Venus Concept Inc.

Please stand by. Good day, ladies and gentlemen, and welcome to the third 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 10Q 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 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 who 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. Rajiv De Silva, Chief Executive Officer of Venus Concept. Please go ahead.

Thank you, Operator, and welcome everyone to Venus Concept's third quarter 2022 earnings conference call. I am joined on the call today by our Chief Financial Officer, Dominic Della Penna. Let me start with a brief agenda of what we will cover during our prepared remarks. As the recently appointed Chief Executive Officer of Venus Concept, I will begin my remarks with a brief introduction and share some thoughts on the company. Then, Dominic will provide you with a more in-depth review of our quarterly financial results and our balance sheet and financial condition at quarter end. Following that, we will open the call for your questions. With that overview in mind, let's get started. I would like to take a moment to introduce myself, share a few summary points on my experience and background, and provide you with a high-level overview of my initial thoughts on the Venus Concept story. I joined the Venus Concept team a little more than a month ago, with more than 25 years in the healthcare industry. I started my career in 1995 as a healthcare consultant at McKinsey & Company, before joining Novartis in 2003, where I held multiple leadership positions, including Head of Pharma Strategic Planning, President of Novartis Pharma Canada, and President of Vaccines USA and Americas. From 2009 to 2013, I worked at Valiant Pharmaceuticals, now known as Bausch Health, serving as COO of its specialty pharmaceuticals business and President of the company. My responsibilities there included building its flagship dermatology and aesthetics business. My experience leading global healthcare companies was further developed during the period of 2013 to 2016 when I served as President, CEO, and Director of Endo International, a publicly traded multinational specialty healthcare company. In recent years, I have continued to be involved in the healthcare industry, including serving as Chairman of Scobies Pharma, a privately held multinational specialty pharmaceutical company, and as a co-founder of Arcery Skin Care, a privately held company focused on topical consumer therapeutic skin care products. To summarize, my 20 years as a senior executive in the health care industry has provided me with expertise in managing complex global businesses, building distribution networks, and developing and commercializing health care products to improve outcomes and overall quality of care for patients around the world I'm also well-versed in multiple aspects of the aesthetics, dermatology, and cosmetic surgery markets. In addition, I have also gained a significant experience managing companies through profitability challenges, capital markets repositionings, and growth through both organic and inorganic means. I am confident that these skills make me well-suited to lead Venus Concept through its next phase of development. in combination with the efforts of our dedicated colleagues. Since joining the Venus Concept team, I have focused in part on building relationships with our colleagues, customers, and physician key opinion leaders to evaluate the key aspects of our strategy and to determine how best to position the company for sustainable, profitable growth going forward. One of the primary takeaways from my discussions has been the understanding and appreciation has been understanding and appreciating the extent to which our customers are passionate about the benefits of Venus Concepts technologies, including innovative medical device aesthetic products and differentiated robotic platforms serving the hair restoration market today and the pipeline of robotic platform application with potential to be truly disruptive in the medical aesthetics market in the future. Building on this early fact finding, We have recently kicked off a comprehensive strategic review of the company, including its financial performance, competitive positioning in the industry, commercial product strategy, R&D and technology strategy, operating model and talent, systems and processes, capital structure, and possible partnership opportunities among other things. While the strategic review is still in its initial stages, my initial impressions have been confirmed. While Venus Concept has built a $100 million plus business, the global infrastructure and business model has resulted in a P&L that has never been cash flow positive. I expect to leverage my considerable experience with turnarounds and profit improvement efforts to help Venus Concept reposition itself to enhance the cash flow profile of the business and to accelerate the path to long-term sustainable profitability and growth. We also welcomed Dr. Hemant Varghese to the Venus Concept team on October 11th. Hemant was appointed to the position of President and Chief Business Officer and brings a 20-year track record of performance and execution with experience leading diverse healthcare businesses in high-growth markets in North America and internationally, managing complex business transformations, high-growth corporate strategy initiatives, executing transformational M&A, and driving critical business development activities. Hemant will work with me to lead the strategic review and planning process. And I'm excited to partner with him and Dominic as we navigate the next phase of the company's evolution. The strategic review and planning process is expected to continue through at least the next three months. We will be in a position to begin implementing the strategic plan that the team develops by the end of the first quarter of 2023. We intend to update the investment community on our progress as part of our fourth quarter earnings call in March 2023. With that, let me turn the call over to Dominic for a review of our third quarter financial results and balance sheet as of September 30th. Dominic?

Thank you, Rajiv. For the avoidance of doubt, unless otherwise noted, my prepared remarks will focus on the company's reported results for the third quarter of 2022 on a GAAP basis and all growth-related items are on a year-over-year basis. We've reported gap revenue of 21.5 million, down 12% year-over-year. The decrease in total revenue by region was driven by a 21% decrease year-over-year in international revenue and a 4% decrease year-over-year in United States revenue. Excluding the impact of changes in foreign currency exchange rates versus the US dollar Total revenue and international revenue on a constant currency basis decreased 9% and 15%, respectively, compared to the third quarter of 2021. The decrease in total revenue by product category was driven by a 43% decrease in lease revenue and a 15% decrease in services revenue, offset partially by a 30% increase in systems revenue and a 6% increase in products revenue. The percentage of total systems revenue derived from the company's subscription model was approximately 41% in the third quarter of 2022 compared to 61% in the prior year period. The primary driver of the year-over-year decline in total revenue is due to our recent strategy to prioritize cash deals over subscription deals in the United States in order to improve cash generation and preserve liquidity. Turning to a review of our third quarter financial results across the rest of the P&L, gross profit decreased 3.9 million or 23% to 13.4 million. Gross margin was 62% compared to 70.5% of revenue in the third quarter of 2021. The change in gross profit was driven primarily by the year-over-year decline in revenue as well as a $1.4 million write-down of end-of-life devices and parts inventory and a $0.8 million impact from changes in foreign currencies, which depreciated relative to the U.S. dollar in the period. The decline in gross margin is due to the combined effect of the inventory write-down and the negative effects movement. If we adjust for these two items, then Q3 2022 non-GAAP gross margins increased approximately 160 basis points year-over-year to 72.1%, driven primarily by U.S. revenue representing a higher mix of our total revenue in the period. Total operating expenses were $24.8 million compared to $22.7 million in the third quarter of 2021. The change in total operating expenses was driven by an increase of $2.1 million or 18% in general and administrative expenses, and an increase of $0.6 million or 34% in research and development expenses, offset partially by a decrease of $0.7 million or 8% in sales and marketing expenses. Third quarter of 2022 GAAP general and administrative expenses include $0.6 million in SOX-related expenses we incurred in preparation for being SOX 404b compliant, $2.4 million of bad debt expenses, and $0.7 million of severance payments associated with a workforce reduction in Venus, Spain and Venus, Canada. For the three months ended September 30th, 2021, GAAP general and administrative expenses included a $1.5 million of bad debt expenses, and a loss of approximately $0.2 million on the sale of a subsidiary in South Africa. Excluding the impacts of bad debt provisions, severance, and other restructuring-related activities in both periods and the SOX costs in Q3 2022, our non-GAAP operating expenses were essentially flat year-over-year and declined 13% on a quarter-over-quarter basis. The sequential decline in non-GAAP operating expenses is a result of our efforts to prudently manage our expenses, prioritize the strategic investments we are making to support our key growth initiatives, and early progress related to the 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, as expected, we began to realize early benefits of these activities in the third quarter of 2022. Returning to a review of our third quarter financial results. Total operating loss was 11.4 million compared to 5.4 million in the third quarter of 2021. Net loss attributable to stockholders for the third quarter of 2022 was $14.6 million or 22 cents per share compared to $9.8 million or 18 cents per share for the third quarter of 2021. Adjusted EBITDA loss for the third quarter of 2022 was $7.7 million compared to $3.5 million for the third quarter of 2021. As a reminder, we have provided a full reconciliation of our gap net loss to adjusted EBITDA loss in our earnings press release. Turning to the balance sheet, as of September 30, 2022, the company had cash and cash equivalents of $6.8 million and total debt obligations of approximately $77.6 million compared to $30.9 million and 77.3 million respectively as of December 31st, 2021. Cash used in operations for the three months ended September 30th was 3.9 million, a 46% decrease in cash use year over year and a 47% reduction quarter over quarter. The improvement in cash used in operations was driven by improvements in working capital and the benefits of cash flow generation as a result of our initiative to focus on cash system sales, which increased 30% year over year in Q3, representing approximately 59% of total systems and subscriptions revenue, compared to 39% in the prior year period. Despite a 12% year over year revenue decline in Q3, our strategy to improve cash generation through higher cash sale targets is clearly having a positive impact and reducing our burn rate. Finally, while we are not providing formal financial guidance for 2022, we are providing the following modeling considerations. First, as we continue to target sequential improvement in our adjusted EBITDA loss in the fourth quarter, this adjusted EBITDA target in Q4 continues to assume total gap operating expenses for full year 2022 of approximately $99 million representing growth of approximately 11% year over year. The increase in OPEX for 2022 compared to prior guidance is related to incremental bad debt expenses and severance costs recognized in the third quarter, which were not assumed in our prior guidance. Importantly, our operating expense target for 2022 also reflects the early benefits of the strategic initiatives we have implemented to streamline our global operations which we estimate together represent roughly 4 million to 5 million of savings over the second half of 2022. There are no material changes to other modeling considerations we shared on our last earnings call. We continue to expect interest expense of approximately 4.5 million, non-cash DNA of 4.5 million, non-cash stock comp of approximately 2.2 million, and weighted average shares outstanding to be approximately 66 million. We continue to evaluate all opportunities to secure requisite capital to fund our strategic growth initiatives. We will continue to prioritize the transition from subscription sales to cash sales. In addition, as part of the strategic review of the company outlined by Rajiv, We are evaluating a full range of opportunities to fund the company's operations and strategic growth initiatives. This includes potential to further streamline the company's operations through cost reductions, possible partnering opportunities for high-priority R&D initiatives, as well as ongoing efforts to potentially secure non-diluted financing, which may include factoring a portion of the current and long-term trade receivables on our balance sheet. With that, operator, we will now open the call to your questions. Operator?