Cutera, Inc.

Thank you for standing by. This is the conference operator. Welcome to the Kutera Inc. 3rd Quarter 2023 Business Update conference call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will 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 will You may signal an operator by pressing star, then zero. I'd now like to turn the call over to Greg Barker, Vice President of Finance and Investor Relations. Please go ahead.

Great. Thank you, Gaylene, and thank you, everyone, for joining us. With me today is Taylor Harris, QTERA's Chief Executive Officer, and Stuart Drummond, Interim CFO. Following our prepared remarks, we'll take your questions. The discussion today includes four looking statements. These forward-looking statements reflect management's current forecast or expectation 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 Exchange Commission and updated in our Form 10Q subsequently filed. QTERRA also cautions you not to place undue reliance on forward-looking statements which speak only 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. With that, it is my pleasure to turn the call over to our CEO, Taylor Harris.

Thank you, Greg. Good afternoon and welcome to QTERRA's third quarter 2023 business update call. I'll begin with an overview of our third quarter financial results and then take you through the actions that can return QTERRA to stronger operational and financial performance. Revenue for the third quarter of 2023 was $46.5 million. a decrease of 26% compared to the third quarter of 2022. Revenue related to capital equipment systems declined 36%, while recurring sources of revenue declined 7%. This revenue performance was below what we had projected internally and assumed as part of our previous guidance. Most of the shortfall came from the core capital business. where we faced heavier macroeconomic pressures and impact from our company-specific operational challenges than we had anticipated. As such, we are adjusting our revenue guidance for the full year 2023 to approximately $205 million, down 19% from 2022. We're planning for tighter financing conditions and a procedural slowdown to persist. We saw these dynamics build over the summer and gain steam through the third quarter. We're also planning to be disciplined with pricing and distributor inventory levels, leading to less of a year-end bolus than normal. The entire industry is facing the same macro pressures. For Cutera, our business has migrated into more economically sensitive practices over the past few years, which creates more exposure to discretionary spending. The challenges we've experienced on service and reliability have dampened our ability to grow and will likely continue to do so during 2024. I'll speak later to how we're addressing these issues, but a reasonable expectation is that it will take some period of time after that improvement for us to win back trust. We are being patient, putting the customer first, and adjusting our cost structure as we wait for the macro and company-specific headwinds to pass. Additionally, AviClear and our entire SkinSuite portfolio, including XLV Plus and Secret, provide us an opportunity to migrate our business mix back to core dermatology practices over time. We finished Q3 with approximately $180 million of cash on the balance sheet, with Q3 cash burn modestly below Q1 and Q2 levels. We burned a little more cash in the quarter than we had planned, due to the reduced top line as well as a necessary catch-up of late payments, particularly to critical materials vendors that we depend on as part of our supply chain. These same dynamics will also affect our Q4 cash burn outlook. Due to an issue identified with inventory control and accounting, we are unable to provide full financial statements today, and we will be late filing our 10Qs. We believe that these issues will lead to the need to restate Q1 and Q2 results, which we will do prior to filing the third quarter 10-Q. Although the near-term challenges that we outlined on the second quarter call have proven to be stronger than we anticipated, there is significant momentum here at QTERA in a positive direction, and our team is excited about our future. We remain focused on three critical priorities, returning to operational excellence, building an AviClear franchise, and achieving long-term profitability. And we have made strides in each of these areas. With the combination of improved operational performance, including service and reliability, growth from AviClear, and aggressive cost management, which we have already begun, we believe we can bring the business to cash flow break-even using the cash we currently have on our balance sheet. Our Kutera University Clinical Forum or CUCF, held last weekend in Las Vegas, captures what we are capable of. We had over 700 attendees, and I consistently heard stories of how much these customers love their QTERRA devices. These are some of the top practices. They do their homework, and they view QTERRA technology as the best, hands down. We used this event to roll out our new branding for the next era of QTERRA, which we have named A New Energy and Aesthetics. In my opening address at CUCF, I highlighted our vision to provide not only the best technology, but also the best partnership-oriented support for our customers and to help them transfer the energy of our team and technology to create transformative outcomes for their patients. We acknowledged that we have fallen short in the ways we have supported customers in recent years, but we highlighted the strides we are making and we're committed to more. As one customer remarked to me, you've always had great products. If you can get the post-sale support model right, this company won't be stoppable. And that is the plan. As we turn QTERRA around, I will continue to update you on the three priorities that I outlined on last quarter's call. I am happy to say that those are still the same priorities and that we are making progress. First, operational excellence. Before we can return to growth, we must address our operational challenges. Shortly after I started, we brought in Jeff Jones as our Chief Operating Officer, and we consolidated several functions underneath him, including production, supply chain, quality, and field service. Jeff has made some critical new hires, and he and his team are making strong early progress. The team has identified the key root causes for challenges that we have in five areas. product reliability, field service delays, lack of inventory control, supply-demand mismatches, and excessive cost of operations. They have also put an action plan together that remediates the most critical elements of these issues by the middle of 2024, with ongoing improvement opportunities beyond that point, particularly in the area of cost control. A few examples. In the area of field service, our backlog of open cases had reached an all-time high as of mid-2023. Over the last few months, though, that backlog has already been reduced by 80%, with most of the remaining cases depending on spare parts availability to resolve. The team believes that it can substantially clear this backlog by year-end, while also returning to industry standard response times for new service calls. and then to exceed industry standards by the second quarter of 2024. In inventory management, we have assembled a materials control team and are retraining operations personnel on utilization of our ERP system. As Stuart will describe later, we identified a significant issue with how the company has been managing inventory during 2023. We will conduct another physical inventory count at year end and plan to fully remediate our challenges by mid-2024. On the cost front, Tutera has been overspending in operations in recent periods due to a lack of process and discipline exacerbated by the stress that the AviClear launch placed on the organization and the supply chain. The company has not had effective processes for either repairing and reusing components that are returned from field service calls, or for checking the quality of purchased materials and rejecting those that aren't usable. We are implementing these processes in the fourth quarter. The company has not done a good job of selecting vendors for certain components, resulting in the purchase of lower quality materials that then need to be scrapped or replaced. We have moved to outsource production of AviClear and XLV+, but it cost positions that were higher than what we can achieve in-house. We are correcting those decisions and have brought in experienced talent in managing supply chains in the medical device and laser-based aesthetics industry. The operations team also sees significant opportunity to manage better our freight and warehousing expense. In the near term, through Q1 of 2024, these positive operational improvements will actually have an adverse effect on cost of goods and cash burn. By resolving the backlog of service challenges, we are spending more on spare parts and service than we did during the time when service calls were not being addressed. In addition, we still have purchase commitments to vendors for the initial ramp up of AviClear that will persist into early next year. However, after we resolve the service backlog and fulfill these AviClear commitments, we should begin to see improvement in cost of goods as well as working capital. Our second key priority is growing the AviClear franchise. As a reminder, we halted new placements of AviClear three months ago in order to catch up with demand and to rethink our go-to-market approach. We have done that, and at CUCF this past weekend, we introduced an enhanced AviClear offering that provides greater flexibility and simplicity when utilizing this innovative first-to-market technology. This new business model offers the option to purchase the device upfront with a corresponding reduction in ongoing treatment costs to the practitioner. Along with greater business model flexibility, we will be offering a hardware and software upgrade that simplifies the user experience, significantly improves product reliability, and moves billing from a per patient model to paying for individual treatment cycles. As part of this transition, the AviClear software will no longer require patient-specific QR codes, which have been a source of operational and billing complexity. Instead, customers will be able to purchase packages of treatment cycles, which mirrors the model for Kutera's TrueBody platform. And this has traditionally worked well, both for customers and the company. On the utilization front, we are planning enhanced programmatic support through cooperative marketing and education. including a multi-day university-style training program supported by the company's clinical training team. The company is beginning a North American limited commercial release in Q4 2023 focused on existing customers, followed by a broader launch in Q1 2024. Additionally, the company will begin an international limited commercial release in select countries starting in Q1 of 2024. Our third and final priority involves our management of the core business. For this priority, we are solely focused on improving the profitability profile of the business. Given the macro and company-specific headwinds we are facing on the top line, we think that is the right approach for the near term. Specifically, we are focused on ASP management, product mix, and cost structure. In October, we initiated a global restructuring program, which will impact all functions and geographies across the company. The goals of this program are to align and structure the external facing portions of the company's business to better serve customers, improve communication and coordination, and gain operational efficiencies in support of long-term financial health. The changes made in the organizational restructuring have been carefully planned to ensure that customers will not experience disruptions in the service that they receive. Through the end of the fourth quarter, the restructuring program is expected to reduce headcount by close to 25%, resulting in personnel-related savings of over $20 million on an annualized basis. We're going through a bottoms-up, zero-based 2024 budget process for cost of goods and non-personnel operating expenses during the month of November. And we are planning on additional belt-tightening activities coming out of that process. We are also focused on pricing and mix. In the third quarter, our ASP has improved relative to the first half of the year. This may have cost us some revenue, but we need to preserve brand integrity and gross margin to allow for profitable growth over time. We are also putting incentive structures and promotional activities behind our higher margin product opportunities. And as part of our restructuring, we're creating more of an emphasis on driving utilization and growth of consumables, both for AviClear and the core. I'll now turn it over to Stuart to provide more detail.