Executives: Ryan Rhodes - President, CEO Mark Hair - CFO Carol Ruth - The Ruth Group

Analysts: David Solomon - ROTH Capital Partners Lucas Baranowski - Craig-Hallum Capital Group LLC

Operator: Good day, ladies and gentlemen, and welcome to the First Quarter 2018 Restoration Robotics Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, today’s program is being recorded. And now I'd like to introduce your host for today's program Carol Ruth at The Ruth Group. Please go ahead.

Carol Ruth: Thanks, operator, and thanks everyone for participating in today’s call. Joining me from the company are Ryan Rhodes, Chief Executive Officer; and Mark Hair, Chief Financial Officer. This call is also being broadcast live over the Internet at www.restorationrobotics.com and a replay of the call will be available on the company's Web site for 90 days. Before we begin, I would like to caution listeners that comments made by management during this conference call may include forward-looking statements within the meaning of Federal Securities Laws. These forward-looking statements involve material risks and uncertainties. Such forward-looking statements are not guarantees of future performance and actual results and outcomes could differ materially from our current expectations. For a discussion of risk factors, I encourage you to review the Restoration Robotics 10-Q, 10-K, and other reports filed or to be filed with the Securities and Exchange Commission. Furthermore, the content of this conference call contains time sensitive information that is accurate only as of the date of the live broadcast, May 14, 2018. Restoration Robotics undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this call. With that, I’d like to turn the call over to Ryan Rhodes. Ryan?

Ryan Rhodes: Thanks, Carol, and good afternoon everyone. Before providing a more detailed update, I’d like to give a high-level overview of our first quarter 2018 performance. In the first quarter, we sold eight ARTAS Systems and recognized total revenue of $5 million. Of the new systems sold in the quarter, three were in the U.S., and five in international geographies, bringing our total systems sold to 261, of which 99 are in the U.S. We believe our first quarter operating results reflect the combined impact of the following: expected Q1 industry seasonality, the early tenure of our new U.S capital sales reps lighter than expected EMEA sales, and last, some customer hesitancy relative to the future availability of our implantation functionality. Notably during the quarter, we are extremely excited to receive the U.S 510(k) clearance to expand ARTAS technology to include implantation. As a reminder, we expect to launch the implantation functionality in the second half of 2018. I will now provide key update since our last call in insights into our expectations for the remainder of the year. First, I will briefly provide an overview of the ARTAS Robotic Hair Restoration System, and how it addresses a significant unmet need in a large and rapidly growing market within the cash pay aesthetics space. Then, I will comment on our activities aimed at enhancing the efficiency and effectiveness of our commercial infrastructure, followed by an update on the recently announced FDA clearance of the implantation functionality. After that I will turn the call over to Mark for a financial update covering our first quarter operating results, and finally I will provide an overview of our key initiatives for 2018 and beyond before opening the call to Q&A. To start, I will provide a brief overview of the ARTAS Robotic Hair Restoration System for those who may be new to our story. We believe that ARTAS is the first and only physician-assisted robotics system to dissect and harvest hair follicles and prepare sites for implantation. With a robust feature set, we believe that ARTAS is very well-positioned to capture share in a large and rapidly growing market within the cash pay aesthetics space. The system provides physicians with an increased level of precision, reproducibility and efficiency that greatly enhances the user experience and procedure outcomes. ARTAS is proven to assist physicians with the precise and repetitive movements required for modern hair transplantation procedures. The system was designed to reduce manual variability, alleviate clinician fatigue and significantly reduce human error while additionally helping physicians drive new incremental patients to their practices. As I’ve outlined in our previous call, to effectively address and penetrate this large growth market, we employ a direct sales force within the United States and select international markets as well as leverage distributors in other geographies. Additionally, in the U.S and other direct markets, we maintain a bifurcated sales force to execute our razor blade sales model, focusing mainly on hair restoration specialists and other aesthetic focused physicians including dermatologists, plastic surgeons, cosmetic surgeons and ENT facial plastic physicians. Our U.S team as of this call consists of seven regional sales managers to drive new system placements, up from four as of our last call with an expectation to further expand through the remainder of the year. We additionally have eight practice success managers and one practice development leader focused on driving utilization at the practice level. And last, we have six additional training managers. Additionally, we've also expanded our inside sales team to respond to inquiries and drive leads generated through various market initiatives to our customers. We are continuing to add regional sales managers as this is one aspect of our plan to enhance our commercial infrastructure as we pivot toward a U.S centric sales strategy to best position ourselves for a sustained growth. In the near-term, we expect some level of softness as we further optimize and expand our sales teams as the new U.S sales reps take time to become more productive. These measures allow or follow the appointment of the aesthetics industry veterans Greg Anderson as Vice President Market Development, Chris Aronson, as Vice President of Sales, and of course Mark Hair as CFO, each of whom have deep experience in the aesthetics capital in consumable market space. Despite our pivot to a more U.S centric strategy, we remain committed to maintaining an international commercial presence, mainly through distributors with some direct reps in select geographies. While we did see weaker than expected first quarter performance in EMEA, we intend to enhance our efforts through an evaluation of our current distributor partners and by augmenting our leadership team with a head of OUS sales. To further bolster our team, we also recently announced the appointment of Keith Sullivan, Interim General Manager of miraDry at Sientra to our Board of Directors, effective July 1, 2018. Keith brings with him deep commercial and operational experience within the aesthetics space, especially with capital equipment and consumable products. Keith most recently served as Chief Commercial Officer and President, North America of ZELTIQ Aesthetics, and has more than 30 years of senior sales leadership experience in the medical device industry. I'm extremely excited to welcome Keith and to work with him to further optimize our commercial strategy moving forward. I would also like to thank Emmett Cunningham, who will be transitioning off the Board in connection with our 2018 Annual Stockholder meeting for his many contributions to the company. Part of our strategy to build brand awareness, grow our commercial footprint and drive utilization involves our ARTAS awards program launched earlier this year to provide co-op marketing support directly to our physician customers to increase utilization. We received positive feedback on the program at our Annual User meeting in March where we had record attendance and we're able to further showcase the ARTAS system to our current and potential users. We also leverage the annual meeting of the American Academy of Dermatology in San Diego as a platform to showcase the power of the ARTAS system and bolster brand awareness in February. While we remain pleased with our progress on each of our near-term and longer-term current commercial initiatives, I’d like to reiterate that our U.S sales reps are early on the productivity curve and that we expect it to take some time to see a more pronounced increase in our revenues. We are very pleased that we received US FDA 510(k) clearance for implantation functionality ahead of expectations. We expect the launch of this functionality will not only improve customer and patient outcomes, but importantly help to drive top line growth and penetrate deeper into the aesthetic market, especially with physicians who are not currently performing hair restoration procedures. We maintain our expectation that we will begin offering implantation before year-end. As I briefly mentioned earlier, we’ve seen some hesitancy from some of our physician customers to purchase new systems ahead of the availability of the implantation functionality. While we do expect this to adversely affect short-term sales growth, we see this as a valuable incremental offering in hair restoration technology and see physician hesitancy as a long-term positive as it indicates real interest in the full enhancement capabilities of the ARTAS system. We believe that this demand will likely play out well into 2019 and are encouraged by the potential for incremental sales following the release of this functionality later this year. In the meantime, we are factoring the release of the implantation into our hiring plans and expect to further augment our sales force ahead of the launch. We will provide more insight into our strategy in terms of specific marketing initiatives on our next earnings call. We remain confident that this technology will provide added precision, accuracy and reproducibility, while improving operative workflow. Furthermore, the addition of the robotic implantation functionality will round out our offering to address all three of the most difficult repetitive tasks in hair restoration, those are harvesting, site making, and implantation. I will now turn the call over to Mark for a review of our financial performance.

Mark Hair: Thank you, Ryan, good afternoon, everyone. I’d like to now provide an overview of our first quarter 2018 financial results. Total revenue in the first quarter of 2018 was $5 million, a 9% decrease from $5.5 million in the first quarter of 2017. The decline was driven by a decrease in system revenue partially offset by a year-over-year increase in procedure-based fees. 46% of first quarter 2018 revenue was generated in the U.S and 54% came from markets outside of the U.S., relatively unchanged from the same period in 2017. Our sales leadership executes on our commercial strategies and as we add additional sales reps, we anticipate slight top line growth in Q2 over Q1 with additional revenue growth in the third quarter and beyond. Gross margin for the first quarter was 36% compared to 44% gross margin in the first quarter of 2017. The decrease in gross margin for the period was primarily related to a nonrecurring charge for excess raw material product components ahead of the implantation functionality launch. This was partially offset by product cost efficiencies and higher procedure-based revenue, which yields a higher gross margin. Excluding the charge for excess raw material inventory, gross margin for the quarter would have been 51% closer to our expectations of margin improvement over time. Operating expenses in the first quarter of 2018 were $8.9 million, a 30% increase from the $6.8 million in the first quarter of 2017. The increase reflects investments in the company's sales and marketing initiatives along with higher headcount and other costs related to becoming a public company. Net loss for the quarter -- for the first quarter of 2018 was $7.4 million or $0.26 per share compared with a net loss of $5.2 million or $0.32 per share for the first quarter of 2017. Total cash and cash equivalents were $16.5 million as of March 31, 2018. On May 10th, we finalized a loan and security agreement with our new lenders to provide the company with a $20 million debt facility, of which $10.7 million was used to repay outstanding amounts under our previous loan facility and pay costs related to the new debt facility. The remaining $9.3 million provide us with additional cash and extend [ph] our cash runway into 2019, increase its flexibility as we expand our commercial footprint and consider further bolstering our balance sheet in the medium-term. This new agreement also provides for interest only payments for the first 18 months, which equates to a reduction in approximately $2 million per quarter and principal payments compared to our prior facility. As I said in last quarter, we will not be providing specific revenue guidance until we’ve additional operational and sales experience with our new management team and greater visibility into our future performance. With that said, I’d now like to turn the call back to Ryan for closing comments and Q&A.

Ryan Rhodes: Thanks, Mark. Let me now conclude with the company's key areas of focus as we continue to progress through 2018. First, we need to continue and will continue to focus and execute on our commercial strategy for ARTAS, which includes growing our sales force to increase market penetration and system utilization, additionally to leverage our 510(k) FDA clearance as a catalyst for new system sales, additionally to broaden our reach in terms of brand awareness through a number of key marketing initiatives, and last and important to remain good stewards of cash as we assess how to best position the company to grow in the near-term. With that said, I'd like to turn the call over to Carol to open our Q&A session.

Carol Ruth: Thank you, Ryan. Please note that if after the call any analysts or investors have additional questions, management will be available in the coming days directors have additional questions management will be available in the coming days. If you like to arrange a call, please reach out to The Ruth Group. I will now turn the call over to the operator to begin the Q&A. Operator?

Operator: Certainly. [Operator Instructions] Our first question comes from the line of David Solomon from ROTH Capital Partners. Your question please.

David Solomon: Hey, guys. Thanks for taking my questions. Just first want to start off on the implementation launch. Just wondering whether the remaining steps assuming they’re engineer related I know that progress is underway in the last conference call. I’m just wondering if we can get a little bit more detail on what to expect or what’s going on. And along with that just a little bit more information on the ability for current systems to be upgraded to have the implantation feature as well, if we can have any color on that? Thanks.

Ryan Rhodes: Yes. So, we will provide a lot more detail on our next earnings call. But I'd say today, it would be fair to say that there were sustaining engineering work being done. We had time to make some enhancements to the technology and functionality. We -- it gives us a chance to work on some additional improvements on software and this is all part of our roadmap. So we are absolutely on track as planned. And again, I think we will be able to share a lot more details and answer more in-depth questions on our next earnings call. But we are excited about the clearance. I know even our customer base is excited and we look forward to watching this opportunity as noted in the second half of the year.

David Solomon: Great. And just on that note, do you have any potential customers that are -- any indications of interest from potential customers whether they’re reserving any units or anything like that or is that too early at this point?

Ryan Rhodes: I think it is early, but I can tell you we've had a number of discussion with current customers and many are excited about this. We offer site making today and site making is kind of a gateway into the implantation functionality. Our site making technology was FDA cleared in 2015 and we have a number of customers actively using it. So, overall, there's been a very good interest and I think most are very excited to see the offering when it comes to market.

David Solomon: Great, great. And just going on the procedure utilization and them do more on spending, so it looks like procedure for sales were in line or a little bit above our expectations. Just wondering if we can get color on that, whether it's more of the units that we're not being used getting back into use or its about that suit more mid-level users becoming higher level users or just seasonality? If we can get any color on that, that would be appreciated.

Mark Hair: Yes. As noted, we haven't given specific metrics related to our utilization, but we do sell the revenue and the revenue quarter -- year-over-year is up, and we will continue to look at, at what point we will provide additional metrics related to utilization. But this is just the revenue related to those procedures sold in the quarter.

David Solomon: Great. And just one more on spending. Just curious, should we be looking at [indiscernible] levels for R&D and G&A as the new normal or was there some 1x noise in here for this quarter?

Ryan Rhodes: There is some seasonality related to G&A. If you think about what takes place in the first quarter, those were the items in -- and activities that we were planning on. There are some of those costs that are related to being a public company going through our audit legal fees and other things. We have had a slight uptick in R&D related to some of the implantation functionality that Ryan was just speaking to as well. So I do think there's some seasonality and some activities related to implantation functionality that were higher in Q1. I wouldn't call it that the new norm just yet, but that there are some increased costs that we will continue to flow through on a go forward basis.

David Solomon: Great. Thanks for taking my questions.

Ryan Rhodes: Absolutely. Thanks, David.

Operator: Thank you. Our next question comes from the line of Matt Hewitt from Craig-Hallum Capital. Your question please.

Lucas Baranowski: Yes. This is Lucas Baranowski on for Matt Hewitt here at Craig-Hallum. Congrats on the implantation approval. And our question was -- have you started to book some orders from those customers you mentioned that or maybe waiting for implantation to be approved before placing an order?

Ryan Rhodes: Yes, we had -- we socialized again what we’re going to be doing at least at a high-level. I think a number of those customers really want more clarity, they want to understand price timing and those issues, so -- as do others. So, I think many are eager at this point, they want to see it obviously the functionality when we get it into the market. But it's something we've been working on for a couple of years. So it's not something that that this is a functionality that -- it's been on the product roadmap for some time. I think the good news here is we did get through the milestone with our FDA clearance. We are on plan and on track to enter the market the second half of the year. And I think many are very anxious to see what comes to market and how they can incorporate it into their practice.

Mark Hair: And Lucas, we’ve not accepted any orders yet for that incremental functionality. Again, we plan to really provide many more details in Q3, and we will do that on our next call as well.

Lucas Baranowski: Okay. Yes, I mean that's perfectly fine. And then I just -- we just had one other question here. Sales and marketing, but spending came in a little bit higher than we anticipated, but a lot of that -- the American Academy of Dermatology and some of these other event site you were attending that were kind of Q1 specific events?

Ryan Rhodes: Yes. Typically Q1 is very busy. We’ve our user meeting, we’ve the American Academy meeting, AAD, the largest meeting of its kind of dermatologists. We also attend the IMCAS meeting in Paris every year, that is a very, very big meeting. And I'd also say, we’ve added additional headcount. We’ve added reps and that obviously increases our line items then. So, overall, I think it's just activity and then the new headcount adds that were mentioned here for Q1.

Lucas Baranowski: And then, just one final question here. You mentioned that you're continuing to build out the sales force. How should we think about kind of the cadence of that sales hiring as we move through the year? Is it just kind of study adds or is it may be a little more weighted toward Q2? How should we be thinking about that?

Ryan Rhodes: Yes, and it's a very good question. We've obviously made some notable adds. We got some new people joining the team. But we’re actively looking across the region, specifically in the U.S with some select headcount adds in OUS markets. But back to the U.S., since that is a high focus and also getting ready for the launch of implantation, I would say we were going to be ramping all the way through this quarter into Q3, and even toward the end of the year. So, again, to be fair to say we will probably have a larger sales force than we've ever had in the U.S historically and that’s all good thing. Good things being led by Chris Aronson, who is building out the sales team infrastructure as well as people were adding on the practice utilization side of the business, into the razor blade side of the business. We’re equally adding headcount in those regions as well. So, again, I would say a steady incremental adds going on to Q2, Q3, and Q4, and also getting ready in the short-term for the upcoming launch of implantation.

Lucas Baranowski: Okay. Thank you very much. That’s all we had.

Operator: Thank you. This does conclude the question-and-answer session of today’s program. I'd like to hand the program back to Ryan Rhodes for any further remarks.

Ryan Rhodes: Yes, thank you. Again, I would -- first like to thank everyone for participating today on the call and for your support and interest in Restoration Robotics. Again, thank you on behalf of the company and we wish everyone a great evening.

Operator: Thank you ladies and gentlemen for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.