Aug 8, 2020
Operator
Thank you for joining Cutera’s Second Quarter 2020 Earnings Conference Call. [Operator Instructions] The discussion today includes forward-looking statements.
These forward-looking statements reflect management’s current forecast or expectation of certain aspects of the company’s future business, including, but not limited to, any financial guidance provided for modeling purposes. Forward-looking statements are based on current information that is by its nature dynamic and subject to change.
Forward-looking statements include, among others, statements regarding financial guidance, plans to introduce new products, regulatory approvals and productivity improvements. For words that may identify forward approval – for words that may identify forward-looking statements, we encourage you to refer to the safe harbor statement in our press release earlier today.
All forward-looking statements are subject to risk and uncertainties, including those risk factors described in the section entitled Risk Factors in our Form 10-K as filed with the Securities and Exchange Commission and updated in our Form 10-Q subsequently filed. 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.
Please refer to the reconciliation from GAAP to non-GAAP measures in our earnings release. These non-GAAP financial measures should be considered along with, but not as an alternative to, the operating performance measures prescribed by GAAP.
With that, I would like to turn the call over to your CEO, Dave Mowry.
Dave Mowry
Thank you, operator. As we all know, the second quarter of 2020 was significantly impacted by the COVID-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 have 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 staffs have been not only impressive, but also humbling to watch in the face of such adversity. Today, I am joined on the call by Jason Richey, President and Chief Operating Officer; as well as Fuad Ahmad, our Interim Chief Financial Officer.
I will begin today’s 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 Cutera is poised to capitalize upon it.
Jason will then discuss the operational highlights for the quarter and outline our continued focus on our vital few initiatives to carry us through the back half of fiscal 2020 and into 2021. Following Jason, Fuad will provide a high-level review of our key financial performance indicators and update you on the steps we have 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 team’s response to the COVID-19 crisis. While our financial results were clearly impacted by the pandemic and the associated market shutdowns in April and most of May, I am 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 team’s 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 straight restrictions lifted, patients began returning to their pre-COVID aesthetic 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 distancing and treatment room disinfecting processes.
While most practices were initially constrained by their capacity to effectively utilize COVID-safe processes, our belief is that the open practices were running in excess of 70% of their pre-COVID 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 move through their reopening processes as the quarter wore on, adopting new procedures, steadily ramping patient volumes and improving their practice capacities as new protocols became more routine. Based on these trends, we anticipate that practices will continue to ramp treatments through the current period to achieve near 90% of their pre-COVID treatment capacity by the end of third quarter 2020.
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 spas were the most aggressive in their efforts to reopen and ramp volumes, followed closely by plastic surgery offices, which faced similar limited billing opportunities during the shutdown.
Both groups were able to tap significant pent-up demand with their patients to fully book their practices. Dermatologist practices were 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 have been significantly impacted during the shutdown. And as a result, customers are looking to rebuild their cash reserves, reestablish consistent patient traffic and monetize as much of their existing consumable and skin care inventories as they can prior to restocking.
Along these lines, consumable reorders trailed practice reopenings by a bit. 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 in line with the anticipated patient traffic for third quarter 2020 as demand rebounds.
Looking across our various revenue categories, skin care 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 treatments, 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.
Cutera believes that our strong and responsive 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 challenged macro environment and anticipated reduction in customer access to capital, we nonetheless sold $15.5 million 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 and did not pull forward future sales into the quarter. Late in the quarter, we launched the Cutera membership program, this was designed as a courtesy to our impacted customers, allowing them access to top of line energy-based aesthetic 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 purchase the consumable products for the procedures they perform and retain the option to upgrade equipment or buy used 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 Cutera customers who appreciated our recognition of their short-term cash constraints and are 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 endorsements of our customers’ resilience as well as their acknowledgment of patient traffic recovery and the value they recognize in our portfolio. All of these factors were reflected in both the volume and the quality of system deals within the period, which surpassed our initial expectations for this challenging time.
Looking ahead, we believe that many dedicated aesthetic 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 dermatological practices will continue to ramp steadily towards near pre-COVID capacities over the coming months, prioritizing injectables, topicals and shorter, more profitable treatments such as our truSculpt iD, Secret RF and excel V+, which provides shorter treatment times and more efficient use of the constrained capacity of the treatment rooms, leading to greater profitability for their practices.
We are mindful to not get too far ahead of the recovery process as COVID will continue to constrain revenue performance in the third quarter of 2020 and potentially in the fourth quarter of 2020. Nevertheless, we are encouraged by the early revenue trends we are seeing in the first month of the current quarter, which were ahead of the first month of the prior quarter and in line with the prior year.
Keeping in mind that capital sales are back-end loaded, we believe that with the patient traffic steadily ramping, customer accounts are indeed recovering. As such, we are guardedly optimistic that our third quarter 2020 revenue will provide sequential improvement over second quarter 2020 results.
Before turning the call over to Jason, I would like to 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 run rate improvements as most programs were initiated 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 headcount 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 expectations in the second quarter of 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.
Jason Richey
Thanks, Dave. As I discussed last quarter, we made several adjustments to our commercial operations to adapt to the ongoing COVID 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, connecting daily with our active installed base of customers; third, reaching out to our medical advisory board to gain their input and ensure we are aligned with them on our activities and our messaging; fourth, staying hyperfocused on our core customers; fifth, remaining flexible; and finally, committing to the resources and programs necessary to accelerate us through the recovery period and assist our commissions in getting up and running as quickly as possible. We executed extremely well against these priorities during the quarter by providing educational webinars and a survival guide to help our customers weather the storm and increase patient traffic as quickly and as safely as possible.
Our new normal of virtual meetings, consults, 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 COVID-19 crisis. These restrictions had the greatest impact on our results from 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 with a focus on skin revitalization and body sculpting by emphasizing lower cost, high-impact procedures like laser genesis and microneedling.
In addition, we’re leveraging our body sculpting portfolio to promote losing the so-called COVID-19 by offering packages for both truSculpt iD and truSculpt flex. We realized 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 shutdowns, most regions have 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 truSculpt 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 truSculpt flex in late Q1 as much of the country was 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 as 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 face strict travel and government restrictions with pockets of growth as distributors look to capitalize on sales in markets with fewer restrictions. Asian markets started to see increased capacity towards the end of the quarter as COVID cases decreased.
Turning now to recurring revenue. Service experienced a steady increase in revenue between May and June as practices insured systems were prepared to treat a backlog of patients.
As Dave mentioned, our skincare business in Japan experienced a significant year-over-year increase due to an increased customer base and growing popularity of home-based 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, an 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 Fraxis PRO, a product designed to deliver best-in-class microneedling along with a combined fractional CO2 laser platform. We believe this device will 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 with Secret RF. By the end of 2020, we expect to make this product available in Canada as well as the United Kingdom.
I will now turn the call over to Fuad to review our key financial performance indicators for the second quarter.
Fuad Ahmad
Thank you, Jason. 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 our earnings release. We encourage listeners and readers to review our non-GAAP metrics in conjunction with the GAAP results as contained in our earnings release.
I will now go over the results for the second quarter of fiscal 2020. Total revenue for the second quarter of fiscal 2020 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 COVID-19-related shutdowns that dramatically curtailed our ability to conduct business for 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 of our ZO skincare line in Japan as well as strong system sales in Australia, New Zealand and Japan.
Those geographies were first to emerge from countrywide shutdowns. Cutera’s skincare revenue was $4.8 million in the second quarter of fiscal 2020, a 169% increase from the second quarter of last year.
For the second quarter of fiscal 2020, recurring revenue declined as consumables, global service and skincare revenue was $10.8 million compared to $10.2 million for the same period last year. Declines from early period procedure deferrals reflected in our service and consumer revenue were more than offset by the substantial increase in ZO Skincare revenue.
The decline in service revenue was a result of contract renewal 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 due to COVID-19.
Gross profit and gross margin declined as a result of the revenue decline described earlier. Gross profit for the second quarter of fiscal 2020 was $12.6 million, representing a 52% decline compared to the same period last year.
Gross margin in the second quarter of fiscal 2020 was 47.9% versus 55.2% for the same period last year due to substantially lower overhead absorption on lower production volumes associated with lower sales and company planned inventory reductions. Now moving to operating expenses.
Total operating expenses for the second quarter of fiscal 2020 were $16.2 million compared to $21.9 million for the same period last year, a 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 with COVID-19 headwinds.
Sales and marketing expense for the second quarter of fiscal 2020 was $8.7 million compared to $15.1 million for the same period last year, a 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 of fiscal 2020 were $2.1 million compared to $2.9 million for the same period last year as a result of lower level of on-site activities due to temporary office closures from COVID-19. We anticipate a rebound in these expenses as employees return to the office and project teams accelerate their activities.
Finally, G&A expenses for the second quarter of fiscal 2020 were $5.3 million compared to $4 million in the same period last year. In light of the COVID-19-related challenges, we reported a substantial bad debt reserve in the second quarter of fiscal 2020 from deals executed in the first quarter.
While we continue to work with customers on our overdue receivables, fidelity of accounts receivables is 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.
For this second quarter of fiscal 2020, our non-GAAP operating income, also called adjusted EBITDA, was a loss of $3.5 million compared to a profit of $4.4 million for the same period last year. During the second quarter of fiscal 2020, we had several onetime 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 costs in the third quarter as we benefit from a full quarter of reduced run rate. There were no material or significant changes to our tax positions.
Turning now to our balance sheet. We ended the quarter with approximately $46.6 million of 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 in my last quarter’s remarks, we felt it prudent to bolster our liquidity to help withstand a potentially prolonged 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 PPP 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 credit facility.
The new facility features more favorable terms and a lower interest rate. We do not plan to draw on this facility in the near term, but this new credit facility bolstered our ability to invest in programs and projects to accelerate our recovery and fuel long-term growth.
Regardless of this renewed strength, we are paying particularly close attention to working capital management in the 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 and limiting future cash exposure on material spend.
I am pleased to report that the goals we outlined at the onset of COVID-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.
We believe our collection approach is fair but firm, and we have good processes in place to qualify customers in the current environment. With that said, our balance sheet is in excellent shape with substantial additional liquidity improvements over our Q1 ending cash position.
The added strength from our activities insulates us from any unforeseen or protracted impact of COVID-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 to 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. With that, I will now pass the call on to Dave for closing comments.
Dave Mowry
Thank you, Fuad. As many of you may have already seen from a press release we issued today accompanying our earnings results, we have hired our permanent CFO, Mr.
Rohan Seth. I am delighted to have Rohan join the Cutera executive team as his background and experience will be very complementary to the team.
His nearly two decades of experience will help us execute on our initiatives to scale the business, drive efficiencies and improve systems and controls that will position Cutera for the future. Rohan will formally assume the CFO duties for Cutera on August 10 and will 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 Fuad for his 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 COVID, Fuad’s 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.
Operator
Thank you. [Operator Instructions] Our first question comes from Jon Block with Stifel.
Please go ahead.
Unidentified Analyst
This is Trevor on for Jon. Thanks for taking my question.
The first one is on recurring revenue growth in the quarter. Just wondering if how much of that do you think has to do with practices drawing down on inventory, rebuilding inventory, that sort of stuff.
If you have any comments there would be great.
Dave Mowry
Yes. Look – thanks, Trevor.
Glad you could join. Listen, I think the way we saw that was volumes seemed to kind of lag procedures in the early part of June, even though we knew procedures were going on.
We saw a little bit of lag on the consumables. But as we exited the June, we saw that kind of step back up.
So it was almost like a step function change from the first couple of weeks in June to the back couple of weeks of June. So, I would say we exited pretty much in line with the increased patient traffic.
And I think the kind of the lag from taking down inventory is kind of all behind us.
Unidentified Analyst
Got it. Maybe to pivot a little bit, focusing on your acne program, do you have any updates to the time line there?
Or anything else that you could share at this point?
Dave Mowry
No. Look, everyone knows that the result of COVID was a lot of these practices were shut down.
So clinical studies got extended. I think everyone was working in remote.
I think the nature of a lot of these things extend time lines, and our job as a company is to find ways to collapse and compress those. We will be working with, obviously, the regulatory agencies over the coming months to kind of coordinate and accelerate as where we can and how we can.
And when we have a legitimate and firm idea of what that time line looks like, or what any change would be, we’ll share that more publicly. But at this point, I would tell you that we continue to be very committed to it from a commercial and transformative pathway for the company.
But we’ve got a lot of wood to chop with the existing portfolio and with our current customers. And our focus right now, from an execution perspective, is to make sure that we’re going to market effectively.
And we’re kind of very pleased with those efforts.
Unidentified Analyst
Great. Thank you.
Operator
Our next question comes from Matthew O’Brien with Piper Jaffrey. Please go ahead.
Matthew O’Brien
Thanks for taking my question, and it’s Piper Sandler. So Dave, just appreciate all the comments about how things are kind of loosening up here in July.
But I’d love to just kind of put a finer point on it because there’s a lot of moving parts between the skincare business, which I don’t think is going to recur in Q3, the drawdown of consumables, which seems like it will be more of a tailwind. And then you’ve also got 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 in that direction.
So how do we just kind of sum up everything that you just talked about as far as the impact on Q3 here with the loosening? And how do we think about numbers in North America elsewhere up and down the revenue side of things?
Dave Mowry
Well, look, I’m not trying to get too – you’ve known me a long time, Matt, so I’ll just kind of share this publicly. I’m not one that wants to get over the tips of my skis, right?
So I want to be very thoughtful to make sure that we’re giving the market good indications and make sure that we’re sharing data as transparently as possible. That said, we’re pretty encouraged coming into this call.
We’ve seen good patient traffic. We’ve seen that, that continues to grow.
We have said all along that patient traffic is the leading indicator to capital. So long-term perspective, we think that kind of the indicators that we’re seeing and how we’re seeing them are certainly kind of pointing in 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, the truSculpt iD, the Secret RF, in particular, really line up well to high profitability procedures for 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 treatment room capacity, and we benefit from that.
So I think there are a lot of tailwinds on the recurring revenue side. I think from a skincare perspective, look, I think that was a really kind of a nice pickup for us in the period.
I think that’s the result of a couple of things. We see continued improvement in 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 our competitor had in Japan, we benefited from, but some of those are going to convert and stick with the new product. So we like that as well.
So we’re a little bit bullish that it’s not a kind of a complete reset on skin care. And we think that, that will continue to be a favorable contributor to our growth.
In terms of the service, 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. I’ve always told you, we have a great sales force.
Since you picked up coverage, I think that’s one of our strengths, if you will, as a company. But I would tell you that field service is also a strength.
And they’re very busy right now. They’re hustling for us.
They’re doing a great job. And I think that we’re going to see that, that will be a sequential improvement as well.
So those things are all leading in the right direction. And then I think the last point I would make is, look at all of those things, the fact that these procedures are running and running aggressively in the practices gives people greater confidence that their patient traffic is restored, and their cash reserves are being recovered.
And I think the net result of that is people are going to be open to capital. And as we launch the Fraxis 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 microneedling with a CO2 fractional laser, which we haven’t had in our portfolio previously.
So, I think – look, I’m not trying to sell futures. All I’m trying to tell you is that there’s a lot more tailwind than headwind coming into Q3 from Q2.
And we’re pretty pleased with where it’s heading. I think I’d be remiss, though, if I didn’t say to you that some of these are coming because we’ve made the right investments, and we’ve made the right decisions on what to cut and what to invest in.
And the cuts we’ve made are going to be very durable. But the things we’ve invested in are equally important, and I think are yielding those fruits.
Matthew O’Brien
Okay. That’s really helpful commentary, Dave.
I appreciate that. To that end, last point you’re making there, making cuts in the right area.
How do we think about the growth trajectory of the business now that you are a much leaner organization than you were before? I mean, what kind of grower can you be coming out of all this?
Could you be back to what you had planned pre-COVID or slightly lower? How do we think about that?
Dave Mowry
I’ll have Jason give some commentary on top of mind. But Matt, I think we didn’t cut things that we thought were going to be growth inhibitors – or growth accelerators.
We kept those intact, right? So the things that I think will come back from expenses, we’re probably going to have to see some small amount of travel increase as a result of kind of being 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, formal events, but our ability to do some of the events necessary to demonstrate our product and the value that our products bring to the practices. But for the most part, these were non-value added, non-required opportunities.
And I think it gave us a chance to really 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 and driving performance.
And I don’t think those are bad things. So I’d say we’re back where we were on a growth basis.
Jason, I don’t know if you have anything to add?
Jason Richey
No, I think you hit the nail on the head. And we used the opportunity, obviously, having to just the size of our force is never a popular or fun thing to do, and we took it very seriously.
As we look to potentially bring some people back on furlough in some areas, we had some gaps, and we used that as an opportunity, in some cases, to hire competitive reps. And I’m really pleased with the talent that we’ve been able to attract to this organization and the immediate impact that they’ve had on our commercial efforts.
So that part’s 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.
Matthew O’Brien
Okay. Very helpful.
And then last one for me is just on the membership program. I mean, typically, clinicians will take a look at something that they’re buying and try to figure out what the payback looks like for them since you’re flipping this kind of on its head and not charging them upfront.
What is the payback for you guys in terms of entering into these partnerships and how big of a contributor could it be? I guess what headwind are we going to face maybe in the near term?
And then what kind of tailwind could we see from this, maybe 12, 18 months from now?
Dave Mowry
Matt, that’s a great question, because I think, first and foremost, it’s important to understand that this was offered as a courtesy to these practices that were so impacted by COVID, right? There are people that have patient traffic that don’t have cash – the availability of 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 the bargain basement program, right?
This is a program. It’s the difference between the people that want to lease versus buy their vehicle.
The people that buy are the ones that want to have that vehicle on a long-term basis, are committed to it, et cetera, et cetera. And the people that lease cars are generally the people that want to upgrade at the end of that lease cycle.
And don’t want to be wed to something where something new and novel and better could be coming out. But I think from a profitability perspective, the person that buys the car is probably going to have a better cost per mile than the person that leases the car.
So you just have to look at these programs somewhat kind of thoughtfully that one is built on low upfront, 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 offer different things based upon the customers’ needs at the current state. I – the last thing that’s really important to hear is, I don’t think you should expect that we think the membership program is going to take over our revenues, right?
We think this is a courtesy program. We’re extending it one more quarter at this point due to the COVID situation.
And we’ll measure again 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 that’s been tied up in assets on our inventory. So it’s a win-win for both parties.
That fundamentally may shift after a quarter, right, as things continue to rebound.
Matthew O’Brien
Okay. Very helpful.
Thank you so much.
Operator
Thank you. Our next question comes from Jim Sidoti with Sidoti & Company.
Please go ahead.
Jim Sidoti
Hi, good afternoon. Can you hear me?
Dave Mowry
We can hear you.
Jim Sidoti
Great. The PPP you took in the quarter, that was $7 million or so.
Now is that something you pay back? And if you don’t pay back, will that get offset against expenses at some point in 2020?
Dave Mowry
Fuad, do you want to maybe just talk about how it’s reflected on our assets right now?
Fuad Ahmad
Yes. So right now, you can see that on our balance sheet, it’s a loan and it’s subject to the loan agreement that the SBA provided us, which is a two-year loan to 1% interest and defer for some period of time.
So it’s a loan. When the rules come out for forgiveness, we will apply for it as appropriately.
And to the extent that those are granted, then we’ll make the appropriate adjustment on the balance sheet. As of now, it’s a loan, and we’ll fulfill the requirements of the agreement as prescribed correctly.
And as you know, this is in flux. The rules have not come out from the SBA at this point.
Jim Sidoti
Okay. But on the income statement, if the loan is forgiven, would that be recorded as an offset to expenses?
Fuad Ahmad
No. We believe accounting rules will require that if it’s forgiven.
And we have the notification from the appropriate authorities that it is forgiven, then we will recognize it as a extinguishment of debt on our income statement or will be below the line – below the OpEx line.
Jim Sidoti
All right. And then the pickup in the skincare business.
That was almost exclusively in Japan? Or was that in other regions as well?
Dave Mowry
Right now, we actually only distribute that skincare line in Japan. And so I think a lot of it has to do with the fact that actually COVID came in place.
And as a 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.
Jim Sidoti
Okay. All right.
And obviously, then the advantage of that is the customer could get the product without having to go in and actually visit with the clinic.
Dave Mowry
Yes. That’s right, Jim.
In general, they show up. And in some cases, in the U.S., what we’ve heard from skin care is, it’s almost been like a curbside pickup, correct.
Jim Sidoti
Okay. All right.
And then the Cutera membership program, does that have the effect of delaying some revenue recognition in the near term?
Dave Mowry
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 we’ll be spending the money on the capital.
And the folks that don’t have access to the capital may at least evaluate the option of doing the lease program, if you will. I think what we saw is in a very few, a handful of cases where people tip that up, the vast majority of people, it’s because they didn’t have the capital to do a regular purchase or a third-party lease for the product.
Instead, they opted to move on with us in this membership program. And like I said earlier to the question posed before you, we are looking at this thing only as a courtesy of those customers, and I think our primary focus is to sell the capital to the customer and continue to move that forward.
Jim Sidoti
All right. And then last one for me.
Third quarter in the typical year, not that this year is anything typical. Third quarter, you had some seasonality.
You had some slowdowns internationally as people checked out for the month of August. Are you seeing any of that this year?
Or do – you pretty much indicated you think Q3 is going to come in ahead of Q2. Does that include any seasonality?
Dave Mowry
Yes. I think there will still be some seasonality, particularly in Europe.
The month of August is typically 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, particularly in the U.S., we’ve seen many physicians that are postponing or just not taking holidays at all during the summer months. And I think that, that’s also carrying across the patient population that’s going in for aesthetic procedures, where they’re taking much smaller holidays or not taking holidays at all.
And so we may get some temporary lift with that. But I think when you look at it on international scale, there’s still going to be some seasonality that plays into this.
Jason Richey
Yes. Just – I think, Jim, just to kind of caution you guys if you build your models, just to recognize that even with some partial seasonality in Europe, the order of magnitude of the revenue is obviously less material coming from Europe than it is elsewhere.
So in the large contributing revenue 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 so than normal, number one.
And then number two, just the scale of revenues that we get from those direct markets is relatively small.
Jim Sidoti
All right. And you did say that procedures or business was in excess of 70% in June from the prior year period.
Do you want to make a comment about July?
Dave Mowry
Well, I think what I told you was that 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 pent-up demand.
I think that continues to exist. I think that some people may kind of bang the drum and tell you how great it is out there.
I think it’s still a COVID 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 waiting to be called in to go directly to the treatment rooms in some practices.
You’ve got a lot of procedures that are somewhat constraining capacity of these offices. So even if they work straight out, there’s not so much they can do.
And that’s what we said is that as we exit Q3, we think we’ll be at a near 90% plus prior year capacities. And that’s only because they 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 two, 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 than maybe other folks on procedures because of the nature of our shorter-cycle times. The Secret RF and the truSculpt iD, in particular, are allowing those procedures to be done in less time and the vascular – the XLV is a shorter cycle time as well.
So these are – I think, are all benefiting us. So I see these as tailwinds.
What I don’t want to do is tell you that everything is fine and COVID is not something to be worried about. Because – but what 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 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.
Jim Sidoti
Thank you.
Operator
Our next question comes from Anthony Vendetti with Maxim. Please go ahead.
Unidentified Analyst
Hi, this is Matt on for Anthony. I just have one quick question for you guys.
If you could speak in a little more detail on the initiatives you’ve encouraged your customers to utilize to drive patient traffic and how those have been received?
Dave Mowry
Well, I think in, a lot of cases, I’m going to hit a very high level, and I’m going to ask Jason to go into some of the specifics. At a very high level – I just want to point out that we started back in April and early May.
And we’re probably driven more significantly by outreach from our sales organizations, and to kind of understand and work more specifically around the account executive management and engagement. So these are not new programs to us in the month of June and July.
We started these early. And I think we benefited from them, not only in patient traffic, but also in getting close to the customer and understanding where to prospect for capital deals.
So that said, maybe, Jason, you want to talk a little bit about some of the localized regional marketing and some of the other things we’re doing?
Jason Richey
Yes, there’s a lot that we did at the onset of COVID to really try and engage with our customers, not only in terms of surviving lockdown, but also how do you exit COVID stronger than you went into it. And in the survival guide that we had as well as the webinars that we used, we spend a lot around how they should organize, how they should manage their practice while they’re in shutdown, but also how they should advertise and fill their schedules coming out of this.
We spent a lot of time with them in our practice development management teams, along with our commercial teams to make sure that they’re advertising in the 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 they focus on patient throughput.
So a lot of that had to – played 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 are trying to stay connected with them as health care providers.
Unidentified Analyst
That’s helpful. Thank you so much.
Operator
I’d like to turn the floor over to Dave Mowry for closing comments.
Dave Mowry
Thank you, operator. I want to thank everyone for being on the call.
I want to ask you to stay safe and stay focused on your health and well-being. These are interesting times, and 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.
Operator
This concludes today’s conference. Thank you for your participation.