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    CUTR   US2321091082

CUTERA, INC.

(CUTR)
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CUTERA : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

08/06/2021 | 05:04pm EST
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, 2020, included in its annual report on Form 10-K filed with the
U.S. Securities and Exchange Commission ("SEC") on March 23, 2021.
Unless otherwise indicated, all results presented are prepared in a manner that
complies, in all material respects, with accounting principles generally
accepted in the United States of America ("GAAP"). Additionally, unless
otherwise indicated, all changes identified for the current-period results
represent comparisons to results for 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's Discussion and Analysis, or MD&A, is organized as follows:
•Executive Summary. This section provides a general description and history of
the Company's business, a brief discussion of the 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, 2021.
Executive Summary
Company Description
The Company is a leading medical device company specializing in the research,
development, manufacture, marketing and servicing of light and other
energy-based aesthetics systems for practitioners worldwide. In addition to
internal development of products, the Company distributes third party sourced
products under the Company's own brand names. The Company offers easy-to-use
products which enable practitioners to perform safe and effective aesthetic
procedures, including treatment for body contouring, skin resurfacing and
revitalization, tattoo removal, removal of benign pigmented lesions, vascular
conditions, hair removal, toenail fungus and women's intimate health. 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.
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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.
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 Juliet, a
product for women's intimate health, in December 2017, 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 and excel
V+III during the fourth quarter of 2020.
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, 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 Juliet and Secret RF ("Consumables"
revenue), the sale of third party manufactured skincare products ("Skincare"
revenue); and the leasing of equipment through a membership program. 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 such as with the
Company's Pearl and Pearl Fractional applications instead of within the console.
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, Juliet, Secret RF, truSculpt and xeo.
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.
Service revenue includes prepaid service contracts, enlighten installation,
customer marketing support and labor on out-of-warranty products.
Significant Business Trends
The Company believes that its ability to grow revenue will be primarily
dependent on the following:
•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;
•enhanced luminary 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 physicians in the core dermatology and plastic surgeon
specialties, as well as outside those specialties; 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 Juliet and Secret RF products.
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For a detailed discussion of the significant business trends impacting its
business, please see the section titled "Results of Operations" below.
Factors that May Impact 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
going forward. The Company has a robust, multi-functional process that reviews
its promotional claims and materials to ensure they are truthful, not
misleading, fair and balanced, and supported by sound 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, 2020- Part I, Item 1A "Risk Factors," and (2)
other announcements the Company makes from time to time.
Impact of COVID-19 on Company's business and operations
In March 2020, the World Health Organization declared the COVID-19 outbreak a
pandemic. The COVID-19 outbreak, and lately the Delta variant, has negatively
affected the United States and global economies. The spread of the coronavirus,
which caused a broad impact in 2020 globally, including restrictions on travel,
shifting work force to work remotely and quarantine policies put into place by
businesses and governments, had a material economic effect on the Company's
business during the year ended December 31, 2020. Notably, healthcare facilities
in many countries effectively banned elective procedures. 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 operation and results of
operations have significantly improved as the economic outlook due to
the COVID-19 pandemic improves in 2021, 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 the 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 Company continues to assess whether any impairment of its goodwill or its
long-lived assets has occurred, and has determined that no charges other than an
impairment loss of $0.2 million on capitalized implementation costs
of cloud-based CRM software during the six months ended June 30, 2021. The
Company's assumptions about 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 to its business, are
subject to uncertainty, and the Company will continue to monitor these
conditions in future periods as new information becomes available, and will
update its analyses accordingly.
The Company has 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 changes in
customers' spending habits as customers purchased more aesthetic treatments that
were able to 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
customers' spending habits, which may 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
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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,
2020 filed with the SEC on March 23, 2021. Except the new policies explained
below, 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 established new accounting policies to account for the Convertible
notes and related transactions during the first quarter of 2021.
The Company issued $138.3 million of convertible senior notes in a private
placement offering on March 5, 2021. The notes bear interest at a rate of 2.25%
per year. In accordance with ASU 2020-06, the Company recorded the 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, which will
result in a change in the classification of the notes to current liabilities.
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.
In connection with issuance of the notes, the Company entered into capped call
transactions with certain option counterparties. The capped call transactions
are generally designated to reduce the potential dilution of the
Company's common stock upon any conversion of the notes. The capped calls were
purchased for $16.1 million and recorded as a reduction to stockholders' equity
Basic income (loss) per share of common stock is calculated by dividing net
income available to common stockholders by the weighted average number of common
shares outstanding for the respective period in accordance with ASC 260. Diluted
loss per common share reflects the potential dilution that would occur if
contracts to issue common stock were exercised or converted into common stock.
See Note 9 the unaudited condensed consolidated financial statements included in
Item I, Part 1 of this Quarterly Report on Form 10-Q.

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Results of Operations
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,
                                              2021             2020            2021            2020
Net revenue                                         100  %     100  %               100  %     100  %
Cost of revenue                                      42  %      56  %                43  %      56  %
Gross margin                                         58  %      44  %                57  %      44  %

Operating expenses:
Sales and marketing                                  31  %      42  %                31  %      44  %
Research and development                              8  %      11  %                 8  %      12  %
General and administrative                           14  %      32  %                15  %      28  %
Total operating expenses                             54  %      86  %                54  %      84  %

Income (loss) from operations                         4  %     (41) %                 3  %     (39) %
Amortization of debt issuance costs                   -  %       -  %                 -  %       -  %
Interest on Convertible notes                        (1) %       -  %                (1) %       -  %
Gain on extinguishment of PPP loan                   12  %       -  %                 7  %       -  %
Other income (expense), net                          (1) %       -  %                (1) %       -  %
Income (loss) before income taxes                    13  %     (41) %                 7  %     (40) %

Income tax expense                                    -  %       2  %                 -  %       1  %
Net income (loss)                                    13  %     (43) %                 7  %     (41) %


Revenue
The timing of the Company's revenue is significantly affected by the mix of
system products, installation, training, consumables and extended contract
services. The revenue generated in any given period is also impacted by whether
the revenue is recognized over time or upon completion of delivery. 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, 2020 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 12% and 18% of the Company's total revenue for the
six months ended June 30, 2021 and 2020, 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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© Edgar Online, source Glimpses

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