Cutera(US:CUTR)2024-05-10 20:15PART I ITEM 1. BUSINESS Cutera, Inc. develops and markets energy-based aesthetic and dermatology solutions, focusing on AviClear expansion and profitable core business growth - Cutera develops, manufactures, and markets energy-based product platforms for aesthetic and dermatology solutions, including treatments for acne, body contouring, skin resurfacing, hair/tattoo removal, and vascular conditions202225 - Key product platforms include AviClear (first FDA-cleared energy-based acne treatment), Secret PRO/DUO (RF microneedling and fractional laser), truSculpt ID/truFlex (non-surgical body sculpting), excel V/V+ (vascular/pigmented lesions), enlighten SR/III (tattoo removal), excel HR (hair removal), and xeo (multi-application platform)202225 - The company's business strategy focuses on operational excellence, global expansion of AviClear, and driving profitable growth in its core business, leveraging recurring revenue from consumables (e.g., AviClear treatment fees, Secret RF/PRO tips, truSculpt/truFlex cycles) and extended service contracts455256 - The aesthetic market is growing due to aging demographics, increased accessibility, broader range of safe treatments, and wider acceptance of aesthetic procedures, with non-invasive options like AviClear offering durable solutions for conditions like acne272831 - Cutera operates in a highly competitive industry, competing with conventional treatments and other energy-based device providers, necessitating continuous innovation, product differentiation, and strong customer relationships7779161 - The company relies on a combination of patents, trademarks, and trade secrets to protect its intellectual property, with 30 issued U.S. patents and 9 pending U.S. applications as of January 19, 20248687 - Cutera's products are Class II medical devices subject to extensive FDA and international regulations, requiring 510(k) clearance for commercial distribution and compliance with Quality System Regulations (QSR) and laser performance standards909198 - As of December 31, 2023, Cutera had 430 employees, a decrease from 540 in 2022, and emphasizes diversity, equity, inclusion, employee engagement, leadership development, and health/safety initiatives112113115 ITEM 1A. RISK FACTORS The company faces multiple risks in supply chain, regulations, and international trade, alongside leadership turnover and capital needs - Significant executive leadership and Board of Directors turnover in 2023 creates uncertainty and could negatively impact business execution and growth129130 - The company may need to raise additional capital, which could result in stockholder dilution or restrictive debt covenants, and its ability to obtain favorable financing is uncertain131132133 - Global supply chain disruptions, inflation, and reliance on limited third-party suppliers pose risks to manufacturing, product availability, and costs138139199 - The aesthetic equipment market is highly competitive and rapidly innovating; failure to develop new products or gain market acceptance for devices like AviClear could harm the business157158161 - Extensive government regulation (FDA, international bodies) means non-compliance, delayed approvals, or product defects could lead to enforcement actions, recalls, and reputational damage166173182 - The company is exposed to various litigations, including securities fraud and intellectual property infringement, which can be costly, divert management attention, and negatively affect financial performance191193272 - International sales (50% of total revenue in 2023) are subject to risks like foreign regulations, currency fluctuations, political instability, and reliance on distributor networks196248253 - Material weaknesses in internal control over financial reporting (ITGCs, inventory, equity-based awards, risk assessment) could lead to financial misstatements if not remediated244245247 ITEM 1B. UNRESOLVED STAFF COMMENTS This item indicates that there are no unresolved staff comments from the SEC ITEM 1C. Cybersecurity Cutera manages cybersecurity risks through recognized frameworks, with Board oversight, and has identified no material threats to date - Cutera employs information security processes aligned with CIS and NIST frameworks to manage cybersecurity threats to its critical IT infrastructure and data304305 - The Board of Directors, supported by experienced internal teams, is responsible for cybersecurity risk oversight, with no material impacts from known threats identified to date306307 ITEM 2. PROPERTIES Cutera's primary U.S. operations are in a leased Brisbane, CA facility, supplemented by a new Hayward warehouse and international leased offices - The company's main U.S. operations are in a 66,000 sq ft leased facility in Brisbane, California, with the lease extended to January 31, 2028309 - A new 53,000 sq ft warehouse in Hayward, California, was leased in January 2024 for inventory consolidation, with the lease expiring February 28, 2027310680 International Leased Office Facilities | Country | Square Footage | Lease Termination or Expiration | | :-------- | :----------------- | :------------------------------ | | Japan | Approximately 10,760 | March 2025 - March 2027 | | France | Approximately 2,239 | June 2031 | | Belgium | Approximately 151 | February 2026 | ITEM 3. LEGAL PROCEEDINGS Cutera is involved in various legal and administrative proceedings, accruing $3.3 million for pending lawsuits as of December 31, 2023 - Cutera is subject to various legal proceedings, including product liability, intellectual property, and commercial disputes312625 - As of December 31, 2023, the company accrued $3.3 million for pending commercial and product liability lawsuits, not expecting a material loss in excess of this amount626 - Recent settlements include patent infringement complaints by Serendia LLC regarding Secret RF and Secret Pro systems (terminated April 2024) and a SOX whistleblower claim and arbitration demand by former Executive Chairperson J. Daniel Plants (settled for approximately $1 million and closed April 2024)628631 ITEM 4. MINE SAFETY DISCLOSURES This item is not applicable to Cutera, Inc PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Cutera's common stock trades on NASDAQ under "CUTR," with no repurchases in 2023 and no anticipated cash dividends - Cutera's common stock (CUTR) is listed on the NASDAQ Global Select Market316 Common Stock Information | Metric | Value | | :----------------------------------- | :-------------- | | Closing Price (May 8, 2024) | $2.51 per share | | Stockholders of Record (Dec 31, 2023) | ~150 | | Shares Outstanding (May 8, 2024) | 20,072,096 | - No common stock repurchases were made in 2023, and no cash dividends are expected in the foreseeable future318320 ITEM 6. Reserved This item is reserved and contains no information ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Cutera experienced significant revenue and gross profit declines in 2023, but management expects sufficient liquidity for the next 12 months Executive Summary Cutera's core business involves energy-based aesthetic platforms, with revenue from system sales, consumables, and services - Cutera's core business involves energy-based aesthetic platforms (AviClear, enlighten, excel, truSculpt, Secret PRO/RF, xeo) for various medical aesthetic procedures330335 - Revenue is derived from system sales, hand pieces, upgrades, AviClear leasing/direct sales, consumables (e.g., cycle refills, treatment fees, disposable tips), and historically, third-party skincare products in Japan (terminated Feb 2024)334337496 - Significant business trends include capitalizing on AviClear momentum, expanding product offerings, investing in global sales/marketing, using clinical results, and generating recurring revenue from the installed customer base339 Critical Accounting Policies and Use of Estimates Financial statement preparation requires significant judgments, particularly for inventory valuation and income tax estimates - Critical accounting policies involve significant estimates and assumptions, particularly for inventory valuation and income taxes341342343 - Inventory valuation relies on estimates of future demand, obsolescence, and market conditions, with a reserve for excess and obsolete inventory344 - Income tax estimates involve assessing the need for a valuation allowance against deferred tax assets, primarily related to $290.1 million in accumulated net operating losses and $23.6 million in unutilized tax credits as of December 31, 2023345 Results of Operations Total net revenue decreased by 15.9% in 2023, leading to a significant decline in gross margin and a substantial operating loss Consolidated Financial Data (Percentage of Net Revenue) | Metric | 2023 | 2022 | 2021 | | :------------------------- | :---- | :---- | :---- | | Net revenue | 100 % | 100 % | 100 % | | Cost of revenue | 80 % | 45 % | 42 % | | Gross margin | 20 % | 55 % | 58 % | | Sales and marketing | 53 % | 42 % | 33 % | | Research and development | 10 % | 10 % | 9 % | | General and administrative | 30 % | 18 % | 14 % | | Total operating expenses | 93 % | 71 % | 57 % | | Income (loss) from operations | (74)% | (15)% | 1 % | | Net income (loss) | (77)% | (33)% | 1 % | Consolidated Revenue by Geography and Product Category (in thousands) | Category / Year | 2023 | % Change (YoY) | 2022 | % Change (YoY) | 2021 | | :------------------------ | :---------- | :------------- | :---------- | :------------- | :---------- | | Revenue by Geography: | | | | | | | North America | $106,786 | (17)% | $128,418 | 15 % | $111,621 | | Japan | $52,134 | (20)% | $64,921 | (8)% | $70,235 | | Rest of World | $53,449 | (10)% | $59,060 | 20 % | $49,414 | | Total Net Revenue | $212,369| (16)% | $252,399| 9 % | $231,270| | Revenue by Product: | | | | | | | Total Systems | $130,528 | (21)% | $164,559 | 18 % | $139,633 | | Consumables | $25,302 | 16 % | $21,737 | 33 % | $16,401 | | Skincare | $33,983 | (20)% | $42,500 | (14)% | $49,669 | | Service | $22,556 | (4)% | $23,603 | (8)% | $25,567 | - Total net revenue decreased by $40.0 million (15.9%) in 2023, driven by a $34.0 million decrease in System sales and an $8.5 million decrease in Skincare revenue, partially offset by a $3.6 million increase in Consumables revenue (AviClear treatment volumes up $6.9 million)351352 - Gross profit margin declined significantly from 55.4% in 2022 to 19.5% in 2023, impacted by revenue mix (5.0 ppt), increased material costs and lower cost absorption (11.3 ppt), and increased excess inventory reserve (13.3 ppt)361362 - Sales and marketing expenses increased by $6.1 million (5.7%) in 2023, primarily due to higher sales commissions ($4.7 million) and consulting services ($2.9 million) related to AviClear364365 - General and administrative expenses increased by $17.4 million (37.9%) in 2023, mainly due to $12.3 million in litigation/shareholder activism costs and a $6.4 million increase in allowance for credit losses368369 - Net loss for 2023 was $162.8 million, compared to $82.3 million in 2022, reflecting the decline in revenue and gross profit, and increased operating expenses448458 Liquidity and Capital Resources Cutera's liquidity is primarily from convertible notes, with management expecting current cash to be sufficient for the next 12 months despite net losses - Primary liquidity source is cash generated from the issuance of convertible notes373385 Cash and Working Capital (in thousands) | Metric | Dec 31, 2023 | Dec 31, 2022 | | :----------------------------------- | :----------- | :----------- | | Working Capital | $181,400 | $345,400 | | Cash and Cash Equivalents | $143,612 | $145,924 | | Marketable Investments | $0 | $171,390 | | Restricted Cash | $0 | $700 | - Net losses were $162.8 million in 2023 and $82.3 million in 2022, impacting overall liquidity375458 - Management believes current cash and cash equivalents are sufficient for the next 12 months, supported by a revised AviClear business model, workforce reductions, supplier restructuring, and improved inventory/receivables management376377386 Debt Cutera has $429.1 million in convertible notes outstanding, with its revolving line of credit terminated in April 2024 Convertible Notes Outstanding (in thousands) | Note Series | Outstanding Principal (Dec 31, 2023) | | :---------- | :----------------------------------- | | 2026 Notes | $69,125 | | 2028 Notes | $240,000 | | 2029 Notes | $120,000 | | Total | $429,125 | - The 2026 Notes, 2028 Notes, and 2029 Notes bear interest at 2.25%, 2.25%, and 4.00% per year, respectively, payable semiannually387390391 - The company's $30.0 million secured revolving loan facility with Silicon Valley Bank was terminated on April 3, 2024, and was undrawn as of December 31, 2023392676 Purchase Commitments Cutera maintains open inventory purchase commitments with suppliers and expects to meet these obligations with adequate funds - Cutera has open inventory purchase commitments with suppliers for key components, with liabilities generally restricted to agreed-upon periods393622 - The company believes it has sufficient funds to fulfill these commitments393 Other Cutera has indemnification agreements with directors and officers, with unknown and unestimable exposure, thus no accruals have been made - Cutera has indemnification agreements with its directors and executive officers394624 - The company's exposure under these indemnification obligations is unknown and not reasonably estimable, so no accruals have been made394624 - The independent auditor issued an unqualified opinion on the consolidated financial statements but an adverse opinion on internal control over financial reporting as of December 31, 2023422423435 - Critical audit matters included the accounting for revenue recognition in contracts with international distributors (due to non-standard payment and control transfer terms) and the valuation of long-term inventories (due to significant judgments in obsolescence and future demand)428429430431 Consolidated Balance Sheet Highlights (in thousands) | Metric | Dec 31, 2023 | Dec 31, 2022 | | :------------------------- | :----------- | :----------- | | Total Current Assets | $269,185 | $451,240 | | Total Assets | $346,291 | $520,988 | | Total Current Liabilities | $87,747 | $105,839 | | Total Liabilities | $518,121 | $536,169 | | Total Stockholders' Deficit | $(171,830) | $(15,181) | Consolidated Statements of Operations Highlights (in thousands) | Metric | 2023 | 2022 | 2021 | | :------------------------- | :----------- | :----------- | :----------- | | Total Net Revenue | $212,369 | $252,399 | $231,270 | | Gross Profit | $41,494 | $139,829 | $133,105 | | Total Operating Expenses | $197,724 | $178,019 | $131,275 | | Income (Loss) from Operations | $(156,230) | $(38,190) | $1,830 | | Net Income (Loss) | $(162,833) | $(82,340) | $2,062 | | Basic EPS | $(8.19) | $(4.39) | $0.12 | Consolidated Cash Flow Data (in thousands) | Activity | 2023 | 2022 | 2021 | | :------------------------- | :----------- | :----------- | :----------- | | Operating Activities | $(137,870) | $(66,995) | $1,235 | | Investing Activities | $137,426 | $(194,182) | $(944) | | Financing Activities | $(2,568) | $242,937 | $117,526 | | Net Change in Cash | $(3,012) | $(18,240) | $117,817 | ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Cutera is exposed to market risks from convertible notes, interest rates, inflation, and foreign exchange fluctuations, which significantly impacted 2023 results Conditional Conversion Feature of Convertible Notes Convertible notes have conditional conversion features that could impact liquidity if triggered, though the company intends to settle in shares - Convertible notes (2026, 2028, 2029) have conditional conversion features that, if triggered, could require cash settlement, impacting liquidity399284 - As of December 31, 2023, conversion conditions were not met for any series, and the company intends to settle future conversion requests in common stock398402407 - The notes are general senior unsecured obligations, ranking equally with other unsecured debt but junior to secured debt405410 Estimated Fair Value of Convertible Notes (Dec 31, 2023, in millions) | Note Series | Estimated Fair Value | | :---------- | :------------------- | | 2026 Notes | $29.9 | | 2028 Notes | $60.7 | | 2029 Notes | $27.4 | Interest Rate and Market Risk Cutera's revolving line of credit, previously subject to a floating Prime rate, was terminated, reducing interest rate sensitivity from that facility - The revolving line of credit, which had a floating Prime rate (8.50% as of Dec 31, 2023), was terminated on April 3, 2024414676 - Interest rate sensitivity is primarily influenced by any amounts borrowed on the line of credit and the prevailing interest rate414 Inflation Cutera mitigated inflationary pressures through cost improvement initiatives, but future unoffset pressures could harm the business - Inflationary pressures were mitigated by cost improvement initiatives415 - Inability to offset significant future inflationary costs through price increases could harm the business415 Foreign Exchange Fluctuations Foreign exchange devaluations negatively impacted 2023 revenue by $5 million and net loss by $6 million, with potential future impacts - Foreign currency devaluations in Japan, Europe, and Australia adversely impacted total revenue by approximately $5 million and net loss by $6 million in 2023417 - A hypothetical 10% unfavorable change in exchange rates could reduce future revenue by approximately $5 million and increase net loss by $1 million417 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA This section presents Cutera's audited financial statements for 2023, with an unqualified opinion on financials but an adverse opinion on internal controls NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This note details Cutera's revenue recognition, critical estimates, and the termination of its Japan skincare distribution agreement - Revenue is recognized upon transfer of control, with systems, accessories, and training recognized at a point in time, and extended service contracts and marketing services recognized over time469471475481482 - AviClear devices are leased to customers, generating fixed annual license fees (recognized straight-line) and variable treatment fees (recognized as consumable revenue when initiated); the business model shifted to direct sales in Q4 2023476613614 - Critical accounting estimates include warranty obligations, sales commissions, allowance for credit losses, inventory valuation (lower of cost or net realizable value), and income taxes (valuation allowance for deferred tax assets)466489500524 - The company terminated its skincare distribution agreement with ZO in Japan on February 28, 2024, which represented 16% of consolidated revenue in 2023495496681682 - Cutera operates in one reportable segment, with revenue disaggregated by geography and product type534600 NOTE 2. CASH, CASH EQUIVALENTS, MARKETABLE SECURITIES, AND RESTRICTED CASH As of December 31, 2023, Cutera held $143.6 million in cash and cash equivalents, with no marketable investments or restricted cash Cash, Cash Equivalents, and Marketable Investments (in thousands) | Category | Dec 31, 2023 | Dec 31, 2022 | | :--------------------------- | :----------- | :----------- | | Cash and cash equivalents | $143,612 | $145,924 | | Restricted cash | $0 | $700 | | Marketable investments | $0 | $171,390 | | Total | $143,612 | $318,014 | - The company's cash and cash equivalents are primarily held in U.S. banks, with foreign subsidiaries maintaining limited local cash486 - Marketable investments at December 31, 2022, were U.S. Treasury securities with net unrealized losses of $0.1 million due to interest rate changes537 NOTE 3. FAIR VALUE OF FINANCIAL INSTRUMENTS Cutera measures financial assets at fair value using a three-level hierarchy, with $123.4 million in Level 1 cash equivalents as of December 31, 2023 - Fair value measurements are categorized into Level 1 (quoted prices in active markets), Level 2 (observable inputs other than Level 1), and Level 3 (unobservable inputs)487 Financial Assets at Fair Value (in thousands) | Category | Dec 31, 2023 (Level 1) | Dec 31, 2022 (Level 1) | Dec 31, 2022 (Level 2) | | :--------------------------- | :--------------------- | :--------------------- | :--------------------- | | Cash equivalents: Money market funds | $123,387 | $26,408 | — | | Marketable investments: Available-for-sale securities | — | $171,390 | — | | Derivative liabilities: Foreign exchange forward | — | — | $(558) | | Total | $123,387 | $197,798 | $(558) | - Money market funds and available-for-sale securities are classified as Level 1, while derivative financial instruments are classified as Level 2540 NOTE 4. DERIVATIVE INSTRUMENTS Cutera uses foreign currency exchange forward contracts to manage currency risk, with no outstanding derivatives as of December 31, 2023 - Cutera uses foreign currency exchange forward contracts to manage currency risk, not for speculation542 - No derivative instruments were outstanding as of December 31, 2023543 Derivative Instruments (Dec 31, 2022, in thousands) | Metric | Value | | :------------------ | :------ | | Gross Notional Amount | $6,128 | | Fair Value (Unrealized Loss) | $(558) | NOTE 5. BALANCE SHEET DETAIL Inventory valuation adjustments significantly increased in 2023, with AviClear devices reclassified to inventory due to a business model change Inventory Valuation Adjustments (in thousands) | Category | Dec 31, 2023 | Dec 31, 2022 | | :------------------------------------- | :----------- | :----------- | | Valuation adjustments for excess and obsolete inventory | $13,000 | $3,600 | Inventories (in thousands) | Category | Dec 31, 2023 | Dec 31, 2022 | | :-------------- | :----------- | :----------- | | Raw materials | $36,970 | $36,323 | | Work in process | $889 | $2,117 | | Finished goods | $24,741 | $25,188 | | Total | $62,600 | $63,628 | - Long-term inventories, primarily AviClear devices and parts not expected to be sold within 12 months, totaled $16.3 million in 2023, with a $12.8 million valuation adjustment545546 - AviClear devices not yet leased were reclassified from property and equipment to inventories in 2023 due to a shift to a direct sales model549 Accrued Liabilities (in thousands) | Category | Dec 31, 2023 | Dec 31, 2022 | | :----------------------------- | :----------- | :----------- | | Bonus and payroll-related accruals | $13,949 | $18,951 | | Accrued sales tax | $6,325 | $9,066 | | Liability for inventory in transit | $5,461 | $7,028 | | Sales and marketing accruals | $4,929 | $5,347 | | Product warranty | $2,593 | $3,254 | | Jabil settlement obligation, net | $8,908 | — | | Other accrued liabilities | $12,890 | $13,806 | | Total | $55,055 | $57,452 | NOTE 6. PRODUCT WARRANTY Cutera provides 12-14 month product warranties, with the accrual decreasing to $2.6 million in 2023 - Cutera offers a 12-month warranty for direct sales and a 14-month parts-only warranty for distributors507 Product Standard Warranty Accrual (in thousands) | Metric | 2023 | 2022 | | :------------------------- | :---------- | :---------- | | Balance at beginning of year | $3,254 | $3,947 | | Accruals for warranties issued | $4,987 | $3,710 | | Settlements made | $(5,648) | $(4,403) | | Balance at end of year | $2,593 | $3,254 | NOTE 7. DEFERRED REVENUE Deferred revenue, primarily from extended service contracts and AviClear leases, totaled $11.9 million as of December 31, 2023, with 87% expected to be recognized within 12 months - Deferred revenue primarily stems from extended service contracts and AviClear fixed annual license fees556557 - Approximately 87% of the $11.9 million deferred revenue balance as of December 31, 2023, is expected to be recognized within the next 12 months556 Deferred Revenue Balance (in thousands) | Metric | Dec 31, 2023 | Dec 31, 2022 | | :----------------------------------- | :----------- | :----------- | | Beginning balance | $13,498 | $10,825 | | Payments received from current period sales | $21,040 | $21,984 | | Revenue recognized from current period sales | $(11,732) | $(9,928) | | Revenue recognized from beginning balance | $(10,890) | $(9,383) | | Ending balance | $11,916 | $13,498 | - AviClear deferred license fees were $2.1 million in 2023, down from $2.3 million in 2022557 NOTE 8. STOCKHOLDERS' EQUITY, STOCK PLANS AND STOCK-BASED COMPENSATION EXPENSE Stock-based compensation expense decreased to $8.1 million in 2023, reflecting reduced PSU vesting estimates and forfeiture reversals - Cutera operates under the 2019 Equity Incentive Plan (amended from 2004 Plan), 2023 Inducement Equity Incentive Plan, and 2004 Employee Stock Purchase Plan (ESPP)561563571572 - Awards include incentive stock options, non-statutory stock options, RSAs, RSUs, stock appreciation rights, and PSUs, with vesting periods typically 1-4 years565569570803 Total Stock-Based Compensation Expense (in thousands) | Category | 2023 | 2022 | 2021 | | :------------------------- | :--------- | :--------- | :--------- | | Stock options | $2,227 | $2,175 | $782 | | RSUs | $6,100 | $6,979 | $5,305 | | PSUs | $(586) | $4,430 | $6,591 | | ESPP | $323 | $816 | $494 | | Total Expense | $8,064 | $14,400| $13,172| - Stock-based compensation expense decreased in 2023 due to reduced estimates for PSU vesting probability and reversals from unvested equity award forfeitures580 - The ESPP was suspended in Q3 2023 due to the late filing of the Quarterly Report on Form 10-Q573808 NOTE 9. INCOME TAXES Cutera's income tax provision decreased slightly in 2023, with a $97.3 million valuation allowance against deferred tax assets Income (Loss) Before Income Taxes (in thousands) | Geography | 2023 | 2022 | 2021 | | :-------- | :------------ | :------------ | :---------- | | U.S. | $(165,784) | $(84,189) | $(356) | | Foreign | $4,485 | $3,487 | $3,741 | | Total | $(161,299)| $(80,702) | $3,385 | Income Tax Provision (in thousands) | Category | 2023 | 2022 | 2021 | | :------- | :--------- | :--------- | :--------- | | Current | $1,517 | $1,453 | $1,425 | | Deferred | $17 | $185 | $(102) | | Total| $1,534 | $1,638 | $1,323 | - A valuation allowance of $97.3 million was recorded against deferred tax assets as of December 31, 2023, an increase of $44.2 million from 2022585 - The company has $190.7 million in federal and $99.4 million in state net operating loss carryforwards, and $23.6 million in R&D tax credits586 Effective Tax Rate Reconciliation | Item | 2023 | 2022 | 2021 | | :--------------------------------- | :------ | :------ | :------ | | U.S. federal statutory income tax rate | 21.00 % | 21.00 % | 21.00 % | | Valuation allowance | (21.52)%| (11.41)%| 72.82 % | | Effective tax rate | (1.17)%| (2.04)%| 39.11 %| NOTE 10. NET INCOME (LOSS) PER SHARE Cutera reported identical basic and diluted net loss per share of $(8.19) in 2023 and $(4.39) in 2022 due to anti-dilutive effects Net Income (Loss) Per Share | Metric | 2023 | 2022 | 2021 | | :------------------------- | :------ | :------ | :------ | | Net income (loss) | $(162,833)| $(82,340) | $2,062 | | Basic EPS | $(8.19) | $(4.39) | $0.12 | | Diluted EPS | $(8.19) | $(4.39) | $0.11 | | Weighted-average shares (Basic) | 19,885 | 18,747 | 17,891 | | Weighted-average shares (Diluted) | 19,885 | 18,747 | 18,362 | - Basic and diluted net loss per share were identical in 2023 and 2022 because potentially dilutive shares were anti-dilutive due to net losses595 - The company uses the if-converted method for convertible notes in diluted EPS calculation, assuming settlement in shares if dilutive530593 NOTE 11. DEFINED CONTRIBUTION PLAN Cutera made discretionary 401(k) contributions of $0.5 million in both 2023 and 2022 for its U.S. employees - Cutera's U.S. 401(k) Plan allows voluntary employee contributions596 401(k) Plan Discretionary Contributions (in millions) | Year | Contribution | | :--- | :----------- | | 2023 | $0.5 | | 2022 | $0.5 | | 2021 | $0.3 | - Foreign subsidiaries maintain discretionary retirement plans, with obligations fully funded or accrued597 NOTE 12. SEGMENT INFORMATION AND REVENUE BY GEOGRAPHY AND PRODUCTS Cutera realigned to a single reportable segment in Q4 2023, with total consolidated revenue decreasing to $212.4 million in 2023 - Cutera realigned to one consolidated reportable segment in Q4 2023, with the CEO as the chief operating decision maker599600 - Substantially all of the company's long-lived assets are located in the U.S601 Revenue by Geography and Product Category (in thousands) | Category / Year | 2023 | 2022 | 2021 | | :------------------------ | :---------- | :---------- | :---------- | | Revenue by Geography: | | | | | United States | $88,378 | $107,453 | $96,629 | | Japan | $52,135 | $64,920 | $70,235 | | Asia, excluding Japan | $18,702 | $21,873 | $12,649 | | Europe | $20,330 | $20,882 | $19,444 | | Rest of the world | $32,824 | $37,271 | $32,313 | | Total Consolidated Revenue| $212,369| $252,399| $231,270| | Revenue by Product Category: | | | | | Systems | $130,528 | $164,559 | $139,633 | | Consumables | $25,302 | $21,737 | $16,401 | | Skincare | $33,983 | $42,500 | $49,669 | | Service | $22,556 | $23,603 | $25,567 | NOTE 13. COMMITMENTS AND CONTINGENCIES Cutera has various operating and finance leases, $10.7 million in 2024 purchase commitments, and $3.3 million accrued for legal contingencies - Cutera is a party to operating and finance leases for vehicles, office space, and storage facilities, with remaining terms of 1 to 7 years603 Lease Liabilities (in thousands) | Category | Dec 31, 2023 | Dec 31, 2022 | | :--------------------------- | :----------- | :----------- | | Total Operating Lease Liabilities | $11,328 | $14,162 | | Total Finance Lease Liabilities | $1,889 | $1,310 | - The company leases AviClear devices to customers, generating operating lease income from fixed annual license fees and variable treatment revenue611614 AviClear Operating Lease Income (in thousands) | Category | 2023 | 2022 | | :----------------------------- | :---------- | :--------- | | AviClear operating lease license fee revenue | $5,386 | $922 | | AviClear operating lease treatment revenue | $10,451 | $3,534 | | Total AviClear revenue | $15,837 | $4,456 | - As of December 31, 2023, Cutera had $10.7 million in non-cancelable inventory purchase obligations due in 2024623 - The company accrued $3.3 million for various pending commercial and product liability lawsuits as of December 31, 2023626 NOTE 14. DEBT Cutera's debt primarily consists of $429.1 million in convertible notes, with capped call transactions to mitigate dilution Convertible Notes Carrying Value (in thousands) | Note Series | Outstanding Principal (Dec 31, 2023) | Carrying Value (Dec 31, 2023) | | :---------- | :----------------------------------- | :---------------------------- | | 2026 Notes | $69,125 | $68,041 | | 2028 Notes | $240,000 | $234,286 | | 2029 Notes | $120,000 | $116,368 | | Total | $429,125 | $418,695 | - The 2026 Notes (2.25%), 2028 Notes (2.25%), and 2029 Notes (4.00%) are senior unsecured obligations with conditional conversion features634637638648656662 - In May 2022, $69.1 million of 2026 Notes were exchanged for cash and common stock, resulting in a $34.4 million loss on extinguishment of debt640641 - Capped call transactions were entered into for each series of notes to reduce potential dilution upon conversion, with strike prices equal to conversion prices and initial cap prices representing 75-100% premiums668669670671 - Total interest expense for 2023, including debt issuance cost amortization, was approximately $14.0 million, up from $7.0 million in 2022675 NOTE 15. QUARTERLY INFORMATION (UNAUDITED) Unaudited quarterly financial data for 2023 and 2022 shows fluctuating net revenue and consistent net losses across all quarters - Unaudited quarterly financial data for 2023 and 2022 is presented, reflecting a restatement for Q1 and Q2 2023678 Unaudited Quarterly Financial Data (in thousands, except per share data) | Metric | Dec 31, 2023 | Sep 30, 2023 | Jun 30, 2023 | Mar 31, 2023 | Dec 31, 2022 | Sep 30, 2022 | Jun 30, 2022 | Mar 31, 2022 | | :--------------- | :----------- | :----------- | :----------- | :----------- | :----------- | :----------- | :----------- | :----------- | | Net revenue | $49,540 | $46,478 | $61,825 | $54,526 | $67,353 | $62,808 | $64,224 | $58,014 | | Gross profit | $(12,678) | $6,457 | $26,083 | $21,632 | $38,749 | $34,248 | $35,044 | $31,788 | | Net loss | $(57,233) | $(44,274) | $(33,278) | $(28,048) | $(7,788) | $(12,134) | $(47,276) | $(15,142) | | Basic EPS | $(2.87) | $(2.22) | $(1.68) | $(1.42) | $(0.40) | $(0.62) | $(2.53) | $(0.84) | NOTE 16. SUBSEQUENT EVENTS Key subsequent events include a new warehouse lease, termination of the Japan skincare agreement, and a $19.5 million settlement with Jabil Inc - A new 53,000 sq ft warehouse in Hayward, CA, was leased on January 16, 2024, for inventory consolidation680 - The skincare distribution agreement with ZO in Japan was terminated on February 28, 2024, with ZO paying Cutera $11.5 million in two installments ($5.75 million received Feb 29, 2024, and $2.37 million received April 1, 2024, net of $1.6 million owed by Cutera)681 - The manufacturing service agreement with Jabil Inc. was not renewed, resulting in a $19.5 million settlement payment by Cutera to Jabil in February 2024, including $5.7 million for Jabil's incurred expenses and a $4.6 million accrued loss on excess inventory683684685 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There have been no changes in or disagreements with accountants on accounting and financial disclosure ITEM 9A. CONTROLS AND PROCEDURES Cutera's disclosure controls were ineffective as of December 31, 2023, due to material weaknesses in internal control over financial reporting, with remediation ongoing - Disclosure controls and procedures were deemed ineffective as of December 31, 2023, due to material weaknesses in internal control over financial reporting691698 - Identified material weaknesses include ITGCs (segregation of duties, user access, ERP system reports), inventory controls (completeness, existence, cut-off, obsolescence adjustments), completeness/accuracy of equity-based award expense, and deficiencies in the risk assessment program697 - Management believes the consolidated financial statements fairly present financial condition despite the material weaknesses691 - Remediation efforts are underway, focusing on ITGC training, enhanced risk assessment, global inventory count policies, and improved review controls for equity compensation expense699700701703 ITEM 9B. OTHER INFORMATION This item reports that there is no other information required to be disclosed ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS This item is not applicable to Cutera, Inc PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE This section details Cutera's Board and executive officers, corporate governance practices, and commitment to ESG initiatives, noting late Section 16(a) filings - The Board of Directors consists of Taylor C. Harris (CEO), Kevin J. Cameron (Executive Chairman), Sheila A. Hopkins, Nicholas S. Lewin, and Keith J. Sullivan, with a majority being independent directors713729 - Executive officers include Taylor C. Harris (CEO), Stuart D. Drummond (Interim CFO), Jeffrey S. Jones (COO), Michael A. Karavitis (CTO), and Stephana E. Patton (CLO)720 - The Board's leadership structure separates the roles of Chairperson (Kevin Cameron) and CEO (Taylor Harris) to allow the CEO to focus on business strategy730 - The Board oversees risk management through its Audit, Compensation, and Governance and Corporate Responsibility Committees, which are composed of independent directors731735737 - Key governance policies include a Code of Business Conduct and Ethics, a Clawback Policy for executive officers, and an Insider Trading Compliance Program that discourages derivatives trading747748749 - The company is committed to diversity, equity, and inclusion, and has formalized environmental, social, and corporate responsibility policies, including an Enterprise-Level Environmental Policy and Human Rights Policy113754 - Several Section 16(a) reports for directors and executive officers were filed late in 2023758 ITEM 11. EXECUTIVE COMPENSATION Cutera's executive compensation aligns with stockholder interests through base salary, bonuses, and equity, with no cash bonuses paid in 2023 due to unachieved performance - Executive compensation is designed to attract, retain, motivate, and reward key personnel, balancing fixed base pay with performance-based incentives tied to business goals and stockholder value763764775 - The Compensation Committee, with an independent consultant (Alpine Rewards replacing Compensia in 2024), reviews and approves executive compensation, benchmarking against a peer group of medical device and healthcare companies768769770772 - In 2023, no payments were made under the Management Bonus Plan as corporate performance measures (AviClear revenue, Non-AviClear revenue, Non-GAAP gross margin, Non-GAAP operating income) were not achieved797800 - Long-term incentive compensation, primarily equity awards (RSUs, PSUs, options), promotes long-term performance and stockholder alignment, with specific performance targets for PSUs (e.g., AviClear commercial goals, truBody growth, product development, cash/inventory/receivables targets)801803805 - The company provides health and welfare benefits, and post-employment compensation through an Executive Change in Control and Severance Policy, which offers severance payments and equity acceleration under specific termination or change-in-control scenarios808809853854855 - Stock ownership guidelines require the CEO to hold shares valued at 3x annual base salary and other executives at 1x, with a five-year period to attain these levels813 2023 Summary Compensation Table (Selected Named Executive Officers, in $) | Name | Salary | Option Awards | Stock Awards | Non-Equity Incentive Plan Compensation | | :--------------- | :---------- | :------------ | :----------- | :------------------------------------- | | Taylor C. Harris | $271,023 | $4,250,008 | $2,747,683 | $0 | | Stuart D. Drummond | $293,030 | $27,500 | $209,087 | $94,368 | | Jeffrey S. Jones | $128,472 | $187,505 | $45,163 | $0 | | Michael A. Karavitis | $457,496 | $125,000 | $268,622 | $248,218 | | Stephana E. Patton | $57,955 | $0 | $0 | $0 | 2023 Director Compensation Table (Selected Non-Employee Directors, in $) | Name | Fees Earned or Paid in Cash | Option Awards | Stock Awards | | :--------------- | :-------------------------- | :------------ | :----------- | | Gregory A. Barrett | $97,500 | $0 | $0 | | Kevin J. Cameron | $35,397 | $250,003 | $0 | | Nicholas S. Lewin | $187,784 | $250,003 | $0 | | Keith J. Sullivan | $19,750 | $0 | $200,295 | ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS This section details beneficial ownership of Cutera's common stock by major stockholders, directors, and executive officers, and securities authorized under equity plans - As of March 31, 2024, 20,013,041 shares of common stock were outstanding906 Beneficial Ownership of Common Stock (as of March 31, 2024) | Beneficial Owner | Number of Shares Beneficially Owned | Approximate Percent Owned | | :--------------------------- | :---------------------------------- | :------------------------ | | RTW Investments, LP | 1,817,585 | 9.1 % | | GAMCO Investors, Inc | 1,526,026 | 7.6 % | | BlackRock, Inc | 1,323,489 | 6.6 % | | Pura Vida Investments, LLC | 1,270,494 | 6.3 % | | The Vanguard Group | 1,012,287 | 5.1 % | | All other directors and executive officers as a group (13 persons) | 111,966 | * | Securities Authorized for Issuance Under Equity Compensation Plans (Dec 31, 2023) | Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) | Weighted average exercise price of outstanding options, warrants and rights (b) | Number of securities remaining available for future issuance (c) | | :------------------------------------------ | :-------------------------------------------------------------------------------- | :-------------------------------------------------------------- | :--------------------------------------------------------------- | | Equity compensation plans approved by security holders | 127,863 | 27.54 | 1,397,725 | | Equity compensation plan not approved by security holders | — | — | — | | Total | 127,863 | 27.54 | 1,397,725 | ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE No material related party transactions occurred, and a policy requires Audit Committee approval for transactions exceeding $120,000 - No material related party transactions occurred since the beginning of the last fiscal year913 - A written policy requires Audit Committee approval for related person transactions exceeding $120,000, ensuring fair terms and considering the related person's interest914 ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES Audit fees incurred by BDO USA, P.C. increased to $4.1 million in 2023, with all services pre-approved by the Audit Committee - The Audit Committee pre-approves all audit and non-audit services by the Independent Registered Public Accounting Firm, BDO USA, P.C916 Aggregate Fees for Audit and Non-Audit Services (in $) | Service Category | 2023 | 2022 | | :--------------- | :------------ | :------------ | | Audit Fees | $4,060,323 | $3,558,176 | | Audit-Related Fees | $0 | $0 | | Tax Fees | $0 | $0 | | Non-Audit Fees | $0 | $0 | | Total | $4,060,323| $3,558,176| - Audit fees increased by approximately $0.5 million from 2022 to 2023918 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES This section lists the financial statements, schedules, and exhibits filed or incorporated by reference in the Form 10-K - The report includes consolidated financial statements and schedules920 - A comprehensive list of exhibits is provided, including corporate governance documents, debt agreements, and compensation plans921922923924 ITEM 16. FORM 10-K SUMMARY This item indicates that no Form 10-K summary is provided