Venus Concept Inc.

Please stand by. Good day, ladies and gentlemen, and welcome to the second quarter 2024 earnings conference call for Venus Concepts, 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 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 factor 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 to 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. Rajiv De Silva, Chief Executive Officer for Venus Concept. Please go ahead, sir.

Thank you, operator, and welcome everyone to Venus Concept's second quarter 2024 earnings conference call. I am joined on the call today by our Chief Financial Officer, Dominic Della Pena, and by our President and Chief Operating 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 review of our second quarter results and operating developments in recent months. Hemant will then share an update on our progress in several key operating areas. Following that, Dominic will provide you with an in-depth review of our second quarter financial results, as well as our balance sheet and financial condition at quarter end. Then, we will open the call for your questions. With that agenda in mind, let's get started. As detailed in our press release issued today, we are pleased to deliver revenue for second quarter that modestly exceeded the expectations we outlined on our first quarter earnings call. While our total business results reflect a decrease of 17% on a year-over-year basis, we're encouraged by the continued improvement in the underlying trends in our business during the quarter, particularly in the U.S. Sales to U.S. customers posted only mid-single-digit declines year-over-year. Outside the U.S., revenue decreased 29% year-over-year in the second quarter, reflecting impacts related to the strategic restructuring activities we executed last year. Additionally, our OUS revenue results were impacted by fluctuations in ordering patterns from our new distribution partners in key international markets, as we had expected. While the business continues to be impacted by macroeconomic headwinds, which are pressuring the aesthetic sector as a whole, we are encouraged by the continued improvement in the underlying trends in our U.S. business. We believe this improvement represents further evidence that the strategy we've implemented to focus our resources on higher opportunity markets with the goal of enhancing the company's long-term growth and profitability profile is working. That said, the operating environment remains challenging. Customer financing pressures higher interest rates, and tighter credit markets continue to impact customer systems adoption throughout our business. This is especially the case with high ASP systems deals, where time to close continues to lengthen. I am proud of our team's continued commitment to our strategy despite the challenging operating environment. The positive energy and enthusiasm give me confidence that my expectations for continued solid execution and improving results over the balance of 2024 is appropriate. Before I turn the call over to Hemant, I wanted to provide an update on a few areas of notable progress made in the second quarter with respect to three of our key strategic initiatives. First, we remain focused on our strategic initiative to enhance the cash flow profile of the business and accelerate the path to long-term sustainable profitability and growth. Dominic will discuss our solid cash flow performance in Q2 later on the call. But I wanted to call out a few important highlights to underscore our recent progress on this front. We achieved a 37% reduction in our cash use and operations year over year, which we view as particularly impressive given the continued headwinds to revenue growth that the aesthetic sector participants are facing over the last year. We continue to believe that this performance represents the clearest evidence that we are making progress with respect to this important strategic initiative. Second, as discussed on our first quarter call, we announced multiple transactions reflecting material progress towards our strategic initiative to restructure the company's debt obligations and secure bridge financing. On April 23rd, one of our largest lenders and investors, Madryn Asset Management, purchased the company's Main Street Lending Program loan, or MSLP loan, from City National Bank of Florida for an undisclosed amount. Following the close of the MSLP loan purchase, we entered into a loan and security agreement with Madryn for an aggregate principal amount of up to $5 million in debt financing to support our near-term liquidity requirements. And on May 28th, we announced a debt-to-equity exchange, which resulted in a net reduction in outstanding borrowings of $35 million. These transactions facilitated a 39% reduction in our total debt outstanding over the first half of 2024 to approximately $46 million, as of June 30th, compared to $74.9 million as of December 31st, 2023. We are pleased that Madeline has demonstrated further commitment to Venus Concept's long-term prospects with these transactions and look forward to our continued engagement with them as we execute our strategic plan. Third, on June 6th, we announced that we were notified by the NASDAQ stock market that Venus Concept has regained continued listing compliance. The debt-to-equity transaction with Madryn served to bring the company above the minimum stockholder's equity requirement. I would now like to turn the call over to Dr. Hemant Varghese, who will share an update on recent progress related to our other initiatives.

Hemant? Thanks, Rajiv. As outlined on our last earnings call, we were focused in 2024 on our restructuring programs as well as our commercial strategy, customer engagement, product development and regulatory initiatives. Let me share a little colour on our recent progress in each of these areas. First, our restructuring, cost reduction and cash management initiatives continue to progress well and our focus on protecting near-term cash runway has been productive. Specifically, We delivered a 13% reduction in our operating expenses year over year, reflecting the significant restructuring activities we've executed as part of our corporate turnaround strategy over the last 18 months. As part of this effort, it's important to understand that we are also focused on allocating our resources to high priority strategic initiatives that will support our future growth. This includes our efforts to advance certain new product pipeline projects such as the regulatory clearance and commercialization of our next body contouring system in early 2025. Our strategic focus on accelerating the company's path to cash flow break-even and sustaining operations has resulted in difficult decisions, like to delay the highly compelling R&D initiatives, including our AIME robotics platform. We continue to believe that our AIME robotics platform has the potential to revolutionize aesthetic medical treatment paradigms, The AMI technology will be critical to maximizing the synergy between our well-established medical aesthetics business and our pioneering robotics R&D capability. As we continue to stabilize the core business and enhance our overall financial security and investment flexibility, we look forward to returning to an expanded R&D program and new product development strategy, which will be an essential component of our long-term revenue growth. Second, Our efforts to rationalize our international infrastructure, reduce costs and simplify the organization continues to progress as well. As part of this initiative, we continue to engage with existing and several new distribution partners to align our new international strategy. Importantly, we remain on track to be substantially completed with our international repositioning in the coming months and ready to return to growth outside the US in 2025. Third, during the second quarter, we continued to drive progress with respect to our efforts to secure new regulatory clearances and execute successful commercial launches. Specifically, we secured TGA clearance in Australia for our Venus Versa Pro on April 3rd. The initial launch in this important global market is progressing favorably. In June, we announced the receipt of a medical device license to market Venus Versa Pro in Canada. Venus Versa Pro continues to receive positive feedback from customers regarding its multimodal system capabilities and best-in-class treatment. Fourth, we're pleased with positive early market response from our company-wide rebranding initiative, Venus AI, and the encouraging feedback from physician participants in our Next Thetics programs. We've been pleased to see a significant increase in the popularity and attendance at our Next Thetic events, which as a reminder, bring together our network of aesthetic leaders and practitioners to learn about the science behind Venus AI technologies and our best-in-class practice development programs. The Nextesthetics program represents a great example of how we're enhancing our focus on physician education and practice enhancement by empowering professionals in the aesthetics field with the knowledge, tools, and support they need to grow their businesses. Since launching the first event in March, we've hosted thousands of registrants including our largest gathering to date, which was held in Houston, Texas in June. Looking ahead to the remainder of 2024, Nexthetic Events will continue to expand across the United States with upcoming events in Phoenix, New York City, Atlanta, Dallas, and Minneapolis. With that, let me turn the call over to Dominic for a review of our second quarter financial results and balance sheet at quarter end. 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 of 2024 on a gap basis, and all growth-related items are on a year-over-year basis. We've reported total revenue of $16.6 million, down $3.5 million, or 17% year-over-year. The decrease in total revenue by region was driven by a 29% decrease year over year in international revenue and a 5% decrease year over year in United States revenue. The decrease in total revenue by product category was driven by a 30% decrease in products systems revenue, a 4% decrease in services revenue, The decrease was offset partially by a 5% increase in lease revenue and a 2% increase in products other revenue. The percentage of total systems revenue derived from the company's internal lease programs, Venus Prime and our legacy subscription model, was approximately 34% in the second quarter of 2024 compared to 26% in the prior year period. Note, this represents a change in the trend demonstrated over the last 18 months. Our focus on prioritizing cash system sales has resulted in the overall percentage of total systems revenue derived from our internal lease programs declined from approximately 42% in fiscal year 2022 to 33% in fiscal year 2023 to a low of 25% in Q1 2024. As discussed in our recent investor calls, this strategic initiative has been a key driver of the significant improvements in our cash generation given the higher quality of revenue cash system sales represent. For avoidance of doubt, this strategy remains a priority for the company. We continue to prioritize cash system sales and believe the appropriate mix of our system sales revenue to be in the 70% cash 30% lease mix going forward. That said, it is important to realize that the company's lease revenue profile in 2024 is very different and materially higher quality than at any time in the company's history. Specifically, in January, we introduced Venus Prime, our structured in-house financing program, which replaced the legacy subscription program for new customers in North America. Venus Prime has been very well received in the marketplace and has given Venus Concept a competitive differentiator during this challenging capital equipment environment. In the current macro environment, third-party lending has tightened and so has access to capital. With this in mind, the ability to offer Venus Prime represents a valuable option to help with new system adoption. Importantly, the Venus Prime program is characterized by adherence to strict credit screening practices, a tiered risk assessment for each customer, and consistent monitoring of payment trends, which has resulted in significantly lower bad debt expense versus our legacy subscription program. While we continue to favor cash system sales with a target of roughly 70% of total systems revenue coming from cash sales, We are very pleased to have the unique lever of our Venus Prime program as a key differentiator from our competitors. Turning to a review of our second quarter financial results across the rest of the P&L, gross profit decreased 2.4 million, or 17%, to 11.8 million. The change in gross profit was primarily due to a decrease in revenue in international markets driven by the accelerated exit from unprofitable direct markets and the effects of tighter third-party lending practices, which negatively impacted capital equipment sales in both the US and international markets. Gross margin was 71.5% of revenue compared to 70.8% of revenue for the second quarter of 2023. While margin management and the exit from unprofitable direct markets are the primary contributors of this improvement, The company has also improved margins on our artist systems through manufacturing efficiencies. Total operating expenses decreased 2.5 million or 13% to 17.4 million. The change in total operating expenses was driven primarily by a decrease of 1.3 million or 16% in selling and marketing expenses, a decrease of 1 million or 10% in general and administrative expenses. Second quarter of 2024 GAAP general and administrative expenses include approximately 0.2 million of costs related to restructuring activities designed to improve the company's operations and cost structure compared to approximately 0.4 million for the second quarter of 2023. The total operating loss was 5.6 million down 0.2 million or 3% year over year. Net interest and other expenses were $14.1 million compared to income of $1.4 million in the second quarter of 2023. The year-over-year change in net interest and other expenses was driven primarily by a $10.9 million non-cash pre-tax loss on debt extinguishment due to the extinguishment of debt as a result of the debt-to-equity exchange transaction with Madron in May 2024. The increase in second quarter net interest and other expenses was also driven by higher interest expense on outstanding borrowings and a non-cash foreign exchange loss of 0.8 million compared to a non-cash gain of 0.2 million in the prior year period. Net loss attributable to stockholders for the second quarter of 2024 was 20 million or $3.05 per share compared to net loss of 7.4 million or $1.35 per share for the second quarter of 2023. Adjusted EBITDA loss for the second quarter of 2024 increased 4% year-over-year to $4.1 million. 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 June, 2024, the company had cash and cash equivalents of 5.7 million and total debt obligations of approximately 46 million compared to 5.4 million and 74.9 million respectively as of December 31st, 2023. Cash used in operations for the three months ended June 30th was 1.3 million, a 37% decrease in cash use year over year. we are very proud of the continued improvement in reducing our cash used in operations despite the challenging operating environment. Specifically, we have delivered a 47% reduction in cash used in operations over the first six months of 2024, continuing the strong performance towards this important strategic initiative in fiscal year 2023 when we reduced our cash used in operations by 52%. With respect to the year-over-year decrease in cash used in operations during the second quarter, the largest driver of change was strong working capital performance with more than $3.8 million of cash generated from working capital in the period. While multiple items are contributing to our working capital improvement, we are particularly proud of the notable reduction in cash tied up in accounts receivable. Our efforts to enhance the quality of our internal lease programs specifically the enhanced credit profile of customers in our Venus Prime program, has resulted in better collections and lower bad debt expense. We remain intently focused on further enhancement of the cash flow profile of our business and believe we have the right strategy to build the requisite foundation to support our growth and profitability goals in the year to come. As outlined in our press release, Given the company's active dialogue with our existing lender and investors and the ongoing evaluation of strategic alternatives with various interested parties to maximize shareholder value, the company is not providing full-year 2024 financial guidance at this time. For modeling purposes, the company expects total revenue for the three months ending September 30, 2024, of at least $17 million. With that, I'll turn the call over to the operator to open the call for your questions. Operator? Thank you.

If you would like to ask a question, please press star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that is star 1 to ask a question. The first question is from Marie Thibault from BTIG. Please go ahead.

Hi, good morning. Thanks for taking the questions. Hey, good morning. I wanted to ask my first question here on the macroeconomic outlook. It looks like U.S. revenue certainly is stabilizing despite some of the longer selling cycles, and I wondered if that was sort of a stable level we are at now, if that's something that you think is relatively sustainable going forward. And then second part there on OUS, there was mention of ordering patterns with the new distributors, new distribution partners. Wondering how long that will take to sort of settle into a routine, if you can just kind of, you know, elaborate on what you meant by some of those ordering patterns.

Sure. Marie, I think as you pointed out, I think, you know, we are encouraged by the performance of the U.S. business. You know, it is – you know, declining at a much lower rate and, you know, approaching a point of stability. And we are, you know, cautiously optimistic as we look into the back half of the year that, you know, we should be getting to a point where it is, you know, flattest to growing versus last year. I think that some of that is, I think, the benefit of our very diverse portfolio because, as you know, we have, you know, products that span a full spectrum of different types of procedures, different price points, and that diversity is certainly likely helping us in this environment despite the tight credit environment. And obviously our Venus Prime program is also helpful because Venus Prime probably plays more of a role in the U.S. than most other markets. So that's the view on the U.S., and Hemant can probably add to it when I'm done. On the OUS markets, And we made great progress in winding down our unprofitable subs. And then the process of signing on new distributors has taken time, and probably intentionally so, because what we didn't want to do was just go sign up a bunch of distributors and start selling. We wanted to make sure we got the right distribution partners, the right terms in place. So that has gone on over the course of the last few months. My guess, and again, Hemant will correct if I'm wrong, is that we should be done with signing up new distributors by the second half of this year. And it's just a little lumpy in terms of when they actually placed their first order, which is kind of what we were referring to. My view is that it will be 2025 before this is all kind of in steady state. There will continue to be a little bit more lumpiness in the back half of 2024. Hemant, do you have anything to add to that?

No, I think you said it well. When you look at, starting on the second, our new distribution partners, as Rajiv mentioned, we've taken a different approach to what was done in the past. We really look for proper partners in each region that can grow our products in that market. So in a lot of cases, they're actually registering our products for the first time in those markets. If you look at markets like India, we're having our products registered for the first time. So some of those things, the registration process, once those get approved, we'll have additional growth. These new contracts are true partnerships, meaning they'll have contractual minimums. There's incentives to essentially not only hit your minimums, but actually grow your sales in each market. So those ordering patterns are what take a little bit of time, right? You go going from your first order for them entering into the market potentially with new regulatory approvals and then starting to grow. But we are seeing positive trends across the board in the markets that we've brought on board and as we mentioned. we have additional ones that we're hoping to complete before the end of the year. On the US, I think Rajiv said it well. I honestly think we're uniquely positioned with the breadth of the portfolio we have and our customer base. We target both core and non-core physicians and with a very broad portfolio of products and that really does let us compete attractively within this market, even with all the challenges we have.

Okay, very useful detail. A quick follow-up here, your cash usage continues to shrink, and you've done a nice job with working capital improvements. Any way to sort of think about the outlook for your cash runway, about $6 million in cash and equivalents here on the balance sheet, how we should think about the next couple quarters in terms of cash usage? Thanks again.

Yeah, let me start, and then Dominic can add to it. So, you know, I think we've – We are reaching a somewhat steady state, Marie. My guess is that third quarter will be similar, though may have a little bit of an uptick because there are some R&D spends and things like that that we're going to have to incur. Fourth quarter, as you know, is generally, because of seasonality, the best quarter for our businesses. So there might be some improvement going into the fourth quarter. And then as we look into 2025, it really is a function of growth and how the pace of our new product introductions and how those will impact the revenue line. But we are still focused on getting the company to cash flow breakeven in the second half of 2025, and I think we are moving on the right trajectory to get there. Dominic?

Yeah, I think Rajiv said it well. You know, we'll see some continued burn, but towards the fourth quarter, we are generally not burning much in the fourth quarter. But there will be some burn in Q3, consistent with what we've seen in Q2, more or less.

All right. Very helpful. Thank you.

Thank you, Marie.

As a reminder, it is star one to ask a question. The next question is from Thomas McGovern from Maxim Group. Please go ahead.

Hi, guys. Thanks for taking my question. So, my first question is on the remaining debt on the balance sheet. So, following this debt-to-equity exchange that you guys did in the quarter, I'm just curious kind of what your strategic approach is to addressing the remaining $46 million in debt on the balance sheet. Thanks.

Yeah. So, thank you for the question. We are very pleased with the partnership that we've had with Madryn. They've been very constructive in helping the company think through our strategic options and obviously their continued investment is a sign of their continued belief in the company and its potential. We continue to work with Madrid, as well as our largest shareholders, is to work towards what we think a sustainable capital structure would be for the company. And certainly, there is ongoing discussion about the remaining 46 million of debt and what that ideally should look like going forward. We don't have a definitive answer on that yet, but that's certainly a part of the ongoing discussion with Madryn and other stakeholders, which we expect to continue over the course of the third quarter.

Gotcha. I appreciate that, Culler. And then my second question is just kind of more on a high level. You guys are talking about how you're revisiting your strategic approach to reestablishing yourselves in international markets. And I know you just kind of briefly touched on it, but maybe if you could Discuss on a higher level kind of what's changed from, you know, the last time you entered some of these international markets and what do you kind of hope to improve upon as you move forward with this strategic expansion plan?

Sure. Hamlet, do you want to pick that up?

Sure. Yeah, at a high level, and again, we've talked about this before as part of the overall restructuring, the legacy Venus business was in a lot of direct, was direct in a lot of markets. meaning we had infrastructure and while we might have been generating revenue, we generally weren't profitable in a lot of those markets. And so as part of the restructuring, the first thing we did was, you know, remain focused in markets with a direct presence where we are profitable. So you look at markets like Australia and Mexico and Israel, where we're very strong and profitable. Those are direct markets. Those make sense for us to maintain and continue to grow. In other markets where we're not, we're either subscale or uh it just doesn't make sense at this time what we've done is found strong distribution partners and again not just any distribution partner a partner that actually has a strong presence in that market and wants to partner with us to introduce our products and so what we've done over the past year has been to transition to strong distributors and both in existing markets where we were direct and into new markets as i mentioned india We're in discussions around a number of areas in Southeast Asia and continue to expand that way. So I'd say the distribution partnerships we're entering into are new and different from the ones we had before, as I described previously, with more strict terms and purchase minimums as well as incentive structures to kind of grow and with a commitment to kind of introduce more and more of our products in that market. So a real marketing and commercial partnership. Does that answer your question?

Yeah, absolutely. I appreciate you guys taking the time, and I can open up the call to further questions. Thanks.

Thank you.

We are currently showing no additional participants in the queue. That does conclude our conference for today. Thank you for your participation.