CUTERA INC MANAGEMENT REPORT AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS (Form 10-Q)

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This Management's Discussion and Analysis should be read in conjunction with the
Company's financial condition and results of operations in conjunction with the
Company's unaudited condensed consolidated financial statements and notes
thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q and the
Company's audited financial statements and notes thereto for the year ended
December 31, 2021, included in its annual report on Form 10-K filed with the
U.S. Securities and Exchange Commission ("SEC") on March 1, 2022.

Unless otherwise indicated, all reported results are prepared in a manner that conforms, in all material respects, to generally accepted accounting principles in The United States of America (“GAAP”). In addition, unless otherwise indicated, all changes identified for the results of the current period represent comparisons with the results of the prior corresponding fiscal period.

Special note regarding forward-looking statements

This report contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed in the forward-looking statements. The statements contained in this
report that are not purely historical are forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Securities
Exchange Act of 1934, as amended, ("the Exchange Act"). Forward-looking
statements are often identified by the use of words such as, but not limited to,
"anticipate," "believe," "can," "continue," "could," "estimate," "expect,"
"intend," "may," "plan," "project," "seek," "should," "strategy," "target,"
"will," "would" and similar expressions or variations intended to identify
forward-looking statements. These statements are based on the beliefs and
assumptions of the Company's management based on information currently available
to management. Such forward-looking statements are subject to risks,
uncertainties and other important factors that could cause actual results and
the timing of certain events to differ materially from future results expressed
or implied by such forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, those identified
below and those discussed in the section titled "Risk Factors" included under
Part II, Item 1A below.

Furthermore, such forward-looking statements speak only as of the date of this
report. Except as required by law, the Company undertakes no obligation to
update any forward-looking statements to reflect events or circumstances after
the date of such statements.

Introduction

The management report, or management report, is organized as follows:

•Executive Summary. This section provides a general description and history of
the Company's business, a brief discussion of its product lines and the
opportunities, trends, challenges and risks the Company focuses on in the
operation of its business.
•Critical Accounting Policies and Estimates. This section describes the key
accounting policies that are affected by critical accounting estimates.
•Results of Operations. This section provides the Company's analysis and outlook
for the significant line items on its condensed consolidated statements of
operations.
•Liquidity and Capital Resources. This section provides an analysis of the
Company's liquidity and cash flows, as well as a discussion of its commitments
that existed as of June 30, 2022.

Summary

Company Description

The Company is a leading provider of aesthetic and dermatology solutions for
practitioners worldwide. In addition to internal development of products, the
Company distributes third party sourced products. The Company offers easy-to-use
products that enable medical practitioners to perform safe and effective
procedures, including treatment for acne, body contouring, skin resurfacing and
revitalization, tattoo removal, removal of benign pigmented lesions, vascular
conditions, and hair removal. The Company's platforms are designed to be easily
upgraded to add additional applications and hand pieces, which provide
flexibility for the Company's customers as they expand their practices. In
addition to systems and upgrade revenue, the Company generates revenue from the
sale of post warranty service contracts, providing services for products that
are out of warranty, hand piece refills and other per procedure related revenue
on select systems and distribution of third-party manufactured skincare
products. The Company also expands its revenues from sales of third-party
skincare products by utilizing its network and relationships with physicians and
practitioners.

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The Company's ongoing research and development activities primarily focus on
developing new products, as well as improving and enhancing the Company's
portfolio of existing products. The Company also explores ways to expand the
Company's product offerings through alternative arrangements with other
companies, such as distribution arrangements. The Company introduced Secret RF,
a fractional RF microneedling device for skin revitalization, in January
2018, enlighten SR in April 2018, truSculpt iD in July 2018, excel V+ in
February 2019, truSculpt flex in June 2019, Secret PRO in July 2020, excel V+III
during the fourth quarter of 2020, and AviClear in April 2022.

The Company's corporate headquarters and U.S. operations are located in
Brisbane, California, where the Company conducts manufacturing, warehousing,
research and development, regulatory, sales and marketing, service, and
administrative activities. The Company markets sells and services the Company's
products through direct sales and service employees in North America (including
Canada), Australia, Austria, Belgium, France, Germany, Hong Kong, Japan,
Netherlands, Spain, Switzerland and the United Kingdom. Sales and Services
outside of these direct markets are made through a worldwide distributor network
in over 42 countries.

Products and Services

The Company derives revenue from the sale of Products and Services. Product
revenue includes revenue from the sale of systems, hand pieces and upgrade of
systems (collectively "Systems" revenue), replacement hand
pieces, truSculpt iD cycle refills, and truSculpt flex cycle refills, as well as
single use disposable tips applicable to Secret RF and Secret PRO ("Consumables"
revenue), and the sale of third party manufactured skincare products ("Skincare"
revenue). A system consists of a console that incorporates a universal graphic
user interface, a laser and or other energy-based module, control system
software and high voltage electronics, as well as one or more hand pieces.
However, depending on the application, the laser or other energy-based module is
sometimes contained in the hand piece.

The Company offers customers the ability to select the system that best fits
their practice at the time of purchase and then to cost-effectively add
applications to their system as their practice grows. This provides customers
the flexibility to upgrade their systems whenever they choose and provides the
Company with a source of additional Systems revenue. The Company's primary
system platforms include excel, enlighten, Secret RF, truSculpt and xeo.

In March 2022the Company has received 510(k) clearance from the US Food and Drug Administration (“FDA”) for the AviClear acne treatment device.

AviClear is a laser treatment that offers a safe, prescription-free solution for
acne. In addition to reducing existing acne, clinical trials show that future
breakout episodes are shorter, less intense, and more infrequent following the
AviClear procedure. Further, acne clearance results continue to improve over
time, demonstrating the long-term efficacy of this novel treatment. Importantly,
no pain mitigation was utilized or required by any clinical study participant.

Acne vulgaris is a nearly universal skin disease, with approximately 50 million
North American teens and young adults seeking treatment each year.
Overproduction of sebum by the sebaceous glands is one of the leading causes of
acne. AviClear tackles acne at the source by selectively targeting the sebocytes
and suppressing sebum production. This product is a 1726 nm laser device
designed to treat inflammatory acne vulgaris. AviClear delivers optimal
therapeutic energy in conjunction with the AviCool feature to ensure safety and
scalability of the procedure across all skin types and acne severities. AviClear
is currently available in a limited commercial capacity in the U.S. and the
Company expects a full commercial launch by the end of the current calendar
year.

Skincare revenue relates to the distribution of ZO's skincare products in Japan.
The skincare products are purchased from a third-party manufacturer and sold to
medical offices and licensed physicians. The Company acts as the principal in
this arrangement, as the Company determines the price to charge customers for
the skincare products and controls the products before they are transferred to
the customer.

Services revenue includes prepaid service contracts, customer marketing support and labor on out-of-warranty products.

Important Business Trends

The Company believes that its ability to grow revenue will be primarily
dependent on the following:
•the successful commercialization of AviClear
•continuing to expand the Company's product offerings, both through internal
development and sourcing from other vendors;
•ongoing investment in the Company's global sales and marketing infrastructure;
•use of clinical results to support new aesthetic products and applications;

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•enhanced physician development and reference selling efforts (to develop a
location where Company's products can be displayed and used to assist in selling
efforts);
•customer demand for the Company's products;
•consumer demand for the application of the Company's products;
•marketing to those practitioners focused on aesthetic and dermatological
conditions; and
•generating recurring revenue from the Company's growing installed base of
customers through the sale of system upgrades, services, hand piece
refills, truSculpt cycles, skincare products and replacement tips for the
Secret RF product.

For a detailed discussion of significant business trends affecting its business, please see the section entitled “Results of Operations” below.

Factors that may affect future performance

The Company's industry is impacted by numerous competitive, regulatory and other
significant factors. The Company's industry is highly competitive and the
Company's future performance depends on the Company's ability to compete
successfully. Additionally, the Company's future performance is dependent upon
the ability to continue to expand the Company's product offerings with
innovative technologies, obtain regulatory clearances for the Company's
products, protect the proprietary technology of the products and manufacturing
processes, manufacture the products cost-effectively, and successfully market
and distribute the products in a profitable manner. If the Company fails to
execute on the aforementioned initiatives, the Company's business would be
adversely affected.

The Company supports any reasonable action that helps ensure patient safety in the future. The company has a robust, multi-functional process that reviews its claims and promotional materials to ensure they are truthful, not misleading, fair and balanced, and backed by solid scientific evidence.

A detailed discussion of these and other factors that could impact the Company's
future performance are provided in (1) the Company's Annual Report on Form 10-K
for the year ended December 31, 2021- Part I, Item 1A "Risk Factors," and (2)
other announcements the Company makes from time to time.

Risks and uncertainties

The COVID-19 outbreak and related variants have negatively affected the United
States and global economies. The spread of the coronavirus has impacted the
global economy broadly from 2020, including restrictions on travel, shifting
work forces to work remotely and quarantine policies put into place by
businesses and governments, and had a material economic effect on the Company's
business during the years ended December 31, 2020 and 2021. Healthcare
facilities in many countries effectively banned elective procedures and this had
a significant impact on the Company. Many of the Company's products are used in
aesthetic elective procedures and as such, the bans on elective procedures
substantially reduced the Company's sales and marketing efforts during the
pandemic and led the Company to implement cost control measures. Although the
Company's operation and results of operations have significantly improved as the
economic outlook improved in 2021 and into 2022, the COVID-19 outbreak continues
to be fluid, and the aftermath of the business and economic disruptions due to
the COVID-19 is still uncertain, making it difficult to forecast the final
impact it could have on the Company's future operations, including disruptions
in the Company's supply chain and contract manufacturing operations. The
Company cannot presently predict the scope and severity of any impacts in future
periods from business shutdowns or disruptions due to the COVID-19 pandemic, but
the impact on economic activity including the possibility of recession or
financial market instability could have a material adverse effect on the
Company's business, revenue, operating results, cash flows and financial
condition.

In addition the world is currently experiencing widespread inflation. Household
budgets are tight and cash is generally being conserved and spent on essential
items like housing, gas, food, clothing and healthcare. Given the inflationary
environment, fewer funds may be spent on aesthetic treatments, which may
translate into less demand for our products and less revenue as a result.

The Company continues to assess whether any impairment of its goodwill or its
long-lived assets has occurred and has determined that no charges were necessary
during the three and six months ended June 30, 2022. The Company will continue
to monitor future conditions important to its assessment of potential impairment
of its long-lived assets and goodwill, including the impacts of the COVID-19
pandemic and other ongoing impacts which are subject to uncertainty.

In 2021, the Company experienced a significant increase in sales of skincare
products under the exclusive distribution agreement with ZO Skin Health, Inc.,
which allows the Company to sell ZO's skincare products in Japan. The reason for
the increase in skincare products sales may have been the result of the COVID-19
pandemic changing customers' spending habits, resulting in customers purchasing
aesthetic treatments that were able to be applied at home, due to limitations on
in-person

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aesthetic procedures. Future growth in sales of skincare products depends on
customers maintaining spending habits adopted during the COVID-19 pandemic. If
customers revert to original spending habits after the COVID-19 pandemic, such
changes may have a material adverse effect on the Company's revenue, operating
results, and cash flows.

Critical Accounting Policies, Significant Judgments and Use of Estimates

The preparation of the Company's consolidated financial statements and related
notes requires the Company to make judgments, estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities. The Company has based
its estimates on historical experience and on various other assumptions that the
Company believes to be reasonable under the circumstances. The Company
periodically reviews its estimates and makes adjustments when facts and
circumstances dictate. To the extent that there are material differences between
these estimates and actual results, its financial condition or results of
operations will be affected.

An accounting policy is considered to be critical if it requires an accounting
estimate to be made based on assumptions about matters that are highly uncertain
at the time the estimate is made, and if different estimates that reasonably
could have been used, or changes in the accounting estimates that are reasonably
likely to occur periodically, could materially impact the consolidated financial
statements. The Company believes that its critical accounting policies reflect
the more significant estimates and assumptions used in the preparation of its
audited consolidated financial statements.

The accounting policies and estimates that the Company considers to be critical,
subjective, and requiring judgment in their application are summarized in "Item
7-Management's Discussion and Analysis of Financial Condition and Results of
Operations" in its Annual Report on Form 10-K for the year ended December 31,
2021 filed with the SEC on March 1, 2022. There have been no new or material
changes to the significant accounting policies discussed in the Company's Annual
Report on Form 10-K that are of significance, or potential significance, to the
Company.

The Company has established new accounting policies to account for the 2.25% Senior Convertible Bonds due 2026 (the “2026 Bonds” and, together with the 2028 Bonds, the “Convertible Bonds”) and related transactions during the first quarter 2021.

The Company issued $138.3 million of 2026 Notes in a private placement offering
in March 2021. In May 2022, the Company issued an additional $240.0 million of
convertible notes in a further private placement offering. Also in May 2022, the
Company extinguished $69.1 million of the $138.3 million principal balance of
the convertible notes issued in 2021. The notes issued in 2021 and 2022 each
bear interest at a rate of 2.25% per year. In accordance with ASU 2020-06, the
Company recorded the Convertible Notes in long-term debt with no separation
between the notes and the conversion option. Each reporting period, the Company
will determine whether any criteria are met for the note holders to have the
option to redeem the notes early. To the extent there are any conversion
requests, the Company intends to settle such conversion requests in shares of
common stock. Therefore, the convertible notes have been included as Long-term
debt on the condensed consolidated balance sheet.

The issuance costs related to the Convertible Notes are presented in the balance
sheet as a direct deduction from the carrying amount of the Convertible Notes.
See Note 13 of the unaudited condensed consolidated financial statements
included in Item I, Part 1 of this Quarterly Report on Form 10-Q.



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Operating results

The following table sets forth selected consolidated financial data for the
periods indicated, expressed as a percentage of total net revenue. Percentages
in this table and throughout its discussion and analysis of financial condition
and results of operations may reflect rounding adjustments.

                                                     Three Months Ended                           Six Months Ended
                                                          June 30,                                    June 30,
                                                 2022                  2021                  2022                  2021
Net revenue                                          100  %                100  %                100  %                100  %
Cost of revenue                                       45  %                 42  %                 45  %                 43  %
Gross margin                                          55  %                 58  %                 55  %                 57  %

Operating expenses:
Sales and marketing                                   42  %                 31  %                 42  %                 31  %
Research and development                              11  %                  8  %                 11  %                  8  %
General and administrative                            18  %                 14  %                 20  %                 15  %
Total operating expenses                              70  %                 54  %                 74  %                 54  %

(Loss) income from operations                        (16) %                  4  %                (19) %                  3  %
Amortization of debt issuance costs                    -  %                  -  %                  -  %                  -  %
Interest on convertible notes                         (2) %                 (1) %                 (2) %                 (1) %
Loss on extinguishment of convertible notes          (54) %                  -  %                (28) %                  -  %
Gain on extinguishment of PPP loan                     -  %                 12  %                  -  %                  7  %
Other expense, net                                    (2) %                 (1) %                 (2) %                 (1) %
(Loss) income before income taxes                    (74) %                 13  %                (51) %                  7  %

Income tax (benefit) expense                           -  %                  -  %                  -  %                  -  %
Net (loss) income                                    (74) %                 13  %                (51) %                  7  %


Revenue

The timing of the Company's revenue is significantly affected by the mix of
system products, training, consumables and extended service contracts. The
revenue generated in any given period is also impacted by whether the revenue is
recognized over time or at a point in time. For an additional description on
revenue, see Note 1 in the notes to consolidated financial statements on the
Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2021
and Note 7 to the unaudited condensed consolidated financial statements included
in Item I, Part 1 of this Quarterly Report on Form 10-Q.

Revenue is recognized upon transfer of control of promised products or services
to customers in an amount that reflects the consideration to which the Company
expects to be entitled in exchange for promised goods or services. The Company's
performance obligations are satisfied either over time or at a point in time.
Revenue from performance obligations that are transferred to customers over time
accounted for approximately 8% and 18% of the Company's total revenue for the
six months ended June 30, 2022 and 2021, respectively. Revenue recognized over
time relates to revenue from the Company's extended service contracts and
marketing services. Revenue recognized upon delivery is primarily generated by
the sales of systems, consumables and skincare.

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