Cutera Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 9, 2023

There are 8 speakers on the call.

Operator

Welcome to

Speaker 1

the Cutera Inc. First Quarter 2023 Results Conference Call. As a reminder, all participants are in listen only mode and the conference is being recorded. Presentation, there will be an opportunity to ask questions. The discussion today includes forward looking statements.

Speaker 1

These forward looking statements reflect management's current forecast or expectation of current 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 Current information that is by nature dynamic and subject to change. 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 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 ks as filed with the Securities and Exchange Commission and updated in our Form 10 Qs subsequently filed.

Speaker 1

Cutera also cautions you not to place undue reliance on forward looking statements, which speak only as of the date they are made. Cutera 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 Cutera's ongoing results of operations, particularly when comparing underlying results from period to period.

Speaker 1

Please refer to the reconciliation of 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, Interim CEO of Cutera. Please go ahead.

Operator

Thank you, Charisse. Good afternoon and welcome to Cutera's Q1 2023 earnings call. I'm glad you're able to join us for this update. As most of you on the call know, I was appointed Interim CEO by the Board in April. As announced in our earnings press release today, Rohan Seth is leaving the company.

Operator

Stuart Drummond, formerly our Vice President and Corporate Controller has been appointed Interim CFO. Stuart is joining me on today's call along with Greg Barker, our Vice President of FP and A and Investor Relations. On today's call, I will walk you through our Q1 and discuss recent events related to our financial results. I will then pass the call over to Stuart, to provide greater detail on the financials. Then I will wrap up the call and open it up for questions.

Operator

First, a bit of background on me. Before joining the Cutera Board in 2021, I held executive leadership roles at Belsch and Lomb, Colgate Palmolive, Procter and Gamble and TAM Brands. Cutera is facing. And while I am new in the interim role, I am confident that we can overcome our challenges to drive long term value. In that regard, since taking the interim role, I've had the opportunity to meet with our senior leadership team and many others across the company.

Operator

I've come away from these conversations with Two key observations. First, we have technology and products that are innovative, differentiated and deliver excellent results. As a result, we have strong customer and patient satisfaction. 2nd, we have a world class organization made up of Highly talented people who believe in our strategy and are committed to our mission, which is engineering technology for clinicians and Practice owners who are creating the future of aesthetics. So we have a very strong foundation in place.

Operator

However, we have not executed particularly well as evidenced by our results in recent quarters, including the disappointing Q1 2023 results being reported today. As the Special Committee of the Board has said publicly, the Board realized in the Q4 of last That Cutera needed a new CEO to help improve execution. The significant execution challenges and our results in the Q1 actually reinforce that fact. But let me be clear, our challenges in the quarter were mostly self inflicted and can be attributed to suboptimal leadership direction that led to execution issues that can and will be solved. No.

Operator

The special committee is committed to finding the right permanent leader for the business who can execute effectively against our opportunities. And to that end, the Board is underway and its search process to identify the next permanent CEO of Cutera. That new CEO will not be me or any other director currently on the Board. We have engaged a leading executive search firm And we are in the process of sourcing external candidates. The Board is committed to bringing in a world class operating executive, Someone who will best serve the long term interest of the shareholders, be a culture carrier for the company, execute our strategy effectively and operate with the highest level of integrity.

Operator

And we're already seeing some terrific candidates and look forward to announcing a permanent CEO as soon as we are through with our process. I want to thank many of our largest shareholders for providing input on the specifications for this critical role. We believe we are aligned in the framework of the skills needed to bring Cutera forward. That comprise the special committee. We are working through those issues and should have clarity for shareholders in the next few months.

Operator

In the meantime, we are continuing to do the important work of improving our execution of the company's strategy and searching for a new CEO. For the purposes of this call, we are not going to address These governance matters, which are the subject of litigation. So with that, I'd like to shift and provide an overview of the first quarter. Total revenue for the quarter was $55,000,000 down slightly from the year ago period. The softness traces primarily to a decline in North American Capital Equipment and skincare in Japan.

Operator

This was offset by strength in the International Capital Equipment Business. Adjusted EBITDA of negative 14 point $5,000,000 was also below our expectations and a year ago, the result of lower gross margins, higher operating expenses and FX headwinds. Now, while revenue came in below our expectations, we're Quite encouraged by AviClear's performance. We placed 350 AviClear devices in the quarter, which exceeded our expectations and demonstrates healthy early market acceptance of this breakthrough technology. Since the November launch, the capital team has been directed to focus on driving placements on AviClear to take advantage of our first mover advantage.

Operator

While we've been very successful in placing devices, We have not done as well in driving treatments and utilization. So our primary focus Going forward, we will be exactly that. It is now clear that the significant pace of placements in the last two quarters has outpaced our ability to quickly install units and partner with practices to effectively drive utilization. Going forward, we will expand our installation team to shorten the time from placement to utilization. We will also fine tune training for our key account managers or CAMs to help them work even more effectively with clinicians to drive treatment volume and utilization.

Operator

Increasing the utilization of each of the systems is key to unlocking AviClear's potential to transform our business and also that of the practitioner. Turning to capital equipment, revenue was down over 2022, primarily a result of underperformance within North America. The North American performance was slightly offset by positive performance in the rest of the world. Lower than expected capital equipment revenues in North America were the result of 2 operational factors. 1st, Our capital sales team's continued focus on driving placements for AviClear.

Operator

And second, the company faced challenges completing its audit related inventory count, which resulted in a 4 week plant shutdown and a loss of production output. Decreases in our average selling prices or ASPs also placed downward pressure on revenue in the quarter. So let me go into a bit more detail on the first two points. As discussed on our last quarterly call, the volume of Avi cleared Deals in the 4th quarters diverted sales attention away from core capital deals. This trend actually continued in the first And as a result, fewer core capital deals were closed.

Operator

As mentioned, we are now shifting our AviClear commercial emphasis towards device utilization, which is driven by our key account manager or CAM organization. Moving forward, This should allow our capital reps to return their primary focus to the sale of our core capital products, while simultaneously securing new attractive AviClear placements at a more measured pace. With these recent changes and the successful implementation of retention incentives, we've re energized our sales force. Based on the Stem to the conversations I've had over the last couple of weeks, they are highly enthusiastic about their opportunities and they remain fully committed to driving growth in our business. The second operational challenge we faced during the quarter traces to an extended plant shutdown that impacted our ability to build inventory and ship product for a period of time.

Operator

So there's typically a 1 week shut This year, to comply with audit requirements, the year end physical inventory count took longer than expected Turning to International Capital, which includes Europe, Japan, InterContinental, our business was During the quarter, we saw strong growth in our Europe and InterContinental regions. This points to healthy underlying demand for our capital Moving on, recurring revenue was up 8% versus a year ago in constant currency, driven by results on AviClear. I'd now like to take a minute and sprinkle in a bit of on the ground market perspective. In April, the company attended the American Society For Laser Medicine and Surgery or ASLMS Conference in Phoenix.

Speaker 2

It's one

Operator

of the big meetings for customers that use energy based technologies like ours. We had a great conference where we celebrated Cutera's 25th anniversary. Our reps were highly engaged in very productive conversations with potential customers And the interest in AviClear was significant. From a technology perspective, 1726 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 Q1 performance did not meet our expectations, we remain optimistic about the underlying demand for our core products and the growth opportunity that AviClear provides.

Operator

I am convinced that as we improve our execution, 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 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.

Operator

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?

Speaker 3

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.

Speaker 3

I obtained my Chart Accounting Certification in New Zealand through KPMG and then worked with large multinationals in Europe before coming to United States. I've worked in the Bay Area for a total of around 14 years, most recently in corporate controller roles in the life sciences industry. I joined Cutera in July 2021 as Vice President and Corporate Controller. Turning to our Q1 results. Total revenue for the Q1 was $55,000,000 compared to $58,000,000 for the same period in 2022, representing a decrease of approximately 5% on an as reported basis.

Speaker 3

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 $2,800,000 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 $1,800,000 in North America and $1,000,000 internationally. In addition, There were other deals which orders we never received as our customers were aware that we didn't have the relevant inventory. 1st quarter consolidated capital equipment revenue CAD33,300,000 decreased by CAD3,200,000 from the prior year period.

Speaker 3

This decrease reflects Lower ASPs are resulting from a geographic shift from North America to our international customers and distributors, as well as the previously mentioned North American capital equipment revenue of $18,000,000 decreased by 21% over the prior year. As I mentioned, we estimate that approximately $1,800,000 of the shortfall is due to orders that could not be shipped due to the lack of finished goods. In addition, dollars 500,000 of orders were packaged and available to ship, but did not meet the revenue cutoff. Had we managed to get this $2,300,000 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 I'll be clear placements in the quarter.

Speaker 3

International capital equipment revenue for the Q1 was $15,400,000 Up 11% from the Q1 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 other clear product line was $21,700,000 in the 1st quarter, 1% as reported and up 8% on a constant currency basis versus the comparative period. The increase over the prior year was driven by Aviclare revenue of of $4,400,000 This growth was partially offset by a decline in skincare revenue, which came in at $8,100,000 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 Q1 of fiscal 2023 was $27,000,000 with a gross margin of 49.1%, representing a decrease of 660 basis points compared to the same period last year.

Speaker 3

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 Q1 of 2023 were $25,800,000 compared to $23,500,000 for the same period last year, driven by a continued expansion in our AviClare sales force.

Speaker 3

Non GAAP R and D expenses for the Q1 of 2023 were 5,700,000 compared to $5,500,000 for the same period last year. Non GAAP G and A expenses for the Q1 of 2023 We were $10,100,000 compared to $7,100,000 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 Q1 of 2023, our non GAAP operating income, which we refer to as adjusted EBITDA, was a loss of 14,500,000 compared to a loss of $3,800,000 in the prior year period. This increase in loss was largely driven by unfavorable gross margin, increasing operating expenses and FX Headwinds.

Speaker 3

There were no material or significant changes to our tax position. Turning now to our balance sheet. We ended the quarter with $267,700,000 of cash and marketable securities compared to $317,300,000 at the end of 2022. Driving this $49,700,000 sequential decrease, a $23,100,000 of cash utilization to support Avicleer, $12,400,000 from core losses, primarily driven by sales and gross margin shortfalls, which we expect to recover from quickly $8,200,000 increase in core inventory and $5,600,000 from slower core collections. Our expectation is that this is the high water mine for And this will trend downwards throughout 2023.

Speaker 3

With that, I will now pass the call back to Sheila.

Operator

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 1st 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 Avicleer will change the way that dermatologists treat acne.

Operator

By approaching the acne market with a minimal upfront financial commitment and a meaningful recurring treatment revenue stream For our customers and Cutera, 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 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 Avi Clear, the foundation of the business is strong and the leadership team and our Board of Directors

Speaker 1

We will now begin the question and answer session. The first question comes from George Sellers with Stephens Inc. Please go ahead.

Speaker 4

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 if there's any additional headwinds from that expected in the second quarter or if those Operations are sort of back to normal.

Speaker 3

Yes. Thanks, George, for your question. It's Stuart here. So we typically shut down production about 1 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 Material into production.

Speaker 3

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 had performed numerous recounts and ultimately had to recount our 3rd party warehouse. So The count procedure is extended an additional 3 weeks, so 4 weeks in total we're unable to produce. You'll see my gross margin comments in my prepared remarks that we were impacted by this.

Speaker 3

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, We believe these effects are transitory and we'll resume normal production in the second quarter.

Speaker 4

Okay. That's helpful. And then maybe taking a step back from the factory shutdown issues, What would have been some of the drivers to North American capital sales coming up a little shorter than expected? I Even after adding back the numbers that you specifically called out that revenue would have been a little bit lower than we were I guess I'm also asking within that question, how would you characterize the underlying aesthetic market in the quarter and how that progressed?

Operator

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 to we will be Pacing the placements in a more deliberate manner going forward.

Operator

Generally speaking, All that I have heard would suggest that the state of the aesthetics market is remains healthy.

Speaker 4

Okay, great. Thank you for the time. I'll leave it at just 2. Thank you all.

Operator

Thank you.

Speaker 1

The next question comes from Jon Block with Stifel. Please go ahead.

Speaker 5

Thanks. 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 Q4 call, the prior management team talked about a new incentive program, which was supposed to help refocus The reps' attention sort of properly allocate their time between Avi Clear and Capital.

Speaker 5

And again, that was On the Q4 call, 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.

Operator

Thanks, John. Appreciate that question. The short answers 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 these Capital selling organization delivered against that direction.

Operator

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, and which enables the capital organization to focus in a priority way against capital again.

Operator

They will, in a world where we are being more strategic about our, AVY 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.

Speaker 5

Okay, got it. I'll go back to that in a second. But maybe just to pivot, 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.

Speaker 5

But 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 The risk of other defections, again, when we think about that letter that was written and still the Board's decision is to go ahead and make the changes that they made.

Operator

Yes. 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 Cutera 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.

Operator

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

Speaker 5

circumstances. Okay. And last one

Operator

The people in the room with me are nodding their heads.

Speaker 5

Okay. It's good to hear. I think the last one, and I think under these circumstances, it hopefully justifies the third question. 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 might give some high level clarity.

Speaker 5

You might provide guidance with a wide range, but you've got a stock right now that's even bidding down another 20%, twenty 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 can provide there would be very helpful. Thanks for your time, guys.

Operator

Sure. So I think the weakness that we have seen in the Q1 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 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 and 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.

Operator

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.

Speaker 2

Thank you.

Speaker 1

The next question comes from Matthew O'Brien with Piper Sandler. Please go ahead. Great.

Speaker 6

Thanks for taking my questions. Sheila, maybe just to follow-up a little bit on John's question there, but previous management had talked about AvaClear being a $30,000,000 product this year approaching that level. Should we think about it maybe as a run rate of what we saw in Q1, Maybe closer to $20,000,000 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.

Operator

Right. So 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.

Speaker 6

Inclusive of Avicleer?

Operator

Once again, That's guiding a bit.

Speaker 6

I'm not sure if this question is for you or for Stuart, but the I would love to hear a little bit more about Sales retention plans that you mentioned earlier because the OpEx numbers in the quarter were quite high. What have you had to commit 2 there, how long is the duration there? And then how can we feel comfortable that when these commitments expire that there's not another exodus Yes, sometime next year or 2025.

Speaker 3

Yes. Hi, it's Stuart speaking. Those sales retention numbers aren't actually in our So we'll be announcing it in our 10 ks as a subsequent event footnote. Our Board has committed up to $13,000,000 $10,000,000 of which is for sales folks. It's an 18 month period.

Speaker 3

The amounts will be paid along the way in about 4 chunks.

Operator

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.

Speaker 6

Okay. Maybe just a follow-up on that, Stuart. The increase in OpEx again in the quarter It was pretty sizable. Is there any more guidance you can give as far as what were there some one time costs in there? What drove Those numbers are up so high because we don't have guidance and we're looking at some of these numbers.

Speaker 6

We're starting to see some pretty high earn rates and I know that's 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.

Speaker 3

Yes. Two primary reasons. Remember the comparisons against Q1 last year, so we've ramped up our Aviclea sales force by up to 40 headcount. So these numbers are obviously rolling into the Q1 2023. And another item in the G and A is we had an increase in It's an audit related expense due to the extended audit of around $1,500,000

Speaker 6

Got it. Thank you.

Speaker 1

The next question comes from Margaret Kaczor with William Blair. Please go ahead.

Speaker 7

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 forward to provide comfort to provide that guidance? What don't you have, I guess, awareness of today that is Prohibiting you from doing that doesn't sound like it's sales force turnover. So what else are you guys missing?

Speaker 7

And more specifically, it did sound, to John's point, to us, Elyse, you might provide us some sense around potential to achieve the prior guidance that when we last spoke, Sheila. So I guess what happened in the last few weeks or months since you joined? Was there something new, I guess, that made you not comfortable with doing that?

Operator

Yes. I mean, I did have conversations around Sharing some color, if not, guidance. And so let me see if I can be a little more Helpful on the color front perhaps and also hope folks better understand Why we're not providing guidance. So with AviClear, we have a new compelling technology. And 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.

Operator

And we need to Fine tune, verify all of those assumptions, particularly on AviClear to make sure that we're getting That number is right as we can be because it is so essential to the outlook. And I would say That is where there is a lot of energy focused right now. And 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.

Speaker 7

Okay. That's helpful. And so 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 I know you talked maybe about hiring some new cams or support reps or at least kind of reeducating and re kind of strategizing their focus. But I look at the over 1,000 sites you guys now have and can't help but think it's going to take a while for your candidates to be able individually go into each account, identify how they could help implement those procedures and see the outcome on the back end With growth and utilization, but you tell me, I mean, is this potentially a 1 quarter, 2 quarter Or is this a longer term effort that will both require new expenses as well as time?

Operator

Thank you. Thank you. That's a great question. So here's the situation. We're early in the launch.

Operator

Utilization varies significantly across the It varies by type of office, how long the device has been in place. But importantly, one thing that is has meaningfully changed is that the big increase in placements that occurred between November 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 and 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.

Operator

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 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. So with those steps in place, we are actually quite Confident that as we move through the quarters, 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.

Speaker 7

So this is all about execution. Okay. So if I can, just one last question. Yes. As we think about pairing those comments with the cash burn that we see and so on, I don't know if You guys can provide it, but it's over $100,000,000 decrease I think in cash and marketable securities.

Speaker 7

Can you ball Mark it for us. Are we thinking $40,000,000 a quarter here, dollars 60,000,000 $80,000,000 especially or maybe even highlight from a CAM perspective how much that might

Speaker 3

Sorry, Margaret, it's Stuart. Can you repeat that question and the number that you announced?

Speaker 7

So when I was doing a 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 to the cash and marketable securities at the end of this quarter, it seemed to me that that was $100,000,000 worth So one, I guess, tell me if that's correct. And then 2, how should we look at that on a quarterly basis going forward?

Operator

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 burn will our cash position will improve Sequentially through the quarters.

Speaker 3

Yes. Margaret, it's Stuart. Our actual cash burn was 49.7 between December 31 March 31, dollars 11,000,000 of that was increase in Abicleer devices, plus we had some balance sheet increases On the inventory with raw materials, our AI collections will lower as well.

Speaker 7

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.

Operator

Thank you.

Speaker 1

The next question comes from Anthony Vendetti with Maxim Group. Please go ahead.

Speaker 2

Thank you. Just wanted to follow-up on the AviClear placements. I guess, Julie, you pointed out that maybe the capital equipment sales force 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 Placement is a lower selling price than, let's say, a truesculpt.

Speaker 2

Do they get a piece of the utilization? How does that work? And was there any change in the incentive structure or compensation structure for the sales force

Operator

That will

Speaker 2

allow them to refocus on the whole portfolio going forward.

Operator

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 PM organization, which drives utilization, I believe, has a compensation structure that is tied to revenue, because each of those organizations does 2 different things. The compensation structure for our cash organization, does it's all inclusive.

Operator

There it covers both Avi and the capital organization and capital sales and The comp program that was released in the Q1, I think it 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.

Speaker 2

Okay. Yes, that's helpful. And then just lastly on a big picture, you mentioned that the underlying business Fundamentals remain healthy. We've seen from other companies in the aesthetic space, They've been impacted by higher interest rates, whether it'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?

Operator

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 Seeing a little bit of evidence that this may be An emerging smallish problem, but in the U. S, The derm market seems to be stable, Strong, no issues is what I am hearing from our field selling organization. We are monitoring this very closely.

Speaker 2

Okay. And then lastly, I just On the expense side, you mentioned you added 40 employees, I'll be clear. Is that over what period of time? And how many were added specifically in the Q1?

Speaker 3

Yes. It's Stuart again. No, that $40,000,000 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.

Speaker 2

Okay, great. Thank you very much. I'll hop back in the queue. Appreciate it.

Operator

Thank you, Anthony.

Speaker 1

The next question comes from George Sellers with Stephens Inc. Please go ahead.

Speaker 4

Hey, thanks so much for taking the follow-up. I just wanted to ask about the release that hit just Few minutes ago, about an agreement between Cutera 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.

Operator

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 release to gather insight on what's happening there.

Speaker 4

Okay, understood. Thank you again.

Operator

Thanks, George.

Speaker 1

This concludes the question and answer session. I would like to turn the conference back over to Sheila Hopkins for any closing remarks.

Operator

Yes. 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.

Operator

We look forward to follow-up conversations with you 1 on 1. So on that note, I would like to Thank our operator, Charisse. Thank the team here and wish you all a great afternoon and rest of your day. Thank you much.

Speaker 3

Thank you.

Speaker 1

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant

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Earnings Conference Call
Cutera Q1 2023
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