Venus Concept Inc.

Please stand by. Good day, ladies and gentlemen, and welcome to the second quarter 2022 earnings conference call for Venus Concept, Inc. At this time, all participants have been placed in a 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 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 10-Q and our annual report on Form 10-K 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 the 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 second quarter of 2022 earnings conference call. I'm pleased to be joined today by our Chief Financial Officer, Dominic Della Pena, and Ross Portaro, our 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 second quarter and a discussion of the initiatives we have implemented to focus our commercial strategy, streamline our global operations, and enhance the cash flow profile of the company. Then Dominic will provide you with a more in-depth review of our quarterly financial results, our balance sheet, and our guidance for full year 2022, which we updated in today's press release. And then we will open up the call to your questions. With that overview in mind, let's get started with a review of our second quarter revenue performance and overall business trends. We reported gap revenue of $27.3 million, up 6% year over year. The increase in total revenue year-over-year was driven by 7% growth in sales to U.S. customers and 5% growth to sales to international customers in that period. Total systems and subscription revenue increased 9% year-over-year in Q2, and our procedure-related disposal revenues increased 2% year-over-year, excluding our discontinued Virografter revenues from the prior year period as we exited that business in Q4 of 2021. Importantly, our total revenue growth in Q2 was driven by the key franchises we prioritized as part of our commercial strategy we have discussed in recent investor calls. Specifically, excluding Vero and Grafters program revenue, sales in our growth franchises increased 13% year-over-year in Q2, fueled by continued strong demand for our Bliss Max following the initial commercial launch in March, and our Artis IX robotic system adoption was strong this quarter, posting 58% growth year-over-year on system sales. While we were pleased to see continued strong demand for products in our growth franchise in Q2, our total revenue results were below expectations. We experienced significant Salesforce disruption in a key U.S. market that had material impact on our results. This was a leadership issue in this key U.S. market, which unfortunately drove regrettable turnover in our sales team and lower Salesforce productivity in this U.S. market during the quarter. We have since consolidated sales leadership to address this issue and have rebuilt the sales team in this key U.S. market aligned with our core values and our sales strategy. That said, we are very encouraged by the strong results in the rest of the U.S. market in Q2. Our team outside of the market where we had disruption delivered growth in subscription and system sales of 24% year over year and continues to build a very strong qualified pipeline. The results validated our enthusiasm heading into the second quarter. We had experienced significant growth in qualified pipeline as we entered Q2 and we were ready to capitalize on the improved operating environment with confidence in our belief that we had the right product portfolio and the right commercial strategy which had us extremely well positioned for our future success. The softer than expected total revenue in Q2 did not change our level of conviction and commitment to driving improving profitability and enhancing our cash flow profile of our business. In fact, we undertook a comprehensive review of our business and our updated expectations for potential growth and profitability in all regions of the world in which we operate. We have developed a series of strategic initiatives to further enhance the cash flow profile of our business and to accelerate our path to long-term sustainable profitability. These strategic initiatives are already being implemented and we expect to realize benefits to our cash flow profile in the second half of 2022. The strategic initiatives we are implementing fall into two brackets, a more focused and targeted commercial strategy and streamlining of our global operations. With respect to the more focused and commercial strategy, we will continue to arm our direct sales team in the U.S. with programs and messaging focused on key product lines, including those with meaningful recurring revenue streams. We are prioritizing our cash system sales to maximize the potential profitability and cash flow that our highly differentiated technology should contribute as we address the continued strong demand in the U.S. market. Note, we are not shelving our industry first subscription model. We will continue to offer this differentiated business model for certain products in certain geographic markets going forward. We will, however, bring a more disciplined approach to the subscription model going forward, specifically stricter pricing and credit qualifications to ensure our total company financial results are not overly exposed to fluctuations in the global macro and interest rate environment. We expect these commercial initiatives to result in a material shift in our mix of systems and subscription revenues, and we are targeting more than a 75% system sales to be cash sales in the second half of 2022 compared to 49% in the first half of the year. We have aligned our Salesforce compensation plan to support this, and we expect the team to fully embrace this important strategic initiative. While the expected shift towards cash sales has an impact on our total revenue expectations for 2022, the improvement in our cash flow conversion in the second half of 22 justifies our efforts in this area. Now, with respect to our efforts of streamlining our global operations, based on comprehensive review of international markets, we plan on a series of actions that may include closing offices, investing, reorganizing, and eliminating redundant operations over the balance of 2022. Our growth and profitability objectives in this coming years cannot support unprofitable operations in international markets. While these activities are expected to represent a modest impact on our total revenue results in 2022, it will reduce our operating expenses in the second half of the year and materially reduce our annualized expenses in 2023. As you may recall, we implemented a restructuring of our global commercial footprint in 2020 including divesting our interest in smaller, less profitable international markets and reinvesting those resources in higher opportunity markets like North America and key countries direct in EMEA. Dominic will provide you additional financial detail on these initiatives, as well as additional areas of where we are working to optimize our go-forward operating expense and cash flow profile to support our focus on becoming a sustainably profitable entity in the future. Before I turn the call over to Dominic, I wanted to provide you an update on the progress we are making in the areas of new product development, clinical validation, regulatory clearances, and commercialization. In April, we announced the receipt of a new 510K clearance to market the BlissMax with an expanded indication for use in new areas of the body and an increased RF energy output. This new clearance further expands our single-body contouring workstation's versatility and utility with its indications for use to include non-invasive lipolysis of the back and thighs in addition to the abdomen and flanks. And by increasing the maximum ORF energy output by 50%, BlissMax offers physicians more efficiency and flexibility in treatments which we believe will provide even stronger clinical results and ultimately increase the revenue for our customers. The early market response to Bliss Max has been notable, and sales of this highly differentiated body contouring workstation have been strong during the initial commercial launch. We continue to expect sales of Bliss Max in the U.S. and Bliss outside of the U.S. to drive strong contributions to total company growth in 2022. Finally, we are proud of the continued progress we have made in recent months to advance our development, regulatory, and clinical strategy for AIME, our non-surgical robotic technology platform for medical aesthetic application. We announced a 510 submission for the general indication of tissue excision and skin resurfacing on March 31st and have been engaging with the FDA during the review of our submission. We continue to believe that Amy has the potential to bring true innovation to the medical aesthetics market by changing the way procedures are performed and bringing a new level of speed, safety, and clinical predictability to our customers. The prospects for AAMI are very compelling, and we look forward to introducing this disruptive technology. It is important to remember that the AAMI platform is just that, a platform that has been designed to support numerous different clinical indications via a unique upgrade path for the clinicians, making it extremely cost-effective and differentiated from any products currently available in the aesthetic device market today. In parallel to the process of submitting for general indication for tissue excision resurfacing, we have also made progress towards the strategy to secure specific clinical indications for AME for treatments on the face. We are pursuing an IDE clinical study evaluating the safety and efficacy of using AME for the treatment of moderate to severe facial wrinkles. We announced first patient treatments in April, and our four investigational SARTs are busy enrolling and treating 70 patients for this study. This study will support our 510 submission for specific clinical indications for treatment of wrinkles and cheeks, which will further expand our annual addressable market opportunity to enhance our long-term growth profile. Now with that, let me turn the call over to Dominic Della Penna, who will provide a detailed review of our second quarter financial results and discuss our balance sheet, financial condition, and our updated 2022 guidance. Dominic. Thank you, Don.

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 will focus on the company's reported results for the second quarter of 2022 on a gap basis, and all growth-related items are on a year-over-year basis. Growth profit increased 0.3 million, or 2%, to $19 million. Gross margin was 70% compared to 72.5% of revenue in the second quarter of 2021. The change in gross margin was driven by changes in mix as well as by changes in foreign currencies, which depreciated relative to the US dollar in the period. Total operating expenses were 26.2 million compared to 17.2 million in the second quarter of 2021. The change in total operating expenses was driven by an increase of $6.4 million, or 82%, in general and administrative expenses, an increase of $0.4 million, or 20%, in research and development expenses, offset partially by a decrease of $0.6 million, or 6%, in sales and marketing expenses. In addition, in the three months ended June 30, 2021, operating expenses included a bad debt recovery of $3.2 million, due to a reactivation of accounts impacted by COVID-19, which did not repeat and the three months ended June 30th, 2022. In fact, our GAAP operating expenses include an additional $2 million reserve for bad debt expense compared to what our prior guidance had assumed. The prior year period also included a $2.8 million non-cash gain on forgiveness of government assistance loans, which did not benefit our gap OPEX in the second quarter of 2022. Excluding the impacts of bad debt expense and recovery in both periods, as well as the non-cash gain last year, our non-gap operating expenses increased 1 million or 4% year over year. We believe this better reflects our efforts to prudently manage our expenses in the current high inflation environment. In addition, we continue to prioritize the strategic investments we are making in support of our key growth initiatives, including our commercial launch of the BlissMax and our development regulatory and clinical programs for AAMI. As Dom mentioned earlier, we've implemented a series of initiatives to streamline our global operations, reduce our operating expenses, and improve our cash generation. While these initiatives are intended To enhance our multi-year financial profile, we expect to realize early benefits of these activities in the second half of 2022. Specifically, by prioritizing cash system sales, we significantly improve cash flow in the second half while minimizing the economic risks we face in this high inflation setting. We now expect gap operating expenses of approximately 95 to 97 million for the full year 2022, compared to our prior guidance, which had assumed gap OPEX in the range of $98 million to $101 million. Returning to a review of our second quarter financial results, total operating loss was $7.1 million compared to income of $1.5 million in the second quarter of 2021. Net loss attributable to stockholders for the second quarter of 2022 was $10.6 million or 16 cents per share compared to net income of 0.4 million for the second quarter of 2021. Adjusted EBITDA loss for the second quarter of 2022 was 5.5 million compared to adjusted EBITDA of 0.5 million for the second quarter of 2021. As a reminder, we have provided a full reconciliation of our GAAP net loss to adjusted EBITDA loss in our earnings press release. Turning to the balance sheet. As of June 30th, 2022, the company had 10.5 million of cash and cash equivalents and total debt obligations of approximately 77.5 million compared to 30.9 million and 77.8 million respectively as of December 31st, 2021. Cash used in operations for the six months ended June 30th was 19.8 million which is flat compared to the prior year period. As discussed on our recent calls, the use of cash to date is directly related to our strategic initiative, which prioritized investments in inventory and advances to suppliers to ensure our ability to meet customer demand as we move through 2022, given the realities of ongoing supply chain challenges. We continue to expect improved working capital trends as we move through 2022. Turning to a review of our updated guidance. As detailed in our press release, we updated our revenue guidance for the full year 2022 period. The company now expects total revenue for the 12 months ending December 31st, 2022 in the range of $110 to $113 million, representing an increase of approximately 4% to 7% year-over-year compared to total revenue of $105.6 million for the 12 months ended December 31st, 2021. For modeling purposes, we would like to offer the following considerations to help investors understand the underlying assumptions driving our 2022 growth and profitability targets. First, our updated total revenue range reflects the following. The largest driver of the change in our guidance range, representing roughly two thirds of the total revision, comes from our strategic initiative to drive more cash flow from the sale of our systems, specifically in shifting our revenue mix towards cash sales versus subscription sales. As Dom mentioned earlier, while the expected shift towards cash sales has an impact on our total revenue expectations for 2022, the improvement in our cash flow conversion in the second half of 2022 justifies our efforts in this area. The remaining one-third of the revision to our 2022 revenue guidance range comes from the combination of the softer than expected sales results in the second quarter and the impact of our strategic initiatives to streamline our global operations, specifically the transition from a direct to distributor-based sales model in certain international markets during the second half of 2022. With respect to the updated assumptions supporting our P&L expectations for 2022, we now expect gross margins of approximately 67% compared to 70% in 2021. The year-over-year change in gross margins continues to reflect impacts from changes in mix as well as the inflationary headwinds discussed on our prior calls. Our updated gross margin range also includes the impact of changes in exchange rates compared to the prior year period. We now expect total GAAP operating expenses of approximately $95 to $97 million, representing growth of 7% to 9% year over year, compared to our prior guidance range of $98 million to $101 million. The revised GAAP operating expense range reflects The incremental bad debt expense realized in Q2 2022 which was not contemplated in our prior guidance range and continued prudent expense management of our expenses in order to prioritize the strategic investments, we are making to support our key growth initiatives. It also reflects the early benefits of the strategic initiatives, we have implemented to streamline our global operations. which we estimate together represent roughly $5 million to $6 million of savings over the second half of 2022. Importantly, these initiatives were designed to enhance our multi-year financial profile, and thus we expect to realize approximately $10 million of GAAP operating expense reduction on a full-year basis in 2023. We now expect interest expense of approximately $4.5 million compared to $4 million previously, driven by higher interest rate assumptions on our variable rate debt. There are no material changes to other modeling considerations we shared on our last earnings call. We continue to expect non-cash DNA of 4.5 million, non-cash stock comp of approximately 2.4 million, and weighted average shares outstanding to be approximately 64 million. Finally, our updated total revenue guidance range for the full year 2022 includes the assumption that third quarter total revenue will be in the range of $24 million to $25 million. With respect to our efforts to secure non-dilutive financing, we are in discussion with potential partners interested in the more than $73 million of current and long-term trade receivables on our balance sheet. By way of reminder, current subscription agreements are reported as part of accounts receivable on our balance sheet each quarter. These accounts receivable do not bear interest and are typically not collateralized. We believe the potential cash infusion from a factoring agreement represents an attractive non-dilutive financing option for the company. With that, operator, we will now open the call to your questions. Operator?