Venus Concept Inc.

Good day, ladies and gentlemen. Welcome to the second quarter 2023 earnings conference call for Venus Concept. At this time, all participants have been placed in a listen-only mode. Please note that this conference call is being recorded, and 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 general accepted accounting principles, or GAAP. We generally refer to those as non-GAAP financial measures. Reconciliation 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. Rahiv Delsilvia, Chief Executive Officer of Venus Concept. Please go ahead, sir.

Thank you, operator, and welcome everyone to Venus Concept's Second Quarter 2023 Earnings Conference Call. I am joined on the call today by our Chief Financial Officer, Dominic Della Pena, and by our President and Chief Innovation and Business Officer, Dr. Hemant Wagis. Let me start with an agenda of what we will cover during our prepared remarks. I will begin with a brief overview of our Q2 results and notable operating developments in recent months. Hemant will share an update on our recent progress in our restructuring programs, R&D priorities, and new product pipeline progress, as well as our recently announced formation of a medical advisory board. Dominic will then provide you with an in-depth review of our second quarter financial results and our balance sheet and financial condition at quarter end, as well as a review of our 2023 financial guidance, which we reaffirmed in today's press release. Then we will open the call for your questions. With that agenda in mind, let's get started. As you would have seen in our press release issued today, in the second quarter of 2023, we delivered total revenue of 20.1 million. These results are within the range of expectations we provided on our Q1 earnings call. Our second quarter revenue results reflect notable declines versus the prior year as expected. Similar to what we discussed on our Q1 call, the year-over-year revenue decline is a direct result of the strategic initiatives we are executing this year. Specifically, we are transitioning the company to higher quality revenues, exiting unprofitable direct operations in certain international markets, and implementing a series of restructuring activities which together are expected to enhance the cash flow profile of the business and to accelerate the path to long-term sustainable profitability and growth. Our results in Q2 point to continued progress towards these key strategic initiatives that we outlined earlier this year. First, we are pleased to report that cash system sales represented 74% of total system sales and subscription sales compared to 49% in the prior year period. Our progress towards this initiative is even more evident when looking at the mix of cash system sales in the U.S., which represented 82% of total U.S. systems and subscription sales in Q2 compared to 36% in the prior year period. Cash system sales to U.S. customers increased 55% year-over-year in Q2 And as expected, this growth fueled significant improvements in our cash generation given the higher quality of revenue cash system sales represent. Second, our restructuring activities continue to progress. We are right-sizing the business, reducing costs, and simplifying the organization. We delivered a 25% reduction in our non-GAAP operating expenses representing a reduction of $6.5 million year-over-year. Our progress in each of these areas in Q2 drove a 71 percent reduction in cash used in operations on a year-over-year basis and a 64 percent reduction in cash used in operations on a quarter-over-quarter basis. We believe this represents the clearest evidence that we are on the right track towards our goal of enhancing the cash flow profile of the business and accelerating the path to long-term, sustainable profitability and growth. We are particularly pleased with our performance in light of a very difficult financing environment for our end customers. This is even more relevant considering our shift from subscription revenues to higher quality cash system sales that rely on third-party financing for our customers. In addition, the inflationary economy has impacted higher price procedures such as those related to our hair business. There are two other items I wanted to briefly discuss. First, we remain highly focused on maximizing our capital resources as we work to manage our near to intermediate term debt obligations and to further enhance the company's foundation for achieving our longer term goals. As outlined on our recent calls, our strategic plan originally targeted a reduction in the company's cost structure by a total annual pre-tax savings of $13 to $15 million beginning in 2024 and achieving cash flow breakeven in the second half of 2024. We're evaluating a series of incremental initiatives to continue our path to cash flow breakeven in the second half of 2024 without impacting our 2023 objectives. We are also actively engaged in discussions with key lenders to ensure the requisite runway that allows us to execute a strategic plan and successfully achieve cash flow breakeven next year. We are appreciative of the constructive relationship that we have with our primary lenders. Second, we developed a plan for regaining NASDAQ continued listing compliance, which is approved by the exchange. NASDAQ provided us with an extension of the compliance period through November of 2023. I would now like to turn the call over to Dr. Hemant Wagees, who will share an update on recent progress in our restructuring programs, R&D investments, and new product pipeline initiatives, including a recently announced formation of a medical advisory board. Hemant. Thanks, Rajiv.

As Rajiv described earlier, we've already made considerable progress against several key initiatives of our corporate turnaround strategy. On balance, we believe we are executing the strategic plan we outlined at the start of the year on or ahead of expectations. Let me share a little color in key areas where we're making notable progress. First, our cost reduction and cash management initiatives designed to accelerate our path to cash flow break-even are progressing at or ahead of expectations. It is a credit to the hard work and dedication of the entire Venus concept organization who've all greatly contributed to improving business performance. In addition, during Q2, we made the decision to target additional cost containment initiatives, including identifying areas where we can implement phased R&D investments to protect cash runway and accelerate our path to cash flow breakeven. Second, recognizing the challenging environment that many of our customers are facing, we've taken proactive steps to stay responsive to market headwinds and are implementing plans in the US and internationally to provide greater commercial momentum as we move through the balance of 2023. We have initiated several targeted programs to provide more operational flexibility to our commercial teams, including new financial tools and transaction support needed to provide an enhanced level of customer and deal support. We believe that these measures will enhance overall sales productivity while improving our ability to respond to an evolving market conditions. In the US, We're streamlining our internal financing processes, expanding our capacity to perform onsite demos, introducing new sales promotions and incentive programs, as well as enhancing our level of technical service commitments to our customers. Outside the U.S., our efforts to right-size the business are progressing well. We are rationalizing our international infrastructure, reducing costs, and simplifying the organization with a keen focus on establishing the optimal mix of direct presence and distribution partners in key international markets around the world. Third, as mentioned earlier, while refocusing our R&D efforts has resulted in phasing of some project spend to better manage cash burn, we've also been able to leverage our broad portfolio of technology and IP to advance certain new product pipeline projects ahead of expectations. Specifically, we now expect FDA 510 clearance in the third quarter and initial commercial introduction in the fourth quarter of a new medical device aesthetic system, the Versapro. The Versapro is the next generation version of the Venus Versa, one of the company's flagship products with more than 2,500 systems sold globally since introduction. The Versapro is our second generation Versa that leverages our novel MP squared, IPL, and nano fractional RF technology that treats color, texture, and tightening for the face and body with a choice of 10 hand pieces. We're adding the advances that have been made with VivaMD to provide higher power and deeper skin penetration for optimal results. We see this as an important near-term growth opportunity for new customers and an attractive upgrade opportunity for existing customers. We're proud of the R&D team's strong execution and commitment to our goals, which resulted in an accelerated product development process. The team has us poised for an exciting new product introduction in the fourth quarter of 2023 ahead of our original timeline. Our new product pipeline continues to progress favorably in terms of what we expect in 2024 as well. Specifically, we are on an accelerated plan for the commercial introduction of our next body system in the first half of 2024. And importantly, we are encouraged by the continued progress we are making in support of our target for commercial introduction of the Amy our next generation aesthetic robotics platform in the second half of 2024. As announced last month, we are very excited to have established our new medical advisory board for Amy. We are fortunate to have attracted the support of an industry leading group of physicians to help us realize Amy's full potential clinically. We look forward to engaging with this group to initiate a series of clinical studies over the next several months. These studies are designed to inform our AMI aesthetic robotics product development and clinical strategy, ensuring we continue to meet the evolving needs of patients and providers with advanced technologies and strong clinical impact. Our first three AMI systems for clinical use have been built and will be shipped to kick off initial study activities in Q3. It is important to note that we expect the commercial launch of AMI to be consistent with the 510K clearance we received in December of 2022. No further FDA clearances are required to support the commercial launch planned for H2 2024. With that, let me turn the call over to Dominic for a review of our second quarter financial results and balance sheet as of June 30th.

Dominic? Thanks, Hayman. For the avoidance of doubt, unless otherwise noted, my prepared remarks will focus on the company's reported results for the second quarter 2023 on a GAAP basis, and all growth-related items are on a year-over-year basis. We reported GAAP revenue of $20.1 million, down 26% year-over-year. The decrease in total revenue by region was driven by a 27% decrease year-over-year in U.S. revenue and a 26% decrease year-over-year in international revenue. The decrease in total revenue by product category was driven by a 64% decrease in lease revenue and a 16% decrease in products other revenue, offset partially by a 7% increase in product systems revenue and a 13% increase in services revenue. Turning to a review of our second quarter financial results across the rest of the P&L, gross profit decreased 4.8 million, or 25% to $14.2 million, the change in gross profit was driven primarily by the year-over-year decline in revenue in the United States and international markets driven by the strategic decision to focus on quality of revenue by deemphasizing subscription sales and exiting and or rightsizing unprofitable direct markets. Gross margin was 70.8% compared to 69.9% of revenue in the second quarter of 2022. The change in gross margin was primarily due to changes in product mix, including lower artist system sales, which have a lower gross margin than our energy-based devices, partially offset by a 0.2 million foreign exchange headwind as a result of certain currencies depreciating relative to the US dollar. Total operating expenses decreased 6.2 million or 24% to 20 million. The change in total operating expenses was driven primarily by a decrease of 3.3 million or 26% in general and administrative expenses, a decrease of 2.1 million or 20% in sales and marketing expenses, And second quarter of 2023 GAAP general and administrative expenses include approximately $0.4 million of costs related to restructuring activities designed to improve the company's operations and cost structure. Excluding these restructuring costs, our non-GAAP operating expenses declined $6.6 million or 25% year-over-year. Excluding the aforementioned non-GAAP items and non-cash DNA, stock compensation expense and bad debt expenses in both periods, our non-GAAP cash operating expenses declined 4.2 million or 19% year over year. The total operating loss was 5.8 million compared to 7.1 million in the second quarter of 2022. Net interest and other expenses were $1.4 million compared to $3.4 million in the second quarter of 2022. The year-over-year change in net interest and other expenses was driven by non-cash foreign exchange gain loss, which was $178,000 gain in the second quarter of 2023 compared to a loss of $2.4 million last year. Net loss attributable to stockholders for the second quarter of 2023 was $7.4 million or $1.35 per share compared to $10.6 million or $2.47 per share for the second quarter of 2022. Note, our net loss per share calculations and the current and prior year periods reflect the 1 for 15 reverse stock split in May 2023. Adjusted EBITDA loss for the second quarter of 2023 was $4 million compared to $5.5 million for the second quarter of 2022. 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, 2023, the company had cash and cash equivalents of $6.1 million and total debt obligations of approximately $78.4 million compared to $11.6 million and $77.7 million respectively as of December 31st, 2022. Cash used in operations for the three months ended June 30th was $2.1 million, a 71% decrease in cash use year over year. The improvement in cash used in operations was driven by our restructuring plan efforts, improvements in working capital, and the benefits to our cash flow generation as a result of our initiative to focus on cash system sales, including a significant reduction in bad debt expense tracing to tighten credit screening practices for subscription sales in an otherwise challenged credit market. Cash used in operating and investing activities during the second quarter of 2023 was partially offset by $1.9 million of cash from financing activities in the period driven by the net proceeds of $1.6 million from the sale of senior preferred stock from the 2023 multi-trench private placement, which occurred on May 15, 2023, and proceeds from the issuance and sale of common stock pursuant to our equity purchase agreement with Lincoln Park Capital of 0.3 million. Turning to a review of our guidance, as detailed in our press release, we reaffirmed our revenue guidance for the full year 2023 period. The company continues to expect total revenue for the 12 months ending December 31st, 2023 in the range of 90 million to 95 million representing a decrease in the range of approximately 9.5% to 4.5% year over year. While we are not providing formal profitability guidance for the full year 2023, we are providing the following modeling considerations for use in evaluating our outlook for 2023. First, the 9.5% decline in revenue at the low end of our full year guidance range continues to assume Total revenue growth in the second half of 2023 offset by year-over-year declines in revenue in the first half of 2023 as we complete the transition to quality of revenues. Note the low end of our guidance implies high single-digit growth year-over-year in the second half of 2023, driven primarily by cash system sales growth of more than 30% year-over-year. We expect cash system sales to represent more than 70% of total subscription and system sales for full year 2023 compared to approximately 58% for full year 2022. Our total revenue guidance for 2023 continues to reflect year-over-year headwinds to our revenue growth from lower lease revenue in favor of cash system sales of approximately $16 million and the impact related to the aforementioned strategic changes we are implementing in our international business this year of approximately $8 million. Excluding the impacts from prioritizing cash system sales and the strategic changes in certain international markets this year, we believe our total revenue growth would be 15% year-over-year on a normalized basis. Our full year 2023 revenue guidance includes the assumption that our third quarter total revenue will be in the range of $20 million to $22 million. Third, at the low end of our full year 2023 revenue range, we now expect gross margins of approximately 67% up roughly 100 basis points year over year as compared to prior guidance assumptions which called for relatively flat gross margins year over year in 2023. Based on the better than expected expense performance in the first half of 2023, we now expect GAAP operating expenses in the range of approximately $87 million to $89 million, compared to our prior guidance of $89 million to $91 million. Note this updated GAAP operating expense guidance range includes approximately $1.9 million of restructuring, severance, and other non-operating expenses. The updated GAAP operating expense guidance range also includes approximately $9 million of non-cash expenses, including stock compensation, DNA, and bad debt expenses. Excluding the aforementioned non-operating items and non-cash expenses, We now expect our cash operating expense target to be approximately $77 to $79 million for 2023, down $1 million from our prior guidance range driven by better than expected performance in Q2. Fourth, we continue to expect interest expense of approximately $6 million. Finally, our total revenue guidance for 2023 and our supporting modeling assumptions across the P&L are now expected to result in a reduction in our cash use from operations of more than 50% year-over-year, compared to our prior modeling assumption, which called for a reduction of more than 40% year-over-year. With that, operator, we will now open the call to your questions. Operator?

Thank you. If you would 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 limit yourself to one question and one follow-up. If you would like to ask additional questions, we invite you to add yourself to the queue again by pressing star one. One moment, please. Our first question comes from Jeff Cohen, with Leidenberg Thalmann. Please proceed with your question.

Hi, Rajiv, Dominic, and Hemant, how are you?

Hey, Jeff, you're well, thank you. Hey, Jeff.

I'm going to work backwards on the complicated questions. So I guess, Dominic, lastly, the 8789 OPEX in the back half, as you compare it to the previous 91-ish, and then you talk about the cash OPEX, 7779. I'm just trying to correlate the differential between cash and GAAP. Sounds like 10 to 12-ish approximately. And then maybe could you tie that into trimming of the business as far as OPEX and spend and let us know how you're thinking about whether you're mostly through that process or preliminary through that process or mostly concluded through that process. Thank you.

I mean, first off, Jeff, the difference between the two metrics, primarily $4 million of DNA, $2 million of stock comp expense, and about $2.5 million of bad debt expense. So those are the key drivers between the gap and the non-gap, and then the cash piece. In terms of where we stand, we're primarily through our restructuring efforts as far as as far as what we announced earlier in the year. There is some ongoing tweaking that goes on as we continually adjust and look for opportunities. But largely, the bulk of it is behind us, subject to certain modifications that we may make as we continue to sort of unleash our strategy in the second half.

Jeff, I think we will continue to... make some further adjustments, particularly in our international region. So that's, you know, taking a little bit longer than the changes that we made in North America and Israel.

Okay, Guy, and then there's a follow-up on the technological side. The Versapro, what difference versus the Versa system now? Is it foreign factor hand pieces and potentially cost of goods and then Also follow us up with, you mentioned body system. I'm assuming you were referring to the AME system.

So with Versapro, we'll have more on that very soon. Again, we're expecting the 510K clearance in the third quarter. But yes, this is what you'd expect in terms of an upgrade to any of our energy-based systems. There will be industrial design updates as well as feature updates. And bringing some of the technology that we developed for Aviva MD in the nanofractional RF onto the Versa system, which it didn't have previously, are the key updates we can speak to at this time. With respect to the body system, this is actually incremental to what we're doing with the AMI system. So AMI, we're expecting to have come out in H2 of next year. The new body system, which again, we'll have more detail on in upcoming calls, will actually be an update to our energy-based systems with a new body system next year.

Okay, that does it for us. Thanks for taking the questions.

Thanks, Jeff.

Thank you. Our next question comes from Marie Sebald with BTIG. Please proceed with your question.

Good evening. Thank you for taking the questions. I wanted to ask one here. I heard you mention targeted programs to try to provide financial tools and transaction support to your sales teams as they go out to the U.S. and try to help those customers who are maybe facing tougher financing environments. Can you give us a little more detail on what sort of tools will be offered and anything we should be considering as we think about your balance sheet and we think about those financing tools?

Yeah, so, Maria, let me just provide a high-level answer to that and allow Haman to add some detail. So, look, there's nothing here that should create any major impact on our balance sheet. These are operational tools and techniques that we are helping our fuel force with. Some of them have to do with how we price our products, you know, particularly in combination with the – in bundles. We've obviously also learned quite a bit about how to approach internal financing well, given our heritage in the subscription sales model, which obviously we have tweaked and changed quite a bit. And so those are the types of tools that we are providing our field for. So nothing that should impact our balance sheet. But maybe, Hemant, if you want to add any further detail.

Yeah, no, I think you said it right. There's nothing here that would be a fundamental shift in terms of our balance sheet or profitability. Think of it in terms of anything that would either help speed up or accelerate the close of any type of transaction. In a tough financing environment, these things take a long time to do, so we've expanded our demo capacity in terms of being able to do on-site demos. As Rajiv mentioned, we've taken a look at our internal processes around our internal financing and to see if there's ways to streamline that so we can get to decisions faster and pricing incentives, bundles, all tools that give the field force and leadership of the commercial organization what they need to be able to move quickly when transactions are available.

Okay. Just to clarify, there wouldn't be any change to revenue recognition? Everything would be recognized up front?

None.

Yeah, no changes.

Okay. Perfect. And then I wanted to ask about, I think on an earlier call, you talked about potential partnering on the R&D side. It certainly seems like you're – Doing quite well going it alone for now, but what might we hear on that? When might we hear more about partnering and which specific systems might you be partnering on?

You know, look, I think, Marie, we continue to be open to the concept of partnering, but we have a lot of intellectual capital built into particularly our AME system. And we want to make sure that we advance it as much as possible under our own steam. So that's really what we're focused on. But as we have described on other calls, there are multiple ways in which the AMI system could evolve in the future with new indications. So once we get beyond getting our arms wrapped around our initial launch, we certainly would benefit from other partnerships. And there's really no timeline to this. but we certainly remain open to the idea of partnering if it will allow us to advance some of our future iterations of AMI.

Okay, very helpful. Thanks for taking the questions.

Thank you, Mary.

Thank you. Our next question comes from Anthony Venditti with Maxim Group. Please proceed with your question.

Thanks, yes, Venditti. But just in terms of... artists, what do you think the reason is for the software sales from artists? And then if you could talk about, I know you're moving away from more of the subscription business, although not completely ending it, if that's what a customer wants to do, what is the split now in terms of subscription versus purchase outright purchase? And what do you think is the ideal mix going forward?

Sure. So let me, uh, We'll start with the artist question. So I think, look, I think there are a couple of reasons driving the softness in the artist business, and as we described in our script. One is this, look, it is one of our higher-priced devices, right? And what we are finding is that any device that's priced above $200,000, it just becomes incrementally harder, and it takes longer for customers to get financing, right? So the sales cycle is becoming longer. And then in terms of the actual procedure itself, it is also one of the more higher-priced procedures that our devices are used for, being upwards of $10,000 to a customer, depending on the number of transplants that a customer is getting. And what we are finding is that there is a certain softness when it comes to these higher price procedures. There's no indication that this is a permanent shift, but certainly it is probably a reflection of the current inflationary economy. Hemant, any further details to add to that?

No, I think you said exactly that. I do believe it's business cycles, and both at the customer level and at the consumer level, we're seeing it, but not something we see as permanent changes.

On your second question, so if you look at the quarter, we were at about 74% cash system sales versus 26% subscription sales. The U.S. was over-indexed in cash system sales. As we said, it was about 82% and 18% subscription. We are not trying to manage this to a particular number, but I would guess going forward, a 75-25 split is not a bad split to think about for modeling purposes. What I would say, though, is that one of the advantages that we have, having done subscription sales for a very long period of time, we have a pretty good understanding of the customer profile that works for internal financing, right? So what we expect to do is to continue to tweak the way we do our subscription sales or internal financing in a way that it becomes more effective, our bad debt expense keeps going down, and if we can do that effectively at a 75-25 split, that's a pretty decent split for us.

Okay, and just a follow-up on the artist. I know you The price of the system has been brought down from over 300, but it's still over 200. Do you feel there's any also competition? Is there a company called SmartGraft or a product called SmartGraft that sells for around 100K that might be somewhat of an option for some of the customers that are thinking about a robotic system? transplant system.

As you pointed out, there are other options for customers. There's obviously also manual procedures. I think the reality, though, is for a new customer getting into this business, the robot offers a lot of benefits that other devices don't because it's a way to overcome inexperienced techs. It provides repeatability for the techniques. So it still has an important role to play. I wouldn't say that the competition is dramatically different, though I would say that as the end consumer looks for cheaper pricing, You know, some people do opt for the manual procedures which do cost less, right? But like I said, for practices getting into this, you know, for the first time, practices looking to expand their offerings, the robot is still a pretty unique offering.

Okay, thanks. I will hop back to Nick here. Appreciate it.

Thank you, Anthony.

Thank you. As a reminder, press star 1 to ask a question at this time. We are currently showing no additional participants in the queue. That does conclude our conference for today. Thank you for your participation.