Venus Concept Inc. (NASDAQ:VERO) Q3 2022 Earnings Conference Call November 10, 2022 5:00 PM ET
Corporate Participants
Rajiv De Silva – Chief Executive Officer
Domenic Della Penna – Chief Financial Officer
Conference Call Participants
Jeff Cohen – Ladenburg Thalmann
Marie Thibault – BTIG
Anthony Vendetti – Maxim Group
Operator
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 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 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.
Rajiv De Silva
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. As the 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.
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 the Venus Concept team a little more than a month ago, with more than 25 years in the healthcare industry. I started my career in 1995 as a healthcare consultant at McKinsey & 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 and the Americas.
From 2009 to 2013, I worked at Valeant Pharmaceuticals now known as Bausch Health, serving as CEO of its Specialty Pharmaceutical Business and President of the company. My responsibilities included building its flagship dermatology and aesthetics business. My experience leading global healthcare companies was further developed during the period of 2013 to 2016, when I served as President, CEO and Director of Endo International, a publicly traded multinational specialty healthcare company.
In recent years, I have continued to be involved in the healthcare industry, including serving as Chairman as Covis Pharma, a privately held multinational specialty pharmaceutical company, and as a co-founder of Asiri Skincare, a privately held company focused 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 networks, and developing and commercializing healthcare 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 addition, I have also gained a 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 me well suited to lead Venus Concept through its next phase of development, in combination with the efforts of our dedicated colleagues.
Since joining the Venus Concept team, I have focused in part on building relationships with our colleagues, customers, and physician 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 appreciating the extent to which our customers are passionate about the benefits of Venus Concept’s technologies, including innovative medical device aesthetic products and differentiated robotic platforms serving the hair reservation market today, and the pipeline of robotic platform applications, with potential to be truly disruptive in 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, commercial product strategy, R&D and technology strategy, operating model and talent, systems and processes, capital structure and possible partnership opportunities among other things.
While the strategic review is still in its initial stages, my initial impressions have been confirmed. While Venus Concept has built $100 million plus business, the global infrastructure and business model has resulted in a P&L that has never been cashflow positive. I expect to leverage my considerable experience with turnarounds and profit improvement efforts 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. Hemanth Varghese to the Venus Concept team on October 11. Hemanth was appointed to the position of President and Chief Business Officer and brings a 20-year track record of performance and execution, with experience leading diverse healthcare businesses in high growth markets in North America and internationally, managing complex business transformations, high growth corporate strategy initiatives, executing transformational M&A and driving critical business development activities. Hemanth will work with me to lead the strategic review and planning process. And I’m excited to partner with him and Dominic as we navigate the next phase of the company’s evolution.
The strategic review and planning process is expected to continue to at least the next three months. We will be in a position to begin implementing the strategic plan that the team develops 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 for a review of our third quarter financial results and balance sheet as of September 30. Dominic?
Domenic Della Penna
Thank you, Rajiv. For the avoidance of doubt, unless otherwise noted, my prepared remarks will focus on the company’s 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 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 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 by product 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 70.5% 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 a 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 effects movement. If we adjust for these two items, then 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 change in total operating expenses was driven by an increase of 2.1 million or 18% in general and administrative expenses, and an increase of 0.6 million or 34% in research and development expenses, offset partially by a decrease of 0.7 million or 8% in sales and marketing expenses.
Third quarter of 2022 GAAP general and administrative expenses include 0.6 million in SOX related expenses we incurred in preparation for being SOX 404(b) compliant, 2.4 million of bad debt expenses, and 0.7 million of severance payments associated with a workforce reduction in Venus Spain and Venus Canada.
For the three months ended September 30, 2021, GAAP, general and administrative expenses included a 1.5 million of bad debt expenses, and a loss of approximately 0.2 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 is a result of our efforts to prudently manage our expenses. Prioritize 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, reduce our operating expenses and improve our cash generation. While these initiatives are intended to enhance our multi-year 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 $0.22 per share, compared to 9.8 million or $0.18 per share for the third quarter of 2021. Adjusted EBITDA loss for the third quarter of 2022 was 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 30, 2022, 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 modeling considerations. First, as we continue to target sequential improvement and our adjusted EBITDA loss in the fourth quarter, this adjusted EBITDA target in Q4 continues to assume 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, recognizing the third quarter, which were not assumed in our prior guidance.
Importantly, 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 4.5 million — non-cash G&A of 4.5 million non-cash 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 a full range of opportunities to fund the company’s 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-dilutive 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?
Question-and-Answer Session
Operator
Thank you. [Operator Instructions]. Our first question comes from the line of Jeff Cohen with Ladenburg Thalmann. Please proceed with your question.
Jeff Cohen
Hello, Rajiv and DDP. How are you?
Rajiv De Silva
Hi, Jeff. We are well, thank you.
Domenic Della Penna
Good, Jeff. How are you?
Jeff Cohen
Good. So just looking for some further color as you transition toward cash sales and diminishes subscriptions trying to get a better understanding on what you might expect to pull through there is for Q4 and early next year. And I guess, coupled out with the fact that so — are you converting also existing subscriptions out there of customers that are within a subscription period? Or were these just for the new ads going toward cash instead of subscriptions?
Domenic Della Penna
Yes. So Jeff, they’re primarily targeted towards new customers. We will put existing customers that have 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 their outstanding obligations, we do have a program open to make that available to them.
Rajiv De Silva
And just to build on that answer. As Dominic pointed out in the script, we did see a very encouraging increase in the cash versus subscription ratio in the third quarter and we expect to keep seeing improvements in that trend going into the fourth quarter as well.
Jeff Cohen
Okay. There is a follow up. Could you give us a sense of how the hair business did in the third quarter as [indiscernible] of the total business and perhaps discuss a little a bit about those equipment and placements as well, related to cash versus subscription. Thank you.
Domenic Della Penna
Yes, so Jeff, all of our ARTAS devices are on a cash basis. So they — we don’t really put them on subscription. So anytime we sell an ARTAS robot, it is for cash. In relation to your question on ARTAS for the quarter it was a bit soft in particular in international markets where we experienced a tightening credit market, and it took us longer to close certain deals. So I’m happy to report that in Q4, we’ve 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.
Jeff Cohen
Okay. 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 falling 0.8 from Q3?
Domenic Della Penna
Yes. I mean, I expect some relative to a year ago, certainly to the extent that 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.
Jeff Cohen
Perfect. Thanks for taking our questions.
Operator
Our next question comes from the line of Marie Thibault with BTIG. Please proceed with your question.
Marie Thibault
Hi, good evening, Rajiv 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 factoring agreement on the trade receivables, any updates or anything to give us a little more comfort there with the immediate cash runway?
Rajiv De Silva
Thank you, Marie. So let me start and then 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 this year before my arrival are beginning to bear fruit, right? So we talked about the fact that the cash versus subscription mix is in increasing. We had a pretty encouraging reduction in our cash burn in the third quarter. And we do expect to see why we are not providing guidance for the fourth quarter. We do expect to see a step up in sales in the fourth quarter in consistent with typical trends, right?
Now, in addition to that the cost reduction efforts that the company put in place early in the year are also beginning to bear fruit. Now we are increasing our effort on additional cost saving measures this quarter and going forward. So there’s a whole series of efforts that are all pointing — all moving towards continuing to reduce the burn of cash flow from operations.
Dominic can talk about the factoring agreements, the effort is going to continue potentially factoring some of our AR, but it’s a long process. And it is complex because the typical factoring processes are done with institutional customers. Most of our customers are individuals, individual practices. So those types of factoring arrangements typically take longer. But I will let Dominic add to that answer.
Domenic Della Penna
Yes. That’s correct. So Marie, those activities are still ongoing. But we are relying on a whole host of initiatives like Raji mentioned. And the primary driver, which we’ve 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 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 is relative to Q3 and other quarters.
So the combination of those two will have a substantially beneficial impact 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 do similar in Q4.
Marie Thibault
Okay. Well understood, thank you for that. Maybe I can ask my follow-up here on a more macro question. Would 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 commercial metrics like pricing and volume are holding up as well. And thank you for taking the questions.
Rajiv De Silva
Sure. Again, let me start and have Dominic add to it. We have cited different dynamics between the hair business and the aesthetics business. The ARTAS robot, as you know, is generally a high-priced item. And also the procedure is relatively high price procedure from a patient standpoint. So consistent with what other companies are seeing in terms of high price procedures, there’s more pressure on them. And also the financing environment for customers is getting a little bit tighter, right?
So that being said, the while those dynamics may have affected the third quarter has somewhat, that’s not the primary driver has Dominic pointed out, we are seeing encouraging trends in the fourth quarter with ARTAS robot. On the aesthetics devices side, there is continued demand for lower priced procedures. And that’s what we hear 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 expect to see continued demand for our products. And we’re not seeing any major change in customer buying patterns around those products.
Marie Thibault
Got it. Thank you so much.
Operator
[Operator Instructions]. Our next question comes from the line of Anthony Vendetti with Maxim Group. Please proceed with your question.
Anthony Vendetti
Thanks. Just to follow up on the distributors. So I know you’re moving more toward 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?
Domenic Della Penna
Yes. So Tony, we don’t typically provide very specific details around headcount in relation to especially international. But we can — as we mentioned, last quarter, we continue to convert certain underperforming subsidiaries from direct to distributor. And you’ll read in our 10-Q, that in particular, this past quarter we look to exit Spain and France, and they will revert to a distributor type model. So yes, there are a number of people that are impacted by that. It’s not material relative to our total sales force. But we will see a bit of a revenue decline as a result in the interim, until we get that distributor model up and running in the fourth quarter.
Anthony Vendetti
Okay. And then, I guess, as we’re modeling in the fourth quarter, you mentioned operating expense is now 99 million, should we assume approximately a couple million in severance payments in the fourth quarter? Is that about the right number?
Domenic Della Penna
It shouldn’t be as high as 2 million, but we’ll have some in the fourth quarter. But we did book some in Q3. We booked 700,000 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.
Anthony Vendetti
Okay, great. All right. I’ll jump back in. Thanks. Appreciate it.
Operator
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.
Rajiv De Silva
Thank you.
Domenic Della Penna
Thank you.
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