The following discussion should be read in conjunction with the Company's audited financial statements and notes thereto for the fiscal year ended December 31, 2022. This Annual Report on Form 10-K, including the following sections, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Throughout this Report, and particularly in this Item 7, the forward-looking statements are based upon the Company's current expectations, estimates and projections and that reflect the Company's beliefs and assumptions based upon information available to the Company at the date of this Report. In some cases, you can identify these statements by words such as "may," "might," "could," "will," "should," "expects," "plans," "anticipates," "likely," "believes," "estimates," "intends," "forecasts," "foresees," "predicts," "potential" or "continue," and other similar terms. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties, and assumptions that are difficult to predict. The Company's actual results, performance or achievements could differ materially from those expressed or implied by the forward-looking statements. The forward-looking statements include, but are not limited to, statements relating to the Company's future financial performance, the ability to grow the Company's business, increase the Company's revenue, manage expenses, generate additional cash, achieve and maintain profitability, develop and commercialize existing and new products and applications, improve the performance of the Company's worldwide sales and distribution network, and to the outlook regarding long term prospects. The Company cautions you not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date of this Annual Report on Form 10-K. The Company undertakes no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this Form 10-K. Some of the important factors that could cause the Company's results to differ materially from those in the Company's forward-looking statements, and a discussion of other risks and uncertainties, are discussed in Item 1A-Risk Factors. The Company encourages you to read that section carefully as well as other risks detailed from time to time in the Company's filings with the SEC.
Introduction
The Management’s Discussion and Analysis (“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 Company's product lines and the opportunities, trends, challenges and risks the Company focuses on in the operation of the Company's 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 the Company's 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 the Company's commitments that existed as of December 31, 2022. The Company has omitted discussion of 2020 results where it would be redundant to the discussion previously included in Management's Discussion and Analysis of Financial Condition and Results of Operations on Form 10-K for the year ended December 31, 2021, which has been filed with the SEC.
Executive Summary
Company Description
Cutera, Inc. ("Cutera" or the "Company") develops, manufactures, distributes,
and markets energy-based product platforms for medical practitioners, enabling
them to offer safe and effective treatments to their customers. In addition, the
Company distributes third-party manufactured skincare products. The Company
currently markets the following system platforms: AviClear, enlighten, excel,
truSculpt, Secret PRO, Secret RF, and xeo - each of which enables medical
practitioners to perform safe and effective 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 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 selection 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,
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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 37 countries. The consolidated financial statements include the accounts of the Company and its subsidiaries. All inter-company transactions and balances have been eliminated. The Company's trademarks include: "CUTERA®," "AVI360®," "AVICARE®," "AVICLEAR®," "AVICOOL®, "ACUTIP 500®," "COOLGLIDE®," "CUCF®," "CUTERA UNIVERSITY CLINICAL FORUM®," "ENLIGHTEN®," "EXCEL HR®," "EXCEL V®," "EXCEL V+™," "GENESIS®," "LASER GENESIS®," "LIMELIGHT®," "MYQ®," "PEARL®," "PICO GENESIS®," "PROWAVE 770®," "SOLERA®," "TITAN®," "TRUBODY®," "TRUFLEX™," "TRUSCULPT®," "TRUSCULPT ID®," "TRUSCULPT FLEX®," "VANTAGE®," and "XEO®." The Company's logo and other Company trade names, trademarks, and service marks appearing in this document are the Company's property. Other trade names, trademarks, and service marks appearing in this Annual Report on Form 10-K are the property of their respective owners. Solely for convenience, the Company's trade names, trademarks and service marks referred to in this Annual Report on Form 10-K appear without the ® or TM symbols, but those references are not intended to indicate, in any way, that the Company will not assert, to the fullest extent under applicable law, the Company's rights, or the right of the applicable licensor to these trade names, trademarks and service marks.
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), leasing of AviClear devices for acne
treatment ("AviClear" revenue), replacement hand pieces, truSculpt cycle
refills, and truFlex cycle refills, as well as single use disposable tips
applicable to Secret RF ("Consumables" revenue); and the sale of third-party
manufactured skincare products ("Skincare" revenue). A system consists of a
console that incorporates a universal graphic user interface, a laser and (or)
an 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 currently markets the following key platforms: AviClear, enlighten,
excel, truSculpt, Secret PRO, Secret RF, and xeo - each of which enables medical
practitioners to perform safe and effective 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 whenever they
choose and provides the Company with a source of additional Systems revenue.
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 includes prepaid service contracts, and labor, time and material on
out-of-warranty products.
Significant Business Trends
The Company believes that the ability to grow revenue will be primarily impacted
by the following:
•capturing market share in the Acne space and capitalizing on the momentum in AviClear; •continuing to expand the Company's product offerings, both through internal development and sourcing from other vendors; •ongoing investment in the Company's global sales and marketing infrastructure; •use of clinical results to support new aesthetic products and applications; •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 Secret RF products.
For a detailed discussion of the significant business trends impacting the
Company’s business, please see the section titled “Results of Operations” below.
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Critical Accounting Policies and Use of Estimates
The preparation of the Company's audited consolidated financial statements and related notes requires the Company to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. The Company has based its estimates on historical experience and on various other assumptions that the Company believes to be reasonable under the circumstances. The Company periodically reviews its estimates and makes adjustments when facts and circumstances dictate. To the extent that there are material differences between these estimates and actual results, its financial condition or results of operations will be affected. An accounting policy is considered to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the consolidated financial statements. The Company believes that its critical accounting policies reflect the more significant estimates and assumptions used in the preparation of its audited consolidated financial statements. The Company's critical accounting policies are described in Note 1 "Summary of significant accounting policies". The following critical accounting policies reflect the more significant estimates and assumptions used in the preparation of the Company's condensed consolidated financial statements.
Inventory Valuation
The Company estimates an excess and obsolete inventory reserve based on expected inventory usage. The Company's estimate of inventory consumption is based on historic consumption patterns, expected future sales and production, anticipated manufacturing capacity, and planned product releases. The Company develops an estimate of these factors through analysis of historic and budgeted data, and enquiries of departmental leaders. The Company evaluates the excess and obsolete model and the resulting reserve on a quarterly basis.
Income Taxes and Valuation Allowance
The Company estimates whether a valuation allowance is necessary for the
Company's deferred tax assets by evaluating evidence of the existence of
sufficient taxable income within the permitted carryback and carryforward
periods. The most significant deferred tax assets relate to the Company's
accumulated net operating losses of $133.0 million at December 31, 2022, and
unutilized tax credit balance of $14.9 million at December 31, 2022. The Company
considers positive and negative evidence in evaluating the likelihood that these
net operating losses and tax credits can be utilized and places greatest
reliance on the most objective available evidence, including the Company's
recent operating loss history or profitability by tax jurisdiction, the timing
of the expiration of net operating losses, and credit carryforwards and
potential reversal of deferred tax liabilities that would give rise to future
taxable income.
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Results of Operations
The following table sets forth selected consolidated financial data expressed as
a percentage of net revenue.
Year Ended December 31,
2022 2021 2020
Net revenue 100 % 100 % 100 %
Cost of revenue 45 % 42 % 49 %
Gross margin 55 % 58 % 51 %
Operating expenses:
Sales and marketing 42 % 33 % 36 %
Research and development 10 % 9 % 10 %
General and administrative 18 % 14 % 20 %
Total operating expenses 71 % 57 % 65 %
Income/(Loss) from operations (15) % 1 % (15) %
Amortization of debt issuance costs (1) % - % - %
Interest on convertible notes (2) % (1) % - %
Gain on extinguishment of PPP loan - % 3 % - %
Other income (expense), net (1) % (1) % - %
Income (loss) before income taxes (19) % 2 % (15) %
Income tax expense 1 % 1 % - %
Net income (loss) (20) % 1 % (16) %
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Net Revenue
The following table sets forth selected consolidated revenue by major geographic
area and product category with changes thereof.
Year Ended December 31,
(Dollars in thousands) 2022 % Change 2021 % Change 2020
Revenue mix by geography:
North America $ 128,418 15 % $ 111,621 61 % $ 69,455
Japan 64,921 (8) % 70,235 62 % 43,265
Rest of World 59,060 20 % 49,414 41 % 34,963
Consolidated total revenue $ 252,399 9 % $ 231,270 57 % $ 147,683
North America as a percentage of
total revenue 51 % 48 % 47 %
Japan as a percentage of total
revenue 26 % 31 % 29 %
Rest of World as a percentage of
total revenue 23 % 21 % 24 %
Revenue mix by product category:
Systems - North America $ 98,345 14 % $ 86,100 70 % $ 50,721
Systems - Rest of World (including
Japan) 65,292 22 % 53,533 34 % 40,045
Total Systems 163,637 17 % 139,633 54 % 90,766
AviClear 4,456 N/A - N/A -
Consumables 18,203 11 % 16,401 77 % 9,286
Skincare 42,500 (14) % 49,669 98 % 25,061
Total Products 228,796 11 % 205,703 64 % 125,113
Service 23,603 (8) % 25,567 13 % 22,570
Total Net revenue $ 252,399 9 % $ 231,270 57 % $ 147,683
Total Net Revenue
The Company's total revenue increased by $21.1 million, or 9%, for the year
ended December 31, 2022, compared to 2021, due to an increase in revenue from
system sales of $24.0 million reflecting an increase in systems volume across
all geographies. Consumables growth increased by $2.6 million driven by an
increased system installed base.
These increases were partially offset by a decrease in Skincare revenue of $7.2
million due to devaluation of the Japanese Yen. Foreign currency devaluation in
Japan, Europe and Australia adversely impacted total revenue in 2022 by
approximately $15.1 million.
Revenue by Geography
The Company's North America revenue increased by $16.8 million, or 15%, for the
year ended December 31, 2022, compared to 2021. This increase is due to an
increase of $12.2 million is systems revenue, attributable to investments in the
Company's sales force, and AviClear revenue of $4.5 million reflecting the
commercialization of the AviClear device in 2022.
The Company's revenue in Japan decreased $5.3 million, or 8%, for the year ended
December 31, 2022, compared to 2021. This decrease was driven by a $7.2 million
decrease in Skincare revenue due to a significant devaluation in the Japanese
Yen in 2022.
The Company's Rest of World revenue increased $9.6 million, or 20%, for the year
ended December 31, 2022, compared to 2021, driven by continued sales process
improvements and development efforts from the sales team resulting in a $9.8
million increase in systems revenue.
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Revenue by Product Type
Systems Revenue
Systems revenue in North America increased by $12.2 million, or 14%, for the year ended December 31, 2022, compared to 2021, due to strong market conditions and investments in the North American sales force. The Rest of the World systems revenue increased by $11.8 million, or 22%, compared to 2021. The increase in Rest of the World revenue was due to increased sales across all international sales regions. AviClear Revenue The Company received FDA clearance related to its AviClear device in March 2022. From April 2022 through November 2022, the Company earned revenue from a limited commercial release and after November 2022 earned revenue from a full commercial release. The AviClear revenue consists of $0.9 million of lease revenue related to the fixed annual license fee and variable lease revenue of $3.5 million related to treatments performed by the lessee.
Consumables Revenue
Consumables revenue increased $1.8 million, or 11%, for the year ended December 31, 2022, compared to 2021. The increase in consumables revenue was primarily due to the increased installed base of truSculpt, Secret RF, truSculpt iD and truFlex, each of which have a consumable element.
Skincare Revenue
The Company's revenue from Skincare products in Japan decreased $7.2 million, or 14%, for the year ended December 31, 2022, compared to 2021. This decrease was mainly due to significant devaluation of the Japanese Yen in 2022.
Service Revenue
The Company's Service revenue decreased $2.0 million, or 8%, for the year ended
December 31, 2022, compared to 2021. This decrease was due to supply chain
constraints on service parts as well as foreign currency devaluation in Japan,
Europe, and Australia.
Gross Profit
Year Ended December 31,
(Dollars in thousands) 2022 Change 2021 Change 2020
Gross profit $ 139,829 $ 6,724 $ 133,105 $ 57,333 $ 75,772
As a percentage of total net
revenue 55.4 % (2.2) % 57.6 % 6.2 % 51.3 %
Gross profit as a percentage of revenue for the year ended December 31, 2022,
was 55.4%, compared to 57.6% in 2021. The decrease in gross profit as a
percentage of revenue was driven by foreign currency devaluation contributing to
a 2.0 percentage point decrease and the increased manufacturing overhead due to
the AviClear launch contributing to a 1.5 percentage point decrease. These
decreases were partially offset by an increase in sales volume, which improved
the Company's leverage on fixed costs and provided an increase of 1.3 percentage
points to the Company's gross profit percentage.
Sales and Marketing
Year Ended December 31,
(Dollars in thousands) 2022 Change 2021 Change 2020
Sales and marketing $ 106,947 $ 30,185 $ 76,762 $ 23,996 $ 52,766
As a percentage of total net
revenue 42.4 % 9.2 % 33.2 % (2.5) % 35.7 %
Sales and marketing expenses consist primarily of personnel expenses, expenses
associated with customer-attended workshops and trade shows, post-marketing
studies, advertising, and training. Sales and marketing expenses for the year
ended December 31, 2022, increased $30.2 million, or 39%, compared to 2021. This
increase was primarily driven by an investment in AviClear sales and marketing
resources and an increase in commission expense due to increased sales. This
investment in AviClear and increase in commission expense resulted in an
increase in labor expenses of $15.1 million. Also contributing to
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the increase in sales and marketing expenses was a $6.2 million increase in
marketing costs and a $4.2 million increase due to the resumption of travel
activities.
Research and Development (“R&D”)
Year Ended December 31,
(Dollars in thousands) 2022 Change 2021 Change 2020
Research and development $ 25,155 $ 3,587 $
21,568 $ 7,246 $ 14,322
As a percentage of total net revenue 10.0 % 0.6 % 9.3 % (0.4) % 9.7 %
R&D expenses consist primarily of personnel expenses, clinical research, regulatory and material costs. R&D expenses increased by $3.6 million, or 17%, for the year ended December 31, 2022, compared to 2021. The increase in expense was due primarily to $1.9 million related to an investment in skin revitalization technology, and a $1.3 million increase in salaries and benefits.
General and Administrative (“G&A”)
Year Ended December 31,
(Dollars in thousands) 2022 Change 2021 Change 2020
General and administrative $ 45,917 $ 12,972 $ 32,945 $ 1,433 $ 31,512
As a percentage of total net
revenue 18.2 % 3.9 % 14.2 % (5.8) % 20.0 %
G&A expenses consist primarily of personnel expenses, legal, accounting, audit
and tax consulting fees, as well as other general and administrative expenses.
G&A expenses increased by $13.0 million, or 39%, for the year ended December 31,
2022, compared to 2021. The increase in expenses was due primarily to a $9.6
million increase in professional fees, mainly related to the implementation of a
new ERP in 2022, a $2.2 million increase in credit loss and other administrative
expense, and a $1.5 million increase in labor-related expenses driven by an
increase in headcount.
Interest and Other Income (Expense), Net
Interest and other income (expense), net, consists of the following:
Year Ended December 31,
(Dollars in thousands) 2022 Change 2021 Change 2020
Amortization of debt issuance
costs $ (1,355) $ (645)
$ (710) $ (710) $ –
Interest on Convertible notes (5,658) (3,144) (2,514) (2,514) - Loss on extinguishment of convertible notes (34,423) (34,423) - - - Gain on extinguishment of PPP loan - (7,185) 7,185 7,185 - Interest income (expense), net 2,600 3,161 (561) 86 (647) Other expense, net (3,676) (1,831) (1,845) (1,913) 68 Interest and other income (expense), net $ (42,512) $ (44,067)
$ 1,555 $ 2,134 $ (579)
Interest and other income (expense), net, changed from a net income of $1.6
million in 2021 to a net expense of $42.5 million in 2022. This change is
primarily due to the loss on extinguishment of the 2026 Notes and the increased
convertible debt costs in 2022 from the issuance of the 2028 and 2029 Notes. The
increased expense was partially offset by interest income of $2.6 million
generated from marketable investments. Other expense, net, mainly consists of
realized and unrealized foreign exchange losses. The increase in the loss in
2022 reflects the devaluation of the Japanese Yen.
Income Tax Provision
Year Ended December 31,
(Dollars in thousands) 2022 Change 2021 Change 2020
Income tax provision $ 1,638 $ 315 $ 1,323 $ 853 $ 470
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Income tax provision increased $0.3 million, or 24%, for the year ended
December 31, 2022, compared to 2021. This increase reflects higher net earnings
from the Company’s foreign subsidiaries.
Segment Results of Operations
Year Ended December 31, 2022 Year Ended December 31, 2021
(Dollars in thousands) Cutera Core AviClear Total Cutera Core AviClear Total
Revenue $ 247,943 $ 4,456 $ 252,399 $ 231,270 $ - $ 231,270
Income (loss) from
operations $ (6,905) $ (31,285) $
(38,190) $ 11,528 $ (9,698) $ 1,830
Interest and other income
(expense), net
(42,512) 1,555 Income (loss) before income taxes $ (80,702) $ 3,385 Cutera Core The Company's Cutera Core reportable segment consists of the Company's systems, consumables, skincare, and service businesses. The Cutera Core segment develops and manufactures energy-based systems for medical practitioners in addition to distributing third-party manufactured skincare products in Japan. The installed base of systems provides opportunities for the segment to earn revenues through service contracts, consumables and replacement handpieces. The Cutera Core segment's revenue increased by $16.7 million for the year ended December 31, 2022, compared to 2021. This increase mainly reflected an increase in system sales of $24.0 million due to volume increases across all geographies. This increase was partially offset by a $7.2 million decrease in Skincare revenue due mainly to a devaluation of the Japanese Yen. The Cutera Core segment recorded a loss from operations of $6.9 million in the year ended December 31, 2022, compared to income from operations of $11.5 million in 2021. This $18.4 million adverse change reflects an increase in operating expenses of $26.0 million, partially offset by an increase in gross margin of $7.6 million due to the increase in revenue. The increase in operating expenses reflects an increase of $13.8 million in professional fees and outside consulting, mainly related to the implementation of a new ERP in 2022, an increase in payroll-related expense of $4.3 million, and an increase of $3.7 million related to the resumption of travel activities and conferences.
AviClear
The Company's AviClear reportable segment consists of the AviClear business. The Company's acne solution, AviClear, is a prescription-free, drug-free laser treatment for the treatment of mild to severe acne. The Company began earning revenue from its AviClear device following FDA approval in 2022. The Company leases the AviClear device to customers in North America and receives a fixed annual license fee over the term of the arrangement and revenue related to treatments performed by the lessee.
In the year ended December 31, 2022, the Company earned $0.9 million in lease
license fee revenue and $3.5 million in treatment revenue.
The AviClear segment recorded a loss from operations of $31.3 million in the year ended December 31, 2022, compared to a loss from operations of $9.7 million in 2021. This $21.6 million adverse change mainly reflects a $19.5 million increase in sales and marketing expense associated with the commercialization of the AviClear device. An increase in sales-related headcount in the AviClear segment resulted in an increase in payroll expenses of $10.5 million and promotional and travel expenses related to the AviClear commercialization accounted for a further $7.3 million of the increase in sales and marketing expense.
Liquidity and Capital Resources
Sources and Uses of Cash
The Company's principal source of liquidity is cash generated from the issuance
of convertible notes. The Company actively manages its cash usage and investment
of liquid cash to ensure the maintenance of sufficient funds to meet its daily
needs. The majority of the Company's cash is held in U.S. banks and its foreign
subsidiaries maintain a limited amount of cash in their local banks to cover
their short-term operating expenses.
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As of December 31, 2022 and December 31, 2021, the Company had $345.4 million and $175.8 million of working capital, respectively. Cash and cash equivalents decreased by $18.2 million to $145.9 million as of December 31, 2022, from $164.2 million as of December 31, 2021, due to the net proceeds from the issuance of the convertible notes, offset by purchases of capped calls and marketable investments, the acquisition of property and equipment and cash used for operations.
Cash, Cash Equivalents, Restricted Cash and Marketable Investments
The following table summarizes the Company’s cash, cash equivalents and
restricted cash (in thousands):
Year ended December 31,
(Dollars in thousands) 2022 2021 Change
Cash and cash equivalents $ 145,924 $ 164,164 $ (18,240)
Restricted cash 700 700 -
Marketable investments 171,390 - 171,390
Cash and cash equivalents $ 318,014 $ 164,864 $ 153,150
Consolidated Cash Flow Data
In summary, the Company’s cash flows were as follows:
Year ended December
31,
(Dollars in thousands) 2022 2021
2020
Cash flows provided by (used in): Operating activities $ (66,995) $ 1,235 $ (16,934) Investing activities (194,182) (944) 6,389 Financing activities 242,937 117,526 31,276
Net increase in cash and cash equivalents $ (18,240) $ 117,817 $ 20,731
Cash Flows from Operating Activities
Net cash used in operating activities for the year ended December 31, 2022, was $67.0 million, which reflected net loss, adjusted for non-cash items of $21.0 million, and changes in assets and liabilities of $46.0 million.
The change in assets and liabilities was driven by increases in accounts
receivable and inventory, reflecting an increase in revenue and purchases of
inventory parts to mitigate global supply shortages, respectively. These
increases were partially offset by an increase in accounts payable.
Cash Flows from Investing Activities
Net cash used in investing activities for the year ended December 31, 2022, was $194.2 million, due to net purchases of marketable investments of $171.5 million and purchases of property, and equipment of $22.7 million.
Cash Flows from Financing Activities
Net cash provided by financing activities for the year ended December 31, 2022, was $242.9 million, which was primarily due to the proceeds from the issuance of convertible notes, net of issuance costs, partially offset by the cash used for the purchase of capped calls, and the partial extinguishment of the 2026 Notes.
Adequacy of Cash Resources to Meet Future Needs
The Company had cash and cash equivalents, including marketable securities, of $317.3 million, as of December 31, 2022. The Company believes that the existing cash resources are sufficient to meet the Company's anticipated cash needs for working capital and capital expenditures through at least the next 12 months from the date the financial statements are issued, but there can be no assurances.
Debt
In March 2021, the Company issued $138.3 million aggregate principal amount of
2026 Notes in a private placement offering. The 2026 Notes bear interest at a
rate of 2.25% per year payable semiannually in arrears on March 15 and September
15 of each year. Upon conversion, the 2026 Notes will be convertible into either
cash, shares of the Company's common stock or a
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combination thereof, at the Company’s election. The convertible notes are
presented as convertible notes, net of unamortized debt issuance costs, on the
consolidated balance sheet. The aggregate proceeds from the offering were
approximately $133.6 million, net of issuance costs, including initial
purchasers’ fees.
In May 2022, the Company issued $240.0 million aggregate principal amount of 2028 Notes. The 2028 Notes bear interest at a rate of 2.25% per year payable semiannually in arrears on June 1 and December 1 of each year. A total of $230.0 million of aggregate principal amount of 2028 Notes was issued in a private placement offering and concurrently with this private placement, the Company entered into a purchase agreement with Voce Capital Management LLC, an entity affiliated with J. Daniel Plants, the Company's Executive Chairperson, pursuant to which the Company issued to Voce $10.0 million aggregate principal amount of 2028 Notes on the same terms and conditions. The aggregate proceeds from the offering of 2028 Notes were approximately $232.4 million, net of issuance costs, including initial purchasers fees. In December 2022, the Company issued $120.0 million aggregate principal amount of 2029 Notes in a private placement offering. The 2029 Notes bear interest at a rate of 4.00% per year payable semiannually in arrears on June 1 and December 1 of each year. Upon conversion, the 2029 Notes will be convertible into either cash, shares of the Company's common stock or a combination thereof, at the Company's election. The Convertible notes are presented as Convertible notes, net of unamortized debt issuance costs, on the consolidated balance sheet. The aggregate proceeds from the offering were approximately $115.8 million, net of issuance costs, including initial purchasers fees. On July 9, 2020, the Company entered into the Loan and Security Agreement for the Revolving Line of Credit. See Note 14 - Debt in the accompanying notes to consolidated financial statements for more information. The Loan and Security Agreement contains customary affirmative covenants, such as financial statement reporting requirements and delivery of borrowing base certificates, as well as customary covenants that restrict the Company's ability to, among other things, incur additional indebtedness, sell certain assets, guarantee obligations of third parties, declare dividends, or make certain distributions, and undergo a merger or consolidation or certain other transactions. The Loan and Security Agreement also contains certain financial condition covenants.
On March 4, 2021, the Loan and Security Agreement was amended to (i) permit the
Company to issue the 2026 Notes, and (ii) to permit the related capped call
transactions.
On May 27, 2021, the Loan and Security Agreement was amended. The amendment
removed the quarterly minimum revenue requirement but kept in place the other
financial covenants.
On May 24, 2022, the Loan and Security Agreement was amended. The amendment increased the permitted indebtedness by $230,000,000 and provided for the 2026 Notes Exchange and issuance of the capped call transactions related to the 2028 Notes. On August 10, 2022, the Loan and Security Agreement was amended. The amendment to the Loan and Security Agreement waived a violation of a covenant and revised the Loan Agreement to permit the issuance of the 2028 Notes. On December 7, 2022, the Loan and Security Agreement was amended. The amendment to the Loan and Security Agreement waived a violation of a covenant and revised the Loan Agreement to permit the issuance of the 2029 Notes.
As of December 31, 2022, the Company had not drawn on the Revolving Line of
Credit and the Company is in compliance with all financial covenants of the
Revolving Line of Credit.
On March 10, 2023, Silicon Valley Bank was closed by the California Department of Financial Protection and Innovation, and the FDIC was appointed receiver. On March 26, 2023, the FDIC announced that it had entered into a purchase and assumption agreement with First-Citizens Bank & Trust Company under which all deposits of the former Silicon Valley Bank were assumed by First-Citizens Bank & Trust Company. In addition, under the purchase and assumption agreement, First-Citizens Bank & Trust Company assumed Silicon Valley Bank's obligations under the Company's credit facility. On March 13, 2023, the Company violated one of the terms of the credit facility agreement by transferring funds from Silicon Valley Bank. The Company received a waiver from First-Citizens Bank & Trust Company for this violation.
Purchase Commitments
The Company maintains certain open inventory purchase commitments with its
suppliers to ensure a smooth and continuous supply for key components. The
Company's liability in these purchase commitments is generally restricted to an
agreed-upon period. Such time periods can vary among different suppliers. The
Company believes it has adequate funds to fulfill any such commitments in the
future using the sources discussed in this Item 7 - Management's Discussion &
Analysis of Financial Condition and Results of Operations.
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Other
In the normal course of business, the Company enters into agreements that
contain a variety of representations, warranties, and indemnification
obligations. For example, the Company has entered into indemnification
agreements with each of the Company's directors and executive officers. The
Company's exposure under the various indemnification obligations is unknown and
not reasonably estimable as they involve future claims that may be made against
us. As such, the Company has not accrued any amounts for such obligations.
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