Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2020 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to_____. Commission File Number: 000-50644 | --- | --- | --- | |----------------------------------------------------------------------- ...

PART I FINANCIAL INFORMATION [Item 1. Financial Statements](index=5&type=section&id=Item%201%20Financial%20Statements%20(unaudited)) The unaudited Q1 2020 financial statements show decreased assets and equity, with a significantly increased net loss [Condensed Consolidated Balance Sheets](index=5&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) Balance Sheet Summary (in thousands) | Balance Sheet Items | March 31, 2020 | December 31, 2019 | | :--- | :--- | :--- | | **Total Assets** | **$94,430** | **$113,738** | | Total current assets | $76,952 | $95,046 | | **Total Liabilities** | **$60,894** | **$67,796** | | Total current liabilities | $52,416 | $58,622 | | **Total Stockholders' Equity** | **$33,536** | **$45,942** | - Total assets decreased by approximately **17%** from December 31, 2019, to March 31, 2020, primarily due to a reduction in cash and cash equivalents and accounts receivable[15](index=15&type=chunk) [Condensed Consolidated Statements of Operations](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) Statement of Operations Summary (in thousands, except per share data) | Metric | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :--- | :--- | :--- | | **Total Net Revenue** | **$32,239** | **$36,026** | | Gross Profit | $14,336 | $17,309 | | Total Operating Expenses | $26,465 | $25,335 | | Loss from Operations | $(12,129) | $(8,026) | | **Net Loss** | **$(12,414)** | **$(8,220)** | | **Net Loss Per Share (Basic & Diluted)** | **$(0.86)** | **$(0.59)** | - Net revenue decreased by **10.5%** year-over-year, while operating expenses increased, leading to a **51.0%** larger net loss compared to the first quarter of 2019[21](index=21&type=chunk) [Condensed Consolidated Statements of Cash Flows](index=9&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Cash Flow Summary (in thousands) | Cash Flow Activity | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :--- | :--- | :--- | | Net cash used in operating activities | $(11,966) | $(7,953) | | Net cash provided by investing activities | $2,640 | $1,549 | | Net cash used in financing activities | $(2,216) | $(490) | | **Net decrease in cash and cash equivalents** | **$(11,542)** | **$(6,894)** | - Cash used in operating activities increased significantly year-over-year, driven by a larger net loss and changes in working capital[34](index=34&type=chunk) [Notes to Condensed Consolidated Financial Statements](index=10&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) - The COVID-19 pandemic began negatively affecting customer demand in late Q1 2020, prompting expense reductions affecting approximately **42%** of the workforce[41](index=41&type=chunk)[42](index=42&type=chunk)[44](index=44&type=chunk) Revenue by Geography and Product (in thousands) | Category | Q1 2020 | Q1 2019 | | :--- | :--- | :--- | | **By Geography** | | | | United States | $13,784 | $20,400 | | International | $18,455 | $15,626 | | **By Product Type** | | | | Products | $26,391 | $30,762 | | Service | $5,848 | $5,264 | | **Total Revenue** | **$32,239** | **$36,026** | - Subsequent to the quarter's end, the company raised approximately **$26.7 million** in net proceeds from a public stock offering and received a **$7.1 million** loan under the Paycheck Protection Program (PPP)[149](index=149&type=chunk)[151](index=151&type=chunk)[152](index=152&type=chunk) - The company maintains a revolving line of credit with Wells Fargo, which was amended to require a minimum cash balance of **$15 million**[141](index=141&type=chunk)[142](index=142&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=34&type=section&id=Item%202%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses the adverse impact of COVID-19 on Q1 2020 results, cost-cutting measures, and subsequent liquidity enhancements [Impact of COVID-19](index=38&type=section&id=Impact%20of%20COVID-19) - The COVID-19 pandemic led to decreasing customer demand starting in the second half of Q1 2020 as customers deferred non-essential procedures[180](index=180&type=chunk) - In response, the company implemented significant cost-reduction measures, including salary cuts and workforce actions affecting approximately **42%** of its employees[188](index=188&type=chunk) - The company received a **$7.1 million** loan under the Paycheck Protection Program (PPP) in April 2020 to support ongoing operations[189](index=189&type=chunk) [Results of Operations](index=41&type=section&id=Results%20of%20Operations) Revenue Analysis (in thousands) | Revenue Category | Q1 2020 | Q1 2019 | % Change | | :--- | :--- | :--- | :--- | | **Total Net Revenue** | **$32,239** | **$36,026** | **(11)%** | | United States | $13,784 | $20,400 | (32)% | | International | $18,455 | $15,626 | 18% | | Total Systems | $20,958 | $27,209 | (23)% | | Consumables | $2,533 | $1,945 | 30% | | Skincare | $2,900 | $1,608 | 80% | | Service | $5,848 | $5,264 | 11% | - The **11%** decrease in total net revenue was primarily caused by a **32%** decline in U.S. revenue due to COVID-19, partially offset by an **18%** increase in international revenue[205](index=205&type=chunk)[206](index=206&type=chunk)[207](index=207&type=chunk) - Gross margin decreased from **48%** to **44%** year-over-year, driven by a decline in the average sales price of systems[214](index=214&type=chunk)[215](index=215&type=chunk) - General and Administrative (G&A) expenses increased by **$2.3 million (41%)** year-over-year, attributed to higher stock compensation, legal, and credit loss expenses[219](index=219&type=chunk) [Liquidity and Capital Resources](index=46&type=section&id=Liquidity%20and%20Capital%20Resources) - As of March 31, 2020, the company had **$19.5 million** in cash, cash equivalents, and marketable investments, a decrease of **$14.4 million** from year-end 2019[226](index=226&type=chunk)[227](index=227&type=chunk) - Subsequent to the quarter's end, the company bolstered its liquidity by raising **$26.7 million** in net proceeds from a public offering and receiving a **$7.1 million** PPP loan[235](index=235&type=chunk)[236](index=236&type=chunk) - The company believes its existing cash and recent financing are sufficient to meet its needs for at least the next 12 months[237](index=237&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=50&type=section&id=Item%203%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company's primary market risks involve interest rate fluctuations and foreign currency exchange rate volatility - A hypothetical **1%** increase in interest rates would have no material impact on its investment portfolio due to its short weighted average maturity[246](index=246&type=chunk)[247](index=247&type=chunk) - The company is exposed to foreign exchange risk as it generates revenue in multiple currencies and does not historically use hedging instruments[252](index=252&type=chunk) [Item 4. Controls and Procedures](index=51&type=section&id=Item%204%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were effective as of March 31, 2020 - The CEO and Interim CFO concluded that the company's disclosure controls and procedures were effective as of the end of the quarter, March 31, 2020[254](index=254&type=chunk) - New controls were implemented for the adoption of FASB ASC 326 for credit losses, with no other material changes to internal controls[256](index=256&type=chunk) PART II OTHER INFORMATION [Item 1. Legal Proceedings](index=51&type=section&id=Item%201%20Legal%20Proceedings) The company is defending an arbitration claim from its former CFO and does not expect a material loss - The company's former CFO filed an arbitration demand against the company in November 2019, which the company intends to defend vigorously[135](index=135&type=chunk) [Item 1A. Risk Factors](index=51&type=section&id=Item%201A%20Risk%20Factors) Key risks include potential ineligibility for its PPP loan and the ongoing adverse business impacts of the COVID-19 pandemic - A significant risk is that the company may be deemed ineligible for the **$7.1 million** PPP loan it received, potentially requiring full repayment and subjecting it to penalties[260](index=260&type=chunk)[261](index=261&type=chunk)[263](index=263&type=chunk) - The COVID-19 pandemic is a major risk, expected to continue reducing customer demand, impacting receivables collection, and disrupting supply chains[265](index=265&type=chunk)[266](index=266&type=chunk)[270](index=270&type=chunk) - Cost-saving measures, including workforce cuts affecting **42%** of employees, could negatively impact employee morale and lead to the loss of key personnel[267](index=267&type=chunk)[268](index=268&type=chunk) [Item 2-5. Other Information](index=53&type=section&id=Item%202%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) No information was reported for Items 2 through 5 for the period - No unregistered sales of equity securities, defaults upon senior securities, mine safety disclosures, or other information were reported for the quarter[274](index=274&type=chunk) [Item 6. Exhibits](index=54&type=section&id=Item%206%20Exhibits) This section lists exhibits filed with the Form 10-Q, including corporate governance documents and required certifications - The report includes standard corporate governance documents and required CEO/CFO certifications as exhibits[275](index=275&type=chunk)

Financial Data and Key Metrics Changes - Total revenue for Q1 2020 was $32 million, a decline of 11% compared to $36 million in the same period last year, primarily due to COVID-19 impacts [36] - US revenues experienced a significant decline of 32%, while international revenue grew by 18% to $18.5 million, driven by efforts to build the international commercial team [36] - Non-GAAP gross profit was $14.8 million with a gross margin of 45.8%, down from 49.1% in the previous year due to lower overhead absorption [38] - Non-GAAP operating income (adjusted EBITDA) was a loss of $8.3 million, compared to a loss of $4.7 million in the same period last year [39] - Cash and equivalents at the end of Q1 2020 were approximately $19.5 million, down from $27 million a year ago [40] Business Line Data and Key Metrics Changes - Global consumable revenue grew 30% year-over-year to $2.5 million, although it was below expectations due to office closures [36] - Service revenue increased by 11% to $5.8 million, attributed to a growing number of systems under extended service contracts [36] - Total recurring revenue, including consumables, service, and skincare categories, grew 28% year-over-year to $11.3 million, representing 30% of total revenue [37] Market Data and Key Metrics Changes - The Asia-Pacific region initially saw a slow decline in business, but the impact escalated as COVID-19 spread, leading to significant disruptions in North America [9][10] - International markets, particularly Japan, showed strong growth in skincare, with nearly 80% growth over 2019 [36] Company Strategy and Development Direction - The company is focused on cost-cutting and cash preservation to extend operational runway during the pandemic [16] - Plans to strengthen the balance sheet include negotiating service contract amendments and deferring non-critical expenses [17][19] - The company aims to maintain its market leadership in body sculpting and continue R&D initiatives for new product launches, including an innovative acne treatment expected in 2021 [21][31] Management's Comments on Operating Environment and Future Outlook - Management acknowledged the unprecedented challenges posed by COVID-19 but expressed confidence in the company's ability to recover and emerge stronger [5][22] - There is an expectation of pent-up demand for aesthetic procedures as practices reopen, with a quicker recovery anticipated for core customers compared to non-core customers [11][14] - The timeline for recovery is fluid and dependent on the lifting of restrictions, but management believes that patient traffic will gradually increase [13][30] Other Important Information - The company ended Q1 2020 with $37 million in inventory and plans to reduce this inventory over the next two to three quarters [42] - An equity offering raised approximately $27 million in net proceeds, and a PPP loan of $7.1 million was received to preserve key positions [43] Q&A Session Summary Question: What could the international segment's growth have been without COVID-19? - Management noted that international performance was strong and investments made in management and structure were paying off, indicating significant growth potential in international markets [47][48] Question: What are the leading indicators in APAC markets? - Management highlighted enthusiasm for body sculpting and the upcoming launch of the flex device in key markets, indicating positive growth prospects [50] Question: How are capital orders being affected? - Management indicated that many capital deals are likely deferred rather than canceled, with ongoing discussions with distributors to facilitate future orders [54][55] Question: What is the revenue outlook for Q2? - Management expressed caution regarding revenue expectations for Q2, noting that April was heavily impacted by shutdowns, but there is optimism for recovery as restrictions ease [60][61] Question: What is the launch strategy for the acne treatment in 2021? - Management emphasized a measured launch strategy focused on building clinical evidence and ensuring robust outcomes, with a target for a successful rollout [66][68]

[Business Overview](index=4&type=section&id=Item%201.%20Business) Cutera, Inc. is a global provider of laser and energy-based aesthetic systems, focusing on product development, market expansion, and recurring revenue generation through direct sales and intellectual property protection, while navigating extensive government regulations [Company Background and Products](index=4&type=section&id=Company%20Background%20and%20Products) Cutera, Inc. provides global laser and energy-based aesthetic systems, offering diverse platforms and new products like truSculpt flex and excel V+, with many generating recurring revenue from consumables - Cutera is a global provider of laser and energy-based aesthetic systems, offering platforms like enlighten, excel HR, truSculpt, excel V, xeo, Juliet, and Secret RF for a wide range of aesthetic treatments[18](index=18&type=chunk) - The company launched several new products recently, including **excel V+ in February 2019** and **truSculpt flex in June 2019**, expanding its offerings in the muscle-sculpting and vascular treatment markets[18](index=18&type=chunk)[21](index=21&type=chunk)[27](index=27&type=chunk) - Several key products are designed to generate **recurring revenue** through consumables. truSculpt flex and truSculpt iD use consumable cycles/hand pieces, while Juliet and Secret RF require disposable tips for each procedure[21](index=21&type=chunk)[22](index=22&type=chunk)[23](index=23&type=chunk)[24](index=24&type=chunk) - In addition to its own manufactured products, Cutera distributes third-party products, including the Juliet laser for women's health and the Secret RF microneedling device, as well as ZO skincare products in Japan[23](index=23&type=chunk)[24](index=24&type=chunk)[29](index=29&type=chunk) [Market Overview and Trends](index=6&type=section&id=The%20Market%20for%20Non-Surgical%20Aesthetic%20Procedures) The global medical aesthetic market, including body contouring and tattoo removal, is projected for significant growth driven by demographic shifts, technological advancements, and increased social acceptance - The global medical aesthetic market is expected to grow at an **11.5% CAGR** from 2019 to reach **$22.2 billion by 2025**. The body contouring market is projected to reach **$1.1 billion by 2022**[31](index=31&type=chunk) - Key market growth drivers include the aging 'baby boomer' demographic, increased safety and efficacy of treatments, expansion of practitioners into non-core specialties, and wider social acceptance of aesthetic procedures[33](index=33&type=chunk) - The tattoo removal market was valued at **$11.6 billion in 2017** and is projected to grow at **12.7% to reach $27.3 billion by 2023**, driven by social and career-related motivations[37](index=37&type=chunk) [Business Strategy](index=11&type=section&id=Business%20Strategy) Cutera's strategy emphasizes expanding product offerings, increasing global revenue, leveraging its installed base through upgrades, and generating recurring revenue from consumables and services - Continuously expand product offerings through internal development (e.g., truSculpt flex, excel V+) and distribution of third-party products (e.g., Juliet, Secret RF)[57](index=57&type=chunk) - Increase revenue by building brand recognition, adding products to international channels, and enhancing the global distribution network[57](index=57&type=chunk) - Leverage the existing installed base by offering upgrades to new platforms and capabilities[59](index=59&type=chunk) - Generate **recurring revenue** from post-warranty services and refillable/consumable products such as Titan, truSculpt iD/flex, Juliet, and Secret RF tips[60](index=60&type=chunk)[61](index=61&type=chunk) [Sales, Marketing, and Competition](index=18&type=section&id=Sales%2C%20Marketing%2C%20and%20Competition) Cutera employs a hybrid sales model and faces intense competition from larger, consolidated rivals in the aesthetic device industry, necessitating product differentiation - The company employs a direct sales and service model in North America, Australia, Japan, and key European markets, complemented by a distributor network in over **40 other countries**[97](index=97&type=chunk) - The aesthetic device industry is intensely competitive, with rivals including Hologic (Cynosure), Allergan (Zeltiq), Bausch Health, InMode, Syneron Candela, and Sciton[101](index=101&type=chunk) - Recent industry consolidation, such as the acquisition of Lumenis by BPEA and Cynosure by Clayton, Dubilier & Rice, has increased competitive pressure[101](index=101&type=chunk) - To compete effectively, Cutera must differentiate its products based on performance, brand, service, and price, as competitors may have greater resources or established relationships[102](index=102&type=chunk) [Manufacturing and Intellectual Property](index=20&type=section&id=Manufacturing%20and%20Intellectual%20Property) Cutera manufactures products in-house and via third parties, protecting its intellectual property through **32 issued U.S. patents** and registered trademarks - Products are assembled and tested at the Brisbane, CA facility and at third-party contract manufacturers, using components and subassemblies from various vendors[108](index=108&type=chunk)[109](index=109&type=chunk) - As of **February 28, 2019**, the company held **32 issued U.S. patents** and had **5 pending U.S. patent applications**[111](index=111&type=chunk) - The company protects its brand through registered trademarks, including Cutera, CoolGlide, enlighten, truSculpt, and xeo[112](index=112&type=chunk) [Government Regulation](index=21&type=section&id=Government%20Regulation) Cutera's medical devices are extensively regulated by the FDA (Class II, 510(k)) and international bodies (CE mark, ISO 13485, MDSAP), also adhering to anti-corruption and data privacy laws - In the U.S., Cutera's products are regulated as **Class II medical devices** by the FDA and require **510(k) pre-market clearance**. The company has obtained numerous 510(k) clearances for its products and various indications[115](index=115&type=chunk)[119](index=119&type=chunk)[120](index=120&type=chunk) - The company's manufacturing facility is **ISO 13485 certified** and participates in the Medical Device Single Audit Program (MDSAP), which helps establish compliance in the U.S., Canada, Australia, Japan, and Brazil[125](index=125&type=chunk)[136](index=136&type=chunk) - For sales in the European Economic Area (EEA), the company complies with directives to bear the **CE mark**, indicating conformity for commercial distribution[135](index=135&type=chunk) - The company is subject to global anti-corruption laws like the U.S. FCPA and the UK Bribery Act, as well as data privacy laws such as HIPAA in the U.S. and GDPR in the EU[138](index=138&type=chunk)[139](index=139&type=chunk)[140](index=140&type=chunk)[141](index=141&type=chunk) [Employees](index=28&type=section&id=Employees) Cutera's employee headcount increased to **447** by December 31, 2019, with no union representation and good employee relations - Employee headcount increased from **387 at the end of 2018 to 447 as of December 31, 2019**[144](index=144&type=chunk) [Risk Factors](index=28&type=section&id=Item%201A.%20Risk%20Factors) Cutera faces significant risks including operational fluctuations, product defects, sales force turnover, management changes, intense market competition, financial instability, and extensive regulatory and legal challenges [Business and Operational Risks](index=28&type=section&id=Business%20and%20Operational%20Risks) Cutera faces operational risks from fluctuating results, product defects, sales force turnover, executive changes, cybersecurity threats, ERP system implementation, and pandemic disruptions - Annual and quarterly operating results may fluctuate significantly due to factors like sales force effectiveness, new product success, and competition[147](index=147&type=chunk) - The company experienced significant turnover in its sales professionals in **Q1 2020**, with many joining a competitor, which may negatively impact sales performance[159](index=159&type=chunk)[182](index=182&type=chunk) - Recent management changes, including the hiring of a new CEO and the resignation of the CFO, may cause business disruption and uncertainty[173](index=173&type=chunk)[174](index=174&type=chunk)[175](index=175&type=chunk) - The company is implementing a new ERP system, which carries inherent risks of data conversion errors and system failures that could impact timely and accurate financial reporting[196](index=196&type=chunk)[197](index=197&type=chunk) - The coronavirus pandemic poses a risk of business interruption and operational delays due to travel bans and other containment measures[153](index=153&type=chunk)[203](index=203&type=chunk) [Market and Competition Risks](index=31&type=section&id=Market%20and%20Competition%20Risks) Cutera faces intense market competition from larger, consolidated rivals in a rapidly innovating industry, with demand sensitive to consumer spending on elective procedures - The aesthetic equipment market is characterized by rapid innovation, requiring continuous development of new products to avoid obsolescence[163](index=163&type=chunk)[164](index=164&type=chunk)[170](index=170&type=chunk) - The company competes with companies that have greater resources, larger installed bases, and broader product offerings. Recent industry consolidation (e.g., Allergan/Zeltiq, Hologic/Cynosure) has increased competition[234](index=234&type=chunk)[238](index=238&type=chunk) - Demand for products is tied to consumer demand for elective procedures, which are not typically reimbursed by insurance and are sensitive to consumer disposable income[240](index=240&type=chunk)[241](index=241&type=chunk) [Financial and Economic Risks](index=36&type=section&id=Financial%20and%20Economic%20Risks) Cutera faces financial risks from credit access limitations, international operations (currency, trade barriers, geopolitical instability), stock price volatility, and customer credit defaults - The company amended its revolving line of credit with Wells Fargo after violating financial covenants in **2018**. The current agreement requires maintaining a **$15 million cash balance** at Wells Fargo and removes other covenants as long as no money is drawn[190](index=190&type=chunk)[193](index=193&type=chunk) - International revenue was **42% of total revenue in 2019**, exposing the company to risks such as currency fluctuations, trade barriers, and political instability (e.g., Brexit)[212](index=212&type=chunk)[216](index=216&type=chunk)[218](index=218&type=chunk) - The company's common stock price has been volatile, and failure to meet financial guidance could cause the price to decline further[205](index=205&type=chunk)[209](index=209&type=chunk)[210](index=210&type=chunk) [Regulatory and Legal Risks](index=45&type=section&id=Regulatory%20and%20Legal%20Risks) Cutera faces significant regulatory and legal risks from FDA non-compliance, product liability lawsuits, intellectual property disputes, and adherence to anti-bribery and data privacy laws - Failure to comply with extensive FDA and international regulations can lead to sanctions, recalls, or production shutdowns[243](index=243&type=chunk)[244](index=244&type=chunk) - A **July 2018 FDA communication** concerning "vaginal rejuvenation" procedures has led to a significant slowdown in sales of the company's Juliet device[248](index=248&type=chunk)[249](index=249&type=chunk) - The company faces risks of product liability suits, which could be expensive and time-consuming, and may arise from product misuse, particularly by non-physicians[264](index=264&type=chunk)[265](index=265&type=chunk)[269](index=269&type=chunk) - The company is involved in litigation, including a lawsuit filed in **January 2020** against a competitor (Lutronic) and former employees for misappropriation of trade secrets[207](index=207&type=chunk)[735](index=735&type=chunk) [Properties](index=54&type=section&id=Item%202.%20Properties) Cutera's primary corporate office is a 66,000 sq. ft. leased facility in Brisbane, California, supplemented by international leased offices in Japan, France, Spain, and Belgium [Properties](index=54&type=section&id=Item%202.%20Properties_summary) Cutera's main corporate office is a **66,000 sq. ft.** leased facility in Brisbane, CA, complemented by international leased offices in Japan, France, Spain, and Belgium - The main corporate office is a **66,000 sq. ft.** leased facility in Brisbane, CA, with the lease term extending to **January 31, 2023**[309](index=309&type=chunk) - The company also leases office space internationally in Japan, France, Spain, and Belgium[310](index=310&type=chunk)[312](index=312&type=chunk) [Selected Financial Data](index=58&type=section&id=Item%206.%20Selected%20Financial%20Data) Cutera's net revenue grew to **$181.7 million** in 2019, but the company reported net losses in 2018 and 2019, with comparability limited by new accounting standard adoptions [Selected Financial Data](index=58&type=section&id=Item%206.%20Selected%20Financial%20Data_summary) Cutera's net revenue reached **$181.7 million** in 2019, but it incurred net losses in 2018 and 2019, with financial comparability affected by new accounting standards Selected Financial Data (2015-2019) | (in thousands, except per share data) | 2019 | 2018 | 2017 | 2016 | 2015 | | :--- | :--- | :--- | :--- | :--- | :--- | | **Statements of Operations Data** | | | | | | | Net revenue | $181,712 | $162,720 | $151,493 | $118,056 | $94,761 | | Gross profit | $98,163 | $80,382 | $86,110 | $68,135 | $54,283 | | Income (loss) from operations | $(12,064) | $(13,392) | $11,076 | $(2,397) | $(4,521) | | Net income (loss) | $(12,348) | $(30,770) | $29,993 | $(2,557) | $(4,440) | | Diluted net income (loss) per share | $(0.88) | $(2.23) | $2.04 | $(0.19) | $(0.32) | | **Balance Sheet Data (End of Period)** | | | | | | | Total assets | $113,738 | $97,637 | $111,238 | $91,854 | $77,518 | | Total stockholders' equity | $45,942 | $46,386 | $64,893 | $61,010 | $50,034 | - Financial results for **2018 and 2019** reflect the adoption of **ASC 606 (Revenue)**, and **2019** results also reflect the adoption of **ASC 842 (Leases)**, which limits comparability with prior years[333](index=333&type=chunk)[334](index=334&type=chunk) [Management's Discussion and Analysis (MD&A)](index=59&type=section&id=Item%207.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section details Cutera's financial performance, liquidity, and critical accounting policies, highlighting revenue growth, improved gross margin, increased operating expenses, and a net loss, alongside cash flow and debt facility information [Results of Operations](index=69&type=section&id=Results%20of%20Operations) In 2019, Cutera's net revenue grew **12% to $181.7 million**, with improved gross margin but increased operating expenses, resulting in a **$12.3 million net loss** Revenue by Geography and Product (2019 vs 2018) | (in thousands) | 2019 | 2018 | % Change | | :--- | :--- | :--- | :--- | | **Revenue by Geography** | | | | | United States | $106,243 | $101,862 | 4% | | International | $75,469 | $60,858 | 24% | | **Total Revenue** | **$181,712** | **$162,720** | **12%** | | **Revenue by Product** | | | | | Systems | $140,478 | $132,595 | 6% | | Consumables | $9,648 | $4,162 | 132% | | Skincare | $8,512 | $5,778 | 47% | | Service | $23,074 | $20,185 | 14% | - Gross profit as a percentage of revenue increased to **54% in 2019 from 49% in 2018**. The 2018 figure was negatively impacted by a **$5.0 million product remediation charge**[420](index=420&type=chunk)[423](index=423&type=chunk)[424](index=424&type=chunk) - Sales and marketing expenses increased by **$12.7 million (22%) in 2019**, primarily due to a **$6.4 million increase in labor costs** from increased headcount and higher promotional expenses[426](index=426&type=chunk)[428](index=428&type=chunk) - General and administrative expenses increased by **$3.0 million (14%) in 2019**, driven by higher personnel costs, professional fees for the ERP system implementation, and executive severance costs[431](index=431&type=chunk) - The company reported a net loss of **$12.3 million in 2019**, compared to a net loss of **$30.8 million in 2018**. The 2018 loss was significantly impacted by a **$17.3 million income tax provision**, largely due to a valuation allowance on deferred tax assets[497](index=497&type=chunk)[435](index=435&type=chunk) [Liquidity and Capital Resources](index=74&type=section&id=Liquidity%20and%20Capital%20Resources) As of December 31, 2019, Cutera held **$33.9 million** in cash, with **$2.2 million** net cash used in operations, and an amended Wells Fargo credit line requiring a **$15 million** minimum cash balance - Cash, cash equivalents, and marketable investments totaled **$33.9 million at December 31, 2019**, down from **$35.6 million at the end of 2018**[437](index=437&type=chunk)[440](index=440&type=chunk) Consolidated Cash Flow Data (in thousands) | Cash flows provided by (used in): | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Operating activities | $(2,217) | $307 | $14,287 | | Investing activities | $1,067 | $10,773 | $17,694 | | Financing activities | $1,414 | $788 | $(31,572) | - The company has a revolving line of credit with Wells Fargo, amended in **March 2019**. It requires a minimum cash balance of **$15 million** at Wells Fargo but removes other covenants so long as no money is drawn. No funds were drawn as of **Dec 31, 2019**[459](index=459&type=chunk)[461](index=461&type=chunk)[728](index=728&type=chunk) Contractual Obligations as of Dec 31, 2019 (in thousands) | Contractual Obligations | Total | Less Than 1 Year | 1-3 Years | 3-5 Years | More Than 5 Years | | :--- | :--- | :--- | :--- | :--- | :--- | | Operating leases | $8,654 | $2,868 | $5,760 | $26 | $ - | | Finance leases | $1,212 | $543 | $669 | $ - | $ - | | **Total leases** | **$9,866** | **$3,411** | **$6,429** | **$26** | **$ -** | [Critical Accounting Policies and Estimates](index=61&type=section&id=Critical%20accounting%20policies%2C%20significant%20judgments%20and%20use%20of%20estimates) Cutera's critical accounting policies involve significant judgment in revenue recognition (ASC 606), inventory and goodwill valuation, lease accounting (ASC 842), stock-based compensation, and income tax provisions - **Revenue Recognition:** Requires judgment in identifying distinct performance obligations, estimating variable consideration, and determining standalone selling prices (SSPs) for bundled products and services[351](index=351&type=chunk)[353](index=353&type=chunk)[355](index=355&type=chunk) - **Valuation of Inventories:** Stated at the lower of cost or net realizable value. The company provides for excess and obsolete inventories based on assumptions about future demand and market conditions[369](index=369&type=chunk)[370](index=370&type=chunk) - **Stock-based Compensation:** Uses the Black-Scholes model for options, which requires subjective inputs like expected volatility and term. The fair value of PSUs is based on achieving performance goals[374](index=374&type=chunk)[375](index=375&type=chunk)[382](index=382&type=chunk) - **Income Taxes:** Involves assessing the need for a valuation allowance against deferred tax assets and establishing reserves for uncertain tax positions[388](index=388&type=chunk)[389](index=389&type=chunk)[390](index=390&type=chunk) [Financial Statements and Supplementary Data](index=82&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This section presents Cutera's consolidated financial statements, including balance sheets, income statements, and detailed notes on accounting policies, equity, income taxes, commitments, and subsequent events [Consolidated Financial Statements](index=85&type=section&id=Consolidated%20Financial%20Statements) As of December 31, 2019, Cutera reported **$113.7 million** in total assets, **$181.7 million** in net revenue, and a **$12.3 million net loss**, reducing accumulated deficit to **($36.4) million** Consolidated Balance Sheet Highlights (as of Dec 31, 2019) | (in thousands) | 2019 | 2018 | | :--- | :--- | :--- | | Cash and cash equivalents | $26,316 | $26,052 | | Total current assets | $95,046 | $87,198 | | **Total assets** | **$113,738** | **$97,637** | | Total current liabilities | $58,622 | $47,620 | | **Total liabilities** | **$67,796** | **$51,251** | | **Total stockholders' equity** | **$45,942** | **$46,386** | Consolidated Statement of Operations Highlights (Year ended Dec 31) | (in thousands, except per share data) | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Total net revenue | $181,712 | $162,720 | $151,493 | | Gross profit | $98,163 | $80,382 | $86,110 | | Income (loss) from operations | $(12,064) | $(13,392) | $11,076 | | **Net income (loss)** | **$(12,348)** | **$(30,770)** | **$29,993** | | **Diluted net income (loss) per share** | **$(0.88)** | **$(2.23)** | **$2.04** | [Notes to Consolidated Financial Statements](index=90&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) These notes detail Cutera's accounting policies, including ASC 606 and ASC 842 adoption, stock-based compensation, income taxes, lease commitments, and a subsequent lawsuit [Note 1: Summary of Significant Accounting Policies](index=90&type=section&id=Note%201%3A%20Summary%20of%20Significant%20Accounting%20Policies) This note outlines Cutera's significant accounting policies, including the adoption of **ASC 606** (revenue) and **ASC 842** (leases), and details on revenue recognition, inventory, goodwill, and stock compensation - Adopted **ASC Topic 606 (Revenue)** on **Jan 1, 2018**, using the modified retrospective method, resulting in a cumulative catch-up adjustment increasing retained earnings by **$3.8 million**[518](index=518&type=chunk)[519](index=519&type=chunk) - Adopted **ASC Topic 842 (Leases)** on **Jan 1, 2019**, resulting in the recognition of operating lease ROU assets of **$10.2 million** and lease liabilities of **$10.1 million** on the balance sheet[528](index=528&type=chunk)[529](index=529&type=chunk)[530](index=530&type=chunk) - Incremental costs of obtaining a contract (sales commissions) are capitalized and amortized over an estimated benefit period of **2.5 years**. Capitalized costs were **$4.6 million in 2019**[521](index=521&type=chunk)[575](index=575&type=chunk)[576](index=576&type=chunk) [Note 6: Stockholders’ Equity, Stock Plans and Stock-Based Compensation Expense](index=117&type=section&id=Note%206%3A%20Stockholders%E2%80%99%20Equity%2C%20Stock%20Plans%20and%20Stock-Based%20Compensation%20Expense) Stockholders approved the 2019 Equity Incentive Plan, leading to **$9.8 million** in stock-based compensation expense in 2019, with **$12.2 million** unrecognized compensation cost remaining - Stockholders approved the **2019 Equity Incentive Plan**, increasing shares available for grant by **700,000**[656](index=656&type=chunk) Stock-Based Compensation Expense (in thousands) | Expense Category | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Cost of revenue | $1,572 | $743 | $660 | | Sales and marketing | $4,510 | $2,105 | $1,642 | | Research and development | $1,536 | $824 | $936 | | General and administrative | $2,214 | $3,485 | $1,872 | | **Total** | **$9,832** | **$7,157** | **$5,110** | - A modification to outstanding PSU grants in **September 2019** resulted in an additional **$1.0 million** of stock-based compensation expense recognized during the year[663](index=663&type=chunk) - As of **Dec 31, 2019**, **$12.2 million** of unrecognized compensation cost related to stock awards is expected to be recognized over a weighted-average period of **2.64 years**[674](index=674&type=chunk) [Note 7: Income Taxes](index=126&type=section&id=Note%207%3A%20Income%20Taxes) Cutera recorded a minimal income tax provision in 2019, with a **$32.4 million** valuation allowance against deferred tax assets and significant federal and state NOL carryforwards - As of **December 31, 2019**, the company has a valuation allowance of **$32.4 million** against its deferred tax assets, an increase of **$4.5 million from 2018**[687](index=687&type=chunk) - The company possesses federal net operating loss (NOL) carryforwards of **$60.1 million** and state NOLs of **$31.3 million**[688](index=688&type=chunk) - Gross unrecognized tax benefits were **$1.4 million as of December 31, 2019**[694](index=694&type=chunk) [Note 11: Commitments and Contingencies](index=132&type=section&id=Note%2011%3A%20Commitments%20and%20Contingencies) Cutera has **$9.9 million** in lease commitments and is involved in legal proceedings, including an arbitration demand from its former CFO, not expected to be material Maturities of Lease Liabilities as of Dec 31, 2019 (in thousands) | Year | Operating Leases | Finance Leases | | :--- | :--- | :--- | | 2020 | $2,868 | $543 | | 2021 | $2,613 | $412 | | 2022 | $2,821 | $253 | | 2023 | $326 | $4 | | 2024 | $26 | - | | **Total Payments** | **$8,654** | **$1,212** | - In **November 2019**, former CFO Sandra A. Gardiner filed an arbitration demand against the company regarding her employment and resignation. The company intends to defend the matter vigorously and does not expect the outcome to be material[721](index=721&type=chunk) [Note 14: Subsequent Events](index=137&type=section&id=Note%2014%3A%20Subsequent%20Events) On **January 31, 2020**, Cutera filed a lawsuit against Lutronic Aesthetics, Inc. and former employees for misappropriation of trade secrets and other violations - On **January 31, 2020**, the company filed a lawsuit against competitor Lutronic Aesthetics, Inc. and former employees alleging misappropriation of trade secrets and other violations[735](index=735&type=chunk) [Controls and Procedures](index=140&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management and independent auditors concluded that Cutera's disclosure controls and internal control over financial reporting were effective as of December 31, 2019 [Controls and Procedures](index=140&type=section&id=Item%209A.%20Controls%20and%20Procedures_summary) Management and independent auditors confirmed the effectiveness of Cutera's disclosure controls and internal control over financial reporting as of **December 31, 2019** - Management concluded that the company's disclosure controls and procedures were effective as of **December 31, 2019**[744](index=744&type=chunk) - Management's assessment concluded that the company's internal control over financial reporting was effective as of **December 31, 2019**, based on the COSO framework[748](index=748&type=chunk) - The independent auditor, BDO USA, LLP, provided an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of **December 31, 2019**[486](index=486&type=chunk)[749](index=749&type=chunk)

Cutera, Inc. (NASDAQ:CUTR) Q4 2019 Earnings Conference Call February 26, 2020 4:30 PM ET Company Participants Dave Mowry – Chief Executive Officer Jason Richey – President Fuad Ahmad – Interim Chief Financial Officer Conference Call Participants Jon Block – Stifel Anthony Vendetti – Maxim Group Operator Thank you for joining Cutera’s Fourth Quarter and Full Year 2019 Earnings Conference Call. After the prepared remarks, there will be a question-and-answer session. The discussion today includes forward-looki ...

[PART I FINANCIAL INFORMATION](index=4&type=section&id=PART%20I%20FINANCIAL%20INFORMATION) [Item 1. Financial Statements (unaudited)](index=4&type=section&id=Item%201%20Financial%20Statements%20(unaudited)) The company presents its unaudited condensed consolidated financial statements as of September 30, 2019 [Condensed Consolidated Balance Sheets](index=4&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) Balance Sheet Summary (in thousands) | Balance Sheet Items | Sep 30, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | **Total Assets** | **$111,236** | **$97,637** | | Total Current Assets | $91,925 | $87,198 | | **Total Liabilities** | **$67,246** | **$51,251** | | Total Current Liabilities | $55,266 | $47,620 | | **Total Stockholders' Equity** | **$43,990** | **$46,386** | - Total assets increased to **$111.2 million**, driven by the adoption of the new lease standard which added **$8.3 million** in operating lease assets[12](index=12&type=chunk) - Total liabilities increased significantly to **$67.2 million**, mainly due to recognizing **$8.5 million** in operating lease liabilities upon adopting ASC 842[12](index=12&type=chunk) [Condensed Consolidated Statements of Operations](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) Statement of Operations Summary (in thousands, except per share data) | Metric | Q3 2019 | Q3 2018 | YTD 2019 | YTD 2018 | | :--- | :--- | :--- | :--- | :--- | | **Total Net Revenue** | **$46,117** | **$40,573** | **$129,917** | **$117,251** | | Gross Profit | $26,233 | $21,885 | $69,373 | $61,596 | | Loss from Operations | ($2,409) | ($998) | ($10,135) | ($7,902) | | **Net Loss** | **($2,628)** | **($873)** | **($10,260)** | **($4,477)** | | Net Loss Per Share (Basic & Diluted) | ($0.19) | ($0.06) | ($0.73) | ($0.33) | - Total net revenue grew **13.7% YoY** for the third quarter and **10.8%** for the nine months ended September 30, 2019[18](index=18&type=chunk) - Operating expenses increased faster than revenue, leading to a wider loss from operations, which grew from **($1.0) million** in Q3 2018 to **($2.4) million** in Q3 2019[18](index=18&type=chunk) [Condensed Consolidated Statements of Cash Flows](index=10&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Cash Flow Summary for Nine Months Ended Sep 30 (in thousands) | Cash Flow Category | 2019 | 2018 | | :--- | :--- | :--- | | Net cash used in operating activities | ($6,194) | ($8,119) | | Net cash provided by investing activities | $2,667 | $15,531 | | Net cash provided by financing activities | $354 | $270 | | **Net (decrease) increase in cash** | **($3,173)** | **$7,682** | - Cash used in operations for the first nine months of 2019 improved to **$6.2 million** from **$8.1 million** used in the same period of 2018[34](index=34&type=chunk) - Investing activities provided **$2.7 million** in cash, a significant decrease from **$15.5 million** in the prior year, due to lower proceeds from marketable investments[34](index=34&type=chunk) [Notes to Condensed Consolidated Financial Statements](index=11&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) Revenue by Geography - Nine Months Ended Sep 30 (in thousands) | Region | 2019 | 2018 | | :--- | :--- | :--- | | United States | $74,972 | $73,597 | | Japan | $18,142 | $12,522 | | Asia, excluding Japan | $11,396 | $11,422 | | Europe | $7,147 | $6,729 | | Rest of the world | $18,260 | $12,981 | | **Total** | **$129,917** | **$117,251** | - The company adopted the new lease accounting standard (ASC Topic 842), recognizing **$10.3 million** in lease assets and **$10.4 million** in lease liabilities[48](index=48&type=chunk) - As of September 30, 2019, the company had not drawn on its revolving line of credit and was in compliance with all financial covenants[135](index=135&type=chunk) - A subsequent event noted was the resignation of the CFO and a related Demand for Arbitration she filed[141](index=141&type=chunk)[142](index=142&type=chunk)[143](index=143&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=35&type=section&id=Item%202%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses financial results, highlighting revenue growth driven by international sales and new products [Results of Operations](index=41&type=section&id=Results%20of%20Operations) Total Net Revenue Breakdown (in thousands) | Category | Q3 2019 | Q3 2018 | % Change | YTD 2019 | YTD 2018 | % Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | **United States** | **$26,425** | **$24,329** | **9%** | **$74,972** | **$73,597** | **2%** | | **International** | **$19,692** | **$16,244** | **21%** | **$54,945** | **$43,654** | **26%** | | **Total Revenue** | **$46,117** | **$40,573** | **14%** | **$129,917** | **$117,251** | **11%** | Revenue by Product Category (in thousands) | Category | Q3 2019 | Q3 2018 | % Change | YTD 2019 | YTD 2018 | % Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Total Systems | $34,958 | $33,197 | 5% | $99,706 | $95,727 | 4% | | Consumables | $2,510 | $1,055 | 138% | $7,109 | $2,881 | 147% | | Skincare | $2,847 | $1,423 | 100% | $6,230 | $3,981 | 56% | | Service | $5,802 | $4,898 | 18% | $16,872 | $14,662 | 15% | - Gross margin for Q3 2019 increased to **57%** from **54%** in Q3 2018, driven by new products and strong growth in consumables and skincare[192](index=192&type=chunk)[193](index=193&type=chunk) - Sales and marketing expenses for Q3 2019 rose **22% YoY** to **$17.7 million**, due to increased headcount and costs for a new CRM system[194](index=194&type=chunk)[195](index=195&type=chunk) - General and administrative expenses for Q3 2019 increased **42% YoY** to **$7.3 million**, driven by higher personnel costs and fees for a new ERP system[200](index=200&type=chunk) [Liquidity and Capital Resources](index=47&type=section&id=Liquidity%20and%20Capital%20Resources) Cash and Investments (in thousands) | Category | Sep 30, 2019 | Dec 31, 2018 | Change | | :--- | :--- | :--- | :--- | | Cash and cash equivalents | $22,879 | $26,052 | ($3,173) | | Marketable investments | $6,448 | $9,523 | ($3,075) | | **Total** | **$29,327** | **$35,575** | **($6,248)** | - As of September 30, 2019, the company had working capital of **$36.7 million**, down from **$39.6 million** at year-end 2018[208](index=208&type=chunk) - The company has a revolving line of credit requiring a minimum cash balance of **$15 million**, with no funds drawn as of September 30, 2019[223](index=223&type=chunk)[224](index=224&type=chunk)[226](index=226&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=50&type=section&id=Item%203%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company's primary market risks include interest rate fluctuations, inflation, and foreign exchange fluctuations - The company's primary market risks are interest rate changes on its investment portfolio, inflation, and foreign currency exchange rate fluctuations[229](index=229&type=chunk) - The investment portfolio consists of high-quality securities with a short weighted average maturity of approximately **0.3 years**, minimizing interest rate risk[230](index=230&type=chunk) - The company does not actively hedge foreign currency exposure, relying on local currency operating expenses to provide a natural hedge[234](index=234&type=chunk)[235](index=235&type=chunk) [Item 4. Controls and Procedures](index=50&type=section&id=Item%204%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were effective with no material changes to internal controls - Based on an evaluation as of September 30, 2019, the CEO and CFO concluded that the company's disclosure controls and procedures were effective[236](index=236&type=chunk) - There were no changes in the company's internal control over financial reporting during the third quarter of 2019 that have materially affected internal controls[238](index=238&type=chunk) [PART II OTHER INFORMATION](index=53&type=section&id=PART%20II%20OTHER%20INFORMATION) [Item 1. Legal Proceedings](index=53&type=section&id=Item%201%20Legal%20Proceedings) The company refers to its 2018 Annual Report on Form 10-K for details on material pending legal matters - For details on material pending legal proceedings, the report refers to the company's Annual Report on Form 10-K for the year ended December 31, 2018[242](index=242&type=chunk) [Item 1A. Risk Factors](index=53&type=section&id=Item%201A%20Risk%20Factors) No material changes were reported to the risk factors previously disclosed in the 2018 Annual Report - There are no material changes from the Risk Factors previously disclosed in the company's 2018 Annual Report on Form 10-K[243](index=243&type=chunk) [Other Items (2, 3, 4, 5)](index=53&type=section&id=Other%20Items%20(2,%203,%204,%205)) The company reports no activity for unregistered sales of equity, defaults, mine safety, or other information - The company reported no activity under Unregistered Sales of Equity Securities, Defaults Upon Senior Securities, Mine Safety Disclosures, or Other Information[244](index=244&type=chunk)[245](index=245&type=chunk)[246](index=246&type=chunk)[247](index=247&type=chunk) [Item 6. Exhibits](index=54&type=section&id=Item%206%20Exhibits) This section lists filed exhibits, including corporate governance documents, certifications, and XBRL data files - Exhibits filed with the report include corporate governance documents, CEO/CFO certifications (Sections 302 and 906), and interactive data files (XBRL)[249](index=249&type=chunk)[253](index=253&type=chunk)[254](index=254&type=chunk)[255](index=255&type=chunk)

Financial Data and Key Metrics Changes - Third quarter revenue was $46.1 million, up 14% year-over-year [19] - U.S. revenue grew 9% year-over-year, driven by share gains in the truSculpt body sculpting portfolio [19] - Recurring revenue, defined as consumable, service, and skin care revenue, grew 51% year-over-year and accounted for approximately 24% of total revenue, up from 18% in the prior year [19] - Non-GAAP gross margin was 58%, approximately 350 basis points higher than the previous year [21] - Non-GAAP operating income was $2.4 million, compared to $1.4 million in the same period of 2018 [23] - Non-GAAP net income for the third quarter was approximately $2.2 million or $0.15 per fully diluted share [24] Business Line Data and Key Metrics Changes - Total truSculpt revenue grew 43% year-over-year, driven by the launch of truSculpt flex [12][19] - truSculpt procedure-related revenue grew triple digits year-over-year [13] - Approximately 18% of the current active installed base generates consumable revenues, up from 13% at the end of 2018 [14] Market Data and Key Metrics Changes - International revenue grew 21% compared to the third quarter of 2018, with significant growth in Japan and Australia [20] - Direct sales efforts accounted for 55% of international product revenue in the third quarter, compared to 45% in the second quarter [20] Company Strategy and Development Direction - The company aims to establish itself as a leader in the energy-based aesthetics market by providing innovative technologies and superior support [8] - Key initiatives include driving performance in the body sculpting portfolio, expanding recurring revenue, and reducing material costs [9][10] - The company raised its 2019 financial guidance to $177 million to $179 million, reflecting ongoing momentum [10][26] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the sustainability of current performance and the cumulative impact of previous execution [10] - The company is focused on executing commercial and operational initiatives to drive growth [26] - Management acknowledged the importance of recurring revenue streams to mitigate economic cycles [35] Other Important Information - The CFO, Sandy Gardiner, announced her departure for personal reasons, and the company expressed gratitude for her contributions [28] Q&A Session Summary Question: Plans for the continued rollout of truSculpt flex in the U.S. - The company is in full market release within North America and plans to roll out flex to Europe, Australia, New Zealand, and the Middle East in the first half of 2020 [32] Question: Progress on recurring revenue as a percentage of total sales - Management expects continued momentum in recurring revenue streams, particularly from consumable products [34] Question: Long-term gross margin expectations - Management aims for long-term gross margins to reach the low to mid-60s, though this will take time [39] Question: Consumer interest in truSculpt iD and flex - The company is seeing interest from both existing customers and new customers, with many adopting flex as a complement to existing fat reduction technologies [42] Question: Fourth quarter guidance and inventory increase - Management is being cautious with fourth quarter guidance due to the timing of product launches and capital sales [46]

Financial Data and Key Metrics Changes - Total revenue for Q2 2019 was $47.8 million, representing a 12% increase year-over-year, marking the highest quarterly revenue in the company's history [15][9] - Non-GAAP gross margin improved to 55%, up approximately 190 basis points from the previous year, driven by revenue growth and improved pricing discipline [19][22] - Non-GAAP net income for Q2 2019 was approximately $4.4 million, or $0.31 per fully diluted share, compared to $800,000 in the same period in 2018 [22] Business Line Data and Key Metrics Changes - truSculpt product portfolio generated 44% worldwide revenue growth in Q2 2019, with truSculpt procedure-related revenue growing triple digits year-over-year [16][10] - Recurring revenue, defined as consumable, service, and skincare revenue, grew 41% over Q2 2018, accounting for approximately 21% of total revenue, up from 17% in the prior year [17][22] - U.S. revenue remained flat year-over-year, with strong demand for truSculpt and Secret RF systems offset by decreased contributions from the Juliet system [16] Market Data and Key Metrics Changes - International revenue grew 36% compared to Q2 2018, with significant growth in Japan, Europe, and Australia [15][12] - Direct sales efforts accounted for 45% of second-quarter international product revenue, up from 35% in the previous year [15] Company Strategy and Development Direction - The company is focused on executing commercial and operational initiatives, with a commitment to improving its positioning in key international markets [12][25] - The introduction of truSculpt flex is seen as a strategic move to enhance the body sculpting portfolio and penetrate competitive accounts [37][29] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the company's performance but emphasized the need for prudence in raising guidance due to the new CEO's recent onboarding and the need to build credibility [43][44] - The company remains focused on executing its initiatives and is optimistic about the potential of the truSculpt flex product [40][29] Other Important Information - Cash generated by operations was $4 million for Q2 2019, reflecting improved credit and collection policies [24] - The company reiterated its 2019 financial guidance, expecting total revenue in the range of $165 million to $175 million, representing a 2% to 8% increase over 2018 [25] Q&A Session Summary Question: Growth in consumables and recurring revenue - Management highlighted that all elements of recurring revenue contributed to gross margin accretion, with consumable revenue showing 150% growth year-over-year [34][35] Question: Rollout of truSculpt portfolio - Management indicated that truSculpt flex is positioned to enhance the existing portfolio, with opportunities for bundling with truSculpt iD [46][37] Question: Guidance for the second half of the year - Management stated that while there are positive indicators, they need time to build credibility and ensure effective execution before raising guidance [43][44]

PART I FINANCIAL INFORMATION [Financial Statements (Unaudited)](index=4&type=section&id=ITEM%201.%20FINANCIAL%20STATEMENTS%20(UNAUDITED)) Unaudited Q2 2019 financials reflect net income turnaround, six-month net loss widening, and improved operating cash flow [Condensed Consolidated Balance Sheets](index=4&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) Total assets and liabilities increased due to new lease standard adoption, while stockholders' equity decreased from net loss Condensed Consolidated Balance Sheet Highlights (in thousands) | Balance Sheet Item | June 30, 2019 | December 31, 2018 | | :--- | :--- | :--- | | **Total Assets** | **$107,946** | **$97,637** | | Total current assets | $88,014 | $87,198 | | Operating lease right-of-use assets | $8,990 | $— | | **Total Liabilities** | **$64,764** | **$51,251** | | Total current liabilities | $52,859 | $47,620 | | Operating lease liabilities, non-current | $7,888 | $— | | **Total Stockholders' Equity** | **$43,182** | **$46,386** | - The adoption of the new lease standard (ASC Topic 842) on January 1, 2019, resulted in the initial recording of operating lease right-of-use assets of **$10.3 million** and lease liabilities of **$10.4 million**[53](index=53&type=chunk) [Condensed Consolidated Statements of Operations](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) Q2 2019 saw 12.3% revenue growth and net income, while six-month revenue grew 9.3% but net loss widened Key Operating Results (in thousands, except per share data) | Metric | Q2 2019 | Q2 2018 | 6 Months 2019 | 6 Months 2018 | | :--- | :--- | :--- | :--- | :--- | | **Total Net Revenue** | **$47,774** | **$42,553** | **$83,800** | **$76,678** | | Gross Profit | $25,831 | $22,377 | $43,140 | $39,711 | | Income (Loss) from Operations | $299 | $(2,155) | $(7,727) | $(6,904) | | **Net Income (Loss)** | **$588** | **$(1,572)** | **$(7,632)** | **$(3,604)** | | Diluted EPS | $0.04 | $(0.11) | $(0.54) | $(0.26) | [Condensed Consolidated Statements of Cash Flows](index=10&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Operating cash use improved, investing activities provided cash, increasing cash and equivalents by **$1.6 million** Cash Flow Summary for Six Months Ended June 30 (in thousands) | Cash Flow Activity | 2019 | 2018 | | :--- | :--- | :--- | | Net cash used in operating activities | $(3,919) | $(6,503) | | Net cash provided by investing activities | $5,284 | $10,611 | | Net cash provided by financing activities | $251 | $140 | | **Net increase in cash and cash equivalents** | **$1,616** | **$4,248** | | Cash and cash equivalents at end of period | $27,668 | $18,432 | [Notes to Condensed Consolidated Financial Statements](index=11&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) Notes detail accounting policies, revenue disaggregation, lease standard impact, credit amendments, and CEO appointment - The company's revenue is categorized into "Products" (Systems, Consumables, Skincare) and "Service" (post-warranty contracts, repairs)[41](index=41&type=chunk) - The company adopted new lease standard ASU 2016-02 on January 1, 2019, resulting in the recognition of **$10.3 million** in lease assets and **$10.4 million** in lease liabilities[53](index=53&type=chunk) Revenue by Product Category - Six Months Ended June 30 (in thousands) | Category | 2019 | 2018 | | :--- | :--- | :--- | | Products | $64,748 | $62,530 | | Consumables | $4,599 | $1,826 | | Skincare | $3,383 | $2,558 | | **Total Product Revenue** | **$72,730** | **$66,914** | | Service | $11,070 | $9,764 | | **Total Consolidated Revenue** | **$83,800** | **$76,678** | - Subsequent to the quarter's end, on July 8, 2019, David H. Mowry was appointed as the new CEO and joined the Board of Directors[145](index=145&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=36&type=section&id=ITEM%202.%20MANAGEMENT'S%20DISCUSSION%20AND%20ANALYSIS%20OF%20FINANCIAL%20CONDITION%20AND%20RESULTS%20OF%20OPERATIONS) Management discusses Q2 2019 revenue growth, flat U.S. revenue, increased operating expenses, and liquidity [Results of Operations](index=42&type=section&id=Results%20of%20Operations) Q2 2019 revenue grew **12%** from international and consumables, gross margin improved, operating expenses mixed Revenue Growth by Geography and Product (Q2 2019 vs Q2 2018) | Category | Q2 2019 Revenue (in thousands) | % Change YoY | | :--- | :--- | :--- | | **By Geography** | | | | United States | $28,147 | 0% | | International | $19,627 | 36% | | **By Product Type** | | | | Total Systems | $37,539 | 6% | | Consumables | $2,654 | 151% | | Skincare | $1,775 | 36% | | Service | $5,806 | 18% | | **Total Net Revenue** | **$47,774** | **12%** | - Growth was driven by demand for product lines including truSculpt iD, Secret RF, and the recently launched excel V+ and truSculpt flex systems[180](index=180&type=chunk) - U.S. performance was negatively affected by softness in the women's health market, competitive pricing on legacy systems, and turnover in the North American salesforce from late 2018[181](index=181&type=chunk) [Liquidity and Capital Resources](index=48&type=section&id=Liquidity%20and%20Capital%20Resources) Company holds **$31.7 million** cash, improved operating cash flow, and an undrawn, amended Wells Fargo credit facility - Cash, cash equivalents, and marketable investments totaled **$31.7 million** as of June 30, 2019, a decrease of **$3.9 million** from year-end 2018[203](index=203&type=chunk)[204](index=204&type=chunk) - The company's revolving line of credit with Wells Fargo was amended in March 2019, requiring a minimum cash balance of **$15 million** at Wells Fargo but removing other financial covenants if undrawn[218](index=218&type=chunk) - As of June 30, 2019, the company had not drawn on its revolving line of credit and was in compliance with all financial covenants[220](index=220&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=52&type=section&id=ITEM%203.%20QUANTITATIVE%20AND%20QUALITATIVE%20DISCLOSURES%20ABOUT%20MARKET%20RISK) Market risks from interest rates and foreign exchange are managed via high-quality investments and natural hedges - The company's investment portfolio is maintained in high-quality securities, and a hypothetical **1%** increase in interest rates would have no impact on the portfolio's value[224](index=224&type=chunk) - The company generates revenue in multiple foreign currencies, including Japanese Yen, Euros, and Australian Dollars, creating exposure to foreign exchange fluctuations[228](index=228&type=chunk) [Controls and Procedures](index=52&type=section&id=ITEM%204.%20CONTROLS%20AND%20PROCEDURES) Disclosure controls and procedures were effective, with no material changes to internal controls during the quarter - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of June 30, 2019[230](index=230&type=chunk) - No material changes to the company's internal control over financial reporting occurred during the second quarter of 2019[232](index=232&type=chunk) PART II OTHER INFORMATION [Legal Proceedings](index=55&type=section&id=ITEM%201.%20LEGAL%20PROCEEDINGS) No new material legal proceedings are reported beyond those disclosed in the 2018 Annual Report on Form 10-K - The company refers to its 2018 Form 10-K for a description of material pending legal proceedings and settlements[236](index=236&type=chunk) [Risk Factors](index=55&type=section&id=ITEM%201A.%20RISK%20FACTORS) No material changes to the risk factors previously disclosed in the 2018 Annual Report on Form 10-K are reported - No material changes from the Risk Factors disclosed in the 2018 Annual Report on Form 10-K are reported[237](index=237&type=chunk)

Financial Data and Key Metrics Changes - First quarter revenue was $36 million, up 6% from the same period a year ago [13] - Non-GAAP gross margin was 49%, approximately 235 basis points lower than the year-ago period [15] - Non-GAAP operating loss was $4.7 million in the quarter compared to a loss of $2.4 million in the same period of 2018 [19] - Non-GAAP net loss for the first quarter of 2019 was approximately $4.9 million or $0.35 per fully diluted share [19] - Cash used by operations was $7.9 million for the first quarter compared to $10 million in the first quarter of 2018 [21] - The company held cash and investments of $27.1 million with no debt as of March 31, 2019 [21] Business Line Data and Key Metrics Changes - Total truSculpt revenue grew 29% over the first quarter of 2018, with procedure-related revenue growing 300% [7][8] - Recurring revenue, defined as consumable, service, and skincare revenue, grew 28% over the first quarter of 2018 [14] - Consumable revenue grew over 150% compared to the first quarter of 2018 [14] Market Data and Key Metrics Changes - U.S. revenue in the first quarter was down 3% year-over-year, while international revenue grew 20% compared to the first quarter of 2018 [13] - Direct sales efforts accounted for 59% of the first quarter international product revenue compared to 46% in the year-ago period [14] Company Strategy and Development Direction - The company aims to rapidly expand high-margin consumable revenue, with a focus on driving adoption of systems with procedure-related revenue [9][25] - The company is committed to improving pricing discipline in North America and enhancing operational efficiencies [10][12] - The company is focused on innovation and empowering employees to challenge the status quo to achieve long-term operational and financial objectives [25] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the positive signs from initiatives implemented in 2018 and the potential for improved gross margins throughout 2019 [24][22] - The company reiterated its 2019 financial guidance, expecting total revenue in the range of $165 million to $175 million, representing a 2% to 8% increase over 2018 [22] - Management acknowledged the competitive landscape in the non-invasive body contouring market but highlighted the unique features of their truSculpt technology [37] Other Important Information - The company established two U.S.-based distribution centers to improve response times and lower transportation costs [12] - The company is working closely with the manufacturer of the Juliet device to address regulatory challenges and is optimistic about its future in the women's health space [32] Q&A Session Summary Question: Impact of domestic sales and margin from pricing and loss of Juliet - Management acknowledged the need for better pricing discipline and noted that international sales were robust, contributing to overall performance [27][28] Question: Long-term margin structure objectives - Management remains focused on achieving long-term margin goals, emphasizing the need for time to implement operational improvements [30] Question: Update on Juliet's U.S. market return - Management confirmed ongoing efforts to address regulatory challenges and has a pre-sub-meeting with the FDA scheduled [32] Question: North American sales force stability and hiring plans - Management reported stabilization in turnover and plans to add more personnel in the practice development manager space [34][35] Question: Non-invasive body contouring market dynamics - Management noted fierce competition but highlighted their ability to sustain pricing above competitors [36][37] Question: Clarification on gross margin pressures - Management confirmed that the sequential gross margin pressure was primarily due to lower revenue base rather than pricing changes [39] Question: Expectations for gross margin improvement - Management reiterated expectations for non-GAAP gross margins to improve over the full year compared to 2018 [40]