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 endedSeptember 30, 2022 ("Form 10-Q"), with our audited consolidated financial statements and notes thereto in our Annual Report on Form 10-K for the year endedDecember 31, 2021 ("Form 10-K"), our Form 10-Q for the quarter endedMarch 31, 2022 andJune 30, 2022 , respectively, filed with theSEC and other filings we have made with theSEC . 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 endedSeptember 30, 2022 and 2021, respectively, a substantial majority of our systems delivered inNorth America were in non-traditional markets. 33
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We have had recurring net operating losses and negative cash flows from operations. As ofSeptember 30, 2022 andDecember 31, 2021 , we had an accumulated deficit of$214.2 million and$180.4 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 ofSeptember 30, 2022 andDecember 31, 2021 , we had cash and cash equivalents of$6.8 million and$30.9 million , respectively. While the impact of Covid-19 on our business has largely subsided, we continue to closely monitor all Covid-19 developments, including its impact on our customers, employees, suppliers, vendors, business partners, and distribution channels. In addition, 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
OnJune 16, 2020 , we entered into the Equity Purchase Agreement withLincoln Park , which provided that, upon the terms and subject to the conditions and limitations set forth therein, we may sell toLincoln 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. During the nine months endedSeptember 30, 2022 , we sold toLincoln Park 0.4 million shares of our common stock and raised net cash proceeds of$0.3 million under the Equity Purchase Agreement. See ''-Liquidity and Capital Resources'' below. The Equity Purchase Agreement expired onJuly 1, 2022 and was replaced by the 2022 LPC Purchase Agreement.
The 2022 LPC Purchase Agreement
OnJuly 12, 2022 , we entered into the 2022 LPC Purchase Agreement withLincoln 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 toLincoln Park 0.7 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 . ThroughSeptember 30, 2022 , the Company issued an additional 0.5 million shares of common stock toLincoln Park at an average price of$0.50 per share, for a total value of$0.3 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. 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. In the third quarter of 2022 we commenced an initiative to reduce our reliance on system sales sold under subscription agreements inthe 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. 34
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We generate recurring monthly revenue under our subscription-based business model and from traditional system sales.Venus Ltd. commenced a subscription-based model inNorth America in 2011. Our subscription model is also available in targeted international markets in which we operate directly. Approximately 41% and 61% of our aesthetic revenues were derived from our subscription model in the three months endedSeptember 30, 2022 and 2021, respectively. Approximately 47% and 56% of our aesthetic revenues were derived from our subscription model in the nine months endedSeptember 30, 2022 and 2021, 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 endedDecember 31, 2021 . 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 alternativeVenus Concept technology throughout the subscription period. This structure can provide greater flexibility than traditional equipment leases secured through financing companies. We work closely with our customers to provide business recommendations that improve the quality of service outcomes, build patient traffic and improve financial returns for the customer's business. 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. Inthe United States , we have obtained 510(k) clearance from the FDA for our Venus Viva, Venus Viva MD, Venus Legacy,Venus Versa , Venus Velocity,Venus Bliss ,Venus Bliss Max , Venus Epileve,Venus Fiore , ARTAS and ARTAS iX systems. Outsidethe United States , we market our technologies in over 60 countries acrossEurope , theMiddle East ,Africa ,Asia-Pacific andLatin 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
Our revenues for the three months endedSeptember 30, 2022 , and 2021 were$21.5 million and$24.6 million , respectively. Our revenues for the nine months endedSeptember 30, 2022 , and 2021 were$75.2 million and$73.0 million , respectively. We had a net loss attributable toVenus Concept of$14.6 million and$9.8 million in the three months endedSeptember 30, 2022 , and 2021, respectively. We had a net loss attributable toVenus Concept of$33.8 million and$18.7 million in the nine months endedSeptember 30, 2022 , and 2021, respectively. We had an Adjusted EBITDA loss of$7.7 million and$3.5 million for the three months endedSeptember 30, 2022 , and 2021, respectively. We had an Adjusted EBITDA loss of$19.0 million and$8.1 million for the nine months endedSeptember 30, 2022 , and 2021, respectively.
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 underU.S. GAAP and should not be considered an alternative to net income or any other performance measures derived in accordance withU.S. GAAP. Accordingly, you should consider Adjusted EBITDA along with other financial performance measures, including net income, and our financial results presented in accordance withU.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 underU.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. 35
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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 theU.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, 2022 2021 2022 2021
Reconciliation of net loss to adjusted EBITDA (in thousands) (in thousands) Net loss$ (14,496 ) $ (8,838 ) $ (33,644 ) $ (18,031 ) Foreign exchange loss 2,014 1,645 4,389 2,489 Finance expenses 1,219 1,000 3,176 4,046 Income tax (benefit) expense (162 ) 616 92 609 Depreciation and amortization 1,081 1,305 3,293 3,756 Stock-based compensation expense 551 536 1,552 1,602 Gain on forgiveness of government assistance loans - - - (2,775 ) Inventory provision (1) 1,388 - 1,388 - Other adjustments (2) 726 188 726 188 Adjusted EBITDA$ (7,679 ) $ (3,548 ) $ (19,028 ) $ (8,116 )
(1) For the three and nine months ended
(2) For the three and nine months endedSeptember 30, 2022 , the other adjustments are represented by severance payments associated with a workforce reduction inVenus Spain andVenus Canada of$0.7 million . For the three and nine months endedSeptember 30, 2021 , the other adjustments are represented by a loss on the sale of a subsidiary inSouth Africa ($0.2 and$0.2 million , respectively). 36
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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
2022 2021 2022 2021
United States 95 122 325 307
International 255 261 908 838
Total systems
delivered 350 383 1,233 1,145
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. 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.
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 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 closed 9 direct offices 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
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 and nine months endedSeptember 30, 2022 , our collections results were negatively impacted by macroeconomic headwinds, including increased interest rates and inflationary factors impacting the operating costs and liquidity positions of our customers. In addition, we increased the allowance for doubtful accounts as a percentage of gross outstanding accounts receivable from the period endedSeptember 30, 2021 to the period endedSeptember 30, 2022 . We incurred a bad debt expense of$2.4 million and$5.9 million during the three and nine months endedSeptember 30, 2022 , respectively. We recovered a bad debt expense of $nil and$2.1 million during the three and nine months endedSeptember 30, 2022 respectively. As ofSeptember 30, 2022 , our allowance for doubtful accounts stands at$13.1 million which represents 17.0% of the gross outstanding accounts receivable as of this date. As ofSeptember 30, 2021 , our allowance for doubtful accounts stands at$11.5 million which represents 13.9% of the gross outstanding accounts receivable as of this date. 37
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Table of Contents Outlook While the impact of Covid-19 on our business has largely subsided, we continue to closely monitor all Covid-19 developments including its impact on our customers, employees, suppliers, vendors, business partners, and distribution channels. In addition, 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 momentum and strength in our overall performance demonstrated in the first half of this fiscal year slowed in the three months endedSeptember 30, 2022 . The bulk of the third quarter revenue decline was due to a strategy shift to prioritize cash deals over subscription deals in order to improve cash generation and preserve liquidity. However, we remain focused on adapting to the challenges presented by the current macro economic environment. Supply chain. In the second half of 2021 we 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$2.4 million and$1.0 million , respectively, which was substantially fulfilled during the fourth quarter of 2021 and the first quarter of 2022. We did not experience significant supply issues during the three and nine months endedSeptember 30, 2022 as we continue to actively work with our suppliers and third-party manufacturers to mitigate supply issues and build inventory of key component parts. We anticipate some supply challenges throughout the remainder of 2022, including 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. In addition, since the second quarter of 2021 we have experienced significant inflationary pressures throughout our supply chain, which we expect to continue through the balance of 2022. We expect to mitigate such pressures, where possible, through price increases and margin management. 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 2022 progressed well in most countries in which we operate, we continue to evaluate our direct operations, particularly those outside ofNorth America . 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. We remain fully focused on reactivating collections with those at-risk accounts that have struggled through the pandemic but show signs of viability. As ofSeptember 30, 2022 , our allowance for doubtful accounts stands at$13.1 million , which represents 17.0% of the gross outstanding accounts receivable as of that date. This represents an increase of$1.1 million from ourDecember 31, 2021 allowance for doubtful accounts balance of$12.0 million . With the successful rollout of COVID-19 vaccines, combined with a relaxation of government restrictions in certain markets we operate in, our collection experience in 2022 improved relative to earlier stages of the pandemic, with collections in our largest subscription markets averaging 85% of our billings inJanuary 2022 , 93% inFebruary 2022 , 106% inMarch 2022 , 98% inApril 2022 , 92% in May 2022,96% inJune 2022 , 89% inJuly 2022 , 90% inAugust 2022 , and 93% inSeptember 2022 . We incurred a bad debt expense of$5.9 million in the first nine months of 2022. We will continue our proactive approach to collections of our accounts receivable and will revisit our allowance for doubtful accounts during the next quarter. 38
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Table of Contents 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 and nine months endedSeptember 30, 2022 , approximately 41% and 47%, respectively, of our system revenues were derived from our subscription model. For the three and nine months endedSeptember 30, 2021 , approximately 61% and 56%, respectively, of our system revenues were derived from our subscription model. The relative decrease in subscription revenues in the third quarter of 2022 is in line with our strategy to prioritize cash deals over subscription deals in order to improve cash generation and preserve liquidity. Our subscription model is designed to provide a low barrier to ownership of our systems and includes an up-front fee followed by monthly payments, typically over a 36-month period. The up-front fee serves as a down payment. The significantly reduced up-front financial commitment, coupled with less onerous credit and disclosure requirements, is intended to make our subscription-based sales program more appealing and affordable to customers, including non-traditional providers of aesthetic services such as family practice physicians, general practice physicians, and operators of medical aesthetic spas. 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 to the customer and achievement of the required revenue recognition criteria. For the three and nine months endedSeptember 30, 2022 , approximately 48% and 43%, respectively, of our system revenues were derived from traditional sales. For the three and nine months endedSeptember 30, 2021 , approximately 27% and 34%, 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 these types of 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. 39
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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 and nine months endedSeptember 30, 2022 , approximately 11% of our system revenues were derived from distributor sales. For the three and nine months endedSeptember 30, 2021 , approximately 12% and 10%, respectively, 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, or 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 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, formerly through 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 Sales and Marketing. We currently sell our products and services using direct sales representatives inNorth 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. 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, 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. 40
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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,Israel andSan 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, 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 6.1% for the MSLP Loan and 8.0% for the Notes as ofSeptember 30, 2022 and 3.10% for the MSLP Loan and 8.0% for the Notes as ofDecember 31, 2021 . 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 theU.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 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 inthe 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 loss incurred
during the three and nine 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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