Venus Concept Inc. Q2 FY2024 Earnings Call

Please standby. Good day, ladies and gentlemen, and welcome to the Second Quarter 2024 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 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 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 the 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 for Venus Concept. Please go ahead, sir.

Thank you, operator, and welcome everyone to Venus Concept's second quarter 2024 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. Hemanth Varghese. 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. Hemanth will then share an update on our progress in several key operating areas. Following that, Domenic 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 the decrease of 17% on a year-over-year basis, we are encouraged by the continued improvements in the underlying trends in our business during the quarter, particularly in the US. Sales to US customers posted only mid-single-digit declines year-over-year. Outside the US, revenue decreased 29% year-over-year in the second quarter, reflecting impact 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're encouraged by the continued improvement in the underlying trends in our US business. We believe this improvement represents further evidence that the strategy we've implemented, focusing 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 financial pressures, higher interest rates, and tighter credit markets continue to impact customer system adoption throughout our business. This is especially the case for high ASP system sales, where the time to close continues to lengthen. I'm 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 of continued solid execution and improving results over the balance of 2024 are appropriate. Before I turn the call over to Hemanth, 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. 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. Domenic will discuss the 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 used in operations year-over-year, which we view as particularly impressive given the continued headwinds to revenue growth that sector participants have faced over the last year. We 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 initiatives to restructure the company's debt obligations and secure bridge financing. On April 23rd, one of our largest lenders, Madryn Asset Management, purchased the company's Main Street Lending Program loan from City National Bank of Florida for a non-disclosed amount. Following the close of the 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. On May 28th, we announced the 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, down from $74.9 million as of December 31, 2023. We're pleased that Madryn has demonstrated further commitment to Venus Concept’s long-term prospects with these transactions. I 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 Markets that Venus Concept has regained continued listing compliance. The debt-to-equity exchange transaction with Madryn served to bring the company above the minimum stockholders' equity requirement. I would now like to turn the call over to Dr. Hemanth Varghese, who will share an update on recent progress relative to our other initiatives.

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 color 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 focusing 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 commercialization of our next Body Contouring System in early 2025. Our strategic focus on accelerating the company's path to cash flow breakeven and sustaining operations has resulted in difficult decisions like delaying the highly compelling R&D initiatives, including our AI.ME. robotics platform. We continue to believe that our AI.ME. robotics platform has the potential to revolutionize aesthetic medical treatment paradigms. The AI.ME. 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 in treatment. Fourth, we're pleased with positive early market responses from our company-wide rebranding initiative, Venus AI, and the encouraging feedback from physician participants in our NEXThetics programs. We’ve been pleased to see a significant increase in popularity and attendance at our NEXThetics 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 NEXThetics 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, NEXThetics 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 Domenic for a review of our second quarter financial results and balance sheet at quarter end.

Thanks, Hemanth. 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 GAAP 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 revenues 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 and 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 that this represents the change in the trends 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 declining 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 that 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 compared to 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 to markets are the primary contributors to this improvement, the company has also improved margins on our ARTAS Systems through manufacturing efficiencies. Total operating expenses decreased to $17.4 million, a decrease of 13%, driven primarily by a decrease of $1.3 million or 16% in selling and marketing expenses and a decrease of $1 million or 10% in general and administrative expenses. The 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 Madryn in May 2024. The increase in second quarter net interest and other expenses was also driven by higher interest expense on our 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 a 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 GAAP 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 31, 2023. Cash used in operations for the three months ended June 30th was $1.3 million, a 37% decrease in cash used 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, have resulted in better collections and lower bad debt expense. We remain intently focused on further enhancements 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 30th 2024 of at least $17 million. With that, I'll turn the call over to the operator to open the call for your questions.

Thank you. The first question is from Marie Thibault from BTIG. Please go ahead.

Hi, good morning. Thanks for taking the questions. Wanted to ask my first question here on the macroeconomic outlook; it looks like US 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; is that something that you think is relatively sustainable going forward? And then, second part there on OUS, there is 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 elaborate on what you meant by some of those ordering patterns?

Sure. Marie, look, I think as you pointed out, I think we are encouraged by the performance of the US business. And it is declining at a much lower rate and approaching a point of stability, and we are cautiously optimistic as we look into the back half of the year that we should be getting to a point where it is flat or growing versus last year. I think some of that has been a benefit of our very diverse portfolio, because as you know, we have products that span a full spectrum of different types of procedures and different price points. 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 a larger role in the US than in most of the markets. So that’s the view on the US, and but Hemanth can probably add when I am done. On the OUS markets, we made great progress in winding down our unprofitable subsidiaries, and the process of signing on new distributors has taken time. And probably intentionally so because what we didn't want to do was just sign up a bunch of distributors and start selling. We want to make sure we got the right distribution partners and the right terms in place. So that has gone on over the course of the last few months. My guess, and again Hemanth will correct if I am 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 place their first order, which is kind of what we were referring to. My overview is that it would be 2025 before this is all kind of in steady state. There will continue to be a little bit more lumpiness in the back of 2024. Hemanth, do you have anything to add to that?

No, I think you said it well. When we look at starting with the new distribution partners, as Rajiv mentioned, we're taking 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. Some of those processes have the registration timeline. Once those get approved, we will have additional growth. These new contracts are true partnerships meaning the contractual minimums have 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're 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 U.S., 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 with a very broad portfolio of products and that really does let us compete attractively within this market even with all the challenges.

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. Anyway 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 of quarters in terms of cash usage? Thanks, again.

Yeah, I mean, we have...

Let me start, and Domenic can add to it though. I think we've reached a somewhat steady state, Marie; my guess is that the third quarter will be similar to when we 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 will impact the revenue line. But we are still focused on getting the company to capital breakeven in the second half of 2025, and I think we are moving in the right trajectory to get there. Domenic?

Yeah, I think Rajiv said it well. We'll see some continued burn, but towards the fourth quarter, we generally are 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.

The next question is from Thomas McGovern from Maxim Group. Please go ahead.

Hi guys. Thank you 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, 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 Madryn, as well as our largest shareholders, to work towards what we think is a sustainable capital structure for the company. There are ongoing discussions 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 ongoing discussions with Madryn and all the stakeholders which we expect to continue over the course of the third quarter.

Got you. I appreciate that color. And then my second question is 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. I know you just kind of briefly touched on it. But maybe if you could discuss on a higher level what has changed from the last time you entered some of these international markets and then what you kind of hope to improve upon as you move forward with this strategic expansion plan?

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

Sure. Yeah, at a high level, and again, we’ve talked about this before as part of our overall restructuring. The legacy Venus business 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. As part of the restructuring, the first thing we did was remain focused on markets with a direct presence where we are profitable. In direct markets like Australia, Mexico, and Israel, we’re very strong and profitable. Those are direct markets that make sense for us to maintain and continue to grow. In other markets where we're not profitable or where we are sub-scale, what we've done is found strong distribution partners. And again, not just any distribution partner but a partner that actually has a strong presence in that market and wants to partner with us to introduce our products. What we've done over the past year has been to transition to strong distributors in both existing markets, where we were direct and into new markets, as mentioned, India; we’re in discussions around a number of areas in Southeast Asia and continue to expand that way. The distribution partnerships we're entering into are new and different from the ones we had before, with more strict terms and purchase minimums, as well as incentive structures to kind of grow and with the commitment to 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’ll turn it back to the call for 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.

Thank you.