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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2023
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to_____.
Commission File Number: 000-50644
Cutera, Inc.
(Exact name of registrant as specified in its charter)
Delaware77-0492262
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
3240 Bayshore Blvd., Brisbane, California 94005
(Address of principal executive offices)
(415) 657-5500
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock ($0.001 par value)CUTRThe NASDAQ Stock Market, LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes    x    No    ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes x     No    ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act (check one):
Large accelerated filerAccelerated filer Non-accelerated filerSmaller reporting companyEmerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.):    Yes    ☐    No    x
The number of shares of Registrant’s common stock issued and outstanding as of February 29, 2024, was 19,960,622.


CUTERA, INC.
FORM 10-Q
TABLE OF CONTENTS
Page



In this Quarterly Report on Form 10-Q, “Cutera,” “the Company,” “we,” “us” and “its” refer to Cutera, Inc. and its consolidated subsidiaries.

This report may contain references to its proprietary intellectual property, including among others, trademarks for its systems and ancillary products, “CUTERA®,” “ACUTIP 500®,” “AVITM,” “AVI360®,” “AVIANALYTICSTM,” “AVICARE®,” “AVICLEAR®,” “AVICOOL®, “AVIREWARDSTM,” “COOLGLIDE®,” “CUCF®,” “CUTERA UNIVERSITY CLINICAL FORUM®,” “ENLIGHTEN®,” “EXCEL HR®,” “EXCEL V®,” “EXCEL V+™,” “GENESISTM,” “LASER GENESISTM,” “LIMELIGHT®,” “MYQ®,” “PEARL®,” “PICO GENESIS®,” “PICO TONING®,” “PROWAVE 770®,” “SOLERA®,” “TITAN®,” “TRUBODY®,” “TRUFLEX™,” “TRUSCULPT®,” “TRUSCULPT FLEX®,” “TRUSCULPT ID®,” “VANTAGE®,” and “XEO®.”
These trademarks and trade names are the property of Cutera or the property of its consolidated subsidiaries and are protected under applicable intellectual property laws. Solely for convenience, its trademarks and tradenames referred to in this Quarterly Report on Form 10-Q may appear without the ® or symbols, but such references are not intended to indicate in any way that the Company will not assert, to the fullest extent under applicable law, its rights to these trademarks and tradenames.

2

PART I.     FINANCIAL INFORMATION
ITEM 1.    FINANCIAL STATEMENTS (UNAUDITED)
CUTERA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share, per share data and par value)
(Unaudited)
September 30,
2023
December 31,
2022
Assets
Current assets:
Cash and cash equivalents$179,516 $145,924 
Marketable investments 171,390 
Accounts receivable, net of allowance for credit losses of $7,985 and $2,497, respectively
49,829 45,562 
Inventories, net61,847 63,628 
Other current assets and prepaid expenses19,415 24,036 
Restricted cash700 700 
Total current assets311,307 451,240 
Property and equipment, net69,923 40,368 
Deferred tax assets528 590 
Goodwill1,339 1,339 
Operating lease right-of-use assets10,690 12,831 
Other long-term assets12,846 14,620 
Total assets$406,633 $520,988 
Liabilities and stockholders' deficit
Current liabilities:
Accounts payable$31,373 $33,736 
Accrued liabilities47,043 57,452 
Operating lease liabilities2,511 2,810 
Deferred revenue11,479 11,841 
Total current liabilities92,406 105,839 
Deferred revenue, net of current portion1,629 1,657 
Operating lease liabilities, net of current portion9,466 11,352 
Convertible notes, net of unamortized debt issuance costs of $10,996 and $12,666, respectively
418,129 416,459 
Other long-term liabilities1,088 862 
Total liabilities522,718 536,169 
Commitments and Contingencies (Note 13)
Stockholders’ deficit:
Common stock, $0.001 par value; authorized: 50,000,000 shares; issued and outstanding: 19,948,803 and 19,668,603 shares at September 30, 2023 and December 31, 2022, respectively
20 20 
Additional paid-in capital130,008 125,406 
Accumulated other comprehensive income (loss) (94)
Accumulated deficit(246,113)(140,513)
Total stockholders’ deficit(116,085)(15,181)
Total liabilities and stockholders’ deficit$406,633 $520,988 
See Accompanying Notes to Condensed Consolidated Financial Statements.

3

CUTERA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended
September 30,
Nine Months Ended
September 30,
2023202220232022
Net revenue:
Products$40,989 $56,540 $146,285 $167,195 
Service5,489 6,268 16,544 17,851 
Total net revenue46,478 62,808 162,829 185,046 
Cost of revenue:
Products36,586 25,255 98,696 74,066 
Service3,435 3,305 9,961 9,900 
Total cost of revenue40,021 28,560 108,657 83,966 
Gross profit6,457 34,248 54,172 101,080 
Operating expenses:
Sales and marketing25,808 26,488 88,591 78,433 
Research and development4,592 6,389 16,844 19,747 
General and administrative17,004 10,804 47,448 35,554 
Total operating expenses47,404 43,681 152,883 133,734 
Loss from operations(40,947)(9,433)(98,711)(32,654)
Interest and other expense, net:
Amortization of debt issuance costs(561)(400)(1,670)(917)
Interest on convertible notes(2,939)(1,739)(8,836)(3,666)
Loss on extinguishment of convertible notes   (34,423)
Interest income2,288 1,141 6,946 1,536 
Other expense, net(1,948)(876)(2,564)(3,554)
Total interest and other expense, net(3,160)(1,874)(6,124)(41,024)
Loss before income taxes(44,107)(11,307)(104,835)(73,678)
Income tax expense167 827 765 874 
Net loss$(44,274)$(12,134)$(105,600)$(74,552)
Net loss per share:
Basic$(2.22)$(0.62)$(5.32)$(3.95)
Diluted$(2.22)$(0.62)$(5.32)$(3.95)
Weighted-average number of shares used in per share calculation:
Basic 19,932 19,593 19,858 18,897 
Diluted19,932 19,593 19,858 18,897 
See Accompanying Notes to Condensed Consolidated Financial Statements.

4

CUTERA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(Unaudited)
Three Months Ended
September 30,
Nine Months Ended
September 30,
2023202220232022
Net loss$(44,274)$(12,134)$(105,600)$(74,552)
Other comprehensive income (loss):
Net change in unrealized gain (loss) on available-for-sale investments, net of tax(4)(153)94 (336)
Other comprehensive income (loss), net of tax(4)(153)94 (336)
Comprehensive loss$(44,278)$(12,287)$(105,506)$(74,888)
See Accompanying Notes to Condensed Consolidated Financial Statements.

5

CUTERA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY (DEFICIT)
(In thousands, except share amounts)
(Unaudited)

Three and Nine Months Ended September 30, 2023
Common StockAdditional
Paid-in
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Income (Loss)
Total
Stockholders’
Deficit
SharesAmount
Balance at December 31, 202219,668,603 $20 $125,406 $(140,513)$(94)$(15,181)
Issuance of common stock for employee purchase plan51,786 — 711 — — 711
Exercise of stock options42,234 — 612 — — 612 
Issuance of common stock in settlement of restricted and performance stock units, net of shares withheld for employee taxes186,180 — (3,273)— — (3,273)
Stock-based compensation expense— — 6,552 — — 6,552 
Net change in unrealized gain (loss) on available-for-sale investments— — — — 94 94 
Net loss— — — (105,600)— (105,600)
Balance at September 30, 202319,948,803 $20 $130,008 $(246,113)$ $(116,085)

Common StockAdditional
Paid-in
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Income (Loss)
Total
Stockholders’
Deficit
SharesAmount
Balance at June 30, 202319,901,600 $20 $128,014 $(201,839)$4 $(73,801)
Issuance of common stock for employee purchase plan —  — —  
Exercise of stock options33,000 — 465 — — 465 
Issuance of common stock in settlement of restricted and performance stock units, net of shares withheld for employee taxes14,203 — (87)— — (87)
Stock-based compensation expense— — 1,616 — — 1,616 
Net change in unrealized gain (loss) on available-for-sale investments— — — (4)(4)
Net loss— — — (44,274)— (44,274)
Balance at September 30, 202319,948,803 $20 $130,008 $(246,113)$ $(116,085)
    
See Accompanying Notes to Condensed Consolidated Financial Statements.

6

CUTERA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY(DEFICIT)
(In thousands, except share amounts)
(Unaudited)

Three and Nine Months Ended September 30, 2022
Common StockAdditional
Paid-in
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Loss
Total
Stockholders’
Equity
SharesAmount
Balance at December 31, 202117,995,344 $18 $114,724 $(58,173)$ — $56,569 
Issuance of common stock for employee purchase plan27,810 — 1,063 — — 1,063 
Exercise of stock options27,023 — 624 — — 624 
Issuance of common stock in settlement of restricted and performance stock units, net of shares withheld for employee taxes203,226 — (4,820)— — (4,820)
Stock-based compensation expense— — 13,021 — — 13,021 
Purchase of capped call, inclusive of issuance cost of $353
— — (32,024)— — (32,024)
Issuance of common stock in repayment of convertible notes1,354,348 2 55,947 — — 55,949 
Net change in unrealized gain (loss) on available-for-sale investments— — — — (336)(336)
Net loss— — — (74,552)— (74,552)
Balance at September 30, 202219,607,751 $20 $148,535 $(132,725)$(336)$15,494 
Common StockAdditional
Paid-in
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Loss
Total
Stockholders’
Equity
SharesAmount
Balance at June 30, 202219,560,163 $20 $144,628 $(120,591)$(183)$23,874 
Issuance of common stock for employee purchase plan —  — —  
Exercise of stock options12,179 — 248 — — 248 
Issuance of common stock in settlement of restricted and performance stock units, net of shares withheld for employee taxes35,409 — (586)— — (586)
Stock-based compensation expense— — 4,245 — 4,245 
Purchase of capped call— —   
Issuance of common stock in extinguishment of convertible notes   — —  
Net change in unrealized gain (loss) on available-for-sale investments— — — (153)(153)
Net loss(12,134)(12,134)
Balance at September 30, 202219,607,751 $20 $148,535 $(132,725)$(336)$15,494 
    
See Accompanying Notes to Condensed Consolidated Financial Statements.

7

CUTERA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended September 30,
20232022
Cash flows from operating activities
Net loss$(105,600)$(74,552)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation6,552 13,021 
Depreciation and amortization5,225 1,603 
Amortization of contract acquisition costs7,085 1,815 
Amortization of debt issuance costs1,670 917 
Unrealized gain on foreign exchange forward (292)
Deferred tax assets62 152 
Provision for credit losses5,488 677 
Loss on sale of property and equipment 86 
   Loss on extinguishment of convertible notes  34,423 
Accretion of discount on investment securities and investment income, net
1,048  
Changes in assets and liabilities:
Accounts receivable(9,755)(5,104)
Inventories1,781 (28,615)
Other current assets and prepaid expenses4,352 (8,835)
Other long-term assets(5,642)(3,644)
Accounts payable(4,735)20,442 
Accrued liabilities(10,963)(3,684)
Operating leases, net(44)46 
Deferred revenue(390)1,576 
Net cash used in operating activities(103,866)(49,968)
Cash flows from investing activities
Acquisition of property and equipment(30,642)(14,107)
Proceeds from maturities of marketable investments193,903 47,000 
Purchase of marketable investments(23,467)(252,282)
Net cash provided by (used in) investing activities139,794 (219,389)
Cash flows from financing activities
Proceeds from exercise of stock options and employee stock purchase plan1,323 1,687 
Taxes paid related to net share settlement of equity awards(3,273)(4,820)
Purchase of capped call (31,671)
Payment of issuance costs of capped calls (353)
Proceeds from issuance of convertible notes 240,000 
Payment of issuance costs of convertible notes (7,602)
Extinguishment of convertible notes (45,777)
Payments on finance lease obligations(386)(391)
Net cash provided by (used in) financing activities(2,336)151,073 
Net increase (decrease) in cash, cash equivalents and restricted cash33,592 (118,284)
Cash, cash equivalents, and restricted cash at beginning of period146,624 164,864 
Cash, cash equivalents, and restricted cash at end of period$180,216 $46,580 
Supplemental non-cash investing and financing activities:
Assets acquired under finance lease$1,428 $689 
Assets acquired under operating lease$57 $549 
Transfer of inventory to property and equipment$ $12,180 
Acquisition of property and equipment$6,503 $5,843 
Supplemental disclosure of cash flow information:
Cash paid for interest$6,509 $2,685 
Cash paid for income taxes$1,160 $1,909 
See Accompanying Notes to Condensed Consolidated Financial Statements.

8

CUTERA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies 
Description of Operations and Principles of Consolidation
Cutera, Inc. (“Cutera” or the “Company”) develops, manufactures, distributes, and markets energy-based product platforms for medical practitioners, enabling them to offer treatments to their customers. In addition, the Company distributes third-party manufactured skincare products and Secret PRO and Secret RF systems and consumables. The Company currently markets the following system platforms: AviClear, enlighten, excel, truSculpt, Secret PRO, Secret RF, and xeo. These platforms enable medical practitioners to perform procedures including treatment for acne, body contouring, skin resurfacing and revitalization, hair and tattoo removal, removal of benign pigmented lesions, and vascular conditions. Several of the Company’s systems offer multiple hand pieces and applications, providing customers the flexibility to upgrade their systems. The sales of systems, system upgrades, and hand pieces (collectively “Systems” revenue); the leasing of AviClear devices for acne treatment (“AviClear” revenue); the replacement hand pieces, Titan, truSculpt 3D, truSculpt and truFlex cycle refills, as well as single use disposable tips applicable to Secret PRO, and Secret RF (“Consumables” revenue); and the distribution of third-party manufactured skincare products (“Skincare”) revenue; are collectively classified as “Products” revenue. In addition to Products revenue, the Company generates revenue from the sale of post-warranty service contracts, parts, detachable hand piece replacements (except for Titan, truSculpt 3D, truSculpt and truFlex) and service labor for the repair and maintenance of products that are out of warranty, all of which are collectively classified as “Service” revenue.
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 also maintains regional distribution centers (“RDCs”) in select locations across the U.S. These RDCs serve as forward warehousing for systems and service parts in various geographies. 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, the Netherlands, Spain, Switzerland, and the United Kingdom. Sales and services outside of these direct markets are made through a worldwide distributor network in over 39 countries. The condensed consolidated financial statements include the accounts of the Company and its subsidiaries.
Liquidity and Management’s Plans
When preparing financial statements, management has the responsibility to evaluate if the Company has adequate liquidity to continue to operate for the next twelve months. In performing this assessment, management considered the Company's current financial condition and liquidity sources, including current funds, forecasted future cash flows and unconditional obligations due over the next twelve months. In addition, management evaluated the history of the Company's financial performance, and determined that the Company has had a historic trend of operating losses, which continues to have an unfavorable impact on the Company's overall liquidity. Most recently, the Company reported net losses of $44.3 million and $105.6 million for the three and nine months ended September 30, 2023, respectively. The Company also reported operating losses for the year ended December 31, 2022.
The Company’s continued operations will depend on several factors, including but not limited to, growth of revenues from its revised business model for AviClear, maintaining or increasing revenues from sales of legacy systems, consumables and services, achieving cost savings as a result of workforce reductions implemented in the fourth quarter of 2023, restructuring of supplier and manufacturing relationships, and initiatives to improve inventory and receivables management. Failure to increase revenue, achieve cost savings, raise additional financing or re-finance the existing convertible notes when they become due, would adversely affect the Company’s ability to achieve its intended business objectives. There can be no assurances that financing will be available on terms favorable to the Company, if at all, and delays may occur in completing the operating activities.
Basis of Presentation
In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements included in this report reflect all adjustments necessary for a fair statement of its condensed consolidated balance sheets as of September 30, 2023 and December 31, 2022, and its condensed consolidated statements of operations, condensed consolidated statements of comprehensive loss, condensed consolidated statements of changes in stockholders' equity (deficit), and condensed consolidated statements of cash flows, for the three and nine months ended September 30, 2023, and 2022, respectively. The December 31, 2022 condensed consolidated balance sheet was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles in the United States of America (“GAAP”). The results for

9

interim periods are not necessarily indicative of results for the entire year or any other interim period. Presentation of certain prior year balances have been updated to conform with the current year presentation. All intercompany accounts and transactions have been eliminated upon consolidation. The accompanying condensed consolidated financial statements should be read in conjunction with the Company’s previously filed audited financial statements and the related notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2022, filed with the Securities and Exchange Commission (the “SEC”) on April 7, 2023, and as amended on May 1, 2023.
Reclassification
Certain reclassifications of prior period amounts have been made in the Company's condensed consolidated statement of operations to conform to the current period presentation. These reclassifications had no effect on the reported results of operations.
Risks and Uncertainties
The Company's future results of operations involve a number of risks and uncertainties. Factors that could affect the Company's future operating results and cause actual results to vary materially from expectations include, but are not limited to, rapid technological change, continued acceptance of the Company's products, stability of global financial markets, cybersecurity breaches and other disruptions that could compromise the Company’s information or results, business disruptions that are caused by natural disasters or pandemic events, management of international activities, competition from substitute products and larger companies, the Company's ability to obtain and maintain regulatory approvals, government regulations and oversight, patent and other types of litigation, the Company's ability to protect proprietary technology from counterfeit versions of the Company's products and its intellectual property rights generally, the ability to generate positive operating results from the use of its property and equipment, the successful execution of new product launches, the continuation of strategic relationships, such as the Company's distribution of third-party products, and dependence on key individuals.
Accounting Policies
These unaudited condensed consolidated financial statements are prepared in accordance with the rules and regulations of the SEC applicable to interim financial statements. While these statements reflect all normal recurring adjustments that are, in the opinion of management, necessary for fair presentation of the results of the interim period, they do not include all of the information and footnotes required by GAAP for complete financial statements. The Company uses the same accounting policies in preparing quarterly and annual financial statements.
Leases
The Company incurs costs to fulfill its lease agreement obligations with its AviClear device lessees. These costs consist of freight, installation, and training. In addition to these mobilization costs, the Company incurs commission costs associated with the placement of the AviClear device. The Company capitalizes commission costs and has made a policy election to capitalize the mobilization costs.
In the nine months ended September 30, 2023, the Company capitalized $2.9 million of mobilization costs and $3.0 million of deferred commission costs related to placements of the AviClear device. These costs are recorded in Other long-term assets in the Company's condensed consolidated balance sheets and will be amortized over the expected lease term. The amortization of the mobilization costs and amortization of deferred commission costs are recorded in cost of revenue and sales and marketing, respectively, in the Company's condensed consolidated statement of operations. Total capitalized mobilization costs were $2.6 million and $1.3 million as of September 30, 2023 and December 31, 2022. Total capitalized commissions as of September 30, 2023, and December 31, 2022, were $3.4 million and $3.3 million, respectively, and are included in Other long-term assets in the Company’s condensed consolidated balance sheet.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with GAAP requires the Company’s management to make estimates and assumptions that affect the amounts reported of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the accompanying notes, and the reported amounts of revenue and expenses during the reported periods. Actual results could differ materially from those estimates.
On an ongoing basis, management evaluates its estimates, including those related to warranty obligations, sales commissions, allowance for credit losses, sales allowances, fair value of investments, valuation of inventories, fair value of goodwill, useful lives of property and equipment, impairment testing for long-lived assets, implicit and incremental borrowing rates related to the Company’s leases, variables used in calculating the fair value of the Company's equity awards, expected achievement of

10

performance-based vesting criteria and management performance bonuses, assumptions used in operating and sales-type lease classifications, the standalone selling price of the Company's products and services, the period of benefit used to capitalize and amortize contract acquisition costs, variable considerations, contingent liabilities, recoverability of deferred tax assets, residual value of leased equipment, lease term and effective income tax rates. Management bases estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.
Distribution of Third-Party Products
The Company generates revenue from the distribution of skincare products, which are manufactured by ZO Skin Health, Inc. (“ZO”), and sold in the Japanese market. In the nine months ended September 30, 2023, and 2022, revenue from the distribution of skincare products was $24.7 million and $30.7 million, respectively, representing 15% and 17% of the Company’s consolidated revenue, respectively.
On February 28, 2024, the Company and its Japanese subsidiary, Cutera KK, entered into a Business Transfer and Termination Agreement (the “Termination Agreement”) with ZO USA and its Japanese subsidiary, ZO Skin Health GK (“ZO Japan” and together with ZO USA and their affiliates, “ZO”), which, among other things, (i) terminates all agreements related to the distribution by the Company of ZO’s products in Japan effective immediately, (ii) provides for the orderly transition of the distribution of ZO products to ZO, (iii) transfers certain Company employees dedicated to the distribution of ZO products to ZO, (iv) transfers certain customer contracts related to ZO products from the Company to ZO and (v) transfers certain inventory and assets related to the distribution of ZO products from the Company to ZO. The Termination Agreement requires ZO to pay the Company $5.75 million within three business days of the execution of the Termination Agreement and make a second payment of $5.75 million, less any offsets under the Termination Agreement (including, but not limited to, 42.2% of the Company’s net revenue for sales of ZO products under the Distribution Agreement between January 1, 2024 and February 28, 2024), upon the earlier of (a) the completion the transition of regulatory and distribution activities such that ZO is able to fulfill product orders by customers in Japan, as determined by ZO and the Company, and (b) June 14, 2024.

The Company generates revenue from the distribution of the Secret systems, which are manufactured by Ilooda Co. Ltd. (“Ilooda”). The Company is the exclusive distributor for all systems sold in the United States, Canada, the United Kingdom; the exclusive distributor for certain systems in France, and Spain; and the non-exclusive distributor for systems sold in Austria and Germany. In both the nine months ended September 30, 2023, and 2022, revenue from the distribution of Secret products represented 13% of the Company’s consolidated revenue. The Company‘s Ilooda distribution agreement expires in June 30, 2026.
Note 2. Cash, Cash Equivalents, Restricted Cash and Marketable Investments
The Company determines the appropriate classification of its investments in marketable securities at the time of purchase and re-evaluates such designation at each balance sheet date. The Company’s marketable securities have been classified and accounted for as available-for-sale securities. Investments with remaining maturities of more than one year are viewed by the Company as available to support current operations and are classified as current assets under the caption marketable investments in the accompanying consolidated balance sheets. Investments in available-for-sale debt securities are measured at fair value under the guidance in ASC 320. Credit losses on impaired available-for-sale debt securities are recognized through an allowance for credit losses. Under ASC 326, credit losses recognized on an available-for-sale debt security should not reduce the net carrying amount of the available-for-sale debt security below its fair value. Any changes in fair value unrelated to credit are recognized as an unrealized gain or loss in other comprehensive income.
The following table summarizes the Company's cash and cash equivalents, restricted cash, and marketable investments (in thousands):


11

GrossGrossFair
AmortizedUnrealizedUnrealizedMarket
September 30, 2023CostGainsLossesValue
Cash and cash equivalentsN/AN/AN/A$179,516 
Current restricted cashN/AN/AN/A700 
Cash, cash equivalents, and restricted cash as reported within the Condensed Consolidated Statements of Cash FlowsN/AN/AN/A180,216 
Total$180,216 


GrossGrossFair
AmortizedUnrealizedUnrealizedMarket
December 31, 2022CostGainsLossesValue
Cash and cash equivalentsN/AN/AN/A$145,924 
Current restricted cashN/AN/AN/A700 
Cash, cash equivalents, and restricted cash as reported within the Condensed Consolidated Statements of Cash FlowsN/AN/AN/A146,624 
Marketable investments - U.S. Treasury171,484 8 (102)171,390 
Total$318,014 

At September 30, 2023 and December 31, 2022, net unrealized losses were zero and $0.1 million, respectively, and were related to interest rate changes on available-for-sale marketable investments. The Company has concluded that it is more-likely-than-not that the securities will be held until maturity or the recovery of their cost basis. No securities were in an unrealized loss position for more than 12 months. The restricted cash balance relates to an outstanding letter of credit provided to a supplier.

Note 3. Fair Value of Financial Instruments
The Company measures certain financial assets at fair value, including cash and cash equivalents.
The fair value hierarchy contains the following three levels of inputs that may be used to measure fair value, in accordance with ASC 820:
Level 1 inputs, which include quoted prices in active markets for identical assets or liabilities;
Level 2 inputs, which include observable inputs other than Level 1 inputs, such as quoted prices for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability. When sufficient quoted pricing for identical securities is not available, the Company uses market pricing and other observable market inputs for similar securities obtained from various third-party data providers. These inputs either represent quoted prices for similar assets in active markets or have been derived from observable market data; and
Level 3 inputs, which include unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the underlying asset or liability. Level 3 assets and liabilities include those whose fair value measurements are determined using pricing models, discounted cash flow methodologies, or similar valuation techniques, as well as significant management judgment or estimation.
In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as considering counterparty credit risk in its assessment of fair value.
As of September 30, 2023, financial assets measured and recognized at fair value on a recurring basis and classified under the appropriate level of the fair value hierarchy as described above were as follows (in thousands):

12

September 30, 2023Level 1Level 2
Cash equivalents:
      Money market funds $164,126 $ 
            Total $164,126 $ 
As of December 31, 2022, financial assets and liabilities measured and recognized at fair value on a recurring basis and classified under the appropriate level of the fair value hierarchy as described above were as follows (in thousands):
December 31, 2022Level 1Level 2
Cash equivalents:
      Money market funds $26,408 $ 
Marketable investments:
      Available-for-sale securities171,390  
Derivative liabilities:
      Foreign exchange forward (558)
            Total $197,798 $(558)
See Note 14 - Debt for the carrying amount and estimated fair value of the Company’s 2.25% Convertible Senior Notes due 2026 (the “2026 Notes”), the 2.25% Convertible Senior Notes due 2028 (the “2028 Notes”), and the 4.00% Convertible Senior Notes due 2029 (the “2029 Notes”).
Note 4. Derivative Instruments
The Company uses foreign currency exchange forward contracts to manage the impact of currency exchange fluctuations on earnings and cash flow. The Company does not enter into derivative instruments for speculative purposes. The Company is exposed to potential credit loss in the event of nonperformance by counterparties on its outstanding derivative instruments but the Company does not anticipate nonperformance by any of its counterparties. Should a counterparty default, the Company's maximum loss exposure would be the potential asset balance of the instrument.
At September 30, 2023, the Company did not have any foreign currency exchange forward contracts outstanding. At December 31, 2022, the following foreign exchange forward was outstanding (in thousands):
December 31, 2022ClassificationForeign Exchange Forward
Gross notional amountN/A$6,128 
Fair valueAccrued liabilities$558 
Unrealized lossOther income (expense), net$(558)
Note 5. Balance Sheet Details
Inventories, net
As of September 30, 2023 and December 31, 2022, inventories consist of the following (in thousands):
September 30,
2023
December 31,
2022
Raw materials$37,216 $36,323 
Work in process1,349 2,117 
Finished goods23,282 25,188 
Total$61,847 $63,628 

13

Other current assets and prepaid expenses
Other current assets and a prepaid expenses, consists of the following (in thousands):
September 30,
2023
December 31,
2022
Deposits with vendors$10,830 $13,917 
Foreign tax receivable4,683 7,147 
Prepayments3,902 2,972 
Total$19,415 $24,036 
Property and Equipment, net
Property and equipment, net, consists of the following (in thousands):
September 30,
2023
December 31,
2022
Leasehold improvements$819 $793 
AviClear devices40,647 19,904 
Office equipment and furniture1,874 1,936 
Machinery and equipment6,879 5,106 
Assets under construction29,570 17,876 
79,789 45,615 
Less: Accumulated depreciation(9,866)(5,247)
Property and equipment, net$69,923 $40,368 
The Company's market capitalization has been declining in 2023, which created a triggering event in the three months ended September 30, 2023, and required the Company to review goodwill and long-lived assets including property and equipment for impairment. The Company concluded that an impairment was not required in the three months ended September 30, 2023. An impairment may potentially result in partial or full write-down of these balances. The Company will continue to monitor financial results and market capitalization. Should the financial results continue to deteriorate, an impairment of goodwill and property and equipment may become reasonably possible to record in the future. The Company's goodwill balance as of each of September 30, 2023 and December 31, 2022 was $1.3 million.
Refer to Note 16. Subsequent Events regarding the change in classification from December 31, 2023 of AviClear parts and devices not placed in service.
Accrued Liabilities
As of September 30, 2023 and December 31, 2022, accrued liabilities consist of the following (in thousands):
September 30,
2023
December 31,
2022
Compensation and payroll-related accruals
$16,106 $18,951 
Sales and marketing accruals4,877 5,347 
Liability for inventory in transit3,490 7,028 
Accrued interest3,469 1,851 
Product warranty2,792 3,254 
Accrued sales tax4,854 9,066 
Other accrued liabilities11,455 11,955 
Total$47,043 $57,452 

14

Note 6. Product Warranty
The Company has a direct field service organization in North America (including Canada). Internationally, the Company provides direct service support in Australia, Austria, Belgium, France, Germany, Hong Kong, Japan, the Netherlands, Spain, Switzerland, and the United Kingdom. In several other countries, where the Company does not have a direct presence, the Company provides service through a network of distributors and third-party service providers.
After the original warranty period, maintenance and support are offered on an extended service contract basis or on a time and materials basis. The Company provides the estimated cost to repair or replace products under standard warranty at the time of sale. Costs incurred in connection with extended service contracts are generally recognized at the time when costs are incurred.
The following table provides the changes in the product warranty accrual for the three and nine months ended September 30, 2023 and 2022 (in thousands):
Three Months Ended
September 30,
Nine Months Ended
September 30,
2023202220232022
Beginning Balance$3,104 $4,189 $3,254 $3,947 
Add: Accruals for warranties issued during the period1,076 1,235 3,626 4,467 
Less: Settlements made during the period(1,388)(1,622)(4,088)(4,612)
Ending Balance$2,792 $3,802 $2,792 $3,802 
Note 7. Deferred Revenue
The Company records deferred revenue when revenue is to be recognized subsequent to invoicing. For extended service contracts, the Company generally invoices customers at the beginning of the extended service contract term. The Company’s extended service contracts typically have one to three-year terms. Deferred revenue also includes payments for training not yet delivered. Approximately 88% of the Company’s deferred revenue balance of $13.1 million as of September 30, 2023 will be recognized over the next 12 months.
The following table provides changes in the deferred revenue balance for the three and nine months ended September 30, 2023 and 2022 (in thousands):
Three Months Ended
September 30,
Nine Months Ended
September 30,
2023202220232022
Beginning balance$14,007 $11,527 $13,498 $10,825 
Add: Payments received from current period sales
5,005 5,738 15,140 14,755 
Less: Revenue recognized from current period sales
(405)(487)(4,902)(4,569)
Less: Revenue recognized from beginning balance(5,499)(4,377)(10,628)(8,610)
Ending balance$13,108 $12,401 $13,108 $12,401 
The fixed annual license fees received related to the AviClear contracts are deferred and recognized over the annual lease periods. The AviClear deferred license fee balance included in the total deferred revenue balance at September 30, 2023, and December 31, 2022, was $3.2 million and $2.3 million, respectively.
Costs for extended service contracts were $2.1 million and $5.8 million for the three and nine months ended September 30, 2023, respectively, and were $1.4 million and $4.6 million for three and nine months ended September 30, 2022, respectively.
Note 8. Revenue
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 13% and 10% of the Company's total revenue for the three and nine months ended September 30, 2023, respectively, and 8% and 7% for the three and nine months ended September 30, 2022, respectively.

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The Company has certain system sale arrangements that contain multiple products and services. For these bundled sale arrangements, the Company accounts for individual products and services as separate performance obligations if they are distinct. The Company’s products and services are distinct if a customer can benefit from the product or service on its own or with other resources that are readily available to the customer, and if the Company’s promise to transfer the products or service to the customer is separately identifiable from other promises in the sale arrangements. The Company’s system sale arrangements can include all or a combination of the following performance obligations: the system and software license (considered one performance obligation), system accessories (hand pieces), training, AviClear license agreements, other accessories, extended service contracts, marketing services, and time and materials services.
For the Company’s system sale arrangements that include an extended service contract, the period of service commences at the expiration of the Company’s standard warranty offered at the time of the system sale. The Company considers the extended service contracts terms in the arrangements that are legally enforceable to be performance obligations. Other than extended service contracts and marketing services, which are satisfied over time, the Company generally satisfies all performance obligations at a point in time. Systems, system accessories (hand pieces), service contracts, training, and time and materials services are also sold on a stand-alone basis. For contracts with multiple performance obligations, the Company allocates the transaction price of the contract to each performance obligation on a relative standalone selling price basis.
The Company leases the AviClear device to customers and receives a fixed annual lease fee over the term of the arrangement and variable revenue related to the treatments performed by the lessee.
Nature of Products and Services
Systems
Systems revenue is generated from the sale of systems and from the sale of upgrades to existing systems. A system consists of a console that incorporates a universal graphic user interface, a laser or other energy-based module, control system software and high voltage electronics, as well as one or more hand pieces. In certain applications, the laser or other energy-based module is contained in the hand piece, rather than 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 system or upgrade and the right to use the embedded software represent a single performance obligation as the software license is integral to the functionality of the system or upgrade.
For systems sold directly to end-customers that are credit approved, revenue is recognized when the Company transfers control to the end-customer, which occurs when the product is shipped to the customer or when the customer receives the product, depending on the nature of the arrangement. When collectability is not established in advance of receipt of payment from the customer, revenue is recognized upon the later of the receipt of payment or the satisfaction of the performance obligation. For systems sold through credit approved distributors, revenue is recognized at the time of shipment to the distributor.
The Company's invoice terms typically require payment for its system consoles and other accessories within 30 days of shipment. Certain international distributor arrangements allow for longer payment terms.
AviClear
The Company leases the AviClear device to customers and receives a fixed annual license fee over the term of the arrangement and variable lease income related to the treatments performed by the lessee. The Company classifies its lease income as product revenue and classifies the AviClear contracts as operating leases. The fixed annual license fee is recognized evenly over the period of the lease contract on a straight-line basis. The treatment fee is recognized in the period the treatment protocol is initiated.
Consumables and other accessories
The Company classifies its customers' purchases of replacement cycles for truSculpt and truFlex, as well as replacement hand pieces, xeo and truSculpt 3D hand pieces, and single use disposable tips applicable to Secret PRO, and Secret RF as Consumable revenue. The Secret PRO and Secret RF products' single use disposable tips must be replaced after every treatment. The Company’s systems offer multiple hand pieces and applications, which allow customers to upgrade their systems.

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Skincare products
The Company generates revenue from the distribution of skincare products, which are manufactured by ZO Skin Health, Inc. (“ZO”), and sold in the Japanese market to medical offices and licensed physicians. The Company warrants that the skincare products are free of significant defects in workmanship and materials for 90 days from shipment. 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. The Company recognizes revenue for skincare products at a point in time upon shipment.
On February 28, 2024, the Company entered into a Business Transfer and Termination Agreement with ZO, which, among other things, terminates all agreements related to the distribution by the Company of ZO’s products in Japan effective immediately. Refer to Note 16. Subsequent Events.
Extended service contract
The Company offers post-warranty services to its customers through extended service contracts that cover parts and labor for a term of one to three years. Service contract revenue is recognized over time, using a time-based measure of progress, as customers benefit from the service throughout the service period. The Company also offers services on a time and materials basis for systems and detachable hand piece replacements. Revenue related to services performed on a time and materials basis is recognized when performed.
Training
Sales of systems to customers include training on the use of the system to be provided within 90 days of purchase. The Company considers training a separate performance obligation as customers can immediately benefit from the training, and training is also sold separately from systems. The Company recognizes revenue for training when the training is provided.
Significant Judgments
The Company determines standalone selling price ("SSP") for each performance obligation as follows:
Systems: The SSPs for systems are based on directly observable sales in similar circumstances to similar customers.
Extended warranty/Service contracts: SSP is based on observable price when sold on a standalone basis to similar customers.
Loyalty Program
The Company operates a customer loyalty program for qualified customers located in the U.S. and Canada. Under the loyalty program, customers accumulate points based on their purchasing levels which can be redeemed for such rewards as the right to attend the Company’s advanced training event for a product, or a ticket for the Company’s annual forum. A customer’s account must be in good standing to receive the benefits of the rewards program. Rewards are earned on a quarterly basis and must be used in the following quarter. All unused rewards are forfeited. The fair value of the reward earned by loyalty program members is included in accrued liabilities and recorded as a reduction of net revenue at the time the reward is earned. As of September 30, 2023 and December 31, 2022, the liability for the loyalty program included in accrued liabilities was $0.3 million and $0.3 million, respectively.
Deferred Sales Commissions
Incremental costs of obtaining a contract related to the sale of a system, which consist primarily of commissions and related payroll taxes, are capitalized, and amortized on a straight-line basis over the expected period of benefit, except for costs that are recognized when product is sold. The Company uses the portfolio method to recognize the amortization expense related to these capitalized costs related to initial contracts and such expense is recognized over a period associated with the revenue of the related portfolio, which is generally two to three years.
Total capitalized commissions as of September 30, 2023 and December 31, 2022 were $2.8 million and $3.8 million, respectively, and are included in Other long-term assets in the Company’s condensed consolidated balance sheet. Amortization expense for these assets was $0.6 million and $1.9 million during the three and nine months ended September 30, 2023, respectively, and $0.6 million and $1.8 million during the three and nine months ended September 30, 2022, respectively. The amortization related to these capitalized costs is included in sales and marketing expense in the Company’s condensed consolidated statement of operations.

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Note 9. StockholdersEquity and Stock-based Compensation Expense
The Company’s equity incentive plans are broad-based, long-term programs intended to attract and retain talented employees and align stockholder and employee interests. The 2019 Equity Incentive Plan (the "2019 Plan") and the 2023 Inducement Equity Plan (the "2023 Plan") provide for the grant of incentive stock options, non-statutory stock options, restricted stock units (“RSUs”), performance stock units ("PSUs"), and other stock or cash awards.
The 2023 Plan was approved by the Board of Directors of Cutera, Inc. on July 17, 2023, and reserves 2,500,000 shares of the Company’s common stock for issuance. The 2023 Plan provides for the grant of equity-based awards, restricted stock units, restricted stock, stock appreciation rights, and performance awards to individuals not previously employees of the Company as an inducement material to the individuals’ entry into employment with the Company.
New Hire Grants to the Chief Executive Officer
On August 18, 2023, the Board of Directors approved a grant of $4 million of restricted stock units and a grant of $4 million of market-based stock options to Taylor Harris, who joined as the Company’s Chief Executive Officer on August 7, 2023. The restricted stock grant of 249,336 shares vests over four years, subject to the continued employment of Mr. Harris. The vesting of the market-based stock option is dependent upon price targets of the Company’s common stock. One quarter of the 735,295 grant quantity will become eligible for time-based vesting at each of the following prices of the Company’s common stock: $20.00, $25.00, $30.00, and $35.00, if these prices are reached within four years of the grant date. The Monte Carlo Simulation valuation model was used to determine the fair value of the market-based stock options granted.
Activity under the Company's equity incentive plans is summarized as follows:
Shares
Available
for Grant
Balance, December 31, 20221,070,925 
Additional shares reserved3,800,000 
Options and stock awards granted
(2,048,037)
Stock awards canceled / forfeited / expired378,128 
Options canceled / forfeited / expired189,705 
Balance, September 30, 20233,390,721 
The equity plans deduct the shares available for issuance by the gross number of shares for which an award is exercised or vests, not the net number of shares actually issued upon exercise, in the event the exercise price is paid in shares of the Company's common stock or shares are withheld to satisfy tax withholding obligations. Any RSU or PSU shares granted on or after July 13, 2023 are counted against the shares available for grant at a ratio of 1.65 shares for every one share granted.
Options Outstanding
Number of
Stock Options
Outstanding
Weighted-
Average
Exercise
Price
Weighted Average Remaining Term
 (in Years)
Balance, December 31, 2022513,935 $34.41 6.63
Options granted1,099,075 $13.27 
Options exercised(42,234)$14.50 
Options canceled / forfeited / expired(189,705)$30.26 
Balance, September 30, 20231,381,071 $18.77 8.44


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Stock Awards Outstanding
Number of Awards OutstandingWeighted Average Grant Date Fair Value per Share
Balance, December 31, 2022906,211$40.39 
Stock awards granted
752,492$15.72 
Awards released(284,231)$35.54 
Stock awards canceled / forfeited / expired(378,128)$39.38 
Balance, September 30, 2023996,344$23.50 
Stock-based Compensation Expense
Stock-based compensation expense by financial statement line item recognized during the three and nine months ended September 30, 2023 and 2022 was as follows (in thousands):
Three Months Ended
September 30,
Nine Months Ended
September 30,
2023202220232022
Cost of revenue$(19)$471 $706 $1,430 
Sales and marketing593 1,641 3,024 3,855 
Research and development(178)466 930 2,513 
General and administrative1,220 1,667 1,892 5,223 
Total stock-based compensation expense$1,616 $4,245 $6,552 $13,021 

In the three months ended September 30, 2023, stock-based compensation expense was impacted by the Company reducing its estimate of the probability of certain performance stock unit grants fully vesting. The nine-month comparison also reflects the reversal of previously reported stock-based compensation expense related to a significant number of executives and directors that left the Company in the three months ended June 30, 2023.
Note 10. Net Loss Per Share

As of September 30, 2023, the Company’s Convertible Notes were potentially convertible into 8,696,792 shares of common stock.

The denominator for diluted net loss per share does not include any effect from the capped call transactions the Company entered into concurrently with the issuances of convertible notes, as this effect would be anti-dilutive. In the event of conversion of a convertible note, shares delivered to the Company under the capped call will offset the dilutive effect of the shares that the Company would issue under the convertible notes. In the three and nine months ended September 30, 2023 and September 30, 2022, the if-converted method was not applied as the effect would have been anti-dilutive.

For the three and nine months ended September 30, 2023 and September 30, 2022, a basic loss per common share and diluted loss per common share are the same in each period as the inclusion of any potentially issuable shares would be anti-dilutive.
The following table sets forth the computation of basic and diluted net loss and the weighted average number of shares used in

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computing basic and diluted net loss per share (in thousands, except per share data):
Three Months Ended
September 30,
Nine Months Ended
September 30,
2023202220232022
Numerator:
Net loss used in calculating net loss per share, basic $(44,274)$(12,134)$(105,600)$(74,552)
Denominator:
Weighted average shares of common stock outstanding used in computing net loss per share, basic19,932 19,593 19,858 18,897 
Dilutive effect of incremental shares and share equivalents:
     Convertible notes    
Options    
RSUs    
PSUs    
ESPP    
Weighted average shares of common stock outstanding used in computing net loss per share, diluted19,932 19,593 19,858 18,897 
Net loss per share:
Net loss per share, basic $(2.22)$(0.62)$(5.32)$(3.95)
Net loss per share, diluted$(2.22)$(0.62)$(5.32)$(3.95)
The following numbers of shares outstanding, prior to the application of the treasury stock method and the if-converted method, were excluded from the computation of diluted net loss per common share for the periods presented because including them would have had an anti-dilutive effect (in thousands):
Three Months Ended
September 30,
Nine Months Ended
September 30,
2023202220232022
Capped call10,780 8,724 10,780 8,724 
Convertible notes8,697 6,640 8,697 6,640 
Options1,381 521 1,381 521 
RSU's756 488 756 488 
PSU's240 470 240 470 
ESPP72 22 72 22 
Total21,926 16,865 21,926 16,865 
Note 11. Income Taxes
For the three and nine months ended September 30, 2023, the Company's income tax expense was $0.2 million and $0.8 million, respectively, compared to $0.8 million and $0.9 million, respectively, for the three and nine months ended September 30, 2022.
The Company's income tax expense for the three and nine months ended September 30, 2023 and 2022 is due to income taxes in foreign jurisdictions. The Company continues to maintain a full valuation allowance on its U.S. deferred tax assets.
Note 12. Leases
The Company is a party to certain operating and finance leases for vehicles, office space and storage facilities. The Company’s material operating leases consist of office space, as well as storage facilities and finance leases consist of automobile leases. The Company’s leases generally have remaining terms of one to 10 years, some of which include options to renew the leases for up to five years. The Company leases space for operations in the United States, Japan, Belgium, France, and Spain.

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The Company determines if a contract contains a lease at inception. Operating lease assets and liabilities are recognized at the lease commencement date. Operating lease liabilities represent the present value of lease payments not yet paid. Operating lease assets represent the right to use an underlying asset and are based upon the operating lease liabilities adjusted for prepayments or accrued lease payments, initial direct costs, lease incentives, and impairment of operating lease assets. To determine the present value of lease payments not yet paid, the Company estimates the incremental secured borrowing rates corresponding to the maturities of the leases. The Company based the rate estimates on prevailing financial market conditions, credit analysis, and management judgment.


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Tenant incentives used to fund leasehold improvements are recognized when earned and reduce the Company’s right-of-use asset related to the lease. These are amortized through the right-of-use asset as reductions of expense over the lease term. 
Supplemental balance sheet information related to leases was as follows (in thousands):
LeasesClassificationSeptember 30,
2023
December 31,
2022
Assets
Right-of-use assetsOperating lease right-of-use assets$10,690 $12,831 
Finance leaseProperty and equipment, net1,825 1,606 
Total leased assets$12,515 $14,437 

LiabilitiesClassificationSeptember 30,
2023
December 31,
2022
Operating lease liabilities
Operating lease liabilities, currentOperating lease liabilities$2,511 $2,810 
Operating lease liabilities, non-currentOperating lease liabilities, net of current portion9,466 11,352 
Total Operating lease liabilities$11,977 $14,162 
Finance lease liabilities
Finance lease liabilities, currentAccrued liabilities$818 $485 
Finance lease liabilities, non-currentOther long-term liabilities1,052 825 
Total Finance lease liabilities$1,870 $1,310 

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Lease costs during the three and nine months ended September 30, 2023 and 2022 (in thousands) was as follows:
Three Months Ended
September 30,
Nine Months Ended
September 30,
Lease costsClassification2023202220232022
Finance lease costAmortization expense$209 $148 $507 $487 
Finance lease costInterest for finance lease$23 $17 $61 $54 
Operating lease costOperating lease expense$921 $883 $2,701 $2,678 
Cash paid for amounts included in the measurement of lease liabilities during the nine months ended September 30, 2023 and 2022 was as follows (in thousands):
Nine Months Ended
September 30,
Cash paid for amounts included in the measurement of lease liabilitiesClassification20232022
Operating cash flowFinance lease$62 $56 
Financing cash flowFinance lease$386 $391 
Operating cash flowOperating lease$2,449 $1,682 
Operating leases
Maturities of facility leases were as follows as of September 30, 2023 (in thousands):
As of September 30, 2023Amount
Remainder of 2023$814 
20242,924 
20252,932 
20263,027 
20273,130 
2028 and thereafter462 
Total lease payments13,289 
Less: imputed interest1,312 
Present value of lease liabilities$11,977 
Finance Leases
As of September 30, 2023, the Company was committed to minimum lease payments for vehicles leased under long-term non-cancelable finance (vehicle) leases as follows (in thousands):
As of September 30, 2023Amount
Remainder of 2023$251 
2024878 
2025600 
2026341 
Total lease payments2,070 
Less: imputed interest200 
Present value of lease liabilities$1,870 


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Weighted-average remaining lease term and discount rate, as of September 30, 2023, were as follows:
Lease Term and Discount RateSeptember 30, 2023
Weighted-average remaining lease term (years)
Operating leases4.4
Finance leases2.5
Weighted-average discount rate
Operating leases4.8 %
Finance leases8.9 %
Lessor - AviClear
Lessor revenue
The Company leases the AviClear device to customers and receives a fixed annual license fee over the term of the arrangement and variable revenue related to the number of treatments performed by the lessee. The contractual term of the lease agreement is three years with a one-year auto-renewal feature. Certain lease agreements' terms in excess of one year can be terminated without financial penalty, and these agreements are accounted for as having a lease term of one year. The AviClear lease agreements are accounted for as operating leases. The fixed annual license fee is recognized evenly throughout the period of the lease agreement on a straight-line basis. The treatment revenue is recognized in the period the lessee has the ability to perform the patient treatment.
The following table summarizes the amount of operating lease income included in product revenue in the accompanying condensed consolidated statements of operations (in thousands):
Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
AviClear operating lease license fee revenue$1,324 $246 $3,916 $285 
AviClear operating lease revenue2,565 909 8,504 1,006 
Total AviClear revenue$3,889 $1,155 $12,420 $1,291 
The AviClear device being leased has a useful life of seven years. The Company expects that a device will be leased for two consecutive lease terms at the end of which its residual value will be immaterial.
The following is the minimum future lease payments as of September 30, 2023, under non-cancelable operating leases, assuming the minimum contractual lease term (in thousands):
As of September 30, 2023Amount
Remainder of 2023$1,082 
20245,924 
20253,476 
Total AviClear revenue$10,482 
Practical Expedients
The Company elected to apply a practical expedient to operating leases and elected not to separate lease and nonlease components as long as the lease and at least one nonlease component have the same timing and pattern of transfer. As such, updates or upgrades on a when-and-if available basis to the AviClear device are combined with the operating lease revenue. The combined component is being accounted for under ASC 842. Additionally, the Company made an accounting policy election to present AviClear revenue net of sales and other similar taxes.

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Capitalized sales commissions
Sales commissions related to obtaining AviClear lease agreements are accounted for as initial direct costs and are capitalized and amortized on a straight-line basis over the lease term. Amortization expenses for these assets were $1.2 million and $3.5 million for the three and nine-month periods ended September 30, 2023, respectively, and $0.1 million and $0.1 million for the comparative periods ended September 30, 2022, and were included in Sales and marketing expense in the Company’s condensed consolidated statement of operations. Total capitalized commissions as of September 30, 2023, and December 31, 2022, were $3.4 million and $3.3 million, respectively, and are included in Other long-term assets in the Company’s condensed consolidated balance sheet.
Lease installment costs

The Company capitalizes fulfillment costs incurred before AviClear lease commencement and these costs include freight, installation, and training costs. Amortization expenses for these assets were $0.7 million and $1.7 million for the three and nine-month periods ended September 30, 2023, respectively, and immaterial amounts for the comparative periods ended September 30, 2022, and were included in Cost of revenue in the Company’s condensed consolidated statement of operations. Total lease installment costs as of September 30, 2023, and December 31, 2022, were $2.6 million and $1.3 million, respectively, and are included in Other long-term assets in the Company’s condensed consolidated balance sheet.
Note 13. Contingencies
The Company is named from time to time as a party to other legal proceedings, product liability, intellectual property disputes, commercial disputes, employee disputes, and contractual lawsuits. A liability and related charge are recorded to earnings in the Company’s consolidated financial statements for legal contingencies when the loss is considered probable and the amount can be reasonably estimated. The assessment is re-evaluated each accounting period and is based on all available information, including discussion with outside legal counsel. If a reasonable estimate of a known or probable loss cannot be made, but a range of probable losses can be estimated, the low-end of the range of losses is recognized if no amount within the range is a better estimate than any other. If a material loss is reasonably possible, but not probable and can be reasonably estimated, the estimated loss or range of loss is disclosed in the notes to the consolidated financial statements. The Company expenses legal fees as incurred. Certain of the cases below are still in the preliminary stages, and the Company is not able to quantify the extent of its potential liability, if any, other than as described. The outcome of litigation is inherently unpredictable and subject to significant uncertainties. If any of these matters are resolved adversely to the Company, this could have a material adverse effect on its business, financial condition, results of operations, and cash flows. In addition, defending these legal proceedings is likely to be costly, which may have a material adverse effect on the Company's financial condition, results of operations and cash flows, and may divert management's attention from the day-to-day operations of its business.
On January 31, 2020, the Company filed a lawsuit against Lutronic Aesthetics in the United States District Court for the Eastern District of California. Lutronic employs numerous former Cutera employees. The complaint against Lutronic generally alleges claims for (1) misappropriation of trade secrets in violation of state and federal law; (2) violation of the Racketeer Influenced and Corrupt Organizations Act ("RICO"); (3) interference with contractual relations; (4) interference with prospective economic advantage; (5) unfair competition; and (6) aiding and abetting. On March 13, 2020, the court entered a temporary restraining order ("TRO") against Lutronic generally prohibiting it from using or disseminating the Company's confidential, proprietary, or trade secret information. The order also prohibited Lutronic, for two years, from using such information for the purpose of soliciting, or conducting business with, certain specified customers. On April 9, 2020, the parties stipulated to the entry of a preliminary injunction providing for the same relief afforded by the TRO. On August 4, 2022, Cutera filed a second amended complaint. In addition to the above referenced claims, Cutera alleged claims for violation of the Lanham Act, unlawful business practi