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spk02: 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.
spk08: 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.
spk02: 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.
spk01: We will now begin the question-answer session. To join the question queue, you may press star, then one on your telephone keypad. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star, then two. The first question comes from George Sellers with Stevens, Inc. Please go ahead.
spk03: Hey, good afternoon, and thanks for taking the question. Could you provide some additional details on the factory shutdown and some of the timing there, when that occurred, and ultimately, you know, if there's any additional headwinds from that expected in the second quarter or if those operations are sort of back to normal?
spk08: Yes. Thanks, George, for your question. It's Stuart here. So we typically shut down production for about one week at the beginning of January to do the inventory count for audit purposes. During this time, there are no inventory movements, so we can't move anything from material into production. This year's count was more challenging than the past. We implemented a new ERP in 2022, plus we had increased levels of inventory. Due to some identified count inaccuracies, we'd perform numerous recounts and ultimately had to recount our third-party warehouse. So the count procedures extended an additional three weeks, so four weeks in total were unable to produce. You'll see in my gross margin comments and my prepared remarks that we were impacted by this. We had lower inventory produced, and so we were... unable to absorb all the usual fixed costs. So our gross margin was set by about 2.1 points, but we believe these effects are transitory and will resume normal production in the second quarter.
spk03: Okay, that's helpful. And then maybe taking a step back from the factory shutdown issues, what What would have been some of the drivers to North American capital sales coming up a little shorter than expected? I think even after adding back the numbers that you specifically called out, that revenue would have been a little bit lower than we were expecting. I guess I'm also asking within that question, how would you characterize the underlying aesthetic market in the quarter and how that progressed?
spk02: Thanks, George, for that question. In addition to the plant shutdown, I'd say the other key driver of the softness that we saw in the capital business is that, as I mentioned in the comments, the capital organization had been directed to continue to focus on AviClear as the number one priority, and that actually did continue to be a bit of a distraction. So we are working to correct that going forward. As mentioned, going forward, the capital organization will return to a number one focus on the capital business. They will continue to place some AVI devices, but in a much more strategic way, making sure that devices are placed only in offices that have the patient traffic to drive significant treatment volume and also we will be pacing the placements in a more deliberate manner going forward. Generally speaking, all that I have heard would suggest that the state of the aesthetics market remains healthy.
spk03: Okay, great. Thank you for the time. I'll leave it at just two. Thank you all. Thank you.
spk01: The next question comes from John Block with CIFL. Please go ahead.
spk07: Hey, good afternoon. Sheila, maybe I'll start on that last point. I'm just a little confused on the sales reps marching orders. So if I recall correctly, in the fourth quarter call, The prior management team talked about a new incentive program, which was supposed to help refocus the rep's attention, you know, sort of properly allocate their time between AVI, Clear, and Capital. And again, that was on the fourth quarter call, and that was conveyed as if it had already taken place. So are you saying that didn't take place or did it not resonate? Maybe you can clarify. And then most importantly, has this all been squared away? And as we sit here today, they know how to allocate their time and they're doing so properly.
spk02: Thanks, John. I appreciate that question. The short answer would be the revisions in the comp plan were executed. What appears to have happened is that there was a direction to the capital sales organization to place AviClear devices as a number one priority. And the capital selling organization delivered against that direction. But that direction did, the reality is that it distracted them a bit from capital placements. The good news is I think that we now have crystal clarity in the market regarding not only direction, but also there is a clear shift in the commercial focus of the organization. So what we've done is a great job of placing devices, which enables us to take advantage of a first mover position in the marketplace. Now the next task is to relentlessly drive utilization off of those devices. And that's the job of the CAM team, which enables the capital organization to focus in a priority way against capital again. They will, in a world where we are being more strategic about our AVI device placement and being more deliberate in the speed in which we place those devices, that really enables the capital organization to focus relentlessly against driving capital. So we think we're very clear on what needs to get done now.
spk07: Okay. Got it. I'll go back to that in a second, but maybe just to pivot a Your thoughts on other potential executive defections. If I recall, roughly a dozen key employees signed a letter saying they didn't want to see a change in leadership. They thought the current team had things moving ahead and going in the right direction. But, you know, under your leadership, you guys went ahead and made some tough decisions and changes anyway. We just saw Rohan go ahead and leave the company. You talked, Sheila, on the call about the people being the company's biggest asset. So I'd love just some commentary on the morale within the company and where that sits and if that's improving. And then maybe your thoughts of the risk of other defections, again, when we think about that letter that was written and still the board's decisions to go ahead and make the changes that they made.
spk02: Yeah, thanks again. Another great question. I think, frankly, the good news in this area is I'm here on the ground, and what I see every single day are QTERA employees who remain passionate and committed to the company. I have people coming into my office on a regular basis to just say, I want you to know I'm here. I'm with you. The day that I got here, I had a meeting with the leadership team, and to a person, everyone said, we are committed to partnering with you, Sheila, to grow this business. And that has not been talk. I have seen nothing but commitment, partnership, and a drive to do what's right for the business. So I think morale is actually quite good, given the circumstances. Okay, and last one. People who are in the room with me are nodding their heads.
spk07: Okay, that's good to hear. I think under these circumstances, it hopefully justifies the third question. You know, you said the business is strong, but how do you get shareholders comfortable without providing any guidance. And I think there was a thought of, you know, you might give some high-level clarity, you might provide guidance with a wide range, but you've got a stock right now that's even bidding down another 20%, 25% off of depressed levels. So you're telling us that the business is strong, but you're not quantifying it. And I guess we certainly don't see that as the takeaway from today's call. So any additional clarity you could provide there would be very helpful. Thanks for your time, guys.
spk02: Sure. So... I think the weakness that we have seen in the first quarter largely reflects executional challenges, not underlying fundamental weakness in the business, and that's why we continue to say that the business is fundamentally healthy. The challenges that we face are challenges that are largely self-inflicted, and the good news is that We are now in charge of correcting and addressing those issues. And so it's under our control, and we are working aggressively to do just that. And I do understand the importance of guidance, and I want you to know that Stuart and I, who are both new in physician, are working fast and furiously to really understand and evaluate the existing financial projections on the business and the key assumptions that underlie them. And we've got to make sure that we are comfortable with them. Obviously, the miss in the first quarter makes it even more imperative to reassess. But once again, once we have a set of numbers that the team is fully confident in, we'll be in a position to provide guidance again.
spk00: Thank you.
spk01: The next question comes from Matthew O'Brien with Piper Sandler. Please go ahead.
spk06: Great. Thanks for taking the questions. Sheila, maybe just to follow up a little bit on John's question there, but, you know, previous management had talked about AvaClear being a $30 million product this year, approaching that level. Should we think about it, you know, maybe as a run rate of what we saw in Q1, maybe closer to $20 million for the full year? And then can the business even grow on the top line this year when you exclude AvaClear, or should we just expect it to be down given everything that's going on?
spk02: Right, so the answer, to answer that question, I would actually have to provide guidance, which we're just not prepared to do right now. What I can tell you is that we would expect the business to grow this year.
spk06: Inclusive of Aliclair?
spk02: Once again, that's guiding a bit. Okay.
spk06: Okay. Understood. And I'm not sure if this question is for you or for Stuart, but I would love to hear a little bit more about the sales retention plan that you mentioned earlier, because the OPEX numbers in the quarter were quite high. What have you had to commit to there? How long is the duration there? And then, you know, how can we feel comfortable that when these commitments expire that there's not another exodus, you know, sometime next year or 25?
spk08: Yeah, hi, it's Stuart speaking. Those sales retention numbers aren't actually in our Q1 results, so we'll be announcing it in our 10-K as a subsequent event footnote. Our board has committed up to $13 million, $10 million of which is for sales folks. It's an 18-month period. The amounts will be paid along the way in about four chunks.
spk02: And I would want to point out that the evidence is overabundant that those retention incentives have been powerfully effective. We have not lost a single salesperson.
spk06: Okay, maybe just to follow up on that, Stuart, the increase in OPEX, again, in the quarter was pretty sizable. So any more guidance you can give as far as, you know, were there some one-time costs in there? What drove those numbers up so high? Because, you know, we don't have guidance, and we're looking at some of these numbers. We're starting to see some pretty high, you know, earn rates. And I know those are supposed to come down, but, like, I mean, how do we think about that? Because it looks like it could be elevated for a while here.
spk08: Yes. Two primary reasons. Remember the comparisons against Q1 last year. So we've ramped up our AviClear Salesforce by up to 40 headcount. So those numbers are obviously rolling into the Q1 2023. And another item in the GNA is we had an increase in audit expense and audit-related expense due to the extended audit of around $1.5 million. Got it. Thank you.
spk01: The next question comes from Margaret Kaxer with William Blair. Please go ahead.
spk04: Hey, good afternoon, everyone. Thanks for taking the questions. I wanted to follow up on guidance, but this time maybe not specifically on what guidance could be, but rather what specific metrics, I guess, are you looking for to provide comfort to provide that guidance? you know, what don't you have, I guess, awareness of today that is prohibiting you from doing that? It doesn't sound like it's Salesforce turnover, so what else are you guys missing? And more specifically, it did sound, you know, to John's point, to us at least, that you might provide us, you know, some sense around potential to achieve the prior guidance when we last spoke, Sheila. So, you know, I guess what happened in the last few weeks or months since you joined, you know, was there something new, I guess, that made you not comfortable with doing that.
spk02: I did have conversations around sharing some color, if not guidance. Let me see if I can be a little more helpful on the color front, perhaps, and also help folks better understand why we're not providing guidance. With AviClear, we have a new compelling technology. One of the things we're really digging into with gusto is the underlying assumptions regarding utilization, timing from placement to the device being active in the marketplace, placement of devices. And we need to fine tune, verify all of those assumptions. particularly on AviClear to make sure that we're getting that number as right as we can be because it is so essential to the outlook. I would say that is where there is a lot of energy focused right now. I think it's in our best interest and hopefully you would see it in your best interest for us to get that number as right as we can.
spk04: Okay. That's helpful. And so, you know, I guess to follow up on that, can you give us a sense around what AviClear utilization was in that first quarter relative to maybe what you guys thought it might be? And then, you know, I know you talk maybe about hiring some new cams or support reps or at least kind of re-educating and re-strategizing their focus. But I look at the over a thousand sites you guys now have and can't help but think, you know, it's going to take a while for your CAM base to be able to individually go into each account, identify, you know, how they could help implement those procedures and see the outcome on the back end with growth and utilization. You tell me, I mean, is this potentially a one-quarter, two-quarter phenomenon, or is this a longer-term effort that will both require new expenses as well as time? Thank you.
spk02: Thank you. That's a great question. So here's the situation. We're early in the launch. Utilization varies significantly across the installed base. It varies by type of office, how long the device has been in place. But importantly, one thing that has meaningfully changed is that the big increase in placements that occurred between November and March means that we have a fair number of boxes, as you pointed out, that are still in the startup phase with low utilization rates because they've just started treating patients. So looking at average utilization today is not really very helpful. The good news is that if we look at utilization levels in offices that have been up and running for a while, the numbers that we see are quite encouraging. So what we have to do with a tremendous sense of urgency is take all of the steps that we can organizationally to drive utilization on the existing installed base as fast as we can, as high as we can. And we have plans in place to do that. We're going to increase the size of our installation team so that we can install faster, We're refining the training for our CAM organization, which is responsible for driving utilization, so that they can partner even more effectively with offices to increase treatment volume and utilization. And as we place new devices in a more strategic and measured way, we are making absolutely certain that we don't place more devices than the CAM team can effectively manage. With those steps in place, we are actually quite confident that as we move through the corridors, we will get those boxes that currently have low utilization rates up to rates that we need to get a good return on the investment. So this is all about execution.
spk04: Okay. So if I can, just one last question. You know, as we think about pairing those comments with, you know, the cash burn that we see and so on, you know, I don't know if you guys can provide it, but, you know, it's over a $100 million decrease, I think, in cash and marketable securities. Can you ballpark it for us? Are we thinking $40 million a quarter here, $60 million, $80 million, or maybe even highlight from a CAM perspective how much that might change your cash flow? Thank you.
spk08: Sorry, Margaret. It's Stuart. Can you repeat that question and the number that you announced?
spk04: When I was doing the quick math, and I apologize if I'm wrong, but If I looked at the end of year 2022 cash plus marketable securities, added that, and then compared it to the cash and marketable securities at the end of this quarter, it seemed to me that that was $100 million worth of burn. So one, I guess, tell me if that's correct. And then two, how should we look at that on a quarterly basis going forward?
spk02: Let me just provide some macro perspective and then Stuart or Greg can answer the more specific calculation question. The cash burn that we saw in this quarter would be a low point for the year. We expect that our cash position will improve sequentially through the quarters.
spk08: Yeah, and Margaret and Stuart, our actual cash burn was 49.7 between December 31 and March 31. Eleven million of that was increase in RBClair devices, plus we had some balance sheet increases on the imagery with raw materials. Our AR collections were lower as well.
spk04: Okay. It could be something on my end of the math. Sorry, I was just looking on the press releases, and that's what I came up with, but we can catch up on that later. Thank you, guys.
spk01: Thank you. Once again, if you have a question, please press star, then 1. The next question comes from Anthony Vendetti with Maxim Group. Please go ahead.
spk05: Thank you. I just wanted to... follow-up on the AviClear placement. I guess, Sheila, you pointed out that maybe the Capital Equipment Salesforce was focused on AviClear potentially at the exclusion of the rest of the portfolio, maybe TrueSculpt, Zio, whatever. Can you talk about what an AviClear placement looks like in terms of the cost for the practitioner? Is the commission for the sales rep related to the average selling price? Or is it, since it's a placement, it's a lower selling price than, let's say, a TrueScope, do they get a piece of the utilization? How does that work? And was there any change in the incentive structure, compensation structure for the sales force that will allow them to refocus on the whole portfolio going forward.
spk02: Got it. So these are the commissions on AVI placements. The capital organization does get a commission and it is somewhat a flat fee that is tied to the placement of a box. The CAM organization, which drives utilization, I believe, has a compensation structure that is tied to revenue because each of those organizations does two different things. The compensation structure for our CAM organization does it's all inclusive it covers both AVI and the capital organization and capital sales and the comp program that was released in the first quarter I think was well intended it was designed to incent performance against both sides of the business. I view the balance issue to be less a function of the design of the comp plan and probably more a function of the fact that the selling organization was ultimately directed to view AVI placements as their number one priority, if that helps.
spk05: Okay. Yeah, that's helpful. And then just lastly on a big picture of You mentioned that the underlying business fundamentals remain healthy. You know, we've seen from other companies in the aesthetic space, they've been impacted by higher interest rates, whether that's related to leases or also we've been hearing that certain practices are hesitant to buy capital equipment when some of their patients may be pulling back on getting some of these treatments. Are you hearing that or not hearing that at this point?
spk02: Thank you for that question, Anthony. So generally speaking, we are not seeing that kind of tightening of availability of funds is affecting our business. There are some, in Canada, we have seen a little bit of evidence that this may be an emerging smallish problem. But in the US, the DERM market seems to be stable. strong, no issues is what I'm hearing from our field selling organization. We are monitoring this very closely. Okay, and then... Does that answer your question, Anthony?
spk05: Yeah, no, that's good. On the expense side, you mentioned you added 40 employees, obviously, Is that over what period of time and how many were added specifically in the first quarter?
spk08: Yeah, hi, it's Stuart again. No, that 40 was since Q1 of last year. So as you recall, we had the initial launch in April and a full commercial launch in November. So most of the headcount was towards the end of 2022. Okay, great.
spk05: Thank you very much. I'll hop back to the queue. Appreciate it.
spk01: Thank you, Anthony. The next question comes from George Sellers with Stevens, Inc. Please go ahead.
spk03: Hey, thanks so much for taking the follow-up. I just wanted to ask about the release that hit just a few minutes ago about an agreement between QTERRA and some of the shareholders. Just curious what the implications are for the special meeting and how that – is expected to progress given this agreement. And then the release also mentions active discussions with the prior CEO towards a resolution. So just curious if we could get any additional color on some of those discussions as well. And thank you again for taking the follow-up.
spk02: Right. I wish I could provide additional perspective on that. But that falls a bit under the umbrella of the external governance issues that we are working our way through. So I would defer to what's in the police to gather insight on what's happening there.
spk03: Okay, understood. Thank you again.
spk02: Thanks, George.
spk01: This concludes the question and answer session. I would like to turn the conference back over to Sheila Hopkins for any closing remarks.
spk02: Yeah, so I would just want to thank you very much for taking the time to join us on this call. Thank you for the questions. Hopefully you found the answers to be helpful. And we look forward to updating you on our next call. We look forward to follow-up conversations with you one-on-one. So on that note, I would like to thank our operator, Sharice, thank the team here, and wish you all a great afternoon and rest of your day. Thank you much.
spk01: Thank you. This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.
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