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Commitments and Contingencies

12 Months Ended

Dec. 31, 2023

COMMITMENTS AND CONTINGENCIES

LEASES

Lessee

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 automobiles leases. The Company’s leases generally have remaining terms of one to 7 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.

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.

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.

Below is supplemental balance sheet information related to leases (in thousands):


		Year Ended December 31,
		2023		2022
Assets	Classification
Right-of-use assets	Operating lease right-of-use assets	$	10,055	$	12,831
Finance lease	Property and equipment, net	2,516		1,606
Total leased assets		$	12,571	$	14,437


		Year Ended December 31,
		2023		2022
Liabilities	Classification

Operating lease liabilities, current	Operating lease liabilities	$	2,441	$	2,810
Operating lease liabilities, non-current	Operating lease liabilities, net of current portion	8,887		11,352
Total Operating lease liabilities		$	11,328	$	14,162


		Year Ended December 31,
	Classification	2023		2022
Finance lease liabilities
Finance lease liabilities, current	Accrued liabilities	$	825	$	485
Finance lease liabilities, non-current	Other long-term liabilities	1,064		825
Total Finance lease liabilities		$	1,889	$	1,310

Lease costs during the twelve months ended December 31, 2023, 2022 and 2021 (in thousands):


		Year Ended December 31,
		2023		2022		2021
Finance lease cost	Amortization expense	$	790	$	643	$	484
Finance lease cost	Interest for finance lease	$	116	$	76	$	59
Operating lease cost	Operating lease expense	$	3,598	$	3,560	$	3,542

Cash paid for amounts included in the measurement of lease liabilities during the twelve months ended December 31, 2023, 2022 and 2021 were as follows (in thousands):


		Year Ended December 31,
		2023		2022		2021
Operating cash flows	Finance lease	$	87	$	78	$	56
Financing cash flows	Finance lease	$	594	$	520	$	462
Operating cash flows	Operating lease	$	3,297	$	2,526	$	3,092

Maturities of lease liabilities

Maturities of operating lease liabilities were as follows as of December 31, 2023 (in thousands):


	Amount
2024	$	2,932
2025	2,935
2026	3,030
2027	3,133
2028	325
Thereafter	147
Total lease payments	12,502
Less: imputed interest	(1,174)
Present value of lease liabilities	$	11,328

Vehicle Leases

As of December 31, 2023, the Company was committed to minimum lease payments for vehicles leased under long-term non-cancelable finance leases as follows (in thousands):


	Amount
2024	$	954
2025	704
2026	424
2027	16
Total lease payments	2,098
Less: imputed interest	(209)
Present value of lease liabilities	$	1,889

Weighted-average remaining lease term and discount rate, as of December 31, 2023, were as follows:


Lease Term and Discount Rate
Weighted-average remaining lease term (years)
Operating leases	4.2
Finance leases	2.4
Weighted-average discount rate
Operating leases	4.8	%
Finance leases	9.0	%

Lessor - AviClear

Lessor revenue

The Company leases certain AviClear devices to customers and receives a fixed annual license fee over the term of the arrangement and revenue related to treatments performed by the lessee. The contractual term of the lease agreement is three years with a one-year autorenewal 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. In the fourth quarter of 2023, the Company announced a change in the AviClear business strategy and moved towards a direct sales model rather than a leasing model, whereby certain existing lessees were offered an option to purchase the leased AviClear device. For the devices under the leasing model, the Company concluded the classification of the AviClear lease contracts remains 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 consolidated statements of operations (in thousands):


	Year Ended December 31, 2023		Year Ended December 31, 2022
AviClear operating lease license fee revenue	$	5,386	$	922
AviClear operating lease treatment revenue	10,451		3,534

Total AviClear revenue	$	15,837	$	4,456

The AviClear device being leased has a useful life of seven years.

The following is the minimum future lease payments as of December 31, 2023, under non-cancelable operating leases, assuming the minimum contractual lease term (in thousands):


	Amount
2024	$	7,220
2025	3,185
Total	$	10,405

Practical Expedients

The Company elected a practical expedient applied to operating leases to elect 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.

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.

Total capitalized costs for the years ended December 31, 2023 and 2022 were $3.8 million for both fiscal years. Amortization expenses for these assets were $4.3 million and $0.5 million, respectively during the fiscal years ended December 31, 2023 and 2022, and were included in sales and marketing expense in the Company’s consolidated statements of operations.

Total capitalized costs as of December 31, 2023 and 2022, were $2.7 million and $3.3 million, respectively, and were included in other long-term assets in the Company’s consolidated balance sheets.

Lease installment costs

The Company capitalizes fulfillment costs incurred before AviClear lease commencement and these costs include freight, installation, and training costs.

Total capitalized costs for the years ended December 31, 2023 and 2022 were $2.8 million and $1.7 million, respectively. Amortization expenses for these assets were $2.1 million and $0.3 million during the fiscal years ended December 31, 2023, and were included in cost of revenue in the Company’s consolidated statements of operations.

Total lease installment costs as of December 31, 2023 and 2022, were $2.1 million and $1.4 million, respectively, and were included in other long-term assets in the Company’s consolidated balance sheets.

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. These periods can vary among different suppliers. Although open purchase orders are considered enforceable and legally binding, the terms generally allow the Company the option to cancel, reschedule, and adjust their requirements based on the Company's business needs prior to the delivery of goods or performance of services.

As of December 31, 2023, the Company had $10.7 million of non-cancelable inventory purchase obligations with a certain vendor due in 2024.

Indemnifications

In the normal course of the Company’s 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 its directors and executive officers and certain key employees. The Company’s exposure under its various indemnification obligations is unknown and not reasonably estimable as they involve future claims that may be made against the Company. As such, the Company has not accrued any amounts for such obligations.

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.

As of December 31, 2023 and 2022, the Company had accrued $3.3 million and $0.5 million, respectively, related to various pending commercial and product liability lawsuits. The Company does not believe that a material loss in excess of accrued amounts is reasonably possible.

On January 31, 2020, Cutera 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 Cutera confidential, proprietary, or trade secret information. The order also prohibits 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 alleges claims for violation of the Lanham Act, unlawful business practices, false advertising and trademark infringement. Discovery is ongoing. No trial date has been scheduled. On April 27, 2023, Lutronic filed a complaint for trade libel, intentional interference with prospective economic advantage, misappropriation of trade secrets and unfair business practices against Cutera in California State Court. Discovery has not yet commenced and no trial date has been scheduled. The Company denies the allegations of the complaint and has instructed counsel to defend the matter vigorously. Discovery is ongoing and no trial date has been scheduled.

In March 2023, Serendia, LLC (“Serendia”), filed patent infringement complaints against the Company with the International Trade Commission (“ITC”) and in U.S. District Court for the District of Delaware alleging infringement of six Serendia patents by the Secret RF and Secret Pro systems, which the Company distributes in the U.S. on behalf of Ilooda Co. Ltd., a Korean company (“ilooda”). The manufacturer of these products, ilooda, is obligated to defend the Company against these claims and, as a result, the Company has not incurred significant external legal costs. Serendia and ilooda have agreed to a settlement of the ITC investigation, the Delaware litigation and any other past, present and future suits or claims related to the six Serendia patents and the Secret RF and Secret Pro systems. The settlement of these matters includes a non-exclusive, worldwide, fully paid up license from Serendia to ilooda to the six Serendia patents related to the Secret RF and Secret Pro systems, which are distributed by the Company. The ITC investigation as to ilooda and the Company was terminated as of April 10, 2024 and the Delaware litigation was dismissed as of April 3, 2024.

On April 11, 2023, J. Daniel Plants, the Company’s former Executive Chairperson, and David Mowry, the Company’s former Chief Executive Officer, filed a complaint in the Delaware Court of Chancery against directors Gregory Barrett, Sheila Hopkins, Timothy O’Shea, Juliane Park and Janet Widmann, as defendants, and the Company, as nominal defendant (the “Delaware Litigation”) seeking a declaration that the individual defendants breached their fiduciary duties and enjoining them from enforcing the nomination deadline under the Company’s Amended and Restated Bylaws in connection with the 2023 annual meeting of stockholders, or in the alternative, a declaration that the Company must hold a special meeting of the stockholders on June 2, 2023. Mr. Plants and Mr. Mowry filed a motion for expedited proceedings with their complaint. Mr. Plants and Mr. Mowry subsequently agreed that the determination made by the Special Committee of the Board to hold a special meeting of the stockholders on June 9, 2023 mooted their request in the Delaware Litigation for a declaration that the Company hold a special meeting of the stockholders. On April 18, 2023, the Court of Chancery denied Mr. Plants and Mr. Mowry’s motion for expedited proceedings.

On May 16, 2023, Mr. Mowry filed a letter with the Court of Chancery disclosing that he had resolved his dispute with the defendants and agreed to dismiss his claims with prejudice. On May 17, 2023, the Court of Chancery granted an order for voluntary dismissal of Mr. Mowry as a plaintiff in the Delaware Litigation. Mr. Plants subsequently publicly voiced opposition to certain aspects of the Company's corporate governance and strategy but did not submit a notice of nomination of director candidates for the Company’s 2023 annual meeting of stockholders and did not purport to nominate any director candidates at the Company’s annual meeting of stockholders held on July 13, 2023. Due to Plaintiff’s failure to amend his Complaint within the time required by the Court’s order dated October 6, 2023, the Delaware Litigation was dismissed with prejudice.

On October 5, 2023, Mr. Plants filed a Sarbanes-Oxley (“SOX”) discrimination claim (the “SOX Whistleblower Complaint”) with the U.S. Department of Labor Occupational Safety and Health Administration (“OSHA”). Mr. Plants alleges that he was terminated on April 11, 2023, in retaliation for reporting to the Board of Directors (the “Board”) his concerns that budgeting and guiding to higher forecasts for 2023 would be misleading to shareholders. The SOX Whistleblower Complaint referenced the April 3, 2023 letter from Mr. Plants to the Company’s Board that articulated Mr. Plants’ concerns. The Company received notice of the SOX Whistleblower Complaint on November 8, 2023. On December 7, 2023, Mr. Plants made an arbitration demand in JAMS against the Company, Mr. Barrett, Ms. Hopkins, Mr. O’Shea, Ms. Park and Ms. Widmann for claims related to the termination of his employment (the “Arbitration Demand”). Mr. Plants alleged several claims: breach of his change of control and severance agreement; wrongful termination; retaliation in violation of California’s whistleblower laws; retaliation in violation of SOX; defamation/libel; tortious interference with prospective economic advantage; and breach of oral contract. He sought compensatory, special, and punitive damages, as well as reinstatement, civil penalties, and attorneys’ fees and costs. Mr. Plants and the Company have settled all claims against the Company and the parties listed in the Arbitration Demand. The Company paid Mr. Plants approximately $1 million in settlement of all claims. The OSHA investigation was officially closed on April 26, 2024, and the JAMS arbitration was dismissed as of April 19, 2024.

Commitments and Contingencies