Venus Concept Inc.

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 listen-only mode. Please note that 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 current expectations of management and involve inherent risks and uncertainties that could cause actual results to differ materially from those indicated in 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 joined today on the call by our Chief Financial Officer, Dominic 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 Dominic will provide with you with a more in-depth review of our quarterly financial results, our balance sheet, and our updated guidance for the full year of 2021. And then we will open the call to questions. With that overview in mind, let's get started with a review of our third quarter revenue performance and overall business trends. We reported gap 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 US customers, which offset 10% decrease in sales to international customers during the same period. We are very encouraged by our 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 with a tougher than expected operating environment in our global customer space 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 a $2.4 million of purchase orders from customers in APAC, EMEA, and Latin America that we were unable to deliver by quarter end. This backlog is directly a result of global supply disruptions related to COVID-19, specifically 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 revenues 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 revenues, system revenues, increasing 97%. By market, sales to aesthetic customers were the largest contributor to year-over-year growth by total subscription and system revenue, increasing 34%. year over year, 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 newer 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 2020, 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 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 to meet their needs. With respect to procedure trends in the third quarter, our real-time IoT data on our systems gives a strong visibility to the active device trends for a large portion of our medical aesthetic install base. This average usage per system data reflects consumer activity consistent with what most companies have reported to date. Specifically, U.S. usage persistent 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 with respect to 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 artist 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 of our artist 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, clearance, 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 technologies that can treat a broad range of common women's health conditions with our recent FDA 510 clearance of the Venus Freedom in October. Venus 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 Fiori 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 US 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 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 contouring capabilities, but also has a muscle stimulation element to the technology. This device addresses the three most in-demand body contouring procedures in one platform workstation. We expect this device will have a list price of approximately $250,000 and contribute contributing gross margins above company current averages. We intend to add on a modest but important utilization fee of approximately $100 per treatment. And importantly, we estimate that the time to ROI of just 33 weeks for our customers, which we expect will be extremely compelling to our clinicians. And 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 AMIE, our development project to create the next generation of robotic technologies for medical aesthetic applications, formally entered the clinical validation phase in recent weeks. 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. AIMEE 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 AIMEE device, a robotic non-stressor device that will potentially disrupt initially 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 a few thoughts on important change 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 15th, 2021. Ross assumed the responsibilities of Chad Ziering, who resigned from his role as Chief Commercial Officer for personal reasons. Ross joined Venus as Vice President of EMEA earlier this year and is an accomplished leader and industry veteran with more than 30 years of experience in the healthcare sector, including key positions at Candela, Luminous, Medicis, and amongst others. Our commercial team has not missed a beat during this transition, and 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's 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 the 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 Dominic Della Penna, who will provide a detailed review of our third quarter financial results and discuss our balance sheet and financial condition. Dominic?

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 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 to five 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. 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 a $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 31st, 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 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 gap 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 DNA of $5 million and non-cash stock comp 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. Operator?