Cutera(CUTR) - 2022 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) Cutera, Inc.'s unaudited condensed consolidated financial statements and detailed notes are presented Condensed Consolidated Balance Sheets Balance Sheet Highlights (in thousands) | Metric | June 30, 2022 | Dec 31, 2021 | Change | | :----- | :------------ | :----------- | :----- | | Cash and cash equivalents | $75,050 | $164,164 | $(89,114) | | Marketable investments | $203,126 | $— | $203,126 | | Total current assets | $373,313 | $249,661 | $123,652 | | Property and equipment, net | $24,470 | $3,019 | $21,451 | | Total assets | $424,092 | $280,293 | $143,799 | | Accounts payable | $25,365 | $7,891 | $17,474 | | Accrued liabilities | $47,539 | $54,100 | $(6,561) | | Total current liabilities | $85,716 | $73,900 | $11,816 | | Convertible notes, net | $299,856 | $134,243 | $165,613 | | Total liabilities | $400,218 | $223,724 | $176,494 | | Total stockholders' equity | $23,874 | $56,569 | $(32,695) | Condensed Consolidated Statements of Operations Condensed Consolidated Statements of Operations Highlights (in thousands, except per share data) | Metric | 3 Months Ended June 30, 2022 | 3 Months Ended June 30, 2021 | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :----- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Total net revenue | $64,224 | $58,589 | $122,238 | $108,257 | | Gross profit | $35,044 | $33,789 | $66,832 | $61,499 | | Total operating expenses | $45,108 | $31,721 | $90,053 | $58,266 | | (Loss) income from operations | $(10,064) | $2,068 | $(23,221) | $3,233 | | Loss on extinguishment of convertible notes | $(34,423) | $— | $(34,423) | $— | | Net (loss) income | $(47,276) | $7,746 | $(62,418) | $7,387 | | Basic Net (loss) income per share | $(2.53) | $0.43 | $(3.39) | $0.41 | | Diluted Net (loss) income per share | $(2.53) | $0.39 | $(3.39) | $0.40 | Condensed Consolidated Statements of Comprehensive Income (Loss) Condensed Consolidated Statements of Comprehensive Income (Loss) Highlights (in thousands) | Metric | 3 Months Ended June 30, 2022 | 3 Months Ended June 30, 2021 | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :----- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Net (loss) income | $(47,276) | $7,746 | $(62,418) | $7,387 | | Net change in unrealized loss on available-for-sale investments | $(172) | $— | $(183) | $— | | Comprehensive (loss) income | $(47,448) | $7,746 | $(62,601) | $7,387 | Condensed Consolidated Statements of Changes in Stockholders' Equity Stockholders' Equity Changes (in thousands, except share amounts) | Metric | Dec 31, 2021 | June 30, 2022 | | :----- | :----------- | :------------ | | Common Shares | 17,995,344 | 19,560,163 | | Common Stock Amount | $18 | $20 | | Additional Paid-in Capital | $114,724 | $144,628 | | Accumulated Deficit | $(58,173) | $(120,591) | | Accumulated Other Comprehensive Loss | $— | $(183) | | Total Stockholders' Equity | $56,569 | $23,874 | - Key activities impacting equity in H1 2022 included: - Issuance of common stock in extinguishment of convertible notes: $55,949 thousand - Purchase of capped call: $(32,024) thousand - Net loss: $(62,418) thousand - Stock-based compensation expense: $8,776 thousand[27] Condensed Consolidated Statements of Cash Flows Cash Flow Summary (in thousands) | Cash Flow Activity | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :----------------- | :----------------------------- | :----------------------------- | | Net cash (used in) provided by operating activities | $(30,085) | $4,818 | | Net cash used in investing activities | $(211,547) | $(299) | | Net cash provided by financing activities | $152,518 | $117,634 | | Net (decrease) increase in cash, cash equivalents and restricted cash | $(89,114) | $122,153 | | Cash, cash equivalents, and restricted cash at end of period | $75,750 | $169,200 | - Major drivers for cash flows in H1 2022: - Operating activities: Net loss of $(62,418)K, adjusted for non-cash items like loss on extinguishment of convertible notes ($34,423K) and stock-based compensation ($8,776K), and changes in working capital, notably an increase in inventories ($(18,059)K) - Investing activities: Primarily driven by the purchase of marketable investments ($203,309K) - Financing activities: Proceeds from issuance of convertible notes ($240,000K), partially offset by extinguishment of convertible notes ($(45,777)K) and purchase of capped call ($(31,671)K)[35] Notes to Condensed Consolidated Financial Statements Note 1. Summary of Significant Accounting Policies - Cutera develops, manufactures, distributes, and markets energy-based product platforms (e.g., AviClear, enlighten, excel, truSculpt) for medical practitioners worldwide[39] - Revenue is categorized into "Products" (Systems, Consumables, Skincare) and "Service" (post-warranty contracts, parts, labor)[39] - AviClear, a laser treatment for acne, received 510(k) clearance in March 2022 and is in limited commercial capacity with a full launch expected by year-end[40] - The company acknowledges ongoing risks from the COVID-19 pandemic (supply chain, economic disruption) and widespread inflation, which could reduce demand for aesthetic treatments[45][46] - Early adopted ASU No. 2020-6 effective January 1, 2021, simplifying accounting for convertible debt instruments[54] Note 2. Cash, Cash Equivalents and Marketable Investments Cash, Cash Equivalents, and Marketable Investments (in thousands) | Metric | June 30, 2022 | Dec 31, 2021 | | :----- | :------------ | :----------- | | Cash and cash equivalents | $75,050 | $164,164 | | Non-current restricted cash | $700 | $700 | | Marketable investments - U.S. Treasury | $203,126 | $— | | Total Cash, Cash Equivalents, and Restricted Cash | $278,876 | $164,864 | - Marketable investments are classified as available-for-sale securities, with a net unrealized loss of $0.2 million at June 30, 2022, due to interest rate changes[59] Note 3. Fair Value of Financial Instruments Financial Assets Measured at Fair Value (in thousands) | Asset Type | Level 1 | Level 2 | Level 3 | Total | | :--------- | :------ | :------ | :------ | :---- | | Money market funds | $1,935 | $— | $— | $1,935 | | Available-for-sale securities | $— | $203,126 | $— | $203,126 | | Total | $1,935 | $203,126 | $— | $205,061 | - The company had no money market funds or marketable investments at December 31, 2021[62] Note 4. Balance Sheet Details Inventories, net (in thousands) | Category | June 30, 2022 | Dec 31, 2021 | | :------- | :------------ | :----------- | | Raw materials | $27,192 | $24,035 | | Work in process | $2,695 | $2,124 | | Finished goods | $15,523 | $13,344 | | Total | $45,410 | $39,503 | Property and Equipment, net (in thousands) | Category | June 30, 2022 | Dec 31, 2021 | | :------- | :------------ | :----------- | | Leasehold improvements | $1,693 | $826 | | Leased equipment | $1,765 | $107 | | Assets under construction | $18,791 | $843 | | Total Property and equipment, net | $24,470 | $3,019 | - Materials for the AviClear acne treatment device, previously inventories, were reclassified to "Assets under construction" and "Leased equipment" after 510(k) clearance and initial device placement in April 2022[66] Accrued Liabilities (in thousands) | Category | June 30, 2022 | Dec 31, 2021 | | :------- | :------------ | :----------- | | Bonus and payroll-related accruals | $16,194 | $21,649 | | Sales and marketing accruals | $4,087 | $4,808 | | Accrued inventory in transit | $4,932 | $4,265 | | Product warranty | $4,189 | $3,947 | | Accrued sales tax | $6,048 | $9,110 | | Other accrued liabilities | $12,089 | $10,321 | | Total | $47,539 | $54,100 | Note 5. Product Warranty Product Warranty Accrual Changes (in thousands) | Metric | 3 Months Ended June 30, 2022 | 3 Months Ended June 30, 2021 | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :----- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Beginning Balance | $3,874 | $4,390 | $3,947 | $4,124 | | Add: Accruals for warranties issued | $1,769 | $2,210 | $3,232 | $3,735 | | Less: Settlements made | $(1,454) | $(1,769) | $(2,990) | $(3,028) | | Ending Balance | $4,189 | $4,831 | $4,189 | $4,831 | Note 6. Deferred Revenue Deferred Revenue Changes (in thousands) | Metric | 3 Months Ended June 30, 2022 | 3 Months Ended June 30, 2021 | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :----- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Beginning balance | $11,064 | $11,737 | $10,825 | $11,237 | | Add: Payments received | $5,199 | $4,423 | $10,032 | $9,352 | | Less: Revenue recognized from beginning balance | $(4,293) | $(2,923) | $(7,956) | $(6,907) | | Ending balance | $11,527 | $11,403 | $11,527 | $11,403 | - Approximately 88% of the $11.5 million deferred revenue balance as of June 30, 2022, is expected to be recognized over the next 12 months[72] Note 7. Revenue - Revenue from performance obligations transferred over time accounted for approximately 7% and 8% of total revenue for the three and six months ended June 30, 2022, respectively, a decrease from 12% and 18% in the prior year[74] - The company acts as the principal in selling third-party manufactured skincare products in Japan, recognizing revenue upon shipment[83] - The loyalty program for qualified customers allows points redemption for training or annual forum tickets, with the fair value of earned rewards recorded as a reduction of net revenue[91] Note 8. Stockholders' Equity and Stock-based Compensation Expense Shares Available for Grant (Summary) | Metric | Dec 31, 2021 | June 30, 2022 | | :----- | :----------- | :------------ | | Balance, Shares Available for Grant | 947,347 | 1,019,984 | | RSUs granted | — | (159,131) | | PSUs granted | — | (164,818) | | Options granted | — | (278,903) | Stock-based Compensation Expense by Department (in thousands) | Department | 3 Months Ended June 30, 2022 | 3 Months Ended June 30, 2021 | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :--------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Cost of revenue | $500 | $434 | $959 | $578 | | Sales and marketing | $1,638 | $522 | $2,214 | $1,243 | | Research and development | $1,067 | $307 | $2,047 | $608 | | General and administrative | $1,528 | $1,656 | $3,556 | $2,336 | | Total | $4,733 | $2,919 | $8,776 | $4,765 | Note 9. Net (Loss) Income Per Share Net (Loss) Income Per Share (in thousands, except per share data) | Metric | 3 Months Ended June 30, 2022 | 3 Months Ended June 30, 2021 | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :----- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Net (loss) income, basic | $(47,276) | $7,746 | $(62,418) | $7,387 | | Net (loss) income, diluted | $(47,276) | $8,713 | $(62,418) | $8,331 | | Basic EPS | $(2.53) | $0.43 | $(3.39) | $0.41 | | Diluted EPS | $(2.53) | $0.39 | $(3.39) | $0.40 | - For the three and six months ended June 30, 2022, basic and diluted EPS were the same because the inclusion of potentially issuable shares (e.g., convertible notes, options, RSUs, PSUs, ESPP shares) would have been anti-dilutive[104][106] Note 10. Income Taxes Income Tax (Benefit) Expense (in thousands) | Metric | 3 Months Ended June 30, 2022 | 3 Months Ended June 30, 2021 | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :----- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Income tax (benefit) provision | $(186) | $122 | $47 | $380 | - The company maintains a full valuation allowance on its U.S. deferred tax assets[108] Note 11. Leases Leased Assets (in thousands) | Asset Type | June 30, 2022 | Dec 31, 2021 | | :--------- | :------------ | :----------- | | Operating lease assets | $13,771 | $14,627 | | Finance lease assets | $1,253 | $392 | | Total leased assets | $15,024 | $15,019 | Lease Liabilities (in thousands) | Liability Type | June 30, 2022 | Dec 31, 2021 | | :------------- | :------------ | :----------- | | Total Operating lease liabilities | $15,082 | $15,902 | | Total Finance lease liabilities | $1,391 | $1,284 | Lease Costs (in thousands) | Cost Type | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :-------- | :--------------------------- | :--------------------------- | | Finance lease cost (amortization) | $339 | $237 | | Finance lease cost (interest) | $37 | $28 | | Operating lease cost | $1,795 | $1,759 | Note 12. Contingencies - Cutera filed a lawsuit against Lutronic Aesthetics in January 2020, alleging misappropriation of trade secrets, RICO violations, interference with contractual relations, and other claims[122] - A temporary restraining order and preliminary injunction were issued against Lutronic, prohibiting the use of Cutera's confidential information[122] - Accrued liabilities for pending commercial and product liability lawsuits were $0.5 million as of June 30, 2022, down from $0.7 million at December 31, 2021[123] Note 13. Debt Convertible Notes Outstanding (in thousands) | Note Series | June 30, 2022 (Principal) | Dec 31, 2021 (Principal) | June 30, 2022 (Carrying Value) | Dec 31, 2021 (Carrying Value) | | :---------- | :------------------------ | :----------------------- | :----------------------------- | :---------------------------- | | 2026 Notes | $69,125 | $138,250 | $67,344 | $134,243 | | 2028 Notes | $240,000 | $— | $232,512 | $— | | Total Convertible notes, net | $309,125 | $138,250 | $299,856 | $134,243 | - In May 2022, the company issued $240.0 million in 2028 Notes (2.25% interest, convertible at $52.67/share) and simultaneously exchanged $69.1 million of 2026 Notes for $45.8 million cash and 1,354,348 common shares, resulting in a $34.4 million loss on extinguishment[128][129][130][133] - The 2026 and 2028 Notes are general senior unsecured obligations. The company intends to settle conversion requests in shares of common stock[137][141][145] - The company has a $30.0 million secured revolving loan facility with Silicon Valley Bank, which was undrawn as of June 30, 2022, but a covenant violation was waived[160][164] - Capped call transactions were entered into for both 2026 and 2028 Notes to reduce potential dilution, purchased for $16.1 million and $32.0 million respectively[152][153] Note 14. Segment reporting - The company's chief operating decision makers (CEO and CFO) manage the business as one operating segment, focusing on consolidated financial information and disaggregated revenue by geography and product[168] Revenue Mix by Geography (in thousands) | Geography | 3 Months Ended June 30, 2022 | 3 Months Ended June 30, 2021 | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :-------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | United States | $26,742 | $22,972 | $51,216 | $41,920 | | Japan | $15,174 | $17,421 | $32,677 | $33,976 | | Asia, excluding Japan | $5,106 | $3,500 | $8,715 | $5,489 | | Europe | $5,925 | $4,886 | $10,116 | $9,887 | | Rest of the World | $11,277 | $9,810 | $19,514 | $16,985 | | Total consolidated revenue | $64,224 | $58,589 | $122,238 | $108,257 | Revenue Mix by Product Category (in thousands) | Product Category | 3 Months Ended June 30, 2022 | 3 Months Ended June 30, 2021 | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :--------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Products | $43,653 | $35,567 | $80,167 | $63,887 | | Consumables | $5,298 | $4,433 | $9,201 | $7,358 | | Skincare | $9,638 | $11,812 | $21,287 | $24,118 | | Total product revenue | $58,589 | $51,812 | $110,655 | $95,363 | | Service | $5,635 | $6,777 | $11,583 | $12,894 | | Total consolidated revenue | $64,224 | $58,589 | $122,238 | $108,257 | ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management discusses Cutera's financial condition, operational results, key business trends, and critical accounting policies Executive Summary Company Description - Cutera offers easy-to-use products for treatments like acne, body contouring, skin resurfacing, tattoo removal, and hair removal, with platforms designed for upgrades[176] - The company generates revenue from systems, upgrades, post-warranty service contracts, hand piece refills, and third-party skincare product distribution[176] - Recent product introductions include Secret RF (2018), truSculpt iD (2018), excel V+ (2019), truSculpt flex (2019), Secret PRO (2020), and AviClear (April 2022)[178] Products and Services - Product revenue includes Systems (consoles, hand pieces, upgrades), Consumables (replacement hand pieces, cycle refills, disposable tips), and Skincare (third-party products in Japan)[180] - AviClear, cleared by the FDA in March 2022, is a 1726 nm laser device for inflammatory acne vulgaris, targeting sebocytes and suppressing sebum production, with a full commercial launch expected by year-end[182][183][184] Significant Business Trends - Key growth drivers include successful commercialization of AviClear, expansion of product offerings (internal and external), investment in global sales/marketing, use of clinical results, enhanced physician development, and recurring revenue from system upgrades, services, and consumables[187][188] Factors that May Impact Future Performance - Future performance is dependent on successful competition, expanding product offerings with innovative technologies, obtaining regulatory clearances, protecting proprietary technology, cost-effective manufacturing, and profitable marketing/distribution[190] Risks and Uncertainties - COVID-19 continues to pose risks, including potential business shutdowns, supply chain disruptions, and economic instability, which could materially affect revenue, operating results, and cash flows[193] - Inflationary pressures may lead to reduced consumer spending on non-essential aesthetic treatments, potentially decreasing demand for Cutera's products and revenue[194] Critical accounting policies, significant judgments and use of estimates - The company's critical accounting policies involve significant estimates and assumptions, including those related to convertible debt instruments[199][200] - Following ASU 2020-06 adoption, convertible notes are recorded as long-term debt without separation of the conversion option, and the company intends to settle conversion requests in shares of common stock[203] Results of Operations Revenue Total Net Revenue (in thousands) | Metric | 3 Months Ended June 30, 2022 | % Change | 3 Months Ended June 30, 2021 | 6 Months Ended June 30, 2022 | % Change | 6 Months Ended June 30, 2021 | | :----- | :--------------------------- | :------- | :--------------------------- | :--------------------------- | :------- | :--------------------------- | | Consolidated total revenue | $64,224 | 10% | $58,589 | $122,238 | 13% | $108,257 | Revenue by Geography (in thousands) | Geography | 3 Months Ended June 30, 2022 | % Change | 3 Months Ended June 30, 2021 | 6 Months Ended June 30, 2022 | % Change | 6 Months Ended June 30, 2021 | | :-------- | :--------------------------- | :------- | :--------------------------- | :--------------------------- | :------- | :--------------------------- | | North America | $32,239 | 20% | $26,786 | $61,092 | 24% | $49,188 | | Japan | $15,174 | (13)% | $17,421 | $32,677 | (4)% | $33,976 | | Rest of World | $16,811 | 17% | $14,382 | $28,469 | 13% | $25,093 | Revenue by Product Type (in thousands) | Product Type | 3 Months Ended June 30, 2022 | % Change | 3 Months Ended June 30, 2021 | 6 Months Ended June 30, 2022 | % Change | 6 Months Ended June 30, 2021 | | :----------- | :--------------------------- | :------- | :--------------------------- | :--------------------------- | :------- | :--------------------------- | | Total Systems | $43,653 | 23% | $35,568 | $80,167 | 25% | $63,888 | | Consumables | $5,298 | 20% | $4,432 | $9,201 | 25% | $7,357 | | Skincare | $9,638 | (18)% | $11,812 | $21,287 | (12)% | $24,118 | | Service | $5,635 | (17)% | $6,777 | $11,583 | (10)% | $12,894 | - North America Systems revenue increased by 27% (3 months) and 31% (6 months) due to COVID-19 recovery[218] - Japan Skincare revenue decreased by 18% (3 months) and 12% (6 months), significantly impacted by a weakening Japanese Yen[221] Gross Profit Gross Profit (in thousands) | Metric | 3 Months Ended June 30, 2022 | % of Revenue | 3 Months Ended June 30, 2021 | % of Revenue | 6 Months Ended June 30, 2022 | % of Revenue | 6 Months Ended June 30, 2021 | % of Revenue | | :----- | :--------------------------- | :----------- | :--------------------------- | :----------- | :--------------------------- | :----------- | :--------------------------- | :----------- | | Gross profit | $35,044 | 54.6% | $33,789 | 57.7% | $66,832 | 54.7% | $61,499 | 56.8% | - Decrease in gross profit margin was driven by labor-related manufacturing overheads (1.9% for 3 months, 1.7% for 6 months) and weakening Japanese Yen (1.8% for 3 months, 1.5% for 6 months)[224] Sales and Marketing Sales and Marketing Expenses (in thousands) | Metric | 3 Months Ended June 30, 2022 | % of Revenue | 3 Months Ended June 30, 2021 | % of Revenue | 6 Months Ended June 30, 2022 | % of Revenue | 6 Months Ended June 30, 2021 | % of Revenue | | :----- | :--------------------------- | :----------- | :--------------------------- | :----------- | :--------------------------- | :----------- | :--------------------------- | :----------- | | Sales and Marketing | $27,001 | 42.0% | $18,410 | 31.4% | $51,945 | 42.5% | $33,478 | 30.9% | - Increases were due to headcount growth for AviClear launch, marketing costs for new business, trade shows, and resumption of travel activities[227] Research and Development ("R&D") Research and Development Expenses (in thousands) | Metric | 3 Months Ended June 30, 2022 | % of Revenue | 3 Months Ended June 30, 2021 | % of Revenue | 6 Months Ended June 30, 2022 | % of Revenue | 6 Months Ended June 30, 2021 | % of Revenue | | :----- | :--------------------------- | :----------- | :--------------------------- | :----------- | :--------------------------- | :----------- | :--------------------------- | :----------- | | Research and development | $6,859 | 10.7% | $4,850 | 8.3% | $13,358 | 10.9% | $8,962 | 8.3% | - Increases were primarily due to higher personnel expenses (headcount increase) and increased outside services[228] General and Administrative ("G&A") General and Administrative Expenses (in thousands) | Metric | 3 Months Ended June 30, 2022 | % of Revenue | 3 Months Ended June 30, 2021 | % of Revenue | 6 Months Ended June 30, 2022 | % of Revenue | 6 Months Ended June 30, 2021 | % of Revenue | | :----- | :--------------------------- | :----------- | :--------------------------- | :----------- | :--------------------------- | :----------- | :--------------------------- | :----------- | | General and administrative | $11,248 | 17.5% | $8,461 | 14.4% | $24,750 | 20.2% | $15,826 | 14.6% | - The increase in G&A expenses for the six months was primarily due to $2.4 million higher personnel expenses and $6.4 million for ERP system implementation[230] Interest and Other (expense) income, Net Interest and Other (expense) income, Net (in thousands) | Metric | 3 Months Ended June 30, 2022 | 3 Months Ended June 30, 2021 | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :----- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Amortization of debt issuance costs | $(298) | $(215) | $(517) | $(267) | | Interest on convertible notes | $(1,149) | $(778) | $(1,927) | $(969) | | Loss on extinguishment of convertible notes | $(34,423) | $— | $(34,423) | $— | | Gain on extinguishment of PPP loan | $— | $7,185 | $— | $7,185 | | Other expense, net | $(1,528) | $(392) | $(2,283) | $(1,415) | | Total | $(37,398) | $5,800 | $(39,150) | $4,534 | - The significant shift from income to expense was primarily driven by the $34.4 million loss on extinguishment of convertible notes and increased interest expense from the May 2022 convertible notes issuance[231][233] Provision for Income Taxes Income Tax (Benefit) Provision (in thousands) | Metric | 3 Months Ended June 30, 2022 | 3 Months Ended June 30, 2021 | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :----- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Income tax (benefit) provision | $(186) | $122 | $47 | $380 | Liquidity and Capital Resources Cash, Cash Equivalents, Restricted Cash and Marketable Investments Cash, Cash Equivalents, Restricted Cash and Marketable Investments (in thousands) | Metric | June 30, 2022 | Dec 31, 2021 | Change | | :----- | :------------ | :----------- | :----- | | Cash and cash equivalents | $75,050 | $164,164 | $(89,114) | | Restricted cash | $700 | $700 | $— | | Marketable investments | $203,126 | $— | $203,126 | | Total | $278,876 | $164,864 | $114,012 | Cash Flows Net Cash Flow (in thousands) | Activity | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :------- | :----------------------------- | :----------------------------- | | Operating activities | $(30,085) | $4,818 | | Investing activities | $(211,547) | $(299) | | Financing activities | $152,518 | $117,634 | | Net (decrease) increase in cash and cash equivalents | $(89,114) | $122,153 | - Operating cash outflow was due to net loss adjusted for non-cash items and an increase in inventory for AviClear launch[239] - Investing cash outflow was primarily due to $203.3 million in marketable investments and $8.2 million in property and equipment[240] - Financing cash inflow was driven by $240.0 million from 2028 Notes issuance, offset by $45.8 million for 2026 Notes extinguishment and $31.7 million for capped calls[242] Adequacy of Cash Resources to Meet Future Needs - The company had $75.1 million in cash and cash equivalents and $203.1 million in marketable investments as of June 30, 2022[243] - Proceeds from convertible notes issuances will fund growth initiatives, market development, working capital, capital expenditures, clinical trials, and potential acquisitions[243] - Management believes current liquidity and the revolving credit facility are sufficient for the next 12 months[244] Debt - In May 2022, $240.0 million of 2028 Notes were issued, with $10.0 million purchased by an affiliated entity[245] - In March 2021, $138.3 million of 2026 Notes were issued[246] - The SVB Revolving Line of Credit ($30.0 million) was undrawn as of June 30, 2022, but a covenant violation occurred and was waived[250] Commitments and Contingencies - No material changes to contractual obligations and commitments since the 2021 Form 10-K[252] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This section outlines Cutera's exposure to market risks, including those related to the conditional conversion feature of its convertible notes, interest rate fluctuations on its revolving credit facility, inflationary pressures on operating costs, and foreign exchange rate volatility, particularly concerning the Japanese Yen - The conditional conversion feature of 2026 and 2028 Convertible Notes could lead to conversion if stock price thresholds are met, requiring cash or share settlement. This condition was not met for 2026 Notes in Q2 2022[255] - Interest rate risk is tied to the floating rate on the undrawn SVB Revolving Line of Credit (Prime rate + 1.75% or 5.0%), potentially increasing expenses if drawn and rates rise[256] - Inflationary pressures could impact costs, and the company may not be able to fully offset these through price increases, harming financial results[257] - Foreign exchange fluctuations, especially the weakening Japanese Yen, adversely impact revenue and gross margin. A hedging program was implemented in July 2022 to mitigate this exposure[258][259] ITEM 4. CONTROLS AND PROCEDURES Cutera's disclosure controls and procedures were deemed ineffective as of June 30, 2022, due to a material weakness in IT general controls at its Japan subsidiary. Despite this, management asserts the financial statements are fairly presented. Remediation efforts are ongoing, including addressing user access and segregation of duties, following a new ERP system implementation in January 2022 - Disclosure controls and procedures were not effective as of June 30, 2022, due to a material weakness in ITGCs (user access and segregation of duties) at the Japan subsidiary[262][263] - Despite the material weakness, management concluded that the financial statements fairly present the company's financial condition and results[263] - Remediation plans include reviewing user access and implementing additional controls, with full remediation expected after these steps operate effectively for a sufficient period[264] - A new ERP system was implemented in January 2022, leading to modifications in internal control processes[265] PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS This section states that Cutera is involved in various legal and administrative proceedings in the normal course of business, with material pending legal and regulatory proceedings detailed in Note 11 of the 2021 Annual Report on Form 10-K - The company is subject to various legal and administrative proceedings[267] - Material pending legal and regulatory proceedings are described in Note 11 of the 2021 Annual Report on Form 10-K[267] ITEM 1A. RISK FACTORS There are no material changes to the risk factors previously disclosed in the 2021 Annual Report on Form 10-K, with the only update being the inclusion of both the 2026 and 2028 Convertible Senior Notes in all relevant references - No material changes to previously disclosed risk factors, other than updating references to include both 2026 and 2028 Convertible Senior Notes[269] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS Cutera issued $138.3 million in 2026 Convertible Senior Notes in March 2021 and $240.0 million in 2028 Convertible Senior Notes in May 2022 through private placements. Proceeds were used for general corporate purposes, including the extinguishment of a portion of the 2026 Notes and the purchase of capped call transactions to mitigate potential dilution - In March 2021, $138.3 million of 2026 Notes were issued in a private placement, with $16.1 million used for capped call transactions[270] - In May 2022, $240.0 million of 2028 Notes were issued in a private placement (including $10.0 million to an affiliate), with $32.0 million used for capped call transactions and $45.8 million cash (excluding accrued interest) for the 2026 Notes Exchange[271] ITEM 3. DEFAULTS UPON SENIOR SECURITIES The company reported no defaults upon senior securities for the period - No defaults upon senior securities[272] ITEM 4. MINE SAFETY DISCLOSURES The company reported no mine safety disclosures for the period - No mine safety disclosures[273] ITEM 5. OTHER INFORMATION The company reported no other information for the period - No other information[274] ITEM 6. EXHIBITS This section lists the exhibits filed with the Form 10-Q, including corporate documents, indenture agreements for convertible notes, purchase agreements, capped call confirmations, amendments to the loan and security agreement, and certifications from the CEO and CFO - Exhibits include corporate governance documents (Certificate of Incorporation, Bylaws), debt-related agreements (Indenture, Form of Convertible Senior Notes, Purchase Agreements, Capped Call Transaction Confirmation), and amendments to the Loan and Security Agreement with Silicon Valley Bank[276] - Also includes certifications from the CEO and CFO as required by the Sarbanes-Oxley Act[276] SIGNATURE The report was duly signed on behalf of Cutera, Inc. by Rohan Seth, Chief Financial Officer, on August 8, 2022 - The report was signed by Rohan Seth, Chief Financial Officer, on August 8, 2022[278]