Q2 2020 Cutera Inc Earnings Call

Thank you for joining could terrorists second quarter 2020 earnings conference call.

After their prepared remarks, there will be a question and answer session. The discussion today includes forward looking statements.

These forward looking statements reflect management's current forecast or expectation.

Certain aspects of the company's future business.

Including but not limited to any financial.

Right that's provided for modeling purposes.

Forward looking statements are based on current information that is by its nature dynamic that's subject to change [laughter] forward looking statements include among others.

Ms regarding financial guidance plants, you introduce new products.

Regulatory approval.

And productivity improvements.

For words that my <unk> that may identify forward approvals approach.

For words.

They identify forward looking statements.

We encourage you to refer to the Safe Harbor statement at our press release earlier today [laughter]. All forward looking statements are subject to risks or uncertainties, including those risk factors described to the section entitled risk factors in our form 10-K as filed with the Securities Exchange Commission and updated that our form 10-K.

Sub sub sub six Whitley filed Cutera also cautions.

You're not to place undue reliance on forward looking statements, which speak only as of the date they are made.

[noise] Cutera undertakes no obligation to update publics 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 analyst greater transparency. It took a terrorist ongoing results of operations, particularly when comparing underlying results from period to period.

Please refer to the reconciliation from GAAP to non-GAAP measures and our earnings release. These non-GAAP financial measure should be considered a lot west, but not as an alternative to the operating performance measures prescribed by gap with that we'd like to turn the call over to your CEO, Dave Mallory.

Thank you operator.

As we all know the second quarter of 2020 was significantly impacted by the covert 19 pandemic.

This unprecedented global crisis has affected all of us in some way shape or form.

As a member of the health care community I would like to take a moment to express our appreciation for the many people who sacrificed their own safety to provide care for those directly touched by the virus the integrity commitment and skill demonstrated by our first responders and acute care center staff have been not only impressive.

But also humbling to watch in the face of such a diversity.

Today I'm joined on the call by Jason Ritchie, President and Chief operating Officer.

Well its bought Ahmed our interim Chief Financial Officer.

Well begin todays call by providing a brief overview of our second quarter 2020 business results highlighting our efforts to mobilize around the customer while rightsizing, our business to an evolving end market environment.

Additionally, I will share our view of the pace and magnitude of the market recovery, we expect to see over the back half of 2020, and how to Terra is poised to capitalize upon it.

Jason will then discuss the operational highlights for the quarter and outlined our continued focus on our vital few initiatives to carries through the back half of fiscal 2020 and into 2021.

Following Jason Board will provide a high level review of our key financial performance indicators and update you on the steps we've taken to strengthen our balance sheet and position the company for the longer term.

We will then conclude the session by inviting your questions.

So turning now to the second quarter.

I am pleased with our teams response to the Cobot 19 crisis, while our financial results were clearly impacted by the pandemic and the associated market shutdowns in April and most of May I'm proud of the way our organization stepped up and performed in light of the broader challenge.

As I discussed on our first quarter earnings call one point of emphasis for our second quarter effort was to increase the level of account engagement and customer outreach.

As a result of our sales teams commitment to this initiative, we were able to take an accurate pulse on the market in real time and partner with customers to drive patient traffic and position ourselves to engage in available capital deals as the opportunities arose.

As federal and street restrictions lifted patients began returning to their pre cobot a static routines.

Patient traffic, though slightly disrupted by the social demonstrations in early to mid June restarted in May and steadily increased in the back half of the quarter as practices became more comfortable with new social dispensing and treatment room disinfecting processes.

Well most practices were initially constrained by their capacity to effectively utilize could save processes. Our belief is that the open practices, we're running in excess of 70% of their pre covert patient rates exiting June.

This is based upon the feedback from many of our customers.

Overall, we have a very resilient group of customers that moved through their reopening processes as the quarter will more on.

The optic new procedures steadily ramping patient volumes and improving their practice capacities as new protocols became more routine.

Based on these trends, we anticipate the practices will continue to ramp treatment through the current period to achieve near 90% of their pre covert treatment capacity by the end of third quarter Twentytwenty. Although this estimate is subject to the uncertainty surrounding the future trajectory and severity of the pandemic and the potential.

Subsequent government restrictions.

As we had anticipated the med spots, where the most aggressive in their efforts to reopen in ramp volumes followed closely by plastic surgery offices, which faced similar limited drilling opportunities during the shutdown.

Both groups were able to tap significant pent up demand with their patients to fully booked their practices.

Dermatologist practices, where the most conservative of our core customer groups as they were able to leverage online consultations and other revenue streams to offset a portion of the lost revenues during the shutdown.

As is the case with all customer segments balance sheets had been significantly impacted during the shutdown and as a result customers are looking to rebuild their cash reserves.

We establish consistent patient traffic and monetize as much of their existing consumable and skincare inventories as they can prior to restocking.

Along these lines consumable reorders trailed practice reopening by debt.

We began to realize a slight acceleration of the consumable volumes during the second half of June and believe we will approach a similar run rate to our consumables inline with the anticipated patient traffic for third quarter 2020 at the man rebounds.

Looking across our various revenue categories skincare performance was a standout growing at a rate of nearly 170% year over year.

This was driven by the continued satisfaction of our current customers and their patients with the product in combination with a slightly restricted access to dermatologists offices in Japan.

Globally patients opted to double down on purchases of topical treatment and we benefited directly from this effect in Japan.

Service revenue was also better than we had originally anticipated as many practices requested service in advance of reopening, thereby driving service calls in excess of expectations.

She terra believes that our strong unresponsive field service team is one of our competitive Differentiators and it has served us and our customers well during this challenging period.

The numerous unsolicited positive customer comments, our field service team has received recently has been prime evidence of this.

Despite the challenge macro environment and anticipated reduction in customer access to capital. We Nonetheless sold 15, and one half million dollars of systems during the quarter.

System revenue was split 60, 40 between U.S. and international respectively, with the majority of deals being prospected using our new approach.

And our increased proximity to customers as evidenced by our gross margin performance, we were exceptionally diligent in maintaining our unit pricing relying instead on our leading service and post sales support to differentiate ourselves in competitive deals.

We were also able to maintain similar pricing discipline on our consumable products. It did not pull forward future sales into the quarter.

Late in the quarter, we launched the two tier membership program.

This was designed as a courtesy to our impacted customers, allowing them access to top of the line energy based a static equipment with a low initial capital investment.

This program is similar to an automotive lease where customers pay a monthly fee with a limited upfront payment.

Customers must still purchased the consumable products for the procedures, they perform and retain the option to upgrade equipment or by use systems at a depreciated level once their contract term expires.

While we only executed a handful of these deals many of them were with existing cut two tier customers, who appreciate it our recognition of their short term cash constraints and our partnering with them in reopening and rebuilding their practices.

The telltale sign of customer confidence is a willingness to invest cash into a capital equipment.

Our second quarter, North American and international capital equipment sales levels are strong endorsement of our customers resilience as well as their acknowledgement of patient traffic recovery and the value they recognized in our portfolio.

All of these factors were reflected in both the volume and the quality assistant deals within the period, which surpassed our initial expectations for this challenging time.

Looking ahead, we believe that many dedicated a static practices will continue to be aggressive in both their marketing and treatment efforts with med spas and plastic surgeons, leading the way.

We also anticipate that dermatology practices will continue to ramp steadily towards near proof pre kobin capacities over the coming months prioritizing injectables topicals and shorter more profitable treatments, such as our Trusculpt I'd secret RF, and XLV, plus which provide shorter.

Treatment times and more efficient use of the constraint capacity the treat rooms, leading to greater profitability for their practices.

We are mindful to not get too far ahead of the recovery practice process as covert will continue to constrain revenue performance in the third quarter 2020.

And potentially in the fourth quarter of 2020.

Nevertheless, we are encouraged by the early revenue trend trends, we're seeing in the first month of the current quarter, which were ahead of the first month of the prior quarter and inline with the prior year.

Keeping in mind that capital sales are backend loaded we believe that with the patient traffic steadily ramping.

Customer counts are indeed recovery as such we're guardedly optimistic that our third quarter 2020 revenue will provide sequential improvement Overset second quarter 2020 results.

Before turning the call over to Jason I would like to Hi, also highlight our operating discipline in the second quarter.

As I shared during the first quarter earnings call. The company made several difficult decisions to reduce headcount and narrow our focus to the most critical programs beginning in May we began reducing expenses and the second quarter results reflect a portion of our expected or run rate improvements as most programs where in this.

She ended in mid May.

While we furloughed a significant portion of our workforce. We also released several full time employees Rightsizing, our staff and resetting our operating expense levels.

In addition to head count reductions during the period, we curtailed several nonessential programs and projects and eliminated non value added activities.

As a result of these changes the company outperformed our internal gross margin and adjusted EBITDA expect expectations in the second quarter 2020.

The vast majority of these expense reductions are permanent and will not be reversed even as business resumes setting the stage for improved profitability as revenues ramp back up over the rest of the year.

I will now turn the call over to Jason to discuss more of the specific drivers across categories and regions.

Thanks, Dave.

As I discussed last quarter, we made several adjustments to our commercial operations to adapt to the ongoing cobot environment.

As a reminder, in response to the pandemic, we aligned our commercial organization around the following principles first the health and safety of our employees our partners and our customers.

Second conducting daily with our active installed base of customers.

Third reaching out to our medical Advisory board the game their input and ensure we aligned with them on our activities and our messaging.

Fourth staying hyper focused on our core customers.

Fifth remaining flexible.

And finally committing to the resources in programs necessary to accelerate as through the recovery period, and assist our conditions and getting up and running as quickly as possible.

We executed extremely well against these priorities during the quarter by providing educational webinars and the survival guide to help our customers weather the storm and increased patient traffic as quickly and as safely as possible.

Our new normal a virtual meetings cancels demonstrations and educational programs has allowed us to partner with customers to help them recover faster.

Now turning to sales during the quarter.

As discussed previously beginning in mid March our sales were negatively impacted by the government restrictions put in place in response to the code at 19 crisis.

These restrictions had the greatest impact on our results for mid March through early June.

Sales began to steadily increase beginning in early June when patient volumes rebounded as states began to ease restrictions.

In North America. The focus has been on working with practices to drive procedure related volume, but the focus on skin revitalization and body sculpting by emphasizing lower cost high impact procedures like laser Genesis in micro needling.

In addition, we're leveraging our body sculpting portfolio to promote losing the so called cope with my team by offering packages for both crew sculpt I'd Antroscope flux.

We realize better than expected capital equipment sales in our international businesses during a quarter when government and travel restrictions made capital sales difficult.

In Europe after experiencing border shut downs, most regions and now begun to reopen and we're beginning to see a recovery in these markets.

Despite the difficult capital sales environment sales in the European market were flat versus prior year, having benefited from our organizational restructuring and the launch of true scope flex.

In Australia, the government tax relief program likely pulled forward some of our sales into the second quarter, although the impact to our overall results was minimal.

In addition, the launch of truth scope flex in late Q1 as much of the country. We're shutting down resulted in some of those Q1 systems being pushed into quarter two.

In Japan, we experienced growth in both skin revitalization and body sculpting, 60% to 70% of offices remained open at 50% to 60% capacity.

We expect this capacity to continue to increase as the country continues to recover from the pandemic.

Most of the middle East and our European distributor markets faced strict traveling government restrictions with pockets of growth as distributors look to capitalize on sales in markets with fewer restrictions.

Asian market started to see increased capacity towards the end of the quarter. That's covered cases decreased.

Turning now to recurring revenue.

Service experience to steady increase in revenue between May and June as practices insured systems were prepared to treat a backlog of patients.

As Dave mentioned, our skin care business in Japan experienced a significant year over year increase due to an increase customer base and growing popularity of home base topical treatments.

And finally consumable revenue nearly doubled from may into June as customers took advantage of our decision to delay price increases as their patient volume started to ramp.

As Dave mentioned in his remarks during the second quarter, we launched the Cutera membership program and equipment leasing program that allows our customers to gain access to equipment at a reduced upfront cost.

This is a great option for customers that want to provide patients with best in class technology. When their current cash reserves do not yet allow them to monetize the recovering levels of patient traffic.

This is just one example of how our team has pivoted to provide our customers with tangible solutions to help them recover faster.

Lastly, I'd like to discuss our commercial outlook for the remainder of the year.

We have evolved our workshop model to smaller localized events that allow virtual participation and more specialized one on one education and demonstration of our products. We expect this platform to continue through the balance of the fiscal year, along with our webinars to support our customers through this ever changing environment.

In late Q3, we will launch practice pro product designed to deliver best in class micro needling, along with a combined fractional Seo two laser platform.

We believe this device would be well suited to meet the needs of our core customers in both plastic surgery and dermatological practices.

This launch will be focused mainly in the United States market as we seek to expand on our success the secret RF.

By the end of 2020, we expect to make this product available in Canada as well as the United Kingdom.

Ill now turn the call over to flawed to review our key financial performance indicators for the second quarter.

Thank you [laughter] before I begin. Please note our prepared remarks will focus primarily on non-GAAP results unless otherwise noted a reconciliation of GAAP to non-GAAP is included in the earnings release, we encourage listeners and readers to review our non-GAAP metrics in conjunction with the gap yourselves as contained in our earnings release.

I will now goal or the results for the second quarter fiscal 2020.

Total revenue for the second quarter fiscal 20 was 26.4 million compared to 47.8 million for the same period in 2019.

Representing a decline of approximately 45%.

The decline is solely attributed to co 19 related shutdowns that dramatically curtailed our ability to conduct business or most of the quarter across all geographies.

U.S. revenue fell 61% to 10.9 million compared to the same period last year.

International revenue for the second quarter was 15.5 million a 21% decline.

The rather modest decline in international revenues relative to U.S. was aided by robust sales afar zeal skincare line in Japan as well as strong system sales in Australia, New Zealand in Japan.

Those geographies were first emerged from countrywide shutdowns.

Good terrorists skincare revenue was 4.8 million in the second quarter fiscal 20, 169% increase for the second quarter of last year.

Well the second quarter fiscal 20 recurring revenue define us consumables global service and skin care revenue was 10.8 million compared to 10.2 million, but the same period last year.

Declines from early period procedure deferrals reflected in our service and consumable revenue were more than offset by the substantial increase in zero skin care revenue.

The decline in service revenue was the result of contract renewals deferrals and reduction in service calls due to mandatory shutdowns.

In addition, consumable revenue was down in direct correlation to the mandatory shutdowns of aesthetic practices you to Cook in 19.

Gross profit in gross margin declined relative to revenue decline described earlier.

Gross profit for the second quarter fiscal 20 was 12.6 million, representing a 52% decline compared to the same period last year.

Gross margin in the second quarter fiscal 20 was 47.9% versus 55.2% for the same period last year due to.

Substantially lower overhead absorption under production volumes associated with lower sales and company plant inventory reductions.

Now moving to operating expenses.

Total operating expenses for the second quarter fiscal 20 were 16.2 million compared to 21.9 million for the same period last year.

It 26% decrease.

Our results reflect lower variable compensation expense as well as the thoughtful and durable cost reduction measures implemented by the company in the face of the business disruptions associated cover 19 headwinds.

Sales and marketing expense for the second quarter fiscal 20 was 8.7 million compared to 15.1 million for the same period last year.

42% reduction.

The lower expense was primarily a direct result of our cost reduction measures and to a lesser extent lower variable compensation expense from lower revenue.

R&D expenses for the second quarter fiscal 20 work 2.1 million compared to 2.9 million for the same here last year as a result up lower level of onside activities due to temporary office bullish or some color 19.

We anticipate a rebound in these expenses as employees returned to the office and project teams accelerate their activities.

Finally.

DNA expenses with the second quarter fiscal 20 were 5.3 million compared to 4 million in the same period last year.

In light of the Golden 19 related challenges reported a substantial bad debt reserve in the second quarter fiscal 20 from deals executed in the first quarter.

Well, we continue to work with customers are overdue receivables fidelity of accounts receivables, it's extremely important to us as we manage cash flow and make investment decisions in these uncertain times.

Therefore, bad debt reserves are expected to remain elevated for the next couple of quarters.

Well this second quarter fiscal 20, our non-GAAP operating income also called adjusted EBITDA was a lots of people and 5 million compared to a profit of 4.4 million for the same here last year.

During the second quarter fiscal 20, we had several one time charges relating to rightsizing activities, increasing certain reserves and resolving open legal matters that are included in our GAAP results.

Going forward with these issues behind us and in conjunction with the cost cutting measures mentioned by Dave earlier, we expect to see sequential improvement in our cost in the third quarter as we benefit from a full quarter of reduce run rate.

There were no material a significant changes to our tax positions.

Turning now to our balance sheet, we ended the quarter with approximately 46.6 million enough cash and equivalents compared to 31.7 million at the same time last year and 19.5 million at the end of March 31 2020.

As I highlighted and my last quarter's remarks, we felt it prudent to bolster our liquidity to help would stand at potentially prolong shutdown and to be well positioned with business when the business begins to improve.

In April we closed on an equity offering raising approximately 27 million in net proceeds.

We also received a payroll protection program or P.P.P. loan in the amount of 7.1 million further enhancing our cash position.

Finally on liquidity, we recently closed on a new $30 million credit facility, replacing our existing 25 million dollar credit facility.

The new facility features more favorable terms and lower interest rate.

We do not blend to drawn this facility in the near term, but this new credit facility bolstered our ability to investment programs and projects to accelerate our recovery and feel long term broke.

Regardless of this new renewed strength, we're paying particularly close attention to working capital management into current environment.

As mentioned on our last call, we're continuing to work with our vendor partners to conserve cash by extending payments deferring purchases limiting feature Cas exposure on material spend.

I'm pleased to report that the goals, we outlined it at the onset of cover 19 pandemic are bearing fruit. We ended the quarter with 31.2 million of inventory down 5.7 million from the end of first quarter.

We expect to continue this effort to monetize our inventory over the next two to three quarters.

Additionally, we have remained diligent on collections recognizing business challenges being faced by distribution partners and customers.

Believe our collection approach is fair, but from.

And we have good processes in place to qualified customers in the current environment.

With that said our balance sheet is in excellent shape its substantial additional liquidity improvements over our Q1 ending cash position.

Yeah. This trend from an activity insulate us from any fourth unforeseen a protracted impact of go over 19, while allowing us to continue making strategic investments in our foundational growth initiatives.

To be clear, our near term capital allocation priorities remain unchanged.

Deliver improved cash flows enhance our margins and increase efficiencies fund R&D and commercial programs that enable us to take advantage of opportunities that we believe can come our way during these challenging times, but that.

I'll now pass the call on to date for closing comments.

Thank you for what.

As many of you may have already seen from a press release, we issued today accompanying our earning results we have hired our permanent CFO Mr. wrote handset.

I'm delighted to have ROE and join the to tear executive team as his background and experience will be very complimentary to the team.

He is nearly two decades of experience will help us execute on initiatives to scale, the business drive efficiencies and improve systems and controls that will position to tariffs for the future.

ROE and it will formally assume the CFO duties Forkey tariff on August TEP and be working closely with Jason and myself to further accelerate our transformative journey.

I would like to take a moment, though to extend a deep and heartfelt. Thank you to fought for support and dedication through this interim assignment.

While the full time CFO hiring process extended a bit longer than initially anticipated with the onset of Cove. It for watch focus and support never wavered. He has been a strong and reliable partner. During this bridge period and we greatly appreciate the many contributions that he has provided we wish him well in any subsequent assignment.

With that I'd like to open the call to questions.

Thank you we will now be conducting a question answer session.

I would like to ask a question. Please press star one on your telephone keypad confirmation total indicate your line is the question Q.

Hey press star to if he would like to evolve your question from the Q.

For participants you six speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

Our first question comes from shock block with Stifel. Please go ahead.

Hi, This is Trevor offer John Thanks for taking my question is first ones on a recurring revenue growth in the quarter I'm just wondering if.

How much of that you think has to do with practices are drawing down on on inventory.

Rebuilding inventory that's sort of stuff if you have any comments there would be great.

Yes, Thanks, Trevor I'm glad you could join listen I think you know the way we saw that was volumes seem just kind of lag procedures in the early part of June even though we need procedures were going on we saw a little bit lag on the consumables, but as we exited the Uh huh.

You know we saw that kinda stepped back up so it's almost like a step function change from the first couple of weeks in June to the back couple of weeks a June so I would say, we exited I'm pretty much in line with the increased patient traffic and I think the kind of the lag from taking down inventory I'm, just kind of all behind us.

Got it thanks, maybe to give it a little bit of focusing on your acne program you have any updates to the timeline there or anything else that you could share at this point.

No. He did it everyone knows that the result of told it was a lot of these practices were shut down so clinicals clinical studies I've got extended I think everyone was working remote I think there's the nature of a lot of these things extend timelines and you know our job is a company is to find ways to collapse and compressed those.

No we will be working with obviously the regulatory agencies over the coming months to kind of coordinate and and accelerate as where we can and how we can and when we have a legitimate and from idea what that time. It looks like well was any change would be we'll share that are more publicly but at this point. It I would tell you there.

You know we continue to be very committed to it from a a commercial and transformative pathway for the company, but we've got a lot of wood to chop the existing portfolio with their current customers and our focus right now from an execution perspective is to make sure that were going to market effectively and you were kind of.

Very pleased with that those efforts.

Great. Thank you.

Our next question comes from Matthew O'brien with Piper Jaffray. Please go ahead.

Yeah. Thanks for taking my questions then its Piper Sandler so.

They've just appreciate all the comments about how.

How things are kinda loosening up here you know in July, but I'd love to let me just kind of put a finer point on it because there's a lot of moving parts between the skin care businesses. I don't think is getting a recurrent Q3 that draw down of Super bowls, what seems like you know it'll be more of a tailwind and then you've also got the.

The new membership program, which could be potentially somewhat of a headwind for newer accounts or headwind as far as revenues go with newer accounts going that direction. So how do we just kinda sum up everything that you just talked about as far as the impact on Q3 here with the loosening up how do we speak about how do we think about you know numbers.

North America elsewhere up and down the other revenue side of things.

Well, you know I'm not trying to get to a you know unit you've got me a longtime Matt I'll just kind of should this publicly you know I'm not one that wants to get over the two tips as my skis right. So I want to be very thoughtful and make sure that we're giving the market good indications and make sure that we're sharing data that's transparently as possible.

That said, we're pretty encouraged.

I mean coming into this call.

We've seen good patient traffic, we seen that continues to grow we have said all along that patient traffic is the leading indicator to come to capital.

So long term. So you know perspective, we think that kinda the indicators that we're seeing in how we're seeing them are certainly kind of pointing the right direction. So on the recurring side I'd say, you're right. It's a tailwind that the consumable inventories have been kind of I guess somewhat depleted we know that the products that we sell.

All the true spilt ideally a secret our ethylene particular really line up well too high profitability procedures for the for the the customers. So those folks that have those are pushing their patients towards them because they're done in shorter periods of time they use less.

Treating room capacity.

And we benefit from that so I think there are a lot of tailwinds on the on the recurring revenue side I think from a skin care perspective, but I think that was a really a a kind of a nice pick up for us in the period I.

I think Thats. The result of a couple of things, we see continued improvement and customer acceptance of the product with both the customer and the patient liking the products.

We think that that component will continue so we think there's some growth that will be sustainable coming from Q2 into Q3.

We think that some of the supply risks that are competitor had in Japan, we benefited from but some of those are going to convert and sticking to the new product. So we like that as well. So we're limited bullish that it's not a kind of a complete reset on skincare and we think that that will continue to be a favorable or cut.

Attributed to our gross in in terms of the service you know that continues to go very aggressively you heard my comments on the quality of our service team and the field service team they've continued to do great work for US you know I've always told you we have great Salesforce you know since since you picked up coverage I think that's one of our.

Our our strong our strengths is if you will as a company, but I would say that field services also a strength and they're very busy right now a their hustling for us they're doing a great job and I think there we're going to see the that will be a sequential improvement as well. So those things are all leading in the right direction and then I think the.

The last point I would make is looking at all of those things. The fact that these procedures are running and running aggressively a in the practices gives people greater confidence that the patient traffic is restored and their cash reserves are being.

Recovered and I think the net result of that as people are going to be open to two capital as we launch the for access in the U.S. in particular I think this is an opportunity for practices to add a.

Really unique product from my perspective that combines the RF micro needling, where the C. O two fractional laser which we haven't had in our portfolio previously so I think it I'm not trying to sell futures Oh I'm trying to tell you is that there's a lot more tailwinds and headwinds coming into Q3 from Q2 and were pretty.

Pretty pleased with where it's headed I think I'd be remiss, if I Didnt say to you that you know some of these are coming because we've made the right investments. We've made the right decisions I want to cut what to invest in.

And the cuts we've made are gonna be very durable, but the things we've invested in our equally important and I think are yielding those fruits.

Okay. That's really helpful commentary, there and I appreciate that you know to that and that last point, you're making they're making cuts in the right area. How do we think about growth trajectory of the business now that you are much leaner organization than you were before I mean, you know what kind of 'em girls can you be.

Coming out of all this would you be back to what you had planned pre cold winter slightly lower how do we think about that.

Hi, Jason give some commentary on top of mind, but now I think you know we didnt cut things that we thought we're gonna be growth inhibitors or gross.

Accelerators, we kept those intact right. So yeah. The things that I think we'll come back from expenses you know, we're probably going to have to see some small amount of travel increase as a result of kind of been face to face with customers because they're so busy I think you'll see a little bit more spend on.

I wouldn't say a formal events, but our ability to do some of the events necessary to demonstrate our product in the values our products bring to visit to the practices.

But for the most part these were non value added non required opportunities and I think he gave us a chance to release take some of those costs out that weren't adding to the value. So while we might have leaned out the organization. We also doubled down on the focus of driving growth in driving performance.

And I don't think those are bad things.

So I'd say, we're back to where we were on a gross basis, Jason I don't know if you haven't done I think you had the nail and then you we use the opportunity obviously, you're having to is the size. Your force is never a a popular a fun thing to do and we took a very seriously as we look to potentially bring some people back on furlough in some areas. We had some gaps and we use that as an op.

For two new D. in some cases tire competitive reps and I'm really pleased with the talent that we've been able to attract to this organization in the immediate impact they've had on our commercial efforts. So that part is gone quite well for us believe it or not and then when you look at our rep productivity, which is something that we're tracking we're really pleased with the momentum that we are.

Starting to see as we exit Q2 and go into Q3.

Okay very helpful. And then last one for me is just on a membership program any typically you know clinicians will take a look at something that they're buying and trying to figure out what the payback looks like for them since your lumpiness kind of on its head and not charging them up front. What is the payback for you guys in terms of entering into these.

These partnerships and.

You know, how how big of a contributor could it be yeah, I guess, what had whenever gonna say, maybe in the near term and then what kind of tell when could we see from this maybe 12 18 months from now I suppose.

No. That's a great question, because I think first and foremost it's important I understand that this was offered as a courtesy to.

To these pay these these practices that were so impacted by cold it right.

There are people that have patient traffic that don't have cash.

The available Billability, a cash to deploy for the purchase of equipment that could allow them to monetize those patients. So this was really done as a courtesy I think if people look at the program. The membership program I don't think they should be looking at as a bargain basement program right. This is a program you know whats.

The difference between the people that want to lease versus buy.

Their vehicle or the people that by are the ones that want to have that vehicle on long term basis.

Our committed to it et cetera, et cetera, and the people that leased cars are generally <unk> people that want to upgrade at the end of that lease cycle and don't want to be wed to something where something new novel and better could be coming out, but I think from a profitability perspective, there the person that buys the car is probably going to have a better you know cost.

Per mile then the person that leases the car. So you just have to look at these programs somewhat you know kind of thoughtfully. That's one is built on low up front, but maybe higher expense over the period. The other is built on.

Higher upfront, but kind of greater profitability over the term right and I think they they offer do different things based upon the customer's needs at the current state.

I just don't overlap.

The last one it's really important you to here is I don't think you should expect that we that we think the membership program is going to take over our revenues right. We think this as a courtesy program, we're extending it one more quarter at this point due to the cool that situation and will.

We'll measure again it at the right time, so I think at this point our view is to be partnered with our customers to give them the helping hand, they need to get cash flows into their business. It allows us to deploy some capital it's been tied up on in assets on our inventory.

So it's a win win for both parties that fundamentally may shift after a quarter right and as things continue to rebound.

Okay very helpful. So much.

Thank you. Our next question comes from Jim Sidoti with Sidoti and company. Please go ahead.

Hi, Good afternoon can you hear me.

We can area.

Great the.

The P.P. will you took in the quarter that was seven $7 million and so now is that something you HM pay back or and if you don't pay back well that get offset against expenses.

At some point in 2001.

Before I do you want to maybe just talk about reflected on our assets right now yeah. So right now you can see done on the balance sheet to say it's alone.

Just to the.

The loan agreement, that's a SBH provided us which is a two year loan.

1% interest and differ for some period of time, so I'd say, it's alone when the rules come out so forgiveness, we will look like for it as appropriately and to the extent.

Those are granted then we'll make the brokerage adjustment on the balance sheet as of now it's a it's alone and I.

I will fulfill the requirements of the of the agreement as prescribers.

Okay, and if so [noise].

Plus the rules have not come out some though from the we asked yet at this point.

Okay, but on the income statement, if the longest forgive him and would that be recorded an offset to expenses.

No we believe.

Turning rules will required that if its forgiven and we have to the notification from the suburban authorities that it just forgiven. A then we will recognize us as a extinguishment of debt on Oh on our income statement there will be below the line.

No the honestly.

Alright, and then the the pick up in the skin care business.

That was there was almost exclusively in Japan or was that in other regions as well.

Right now, we actually only distribute that skincare line in Japan, and so I I think a lot of it has to do with the fact that actually covered came in place and as a as.

Culture, the promotion in Japan has been around doing home treatments and so I think we got a really nice lift in that as a result of that but at this point in time, we only distribute that product in Japan.

Okay, all right and obviously then the advantage of that is.

The customer could.

At the product without having to go in and actually visit with the ER with the clinic.

Yes, that's right Jim in general they they show up in and in some cases in the U.S. What we've heard from skincare is it's almost spend like a curbside pickup correct.

Okay.

And then the but can turn membership program.

Does that have the effect of delaying some revenue recognition in the near term.

Probably not I think it's a thoughtful question, Jim, but it's probably not delaying it because I think the folks that have access to capital probably will be spending the money on the capital in the folks that don't have access to the capital made me or at least evaluate the option of doing the a the at least program if you will.

I think what we saw is in a very few a handful of cases, where people took that up the vast majority people you know, it's because they didnt have the capital to do look to do on a regular purchase or third party lease for the product instead, they opted to to move on with US in this membership program.

And like I said earlier to the the question posed before you.

We are looking at this thing only as a courtesy those customers and.

I think our primary focus is to sell the capital to the customer and continuing to move that forward.

Alright, and then Oh last one for me your third quarter or you know.

The typical year or not.

Then even typical third quarter your husband seasonality a hard.

Slowdowns and internationally or people checked out for the month August.

Are you seeing any of that this year or do you you know you.

Pretty much indicated you think.

Who's going to come in or how to Q2 does not include any seasonality.

Yeah, I think there was still be some seasonality, particularly in Europe and the month of August is we fairly stagnant just due to the culture of holidays before school starts. So I think there's still going to be a little bit of that however, you know, particularly in the U.S. We've seen many physicians that are postponing are just not taking holidays at all during the.

Summer months than I think that that's also carrying across the patient population that is going in for set of procedures, where they're taking much smaller holidays are not taking holidays at all so we may get some some temporary live with that but I think when you look at it on international scale, Oh, there's still going to be some seasonality that plays in the yeah. Just I think Jim just to kind of cost.

And you guys. If you build your models just recognize that even with some partial seasonality in Europe or the the order of magnitude as others are the revenue is obviously less material coming from Europe than it is elsewhere. So in the in the large contributing revenue [noise].

Geographies of the U.S., Japan, Australia et cetera, we're not seeing a significant amount of seasonality in Europe, where we do see seasonality or a little bit of that seasonality, it's less though the normal number one and then number two the just the SEC scale a revenues that we get from a from those direct markets is.

Is relatively small.

All right and you did say that you know.

<unk> ER business would you know in excess of 70%.

June from the prior year period, you want to make a comment about July.

Well I think what I told you was that a June was exiting at 70% of prior year. That's in terms of patient traffic and I think the point I would make on that is there's a pent up demand I think a lot of our competitors have talked about and up demand I think that continues to exist I think.

You know some people may try to banging the drum and tell you how great. It is out there I think it's still a covert environment right, which means that there's new procedures. There's disinfecting processes that have to be done there's patients that are waiting in their cars being weighted waiting to be called into go directly to the treatment rooms in some.

This is you've got a lot of procedures that are somewhat constraining capacity of these offices. So even as they work street out there. There's there's only so they can do and that's what we said is that as we exit Q3, we think we'll be at or near 90% plus a prior year capacities and that's only because they'd become more.

Routine people get used to them and understand how to move through them effectively there's other practices that are expanding and getting an extra treatment room or too right. So we're just trying to give some guidance that we believe that patient pent up demand still extends probably well into the late part of the fall.

We believe that people are ramping and getting being able to treat more and more patients as they get more and more used to these procedures I think we're getting a lot more lift that maybe other folks on procedures because of the nature of our shorter cycle times.

You know the secret our after the Trusculpt I'd in particular are allowing those procedures to be done less time in the vascular. The XLV is is a shorter cycle time as well. So these are our I think are all benefiting so I see these tailwinds what I don't want to do is tell you that everything's fine and Cove, it's not something to.

Be worried about.

Yes, but but I would I will remind you is we're navigating it effectively we're navigating what I consider to be faster than others, and we believe that a at the end of the day our customers are recovering at a pretty good clip and that we're getting the benefit of that recovery.

Thank you.

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

Hi, This is Matt I'll Grant money I saw one quick question for you guys.

If you could sneak in a little more detail on the initiatives you encourage your customers utilize the drive patient traffic.

On how those have been steep.

Well you know what I see you know a in a lot of keys that I'm going to hit very high level, then ask Jason going some specifics, but a very very high level I just want to point out. These started back in April in early May and we're probably driven more significantly but outreach from our sales organizations and to.

Kind of understand and worked more specifically around the account executive management and engagement. So.

You know these are not new programs to us in the month to June and July. We started these early and I think we benefited from the not only in patient traffic, but also in getting close to the customer in understanding where the prospect for capital deals. So that said, maybe just you want to talk about some of the localize region.

No marketing and somebody other things we're doing yeah, there's a lot than we did at the onset of code to really try and engage with our customers not only in terms of surviving locked down but also how do you. How do you exit covert stronger than you went into it in the survival Guy that we had as well as the.

The webinars that we use we spent a lot around how they should organize how they should manage their practice, while they're in shutdown, but also how they should advertising so their schedules coming out of this you know we spent a lot of time with them in our practice development management teams along with our commercial teams make sure that their advertising in right areas in order to fill schedules and build up demand and then pair.

That demand with the portfolio that we have that helps treat patients quickly hands free minimizing things like airborne pathogens et cetera et cetera. We also educated around sterilization techniques and how to maximize the time as the is the focus on patient throughput. So a lot of that had to.

Play to the advantage of that but I think the key here was really focusing on patient engagement tactics that help keep them connected with their patients just like we're trying to stay connected with them as health care providers.

That's helpful. Thanks, so much.

I'd like to kind of Florida for today's salary for closing comments.

Thank you operator.

And just take everyone for being on the call I want to ask you to stay safe and stay focused on your health and wellbeing.

These are interesting times than I think we've positioned the company well to go forward.

And we really welcome your interest and look forward to giving you an update next quarter. Thank you.

This concludes today's conference. Thank you for your participation.

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