UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

For the fiscal year ended December 31, 2019

OR

Commission File Number 001-38238

 

Venus Concept Inc.

(Exact name of Registrant as specified in its Charter)

 

 

 

(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:

 

 

Securities Registered Pursuant to Section 12(g) of the Act: None

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ☐ NO ☒

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. YES ☐ NO ☒

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ☒ NO ☐

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). YES ☒ NO ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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.

 

 

If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ☒

As of June 29, 2019, (the last business day of the registrant’s most recently completed second quarter), the aggregate market value of Registrant’s common stock, par value $0.0001, held by non-affiliates of the Registrant was $26,468,409 based upon the closing price of $9.1495 per share as reported for such date by the Nasdaq Global Market. Shares of the Registrant's common stock held by executive officers and directors of the Registrant and by certain stockholders who owned 10% or more of the outstanding common stock have been excluded because such persons may be deemed to be affiliates of the registrant. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

The number of shares of Registrant’s Common Stock outstanding as of March 25, 2020 was 32,194,285.

Documents to be Incorporated by Reference

Certain information required in Items 10, 11, 12, 13 and 14 of Part III of this Annual Report on Form 10-K (the "Annual Report") is incorporated by reference from our definitive Proxy Statement for our 2019 Annual Meeting of Stockholders (our "Proxy Statement") which will be filed with the Securities and Exchange Commission (the "SEC") within 120 days after the end of the fiscal year ended December 31, 2019.

 

 

 

 

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Table of Contents

 

 

 

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CAUTIONARY INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

 

This Annual Report on Form 10-K for the year ended December 31, 2019 contains “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “1933 Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “1934 Act”). Any statements contained herein that are not of 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. These forward-looking statements include, but are not limited to, statements about:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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These forward-looking statements are based on current expectations, estimates, forecasts, and projections about our business and the industry in which we operate and management's beliefs and assumptions and are not guarantees of future performance or developments and involve known and unknown risks, uncertainties, and other factors that are in some cases beyond our control. As a result, any or all of our forward-looking statements in this Annual Report on Form 10-K may turn out to be inaccurate. Factors that could materially affect our business operations and financial performance and condition include, but are not limited to, those risks and uncertainties described herein under “Item 1A - Risk Factors.” You are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on the forward-looking statements. The forward-looking statements are based on information available to us as of the filing date of this Annual Report on Form 10-K. 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 Securities and Exchange Commission, or the SEC, after the date of this Annual Report on Form 10-K.

 

This Annual Report Form 10-K also contains estimates, projections and other information concerning our industry, our business, and the markets in which we compete, including data regarding the estimated size of these markets. Information that is based on estimates, forecasts, projections, market research or similar methodologies is inherently subject to uncertainties and actual events or circumstances may differ materially from events and circumstances reflected in this information. Unless otherwise expressly stated, we obtained this industry, business, market and other data from reports, research surveys, studies and similar data prepared by market research firms and other third parties, industry, medical and general publications, government data and similar sources.

 

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PART I

 

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 practice enhancement services. Our aesthetic systems have been designed on a cost-effective, proprietary and flexible platform that enables 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 years ended December 31, 2019 and in 2018, a substantial majority of our systems delivered in North America were in non-traditional markets.

 

In November 2019, we completed our business combination with Venus Concept Ltd. and the business of Venus Concept Ltd. became the primary business of the company, a global leader in hair restoration. It significantly expanded our presence and capability in the hair restoration market. We have developed and commercialized a robotic device, the ARTAS^® System, that assists physicians in performing many of the repetitive tasks that are part of a follicular unit extraction surgery, or FUE, a type of hair restoration surgery. In July 2018, we introduced the ARTAS^® iX Robotic Hair Restoration System, which we believe is the first and only robotic intelligent solution to offer precise, minimally invasive, repeatable harvesting and implantation functionality in one platform. The system delivers procedural analysis, precision, repeatability and clinical workflow efficiency for hair restoration. Through our NeoGraft^® division, which we acquired in 2018, we offer an automated hair restoration system that facilitates the harvesting of follicles during an FUE process, improving the accuracy and speed over commonly used manual extraction instruments. Our hair restoration systems are sold primarily to plastic surgeons and dermatologists, and in the U.S. we offer doctors using the NeoGraft^® system the services of a group of independently contracted technicians, whom we market as “VeroGrafters.” This group of approximately 50 technicians is available to assist the physician during a NeoGraft^® hair restoration procedure. The ARTAS^® iX System complements our NeoGraft^® hair restoration system and allows us to penetrate a broader segment of the hair restoration market.

 

We have developed and commercialized twelve technology platforms, including our ARTAS^® and NeoGraft^® systems. We have received clearance from the U.S. Food and Drug Administration, or FDA, for the combined use of multipolar radio frequency, or RF, and pulsed electromagnetic fields, or PEMF, for non-invasive treatment of facial rhytides (wrinkles) in Fitzpatrick skin types I (ivory)-IV (light brown), and temporary reduction in the appearance of cellulite, among others. We have also received FDA clearance for the use of our diode laser system for non-invasive fat reduction (lipolysis) in the abdomen and flanks for certain body types. In certain jurisdictions outside of the U.S., our products have received marketing authorizations for indications such as temporary increase of skin tightening, non-invasive lipolysis of the abdomen and flanks, cellulite reduction and uses for certain soft tissue injuries, among others, and for vaginal treatment in the Israeli market. Our proprietary multipolar RF and PEMF technologies, also referred to as our (MP)^2® technology, synergistically deliver consistent homogenous treatments in a minimally invasive process. We also use in our systems Intense Pulsed Light, or IPL, for treatment of benign pigmented epidermal and cutaneous lesions, lasers for hair removal and fractional ablative RF modality for skin resurfacing. The ARTAS^® system was cleared by FDA in April 2011 and the ARTAS^® iX was cleared by FDA in March 2018 to include implantation of harvested hair follicles.

 

In the U.S., we have obtained 510(k) clearance from FDA for our Venus Freeze^® and Freeze Plus systems, Venus Viva^®, Venus Legacy^®, Venus Versa^®, Venus Velocity^™, Venus Heal^™, Venus Bliss^™ and ARTAS^® systems. The Venus Glow^™ and NeoGraft^® systems are listed as class I devices under FDA classification system. Outside the U.S., we market our technologies in over 60 countries across Europe, 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.

 

 

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To address the financial barriers faced by physicians and aesthetic service providers globally, we focus our medical aesthetic product sale strategy on a subscription-based business model in North America and in our well-established direct global markets, which allows us to offer our aesthetic products to non-traditional providers and medical spas. Traditional energy-based aesthetic devices can require financial commitments of up to $190,000, which typically involve third-party financing, often with personal guarantees. These products are often superseded by next-generation products within 18 to 24 months, making it financially difficult for aesthetic service providers to continually access the market’s newest technologies, and for providers in non-traditional markets to justify the significant investment. Our subscription-based model is designed to provide a lower initial barrier to ownership and includes an up-front fee, and a monthly payment schedule, typically over a period of 36 months, with approximately 40% of total contract payments collected in the first year. Our subscription-based business model can provide customers with greater flexibility than traditional equipment leases secured through finance companies. The significantly reduced upfront financial commitments, without onerous credit and disclosure requirements, make this business model increasingly appealing and affordable to non-traditional physicians and medical aesthetic spas. If economic circumstances are appropriate, we provide customers in good standing with the opportunity to “upgrade” to new agreements for our newest available or alternative technology throughout the subscription period. To ensure that each monthly product payment is made on time and that the customers’ systems are 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. We currently do not offer the ARTAS^® iX System under the subscription-based model.

 

To support the growth initiatives of our customers, we developed practice enhancement services that provides our customers with a fully integrated monthly marketing support program with business and marketing tools to grow their practices, improve their financial and business performance, and maximize their return on investment, while also supporting our sale of products and ancillary services. These interactions help in further building our customer relationships.

 

As of December 31, 2019, we operated directly in 29 international markets through our 24 direct offices in the U.S., Canada, United Kingdom, Japan, South Korea, Mexico, Argentina, Colombia, Spain, France, Germany, Australia, China, Hong Kong, Singapore, Indonesia, Vietnam, India, Israel, Italy, Bulgaria, Russia, Kazakhstan and South Africa.

 

Subscription-based Business Model

 

We generate recurring monthly revenue under our subscription-based business model and from traditional system sales. We commenced a subscription-based model in North America in 2011 and, for the years ended December 31, 2019 and 2018, approximately 51% and 55%, respectively, of aesthetic systems we delivered were sold under the subscription-based model. For the years ended December 31, 2019 and 2018, approximately 67% and 75%, respectively, of our total system revenues were derived from the subscription-based model. We have launched our subscription-based model in targeted international markets in which we operate directly. We currently do not offer the ARTAS^® iX System under the subscription-based model.

 

Our subscription-based model includes an up-front fee and a monthly payment schedule, typically over a period of 36 months, with approximately 40% 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 to the customer and achievement of the required revenue recognition criteria.

 

Market Overview

 

Aesthetic Procedures

 

The market for aesthetic procedures is large, growing, global in scale, and comprised of both surgical and non-surgical procedures. The International Society of Aesthetic Plastic Surgery, or ISAPS, reported approximately 23 million cosmetic procedures worldwide in 2018. Total cosmetic procedures worldwide in 2018 was comprised of approximately 10.6 million surgical cosmetic procedures and approximately 12.7 million non-surgical cosmetic procedures. Total non-surgical procedures worldwide in 2018 included approximately 10.0 million injectable procedures – primarily botulinum toxin and hyaluronic acid fillers – with the remaining 2.7 million non-surgical, non-injectable procedures worldwide in 2018 representing annual addressable procedure opportunity for our minimally invasive and non-invasive medical aesthetic technologies.

 

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Based on data from Medical Insights reports published in 2019, we estimate the global energy-based aesthetic device market totaled approximately $3.4 billion in 2018. We also estimate this market will increase at a 9.7% CAGR to more than $5.3 billion by the end of 2023. This projected growth CAGR is based on a weighted-average of expected growth CAGRs per Medical Insights of 6.1% for “Energy-Based Aesthetic Devices”, 12.7% for “Energy-Based Body Shaping & Skin Tightening” and 15.0% for “Energy-Based Feminine Rejuvenation”, respectively.

 

Hair Restoration

 

According to the “2017 Practice Census Results Report” from the International Society of Hair Restoration or ISHRS, an estimated 597,181 patients worldwide had a surgical hair restoration procedure in 2016, compared to an estimated 216,547 patients in 2006, representing a 10.6% CAGR over the period. The ISHRS estimated the global market for surgical hair restoration treatments totaled $4.1 billion in 2016, compared to $2.4 billion in 2014, representing a 32% CAGR over the period.

 

We believe several factors are contributing to the growth in the aesthetic and hair restoration markets, including:

 

 

 

 

 

 

Limitations of Existing Technologies

 

Aesthetic Procedures

 

We believe that several limitations have restricted the growth of existing aesthetic technologies and that patients who do not require significant skin tightening, cellulite reduction, circumferential reduction or body contouring will explore non-invasive alternatives to minimize the pain, expense, downtime, and surgical risks associated with current invasive procedures. Most existing non-invasive procedures are based on various forms of directed energy treatments, such as RF, IPL, lasers using various wavelengths, shockwave therapy or ultrasound.

 

 

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Most current aesthetic technologies present the following limitations:

 

 

 

 

 

 

 

 

 

Our Aesthetic Solutions

 

Aesthetic Technology Solution

 

We designed a suite of medical aesthetic systems that use our proprietary (MP)² technology to address the limitations of existing medical aesthetic technologies and procedures. Our systems have the following characteristics:

 

 

 

 

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Competitive Advantages for the Aesthetic Market

 

 

 

 

 

 

Competitive Advantages For Our Customers in the Aesthetic Market

 

 

 

 

 

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Our Hair Restoration Solutions

 

Hair Loss Treatment Options and Their Limitations

 

The treatments for hair loss can broadly be divided between non-surgical options and surgical procedures.

 

Non-Surgical Options

 

Non-surgical options for hair loss include prescription therapeutics and non-prescription remedies. In the U.S., FDA has authorized two prescription therapeutics for hair loss: Rogaine which is applied topically, and Propecia which is ingested in pill form. Both Rogaine and Propecia have several drawbacks, including limited efficacy in some individuals and the need for strict patient compliance for the treatment to have meaningful effect.

 

Surgical Procedures

 

Surgical procedures to address hair loss continue to evolve and become more popular. The first of these therapies, hair plugs, was developed in the late 1950s. Due to the size of the transplanted hair follicle groups, or plugs, the transplants resulted in an unnatural look with the patient often having a “doll-hair” like appearance, the clumping or grouping of hair follicles in a visibly uniform pattern. Because of the poor aesthetic results of hair plugs, strip surgery, or FUT, follicular unit transplantation and follicular unit extraction, or FUE became increasingly more popular.

 

FUE is significantly less invasive than strip surgery. In this procedure, the physician or technician removes individual hair follicles from the patient’s scalp without removing a strip of tissue. FUE can be performed with manual hand-held punches, automated hand-held devices (e.g. NeoGraft^®) or with the ARTAS^® System.

 

Strip Surgery

 

In an FUT procedure, or strip surgery, the physician uses a sharp scalpel to surgically remove a large strip of the patient’s scalp, approximately eight inches in length, and one-half inch in width and depth, from the donor area. The subsequent wound is sutured or stapled closed. Following the surgical removal of the strip of the scalp from the patient’s head, the follicular unit grafts, the natural groupings of hair follicles in the scalp, are removed from the strip of scalp by technicians using microscopes and scalpel blades. Following the removal of the individual hair follicles, technicians implant the individual hair follicles into hundreds to thousands of incisions in the patient’s scalp prepared by the physician. Strip surgery results in a linear scar which may enlarge over time creating a poor aesthetic outcome in the donor area. As a result, strip surgery patients are generally unable to wear their hair short without revealing the scar.

 

 

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Follicular Unit Extraction Using Hand-Held Devices

 

In part as a solution to the significant scarring and other drawbacks of strip surgery, FUE procedure was developed in the early 2000s. In an FUE procedure, rather than surgically removing a portion of the patient’s scalp, each hair graft is individually dissected from the scalp for transplantation. Because a strip of the patient’s scalp is not removed, a FUE procedure avoids a long linear scar and reduces the post-operative pain and numbness associated with strip surgery. Following the dissection of the individual hair follicles, the physician uses a hand-held device to remove the hair follicles. After harvesting, the individual hair follicles are implanted in the same way as in a strip surgery procedure.

 

Drawbacks of Strip Surgery and FUE Surgery Using Hand-Held Devices

 

While strip surgery and FUE surgery using a hand-held device, or manual FUE, can provide significant, long-term results in restoring hair, there are several limitations associated with these procedures.

 

 

 

 

 

 

 

 

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The ARTAS® Solution

 

We believe the ARTAS^® System addresses many of the shortcomings of other hair restoration procedures. The ARTAS^® System is capable of robotically assisting a physician through many of the most challenging steps of the hair restoration process, including the dissection of hair follicles, site planning and recipient site making. We believe, with this assistance, the ARTAS^® System can help shorten the often-long learning curve for both physicians and technicians to become proficient in performing hair restoration procedures. In addition, we believe that by assisting the physician and technicians with many of the repetitive and tedious tasks associated with the hair restoration procedure, the ARTAS^® System can make hair restoration procedures less labor intensive and can reduce inconsistent results. Further, we believe the ARTAS^® System’s Site Making functionality, which includes an enhanced imaging system and sophisticated algorithms, helps physicians avoid damaging existing follicles and enables them to create a more natural, aesthetically pleasing outcome for the patient. In March 2018, we received 510(k) clearance from FDA to expand the ARTAS^® technology to include implantation of harvested hair follicles. In December 2018, we completed the ISO audit and are compliant with CE Mark requirements for the sale of the ARTAS^® iX System with implantation functionality in Europe. Our platform includes the ARTAS^® Hair Studio application which can simulate pre-procedure and post-procedure outcomes and can be utilized during the patient consultation and education process.

 

 

 

 

Advantages of the ARTAS^® Procedure

 

Patient Value. We believe the ARTAS^® System significantly improves the patient experience and outcome in hair transplantation procedures in the following ways:

 

 

 

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Physician Value. We believe the ARTAS^® System provides physicians compelling economic benefits and enables physicians to achieve consistent reproducible results. As a result, we believe the ARTAS® procedure also offers an attractive addition to existing dermatology, plastic surgery or aesthetics practices whether they do or do not provide hair restoration procedures.

 

 

 

 

Clinically-Established Results. Four peer-reviewed clinical publications have demonstrated the quality and consistency of grafts produced by the ARTAS^® System. One published study indicated average damage rates for the hair follicles, or transection rates, with the ARTAS^® System were as low as 6.6%, with a second study documenting average transection rates as low as 4.9% in a Korean population of patients. The third study documented that the ARTAS^® System can be programmed by the physician to select follicular units with larger groupings of hairs while skipping single hair grafts, which allows physicians to choose particular follicular units depending on the hair density they are trying to achieve, providing a clinical benefit as measured by the increase in hairs per harvest of 17% and as measured by the increase in hairs per graft of 11.4%. Results were statistically significant with a p-value less than 0.01. This study also demonstrates the ability of robotic follicular unit graft selection to increase the amount of hairs a physician can extract for each incision made in the donor area. The fourth study demonstrated that FUE cases larger than 2,500 grafts, or mega-sessions, are possible using the ARTAS^® System. These peer-reviewed publications demonstrate the reproducibility and consistency of dissection results from the ARTAS^® System in a diverse group of patients, even as the system is used by different clinicians. To our knowledge, there are no other peer-reviewed clinical publications that demonstrate the reproducibility of results utilizing other products in FUE or strip surgery procedures. We intend to encourage scientific research in the study of hair restoration to improve our technology, solutions, enhance understanding of our industry and educate physicians on the capabilities of the ARTAS^® System.

 

Advantages of the NeoGraft® Procedure

 

We believe that NeoGraft® offers a technology solution that complements our robotic hair restoration system and provides an alternative to strip surgery and fully manual FUE procedures for our customers and their patients.    

 

 

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Patient Value

 

 

 

 

Physician Value

 

 

 

 

Our Strategy

 

Our goal is to become a leading global provider of minimally invasive and non-invasive medical aesthetic technologies and complimentary products, hair restoration technologies and marketing and other support services for aesthetic practitioners and aesthetic medical spas. To achieve this goal, we intend to:

 

 

 

 

 

 

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Our Technologies

 

We use a variety of technologies that allow us to expand into non-traditional physician markets. One differentiating technology is our proprietary multipolar magnetic pulsed technology, or (MP)², which synergizes PEMF and a multipolar RF matrix. Our (MP)² technology is applicable to a wide range of non-invasive skin tightening, wrinkle reduction, body contouring and fat reduction, which have been cleared in U.S., Canada, or Europe, and we plan to enter the rapidly growing non-invasive feminine health market in various geographic regions once we receive the necessary regulatory clearances. We also currently have solutions based on other technologies such as fractional ablative RF, IPL and laser technologies, affording a broader set of solution options to address key markets for hair removal, and vascular pigmented lesions, circumference reduction and fat reduction (lipolysis). As part of our strategy, our Heal, Freeze Plus and Fiore systems come with integrated Automatic Temperature Control, or ATC, and our Velocity, Heal, Fiore, Freeze Plus and NeoGraft^®  systems come with integrated internet of things, or IOT, capabilities.

 

 

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Background on Energy-Based Aesthetic Technologies

 

RF, a technique that has been employed for several decades for medical purposes, uses an oscillating current of electricity to generate energy in the form of heat. This heat can be used to stimulate, coagulate and/or ablate targeted tissue within the body. RF energy is most commonly used in aesthetic dermatology as a noninvasive method of skin tightening, wrinkle removal, and facial rejuvenation. These effects are produced within the heated area through several mechanisms, including ablation and coagulation of connective tissue, stimulation of tissue inflammation and wound healing processes, and improved blood circulation. RF devices that use fractional ablative/coagulative technology have been shown to improve the appearance of fine lines and wrinkles in the dermis, while maintaining low risk of adverse side effects in patients of most skin types. This fractional technology uses needle-shaped elements as electrodes to deliver the RF energy to the targeted tissue and has been used for treating a variety of dermatological conditions such as improving facial brightness and improving the appearance of skin tightness and skin pigmentation.

 

RF has been recognized as a variable solution by various researchers and companies for aesthetic use due to its safety profile on many skin types, limited downtime and results for tissue tightening. The effect of RF on the dermal extracellular matrix causing this immediate visible tightening of the tissue (through shrinkage of the collagen fibers) with stimulation of dermal fibroblasts inducing the synthesis of new collagen (called neocollagenisis) and elastin fibers (called neoelastogenesis) has been well documented in published clinical research that is widely available through various peer reviewed journals and universities.

 

PEMF has been used in a variety of different medical settings including bone fusion for many years. Clinically, PEMF has also demonstrated benefits for soft tissue repair (in cases of various sports related injuries), while exhibiting few side effects. It has been suggested that tissue exposed to PEMF has a modulated production of growth factors leading to elevated production of collagen and other proteins, and improved skin vitality and appearance. PEMF triggers a cascade of biological processes at a cellular level that facilitates the creation of new blood vessels (called angiogenesis).

 

IPL relies on selective photothermolysis to damage pigmented targets within cells or tissues, causing demarcated thermal injury to the target while sparing surrounding tissue. Light pulses are generated by bursts of electrical current passing through a xenon gas-filled lamp. Individual light pulses have a specific duration, intensity, and fluence, and spectral distribution that allows for a controlled and confined energy delivery into tissue. The effective use of IPL relies on the phenomena that certain targets (chromophores) are capable of absorbing energy from this broad spectrum of light wavelength (absorptive band) without exclusively being targeted by their highest absorption peak. The three main chromophores (hemoglobin, water, and melanin) in human skin all have broad absorption peaks of light energy, allowing them to be targeted by a range of light wavelengths and not requiring that any single specific wavelength of light (monochromatic light) is used. Therefore, monochromatic light is not a prerequisite for selective heating of target structures in human skin. The broad wavelength range discharged from an IPL device leads to the simultaneous emission of different wavelengths that can be further filtered to narrower bands, allowing the various chromophores to be targeted simultaneously but specifically.

 

Our (MP)² Proprietary Technology

 

Our proprietary (MP)² technology employs both PEMF and RF energy in a synergistic manner. (MP)² is noninvasive and because (MP)² disperses heat equally across the treatment area, it does not produce potentially painful localized heat spikes, and unlike other devices employing RF, (MP)² does not require local cooling during treatment.

PEMFs energy is created by running short pulses of electrical current through metal coils, which results in the formation of electromagnetic fields. Electromagnetic fields, in turn, influence the behavior of charged particles, including various biomolecules, within the range of the electromagnetic field to cause one or more desired effects at the cellular level. PEMF therapy is used for the treatment of wounds, for aesthetic applications, and in the management of postsurgical pain and edema.

 

RF energy, on the other hand, delivers energy that manifests itself as heat within various layers of the skin. The heat generated in the tissue by application of RF energy directly affects fibroblasts, extra cellular matrix, or ECM, materials and fat cells, thereby triggering natural wound healing processes of the skin and resulting in synthesis of new collagen and elastin fibers. In addition, under predetermined conditions, the heat causes contraction of collagen fibers and lipolysis. In our (MP)² technology, we employ a multipolar matrix of RF circuits to produce heat. Our multipolar RF matrix distributes the RF currents evenly across the treatment area in a proprietary pattern, which results in the quick and uniform heating of the skin layers without overheating any particular area of the skin.

 

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Elements of (MP)² Technology

 

Benefits of (MP)² Technology

 

Our proprietary (MP)² technology enables medical and aesthetic practitioners to offer a wide range of non-invasive skin tightening and body contouring solutions.

 

The main benefits of using (MP)² technology in non-invasive aesthetic treatments are the following:

 

 

 

 

 

Our Additional Key Technologies

 

In addition to our core (MP)² technology, we have technologies that use fractional ablative RF, IPL and laser technologies that allow us to address key markets for skin resurfacing, wrinkle reduction, body contouring, noninvasive fat and circumference reduction, hair removal, acne treatment and treatment of vascular and pigmented lesions. In offering these solutions in the markets where we have marketing clearances or approvals, our goal is to provide improved technologies that are safe and effective for their intended uses and economically viable for our customers.

 

Fractional ablative RF

 

Fractional ablative techniques improve the appearance of skin surfaces by injuring the skin in a fractional manner to trigger a healing response in the treated area. This both tightens the skin and elicits collagen formation, thus rejuvenating the skin surface. Because our fractional ablative RF technology does not use lasers or other light technologies, which are skin color dependent, fractional ablative RF can be used on patients of all skin tones.

Fractional ablative RF technology has been incorporated into our Venus Viva applicator, supported by our Venus Viva and Venus Versa systems. Our current Viva applicator delivers the RF energy via 160 pins, which permit ablation and resurfacing of the skin.

 

Intense Pulsed Light

 

Our IPL devices employ non-laser high intensity light sources as part of a high-output flash lamp to produce a broad wavelength of non-coherent light, usually in the 400 to 1200 nm range, that may be further filtered to narrower bands per specific absorption coefficients of predetermined targets and may be applied to remove unwanted hair as well as vascular and pigmented dermal lesions.

 

 

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We have incorporated IPL technology into our Venus Versa system to expand that treatment offering and to build a modular, upgradable platform that affords a comprehensive solution for common aesthetic treatments. Specifically, the IPL capability permits users of the Venus Versa systems to offer their patients the service options of removing unwanted hair, treating acne vulgaris, and treating vascular and pigmented dermal lesions. Venus Versa uses a square pulse technology in which continuous pulses of the combination of certain wavelengths create a signal that alternates between a constant fixed intensity for a period of time and then changes to a state of no energy for an amount of time. This allows treatment of an area of the patient without having the tissue exposed to the undesirable lower wavelengths that would be present in a signal with a sinusoidal or other varying pattern of energy. A cooling mechanism is also used, cumulatively allowing for an effective impact using less energy per area in a given time period. This enables efficient treatment while significantly reducing and sparing the patient from the undesired side effects that are sometimes associated with IPL treatments.

 

Diode Lasers

 

Diode laser technology is a recognized technology for hair removal. The Venus Velocity system achieves hair removal, permanent hair reduction and inflammation from ingrown hair using the diode laser. The Venus Velocity employs the laser energy to skin via a chilled sapphire light guide that conductively cools the skin simultaneously with the delivery of laser energy, thereby maintaining low temperature in the epidermis to enhance the comfort of the procedure and avoid potential epidermal damage. The Venus Velocity allows us to expand our offering in the hair reduction market, which is one of the most popular non-invasive energy based aesthetic procedures in the United States.

 

Our laser technology is also incorporated into another non-invasive diode laser device, the Venus Bliss, for which we received 510(k) clearance in June 2019. The diode laser system is intended for non-invasive lipolysis of the abdomen and flanks in individuals with a Body Mass Index of 30 or less.

 

Our Products

 

Our product portfolio includes ten energy-based systems that provide solutions for various non-invasive aesthetic applications using Venus Concept’s (MP)² technology, as well as the VariPulse, and/or fractional ablative RF, IPL, or laser technologies. We have acquired two systems for hair restoration, NeoGraft in 2018 and ARTAS iX at the end of 2019. We also offer practice enhancement services.

 

 

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The ARTAS^® and ARTAS^® iX Systems and Procedure

We believe the ARTAS^® and ARTAS^® iX Systems have improved multiple phases of the hair transplantation procedure, which include harvesting, recipient site making and implantation.

 

Harvesting

During the harvesting phase of the hair restoration procedure, the robotic arm and integrated vision system work in tandem to identify the optimal hair follicles to be used in the procedure. The ARTAS vision system uses proprietary algorithms to identify individual hair follicles, growth angle, density, thickness, length and follicle grouping and to determine which grafts to dissect and the optimal order in which they should be dissected. The algorithms recalculate 60 times per second, accommodating patient movement, to provide the physician with accurate up-to-date information during the course of the procedure. We believe these assessments directly correlate to the quality of the outcome and the state of the donor area. This is important because we believe it affects how the donor area will appear following the procedure, and the potential viability for subsequent harvesting for future transplantation procedures.

The ARTAS^® System harvesting user interface provides the physician with enhanced control during the procedure. An example of the harvesting user interface appears as follows:

 

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Following the vision system’s identification of the optimal hair follicles for transplant, the ARTAS^® System dissects these follicles using a sharp needle to score the epidermis and a punch, coaxial with the needle, to separate the graft from the surrounding tissue. In the final step of the harvesting phase, the grafts are removed manually with forceps by the physician or the technician. The grafts are then cleaned, inspected and prepared for implantation.

 

During the procedure, the physician can customize the dissection incisions by choosing a needle and punch that will produce 0.8mm, 0.9mm or 1.0mm incisions. The image below illustrates a typical ARTAS^® System punch and needle:

 

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The needle travels at speeds such that, when it contacts the skin, it provides targeted precision and a cleanly scored incision. The punch then spins between 3,000 and 5,000 rpm and loosens the grafts from the surrounding tissue. In a clinical setting, we have observed that the dissection cycle takes between one to two seconds per graft, depending on the length of the graft. In a clinical setting, the ARTAS^® System has been shown to move from graft to graft at a rate of approximately one to three seconds, thereby enabling the ARTAS^® System to dissect a graft every two to five seconds, or approximately 720 to over 1,800 grafts per hour. The ARTAS^® System enables the physicians to adjust dissection parameters to accommodate for different types of skin and manipulate graft selection algorithms based on patient needs. The ARTAS^® System can be programmed to dissect as many grafts as appropriate thus maximizing the use of the donor area. It can also be programmed to dissect grafts with more than two hairs each, thereby increasing the hair yield or the number of hairs per graft.

During the harvesting phase of the hair transplantation procedure, the patient may be lightly sedated, and the integrated vision system can track patient movement and pause if excessive movement is detected.

Recipient Site Making

Sites, or incisions, are created to receive the harvested grafts. This task is generally performed by the physician. Prior to the ARTAS^® System, site making was performed manually using a hand-held tool or needle to create hundreds to thousands of tiny incisions in the scalp. This is a critical step as it creates the hair pattern in which the harvested grafts will grow. From communications with physicians we have found that, typically, a physician can manually create approximately 1,500 sites per hour. Precision and consistency, however, can be affected by experience, hand-eye coordination and fatigue.

The ARTAS^® System Site Making functionality incorporates artificial intelligence and robotics precision to strategically make surgical incision sites for implanting hair follicles, while also identifying and avoiding injuring healthy follicles in proximity of the implantation sites. This allows the patient’s hair to look more natural and prevents damaging existing healthy hair in the transplant area which we believe would result in patients with more hair than if the sites were made manually.

Robotic recipient Site Making is performed by the physician, who develops the ARTAS^® System treatment plan, or map, identifying where to make the incisions on the patient. The treatment plan is prepared using three-dimension modeling software that takes one picture of the patient’s recipient area and generates a three-dimensional map that is utilized by the ARTAS^® System. With entry angle accuracy, consistency and precise depth control, the ARTAS^® System creates the recipient sites using a small solid core needle or a blade at a rate of approximately 2,500 to 3,000 sites per hour, which is significantly faster than the approximately 1,500 sites per hour achieved manually.

 

Implantation

Following the site making phase of the hair transplantation procedure, the physician and/or technicians utilizing an ARTAS^® System without the implantation functionality will manually implant the grafts in the robotically created sites made by the ARTAS^® System. Physicians and technicians utilizing an ARTAS^® iX System can utilize the robotic functionality of the system to assist in implanting the dissected follicles. We believe this robotic implantation functionality will help further shorten the learning curve, improve the consistency and reproducibility of results by protecting permanent hair and reducing inconsistencies associated with manual implantation, and could potentially reduce the amount of time each graft spends outside of the scalp and decrease the overall time required for implantation.

 

ARTAS^® Kits for Harvesting and Site Making

 

The ARTAS^® System utilizes a set of disposable and reusable kits for our Harvesting and Site Making functionality. Each system comes with a set of reusable items. The disposable kits are included with the purchase of procedures.

 

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Venus Legacy

Venus Legacy combines (MP)² and VariPulse technologies with real-time thermal feedback to act as a workstation, providing homogeneous heating to multiple tissue depths while allowing for adjustable pulsed suction.

 

 

Venus Versa

Venus Versa is a versatile system based on a multi-application approach. It is a modular and upgradable platform that offers the most in-demand aesthetic treatments by supporting 10 optional applicators which utilize Venus Concept’s (MP)², and IPL and NanoFractional RF technologies. Designed as an open platform, the Venus Versa can be configured to best suit a practice’s needs with the ability to add additional applications as the practice grows or changes. Depending on the applicator, the platform can provide multiple aesthetic solutions.

 

 

Venus Viva

Venus Viva is an advanced, portable, fractional ablative system for dermatological procedures requiring ablation and resurfacing of the skin. Venus Viva uses NanoFractional RF and Smart Scan technologies. The combination of technologies allows ablation heated zone density control and pattern generation via a proprietary tip. The energy is delivered through 160 pins per tip into the treated skin and maintains the surrounding tissue intact and healthy to support the healing process.

 

 

Venus Freeze Plus

Venus Freeze Plus is the second generation of Venus Concept’s (MP)² family of products. The Venus Freeze Plus uses Venus Concept’s (MP)² technology. ATC is a new feature that Venus Concept added to the Venus Freeze Plus, which allows the operator to choose a target temperature within the therapeutic range and have the system adjust the output power accordingly, to automatically maintain the desired temperature. This feature allows a more intuitive user experience, and results in less variable treatment outcomes usually attributable to the differences in operator’s techniques.

 

 

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Venus Velocity

The Venus Velocity system uses pulsed laser energy of 800 mm that is absorbed by a chromophore or pigmented target (e.g., melanin in hair follicles) that has greater optical absorption at the selected laser wavelength than the surrounding tissue. Different chromophores are targeted for different clinical indications. The selective absorption of different wavelengths leads to localized heating and thermal denaturation and destruction of the anatomic hair follicle target with minimal effect on surrounding tissues. The chilled sapphire light guide conductively cools the skin simultaneously with the delivery of laser energy, thereby maintaining low temperature in the epidermis to enhance the comfort of the procedure and avoid potential epidermal damage.

 

 

Venus Fiore

Venus Fiore incorporates Venus Concept’s (MP)² technology, supporting three different applicators. Venus Fiore has a desktop configuration and is portable and compact. It incorporates ATC technology, allowing the operator to choose a target temperature within the therapeutic range and have the system adjust the output power accordingly, to automatically maintain the desired temperature. The vaginal applicator incorporates three pairs of electrodes, each pair of electrodes accompanied by a temperature sensor, allowing the operator to control the temperature in the distal, middle and proximal thirds of the vaginal canal independently. Venus Fiore has received clearance in the EU and Israel, but is not yet cleared or approved in the United States or Canada.

 

Venus Heal

The Venus Heal has a desktop configuration and is portable and compact. The Venus Heal incorporates Venus Concept’s RP3 technology (a synergistic combination of Multi-Polar Radio Frequency and PEMF, along with massage) supporting two different applicators. Venus Heal also incorporates ATC technology, allowing the operator to choose a target temperature within the therapeutic range, while the system adjusts the output power accordingly, to automatically maintain the temperature at the desired level. The device incorporates a 15” touch screen allowing an intuitive and friendly user interface.

 

 

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Venus Bliss

The Venus Bliss device consists of a console (main unit), one RF applicator and four diode laser applicators. The system, via its different applicator types, delivers laser and/or bipolar RF energies, vacuum pressure, and pulsed magnetic fields to the skin and the underlying tissues of the treatment area. The console of the Venus Bliss device contains a power supply unit, laser and RF controllers, a suction module, a controller unit, laser water cooling system, a touch-screen user interface and display panel. Venus Bliss delivers laser energy to the subcutaneous tissue layers via the four diode laser applicators connected to the console. The console utilizes diode laser modules as sources of optical energy and the optical output is fiber-coupled through the applicator to the treatment area so to increase the temperature of the fat resulting in fat breakdown (lipolysis). In addition, the Venus Bliss device through the (MP)² applicator provides RF treatments combined with emitted magnetic fields and vacuum massaging. The RF heating effect, together with the non-thermal magnetic fields and vacuum, leads to the temporary reduction in the appearance of cellulite, temporary relief of muscle pain and spasm, and improvement of local blood circulation in the subdermal layers.

 

Venus Glow

Venus Glow consists of a console and applicator. It is used to improve skin appearance using powerful tri-modality treatment combining a rotating tip, a vacuum modality and a jet. Venus Glow deep-cleans pores by removing impurities such as daily dirt and debris, dry or dead skin cells, and excess sebum.

 

NeoGraft®

Venus Concept’s NeoGraft® device is an advanced hair restoration technology with an automated FUE and implantation system. The procedure leaves no linear scar and is minimally invasive.

 

 

ARTAS^® iX

The ARTAS^® System is comprised of the patient chair, the cart, which includes the robotic arm, integrated vision system, artificial intelligence algorithms and a series of proprietary end effectors, which are the various devices at the end of the robotic arm, such as the automated needle and punch, that interact with the patient’s scalp and hair follicles and perform various clinical functions.

 

 

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The image below depicts the ARTAS^® iX System cart, including the robotic arm and the needle mechanism which houses the automated needle and punch used for follicle dissection and site making.

 

Venus Epileve

The Venus Epileve system uses pulsed laser energy of 800 mm that is absorbed by a chromophore or pigmented target (e.g., melanin in hair follicles) while skin surface is being chilled, for different indications of hair removal and permanent hair reduction. Venus Epileve is intended to provide an entry level, affordable solution for non-traditional markets for hair removal of all skin types. Epileve has obtained both CE mark and Health Canada license.

Products in Development

 

On an ongoing basis, we work to bring new and innovative products to market. We are developing the following products and technologies:

 

Venus Glow Serums

 

We are developing a series of topical serums to be used with our Venus Glow system.

 

Directional Skin Tightening (DT) Technology

 

DT is intended as a non-surgical alternative to lift and tighten skin for procedures typically requiring surgical intervention that uses artificial intelligence and robotics to achieve the intended outcomes. The punches DT utilizes for coring are designed not leave scars on tissue. The skin will be contracted after coring by applying a flexible patch to the area which will allow healing of the skin with predefined directional effect.

 

Magnetic Muscle Stimulation Technology

 

Magnetic Muscle Stimulation (MMS) is body contouring technology that is intended to be complimentary to our Venus Bliss device. MMS is intended to create volume in predefined areas of the body by utilizing magnetic fields to create controlled muscle contractions. MMS will be operated with two applicators for use on symmetrical pairs of the muscles and will use smart algorithms to determine the strength and sequences of muscle contraction and relaxation.

 

 

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Venus Legacy 2

 

Venus Legacy 2 is intended to be the next generation of the well-accepted Venus Legacy product line. The Venus Legacy 2 is intended to extend and revive the original Venus Legacy system product line, which has been in the worldwide market for over 5 years. The device will combine (MP)² and VariPulse technologies with real-time thermal feedback and ATC to provide homogeneous heating to multiple tissue depths while allowing for adjustable pulsed suction to further support deep energy penetration, resulting in enhanced lymphatic drainage and improved circulation stimulation. We are planning to include some advanced user feedback features, such as a thermal camera in the Venus Legacy 2.

 

VeroGrafter Services

 

In the United States, we offer the services of a group of independently contracted technicians who are certified to assist physicians during a hair restoration procedure. These technicians, who we market as “VeroGrafters”, must successfully complete a yearly certification process to remain active. VeroGrafters service is currently offered for NeoGraft procedures and we expect we offer VeroGrafters for ARTAS procedures in 2020.

 

2two5 Services

 

2two5 is our internal advertising agency focused on localized marketing services for small to mid-sized business owners who have purchased products sold by us. Currently there are three areas of focus: (i) digital lead generation; (ii) local search engine optimization (SEO) and reputation management; and (iii) website development.

 

Digital Lead Generation. More commonly referred to as Pay-Per-Click Marketing, the business owners establish a recommended campaign budget that we manage on their behalf with a goal of generating qualified prospective patient phone calls and email leads for their practice. We manage the strategy, creative development, campaign execution, and media spend on three main platforms (Google, Facebook and Instagram) and provide real time dashboard reporting to demonstrate the success of their digital marketing programs.

 

Local SEO & Reputation Management. This service is offered to ensure the doctors are represented accurately and fairly on online directories and they can monitor and respond to their reviews. We ensure their Google My Business Listings for all locations are done accurately, optimized for Local SEO success, and updated regularly to reflect any change in business hours, services offered, additional locations, etc. Last, we setup, all customers on Google Search Console to monitor any changes or issues with their website and organic traffic.

 

Website Development. Our team of Web Development experts create, develop and maintain engaging, fully responsive, mobile-friendly aesthetic practice websites that are not only SEO-ready, but also optimized for conversions to help generate more patient leads from both organic and Pay-Per-Click traffic. These websites are hosted in secure, high-speed web servers, loaded with custom colors, unique branding, stock images and include SEO-optimized aesthetic text content. They also bring functionality that allows customers to add pages, edit content, integrate with social platforms, and Google Analytics.

 

Practice Enhancement Services

 

To support the growth initiatives of our customers, we have built a practice enhancement offering that provides our customers with a fully integrated marketing support program along with business and marketing tools to grow their practices, improve their financial and business performance, and maximize their return on investment, while also supporting our sale of products and ancillary services. Complimentary practice enhancement services are included with the purchase of a system under our subscription model. These services include marketing support and media exposure, such as email marketing, search engine optimization, branding, web presence, social media presence, photography and videography, copywriting, and event planning, in each case specifically designed for physician practices. For an additional fee, we offer incremental practice enhancement services such as a specific digital marketing package, custom website redesign, and customized video and photography shoots.

 

 

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Vero Hair Practice Development Services

 

To support the growth initiatives of our hair restoration customers, we have built a specialized practice development team. This team offers support in all areas of marketing and clinic support. Some of the key services include clinic staff training, marketing of the procedure and device online and off-line. The practice development services help drive utilization of the ARTAS^® system and procedure kits and consumables.

 

Clinical Developments

 

We have invested in research and development to support our technology, marketing and post-marketing surveillance. We also have a portfolio of 15 peer-reviewed publications and more than 20 white papers, many of which pertain to indications cleared outside of the United States to educate users in other countries and to study expanded indications in the United States. Authors for several of these publications hold stock options in Venus Concept or were consultants for us.

 

One of the published studies examined the thermal levels reached with Venus Concept’s Venus Freeze system. The results indicated that these systems achieve homogeneous dermal heating. Another study reviewed the use of (MP)² technology for wrinkles and rhytides treatment. In addition, to test the effectiveness and safety of Venus Viva and its Nano-Fractional technology, a study examined the performance of Venus Concept’s fractional RF technology on skin texture in the United States. In this trial, subject improvement was assessed after one month and after two months, and subject satisfaction was assessed through surveys. Reviewers reported that the subjects demonstrated statistically significant and measurable reductions in minor wrinkles, and textual appearance in the skin. In addition, over 80% of subjects indicated in their survey satisfaction with treatments.

 

In a 60-patient clinical study done with the Venus Bliss device, all participants received a single diode laser treatment to either their flanks or abdomen. Based on the data review, subjects saw a statistically significant reduction in adipose layer thickness as measured by ultrasound, 6- and 12-weeks following treatment. Greater than 90% of the subjects found the treatment to be comfortable and the majority were satisfied with the results.

 

The IPL technology used in Venus Versa has shown to be versatile and effective for treating vascular and pigmented lesions, acne and rosacea.

 

Venus Concept has a number of ongoing clinical trials covering both new technologies and the development of expanded indications for existing technology. Clinical trials are conducted frequently to support existing technologies and their respective enhancements and upgrades.  

 

Sales and Marketing

 

We market and sell our products and services to the traditional medical aesthetic market including plastic surgeons and dermatologists. We also sell in certain markets to a broad base of non-traditional physician markets, including general and family practitioners and aesthetic medical spas.

 

Through our wholly-owned and majority-owned subsidiaries, we sell our products and services both through a traditional sales model as well as through our subscription model. In select markets, we enter into distribution agreements with local distributors.

 

Direct Sales

 

We currently provide our subscription model and associated marketing support programs through its wholly-owned subsidiaries in the United States, Canada, United Kingdom, Japan, South Korea, Mexico, Argentina, Colombia, Spain, France, Germany, Israel and Australia, as well as through Venus Concept’s majority-owned subsidiaries in China, Hong Kong, Singapore, Indonesia, Vietnam, India, Italy, Bulgaria, Russia, Kazakhstan and South Africa. In our international direct operations, whether wholly-owned or a majority-owned subsidiary, we deliver devices under both our subscription model and traditional sales model.  

 

 

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Direct sales force. In the United States and select international markets, we use our direct sales force to sell our systems and other products and services. Our direct sales force works directly with our customers to provide comprehensive education and training on the use of our systems.  As of December 31, 2019, we had a direct sales and marketing team of approximately 245 employees, managed by five Vice Presidents of Sales for various international markets and one Vice President of Global Marketing. We plan to continue to expand our direct sales organization internationally to help facilitate further adoption among a broad physician market.

 

Distributors. In countries where we do not operate directly, we sell through distributors. As of December 31, 2019, we had distribution agreements in approximately 36 countries. We enter into both exclusive and non-exclusive distribution agreements. Our distribution agreements generally provide the distributor with a right to distribute our systems for an initial term of one to three years, with certain agreements automatically renewing for a period of two to three additional years. Our distribution agreements also typically provide the exclusive right to distribute our systems within a designated territory and a right of first refusal to distribute any of our new systems offered in the territory. Each agreement sets forth the minimum quarterly purchase commitments. If the distributor fails to meet one of its minimum quarterly purchase commitments, we can convert the distributor to a non-exclusive distributor during the then-remaining term or it can terminate the agreement. To provide more comprehensive customer support, these agreements require our distributors to provide after sales service to customers, such as training and technical support, and various marketing activities, such as preparing and executing marketing plans and working with key market leaders in the designated territory to promote the product.

 

Marketing and Branding Programs

 

We are focused on, and invest heavily in, direct-to-consumer marketing initiatives to increase awareness of our products and services. We believe our marketing activities are both cost effective and critical in supporting the continued growth and development of our business. As of December 31, 2019, we had a Vice President of Global Marketing and a Director of Global Brand Marketing, with marketing associates located in various markets who specifically focus on implementing Venus Concept’s marketing initiatives.

 

We implemented a public relations outreach strategy that incorporates both digital media and top national media channels in the fashion and beauty industries and have a presence on the most popular social media channels, such as Facebook, Twitter, YouTube, Pinterest, LinkedIn and Instagram. We also raise our profile through large media events in major metropolitan centers, such as New York, Milan, Los Angeles, Toronto, London, Paris, and Madrid, and engage in regular meetings with journalists, media outlets, celebrity doctors, and representatives of the fashion and beauty industries.  We also attend major medical and scientific meetings, as well as trade shows.  Since some countries require customized marketing programs, we have hired country-specific marketing managers to ensure that marketing programs are executed successfully in those jurisdictions.

 

Customer Support

 

We provide our physician customers and authorized distributors with customer support through our fully integrated marketing program and strong clinical and technical support teams.

 

Practice Enhancement Services

 

To support the growth initiatives of our customers, we have built a practice enhancement unit that provides  customers with a fully integrated marketing support program with business and marketing tools to grow their practices, improve their financial and business performance, and maximize their return on investment while also supporting our sale of products and ancillary services. Our practice enhancement program includes the following features:

 

 

 

 

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Technical and Clinical Support

 

We provide a warranty for many of our products against defects for up to three years, with certain products carrying a warranty for a more extended period. Once the warranty expires, our customers have the option of purchasing a service contract, which is typically for a term of one to three years.    

 

We maintain a technical and clinical support team to field inquiries, troubleshoot product issues, facilitate sales activities and support the commercial activities of our direct offices and its international distributors. We provide immediate response technical support to our physician customers and distributors year-round. In the event that an issue arises, our technical support personnel will work with our customers to determine if a technical issue may be resolved over the telephone or requires a service visit. In markets where we do not have our own service engineers, we service and support our products through arrangements handled by our independent distributors. In order to maximize customer “up time,” we proactively deploy replacement systems, modules, and components to strategic hubs worldwide.

 

Manufacturing and Quality Assurance

 

We have our own research and development center in Yokneam, Israel and uses four ISO-certified contract manufacturers in Karmiel, Israel; Nazareth, Israel; Mazet, France and Weston, Florida where it manufactures the Venus Legacy and Venus Viva systems in a FDA-registered facility. During the second half of 2018, we began to assemble the ARTAS^® iX System in San Jose, California, while reusable and disposable kits are assembled exclusively for us by NPI Solutions, Inc., or NPI based in Morgan Hill, California.

 

We work closely with our manufacturers and perform final quality control testing using our own employees stationed in the manufacturing facilities. Having over 85% of the production of our systems in close proximity to our research and development and operations facilities enables us to control the entire process from product development through manufacturing and final testing, which enables us to provide advanced, high-quality systems as well as the flexibility to create customized solutions for our customers. Also, using multiple manufacturers allows us a greater degree of flexibility in adjusting production levels to meet fast changing market demand. We do not have any long-term supply agreements for components.

 

 

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Manufacturing facilities that produce medical devices intended for distribution in the United States and internationally are subject to regulation and periodic unannounced inspection by FDA and other domestic and international regulatory agencies. In the United States, we are required to manufacture our products in compliance with FDA’s QSR, which covers the methods and documentation of the design, testing, control, manufacturing, labeling, quality assurance, packaging, storage, and shipping of our products. In international markets, we are required to obtain and maintain various quality assurance and quality management certifications. We have obtained the following international certifications: ISO 13485:2016 Medical devices — Quality management systems — Requirements for regulatory purposes, ISO 13485 under Medical Devices Single Audit Program, or MDSAP, in Canada, Ordinance 169 certification (Japan), CE Certificate of Conformity in accordance with Annex II (Full Quality System) to the Medical Devices Directive (EEA), and MDSAP.

 

Venus Concept maintains a quality system designed to be compliant with quality system management and QSR and have procedures in place designed to ensure that all products and materials purchased by us conform to specified requirements, including evaluation of suppliers, and where required, qualification of the components supplied.

 

Our current facilities are adequate to support our operations.

 

Research and Development

 

Our ongoing research and development activities are primarily focused on improving and enhancing our current technologies, products, and services, as well as expanding our current product offering with the introduction of new products for different aesthetic, medical and hair restoration applications. Our research and development efforts related to our technologies currently include research to expand indications, broaden our offering of system applicators, advance our proprietary (MP)² technology, refine our Harvesting and Site Making functions, as well as the  implantation functionality for the ARTAS^® iX System, develop design improvements and new products, and implement a technology platform to record and collect information on each treatment procedure. For the years ended December 31, 2019 and 2018, we incurred research and development expenses of $8.0 million and $7.0 million, respectively. We expect our research and development expense to vary as different development projects are initiated and completed, as we invest in research, clinical studies, regulatory affairs and development activities over time, and as we continue to expand our business.

 

Intellectual Property

 

Portfolio

 

We rely on a combination of patent, copyright, trademark and trade secret laws, and confidentiality and invention assignment agreements to protect our intellectual property rights. As of December 31, 2019, our patent portfolio is comprised of 8 issued U.S. patents which cover our (MP)² technology that are associated with two different patent families (the earliest of which will expire in 2022), 94 issued U.S. patents primarily covering the ARTAS System and methods of use (the earliest of which expire in 2021), 18 pending U.S. patent applications, 1 pending U.S. provisional patent application, 135 issued foreign counterpart patents, and 39 pending foreign counterpart patent applications.

 

As of December 31, 2019, our trademark portfolio included the following trademark registrations, pending trademark applications or common law trademark rights, among others: Venus, Venus Concept®, Venus Fiore®, Venus Freeze®, Venus Freeze Plus®, Venus Glow™, Venus Heal™, Venus Legacy®, Venus Skin®, Venus Viva®, Venus Versa®, Venus Bliss®, Restoration Robotics®, ARTAS®, ARTAS® iX, Venus Concept delivering the promise, NeoGraft® and (MP)2. We continue to file new trademark applications in many countries to protect our current and future products and related slogans.

 

 

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Intellectual Property Transfer Agreement

 

In August 2013, Venus Concept Ltd. entered into a license agreement for the rights to an invention for fractional RF treatment of the skin with the developers of the technology. Pursuant to the license agreement, the developers granted to Venus Concept Ltd. an exclusive worldwide, perpetual, irrevocable license to develop and commercialize their inventions and any product into which it is integrated. As consideration for such license, Venus Concept Ltd. agreed to pay the developers 7% of the gross income received by it from sales of the Venus Viva system and the related consumables and $1,500 per Venus Versa system, which includes the IPL applicator, up to an aggregate amount of $3.0 million. With respect to gross income from sales of the Venus Viva system and the related consumables in China, Hong Kong, Israel and Italy, payment is determined by multiplying the sales by Venus Concept Ltd.’s percentage equity ownership in those majority-owned subsidiaries. One of the developers of the technology is Boris Vaynberg, our Chief Technology Officer.

 

In 2014, the developers executed a patent assignment document and Venus Concept Ltd. filed it with the USPTO to provide notice of the transfer and to perfect its rights. In 2016, the parties executed an amendment to the 2013 license agreement to memorialize the transfer that was filed with the USPTO, among other things. For the years ended December 31, 2019 and 2018, Venus Concept paid Mr. Vaynberg $370,000 and $280,000 respectively, under these arrangements.

 

License Agreement with HSC Development LLC and James A. Harris, MD

 

In July 2006, we entered into a license agreement, or the HSC license agreement, with HSC Development LLC, or HSC, and James A. Harris, M.D., as amended, pursuant to which we received an exclusive, worldwide license to develop, manufacture and commercialize products covered by any of the licensed patent rights or that incorporate the licensed technology in the field of performance of hair removal and implantation, including transplantation, procedures using a computer controlled system in which a needle or other device carried on a mechanized arm is oriented to a follicular unit for extraction of same, or to an implant site for implantation of a follicular unit, or some combination thereof. Under the HSC license agreement, we are developing the ARTAS^® System to be utilized as a robotic system to assist a physician in performing hair restoration procedures. In consideration for the license, we issued to HSC 25,000 shares of our common stock, prior to the Company’s 1-for-10 reverse stock split, and paid HSC a one-time payment of $25,000. The license grant is perpetual, and the license agreement does not provide a right for HSC or Dr. Harris to terminate the HSC license agreement. The licensed patents cover, in general, a method and device for the extraction of follicular units from a donor area on a patient. The method includes scoring the outer skin layers with a sharp punch, and then inserting a blunt punch into the incision to separate the hair follicle from the surrounding tissue and fatty layer. The method and device significantly decrease the amount of follicular transection and increase the rate at which follicular units can be extracted. There are other embodiments not herein disclosed. The licensed patents will expire from 2025 through 2030.

 

Competition

 

The medical technology and aesthetic product markets are highly competitive and dynamic and are characterized by rapid and substantial technological development and product innovation. Demand for our systems is impacted by the products and procedures offered by our competitors. Certain of our systems also compete against conventional non-energy-based treatments, such as Botox and collagen injections, chemical peels, and microdermabrasion. In the U.S., we compete against companies that have developed minimally invasive and non-invasive medical aesthetic procedures. Outside of the U.S., likely due to less stringent regulatory requirements, there are more aesthetic products and procedures available in international markets than are cleared for use in the U.S. Sometimes, there are also fewer limitations on the claims our competitors in international markets can make about the effectiveness of their products and the manner in which they can market them. As a result, we may face a greater number of competitors in markets outside of the U.S. We also compete generally with medical technology and aesthetic companies, including those offering products and products unrelated to skin treatment. Recently, there has been consolidation in the aesthetic industry leading to companies combining their resources, which increases competition and could result in increased downward pressure on our system prices.

 

 

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In the surgical hair restoration market, we consider our direct competition to be strip surgeries and FUE procedures using hand-held devices. Many of our surgical device and equipment competitors have greater capital resources, sales and marketing operations and service infrastructures than we do, as well as longer commercial histories and more extensive relationships with physicians. Strip surgery and some manual FUE procedures have a greater penetration into the hair restoration market. Our indirect competition in the hair restoration market also includes non-surgical treatments for hair loss, such as prescription therapeutics, including Propecia, and non-prescription remedies, such as wigs, hair pieces and spray-on applications.

 

We believe that its systems compete largely on the basis of the following factors:

 

 

Many of our competitors are larger, more experienced companies that have substantially greater resources and brand recognition than we do. Some of these companies have a broad range of product offerings, large direct sales forces and long-term customer relationships with the physicians we target, which could make our market penetration efforts more difficult.

 

Government Regulation

 

The design, development, manufacture, testing and sale of Venus Concept’s products are subject to regulation by numerous governmental authorities, including FDA, and corresponding state and foreign regulatory agencies.

 

Regulation by FDA

 

In the United States, the Federal Food, Drug, and Cosmetic Act, or FDCA, FDA regulations and other federal and state statutes and regulations govern, among other things, medical device design and development, preclinical and clinical testing, premarket clearance or approval, registration and listing, manufacturing, labeling, storage, advertising and promotion, sales and distribution, export and import, and post-market surveillance. FDA enforces the FDCA and the regulations promulgated pursuant to the FDCA.

 

Each medical device that we wish to distribute commercially in the United States will require marketing authorization from FDA prior to distribution, unless exempt. The two primary types of FDA marketing authorization applicable to a device are premarket notification, also called 510(k) clearance, and premarket approval, also called PMA approval. The type of marketing authorization is generally linked to the classification of the device. FDA classifies medical devices into one of three classes (Class I, II, or III) based on the degree of risk FDA determines to be associated with a device and the level of regulatory control deemed necessary to ensure the device’s safety and effectiveness for its intended use(s). Devices requiring fewer controls because they are deemed to pose lower risk are placed in Class I or II. Class I devices are deemed to pose the least risk and are subject only to general controls applicable to all devices, such as requirements for device labeling, and adherence to FDA’s current Good Manufacturing Practices, or cGMP, and regulation, as reflected in its QSR. Class II devices are intermediate risk devices that are subject to general controls and may also be subject to special controls such as performance standards, product-specific guidance documents, special labeling requirements, patient registries, or post-market surveillance. Class III devices are those for which insufficient information exists to assure safety and effectiveness solely through general or special controls and include life-sustaining, life-supporting or implantable devices, devices of substantial importance in preventing impairment of human health, or which present a potential, unreasonable risk of illness or injury.

 

 

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Most Class I devices and some Class II devices are exempted by regulation from the 510(k) clearance requirement and can be marketed without prior authorization from FDA. Some Class I devices that have not been so exempted and most Class II devices are eligible for marketing through the 510(k) clearance pathway. By contrast, devices placed in Class III generally require PMA approval or approval of a de novo reclassification petition prior to commercial marketing. FDA’s 510(k) clearance process usually takes from three to twelve months, but can take longer. For products subject to PMA, the regulatory process generally takes from one to three years or even longer, from the time the application is filed with FDA and involves substantially greater risks and commitment of resources than either the 510(k) clearance or de novo processes.

 

510(k) Clearance

 

To obtain 510(k) clearance for a medical device, an applicant must submit a premarket notification to FDA demonstrating that the device is “substantially equivalent” to a previously cleared 510(k) device or a device that was in commercial distribution before May 28, 1976 for which FDA has not yet called for PMA approval, commonly known as the “predicate device.” A device is substantially equivalent if, with respect to the predicate device, it has the same intended use and has either (i) the same technological characteristics or (ii) different technological characteristics and the information submitted demonstrates that the device is as safe and effective as a legally marketed device and does not raise different questions of safety or effectiveness. A showing of substantial equivalence sometimes, but not always, requires clinical data. Generally, the 510(k) clearance process can exceed 90 days and may extend to a year or more.

 

After a device receives 510(k) marketing clearance, any modification that could significantly affect its safety or effectiveness, or that would constitute a major change or modification in its intended use, will require a new 510(k) marketing clearance or, depending on the modification, a de novo classification or PMA approval. FDA requires each manufacturer to determine whether the proposed change requires submission of a 510(k) or a PMA in the first instance, but FDA can review any such decision and disagree with a manufacturer’s determination. Many minor modifications today are accomplished by a letter-to-file in which the manufacture documents the change in an internal letter-to-file. The letter-to-file is in lieu of submitting a new 510(k) to obtain clearance for every change. FDA may review these letters-to-file during an inspection. If FDA disagrees with a manufacturer’s determination that no 510(k) was required for the change, FDA can require the manufacturer to cease marketing and/or request the recall of the modified device until 510(k) marketing clearance or PMA approval is obtained. Also, in these circumstances, we may be subject to significant regulatory fines or penalties.  In addition, FDA may not approve or clear our products for the indications that are necessary or desirable for successful commercialization or could require clinical trials to support any modifications. FDA has issued guidance intended to assist manufacturers in determining whether modifications to cleared devices require the submission of a new 510(k), and such guidance has come under scrutiny in recent years, the practical impact of which is unclear.

 

We have made modifications to our products in the past and have determined based on our review of the applicable FDA regulations and guidance that in certain instances new 510(k) clearances or PMA approvals were not required.

 

As part of an internal review of our regulatory clearances in the U.S., we determined that Special 510(k) applications were necessary related to an earlier modification to two of our FDA-cleared devices. Specifically, because we added to two of our FDA-cleared devices additional FDA-cleared applicators not initially considered in the device clearance submissions, we believed that Special 510(k) applications should have been filed to allow FDA to review the incorporation into the cleared devices of the separately cleared applicators. We filed one of the Special 510(k) submissions with FDA. FDA requested that we instead submit a Traditional 510(k) and provide additional information. We have accordingly modified the Special 510(k) submitted to FDA to a Traditional 510(k) application for this device, related to these modifications. Generally the 510(k) initial response process takes approximately 90 days, however, the overall process may extend to 180 days or more. We cannot be certain that FDA will respond to our submission in a timely manner or that clearance will be obtained. We also submitted a Traditional 510(k) for the second device and, on September 6, 2019, received 510(k) clearance from FDA. We believe that the modifications do not affect safety or efficacy, do not affect the intended use of the device, and do not alter the fundamental scientific technology of the device, however, we cannot be certain that FDA will agree with our assessment. FDA may not clear the device or may take other action against us as described above, which could have a material adverse effect on our business.

 

 

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De Novo Reclassification

 

If there is no known predicate for a device (i.e., a legally marketed Class I or II device with comparable indications), a company may request a de novo reclassification of the product. De novo reclassification generally applies where there is no predicate device and FDA believes the device is sufficiently safe so that no PMA should be required. FDA’s de novo reclassification process has been streamlined to allow a company to request that a new product classification be established based on information provided by the requesting company. The “direct” de novo process allows a company to submit a reclassification petition without the company needing to submit a 510(k) clearance application first. The submitter also must provide draft Special Control(s) for the product. The Special Controls specify the recommendations for submission of subsequent devices for the same intended use. If a product is classified as Class II through the “direct” de novo review process, then that device may serve as a predicate device for subsequent 510(k) pre-market notifications. The FDA may take a year or more to reach a decision on  the petition and issue a new product code. Should FDA fail to approve a “direct” de novo petition, or establish a new product code, PMA approval may be required.

 

PMA Approval

 

A PMA application must be submitted if the device cannot be cleared through the 510(k) process and is found ineligible for de novo reclassification. The PMA application process is generally more costly and time-consuming than the 510(k) process. A PMA application requires the payment of significant user fees. PMA applications must be supported by valid scientific evidence, which typically requires extensive data, including technical, preclinical, clinical, and manufacturing data, to demonstrate to FDA’s satisfaction the safety and effectiveness of the device. A PMA application must also include, among other things: a complete description of the device and its components; a detailed description of the methods, facilities and controls used to manufacture the device; and proposed labeling.

 

FDA has 45 days from its receipt of a PMA to determine whether the application will be accepted for filing based on the agency’s threshold determination that it is sufficiently complete to permit substantive review. Once the submission is accepted for filing, FDA begins an in-depth review. Although FDA by statute has 180 days to review the “accepted application”, review of the application can take between one and three years or longer. During this review period, FDA may request additional information or clarification of information already provided. Also, during the review period, an advisory panel of experts from outside FDA may be convened to review and evaluate the application and provide recommendations to FDA as to the approvability of the device. In addition, FDA will conduct a pre-approval inspection of the manufacturing facility or facilities to ensure compliance with the QSR.

 

Approval of FDA review of an initial PMA application may require several years to complete. FDA can delay, limit, or deny approval of a PMA application for many reasons, including:

 

 

 

 

If FDA evaluations of both the PMA application and the manufacturing facilities are favorable, FDA will either issue an approval letter or an approvable letter, which usually contains a number of conditions that must be met in order to secure final approval of the PMA. If FDA’s evaluation of the PMA or manufacturing facilities is not favorable, FDA will deny approval of the PMA or issue a not approvable letter. A not approvable letter will outline the deficiencies in the application and, where practical, will identify what is necessary to make the PMA approvable. FDA may also determine that additional clinical trials are necessary, in which case the PMA approval may be delayed for several months or years while the trials are conducted and then the data must be submitted in an amendment to the PMA. Once granted, PMA approval may be withdrawn by FDA if compliance with post-approval requirements, conditions of approval or other regulatory standards is not maintained, or problems are identified following initial marketing.

 

 

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Certain changes to an approved device, such as changes in manufacturing facilities, methods, or quality control procedures, or changes in the design performance specifications, which affect the safety or effectiveness of the device, require submission of a PMA supplement. PMA supplements often require submission of the same type of information as a PMA, except that the supplement is limited to information needed to support any changes from the device covered by the original PMA and may not require as extensive clinical data or the convening of an advisory panel. Certain other changes to an approved device require the submission of a new PMA, such as when the design change causes a different intended use, mode of operation, and technical basis of operation, or when the design change is so significant and the data that were submitted with the original PMA do not provide reasonable assurance of safety and effectiveness.

 

Clinical Trials

 

Clinical trials are almost always required to support FDA’s approval of a premarket approval application and are sometimes required for 510(k) clearances. If a device presents a “significant risk,” as defined by FDA, to human health, the device sponsor may need to file an investigational device exemption (“IDE”) application with FDA and obtain an IDE approval prior to commencing the human clinical trials. The IDE application must be supported by appropriate data, such as animal and laboratory testing results, showing that it is safe to test the device in humans and that the testing protocol is scientifically sound. The IDE application must be approved in advance by FDA for a specified number of patients, unless the product is deemed a “non-significant risk” device and eligible for more abbreviated IDE requirements. Clinical trials for a significant risk device may begin once the IDE application is approved by FDA and the appropriate institutional review boards, or IRBs. Clinical trials are subject to extensive monitoring, recordkeeping and reporting requirements. Clinical trials must be conducted under the oversight of an IRB and must comply with FDA regulations, including but not limited to those relating to good clinical practices. To conduct a clinical trial, the devices sponsor is also required to obtain the patients’ informed consent in form and substance that complies with both FDA requirements and applicable state and federal privacy and human subject protection regulations. Any future clinical trials must be conducted in accordance with FDA regulations and applicable federal and state regulations concerning human subject protection, including informed consent and healthcare privacy regulations. A clinical trial may be suspended by FDA or the IRB at any time for various reasons, including a belief that the risks to the study participants outweigh the benefits of participation in the study. Even if a study is completed, the results of its clinical testing may not demonstrate the safety and efficacy of the device or may be equivocal or otherwise not be sufficient to obtain clearance or approval of the sponsor’s device.

 

The Food and Drug Administration Amendments Act, or FDAAA, expanded the federal government’s clinical trial registry and results databank maintained by the National Institutes of Health, or NIH, to include all (with limited exceptions) medical device trials. In particular, it requires certain information about device trials, including a description of the trial, participation criteria, location of trial sites, and contact information, to be sent to NIH for inclusion in a publicly accessible database. In addition, the results of clinical trials that form the primary basis for efficacy claims or are conducted after a device is approved or cleared must be posted to the results databank. Under FDAAA, companies that violate these and other provisions of the law are subject to substantial civil monetary penalties.

 

Similarly, in Europe a clinical study must be approved by the local ethics committee and in some cases, including studies of high-risk devices, by the ministry of health in the applicable country. In the EU, physico-chemical tests carried out on the medical device may be necessary in order to obtain the CE mark. These tests must be performed by accredited laboratories for Class II b and III medical devices. The reports and tests are required to be filed in a technical file submitted to the notified body for validation of and obtaining the CE mark. Regulation 2017/745 applicable as of May 2020 in the EU will significantly strengthen the requirements for clinical evaluation (EC). The clinical evaluation for class II b and class III medical devices will be based on a critical evaluation of relevant scientific publications, the results of all available clinical investigations as well as the consideration of other medical devices with the same purpose. Regulation 2017/745 notably requires the manufacturer to carry out a post-marketing safety monitoring plan, which includes post-marketing clinical follow-ups (SCAC) in order to update information about the devices marketed throughout its life cycle, and notably any adverse effects.

 

 

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Post-market Regulation

 

Any devices that are manufactured or distributed pursuant to clearance or approval by FDA are subject to pervasive and continuing regulation by FDA and certain state agencies. After a device is placed on the market, numerous regulatory requirements continue to apply. These include:

 

 

 

 

 

 

 

 

 

 

We may be subject to similar foreign laws that may include applicable post-marketing requirements such as safety surveillance. Our manufacturing processes are required to comply with the applicable portions of the QSR, which cover the methods and the facilities and controls for the design, manufacture, testing, production, processes, controls, quality assurance, labeling, packaging, distribution, installation and servicing of finished devices intended for human use. The QSR also requires, among other things, maintenance of a device master file, device history file, and complaint files. As a manufacturer, we are subject to periodic scheduled or unscheduled inspections by the FDA. A failure to maintain compliance with the QSR requirements could result in the shut-down of, or restrictions on, manufacturing operations and the recall or seizure of products. The FDA has broad regulatory compliance and enforcement powers. If the FDA determines that we failed to comply with applicable regulatory requirements, it can take a variety of compliance or enforcement actions, which may result in any of the following sanctions:

 

 

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Labeling and promotional activities are subject to scrutiny by FDA and, in certain circumstances, by the Federal Trade Commission. Medical devices approved or cleared by FDA may not be promoted for unapproved or uncleared uses, otherwise known as “off-label” promotion. Medical devices requiring clearance or approval, but for which such clearance/approval has not been obtained, also must not be marketed. FDA and other agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses, and a company that is found to have improperly promoted off-label uses may be subject to significant liability, including substantial monetary penalties and criminal prosecution.

 

We received an inquiry from FDA in August 2018 regarding off-label or unapproved uses of Venus Fiore. However, we never marketed or promoted Venus Fiore in the United States and we explained this to the agency. We subsequently added geoblocker functionality to our website, to portray accurately what devices we are marketing in the United States.

 

Export of Our Products

 

Export of products subject to the 510(k) notification requirements, but not yet cleared to market, is permitted with FDA authorization provided certain requirements are met. Unapproved or uncleared products subject to the PMA requirements may be exported if the exporting company and the device meet certain criteria, including, among other things, that the device complies with the laws of the receiving country, has valid marketing authorization from the appropriate authority and the company submits a “Simple Notification” to FDA when Venus Concept begins to export. Importantly, however, export of such products may be limited to certain countries designated by statutory provisions, and petitions may need to be submitted to FDA to enable export to countries other than those designated in the statutory provisions. The petitioning process can be difficult, and FDA may not authorize unapproved or uncleared products to be exported to countries to which a manufacturer wishes to export. Devices that are adulterated, devices whose label and labeling does not comply with requirements of the country receiving the product, and devices that are not promoted in accordance with the law of the receiving country, among others, cannot be exported.

 

Fraud and Abuse Regulations

 

Federal and state governmental agencies subject the healthcare industry to intense regulatory scrutiny, including heightened civil and criminal enforcement efforts. These laws constrain the sales, marketing and other promotional activities of medical device manufacturers by limiting the kinds of financial arrangements Venus Concept may have with physicians and other potential purchasers of Venus Concept’s products. There exist numerous federal and state health care anti-fraud laws, including the federal anti-kickback statute which prohibits, among other things, persons from knowingly and willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, in cash or in kind, to induce or reward either the referral of an individual for, or the purchase, order or recommendation of, items or services for which payment may be made, in whole or in part, under federal healthcare programs. Violations may result in substantial civil penalties, including treble damages, and criminal penalties, including imprisonment, fines and exclusion from participation in federal health care programs. The Federal False Claims Act also contains “whistleblower” or “qui tam” provisions that allow private individuals to bring actions on behalf of the government alleging that the defendant has defrauded the government.

 

Venus Concept’s products are not reimbursable by Medicare, Medicaid or other federal health care programs. As a result, the federal anti-kickback statute and many federal false claims provisions do not apply to Venus Concept. However, Venus Concept may be subject to similar state anti-kickback laws that apply regardless of the payor. In addition, various states have enacted laws modeled after the Federal False Claims Act, including “qui tam” or whistleblower provisions, and some of these laws apply to claims filed with commercial insurers.

 

 

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HIPAA created federal criminal statutes that prohibit among other actions, knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program, including private third-party payors, knowingly and willfully embezzling or stealing from a healthcare benefit program, willfully obstructing a criminal investigation of a healthcare offense, and knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services.  

 

Compliance with applicable United States and foreign laws and regulations, such as import and export requirements, anti-corruption laws such as the FCPA and similar worldwide anti-bribery laws, tax laws, foreign exchange controls and cash repatriation restrictions, data privacy requirements, environmental laws, labor laws and anti-competition regulations, increases the costs of doing business in foreign jurisdictions. In some cases, compliance with the laws and regulations of one country could violate the laws and regulations of another country.

 

Many foreign countries have similar laws relating to healthcare fraud and abuse. Foreign laws and regulations may vary greatly from country to country. Violations of these laws, or allegations of such violations, could result in fines, penalties, or prosecution and have a negative impact on our business, results of operations and reputation.

 

There has been a recent trend of increased foreign, federal, and state regulation of payments and transfers of value provided to healthcare professionals, such as physicians, and entities. As noted, Venus Concept’s products are not reimbursed by Medicare, Medicaid, or federal health care programs, so the U.S. federal reporting laws (such as the federal Sunshine Act) do not apply to Venus Concept. However, certain foreign countries and U.S. states also mandate implementation of commercial compliance programs, impose restrictions on device manufacturer marketing practices and require tracking and reporting of gifts, compensation and other remuneration to healthcare professionals and entities. Violations of these laws, or allegations of such violations, could result in fines, penalties, or prosecution and have a negative impact on our business, results of operations and reputation.

 

Patient Protection and Affordable Care Act

 

In the United States, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act, to which we refer collectively as the Affordable Care Act, or ACA, was enacted into law in 2010. Although most of the provisions of the ACA are now in effect, in December 2018 a federal court judge in the Northern District of Texas ruled in Texas v. Azar, or the Texas Case, that the ACA’s individual mandate is unconstitutional, and that the remainder of the ACA was inseverable from the individual mandate and therefore invalid. This case was appealed to the Fifth Circuit in January 2019. Because the Texas judge issued a stay of his ruling pending the appeal, the ACA continues to be in effect at this time. In the event the Fifth Circuit were to uphold the ruling of the district court, the case will likely be appealed to, and ultimately decided by, the U.S. Supreme Court.

 

As a result of the passage of the ACA, an excise tax is imposed on the sale of certain medical devices by the U.S. manufacturer, producer, or importer of the device. This excise tax applies to sales of taxable medical devices beginning January 1, 2013. The excise tax equals 2.3% of the “constructive sale price” of the applicable medical device. As a U.S.-based manufacturer and importer of taxable medical devices, are responsible for remitting to the federal government the excise tax on the sales of medical devices it manufactures in, or imports into, the U.S. Although this excise tax was in effect during the years 2013-2015, there was in effect a moratorium on the medical device excise tax through the end of 2019. The excise tax was repealed effective January 1, 2020.

 

Foreign Government Regulation

 

The regulatory review process for medical devices varies from country to country, and many countries also impose product standards, packaging requirements, environmental requirements, labeling requirements and import restrictions on devices. Each country has its own tariff regulations, duties, and tax requirements. Failure to comply with applicable foreign regulatory requirements may subject a company to fines, suspension or withdrawal of regulatory approvals, product recalls, seizure of products, operating restrictions, criminal prosecution, or other consequences.

 

 

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European Economic Area

 

In the European Economic Area (the “EEA”), our devices are required to comply with the Essential Requirements set forth in Annex I to the Council Directive 93/42/EEC concerning medical devices, commonly referred to as the Medical Devices Directive. Compliance with these requirements entitles a manufacturer to affix the CE mark to its medical devices, without which they cannot be commercialized in the EEA. To demonstrate compliance with the Essential Requirements set forth in Annex I to the Medical Devices Directive and to obtain the right to affix the CE mark to medical devices, they must undergo a conformity assessment procedure, which varies according to the type of medical device and its classification. Except for low risk medical devices (Class I with no measuring function and which are not sterile), where the manufacturer can issue an EC Declaration of Conformity based on a self-assessment of the conformity of its products with the Essential Requirements set forth in the Medical Devices Directive, a conformity assessment procedure requires the intervention of a notified body, which is an organization designated by the competent authorities of a EEA country to conduct conformity assessments. The notified body typically audits and examines products’ Technical File and the quality system for the manufacture, design and final inspection of our devices before issuing a CE Certificate of Conformity demonstrating compliance with the relevant Essential Requirements laid down in Annex I to the Medical Devices Directive. Following the issuance of this a CE Certificate of Conformity, a manufacture Venus Concept can draw up an EC Declaration of Conformity and affix the CE mark to the products covered by this CE Certificate of Conformity and the EC Declaration of Conformity. Venus Concept has successfully completed several notified body audits since Venus Concept’s original certification in December 2009. Following these audits, Venus Concept’s notified body issued ISO 13485:2016 Certificate and CE Certificates of Conformity allowing it to draw up an EC Declaration of Conformity and affix the CE mark to certain of Venus Concept’s devices since 2019 MDSAP Certificate.

 

After the product has been CE marked and placed on the market in the EEA, a manufacturer must comply with a number of regulatory requirements relating to:

 

 

In 2017, the European Parliament passed the Medical Devices Regulation, which repeals and replaces the EU Medical Devices Directive. Unlike directives, which must be implemented into the national laws of the EEA member States, the regulations would be directly applicable, i.e., without the need for adoption of EEA member State laws implementing them, in all EEA member States and are intended to eliminate current differences in the regulation of medical devices among EEA member States. The Medical Devices Regulation, among other things, is intended to establish a uniform, transparent, predictable and sustainable regulatory framework across the EEA for medical devices and in vitro diagnostic devices and ensure a high level of safety and health while supporting innovation.

 

The Medical Devices Regulation will however only become applicable three years after publication. Once applicable, the new regulations will among other things:

 

 

 

 

 

 

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To the extent that our products have already been certified under the existing regulatory framework, the MDR allows us to market them provided that the requirements of the transitional provisions are fulfilled. In particular, the certificate in question must still be valid. Under article 120(2) MDR, certificates issued by notified bodies before May 25, 2017 will remain valid until their indicated expiry dates. By contrast, certificates issued after May 25, 2017 will be void at the latest by May 27, 2024. Accordingly, before that date, we will need to obtain new CE Certificates of Conformity. Furthermore, the regulation introduces UDI, i.e. a bar code that must be placed on the label of the device or on its packaging, and manufacturers will be obligated to file adverse effects reports via the Eudamed platform in case there is an increase in the frequency or severity of incidents related to the medical device.

 

Environmental Regulation

 

We are subject to numerous foreign, federal, state, and local environmental, health and safety laws and regulations relating to, among other matters, safe working conditions, product stewardship and environmental protection, including those governing the generation, storage, handling, use, transportation and disposal of hazardous or potentially hazardous materials. Some of these laws and regulations require us to obtain licenses or permits to conduct our operations. Environmental laws and regulations are complex, change frequently and have tended to become more stringent over time. Although the costs to comply with applicable laws and regulations have not been material, we cannot predict the impact on our business of new or amended laws or regulations or any changes in the way existing and future laws and regulations are interpreted or enforced, nor can we ensure we will be able to obtain or maintain any required licenses or permits.

 

Data Privacy and Security

 

We are subject to diverse laws and regulations relating to data privacy and security, including, in the U.S., the HIPAA, and, in the EU and shortly in the EEA, GDPR. New global privacy rules are being enacted and existing ones are being updated and strengthened. Complying with these numerous, complex and often changing regulations is expensive and difficult, and failure to comply with any privacy laws or data security laws or any security incident or breach involving the misappropriation, loss or other unauthorized use or disclosure of sensitive or confidential patient or consumer information, whether by us, one of our business associates or another third-party, could have a material adverse effect on our business, reputation, financial condition and results of operations, including but not limited to: material fines and penalties; damages; litigation; consent orders; and injunctive relief.

 

The regulation of data privacy and security, and the protection of the confidentiality of personal information, is increasing and continues to evolve. For example, the GDPR came into effect in May 2018 reforming the European regime. The GDPR implements more stringent operational requirements than its predecessor legislation. For example, the GDPR requires us to make more detailed disclosures to data subjects, requires disclosure of the legal basis on which we can process personal data, makes it harder for us to obtain valid consent for processing, provides more robust rights for data subjects, introduces mandatory data breach notification through the EU, imposes additional obligations on us when contracting with service providers and requires us to adopt appropriate privacy governance including policies, procedures, training and data audit. If we do not comply with our obligations under the GDPR, we could be exposed to fines of up to the higher of 20,000,000 Euros or up to 4% of our total worldwide annual turnover in the event of a significant breach. In addition, we may be the subject of litigation and/or adverse publicity, which could have material adverse effect on our reputation and business.

 

We are also subject to evolving European laws on data export and electronic marketing. The rules on data export will apply when we transfer personal data to group companies or third parties outside of the EEA. For example, in 2015, the Court of Justice of the EU ruled that the U.S.-EU Safe Harbor framework, one compliance method by which companies could transfer personal data regarding citizens of the EU to the U.S., was invalid and could no longer be relied upon. The U.S.-EU Safe Harbor framework was replaced with the U.S.-EU Privacy Shield framework, which is now under review and there is currently litigation challenging another EU mechanism for adequate data transfers, the standard contractual clauses. It is uncertain whether the Privacy Shield framework and/or the standard contractual clauses will be similarly invalidated by the European courts. These changes may require us to find alternative bases for the compliant transfer of personal data from the EEA to the U.S. and we are monitoring developments in this area. The EU is also in the process of replacing the e-Privacy Directive with a new set of rules taking the form of a regulation, which will be directly implemented in the laws of each European member state, without the need for further enactment. The current draft of the e-Privacy Regulation retains strict opt-in for electronic marketing and the penalties for contravention have significantly increased with fining powers to the same levels as the GDPR (i.e. the greater of 20,000,000 Euros or 4% of total global annual revenue).

 

 

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Employees

 

As of December 31, 2019 we had 525 employees, 155 based in the United States, 92 based in Canada, 75 based in Israel, and 203 in the rest of the world. Of the total number of full-time employees, approximately 245 are direct sales representatives, including sales management and members of the physician engagement team.

 

In addition, as of December 31, 2019, we engaged the services of approximately 50 contract technicians in 2019 as part of our VeroGrafters program.

 

Corporate Information

 

We were founded on November 22, 2002 as a Delaware corporation under the name Restoration Robotics, Inc. Our principal executive offices are located at 235 Yorkland Blvd., Suite 900, Toronto, Ontario M2J 4Y8 and our telephone number is (877) 848-8430. You may find on our website at https://www.venusconcept.com/en-us/ electronic copies of our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. Such filings are placed on our website as soon as reasonably possible after they are filed with the Securities and Exchange Commission (the “SEC”). Our most recent charter for our audit, compensation, and nominating and corporate governance committees and our Code of Business Conduct and Ethics are available on our website as well. Any waiver of our Code of Business Conduct and Ethics may be made only by our board of directors. Any waiver of our Code of Business Conduct and Ethics for any of our directors or executive officers must be disclosed on a Current Report on Form 8-K within four business days, or such shorter period as may be required under applicable regulation. Information contained on, or that can be accessed through, our website is not incorporated by reference into this Annual Report on Form 10-K, and you should not consider information on our website to be part of this Annual Report on Form 10-K. We have included our website address as an inactive textual reference only.

 

Available Information

 

We file Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other information with the SEC. Our filings with the SEC are available free of charge on the SEC’s website at www.sec.gov and on our website under the “Investors” tab as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.

 

Item 1A. Risk Factors.

 

Our operations and financial results are subject to various risk and uncertainties, including those described below, 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 adversely affect our business operations. You should carefully consider the risk described below and the other information in this Annual Report on Form 10-K, including our audited consolidated financial statements and the related notes thereto, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

Risks Related to Our Business

 

Following the Merger, we may be unable to integrate successfully the businesses of Restoration Robotics and Venus Concept Ltd. and realize the anticipated benefits of the Merger.

 

The Merger, which closed on November 7, 2019, involved the combination of two companies which operated as independent companies. Following the Merger, we have been required to devote significant management attention and resources to integrating our business practices and operations. We may fail to realize some or all of the anticipated benefits of the Merger if the integration process takes longer than expected or is more costly than expected. Potential difficulties we may encounter in the integration process include the following:

 

 

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Restoration Robotics and Venus Concept Ltd. have operated independently prior to the Merger. The integration process may also result in the diversion of management’s attention, the disruption or interruption of, or the loss of momentum in, each company’s ongoing businesses or inconsistencies in standards, controls, procedures and policies, any of which could adversely affect our ability to maintain relationships with customers, suppliers and employees or the ability to achieve the anticipated benefits of the Merger, or could reduce the earnings or otherwise adversely affect the business and financial results of the combined company.

 

Our product sale strategy is focused primarily on a subscription-based business model, and the success of this sales strategy depends on the continued adoption and use of our subscription-based products and services.

 

To address the financial barriers faced by physicians and aesthetic service providers globally, in our direct operations, we focus our product sale strategy on a subscription-based business model. Our subscription-based model includes an up-front fee and a monthly payment schedule, typically over a period of 36 months, with approximately 40% of total contract payments collected in the first year. If economic circumstances are appropriate, we provide customers in good standing with the opportunity to “upgrade” to new agreements for the newest available or alternative technology we provide throughout the subscription period. Our success depends on growing market adoption by traditional and non-traditional providers and use of our subscription-based business model. Our subscription-based model may not be adopted by customers and potential customers at the rate we anticipate. Our ability to increase the number of customers who purchase our products and services or participate in our subscription-based programs and make our products a significant part of their practices, depends in part on the success of our direct sales and marketing programs. Before potential customers make a subscription-based purchase, they may need to recoup the cost of products that they have already purchased from competitors, and therefore they may decide to delay participating in our subscription-based programs, or decide not to participate at all. If we are unable to increase market adoption and use of our products and services through our subscription-based model, the number of systems we sell may be lower than anticipated.

 

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Our subscription-based model exposes us to the credit risk of our customers over the life of the subscription agreement. In the event that our customers fail to make the monthly payments under their subscription agreements, our financial results may be adversely affected.

 

For the years ended December 31, 2019 and 2018, approximately 67% and 75%, respectively, of our system revenues were derived from our subscription-based model. Although the ARTAS^® System will not be available under our subscription-based model, we expect that our subscription-based business model to continue to represent the majority of our revenue for the foreseeable future. We collect an up-front fee, combined with a monthly payment schedule typically over a period of 36 months, with approximately 40% 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. As part of our sales and marketing effort, we do not require our customers to undergo a credit check or register a lien or security interest under the Uniform Commercial Code or similar legislation, as is typically required with a third-party equipment leasing financing. Instead, to ensure that each monthly product payment is made on time and that the customer’s systems are serviced in accordance with the terms of the warranty, every product requires a monthly activation code, which we provide to the customer upon receiving each monthly payment. If a customer does not timely pay a monthly installment, the customer will not receive an activation code and will be unable to use the system for any procedures. This process does not protect us from the economic impact of a customer’s failure to make its monthly payments and as an unsecured creditor, we are subject to a greater risk in the event of a customer default. We cannot provide any assurance that the financial position of customers purchasing its products and services under a subscription agreement will not change adversely before we receive all of 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 this bad debt expense is material, it could negatively affect our results of operations and cash flows.

 

One of our large customers filed for bankruptcy protection in February 2019 and we recorded a provision for bad debts of $8.3 million against the receivable for this customer for the year ended December 31, 2018, and if we experience other customer defaults under our subscription agreements, our financial results may be adversely affected.

 

In February 2019, one of our large customers filed for bankruptcy protection. Prior to the bankruptcy filing, we had entered into numerous subscription agreements between 2015 and 2017 with this customer. We recorded a provision for bad debts of $8.3 million against the receivable for this customer for the year ended December 31, 2018. In connection with the bankruptcy, the debtors filed an adversary action against Venus Concept Ltd. (and several others) seeking to avoid any security interest of Venus Concept Ltd., to recover 89 units that had been transferred back to Venus Concept Ltd., the return of approximately $150,000 paid to Venus Concept Ltd. within the 90 days before the bankruptcy filing and to disallow Venus Concept Ltd.’s asserted claim of approximately $5.9 million. Venus Concept Ltd. and the debtors entered into a settlement agreement, which was approved by the bankruptcy court on May 24, 2019, pursuant to which, among other things, a third-party purchaser would buy and assume certain units from the debtors and pay a total of approximately $2.7 million to Venus Concept Ltd. over 25 months, debtors would release and waive any and all claims against us, including the preference claim, we would retain and have all rights to previously terminated units, and any units in possession of the debtors or that were subsequently discovered to be property of the debtor would be returned to us without further cost to us. Pursuant to the settlement agreement, Venus Concept Ltd. agreed to waive and release the debtors from all claims (other than those specifically carved out). We do not anticipate receiving any further distribution from this customer’s bankruptcy due to the releases provided for in the settlement agreement. Although we are currently receiving monthly payments under the new agreement with the purchaser of this customer’s assets, we cannot assure you that we will receive the full amount. Furthermore, we cannot assure you that we will not experience further customer defaults under our subscription agreements that could have a material adverse effect on our financial position.

 

 

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We offer credit terms to some qualified customers. In the event that any of these customers default on the amounts payable to us, our financial results may be adversely affected.

 

In addition to our subscription-based model, we generally offer credit terms of 30 to 60 days to qualified customers and distributors. In the event that there is a default by any of the customers to whom we have provided credit terms, we may recognize bad debt expenses in our general and administrative expenses. If this bad debt expense is material, it could negatively affect our future results of operations and cash flows. Additionally, in the event of deterioration of general business conditions, we may be subject to increased risk of non-payment of our accounts receivables. 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 receivables or a reduction of accounts receivables collected may impact our liquidity or result in bad debt expenses.

 

Our competitors may emulate our subscription-based model and erode our competitive advantage.

 

Our subscription-based model allows us to penetrate new markets and access a broader customer base because it offers an alternative to traditional equipment lease financing. For the years ended December 31, 2019 and 2018, approximately 67% and 75%, respectively, of systems revenues were derived from the subscription-based model. However, to the extent we continue to be successful in growing the market adoption of our products through our subscription-based model, competitors may seek to emulate this model. Although, we believe that our products compete effectively with the products offered by our competitors, our customers may be more willing to purchase the products of our competitors if they were offered through a subscription-based model. If customers decide to use the products of its competitors instead of our systems, our financial performance will be adversely affected.

 

Our recurring losses from operations and negative cash flows raise substantial doubt about our ability to continue as a going concern.

 

We have had recurring net operating losses and negative cash flows from operations, and until we generate revenue at a level to support our cost structure, we expect to continue to incur substantial operating losses and net cash outflows. As of December 31, 2019 and 2018, we had an accumulated deficit of $75.7 million and $35.1 million, respectively. Our recurring losses from operations and negative cash flows raise substantial doubt about our ability to continue as a going concern, meaning that we may be unable to continue operations for the foreseeable future or realize assets and discharge liabilities in the ordinary course of operations. In order to continue our operations, we must achieve profitable operations and/or obtain additional equity or debt financing. There can be no assurance that we will be successful in raising additional capital or that such capital, if available, 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. The perception of our ability to continue as a going concern may make it more difficult for us to obtain financing for the continuation of our operations and could result in the loss of confidence by investors, suppliers and employees. Our consolidated financial statements do not include any adjustments that may result from the outcome of this uncertainty.

 

 

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Business or economic disruptions or global health concerns could have an adverse effect our business, operating results or financial condition.

 

Global business or economic disruptions could adversely affect our business. For example, in December 2019, an outbreak of a novel strain of coronavirus originated in Wuhan, China, and has since spread to a number of other countries, including the United States. To date, this outbreak has already resulted in extended shutdowns of certain businesses in China, Europe, the United States and other countries. Global health concerns, such as the coronavirus, could also result in social, economic, and labor instability in the countries in which we or the third parties with whom we engage operate. We cannot presently predict the scope and severity or duration of any potential business shutdowns or disruptions, but if we or any of the third parties with whom we engage, including our suppliers, manufacturers, customers, regulators and other third parties with whom we conduct business, experience shutdowns or other business disruptions, our ability to conduct our business in the manner presently planned could be materially and negatively affected.  Disruptions to our business could include restrictions on the ability of our sales and marketing personnel and distributors to travel and sell our systems, disruptions of our global supply chain, reduced demand and/or suspension of operations by our customers which could impact their ability to make monthly payments, or deferral of aesthetic or hair restoration procedures in impacted areas. In addition, the outbreak of contagious diseases or the fear of such an outbreak could adversely affect the economies and financial markets of many countries, resulting in an economic downturn that could affect the demand for our systems. Any of these events could negatively impact our business, operating results or financial condition.

 

Venus Concept’s loan and security agreements contain restrictions that limit its flexibility in operating its business.

 

On October 11, 2016, Venus Concept Ltd. entered into a credit agreement as a guarantor with Madryn Health Partners, LP, as administrative agent, and certain of its affiliates as lenders, or collectively, Madryn, as amended, or the Madryn Credit Agreement, pursuant to which Madryn agreed to make certain loans to certain of Venus Concept’s subsidiaries, or the Subsidiary Obligors. On November 7, 2019, in connection with the Merger, we joined the Madryn Credit Agreement as a guarantor pursuant to that certain Tenth Amendment to Credit Agreement, Consent and Joinder Agreement. The Madryn Credit Agreement is comprised of four tranches of debt aggregating $70.0 million. As at December 31, 2019, the Subsidiary Obligors had borrowed $60.0 million under the term A-1 and A-2 and B tranches of the Madryn Credit Agreement. Term C borrowings of $10.0 million were undrawn and are no longer available. Borrowings under the Madryn Credit Agreement are secured by substantially all of our assets and the assets of the Subsidiary Obligors. The outstanding principal amount of the loans and all accrued and unpaid interest are due and payable in full on September 30, 2022.

 

The Madryn Credit Agreement also contains various covenants that limit our ability and the ability of our subsidiaries to engage in specified types of transactions. Subject to limited exceptions, these covenants limit our ability, without Madryn’s consent, to, among other things:

 

 

 

 

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In addition, the Madryn Credit Agreement contains certain covenants that require us together with our subsidiaries to achieve certain minimum revenue and liquidity thresholds. The minimum revenue and liquidity covenants require that we and our subsidiaries, on a consolidated basis, achieve (i) minimum reported revenue targets for any four consecutive fiscal quarter period of an amount equal to the greater of (A) $100.0 million and (B) one hundred and fifty percent (150%) of the aggregate outstanding amount of the loans as of the last day of such four consecutive fiscal quarter period, (ii) minimum levels of cash held in deposit accounts controlled by Madryn to be no less than $2.0 million and (iii) minimum levels of cash held in all deposit accounts, plus availability under the CNB Credit Facility (as defined below), to be no less than $5.0 million.

 

Prior to the Merger, Venus Concept Ltd. had failed to satisfy minimum liquidity covenant and failed to timely pay an interest payment, which non-compliance and default was waived. If we together with our subsidiaries fail to comply with these covenants in the future, such failure will result in a default and enable Madryn to require us and the Subsidiary Obligors to repay all outstanding principal amounts and accrued interest. In the event of a default, if we and the Subsidiary Obligors are unable to repay all outstanding amounts, Madryn may foreclose on the collateral granted to it to collateralize the indebtedness, which will significantly affect our ability to operate our business.

 

If all or any portion of the loans under the Madryn Credit Agreement are prepaid then a prepayment premium must be paid equal to: (i) 6.50% if prepaid after August 31, 2019 but on or prior to August 31, 2020; (ii) 5.00% if prepaid after August 31, 2020 but on or prior to February 28, 2021; (iii) 4.00% if prepaid after February 28, 2021 but on or prior to August 31, 2021; (iv) 3.00% percent if prepaid after August 31, 2021 but on or prior to February 28, 2022; and (v) 2.00% if prepaid after February 28, 2022.

 

On August 29, 2018, Venus Concept Ltd. entered into an Amended and Restated Loan Agreement as a guarantor with City National Bank of Florida, or CNB, as amended, or the CNB Credit Facility, pursuant to which CNB agreed to make certain loans and other financial accommodations to the Subsidiary Obligors. In connection with the CNB Credit Facility, Venus Concept Ltd. also entered into a Guaranty Agreement with CNB dated as of August 29, 2018, or the CNB Guaranty, pursuant to which Venus Concept Ltd. agreed to guaranty the obligations of its subsidiaries under the CNB Credit Facility.

 

On March 20, 2020, we entered into a Second Amended and Restated Loan Agreement as a borrower with CNB, as amended, pursuant to which CNB agreed to make certain loans and other financial accommodations to us and certain of our subsidiaries. In connection with the CNB Credit Facility, we also entered into (i) a Second Amended and Restated Guaranty of Payment and Performance with CNB dated as of March 20, 2020, or the CNB Guaranty, pursuant to which we agreed to guaranty the obligations under the CNB Credit Facility and (ii) a Security Agreement with CNB dated as of March 20, 2020, or the CNB Security Agreement, pursuant to which we agreed to grant CNB a security interest, in substantially all of its assets, to secure the obligations under the CNB Credit Facility. Borrowings under the CNB Credit Facility are secured by substantially all of the assets of Venus Concept Inc. and the Subsidiary Obligors and the CNB Guaranty. As of December 31, 2019, the CNB Credit Facility provided for a revolving loan commitment of $10.0 million and $7.8 million was drawn thereunder.

 

The CNB Credit Facility contains various covenants that limit us and our subsidiaries’ ability to engage in specified types of transactions. Subject to limited exceptions, these covenants limit our ability, without CNB’s consent, to, among other things, sell, lease, transfer, exclusively license or dispose of our 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.

 

In addition, the CNB Credit Facility contains certain covenants that require the Subsidiary Obligors to achieve certain minimum account balances, or a minimum debt service coverage ratio and a maximum total liability to tangible net worth ratio. If the Subsidiary Obligors fail to comply with these covenants, it will result in a default and require us and the Subsidiary Obligors to repay all outstanding principal amounts and accrued interest. Prior to the Merger, Venus Concept Ltd. was not in compliance with the minimum debt service coverage ratio of its credit facility with CNB, which non-compliance was waived. On October 30, 2019, Venus Concept Ltd. and CNB executed a Third Amendment and Waiver to Amended and Restated Loan Agreement which, among other things, revised certain of the financial covenants and waived compliance with the debt service coverage ratio covenant for the fiscal quarter ending September 30, 2019.

 

 

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In the event of a default, and if we and the Subsidiary Obligors are unable to repay all outstanding amounts, CNB may foreclose on the collateral granted to it to collateralize the indebtedness, which includes the enforcement of the CNB Guaranty, which will significantly affect our ability to operate our business. The occurrence of any event of default under the CNB Credit Facility would trigger an event of default under the Madryn Credit Agreement. Additionally, the occurrence of any event of default under the Madryn Credit Agreement would trigger an event of default under the CNB Credit Facility.

 

We will require additional financing to achieve our goals, and a failure to obtain this necessary capital when needed on acceptable terms, or at all, could force us to delay, limit, reduce or terminate our product development, commercialization and other operations or efforts.

 

Since our inception, we have invested a significant portion of our efforts and financial resources in research and development and sales and marketing activities. Research and development, clinical trials, product engineering, ongoing product upgrades and other enhancements and seeking regulatory clearances and approvals to market future products will require substantial funds to complete. As of December 31, 2019, we had capital resources consisting of cash and cash equivalents of approximately $15.7 million. We believe that we will continue to expend substantial resources for the foreseeable future in connection with the ongoing commercializing of our systems, increasing our sales and marketing efforts, and continuing research and development and product enhancements activities.

 

We believe our existing cash and cash equivalents and cash expected to be generated from the sale of our systems and other products and services will not be enough for us to fund our planned operations for the next twelve months. Therefore, we will need additional capital to fund our future operations. In addition, our operating plans may change as a result of many factors some of which may be unknown to us, and we may need to seek additional funds sooner than planned, through public or private equity or debt financings or other sources, such as strategic collaborations. Such financing may result in dilution to stockholders, the issuance of securities may have rights, preferences, or privileges senior to those of holders of our common stock, the imposition of more burdensome debt covenants and repayment obligations, the licensing of rights to our technology or other restrictions that may affect our business. In addition, we may seek additional capital if favorable market conditions or given other strategic considerations even if we believe we have sufficient capital to fund our current or future operating plans.

 

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:

 

 

We are restricted by covenants in the Madryn Credit Agreement and the CNB Credit Facility. These covenants restrict, among other things, our ability to incur additional indebtedness, which may limit our ability to obtain additional debt financing. In addition, the Madryn Credit Agreement contains certain minimum liquidity and minimum revenue covenants, which, if we fail to maintain or achieve, will result in a default under the agreement and the requirement for us to repay all outstanding principal amounts and accrued interest repay all amounts outstanding.

 

We will need to continue to incur significant expenses to grow our business, which could negatively affect our future profitability.

 

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 assure you 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.

 

 

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We may not be able to correctly estimate or control our future operating expenses, which could lead to cash shortfalls.

 

Our operating expenses may fluctuate significantly in the future because of a variety of factors, many of which are outside of our control. These factors include:

 

 

Our budgeted expense levels are based in part on our expectations concerning future revenue from systems sales, products sales and servicing and procedure-based fees. We may be unable to reduce our expenditures in a timely manner to compensate for any unexpected shortfalls in revenue. Accordingly, a significant shortfall in market acceptance or demand for our systems and procedures could have a material adverse impact on our business and financial condition.

 

Because we incur a substantial portion of our expenses in currencies other than the U.S. dollar, our financial condition and results of operations may be adversely affected by currency fluctuations and inflation.

 

In the year ended December 31, 2019 and 2018, 47% and 49%, respectively, of our global revenues were denominated in U.S. dollars and our reporting currency was the U.S. dollar. We pay a meaningful portion of our expenses in NIS, CAD, and other foreign currencies. Expenses in NIS and CAD accounted for 21% and 14%, respectively, of our expenses for the year ended December 31, 2019, and 32% and 14%, respectively, of our expenses for the year ended December 31, 2018. Salaries paid to our employees, general and administrative expenses and general sales and related expenses are paid in many different currencies. As a result, we are exposed to the currency fluctuation risks relating to the denomination of its future revenues in U.S. dollars. More specifically, if the U.S. dollar devaluates against the CAD or the NIS, our CAD and NIS denominated expenses will be greater than anticipated when reported in U.S. dollars. Inflation in Israel compounds the adverse impact of such devaluation by further increasing the amount of our Israeli expenses. Israeli inflation may also in the future outweigh the positive effect of any appreciation of the U.S. dollar relative to the CAD and the NIS, if, and to the extent that, it outpaces such appreciation or precedes such appreciation. We generally do not engage in currency hedging to protect the Company from fluctuations in the exchange rates of the CAD, NIS and other foreign currencies in relation to the U.S. dollar (and/or from inflation of such foreign currencies), we may be exposed to material adverse effects from such movements. We cannot predict any future trends in the rate of inflation in Israel or the rate of devaluation (if any) of the U.S. dollar or any other currency against the NIS or CAD.

 

 

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Downturns in the economy or economic uncertainty may reduce patient and customer demand for our systems and services, which could adversely affect our business, financial condition or results of operations.

 

Our results of operations could be adversely affected by general conditions in the global economy and in the global financial markets. Furthermore, the aesthetic industry in which we operate is particularly vulnerable to unfavorable economic trends. Treatments using our systems involves elective procedures, the cost of which must be borne by patients, and is not reimbursable through government or private health insurance. Economic uncertainty may reduce patient demand for the procedures performed using our systems; if there is not sufficient patient demand for the procedures for which our systems are used, practitioner demand for these systems could drop, negatively impacting operating results. The decision to undergo a procedure using our systems is driven by consumer demand. In times of economic uncertainty or recession, individuals generally reduce the amount of money that they spend on discretionary items, including aesthetic procedures. If our customers’ patients face economic hardships, our business would be negatively impacted, and our financial performance would be materially harmed in the event that any of the above factors discourage patients from seeking the procedures for which our systems are used. A weak or declining economy could also strain our manufacturers or suppliers, possibly resulting in supply disruption, or cause our customers to delay or stop making payments for our systems or services. As a result of the COVID-19 pandemic and the economic turmoil that has resulted, we expect that some of our customers may experience difficulty in making timely payments or payments at all under their subscription agreements. Any of the foregoing could harm our business and we cannot anticipate all of the ways in which the economic climate and financial market conditions, including the effect of the COVID-19 pandemic, could adversely impact our business. The impact of economic uncertainty on our industry may vary from region to region.

 

It is difficult to forecast our future performance and our financial results may fluctuate unpredictably.

The rapid evolution of the markets for medical technologies and aesthetic products make it difficult for us to predict our future performance. Several factors, many of which are outside of our control, may contribute to fluctuations in our financial results, such as:

 

 

 

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The historic seasonality of our industry and other factors may contribute to fluctuations in our operating results and stock price and make it difficult to compare our results of operations to prior periods and predict future financial results.

 

We believe that our business is affected by seasonal and other trends. Specifically, we believe our business is affected by seasonal trends during the summer months in the U.S. and Europe due to vacations taken by physician customers and their patients, as well as fluctuations in operating results due to uneven timing of distributor and corporate account orders and marketing into new geographic regions. Historically, we have sold a relatively small number of ARTAS^® and ARTAS^® iX Systems at a relatively high price, with each sale of an ARTAS^® System or ARTAS^® iX System typically involving a significant amount of time, which may also contribute to fluctuations in operating results in the future. In addition, there is typically a substantial increase in sales in the last two months of the year. It is difficult for us to evaluate the degree to which these factors may make our revenue unpredictable in the future, and these seasonal and other trends may continue to lead to fluctuations in quarterly operating results. As a result of these factors, future fluctuations in quarterly results could cause our revenue and cash flows to be below analyst and investor expectations, which could cause decline in our stock price. Due to future fluctuations in revenue and costs, as well as other potential fluctuations, you should not rely upon our operating results in any period as an indication of future performance.

 

Our success depends on growing physician adoption and use of our systems and adoption by physicians in non-traditional specialty areas.

 

Aesthetic and hair restoration procedures are performed primarily by physicians who practice dermatology or plastic surgery. Our success depends on the growth of aesthetic and hair restoration procedures performed by physicians other than dermatologists and plastic surgeons, and aesthetic procedures performed by general and family practitioners and aesthetic medical spas. Our ability to increase the number of physicians willing to make a significant capital expenditure to purchase our systems or participate in our subscription program and make them a significant part of their practices, depends on the success of our sales and marketing programs. We must be able to demonstrate that the cost of our systems and the revenue that a physician can derive from performing procedures are compelling when compared to the costs and revenue associated with alternative aesthetic treatments the physician can offer and persuade physicians to purchase our systems instead of those of our competitors, many of whom already have existing relationships with our target physicians. In addition, we believe our marketing programs, including clinical and practice development support, will be critical to increasing utilization and awareness of our systems, particularly the ARTAS^® and ARTAS^® iX Systems, but these programs require physician commitment and involvement to succeed. We must also be successful in persuading physicians in non-traditional specialties to introduce procedures performed with our systems into their practices. If we are unable to increase adoption and use of its systems by physicians in other non-traditional specialties, our growth and prospects may be adversely affected.  

 

Our success depends in part upon patient satisfaction with the effectiveness of our hair restoration systems.

 

In order to generate repeat and referral business, patients must be satisfied with the effectiveness of a hair restoration procedure using one of our hair restoration systems. If the ARTAS^® System, ARTAS^® iX System or NeoGraft^® system procedure is not done correctly, and or the patient suffers from complications and other adverse effects, the patient may not be satisfied with the benefits of our hair restoration systems. Furthermore, if the transplanted hair follicles do not grow or survive the transplant, the patient will likely not view the procedure as having a satisfactory outcome. If patients are not satisfied with the aesthetic benefits of a hair restoration procedure using one of our systems or feel that it is too expensive for the results obtained, our reputation and future sales will suffer.

 

If there is not sufficient patient demand for our procedures, our financial results and future prospects will be negatively impacted.

 

Our procedures are elective aesthetic procedures, the cost of which must be borne by the patient and is not covered by or reimbursable through government or private health insurance. The decision to undergo one of our procedures is thus driven by patient demand, which may be influenced by a number of factors, such as:

 

 

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Our financial performance will be negatively impacted in the event we cannot generate significant patient demand for procedures performed with our systems.

 

We compete against companies that offer alternative solutions to our systems, or have greater resources, a larger installed base of customers and broader product offerings than we have. If we are not able to effectively compete with these companies and alternative solutions, our business may not continue to grow.

 

The medical technology and aesthetic product markets are highly competitive and dynamic and are characterized by rapid and substantial technological development and product innovation. Demand for our systems is impacted by the products and procedures offered by our competitors. Certain of our systems also compete against conventional non-energy-based treatments, such as Botox and collagen injections, chemical peels, and microdermabrasion. In the U.S., we compete against companies that have developed minimally invasive and non-invasive medical aesthetic procedures. Outside of the U.S., likely due to less stringent regulatory requirements, there are more aesthetic products and procedures available in international markets than are cleared for use in the U.S. Sometimes, there are also fewer limitations on the claims our competitors in international markets can make about the effectiveness of their products and the manner in which they can market them. As a result, we may face a greater number of competitors in markets outside of the U.S.

 

We also compete generally with medical technology and aesthetic companies, including those offering products and products unrelated to skin treatment. Recently, there has been consolidation in the aesthetic industry leading to companies combining their resources, which increases competition and could result in increased downward pressure on our system prices. These consolidations have created combined entities with greater financial resources, deeper sales channels and greater pricing flexibility than ours. Rumored or actual consolidation of our competitors could cause uncertainty and disruption to our business. In the surgical hair restoration market, we consider our direct competition to be strip surgeries and FUE procedures using hand-held devices. Many of our surgical device and equipment competitors have greater capital resources, sales and marketing operations and service infrastructures than we do, as well as longer commercial histories and more extensive relationships with physicians. Strip surgery and some manual FUE procedures have a greater penetration into the hair restoration market. We face resistance from some established hair restoration practices in converting to ARTAS® procedures due to workflow and staffing changes required, even though we believe that staffing requirements are reduced with the adoption of ARTAS® procedures. Our indirect competition in the hair restoration market also includes non-surgical treatments for hair loss, such as prescription therapeutics, including Propecia, and non-prescription remedies, such as wigs, hair pieces and spray-on applications. Many of our competitors are larger, more experienced companies that have substantially greater resources and brand recognition than we do. Some of these companies have a broad range of product offerings, large direct sales forces and long-term customer relationships with the physicians we target, which could make our market penetration efforts more difficult. Competition in the medical technology and aesthetic hair restoration markets could result in price-cutting, reduced profit margins, and limited market share, any of which would harm our business, financial condition and results of operations.

 

 

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The success of our subscription-based model depends on customer loyalty.

 

The success of our subscription-based model depends on customer loyalty. In order to generate recurring revenues and for customers to continue upgrading their technologies to our newest technologies, customers must believe that our systems and service offerings are superior to those of its competitors and enhance the physician’s practices and business from a professional, financial and reputational vantage point. To the extent we fail to maintain ongoing relationships with our customers or our systems and service offerings do not satisfy its customers’ needs, including their financial goals, our business will be adversely affected.

 

We may not be able to establish or strengthen our brand.

 

We believe that establishing and strengthening our brands is critical to achieving widespread acceptance of our systems, particularly because of the highly competitive nature of the market for aesthetic treatments and procedures. Promoting and positioning our brand will depend largely on the success of our marketing efforts and our ability to provide physicians with a reliable systems and services. Given the established nature of our competitors, it is likely that our future marketing efforts will require us to incur significant additional expenses. These brand promotion activities may not yield increased sales and, even if they do, any sales increases may not offset the expenses we incur to promote our brand. If we fail to successfully promote and maintain our brand, or if we incur substantial expenses in an unsuccessful attempt to promote and maintain our brand, systems may not achieve adequate acceptance by physicians, which would adversely affect our business, results of operations and financial condition.

 

The aesthetic equipment market is characterized by rapid innovation. To compete effectively, we must develop and/or acquire new products and services, seek regulatory clearance and maintain regulatory compliance, market new products successfully, and identify new markets for our technology.

 

The aesthetic energy-based treatment equipment and hair restoration markets are subject to continuous technological development and product innovation. If we do not continue to innovate and develop new products, services and applications, our competitive position will likely deteriorate as other companies successfully design and commercialize new products, applications and services or enhancements to current products. To continue to grow in the future, we must continue to develop and/or acquire new and innovative aesthetic and medical products, services and applications, identify new markets, and successfully launch any newly developed or acquired product offerings.

 

To successfully expand our product and service offerings, we must, among other things:

 

 

Historically, product introductions have been a significant component of our financial performance. To be successful in the medical aesthetics industry, we believe we need to continue to innovate. Our business strategy is based, in part, on our expectation that we will continue to increase or enhance our product offerings. We need to continue to devote substantial research and development resources to introduce new products, which can be costly and time-consuming to our organization.

 

We also believe that, to increase revenue from sales of new products, we need to continue to develop our clinical support, further expand and nurture relationships with industry thought leaders, and increase market awareness of the benefits of our new products. However, even with a significant investment in research and development, we may be unable to continue to develop, acquire or effectively launch and market new products and technologies regularly, or at all. If we fail to successfully commercialize new products or enhancements, our business may be harmed.

 

 

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While we attempt to protect our products through patents and other intellectual property, there are few barriers to entry that would prevent new entrants or existing competitors from developing products that compete directly with our systems. We expect that any competitive advantage we may enjoy from current and future innovations may diminish over time as certain of our intellectual property expires and as companies use or create intellectual property and related products that compete with our innovations. Consequently, we believe that we will have to continuously innovate and improve our products and technology to compete successfully. If we are unable to innovate successfully, our products could become obsolete and our revenue could decline as our customers and prospects purchase competing products.

 

We may be unsuccessful in penetrating certain international markets through majority-owned subsidiary arrangements with local partners.

 

We have established several majority-owned subsidiaries in international markets as part of our international growth strategy. Although we select our local partners based on demonstrated experience and expertise in the local aesthetic market, the nature of our arrangements with local partners requires us to share control with unaffiliated third parties. We may not be able to identify local partners with the requisite experience and expertise in their local markets or successfully negotiate an agreement with such local partners. Moreover, the ability of these subsidiaries to execute their business plans depends on the local partners to fulfill their obligations. If local partners fail to fulfill their obligations to our satisfaction, our financial results could be adversely affected or we may be required to increase our level of commitment to the subsidiary and dedicate additional resources. Although our agreements with our local partners generally allow us control over business operations, differences in views could also result in delayed execution of the subsidiary’s business plan. If these differences cause a subsidiary to deviate from our business plans, our results of operations could be adversely affected.

 

We may be unsuccessful in expanding and managing our direct sales and marketing forces effectively.

 

We rely on our own direct sales force and in-house marketing organization to sell our systems and services in North America and in international markets, either through wholly-owned or majority-owned subsidiaries. In order to meet our anticipated sales objectives, we expect to continue to grow our global sales and marketing organization over the next several years. There are significant risks involved in building and managing a sales and marketing organization, including risks related to our ability to:

 

 

Our failure to adequately address these risks could have a material adverse effect on our ability to increase sales and use of our systems and services, which would cause our revenues to be lower than expected and harm our results of operations. In addition, as we transition to direct sales in certain international markets, the transition may result in a slow-down of growth or even a reduction in sales in those markets during the transition process as our distributors anticipate losing the ability to sell our systems.

 

We depend on third-party distributors to market and sell our systems in certain markets.

 

In addition to a direct sales and marketing forces, we currently depend on third-party distributors to sell, market, and service our systems in certain markets outside of North America and to train our customers in these markets. For the years ended December 31, 2019 and 2018, we generated 6% and 5%, respectively, of our systems revenues from sales made through third-party distributors. Our agreements with third-party distributors generally set forth minimum quarterly purchase commitments required for each distributor and provide the distributor the exclusive right to distribute its systems within a designated territory. As we continue to expand into new markets outside of North America, we may need to engage additional third-party distributors which is subject to a number of risks, including:

 

 

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In addition, one of our strategic initiatives is to directly provide marketing personnel and resources for third-party distributors. If we fail to establish and maintain satisfactory relationships with our third-party distributors, our revenue and market share may not grow as anticipated, and we could be subject to unexpected costs which would harm our results of operations and financial condition.

 

Our expanded use of social media platforms presents new risks and challenges, which, if not managed properly, could have a material adverse effect on our business, financial condition and results of operations.

 

We have implemented a robust public relations outreach strategy that incorporates both digital media and top national media in the fashion and beauty industries. In addition, as part of our practice enhancing services, we provide customers with digital marketing services, including a social media strategy, to support the growth of their practices. Negative posts or comments about us or any of our brands on any social networking website could seriously damage our reputation. In addition, the inappropriate use of certain media vehicles could cause brand damage or information leakage or could lead to legal implications from the improper collection and/or dissemination of personally identifiable information.

 

Economic and other risks associated with international sales and operations could adversely affect Venus Concept’s business.

 

Sales in markets outside of the U.S. accounted for approximately 57% of our revenue for the year ended December 31, 2019 and 55% of our revenue for the year ended December 31, 2018. As part of our growth strategy, we intend to expand the percentage of our business that comes from sales in markets outside of North America through increased penetration in countries where we currently market and sell our systems through our third-party distributor network and local partners, combined with expansion into new international markets. The majority of our research and development activities and the manufacture of our systems is located outside of the U.S. As a result of our international business, we are subject to a number of risks, including:

 

 

If one or more of these risks were realized, it could require us to dedicate significant financial and management resources, and our results of operations and financial condition could be adversely affected.

 

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The success of our hair restoration business depends upon the success of the ARTAS^® System and ARTAS^® iX System, which has a limited commercial history. If we are unsuccessful in developing the market for robotic hair restoration or the market acceptance for the ARTAS^® System and ARTAS^® iX System fails to grow significantly, our business and future prospects will be negatively impacted.

 

We commenced commercial sales of the ARTAS^® System for hair follicle dissection in the U.S. in 2011. Our success in the hair restoration market depends on the acceptance among physicians and patients of the ARTAS^® and ARTAS^® iX Systems as the preferred system for performing hair restoration surgery. Acceptance of the ARTAS^® and ARTAS^® iX Systems by physicians is significantly dependent on our ability to convince physicians of the benefits of the ARTAS^® and ARTAS^® iX Systems to their practices and, accordingly, develop the market for robotic-assisted hair restoration surgery. Acceptance of the ARTAS^® procedure by patients is equally important as patient demand will influence physicians to offer the ARTAS^® procedure, and the degree of market acceptance of the ARTAS^® and ARTAS^® iX Systems by physicians and patients is unproven. We believe that market acceptance of the ARTAS^® and ARTAS^® iX Systems will depend on many factors, including:

 

 

 

 

 

 

 

 

Further, the ARTAS^® iX System, which was launched in July 2018, includes our recently cleared robotic implantation functionality. As this functionality is relatively new, it is possible that it could include defaults, “bugs” or present other technical issues which could prompt potential physician customers to delay their purchase of the ARTAS^® iX System or could prompt physicians that have purchased the ARTAS^® iX System to either return or not utilize the system.

 

We cannot assure you that the ARTAS^® System or ARTAS^® iX System will achieve broad market acceptance among physicians and patients. Because we expect to derive a significant portion of our revenue in the hair restoration market from ARTAS^® and ARTAS^® iX Systems sales, servicing and procedure-based fees, any failure of this product to satisfy physician or patient demand or to achieve meaningful market acceptance will harm our business and future prospects.  

 

Our inability to effectively compete with competitive hair restoration treatments or procedures may prevent us from achieving significant market penetration in the hair restoration market or improving our operating results.

 

We designed the ARTAS^® System to assist physicians in performing follicular unit extraction surgery. Demand for the ARTAS^® Systems and ARTAS^® procedures could be limited by other products and technologies. Competition to address hair loss comes from various sources, including:

 

 

 

 

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Surgical alternatives to the ARTAS^® and ARTAS^® iX Systems may be able to compete more effectively than the ARTAS^® procedure in established practices with trained staff and workflows built around performing these surgical alternatives. Practices experienced in offering strip surgery or follicular unit extractions using hand-held devices may be reluctant to incorporate or convert their practices to offer ARTAS^® procedures due to the effort involved to make such changes.

 

Many options may be able to provide satisfactory results for male hair loss, generally at a lower cost to the patient than the ARTAS^® and ARTAS^® iX Systems. As a result, if patients choose these competitive alternatives, our results of operation could be adversely affected.

 

While traditional hair transplantation surgery has been available for many years, the ARTAS^® System has only been commercially available since 2011. As a result, we have a limited track record compared to traditional hair transplantation surgery and the safety and efficacy of the ARTAS^® System is not yet supported by long-term clinical data, which could limit sales, and the ARTAS^® System could prove to be less safe or effective than initially thought.

 

The ARTAS^® System that we market in the U.S. is regulated as a medical device by the FDA and has received premarket clearance under Section 510(k) of the Federal Food, Drug and Cosmetic Act, or FDCA. In the 510(k) clearance process, before a device may be marketed, FDA must determine that a proposed device is “substantially equivalent” to a legally-marketed “predicate” device, which includes a device that has been previously cleared through the 510(k) process, a device that was legally marketed prior to May 28, 1976 (pre-amendments device), a device that was originally on the U.S. market pursuant to an approved premarket approval, or PMA, application and later down-classified, or a 510(k)-exempt device. This process is typically shorter and generally requires the submission of less supporting documentation than FDA’s PMA process and does not always require long-term clinical studies.

 

Hair transplantation surgery has been a treatment option for hair restoration for many years, while we only began commercializing the ARTAS^® System in 2011. Consequently, we lack the breadth of published long-term clinical data supporting the safety and efficacy of the ARTAS^® System and the benefits it offers that might have been generated in connection with other hair restoration techniques. As a result, physicians may be slow to adopt the ARTAS^® System, we may not have comparative data that our competitors have or are generating, and we may be subject to greater regulatory and product liability risks. Furthermore, future patient studies or clinical experience may indicate that treatment with the ARTAS^® System does not improve patient outcomes compared to other hair restoration techniques. Such results would slow the adoption of the ARTAS^® System by physicians, would significantly reduce our ability to achieve expected sales from this system.

 

We have limited complication or patient success rate data with respect to treatment using the ARTAS^® System. If future patient studies or clinical testing do not support our belief that our system offers a more advantageous treatment for hair restoration, market acceptance of the ARTAS^® System could fail to increase or could decrease and our business could be harmed. Moreover, if future results and experience indicate that our implant products cause unexpected or serious complications or other unforeseen negative effects, we could be subject to mandatory product recalls, suspension or withdrawal of FDA or other governmental clearance or approval or, CE Certificates of Conformity, significant legal liability or harm to our business reputation. Furthermore, if patients that receive traditional hair transplantation surgery, such as strip surgery, were to experience unexpected or serious complications or other unforeseen effects, the market for the ARTAS^® System may be adversely affected, even if such effects are not applicable to the ARTAS^® System.

 

 

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If we choose to, or are required to, conduct additional studies, such studies or experience could slow the market adoption of the ARTAS^® System by physicians, significantly reduce our ability to achieve expected revenue from this system.

 

One of our subsidiaries is the subject of an investigation by the People’s Republic of China, or the PRC, State Administration for Market Regulation, or SAMR, regarding the potential misclassification of one product as a non-medical device. If this subsidiary is determined to have sold the Versa platform under an improper classification, the subsidiary could face material administrative penalties, including loss of future sales, corrective actions, disgorgement of profits and fines.

 

Our Chinese subsidiary, or Venus Concept China, imports and sells registered medical devices and unregistered non-medical devices in the PRC. One of its unregistered products has been the subject of inquiries from two district level branches of the SAMR, Xuhui MSA and Huangpu MSA, as to whether the product was properly sold as a non-medical device. In January 2019, Venus Concept China had applied to register a version of this non-medical device as a medical device with the National Medical Products Administration of PRC, or NMPA. On June 12, 2019, Venus Concept China was informed that Xuhui MSA had opened an administrative investigation case related to whether the device is an unregistered medical device, as a result of a complaint that Xuhui MSA received from a former distributor of Venus Concept China. Huangpu MSA notified Venus Concept China that it would be suspending its separate investigation against Venus Concept China, pending the results of the Xuhui MSA investigation. We and Venus Concept China have voluntarily stopped sales in China of this product. On December 11, 2019, Xuhui MSA informed Venus Concept China that a determination had been made by the Shanghai Medical Products Administration that Versa’s IPL function should be administered as a Class II medical device. Xuhui MSA also suggested that Venus Concept China consider a voluntary recall of all Versa units sold in China. Venus Concept China is currently contemplating a recall plan. In late January 2020, Venus Concept China received a copy of the Shanghai Medical Products Administration’s determination that because of the intended uses for Versa’s IPL function comprise medical treatment functions such as “treatment of benign pigmented epidermis and skin lesions,” Versa’s IPL function should be administered as a Class II medical device. Venus Concept China has not yet received a notice of proposed penalty decision from Xuhui MSA. Venus Concept China has not yet received a determination from NMPA on its application for registering Versa’s IPL function as a medical device. In addition to the product that is the subject of an administrative investigation, Venus Concept China also sells two other products in the PRC, which are not registered as medical devices with the NMPA. Venus Concept China may not be able to convince the relevant SAMR authorities that the product that is the subject of an administrative investigation was properly classified, or that any of its other products that might be the subject of future government investigations, is properly classified. If any of the products sold by us as unregistered products is ultimately determined to be a medical device, the registration process with the NMPA could be extensive and time-consuming, potentially resulting in Venus Concept China’s inability to sell such products in the PRC for several years. Venus Concept China’s prior sales of those products could also subject it to material administrative penalties if it is determined that the products were sold in the absence of necessary registrations with NMPA. These administrative penalties could include limitations on future sales, corrective actions, including product recalls, disgorgement of profits and fines, the future imposition of which could materially adversely affect our business, operations, financial condition and reputation in the market. Although the revenue generated from the product that is the subject of the investigation did not represent a material amount of our total revenues for the years ended December 31, 2019 or 2018, monetary penalties nonetheless could be material.

 

 

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We are the subject of purported class action lawsuits, and additional litigation may be brought against us in the future.

 

Between May 23, 2018 and June 11, 2019, four putative shareholder class actions complaints were filed against us, certain of our former officers and directors, certain of our venture capital investors, and the underwriters of our IPO.  Two of these complaints, Wong v. Restoration Robotics, Inc., et al., No. 18CIV02609, and Li v. Restoration Robotics, Inc., et al., No. 19CIV08173 (together, the “State Actions”), were filed in the Superior Court of the State of California, County of San Mateo, and assert claims under Sections 11, 12(a)(2) and 15 of the Securities Act of 1933, or the Securities Act. The other two complaints, Guerrini v. Restoration Robotics, Inc., et al., No. 5:18-cv-03712-EJD and Yzeiraj v. Restoration Robotics, Inc., et al., No. 5:18-cv-03883-BLF (together, the “Federal Actions”), were filed in the United States District Court for the Northern District of California, and assert claims under Sections 11 and 15 of the Securities Act.  The complaints all allege, among other things, that our Registration Statement filed with the SEC on September 1, 2017 and the Prospectus filed with the SEC on October 13, 2017 in connection with our IPO were inaccurate and misleading, contained untrue statements of material facts, omitted to state other facts necessary to make the statements made not misleading and omitted to state material facts required to be stated therein. The complaints seek unspecified monetary damages, other equitable relief and attorneys’ fees and costs.  

 

In the State Actions, we, along with the other defendants, successfully demurred to the initial Wong complaint for failure to state a claim, and secured a stay of both cases based on the forum selection clause contained in our Amended and Restated Certificate of Incorporation, which designates the federal district courts as the exclusive forums for claims arising under the Securities Act.  However, on December 19, 2018, the Delaware Court of Chancery in Sciabacucchi v. Salzberg held that exclusive federal forum provisions are invalid under Delaware law. Based on this ruling, the San Mateo Superior Court lifted its stay of State Actions on December 10, 2019. On January 17, 2020, Plaintiffs in the State Actions filed a consolidated amended complaint for violations of federal securities laws, alleging again that, among other things, our Registration Statement filed with the SEC on September 1, 2017 and the Prospectus filed with the SEC on October 13, 2017 in connection with our IPO were inaccurate and misleading, contained untrue statements of material fact, omitted to state other facts necessary to make the statements made not misleading and omitted to state material facts required to be stated therein. The complaint seeks unspecified monetary damages, other equitable relief and attorneys’ fees and costs. On February 24, 2020, we demurred to the consolidated amended complaint for failure to state a claim. A hearing on our demurrer is currently scheduled for May 8, 2020. On March 18, 2020, the Delaware Supreme Court reversed the Chancery Court’s decision in Sciabacucchi v. Salzberg and held that exclusive federal forum provisions are valid under Delaware law. The Company intends to seek appropriate relief based on the Sciabacucchi decision.

 

In the Federal Actions, which have been consolidated under the caption In re Restoration Robotics, Inc. Securities Litigation, Case No. 5:18-cv-03712-EJD, Lead Plaintiff Eduardo Guerrini filed his consolidated amended complaint for violations of federal securities laws on November 30, 2018. The consolidated amended complaint alleges again that, among other things, our Registration Statement filed with the SEC on September 1, 2017 and the Prospectus filed with the SEC on October 13, 2017 in connection with our IPO were inaccurate and misleading, contained untrue statements of material facts, omitted to state other facts necessary to make the statements made not misleading and omitted to state material facts required to be stated therein. On January 29, 2019, we, along with certain of our former officers and directors, filed a motion to dismiss the consolidated amended complaint for failure to state a claim. On October 18, 2019, the District Court granted our motion to dismiss as to all but two allegedly false or misleading statements contained in our Prospectus. On December 9, 2019, we filed our answer to the consolidated amended complaint denying the falsity of these statements, and discovery is underway.

 

In addition to the State and Federal 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 our former officers and directors breached their fiduciary duties, have been unjustly enriched and violated Section 14(a) of the Securities Exchange Act of 1934, or the Exchange Act, in connection with our IPO and our 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 during the pendency of the Federal Actions, and the case remains stayed.  

 

 

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In addition to the actions described above relating to our IPO, two lawsuits purporting to challenge disclosures made in connection with our merger have also been filed. The first, captioned Bushansky v. Restoration Robotics, Inc., et al., No. 5:19-cv-06004-MMC, alleged, among other things, that defendants violated Sections 14(a) and 20(a) of the Exchange Act and SEC Rule 14a-9. The complaint alleged that the proxy statement filed with the SEC by Restoration Robotics on September 10, 2019 in connection with the Merger omitted or misrepresented material information. The complaint sought, among other things, injunctive relief, unspecified damages, and attorneys’ fees and costs. On November 6, 2019, the plaintiff voluntarily dismissed the Bushansky action with prejudice as to his individual claims and without prejudice as to the claims of the putative class.

 

The second, a putative shareholder class action complaint captioned Pak v. Restoration Robotics, Inc., et al., No. 1:19-cv-02237, was filed in the United States District Court for the District of Delaware on December 6, 2019. The complaint alleges, among other things, that defendants violated Sections 14(a) and 20(a) of the Exchange Act and SEC Rule 14a-9. The complaint alleges that the proxy statement filed with the SEC by Restoration Robotics on September 10, 2019 in connection with the Merger contained false or misleading information. The complaint seeks, among other things, compensatory and/or rescissory damages, and attorneys’ fees and costs. On February 26, 2020, the District Court appointed Joon Pak as Lead Plaintiff in the Pak action, and approved his selection of Lead Counsel.

 

While we believe these claims to be without merit, we cannot assure you that additional claims alleging the same or similar facts will not be filed. Any litigation could result in substantial costs and a diversion of management’s attention and resources.

 

We rely on a limited number of third-party contract manufacturers for the production of our systems and only have contracts with certain suppliers for the components used in our systems. The failure of these third parties to perform could adversely affect our ability to meet demand for our systems in a timely and cost effective manner.

 

We rely on third-party contract manufacturers in Karmiel, Israel, Nazareth, Israel, Mazet, France, Weston, Florida and San Jose, California for the manufacture of the majority of our systems. Other than with respect to the ARTAS^® iX System, the majority of the components used in our systems are available off the shelf and we do not rely on any single supplier, and as a result we do not have any long-term supply agreements for these components. Our reliance on third-party contract manufacturers and suppliers involves a number of risks, including, among other things:

 

 

 

 

 

 

 

 

 

 

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If any of these risks materialize, they could significantly increase our costs and effect our ability to meet demand for our systems. If we are unable to satisfy commercial demand for our systems in a timely manner, our ability to generate revenue would be impaired, market acceptance of our systems and our reputation could be adversely affected, and customers may instead purchase or use our competitors’ products. In addition, we could be forced to secure new or alternative contract manufacturers or suppliers. Securing a replacement contract manufacturer or supplier could be difficult. The introduction of new or alternative manufacturers or suppliers also may require design changes to our medical device products that are subject to FDA and other regulatory clearances or approvals, or a new or revised CE Certificate of Conformity. We may also be required to assess the new manufacturer’s compliance with all applicable regulations and guidelines, which could further impede our ability to manufacture our systems in a timely manner. As a result, we could incur increased production costs, experience delays in deliveries of our systems, suffer damage to our reputation, and experience an adverse effect on our business and financial results.

 

We rely on a single third-party manufacturer for the manufacturing of the reusable procedure kits, disposable procedure kits and spare procedures kits used with the ARTAS^® System and the ARTAS^® iX System.

 

NPI Solutions, Inc., or NPI, produces reusable procedure kits, disposable procedure kits and spare kits used with the ARTAS^® System and ARTAS^® iX System. If the operations of NPI are interrupted or if it is unable or unwilling to meet our delivery requirements due to capacity limitations or other constraints, we may be limited in our ability to fulfill new customer kit orders required for use with the existing ARTAS^® System and ARTAS^® iX System. Any change to another contract manufacturer would likely entail significant delay, require us to devote substantial time and resources, and could involve a period in which our products could not be produced in a timely or consistently high-quality manner, any of which could harm our reputation and results of operations.

 

We have a manufacturing agreement for consumables with NPI for the supply of consumable products, including reusable procedure kits, disposable procedure kits and spare procedure kits used with the ARTAS^® System and ARTAS^® iX System, pursuant to both of which we make purchases on a purchase order basis. The agreement is effective for an initial term of two years and will continue to automatically renew for additional twelve-month periods, subject to either party’s right to terminate the agreement upon 180 days advance notice during the initial term if our quarterly forecasted demand falls below 75% of our historical forecasted demand for the same period in the previous year or upon 120 days’ advance notice after the initial term.

 

In addition, our reliance on NPI involves a number of other risks, including, among other things, that:

 

 

 

 

 

 

If any of these risks materialize, it could significantly increase our costs, our ability to generate net sales would be impaired, market acceptance of our products could be adversely affected, and customers may instead purchase or use our competitors’ products, which could have a materially adverse effect on our business, financial condition and results of operations.

 

 

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Furthermore, if we are required to change the manufacturing of our various procedure kits, we will be required to verify that the new manufacturer maintains facilities, procedures and operations that comply with our quality and applicable regulatory requirements, which could further impede our ability to manufacture the procedure kits in a timely manner. Transitioning to a new supplier could be time-consuming and expensive, may result in interruptions in our operations and product delivery. The occurrence of these events could harm our ability to meet the demand for our products in a timely or cost-effective manner.

 

We cannot assure you that we will be able to secure alternative equipment and materials and utilize such equipment and materials without experiencing interruptions in our workflow. If we should encounter delays or difficulties in securing, reconfiguring or revalidating the equipment and components we require for the ARTAS^® System and ARTAS^® iX System, including the related consumables, our reputation, business, financial condition and results of operations could be negatively affected.

 

If NPI is unable to manufacture the reusable procedure kits, disposable procedure kits and spare procedures kits used with the ARTAS^® System and the ARTAS^® iX System in high-quality commercial quantities successfully and consistently to meet demand, our growth in the hair restoration market may be limited.

 

To manufacture our reusable procedure kits, disposable procedure kits and spare procedure kits in the quantities that we believe will be required to meet anticipated market demand, NPI will need to increase manufacturing capacity, which will involve significant challenges. In addition, the development of commercial-scale manufacturing capabilities will require us and NPI to invest substantial additional funds and hire and retain the technical personnel who have the necessary manufacturing experience. Neither we nor NPI may successfully complete any required increase to existing manufacturing processes in a timely manner, or at all.

 

If NPI is unable to produce the reusable procedure kits, disposable procedure kits and spare kits in sufficient quantities to meet anticipated customer demand, our revenue, business, and financial prospects would be harmed. The limited experience NPI has in producing larger quantities of the procedure kits may also result in quality issues, and possibly result in product recalls. Manufacturing delays related to quality control could harm our reputation and decrease our revenue. Any recall could be expensive and generate negative publicity, which could impair our ability to market the ARTAS^® System and the ARTAS^® iX System and procedures and negatively affect our results of operations.  

 

If we are unable to manufacture our next generation ARTAS^® System, called the ARTAS^® iX System in high-quality commercial quantities successfully and consistently to meet demand, our penetration of the hair restoration market will be limited, and our reputation could be harmed.

 

To manufacture our ARTAS^® iX System in the quantities that we believe will be required to meet anticipated market demand, we will need to develop and maintain sufficient manufacturing capacity, which will involve significant challenges. Historically, we have not manufactured any of our other ARTAS^® System products in-house or without the contract manufacturer involvement. We have been manufacturing the ARTAS^® iX System without a third-party contract manufacturer’s involvement for over 18 months. The continuous development of commercial-scale manufacturing capabilities will require us (or our contract manufacturer for ARTAS^® iX System, if we decide to utilize one on a long-term basis) to invest substantial additional funds and hire and retain the technical personnel who have the necessary manufacturing experience. We also may become subject to additional, onerous regulatory requirements from the U.S. regulatory agencies as well as foreign regulatory agencies. Neither we nor a third-party manufacturer, if one is utilized, may successfully complete any required increase to existing manufacturing processes in a timely manner, or at all.

 

If we or a contract manufacturer, if one is utilized, are unable to produce the ARTAS^® iX System in sufficient quantities to meet anticipated customer demand, our revenue, business, financial prospects, and reputation would be harmed. The limited experience we have or a third-party manufacturer may have, if one is utilized, in producing the ARTAS^® iX System may also result in quality issues, and possibly result in product recalls. Manufacturing delays related to quality control could harm our reputation and decrease our revenue. Any recall could be expensive and generate negative publicity, which could impair our ability to market the ARTAS^® iX System and procedures and further affect our results of operations.

 

 

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Both our manufacturing of certain of our systems and NPI’s manufacturing of the ARTAS procedure kits are dependent upon third-party suppliers and, in some cases, sole suppliers, for the majority of our components, subassemblies and materials, making us vulnerable to supply shortages and price fluctuations, which could harm our business.

 

We and NPI, as the case may be, rely on several sole source suppliers, including Kuka Robotics, Inc., FLIR Integrated Imaging Solutions Inc. and 3D-CAM International Corporation, for certain components of the ARTAS^® iX System, reusable procedure kits, disposable procedure kits and spare procedure kits. We also rely on other suppliers for some of the components used to manufacture our other devices. These suppliers may be unwilling or unable to supply components of these systems to us or NPI reliably and at the levels we anticipate or require to meet demand for our products. For us to be successful, our suppliers must be able to provide products and components in substantial quantities, in compliance with regulatory requirements, in accordance with agreed upon specifications, at acceptable costs and on a timely basis. An interruption in our commercial operations could occur if we encounter delays or difficulties in securing these components, and if we cannot then obtain an acceptable substitute. We source a number of components used in the manufacture of our systems from China; the severity of the coronavirus outbreak could make access to our existing supply chain difficult or impossible and could materially impact our business, and any disruption in the chain of supply may result in manufacturing delays and inventory shortages. If we are required to transition to new third-party suppliers for certain components of our systems or our ARTAS procedure kits, we believe that there are only a few such suppliers that can supply the necessary components. A supply interruption, price fluctuation or an increase in demand beyond our current suppliers’ capabilities could harm our ability to manufacture our systems and NPI’s ability to manufacture our ARTAS procedure kits until new sources of supply are identified and qualified. In addition, the use of components or materials furnished by these alternative suppliers could require us to alter our operations.

 

Our reliance on these suppliers subjects us to a number of risks that could harm our reputation, business, and financial condition, including, among other things:

 

 

 

 

 

 

 

 

 

 

 

Where practicable, we are seeking, or intending to seek, second-source manufacturers for certain of our components. However, we cannot provide assurance that we will be successful in establishing second-source manufacturers or that the second-source manufacturers will be able to satisfy commercial demand for our systems.

 

If any of these risks materialize, costs could significantly increase and our ability to meet demand for our products could be impacted. If we are unable to satisfy commercial demand for our systems in a timely manner, our ability to generate revenue from these systems would be impaired.

 

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We forecast sales to determine requirements for components and materials used in our systems and if our forecasts are incorrect, we may experience delays in shipments or increased inventory costs.

 

We keep limited materials, components and finished products on hand. To manage our operations, with third-party contract manufacturers and suppliers, we forecast anticipated system orders and material requirements to predict our inventory needs and enter into purchase orders on the basis of these requirements. Several components of our systems require significant order lead time. As our business continues to expand and if our needs for components and materials increases beyond our estimates, our manufacturers and suppliers may be unable to meet our demand. In addition, if we underestimate our component and material requirements, we may have inadequate inventory, which could interrupt, delay, or prevent delivery of our systems. In contrast, if we overestimate our requirements, we may have excess inventory, which would increase use of our working capital. Any of these occurrences would negatively affect our financial condition and the level of satisfaction our customers have with our business.

 

Although we actively train our customers on the use of our systems and post-treatment care, misuse by the operator of our systems may result in adverse results and may subject us to liability or otherwise harm our reputation and our business.

 

We and our independent distributors market and sell our systems to physicians. In the U.S. and certain international markets, subject to local regulations, physician customers can generally allow nurse practitioners, technicians and other non-physicians to perform aesthetic procedures using our systems under their direct supervision. Although we and our distributors provide training on the use of our systems as well as the proper post-treatment care, we do not supervise the procedures performed with our systems, nor can we be certain that physicians are directly supervising procedures according to our recommendations. The potential misuse of our systems or failing to adhere to operating guidelines can cause skin damage and underlying tissue damage, which could harm the reputation of our systems and expose us to costly product liability litigation. In addition, patients may not comply with post-treatment guidelines, which could also lead to adverse results and subject us to liability.  

 

We and our distributors offer system training sessions, but neither we nor our distributors require purchasers or operators of our systems to attend training sessions. The lack of required training for operators of our systems and the use of our systems by non-physicians may result in product misuse and adverse treatment outcomes, which could harm our reputation and expose us to costly product liability litigation.  

 

Product liability suits could be brought against us for defective design, labeling, material, workmanship, or software or misuse of our systems, and could result in expensive and time-consuming litigation, payment of substantial damages, an increase in our insurance rates and substantial harm to our reputation.

 

If our systems are defectively designed, manufactured, or labeled, contain defective components or software, or are misused, we may become subject to substantial and costly litigation by our customers or their patients. For example, if a patient is injured or suffers unanticipated adverse events after undergoing a procedure using one of our systems, or if system operating guidelines are found to be inadequate, we may be subject to product liability claims. Claims could also be asserted under state consumer protection acts. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities. Even successful defense would require significant financial and management resources. Regardless of the merits or eventual outcome, product liability claims may result in:

 

 

 

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We currently have product liability insurance, but any claim that may be brought against us could result in a court judgment or settlement in an amount that is not covered, in whole or in part, by our insurance or that is in excess of the limits of our insurance coverage. Our insurance policies also have various exclusions and deductibles, and we may be subject to a product liability claim for which we have no coverage. We will have to pay any amounts awarded by a court or negotiated in a settlement that exceed our coverage limitations or that are not covered by our insurance, and we may not have, or be able to obtain, sufficient funds to pay such amounts. Moreover, in the future, we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses.

 

Third parties may attempt to reverse engineer or produce counterfeit versions of our systems which may negatively affect our reputation, or harm patients and subject us to product liability claims.

 

Third parties have sought in the past, and in the future may seek, to reverse engineer or develop counterfeit products that are substantially similar or compatible with our systems and available to practitioners at lower prices than our own. Practitioners may be able to make unauthorized use of our systems’ technology. In addition, if copies of products that have been reverse engineered or counterfeit products are used with or in place of our own, we could be subject to product liability claims resulting from the use of damaged or defective goods and suffer damage to our reputation.  

 

Security breaches and other disruptions could compromise our information and expose us to liability.  

 

In the ordinary course of our business and to the extent necessary, we rely on software to control the ongoing use of our systems, collect and aggregate diagnostic data, and collect and store sensitive data, including intellectual property and proprietary business information, and certain personally identifiable information of customers, distributors, consultants and employees in our data centers and on our networks. The secure processing, maintenance, and transmission of this information is important to our operations and business strategy. We have established physical, electronic, and policy measures to secure our systems in an attempt to prevent a system breach and the theft of data we collect, and we rely on commercially available systems, software, tools, and monitoring in our effort to provide security for our information technology systems and the digital information we collect, process, transmit and store. The third-party providers of such information technology systems and related infrastructure may have or may obtain access to our systems and data within them. Despite our security measures, our information technology systems and related infrastructure, and those of our current and any future collaborators, contractors and consultants and other third parties on which we rely, may be vulnerable to attacks by computer viruses, malware, hackers or breaches due to malfeasance, employee or contractor error, telecommunication or electrical failures, terrorism or other created or natural disasters. The risk of a cyber-attack or cyber intrusion by computer hackers from around the world, including those from foreign governments and terrorists, has greatly increased in number, intensity and sophistication. In addition, the prevalent use of mobile devices that access confidential information increases the risk of data security breaches, which could lead to the loss of confidential information or other intellectual property. The costs to us to mitigate network security problems, bugs, viruses, worms, malicious software programs and security vulnerabilities could be significant, and while we have implemented security measures to protect our data security and information technology systems, our efforts to address these problems may not be successful, and these problems could result in unexpected interruptions, delays, cessation of service and other harm to our business and our competitive position. If such an event were to occur and cause interruptions in our operations, it could result in a material disruption of our product development programs. Moreover, if a computer security breach affects our systems or results in the unauthorized release of personally identifiable information, our reputation could be materially damaged. In addition, such a breach may require notification to governmental agencies, the media or individuals pursuant to various federal and state privacy and security laws, if applicable, including the Health Insurance Portability and Accountability Act of 1996, or HIPAA, as amended by the Health Information Technology for Clinical Health Act of 2009, or HITECH, and its implementing rules and regulations, as well as regulations promulgated by the Federal Trade Commission and state breach notification laws, or the laws or one or more foreign jurisdictions including the European Union’s, or the EU, the General Data Protection Regulation 2016/679, or GDPR. We could also be exposed to a risk of loss or litigation and potential liability, which could materially adversely affect our business, results of operations and financial condition.

 

 

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The clinical trial process required to obtain regulatory clearances or approvals is lengthy and expensive with uncertain outcomes and could result in delays in new product introductions.

 

In order to obtain 510(k) clearance for certain of our systems, including the ARTAS^® System, we were required to conduct clinical trials, and we expect to conduct clinical trials in support of marketing authorization for future products and product enhancements. Conducting clinical trials is a complex and expensive process, can take many years, and outcomes are inherently uncertain. We may suffer significant setbacks in clinical trials, even after earlier clinical trials showed promising results, and failure can occur at any time during the clinical trial process. Any of our products may malfunction or may produce undesirable adverse effects that could cause us or regulatory authorities to interrupt, delay or halt clinical trials. We, FDA, or another regulatory authority may suspend or terminate clinical trials at any time to avoid exposing trial participants to unacceptable health risks.

 

Successful results of pre-clinical studies are not necessarily indicative of future clinical trial results, and predecessor clinical trial results may not be replicated in subsequent clinical trials. Additionally, FDA may disagree with our interpretation of the data from our pre-clinical studies and clinical trials, or may find the clinical trial design, conduct or results inadequate to prove safety or efficacy, and may require us to pursue additional pre-clinical studies or clinical trials, which could further delay the clearance or approval of our products. The data we collect from our pre-clinical studies and clinical trials may not be sufficient to support FDA clearance or approval, and if we are unable to demonstrate the safety and efficacy of our future products in our clinical trials, we will be unable to obtain regulatory clearance or approval to market our products.

 

In addition, we may estimate and publicly announce the anticipated timing of the accomplishment of various clinical, regulatory and other product development goals, which are often referred to as milestones. These milestones could include the obtainment of the right to affix the CE Mark in the European Union; the submission to FDA of an investigational device exemption, or IDE, application to commence a pivotal clinical trial for a new product; the enrollment of patients in clinical trials; the release of data from clinical trials; and other clinical and regulatory events. The actual timing of these milestones could vary dramatically compared to our estimates, in some cases for reasons beyond our control. We cannot assure you that we will meet our projected milestones and if we do not meet these milestones as publicly announced, the commercialization of our products may be delayed and, as a result, our stock price may decline.

 

Delays in the commencement or completion of clinical testing could significantly affect our product development costs. We do not know whether planned clinical trials will begin on time, need to be redesigned, enroll an adequate number of patients in a timely manner or be completed on schedule, if at all. The commencement and completion of clinical trials can be delayed or terminated for a number of reasons, including delays or failures related to:

 

 

 

 

 

 

 

 

 

 

 

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Patient enrollment in clinical trials and completion of patient follow-up depend on many factors, including the size of the patient population, the nature of the trial protocol, the proximity of patients to clinical sites, the eligibility criteria for the clinical trial, patient compliance, competing clinical trials and clinicians’ and patients’ perceptions as to the potential advantages of the product being studied in relation to other available therapies, including any new treatments that may be cleared or approved for the indications we are investigating. For example, patients may be discouraged from enrolling in our clinical trials if the trial protocol requires them to undergo extensive post-treatment procedures or follow-up to assess the safety and efficacy of a product, or they may be persuaded to participate in contemporaneous clinical trials of a competitor’s product. In addition, patients participating in our clinical trials may drop out before completion of the trial or suffer adverse medical events unrelated to our products. Delays in patient enrollment or failure of patients to continue to participate in a clinical trial may delay commencement or completion of the clinical trial, cause an increase in the costs of the clinical trial and delays, or result in the failure of the clinical trial.  

 

We could also encounter delays if FDA concluded that our financial relationships with our principal investigators resulted in a perceived or actual conflict of interest that may have affected the interpretation of a study, the integrity of the data generated at the applicable clinical trial site or the utility of the clinical trial itself. Principal investigators for our clinical trials may serve as scientific advisors or consultants to us from time to time and receive cash compensation and/or stock options in connection with such services. If these relationships and any related compensation to or ownership interest by the clinical investigator carrying out the study result in perceived or actual conflicts of interest, or FDA concludes that the financial relationship may have affected interpretation of the study, the integrity of the data generated at the applicable clinical trial site may be questioned and the utility of the clinical trial itself may be jeopardized, which could result in the delay or rejection of our marketing application by FDA. Any such delay or rejection could prevent us from commercializing any of our products in development.

 

Furthermore, clinical trials may also be delayed because of ambiguous or negative interim results. In addition, a clinical trial may be suspended or terminated by us, FDA, the IRB overseeing the clinical trial at issue, the Data Safety Monitoring Board for such trial, any of our clinical trial sites with respect to that site, or other regulatory authorities due to several factors, including:

 

 

 

 

 

 

 

Additionally, changes in regulatory requirements and guidance may occur and we may need to amend clinical trial protocols to reflect these changes. Amendments may require us to resubmit our clinical trial protocols to IRBs for reexamination, which may impact the costs, timing or successful completion of a clinical trial. If we experience delays in completion of, or if we terminate, any of our clinical trials, the commercial prospects for our products may be harmed and our ability to generate product revenue from these products will be delayed or not realized at all. In addition, any delays in completing our clinical trials will increase our costs, slow down our product development and approval process and jeopardize our ability to commence product sales and generate revenue. Any of these occurrences may significantly harm our business, financial condition and prospects significantly. In addition, many of the factors that cause, or lead to, a delay in the commencement or completion of a clinical trial may also ultimately lead to the denial of regulatory approval of the subject product.

 

 

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We have increased the size of our company significantly over a short period, and difficulties managing our continued growth could adversely affect our business, operating results, and financial condition.

 

We have increased our head count from a few employees in 2009 to 525 employees as of December 31, 2019, which includes employees of Restoration Robotics. This growth has placed, and may continue to place, a strain on our management and administrative, operational and financial infrastructure. Our ability to manage our operations and growth requires the continued improvement of our operational, financial and management controls and reporting systems and procedures. If we are unable to manage our growth effectively or if we are unable to attract, incentivize and integrate additional highly qualified personnel, our business, operating results, and financial condition may be harmed.

 

We depend on skilled and experienced personnel to operate our business effectively. If we are unable to recruit, hire, and retain these employees, our ability to manage and expand our business will be hampered, which could negatively affect our future revenue and profitability.

 

We are highly dependent on the skills, experience, and efforts of our executive officers and other key employees. Our success depends in part on our continued ability to attract, retain and motivate highly qualified management, sales and marketing, product development and other personnel. The loss of services of any of these individuals could delay or prevent enhancement of the execution of our business and the development of future products and services. Although we have entered into employment agreements with certain members of our senior management team, these agreements do not provide for a fixed term of service.

 

Competition for qualified personnel in the medical device field is intense due to the limited number of individuals who possess the skills and experience required by the industry. Our ability to retain skilled employees and our success in attracting and hiring new skilled employees will be a critical factor in determining whether we will be successful in the future. We will face significant challenges and risks in hiring, training, managing, and retaining sales and marketing, product development, financial reporting, and regulatory compliance employees, many of whom may be geographically dispersed. In addition, to the extent we hire personnel from competitors, we may be subject to allegations that they have been improperly solicited or that they have divulged proprietary or other confidential information, or that their former employers own their research output. The failure to attract and retain personnel, particularly sales and marketing and product development personnel, could materially harm our ability to compete effectively and grow our business.

 

We incur significant costs because of operating as a public company, and our management devotes substantial time to new compliance initiatives.

 

We incur significant legal, accounting and other expenses as a public company, including costs resulting from public company reporting obligations under the Exchange Act and regulations regarding corporate governance practices. The listing requirements of the Nasdaq Global Market and the rules of the Securities and Exchange Commission, or the SEC, require that we satisfy certain corporate governance requirements relating to director independence, filing annual and interim reports, stockholder meetings, approvals and voting, soliciting proxies, conflicts of interest and a code of conduct. Our management and other personnel devote a substantial amount of time to ensure that we comply with all of these requirements. Moreover, the reporting requirements, rules and regulations will continue to increase our legal and financial compliance costs and will make some activities more time-consuming and costlier. Any changes we make to comply with these obligations may not be sufficient to allow us to satisfy our obligations as a public company on a timely basis, or at all. These reporting requirements, rules and regulations, coupled with the increase in potential litigation exposure associated with being a public company, could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors or board committees or to serve as executive officers, or to obtain certain types of insurance, including directors’ and officers’ insurance, on acceptable terms.

 

 

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We have identified material weaknesses in our internal control over financial reporting and if we fail to remediate these weaknesses and maintain proper and effective internal controls, our ability to produce accurate and timely financial statements could be impaired, which could harm our operating results, our ability to operate our business and investors’ views of the Company.

 

Prior to the Merger, Venus Concept Ltd. was a private company. The Merger has been accounted for as a reverse acquisition with Venus Concept Ltd. as the acquiring company for accounting purposes, and the Company as the legal acquirer. As a result, upon consummation of the Merger, the historical financial statements of Venus Concept Ltd. became the historical financial statements of the combined organization. As a private company, Venus Concept Ltd. has not historically prepared public company level financial statements. In connection with our preparation and the audit of our consolidated financial statements as of and for the years ended December 31, 2018 and 2017, we identified several material weaknesses as defined under the Exchange Act and by the Public Company Accounting Oversight Board (United States) in our internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim consolidated financial statements will not be prevented or detected on a timely basis. The material weaknesses that were identified are as follows:

 

 

 

 

To remediate the material weaknesses associated with lack of effective controls over the financial statement close and reporting process, as well as lack of an effective control environment with formal processes and procedures, described above, and to prevent similar deficiencies in the future, we added additional controls and procedures in 2019.  As of December 31, 2019, these material weaknesses were fully remediated. 

 

However, as of December 31, 2019, we have not yet implemented centralized procedures or a technology solution that would ensure appropriate lessor accounting processes and enable the accurate and timely preparation of consolidated financial statements. We plan to establish adequate centralized procedures related to lessor accounting processes in 2020, and as a result, we concluded that the material weakness associated with lessor accounting processes had not been remediated at December 31, 2019. Due to the material weakness in internal control over financial reporting associated with the lessor accounting processes automation our management concluded that our internal control over financial reporting was not effective as of December 31, 2019.

 

The remediation measures we have taken and will need to take have been and may be time consuming, costly, and might place significant demands on our financial and operational resources. The material weaknesses associated with the lessor accounting processes automation will not be remediated until the necessary controls have been implemented and are operating effectively. We do not know the specific time frame needed to fully remediate this material weakness.

 

Implementing any appropriate changes to our internal controls and continuing to update and maintain internal controls may distract our officers and employees, entail substantial costs to implement new processes and modify our existing processes and take significant time to complete. If we fail to enhance our internal control over financial reporting to meet the demands that are placed upon us as a public company, including the requirements of the Sarbanes-Oxley Act, we may be unable to report our financial results accurately, which could increase operating costs and harm our business, including investors’ perception of our business. The actions we plan to take are subject to continued management review supported by confirmation and testing, as well as audit committee oversight. While we expect to fully remediate the material weakness associated with the lease accounting process automation, we cannot assure you that we will be able to do so in a timely manner, which could impair our ability to report our financial results.

 

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We or the third parties upon whom we depend may be adversely affected by earthquakes or other natural disasters and our business continuity and disaster recovery plans may not adequately protect us from a serious disaster.

 

Some of our facilities are located in San Jose, California, which in the past has experienced both severe earthquakes and floods. We do not carry earthquake or flood insurance. Earthquakes or other natural disasters could severely disrupt our operations, and have a material adverse effect on our business, results of operations, financial condition and prospects.

 

If a natural disaster, power outage or other event occurred that prevented us from using all or a significant portion of these facilities, that damaged critical infrastructure, such as our manufacturing resource planning for the ARTAS^® System and enterprise quality systems, or that otherwise disrupted operations, it may be difficult for us to achieve our growth strategy for our hair restoration business. The disaster recovery and business continuity plan we have in place are limited and are unlikely to prove adequate in the event of a serious disaster or similar event. We may incur substantial expenses because of the limited nature of our disaster recovery and business continuity plans, which, particularly when taken together with our lack of earthquake or flood insurance, could have a material adverse effect on our business.

 

Furthermore, integral parties in our supply chain are similarly vulnerable to natural disasters or other sudden, unforeseen and severe adverse events. If such an event were to affect our supply chain, it could have a material adverse effect on our business.

 

We may not be able to enforce in all of the jurisdictions in which we have employees covenants not to compete and therefore may be unable to prevent our competitors from benefiting from expertise of some of our former employees.

 

We currently have non-competition agreements with a majority of our employees. These agreements prohibit these employees, if they cease working for us, from directly competing with us or working for our competitors. We may not be able to enforce in all of the jurisdictions in which we have employee covenants not to compete and therefore may be unable to prevent our competitors from benefiting from expertise of some of our former employees.

 

Our employees and independent contractors, including consultants, manufacturers, distributors, commercial collaborators, service providers and other vendors may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements, which could have an adverse effect on our results of operations.

 

We are exposed to the risk that our employees and independent contractors, including consultants, manufacturers, distributors, commercial collaborators, service providers and other vendors may engage in misconduct or other illegal activity. Misconduct by these parties could include intentional, reckless and/or negligent conduct or other unauthorized activities that violate the laws and regulations of FDA and other similar regulatory bodies, including those laws that require the reporting of true, complete and accurate information to such regulatory bodies; manufacturing standards; U.S. federal and state healthcare fraud and abuse, data privacy laws and other similar non-U.S. laws; or laws that require the true, complete and accurate reporting of financial information or data. Activities subject to these laws also involve the improper use or misrepresentation of information obtained in the course of clinical trials, the creation of fraudulent data in our nonclinical studies or clinical trials, or illegal misappropriation of product, which could result in regulatory sanctions and cause serious harm to our reputation. It is not always possible to identify and deter misconduct by employees and other third-parties, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. In addition, we are subject to the risk that a person or government could allege such fraud or other misconduct, even if none occurred. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business and financial results, including, without limitation, the imposition of significant civil, criminal and administrative penalties, damages, monetary fines, disgorgements, individual imprisonment, other sanctions, contractual damages, reputational harm, diminished profits and future earnings and curtailment of our operations, any of which could adversely affect our ability to operate our business and our results of operations.

 

 

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We may seek to acquire companies or technologies, which could disrupt our ongoing business, divert the attention of our management and employees and adversely affect our results of operations.

 

We may, from time to time, evaluate potential strategic acquisitions of other complementary businesses, products or technologies, as well as consider joint ventures and other collaborative projects. We may not be able to identify suitable future acquisition candidates, consummate acquisitions on favorable terms or complete otherwise favorable acquisitions because of antitrust or other regulatory concerns. We cannot be certain that the acquisition of the NeoGraft^® business we completed in 2018 or our business combination with Venus Concept Ltd., which closed on November 7, 2019, or any future acquisitions that we may make, will enhance our business or strengthen our competitive position. In particular, we may encounter difficulties assimilating or integrating the acquired businesses, technologies, products, personnel or operations of the acquired companies, and in retaining and motivating key personnel from these businesses. The integration of these businesses may not result in the realization of the full benefits of synergies, cost savings, innovation and operational efficiencies that may be possible from this integration and these benefits may not be achieved within a reasonable period of time.

 

Risks Related to Intellectual Property

 

If we are unable to obtain, maintain, retain and enforce adequate intellectual property rights covering our products and any future products we develop, others may be able to make, use, or sell products that are substantially the same as our, which could adversely affect our ability to compete in the market.

 

Our commercial success is dependent in part on obtaining, maintaining, retaining and enforcing our intellectual property rights, including our patents and the patents we exclusively licenses. If we are unable to obtain, maintain, retain and enforce sufficiently broad intellectual property protection covering our products and any other products we develop, others may be able to make, use, or sell products that are substantially the same as our products without incurring the sizeable development and licensing costs that we have incurred, which would adversely affect our ability to compete effectively in the market.

 

We have obtained and maintained our existing patents, seek to diligently prosecute our existing patent applications, and seek to file patent applications and obtain additional patents and other intellectual property rights to restrict the ability of others to market products that compete with our current and future products. As of December 31, 2019, Venus Concept Ltd.’s patent portfolio was comprised of 8 issued U.S. patents (all of which cover our (MP)^2® technology that are associated with two different patent families), 7 pending U.S. patent applications, 1 pending U.S. provisional patent application, 12 issued foreign counterpart patents, and 11 pending foreign counterpart patent applications. As of December 31, 2019, Restoration Robotics patent portfolio was comprised of 94 issued U.S. patents, 11 pending U.S. patent applications, 123 issued foreign counterpart patents, and 28 pending foreign counterpart patent applications. However, patents may not be issued on any pending or future patent applications we file, the claims that issue may provide limited or no coverage of its products and technologies, and, moreover, issued patents owned or licensed to us now or in the future may be found by a court to be invalid or otherwise unenforceable at any time. We may choose to not apply for patent protection or may fail to apply for patent protection on important technologies or product candidates in a timely fashion. In addition, we may be unable to obtain patents necessary to protect our technology or products due to prior uses of or claims to similar processes or systems by third parties, or to blocking intellectual property owned by third parties. Even though we have issued patents, and even if additional patents are issued to us in the future, they may be challenged, narrowed, invalidated, held to be unenforceable or circumvented, which could limit our ability to prevent competitors from using similar technology or marketing similar products, or limit the length of time our technologies and products have patent protection. Also, even if our existing and future patents are determined to be valid and enforceable, they may not be drafted or interpreted sufficiently broadly enough to prevent others from marketing products and services similar to ours, by easily designing products around our patents or otherwise developing competing products or technologies. In addition, the ownership or inventorship of one or more of our patents and patent applications may be challenged by one or more parties in one or more jurisdictions, including in a patent interference or a derivation proceeding in the United States Patent and Trademark Office, or the USPTO, or a similar foreign governmental agency or during the course of a litigation. If a competitor were able to successfully design around our patents, we may not be able to block such competition, and furthermore the competitor’s products may be more effective or commercially successful than its products. In addition, our current patents will eventually expire or they may otherwise cease to provide meaningful competitive advantage, and we may be unable to adequately develop new technologies and obtain future patent protection to preserve our competitive advantage or avoid other adverse effects on our business.

 

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We have a number of foreign patent applications, and while we generally try to pursue patent protection in the jurisdictions in which we do or intend to do significant business, the filing, prosecuting, maintaining and defending patents relating to our current or future products in all countries throughout the world would be prohibitively expensive. Furthermore, the laws of some foreign jurisdictions do not protect intellectual property rights to the same extent as laws in the U.S., and many companies have encountered significant difficulties in obtaining, protecting, and defending such rights in foreign jurisdictions. As a result, our intellectual property may not provide us with sufficient rights to exclude others from commercializing products similar or identical to its products in various jurisdictions. Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own products, and we may be unable to prevent such competitors from importing those infringing products into territories where we do not have patent protection or into territories where we do have patent protection but there is no prohibition against such importation, or even if such prohibitions exist, the law or related enforcement is not as strong as in the U.S. These products may compete with our systems and our patents and our other intellectual property rights may not be effective or sufficient to prevent competitors from competing in those jurisdictions. If we encounter such difficulties or are otherwise precluded from effectively protecting and enforcing our intellectual property rights in foreign jurisdictions, our business prospects could be substantially harmed.

 

Our patents may not afford us protection against competitors with similar technology. Because the systems of obtaining patent rights in the U.S. and many foreign jurisdictions mandate that the first filer of a patent application is the only one that may be awarded patent rights related to the invention disclosed therein, and there may be a delay up to eighteen months after filing for the patent applications of others to become public (or, in some cases, are not published until they issue as patents), we cannot be certain that we were the first to file for protection of the inventions set forth in such patent applications. Another party may own patents, may have filed or may in the future file patent applications which may result in issued patents, covering our systems or technology. Third-party patent applications and patents could significantly reduce the scope of protection of patents owned by or licensed to us and limit our ability to obtain a meaningful scope of patent protection or market and sell our products or develop, market and sell future products. In the U.S., other parties may attack the validity of our patents after they issue, in a court proceeding, or in an ex-parte reexamination proceeding or one or more post-grant procedures that were authorized under the America Invents Act of 2011, that were available commencing on March 16, 2013 such as post-grant review, covered business method review or inter partes review, in front of the Patent Trial and Appeal Board of the USPTO. The costs of these proceedings could be substantial. Additionally, patents and patent applications owned by third parties may prevent us from pursuing certain opportunities such as entering into specific markets or developing certain products. Finally, we may choose to enter into markets in which certain competitors own patents or control patent rights to technology that may impede our ability to compete effectively.

 

We may in the future become involved in lawsuits to defend ourselves against intellectual property disputes, which could be expensive and time consuming, and ultimately unsuccessful, and could result in the diversion of significant resources, and hinder our ability to commercialize our existing or future products.

 

Our success depends in part on not infringing the patents or not violating other intellectual property rights of others. Intellectual property disputes can be costly to defend and may cause our business, operating results and financial condition to suffer. Significant litigation regarding patent rights occurs in the medical technology and aesthetic product industries. Whether merited or not, it is possible that U.S. and foreign patents and pending patent applications controlled by third parties may be alleged to cover our products. We may also face allegations that our employees have misappropriated the intellectual property rights of their former employers or other third parties. Our competitors in both the U.S. and abroad, many of which have substantially greater resources and have made substantial investments in patent portfolios and competing technologies, may have applied for or obtained or may in the future apply for and obtain, patents that will prevent, limit, or otherwise interfere with our ability to make, use, sell, and/or export our products. Our competitors may have one or more patents for which they can threaten and/or initiate patent infringement actions against us and/or any of our third-party suppliers. Our ability to defend ourselves and/or our third-party suppliers may be limited by our financial and human resources, the availability of reasonable defenses, and the ultimate acceptance of our defenses by the courts or juries. Furthermore, if such patents are successfully asserted against us, this may result in an adverse impact on our business, including injunctions, damages, and/or attorneys’ fees. From time to time and in the ordinary course of business, we may develop noninfringement and/or invalidity positions with respect to third-party patents, which may or not be ultimately adjudicated as successful by a judge or jury if such patents were asserted against us.

 

 

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We may receive in the future, particularly as a public company, communications from patent holders, including non-practicing entities, alleging infringement of patents or other intellectual property rights or misappropriation of trade secrets, or offering licenses to such intellectual property. Any claims that we assert against perceived infringers could also provoke these parties to assert counterclaims against us alleging that we infringe their intellectual property rights. At any given time, we may be involved as either a plaintiff or a defendant in a number of patent infringement actions, the outcomes of which may not be known for prolonged periods of time.

 

The large number of patents, the rapid rate of new patent applications and issuances, the complexities of the technologies involved, and the uncertainty of litigation significantly increase the risks related to any patent litigation. Any potential intellectual property litigation also could force us to do one or more of the following:

 

 

 

 

 

 

 

 

 

 

From time to time, we may be subject to legal proceedings and claims in the ordinary course of business with respect to intellectual property. Even if resolved in our favor, litigation or other legal proceedings relating to intellectual property claims may cause us to incur significant expenses and could distract our technical and management personnel from their normal responsibilities. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments, and if securities analysts or investors perceive these results to be negative, it could have a material adverse effect on the price of our Common Stock. Finally, any uncertainties resulting from the initiation and continuation of any litigation could have a material adverse effect on our ability to raise the funds necessary to continue our operations.

 

If any of the foregoing occurs, we may have to withdraw existing products from the market or may be unable to commercialize one or more of our products, all of which could have a material adverse effect on our business, results of operations and financial condition. Any litigation or claim against us, even those without merit, may cause us to incur substantial costs, and could place a significant strain on our financial resources, divert the attention of management from our core business and harm our reputation. Furthermore, as the number of participants in the medical aesthetic and robotic hair restoration surgery market grows, the possibility of intellectual property infringement claims against us increases.

 

 

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In addition, we may indemnify our customers, suppliers and international distributors against claims relating to the infringement of the intellectual property rights of third parties relating to our products, methods, and/or manufacturing processes. Third parties may assert infringement claims against our customers, suppliers, or distributors. These claims may require us to initiate or defend protracted and costly litigation on behalf of our customers, suppliers or distributors, regardless of the merits of these claims. If any of these claims succeed, we may be forced to pay damages on behalf of our customers, suppliers, or distributors or may be required to obtain licenses for the products they use. If we cannot obtain all necessary licenses on commercially reasonable terms, our customers may be forced to stop using our products, or our suppliers may be forced to stop providing us with products.

 

Similarly, interference or derivation proceedings provoked by third parties or brought by the USPTO or any foreign patent authority may challenge the priority of inventions or other matters of inventorship with respect to our patents or patent applications. We may also become involved in other proceedings, such as re-examination or opposition proceedings, before the USPTO or its foreign counterparts relating to our intellectual property or the intellectual property rights of others. An unfavorable outcome in any such proceedings could require us to cease using the related technology or to attempt to license rights to it from the prevailing party or could cause us to lose valuable intellectual property rights. Our business could be harmed if the prevailing party does not offer us a license on commercially reasonable terms, if any license is offered at all. Litigation or other proceedings may fail and, even if successful, may result in substantial costs and distract our management and other employees. We may also become involved in disputes with others regarding the ownership of intellectual property rights. For example, we may in the future jointly develop intellectual property with certain parties, and disagreements may therefore arise as to the ownership of the intellectual property developed pursuant to these future relationships. If we are unable to resolve these disputes, we could lose valuable intellectual property rights.

 

The legal determinations relating to patent rights afforded to companies in the medical technology and aesthetic product fields can be uncertain and involve complex legal, factual and scientific questions, sometimes involving important legal principles which remain uncertain or unresolved, and such uncertainty could affect the outcome or intellectual property related legal determinations in which we are involved.

 

Both the U.S. Supreme Court and the U.S. Court of Appeals for the Federal Circuit have made, and will likely continue to make, changes in how the patent laws of the U.S. are interpreted. Similarly, foreign courts have made, and will likely continue to make, changes in how the patent laws in their respective jurisdictions are interpreted. In addition, the U.S. Congress is currently considering legislation that would change certain provisions of U.S. federal patent law. We cannot predict future changes U.S. and foreign courts may make in the interpretation of patent laws or changes to patent laws which might be enacted into law by U.S. and foreign legislative bodies. Those changes may materially affect our patent rights, and our ability to obtain patents in the future.

 

The Leahy-Smith America Invents Act, or the Leahy-Smith Act, includes a number of significant changes to U.S. patent law. These include provisions that affect the way patent applications are prosecuted and also affect patent litigation. The USPTO recently developed new regulations and procedures to govern administration of the Leahy-Smith Act, and many of the substantive changes to patent law associated with the Leahy-Smith Act, and in particular, the first to file provisions, which became effective on March 16, 2013. The first to file provisions limit the rights of an inventor to patent an invention if not the first to file an application for patenting that invention, even if such invention was the first invention. Accordingly, it is not clear what, if any, impact the Leahy-Smith Act will have on the operation of our business.

 

However, the Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the enforcement and defense of our issued patents. For example, the Leahy-Smith Act provides that an administrative tribunal known as the Patent Trial and Appeals Board, or PTAB, provides a venue for challenging the validity of patents at a cost that may be lower than district court litigation and on timelines that are much faster. Although it is not clear what, if any, long-term impact the PTAB proceedings will have on the operation of our business, the initial results of patent challenge proceedings before the PTAB since its inception in 2013 have resulted in the invalidation of many U.S. patent claims. The availability of the PTAB as a lower-cost, faster and potentially more potent tribunal for challenging patents could increase the likelihood that our own patents will be challenged, thereby increasing the uncertainties and costs of maintaining and enforcing them.

 

 

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The protection for our proprietary developments is uncertain because legal means may afford only limited protection and may not adequately protect our rights or permit us to gain or keep our competitive advantage arising from our proprietary developments, which could adversely affect our financial condition and results of operations. For example, any of the following could occur:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

From time to time, we analyze our competitors’ products and services, and may in the future seek to enforce our patents or other rights to counter perceived infringement. In order to preserve and enforce our patent and other intellectual property rights, we may need to make claims or file lawsuits against third parties. Such lawsuits can be expensive and time-consuming and could divert our efforts and attention from other aspects of our business. In addition, in an infringement proceeding, a court may decide that the patent we seek to enforce is invalid or unenforceable, or may refuse to stop the other party from using the technology at issue on the grounds that the patent in question does not cover products accused of infringement. An adverse result in any litigation also could put one or more of our patents at risk of being interpreted more narrowly than previously thought. Similarly, some of our competitors are very large companies that may be able to devote significantly more resources to intellectual property litigation, and may have significantly broader patent portfolios to assert against us if we assert our rights against them. Finally, because of the substantial discovery required in connection with intellectual property litigation in the U.S., substantial burden could be placed on us relating to discovery activities and related costs associated with intellectual property litigation.

 

 

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Prosecution of patent applications, post-grant opposition proceedings, and litigation to establish the validity, enforceability, and scope of patents, assert patent infringement claims against others or defend against patent infringement claims by others are expensive and time-consuming. There can be no assurance that, in the event that claims of any of our patents are challenged by one or more third parties, any court or patent authority ruling on such challenge will determine that such patent claims are valid and enforceable. An adverse outcome in such litigation or post grant proceeding could cause us to lose associated patent rights and may have a material adverse effect on our business.

 

Obtaining and maintaining patent protection depends on compliance with various procedural, document submission, fee payment and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements.

 

The USPTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment, and other similar provisions during the patent application process. In addition, periodic maintenance fees on issued patents often must be paid to the USPTO and foreign patent agencies over the lifetime of the patent. While an unintentional lapse can in many cases be cured by payment of a late fee or by other means in accordance with the applicable rules, there are situations in which noncompliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. Non-compliance events that could result in abandonment or lapse of a patent or patent application include, but are not limited to, failure to respond to official actions within prescribed time limits, non-payment of fees and failure to properly legalize and submit formal documents. If we fail to maintain the patents and patent applications covering our products or procedures, we may not be able to stop a competitor from marketing products that are the same as or similar to our own, which would have a material adverse effect on our business.

 

We may not be able to adequately protect our intellectual property rights throughout the world.

 

Filing, prosecuting and defending patents on our products in all countries throughout the world would be prohibitively expensive. The requirements for patentability may differ in certain countries, particularly developing countries, and the breadth of patent claims allowed can be inconsistent. In addition, the laws of some foreign countries may not protect our intellectual property rights to the same extent as laws in the U.S. Consequently, we may not be able to prevent third parties from practicing our inventions in all countries outside the U.S. Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own products and, furthermore, may export otherwise infringing products to territories in which we have patent protection that may not be sufficient to terminate infringing activities.

 

We do not have patent rights in certain foreign countries in which a market may exist. Moreover, in foreign jurisdictions where we do have patent rights, proceedings to enforce such rights could result in substantial costs and divert our efforts and attention from other aspects of our business, could put our patents at risk of being invalidated or interpreted narrowly, and our patent applications at risk of not issuing. Additionally, such proceedings could provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate, and the damages or other remedies awarded, if any, may not be commercially meaningful. Thus, we may not be able to stop a competitor from marketing and selling in foreign countries products that are the same as or similar to our products, and our competitive position in the international market would be harmed.

 

Unauthorized use of our intellectual property may have occurred or may occur in the future. Any failure to detect or identify unauthorized use of, and otherwise adequately protect, our intellectual property could adversely affect our business, including by reducing the demand for our products.

 

Unauthorized use of our intellectual property may have occurred or may occur in the future. Any reverse engineered or counterfeit products that purport to be our systems that are currently in the market or that may be introduced in the future may harm our reputation and our sale of products. Moreover, if we commence litigation to stop or prevent any unauthorized use of our technology that occurs from reverse engineering or counterfeiting of our products, or if we have to defend allegations of such unauthorized use of a third party’s technology, such litigation would be time-consuming, force us to incur significant costs and divert our attention and the efforts of its management and other employees.

 

 

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We depend on certain technologies that are licensed to us. We do not control these technologies and any loss of our rights to them could prevent us from selling our products.

 

We are dependent on intellectual property license agreements for certain key technology for which we pay royalty fees. We do not own the patents that underlie our licenses. Our rights to use the technology we license are subject to the negotiation of, continuation of and compliance with the terms of those licenses. In some cases, we do not control the prosecution, maintenance, or filing of the patents to which we hold licenses, or the enforcement of these patents against third parties. These patents and patent applications are not written by us or our advisors, and we did not have control over the drafting and prosecution. Our licensors might not have given the same attention to the drafting and prosecution of these patents and applications as we would have if we had been the owners of the patents and applications and had control over the drafting and prosecution. We cannot be certain that drafting and/or prosecution of the licensed patents and patent applications by the licensors have been or will be conducted in compliance with applicable laws and regulations or will result in valid and enforceable patents and other intellectual property rights.

 

Our intellectual property agreements with third parties may be subject to disagreements over contract interpretation, which could narrow the scope of our rights to the relevant intellectual property or technology or increase our financial or other obligations to our licensors.

 

Certain provisions in our intellectual property agreements may be susceptible to multiple interpretations. The resolution of any contract interpretation disagreement that may arise could affect the scope of our rights to the relevant intellectual property or technology or affect financial or other obligations under the relevant agreement, either of which could have a material adverse effect on our business, financial condition, results of operations and prospects.

 

In addition, while it is our policy to require our employees and contractors who may be involved in the conception or development of intellectual property to execute agreements assigning such intellectual property to us, we may be unsuccessful in executing such an agreement with each party who in fact conceives or develops intellectual property that we regard as our own. Our assignment agreements may not be self-executing or may be breached, and we may be forced to bring claims against third parties, or defend claims they may bring against us, to determine the ownership of what we regard as our intellectual property.

 

We may be subject to damages resulting from claims that we or our employees have wrongfully used or disclosed alleged trade secrets of our competitors or are in breach of non-competition or non-solicitation agreements with our competitors.

 

We could in the future be subject to claims that we or our employees have inadvertently or otherwise used or disclosed alleged trade secrets or other proprietary information of former employers or competitors. Although we have procedures in place that seek to prevent our employees and consultants from using the intellectual property, proprietary information, know-how or trade secrets of others in their work for us, we may in the future be subjected to claims that we caused an employee to breach the terms of his or her non-competition or non-solicitation agreement, or that we or these individuals have, inadvertently or otherwise, used or disclosed the alleged trade secrets or other proprietary information of a former employer or competitor. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and could be a distraction to management. If our defense to those claims fails, in addition to paying monetary damages, a court could prohibit us from using technologies or functionalities that are essential to our products, if such technologies or functionalities are found to incorporate or be derived from the trade secrets or other proprietary information of the former employers. An inability to incorporate technologies or functionalities that are important or essential to our products would have a material adverse effect on our business and may prevent us from selling our products or from practicing our processes. In addition, we may lose valuable intellectual property rights or personnel. Moreover, any such litigation or the threat thereof may adversely affect our ability to hire employees or contract with independent sales representatives. A loss of key personnel or their work product could hamper or prevent our ability to commercialize our products, which could have an adverse effect on our business, results of operations and financial condition.

 

 

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If our trademarks and trade names are not adequately protected, then we may not be able to build name recognition in our markets of interest and our business may be adversely affected.

 

We have trademark registrations and applications in the U.S. and also in certain foreign countries for Venus Concept, Venus Viva^®, Venus Versa^®, Venus Freeze^®, Venus Legacy^®, Venus Bliss^™, NeoGraft^®, (MP)^2®, Restoration Robotics, ARTAS^®, and ARTAS^® iX. Actions taken by us to establish and protect our trademarks might not prevent imitation of our products or services, infringement of our trademark rights by unauthorized parties or other challenges to our ownership or validity of our trademarks. If any of these events occur, we may not be able to protect and enforce our rights in these trademarks, which we need in order to build name recognition with potential partners or customers in our markets of interest. In addition, unauthorized third parties may have registered trademarks similar and identical to our trademarks in foreign jurisdictions or may in the future file for registration of such trademarks. If they succeed in registering or developing common law rights in such trademarks, and if we were not successful in challenging such third-party rights, we may not be able to use such trademarks to market our products and services in those countries. If we are unable to register our trademarks, enforce our trademarks, or bar a third-party from registering or using a trademark, our ability to establish name recognition based on our trademarks and compete effectively in our markets of interest may be adversely affected. In addition, our enforcement against third-party infringers or violators may be expensive and time-consuming, and the outcome is unpredictable and may not provide an adequate remedy.  

 

If we are unable to protect the confidentiality of our proprietary information and know-how, the value of our technology and products could be adversely affected.

 

We rely on trade secret protection to protect our interests in proprietary know-how and processes for which, for example, patents are difficult or impossible to obtain or enforce, or which we believe would be best protected by means that do not result in public disclosure. We may not be able to protect our trade secrets adequately. We have limited control over the protection of trade secrets used by our third-party manufacturers and suppliers and could lose future trade secret protection if any unauthorized disclosure of such information occurs. Although we use reasonable efforts to protect our trade secrets, our employees, consultants, contractors and outside scientific advisors may unintentionally or willfully disclose our proprietary information to competitors. Litigating a claim that a third-party illegally obtained and is using any of our trade secrets is expensive and time-consuming, and the outcome is unpredictable. In addition, courts outside the U.S. are sometimes less willing to protect trade secrets. We rely, in part, on non-disclosure and confidentiality agreements with our employees, consultants and other parties to protect our trade secrets and other proprietary technology. These agreements generally require that all confidential information developed by the individual or made known to the individual by us during the course of the individual’s relationship with us be kept confidential and not be disclosed to third parties. However, we may fail to enter into the necessary agreements, and even if entered into, these agreements may be of limited duration or may be breached and we may not have adequate remedies for any unauthorized use or disclosure of our confidential information. Moreover, others may independently and legitimately develop equivalent trade secrets or other proprietary information. In addition, if third parties are able to establish that we are using their proprietary information without their permission, we may be required to obtain a license to that information, or if such a license is not available, re-design our products to avoid any such unauthorized use or permanently stop manufacturing and selling the related products.

 

We could in the future be subject to claims that we or our employees have intentionally or inadvertently used or disclosed alleged trade secrets or other proprietary information of former employers or competitors. Although we have procedures in place that seek to prevent our employees and consultants from using the intellectual property, proprietary information, know-how or trade secrets of others in their work for us, we may in the future be subject to claims that we caused an employee to breach the terms of his or her non-disclosure obligations under one or more agreements, or that we or these individuals have, inadvertently or intentionally used or disclosed the alleged trade secrets or other proprietary information of a former employer or competitor. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, any such litigation could result in substantial costs and could be a distraction to management. If our defense to those claims fails, in addition to paying monetary damages, a court could prohibit it from using technologies or functionalities that are essential to our systems. An inability to incorporate technologies or functionalities that are important or essential to our systems could have a material adverse effect on our business and may prevent us from selling our products or from practicing our processes. In addition, we may lose valuable intellectual property rights or personnel. Moreover, any such litigation or corresponding threat may adversely affect our ability to retain or hire employees or contract with independent sales representatives. A loss of key personnel could hamper or prevent our ability to commercialize our products, which could have an adverse effect on our business, results of operations and financial condition.

 

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We also rely on physical and electronic security measures to protect our proprietary information, but these security measures may be breached or may not provide adequate protection for our property. There is a risk that third parties may obtain and improperly utilize our proprietary trade secrets or other proprietary information to our competitive disadvantage. We may not be able to detect or prevent the unauthorized access or use of such information or take appropriate and timely steps to enforce our intellectual property rights.

 

We may become subject to claims for remuneration for service invention rights by our employees, which could result in litigation and adversely affect our business.

 

A significant portion of our intellectual property has been developed by our employees based in Israel in the course of their employment for Venus Concept Ltd. Under the Israeli Patent Law, 5727-1967, or the Patent Law, inventions conceived by employees during and within the scope of employment with an employer are regarded as “service inventions,” which belong to the employer, absent a specific agreement between the employee and employer giving the employee service invention rights. The Patent Law also provides that if there is no agreement between an employer and an employee with respect to the employee’s right to receive compensation for such “service inventions,” the Israeli Compensation and Royalties Committee, a body constituted under the Patent Law, shall determine whether the employee is entitled to remuneration for his or her service inventions and the scope and conditions for remuneration. While Venus Concept Ltd.’s employees have generally explicitly waived their right to any additional compensation for their contribution to service invention rights, certain current or former employees may not have signed such waivers, and we may face claims from current or former employees demanding remuneration in consideration for Venus Concept Ltd.’s employees’ contribution to service invention rights, which may lead to future litigation, which could be costly and could divert management’s attention and we could be required to pay such remuneration.

 

Indemnification obligations for third party intellectual property claims may increase our costs or require it to cease selling certain products, which could adversely affect our financial condition and results of operations.

 

We may be subject to indemnification claim obligations with respect to our intellectual property rights pursuant to its agreements with our customers. Such indemnification provisions are customary in the industry. Successful claims of infringement or misappropriation by a third-party against us or a customer or other third-party that we indemnify could not only prevent us from distributing certain products or performing certain services, but could also require us to pay substantial damages, royalties, legal fees or other fees.

 

Risks Related to Government Regulation

 

Our devices and our operations are subject to extensive government regulation and oversight both in the U.S. and abroad, and our failure to comply with applicable requirements could harm our business.

 

Certain of our systems are regulated as medical devices subject to extensive regulation in the U.S. and elsewhere, including by FDA and its foreign counterparts. FDA and foreign regulatory agencies regulate, among other things, with respect to medical devices:

 

 

 

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The regulations to which we are subject are complex and have tended to become more stringent over time. Regulatory changes could result in restrictions on our ability to carry on or expand our operations, higher than anticipated costs or lower than anticipated sales.  

 

In the U.S., before we can market a new medical device, or a new use of, new claim for or significant modification to an existing product, we must first receive either clearance under Section 510(k) of the FDCA or approval of a PMA application from FDA, unless an exemption applies. We consider our Venus Glow™ and NeoGraft® systems exempt from FDA’s 510(k) clearance requirement. We have obtained 510(k) clearance from FDA for Venus Concept’s Freeze® and Venus Freeze Plus, Venus Viva® SR, Venus Legacy® BX and Legacy CX, Venus Versa®, Venus Velocity™, Venus Heal™, Venus Bliss™ systems, ARTAS® and ARTAS® iX Systems.

 

In the 510(k) clearance process, before a device may be marketed, FDA must determine that a proposed device is “substantially equivalent” to a legally-marketed “predicate” device, which includes a device that has been previously cleared through the 510(k) process, a device that was legally marketed prior to May 28, 1976 (pre-amendments device), a device that was originally on the U.S. market pursuant to a PMA application and later down-classified, or a 510(k)-exempt device. To be “substantially equivalent,” the proposed device must have the same intended use as the predicate device, and either have the same technological characteristics as the predicate device or have different technological characteristics and not raise different questions of safety or effectiveness than the predicate device. Clinical data are sometimes required to support substantial equivalence. If a product is not eligible for 510(k) clearance it may require approval of a de novo reclassification petition or a PMA. If there is no known predicate for a device, a company can request a de novo reclassification of the product. FDA’s de novo process allows a company to request for certain new devices marketing authorization as class I or class II devices, rather than being subject to PMA requirements as class III devices. In the PMA process, FDA must determine that a proposed device is safe and effective for its intended use based, in part, on extensive data, including, but not limited to, technical, preclinical, human clinical studies conducted under an IDE, and manufacturing and labeling data. The PMA process is typically required for devices that are deemed to pose the greatest risk, such as life- sustaining, life-supporting or implantable devices. Modifications to products that are approved through a PMA application generally require FDA approval. Similarly, certain modifications made to products cleared through a 510(k) may require a new 510(k) clearance. Both the PMA approval and the 510(k) clearance process can be expensive, lengthy and uncertain. FDA’s 510(k) clearance process usually takes from three to 12 months, but can take longer. For products subject to PMA, the regulatory process generally takes from one to three years or even longer, from the time the application is filed with FDA and involves substantially greater risks and commitment of resources than either the 510(k) clearance or de novo processes. We may not be able to obtain necessary regulatory approvals or clearances on a timely basis, if at all, for any of our products under development, and delays in receipt of, or failure to receive such approvals or clearances could have a material adverse effect on our business. In addition, FDA may disagree with certain of our device classifications. Such a misclassification could render the devices as misbranded and/or adulterated.

 

FDA can delay, limit or deny clearance or approval of a device for many reasons, including:

 

 

 

 

FDA’s and other regulatory authorities’ policies may change, and additional government regulations may be enacted that could prevent, limit or delay regulatory approval of our products. For example, in December 2016, the 21st Century Cures Act, or Cures Act, was signed into law. The Cures Act, among other things, is intended to modernize the regulation of medical devices and spur innovation, but its ultimate implementation remains unclear. If we are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if we are not able to maintain regulatory compliance, we may fail to obtain any marketing clearances or approvals, lose any marketing clearance or approval that we may have obtained, and we may not achieve or sustain profitability.

 

 

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We also cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative action, either in the U.S. or abroad. For example, certain policies of the Trump administration may impact our business and industry. Namely, the Trump administration has taken several executive actions, including the issuance of several Executive Orders, that could impose significant burdens on, or otherwise materially delay, FDA’s ability to engage in routine regulatory and oversight activities such as implementing statutes through rulemaking, issuance of guidance, and review and approval of marketing applications. Notably, on January 30, 2017, President Trump issued an Executive Order, applicable to all executive agencies including FDA, requiring that for each notice of proposed rulemaking or final regulation issued in fiscal year 2017, the agency had to identify at least two existing regulations to be repealed, unless prohibited by law. These requirements are referred to as the “two-for-one” provisions. This Executive Order includes a budget neutrality provision that required the total incremental cost of all new regulations in the 2017 fiscal year, including repealed regulations, to be no greater than zero, except in limited circumstances. For fiscal years 2018 and beyond, the Executive Order requires agencies to identify regulations to offset any incremental cost of a new regulation and approximate the total costs or savings associated with each new regulation or repealed regulation. In interim guidance issued by the Office of Information and Regulatory Affairs within OMB on February 2, 2017, the administration indicates that the “two-for-one” provisions may apply not only to agency regulations, but also to significant agency guidance documents. In addition, on February 24, 2017, President Trump issued an executive order directing each affected agency to designate an agency official as a “Regulatory Reform Officer” and establish a “Regulatory Reform Task Force” to implement the two-for-one provisions and other previously issued executive orders relating to the review of federal regulations, however it is difficult to predict how these requirements will be implemented, and the extent to which they will impact FDA’s ability to exercise its regulatory authority. If these executive actions impose constraints on FDA’s ability to engage in oversight and implementation activities in the normal course, our business may be negatively impacted.

 

Even after we have obtained the proper regulatory clearance or approval to market a product, we have ongoing responsibilities under FDA regulations. The failure to comply with applicable regulations could jeopardize our ability to sell our systems and result in enforcement actions such as:

 

 

Any of these sanctions could result in higher than anticipated costs or lower than anticipated sales and harm our reputation, business, financial condition and results of operations.

 

 

We are subject to extensive governmental regulation in foreign jurisdictions, such as Europe, and our failure to comply with applicable requirements could cause our business to suffer.

 

We must maintain regulatory approval in foreign jurisdictions in which we plan to market and sell our systems. In the European Economic Area or the EEA, manufacturers of medical devices need to comply with the Essential Requirements laid down in Annex II to the EU Medical Devices Directive (Council Directive 93/42/EEC). Compliance with these requirements is a prerequisite to be able to affix the CE mark to medical devices, without which they cannot be marketed or sold in the EEA. To demonstrate compliance with the Essential Requirements and obtain the right to affix the CE Mark, manufacturers of medical devices must undergo a conformity assessment procedure, which varies according to the type of medical device and its classification. Except for low risk medical devices (Class I with no measuring function and which are not sterile), where the manufacturer can issue an EC Declaration of Conformity based on a self-assessment of the conformity of its products with the Essential Requirements, a conformity assessment procedure requires the intervention of a Notified Body, which is an organization designated by a competent authority of an EEA country to conduct conformity assessments.

 

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Depending on the relevant conformity assessment procedure, the Notified Body would audit and examine the Technical File and the quality system for the manufacture, design and final inspection of our devices. The Notified Body issues a CE Certificate of Conformity following successful completion of a conformity assessment procedure conducted in relation to the medical device and its manufacturer and their conformity with the Essential Requirements. This Certificate entitles the manufacturer to affix the CE mark to its medical devices after having prepared and signed a related EC Declaration of Conformity.

 

As a rule, demonstration of conformity of medical devices and their manufacturers with the Essential Requirements must be based, among other things, on the evaluation of clinical data supporting the safety and performance of the products during normal conditions of use. Specifically, a manufacturer must demonstrate that the device achieves its intended performance during normal conditions of use and that the known and foreseeable risks, and any adverse events, are minimized and acceptable when weighed against the benefits of its intended performance, and that any claims made about the performance and safety of the device (e.g., product labeling and instructions for use) are supported by suitable evidence. This assessment must be based on clinical data, which can be obtained from (1) clinical studies conducted on the devices being assessed, (2) scientific literature from similar devices whose equivalence with the assessed device can be demonstrated or (3) both clinical studies and scientific literature. With respect to active implantable medical devices or Class III devices, the manufacturer must conduct clinical studies to obtain the required clinical data, unless reliance on existing clinical data from equivalent devices can be justified. The conduct of clinical studies in the EEA is governed by detailed regulatory obligations. These may include the requirement of prior authorization by the competent authorities of the country in which the study takes place and the requirement to obtain a positive opinion from a competent Ethics Committee. This process can be expensive and time-consuming.

 

On April 5, 2017, the European Parliament passed the Medical Devices Regulation, which repeals and replaces the EU Medical Devices Directive. Unlike directives, which must be implemented into the national laws of the EEA member States, the regulations would be directly applicable, i.e., without the need for adoption of EEA member State laws implementing them, in all EEA member States and are intended to eliminate current differences in the regulation of medical devices among EEA member States. The Medical Devices Regulation, among other things, is intended to establish a uniform, transparent, predictable and sustainable regulatory framework across the EEA for medical devices and in vitro diagnostic devices and ensure a high level of safety and health while supporting innovation.

 

The Medical Devices Regulation will however only become applicable three years after publication. Once applicable, the new regulations will among other things:

 

 

 •establish explicit provisions on manufacturers’ responsibilities for the follow-up of the quality, performance and safety of devices placed on the market;

 

 

 

 

These modifications may have an impact on the way we conduct our business in the EEA.

 

 

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We are subject to governmental regulation and other legal obligations, particularly related to privacy, data protection and information security, which are complex and rapidly changing. Our actual or perceived failure to comply with such obligations could harm our business.

 

We are subject to diverse laws and regulations relating to data privacy and security, including, in the U.S., the HIPAA, and, in the EU and shortly in the EEA, GDPR. New global privacy rules are being enacted and existing ones are being updated and strengthened. Complying with these numerous, complex and often changing regulations is expensive and difficult, and failure to comply with any privacy laws or data security laws or any security incident or breach involving the misappropriation, loss or other unauthorized use or disclosure of sensitive or confidential patient or consumer information, whether by us, one of our business associates or another third-party, could have a material adverse effect on our business, reputation, financial condition and results of operations, including but not limited to: material fines and penalties; damages; litigation; consent orders; and injunctive relief.

 

The regulation of data privacy and security, and the protection of the confidentiality of personal information, is increasing and continues to evolve. For example, the GDPR came into effect in May 2018 reforming the European regime. The GDPR implements more stringent operational requirements than its predecessor legislation. For example, the GDPR requires us to make more detailed disclosures to data subjects, requires disclosure of the legal basis on which we can process personal data, makes it harder for us to obtain valid consent for processing, provides more robust rights for data subjects, introduces mandatory data breach notification through the EU, imposes additional obligations on us when contracting with service providers and requires us to adopt appropriate privacy governance including policies, procedures, training and data audit. If we do not comply with our obligations under the GDPR, we could be exposed to fines of up to the higher of 20,000,000 Euros or up to 4% of our total worldwide annual turnover in the event of a significant breach. In addition, we may be the subject of litigation and/or adverse publicity, which could have material adverse effect on our reputation and business.

 

We are also subject to evolving European laws on data export and electronic marketing. The rules on data export will apply when we transfer personal data to group companies or third parties outside of the EEA. For example, in 2015, the Court of Justice of the EU ruled that the U.S.-EU Safe Harbor framework, one compliance method by which companies could transfer personal data regarding citizens of the EU to the U.S., was invalid and could no longer be relied upon. The U.S.-EU Safe Harbor framework was replaced with the U.S.-EU Privacy Shield framework, which is now under review and there is currently litigation challenging another EU mechanism for adequate data transfers, the standard contractual clauses. It is uncertain whether the Privacy Shield framework and/or the standard contractual clauses will be similarly invalidated by the European courts. These changes may require us to find alternative bases for the compliant transfer of personal data from the EEA to the U.S. and we are monitoring developments in this area. The EU is also in the process of replacing the e-Privacy Directive with a new set of rules taking the form of a regulation, which will be directly implemented in the laws of each European member state, without the need for further enactment. The current draft of the e-Privacy Regulation retains strict opt-in for electronic marketing and the penalties for contravention have significantly increased with fining powers to the same levels as the GDPR (i.e. the greater of 20,000,000 Euros or 4% of total global annual revenue).

 

 

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Modifications to our products may require new regulatory clearances or approvals or expansion of the scope of our CE Certificates of Conformity with our notified body.

 

Modifications to our products may require new regulatory clearances or approvals from FDA or other regulatory authorities or expansion of the scope of our CE Certificates of Conformity with our notified body. Even after achieving the initial market clearance, or approval from FDA or other regulatory authorities or having affixed the CE marked to a product, modifications to our systems during their life cycles may require new regulatory approvals or clearances, including 510(k) clearances, premarket approvals, the conduct of a new conformity assessment with our notified body, or foreign regulatory approvals. If we make changes or modifications to an FDA cleared or approved device, FDA requires device manufacturers to initially make and document a determination of whether or not a modification requires a new approval, supplement or clearance. A manufacturer may determine that a modification does not significantly affect safety or efficacy, and that the modification does not represent a major change in its intended use, so that no new 510(k) clearance is necessary, but rather a Letter to File is necessary. However, FDA can review a manufacturer’s decision and may disagree. FDA may determine that a traditional 510(k), an abbreviated 510(k), a special 510(k) clearance, or device approval is required for the device as modified. For products sold in the EU, we must notify our notified body if significant changes are made to the products or if there are substantial changes to the quality assurance systems affecting those products. We have similar obligations with Health Canada. Obtaining a new 510(k), other regulatory clearances and approvals, or a revised or new CE Certificate of Conformity can be a time-consuming process, and we may not be able to obtain such clearances or approvals in a timely manner, or at all.

 

We have made modifications to our products in the past and have determined based on our review of the applicable FDA regulations and guidance that in certain instances new 510(k) clearances or PMA approvals were not required. We may make similar modifications or add additional functionalities in the future that we believe do not require a new 510(k) clearance or approval of a PMA. FDA has issued a guidance document intended to assist manufacturers in determining whether modifications to cleared devices require the submission of a new 510(k), and such guidance has come under scrutiny in recent years, the practical impact of which is unclear. If FDA disagrees with our determination and requires us to submit new 510(k) notifications or PMA applications for modifications to our previously cleared products for which we have concluded that new clearances or approvals are unnecessary, we may be required to cease marketing or to recall the modified product until we obtain clearance or approval, which could require us to redesign our products, conduct clinical trials to support any modifications, and pay significant regulatory fines or penalties. In addition, FDA may not approve or clear our products for the indications that are necessary or desirable for successful commercialization or could require clinical trials to support any modifications. Any delay or failure in obtaining required clearances or approvals would adversely affect our ability to introduce new or enhanced products in a timely manner, which in turn would harm our future growth. Any of these actions would harm our operating results.

 

As part of an internal review of our regulatory clearances in the U.S., we determined that Special 510(k) applications were necessary related to an earlier modification to two of our FDA-cleared devices. Specifically, because we added to two of our FDA-cleared devices additional FDA-cleared applicators not initially considered in the device clearance submissions, we believed that Special 510(k) applications should have been filed to allow FDA to review the incorporation into the cleared devices of the separately-cleared applicators. We filed one of the Special 510(k) submissions with FDA. FDA requested that we instead submit a Traditional 510(k) and provide additional information. We have accordingly modified the Special 510(k) submitted to FDA to a Traditional 510(k) application for this device, related to these modifications. Generally the 510(k) initial response process is 90 days, however, the overall process may extend to 180 days or more. We cannot be certain that FDA will respond to our submission in a timely manner or that clearance will be obtained. We also submitted a Traditional 510(k) for the second device and, on September 6, 2019, received 510(k) clearance from FDA. We believe that the modifications do not affect safety or efficacy, do not affect the intended use of the device, and do not alter the fundamental scientific technology of the device, however, we cannot be certain that FDA will agree with our assessment. FDA may not clear the device or may take other action against us as described above, which could have a material adverse effect on our business.

 

 

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We are subject to restrictions on the indications for which we are permitted to market our products, and any violation of those restrictions, or marketing of systems for off-label uses, could subject us to enforcement action.

 

Our promotional materials and training methods must comply with FDA and other applicable laws and regulations, including the prohibition of the promotion of off-label use in both the U.S. and in foreign countries. We train our marketing and direct sales force to not promote our systems for uses outside of FDA-cleared indications for use, known as “off-label uses.” We cannot, however, prevent a physician from using one of our systems off-label when, in the physician’s independent professional medical judgment, he or she deems it appropriate. There may be increased risk of injury to patients if physicians attempt to use one of our systems off-label. Furthermore, the use of one of our systems for indications other than those cleared by FDA or approved by any foreign regulatory body may not effectively treat such conditions, which could harm our reputation in the marketplace among physicians and patients.

 

If FDA or any foreign regulatory body determines that our promotional materials or training constitute promotion of an off-label use, it could request that we modify our training or promotional materials or subject us to regulatory or enforcement actions, including, among other things, the issuance or imposition of an untitled letter, a warning letter, injunction, seizure, refusal to issue new 510(k)s or PMAs, withdrawal of existing 510(k)s or PMAs, refusal to grant export approvals, and civil fines or criminal penalties. It is also possible that other federal, state or foreign enforcement authorities might take action under other regulatory authority, such as false claims laws, if they consider our business activities to constitute promotion of an off-label use, which could result in significant penalties, including, but not limited to, criminal, civil and administrative penalties, damages, fines, disgorgement, exclusion from participation in government healthcare programs and the curtailment of our operations.

 

FDA regulates the labeling of 510(k)-cleared devices to make sure that the labeling complies with the cleared indications for use and no off-label indication or claim is being promoted by the manufacturer. FDA also engages in market surveys to identify any devices whose intended uses include unapproved uses of the products. Devices are considered adulterated or misbranded when advertising or labeling creates a new intended use, indications for use or even a new claim. Federal laws prohibit the introduction into interstate commerce of adulterated or misbranded devices, and adulteration or misbranding violations can lead to a variety of enforcement activities in the U.S. and in foreign countries, including but not limited to large civil and criminal fines, oversight of sales and marketing practices and modifications of promotional conduct.

 

We previously received an inquiry from FDA regarding off-label or unapproved uses of the Venus Fiore^® on August 1, 2018. Venus Fiore^® is not cleared or approved in the U.S. or in jurisdictions outside of the U.S., other than Israel. Venus Fiore^® is marketed in Israel for aesthetic and functional treatment of the vagina, labia and mons pubis. However, we have not marketed or promoted Venus Fiore^® in the U.S. and explained this to the agency. We added geoblocker functionality to our website, to portray accurately what devices it is marketing in the U.S. Although we have not received subsequent inquiries regarding off-label promotion, FDA may conclude that we are inappropriately promoting off-label or unapproved uses for our products. If the agency brings enforcement actions, we may become subject to significant liability including criminal and civil liabilities. Off-label promotion may also be treated as racketeering in civil litigation or result in expensive and time-consuming lawsuits from physicians or their patients if a patient is injured by the off-label use.  

 

Our systems may cause or contribute to adverse medical events that we are required to report to FDA, and if we fail to do so, we would be subject to sanctions that could harm our reputation, business, financial condition and results of operations.

 

We are subject to FDA’s medical device reporting regulations and similar U.S. state and foreign regulations. FDA’s medical device reporting regulations require us to report to FDA when we receive or become aware of information that reasonably suggests that one of our systems may have caused or contributed to a death or serious injury or malfunctioned in a way that, if the malfunction were to recur, it could cause or contribute to a death or serious injury. The timing of our obligation to report is triggered by the date we become aware of the adverse event as well as the nature of the event. We may fail to report adverse events of which we become aware within the prescribed timeframe. We may also fail to recognize that we have become aware of a reportable adverse event, especially if it is not reported to us as an adverse event or if it is an adverse event that is unexpected or removed in time from the use of one of our systems. If we fail to comply with our reporting obligations, FDA could act, including warning letters, untitled letters, administrative actions, criminal prosecution, imposition of civil monetary penalties, revocation of our device clearance, seizure of our products or delay in clearance of future products.

 

 

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FDA, state regulating agencies at times, and foreign regulatory bodies have the authority to require the recall of commercialized products in the event of material deficiencies or defects in design or manufacture of a product or if a product poses an unacceptable risk to health. FDA’s authority to require a recall must be based on a finding that there is reasonable probability that the device could cause serious injury or death. We may also choose to voluntarily recall a product if any material deficiency is found. A government-mandated or voluntary recall by us could occur because of an unacceptable risk to health, component failures, malfunctions, manufacturing defects, labeling or design deficiencies, packaging defects or other deficiencies or failures to comply with applicable regulations. We cannot assure you that product defects or other errors will not occur in the future. Recalls involving any of our systems could be particularly harmful to our business, financial condition and results of operations because it is our only product.

 

Prior to the Merger, we received a letter from FDA’s Center for Devices and Radiological Health (CDRH) requesting our assistance to complete an evaluation of a potential post-market safety concern regarding devices used for hair restoration surgery. The letter stated that the potential safety concern is related to adverse events and possible allergic reaction after hair restoration surgery. We are fully cooperating with FDA in its evaluation and have responded to FDA’s questions.

 

Companies are required to maintain certain records of recalls and corrections, even if they are not reportable to FDA. We may initiate voluntary withdrawals or corrections for any of our systems in the future that we determine do not require notification of FDA. If FDA disagrees with our determinations, it could require us to report those actions as recalls and we may be subject to enforcement action. A future recall announcement could harm our reputation with customers, potentially lead to product liability claims against us and negatively affect our sales.

 

If we or our distributors do not obtain and maintain international regulatory registrations or approvals for our systems, our ability to market and sell our systems outside of the U.S. will be diminished.

 

Sale of our systems, outside the U.S. are subject to foreign regulatory requirements that vary widely from country to country. In addition, FDA regulates exports of medical devices from the U.S. While the regulations of some countries may not impose barriers to marketing and selling certain of our systems or only require notification, others require that we or our distributors obtain the approval of a specified regulatory body. Complying with foreign regulatory requirements, including obtaining registrations or approvals, can be expensive and time-consuming, and we cannot be certain that we or our distributors will receive regulatory approvals in each country in which we plan to market a particular system or that we will be able to do so on a timely basis. The time required to obtain registrations or approvals, if required by other countries, may be longer than that required for FDA clearance, and requirements for such registrations, clearances, or approvals may significantly differ from FDA requirements. If we modify our systems, we or our distributors may need to apply for additional regulatory approvals or other authorizations before we are permitted to sell the modified product. In addition, we may not continue to meet the quality and safety standards required to maintain the authorizations that we or our distributors have received. If we or our distributors are unable to maintain our authorizations in a particular country, we will no longer be able to sell the applicable product in that country, which could harm our business.

 

Regulatory clearance or approval by FDA does not ensure clearance or approval by regulatory authorities in other countries, and clearance or approval by one or more foreign regulatory authorities does not ensure clearance or approval by regulatory authorities in other foreign countries or by FDA. However, a failure or delay in obtaining regulatory clearance or approval in one country may have a negative effect on the regulatory process in others.

 

 

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Our ability to continue manufacturing and supplying our products depends on our continued adherence to ongoing FDA and other foreign regulatory authority manufacturing requirements.

 

Our manufacturing processes and facilities are required to comply with the quality management system regulations of its target markets (i.e., FDA’s Quality System Regulations, or QSR, ISO 13485:2016, and the MDSAP). Adherence to quality management system regulations and the effectiveness of our quality management control systems are periodically assessed through internal audits and inspections of manufacturing facilities by regulatory authorities. Failure to comply with applicable quality management system requirements, or later discovery of previously unknown problems with our products or manufacturing processes, including our failure or the failure of our third-party manufacturer to take satisfactory corrective action in response to an adverse quality system inspection, can result in enforcement action, which could have an adverse effect on our business. Our manufacturing process and facilities are audited annually for compliance with the last editions of QSR, ISO13485 and MDSAP requirements. FDA inspected our San Jose facility in January 2020, which audit resulted in two observations. We are in the process of mitigating these issues. On November 20, 2019, the Texas Department of State Health Services, or the DSHS, conducted an inspection of our Lewisville, Texas facility and identified alleged misstatements on the packaging of our Venus Skin^® products in violation of the Texas Health and Safety Code (Texas Food, Drug, and Cosmetic Act). The DSHS issued a blanket detention of the Venus Skin^® inventory at the Lewisville facility until the matter is resolved. On February 12, 2020, the DSHS accepted our product re-labelling proposal and agreed to release the detained inventory. FDA has not inspected our other facilities, although we expect an FDA inspection in the future. Regulating agencies, including FDA, foreign regulatory authorities, and our notified body can institute a wide variety of enforcement actions, ranging from inspectional observations to more severe sanctions such as:

 

 

If any of these actions were to occur, it would harm our reputation and cause our system sales and profitability to suffer and may prevent us from generating revenue. Furthermore, our key component suppliers may not currently be or may not continue to be in compliance with all applicable regulatory requirements, which could result in the failure to produce our devices on a timely basis and in the required quantities, if at all.

 

We may be subject to various federal and state laws pertaining to healthcare fraud and abuse, and any violations by us of such laws could result in fines or other penalties.

 

While procedures utilizing our systems are not currently covered or reimbursed by any third-party payor, our commercial, research and other financial relationships with healthcare providers and others may be subject to various federal and state laws intended to prevent healthcare fraud and abuse. Such laws include the U.S. federal Anti-Kickback Statute and similar laws that apply to state healthcare programs, private payors and self-pay patients; the U.S. federal civil and criminal false claims laws, such as the civil False Claims Act, and civil monetary penalties laws; state and federal data privacy and security laws and regulations; state and federal physician payment transparency laws; and state and federal consumer protection and unfair competition laws.

 

Further, these laws may impact any sales, marketing and education programs we currently have or may develop in the future and the way we implement any of those programs. Penalties for violations of these laws can include exclusion from federal healthcare programs and substantial civil and criminal penalties.

 

 

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We may be affected by healthcare policy changes and evolving regulations.

 

Our global regulatory environment is becoming increasingly stringent and unpredictable, which could increase the time, cost and complexity of obtaining regulatory approvals for our products, as well as the clinical and regulatory costs of supporting those approvals. Several countries that did not have regulatory requirements for medical devices have established such requirements in recent years and other countries have expanded on existing regulations. Certain regulators are exhibiting less flexibility and are requiring local preclinical and clinical data in addition to global data. While harmonization of global regulations has been pursued, requirements continue to differ significantly among countries. We expect this global regulatory environment will continue to evolve, which could impact our ability to obtain future approvals for our products or could increase the cost and time to obtain such approvals in the future.

 

In the U.S., the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act, to which we refer collectively as the Affordable Care Act, or ACA, was enacted into law in 2010. Although most of the provisions of the ACA are now in effect, in December 2018 a federal court judge in the Northern District of Texas ruled in Texas v. Azar, or the Texas Case, that the ACA’s individual mandate is unconstitutional, and that the remainder of the ACA was inseverable from the individual mandate and therefore invalid. This case was appealed to the Fifth Circuit in January 2019. Because the Texas judge issued a stay of his ruling pending the appeal, the ACA continues to be in effect at this time.

 

As a result of the passage of the ACA, an excise tax is imposed on the sale of certain medical devices by the U.S. manufacturer, producer, or importer of the device. This excise tax applies to sales of taxable medical devices beginning January 1, 2013. The excise tax equals 2.3% of the “constructive sale price” of the applicable medical device. As a U.S.-based manufacturer and importer of taxable medical devices, are responsible for remitting to the federal government the excise tax on the sales of medical devices it manufactures in, or imports into, the U.S. Although this excise tax was in effect during the years 2013-2015, there was in effect a moratorium on the medical device excise tax through the end of 2019. The excise tax was repealed effective January 1, 2020.

 

In a referendum on June 23, 2016, voters approved for the United Kingdom, or the UK, to exit the EU. On January 31, 2020, the UK departed the EU, however, there is a transition period until the end of 2020 while the UK and the EU negotiate additional arrangements. During the transition period, the current rules on trade, travel and business for the UK and the EU will continue to apply. New rules will take effect on January 1, 2021. The UK’s exit from the EU will have numerous consequences in all areas of the business, including, economic, regulatory, operational, and the actual impact depends on the ultimate deal reached and is very difficult to assess at this time. Changes in the industry regulations could have an effect on existing CE certificates being renewed and new certificates being issued which would impact the ability to trade; however, it is impossible to assess the full impact at this point.

 

We are subject to environmental, health and safety laws and regulations, and must maintain licenses or permits, and non-compliance with these laws, regulations, licenses, or permits may expose us to significant costs or liabilities.

 

We are subject to numerous foreign, federal, state, and local environmental, health and safety laws and regulations relating to, among other matters, safe working conditions and environmental protection, including those governing the generation, storage, handling, use, transportation, and disposal of hazardous or potentially hazardous materials. Some of these laws and regulations require us to obtain licenses or permits to conduct its operations. Environmental laws and regulations are complex, change frequently and have tended to become more stringent over time. If we violate or fail to comply with these laws, regulations, licenses, or permits, we could be fined or otherwise sanctioned by regulators. We cannot predict the impact on its business of new or amended laws or regulations or any changes in the way existing and future laws and regulations are interpreted or enforced, nor can we ensure we will be able to obtain or maintain any required licenses or permits.

 

 

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Recent U.S. tax legislation and future changes to applicable U.S. or foreign tax laws and regulations may have a material adverse effect on our business, financial condition and results of operations.

 

We are subject to income and other taxes in the U.S. and foreign jurisdictions. Changes in laws and policy relating to taxes or trade may have an adverse effect on our business, financial condition and results of operations. For example, the U.S. government recently enacted significant tax reform, and certain provisions of the new law may adversely affect us. Changes include, but are not limited to, a federal corporate tax rate decrease from 35% to 21% for tax years beginning after December 31, 2017, the transition of U.S. international taxation from a worldwide tax system to a more generally territorial system, and a one-time transition tax on the mandatory deemed repatriation of foreign earnings. The legislation is unclear in many respects and could be subject to potential amendments and technical corrections and will be subject to interpretations and implementing regulations by the Treasury and Internal Revenue Service, any of which could mitigate or increase certain adverse effects of the legislation. In addition, it is unclear how these U.S. federal income tax changes will affect state and local taxation. Generally, future changes in applicable U.S. or foreign tax laws and regulations, or their interpretation and application could have an adverse effect on our business, financial conditions and results of operations.

 

Risks Related to Our Operations in Israel

 

We conduct a significant portion of our operations in Israel and therefore our business, financial condition and results of operations may be adversely affected by political, economic and military conditions in Israel.

 

Our research and development facilities and key third-party suppliers are located in northern Israel, and some of our key employees are residents of Israel. Accordingly, political, economic and military conditions in Israel may directly affect our business.

 

Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its neighboring countries. Any hostilities, armed conflicts, terrorist activities or political instability involving Israel or the interruption or curtailment of trade within Israel or between Israel and its trading partners could adversely affect business conditions and have a material adverse effect on our business, financial condition and results of operations and could make it more difficult for us to raise capital. In recent years, these have included hostilities between Israel and Hezbollah in Lebanon, and Israel and Hamas in the Gaza Strip, both of which resulted in rockets being fired into Israel causing casualties and disruption of economic activities. In addition, Israel faces threats from more distant neighbors, in particular, Iran.

 

In addition, hostilities, armed conflicts, terrorist activities or political instability involving Israel could have a material adverse effect on our facilities including our corporate administrative office or on the facilities of our local suppliers, in which event all or a portion of our inventory may be damaged and our ability to deliver products to customers could be significantly delayed. Certain of our executive officers and key employees reside in Israel and some may be required to perform annual military reserve duty and may be called for active duty under emergency circumstances at any time. Our operations could be disrupted by an absence for a significant period of time of one or more of these officers or key employees due to military service, which could adversely affect our business, results of operations and financial condition.

 

Several countries, principally in the Middle East, restrict doing business with Israel and Israeli companies, and additional countries may impose restrictions on doing business with Israel and Israeli companies whether as a result of hostilities in the region or otherwise. Similarly, Israeli companies are limited in conducting business with entities from several countries. Such restrictions may seriously limit our revenues.

 

Our commercial insurance does not cover losses that may occur as a result of events associated with the security situation in the Middle East, such as damages to our facilities resulting in disruption of our operations. Although the Israeli government is currently committed to covering the reinstatement value of direct damages that are caused by terrorist attacks or acts of war, there can be no assurance that this government coverage will be maintained, or if maintained, will be sufficient to compensate us fully for damages incurred. Any losses or damages incurred by us could have a material adverse effect on our business, financial condition and results of operations. Any armed conflicts or political instability in the region would likely negatively affect business conditions and could harm our business, financial condition and results of operations.

 

 

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Our operations may be affected by negative labor conditions in Israel.

 

Strikes and work-stoppages occur relatively frequently in Israel. If Israeli trade unions threaten additional strikes or work-stoppages and such strikes or work-stoppages occur, those may, if prolonged, have a material adverse effect on the Israeli economy and on our business, including our ability to deliver products to our customers and to receive raw materials from our suppliers in a timely manner.

 

Risks Related to Our Common Stock

 

Following completion of the Merger, the market price of our stock price may be volatile, and you may not be able to resell shares of our Common Stock at or above the price you paid.

 

The market price of our Common Stock following the Merger could be subject to significant fluctuations. Some of the factors that may cause the market price of the combined company’s Common Stock to fluctuate include:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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In addition, the stock markets in general, and the markets for medical device and aesthetic stocks in particular, have experienced extreme volatility that may have been unrelated to the operating performance of the issuer. These broad market fluctuations may adversely affect the market price or liquidity of our Common Stock. In the past, when the market price of a stock has been volatile, holders of that stock have sometimes instituted securities class action litigation against the issuer. Recently, several securities class action complaints have been filed against us, certain of our current and former executive officers and directors, certain of our investors and certain underwriters in our IPO. These complaints allege violations of Sections 11, 12(a)(2) and 15 of the Securities Act of 1933, as amended, or the Securities Act, due to allegedly false and misleading statements made in connection with our IPO. While we believe that these lawsuits are without merit and we intend to vigorously defend against these claims, we could incur substantial costs in defending these lawsuits and the attention of our management could be diverted from the operation of our business. Further, if more of our stockholders were to bring additional lawsuits on similar or unrelated grounds, we could incur substantial costs defending these additional lawsuits and the attention of our management would be further diverted from the operation of our business.    

 

An active market for our Common Stock may not be maintained.

 

Our stock began trading on the Nasdaq Global Market in July 2017, but we can provide no assurance that we will be able to maintain an active trading market on the Nasdaq Global Market or any other exchange in the future. If an active market for our Common Stock does not develop or is not maintained, it may be difficult for our stockholders to sell shares without depressing the market price for the shares or at all. An inactive trading market may also impair our ability to raise capital by selling shares and may impair our ability to acquire other businesses, applications, or technologies using our shares as consideration.

 

If equity research analysts do not publish research or reports, or publish unfavorable research or reports, about the Company, our business or our market, the Company’s stock price and trading volume could decline.

 

The trading market for the Company’s Common Stock will be influenced by the research and reports that equity research analysts publish about us and our business. Equity research analysts may elect not to provide research coverage of our Common Stock, and such lack of research coverage may adversely affect the market price of our Common Stock. In the event that equity research analysts initiate coverage, we will not have any control over the analysts or the content and opinions included in their reports. The price of our Common Stock could decline if one or more equity research analysts downgrade our stock or issue other unfavorable commentary or research. If one or more equity research analysts ceases coverage of us or fails to publish reports on us regularly, demand for our Common Stock could decrease, which in turn could cause our stock price or trading volume to decline.  

 

We are an emerging growth company and a smaller reporting company within the meaning of the Securities Act and we have taken advantage of certain exemptions from disclosure requirements available to emerging growth companies and smaller reporting companies; this could make our securities less attractive to investors and may make it more difficult to compare our performance with other public companies.

 

Following the Merger, we will continue to qualify as, an “emerging growth company” within the meaning of the Securities Act, as modified by the JOBS Act. We have taken advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies or smaller reporting companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on certain executive compensation matters and reduced reporting periods. As a result, stockholders may not have access to certain information they may deem important. We cannot predict whether investors will find our securities less attractive because we rely on these exemptions. If some investors find the securities less attractive as a result of reliance on these exemptions, the trading prices of our securities may be lower than they otherwise would be, there may be a less active trading market for our securities and the trading prices of our securities may be more volatile.

 

 

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Further, Section 102(b)(1) of the JOBS Act exempts emerging growth companies from complying with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that an emerging growth company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such an election to opt out is irrevocable. We have elected not to opt out of such extended transition period. Accordingly, when a standard is issued or revised and it has different application dates for public or private companies, we, as an emerging growth company, could adopt the new or revised standard at the time private companies adopt the new or revised standard, unless early adoption is permitted by the standard. We intend to continue to use private company adoption dates for ASC 842, Leases. This may make comparison of us with another public company which is neither an emerging growth company nor an emerging growth company which has opted out of using the extended transition period difficult or impossible because of the potential differences in accounting standards used.

 

If we sell shares of our Common Stock in future financings, stockholders may experience immediate dilution and, as a result, our stock price may decline.

 

We may from time to time issue additional shares of Common Stock at a discount from the current market price of our Common Stock. As a result, our stockholders would experience immediate dilution upon the purchase of any shares of our Common Stock sold at such discount. In addition, as opportunities present themselves, we may enter into financing or similar arrangements in the future, including the issuance of debt securities, preferred stock or Common Stock. If we issue Common Stock or securities convertible into Common Stock, our common stockholders would experience additional dilution and, as a result, our stock price may decline.

 

Because the Merger resulted in an ownership change under Section 382 of the Code for Restoration Robotics, Restoration Robotics’ pre-merger net operating loss carryforwards and certain other tax attributes will be subject to limitation or elimination. The net operating loss carryforwards and certain other tax attributes of Venus Concept Ltd. and of the combined company may also be subject to limitations as a result of ownership changes.

 

Restoration Robotics incurred substantial losses during its history and carried forward significant net operating losses, or NOLs, to offset future taxable income, if any, until such unused losses expire. To the extent that we continue to generate taxable losses, unused losses will carry forward to offset future taxable income, if any, until such unused losses expire. If a corporation undergoes an “ownership change” within the meaning of Section 382 of the Code, the corporation’s net operating loss carryforwards and certain other tax attributes arising before the ownership change are subject to limitations on use after the ownership change. In general, an ownership change occurs if there is a cumulative change in the corporation’s equity ownership by certain stockholders that exceeds 50 percentage points by value over a rolling three-year period. Similar rules may apply under applicable state income tax laws. The Merger resulted in an ownership change for Restoration Robotics and, accordingly, Restoration Robotics’ net operating loss carryforwards and certain other tax attributes will be subject to limitation and possibly elimination after the Merger. The Merger may limit our net operating loss carryforwards and certain other tax attributes. Additional ownership changes in the future could result in additional limitations on our net operating loss carryforwards and certain other tax attributes. Consequently, even if the combined company achieves profitability, it may not be able to utilize a material portion of the predecessor companies’ or the combined company’s net operating loss carryforwards and certain other tax attributes, which could have a material adverse effect on cash flow and results of operations.

 

We do not intend to pay dividends on our Common Stock, and, consequently, our stockholders’ ability to achieve a return on their investment will depend on appreciation in the price of our Common Stock.

 

We do not intend to pay any cash dividends on our Common Stock for the foreseeable future. We intend to invest our future earnings, if any, to fund our growth. Payment of future cash dividends, if any, will be at the discretion of the board of directors, subject to applicable law and will depend on various factors, including our financial condition, operating results, current and anticipated cash needs, the requirements of current or then-existing debt instruments and other factors the board of directors deems relevant. Therefore, our stockholders are not likely to receive any dividends on their Common Stock for the foreseeable future. Since we do not intend to pay dividends, our stockholders’ ability to receive a return on their investment will depend on any future appreciation in the market value of our Common Stock. There is no guarantee that our Common Stock will appreciate or even maintain the price at which our stockholders have purchased it. The terms of our credit facilities limit our ability to pay dividends.

 

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Provisions in our charter documents and under Delaware law could make an acquisition us more difficult and may discourage any takeover attempts the company stockholders may consider favorable, and may lead to entrenchment of management.

 

Provisions of our amended and restated certificate of incorporation and amended and restated bylaws could delay or prevent changes in control or changes in management without the consent of the board of directors. These provisions will include the following:

 

 

 

 

 

 

 

 

 

 

These provisions would apply even we were to receive an offer that some stockholders may consider beneficial.

 

We are also be subject to the anti-takeover provisions contained in Section 203 of the Delaware General Corporation Law, or the DGCL, or Section 203. Under Section 203, a corporation may not, in general, engage in a business combination with any holder of 15% or more of its capital stock unless the holder has held the stock for three years or, among other exceptions, the board of directors has approved the transaction.

 

 

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Our certificate of incorporation provides that the Court of Chancery of the State of Delaware is the exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or other employees.

 

Our certificate of incorporation provides that the Court of Chancery of the State of Delaware is the sole and exclusive forum for any derivative action or proceeding brought on our behalf, any action asserting a breach of fiduciary duty owed by any of our directors, officers or other employees to us or ours stockholders, any action asserting a claim against us arising pursuant to any provisions of the DGCL, our certificate of incorporation or our bylaws, or any action asserting a claim against we that are governed by the internal affairs doctrine; provided that, the exclusive forum provision will not apply to suits brought to enforce any liability or duty created by the Exchange Act or any other claim for which the federal courts have exclusive jurisdiction. Our certificate of incorporation also provides that the federal district courts of the United States of America shall be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act. However, the enforceability of similar federal court choice of forum provisions in other companies’ certificates of incorporation has been challenged in legal proceedings, and it is possible that a court could find this type of provision to be inapplicable or unenforceable. If a court were to find the federal choice of forum provision contained in our amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions.

 

The choice of forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with the combined company or its directors, officers or other employees, which may discourage such lawsuits against the combined company and its directors, officers and other employees.

 

Claims for indemnification by our directors and officers may reduce our available funds to satisfy successful third-party claims against us and may reduce the amount of money available to us.

 

Our amended and restated certificate of incorporation and amended and restated bylaws provide that we will indemnify our directors and officers, in each case to the fullest extent permitted by Delaware law.

 

In addition, as permitted by Section 145 of the DGCL, our amended and restated bylaws and our indemnification agreements that we have entered into with our directors and officers provide that:

 

 

 

 

 

 

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Our executive officers, directors and certain of our shareholders who are affiliated with our directors will have the ability to control or significantly influence all matters submitted to our stockholders for approval.

 

As of December 31, 2019, our executive officers, directors and certain of our shareholders who are affiliated with our directors, in the aggregate, beneficially own approximately 62.1% of our outstanding shares of Common Stock. As a result, if these stockholders were to choose to act together, they would be able to control or significantly influence all matters submitted to our stockholders for approval, as well as our management and affairs. For example, if they choose to act together, these persons would control or significantly influence the election of directors and approval of any merger, consolidation or sale of all or substantially all of our assets. Within this group,  EW Healthcare and its affiliates own approximately 23.5%, HealthQuest and its affiliates own approximately 13.4% and Longitude Venture Partners II, L.P and its affiliates own approximately 12.3% and respectively, of our outstanding shares. This concentration of voting power could delay or prevent an acquisition of the Company on terms that other stockholders may desire.

 

 

None.

 

 

Our principal executive offices are located at 235 Yorkland Blvd, Suite 900, Toronto, Ontario, Canada. We lease these facilities pursuant to a lease agreement that expires on August 31, 2030. These facilities consist of 15,678 square feet of office space, and 2,134 square feet of storage space.

 

We also  have office space in San Jose, California, where we occupy approximately 23,000 square feet of space under a lease that expires in April 2022. In addition, we lease a manufacturing facility for approximately 2,500 square feet in San Jose, California under a lease that expires in June 2020.

 

We also have offices and a research and development center located at 6 Hayozma Street, Yokne’am Illit 2069203, Israel. We lease these facilities pursuant to a lease agreement that expires on September 30, 2023, with an option to extend the term for an additional 60 months. These facilities consist of approximately 12,580 square feet of space.

We believe that our existing facilities are sufficient to meet our current needs.

 

 

 

Between May 23, 2018 and June 11, 2019, four putative shareholder class actions complaints were filed against us, certain of our former officers and directors, certain of our venture capital investors, and the underwriters of our IPO.  Two of these complaints, Wong v. Restoration Robotics, Inc., et al., No. 18CIV02609, and Li v. Restoration Robotics, Inc., et al., No. 19CIV08173 (together, the “State Actions”), were filed in the Superior Court of the State of California, County of San Mateo, and assert claims under Sections 11, 12(a)(2) and 15 of the Securities Act of 1933, or the Securities Act. The other two complaints, Guerrini v. Restoration Robotics, Inc., et al., No. 5:18-cv-03712-EJD and Yzeiraj v. Restoration Robotics, Inc., et al., No. 5:18-cv-03883-BLF (together, the “Federal Actions”), were filed in the United States District Court for the Northern District of California, and assert claims under Sections 11 and 15 of the Securities Act.  The complaints all allege, among other things, that our Registration Statement filed with the SEC on September 1, 2017 and the Prospectus filed with the SEC on October 13, 2017 in connection with our IPO were inaccurate and misleading, contained untrue statements of material facts, omitted to state other facts necessary to make the statements made not misleading and omitted to state material facts required to be stated therein. The complaints seek unspecified monetary damages, other equitable relief and attorneys’ fees and costs.

 

 

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In the State Actions, we, along with the other defendants, successfully demurred to the initial Wong complaint for failure to state a claim, and secured a stay of both cases based on the forum selection clause contained in our Amended and Restated Certificate of Incorporation, which designates the federal district courts as the exclusive forums for claims arising under the Securities Act.  However, on December 19, 2018, the Delaware Court of Chancery in Sciabacucchi v. Salzberg held that exclusive federal forum provisions are invalid under Delaware law. Under this ruling, the San Mateo Superior Court lifted its stay of State Actions on December 10, 2019. On January 17, 2020, Plaintiffs in the State Actions filed a consolidated amended complaint for violations of federal securities laws, alleging again that, among other things, our Registration Statement filed with the SEC on September 1, 2017 and the Prospectus filed with the SEC on October 13, 2017 in connection with our IPO were inaccurate and misleading, contained untrue statements of material fact, omitted to state other facts necessary to make the statements made not misleading and omitted to state material facts required to be stated therein. The complaint seeks unspecified monetary damages, other equitable relief and attorneys’ fees and costs. On February 24, 2020, we demurred to the consolidated amended complaint for failure to state a claim. A hearing on our demurrer is currently scheduled for May 8, 2020. On March 18, 2020, the Delaware Supreme Court reversed the Chancery Court’s decision in Sciabacucchi v. Salzberg and held that exclusive federal forum provisions are valid under Delaware law. The Company intends to seek appropriate relief based on the Sciabacucchi decision.

 

In the Federal Actions, which have been consolidated under the caption In re Restoration Robotics, Inc. Securities Litigation, Case No. 5:18-cv-03712-EJD, Lead Plaintiff Eduardo Guerrini filed his consolidated amended complaint for violations of federal securities laws on November 30, 2018. The consolidated amended complaint alleges again that, among other things, our Registration Statement filed with the SEC on September 1, 2017 and the Prospectus filed with the SEC on October 13, 2017 in connection with our IPO were inaccurate and misleading, contained untrue statements of material facts, omitted to state other facts necessary to make the statements made not misleading and omitted to state material facts required to be stated therein. On January 29, 2019, we, along with certain of our former officers and directors, filed a motion to dismiss the consolidated amended complaint for failure to state a claim. On October 18, 2019, the District Court granted our motion to dismiss as to all but two allegedly false or misleading statements contained in our Prospectus. On December 9, 2019, we filed our answer to the consolidated amended complaint denying the falsity of these statements, and discovery is underway.

 

In addition to the State and Federal 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 our former officers and directors breached their fiduciary duties, have been unjustly enriched and violated Section 14(a) of the Securities Exchange Act of 1934, or the Exchange Act, in connection with our IPO and our 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 during the pendency of the Federal Actions, and the case remains stayed.  

 

In addition to the actions described above relating to our IPO, two lawsuits purporting to challenge disclosures made in connection with our merger have also been filed. The first, captioned Bushansky v. Restoration Robotics, Inc., et al., No. 5:19-cv-06004-MMC, alleged, among other things, that defendants violated Sections 14(a) and 20(a) of the Exchange Act and SEC Rule 14a-9. The complaint alleged that the proxy statement filed with the SEC by Restoration Robotics on September 10, 2019 in connection with the Merger omitted or misrepresented material information. The complaint sought, among other things, injunctive relief, unspecified damages, and attorneys’ fees and costs. On November 6, 2019, the plaintiff voluntarily dismissed the Bushansky action with prejudice as to his individual claims and without prejudice as to the claims of the putative class.

 

The second, a putative shareholder class action complaint captioned Pak v. Restoration Robotics, Inc., et al., No. 1:19-cv-02237, was filed in the United States District Court for the District of Delaware on December 6, 2019. The complaint alleges, among other things, that defendants violated Sections 14(a) and 20(a) of the Exchange Act and SEC Rule 14a-9. The complaint alleges that the proxy statement filed with the SEC by Restoration Robotics on September 10, 2019 in connection with the Merger contained false or misleading information. The complaint seeks, among other things, compensatory and/or rescissory damages, and attorneys’ fees and costs. On February 26, 2020, the District Court appointed Joon Pak as Lead Plaintiff in the Pak action, and approved his selection of Lead Counsel. We believe that these lawsuits are without merit and we intend to vigorously defend against these claims.

 

 

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Our Chinese subsidiary, or Venus Concept China, imports and sells registered medical devices and unregistered non-medical devices in the PRC. One of its unregistered products has been the subject of inquiries from two district level branches of the SAMR, Xuhui MSA and Huangpu MSA, as to whether the product was properly sold as a non-medical device. In January 2019, Venus Concept China had applied to register a version of this non-medical device as a medical device with the National Medical Products Administration of PRC, or NMPA. On June 12, 2019, Venus Concept China was informed that Xuhui MSA had opened an administrative investigation case related to whether the device is an unregistered medical device, as a result of a complaint that Xuhui MSA received from a former distributor of Venus Concept China. Huangpu MSA notified Venus Concept China that it would be suspending its separate investigation against Venus Concept China, pending the results of the Xuhui MSA investigation. We and Venus Concept China have voluntarily stopped sales in China of this product. On December 11, 2019, Xuhui MSA informed Venus Concept China that a determination had been made by the Shanghai Medical Products Administration that Versa’s IPL function should be administered as a Class II medical device. Xuhui MSA also suggested that Venus Concept China consider a voluntary recall of all Versa units sold in China. Venus Concept China is currently contemplating a recall plan. In late January 2020, Venus Concept China received a copy of the Shanghai Medical Products Administration’s determination that because of the intended uses for Versa’s IPL function comprise medical treatment functions such as “treatment of benign pigmented epidermis and skin lesions,” Versa’s IPL function should be administered as a Class II medical device. Venus Concept China has not yet received a notice of proposed penalty decision from Xuhui MSA. Venus Concept China has not yet received a determination from NMPA on its application for registering Versa’s IPL function as a medical device. Although the revenue generated from the product that is the subject of the investigation did not represent a material amount of our total revenues for the years ended December 31, 2019 or 2018, monetary penalties nonetheless could be material. Venus Concept and Venus Concept China are cooperating with the relevant authorities, however, Venus Concept China cannot predict the outcome of this matter.

 

Further, we may from time to time continue to be involved in various legal proceedings of a character normally incident to the ordinary course of our business, which we do not deem to be material to our business and results of operations.

 

Item 4.Mine Safety Disclosures.

 

Not applicable.

 

 

 

 

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PART II

 

 

Market Information

 

Our common stock has been listed on the Nasdaq Global Market since October 12, 2017.  Prior to the merger with Venus Concept Ltd., our common stock traded under the symbol “HAIR” and following the merger, our common stock trades under the symbol “VERO”.  

 

Holders

 

As of March 25, 2020, there were 173 holders of record of our common stock. The actual number of stockholders is greater than this number of record holders and includes stockholders who are beneficial owners but whose shares are held in street name by brokers and other nominees.  

 

Dividends

 

We have never declared or paid cash dividends on our common stock. We currently intend to retain all available earnings, if any, for use in the operation of our business and do not anticipate paying any dividends on our common stock in the foreseeable future. Any future determination related to dividend policy will be made at the discretion of our board of directors and will depend on our financial condition, operating results, capital requirements, general business conditions and other factors that our board of directors may deem relevant.

 

Performance Graph

 

As a smaller reporting company, we are not required to provide disclosure for this Item.  

 

Recent Sale of Unregistered Securities

 

None.

 

Purchase of Equity Securities by the Issuer and Affiliated Purchasers

 

None.

 

 

As a smaller reporting company, we are not required to provide disclosure for this Item.

 

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The following discussion contains management’s discussion and analysis of our financial condition and results of operations and should be read together with the historical consolidated financial statements and the notes thereto included in Part II, Item 8 “Consolidated Financial Statements and Supplementary Data.” This discussion contains forward-looking statements that reflect our plans, estimates and beliefs and involve numerous risks and uncertainties, including but not limited to those described in Part I, Item 1A “Risk Factors” of this Annual Report on Form 10-K. Actual results may differ materially from those contained in any forward-looking statements. You should carefully read “Special Note Regarding Forward-Looking Statements” and Part I, Item 1A, “Risk Factors.”

 

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 practice enhancement services. Our aesthetic systems have been designed on a cost-effective, proprietary and flexible platform that enables 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 2019 and 2018, a substantial majority of Venus Concept Ltd.’s systems delivered in North America were in non-traditional markets.

 

In November 2019, we completed our business combination with Venus Concept Ltd. and the business of Venus Concept Ltd. became the primary business of the company, as described in more detail below under the heading “Merger with Venus Concept Ltd.” The combination with Restoration Robotics, a global leader in hair restoration, significantly expanded our presence and capability in the hair restoration market. We have developed and commercialized a robotic device, the ARTAS® System, that assists physicians in performing many of the repetitive tasks that are part of a follicular unit extraction surgery, or FUE, a type of hair restoration surgery. In July 2018, we introduced the ARTAS® iX Robotic Hair Restoration System, which we believe is the first and only robotic intelligent solution to offer precise, minimally invasive, repeatable harvesting and implantation functionality in one platform. The system delivers procedural analysis, precision, repeatability, and clinical workflow efficiency for hair restoration. Through our NeoGraft division, which we acquired in 2018, we offer an automated hair restoration system that facilitates the harvesting of follicles during an FUE process, improving the accuracy and speed over commonly used manual extraction instruments. Our hair restoration systems are sold primarily to plastic surgeons and dermatologists, and in the United States we offer doctors using the NeoGraft® system the services of a group of independently contracted technicians, whom we market as “VeroGrafters”. This group of approximately 50 technicians is available to assist the physician during a NeoGraft® hair restoration procedure. The ARTAS® iX System complements our NeoGraft® hair restoration system and allows us to penetrate a broader segment of the hair restoration market. We expect to make the VeroGrafters™ service available in 2020 to physicians using the ARTAS® System.

 

We have had recurring net operating losses and negative cash flows from operations. As of December 31, 2019 and 2018, we had an accumulated deficit of $75.7 million and $35.1 million, respectively. We expect to continue to incur significant expenses and increasing operating losses for the foreseeable future in connection with our ongoing activities. As of December 31, 2019 and 2018, we had cash and cash equivalents of $15.7 million and $6.8 million, respectively. In order to continue our operations, we must achieve profitable operations and/or obtain additional equity investment or debt financing. We completed convertible notes offerings in June 2019 and August 2019 as described in the following paragraph and in more detail below under the heading “Convertible Note Financings” and a private placement financing in November 2019 as described in the following paragraph and in more detail below under the heading “Concurrent Financing”. Until we generate revenue at a level to support our cost structure, we expect to continue to incur substantial operating losses and net cash outflows.

 

 

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On June 25, 2019, Venus Concept Ltd. sold $7.8 million of convertible notes. On August 14, 2019, Venus Concept Ltd. sold an additional $7.2 million of Venus Concept Ltd.’s convertible notes to certain investors. On August 21, 2019, Venus Concept Ltd. sold an additional $14.05 million to certain of the equity commitment letter investors. Immediately after the Merger (as defined below) we issued and sold securities in a private placement for approximately $28.1 million. See “—Concurrent Financing”. On March 18, 2020 we issued and sold securities in a private placement for approximately $22.3 million.  See “—2020 Private Placement” below. We believe that the net proceeds from the issuance of the securities issued in the 2020 private placement, together with our existing cash and cash equivalents will enable us to fund our operating expenses and capital expenditure requirements for at least 12 months. We based this estimate on our current assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than we expect. See ‘‘—Liquidity and Capital Resources’’.

 

Merger with Venus Concept Ltd.

 

In accordance with the terms of the Agreement and Plan of Merger and Reorganization, or the Merger Agreement, dated March 15, 2019, as amended, by and among Venus Concept Ltd., Restoration Robotics and Radiant Merger Sub Ltd., a company organized under the laws of Israel and a direct, wholly-owned subsidiary of Restoration Robotics, or Merger Sub, Merger Sub merged with and into Venus Concept Ltd., with Venus Concept Ltd. surviving as a wholly-owned subsidiary of Restoration Robotics, or the Merger. Following the completion of the Merger, Restoration Robotics changed its corporate name to “Venus Concept Inc.” and the business conducted by Venus Concept Ltd. became the primary business conducted by the company.

 

At the effective time of the Merger, each outstanding ordinary and preferred share of Venus Concept Ltd., other than shares held by Venus Concept Ltd. as treasury stock or held by the Company or Merger Sub, were converted into the right to receive 8.6506 (the “Exchange Ratio”) validly issued, fully paid and non-assessable shares of Common Stock of the Company, par value $0.0001 per share (“Common Stock”), and each outstanding stock option and warrant issued and outstanding by Venus Concept Ltd. was assumed by Restoration Robotics and converted into and became an option or warrant (as applicable) exercisable for shares of Common Stock with the number and exercise price adjusted by the Exchange Ratio.

 

The Merger was accounted for as a reverse acquisition with Venus Concept Ltd. as the acquiring company for accounting purposes, and  Venus Concept as the legal acquirer. As a result, upon consummation of the Merger, the historical financial statements of Venus Concept Ltd. became the historical financial statements of Venus Concept Inc.

 

Concurrent Financing

 

Immediately following the closing of the Merger, we issued and sold in a private placement to certain investors an aggregate of approximately 7.5 million shares of our common stock and warrants to purchase up to an aggregate of approximately 3.7 million shares of our common stock at an exercise price of $6.00 per share, which we refer to as the Concurrent Financing. The aggregate purchase price for the securities sold in the Concurrent Financing was approximately $28.1 million. We filed the registration statement on Form S-3 (333-236207) registering the resale of the shares sold in the Concurrent Financing and shares issuable upon exercise of the warrants which became effective  on February 12, 2020. The warrants issued in the Concurrent Financing are exercisable beginning on May 7, 2020.

 

Reverse Stock Split

 

Immediately following completion of the Merger, we effected a 15-for-1 reverse stock split, or Reverse Stock Split, of all outstanding shares of our common stock. All share and per share amounts shown in this Annual Report on Form 10-K have been adjusted to reflect the Reverse Stock Split, unless otherwise noted.

 

 

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2020 Private Placement

 

On March 18, 2020, we entered into a securities purchase agreement with certain investors pursuant to which we agreed to sell and they agreed to purchase an aggregate of approximately 2.3 million shares of our common stock, 0.7 million shares of Series A convertible preferred stock, par value $0.0001 per share, which is convertible into 6.6 million shares of our common stock and warrants to purchase up to an aggregate of approximately 6.7 million shares of our common stock at an exercise price of $3.50 per share, which we refer to as the 2020 Private Placement. The warrants have a five-year term and are exercisable beginning 181 days after their issue date. The Series A preferred stock will automatically convert into shares of common stock upon receipt of stockholder approval. The Series A preferred stock has no voting rights other than as required by law. The aggregate purchase price for the securities sold in the 2020 Private Placement was approximately $22.3 million. The transaction was completed on March 19, 2020.

 

Products and Services

 

We derive revenue from the sale of products and services. Product revenue includes revenue from the following:

 

 

Service revenue includes revenue derived from our VeroGrafters™ technician services, practice enhancement services, our 2two5 internal advertising agency, and our extended warranty service contracts provided to our existing customers.

 

Systems are sold through our subscription model, or through traditional sales contracts directly and through distributors.

 

We generate recurring monthly revenue under our subscription-based business model and from traditional system sales. Venus Concept Ltd. commenced a subscription-based model in North America in 2011 and, for the years ended December 31, 2019 and 2018, approximately 51% and 55%, respectively, of aesthetic systems Venus Concept Ltd. delivered were sold under the subscription model. We have launched our subscription model in targeted international markets in which we operate directly. We currently do not offer the ARTAS® iX System under the subscription model.

 

Our subscription model includes an up-front fee and a monthly payment schedule, typically over a period of 36 months, with approximately 40% of total contract payments collected in the first year. To ensure that each monthly product 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” to new agreements for the newest available or alternative Venus Concept’s technology throughout the subscription period. This structure can provide greater flexibility than traditional equipment leases secured through financing companies. Through our practice enhancement services, we work closely with our customers and physicians to provide business recommendations that improve the quality of service outcomes, build patient traffic and improve financial returns for the customer’s business.

 

 

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We have developed and commercialized twelve technology platforms, including our ARTAS® and NeoGraft® systems. Our  medical aesthetic technology platforms have received regulatory clearance for indications such as 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, as well as other indications, that are cleared for marketing in overseas markets but not in the United States, including treatment of certain soft tissue injuries, temporary increase of skin tightening, temporary body contouring, and vaginal treatments in the Israeli market only. In 2018, we acquired NeoGraft® and in November 2019, we completed our business combination with Restoration Robotics, which significantly expanded our hair restoration product offerings and capabilities to include the ARTAS® iX System, a robotic device that assists physicians in a FUE hair restoration procedure. We believe these two systems are complementary and give us a hair restoration product offering that can serve a broad segment of the market.

 

In the United States, we have obtained 510(k) clearance from FDA for our Venus Freeze and Freeze Plus systems, Venus Viva, Venus Legacy, Venus Versa, Venus Velocity, Venus Heal, Venus Bliss and ARTAS® systems. The Venus Glow and NeoGraft® systems are listed as class I devices under FDA classification system. Outside the United States, we market our technologies in over 60 countries across Europe, 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. See “Venus Concept Business—Venus Concept’s Products” in this Annual Report on Form 10-K for a summary of FDA, EU and Health Canada cleared indications for our systems.

 

As of December 31, 2019, we operated directly in 29 international markets through our 24 direct offices in the United States, Canada, United Kingdom, Japan, South Korea, Mexico, Argentina, Colombia, Spain, France, Germany, Australia, China, Hong Kong, Singapore, Indonesia, Vietnam, India, Israel, Italy, Bulgaria, Russia, Kazakhstan and South Africa.

 

Our revenues increased from $102.6 million in 2018 to $110.4 million in 2019. Our company had a net loss attributable to Venus Concept of $40.6 million and $15.0 million in the years ended December 31, 2019 and 2018, respectively. We had Adjusted EBITDA loss of $12.5 million and $9.8 million in 2019 and 2018, respectively.

 

Use of Non-GAAP Financial Measures

 

Adjusted EBITDA is a non-GAAP measure defined as net loss income before foreign exchange loss, financial expenses, income tax expense, 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 a 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 reconciliation of net loss  to Adjusted EBITDA for the years presented:

 

 

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Venus Concept Inc.

 

Reconciliation of Net loss to Non-GAAP Adjusted EBITDA

 

 

⁽¹⁾  For the year ended December 31, 2019, the other adjustments are mainly represented by professional fees related to the Merger and a patent infringement case. For the year ended December 31, 2018, the other adjustments are mainly represented by professional fees incurred in 2018 related to a transaction that was not completed.

 

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 sale contract and under subscription agreements. The following table set forth the number of systems we have delivered in the geographic regions indicated:

 

 

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 distributor agreements. Unit deliveries under direct system sales contracts and subscription agreements have the 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 contracts and subscription contracts have similar gross margins, cash collections on subscription contracts generally occur over a three-year period, with approximately 40% collected in the first year and the balance collected evenly over the remaining two years of the subscription agreement.

 

Significant Investment in Sales, Marketing and Operations. We have made a strategic decision to continue to penetrate the global market by investing in sales and marketing expenses across all geographic segments. This includes reducing our reliance on distributor arrangements, opening more direct offices and hiring experienced sales, marketing and operational staff. While we will generate incremental product sales in these new markets, these revenues and the related margins may not fully offset the startup investments in the initial years. In 2019, we did not open any direct sales offices. In 2018, we opened direct sales offices in Argentina and South Korea and relaunched our direct operations in Germany.

 

 

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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 required payments under the subscription contracts. In 2019, we performed a market by market re-evaluation of our bad debt experience across our operations and determined that the allowance for doubtful accounts was insufficient to cover the non-performing accounts and anticipated write-offs under our subscription contracts. This resulted in an incremental charge to bad debt expense in the fourth quarter and a full year bad debt expense of approximately $10.0 million in 2019. Bad debt expense in 2018 reflects an $8.3 million provision against the receivable of a large U.S. national account customer that filed for Chapter 11 bankruptcy in February 2019. To the extent that we conduct a significant amount of business with one customer or distributor, the potential impact on the business, both positive and negative, can significantly impact our results.

 

Outlook

 

The global pandemic caused by the novel coronavirus (COVID-19) has significantly impacted our growth trends during the first three months of 2020, which, while difficult to predict, we expect will continue to impact our results in the second quarter of 2020 and possibly beyond. We are a global business, having established a commercial presence in more than 60 countries over the course of our ten-year history. Approximately 30% of our 2019 sales came from the APAC and European regions which were impacted by the pandemic throughout the first quarter, and we have also seen a pronounced decline in both procedures and system adoption in the U.S. beginning in March 2020.

 

As a result of the global economic turmoil that has resulted from COVID-19, we also expect that some of our customers may experience difficulty in making timely payments or payments at all during this pandemic under their subscription agreements which could result in higher than anticipated bad debt expense over the course of the 2020 fiscal year.

 

After the Merger, we focused on improving the profitability of the combined businesses and have identified approximately $18.0 million of synergies and cost reductions related to the Merger that we expect to realize over the course of fiscal 2020.  In addition, and in response to the challenging trends in recent months related to COVID-19, we also conducted a full review of our 2020 operating budget. In this review, we identified additional operating expense reduction opportunities of at least $20 million, which we expect to implement beginning in the second quarter. We also continue to identify additional expense cuts that will be made if we experience a prolonged recovery from this pandemic. We expect to begin implementing this expense reduction program in the second quarter of 2020. We cannot assure you that we will be successful in fully realizing synergies and cost reductions related to the Merger or that we will realize additional operating expense reductions in the range of our estimates.

 

We cannot anticipate all of the ways in which the current economic conditions, resulting from the COVID-19 pandemic, could adversely impact our business. We may need additional capital to fund our future operations.

 

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 our skincare and hair products and (3) service revenue from the sale of our VeroGrafters™ technician services, our 2two5 internal advertising agency and our extended warranty service contracts provided to existing customers.

 

System Revenue

 

For the years ended December 31, 2019 and 2018, approximately 67% and 75%, respectively, of our system revenues were derived from subscription contracts. 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 deposit. 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 physicians, including non-traditional providers of aesthetic services such as family practice, general practice, and medical 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.

 

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For the years ended December 31, 2019 and 2018, approximately 27% and 20%, respectively, of our system revenues were derived from traditional sales. Customers generally demand higher discounts in connection with these types of sales. We recognize revenues from products sold to end 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) determine the transaction price; and (4) allocate the transaction price to the separate performance obligations in the contract; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. We do not generally grant rights of return or early termination rights to its end customers. These traditional sales are generally made through our sales team in the countries in which the team operates.

 

For the years ended December 31, 2019 and 2018, approximately 6% and 5%, 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 our harvesting and site making procedures in hair restoration procedures. The harvesting procedure is an act of activating the needle mechanism of the ARTAS® System and it consists of multiple harvests (each harvested hair follicle is one harvest), which direct customers can purchase at fixed price per harvest (with a minimum of 750 harvests) or a set price per procedure, as agreed upon at the time of system purchase. We also provide one sterile and one non-sterile disposable clinical kit per procedure. On average, each procedure consists of approximately 1,500 harvests. The customer must place an online order with us for the number of procedures desired and make a payment. Upon receipt of the order and the related payment, we release an electronic key that enables the ARTAS® System to perform the number of procedures purchased. Once the procedures are exhausted (or “consumed”), the customer must purchase additional procedures. Harvesting procedures can also be purchased in bulk orders. The site making procedure is use of the ARTAS® System to create a recipient site (i.e. site making) in the patient’s scalp affected by androgenic alopecia or AGA (or male pattern baldness). The site making procedures generally include one disposable site making kit. The site making procedures are sold to customers in the same manner as the harvesting procedures.

 

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, consumables and disposables, replacement applicators and handpieces, our skincare products (Venus Skin) and hair products, and ARTAS® System training.

 

Service Revenue

 

We generate ancillary revenue from our existing customers by selling additional services including VeroGrafters™ technician services for hair restoration using our NeoGraft® system, extended warranty service contracts, and services provided by our 2two5 internal advertising agency.

 

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.

 

 

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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. We continue to invest in new sales and marketing programs, and we expect that selling costs will continue to increase as we expand our direct operations across all geographic segments. However, we expect that selling expenses as a percentage of revenue will decline over time.

 

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. Our marketing expenses have increased as we continue to scale up our direct operations across all geographic segments. However, given the fixed cost nature of many of these expenses, we expect that marketing expenses as a percentage of revenue will decline over time.

 

General and Administrative. Our general and administrative costs primarily consist of expenses associated with our executive, accounting and finance, legal, intellectual property and human resource departments. 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. We expect our general and administrative expenses to increase due to the anticipated growth of our business and infrastructure.

 

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, and clinical costs, and facilities costs in our Yokneam, Israel research center. 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.

 

Our expenses 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 rate on our long-term debt is fixed at 9% as of December 31, 2019 and 9% as of December 31, 2018.

 

Foreign Exchange Loss (Income)

 

Foreign currency exchange loss (income) 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.

 

 

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Income Taxes 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.  Our most significant temporary difference results from our subscription business.  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.

 

As of December 31, 2019, we had U.S. federal net operating loss carryforwards of $228.0 million, which may be available to offset future taxable income and begin to expire in 2022 and 2039 respectively. As of December 31, 2019, we also had U.S. federal and state research and development tax credit carryforwards of $2.3 million and $2.6 million, respectively, which may be available to offset future tax liabilities and begin to expire in 2025. We have recorded a full valuation allowance against our net deferred tax assets at each balance sheet date.

 

We may recognize the tax benefit from an uncertain tax positions only if it is more likely than not that the tax position will be sustained upon examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. ASC 740 also provides guidance on de-recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, and income tax disclosures.  During the year we determined that $0.6 million of future tax benefits met this criterion.

 

Non-Controlling Interests

 

In many countries where we have direct operations, we have minority shareholders. 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 sheet and consolidated statement of stockholder’ equity.

 

Restatement of Comparative Amounts

 

For the year ended December 31, 2018, we previously classified the issuance of common stock shares and preferred shares as a credit to common stock. In accordance with U.S. GAAP, amounts issued in excess of par value are required to be accounted for in additional paid in capital (APIC). The error is a reclassification from common stock into APIC and has an immaterial impact on the consolidated statement of stockholders’ equity and consolidated balance sheet. Items previously reported have been reclassified to conform to U.S. GAAP and the reclassification did not have any impact on the Company’s consolidated statements of operations, consolidated statements of comprehensive loss, consolidated statements of cash flows and net loss per share calculations.

 

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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 years indicated:

 

 

The following tables set forth our revenue by region and by product type for the years indicated:

 

 

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Comparison of the Years Ended December 31, 2019 and 2018

Revenues

 

 

Total revenue increased by $7.8 million, or 7.6%, to $110.4 million for the year ended December 31, 2019 from $102.6 million for the year ended December 31, 2018. The increase in revenue was a result of increased revenue in the United States of $1.4 million and increased revenue in international markets of $6.4 million. The increase in revenue in the United States was driven by ARTAS® iX revenue post-Merger. The increase in revenue in international markets is largely due to our expanded direct sales presence in Latin America and Asia.

 

We sold an aggregate of 2,464 systems in the year ended December 31, 2019 compared to 2,080 in the year ended December 31, 2018. The percentage of systems revenue derived from our subscription model was approximately 67% in the year ended December 31, 2019 compared to 75% in the year ended December 31, 2018.

 

Other product revenue increased by $1.6 million, or 36.7%, to $6.0 million in the year ended December 31, 2019 from $4.4 million in the year ended December 31, 2018.The increase was driven by sales of ARTAS procedure kits, our expanded direct sales presence in Latin America and Asia and additional consumables sales related to increased systems sales.

 

Services revenue increased by $4.3 million, or 133.0%, to $7.5 million in the year ended December 31, 2019 from $3.2 million in the year ended December 31, 2018. This increase was driven by an expansion of the VeroGrafters™   technician services, a full year of new 2two5 ad agency services that commenced operation in the second quarter of 2018, and additional warranty revenue on ARTAS® systems.

 

 

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Cost of Goods Sold and Gross Profit

 

Cost of goods sold increased by $10.5 million, or 45.1%, to $33.8 million in the year ended December 31, 2019 from $23.3 million in the year ended December 31, 2018. Gross profit decreased by $2.7 million, or 3.4%, to $76.7 million in the year ended December 31, 2019, as compared to $79.4 million in the year ended December 31, 2018. The decrease in gross profit is primarily due to lower average selling prices on the sale of certified pre-owned systems and increased services revenue at lower margins. Gross margin was 69.4% of revenue in the year ended December 31, 2019 compared to 77.3% of revenue in the year ended December 31, 2018.The decrease in gross profit percentage is primarily related to an increase in cost of goods sold mainly due to a large chain account sale in Asia at a lower margin, increased costs of replacement parts under warranty, and lower selling prices on sales of certain certified pre-owned systems, and sales of ARTAS® iX systems, which have a lower margin than other systems.

 

Operating expenses

 

 

Selling and Marketing. Selling and marketing expenses increased by 11.0% in the year ended December 31, 2019 compared to the year ended December 31, 2018. This increase was primarily due to the Merger completed in the fourth quarter of 2019 and costs related to the Bliss launch in the U.S. As a percentage of total revenues, our selling and marketing expenses increased by 1.1%, from 36.4% in the year ended December 31, 2018 to 37.5% in the year ended December 31, 2019. We expect selling and marketing expenses to decrease as a percentage of sales in the future.

 

General and Administrative. General and administrative expenses increased by 73.1% in the year ended December 31, 2019 compared to the year ended December 31, 2018, reflecting costs related to the Merger and general and administrative expenses of Restoration Robotics post-Merger, continued investment in corporate infrastructure including expanded infrastructure in Asia-Pacific, Latin America and Europe, the related general and administrative expenses resulting from the expansion of the 2two5 internal advertising agency. As a percentage of total revenues, our general and administrative expenses increased by 16.3%, from 26.7% in the year ended December 31, 2018, to 43.0% in the year ended December 31, 2019, primarily due to Merger-related expenses.

 

Research and Development. Research and development expenses increased by 14.0% in the year ended December 31, 2019 compared to the year ended December 31, 2018. As a percentage of total revenues, our research and development expenses increased by 0.4%, from 6.9% in the year ended December 31, 2018, to 7.3% in the year ended December 31, 2019.

 

Provision for Bad Debts. The provision for bad debts decreased by 8.6% in the year ended December 31, 2019 compared to the year ended December 31, 2018. The decrease related to non-recurrence of a $8.3 million bad debt incurred in 2018 due to a large U.S. national account customer filing for Chapter 11 bankruptcy, partially offset by a charge to bad debt expense in 2019. In 2019, we performed a market by market re-evaluation of our bad debt experience across our operations and determined that the allowance for doubtful accounts was insufficient to cover the non-performing accounts and anticipated write-offs under our subscription contracts. This resulted in an incremental charge to bad debt expense in the fourth quarter and a full year bad debt expense of approximately $10.0 million in 2019. As a percentage of total revenues, our provision for bad debts decreased 1.5%, from 10.6% in the year ended December 31, 2018, to 9.1% in the year ended December 31, 2019.

 

 

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Foreign exchange loss (income). We had a foreign exchange loss of $2.6 million in the year ended December 31, 2019 and foreign exchange loss of $3.3 million in the year ended December 31, 2018. Changes in foreign exchange in 2019 are driven mainly by foreign exchange effect on accounts receivable balances denominated in currencies other than the US dollar. We generally do not hedge against foreign currency risk.

 

Finance Expenses. Finance expenses increased by $2.1 million, to $7.5 million in the year ended December 31, 2019 from $5.4 million in the year ended December 31, 2018. This increase is a result of interest expense on increased debt assumed with our primary lender in the years ended December 31, 2019 and 2018. See “—Liquidity and Capital Resources” below.

 

Income Taxes Expense. Income taxes expense decreased to $1.9 million in the year ended December 31, 2019 from a $2.2 million income tax expense in the year ended December 31, 2018. The tax provision is driven by profitable sales and the actual effective tax rates where the sale took place.  In 2019 we had a combination of less profitable sales and an increase in sales in lower rate tax jurisdictions.

 

Liquidity and Capital Resources

 

We had $15.7 million and $6.8 million of cash and cash equivalents as of December 31, 2019 and 2018, respectively. We have funded our operations with cash generated from operating activities, through the sale of equity securities to investors in private placements and through debt financing. During the year ended December 31, 2019, we drew an additional $10.0 million on a term loan facility with Madryn Health Partners, LP, $2.1 million on a credit facility with City National Bank of Florida and issued an aggregate principal amount of $29.1 million unsecured senior subordinated convertible promissory notes to certain existing investors, which converted into shares of common stock immediately after consummation of the Merger. We had total debt obligations of approximately $69.0 million as of December 31, 2019, including line of credit borrowings of $7.8 million, compared to total debt obligations of approximately $56.5 million at December 31, 2018, including line of credit borrowings of $5.6 million. The proceeds from the $28.1 million equity financing that closed on November 7, 2019 were used  in part to retire Restoration Robotics outstanding senior debt obligations upon closing of the Merger, resulting in combined company indebtedness of approximately $40.9 million. See “—Concurrent Financing” above. In connection with the Merger, all outstanding convertible debt obligations were converted into approximately 4.1 million shares of common stock. See “—Convertible Note Financing” below. During 2018, Venus Concept Ltd. raised $6.9 million from the sale of its preferred shares to existing investors that was used to fund the NeoGraft  acquisition, and Venus Concept Ltd. refinanced its long-term debt yielding incremental proceeds of $15.0 million used to fund working capital.

 

Our working capital requirements reflect the growth of our business, in particular, the shift from a traditional sales model to a subscription model. Working capital is primarily impacted by growth in our subscription sales which also impacts accounts receivable. Our overall growth 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 67:33 in 2019, compared to 75:25 in 2018. In the second half of 2019, we directed more effort to securing traditional sales in order to improve cash flow. We expect this trend will continue in 2020. We expect inventory to continue to increase in the short term, but at a lower rate than the rate of revenue growth.

 

We also require modest funding for capital expenditures. Our capital expenditures relate primarily to our research and development facilities in Yokneam, Israel. In addition, our capital investments have included improvements and expansion of our subsidiary operations to support our growth.

 

 

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Madryn Credit Agreement

 

On October 11, 2016, Venus Concept 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 Ltd.’s subsidiaries (the “Subsidiary Obligors”). The Madryn Credit Agreement is comprised of four tranches of debt aggregating $70.0 million. As at December 31, 2019, the Subsidiary Obligors had borrowed $60.0 million under the term A-1 and A-2 and B tranches of the Madryn Credit Agreement. Term C borrowings of $10.0 million were undrawn and are no longer available. As of December 31, 2018, we have drawn on the term A-1 and A-2 borrowings for gross debt of $50.0 million. Borrowings under the Madryn Credit Agreement are secured by substantially all of our assets and the assets of the Subsidiary Obligors. On the 24th payment date, which is September 30, 2022, the aggregate outstanding principal amount of the loans, together with any accrued and unpaid interest thereon and all other amounts due and owing under the loan agreement will become due and payable in full.

 

In connection with the Madryn Credit Agreement, Venus Concept Ltd. issued three types of 10-year warrants (“Madryn Warrants”). Immediately prior to the consummation of the Merger, Madryn held Madryn Warrants to purchase 150,000 ordinary shares of Venus Concept Ltd. at a price of $5.0604 per share, 150,000 Series B preferred shares of Venus Concept Ltd. at a price of $5.0604 per share, and 12,000 Series C preferred shares of Venus Concept Ltd. at a price of $5.0604 per share. At the effective time of the Merger, each outstanding Venus Concept Ltd. warrant, whether or not vested, to purchase ordinary shares or preferred shares, as applicable, of Venus Concept Ltd., that was unexercised immediately prior to the effective time of the Merger was converted into a warrant to purchase shares of our common stock as determined pursuant to the Exchange Ratio as defined above. We had Madryn Warrants exercisable for 179,932 shares of common stock outstanding as of December 31, 2019, after giving effect to the Reverse Stock Split defined above.

 

Effective August 14, 2018, interest on the Madryn loan is 9%, payable quarterly. Previously, interest was payable quarterly, at Venus Concept Ltd.’s option, as follows: cash interest 9% during the interest only period, which was 3 years or 12 principal payments after closing, plus an additional 4% rate, paid in kind (“PIK”). We have the option of settling the PIK interest in cash or adding the owed interest to the principal amount of the loan.

 

The loans are collateralized by substantially all the assets of Venus Concept Ltd. and certain of its subsidiaries. In addition, the Madryn Credit Agreement contains certain covenants that require us together with our subsidiaries to achieve certain minimum revenue and liquidity thresholds. The minimum revenue and liquidity covenants require that we and our subsidiaries, on a consolidated basis, achieve (i) minimum reported revenue targets for any four consecutive fiscal quarter period of an amount equal to the greater of (A) $100.0 million and (B) one hundred and fifty percent (150%) of the aggregate outstanding amount of the loans as of the last day of such four consecutive fiscal quarter period, (ii) minimum levels of cash held in deposit accounts controlled by Madryn to be no less than $2.0 million and (iii) minimum levels of cash held in all deposit accounts, plus availability under the CNB Credit Facility (as defined below), to be no less than $5.0 million.

 

The Madryn Credit Agreement also contains various covenants that limit our ability and the ability of our subsidiaries to engage in specified types of transactions. Subject to limited exceptions, these covenants limit our ability, without Madryn’s consent, to, among other things:

 

 

The covenants under the Madryn Credit Agreement require us to achieve minimum reported revenue targets and minimum levels of cash on hand in certain subsidiaries. As of June 30, 2019, we were not in compliance with the minimum liquidity covenant under Madryn Credit Agreement. Additionally, we failed to timely pay an interest payment due June 28, 2019 as required by Madryn Credit Agreement; however, we subsequently made this interest payment on July 10, 2019.

 

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On July 26, 2019, Venus Concept Ltd. and Madryn executed a waiver and amendment to the Madryn Credit Agreement pursuant to which Madryn lowered the liquidity covenant threshold from $2.0 million to $0.2 million through the earlier of August 30, 2019, or the time we raised $21.0 million in additional equity. Madryn also waived the existing events of default. In addition, the amendment to the Madryn Credit Agreement included, among other changes, a requirement that we complete the Concurrent Financing with proceeds of $21.0 million no later than August 30, 2019. This financing was completed as described above.

 

Pursuant to the terms of the amendment, if all or any portion of the loans under the Madryn Credit Agreement are prepaid, then a prepayment premium must be paid equal to: (i) 8.00% of the loans prepaid if prepaid on or prior to August 31, 2019, (ii) 6.50% if prepaid after August 31, 2019 but on or prior to August 31, 2020, (iii) 5.00% if prepaid after August 31, 2020 but on or prior to February 28, 2021, (iv) 4.00% if prepaid after February 28, 2021, but on or prior to August 31, 2021, (v) 3.00% if prepaid after August 31, 2021, but on or prior to February 28, 2022, and (vi) 2.00% if prepaid after February 28, 2022.

 

As of September 30, 2019, we were not in compliance with the minimum debt service coverage ratio under the CNB Credit Facility (as defined below). Failure to comply with the covenants under the CNB Credit Facility would result in a default, which would also cause a default in the Madryn Credit Agreement. CNB has provided a waiver for cross defaults arising under the Madryn Credit Agreement through September 30, 2019.

 

As of December 31, 2019, we were in compliance with all required covenants.

 

In connection with the Merger, we entered into an amendment to the Madryn Credit Agreement, dated as of November 7, 2019, (the “Amendment”), pursuant to which we joined as (i) a guarantor to the Madryn Credit Agreement and (ii) a grantor to the certain security agreement, dated October 11, 2016, (as amended, restated, supplemented or otherwise modified from time to time), by and among the grantors from time to time party thereto and the administrative agent (the “U.S. Security Agreement”).

 

As a guarantor under the Madryn Credit Agreement, we are jointly and severally liable for the obligations (as defined in the Madryn Credit Agreement) thereunder and to secure our obligations thereunder, we have granted the administrative agent a lien on all of our assets pursuant to the terms of the U.S. Security Agreement. In the event of default under the Madryn Credit Agreement, Madryn may accelerate the obligations and foreclose on the collateral granted by Venus Concept Ltd. under the U.S. Security Agreement to satisfy the obligations.

 

CNB Credit Facility

 

We have an agreement with CNB pursuant to which CNB agreed to provide a revolving credit facility to us and certain of our subsidiaries in the maximum principal amount of $10.0 million ($7.5 million in 2018), to be used to finance working capital requirements (the “Credit Facility”). As of December 31, 2019, there was $7.8 million outstanding ($5.7 million in 2018) under the Credit Facility, which bears interest at LIBOR rate plus 3.25%, which amounted to a weighted average of 5.4% (5.7% in 2018).

 

In April 2019, the Credit Facility increased from $7.5 million to $10.0 million.

 

The Credit Facility contains various covenants that limit our ability to engage in specified types of transactions. Subject to limited exceptions, these covenants limit our ability, without CNB’s consent, to, among other things, sell, lease, transfer, exclusively license or dispose of our 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. In addition, the Credit Facility contains certain covenants that require our subsidiary obligors to achieve certain minimum account balances, or a minimum debt service coverage ratio and a maximum total liability to tangible net worth ratio. If our subsidiary obligors fail to comply with these covenants, it will result in a default and require us and our subsidiary obligors to repay all outstanding principal amounts and accrued interest.

 

 

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The Credit Facility is secured by substantially all of our assets and the assets of certain of our subsidiaries requires us to maintain either a minimum cash balance in deposit accounts or a maximum total liability to tangible net worth ratio and a minimum debt service coverage ratio. As of December 31, 2019 and 2018, we were in compliance with maintaining the maximum total liability to tangible net worth ratio. To be in compliance with maintaining the minimum debt service coverage ratio as of December 31, 2018, we received a waiver to exclude write-offs from a large U.S. national account from the ratio as disclosed above. An event of default under this agreement would cause a default under the Madryn Credit Agreement as described above.

 

In the event of a default, if we and our subsidiary obligors are unable to repay all outstanding amounts, CNB may foreclose on the collateral granted to it to collateralize the indebtedness, which includes the enforcement of the CNB Guaranty, which will significantly affect our ability to operate its business.

 

As of March 31, 2019, and June 30, 2019, Venus Concept Ltd. was not in compliance with the minimum debt service coverage ratio under the Credit Facility. CNB provided Venus Concept Ltd. with waivers as of March 31, 2019, and June 30, 2019. As of September 30, 2019, we were not in compliance with the minimum debt service coverage ratio under the Credit Facility. On October 30, 2019, CNB amended the minimum debt service coverage ratio covenant calculation, reaffirmed its prior waiver as of June 30, 2019 and provided us with a waiver removing the requirement to meet the minimum debt service coverage ratio as of September 30, 2019.

 

As of December 31, 2019 we were in compliance with all required covenants.

 

Convertible Note Financings

 

Venus Concept Ltd. convertible promissory notes

 

In June 2019, Venus Concept Ltd. issued unsecured senior subordinated convertible promissory notes in the aggregate principal amount of $7.8 million. In August 2019, Venus Concept Ltd. issued an aggregate of $21.25 million of additional unsecured senior subordinated convertible promissory notes to certain investors.

 

The convertible notes issued by Venus Concept Ltd. in June 2019 and August 2019 are collectively referred to as the “2019 Notes”.

 

The 2019 Notes bore interest at a rate of 8.00% per annum, were unsecured and were due and payable, including accrued interest, on the thirtieth day following the termination of the Merger. When the Merger was consummated, all outstanding principal and any accrued and unpaid interest under the 2019 Notes was automatically converted into a number of shares of fully paid and non-assessable shares of the Common Stock, par value $0.0001 per share, of our company, calculated by dividing the outstanding principal amount of the 2019 Notes (and any accrued and unpaid interest under the 2019 Notes) by the conversion price of $6.996 per share.

 

In connection with the 2019 Notes, we recognized interest expense of $0.6 million during the period from January 1, 2019 through November 6, 2019.

 

Venus Concept Inc. (formerly Restoration Robotics) convertible promissory notes

 

On February 28, 2019, the Company entered into a Note Purchase Agreement pursuant to which the Company raised $5.0 million through the issuance of unsecured subordinated convertible promissory notes to two investors (the “Investors”). The Note Purchase Agreement was amended on August 20, 2019 to adjust the conversion price for per share to $6.996 (post-split) and to provide for automatic conversion of the convertible promissory notes upon consummation of the Merger.

 

In addition, on August 20, 2019, we entered into a Note Purchase Agreement pursuant to which we raised $2.0 million through the issuance of an unsecured subordinated convertible promissory note to one investor. The convertible notes we issued in February 2019 and August 2019 pursuant to the Notes Purchase Agreements are collectively referred to as the “Notes”. The maturity date of the Notes was August 28, 2020. The Notes bore interest on the unpaid principal amount at a rate of eight percent (8.0%) per annum from the date of issuance. The Notes were unsecured and subordinated in priority to our existing obligations under the Solar Agreement.

 

 

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On November 7, 2019, immediately following the closing of the Merger, all outstanding principal and any accrued and unpaid interest on the 2019 Notes and the Notes in the aggregate amount of $37.0 million were automatically converted into 5.3 million of fully paid and non-assessable shares of Common Stock, of which 1.2 million were issued subsequent to December 31, 2019.

 

Capital Resources

 

Since our inception, we have invested a significant portion of our efforts and financial resources in research and development and sales and marketing activities. Research and development, clinical trials, product engineering, ongoing product upgrades and other enhancements and seeking regulatory clearances and approvals to market future products will require substantial funds to complete. As of December 31, 2019, we had capital resources consisting of cash and cash equivalents of approximately $15.7 million. We have financed our operations principally through the issuance and sale of our common stock, secured debt financing, and payments from customers. Subsequent to the December 31, 2019, we completed the 2020 Private Placement (as defined above) and received approximately $22.3 million in gross proceeds.

 

We believe our existing cash and cash equivalents, including the proceeds from the 2020 Private Placement, along with cash expected to be generated from the sale of our systems and other products and services, and taking into account our cost reduction initiatives we intend to implement, will be sufficient for us to fund our planned operations for the next twelve months. As a result of the COVID-19 pandemic and the economic turmoil that has resulted, we expect that some of our customers may experience difficulty in making timely payments or payments at all under their subscription agreements. Any of the foregoing could harm our business and we cannot anticipate all of the ways in which the economic climate and financial market conditions, including the effect of the COVID-19 pandemic, could adversely impact our business. We may need additional capital to fund our future operations. In addition, our operating plans may change as a result of many factors some of which may be unknown to us, and we may need to seek additional funds sooner than planned, through public or private equity or debt financings or other sources, such as strategic collaborations. Such financing may result in dilution to stockholders, the issuance of securities may have rights, preferences, or privileges senior to those of holders of our common stock, the imposition of more burdensome debt covenants and repayment obligations, the licensing of rights to our technology or other restrictions that may affect our business. In addition, we may seek additional capital if favorable market conditions or given other strategic considerations even if we believe we have sufficient capital to fund our current or future operating plans.

 

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:

 

 

We are restricted by covenants in the Madryn Credit Agreement and the CNB Credit Facility. These covenants restrict, among other things, our ability to incur additional indebtedness, which may limit our ability to obtain additional debt financing. In addition, the Madryn Credit Agreement contains certain minimum liquidity and minimum revenue covenants, which, if we fail to maintain or achieve, will result in a default under the agreement and the requirement for us to repay all outstanding principal amounts and accrued interest repay all amounts outstanding.

 

We 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 will depend on many factors, including, but not limited to:

 

 

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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 years indicated:

 

 

Cash Flows from Operating Activities

 

In the year ended December 31, 2019, cash used in operating activities consisted of a net loss of $42.3 million and an investment in net operating assets of $12.8 million, partially offset by non-cash operating expenses of $15.5 million. The investment in net operating assets was primary attributable to an increase in accounts receivable of $21.1 million, primarily due to the increase in subscription sales, an increase in prepaid expenses of $0.9 million, a decrease in accounts payable of $6.0 million and a decrease in other long-term liabilities of $1.4 million. This was partially offset by an increase in inventories of $6.4 million, an increase in other current assets of $0.5 million, an increase in severance payments of $0.1 million and an increase in accrued expenses and other current liabilities of $9.6 million. The non-cash operating expenses consisted mainly of a provision for bad debts of $10.0 million, depreciation and amortization of $2.0 million, stock-based compensation expense of $2.2 million, deferred tax benefit of $1.1 million, interest on convertible promissory notes of $0.6 million, a change in the fair value of the earn-out liability for the purchase of NeoGraft of $0.5 million, unrealized foreign exchange loss of $0.2 million, financing fees of $0.3, issuance of warrants of $0.1 million, interest on convertible promissory notes of $0.6 and a provision for inventory obsolescence of $1.0 million.

 

 

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In the year ended December 31, 2018, cash used in operating activities consisted of a net loss of $14.2 million and an investment in net operating assets of $34.8 million, partially offset by non-cash operating expenses of $15.4 million. The investment in net operating assets was attributable to an increase in accounts receivable of $38.2 million due to the increase in subscription sales and an increase in inventories of $6.2 million to meet higher demand and to accommodate the increased number of technology platforms offered. This was partially offset by an increase in accounts payable of $4.2 million, a decrease in deferred expenses of $1.6 million, an increase in other liabilities of $2.6 million and a net decrease in other net operating assets of $1.1 million. The non-cash operating expenses consisted mainly of stock-based compensation of $1.3 million, depreciation and amortization of $1.3 million, capitalized interest of $0.9 million, and a provision for bad debts of $10.9 million.

 

Cash Flows from Investing Activities

 

In the year ended December 31, 2019, cash used in investing activities consisted of the purchase of property and equipment of $1.1 million, offset by the $7.4 million of cash, cash equivalents and restricted cash acquired in connection with the Merger and $0.1 million of proceeds from sale of property and equipment.

 

In the year ended December 31, 2018, cash used in investing activities consisted of $1.2 million for the purchase of property and equipment and $7.5 million for the acquisition of NeoGraft.

 

Cash Flows from Financing Activities

 

In the year ended December 31, 2019, cash from financing activities consisted primarily of net proceeds from the drawdown on the Madryn Credit Agreement of $9.7 million, net proceeds from issuance of unsecured senior subordinated convertible promissory notes of $29.1 million, net proceeds from Concurrent Financing of $26.5 million, proceeds from exercise of options of $0.4 million and proceeds from the drawdown on the CNB Credit Facility of $2.1 million, partially offset by the issuance of the loan to Restoration Robotics of $4.5 million prior to the Merger, payment under the Solar loan and security agreement of $20.0 million, payment of the NeoGraft earn-out liability of $0.8 million, and NeoGraft annual installment payment of $0.3 million.

 

In the year ended December 31, 2018, the cash from financing activities consisted of net proceeds from the issuance of shares of $6.9 million, issuance of long-term debt of $15.0 million, $5.7 million in drawings on the credit facility and proceeds on the exercise of stock option of $0.2 million, offset by the $0.5 million of cash used to acquire the non-controlling interest in two subsidiaries and $0.8 million of financing fees.

 

Contractual Obligations and Other Commitments

 

Our premises and those of our subsidiaries are leased under various operating lease agreements, which expire on various dates.

 

As of December 31, 2019, we had non-cancellable purchase orders placed with Venus Concept’s contract manufacturers in the amount of $5.7 million. In addition, as of December 31, 2019, we had $1.5 million of open purchase orders that can be cancelled with 90 days’ notice, except for a portion equal to 15% of the total amount representing the purchase of “long lead items”.

 

The following table summarizes our contractual obligations as of December 31, 2019, which represent material expected or contractually committed future obligations.

 

 

 

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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 structure finance entities.

 

Critical Accounting Policies and Estimates

 

Our consolidated financial statements are prepared in accordance with U.S GAAP. The preparation of these 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.

 

While our significant accounting policies are more fully described in Note 2 to our consolidated financial statements included in this Annual Report on Form 10-K, we believe that the assumptions and estimates associated with stock-based compensation, allowance for doubtful accounts, revenue recognition and income taxes have the most significant impact on our consolidated financial statements. 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, traditional system sales to customers and distributors, (2) other product revenues from the sale of ARTAS procedure kits, marketing supplies and kits, consumables and Venus Concept’s skincare and hair products and (3) service revenue from the sale of our VeroGrafters™ technician services, our  2two5 internal advertising agency and our extended warranty service contracts provided to existing customers.

 

The Company recognizes 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) determine the transaction price; and (4) allocate the transaction price to the separate performance obligations in the contract; and (5) recognize 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 contracts which stipulate payment terms which exceed one year. They are comprised of the unpaid principal balance, net of the allowance for doubtful accounts. These receivables have been discounted based on the implicit interest rate in the subscription lease which range between 8% to 9% for the year ended December 31, 2019 and 8% to 9% for the year ended December 31, 2018. 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 doubtful accounts

 

The allowance for doubtful accounts 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 its 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.

 

 

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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 consolidated statements of operations based on their fair values.

 

The fair value of stock options ("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 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. Thus, 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 re-measured 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 (income) in the consolidated statement of operations as they arise.

 

JOBS Act Accounting Election

 

We are an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. We have elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our consolidated financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.

 

Recent Accounting Pronouncements

 

See Note 2 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for recently adopted accounting pronouncements and recently issued accounting pronouncements not yet adopted as of the date of this Annual Report on Form 10-K.

 

 

As a smaller reporting company, we are not required to provide disclosure for this Item.

 

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Item 8.Consolidated Financial Statements and Supplementary Data.

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders of Venus Concept Inc.

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheet of Venus Concept Inc. and subsidiaries (the “Company”) as of December 31, 2019, and the related consolidated statements of operations, comprehensive loss, stockholders' equity, and cash flows for the year ended December 31, 2019, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019, and the results of its operations and its cash flows for the year ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.

 

We have also audited the effects of the adjustments to retrospectively apply the merger accounting (including the reverse stock split accounting) as disclosed in Note 1. In our opinion, such adjustments are appropriate and have been properly applied. We were not engaged to audit, review, or apply any procedures to the 2018 consolidated financial statements of Venus Concept Ltd. other than with respect to the adjustments related to merger accounting (including the reverse stock split accounting) and, accordingly, we do not express an opinion or any other form of assurance on the 2018 consolidated financial statements taken as a whole.

 

We have also audited the adjustments described in Note 1 that were applied to restate the 2018 consolidated financial statements to correct an error. In our opinion, such adjustments are appropriate and have been properly applied. We were not engaged to audit, review, or apply any procedures to the 2018 consolidated financial statements of Venus Concept Ltd. other than with respect to the adjustments and, accordingly, we do not express an opinion or any other form of assurance on the 2018 consolidated financial statements taken as a whole.

 

Going Concern

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has reported recurring net losses and negative cash flows from operations, which raises substantial doubt about the Company’s ability to continue as a going concern. Management’s plans regarding these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.

 

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

To the shareholders and the Board of Directors of Venus Concept Ltd.

 

Opinion on the Financial Statements

 

We have audited, before the effects of the adjustments to retrospectively apply the reverse merger accounting (including the  stock split  accounting) and to effect the retrospective restatement of comparative amounts disclosed in Note 1 to the 2019  consolidated financial statements of Venus Concept Inc.  (“2019 financial statements”), the consolidated balance sheet of Venus Concept Ltd. and subsidiaries (“Venus”) as of December 31, 2018, the related consolidated statements of operations, comprehensive (loss) income, changes in shareholders’ equity (deficit), and cash flows, for the year ended December 31, 2018, and the related notes (collectively referred to as the “financial statements”) (the 2018 financial statements before the effects of the retrospective adjustments discussed in Note 1 to the 2019 financial statements are not presented herein).  In our opinion, the 2018 financial statements before the effects of the  adjustments to retrospectively apply the reverse merger accounting (including the stock split accounting) and to effect the retrospective restatement of comparative amounts disclosed in Note 1 to the 2019 financial statements, present fairly, in all material respects, the financial position of Venus as of December 31, 2018, and the results of its operations and its cash flows for the year ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.

 

We were not engaged to audit, review, or apply any procedures to the adjustments to retrospectively apply the reverse merger accounting (including the stock split accounting) and to effect the retrospective restatement of comparative amounts disclosed in Note 1 to the 2019 financial statements, and accordingly, we do not express an opinion or any other form of assurance about whether such retrospective adjustments are appropriate and have been properly applied. Those retrospective adjustments were audited by other auditors.

 

Going Concern

 

The accompanying financial statements have been prepared assuming that Venus will continue as a going concern. As discussed in Note 1 to the financial statements, Venus has reported recurring net losses and negative cash flows from operations, which raises substantial doubt about Venus’ ability to continue as a going concern. Management’s plans regarding these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Basis for Opinion

 

These financial statements are the responsibility of Venus’ management. Our responsibility is to express an opinion on Venus’ financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to Venus in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Venus is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of Venus’ internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.

 

 

/s/ Deloitte LLP

Chartered Professional Accountants

Licensed Public Accountants

Toronto, Canada

December 2, 2019

 

We began serving as Venus’ auditor in 2017.  In 2019, we became the predecessor auditor.

 

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VENUS CONCEPT INC.

Consolidated Balance Sheets

(in thousands, except share and per share data)

 

 

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

 

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VENUS CONCEPT INC.

Consolidated Statements of Operations

(in thousands, except per share data)

 

 

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

 

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VENUS CONCEPT INC.

Consolidated Statements of Comprehensive Loss

(in thousands, except share and per share data)

 

 

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

 

 

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VENUS CONCEPT INC.

Consolidated Statement of Stockholders’ Equity

(in thousands, except share and per share data)

 

 

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

 

 

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VENUS CONCEPT INC.

Consolidated Statements of Cash Flows

(in thousands, except share and per share data)

 

 

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

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VENUS CONCEPT INC.

Notes to Consolidated Financial Statements

(in thousands, except share and per share data)

 

1. Nature of Operations

 

Venus Concept Inc. (formerly Restoration Robotics, 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 practice enhancement services. The Company’s aesthetic systems have been designed on a cost-effective, proprietary and flexible platform that enables 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 audited consolidated financial statements, the “Company”, “Venus Concept,” refers to Venus Concept Inc. and its subsidiaries on a consolidated basis.

 

Merger of Venus Concept Inc. with Venus Concept Ltd.

 

On November 7, 2019, the Company (formerly Restoration Robotics, Inc.), completed its business combination with Venus Concept Ltd., in accordance with the terms of the Agreement and Plan of Merger and Reorganization, dated as of March 15, 2019, as amended from time to time (the “Merger Agreement”), by and among the Company, Venus Concept Ltd. and Radiant Merger Sub Ltd., a company organized under the laws of Israel and a direct, wholly-owned subsidiary of the Company (“Merger Sub”). Under the Merger Agreement, Merger Sub merged with and into Venus Concept Ltd., with Venus Concept Ltd. surviving as a wholly owned subsidiary of the Company (the “Merger”). Following the completion of the Merger, the Company changed its corporate name to Venus Concept Inc. (“Name Change”), and the business conducted by Venus Concept Ltd. became the primary business conducted by the Company.

 

At the effective time of the Merger, each outstanding ordinary and preferred share of Venus Concept Ltd., other than shares held by Venus Concept Ltd. as treasury stock or held by the Company or Merger Sub, were converted into the right to receive 8.6506 (the “Exchange Ratio”) validly issued, fully paid and non-assessable shares of Common Stock of the Company, par value $0.0001 per share (“Common Stock”), and each outstanding stock option and warrant issued and outstanding by Venus Concept Ltd. was assumed by the Company and converted into and became an option or warrant (as applicable) exercisable for shares of Common Stock with the number and exercise price adjusted by the Exchange Ratio. The number of shares of Common Stock subject to each Venus Concept Ltd.’s stock option assumed by the Company was determined by multiplying (a) the number of Venus Concept Ltd. ordinary shares that were subject to such Venus Concept Ltd. stock option, as in effect immediately prior to the effective time of the Merger by (b) the Exchange Ratio and rounding the resulting number down to the nearest whole number of shares of Common Stock. The per share exercise price for the shares of Common Stock issuable upon exercise of each Venus Concept Ltd.’s stock option assumed by the Company was determined by dividing (a) the per share exercise price of Venus Concept Ltd.’s ordinary shares subject to such Venus Concept Ltd. stock option, as in effect immediately prior to the effective time of the Merger, by (b) the Exchange Ratio and rounding the resulting exercise price up to the nearest whole cent. The conversion of Venus Concept Ltd. stock options to the Company’s stock options was treated as a modification of the awards for accounting purposes.

 

The issuance of the shares of Common Stock to the former shareholders of Venus Concept Ltd. was registered with the Securities Exchange Commission (the “SEC”) on a registration statement on Form S-4 (Reg. No. 333-232000), which was declared effective on September 10, 2019. The Merger and additional related proposals were submitted to a vote of the Company’s stockholders pursuant to a proxy statement/prospectus statement dated September 10, 2019. The Merger and additional related proposals were approved by the Company’s stockholders at an annual meeting of its stockholders held on October 4, 2019, subject to the closing of the Merger. The Merger closed on November 7, 2019. Immediately following the effective time of the Merger, the Company effected a 15-for-1 reverse stock split of the Company’s Common Stock (“Reverse Stock Split”). The impact of the Merger and Reverse Stock Split has been retrospectively applied to prior periods in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).

 

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The shares of Common Stock listed on the Nasdaq Global Market traded through the close of business on November 7, 2019 under the ticker symbol “HAIR” and commenced trading on the Nasdaq Global Market under the ticker symbol “VERO” on a post-Reverse Stock Split basis on November 8, 2019. The Merger was accounted for as a business combination using the acquisition method of accounting under the provisions of Financial Accounting Standards Board, Accounting Standards Codification (“ASC”), Topic 805 “Business Combinations” (“ASC 805”). The Merger was accounted for as a reverse acquisition with Venus Concept Ltd. being deemed the acquiring company for accounting purposes. Under ASC 805, Venus Concept Ltd., as the accounting acquirer, recorded the assets acquired and liabilities assumed of Venus Concept Inc. in the Merger at their fair values as of the acquisition date (Note 4).

 

Venus Concept Ltd. was determined to be the accounting acquirer based on an analysis of the criteria outlined in ASC 805 and the facts and circumstances specific to the Merger, including the fact that immediately following the Merger: (1) Venus Concept Ltd. shareholders owned a substantial majority of the voting rights of the combined company; (2) Venus Concept Ltd. designated a majority (seven of nine) of the initial members of the board of directors of the combined company; and (3) Venus Concept Ltd. senior management held most key positions in senior management of the combined company. As a result, upon consummation of the Merger, the historical financial statements of the Venus Concept Ltd. became the historical financial statements of the combined organization.

 

Concurrent Financing

 

On November 3, 2019, the Company (formerly Restoration Robotics, Inc.) and Venus Concept Ltd. entered into a securities purchase agreement (the “Purchase Agreement”) with certain investors (collectively, the “Investors”) pursuant to which the Company agreed to issue and sell to the Investors in a private placement an aggregate of 7,483,980 shares (the “Concurrent Financing Shares”) of the Company Common Stock, par value $0.0001 per share, and warrants to purchase up to an aggregate of 3,741,990 shares (the “Warrant Shares”) of the Company common stock at an exercise price of $6.00 per share (the “Concurrent Financing Warrants” and, together with the Concurrent Financing Shares and the Concurrent Financing Warrant Shares, the “Securities”) immediately following the closing of the Merger (the “Concurrent Financing”). The gross proceeds from the Securities sold in the Concurrent Financing was $28,065.The costs incurred with respect to the Concurrent Financing amounted to $1,564 and were recorded in the consolidated statements of stockholders’ equity. The Concurrent Financing closed on November 7, 2019.

 

Loans from Venus Concept Ltd. to Restoration Robotics, Inc.

 

From July to September 2019 Venus Concept Ltd. loaned to Restoration Robotics, Inc. an aggregate of $4,500 in three installments, using the proceeds from the issuance of the Venus Concept Ltd.’s unsecured senior subordinated convertible promissory notes (see Note 10). The loans to Restoration Robotics, Inc. accrued interest at a rate of 8.00% per annum and matured on November 30, 2019. As a result of the Merger, these loans were effectively settled at the recorded amount, and no gain or loss was recognized (Note 4).

 

Restatement of Comparative Amounts

 

Venus Concept Ltd. previously classified the issuance of common stock shares and preferred shares as a credit to common stock. In accordance with U.S. GAAP, amounts issued in excess of par value are required to be accounted for in additional paid in capital (APIC). The error is a reclassification from common stock into APIC and has an overall immaterial impact on the consolidated statement of stockholders’ equity and consolidated balance sheet. Items previously reported have been reclassified to conform to U.S. GAAP and the reclassification did not have any impact on the Company’s consolidated statements of operations, consolidated statements of comprehensive loss, consolidated statements of cash flows and net loss per share calculations.

 

The following table summarizes the impact of the restatement adjustments on Venus Concept Ltd.’s previously reported consolidated financial statements:

 

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Going Concern

 

The accompanying 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 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 December 31, 2019 and 2018, the Company had an accumulated deficit of $75,686 and $35,067, respectively.  Further, during the year ended December 31, 2019, the Company was not in compliance with certain financial covenants contained in the credit agreements with City National Bank of Florida and Madryn Health Partners, L.P. for the nine months ended September 30, 2019 (see Notes 11 and 12). The Company was in compliance with all required covenants as of December 31, 2019. The Company’s recurring losses from operations and negative cash flows raise substantial doubt about the Company’s ability to continue as a going concern within 12 months from the date that the consolidated financial statements are issued.

 

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 through borrowings and issuance of capital stock.  The Company completed convertible promissory note offerings in June 2019 and August 2019 (see Note 10) and the Concurrent Financing described above. Subsequent to December 31, 2019 the Company completed a private placement of the common stock shares, preferred shares and warrants, as described in Note 19. 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.

 

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 consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded assets amounts or amounts and classification of liabilities that might result from the uncertainty.

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 

Basis of Presentation

 

The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (U.S. GAAP).

 

Principles of Consolidation

 

The accompanying consolidated financial statements include the accounts of Venus Concept Inc. and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated on consolidation. Where the Company does not own 100% of its subsidiaries, it accounts for the partial ownership interest through non-controlling interest.

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Use of Estimates

 

The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Significant estimates and assumptions made in the accompanying consolidated financial statements include, but are not limited to, the implicit interest rate used to record lease revenue, allowance for doubtful accounts, inventory valuation, stock-based compensation, warranty accrual, the valuation and measurement of deferred tax assets and liabilities, accrued severance pay, useful lives of property and equipment, earn-out liability, useful lives of intangible assets, impairment of long-lived assets and goodwill and valuation of acquired intangible assets and goodwill. The Company evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors and adjusts those estimates and assumptions when facts and circumstances dictate. Actual results could materially differ from those estimates.

 

Foreign Currency

 

The consolidated financial statements are presented in U.S. dollars.

 

The Company and its subsidiaries’ functional currency is the U.S. dollar as determined by management.

 

All exchange gains and losses from remeasurement of monetary balance sheet items resulting from transactions in non-functional currencies are recorded in the consolidated statements of operations as they arise.

 

In respect of transactions denominated in currencies other than the Company and its subsidiaries’ functional currencies, the monetary assets and liabilities are remeasured at the period end rates. Revenue and expenses are remeasured at rates of exchange prevailing on the transaction dates. All of the exchange gains or losses resulting from these transactions are recognized in the consolidated statements of operations.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid investments with an original maturity of three months or less from the date of purchase to be cash equivalents. Cash and cash equivalents consist primarily of funds invested in readily available checking and savings accounts, investments in money market funds and short-term time deposits.

 

Restricted Cash

 

As of December 31, 2019, and 2018, the Company was required to hold $83 and $19, respectively, in a separate deposit account as collateral for rent and credit cards.

 

Concentration of Credit Risk

 

Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash and cash equivalents, accounts receivable and long-term receivables. The Company’s cash and cash equivalents are invested primarily in deposits with major banks worldwide, as such minimal credit risk exists with respect to such investments. The Company’s trade receivables are derived from global sales to customers. An allowance for doubtful accounts is provided with respect to all balances for which collection is deemed to be doubtful.

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Risks and Uncertainties

 

The Company’s future results of operations involve a number of risks and uncertainties. Factors that could affect the Company’s future operating results and cause actual results to vary materially from expectations include, but are not limited to, rapid technological change, continued acceptance of the Company’s products, competition from substitute products and larger companies, protection of proprietary technology, strategic relationships and dependence on key individuals. If the Company fails to adhere to ongoing Food and Drug Administration (“FDA”) Quality System Regulation, or regulations in countries other than the United States, FDA or other regulators may withdraw its market clearances or take other action. The Company relies on suppliers to manufacture some of the components used in its products. The Company’s suppliers may encounter supply interruptions or problems during manufacturing due to a variety of reasons, including failure to comply with applicable regulations, including FDA’s Quality System Regulation, making errors in manufacturing or losing access to critical services and components, any of which could delay or impede the Company’s ability to meet demand for its products.

 

The Company has borrowings with interest rates that are subject to fluctuations as charged by the lender. The Company does not use derivative financial instruments to mitigate the exposure to interest rate risk. The Company’s objective is to have sufficient liquidity to meet its liabilities when due. The Company monitors its cash balances and cash used in operating activities to meet its requirements. As at December 31, 2019 and 2018, the most significant financial liabilities are the line of credit, trade payables, accrued expenses and other current liabilities, earn-out liability and long-term debt.

 

Concentration of Customers

 

For the years ended December 31, 2019 and 2018, there were no customers accounting for more than 10% of the Company’s revenue. As of December 31, 2019 and 2018, there were no customers accounting for more than 10% of the Company’s accounts receivable.

 

Allowance for Doubtful Accounts

 

Accounts receivable do not bear interest and are typically not collateralized. The Company performs ongoing credit evaluations of its customers’ financial condition and maintains an allowance for doubtful accounts. Uncollectible accounts are charged to expense when deemed uncollectible, and accounts receivable are presented net of an allowance for doubtful accounts. Accounts receivable are deemed past due in accordance with the contractual terms of the agreement. Actual losses may differ from our estimates and could be material to our consolidated financial position, results of operations and cash flows. The allowance for doubtful accounts was $10,494 and $4,408 at December 31, 2019 and 2018, respectively.

 

The allowance for doubtful accounts consisted of the following activity for years ended December 31, 2019 and 2018 (in thousands):

 

 

Inventory

 

Inventories are stated at the lower of cost or net realizable value and include raw materials, work in progress and finished goods. Cost is determined as follows:

 

Raw Materials and Work in Progress (“WIP”) – Cost is determined on a standard cost basis utilizing the weighted average cost of historical purchases, which approximates actual cost.

 

The cost of WIP and finished goods includes the cost of raw materials and the applicable share of the cost of labor and fixed and variable production overheads.

 

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The Company regularly evaluates the value of inventory based on a combination of factors including the following: historical usage rates, product end of life dates, technological obsolescence and product introductions.

The Company includes demonstration units within inventories. Proceeds from the sale of demonstration units are recorded as revenue.

 

Long-term Receivables

 

Long-term receivables relate to the Company’s subscription revenue or contracts which stipulate payment terms which exceed one year. They are comprised of the unpaid principal balance, plus accrued interest, net of the allowance for credit losses. These receivables have been discounted based on the implicit interest rate in the subscription lease which range between 8% to 9% in 2019 and 8% to 9% in 2018. 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.

 

Deferred revenues represent payments received prior to the income being earned. Once the equipment has been delivered or the services have been rendered, these amounts are recognized in income.

 

Property and Equipment

 

Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which is between three and ten years. Leasehold improvements are depreciated over the lesser of the life of the lease or the useful life of the improvements. Maintenance and repairs are charged to expense as incurred. When assets are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the consolidated balance sheets, and any resulting gain or loss is reflected in consolidated statements of operations.

 

Intangible Assets

 

Intangible assets consist of customer relationships, brand, technology and supplier agreement. Intangible assets are stated at cost less accumulated amortization. Amortization is computed using the straight-line method over the estimated useful lives of the respective assets, which range from approximately six to fifteen years.

 

The useful lives of intangible assets are based on the Company’s assessment of various factors impacting estimated cash flows, such as the product’s position in its lifecycle, the existence or absence of like products in the market, various other competitive and regulatory issues, and contractual terms.

 

Impairment of Long-Lived Assets

 

The Company accounts for the impairment of long-lived assets in accordance with FASB, Accounting Standards Codification (“ASC”) 360-10, “Accounting for the Impairment of Long-Lived Assets”. This standard requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the assets’ carrying amounts may not be recoverable. For assets that are to be held and used, impairment is assessed when the estimated undiscounted cash flows associated with the asset or group of assets is less than their carrying values. If impairment exists, an adjustment is made to write the asset down to its fair value, and a loss is recorded as the difference between the carrying value and fair value. Fair values are determined based on quoted market values, discounted cash flows or internal and external appraisals, as applicable. Assets to be disposed of are carried at the lower of carrying value and estimated net realizable value. During the years ended December 31, 2019 and 2018, there was no impairment of long-lived assets.

 

Goodwill

 

Goodwill represents the excess of the purchase price of the business acquired over the fair value of the net identifiable assets of an acquired business. The Company allocates goodwill to reporting units at the time of acquisition or when there is a change in the reporting structure and bases that allocation on which reporting units will benefit from the acquired assets and liabilities. Reporting units are defined as operating segments or one level below an operating segment, referred to as a component.

 

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Goodwill is not amortized but is tested for impairment annually or more frequently when an event occurs, or circumstances change that indicate the carrying value may not be recoverable. In testing goodwill for impairment, the Company elected to utilize a qualitative assessment to evaluate whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the qualitative assessment indicates that goodwill impairment is more likely than not, a two-step impairment test is performed. Under the two-step impairment test, the carrying value of the reporting unit is compared to the fair value of the reporting unit. If the fair value is determined to be less than the carrying value, the Company performs a second step to compute the amount of impairment as the difference between the implied fair value of goodwill and the carrying value. Fair value of a reporting unit is estimated using discounted cash flows. Forecasts of future cash flows are based on the Company’s best estimate of future net sales and operating expenses. Required annual testing of goodwill for impairment was completed for the reporting unit as of December 31, 2019 and determined that goodwill is not impaired.

 

Debt Issuance Costs

 

Costs related to the issuance of debt are presented as a direct deduction to the carrying value of the debt and are amortized to accretion expense using the effective interest rate method over the term of the related debt.

 

Revenue Recognition

 

The Company adopted Accounting Standards Codification (“ASC”) 606 “Revenue from contract with customers” (“ASC 606”) on January 1, 2019 using the modified retrospective method for all contracts not completed as of the date of adoption. The reported results for the year ended December 31, 2019 reflect the application of ASC 606 guidance while the reported results for 2018 were prepared under the guidance of ASC 605, Revenue Recognition. The adoption of ASC 606 represents a change in accounting principle that will more closely align revenue recognition with the delivery of the Company’s goods or services and will provide the consolidated financial statements’ readers with enhanced disclosures.

 

The Company generates revenue from (1) sales of systems through the subscription model, traditional system sales to customers and distributors, (2) other product revenues from the sale of marketing supplies and kits, consumables and Venus Concept’s skincare and hair products and (3) service revenue from the sale of VeroGrafters™ technician services, 2two5 internal advertising agency services and an extended warranty service contracts provided to existing customers.

 

Many of the Company’s products are sold under subscription contracts with control passing to the customer at the earlier of the end of the term and when the payment is received in full. The subscription contracts include an initial deposit followed by monthly installments typically over a period of 36 months. In accordance with ASC 840 “Leases” (“ASC 840”), these arrangements are considered to be sales-type leases, where the present value of all cash flows to be received within the arrangement is recognized upon shipment to the customer and achievement of the required revenue recognition criteria. Various accounting and reporting systems are used to monitor subscription receivables which include providing access codes to operate the machines to paying customers and restricting access codes on machines to non-paying customers.

 

The Company recognizes 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) determine the transaction price; and (4) allocate the transaction price to the separate performance obligations in the contract; and (5) recognize revenue when (or as) the entity satisfies a performance obligation.

 

The Company does not grant rights of return to its end customers. The Company’s products sold through arrangements with distributors are non-refundable, non-returnable and without any rights of price protection.

The Company records revenue net of sales tax and shipping and handling costs.

 

Cost of Goods

 

For subscription sales (qualifying as sales-type lease arrangements) and product sales, the costs are recognized upon shipment to the customer or distributor.

 

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Advertising Costs

 

The cost of advertising and media is expensed as incurred. For the years ended December 31, 2019 and 2018, advertising costs totaled $2,004 and $1,225, respectively.

 

Research and Development

 

Research and development costs are charged to operations as incurred. Major components of research and development expenses consist of personnel costs, including salaries and benefits, hardware and software research and development costs, regulatory affairs, and clinical costs.

 

Warranty

 

The Company provides a standard warranty against defects for all of its systems. The warranty period begins upon shipment and is typically for a period between one and three years.

 

The Company records a liability for accrued warranty costs at the time of sale of a system, which consists of the warranty on products sold based on historical warranty costs and management’s estimates. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts thereof as necessary.

The Company also provides an extended warranty service. Extended warranty can be purchased at any time after the purchase of a system and prior to the expiration of the standard warranty provided with the sale of the system. Extended warranty services include standard warranty services.

 

The Company recognizes the revenue from the sale of an extended warranty over the period of the extended warranty and accounts it for separately from the standard warranty.

 

Income Taxes

 

The Company follows the deferred income taxes method of accounting for income taxes. Under this method, deferred income taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying values of accounts and their respective income tax basis. Deferred income tax assets and liabilities are measured using enacted income tax rates expected to apply to taxable income in the years during which the temporary differences are expected to be realized or settled. The effect on deferred income tax assets and liabilities of a change in tax rates is included in income in the period that includes the enactment date.

 

The Company establishes valuation allowances when necessary to reduce deferred tax assets to the amounts that are more likely than not to be realized. The Company evaluates tax positions taken or expected to be taken in the course of preparing tax returns to determine whether the tax positions have met a “more likely-than-not” threshold of being sustained by the applicable tax authority. Tax benefits related to tax positions not deemed to meet the “more likely-than-not” threshold are not permitted to be recognized in the consolidated financial statements.

 

Uncertain Tax Positions

 

The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained on examination based on the technical merit of the position. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on examination, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount, which is more than 50% likely of being realized upon ultimate settlement.

 

The Company considers many factors when evaluating and estimating its tax positions and tax benefits, which may require periodic adjustments. The Company recognizes interest charges and penalties related to unrecognized tax benefits as a component of the tax provision.

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Business Combinations

 

The consideration for each acquisition is measured at the aggregate of the fair values of assets acquired, liabilities incurred or assumed, and equity instruments issued by the Company in exchange for control of the acquired company. Acquisition-related costs are recognized in operations as incurred in general and administrative expenses. Where applicable, the consideration for the acquisition includes any asset or liability resulting from a contingent consideration arrangement, measured at its acquisition date fair value. Subsequent changes in such fair values are adjusted against the cost of acquisition as soon as all necessary information is obtained where it qualifies as measurement period adjustments within one year from closing.

 

Stock-Based Compensation

 

The Company accounts for stock-based compensation in accordance with ASC 718, “Compensation – Stock Compensation” (“ASC 718”). ASC 718 requires companies to estimate the fair value of equity-based payment awards on the date of grant. The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service period in the Company’s consolidated statements of operations.

 

The fair value of stock options (“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. The Company recognizes compensation expenses for the value of its awards granted based on the straight-line method over the requisite service period of each of the awards. The Company has made a policy choice to account for forfeitures when they occur.

 

Stock options granted to non-employees are based on the fair value on the grant date and re-measured at the end of each reporting period based on the fair value until the earlier of the options being fully vested and completion of the performance obligations. These are subject to a service vesting condition and are recognized on a straight-line method over the requisite service period. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Estimated forfeitures are based on historical pre-vesting forfeitures.

 

Net Loss Per Share

 

The Company computes net (loss) income per share in accordance with ASC Topic 260, “Earnings Per Share” (“ASC 260”) and related guidance, which requires two calculations of net (loss) income attributable to the Company’s shareholders per share to be disclosed: basic and diluted. Convertible preferred shares are participating securities and are included in the calculation of basic and diluted net (loss) income per share using the two-class method. In periods where the Company reports net losses, such losses are not allocated to the convertible preferred shares for the computation of basic or diluted net (loss) income.

 

Diluted net (loss) income per share is the same as basic net (loss) income per share for the periods in which the Company had a net loss because the inclusion of outstanding common stock equivalents would be anti-dilutive.

 

JOBS Act Accounting Election

 

The Company is an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. The Company has elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that it is (i) no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, these consolidated financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates.

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Recently Issued Accounting Standards Not Yet Adopted

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which was subsequently amended by ASU 2018-11, Leases (Topic 842): Targeted Improvements, ASU 2018-20, Narrow-Scope Improvements for Lessors and ASU 2019-01, Leases (Topic 842): Codification Improvements. The guidance is intended to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and requiring more disclosures related to leasing transactions. The amendments in this update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. Early adoption is permitted.

 

On November 15, 2019, the FASB issued ASU 2019-10, which (1) provides a framework to stagger effective dates for future major accounting standards and (2) amends the effective dates for certain major new accounting standards to give implementation relief to certain types of entities. Specifically, ASU 2019-10 changes some effective dates for certain new standards on the following topics in the FASB ASC, including Topic 842, Topic 326 (Financial Instruments — Credit Losses) and Topic 350 (Intangibles — Goodwill and Other). As an emerging growth company, the Company elected to use private company adoption date for ASC 842, which is January 1, 2021. The Company is in the process of determining the impact of Topic 842 on its consolidated financial statements.

 

In August 2018, the FASB issued ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40), relating to a customer’s accounting for implementation, set-up, and other upfront costs incurred in a cloud computing arrangement that is hosted by a vendor (i.e., a service contract). Under the new guidance, a customer will apply the same criteria for capitalizing implementation costs as it would for an arrangement that has a software license. The new guidance also prescribes the balance sheet, income statement, and cash flow classification of the capitalized implementation costs and related amortization expense and requires additional quantitative and qualitative disclosures. The amendments in this ASU are effective for annual reporting periods beginning after December 15, 2020, and interim periods within annual periods beginning after December 15, 2021. Early application is permitted. The Company can choose to adopt the new guidance (1) prospectively to eligible costs incurred on or after the date this guidance is first applied or (2) retrospectively. The Company is evaluating the impact, if any, that this pronouncement will have on the consolidated financial statements.

 

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, which removes, adds and modifies certain disclosure requirements for fair value measurements in Topic 820. The Company will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, and the valuation processes of Level 3 fair value measurements. However, the Company will be required to additionally disclose the changes in unrealized gains and losses included in other comprehensive income (loss) for recurring Level 3 fair value measurements, and the range and weighted average of assumptions used to develop significant unobservable inputs for Level 3 fair value measurements. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The amendments relating to additional disclosure requirements will be applied prospectively for only the most recent interim or annual period presented in the initial year of adoption. All other amendments will be applied retrospectively to all periods presented upon their effective date. The Company anticipates that the adoption of Topic 820 will not have a material impact on the Company’s consolidated financial statements.

 

In June 2018, the FASB issued ASU 2018-07, Improvements to Nonemployee Share-Based Payment Accounting, which simplifies guidance on non-employee share-based payments. This expands the scope of ASC 718, Compensation—Stock Compensation (Topic 718), to include all share-based payment arrangements related to the acquisition of goods and services from both non-employees and employees. As a result, most of the guidance in ASC 718 associated with employee share-based payments, applies to non-employee share-based payment arrangements. The ASU amendment is effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. The Company anticipates that the adoption of Topic 718 will not have a material impact on the Company’s consolidated financial statements.

 

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In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This standard introduced the expected credit losses methodology for the measurement of credit losses on financial assets that are not measured at fair value through net income and replaces today’s “incurred loss” model with an “expected credit loss” model that requires consideration of a broader range of information to estimate expected credit losses over the lifetime of the asset. There have been several consequential subsequent amendments to this standard. This standard is effective for annual periods beginning after January 1, 2023, including interim periods within those fiscal years. The Company is evaluating the impact, if any, that this pronouncement will have on the consolidated financial statements.

 

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 common shares outstanding during the year, without consideration for common stock equivalents. Diluted net loss per share is computed by dividing net loss by the weighted-average number of common share equivalents outstanding for the year 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):

 

 

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 years ended December 31, 2019 and 2018 because including them would have been antidilutive:

 

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4. Business combinations

 

The Merger

 

As described in Note 1 above, on November 7, 2019, the Company completed its business combination with Venus Concept Ltd. The Merger allows the Company to significantly expand its presence and capability in the hair restoration market. Venus Concept Ltd. is an innovative global medical technology company that develops, commercializes, and delivers minimally invasive and non-invasive medical aesthetic and hair restoration technologies and related practice enhancement services. It designs and sells a full suite of medical aesthetic products and markets its current products primarily to physicians interested in providing minimally invasive and non-invasive aesthetic medical procedures, and to aesthetic medical spas. Through its NeoGraft division, Venus Concept Ltd. offers an automated hair restoration system that facilitates the harvesting of follicles during a follicular unit extraction or FUE process, improving the accuracy and speed over commonly used manual extraction instruments.

 

For accounting purposes the purchase price was based on (i) the fair value of the Company’s Common Stock as of the Merger date of $15.7 million which was determined based on the number of shares of Common Stock that were issued to the Venus Concept Inc. shareholders in connection with the Merger, (ii) the portion of the fair value attributable to fully and partially vested stock options and warrants, and (iii) the fair value of the promissory notes issued by Venus Concept Ltd. to Restoration Robotics of $4.6 million, which were effectively settled as a result of the Merger.

 

Under the acquisition method of accounting, the total purchase price is allocated to the acquired tangible and intangible assets and assumed liabilities based on their fair values as of the acquisition date. Any excess of the purchase price over the fair value of assets acquired and liabilities assumed is allocated to goodwill. Goodwill is allocated to one reporting unit. The Company determined that the underlying goodwill and intangible assets are not deductible for tax purposes.

 

For the year ended December 31, 2019, the Company incurred acquisition-related expenses of approximately $12.2 million which are included in general and administrative expenses.

 

The purchase price is allocated to the fair value of assets and liabilities acquired as follows:

 

 

The results of this acquisition were included in the Company’s consolidated statement of operations beginning on November 7, 2019.

 

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The Company’s consolidated net revenue, net loss and net loss per share for the year ended December 31, 2019 include the following amounts of revenue, net loss and net loss per share of Restoration Robotics, Inc. since the Merger date:

 

 

The following unaudited pro forma financial information presents the combined results of operations of the Company as if the Merger had occurred on January 1, 2018. The unaudited pro forma financial information is not necessarily indicative of what the Company’s consolidated results of operations actually would have been had the Merger occurred at the beginning of each year. In addition, the unaudited pro forma financial information does not attempt to project the future results of operations of the combined Company.

 

 

The unaudited pro forma financial information above gives effect primarily to the following:

 

 

Acquisition of non-controlling interest

 

On July 4, 2019, the Company acquired the remaining 49% minority interest shares of Venus Concept Israel Ltd. for total consideration of $123 in a form of transfer of equipment. Acquisition-related costs were expensed as incurred and amounted to $19 for the year ended December 31, 2019. In 2018, the Company acquired the remaining 49% minority interest shares of Venus Concept Japan Co., Ltd. for total consideration of $21, and the remaining 40% minority interest shares of Venus Concept UK Limited for total consideration of $452. Acquisition-related costs were insignificant and were expensed as incurred.

 

Acquisition of NeoGraft

 

On February 15, 2018, the Company acquired the assets and liabilities of NeoGraft Solutions, Inc. (“NeoGraft”). The primary reason for this acquisition was to expand the product offering to hair restoration solutions. Acquisition-related costs were expensed as incurred and amounted to $67 for the year ended December 31, 2018. Pro forma results of operations have not been presented because the effect of this acquisition was not material to the results of operations. In 2018, the total revenues and net income related to NeoGraft amounted to $7,763 and $707, respectively.

 

The total consideration for the acquisition was $8,679, of which $500 was held back at closing of the acquisition and is payable in two annual installments of $250 beginning one year from the closing date. As of December 31, 2019, $250 remains payable by the Company.

 

The purchase price is allocated to the fair value of assets and liabilities acquired as follows:

 

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Goodwill is primarily related to sales growth from future product and service offerings and new customers. The goodwill of NeoGraft is deductible for tax purposes under the cumulative eligible capital expenditures deduction in Canada.

 

The weighted average life remaining on the intangibles acquired as a result of both business combinations are as follows:

 

 

5. FAIR VALUE MEASUREMENTS

 

Financial assets and financial liabilities are initially recognized at fair value when the Company becomes a party to the contractual provision 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, line of credit, trade payables, accrued expenses and other current liabilities, earn-out liability, other long-term liabilities and long-term debt. In view of their nature, the fair value of most of the financial instruments approximates their carrying amounts.

 

The Company measures the fair value of its financial assets and 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.

 

The categorization of a financial instrument within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement.

 

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The Company classifies its restricted cash and guaranteed investment certificates within Level 2 as it uses alternative pricing sources and models utilizing market observable inputs. The following tables set forth the fair value of the Company’s Level 2 and Level 3 financial assets and liabilities within the fair value hierarchy: 

 

 

 

The earn-out liability is measured using discounted cash flow techniques, with the expected cash outflows estimated based on the probability of assessment of the acquired business achieving the revenue metrics required for payment. Expected future revenues of the acquired business and the associated estimate of probability are not observable inputs. The payments due are based on point in time measurements of the metrics quarterly for two years from the acquisition date. Changes in the fair value of the earn-out liability were recognized in finance expenses in the consolidated statements of operations.

 

The following table provides a roll forward of the aggregate fair values of the earn-out liability as of December 31, 2019, for which fair value is determined using Level 3 inputs:

 

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6. ACCOUNTS RECEIVABLE

 

The Company’s products may be sold under subscription contracts with control passing to the customer at the end of the lease term, which is generally 36 months. These arrangements are considered to be sales-type leases, where the present value of all cash flows to be received within the arrangement is recognized upon shipment to the customer as lease revenue.

 

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 consolidated balance sheets. The Company's financing receivables, consisting of its sales-type leases, totaled $72,602 and $74,554 at December 31, 2019 and 2018, respectively, and are included in accounts receivable and long-term receivables on the consolidated balance sheets. The Company evaluates the credit quality of an obligor at lease inception and monitors credit quality over the term of the underlying transactions.

 

The Company performed an assessment of the allowance for doubtful accounts as of December 31, 2019 and 2018. Based upon such assessment, the Company recorded an allowance for doubtful totaling $10,494 and $4,408 as of December 31, 2019 and 2018, respectively. In 2018 the Company recorded a significant provision of $8,300 for bad debts against the receivable of a large U.S. national account customer that filed for Chapter 11 bankruptcy in February of 2019.

 

A summary of the Company’s accounts receivables is presented as follows:

 

 

Current subscription contracts are reported as part of accounts receivable. The following are the contractual commitments, net of allowance for doubtful accounts, to be received by the Company over the next 5 years:

 

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7. SELECT BALANCE SHEET AND STATEMENT OF OPERATIONS INFORMATION

Inventory

 

Inventory consists of the following:

 

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 year from upgraded sales. The Company expensed $26,869 ($19,929 in 2018) in cost of goods sold during the year. The balance of cost of goods sold represents the sale of applicators, parts and warranties.

 

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 at December 31, 2019, a provision for obsolescence of $1,439 ($470 in 2018) was taken against inventory.

 

Property and Equipment, Net

 

Property and equipment, net consist of the following:

 

 

Depreciation expense amounted to $1,026 and $892 for the years ended December 31, 2019 and 2018.

 

Other Current Assets

 

 

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Accrued Expenses and Other Current Liabilities

 

 

Warranty Accrual

 

The following table provides the details of the change in the Company’s warranty accrual:

 

 

Finance Expenses

 

The following table provides the details of the Company’s finance expenses:

 

 

8. INTANGIBLE ASSETS

 

Intangible assets net of accumulated amortization were as follows:

 

 

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Estimated amortization expense for the next five fiscal years and all years thereafter are as follows:

 

 

9. COMMITMENTS AND CONTINGENCIES

 

Operating Leases

 

The Company and its subsidiaries have various operating lease agreements, which expire on various dates.

 

The Company recognizes rent expense on a straight-line basis over the non-cancellable lease period and records the difference between cash rent payments and the recognition of rent expense as a deferred rent liability. When leases contain escalation clauses, rent abatements and/or concessions, such as rent holidays and landlord or tenant incentives or allowances, the Company applies them in the determination of straight-line rent expense over the lease period.

 

Aggregate future minimum lease payments and purchase commitments with manufacturers as of December 31, 2019 are as follows:

 

 

The total rent expense for all operating leases for the years ended December 31, 2019 and 2018 was $2,199 and $1,344.

 

Commitments

 

As of December 31, 2019, the Company has non-cancellable purchase orders placed with its contract manufacturers in the amount of $5,748. In addition, as of December 31, 2019, the Company had $1,516 of open purchase orders that can be cancelled with 90 days’ notice, except for a portion equal to 15% of the total amount representing the purchase of “long lead items”.

 

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The Company has also committed to quarterly earn-out payments as part of its purchase obligation of the assets described in Note 4 of these consolidated financial statements. The amount due is 5% of NeoGraft® equipment sales and services that occur within the quarter. The balance of the earn-out was $655 as at December 31, 2019 ($950 in 2018), which includes deferred payments and is presented as part of accrued expenses and other current liabilities.

 

Legal Proceedings

 

Purported Shareholder Class Actions

 

Between May 23, 2018 and June 11, 2019, four putative shareholder class actions complaints were filed against Restoration Robotics, certain of its former officers and directors, certain of its venture capital investors, and the underwriters of the IPO.  Two of these complaints, Wong v. Restoration Robotics, Inc., et al., No. 18CIV02609, and Li v. Restoration Robotics, Inc., et al., No. 19CIV08173 (together, the “State Actions”), were filed in the Superior Court of the State of California, County of San Mateo, and assert claims under Sections 11, 12(a)(2) and 15 of the Securities Act of 1933, or the Securities Act. The other two complaints, Guerrini v. Restoration Robotics, Inc., et al., No. 5:18-cv-03712-EJD and Yzeiraj v. Restoration Robotics, Inc., et al., No. 5:18-cv-03883-BLF (together, the “Federal Actions”), were filed in the United States District Court for the Northern District of California, and assert claims under Sections 11 and 15 of the Securities Act.  The complaints all allege, among other things, that the Restoration Robotics’ Registration Statement filed with the SEC on September 1, 2017 and the Prospectus filed with the SEC on October 13, 2017 in connection with Restoration Robotics’ IPO were inaccurate and misleading, contained untrue statements of material facts, omitted to state other facts necessary to make the statements made not misleading and omitted to state material facts required to be stated therein. The complaints seek unspecified monetary damages, other equitable relief and attorneys’ fees and costs.

 

In the State Actions Restoration Robotics, along with the other defendants, successfully demurred to the initial Wong complaint for failure to state a claim, and secured a stay of both cases based on the forum selection clause contained in its Amended and Restated Certificate of Incorporation, which designates the federal district courts as the exclusive forums for claims arising under the Securities Act.  However, on December 19, 2018, the Delaware Court of Chancery in Sciabacucchi v. Salzberg held that exclusive federal forum provisions are invalid under Delaware law. Based on this ruling, the San Mateo Superior Court lifted its stay of State Actions on December 10, 2019. On January 17, 2020, Plaintiffs in the State Actions filed a consolidated amended complaint for violations of federal securities laws, alleging again that, among other things, the Registration Statement filed with the SEC on September 1, 2017 and the Prospectus filed with the SEC on October 13, 2017 in connection with Restoration Robotics’ IPO were inaccurate and misleading, contained untrue statements of material fact, omitted to state other facts necessary to make the statements made not misleading and omitted to state material facts required to be stated therein. The complaint seeks unspecified monetary damages, other equitable relief and attorneys’ fees and costs. On February 24, 2020, the Company demurred to the consolidated amended complaint for failure to state a claim. A hearing on the Company’s demurrer is currently scheduled for May 8, 2020. On March 18, 2020, the Delaware Supreme Court reversed the Chancery Court’s decision in Sciabacucchi v. Salzberg and held that exclusive federal forum provisions are valid under Delaware law. The Company intends to seek appropriate relief based on the Sciabacucchi decision.

 

In the Federal Actions, which have been consolidated under the caption in re Restoration Robotics, Inc. Securities Litigation, Case No. 5:18-cv-03712-EJD, Lead Plaintiff Eduardo Guerrini filed his consolidated amended complaint for violations of federal securities laws on November 30, 2018. The consolidated amended complaint alleges again that, among other things, Restoration Robotics’ Registration Statement filed with the SEC on September 1, 2017 and the Prospectus filed with the SEC on October 13, 2017 in connection with the IPO were inaccurate and misleading, contained untrue statements of material facts, omitted to state other facts necessary to make the statements made not misleading and omitted to state material facts required to be stated therein. On January 29, 2019, Restoration Robotics, along with certain of its former officers and directors, filed a motion to dismiss the consolidated amended complaint for failure to state a claim. On October 18, 2019, the District Court granted Restoration Robotics motion to dismiss as to all but two allegedly false or misleading statements contained in our Prospectus. On December 9, 2019, the Company filed its answer to the consolidated amended complaint denying the falsity of these statements, and discovery is underway.

 

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In addition to the State and Federal 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 Securities Exchange Act of 1934, or 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 during the pendency of the Federal Actions, and the case remains stayed.  

 

In addition to the actions described above relating to the IPO, two lawsuits purporting to challenge disclosures made in connection with our merger have also been filed. The first, captioned Bushansky v. Restoration Robotics, Inc., et al., No. 5:19-cv-06004-MMC, alleged, among other things, that defendants violated Sections 14(a) and 20(a) of the Exchange Act and SEC Rule 14a-9. The complaint alleged that the proxy statement, filed with the SEC by Restoration Robotics on September 10, 2019 in connection with the Merger, omitted or misrepresented material information. The complaint sought, among other things, injunctive relief, unspecified damages, and attorneys’ fees and costs. On November 6, 2019, the plaintiff voluntarily dismissed the Bushansky action with prejudice as to his individual claims and without prejudice as to the claims of the putative class.

 

The second, a putative shareholder class action complaint captioned Pak v. Restoration Robotics, Inc., et al., No. 1:19-cv-02237, was filed in the United States District Court for the District of Delaware on December 6, 2019. The complaint alleges, among other things, that defendants violated Sections 14(a) and 20(a) of the Exchange Act and SEC Rule 14a-9. The complaint alleges that the proxy statement, filed with the SEC by Restoration Robotics on September 10, 2019 in connection with the Merger, contained false or misleading information. The complaint seeks, among other things, compensatory and/or rescissory damages, and attorneys’ fees and costs. On February 26, 2020, the District Court appointed Joon Pak as Lead Plaintiff in the Pak action, and approved his selection of Lead Counsel. The Company believes that these lawsuits are without merit and management intends to vigorously defend against these claims.

 

Administrative Investigation Case

 

The Company’s Chinese subsidiary, Venus Concept China, imports and sells registered medical devices and unregistered non-medical devices in the People’s Republic of China (“PRC”). One of its unregistered products has been the subject of inquiries from two district level branches of the SAMR, Xuhui MSA and Huangpu MSA, as to whether the product was properly sold as a non-medical device. In January 2019, Venus Concept China applied to register a version of this non-medical device as a medical device with the National Medical Products Administration of PRC, or NMPA. On June 12, 2019, Venus Concept China was informed that Xuhui MSA had opened an administrative investigation case related to whether the device is an unregistered medical device, as a result of a complaint that Xuhui MSA received from a former distributor of Venus Concept China. Huangpu MSA notified Venus Concept China that it would be suspending its separate investigation against Venus Concept China, pending the results of the Xuhui MSA investigation. The Company and Venus Concept China have voluntarily stopped sales in China of this product. On December 11, 2019, Xuhui MSA informed Venus Concept China that a determination had been made by the Shanghai Medical Products Administration that Versa’s IPL function should be administered as a Class II medical device. Xuhui MSA also suggested that Venus Concept China consider a voluntary recall of all Versa units sold in China. Venus Concept China is currently contemplating a recall plan. In late January 2020, Venus Concept China received a copy of the Shanghai Medical Products Administration’s determination that because of the intended uses for Versa’s IPL function comprise medical treatment functions such as “treatment of benign pigmented epidermis and skin lesions,” Versa’s IPL function should be administered as a Class II medical device. Venus Concept China has not yet received a notice of proposed penalty decision from Xuhui MSA. Venus Concept China has not yet received a determination from NMPA on its application for registering Versa’s IPL function as a medical device. Although the revenue generated from the product that is the subject of the investigation did not represent a material amount of our total revenues for the years ended December 31, 2019 or 2018, monetary penalties nonetheless could be material. The Company and Venus Concept China are cooperating with the relevant authorities; however, Venus Concept China cannot predict the outcome of this matter.

 

Further, the Company may from time to time continue to be involved in various legal proceedings of a character normally incident to the ordinary course of its business, which does not deem to be material to the Company’s business and results of operations.

 

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10. CONVERTIBLE PROMISSORY NOTES

 

Venus Concept Ltd. convertible promissory notes

 

In June 2019, Venus Concept Ltd. issued unsecured senior subordinated convertible promissory notes in the aggregate principal amount of $7,800. In August 2019, Venus Concept Ltd. issued an aggregate of $21,250 of additional unsecured senior subordinated convertible promissory notes to certain investors. The convertible notes issued by Venus Concept Ltd. in June 2019 and August 2019 are collectively referred to as the “2019 Notes”.

The 2019 Notes bore interest at a rate of 8.00% per annum, were unsecured and were due and payable, including accrued interest, on the thirtieth day following the termination of the Merger. When the Merger was consummated, all outstanding principal and any accrued and unpaid interest under the 2019 Notes was automatically converted into a number of shares of fully paid and non-assessable shares of the Common Stock, par value $0.0001 per share, of the Company, calculated by dividing the outstanding principal amount of the 2019 Notes (and any accrued and unpaid interest under the 2019 Notes) by the post-Merger conversion price of $6.996 per share.

 

In connection with the 2019 Notes, Venus Concept Ltd. recognized interest expense of $599 during the period from January 1, 2019 through November 6, 2019.

 

Venus Concept Inc. (formerly Restoration Robotics) convertible promissory notes

 

On February 28, 2019, the Company entered into a Note Purchase Agreement pursuant to which the Company raised $5,000 through the issuance of unsecured subordinated convertible promissory notes to two investors (the “Investors”). The Note Purchase Agreement was amended on August 20, 2019 to adjust the post-Merger conversion price for per share from $0.825 to $6.996 (post-split) and to provide for automatic conversion of the convertible promissory notes upon consummation of the Merger.

 

In addition, on August 20, 2019, the Company entered into a Note Purchase Agreement pursuant to which the Company raised $2,000 through the issuance of one unsecured subordinated convertible promissory note to one investor. The convertible notes issued by the Company in February 2019 and August 2019 pursuant to the Notes Purchase Agreements are collectively referred to as the “Notes”.  The maturity date of the Notes was August 28, 2020. The Notes bore interest on the unpaid principal amount at a rate of eight percent (8.0%) per annum from the date of issuance. The Notes were unsecured and subordinated in priority to the Company’s existing obligations under the Solar Agreement (Note 11).

 

On November 7, 2019, immediately following the closing of the Merger, all outstanding principal and any accrued and unpaid interest of the 2019 Notes and the Notes in the aggregate amount of $36,958 were automatically converted into 5.3 million of fully paid and non-assessable shares of Common Stock, of which 1.2 million were issued subsequent to December 31, 2019.

 

11. LONG-TERM DEBT

 

Solar Loan and Security Agreement

 

In May 2018, the Company entered into a Loan and Security Agreement and as subsequently amended (the “Solar Agreement”) with Solar Capital Ltd. (“Solar”) and certain other lenders (together with Solar, the “Lenders”), and Solar, as the Collateral Agent. The Solar Agreement consists of a four-year term loan for an aggregate principal amount of $20,000, for working capital, to fund the Company’s general business requirements and to repay indebtedness of the Company to Oxford Finance LLC. The borrowings under the Solar Agreement bore interest through maturity at a rate equal to the U.S. Dollar LIBOR rate plus 7.95% per annum.

 

In addition, pursuant to the Solar Agreement, the Company issued the Lenders warrants (“Solar 2018 Warrants”) to purchase an aggregate of 10,781 shares of the Company’s Common Stock, at an exercise price of $55.65 per share. Solar 2018 Warrants are immediately exercisable upon issuance, and excluding certain mergers or acquisitions, will expire on the ten-year anniversary of the date of issuance. Solar 2018 Warrants exercisable for 10,781 shares of Common Stock were outstanding as of December 31, 2019.

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On November 7, 2019, in connection with the consummation of the Merger, the Company paid off and terminated its obligations under Solar Agreement. The payoff to the Lenders pursuant to the Solar Agreement consisted of cash and the issuance of warrants (“Solar 2019 Warrants”) to purchase up to 50,000 shares of the Company’s Common Stock at an exercise price of $6.00 per share. The fair value of Solar 2019 Warrants issued was determined to be $137 using a Black-Scholes valuation model with the following assumptions: Common Stock price at issuance of $5.61 per share; exercise price of $6.00; risk-free interest rate of 1.74% based upon observed risk-free interest rates; expected volatility of 58.0%; expected term of five years, which is the contractual life of the warrants; and a dividend yield of 0%.  Solar 2019 Warrants exercisable for 50,000 shares of Common Stock were outstanding as of December 31, 2019.   

 

Madryn Credit Agreement

 

On October 11, 2016, Venus Concept 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, or the Madryn Credit Agreement, pursuant to which Madryn agreed to make certain loans to certain of Venus Concept Ltd.’s subsidiaries (the “Subsidiary Obligors”). The Madryn Credit Agreement is comprised of four tranches of debt aggregating $70,000. As at December 31, 2019, the Subsidiary Obligors had borrowed $60,000 under the term A-1 and A-2 and B tranches of the Madryn Credit Agreement. Term C borrowings of $10,000 were undrawn and are no longer available. As of December 31, 2018, the Company has drawn on the term A-1 and A-2 borrowings for gross debt of $50,000. Borrowings under the Madryn Credit Agreement are secured by substantially all of the Company’s assets and the assets of the Subsidiary Obligors. On the 24th payment date, which is September 30, 2022, the aggregate outstanding principal amount of the loans, together with any accrued and unpaid interest thereon and all other amounts due and owing under the loan agreement will become due and payable in full.

 

In connection with the Madryn Credit Agreement, Venus Concept Ltd. issued three types of 10-year warrants (“Madryn Warrants”). Immediately prior to the consummation of the Merger, Madryn held Madryn Warrants to purchase 150,000 ordinary shares of Venus Concept Ltd. at a price of $5.0604 per share, 150,000 Series B Preferred Shares at a price of $5.0604 per share, and 12,000 Series C Preferred Shares of Venus Concept Ltd. at a price of $5.0604 per share. At the effective time of the Merger, each outstanding Venus Concept Ltd. warrant, whether or not vested, to purchase ordinary shares or preferred shares, as applicable, of Venus Concept Ltd., that was unexercised immediately prior to the effective time of the Merger was converted into a warrant to purchase shares of Common Stock as determined pursuant to the Exchange Ratio as defined in Note 1. The Company had Madryn Warrants exercisable for 179,932 shares of Common Stock outstanding as of December 31, 2019.

 

Effective August 14, 2018, interest on the Madryn loan is 9%, payable quarterly. Previously, interest was payable quarterly, at the Company’s option, as follows: cash interest 9% during the interest only period, which was 3 years or 12 principal payments after closing, plus an additional 4% rate, paid in kind (“PIK”). The Company has the option of settling the PIK interest in cash or adding the owed interest to the principal amount of the loan.

 

The covenants under the loan agreement with Madryn require the Company to achieve minimum reported revenue targets and minimum levels of cash on hand in certain subsidiaries. As of June 30, 2019, the Company was not in compliance with the minimum liquidity covenant under its loan agreement with Madryn. Additionally, the Company failed to timely pay an interest payment due June 28, 2019 as required by the Madryn Credit Agreement; however, this interest payment was subsequently made by the Company on July 10, 2019.

 

On July 26, 2019, the Company and Madryn executed a waiver and amendment to the Madryn Credit Agreement pursuant to which Madryn lowered the liquidity covenant threshold from $2,000 to $200 through the earlier of August 30, 2019 or the time the Company raised $21,000 in additional equity. Madryn waived the existing events of default. In addition, the amendment to the Madryn Credit Agreement included, among other changes, a requirement that the Company complete the Concurrent Financing with proceeds of $21,000 no later than August 30, 2019. This financing was completed as described above in the Note 1.

 

Pursuant to the terms of the amendment, if all or any portion of the loans under the Madryn Credit Agreement are prepaid, then a prepayment premium must be paid equal to: (i) 8.00% of the loans prepaid if prepaid on or prior to August 31, 2019, (ii) 6.50% if prepaid after August 31, 2019 but on or prior to August 31, 2020, (iii) 5.00% if prepaid after August 31, 2020 but on or prior to February 28, 2021, (iv) 4.00% if prepaid after February 28, 2021 but on or prior to August 31, 2021, (v) 3.00% if prepaid after August 31, 2021 but on or prior to February 28, 2022, and (vi) 2.00% if prepaid after February 28, 2022.

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As of September 30, 2019, the Company was not in compliance with the minimum debt service coverage ratio under its credit facility with City National Bank of Florida. Failure to comply with the covenants under the City National Bank of Florida credit facility would result in a default, which would also cause a default in the Madryn Credit Agreement. City National Bank of Florida has provided a waiver for cross defaults arising under the Madryn Credit Agreement through September 30, 2019.

 

As of December 31, 2019 the Company was in compliance with all required covenants.

 

In connection with the Merger, the Company entered into an amendment to the Madryn Credit Agreement, dated as of November 7, 2019, (the “Amendment”), pursuant to which the Company joined as (i) a guarantor to the Madryn Credit Agreement and (ii) a grantor to the certain security agreement, dated October 11, 2016, (as amended, restated, supplemented or otherwise modified from time to time), by and among the grantors from time to time party thereto and the administrative agent (the “U.S. Security Agreement”).

 

As a guarantor under the Madryn Credit Agreement, the Company is jointly and severally liable for the obligations (as defined in the Madryn Credit Agreement) thereunder and to secure its obligations, the Company has granted the administrative agent a lien on all of its assets pursuant to the terms of the U.S. Security Agreement. In the event of default under the Madryn Credit Agreement, Madryn may accelerate the obligations and foreclose on the collateral granted by Venus Concept Ltd. under the U.S. Security Agreement to satisfy the obligations.

 

The scheduled principal payments on the outstanding borrowings as of December 31, 2019 are as follows:

 

 

For the years ended December 31, 2019 and 2018, the Company did not make any principal repayments.   

 

12. Credit facility

 

The Company has an agreement with City National Bank of Florida (“CNB”) pursuant to which CNB agreed to provide a revolving credit facility to certain of the Company’s subsidiaries in the maximum principal amount of $10,000 ($7,500 in 2018), to be used to finance working capital requirements (the “Credit Facility”). As of December 31, 2019, the Company had $7,789 outstanding ($5,655 in 2018) under the Credit Facility, which bears interest at LIBOR rate plus 3.25%, which amounted to a weighted average of 5.4% (5.7% in 2018).

 

In April 2019, the Company increased the Credit Facility capacity from $7,500 to $10,000.

 

The Credit Facility is secured by accounts receivable and inventory and requires the Company to maintain either a minimum cash balance in deposit accounts or a maximum total liability to tangible net worth ratio and a minimum debt service coverage ratio. As of December 31, 2019 and 2018, the Company was in compliance with maintaining the maximum total liability to tangible net worth ratio. To be in compliance with maintaining the minimum debt service coverage ratio as of December 31, 2018, the Company received a waiver to exclude write-offs from a large U.S. national account from the ratio (see Note 6). An event of default under this agreement would cause a default under the Madryn Credit Agreement (see Note 11).

 

As of March 31, 2019, and June 30, 2019, Venus Concept Ltd. was not in compliance with the minimum debt service coverage ratio under the Credit Facility. CNB provided Venus Concept Ltd. with waivers as of March 31, 2019, and June 30, 2019.

 

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As of September 30, 2019, the Company was not in compliance with the minimum debt service coverage ratio under the Credit Facility. On October 30, 2019, CNB amended the minimum debt service coverage ratio covenant calculation, reaffirmed its prior waiver as of June 30, 2019 and provided the Company with a waiver removing the requirement to meet the minimum debt service coverage ratio as of September 30, 2019.

 

As of December 31, 2019 the Company was in compliance with all required covenants.

 

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 conversion of all outstanding shares of convertible preferred stock, plus options granted and available for grant under the incentive plans.

 

 

14. STOCK OPTION PLAN

 

2010 Plan

 

In November 2010, the Company’s Board of Directors adopted a share option plan (the “2010 Share Option Plan”) pursuant to which some of the Company’s ordinary shares 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 Company’s 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 seven years, which was extended by ten years in November 2017, and are non-assignable except by the laws of descent. The Board has the authority to prescribe, amend and rescind rules and regulations relating to the 2010 Share Option Plan, provided that any such amendment or rescindment that would adversely affect the rights of an Optionee that has received or been granted an Option shall not be made without the Optionee’s written consent. As of December 31, 2019, the number of shares of the Company’s common stock reserved for issuance and available for grant under the 2010 Share Option Plan was 44,450 (188,217 in 2018).

 

2019 Plan

 

The 2019 Incentive Award Plan was originally established under the name Restoration Robotics, Inc., as the 2017 Incentive Award Plan. It was adopted by the Company’s Board of Directors 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, effective upon the approval of the Company’s stockholders on October 4, 2019 and the consummation of the Merger.

 

Under the 2019 Plan, 450,000 shares of Common Stock were initially reserved for issuance pursuant to a variety of stock-based compensation awards, including stock options, stock appreciation rights, or SARs, performance stock awards, performance stock unit awards, restricted stock awards, restricted stock unit awards and other stock-based awards, plus the number of shares remaining available for future awards under the 2019 Plan as of the date of the Merger. As of December 31, 2019, there were 698,378 of shares of Common Stock available under the 2019 Plan. 

 

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The Company recognized stock-based compensation for its employees and non-employees in the accompanying consolidated statements of operations as follows:

 

 

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:

 

 

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 zero as the Company has not paid nor does it anticipate paying any dividends on its common stock in the foreseeable future.

 

Fair Value of Common Stock— Prior to the Merger, Venus Concept 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 plan:

 

 

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The following tables summarize information about share options outstanding  and exercisable at December 31, 2019:

 

 

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 $1,532 and $574  for the years ended December 31, 2019 and 2018, respectively.

 

The weighted-average grant date fair value of options granted was $5.50 and $5.85 per share for the years ended December 31, 2019 and 2018, respectively.

 

15. INCOME TAXES

 

The geographical breakdown of loss before provision for income taxes is as follows:

 

 

The components of the provision for income taxes are as follows:

 

 

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

 

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A valuation allowance is provided when it is more likely than not that the deferred tax assets will not be realized. The Company has established a valuation allowance in the U. S. and its foreign subsidiaries to offset net deferred tax assets for all periods presented due to the uncertainty of realizing future tax benefits from net operating loss carryforwards and other deferred tax assets. The valuation allowance increased by $54,049 and $2,433 for the years ended December 31, 2019 and 2018 respectively. The increases in valuation allowance in 2019 was due to the Merger and assumption of their losses as well as ongoing operational losses in both years.

 

On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was enacted into law making significant changes to the Internal Revenue Code (the “IRC”). Changes include, but are not limited to, a federal corporate tax rate decrease from 35% to 21% for tax years beginning after December 31, 2017, the transition of U.S. international taxation from a worldwide tax system to a territorial system and a one-time transition tax on the mandatory deemed repatriation of foreign earnings. ASC 740 requires the Company to recognize the effect of the tax law changes in the period of enactment. However, the SEC staff has issued SAB 118 which will allow the Company to record provisional amounts during the measurement period.

 

The Company’s effective tax rate substantially differed from the federal statutory tax rate primarily due to the change in the valuation allowance. The reconciliation between income taxes computed at the federal statutory income tax rate and the provision for income taxes is as follows:

 

 

The components of the deferred tax assets and deferred tax liabilities are as follows:

 

 

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As of December 31, 2019, the Company had federal and state non-operating loss (“NOL”) carryforwards of approximately $228,396 ($27,631 in 2018). The use of these NOL carryforwards might be subject to limitation under the rules regarding a change in stock ownership as determined by the IRC and similar state provisions; however, a complete analysis of the limitation of the NOL carryforwards will not be complete until the time the Company projects it will be able to utilize such NOLs. The NOL carryforwards expire between 2022 and 2039, and valuation allowances have been reserved, where necessary. The Company also had federal and state research and development credit carryforwards of approximately $2,288 and $2,602 as of December 31, 2019. The federal credits will expire starting in 2025 if not utilized. The state credits have no expiration date.

 

We may recognize the tax benefit from uncertain tax positions only if it is more likely than not that the tax position will be sustained upon examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. ASC 740 also provides guidance on de-recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, and income tax disclosures. During the year we determined that $622 of future tax benefits met this criterion.

 

Utilization of the research and development credits carryforwards may be subject to an annual limitation due to the ownership percentage change limitations provided by the IRC. However, the Company has not conducted a formal study to determine the extent of the limitations, which could impact the realizability of these credit carryforwards in future periods. The annual limitations may result in the expiration of the net operating losses and research and development credits before utilization.

 

Uncertain Tax Positions

 

The activity related to gross amount of unrecognized tax benefits is as follows:

 

 

These amounts are related to certain deferred tax assets with a corresponding valuation allowance. If recognized, the impact on the Company’s effective tax rate would not be material due to the full valuation allowance. Management believes that there will not be any significant changes in the Company’s unrecognized tax benefits in the next twelve-months.

 

The Company recognizes interest and penalties related to unrecognized tax benefits in the provision for income taxes in the accompanying consolidated statement of operations. Accrued interest and penalties, if applicable, are included in accrued expenses and other current liabilities in the consolidated balance sheets. For the years ended December 31, 2019 and 2018, the Company did not recognize any accrued interest and penalties.

 

The Company files income tax returns in the United States and in various state jurisdictions with varying statutes of limitations. Tax years 2002 through 2018 remain open to examination by the United States and various state jurisdictions. The Company is currently under examination by the Internal Revenue Service for its 2017 taxation year but not under examination in any other jurisdiction for any year.

 

16. Accrued severance pay and severance pay funds

 

The Company’s liability for severance pay in Israel is calculated pursuant to Israeli severance pay law based on the most recent salary of each employee multiplied by the number of years of employment as of the consolidated balance sheet date.  

 

The Company’s liability to all employees is funded by monthly deposits to severance pay funds and insurance policies.

 

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The deposited funds include an accumulated gain up to the consolidated balance sheet date. The total amount of unrealized gains on the deposited funds amounted to $36 ($12 in 2018). The deposited funds may be withdrawn by the employee pursuant to Israeli severance pay law the orders, permits, and regulations. The value of the deposited funds is based on the cash surrender value of the policies.

 

17. 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 one 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 line 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:

 

 

 

As of December 31, 2019, and 2018, substantially all long-lived assets were located in Israel.

 

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:

 

 

 

 

 

The following table presents revenue by type:

 

 

18. RELATED PARTY TRANSACTIONS

 

All amounts were at 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.

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Services Agreement

 

In 2016, Ipsum Management (S) Pte. Ltd. (“Ipsum”) began providing marketing and sales support services to the Company’s subsidiary in Singapore. One of the senior executives of the Company is the sole shareholder of Ipsum. For the year ended December 31, 2019, the fees charged by Ipsum were $35. For the year ended December 31, 2018, the fees charged by Ipsum were $44. These amounts are reported as part of general and administrative expenses. No amounts were outstanding as at December 31, 2019 and December 31, 2018.

 

Non-Interest Demand Loan to PT Neoasia Medical

 

On July 1, 2016, a senior manager of the Company transferred 100.0% of his shares in Inphronics Limited to the Company, making it a wholly-owned subsidiary. At such time, an unsecured non-interest-bearing working capital loan to PT Neoasia Medical, a subsidiary of Inphronics Limited, that was previously provided by the senior manager of the Company was outstanding. As of December 31, 2019 and December 31, 2018, the outstanding amount of the loan was Indonesian rupiah (“IDR”) 6.9 billion, which is equivalent to $498 and $477, respectively. This loan is reported as part of accrued expenses and other current liabilities.

 

Distribution agreements

 

On January 1, 2018, the Company entered into a new Distribution Agreement with Technicalbiomed Co., Ltd. (“TBC”), pursuant to which TBC will continue to distribute the Company’s products in Thailand. A senior manager of the Company is a 30.0% shareholder of TBC. For the years ended December 31, 2019 and 2018, TBC purchased products in the amount of $378 and $330, respectively, under this distribution agreement. These sales are included in products and services revenue.

 

Intellectual Property Transfer Agreement

 

In August 2013, the Company entered into a license agreement for the rights to an invention for fractional radio frequency treatment of the skin with the developers of the technology. Pursuant to the license agreement, the developers, amongst which one is a senior executive of the Company, granted to the Company an exclusive worldwide, perpetual, irrevocable license to develop and commercialize their inventions and any product into which it is integrated. As consideration for such license, the Company agreed to pay the developers 7.0% of the gross income received by the Company from sales of the Venus Viva system and the related consumables and $1.50 per Venus Versa system, up to an aggregate amount of $3,000. For the years ended December 31, 2019 and 2018, the Company paid approximately $806 and $382, respectively, in royalties and reported the amounts under research and development expenses in the consolidated financial statements. As of December 31, 2019 and December 31, 2018, $nil and $101, respectively, was outstanding and reported as part of trade payables.

 

19. SUBSEQUENT EVENTS

 

In December 2019, an outbreak of a novel strain of coronavirus originated in Wuhan, China, and has since spread to a number of other countries, including the United States. To date, this outbreak has already resulted in extended shutdowns of certain businesses in China, Europe, the United States and other countries. Global health concerns, such as the coronavirus, could also result in social, economic, and labor instability in the countries in which we or the third parties with whom we engage operate. We cannot presently predict the scope and severity or duration of any potential business shutdowns or disruptions, but if we or any of the third parties with whom we engage, including our suppliers, manufacturers, customers, regulators and other third parties with whom we conduct business, experience shutdowns or other business disruptions, our ability to conduct our business in the manner presently planned could be materially and negatively affected. Disruptions to our business could include restrictions on the ability of our sales and marketing personnel and distributors to travel and sell our systems, disruptions of our global supply chain, reduced demand and/or suspension of operations by our customers which could impact their ability to make monthly payments, or deferral of aesthetic or hair restoration procedures in impacted areas. In addition, the outbreak of contagious diseases or the fear of such an outbreak could adversely affect the economies and financial markets of many countries, resulting in an economic downturn that could affect the demand for our systems. Any of these events could negatively impact our business, operating results or financial condition.

 

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On March 5, 2020, the Company’s Board of Directors approved declaration and distribution of dividends from Venus Concept Singapore Pte. Ltd in the amount of 400 Singapore dollars (“SDG”), which is equivalent to $289. The Chief Operating Officer (“COO”) of the Company is an existing shareholder of Venus Concept Singapore Pte. Ltd., therefore this transaction was approved by the Audit Committee as a related party transaction.

 

On March 18, 2020 the Company entered into a securities purchase agreement (the “Securities Purchase Agreement”) with certain investors (collectively, the “Investors”) pursuant to which the Company  issued and sold to the Investors an aggregate of 2,300,000 shares of common stock, $0.0001 per share, 660,000 shares of Series A Convertible Preferred Stock, $0.0001 per share, which are convertible into 6,600,000 shares of common stock, and warrants to purchase up to 6,675,000 shares of common stock with an exercise price of $3.50 per share (the “2020 Private Placement”). The warrants have a five-year term and are exercisable beginning 181 days after their issue date. The Series A Preferred Stock will automatically convert into shares of common stock upon receipt of stockholder approval. The Series A Preferred Stock has no voting rights other than as required by law. The 2020 Private Placement was completed on March 19, 2020. The gross proceeds to the Company from the 2020 Private Placement are $22.25 million, before placement agent fees and other offering expenses. EW Healthcare Partners (“EW”) and HealthQuest Capital (“HQ”), existing stockholders of the Company, participated in the 2020 Private Placement. One director of the Company is affiliated with EW and another with HQ, and therefore this transaction was approved by the Audit Committee as a related party transaction.

 

On March 20, 2020, the Company entered into a Second Amended and Restated Loan Agreement as a borrower with CNB, as amended, (the “CNB Credit Facility”), pursuant to which CNB agreed to make certain loans and other financial accommodations to the Company, and certain of its subsidiaries. In connection with the CNB Credit Facility, the Company also entered into (i) a Second Amended and Restated Guaranty of Payment and Performance with CNB dated as of March 20, 2020, (the “CNB Guaranty”), pursuant to which the Company agreed to guaranty the obligations under the CNB Credit Facility and (ii) a Security Agreement with CNB dated as of March 20, 2020, (the “CNB Security Agreement”), pursuant to which the Company agreed to grant CNB a security interest, in substantially all of its assets, to secure the obligations under the CNB Credit Facility. Borrowings under the CNB Credit Facility are secured by substantially all of the assets of the Company and its subsidiaries and the CNB Guaranty.  

 

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None.

 

 

Evaluation of disclosure controls and procedures.

 

As of December 31, 2019, 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 Securities Exchange Act of 1934, as amended (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 Securities and Exchange Commission’s (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 not effective as of December 31, 2019, because of the material weaknesses in internal control over financial reporting described below.

 

Management’s Annual Report on Internal Control Over Financial Reporting

 

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 control over financial reporting was not effective as of December 31, 2019, due to a material weakness in internal control over financial reporting, associated with the lease accounting process automation which was identified during the audit of our fiscal year ended December 31, 2018, as described below.

 

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.

 

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.

 

Remediation of the Material Weaknesses identified as of December 31, 2018 during 2019

 

In connection with our preparation and the audit of our consolidated financial statements as of and for the years ended December 31, 2018 and 2017, we identified several material weaknesses as defined under the Exchange Act and by the Public Company Accounting Oversight Board (United States) in our internal control over financial reporting, which we describe below:  

 

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To remediate the material weaknesses associated with lack of effective controls over the financial statement close and reporting process, as well as lack of an effective control environment with formal processes and procedures, described above, and to prevent similar deficiencies in the future, we added additional controls and procedures in 2019, including:

 

 

 

 

 

 

As of December 31, 2019, the material weaknesses associated with lack of effective controls over the financial statement close and reporting process as well as lack of an effective control environment with formal processes and procedures, are considered fully remediated as the applicable controls operated for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. Any actions we have taken to remediate these deficiencies are subject to continued management review supported by testing, as well as oversight by the Audit Committee of our Board of Directors.

 

Material Weakness not yet remediated as of December 31, 2019

 

As of December 31, 2019, we have not yet implemented centralized procedures or a technology solution that would ensure appropriate lessor accounting processes and enable the accurate and timely preparation of consolidated financial statements. We plan to establish adequate centralized procedures related to lease accounting processes in 2020, which could involve either hiring additional personnel or implementing a technology solution. As a result, we concluded that the material weakness associated with lease accounting process existed as of December 31, 2019, as noted above.

 

Changes in Internal Control over Financial Reporting

 

As discussed above, the material weaknesses over effective controls over the financial statement close and reporting process as well as lack of an effective control environment with formal processes and procedures as of December 31, 2018, were remediated during 2019. In addition, our plans for remediating the material weakness related to lease accounting process automation would constitute a change in our internal control over financial reporting prospectively, when such controls are effectively implemented. Other than the continuation of the implementation of measures described above, there were no material changes in our internal control over financial reporting during the year ended December 31, 2019, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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This Annual Report on Form 10-K 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.”

 

 

None.

 

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PART III

 

 

The information required by this item is incorporated herein by reference to our Proxy Statement with respect to our 2020 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the end of the fiscal year covered by this Annual Report on Form 10-K.

 

 

The information required by this item is incorporated herein by reference to our Proxy Statement with respect to our 2020 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the end of the fiscal year covered by this Annual Report on Form 10-K.

 

 

The information required by this item is incorporated herein by reference to our Proxy Statement with respect to our 2020 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the end of the fiscal year covered by this Annual Report on Form 10-K.

 

 

The information required by this item is incorporated herein by reference to our Proxy Statement with respect to our 2020 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the end of the fiscal year covered by this Annual Report on Form 10-K.

 

 

The information required by this item is incorporated herein by reference to our Proxy Statement with respect to our 2020 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the end of the fiscal year covered by this Annual Report on Form 10-K.

 

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PART IV

 

 

 

1. Consolidated Financial Statements

 

See Index to Consolidated Financial Statements at Item 8 herein.

 

2. Consolidated Financial Statement Schedules

 

No consolidated financial statement schedules are provided because the information called for is not required or is shown either in the consolidated financial statements or notes thereto.

 

3. Exhibits

 

See the Exhibit Index immediately preceding the signature page of this Annual Report on Form 10-K.

 

 

Not applicable.

 

EXHIBIT INDEX

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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

POWER OF ATTORNEY

 

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints each of Domenic Serafino, Domenic Della Penna and Domenic DiSisto his or her true and lawful attorney-in-fact and agent, with full power of substitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitutes or substitute, may lawfully do or cause to be done by virtue hereof.

 

IN WITNESS WHEREOF, each of the undersigned has executed this Power of Attorney as of the date indicated opposite his or her name.

 

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.

 

 

175

        Exhibit 2.4

This MASTER ASSET PURCHASE AGREEMENT is dated as of January 26, 2018.

AMONG:

NEOGRAFT SOLUTIONS INC., a corporation existing under the laws of the Province of Ontario (“Solutions Canada”)

– and –

NEOGRAFTERS LIMITED, a corporation existing under the laws of the Province of Ontario (“Grafters Canada”)

– and –

1904247 ONTARIO LTD., a corporation existing under the laws of the Province of Ontario (“IPCo” and together with Solutions Canada and Grafters Canada, the “Canadian Vendors”)

– and –

NEOGRAFT HOLDING CORP., a corporation existing under the laws of the State of Delaware (“Holdings US”)

– and –

NEOGRAFT SOLUTIONS CORP., a corporation existing under the laws of the State of Delaware (“Solutions US”)

– and –

NEOGRAFTERS US CORP., a corporation existing under the laws of the State of Delaware (“Grafters US” and together with Holdings US and Solutions US, the “US Vendors”)

– and –

SOCIETE DE PROMOTION ET DIFFUSION D’EQUIPEMENT MEDICAL MEDICAMAT, a corporation existing under the laws of France (the “French Vendor” and together with the Canadian Vendors and the US Vendors, the “Vendors”)

– and –

MIRIAM MERKUR, an individual resident in the Province of Ontario (“Miriam” and collectively with the Vendors, the “Vendor Parties”)

US_ACTIVE-152513991.1-IPSTEWAR 03/27/2020 7:54 PM

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– and –

VENUS CONCEPT LTD., a corporation existing under the laws of Israel (the “Purchaser”)

WHEREAS the Vendors are in the business of manufacturing, distributing and supporting hair restoration devices and related products and services (collectively, the “Business”), including the Business Products (as such term is defined herein);

AND WHEREAS the Purchaser desires to purchase, or cause certain of its Affiliates designated by it to purchase, and the Vendors desire to sell, certain assets related to the Business, on the terms and conditions set forth in this Agreement;

AND WHEREAS the French employees have been notified by the French Vendor of their right to make a proposal to acquire the French Business in accordance with Article L 141-23 of the French Code of commerce (Code de Commerce) and have waived all such rights;

AND WHEREAS Miriam is the sole shareholder of the Canadian Vendors and controls (directly or indirectly) each of the other Vendors;

NOW THEREFORE THIS AGREEMENT WITNESSETH that in consideration of the mutual covenants and agreements hereinafter contained, the parties hereto (collectively, the “Parties”, and individually a “Party”) hereby agree as follows:

ARTICLE 1 – INTERPRETATION

Whenever used in this Agreement, unless there is something in the subject matter or context inconsistent therewith, the following words and phrases shall have the respective meanings ascribed to them as follows:

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The following are the Exhibits attached to and incorporated in this Agreement by reference and deemed to be an integral part hereof:

Exhibit ADirection to Pay

Exhibit BEscrow Agreement

Exhibit CFrench Business Asset Transfer Agreement

Exhibit DTrademark Assignment

Exhibit ETransition Services Agreement

Exhibit FUS Business Transfer Agreement

Exhibit GNo-Interest Letter from Greenbanktree Power Corporation

The following are the Schedules attached to and incorporated in this Agreement by reference and deemed to be an integral part hereof:

Schedule 1.1(k)Business Names

Schedule 1.1(o)Canadian Contracts

Schedule 1.1(p)Canadian Intellectual Property

Schedule 1.1(q)Canadian Permits

Schedule 1.1(dd)Data Room

Schedule 1.1(kk)Employees & Independent Contractors

Schedule 1.1(nn)Equipment

Schedule 1.1(ww)Excluded Litigation

Schedule 1.1(xx)Excluded Receivables

Schedule 1.1(hhh)French Contracts

Schedule 1.1(kkk)French Intellectual Property

Schedule 1.1(lll)French Permits

Schedule 1.1(qqq)Furniture & Fixtures

Schedule 1.1(sss)Goodwill

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Schedule 1.1(vvv)Hair Medica Products

Schedule 1.1(www)Hair Medica Intellectual Property

Schedule 1.1(xxx)Key Terms of Hair Medica Supply Agreement

Schedule 1.1(gggg)Key Employee

Schedule 1.1(pppp)NeoGraft Device

Schedule 1.1(qqqq)NeoGraft Device Products

Schedule 1.1(ddddd)Prepaid Expenses

Schedule 1.1(hhhhh)Purchaser Fundamental Representations & Warranties

Schedule 1.1(qqqqq)Reference NWC Statement

Schedule 1.1(iiiiii)Tax Representations & Warranties

Schedule 1.1(kkkkkk)Terminated Contracts

Schedule 1.1(wwwwww)Unpaid Tax Liabilities

Schedule 1.1(aaaaaaa)US Contracts

Schedule 1.1(bbbbbbb)US Intellectual Property

Schedule 1.1(ddddddd)US Permits

Schedule 1.1(hhhhhhh)Vendor Fundamental Representations & Warranties

Schedule 2.8Tax Liabilities and Escrow

Schedule 2.11Purchase Price Allocation

Schedule 3.6Third Party Consents

Schedule 4.1(d)Compliance with Laws

Schedule 4.1(f)Ordinary Course

Schedule 4.1(j)Insurance

Schedule 4.1(k)Litigation

Schedule 4.1(m)Exclusivity and Confidentiality Agreements

Schedule 4.1(p)Computer Systems

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Schedule 4.1(q)Warranties

Schedule 4.1(u)(i)Regulatory Matters

Schedule 4.2(a)Canadian Vendors’ Jurisdictions

Schedule 4.2(b)Encumbrances against the Canadian Purchased Assets

Schedule 4.3(a)US Vendors’ Jurisdictions

Schedule 4.3(b)Encumbrances against the US Purchased Assets

Schedule 4.3(e)(i)Employee Benefits

Schedule 4.3(h)US Real Property

Schedule 4.4(a)French Vendor’s Jurisdictions

Schedule 4.4(d)French Transferred Employees

Schedule 7.1(p)Tax Liabilities to be paid at Closing

If a matter is said to be set out, disclosed, listed, described or reflected in a particular Schedule, it is deemed to have been sufficiently disclosed to the Parties if such matter is fully and plainly described in that particular Schedule or there is, in that particular Schedule, a specific cross-reference to another Schedule.  No such matter is considered to be sufficiently disclosed if it is set out in any other section of a Schedule unless there is full and plain description to the cross-referenced section.  Nothing set out in the Schedules established a standard of materiality.

The division of this Agreement into Articles, Sections, Subsections, schedules and exhibits and the inclusion of headings in this Agreement are for convenience of reference only and shall not affect the construction or interpretation hereof.

Where a time period is expressed to begin or end at, on or with a specified day, or to continue to or until a specified day, the time period includes that day.  Where a time period is expressed to begin after or to be from a specified day, the time period does not include that day.  Where anything is to be done within a time period expressed after, from or before a specified day, the time period does not include that day.  If the last day of a time period is not a Business Day, the time period shall end on the next Business Day.

In this Agreement, unless the context otherwise requires, words importing the singular include the plural and vice versa and words importing gender include all genders.

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Except where otherwise expressly provided, all amounts in this Agreement are stated and shall be paid in the currency of the United States of America.  Any tender of money hereunder may be made upon the Parties or their respective counsel and all payments hereunder shall be made in immediately available funds by wire, bank draft, certified cheque or solicitor’s trust cheque.

All accounting terms not expressly defined in this Agreement hall have the meanings generally ascribed to them in accordance with GAAP.

Each of the provisions contained in this Agreement is distinct and severable and a declaration of invalidity or unenforceability of any such provision or part thereof by a court of competent jurisdiction shall not affect the validity or enforceability of any other provision hereof.

Unless otherwise specifically provided in this Agreement, any reference in this Agreement to any Applicable Law shall be construed as a reference to such Applicable Law as amended or re-enacted from time to time or as a reference to any successor thereto.

This Agreement constitutes the entire agreement between the parties pertaining to the subject matter hereof and replaces and supersedes the letter of intent dated November 1, 2017 among the Purchaser, Solutions Canada and Miriam.  There are no warranties, conditions, or representations (including any that may be implied by statute) and there are no agreements in connection with such subject matter except as specifically set forth or referred to in this Agreement or the Transaction Documents.  No reliance is placed on any warranty, representation, opinion, advice or assertion of fact made by any party hereto or its directors, officers, employees or agents, to any other party hereto or its directors, officers, employees or agents, except to the extent that the same has been reduced to writing and included as a term of this Agreement or the Transaction Documents.  Accordingly, there shall be no Liability, either in tort or in contract, assessed in relation to any such warranty, representation, opinion, advice or assertion of fact, except to the extent that it has been reduced to writing and included as a term of this Agreement or the Transaction Documents.

No amendment or waiver of this Agreement or any other agreements provided for in, or delivered in connection with, this Agreement shall be binding unless executed in writing by the party to be bound thereby.  No waiver of any provision of this Agreement or any other agreements provided for in, or delivered in connection with, this Agreement shall constitute a waiver of any other provision of this Agreement or any other agreements provided for in, or delivered in connection with, this Agreement nor shall any waiver of any provision of this Agreement or any other

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agreements provided for in, or delivered in connection with, this Agreement constitute a continuing waiver unless otherwise expressly provided.

This Agreement shall be governed by and construed in accordance with the laws of the Province of Ontario and the laws of Canada applicable therein, and the parties hereto irrevocably attorn to the jurisdiction of the Courts of the Province of Ontario for any and all disputes arising under the terms of this Agreement or the transactions contemplated hereby.

Any reference herein to “including” or “includes” means “including (or includes) but is not limited to” and shall not be construed to limit any general statement preceding it to the specific or similar items or matters immediately following it.

Where any statement in this Agreement or in any Transaction Document is expressed to be made to the “knowledge” of one or more of the Vendors, such expression or any similar expressions shall be understood to be made on the basis of (a) the knowledge of any director or officer of the applicable Vendor(s), or the Key Employee, of the relevant subject matter, or (b) such knowledge of the relevant subject matter as such individual would have if they had conducted a reasonable amount of diligence and inquiry of the relevant Persons or matter.

All references to “delivered or otherwise made available for inspection” means, with respect to any document, the posting of such document in the Data Room with access thereto granted to the Purchaser and its representatives at least 48 hours prior to the execution and delivery of this Agreement.

ARTICLE 2 – PURCHASE AND SALE

Subject to the warranties, representations, terms and conditions set out in this Agreement and the Transaction Documents, the Vendors agree to sell and assign to the Purchaser or its designated Affiliates, and the Purchaser agrees to purchase and assume, or cause its Affiliates to purchase or assume, from the Vendors, the Purchased Assets and the Assumed Liabilities on the Closing Date with effect from the Time of Closing.

Subject to set-off and adjustment in accordance with the terms of this Agreement, the Purchaser agrees to pay, and the Vendors agree to accept as payment for the Purchased Assets the aggregate purchase price of $10,000,000 (as adjusted, the “Purchase Price”), which is payable as set out in Section 2.5 and which amount is inclusive of all applicable Taxes (other than Transfer Taxes).

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At least five (5) days prior to the Closing Date, representatives of the Purchaser and the Vendors shall jointly conduct a physical inspection and count of the entire inventory of the Business which the Vendors shall use to prepare and deliver to the Purchaser an estimated Net Working Capital (“Estimated Net Working Capital”) as of the Closing Date.  For the purposes of determining the Estimated Net Working Capital, the inventory of the US Vendors shall be deemed to be the saleable, functioning, undamaged and current inventory of the Business that relates or pertains to the NeoGraft Device, the NeoGraft Device Products or the Hair Medica Products (collectively, the “Saleable Inventory”) and for greater certainty, shall exclude: (i) outdated or obsolete inventory; (ii) inventory that cannot be used in the Business as conducted on the date hereof; (iii) inventory that relates to any discontinued Business Products or Business Products that are not manufactured or distributed by the Vendors on the date hereof; and (iv) inventory that cannot reasonably be expected to be used in the Business (A) in the case of Hair Medica Products, in the twelve months immediately following Closing, and (B) for all other inventory, in the twenty-four months immediately following Closing.  The date the Estimated Net Working Capital is determined and delivered to the Purchaser is referred to herein as the “Estimated Net Working Capital Date”.  The Estimated Net Working Capital will be prepared (i) in the same format as the Reference NWC Statement, and (ii) in accordance with the standards and methodologies set out therein, in each case, using the relevant Business Records as of the Estimated Net Working Capital Date.

If: (a) the Estimated Net Working Capital is greater than the Target Net Working Capital, that portion of the Purchase Price payable in accordance with Subsection 2.5(a)(v) will be increased, dollar for dollar, by the amount by which the Estimated Net Working Capital exceeds the Target Working Capital; or (b) the Estimated Net Working Capital is less than the Target Net Working Capital, that portion of the Purchase Price payable in accordance with Subsection 2.5(a)(v) will be decreased, dollar for dollar, by the amount by which the Estimated Net Working Capital is less than the Target Net Working Capital.

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Half of the balance of the Holdback, as adjusted pursuant Section 9.8, shall be released and paid to Canadian Vendor Amalco or as Miriam shall direct on the first anniversary of the Closing Date.  The balance of the Holdback, if any following adjustment pursuant to Article 9, shall be released and paid by the Purchaser to Canadian Vendor Amalco or as Miriam shall direct on the second anniversary of the Closing Date.

The Tax Liabilities Escrow Amount shall be deposited with the Escrow Agent as provided in Section 2.5(a) and such amount shall be released and paid by the Escrow Agent to the relevant Person, in accordance with the remainder of this Section 2.8 and the terms of the Escrow Agreement and upon receipt by the Escrow Agent from the Escrow Vendor Parties and the Purchaser of the written instruction set out in Exhibit A to the Escrow Agreement.  The Parties confirm that the Tax Liabilities Escrow Amount shall be released in accordance with and subject to the following terms and conditions, to:

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provided that under no circumstances will such payments exceed, in the aggregate, the Earn-Out Amount.

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The Purchaser and the Vendors agree to reflect the allocation of the Purchase Price as determined by the Vendors and provided at Schedule 2.11 (as adjusted) in their respective financial statements and Tax Returns on and subsequent to the Closing and not to take any position inconsistent with such allocation.  The Vendors acknowledge and agree that the Purchaser has relied on such allocation of the Purchase Price in entering into this Agreement and in meeting its obligations under this Section 2.11.  In the event that allocation of the Purchase Price is disputed by any Tax Authority, the Party receiving notice of such dispute shall promptly notify the other Parties and the Parties will use commercially reasonably efforts to sustain the allocation provided at Schedule 2.11.  The Parties will share information and cooperate to the extent reasonably necessary to permit the transactions contemplated by this Agreement to be properly, timely and consistently reported.

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ARTICLE 3 – COVENANTS

Except as otherwise contemplated by this Agreement, as required by Applicable Law or consented to in writing by the Purchaser, from the date of this Agreement until the earlier of the termination of this Agreement and the Closing, each of the Vendor Parties covenants and agrees to:

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Except as otherwise contemplated by this Agreement, as required by Applicable Law or consented to in writing by the Purchaser, from the date of this Agreement until the earlier of the termination of this Agreement and the Closing, each of the Vendor Parties covenants and agrees not to:

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provided, for certainty, the French Vendor may, at any time, sell the French Real Property.

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Following the Closing, the Purchaser and its Affiliates shall have the exclusive right to represent itself as carrying on the Business in continuation of and in succession to the Vendors and the right to use any words indicating that the Business is so carried on, and the right to register the Canadian Business Names, the US Business Names, the French Business Names and any variations thereof.  As soon as practicable following the Closing, the Vendor Parties agree and covenant (a) to effect a change of their names along with the names of any other entity in their control using the NeoGraft name or any other Business Name and (b) to take all necessary actions requested by the Purchaser to allow the Purchaser to use the Business Names or any variation thereof following the Closing.  The Vendors shall promptly notify the Purchaser when such name changes have been completed.

Each of the Vendors and the Purchaser shall reasonably cooperate and use commercially reasonable efforts to obtain, prior to Closing or termination of this Agreement, the consents and approvals of any Person that is required, necessary, proper or advisable to be obtained in respect of the transfer to the Purchaser by the Vendors on Closing of any of the Vendors’ rights under any Purchased Asset or in order to consummate and make effective the transactions contemplated by this Agreement and the Transaction Documents or to avoid any cancellation, termination or acceleration of any rights under, or constitute a default under any Assumed Contract (collectively, the “Third Party Consents”) all of which are described in Schedule 3.6, and which, for certainty, shall include the Major Contracts.  To the extent any Third Party Consents have not been obtained as of Closing and the Closing occurs nevertheless, then (a) this Agreement and the documents contemplated hereby shall not constitute an agreement to assign the applicable Purchased Asset if an attempted assignment would constitute a breach thereof or be unlawful and such Purchased Asset shall not be assigned and transferred at the Closing and the Purchaser (or one or more of its Affiliates) shall not assume the applicable Vendor’s Liabilities or obligations with respect thereto at the Closing, to the extent such Liabilities or obligations constitute Assumed Liabilities, (b) the Vendors shall continue to reasonably cooperate with the Purchaser and use their commercially reasonable efforts to obtain the necessary consent or approval as soon as practicable after the Closing, (c) upon the obtaining of such consent or approval, the Vendors and the Purchaser shall execute such further instruments of conveyance (in substantially the form executed at the Closing) as may be necessary to assign and transfer such Purchased Asset (and the associated Liabilities and obligations of the Vendors, to the extent such Liabilities and obligations constitute Assumed Liabilities) to the Purchaser or one or more of its Affiliates and (d) from and after the Closing until

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the assignment, pursuant to clause (c) above, of any Assumed Contract that was not transferred at the Closing in accordance with this Section 3.6 and to which the Purchaser notifies Solutions Canada that this clause (d) shall apply, the Purchaser shall perform and fulfill, or cause to be performed and fulfilled, on a subcontractor basis, the obligations of the applicable Vendor or Vendors to be performed and fulfilled under such Assumed Contract, and such Vendor or Vendors shall promptly remit to (or as directed by) the Purchaser all payments received by such Vendor or Vendors under such Assumed Contract for services performed during such period, provided, in the case of this clause (d), that the Purchaser shall indemnify the applicable Vendor for any Loss suffered by the other party to such Assumed Contract (i) with respect to the period following the Closing during which the Purchaser performs and fulfills, or causes to be performed and fulfilled, on a subcontractor basis, the obligations of the applicable Vendor or Vendors to be performed and fulfilled under such Assumed Contract and (ii) only to the extent that such Loss is based on facts, circumstances or events that arise during the period referred to in clause (i) of this proviso.  If any such consent shall not be obtained or if any attempted assignment would be ineffective or would impair Purchaser’s rights under the Purchased Asset in question so that Purchaser would not in effect acquire the benefit of all such rights, the Vendors, to the maximum extent permitted by Applicable Laws and such Purchased Asset, shall after the Closing provide to the Purchaser the benefit of such Purchased Asset in order to obtain for it the benefits thereunder and shall cooperate at the Vendors’ sole cost and expense, to the maximum extent permitted by Applicable Law, with the Purchaser in any other reasonable arrangement designed to provide such benefits to Purchaser, including enforcing any rights under such Purchased Asset or allow Purchaser or its designees to enforce such rights.

Subject to compliance with Applicable Laws, from the date hereof until the earlier of the termination of this Agreement and the Closing, each of the Vendor Parties, on the one hand, and the Purchaser, on the other hand, shall promptly notify the other and keep it apprised as to:

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No notification made pursuant to this Section 3.7 will have the effect of satisfying any condition set forth in Article 8, nor will any such notification have any effect for the purposes of determining the right of any Party to claim or obtain indemnification under this Agreement, other than as a breach of a covenant by a Party failing to notify or keep the other apprised, or otherwise enforce its rights and remedies under this Agreement.

The Vendor Parties shall cooperate with the Purchaser and its Affiliates to effect an orderly transition of the Business following Closing and to make such announcements regarding the change of ownership of the Business as the Purchaser and its Affiliates shall wish to make.  If, at any time after the Closing Date, any Intellectual Property remains for any reason vested in the Vendors, the Vendors shall transfer such Intellectual Property to the Purchaser or to any of its designated Affiliate as soon as practicable for no additional or nominal consideration.  Except as expressly agreed by the Parties, as from the Closing Date, the Vendors shall not use, in any way whatsoever, the Intellectual Property.

At or prior to the Closing, the Vendors shall deliver to the Purchaser a true and correct electronic copy of the Data Room together with all documents and materials added to the Data Room on and after the date hereof and on or prior to the Closing Date.  From and after the Closing, the Vendor

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Parties and their respective representatives will cease to have access to the Data Room but may retain a true and correct electronic copy of the Data Room provided that such information may not be used for any purpose which is prohibited by this Agreement, the Transaction Documents or Applicable Law or which may result in the disclosure of a Trade Secret.

The Vendor Parties hereby covenant and agree that neither of them, nor any of their Affiliates, shall, without the prior written consent of the Purchaser, at any time during the period commencing on the Closing Date and ending three (3) years following the Closing Date:

Notwithstanding clause (a) above, Miriam shall be permitted, indirectly through her controlling interest in INCI Medica Incorporated or any successor thereto, to continue to be engaged in the business of selling hair growth products (including the formulas currently branded as “Reload” and “HR9” but for greater certainty specifically excluding the NeoGraft Device, the NeoGraft Device Products or any hair restoration products in the context of hair transplants) provided that she shall not (and shall cause INCI Medica Incorporated not to) directly market such hair growth products to any hair transplant doctors anywhere in Canada or the United States except as otherwise expressly permitted by the Hair Medica Supply Agreement.  The Vendor Parties acknowledge that the foregoing restrictions are reasonable in order to protect the legitimate business interests of the Purchaser, and a breach by any of the Vendor Parties of any of the provisions of this Section 3.11 may result in damage to the Purchaser.  The Purchaser may not be adequately compensated for such damages by monetary award.  Accordingly, in the event of any such breach, in addition to all the remedies available to the Purchaser at law or in equity, the Purchaser may seek a restraining order, injunction, decree or other remedy to ensure compliance with this Agreement.

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The Purchaser and the Vendor Parties intend that the conditions set out in Subsection 56.4(7) of the Tax Act have been met, so that Subsection 56.4(5) of the Tax Act applies to any “restrictive covenant” (as defined in Subsection 56.4(1) of the Tax Act) granted by each of the Vendor Parties pursuant to this Agreement (in this Section 3.12, the “Non-Competition Covenants”).  For greater certainty:

The Purchaser will, within (5) five Business Days of a written request from Miriam to do so following Closing, make jointly with a Vendor Party one or more elections pursuant to or in respect of Subsection 56.4(7) of the Tax Act in the required manner and using a form prescribed for such purposes (if applicable) and otherwise reasonably acceptable to their respective counsels, as will cause Subsection 56.4(5) of the Tax Act to apply to the Non-Competition Covenants granted by the Vendor.  Such election will reflect that the Parties have allocated no proceeds to the restrictive covenant.  Provided that it has complied with the foregoing covenant, the Purchaser will not be responsible for any late filing penalties and will have no Liability to the Vendor Parties or otherwise with respect to the Tax consequences associated with any such election.

From and after the Closing until the third anniversary of the date hereof: (a) the Vendor Parties will, and will cause its Affiliates and representatives to, maintain in confidence any written, oral or other information to the extent relating to or obtained from the Purchased Assets or the Business or obtained from the Purchaser, its Affiliates or its representatives; and (b) the Purchaser will, and will cause its Affiliates and representatives to, maintain in confidence any written, oral or other information to the extent relating to or obtained from the Vendor Parties, their Affiliates or their representatives (other than information to the extent relating to the Purchased Assets or the Business), except, in each case, to the extent that: (i) the applicable Party or its Affiliates or representatives are required to disclose such information by or pursuant to Applicable Law; or (ii) such information can be shown to have been in the public domain (so long as such Party and its representatives were not responsible for such information becoming public).  In addition, in the case of clause (i), to the extent permitted by Applicable Law, the disclosing Party agrees that it and its Affiliates and representatives will provide the other Party with prompt written notice of such requirement or request so that such Party may seek a protective order or other appropriate remedy and/or waive compliance with the terms of this Section 3.12(a).  Each Party agrees that it and its Affiliates and representatives will use commercially reasonable efforts to cooperate with

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the other Party, to the extent permitted by Applicable Law and at the sole cost and expense of the other Party, to obtain such a protective order or other remedy and to delay or cause its Affiliates and representatives to delay such disclosure in the meantime.  Each Party agrees to disclose or furnish and cause its Affiliates and representatives to disclose or furnish only that portion of the information that such Party, Affiliate or representative concludes, after consultation with counsel, is required by Applicable Law to be disclosed or furnished and, to the extent permitted by Applicable Law and at the sole cost and expense of the other Party, each Party agrees that it and its Affiliates and representatives will use commercially reasonable efforts to obtain assurance that confidential treatment will be accorded such information (it being understood that this provision will not be construed to require such party or its Affiliates or representatives to undertake any litigation or other legal proceedings).  Each Party agrees in any event to give prompt written notice to the other Parties of any proposed disclosure made by it or its respective Affiliates or representatives pursuant to this Section 3.12(a), to the extent permitted by Applicable Law.  For greater certainty, nothing in this Section 3.12(a) will preclude a Party from disclosing any such information for the purposes of preparing and filing any Tax Return or other Tax filing or for any dispute, controversy or claim arising out of or relating to this Agreement, and, with respect to the Vendor Parties, subject to the consent of the Purchaser, not to be unreasonably withheld, disclosing any such information for the purposes of carrying out the Excluded Litigation.  With respect to the Excluded Litigation, no consent will be required to disclose such information to a Vendor Party’s legal counsel or accountants in connection with the Excluded Litigation or to disclose information that has already been shared with an opposing party or its counsel or the relevant court or arbitrator prior to the Closing.

The Vendors agree as soon as practicable after the date hereof to do all things necessary or appropriate under Applicable Laws to obtain the Regulatory Approvals with any competent Governmental Entity, being the following:

The Vendor Parties agree to regularly inform the Purchaser of any update on the status of the filings with any competent Governmental Entity or Notified Body and promptly provide the Purchaser with any material submission, filing, notification or communication and notify the

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Purchaser of any material written understanding, undertaking or agreement that the Vendors propose to enter into with said competent Governmental Entity or Notified Body.

From the date of this Agreement through the Closing, (a) the Vendor Parties shall not, nor shall they permit any of their Affiliates, shareholders, directors, officers or employees to, nor shall they authorize any of their Affiliates, shareholders, representatives, advisors, bankers or agents to, directly or indirectly, (i) solicit, initiate, or encourage the submission of any proposal or indication of interest relating to an Alternative Transaction, (ii) participate in any discussions or negotiations regarding, or furnish to any Person any information with respect to, or knowingly take any other action to facilitate any inquires or the making of any proposal that constitutes, or may reasonably be expected to lead to, an Alternative Transaction or (iii) authorize, consummate or engage in, or enter into any agreement or understanding with respect to, an Alternative Transaction; (b) the Vendor Parties shall cease and cause to be terminated any and all discussions and negotiations with all Persons (other than the Purchaser and its Affiliates) regarding any Alternative Transaction or any other transaction that could reasonably be expected to lead to an Alternative Transaction; and (c) the Vendor Parties shall promptly inform the Purchaser of any other offer, proposal or expression of interest for an Alternative Transaction that it or any of its Affiliates, representatives or advisors may receive.

The Purchaser and its Affiliates shall make commercially reasonable efforts to collect Accounts Receivable following the Closing provided that the Vendor Parties shall assist the Purchaser and its Affiliates with such efforts and shall advance any monies, cheques or instruments received by them to the Purchaser to the extent relating to the Accounts Receivable.  The Vendors shall be permitted to collect any Excluded Receivables.

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Prior to the Closing Date, the French Vendor shall terminate the French Sales Representative Agreement in compliance in all respect with Applicable Laws for its termination.  In this respect, on the Closing Date, the French Vendor shall pay the sales representative all termination indemnity due under the French Sales Representative Agreement and Applicable Laws (unless otherwise agreed between the French Vendor and the sales representative and the sales representative having expressly waived any right to any indemnity due under the French Sales Representative Agreement), so that the sales representatives may have no Claim of any nature whatsoever against the Purchaser or its Affiliates as a result of the performance and termination of the French Sales Representative Agreement.

ARTICLE 4 – REPRESENTATIONS & WARRANTIES OF THE VENDOR PARTIES

The Vendor Parties represent and warrant, on a joint and several basis, to the Purchaser as of the date hereof and as of the Closing Date (except to the extent that any such representation or warranty is, by its terms, limited to a specific date, in which case, as of such specific date) as follows and acknowledge that the Purchaser and its Affiliates, to the extent that they are parties to the transactions contemplated herein, are relying upon such representations and warranties in connection with the execution of this Agreement and the purchase of the Purchased Assets and the Assumed Liabilities:

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ARTICLE 5 – REPRESENTATIONS & WARRANTIES OF THE PURCHASER

The Purchaser represents and warrants to Vendor Parties as of the date hereof and as of the Closing Date (except to the extent that any such representation or warranty is, by its terms, limited to a specific date, in which case, as of such specific date) as follows and acknowledges that the Vendor Parties are relying upon such representations and warranties in connection with the execution of this Agreement and the sale of the Purchased Assets and the Assumed Liabilities:

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ARTICLE 6 – RISK OF LOSS

The Purchased Assets are to be at the risk of the Vendors until the Time of Closing and at the risk of the Purchaser on and following the Time of Closing.

Pending Closing, the Vendors will hold all insurance policies and the proceeds thereof in respect of the Purchased Assets in trust for the parties as their interests may appear.

If, prior to the Closing Date, all or any material part of the Purchased Assets are destroyed or damaged by fire or any other casualty (including non-physical damage to the Intellectual Property or source code by viruses, worms, bugs, time locks, or Trojan horses), the Purchaser shall have the option, exercisable by notice in writing given to the Vendors no later than ten (10) days after the Purchaser has received notice in writing from the Vendors of such destruction or damage, to

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ARTICLE 7 – CONDITIONS PRECEDENT TO CLOSING

The Purchaser’s obligations under this Agreement are conditional upon the performance or compliance with the following conditions at or prior to the Closing, each of which is inserted for the benefit of the Purchaser:

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The Vendor Parties’ obligations under this Agreement are conditional upon the performance or compliance with the following conditions, each of which is inserted for the benefit of the Vendor Parties:

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The Purchaser, in the case of a condition set out in Section 7.1, and the Vendor Parties, in the case of a condition set out in Section 7.2, will have, to the extent permitted by Applicable Law, the exclusive right to waive, by written notice to the other Party, the performance or compliance of such condition in whole or in part and on such terms as may be agreed upon without prejudice to any of its rights.  Any such waiver will not constitute a waiver of any other conditions in favour of the waiving Party.

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either the Vendor Parties or the Purchaser may elect to extend the Closing Date to February 22, 2018, in which case the Parties will continue to use their respective commercially reasonable efforts to obtain such duly executed La Tôlerie Plastique Agreement, Third Party Consents or Regulatory Approvals.

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ARTICLE 8 – CLOSING

The Closing shall take place on the Closing Date at such time and location as the parties may agree.  The parties agree that the transfer of the ownership of the Purchased Assets and Assumed Liabilities shall be as of the Time of Closing.

Upon the terms and subject to the conditions and limitations set forth in the Agreement, at the Closing:

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From time to time subsequent to the Closing Date, the Parties shall, at the request of the other Party, execute and deliver such additional conveyances, transfers and other reasonable assurances

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as may, in the option of the Purchaser’s Counsel or Vendors’ Counsel, be reasonably required to carry out the intent of this Agreement.

ARTICLE 9 – INDEMNIFICATION

All covenants, representations and warranties of each Party contained in this Agreement will survive the Closing indefinitely and will continue in full force and effect, subject to the provisions of this Article 9.

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whether or not the Purchaser has discovered or could have discovered such breach or inaccuracy of such matters before such time, but excluding any Claim or Loss arising out of, resulting from, based on or relating to any fraud or willful and material breach by the Vendor Parties in which case there will be no time limit for the Purchaser to make a Claim against the Vendor in respect thereof.

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All Losses for which indemnification is required hereunder shall bear interest at a rate per annum equal to the Prime Rate, calculated and payable monthly, both before and after judgment, with interest on overdue interest at the same rate, from the date that the Indemnitee disbursed funds, suffered damages or losses or incurred a loss, liability or expense in respect of a Loss, to the date of payment by the Indemnitor to the Indemnitee.  Each Indemnitor shall pay the amount of any Loss set forth in any Claim with all accrued interest thereon within 10 Business Days of receiving notice of a Claim.  If such Claim is subsequently determined not to have been valid, the Indemnitee shall reimburse the Indemnitor for the amount so paid together with interest at the Prime Rate per annum.

Except as otherwise required by Applicable Law, all amounts payable by the Vendors to the Purchaser under this Article 9 will be deemed to be a decrease to the Purchase Price.  Except as otherwise required by Applicable Law, all amounts payable by the Purchaser to the Vendors under this Article 9 will be deemed to be an increase to the Purchase Price.

The Purchaser has the right to satisfy any amount from time to time owing by it to one or more of the Vendor Parties by way of setting off any amount from time to time owing by the Vendors to the Purchaser against any amounts owing by the Purchaser to the Vendors, including any amounts owing to the Purchaser pursuant to the Vendor Parties indemnification obligations pursuant to this Agreement.  Notwithstanding the foregoing, the Purchaser shall not have the right to satisfy any amount from time to time owing by it to the Vendors by way of set-off against the Earn-Out Amount.

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Each of the Parties will, upon the prior written request of the other Party, use its commercially reasonable efforts to take, or to cause its Affiliates to take, any specific steps as may be reasonably requested by such other Party to assist in mitigating its Losses that are subject to indemnification by such other Party hereunder so long as and to the extent the requesting Party promptly reimburses the mitigating Party for any reasonable, out-of-pocket costs and expenses incurred by the mitigating Party in providing its mitigation assistance hereunder; provided, that no Party will be required to initiate or join any litigation in order to assist in mitigating any Losses.  In the event that such a request is not made and a Party determines to mitigate its Losses that are subject to indemnification hereunder by the other Party hereto, the mitigating Party will be entitled to prompt reimbursement for any reasonable, out-of-pocket costs and expenses incurred by such mitigating Party in providing its mitigation actions; provided, that such mitigating Party will have received the prior written consent (such consent not to be unreasonably withheld, conditioned or delayed) of the other Party hereto, and such mitigating actions will be reasonably within the scope of such consent.

In the event that an Indemnitor: (1) consolidates with or amalgamates, combines or merges into any other Person and is not the continuing or surviving corporation or entity of such consolidation, amalgamation, combination or merger; or (2) sells, transfers, pledges or otherwise disposes of all or substantially all (measured as of its most recent available balance sheet) of its properties or assets (whether in one transaction or a series of related transactions) to one or more Persons, then, in each such case, proper provision will be made prior to the consummation of any such transaction so that each such Person will assume, by a written instrument entered into for the benefit of, and

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enforceable by, the applicable Indemnitee, the obligations of such Indemnitor set forth in this Article 9.  No Indemnitor will enter into or participate in any transaction designed to evade, or with the purpose of evading, its indemnification obligations under this Article 9.

In determining the amount of any Loss under this Article 9, such Loss will be increased (or decreased) to take into account any Tax cost (or Tax Benefit) actually incurred or enjoyed by the Indemnitee as a result of the matter giving rise to such Loss and the receipt of an indemnity payment hereunder.  For purposes of such adjustments, any Tax cost will include any further cost resulting from such increased payment, and any Tax Benefit will result in a decrease to the amount of the Loss at such time as the Tax Benefit is actually realized by the Indemnitee; provided, however, that if any such Tax Benefit is later reduced or eliminated by any Tax Authority, the Indemnitor will indemnify the Indemnitee for the amount of such Tax Benefit to the extent such Tax Benefit had reduced any Loss for which the Indemnitor was liable.

ARTICLE 10 – GENERAL

All notices, requests, demands or other communication required pursuant to this Agreement shall be in writing and either hand delivered, sent by a recognized next day courier service, by first class, registered or certified mail, by facsimile, or electronic mail and shall be deemed to have been received on the next Business Day following their receipt.  The Parties’ addresses for the purposes of giving notice and their contact information are as follows:

23 Lesmill Road, Unit 205

Toronto, ON M3B 3P6

Attention:Miriam Merkur

Email:merks3@rogers.com  

with a copy to the Vendor’s Counsel:

Bennett Jones LLP

3400 One First Canadian Place

P.O. Box 130

Toronto, ON M5X 1A4

Attention:Ted M. Shoub

Email:shoubt@bennettjones.com

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255 Consumers Road, Suite 110

Toronto, ON M2J 1R4

Attention:Domenic Di Sisto, General Counsel and Corporate Secretary

Email:ddisisto@venusconcept.com  

with a copy to the Purchaser’s Counsel:

Stewart McKelvey

Purdy’s Wharf Tower One

900 – 1959 Upper Water Street PO Box 997

Halifax, NS B3J 2X2

Attention:David Randell

Email:drandell@stewartmckelvey.com

Any party may at any time give notice in writing to the other of any change of address of the party giving such notice and from and after the date of giving such notice the address therein specified shall be deemed to be the address of such party for the giving of notices hereunder.

This Agreement may not be assigned by the Vendor Parties without the written consent of the Purchaser but may be assigned, in whole or in part, by the Purchaser without the consent of the Vendor Parties to an Affiliate of the Purchaser; provided, that the Purchaser will continue to be bound by all the obligations hereunder as if such assignment had not occurred and perform such obligations to the extent that such Affiliate fails to do so.

This Agreement shall enure to the benefit of and be binding upon the Parties and their respective heirs, executors, administrators, successors and assigns.

Except as otherwise expressly provided in this Agreement, each of the Parties shall be responsible for all costs and expenses that it may incur in connection with the transactions provided for in this Agreement.

Time shall be of the essence of this Agreement.

Each of the parties hereto shall promptly do, make, execute or deliver, or cause to be done, made, executed or delivered, all such further acts, documents and things as the other party hereto may

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reasonably require from time to time for the purpose of giving effect to this Agreement or any other agreements provided for in, or delivered in connection with, this Agreement to which it is a party and shall use reasonable efforts and take all such steps as may be reasonably within its power to implement to their full extent the provisions of this Agreement.

The Vendor Parties shall be responsible for any broker’s fees respecting commitments that the Vendor Parties have made for such fees arising from this transaction.

No public announcement or press release concerning the transactions contemplated hereby may be issued without the consent and joint approval of the Vendor Parties and the Purchaser.

The Parties agree that irreparable damage would occur in the event that any provision of this Agreement was not performed in accordance with its specific terms or was otherwise breached.  Accordingly, each of the Parties agrees that the other Party will be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions hereof in addition to any other remedy to which such Party is entitled at law or in equity, upon application to a court of competent jurisdiction without proof of actual damages.  The Parties hereby waive, in any action for specific performance, the defence of adequacy of a remedy at law and the posting of any bond or other undertaking or security in connection therewith.  Each Party further agrees that: (a) by seeking any remedy provided in this Section 10.9, a Party will not in any respect waive its right to seek any other form of relief that may be available to a Party under this Agreement; and (b) nothing contained in this Section 10.9 will require any Party to institute any action for (or limit any Party’s right to institute any action for) specific performance under this Section 10.9 before exercising any other right under this Agreement.

Except for the provisions of Article 9, which after the Closing will be for the benefit of the Indemnified Parties (as defined in Sections 9.1 and 9.2), this Agreement is solely for the benefit of:

and this Agreement will not be deemed to confer upon or give to any other Person any Claim or other right or remedy.

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This Agreement may be executed by the Parties in separate counterparts by original or electronic signature, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute one and the same instrument.  Delivery of an executed signature page to this Agreement by any Party by electronic transmission will be as effective as delivery of a manually executed copy of this Agreement by such Party.

[SIGNATURE PAGE FOLLOWS]

 

 

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IN WITNESS WHEREOF the Parties have caused this Agreement to be executed as of the day and year first above written.

 

 

[Signature Page – Master Asset Purchase Agreement]

 

 

Exhibit 4.1

 

                                                                        DESCRIPTION OF SECURITIES

 

General

Our authorized capital stock consists of 300,000,000 shares of Common Stock, $0.0001 par value per share, and 10,000,000 shares of preferred stock, $0.0001 par value per share. As of December 31, 2019, there were outstanding:

 

The actual number of stockholders is greater than the number of record holders and includes stockholders who are beneficial owners but whose shares are held in street name by brokers and other nominees. This number of holders of record also does not include stockholders whose shares may be held in trust by other entities.

 

The following description of our capital stock and provisions of our amended and restated certificate of incorporation and amended and restated bylaws are summaries of material terms and provisions and are qualified by reference to our amended and restated certificate of incorporation and amended and restated bylaws, copies of which have been filed with the SEC and are incorporated by reference as exhibits to the Annual Report on Form 10-K for year ended 2019.

 

Common Stock

Voting Rights

Each holder of our Common Stock is entitled to one vote for each share on all matters submitted to a vote of the stockholders, including the election of directors. Our stockholders do not have cumulative voting rights in the election of directors.

 

Dividends

Subject to preferences that may be applicable to any then outstanding preferred stock, holders of our Common Stock are entitled to receive dividends, if any, as may be declared from time to time by our board of directors out of legally available funds. However, our current debt instruments restrict our ability to pay dividends.

 

Liquidation

In the event of our liquidation, dissolution or winding up, holders of our Common Stock will be entitled to share ratably in the net assets legally available for distribution to stockholders after the payment of all of our debts and other liabilities and the satisfaction of any liquidation preference granted to the holders of any then outstanding shares of preferred stock.

 

Rights and Preferences

Holders of our Common Stock have no preemptive, conversion, subscription or other rights, and there are no redemption or sinking fund provisions applicable to our Common Stock. The rights, preferences and privileges of the holders of our Common Stock are subject to and may be adversely affected by the rights of the holders of shares of any series of our preferred stock that we may designate in the future.

 

Anti-Takeover Effects of Provisions of our Amended and Restated Certificate of Incorporation, our Amended and Restated Bylaws and Delaware Law

Some provisions of Delaware law and our amended and restated certificate of incorporation and our amended and restated bylaws contain provisions that could make the following transactions more difficult: acquisition of us by means of a tender offer; acquisition of us by means of a proxy contest or otherwise; or removal of our incumbent

 

 

 

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officers and directors. It is possible that these provisions could make it more difficult to accomplish or could deter transactions that stockholders may otherwise consider to be in their best interest or in our best interests, including transactions that might result in a premium over the market price for our shares.

 

These provisions, summarized below, are expected to discourage coercive takeover practices and inadequate takeover bids. These provisions are also designed to encourage persons seeking to acquire control of us to first negotiate with our board of directors. We believe that the benefits of increased protection of our potential ability to negotiate with the proponent of an unfriendly or unsolicited proposal to acquire or restructure us outweigh the disadvantages of discouraging these proposals because negotiation of these proposals could result in an improvement of their terms.

 

Delaware Anti-Takeover Statute

We are subject to Section 203 of the DGCL, which prohibits persons deemed “interested stockholders” from engaging in a “business combination” with a publicly-held Delaware corporation for three years following the date these persons become interested stockholders unless the business combination is, or the transaction in which the person became an interested stockholder was, approved in a prescribed manner or another prescribed exception applies. Generally, an “interested stockholder” is a person who, together with affiliates and associates, owns, or within three years prior to the determination of interested stockholder status did own, 15% or more of a corporation’s voting stock. Generally, a “business combination” includes a merger, asset or stock sale, or other transaction resulting in a financial benefit to the interested stockholder. The existence of this provision may have an anti-takeover effect with respect to transactions not approved in advance by the board of directors, such as discouraging takeover attempts that might result in a premium over the market price of our Common Stock.

 

Undesignated Preferred Stock

The ability to authorize undesignated preferred stock makes it possible for our board of directors to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to change control of us. These and other provisions may have the effect of deterring hostile takeovers or delaying changes in control or management of our company.

 

Special Stockholder Meetings

Our amended and restated bylaws provide that a special meeting of stockholders may be called at any time by the board of directors, chief executive officer or president (in the absence of a chief executive officer), but such special meeting may not be called by the stockholders or any other person or persons.

 

Requirements for Advance Notification of Stockholder Nominations and Proposals

Our amended and restated bylaws establish advance notice procedures with respect to stockholder proposals and the nomination of candidates for election as directors, other than nominations made by or at the direction of the board of directors or a committee of the board of directors.

 

Elimination of Stockholder Action by Written Consent

Our amended and restated certificate of incorporation and our amended and restated bylaws eliminate the right of stockholders to act by written consent without a meeting.

 

Classified Board; Election and Removal of Directors; Filling Vacancies

Our board of directors is divided into three classes. The directors in each class will serve for a three-year term, one class being elected each year by our stockholders, with staggered three-year terms. Only one class of directors will be elected at each annual meeting of our stockholders, with the other classes continuing for the remainder of their respective three-year terms. Because our stockholders do not have cumulative voting rights, our stockholders holding a majority of the shares of Common Stock outstanding will be able to elect all of our directors. Our amended and restated certificate of incorporation provides for the removal of any of our directors only for cause and requires a stockholder vote by the holders of at least a 66 2/3% of the voting power of the then outstanding voting stock.

 

 

 

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Furthermore, any vacancy on our board of directors, however occurring, including a vacancy resulting from an increase in the size of the board, may only be filled by a resolution of the board of directors unless the board of directors determines that such vacancies shall be filled by the stockholders. This system of electing and removing directors and filling vacancies may tend to discourage a third party from making a tender offer or otherwise attempting to obtain control of us, because it generally makes it more difficult for stockholders to replace a majority of the directors.

 

Choice of Forum

Our amended and restated certificate of incorporation provides that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will be the exclusive forum for: any derivative action or proceeding brought on our behalf; any action asserting a breach of fiduciary duty; any action asserting a claim against us arising pursuant to the DGCL, our amended and restated certificate of incorporation or our amended and restated bylaws; or any action asserting a claim against us that is governed by the internal affairs doctrine. However, the enforceability of similar federal court choice of forum provisions in other companies’ certificates of incorporation has been challenged in legal proceedings, and it is possible that a court could find this type of provision to be inapplicable or unenforceable. The choice of forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with the combined company or its directors, officers or other employees, which may discourage such lawsuits against the combined company and its directors, officers and other employees.

 

Amendment of Charter Provisions

The amendment of any of the above provisions, except for the provision making it possible for our board of directors to issue undesignated preferred stock, would require approval by a stockholder vote by the holders of at least a 662/3% of the voting power of the then outstanding voting stock, voting together as a single class.

The provisions of the DGCL, our amended and restated certificate of incorporation and our amended and restated bylaws could have the effect of discouraging others from attempting hostile takeovers and, as a consequence, they may also inhibit temporary fluctuations in the market price of our Common Stock that often result from actual or rumored hostile takeover attempts. These provisions may also have the effect of preventing changes in our management. It is possible that these provisions could make it more difficult to accomplish transactions that stockholders may otherwise deem to be in their best interests.

 

 

 

 

 

 

 

 

 

 

 

Exhibit 4.3

COMMON STOCK PURCHASE WARRANT

 

VENUS CONCEPT INC.

Warrant Shares: _______Initial Exercise Date: _______, 2020

 

THIS COMMON STOCK PURCHASE WARRANT (the “Warrant”) certifies that, for value received, _____________ or its assigns (the “Holder”) is entitled, upon the terms and subject to the limitations on exercise and the conditions hereinafter set forth, at any time on or after 181 days following the date hereof (the “Initial Exercise Date”) and on or prior to 5:00 p.m. (New York City time) on March 18, 2025 (the “Termination Date”) but not thereafter, to subscribe for and purchase from Venus Concept Inc., a Delaware corporation (the “Company”), up to _________ shares (as subject to adjustment hereunder, the “Warrant Shares”) of Common Stock. The purchase price of one share of Common Stock under this Warrant shall be equal to the Exercise Price, as defined in Section 2(b).

Section 1.Definitions.  In addition to the terms defined elsewhere in this Warrant, the following terms have the meanings indicated in this Section 1:

“Affiliate” means any Person that, directly or indirectly through one or more intermediaries, controls or is controlled by or is under common control with a Person, as such terms are used in and construed under Rule 405 under the Securities Act.

“Bid Price” means, for any date, the price determined by the first of the following clauses that applies: (a) if the Common Stock is then listed or quoted on a Trading Market, the bid price of the Common Stock for the time in question (or the nearest preceding date) on the Trading Market on which the Common Stock is then listed or quoted as reported by Bloomberg L.P. (based on a Trading Day from 9:30 a.m. (New York City time) to 4:02 p.m. (New York City time)), (b)  if OTCQB or OTCQX is not a Trading Market, the volume weighted average price of the Common Stock for such date (or the nearest preceding date) on OTCQB or OTCQX as applicable, (c) if the Common Stock is not then listed or quoted for trading on OTCQB or OTCQX and if prices for the Common Stock are then reported on the Pink Open Market (or a similar organization or agency succeeding to its functions of reporting prices), the most recent bid price per share of the Common Stock so reported, or (d) in all other cases, the fair market value of a share of Common Stock as determined by an independent appraiser selected in good faith by the Holders of a majority in interest of the Warrants then outstanding and reasonably acceptable to the Company, the fees and expenses of which shall be paid by the Company.

“Business Day” means any day except any Saturday, any Sunday, any day which is a federal legal holiday in the United States or any day on which banking institutions in the State of New York are authorized or required by law or other governmental action to close.

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“Commission” means the United States Securities and Exchange Commission.

“Common Stock” means the common stock of the Company, par value $0.0001 per share, and any other class of securities into which such securities may hereafter be reclassified or changed.

“Common Stock Equivalents” means any securities of the Company which would entitle the holder thereof to acquire at any time Common Stock, including, without limitation, any debt, preferred stock, right, option, warrant or other instrument that is at any time convertible into or exercisable or exchangeable for, or otherwise entitles the holder thereof to receive, Common Stock.

“Exchange Act” means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.

“Person” means an individual or corporation, partnership, trust, incorporated or unincorporated association, joint venture, limited liability company, joint stock company, government (or an agency or subdivision thereof) or other entity of any kind.

“Registration Statement” means the Company’s registration statement on Form S-3 (File No. 333-228562), as the same may be amended or supplemented.

“Securities Act” means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.

“Trading Day” means a day on which the Common Stock is traded on a Trading Market.

“Trading Market” means any of the following markets or exchanges on which the Common Stock is listed or quoted for trading on the date in question: the NYSE American, the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global Select Market, the New York Stock Exchange, OTCQB or OTCQX (or any successors to any of the foregoing.

“Transfer Agent” means Computershare Inc., the current transfer agent of the Company, with a mailing address of 250 Royall Street, Canton, Massachusetts 02021, and any successor transfer agent of the Company.

“VWAP” means, for any date, the price determined by the first of the following clauses that applies: (a) if the Common Stock is then listed or quoted on a Trading Market, the daily volume weighted average price per share of the Common Stock for such date (or the nearest preceding date) on the Trading Market on which the Common Stock is then listed or quoted as reported by Bloomberg L.P. (based on a Trading Day from 9:30 a.m. (New York City time) to 4:02 p.m. (New York City time)), (b)  if OTCQB or OTCQX is not a Trading Market, the volume weighted average price of the Common Stock for such date (or the nearest preceding date) on OTCQB or OTCQX as applicable, (c) if the Common Stock is not then listed or quoted for trading on OTCQB or OTCQX and if prices for the Common Stock are then reported on the Pink Open Market (or a

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similar organization or agency succeeding to its functions of reporting prices), the most recent bid price per share of the Common Stock so reported, or (d) in all other cases, the fair market value of a share of Common Stock as determined by an independent appraiser selected in good faith by the holders of a majority in interest of the Warrants then outstanding and reasonably acceptable to the Company, the fees and expenses of which shall be paid by the Company.

“Warrants” means this Warrant and other Common Stock purchase warrants issued by the Company pursuant to the Registration Statement.

Section 2.Exercise.

a)Exercise of Warrant.  Exercise of the purchase rights represented by this Warrant may be made, in whole or in part, at any time or times on or after the Initial Exercise Date and on or before the Termination Date by delivery to the Company or the Transfer Agent (or such other office or agency of the Company as it may designate by notice in writing to the registered Holder at the address of the Holder appearing on the books of the Company), as applicable, of a duly executed facsimile copy (or e-mail attachment) of the Notice of Exercise in the form annexed hereto (the “Notice of Exercise”). Within the earlier of (i) two (2) Trading Days and (ii) the number of Trading Days comprising the Standard Settlement Period (as defined in Section 2(d)(i) herein) following the date of exercise as aforesaid the Holder shall deliver the aggregate Exercise Price for the number of Warrant Shares specified in the applicable Notice of Exercise by wire transfer or cashier’s check drawn on a United States bank unless the cashless exercise procedure specified in Section 2(c) below is specified in the applicable Notice of Exercise. No ink-original Notice of Exercise shall be required, nor shall any medallion guarantee (or other type of guarantee or notarization) of any Notice of Exercise be required.  Notwithstanding anything herein to the contrary, the Holder shall not be required to physically surrender this Warrant to the Company until the Holder has purchased all of the Warrant Shares available hereunder and the Warrant has been exercised in full, in which case, the Holder shall surrender this Warrant to the Company or the Transfer Agent for cancellation within three (3) Trading Days of the date on which the final Notice of Exercise is delivered to the Company or the Transfer Agent. Partial exercises of this Warrant resulting in purchases of a portion of the total number of Warrant Shares available hereunder shall have the effect of lowering the outstanding number of Warrant Shares purchasable hereunder in an amount equal to the applicable number of Warrant Shares purchased.  The Holder and the Transfer Agent (or the Company) shall maintain records showing the number of Warrant Shares purchased and the date of such purchases. The Company shall deliver any objection to any Notice of Exercise within one (1) Business Day of receipt of such notice.  The Holder, by acceptance of this Warrant, acknowledge and agree that, by reason of the provisions of this paragraph, following the purchase of a portion of the Warrant Shares hereunder, the number of Warrant Shares available for purchase hereunder at any given time may be less than the amount stated on the face hereof.

b)Exercise Price.  The exercise price per share of Common Stock under this Warrant shall be $3.50, subject to adjustment hereunder (the “Exercise Price”).  

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c)Cashless Exercise. If at the time of exercise hereof there is no effective registration statement under the Securities Act registering, or the prospectus contained therein is not available for the issuance of the Warrant Shares to the Holder, then this Warrant may also be exercised, in whole or in part, at such time by means of a “cashless exercise” in which the Holder shall be entitled to receive a number of Warrant Shares equal to the quotient obtained by dividing (A-B) (X) by (A), where:

(A) = as applicable: (i) the VWAP on the Trading Day immediately preceding the date of the applicable Notice of Exercise if such Notice of Exercise is (1) both executed and delivered pursuant to Section 2(a) hereof on a day that is not a Trading Day or (2) both executed and delivered pursuant to Section 2(a) hereof on a Trading Day prior to the opening of “regular trading hours” (as defined in Rule 600(b)(68) of Regulation NMS promulgated under the federal securities laws) on such Trading Day, (ii) at the option of the Holder, either (y) the VWAP on the Trading Day immediately preceding the date of the applicable Notice of Exercise or (z) the Bid Price of the Common Stock on the principal Trading Market as reported by Bloomberg L.P. as of the time of the Holder’s execution of the applicable Notice of Exercise if such Notice of Exercise is executed during “regular trading hours” on a Trading Day and is delivered within two (2) hours thereafter (including until two (2) hours after the close of “regular trading hours” on a Trading Day) pursuant to Section 2(a) hereof or (iii) the VWAP on the date of the applicable Notice of Exercise if the date of such Notice of Exercise is a Trading Day and such Notice of Exercise is both executed and delivered pursuant to Section 2(a) hereof after the close of “regular trading hours” on such Trading Day;

 

(B) = the Exercise Price of this Warrant, as adjusted hereunder; and

 

(X) = the number of Warrant Shares that would be issuable upon exercise of this Warrant in accordance with the terms of this Warrant if such exercise were by means of a cash exercise rather than a cashless exercise.

 

If Warrant Shares are issued in such a cashless exercise, the parties acknowledge and agree that in accordance with Section 3(a)(9) of the Securities Act, the Warrant Shares shall take on the registered characteristics of the Warrants being exercised.  The Company agrees not to take any position contrary to this Section 2(c).

 

d)Mechanics of Exercise.

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ii.Delivery of New Warrants Upon Exercise.  If this Warrant shall have been exercised in part, the Company shall, at the request of a Holder and upon surrender of this Warrant certificate, at the time of delivery of the Warrant Shares, deliver to the Holder a new Warrant evidencing the rights of the Holder to purchase the unpurchased Warrant Shares called for by this Warrant, which new Warrant shall in all other respects be identical with this Warrant.

iii.Rescission Rights.  If the Company fails to cause the Transfer Agent to transmit to the Holder the Warrant Shares pursuant to Section

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2(d)(i) by the Warrant Share Delivery Date, then the Holder will have the right to rescind such exercise.

v.No Fractional Shares or Scrip.  No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant.  As to any fraction of a share which the Holder would otherwise be entitled to purchase upon such exercise, the Company shall, at its election, either pay a cash adjustment in respect of such final fraction in an

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amount equal to such fraction multiplied by the Exercise Price or round up to the next whole share.

vi.Charges, Taxes and Expenses.  Issuance of Warrant Shares shall be made without charge to the Holder for any issue or transfer tax or other incidental expense in respect of the issuance of such Warrant Shares, all of which taxes and expenses shall be paid by the Company, and such Warrant Shares shall be issued in the name of the Holder or in such name or names as may be directed by the Holder; provided, however, that in the event that Warrant Shares are to be issued in a name other than the name of the Holder, this Warrant when surrendered for exercise shall be accompanied by the Assignment Form attached hereto duly executed by the Holder and the Company may require, as a condition thereto, the payment of a sum sufficient to reimburse it for any transfer tax incidental thereto.  The Company shall pay all Transfer Agent fees required for same-day processing of any Notice of Exercise and all fees to the Depository Trust Company (or another established clearing corporation performing similar functions) required for same-day electronic delivery of the Warrant Shares.

vii.Closing of Books.  The Company will not close its stockholder books or records in any manner which prevents the timely exercise of this Warrant, pursuant to the terms hereof.

e)Holder’s Exercise Limitations.  The Company shall not effect any exercise of this Warrant, and a Holder shall not have the right to exercise any portion of this Warrant, pursuant to Section 2 or otherwise, to the extent that after giving effect to such issuance after exercise as set forth on the applicable Notice of Exercise, the Holder (together with the Holder’s Affiliates, and any other Persons acting as a group together with the Holder or any of the Holder’s Affiliates (such Persons, “Attribution Parties”)), would beneficially own in excess of the Beneficial Ownership Limitation (as defined below).  For purposes of the foregoing sentence, the number of shares of Common Stock beneficially owned by the Holder and its Affiliates and Attribution Parties shall include the number of shares of Common Stock issuable upon exercise of this Warrant with respect to which such determination is being made, but shall exclude the number of shares of Common Stock which would be issuable upon (i) exercise of the remaining, nonexercised portion of this Warrant beneficially owned by the Holder or any of its Affiliates or Attribution Parties and (ii) exercise or conversion of the unexercised or nonconverted portion of any other securities of the Company (including, without limitation, any other  Common Stock Equivalents) subject to a limitation on conversion or exercise analogous to the limitation contained herein beneficially owned by the Holder or any of its Affiliates or Attribution Parties.  Except as set forth in the preceding sentence, for purposes of this Section 2(e), beneficial ownership shall be calculated in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder, it being acknowledged by the Holder that the Company is not representing to the Holder that such calculation is in compliance with Section 13(d) of the Exchange Act and the Holder is solely responsible for any schedules required to be filed

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in accordance therewith.  To the extent that the limitation contained in this Section 2(e) applies, the determination of whether this Warrant is exercisable (in relation to other securities owned by the Holder together with any Affiliates and Attribution Parties) and of which portion of this Warrant is exercisable shall be in the sole discretion of the Holder, and the submission of a Notice of Exercise shall be deemed to be the Holder’s determination of whether this Warrant is exercisable (in relation to other securities owned by the Holder together with any Affiliates and Attribution Parties) and of which portion of this Warrant is exercisable, in each case subject to the Beneficial Ownership Limitation, and the Company shall have no obligation to verify or confirm the accuracy of such determination and shall have no liability for exercises of this Warrant that are not in compliance with the Beneficial Ownership Limitation.  In addition, a determination as to any group status as contemplated above shall be determined in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder.  For purposes of this Section 2(e), in determining the number of outstanding shares of Common Stock, a Holder may rely on the number of outstanding shares of Common Stock as reflected in (A) the Company’s most recent periodic or annual report filed with the Commission, as the case may be, (B) a more recent public announcement by the Company or (C) a more recent written notice by the Company or the Transfer Agent setting forth the number of shares of Common Stock outstanding.  Upon the written request of a Holder (which may be via email), the Company shall within one Trading Day confirm in writing (which may be via email) to the Holder the number of shares of Common Stock then outstanding.  In any case, the number of outstanding shares of Common Stock shall be determined after giving effect to the conversion or exercise of securities of the Company, including this Warrant, by the Holder or its Affiliates or Attribution Parties since the date as of which such number of outstanding shares of Common Stock was reported.  The “Beneficial Ownership Limitation” shall be 4.99% (or, upon election by a Holder prior to the issuance of any Warrants, 9.99%) of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon exercise of this Warrant.  The Holder, upon notice to the Company, may increase or decrease the Beneficial Ownership Limitation percentage from time to time, including for the avoidance of doubt to any percentage in excess of 9.99%. Any increase in the Beneficial Ownership Limitation will not be effective until the 61^st day after such notice is delivered to the Company.  The provisions of this paragraph shall be construed and implemented in a manner otherwise than in strict conformity with the terms of this Section 2(e) to correct this paragraph (or any portion hereof) which may be defective or inconsistent with the intended Beneficial Ownership Limitation herein contained or to make changes or supplements necessary or desirable to properly give effect to such limitation. The limitations contained in this paragraph shall apply to a successor holder of this Warrant.¹

f)Limitation on Exercise. The number of Warrant Shares that may be acquired by the Holder upon any exercise of the Warrant (or otherwise in respect hereof) shall be limited to the extent necessary to insure that, following such exercise (or other issuance), the total number of shares of Common Stock then beneficially owned by the

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Holder and its affiliates and any other Persons whose beneficial ownership of Common Stock would be aggregated with the Attribution Parties, does not exceed 19.999% of the total number of issued and outstanding shares of Common Stock (including for such purpose the shares of Common Stock issuable upon such conversion) (the “Threshold Percentage”). For such purposes, beneficial ownership shall be determined in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder. The Holder shall have the right at any time and from time to time, to waive the provisions of this Section 2(f) in its entirety or to increase or decrease the Threshold Percentage by written instrument delivered to the Company, but any such waiver or increase will not be effective until the 61st day after such notice is delivered to the Company and (ii) any such increase or decrease will apply only to the Holder and the other Attribution Parties and not to any other holder of Warrants that is not an Attribution Party of the Holder. For purposes of clarity, the shares of Common Stock issuable pursuant to the terms of the Warrant in excess of the Threshold Percentage shall not be deemed to be beneficially owned by the Holder for any purpose including for purposes of Section 13(d) or Rule 16a-1(a)(1) of the Exchange Act. No prior inability to exercise the Warrant pursuant to this Section 2(f) shall have any effect on the applicability of the provisions of this Section 2(f) with respect to any subsequent determination of exercisability. The provisions of this Section 2(f) shall be construed and implemented in a manner otherwise than in strict conformity with the terms of this Section 2(f) to the extent necessary to correct this section or any portion of this section which may be defective or inconsistent with the intended beneficial ownership limitation contained in this Section 2(f) or to make changes or supplements necessary or desirable to properly give effect to such limitation.²

Section 3.Certain Adjustments.

a)Stock Dividends and Splits. If the Company, at any time while this Warrant is outstanding: (i) pays a stock dividend or otherwise makes a distribution or distributions on shares of its Common Stock or any other equity or equity equivalent securities payable in shares of Common Stock (which, for avoidance of doubt, shall not include any shares of Common Stock issued by the Company upon exercise of this Warrant), (ii) subdivides outstanding shares of Common Stock into a larger number of shares, (iii) combines (including by way of reverse stock split) outstanding shares of Common Stock into a smaller number of shares, or (iv) issues by reclassification of shares of the Common Stock any shares of capital stock of the Company, then in each case the Exercise Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding immediately before such event and of which the denominator shall be the number of shares of Common Stock outstanding immediately after such event, and the number of Warrant Shares issuable upon exercise of this Warrant shall be proportionately adjusted such that the aggregate Exercise Price of this Warrant shall remain unchanged.  Any adjustment made pursuant to this Section 3(a) shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or

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distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or re‑classification.

b)Pro Rata Distributions.  During such time as this Warrant is outstanding, if the Company shall declare or make any dividend or other distribution of its assets (or rights to acquire its assets) to holders of shares of Common Stock, by way of return of capital or otherwise (including, without limitation, any distribution of cash, stock or other securities, property or options by way of a dividend, spin off, reclassification, corporate rearrangement, scheme of arrangement or other similar transaction) (a "Distribution"), at any time after the issuance of this Warrant, then, in each such case, the Holder shall be entitled to participate in such Distribution to the same extent that the Holder would have participated therein if the Holder had held the number of shares of Common Stock acquirable upon complete exercise of this Warrant (without regard to any limitations on exercise hereof, including without limitation, the Beneficial Ownership Limitation) immediately before the date of which a record is taken for such Distribution, or, if no such record is taken, the date as of which the record holders of shares of Common Stock are to be determined for the participation in such Distribution (provided, however, to the extent that the Holder's right to participate in any such Distribution would result in the Holder exceeding the Beneficial Ownership Limitation, then the Holder shall not be entitled to participate in such Distribution to such extent (or in the beneficial ownership of any shares of Common Stock as a result of such Distribution to such extent) and the portion of such Distribution shall be held in abeyance for the benefit of the Holder until such time, if ever, as its right thereto would not result in the Holder exceeding the Beneficial Ownership Limitation).

c)Fundamental Transaction. If, at any time while this Warrant is outstanding, (i) the Company, directly or indirectly, including through one or more subsidiaries, in one or more related transactions effects any merger or consolidation of the Company with or into another Person, (ii) the Company, directly or indirectly, effects any sale, lease, assignment, transfer, conveyance or other disposition of all or substantially all of its assets in one or a series of related transactions, (iii) any, direct or indirect, purchase offer, tender offer or exchange offer (whether by the Company or another Person) is completed pursuant to which holders of Common Stock are permitted to sell, tender or exchange their shares for other securities, cash or property and has been accepted by the holders of 50% or more of the outstanding Common Stock, (iv) the Company, directly or indirectly, in one or more related transactions effects any reclassification, reorganization or recapitalization of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is effectively converted into or exchanged for other securities, cash or property, or (v) the Company, directly or indirectly, in one or more related transactions consummates a stock or share purchase agreement or other business combination (including, without limitation, a reorganization, recapitalization, merger, spin-off or scheme of arrangement) with another Person or group of Persons whereby such other Person or group acquires more than 50% of the outstanding shares of Common Stock (not including any shares of Common Stock held by the other Person or other Persons making or party to, or associated or affiliated with the other Persons making or party to, such stock or share purchase agreement or other business combination) (each a “Fundamental Transaction”), then, upon any subsequent exercise of this Warrant, the

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Holder shall have the right to receive, for each Warrant Share that would have been issuable upon such exercise immediately prior to the occurrence of such Fundamental Transaction, at the option of the Holder (without regard to any limitation in Section 2(e) on the exercise of this Warrant), the number of shares of Common Stock of the successor or acquiring corporation or of the Company, if it is the surviving corporation, and any additional consideration (the “Alternate Consideration”) receivable as a result of such Fundamental Transaction by a holder of the number of shares of Common Stock for which this Warrant is exercisable immediately prior to such Fundamental Transaction (without regard to any limitation in Section 2(e) on the exercise of this Warrant).  For purposes of any such exercise, the determination of the Exercise Price shall be appropriately adjusted to apply to such Alternate Consideration based on the amount of Alternate Consideration issuable in respect of one share of Common Stock in such Fundamental Transaction, and the Company shall apportion the Exercise Price among the Alternate Consideration in a reasonable manner reflecting the relative value of any different components of the Alternate Consideration.  If holders of Common Stock are given any choice as to the securities, cash or property to be received in a Fundamental Transaction, then the Holder shall be given the same choice as to the Alternate Consideration it receives upon any exercise of this Warrant following such Fundamental Transaction.  Notwithstanding anything to the contrary, in the event of a Fundamental Transaction, the Company or any Successor Entity (as defined below) shall, at the Holder’s option, exercisable at any time concurrently with, or within 30 days after, the consummation of the Fundamental Transaction (or, if later, the date of the public announcement of the applicable Fundamental Transaction), purchase this Warrant from the Holder by paying to the Holder an amount of cash equal to the Black Scholes Value of the remaining unexercised portion of this Warrant on the date of the consummation of such Fundamental Transaction; provided, however, that, if the Fundamental Transaction is not within the Company's control, including not approved by the Company's Board of Directors, Holder shall only be entitled to receive from the Company or any Successor Entity, as of the date of consummation of such Fundamental Transaction, the same type or form of consideration (and in the same proportion), at the Black Scholes Value (as defined below) of the unexercised portion of this Warrant, that is being offered and paid to the holders of Common Stock of the Company in connection with the Fundamental Transaction, whether that consideration be in the form of cash, stock or any combination thereof, or whether the holders of Common Stock are given the choice to receive from among alternative forms of consideration in connection with the Fundamental Transaction; provided, further, that if the holders of Common Stock are not offered or paid any consideration in such Fundamental Transaction, the holders of Common Stock will be deemed to have received common stock of the Successor Entity, which may be deemed to be common stock of the Company immediately following such Fundamental Transaction, in such Fundamental Transaction.  “Black Scholes Value” means the value of this Warrant based on the Black and Scholes Option Pricing Model obtained from the “OV” function on Bloomberg, L.P. (“Bloomberg”) determined as of the day of consummation of the applicable Fundamental Transaction for pricing purposes and reflecting (A) a risk-free interest rate corresponding to the U.S. Treasury rate for a period equal to the time between the date of the public announcement of the applicable Fundamental Transaction and the Termination Date, (B) an expected volatility equal to

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the greater of 50% and the 30-day volatility obtained from the HVT function on Bloomberg as of the Trading Day immediately following the public announcement of the applicable Fundamental Transaction, (C) the underlying price per share used in such calculation shall be the sum of the price per share being offered in cash, if any, plus the value of any non-cash consideration, if any, being offered in such Fundamental Transaction and (D) a remaining option time equal to the time between the date of the public announcement of the applicable Fundamental Transaction and the Termination Date.  The payment of the Black Scholes Value will be made by wire transfer of immediately available funds within five (5) Business Days of the Holder’s election (or, if later, on the effective date of the Fundamental Transaction).  The Company shall cause any successor entity in a Fundamental Transaction in which the Company is not the survivor (the “Successor Entity”) to assume in writing all of the obligations of the Company under this Warrant in accordance with the provisions of this Section 3(e) prior to such Fundamental Transaction and shall, at the option of the Holder, deliver to the Holder in exchange for this Warrant a security of the Successor Entity evidenced by a written instrument substantially similar in form and substance to this Warrant which is exercisable for a corresponding number of shares of capital stock of such Successor Entity (or its parent entity) equivalent to the shares of Common Stock acquirable and receivable upon exercise of this Warrant (without regard to any limitations on the exercise of this Warrant) prior to such Fundamental Transaction, and with an exercise price which applies the exercise price hereunder to such shares of capital stock (but taking into account the relative value of the shares of Common Stock pursuant to such Fundamental Transaction and the value of such shares of capital stock, such number of shares of capital stock and such exercise price being for the purpose of protecting the economic value of this Warrant immediately prior to the consummation of such Fundamental Transaction). Upon the occurrence of any such Fundamental Transaction, the Successor Entity shall succeed to, and be substituted for (so that from and after the date of such Fundamental Transaction, the provisions of this Warrant referring to the “Company” shall refer instead to the Successor Entity), and may exercise every right and power of the Company and shall assume all of the obligations of the Company under this Warrant with the same effect as if such Successor Entity had been named as the Company herein.

 

d)Calculations. All calculations under this Section 3 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be. For purposes of this Section 3, the number of shares of Common Stock deemed to be issued and outstanding as of a given date shall be the sum of the number of shares of Common Stock (excluding treasury shares, if any) issued and outstanding.

e)Notice to Holder.  

i.Adjustment to Exercise Price. Whenever the Exercise Price is adjusted pursuant to any provision of this Section 3, the Company shall promptly deliver to the Holder by facsimile or email a notice setting forth the Exercise Price after such adjustment and any resulting adjustment to the number of Warrant Shares and setting forth a brief statement of the facts requiring such adjustment.

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ii.Notice to Allow Exercise by Holder. If (A) the Company shall declare a dividend (or any other distribution in whatever form) on the Common Stock, (B) the Company shall declare a special nonrecurring cash dividend on or a redemption of the Common Stock, (C) the Company shall authorize the granting to all holders of the Common Stock rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights, (D) the approval of any stockholders of the Company shall be required in connection with any reclassification of the Common Stock, any consolidation or merger to which the Company is a party, any sale or transfer of all or substantially all of the assets of the Company, or any compulsory share exchange whereby the Common Stock is converted into other securities, cash or property, or (E) the Company shall authorize the voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Company, then, in each case, the Company shall cause to be delivered by facsimile or email to the Holder at its last facsimile number or email address as it shall appear upon the Warrant Register of the Company, at least 10 calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be taken, the date as of which the holders of the Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer or share exchange is expected to become effective or close, and the date as of which it is expected that holders of the Common Stock of record shall be entitled to exchange their shares of the Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer or share exchange; provided that the failure to deliver such notice or any defect therein or in the delivery thereof shall not affect the validity of the corporate action required to be specified in such notice.  To the extent that any notice provided in this Warrant constitutes, or contains, material, non-public information regarding the Company or any of the Subsidiaries, the Company shall simultaneously file such notice with the Commission pursuant to a Current Report on Form 8-K.  The Holder shall remain entitled to exercise this Warrant during the period commencing on the date of such notice to the effective date of the event triggering such notice except as may otherwise be expressly set forth herein.

Section 4.Transfer of Warrant.

a)Transferability.  This Warrant and all rights hereunder (including, without limitation, any registration rights) are transferable, in whole or in part, upon surrender of this Warrant at the principal office of the Company or its designated agent, together with a written assignment of this Warrant substantially in the form attached hereto duly executed by the Holder or its agent or attorney and funds sufficient to pay any transfer taxes payable upon the making of such transfer.  Upon such surrender and, if required,

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such payment, the Company shall execute and deliver a new Warrant or Warrants in the name of the assignee or assignees, as applicable, and in the denomination or denominations specified in such instrument of assignment, and shall issue to the assignor a new Warrant evidencing the portion of this Warrant not so assigned, and this Warrant shall promptly be cancelled.  Notwithstanding anything herein to the contrary, the Holder shall not be required to physically surrender this Warrant to the Company unless the Holder has assigned this Warrant in full, in which case, the Holder shall surrender this Warrant to the Company within three (3) Trading Days of the date on which the Holder delivers an assignment form to the Company assigning this Warrant in full.  The Warrant, if properly assigned in accordance herewith, may be exercised by a new holder for the purchase of Warrant Shares without having a new Warrant issued.  

b)New Warrants. This Warrant may be divided or combined with other Warrants upon presentation hereof at the aforesaid office of the Company, together with a written notice specifying the names and denominations in which new Warrants are to be issued, signed by the Holder or its agent or attorney.  Subject to compliance with Section 4(a), as to any transfer which may be involved in such division or combination, the Company shall execute and deliver a new Warrant or Warrants in exchange for the Warrant or Warrants to be divided or combined in accordance with such notice. All Warrants issued on transfers or exchanges shall be dated the initial issuance date of this Warrant and shall be identical with this Warrant except as to the number of Warrant Shares issuable pursuant thereto.

c)Warrant Register. The Company or the Transfer Agent shall register this Warrant, upon records to be maintained by the Company or the Transfer Agent for that purpose (the “Warrant Register”), in the name of the record Holder hereof from time to time.  The Company and the Transfer Agent may deem and treat the registered Holder of this Warrant as the absolute owner hereof for the purpose of any exercise hereof or any distribution to the Holder, and for all other purposes, absent actual notice to the contrary.

Section 5.Miscellaneous.

a)No Rights as Stockholder Until Exercise.  This Warrant does not entitle the Holder to any voting rights, dividends or other rights as a stockholder of the Company prior to the exercise hereof as set forth in Section 2(d)(i), except as expressly set forth in Section 3.  

b)Loss, Theft, Destruction or Mutilation of Warrant. The Company covenants that upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant or any stock certificate relating to the Warrant Shares, and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it (which, in the case of the Warrant, shall not include the posting of any bond), and upon surrender and cancellation of such Warrant or stock certificate, if mutilated, the Company will make and deliver a new Warrant or stock certificate of like tenor and dated as of such cancellation, in lieu of such Warrant or stock certificate.

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c)Saturdays, Sundays, Holidays, etc.  If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall not be a Business Day, then, such action may be taken or such right may be exercised on the next succeeding Business Day.

d)Authorized Shares.  

The Company covenants that, during the period the Warrant is outstanding, it will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of the Warrant Shares upon the exercise of any purchase rights under this Warrant.  The Company further covenants that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of issuing the necessary Warrant Shares upon the exercise of the purchase rights under this Warrant.  The Company will take all such reasonable action as may be necessary to assure that such Warrant Shares may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of the Trading Market upon which the Common Stock may be listed.  The Company covenants that all Warrant Shares which may be issued upon the exercise of the purchase rights represented by this Warrant will, upon exercise of the purchase rights represented by this Warrant and payment for such Warrant Shares in accordance herewith, be duly authorized, validly issued, fully paid and nonassessable and free from all taxes, liens and charges created by the Company in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issue).  

Except and to the extent as waived or consented to by the Holder, the Company shall not by any action, including, without limitation, amending its certificate of incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate to protect the rights of Holder as set forth in this Warrant against impairment.  Without limiting the generality of the foregoing, the Company will (i) not increase the par value of any Warrant Shares above the amount payable therefor upon such exercise immediately prior to such increase in par value, (ii) take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable Warrant Shares upon the exercise of this Warrant and (iii) use commercially reasonable efforts to obtain all such authorizations, exemptions or consents from any public regulatory body having jurisdiction thereof, as may be, necessary to enable the Company to perform its obligations under this Warrant.

Before taking any action which would result in an adjustment in the number of Warrant Shares for which this Warrant is exercisable or in the Exercise Price, the Company shall obtain all such authorizations or exemptions thereof, or

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consents thereto, as may be necessary from any public regulatory body or bodies having jurisdiction thereof.

e)Governing Law. All questions concerning the construction, validity, enforcement and interpretation of this Warrant shall be governed by and construed and enforced in accordance with the internal laws of the State of New York, without regard to the principles of conflicts of law thereof. Each party agrees that all legal proceedings concerning the interpretations, enforcement and defense of the transactions contemplated by this Warrant (whether brought against a party hereto or their respective affiliates, directors, officers, shareholders, partners, members, employees or agents) shall be commenced exclusively in the state and federal courts sitting in the City of New York. Each party hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in the City of New York, Borough of Manhattan for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is improper or is an inconvenient venue for such proceeding. Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Warrant and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any other manner permitted by law. If either party shall commence an action, suit or proceeding to enforce any provisions of this Warrant, the prevailing party in such action, suit or proceeding shall be reimbursed by the other party for their reasonable attorneys’ fees and other costs and expenses incurred with the investigation, preparation and prosecution of such action or proceeding. Each party hereby irrevocably waives any right it may have, and agrees not to request, a jury trial for the adjudication of any dispute hereunder or in connection with or arising out of this warrant or any transaction contemplated hereby.

f)Restrictions.  The Holder acknowledges that the Warrant Shares acquired upon the exercise of this Warrant, if not registered, and the Holder does not utilize cashless exercise, will have restrictions upon resale imposed by state and federal securities laws.

g)Nonwaiver and Expenses.  No course of dealing or any delay or failure to exercise any right hereunder on the part of Holder shall operate as a waiver of such right or otherwise prejudice the Holder’s rights, powers or remedies.  Without limiting any other provision of this Warrant, if the Company willfully and knowingly fails to comply with any provision of this Warrant, which results in any material damages to the Holder, the Company shall pay to the Holder such amounts as shall be sufficient to cover any costs and expenses including, but not limited to, reasonable attorneys’ fees, including those of appellate proceedings, incurred by the Holder in collecting any amounts due pursuant hereto or in otherwise enforcing any of its rights, powers or remedies hereunder.

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h)Notices.  Any and all notices or other communications or deliveries to be provided by the Holders hereunder including, without limitation, any Notice of Exercise, shall be in writing and delivered personally, by facsimile or e-mail, or sent by a nationally recognized overnight courier service, addressed to the Company, 235 Yorkland Blvd., Suite 900, Toronto, Ontario, Canada M2J 4Y8, Attention: Chief Financial Officer, with a copy (which copy shall not constitute notice) to Reed Smith LLP, 599 Lexington Avenue, New York, New York 10022-7650, Attention Danielle Carbone, Esq., or such other facsimile number, email address or address as the Company may specify for such purposes by notice to the Holders. Any and all notices or other communications or deliveries to be provided by the Company hereunder shall be in writing and delivered personally, by facsimile or e-mail, or sent by a nationally recognized overnight courier service addressed to each Holder at the facsimile number, e-mail address or address of such Holder appearing on the books of the Company. Any notice or other communication or deliveries hereunder shall be deemed given and effective on the earliest of (i) the time of transmission, if such notice or communication is delivered via facsimile at the facsimile number or via e-mail at the e-mail address set forth in this Section prior to 5:30 p.m. (New York City time) on any date, (ii) the next Trading Day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number or via e-mail at the e-mail address set forth in this Section on a day that is not a Trading Day or later than 5:30 p.m. (New York City time) on any Trading Day, (iii) the second Trading Day following the date of mailing, if sent by U.S. nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given.  To the extent that any notice provided hereunder constitutes, or contains, material, non-public information regarding the Company or any subsidiaries, the Company shall simultaneously file such notice with the Commission pursuant to a Current Report on Form 8-K.

i)Limitation of Liability.  No provision hereof, in the absence of any affirmative action by the Holder to exercise this Warrant to purchase Warrant Shares, and no enumeration herein of the rights or privileges of the Holder, shall give rise to any liability of the Holder for the purchase price of any Common Stock or as a stockholder of the Company, whether such liability is asserted by the Company or by creditors of the Company.

j)Remedies.  The Holder, in addition to being entitled to exercise all rights granted by law, including recovery of damages, will be entitled to specific performance of its rights under this Warrant.  The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Warrant and hereby agrees to waive and not to assert the defense in any action for specific performance that a remedy at law would be adequate.

k)Successors and Assigns.  Subject to applicable securities laws, this Warrant and the rights and obligations evidenced hereby shall inure to the benefit of and be binding upon the successors and permitted assigns of the Company and the successors and permitted assigns of Holder.  The provisions of this Warrant are intended to be for the benefit of any Holder from time to time of this Warrant and shall be enforceable by the Holder or holder of Warrant Shares.

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l)Amendment.  This Warrant may be modified or amended or the provisions hereof waived with the written consent of the Company and the Holders holding Warrants at least equal to 50% of the Warrant Shares issuable upon exercise of all then outstanding Warrants.

m)Severability.  Wherever possible, each provision of this Warrant shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Warrant shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provisions or the remaining provisions of this Warrant.

n)Headings.  The headings used in this Warrant are for the convenience of reference only and shall not, for any purpose, be deemed a part of this Warrant.

********************

 

(Signature Page Follows)

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IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officer thereunto duly authorized as of the date first above indicated.

 

  

 

 

 

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NOTICE OF EXERCISE

 

To:_______________________

 

(1)The undersigned hereby elects to purchase ________ Warrant Shares of the Company pursuant to the terms of the attached Warrant (only if exercised in full), and tenders herewith payment of the exercise price in full, together with all applicable transfer taxes, if any.

(2)Payment shall take the form of (check applicable box):

[  ] in lawful money of the United States; or

[ ] if permitted the cancellation of such number of Warrant Shares as is necessary, in accordance with the formula set forth in subsection 2(c), to exercise this Warrant with respect to the maximum number of Warrant Shares purchasable pursuant to the cashless exercise procedure set forth in subsection 2(c).

(3)Please issue said Warrant Shares in the name of the undersigned or in such other name as is specified below:

_______________________________

 

 

The Warrant Shares shall be delivered to the following DWAC Account Number:

 

_______________________________

 

_______________________________

 

_______________________________

 

 

[SIGNATURE OF HOLDER]

 

Name of Investing Entity: ________________________________________________________________________

Signature of Authorized Signatory of Investing Entity: _________________________________________________

Name of Authorized Signatory: ___________________________________________________________________

Title of Authorized Signatory: ____________________________________________________________________

Date: ________________________________________________________________________________________

 

 

 

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ASSIGNMENT FORM

 

(To assign the foregoing Warrant, execute this form and supply required information.  Do not use this form to purchase shares.)

FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced thereby are hereby assigned to

 

US_ACTIVE-152309365.3-391930-20028

Exhibit 4.9

THIS WARRANT AND THE SHARES ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR THE SECURITIES LAWS OF ANY STATE AND, EXCEPT AS SET FORTH IN SECTIONS 5.3 AND 5.4 BELOW, MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED UNLESS AND UNTIL REGISTERED UNDER SAID ACT AND LAWS OR, IN THE OPINION OF LEGAL COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE COMPANY, SUCH OFFER, SALE, PLEDGE OR OTHER TRANSFER IS EXEMPT FROM SUCH REGISTRATION.

WARRANT TO PURCHASE STOCK

 

THIS WARRANT CERTIFIES THAT, for good and valuable consideration, OXFORD FINANCE LLC (“Oxford” and, together with any successor or permitted assignee or transferee of this Warrant or of any shares issued upon exercise hereof, “Holder”) is entitled to purchase the number of fully paid and non-assessable shares (the “Shares”) of the above-stated Type/Series of Stock (the “Class”) of the above-named company (the “Company”) at the above-stated Warrant Price, all as set forth above and as adjusted pursuant to Sections 1.7 and 2 of this Warrant, subject to the provisions and upon the terms and conditions set forth in this Warrant.

SECTION 1. EXERCISE.

1.1 Method of Exercise. Holder may at any time and from time to time exercise this Warrant, in whole or in part, by delivering to the Company the original of this Warrant together with a duly executed Notice of Exercise in substantially the form attached hereto as Appendix 1 and, unless Holder is exercising this Warrant pursuant to a cashless exercise set forth in Section 1.2, a check, wire transfer of same-day funds (to an account designated by the Company), or other form of payment acceptable to the Company for the aggregate Warrant Price for the Shares being purchased.

1.2 Cashless Exercise. On any exercise of this Warrant, in lieu of payment of the aggregate Warrant Price in the manner as specified in Section 1.1 above, but otherwise in accordance with the requirements of Section 1.1, Holder may elect to receive Shares equal to the value of this Warrant, or portion hereof as to which this Warrant is being exercised. Thereupon, the Company shall issue to the Holder such number of fully paid and non-assessable Shares as are computed using the following formula:

X = Y(A-B)/A

where:

 

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1

1.3 Fair Market Value. If the Company’s common stock is then traded or quoted on a nationally recognized securities exchange, inter-dealer quotation system or over-the-counter market (a “Trading Market”) and the Class is common stock, the fair market value of a Share shall be the closing price or last sale price of a share of common stock reported for the Business Day immediately before the date on which Holder delivers this Warrant together with its Notice of Exercise to the Company. If the Company’s common stock is then traded in a Trading Market and the Class is a series of the Company’s Preferred Stock, the fair market value of a Share shall be the closing price or last sale price of a share of the Company’s common stock reported for the Business Day immediately before the date on which Holder delivers this Warrant together with its Notice of Exercise to the Company multiplied by the number of shares of the Company’s common stock into which a Share is then convertible. If the Company’s common stock is not traded in a Trading Market, the Board of Directors of the Company shall determine the fair market value of a Share in its reasonable good faith judgment.

1.4 Delivery of Certificate and New Warrant. Within a reasonable time after Holder exercises this Warrant in the manner set forth in Section 1.1 or 1.2 above, the Company shall deliver to Holder a certificate representing the Shares issued to Holder upon such exercise and, if this Warrant has not been fully exercised and has not expired, a new warrant of like tenor representing the Shares not so acquired.

1.5 Replacement of Warrant. On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of loss, theft or destruction, on delivery of an indemnity agreement reasonably satisfactory in form, substance and amount to the Company or, in the case of mutilation, on surrender of this Warrant to the Company for cancellation, the Company shall, within a reasonable time, execute and deliver to Holder, in lieu of this Warrant, a new warrant of like tenor and amount.

1.6 Treatment of Warrant Upon Acquisition of Company.

(a) Acquisition. For the purpose of this Warrant, “Acquisition” means any transaction or series of related transactions involving: (i) the sale, lease, exclusive license, or other disposition of all or substantially all of the assets of the Company; (ii) any merger or consolidation of the Company into or with another person or entity (other than a merger or consolidation effected exclusively to change the Company’s domicile), or any other corporate reorganization, in which the stockholders of the Company in their capacity as such immediately prior to such merger, consolidation or reorganization, own less than a majority of the Company’s (or the surviving or successor entity’s) outstanding voting power immediately after such merger, consolidation or reorganization (or, if such Company stockholders beneficially own a majority of the outstanding voting power of the surviving or successor entity as of immediately after such merger, consolidation or reorganization, such surviving or successor entity is not the Company); or (iii) any sale or other transfer by the stockholders of the Company of shares representing at least a majority of the Company’s then-total outstanding combined voting power (other than in connection with a bona fide sales or issuance of securities of the Company for capital raising purposes).

(b) Treatment of Warrant at Acquisition. In the event of an Acquisition in which the consideration to be received by the Company’s stockholders consists solely of cash, solely of Marketable Securities or a combination of cash and Marketable Securities (a “Cash/Public Acquisition”), either (i) Holder shall exercise this Warrant pursuant to Section 1.1 and/or 1.2 and such exercise will be deemed effective immediately prior to and contingent upon the consummation of such Acquisition or (ii) if Holder elects not to exercise the Warrant, this Warrant will expire immediately prior to the consummation of such Acquisition.

(c) The Company shall provide Holder with written notice of its request relating to the Cash/Public Acquisition (together with such reasonable information as Holder may reasonably require regarding the treatment of this Warrant in connection with such contemplated Cash/Public Acquisition giving rise to such notice), which is to be delivered to Holder not less than seven (7) Business Days prior to the closing of the proposed Cash/Public

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Acquisition. In the event the Company does not provide such notice, then if, immediately prior to the Cash/Public Acquisition, the fair market value of one Share (or other security issuable upon the exercise hereof) as

 

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determined in accordance with Section 1.3 above would be greater than the Warrant Price in effect on such date, then this Warrant shall automatically be deemed on and as of such date to be exercised pursuant to Section 1.2 above as to all Shares (or such other securities) for which it shall not previously have been exercised, and the Company shall promptly notify the Holder of the number of Shares (or such other securities) issued upon such exercise to the Holder and Holder shall be deemed to have restated each of the representations and warranties in Section 4 of the Warrant as the date thereof.

(d) Upon the closing of any Acquisition other than a Cash/Public Acquisition defined above, the Company shall use commercially reasonable efforts to cause the acquiring, surviving or successor entity to assume the obligations of this Warrant as part of the Acquisition. If the acquiring entity assumes this Warrant then it shall thereafter be exercisable for the same securities and/or other property as would have been paid for the Shares issuable upon exercise of the unexercised portion of this Warrant as if such Shares were outstanding on and as of the closing of such Acquisition, subject to further adjustment from time to time in accordance with the provisions of this Warrant.

(e) As used in this Warrant, “Marketable Securities” means securities meeting all of the following requirements: (i) the issuer thereof is then subject to the reporting requirements of Section 13 or Section 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and is then current in its filing of all required reports and other information under the Act and the Exchange Act; (ii) the class and series of shares or other security of the issuer that would be received by Holder in connection with the Acquisition were Holder to exercise this Warrant on or prior to the closing thereof is then traded in Trading Market, and (iii) following the closing of such Acquisition, Holder would not be restricted from publicly re-selling all of the issuer’s shares and/or other securities that would be received by Holder in such Acquisition were Holder to exercise or convert this Warrant in full on or prior to the closing of such Acquisition, except to the extent that any such restriction (x) arises solely under federal or state securities laws, rules or regulations, and (y) does not extend beyond six (6) months from the closing of such Acquisition.

1.7 Adjustment to Class of Shares; Number of Shares; Warrant Price; Adjustments Cumulative. If, upon the closing of the Next Equity Financing, the Next Equity Financing Price shall be less than the Warrant Price in effect as of immediately prior thereto, then the “Class” shall be Next Equity Financing Securities from and after such closing, subject to adjustment thereafter from time to time in accordance with the provisions of this Warrant and the “Warrant Price” shall be the Next Equity Financing Price from and after such closing, subject to adjustment thereafter from time to time in accordance with the provisions of this Warrant; provided, that upon such date, if any, as the “Class” becomes Next Equity Financing Securities pursuant to this sentence, this Warrant shall be exercisable for such number of shares of such Class as shall equal (i) One Hundred Ninety-Seven Thousand Five Hundred Dollars ($197,500.00), divided by (ii) the Next Equity Financing Price, subject to adjustment thereafter from time to time in accordance with the provisions of this Warrant. As used herein (i) “Next Equity Financing” means the first sale or issuance by the Company on or after the Issue Date of this Warrant set forth above, in a single transaction or series of related transactions, of shares of its Preferred Stock or other senior equity securities to one or more investors for cash for financing purposes; (ii) “Next Equity Financing Securities” means the type, class and series of Preferred Stock or other senior equity security sold or issued by the Company in the Next Equity Financing; and (iii) “Next Equity Financing Price” means the lowest price per share for which Next Equity Financing Securities are sold or issued by the Company in the Next Equity Financing.

SECTION 2. ADJUSTMENTS TO THE SHARES AND WARRANT PRICE.

2.1 Stock Dividends, Splits, Etc. If the Company declares or pays a dividend or distribution on the outstanding shares of the Class payable in common stock or other securities or property (other than cash), then upon exercise of this Warrant, for each Share acquired, Holder shall receive, without additional cost to Holder, the total number and kind of securities and property which Holder would have received had Holder owned the Shares of record as of the date the dividend or distribution occurred. If the Company subdivides the outstanding shares of the Class by reclassification or otherwise into a greater number of shares, the number of Shares purchasable hereunder shall be proportionately increased and the Warrant Price shall be proportionately decreased. If the outstanding shares

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of the Class are combined or consolidated, by reclassification or otherwise, into a lesser number of shares, the Warrant Price shall be proportionately increased and the number of Shares shall be proportionately decreased.

 

3

2.2 Reclassification, Exchange, Combinations or Substitution. Upon any event whereby all of the outstanding shares of the Class are reclassified, exchanged, combined, substituted, or replaced for, into, with or by Company securities of a different class and/or series, then from and after the consummation of such event, this Warrant will be exercisable for the number, class and series of Company securities that Holder would have received had the Shares been outstanding on and as of the consummation of such event, and subject to further adjustment thereafter from time to time in accordance with the provisions of this Warrant. The provisions of this Section 2.2 shall similarly apply to successive reclassifications, exchanges, combinations substitutions, replacements or other similar events.

2.3 Conversion of Preferred Stock. If the Class is a class and series of the Preferred Stock, in the event that all outstanding shares of the Class are converted, automatically or by action of the holders thereof, into common stock pursuant to the provisions of the Company’s Certificate of Incorporation, including, without limitation, in connection with the Company’s initial, underwritten public offering and sale of its common stock pursuant to an effective registration statement under the Act (the “IPO”), then from and after the date on which all outstanding shares of the Class have been so converted, this Warrant shall be exercisable for such number of shares of common stock into which the Shares would have been converted had the Shares been outstanding on the date of such conversion, and the Warrant Price shall equal the Warrant Price in effect as of immediately prior to such conversion divided by the number of shares of common stock into which one Share would have been converted, all subject to further adjustment thereafter from time to time in accordance with the provisions of this Warrant.

2.4 Adjustments for Diluting Issuances. Without duplication of any adjustment otherwise provided for in this Section 2, for so long as this Warrant is exercisable for shares of Preferred Stock, the number of shares of common stock issuable upon conversion of the Shares shall be subject to anti-dilution adjustment from time to time in the manner set forth in the Company’s Articles or Certificate of Incorporation as if the Shares were issued and outstanding on and as of the date of any such required adjustment.

2.5 No Fractional Share. No fractional Share shall be issuable upon exercise of this Warrant and the number of Shares to be issued shall be rounded down to the nearest whole Share. If a fractional Share interest arises upon any exercise of the Warrant, the Company shall eliminate such fractional Share interest by paying Holder in cash the amount computed by multiplying the fractional interest by (i) the fair market value (as determined in accordance with Section 1.3 above) of a full Share, less (ii) the then-effective Warrant Price.

2.6 Notice/Certificate as to Adjustments. Upon each adjustment of the Warrant Price, Class and/or number of Shares, the Company, at the Company’s expense, shall notify Holder in writing within a reasonable time setting forth the adjustments to the Warrant Price, Class and/or number of Shares and facts upon which such adjustment is based. The Company shall, upon written request from Holder, furnish Holder with a certificate of its Chief Financial Officer, including computations of such adjustment and the Warrant Price, Class and number of Shares in effect upon the date of such adjustment.

SECTION 3. REPRESENTATIONS AND COVENANTS OF THE COMPANY.

3.1 Representations and Warranties. The Company represents and warrants to, and agrees with, the Holder as follows:

(a) The initial Warrant Price referenced on the first page of this Warrant is not greater than the price per share at which shares of the Class were last sold and issued prior to the Issue Date hereof in an arms-length transaction in which at least $500,000 of such shares were sold.

(b) All Shares which may be issued upon the exercise of this Warrant, and all securities, if any, issuable upon conversion of the Shares, shall, upon issuance, be duly authorized, validly issued, fully paid and non-assessable, and free of any liens and encumbrances except for restrictions on transfer provided for herein or under applicable federal and state securities laws. The Company covenants that it shall at all times cause to be reserved and kept available out of its authorized and unissued capital stock such number of shares of the Class, common

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stock and other securities as will be sufficient to permit the exercise in full of this Warrant and the conversion of the Shares into common stock or such other securities.

 

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(c) The Company’s capitalization table attached hereto as Schedule 1 is true and complete, in all material respects, as of the Issue Date.

3.2 Notice of Certain Events. If the Company proposes at any time to:

(a) declare any dividend or distribution upon the outstanding shares of the Class or common stock, whether in cash, property, stock, or other securities and whether or not a regular cash dividend;

(b) offer for subscription or sale pro rata to the holders of the outstanding shares of the Class any additional shares of any class or series of the Company’s stock (other than pursuant to contractual pre-emptive rights);

(c) effect any reclassification, exchange, combination, substitution, reorganization or recapitalization of the outstanding shares of the Class;

(d) effect an Acquisition or to liquidate, dissolve or wind up; or

(e) effect an IPO;

then, in connection with each such event, the Company shall give Holder:

(1) at least seven (7) Business Days prior written notice of the date on which a record will be taken for such dividend, distribution, or subscription rights (and specifying the date on which the holders of outstanding shares of the Class will be entitled thereto) or for determining rights to vote, if any, in respect of the matters referred to in (a) and (b) above;

(2) in the case of the matters referred to in (c) and (d) above at least seven (7) Business Days prior written notice of the date when the same will take place (and specifying the date on which the holders of outstanding shares of the Class will be entitled to exchange their shares for the securities or other property deliverable upon the occurrence of such event); and

(3) with respect to the IPO, at least seven (7) Business Days prior written notice of the date on which the Company proposes to file its registration statement in connection therewith.

Reference is made to Section 1.6(c) whereby this Warrant will be deemed to be exercised pursuant to Section 1.2 hereof if the Company does not give written notice to Holder of a Cash/Public Acquisition as required by the terms hereof. Company will also provide information requested by Holder that is reasonably necessary to enable Holder to comply with Holder’s accounting or reporting requirements.

SECTION 4. REPRESENTATIONS, WARRANTIES OF THE HOLDER.

The Holder represents and warrants to the Company as follows:

4.1 Purchase for Own Account. This Warrant and the securities to be acquired upon exercise of this Warrant by Holder are being acquired for investment for Holder’s account, not as a nominee or agent, and not with a view to the public resale or distribution within the meaning of the Act. Holder also represents that it has not been formed for the specific purpose of acquiring this Warrant or the Shares.

4.2 Disclosure of Information. Holder is aware of the Company’s business affairs and financial condition and has received or has had full access to all the information it considers necessary or appropriate to make an informed investment decision with respect to the acquisition of this Warrant and its underlying securities. Holder further has had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the offering of this Warrant and its underlying securities and to obtain additional information (to the extent the Company possessed such information or could acquire it without unreasonable effort or expense) necessary to verify any information furnished to Holder or to which Holder has access.

 

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4.3 Investment Experience. Holder understands that the purchase of this Warrant and its underlying securities involves substantial risk. Holder has experience as an investor in securities of companies in the development stage and acknowledges that Holder can bear the economic risk of such Holder’s investment in this Warrant and its underlying securities and has such knowledge and experience in financial or business matters that Holder is capable of evaluating the merits and risks of its investment in this Warrant and its underlying securities and/or has a preexisting personal or business relationship with the Company and certain of its officers, directors or controlling persons of a nature and duration that enables Holder to be aware of the character, business acumen and financial circumstances of such persons.

4.4 Accredited Investor Status. Holder is an “accredited investor” within the meaning of Regulation D promulgated under the Act.

4.5 The Act. Holder understands that this Warrant and the Shares issuable upon exercise hereof have not been registered under the Act in reliance upon a specific exemption therefrom, which exemption depends upon, among other things, the bona fide nature of the Holder’s investment intent as expressed herein. Holder understands that this Warrant and the Shares issued upon any exercise hereof must be held indefinitely unless subsequently registered under the Act and qualified under applicable state securities laws, or unless exemption from such registration and qualification are otherwise available. Holder is aware of the provisions of Rule 144 promulgated under the Act.

4.6 Market Stand-off Agreement. The Holder agrees that the Shares shall be subject to the Market Standoff provisions in Section 1.12 of the Company’s Amended and Restated Investors’ Rights Agreement, as amended to, and in effect as of, the Issue Date.

4.7 No Voting Rights. Holder, as a Holder of this Warrant, will not have any voting rights until the exercise of this Warrant.

SECTION 5. MISCELLANEOUS.

5.1 Term; Automatic Cashless Exercise Upon Expiration.

(a) Term. Subject to the provisions of Section 1.6 above, this Warrant is exercisable in whole or in part at any time and from time to time on or before 6:00 PM, Eastern time, on the Expiration Date and shall be void thereafter.

(b) Automatic Cashless Exercise upon Expiration. In the event that, upon the Expiration Date, the fair market value of one Share (or other security issuable upon the exercise hereof) as determined in accordance with Section 1.3 above is greater than the Warrant Price in effect on such date, then this Warrant shall automatically be deemed on and as of such date to be exercised pursuant to Section 1.2 above as to all Shares (or such other securities) for which it shall not previously have been exercised, and the Company shall, within a reasonable time, deliver a certificate representing the Shares (or such other securities) issued upon such exercise to Holder.

5.2 Legends. Each certificate evidencing Shares (and each certificate evidencing the securities issued upon conversion of any Shares, if any) shall be imprinted with a legend in substantially the following form:

THE SHARES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR THE SECURITIES LAWS OF ANY STATE AND, EXCEPT AS SET FORTH IN THAT CERTAIN WARRANT TO PURCHASE STOCK ISSUED BY THE ISSUER TO OXFORD FINANCE LLC DATED

 

6

MAY 19, 2015, MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED UNLESS AND UNTIL REGISTERED UNDER SAID ACT AND LAWS OR, IN THE OPINION OF LEGAL COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER, SUCH OFFER, SALE, PLEDGE OR OTHER TRANSFER IS EXEMPT FROM SUCH REGISTRATION.

5.3 Compliance with Securities Laws on Transfer. This Warrant and the Shares issued upon exercise of this Warrant (and the securities issuable, directly or indirectly, upon conversion of the Shares, if any) may not be

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transferred or assigned in whole or in part except in compliance with applicable federal and state securities laws by the transferor and the transferee (including, without limitation, the delivery of investment representation letters and legal opinions reasonably satisfactory to the Company, as reasonably requested by the Company). The Company shall not require Holder to provide an opinion of counsel if the transfer is to an affiliate of Holder, provided that any such transferee is an “accredited investor” as defined in Regulation D promulgated under the Act. Additionally, the Company shall also not require an opinion of counsel if there is no material question as to the availability of Rule 144 promulgated under the Act.

5.4 Transfer Procedure. After receipt by Oxford of the executed Warrant, Oxford may transfer all or part of this Warrant to one or more of Oxford’s affiliates (each, an “Oxford Affiliate”), by execution of an Assignment substantially in the form of Appendix 2. Subject to the provisions of Article 5.3 and upon providing the Company with written notice, Oxford, any such Oxford Affiliate and any subsequent Holder, may transfer all or part of this Warrant or the Shares issuable upon exercise of this Warrant (or the Shares issuable directly or indirectly, upon conversion of the Shares, if any) to any other transferee, provided, however, in connection with any such transfer, the Oxford Affiliate(s) or any subsequent Holder will give the Company notice of the portion of the Warrant being transferred with the name, address and taxpayer identification number of the transferee and Holder will surrender this Warrant to the Company for reissuance to the transferee(s) (and Holder if applicable; and provided further, that any subsequent transferee shall agree in writing with the Company to be bound by all of the terms and conditions of this Warrant. Notwithstanding any contrary provision herein, at all times prior to the IPO, Holder may not, without the Company’s prior written consent, transfer this Warrant or any portion hereof, or any Shares issued upon any exercise hereof, or any shares or other securities issued upon any conversion of any Shares issued upon any exercise hereof, to any person or entity who directly competes with the Company, except in connection with an Acquisition of the Company by such a direct competitor.

5.5 Notices. All notices and other communications hereunder from the Company to the Holder, or vice versa, shall be deemed delivered and effective (i) when given personally, (ii) on the third (3rd) Business Day after being mailed by first-class registered or certified mail, postage prepaid, (iii) upon actual receipt if given by facsimile or electronic mail and such receipt is confirmed in writing by the recipient, or (iv) on the first Business Day following delivery to a reliable overnight courier service, courier fee prepaid, in any case at such address as may have been furnished to the Company or Holder, as the case may be, in writing by the Company or such Holder from time to time in accordance with the provisions of this Section 5.5. All notices to Holder shall be addressed as follows until the Company receives notice of a change of address in connection with a transfer or otherwise:

Oxford Finance LLC

133 N. Fairfax Street

Alexandria, VA 22314

Attn: Legal Department

Telephone: (703) 519-4900

Facsimile: (703) 519-5225

Email: LegalDepartment@oxfordfinance.com

Notice to the Company shall be addressed as follows until Holder receives notice of a change in address:

RESTORATION ROBOTICS, INC.

128 Baytech Drive

San Jose, CA 95134

 

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Attn: Vice President – Finance & Administration

Facsimile: (408) 883-6889

Email: charlotteh@restorationrobotics.com

With a copy (which shall not constitute notice) to:

LATHAM & WATKINS

140 Scott Drive

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Menlo Park, CA 94025

Attn: Brian J. Cuneo

Facsimile: (650) 463-2600

Email: brian.cuneo@lw.com

5.6 Waiver. This Warrant and any term hereof may be changed, waived, discharged or terminated (either generally or in a particular instance and either retroactively or prospectively) only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought.

5.7 Attorneys’ Fees. In the event of any dispute between the parties concerning the terms and provisions of this Warrant, the party prevailing in such dispute shall be entitled to collect from the other party all costs incurred in such dispute, including reasonable attorneys’ fees.

5.8 Counterparts; Facsimile/Electronic Signatures. This Warrant may be executed in counterparts, all of which together shall constitute one and the same agreement. Any signature page delivered electronically or by facsimile shall be binding to the same extent as an original signature page with regards to any agreement subject to the terms hereof or any amendment thereto.

5.9 Governing Law. This Warrant shall be governed by and construed in accordance with the laws of the State of California, without giving effect to its principles regarding conflicts of law.

5.10 Headings. The headings in this Warrant are for purposes of reference only and shall not limit or otherwise affect the meaning of any provision of this Warrant.

5.11 Business Days. “Business Day” is any day that is not a Saturday, Sunday or a day on which Silicon Valley Bank is closed.

[Remainder of page left blank intentionally]

[Signature page follows]

 

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IN WITNESS WHEREOF, the parties have caused this Warrant to Purchase Stock to be executed by their duly authorized representatives effective as of the Issue Date written above.

 

[Signature Page to Warrant to Purchase Stock – Warrant No. 1]

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                            Exhibit 4.10       

 

Execution Version

 

THIS WARRANT AND THE SHARES ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR THE SECURITIES LAWS OF ANY STATE AND, EXCEPT AS SET FORTH IN SECTIONS 5.3 AND 5.4 BELOW, MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED UNLESS AND UNTIL REGISTERED UNDER SAID ACT AND LAWS OR IN FORM AND SUBSTANCE SATISFACTORY TO THE COMPANY, SUCH OFFER, SALE, PLEDGE OR OTHER TRANSFER IS EXEMPT FROM SUCH REGISTRATION.

 

WARRANT TO PURCHASE STOCK

 

 

THIS WARRANT CERTIFIES THAT, for good and valuable consideration, Western Alliance Bank, an Arizona corporation with an office located at 55 S. Almaden Boulevard, San Jose, CA 95113 (together with any successor or permitted assignee or transferee of this Warrant or of any shares issued upon exercise hereof, “Holder”) is entitled to purchase the number of fully paid and non-assessable - (the “Shares”) of the above-stated Type/Series of Stock (the “Class”) of the above-named company (the “Company”) at the above-stated Warrant Price, all as set forth above and as adjusted pursuant to Section 2 of this Warrant, subject to the provisions and upon the terms and conditions set forth in this Warrant.

 

SECTION 1. EXERCISE.

 

1.1 Method of Exercise. Holder may at any time and from time to time exercise this Warrant, in whole or in part, by delivering to the Company the original of this Warrant together with a duly executed Notice of Exercise in substantially the form attached hereto as Appendix 1 and, unless Holder is exercising this Warrant pursuant to a cashless exercise set forth in Section 1.2, a check, wire transfer of same-day funds (to an account designated by the Company), or other form of payment acceptable to the Company for the aggregate Warrant Price for the Shares being purchased.

 

1.2 Cashless Exercise. On any exercise of this Warrant, in lieu of payment of the aggregate Warrant Price in the manner as specified in Section 1.1 above, but otherwise in accordance with the requirements of Section 1.1, Holder may elect to receive Shares equal to the value of this Warrant, or portion hereof as to which this Warrant is being exercised. Thereupon, the Company shall issue to the Holder such number of fully paid and non-assessable Shares as are computed using the following formula:

 

X = Y(A-B)/A

US_ACTIVE-152522405.1-IPSTEWAR 03/27/2020 8:02 PM

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where:

X =the number of Shares to be issued to the Holder;

Y = the number of Shares with respect to which this Warrant is being exercised (inclusive of the Shares surrendered to the Company in payment of the aggregate Warrant Price);

 

A =   the Fair Market Value (as determined pursuant to Section 1.3 below) of   one Share; and

 

B =the Warrant Price.

 

 

 

1.3 Fair Market Value. If the Company’s common stock is then traded or quoted on a nationally recognized securities exchange, inter-dealer quotation system or over-the-counter market (a “Trading Market”), the fair market value of a Share shall be the volume-weighted average closing price of a share of common stock reported for the ten (10) Business Days immediately before the date on which Holder delivers this Warrant together with its Notice of Exercise to the Company. If the Company’s common stock is not traded in a Trading Market, the Board of Directors of the Company shall determine the fair market value of a Share in its reasonable good faith judgment.

 

1.4 Delivery of Certificate and New Warrant. Promptly after Holder exercises this Warrant in the manner set forth in Section 1.1 or 1.2 above, the Company shall deliver to Holder a certificate representing the Shares issued to Holder upon such exercise and, if this Warrant has not been fully exercised and has not expired, a new warrant of like tenor representing the Shares not so acquired.

 

1.5 Replacement of Warrant. On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of loss, theft or destruction, on delivery of an indemnity agreement reasonably satisfactory in form, substance and amount to the Company or, in the case of mutilation, on surrender of this Warrant to the Company for cancellation, the Company shall, within a reasonable time, execute and deliver to Holder, in lieu of this Warrant, a new warrant of like tenor and amount.

 

1.6 Treatment of Warrant Upon Acquisition of Company.

 

(a)Acquisition. For the purpose of this Warrant, “Acquisition” means any  transaction or series of related transactions involving: (i) the sale, lease, exclusive license, or other disposition of all or substantially all of the assets of the Company (ii) any merger or consolidation of the Company into or with another person or entity (other than a merger or consolidation effected exclusively to change the Company’s domicile), or any other corporate reorganization, in which the stockholders of the Company in their capacity as such immediately prior to such merger, consolidation or reorganization, own less than a majority of the Company’s (or the surviving or successor entity’s) outstanding voting power immediately after such merger, consolidation or reorganization; or (iii) any sale or other transfer by the stockholders of the Company of shares representing at least a majority of the Company’s then-total outstanding combined voting power.

 

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(b)Treatment of Warrant at Acquisition. In the event of an Acquisition in which the consideration to be received by the Company’s stockholders consists solely of cash, solely of Marketable Securities or a combination of cash and Marketable Securities (a “Cash/Public Acquisition”), either (i) Holder shall exercise this Warrant pursuant to Section 1.1 and/or 1.2 and such exercise will be deemed effective immediately prior to and contingent upon the consummation of such Acquisition or (ii) if Holder elects not to exercise the Warrant, this Warrant will expire immediately prior to the consummation of such Acquisition.

 

(c)The Company shall provide Holder with written notice of its request relating to the Cash/Public Acquisition (together with such reasonable information as Holder may reasonably require regarding the treatment of this Warrant in connection with such contemplated Cash/Public Acquisition giving rise to such notice), which is to be delivered to Holder not less than five (5) Business Days prior to the closing of the proposed Cash/Public Acquisition. Notwithstanding the foregoing, if, immediately prior to the Cash/Public Acquisition, the fair market value of one Share (or other security issuable upon the exercise hereof) as determined in accordance with Section 1.3 above would be greater than the Warrant Price in effect on such date, then this Warrant shall automatically be deemed on and as of such date to be exercised pursuant to Section 1.2 above as to all Shares (or such other securities) for which it shall not previously have been exercised, and the Company shall promptly notify the Holder of the number of Shares (or such other securities) issued upon such exercise to the Holder.

 

 

 

(d)Upon the closing of any Acquisition other than a Cash/Public Acquisition defined above, the acquiring, surviving or successor entity shall assume the obligations of this Warrant, and this Warrant shall thereafter be exercisable for the same securities and/or other property as would have been paid for the Shares issuable upon exercise of the unexercised portion of this Warrant as if such Shares were outstanding on and as of the closing of such Acquisition, subject to further adjustment from time to time in accordance with the provisions of this Warrant.

 

(e)As used in this Warrant, “Marketable Securities” means securities meeting all of the following requirements: (i) the issuer thereof is then subject to the reporting requirements of Section 13 or Section 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and is then current in its filing of all required reports and other information under the Act and the Exchange Act; (ii) the class and series of shares or other security of the issuer that would be received by Holder in connection with the Acquisition were Holder to exercise this Warrant on or prior to the closing thereof is then traded in Trading Market, and (iii) Holder would be able to publicly re-sell, within six (6) months following the closing of such Acquisition, all of the issuer’s shares and/or other securities that would be received by Holder in such Acquisition were Holder to exercise this Warrant in full on or prior to the closing of such Acquisition.

 

1.7 Registration Rights. As to any Shares Holder receives or is entitled to receive upon any exercise or conversion of this Warrant, Holder shall be entitled to such demand registration rights and such piggyback registration rights as are commensurate with such registration rights are set forth in that certain Investors’ Rights Agreement, dated as of February 7, 2013 by and among the Company and certain of the Company’s stockholders, as the same may be amended from time to time, or similar agreement (the “Investors’ Rights Agreement”).

 

SECTION 2. ADJUSTMENTS TO THE SHARES AND WARRANT PRICE.

 

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2.1 Stock Dividends, Splits, Etc. If the Company declares or pays a dividend or distribution on the outstanding shares of the Class payable in common stock or other securities or property (other than cash), then upon exercise of this Warrant, for each Share acquired, Holder shall receive, without additional cost to Holder, the total number and kind of securities and property which Holder would have received had Holder owned the Shares of record as of the date the dividend or distribution occurred. If the Company subdivides the outstanding shares of the Class by reclassification or otherwise into a greater number of shares, the number of Shares purchasable hereunder shall be proportionately increased and the Warrant Price shall be proportionately decreased. If the outstanding shares of the Class are combined or consolidated, by reclassification or otherwise, into a lesser number of shares, the Warrant Price shall be proportionately increased and the number of Shares shall be proportionately decreased.

 

2.2 Reclassification, Exchange, Combinations or Substitution. Upon any event whereby all of the outstanding shares of the Class are reclassified, exchanged, combined, substituted, or replaced for, into, with or by Company securities of a different class and/or series, then from and after the consummation of such event, this Warrant will be exercisable for the number, class and series of Company securities that Holder would have received had the Shares been outstanding on and as of the consummation of such event, and subject to further adjustment thereafter from time to time in accordance with the provisions of this Warrant. The provisions of this Section 2.2 shall similarly apply to successive reclassifications, exchanges, combinations substitutions, replacements or other similar events.

 

2.3 No Fractional Share. No fractional Share shall be issuable upon exercise of this Warrant and the number of Shares to be issued shall be rounded down to the nearest whole Share. If a fractional Share interest arises upon any exercise of the Warrant, the Company shall eliminate such fractional Share interest by paying Holder in cash the amount computed by multiplying the fractional interest by (i) the fair market value (as determined in accordance with Section 1.3 above) of a full Share, less (ii) the then-effective Warrant Price.

 

2.4 Notice/Certificate as to Adjustments. Upon each adjustment of the Warrant Price, Class and/or number of Shares, the Company, at the Company’s expense, shall notify Holder in writing within a reasonable time setting forth the adjustments to the Warrant Price, Class and/or number of Shares and facts upon which such adjustment is based. The Company shall, upon written request from Holder, furnish Holder with a certificate of its Chief Financial Officer, including computations of such adjustment and the Warrant Price, Class and number of Shares in effect upon the date of such adjustment.

 

 

 

SECTION 3. REPRESENTATIONS AND COVENANTS OF THE COMPANY.

 

3.1 Representations and Warranties. The Company represents and warrants to, and agrees with, the Holder as follows:

 

(a)The initial Warrant Price referenced on the first page of this Warrant is equal to the lesser of (a) the ten (10) day trailing average of the Company’s common stock price, as determined as of the close of business on the business day immediately prior to the Issue Date, and (b) the Company’s common stock price, as determined as of the close of business on the business day immediately prior to the Issue Date.

 

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(b)All Shares which may be issued upon the exercise of this Warrant, shall, upon issuance, be duly authorized, validly issued, fully paid and non-assessable, and free of any liens and encumbrances except for restrictions on transfer provided for herein or under applicable federal and state securities laws. The Company covenants that it shall at all times cause to be reserved and kept available out of its authorized and unissued capital stock such number of shares of the Class, common stock and other securities as will be sufficient to permit the exercise in full of this Warrant.

 

3.2 Notice of Certain Events. If the Company proposes at any time to:

 

(a)declare any dividend or distribution upon the outstanding shares of the Class or common stock, whether in cash, property, stock, or other securities and whether or not a regular cash dividend;

 

(c)effect any reclassification, exchange, combination, substitution, reorganization or recapitalization of the outstanding shares of the Class; or

 

(d)effect an Acquisition or to liquidate, dissolve or wind up. then, in connection with each such event, the Company shall give Holder:

(1)at least five (5) Business Days prior written notice of the date on which a record will be taken for such dividend, distribution, or subscription rights (and specifying the date on which the holders of outstanding shares of the Class will be entitled thereto) or for determining rights to vote, if any, in respect of the matters referred to in (a) and (b) above; and

 

(2)in the case of the matters referred to in (c) and (d) above at least five (5) Business Days prior written notice of the date when the same will take place (and specifying the date on which the holders of outstanding shares of the Class will be entitled to exchange their shares for the securities or other property deliverable upon the occurrence of such event).

 

Reference is made to Section 1.6(c) whereby this Warrant will be deemed to be exercised pursuant to Section 1.2 hereof if the Company does not give written notice to Holder of a Cash/Public Acquisition as required by the terms hereof. Company will also provide information requested by Holder that is reasonably necessary to enable Holder to comply with Holder’s accounting or reporting requirements.

 

SECTION 4. REPRESENTATIONS, WARRANTIES OF THE HOLDER.

 

The Holder represents and warrants to the Company as follows:

 

4.1 Purchase for Own Account. This Warrant and the securities to be acquired upon exercise of this Warrant by Holder are being acquired for investment for Holder’s account, not as a nominee or agent, and not with a view to the public resale or distribution within the meaning of the Act. Holder also represents that it has not been formed for the specific purpose of acquiring this Warrant or the Shares.

 

 

 

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4.2 Disclosure of Information. Holder is aware of the Company’s business affairs and financial condition and has received or has had full access to all the information it considers necessary or appropriate to make an informed investment decision with respect to the acquisition of this Warrant and its underlying securities. Holder further has had an opportunity to ask questions and  receive answers from the Company regarding the terms and conditions of the offering of this Warrant and its underlying securities and to obtain additional information (to the extent the Company possessed such information or could acquire it without unreasonable effort or expense) necessary to verify any information furnished to Holder or to which Holder has access.

 

4.3 Investment Experience. Holder understands that the purchase of this Warrant and its underlying securities involves substantial risk. Holder has experience as an investor in securities of companies in the development stage and acknowledges that Holder can bear the economic risk of such Holder’s investment in this Warrant and its underlying securities and has such knowledge and experience in financial or business matters that Holder is capable of evaluating the merits and risks of its investment in this Warrant and its underlying securities and/or has a preexisting personal or business relationship with the Company and certain of its officers, directors or controlling persons of a nature and duration that enables Holder to be aware of the character, business acumen and financial circumstances of such persons.

 

4.4 Accredited Investor Status. Holder is an “accredited investor” within the meaning of Regulation D promulgated under the Act.

 

4.5 The Act. Holder understands that this Warrant and the Shares issuable upon exercise hereof have not been registered under the Act in reliance upon a specific exemption therefrom, which exemption depends upon, among other things, the bona fide nature of the Holder’s investment intent as expressed herein. Holder understands that this Warrant and the Shares issued upon any exercise hereof must be held indefinitely unless subsequently registered under the Act and qualified under applicable state securities laws, or unless exemption from such registration and qualification are otherwise available. Holder is aware of the provisions of Rule 144 promulgated under the Act.

 

4.6 Reserved.

 

4.7 No Voting Rights. Holder, as a Holder of this Warrant, will not have any voting rights until the exercise of this Warrant.

 

SECTION 5. MISCELLANEOUS.

 

5.1 Term and Automatic Conversion Upon Expiration.

 

(a)Term. Subject to the provisions of Section 1.6 above, this Warrant is exercisable in whole or in part at any time and from time to time on or before 6:00 PM, Pacific time, on the Expiration Date and shall be void thereafter.

 

(b)Automatic Cashless Exercise upon Expiration. In the event that, upon the Expiration Date, the fair market value of one Share (or other security issuable upon the exercise hereof) as determined in accordance with Section 1.3 above is greater than the Warrant Price in effect on such date, then this Warrant shall automatically be deemed on and as of such date to be exercised pursuant to Section 1.2 above as to all Shares (or such other securities) for which it shall not previously have been exercised, and the Company shall, within a reasonable time, deliver a certificate representing the Shares (or such other securities) issued upon such exercise to Holder.

 

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5.2 Legends. The Shares shall be imprinted with a legend in substantially the following form:

 

THE SHARES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR THE SECURITIES LAWS OF ANY STATE AND, EXCEPT AS SET FORTH IN THAT CERTAIN WARRANT TO PURCHASE STOCK ISSUED BY THE ISSUER TO WESTERN ALLIANCE BANK DATED

 

 

NOVEMBER 2, 2018, MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED UNLESS AND UNTIL REGISTERED UNDER SAID ACT AND LAWS OR IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER, SUCH OFFER, SALE, PLEDGE OR OTHER TRANSFER IS EXEMPT FROM SUCH REGISTRATION.

 

5.3 Compliance with Securities Laws on Transfer. This Warrant and the Shares issuable upon exercise of this Warrant may not be transferred or assigned in whole or in part except in compliance with applicable federal and state securities laws by the transferor and the transferee (including, without limitation, the delivery of investment representation letters and legal opinions reasonably satisfactory to the Company, as reasonably requested by the Company). The Company shall not require Holder to provide an opinion of counsel if the transfer is to Holder’s parent company, Western Alliance Bancorporation, or any affiliate of Holder, provided that any such transferee is an “accredited investor” as defined in Regulation D promulgated under the Act. Additionally, the Company shall also not require an opinion of counsel if there is no material question as to the availability of Rule 144 promulgated under the Act.

 

5.4 Transfer Procedure. After receipt by Holder of the executed Warrant, Holder may transfer all of this Warrant to Holder’s parent company, Western Alliance Bancorporation, or an affiliate thereof or successor thereto (the “Subsequent Holder”), by execution of an Assignment substantially in the form of Appendix 2. Subject to the provisions of Section 5.3 and upon providing the Company with written notice, Subsequent Holder may transfer all or part of this Warrant or the Shares issuable upon exercise of this Warrant to any transferee, provided, however, in connection with any such transfer, the Subsequent Holder will give the Company notice of the portion of the Warrant being transferred with the name, address and taxpayer identification number of the transferee and Holder will surrender this Warrant to the Company for reissuance to the transferee(s) (and Holder if applicable); and provided further, that any subsequent transferee shall agree in writing with the Company to be bound by all of the terms and conditions of this Warrant.

 

5.5 Notices. All notices and other communications hereunder from the Company to the Holder, or vice versa, shall be deemed delivered and effective (i) when given personally, (ii) on the third (3rd) Business Day after being mailed by first-class registered or certified mail, postage prepaid, (iii) upon actual receipt if given by facsimile or electronic mail and such receipt is confirmed in writing by the recipient, or (iv) on the first Business Day following delivery to a reliable overnight courier service, courier fee prepaid, in any case at such address as may have been furnished to the Company or Holder, as the case may be, in writing by the Company or such Holder from time to time in accordance with the provisions of this Section 5.5. All notices to Holder shall be addressed as follows until the Company receives notice of a change of address in connection with a transfer or otherwise:

 

Western Alliance Bank

55 S. Almaden Boulevard

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San Jose, CA 95113

Attn: Robert Lake

 

Email: rob.lake@bridgebank.com

Notice to the Company shall be addressed as follows until Holder receives notice of a change in address:

 

Restoration Robotics, Inc. 128 Baytech Drive

San Jose, CA

Attn: Chief Financial Officer

Email: markh@restorationrobotics.com

 

With a copy (which shall not constitute notice) to:

 

Latham & Watkins LLP 140 Scott Drive

Menlo Park, CA 94025 Attn: Brian J. Cuneo

Email: Brian.Cuneo@lw.com

 

 

 

5.6 Waiver. This Warrant and any term hereof may be changed, waived, discharged or terminated (either generally or in a particular instance and either retroactively or prospectively) only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought.

 

5.7 Attorney’s Fees. In the event of any dispute between the parties concerning the terms and provisions of this Warrant, the party prevailing in such dispute shall be entitled to collect from the other party all costs incurred in such dispute, including reasonable attorneys’ fees.

 

5.8  Counterparts; Facsimile/Electronic Signatures. This Warrant may be executed in counterparts, all of which together shall constitute one and the same agreement. Any signature page delivered electronically or by facsimile shall be binding to the same extent as an original signature page with regards to any agreement subject to the terms hereof or any amendment thereto.

 

5.9 Governing Law. This Warrant shall be governed by and construed in accordance with the laws of the State of New York, without giving effect to its principles regarding conflicts of law.

 

5.10 Headings. The headings in this Warrant are for purposes of reference only and shall not limit or otherwise affect the meaning of any provision of this Warrant.

 

5.11 Business Days. “Business Day” is any day that is not a Saturday, Sunday or a day on which banks in New York, New York are closed.

 

[Signature page follows]

 

 

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IN WITNESS WHEREOF, the parties have caused this Warrant to Purchase Stock to be executed by their duly authorized representatives effective as of the Issue Date written above.

 

 

 

 

 

 

 

 

 

 

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   Exhibit 4.11

WARRANT TO PURCHASE STOCK

 

 

 

THIS WARRANT CERTIFIES THAT, for good and valuable consideration, SUNS SPV LLC, a Delaware limited liability company with an office located at 500 Park Avenue, 3rd Floor, New York, NY 10022 (together with any successor or permitted assignee or transferee of this Warrant or of any shares issued upon exercise hereof, “Holder”) is entitled to purchase the number of fully paid and non- assessable - (the “Shares”) of the above-stated Type/Series of Stock (the “Class”) of the above-named company (the “Company”) at the above-stated Warrant Price, all as set forth above and as adjusted pursuant to Section 2 of this Warrant, subject to the provisions and upon the terms and conditions set forth in this Warrant.

 

SECTION 1. EXERCISE.

 

1.1 Method of Exercise. Holder may at any time and from time to time exercise this Warrant, in whole or in part, by delivering to the Company the original of this Warrant together with a duly executed Notice of Exercise in substantially the form attached hereto as Appendix 1 and, unless Holder is exercising this Warrant pursuant to a cashless exercise set forth in Section 1.2, a check, wire transfer of same-day funds (to an account designated by the Company), or other form of payment acceptable to the Company for the aggregate Warrant Price for the Shares being purchased.

 

1.2 Cashless Exercise. On any exercise of this Warrant, in lieu of payment of the aggregate Warrant Price in the manner as specified in Section 1.1 above, but otherwise in accordance with the requirements of Section 1.1, Holder may elect to receive Shares equal to the value of this Warrant, or portion hereof as to which this Warrant is being exercised. Thereupon, the Company shall issue to the Holder such number of fully paid and non-assessable Shares as are computed using the following formula:

 

X = Y(A-B)/A

 

where:

X = the number of Shares to be issued to the Holder;

Y = the number of Shares with respect to which this Warrant is being exercised (inclusive of the Shares surrendered to the Company in payment of the aggregate Warrant Price);

 

A =   the Fair Market Value (as determined pursuant to Section 1.3 below) of   one Share; and

 

US_ACTIVE-152522531.1-IPSTEWAR 03/27/2020 8:03 PM

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B = the Warrant Price.

 

 

 

 

1.3 Fair Market Value. If the Company’s common stock is then traded or quoted on a nationally recognized securities exchange, inter-dealer quotation system or over-the-counter market (a “Trading Market”), the fair market value of a Share shall be the volume-weighted average closing price of a share of common stock reported for the ten (10) Business Days immediately before the date on which Holder delivers this Warrant together with its Notice of Exercise to the Company. If the Company’s common stock is not traded in a Trading Market, the Board of Directors of the Company shall determine the fair market value of a Share in its reasonable good faith judgment.

 

1.4 Delivery of Certificate and New Warrant. Promptly after Holder exercises this Warrant in the manner set forth in Section 1.1 or 1.2 above, the Company shall deliver to Holder a certificate representing the Shares issued to Holder upon such exercise and, if this Warrant has not been fully exercised and has not expired, a new warrant of like tenor representing the Shares not so acquired.

 

1.5 Replacement of Warrant. On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of loss, theft or destruction, on delivery of an indemnity agreement reasonably satisfactory in form, substance and amount to the Company or, in the case of mutilation, on surrender of this Warrant to the Company for cancellation, the Company shall, within a reasonable time, execute and deliver to Holder, in lieu of this Warrant, a new warrant of like tenor and amount.

 

1.6 Treatment of Warrant Upon Acquisition of Company.

 

(a)Acquisition. For the purpose of this Warrant, “Acquisition” means any  transaction or series of related transactions involving: (i) the sale, lease, exclusive license, or other disposition of all or substantially all of the assets of the Company (ii) any merger or consolidation of the Company into or with another person or entity (other than a merger or consolidation effected exclusively to change the Company’s domicile), or any other corporate reorganization, in which the stockholders of the Company in their capacity as such immediately prior to such merger, consolidation or reorganization, own less than a majority of the Company’s (or the surviving or successor entity’s) outstanding voting power immediately after such merger, consolidation or reorganization; or (iii) any sale or other transfer by the stockholders of the Company of shares representing at least a majority of the Company’s then-total outstanding combined voting power.

 

(b) Treatment of Warrant at Acquisition. In the event of an Acquisition in which the consideration to be received by the Company’s stockholders consists solely of cash, solely of Marketable Securities or a combination of cash and Marketable Securities (a “Cash/Public Acquisition”), either (i) Holder shall exercise this Warrant pursuant to Section 1.1 and/or 1.2 and such exercise will be deemed effective immediately prior to and contingent upon the consummation of such Acquisition or (ii) if Holder elects not to exercise the Warrant, this Warrant will expire immediately prior to the consummation of such Acquisition.

 

(c) The Company shall provide Holder with written notice of its request relating to the Cash/Public Acquisition (together with such reasonable information as Holder may reasonably require regarding the treatment of this Warrant in connection with such contemplated

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Cash/Public Acquisition giving rise to such notice), which is to be delivered to Holder not less than five (5) Business Days prior to the closing of the proposed Cash/Public Acquisition. Notwithstanding the foregoing, if, immediately prior to the Cash/Public Acquisition, the fair market value of one Share (or other security issuable upon the exercise hereof) as determined in accordance with Section 1.3 above would be greater than the Warrant Price in effect on such date, then this Warrant shall automatically be deemed on and as of such date to be exercised pursuant to Section 1.2 above as to all Shares (or such other securities) for which it shall not previously have been exercised, and the Company shall promptly notify the Holder of the number of Shares (or such other securities) issued upon such exercise to the Holder.

 

(d) Upon the closing of any Acquisition other than a Cash/Public Acquisition defined above, the acquiring, surviving or successor entity shall assume the obligations of this Warrant, and this Warrant shall thereafter be exercisable for the same securities and/or other property as would have been paid for the Shares issuable upon exercise of the unexercised portion of this Warrant as if such Shares were outstanding on and as of the closing of such Acquisition, subject to further adjustment from time to time in accordance with the provisions of this Warrant.

 

(e) As used in this Warrant, “Marketable Securities” means securities meeting all of the following requirements: (i) the issuer thereof is then subject to the reporting requirements of Section 13 or Section 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and is then current in its filing of all

 

 

required reports and other information under the Act and the Exchange Act; (ii) the class and series of shares or other security of the issuer that would be received by Holder in connection with the Acquisition were Holder to exercise this Warrant on or prior to the closing thereof is then traded in Trading Market, and (iii) Holder would be able to publicly re-sell, within six (6) months following the closing of such Acquisition, all of the issuer’s shares and/or other securities that would be received by Holder in such Acquisition were Holder to exercise this Warrant in full on or prior to the closing of such Acquisition.

 

1.7 Registration Rights. As to any Shares Holder receives or is entitled to receive upon any exercise or conversion of this Warrant, Holder shall be entitled to such demand registration rights and such piggyback registration rights as are commensurate with such registration rights are set forth in that certain Investors’ Rights Agreement, dated as of February 7, 2013 by and among the Company and certain of the Company’s stockholders, as the same may be amended from time to time, or similar agreement (the “Investors’ Rights Agreement”).

 

SECTION 2. ADJUSTMENTS TO THE SHARES AND WARRANT PRICE.

 

2.1 Stock Dividends, Splits, Etc. If the Company declares or pays a dividend or distribution on the outstanding shares of the Class payable in common stock or other securities or property (other than cash), then upon exercise of this Warrant, for each Share acquired, Holder shall receive, without additional cost to Holder, the total number and kind of securities and property which Holder would have received had Holder owned the Shares of record as of the date the dividend or distribution occurred. If the Company subdivides the outstanding shares of the Class by reclassification or otherwise into a greater number of shares, the number of Shares purchasable hereunder shall be proportionately increased and the Warrant Price shall be proportionately decreased. If the outstanding shares of the Class are combined or consolidated, by reclassification or otherwise, into a lesser number of shares, the Warrant Price shall be proportionately increased and the number of Shares shall be proportionately decreased.

 

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2.2 Reclassification, Exchange, Combinations or Substitution. Upon any event whereby all of the outstanding shares of the Class are reclassified, exchanged, combined, substituted, or replaced for, into, with or by Company securities of a different class and/or series, then from and after the consummation of such event, this Warrant will be exercisable for the number, class and series of Company securities that Holder would have received had the Shares been outstanding on and as of the consummation of such event, and subject to further adjustment thereafter from time to time in accordance with the provisions of this Warrant. The provisions of this Section 2.2 shall similarly apply to successive reclassifications, exchanges, combinations substitutions, replacements or other similar events.

 

2.3 No Fractional Share. No fractional Share shall be issuable upon exercise of this Warrant and the number of Shares to be issued shall be rounded down to the nearest whole Share. If a fractional Share interest arises upon any exercise of the Warrant, the Company shall eliminate such fractional Share interest by paying Holder in cash the amount computed by multiplying the fractional interest by (i) the fair market value (as determined in accordance with Section 1.3 above) of a full Share, less (ii) the then-effective Warrant Price.

 

2.4 Notice/Certificate as to Adjustments. Upon each adjustment of the Warrant Price, Class and/or number of Shares, the Company, at the Company’s expense, shall notify Holder in writing within a reasonable time setting forth the adjustments to the Warrant Price, Class and/or number of Shares and facts upon which such adjustment is based. The Company shall, upon written request from Holder, furnish Holder with a certificate of its Chief Financial Officer, including computations of such adjustment and the Warrant Price, Class and number of Shares in effect upon the date of such adjustment.

 

 

 

SECTION 3. REPRESENTATIONS AND COVENANTS OF THE COMPANY.

 

3.1 Representations and Warranties. The Company represents and warrants to, and agrees with, the Holder as follows:

 

(a)The initial Warrant Price referenced on the first page of this Warrant is equal to the lesser of (a) the ten (10) day trailing average of the Company’s common stock price, as determined as of the close of business on the business day immediately prior to the Issue Date, and (b) the Company’s common stock price, as determined as of the close of business on the business day immediately prior to the Issue Date.

 

(b)All Shares which may be issued upon the exercise of this Warrant, shall, upon issuance, be duly authorized, validly issued, fully paid and non-assessable, and free of any liens and encumbrances except for restrictions on transfer provided for herein or under applicable federal and state securities laws. The Company covenants that it shall at all times cause to be reserved and kept available out of its authorized and unissued capital stock such number of shares of the Class, common stock and other securities as will be sufficient to permit the exercise in full of this Warrant.

 

3.2 Notice of Certain Events. If the Company proposes at any time to:

(a) declare any dividend or distribution upon the outstanding shares of the Class or common stock, whether in cash, property, stock or other securities and whether or not a regular cash dividend;

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(c) effect any reclassification, exchange, combination, substitution, reorganization or recapitalization of the outstanding shares of the Class; or

 

(d) effect an Acquisition or to liquidate, dissolve or wind up. then, in connection with each such event, the Company shall give Holder:

 

(1) at least five (5) Business Days prior written notice of the date on which a record will be taken for such dividend, distribution, or subscription rights (and specifying the date on which the holders of outstanding shares of the Class will be entitled thereto) or for determining rights to vote, if any, in respect of the matters referred to in (a) and (b) above; and

 

(2)in the case of the matters referred to in (c) and (d) above at least five (5) Business Days prior written notice of the date when the same will take place (and specifying the date on which the holders of outstanding shares of the Class will be entitled to exchange their shares for the securities or other property deliverable upon the occurrence of such event).

 

Reference is made to Section 1.6(c) whereby this Warrant will be deemed to be exercised pursuant to Section 1.2 hereof if the Company does not give written notice to Holder of a Cash/Public Acquisition as required by the terms hereof. Company will also provide information requested by Holder that is reasonably necessary to enable Holder to comply with Holder’s accounting or reporting requirements.

 

SECTION 4. REPRESENTATIONS, WARRANTIES OF THE HOLDER.

 

The Holder represents and warrants to the Company as follows:

 

4.1 Purchase for Own Account. This Warrant and the securities to be acquired upon exercise of this Warrant by Holder are being acquired for investment for Holder’s account, not as a nominee or agent, and not with a view to the public resale or distribution within the meaning of the Act. Holder also represents that it has not been formed for the specific purpose of acquiring this Warrant or the Shares.

 

 

 

4.2 Disclosure of Information. Holder is aware of the Company’s business affairs and financial condition and has received or has had full access to all the information it considers necessary or appropriate to make an informed investment decision with respect to the acquisition of this Warrant and its underlying securities. Holder further has had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the offering of this Warrant and its underlying securities and to obtain additional information (to the extent the Company possessed such information or could acquire it without unreasonable effort or expense) necessary to verify any information furnished to Holder or to which Holder has access.

 

4.3 Investment Experience. Holder understands that the purchase of this Warrant and its underlying securities involves substantial risk. Holder has experience as an investor in securities of companies in the development stage and acknowledges that Holder can bear the economic risk of such Holder’s investment in this Warrant and its underlying securities and has such knowledge and experience

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in financial or business matters that Holder is capable of evaluating the merits and risks of its investment in this Warrant and its underlying securities and/or has a preexisting personal or business relationship with the Company and certain of its officers, directors or controlling persons of a nature and duration that enables Holder to be aware of the character, business acumen and financial circumstances of such persons.

 

4.4 Accredited Investor Status. Holder is an “accredited investor” within the meaning of Regulation D promulgated under the Act.

 

4.5 The Act. Holder understands that this Warrant and the Shares issuable upon exercise hereof have not been registered under the Act in reliance upon a specific exemption therefrom, which exemption depends upon, among other things, the bona fide nature of the Holder’s investment intent as expressed herein. Holder understands that this Warrant and the Shares issued upon any exercise hereof must be held indefinitely unless subsequently registered under the Act and qualified under applicable state securities laws, or unless exemption from such registration and qualification are otherwise available. Holder is aware of the provisions of Rule 144 promulgated under the Act.

 

4.6 Reserved.

 

4.7 No Voting Rights. Holder, as a Holder of this Warrant, will not have any voting rights until the exercise of this Warrant.

 

SECTION 5. MISCELLANEOUS.

 

5.1 Term and Automatic Conversion Upon Expiration.

 

(a)Term. Subject to the provisions of Section 1.6 above, this Warrant is exercisable in whole or in part at any time and from time to time on or before 6:00 PM, Pacific time, on the Expiration Date and shall be void thereafter.

 

(b)Automatic Cashless Exercise upon Expiration. In the event that, upon the Expiration Date, the fair market value of one Share (or other security issuable upon the exercise hereof) as determined in accordance with Section 1.3 above is greater than the Warrant Price in effect on such date, then this Warrant shall automatically be deemed on and as of such date to be exercised pursuant to Section 1.2 above as to all Shares (or such other securities) for which it shall not previously have been exercised, and the Company shall, within a reasonable time, deliver a certificate representing the Shares (or such other securities) issued upon such exercise to Holder.

 

5.2 Legends. The Shares shall be imprinted with a legend in substantially the following form:

 

THE SHARES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR THE SECURITIES LAWS OF ANY STATE AND, EXCEPT AS SET FORTH IN THAT CERTAIN WARRANT TO PURCHASE STOCK ISSUED BY THE ISSUER TO SUNS SPV LLC DATED NOVEMBER 2, 2018, MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED UNLESS AND UNTIL REGISTERED UNDER SAID ACT AND LAWS OR IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER, SUCH OFFER, SALE, PLEDGE OR OTHER TRANSFER IS EXEMPT FROM SUCH REGISTRATION.

 

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5.3 Compliance with Securities Laws on Transfer. This Warrant and the Shares issuable upon exercise of this Warrant may not be transferred or assigned in whole or in part except in compliance with applicable federal and state securities laws by the transferor and the transferee (including, without limitation, the delivery of investment representation letters and legal opinions reasonably satisfactory to the Company, as reasonably requested by the Company). The Company shall not require Holder to provide an opinion of counsel if the transfer is to any entity under common management control with Holder, or any affiliate of Holder, provided that any such transferee is an “accredited investor” as defined in Regulation D promulgated under the Act. Additionally, the Company shall also not require an opinion of counsel if there is no material question as to the availability of Rule 144 promulgated under the Act.

 

5.4 Transfer Procedure. After receipt by Holder of the executed Warrant, Holder may transfer all of this Warrant to any entity under common management control with Holder, or an affiliate thereof or successor thereto (the “Subsequent Holder”), by execution of an Assignment substantially in the form of Appendix 2. Subject to the provisions of Section 5.3 and upon providing the Company with written notice, Subsequent Holder may transfer all or part of this Warrant or the Shares issuable upon exercise of this Warrant to any transferee, provided, however, in connection with any such transfer, the Subsequent Holder will give the Company notice of the portion of the Warrant being transferred with the name, address and taxpayer identification number of the transferee and Holder will surrender this Warrant to the Company for reissuance to the transferee(s) (and Holder if applicable); and provided further, that any subsequent transferee shall agree in writing with the Company to be bound by all of the terms and conditions of this Warrant.

 

5.5 Notices. All notices and other communications hereunder from the Company to the Holder, or vice versa, shall be deemed delivered and effective (i) when given personally, (ii) on the third (3rd) Business Day after being mailed by first-class registered or certified mail, postage prepaid, (iii) upon actual receipt if given by facsimile or electronic mail and such receipt is confirmed in writing by the recipient, or (iv) on the first Business Day following delivery to a reliable overnight courier service, courier fee prepaid, in any case at such address as may have been furnished to the Company or Holder, as the case may be, in writing by the Company or such Holder from time to time in accordance with the provisions of this Section 5.5. All notices to Holder shall be addressed as follows until the Company receives notice of a change of address in connection with a transfer or otherwise:

 

SUNS SPV LLC

c/o Solar Capital Ltd.

500 Park Avenue, 3rd Floor

New York, NY 10022

Attn: Anthony Storino Telephone: (646) 308 - 8730

Fax: (212) 993-1698

Email: storino@solarcapltd.com

With a copy (which shall not constitute notice) to:

 

Baker Botts L.L.P.

101 California Street, Suite 3600 San Francisco, CA 94111

Attn: Jeff Kayes Fax: (415) 291-6331

Email: jeff.kayes@bakerbotts.com

 

Notice to the Company shall be addressed as follows until Holder receives notice of a change in address:

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Restoration Robotics, Inc. 128 Baytech Drive

San Jose, CA

Attn: Chief Financial Officer

Email: markh@restorationrobotics.com

 

With a copy (which shall not constitute notice) to:

 

Latham & Watkins LLP 140 Scott Drive

Menlo Park, CA 94025 Attn: Brian J. Cuneo

Email: Brian.Cuneo@lw.com

 

 

 

5.6 Waiver. This Warrant and any term hereof may be changed, waived, discharged or terminated (either generally or in a particular instance and either retroactively or prospectively) only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought.

 

5.7 Attorney’s Fees. In the event of any dispute between the parties concerning the terms and provisions of this Warrant, the party prevailing in such dispute shall be entitled to collect from the other party all costs incurred in such dispute, including reasonable attorneys’ fees.

 

5.8 Counterparts; Facsimile/Electronic Signatures. This Warrant may be executed in counterparts, all of which together shall constitute one and the same agreement. Any signature page delivered electronically or by facsimile shall be binding to the same extent as an original signature page with regards to any agreement subject to the terms hereof or any amendment thereto.

 

5.9 Governing Law. This Warrant shall be governed by and construed in accordance with the laws of the State of New York, without giving effect to its principles regarding conflicts of law.

 

5.10 Headings. The headings in this Warrant are for purposes of reference only and shall not limit or otherwise affect the meaning of any provision of this Warrant.

 

5.11 Business Days. “Business Day” is any day that is not a Saturday, Sunday or a day on which banks in New York, New York are closed.

 

[Signature page follows]

 

 

 

IN WITNESS WHEREOF, the parties have caused this Warrant to Purchase Stock to be executed by their duly authorized representatives effective as of the Issue Date written above.

 

 

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Exhibit 4.12

SECURITIES PURCHASE AGREEMENT

SECURITIES PURCHASE AGREEMENT (the “Agreement”), dated as of March 18, 2020, by and among Venus Concept Inc., a Delaware corporation (the “Company”), and the investors listed on the Schedule of Buyers attached hereto as Exhibit A and any additional investor that becomes party to this Agreement in accordance with Section 1(c) hereof (individually, a “Buyer” and collectively, the “Buyers”).

WHEREAS:

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NOW, THEREFORE, in consideration of the mutual promises made herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and each Buyer hereby agree as follows:

1.PURCHASE AND SALE OF THE SECURITIES

(a)Purchase of the Securities. Subject to the satisfaction (or waiver) of the conditions set forth in Sections 6 and 7 below, the Company shall issue and sell to each Buyer, and each Buyer severally, but not jointly, shall purchase from the Company on the Closing Date (as defined below): (i) in the case of Common Units, the number of Common Shares as is set forth opposite such Buyer’s name in column (4) on the Schedule of Buyers, together with Warrants to acquire up to that number of Warrant Shares as is set forth opposite such Buyer’s name in column (6) on the Schedule of Buyers; provided, however, that (A) no fractional number of Common Shares shall be sold hereunder, (B) any fractional number of Common Shares shall be rounded down to the nearest whole number of Common Shares, and (C) the Common Share Purchase Price will be reduced by the value of any fractional share, and (ii) in the case of Preferred Units, the number of Preferred Shares as is set forth opposite such Buyer’s name in column (5) on the Schedule of Buyers, together with Warrants to acquire up to that number of Warrant Shares as is set forth opposite such Buyer’s name in column (6) on the Schedule of Buyers; provided, however, that (A) no fractional number of Conversion Shares shall be sold hereunder and (B) any fractional number of Conversion Shares shall be paid in cash equal to such fraction multiplied by the fair market value of a share of Common Stock as determined in good faith by the Board of Directors of the Company (the “Closing”).

(i)Closing. The date and time of the Closing (the “Closing Date”) shall be 9:00 a.m., New York City time, on or before March 20, 2020 (or such later date and time as is mutually agreed to by the Company and each Buyer) after notification of satisfaction (or waiver) of the conditions to the Closing set forth in Sections 6 and 7 below, remotely at the offices of Reed Smith LLP, 599 Lexington Avenue, 22nd Floor, New York, New York, 10022.

(ii)Purchase Price. The aggregate purchase price for the Common Units to be purchased by each Buyer at the Closing (the “Common Stock Purchase Price”) shall be $2.50 per unit (consisting of one Common Share and 0.75 of a Warrant, with each whole Warrant exercisable for one share of Common Stock at an exercise price of $3.50 per share) (as adjusted for the value of any fractional shares). The aggregate purchase price for the Preferred Units to be purchased by each Buyer at the Closing (the “Preferred Stock Purchase Price” and together with the Common Stock Purchase Price, the “Purchase Price”) shall be $2.50 per unit (consisting of one-tenth of one share of Preferred Stock and 0.75 of a Warrant, with each whole Warrant exercisable for one share of Common Stock at an exercise price of $3.50 per share) (as adjusted for the value of any fractional shares).

(b)Form of Payment. On the Closing Date, (i) each Buyer shall pay its respective Purchase Price to the Company for the applicable Securities to be issued and sold to such Buyer at the Closing, by wire transfer of immediately available funds in accordance with the Company’s written wire instructions and (ii) the Company shall deliver to each Buyer the applicable Securities (allocated in the amounts as such Buyer shall request) which such Buyer is then purchasing hereunder, in each case, duly executed on behalf of the Company and registered in the name of such Buyer or its designee, and, in the case of the Common Shares, on the applicable balance account at Computershare Inc., as the Company’s transfer agent (the “Transfer Agent”) and in the case of the Preferred Shares in in either book-entry or  certificated form. Upon the request of a Buyer, the Company shall instruct the Transfer Agent to provide such Buyer with a copy of such Buyer’s balance account at the Transfer Agent.

2.BUYER’S REPRESENTATIONS AND WARRANTIES.

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Each Buyer, severally and not jointly, represents and warrants with respect to only itself that:

(a)Organization and Good Standing. If the Buyer is an entity, such Buyer is a corporation, partnership, limited liability company or other entity duly incorporated or organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization.

(b)Authorization and Power. Such Buyer has the requisite power and authority to enter into and perform the Transaction Documents (as defined below) to which such Buyer is a party and to purchase the Securities being sold to it hereunder. If such Buyer is an entity, the execution, delivery and performance of the Transaction Documents to which such Buyer is a party by such Buyer and the consummation by it of the transactions contemplated hereby and thereby have been duly authorized by all necessary corporate, limited liability company or partnership action, and no further consent or authorization of such Buyer or its board of directors, stockholders, partners or similar body, as the case may be, is required. The Transaction Documents to which such Buyer is a party have been duly authorized, executed and delivered by such Buyer and assuming due authorization, execution and deliver by the Company, constitute valid and binding obligations of such Buyer enforceable against such Buyer in accordance with the terms thereof, except as such enforceability may be limited by general principles of equity or applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to, or affecting generally, the enforcement of applicable creditors’ rights and remedies.

(c)No Public Sale or Distribution. Such Buyer is acquiring (i) the Common Shares, and upon exercise of the Warrants will acquire the Warrant Shares, and/or (ii) the Preferred Shares, and upon conversion of the Preferred Shares will acquire the Conversion Shares and upon exercise of the Warrants, will acquire the Warrant Shares for its own account and not with a view toward, or for resale in connection with, the public sale or distribution thereof, except pursuant to sales registered or exempted under the Securities Act of 1933 Act, as amended (the “1933 Act”); provided, however, that by making the representations herein, such Buyer does not agree to hold any of the Securities for any minimum or other specific term and reserves the right to dispose of all or any part of the Securities at any time in accordance with or pursuant to a registration statement or an exemption from registration under the 1933 Act and pursuant to the applicable terms of the Transaction Documents. Such Buyer is acquiring the Securities hereunder in the ordinary course of its business. Such Buyer does not presently have any agreement or understanding, directly or indirectly, with any Person to distribute any of the Securities. As used in this Agreement, “Person” means an individual, a limited liability company, a partnership, a joint venture, a corporation, a trust, an unincorporated organization and a government or any department or agency thereof.

(d)Accredited Investor Status. Such Buyer is an “accredited investor” as that term is defined in Rule 501(a) of Regulation D. Such Buyer has executed and delivered to the Company a questionnaire in substantially the form attached hereto as Exhibit E (the “Investor Questionnaire”), which such Buyer represents and warrants is true, correct and complete. Such Buyer will promptly notify the Company of any changes to its status as an “accredited investor”.

(e)Reliance on Exemptions. Such Buyer understands that the Securities are being offered and sold to it in reliance on specific exemptions from the registration requirements of United States federal and state securities laws and that the Company is relying upon the truth and accuracy of, and such Buyer’s compliance with, the representations, warranties, agreements, acknowledgments and understandings of such Buyer set forth in the Transaction Documents and the Investor Questionnaire in order to determine the availability of such exemptions and the eligibility of such Buyer to acquire the Securities.

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(f)Information. Such Buyer and its advisors, if any, have been furnished with all materials relating to the business, finances and operations of the Company and materials relating to the offer and sale of the Securities that have been requested by such Buyer as it has deemed necessary or appropriate to conduct its due diligence investigation. Such Buyer has sufficient knowledge and experience in investing in companies similar to the Company so as to be able to evaluate the risks and merits of its investment in the Company. Such Buyer and its advisors, if any, have been afforded the opportunity to ask questions of the Company. Neither such inquiries nor any other due diligence investigations conducted by such Buyer or its advisors, if any, or its representatives shall modify, amend or affect such Buyer’s right to rely on the Company’s representations and warranties contained herein and the truth, accuracy, and completeness thereof. Such Buyer understands that its investment in the Securities involves a high degree of risk and represents and warrants that it is able to bear the economic risk and complete loss of such investment. Such Buyer has sought such accounting, legal and tax advice as it has considered necessary to make an informed investment decision with respect to its acquisition of the Securities.

(g)No Governmental Review. Such Buyer understands that no United States federal or state agency or any other government or governmental agency has passed on or made any recommendation or endorsement of the Securities or the fairness or suitability of the investment in the Securities nor have such authorities passed upon or endorsed the merits of the offering of the Securities.

(h)Transfer or Resale. Such Buyer understands that, except as provided in the Registration Rights Agreement: (i) the Securities have not been and are not being registered under the 1933 Act or any state securities laws, and may not be offered for sale, sold, assigned or transferred unless (A) subsequently registered thereunder, or (B) such Buyer shall have delivered to the Company an opinion of counsel, in a form reasonably acceptable to the Company, to the effect that such Securities to be sold, assigned or transferred may be sold, assigned or transferred pursuant to Rule 144, as amended, promulgated under the 1933 Act (or a successor rule thereto) ( “Rule 144”) or an exemption from such registration, (ii) any sale of the Securities made in reliance on Rule 144 may be made only in accordance with the terms of Rule 144 and further, if Rule 144 is not applicable, any resale of the Securities under circumstances in which the seller (or the Person through whom the sale is made) may be deemed to be an underwriter (as that term is defined in the 1933 Act) may require compliance with some other exemption under the 1933 Act or the rules and regulations of the SEC thereunder, and (iii) neither the Company nor any other Person is under any obligation to register the Securities under the 1933 Act or any state securities laws or to comply with the terms and conditions of any exemption thereunder.

(i)Legends. Such Buyer understands that the certificates or other instruments representing the Securities, including any applicable balance account at the Transfer Agent, except as set forth below, shall bear any legend as required by the “blue sky” laws of any state and a restrictive legend in substantially the following form (and a stop-transfer order may be placed against transfer of such Securities):

NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE SECURITIES INTO WHICH ANY OF THESE SECURITIES ARE CONVERTIBLE OR EXERCISABLE HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL, IN A FORM REASONABLY ACCEPTABLE TO THE COMPANY, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT.

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(j)Legend Removal. Unless otherwise required by state securities laws, the legend set forth above shall be removed and the Company shall issue a certificate without such legend to the holder of the Securities upon which it is stamped or issue to such holder by electronic delivery at the applicable balance account at The Depository Trust Company (“DTC”) or the Transfer Agent, as applicable, and at the Buyer’s election so long as the Buyer is not an affiliate of the Company, if (i) with respect to the Common Shares and the Warrant Shares, such shares are registered for resale under the 1933 Act, (ii) in connection with a sale, assignment or other transfer of the Securities, such holder provides the Company with an opinion of a law firm reasonably acceptable to the Company, in a form reasonably acceptable to the Company, to the effect that such sale, assignment or transfer of the Securities may be made without registration under the applicable requirements of the 1933 Act, or (iii) such holder provides the Company with an opinion of a law firm reasonably acceptable to the Company, in a form reasonably acceptable to the Company, to the effect that the Securities can be sold, assigned or transferred pursuant to Rule 144 or an exemption from registration.

(k)No Conflicts. The execution, delivery and performance by such Buyer of the Transaction Documents and the consummation by such Buyer of the transactions contemplated hereby and thereby will not (i) result in a violation of the organizational documents of such Buyer, (ii) conflict with, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture or instrument to which such Buyer is a party, or (iii) result in a violation of any law, rule, regulation, order, judgment or decree (including federal and state securities laws) applicable to such Buyer, except in the case of clauses (ii) and (iii) above, for such conflicts, defaults, rights or violations which would not, individually or in the aggregate, reasonably be expected to have a material adverse effect on the ability of such Buyer to perform its obligations hereunder.

(l)No General Solicitation and Advertising. Such Buyer represents and acknowledges that it has not been solicited to offer to purchase or to purchase any Securities by means of any general solicitation or advertising within the meaning of Regulation D.

(m)Residency. Such Buyer is a resident of that jurisdiction specified below its address on the Schedule of Buyers.

(n)Brokers. There is no broker, investment banker, financial advisor, finder or other Person which has been retained by or is authorized to act on behalf of such Buyer who might be entitled to any fee or commission for which the Company will be liable in connection with the execution of this Agreement and the consummation of the transactions contemplated hereby.

(o)Independent Evaluation. Such Buyer confirms and agrees that (i) it has independently evaluated the merits of its decision to purchase the Securities, (ii) it has not relied on the advice of, or any representations by, the Agents or any affiliate thereof or any representative of the Agents or their affiliates in making such decision and (iii) neither the Agents nor any of their representatives has any responsibility with respect to the completeness or accuracy of any information or materials furnished to such Buyer in connection with the transactions contemplated hereby. Such Buyer has furnished to the Agents a non-reliance letter addressed to the Agents in the form attached hereto as Exhibit F (the “Non-reliance Letter”).

(p)Bad Actor Disclosure. Such Buyer acknowledges and agrees that it has received and reviewed the disclosure set forth on Exhibit G attached hereto a reasonable time prior to the date hereof.

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(q)ERISA.  Such Buyer represents and acknowledges that it is not an employee benefit plan subject to the ERISA (as defined below) or a “plan” subject to Section 4975 of the Code (as defined below). 

3.REPRESENTATIONS AND WARRANTIES OF THE COMPANY.

The Company represents and warrants to each of the Buyers that, unless otherwise specified, as of the date hereof and as of the Closing Date:

(a)Organization and Qualification. The Company is duly organized, validly existing and in good standing under the laws of the State of Delaware with full corporate power and authority to own or lease, as the case may be, and to operate its properties and conduct its business as described in the SEC Documents (as defined below), and is duly qualified to do business as a foreign corporation and is in good standing under the laws of each jurisdiction which requires such qualification, except where the failure to so qualify or have such power or authority would not reasonably be expected to (i) have, singularly or in the aggregate, a material adverse effect on the condition (financial or otherwise), prospects, earnings, business or properties of the Company and its subsidiaries, taken as a whole, whether or not arising from transactions in the ordinary course of business or (ii) impair in any material respect the ability of the Company to perform its obligations under the Transaction Documents to which it is a party or to consummate the transactions contemplated hereby and thereby (any such effect as described in clauses (i) or (ii), a “Material Adverse Effect”).

(b)Authorization; Enforcement; Validity. The Company has the requisite power and authority to execute and deliver this Agreement, the Registration Rights Agreement, the Irrevocable Transfer Agent Instructions (as defined below), the Warrants and each of the other agreements entered into by the parties hereto in connection with the transactions contemplated by this Agreement, if any (collectively, the “Transaction Documents”) and to perform its obligations thereunder; and all action required to be taken for the due and proper authorization, execution and delivery by it of the Transaction Documents and the consummation by it of the transactions contemplated thereby have been duly and validly taken other than in connection with the Required Approvals (as defined below). This Agreement has been duly authorized, executed and delivered by the Company, and constitutes the legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except as such enforceability may be limited by general principles of equity or applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to, or affecting generally, the enforcement of applicable creditors’ rights and remedies.

(c)Subsidiaries. Each of the Company’s Subsidiaries (as defined below) has been duly incorporated, organized or formed, as the case may be, and is validly existing and in good standing under the laws of the jurisdiction of its incorporation, organization or formation with full power and authority to own or lease, as the case may be, and to operate its properties and conduct its business as described in the SEC Documents, and is duly qualified to do business as a foreign entity and is in good standing under the laws of each jurisdiction which requires such qualification, except where the failure to so qualify would not reasonably be expected to have a Material Adverse Effect. “Subsidiary” of any Person means any entity in which such Person, directly or indirectly, owns more than 50% of the outstanding capital stock, equity or similar interests or voting power of such entity at the time of this Agreement. As of the Initial Closing, the Company has no Subsidiaries except those set forth in Schedule 3(c).

(d)Issuance of the Securities. The Company’s capitalization as of December 31, 2019 and giving effect to the issuance of the Securities hereunder, is set forth on Schedule 3(d). As of the date hereof and as of the Closing Date, the Company will have 310,000,000 authorized shares, of which 300,000,000 are shares of Common Stock, and 10,000,000 are shares of preferred stock, par value

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$0.0001 per share. The Common Shares, the Warrants have been duly authorized and, upon issuance in accordance with the terms hereof and payment of the Common Purchase Price, shall be validly issued, fully paid and nonassessable and free from all preemptive or similar rights. The Preferred Shares and the Warrants have been duly authorized and, upon issuance in accordance with the terms hereof and payment of the Preferred Purchase Price, shall be validly issued, fully paid and nonassessable and free from all preemptive or similar rights. Upon conversion of the Preferred Shares in accordance with the Certificate of Designation, the Conversion Shares will be validly issued, fully paid and nonassessable and free from all preemptive or similar rights.  Upon exercise of the Warrants in accordance with the terms thereof payment of any applicable exercise price therefore, the Warrant Shares will be validly issued, fully paid and nonassessable and free from all preemptive or similar rights. As of the Closing, (i) a number of shares of Common Stock shall have been duly authorized and reserved for issuance which equals 100% of the aggregate of the maximum number of Conversion Shares issuable upon conversion of the Preferred Stock, and (ii) a number of shares of Common Stock shall have been duly authorized and reserved for issuance which equals 100% of the aggregate of the maximum number of shares of Common Stock issuable upon exercise of the Warrants. Assuming the accuracy of each of the representations and warranties set forth in Section 2 of this Agreement, the offer and issuance by the Company of the Securities does not require registration under the 1933 Act. All of the issued and outstanding shares of the Company’s capital stock have been duly authorized and validly issued and are fully paid, nonassessable and free of pre-emptive rights and were issued in compliance with applicable state and federal securities law and any rights of third parties. Except as described on Schedule 3(d), no Person is entitled to pre-emptive or similar statutory or contractual rights with respect to any securities of the Company. As of the Closing Date, except as disclosed on Schedule 3(d), there are no outstanding warrants, options, convertible securities or other rights, agreements or arrangements of any character under which the Company has an obligation, contingent or otherwise, to issue any equity securities.

(e)No Conflicts. The execution and delivery of the Transaction Documents by the Company, the performance by the Company of its obligations thereunder and the consummation by the Company of the transactions contemplated hereby and thereby (including the issuance of the Securities) will not, subject to the Required Approvals, conflict with, result in a breach or violation of, or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any of its Subsidiaries pursuant to, (i) the organizational documents of the Company or any of its Subsidiaries, (ii) the terms of any material indenture, contract, lease, mortgage, deed of trust, note agreement, loan agreement or other agreement, obligation, condition, covenant or instrument to which the Company or any of its Subsidiaries is a party or bound or to which its or their property is subject, or (iii) any statute, law, rule, regulation, judgment, order or decree applicable to the Company or any of its Subsidiaries of any court, regulatory body, administrative agency, governmental body, arbitrator or other authority having jurisdiction over the Company or any of its Subsidiaries or any of its or their properties; except, in the case of clauses (ii) and (iii) above, for any such conflict, breach, violation or imposition that would not, individually or in the aggregate, have a Material Adverse Effect.

(f)Consents. No consent, approval, authorization, filing with or order of any court, governmental agency or body, or other Person is required in connection with the transactions contemplated by this Agreement, except (i) such as have been obtained under the blue sky laws of any jurisdiction in connection with the purchase of the Securities, (ii) such as maybe required under the 1933 Act in connection with the registration of the Common Shares, Conversion Shares and Warrant Shares pursuant to the Registration Rights Agreement, (iii) the filing of a Form D with the SEC, (iv) the filing of the Certificate of Designation with the Secretary of State of the State of Delaware (the “Delaware Secretary of State”), and (v) such as have been obtained under the securities laws and regulations of jurisdictions outside of the United States in which the Securities are sold (collectively, the “Required Approvals”).

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(g)Absence of Defaults. As of the Closing Date, and after giving effect the funding of the aggregate amount set forth on the Schedule of Buyers, the Company is not in default (and no event that, with the passage of time or giving of notice or both, would be a default) in the performance or observance of any material obligation, covenant or condition contained in any loan agreement to which it is a party.

(h)No General Solicitation; Agents’ Fees. Neither the Company, nor any of its Subsidiaries or affiliates, nor any Person acting on its behalf, has engaged in any form of general solicitation or general advertising (within the meaning of Regulation D) in connection with the offer or sale of the Securities. The Company shall be responsible for the payment of the Agents’ fees under the Engagement Letter and shall not have any responsibility for any fees or brokers’ commissions incurred by any Buyer or its investment advisor relating to or arising out of the transactions contemplated hereby. The Company acknowledges that it has engaged the Agents in connection with the sale of the Securities. Other than the Agents, neither the Company nor any of its Subsidiaries has engaged any placement agent or other agent in connection with the sale of the Securities.

(i)No Integrated Offering. Neither the Company, nor any of its Subsidiaries or affiliates, nor any Person acting on its behalf, has, directly or indirectly, made any offers or sales of any security or solicited any offers to buy any security, under circumstances that would require registration of the issuance of any of the Securities under the 1933 Act, whether through integration with prior offerings or otherwise.

(j)Application of Takeover Protections; Rights Agreement. The Company and its board of directors have taken all necessary action, if any, in order to render inapplicable (and accordingly the Buyers are exempt from) any control share acquisition, business combination, poison pill (including any distribution under a rights agreement) or other similar anti-takeover provision under the Company’s Certificate of Incorporation, as amended and as in effect on the date hereof (the “Certificate of Incorporation”), or the laws of the State of Delaware which are or could become applicable to any Buyer as a result of the transactions contemplated by the Transaction Documents, including the Company’s issuance of the Securities and any Buyer’s ownership of the Securities.

(k)SEC Documents; Financial Statements. The Company has filed all reports, schedules, forms, statements and other documents required to be filed by it (the “SEC Documents”) with the SEC pursuant to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “1934 Act”). As of their respective filing dates, the SEC Documents complied in all material respects with the requirements of the 1934 Act and the 1933 Act applicable to the SEC Documents, and none of the SEC Documents, at the time they were filed with the SEC, contained or contain any untrue statement of a material fact or omitted or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. As of the filing date, the financial statements of the Company included in the SEC Documents complied as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto as in effect as of the time of filing. The financial statements of the Company have been prepared in accordance with generally accepted accounting principles, consistently applied, during the periods involved (except (i) as may be otherwise indicated in such financial statements or the notes thereto or (ii) in the case of unaudited interim statements, to the extent they may exclude footnotes or may be condensed or summary statements) and fairly present in all material respects the financial position of the Company, as of the dates thereof and the results of its operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments). The Company has never been an issuer subject to Rule 144(i) under the 1933 Act. The pro forma financial information and the related notes included in the SEC Documents have been prepared in accordance with the applicable requirements of the 1933 Act and the rules and regulations thereunder and present fairly the information shown therein, and the assumptions

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used in the preparation thereof are reasonable and the adjustments used therein are appropriate to give effect to the transactions and circumstances referred to therein.

(l)Absence of Certain Changes. Since the date of the Company’s last audited financial statements included in or incorporated by reference in its SEC Documents, there has been no Material Adverse Effect and no circumstances exist that could reasonably be expected to be, cause or have a Material Adverse Effect. Neither the Company nor any of its respective Subsidiaries has taken any steps to seek protection pursuant to any bankruptcy law nor does any of the Company have any knowledge or reason to believe that its creditors intend to initiate involuntary bankruptcy proceedings or any actual knowledge of any fact that would reasonably lead a creditor to do so.

(m)Transfer Taxes. On the Closing Date, all stock transfer or other taxes (other than income or similar taxes) which are required to be paid in connection with the sale and transfer of the Securities to be sold to each Buyer hereunder will be, or will have been, fully paid or provided for by the Company, and all laws imposing such taxes will be or will have been complied with.

(n)Disclosure. The Company confirms that neither it nor any other Person acting on its behalf has provided any of the Buyers with any information that would constitute material, nonpublic information which has not otherwise been disclosed publicly as of the Closing Date. The Company acknowledges and agrees that no Buyer makes or has made any representations or warranties with respect to the transactions contemplated hereby other than those specifically set forth in Section 2 hereof and in the Investor Questionnaire.

(o)Manipulation of Price. The Company has not, and to its knowledge no one acting on its behalf has, taken, directly or indirectly, any action designed to cause or to result in the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Securities.

(p)Capital Stock of Subsidiaries. All of the outstanding units, limited liability company interests, limited company interests or other equity ownership interests issued by each Subsidiary have been duly and validly authorized and issued, are fully paid and non-assessable (to the extent applicable under the laws of the relevant jurisdiction).

(q)Investment Company. The Company is not and, after giving effect to the offering and sale of the Securities and the application of the proceeds therefrom, will not be an “investment company” as defined in the Investment Company Act of 1940, as amended.

(r)Exhibits. There is no agreement, contract or other document of a character required to be described in the SEC Documents, or to be filed as an exhibit thereto, which is not described or filed as required.

(s)Registration Rights. Except as disclosed in the SEC Documents, there are no persons with registration or other similar rights to have any equity or debt securities of the Company registered for sale under a registration statement, except for rights (i) contained in the Registration Rights Agreement, or (ii) as have been duly waived.

(t)Legal Proceedings. No action, suit or proceeding by or before any court or governmental agency, authority or body or any arbitrator involving the Company or any of its Subsidiaries or its or their property is pending or, to the best knowledge of the Company, threatened, that could reasonably be expected to have a Material Adverse Effect, except as set forth in or contemplated in the SEC Documents.

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(u)Real Property. The Company and its Subsidiaries own or lease all such properties as are necessary for the conduct of their operations as presently conducted.

(v)Independent Accountants. Deloitte LLP who has certified certain financial statements of the Venus Concept Ltd. and its consolidated subsidiaries and delivered its report with respect to the audited consolidated financial statements and schedules included in the SEC Documents, are Chartered Professional Accountants/Licensed Public Accountants and are independent with respect to Venus Concept Ltd. within the meaning of the 1933 Act and the applicable published rules and regulations thereunder and Grant Thornton LLP, who have certified certain financial statements of the Company and its consolidated subsidiaries and delivered it report with respect to the audited consolidated financial statements and schedules included in the SEC Documents, are independent public accountants with respect to the Company within the meaning of the 1933 Act and the applicable published rules and regulations thereunder.

(w)Taxes. The Company and its Subsidiaries have (a) filed all foreign, federal, state and local tax returns (as defined below) required to be filed with taxing authorities prior to the date hereof or have duly obtained extensions of time for the filing thereof and (b) paid all taxes (as hereinafter defined below) shown as due and payable on such returns that were filed and have paid all taxes imposed on or assessed against the Company or its Subsidiaries, except in each case, as would not reasonably be expected to result in a Material Adverse Effect. The provisions for taxes payable, if any, shown on the financial statements included in the SEC Documents are sufficient for all accrued and unpaid taxes, whether or not disputed, and for all periods to and including the dates of such consolidated financial statements. The term “taxes” means all federal, state, local, foreign, and other net income, gross income, gross receipts, sales, use, ad valorem, transfer, franchise, profits, license, lease, service, service use, withholding, payroll, employment, excise, severance, stamp, occupation, premium, property, windfall profits, customs, duties or other taxes, fees, assessments, or charges of any kind whatever, together with any interest and any penalties, additions to tax, or additional amounts with respect thereto. The term “returns” means all returns, declarations, reports, statements, and other documents required to be filed in respect to taxes.

(x)Employment Matters. There is (A) no unfair labor practice complaint pending against the Company or any of its Subsidiaries, nor to the Company’s knowledge, threatened against it or any of its Subsidiaries, before the National Labor Relations Board, any state or local labor relation board or any foreign labor relations board, and no grievance or arbitration proceeding arising out of or under any collective bargaining agreement is so pending against the Company or any of its Subsidiaries, or, to the Company’s knowledge, threatened against it and (B) no labor disturbance by the employees of the Company or any of its Subsidiaries exists or, to the Company’s knowledge, is imminent, and the Company is not aware of any existing or imminent labor disturbance by the employees of any of its or its Subsidiaries, principal suppliers, manufacturers, customers or contractors, that could reasonably be expected, singularly or in the aggregate, to have a Material Adverse Effect.

(y)Compliance with Occupational Laws. The Company and each of its Subsidiaries (A) is in compliance, in all material respects, with any and all applicable foreign, federal, state and local laws, rules, regulations, treaties, statutes and codes promulgated by any and all governmental authorities (including pursuant to the Occupational Health and Safety Act) relating to the protection of human health and safety in the workplace (“Occupational Laws”); (B) has received all material permits, licenses or other approvals required of it under applicable Occupational Laws to conduct its business as currently conducted; and (C) is in compliance, in all material respects, with all terms and conditions of such permit, license or approval. No action, proceeding, revocation proceeding, writ, injunction or claim is pending or, to the Company’s knowledge, threatened against the Company or any of its Subsidiaries relating to Occupational Laws that could be reasonably expected to have a Material Adverse Effect.

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(z)Insurance. The Company, on a consolidated basis with its Subsidiaries, carries, or is covered by, insurance in such amounts and covering such risks as it believes is adequate for the conduct of its business as currently conducted as described in the SEC Documents and to cover its properties.

(aa)Permits. The Company and each of its Subsidiaries holds, and is in compliance with, all franchises, grants, authorizations, licenses, permits, easements, consents, certificates and orders (“Permits”) of any governmental authority required for the conduct of its business as currently conducted as described in the SEC Documents, and all such Permits are in full force and effect, in each case except where the failure to hold, or comply with, any of them is not reasonably likely to result in a Material Adverse Effect or adversely affect the consummation of the transactions contemplated by the Transaction Documents.

(bb)Accounting and Disclosure Controls. Except as disclosed in the SEC documents, the Company, on a consolidated basis with its Subsidiaries, maintains a system of “internal control over financial reporting” (as defined under Rules 13a-15 and 15d-15 under the 1934 Act) that has been designed by, or under the supervision of, the Company’s principal executive and principal financial officers, or persons performing similar functions, to provide reasonable assurance that (i) transactions are executed in accordance with management’s general or specific authorizations; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and to maintain asset accountability; (iii) access to assets is permitted only in accordance with management’s general or specific authorization; and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. Since the date of the latest audited financial statements included in the SEC Documents, there has been no change in the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. The Company maintains disclosure controls and procedures that have been designed to ensure that material information relating to the Company and any subsidiaries is made known to the Company’s principal executive officer and principal financial officer by others within those entities; and such disclosure controls and procedures are effective.

(cc)Environmental Matters. The Company and its Subsidiaries are in compliance with all foreign, federal, state and local rules, laws and regulations relating to the use, treatment, storage and disposal of hazardous or toxic substances or waste and protection of health and safety or the environment which are applicable to their businesses (“Environmental Laws”), except where the failure to comply has not had and would not reasonably be expected to have, singularly or in the aggregate, a Material Adverse Effect. There has been no storage, generation, transportation, handling, treatment, disposal, discharge, emission, or other release of any kind of toxic or other wastes or other hazardous substances by, due to, or caused by the Company or any of its Subsidiaries (or, to the Company’s knowledge, any other entity for whose acts or omissions the Company or any of its Subsidiaries is or may otherwise be liable) upon any of the property now or previously owned or leased by the Company or any of its Subsidiaries, or upon any other property, in violation of any law, statute, ordinance, rule, regulation, order, judgment, decree or permit or which would, under any law, statute, ordinance, rule (including rule of common law), regulation, order, judgment, decree or permit, give rise to any liability, except for any violation or liability which has not had and would not reasonably be expected to have, singularly or in the aggregate, a Material Adverse Effect; and there has been no disposal, discharge, emission or other release of any kind onto such property or into the environment surrounding such property of any toxic or other wastes or other hazardous substances with respect to which the Company or any of its Subsidiaries has knowledge.

(dd)ERISA Compliance. No “prohibited transaction” (as defined in Section 406 of the Employee Retirement Income Security Act of 1974, as amended, including the regulations and published

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interpretations thereunder (“ERISA”), or Section 4975 of the Internal Revenue Code of 1986, as amended from time to time (the “Code”)) or “accumulated funding deficiency” (as defined in Section 302 of ERISA) or any of the events set forth in Section 4043(b) of ERISA (other than events with respect to which the thirty (30)-day notice requirement under Section 4043 of ERISA has been waived) has occurred or could reasonably be expected to occur with respect to any employee benefit plan of the Company or any of its Subsidiaries which would reasonably be expected to, singularly or in the aggregate, have a Material Adverse Effect. Each employee benefit plan of the Company or any of its Subsidiaries is in compliance in all material respects with applicable law, including ERISA and the Code. The Company and its Subsidiaries have not incurred and could not reasonably be expected to incur liability under Title IV of ERISA with respect to the termination of, or withdrawal from, any pension plan (as defined in ERISA). Each pension plan for which the Company or any of its Subsidiaries would have any liability that is intended to be qualified under Section 401(a) of the Code is so qualified, and, to the Company’s knowledge, nothing has occurred, whether by action or by failure to act, which could, singularly or in the aggregate, cause the loss of such qualification.

(ee)SOX Compliance. The Company has taken all actions it deems reasonably necessary or advisable to take on or prior to the date of this Agreement to assure that it is and will continue be in compliance in all material respects with all applicable provisions of the Sarbanes-Oxley Act of 2002 and all rules and regulations promulgated thereunder or implementing the provisions thereof that are then in effect.

(ff)Foreign Corrupt Practices Act. Neither the Company nor any of its Subsidiaries, nor any director or officer of the Company or any Subsidiary, nor, to the knowledge of the Company, any employee, representative, agent, affiliate of the Company or any of its Subsidiaries or any other person acting on behalf of the Company or any of its Subsidiaries, is aware of or has taken any action, directly or indirectly, that would result in a violation by such persons of the Foreign Corrupt Practices Act of 1977, as amended, and the rules and regulations thereunder (the “FCPA”), including, without limitation, making use of the mails or any means or instrumentality of interstate commerce corruptly in furtherance of an offer, payment, promise to pay or authorization of the payment of any money, or other property, gift, promise to give, or authorization of the giving of anything of value to any “foreign official” (as such term is defined in the FCPA) or any foreign political party or official thereof or any candidate for foreign political office, in contravention of the FCPA, and the Company and, to the knowledge of the Company, its affiliates have conducted their businesses in compliance with the FCPA and have instituted and maintain policies and procedures designed to ensure, and which are reasonably expected to continue to ensure, continued compliance therewith.

(gg)Money Laundering Laws. The operations of the Company and its Subsidiaries are and have been conducted at all times in compliance in all material respects with applicable financial recordkeeping and reporting requirements of the Currency and Foreign Transactions Reporting Act of 1970, as amended, the money laundering statutes of all jurisdictions, the rules and regulations thereunder and any related or similar rules, regulations or guidelines, issued, administered or enforced by any governmental entity (collectively, the “Money Laundering Laws”); and no action, suit or proceeding by or before any governmental entity involving the Company or any of its Subsidiaries with respect to the Money Laundering Laws is pending or, to the knowledge of the Company, threatened.

(hh)OFAC. Neither the Company nor any of its Subsidiaries nor any director or officer of the Company or any of its Subsidiaries, nor, to the knowledge of the Company, any employee, representative, agent or affiliate of the Company or any of its Subsidiaries or any other person acting on behalf of the Company or any of its Subsidiaries is currently subject to any U.S. sanctions administered by the Office of Foreign Assets Control of the U.S. Treasury Department (“OFAC”); and the Company will not directly or indirectly use the proceeds of the offering of the Securities contemplated hereby, or lend,

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contribute or otherwise make available such proceeds to any person or entity, for the purpose of financing the activities of any person currently subject to any U.S. sanctions administered by OFAC.

(ii)Intellectual Property. The Company and each of its Subsidiaries owns or possesses or has valid right to use all patents, patent applications, trademarks, service marks, trade names, trademark registrations, service mark registrations, copyrights, licenses, inventions, trade secrets and similar rights (“Intellectual Property”) necessary for the conduct of the business of the Company and its Subsidiaries as currently conducted as described in the SEC Documents. To the knowledge of the Company, no action or use by the Company or any of its Subsidiaries involves or gives rise to any infringement of, or license or similar fees for, any Intellectual Property of others, except where such action, use, license or fee is not reasonably likely to result in a Material Adverse Effect. Except as disclosed in the SEC Documents, neither the Company nor any of its Subsidiaries has received any notice alleging any such infringement or fee which would reasonably likely to result in a Material Adverse Effect. To the Company’s knowledge, none of the technology employed by the Company or any of its Subsidiaries has been obtained or is being used by the Company or such Subsidiary in violation of any contractual obligation binding on the Company or such Subsidiary or, to the Company’s knowledge, any of the officers, directors or employees of the Company or any Subsidiary, or, to the Company’sknowledge, otherwise in violation of the rights of any persons, except in each case for such violations as would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.

(jj)Compliance with Health Care Laws. The Company and, to the Company’s knowledge, its directors, officers, employees, and agents (while acting in such capacity) are, and at all times since January 1, 2017 have been, in compliance with, all health care laws and regulations applicable to the Company, including all such health care laws and regulations pertaining to development and testing of health care products or medical devices, fraud and abuse, kickbacks, recordkeeping, documentation requirements, the hiring of employees (to the extent governed by health care laws), quality, safety, privacy, security, licensure, ownership, manufacturing, packaging, labeling, processing, use, distribution, storage, import, export, advertising, promotion, marketing or disposal of health care products or medical devices (collectively, “Health Care Laws”), except where such noncompliance would not, individually or in the aggregate, have a Material Adverse Effect. Except as disclosed in the SEC Documents, the Company, and to the Company’s knowledge, its contract manufactures (while acting on behalf of the Company) has not received any written notification, correspondence or any other written communication, including notification of any pending or threatened claim, suit, proceeding, hearing, enforcement, investigation, arbitration or other action from any Governmental Authority, including, without limitation, the United States Food and Drug Administration (“FDA”), the Centers for Medicare & Medicaid Services, and the U.S. Department of Health and Human Services Office of Inspector General, of material non-compliance by, or liability of, the Company under any Health Care Laws. To the Company’s knowledge, there are no facts or circumstances that would reasonably be expected to give rise to liability of the Company under any Health Care Laws, except that would not individually or in the aggregate have a Material Adverse Effect. To the Company’s knowledge, the manufacture of products by or on behalf of the Company is being conducted in compliance in all material respects with all Health Care Laws applicable to the Company or any of its products or activities, including, without limitation, the FDA’s current good manufacturing practice regulations at 21 C.F.R. Part 820 for products sold in the United States, and the respective counterparts thereof promulgated by governmental authorities in countries outside the United States. Except as disclosed in the SEC Documents or as would not reasonably be expected to have a Material Adverse Effect, during the two year period ended on December 31, 2018 and through the date hereof, the Company has not had any product or Company-owned manufacturing site subject to a governmental authority (including FDA) shutdown or import or export prohibition, nor received any FDA Form 483 or other governmental authority notice of inspectional observations, “warning letters,” “untitled letters,” written requests to make changes to the Company’s products, processes or operations, or similar written correspondence or notice from the FDA or other governmental

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authority alleging or asserting material noncompliance with any applicable Health Care Laws that has not been resolved. To the Company’s knowledge, neither the FDA nor any other Governmental Authority has threatened such action.

(kk)Clinical Data and Regulatory Compliance. The clinical and preclinical studies and tests conducted by the Company and, to the knowledge of the Company, the clinical and preclinical studies conducted on behalf of or sponsored by the Company, were, and if still pending, are, being conducted in all material respects in accordance with all applicable Health Care Laws, including, but not limited to, the Federal Food, Drug and Cosmetic Act and its applicable implementing regulations at 21 C.F.R. Parts 50, 54, 56, 58 and 812. Any descriptions of clinical, preclinical and other studies and tests, including any related results and regulatory status, contained in the SEC Documents are complete, accurate, and fairly represented in all material respects. No marketing authorization, including any 510(k) clearance held by the Company, has been terminated or suspended by the FDA, and neither the FDA nor any applicable foreign regulatory agency has commenced, or, to the Company’s knowledge, threatened to initiate, any action to place a clinical hold order on, or otherwise terminate, delay or suspend, any proposed or ongoing clinical investigation conducted or proposed to be conducted by or on behalf of the Company.

(ll)No Safety Notices. Except as would not reasonably be expected to have a Material Adverse Effect or as disclosed in the SEC Documents, there have been no recalls, field notifications, corrections or removals, market withdrawals or replacements, warnings, “dear doctor” letters, investigator notices, safety alerts, safety communications or other notice of action relating to an alleged lack of safety, efficacy, or regulatory compliance of the Company’s products (“Safety Notices”) during the two year period ended on December 31, 2018 and through the date hereof. To the Company’s knowledge, there are no facts that would be reasonably likely to result in (i) a material Safety Notice with respect to the Company’s products, (ii) a material change in labeling of any of the Company’s products, or (iii) a termination or suspension of marketing or testing of any of the Company’s products, except, in each case, as would not reasonably be expected to have a Material Adverse Effect.

(mm)U.S. Real Property Holding Corporation. The Company is not and has never been a U.S. real property holding corporation, within the meaning of Section 897 of the Internal Revenue Code of 1986, as amended, and the Company shall so certify upon Buyer’s request.

4.COVENANTS.

(a)Blue Sky. The Company, on or before the Closing Date, shall take such action as the Company shall reasonably determine is necessary in order to obtain an exemption for or to qualify the Securities for sale to the Buyers at the Closing pursuant to this Agreement under applicable securities or “blue sky” laws of the states of the United States (or to obtain an exemption from such qualification). The Company shall make all filings and reports relating to the offer and sale of the Securities required under applicable securities or “blue sky” laws of the states of the United States following the Closing Date.

(b)Reporting Status; Public Information. From the date of this Agreement until the first date on which no Buyer owns any Securities (the “Reporting Period”), the Company shall timely file all reports required to be filed with the SEC pursuant to the 1934 Act, and the Company shall not terminate its status as an issuer required to file reports under the 1934 Act even if the 1934 Act would otherwise permit such termination.

(c)Listing. The Company shall promptly secure the listing of all of the Common Shares, the Conversion Shares and the Warrant Shares upon each national securities exchange and automated quotation system, if any, upon which shares of Common Stock are then listed (subject to official notice of issuance) (the “Principal Market”) and shall maintain, so long as any other shares of Common Stock

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shall be so listed, such listing of all Registrable Securities from time to time issuable under the terms of the Transaction Documents. The Company shall take all actions necessary to remain eligible for quotation of the Common Stock on the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global Select Market or The New York Stock Exchange and neither the Company nor any of its Subsidiaries shall take any action which would be reasonably expected to result in the delisting or suspension of the Common Stock thereon. The Company shall pay all fees and expenses in connection with satisfying its obligations under this Section 4(c).

(d)Fees. The Company shall be responsible for the payment of any Agents’ fees, financial advisory fees, or broker’s commissions (other than for Persons engaged by any Buyer) relating to or arising out of the transactions contemplated by this Agreement, including, without limitation, any fees or commissions payable to the Agents. Except as otherwise set forth in the Transaction Documents, each party to this Agreement shall bear its own expenses in connection with the sale of the Securities to the Buyers, provided, however, the Company has agreed to reimburse the SEDCO Buyers $25,000 for legal fees and expenses and the Agents for $100,000 for legal fees and expenses.

(e)Disclosure of Transactions and Other Material Information. No later than 5:30 p.m., New York City time, on the fourth Business Day following the date of this Agreement, the Company shall issue a press release and file a Current Report on Form 8-K describing the terms of the transactions contemplated by the Transaction Documents in the form required by the 1934 Act and attaching the material Transaction Documents (including, without limitation, this Agreement and the form of the Registration Rights Agreement) as exhibits to such filing. Without the prior written consent of any applicable Buyer, neither the Company nor any of its Subsidiaries or affiliates shall disclose the name of such Buyer in any filing, announcement, release or otherwise other than in connection with the registration statement contemplated by the Registration Rights Agreement, unless such disclosure is required by law, regulation or the Principal Market.

(f)Subsequent Equity Sales. The Company shall not, and shall use its commercially reasonable efforts to ensure that no affiliate of the Company shall, sell, offer for sale or solicit offers to buy or otherwise negotiate in respect of any security (as defined in Section 2 of the 1933 Act) that will be integrated with the offer or sale of the Securities in a manner that would require the registration under the 1933 Act of the sale of the Securities to the Buyers, or that will be integrated with the offer or sale of the Securities for purposes of the rules and regulations of any trading market such that it would require stockholder approval prior to the closing of such other transaction unless stockholder approval is obtained before the closing of such subsequent transaction.

(g)No Avoidance of Obligations. The Company shall not, and shall cause each of its Subsidiaries not to, enter into any agreement which would prevent the Company’s or any of its Subsidiaries’ ability to perform under, or take any other voluntary action to avoid or seek to avoid the observance or performance of any of the terms to be observed or performed by it under, this Agreement and the other Transaction Documents.

 

(h)Regulation M. Neither the Company, nor the Subsidiaries nor any affiliates of the foregoing shall take any action prohibited by Regulation M under the 1934 Act, in connection with the offer, sale and delivery of the Securities contemplated hereby.

(i)Use of Proceeds. The net proceeds from the sale of the Securities hereunder shall be used for general corporate purposes, including the funding of research and development activities. The Company’s management will retain broad discretion over the allocation of the net proceeds from the sale of the Securities.

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(j)Reservation of Common Stock. The Company shall maintain a reserve from its duly authorized shares of Common Stock for issuance pursuant to the Transaction Documents in such amount as may then be required to fulfill its obligations in full under the Transaction Documents but in no event less than the Required Minimum. If, on any date, the number of authorized but unissued (and otherwise unreserved) shares of Common Stock is less than 130% of the Required Minimum on such date, then the Board of Directors shall use commercially reasonable efforts to amend the Certificate of Incorporation to increase the number of authorized but unissued shares of Common Stock to at least the Required Minimum at such time, as soon as possible and in any event not later than the 75th day after such date; provided that the Company will not be required at any time to authorize a number of shares of Common Stock greater than the maximum remaining number of shares of Common Stock that could possibly be issued after such time pursuant to the Transaction Documents. For purposes of this Agreement, “Required Minimum” means, as of any date, the maximum aggregate number of shares of Common Stock then issued or potentially issuable in the future pursuant to the Transaction Documents, including any Conversion Shares issuable upon the conversion of the Preferred Shares and the issuance of any Warrant Shares upon exercise of the Warrants, ignoring any conversion limits set forth therein.

(k)Stockholder Approval. The Company shall use its best efforts to file a preliminary proxy statement with the SEC for the purpose of obtaining such approval as may be required by (i) the applicable rules and regulations of the Nasdaq Stock Market (or any successor entity) from the stockholders of the Company with respect to the  issuance of all Conversion Shares issuable upon conversion of the Preferred Shares in excess of 19.99% of the issued and outstanding Common Stock on the date hereof, and (ii) any other applicable rule or regulation of the Nasdaq Stock Market (or any successor entity) from the stockholders of the Company with respect to the issuance of all Conversion Shares (the “Stockholder Approval”). The Company shall use its best efforts to hold a special meeting of its stockholders (which may also be the annual meeting of stockholders) at the earliest practical date after the date hereof, but in no event later than 120 days after the filing of the Company’s Form 10-K for the fiscal year ended December 31, 2019 for the purpose of obtaining Stockholder Approval, with the recommendation of the Board of Directors that such proposals are approved, and the Company shall solicit proxies from its stockholders in connection therewith in the same manner as all other management proposals in such proxy statement and all management-appointed proxyholders shall vote their proxies in favor of such proposal. If the Company does not obtain Stockholder Approval at the first meeting held for such purpose, upon the written request of holders of Preferred Shares representing at least a majority of the amount of the outstanding Preferred Shares, the Company shall use its best efforts to call another meeting of stockholders within six (6) months of the first meeting of stockholders held pursuant to this Section 4(k).

5.REGISTER; TRANSFER AGENT INSTRUCTIONS.

(a)Register. The Company shall maintain at its principal executive offices (or such other office or agency of the Company as it may designate by notice to each holder of the Securities), a register for (i) the Warrants in which the Company shall record the name and address of the Person in whose name the Warrants have been issued (including the name and address of each transferee) and the number of Warrant Shares issuable upon exercise of the Warrants held by such Person and (ii) the Preferred Shares in which the Company shall record the name and address of the Person in whose name the Preferred Shares have been issued (including the name and address of each transferee) and the number of Conversion Shares issuable upon conversion of the Preferred Shares held by such Person.

(b)Transfer Agent Instructions. The Company shall issue irrevocable instructions to its transfer agent, and any subsequent transfer agent, to issue certificates or credit shares to the applicable balance accounts of such transfer agent, registered in the name of each Buyer or its respective nominee(s), for (i) the Warrant Shares in such amounts as specified from time to time by each Buyer to the Company

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upon exercise of the Warrants (including payment of any applicable exercise price) and (ii) the Conversion Shares in such amounts as specified from time to time by each Buyer to the Company upon conversion of the Preferred Shares substantially in the form of Exhibit H attached hereto (the “Irrevocable Transfer Agent Instructions”). The Company represents and warrants that no instruction other than the Irrevocable Transfer Agent Instructions referred to in this Section 5, and stop transfer instructions to give effect to Section 2(h) hereof, will be given by the Company to its transfer agent with respect to the Common Shares, Conversion Shares and Warrant Shares. If a Buyer effects a sale, assignment or transfer of the Common Shares, Conversion Shares or Warrant Shares in accordance with Section 2(h), the Company shall permit the transfer and shall promptly instruct its transfer agent to issue one or more certificates or credit shares to the applicable balance accounts of such transfer agent in such name and in such denominations as specified by such Buyer to effect such sale, transfer or assignment; provided that the Buyer has complied with Section 2(h) through (j). In the event that such sale, assignment or transfer involves Common Shares, Warrant Shares or Conversion Shares sold, assigned or transferred pursuant to an effective registration statement or pursuant to Rule 144, the transfer agent shall issue such securities to the Buyer, assignee or transferee, as the case may be, without any restrictive legend upon such sale.

(c)Breach. The Company acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to a Buyer. Accordingly, the Company acknowledges that the remedy at law for a breach of its obligations under this Section 5 will be inadequate and agrees, in the event of a breach or threatened breach by the Company of the provisions of this Section 5, that a Buyer shall be entitled, in addition to all other available remedies, to an order and/or injunction restraining any breach and requiring immediate issuance and transfer, without the necessity of showing economic loss and without any bond or other security being required.

6.CONDITIONS TO THE COMPANY’S OBLIGATION TO SELL.

The obligation of the Company hereunder to issue and sell the Common Units and the Preferred Units to each Buyer as set forth on the Schedule of Buyers at the Closing is subject to the satisfaction, at or before the Closing Date, of each of the following conditions, provided that these conditions are for the Company’s sole benefit and may be waived by the Company at any time in its sole discretion by providing each Buyer with prior written notice thereof:

(a)Each Buyer shall have executed each of the Transaction Documents to which it is a party and delivered the same to the Company.

(b)Each Buyer shall have executed and delivered to the Company an Investor Questionnaire, in the form attached hereto as Exhibit E, pursuant to which each such Buyer shall provide information necessary to confirm each such Buyer’s status as an “accredited investor” (as such term is defined in Rule 501 promulgated under the 1933 Act) and to enable the Company to comply with the Registration Rights Agreement.

(c)Each Buyer shall have delivered to the Company its respective Purchase Price for the Common Units and/or Preferred Units being purchased by such Buyer by wire transfer of immediately available funds pursuant to the wire instructions provided by the Company.

(d)The representations and warranties of each Buyer shall be true and correct in all material respects as of the date when made and as of the Closing Date as though made at that time (except for representations and warranties that speak as of a specific date, which shall be true and correct as of such specified date), and each Buyer shall have performed, satisfied and complied in all material respects with the covenants, agreements and conditions required by this Agreement to be performed, satisfied or

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complied with by such Buyer at or prior to the Closing Date. By delivering its respective Purchase Price for the Common Units and/or Preferred Units being purchased by such Buyer at the Closing, each Buyer shall be deemed to have confirmed the foregoing as of the Closing Date.

(e)Each of the Buyers affiliated with EW, HealthQuest and SEDCO shall have concurrently funded at the Closing its respective Purchase Price as set forth in the Schedule of Buyers.

7.CONDITIONS TO EACH BUYER’S OBLIGATION TO PURCHASE.

The obligation of each Buyer hereunder to purchase the Common Units and/or Preferred Units set forth on the Schedule of Buyers at the Closing is subject to the satisfaction, at or before the Closing Date, of each of the following conditions, provided that these conditions are for each Buyer’s sole benefit and may be waived by such Buyer at any time in its sole discretion by providing the Company with prior written notice thereof:

(a)The Company shall have duly executed and delivered to such Buyer (i) each of the Transaction Documents and (ii) the Common Units and/or Preferred Units being purchased by such Buyer at the Closing pursuant to this Agreement.

(b)Such Buyer shall have received the opinion of Reed Smith LLP, counsel for the Company (“Company Counsel”), dated as of the Closing Date, in substantially the form of Exhibit I attached hereto.

(c)The Company shall have delivered to such Buyer a copy of the Irrevocable Transfer Agent Instructions, in the form of Exhibit H attached hereto, which instructions shall have been delivered to and acknowledged in writing by the Company’s transfer agent.

(d)The Company shall have delivered to such Buyer a certificate evidencing the good standing of the Company issued by the Delaware Secretary of State as of a date within five Business Days of the Closing Date.

(e)The Company shall have filed with the Nasdaq Stock Market a Notification Form: Listing of Additional Shares for the listing of the Shares, and Nasdaq shall have raised no objection to the consummation of the Transaction.

(f)The Company shall have delivered to such Buyer a certified copy of the Certificate of Incorporation or organization of the Company as certified by the Delaware Secretary of State within five Business Days of the Closing Date.

(g)The Company shall have delivered to such Buyer a certificate, executed by the Secretary of the Company and dated as of the Closing Date, as to (i) the resolutions of the Board of Directors of the Company or an authorized committee thereof, approving the Transaction Documents and the transactions contemplated thereby, and (ii) the Bylaws of the Company, each as in effect at the Closing, in the form attached hereto as Exhibit J.

(h)The representations and warranties of the Company shall be true and correct as of the date when made and as of the Closing Date as though made at that time (except for representations and warranties that speak as of a specific date, which shall be true and correct as of such specified date) and the Company shall have performed, satisfied and complied in all material respects with the covenants, agreements and conditions required by the Transaction Documents to be performed, satisfied or complied with by the Company at or prior to the Closing Date. Such Buyer shall have received one or more

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certificates, executed by the Chief Executive Officer of the Company, dated as of the Closing Date, to the foregoing effect in the form attached hereto as Exhibit K.

(i)The Company shall have obtained all governmental, regulatory or third party consents and approvals, if any, necessary for the sale of the Common Units and the Preferred Units. No judgment, writ, order, injunction, award or decree of or by any court, or judge, justice or magistrate, including any bankruptcy court or judge, or any order of or by any governmental authority, shall have been issued, and no action or proceeding shall have been instituted by any governmental authority, enjoining or preventing the consummation of the transactions contemplated hereby or in the other Transaction Documents.

8.MISCELLANEOUS.

(a)Governing Law; Jurisdiction; Jury Trial. All questions concerning the construction, validity, enforcement and interpretation of this Agreement shall be governed by the internal laws of the State of New York, without giving effect to any choice of law or conflict of law provision or rule (whether of the State of New York or any other jurisdictions) that would cause the application of the laws of any jurisdictions other than the State of New York. Each party hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in The City of New York, Borough of Manhattan and each of their respective appellate courts for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is brought in an inconvenient forum or that the venue of such suit, action or proceeding is improper. Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof to such party at the address for such notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. EACH PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION WITH OR ARISING OUT OF THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY.

(b)Counterparts. This Agreement may be executed in two or more identical counterparts, all of which shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party; provided that a facsimile signature shall be considered due execution and shall be binding upon the signatory thereto with the same force and effect as if the signature were an original, not a facsimile signature.

(c)Headings. The headings of this Agreement are for convenience of reference and shall not form part of, or affect the interpretation of, this Agreement.

(d)Severability. If any provision of this Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remainder of this Agreement in that jurisdiction or the validity or enforceability of any provision of this Agreement in any other jurisdiction.

(e)Entire Agreement; Amendments. This Agreement and the other Transaction Documents supersede all other prior oral or written agreements between the Buyers, the Company, their affiliates and Persons acting on their behalf with respect to the matters discussed herein, and this Agreement, the other Transaction Documents and the instruments referenced herein and therein contain the entire understanding of the parties with respect to the matters covered herein and therein and, except as

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specifically set forth herein or therein, neither the Company nor any Buyer makes any representation, warranty, covenant or undertaking with respect to such matters. No provision of this Agreement may be amended other than by an instrument in writing signed by the Company, the SEDCO Buyers, and the holders of the Common Shares representing at least a majority of the amount of the Common Shares on an as converted basis. No provision hereof may be waived other than by an instrument in writing signed by the party against whom enforcement is sought. No such amendment shall be effective to the extent that it applies to less than all of the holders of the Common Shares on an as converted basis then outstanding. No consideration shall be offered or paid to any Person to amend or consent to a waiver or modification of any provision of any of the Transaction Documents unless the same consideration also is offered to all of the parties to the Transaction Documents. The Company has not, directly or indirectly, made any agreements with any Buyers relating to the terms or conditions of the transactions contemplated by the Transaction Documents except as set forth in the Transaction Documents. Without limiting the foregoing, the Company confirms that, except as set forth in this Agreement, no Buyer has made any commitment or promise or has any other obligation to provide any financing to the Company or otherwise.

(f)Notices. Any notices, consents, waivers or other communications required or permitted to be given under the terms of this Agreement must be in writing and will be deemed to have been delivered: (i) upon receipt, when delivered personally, (ii) when sent, if sent by email (provided that such sent email is kept on file (whether electronically or otherwise) by the sending party and the sending party does not receive an automatically generated message from the recipient’s email server that such email could not be delivered to such recipient, or (iii) one Business Day after deposit with an overnight courier service, in each case properly addressed to the party to receive the same. The addresses and facsimile numbers for such communications shall be:

If to the Company:

Venus Concept Inc.

235 Yorkland Blvd, Suite 900

Toronto, Ontario M2J 4Y8

Attention: Domenic DiSisto

Email: ddisisto@venusconcept.com

with a copy (for informational purposes only) to:

Reed Smith LLP

599 Lexington Avenue

New York, NY 10022

Facsimile: (212) 521 5450

Attention: Mark Pedretti

Email: mpedretti@reedsmith.com

If to the Transfer Agent:

Computershare

150 Royall Street

Canton, MA 02021.

If to a Buyer, to its physical or electronic address set forth on the Schedule of Buyers, with copies to such Buyer’s representatives as set forth on the Schedule of Buyers.

With a copy (for informational purposes only) to:

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Proskauer Rose LLP
One International Place
Boston, MA 02110-2600
Attention: Steve Peck

Facsimile: 617.526.9899

Email: speck@proskauer.com

or to such other physical or electronic address or to the attention of such other Person as the recipient party has specified by written notice given to each other party five (5) days prior to the effectiveness of such change. Written confirmation of receipt (A) given by the recipient of such notice, consent, waiver or other communication, (B) mechanically or electronically generated by the sender’s email containing the time, date and recipient email address of such transmission, or (C) provided by an overnight courier service shall be rebuttable evidence of personal service, receipt by email or receipt from an overnight courier service in accordance with clause (i), (ii) or (iii) above, respectively.

(g)Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties and their respective successors and assigns. The Company shall not assign this Agreement or any rights or obligations hereunder without the prior written consent of the holders of at least a majority of the aggregate number Common Shares on an as converted basis issued and issuable hereunder, including by merger or consolidation. A Buyer may assign some or all of its rights hereunder with the consent of the Company, in which event such assignee shall be deemed to be a Buyer hereunder with respect to such assigned rights; provided that such assignee agrees in writing to be bound, with respect to the transferred Securities, by the provisions of the Transaction Documents that apply to the “Buyers.”

(h)No Third Party Beneficiaries. This Agreement is intended for the benefit of the parties hereto and their respective permitted successors and assigns, and is not for the benefit of, nor may any provision hereof be enforced by, any other Person, except as set forth in Section 9(p) below and except that each Indemnitee shall have the right to enforce the obligations of the Company with respect to Section 9(k) below.

(i)Survival. The representations and warranties of the Company and the Buyers contained in Sections 2 and 3 and in the Secretary’s Certificate and Officer’s Certificate delivered on the Initial Closing, and the agreements and covenants set forth in Sections 4, 8 and 9 shall survive the Initial Closing. Each Buyer shall be responsible only for its own representations, warranties, agreements and covenants hereunder.

(j)Further Assurances. Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as any other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby.

(k)Indemnification. The Company agrees to indemnify and hold harmless each of the Buyers, the officers, directors, partners, members, and employees of each Buyer, each Person, if any, who controls any such Buyer (within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act) and the officers, directors, partners, members and employees of each such controlling Person (each, an “Indemnified Party”), against any losses, claims, damages, liabilities or expenses, joint or several, to which such Indemnified Party may become subject under the 1933 Act, the 1934 Act, or any other federal or state statutory law or regulation, or at common law (including in settlement of any litigation, if such settlement is effected with the written consent of the Company), insofar as such losses, claims, damages, liabilities or expenses (or actions in respect thereof as contemplated below) arise out of or are based in

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whole or in part on the inaccuracy in the representations and warranties of the Company contained in the Transaction Documents or the failure of the Company to perform its obligations hereunder or thereunder, and will reimburse each Indemnified Party for legal and other expenses reasonably incurred as such expenses are reasonably incurred by such Indemnified Party in connection with investigating, defending, settling, compromising or paying such loss, claim, damage, liability, expense or action; provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, damage, liability or expense arises out of or is based upon (i) the failure of such Indemnified Party to comply with the covenants and agreements contained in Section 2(h) above respecting sale of the Shares, or (ii) the inaccuracy of any representations made by such Indemnified Party herein. Notwithstanding the foregoing, in no event shall the Company have any liability under this Section 8(k) in an amount that exceeds the proceeds received by the Company pursuant to this Agreement.

(i)Each Buyer shall severally, and not jointly, indemnify and hold harmless the other Buyers and the Company, its directors, officers, and employees, each Person who controls the Company (within the meaning of Section 15 of the 1933 Act and Section 20 of the 1934 Act) and the directors, officers, partners, members or employees of such controlling Persons, against any losses, claims, damages, liabilities or expenses to which the Company, each of its directors or each of its controlling Persons may become subject, under the 1933 Act, the 1934 Act, or any other federal or state statutory law or regulation, or at common law or otherwise (including in settlement of any litigation, if such settlement is effected with the written consent of such Buyer) insofar as such losses, claims, damages, liabilities or expenses (or actions in respect thereof as contemplated below) arise out of or are based upon (i) any failure by such Buyer to comply with the covenants and agreements contained in Section 2(h) above respecting the sale of the Securities or (ii) the inaccuracy of any representation made by such Buyer in any of the Transaction Documents, in each case to the extent, and will reimburse the Company, each of its directors, and each of its controlling Persons for any legal and other expense reasonably incurred, as such expenses are reasonably incurred by the Company, each of its directors, and each of its controlling Persons in connection with investigating, defending, settling, compromising or paying any such loss, claim, damage, liability, expense or action. No Buyer shall be liable for the indemnification obligations of any other Buyer.

(l)No Strict Construction. The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent, and no rules of strict construction will be applied against any party.

(m)Remedies. Each Buyer shall have all rights and remedies set forth in the Transaction Documents and all of the rights which such holders have under any law. Any Person having any rights under any provision of this Agreement shall be entitled to enforce such rights specifically (without posting a bond or other security), to recover damages by reason of any breach of any provision of this Agreement and to exercise all other rights granted by law.

(n)Independent Nature of Buyers’ Obligations and Rights. The obligations of each Buyer under any Transaction Document are several and not joint with the obligations of any other Buyer, and no Buyer shall be responsible in any way for the performance of the obligations of any other Buyer under any Transaction Document. Nothing contained herein or in any other Transaction Document, and no action taken by any Buyer pursuant hereto or thereto, shall be deemed to constitute the Buyers as, and the Company acknowledges that the Buyers do not so constitute, a partnership, an association, a joint venture or any other kind of entity, or create a presumption that the Buyers are in any way acting in concert or as a group, and the Company will not assert any such claim with respect to such obligations or the transactions contemplated by the Transaction Documents and the Company acknowledges that the Buyers are not acting in concert or as a group with respect to such obligations or the transactions contemplated by the Transaction Documents. The Company acknowledges and each Buyer confirms that it has

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independently participated in the negotiation of the transaction contemplated hereby with the advice of its own counsel and advisors. Each Buyer shall be entitled to independently protect and enforce its rights, including, without limitation, the rights arising out of this Agreement or out of any other Transaction Documents, and it shall not be necessary for any other Buyer to be joined as an additional party in any proceeding for such purpose.

(o)Reliance by the Agents. The parties agree and acknowledge that the Agents may rely on the representations, warranties, agreements and covenants of the Company contained in this Agreement and may rely on the representations and warranties of the respective Buyers contained in this Agreement as if such representations, warranties, agreements, and covenants, as applicable, were made directly to the Agents. The parties further agreement that the Agents may rely on or, if the Agents so request, be specifically named as an addressee of, the legal opinions to be delivered pursuant to Section 7(d) of this Agreement.

(p)Exculpation of Agents. Each party hereto agrees for the express benefit of the Agents, their respective affiliates and their respective representatives that:

(i)Neither Agents nor any of their affiliates or any of their representatives (A) have any duties or obligations other than those specifically set forth herein or in the Engagement Letter, (B) make any representation or warranty, or have any responsibilities as to the validity, accuracy, value or genuineness of any information, certificates or documentation delivered by or on behalf of the Company pursuant to this Agreement or the Transaction Documents or in connection with any of the transactions contemplated hereby, or (C) shall be liable (i) for any action taken, suffered or omitted by any of them in good faith and reasonably believed to be authorized or within the discretion or rights or powers conferred upon it by this Agreement or any Transaction Document or (ii) for anything which any of them may do or refrain from doing in connection with this Agreement or any Transaction Document, except for such party’s own gross negligence, willful misconduct or bad faith.

(ii)Each of the Agents, their respective affiliates and their respective representatives shall be entitled to rely on, and shall be protected in acting upon, any certificate, instrument, opinion, notice, letter or any other document or security delivered to any of them by or on behalf of the Company.

(iii)Each Buyer represents and warrants, for the express benefit of the Agents, their respective affiliates and their respective representatives, that (A) it has independently made its own analysis and decision to enter into the transactions contemplated by this Agreement and the Transaction Documents based on such information as it deems appropriate and without reliance on the Placement Agents and (B) it is relying exclusively on its own sources of information and advisors with respect to all business, legal, regulatory, accounting, credit and tax matters.

(q)Waiver of Conflicts. Each party to this Agreement acknowledges that Reed Smith LLP, counsel for the Company, has in the past performed and may continue to perform legal services for certain of the Buyers in matters unrelated to the transactions described in this Agreement, including the representation of such Buyers in financings and other matters. Accordingly, each party to this Agreement hereby (a) acknowledges that they have had an opportunity to ask for information relevant to this disclosure; and (b) gives its informed consent to Reed Smith LLP’s representation of certain of the Buyers in such unrelated matters and Reed Smith LLP’s representation of the Company in connection with this Agreement and the transactions contemplated hereby.

 

[Signature Page Follows]

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IN WITNESS WHEREOF, the undersigned has duly executed this Agreement as of the date first written above.

 

 

 

Signature Page to Securities Purchase Agreement

 

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IN WITNESS WHEREOF, the undersigned has duly executed this Agreement as of the date first written above.

 

 

 

 

 

 

Signature Page to Securities Purchase Agreement

 

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IN WITNESS WHEREOF, the undersigned has duly executed this Agreement as of the date first written above.

 

 

 

 

Signature Page to Securities Purchase Agreement

 

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IN WITNESS WHEREOF, the undersigned has duly executed this Agreement as of the date first written above.

 

 

 

 

Signature Page to Securities Purchase Agreement

 

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IN WITNESS WHEREOF, the undersigned has duly executed this Agreement as of the date first written above.

 

 

 

 

Signature Page to Securities Purchase Agreement

 

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IN WITNESS WHEREOF, the undersigned has duly executed this Agreement as of the date first written above.

 

 

 

 

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EXHIBIT A

SCHEDULE OF BUYERS

 

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                           Exhibit 4.13

REGISTRATION RIGHTS AGREEMENT

This REGISTRATION RIGHTS AGREEMENT (as it may be amended from time to time in accordance with the terms hereof, the “Agreement”), dated as of March [ ], 2020, is made by and among Venus Concept Inc., a Delaware corporation (the “Company”), and the investors listed on Schedule I hereto (together with their Permitted Transferees that become party hereto, the “Investors”). Terms that are not defined herein, shall have the meaning set forth in the Securities Purchase Agreement (as defined below).

RECITALS

WHEREAS, the Company and the Investors entered into that certain Securities Purchase Agreement dated as of March 18, 2020 (the “Securities Purchase Agreement”), pursuant to which the Company issued to the Investors (i)(a) an aggregate of 2,300,000 shares of its common stock (“Common Stock”), par value $0.0001 per share (the “Shares”) and (b) warrants to purchase up to an aggregate of 1,725,000 shares of Common Stock (the “Common Stock Warrant Shares”) at an exercise price of $3.50 per share, and (ii)(a) an aggregate of 660,000 shares of its Series A Preferred Stock, par value $0.0001 per share, convertible into 6,600,000 shares of Common Stock (the “Conversion Shares”) and (b) warrants to purchase up to an aggregate of 4,950,000 shares of Common Stock (the “Preferred Stock Warrant Shares”) at an exercise price of $3.50 per share;

WHEREAS, pursuant to the terms of the Securities Purchase Agreement, the Company agreed to provide certain registration rights to the Investors.

NOW, THEREFORE, in consideration of the foregoing and the mutual promises, covenants and agreements of the parties hereto, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows:

ARTICLE 1
EFFECTIVENESS

Section 1.1Effectiveness. This Agreement shall become effective on the Closing Date.

ARTICLE 2
DEFINITIONS

Section 2.1Definitions. As used in this Agreement, the following terms shall have the following meanings:

“Adverse Disclosure” means public disclosure of material non-public information that, in the good faith judgment of the board of directors of the Company: (i) would be required to be made in any Registration Statement filed with the SEC by the Company so that such Registration Statement, from and after its effective date, does not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the

 

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statements therein not misleading; (ii) would not be required to be made at such time but for the filing, effectiveness or continued use of such Registration Statement; and (iii) the Company has a bona fide business purpose for not disclosing publicly.

“Affiliate” means, with respect to any specified Person, (a) any Person that directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with, such specified Person or (b) in the event that the specified Person is a natural Person, a Member of the Immediate Family of such Person; provided that the Company and each of its subsidiaries shall be deemed not to be Affiliates of any Investor. As used in this definition, the term “control” means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through ownership of voting securities, by contract or otherwise.

“Agreement” shall have the meaning set forth in the preamble.

“Business Day” means any day that is not a Saturday, a Sunday or other day on which banks are required or authorized by law to be closed in the City of New York.

“Common Stock” shall have the meaning set forth in the recitals.

“Common Stock Warrant Shares” shall have the meaning set forth in the recitals.

“Conversion Shares” shall have the meaning set forth in the recitals.

“Event” shall have the meaning set forth in Section 3.1.2.

“Event Date” shall have the meaning set forth in Section 3.1.2.

“Exchange Act” means the Securities Exchange Act of 1934, as amended, and any successor thereto, and any rules and regulations promulgated thereunder, all as the same shall be in effect from time to time.

“Filing Date” shall have the meaning set forth in Section 3.1.1.

“FINRA” means the Financial Industry Regulatory Authority.

“Issuer Free Writing Prospectus” means an issuer free writing prospectus, as defined in Rule 433 under the Securities Act, relating to an offer of the Registrable Securities.

“Loss” shall have the meaning set forth in Section 3.4.1.

“Member of the Immediate Family” means, with respect to any Person who is an individual, (a) each parent, spouse (but not including a former spouse or a spouse from whom such Person is legally separated) or child (including those adopted) of such individual and (b) each trustee, solely in his or her capacity as trustee, for a trust naming only one or more of the Persons listed in sub-clause (a) as beneficiaries.

“Permitted Transferee” means any Affiliate of any Investor.

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“Person” means an individual, partnership, corporation, trust, joint venture, limited liability company, unincorporated organization, or any government, governmental department or agency or political subdivision thereof.

“Piggyback Notice” shall have the meaning set forth in Section 3.2.1.

“Piggyback Registration” shall have the meaning set forth in Section 3.2.1.

“Preferred Stock Warrant Shares” shall have the meaning set forth in the recitals.

“Prospectus” means (i) the prospectus included in any Registration Statement, all amendments and supplements to such prospectus, including post-effective amendments and supplements, and all other material incorporated by reference in such prospectus, and (ii) any Issuer Free Writing Prospectus.

“Public Offering” means the offer and sale of Registrable Securities for cash pursuant to an effective Registration Statement under the Securities Act (other than a Registration Statement on Form S-4 or Form S-8 or any successor form).

“Registrable Securities” means (i) all Shares, (ii) all Common Stock Warrant Shares, (iii) all Conversion Shares (iv) all Preferred Stock Warrant Shares, and (v) all shares of common stock of the Company directly or indirectly issued or then issuable with respect to the securities referred to in clauses (i), (ii), (iii) or (iv) above by way of a stock dividend or stock split, or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization. As to any particular Registrable Securities, such securities shall cease to be Registrable Securities when (w) a Registration Statement with respect to the sale of such securities shall have become effective under the Securities Act and such securities shall have been disposed of in accordance with such Registration Statement, (x) such securities shall have been Transferred pursuant to Rule 144, (y) such holder is able to immediately sell such securities under Rule 144 without any restrictions on transfer (including without application of paragraphs (c), (d), (e), (f) and (h) of Rule 144, and for purposes of Section 3.2, Rule 144(e) shall be applied as if such holder is an Affiliate), as reasonably determined by the Investor, or (z) such securities shall have ceased to be outstanding.

“Registration” means registration under the Securities Act of the offer and sale to the public of any Registrable Securities under a Registration Statement. The terms “register”, “registered” and “registering” shall have correlative meanings.

“Registration Statement” means any registration statement (including the Shelf Registration Statement) of the Company filed with, or to be filed with, the SEC under the Securities Act, including the related Prospectus, amendments and supplements to such registration statement, including pre- and post-effective amendments, and all exhibits and all material incorporated by reference in such registration statement other than a registration statement (and related Prospectus) filed on Form S-4 or Form S-8 or any successor form thereto.

“Representatives” means, with respect to any Person, any of such Person’s officers, directors, employees, agents, attorneys, accountants, actuaries, consultants, equity financing

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partners or financial advisors or other Person associated with, or acting on behalf of, such Person.

“Rule 144” means Rule 144 under the Securities Act (or any successor rule).

“SEC” means the Securities and Exchange Commission or any successor agency having jurisdiction under the Securities Act.

“SEC Guidance” means (i) any publicly-available written or oral guidance of the SEC staff, or any comments, requirements or requests of the SEC staff and (ii) the Securities Act.

“Securities Act” means the Securities Act of 1933, as amended, and any successor thereto, and any rules and regulations promulgated thereunder, all as the same shall be in effect from time to time.

“Selling Stockholder Information” shall have the meaning set forth in Section 3.4.1.

“Shares” shall have the meaning set forth in the recitals.

“Shelf Period” shall have the meaning set forth in Section 3.1.4.

“Shelf Registration” shall have the meaning set forth in Section 3.1.1(a).

“Shelf Registration Statement” shall have the meaning set forth in Section 3.1.1(a).

“Shelf Suspension” shall have the meaning set forth in Section 3.1.4.

“Transfer” means, with respect to any Registrable Security, any interest therein, or any other securities or equity interests relating thereto, a direct or indirect transfer, sale, exchange, assignment, pledge, hypothecation or other encumbrance or other disposition thereof, including the grant of an option or other right, whether directly or indirectly, whether voluntarily, involuntarily, by operation of law, pursuant to judicial process or otherwise. “Transferred” shall have a correlative meaning.

Section 2.2Other Interpretive Provisions.  The meanings of defined terms are equally applicable to the singular and plural forms of the defined terms.

(a)The words “hereof”, “herein”, “hereunder” and similar words refer to this Agreement as a whole and not to any particular provision of this Agreement; and any subsection and section references are to this Agreement unless otherwise specified.

(b)The term “including” is not limiting and means “including without limitation.”

(c)The captions and headings of this Agreement are for convenience of reference only and shall not affect the interpretation of this Agreement.

(d)Whenever the context requires, any pronouns used herein shall include the corresponding masculine, feminine or neuter forms.

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ARTICLE 3
REGISTRATION RIGHTS

The Company will perform and comply, and cause each of its subsidiaries to perform and comply, with such of the following provisions as are applicable to it. Each Investor will perform and comply with such of the following provisions as are applicable to such Investor.

Section 3.1Shelf Registration.

Section 3.1.1Request for Shelf Registration. As soon as reasonably practicable, but in any event on or prior to 30th day following the Closing Date (the “Filing Date”), the Company shall file with the SEC a shelf Registration Statement pursuant to Rule 415 under the Securities Act (“Shelf Registration Statement”) relating to the offer and sale of Registrable Securities held by the Investors and any other Investors from time to time in accordance with the methods of distribution elected by the Investors, and the Company shall use its reasonable best efforts to cause such Shelf Registration Statement to become effective under the Securities Act as soon as reasonably practicable following its initial filing. Any such Registration pursuant to a Shelf Registration Request shall hereinafter be referred to as a “Shelf Registration.” The Shelf Registration Statement shall be on Form S-3 or, if Form S-3 is not then available to the Company, on Form S-1 or such other form of registration statement as is then available to effect a registration for resale of such Registrable Securities.

Section 3.1.2If: (i) the Shelf Registration Statement is not filed on or prior to its Filing Date, (ii) the Company fails to file with the SEC a request for acceleration of a Registration Statement in accordance with Rule 461 promulgated by the SEC pursuant to the Securities Act, within five Business Days of the date that the Company is notified (orally or in writing, whichever is earlier) by the SEC that such Registration Statement will not be “reviewed” or will not be subject to further review, or (iii) after the effective date of a Registration Statement, such Registration Statement ceases for any reason to remain continuously effective as to all Registrable Securities included in such Registration Statement, or the Investors are otherwise not permitted to utilize the Prospectus therein to resell such Registrable Securities (other than due to the fault of an Investor), for more than twenty (20) consecutive calendar days or more than an aggregate of twenty-five (25) calendar days (which need not be consecutive calendar days) during any 12-month period (any such failure or breach being referred to as an “Event,” and for purposes of clause (i), the date on which such Event occurs, and for purpose of clause (ii) the date on which such five (5) Business Days period is exceeded, and for purpose of clause (iii) the date on which such twenty (20) or twenty-five (25) calendar day period, as applicable, is exceeded being referred to as “Event Date”), then, in addition to any other rights the Investors may have hereunder or under applicable law, on each such Event Date and on each monthly anniversary of each such Event Date (if the applicable Event shall not have been cured by such date) until the applicable Event is cured, the Company shall pay to each Investor an amount in cash, as partial liquidated damages and not as a penalty, equal to the product of 0.5% multiplied by the aggregate purchase price paid by such Investor pursuant to the Securities Purchase Agreement for such Registerable Securities held by such Investor on such Event Date, provided, however, that the Company shall not be required to make any payments pursuant to this Section 3.1.2 if an Event occurred at such time that all Registrable Securities are eligible for resale pursuant to Rule 144 (without volume restrictions or current public information

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requirements) promulgated by the SEC pursuant to the Securities Act; provided, further, that the Company shall not be required to make any payments pursuant to this Section 3.1.2 with respect to any Registrable Securities the Company is unable to register due to limits imposed by the SEC’s interpretation of Rule 415 under the Securities Act. The parties agree that the maximum aggregate liquidated damages payable to an Investor under this Agreement and the Securities Purchase Agreement shall be 8.0% of the aggregate Subscription Amount paid by such Investor pursuant to the Securities Purchase Agreement. If the Company fails to pay any partial liquidated damages pursuant to this Section 3.1.2 in full within seven (7) Business Days after the date payable, the Company will pay interest thereon at a rate of 1.0% per month (or such lesser maximum amount that is permitted to be paid by applicable law) to the Investor, accruing daily from the date such partial liquidated damages are due until such amounts, plus all such interest thereon, are paid in full. The partial liquidated damages pursuant to the terms hereof shall apply on a daily pro rata basis for any portion of a month prior to the cure of an Event.  Such payments shall constitute the Investors’ exclusive monetary remedy for such Events, but shall not affect the right of the Investors to seek injunctive relief.

Section 3.1.3Continued Effectiveness. The Company shall use its reasonable best efforts to keep such Shelf Registration Statement continuously effective under the Securities Act in order to permit the Prospectus forming part of the Shelf Registration Statement to be usable by an Investor until the earlier of: (i) the date as of which all Registrable Securities have been sold pursuant to the Shelf Registration Statement or another Registration Statement filed under the Securities Act (but in no event prior to the applicable period referred to in Section 4(a)(3) of the Securities Act and Rule 174 thereunder); and (ii) the date as of which all Investors no longer hold Registrable Securities (such period of effectiveness, the “Shelf Period”).                  

Section 3.1.4Suspension of Registration. If the continued use of such Shelf Registration Statement at any time would require the Company to make an Adverse Disclosure, the Company may, upon giving prompt written notice of such action to the Investors, suspend use of the Shelf Registration Statement (a “Shelf Suspension”); provided, however, that the Company shall not be permitted to exercise a Shelf Suspension more than one time during any twelve (12)-month period for a period not to exceed ninety (90) consecutive days. In the case of a Shelf Suspension, the Investors agree to suspend use of the applicable Prospectus in connection with any sale or purchase of, or offer to sell or purchase, Registrable Securities, upon receipt of the notice referred to above. The Company shall immediately notify the Investors in writing upon the termination of any Shelf Suspension, amend or supplement the Prospectus, if necessary, so it does not contain any untrue statement or omission and furnish to the Investors such numbers of copies of the Prospectus as so amended or supplemented as the Investors may reasonably request. The Company shall, if necessary, supplement or amend the Shelf Registration Statement, if required by the registration form used by the Company for the Shelf Registration Statement or by the instructions applicable to such registration form or by the Securities Act or the rules or regulations promulgated thereunder or as may reasonably be requested by the Investors of a majority of the Registrable Securities then outstanding.

Section 3.1.5Limitation of Shelf Registration.  Notwithstanding any other provision of this Agreement, if the SEC or any SEC Guidance sets forth a limitation on the number of Registrable Securities permitted to be registered on a particular Registration Statement as a secondary offering (and notwithstanding that the Company used diligent efforts to

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advocate with the SEC for the registration of all or a greater portion of Registrable Securities), unless otherwise directed in writing by an Investor as to its Registrable Securities, the number of Registrable Securities to be registered on such Registration Statement will be reduced as follows:

(a)First, the Company shall reduce or eliminate any securities to be included by any Person other than the Investors;

(b)Second, the Company shall reduce Registrable Securities represented by Common Stock Warrant Shares and Preferred Stock Warrant Shares (applied, in the case that some Common Stock Warrant Shares and Preferred Stock Warrant Shares may be registered, to the Investors on a pro rata basis based on the total number of unregistered Common Stock Warrant Shares and Preferred Stock Warrant Shares held by such Investors); and

(c)Third, the Company shall reduce Registrable Securities represented by Shares and Conversion Shares (applied, in the case that some Shares and Conversion Shares may be registered, to the Investors on a pro rata basis based on the total number of unregistered Shares and Conversion Shares held by such Investors).

In the event of a cutback hereunder, the Company shall give the Investor at least two (2) Business Days prior written notice along with the calculations as to such Investor’s allotment.  In the event the Company amends the initial Registration Statement filed pursuant to this Agreement in accordance with the foregoing, the Company will use its best efforts to file with the SEC, as promptly as allowed by the SEC or SEC Guidance provided to the Company or to registrants of securities in general, one or more registration statements on Form S-3 or such other form available to register for resale those Registrable Securities that were not registered for resale on such initial Registration Statement, as amended.

Section 3.2Piggyback Registration.

Section 3.2.1Participation. If the Company at any time proposes to file a Registration Statement under the Securities Act or to conduct a Public Offering with respect to any offering of its equity securities for its own account or for the account of any other Persons (other than (i) a Registration under Section 3.1, (ii) a Registration on Form S-4 or Form S-8 or any successor form to such forms or (iii) a Registration of securities solely relating to an offering and sale to employees or directors of the Company or its subsidiaries pursuant to any employee stock plan or other employee benefit plan arrangement), then, as soon as practicable (but in no event less than ten (10) Business Days prior to the proposed date of filing of such Registration Statement or, in the case of a Public Offering under a Shelf Registration Statement, the anticipated pricing or trade date), the Company shall give written notice (a “Piggyback Notice”) of such proposed filing or Public Offering to the Investors, and such Piggyback Notice shall offer the Investors the opportunity to register under such Registration Statement, or to sell in such Public Offering, such number of Registrable Securities as the Investors may request in writing (a “Piggyback Registration”). Subject to Section 3.2.2, the Company shall include in such Registration Statement or in such Public Offering as applicable, all such Registrable Securities that are requested to be included therein within seven (7) Business Days after the receipt from the Investor of any such notice; provided, however, that if at any time after giving written notice of its intention to register or sell any securities and prior to the effective date of the Registration Statement filed in connection with such Registration, or the pricing or trade date of a Public

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Offering under a Shelf Registration Statement, the Company determines for any reason not to register or sell or to delay the Registration or sale of such securities, the Company shall give written notice of such determination to the Investors and, thereupon, (i) in the case of a determination not to register or sell, shall be relieved of its obligation to register or sell any Registrable Securities in connection with such Registration or Public Offering (but not from its obligation to pay the Registration Expenses in connection therewith), and (ii) in the case of a determination to delay Registration or sale, shall be permitted to delay registering or selling any Registrable Securities, for the same period as the delay in registering or selling such other securities. The Investors shall have the right to withdraw all or part of their request for inclusion of its Registrable Securities in a Piggyback Registration by giving written notice to the Company of its request to withdraw. The parties hereto understand and agree that any failure of an Investor to timely provide any required information pursuant to this Section 3.2.1 shall be deemed a waiver by such Investor of its rights to include its Registrable Securities in a Piggyback Registration and to receive related liquidated damages hereunder.

Section 3.2.2Priority of Piggyback Registration. If the managing underwriter or underwriters of any proposed offering of Registrable Securities included in a Piggyback Registration informs the Company and the Investors in writing that, in its or their opinion, the aggregate number of securities that the Investors and any other Persons intend to include in such offering exceeds the number that can be sold in such offering without being likely to have a significant adverse effect on the price, timing or distribution of the securities offered or the market for the securities offered, then the securities to be included in such Registration shall be (i) first, one hundred percent (100%) of the securities that the Company proposes to sell, and (ii) second, and only if all the securities referred to in clause (i) have been included, the aggregate number of the Investors’ Registrable Securities who have sought to include such Registrable Securities in the proposed offering, on a pro rata basis based on such aggregate number of such securities, that, in the opinion of such managing underwriter or underwriters, can be sold without having such adverse effect, and (iii) third, and only if all of the Registrable Securities referred to in clause (ii) have been included in such Registration, any other securities eligible for inclusion in such Registration.

Section 3.2.3No Effect on Other Registrations. No Registration of Registrable Securities effected pursuant to a request under this Section 3.2 shall be deemed to have been effected pursuant to Section 3.1 or shall relieve the Company of its obligations under Section 3.1.

Section 3.3Registration Procedures.

Section 3.3.1Requirements. In connection with the Company’s obligations under Sections 3.1 – 3.2, the Company shall use its reasonable best efforts to effect such Registration and to permit the sale of such Registrable Securities in accordance with the intended method or methods of distribution thereof as expeditiously as reasonably practicable, and in connection therewith the Company shall:

(a)prepare the required Registration Statement, including all exhibits and financial statements required under the Securities Act to be filed therewith and Prospectus, and, before filing a Registration Statement or Prospectus or any amendments or supplements thereto, (x) furnish to the underwriters, if any, and to the Investors, copies of all documents prepared to

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be filed, which documents shall be subject to the review of such underwriters and the Investors and their respective counsel and (y) make such changes in such documents concerning an Investor prior to the filing thereof as such Investor, or its counsel, may reasonably request;

(b)prepare and file with the SEC such amendments and post-effective amendments to such Registration Statement and supplements to the Prospectus as may be (x) reasonably requested by the Investors with Registrable Securities covered by such Registration Statement, (y) reasonably requested by any Investor  (to the extent such request relates to information relating to such Investor), or (z) necessary to keep such Registration Statement effective for the period of time required by this Agreement, and comply with provisions of the applicable securities laws with respect to the sale or other disposition of all securities covered by such Registration Statement during such period in accordance with the intended method or methods of disposition by the sellers thereof set forth in such Registration Statement;

(c)notify the Investors and the managing underwriter or underwriters, if any, and (if requested) confirm such notice in writing and provide copies of the relevant documents, as soon as reasonably practicable after notice thereof is received by the Company (a) when the applicable Registration Statement or any amendment thereto has been filed or becomes effective, and when the applicable Prospectus or any amendment or supplement thereto has been filed, (b) of any written comments by the SEC, or any request by the SEC or other federal or state governmental authority for amendments or supplements to such Registration Statement or such Prospectus, or for additional information (whether before or after the effective date of the Registration Statement) or any other correspondence with the SEC relating to, or which may affect, the Registration, (c) of the issuance by the SEC of any stop order suspending the effectiveness of such Registration Statement or any order by the SEC or any other regulatory authority preventing or suspending the use of any preliminary or final Prospectus or the initiation or threatening of any proceedings for such purposes, (d) if, at any time, the representations and warranties of the Company in any applicable underwriting agreement cease to be true and correct and (e) of the receipt by the Company of any notification with respect to the suspension of the qualification of the Registrable Securities for offering or sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose;

(d)promptly notify the Investors and the managing underwriter or underwriters, if any, when the Company becomes aware of the happening of any event as a result of which the applicable Registration Statement or the Prospectus included in such Registration Statement (as then in effect) contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements therein (in the case of such Prospectus or any preliminary Prospectus, in light of the circumstances under which they were made) not misleading, when any Issuer Free Writing Prospectus includes information that may conflict with the information contained in the Registration Statement, or, if for any other reason it shall be necessary during such time period to amend or supplement such Registration Statement or Prospectus in order to comply with the Securities Act and, as promptly as reasonably practicable thereafter, prepare and file with the SEC, and furnish without charge to the Investors and the managing underwriter or underwriters, if any, an amendment or supplement to such Registration Statement or Prospectus, which shall correct such misstatement or omission or effect such compliance;

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(e)to the extent the Company is eligible under the relevant provisions of Rule 430B under the Securities Act, if the Company files any Shelf Registration Statement, the Company shall include in such Shelf Registration Statement such disclosures as may be required by Rule 430B under the Securities Act (referring to the unnamed selling security holders in a generic manner) in order to ensure that any Investor may be added to such Shelf Registration Statement at a later time through the filing of a Prospectus supplement rather than a post-effective amendment;

(f)use its reasonable best efforts to prevent, or obtain the withdrawal of, any stop order or other order or notice preventing or suspending the use of any preliminary or final Prospectus;

(g)promptly incorporate in a Prospectus supplement, Issuer Free Writing Prospectus or post-effective amendment such information as the managing underwriter or underwriters, if any, and Investors of a majority of any Registrable Securities being sold agree should be included therein relating to the plan of distribution with respect to such Registrable Securities; and make all required filings of such Prospectus supplement, Issuer Free Writing Prospectus or post-effective amendment as soon as reasonably practicable after being notified of the matters to be incorporated in such Prospectus supplement, Issuer Free Writing Prospectus or post-effective amendment;

(h)furnish to the Investors and each underwriter, if any, without charge, as many conformed copies as the Investors or such underwriter may reasonably request of the applicable Registration Statement and any amendment or post-effective amendment or supplement thereto, including financial statements and schedules, all documents incorporated therein by reference and all exhibits (including those incorporated by reference);

(i)deliver to the Investors and each underwriter, if any, without charge, as many copies of the applicable Prospectus (including each preliminary Prospectus) and any amendment or supplement thereto and such other documents as the Investors or such underwriter may reasonably request in order to facilitate the disposition of the Registrable Securities by the Investors or underwriter (it being understood that the Company shall consent to the use of such Prospectus or any amendment or supplement thereto by the Investors and the underwriters, if any, in connection with the offering and sale of the Registrable Securities covered by such Prospectus or any amendment or supplement thereto);

(j)on or prior to the date on which the applicable Registration Statement becomes effective, use its reasonable best efforts to register or qualify, and cooperate with the Investors, the managing underwriter or underwriters, if any, and their respective counsel, in connection with the Registration or qualification of such Registrable Securities for offer and sale under the securities or “Blue Sky” laws of each state and other jurisdiction as the Investors holding  a majority of the Registrable Securities included in any such Registration Statement, managing underwriter or underwriters, if any, or their respective counsel reasonably request in writing and do any and all other acts or things reasonably necessary or advisable at Investors’ expense to keep such Registration or qualification in effect for such period as required by Section 3.1, provided that the Company shall not be required to qualify generally to do business

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in any jurisdiction where it is not then so qualified or to take any action which would subject it to taxation or general service of process in any such jurisdiction where it is not then so subject;

(k)cooperate with the Investors and the managing underwriter or underwriters, if any, to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be sold and not bearing any restrictive legends and enable such Registrable Securities to be in such denominations and registered in such names as the managing underwriters may request prior to any sale of Registrable Securities to the underwriters;

(l)use its reasonable best efforts to cause the Registrable Securities covered by the applicable Registration Statement to be registered with or approved by such other governmental agencies or authorities as may be necessary to enable the seller or sellers thereof or the underwriter or underwriters, if any, to consummate the disposition of such Registrable Securities;

(m)make such representations and warranties to the Investors, and the underwriters or agents, if any, in form, substance and scope as are customarily made by issuers in public offerings similar to the offering then being undertaken;

(n)enter into such customary agreements (including underwriting and indemnification agreements) and take all such other actions as the Investors or the managing underwriter or underwriters, if any, reasonably request in order to expedite or facilitate the Registration and disposition of such Registrable Securities;

(o)obtain for delivery to the Investors and to the underwriter or underwriters, if any, an opinion or opinions from counsel for the Company dated the most recent effective date of the Registration Statement, in customary form, scope and substance, which opinions shall be reasonably satisfactory to the Investors or underwriters, as the case may be, and their respective counsel;

(p)cooperate with each Investor selling Registrable Securities and each underwriter, if any, participating in the disposition of such Registrable Securities and their respective counsel in connection with any filings required to be made with FINRA;

(q)use its reasonable best efforts to comply with all applicable securities laws and, if a Registration Statement was filed, make available to its security holders, as soon as reasonably practicable, an earnings statement satisfying the provisions of Section 11(a) of the Securities Act and the rules and regulations promulgated thereunder;

(r)provide and cause to be maintained a transfer agent and registrar for all Registrable Securities covered by the applicable Registration Statement;

(s)use its reasonable best efforts to cause all Registrable Securities covered by the applicable Registration Statement to be listed on each securities exchange on which any of the Company’s equity securities are then listed or quoted and on each inter-dealer quotation system on which any of the Company’s equity securities are then quoted;

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(t)take no direct or indirect action prohibited by Regulation M under the Exchange Act;

(u)take all reasonable action to ensure that any Issuer Free Writing Prospectus utilized in connection with any Registration complies in all material respects with the Securities Act, is filed in accordance with the Securities Act to the extent required thereby, is retained in accordance with the Securities Act to the extent required thereby and, when taken together with the related Prospectus, will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; and

(v)take all such other commercially reasonable actions as are necessary or advisable in order to expedite or facilitate the disposition of such Registrable Securities in accordance with the terms of this Agreement.

Section 3.3.2Company Information Requests. The Company may require the Investors to furnish to the Company such information regarding the distribution of such securities and such other information relating to the Investors and their ownership of Registrable Securities as the Company may from time to time reasonably request in writing and the Company may exclude from such Registration or sale the Registrable Securities of the Investors who unreasonably fails to furnish such information within a reasonable time after receiving such request. Each Investor agrees to furnish such information to the Company and to cooperate with the Company as reasonably necessary for inclusion in the Shelf Registration Statement and otherwise to enable the Company to comply with the provisions of this Agreement.

Section 3.4Indemnification.

Section 3.4.1Indemnification by the Company. The Company shall indemnify and hold harmless, to the full extent permitted by law, the Investors, each shareholder, member, limited or general partner of any Investor, each shareholder, member, limited or general partner of each such shareholder, member, limited or general partner, each of their respective Affiliates, officers, directors, shareholders, employees, advisors, and agents and each Person who controls (within the meaning of the Securities Act or the Exchange Act) such Persons and each of their respective Representatives from and against any and all losses, penalties, judgments, suits, costs, claims, damages, liabilities and expenses, joint or several (including reasonable costs of investigation and legal expenses as incurred and any indemnity and contribution payments made to underwriters ) (each, a “Loss” and collectively “Losses”) arising out of or based upon (i) any untrue or alleged untrue statement of a material fact contained in any Registration Statement under which such Registrable Securities are registered or sold under the Securities Act (including any final, preliminary or summary Prospectus contained therein or any amendment thereof or supplement thereto or any documents incorporated by reference therein) or any other disclosure document produced by or on behalf of the Company or any of its subsidiaries including any report and other document filed under the Exchange Act, (ii) any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein (in the case of a Prospectus or preliminary Prospectus, in light of the circumstances under which they were made) not misleading or (iii) any violation or alleged violation by the Company or any of its subsidiaries of any federal, state, foreign or common law rule or regulation

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applicable to the Company or any of its subsidiaries and relating to action or inaction in connection with any such registration, disclosure document or other document or report; provided, that the Investors shall not be entitled to indemnification pursuant to this Section 3.4.1 in respect of any untrue statement or omission contained in any information relating to any Investor furnished in writing by such Investor to the Company specifically for inclusion in a Registration Statement and used by the Company in conformity therewith (such information “Selling Stockholder Information”). This indemnity shall be in addition to any liability the Company may otherwise have. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of the Investors or any indemnified party and shall survive the Transfer of such securities by any Investor and regardless of any indemnity agreed to in the underwriting agreement that is less favorable to the Investors. The Company shall also indemnify underwriters, selling brokers, dealer managers and similar securities industry professionals participating in the distribution, their officers and directors and each Person who controls such Persons (within the meaning of the Securities Act and the Exchange Act) to the same extent as provided above (with appropriate modification) with respect to the indemnification of the indemnified parties.

Section 3.4.2Indemnification by the Investors. Each Investor shall (severally and not jointly) indemnify and hold harmless, to the fullest extent permitted by law, the Company, its directors and officers and each Person who controls the Company (within the meaning of the Securities Act or the Exchange Act) from and against any Losses resulting from (i) any untrue statement of a material fact in any Registration Statement under which such Registrable Securities were registered or sold under the Securities Act (including any final, preliminary or summary Prospectus contained therein or any amendment thereof or supplement thereto or any documents incorporated by reference therein) or (ii) any omission to state therein a material fact required to be stated therein or necessary to make the statements therein (in the case of a Prospectus or preliminary Prospectus, in light of the circumstances under which they were made) not misleading, in each case to the extent, but only to the extent, that such untrue statement or omission is contained in such Investor’s Selling Stockholder Information. In no event shall the liability of any Investor hereunder be greater in amount than the dollar amount of the proceeds from the sale of its Registrable Securities in the offering giving rise to such indemnification obligation, net of underwriting discounts and commissions but before expenses, less any amounts paid by such Investor pursuant to Section 3.4.4 and any amounts paid by such Investor as a result of liabilities incurred under the underwriting agreement, if any, related to such sale.

Section 3.4.3Conduct of Indemnification Proceedings. Any Person entitled to indemnification hereunder shall (i) give prompt written notice to the indemnifying party of any claim with respect to which it seeks indemnification (provided that any delay or failure to so notify the indemnifying party shall relieve the indemnifying party of its obligations hereunder only to the extent, if at all, that it forfeits substantive legal rights by reason of such delay or failure) and (ii) permit such indemnifying party to assume the defense of such claim with counsel reasonably satisfactory to the indemnified party; provided, however, that any Person entitled to indemnification hereunder shall have the right to select and employ separate counsel and to participate in the defense of such claim, but the fees and expenses of such counsel shall be at the expense of such Person unless (i) the indemnifying party has agreed in writing to pay such fees or expenses, (ii) the indemnifying party shall have failed to assume the defense of such claim

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within a reasonable time after receipt of notice of such claim from the Person entitled to indemnification hereunder and employ counsel reasonably satisfactory to such Person, (iii) the indemnified party has reasonably concluded (based upon advice of its counsel) that there may be legal defenses available to it or other indemnified parties that are different from or in addition to those available to the indemnifying party, or (iv) in the reasonable judgment of any such Person (based upon advice of its counsel) a conflict of interest may exist between such Person and the indemnifying party with respect to such claims (in which case, if the Person notifies the indemnifying party in writing that such Person elects to employ separate counsel at the expense of the indemnifying party, the indemnifying party shall not have the right to assume the defense of such claim on behalf of such Person). If the indemnifying party assumes the defense, the indemnifying party shall not have the right to settle such action without the consent of the indemnified party. No indemnifying party shall consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of an unconditional release from all liability in respect to such claim or litigation without the prior written consent of such indemnified party. If such defense is not assumed by the indemnifying party, the indemnifying party will not be subject to any liability for any settlement made without its prior written consent, but such consent may not be unreasonably withheld. It is understood that the indemnifying party or parties shall not, except as specifically set forth in this Section 3.4.3, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the reasonable fees, disbursements or other charges of more than one separate firm admitted to practice in such jurisdiction at any one time unless (x) the employment of more than one counsel has been authorized in writing by the indemnifying party or parties, (y) an indemnified party has reasonably concluded (based on the advice of counsel) that there may be legal defenses available to it that are different from or in addition to those available to the other indemnified parties or (z) a conflict or potential conflict exists or may exist (based upon advice of counsel to an indemnified party) between such indemnified party and the other indemnified parties, in each of which cases the indemnifying party shall be obligated to pay the reasonable fees and expenses of such additional counsel or counsels.

Section 3.4.4Contribution. If for any reason the indemnification provided for in Section 3.4.1 and Section 3.4.2 is unavailable to an indemnified party or insufficient in respect of any Losses referred to therein (other than as a result of exceptions or limitations on indemnification contained in Section 3.4.1 and Section 3.4.2), then the indemnifying party shall contribute to the amount paid or payable by the indemnified party as a result of such Loss in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and the indemnified party or parties on the other hand in connection with the acts, statements or omissions that resulted in such Losses, as well as any other relevant equitable considerations. In connection with any Registration Statement filed with the SEC by the Company, the relative fault of the indemnifying party on the one hand and the indemnified party on the other hand shall be determined by reference to, among other things, whether any untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified party and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The parties hereto agree that it would not be just or equitable if contribution pursuant to this Section 3.4.4 were determined by pro rata allocation or by any other method of allocation that does not take account of the equitable considerations referred to in this

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Section 3.4.4. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. The amount paid or payable by an indemnified party as a result of the Losses referred to in Sections 3.4.1 and 3.4.2 shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 3.4.4, in connection with any Registration Statement filed by the Company, no Investor shall not be required to contribute any amount in excess of the dollar amount of the proceeds from the sale of its Registrable Securities in the offering giving rise to such indemnification obligation, net of underwriting discounts and commissions but before expenses, less any amounts paid by such Investor pursuant to Section 3.4.2 and any amounts paid by such Investor as a result of liabilities incurred under the underwriting agreement, if any, related to such sale. If indemnification is available under this Section 3.4, the indemnifying parties shall indemnify each indemnified party to the full extent provided in Sections 3.4.1 and 3.4.2 hereof without regard to the provisions of this Section 3.4.4. The remedies provided for in this Section 3.4 are not exclusive and shall not limit any rights or remedies which may otherwise be available to any indemnified party at law or in equity.

Section 3.5Rules 144 and 144A and Regulation S

. The Company shall file the reports required to be filed by it under the Securities Act and the Exchange Act and the rules and regulations adopted by the SEC thereunder (or, if the Company is not required to file such reports, it will, upon the request of any Investor, make publicly available such necessary information for so long as necessary to permit sales that would otherwise be permitted by this Agreement pursuant to Rule 144, Rule 144A or Regulation S under the Securities Act, as such rules may be amended from time to time or any similar rule or regulation hereafter adopted by the SEC), and it will take such further action as any Investor may reasonably request, all to the extent required from time to time to enable the Investors to sell Registrable Securities without Registration under the Securities Act in transactions that would otherwise be permitted by this Agreement and within the limitation of the exemptions provided by (i) Rule 144, Rule 144A or Regulation S under the Securities Act, as such rules may be amended from time to time, or (ii) any similar rule or regulation hereafter adopted by the SEC. Upon the request of any Investor, the Company will deliver to the Investors a written statement as to whether it has complied with such requirements and, if not, the specifics thereof.

Section 3.6Notification. As promptly as practicable, each Investor of Registrable Securities shall notify the Company when all of such Investor’s Registrable Securities have been sold.

Section 3.7Existing Registration Statements. Notwithstanding anything herein to the contrary and subject to applicable law and regulation, the Company may satisfy any obligation hereunder to file a Registration Statement or to have a Registration Statement become effective by a specified date by designating, by notice to each Investor, a Registration Statement that previously has been filed with the SEC or become effective, as the case may be, as the relevant Registration Statement for purposes of satisfying such obligation, and all references to any such obligation shall be construed accordingly; provided that such previously filed Registration Statement may be, and is, amended or, subject to applicable securities laws, supplemented to add

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the number of Registrable Securities, and, to the extent necessary, to identify the Investors as selling stockholders demanding the filing of a Registration Statement pursuant to the terms of this Agreement. To the extent this Agreement refers to the filing or effectiveness of other Registration Statements, by or at a specified time and the Company has, in lieu of then filing such Registration Statements or having such Registration Statements become effective, designated a previously filed or effective Registration Statement as the relevant Registration Statement for such purposes, in accordance with the preceding sentence, such references shall be construed to refer to such designated Registration Statement, as amended or supplemented in the manner contemplated by the immediately preceding sentence.

ARTICLE 4
MISCELLANEOUS

Section 4.1Authority: Effect. Each party hereto represents and warrants to and agrees with each other party that the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized on behalf of such party and do not violate any agreement or other instrument applicable to such party or by which its assets are bound. This Agreement does not, and shall not be construed to, give rise to the creation of a partnership among any of the parties hereto, or to constitute any of such parties members of a joint venture or other association. The Company and its subsidiaries shall be jointly and severally liable for all obligations of each such party pursuant to this Agreement.

Section 4.2Notices. Any notices, requests, demands and other communications required or permitted in this Agreement shall be effective if in writing and (i) delivered personally, (ii) sent by facsimile or e-mail, or (iii) sent by overnight courier, in each case, addressed as follows:

If to the Company to:

Venus Concept Inc.

235 Yorkland Blvd, Suite 900 
Toronto, Ontario M2J 4Y8 
Attention: Domenic DiSisto

Email: ddisisto@venusconcept.com                                                                      

With a copy to (which shall not constitute notice):

Reed Smith LLP                                      
599 Lexington Avenue
New York, NY 10022

Facsimile: (212) 521 5450
Attention: Mark Pedretti                                      
Email: mpedretti@reedsmith.com

If to an Investor, to address, telephone, facsimile and email address set forth on the Schedule of Buyers attached to the Stock Purchase Agreement.

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Notice to the holder of record of any Registrable Securities shall be deemed to be notice to the holder of such securities for all purposes hereof.

Unless otherwise specified herein, such notices or other communications shall be deemed effective (i) on the date received, if personally delivered, (ii) on the date received if delivered by facsimile or e-mail on a Business Day, or if not delivered on a Business Day, on the first Business Day thereafter and (iii) two (2) Business Days after being sent by overnight courier. Each of the parties hereto shall be entitled to specify a different address by giving notice as aforesaid to each of the other parties hereto.

Section 4.3Registration Expenses

. All reasonable and documented expenses, other than any underwriting discounts and commissions, incurred in connection with registrations, filings or qualifications pursuant to Section 3 herein, including all registration, listing and qualifications fees, printers and accounting fees, and fees and disbursements of counsel for the Company shall be paid by the Company (“Registration Expenses”).

Section 4.4Termination and Effect of Termination

. This Agreement shall terminate upon the date on which the Investors no longer holds any Registrable Securities, except for the provisions of Sections 3.4, which shall survive any such termination. No termination under this Agreement shall relieve any Person of liability for breach or Registration Expenses incurred prior to termination. In the event this Agreement is terminated, each Person entitled to indemnification rights pursuant to Section 3.4 hereof shall retain such indemnification rights with respect to any matter that (i) may be an indemnified liability thereunder and (ii) occurred prior to such termination.

Section 4.5Permitted Transferees

. The rights of the Investors hereunder may be assigned (but only with all related obligations as set forth below) in connection with a Transfer of Registrable Securities to a Permitted Transferee of the Investor. Without prejudice to any other or similar conditions imposed hereunder with respect to any such Transfer, no assignment permitted under the terms of this Section 4.5 will be effective unless the Permitted Transferee to which the assignment is being made, if not an Investor, has delivered to the Company a written acknowledgment and agreement in form and substance reasonably satisfactory to the Company that the Permitted Transferee will be bound by, and will be a party to, this Agreement. A Permitted Transferee to whom rights are transferred pursuant to this Section 4.5 may not again transfer those rights to any other Permitted Transferee, other than as provided in this Section 4.5.

Section 4.6Remedies. The parties to this Agreement shall have all remedies available at law, in equity or otherwise in the event of any breach or violation of this Agreement or any default hereunder. The parties acknowledge and agree that in the event of any breach of this Agreement, in addition to any other remedies that may be available, each of the parties hereto shall be entitled to specific performance of the obligations of the other parties hereto and, in addition, to such other equitable remedies (including preliminary or temporary relief) as may be appropriate in the circumstances. No delay of or omission in the exercise of any right, power or

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remedy accruing to any party as a result of any breach or default by any other party under this Agreement shall impair any such right, power or remedy, nor shall it be construed as a waiver of or acquiescence in any such breach or default, or of any similar breach or default occurring later; nor shall any such delay, omission nor waiver of any single breach or default be deemed a waiver of any other breach or default occurring before or after that waiver.

Section 4.7Amendments. This Agreement may be amended, modified, extended or terminated, and the provisions hereof may be waived, only by an agreement in writing signed by the Company and the Investors holding a majority of the outstanding Registrable Securities. Each such amendment, modification, extension or termination shall be binding upon each party hereto.

Section 4.8Governing Law. This Agreement and all claims arising out of or based upon this Agreement or relating to the subject matter hereof shall be governed by and construed in accordance with the domestic substantive laws of the State of New York without giving effect to any choice or conflict of laws provision or rule that would cause the application of the domestic substantive laws of any other jurisdiction.

Section 4.9Consent to Jurisdiction

. Each party to this Agreement, by its execution hereof, (i) hereby irrevocably submits to the exclusive jurisdiction of the state courts sitting in the State of Delaware for the purpose of any action, claim, cause of action or suit (in contract, tort or otherwise), inquiry, proceeding or investigation arising out of or based upon this Agreement or relating to the subject matter hereof, (ii) hereby waives to the extent not prohibited by applicable law, and agrees not to assert, and agrees not to allow any of its subsidiaries to assert, by way of motion, as a defense or otherwise, in any such action, any claim that it is not subject personally to the jurisdiction of the above-named courts, that its property is exempt or immune from attachment or execution, that any such proceeding brought in one of the above-named courts is improper, or that this Agreement or the subject matter hereof or thereof may not be enforced in or by such court and (iii) hereby agrees not to commence or maintain any action, claim, cause of action or suit (in contract, tort or otherwise), inquiry, proceeding or investigation arising out of or based upon this Agreement or relating to the subject matter hereof or thereof other than before one of the above-named courts nor to make any motion or take any other action seeking or intending to cause the transfer or removal of any such action, claim, cause of action or suit (in contract, tort or otherwise), inquiry, proceeding or investigation to any court other than one of the above-named courts whether on the grounds of inconvenient forum or otherwise. Notwithstanding the foregoing, to the extent that any party hereto is or becomes a party in any litigation in connection with which it may assert indemnification rights set forth in this Agreement, the court in which such litigation is being heard shall be deemed to be included in clause (i) above. Notwithstanding the foregoing, any party to this Agreement may commence and maintain an action to enforce a judgment of any of the above-named courts in any court of competent jurisdiction. Each party hereto hereby consents to service of process in any such proceeding in any manner permitted by Delaware law, and agrees that service of process by registered or certified mail, return receipt requested, at its address specified pursuant to Section 4.2 hereof is reasonably calculated to give actual notice.

Section 4.10WAIVER OF JURY TRIAL

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. TO THE EXTENT NOT PROHIBITED BY APPLICABLE LAW WHICH CANNOT BE WAIVED, EACH PARTY HERETO HEREBY WAIVES AND COVENANTS THAT IT WILL NOT ASSERT (WHETHER AS PLAINTIFF, DEFENDANT OR OTHERWISE) ANY RIGHT TO TRIAL BY JURY IN ANY FORUM IN RESPECT OF ANY ISSUE OR ACTION, CLAIM, CAUSE OF ACTION OR SUIT (IN CONTRACT, TORT OR OTHERWISE), INQUIRY, PROCEEDING OR INVESTIGATION ARISING OUT OF OR BASED UPON THIS AGREEMENT OR THE SUBJECT MATTER HEREOF OR IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE TRANSACTIONS CONTEMPLATED HEREBY, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING. EACH PARTY HERETO ACKNOWLEDGES THAT IT HAS BEEN INFORMED BY THE OTHER PARTIES HERETO THAT THIS SECTION 4.10 CONSTITUTES A MATERIAL INDUCEMENT UPON WHICH THEY ARE RELYING AND WILL RELY IN ENTERING INTO THIS AGREEMENT. ANY PARTY HERETO MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS SECTION 4.10 WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF EACH SUCH PARTY TO THE WAIVER OF ITS RIGHT TO TRIAL BY JURY.

Section 4.11Merger; Binding Effect, Etc

. This Agreement constitutes the entire agreement of the parties with respect to its subject matter, supersedes all prior or contemporaneous oral or written agreements or discussions with respect to such subject matter, and shall be binding upon and inure to the benefit of the parties hereto and thereto and their respective heirs, representatives, successors and permitted assigns. Except as otherwise expressly provided herein, neither the Investors nor any other party hereto may assign any of its respective rights or delegate any of its respective obligations under this Agreement without the prior written consent of the other parties hereto, and any attempted assignment or delegation in violation of the foregoing shall be null and void.

Section 4.12Counterparts. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original, but all of which taken together shall constitute one instrument.

Section 4.13Severability. In the event that any provision hereof would, under applicable law, be invalid or unenforceable in any respect, such provision shall be construed by modifying or limiting it so as to be valid and enforceable to the maximum extent compatible with, and possible under, applicable law. The provisions hereof are severable, and in the event any provision hereof should be held invalid or unenforceable in any respect, it shall not invalidate, render unenforceable or otherwise affect any other provision hereof.

Section 4.14No Recourse. Notwithstanding anything that may be expressed or implied in this Agreement, the Company and the Investors covenant, agree and acknowledge that no recourse under this Agreement or any documents or instruments delivered in connection with this Agreement shall be had against any current or future director, officer, employee, general or limited partner or member of any Investor or of any Affiliate or assignee thereof, as such, whether by the enforcement of any assessment or by any legal or equitable proceeding, or by virtue of any statute, regulation or other applicable law, it being expressly agreed and acknowledged that no personal liability whatsoever shall attach to, be imposed on or otherwise

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be incurred by any current or future officer, agent or employee of any Investor or any current or future member of any Investor or any current or future director, officer, employee, partner or member of any Investor or of any Affiliate or assignee thereof, as such, for any obligation of any Investor under this Agreement or any documents or instruments delivered in connection with this Agreement for any claim based on, in respect of or by reason of such obligations or their creation.

[Signature pages follow]

 

 

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IN WITNESS WHEREOF, the undersigned has duly executed this Agreement as of the date first above written.

Company:

Venus Concept Inc.

 

By: /s/ Domenic Serafino___
Name: Domenic Serafino
Title: Chief Executive Officer

 

[Signature Page to Registration Rights Agreement]

 

 

 

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IN WITNESS WHEREOF, the undersigned has duly executed this Agreement as of the date first above written.

Investors:

 

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IN WITNESS WHEREOF, the undersigned has duly executed this Agreement as of the date first written above.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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IN WITNESS WHEREOF, the undersigned has duly executed this Agreement as of the date first written above.

 

 

 

 

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IN WITNESS WHEREOF, the undersigned has duly executed this Agreement as of the date first written above.

 

 

 

 

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IN WITNESS WHEREOF, the undersigned has duly executed this Agreement as of the date first written above.

 

 

 

 

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IN WITNESS WHEREOF, the undersigned has duly executed this Agreement as of the date first written above.

 

 

 

 

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ipstewar-152459137.1.doc

 

Exhibit 10.24

VENUS CONCEPT INC.

2019 INCENTIVE AWARD PLAN

STOCK OPTION GRANT NOTICE AND STOCK OPTION AGREEMENT

Venus Concept Inc. (the “Company”), pursuant to its 2019 Incentive Award Plan (the “Plan”), hereby grants to the participant set forth below (“Participant”), an Option to purchase the number of shares of the Company’s Common Stock (referred to herein as “Shares”) set forth below. This Option is subject to all of the terms and conditions as set forth herein and in the Stock Option Agreement attached hereto as Exhibit A (the “Stock Option Agreement”) and the Plan, each of which is incorporated herein by reference. Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings in this Stock Option Grant Notice and the Stock Option Agreement.

 

 

 

US_ACTIVE-150354394.2

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Vesting Schedule:

1/48 of the unvested Shares subject to the Option shall vest on each of the forty-eight (48) monthly anniversaries of the Vesting Commencement Date thereafter.

For purposes of the foregoing schedule, any fractional share for any monthly anniversary shall be rounded down to the next whole share, except for the last monthly anniversary set forth above which shall include the balance of unvested Shares subject to the Option.  The foregoing vesting schedule is subject to the Change in Control provisions of Section 14.2 of the Plan.

By his or her signature and the Company’s signature below, Participant agrees to be bound by the terms and conditions of the Plan, the Stock Option Agreement and this Grant Notice. Participant has reviewed the Stock Option Agreement, the Plan and this Grant Notice in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Grant Notice and fully understands all provisions of this Grant Notice, the Stock Option Agreement and the Plan. Participant hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Administrator of the Plan upon any questions arising under the Plan or the Option.

 

2

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Exhibit 10.44

 

[***] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED BECAUSE THE INFORMATION (I) IS NOT MATERIAL AND (II) WOULD BE COMPETITIVELY HARMFUL IF PUBLICLY DISCLOSED.

.

PERSONAL EMPLOYMENT AGREEMENT

Duly made and executed on this 28^th day of April 2019

This Employment Agreement (this “Agreement”) is entered by and between Venus Concept Ltd., with offices at 2^nd Hyetzira st, Yokneam, Israel (the “Company”); and Mr. Boris Vaynberg I.D No. [***]  residing at [***] (the “Employee”).

NOW, THEREFORE, in consideration of the mutual premises, covenants and undertakings contained herein, the parties hereto have hereby agreed as follows:

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Each of the notice periods set forth under subsections 3.2.2 or 3.2.3 (as the case may be) shall be referred to herein as the “Notice Period”

“Change of Control” shall mean (i) a consolidation or merger of the Company, transfer of the Company’s shares or any other transaction or series of related transactions, provided that following such consolidation, merger or transaction the Company’s shareholders do not retain solely by virtue of their pre-transaction shares (or shares received in consideration thereof) voting control of the Company or the resulting entity after the transaction, or (ii) a sale of all or substantially all of the Company’s assets or shares, or a transfer or grant of an exclusive license to all

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or substantially all of the Company’s assets (other than an exclusive license in the ordinary course of business which does not amount to a de-facto sale of the Company or substantial part thereof), other than to a wholly-owned subsidiary of the Company, and excluding a transaction in which shareholders of the Company prior to the transaction will retain solely by virtue of their pre-transaction shares (or shares received in consideration thereof) voting control of the resulting entity after the transaction.

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In consideration for the performance of his duties, the Employee shall be entitled to the compensation set forth in Appendix B attached hereto.

The Employee hereby represents and undertakes that:

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EMPLOYEE ACKNOWLEDGES THAT HE IS FAMILIAR WITH AND UNDERSTANDS THE ENGLISH LANGUAGE AND DOES NOT REQUIRE TRANSLATION OF THIS UNDERTAKING TO ANY OTHER LANGUAGE.  EMPLOYEE FURTHER ACKNOWLEDGES THAT THE COMPANY HAS ADVISED HIM/HER THAT HE/SHE MAY CONSULT AN ATTORNEY BEFORE EXECUTING THIS UNDERTAKING AND THAT HE/SHE HAS BEEN AFFORDED AN OPPORTUNITY TO DO SO.

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IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first stated above.

 

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APPENDIX A

IP UNDERTAKINGS

 

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APPENDIX B

COMPENSATION

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Employee shall be entitled to Recreation Pay (“Dmei Havra’a”) pursuant to applicable law.  

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The Employee shall be entitled, against submission to the Company of any appropriate supporting documentation, to receive the Salary during any period which the Employee serves in military reserve duty (“miluim”).

The Company shall withhold or charge the Employee with all taxes and other compulsory payments as required under law in respect of, or resulting from, the compensation paid to or received by him and in respect of all the benefits that the Employee is or may be entitled to.

 

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EXHIBIT A

General Order and Confirmation Regarding Payments of Employers to Pension Funds and

Insurance Funds instead of Severance Pay

Pursuant to the power granted to me under section 14 of the Severance Pay Law 5723-1963 (“Law”) I hereby confirm that payments paid by an employer, commencing the date hereof, to an employee’s comprehensive pension fund into a provident fund which is not an insurance fund, as defined in the Income Tax Regulations (Registration and Management Rules of a Provident Fund) 5724-1964 (“Pension Fund”), or to a Manager’s Insurance Fund that includes the possibility of an allowance or a combination of payments to an Allowance Plan and to a plan which is not an Allowance Plan in an Insurance Fund (“Insurance Fund”), including payments which the employer paid by combination of payments to a Pension Fund and to an Insurance Fund whether there exists a possibility in the Insurance Fund to an allowance plan (“Employer Payments”), will replace the severance pay that the employee is entitled to for the salary and period of which the payments were paid (“Exempt Wages”) if the following conditions are satisfied:

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                         Exhibit 10.48

SECOND AMENDMENT TO LEASE AGREEMENT

THIS SECOND AMENDMENT TO LEASE AGREEMENT (this “Second Amendment”) is made and entered into as of the 7th day of November, 2019, by and between BRIDGE III CA ALVISO TECH PARK, LLC, a Delaware limited liability company (“Landlord”), and VENUS CONCEPT INC., a Delaware corporation formerly known as Restoration Robotics, Inc. (“Tenant”).

R E C I T A L S:

A.Pursuant to that certain Lease Agreement dated April 16, 2012, by and between Landlord and Tenant (the “Original Lease”), as amended by that certain First Amendment to Lease Agreement dated April 27, 2016, by and between Landlord and Tenant (the “First Amendment”, along with the Original Lease, collectively, the “Lease”), Landlord leases to Tenant approximately 23,155 rentable square feet in the building located at 128 Baytech Drive, San Jose, California (the “Building”).

B.Landlord and Tenant desire to amend and modify the Lease as hereinafter set forth to memorialize Tenant’s name change and for other purposes as set forth herein.

NOW, THEREFORE, in consideration of the mutual covenants and conditions contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

1.Tenant. The Basic Lease Information portion of the Lease is hereby amended to reflect Tenant’sa name change from Restoration Robotics, Inc., a Delaware corporation, to Venus Concept Inc., a Delaware corporation. Henceforth, any reference in the Lease to Tenant shall mean Venus Concept Inc., a Delaware corporation.

2.Notices.

a)Landlord’s address for all notices, as set forth in the Basic Lease Information portion of the Lease is hereby deleted in its entirety and replaced with the following:

For all notices:

Bridge III CA Alviso Tech Park, LLC

c/o Bridge Investment Group

Five Concourse Parkway, Suite 3100

Atlanta, GA 30328

Attention: Asset Management

Email: David.McCleve@bridgeig.com

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with a copy to:

Bridge Investment Group

Five Concourse Parkway, Suite 3100

Atlanta, GA 30328

Attention: Travis D. Hughes, Counsel

Email: Travis.Hughes@bridgeig.com

b)Tenant’s address for all notices, including notices of default, as set forth in the Basic Lease Information portion of the Lease is hereby deleted in its entirety and replaced with the following:

For all notices:

Venus Concept Inc.

128 Baytech Drive

San Jose, California 95134-2303

Attention: Vice President - Legal

3.Broker. Tenant represents and warrants to Landlord that it has not entered into any agreement with, or otherwise had any dealings with, any broker or agent in connection with this Second Amendment. Tenant hereby indemnifies and holds Landlord harmless from and against all losses, costs, damages or expenses (including, but not limited to, court costs, investigation costs and reasonable attorneys’ fees) as a result of any agreement or dealings, or alleged agreement or dealings, between Tenant and any such broker or agent.

4.Time of the Essence. Time is of the essence with respect to all time periods set forth in this Second Amendment.

5.Counterparts. This Second Amendment may be executed in counterparts, each of which shall be deemed an original, but such counterparts, when taken together, shall constitute one agreement. Additionally, facsimile and scanned emailed signatures shall be deemed original and binding on the parties.

6.Miscellaneous. The parties hereby acknowledge and agree that the recitals set forth above are true and accurate as of the date hereof. Whenever terms are used in this Second Amendment, but are not defined, such terms shall have the same meaning as set forth in the Lease. Except as modified by this Second Amendment, Landlord and Tenant do hereby ratify and reaffirm each and every provision, term, covenant, agreement and condition of the Lease. The Lease, as modified by this Second Amendment, sets forth the entire agreement between Landlord and Tenant and cancels all prior negotiations, arrangements, agreements and understandings, if any, between Landlord and Tenant regarding the subject matter of this Second Amendment. In the event of any conflict between the terms of the Lease and the terms of this Second Amendment, the terms of this Second Amendment shall control. Tenant represents and warrants that the person executing this Second Amendment is authorized to execute and deliver this Second Amendment and that all necessary approvals and consents have been obtained to bind Tenant under this

Page 2 of 4, Second Amendment to Lease Agreement

 

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Second Amendment and the Lease in accordance with their terms. Landlord represents and warrants that the person executing this Second Amendment is authorized to execute and deliver this Second Amendment and that all necessary approvals and consents have been obtained to bind Landlord under this Second Amendment and the Lease in accordance with their terms.

IN WITNESS WHEREOF, the duly authorized officials of Landlord and Tenant have signed and sealed this Second Amendment as of the day and year first set forth above.

LANDLORD:

BRIDGE III CA ALVISO TECH PARK, LLC,
a Delaware limited liability company

By:ROC III Real Estate Holdings 2, LLC,
a Delaware limited liability company
Its: Managing Member

By:
Name:
Its:

[Signatures continue on the following page]

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[Signatures continued from the previous page]

TENANT:

VENUS CONCEPT INC.,

A Delaware corporation

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TABLE OF CONTENTS

ARTICLE 1 - BASIC TERMS1

1.1Basic Terms1

ARTICLE 2 - SPECIAL PROVISIONS2

2.1Schedule “E”2

ARTICLE 3 - DEFINITIONS AND INTERPRETATIΠN3

3.1Definitions3

3.2Entire Agreement, Amendments, Waiver9

3.3Acceptance and Application of Rent9

3.4General Rules of Interpretation9

3.5Successors10

ARTICLE 4 - GRANT AND TERM10

4.1Term, Demise10

4.2Acceptance10

4.3Quiet Enjoyment11

ARTICLE 5 - RENT11

5.1Basic Rent11

5.2Additional Rent11

5.3Adjustment Due to Measurement11

5.4Payment of Rent - General11

5.5Payment of Additional Rent12

5.6Rent Deposit13

5.7Security Deposit14

5.8Net Lease14

ARTICLE 6 - OPERATING COSTS AND TAXES14

6.1Property Taxes Payable by Landlord14

6.2Property Taxes Payable by Tenant14

6.3Business Taxes and Other Taxes of Tenant15

6.4Assessment Appeals15

6.5Operating Costs16

6.6Limitations on Operating Costs18

6.7Adjustments of Operating Costs19

6.8Reduction or Control of Operating Costs20

ARTICLE 7 - HVAC, UTILITIES AND OTHER LANDLORD SERVICES20

7.1Heating, Ventilating and Air Conditioning20

7.2Electricity and Other Utilities20

7.3Special HVAC Services and Utilities and Excess Quantities21

7.4Other Landlord Services21

7.5Additional Services Provided by Landlord22

7.6Telecommunications22

 

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7.7Signs and Premises Identification23

ARTICLE 8 - OPERATION, CONTROL AND MAINTENANCE BY LANDLORD24

8.1Operation of the Building by Landlord24

8.2Control of the Building by Landlord25

8.3Name of Building25

8.4Maintenance and Repair by Landlord25

8.5Access by Landlord26

8.6Relocation26

ARTICLE 9 - MAINTENANCE AND ALTERATIONS BY TENANT27

9.1Maintenance and Repair by Tenant27

9.2Alterations by Tenant27

9.3Removal of Improvements and Fixtures29

9.4Liens30

9.5Notice by Tenant30

ARTICLE 10 - USE OF PREMISES30

10.1Permitted Use30

10.2Compliance with Laws31

10.3Nuisance, Interference, Waste, Overloading31

10.4Rules and Regulations31

ARTICLE 11 - INSURANCE, LIABILITY AND INDEMNITY32

11.1Tenant’s Insurance32

11.2Form of Tenant Policies33

11.3Certified Copies and Notice to Landlord33

11.4Landlord’s Insurance34

11.5Insurance Risks34

11.6Release of Landlord34

11.7Release of Tenant35

11.8Indemnity by Tenant36

ARTICLE 12 - ASSIGNMENT, SUBLETTING AND OTHER TRANSFERS36

12.1Transfers36

12.2Tenant’s Notice, Landlord’s Right to Terminate37

12.3Conditions of Transfer38

12.4Corporate Records39

12.5Permitted Transfers39

12.6No Advertising39

12.7Sales or Dispositions by Landlord40

ARTICLE 13 - LANDLORD FINANCING AND STATUS CERTIFICATES40

13.1Subordination and Postponement40

13.2Attornment40

13.3Status Certificates41

13.4Reliance41

 

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ARTICLE 14 - DAMAGE, DESTRUCTION41

14.1Damage to Premises41

14.2Abatement42

14.3Termination Rights42

14.4Landlord’s Rights on Rebuilding42

ARTICLE 15 - DEFAULT AND REMEDIES43

15.1Events of Default43

15.2Remedies44

15.3Distress45

15.4Interest and Costs45

15.5Remedies Cumulative45

ARTICLE 16 - MISCELLANEOUS45

16.1Relationship of Parties45

16.2Consent Not to be Unreasonably Withheld45

16.3Overholding46

16.4Registration46

16.5Unavoidable Delay46

16.6Decisions of Experts47

16.7Notices47

16.8Confidentiality, Personal Information47

16.9Power, Capacity and Authority48

16.10Liability of Landlord48

16.11Contra Proferentem48

 

SCHEDULE “A” LEGAL DESCRIPTION

SCHEDULE “B” FLOOR PLAN SHOWING APPROXIMATE CONFIGURATION OF PREMISES

SCHEDULE “Bl” FLOOR PLAN SHOWING TEMPORARY PREMISES

SCHEDULES “C”, “Cl” AND “C2”- CONSTRUCTION OF PREMISES

SCHEDULE “D” RULES AND REGULATIONS

SCHEDULE “E” SPECIAL PROVISIONS

1.Indemnifier

IA.Temporary Premises

2.Fixturing Period / Early Occupancy Period

3.Extended Term

4.Parking

SCHEDULE “F” INDEMNITY AGREEMENT

 

 

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THIS LEASE, dated March 29, 2019, is made by the Landlord and the Tenant named in it who, in consideration of the rents, covenants and agreements contained in this Lease, covenant and agree as follows:

ARTICLE 1 - BASIC TERMS

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ARTICLE 2 - SPECIAL PROVISIONS

1.Indemnifier

2.Fixturing Period / Early Occupancy Period

3.Extended Term

4.Parking

ARTICLE 3 - DEFINITIONS AND INTERPRETATioN

 

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This Lease contains the entire agreement between the parties with respect to the subject matter of this Lease and there are no other agreements, promises or understandings, oral or written, between the parties in respect of this subject matter. This Lease may be amended only by written agreement between the Landlord and the Tenant. No electronic communications between the parties will have the effect of amending this Lease. No provisions of this Lease shall be deemed to have been waived by the Landlord or the Tenant unless such waiver is in writing signed by such party. If either the Landlord or the Tenant excuses or condones any default by the other of any obligation under this Lease, no waiver of such obligation shall be implied in respect of any continuing or subsequent default. The Landlord’s receipt of Rent with knowledge of a breach shall not be deemed a waiver of any breach.

Any endorsement, statement, condition, direction or other communication on or accompanying any Rent payment shall not be binding on the Landlord and the acceptance of any such payment shall be without prejudice to the Landlord’s right to recover the balance of Rent then owing or to pursue any other remedy available to the Landlord. Any payment received by the Landlord may be applied towards amounts then outstanding under this Lease in such manner as the Landlord determines.

 

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This Lease and everything herein contained shall extend to and bind the successors and assigns of the Landlord and the legal representatives, heirs, executors, administrators, successors and permitted assigns of the Tenant (as the case may be).

ARTICLE 4 - GRANT AND TERM

The Landlord hereby demises and leases the Premises to the Tenant for the Term (unless terminated earlier pursuant to this Lease), to have and to hold during the Term, subject to the terms and conditions of this Lease. The Landlord grants to the Tenant a non-exclusive licence throughout the Term to the benefit or use (as may be appropriate) of those Common Areas and Facilities which provide access to the Premises or which are generally made available to all tenants in the Building, in common with other tenants of the Building and with all others entitled thereto, subject to the terms and conditions of this Lease.

The Tenant hereby leases and accepts the Premises from the Landlord and covenants to pay the Rent and to observe and perform all the covenants and obligations to be observed and performed by the Tenant pursuant to this Lease. The Tenant agrees that, except as may be specifically set out herein, the Premises are accepted on an “as is” basis and there is no promise, representation or undertaking binding upon the Landlord with respect to any alteration, remodelling or decoration of the Premises or with respect to the installation of equipment or fixtures in the Premises save and except as specifically set out in Schedule “C” hereof.

 

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If the Tenant pays the Rent, fully performs all its obligations under this Lease and there has been no Event of Default, then the Tenant shall be entitled, subject to the provisions of this Lease, to peaceful and quiet enjoyment of the Premises for the Term.

ARTICLE 5 - RENT

The Tenant shall pay to the Landlord Basic Rent in the amount set out in Section 1.1(i) for the respective Lease Year, by equal consecutive monthly instalments in advance on the first day of each month, subject to any adjustment pursuant to Section 5.3.

The Tenant shall also pay throughout the Term, at the times and in the manner provided in this Lease, all Additional Rent which shall, except as otherwise provided in this Lease, be payable within 15 days of receipt by the Tenant of an invoice, statement or demand for it.

The Landlord may, from time to time, at its option, cause the Rentable Area of the Premises to be measured by an Expert in accordance with the Measurement Standards and, if necessary as a result of such measurement, the annual Basic Rent and the calculation of Additional Rent shall be adjusted by the Landlord. The effective date of any such adjustment shall be:

Any such measurement by an Expert shall be final and binding on the Landlord and the Tenant. Neither the Landlord nor the Tenant may claim any adjustment to the annual Basic Rent or to the calculation of Additional Rent based on the Rentable Area of the Premises except in accordance with a measurement by an Expert made pursuant to this Section and, for greater certainty, neither the Landlord nor the Tenant may claim any adjustment to the annual Basic Rent or to the calculation of Additional Rent based on such measurement for the period prior to the effective date of such adjustment as set out above.

 

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If the Tenant fails to deliver the Second Rent Deposit to the Landlord’s property manager, Northam Realty Advisors Limited, by June 30, 2019, then the Landlord shall be permitted to take the portion of the Rent Deposit that was to be applied to the first months Basic Rent and Additional Rent and add it to the Security Deposit described in Section 1.1(j) (ii) and hold it during the Term of this Lease, and any extensions or renewals thereof, without interest, in accordance with the provisions of

 

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Section 5.7. In the event that the Tenant fails to deliver the Second Rent Deposit, the Tenant shall continue to be responsible for the payment of Rent for the first month of the Term, in accordance with the provisions of this Lease.

Subject to Section 5.6 (b) above, the Landlord acknowledges receipt from the Tenant of the Security Deposit to be held, without interest, as security (without prejudice to the Landlord’s other rights and remedies) for the observance and performance of the Tenant’s obligations under this Lease. If the Tenant defaults in the performance of any of the terms, covenants, conditions and provisions of this Lease as and when the same are due to be performed by the Tenant, then the Landlord, at its option, may appropriate and apply all or any part of the Security Deposit on account of any losses or damages sustained by the Landlord as a result of such default. Upon demand by the Landlord following any such appropriation, the Tenant shall pay to the Landlord an amount sufficient to restore the total original amount of the Security Deposit. if the Tenant complies with all of the terms, covenants, conditions and provisions under this Lease and is not then overholding in accordance with Section 16.3, the Security Deposit shall be returned to the Tenant without interest within 60 days after the expiry or earlier termination of the Term, or, at the Landlord’s option, shall be applied by the Landlord on account of the last month’s Rent.

The Tenant acknowledges and agrees that it is intended that this Lease shall be a completely carefree net lease for the Landlord and that the Landlord shall not be responsible for any costs, charges, expenses and outlays of any nature whatsoever arising from or relating to the Premises or the Building during the Term, whether foreseen or unforeseen and whether or not within the contemplation of the parties at the commencement of the Term, except as shall be otherwise expressly provided in this Lease.

ARTICLE 6 - OPERATING COSTS AND TAXES

The Landlord shall pay all Property Taxes, but it may defer such payments or compliance to the fullest extent permitted by law so long as it pursues in good faith any contest or appeal of any such Property Taxes with reasonable diligence.

 

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Landlord acknowledges that as of the date hereof, tenants in the Building pay their Proportionate Share of Property Taxes.

The Tenant shall promptly pay before delinquency to the taxing authorities or to the Landlord, if it so directs, as Additional Rent, any taxes, rates, duties, levies and assessments whatsoever, whether municipal, provincial, federal or otherwise, levied, imposed or assessed against or in respect of the operations at, occupancy of, or conduct of business in or from the Premises by the Tenant or any other permitted occupant, including the Tenant’s Business Taxes, if levied in the province in which the Building is situate. Whenever requested by the Landlord, the Tenant shall deliver to the Landlord copies of receipts for payment of all such taxes.

The Tenant shall not appeal any governmental assessment or determination of the value of the Building or any portion of the Building whether or not the assessment or determination affects the

 

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amount of Property Taxes or other taxes, rates, duties, levies or assessments to be paid by the Tenant.

The Tenant shall pay its Proportionate Share of Operating Costs to the Landlord. Subject to the exclusions and deductions stipulated in Section 6.6, “Operating Costs” means the total, without duplication and calculated in accordance with accounting principles or practices generally accepted in the real estate industry in Canada, of the costs, expenses, fees, rentals, disbursements and outlays (in Sections 6.5 and 6.6 referred to collectively as “costs”) of every kind, whether direct or indirect, paid, payable or incurred by or on behalf of the Landlord on an accrual basis (or on a cash basis to the extent that the Landlord determines is reasonable) in the ownership, maintenance, repair, replacement, operation, administration, supervision and management of the Building, including, without limitation:

 

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all to the extent that such costs are fully chargeable in the Fiscal Year in which they are incurred in accordance with sound accounting principles or practices generally accepted in the real estate industry in Canada as applied by the Landlord;

 

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Notwithstanding anything to the contrary set out in this Lease, the Landlord agrees that annual increases in Controllable Operating Costs, shall not exceed the greater of the rise in the Consumer Price Index for Ontario, (CPI), as calculated by Statistics Canada, year over year, on a cumulative basis, or three percent (3%) per annum, on a cumulative basis, during the initial Term and Extended Term, provided that the Tenant exercises its right to extend the Term in accordance with Section 3 of Schedule “E” attached hereto.

For the purposes of this section, “Controllable Operating Costs” means all Operating Costs, excluding all Non-Controllable Operating Costs.

For the purposes of this section, “Non-Controllable Operating Costs” means those Operating Costs over which it is reasonable to assume the Landlord may not exercise a measure of control, and includes, by way of example only and without limitation: utilities, insurance, and payments and/or levies which may be imposed by a governmental authority, during the Term (as same may be extended in accordance with Section 3 of Schedule “E” attached to this Lease).

In determining Operating Costs, the cost (if any) of the following shall be excluded or deducted, as the case may be:

 

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In computing Operating Costs:

 

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the costs, charges and expenses of such items shall be allocated by the Landlord, between the Building and other building or buildings on a reasonable basis.

The Tenant shall comply with any practices or procedures that the Landlord, acting reasonably, may from time to time introduce to reduce or control Operating Costs and shall pay, as Additional Rent, all costs, as determined by the Landlord, that may be incurred by the Landlord as a result of any non-compliance. The Landlord may use an Expert to assist it in making such determination.

ARTICLE 7 - HVAC, UTILITIES AND OTHER LANDLORD SERVICES

 

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If the Tenant requests interior climate control services, electricity, sewage disposal, water or other utility services of a type or in quantities that exceed normal use by tenants in the Building, as determined by the Landlord, the Landlord shall supply such services if the Landlord determines, in its sole discretion, that the provision of such services: (a) is within the capacity of the Building Systems; (b) would not affect the operation, aesthetics or structure of the Building; (c) would not reduce the efficiency of the existing services supplied to other tenants or parts of the Building; and (d) is otherwise feasible. The Tenant will pay to the Landlord all costs, both non-recurring and recurring, of providing all such services. Such costs shall be determined by the Landlord in a reasonable manner, which may include installation at the Tenant’s expense of separate meters or other measuring devices in the Premises or elsewhere or the Landlord may use an Expert to assist it in determining such costs.

 

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Wherever this Lease provides that the Tenant is to pay a cost or expense to the Landlord as an item of Additional Rent (except for Operating Costs and the 15% administration fee referred to herein), the Tenant shall pay, in addition to such cost or expense, the Landlord’s administration charge of 15% of such cost or expense, which cost shall also be an item of Additional Rent. The Tenant shall pay to the Landlord the costs of all such services provided at the Tenant’s request or otherwise provided for herein and which are not included in Operating Costs including, without limitation: (a) the provision of processed air, electricity and other utilities and services outside of Business Hours or of a special nature or in excess quantities; (b) replacement of non-standard electric light fixtures, ballasts, tubes, starters, lamps, light bulbs and controls; (c) special janitorial or cleaning services; (d) operating elevators for the sole benefit of the Tenant and supervising the movement of furniture, equipment, freight and supplies for the Tenant; and (e) construction of any Leasehold Improvements or other work performed at the request of or on behalf of the Tenant.

 

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(i)Subject to Section 7.7 (ii) below, the Tenant shall not erect, affix, install or maintain any signs, lettering, identification or any promotional or other written materials visible from the exterior of the Building or from any interior Common Areas and Facilities. The Landlord shall, at the Landlord’s expense, for the Tenant’s initial signage only, at the request and expense of the Tenant, supply and install: (a) on or near the entrance door of the Ground Floor Premises and the Ninth Floor Premises a standard Building sign bearing the name of the Tenant; (b) standard Building identification in any elevator lobby directional signage on the Tenant’s floor; and (c) one standard Building entry in any directory board for the Building, each in accordance with the Landlord’s uniform scheme for identification signage. Any tenant occupying at least a full floor in the Building may, subject to having received the Landlord’s prior written approval as to design, location, material and method of installation, supply and install its own sign in the elevator lobby of each full floor occupied by it.

(ii)Exterior Building Signage

Provided the Tenant: is Venus Concept Canada Corp., or a Permitted Transferee, is in occupation of and conducting business in the whole of the Premises and, in accordance with this Lease; is not and has not been in default of any provision of this Lease, and further provided that the Landlord and Tenant have executed this Lease and the Indemnifier has executed the Indemnity Agreement in a form satisfactory to the Landlord, then the Tenant shall be entitled to install, at its sole cost and expense, including all costs associated with

 

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maintenance, insurance, repair and restoration thereof, one (1) exterior sign, bearing its name or corporate logo, on the side of the top fascia of the west side of the Building, (the “Signage”). The Signage shall be non-exclusive and of a design and quality appropriate to the image of the Building, in keeping with the architectural integrity of the Building, and shall be subject to the prior written approval of Landlord (as to affixation, colour, content, design, location and specifications).

All costs of maintaining the Signage, including, without limitation, all costs of electricity consumed by the Signage, will be paid for by Tenant to Landlord upon receipt of an invoice therefor, with Tenant’s next instalment of monthly Rent, as an item of Additional Rent. Tenant’s insurance coverage shall include the Signage. Such Signage shall be in conformance with the Building Code, zoning by-laws and the regulations of any other bodies having jurisdiction and Tenant shall obtain, at its sole expense, all necessary permits and governmental approvals.

At the earlier of (i) expiration or earlier termination of this Lease, and any renewal or extension thereof, or (ii) the date upon which Tenant itself ceases to occupy the entirety of the Premises, Tenant shall, at its sole cost and expense, remove the Signage from the Building and make good any damage caused thereby. Upon prior Notice to Landlord, Tenant shall be permitted to remove the Signage prior to the expiration of the Term or any extension thereof, provided that it repairs any damage caused by such removal. If required by Landlord, the installation and removal of the Signage shall be performed by Landlord’s contractors, at Tenant’s cost, plus an administration fee and any applicable taxes, as Additional Rent. The Tenant’s right to install Signage and the location thereof shall cease upon the Tenant’s removal of the Signage.

The Signage shall be kept in a state of good repair at all times by the Tenant, at its expense, and to the standards of a first-class building and the Tenant may not remove same except for replacement due to damage or repair, provided that at the expiry or earlier termination of the Lease the Tenant at its expense shall remove same and repair all damage caused by the removal and installation.

The Tenant agrees that all indemnity and release of liability provisions set out in this Lease (the insurance and indemnity provisions) shall apply to the Tenant’s Signage and that the insurance coverage which it is required to maintain under this Lease shall apply to the Signage and to all occurrences which in any way relate to the installation or existence of same and to the Tenant’s rights under this section.

In the event the Tenant fails to install the exterior Signage during the first 12 months of the Term, it shall be deemed that the Tenant does not intend to install the exterior Signage, and this right set out herein shall be null and void and of no further force or effect.

ARTICLE 8 - OPERATION, CONTROL AND MAINTENANCE BY LANDLORD

The Landlord shall operate the Building in accordance with all Applicable Laws and with standards from time to time prevailing for similar office buildings in the area in which the Building

 

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is located, subject, however, to the limitations occasioned by the design and age of the Building and the capacity of the Building Systems.

The Landlord has at all times exclusive control of the Building and its management and operation, but not so as to deny the Tenant access to the Premises except in an emergency. Without limiting the generality of the foregoing, at any time and from time to time, the Landlord may:

provided that in the course of the Landlord’s exercise of its rights hereunder, the Landlord shall be deemed not to have re-entered the Premises nor to have breached any obligation of this Lease. The Landlord shall perform all of its work as expeditiously as is reasonably possible so as to interfere as little as is reasonably possible with the Tenant’s use of the Premises.

The Landlord may from time to time designate a name or other identification for the Building, subject to leaving in place the Signage, provided there has been no Event of Default. The Tenant shall be responsible for any costs it incurs as a result of any changes in the name or identification (such as changes to its stationery and other material). The Tenant shall have no rights in any such names or identification.

 

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The Landlord shall keep or cause to be kept the following in good repair to the standards from time to time prevailing for similar office buildings in the area in which the Building is located, subject, however, to the limitations occasioned by the design and age of the Building and the capacity of the Building Systems and to reasonable wear and tear not inconsistent with such standard:

provided that:

All of the preceding costs that are referred to in this Section 8.4 shall be included in Operating Costs.

The Tenant shall permit the Landlord, its agents and others authorized by it, to enter the Premises to inspect, to provide services or to make repairs, replacements, changes or alterations as set out in this Lease, to take such steps as the Landlord may deem necessary for the safety, improvement, alteration or preservation of the Premises or the Building and to show the Premises to Mortgagees, prospective Mortgagees, purchasers and prospective purchasers and, during the last 18 months of the Term, to prospective tenants. In carrying out such rights the Landlord shall use reasonable efforts to minimize interference with the Tenant’s use and enjoyment of the Premises. The Landlord shall whenever possible give reasonable Notice to the Tenant prior to such entry (other than in the case of an emergency or apprehended emergency), but no such entry shall constitute a re-entry by the Landlord or an eviction or entitle the Tenant to any abatement of Rent.

The Landlord shall have the right from time to time, on not less than 60 days’ Notice to the Tenant, to relocate the Premises to other premises within the Building having approximately the same area as the Premises. If the Landlord relocates the Premises prior to occupancy by the Tenant, it shall reimburse the Tenant for all expenses already incurred by the Tenant in preparing to move into the Premises to the extent that such expenditure is for items or materials not usable in the alternate premises. If the Landlord relocates the Tenant after occupancy by the Tenant, the Landlord shall

 

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provide the relocated premises improved to a standard and using materials of approximately the same quality as the Leasehold Improvements which exist in the existing Premises at the time of relocation and reimburse the Tenant within thirty (30) days of receipt of copies of receipted third party invoices for direct costs associated with the relocation, including, without limitation, moving costs, reprinting of a limited supply of stationery and supplies and disconnection and reconnection of telephone and computer equipment and systems. In no case will the Tenant be reimbursed or compensated for indirect costs including overhead, overtime charges or loss of profits and the Tenant will minimize costs by re-using all fixtures and trade fixtures from the Premises where it is feasible to do so. The Landlord agrees to use reasonable efforts to effect the relocation with a minimum of disruption to the Tenant’s business. The Landlord and the Tenant shall enter into a lease amending agreement in the Landlord’s standard form to confirm the terms of the relocation including, without limitation, any adjustment to the Basic Rent if the Rentable Area of the relocated premises is different than the Rentable Area of the existing Premises and to confirm that all other terms and conditions of this Lease shall apply with respect to the relocated premises for the remainder of the Term.

Notwithstanding anything to the contrary set out in this Lease, provided Venus Concept Canada Corp or a Permitted Transferee., is the Tenant, then the Landlord shall not have the right to relocate any part of the Premises the Tenant is occupying.

For greater clarity and by way of example only, in the event the Tenant does not require the Ground Floor Premises and subsequently sublets this portion of the Premises to another party, then the Landlord shall have the right to relocate that particular portion of the Premises.

ARTICLE 9 - MAINTENANCE AND ALTERATIONS BY TENANT

The Tenant shall at its sole cost maintain and repair the Premises and all Leasehold Improvements in good order and condition to the standards from time to time prevailing for similar office buildings in the area in which the Building is located, subject to reasonable wear and tear not inconsistent with such standard and with the exception only of those repairs which are the obligation of the Landlord under this Lease and subject to Article 14.

 

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All Leasehold Improvements shall immediately upon their placement become the Landlord’s property without compensation to the Tenant. Except as otherwise agreed by the Landlord in writing, no Leasehold Improvements or trade fixtures shall be removed from the Premises by the Tenant either during or at the expiry or earlier termination of the Term except that:

 

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Upon the expiry or earlier termination of this Lease, the Tenant shall leave the Premises in a clean and broom swept condition and free of debris. The Tenant shall at its own expense repair any damage caused to the Building by the Leasehold Improvements, trade fixtures or wiring, cables and related devices and equipment and/or such removal and restoration. if the Tenant does not remove its trade fixtures, or wiring, cables and related equipment prior to the expiry or earlier termination of the Term, such trade fixtures or wiring, cables and related devices and equipment shall, at the option of the Landlord, be deemed abandoned and become the property of the Landlord and may be removed from the Premises and sold or disposed of by the Landlord in such manner as it deems advisable and the Tenant shall pay to the Landlord on demand all costs incurred by the Landlord in connection therewith, plus an administration fee of 15% of the costs. If the Tenant fails to complete any work referred to in this Section within the period specified, the Tenant shall pay compensation to the Landlord for damages suffered by the Landlord for loss of use of the Premises, which damages shall not be less than 125% 150% of the per diem Rent payable during the last month preceding the expiry or earlier termination of the Term.

The Tenant shall pay before delinquency for all materials supplied and work done in respect of the Premises so as to ensure that no lien or claim of lien is registered against any portion of the Lands or against the Landlord’s or Tenant’s interest in the Lands. if a lien or claim of lien is registered or filed, the Tenant shall discharge or vacate it at its expense within seven ti-ye Business Days after Notice from the Landlord (or sooner if such lien or claim is delaying a financing or sale of all or any part of the Lands), failing which the Landlord may at its option discharge the lien or claim of lien by paying the amount claimed to be due into court and the amount so paid and all expenses of the Landlord including legal fees (on a substantial indemnity costs basis) shall be paid by the Tenant to the Landlord. The Tenant shall not mortgage, charge, grant a security interest in or otherwise encumber any Leasehold Improvements.

The Tenant shall promptly notify the Landlord of any accident, defect, damage or deficiency which occurs or exists in any part of the Premises, the Building Systems within the Premises or the Common Areas and Facilities located on the floor(s) on which the Premises is located and which comes to the attention of the Tenant.

ARTICLE 10 - USE OF PREMISES

The Tenant shall continuously and actively use and operate the whole of the Premises in a first-class, reputable manner befitting the reputation and image of the Building. The Ninth Floor Premises shall be used and occupied only as professional business offices for the administration of medical aesthetic devices and other uses as maybe permitted under this

 

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Lease. Notwithstanding the above, the Tenant and Landlord acknowledge that in addition to the above, the Ground Floor Premises shall be used for receiving, storing and distribution of the Tenant’s medical aesthetic products and medical aesthetic equipment. The Tenant shall use its best efforts to work with the Landlord in scheduling deliveries and pickups to ensure that minimal disturbance is caused to the Building, other tenants in the Building and the parking lot servicing the Building. The Premises shall be used for no other purposes other than as stated above. The Tenant shall not use the Premises for the purposes of a call centre, school or telecommunications centre or in any manner which does or could result in excessive demands being placed on the Building Systems or other Common Areas and Facilities.

The Tenant acknowledges that the occupancy level of the Premises shall not exceed one (1) person to every one hundred and fifty (150) square feet of usable area of the Premises.

The Tenant shall use and occupy and shall cause the Premises to be used and occupied in compliance with all Applicable Laws and in a safe, careful and proper manner. It is the Tenant’s responsibility to ensure that its use from time to time is permitted by all Applicable Laws. At the Landlord’s request the Tenant shall comply with any directive, policy or request of any governmental or quasi-governmental authority or any other reasonable request of the Landlord, in respect of any energy conservation, waste management, safety, security or other matter relating to the operation of the Building. If due primarily to the Tenant’s use or occupancy of the Premises, improvements or changes are necessary to comply with any Applicable Laws or with any such directive, policy or request or with the requirements of insurance carriers, the Landlord may at its option either do the necessary work, at the expense of the Tenant, or forthwith give Notice to the Tenant to do such work within the requisite period of time and the Tenant shall then do such work within the requisite period of time. The Tenant shall pay to the Landlord the costs of any such work done by the Landlord.

The Tenant shall not cause or allow any act or thing which constitutes a nuisance or which is offensive to the Landlord or other occupants of the Building or which interferes with the operation of any Building Systems or with the computer equipment, telecommunication equipment or other technological equipment of the Landlord, any service providers or other occupants of the Building. The Tenant shall keep the Premises free of debris and other items that might attract rodents or vermin and free of anything of a dangerous, noxious or offensive nature or which could create a fire, environmental, health or other hazard (including any electromagnetic fields or other forms of radiation) or undue vibration, heat or noise. The Tenant shall not cause or allow any overloading of the floors of the Building or the bringing into any part of the Building, including the Premises, of any articles or fixtures that by reason of their weight, use or size might damage or endanger the structure or any of the Building Systems.

The Tenant shall comply and cause every Person over whom it has control to comply with the Rules and Regulations. The Landlord shall have the right from time to time to make reasonable

 

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amendments, deletions and additions to such Rules and Regulations. If the Rules and Regulations conflict with any other provisions of this Lease, the other provisions of this Lease shall govern. The Landlord shall not be obligated to enforce the Rules and Regulations and shall not be responsible to the Tenant for failure of any Person to comply with the Rules and Regulations. The Rules and Regulations may differentiate between different types of tenants, different parts of the Building or otherwise. The Landlord agrees that it will not enforce the Rules and Regulations in a manner that is discriminatory to the Tenant.

ARTICLE 11 - INSURANCE, LIABILITY AND INDEMNITY

The Tenant shall effect and maintain during the Term and any renewals and extensions thereof, (and any period that the Tenant occupies or is given possession of the Premises), at its sole cost and expense:

 

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Should the Tenant fail to maintain any of the insurance required pursuant to this Section 11.1 and should such default continue for two (2) Business Days after Notice to the Tenant, then in addition to any other rights and remedies, the Landlord may, but shall have no obligation to, elect to obtain the required insurance and the Tenant shall upon demand pay to the Landlord, as Rent, the Landlord’s cost of obtaining such insurance.

Each policy required pursuant to Section 11.1 shall be in a form and with insurers acceptable to the Landlord, acting reasonably, having reasonable deductibles, and: (a) the insurance described in Sections 11.1(α) and 11.1(b) and any other property damage insurance shall include, as additional insureds (but without liability for premiums) as its interests may appear the Landlord, the Landlord’s property manager, facilities manager, asset manager (if any) and any Mortgagee; and other Persons with an interest in the Building from time to time designated in writing by the Landlord; (b) the insurance described in Section 11.1(c) shall include as additional insureds (but without liability for premiums) the Landlord, any Mortgagee, tiny other Persons with an interest in the Building from time to time designated in writing by the Landlord and any property manager, asset manager or facilities manager retained by the Landlord in respect of the Building; (c) all property damage and liability insurance shall contain provisions for cross-liability and severability of interests among the Landlord, the other insureds and the Tenant; (d) all property damage insurance (including boiler and machinery insurance) shall contain a waiver of any rights of subrogation which the insurer may have against the Landlord and those for whom the Landlord is in law responsible whether the damage is caused by the act, omission or negligence of the Landlord or such other Persons; and (e) shall contain a provision that the Tenant’s insurance shall be primary and shall not call into contribution any other insurance available to the Landlord.

The Tenant shall provide to the Landlord, prior to the Tenant’s occupancy of all or any portion of the Premises for any purpose, certified copies or other evidence satisfactory to the Landlord that the Tenant has obtained all insurance policies required by this Lease and shall provide written evidence of the continuation of such policies not less than ten days prior to their respective expiry dates. Each policy required pursuant to Section 11.1 shall provide that: (a) the insurer must notify the Landlord and any Mortgagee in writing at least 30 days prior to any material change detrimental to the Landlord or any Mortgagee or the cancellation of any such policy; (b) the policy shall not be invalidated in respect of the interests of the Landlord or any Mortgagee or any other additional insureds by reason of any breach or violation of any warranties, representations, declarations or conditions contained in such policy; and (c) the policy shall be non-contributing with, and shall apply only as primary and not excess to any other insurance available to all and any of the Landlord, any Mortgagee or any other additional insured referred to above. The delivery to Landlord of a certificate of insurance or any review thereof by or on behalf of Landlord shall not

 

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limit the obligation of Tenant to provide and maintain insurance pursuant to this Article 11 or derogate from Landlord’s rights if Tenant fails to fully insure.

The Landlord shall effect and maintain during the Term: (a) liability insurance; (b) “all risks” property insurance; (c) boiler and machinery insurance; and (d) such other insurance on the Building and all property and interest of the Landlord in the Building as determined by the Landlord, in each case, to the extent, with coverage and in amounts as determined by the Landlord from time to time, and consistent with the levels of insurance maintained by a prudent landlord of a building of a similar nature in a similar location. The Tenant agrees that notwithstanding the Tenant contributes to the cost of the Landlord’s insurance with respect to the Building, the Tenant shall not have any insurable interest in, or any right to recover any proceeds under any of the Landlord’s insurance policies.

The Tenant shall not do, omit to do, or permit to be done or omitted to be done upon the Premises or any other portion of the Building anything that may contravene or be prohibited by any of the Landlord’s insurance policies in force from time to time covering or relevant to any part of the Building or which would prevent the Landlord from procuring such policies with companies acceptable to the Landlord. If the occupancy of the Premises, the conduct of business in the Premises or any acts or omissions of the Tenant in the Premises or any other portion of the Building causes or results in any increase in premiums for any of the Landlord’s insurance policies, then, without limiting any other rights or remedies of the Landlord, the Tenant shall pay any such increase as Additional Rent forthwith upon receipt of the invoices of the Landlord for such additional premiums. A written report by an Expert concerning the cause of any increase in premiums will be accepted as conclusive evidence of the cause for the purposes of determining the Tenant’s liability to pay for increases as Additional Rent.

 

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Save and except for the negligence of the Tenant and those for whom the Tenant is in law responsible, the Landlord hereby releases the Tenant, and its agents, officers and employees, and any other Person for whom the Tenant is legally responsible from any liability or claim that may be made by the Landlord against the Tenant under the provisions of this Lease with respect to such loss to the extent of the lesser of: (a) the amount, if any, by which such loss exceeds the amount of insurance the Tenant is required to maintain under the terms of this Lease or actually maintains, whichever is greater; and (b) the proceeds actually paid to the Landlord with respect to such loss

 

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under the policies of insurance maintained by the Landlord pursuant to Section 11.4 or which would have been paid if the Landlord had maintained the insurance required under this Lease and had diligently processed any claims thereunder. This release shall be operative only if it is not prohibited by the Landlord’s insurance policies and would not place the Landlord in breach of such policies or expose the Landlord to additional costs under or in connection with such policies. The Landlord further releases the Tenant from any indirect or consequential damages of the Landlord, but not limited to, loss of profit, save and except for any damage caused by the negligence of the Tenant and those for whom the Tenant is in law responsible.

The Tenant shall indemnify and save harmless the Landlord from and against any and all claims, actions, causes of action, damages, demands for damages, losses and other liabilities and expenses (including, without limitation, those in connection with bodily injury (including death), personal injury, illness or discomfort or damage to property and legal fees on a substantial indemnity costs basis) due to or arising from or out of, subject to Section 11.7, any occurrence in, on or at the Premises or the occupancy or use by the Tenant of the Premises or any other part of the Building or occasioned wholly or in part by any act or omission of the Tenant, its officers, employees, agents, contractors, invitees, licensees or by any Person permitted by the Tenant to be on the Premises or the Building or due to or arising out of any breach by the Tenant of this Lease.

ARTICLE 12 - ASSIGNMENT, SUBLETTING AND OTHER TRANSFERS

The Tenant shall not enter into, consent to, or permit any Transfer without the prior written consent of the Landlord, which consent shall not be unreasonably withheld but shall be subject to the Landlord’s rights under Section 12.2. The Tenant shall pay to the Landlord its then current reasonable charge and all costs incurred (including legal fees and disbursements) in respect of the proposed Transfer. Notwithstanding any statutory provision to the contrary, it shall not be considered unreasonable for the Landlord to withhold its consent if, without limiting any other factors or circumstances which the Landlord may reasonably take into account:

 

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Any consent by the Landlord to a Transfer shall not constitute a waiver of the necessity for such consent to any subsequent Transfer.

If the Tenant intends to effect a Transfer the Tenant shall give prior Notice to the Landlord of such intent specifying the identity of the Transferee, the type of Transfer contemplated, the part of the Premises affected and the financial and other terms of the Transfer, and shall provide such financial, business or other information relating to the proposed Transferee and its principals as the Landlord or any Mortgagee reasonably requires, together with copies of all documents which record the particulars of the proposed Transfer. The Landlord shall, within 15 days after having received such Notice and all requested information, notify the Tenant either that:

 

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If the Landlord elects to terminate this Lease it shall stipulate in its Notice the termination date of this Lease, which date shall be the date of possession contemplated under the proposed Transfer (provided that if such date is less than 30 days following the giving of Notice of such election, the Landlord may elect to have the termination date 30 days following the giving of Notice). If the Landlord elects to terminate this Lease, the Tenant may notify the Landlord within ten days following receipt of such Notice of the Tenant’s intention to refrain from such Transfer and, if the Tenant provides such Notice within such time period, then the Landlord’s election to terminate this Lease shall become void. If the Tenant fails to deliver such Notice within such time period, then this Lease shall, as to the whole or affected part of the Premises, as the case may be, be terminated on the date of termination stipulated by the Landlord in its Notice of election to terminate. If the Tenant is required to deliver possession of a part only of the Premises, the Tenant shall pay all costs incurred in connection with rendering that part functionally separate and suitable for separate use and occupancy, including partitioning and providing entrances and services.

The following terms and conditions apply in respect of a Transfer:

 

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Upon the Landlord’s request, the Tenant shall: (a) deliver a statutory declaration by one of its senior officers setting forth the details of its corporate and capital structure; and (b) make available to the Landlord or its representatives all of its corporate or partnership records, as the case may be, for inspection at all reasonable times, in order to ascertain whether any Change of Control has occurred.

Notwithstanding Section 12.1 and provided that the Required Conditions are satisfied and there is not then an Event of Default, the Tenant shall have the right on prior Notice to the Landlord, but without being required to obtain the Landlord’s consent, to effect a Transfer in compliance with Section 12.3 in favour of a Permitted Transferee and the Landlord’s right to terminate shall not apply to such a Transfer.

The Tenant shall not advertise that the whole or any part of the Premises are available for a Transfer and shall not permit any broker or other Person to do so unless the text and format of such

 

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advertisement is approved in writing by the Landlord. No such advertisement shall contain any reference to the rental rate of the Premises.

The Landlord shall have the unrestricted right to sell, transfer, lease, license, charge or otherwise dispose of all or any part of its interest in the Building or any interest of the Landlord in this Lease. In the event of any sale, transfer, lease or other disposition the Landlord shall thereupon, and without further agreement, be released of all liability under this Lease arising from and after such disposition upon assumption of the Lease by the purchaser or transferee. If required by the Landlord in connection with any sale, transfer, charge or other disposition the Tenant shall, within five Business Days of request, provide to the Landlord, prospective purchasers and Mortgagees and their respective agents and consultants, access to the current financial statements of the Tenant and any Indemnifier. If the Tenant is listed on a recognized stock exchange in Canada or the United States, the Tenant agrees to provide instead copies of the Tenant’s annual reports, quarterly reports and all other publicly distributed reporting material:,.

ARTICLE 13 - LANDLORD FINANCING AND STATUS CERTIFICATES

At any time after any of the following has occurred:

 

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the Tenant shall, at the option of the Mortgagee or the Purchaser, as the case may be, exercisable by Notice in writing to the Tenant, be deemed to have attorned to the Mortgagee or the Purchaser, as the case may be, upon receipt of such Notice. The Landlord, the Mortgagee or the Purchaser, as the case may be, may require the Tenant to enter into all instruments required by the Landlord, the Mortgagee or the Purchaser, as the case may be, to confirm such attornment. Upon such attornment the obligations of the Tenant under this Lease shall continue in full force and effect upon all the same terms, conditions and covenants in this Lease.

The Tenant shall at any time and from time to time execute and deliver to the Landlord, or as the Landlord, a Mortgagee or a Purchaser may direct, within ten Business Days after it is requested, a certificate of the Tenant, in the form supplied, subject to such changes as are necessary to accurately reflect the terms of the Lease, addressed to the Landlord, the Mortgagee or the Purchaser, as the case may be, and/or any prospective purchaser, lessor or Mortgagee, certifying such particulars, information and other matters in respect of the Tenant, the Premises and this Lease that the Landlord, the Mortgagee or the Purchaser, as the case may be, may request.

Notwithstanding that a Mortgagee or a Purchaser is not a party to this Lease, it shall be entitled to rely upon and enforce the provisions of this Lease which are stated to be for its benefit and, without limitation, the Mortgagee shall be entitled to act as agent for the Landlord to the extent necessary to enforce any such provisions.

ARTICLE 14 - DAMAGE, DESTRUCTION

If all or any material part of the Premises is rendered untenantable or completely inaccessible by damage from fire or other casualty to the Building, then:

 

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If the Landlord is required to repair damage to the Premises under Section 14.1 the Basic Rent payable by the Tenant shall be proportionately reduced to the extent that the Premises are rendered untenantable or inaccessible, from the date of the casualty until 30 days after completion by the Landlord of the repairs to the Premises or until the Tenant again uses the Premises (or the part thereof rendered untenantable), whichever first occurs. The Tenant shall effect its own repairs as soon as possible after completion of the Landlord’s repairs. Notwithstanding the foregoing, there shall be no abatement or reduction of Basic Rent where the Landlord’s repairs to the Premises take less than ten days to complete after the damage occurs.

Notwithstanding anything else contained in this Lease, if: (a) the Building is partially destroyed or damaged so as to affect 25% or more of the Rentable Area of the Building; or (b) in the reasonable opinion of the Expert the Building is unsafe or access or services are affected and, in either case, cannot be substantially repaired under Applicable Laws within 180 days from the date of such casualty (employing normal construction methods without overtime or other premium); or (c) the proceeds of insurance are substantially insufficient to pay for the costs of repair or rebuilding or are not payable to or received by the Landlord; or (d) damage or destruction is caused by an occurrence against which the Landlord is not insured or beyond the extent to which the Landlord is required to insure under this Lease; or (e) any Mortgagee(s) or other Person entitled to the insurance proceeds shall not consent to the repair and rebuilding, then the Landlord may terminate this Lease by giving to the Tenant Notice of such termination within 60 days of the damage or destruction, in which event the Term shall cease and be at an end as of the date of such damage or destruction and the Rent and all other payments for which the Tenant is liable under the terms of this Lease shall be apportioned and paid in full to the date of termination (subject to any abatement under Section 14.2).

In the event of damage to the Building and if this Lease is not terminated in accordance with Sections 14.1 or 14.3, the Landlord shall forthwith repair any damage to the Building, but only to the extent of the Landlord’s obligations under the terms of the various leases for premises in the Building (including this Lease) and exclusive of any tenant’s responsibilities with respect to such repair. In repairing or rebuilding the Building or the Premises the Landlord may use drawings, designs, plans and specifications other than those used in the original construction and may alter or relocate the Building on the Lands, the Common Areas and Facilities or any part thereof, and may alter or relocate the Premises, provided that the Building as repaired or rebuilt is of a similar standard and the Premises as altered or relocated shall be of approximately the same size as the original Premises.

 

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ARTICLE 15 - DEFAULT AND REMEDIES

Any of the following constitutes an Event of Default under this Lease:

 

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If and whenever an Event of Default occurs, the Landlord shall have the following rights and remedies, exercisable immediately and without further Notice and at any time while the Event of Default continues:

 

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The Tenant agrees that despite anything contained in the Commercial Tenancies Act (in particular, but not limited to Section 19(2)), no notice of an Event of Default or of a breach of any covenant or condition in this Lease will be considered void or ineffective as a result of a minor or technical inaccuracy or error.

Notwithstanding any provision of this Lease or any provision of any present or future Applicable Laws, none of the goods, chattels or trade fixtures on the Premises at any time during the Term shall be exempt from levy by distress for Rent in arrears, and the Tenant waives any such exemption. If the Landlord makes any claim against the goods and chattels of the Tenant by way of distress this provision may be pleaded as an estoppel against the Tenant in any action brought to test the right of the Landlord to levy such distress.

The Tenant shall pay to the Landlord upon demand: (a) interest at the Default Rate on all Rent required to be paid hereunder from the due date for payment until fully paid and satisfied; and (b) the Landlord’s then current reasonable administration charge for each Notice of default given by the Landlord to the Tenant under this Lease. The Tenant shall pay and indemnify the Landlord against damages, costs and expenses (including, without limitation, all legal fees on a substantial indemnity costs basis) incurred in enforcing the terms of this Lease, or with respect to any matter or thing which is the obligation of the Tenant under this Lease, or in respect of which the Tenant has agreed to insure or to indemnify the Landlord.

No reference to or exercise of any specific right or remedy by the Landlord shall prejudice or preclude the Landlord from exercising or invoking any other remedy, whether allowed under this Lease or generally at law or in equity, and the express provisions of this Lease as to certain rights and remedies are not to be interpreted as excluding any other or additional rights and remedies available to the Landlord generally at law or in equity.

ARTICLE 16 - MISCELLANEOUS

Nothing contained in this Lease shall create any relationship between the parties other than that of landlord and tenant, and, without limitation, nothing in this Lease shall be construed to constitute the Landlord and the Tenant as partners, joint venturers or members of a joint or common enterprise.

 

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Except as otherwise specifically provided in this Lease, the Landlord and the Tenant, and each Person acting for them, in granting a consent or approval or making a determination, designation, calculation, estimate, conversion or allocation under this Lease, will act reasonably and in good faith and each Expert or other professional Person employed or retained by the Landlord will act in accordance with the applicable principles and standards of such Person’s profession. The Tenant’s sole remedy against the Landlord in respect of any breach or alleged breach of this Section shall be an action for specific performance and, without limitation, the Landlord shall not be liable for damages and the Tenant shall not be entitled to any other rights or remedies. If either party withholds any consent or approval where it is required to act reasonably, such party shall, on written request, deliver to the other party a written statement giving the reasons for withholding the consent or approval.

The Tenant has no right to remain in possession of the Premises after the end of the Term. If the Tenant remains in possession of the Premises after the end of the Term with the written consent of the Landlord but without entering into a new lease or other agreement then, notwithstanding any statutory provisions or legal presumption to the contrary, there shall be no tacit renewal of this Lease or the Term and the Tenant shall be deemed to be occupying the Premises as a tenant from month to month (with either party having the right to terminate such month to month tenancy at any time on 30 days’ Notice, whether or not the date of termination is at the end of a rental period) at a monthly Basic Rent payable in advance on the first day of each month equal to 150% of the monthly amount of Basic Rent payable during the last month of the Term and otherwise upon the same terms, covenants and conditions as in this Lease insofar as these are applicable to a monthly tenancy and, for greater certainty, including liability for all Additional Rent.

Neither the Tenant nor anyone on the Tenant’s behalf or claiming under the Tenant (including any Transferee) shall register this Lease or any Transfer against the Lands. The Tenant may register a notice or caveat of this Lease provided that: (a) a copy of the Lease is not attached; (b) no financial terms are disclosed; (c) the Landlord gives its prior written approval to the notice or caveat; and (d) the Tenant pays the Landlord’s reasonable costs on account of the matter. The Landlord may limit such registration to one or more parts of the Lands. Upon the expiration or other termination of the Term the Tenant shall immediately discharge or otherwise vacate any such notice or caveat. If any part of the Lands which in the opinion of the Landlord are surplus is transferred, the Tenant shall forthwith at the request of the Landlord discharge or otherwise vacate any such notice or caveat as it relates to such part. If any part of the Lands is made subject to any easement, right-of-way or similar right, the Tenant shall immediately at the request of the Landlord postpone its registered interest to such easement, right-of-way or similar right.

If any party is bona fide delayed, or hindered in or prevented from the performance of any term, covenant or act required by this Lease by reason of any cause beyond the control of the party affected including, without limitation, strikes, lockouts or other labour disputes, the enactment, amendment or repeal of any Applicable Laws, the failure of any existing tenant or occupant to

 

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vacate the Premises, shortages or unavailability of labour or materials, riots, insurrection, sabotage, rebellion, war, acts of terrorism, act of God, or any other similar reason (“Unavoidable Delay”), then performance of such term, covenant or act is excused for the period of the delay and the party so delayed, hindered or prevented shall be entitled to perform such term, covenant or act within the appropriate time period after the expiration of the period of such delay. However, the provisions of this Section do not operate to excuse the Tenant from the prompt payment of Rent and any other payments required by this Lease and Unavoidable Delay shall not include any delay caused by the parties’ default or act or omission, any delay avoidable by the exercise of reasonable care by such party or any delay caused by lack of funds of such party. The Landlord shall also be excused from the performance of any term, covenant or act required hereunder if the performance of such item would be in conflict with any directive, policy or request of any governmental or quasi-governmental authority in respect of any energy, conservation, safety or security matter.

The decision of any Expert whenever provided for under this Lease and any certificate of an Expert shall be final and binding on the parties and there shall be no further right of dispute or appeal.

Any notice, demand, statement or request (“Notice”) required or permitted to be given under this Lease shall be in writing and shall be deemed to have been duly given if personally delivered, delivered by courier or mailed by registered prepaid post, in the case of Notice to the Landlord, to it at the address set out in Section 1.1(a)(ii) and in the case of Notice to the Tenant, to it at the Premises. Notice may not be given by facsimile transmission, electronic mail or any other electronic communication.

Any such Notice given in accordance with the above requirements shall be deemed to have been given, if mailed, on the fifth day following the date of such mailing or, if delivered, on the day οn which it was delivered so long as such delivery was prior to 5:00 p.m. on a Business Day (and, if after 5:00 p.m. or if any such day is not a Business Day, then it shall be deemed to have been delivered on the next Business Day). Either party may from time to time by Notice change the address to which Notices to it are to be given. Notwithstanding the foregoing, during any interruption or threatened interruption in postal services, any Notice shall be personally delivered or delivered by courier. If a copy of any Notice to the Tenant is to be sent to a second address or to another Person other than the Tenant, the failure to give any such copy shall not vitiate the delivery of the Notice to the Tenant.

The Tenant shall keep confidential all financial information in respect of this Lease, provided that it may disclose such information to its auditors, consultants and professional advisors so long as they have first agreed to respect such confidentiality. Any Tenant or Indemnifier that is an individual person consents to the collection and use of their personal information, as provided directly or collected from third parties, for the purposes of the Landlord considering the Tenant’s offer to lease and determining the suitability of the Tenant or Indemnifier, as applicable, (both

 

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initially and on an on-going basis), including the disclosure of such information to existing and potential lenders, investors and purchasers.

The Landlord and the Tenant covenant, represent and warrant to each other that they have the power, capacity and authority to enter into this Lease and to perform its obligations hereunder and that there are no covenants, restrictions or commitments given by it which would prevent or inhibit it from entering into this Lease.

Any liability of the Landlord under this Lease shall be limited to its interest in the Building from time to time. If the Landlord consists of more than one Person, the liability of each such Person shall be several and be limited to its percentage interest in the Building.

The parties acknowledge and agree that both parties have participated in the drafting of this Lease, and that any rule of law providing that ambiguities shall be construed against the drafting party, shall be of no force or effect.

SIGNATURE PAGE FOLLOWS

 

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IN WITNESS WHEREOF the parties hereto have executed this Lease.

 

 

235 INVESTMENT LIMITED

(Landlord)

 

Per: /s/ Craig Walters_______________

Craig Walters, A.S.O.

 

I have the authority to bind the corporation.

 

 

VENUS CONCEPT CANADA CORP. (Tenant)

 

 

Per: /s/ Domenic Della Penna___________

Name: Domenic Della Penna

Title: CFO

 

Per:

Name:

Title:

 

I/We have the authority to bind the corporation

 

 

VENUS CONCEPT LTD.

(Indemnifier)

 

 

Per: /s/ Domenic Della Penna____________

Name: Domenic Della Penna

Title: CFO

 

Per:

Name:

Title:

 

I/We have the authority to bind the corporation

 

Exhibit 10.50

ASSUMPTION AND AMENDMENT AGREEMENT

This Assumption and Amendment Agreement (the “Agreement”) is entered into by and between Venus Concept USA Inc. (the “Company”) and Jack Fisher, MD (“Consultant”) as of this 8th day of February, 2018.

WHEREAS, the Company and/or its affiliates are purchasing certain assets and assuming certain liabilities of NeoGraft (as defined below) pursuant to the Master Asset Purchase Agreement, dated January 26, 2018 (the “MAPA”), among NeoGraft Solutions, Inc. (“Solutions Canada”), NeoGrafters Limited, 1904247 Ontario LTD, NeoGraft Holding Corp., NeoGraft Solutions Corp. (“Solutions US” and, together with Solutions Canada, “NeoGraft”), NeoGrafters US Corp., Societe de Promotion et Diffusion D’Equipement Medical Medicamat, Miriam Merkur, and Venus Concept Ltd. (the “Transaction”); and

WHEREAS, in connection with the Transaction, NeoGraft and the Company desire that the services of certain NeoGraft consultants be transferred from NeoGraft to the Company; and

WHEREAS, Consultant is one of the consultants whose services NeoGraft and the Company desire to transfer to the Company effective as of the closing of the Transaction (the “Effective Time”); and

WHEREAS, Consultant and Solutions Canada and/or Solutions US (as successor to Solutions Canada) are parties to a September 2015 NeoGraft Solutions, Inc. Consulting Agreement, attached hereto as Exhibit A (the “Consulting Agreement”).

NOW, THEREFORE, in consideration of the promises, mutual covenants, above recitals and agreements hereby set forth, and for other good and valuable consideration, the sufficiency of which is hereby acknowledged, the parties agree as follows:

1.Assignment and Assumption. Consultant hereby consents, effective as of the Effective Time, to the assignment by NeoGraft to the Company, and to the assumption by the Company, of the Consulting Agreement. Pursuant to such assumption by the Company, all rights, interests and, only to the extent required to be performed after the Effective Time and as further specified in the MAPA, obligations of NeoGraft in and under the Consulting Agreement are transferred, assigned and delivered to the Company and accepted and assumed by the Company, which shall pay, perform, discharge and otherwise satisfy all such obligations to Consultant in accordance with the terms of the Consulting Agreement, as amended hereby, and the MAPA as of the Effective Time. By signing this Agreement, Consultant expressly consents to his engagement by the Company pursuant to the terms of the Consulting Agreement, as amended hereby, effective as of the Effective Time. Consultant further understands and agrees that all obligations formerly owed by him to NeoGraft under the Consulting Agreement shall be owed by him to the Company as of the Effective Time.

2.Amendment of Consulting Agreement. The parties agree that, effective as of the Effective Time and immediately following the assignment of the Consulting Agreement to the Company, the Consulting Agreement shall be deemed amended as follows:

03/27/2020 8:56 PM

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(a)The initial three sentences of Section 4 (i.e., the sentences preceding “Notwithstanding anything in this Agreement...”) shall be deleted in their entirety and replaced with the following: “This Agreement may be terminated in the following manner: (a) by either the Company or Consultant upon not less than thirty (30) days prior written notice to the other party; (b) by the non-breaching party, upon twenty-four (24) hours prior written notice to the breaching party if one party has materially breached this Agreement; or (c) at any time upon the mutual written consent of the Parties hereto. In the event of termination, Consultant shall be entitled to payment for services performed prior to the effective date of termination that have not been previously paid. Such payment shall constitute full settlement of any and all claims of Consultant of every description against the Company.”

(b)Section 8 shall be deleted in its entirety and replaced with the following:

“Proprietary Information and Inventions.

(a) Proprietary Information.

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(c)The second sentence of Section 14 shall be deleted in its entirety and replaced with the following: “This Agreement shall be governed by and interpreted under the laws of the State of Florida, regardless of the location of Consultant’s residence or place of business, and regardless of where Consultant performs the Services.”

(d)Section 1 of Schedule A shall be deleted in its entirety and replaced with the following: “Company shall pay Consultant a monthly base consulting fee of Sixteen Thousand Dollars ($17,085.00).”

(e)Section 2 of Schedule A shall be deleted in its entirety and replaced with the following: [INTENTIONALLY DELETED].

(f)The Consultant acknowledges and agrees that the amendments to Sections 1 and 2 of Schedule A outlined in ss.2(d) and (e) above were mutually agreed to by the Consultant and NeoGraft as of May 1, 2017 and are effective as of such date.

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(g)Section 3 of Schedule A shall be deleted in its entirety and replaced with the following: “Effective as of the Effective Time of the Assumption and Amendment Agreement dated February 8, 2018 (the “Amendment Date”), Consultant will receive a stock option to purchase 20,000 ordinary shares of Venus Concept Ltd. under Venus Concept Ltd. ‘s share option plan at an exercise price equal to the fair market value of an ordinary share as determined by the Board of Venus Concept Ltd. at the time of grant. Vesting will occur with respect to 5000 of the shares on the twelve (12) month anniversary of the Amendment Date, and the balance of 15,000 shares will vest in equal monthly installments during the ensuing three (3) year period, contingent upon Consultant’s continued engagement with the Company each month. Upon termination of the Agreement for any reason, all unvested stock options shall automatically terminate as of the effective date of termination and Consultant will have 90 days from the effective date of termination to exercise any vested stock options he may have, in accordance with the Venus Concept Ltd. share option plan. Consultant will receive separate documentation to reflect the detailed terms of the stock option grant and the share option plan, and the grant will be subject to all terms, vesting schedules and other provisions set forth therein.”

Except as explicitly amended pursuant to this Section 2, the terms and conditions of the Consulting Agreement shall continue in full force and effect.

3.Amendment, Waiver and Termination. This Agreement cannot be amended, waived, or terminated except by a writing signed by the parties hereto.

4.Execution in Counterparts; Facsimile. This Agreement may be executed in two or more counterparts and via facsimile or other electronic signature, each of which shall be considered an original instrument, but all of which shall be considered one and the same agreement.

5.Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Florida.

VENUS CONCEPT USA INC.

By:/s/ Domenic Di Sisto_________

By:/s/ Jack Fisher________________

JACK FISHER

 

 

 

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Exhibit 10.51

 

[***] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED BECAUSE THE INFORMATION (I) IS NOT MATERIAL AND (II) WOULD BE COMPETITIVELY HARMFUL IF PUBLICLY DISCLOSED.

 

Head of Medical Advisory Board

The following agreement is made this 1st day of June, 2016 between Dr. Neil Sadick (the Luminary) located at [***] and Venus Concept LTD (the Company) located at 255 Consumers Rd, Toronto Ontario M2J 1R4 for a period of one year with a 60 day notice of termination from either party.

Upfront Compensation

Dr. Sadick we are pleased to offer you the consulting agreement for Medical Advisor for Venus Concept.  The compensation for this agreement is [***] USD per year.  We will need you to submit an invoice monthly to Venus Concept for $[***] and Venus Concept agrees to pay the amount within 15 days of receipt of the invoice.  The requirements of this agreement include but are not limited to, and may be altered from time to time during this agreement as the needs of the company evolve;

Clinical evaluation

Adverse Events

General Medical Queries

Protocol Revision

Clinical Papers

 

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Clinical Trials

Miscellaneous

It is agree that while Dr. Sadick may discuss other competing technologies at congresses, meetings or during various interviews, his primary focus will be to promote the advantages of Venus Concept technologies and the benefits to the potential customer of working with Venus Concept.

Dr. Sadick we have always had a great working relationship and we are excited to have you join our group as head of the medical advisory board.  We believe we can build a company that has the potential to be the biggest in the industry and are well on our way to achieving this lofty goal.  Please sign this agreement as soon as possible so that we can facilitate the delivery of a system to you.

 

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1^st AMENDMENT TO HEAD OF MEDICAL ADVISORY BOARD AGREEMENT

This 1^st AMENDMENT TO HEAD OF MEDICAL ADVISORY BOARD AGREEMENT (the “Amendment”) is made effective as of September 24, 2018, (the “Effective Date”), and shall become an integral part of the Head of Medical Advisory Board Agreement by and between Venus Concept Ltd. (hereinafter: “Company”) and Dr. Neil Sadick (hereinafter: “Luminary”).  Company and Luminary shall sometimes be referred to, each as a “Party” and collectively, as the “Parties”.

WHEREAS, Company and Luminary are parties to that certain Head of Medical Advisory Board Agreement dated June 1^st, 2016 (the “Agreement”); and

WHEREAS, The Parties have continued performance as set in the Agreement; and

WHEREAS, The Parties wish to amend certain terms of the Agreement:

NOW, THEREFORE, in consideration of the mutual promises and covenants set forth herein, the Parties hereby agree as follows:

“This Agreement shall enter into force on the Effective Date, and shall remain in effect unless terminated by either Party upon 30 days written notice of termination.”

IN WITNESS WHEREOF, this Amendment No.1 to Head of Medical Advisory Board Agreement has been executed by the undersigned as of the date set forth above.

 

 

 

Exhibit 10.52

Joint Venture and Shareholders Agreement for
Venus Concept Singapore PTE Ltd.

between

Venus Concept Ltd., a private company incorporated under the laws of the State of Israel (registration no. 514246636) and with offices at 62 Ha’chermesh St. Karmiel, Israel, (“Venus”)

- as one party -

and

Soeren Maor Sinay, 573/52 Soi Ramkhamhaeng 39 (Thepleelal), Plubpla, Wangthonglang, Bangkok 10310, THAILAND, 207287047, maor.sinai@gmail.cοm, +66817797496 (“Sinay”);

-as the other party –

and

Venus Concept Singapore PTE Ltd., a private company incorporated under laws of Singapore (registration no. 201503227C) and with offices at 3 Raffles Place, # 06-01, Bharat Building, Singapore 048617 (registered office address) as well as at Fullerton Road, # 02-01 One Fullerton, Singapore 049213 (physical office address) (“VC Singapore”);

-as the other party –

Venus, Sinay and VC Singapore shall be hereinafter jointly referred to as the “Parties” and severally as a “Party”

Whereas

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Now therefore, the Parties agree as follows:

1.General Provisions

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2.Purpose of the JVSA

This JVSA contains all the undertakings of the Parties in relation to: (i) the compliance of VC Singapore with the terms and conditions of this NSA; (ii) the definition of the terms of VC Singapore’s governance and activities; (iii) the definition of the relationships between the Parties concerning the development by VC Singapore of the Business Model; (iv) the funding of VC Singapore; (v) the management compensation; (vi) the procedure for the Buyout Options upon certain events.

3.Approval and Ratification

As soon as possible following the execution and delivery of this JVSA, a meeting of the Board of Directors will be called to resolve on the following matters:

4.Operations

VC Singapore’s General Manager (President) shall be Sinay and he shall undertake and be responsible for all day to day operating decisions, subject to the Board supervision, where required under this JVSA or applicable law, and shall have the authority to sign cheques on behalf of VC Singapore according to the Signatory Rights Procedure in Exhibit B attached hereto.

Venus shall provide and deliver to VC Singapore, as long as: (i) VC Singapore is active; and (ii) Sinay serves as the General Manager (President); and (iii) for as long as there is

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no deadlock situation, on an exclusive basis for the Singaporean territory, Venus Products for demos and/or for sale. Demos of Venus Products shall be paid within one year from VC Singapore’s receipt, provided that the company has sufficient funds.

The Parties agree that management services shall be rendered personally by Sinay as a key person.

Sinay as VC Singapore’s General Manager (President) shall be responsible for the management of VC Singapore and local costs in Singapore shall be borne by VC Singapore in accordance with the Strategic Plan. The following summarizes specific cost and service matters agreed herein between the Parties for clarity:

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5.Shareholders’ Μeeting

The Amended Articles of VC Singapore shall stipulate that the adoption of the following resolutions by the Shareholders’ Meetings of VC Singapore and shall require the favourable vote of the holder of at least 75% of the issued and outstanding corporate capital:

In case VC Singapore cannot resolve on the above matters, the Escalation Procedure shall be followed as described in Section 14.1.

Shareholders’ meeting resolutions on any other matters other than the ones listed above shall be adopted with the affirmative consent or voting of the holders of more than 50% of the issued and outstanding share capital of VC Singapore, on a fully diluted basis.

6.Board of Directors

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Venus shall be entitled to designate and dismiss 2 (two) directors. Mr. Domenico Serafino and Mr. Greg Van Staveren shall be the initial directors designated by Venus.

Sinay shall be entitled to appoint and dismiss 1 (one) director.

Should, for whatever reason, a director cease his office, a substitute director may be designated by the Party that had designated the ceasing director.

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7.General Manager (President)

The General Manager (President) shall chair the Board and the Shareholders’ meeting. He shall further manage the day-to-day operations of VC Singapore and shall be provided with the ordinary powers to run VC Singapore as directed by the Board.

8.Share Transfer and Lock-Up

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9.Right of First Refusal

Party having received a binding offer of the Shares from a third party that the transferring Party is willing to accept.

10.Funding, Staff, costs and expenses, and Tax Arrangements

The Parties agree that any future investments in VC Singapore shall continue to be made on a pro-rata basis. In the event that Sinay is unable to provide its pro-rata share of funding, whether under a corporate capital increase or Shareholders financing, then Venus shall, subject to approval by the Board of the revised Strategic Plan or the Business Plan (if necessary), act as financier of VC Singapore and advance a loan or investment (as the case may be) in an amount and other terms and conditions to be agreed between the Parties hereto. VC Singapore, to properly carry out the activities under the Strategic Plan, shall hire the employees having the roles and responsibilities provided in the Strategic Plan.

11.Brand

VC Singapore shall hold a license to use the Brand on an exclusive basis for Singapore, for as long as Sinay is a shareholder and a General Manager (President) of VC Singapore.

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12.Purpose of VC Singapore

VC Singapore will have as its sole purpose the exclusive sale and delivery of Venus’ products in the Territory, generally in accordance with the Business model.

13.Yearly Profits

The VC Singapore’s yearly profit resulting from the financial statements, as proposed to the Shareholders meeting and approved by Board, may be distributed to the Shareholders after having complied with the law provisions related to the mandatory reserves, provided that VC Singapore does not need additional financial resources. It is the general intent of the Parties to reinvest the profits from VC Singapore into growing the business. If VC Singapore has excess earnings above normal working capital needs, then the Board shall discuss the most favourable ways to distribute any excess accumulated earnings, on an annual basis.

14.Deadlock, Escalation Procedure and Liquidation

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15.Undertakings of the Parties upon the Review Date

At the Review Date, the Parties undertake to discuss and/or negotiate in good faith any appropriate review and update of the VC Singapore’s organisation and activities.

16.Buyout Option

(i) The Parties are unable to reach an agreement on a material issue relating to the activities of VC Singapore; or (ii) VC Singapore materially deviates from the budget and/or P&L performance and objectives and has failed to remedy such deviations within a reasonable remedy period; or (iii) material violation of either Party at any time of its confidentiality, intellectual property and non-competition and non-solicitation undertakings; or (iv) resignation of Sinay from the management of VC Singapore at any time; or (v) an unresolved Deadlock under Section 14.1; or (vi) VC Singapore’s material and adverse deviation from the Strategic Plan or Business Plan (each one and together “Triggering Event/s”), provided however, that the Triggering Events may be triggered only after the lapse of two (2) years following VC Singapore’s incorporation, then:

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The amount equal to:

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(For purposes of this calculation, no fixed overhead costs for the Singaporean personnel will be applied).

In case of disagreement between the Parties regarding the interpretation of the foregoing formula, the opinion of a qualified accountant/bookkeeper, appointed by the Board, shall be provided and deem definitely not later than 20 (Twenty) days after the date on which the Call Option has been exercised.

17.Miscellaneous

Unless otherwise agreed between the Parties and with the exception of any compulsory disclosure duty as may be

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provided by law, regulation or any other applicable rule, the Parties, considering the high degree of confidentiality of the Confidential Information dealt with during the performance of this Agreement, mutually agree to:

The confidentiality obligations hereunder will be binding for the Parties for 12 (twelve) months after the termination or the expiration of this JVSA for whatever reason.

The Parties hereby undertakes that neither person in their respective group shall (either personally or via any of its agents, affiliates or businesses in which it is a shareholder, partner, owner, employee, officer, director, consultant, or otherwise), during the term of this JVSA:

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This JVSA constitutes the entire agreement between the Parties and no amendment to this JVSA shall be binding on either Party, unless it is agreed between the Parties in writing with expressed reference to this JVSA.

All notices to be given hereunder shall be submitted in writing, by means of registered letter with advice of receipt, courier, facsimile or e-mail, followed by registered mail with advice of receipt, to the addresses listed hereinbelow or to such other address as the Parties may indicate in writing to each other:

for Venus:

255 Consumers Road,

Suite 100

Toronto, Ontario, M2J 1R4

Attention to: Mr. Greg Van Staveren, CFO

Tel.: +1 888 907 0115, ext. 149

Fax: +1 855 907 0115

E-mail: greg@venusconcept.com

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for Sinay:

573/52 Soi Ramkhamhaeng 39 (Thepleelal)

Plubpla, Wangthonglang

Bangkok 10310 THAILAND

Attention to: Mr. Soeren Maor Sinay

Tel.: +66817797496

E-mail: maor.sinai@gmail.com

18.Unless a cost relates to VENUS inability to comply with requirements of local authorities, all applicable charges relevant to the stipulation of this NSA and/or its annexes, including stamp and registration duties, where due, shall be borne equally by the Parties.

The Parties may not assign in whole or in part this JVSA or the rights and obligations arising therefrom to third parties, with or without consideration and by any title, without the prior written consent of the other Party.

No public announcement or statement to any member of the press or media with respect to this JVSA or any transaction contemplated hereby shall be made at any time by any Party hereto except where the text of the announcement or statement and the time and manner of its release have been expressly consented by and agreed upon in writing by the other Party. However, if at any time, any Party hereto shall be bound by law or regulation or other mandatory order to make any such public announcement, such Party shall be entitled to do so after close and timely consultation with the other Party.

Should any of the provisions of this NSA be held invalid or non-enforceable, said invalidity or non-enforceability will not result in the invalidity or non-enforceability of the remaining provisions of this JVSA, which will continue to remain in full force and effect. In that event, the Parties will negotiate in good faith feasible solutions, satisfactory to both Parties aimed at replacing the invalid or non-enforceable provisions.

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Headings used in this JVSA are for convenience only and shall not affect the meaning or construction of this JVSA.

This JVSA shall be interpreted in good faith, having regard to the common intention of the Parties and the substantial result, which, with the execution of this JVSA, they intend to achieve.

This .JVSA and the Annexes hereto contain all the provisions governing the relationships between the Parties concerning the rights and obligations set forth herein and supersede any other previous understanding between the Parties on the subject matter hereof.

This JVSA shall be governed by the laws of the State of Israel. All disputes arising from the implementation, interpretation and termination of this JVSA shall be referred to the exclusive jurisdiction of the competent courts in Tel Aviv district.

The Parties also acknowledge that this JVSA is the outcome of articulated negotiations between the Parties who therefore give their express and unconditional acceptance of the whole and of every part hereof.

This JVSA includes the JVSA and the following Exhibits:

Exhibits:

February 28, 2015

Sinay

/s/ Soeren Maor Sinay________

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By: Soeren Maor Sinάy

Title: General Manager (President)

Venus Concept Ltd.

/s/ Greg Van Steveren

by: Greg Van Steveren on behalf of Domenic Serafino

Title: Chief Financial Officer

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Exhibit 10.53

 

[***] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED BECAUSE THE INFORMATION (I) IS NOT MATERIAL AND (II) WOULD BE COMPETITIVELY HARMFUL IF PUBLICLY DISCLOSED.

 

Quality Agreement — Suppliers of Materials/Finish Goods

: The supplier will establish and maintain a quality management system in accordance with the relevant standards and regulations.

- 1 -

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- 2 -

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- 3 -

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- 4 -

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Annex A: Products and Services Covered by This Agreement

[as referred in article 1.2 of this agreement]

 

- 5 -

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This Quality Agreement has been signed by:

 

 

 

By: /s/ Svetlana Igel____________ By: /s/ Ehud Gitai_________________

Date: November 19, 2017_______Date: November 17, 2019__________

Title: QA Director_____________Title: Quality Technology and Regulating

forVenus Concept Ltd.forR.H. Technologies Ltd.

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Quality Agreement History

 

- 7 -

 

 

Exhibit 10.54

 

[***] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED BECAUSE THE INFORMATION (I) IS NOT MATERIAL AND (II) WOULD BE COMPETITIVELY HARMFUL IF PUBLICLY DISCLOSED.

 

Quality Agreement — Suppliers of Materials/Finish Goods

- 1 -

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- 2 -

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- 3 -

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- 4 -

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Annex A: Products and Services Covered by This Agreement

[as referred in article 1.2 of this agreement]

- 5 -

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- 6 -

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Annex B: Quality Management System processes [as referred in article 1.2 of this agreement].

USR Electronic Systems Ltd. and Venus Concept Ltd. shall bear responsibility for the following quality management system aspects, as applicable:

 

 

- 7 -

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This supplier technical agreement has been signed by:

 

 

 

- 8 -

Exhibit 10.55

 

[***] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED BECAUSE THE INFORMATION (I) IS NOT MATERIAL AND (II) WOULD BE COMPETITIVELY HARMFUL IF PUBLICLY DISCLOSED.

 

TURN-KEY PROJECT MANUFACTURING AGREEMENT
Dated 23 March, 2014

THIS AGREEMENT (the “Agreement”) is effective as of 23 March, 2014 (the “Effective Date”), by and between Venus Concept Ltd. an Israeli company having a principal place of business at Building 62 Hahermesh st POB 6264 Karmiel 21652 Israel (“Customer”) and U.S.R. Electronic Systems (1987) Ltd., an Israeli company having its principal place of business at 19 Hanapach st Karmiel, 21617, Israel, and its affiliates and subsidiaries (“USR”).

Now, therefore; it is agreed by the parties as follows:

1.Manufacture on Turnkey Basis

USR will procure materials, manufacture, assemble and sell to Customer the products ordered (the: “Products”). USR shall be entitled to engage subcontractors in the performance of its obligations under this agreement.

2.Purchase Orders

The Customer will issue USR a binding Purchase Orders (“PO”) on a monthly basis (no later than the 24^th day of each month) so that at any time USR will have no less than three (3) months (excluding the month on which the applicable PO is issued) PO lead time to delivery. PO’s shall be irrevocable. Increasing of quantities, rescheduling of deliveries and expedites of deliveries will be approved in writing based on production capacity and material deliveries to USR. When issuing an order, the customer will approve the material purchasing process according to minimum order quantities (“MOQ”) or minimum package quantities (“MPQ”) (according to paragraph 6.1). This MOQ and MPQ approval will be considered as Customer obligation and the Customer will purchase all the excess materials at the end of the project, termination of this agreement with or without any cause or in any case of discontinuation of production due to Customer request and in accordance with paragraph 6.3.

ipstewar-152440267.3.doc

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3.Forecasts

The customer will provide USR, no later than the 25th day of every calendar month, a rolling forecast covering at least the period of three (3) calendar months beginning at the end of the period mentioned in section 2. Based on this forecast USR will purchase all the long lead items (“LLI”), the customer will be noticed and will approve the purchase of these items and will be obligated for this inventory accordingly.

4.Payment Terms

5.Product Pricing

For each Product, Customer will pay USR a price (“Product Price”) which shall consist of ( a + b + c + d ) which (a) The DDU cost of materials and (b) Material Overhead = (a) * Mark up and (c) The components placement machines costs plus the labor costs based on [***] $ per hour and (d) The test costs based on [***] $ per hour. All changes in the price shall be by mutual agreed. Notwithstanding the above, if the costs of production increase due to changes in a Product requested by Customer the Product Price shall be adjusted to reflect the increase in USR’s costs. Any changes on the production definition requested by the customer that affect the manufacturing costs shall be priced according to the changes on the material cost and/or production process based on [***] $ per working hour . The customer shall approve such changes in writing and update the purchase orders respectively.

6.Procurement of materials; Inventory management

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7.Warranty

8.RMA Procedure

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9.Changes in Products (ECO)

10.Yield

The customer shall cover the all costs (material + overhead + labor + test) regarding the products and/or materials that defined as defective and the cause is not the workmanship

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or incoming material inspection, based on the production file supplied by the customer or known production standards.

11.Terms & Termination

In the event of termination for cause, Customer shall be under obligation to meet USR payments pursuant to Section 4 of this Agreement.

12.Title to Specifications

The title to all specifications provided by Customer shall remain with Customer.

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13.Title to Products

 

 

4'4683'

 

5

 

Title to the Products shall pass to Customer upon receipt by USR of full payment pursuant to Sections 4 above. Risk of loss or damage for the Products shall pass to Customer upon delivery

14.No Solicitation

During the term of this agreement and for a period of twelve (12) months following the termination of this agreement for any reason, both parties shall not directly or indirectly: solicit, induce, recruit, hire or encourage any employee of the other party (during the term of his relationship with such party and for a period of twelve (12) months following the termination of such relationship) to leave such position.

15.Conflict between Agreements

In the event of any conflict or inconsistency between the terms of this agreement and any other agreement, the terms of this Agreement shall control and prevail, unless agreed otherwise by the parties in writing.

16.Governing Law

This agreement shall be governed by and construed in accordance with the laws of state of Israel.

17.General

 

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   Exhibit 10.56

Quality Agreement

1.Administrative information:

2.Quality Management System and regulations:

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3.Complaince:

4.Non conformance:

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5.Procurement

6.Confidentiality

7.Product Design

8.Manufacturing, Packaging, and Labeling

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Annex A: Products and Services Covered by This Agreement

[As referred in article 1.2 of this agreement]

 

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Annex B: Quality Management System processes [as referred in article 2.4 of this agreement].

Each of Electronique du Mazet and Venus Concept Ltd. shall bear responsibilities for the following Quality Management System aspects, as applicable:

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(*) — in case of materials supplied by Venus Concept.

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This Quality Agreement has been signed by:

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Quality Agreement History

 

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Exhibit 10.57

 

 

 

 

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5

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Electronique du Mazet

 

 

/s/ Sebastian Ailleret_____________

Sebastian Ailleret

 

11

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Venus Concept Ltd.

 

 

/s/ Domenico Serafino________

Domenico Serafino

12

                    Exhibit 10.58

 

Electronique du Mazet

To the attention of Sebastien AILLERET

ZA route de Tence

43520 Le Mazet Saint Voy

 

On February 1st, 2018

 

By email and registered letter with acknowledgment of receipt

Re.: Consent to transfer of the contrat de sous-traitance de confidentialite et non sollicitation dated 10 May 2014

Dear Sir/Madam,

We refer to the contrat de sous-traitance de confidentialite et non solicitation entered into with your company dated 10 May 2014 (the “Contract”), and more precisely to the article entitled “transfer” for the purposes of obtaining your consent to the transfer of the Contract.

By the present letter, we are informing you that pursuant to a master asset purchase agreement, subject to conditions precedent, dated 26 January 2018, SOCIETE DE PROMOTION ET DIFFUSION D’EQUIPEMENT MEDICAL MEDICAMAT, a French societe par actions simplifiee with a share capital of EUR 40,000, the registered office of which is located at 59 Avenue Augustin Dumont, 92240 Malakoff, and registered with the Trade and Companies Registry of Nanterre under number 313 104 614 (“MEDICAMAT”) has agreed to transfer certain assets and liabilities relating to its activity consisting in the commercialisation and distribution of a hair restoration medical device: S.A.F.E.R.®/NeoGraft® as well as spare parts related to the S.A.F.E.R.®/NeoGraft® device in France and overseas to Venus Concept Ltd., an Israeli company, with share capital of NIS 100,000 the registered office of which is located at 2 Ha-Yetzira St., Yokneam, Israel and registered under number 514246636 (“Venus Concept”), and/or its designated affiliates, in each case, an affiliate of Venus Concept (such transfer, the “Transaction”).

For further details regarding Venus Concept and it group you may refer to its website: https://www.venusconceptcom/en-gl/

In the context of the Transaction, MEDICAMAT intends to transfer to Venus Concept (the “Transferee”) all its rights, obligations and liabilities under the Contract, and the Transferee intends to assume all rights, obligations and liabilities under the Contract (the “Contract Transfer”), upon the completion of the Transaction (the “Contract Transfer Date”).

The Contract Transfer Date, we anticipate will occur in the first quarter of 2018. In any event, we will inform you of such date when it has been determined and completed.

US_ACTIVE-152514171.1-IPSTEWAR 03/28/2020 1:48 PM

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Until the Contract Transfer Date (included), all sums due under the Contract will be paid by MEDICAMAT and the invoices shall continue to be issued according to usual practices to the attention of MEDICAMAT,

Until the Contract Transfer Date, you current contacts under the Contract remains unchanged.

Following the next day of the Contract Transfer Date, the Transferee shall have of all rights and obligations under the Contract, all correspondence in relation to the performance or invoicing of the Contract shall be directly sent to the Transferee, under the procedure which will be notified to you.

You will find herewith, in Schedule 1 a pricing proposal of the Transferee applicable to the Contract for the year 2018 as from the Contract Transfer Date (the “Pricing Proposal”).

By countersigning this letter below, subject to the completion of the Transaction, you hereby:

The governing law and jurisdiction provisions under the Contract shall apply to this letter.

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For the  proper management of our files, we should be grateful if you could return two originals of this letter, duly executed and signed by an authorized person with the below hand written mention

We remain at your disposal should you require any additional information in this respect.

Yours sincerely,

 

 

/s/ Miriam Merkur______________________                /s/ Domenic Serafino________________

 

 

 

/s/ Sebastian Ailleret

Signature to be followed by the hand written mention:

« Consent to transfer and amendment to the Contract »

 

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Exhibit 10.59

 

MANUFACTURING AGREEMENT FOR CONSUMABLES

This MANUFACTURING AGREEMENT FOR CONSUMABLES (hereinafter referred to as “Agreement”) is made and entered into as of the October 26, 2018. (hereinafter “Effective Date”), by and between
NPI SOLUTIONS, (hereinafter “Seller”), having a principal place of business at
685 Jarvis Dr, Morgan Hill, CA 95037, and RESTORATION ROBOTICS, INC.,
(hereinafter “Buyer”), having a principal place of business at 128 Baytech Drive, San Jose, CA 95134. Seller and Buyer are collectively referred to herein as the “Parties” and individually as a “Party”.

WHEREAS, Buyer and Seller desire to enter into a Manufacturing Agreement for Consumables pursuant to which Buyer wishes to engage Seller to manufacture certain products, which include subassemblies and components; and

NOW THEREFORE, in consideration of the premises and undertakings hereinafter set forth, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereby agree as follows:

ipstewar-152440272.2.doc 03/28/2020 2:25 PM

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Seller shall order and purchase all of the process tooling, assembly tools and test fixtures necessary or appropriate to manufacture the Products, except for tools consigned by Buyer and listed in Exhibit B. Seller must obtain Buyer’s approval before purchase of all tooling and fixtures necessary to manufacture the Products. Upon obtaining such approval from Buyer, Seller’s receipt and use of Buyer-approved tooling and test fixtures shall be deemed as Buyer’s acceptance of the process tooling, assembly tools and test fixtures. Upon termination of this Agreement and no later than 10 days after the date that Seller completes any agreed transition services pursuant to this Agreement, Seller shall ship to Buyer, FOB, Seller’s Manufacturing Plant, and at the expense of Buyer, all of the process tooling and test fixtures paid for by the Buyer or consigned to Seller. The tools must be packaged such that they will not be damaged during transport back to the Buyer.

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THE FOREGOING SECTION 9 STATES THE ENTIRE LIABILITY OF THE PARTIES TO EACH OTHER CONCERNING INFRINGEMENT OF PATENT, COPYRIGHT, TRADE SECRET OR OTHER INTELLECTUAL PROPERTY RIGHTS.

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In the event that Buyer fails to make timely payment at least sixty (60) days after the due date on any undisputed purchase order according to its payment terms and for as long as such payment remains overdue and payable, Seller shall be permitted to stop work on any and all outstanding purchase orders issued by Buyer, without penalty to Seller. Except in the event of termination by Seller pursuant to Section 12.1 or Section 12.2 below, Seller shall be obligated to re-commence work on outstanding purchase orders upon Buyer bringing overdue payment(s) current.

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Seller agrees not to begin new production, or purchase more materials or components, without receiving written approval from Buyer, following receipt of a written notice of termination from Buyer. The cost for Products will be in accordance with the established pricing in effect at the time of termination. The cost of components will be limited to the actual purchase price paid by Seller for the components, plus mutually agreed upon material handling charges or supplier related charges, if any.

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Notwithstanding any provisions to the contrary, Sections 5, 6, 9, 10, 12.1(c), and 14 shall survive the termination of this Agreement. Except for a termination as described in Sections 12.2, the provisions of this Agreement will continue to apply to purchase orders accepted by Seller prior to the effective date of such termination or expiration. This Agreement shall constitute the entire agreement of the Parties with respect to the subject matter herein, supersedes any prior agreement or understanding, whether written or oral, relating thereto, and can be amended only by a writing that is executed and delivered by both Parties hereto. This Agreement shall be governed by the laws of the State of California notwithstanding the conflict of laws provisions of the State of California. Further, to the extent that either Party waives any right hereunder, it shall not be deemed to have waived any other right hereunder. Finally, this Agreement shall be binding upon successors and assigns of each Party hereto and may only be assigned with the prior written consent of the other Party.

. “Confidential Information” means information or material, whether of technical nature, business nature or otherwise, including trade secrets, pertaining to any aspects of Buyer’s business which is commercially valuable to Buyer and not generally known or readily ascertainable. Confidential Information includes, without limitation, any and all technical and non-technical information including techniques, sketches, designs, drawings, models, inventions, know-how, processes, apparatus, equipment, algorithms, software programs, software source documents, and formulae; information related to the current, existing or contemplated or proposed Buyer’s products and services; information concerning research, experimental work, development, design details and specifications, engineering, financial information, procurement requirements, purchasing, manufacturing, customer lists and information, business forecasts, sales and merchandising, pricing, marketing plans and information, as well as the terms of this Agreement; and any information or data developed pursuant to the performance of the Services. Confidential Information shall not include information which: (a) is or becomes public knowledge without any action by, or involvement of, Seller, as evidenced by written records of Seller; (b) is disclosed by Seller with the specific, prior written approval of Buyer; (c) is independently developed by Seller without use of Buyer’s Confidential Information; (d) is rightfully received by Seller from a third party who is authorized to make such disclosure without requiring confidentiality treatment; or (e) is disclosed publicly pursuant to any judicial or

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governmental order, provided that Seller gives Buyer sufficient prior notice to contest such order. All Confidential Information provided pursuant to this Agreement shall not be distributed, disclosed or disseminated in any way or form by Seller to anyone except its own employees who have a reasonable need to know such Confidential Information and who have been advised of the confidential nature and required to observe the terms and conditions hereof; nor shall Confidential Information be used by Seller for its own purpose, except for the purposes of exercising its rights or fulfilling its obligations under the Agreement. Neither Party shall communicate or otherwise disclose to the other Party, during the Term of this Agreement, confidential or proprietary information of third parties. Upon request of Buyer, copies and embodiments of all Confidential Information shall be promptly returned to Buyer by Seller, unless such copies are required to support existing Buyer’s purchase orders under the terms of this Agreement. Upon termination of this Agreement for any reason, Seller shall promptly return or deliver to Buyer all Confidential Information provided by Buyer, including all copies thereof, unless such copies are required to support existing Buyer’s purchase orders under the terms of this Agreement. Both Parties agree and acknowledge the existence of a confidentiality agreement entered into on April 24, 2015 between Buyer and Seller (“Confidentiality Agreement”). To the extent any terms in this Section 14 conflicts with the provisions in the Confidentiality Agreement, the terms of the Confidentiality Agreement shall control.

Buyer and Seller hereby agree that neither Party may assign or transfer this Agreement or any interest herein or any rights or obligations hereunder without the prior written consent of the other Party, which consent will not be unreasonably withheld or delayed; provided, however, that Buyer may assign its rights and obligations to an entity controlling, controlled by or under common control with Buyer, or to Buyer’s successor in interest, or to any party to which Buyer sells the portion of its business which relates to the Products.

This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument.

IN WITNESS WHEREOF, the duly authorized representatives of Buyer and Seller have executed this Agreement on the dates shown below:

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14

Exhibit 21.1

 

LIST OF SUBSIDIARIES

 

 

 

US_ACTIVE-152460951.1-IPSTEWAR 03/24/2020 4:05 PM

 

Exhibit 23.2

 

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in Registration Statement No(s). 333-220993, 333-231507, 333-223448, and 333-235480 on Form S-8, and in Registration Statement No(s). 333-236207 and 333-228562 on Form S-3 of our auditors’ report dated March 30, 2020, relating to the consolidated financial statements of Venus Concept Inc. and its subsidiaries (the “Company”) for the year ended December 31, 2019 (which expresses an unqualified opinion and includes an explanatory paragraph relating to the conditions and events that raise substantial doubt on the Company’s ability to continue as a going concern) appearing in this Report on Form 10-K dated March 30, 2020.

 

/s/ MNP LLP

Chartered Professional Accountants

Licensed Public Accountants

March 30, 2020

Toronto, Canada

 

 

 

 

Exhibit 23.3

 

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

We consent to the incorporation by reference in Registration Statement No. 333-236207 on Form S-3 of Venus Concept Inc., of our report dated December 2, 2019, relating to the financial statements of Venus Concept Ltd., appearing in this Annual Report on Form 10-K for the year ended December 31, 2019.

 

/s/ Deloitte LLP

Chartered Professional Accountants

Licensed Public Accountants

Toronto, Canada

March 30, 2020

 

 

 

 

Exhibit 31.1

 

CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 

I, Domenic Serafino, certify that:

 

 

 

 

 

 

 

 

 

 

 

 

 

[SIGNATURE PAGE FOLLOWS]

 

 

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Exhibit 31.2

 

CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 

I, Domenic Della Penna, certify that:

 

 

 

 

 

 

 

 

 

 

 

 

 

[SIGNATURE PAGE FOLLOWS]

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Exhibit 32.1

 

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

 

Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, I, Domenic Serafino, the Chief Executive Officer of Venus Concept Inc. (the “Company”), hereby certify, that, to my knowledge:

1.The Annual Report on Form 10-K for the year ended 2019 (the “Report”) of the Company fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and

2.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

[SIGNATURE PAGE FOLLOWS]

 

 

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Date: March 30, 2020By:/s/ DOMENIC SERAFINO

Name: Domenic Serafino

Chief Executive Officer

(Principal Executive Officer)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1/1

 

 

 

Exhibit 32.2

 

 

 

 

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

 

Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, I, Domenic Della Pena, the Chief Financial Officer of Venus Concept Inc. (the “Company”), hereby certify, that, to my knowledge:

1.The Annual Report on Form 10-K for the year ended 2019 (the “Report”) of the Company fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and

2.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

[SIGNATURE PAGE FOLLOWS]

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Date: March 30, 2020By:  /s/ DOMENIC DELLA PENNA

Name: Domenic Della Penna              Chief Financial Officer

(Principal Financial Officer)