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Table of Contents



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549


FORM 10-Q


(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2022

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ____________ to ____________

 

Commission File Number: 001-38238


Venus Concept Inc.

(Exact Name of Registrant as Specified in its Charter)


Delaware

06-1681204

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer
Identification No.)

235 Yorkland Blvd., Suite 900

Toronto, Ontario M2J 4Y8

(877) 848-8430

(Address including zip code, and telephone number including area code, of registrants principal executive offices)

 


 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading Symbol

 

Name of each exchange on which registered

Common Stock, $0.0001 par value per share

 

VERO

 

The Nasdaq Global Market

 

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.

 

Large accelerated filer

Accelerated filer

    

Non-accelerated filer

Smaller reporting company

    
  

Emerging growth company

 

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  ☒

 

As of August 10, 2022 the registrant had 65,459,573 shares of common stock, $0.0001 par value per share, outstanding.



 

 

 

 

Table of Contents

 

 

 

Page

Part I.

Financial Information

2

Item 1.

Condensed Consolidated Financial Statements (unaudited)

2

 

Condensed Consolidated Balance Sheets

2

 

Condensed Consolidated Statements of Operations

3

 

Condensed Consolidated Statements of Comprehensive Loss

4

 

Condensed Consolidated Statements of Stockholders’ Equity

5

 

Condensed Consolidated Statements of Cash Flows

6

 

Notes to the Condensed Consolidated Financial Statements

7

Item 2.

Managements Discussion and Analysis of Financial Condition and Results of Operations

28

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

46

Item 4.

Controls and Procedures

46

PART II.

Other Information

47

Item 1.

Legal Proceedings

47

Item 1A.

Risk Factors

47

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

47

Item 3.

Defaults Upon Senior Securities

48

Item 4.

Mine Safety Disclosures

48

Item 5.

Other Information

48

Item 6.

Exhibits

48

Signatures

49

 

 

 

PART I

 

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

VENUS CONCEPT INC.

 

Condensed Consolidated Balance Sheets

(Unaudited)

(in thousands, except share and per share data)

 

  

June 30,

  

December 31,

 
  

2022

  

2021

 

ASSETS

        

CURRENT ASSETS:

        

Cash and cash equivalents

 $10,540  $30,876 

Accounts receivable, net of allowance of $14,100 and $11,997 as of June 30, 2022, and December 31, 2021

  46,754   46,918 

Inventories

  22,363   20,543 

Prepaid expenses

  2,169   2,737 

Advances to suppliers

  2,869   2,162 

Other current assets

  3,873   3,758 

Total current assets

  88,568   106,994 

LONG-TERM ASSETS:

        

Long-term receivables

  26,724   27,710 

Deferred tax assets

  579   284 

Severance pay funds

  815   817 

Property and equipment, net

  2,395   2,669 

Intangible assets

  13,670   15,393 

Total long-term assets

  44,183   46,873 

TOTAL ASSETS

 $132,751  $153,867 

LIABILITIES AND STOCKHOLDERS’ EQUITY

        

CURRENT LIABILITIES:

        

Trade payables

 $4,184  $4,913 

Accrued expenses and other current liabilities

  17,449   19,512 

Income taxes payable

  690   294 

Unearned interest income

  2,884   2,678 

Warranty accrual

  1,173   1,245 

Deferred revenues

  1,800   2,030 

Current portion of government assistance loans

     543 

Total current liabilities

  28,180   31,215 

LONG-TERM LIABILITIES:

        

Long-term debt

  77,507   77,325 

Income tax payable

  582   563 

Accrued severance pay

  931   911 

Deferred tax liabilities

  58   46 

Unearned interest income

  1,433   1,355 

Warranty accrual

  437   508 

Other long-term liabilities

  227   348 

Total long-term liabilities

  81,175   81,056 

TOTAL LIABILITIES

  109,355   112,271 

Commitments and Contingencies (Note 8)

          

STOCKHOLDERS’ EQUITY:

        

Common Stock, $0.0001 par value: 300,000,000 shares authorized as of June 30, 2022 and December 31, 2021; 64,399,044 and 63,982,580 issued and outstanding as of June 30, 2022, and December 31, 2021, respectively

  27   27 

Additional paid-in capital

  222,393   221,321 

Accumulated deficit

  (199,583)  (180,405)

TOTAL STOCKHOLDERS’ EQUITY

  22,837   40,943 

Non-controlling interests

  559   653 
   23,396   41,596 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 $132,751  $153,867 

 

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

 

 

 

 

VENUS CONCEPT INC.

 

Condensed Consolidated Statements of Operations

(Unaudited)

(in thousands, except per share data)

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2022

   

2021

   

2022

   

2021

 

Revenue

                               

Leases

  $ 11,874     $ 12,787     $ 22,297     $ 21,324  

Products and services

    15,392       13,041       31,375       27,101  
      27,266       25,828       53,672       48,425  

Cost of goods sold

                               

Leases

    2,761       2,736       5,461       4,506  

Products and services

    5,459       4,375       11,402       9,968  
      8,220       7,111       16,863       14,474  

Gross profit

    19,046       18,717       36,809       33,951  

Operating expenses:

                               

Sales and marketing

    9,487       10,114       19,390       17,968  

General and administrative

    14,249       7,828       27,343       19,993  

Research and development

    2,436       2,024       4,638       4,075  

Gain on forgiveness of government assistance loans

          (2,775 )           (2,775 )

Total operating expenses

    26,172       17,191       51,371       39,261  

(Loss) income from operations

    (7,126 )     1,526       (14,562 )     (5,310 )

Other expenses:

                               

Foreign exchange loss

    2,370       130       2,375       844  

Finance expenses

    1,034       1,161       1,957       3,046  

(Loss) income before income taxes

    (10,530 )     235       (18,894 )     (9,200 )

Income tax (benefit) expense

    (18 )     (7 )     254       (7 )

Net (loss) income

    (10,512 )     242       (19,148 )     (9,193 )

Net (loss) income attributable to stockholders of the Company

    (10,559 )     377       (19,178 )     (8,882 )

Net income (loss) attributable to non-controlling interest

    47       (135 )     30       (311 )
                                 

Net (loss) income per share:

                               

Basic

  $ (0.16 )   $ 0.01     $ (0.30 )   $ (0.16 )

Diluted

  $ (0.16 )   $ 0.01     $ (0.30 )   $ (0.16 )

Weighted-average number of shares used in per share calculation:

                               

Basic

    64,130       54,088       64,059       53,917  

Diluted

    64,130       54,237       64,059       53,917  

 

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

 

 

 

VENUS CONCEPT INC.

 

Condensed Consolidated Statements of Comprehensive Loss

(Unaudited)

(in thousands)

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2022

   

2021

   

2022

   

2021

 

Net (loss) income

  $ (10,512 )   $ 242     $ (19,148 )   $ (9,193 )

(Loss) income attributable to stockholders of the Company

    (10,559 )     377       (19,178 )     (8,882 )

Income (loss) attributable to non-controlling interest

    47       (135 )     30       (311 )

Comprehensive (loss) income

  $ (10,512 )   $ 242     $ (19,148 )   $ (9,193 )

 

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

 

 

 

 

VENUS CONCEPT INC.

 

Condensed Consolidated Statements of Stockholders Equity

(Unaudited)

(in thousands, except share data)

 

   

Series A Preferred

   

Series A Preferred

   

Common Stock

   

Additional Paid-

   

Accumulated

   

Non- controlling

   

Total Stockholders’

 
   

Shares

   

Amount

   

Shares

   

Amount

   

in-Capital

   

Deficit

   

Interest

   

Equity

 

Balance — January 1, 2022

    3,790,755     $       63,982,580     $ 27     $ 221,321     $ (180,405 )   $ 653     $ 41,596  

Options exercised

                16,464             23                   23  

Net loss — the Company

                                  (8,619 )           (8,619 )

Net loss — non-controlling interest

                                        (17 )     (17 )

Stock-based compensation

                            443                   443  

Balance — March 31, 2022

    3,790,755     $       63,999,044       27       221,787       (189,024 )     636       33,426  

Net loss — the Company

                                  (10,559 )           (10,559 )

Net income — non-controlling interest

                                        47       47  

Equity issuance

                400,000             48                   48  

Stock-based compensation

                            558                   558  

Dividends from subsidiaries

                                        (124 )     (124 )

Balance — June 30, 2022

    3,790,755     $       64,399,044       27       222,393       (199,583 )     559       23,396  

 

   

Series A Preferred

   

Series A Preferred

   

Common Stock

   

Additional Paid-

   

Accumulated

   

Non- controlling

   

Total Stockholders

 
   

Shares

   

Amount

   

Shares

   

Amount

   

in-Capital

   

Deficit

   

Interest

   

Equity

 

Balance — January 1, 2021

        $       53,551,126     $ 26     $ 201,598     $ (157,392 )   $ (471 )   $ 43,761  

December 2020 Public Offering warrants exercise

                361,200             903                   903  

Options exercised

                157,304             212                   212  

Net loss — the Company

                                  (9,259 )           (9,259 )

Net loss — non-controlling interest

                                        (176 )     (176 )

Stock-based compensation

                            508                   508  

Balance — March 31, 2021

        $       54,069,630       26       203,221       (166,651 )     (647 )     35,949  

Options exercised

                72,192             98                   98  

Net income — the Company

                                  377             377  

Net loss — non-controlling interest

                                        (135 )     (135 )

Stock-based compensation

                            558                   558  

Balance — June 30, 2021

        $       54,141,822       26       203,877       (166,274 )     (782 )     36,847  

 

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

 

 

 

VENUS CONCEPT INC.

 

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(in thousands)

 

   

Six Months Ended June 30,

 
   

2022

   

2021

 

CASH FLOWS FROM OPERATING ACTIVITIES:

               

Net loss

  $ (19,148 )   $ (9,193 )

Adjustments to reconcile net loss to net cash used in operating activities:

               

Depreciation and amortization

    2,212       2,451  

Stock-based compensation

    1,001       1,066  

Provision for bad debt

    3,521       (2,132 )

Provision for inventory obsolescence

    862       868  

Finance expenses and accretion

    182       849  

Deferred tax recovery

    (283 )     (814 )

Gain on forgiveness of government assistance loans

          (2,775 )

Loss on disposal of property and equipment

    31        

Changes in operating assets and liabilities:

               

Accounts receivable short and long-term

    (2,492 )     4,028  

Inventories

    (2,682 )     (2,877 )

Prepaid expenses

    568       (110 )

Advances to suppliers

    (707 )     (772 )

Other current assets

    (115 )     1,038  

Other long-term assets

    (79 )     (12 )

Trade payables

    (729 )     (640 )

Accrued expenses and other current liabilities

    (1,969 )     (2,936 )

Severance pay funds

    2       (31 )

Unearned interest income

    284       (87 )

Other long-term liabilities

    (172 )     (99 )

Net cash used in operating activities

    (19,713 )     (12,178 )

CASH FLOWS FROM INVESTING ACTIVITIES:

               

Purchases of property and equipment

    (251 )     (126 )

Net cash used in investing activities

    (251 )     (126 )

CASH FLOWS FROM FINANCING ACTIVITIES:

               

Proceeds from issuance of common stock, net of costs

    272        

Exercises of 2020 December Public Offering Warrants

          903  

Payment of earn-out liability

          (147 )

Repayment of government assistance loans

    (543 )      

Proceeds from exercise of options

    23       310  

Dividends from subsidiaries paid to non-controlling interest

    (124 )      

Net cash (used in) provided by financing activities

    (372 )     1,066  

NET DECREASE IN CASH AND CASH EQUIVALENTS AND RESTRICTED CASH

    (20,336 )     (11,238 )

CASH AND CASH EQUIVALENTS AND RESTRICTED CASH — Beginning of period

    30,876       34,380  

CASH AND CASH EQUIVALENTS AND RESTRICTED CASH — End of period

  $ 10,540     $ 23,142  

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

               

Cash paid for income taxes

  $ 224     $ 88  

Cash paid for interest

  $ 1,775     $ 2,312  

 

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

 

 

VENUS CONCEPT INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(in thousands, unless otherwise noted, except share and per share data)

 

 

1. NATURE OF OPERATIONS

 

Venus Concept Inc. is a global medical technology company that develops, commercializes, and sells minimally invasive and non-invasive medical aesthetic and hair restoration technologies and related services. The Company’s systems have been designed on cost-effective, proprietary and flexible platforms that enable it to expand beyond the aesthetic industry’s traditional markets of dermatology and plastic surgery, and into non-traditional markets, including family and general practitioners and aesthetic medical spas. The Company was incorporated in the state of Delaware on November 22, 2002. In these notes to the condensed consolidated financial statements, the “Company” and “Venus Concept”, refer to Venus Concept Inc. and its subsidiaries on a consolidated basis.

 

Going Concern

 

The accompanying unaudited condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business for the foreseeable future, and, as such, the unaudited condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence.

 

The Company has had recurring net operating losses and negative cash flows from operations. As of  June 30, 2022 and December 31, 2021, the Company had an accumulated deficit of $199,583 and $180,405, respectively. The Company was in compliance with all required covenants as of June 30, 2022, and December 31, 2021. 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 unaudited condensed consolidated financial statements are issued. While the Company's business has improved and management expects this momentum to continue through the balance of 2022, the Company is still recovering from the impact of the coronavirus pandemic ("COVID-19" or "pandemic"). As of  June 30, 2022, and for the six months then ended management expects the pandemic to continue to have a negative impact in the foreseeable future, the extent of which is uncertain and largely subject to whether the severity of the pandemic worsens, or duration lengthens. In the event that the pandemic and the economic disruptions it has caused continue for an extended period of time, the Company cannot assure that it will remain in compliance with the financial covenants contained within its credit facilities. 

 

In order to continue its operations, the Company must achieve profitable operations and/or obtain additional equity or debt financing. Until the Company achieves profitability, management plans to fund its operations and capital expenditures with cash on hand, borrowings, and issuance of capital stock. On June 16, 2020, the Company entered into a purchase agreement (the "Equity Purchase Agreement") with Lincoln Park Capital Fund LLC ("Lincoln Park"), which provides that, upon the terms and subject to the conditions and limitations set forth therein, the Company may sell to Lincoln Park up to $31,000 worth of shares of its common stock from time to time over the two-year term of the agreement. Any shares of common stock sold to Lincoln Park will be sold at a purchase price that is based on the prevailing prices of the common stock at the time of each sale. During the six months ended June 30, 2022, the Company raised net cash proceeds of $272 under the Equity Purchase Agreement as described below. The Equity Purchase Agreement expired on July 1, 2022. On July 12, 2022, the Company entered into a subsequent purchase agreement (the “2022 LPC Purchase Agreement”) with Lincoln Park, the details of which are described in Note 18 below. In December 2021, the Company issued and sold to investors 9,808,418 shares of common stock, par value $0.0001 per share, and 3,790,755 shares of the convertible preferred stock, par value $0.0001 per share for the total gross proceeds of $16,999 (see “The 2021 Private Placement” in Note 14). In February 2021, several investors exercised an aggregate of 361,200 December 2020 Public Offering Warrants at the exercise price of $2.50 per share. The total proceeds received by the Company from the December 2020 Public Offering Warrants exercises were $903. Until the Company generates revenue at a level to support its cost structure, the Company expects to continue to incur substantial operating losses and net cash outflows from operating activities.

 

Given the pandemic and the uncertainty around the COVID-19 variants, the Company cannot anticipate the extent to which the current economic turmoil and financial market conditions will continue to adversely impact the Company’s business and the Company may need additional capital to fund its future operations and to access the capital markets sooner than planned. There can be no assurance that the Company will be successful in raising additional capital or that such capital, if available, will be on terms that are acceptable to the Company. If the Company is unable to raise sufficient additional capital, it may be compelled to reduce the scope of its operations and planned capital expenditures or sell certain assets, including intellectual property assets. These unaudited condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might result from the uncertainty. Such adjustments could be material.

 

Equity Purchase Agreement with Lincoln Park

 

On June 16, 2020, the Company entered into the Equity Purchase Agreement with Lincoln Park, which provides that, upon the terms and subject to the conditions and limitations set forth therein, the Company may sell to Lincoln Park up to $31,000 worth of shares of its common stock, par value $0.0001 per share, pursuant to its shelf registration statement. The purchase price of shares of common stock related to a future sale will be based on the then prevailing market prices of such shares at the time of sales as described in the Equity Purchase Agreement. The aggregate number of shares that the Company can sell to Lincoln Park under the Equity Purchase Agreement may in no case exceed 7,763,411 shares (subject to adjustment) of common stock (which is equal to approximately 19.99% of the shares of the common stock outstanding immediately prior to the execution of the Equity Purchase Agreement) (the “Exchange Cap”), unless (i) stockholder approval is obtained to issue shares above the Exchange Cap, in which case the Exchange Cap will no longer apply, or (ii) with Equity Purchase Agreement equals or exceeds $3.9755 per share (subject to adjustment) (which represents the minimum price, as defined under Nasdaq Listing Rule 5635(d), on the Nasdaq Global Market immediately preceding the signing of the Equity Purchase Agreement, such that the transactions contemplated by the Equity Purchase Agreement are exempt from the Exchange Cap limitation under applicable Nasdaq rules. Also, at no time may Lincoln Park (together with its affiliates) beneficially own more than 9.99% of the Company’s issued and outstanding common stock. Concurrently with entering into the Equity Purchase Agreement, the Company also entered into a registration rights agreement with Lincoln Park, pursuant to which it agreed to provide Lincoln Park with certain registration rights related to the shares of common stock issued under the Equity Purchase Agreement (the “Registration Rights Agreement”).

 

Since inception through June 30, 2022, the Company issued and sold to Lincoln Park 3,437,521 shares of its common stock at an average price of $2.70 per share, and 209,566 of these shares were issued to Lincoln Park as a commitment fee in connection with entering into the Equity Purchase Agreement (the “Commitment Shares”). The total value of the Commitment Shares of $620 together with the issuance costs of $123 were recorded as deferred issuance costs in the consolidated balance sheet at inception and were amortized into consolidated statements of stockholders’ equity proportionally based on proceeds received during the term of the Equity Purchase Agreement. In 2022, the Company issued 400,000 shares of its common stock and the proceeds from common stock issuances as of June 30, 2022 were $272, with no issuance costs. The proceeds in the amount of $272 were recorded in the condensed consolidated statements of cash flows as net cash proceeds from issuance of common stock. The Equity Purchase Agreement expired on July 1, 2022. 

 

7

 
 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements of Venus Concept Inc. have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2021, filed with the Securities and Exchange Commission (the “SEC”) on March 28, 2022. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for fair presentation have been included. Operating results for the six months ended June 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022. For further information, refer to the consolidated financial statements and footnotes thereto included in Item 8 of the Company’s most recent Annual Report on Form 10-K.

 

In the Form 10-Q for the period ended March 31, 2021, filed with the SEC on May 17, 2021, in the Form 10-Q for the period ended June 30, 2021, filed with the SEC on August 17, 2021, in the form 10-Q for the period ended September 30, 2021, filed with the SEC on November 12, 2021 and in the Form 10-K for the year ended December 31, 2021, filed with the SEC on March 28, 2022, the revenue by geographic location, which is based on the product shipped to location, was presented incorrectly (see below). The Company corrected the presentation in the accompanying unaudited condensed consolidated financial statements for the periods presented (see Note 16).

 

  

Reclassification Adjustment

 
  Three Months Ended  Year Ended 
  

March 31, 2021

  

June 30, 2021

  

September 30, 2021

  

December 31, 2021

  

December 31, 2021

 

United States

 $(362) $(615) $(703) $(440) $(2,120)

International

  362   615   703   440   2,120 

Total revenue

 $  $  $  $  $ 

 

The preparation of these unaudited condensed consolidated financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ materially from those estimates. The Company assessed certain accounting matters that generally require consideration of forecasted financial information in context with the information reasonably available to the Company and the unknown future impacts of COVID-19 as of June 30, 2022 and through the date of this report filing. The accounting matters assessed included, but were not limited to, the allowance for doubtful accounts and the carrying value of intangible and long-lived assets.

 

Amounts reported in thousands within this report are computed based on the amounts in dollars. As a result, the sum of the components reported in thousands may not equal the total amount reported in thousands due to rounding. Certain columns and rows within tables may not add due to the use of rounded numbers. Percentages presented are calculated from the underlying numbers in dollars.

 

Accounting Policies

 

The accounting policies the Company follows are set forth in the Company’s audited consolidated financial statements for fiscal year 2021. For further information, refer to the consolidated financial statements and footnotes thereto included in Item 8 of the Company’s most recent Annual Report on Form 10-K. There have been no material changes to these accounting policies.

 

JOBS Act Accounting Election

 

The Company is an emerging growth company, within the meaning of the 1933 Act, as modified by the Jumpstart Our Business Startups Act (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 unaudited condensed consolidated financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates.

 

8

 

Recently Issued Accounting Standards Not Yet Adopted

 

In August 2020, Financial Accounting Standards Board (the “FASB”) issued ASU No. 2020-06 (“ASU 2020-06”): Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40). ASU 2020-06 reduces the number of accounting models for convertible debt instruments by eliminating the cash conversion and beneficial conversion models. The diluted net income per share calculation for convertible instruments will require us to use the if-converted method. For contracts in an entity’s own equity, the type of contracts primarily affected by this update are freestanding and embedded features that are accounted for as derivatives under the current guidance due to a failure to meet the settlement conditions of the derivative scope exception. This update simplifies the related settlement assessment by removing the requirements to (i) consider whether the contract would be settled in registered shares, (ii) consider whether collateral is required to be posted, and (iii) assess shareholder rights. ASU 2020-06 is effective for the Company on January 1, 2024, with early adoption permitted. ASU No. 2020-06 can be adopted on either a fully retrospective or modified retrospective basis. The Company is currently assessing the impact of applying this guidance as well as when to adopt this guidance.

 

In April 2020, the FASB issued a Staff Question-and-Answer Document (Q&A): ASC Topic 842 and ASC Topic 840: Accounting for Lease Concessions Related to the Effects of the COVID-19 Pandemic, that focuses on the application of the lease guidance for lease concessions related solely to the effects of COVID-19. The FASB issued the guidelines to reduce the burden and complexity for companies to account for such lease concessions (e.g., rent abatements or other economic incentives) under current lease accounting rules due to COVID-19 by providing certain practical expedients that can be used. This guidance can be applied immediately. The adoption of the guidance did not have a material impact on the Company’s unaudited condensed consolidated financial statements.

 

In March 2020, the FASB issued Accounting Standards Update (“ASU”) 2020-04 - Facilitation of the Effects of Reference Rate Reform on Financial Reporting (ASC Topic 848). This authoritative guidance provides optional relief for companies preparing for the discontinuation of interest rates such as LIBOR, which is expected to be phased out at the end of calendar 2021, and applies to lease contracts, hedging instruments, held-to-maturity debt securities and debt arrangements that have LIBOR as the benchmark rate. This guidance can be applied for a limited time, as of the beginning of the interim period that includes March 12, 2020 or any date thereafter, through December 31, 2022. The guidance may no longer be applied after December 31, 2022. In January 2021, the FASB issued authoritative guidance that makes amendments to the new rules on accounting for reference rate reform. The amendments clarify that all derivative instruments affected by the changes to interest rates used for discounting, margining or contract price alignment, regardless of whether they reference LIBOR, or another rate expected to be discontinued as a result of reference rate reform, an entity may apply certain practical expedients in ASC Topic 848. The Company is currently assessing the impact of applying this guidance as well as when to adopt this guidance.

 

In February 2020, the FASB issued authoritative guidance (ASU 2020-02 – Financial Instruments – Credit Losses (Topic 326) and Leases (Topic 842)) that amends and clarifies Topic 326 and Topic 842. For Topic 326, the codification was updated to include the SEC staff interpretations associated with registrants engaged in lending activities. ASC Topic 326 is effective for annual periods beginning after January 1, 2023, including interim periods within those fiscal years. The Company is currently evaluating the impact of applying this guidance on its financial instruments, such as accounts receivable.

 

In December 2019, the FASB issued ASU 2019-12 – Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, an authoritative guidance that simplifies the accounting for income taxes by removing certain exceptions and making simplifications in other areas. It is effective from the first quarter of fiscal year 2022, with early adoption permitted in any interim period. If adopted early, the Company must adopt all the amendments in the same period. The amendments have differing adoption methods including retrospectively, prospectively and/or modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption, depending on the specific change. The adoption of the guidance did not have a material impact on the Company’s unaudited condensed consolidated financial statements.

 

 

3. NET (LOSS) INCOME PER SHARE

 

Net (Loss) Income Per Share

 

Basic net (loss) income per share is calculated by dividing net (loss) income by the weighted-average number of shares of common stock outstanding during the period, without consideration for common stock equivalents. Diluted net (loss) income per share is computed by dividing net (loss) income by the weighted-average number of common stock equivalents outstanding for the period determined using the treasury-stock method. For purposes of this calculation, common stock warrants and stock options are considered to be common stock equivalents and are only included in the calculation of diluted net (loss) income per share when their effect is dilutive.

 

9

 

The following table sets forth the computation of basic and diluted net (loss) income per share and the weighted average number of shares used in computing basic and diluted net (loss) income per share (in thousands, except per share data):

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2022

   

2021

   

2022

   

2021

 

Numerator:

                               

Net (loss) income

  $ (10,512 )   $ 242     $ (19,148 )   $ (9,193 )

Net (loss) income allocated to stockholders of the Company

  $ (10,559 )   $ 377     $ (19,178 )   $ (8,882 )

Denominator:

                               

Weighted-average shares of common stock outstanding used in computing net (loss) income per share, basic

    64,130       54,088       64,059       53,917  

Weighted-average shares of common stock outstanding used in computing net (loss) income per share, diluted

    64,130       54,237       64,059       53,917  

Net (loss) income per share:

                               

Basic

  $ (0.16 )   $ 0.01     $ (0.30 )   $ (0.16 )

Diluted

  $ (0.16 )   $ 0.01     $ (0.30 )   $ (0.16 )

 

The following potentially dilutive securities were excluded from the computation of the diluted net loss per share for the periods presented because their effect would have been antidilutive: 

 

   

June 30, 2022

   

June 30, 2021

 

Options to purchase common stock and restricted stock units ("RSUs")

    7,323,729       5,794,087  

Preferred stock

    3,790,755       -  

Warrants for common stock

    15,928,867       15,928,867  

Total potential dilutive shares

    27,043,351       21,722,954  

 

 

4. FAIR VALUE MEASUREMENTS

 

Financial assets and financial liabilities are initially recognized at fair value when the Company becomes a party to the contractual provisions of the financial instrument. Subsequently, all financial instruments are measured at amortized cost using the effective interest method.

 

The financial instruments of the Company consist of cash and cash equivalents, restricted cash, accounts receivable, long-term receivables, lines of credit, trade payables, government assistance loans, accrued expenses and other current liabilities, other long-term liabilities and long-term debt. In view of their nature, the fair value of these financial instruments approximates their carrying amounts.

 

The Company measures the fair value of its financial assets and financial liabilities using the fair value hierarchy. A financial instrument’s classification within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The accounting guidance establishes a three-tiered hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:

 

Level 1 – Quoted prices in active markets for identical assets or liabilities.

 

Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

10

 

Guaranteed investment certificates (“GIC”) are classified within Level 2 as the Company uses alternative pricing sources and models utilizing market observable inputs for valuation. The following tables set forth the fair value of the Company’s Level 1, Level 2 and Level 3 financial assets and liabilities within the fair value hierarchy: 

 

   

Fair Value Measurements as of June 30, 2022

 
   

Quoted Prices in Active Markets using Identical Assets (Level 1)

   

Significant Other Observable Inputs (Level 2)

   

Significant Unobservable Inputs (Level 3)

   

Total

 

Assets

                               

GIC

  $     $ 63     $     $ 63  

Total assets

  $     $ 63     $     $ 63  

 

   

Fair Value Measurements as of December 31, 2021

 
   

Quoted Prices in Active Markets using Identical Assets (Level 1)

   

Significant Other Observable Inputs (Level 2)

   

Significant Unobservable Inputs (Level 3)

   

Total

 

Assets

                               

GIC

  $     $ 64     $     $ 64  

Total assets

  $     $ 64     $     $ 64  

 

 

11

 
 

5. ACCOUNTS RECEIVABLE

 

The Company’s products may be sold under subscription agreements with unencumbered title passing to the customer at the end of the lease term, which is generally 36 months. These arrangements are considered to be sales-type leases, where the present value of all cash flows to be received under the agreement 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 unaudited condensed consolidated balance sheets. The Company's financing receivables, consisting of sales-type leases, totaled $51,240 and $53,887 as of  June 30, 2022 and December 31, 2021, respectively, and are included in accounts receivable and long-term receivables on the unaudited condensed 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 June 30, 2022 and December 31, 2021. Based upon such assessment, the Company recorded an allowance for doubtful accounts totaling $14,100 and $11,997 as of June 30, 2022, and December 31, 2021, respectively.

 

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

 

   

June 30,

   

December 31,

 
   

2022

   

2021

 

Gross accounts receivable

  $ 87,578     $ 86,625  

Unearned income

    (4,317 )     (4,033 )

Allowance for doubtful accounts

    (14,100 )     (11,997 )
    $ 69,161     $ 70,595  

Reported as:

               

Current trade receivables

  $ 46,754     $ 46,918  

Current unearned interest income

    (2,884 )     (2,678 )

Long-term trade receivables

    26,724       27,710  

Long-term unearned interest income

    (1,433 )     (1,355 )
    $ 69,161     $ 70,595  

 

Current subscription agreements 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:

 

      

June 30,

 
  

Total

  

2022

  

2023

  

2024

  

2025

  

2026

 

Current financing receivables, net of allowance of $6,352

 $24,516  $24,516  $  $  $  $ 

Long-term financing receivables, net of allowance of $948

  26,724      19,530   7,164   30    
  $51,240  $24,516  $19,530  $7,164  $30  $ 

 

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 the Company’s estimates and could be material to its unaudited condensed consolidated financial position, results of operations and cash flows.

 

12

 

The allowance for doubtful accounts consisted of the following activity:

 

Balance at January 1, 2021

  $ 18,490  

Write-offs

    (6,230 )

Recovery

    (263 )

Balance at December 31, 2021

    11,997  

Write-offs

    (259 )

Provision

    1,004  

Balance at March 31, 2022

    12,742  

Write-offs

    (1,159 )

Provision

    2,517  

Balance at June 30, 2022

  $ 14,100  

 

 

6. SELECT BALANCE SHEET AND STATEMENT OF OPERATIONS INFORMATION

 

Inventory

 

Inventory consists of the following:

 

   

June 30,

   

December 31,

 
   

2022

   

2021

 

Raw materials

  $ 2,346     $ 2,368  

Work-in-progress

    964       1,649  

Finished goods

    19,053       16,526  

Total inventory

  $ 22,363     $ 20,543  

 

Additions to inventory are primarily comprised of newly produced units and applicators, refurbishment cost from demonstration units and used equipment which were reacquired during the period from upgraded sales. The Company expensed $7,731 and $15,231 in cost of goods sold in the three and six months ended June 30, 2022, respectively ($5,339 and $11,359 in cost of goods sold in the three and six months ended June 30, 2021, respectively). 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 of June 30, 2022 and December 31, 2021, a provision for obsolescence of $2,701 and $2,213 was taken against inventory, respectively.

 

13

 

Property and Equipment, Net

 

Property and equipment, net consist of the following:

 

  

Useful Lives

  

June 30,

  

December 31,

 
  

(in years)

  

2022

  

2021

 

Lab equipment tooling and molds

  4 –10  $8,181  $8,194 

Office furniture and equipment

  6 –10   1,764   1,743 

Leasehold improvements

 

 

up to 10   1,793   1,839 

Computers and software

  3   2,043   1,939 

Vehicles

  5 –7   37   37 

Demo units

  5   114   114 

Total property and equipment

      13,932   13,866 

Less: Accumulated depreciation

      (11,537)  (11,197)

Total property and equipment, net

     $2,395  $2,669 

 

Depreciation expense amounted to $246 and $280 for the three months ended June 30, 2022 and 2021, respectively. Depreciation expense was $490 and $728 for the six months ended June 30, 2022 and 2021, respectively.

 

Other Current Assets

 

   

June 30,

   

December 31,

 
   

2022

   

2021

 

Government remittances (1)

  $ 1,738     $ 1,322  

Consideration receivable from sale of subsidiaries

    1,092       1,405  

Deferred financing costs

    316       223  

Sundry assets and miscellaneous

    727       808  

Total other current assets

  $ 3,873     $ 3,758  

 

(1)         Government remittances are receivables from the local tax authorities for refunds of sales taxes and income taxes.

 

Accrued Expenses and Other Current Liabilities

 

   

June 30,

   

December 31,

 
   

2022

   

2021

 

Payroll and related expense

  $ 1,530     $ 1,770  

Accrued expenses

    5,708       6,584  

Commission accrual

    3,640       4,529  

Sales and consumption taxes

    6,571       6,629  

Total accrued expenses and other current liabilities

  $ 17,449     $ 19,512  

 

14

 

Warranty Accrual

 

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

 

   

June 30,

   

December 31,

 
   

2022

   

2021

 

Balance as of the beginning of the period

  $ 1,753     $ 1,639  

Warranties issued during the period

    429       1,231  

Warranty costs incurred during the period

    (572 )     (1,117 )

Balance at the end of the period

  $ 1,610     $ 1,753  

Current

    1,173       1,245  

Long-term

    437       508  

Total

  $ 1,610     $ 1,753  

 

Finance Expenses

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2022

   

2021

   

2022

   

2021

 

Interest expense

  $ 969     $ 930     $ 1,827     $ 2,068  

Accretion on long-term debt and amortization of fees

    65       231       130       978  

Total finance expenses

  $ 1,034     $ 1,161     $ 1,957     $ 3,046  

 

 

7. INTANGIBLE ASSETS

 

Intangible assets net of accumulated amortization and goodwill were as follows:

 

   

At June 30, 2022

 
   

Gross Amount

   

Accumulated Amortization

   

Net Amount

 

Customer relationships

  $ 1,400     $ (382 )   $ 1,018  

Brand

    2,500       (933 )     1,567  

Technology

    16,900       (7,500 )     9,400  

Supplier agreement

    3,000       (1,315 )     1,685  

Total intangible assets

  $ 23,800     $ (10,130 )   $ 13,670  

 

   

At December 31, 2021

 
   

Gross Amount

   

Accumulated Amortization

   

Net Amount

 

Customer relationships

  $ 1,400     $ (336 )   $ 1,064  

Brand

    2,500       (803 )     1,697  

Technology

    16,900       (6,103 )     10,797  

Supplier agreement

    3,000       (1,165 )     1,835  

Total intangible assets

  $ 23,800     $ (8,407 )   $ 15,393  

 

 

For the three months ended June 30, 2022 and 2021, amortization expense was $865 and $866, respectively. For the six months ended June 30, 2022 and 2021, amortization expense was $1,722 and $1,722, respectively.

 

15

 

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

 

Years ending December 31,

       

2022

  $ 1,751  

2023

    3,473  

2024

    3,473  

2025

    3,004  

2026

    657  

Thereafter

    1,312  

Total

  $ 13,670  

 

 

8. COMMITMENTS AND CONTINGENCIES

 

Operating Leases

 

The Company has 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 service and purchase commitments with manufacturers as of June 30, 2022 are as follows:

 

Years ending December 31,

 

Office Lease

   

Purchase and Service Commitments

   

Total

 

2022

  $ 1,024     $ 21,432     $ 22,456  

2023

    1,809       -       1,809  

2024

    1,330       -       1,330  

2025

    1,122       -       1,122  

2026

    1,030       -       1,030  

Thereafter

    1,283       -       1,283  

Total

  $ 7,598     $ 21,432     $ 29,030  

 

The total rent expense for all operating leases for the three months ended June 30, 2022 and 2021 was $635 and $524, respectively. The total rent expense for all operating leases for the six months ended June 30, 2022 and 2021 was $1,313 and $1,095, respectively. 

 

Commitments

 

As of June 30, 2022, the Company has non-cancellable purchase orders placed with its contract manufacturers in the amount of $19,803. In addition, as of June 30, 2022, the Company had $6,515 of open purchase orders that can be cancelled with 270 days’ notice, except for a portion equal to 25% of the total amount representing the purchase of “long lead items”.

 

On March 25, 2021, the Company entered into an endorsement agreement for the services of Venus Williams, four-time Olympic Gold Medalist, seven-time Grand Slam Champion and entrepreneur, pursuant to which Ms. Williams will act as a brand ambassador for Venus Bliss. The endorsement agreement will expire November 1, 2022, unless the Company exercises an optional term extension for an additional cost.

 

16

 

Legal Proceedings

 

Purported Shareholder Class Actions

 

In 2018 and 2019, four putative shareholder class action complaints were filed against Restoration Robotics, Inc., certain of its former officers and directors, certain of its venture capital investors, and the underwriters of the initial public offering (“IPO”). Two claims, captioned 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 1933 Act. Two additional claims, captioned 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 1933 Act. The complaints in both the State Actions and Federal Actions alleged, 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 sought unspecified monetary damages, other equitable relief and attorneys’ fees and costs. A settlement in the Federal Actions was granted final approval in the District Court on September 9, 2021. 

 

In the State Actions, the Plaintiffs filed a consolidated amended complaint on January 17, 2020 seeking unspecified monetary damages, other equitable relief and attorneys’ fees and costs. Following the Delaware Supreme Court reversal of the Chancery Court’s decision in Sciabacucchi v. Salzberg which held that exclusive federal forum provisions are valid under Delaware law, the Company filed a renewed motion to dismiss based on its federal forum selection clause on March 30, 2020, which was granted as to the Company and the individual defendants on September 1, 2020 and a judgement of dismissal was entered by the Court on September 22, 2020. On November 23, 2020, plaintiff filed a notice of appeal of the Court’s order granting the renewed motion to dismiss. The court of appeal heard oral argument related to the appeal on April 20, 2022, and on April 28, 2022, issued its opinion affirming the trial court’s dismissal of the State Actions based on the federal forum selection clause. On June 7, 2022, Plaintiff-Appellant Wong petitioned the California Supreme Court to review the appellate court’s opinion. The Company filed its Response to Plaintiff-Appellant Wong’s petition on June 27, 2022, and Plaintiff-Appellant Wong filed a Reply in Support of the Petition For Review on July 7, 2022. On July 27, 2022, the California Supreme Court denied Plaintiff-Appellant Wong’s petition for review. Absent extensions, Plaintiff-Appellant Wong’s deadline to seek review in the United States Supreme Court is October 25, 2022.

 

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 1934 Act in connection with the IPO and Restoration Robotics’ 2018 proxy statement. The complaint seeks unspecified damages, declaratory relief, other equitable relief and attorneys’ fees and costs. On August 21, 2019, the District Court granted the parties’ joint stipulation to stay the Mason action. On June 21, 2021, the District Court granted the parties’ further stipulation to stay the Mason action and the case remains stayed. 

 

17

 

9. MAIN STREET TERM LOAN

 

On December 8, 2020, the Company executed a loan and security agreement (the "MSLP Loan Agreement"), a promissory note (the "MSLP Note"), and related documents for a loan in the aggregate amount of $50,000 for which City National Bank of Florida (“CNB”) will serve as a lender pursuant to the Main Street Priority Loan Facility as established by the Board of Governors of the Federal Reserve System Section 13(3) of the Federal Reserve Act (the “MSLP Loan”). On December 9, 2020, the MSLP Loan had been funded and the transaction was closed. The MSLP Note has a term of five years and bears interest at a rate per annum equal to 30-day LIBOR plus 3%. On December 8, 2023 and December 8, 2024, the Company must make an annual payment of principal plus accrued but unpaid interest in an amount equal to fifteen percent (15%) of the outstanding principal balance of the MSLP Note (inclusive of accrued but unpaid interest). The entire outstanding principal balance of the MSLP Note together with all accrued and unpaid interest is due and payable in full on  December 8, 2025. The Company may prepay the MSLP Loan at any time without incurring any prepayment penalties. The MSLP Note provides for customary events of default, including, among others, those relating to a failure to make payment, bankruptcy, breaches of representations and covenants, and the occurrence of certain events. In addition, the MSLP Loan Agreement and MSLP Note contain various covenants that limit the Company’s ability to engage in specified types of transactions. Subject to limited exceptions, these covenants limit the Company’s ability, without CNB’s consent, to, among other things, sell, lease, transfer, exclusively license or dispose of the Company’s assets, incur, create or permit to exist additional indebtedness, or liens, to make dividends and other restricted payments, and to make certain changes to its ownership structure.

 

As of June 30, 2022 and December 31, 2021, the Company was in compliance with all required covenants.

 

The scheduled payments on the outstanding borrowings as of June 30, 2022 are as follows:

 

Years ending December 31,

    

2022

 $1,228 

2023

  10,239 

2024

  8,709 

2025

  39,068 

Total

 $59,244 

 

18

 

10. MADRYN LONG-TERM DEBT AND CONVERTIBLE NOTES

 

On October 11, 2016, Venus Concept Ltd., a wholly owned subsidiary of the Company ("Venus Ltd."), entered into a credit agreement as a guarantor with Madryn Health Partners, LP, as administrative agent, and certain of its affiliates as lenders (collectively, “Madryn”), as amended (the “Madryn Credit Agreement”), pursuant to which Madryn agreed to make certain loans to certain of Venus Ltd.’s subsidiaries (the “Subsidiary Obligors”). The Madryn Credit Agreement was comprised of four tranches of debt aggregating $70,000. As of September 30, 2020, the Subsidiary Obligors had borrowed $60,000 under the term A-1 and A-2 and B tranches of the Madryn Credit Agreement. Borrowings under the Madryn Credit Agreement were 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 were to become due and payable in full.

 

In connection with the Merger (as defined below), 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”). Effective August 14, 2018, interest on the Madryn loan was 9.00%, payable quarterly. 

 

The Company had the option of settling the paid in kind (“PIK”) interest in cash or adding the owed interest to the principal amount of the loan. On April 29, 2020, the Company entered into the Twelfth Amendment to the Madryn Credit Agreement that (i) required that interest payments for the period beginning January 1, 2020 and ending on, and including, April 29, 2020 (the “PIK Period”), be paid-in-kind, (ii) increased the interest rate from 9.00% per annum to 12.00% per annum during the PIK Period and (iii) require the Company to provide certain additional financial and other reporting information to the lenders.

 

On June 30, 2020, the Company entered into the Thirteenth Amendment to the Madryn Credit Agreement that (i) extended the PIK Period through June 30, 2020, (ii) reduced the consolidated minimum revenue threshold requirement (a) for the four consecutive fiscal quarter period ended June 30, 2020, to at least $85,000 and (b) for the four consecutive fiscal quarter period ending September 30, 2020, to at least $75,000, (iii) required the Company to raise at least $5,000 of cash proceeds from the issuance of equity during the period June 1, 2020 through September 30, 2020 and (iv) obligated the Company to use its best efforts to raise an additional $2,000 of cash proceeds from the issuance of equity during the period June 1, 2020 through September 30, 2020.

 

On September 30, 2020, the Company entered into the Fourteenth Amendment to the Madryn Credit Agreement that (i) required that fifty percent (50%) of the interest payments for the period beginning July 1, 2020 and ending on, and including, September 30, 2020 (the “Second PIK Period”), be paid in cash, (ii) the remaining fifty percent (50%) of the interest payments for the Second PIK Period, to be paid in kind, and (iii) increased the interest rate applicable to the Second PIK Period from 9.00% per annum to 10.50% per annum during the Second PIK Period.

 

On December 9, 2020, contemporaneously with the MSLP Loan Agreement (Note 9), the Company and its subsidiaries, Venus Concept USA, Inc., a Delaware corporation (“Venus USA”), Venus Concept Canada Corp., an Ontario corporation (“Venus Canada”), Venus Ltd., and the Madryn Noteholders (as defined below), entered into a Securities Exchange Agreement (the “Exchange Agreement”) dated as of December 8, 2020, pursuant to which the Company (i) repaid $42,500 aggregate principal amount owed under the Madryn Credit Agreement, and (ii) issued, to the Madryn Health Partners (Cayman Master), LP and Madryn Health Partners, LP (together the “Madryn Noteholders”) secured subordinated convertible notes in the aggregate principal amount of $26,695 (the “Notes”). The Madryn Credit Agreement was terminated effective  December 9, 2020 upon the funding and closing of the MSLP Loan and the issuance of the Notes.

 

The Notes will accrue interest at a rate of 8.0% per annum from the date of original issuance of the Notes to the third anniversary date of the original issuance and thereafter interest will accrue at a rate of 6.0% per annum. Under certain circumstances, in the case of an event of default under the Notes, the then-applicable interest rate will increase by 4.0% per annum. Interest is payable quarterly in arrears on the last business day of each calendar quarter of each year after the original issuance date, beginning on  December 31, 2020. The Notes will mature on  December 9, 2025, unless earlier redeemed or converted. In connection with the Exchange Agreement, the Company also entered into, by and among the Company, Venus USA, Venus Canada, Venus Ltd., and the Madryn Noteholders, (i) a Guaranty and Security Agreement dated as of December 9, 2020 (the "Madryn Security Agreement"), pursuant to which the Company agreed to grant Madryn a security interest in substantially all of its assets to secure the obligations under the Notes and (ii) a Subordination of Debt Agreement dated as of December 9, 2020 (the "CNB Subordination Agreement"). The security interests and liens granted to the Madryn Noteholders under the Madryn Security Agreement will terminate upon the earlier of (i) an assignment of the Notes (other than to an affiliate of the Madryn Noteholders) pursuant to the terms of the Exchange Agreement and (ii) the first date on which the outstanding principal amount of the Notes is less than $10,000. Obligations under the Notes are secured by substantially all of the assets of Venus Concept Inc. and its subsidiaries party to the Madryn Security Agreement. The Company’s obligations under the Notes and the security interests and liens created by the Madryn Security Agreement are subordinated to the Company’s indebtedness owing to CNB (including, but not limited, pursuant to the MSLP Loan Agreement and the CNB Loan Agreement, (Note 11)) and any security interests and liens which secure such indebtedness owing to CNB. The Notes are convertible at any time into shares of the Company’s common stock, par value $0.0001 per share, calculated by dividing the outstanding principal amount of the Notes (and any accrued and unpaid interest under the Notes) by the initial conversion price of $3.25 per share. In connection with the Notes, the Company recognized interest expense of $540 and $540 during the three months ended June 30, 2022 and 2021, respectively. The Company recognized interest expense of $1,074 and $1,067 during the six months ended June 30, 2022 and 2021, respectively. The conversion feature, providing the Madryn Noteholders with a right to receive the Company’s shares upon conversion of the Notes, was qualified for a scope exception in ASC 815-10-15 and did not require bifurcation. The Notes also contained embedded redemption features that provided multiple redemption alternatives. Certain redemption features provided the Madryn Noteholders with a right to receive cash and a variable number of shares upon change of control and an event of default (as defined in the Notes). The Company evaluated redemption upon change of control and an event of default under ASC 815, Derivatives and Hedging, and determined that these two redemption features required bifurcation. These embedded derivatives were accounted for as liabilities at their estimated fair value as of the date of issuance, and then subsequently remeasured to fair value as of each balance sheet date, with the related remeasurement adjustment being recognized as a component of change in fair value of derivative liabilities in the unaudited condensed consolidated statements of operations. The Company determined the likelihood of an event of default and change of control as remote as of June 30, 2022, and December 31, 2021, therefore a nominal value was allocated to the underlying embedded derivative liabilities as of June 30, 2022, and December 31, 2021.

 

The scheduled payments on the outstanding borrowings as of June 30, 2022 are as follows:

 

Years ending December 31,

       

2022

  $ 1,092  

2023

    2,131  

2024

    1,628  

2025

    28,217  

Total

  $ 33,068  

 

For the three and six months ended June 30, 2022, the Company did not make any principal repayments.

 

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11. CREDIT FACILITY

 

On August 29, 2018, Venus Ltd. entered into an Amended and Restated Loan Agreement as a guarantor with CNB, as amended on March 20, 2020, December 9, 2020 and August 26, 2021 (the “CNB Loan Agreement”), pursuant to which CNB agreed to make certain loans and other financial accommodations to certain of Venus Ltd.’s subsidiaries to be used to finance working capital requirements. In connection with the CNB Loan Agreement, Venus Ltd. also entered into a guaranty agreement with CNB dated as of August 29, 2018, as amended on March 20, 2020, December 9, 2020 and August 26, 2021 (the “CNB Guaranty”), pursuant to which Venus Ltd. agreed to guaranty the obligations of its subsidiaries under the CNB Loan Agreement. On March 20, 2020, the Company also entered into a Security Agreement with CNB (the “CNB Security Agreement”), as amended on December 9, 2020 and August 26, 2021, pursuant to which it agreed to grant CNB a security interest in substantially all of our assets to secure the obligations under the CNB Loan Agreement. 

 

The CNB Loan Agreement contains various covenants that limit the Company’s ability to engage in specified types of transactions. Subject to limited exceptions, these covenants limit the Company’s ability, without CNB’s consent, to, among other things, sell, lease, transfer, exclusively license or dispose of the Company’s assets, incur, create or permit to exist additional indebtedness, or liens, to make dividends and certain other restricted payments, and to make certain changes to its management and/or ownership structure. The Company is required to maintain $3,000 in cash in a deposit account maintained with CNB at all times during the term of the CNB Loan Agreement. In addition, the CNB Loan Agreement contains certain covenants that require the Company 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 Company fails to comply with these covenants, it will result in a default and require the Company to repay all outstanding principal amounts and any accrued interest. In connection with the CNB Loan Agreement, a loan fee of $1,000 was paid in equal installments on  January 25,  February 25 and  March 25, 2021.

 

On August 26, 2021, the Company, Venus USA and Venus Canada entered into a Fourth Amended and Restated Loan Agreement (the “Amended CNB Loan Agreement”) with CNB, pursuant to which, among other things, (i) the maximum principal amount the revolving credit facility was reduced from $10,000 to $5,000 at the LIBOR 30-Day rate plus 3.25%, subject to a minimum LIBOR rate floor of 0.50%, and (ii) beginning December 10, 2021, the cash deposit requirement was reduced from $3,000 to $1,500, to be maintained with CNB at all times during the term of the Amended CNB Loan Agreement. The Amended CNB Loan Agreement is secured by substantially all of the Company’s assets and the assets of certain of its subsidiaries.

 

As of June 30, 2022, and December 31, 2021, the Company was in compliance with all required covenants. An event of default under this agreement would cause a default under the MSLP Loan (see Note 9).

 

In connection with the Amended CNB Loan Agreement, the Company, Venus USA and Venus Canada issued a promissory note dated August 26, 2021, in favor of CNB (the “CNB Note”) in the amount of $5,000 with a maturity date of  July 24, 2023 and the obligations of the Company pursuant to certain of the Company’s outstanding promissory notes were reaffirmed as subordinated to the indebtedness of the Company owing to CNB pursuant to a Supplement to Subordination of Debt Agreements dated as of August 26, 2021 (the “Subordination Supplement”) by and among Madryn Health Partners, LP, Madryn Health Partners (Cayman Master), LP, the Company and CNB.

 

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12. GOVERNMENT ASSISTANCE PROGRAMS

 

Venus Concept Inc. and Venus USA, received funding in the total amount of $4,048 in connection with two Small Business Loans under the federal Paycheck Protection Program provided in Section 7(a) of the Small Business Act of 1953, as amended by the Coronavirus Aid, Relief, and Economic Security Act, as amended from time to time (the “PPP”).

 

Venus Concept Inc. entered into a U.S. Small Business Administration Note dated as of April 21, 2020 in favor of CNB pursuant to which the Company borrowed $1,665 original principal amount, which was funded on April 29, 2020 (the “Venus Concept PPP Loan”). The Venus Concept PPP Loan bears interest at 1% per annum and matures in two years from the date of disbursement of funds under the loan.

 

Venus USA entered into a U.S. Small Business Administration Note dated as of April 15, 2020 in favor of CNB. Venus USA borrowed $2,383 original principal amount, which was funded on April 20, 2020 (the “Venus USA PPP Loan” and together with the Venus Concept PPP Loan, individually each a “PPP Loan” and collectively, the “PPP Loans”). The terms of the Venus USA PPP Loan were substantially similar to the terms of the Venus Concept PPP Loan.

 

The Venus Concept PPP Loan contained certain covenants which, among other things, restrict the Company’s use of the proceeds of the PPP Loan to the payment of payroll costs, interest on mortgage obligations, rent obligations and utility expenses, require compliance with all other loans or other agreements with any creditor of the Company, to the extent that a default under any loan or other agreement would materially affect the Company’s ability to repay its PPP Loan and limit the Company’s ability to make certain changes to its ownership structure.

 

In 2021, through CNB, the Company applied for and received partial forgiveness of the Venus USA PPP Loan in the amount of $1,689 and the Venus Concept PPP Loan in the amount of $1,086. The Company repaid $407 during the three months ended  March 31, 2022, and the remaining portion of the PPP Loans in the amount of $136 was fully repaid in  April 2022. As of  June 30, 2022, the Company had $nil outstanding under the PPP Loans ($543 as of December 31, 2021). 

 

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13. COMMON STOCK RESERVED FOR ISSUANCE

 

The Company is required to reserve and keep available out of its authorized but unissued shares of common stock a number of shares sufficient to affect the exercise of all options granted and available for grant under the incentive plans, warrants to purchase common stock and preferred shares which are convertible to common stock.

 

   

June 30, 2022

   

December 31, 2021

 

Outstanding common stock warrants

    15,928,867