Venus Concept 8K/A Completion of Acquisition or Disposition of Assets | VERO 2 Dec 19

Exhibit 99.1

VENUS CONCEPT LTD. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of Venus Concept Ltd.’s (Venus Concept) financial condition and results of operations should be read together with the consolidated financial statements of Venus Concept and the related notes and the unaudited pro forma financial information, each included elsewhere in this Current Report onForm 8-K/A. This discussion of Venus Concept’s financial condition and results of operations contains certain statements that are not strictly historical and are “forward-looking” statements and involve a high degree of risk and uncertainty. Actual results may differ materially from those projected in the forward-looking statements due to other risks and uncertainties that exist in Venus Concept’s operations, development efforts and business environment. All forward-looking statements are based on information available to Venus Concept as of the date hereof, and Venus Concept assumes no obligation to update any such forward-looking statement.

Overview

Venus Concept is an innovative global medical technology company that develops, commercializes, and delivers minimally invasive andnon-invasive medical aesthetic technologies and related practice enhancement services. To address the financial barriers faced by physicians and aesthetic service providers globally, Venus Concept focuses its product sale strategy on a subscription-based business model in North America and in Venus Concept’s well established direct global markets. Venus Concept has received FDA clearance for the combined use of multipolar RF and PEMF fornon-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. Venus Concept also received FDA clearance for the use of its diode laser system fornon-invasive fat reduction (lipolysis) in the abdomen and flanks for certain body types. In certain jurisdictions outside of the United States, Venus Concept’s products have received marketing authorizations for indications such as temporary increase of skin tightening, cellulite reduction and uses for certain soft tissue injuries, among others, and for vaginal treatment in the Israeli market. Venus Concept’s proprietary multipolar RF and PEMF technologies, also referred to as Venus Concept’s (MP)2 technology, synergistically deliver consistent, homogenous treatments in a minimally invasive process. Venus Concept also uses in its systems IPL for treatment of benign pigmented epidermal and cutaneous lesions, lasers for hair removal and fractional ablative RF modality for skin resurfacing. Venus Concept designs and sells a full-suite of medical aesthetic products and markets its current products primarily to physicians interested in providing minimally invasive andnon-invasive aesthetic procedures, and to aesthetic medical spas. Through its NeoGraft division, Venus Concept offers 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. Venus Concept’s NeoGraft systems are sold primarily to plastic surgeons and dermatologists, and in the United States, Venus Concept offers these doctors the services of a group of independently contracted technicians, who Venus Concept markets as “NeoGrafters”. These technicians are certified to assist the physician during a NeoGraft hair restoration procedure.

Venus Concept has reported recurring net losses and negative cash flows from operations. As of September 30, 2019 and December 31, 2018, Venus Concept had an accumulated deficit of $54.9 million and $35.1 million, respectively. Venus Concept expects to continue to incur significant expenses and increasing operating losses for the foreseeable future in connection with our ongoing activities. As of September 30, 2019 and December 31, 2018, Venus Concept had cash and cash equivalents of $15.7 million and $6.8 million, respectively. In order to continue its operations, Venus Concept must achieve profitable operations and/or obtain additional equity investment or debt financing. Venus Concept completed convertible note offerings in June 2019 and August 2019 as described in the following paragraph and in more detail in the “Convertible Note Financings” section below and a private placement financing in November 2019 as described in the following paragraph and in more detail in the “Concurrent Financing” section below. Until Venus Concept generates revenue at a level to support its cost structure, Venus Concept expects to continue to incur substantial operating losses and net cash outflows.

On June 25, 2019, Venus Concept sold $7.8 million of convertible notes. On August 14, 2019, Venus Concept sold an additional $0.3 million of Venus Concept convertible notes to one investor and $7.0 million of Venus Concept convertible notes to certain investors. On August 21, 2019, Venus Concept sold an additional $14.1 million to certain investors. Venus Concept’s recurring net losses and negative cash flows from operations raise substantial doubt about its ability to continue as a going concern within 12 months. Venus Concept based this estimate on assumptions that may prove to be wrong, and it could exhaust our available capital resources sooner than it expects. See “Liquidity and Capital Resources” below.

Merger with Restoration Robotics

Venus Concept completed its business combination with Restoration Robotics, Inc. (“Restoration Robotics”), 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 Venus Concept, Restoration Robotics and Radiant Merger Sub Ltd., a company organized under the laws of Israel and a direct, wholly-owned subsidiary of Venus Concept (“Merger Sub”). Under the Merger Agreement, Merger Sub merged with and into Venus Concept, with Venus Concept surviving as a wholly owned subsidiary of Restoration Robotics (the “Merger”). The Merger became effective on November 7, 2019. Following the completion of the Merger, Restoration Robotics changed its corporate name to “Venus Concept Inc.”, and the business conducted by Venus Concept became the primary business conducted by Venus Concept Inc.

At the effective time of the Merger, each outstanding ordinary and preferred share of Venus Concept, nominal value of New Israeli Shekels 0.001 each, other than shares held by Venus Concept as treasury stock or held by Venus Concept Inc. or the Merger Sub, were converted into the right to receive 8.6506 (the pre-split “Exchange Ratio”) validly issued, fully paidand non-assessable Venus Concept Inc. common stock (“Venus Concept Inc. Common Stock”), and each outstanding the Company stock option and warrant was assumed by Venus Concept Inc. and converted into and become an option or warrant (as applicable) exercisable for Venus Concept Inc. Common Stock with the number and exercise price adjusted by the Exchange Ratio.

Immediately following completion of the Merger, Venus Concept effected a15-for-1 reverse stock split of Venus Concept Inc. Common Stock (the “Reverse Stock Split”). The Merger and the Reverse Stock Split were approved by Venus Concept Inc. stockholders on October 4, 2019. All share and per share amounts of Venus Concept Inc. (formerly Restoration Robotics) have been adjusted to reflect the reverse stock split, unless otherwise noted.

Products and Services

Venus Concept derives revenue from the sale of products and services. Product revenue includes revenue from the following:

•

the sale of systems, which includes the main console and is inclusive of control software and applicators (referred to as system revenue);

•

marketing supplies and kits;

•

consumables and disposables;

•

replacement applicators/handpieces; and

•

Venus Concept skincare and hair products.

Service revenue includes revenue derived from Venus Concept’s NeoGrafter technician services, practice enhancement services, Venus Concept’s 2two5 internal advertising agency, and Venus Concept’s extended warranty service contracts provided to Venus Concept’s existing customer base.

Systems are sold through Venus Concept’s subscription model, or through traditional sales contracts directly and through distributors.

Venus Concept’s subscription model includes anup-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 Venus Concept provides to the customer upon receipt of the monthly payment. These recurring monthly payments provide Venus Concept’s customers with enhanced financial transparency and predictability. If economic circumstances are appropriate, Venus Concept provides customers in good standing with the opportunity to “upgrade” to new agreements for the newest available or alternative Venus Concept technology throughout the subscription period. This structure can provide greater flexibility than traditional equipment leases secured through finance companies. Through Venus Concept’s practice enhancement services, Venus Concept works closely with its 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.

Venus Concept has developed and commercialized nine technology platforms, including the NeoGraft platform. Venus Concept’s 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 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 Venus Concept purchased the NeoGraft business to penetrate the hair restoration market.

In the United States, Venus Concept has obtained 510(k) clearance from FDA for Venus Concept’s Venus Freeze and Venus Freeze Plus, Venus Viva, Venus Legacy, Venus Versa, Venus Velocity, Venus Heal and Venus Bliss systems. The Venus Glow and NeoGraft systems are listed as class I devices under FDA classification system. Outside the United States, Venus Concept markets its technologies in over 60 countries across Europe, Asia-Pacific and Latin America. Because each country has its own regulatory scheme and approval process, not every device is authorized for the same indications in each market in which a particular system is marketed.

Venus Concept generates recurring monthly revenue under its subscription model and traditional system sales. Venus Concept commenced its subscription model in North America in 2011 and, for the year ended December 31, 2018, approximately 75% of system revenues were derived from its subscription model. For the three and nine months ended September 30, 2019, approximately 70% of system revenues were derived from its subscription model. For the three and nine months ended September 30, 2018, approximately 75% and 77%, respectively, of system revenues were derived from its subscription model. Venus Concept operates directly in 29 international markets through its 24 direct offices, including wholly-owned subsidiaries in the United States, Canada, United Kingdom, Japan, South Korea, Mexico, Argentina, Colombia, Spain, France, Germany, Israel and Australia, and majority-owned subsidiaries in China, Hong Kong, Singapore, Indonesia, Vietnam, India, Italy, Bulgaria, Russia, Kazakhstan and South Africa.

Venus Concept’s revenues were $26.2 million and $78.6 million for the three and nine months ended September 30, 2019 respectively as compared to $25.6 million and $74.0 million for the three and nine months ended September 30, 2018 respectively. Venus Concept had a net loss attributable to Venus Concept of $8.6 million and $19.8 million for the three and nine months ended September 30, 2019 respectively as compared to net loss of $1.4 million and $1.7 million for the three and nine months ended September 30, 2018, respectively. Venus Concept had an Adjusted EBITDA income of $28 thousand and Adjusted EBITDA loss of $1.0 million for the three and nine months ended September 30, 2019, respectively, as compared to Adjusted EBITDA income of $1.7 million and $7.4 million for the three and nine months ended September 30, 2018, respectively.

Useof Non-GAAP Financial Measures

Adjusted EBITDA is anon-GAAP measure defined as net loss income before foreign exchange loss, financial expenses, income tax expense, depreciation and amortization, stock-based compensation andnon-recurring items for a given period. Adjusted EBITDA is not a measure of Venus Concept’s 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 Venus Concept’s financial results presented in accordance with U.S. GAAP. Other companies, including companies in Venus Concept’s industry, may calculate Adjusted EBITDA differently or not at all, which reduces its usefulness as a comparative measure. Venus Concept understands 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 Venus Concept’s results as reported under U.S. GAAP. Some of these limitations are: Adjusted EBITDA does not reflect Venus Concept’s cash expenditures or future requirements for capital expenditures or contractual commitments; Adjusted EBITDA does not reflect changes in, or cash requirements for, Venus Concept’s working capital needs; and although depreciation is anon-cash charge, 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.

Venus Concept believes that Adjusted EBITDA is a useful measure for analyzing the performance of Venus Concept’s 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), stock-based compensation expense (because it is anon-cash expense) andnon-recurring items as explained below.

The following reconciliation of net loss to Adjusted EBITDA for the periods presented:

Venus Concept Ltd.

Reconciliation of Net Income toNon-GAAP Adjusted EBITDA

(Unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Net loss	$	(8,977	)	$	(1,184	)	$	(19,560	)	$	(1,160	)
Add back:
Foreign exchange loss		396			886			409			1,675
Finance expenses		2,097			1,438			5,904			4,240
Income tax expense		(80	)		(43	)		867			1,027
Depreciation and amortization		329			241			1,064			734
Stock-based compensation expense		313			328			1,732			891
Other adjustments⁽¹⁾		5,950			—			8,600			—

Adjusted EBITDA	$	28		$	1,666		$	(984	)	$	7,407

⁽¹⁾	For the three and nine months ended September 30, 2019, other adjustments included:

•

The expenses related to the Merger (mainly professional fees).

•

The expenses related to a patent infringement case (mainly professional fees).

Key Factors Impacting Venus Concept’s Results of Operations

Venus Concept’s results of operations are impacted by several factors, but it considers the following to be particularly significant to its business:

•

Number of systems delivered. The majority of Venus Concept’s revenue is generated from the delivery of systems, both under traditional sale contracts and under subscription agreements. The following table sets forth the number of systems Venus Concept has delivered in the geographic areas indicated:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
United States		173		114		483		346
Israel		69		44		151		129
International		413		364		1,212		944

Total		655		522		1,846		1,419

•

Mix between traditional sales, subscription model sales and distributor sales. Venus Concept delivers units through (1) traditional direct system sales contracts to customers, (2) Venus Concept’s 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. Venus Concept has made a strategic decision to continue to penetrate the global market by investing in sales and marketing expenses across all geographic areas. This includes reducing Venus Concept’s reliance on distributor arrangements, opening more direct offices and hiring experienced sales, marketing and operational staff. While Venus Concept 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. For the three months and nine months ended September 30, 2019, Venus Concept did not open any direct sales offices. In 2018, Venus Concept opened direct sales offices in Argentina and South Korea and relaunched its direct operations in Germany. In 2017, Venus Concept opened a direct sales office in Vietnam.

•

Bad Debt Expense. Venus Concept maintains 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. Venus Concept’s bad debt expense as a percentage of sales has generally been consistent year-over-year and quarter-over-quarter, however, bad debt expense in 2018 increased substantially as in the fourth quarter of 2018 Venus Concept recorded 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 Venus Concept conducts a significant amount of business with one customer or distributor, the potential impact on the business, both positive and negative, can significantly impact Venus Concept’s results.

Basis of Presentation

Revenues

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

System Revenue

For the year ended December 31, 2018 and the three and nine months ended September 30, 2019, approximately 75%, 70% and 70%, respectively, of Venus Concept’s system revenues were derived from subscription contracts. Venus Concept’s subscription model is designed to provide a low barrier to ownership of Venus Concept’s systems and includes anup-front fee followed by monthly payments, typically over a36-month period. Theup-front fee serves as a deposit. The significantly reducedup-front financial commitment, coupled with less onerous credit and disclosure requirements, is intended to make the sales program more appealing and affordable to physicians, including largernon-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 equipment leases, where the present value of all cash flows to be received under the subscription agreement is recognized as revenue upon shipment to the customer and achievement of the required revenue recognition criteria.

For the year ended December 31, 2018 and the three and nine months ended September 30, 2019, approximately 20%, 22% and 24%, respectively, of Venus Concept’s system revenues were derived from traditional sales. Customers generally demand higher discounts in connection with these types of sales. Venus Concept recognizes revenues from products sold to end customers when title and risk of ownership have been transferred which usually occurs upon shipment to the end customer. Venus Concept does not generally grant rights of return or early termination rights to its end customers. These traditional sales are generally made through Venus Concept’s sales team in the countries in which the team operates.

For the year ended December 31, 2018 and the three and nine months ended September 30, 2019, approximately 5% and 8% and 6%, respectively, of Venus Concept’s system revenues were derived from distributor sales. Under the traditional distributor relationship, Venus Concept does not sell directly to the end customer and, accordingly, achieves a lower overall margin on each system sold compared to Venus Concept’s direct sales. These sales arenon-refundable,non-returnable and without any rights of price protection or stock rotation. Accordingly, Venus Concept considers distributors as end customers, or thesell-in method.

Other Product Revenue

Venus Concept also generates revenue from its customer base by selling Glide (a cooling/conductive gel which is required for use with many of Venus Concept’s systems), marketing supplies and kits, consumables and disposables, replacement applicators and handpieces, Venus Concept skincare products (Venus Skin) and hair products.

Service Revenue

Venus Concept generates ancillary revenue from its existing customers by selling additional services including Venus Concept’s NeoGrafter technician services for hair restoration, extended warranty service contracts, and services provided by Venus Concept’s 2two5 internal advertising agency.

Cost of Goods Sold and Gross Profit

Cost of goods sold consists primarily of costs associated with manufacturing Venus Concept’s different systems, including direct product costs from third party manufacturers, warehousing and storage costs and fulfillment and supply chain costs inclusive of personnel-related costs (primarily salaries, benefits, incentive compensation and stock-based compensation). Cost of goods sold also includes the cost of upgrades, technology amortization, royalty fees, parts, supplies, and cost of product warranties.

Operating Expenses

Selling and Marketing

Venus Concept currently sells its products and services using direct sales representatives in North America and in select international markets. Venus Concept’s 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. Venus Concept continues to invest in new sales and marketing programs, and it expects that selling costs will continue to increase as Venus Concept expands its direct operations across all geographic areas. However, Venus Concept expects that selling expenses as a percentage of revenue will decline over time.

Venus Concept’s 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. Venus Concept’s marketing expenses have increased as it continues to scale up its direct operations across all geographic areas. However, given the fixed cost nature of many of these expenses, Venus Concept expects that marketing expenses as a percentage of revenue will decline over time.

General and Administrative

Venus Concept’s general and administrative costs primarily consist of expenses associated with Venus Concept’s 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, Venus Concept may incur bad debt expense on accounts receivable balances that are deemed to be uncollectible. Venus Concept expects its general and administrative expenses to increase due to the anticipated growth of Venus Concept’s business and infrastructure.

Research and Development

Venus Concept’s research and development costs primarily consist of personnel-related costs (primarily salaries, benefits, incentive compensation, and stock-based compensation), material costs, and facilities costs in Venus Concept’s Yokneam, Israel research center. Venus Concept’s ongoing research and development activities are primarily focused on improving and enhancing Venus Concept’s current technologies, products, and services, and on expanding its current product offering with the introduction of new products and expanded indications.

Venus Concept expenses all research and development costs in the periods in which they are incurred. Venus Concept expects its research and development expenses to increase in absolute dollars as it continues to invest in research, clinical studies, regulatory affairs, and development activities, but to decline as a percentage of revenue as Venus Concept’s 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 Venus Concept’s cash, cash equivalents and short-term bank deposits. Venus Concept expects interest income to vary depending on Venus Concept’s 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 Venus Concept’s long-term debt is fixed at 9% as of September 30, 2019 and 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.

Income Taxes Expense

Commencing from the year 2018 and including the three and nine months ended September 30, 2019, Israeli companies are generally subject to income tax at the corporate tax rate of 23%. However, if certain conditions are met, companies may be entitled to a reduced corporate tax rate under various programs of the Encouragement of Capital Investment Law, 5719-1959, or the Encouragement Law. Venus Concept is currently examining its eligibility to be treated as Preferred Technology Enterprise which may entitle it to a reduced tax rate of 7.5% on Venus Concept’s Preferred Technological Income as such term is defined in the Encouragement Law.

Venus Concept’snon-Israeli subsidiaries are taxed according to the tax laws in their respective jurisdictions of organization. Due to Venus Concept’s multi-jurisdictional operations, Venus Concept applies significant judgment to determine its consolidated income tax position. Venus Concept expects that the effective tax rate overall will be significantly impacted by its tax position in Israel but will also be impacted by the tax rates in jurisdictions where Venus Concept has subsidiaries.

Non-Controlling Interests

In many countries where Venus Concept has direct operations, Venus Concept has a minority shareholder. For accounting purposes, these minority partners are referred to asnon-controlling interests, and Venus Concept records thenon-controlling interests’ share of earnings in Venus Concept’s subsidiaries as a separate balance within shareholders’ equity in the consolidated balance sheet and consolidated statements of changes in shareholders’ equity (deficit).

Results of Operations

The following tables set forth Venus Concept’s consolidated results of operations in U.S. dollars and as a percentage of revenues for the periods indicated:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
	(in thousands)						(in thousands)
Revenues:
Leases	$	16,427		$	17,869		$	48,812		$	52,885
Products and services		9,727			7,724			29,740			21,082

Total revenue		26,154			25,593			78,552			73,967

Cost of goods sold		7,386			5,878			21,645			16,660

Gross profit		18,768			19,715			56,907			57,307

Expenses:
Selling and marketing		9,201			9,770			28,983			26,311
General and administrative		13,556			6,605			31,731			18,631
Research and development		1,686			1,713			5,667			4,856
Provision for bad debts		889			530			2,906			1,727

Total expenses		25,332			18,618			69,287			51,525

(Loss) income from operations		(6,564	)		1,097			(12,380	)		5,782
Foreign exchange loss		396			886			409			1,675
Finance expenses		2,097			1,438			5,904			4,240

Loss before income taxes		(9,057	)		(1,227	)		(18,693	)		(133	)
Income taxes expense		(80	)		(43	)		867			1,027

Net loss		(8,977	)		(1,184	)		(19,560	)		(1,160	)

Net loss attributable to Venus Concept		(8,640	)		(1,363	)		(19,823	)		(1,736	)
Net (loss) income attributable to thenon-controlling interest		(337	)		179			263			576

Net loss	$	(8,977	)	$	(1,184	)	$	(19,560	)	$	(1,160	)

As a % of revenue:
Revenues		100.0	%		100.0	%		100.0	%		100.0	%
Cost of goods sold		28.2	%		23.0	%		27.6	%		22.5	%

Gross profit		71.8	%		77.0	%		72.4	%		77.5	%

Operating expenses:
Selling and marketing		35.2	%		38.2	%		36.9	%		35.6	%
General and administrative		51.8	%		25.8	%		40.4	%		25.2	%
Research and development		6.4	%		6.7	%		7.2	%		6.6	%
Provision for bad debts		3.4	%		2.1	%		3.7	%		2.3	%

Total operating expenses		96.9	%		72.7	%		88.2	%		69.7	%

(Loss) income from operations		-25.1	%		4.3	%		-15.8	%		7.8	%
Foreign exchange loss		1.5	%		3.5	%		0.5	%		2.3	%
Finance expenses		8.0	%		5.6	%		7.5	%		5.7	%

Loss before income taxes		-34.6	%		-4.8	%		-23.8	%		-0.2	%

The following tables set forth Venus Concept’s revenue by region and by product type for the periods indicated:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
	(in thousands)				(in thousands)
Revenue by region:
United States		10,118		9,653		31,337		29,643
Israel		1,523		1,108		3,688		3,023
International		14,513		14,832		43,527		41,301

Total revenue		26,154		25,593		78,552		73,967


	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
	(in thousands)				(in thousands)
Revenue by product:
Subscription – Systems		16,427		17,869		48,812		52,885
Products – Systems		7,105		6,081		21,189		16,011
Product – Other⁽¹⁾		1,167		1,093		4,117		3,193
Services⁽²⁾		1,455		550		4,434		1,878

Total revenue		26,154		25,593		78,552		73,967

(1)	Other products include Venus Concept’s Venus Skin and hair products, and other consumables.

(2)	Services includes NeoGrafter technician services, 2two5 ad agency services and extended warranty sales.

Comparison of the Three Months Ended September 30, 2019 and 2018

Revenues


	Three Months Ended September 30,
	2019				2018				Change
	$		% of Total		$		% of Total		$			%
Revenue by product:
Subscription – Systems		16,427		62.8		17,869		69.8		(1,442	)		(8.1	)
Products – Systems		7,105		27.2		6,081		23.8		1,024			16.8
Product – Other		1,167		4.4		1,093		4.3		74			6.8
Services		1,455		5.6		550		2.1		905			164.5

Total revenue		26,154		100.0		25,593		100.0		561			2.2

Total revenue increased by $0.6 million, or 2.2%, to $26.2 million for the three months ended September 30, 2019 from $25.6 for the three months ended September 30, 2018. Revenues in the United States increased by $0.5 million, revenues in Israel increased by $0.4 million, while International revenues decreased by $0.3 million. The increase in revenue in U.S. markets in the third quarter of 2019 was driven primarily by sales of newer technology platforms. The decrease in revenue in International markets is primarily due to lower sales in our Asia Pacific market.

Venus Concept sold an aggregate of 655 systems in the three months ended September 30, 2019 compared to 522 in the three months ended September 30, 2018. The percentage of systems revenue derived from Venus Concept’s subscription model was approximately 69.8% in the three months ended September 30, 2019 compared to 74.6% in the three months ended September 30, 2018.

Other product revenue increased by $0.1 million, or 6.8%, to $1.2 million in the three months ended September 30, 2019 from $1.1 million in the three months ended September 30, 2018. The increase was driven by Venus Concept’s expanded direct sales presence in Latin America and Asia and additional consumables sales-related to increased systems sales.

Services revenue increased by $0.9 million, or 164.5%, to $1.5 million in the three months ended September 30, 2019 from $0.6 million in the three months ended September 30, 2018. This increase was driven by the addition of the NeoGrafter technician services as part of the NeoGraft acquisition and Venus Concept’s new 2two5 ad agency services that commenced operation in the second quarter of 2018.

Cost of Goods Sold and Gross Profit

Cost of goods sold increased by $1.5 million, or 25.7%, to $7.4 million in the three months ended September 30, 2019 from $5.9 million in the three months ended September 30, 2018. Gross profit for the third quarter of 2019 decreased $0.9 million, or 4.8%, to $18.8 million, compared to $19.7 million in the third quarter of 2018. The decrease in gross profit is primarily due to lower average selling prices on systems sales and increased services revenue at lower margins. Gross margin was 71.8% of revenue in the third quarter of 2019, compared to 77.0% of revenue in the third quarter of 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 and lower selling prices on sales of certain certifiedpre-owned systems.


	Three Months Ended September 30,
	2019				2018				Change
	$		% of Revenue		$		% of Revenue		$			%
Operating expenses:
Selling and marketing		9,201		36.3		9,770		52.5		(569	)		(5.8	)
General and administrative		13,556		53.5		6,605		35.5		6,951			105.2
Research and development		1,686		6.7		1,713		9.2		(27	)		(1.6	)
Provision for bad debts		889		3.5		530		2.8		359			67.7

Total operating expenses		25,332		100.0		18,618		100.0		6,714			36.1

Selling and Marketing. Selling and marketing expenses decreased by 5.8% in the three months ended September 30, 2019 compared to the three months ended September 30, 2018. This decrease was primarily due to a timing factor, as during the third quarter of 2018 Venus Concept launched several new products – Venus Velocity and Venus Glow – that required significant marketing investments. In 2019 new product launch is planned for the fourth quarter of 2019. As a percentage of total revenues, Venus Concept’s selling and marketing expenses decreased 3.0%, from 38.2% in the three months ended September 30, 2018 to 35.2% in the three months ended September 30, 2019. Venus Concept expects selling and marketing expenses to decrease as a percentage of sales in the future as it continues to penetrate the large countries in most regions.

General and Administrative. General and administrative expenses increased by 105.2% in the three months ended September 30, 2019 compared to the three months ended September 30, 2018, reflecting cost related to the 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 NeoGraft acquisition and the launch of the 2two5 internal advertising inmid-2018. Increases in headcount were necessary to support increased activity across all areas of Venus Concept’s business. As a percentage of total revenues, Venus Concept’s general and administrative expenses increased 26.0%, from 25.8% in the three months ended September 30, 2018 to 51.8% in the three months ended September 30, 2019, primarily due to Merger related expenses.

Research and Development. Research and development expenses decreased by 1.6% in the three months ended September 30, 2019 compared to the three months ended September 30, 2018. As a percentage of total revenues, Venus Concept’s research and development expenses decreased 0.3%, from 6.7% in the three months ended September 30, 2018 to 6.4% in the three months ended September 30, 2019.

Provision for Bad Debts. The provision for bad debts increased by 67.7% in the three months ended September 30, 2019 compared to the three months ended September 30, 2018. This increase related primarily to awrite-off the receivable of a distributor of approximately $0.2 million during the third quarter of 2019, due to termination of a distribution agreement. As a percentage of total revenues, Venus Concept’s provision for bad debts increased 1.3%, from 2.1% in the three months ended September 30, 2018 to 3.4% in the three months ended September 30, 2019.

Foreign exchange loss (income). Venus Concept had a foreign exchange loss of $0.4 million in the three months ended September 30, 2019 and foreign exchange loss of $0.9 million in the three months ended September 30, 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. Venus Concept generally does not hedge against foreign currency risk.

Financial Expenses. Financial expenses increased by $0.7 million, to $2.1 million in the three months ended September 30, 2019 from $1.4 million in the three months ended September 30, 2018. This increase is a result of interest expense on increased debt assumed with our primary lender in the year ended December 31, 2018 and the three months ended September 30, 2019. See “Liquidity and Capital Resources” below.

Income Taxes Expense. Income taxes benefit increased to $80 thousand in the three months ended September 30, 2019 from a $40 thousand income tax benefit in the three months ended September 30, 2018, as Venus Concept continued to utilize prior periods losses. In certain jurisdictions, a temporary difference is created on the sale of systems under subscription agreements between the present value of the contract for accounting purposes and the taxability of the income when installments on that subscription are billed and paid.

Comparison of the Nine Months Ended September 30, 2019 and 2018

Revenues


	Nine Months Ended September 30,
	2019				2018				Change
	$		% of Total		$		% of Total		$			%
Revenue by product:
Subscription – Systems		48,812		62.1		52,885		71.5		(4,073	)		(7.7	)
Products – Systems		21,188		27.0		16,011		21.7		5,177			32.3
Product – Other		4,117		5.2		3,193		4.3		924			28.9
Services		4,435		5.7		1,878		2.5		2,557			136.2

Total revenue		78,552		100.0		73,967		100.0		4,585			6.2

Total revenue increased by $4.6 million, or 6.2%, to $78.6 million for the nine months ended September 30, 2019 from $74.0 million for the nine months ended September 30, 2018. The increase in revenue was a result of increased revenue in the United States of $1.7 million, increased revenue in international markets of $2.2 million, and a slight increase in revenue in Israel of $0.7 million. The increase in revenue in the United States was driven by Venus Concept’s continued investment in selling and marketing, partially offset by lower system sales in Venus Concept’s national accounts channel. The increase in revenue in international markets is largely due to Venus Concept’s expanded direct sales presence in Latin America and Asia.

Venus Concept sold an aggregate of 1,846 systems in the nine months ended September 30, 2019 compared to 1,419 in the nine months ended September 30, 2018. The percentage of systems revenue derived from Venus Concept’s subscription model was approximately 69.7% in the nine months ended September 30, 2019 compared to 76.8% in the nine months ended September 30, 2018.

Other product revenue increased by $0.9 million, or 28.9%, to $4.1 million in the nine months ended September 30, 2019 from $3.2 million in the nine months ended September 30, 2018. The increase was driven by Venus Concept’s expanded direct sales presence in Latin America and Asia and additional consumables sales-related to increased systems sales.

Services revenue increased by $2.6 million, or 136.2%, to $4.4 million in the nine months ended September 30, 2019 from $3.2 million in the nine months ended September 30, 2018. This increase was driven by the addition of the NeoGrafter technician services as part of the NeoGraft acquisition and Venus Concept’s new 2two5 ad agency services that commenced operation in the second quarter of 2018.

Cost of Goods Sold and Gross Profit

Cost of goods sold increased by $5.0 million, or 29.9%, to 21.7 million in the nine months ended September 30, 2019 from $16.7 million in the nine months ended September 30, 2018. Gross profit decreased by $0.4 million, or 0.7%, to $56.9 million in the nine months ended September 30, 2019, as compared to $57.3 million in the nine months ended September 30, 2018. The decrease in gross profit is primarily due to lower average selling prices on systems sales and increased services revenue at lower margins. Gross margin was 72.4% of revenue in the nine months ended September 30, 2019 compared to 77.5% of revenue in the nine months ended September 30, 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 and lower selling prices on sales of certain certifiedpre-owned systems.


	Nine Months Ended September 30,
	2019				2018				Change
	$		% of Revenue		$		% of Revenue		$		%
Operating expenses:
Selling and marketing		28,983		41.8		26,311		51.1		2,672		10.2
General and administrative		31,731		45.8		18,631		36.2		13,100		70.3
Research and development		5,667		8.2		4,856		9.4		811		16.7
Provision for bad debts		2,906		4.2		1,727		3.3		1,179		68.3

Total operating expenses		69,287		100.0		51,525		100.0		17,762		34.5

Selling and Marketing. Selling and marketing expenses increased by $2.7 million in the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018. This increase was primarily due to a continued increase in sales headcount, and related travel and marketing expenditures. The sales headcount increase was a result of an increase in Venus Concept’s direct sales presence in Asia Pacific and Latin America and the acquisition of NeoGraft in the first quarter of 2018. As a percentage of total revenues, Venus Concept’s selling and marketing expenses increased 1.3%, from 35.6% in the nine months ended September 30, 2018 to 36.9% in the nine months ended September 30, 2019. Venus Concept expects selling and marketing expenses to decrease as a percentage of sales in the future as it continues to penetrate the large countries in most regions.

General and Administrative. General and administrative expenses increased by $13.1 million in the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018, reflecting cost related to 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 NeoGraft acquisition and the launch of the 2two5 internal advertising agency inmid-2018. Increases in headcount were necessary to support increased activity across all areas of Venus Concept’s business. As a percentage of total revenues, Venus Concept’s general and administrative expenses increased 15.2%, from 25.2% in the nine months ended September 30, 2018 compared to 40.4% in the nine months ended September 30, 2019.

Research and Development. Research and development expenses increased by $0.8 million in the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018. This increase related primarily to an increase in the development of new products, clinical trials and regulatory certification for numerous products including Venus Heal, NeoGraft, Venus Fiore and Venus Bliss. As a percentage of total revenues, Venus Concept’s research and development expenses increased 0.6%, from 6.6% in the nine months ended September 30, 2018 compared to 7.2% in the nine months ended September 30, 2019.

Provision for Bad Debts. The provision for bad debts increased by $1.2 million in the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018. This increase related primarily to awrite-off of the receivable of a larger U.S. national account customer of approximately $0.8 million during the second quarter of 2019. As a percentage of total revenues, Venus Concept’s provision for bad debts increased 1.4%, to 3.7% in the nine months ended September 30, 2019 compared to 2.3% in the nine months ended September 30, 2018.

Foreign exchange loss. Venus Concept had a foreign exchange loss of $0.4 in the nine months ended September 30, 2019 compared to $1.7 million in the nine months ended September 30, 2018. The loss in 2019 is driven mainly by unrealized losses from accounts receivable balances denominated in currencies other than the US dollar. Venus Concept generally does not hedge against foreign currency risk.

Financial Expenses. Financial expenses increased by $1.7 million, to $5.9 million in the nine months ended September 30, 2019 from $4.2 million in the nine months ended September 30, 2018. This increase is a result of interest expense on increased debt levels with its primary lender in the year ended December 31, 2018 and the nine months ended September 30, 2019. See “Liquidity and Capital Resources” below.

Income Taxes Expense (Benefit). Income taxes expense decreased by $0.1 million, to $0.9 million in the nine months ended September 30, 2019 from $1.0 million in the nine months ended September 30, 2018. This decrease resulted from the changes in the deferred tax liabilities created from Venus Concept’s subscription business. In certain jurisdictions, a temporary difference is created on the sale of systems under subscription agreements between the present value of the contract for accounting purposes and the taxability of the income when installments on that subscription are billed and paid.

Liquidity and Capital Resources

Venus Concept had $15.7 million and $6.8 million of cash and cash equivalents as of September 30, 2019 and December 31, 2018, respectively. Venus Concept has funded its operations with cash generated from operating activities, through the sale of equity securities to investors in private placements and through debt financing. During the nine months ended September 30, 2019, Venus Concept drew $10.0 million on a term loan facility with Madryn Health Partners, LP, $1.9 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. During the nine months ended September 30, 2019, Venus Concept provided two loans to Restoration Robotics in total amount of $4.5 million, using proceeds from issuances of the unsecured senior subordinated convertible promissory notes. Venus Concept had total debt obligations of approximately $98.0 million as of September 30, 2019, including line of credit borrowings of $7.6 million and convertible promissory notes of $29.4 million, compared to total debt obligations of approximately $56.5 million at December 31, 2018, including line of credit borrowings of $5.6 million. Subsequent to September 30, 2019, the proceeds from the $28.0 million equity financing that closed on November 7, 2019 (see “Concurrent Financing” below) allowed Venus Concept to retire Venus Concept Inc. (former Restoration Robotics) existing obligations for the combined company, resulting in combined company indebtedness of approximately $69.0 million. In connection with the Merger (as defined above), all outstanding convertible debt obligations were converted into Venus Concept Inc. Common Stock (see “Convertible Note Financing” below) which resulted in having approximately $29.7 million shares of combined company common stock outstanding, on a post reverse split basis. During 2018, Venus Concept raised $6.9 million from the sale of preferred shares to existing investors that was used to fund the NeoGraft acquisition, and Venus Concept refinanced its long-term debt yielding incremental proceeds of $15.0 million used to fund working capital. During 2017, Venus Concept raised $36.3 million through private placements of securities used to fund Venus Concept’s operations and working capital.

Venus Concept’s working capital requirements reflect the growth of its business, in particular, the shift from a traditional sales model to its subscription model. Working capital is primarily impacted by growth in Venus Concept’s subscription sales which also impacts accounts receivable. Venus Concept’s overall growth also requires higher inventory levels to meet demand and to accommodate the increased number of technology platforms offered. Venus Concept expects its near tomid-term split of subscription sales revenue to traditional sales revenue to be at a ratio of approximately 70:30 respectively, compared to 75:25 split in 2018. In the second half of 2019, Venus Concept directed more effort to securing traditional sales in order to improve cash flow. This trend will continue in 2020. Venus Concept expects inventory to continue to increase in the short term, but at a lower rate than the rate of revenue growth.

Venus Concept also requires modest funding for capital expenditures. Venus Concept’s capital expenditures relate primarily to its research and development facilities in Yokneam, Israel. In addition, Venus Concept’s capital investments have included improvements and expansion of its subsidiary operations to support Venus Concept’s growth.

Madryn Loan Agreement

On October 11, 2016, Venus Concept entered into a loan agreement with Madryn Health Partners, LP as administrative agent and certain of its affiliates as lenders, collectively, “Madryn”, which was amended on August 14, 2018. The loan agreement, as amended, is comprised of three committed tranches and one uncommitted tranche of debt totaling $70.0 million. The termA-1 commitment is $35.0 million, the termA-2 commitment is $15.0 million, the term B commitment is $10.0 million and the uncommitted term C was $10.0 million, but expired on September 30, 2019. As of September 30, 2019, Venus Concept had drawn on the termA-1,A-2 and B tranches for gross debt of $60.0 million. As of December 31, 2018, Venus Concept had drawn on the termA-1 andA-2 tranches for gross debt of $50.0 million. As of September 30, 2019, Venus had $60.0 million aggregate principal amount outstanding under the Madryn loan agreement.

In connection with the Madryn loan agreement, Venus Concept issued three10-year warrants to funds affiliated with Madryn. As of September 30, 2019 and December 31, 2018, the Madryn funds held warrants to purchase 150,000 ordinary shares 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 at a price of $5.0604 per share.

Effective August 14, 2018, interest on the Madryn loan agreement is 9.00%, payable quarterly. Previously, interest was payable quarterly, at Venus Concept’s option, as follows: cash interest at 9.00% during the interest only period, which was3-years or 12 payments after closing, plus an additional 4.00%, paid in kind, or PIK. PIK interest could be paid in cash or added to the principal amount of the loan at Venus Concept’s option.

On the 24th payment date following the closing date, December 31, 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.

The loans are collateralized by substantially all the assets of Venus Concept and certain of its subsidiaries and are subject to certain revenue and liquidity covenants. The covenants require that Venus Concept and its 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 City National Bank of Florida (“CNB”) credit facility, to be no less than $5.0 million. As of March 31, 2019 and December 31, 2018, Venus Concept was in compliance with these revenue and liquidity covenants, however, as of June 30, 2019, Venus Concept was not in compliance with the minimum liquidity covenant and did not make a required interest payment due June 28, 2019 until July 10, 2019. Venus Concept received a letter from Madryn on July 5, 2019 stating that an event of default existed as a result of Venus Concept’s failure to timely pay the interest payment due June 28, 2019.

On July 26, 2019, Venus Concept and Madryn executed a waiver and amendment to the Madryn loan agreement pursuant to which, Madryn lowered the liquidity covenant from $2.0 million to $0.2 million through the earlier of August 30, 2019 or the time Venus Concept raised $21.0 million in additional equity. Madryn waived the existing events of default.

Subsequent to the amendment, if all or any portion of the loans under the Madryn loan agreement are prepaid, then a prepayment premium is due, 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, Venus Concept was in compliance with minimum reported revenue targets and minimum level of cash on hand in certain subsidiaries requirements

In connection with the Merger, Venus Concept entered into an amendment to the Madryn loan agreement, dated as of November 7, 2019 (the “Amendment”), pursuant to which Venus Concept Inc. was joined as (i) a guarantor to the Madryn loan 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 loan agreement, Venus Concept Inc. is jointly and severally liable for the obligations (as defined in the Madryn loan agreement) thereunder and to secure its obligations thereunder, Venus Concept Inc. 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 under the U.S. Security Agreement to satisfy the obligations.

CNB Credit Facility

Venus Concept has an agreement with City National Bank of Florida, or CNB, whereby CNB agreed to provide a revolving credit facility to certain of Venus Concept’s subsidiaries in the maximum principal amount of $7.5 million, to be used to finance working capital requirements. As of December 31, 2018, Venus Concept had $5.7 million outstanding under the credit facility which bears interest at LIBOR plus 3.25%.

On April 25, 2019, the revolving loan commitment under the CNB credit facility was increased to $10.0 million. On August 19, 2019, the CNB credit facility was further amended to require the consummation on or before October 15, 2019 of both the Merger and an equity financing of at least $20.0 million. If both such events were not consummated by July 31, 2019, then an event of default would have been deemed to occur under the CNB credit facility on August 30, 2019, unless by such date either (i) the outstanding principal balance of loans in excess of $7.5 million had been repaid or (ii) the Merger and an equity financing of at least $20.0 million had been consummated.

On August 19, 2019, the CNB credit facility was further amended to require the consummation of the Merger and equity financing of at least $20.0 million on or before October 15, 2019.

As of September 30, 2019, Venus Concept had $7.6 million outstanding under the CNB credit facility, bearing interest at LIBOR plus 3.25%.

On October 30, 2019 the CNB credit facility was further amended to require the consummation of the Merger on or before November 15, 2019.

The CNB credit facility contains various covenants that limit Venus Concept’s and its subsidiaries’ ability to engage in specified types of transactions. Subject to limited exceptions, these covenants limit Venus Concept’s ability, without CNB’s consent, to, among other things, sell, lease, transfer, exclusively license or dispose of Venus Concept’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. In addition, the CNB credit facility contains certain covenants that require Venus Concept 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 Venus Concept subsidiary obligors fail to comply with these covenants, it will result in a default and require Venus Concept and Venus Concept subsidiary obligors to repay all outstanding principal amounts and accrued interest.

As of March 31, 2019, Venus Concept was not in compliance with the minimum debt service coverage ratio of its credit facility with CNB. In June 2019, Venus Concept received a waiver removing the requirement to meet the minimum debt service coverage ratio for the period ended March 31, 2019. In July 2019, Venus Concept received a waiver removing the requirement to meet the minimum debt service coverage ratio for the period ended June 30, 2019 and that future periods would not be measured until August 30, 2019. As of September 30, 2019, Venus Concept was not in compliance with the minimum debt service coverage ratio under its credit facility with CNB. On October 30, 2019, CNB amended the minimum debt service coverage ratio covenant calculation, reaffirmed its prior waiver for June 30, 2019 and provided Venus Concept with a waiver removing the requirement to meet the minimum debt service coverage ratio as of September 30, 2019.

In the event of a default, if Venus Concept and Venus Concept 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 Venus Concept’s ability to operate its business.

Convertible Note Financings

On June 25, 2019, Venus Concept entered into a note purchase agreement pursuant to which Venus Concept issued an aggregate of $7.8 million of unsecured senior subordinated convertible promissory notes, or Venus Concept convertible notes, to certain investors named therein. Venus Concept convertible notes bore interest on the unpaid principal amount at a rate of eight percent (8%) per annum from the date of issuance. All of the outstanding principal and unpaid accrued interest on Venus Concept convertible notes were automatically converted into common stock of Venus Concept Inc. immediately following the closing of the Merger, at a conversion price of $6.996 per share. In the event that the Merger was not consummated, Venus Concept convertible notes would have been convertible into equity securities of Venus Concept.

On August 14, 2019, the parties to the equity commitment letter, related to the Merger, amended the equity commitment letter to “pull forward” their maximum committed amounts such that the $21.0 million committed under the equity commitment letter would be invested on or prior to August 30, 2019 in Venus Concept convertible notes were convertible into shares of Venus Concept Inc. Common Stock immediately following the closing of the Merger.

On August 14, 2019, Venus Concept issued $0.3 million aggregate principal amount of unsecured senior subordinated convertible promissory notes to one investor and $7.0 million aggregate principal amount to certain investors pursuant to the amended equity commitment letter for gross proceeds of $7.2 million. Debt issuance costs associated with the financing were approximately $0.8 million. The unsecured senior subordinated convertible promissory notes were automatically convertible into shares of Venus Concept Inc. Common Stock immediately following the closing of the Merger at a conversion price of $6.996 per share. The unsecured senior subordinated convertible promissory notes accrued interest at a rate of 8.00% per annum and matured on the thirtieth day following the termination of the Merger Agreement. The unsecured senior subordinated convertible promissory notes were subordinated to the Madryn and CNB indebtedness pursuant to subordination agreements with each investor and Madryn and CNB.

On August 21, 2019, Venus Concept issued unsecured senior subordinated convertible promissory notes to certain investors for gross proceeds of $14.1 million. Debt issuance costs associated with the financing were approximately $0.4 million. The unsecured senior subordinated convertible promissory notes were automatically convertible into shares of Venus Concept Inc. Common Stock at the closing of the Merger at a conversion price of $6.996 per share. The unsecured senior subordinated convertible promissory notes accrued interest at a rate of 8.00% per annum and would have matured on the thirtieth day following the termination of the Merger Agreement. The unsecured senior subordinated convertible promissory notes were subordinated to the Madryn and CNB indebtedness pursuant to subordination agreements with each investor and Madryn and CNB. Upon the closing of this financing, the equity commitment letter investors were released from their maximum committed amounts under the equity commitment letter.

Restoration Robotics Loans

On July 5, 2019, Venus Concept loaned Restoration Robotics $2.5 million of the proceeds from the issuance of Venus Concept convertible notes pursuant to a subordinated promissory note, or the First Restoration Note. The First Restoration Note is subordinated to the Solar Capital Ltd. loan agreement pursuant to a subordination agreement between Solar Capital Ltd. and Venus Concept dated June 25, 2019. The First Restoration Note accrues interest at a rate of 8.00% per annum and matures on November 30, 2019.

On August 14, 2019, pursuant to the terms of the equity commitment letter, Venus Concept agreed to loan Restoration Robotics $2.5 million of the proceeds from the August 2019 issuances of Venus Concept convertible notes. The loan was supposed to be made in three installments: $1.0 million loaned by August 30, 2019, $1.0 million loaned by September 30, 2019, and $0.5 million being loaned by October 15, 2019, in each case subject to the satisfaction of the conditions thereto. The third installment of $0.5 million was never made as the conditions were not met. Venus Concept’s loan to Restoration Robotics is subordinated to the Solar Capital Ltd. loan agreement pursuant to a subordination agreement between Solar Capital Ltd. and Venus Concept dated June 25, 2019. The loan to Restoration Robotics accrues interest at a rate of 8.00% per annum and matures on November 30, 2019.

As of September 30, 2019, the principle amount of Venus Concept notes receivable outstanding was $4.5 million.

Concurrent Financing

On November 3, 2019, Restoration Robotics and Venus Concept entered into a securities purchase agreement (the “Purchase Agreement”) with certain investors named therein pursuant to which the combined company agreed to issue and sell to the investors in a private placement in public equity an aggregate of approximately 7,483,980 shares (the “Concurrent Financing Shares”) of the combined company common stock, par value $0.0001 per share, and warrants to purchase up to an aggregate of approximately 3,741,990 shares (the “Warrant Shares”) of the combined 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 Warrant Shares, the “Securities”) immediately following the closing of the Merger (the “Concurrent Financing”). The aggregate purchase price for the Securities sold in the Concurrent Financing was $28.0 million.

Cash Flows

The following table presents the major components of net cash flows for the periods presented:


	Nine Months Ended September 30,
	2019			2018
	*(in thousands)*
Net cash used in operating activities	$	(25,867	)	$	(25,901	)
Net cash used in investing activities		(5,240	)		(8,376	)
Net cash provided by financing activities		40,081			21,347

Net increase in cash and cash equivalents	$	8,974		$	(12,930	)

Cash Flows from Operating Activities.

In the nine months ended September 30, 2019, cash used in operating activities consisted of a net loss of $19.6 million and an investment in net operating assets of $14.6 million, partially offset bynon-cash operating expenses of $8.3 million. The investment in net operating assets was primary attributable to an increase in accounts receivable of $19.1 million, primarily due to the increase in subscription sales, a decrease in the trade payables of $0.9 million and an increase in other current assets of $2.9 million. This was partially offset by a decrease in inventories of $4.0 million and an increase in accrued expenses and other current liabilities of $4.2 million. Thenon-cash operating expenses consisted mainly of a provision for bad debts of $2.9 million, depreciation and amortization of $1.1 million, stock-based compensation expense of $1.7 million, deferred tax expense of $0.5 million, a change in the fair value of theearn-out liability for the purchase of NeoGraft of $0.7 million, and a provision for inventory obsolescence of $0.5 million.

In the nine months ended September 30, 2018, cash used in operating activities consisted of net loss of $1.2 million, and an investment in net operating assets of $30.2 million, partially offset bynon-cash operating expenses of $5.5 million. The investment in net operating assets was primarily attributable to an increase in accounts receivable of $30.6 million, primarily due to the increase in subscription sales, an increase in inventories of $5.4 million, an increase in other current assets of $0.4 million, and a decrease in other long term liabilities of $1.6 million, partially offset by an increase in accrued expenses and other current liabilities of $3.9 million, an increase in trade payables of $1.4 million, an increase in unearned interest income of $1.0 million, and an increase in other long term assets of $0.6 million. Thenon-cash operating expenses consisted mainly of a provision for bad debts of $1.7 million, deferred tax expense of $0.3 million, capitalized interest on debt of $0.9 million, financing fees of $0.5 million, stock-based compensation of $0.9 million, depreciation and amortization of $0.7 million, and a provision for inventory obsolescence of $0.4 million.

In 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 bynon-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. Thenon-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 $10.3 million.

Cash Flows from Investing Activities.

In the nine months ended September 30, 2019, cash used in investing activities consisted of the issuance of the loan to Restoration Robotics of $4.5 million, the purchase of property and equipment of $0.6 million and the cash paid for purchase of thenon-controlling interest in Venus Concept Israel Ltd. of $0.1 million.

In the nine months ended September 30, 2018, cash used in investing activities consisted of the purchase of property and equipment of $0.4 million, $7.5 million of cash paid for the acquisition of NeoGraft, and $0.5 million of cash paid for the acquisition of Venus Concept UK Limited.

In 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 nine months ended September 30, 2019, cash from financing activities consisted primarily of net proceeds from the drawdown on the Madryn loan agreement of $9.7 million, net proceeds from issuance of unsecured senior subordinated convertible promissory notes of $28.8 million, proceeds from exercise of options of $0.4 million and proceeds from the drawdown on the CNB credit facility of $1.9 million partially offset by payments related to the NeoGraftearn-out liability of $0.5 million, and NeoGraft annual installment payment of $0.3 million.

In the nine months ended September 30, 2018, cash from financing activities consisted primarily of net proceeds from the issuance of Series D preferred shares of $6.9 million and proceeds from the drawdown on the CNB credit facility of $14.2 million.

In 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 thenon-controlling interest in two subsidiaries and $0.8 million of financing fees.

Contractual Obligations and Commitments

Venus Concept’s premises and those of its subsidiaries are leased under various operating lease agreements, which expire on various dates.

As of September 30, 2019, Venus Concept hasnon-cancellable purchase orders placed with Venus Concept’s contract manufacturers in the amount of $6.3 million. In addition, as of September 30, 2019, Venus Concept had $0.6 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 Venus Concept contractual obligations as of September 30, 2019:


	Payments Due by Period
	Less than 1 year		1 to 3 years		4 to 5 years		More than 5 years		Total
	*(in thousands)*
Debt obligations, including interest	$	5,643	$	11,286	$	64,111	$	—	$	81,040
Operating leases		855		1,259		831		1,531		4,476
Purchase commitments		6,404		—		—		—		6,404

Total contractual obligations	$	12,902	$	12,545	$	64,942	$	1,531	$	91,920

Off-Balance Sheet Arrangements

Venus Concept did not have during the periods presented, and does not currently have, anyoff-balance sheet arrangements, as defined in the rules and regulations of the SEC.

Quantitative and Qualitative Disclosures about Market Risk

Venus Concept is exposed to market risks in the ordinary course of its business. These risks include interest rate fluctuations, inflation and foreign currency exchange risk.

Interest Rate Fluctuations

Venus Concept’s investments include cash and cash equivalents, which consist of cash accounts, and are held for working capital purposes. Venus Concept had cash and cash equivalents of approximately $15.7 million and $6.8 million as of September 30, 2019 and December 31, 2018, respectively. The primary objective of Venus Concept’s investment activities is to preserve principal without significantly increasing risk. Venus Concept does not enter into investments for trading or speculative purposes, and all of Venus Concept’s cash accounts are held in low interest rate cash accounts. Venus Concept’s long-term debt bears interest at a fixed rate of 9% and the credit facility bears interest at a variable rate of LIBOR plus 3.25%. Venus Concept does not invest in any instruments to manage its interest rate risk. Although the credit facility interest rates may fluctuate, Venus Concept does not expect its operating results or cash flows to be materially affected to any degree by a sudden change in market interest rates.

Inflation

Venus Concept does not believe that inflation has had a material effect on its business, financial condition, or results of operations. If Venus Concept’s costs were to become subject to significant inflationary pressures, Venus Concept may not be able to fully offset such higher costs through price increases. Venus Concept’s inability or failure to do so could harm its business, financial condition, and its results of operations.

Foreign Currency Exchange Risk

Venus Concept’s functional currency for selling products and services and its financial reporting currency is the U.S. dollar. During the nine months ended September 30, 2019 and the year ended December 31, 2018, approximately 53% and 49% of Venus Concept’s revenues respectively were denominated in U.S. dollars, 7% and 10%, respectively, in Canadian dollars and the balance in a mixture of currencies. In addition, during the nine months ended September 30, 2019 and the year ended December 31, 2018, approximately 42% and 36%, respectively, of Venus Concept’s operating expenses were incurred in U.S. dollars, 23.5% and 32%, respectively, in Israeli shekels and 14% in Canadian dollars. Venus Concept’s Israeli operating expenses consisted primarily of salaries and overhead for Venus Concept’s research and development and general and administrative operations in Israel.

A 10% increase or decrease in the value of the NIS against the U.S. dollar would have decreased or increased Venus Concept’s net loss by approximately $2.1 million and $3.2 million in the nine months ended September 30, 2019 and the year ended December 31, 2018, respectively.

For purposes of Venus Concept’s consolidated financial statements, local currency assets and liabilities are translated at the rate of exchange to the U.S. dollar on the balance sheet date and local currency revenues and expenses are translated at the exchange rate at the date of the transaction or the average exchange rate during the reporting period to the U.S. dollar.

Venus Concept generally does not hedge against foreign currency exchange risk.

Internal Control Over Financial Reporting

As a private company, Venus Concept has not historically prepared public company level financial statements. In connection with the audit of its consolidated financial statements, it has identified material weaknesses in its 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.

Venus Concept has experienced significant global expansion of operations and revenue growth. As this has occurred, the Company has increased the number of personnel in the organization and specifically in its financial reporting team. Despite this progress, Venus Concept identified control deficiencies in aggregate that constitute material weaknesses in the five components of internal control as defined by COSO 2013 (control environment, risk assessment, control activities, information and communication, and monitoring). In particular, compared to public company level processes and standards, Venus Concept did not have in place an effective control environment with formal processes and procedures and an adequate number of accounting personnel with the appropriate technical training in, and experience with, U.S. GAAP to allow for a detailed review of accounting transactions that would identify errors in a timely manner. Furthermore, given the growth of the Company, Venus Concept had not adopted and implemented technology solutions that would automate lessor accounting processes and enable the accurate and timely preparation of financial statements. Finally, the Company did not design or maintain effective controls over the financial statement close and reporting process in order to ensure the accurate and timely preparation of financial statements in accordance with US GAAP.

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Venus Concept performed a formal evaluation of key business process internal controls;

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Management developed a formal plan of internal controls assessment and testing, which was approved by Venus Concept’s Audit Committee;

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Venus Concept has added personnel to the accounting and financial department with experience in GAAP and SEC financial reporting requirements, implementing accounting systems, developing and implementing internal and external financial reporting systems, as well as compliance, internal controls and enterprise risk management;

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Venus Concept is in the process of implementing a new software program to automate lease accounting;

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Venus Concept has also engaged an independent consulting firm which has extensive experience in SEC reporting, internal controls, and compliance and has been involved in addressing the areas identified in the material weakness disclosure in the registration statement and which has been assisting in the implementation of the remediation plan; and

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Venus Concept recently hired a manager of internal audit and compliance.

Venus Concept intends to continue further enhancing its design and implementation of the processes described above and as Venus Concept continues to evaluate and work to improve its internal control over financial reporting, additional measures may be taken to address these control deficiencies or modify the remediation plan described above.

These remediation measures may be time consuming, costly, and might place significant demands on our financial and operational resources. Although Venus Concept has made enhancements to its control procedures in this area, the material weaknesses will not be remediated until the necessary controls have been implemented and are operating effectively. Venus Concept does not know the specific time frame needed to fully remediate the material weaknesses identified.

Critical Accounting Policies and Estimates

Venus Concept’s condensed consolidated financial statements have been prepared in accordance with U.S. GAAP. The preparation of Venus Concept’s consolidated financial statements requires management to make estimates, assumptions, and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the applicable periods. Management bases its estimates, assumptions, and judgments on historical experience and on various other factors that it believes to be reasonable under the circumstances. Different assumptions and judgments would change the estimates used in the preparation of Venus Concept’s consolidated financial statements, which, in turn, could materially change Venus Concept’s results from those reported. Management evaluates its estimates, assumptions, and judgments on an ongoing basis. Historically, Venus Concept’s critical accounting estimates have not differed materially from actual results. However, if Venus Concept’s assumptions change, it may need to revise its estimates, or take other corrective actions, either of which may also have a material adverse effect on Venus Concept’s statements of operations, liquidity, and financial condition.

Venus Concept believes the following critical accounting policies involve significant areas where management applies judgments and estimates in the preparation of Venus Concept’s consolidated financial statements.

Revenue Recognition

(i)	Subscription revenue

Many of Venus Concept’s products are sold under subscription contracts with title passing to the customer at the end of the contract term. The subscription contracts include an initialup-front fee followed by monthly installments typically over a period of 36 months. In accordance with ASC 840 Leases, 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.

When management determines that collection of future minimum contractual payments cannot be reasonably assured at the inception of a subscription contract, these contracts are classified as operating leases, where revenue is recognized on a straight-line basis over the term of the lease.

(ii)	Other products and services

For products (systems and other products) and service not sold through subscription contracts, Venus recognizes revenue in accordance with the accounting guidance for ASC605-25, Revenue Arrangements with Multiple Deliverables, which requires that the following four criteria be met in order to recognize revenue:

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persuasive evidence of an agreement with a customer exists;

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delivery has occurred or services have been rendered;

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the fees for the arrangement are fixed or determinable; and

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collectability is reasonably assured.

Venus Concept recognizes revenues from products sold toend-customers when title and risk of ownership has been transferred which usually occurs upon shipment to the end customer. Venus Concept does not grant rights of return to itsend-customers.

Venus Concept’s products sold through arrangements with distributors arenon-refundable,non-returnable and without any rights of price protection. Accordingly, Venus Concept considers distributors asend-customers.

In respect of sales of systems with installation and training, in accordance with (ASC) ASC 605, Venus Concept has concluded that its arrangements are generally consistent with the indicators suggesting that installation and training are not essential to the functionality of Venus Concept’s systems. Accordingly, installation and training are considered inconsequential and perfunctory relative to the system, and therefore Venus Concept recognizes revenue for the system, installation and training upon shipment to the customer once all other revenue recognition criteria have been met.

Long-term receivables

Long-term receivables relate to Venus Concept’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% for the three and nine months ended September 30, 2019 and the year ended December 31, 2018 and 10% to 14% for the year ended December 31, 2017. 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 Venus Concept’s assessment of the collectability of customer accounts and the aging of the related invoices and represents Venus Concept’s best estimate of probable credit losses in its existing trade accounts receivable. Venus Concept regularly reviews the allowance by considering factors such as historical experience, credit quality, the age of the accounts receivable balances, and current economic conditions that may affect a customer’s ability to pay.

Warranty accrual

Venus Concept generally warranties the majority of its systems against defects for up to three years. The warranty period begins upon shipment and Venus Concept records 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. Venus Concept periodically assesses the adequacy of Venus Concept’s recorded warranty liabilities and adjust the amounts thereof as necessary. Venus Concept must exercise judgment in estimating its expected system warranty costs. If actual system failure rates, freight, material, technical support and labor costs differ from Venus Concept’s estimates, Venus Concept will be required to revise its estimated warranty liability. To date, Venus Concept’s warranty reserve has been sufficient to satisfy warranty claims paid.

Stock-Based Compensation

Option Valuations

Venus Concept recognizes compensation costs related to stock-based awards granted to employees based on the estimated fair value of the awards on the date of grant, net of estimated forfeitures. Venus Concept estimates the grant date fair value, and the resulting stock-based compensation expense, using the Black-Scholes option-pricing model. The grant date fair value of the stock-based awards is generally recognized on a straight-line basis over the requisite service period, which is generally the vesting period of the respective awards.

The Black-Scholes option pricing model requires the use of subjective and complex assumptions which determine the fair value of stock-based awards as follows:

Expected term. The expected term represents the period that Venus Concept’s stock-based awards are expected to be outstanding and was primarily determined using the simplified method in accordance with guidance provided by the SEC. For option grants considered to be “plain vanilla,” the simplified method calculates the expected term as the average of thetime-to-vesting and the contractual life of the options.

Expected volatility. The expected volatility is derived from historical volatilities of several unrelated public companies that are deemed to be comparable to Venus Concept’s business because Venus Concept has limited information on the volatility of Venus Concept’s common stock since Venus Concept has no trading history. When making the selections of Venus Concept’s industry peer companies to be used in the volatility calculation, Venus Concept considered the size, operational and economic similarities to Venus Concept’s principal business operations. The early exercise multiple was based on data of comparable companies.

Risk-free interest rate. The risk-free interest rate assumption is derived from the interest curve for United States government bonds for periods corresponding to the life term of the option on the grant date.

Expected dividend rate. The expected dividend was assumed to be zero as Venus Concept has no current plans to pay dividends.

Expected forfeiture rates. Venus Concept accounts for forfeitures as they occur.

Fair Value of Venus Concept’s ordinary shares. Because Venus Concept’s shares are not publicly traded, Venus Concept must estimate the fair value of ordinary shares. Venus Concept uses the price per share in its latest sale of securities as an estimate of the fair value of Venus Concept’s ordinary shares.

Financial statements in U.S. dollars

Venus Concept’s management believes that the U.S. dollar is the currency in the primary economic environment in which Venus Concept operates. The U.S. dollar is the most significant currency in which Venus Concept’s revenues are generated, and Venus Concept’s costs are incurred. In addition, Venus Concept’s debt and equity financings are generally based in U.S. dollars. Thus, Venus Concept’s functional currency, and that of its 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 arere-measured into U.S. dollars in accordance with the principles set forth in ASC830-10 “Foreign Currency Translation”. All exchange gains and losses fromre-measurement of monetary balance sheet items resulting from transactions innon-U.S. dollar currencies are recorded as foreign exchange loss (income) in the consolidated statement of operations as they arise.

Income Taxes

Venus Concept 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. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts that are more likely than not to be realized. Venus Concept 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 “morelikely-than-not” threshold of being sustained by the applicable tax authority. Tax benefits related to tax positions not deemed to meet the “morelikely-than-not” threshold are not permitted to be recognized in the consolidated financial statements. Although Venus Concept believes that its estimates are reasonable and that Venus Concept has considered future taxable income and ongoing prudent and feasible tax strategies in estimating Venus Concept’s tax outcome, there is no assurance that the final tax outcome will not be different than those which are reflected in Venus Concept’s historical income tax provisions and deferred income tax assets and liabilities. Such differences could have a material effect on Venus Concept’s income tax provision, net income and cash balances in the period in which such determination is made.

Recent Accounting Pronouncements

Accounting pronouncements recently adopted

On January 1, 2018, the Company adopted ASUNo. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. Previously, U.S. GAAP prohibited the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party. This prohibition on recognition was an exception to the principle of comprehensive recognition of current and deferred income taxes under U.S. GAAP. The amendment to the guidance eliminated the exception for an intra-entity transfer of an asset other than inventory and required an entity to recognize the income tax consequences when the transfer occurs. Prior periods were not retrospectively adjusted. The adoption of the ASU did not have an impact on the consolidated financial statements.

In May 2017, the Financial Accounting Standards Board (“FASB”) issued ASUNo. 2017-09 (Topic 718) Compensation—Stock Compensation: Scope of Modification Accounting, which provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting. The new standard is effective on a prospective basis for interim and annual periods beginning after December 15, 2017, with early adoption permitted. The Company adopted this ASU on a prospective basis on January 1, 2018. The adoption of the ASU did not have a material impact on the consolidated financial statements.

In March 2016, the FASB issued ASUNo. 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, or ASU2016-09. ASU2016-09 simplifies the accounting and reporting of share-based payment transactions, including adjustments to how excess tax benefits and payments for tax withholdings should be classified and provides the election to eliminate the estimate for forfeitures. This standard is effective for annual reporting periods beginning after December 15, 2016, and interim periods within annual periods beginning after December 15, 2016. Early adoption is permitted for any entity in any interim or annual period for which financial statements have not been issued or made available for issuance. The Company adopted this ASU on a prospective basis on January 1, 2017. The adoption of the ASU did not have a material impact on the consolidated financial statements.

In November 2016, the FASB issued ASUNo. 2016-18 (Topic 230) Statement of Cash Flow: Restricted Cash, which provides guidance on the classification of restricted cash to be included with cash and cash equivalents when reconciling the beginning of period and end of period total amounts on the statement of cash flows. The amendments of this ASU are effective for interim and annual periods beginning after December 15, 2017, with early adoption permitted. The standard must be applied retrospectively to all periods presented. The Company adopted this standard on January 1, 2018 and the adoption did not have an impact on its consolidated financial statements.

In January 2017, the Company adopted ASU2015-11 Simplifying the Measurement of Inventory. The guidance requires that inventory that is measured on afirst-in-first-out (“FIFO”) or average cost basis be measured at lower of cost and net realizable value, as opposed to the lower of cost or market. The Company applied this guidance prospectively on January 1, 2017 and the adoption did not cause a material impact of the Company’s consolidated financial statements.

Accounting pronouncements issued but not yet adopted

In May 2014, the FASB issued ASU2014-09, Revenue from Contracts with Customers (Topic 606). The FASB subsequently issued the following amendments to ASUNo. 2014-09:ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations; ASUNo. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing; ASUNo. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients; andASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers.

The main provisions of Topic 606 require the identification of performance obligations within a contract and require the recognition of revenue based on a stand-alone allocation of contract revenue to each performance obligation. Performance obligations may be satisfied and revenue recognized over a period of time if: 1) the customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs, or 2) the entity’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced, or 3) the entity’s performance does not create an asset with an alternative use to the entity, and the entity has an enforceable right to payment for performance completed to date. For public entities the amendments of the update are effective for annual reporting periods beginning after December 15, 2017 including interim periods within that reporting period.

In February 2016, the FASB issued ASU2016-02, Leases (Topic 842) and subsequently amended byASU 2018-11, Leases (Topic 842): Targeted Improvements,ASU 2018-20, Narrow-Scope Improvements for Lessors andASU 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.

As codified in ASU2017-13, in an SEC staff announcement at the July 20, 2017 Emerging Issues Task Force (“EITF”) meeting, specifically related to public business entities (“PBEs”) that qualify as a PBE solely due to the requirement to include or the inclusion of its financial statements or financial information in another entity’s SEC filing (certain PBEs), the SEC stated that it will allow certain PBEs to elect to apply thenon-PBE effective dates for the revenue recognition and lease accounting standards only. The Company has made these elections and plans to adopt the revenue recognition guidance for the annual period ending December 31, 2019 using the modified retrospective adoption method and the lease guidance for the annual period ending December 31, 2020.

The Company has commenced the issue identification phase for Topic 606 and does not expect the new revenue recognition guidance to have a material impact on the Company’s consolidated financial statements. The Company is in the process of determining the impact of Topic 842 on its consolidated financial statements.

In August 2018, the FASB issued ASUNo. 2018-15, Intangibles – Goodwill and Other –Internal-Use Software (Subtopic350-40), 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 ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. 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 ASUNo. 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 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 is evaluating the impact, if any, that this pronouncement will have on the consolidated financial statements.

Venus Concept (VERO) 8-K/ACompletion of Acquisition or Disposition of Assets