Venus Concept Inc (VERO) 2020 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, to the Second Quarter of 2020 Earnings Conference Call for Venus Concept.

(Operator Instructions) 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 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 these 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. Dom Serafino, Chief Executive Officer of Venus Concept.

Please go ahead, sir.

Thank you, operator, and welcome, everybody, to Venus Concept's Second Quarter 2020 Earnings Conference Call.

I'm joined today on the call by our Chief Financial Officer, Domenic Della Penna; and Chad Zaring, our Chief Commercial Officer.

Let me start with a brief agenda of what we will be covering today during our prepared remarks.

I will start with an overview of our revenue performance in the second quarter, including color on how our business trends were impacted by COVID-19 and how we have managed the business to ensure we are well positioned for our recovery.

After my opening remarks, Domenic will provide you with a more in-depth review of our quarterly financial results as well as a summary of our balance sheet and financial condition.

And then we will open up the call for your questions.

With that in mind, let's get started.

We'll begin with a review of our second quarter revenue performance.

We reported GAAP revenue of $17 million for the second quarter of 2020, representing a decrease of 39% year-over-year, but at the high end of our preliminary revenue range, which we announced on July 15.

As expected, our sales performance in the second quarter was significantly impacted by business disruption caused by the global pandemic.

As discussed in our Q1 call in mid-May, April was unlike any month I've ever experienced in this sector.

Roughly 95% of our U.S. customers were closed during the month as a result of federal restrictions, and our U.S. sales declined 55% year-over-year.

And the fundamentals were worse in our primary markets outside of the U.S.

It was a painful first month of the quarter to say the least, but the organization rallied, and I'm very proud of how their hard work and dedication had us well positioned to bounce back as the operating environment began to improve in May and throughout June.

By the end of May, roughly 30% of our customers were open and more than 40% were opened by the end of June.

These reopenings were followed by a steady increase in procedures as many of our customers had built solid pipelines of future procedures by leveraging virtual technologies to conduct patient consultations while their offices were closed.

In the U.S., after a difficult April, we saw improving year-over-year device sales trends in May and then sharp improvement in our year-over-year device sales trends for the month of June.

Although we are still flat on a year-over-year basis for the month of June.

Outside of the U.S., we saw a similar improvement in sales trends in May compared to April, and June showed a material improvement in trends compared to May.

However, sales for the month of June were still down more than 20% year-over-year.

The recovery is best categorized as improving, but there are certainly pockets of strength and relative weakness depending on the region of the country, and this is definitely the case as you look across the many regions of the world in which we operate.

As of the end of July, roughly 65% of our U.S. customers were open.

Based on our feedback from our customers and the strong visibility we have into the usage and procedure activity for a large portion of our installed base of systems, we are really encouraged with the recovery that is taking shape and that our U.S. customers are on the path to pre COVID productivity.

As for our business outside of the U.S., in total, we did see an improvement in sales trends during the month of July.

Although there was a wide variety of variability in the pace of recovery, depending on the region, we had a very strong July in EMEA region, but this was offset by softer trends in APAC and certain countries in Latin America.

While the year-over-year decline in revenue for the second quarter was quite shocking at face value, it was largely expected given our overall exposure to elective procedures.

The medical aesthetics and hair restoration markets have been significantly impacted by the disruption caused by the global pandemic.

And while a significant amount of uncertainty around the pace and timing of the global recovery remains, we continue to believe that we are well positioned to return to above-market growth and significant market share gains as the global recovery takes shape over the second half of 2020.

Our confidence in this belief is driven by the early evidence that we are seeing both in terms of driving growth in key areas of commercial focus and in terms of improving profitability as a result of the strategic initiatives outlined in our Q1 call.

These strategic initiatives are squarely focused on enhancing our competitive positioning and maximizing our capital as the global recovery progresses.

Let me share a few thoughts on the early evidence of success in each of these areas.

Firstly, the new commercial strategy for the ARTAS and ARTAS iX systems, products and services is focused on driving broad-based adoption and utilization, which had not happened under the prior management of Restoration Robotics.

By way of reminder, there are 3 tenets to this new commercial strategy.

First, an improved pricing model where we significantly lowered the list price of the ARTAS system while still improving the gross profit margin profile as a result of the significant reductions in the cost of the goods that we identified.

The second tenet of this new commercial strategy is a targeted plan to engage with clinicians to reinvigorate underutilized ARTAS systems, including practice enhancement managers and customer-focused hair technicians like our VeroGrafter program.

And importantly, the third key tenet of the new commercial strategy, which we believe will improve the growth trends for ARTAS, is the fact that we are now able to offer the most comprehensive hair restoration solutions offering available today.

This point really can't be overstated.

With ARTAS and NeoGraft, we now have an end-to-end portfolio of minimally invasive solutions unique from any competitor in this $4.1 billion global hair restoration market.

Simply stated, our new commercial strategy is clearly working.

Sales of the ARTAS systems and products in the second quarter increased 11% year-over-year to $3.3 million.

The sales results were driven by new system adoption and strong procedure growth compared to the prior year period.

We've sold systems to new customers in both the U.S. and outside of the U.S., and we are encouraged by the improving utilization trends for our U.S. customers, where utilization increased more than 40% year-over-year in June and July.

Overall, we believe the new commercial strategy has led to improving results during the second quarter and in July, impressive performance given the challenging operating environment we work under.

We are also seeing early evidence of success in our goals to enhance our competitive positioning, which we outlined in the Q1 call.

Chad Zaring has been instrumental in executing these initiatives, which include: Consolidation of direct selling operations in certain international markets and investing that capital in the higher return, more attractive U.S. market; enhancing our sales leadership team by eliminating multiple layers of sales management positions and duplicative positions throughout the sales organization and calling on performing reps -- underperforming reps; importantly, we have relocated a portion of these savings towards the expansion of our North American direct sales team, which we believe offers the highest return on investment for these investment dollars.

Lastly, we implemented a more targeted near-term commercial strategy during Q2, which is focused on optimizing our pipeline and sales process, tightening clinician targeting, tailoring our sales strategies depending on the geographic region of the country and arming our direct sales team with programs and messaging focused on 6 key product lines within our broad portfolio of 12 commercialized products.

Importantly, the changes to our direct sales infrastructure and more targeted near-term commercial strategy have not altered our commitment to our high-touch customer-focused philosophy, which builds long-term relationships with our customers, supported by our outstanding marketing team, continuous clinical education, practice enhancement programs and much more.

These efforts to enhance our competitive position are already paying dividends.

Our second quarter sales results in the U.S. benefited from this strategic focus.

And we are seeing strong pipeline thus far in the third quarter, which further supports our cautious optimism and our ability to drive improving sales performance over the balance of 2020.

We also made notable progress in our efforts to reduce our operating expenses profile during Q2, which Domenic will discuss in greater detail in a few moments.

By way of reminder, as discussed on our last call, we conducted a full review of our operating budget for 2020 in April and announced a new restructuring program that identified additional operating expense reduction opportunities of at least $20 million, which we expect to realize in 2020 and into '21.

This new restructuring program, combined with the previously announced synergies and cost reductions, is expected to result in a total cost savings of approximately $38 million in 2020, continuing into 2021.

Simply stated, we expect these efforts to result in a significant improvement in the company's financial profile going forward and allowing us to maximize our capital.

I wanted to highlight one other item before I turn the call over to Domenic; specifically, the significant progress we have made this year in the area of R&D, which we believe is the key driver for our long-term value creation.

As discussed on prior calls, our longer-term R&D strategy is focused on leveraging the potentially powerful combination of Venus' expertise in noninvasive energy-based technology solutions for aesthetic applications with Restoration Robotics' expertise in robotic technology, 3D preoperative planning and software.

Specifically, we believe that there is a compelling opportunity to introduce new minimally invasive robotic solutions beyond hair restoration for medical aesthetic procedures that are not only treated -- that are currently only treated by surgical intervention today.

The combination of our manufacturing capabilities in Israel and Restoration's deep IP portfolio and strong robotic capabilities in San Jose has us well positioned to develop the next-generation of robotic technologies for medical aesthetic applications that are truly disruptive, and that is exactly what our teams have -- and that's exactly what our teams have been working on diligently this year.

We are excited with the progress that we are making in this product development.

And we believe this new technology will offer dermatology and plastic surgery minimally invasive robotic solution for medical aesthetic procedures that will improve the safety profile, predictability and clinical outcomes.

And we're also offering significant competitive advantage to this group of core physicians in the areas of marketing and new customer acquisition.

We plan on hosting a virtual R&D event this fall where analysts and investors can learn more about the progress we have made in product development as well as our near and longer-term strategy in this exciting area of next-gen medical device innovation.

With that said, let me turn the call over to Domenic Della Penna, who will provide a detailed review of our second quarter financial results and discuss our balance sheet and financial condition.

Domenic?

Thanks, Dom.

My prepared remarks this afternoon will focus on the company's reported results on a GAAP basis, unless otherwise noted.

To avoid confusion when evaluating our reported results or when reviewing our historical financial results and SEC filings, let me highlight a few items regarding our merger transaction with Restoration Robotics.

First, reported results prior to the fourth quarter of fiscal year 2019 reflect the business operations and performance of the legacy Venus Concept business, referred to as Venus Concept Ltd.

in our SEC filings.

Second, beginning with the fourth quarter and fiscal year 2019 periods, our reported results include the contributions from Restoration Robotics.

Second quarter total GAAP revenue decreased $10.8 million or 39% year-over-year to $17 million.

As reported on our GAAP income statement, total lease revenue decreased $9.2 million or 55% year-over-year to $7.5 million, and total products and services revenue decreased $1.6 million or 15% year-over-year to $9.6 million.

The decrease in lease revenue and in products and services revenue in the second quarter of 2020 was driven primarily by the business disruption caused by the global pandemic.

Total products and services revenue in the second quarter of 2020 included $3.3 million from the sale of ARTAS and ARTAS iX systems, products and services.

Sales of ARTAS systems, products and services increased 11% year-over-year as compared to $2.9 million of revenue in the second quarter of 2019 that Restoration Robotics reported when they were a stand-alone public company.

Turning to a brief review of our revenue performance by geography and product line, which incidentally is how we report and discuss revenue in our 10-K and 10-Q filings.

The year-over-year change in second quarter total GAAP revenue by geography was driven by an $8 million decrease or 50% year-over-year in international sales and a $2.8 million decrease or 24% year-over-year in U.S. sales compared to the prior year period.

The year-over-year change in second quarter total GAAP revenue by product category was driven by: A decrease of $9.2 million or 55% year-over-year in leases revenue, which is where our subscription program is reported and represents all system sales with typical lease terms of 36 months; a decrease of $1 million or 13% year-over-year in system revenue, which are cash sales or sales of systems with payments expected in less than 12 months; and a decrease of $0.8 million or 45% year-over-year in service sales.

These decreases were partially offset by an increase of $0.2 million or 10% year-over-year in sales of procedure-related products, including our ARTAS kits and other consumable products.

Turning to a review of our second quarter performance across the rest of the P&L.

Gross profit for the second quarter of 2020 decreased $8.2 million or 41% year-over-year to $11.9 million, representing a gross margin of 70% compared to a gross margin of 72.2% last year.

The primary driver of the year-over-year change in gross profit was lower revenue as a result of COVID-related business disruption.

The primary drivers of the year-over-year change in gross margin were directly related to sales of ARTAS system, representing a higher mix of total sales this year as well as inventory fair value adjustments recognized on the business combination with Restoration Robotics compared to the prior year period, which was not impacted by these items having not yet closed the merger transaction.

Note, one item that is not readily apparent in our GAAP gross profit margin results this quarter is the improvement we saw in Restoration Robotics' gross margins, which were approximately 50% in Q2 2020 compared to approximately 42% in Q2 2019.

This improvement reflects the early evidence of our strategic initiative to improve the long-term profitability of ARTAS-related sales.

Total GAAP operating expense decreased $2.9 million or 12% year-over-year to $21.1 million.

The decrease in total operating expenses was driven primarily by a decrease of $5.7 million or 56% in sales and marketing expenses and, to a lesser extent, a decrease of $0.4 million or 18% in research and development expenses, offset partially by a $3.1 million, 26% increase in general and administrative expenses.

Our Q2 GAAP G&A was impacted by two items that were incremental to our normalized OpEx.

First, we recorded a $3 million bad debt charge, driven by COVID-19 reductions and the collections of accounts receivable from our subscription customers across the markets we operate in.

Second, we had a $0.4 million loss related to the sale of our 51% share in our Bulgarian subsidiary, Venus Concept Central Eastern Europe Limited (sic) [Venus Concept Central & Eastern Europe Ltd.] to a third party in the period.

This transaction was a direct result of one of the strategic initiatives Dom earlier; specifically, the consolidation of direct selling operations in certain international markets and investing that capital in the higher return, more attractive U.S. market.

Excluding these 2 items, our GAAP G&A expenses would have declined year-over-year despite absorbing the operating expenses from our merger with Restoration Robotics, which did not impact GAAP OpEx in the second quarter of 2019.

Our second quarter operating expense performance includes significant progress in our new restructuring program.

By way of reminder, this new restructuring program was initiated in response to the challenging business environment caused by COVID-19 and is expected to contribute to our overall strategy of financial improvement through the elimination of overhead and streamlining of certain enterprise functions.

This restructuring program is mainly focused on a combination of permanent head count reductions, hiring freezes, temporary unpaid leave and a reduced work week for certain employees and a reduction of discretionary spending across all departments.

We realized cost savings from this new restructuring program of more than $7 million during the second quarter, and we continue to expect to realize $20 million of cost savings for the full year 2020.

Total operating loss in the second quarter of 2020 was $9.2 million compared to an operating loss of $3.9 million in the prior year period.

Net loss attributable to Venus Concept Inc.

for the second quarter of 2020 was $13.2 million or $0.39 per share compared to $5.9 million or $1.24 per share in the prior year period.

Weighted average shares used to compute net loss attributable to Venus Concept Inc.

holders per share were 33.3 million and 4.8 million for the second quarter of 2020 and 2019, respectively.

Net loss attributable to Venus Concept Inc.

for the second quarter of 2020 included a noncash deemed dividend beneficial conversion feature of $3.6 million related to the Series A preferred stock conversion, which occurred on June 16, 2020.

Adjusted EBITDA loss for the second quarter of 2020 was $2.6 million compared to adjusted EBITDA income of $155,000 for the second quarter of 2019.

We have provided a full reconciliation of our GAAP net loss to adjusted EBITDA in our press release this afternoon.

Now turning to the balance sheet.

The company had $14 million and $15.7 million of cash and cash equivalents as of June 30, 2020, and December 31, 2019, respectively.

And total debt obligations of approximately $73.3 million, including line of credit borrowings of $3.9 million and government assistance loans of $4.1 million compared to total debt obligations of approximately $69 million, including line of credit borrowings of $7.8 million at December 31, 2019.

The year-to-date change in cash was driven by an increase of $23.1 million in cash from financing activities, offset by a use of cash from operating activities of $24.7 million.

The increase in cash from financing activities was driven primarily by: Proceeds of $20.3 million from our private placement in Q1; proceeds of $4.1 million from 2 small business loans under the federal Paycheck Protection Program provided under the CARES Act; and proceeds from the issuance of common stock to Lincoln Park of $3 million under our new equity purchase agreement, which we signed in June, offset partially by repayment of our credit facility of $3.9 million.

Finally, on June 30, the company entered into an amended agreement with Madryn, which calls for interest payments for the period beginning January 1, 2020 and ending and including June 30, 2020 to be paid in kind.

As of June 30, 2020, the company was in compliance with all required covenants.

Turning to a review of our guidance.

Due to the rapidly evolving environment and continued uncertainties from the impact of COVID-19.

On March 30, 2020, the company withdrew its previously announced fiscal year 2020 revenue guidance which was issued on January 13, 2020.

At this date, the company cannot predict the specific extent or duration of the impact of the COVID-19 outbreak on its financial and operating results for the fiscal year 2020.

As such, we are not able to provide financial guidance at this time.

We plan to provide additional information to the extent practicable during our third quarter of 2020 earnings call.

While we are not in a position to offer formal guidance at this time, we would like to offer the following considerations for modeling purposes.

The combined companies had a total OpEx of $34.6 million in Q3 2019, roughly 1/3 of which came from Restoration Robotics.

The combined OpEx in Q3 2019 included approximately $7.5 million of merger-related costs, so the normalized OpEx was $27 million in Q3 2019.

In total, we expect to realize a $9 million reduction year-over-year in combined company normalized OpEx in the third quarter of 2020, which implies roughly $18 million of GAAP OpEx in Q3 2020.

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

Operator?

(Operator Instructions) And our first question comes from Suraj Kalia with Oppenheimer & Company.

So Dom, a couple of questions for you, and maybe Chad can chip in, and one question for Domenic.

Dom, there were a lot of numbers floating around, so forgive me if I missed this.

Try to keep pace with the commentary.

So the U.S. biz in Q2 was down 24% year-over-year.

I think so I heard you say that by end of June, 40% of customers were offline.

Maybe I screwed that up.

But I guess my point is if you can just walk us through the cadence in Q2 again.

And what percent of your U.S. business was up and going?

And in a normalized circumstance, what do they usually contribute?

Right.

So in a normalized basis, the U.S. business represents about 45% of our global consolidated revenues.

Just to correct you a little bit on the business trend.

In April, about 5% of our customers were open.

In May, that grew to 30% because of, obviously, regional disparities there.

And by the end of June, we were working with about 45% of our customers being active.

So 60% were still dark.

And during this period of time, Suraj, what we spent most of our time doing was targeting our pretty substantive customer base in the United States and working on creating a very solid pipeline for, obviously, future consideration as we moved into Q3 and into Q4.

So overall, our sales trends in April were down 55% year-over-year.

May demonstrated an improvement year-over-year on the device sales.

And in June, we started to really see, as the broader markets opened, a very significant improvement in our sales trends and specifically in the areas of ARTAS and in our Venus Bliss product.

Fair enough.

Okay.

So Dom, on product-specific issues, on the Venus Plus, maybe you can provide us the latest and the greatest on the uptake profile, its competitive positioning.

And maybe, Chad, you can just chime in on a sneak peek on -- you mentioned -- your commentary on robotics and minimally invasive aesthetic procedures.

If you can just give us some additional color there, that would be great.

Right.

So I'll touch the first part, and then I'll pass it over to Chad.

But as you may recall, we -- in North America, we were in soft launch mode in Q1.

And combined with our challenges of getting some of the component parts out of China, while we were pleased with what we were able to realize in terms of sales in Q1, we were in full launch mode in Q2.

We were able to keep up with the demand that we had, which has significantly improved and on target where we would have normally been under normal circumstances.

So I can't stress this enough.

That while we don't obviously get into unit counts and so on, from a projection perspective, our assumptions related to the price competitiveness, the 3-year warranty and no disposable element to this product compared to our peers, who sell a 1-year warranty with their devices and have a typical utilization charge of somewhere between $150 and $250 per treatment.

This seems to be working really well for us.

Lastly, on the product itself, I think that one of the things that we need to remember about the Venus Bliss is that we built a device to not only treat fat noninvasively, but to simultaneously do a body contouring treatment in conjunction with the fat reduction treatment, so patients are getting more value for their treatment dollars compared to our peers.

As it relates to robotics, perhaps, Chad, you want to give sort of a little bit of an overview there.

Sure.

We were able to see strong improvements in robotic sales, both on the capital side and the utilization side.

And if you look at our commercial strategy we outlined, which is an improved pricing model, so making the barrier eventually lower for physicians and core doctors who want to get into robotics, focusing on reinvigorating underutilized systems which is a core tenet of selling the capital is creating strong utilization in the installed base.

And then our end-to-end product portfolio of ARTAS and NeoGraft, and giving customers kind of a one size fits all model to start a hair restoration practice.

We saw good return from that in the second quarter.

Got it.

Fair enough.

And Domenic, one final question for you.

Sort of a 2-part question.

Just generally speaking, Domenic, are credit terms changing?

Are you all seeing that in the U.S. and OUS?

And also, how should we think about RR contribution for Q3 and Q4?

It's sort of counterintuitive, right?

ARTAS did pretty well in the quarter and you would think capital equipment would be relatively, at least what we are seeing in other sectors, it's getting hit harder.

So just kind of walk us through how we should think about the next 2 quarters.

Not necessarily guidance, but just to get our arms around because gross margin also ticked up.

Any color there would be great.

And also, more importantly, what's happening with credit terms that you guys are seeing.

Sure.

So on the credit terms side, I mean, we haven't really changed our requirements in respect of the subscription model.

We're being very, very careful in this environment, which is why we have not focused more on subscription sales.

But our terms are basically the same.

We do want to make sure that we get a down payment, and we do want to make sure that the customer we're dealing with has the capability to pay based on whatever public reference checks we can make.

So there's still that diligence that we have.

And in fact, we're a bit more diligent on our end to make sure that we qualify the customers appropriately, especially if they're signing up for a package that's north of $100,000.

There's a little more care there because there's more at risk.

But in terms of our approach, not much has changed, but we're a bit more careful.

Now in terms of the global credit markets, obviously, they've -- the overnight rates have come down, the 30-day LIBOR is next to negative.

So those other factors, there's a lot of quantitative easing and easy money policy that's out there, which I think will help.

But certainly, we feel a bit bullish about Q3 and Q4, especially in the U.S., notwithstanding the fact that the pandemic is still alive and well.

But there is signs of resurgence as we'd seen in Q2.

Your question around ARTAS, and we're kind of bucking the trend.

I think, yes, we've -- our strategy is working.

But understand that a year ago, this business was in a bit of disarray.

When we're starting to put the pieces together to make sure that it works both on the -- on what is the right price point, what is the right margin that we want and as well, how do we drive utilization.

And all 3 of those have worked very, very well for us in the first half of this year.

And Dom may comment on...

Yes, Suraj, I just want to add one more point to that part of the story because we knew we broke -- we bought a broken asset last year.

But we understood that the product was very promising if it had the proper attention.

And by that, I mean, by having a global footprint that could support the installed base, which Restoration didn't traditionally have.

What was interesting about the performance in Q2 is we had virtually an equal contribution in North America and in Europe.

And that was quite pleasing to us because what it did for us is it validated that we were able to demonstrate outside of the U.S. that there was a very real interest in hair restoration, especially with the competitive advantage that robotic solutions could provide from a marketing perspective.

Lastly, and I'll leave it at this.

We have to understand that hair restoration is the highest ROI treatment outside of a surgical intervention for physicians.

So when they're generating anywhere from $1,000 to $1,500 an hour on an average hair restoration treatment, that becomes quite compelling as opposed to trying to chase the $50 hair removal procedures with Groupon advertising.

So doctors understood our value proposition that we've represented with hair restoration, and it took a -- it made a very significant impact for us.

And we believe that based on our current pipeline and what we're doing with our organization, that will continue into Q3 and into Q4 and beyond.

Our next question comes from Anthony Vendetti with Maxim Group.

On the -- it looks like, obviously, the U.S. business is starting to reopen, but slowly.

Obviously, only 5% in April, 30% in May, but you said 40% in June.

And I was wondering if you could comment on July.

Yes.

Yes.

So what's really good about -- when we give you these numbers, they're not anecdotal.

With the use of Internet of Things on our devices, we're able to see procedures being done globally.

And what we can report is as of the end of July, about 65% of the U.S. customers were open and generating meaningful revenues with the devices that they have, and we were able to measure that through our IT integration with our devices.

So we feel that as we finished the July and moved into August, we have continually sort of surveyed our customer base, and we believe that the 65% that we saw in July will continue to increase through the end of August.

And then as we all know, when -- even though this is a bit of a weird year and typically Q3 represents the slowest quarter of the year in our industry, we think that those rules are out the window, and we expect a very strong September in Q3.

So the trend is moving in the right direction.

It's not quite there yet.

There's been obviously some pockets of challenges.

But I think that for the most part, many people are becoming somewhat immune to this.

The second thing I want to point out on this, which I think is really important to recognize as we look at our data that we collect from our devices, the demographic profile of the patients is shifting a little bit.

Typically, in our industry, the majority of the patients who took advantage of these procedures were usually 50 plus.

And based on the fear around COVID and everything else, we've seen a significant movement towards the 35 to 45-year age group demographic.

So what it's telling us and certainly what the doctors that we work with are telling us is that it seems like the younger population is now starting more of a preventative care program so that they can get ahead of wrinkles and saggy skin and fat and so on as opposed to being reactive when you're in your 50s, which has traditionally been the case in our industry.

And Dom, I'll add a third point to that, too, is our ability -- our long-term focus is to have products that have -- our core product focus to have consumables.

And so we can look at that real-time to see if customers that have our core devices are ordering consumables.

And that really allows us to predict trends in terms of the number of customers and percentages that are reopening.

Okay.

That's helpful.

And then just on the consumables side.

I think you mentioned utilization for your hair restoration, ARTAS and NeoGraft, that was up 40% year-over-year in June, July, that time frame.

Is that the correct number?

Correct.

Correct.

And what would you attribute that to?

I know Domenic mentioned the disarray that the business was in, in last year, in both 2Q, 3Q.

But 40% increase in utilization, can you talk a little bit about what you changed in the consumable part of that business?

Yes.

I'll address the first part of it.

And Chad, if you want to add anything after.

But what we've identified is the doctors who had already established themselves in hair restoration.

This is a procedure that typically requires a portion of the head, if not all of the head, to be shaved.

Typically, there's a bit of downtime, 3 to 5 days before people return to normal activity.

And by way of COVID, I think that where the markets were open and as the markets continue to open, it didn't necessarily mean that people were back in the workplace.

And with the shift towards more Zoom type of daily activity, I think that, that led to a very positive outcome in terms of patients deciding that this is probably the right time for something that I may have been holding off on and doing it.

So I think that with the improved pricing model, it's allowed doctors to better position their procedures.

And again, in an area where the doctors can justify the limited time they've had available in their clinics for the highest return on investment dollars that they can generate in their clinic.

In other words, if I only want to see 1 patient a day and make $15,000 of revenue with a hair restoration treatment, I'd rather do that than do 50 patients doing hair removal.

I'd add a third component to that as well.

So there's an opportunity for patients to recover.

COVID has presented that opportunity.

There's also that shift to the higher revenue, lower volume procedures.

But there's also a focus.

We've undergone a pretty extensive initiative that we launched in Q2 to roll out #1, an initiative to speak directly with our product team to every customer in the U.S. and North America.

And we take those -- whatever the customer feedback is, we break them into 3 buckets: Number 1, marketing; number 2, training; or number 3, product wish list, so to speak.

And we use that then to define a clinical pathway.

So our goal is for us to apply as much focus to the installed base and driving utilization as we apply the new system sales because strong utilization will drive new system sales.

And we believe that for each doctor to have a plan in place, through marketing, product training initiatives that we'll be able to increase the overall utilization across the base.

Okay, great.

And then if we can just talk a little bit about the ARTAS.

The overall gross margin, either for the ARTAS system, the capital equipment, and then obviously the per case gross margin.

However, you want to break that down.

But obviously, you've brought the price down, and I know you brought the cost of goods down significantly as well.

But what's the -- what's either the current gross margin or the gross margin goal for the ARTAS system?

Yes.

So you want to go ahead, Dom?

Yes.

So I mean we experienced the gross margin in Q2 on the ARTAS business of approximately 50%.

So that compares favorably to 42% in Q2 of 2019.

And that's a pretty good outcome given that we've changed the price point.

We've made the product appeal to a wider audience in terms of its revised pricing.

But at the same time, true to our commitment to continue to reduce costs, we've done so, and we've been able to increase the margin.

So we think there's still some opportunity to go in terms of getting that margin north of 50%.

It won't happen overnight, but we're pretty comfortable with the progress that we've made thus far.

And it hasn't had a huge impact on our overall margins.

We're quite comfortable with the result of 70% for Q2.

And as we continue to focus on procedures and driving ARTAS kits, I think that will continue to help the margins overall as that component of the ARTAS business is actually quite a high margin.

Right.

Exactly.

Okay.

And then not that -- nor the -- your base business, the Venus Bliss.

And then I know you launched the new Epileve and also the new Viva MD.

And I know the Bliss is probably the main driver on your growth side of your base business.

Maybe talk about the focus on 6 main platforms and then how you would -- how would you rank the drivers, Bliss?

And then if it's some of these new products like Viva MD and Epileve?

Or how would you categorize it?

So if you're talking about dollar contribution, which I assume you are, Anthony, when in terms of ranking of the products, I think if we look at where we see the overall of the 6 products, the Venus Bliss, we believe, will be the biggest dollar value driver overall, simply because the fat category has broad appeal to both sexes.

So -- and it's pretty well-established and people that are doing fat or have been looking at fat, understand the value proposition of a no-disposable 3-year warranty cost certainty model, which I think is really important.

In terms of the second driver, I'm going to say, essentially, the way we look at it is there's a lot of bundling opportunities for people who are serious in hair, which allows us to bring up our ASP by bundling the NeoGraft and the ARTAS robot together so that they have a one-stop solution for everything related to hair; again, being the highest per procedure revenue generator in the clinic outside of a breast augment, anything surgical intervention-wise.

So those are the 2 key areas.

In terms of Epileve and Viva MD, we didn't really have a lot of contributions of both those products in Q2.

That said, the Viva MD was specifically designed to be consistent with our go-forward strategy of having a, I'll call it, a renewed focus on the core physician group of derms and plastics who fell in love essentially with the Viva base product and wanted something more aggressive to get a little bit more -- a better tool for deeper wrinkles, bigger pores, acne scars and so on.

So we spent over almost 2 years developing the Viva MD model, and we feel that combined with the more aggressive ability to treat a broader range of patient problems, we also took the opportunity to add a meaningful disposable element to that product from the previous platform.

So overall, if you were to rank our products, I mean, I think that the Bliss will continue to be #1 in terms of revenue generation, the combination of ARTAS and NeoGraft being #2.

And probably our Versa technology will still be #3 because of its modularity and its ability to be sort of built a la carte.

And so that typically allows us to get a much higher ASP for the product.

And it's probably the most diversified platform that we offer.

So for people that are just getting started in the business, it's the right platform.

And if I could just add one last point to that.

Four of our six core products have consumables, the VERO Hair, the hair restoration, ARTAS and NeoGraft allow us to lead into the core market with something where it's a unique solution without significant competition.

So it's a strategic way to increase revenue for the clinic.

And then the Bliss, as Dom mentioned, the one product that doesn't have the consumable stream, that's what the customers are asking for.

So it's a really nice complement that drives bundling.

We go in with our strategic products, and then we're able to layer on products based on customer needs, either in an established market like fat reduction or in another market.

(Operator Instructions) Our next question comes from Marie Thibault with BTIG.

I wanted to -- I appreciate all the metrics you've given us throughout this call.

I wanted to spend a little bit of time on procedure volumes and the range of procedure volumes your customers who are back online are seeing.

Guess I'm curious if you can tell us a little bit more about what procedures are coming back fastest.

Where, in terms of volume recovery, some of the more successful customers are at this point?

Yes.

I mean I think it's hard to pinpoint exactly like what -- if I was going to handicap what is the #1 procedure, what is #2 and #3, I think that the real message here is that while clinics are still working in an environment of, I'll call it, cautious optimism, they're trying to find ways to maximize their revenue with minimizing their transportation traffic.

And just by the default, the categories that we're in, specifically hair restoration and fat treatments are 1 and 2, for sure.

And so that's where we're seeing a lot of volume.

In markets like Europe, for example, where they've been -- they've had better control of this disease to this point, our IoT data points are telling us that hair removal and wrinkle reduction is coming back strongly.

So I think it's regional, Marie.

I think that we still have some challenges in places like Latin America.

And APAC sort of jumped out to a nice start and then came back into some degree of moderation, if you will, in terms of opening of clinics and staying open or opening less hours during the day.

This is the kind of stuff that we've seen in the field.

Now that's -- that was in Q2.

And as we move through Q3 and get through August -- July and August, what I will tell you is that normally, EMEA is -- goes to sleep in Q3 in July and August, and we have not seen any indication of that whatsoever.

In fact, we've seen the opposite.

And I think that that's a byproduct of clinics that were closed for 3 or 4 months are trying to compensate for what they lost in terms of revenue during that shutdown period where they're completely locked down.

So to get specific about procedures.

What I can tell you, the broader picture is that surgical procedures are up dramatically.

The physicians that we've been talking to have demonstrated to us a new way to go-to-market in terms of interacting with their potential patients.

They've been able to eliminate a lot of the sort of touch points within their clinic and dealing directly with the potential patient through typical Zoom type of consultations, which has led to higher procedure rates and better comfort or stronger comfort by the patient to go through this process while they're still in somewhat shutdown mode or at least working from home.

And then as we think about the subscription system, kind of the legacy systems there, any thoughts on kind of the characteristics of customers who are buying?

Who is feeling, I guess, healthy enough and confident enough in this environment to go ahead and purchase any system or on a subscription model?

Yes.

So just to be clear, I mean, while the numbers may seem that there's been a move away from the subscription model, the way we looked at this was we said, look, there's going to be a product mix influence on the total dollars as it represents the number of deals.

So with the higher-priced products like the Venus Bliss and the ARTAS system, and with the contributions of a cash-only business of disposables, when you blend that all together, that does disproportionately impact the percentage of contributions on a revenue perspective between subscription and cash deals.

So to a degree, that was partially intentional with our focus on 6 products, of which 2 are very higher-than-average selling prices -- average selling prices.

In terms of the subscription, what's interesting about what we've seen is this is still -- this program is still appealing to what we call the noncore market.

People that want to get into the business or thinking about getting into the business, it gives them optionality.

And it also gives dermatology and plastic surgery clinics that do need solutions that we offer an opportunity to not have to go back to their bank and leasing institutions to be able to do things to continue to offer what they perceive to be competitive advantage, state-of-the-art technologies, especially in robotics, which is why we saw some decent demand globally with the products that we carry in hair restoration and in the area of fat.

Very helpful.

Last one for you here.

You mentioned the bad debt charge in the quarter.

And I know that your team is doing work to reactivate some of your subscription customers and get some of those monthly payments back online.

Can you give us a status update on how that is going and whether we could see some of that reverse in the second half of the year?

Yes.

I mean predicting a reversal of that is something that I wouldn't want to touch at this stage given all the unknowns.

But what I can tell you about the $3 million charge, in fact, year-to-date, it's $3.5 million.

We took a small provision in Q1 as the pandemic had just unfolded, at least in North America.

So the $3.5 million, you have to correlate that to the total basket of receivables that's on our balance sheet.

And on a gross basis, that basket is $96 million of gross accounts receivable between the current and the long term.

And that's before the allowance for doubtful accounts because that's the amount of receivable at risk.

So when you correlate $3.5 million on $96 million, it works out to 3.6% that we've identified and are watching and saying, you know what, there may be a problem here because the clinic is closed, we try to contact them, but we know that they're shut down.

They're not asking for activation codes, et cetera.

So we have basically put those aside and said, okay, they're at risk, and we just got to keep an eye on them.

So that's the process.

I know $3.5 million is a big number especially for our business.

But in the context of the totality of our receivables, I don't think it's out of whack.

What I can offer you is that in the majority of cases where we've made contact with a customer that has been closed down and couldn't make a payment, in the vast majority of cases, we have been successful at securing a repayment arrangement such that over the next 3 to 6 months, they will make good on whatever it is that they were missing.

So now that they've come open again, they've asked for an activation code.

We won't release an activation code unless they can demonstrate that they are willing to repay.

And that typically involves a payment that very day for a past charge or a round payment of $1,000 and a repayment plan based on specific payments on certain dates.

And in those cases, we've been very successful in arranging repayment programs.

So I'm very encouraged by what my team has done thus far and how things are working out.

Thank you.

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That does conclude our conference for today.

Thank you all for your participation, and have a good day.

Thank you.