Venus Concept Inc. (NASDAQ:VERO) Q1 2023 Earnings Call Transcript May 15, 2023

Venus Concept Inc. misses on earnings expectations. Reported EPS is $-1.85 EPS, expectations were $-0.14.

Operator: Good day, ladies and gentlemen, and welcome to the First Quarter 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 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 may 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 of Venus Concept.

Please go ahead sir.

Rajiv De Silva: Thank you, operator, and welcome everyone to Venus Concept’s first 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 Innovation and Business 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 Q1 revenue results and notable developments in recent weeks. Hemanth will then provide a summary of our recent progress in implementing our strategic plan unveiled at our last earning call, including how we intend to evolve by intermediate term strategy, as we look to accelerate our path to cash flow breakeven. Domenic will then provide you with an in-depth review of our first quarter financial results, our balance sheet and financial condition at year end as well as a review of our 2023 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 have seen in our press release issued this morning, in the first quarter of 2023, we delivered total revenues of $20.5 million. These results exceeded the expectations we provided on our Q4 earnings call, driven by stronger than expected demand in the U.S. market. To be clear, while our first quarter revenue results reflect notable declines versus the prior year and prior quarter. This is a direct result of the strategic initiatives we outlined on our fourth quarter call. Our team is executing well and we are encouraged by the early signs of evidence that our transformational strategy is well founded. We are transitioning the company to higher quality cash 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.

To that end, we believe there is evidence of early progress towards these key strategic initiatives in Q1. First, we are pleased to report that cash system sales represented 66% of total systems and subscription sales compared to 53% in the prior year period. Our progress towards this initiative even more evident, when looking at the mix of cash system sales in the U.S. which represented 79% of total U.S. systems and subscription sales in Q1 compared to 42% in the prior year period. Cash system sales to U.S. customers increased 68% year-over-year in Q1. And as expected, this growth fueled significant improvements in our cash generation, given the higher quality of revenue cash system sales represent. Our efforts to improve our quality of revenue are also impacting our reported revenue results for international markets as well.

As discussed on our Q4 call, while our customers outside the United States will continue to be important to the company, we are transitioning our less profitable international markets to partner with distributors going forward. We believe that divesting our interests in smaller and less profitable international markets and reinvesting those resources in higher opportunity markets like the U.S. represent a key driver of profitability improvement in the future. Finally, our restructuring activities continue to progress. We are rightsizing the business, reducing cost and simplifying the organization. We delivered a 17% reduction in our non-GAAP operating expenses representing more than $4 million in savings year-over-year. Our progress in each of these areas in Q1 drove a 53% reduction in cash used in operations, which we believe 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.

There are two other important developments that I wanted to briefly discuss. First, we announced via press release on May 11 that the annual and special meeting of the company’s shareholders held on May 10, the company’s shareholders granted the Board of Directors discretionary authority to implement a reverse stock split-based on a 1:15 consolidation ratio. The company’s common shares began trading on the NASDAQ capital market on a split-adjusted basis under the company’s existing trade symbol, VERO, at the opening of the market on May 12, 2023. The reason for the reverse stock split was to increase the bid price of our common stock to regain compliance with the continued listing requirements of the NASDAQ capital market. Second, despite a difficult financing environment in recent months, we were pleased to announce via press release this morning that we have entered into a stock price — stock purchase agreement with EW Healthcare Partners for a private placement of voting convertible preferred stock for maximum gross proceeds of up to $9 million.

EW Healthcare Partners is the company’s largest equity investor and one of the original institutional investors in Venus Concept. This private placement provides us with valuable capital to execute our near to intermediate term strategic objectives. We appreciate their continued confidence in the company. While securing this equity capital is a positive for the company, we remain highly focused on maximizing our capital resources as we 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 Q4 call, our strategic plan originally targeted a reduction in the company’s cost structure by a total of annual pre-tax savings of $13 million to $15 million beginning in 2024 and achieving cash flow breakeven in the second half of 2024.

We are evaluating a series of incremental initiatives to accelerate our path to cash flow breakeven in 2024 without impacting our 2023 objectives. I would now like to turn the call over to Dr. Hemanth Varghese, who will share an update on our recent progress in the early implementation of our new strategic plan introduced on our Q4 call, as well as some of the potential initiatives we are evaluating to accelerate our path to cash flow breakeven in 2024. Hemanth?

Hemanth Varghese: Thanks, Rajiv. As discussed on our Q4 call, we’ve begun implementing a transformational strategic plan that is six main pillars. First, rightsizing the business, by rationalizing our international infrastructure, reducing costs and simplifying the organization. Second, we’ve been significantly reducing reliance on the use of our subscription sales model. Third, focusing on the U.S. as our primary market and maintaining an optimal mix of direct presence and distributors in international markets. Fourth, leveraging our broad portfolio of energy based devices and robotic systems with better customer segmentation and a more robust customer centric approach to support market building in key core and non-core segment.

Fifth, targeted investment in R&D with a primary focus on robotics and artificial intelligence technologies as the key future growth driver and a phased development strategy to continue to rejuvenate our energy based product portfolio over time with new innovations and features that will also support a more stable recurring revenue profile. Six, exploring strategic business development and M&A opportunities by leveraging our innovative R&D pipeline, intellectual property and development expertise in medical robotics development to provide a platform for strategic partnerships aesthetic robotics, as well as position the business for future inorganic growth and consolidation through M&A. As Rajeev described earlier, we’ve already made considerable progress against several key initiatives of our corporate transformation strategy 3G, including a sustained improvement in our quality of revenues through prioritizing cash over subscription sales, transitioning operational focus on our U.S. business performance and dramatically reducing our operating expenses and cash burn through rightsizing of our infrastructure and operations.

In addition, I’d like to provide a brief update on R&D and product pipeline priorities. Since joining Venus Concept this past October, I continue to be impressed with the high caliber of talented employees, we have in our R&D organization. We’re committed to advancing aesthetic practices by bringing innovative new technologies to market and supporting our customers with new tools and services to improve treatment outcomes for their patients. We remain committed to our strategy of sustained value creation through technology leadership and continuous innovation. And going forward, our new product development strategy will be an essential component of our long term revenue growth. As we’ve discussed previously, our current development plan is to introduce two new products to market in 2024.

A brand new body contouring product called Astera and Amy, our next generation aesthetic robotics platform, which received 510-K clearance this past December for fractional skin resurfacing. We continue to believe that our Amy Robotics platform has the potential to revolutionize aesthetic medical treatment paradigms. The Amy technology will be critical to maximizing the synergy between our well-established medical aesthetics business and our pioneering robotics R&D capability. We are in the final process of establishing a medical advisory board of leading physician partners that will support our preparation for full commercial launch. At this time and in response to a difficult financing environment, we’re also focused on accelerating our plan to bring the business to cash flow breakeven and sustaining operations, thereby providing both financial security and investment flexibility for our long term growth.

As such, we have evolved our thinking on the scope of concurrent R&D programs that we can fully support and are exploring our options to phase some of our R&D investment in energy based devices and robotics programs to better stabilize core business performance and profitability before further leveraging the business with an expanded R&D program strategy. We remain very excited by the option value provided by our current R&D programs and we’ll continue to explore opportunities to expand our capacity for growth investment. In addition, we’re actively engaging in R&D partnering discussions with potential parties interested in leveraging our robotics and artificial intelligence team and development expertise for a range of exciting new programs potentially providing a valuable source of non-dilutive growth funding.

We look forward to sharing more updates on our progress in future calls. With that, let me turn the call over to Dominic for a review of our first quarter financial results and balance sheet as of March 31. Dominic?

Domenic Della Penna: Thanks, Raymond. For the avoidance of doubt, unless otherwise noted, my prepared remarks will focus on the company’s reported results for the quarter of 2023 on a GAAP basis and all growth related items are on a year-over-year basis. We reported GAAP revenue of $20.5 million down 22% year-over-year, the decrease in total revenue by region was driven by a 26% decrease year-over-year in international revenue and an 18% decrease year-over-year in United States revenue. The decrease in total revenue by product category was driven by a 40% decrease in lease revenue, a 7% decrease in systems revenue, a 16% decrease in products revenue, offset partially by a 24% increase in services revenue. Turning to a review of our first quarter financial results across the rest of the P&L.

Gross profit decreased $4.1 million or 23% to $13.7 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 deemphasizing subscription sales and exiting and/or rightsizing unprofitable direct markets. Gross margin was 66.7% compared to 67.3% of revenue in the first quarter of 2022. The change in gross margin was primarily due to a $0.4 million foreign exchange headwind as a result of most currencies depreciating relative to the U.S. dollar. Adjusting for these factors, our gross margins are slightly above the prior year period. Total operating expenses decreased $3.3 million or 13% to $21.9 million.

The change in total operating expenses was driven by a decrease of $3.1 million or 28% in sales and marketing expenses, and a decrease of $0.3 million or 3% in general and administrative expenses. First quarter of 2023 GAAP general and administrative expenses include cost related to restructuring activities designed to improve the company’s operations and cost structure. Excluding the costs related to restructuring activities, our non-GAAP operating expenses declined $4.3 million or 17% year-over-year. The total operating loss was $8.2 million compared to $7.4 million in the first quarter of 2022. Net interest and other expenses were $1.2 million compared to $0.9 million in the first quarter of 2022. Other expenses [Technical Difficulty] in the first quarter of 2023 includes $77,000 of loss on disposal of subsidiaries related to a write-down of a balance owing from the prior sale of our Venus Russia subsidiary.

Net loss attributable to stockholders for the first quarter of 2023 was $9.6 million or $1.85 per share compared to $8.6 million or $2.02 per share for the first quarter of 2022. Note, our net loss per share calculations in the current and prior year periods reflect the 1 to 15 reverse stock split. Adjusted EBITDA loss for the first quarter of 2023 was $5.7 million compared to $5.9 million for the first 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. As of March 31, 2023, the company had cash and cash equivalents of $6.4 million and total debt obligations of approximately $77.8 million compared to $11.6 million and $77.7 million respectively, as of December 31, 2022.

Cash used in operations for the three months ended March 31 was $5.9 million, a 53% decrease and cash used year-over-year. The improvement in cash used in operations was driven by our restructuring plan efforts 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 tighten credit screening practices and an otherwise challenged credit market. Cash used in operating and investing activities during the first quarter of 2023 was partially offset by $0.8 million of cash from financing activities in the period driven by proceeds from the issuance and sale of common stock pursuant to our equity purchase agreement with Lincoln Park Capital.

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 ending December 31, 2023 in the range of $90 million to $95 million, representing a decrease in the range approximately 9.5% to 4.5% year-over-year. While we are not providing formal profitability guidance for the for the full year 2023, we are providing the following modeling considerations for use in evaluating our outlook for 2023. First, the 9.5% 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.

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. This revenue mix shift is expected to result in a decline in lease revenue of approximately $16 million offset partially by the expected growth in sales of cash systems, which we expect will increase in the high-teens year-over-year. Despite the expected net decline in total subscription and systems revenue, we expect an improvement in cash generation. Our total revenue guidance for 2023 also reflects approximately $8 million of year-over-year revenue impact related to the aforementioned strategic changes we are implementing in our international business this year. 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 second 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 continue to expect relatively flat gross margins based on better than expected expense performance in Q1, we now expect GAAP operating expenses in the range of approximately $89 million to $91 million compared to our prior guidance of $91 million to $93 million. Note, this updated GAAP operating expense guidance range includes approximately $1.8 million of restructuring severance and other non-operating expenses. The updated GAAP operating expense guidance range also includes approximately $9 million of non-cash expenses compared to approximately $10 million in our prior guidance range with the largest driver of change coming from better than expected bad debt expense.

Excluding the aforementioned non-operating items and non-cash expenses, we now expect our cash operating expense target is approximately $78 million to $80 million for 2023 down $2 million from our prior guidance range. This cash expense target reflects a reduction of $6 million to $8 million or 7% to 9% year-over-year, driven by the initial benefits from the restructuring activities announced in our press release in early February offset partially by strategic investments in R&D initiatives. Fourth, we continue to expect interest expense of approximately $6 million. And finally, our total revenue guidance for 2023 and our supporting modeling of some across the P&L are now expected to result in a reduction in our cash use from operations of more than 40% year-over-year.

With that operator, we will now open the call to your questions. Operator?

Q&A Session

Operator: Thank you. [Operator Instructions] Thank you. And our first question will come from Jeff Cohen with Ladenburg. Please proceed with your question.

Operator: Thank you. [Operator Instructions] We are currently showing no remaining questions in queue and that does conclude our a conference for today. Thank you for your participation, and have a wonderful day.

Rajiv De Silva: Great. Thank you very much.