Cutera, Inc.

Thank you for standing by. This is the conference operator. Welcome to the QTERA Inc. 3rd Quarter 2024 Results 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 may signal an operator by pressing star then 0. I would now like to turn the call over to Shelby Eckerman, Vice President of Finance. Please go ahead.

Thank you, Operator, and thank you, everyone, for joining us. With me today is Taylor Harris, Katerra's Chief Executive Officer, and Stuart Drummond, Interim CFO. Following our prepared remarks, we will take your questions. Before we get started, I'll note that today's discussion includes forward-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 risk and uncertainties, including those risk factors described in the section entitled Risk Factors and are from 10-K, as filed with the Securities and Exchange Commission and updated in our Form 10Qs subsequently filed. QTERRA also costs 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 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 in Katerra'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 alternative to the operating performance measures prescribed by GAAP. With that, it is my pleasure to turn the call over to our CEO, Taylor Harris.

Thank you, Shelby. Although we continue to face challenging business conditions, we remain on track with the 2024 plans that we outlined last quarter, both operationally and financially. AviClear revenue continued to grow on a year-over-year basis, driven by our international launch. Core capital sales, while down year over year, increased modestly on a sequential basis. And we saw underlying improvements in gross margin and controlled operating expenses, excluding some non-cash accounting charges. At the same time, we're building the foundation through our team, culture, and customer-focused service mindset to support long-term growth for our company. Nowhere was that more evident to me than last weekend at the Cutera University Clinical Forum, or CUCF, which is our annual educational event designed to disseminate best practices for utilization of our technology. At CUCF, I spoke with numerous customers who love their Cutera devices and who are starting to provide me with more and more positive feedback on the team that is supporting them across the board. from sales to service to marketing and post-sales practice development. I remain proud of the resilience that our team at Qterra has been demonstrating and of the foundational changes we continue to pursue to position the company well for future growth. Turning to Q3, the international launch of AviClear continues to proceed exceedingly well. We've now sold over 100 AviClear systems outside of North America, and we've expanded into approximately 25 countries as we brought online a number of distributor markets during the third quarter. Utilization remains strong, with our direct markets averaging over nine treatments per device per month, an increase versus prior quarters. We're still early in the launch, so it wouldn't be appropriate to extrapolate that performance. But that said, the utilization trends are clearly encouraging, and customers are reporting to us that they are achieving impressive clinical results, which is the most important indicator of future growth. In North America, we saw typical seasonality across most components of our business, although our core capital revenue was relatively stable in the third quarter compared to the second quarter, with broader revenue contribution across our field team than we had last quarter. We are focused intensely on hiring well, cultivating a winning culture, and providing industry-leading training and development opportunities for the team. For example, we brought the entire field organization together for training during the first week of October, including a new sales rep certification process for AviClear. We believe that increased productivity over time begins here with the right team, processes, and training. The North America team continues to execute well on the launch of Zeo Plus. As a reminder, Zeo Plus offers tremendous flexibility and customization with over 25 applications from Cutera's signature laser genesis skin revitalization procedure to hair removal to pigment reduction and more. With a larger spot size, enhanced contact cooling, and redesigned hand pieces, Zeo Plus provides faster treatments and improved comfort. Additionally, the team drove a nice sequential uptick in our sales of the secret portfolio of RF microneedling devices, and we also saw a modest uptick in TruFlex. The TruBody platform, in fact, was one of the highlights at CUCF this year, as panelists spoke about the potential for indication expansion, which would involve studying the integration of Sculpt and Flex into regimens with GLP-1s, Panelists also spoke about the potential for studies of TruFlex, our multi-directional RF energy device for muscle stimulation, in indications outside of aesthetics. For example, functional strength and physical rehabilitation. We are inspired to do more work clinically to understand how TruFlex could potentially be deployed to assist patients in these areas. I'll now provide an update on our top near-term business priorities, which are, one, the pursuit of operational excellence across a range of functions, two, fully developing the opportunity for AviClear, and three, improving our financial health through an efficient cost structure and reductions in working capital. I will elaborate on all of these. First, operational excellence. We continue to make progress in all of the key areas that we identified last year, product reliability, field service, supply-demand planning, and inventory control. And I'd like to highlight field service in particular, where during the third quarter, we reduced service backlog in all geographies across the globe. In North America, we've continued to improve our service response times. Earlier this year, we crossed the industry gold standard for 72-hour response time of 80%. And we've actually achieved 90% to 100% in more recent weeks and months, which we believe puts us into an industry-leading position. It's truly remarkable to see how far we've come in just over a year. We now believe that our service capability can provide a competitive advantage to and it demonstrates clearly to our customer base the type of partner that QTERRA will be and the type of support we will provide. Second, AviClear. We continue to be encouraged by international launch dynamics, including the uptake by thought-leading KOLs in major direct markets, the initial uptake we're seeing in newly launched distributor territories, as well as the strong and growing utilization across our installed base. In North America, we're still working through the transition from the initial leased business model. As of the end of the third quarter, there were approximately 785 systems operating under the leased model, down from 925 last quarter, a reduction of approximately 140 during the quarter, with approximately 200 on a list to be returned in the coming quarters. We continue to expect that more than half of the original installed base of systems will be returned, and we're now working on moving efficiently through this return process. In addition, we are focusing our efforts squarely on a group of around 150 of the most committed AviClear accounts, where we believe our PDMs can help drive increases in utilization. We'll also continue to use QTERRA Academy programs to help accounts relaunch AviClear successfully in their practices. And third, cost structure and working capital. We saw underlying improvement in our gross margin and operating expense profiles in the third quarter. On a normalized basis, that is, if we exclude our standard non-gap adjustments as well as non-cash charges for excess and obsolete inventory, Our gross margin was 42% in Q3 compared to 35% in Q2 and 40% in Q1. Our non-GAAP operating expenses were $35 million, but that included a bad debt charge of $5.4 million. So that marks two quarters in a row of operating expenses below $30 million, excluding our standard non-GAAP adjustments as well as bad debt expense. On a go-forward basis, we're likely to have some ongoing E&O and bad debt, but we believe that it will be significantly reduced from the levels we've recorded in recent quarters. On an underlying basis, the progress we're making in our cost structure reflects operational efficiencies in service, freight, packaging, as well as the impact of the reductions in force and other cost containment programs that we have implemented. On the working capital front, as we mentioned last quarter, our ability to realize an inventory work down benefit has been delayed due to the reduced revenue environment. As a reminder, due to a variety of factors, we have built a gross inventory balance of approximately $135 million. Excluding our field-based inventory, like demo units or service loaners, this balance is approximately $120 million. Over the coming years, we plan to reduce this inventory significantly, beginning in the fourth quarter and into a greater degree in 2025. In fact, we continue to anticipate a year-over-year improvement in cash burn of over $50 million as we move from 2024 to 2025 related to working capital alone, even in the absence of revenue growth. Additionally, we should recognize a full year of benefit from the cost savings initiatives that we implemented during the third quarter. As such, we anticipate reducing our cash burn by over 50% in 2025, before factoring the opportunities for revenue growth or gross margin improvement. Before I turn the call over to Stuart, I would like to mention that we have now begun selling under our distribution partnership with L'Oreal's SkinCeuticals business in Japan, following a well-attended launch event with leading dermatologists. We don't expect a material revenue contribution in the fourth quarter, but we remain excited about the potential for this partnership longer term. With that, I'll turn the call over to Stuart.