Cutera, Inc.

Thank you for standing by. This is the conference operator. Welcome to the QTERRA, Inc. second quarter 2023 results conference call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there'll be an opportunity to ask questions. To join the question queue, you may press star then 1 on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star then 0. 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 information available to us at the time those statements are made, which by its nature is dynamic and subject to change, or management's good faith belief as of that time with respect to future events. 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, including those risk factors described in the section entitled Risk Factors in our Form 10-K as filed with the Securities and and Exchange Commission and updated on our Form 10Qs subsequently filed. QTERRA also cautions you not to place undue 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 QTERA'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 conference over to Sheila Hopkins, former interim CEO of QTERRA. Please go ahead.

Thank you, operator. Good afternoon, and welcome to QTERRA's second quarter 2023 earnings call. With me on the call are Stuart Drummond, interim CFO, Greg Barker, vice president of financial planning and investor relations, and Taylor Harris, our recently appointed chief executive officer. Before reviewing results, I'd like to comment on Taylor's appointment. Since I stepped in as interim CEO, our board has worked with a clear mandate, find the best person to serve as the permanent CEO of QTERA. We committed to bringing in a world-class operating executive with a track record of success, uncompromising standards, and the skill set and industry experience needed to execute the company's strategy. Taylor Harris more than delivers against these specs. His appointment follows a comprehensive search process led by Russell Reynolds that included input from some of our largest investors. I speak on behalf of the entire board when I say that we could not be more excited to have Taylor at the helm, and we're confident that the company and our shareholders are in good hands going forward. For those of you who don't know Taylor, let me share a bit more about why the Board and I believe he's the right person for the job. Taylor is a proven executive with over 20 years of experience and a track record of driving growth in the medical and aesthetic device landscape. Most recently, he served as Senior Vice President and CFO of Myocardia, a biopharmaceutical company. Prior to that, he was SVP and CFO of Zeltik Aesthetics. Taylor played a key role in building CoolSculpting into a formidable competitor. He also served as Vice President and Chief Financial Officer at Thorotech Corporation. And prior to that, he worked at JPMorgan Chase for over a decade with a focus on the medical device industry. Taylor joined our board in June and also served as a consultant for us. And we've been able to see that he has a deep-seated sense of integrity, a people-centric approach, and a commitment to excellence that can take Kuterra's business performance and its culture to the next level. Taylor also shares the Board's conviction that there is a tremendous opportunity to unlock and create value at Kuterra. And if there's a common thread woven throughout Taylor's experience, it is, in fact, his ability to drive value creation. So when you add it up, there is no doubt that he is the right person for this job. And I'm delighted that he is here, his second day in the seat for this call. And you'll hear from him in a few minutes. But first, let me walk you through the highlights of our second quarter performance. Then I'll pass things over to Stuart to provide greater details on the financials. We'll conclude with Taylor sharing his initial thoughts on the way forward for the company. He'll wrap up the call and open it up for questions. And with that, I'd like to shift and provide an overview of the second quarter. First, a couple of reminders regarding the company's progress on governance issues. From a board perspective, in June, we welcomed four new directors, Kevin Cameron, Nick Lewin, Keith Sullivan, and Taylor. and they each bring relevant skills and experiences to the table and are adding significant value already. From an organization perspective, the retention bonuses we implemented in April have worked. We've only lost one person among the targeted group of people, so our employee base has remained engaged. Turning to the business, our results for the second quarter are frankly disappointing. and reflect that the business faces more challenges than were apparent when I first stepped into this seat in April. Total revenue for the second quarter was $61.2 million, down 5% versus a year ago on a reported basis and down 2% in constant currency. We did see sequential growth versus the prior quarter, but not as much as expected. and the decline versus a year ago traces primarily to capital equipment and cuts across most geographies. Adjusted EBITDA was a loss of $11.6 million versus a $1.6 million loss in the year-ago period. Now, this reflects decreased gross profits and increased OPEX spend behind AviClear. Stuart will provide more detail. But let me provide a bit more perspective on revenue performance. Our core capital business was down minus 13%, as reported, and 11% in constant currency. Now, some of the declines reflect challenging year-over-year comparisons, as our Q2 2022 revenues were a high watermark. However, a clear-eyed assessment of this business shows that it also faces operational and macroeconomic headwinds. On the operational front, core capital has been hampered by parts-driven service delays and increased reliability issues. These service and reliability hiccups don't sit well with our customers and are making it much more difficult to close deals. These issues reflect growing pains our supply chain and production facilities have faced as they ramped up AviClear production while at the same time working to meet the needs of our core capital business. Having said that, we own this problem, and we're working diligently to mitigate and then solve it so that we meet our standards and the expectations of our customers. On the macroeconomic front, our capital business is also challenged by the tightening credit environment, which has made it more difficult for some customers to find financing. This has impacted deal closures and placed pressure on our ASPs. Med spas have been the most affected, and we're investigating new approaches to help these customers find financing. Now, there are shoots of green on the core capital business. First, the shift to a more measured booking pace for AviClear addressed the problem that we had faced from October through March, with the capital selling organization being somewhat distracted by steep AviClear booking targets. Second, we'll bring new product news to the capital portfolio this year with new technology to round out the secret franchise, and we'll follow that with more new product news on core capital in 2024. So a net getting our capital business back on track is a top priority for the company, and Taylor is already engaged with the team to do just that. Turning to AviClear, we have more work to do here also, but the biggest challenge being increasing utilization and the percent of installed offices that are contributing. Key to success will be practice business development and more effectively holding utilization rates in existing offices as new offices are onboarded. We are working expeditiously on the playbook to achieve stronger results here, and Taylor brings invaluable industry experience to the task at hand. Now I'm encouraged by the progress that we made in the quarter on AviClear. We moved forward with a more measured pace of device bookings, our CAM team drove treatment volume in the quarter that was in line with our expectations, and we're also progressing development of new hand pieces for AviClear that will expand treatment areas. And finally, AviClear became the first acne therapy to obtain FDA clearance as a long-term treatment for mild to severe acne. Connecting all of the dots, while second quarter performance did not meet our expectations and the challenges that we faced are greater than I initially realized, I am confident that with Taylor's leadership, these challenges will be addressed and the business will return to sustainable growth. And with that, I'd like to turn the call over to Stuart for a financial update.

Stuart? Thank you, Sheila. Today I'll be discussing our reported Q2 results as well as some non-GAAP results. Our reconciliation of GAAP's 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 contained in this earnings release. Turning to our Q2 results, total revenue for the first quarter was $61.2 million compared to $64.2 million for the same period in 2022 and compared to $55 million in Q1 of 2023. The $3 million or 5% decrease from the comparative period represents a 2% decrease on a constant currency basis. This decrease reflects a decline in capital equipment revenue partially offset by RVCLIA revenue recorded in Q2 of this year. As a reminder, we began a limited commercial launch of RVClear in April 2022 and a full commercial release in November 2022. Second quarter consolidated capital equipment revenue of $37.9 million decreased by $5.8 million, 13%, from the prior year period. North American capital equipment revenue of $22.2 million decreased by $3 million, or 12%, from the prior year period. This decrease included a $1 million increase in our sales return reserve. I would like to highlight that Q2 2023 North American system revenue represented a $4.2 million improvement over Q1 2023, reflecting our Salesforce's refocus on core capital. International equipment revenue of $15.7 million represented a $2.8 million, or 15%, decrease from Q2 2022. Recurring revenue, defined as our consumables, global service, skincare, and RVClear revenue, was $23.3 million in the quarter, up $2.8 million or 13% over the comparative period. The increase over the prior year was mainly driven by RVCLAIR revenue of $4 million, partially offset by a $0.9 million decrease in consumable revenue resulting from a promotion we offered in Q2 2022. Non-GAAP gross profit for the first quarter of 2023 was $30.8 million with a gross margin of 50.3%, representing a decrease of 530 basis points compared to the same period last year at an increase of 120 basis points compared to Q1 of 2023. Regarding the comparative quarterly decrease, geographic and product revenue mix and increased pressure on ASPs affected gross margin by 270 basis points, and continued foreign exchange headwinds adversely impacted gross margin by a further 120 basis points. The remaining factors impacting the comparative decline at a gross margin were cost increases for certain parts, which had 170 basis point impact, and an increase in our inventory obsolescence reserve, which had 100 basis point impact. RVClear revenue in the second quarter of 2023 positively impacted our gross margin compared to the second quarter of 2022 by 130 basis points. Non-GAAP operating expenses for the second quarter of 2023 were $42.4 million compared to $37.3 million for the same period last year. This $5 million increase was mainly driven by the continued expansion of RVClear sales force and promotional activities which represented around $3.1 million of this increase, as well as the charge we took in the second quarter as we increased our Allowance for Doubt for Accounts by $2 million. For the second quarter of 2023, our non-GAAP operating income, which we refer to as adjusted EBITDA, was a loss of $11.6 million compared to a loss of $1.6 million in the prior year period, and compared to a loss of $14.5 million in the first quarter of 2023. The increase in loss compared to Q2 2022 was due to the decrease in gross profit and increase in operating expenses. Turning to a balance sheet, we ended the quarter with $222.6 million of cash in marketable securities compared to $267.7 million at March 31st, 2023. Driving this $45 million sequential decrease are $25 million used in the Abbeyclare business and $18 million from core losses, of which $8 million relates to Board of Director legal and advisory fees incurred in support of the recent Board governance matters. The Ivyclare use of cash results from $17 million spent on devices and parts, and $7 million in cash losses. Our cash consumed in the first quarter of this year was $49.7 million. Our expectation is that our cash consumption will continue to trend downwards throughout 2023, driven by a decline in Board of Director legal and advisory fees, as we're expecting the Q3 amount to be about half of Q2, a reduction in core inventory, an improvement in cash collection, and a slower pace of Aviclair placements. I will now pass the call back to Sheila.