Cutera, Inc.

nanometer lasers, which we use in our AviClear device, continue to lead the conversation for the treatment of acne. So connecting all of the dots, while our first quarter performance did not meet our expectations, we remained optimistic about the underlying demand for our core products and the growth opportunity that AviClear provides. I am convinced that as we improve our executions, the business will return to sustainable growth. Despite our long-term confidence in the business, we are not providing financial guidance at this time. Given the issues that we've discussed today, the current team has a lot of work to go through to validate our financial projections and the assumptions that underlie them. We want to take the time to be diligent in this process and ensure that the entire team is comfortable with these financial expectations for the business going forward. We do recognize the importance of guidance to the street, and we're working towards reintroducing guidance as soon as possible. Finally, I would be remiss not to thank everyone throughout the organization for their continued hard work, flexibility, and focus as we work through some of the recent changes in our leadership. Our people are our biggest asset, and we consider ourselves fortunate to have the best people in the industry on our team. I would now like to turn the call over to Stuart for a financial update.

Stuart? Thank you, Sheila. As I review my prepared remarks, I want to note that I will be discussing some non-GAAP results. A reconciliation of GAAP to non-GAAP gross margin and operating loss is included in our earnings release. We encourage listeners and readers to review our non-GAAP results in conjunction with the GAAP results as contained in this earnings release. First, just a little bit about me. I obtained my child accounting certification in New Zealand through KPMG and then worked with large multinationals in Europe before coming to the United States. I've worked in the Bay Area for a total of around 14 years, most recently in corporate control roles in the life sciences industry. I joined Katerra in July 2021 as Vice President and Corporate Controller. Turning to our Q1 results, total revenue for the first quarter was $55 million compared to $58 million for the same period in 2022, representing a decrease of approximately 5% on an as-reported basis. During the quarter, we continued to face foreign currency headwinds, and our constant currency revenue decline was approximately 1%. Before I begin with providing you the details regarding our performance across the globe, let me give you some insights on the financial impact of the production shutdown driven by the audit-related procedures that Sheila mentioned earlier in the call. We estimate $2.8 million was lost in revenue for products which we had orders on hand and weren't able to fulfill due to the lack of finished goods inventory, with an estimated split of $1.8 million in North America and $1 million internationally. In addition... There were other deals for which orders we never received as our customers were aware that we didn't have the relevant inventory. First quarter consolidated capital equipment revenue of $33.3 million decreased by $3.2 million from the prior year period. This decrease reflects lower ASPs resulting from a geographic shift from North America to our international customers and distributors, as well as the previously mentioned impact of the extended plant shutdown on sales volumes. North American capital equipment revenue of $18 million decreased by 21% over the prior year. As I mentioned, we estimate that approximately $1.8 million of the shortfall was due to orders that could not be shipped due to the lack of finished goods. In addition, $0.5 million of orders were packaged and available to ship but did not meet the revenue cutoff. Had we managed to get this $2.3 million in the quarter, the revenue decline would have been 11%. While we are disappointed with these results, we also note that we had more than 350 AviClear placements in the quarter. International capital equipment revenue for the first quarter was $15.4 million, up 11% from the first quarter of 2022, driven by consistent execution and focus, particularly in our distributor markets and European direct markets. Recurring revenue, defined as our consumables, global service, skincare and AviClear product line, was $21.7 million in the first quarter. up 1% as reported and up 8% on a constant currency basis versus the comparative period. The increase over the prior year was driven by Aviclair revenue of $4.4 million. This growth was partially offset by a decline in skincare revenue, which came in at $8.1 million, down 30% as reported and 19% on a constant currency basis. Our service revenue declined by 9% as it continues to be impacted by the availability of spare parts. Non-GAAP gross profit for the first quarter of fiscal 2023 was 27 million, with a gross margin of 49.1%, representing a decrease of 660 basis points compared to the same period last year. Foreign exchange headwinds adversely impacted gross margin by 190 basis points, and the delays in completing our imagery audit procedures affected us on multiple fronts. The resulting delays in production impacted our manufacturing absorption by approximately 110 basis points, and the resulting lack of finished goods availability resulted in lower fixed cost leverage, which had an impact of approximately 100 basis points. Also adversely impacting our gross margin were customer and region mix impacts of approximately 250 basis points. We view these impacts as largely transitory in nature and expect that as production volumes ramp up and North America returns to growth, these margin impacts will dissipate. Non-GAAP sales and marketing expenses for the first quarter of 2023 were $25.8 million compared to $23.5 million for the same period last year, driven by a continued expansion in our Arby Claire sales force. Non-GAAP R&D expenses for the first quarter of 2023 were $5.7 million compared to $5.5 million for the same period last year. Non-GAAP G&A expenses for the first quarter of 2023 were $10.1 million compared to $7.1 million in the same period last year. More than half of the increase was driven by fees associated with the extended audit, and the rest primarily relates to increased legal expenses and IT costs to support our recently implemented ERP system. For the first quarter of 2023, our non-GAAP operating income, which we refer to as adjusted EBITDA, was a loss of $14.5 million compared to a loss of $3.8 million in the prior year period. This increase in loss was largely driven by unfavorable gross margin, increasing operating expenses, and FX headwinds. There were no material or significant changes to our tax position. Turning now to our balance sheet, we ended the quarter with $267.7 million of cash and marketable securities, compared to $317.3 million at the end of 2022. Driving this $49.7 million sequential decrease, a $23.1 million of cash utilization to support Aviclair, $12.4 million from core losses, primarily driven by sales and gross margin shortfalls, which we expect to recover from quickly, $8.2 million increase in core inventory, and $5.6 million from slower core collections. Our expectation is that this is the high watermark for cash burn, and this will trend downwards throughout 2023. With that, I will now pass the call back to Sheila.

Thanks, Stuart. So in conclusion, our strategy is sound, and we believe we'll be able to drive results as we double down our focus on execution. In particular, we remain enthusiastic about AviClear, the first FDA approved device for the treatment of mild, moderate, and severe acne across all skin types. Most critically, the clinical outcomes and patient safety profile from this signature procedure are unmatched. We believe that AviClear will change the way that dermatologists treat acne. By approaching the acne market with a minimal upfront financial commitment and a meaningful recurring treatment revenue stream for our customers and Futera, we have established a true collaboration that tightly aligns our interest with our customers, the clinicians, and practice owners. Know that we will also be responsible stewards of our capital as we move forward to realize the full potential of AviClear. We are enthusiastic about our business prospects and believe the future is bright for Cutera. We have extremely talented people throughout the organization who are highly committed to capitalizing on the significant opportunities that exist, both within our core business and with AviClear. The foundation of the business is strong, and the leadership team and our board of directors remain as enthusiastic about the business as ever. So at this time, we're happy to answer any questions.