Q2 2023 Venus Concept Inc Earnings Call
[music].
Please standby.
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 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 S. E C, which are available on our website, we undertake no obligation to publicly.
Pete 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. Rushee still Sylvia Chief Executive Officer of Venus concept. Please go ahead Sir.
Thank you operator, and welcome everyone to Venus Concept's second quarter clean twenty-three earnings conference call.
I'm joined on the call today by our Chief Financial Officer, Domenic della Penna, and by our President and Chief Innovation and business Officer, Dr. Hammond Buggies.
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.
Then 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 our medical Advisory Board.
Domenic 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 Canadian twenty-three 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've seen in our press release issued today and the second quarter of Duane twenty-three. We delivered total revenue of 21 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 into 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 this 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 system 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 representative.
Second our restructuring activities continue to progress well.
Second in 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% reduction in cash used in operations on a year over year basis, and a 64% 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 rock.
We are particularly pleased with our performance in light of a very difficult financing environment for our end customers.
This is a this is even more relevant.
During our shift from subscription revenues to higher quality cash system cells that rely on third party financing for our customers.
And Edison the inflationary economy has impacted higher priced procedures, such as those related to I have business.
There are two other items I wanted to briefly discuss.
First we remain highly focused on maximizing our capital resources as you 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 pretax savings of $13 million 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 'twenty to 'twenty two objectives.
We are also actively engaged in discussions with key lenders to ensure the requisite runway that allows us to execute our strategic plan and successfully achieve cash flow breakeven next year.
We are appreciative of the constructive relationship that we have that we have with our primary lenders.
Second we developed a plan for regaining NASDAQ continued listing compliance which is approved by the exchange.
<unk> provided us with an extension of the compliance period through November of 2023.
I would now like to turn the call over to Dr. Hermann Druggies will share an update on recent progress in our restructuring programs R&D investments and new product pipeline initiatives, including our recently announced formation of our medical Advisory Board Herman.
Thanks Rajiv.
As we have 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 breakeven are progressing at or ahead of expectations. It is a credit to the hard work and dedication of the entire Venus concept organization well 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 in many of our customers are facing we've taken proactive steps to stay responsive to market headwinds and are implementing plans in the U S 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 dealer support.
We believe that these measures will enhance overall sales productivity, while improving our ability to respond to evolving market conditions.
In the U S. We're streamlining our internal financing processes, expanding our capacity to perform on site 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 five 10-K clearance in the third quarter and initial commercial interaction in the fourth quarter of a new medical devices that X system diverse the pro diverse. It pro is a next generation version of the venous versa. One of the Companys flagship products with more than 2500 systems sold globally since introduction.
The <unk> 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 Veeva M D 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 are 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 we easily 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.
Action of the Amy.
Our next generation of 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 <unk> full potential.
Cynically.
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 Amy aesthetic robotic robotics product development and clinical strategy.
Sharing we continue to meet the evolving needs of patients and providers with advanced technologies and strong clinical impact our.
Our first three Amy systems for clinical use has been built and will be shipped to kickoff initial study activities in Q3.
It is important to note that we expect the commercial launch of Amy to be consistent with a five 10-K clearance. We received in December of 2022, no. Further FDA clearances are required to support the commercial launch planned for <unk> 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 30 Domenic.
Thanks Hemant.
For the avoidance of doubt unless otherwise noted my prepared remarks will focus on the company's reported results for the second quarter of 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.
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 down by Deemphasizing subscription sales and exiting <unk> right sizing unprofitable direct markets.
Gross margin was 78% 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 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 U S 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% and general and administrative expenses, a decrease of $2 1 million or 20% and 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 noncash G&A 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 noncash foreign exchange gain loss, which was $178000 gain in the second quarter of <unk>.
<unk> 23, compared to a loss of $2 4 million last year.
Net loss attributable to stockholders for the second quarter of 2023 was seven 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 in the current and prior year periods reflect the one 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 32023, 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 31, 2022.
Yeah.
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 and 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 tightened credit screening practices.
As for subscription sales and 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 tranche <unk>.
Pivot placement, which occurred on may 15th 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 31, 2023, and the range of 90 million to 95 million representing a decrease in the range of approximately nine 5% to four 5% year over year.
While we are not providing formal profitability guidance for the full year 2023, we are providing the following model modeling considerations for use in evaluating our outlook for 2023.
First the nine 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.
No 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 systems 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.
Second 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 and 2020.
Three.
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 noncash expenses, including stock compensation, DNA and bad debt expenses.
Excluding the aforementioned nonoperating items and noncash expenses, we now expect our cash operating expense target to be approximately $77 million 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 are supporting modelling assumptions across the P&L.
Now expected to result in a reduction in our cash used 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.
Yeah.
Okay.
Thank you.
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My moment please.
Our first question comes from Jeff Cohen with Ladenburg Thalmann. Please proceed with your question.
Well, hi, Rajeev Domenic enhancements how are you.
Jeff. Thank you, Hey, Jeff I'm going to work backwards on a complicated question. So I guess, so it's all nickel lastly, the the 80 789 opex in the back half.
As you compare to the previous 91 ish and then you talk about the cash Opex 77 to 79 so.
I'm just trying to correlate the differential between cash.
Cash and GAAP sounds like 10 to 12 ish approximately and then maybe could you.
Try that into trimming of the business as far as.
Opex and spend in.
Let us know.
How are you thinking about whether you're you are mostly through that process or a 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 GAAP and the non-GAAP and then the cash piece.
In terms of where we stand.
We've we're primarily through our restructuring efforts as far as.
As far as they 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 regions, So thats taken a little bit.
Longer than the changes that we've made.
In North America and Israel.
Okay got it and then as a follow up on the <unk>.
Logical side.
Diverse approach.
What difference versus the versus system now is it form factor hand pieces and potentially cost of goods and then also a follow up with you mentioned body system I'm, assuming you were referring to the <unk> system.
So so with first of all we'll have more on that very soon and again, we're expecting the.
Slide 10-K clearance in the third quarter, but yes.
What you would 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 nano fractional RF onto the versus system, which you didn't have previously.
Or are the key updates we can speak to at this time.
With respect to the body system Amy is actually.
This is actually incremental to what we're doing at the Amy Amy.
Amy we're expecting to have come out in each two of next year, the new body system, which again, we'll have more detail on in upcoming calls.
We will actually be.
The update to our energy based systems with a new body system next year.
Got it okay. That's helpful. Thanks for taking the questions.
Thanks, Jeff.
Thank you. Our next question comes from Marie Thibault with B P. I G. 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 our sales teams as they go out to the U S and try to help.
It helps those customers who are maybe facing tougher financing environment 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 the financing tools.
Yes.
Mary.
Let me just.
Provide a high level answer that and I'll ask him to add some detail so.
There's nothing here that should create any major impact on our balance sheet.
Operational tools and techniques that we are helping.
Field force with some of them have to do it.
Rice, our products, particularly in combination with <unk>.
In bundles.
We've obviously also learned quite a bit about how to approach internal financing.
Given our heritage in the.
Subscription sales model, which obviously, we have tweaked and change quite a bit.
And so those are the types of tools that we are providing our field force and nothing that should impact our balance sheet, but maybe if you want to add any further detail. Yes, no. I think you said it right nothing theres nothing here that would be a fundamental shift in terms of our.
Our balance sheet or profitability I think of it in terms of anything that would either help.
Speed up or accelerate the close or any type of transaction rate 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 onsite demos as Rajeev 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.
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 rather than recognition everything would be recognized upfront.
No no changes.
Okay perfect.
And then wanted to ask about I think on the earlier call you talked about potential partnering on the R&D side, certainly seems like you're.
We're doing quite well going it alone for now, but what might we hear on that one might meet here more about partnering and which specific systems might you be partnering on.
Look I think we continue to be open to the concept of partnering but.
Our we have a lot of intellectual capital built into particularly our Ami system.
And we want to make sure that we advance it as much as possible under our own steam right. So thats really what we are focused on but as we have described on other calls.
Multiple ways in which the Amy.
Our system could evolve in the future with new indications.
Once we get beyond getting our arms wrapped around initial launch.
We certainly would benefit from other partnerships and so there is really no timeline to this.
But we certainly remain open to the idea of partnering it will allow us to advance of <unk>.
Future iterations of Amy.
Okay very helpful. Thanks for taking the questions.
Thank you Mary.
Thank you. Our next question comes from Anthony Vendetti with Maxim Group. Please proceed with your question.
Thanks, Yes event dirty but.
Just on in terms of.
Artists.
What do you think the reason for the.
Softer sales from artists and then if you could talk about I know you're moving away from <unk>.
The subscription business, although not completely ending it if that's what the 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.
Start with the Argus.
<unk>.
I didn't look that and there are a couple of reasons driving the softness in the risk business and as we described in our script.
One is this.
It is one of our higher priced devices right and what we're finding is that any device that's priced above $200000. It just becomes incrementally harder and it takes longer for customers to get financing rates as the sales cycle is becoming longer.
And then in terms of the actual procedure itself. It is also one of the higher more higher priced procedures that our devices are useful.
Being.
Upwards of $10000.
Talk to a customer depending on the number of transplants or the customer is getting.
And what we're finding is that there is a certain softness when it comes to these higher price procedures right. Now there is no indication that this is a permanent shift but certainly it is partly a reflection of the current.
Current inflationary economy.
Any further details after that.
Exactly.
I believe it's a business cycles at both at the customer level and at the consumer level.
Seeing it but not something we see as permanent.
On your on your second question. So if you look at the quarter.
We were at about 74% cash system sales versus.
26%.
Subscription sales.
In the U S was over index in cash system sales. So as we said it was about 82% and 18% subscription.
We're not trying to manage this to a particular number but I would guess going forward is 70 525 split is not a bad.
Split too to kind of think about for modeling.
Sure.
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 wait until financing right. So what we expect to do is to continue to tweak the way we do our subscription sales are until final.
Lansing.
In a way that it becomes more effective.
That expense keeps going down and if we can do that effectively at a 70 525 split that's a pretty decent split for us.
Okay, and then just just a follow up on the artist.
Yes, I know.
The price of the system.
It has been.
Down from over 300, but it's still over 200.
Is there any do you feel there is any also.
Competition is there a company called smart graft or a product called smart graph that sells for around 100 K.
Okay.
It might be.
Somewhat of an option for some of the customers are thinking about a robotic Eric transplant system.
The other thing as you pointed out there are.
Other options for customers is obviously also manual procedures.
I think the reality, though is where our new customer getting into this business. The robot offers.
Lot of benefits that other devices, because it's a it's a way to overcome inexperienced tax it provides repeat ability.
For the 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 it looks for cheaper pricing.
Some people do up for the manual procedures with do cost less right.
But like I said for practices getting into this for the first time practices looking to expand the offerings. The robot is still a pretty unique offering.
Okay. Thanks, I will hop back in the queue I appreciate it.
Thank you Ed.
Yeah.
Thank you.
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That does conclude our conference for today.
Thank you for your participation.
Thank you everyone. Thank you.
Got it.
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