VENUS CONCEPT INC. 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
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 months
ended
We have had recurring net operating losses and negative cash flows from
operations. As of
Venus Viva®, Venus Viva (logo)®,Venus Viva® MD, Venus Legacy®, Venus Legacy
(logo)®, Venus Concept®,
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 and VeroGrafters technician services (which were discontinued in the fourth quarter of 2021).
Systems are sold through our subscription model, or through traditional sales contracts directly and through distributors.
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We generate recurring monthly revenue under our subscription-based business
model and from traditional system sales.
Our subscription model includes an up-front fee and 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. To ensure that each monthly
payment is made on time and that the customer's system is serviced in accordance
with the terms of the warranty, every product purchased under a subscription
agreement requires a monthly activation code, which we provide to the customer
upon receipt of the monthly payment. These recurring monthly payments provide
our customers with enhanced financial transparency and predictability. If
economic circumstances are appropriate, we provide customers in good standing
with the opportunity to "upgrade" into our newest available or alternative
We have developed and commercialized eleven 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
As of
Use of Non-GAAP Financial Measures
Adjusted EBITDA is a non-GAAP measure defined as net income (loss) before
foreign exchange loss (gain), 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
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
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The following is a reconciliation of net loss to Adjusted EBITDA for the periods
presented:
Three Months Ended March 31,
2022 2021
Reconciliation of net loss to adjusted EBITDA (in thousands)
Net loss $ (8,636 ) $ (9,435 )
Foreign exchange loss 5 714
Finance expenses 923 1,885
Income tax expense 272 -
Depreciation and amortization 1,101 1,304
Stock-based compensation expense 443 508
Adjusted EBITDA $ (5,892 ) $ (5,024 ) 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 March 31,
2022 2021
United States 126 67
International 327 299
Total systems delivered 453 366
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 sales 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.
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 are evaluating our profitability and
growth prospects in these countries post-COVID-19, and we have taken and will
continue to take steps to exit countries which we do not believe will produce
sustainable results. Since
In the three months ended
Bad Debt Expense. We maintain an allowance for doubtful accounts for estimated
losses that may primarily arise from subscription customers that are unable to
make the remaining payments required under their subscription agreements. During
the three months ended
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Table of Contents Outlook COVID-19
Our overall performance continues to show strength as we find ways to adapt to the challenges presented by the COVID-19 pandemic. There are certain markets that we operate in where commercial efforts are still challenged by the effects of COVID-19, either through local government restrictions and/or patients' hesitancy to undergo procedures. Where possible, our sales efforts are increasingly focused on countries and markets that have had success in managing the pandemic through proper guidance from public health authorities combined with strong COVID-19 vaccination outcomes.
Employee and customers' health and safety measures. At
? Implementation of and continuously updated health and safety policies and
processes;
? Establishment of remote working guidelines;
? Continued communication with customers, including planning for business
resumption, implementing virtual training sessions and monitoring
announcements regarding developments;
? Enhanced safety guidelines and access to personal protective equipment for our
clinical trainers; shift to virtual training sessions where possible;
? Thorough cleaning and decontamination procedures throughout our global
manufacturing, warehouse and office facilities; and
? Establishment of phased roll-out of vaccine mandates for Venus Concept offices
and safe return to work policies.
Supply chain. In the second half of 2021we were impacted by the global supply
disruptions related to COVID-19, which resulted in our inability to fulfil
demand for certain of our products. The value of such purchase order backlog in
the third and the fourth quarters of 2021 was
Sales markets. We are a global business, having established a commercial presence in more than 60 countries during our history. The continued economic recovery in individual countries during the first three months of 2022 progressed well in most countries that we operate in. While we expect this momentum to continue for the 2022 year, the COVID-19 outbreak continues to be fluid, and the extent to which the pandemic will continue to impact our business remains largely uncertain and could continue to be significant for the foreseeable future.
Accounts receivable collections. As a result of the global economic turmoil that
has resulted from COVID-19, many of our customers experienced difficulty in
making timely payments or payments at all during the pandemic under their
subscription agreements. In 2020 and 2021, we entered into repayment
arrangements with the majority of non-paying customers, and as government
lockdowns and shelter in place orders were lifted, we experienced a significant
improvement in collections as businesses reopened. We remain fully focused on
reactivating collections with those at-risk accounts that have struggled through
the pandemic but show signs of viability. As of
With the successful rollout of COVID-19 vaccines, combined with a relaxation of
government restrictions in certain markets we operate in, our collection
experience continues to improve, with collections in our largest subscription
markets averaging 85% of our billings in
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Mitigation efforts. We are focused on continuing to mitigate the impacts of the COVID-19 pandemic on our business to the extent possible. Our mitigation efforts include the following:
? Accounts Receivables Collections Initiatives. We have made repayment
arrangements with the majority of our non-paying subscription customers to
collect temporarily reduced monthly payments where possible and/or deferred
amounts in expectation of full collection as business activities continue to
resume. We modified our payment arrangements with these subscription customers
such that past due amounts are scheduled to be repaid over a three to six
month period. While the repayment arrangements and improvements in collections
activities made thus far have resulted in our cash collections rate averaging
at pre-COVID-19 levels, we may not be successful in collecting all outstanding
amounts.
? The 2021 Private Placement. In December 2021 , we issued and sold to certain
investors 9,808,418 shares of common stock and 3,790,755 shares of convertible
preferred stock. The 2021 Private Placement was completed on December 15,
2021 . 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 in the 2021 Form 10-K. See Note 14 "Stockholders Equity"
in the notes to our condensed consolidated financial statements included
elsewhere in this report.
? Government Assistance Programs. In 2020, certain of our subsidiaries applied
for government assistance programs and received loans and other government
subsidies in the aggregate of $5.3 million , including $4.1 million in PPP
Loans under the PPP. The terms of these government assistance programs vary by
jurisdiction. See Note 12 "Government Assistance Programs" in the notes to our
condensed consolidated financial statements included elsewhere in this report.
In 2021, we applied for partial forgiveness of the PPP Loans with the SBA and
received partial forgiveness in the total amount of $2.8 million of original
PPP Loans as of March 31, 2022 . Also in 2021, we received additional
government subsidies for $0.1 million .
? December 2020 Public Offering Warrants Exercise. On December 24, 2020 , we sold
in a public offering 11,250,000 shares of common stock and warrants to
purchase up to 5,625,000 shares of common stock at a combined offering price
to the public of $2.00 per share and accompanying warrants. Total net proceeds
generated by the December 2020 Public Offering was $20.5 million . In February
2021 , a small number of our investors exercised an aggregate of 361,200
December 2020 Public Offering Warrants at the exercise price of $2.50 per
share. We received total proceeds from the December 2020 Public Offering
Warrants exercises of $0.9 million .
The extent to which the COVID-19 pandemic may continue to impact our business, operating results, financial condition, and liquidity in the future will depend on future developments, which we cannot predict with reasonable accuracy, including the duration and severity of the pandemic, travel restrictions, business and workforce disruptions, the impact of COVID-19 variants and the effectiveness of actions taken to contain and treat the disease in each of the markets in which we operate. While our business has clearly improved and we expect this momentum to continue through the balance of 2022, the situation surrounding COVID-19, and in particular, the COVID-19 variants, remains fluid, and the potential for additional negative impacts on our results of operations, financial condition and liquidity increases the longer the pandemic impacts activity levels in the countries in which we operate.
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 marketing supplies and kits, consumables and (3) service revenue from our extended warranty service contracts provided to existing customers and the sale of our VeroGrafters technician services. VeroGrafters services were discontinued in the fourth quarter of 2021.
System Revenue
For the three months ended
For the three months ended
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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 months ended
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 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 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 and VeroGrafters technician services for hair restoration using our NeoGraft and ARTAS systems. In the fourth quarter of 2021 we discontinued our VeroGrafters technician services in order to focus on higher margin products and services.
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
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 selling 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, legal and human resource departments and intellectual property portfolio. These expenses consist of personnel-related expenses (primarily salaries, benefits, incentive compensation and stock-based compensation) and allocated facilities costs, audit fees, legal fees, consultants, travel, insurance, and bad debt expense. During the normal course of operations, we may incur bad debt expense on accounts receivable balances that are deemed to be uncollectible.
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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, regulatory affairs, clinical costs, and facilities costs in
our Yokneam,
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, regulatory affairs, and development activities, but to decline as a percentage of revenue as our revenue increases over time.
Finance Expenses
Finance expenses consists of interest income, interest expense and other banking
charges. Interest income consists of interest earned on our cash, cash
equivalents and short-term bank deposits. We expect interest income to vary
depending on our average investment balances and market interest rates during
each reporting period. Interest expense consists of interest on long-term debt
and other borrowings. The interest rates on our long-term debt were 3.45% for
the MSLP Loan and 8.0% for the Notes as of
Foreign Exchange (Gain) Loss
Foreign currency exchange (gain) loss changes reflect foreign exchange gains or
losses related to the change in value of assets and liabilities denominated in
currencies other than the
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 agreements 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
Income tax expense is recognized based on the actual taxable loss incurred
during the three months ended
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.
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