Cutera, Inc.

Thank you for joining QTERRA's second quarter 2022 earnings conference call. After the prepared remarks, there will be a question and answer session. To join the question queue, you may press star then one on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star and zero. The discussion today includes forward-looking statements. These forward-looking statements reflect management's current forecast or expectations of certain aspects of the company's future business, including, but not limited to, any financial guidance provided for modeling purposes. Forward-looking statements are based on current information that is by its nature dynamic and subject to change. Forward-looking statements include, among others, statements regarding financial guidance, regulatory approvals, productivity improvements, and plans to introduce new products and expand into additional geographies. For words that may identify forward-looking statements, we encourage you to refer to the Safe Harbor Statement in our press release earlier today. All forward-looking statements are subject to risks and uncertainties included in those risk factors described in the section entitled Risk Factors in our Form 10-K as filed with the Securities and Exchange Commission and updated on our Form 10-Qs subsequently filed. QTERRA also cautions you not to place under reliance on forward-looking statements which speak only as of the date they are made. QTERRA undertakes no obligation to update publicly any forward-looking statements to reflect new information, events, or circumstances, or to reflect the occurrence of unanticipated events. Future results may differ materially from management's current expectations. In addition, we will discuss non-GAAP financial measures, including results on an adjusted basis. We believe these financial measures can facilitate a more complete analysis and greater transparency into QTERRA's ongoing results of operations. particularly when comparing underlying results from period to period. Please refer to the reconciliation from GAAP to non-GAAP measures in our earnings release. These non-GAAP financial measures should be considered along with, but not as alternatives to, the operating performance measures prescribed by GAAP. With that, I would like to turn the call over to our CEO, Dave Mowery.

Thank you, Arielle. I'd like to welcome each of you to Katerra's second quarter 2022 earnings call, and I'm glad that you're able to join us for this important update. With me on today's call is Rohan Seth, our Chief Financial Officer. Before I dive into a recap of the quarter, I'd like to mention that during the period, we successfully raised $240 million in convertible debt financing, allowing us to retire 50% of our prior convertible debt and add to our existing cash position. This activity places Kuterra in an exceptionally strong cash position and provides us with the flexibility to bring other innovative first mover products to market. Turning now to the second quarter 2022. During the remainder of the call, I will provide an overview of our second quarter performance along with some operational highlights, including an update on our experience to date with the AviClear during the initial quarter of our limited commercial release. Rohan will then provide a detailed review of our financial results and our updated fiscal 2022 financial guidance, after which he will turn the call back over to me, and I will spend a few minutes discussing our plans for the remainder of the year, along with some specific details on our plans to expand customer access to our AviClear device in the second half of 2022. After these remarks, I will hand the call over to the conference operator so that we may take your questions. As I have done in previous updates, I will begin by sharing our high-level observations of the energy-based aesthetics market and how we expect current geopolitical and macroeconomic factors to impact customers and patient patterns. During the prevailing uncertainty around the macroeconomic environment and elective procedures, I am pleased to say that Kuterra continues to thrive, as you will hear reflected throughout our business results. Underlying market fundamentals remain robust and our customers continue to maintain approximately two months of forward-looking demand in their schedules. Patient traffic remains intact with no signs of weakening beyond expected third quarter seasonality. And as mentioned in previous updates, aesthetic practitioners continue to see demographic shift in their patient base with younger career-oriented individuals with access to greater disposable income seeking routine procedures. This expanded patient group prioritizes aesthetic procedures within their spending plans each month, providing greater resilience in the overall demand and a more stable patient traffic forecast. We anticipate that the capital selling environment will remain robust with this continued level of patient treatment volumes. This is further enforced by some early capital equipment demand we serviced in third quarter as some deals flowed into this period from second quarter 2022. Moving on now to an update on the global macroeconomic environment and its impact on Katerra. Katerra, unlike many other companies, has limited exposure to the lockdowns and movement restrictions in China associated with COVID. However, we do have a material exposure in Japan as seen in our skin care results within the period. With significant exchange rate movement over the last seven months, The Japanese yen has fallen to multi-decade lows against the U.S. dollar. As a reminder, our skincare line, a distributed line we provide only in the Japanese market, is purchased in U.S. dollars but sold in Japanese yen. This arrangement has resulted in a painful currency squeeze that we feel on both our top and bottom line performances. Global foreign exchange rates had a significant impact, and we expect that this will continue into the second half of the year. With these market conditions and economic pressures as a backdrop, let me share Kateri's commercial highlights during the second quarter of 2022. In the period, we delivered a total revenue of $64.2 million, representing approximately 10% growth over prior year's period, as reported, and a 15% growth on a constant currency basis. Discounting the impact of foreign exchange rates in the period, top-line revenue would have eclipsed a previous all-time high revenue of $65.6 million in our seasonal peak in the fourth quarter of 2021. This top-line performance was driven by the continued momentum in our capital and consumable businesses, offsetting the aforementioned economic challenges we saw in Japan. During the second quarter of 2022, we posted $43.7 million in capital equipment revenue, a record result for the company in this segment. Our capital equipment revenue performance was led by our TrueBody family of products. In addition to strong capital equipment sales, we nearly matched record revenues for consumer products as well within this period. Looking forward, we intend to further expand our body contouring offering as well as increase our marketing and promotional efforts around the TrueBody product family during the back half of 2022. Specific to our capital revenue performance, our North American sales team continued to demonstrate momentum in the period, posting $25.2 million of revenue, representing a 27% growth over prior year period. These results come from the investments in Salesforce expansion during the second half of 2021, in combination with the continued focus from sales leadership on improved productivity through sales process execution. International capital equipment sales where $18.4 million representing a 17% growth as reported and a 26% growth on a constant currency basis compared to previous year's quarter. International capital performance was strong in aggregate as well as across the key regions. As expected, our European capital sales rebounded sharply from the decline reported in first quarter 2022, posting second quarter revenue of $5.3 million or 36% constant currency growth over the prior year period. Following the second quarter results, the European capital equipment revenue now represents an 11% growth year-to-date on a constant currency basis. We benefited from favorable trends in our distribution markets as well, posting 26% growth during the quarter. And Australia and New Zealand also provided healthy year-over-year growth, with $5.2 million in capital equipment revenue representing 17% growth and 26% constant currency growth over the prior year period. Similar to our 2021 capital purchasing trends, we believe that the third quarter capital revenue will be impacted by the timing of our CUCF event conducted during the second quarter. These professional education events typically pull forward a handful of deals that would have normally flowed into 3Q 2022. As such, we anticipate a slight step back in capital sequentially. Our recurring revenue category defined as the combination of skincare, service, and consumer products with 20.6 million in the period, a decrease of 11% over prior year period as reported, and a decrease of 2% on constant currency basis. Skincare, the largest contributor to our recurring revenue, delivered only 9.6 million in revenue during the period. representing an 18% decline from prior year's quarter on a reported basis and a decline of 6% on a constant currency basis. In comparison to the previous period rate, foreign exchange rate was responsible for two-thirds of the decline, while the remaining third reflects the impact of the regional economic headwinds on buying patterns. Without near-term relief from these issues, we believe that our skin care revenue for the back half of 2022 will reflect a similar run rate to our second quarter results. Service revenues of 5.6 in the quarter represented a decline of 17% as reported and a decline of 13% in constant currency. As discussed previously, we expect to recover our service part inventory and book higher volumes of time and material work orders in the second half and expect to return to approximately $6 million per quarter. Consumable revenues of $5.3 million in the quarter represent approximately 20% growth over prior year's quarter, as reported, and 23% on a constant currency basis, driven by the growing demand for treatments from the TrueBody family of products. We anticipate strong patient traffic in the second half, bolstered by the continued expansion of the install base. Shifting now to our RVClear Limited Commercial Release. As discussed during our previous earnings call, we crafted a very thoughtful initial entry into the market for AviClear. As a reminder, the introduction of AviClear represents the launch of a new and disruptive technology, a vastly different business model, and a device bringing multiple customer disciplines, bridging multiple customer disciplines to include medical dermatologists. Due to the disruptive nature of this product and its positioning, we intentionally focused on a very targeted introduction to test our assumptions using a few dozen sites. This limited release was aimed at gaining a fully informed perspective on how to best expand into a full national launch by the end of 2022. As expected, we generated a very small amount of revenue from the patient treatments during the quarter, but gained significant insight into the product performance, product acceptance, and practice onboarding processes. We are pleased with the progress we've made with the field placements and energized by the clinical outcomes our physician partners have shared with us. Many physicians who adopted AviClear into their practice have already begun to see results with their patients. And in some cases, early clearance results seem to exceed those results that we witnessed in our own trials. These data served to boost physician competence and increase their comfort in selling the procedure to their patients suffering from acne. During the second quarter of 2022, AviClear physician partners treated over 100 individual patients. We were especially delighted with the patient survey data we received after the AviClear treatments from 53 different respondents captured via the Kuterra smartphone app. As of today, patient respondents have rated the AviClear treatment with an average reported score of 4.9 out of 5, with no patients rating below 4. The survey prompts patients to provide ratings in areas such as general procedure satisfaction, pain levels, procedure tolerability, their value proposition, as well as the overall ease and convenience of this procedure. To date, we now have over 500 treatments under our belt, and we continue to learn from each and every treatment provided. One of our critical learnings was that normal practice patterns coupled with patient cues of roughly two months directly impacts the speed of account conversion. However, once AviClear is adopted and incorporated into these practices, patient conversions, and device utilization ramps up very quickly as physicians build confidence in the procedure and recognize their own patient satisfaction. With that, I'd like to turn the call over to Rohan to provide you some additional color on our financial performance.

Thank you, Dave. As I review my prepared remarks, I want to note that I will be discussing some non-GAAP results. A complete reconciliation of GAAP to non-GAAP is included in our earnings release. We encourage listeners and readers to review our non-GAAP metrics in conjunction with the GAAP results as contained in this earnings release. Total revenue for the second quarter was $64.2 million compared to $58.6 million for the same period in 2021, representing an increase of approximately 10% and 15% in constant currency. During the quarter, we continued to face meaningful foreign currency headwinds, particularly in Japan, with the Japanese yen accounting for approximately 70% of the impact. Based on current exchange rates, we expect that we will continue to face ongoing headwinds from foreign currency throughout the remainder of 2022. Second quarter North American capital equipment revenue of 25.2 million increased 27% over the prior year. International capital equipment revenue for the second quarter was 18.4 million, up 17% as reported and 26% in constant currency from the second quarter of 2021. Recurring revenue defined to include our consumables, global service and skincare product lines was 20.6 million in the second quarter, down 11% as reported and down 2% in constant currency. The decrease over the prior year was driven by skincare revenue of 9.6 million, down 18% as reported, and down 6% in constant currency, as well as a decline in services revenue of 5.6 million, down 17% as reported, and down 13% in constant currency. Services revenue continued to be impacted by parts availability. These declines were partially offset by growth in our consumable products, up 20 percent as reported, and 23 percent in constant currency. Non-GAAP gross profit for the second quarter of fiscal 2022 was $35.7 million, with a gross margin of 55.6 percent, representing a decrease of approximately 250 basis points compared to the same period last year. Excluding acne program impacts of approximately 180 basis points and an additional 180 basis points in foreign exchange headwinds, the non-GAAP gross margin in the second quarter would have been 59.2%, an approximately 110 basis point increase as compared to the same quarter last year. While we did experience supply chain and macroeconomic inflationary pressures, as well as FX headwinds at the gross margin level during the quarter, we were able to offset them with ongoing cost improvement initiatives, as well as leverage on our fixed cost base. Total non-GAAP operating expenses for the second quarter of 2022 were $37.3 million compared to $27.2 million for the same period last year. Included within this number are $6.4 million in expenses related to our ACNI device. Non-GAAP sales and marketing expense for the second quarter of 2022 was $24.6 million compared to $16.7 million for the same period last year, driven by continued expansion in our sales force, higher commissions, increased travel, as well as 4.4 million in expenses associated with the launch of AviClear. Non-GAAP R&D expense for the second quarter of 2022 was 5.7 million compared to 4.5 million for the same period last year, driven by increased investments in AviClear and additional clinical studies. Finally, Non-GAAP G&A expense for the second quarter of 2022 was 7 million compared to 6.1 million in the same period last year, driven by inflation and expansion in our headcount. For the second quarter of 2022, our non-GAAP operating income, which we refer to as adjusted EBITDA, was a loss of 1.6 million compared to a profit of 6.8 million in the prior year period. As anticipated, Our investment in AviClear was the most significant driver of EBITDA decline on a year-over-year basis. Excluding ACNI program impacts of $7.5 million for the second quarter of 2022 and foreign exchange headwinds over the prior year of $2.4 million, adjusted EBITDA would have been $8.3 million. As I mentioned earlier, embedded within our non-GAAP OPEX is $6.4 million spent on our ACNI program. 70% of which is in sales and marketing, and the majority of the remainder is in R&D. Finally, there were no material or significant changes to our tax position. Turning now to our balance sheet. As Dave mentioned earlier, during the quarter we raised $240 million from a convertible debt offering announced in May that will net $154.6 million of incremental cash. after accounting for the extinguishment of 50% of our 2026 notes at $45.8 million, capped calls of $31.7 million, which were done to limit dilution, and $8 million in issuance costs. With this addition, we ended the quarter with $278.2 million of cash and marketable securities, compared to $131.8 million at the end of the first quarter. The sequential increase of approximately $146.4 million was primarily driven by the cash raised in our convertible debt offering. We continue to expect cash burn to be approximately $20 million for the remainder of the year. We do not expect cash consumption to be linear as we build and place initial inventories to launch AviClear. With a strong balance sheet in place, we are well positioned to continue supporting the growth of our business while ensuring a successful launch of AviClear. Before I turn the call back over to Dave, I would like to provide you with an update on our outlook for the full year of 2022, starting with revenue. We are reiterating 2022 guidance of $255 million to $260 million, entirely absorbing the impact of the unprecedented foreign exchange headwinds of $15 million annually, implying constant currency growth of 17% to 19%. This guidance does not include revenue from our AviClear device, as we continue with its limited commercial release. Moving on to adjusted EBITDA. FX pressures have continued to worsen, and we now expect a further impact from FX of around $3 million on the full year adjusted EBITDA, bringing the full year impact to approximately $11 million. As a business, we are continuing to respond to these pressures, and we expect to offset most of these headwinds. Therefore, we are reaffirming our fully adjusted EBITDA guidance to be in the range of $5 to $10 million. I would like to now spend a few minutes discussing the ACNI business model and the related accounting in greater detail. As Dave mentioned in his remarks, We are launching this innovative product under an equally innovative business model to maximize its reach with patients and clinicians alike. Instead of selling the capital, we will instead be licensing the device over a period of three-plus years. The licensing fees we collect will be ratably recognized as revenue over the term of the lease, and treatment revenue will be recognized as earned. As the units will remain on Kuterra's balance sheet on the PP&E line, we will depreciate these units over their useful lives. Finally, the treatment and licensing fees will be considered recurring revenue. During the second quarter, our ACME-related revenue was recognized within the consumables category and was approximately $0.1 million. As the business grows, we intend to create a separate line for ACME. With that, I will now pass the call back over to Dave.