Venus Concept Inc. Q3 FY2021 Earnings Call

Good morning, ladies and gentlemen and welcome to the Third Quarter 2021 Earnings Conference Call for Venus Concept. At this time, all participants have been placed in a listen-only mode. Please note this conference call is being recorded and that the recording will be available on the company's website for replay. Before we begin, I would like to remind everyone that our remarks and responses to your questions today may contain forward-looking statements that are based on the current expectations of management and involve inherent risks and uncertainties that could cause actual results to differ materially from those indicated, including those identified in the Risk Factors section of our most recent annual report on Form 10-K and 10-Q filed with the Securities and Exchange Commission. Such factors may be updated from time-to-time in our filings with the SEC which are available on our website. We undertake no obligation to publicly update or revise our forward-looking statements as a result of new information, future events or otherwise. This call will also include references to certain financial measures that are not calculated in accordance with Generally Accepted Accounting Principles or GAAP; we generally refer to these as non-GAAP financial measures. Reconciliations of those non-GAAP financial measures to the most comparable measures calculated and presented in accordance with GAAP are available in our earnings press release issued today on the Investor Relations portion of our website. I would now like to turn the call over to Mr. Dom Serafino, Chief Executive Officer of Venus Concept. Please go ahead, sir.

Thank you, operator and welcome everyone to Venus Concept's third quarter of 2021 earnings conference call. I am pleased to be joined today on the call by our Chief Financial Officer, Domenic Della Penna; and Ross Portaro, our recently appointed President of Global Sales. Let me start with a brief agenda of what we will cover during our prepared remarks. I will start with an overview of our revenue results in the third quarter. I will then provide a summary of our operating progress in recent months. And then Domenic will provide you with a more in-depth review of our quarterly financial results, our balance sheet, and our updated guidance for the full year 2021. And then, we will open the call to questions. With that overview in mind, let's get started with the review of our third quarter revenue performance and overall business trends. We've reported GAAP revenue of $24.6 million, up 19% year-over-year. The increase in total revenue year-over-year was driven by a 67% growth in sales to U.S. customers which offset a 10% decrease in sales to international customers during the same period. We are very encouraged by the overall demand trends we experienced during the third quarter, particularly in the United States. We saw continued improvements in system adoption trends in Q3 as well. While procedure trends were impacted by a tougher-than-expected operating environment that our global customers faced during the quarter, we were pleased to see strong recovery in procedure trends during the month of September. Unfortunately, our total revenue results for Q3 do not fully reflect the favorable underlying demand environment as our international revenue was impacted by $2.4 million of purchase orders from customers in APAC, EMEA, and Latin America that we were unable to deliver by quarter's end. This backlog is directly a result of global supply disruptions related to COVID-19, specifically as we have seen longer lead times and shortages in certain materials and components that are impacting our ability to manufacture the number of systems to meet the demand of our international customers. We have been working with our suppliers and third-party manufacturers to mitigate supply risks. And as of this week, we have already delivered $1.4 million of the quarter-end backlog. We intend to fulfill the majority of this remaining backlog during the fourth quarter of 2021 and the first quarter of 2022. We are understandably frustrated by these supply chain issues as they are masking the favorable demand trends we are seeing from customers around the world. To that end, if we had not encountered the supply chain issues, we would have reported total revenue growth of 30% year-over-year, and international sales growth of 9% year-over-year for the third quarter. Diving deeper into our revenue performance and trends we experienced during the third quarter. Third quarter total revenue growth benefited from a 22% increase in total subscription and systems revenue compared to the prior year. By region, the U.S. customers were the largest contributor to the year-over-year growth in total subscription and system revenues increasing 97%. By market, sales to aesthetic customers were the largest contributor to year-over-year growth in total subscription and system revenue increasing 34%, driven predominantly by a 32% increase in sales of our franchise aesthetic platforms, which are the Venus Legacy, Venus Versa and Venus Velocity, and a 119% increase in our sales of our new aesthetic platforms, the Venus Bliss and Venus Glow, both of which drive growth in sales and consumables. Our total system shipments increased 15% year-over-year in Q3, driven by 93% growth in shipments to customers in the U.S., reflecting continued improvement in the U.S. capital equipment environment during the quarter. System shipments under our subscription model increased 15% on a year-over-year basis in Q3 and represented 51% of the total global shipments in the period. As discussed on prior calls, the flexibility we have in our commercial model with unique pricing and payment options via our industry-first subscription model is an incredible lever that we have which differentiates us from competition. Importantly, this lever really empowers our commercial team to work with customers to identify not only the right technologies for their practices, but also the right business model for each individual clinic and to meet their needs. With respect to procedure trends in the third quarter; our real-time IoT data on our systems gives us strong visibility to the active device trends for a large portion of our medical aesthetic installed base. This average usage per system data reflects consumer activity consistent with what most companies have reported to date. Specifically, U.S. usage per system trends were softer in July and August, some of which related to normal seasonality, and we saw a nice recovery in usage during the month of September. Outside the U.S., we continue to see varying usage trends depending on the region of the world and the respective pace of recovery from the pandemic. Procedure trends in our hair restoration customers in the third quarter reflect a larger impact from seasonality this year with doctors returning to summer vacation activities with COVID restrictions eased compared to the third quarter of 2020. Procedures on our ARTAS systems in North America did show month-to-month improvements during the quarter but were basically flat year-over-year in Q3. Outside of North America, procedures on our ARTAS systems were down year-over-year for the quarter but did show strong improvements in September. Turning to a brief update on operating highlights in the third quarter. First, we continue to make notable progress in areas of new product development, clearances and commercialization. Following the receipt of Health Canada authorization for our Venus Fiore, Feminine Health System, in July, we are pleased to further expand our portfolio of technology that can treat a broad range of common women's health conditions with our recent FDA 510(k) clearance of the Venus Freedom in October. Venus Concept devoted nearly six years to developing this technology in order to create a comprehensive, safe and effective system that has the ability to treat a variety of different women's wellness issues, addressing important medical needs and supported with significant clinical data. We intend to sell the Venus Freedom using a unique utilization-focused business model, which we believe will make the return on investment of this system very attractive for both, Venus Concept and the OBGYN community. We began a limited launch of the Venus Fiore in Canada and the European Union in the third quarter of 2021, and we look forward to commencing a limited launch of the Venus Freedom in the U.S. during the first quarter of 2022. Our efforts to expand the Venus Bliss portfolio of systems and products continues to progress as well. We submitted our request for 510(k) clearance for the Venus Bliss Max at the end of September. Venus Bliss Max is a new device that not only includes fat reduction and body contour capabilities, but also has a muscle stimulation element to the technology. This device addresses the three most in-demand body contour procedures in one platform workstation. We expect this device will have a list price of approximately $250,000, contributing gross margins above the company's current averages. We intend to add on a modest but important utilization fee of approximately $100 per treatment. Importantly, we estimate the time to ROI at just 33 weeks for our customers, which we expect will be extremely compelling to our clinicians. This compares nicely to the 28-week ROI of the current Venus Bliss customers we are achieving to date based on the visibility we have from our IoT data on the platforms. We are now targeting a potential clearance in Q1 of 2022 and a commercial launch in early 2022. Our strategy to expand the potential addressable market for both, the existing Venus Bliss and eventually, the Venus Bliss Max also continues to progress. Specifically, we are on track to targeting large areas of the body and specific indications of use. Securing these additional clearances will allow us to fully market key differentiators of the Venus Bliss and the Venus Bliss Max optimizing our potential for increased market share in the largest and fastest-growing area of the aesthetic market. We are targeting submission for these additional clearances in early 2022 with commercial introductions in Q2. We are pleased to announce that AIme, our development project to create the next generation of robotic technologies for medical aesthetic applications, has recently entered the clinical validation phase. We have finalized the protocol for our human clinical study, which is now available on clinicaltrials.gov and we are working through training and IDE approvals for our three clinical investigator sites. We expect to begin enrollment of up to 60 patients in December, and we intend to submit FDA clearance as soon as possible upon completion of the study, which depending on the pace of enrollment is expected to be by the end of Q3 2022. Since our last earnings call, we completed commercial design and finalized the look and feel design options of the device. AIme will consist of a cart, and a six-axis robotic arm, and vision system which features automation to track and adapt to the curve of body surfaces. We are very excited about the prospects for our AIme device, a robotic technology that will initially disrupt the skin tightening and directional lifting market with plans to add additional clinical applications in the years to come. Firstly, I want to share also some thoughts on important changes in our leadership that we announced last month. We announced the appointment of Ross Portaro to the position of President of Global Sales, effective October 15, 2021. Ross assumed the responsibilities of Chad Zaring, who resigned from his role as Chief Commercial Officer for personal reasons. Ross joined Venus as President of EMEA earlier this year and is an accomplished leader and industry veteran with more than 30 years of experience in the health care sector, including key positions at Candela, Luminous, MetaSys and others. Our commercial team has not missed a beat during this transition. In fact, we are encouraged by the positive feedback from the team who appreciates Ross's strong pedigree in the medical aesthetics market, and his passion for leading a commercial strategy centered around differentiated products in large and growing procedure categories, as well as Venus' commitment to the development and commercialization of disruptive robotic technologies in the medical aesthetic and hair restoration market. We are confident that Ross's reputation will also help us attract high-level industry talent over time. So to summarize the third quarter results, we are very encouraged by the overall demands we experienced during the third quarter, particularly with respect to system sales, while procedural trends were impacted by a tougher-than-expected environment that our global customers faced during the quarter; we are pleased to see a strong recovery in procedure trends during the month of September. Our global sales team continues to increase the qualified pipeline of new prospects across the full product portfolio, which gives us confidence in our increased revenue growth expectations for the balance of 2021. Our third quarter leases and systems revenue results, particularly in the U.S., combined with a strong qualified pipeline we are actively managing today were the primary drivers of the increase in our full year 2021 guidance, which now calls for total revenue in the range of $104 million to $107 million, representing an increase of approximately 33% to 37% year-over-year. We are confident in our outlook for 2021 based on our belief that we have the right product portfolio and the right commercial strategy, which has us extremely well positioned for future success in the near to intermediate term. With that, let me turn the call over to Domenic Della Penna, who will provide a detailed review of our third quarter financial results and discuss our balance sheet and financial condition.

Thanks, Dom. Given Dom's detailed review of our revenue results, I will begin with a review of our financial performance across the rest of the P&L. For the avoidance of doubt, unless otherwise noted, my prepared remarks this afternoon, sorry, this morning, will focus on the company's reported results for the third quarter of 2021 on a GAAP basis, and all growth-related items are on a year-over-year basis. Gross profit increased $3.8 million or 28% to $17.3 million. Gross margin was 70.5% compared to 65.3% of revenue in the third quarter of 2020. The increase in gross margin was primarily driven by higher sales of Venus consumables and improved revenue mix of system sales sold under our subscription program, primarily tracing to Venus Bliss and the discontinuation of our two advertising agency services. Total operating expense increased $3.9 million or 21% to $22.7 million. The increase in total operating expenses was driven by an increase of $3.1 million or 55% in sales and marketing expenses, and to a lesser extent, an increase of $0.7 million or 6% in general and administrative expenses, and an increase of $0.1 million or 4% in R&D expenses compared to the third quarter of 2020. Total operating loss increased $0.1 million or 2% to $5.4 million. Net loss attributable to stockholders increased $2.6 million or 35% to $9.8 million. Non-GAAP adjusted EBITDA increased $2.2 million or 155% to $3.5 million. We have provided a full reconciliation of our GAAP net income to adjusted EBITDA in our press release this afternoon today. Turning to the balance sheet; as of September 30, 2021, the company had $15.8 million of cash and cash equivalents and total debt obligations of approximately $77.8 million compared to $34.3 million and $79.6 million, respectively as of December 31, 2020. The change in cash for the three months ended September 30, 2021, was driven primarily by $7.3 million of cash used in operating and investing activities. We have significantly improved our cash performance during the first nine months of 2021. Our cash used in operations in the first nine months of 2021 declined 33% year-over-year, driven primarily by a reduction in our net loss, and a 36% decline in cash used in working capital compared to the prior year period. Note, our use of cash in the working capital line includes proactive investments in recent months to build safety stock of our longer lead-time components given the global supply chain issues in 2021. Turning to a review of our guidance. As detailed in our press release this morning, we updated our revenue guidance for the full year 2021 period. The company now expects total revenue for the 12 months ending December 31, 2021 in the range of $104 million to $107 million, representing an increase of approximately 33% to 37% year-over-year. While we are not providing formal profitability guidance for the full year 2021, we would like to offer the following considerations for modeling purposes. First, given the strong gross margin performance over the first nine months of 2021, we now expect our gross margins to be in the range of 69% to 70% in 2021 compared to 68% to 70% previously. Second, we continue to expect GAAP operating expenses of approximately $88 million, representing a 26% decrease year-over-year. Importantly, this represents approximately $94 million of normalized operating expenses in 2021, which excludes certain items that impacted our GAAP operating expenses in 2020 and 2021, including non-cash goodwill impairment, incremental bad debt expense and recoveries, and the non-operating non-recurring items related to retention, severance and other legal expenses which together represented approximately $2.3 million of costs and expenses last year. All of these items were detailed in our non-GAAP adjusted EBITDA reconciliation tables in 2020. Third, we expect our interest expense to be approximately $5 million given the lower borrowing costs and debt obligations compared to the prior year. Fourth, we expect non-cash G&A of $5 million and non-cash stock compensation of approximately $2.5 million. Fifth, we continue to expect our weighted average shares outstanding to be approximately $54 million. With that, operator, we will now open the call to your questions.

Thank you. Our first question will come from Jeffrey Cohen with Ladenburg Thalmann.

Hi Dom, Domenic and Ross, how are you?

Hey, good morning. How are you?

Great, thanks.

Just a couple from my end. So firstly, could you discuss the backlog a little bit? So it sounded like $2.4 million, you're unable to pull through as far as production and manufacturing, and you picked up $1.4 million of that thus far in the fourth quarter. Do you expect the balance to come through by the end of the year or how does that change look as far as the manufacturing components are?

Yes. Thanks for the question, Jeff. I think that there are a couple of factors related to this particular topic. Yes, we have, in fact, filled $1.4 million. We had a resurgence in some of our legacy items, including our Venus Legacy product and Velocity. The majority of the business that represents that $2.4 million came from our distributor network in EMEA, Latin America and APAC. As we said, $1.4 million has been filled. We expect a large portion of the other $1 million outstanding to be captured in Q4 but there will be leakage into Q1 for sure based on our current visibility to our supply chain.

And the leakage is coming from last quarter? Or do you expect to have further orders in the fourth quarter that also spill into the first quarter?

Yes, I believe that our product mix and the improved sales forecasting under Ross' leadership are definitely helping us. We are not facing shortages of specific SKUs this quarter. Overall, we should be in a strong position based on our current knowledge and the finished products we have received. When I refer to leakage, I'm talking about large orders from suppliers that we will partially fulfill to keep them progressing. There is a balance in global inventory requirements, including in North America, where we are experiencing a significant increase in demand for some of our established products, such as the Venus Legacy and Velocity. Some of the $1 million will carry over into Q1, although we don't have an exact figure yet; I would estimate that about 50% of that amount will be in Q1.

Got it. And then secondly, could you clarify the difference between the Fiore and the Freedom as you talked about? The Fiore is ex-U.S., Freedom is U.S.; is there a difference in the technology?

There is absolutely no difference in the technology. It was really more of a pathway for regulatory clearances and creating a separate brand for the U.S. market compared to the specific labeling that we have for Venus Fiore in the CE markets and Health Canada, and Rest of World; but it's exactly the same technology.

Got it. Okay, that does it for me. I'll jump back in queue. Thank you.

Okay. Thanks, Jeff.

Our next question comes from Marie Thibault with BTIG.

Hi, good morning. Thank you for taking the questions. I did want to just follow up on the international portion of the business and hear a little bit more about excluding some of the supply chain disruptions during the quarter; how the international commercial strategy is progressing? I understand that some markets have been consolidating; I mean you've been focusing on some of the faster-growing markets. So I'd love to hear a little bit about how that progressed during the quarter.

Yes, that's a great question, Marie. As you may remember, at the beginning of the year, we had 29 direct offices. Now, as part of our restructuring post-COVID, we are down to 18 direct offices, which we believe present the best opportunities for sustained growth. In Q3, we experienced a temporary slowdown, not due to a lack of demand—demand remains strong, as seen in North America—but rather due to our ability to deliver products to meet the needs of our direct offices. We had to prioritize the allocation of technologies, which affected our product availability in European, APAC, and Latin American markets, resulting in our distributors not receiving the products they needed. While our direct offices performed well in Q3, we did face a temporary setback in our distributor channel overall.

Okay. That's well understood, Dom. I guess I'll ask a follow-up here then on CRE Freedom.

Sure.

When it comes to targeting some of those customers, it's a different call point than we're used to with much of the rest of your portfolio. So I'd like to hear about some of the investments you're making perhaps on the sales force side or how you're thinking about targeting those new customers? And thanks for taking the question.

Sure. Thanks, Marie. We plan to approach the Venus Freedom and Fiore in a way that's similar to how we handled the ARTAS portfolio. We've decided there needs to be a specialized sales organization for this. For the ARTAS system, we assigned one expert to each region in North America, totaling seven experts. We're applying the same strategy for Venus Fiore and Venus Freedom, ensuring that these experts have a strong background in the OBGYN market. The way we are structuring our business model for the OBGYN community will be appealing, and we believe it will lead to substantial growth in usage for this category. Historically, the area of female wellness and health has shown significant success in terms of usage and revenue growth. We believe that our development of technology aimed at various clinical needs will be well-received globally, backed by substantial clinical support, validating our six-year journey to bring the product to market.

Thank you.

Our next question is from the line of Suraj Kalia with Oppenheimer & Company.

Good morning, Dom, Dominic, Ross. Can you hear me, all right?

Yes, we can. Thank you. Thank you, Suraj.

Perfect. I hope everyone is safe and healthy. So, Dom, specifically regarding the supply issue, on a macro level, it seems like it's not going to improve anytime soon; these challenges are likely to continue. I'm interested in understanding how your decision-making process looks when dealing with supply issues. Is it primarily based on FIFO, or could you explain how you approach this? In case similar supply issues arise again, whether in Q1 or Q4, how do you manage them?

I understand your concern, Suraj. It seems that every time we check the news, there's a mention of supply chain challenges. In our situation, we were taken aback by the unexpected demand for key products like Venus Legacy and Velocity. We've observed a notable increase in demand, especially in international markets through our distributor networks, partly due to competitors exiting certain markets like cellulite and hair removal. We’ve been fairly proactive with our production planning and have invested in inventory for items with long lead times. Overall, we believe we've managed these challenges well so far and while there may be some minor impacts on our expected Q4 demand, we've effectively navigated surprises in select categories. Regarding FIFO, that is somewhat applicable. We focus on areas with strong demand, higher profit margins, and direct customer service. In Q3, our European and international business faced some difficulties as we had to prioritize shipping available products in response to the surge in specific categories from the historical Venus line. Currently, I believe we're managing this increase pretty effectively, and I don't expect the impact to be overly significant moving forward.

Got it. Hey Dom, maybe you could give us a qualitative aspect of Venus plus adoption? And more specifically, I'm interested in the assumptions made for Bliss Max, so for 33-week payback versus a 20-week or something like that for the Bliss, if you can just kind of walk us through what are your utilization assumptions?

Yes. So this is one of those categories where it's not an anecdotal commentary from my part, it's factual on data that we draw from all of our devices that are in the field globally; so we can benchmark regions, how they're performing. And consistently since we launched the Bliss, even with a very significant increase in user base, the per store sales have been quite impressive. And so what that means is, that on average a clinic is doing somewhere between 5 and 6 fat reduction treatments a week with the current Bliss system, and we don't see any reason why that would be differentiated with the Venus Bliss Max. And currently with the Venus Bliss, about double that in the body contouring; so 5 to 6 on the fat and 5 to 10 or so on the body contouring, which is an element of the total treatment protocol. And that payback period right now based on the ASP of the device globally and based on what the clinics typically charge for these procedures, whether they're individual costs or bundles is about 26 weeks. The assumption that we made on the Venus Bliss Max is that by adding a third element, and we'll be the only platform in the market that will actually have a full body contouring workstation that will not only reduce fat, contour the tissue where the fat was reduced, as well as create muscle definition through our muscle stim device; we think that moving from 26 to 30-33 weeks is a safe assumption based on our current global trends store-for-store with the Venus Bliss and the extra 6 or 7 weeks is really taken into consideration the intended or anticipated higher ASP. Additionally, what we will have is, as we've said in our prepared remarks, about $100 charge every time a treatment is being done with the muscle stim portion of the device at a very high margin.

Got it. And final from my side, Dom, and I'll hop back in queue. AIme is supposed to be a 510(k) or de novo 510(k)? Thank you for taking my questions.

It will be a 510(k). We have a strong belief that we'll be able to predicate our own ARTAS device and recent clearances from competitors. We've spoken with the FDA, we have a pretty good understanding of the track that we need to follow, and we're quite encouraged with what we're seeing with that device now that we have design stopped and we're ready to move forward in our clinical trials.

Thank you.

My pleasure.

The next question is from Jon Block with Stifel.

Thanks, guys. Good morning.

Good morning, Jon.

Maybe just to start on ARTAS, I know you mentioned some consumable headwinds year-over-year; I think more notably in the international markets. Can you just talk about the utilization expectations for that key product line going forward, Dom? And also, with what you're willing to say about ARTAS Capital sales specific to the quarter; you might not break it out specifically, but what was ARTAS in the quarter as a percent of total revenue? Was it in and around that 25% OBGYN? I'm guessing just based on some of the commentary it might have been below. Thanks.

Yes, John. Thank you for the question. Regarding utilization, we noticed in early September that doctors were starting to take vacations, especially in hair restoration clinics where procedures are longer and require their involvement. It seems doctors reached a point where they felt the need for time off, and this trend was particularly noticeable in August. However, we saw a strong recovery in utilization in September, which has continued into October and November. We believe the earlier dip was typical for the softer Q3 period, which is traditionally the weakest quarter in our industry. In terms of our device business, we've historically indicated that it usually represents about 40% to 45% when combined with our Bliss product. In Q3, however, the ARTAS segment was softer, bringing the overall figure closer to 35%. We did face some shipment delays for the ARTAS system at the end of the quarter, not due to supply chain issues, but rather due to documentation and financing requirements. We were disappointed with ARTAS's Q3 performance, but with our early progress in Q4, where some of the delays were resolved and deals were closed, we feel confident that we're back on track with the ARTAS system.

That's great. That's very helpful color, thank you. And then maybe just to shift to the pipeline; the clinical trial for AIme, a bunch of good color there, Dom, thanks. It does seem like a little bit of a push on the timeline. One, is that correct? And then, what's that attributable to? In other words, is it just a function of a little bit more time getting the trial up and running? Or are you leaving yourself some more room in terms of the pace of enrollment?

Yes, I believe it's a combination of both factors. Regarding your last question, we made a strategic choice to change two of the doctors involved in our multicenter clinical trial. This decision wasn't a reflection on the doctors' abilities; rather, as we assessed their capacity to enroll patients and meet our timelines, we realized they couldn't fulfill those requirements. Simultaneously, we received numerous inquiries from various doctors in the dermatology and plastic surgery fields, which gave us confidence that we could enhance AIme's visibility after the clinical trial through presentations and peer-reviewed publications. We're enthusiastic about the quality of physicians now interested in serving as clinical sites. Regarding the supply chain, it did pose challenges for building four platforms for the clinical trials—three for sites and one backup. We have one system ready, and we're currently moving it around to ensure the doctors become familiar with the device. Ideally, we'd prefer stationary devices, but we faced supply chain issues acquiring key components in sufficient quantities for these devices to facilitate the clinical trials. So, it's a mix of factors, but overall, we are optimistic about this product's trajectory and the timeline to bring it to market in 2022. Moreover, we're beginning to recognize the potential for this platform in other clinical applications. Essentially, the platform is being developed as a customizable tool, allowing users to select different clinical indications through a software algorithm, which is quite exciting. This is a significant reason why the caliber of doctors looking to participate has greatly improved.

That's great. And last one for me, I don't know if this is a fair game. But Ross, I believe you're on the call, congratulations on the role. Is there anything to call out? And I know it's early, but at a high level that you think can be done differently? Anything in particular that you're very excited about, more or less emphasis on certain product lines; we'd just love to hear, again, a fair game, your initial thoughts on the organization. Thank you.

Ross, would you like to respond to that? Are you there? It seems like you might be muted. Jon, I think he may be having some issues with his connection because he...

I'll follow-up, all good. Thank you.

Yes, we'll follow up on the call, but he will be on, though I think he is traveling, so he may have encountered a little difficulty. Just to clarify, Ross has been with the organization for about five months, as he started in EMEA and then moved to North America due to the need to reset the organization there. We'll discuss this further on our ongoing calls.

That's great. Thanks for the color guys.

No problem, John.

Our next question is from Anthony Vendetti with Maxim Group.

Hey, good morning. Anthony.

Hey, good morning, Dom. How are you?

I'm good, thanks. We're good.

I have two questions; one about Venus Bliss Max and another regarding the supply chain. For Venus Bliss Max, I want to confirm the timeline since it seems like a major growth opportunity for 2022. Can you discuss the FDA 510(k) submission, including the exact timing and expected clearance? I believe you mentioned it would be cleared in the first quarter of 2022 and that commercialization would occur in the second quarter. Am I correct about the timeline, or can you please clarify?

We submitted our application to the FDA on September 30. About ten days ago, we received some feedback from them that required clarification, which we have addressed and will be resubmitting shortly. We expect that these questions have caused a slight delay, but we anticipate receiving FDA approval early in the first quarter, possibly by late January or mid-February. We have a production plan for around 15 systems that will be ready in the first quarter. However, we expect a full release in the second quarter, which will be staggered. The initial 15 units will be allocated to key strategic partners and thought leaders who can quickly demonstrate commercial success and share their experiences with potential new customers. This is why we are aiming for a full release in the second quarter. I hope this clarifies your question.

Yes. No, that's great color. That's very helpful. So the 15 systems in 1Q that are going to be available, those would be the KOLs and then full commercial release.

Yes.

Okay, good. And then, look, every industry is having different supply chain issues. And I'm curious, with the supply chain issues that are out there, whether it's shipping or so forth, you still were able to have a 70% gross margin here in the third quarter and you're guiding towards 69%, 70%. So is the supply chain issues more of a timing situation for Venus Concept? Or are you seeing actual impact on the cost of your goods going forward?

We haven't encountered a significant increase in device costs due to our contractual commitments with suppliers, which has allowed us to maintain our gross profit margins, particularly on our Venus products that traditionally yield high returns. Regarding supplier challenges post-COVID, it's akin to the empty streets in Manhattan; some suppliers struggled to navigate the disruptions of 2020. Consequently, we had to seek alternative sources for essential components, which involves a compliance process including safety testing. This is comparable to developing a new product when changing a component on a platform. Although we experienced some of these issues, they did not impact our main growth drivers like Venus Bliss or ARTAS, but rather some unexpected items that saw a significant resurgence in Q3. While it's promising to see older products in our portfolio gaining renewed interest, which underscores the technology's quality and clinical efficacy, it did create a challenging situation for us.

Okay, great. Thanks for that color.

And lastly, Anthony, I want to confirm that the margins were positively impacted by the product mix, correct? This includes better contributions from the Venus Glow, Venus Viva, Versa, and certainly the ARTAS. I believe this will continue to enhance our margins over the next three to four quarters.

Okay, that's helpful.

And Anthony, we also improved or increased our safety stock levels on certainty components such that we secure our Q4. So we're feeling a lot better about the fourth quarter, and that was part of the working capital build in the third quarter was in order to secure that supply because we were pretty tight entering the third quarter but we wanted to be able to match that fourth quarter demand, which for us is quite strong with sufficient inventory. So that explains some of the working capital impact.

Okay, great. Thank you very much.

Our pleasure, Anthony.

We are currently showing no additional participants in the queue. That does conclude our conference for today. Thank you for your participation.