Q3 2022 Venus Concept Inc Earnings Call
Please standby 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 <unk>.
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 generally accepted accounting principles or GAAP.
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 gap 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.
Frankly, the 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 Domenic della Penna.
Let me start with a brief agenda of what we will cover during our prepared remarks.
After our 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.
Yes.
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 <unk> joined the Venus concept team a little more than a month ago.
With more than 25 years in the health care industry.
Started my career in 1995 was a health care consultant at Mckinsey <unk> 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 vaccines USA in the Americas.
From 2009 to 2013 I worked at Valeant Pharmaceuticals, now known as Bausch health.
Having a CEO all of its specialty pharmaceuticals business and president of the company.
My responsibilities that included building its flagship dermatology and aesthetics vessels.
My experience, leading global healthcare companies was further develop during the period of 2013 to 2016, when I served as president CEO and director of Endo International publicly traded multinational specialty health care company.
In recent years I have continued to be involved in the health care industry, including serving as chairman of <unk> pharma, a privately held multinational specialty pharmaceutical company and as a cofounder of <unk> skincare, a privately held company focus on topical consumer therapeutic skincare products.
To summarize my 20 years as a senior executive in the healthcare industry has provided me with expertise in managing complex global businesses building distribution.
<unk> networks, and developing and commercializing health care products to improve outcomes and overall quality of care for patients around the world.
I am also well versed in multiple aspects of the aesthetics, dermatology and cosmetic surgery markets.
In Edison.
Again, the significant experience managing companies through profitability challenges capital markets repositioning and growth through both organic and inorganic means.
I am confident that these skills make him well suited to lead the witness concept through its next phase of development in combination with the efforts of our dedicated colleagues.
Okay.
Since joining the Venus concept team I have focused in part on building relationships with our colleagues customers and precision 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 Concept's technologies, including innovative medical device static products and differentiated robotic platform serving the hair.
Restoration market today, and the pipeline of robotic platform application with potential to be truly disruptive and 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.
<unk> product strategy.
R&D and technology strategy.
Operating model and talent.
Our systems and processes capital structure and possible partnership opportunities among other things.
While the strategic review is still in its initial stages.
Initial impressions have been confirmed.
While womens concept has built a 100 million dollar 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.
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. Hammond Varghese to the Venus concept team on October 11th.
Payment was appointed to the position of President and Chief business Officer, and brings a 20 year track record of performance and execution with experienced leading diverse health care businesses in high growth markets in North America, and internationally managing complex business transformations high growth corporate strategy initiatives executing transfer.
<unk> M&A and driving critical business development activities.
Payment will work with me to lead the strategic planning.
We began planning process.
And I'm excited to partner with him and Dominic as we navigate the next phase of the company's evolution.
Clearly the strategic review and planning process is expected to continue through at least the next three months.
We'll be in a position to begin implementing the strategic plan that the team developed 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 <unk> for a review of our third quarter financial results and balance sheet as of September 30th Dominic.
Thank you Rajeev.
For the avoidance of doubt unless otherwise noted my prepared remarks will focus on the Companys 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.
We reported GAAP 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 the United States revenue.
Excluding the impact of changes in foreign currency exchange rates versus the U S. 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 byproduct 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 75% of revenue in the third quarter 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 as 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 FX movement.
If we adjust for these two items in 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.
The change in total operating expenses was driven by an increase of $2 1 million or 18% and general and administrative expenses and an increase of <unk> 6 million or 34% in research and development expenses.
Offset partially by a decrease of <unk> 7 million or 8% and sales and marketing expenses.
Third quarter of 2022, GAAP General and administrative expenses include <unk> 6 million and Sox related expenses, we incurred in preparation for being Sox 404, B compliant too.
$2 4 million of bad debt expenses, and <unk> 7 million of severance payments associated with a workforce reduction in venous, Spain and Venus Canada.
For the three months ended September 32021, GAAP General and administrative expenses included a $1 5 million of bad debt expenses and a loss of approximately <unk> 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 as a result of our efforts to prudently manage our expenses.
<unk> 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 reduced our operating expenses and improve our cash generation.
While these initiatives are intended to enhance our multiyear 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 <unk> 22 per share compared to $99 8 million or <unk> 18 per share for the third quarter of 2021.
Adjusted EBITDA loss for the third quarter of 2022, with $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 GAAP net loss to adjusted EBITDA loss in our earnings press release.
Turning to the balance sheet.
As of September 32022, 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 31, 2021.
Cash used in operations for the three months ended September 30 was $3 9 million, a 46% decrease in cash used 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 in reducing our burn rate.
Finally, while we are not providing formal financial guidance for 2022, we are providing the following <unk> modeling considerations.
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 <unk>.
Total GAAP 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.
Accordingly, 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 five <unk>.
Non cash G&A of $4 5 million.
Noncash 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 our full range of opportunities to fund the Companys 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 debt.
<unk> 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.
Thank you ladies and gentlemen at this time, we will be conducting a question and answer session.
I'd like to ask a question you May press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the Q4 participants using speaker equipment. It may be necessary to pick up your handset before pressing the star key.
Please limit yourself to one question and one follow up and then re queue for additional questions.
Our first question comes from the line of Jeff Cohen with Ladenburg Thalmann. Please proceed with your question.
So Hello, Rajeev GDP how are you.
Hey, Jeff well, thank you Jeff.
How are you.
So sure.
Just looking for some further color on Q2.
Transition.
Towards cash sales and diminishes subscription just trying to get a better understanding.
What you might expect to pull through there is Q.
Q4, and early next year.
I guess couple that with the fact that.
So.
Converting also existing subscription challenged here.
Of customers that are within our subscription period or were these just for the the new ads going toward cash instead of subscriptions.
Yeah, So Jeff there primarily.
Targeted towards.
New customers.
We will.
Existing customers that are.
That that have an established track record of paying on a subscription program if that track record still remains good at the time of entering into a transaction but.
The focus is mostly on new deals that we have.
Opportunities that we've secured whereby existing customers that want to pay off our outstanding obligations. We do have a program open too.
To make that available to them.
And Jeff.
Just to just to build on that answer.
As Dominic.
Got it out in the script, we did see.
Encouraging increase in the cash versus subscription.
Ratio in the third quarter, and we expect to keep it.
<unk> seen improvements in that trend.
Going into the fourth quarter as well.
Okay, and then just a follow up could you give us.
A sense of.
How the hair business did in the third quarter Super showed that the total business and perhaps discussion a little bit about.
Those equipment placements as well related to chew cash versus subscription. Thank you.
Yes, so Jeff all of our.
Artist devices or on a cash basis.
So they don't we don't really put demand on subscription so any time, we sell an artist drove bought it as it is for cash.
In relation to your question on <unk>.
On artist for the quarter it was a bit soft in particular in international markets, where we experienced a tightening credit market and <unk>.
Took us longer to close certain deals.
So I'm happy to report that in Q4.
Cycled through some of those difficulties and we're off to a decent start in terms of.
Robot sales in the fourth quarter, but we had some challenges in the third quarter, particularly in the international markets.
Okay, and one more if I could real quick on the FX for the fourth quarter do you expect some follow on as far as some of the negative FX ramifications. Following the 0.8 from Q3.
Yes, I mean, I expect some relative to year ago.
Certainly to the extent that we we continue to see U S. Dollar strength, we will run into some headwinds in Q4.
I don't expect them to be any worse than where we are in Q3.
But.
I'm not expecting a strengthening of other currencies relative to the U S dollars in the immediate term.
Perfect. Thanks for taking our questions.
Thank you Jeff.
Our next question comes from the line of Marie Bible.
With BTG. Please proceed with your question.
Hi, good evening, Rajeev and DDP. Thank you for taking the questions.
I wanted to ask my first here on the cash runway. It seems to me like the most immediate challenge facing the new leadership and I wanted to see if we could get a little more detail on.
The progress of some of your efforts there I know that last quarter. There was discussion of a factor of agreement on the trade receivables any updates or anything.
Can you give us a little more comfort there with the immediate cash runway.
Thank you, Mike So look let me start and I'll have Dominic.
Add to this.
And the good news is a lot of the initiatives that the team put in place earlier in the year before my arrival I'll begin to bear fruit. So we've talked about the fact that the.
Cash was a subscription mix is increasing.
We had a pretty encouraging reduction in our cash burn in the in the third quarter.
And we do expect to see all while we're not providing guidance for the fourth quarter, we do expect to see a step up in sales in.
In the fourth quarter.
And consistent with typical trends right now in addition to that the cost reduction efforts.
Company put in place early in the year also begin to bear fruit and we are increasing our efforts on additional.
Cost saving measures this quarter and going forward.
So there's a whole series of efforts that.
All pointing all moving towards.
Continuing to reduce the burn of cash flow from operations.
The dominant can talk about the factoring agreements.
The effort is going to continue on potentially factoring the sulfur.
But it's a long process and it is any of it is complex because in a typical factoring.
This is <unk>.
Done with institutional.
Customers most of our customers are individuals' individual practices. So those types of factoring arrangements typically take longer but.
But I will let dominic add to that.
Answer.
Yes, that's correct summary, those activities are still ongoing.
We are relying on a whole host of initiatives like.
Rajeev mentioned and the primary driver, which we had some very immediate success on is converting to cash deals.
And again the trajectory is just getting going and we see an improvement in Q4 already.
And that's going to be a primary driver of of getting our continued burn down in the fourth quarter. In addition to the sequential improvement that we expect in Q4.
Which patterns.
Historical trends for the industry and for Venus in terms of how big Q4 as relative to Q3 than other quarters. So the combination of those two we will have a substantially.
Beneficial impact on our on our cash burn in Q4, as we continue to work on that and again, we burned a significant amount of money in the first half of the year, we really dropped back down significantly in Q3, and we continue to have plans in place to to.
Do similar in Q4.
Okay, well understood. Thank you for that maybe I can ask my follow up here on a more macro question with just love to hear what your customers are saying, what they're seeing in terms of patient demand for aesthetic procedures in this environment and how some of the metrics commercial metrics like.
Pricing and volume or are holding up as well and thank you for taking my questions.
Again, let me start and I'll have a dominant guide to it.
Yes.
So the different dynamics between the hair business.
The aesthetics business.
The August robot as you know is a generally a high price item.
And also the procedure is a relatively high priced procedure from a from a patient standpoint, so consistent with what.
What other.
Companies are seeing in terms of high priced procedures, there's more pressure on them.
And also the financing environment for customers.
Is getting a little bit tighter right. So.
Being said.
While those dynamics may have affected the third quarter is somewhat.
The primary driver as Domenick pointed out we are seeing encouraging.
Trends in the fourth quarter with Argus robot on the.
On the aesthetics devices side.
There is continued demand for lower priced.
Procedures.
And Thats.
But what we hear from our from our customers and as you know we have a full range of.
Devices for both the face as well as the body and I think overall we.
We expect to see continued demand for our products and we're not seeing any major change in.
And customer buying patterns around those products.
Got it thank you so much.
Thank you.
As a reminder, ladies and gentlemen, its star one to ask a question. Our next question comes from the line of Anthony Vendetti with Maxim Group. Please proceed with your question.
Thanks.
Just to follow up on the distributors.
So I know youre moving more to the distributor model.
How many direct salespeople do you still have.
In the U S and internationally, whether it's sales managers or direct sales.
Yes.
So Tony we don't typically provide.
Very specific details around head count.
In relation to especially international.
But we what we can as we mentioned last quarter, we continue to.
Convert certain underperforming subsidiaries from direct to distributor and Youll read in our 10-Q that in particular this past quarter.
We look to exit, Spain, Spain and France.
And they will revert to a distributor type model.
Yes, there are a number of people that are impacted by that it's not material relative to our total sales force.
But but we will see a bit of a.
The revenue decline as a result in the interim until we get that distributor model up and running in the fourth quarter.
Okay and then.
I guess as we're modeling in the fourth quarter.
You mentioned operating expenses now $99 million.
So should we should we assume approximately a couple of million in severance payments in the fourth quarter is that about the right number.
It shouldnt be as high as as $2 million, but we'll have some in the fourth quarter, but we did book some in Q3.
We booked 700000 in Q3.
There may be a minimal amount.
In Q4.
But I don't expect it to be overly material in terms of severance not in Q4.
Okay great.
Alright, I'll jump back in thanks. Thanks appreciate it.
Thank you.
There are no further questions in the queue. This does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.
Thank you.
Yeah.