinds that impacted customer access to capital. We are in the process of appointing distributors in those loss making markets that we have exited. Despite this reduction in revenue, our cash used in operations decreased by $11.5 million versus the nine months ended September 30, 2023.
We sold an aggregate of 909 systems in the nine months ended September 30, 2023 compared to 1,233 systems in the nine months ended September 30, 2022. The percentage of systems revenue derived from our subscription model was approximately 25% and 39% during the nine months ended September 30, 2023 and 2022, respectively. The relative decrease in subscription revenues is in line with our strategy to prioritize cash deals over subscription deals in the U.S. market in order to improve cash generation and preserve liquidity. Specific to the U.S. market, systems revenue derived from our subscription model was approximately 24% and 56% during the nine months ended September 30, 2023 and 2022, respectively.
Other product revenue decreased by $1.7 million, or 17.3%, to $8.0 million in the nine months ended September 30, 2023 compared to $9.7 million in the nine months ended September 30, 2022. The decrease was primarily driven by lower sales in international markets as we exit unprofitable jurisdictions.
Services revenue increased by $0.4 million, or 17.0%, to $2.6 million in the nine months ended September 30, 2023, compared to $2.2 million in the nine months ended September 30, 2022. The increase was driven by higher warranty sales through various chain accounts.
Cost of Goods Sold and Gross Profit
Cost of goods sold decreased by $6.9 million, or 27.6%, to $18.1 million in the nine months ended September 30, 2023, compared to $25.0 million in the nine months ended September 30, 2022. Gross profit decreased by $10.1 million, or 20.1%, to $40.1 million in the nine months ended September 30, 2023, compared to $50.2 million in the nine months ended September 30, 2022. The decrease in gross profit is primarily due to a decrease in revenue in the United States and international markets driven by the strategic decision to deemphasize subscription sales and the accelerated exit from unprofitable direct markets as discussed above. Gross margin was 68.9% of revenue in the nine months ended September 30, 2023, compared to 66.7% of revenue in the nine months ended September 30, 2022. The increase in gross margin was primarily due to geographic mix as we continue to invest in the U.S. market and exit unprofitable international markets, and to a lesser extent impacted by lower inventory write-offs compared to the nine months ended September 30, 2022.
Operating expenses
Nine Months Ended September 30, |
||||||||||||||||||||||||
2023 |
2022 |
Change |
||||||||||||||||||||||
(in thousands, except percentages) |
$ |
% of Revenues |
$ |
% of Revenues |
$ |
% |
||||||||||||||||||
Operating expenses: |
||||||||||||||||||||||||
Selling and marketing |
$ | 23,319 | 40.1 | $ | 30,976 | 41.2 | $ | (7,657 | ) | (24.7 | ) | |||||||||||||
General and administrative |
30,933 | 53.1 | 36,814 | 48.9 | (5,881 | ) | (16.0 |
) | ||||||||||||||||
Research and development |
6,527 | 11.2 | 8,379 | 11.1 | (1,852 | ) | (22.1 | ) | ||||||||||||||||
Total operating expenses |
$ | 60,779 | 104.4 | $ | 76,169 | 101.3 | $ | (15,390 | ) | (20.2 | ) |
Selling and Marketing
Selling and marketing expenses decreased by $7.7 million or 24.7% in the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. This decrease is largely due to lower revenues and reduced marketing expenditures as we consolidate some of these activities. As a percentage of total revenues, our selling and marketing expenses decreased by 1.1%, from 41.2% in the nine months ended September 30, 2022 to 40.1% in the nine months ended September 30, 2023. As the business environment improves, we expect selling and marketing expenses to increase in absolute terms, but at a rate slightly below our rate of revenue growth.
General and Administrative
General and administrative expenses decreased by $5.9 million or 16.0% in the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022, primarily due to exiting certain unprofitable direct markets, partially offset by inflationary pressures associated with salaries and other cost elements. As a percentage of total revenues, our general and administrative expenses increased by 4.2%, from 48.9% in the nine months ended September 30, 2022, to 53.1% in the nine months ended September 30, 2023, primarily due to the increases in costs noted above.
Research and Development
Research and development expenses decreased by $1.9 million or 22.1% in the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. We experienced some cost savings through the consolidation of activities between our Israel and San Jose sites, partially offset by a reinvestment in research and development efforts directed at scaling our robotic technology across other aesthetic platforms. As a percentage of total revenues, our research and development expenses increased by 0.1%, from 11.1% in the nine months ended September 30, 2022, to 11.2% in the nine months ended September 30, 2023.
Foreign Exchange Loss
We had $0.4 million of foreign exchange loss in the nine months ended September 30, 2023 and foreign exchange loss of $4.4 million in the nine months ended September 30, 2022. Changes in foreign exchange are driven mainly by the effect of foreign exchange on accounts receivable balances denominated in currencies other than the US dollar. In the nine months ended September 30, 2023, fluctuations in foreign currencies compared to the U.S. dollar were collectively immaterial. We do not currently hedge against foreign currency risk.
Finance Expenses
Finance expenses increased by $1.5 million or 46.9%, to $4.7 million in the nine months ended September 30, 2022, compared to $3.2 million in the nine months ended September 30, 2023, due to an increase in the LIBOR rate under our CNB Loan Agreement. See “Liquidity and Capital Resources” below.
Income Tax Expense
We had an income tax expense of $103 thousand in the nine months ended September 30, 2023 compared to a $92 thousand income tax expense in the nine months ended September 30, 2022. The tax provision is driven by profitable sales and the actual effective tax rates where the sale took place or losses were incurred. In 2023, we had changes in timing of deductible expenses, tax accrual reversals and taxable income in specific judications, which resulted in $103 thousand of income tax expense.
Liquidity and Capital Resources
We had $4.9 million and $11.6 million of cash and cash equivalents as of September 30, 2023, and December 31, 2022, respectively. We have funded our operations with cash generated from operating activities, through the sale of equity securities and through debt financing. We had total debt obligations of approximately $79.0 million as of September 30, 2023, including the MSLP Loan of $51.2 million, and convertible notes of $27.8 million, compared to total debt obligations of approximately $77.7 million as of December 31, 2022.
Working capital is primarily impacted by growth in our subscription sales which also impacts accounts receivable. Our recent shift to prioritize traditional cash sales over subscription sales is designed to improve liquidity and reduce working capital requirements over time. Our expanding product portfolio also requires higher inventory levels to meet demand and to accommodate the increased number of technology platforms offered. We had a split of subscription sales revenue to traditional sales revenue at a ratio of approximately 33:67 in the nine months ended September 30, 2023, compared to 52:48 in the nine months ended September 30, 2022. We expect a slight increase in the ratio of traditional sales to subscription sales in 2023 and beyond. We expect inventory to remain relatively flat in the short term but increase at a lower rate than the rate of revenue growth over the longer term.
We also require modest funding for capital expenditures. Our capital expenditures relate primarily to our research and development facilities in Yokneam, Israel and San Jose, California. In addition, our past capital investments have included improvements and expansion of our subsidiaries’ operations to support our growth, but do not expect to incur such costs over the next twelve months.
Issuance of Secured Subordinated Convertible Notes
Contemporaneously with the MSLP Loan Agreement, on December 9, 2020, we issued $26.7 million aggregate principal amount of the Notes to the Madryn Noteholders pursuant to the terms of the Exchange Agreement. The Notes will accrue interest at a rate of 8.0% per annum from the date of original issuance of the Notes to the third anniversary date of the original issuance and thereafter interest will accrue at a rate of 6.0% per annum. In connection with the Exchange Agreement, we also entered into (i) the Madryn Security Agreement, pursuant to which we agreed to grant Madryn a security interest, in substantially all of our assets, to secure the obligations under the Notes and (ii) the CNB Subordination Agreement. The Notes are convertible at any time into shares of our common stock at an initial conversion price of $48.75 per share, subject to adjustment. For additional information regarding the Notes, Exchange Agreement, Madryn Security Agreement and CNB Subordination Agreement, see Note 11 “Madryn Long-Term Debt and Convertible Notes” to our unaudited condensed consolidated financial statements included elsewhere in this report. On October 4, 2023, the Company entered into the 2023 Exchange Agreement with the Madryn Noteholders, pursuant to which the Madryn Noteholders agreed to exchange $26,695,110.58 in aggregate principal amount outstanding under the Notes for (i) $22,791,748.32 in aggregate principal amount of new secured convertible notes of the Company and (ii) 248,755 shares of newly-created convertible preferred stock of the Company, par value $0.0001 per share designated as "Series X Convertible Preferred Stock". Refer to Note 18 "Subsequent Events" for additional details.
Main Street Priority Lending Program Term Loan
On December 8, 2020, we executed the MSLP Loan Agreement, MSLP Note, and related documents for a loan in the aggregate amount of $50.0 million for which CNB will serve as a lender pursuant to the Main Street Priority Loan Facility as established by the Board of Governors of the Federal Reserve System Section 13(3) of the Federal Reserve Act. For additional information regarding this loan, see Note 10 “Main Street Term Loan” to our unaudited condensed consolidated financial statements included elsewhere in this report. On October 4, 2023, the Company, Venus USA, Venus Canada, and Venus Ltd. entered into the MSLP Loan Modification, which modified certain terms of the MSLP Loan Agreement. Refer to Note 18 "Subsequent Events" for additional details.
CNB Loan Agreement
We have a revolving credit facility with CNB pursuant to which CNB agreed to provide a revolving credit facility to us and certain of our subsidiaries to be used to finance working capital requirements. There was $nil outstanding balance as of September 30, 2023 and December 31, 2022. On February 22, 2023, CNB notified the Company that it would be temporarily restricting advances under the Fourth Amended and Restated CNB Loan Agreement pursuant to its rights under Section 2 of the agreement. CNB and the Company continue to actively discuss lifting the restrictions on advances under the credit facility.
On August 26, 2021 we entered into the Fourth Amended and Restated CNB Loan Agreement with CNB, pursuant to which, among other things, (i) the maximum principal amount the revolving credit facility was reduced from $10.0 million to $5.0 million at the LIBOR 30-Day rate plus 3.25%, subject to a minimum LIBOR rate floor of 0.50%, and (ii) beginning December 10, 2021, the cash deposit requirement was reduced from $3.0 million to $1.5 million, to be maintained with CNB at all times during the term of the Amended CNB Loan Agreement. As of September 30, 2023, and December 31, 2022, we were in compliance with all required covenants. For additional information on the CNB Loan Agreement and the related agreements, see Note 12 “Credit Facility” to our unaudited condensed consolidated financial statements included elsewhere in this report.
Equity Purchase Agreement with Lincoln Park
On June 16, 2020, we entered into the Equity Purchase Agreement with Lincoln Park, which provides that, upon the terms and subject to the conditions and limitations set forth therein, we may sell to Lincoln Park up to $31.0 million of shares of our common stock pursuant to our shelf registration statement. The purchase price of shares of common stock related to a future sale will be based on the then prevailing market prices of such shares at the time of sales as described in the Equity Purchase Agreement. The aggregate number of shares that we can sell to Lincoln Park under the Equity Purchase Agreement may in no case exceed the Exchange Cap, unless (i) stockholder approval is obtained to issue shares above the Exchange Cap, in which case the Exchange Cap will no longer apply, or (ii) the average price of all applicable sales of common stock to Lincoln Park under the Equity Purchase Agreement equals or exceeds $59.6325 per share (subject to adjustment) (which represents the minimum price, as defined under Nasdaq Listing Rule 5635(d), on the Nasdaq Global Market immediately preceding the signing of the Equity Purchase Agreement, such that the transactions contemplated by the Equity Purchase Agreement are exempt from the Exchange Cap limitation under applicable Nasdaq rules). Also, at no time may Lincoln Park (together with its affiliates) beneficially own more than 9.99% of our issued and outstanding common stock. Concurrently with entering into the Equity Purchase Agreement, we also entered into a Registration Rights Agreement with Lincoln Park.
The 2021 Private Placement
On December 15, 2021, the Company consummated the 2021 Private Placement whereby entered into a securities purchase agreement pursuant to which we issued and sold to the 2021 Investors an aggregate of 653,894 shares of our common stock and 252,717 shares of our Non-Voting Preferred Stock. The gross proceeds from the securities sold in the 2021 Private Placement was $17.0 million. The costs incurred with respect to the 2021 Private Placement totaled $0.3 million and were recorded as a reduction of the 2021 Private Placement proceeds in the consolidated statements of stockholders’ equity. The accounting effects of the 2021 Private Placement transaction are discussed in Note 14 "Stockholders Equity" in the notes to our consolidated financial statements included elsewhere in this report. These Non-Voting Preferred Stock shares were subsequently converted to common stock upon issuance of the 2022 Private Placement described below.
The 2022 LPC Purchase Agreement
On July 12, 2022, we entered into the 2022 LPC Purchase Agreement with Lincoln Park, and we issued and sold to Lincoln Park 0.05 million shares of our common stock as a commitment fee in connection with entering into the 2022 LPC Purchase Agreement, with the total value of $0.3 million. Through September 30, 2023 we issued an additional 0.78 million shares of common stock to Lincoln Park at an average price of $3.97 per share, for a total proceeds value of $3.1 million since entering into the Purchase Agreement. For additional information regarding the 2022 LPC Purchase Agreement, see Note 14 “Stockholders Equity” in the notes to our unaudited condensed consolidated financial statements included elsewhere in this report.
The 2022 Private Placement
On November 18, 2022, we consummated the 2022 Private Placement whereby we entered into a securities purchase agreement pursuant to which we issued and sold to the 2022 Investors an aggregate of 116,668 shares of our common stock and 3,185,000 shares of our Voting Preferred Stock. The gross proceeds from the securities sold in the 2022 Private Placement totaled $6.7 million before offering expenses. The costs incurred with respect to the 2022 Private Placement totaled $0.2 million and were recorded as a reduction of the 2022 Private Placement proceeds in the consolidated statements of stockholders’ equity. The accounting effects of the 2022 Private Placement transaction are discussed in Note 14 "Stockholders Equity" in the notes to our consolidated financial statements included elsewhere in this report.
The 2023 Multi-Tranche Private Placement
In May 2023, we entered into the 2023 Multi-Tranche Private Placement Stock Purchase Agreement, with the 2023 Investors pursuant to which the Company may issue and sell to the 2023 Investors up to $9.0 million in shares of Senior Preferred Stock, in multiple tranches from time to time until December 31, 2025, subject to a minimum aggregate purchase amount of $0.5 million in each tranche. The Initial Placement occurred on May 15, 2023, under which the Company sold the 2023 Investors 280,899 shares of Senior Preferred Stock for an aggregate purchase price of $2.0 million. As of September 30, 2023 an additional 792,398 shares of Senior Preferred Stock were issued for an aggregate purchase price of $3.0 million through two subsequent tranches. The Company expects to use the proceeds of the Placements, after the payment of transaction expenses, for general working capital purposes. The accounting effects of the 2023 Multi-Tranche Private Placement transactions are discussed in Note 14 "Stockholders Equity" in the notes to our consolidated financial statements included elsewhere in this report.
Capital Resources
As of September 30, 2023, we had capital resources consisting of cash and cash equivalents of approximately $4.9 million. We have financed our operations principally through the issuance and sale of our common stock and preferred stock, debt financing, and payments from customers.
We believe that the net proceeds from the 2023 Multi-Tranche Private Placement, the 2022 Private Placement, the 2021 Private Placement, the proceeds from issuance of our common stock to Lincoln Park, the proceeds from the MSLP Loan, our continued availability under the 2022 LPC Purchase Agreement, our strategic cash flow enhancement initiatives, together with our existing cash and cash equivalents, will enable us to fund our operating expenses and capital expenditure requirements for at least the next 12 months. We can provide no assurances that we will be successful in raising additional capital or that such capital, if available at all, will be on terms that are acceptable to us. If we are unable to raise sufficient additional capital, we may be compelled to reduce the scope of our operations and planned capital or research and development expenditures or sell certain assets, including intellectual property assets.
Additional funds may not be available when we need them, on terms that are acceptable to us, or at all. If adequate funds are not available to us on a timely basis, we may be required to:
• |
delay or curtail our efforts to develop system product enhancements or new products, including any clinical trials that may be required to market such enhancements; |
• |
delay or curtail our plans to increase and expand our sales and marketing efforts; or |
• |
delay or curtail our plans to enhance our customer support and marketing activities. |
We are restricted by covenants in the MSLP Loan, the Amended CNB Loan Agreement, and the Madryn Security Agreement. These covenants restrict, among other things, our ability to incur additional indebtedness, which may limit our ability to obtain additional debt financing. In the event that the pandemic and the economic disruptions it has caused continue for an extended period of time, we cannot assure you that we will remain in compliance with the financial covenants contained in our credit facilities. We also cannot assure you that our lenders would provide relief or that we could secure alternative financing on favorable terms, if at all. Our failure to comply with the covenants contained in our credit facilities, including financial covenants, could result in an event of default, which could materially and adversely affect our results of operations and financial condition.
We have based our projections on the amount of time through which our financial resources will be adequate to support our operations on assumptions that may prove to be incorrect, and we may use all our available capital resources sooner than we expect. Our future funding requirements, including long-term funding requirements, will depend on many factors, including, but not limited to:
• | the cost of growing our ongoing commercialization and sales and marketing activities; |
• |
the costs of manufacturing and maintaining enough inventories of our systems to meet anticipated demand and inventory write-offs related to obsolete products or components; |
• |
the costs of enhancing the existing functionality and development of new functionalities for our systems; |
• |
the costs of preparing, filing, prosecuting, defending, and enforcing patent claims and other patent related costs, including litigation costs and the results of such litigation; |
• |
any product liability or other lawsuits and the costs associated with defending them or the results of such lawsuits; |
• |
the costs associated with conducting business and maintaining subsidiaries and other entities in foreign jurisdictions; |
• |
customers in jurisdictions where our systems are not approved delaying their purchase, and not purchasing our systems, until they are approved or cleared for use in their market; |
• |
the costs to attract and retain personnel with the skills required for effective operations; and |
• |
the costs associated with being a public company. |
In order to grow our business and increase revenues, we will need to introduce and commercialize new products, grow our sales and marketing force, implement new software systems, as well as identify and penetrate new markets. Such endeavors have in the past increased, and may continue in the future, to increase our expenses, including sales and marketing, and research and development. We will have to continue to increase our revenues while effectively managing our expenses in order to achieve profitability and to sustain it. Our failure to control expenses could make it difficult to achieve profitability or to sustain profitability in the future. Moreover, we cannot be sure that our expenditures will result in the successful development and introduction of new products in a cost-effective and timely manner or that any such new products will achieve market acceptance and generate revenues for our business.
Cash flows
The following table summarizes our cash flows for the periods indicated:
Nine Months Ended September 30, |
||||||||
2023 |
2022 |
|||||||
(in thousands) |
||||||||
Cash used in operating activities |
$ | (12,085 | ) | $ | (23,573 | ) | ||
Cash used in investing activities |
(89 |
) | (297 | ) | ||||
Cash (used in) provided by financing activities |
5,531 |
(229 | ) | |||||
Net decrease in cash and cash equivalents |
$ | (6,643 | ) | $ | (24,099 | ) |
Cash Flows from Operating Activities
For the nine months ended September 30, 2023, cash used in operating activities consisted of a net loss of $25.9 million, partially offset by decreases in net operating assets of $6.1 million and non-cash operating expenses of $7.7 million. The increase of cash from net operating assets was attributable to a decrease in accrued expenses and other current liabilities of $4.5 million, a decrease in unearned interest income of $1.0 million, a decrease in long-term operating lease liabilities of $1.0 million, and a decrease in trade payables of $0.9 million. These were offset by a decrease in accounts receivable of $11.1 million, a decrease in operating right-of-use assets, net of $1.2 million, and a decrease in other current assets of $1.3 million. The non-cash operating expenses consisted of provision for expected credit losses of $1.3 million, depreciation and amortization of $3.0 million, finance expenses and accretion of $1.3 million, stock-based compensation expense of $1.2 million, provision for inventory obsolescence of $0.8 million.
For the nine months ended September 30, 2022, cash used in operating activities consisted of a net loss of $33.6 million and an investment in net operating assets of $2.2 million, partially offset by non-cash operating expenses of $12.3 million. The investment in net operating assets was attributable to an increase in accounts receivable of $4.5 million, an increase in prepaid expenses of 0.8 million, an increase in other current assets of $0.4 million, an increase in other long-term assets of $0.3 million. This was partially offset by a decrease in inventories of $5.5 million, a decrease in accrued expenses and other current liabilities of $2.2 million, a decrease in unearned interest income of $0.1 million, and a decrease in other long-term liabilities of $0.3 million. The non-cash operating expenses consisted of provision for bad debts of $5.9 million, depreciation and amortization of $3.3 million, finance expenses and accretion of $0.3 million, stock-based compensation expense of $1.6 million, provision for inventory obsolescence of $1.8 million, partially offset by a deferred tax recovery of $0.6 million.
Cash Flows from Investing Activities
In the nine months ended September 30, 2023, cash used in investing activities consisted of $0.1 million for the purchase of property and equipment.
In the nine months ended September 30, 2022, cash used in investing activities consisted of $0.3 million for the purchase of property and equipment.
Cash Flows from Financing Activities
In the nine months ended September 30, 2023, cash used in financing activities primarily consisted of net proceeds from the issuance of shares of common stock to Lincoln Park of $1.1 million and net proceeds from the 2023 Multi-Tranche Private Placement of $4.5 million.
In the nine months ended September 30, 2022, cash used in financing activities primarily consisted of $0.6 million repayment of government assistance loans and $0.1 million of dividends from subsidiaries paid to non-controlling interest, partially offset by net proceeds from the issuance of shares of common stock to Lincoln Park of $0.4 million and proceeds from exercise of options of $23 thousand.
.
Contractual Obligations and Other Commitments
Our premises are leased under various operating lease agreements, which expire on various dates.
As of September 30, 2023, we had non-cancellable purchase orders placed with our contract manufacturers in the amount of $11.2 million. In addition, as of September 30, 2023, we had 1.0 million of open purchase orders that can be cancelled with 270 days’ notice, except for a portion equal to 25% of the total amount representing the purchase of “long lead items."
The following table summarizes our contractual obligations as of September 30, 2023, which represent material expected or contractually committed future obligations.
Payments Due by Period |
||||||||||||||||||||
Less than 1 Year |
2 to 3 Years |
4 to 5 Years |
More than 5 Years |
Total |
||||||||||||||||
(in thousands) |
||||||||||||||||||||
Debt obligations, including interest |
$ | 6,225 | $ | 86,552 | $ | — | $ | — | $ | 92,777 | ||||||||||
Operating leases |
1,515 | 2,167 | 594 | 544 | 4,820 | |||||||||||||||
Purchase commitments |
11,273 | — | — | — | 11,273 | |||||||||||||||
Total contractual obligations |
$ | 19,013 | $ | 88,719 | $ | 594 | $ | 544 | $ | 108,870 |
For an additional description of our commitments see Note 9, “Commitments and Contingencies” to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
Off-Balance Sheet Arrangements
We do not currently engage in off-balance sheet financing arrangements. In addition, we do not have any interest in entities referred to as variable interest entities, which includes special purpose entities and other structured finance entities.
Critical Accounting Policies and Estimates
Our unaudited condensed consolidated financial statements are prepared in accordance with U.S. GAAP. The preparation of these unaudited condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. These estimates form the basis for judgments we make about the carrying values of our assets and liabilities, which are not readily apparent from other sources. We base our estimates and judgments on historical experience and on various other assumptions that we believe are reasonable under the circumstances. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results may differ from these estimates under different assumptions or conditions.
Our significant accounting policies are more fully described in Note 2 to the audited consolidated financial statements included in our Annual Report filed on Form 10-K for the year ended December 31, 2022. We believe that the assumptions and estimates associated with revenue recognition, long-term receivables, allowance for expected credit losses, warranty accrual, and stock-based compensation have the most significant impact on our consolidated financial statements, and therefore, we consider these to be our critical accounting policies and estimates.
Revenue Recognition
We generate revenue from (1) sales of systems through our subscription model, in accordance with ASC 842, traditional system sales to customers and distributors, (2) other product revenues from the sale of ARTAS procedure kits, marketing supplies and kits, consumables and (3) and our extended warranty service contracts provided to existing customers.
We recognize revenues on other products and services in accordance with ASC 606. Revenue is recognized based on the following five steps: (1) identification of the contract(s) with the customer; (2) identification of the performance obligations in the contract; (3) determination of the transaction price; (4) allocation of the transaction price to the separate performance obligations in the contract; and (5) recognition of revenue when (or as) the entity satisfies a performance obligation.
We record our revenue net of sales tax and shipping and handling costs.
Long-term receivables
Long-term receivables relate to our subscription revenue or other contracts which stipulate payment terms which exceed one year. They are comprised of the unpaid principal balance, net of the allowance for expected credit losses. These receivables have been discounted based on the implicit interest rate in the subscription lease which range between 8% and 10% for the nine months ended September 30, 2023 and September 30, 2022, respectively. Unearned interest revenue represents the interest only portion of the respective subscription payments and will be recognized in income over the respective payment term as it is earned.
Allowance for expected credit losses
The allowance for expected credit losses is based on our assessment of the collectability of customer accounts and the aging of the related invoices and represents our best estimate of probable credit losses in our existing trade accounts receivable. We regularly review the allowance by considering factors such as historical experience, credit quality, the age of the account receivable balances, and current economic conditions that may affect a customer’s ability to pay.
Warranty accrual
We generally offer warranties for all our systems against defects for up to three years. The warranty period begins upon shipment and we record a liability for accrued warranty costs at the time of sale of a system, which consists of the remaining warranty on systems sold based on historical warranty costs and management’s estimates. We periodically assess the adequacy of our recorded warranty liabilities and adjust the amounts thereof as necessary. We exercise judgment in estimating expected system warranty costs. If actual system failure rates, freight, material, technical support and labor costs differ from our estimates, we will be required to revise our estimated warranty liability. To date, our warranty reserve has been sufficient to satisfy warranty claims paid.
Stock-Based Compensation
We account for stock-based compensation costs in accordance with the accounting standards for stock-based compensation, which require that all stock based payments to employees be recognized in the unaudited condensed consolidated statements of operations based on their fair values.
The fair value of stock options on the grant date is estimated using the Black-Scholes option-pricing model using the single-option approach. The Black-Scholes option pricing model requires the use of highly subjective and complex assumptions, including the option's expected term and the price volatility of the underlying stock, to determine the fair value of the award. We recognize the expense associated with options using a single-award approach over the requisite service period.
Financial statements in U.S. dollars
We believe that the U.S. dollar is the currency in the primary economic environment in which we operate. The U.S. dollar is the most significant currency in which our revenues are generated, and our costs are incurred. In addition, our debt and equity financings are generally based in U.S. dollars. Therefore, our functional currency, and that of our subsidiaries, is the U.S. dollar.
Transactions and balances originally denominated in U.S. dollars are presented at their original amounts. Non-dollar transactions and balances are remeasured into U.S. dollars in accordance with the principles set forth in ASC 830-10 “Foreign Currency Translation”. All exchange gains and losses from re-measurement of monetary balance sheet items resulting from transactions in non-U.S. dollar currencies are recorded as foreign exchange loss in the unaudited condensed consolidated statement of operations as they arise.
Recent Accounting Pronouncements
See Note 2 to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for recently issued accounting pronouncements not yet adopted as of the date of this Quarterly Report on Form 10-Q.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company, we are not required to provide disclosure for this Item.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
As of September 30, 2023, our management, under the supervision of our Chief Executive Officer and Chief Financial Officer, performed an evaluation of the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2023.
We have performed an evaluation of the effectiveness of our internal control over financial reporting, based on criteria established by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in its 2013 Internal Control-Integrated Framework. Based on that evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, concluded that our internal controls over financial reporting were effective as of September 30, 2023.
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. Because of these limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become ineffective because of changes in conditions or that the degree of compliance with established policies or procedures may deteriorate.
Changes in Internal Control over Financial Reporting
There were no material changes in our internal control over financial reporting during the three and nine months ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
This Quarterly Report on Form 10-Q does not include an attestation report of our registered public accounting firm due to a transition period established by rules of the SEC for “emerging growth companies.”
In the ordinary course of our operations, we become involved in routine litigation incidental to the business. Material proceedings are described under Note 9, “Commitments and Contingencies” to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
Our operations and financial results are subject to various risk and uncertainties, including those described below and the risk factors described under Part I, Item 1A. “Risk Factors” in our latest Form 10-K for the year ended December 31, 2022, any of which could adversely affect our business, results of operations, financial condition and prospects. In such an event, the market price of our common stock could decline, and you may lose all or part of your investment. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations. You should carefully consider the risks described below and the other information in this Quarterly Report on Form 10-Q, our unaudited condensed consolidated financial statements, and the related notes thereto, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, included herein, and the risk factors previously disclosed in Part I, Item 1A. “Risk Factors” in our Form 10-K for the year ended December 31, 2022 filed with the SEC and incorporated by reference herein.
Conditions in Israel, including the recent attack by Hamas and other terrorist organizations from the Gaza Strip and Israel’s war against them, may adversely affect our operations and limit our ability to manage and market our products, which could lead to a decrease in revenues.
Certain of our operations are conducted in Israel and a number of our employees, contract manufacturers and consultants, including employees of our service providers, are located in Israel. As such, our business and operations may be directly affected by economic, political, geopolitical and military conditions affecting Israel.
On October 7, 2023, Hamas militants and members of other terrorist organizations infiltrated Israel’s southern border from the Gaza Strip and conducted a series of terror attacks on civilian and military targets. Thereafter, these terrorists launched extensive rocket attacks on Israeli population and industrial centers located along the Israeli border with the Gaza Strip. Shortly following the attack, Israel’s security cabinet declared war against Hamas. The intensity, duration and impact of Israel’s current war against Hamas and the corresponding geopolitical instability in the region is difficult to predict, as are the war’s economic implications on the Company’s business and operations.
It is possible that the conflict in the region may escalate. Our facilities are within the range of rockets that could be launched from a number of surrounding territories. In the event that our facilities in Israel, or the facilities of our vendors in Israel, are damaged as a result of the hostilities or hostilities otherwise disrupt the ongoing operation of our facilities, our ability to deliver products to customers in a timely manner to meet our contractual obligations with customers and vendors could be materially and adversely affected. Any losses or damages incurred by us could have a material adverse effect on our business.
Our operations may be disrupted because of the obligation of Israeli citizens to perform military service.
As a result of the Israeli security cabinet’s decision to declare war against Hamas, Israeli reservists have been drafted to perform immediate military service. Certain of our employees and consultants in Israel, in addition to employees of our service providers located in Israel, have been called for service in the current war with Hamas as of the date of this Quarterly Report on Form 10-Q, and such persons may be absent for an extended period of time. As a result, our operations may be disrupted by such absences, which may materially and adversely affect our business and results of operations. Additionally, the absence of employees of our Israeli suppliers and contract manufacturers due to their military service in the current war or future wars or other armed conflicts may disrupt their operations, in which event our ability to deliver products to customers may be materially and adversely affected.
We offer credit terms to some qualified customers and distributors. In the event that a customer or distributor defaults on the amounts payable to us, our financial results may be adversely affected.
For the nine months ended September 30, 2023 and 2022, approximately 30% and 47% of our total system revenues were derived from our subscription-based model. Under our subscription model, we collect an up-front fee, combined with a monthly payment schedule typically over a period of 36 months, with approximately 40% to 45% of total contract payments collected in the first year. For accounting purposes, these arrangements are considered to be sales-type finance leases, where the present value of all cash flows to be received under the subscription agreement is recognized as revenue upon shipment of the system to the customer. We cannot provide any assurance that the financial position of customers purchasing products and services under a subscription agreement will not change adversely before we receive all the monthly installment payments due under the contract. In the event that there is a default by any of the customers to whom we have sold systems under the subscription-based model, we may recognize bad debt expenses in our general and administrative expenses. If the extent of such defaults is material, it could negatively affect our results of operations and operating cash flows.
In addition to our subscription-based model, we generally offer credit terms of 30 to 90 days to qualified customers and distributors. In the event that there is a default by any of the customers or distributors to whom we have provided credit terms, we may recognize bad debt expenses in our general and administrative expenses. If the extent of such defaults is material, it could negatively affect our future results of operations and cash flows.
We may also be adversely affected by bankruptcies or other business failures of our customers, distributors, and potential customers. A significant delay in the collection of accounts receivable or a reduction of accounts receivables collected may impact our liquidity or result in bad debt expenses.
We may not be able to maintain our listing on The Nasdaq Capital Market and it may become more difficult to sell our stock in the public market.
On May 31, 2023, we received a notice (the “Notice”) from the Listing Qualifications Department of Nasdaq stating that our stockholders’ equity as reported in our Quarterly Report on Form 10-Q for the period ended March 31, 2023 was below the minimum $2,500,000 required for continued listing under Listing Rule 5550(b)(1) (“Minimum Equity Requirement”).
The Notice had no immediate effect on the listing of our common stock.
On July 17, 2023, we submitted to Nasdaq a plan to regain compliance with the Minimum Equity Requirement (the "Plan"). On July 28, 2023, Nasdaq granted us an extension until November 27, 2023 (the "Extension") to evidence compliance with the Minimum Equity Requirement, conditioned upon our achievement of certain milestones as set forth in the Plan.
Despite Nasdaq's grant of the Extension, there can be no assurance that we will be able to achieve the required milestones in the Plan or evidence compliance with the Minimum Equity Requirement within the timeframe required by Nasdaq, or that we will be able to maintain compliance with the other Nasdaq Listing Rules. If we are unable to timely regain compliance with the Minimum Equity Requirement, or if we fall out of compliance with one or more of the other Nasdaq Listing Rules, Nasdaq could seek to delist our common stock, in which case we would have the right to appeal such determination. If our common stock ultimately is delisted, our shareholders could face significant adverse consequences, including:
• | Limited availability or market quotations for our common stock; |
• |
Reduced liquidity of our common stock; |
• | Determination that shares of our common stock are “penny stock”, which would require brokers trading in our common stock to adhere to more stringent rules and possibly result in a reduced level of trading activity in the secondary trading market for our common stock; |
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Limited amount of news an analysts’ coverage of us; and |
• | Decreased ability for us to issue additional equity securities or obtain additional equity or debt financing in the future. |
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Unregistered Sales of Equity Securities
Except as otherwise disclosed in the Company’s Current Reports on Form 8-K filed with the SEC on May 15, 2023, July 12, 2023, and September 8, 2023 there were no unregistered securities issued and sold during the three and nine months ended September 30, 2023.
Use of Proceeds
None
Issuer Purchases of Equity Securities
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable.
* The certification attached as Exhibit 32.1 and Exhibit 32.2 that accompanies this Quarterly Report on Form 10-Q is not deemed filed with the United States Securities and Exchange Commission and is not to be incorporated by reference into any filing of Venus Concept Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Quarterly Report on Form 10-Q, irrespective of any general incorporation language contained in such filing.
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.
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Venus Concept Inc. |
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Date: November 14, 2023 |
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By: |
/s/ Rajiv De Silva |
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Rajiv De Silva |
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Chief Executive Officer |
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Date: November 14, 2023 |
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By: |
/s/ Domenic Della Penna |
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Domenic Della Penna |
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Chief Financial Officer |