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?

Thank you. If you'd like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. We do ask that you please limit yourself to one question and one follow-up question. If you would like to ask additional questions, we invite you to add yourself to the queue again by pressing star 1. And our first question will come from the line of Jeffrey Cohen with Lattenberg Thalman. Please proceed with your questions.

Hi, Dominic and Ross. How are you?

Good morning, Jeff. We're good. Good morning.

Good morning. I guess the first question is, could you dive in a little bit on the Salesforce disruption? It was one geography within the U.S. representing what percent of the U.S. and how many individuals, and where are you as far as advancing a new Salesforce into that territory?

Yeah, so Jeff, no, hold on, hold on, Ross. Just for competitive reasons, we're not going to get into the specifics of the geography. We will say that we were disappointed with the leadership. It didn't really fit with, you know, sort of the direction and the consistency in the company's, you know, desires to continue to grow the business. It did impact a number of sales reps once we identified this issue. It was unfortunately late in the quarter, and it did significantly impact the overall performance of that particular region. Now, that said, I think it's really important to identify that the team outside of this particular market did show a very significant 24% year-over-year growth and has continued to build a very strong pipeline. The leadership that was running that particular region has now been homogenized, if you will, over the entire U.S. territory. And we feel very comfortable based on where we are right now with the team. And I'm happy to say that the majority of the team that exited during this very difficult period of time has been replaced in the region. And we do feel comfortable as we go forward that these individuals will get their feet under them and will be able to contribute certainly in the back half of 2022.

Okay, got it. Can you talk a little bit about supply chain challenges? It looks like your margins for the second quarter held up rather well, but it sounds like you do have some challenges in the back half. Could you talk to us a little bit about what's going on out there and why it didn't impact Q2, but you expect it to impact the latter part of the year?

Sure, people handle that. So, Jeff, what we're anticipating in the second quarter is, sorry, the second half is more of the same in terms of FX. So we had roughly a $1 million FX impact in Q2 with most major currencies depreciating vis-a-vis the U.S. dollar. So we expect that to continue. And the impact of exchange is worth about 100 basis points. In addition, we expect inflation to have an impact of between 80 and 100 basis points. And then thirdly, we're expecting mix to have an impact of between 100 and 120 basis points. So that collectively is about 300 basis points relative to the 70% we experienced in Q2. Now, I can offer the additional insight in relation to the cash versus subscription split So we pulled down our revenue guidance in the second half, but that guidance has not necessarily been pulled down for the hair side of the business. So the artist side in particular is not impacted because that's a fully cash business anyway. But because artists have slightly lower margins, then the subscription side of the business, when you pull the one lever down and you hold the artist side, which is still continuing to perform very strong, that's where you get a slight bit of mixed impact of approximately 100 basis points. And then the balance is inflationary impacts, which up to date we've managed pretty well, but that sort of is how we're looking at it and how we've hedged in the second half.

Okay, and... Dominic, the 3.2 bad debt recovery is reflected where?

So the 3.2 million relates to a bad debt expense recovery that we experienced in the second quarter of 2021, which did not repeat in the second quarter of 2022. So it was a one-time benefit because when we experienced the dramatic COVID shutdown in 2020 and 2021, a lot of our customers stopped paying. And then we were able to reactivate those customers. Many of them were reactivated in the first half of 2021. And in particular, in Q2, we realized a bad debt expense recovery with the activation of several hundred accounts. And that is a one-off benefit in Q1 of 2021. Whereas in Q2, we actually experienced some negatives impact on the bad debt side. So instead of a recovery, we ended up booking about $2 million more than we would normally book.

Okay. Perfect. That does it for us. I'll jump back into you.

Great.

Thank you.

Thank you. Our next question has come from the line of Marie Thibault with BTIG. Please proceed with your questions.

Good morning. Thanks for taking the questions. I understand the shift to prioritize cash sales and help your cash flow profile, but I wanted to hear a little bit about what you're seeing on patient demand and appetite for discretionary spending. I'm trying to dig into customer willingness to pay upfront for a system at a time that we're hearing a lot more pressure on the CapEx environment. So any commentary there would be helpful.

Yeah, look, I think that there's ebbs and flows, Maria, and good morning. I think overall the thing that we're really focused on right now is we spent the first 12 years of the company's life focusing a lot on promoting the differentiated subscription model. And so the impact that's moving to cash versus subscription is more based in our marketing efforts than it is the realities of the market demand. Our pipeline has grown exponentially in the last 30 to 60 days, and we feel very good about that. And especially following the performance of the region in the U.S. that grew 24%, we don't see a real slowing down, per se, of demand. Now, having said that, there's always the credit challenges and risks associated with dealing with third-party lenders. But to this point, and it's early, but to this point, we have not really seen any issues there. As far as patient traffic, based on our IoT data that we see on a routine basis, I can tell you that patient activity has consistently outperformed pre-COVID trends into clinics around the world. So I think that this is more, for us anyway, an issue of getting our sales reps right-sized in terms of their messaging and what they focus on day in and day out when they talk to our customers. and taking full advantage of the significantly increasing pipeline, especially in our hair franchise and in our body franchise.

Okay, that's very helpful, Don. Thank you. And I'll ask my follow-up here on the cash flow conversion improvements expected in the second half. Is there any way you can sort of quantify for us as we think about that cadence in cash flow improvement? And do you care to give any updates on that? a goal of reaching cash flow positive. I recall that was previously Q4. I don't know if that's, you know, that goal has been updated. Thank you.

So, Marie, we're expecting that the conversion to, you know, previously we said that we'd be cash flow positive in the fourth quarter. We're still on that track with this conversion And in fact, we expect that a good proportion of those cash, of those subscription sales, will in fact convert to cash, but not all of them. So when we pull down our guidance, we've referenced that approximately two-thirds of that impact is related to this shift. And based on early results, and thus far to almost the midpoint of August, we're in line with those expectations as far as that trajectory to convert over from subscription to more cash deals, which doesn't mean we're abandoning subscription, but we feel that the combination of that incremental cash that previously was not in any of our plans will be of cash benefit to us in the second half. But the other reminder is that we continue to have $73 million of receivables on our books that will continue to pay, even though we're de-emphasizing the subscription business. So in effect, you have the benefit of the previous model continuing to pay dividends in the form of an annuity, and then you've got this cash conversion of new deals that are coming in, which were never anticipated. So this is the fundamental shift in benefit that we're going to have over the next year, year and a half. before that $73 million starts to really dwindle down. So we're looking at this inflection point as being a substantial pivot in the business that will significantly help us. But we don't want to give any specific cash targets at this point.

Okay. Understood. I'll get back in queue. Best of luck.

Thank you, Marie.

Thank you. Our next questions come from the line of John Block with Stiefel. Please proceed with your questions.

Great. Thanks, guys. Good morning. Good morning, John. The first question is the emphasis on the cash sales. I guess maybe a couple questions to that. Are there concerns about, call it, further sales force disruption with the change in strategy? That might necessitate a different type of rep or just a change in behavior. And then I would think the subscription model is what's really needed in this type of environment. You know, it just gives the docs a little bit more flexibility. I know you're not abandoning, as you said several times, but you're arguably de-emphasizing. So maybe you could just talk to that. Should we be concerned about further Salesforce disruption with this move? And then, you know, why this move that gives the docs a little bit more of a flex, if you would, in proceeding with a purchase in this type of uncertain environment? Now I've got to follow up.

Yeah, no, and it's a great question, John. And look, I think that there's multi-parts to this answer. First of all, we don't believe that it's going to have any material impact on the sales force that we have done a very good job, and Ross can elaborate on this a little bit more, you know, sort of replacing the individuals that left because of the challenges we had in one region. Having said that, this is the right time for us to do this for a few reasons. Number one, As we continue to develop our robotic technologies and so on that are going to be focused predominantly in the core market of dermatology and plastic surgery, it is more important that we focus our energies and how we compete on the technical advantages of our technology versus the ROI, which essentially was the primary focus when we talk about the subscription model in the past. It's not as important to the core audience as it is to the non-core or med spa market where we were you know, very, very strong for many years. We think that the ability to keep both programs in play will give us the ultimate flexibility in being able to start with the conversation related to a traditional cash transaction like everybody else that we compete against and basically leveraging what we believe to be best-in-class technologies, and we prove that day in and day out when we do competitive side-by-side evaluations with our competitive products. And at the same time, be able to look at customers, for example, might be a new physician that is just opening a practice and they don't necessarily have a credit history with a third party that will be beneficial to them, but we have the option in total control and apply certain disciplines that quite frankly were not there in the past when it relates to when we offer the subscription model and we don't. By doing this, we think that we're in control of our own destiny as it relates to cash on balance sheet and ensuring that You know, we don't find ourselves in a situation where we have to go out and dilute any further. We've made this shift keeping in mind, you know, possible outcomes, not only for the company but for our shareholders as well.

Got it. Very helpful. And maybe just to pivot a little bit, we've got a pipeline update. For Amy, are the 12 patients done, I guess, in the first part of the pivotal, and has that been submitted to the FDA yet? any update on the freedom, freedom, timing, or expectations, and then DDP, maybe just to build on the prior question around cashflow, you know, previously you said positive cashflow in four Q, which was, I think street was around 39, $40 million. Are there just ways to think on, you know, a new revenue top line and how that shakes out with some of the, you know, the op X streamlining and the move to more cash sales. Thanks guys.

Okay, so on the AMIE update, we are in the final stages of completing phase one of that clinical trial. As you may recall, there is a waiting period between the last treatment and the time in which we measure and then submit to the FDA. We do expect that that phase, that trial, first of all, the first submission, as we mentioned in our prepared remarks, we are waiting for the FDA to come back to us with a general clearance on the AMIE. And, you know, we're well down the road. We continue to communicate with them as to when we expect that clearance, and hopefully that should be sooner rather than later. Having said that, the patient trials continue. The FDA did ask us to do the first 12 patients and then submit. We are almost complete with that, and then we have a timeframe that we need to wait before we can submit that data. That should happen before the end of the year. So we do expect to be re-engaged with the balance of the treatments and so on in early part of 2023 with a full commercial release later in the year. And just let me be clear, full commercial release later in the year with an on-label specific indication for the face, we do expect a general clearance that will allow us to commercialize this product later this year in a limited fashion. Does that make sense, John?

It does, sorry. And then I was just going to ask anything that made a lot of sense. Anything on freedom or the cash flow? I think so.

Yeah, we just as part of the restructuring, John, and, you know, we took a long, hard look and we're quite objective at this point. I think we're going to, as we streamline some of our product offerings, the freedom category is a good one. It's just not one that we can focus resources on at this point because it is, as you know, a differentiated market. We made a commitment that when we do go there, it's going to be for predominantly the OBGYN community. And we made a strategic decision at this point to focus on, you know, what we're doing really well. at this point, and we look at a variety of different alternatives on how to bring that product to market, but not necessarily in a direct way, maybe through a third party. But at this point, we are not pursuing moving that project forward simply because we want to focus on what's real for today and what's going to drive the maximum return for us in the short to midterm, and then we'll revisit that particular project. And, Don, do you want to answer the second part?

Hey, John, can you just reiterate your – because you had a lot in there. I just want to make sure I – would you mind just reiterating the question?

Sure. No, you're right.

I tried to pack a lot in there.

I was just sort of going that the prior guidance said, you know, cash flow positive and 4Q, and I think the street or we were around that $39, $40 million number. And so just even at a high level, I'm trying to rethink – You know, with some of the OPEX coming down and the move to more cash sales, I'm guessing the top line requirement to reach cash flow positive wouldn't be quite as high. Are there any sort of benchmarks or thoughts that you can put in and around that thought process?

Yeah, so we've guided the full year 110 to 113 and then for Q3 in and around the 24 to 25 million range. So if you do that math, you're sort of left with the difference, which is in the lower end of the 30s for Q4 based on that guidance. And, you know, that combined with the OPEX cuts that we're making in the second half of between, you know, $5 and $6 million should render us, you know, profitable in that fourth quarter based on $32 million. of revenue and our gross margins in around 67%. So that's what we're guiding. That's what we're aiming for. And in addition, in 2023, the annualized impact of the restructuring savings amounts to about $10 million in that year. So that'll put us in a much better position in 2023, notwithstanding that we're calling down you know, the revenues for this year based on the shift in subscription being more geared towards cash without necessarily abandoning subscription. Very helpful. It's a combination of the cash shift as well as the OpEx cuts and refocusing the business.

Yep, that's where I was going. Perfect.

Thanks, CDP. You're welcome.

Thanks, Sean.

Thank you. As a reminder, if you would like to ask the question, please press star 1 on your telephone keypad. Our next question has come from the line. I'm Anthony Vendetti with the Maxim Group. Please proceed with your questions. Thanks, and good morning.

Hey, good morning. Good morning. Good morning, guys.

Good morning, Dominic. Good morning, Dom. So just following up on the little bit of a strategy shift, can you talk a little bit about ASPs? Are they... are they holding up in this environment or, um, especially if you ship to a cash, uh, and I know it's not pure cash, but if you're offering the cash alternative or pushing that, um, are you expecting ASPs to come in a little bit? Um, just talk a little bit about that. And then obviously in this environment, you know, we could see some pullback. We go back to the financial crisis, um, 2007, 2008, you know, to 2009, we did see, you know, revenue start to fall off, in some cases pretty dramatically. What, you know, how do you navigate through this if we do fall into a recession? What's your strategy or plan?

Okay, so let me answer the second part of the question, then I'll let DDP answer the first part, if that's okay, Anthony? Sure. So, I started this company in 2009, 2010, and the business model that we had put in place was to protect the opportunity at the customer level by offering the subscription model. This is the main reason why we are not abandoning the subscription model. But if you remember in 2007, 2008, 2009, there was an interesting phenomena that occurred. You're absolutely right that the device business did dry up, and there was a significant amount of pressure on pricing, etc., And that was predominantly based on the fact that lenders were not lending. And if they did lend, it was really in a very small part of the market and with all sorts of bells and whistles in terms of guarantees, et cetera. But what was interesting in that time period is that the patient traffic was pretty level. And in fact, in some jurisdictions, actually continued to increase. People wanted to feel better during bad times, et cetera, et cetera. And they took advantage of disposable income that they did have, especially as you look at today's market where the job market is actually pretty robust. So we're not seeing any of that impact at the street level with the consumer to the clinic. We do maintain the right to continue to have the subscription model in play. The only difference is that now we have a very specific way that we are going to the market with a cash-first conversation based on technology benefits compared to our peers. And if the customer is in a situation that falls into one of the buckets of new clinic or whatever the case may be, we have the ability to still leverage that customer. So instead of losing them, we have an alternative to go to which our competitors do not offer and, quite frankly, are afraid to offer because they don't really want to stand behind the consistency of the technology's ability to generate revenue for the three-year period in which we run our subscription model versus traditional leases. DDP, do you want to touch on the other stuff?

So, Anthony, on the ASP side, in the second quarter, our ASPs by device actually held up very well. In fact, on the artist side, we were actually slightly above our own internal targets on ASPs. Where we have the challenge is that for rest of world, where we've got currency impacts, although the ASP and local currency in markets like China Spain and Germany, et cetera, or the Euro, when we convert to US dollars, that's where we get hit on the ESP side. So on local currencies, we're holding, but we're not able to get that extra bit to offset the currency impact, which we estimate to be about 8% on rest of world in Q2. And we've modeled that 8% in the second half, which causes a bit of the margin compression that I spoke about earlier.

Anthony, there is one other thing to consider here as well. As we take a look at some of the non-performing OUS markets, we will be converting from direct operations to distributor operations, and that by itself has a bit of an impact on the ASPs because we're selling to distributors at obviously lower pricing. So, you know, these are modest shifts, but to DDP's point, we've been able to maintain pretty consistent ASPs across the product portfolio, especially in North America.

Okay, great. And then just lastly, for DDP, one of the things mentioned in the press release was you're exploring non-dilutive financing. Maybe just talk about what's available to you at this point and what type of non-dilutive financing, if you were to seek that, what it may look like.

Yeah, I mean, we can't say much on that front, Anthony, but there are many forms of the non-diluted financing. Clearly, one of the key opportunities we have is to leverage the significant receivables balance between long-term and current receivables of over $70 million. So that's obviously an area that we're looking closely at and looking But there are also other opportunities for non-diluted financing, be it partnerships, et cetera. So these are very active things that are ongoing. And in addition to our restructuring plan, we're feeling pretty good about where we're headed.

Anthony, the only thing I'll add to that is that we do have a few opportunities that we're exploring that could bring to DDP's point some strategic partnerships to help develop certain categories, especially in the robotics area, on behalf of these entities, and that would represent, you know, I'll call it a cash injection that would be non-dilutive.

Okay, great. That's helpful. Thanks, guys. Appreciate it.

Our pleasure.

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