Vince Martin on the "Game of Thrones" style proxy fight at $CUTR (Podcast #163)

Vince Martin, Lead Analyst and Writer at Overlooked Alpha, discusses the "Game of Thrones" style proxy fight happening at CUTR (I also wrote CUTR up here).

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Transcript begins below

Andrew: All right. Hello and welcome to the Yet Another Value Podcast. I'm your host, Andrew Walker, and if you like this podcast, it would mean a lot if you could follow rate, subscribe, review at all that jazz, wherever you're watching or listening to it. With me today, Vince Martin. Vince is the head writer of Overlooked Alpha. Vince, how's it going?

Vince: Quite well. How are you? Thank you so much for having me on.

Andrew: Doing great. Hey, really appreciate you coming on. We got this going on kind of quick notice because a really interesting situation, but I'll get to that in a second. Let's just start the podcast the way I do every podcast with a quick disclaimer. Remind everyone, nothing on this podcast is investing advice. That's always true, but you and I are going to be talking about a five hundred million market cap company. It's a MedTech company. There's all so smaller Medtech, all sorts of risks there and it is 1 of the wilder proxy situations I've ever seen, and a wild situation means a lot more volatility, probably a little extra risk there, so everybody should just keep that in mind.

This is not investing advice. Please do your own research. All that out the way. I'll turn it over to you. The company we're going to talk about is CUTR, the ticker is C-U-T-R. You and I both kind of we connected because you published on Friday. I published on Monday. We were both looking at it at the same time, some really wild stuff happened over the past week, but I'll stop there. Stop rambling and turn over to you. What is CUTR and why are they so interesting?

Vince: CUTR is what's known as an energy-based aesthetics company. Listeners may not know CUTR or even some of the other companies in the sector, but they're probably familiar with some of the brands, so you'll see billboards on interstates for Cool Sculpting, , which Zeltiq that's now part of AbbVie. CUTR itself, they do, , acne care through a cooling. They do, it's known as body contouring. It's essentially use... it's a version of liposuction without surgery. These companies all use basically very concentrated energy, so Zeltiq they freeze the fat cells.

CUTR, they use RF radio frequency technology to heat the cells and destroy them that way. It's known as body contouring because, basically for regulatory reasons they can't call it what it is, what it's supposed to be, which is basically fat removal, and then there's vaginal health, there's tattoo removal, all different. They're all kind of broadly speaking the same idea, which is you use concentrated energy for aesthetic reasons most, mostly related to dermatology, and CUTR is certainly not the biggest player in their space, but they've been public for 20 years.

Which I think revenue this year should be close to three hundred million if I remember off the top of my head, so a reasonably large player in the space.

Andrew: Yeah, no, that's perfect. I guess the 1 thing is, so they've got all these products which are interesting, but I don't want to say they're me too, because this is regulated med tech, but it's not like they're the only person providing the true sculpt and the body contouring and like there's 4 or 5 players out there. There's nothing special. I guess the thing to get into before we can get to the real juicy proxy battle is to talk about their acne solution that they kind of ruled out last year, because that's the growth driver.

That's the thing that differentiates them from... I had some messages when I said you were coming on the podcast, they were like, "Oh, I looked at this company 4 years ago and I thought this was great, and these companies, they always kind of disappoint you." So why don't we talk about the acne product and then we can dive into the real juicy stuff.

Vince: Yeah, because I mean, I think part of his acne product appears like it is a part of the juicy stuff or a catalyst for the juicy stuff. This is called AviClear. It's a cooling technology, so it's a little different, but was supposed to be a big deal for the company. It really helped drive the stock up ahead of the launch, the commercial launchers last year, because they were the first ones, and that's a big deal in the space. Zeltiq is a great example of that.

They really won in the body contouring thing and they wound up getting taken out for close to 3 billion, so you the idea with this was, they were really ahead of the market. There's now a second competitor, but they're private. They don't appear to be... if CUTR executes, well this other company really shouldn't be an issue. This should really be a market. CUTR has to itself for at least a couple years while the other players in the space try and catch up, and then they'll probably be an IP lawsuit at some point, because that's also the way this industry seems to go.

Yeah, that was a big driver and it kind of doesn't seem like the Q4 results are a little disappointing and it doesn't seem like it's kind of quite, where it's certainly not where investors expect it to be. That's why the stocks plunged kind of giving back most of the gains, but it seems like the company itself after Q4 or was saying without saying that they were a little, little disappointed with the launch.

Andrew: Yeah, I think they were saying a little disappointed with the launch and they were all saying, look, your salesforce, like 1 of the advantage of these, you have a whole product of dermatological devices, right? So you can go and sell into a derm, the true sculpt and the AviClear and all this sort of stuff, and may maybe each product isn't perfect, but you can sell multiple ones, and I think they were saying, I know they were saying "Our Salesforce, we might have incentivized them too hard to go after AviClear and they kind of stopped selling everything else, so we're restructuring our salesforce, we're restructuring our incentives, everything, taking another look at that which sounds reasonable."

At the same time, it does blow back on the CEO, it blows back on everyone. Like, "Hey, you're not the first person to launch multiple products in a portfolio. The fact that you so misaligned incentives for the salesforce, and you have to go restructure it like that." Not good, not great Bob. Not great Bob.

Vince: Yeah, at the risk of jumping ahead the board that was in the board letter, I think that was this morning, they actually made precisely that point, and I had the same thought you did was that they were writing that the strategy been executed by the launch, and you're right, I mean I think it was the CEO Mary who literally made that, I believe it was him who admitted on the Q4 call in February that yeah, we didn't have the salesforce set up, and they were selling AviClear and didn't sell anything else, and this is really I mean we can talk about that a little bit.

This is a sales driven business. This is very rarely like these are not Medtech products where a specialist understands from their training that they need X product and when they start an office or when they replace or when they expand, they go get them. These are because they're cash pay, 1 of the attractions to doctor's offices in particular, these are all cash pay transactions. You don't get insurance involved, so if you can get something in your office, you have it in a room, they're increasingly designed for small training and kind of short visits. Like even auto clears 3. I think it's 3, thirty-minute visits, right?

Andrew: That's correct.

Vince: You have one assistant handling this stuff, the paperwork's pretty minimal because you're just running or swiping a card, there's no insurance, so they're attractive to doctor's offices, but at the same time, they're not something that a dermatologist necessarily is going to run out and call you, so your salesforce strategy in this business really needs to be on point, and if you look, like I said, I followed this for years and owned a couple companies in the space when they stumbled a lot of times... excuse me. That's the explanation or the excuse or the cause salesforce had some issues, they don't perform. Another company's doing better, and once you fall behind, you get in trouble in a hurry.

Andrew: Yeah. Look, they're not one-to-one comparables obviously, but the, the kind of comparable is Botox. Like, there is huge demand for an aesthetic, but you need to go out to the dermatologist, you need to pound the doors to get the Botox in there. You need to explain to them how to do it, how to do it quickly, and the doctor's going to want to do it because there's huge demand for it, and if they do it quickly, as you said, it's a cash paid product, they're going to make tons of money.

This is why plastic surgeons have the boats and have the fancy cars and stuff, but you need to go out and sell and even Botox, it's a competitive space, and if your salesperson isn't out there knocking on the doors, especially for a startup product like this like AviClear, if they're not knocking on the doors, going to grab doctor, selling them why to use your product over the competitor down the corner, you're not going to sell and you're not going to get all that.

It should be a simple-ish business, but it is execution driven and it's kind of high risk, high reward, but as you said, you mentioned a couple competitors got them taken out. Like if you get this going, it's an annuity stream. Once you get the AviClear into the system, you get to the cut of every procedure that's going forward, and if the doctor, if he's fully booked up on AviClear guess what? He's not going to want to switch to the guy down the street because he's going to have to get the new thing in. He's going to have to learn. He's used to it, he's going to have to all his patients while he is switching. Like it's a pretty nice annuity stream once you do get it in there.

Vince: Yeah, and then the doctor to replace is also going to have to pay up front mid one fifty, 2 fifty depending on the product, it's not cheap, but yeah, and I'd add 1 more point about, are you talking about Salesforce. 1 of the big things that they have to do is teach doctors how to market, because there are some doctors who kind of build their practices that way, but there are many who don't, and so it's not a matter of you can put it in the room, but if the only way your patient knows it's in the room is you have a poster in the waiting room, your utilization rate I think is probably not going to be like supervised.

Andrew: Just some marketing will go to the proxy in a second. There is also with marketing, there's benefits to scale. Like you have to teach the doctor how to market and that's 1 side of it, but if you think similar to a McDonald's or something, like if you're just marketing in the doctor's office, that's 1 thing, but once you have a hundred or five hundred doctors you can start doing... you see the advertisements for a Botox on TV or something. Like you can start doing national advertising and you can start kind of doing that whole advertising instead of only in the doctor's office.

Or if you think of a local market, I've done some work on the Botox competitors. You think of a local Botox market if you have 1 doctor who's doing Botox to the Botox competitor, you probably can't afford a billboard, but if you have ten doctors, you can probably take all their advertising, put the billboard for, "Hey, go get Botox, here's the 10 doctors." Like you can get a little bit of scale and kind of get a little bit of local economies there.

Vince: Yeah, absolutely. No doubt.

Andrew: Cool, so why don't we turn to... I think that's a fine overview of the business and we can talk valuation. It's tough to value because as we said, AviClear clears a startup and if they get 2 thousand versus four thousand versus four hundred offices is going to be hugely different. We don't really know the firm economics of it, but why don't we talk about the proxy pipe, because I think that's what's most interesting. Everything launches about ten days ago. I'll just let you talk about the everything that's going on however you want, and I'll interject if necessary.

Vince: Yeah, I mean as you said, it's a fun 1 and it kind of burst, it kind of came out of nowhere as far as we know. It certainly seems like there's been stuff going on, and you can actually correct me if I'm wrong here. I mean, I think the first public thing was the announcement that the CEO in the... oh no, that was the first public. What was the first? I'm missing this.

Andrew: The first public thing is April 7th, the company, and anyone can correct me if I'm wrong. This is to my knowledge, but to my knowledge, the first public thing is April 7th. The company quietly files an 8K that says, "Hey, our executive chairman is seeking to hold a special meeting to replace the board." And they quietly file an 8K and that's not a quiet 8K that's pretty big news, so that's how everything starts, and it just really escalates quickly from there.

Vince: Right, right, so you have that on the 7th, and then there's, there's letters going back and forth. The CEO, the CEO and the chairman, they come out with their side of the case. There's 2, I think it was on the 11th, right? There are 2 letters from major stockholders, which both of which were basically publicly saying, "Come on guys, don't do this." I think they wanted a special meeting, which is what the demand they wanted which is what the chairman CEO has basically said, let everybody vote, but put the CEO back and let's try and not have this public thing, and then on the 12th, the company fires the chairman, and that in particular is pretty unusual.

Like it's 1 thing for a CEO or CFO but you don't really see a chairman get fired too often. They fired the chairman and the CEO, and then they announced the next day the 13th. They say, "Okay, we'll do a special meeting, everyone can vote. We'll figure it out from there." And then you have a letter from the board this morning kind of given their side of the case after the CEO and the chairman basically said the board is working under minus, they alleged that the board was using Gutierrez counsel for their own purposes, that more board members were micromanaging, and then the board basically came out and said, "Look, the chairman's been trying to get the CEO fired for 2 years and we were going to fire the CEO anyways, and the point that we were saying about the letter this morning had the point about the public admission that the sales strategy behind a AviClear had had impacted the rest of the business." I think that's about here where we are. The special meeting is in May?

Andrew: June 9th, I think early June. Early June.

Vince: June 9th, right? Yeah, that's right.

Andrew: Let's pick up a little bit because there's a couple parties here. There's the executive chairman, there's the CEO, there's the rest of the board. There actually is one board member who's kind of on the exec chair and CEO sorry, but I'll ignore them, so there's executive chairman's, 1 party CEO's, another, the rest of the board, and then there's 2 major shareholders here, and I think what's interesting is every party is pushing employee, and I guess the first thing that's interesting to me is, and this is actually what caught my eye, the executive chairman and the CEO are the ones who kind of launched this fight, right?

The board files that 8K we talked about that says, "Hey, our executive chairman's trying to call a special meeting." But basically, the next day, the executive chairman and CEO come out and say, we're calling the special meeting together, and what caught my eye is the board's first response is, and you kind of alluded to it, "Hey, the executive chairman has been trying to get the CEO fired for several years." The first letter they said it started back in 2021 and I believe the letter this morning, they said he might have even started trying in 2020.

Vince: Yeah, they said 2020 this morning. Yeah.

Andre: Not only has he been try been trying to get the CEO fired, but the executive chairman, he runs an activist fund, the executive chairman has been trying to personally replace the CEO as CEO, and what kind of caught my eye is it's really strange as for an executive chairman and CEO to partner and try and oust the rest of the board, but it seems really, really strange when the executive chairman tried to fire the CEO and now they're partnering together and part of the partnership is the c e o and chairman are saying, "Hey, our CEO, he's ready to retire. He was looking into succession planning."

It still strikes me as very strange that the CEO and chair would partner together after the chair tried to fire and replace the CEO, so I just want to ask you like all of these things are done for a reason. These guys are fighting over tens and hundreds of millions dollars. What do you think is going on with the executive chairman and CEO's relationship here that they're partnering together now?

Vince: I have no idea. That's a really good question. The part of the problem is this's really fun to read about and it's fun to talk about, but when you ask questions, why is this happening when you're an outsider, the answer a lot of times I can't imagine, but...

Andrew: I don't disagree, but I just odd not knowing. I don't disagree, I do not know, but the speculation is interesting because all these parties should be trying to do what's rational in their head and if they don't say it, but you can figure out the reasoning, like maybe they're partnering because they see five hundred billion value here, or maybe they're partnering because the company's falling apart and they want to take over and like cover up what, cover up how bad they've run it or something. Like, both are possible, and if you can figure out 1 way or the other, that's kind of where the alpha could lie.

Vince: Oh, let's see. That's funny. Yeah. I kind of didn't think of it. I didn't think of it as that extreme. My thought I would think was a little more along your original... I kind of thought 2 things. 1 is as you said, the CEO has said publicly that I think in February he went to the board and said that he was thinking of retiring anyways, so I mean, 1 of his very clear incentives is to not be fired for cause because there's a pretty, pretty substantial severance difference there. I think the other likely explanation is that the enemy of my enemy is my friend.

The CEO Murray is probably not real thrilled with the chairman plants, but he may have less animosity based on what we're hearing. He may still have less animosity towards plants than he does till these. What the entrenched board members as they were named in their letter.

Andrew: Still, it is strange to me just harping on that. It's strange to me that he would be less, he would align himself with the executive chairman who tried to fire him versus the rest of the board, because to me, like if I just imagined a typical power struggle in my head, you would have an executive chairman who wanted to kind of take control of the company and be CEO and then you would have the CEO and it seems like the natural alignment would be executive chairman on one side and the rest of the board and the CEO on another side.

Again, like the CEO's trying to retire, I don't know what happened between kind of call it February when he announced he wanted to retire and today, but it seems like if he just stays with the independent board, tries to retire, keeps going with the succession planning, he's not getting fired for cause, so all of his retirement stuff is investing like it seems a weird alignment.

Vince: Yeah, that's quite a fair point. That's a very good point. Yeah, I mean it is strange and I mean there's just a lot of strange aspects to it, to your point, you said you didn't know what had happened since February. [inaudible] and Murray said that in their letter that when Murray, the CEO went and said he wanted to retire the board, like just didn't do anything, and you kind of get the sense like from the board's response that that's probably true because one of the things that it's kind of funny, the board sitting there saying, "Hey, look, you guys botched the Salesforce thing, you botched the launch of AviClear."

Having the salesforce in the right position, and then they're writing a letter saying basically we wanted to fire this guy for 2 and a half years, but we were busy or, so I don't know, it's kind of like you kind of look at the board's letter like, "Okay, if this was such a train wreck that you are wanted to fire him, and then he comes to you and says, I want to retire. Why is this another 6 weeks going by? When you're in the middle of this critical launch and what you're saying is a bad CEO, why are 6 weeks going by when with no interim, no plan?"

I mean, you would think if he comes to you in February and says, "I want to retire." You'd be like, "Great, this is 1 less thing we have to deal with." You would think that there'd be the outline of succession plan if you were talking about considering firing him for, again, it was either 2020 or 2021, so it's 2 and a half years, something like that, and then that kind of leads you back to the side of the chair of the CEO, like, yeah, maybe these board members do need to go, but of course it's because they didn't fire the CEO who's saying the board members need to go, so we're kind of going in circles here.

Andrew: I'm going to come back to the exec chairman and CEO in a second, and I'm actually going to come back to all the parties a second, but I do think 1 thing that jumps out is the, the stock sold off kind of hard last week as this goes on because the exec chair and CEO kind of filed the first shot where they call for the special meeting. They put out their PR calling for it. They publish a letter from like, I think 10 of the senior managers at CUTR saying, "Hey, we really support the executive chairman and CEO."

I'll come back to that in a second, but the stock really so sells off hard Thursday, Friday, I can't remember the exact day when the board does their response and their response is, we are firing the executive chairman and CEO for a cause we're one of the board members is stepping up as interim CEO, and they've been very clear, this is interim, they're not trying to go full-time, or maybe they start changing that after, but they say that, and then the thing that I think causes the stocks to fall off really hard is they just say, and they don't really give an explanation.

They just say, and we're withdrawing our 2023 guidance, and I think the market always going's to shoot first and ask questions later, right? You just had the 2 top people at the, at the company fired and, and it's a hyper-growth company, again, we don't know where AviClear tops out, it launched last year, this is the year where it's supposed to be growing. They had salesforce issues, and they just withdraw 2023 guidance without anything, and that's where the stock kind of falls off and it's recovered since then. We'll, talk about the other shareholders, but what do you think the board is doing with the 2023 guidance draw?

Like is this a continuation of the issues they see in Q4? Is this saying sales are weak or is this the board just trying to cause terror as they fire this thing to get shareholders to think, "Oh, we can't support this old management team."

Vince: I think that there's absolutely... I should say absolutely. I would put a lot of money behind the speculation that there's some significant financial problems going on, and I think there's 2 reasons for that. 1 is what you talked about with Q4 being soft and the salesforce issues, those generally kind of don't get fixed. This is a long sales cycle business. Again, I mean, I don't know off the top of my head AviClear price, but most of these devices are 150 grand upfront and they can get financed and things like that, but this is not something where you fix your salesforce stuff and they go out and sell and then they're bringing in revenue a week later, so you have that issue, but you also have the issue that... excuse me. These businesses are really, really macro sensitive.

I think if you kind of look at some of the warning signs in consumer spending more generally, and I think without this board drama, if they had withdrawn guidance for the full year at this point, it wouldn't be the most stunning thing in the world. That's kind of what these businesses do. CUTR itself, I mean, if you look at their numbers, I'm probably, again, I'm roughly wrong, but if you like in '05 and '06, they were doing I think like fifteen, sixteen million in operating profit, and in '09, '10, they were losing almost that much.

I mean, these businesses swing in a hurry, so I think there may be some gamesmanship involved, but I think certainly the market believes that, that there's an underlying financial issue to underlying financial logic behind them withdrawing guidance for the year.

Andrew: See, I think I would tend to agree with you, but he 2 things that make it more interesting to me are the executive chairman and the CEO are fighting really hard to take control her, which they're fighting really hard and they're fighting from a position like they think they have strength, which I don't know if they can do as clearly if like the Q1 and guide are just an absolute disaster, if that makes sense, and then the other thing is, the senior management of the company, year 10 of them come out in strong support of the CEO and chairman,

Like if I had run this in my mind, if you had told me everything else that happened here, my gut would've been that you had like the CFO or the top 2 commercial guys who had written a letter to the board like, "Hey, we've been working with the CEO, and we are way underperforming. Our potential commercial potential sales are falling off a cliff, and it's because of these guys and their strategy. We need someone new." Kind of like what happened with Disney where the CFO said, kind of acts the old CEO by saying, "Hey, board, it's time. Like we can't do this." Like, that would've be my guess, but that's not what happened here right? You had all the executive committee coming out in support of the CEO so that's just why it's so strange, and again, it's 1 of the reasons why I'm so interested in this situation.


Yeah, I think that's true. Yeah, I mean, 1 of my kind of maybe I'm getting too skeptical of my old age, but 1 of my thoughts with the executive letter that came out was also, I mean, they probably want one of those 2 guys, right? I mean, if you're the CFO or if you're a senior vice president of this company, and you know those guys, and you job's probably a little safer with 1 of those 2 guys, and maybe it's a lot safer, particularly if you're struggling, particularly if the narrative that you're telling yourselves and each other is, "Look, we'll be fine, it's a little slow, but it's the economy." But I think that there's a version of the story in which sales are like where results if you could make them give guidance, they would kind of be like a little bit below the low end.

Like it's not like it's a disaster. It's not like everything's going wrong, but maybe revenue's going to be the target for revenue is 10 million below the low end of the original range, and maybe they're doing 60% of the AviClear installations. They thought they were going to be like somewhere in there where it's enough that the people running the business can tell themselves that they're still doing a good job against external headwinds, and yet the guidance that was being given in February is probably nit worth.

Andrew: Probably the management team says, "Hey, the sales are falling off in late March, and guess what, a lot of germs were banked by Silicon Valley and First Republic, so a lot of the germs are heavy." A lot of doctors are banked, especially by First Republic, I believe, so that kind of, you could tell yourself the story. Here's the other reason I'm curious on the guidance withdrawal and why normally I'd be with you, but maybe I'm a little more skeptical that it's a disaster because CUTR in the press release that the board released this morning, they don't even address the guidance, and like, I kind of think, and we'll talk about the big shareholders in a second.

Just to sum it up, 2 big shareholders basically came out against the board, plus the executive chairman and CEO, like I kind of think the board, if you're waging a battle, you've got this special meeting coming up in 6 weeks, like your biggest bullet would be just put in, they do their first big response this morning. Your biggest bullet and your ineffective and leadership and poor execution bullet for the C E O would be, hey, 2023 is off to an awful start. We are missing everything, we need somebody to come in and write the ship, and they don't really say that in the letter, right?

They do say, CUTR signed the form 10K late. We couldn't develop a budget that was grounded unsupportable assumptions, but they don't say, "Hey, 2023 is off to an awful start."

Vince: Yeah, that's a good point. Yeah, that could be. I think as, when I read it the first time, there's the line there, I'm pulling it up here that, um, , the missteps in the rollout were "were unforced errors that diminished our confidence and Mr. Mr. Murray's ability to execute our attractive AviClear clear strategy to me there." That to me I took a little bit of that as maybe that product is disappointing, and to be clear, I don't think when I was saying like, I think that there's financial logic to guidance, I don't necessarily think that 2023 actuals are going to be a disaster.

I'm just saying in like when the economy has turned really bad in '09, their results were a disaster, so in a situation where the economy, at least from the consumer standpoint, it may be weakening, it wouldn't surprise me at all that their results are going to be softer than they thought they would be even 6 weeks ago.

Andrew: Completely makes sense to me. Again, if I'm the board, and we'll talk to the big shareholders in a second, but if I feel a lot of things calcifying against me, like my first shot is to come out and be like, sales are just a disaster. Kitchen sink thing. You guys can't possibly support the CEO because forget how bad fall 2022 was. Forget how bad Q4 2022 was. All that matters is the future, and the fact is we were way underperforming right now and we were going to keep way underperforming under the CEO and they don't quite see that, and I wonder why they don't.

Vince: Yeah. Oh, it's a great point because I mean, I can't remember any off head, but you definitely have heard boards make that you've heard boards or activists or or other people. People in these proxy fights make exactly that claim, and you're right that they didn't. That's interesting.

Andrew: Let's go to the... there's 2 big shareholders and the other reason I'm just like, if you had told me you had an executive chairman and CEO versus board fight and they seem ready to go to the mat here, right? My instinct would've been that the board had either inbounds or kind of softly reached out to a couple major shareholders and had major shareholders who said, "Yeah, it, it's been too long. The CEO has underperformed, and we need somebody to go."

Again. It doesn't appear like the board does because last week, right after the CEO and exec chair fired, RW and Pure Vita, those are 2 separate firms, both of them off the top of my head, they're the like to 107% of the company range, so these are major shareholders, they switch from 13Gs to 13Ds and they publish press releases that say, "Hey, don't go this route. Don't fire the CEO and chairman, we support a special meeting because we want to replace the board based on, we're really concerned about the board." I look at the special committee and I say, "Hey, you just pissed off the exec chair and the CEO executive chair owns 7%. You're 2 other major shareholders who own about 7% each. They don't seem to support you. How does the board see a path to winning this?"

And again, this comes back to the you didn't come and blast the 2023 results so far. Like how does the board see a path to winning this?

Vince: Yeah, I'm not sure. I think that they're trying. I think that they're just kind of trying to make their make their case. yeah, it's hard to say it is possible that they didn't really quite gain this out, because I mean, they announced the firing for cause on the 12th and then they're calling the special meeting on the 13th, and that itself is kind of strange, which is basically like why did they get a whole bunch of phone calls on the evening of the 12th saying basically, "You guys better call a special meeting or else we'll do it for you?"

Yeah, it's really hard to say, and it goes back to kind of the idea that the complaints against these board members sort of seem valid, because there's not a lot of strategic. Doesn't seem to be a lot of strategic foresight or organization or and I mean that's 1 of the points that the chairman and CEO made is that these guys just don't do anything. They're asked for things. They're told things and they don't respond, and you kind of, in this fight, you're kind of getting really like that point seems to getting more and more support from, because you're right, I can't answer that, and it doesn't, I think their path is basically to say, that the CEO is going to leave anyways.

He should have left, he was a bad CEO and then the chairman was doing this makavelian stuff, so you don't want a guy there who's trying to line his pockets, and so if you vote for them, you're going to wind up with this guy as CEO who's going to pay himself fifteen million a year comp package, and that's no good. I mean, that seems to be the kind of the core of their strategy, but to your point, when the other side has already got 20 odd percent of shares in their pocket. The math starts getting going against you pretty quick.

Andrew: Let me go back to the executive chairman real quick, so it seems pretty clear he wants to become the CEO and I do think that the, that is interesting because the executive chairman is a partner at I believe it's [inaudible] It's not...

Vince: Yeah, I'm not sure. I kind of assumed it was Voce or something like that.

Andrew: V-O-C-E Capital. Right. I don't personally know them. I've heard fine things, but he runs a kind of activist firm, right? He was the executive chairman here. Great, but...

Vince: Yeah, I mean my understanding there is a profile of them. I read that they're kind of activist ish, the tagline and like is a profile in an industry magazine, wasn't a hard-hitting piece, but the tagline was something like always, always engaged, sometimes activist or something like that, so they're not kind of a pure activist firm, but I think that's a strategy that they have used that makes,

Andrew: I know they were in Argo, which was an insurance company that ran into that, stumbled a lot, and they eventually got that sold. He's been executive chairman here, obviously he's been involved here, but he's tried to come the CEO and I just think that's interesting, right? Like if your background's in portfolio management and you're trying to become the CEO of a startup, not startup, but kind of growthy med tech sales focus company. That's interesting. What do you think kind of his angle with this is. Does he just think, "Hey, I can get in there, focus on capital allocation, hire the right guy in commercials or in in commercial sales?"

Or does he mentions in 1 of his letters, I spend twenty hours plus a week aat CUTR? Like, does he think he can come in here and like actually run a Medtech ceo, be a medtech CEO

Vince: I would imagine? I mean, I mean we've seen this story before a couple times, but yeah, I mean, I think it's certainly possible that he's in there enough that he thinks that there are material changes that he can make that are really going to drive value and really drive growth and all those sorts of things, and who is the manager? It's Vate now Innovate, you see Innovate.

Andrew: Yeah, I know innovate well. Yep.

Vince: Yeah. I mean that's what was one of my thoughts was like, 0, whatever side you take, like I really don't want to own a company who, CEOs a hedge fund manager with all due respect to any hedge fund managers, , listening, and I think particularly to your point about it being a med tech and being if I had to have a hedge fund manager as CEO, I don't think this is the kind of business I would choose, but yeah, I think to your question, absolutely he thinks he can do it. I don't think there's any doubt he thinks that he could and should add value, and I think, I'm sure it's the kind of case where if you're there.

He's probably there enough to that he feels he knows the business well and I'm sure that there are specific things that he sees that, "Oh, if we could just get this fixed, it would really be a game changer." And why hire and why hire someone else to do it? To fix it if you can do it yourself?

Andrew: Yeah. It just, it seems to me... and again, this is outside, we haven't even seen the, the CEO and exec chairman filed a lawsuit against the company, which I don't believe has been on Seal yet. There's still going to be more, but it seems to me the weakest point of the exec chair and CEO's point and the strongest point of the board's points is that the exec chair wanted to become the CEO himself and he doesn't have the background for it, and if this was just me, I wouldn't have tried to be the... if I was on the board, I wouldn't have tried to become the CEO and the first thing I would've put out was, no, these guys are crazy. I'm not trying to take the CEO for a job for myself.

Since he hasn't done that, it seems like he is, and it's another thing in a very strange... in a very strange situation that strikes me as strange, let me go back to the board at this point. I think we've talked about, hey, 3 major shareholders, including the former exec chairs against you, senior management seems to be against you. CEO seems to be against you, CEO E is against you. The board has 2 paths to winning here, right?

hey, can go and change major shareholders' minds and they try to do that with the release they did today. Maybe they've gotten more stuff coming out they put a lot of stuff in there that I think is questionable on the exec chairman's comp demands and everything. Maybe they can show, Hey, support us. We really do have shareholders' best interests at arts. Even though the first your knee jerk reaction was the first shareholders was to go the other way, so they can do that, and I think they could do that in 2 ways.

Number 1, they could hire a rockstar CEO, right? Somebody who grew Botox from zero to ten billion or something, right? They could hire a rockstar CEO. I think that's difficult here, right? Because if you're the current board, if you're a CEO who's a rockstar, you've probably got your choice of companies, and this board comes to you and says, "Hey, our former CEO and executive chairman are running a proxy fight every shareholder's against us. The executive chairman clearly wants to be CEO, you're a rockstar. Why don't you come in in here and we'll hire you?"

Like my first thought would be a better negotiate a pretty g good, , firing package because I'm going to get fired the moment the new board comes in, so yeah, I don't how they could get rockstar CEO/


Vince: 5 million on day 1 and 5 million my first day and 5 million my last day. I'll show up.

Andrew: Yeah, and it'll be about fourteen days of work, so yeah, I think the rockstar CEOs really tough though. Again, we kind of I laid out the math where if you think AviClear is this great acne product, 0, you could lay out the math to two hundred and fifty million, five hundred million even more an annual revenue. Maybe if you can convince a rockstar CEO that's the case. You could get that man on the, "Hey, look how big this thing could be. We're going to hire you in your reputation procedure, and even if we lose to the exec chair and all the other people, they're going to want to keep you because you're so, you're so good."

Like, that's the only case I could kind of see.

Vince: Yeah. Yeah. I think you're right. I think it's tough. I think their best, I think the core of their strategy is basically going to shareholders and be the devil is better than the devil you don't.

Andrew: I agree though again, it seems like the board's already, the deck's already stacked against them, so that brings me to the other thing. I think if you're the board, your only way out of this at this point is sell the company for a huge premium before the proxy fight. Right? And again, even that might be tough because it seems like the exec chair and the major shareholders are playing for a multi-billion dollar EV company. This is a five hundred billion EV company currently seems like they want, it seems like everybody's a believer and wants to see AviClear kind of play out and see if they can get a multi multibagger, but if the board could go and find a strategic to put a number that starts with a 4 in front of shareholders or something, maybe that's the only way for the board to escape.

Vince: Yeah, and that's a narrow path. I mean, we're at twenty three today. The stock came into the year at forty three, so I mean, I think it's really hard just as a general rule, it's really hard to sell a company for a price below your year to date high. Like except in really extreme and maybe these are extreme circumstances, but I think those shareholders are not going to, are not going to take, a 40% premium to the current close as you said, and the other issue too, I mentioned this a little bit, my article, the history of strategic acquisitions in this industry is pretty ugly.

Maybe the most unknown, horrible acquisition of the century was Ho Logic acquired Sign Ashore in 2017, I think they paid 1.7 billion and less than three years later they sold it to a private equity firm for a hundred and thirty-eight million in net cash, and then Zeltiq which we talked about is now part of that was bought by Allergan before it was bought by AbbVie. That was a pretty ugly deal. They got bought as soon as they got bought, their revenue tanked, so I think coming and going trying to sell this company would just be, I think it'd be really hard to get the shareholders on board.

I think the flip side is trying to find a strategic who's going to do anything other than talk to themselves in offering twenty seven and saying, "Hey look, we'll give you a little premium, get you guys out of this and you don't have to worry about the mess and we'll take the risk of AviClear disappointing, but I think trying to thread the needle on both sides to something that gets done, boy, that just seems... it's probably going to happen in 2 weeks now that I said this publicly, but to me it just seems really like a, very, very narrow path.

Andrew: No, I agree, and look, I'm thinking through this in real time, right? This started last week, I published on it this morning, all these are new, but the thing that's jumping out to me as we talk, and I think we said it earlier, like I would think boards would be... I understand everyone isn't always hyper-rational, but you would think a board before they fired the executive chairman and CEO and went down these paths, you would think they had some path and it just doesn't seem like there's a path because I agree with you, it seems an acquisition is unlikely, but that seems the best way they did.

If they had in their back pocket like, "Hey, 2 strategics have reached out to us in the past 6 weeks and are offering $40 per share, and we think shareholders would accept that." Like they could have done all this knowing that they could open up the strategic process, but as you said, like everybody came in here owning the stock at forty earlier this year. If a strategic offered what's almost a 100% premium and $40 per share, I'm not sure this strategic could even be sure that shareholders would accept this and they could get this done.

They'd be walking into a Harry process, they'd have to do due diligence, and as we talked about, we don't know what the current sales trends for o obviously look like. It could be a lot worse than the company thought at the beginning of the year. Like, my God, it's just a really weird situation.

Vince: Yeah, it is. It's, yeah, I mean, I'm glad you asked me to talk about because I've enjoyed talking about realtime too. I enjoyed writing about it. These proxy fights like this, like at public don't happen that often, but even in that small group, it kind of stands out for being a little, it's a little extra nuts and has a little extra angles to kind of think through and all that stuff, and it is also to kind of to the a broad point, it is a proxy fight where really no one's covered themselves with glory yet.

Like if you don't have a position, there's not really anyone yet where you're really root, you're really rooting for, I guess the employees and the kind of the management out below the C-suite. I hope it works out for them, but from what I've seen, no one's really jumped out as somebody who's really got the right strategy and really has been in the right, in the right place to this point.

Andrew: You know what put it over the top for me. I was kind of thinking, do I want to write about it like the CEO and chair trying to fire the CEO and then aligning with the CEO, that felt game of throne style to me, right? Like my enemy has become my friend. Like what really actually put it over the top for me last week, it wasn't the extra shareholders coming out, it wasn't the executive.

There's an independent board member who I believe has worked with the executive chairman's firm before, but it was the independent board member when the board came out and said, "We're firing the CEO in the chair, and 1 of the independent board members put out a PR in his own personal capacity saying, "Hey guys, I don't support any of this. I'm just here to maximize value for shareholders. I got your back." It was just the independent shareholder coming off the top ropes if you're Game of Thrones, he's like little finger, like the big guys are moving down, he's just looking to find words to put the knife.

That was what really put it over the top for me. I was like, my God, I can't believe how many people are arguing with what's going on here. I laid out a bunch of things. I think we both probably agree, but might as well ask, it seems like the special meeting's going to be called June 9th. There's yeah, infinite number of possibilities here, right? Company could get sold for a huge premium before then as we discussed, board could cave, we could see a settlement where half the board stays and half the board comes. The executive chairman could become the CEO, we could see a new CEO, we could go all the way to the wire and see a boat go down.

July comes around, what do we think? We're looking back in hindsight, the results of the CUTR game of throne style proxy season came out too.

Vince: I think the most likely outcome is that plants to current chairman is the CEO. How exactly you get there, whether it's a settlement or them or them losing the losing or the board losing the proxy, losing the those special meeting vote. I think to your point, I think the math is just against him, and I think there's too much evidence just reading between the lines that the board has been ineffectual, so if you're a shareholder and you're kind of on the fence I think you can believe what the board is saying, but still figure that it's just better to get those guys out of there and get someone new.

Because if Plants[?] does kind of follow the trajectory of some other hedge fund managers, maybe you just can just move on from him easier than you can move on from board members who have been there for so long, so yeah, I think that's the most likely outcome. Um, and I think, I think by the end of the year, this is what I we're looking at it like, if I had a bet, I'd bet stock price actually probably a little lower, and I think we're probably checking back on this going, "Oh, it's an interesting turnaround play. Maybe if I clear gets going in '24, there's a chance here."

Andrew: Let me ask you 1 question on that. That that's 1 of the other reasons I came here, right? So you've got this company, it's got this growthy product, AviClear, and everyone on all sides is arguing for it, and originally before I was kind of convinced that the independent board probably didn't want to become full-time CEO. 1 of my thoughts was, oh, maybe the board... because the interim CEO from the board, does have the background where she could become full-time CEO if they wanted to."

One of my thoughts was, "Oh, maybe AviClear people think this could be such a home run that everybody's kind of fighting to take control of the golden goose before it's like completely gold. If that makes sense, and I was at attract that not only because you've got the excutive chairman who comes from an investing background who wants to make himself CEO and seems to want to get a lot of upsides tied with that. You've got RTW and Pura, who I believe both have great reputations. RTW was the... I'm looking right now, third or fourth largest shareholder of Prometheus, that company that just got sold for a massive, massive premium to multi-billion dollar deal just this morning.

RTW, they're big, they've got a lot and they filed a 13D they clearly are willing to get involved here. I was just kind of wondering, 1 of the things that attracts me other than the Game of Thrones was everybody arguing over this, everyone sees a golden goose at the stock market. , because you make all the investment up front and it takes a year or 2 for the recurring revenues risk. Again, is there a golden goose here? Do they see that? Or is it kind of what you said where everybody's fighting, but if you look at the history of these things, it's up, down, up, down, but the kind of overall results is a lot of value destruction.

Vince: Yeah, and I think the possible answers, it certainly could be both, because the numbers do change so dramatically, as you said, once you start getting revenue, these launches are such a drag on profits that when that starts to reverse, when the drag goes away and they're actually becoming accretive, the earnings really springboard, so I think it certainly could be both. Yeah, I mean I think the interim, the 1 thing, the interim CEO in her bio, I mean, she retired I think like from not a I think an SVP level job like in 2015, I think she's 67 years old, so my sense with her, I would be surprised if she's really trying.

I think when they say that she's going to be interim, that they actually do mean interim there, that they want someone else.

Andrew: They have basically committed to that. Yeah. President Global Vision Care and EEVP at B&Ll. Yeah. Okay. Cool, cool. Look, Vince, this was great. I mean, this is 1 of the more interesting and exciting situations I've seen and I put up 2 posts over the weekend between this 1 and Cano is a little buzzier and it's got some bigger personalities, but I think this 1 actually is a little bit more Machiavellian, but between these 2, ooh, it's going to be fun process season. Anything else you want to say on CuUTR?

Vince: No, I think we covered the fun angle, certainly. The financials, I think you kind of alluded to that. Valuation is down here. It historically, relative to them, it is kind of attractive if you look at a price to revenue basis, which is not a great metric, but it has some value, and I mean the 1 thing I think which makes it interesting and, and beyond sort of the grabbing your popcorn nature of the proxy fight is... and I think you've, you've kind of come to this point a few times is if this gets resolved in the right way, and if they deliver, like this is a stock, this is a stock deck can triple into your.

I mean that's 1 thing that is really, well it's fun to game the scenarios and stuff, but that is something that makes it intriguing just as an investment is that if they can somehow get through this and they can get this album clear going, I mean, it's speculative as you said in your disclaimer up upfront, look, the stock dropped 28% last week. In a single day. There are risks, there's huge risks, but it is certainly down here, there's absolutely a world where this proxy fight gets resolved one way or another, and people are looking back at this going, "Oh my God, that was such a dumb, like the proxy fight who really... like that was so dumb."

All people's took their eye off to how good the business was and everybody missed this opportunity because the stock's at 60 or 65, 75, whatever number you want to throw out there, that's absolutely in the realm of possibility. I do think that's kind of worth toward the end here. Trying to call out a little bit.

Andrew: I did some dumb dumb math in the post, but again, this is a startup product, right? It launches March or April, 2022 A, as we kind of talked about. It takes a while to get these things fully scaled up. The doctors have to learn how to sell it, even if I put it in a doctor's office on in January, like it's not going to be fully ramped up by the end of January. It takes a while to get the patients, for the doctors to get used to selling it, for it to get kind of the name brand recognition, but I don't think it's crazy to say if this is a success, and that is a very big, if, I don't think it's crazy to say this could be doing two hundred and fifty, three hundred, even five hundred million in annual revenue and you slap a multiple on a medtech multiple on like two hundred and fifty of annual revenue, probably 65% gross margins.

Like it's not crazy to think AviClear alone could be a billion, a billion five, two billion plus valuation that would get you, as you said to the 3, 4, 5 X on the stock you're talking about. Ignoring, completely ignoring the rest of the business. Now there is the devil's in the detail and execution. That's why I kept saying that's kind of why I kept thinking there could be kind of like the golden goose at the end of this rainbow,

Vince: Right. Yeah. I think that's definitely possibility, and I'm also aware this is 1 of those industries where if you follow it for too long, you get a little too jaded. Everybody, the lunches I think like, ah, that's, I've seen that before. It'll be gone in eighteen months.

Andrew: 100% and like there are a few golden gooses in this industry, but as you said, for the most part you think you're buying a golden goose and then you take it home and it's laying normal eggs. Or even worse, it might be laying rotten eggs and you just invested a hundred million into salesforce and rolling this product out and you're not even getting a hundred million back.

Vince: Yeah, that's exactly right.

Andrew: Well hey Vince, I really enjoyed this. I'm going to include for anybody who listened to this, and interest in more, I'm going to include a link to Vince's write-up that he did on Friday, so that was before the original, the most recent board response that actually came out this morning. We're taking this Monday, is it April 17th or 18th? I can't remember. Monday, April 17th, but, so people should go read that for a background. I did another write up. People can go find that, but Vince, I really appreciate you coming on and I'm looking forward to the next one.

Vince: Yeah, absolutely. Thank you so much for having me. It was fun.


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