Item 2.02. Results of Operations and Financial Condition.

On May 24, 2022, Cutera, Inc. (the "Company") issued a press release announcing its intention to offer convertible senior notes in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act (the "Act") and in a concurrent private placement pursuant to Section 4(a)(2) under the Act (collectively, the "Offering"). In connection with the Offering, the Company is providing the following Non-GAAP financial data and a reconciliation to GAAP.




Item 8.01. Other Events.

In connection with the Offering, the Company has updated certain market opportunity information as provided below:

The Company estimates the global aesthetic medicine market to be $12.4 billion with 86 million procedures on an annual basis with an approximate 10% five-year global market compound annual growth rate. The Company also estimates the U.S. acne treatment market to be $4.3 billion with approximately 54 million individuals in the U.S. affected by acne annually and greater than 455 active acne patients per dermatologist in the United States. Of the approximately 54 million acne patients in the United States, approximately 8.5 million of these patients have moderate to severe acne. The Company's AviClear device recently received U.S. Food and Drug Administration 510(k) clearance for the treatment of mild, moderate and severe acne. The Company estimates that approximately 18 million acne patients in the U.S. are teenage females, 21 million are teenage males, 10 million are adult females and 5 million are adult males and 11%, 23%, 8% and 18%, respectively, have moderate or severe acne. The Company further estimates that there are 12,518 dermatologists and approximately 7,800 dermatology practices in the United States.



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In connection with the Offering, the Company has updated its risk factors as provided below:



                                  RISK FACTORS

An investment in the notes involves significant risks and the Company's operations and financial results are subject to various risks and uncertainties including those described below. Prior to making a decision about investing in the notes, and in consultation with your own financial and legal advisors, you should carefully consider, among other matters, the following risk factors, as well as those incorporated by reference in this offering memorandum from the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2021 under the heading "Risk Factors" and subsequent periodic filings with the SEC. The risks and uncertainties described below and incorporated by reference in this offering memorandum are not the only ones the Company faces. Additional risks and uncertainties that the Company is unaware of, or that the Company currently believes are not material, may also become important factors that adversely affect the Company's business. If any of the following risks or others not specified below materialize, the Company's business, financial condition and results of operations could be materially and adversely affected. In that case, the trading price of the notes and the common stock, if any, issuable upon conversion of the notes could decline, which could cause you to lose part or all of your investment.



              Risks Related to the Company's Business and Industry

Growing inflation, global supply chain disruption and other increased operating costs could materially and adversely affect the Company's results of operations.

Growing inflation, global supply chain disruptions, interest rate increases, civil unrest, tariffs and government regulations, which are beyond the Company's control, could adversely affect operating costs and administrative expenses such as wages, benefits, supplies and inventory costs, insurance costs and costs of borrowing. Any such increase could impact results of operations and cash flows if the Company does not choose, or is unable, to pass the increased costs to its customers.

Additionally, the Company relies on a limited number of suppliers for certain components in its products. The Company's ability to secure such components from alternative sources as needed may be time-consuming or expensive or may cause a temporary disruption in the Company's supply chain. Increasingly during 2020 and 2021, the delivery times were extended on certain components. Shortages or interruptions in the supply chain could occur for reasons within or beyond the control of the Company and the supplier. Decreased fuel supplies resulting from the continued war in the Ukraine are anticipated to increase fuel prices, which may adversely impact the Company's transportation costs for its products and personnel. Any shortage or interruption to the Company's supply chain could reduce its sales and profit margins, which in turn may materially and adversely affect its business and results of operations.

The effects of the COVID-19 pandemic have affected how the Company and their customers are operating its businesses, and the duration and extent to which this will impact the Company's future results of operations and overall financial performance remains uncertain.

The COVID-19 outbreak and related variants have negatively affected the United States and global economies. The spread of the coronavirus impacted the global economy broadly in 2020 and 2021, as a result of restrictions on travel, shifting work forces to work remotely and implementing quarantine policies. These factors had a material economic effect on the Company's business during the year ended December 31, 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 in the early months of the pandemic and led the Company to implement cost control measures. Although the Company's revenues and profits have improved recently, the COVID-19 pandemic continues to be fluid, and the long-term impact on the Company's business due to COVID-19 is still uncertain. The Company cannot presently predict the



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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.

The increase in sales of skincare products in Japan may be temporary and sales of Skincare products may decline in the future.

During 2020 and 2021, the Company experienced a significant increase in sales of skincare products under the exclusive distribution agreement with ZO Skin Health, Inc. ("ZO") which allows the Company to sell ZO's skincare products in Japan. The reason for the increase in skincare products sales might have been the result of changes in customers' spending habits to purchase more aesthetic treatments which could be applied at home due to limitations on in-person aesthetic procedures, social distancing and mask wearing requirements due to the COVID-19 pandemic. Future growth in sales of skincare products depends on the customers' spending habits, which may change back 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.

The Company's ability to report timely and accurate information could be negatively impacted by its implementation of a new accounting and enterprise resource planning ("ERP") system.

The Company recently implemented a new accounting and ERP system. An ERP system is intended to combine and streamline the management of the Company's financial, accounting, human resources, sales and marketing and other functions, enabling it to manage operations and track performance more effectively. However, an ERP system will likely require the Company to complete many processes and procedures for the effective use of the system or to run its business using the system, which may result in substantial costs. The Company's business and results of operations may be adversely affected if it experiences operating problems or cost overruns following the implementation process, or if the systems and the associated process changes do not give rise to the benefits that it expects. If the Company does not effectively maintain or integrate the ERP system as planned or if the systems do not operate as intended, it may adversely affect the Company's ability to manage and run its business operations, file reports with the SEC in a timely manner, and/or otherwise affect its internal control environment. Any of these consequences could result in unanticipated costs and diversion of management attention and have an adverse effect on the Company's results of operations and financial condition.

The Company currently relies on third-party contract manufacturers ("CMs") to produce certain systems. This reliance on CMs increases the risk that the Company will not have sufficient supply or that such supply will not be available to the Company at an acceptable cost, which may have a material adverse effect on the Company's business.

The Company has entered into arrangements with third-party CMs to produce and deliver fully assembled systems ready for direct shipment to its customers. The Company may experience supply shortfalls or delays in shipping products to its customers if the Company's CMs experience delays, disruptions, quality control problems in their manufacturing operations, or if the Company has to change or add manufacturers or contract manufacturing locations. Even if products are available, the Company may be unable to obtain sufficient quantities at an acceptable cost or quality. Although the Company has contracts with its manufacturers that include terms to protect it in the event of early termination, the Company may not have adequate time to transition all of its manufacturing needs to an alternative manufacturer under comparable commercial terms. As well, a significant portion of the Company's manufacturing is performed in foreign countries and is therefore subject to risks associated with doing business outside of the U.S., including import restrictions, export restrictions, disruptions to its supply chain, cyberattacks, pandemics, regional climate-related events, or regional conflicts. The



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failure by the Company or its CMs to produce sufficient quantities at acceptable cost and quality may have a material adverse effect on the Company's business.

If defects are discovered in the Company's products, the Company may incur additional unforeseen costs, customers may not purchase the Company's products and the Company's reputation may suffer.

The Company's success depends on the quality and reliability of its products. The Company's products incorporate different components including optical components, and other medical device software, any of which may contain errors or exhibit failures, especially when products are first introduced. In addition, new products or enhancements may contain undetected errors or performance problems that, despite testing, are discovered only after commercial shipment. Because the Company's products are designed to be used to perform complex surgical procedures, due to the serious and costly consequences of product failure, the Company and its customers have an increased sensitivity to such defects. In the past, the Company has voluntarily recalled certain products. Although the Company's products are subject to stringent quality processes and controls, the Company cannot provide assurance that its products will not experience component aging, errors, or performance problems. If the Company experiences product flaws or performance problems, any or all of the following could occur:



  •   delays in product shipments;



  •   loss of revenue;



  •   delay in market acceptance;



  •   diversion of the Company's resources;



  •   damage to the Company's reputation;



  •   product recalls;



  •   regulatory actions;



  •   increased service or warranty costs; or



  •   product liability claims.

Costs associated with product flaws or performance problems could have a material adverse effect on the Company's business, financial condition, results of operations or cash flows.

The success and continuing development of the Company's products depends, in part, upon maintaining strong relationships with physicians and other healthcare professionals.

If the Company fails to maintain the Company's working relationships with physicians and other ancillary healthcare and aesthetic professionals, the Company's products may not be developed and marketed in line with the needs and expectations of the professionals who use and support the Company's products. Physicians assist the Company as researchers, marketing consultants, product consultants, and public speakers, and the Company relies on these professionals to provide the Company with considerable knowledge and experience. If the Company is unable to maintain these strong relationships, the development and marketing of the Company's products could suffer, which could have a material adverse effect on the Company's consolidated financial condition and results of operations.



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The Company relies heavily on its sales professionals to market and sell its products worldwide. If the Company is unable to hire, effectively train, manage, improve the productivity of, and retain the Company's sales professionals, the Company's business will be harmed, which would impair its future revenue and profitability.

The Company's success largely depends on the Company's ability to hire, train, manage, and improve the productivity levels of the Company's sales professionals worldwide. Because of the Company's focus on non-core practitioners in the past, several of its sales professionals do not have established relationships with the core market, consisting of dermatologists and plastic surgeons, or where those relationships exist, they are not appropriately strong.

Competition for sales professionals who are familiar with, and trained to sell in, the aesthetic equipment market continues to be robust. As a result, the Company occasionally loses its salespeople to competitors. The Company's industry is characterized by a few established companies that compete vigorously for talented sales professionals. Some of its sales professionals leave the Company for jobs that they perceive to be better opportunities, both within and outside of the aesthetic industry. For instance, in 2020, the Company experienced significant turnover of the Company's sales professionals, including several people in key sales leadership positions. Most of these sales professionals went to work for a competitor and the loss of these sales professionals negatively impacted the Company's sales performance until the Company was able to hire and train replacement personnel. The Company believes it has adequate measures in place to protect the Company's proprietary and confidential information when employees leave the Company, however the ability to enforce these measures varies from jurisdiction to jurisdiction and the Company must make a case-by-case decision regarding legal enforcement action. For instance, covenants not-to-compete are not allowed in many states, and if allowed, are difficult to enforce in many jurisdictions. Furthermore, such legal enforcement actions are expensive and the Company cannot give any assurance that these enforcement actions will be successful.

However, the Company also continues to hire and train new salespeople, including several from the Company's competitors. Several of the Company's sales employees and sales management are recently hired or transferred into different roles, and it will take time for them to be fully trained to improve their productivity. In addition, due to the competition for sales professionals in the Company's industry, the Company also recruits sales professionals from outside the industry. Sales professionals from outside the industry typically take longer to train and become familiar with the Company's products and the procedures in which they are used. As a result of a lack of industry knowledge, these sales professionals may take longer to become productive members of the Company's sales force.

It takes time for the sales professionals to become productive following their training and there can be no assurance that the newly recruited sales professionals will be adequately trained in a timely manner, or that the Company direct sales productivity will improve, or that the Company will not experience significant levels of attrition in the future.

Measures the Company implements in an effort to recruit, retain, train and manage the Company's sales professionals, strengthen their relationships with core market physicians, and improve their productivity may not be successful and may instead contribute to instability in its operations, additional departures from the Company's sales organization, or further reduce the Company's revenue and harm the Company's business. If the Company is not able to improve the productivity and retention of the Company's North American and international sales professionals, then the Company's total revenue, profitability and the trading price of the notes and the common stock may be adversely impacted.



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The Company recently launched an energy-based solution for the treatment of acne and can provide no assurance that the device will be widely adopted by customers or their patients.

In April 2022, the Company launched AviClear, an energy-based device for the treatment of acne. The Company's ability to achieve and maintain market acceptance of the AviClear will depend on a number of factors and the Company expects that AviClear will be subject to the market forces and adoption curves common to other new aesthetic technologies. Other factors in achieving commercial market acceptance, include:



     •    the Company's ability to market and increase awareness of the
          capabilities of AviClear;



  •   the ability of AviClear to perform as intended in the hands of customers;



     •    willingness of customers to invest in and adopt new products and their
          patients to adopt new treatments;



     •    AviClear's ease of use and whether it reliably provides advantages over
          other alternative treatments;



  •   the price the Company charges for the AviClear system;



     •    if competitors develop and commercialize products that perform similar
          functions as AviClear; and



     •    the Company's ability to establish and manage a sufficient or effective
          sales force for AviClear in a timely or cost-effective manner.

The Company cannot provide any assurances that it will be successful in addressing these criteria or other criteria that might affect the market acceptance of AviClear. If the Company is unsuccessful in achieving and maintaining market acceptance of AviClear, its business, financial condition and results of operations would be adversely affected.

The aesthetic equipment market is characterized by rapid innovation. To compete effectively, the Company must develop and/or acquire new products, seek regulatory clearance, market them successfully, and identify new markets for the Company's technology.

The aesthetic light and energy-based treatment system industry is subject to continuous technological development and product innovation. If the Company does not continue to innovate and develop new products and applications, the Company's competitive position will likely deteriorate as other companies successfully design and commercialize new products and applications or enhancements to the Company's current products. The Company created products to apply the Company's technology to body contouring, hair removal, treatment of veins, tattoo removal and skin revitalization, including the treatment of diffuse redness, fine lines and wrinkles via hemostasis and coagulation, skin texture, pore size and benign pigmented lesions, etc. For example, 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, and the Secret Pro, a device combining the benefits of RF microneedling with the capabilities of a fractional, ablative CO2 laser in September of 2020. In 2021, the Company introduced truSculpt flex+, a treatment mode of muscle sculpting that decreased the treatment time of truSculpt flex from 45 minutes to approximately 15 minutes. To grow in the future, the Company must continue to develop and/or acquire new and innovative aesthetic products and applications, identify new markets, and successfully launch the newly acquired or developed product offerings.

To successfully expand the Company's product offerings, the Company must, among other things:



     •    develop or otherwise acquire new products that either add to or
          significantly improve the Company's current product offerings;



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  •   obtain regulatory clearance for these new products;



     •    convince the Company's existing and prospective customers that the
          Company's product offerings are an attractive revenue-generating addition
          to their practice;



  •   sell the Company's product offerings to a broad customer base;



     •    identify new markets and alternative applications for the Company's
          technology;



     •    protect the Company's existing and future products with defensible
          intellectual property; and



  •   satisfy and maintain all regulatory requirements for commercialization.

Historically, product introductions have been a significant component of the Company's financial performance. To be successful in the aesthetics industry, the Company believes it needs to continue to innovate. The Company's business strategy is based, in part, on its expectation that the Company will continue to increase or enhance its product offerings. The Company needs to continue to devote substantial research and development resources to make new product introductions, which can be costly and time consuming to its organization.

The Company also believes that, to increase revenue from sales of new products, the Company needs to continue to develop its clinical support, further expand and nurture relationships with industry thought leaders, and increase market awareness of the benefits of its new products. However, even with a significant investment in research and development, the Company may be unable to continue to develop, acquire or effectively launch and market new products and technologies regularly, or at all. If the Company fails to successfully commercialize new products or enhancements, its business may be harmed.

While the Company attempts to protect its products through patents and other intellectual property, there are few barriers to entry that would prevent new entrants or existing competitors from developing products that compete directly with the Company's. The Company expects that any competitive advantage the Company may enjoy from current and future innovations may diminish over time as companies successfully respond to the Company's, or create their own, innovations. Consequently, the Company believes that it will have to continuously innovate and improve the Company's products and technology to compete successfully. If the Company is unable to innovate successfully, its products could become obsolete and its revenue could decline as its customers and prospective customers purchase its competitors' products.

Demand for the Company's products in any of the Company's markets could be weakened by several factors, including:



     •    inability to develop and market the Company's products to the core market
          specialties of dermatologists and plastic surgeons;



     •    poor financial performance of market segments that attempt to introduce
          aesthetic procedures to their businesses;



     •    the inability to differentiate the Company's products from those of the
          Company's competitors;



  •   competitive threat from new innovations and product introductions;



  •   reduced patient demand for elective aesthetic procedures;



     •    failure to build and maintain relationships with opinion leaders within
          the various market segments; and



     •    the lack of credit financing, or an increase in the cost of borrowing,
          for some of the Company's potential customers.



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If the Company does not achieve anticipated demand for the Company's products, there could be a material adverse effect on its total revenue, profitability, employee retention and the trading price of the notes and the common stock.

The Company depends on skilled and experienced personnel to operate its global business effectively. Changes to management or the inability to recruit, hire, train and retain qualified personnel, could harm the Company's ability to successfully manage, develop and expand its business, which would impair the Company's future revenue and profitability.

The Company's success largely depends on the skills, experience and efforts of the Company's officers and other key employees. The loss of any of the Company's executive officers could weaken its management expertise and harm the Company's business, and it may not be able to find adequate replacements on a timely basis, or at all. Except for Change of Control and Severance Agreements for the Company's executive officers and a few key employees, the Company does not have employment contracts with any of its officers or other key employees. Any of the Company's officers and other key employees may terminate their employment at any time and their knowledge of the Company's business and industry may be difficult to replace. The Company does not have a succession plan in place for each of its officers and key employees. In addition, the Company does not maintain "key person" life insurance policies covering any of the Company's employees.

In addition to dependence on the Company's officers and key employees, the Company is highly dependent on other sales and scientific personnel. For example, in the first quarter of 2020 the Company experienced turnover of its sales professionals, including several people in key sales leadership positions. Most of these sales professionals went to work for a competitor. Additionally, the Company's product development plans depend, in part, on the Company's ability to attract and retain engineers with experience in medical devices. Attracting and retaining qualified personnel will be critical to the Company's success, and competition for qualified personnel is intense. The Company may not be able to attract and retain personnel on acceptable terms given the competition for such personnel among technology and healthcare companies and universities. The loss of any of these persons or the Company's inability to attract, train and retain qualified personnel could harm the Company's business and the Company's ability to compete and become profitable.

Security breaches, cyber-security incidents and other disruptions could compromise the Company's information and impact the Company's business, financial condition or results of operations.

The Company relies on networks, information management software and other technology, or information systems, including the Internet and third-party hosted services, to support a variety of business processes and activities, including procurement and supply chain, manufacturing, distribution, invoicing, order processing and collection of payments. The Company uses information systems to process financial information and results of operations for internal reporting purposes and to comply with regulatory financial reporting, legal and tax requirements. In addition, the Company depends on information systems for digital marketing activities and electronic communications among the Company's locations around the world and between company personnel as well as customers . . .

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