Q3 2023 Venus Concept Inc Earnings Call

Please standby good day, ladies and gentlemen, and welcome to the third quarter of 2023 earnings Conference call for Venus concept, Inc. At this time all participants have been placed in a listen only mode. Please note that this conference call is being recorded and that the recording will be available on the company's website for replay.

Before we begin I would like to remind everyone that our remarks and responses to your questions. Today may contain forward looking statements that are based on the current expectations of management and involve inherent risks and uncertainties that could cause actual results to differ materially from those indicated including those identified in the risk factors section of our most recent 10-Q and our.

Our annual report on Form 10-K filed with the Securities and Exchange Commission such factors may be updated from time to time in our filings with the SEC, which are available on our website.

We undertake no obligation to publicly update or revise our forward looking statements as a result of new information future events or otherwise. This call will also include references to certain financial measures that are not calculated in accordance with generally accepted accounting principles or GAAP.

We generally refer to these as non-GAAP financial measures reconciliations of those non-GAAP financial measures to the most comparable measures calculated and presented in accordance with GAAP are available in our earnings press release issued today on the Investor Relations portion of our website.

I would now like to turn the call over to Mr. Rajiv de Silva Chief Executive Officer of Venus concept. Please go ahead Sir.

Thank you operator, and welcome everyone to Venus Concept's third quarter 2023 earnings conference call.

I'm joined on the call today by our Chief Financial Officer, Domenic della Penna, and by our President and Chief Operating 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 Q3 results and notable operating developments in recent months.

Then hemant will share an update on our recent progress in several key initiatives of our corporate turnaround strategy.

Dominic will then provide you with an in depth review of our third quarter financial results.

And our balance sheet and financial condition at quarter end as well as a review of our 2023 year financial guidance, which we reaffirmed in today's press release.

And then we will open the call for your questions.

With that agenda in mind, let's get started.

Let's see what have seen in our press release issued today in the third quarter of 2023.

We delivered total revenue of $17 6 million.

These results are within the range of preliminary revenue expectations, we provided as part of our debt restructuring announcement on October 5th.

While our third quarter total revenue declined on a year over year basis. The majority of the decline can be attributed to accelerated restructuring activities in certain international markets.

We were pleased to see improvements in revenue trends in the U S. During the third quarter, where sales declined modestly on a year over year basis, but increased 14% on a quarter over quarter basis in Q3.

Similar to what we have discussed on our recent earnings calls 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 cash revenues exiting unprofitable direct operations in certain international markets and implementing a series of restructuring activities, which altogether I expect it to enhance the cash flow profile of the business and accelerate the path to long term sustainable profitability.

Alrighty and growth.

We are pleased with the progress we have made.

In our strategic turnaround plan in 2023.

Macroeconomic headwinds continue to pressure the aesthetics sector.

That's a hole with higher interest rates affecting our customers' ability to finance new capital equipment purchases and deals are taking longer to close in Edison. The inflationary economy has impacted higher priced procedures, such as those related to our business.

First we are pleased to report that cash system sales represented 69% of total systems and subscription sales compared to 59% in the prior year period.

Our progress on these initiatives, even more evident when looking at the mix of cash system sales in the U S, which represented 76% of total U S systems and subscription sales over the first nine months of 2023 compared to 44% in the prior year period.

Cash system sales to U S customers increased 12% year over year in Q3 and have increased more than 40% over the first nine months of 2020 three.

This reflects the team's strong execution towards our strategic priority to transition the company into higher quality cash revenues.

Second our restructuring activities accelerated in certain international markets during the quarter.

By way of reminder, one of our key strategic priorities in 2023 was to optimize our commercial and operational strategy in certain international markets and to reinvest those resources in higher opportunity markets to enhance the company's longer term growth and profitability profile.

Our restructuring activities outside the U S have included divesting, our interests and smaller and less profitable markets and transitioning to partner with distributors.

With a target of having our new distributor partners in key markets identified signed up and up and running in the majority of our key international markets by early next year, we expect to be well positioned for a return to growth in 2024.

We recognize that much of the work we are doing this year has yet to evidence itself in our topline results.

This was largely expected when we outlined our plan earlier this year.

Candidly the macro environment has represented more of a headwind than we had contemplated.

Sure.

Our team is executing well despite these unexpected challenges.

Importantly, despite the softer than expected revenue results. This year. The continued focus on restructuring and right sizing the business, reducing costs and simplifying the organization are progressing well ahead of expectations.

We have reduced our non-GAAP operating expenses by nearly $17 million over the first nine months of 2023, representing a 22% reduction year over year.

We have reduced our cash used in operations by 49% over the first nine months of 2023 and continue to target a 50% reduction year over year for the full year 2023 period.

We believe the.

The reduction in expenses and cash used in operations to date 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.

One other noteworthy item I wanted to discuss briefly.

On October five.

We announced an agreement with city National Bank of Florida, and Madron asset management to restructure our existing debt obligations.

As discussed on our recent earnings calls we had been actively engaged in discussions with our key lenders to ensure the requisite runway that allows us to execute our strategic plan and successfully achieve cash flow breakeven in the second half of 2024.

Restructuring our debt obligations represents the achievement of an important milestone for the company.

One that reduces our total debt.

First principal and interest payments and lowers our near term cash needs.

This debt restructuring activities provide Venus concept with additional liquidity to support the maintenance of ongoing operations.

Execution of our near to medium term strategic turnaround objectives and funding a priority investments in key R&D initiatives.

We are appreciative of the valuable partnership and continued support from our lenders, we look forward to continuing to engage with our lenders as we execute our strategic plan.

I would now like to turn the call over to Dr. Hemant, <unk>, who will share an update on recent progress in our restructuring programs new product pipeline initiatives and our recent companywide rebranding initiative, which marked an important inflection point in our strategic turnaround payment.

Thanks Rajiv.

As Rajiv described earlier, we've already made considerable progress against several key initiatives of our corporate turnaround strategy.

We're 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, notably the decision. We made in Q2 to target additional cost containment initiatives, including identifying areas, where we can implement phased R&D investments.

To protect our near term cash runway and accelerate our path to cash flow breakeven in the second half of 2024.

Second we are encouraged by the early momentum we are seeing as a result of the targeted programs implemented in Q2 to provide more operational flexibility to our U S commercial teams, including new financial tools and transaction support needed to provide an enhanced level of customer and deal support we continue to.

Expect improvements to overall sales productivity and customer responsiveness and the challenging environment in many of our customers are facing.

Third outside the U S. Our efforts to right size the business had been accelerated in recent months, we are rationalizing our international infrastructure, reducing costs and simplifying the organization with a keen focus on establishing the optimal mix of direct presence with distribution partners in key international.

It gets around the world.

Discussions are ongoing with both existing and several new distribution partners to align with our new international strategy.

Multiple new distribution agreements are under negotiation.

Which has us on track to be sustainably substantially completed with our international repositioning by early 2024 and ready to return to growth outside the U S. In 2024.

Fourth at.

As discussed on our second quarter call, we've advanced certain new product pipeline projects ahead of expectations.

And I'm pleased with the significant progress made in new product introductions in recent months.

After receiving five FDA 500, 10-K clearance in September we were pleased to announce the U S. Commercial launch of our new multi application platform the Venus versus a pro on November one.

The <unk> is a next generation version of the venous versa. One of the company's flagship products with more than 200 systems sold globally since introduction.

The new versus a pro provides our customers with an enhanced user experience and superior clinical performance.

System's ability to support 10 different applicators addresses the growing demand for multimodal solutions and aesthetic clinics and med spas and offers a complete rejuvenation solution for addressing tone texture and tightness we.

We see this as an important near term growth opportunity for new customers and an attractive upgrade opportunity for existing users.

Finally, we are pleased to announce a company wide rebranding initiative in October we introduced our new branding called Venus aesthetic intelligence or venous AI.

Venus AI captures our strong commitment towards growing our global brand focusing on emerging technologies and services partnering with customers to build smarter practices and customizable treatments.

The new Venus Venus AI branding represents a forward looking approach to Fedex innovation that is core to Venus as future aspirations are.

Our product portfolio will continue to evolve and deliver more than just leading device performance, but with a shift towards total practice performance.

<unk> patient enters the clinic to post treatment and recovery.

Further by staying connected to our customers, we can start to leverage real time data across our growing network of connected devices to uncover the meaningful business insights that define the best in practice performance and.

And fuel the next generation of static device technologies customers will see Venus AI branding and all of our new product launches, including the versa Pro launch earlier this month and importantly, with the launch of our next generation of aesthetics robotics platform Amy in late 2024.

With that let me turn the call over to Dominic for a review of our third quarter financial results and balance sheet as of September 30th Delek.

Thanks Simon.

For the avoidance of doubt unless otherwise noted my prepared remarks will focus on the Companys reported results for the third quarter of 2023 on.

On a GAAP basis, and all growth related items are on a year over year basis.

We reported GAAP revenue of $17 6 million down 18% year over year. The decrease in total revenue by region was driven by a 34% year over year.

34% decrease year over year near international revenue and a 5% decrease year over year in United States revenue.

Our international revenue results were impacted by the company's decision to exit three unprofitable direct markets in the past year.

As well as the general macro economic headwinds that impacted customer access to capital the.

The decrease in total revenue by product category was driven by a 39% decrease in lease revenue a 20% decrease in products. Other revenue a 6% decrease in products systems revenue, partially offset by a 15% increase in services revenue.

As Rajiv mentioned earlier, we continued to deliver on our stated goal of shifting our mix of systems revenue.

Cash system sales represented 69% of revenue in the third quarter of 2023 compared to 59% last year.

We continue to target cash system sales to represent approximately 70% of total subscription and system sales for full year 2023, compared to approximately 58% for full year 2022.

Turning to a review of our third quarter financial results across the rest of the P&L.

Gross profit decreased $1 2 million or 9% to $12 2 million the.

The change in gross profit was primarily due to a decrease in revenue in our international markets driven by the accelerated exit from unprofitable direct markets.

Gross margin was 69, 2% of revenue compared to 62, 1% of revenue for the third quarter of 2022. The change in gross margin was primarily due to significant inventory write offs in the third quarter of 2022, which did not repeat this quarter.

And as zero point $8 million foreign exchange headwind as a result of certain foreign currencies depreciating relative to the U S dollar.

Excluding the inventory write offs in the third quarter of 2022, and the impact of changes in foreign exchange third quarter gross margin was 73, 6% compared to 72, 1% last year and.

An increase of 150 basis points year over year.

On a regional level the improved margins speaks to our continued focus on higher margin U S operations.

Total operating expenses decreased $5 9 million or 24% to $18 9 million.

The change in total operating expenses was driven primarily by a decrease of $2 5 million or 26% and selling and marketing expenses.

A decrease of $2 3 million or 19% and general and administrative expenses.

Decrease of $1 1 million or 36% in research and development expenses.

Third quarter of 2023, GAAP General and administrative expenses include approximately 0.8 million of costs related to debt restructuring activities.

Designed to improve the company's liquidity and overall ability to execute our near term strategic initiatives.

The total operating loss was $6 8 million compared to $11 4 million in the third quarter of 2022.

Net interest and other expenses were $2 5 million compared to $3 2 million in the third quarter of 2022.

The year over year change in net interest and other expenses was driven primarily by a reduction in noncash foreign exchange loss, which was zero point $9 million in the third quarter of 2023 compared to a loss of $2 million last year.

Net loss attributable to stockholders for the third quarter of 2023 was $9 1 million or $1 64 per share compared to $14 6 million or $3 36 per share for the third 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 third quarter of 2023 was $4 6 million compared to $7 7 million for the third 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 September 32023, the company had cash and cash equivalents of $4 9 million and total debt obligations of approximately $79 million compared to $11 6 million and $77 $7 million, respectively. As of December 30 <unk>.

<unk> 2022.

Cash used in operations for the three months ended September 30th was $4 2 million.

Compared to $2 1 million in the second quarter and $3 9 million used in the prior year period.

The sequential increase in cash used in operations was driven almost entirely by timing of restructuring payments and changes in third party lending cycles, creating delays in payment receipts. Nonetheless, we delivered another strong quarter working on working capital performance with more than $2 5 million of cash.

<unk> generated from working capital in the period.

Cash used in operating and investing activities. During the third quarter of 2023 was partially offset by $2 8 million of cash from our financing activities in the third in the period driven by the net proceeds of $2 8 million from the sale of senior preferred stock from the second and third tranches.

And the 2023 multi tranche private placement, which occurred on July 12, 2023 and September eight 2023.

Turning to a review of our guidance as detailed in our press release, we reaffirmed our revenue guidance for the full year 2023 period, which was previously updated in our press release on October <unk>.

The company continues to expect total revenue for the 12 months ending December 31, 2023, and the range of 80 million to 82 million representing a decrease in the range of approximately 18% to 20% 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 20% decline in revenue at the low end of our full year guidance range continues to reflect the expectation that cash system sales represent approximately 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, now assumes year over year headwinds to our revenue growth from lower lease revenue in favor of cash system sales of approximately $15 million versus $16 million previously and the impacts related to the acceleration of strategic initiatives. We are implementing in our.

International business this year of approximately $17 million compared to an $8 million headwind assumed at the low end of our prior guidance range.

Excluding the impacts from prioritizing cash system sales and strategic changes in certain international markets. This year, we believe our total revenue growth would be 13% year over year on a normalized basis.

Second at the low end of our full year 2023 range revenue range. We now expect gross margins of approximately 68% up roughly 200 basis points year over year as compared to prior guidance assumptions, which calls for 67% gross margins year over year in 2023.

<unk>.

And based on better than expected expense performance in the first nine months of 2023, and our updated expense assumptions for Q4, we now expect GAAP operating expenses for the full year 2023 period in the range of approximately $81 million to $83 million.

Compared to our prior guidance of $87 million to $89 million.

No. This updated GAAP operating expense guidance range includes approximately $2 4 million of restructuring severance and other non operating expenses compared to $1 9 million previously.

The updated GAAP operating expense guidance range also includes approximately $7 million of noncash expenses, including stock compensation, DNA and bad debt expenses compared to $9 million previously.

Excluding the aforementioned nonoperating items and noncash expenses, we now expect our cash operating expense target to be approximately $72 million to $74 million for 2023 down $5 million from our prior guidance range.

Fourth we expect interest expense of approximately $6 6 million.

Finally, we continue to expect our updated total revenue guidance and supporting modelling assumptions across the P&L for 2023 to result in a reduction in our cash used from operations of more than 50% 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 one on your telephone keypad, if youre using a speakerphone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.

If you'd like to ask additional questions. We invite you to add yourself to the queue again by pressing the star Star one.

And our first question will come from.

Jeff Cohen with Ladenburg Thalmann. Please proceed with your question.

Hi, Rajeev.

Film and Nick how are you.

Hey, Jeff Alright. Thank you. Thank you.

So on a go full start form.

Ladies and gentlemen, you talked a little bit about the margin some of the assumptions you're giving to them.

68% so be sure.

Aspirational.

In 'twenty four would you anticipate that.

That can be held.

Yes, we're pretty comfortable with the 68% range.

Trending a little higher than that now.

A little bit of room for slippage in the fourth quarter, but we're pretty confident in the 68% and in terms of maintaining it going forward in 2024, we think somewhere between 66% and 69% is probably.

Where we will sort of target.

We have a fair bit of confidence in that sort of range for 2020 for Jeff Obviously, we will finalize that when we get to our guidance call early next year for trading credit for but.

We are pleased with how the gross margins are progressing.

Super.

Could you talk a little bit about the.

<unk>.

And.

<unk>.

The equipment, that's getting out there now are you expecting that.

Users will upgrade or would you anticipate that they would be purchasing second units.

In the case of upgrading could.

Could there be a refurbished shouldnt reduce your self insured.

Yes, I think both are opportunities as we mentioned there is a large installed base over 2200 units out there. There is an upgrade path on the existing systems to actually upgrade to some of the new functionality without the.

The updated color but.

And look but.

Added functionality, but there's also great opportunities for those that have initial system to either expand with the new system to have the higher powered visa MD Handpiece incorporated.

Or to or to add to their to their practice. So it's a great installed base to build off of but for those that have a versa. There's also an upgrade path if they want to move to diverse pro.

Okay. That's helpful. And then lastly could you talk a little bit about some of your other territories.

Pall Mall continues along some of the divestitures.

Smaller markets. There are only 24 could you give us a sense.

Geography and perhaps.

As I mentioned before we're case concluded thus for.

She wants to do in the company.

A couple.

Couple or few quarters.

Yes, Jeff so.

The geographies are focused in.

Our EMEA region, which is primarily Europe.

And in APAC.

And within that within APAC, primarily in.

In East Asia, So I would say.

Probably about.

80% to 90% through our various wind down and restructuring efforts.

What is a little bit.

Off cycle is the onboarding of new distributors right, which.

It is always difficult to time, and especially because we are.

Working on making sure that we have the right distributor distribution partners in each of these markets. So that part of it is a little bit more fluid than we expect.

A large amount of that to be done by year end, but some of it may slip into the first quarter, but we would expect.

All of this will be concluded in the first quarter by the first quarter of 2024.

Okay.

So for us generic perfect. Thank you very much for taking the questions. Thanks.

Great. Thanks, Jeff.

Our next question comes from Murray Diebold with BTG.

Please proceed with your question.

Hey, good afternoon, everyone, you've got Sam LIBOR Entre Maria Thanks for taking the questions.

Maybe I can start here in the U S.

Numbers, indicating a fair a bit better this quarter.

Wondering what's driving maybe some of the resiliency there.

You mentioned, some macroeconomic headwinds and that's starting to impact customer access to capital is that something we could start seeing.

Elongated purchasing cycles in the U S.

So look.

Look I think in the U S. We have a lot of moving parts.

Obviously.

There is that what has been a large impact on the U S to the positive in terms of higher quality of revenues by shifting to cash systems and subscription sales. So a lot of that is beginning to.

Again traction. We've also made a number of changes in our U S field organization and continuing to make those changes to further improve it. So those are also.

Coming to coming together.

Now in terms of our expectations around the macroeconomic headwinds. So those have been present for most of this year, so they're not particularly new I think what's new is that.

That.

Customer buying patterns, especially when it comes to kind of the deal cycle is becoming longer and longer because many customers.

Shopping deals, which is certainly we likely saw.

As Dominic mentioned, certainly cash collections slipped from third quarter into fourth quarter, So thats kind of.

Freezing will public continue but obviously those the cash that we don't collect in the third.

Sorry, we're collecting the fourth quarter and and so on and so forth right.

So we certainly don't predict a improvement in the customer buying patterns in the fourth quarter.

But we do believe that the impact and implications of those headwinds are already present in our third quarter results.

Okay understood maybe I can use my follow up here on <unk>.

I didn't catch it on the call just wondering an update on that platform for for next year.

Sure Yeah Sterno was internal name what the actual name will be going into next year.

Still to be determined, but we have discussed I believe on our last call that we are still planning a launch of a new body system.

By mid next year.

And that is still planned ahead, so as we discussed with.

There is some R&D investments, but in doing that we've actually still been able to maintain that accelerate others. So versus a pro action was accelerated we're able to launch that this year and body system that we're planning on launching is still anticipated for mid next year.

Okay sounds good looking forward to that and maybe if I could just squeeze in a last clarification question.

You mentioned.

U S being able to grow year over year in 2024 is that on a year over year basis 2024 for 2023 year or is that just meant to mean a quarter in 24 growing over 23.

We would expect to see.

Some growth for the full year in 2020 full but.

As we've described.

The distribution of Onboarding will continue into the first quarter right. So I think the trajectory of that return to growth slightly in the more in the second half.

Got it thanks for taking questions.

Thank you.

And as a reminder, if you'd like to ask a question. Please signal by pressing star one on your telephone keypad. Our next question comes from the line of Anthony Vendetti with Maxim Group. Please proceed with your question.

Thank you for taking the question. This is actually Jeremy on the line for Anthony.

In terms of just general macro economic you talked about the customers from year end and what are your customers being in terms of patient traffic patient volume is there some.

How do you see anything rebound in there or is that still lagging.

Yeah.

I think as we've described where we are seeing.

Hey.

The difference in customer behavior is primarily for the higher priced procedures. So so that is primarily for us to have business. So that dynamic will continue as we talked about that in.

In the second quarter that has continued into the third quarter and will likely continue into the fourth quarter as well.

In terms of end customer demand for other procedures, such as hair removal body contouring skin tightening.

We're not hearing from our customers any major downward trend in those types of procedures.

Okay understood and then just.

You mentioned on the call. The Amy you said, it's still on schedule for commercialization in the second half of 'twenty before late 2024, So what is going to happen, maybe just walk us on some of the steps.

And what has to happen until the inflammation, whether that commercialization is successful.

Yes, so as we've announced in previous announcements. This year, we launched our medical Advisory Board with top flight group of physicians to work with us around the development and launch.

We already received clearance for majority of work this ongoing would be clinical supporting specific indications generating the kind of data that would actually support a strong commercial launch at the back end of next year.

So thats, what you would expect to see as well as the ramp up preparation for manufacturing that.

Would be occurring next year, but.

From a regulatory perspective, it's largely complete.

It's working on specific applications and indications that will support the launch that will be the focus.

Okay understood. Thank you for taking my question.

Thank you.

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

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