UNITED STATES
SECURITIESANDEXCHANGECOMMISSION
Washington, D.C.20549
FORM10-K
ANNUAL REPORT PURSUANT TO SECTION
☒ Annual Report Pursuant to Section 13 ORor 15(d) OF THE
SECURITIES EXCHANGE ACT OFof the Securities Exchange Act of 1934
For fiscal year ended December 31, 20182020
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)
| Delaware | 77-0492262 | ||
(Stateorother jurisdiction of
| (I.R.S.Employer | |||
incorporationororganization) | Identification No.) |
(I.R.S. Employer
Identification Number)
3240 Bayshore Blvd.
, Brisbane, California 94005
(415) 657-5500
(Address including zip code, and telephone number, including area code, of registrant’s 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 | Trading Symbol(s) | Name of |
Common Stock | CUTR | The NASDAQ Stock Market, LLC |
Securities Registered Pursuantregistered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐No ☒
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 ☒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 andsuch files). Yes ☒No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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.
Large accelerated filer ☐Accelerated filer ☒ Non-accelerated filer ☐ Smaller reporting company ☐Emerging growth company ☐ |
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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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. Yes ☒No ☐
Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐No ☒
The aggregate market value of the registrant’s common stock, held by non-affiliates of the registrant as of June 30, 20182020 (which is the last business day of registrant’s most recently completed second fiscal quarter) based upon the closing price of such stock on the NASDAQ Global Select Market on June 30, 2018,2020, was approximately $418$143 million. For purposes of this disclosure, shares of common stock held by entities and individuals who own 5% or more of the outstanding common stock and shares of common stock held by each officer and director have been excluded in that such persons may be deemed to be “affiliates” as that term is defined under the Rules and Regulations of the Securities Exchange Act of 1934. This determination of affiliate status is not necessarily conclusive.
The number of shares of Registrant’s common stock issued and outstanding as of March 1, 201910, 2021 was 14,014,511.17,782,872.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates by reference certain information from the registrant’s definitive proxy statement for the 20192021 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2018.2020.
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Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
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Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
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FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains “forward-looking statements” that involve risks and uncertainties. OurThe Company’s actual results could differ materially from those discussed in the forward-looking statements. The statements contained in this report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Forward-looking statements are often identified by the use of words such as, but not limited to, “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “might,” “expect,” “intend,” “may,” “plan,” “project,” “seek,” “should,” “strategy,” “target,” “will,” “would” or variations of these terms and similar expressions, or the negative of these terms or similar expressions intended to identify forward-looking statements. Forward-looking statements are necessarily based on estimates and assumptions that, while considered reasonable by Cuterathe Company and its management based on their knowledge and understanding of the business and industry, are inherently uncertain. Forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in the section titled “Risk Factors” included under Part I, Item 1A below. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, the Company undertakes no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.
The following discussion and analysis should be read in conjunction with and are qualified in their entirety by reference to the discussions included in Item 1A - Risk Factors, Item 7 - Management’s Discussion & Analysis of Financial Condition and Results of Operations, and elsewhere in this Annual Report on Form 10-K.
In this Annual Report on Form 10-K, unless the context otherwise requires, references to the “Company,” “Cutera,” “we,” “us” and “our”“the Company’s” refers to Cutera, Inc.
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In this Annual Report on Form 10-K, “Cutera,” “the Company,” “we,” “us” and “our”“the Company’s” refer to Cutera, Inc. and its consolidated subsidiaries.
Cutera®Cutera®,AcuTipAccuTip®, CoolGlide®, CoolGlide excel®, enlighten®, excel HR®, excel V®, excel V+®, LimeLight®, MyQ®, Pearl®, PicoGenesis™, ProWave®, Solera®, Titan®, truSculpt®, truSculpt® flex, Secret PRO®,CoolGlide® Secret RF® , andCoolGlide excel® xeo®, enlighten®, excel HR®, excel V®, LimeLight®, myQ®, Pearl®, PicoGenesis™, ProWave 770®, Solera®, Titan®, truSculpt®, Vantage® and xeo®are trademarks or registered trademarksfor the systems and ancillary products of the Company.
Company Background
Cutera was formed in 1988 as a DelewareDelaware corporation and is a global provider of laser and energy-based aesthetic systems for practitioners worldwide. The Company designs, develops, manufactures, distributes and markets light and energy-based product platforms for use by physicians and other qualified practitioners (collectively, “practitioners”), enabling them to offer safe and effective aesthetic treatments to their customers. In addition, the Company distributes third-party manufactured skincare products. The Company currently offers easy-to-use products based on the following key platforms:enlighten®,excel HR®, excel V®, excel V+®,truSculpt®, truSculpt® flex, excel VSecret PRO®,xeo Secret RF®, JulietTM, andSecretTM RFxeo®— each of which enables physicians and other qualified practitioners to perform safe and effective aesthetic procedures, including treatment for body contouring, skin resurfacing and revitalization, tattoo removal, removal of benign pigmented lesions, vascular conditions, hair removal, toenail fungus and women's health. The Company’s platforms are designed to be easily upgraded to add additional applications and hand pieces, which provide flexibility for the Company’s customers as they expand their practices. The Company’s ongoing research and development activities primarily focus on developing new products, as well as improving and enhancing the Company’s portfolio of existing products. The Company also explores ways to expand the Company’s product offerings through alternative arrangements with other companies, such as distribution arrangements. The Company introduced Juliet, a product for women’s health, in December 2017, Secret RF, a fractional RF microneedling device for skin revitalization, in January 2018, enlighten SR in April 2018, and truSculpt iD in July 2018.2018, excel V+ in February 2019 and truSculptflex in June 2019.
The Company’s trademarks include: “Cutera,” “AcuTip,“AcuTip,” “CoolGlide,“CoolGlide,” “CoolGlide“CoolGlide excel,” “enlighten,” “excel “excelHR,” “excel “excelV,” “LimeLight,“excelV+,” ‘myQ,“LimeLight,” “Pearl,‘myQ,”“Pearl,” “PicoGenesis,” “ProWave770,” “Solera,“Solera,” “Titan,” “truSculpt,” “Vantage”truSculpt,”“truSculpt flex,”"Secret PRO”“Secret RF” and “xeo.“xeo.” The Company’s logo and other trade names, trademarks and service marks appearing in this document are ourthe 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. Solelyfor convenience, ourthe Company’s trademarks and trade names referred to in this Annual Report on Form 10-K appear without the ™® or ® symbols, but those referencesare not intended to indicate, in any way, that the Company will not assert, to the fullest extent under applicable law, ourthe Company’s rights, or the right of the applicable licensorto these trademarks and trade names.
A description of each of the Company’s hand pieces, and the aesthetic conditions they are designed to treat, is contained in the section below entitled “Products” and a summary of the features of ourthe Company’s primary platforms is as follows:
● truSculptflex – In June 2019, the Company introduced the truSculpt flex for the muscle-sculpting market. This product is a bio-electrical muscle stimulation device designed to strengthen, firm and tone the abdomen, buttocks and thighs, and can treat patients at all fitness levels. The truSculpt flex delivers Multi-Direction Stimulation with truControl, inducing muscle hypertrophy. Johari (the Company’s contract manufacturing organization) received 510(k) clearance from the United States (“U.S.”) Food and Drug Administration (“FDA”) for muscle conditioning in 2013. It is sold in the USA, Canada, Japan, certain Asia Pacific markets, and the European Union (“EU”) and is expected to be sold to a broader international customer base upon required regulatory approvals. The truSculptflexincludes a consumable hand piece that needs to be "refilled" after a set number of treatments are performed, resulting in recurring revenue.
● excelV+– In February 2019, the Company introduced the excelV+, a new iteration of the excelVvascular platform originally introduced in 2011. ExcelV+, is a high-performance, vascular and benign pigmented lesion treatment platform designed specifically for the core-market of dermatologists and plastic surgeons. The excelV+has 50% more power than its predecessor and provides a greater range of parameters for faster more customizable treatments. The excelVand excelV+are solid-state laser platforms providing a combination of the 532 nm green laser with 1064 nm Nd:YAG technology, to provide a single, compact and efficient system that treats the entire range of cosmetic vascular and benign pigmented lesion conditions.
● truSculptiD–In July 2018 the Company introduced a hands-free version of ourthe Company’s truSculptplatform, the truSculptiDiD, for the non-surgical body sculpting market. It includes consumable cycles that need to be ordered by the practitioner after a set number of treatments are performed, resulting in recurring revenue. This product is a high-powered RF system designed for body contouring, lipolysis, and deep tissue heating, and is able to treat all body and skin types. The truSculptiDdelivers targeted energy at 2 MHz, causing lipolysis of the subcutaneous adipose tissue. The Company received 510(k) clearance from the United States (“U.S.”) Food and Drug Administration (“FDA”)FDA for lipolysis of abdominal fat in 2018. It was primarily sold in the U.S., Canada and CanadaEurope in 2018 and is planned to bewas sold to a broader international customer base in 2019. Prior truSculptplatforms include the truSculpt3D, a 2 MHZ device for tissue heating and temporary reduction of fat in the abdomen, and the original truSculptplatform which was launched in August 2012 and delivered treatments at 1 MHz. In December 2016, the Company received 510(k) clearance from the FDA to market the truSculptplatform for the temporary reduction in circumference of the abdomen. The truSculpt3Dincludes a consumable hand piece that needs to be "refilled"“refilled” after a set number of treatments are performed, resulting in recurring revenue.
● JulietJuliet – In December 2017, the Company introduced the Julietlaser for women’s intimate health. Julietis a versatile multi-application platform utilizing an Er:YAG laser with the 2940 nm wavelength. This Erbium wavelength produces noticeable results due to its high peak absorption in water. Additionally, Juliet’sErbium technology allows for a controlled thermal delivery to tissue, keeping the procedure safe for patients while minimizing downtime. Julietdelivers two passes of energy to the target area during treatment. The first pass uses ablation to vaporize the tissue and create micro-channels of injury. The second pass uses coagulation to deliver a thermal injury to the area, which further stimulates the body's normal wound healing process, revitalizing, and remodeling damaged tissue and introducing the formation of new blood vessels. Julietalso has a disposable tip, which must be changed for every procedure. As a result, the replacementsreplacement of the tips results in recurring revenue. The Company is the distributor of Juliet. All regulatory activities are managed by Asclepion laser technologies gmbh, the legal manufacturer. During the quarter ended June 30, 2020, the Company wrote-off $0.8 million of inventory on hand related to its Juliet platform due to declining sales. Sales related to Juliet have been declining due to the COVID-19 pandemic and the FDA letter issued on July 30, 2018 expressing concerns regarding “vaginal rejuvenation” procedures using energy-based devices.
● SecretSecret RF– In January 2018, the Company introduced a new fractional radio frequency (“RF”) microneedling device that delivers heat into the deeper layers of the skin using controlled RF energy. The targeted energy revitalizes, rebuilds and firms up tissue, effectively remodeling collagen, improving mild wrinkles and diminishing scars while leaving the outer layer of skin intact, minimizing downtime. Each time a procedure is performed, it requires the physician to use a new hand piece tip. The sale of the replacement tip results in recurring revenue. The Company is the distributor of Secret RF. All regulatory activities are managed by Ilooda Co. Ltd.
● enlightenenlighten – In December 2014, the Company introduced the enlighten laser platform with a dual wavelength (1064 nanometer, or “nm” + 532 nm) and in December 2016, wethe Company introduced a three wavelength model (1064 nm + 532 nm + 670 nm),enlightenIII. The enlighten system is a dual pulse duration (750 picosecond, or “ps,” and 2 nanosecond, or “ns”) laser system and is cleared for multi-colored tattoo removal and for the treatment of benign pigmented lesions and acne scars. In 2018, the Company introduced an expanded performance enlightenIIIand in April 2018, the Company introduced enlightenSR,,which is a lighter version of enlighten with reduced optical performance. Clinical studies were conducted to support an FDA clearance in October 2018 for treatment of acne scars on patients with Fitzpatrick skin types II-V when used with the Micro Lens Array (MLA)(“MLA”) hand piece attachment.
● excelexcel HR– In June 2014, the Company introduced the excelHR platform, a premium hair removal solution for all skin types, combining Cutera’sthe Company’s proven long-pulse 1064 nm Nd:YAG laser and a high-power 755 nm Alexandrite laser with sapphire contact cooling.
● xeoexcel V+ – In March 2019, the Company introduced the excel V+, a new iteration of the excel V vascular platform originally introduced in 2011. The excel V+, a high-performance, vascular and benign pigmented lesion treatment platform designed specifically for the core-market of dermatologists and plastic surgeons. The excel V+ has 50% higher power than its predecessor and provides greater range of parameters for faster more customizable treatments. The excel V and excel V+ are solid-state laser platforms providing a combination of the 532 nm green laser with 1064 nm Nd:YAG technology, to provide a single, compact and efficient system that treats the entire range of cosmetic vascular and benign pigmented lesion conditions.
● xeo– In 2003, the Company introduced the xeo platform, which combines intense pulsed light technology with laser applications in a single system. The xeois a multi-application platform on which a customer can purchase hand piece applications for the removal of unwanted hair, treatment of vascular lesions, and skin revitalization by treating discoloration, fine lines and laxity.
In addition to the above mentioned seven primary systems, the Company continues to generate revenue from its legacy products such as GenesisPlus,CoolGlide, and the distribution of ZO’s skincare products, a third-party product manufactured by ZO Skin Health, Inc. (“ZO”), and sold in the Japanese market. The Company also generates revenue from the sale of post-warranty services, as well as the sales of Titanhand piece refills.refills, and from the lease arrangements under its membership program.
The Company offers its customers the ability to select the systems and applications that best fit their practice and to subsequently upgrade their systems to add new applications. This upgrade path allows ourthe Company’s customers to cost-effectively build their aesthetic practices and provides usthe Company with a source of incremental revenue.
Recent Developments
On March 9, 2021, the Company offered $125 million aggregate principal amount of 2.25% convertible senior notes due 2026 (the “notes”) in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”). Cutera also granted the initial purchasers of the notes an option to purchase up to an additional $13.25 million aggregate principal amount of the notes on the same terms and conditions. The Initial Purchasers exercised their option in full on March 5, 2021, bringing the total aggregate principal amount of the Notes to $138.25 million.
The Company entered into capped call transactions, in connection with the offering, with one or more of the initial purchasers and/or their respective affiliates and/or other financial institutions (the “option counterparties”). The capped call transactions are expected generally to reduce potential dilution to Cutera’s common stock upon any conversion of notes, with such reduction subject to a cap. If the initial purchasers exercise their option to purchase additional notes, the Company expects to enter into additional capped call transactions with the option counterparties.
The net proceeds from the offering, before deducting purchasers’ discounts and offering expenses were approximately $134.1 million. The Company used $16.1 million of the net proceeds to pay the cost of the capped call transactions described above and the remainder of the net proceeds for general corporate purposes, which may include working capital, capital expenditures and potential acquisitions and strategic transactions.
In connection with the offering, the Company entered into Amendment No. 1 to Loan and Security Agreement on March 4, 2021, which amends the Company’s Loan and Security Agreement, dated as of July 9, 2020 between the Company, as borrower, and Silicon Valley Bank. The Amendment amends the Loan and Security Agreement to (i) permit the Company to issue the Notes and perform its obligations in connection therewith, and (ii) permit the Capped Call transactions.
The Market for Non-Surgical Aesthetic Procedures
The market for non-surgical aesthetic procedures has grown significantly over the past several years. According to data presented at the IMCAS Global Market Summit in February 2019,2020, the medical aesthetic global market has doubled from $6.3 billion to $11 billion from 2014 to 2018, and is projected to reach $15 billion by 2022. The market growth rate for 2018 was 5.1% and a 6.3% growth is estimated in 2019. Body sculpting is expected to grow at a CAGR11.5% from 2019 to reach $22.2 billion by 2025. The body contouring market is expected to grow to $1.1 billion by 2022 at annual growth rate of 9.7%7.9%.
The Company believes there are several factors contributing to the global growth of aesthetic treatment procedures and aesthetic laser equipment sales, including:
● ImprovedImproved EconomicEnvironmentandExpandedPhysicianBase–The improvements in overall global economic conditions since the last recessionfinancial crisis of 2007-2008 have created increased demand for aesthetic procedures, which in turn has resulted in an expanding practitioner base to satisfy the demand.
● Aging Aging DemographicsofIndustrializedCountries–The aging population of industrialized countries, the amount of discretionary income available to the “baby boomer” demographic segment ─ ages 5456 to 72 in 201874 as of 2020 ─ and their desire to retain a youthful appearance, contribute to the increased demand for aesthetic procedures.
● Broader Broader RangeofSafeandEffectiveTreatments–Technical developments, as well as an increase in treatable conditions due to new product introductions, lead to safe, effective, easy-to-use, and low-cost treatments with fewer side effects, resulting in broader adoption of aesthetic procedures by practitioners. In addition, technical advancements enable practitioners to offer a broader range of treatments. These technical developments reduce treatment and recovery times, which in turn lead to greater patient demand.
● Broader Broader BaseofCustomers–Managed care and government payor reimbursement restrictions motivate physicians to establish, or seek to expand, their elective aesthetic practices with procedures that are paid for directly by patients. As a result, in addition to core practitioners such as dermatologists and plastic surgeons, many other practitioners, such as gynecologists, family practitioners, primary care physicians, physicians performing aesthetic treatments in non-medical offices, and other qualified practitioners (“non-core practitioners”) expand their practices and offer aesthetic procedures.
● Reductions Reductions inCostperProcedure–Due in part to increased competition in the aesthetic market, the cost per procedure has been reduced in the past few years. This attracts a broader base of customers and patients seeking aesthetic procedures.
● Wide Wide AcceptanceofAestheticProceduresandIncreasedFocusonBodyImageandAppearance–According to the American Society for Aesthetic Plastic Surgery survey in 2016,2019 both surgical and non-surgical procedures increased compared to 1997.2015. Surgical procedures increased by 99%6.2%, while non-surgical procedures increased by 650%13.3% over this 20-year4 year period.
Non-Surgical Aesthetic Procedures for Improving the Body and/or Skin’s Appearance and Their Limitations
Many alternative therapies are available for improving a person’s appearance by treating specific structures within the skin. These procedures utilize injections or abrasive agents to reach different depths of the dermis and the epidermis. In addition, non-invasive and minimally invasive treatments have been developed that employ laser and other energy-based technologies to achieve similar therapeutic results. Some of these common aesthetic procedures and their limitations are described below.
Non-InvasiveNon-Invasive Body Contouring Contouring–– Treatments for non-invasive body sculpting can be done utilizing a variety of technologies including radio frequency, laser, cooling and ultrasound. Procedures address reduction of unwanted fat on the abdomen, flanks, arms, thighs, submentum and back, and can require one or more treatments. Systems with the ability to induce non-invasive lipolysis (breakdown of fat) offer a more permanent solution with an average fat reduction of greatermore than 20%. Side effects to this approach may include nodules that typically resolve over time, and the risk of burning the treatment area. In June 2019, the Company introduced the truSculpt flex, a bio-electrical muscle stimulation device designed to strength, firm and tone the abdomen, buttocks and thighs.
TattooTattoo removal–The most effective way to remove tattoos on the body is to utilize laser systems that deliver very short pulse durations with high peak power in order to break up the ink particles that comprise tattoos.
The global tattoo removal market was valued at $122.8 million in 2019 and is projected to reach $219.0 million by 2026 growing at 8.5% from 2019 to 2026. According to a Tattoo Incidence Study published in ORC International in June 2015, upthe market research, people tend to 27%get rid of Americanstheir tattoos due to career purposes, social conditions, personal situations, and more, which have one or more tattoos, and 1 in 4been the key drivers for the tattoo bearing American adults have “tattoo regret”.removal market. Despite the effectiveness of lasers for tattoo removal, common complaints concerning laser tattoo removal include a low rate of complete clearance (sometimes no better than 50% after several treatments) as well as the high number of treatments for satisfactory clearance (often 10 or more treatments spaced four to eight weeks apart). However, the latest generation of tattoo removal lasers produce picosecond pulse durations, (a trillionth of a second) and thereby, can meaningfully improve tattoo clearance and reduce the total number of treatments. The Company introduced the enlighten system, a dual pulse duration laser system, that was cleared for multi-colored tattoo removal.
Hair Removal– Techniques for hair removal include waxing, depilatories, tweezing, shaving, electrolysis, laser as well as other energy-based hair removal modalities. The only techniques that provide a long-lasting solution are electrolysis, laser, and other energy-based technology such as an Intense Pulsed Light (“IPL”). Electrolysis is usually painful, time-consuming and expensive for large areas, but is the most common method for removing light-colored hair. During electrolysis, an electrologist inserts a needle directly into a hair follicle and activates an electric current in the needle. Since electrolysis only treats one hair follicle at a time, the treatment of an area as small as an upper lip may require numerous visits and many hours of treatment. In addition, electrolysis can cause blemishes and infection related to needle use. In comparison, lasers can quickly treat large areas with a high degree of safety and efficacy. In 2003, the Company introduced the xeo system platform utilized for hair removal, which combines intense pulse light technology with laser applications in a single system. In 2014, the Company introduced the excel HR platform, a premium hair removal solution for all skin types, combining the Company’s proven long-pulse 1064 nm Nd:YAG laser and a high-power 755 nm Alexandrite laser with sapphire contact cooling.
SkinSkin Revitalization–Skin revitalization treatments include a broad range of popular alternatives, including Botox and collagen injections, chemical peel, microdermabrasion, radio frequency treatment and laser and other energy-based treatments. With these treatments, patients hope to improve overall skin tone and texture, reduce pore size, tighten skin and remove other signs of aging, including mottled pigmentation, diffuse redness and wrinkles. All of these procedures are temporary solutions and must be repeated within several weeks or months to sustain their effect, thereby increasing the cost and inconvenience to patients. For example, the body absorbs Botox and collagen, and patients require supplemental injections every three to six months to maintain the benefits of these treatments.
Other skin revitalization treatments, such as chemical peels and microdermabrasion, can have undesirable side effects. Chemical peels use acidic or caustic solutions to peel away the epidermis, and microdermabrasion generally utilizes sand crystals to resurface the skin. These techniques can lead to stinging, redness, irritation and scabbing. In addition, more serious complications, such as changes in skin color, can result from deeper chemical peels.
With many modalities available today for skin revitalization and resurfacing, the Company has developed a range of clinically proven solutions uniquely paired with a patient’s lifestyle and skin concerns, such as Secret PRO, which utilizes fractional CO2 for skin resurfacing and radio frequency microneedling for deep dermal remodeling and Secret RF, a novel fractional RF microneedling system for tissue coagulation and hemostasis designed to stimulate and remodel collagen and address the common signs of aging.
MicroneedlingMicroneedling – (alsoAlso known as collagen induction therapy)therapy, microneedling is a minimally invasive revitalization treatment that involves using fine needles to create hundreds of tiny, invisible puncture wounds in the top layer of the skin, which stimulates the body's natural wound healing processes, resulting in cell turnover and increased collagen and elastin production. Our recentlyIn January 2018, the Company introduced Secret RF product, is a RF fractional microneedling system that helps deliver tailored energy to improve fine lines, wrinkles, and scars from the inside out.
Women’s Intimate Health–Lasers and RF technology have emerged as a treatment for issues unique to women's health such as vulvar vaginal atrophy and genitourinary symptoms of menopause. The condition causes vaginal dryness, inflammation and irritation, which can lead to painful or frequent urination. Traditional treatments use estrogen therapy to combat vulvar vaginal atrophy and genitourinary symptoms of menopause to restore vaginal health, but not all women suffering from the symptoms are candidates. Lasers have been shown to ablate the vaginal tissue generating a healing response that may lead to systemsymptomatic improvement.
LegLeg andFacialVeins–Current aesthetic treatment methods for leg and facial veins include sclerotherapy, as well as laser and other energy-based treatments. With these treatments, patients seek to eliminate visible veins, and improve overall skin appearance. Sclerotherapy requires a skilled practitioner to inject a saline or detergent-based solution into the target vein, which breaks down the vessel causing it to collapse and be absorbed into the body. The need to correctly position the needle on the inside of the vein makes it difficult to treat smaller veins, which limits the treatment of facial vessels and small leg veins. In 2019, the Company introduced the excelV+, a high-performance, vascular and benign pigmented lesion treatment platform designed specifically for the core-market of dermatologists and plastic surgeons, which treats the entire range of cosmetic vascular and benign pigmented lesion conditions.
Laser and other energy-based non-surgical treatments for hair removal, veins, skin revitalization and body contouring are discussed in the following section and in the section entitled “Our Applications and Procedures” below.’section.
Laser and Other Energy-Based Aesthetic Treatments
Laser and other energy-based aesthetic treatments can achieve therapeutic results by affecting structures within the skin. The development of safe and effective aesthetic treatments has resulted in a well-established market for these procedures.
Practitioners can use laser and other energy-based technologies to selectively target hair follicles, veins or collagen in the dermis, as well as cells responsible for pigmentation in the epidermis, without damaging surrounding tissue. Practitioners can also use these technologies to safely remove portions of the epidermis and deliver heat to the dermis as a means of generating new collagen growth. Ablative skin resurfacing improves the appearance of the skin by removing the outer layers of the skin. Ablative skin resurfacing procedures are considered invasive or minimally invasive, depending on how much of the epidermis is removed during a treatment. Non-ablative skin resurfacing improves the appearance of the skin by treating the underlying structure of the skin.
Safe and effective laser and energy-based treatments require an appropriate combination of the four parameters:
● EnergyLevel–the amount of light or radio frequency emitted to heat a target;
● PulseDuration–the time interval over which the energy is delivered;
● SpotSizeorElectrodeSize–the diameter of the energy beam, which affects treatment depth and area; and
● WavelengthorFrequency–the position in the electromagnetic spectrum which impacts the absorption and the effective depth of the energy delivered.
For example, in the case of hair removal, by utilizing the correct combination of these parameters, a practitioner can use a laser or other light source to selectively target melanin within the hair follicle to absorb the laser energy and destroy the follicle, without damaging other delicate structures in the surrounding tissue.
Technology and Design of the Company’s Systems
The Company’s enlighten, excel, HR, excel V, Secret PRO, Juliet, Secret RF, truSculpt,truSculpt and xeo platforms provide the long-lasting benefits of laser and other energy-basedenergy- based aesthetic treatments. OurThe Company’s technology allows for a wide variety of applications in a single system. Key features of ourthe Company’s solutions include:
● MultipleApplicationsAvailableinaSingleSystem–Many of ourthe Company’s platforms feature multiple-applications that enable practitioners to perform a variety of aesthetic procedures using a single device. These procedures include hair removal, vascular treatments and skin revitalization, ─ including the treatment ofwhich address discoloration, fine lines, and uneven texture. Because practitioners can use ourthe Company’s systems for multiple indications, the investment in a unit is spread across a greater number of patients and procedures, and the acquisition cost may be more rapidly recovered.
● TechnologyandTechnology and DesignLeadership–OurThe Company’s innovative laser technology combines multiple wavelengths, adjustable energy levels, variable spot sizes and a wide range of pulse durations, allowing practitioners to customize treatments for each patient and condition. OurThe Company’s proprietary pulsed light hand pieces for the treatment of discoloration, hair removal and vascular treatments optimize the wavelength used for treatments and incorporate a monitoring system to increase safety. OurThe Company’s Titan hand pieces utilizepiece utilizes a novel light source not previously used for aesthetic treatments. OurThe Company’s Pearland PearlFractional hand pieces, with proprietary YSGG technology, represent the first application of the 2790 nm wavelength for minimally invasive cosmetic dermatology.
● UpgradeablePlatform–Some of ourthe Company’s products allow ourthe Company’s customers to upgrade their system to ourthe Company’s newest technologies or add new applications to their system, each of which provide usthe Company with a source of incremental revenue. The Company believes that product upgradeability allows our customers to take advantage of ourthe Company’s latest product offerings and provide additional treatment options to their patients, thereby expanding the opportunities for their aesthetic practices.
● TreatmentsforBroadRangeofSkinTypesandConditions–For hair removal, ourthe Company’s products are safe and effective on patients of all skin types, including harder-to-treat patients with dark or tanned skin. In addition, the wide parameter range of ourthe Company’s systems allows practitioners to effectively treat patients with both fine and coarse hair. Practitioners may use ourthe Company’s products to treat spider veins on the leg; to treat facial veins; and perform skin revitalization procedures for discoloration, texture, fine lines and wrinkles on any type of skin. The ability to customize treatment parameters based on skin type enables practitioners to offer safe and effective therapies to a broad base of their patients.
● EaseofUse–The Company designs its products to be easy to use. OurThe Company’s proprietary hand pieces are lightweight and ergonomic, minimize user fatigue, and facilitate clear views of the treatment area, reducing the possibility of unintended damage and increasing the speed of application. OurThe Company’s control console contains an intuitive user interface with simple, independently adjustable controls from which to select a wide range of treatment parameters to suit each patient’s profile. For instance, the clinical navigation user interface on the xeo platform provides recommended clinical treatment parameter ranges based on patient criteria entered. OurThe Company’s Pearl and PearlFractional hand pieces include a scanner with multiple scan patterns to allow simple and fast treatments of the face. Finally, ourthe Company’s truSculpt iDembodies the best of many of the above features. Unlike other body sculpting treatments on the market that require certain body types, or pinchable fat, truSculptiDis "body agnostic"“body agnostic” with the ability to customize treatments to the patient's needs and body type. In addition, ourthe Company’s proprietary algorithms and navigation enable the practitioner to treat a 300cm2 area in only 15 minutes.
Business Strategy
The Company’s goal is to maintain and expand its position as a leading worldwide provider of light and energy-based aesthetic devices and complementary aesthetic products by executing the following strategies:
● Continue to Expand our the Company’sProductOffering–Though the Company believes that its current portfolio of products is comprehensive, ourthe Company’s research and development group has a pipeline of potential products under development. The Company launched excel Vin 2011, truSculpt in 2012, ProWave LX in 2013, and excel HRand enlightenin 2014. In addition, the Company continues to expand offerings on the Company’s current platforms with further enhancement such as the enlighten III launched in 2016,truSculpt 3D launched in 2017, enlighten SR launched in April 2018, truSculpt 3D iDlaunched in 2017July 2018, excel V+ launched in February 2019 and truSculpt iD flexlaunched in July 2018.June 2019. The Company also introduced Juliet, a product for women’s health, in December 2017, and Secret RF, a fractional RF microneedling device for skin revitalization, in January 2018. Just recently,2018, and Secret PRO, a CO2 fractional RF microneedling device, in March 2019, the Company introduced the excel V+, an enhanced iteration of our excel V vascular platform originally launched in 2011.July 2020. These products allow the Company to leverage existing customer call points and create new customer call points.
● IncreaseRevenueandImproveProductivity–The Company believes that the market for aesthetic systems will continue to offer growth opportunities. The Company continues to build brand recognition, add additional products to ourthe Company’s international distribution channel, and focus on enhancing the Company’s global distribution network, all of which the Company expects will contribute to increased revenue.
● IncreaseFocusonPractitionerswithEstablishedMedicalOffices–The Company believes there is growth opportunity in targeting ourthe Company’s products to a broad customer base. The Company also believes that its customers’ success is largely dependent upon having an existing medical practice, infor which the Company’s systems provide incremental revenue sources to augment theira customer’s existing practice revenue.
● Leverage our the Company’sInstalledBase– With the introduction of enlighten,excelV, excelHR and truSculpt, the Company is able to effectively offer additional platforms into the existing installed base. In addition, each of these platforms allows for potential future upgrades that offer additional capabilities. The Company believes this program aligns ourthe Company’s interest in generating revenue with ourthe Company’s customers’ interest in improving the return on their investment by expanding the range of treatments that can be performed in their practice.
● GenerateRevenuefromServicesandRefillable,Consumable,HandPieces–The Company’s Titan, truSculpt 3D3,D, truSculpt iD iD and truSculpt flex cycle and pulsed-light hand pieceshandpieces are refillable products, while our the Company’s single use disposable tips applicable toSecret PRO, Juliet and Secret RFtips are consumable products. Each provides usthe Company with the opportunity to participate in the procedure basedprocedure-based revenue from ourthe Company’s existing customers. The Company offers post-warranty services to its customers either through extended service contracts to cover preventive maintenance or through direct billing for parts and labor. These post-warranty services serve as additional sources of revenue.
● GenerateRevenuefrom Skincare (Cosmeceutical) Products –The Company generates revenue from distribution of third party manufactured skincare products in Japan. The skincare products are purchased from a third-party manufacturer and sold to licensed physicians and other end users. The Company recognizes revenue for these skincare products when they are sold to the customer.
● Generate Revenue from Leasing of Equipment Through a Membership Program – In the second quarter of 2020, the Company began generating revenue from leasing equipment to customers through a membership program where the customer pays a fixed monthly fee over the lease term. The Company enters into leasing transactions, in which the Company is the lessor, through the Company's membership program. Revenue is recognized over the term of the lease. Along with the leased equipment, the membership program provides customers with a warranty service and a fixed amount of consumables per month for the term of the lease.
Products
The Company’s enlighten,excel, V, excel HR, enlighten,Secret PRO, Juliet, Secret RF, truSculpt xeo,CoolGlide, and xeo, andmyQ platforms allow for the delivery of multiple laser and energy-based aesthetic applications from a single system. With our the Company’s xeo platform, practitioners can purchase customized systems with a variety of ourthe Company’s multi-technology applications. Each of the Company’s products consists of a control console and one or more hand pieces, depending on the model.
The following table lists ourthe Company’s currently offered products. Each checked box represents the applications included in the product in the years noted.
Applications: | Skin Revitalization | Noninvasive Body Contouring* | Women’s Health | |||||||||||||||||||||||||||
System Platforms | Products | Year | Energy Source | Hair Removal | Vascular Lesions | BPL’s Dyschromia & Melasma | Texture, Lines and Wrinkles | Acne Scars | Tattoo Removal | Lipolysis* | Gynecology | |||||||||||||||||||
CoolGlide |
| CV |
| 2000 |
| (a) |
| x |
|
|
|
|
|
|
| |||||||||||||||
|
| Excel |
| 2001 |
| (a) |
| x |
| x | ||||||||||||||||||||
xeo |
|
|
|
|
| (a) |
| x | x | x | ||||||||||||||||||||
|
|
|
|
|
|
| ||||||||||||||||||||||||
| ProWave 770 |
| 2005 |
| (b) |
| x |
|
|
|
|
|
|
| ||||||||||||||||
|
| AcuTip 500 |
| 2005 |
| (b) |
|
| x |
|
|
|
|
| ||||||||||||||||
|
| Titan V/XL |
| 2006 |
| (c) |
|
|
|
|
|
|
| |||||||||||||||||
|
| LimeLight |
| 2006 |
| (b) |
|
| x |
|
| x |
|
|
|
|
| |||||||||||||
|
| Pearl |
| 2007 |
| (d) |
|
|
| x |
| x |
|
|
|
|
| |||||||||||||
|
| Pearl Fractional |
| 2008 |
| (d) |
|
|
| x |
| x |
|
|
|
|
| |||||||||||||
| ProWave LX |
| 2013 |
| (b) |
| x |
|
|
|
|
|
|
| ||||||||||||||||
excel V |
| 2011 | (e) | x | x | x | x | |||||||||||||||||||||||
myQ |
| 2011 | (e) | x | x | |||||||||||||||||||||||||
truSculpt | 2012 | (f) | x | |||||||||||||||||||||||||||
excel HR | 2014 | (g) | x | x | x | |||||||||||||||||||||||||
enlighten(dual wavelength) | 2014 | (h) | x | x | ||||||||||||||||||||||||||
enlighten III (MLA) | 2016 | (i) | x | x | x | |||||||||||||||||||||||||
truSculpt 3D | 2017 | (f) | x | |||||||||||||||||||||||||||
Juliet | 2018 | (j) | x | x |
| X | ||||||||||||||||||||||||
Secret RF | 2018 | (k) | x | |||||||||||||||||||||||||||
truSculpt iD | 2018 | (f) | x* | |||||||||||||||||||||||||||
truSculpt flex | 2019 | (f) | x* | |||||||||||||||||||||||||||
excel V+ | 2019 | (e) | x | x | x | x | ||||||||||||||||||||||||
Secret PRO | 2020 | (l) | x |
EnergySources:
(a) 1064 nm Nd:YAG laser;
(b) Visible and near-infrared Intense Pulsed Light;
(c) Infrared Intense Pulsed Light;
(d) 2790 nm Er:YSGG laser;
(e) Combined frequency-doubled 532 nm and 1064 nm Nd:YAG laser;
(f) Radio frequency at 1 & 2 MHz – mono-polar
(g) Combined 755 nm Alexandrite laser and 1064 nm Nd:YAG laser;
(h) Dual wavelength 532 nm and 1064 nm Nd:YAG picosecond laser;
(i) Three wavelength 532 nm, 670 nm, and 1064 nm Nd:YAG picosecond laser;
(j) 2940 nm Er:YAG laser; and
(a) 1064nmNd:YAGlaser; (b) Visibleandnear-infraredIntensePulsedLight; (c) InfraredIntensePulsedLight; (d) 2790nmEr:YSGGlaser; (e) Combinedfrequency-doubled532nmand1064nmNd:YAGlaser; (f) Radiofrequencyat1&2MHz–mono-polar (g) Combined755nmAlexandritelaserand1064nmNd:YAGlaser; (h) Dualwavelength532nmand1064nmNd:YAGpicosecondlaser; (i) Threewavelength532nm,670nm,and1064nmNd:YAGpicosecondlaser; (j) 2940nmEr:YAGlaser; (k) Radiofrequencyat2MHzmono-polar; and (l) Radiofrequencyat2MHzBi-polar.(k) Radio frequency at 2 MHz mono
*TheCompany’sCEMarkallowsittomarkettruSculptintheEuropeanUnion,AustraliaandcertainothercountriesoutsidetheU.S.forfatreduction,bodyshapingandbodycontouring.IntheU.S.theCompanyhas510(k)clearanceforthereductionincircumferenceoftheabdomen,non-invasivelipolysis(breakdownoffat)oftheabdomenandelevatingtissuetemperatureforthetreatmentofselectedmedicalconditionssuchasreliefofpain,musclespasms,increaseinlocalcirculation,andthetemporaryimprovementintheappearanceofcellulite.
* The Company’s CE Mark allows it to market truSculpt in the European Union, Australia and certain other countries outside the U.S. for fat reduction, body shaping and body contouring. In the U.S. the Company has 510(k) clearance for the reduction in circumference of the abdomen, non-invasive lipolysis (breakdown of fat) of the abdoment and elevating tissue temperature for the treatment of selected medical conditions such as relief of pain, muscle spasms, increase in local circulation, and the temporary improvement in the appearance of cellulite.
Upgrade
The Company’s enlighten,truSculpt, and xeo products, are designed to allow customers to cost-effectively upgrade to ourthe Company’s newest technologies or add applications to their system, each of which provide usprovides the Company with a source of additional revenue.
ServiceExtended contract services and support
The Company offers post-warranty services to its customers through extended service contracts that cover parts and labor for a term of one, two, or three years. The Company also offers services on a time-and-materials basis for systems and detachable hand piece replacements (except for Titan, truSculpt 3D and truSculpt iD ) and service labor for the repair and maintenance of products that are out of warranty, all of which are classified as “Service” revenue.replacements. Revenue related to services performed on a time-and-materials basis is recognized when performed. These post-warranty services serve as additional sources of recurring revenue from ourthe Company’s installed product base.
Hand Piece RefillsThe Company’s products are engineered to enable quick and efficient service and support. There are several separate components of the Company’s products, each of which can be removed and replaced. The Company believes that quick and effective delivery of service is important to its customers. As of December 31, 2020, the Company had 323 employees.
In countries where the Company is represented by distribution partners, customers are serviced through the distributor. Distributors are generally provided 14 to 16 months warranty coverage for parts only, with labor customarily provided to the end customer by the distributor. The Company’s Titan,truSculpt3D, truSculptiD, and truSculpt flex hand pieces generally include a warranty for a set number of shots, instead of for a period of time.
Training
Sales of systems to customers, except system sales through distributors, include training on the use of the system to be provided within 180 days of purchase. Training is also sold separately from systems. The Company recognizes revenue for training when the training is provided. Training is not required for customers to use the systems.
Consumables (Other accessories)
The Company treats its customers' purchasepurchases of replacement cycles for Titan, truSculpt 3D iDand truSculpt iD flex, as well as single use disposable tips applicable toreplacement Juliet Titanand Secret RF truSculpt 3D hand pieces, as “Consumables”Consumable revenue, which provides usthe Company with a source of recurring revenue from existing customers. The Juliet and Secret RF products have single use disposable tips which must be replaced after every treatment. Sales of these consumable tips further enhance the Company’s recurring revenue. Hand piece refills of ourthe Company’s legacy truSculptproduct are included in the standard warranty andaccounted for as service contract offerings for this product.revenue.
Skincare
The Company distributes third party manufactured skincare products ("Skincare” revenue in the Japanese market).
Applications and Procedures
OurThe Company’s products are designed to allow the practitioner to select an appropriate combination of energy level, spot size and pulse duration for each treatment. The ability to manipulate the combinations of these parameters allows ourthe Company’s customers to treat the broadest range of conditions available with a single energy-based system.
Non-InvasiveBody Contouring Contouring–OurThe Company’s truSculpttechnology allows practitioners to apply a hand piece directly to the skin and deliver high-powered RF energy that results in the deep and uniform heating of the subcutaneous fat tissue at sustained therapeutic temperatures. This heating can cause selective destruction of fat cells, which are eliminated from the treatment area through the body’s natural wound healing processes. The treatment takes approximately 15 minutes and two or more treatments may be required to obtain the desired aesthetic results. OurThe Company’s CE Mark allows usthe Company to market truSculptin the European Union (“EU”),EU, Australia and certain other countries outside the U.S. for fat reduction, body shaping, body contouring and circumferential reduction. In the U.S., truSculpthas 510(k) clearance for topical heating for the purpose of elevating tissue temperature for the treatment of selected medical conditions, such as relief of pain and muscle spasms and increase in local circulation. Additionally, the 2 MHz setting for the 40 cm2 hand piece is indicated for reduction in circumference of the abdomen and non-invasive lipolysis (breakdown of fat) of the abdomen. The truSculptmassage device is intended to provide a temporary reduction in the appearance of cellulite.
TattooRemoval–OurThe Company’s enlighten systems, delivering picosecond and nanosecond pulse duration, and ourthe Company’s myQmyQ Q-switched laser are used for tattoo removal, the treatment of benign pigmented lesions, and a laser skin toning procedure that the Company refers to as PicoGenesis.
HairRemoval– We haveThe Companyhas two platforms, excelHRand xeo, which address hair removal for all skin types as well as hair thicknesses. OurThe Company’s xeoplatform allows practitioners to select between the 1064 nm mode for darker, course hair, and the ProWaveLXhand piece designed to address finer, vellus hair. Contact cooling is present on both hand pieces for epidermal protection. excelHRemploys both a 1064 nm Nd:YAG as well as a 755 nm Alexandrite for hair removal. Like the xeo, the 1064 nm wavelength addresses darker, course hair while the 755 nm wavelength is used for finer, lighter hair. Both wavelengths are transmitted through the same CoolViewhand piece with spot sizes up to 20 mm for the 755 nm wavelength and up to 18 mm for the 1064 nm wavelength. The CoolViewhand piece employs sapphire as a means of contact cooling – epidermal protection. Both platforms are cleared for treating all skin types.
VascularLesions–Both ourthe Company’s xeoas well as excelVplatforms are capable of treating a wide range of aesthetic vein conditions, including spider and reticular veins, and small facial veins. xeoemploys the LimeLighthand piece for addressing small veins as well as vascular lesions while the Nd:YAG is appropriate for deeper, larger vessels. LimeLightis a fixed spot size IPL while the Nd:YAG has adjustable spot sizes up to 10mm. excelVis a dual wavelength laser -– 1064 nm and 532 nm – with adjustable spot sizes ranging from 2 mm to 12 mm. The 532 nm wavelength can be used to treat over 20 conditions ranging from small veins and vessels to a variety of vascular lesions while the Nd:YAG is appropriate for deeper, larger vessels. For both of these devices, patients receive on average between one and six treatments, with six weeks or longer between treatments.
SkinRevitalization– OurThe Company’s xeo, excelV, excelHRand enlighten platforms, utilizing an Nd:YAG laser, allow ourthe Company’s customers to perform non-invasive and minimally-invasive treatments that reduce redness, dyschromia, fine lines, improve skin texture, and treat other aesthetic conditions. When using a 1064 nm Nd:YAG laser to improve skin texture and treat fine lines, cooling is not applied and the hand piece is held directly above the skin. A large number of pulses are directed at the treatment site, repeatedly covering an area, such as the cheek. By delivering many pulses of laser light to a treatment area, a gentle heating of the dermis occurs and collagen growth is stimulated to rejuvenate the skin and reduce wrinkles. Patients typically receive four to six treatments for this procedure. The treatment typically takes less than a half hour with a spacing of two to four weeks between treatments.
Texture,LinesandWrinkles– The xeoplatform can address fine lines and wrinkles using the Pearland PearlFractionalhand pieces. When treating fine lines, texture and wrinkles with a Pearlhand piece, the hand piece is held at a controlled distance from the skin and the scanner delivers a preset pattern of spots to the treatment area. Cooling is not applied to the epidermis during the treatment. The energy delivered by the hand piece ablates a portion of the epidermis while leaving a coagulated portion that will gently peel off over the course of a few days. Heat is also delivered into the dermis, which can result in the production of new collagen. Treatment of the full face can usually be performed in 15 to 30 minutes. Patients receive on average between one and three treatments at monthly intervals.
Our recently launchedThe Company’s Julietlaser is a versatile multi-application platform utilizing an Er:YAG laser with the 2940 nm wavelength. This Erbium wavelength produces noticeable results with fewer side effects, due to its high peak absorption in water. Additionally, Juliet’sErbium technology allows for a controlled thermal delivery to tissue. The Microspot hand piece delivers fractionated energy to induce skin resurfacing and improved skin quality, tone and texture.
Additionally, our recently launchedthe Company’s Secret RFplatformis a Radio Frequency microneedling device that employs fractionated RF energy (2 MHz) delivered at different pre-programmed depths in the dermis to produce new collagen. The SecretRFcomes with four treatment tips: a 25-pin tip, both insulated and semi-insulated, and a 64-pin tip, both insulated and semi-insulated. The treatment has minimal side effects, negligible downtime and results in improved skin tone and texture as well as improvement in acne scars.
Dyschromia–OurThe Company’s pulsed-light technologies allow ourthe Company’s customers to safely and effectively treat red and brown dyschromia (skin discoloration), benign pigmented lesions, and rosacea. The practitioner delivers a narrow spectrum of light to the surface of the skin through ourthe Company’s LimeLight hand pieces. These hand pieces include one of ourthe Company’s proprietary wavelength filters, which reduce the energy level required for therapeutic effect and minimize the risk of skin injury.
The 532 nm wavelength green laser option of the excelV and enlighten systems, as well as the 755 nm infrared wavelength of the excelHR, can be used to treat benign pigmented lesions in substantially the same way.
In treating benign pigmented lesions, the hand piece is placed directly on the skin and then the pulse is triggered. The cells forming the pigmented lesion absorb the light energy, darken and then flake off over the course of two to three weeks. Several treatments may be required to completely remove the lesion. The treatment takes a few minutes per area treated and there are typically three to four weeks between treatments.
Practitioners can also treat dyschromia and other skin conditions with ourthe Company’s Pearl hand piece. During these treatments, the heat delivered by the Pearl hand piece will remove the outer layer of the epidermis while coagulating a portion of the epidermis. That coagulated portion will gently peel off over the course of a few days, revealing a new layer of skin underneath. Treatment of the full face can usually be performed in 15 to 30 minutes. Patients receive on average between one and three treatments at monthly intervals.
SkinQuality–OurThe Company’s Titan technology allows ourthe Company’s customers to use deep dermal heating to tighten lax skin. The practitioner delivers a spectrum of light to the skin through ourthe Company’s Titan hand piece. This hand piece includes ourthe Company’s proprietary light source and wavelength filter which tailors the delivered spectrum of light to provide heating at the desired depth in the skin.
In treating compromised skin, the hand piece is placed directly on the skin and then the light pulse is triggered. A sustained pulse causes significant heating in the dermis. This heating can cause immediate collagen contraction while also stimulating long-term collagen regrowth. Several treatments may be required to obtain the desired degree of tightening of the skin. The treatment of a full face can take over an hour and there are typically four weeks between treatments.
OurThe Company’s CE Mark allows usthe Company to market the Titan in the EU, Australia and certain other countries outside the U.S. for the treatment of wrinkles through skin tightening. However, in the U.S. we havethe Company has a 510(k) clearance for only deep dermal heating.
Sales and Marketing
In the U.S. theThe Company markets, sells, and sells itsservices the Company’s products through direct sales and service employees in North America (including Canada), Australia, Austria, Belgium, France, Germany, Hong Kong, Japan, Spain, Switzerland and the United Kingdom. International sales and services outside of these direct markets are made through a network of distributors in over 42 countries, as well as a direct international sales organization.force. The Company internally manages its U.S. and Canadian sales organization as one North American sales region. As of December 31, 2018, the Company had 68 territories and a direct sales force of 68 employees. In addition, the Company created a new commercial organization in 2018 dedicated to supporting consumable products for procedures performed in physicians’ practices. As of December 31, 2018, the Company had nine employees related to consumable sales support.
International sales are made both through a worldwide distributor network in over 40 countries, as well as a direct international sales force. As of December 31, 2018, the Company had a direct sales force in Australia, Belgium, France, Germany, Hong Kong, Japan, Spain, Switzerland and the United Kingdom with a total of 41 direct sales employees.
The Company also sells certain items like hand piece refills, cycle refills, consumable tips, and marketing brochures through ourthe Company’s web site www.cutera.com.
Customers generally demand quality, performance, ease of use and high productivity in relation to the cost of ownership. The Company responds to these customer demands by introducing new products focused on these requirements in the markets it serves. Specifically, the Company believes it introduces new products and applications that are innovative, address the specific aesthetic procedures in demand, and are upgradeable on its customers’ existing systems. In addition, the Company provides attractive upgrade pricing to new product families. To increase market penetration, the Company also markets to non-core practitioners in addition to ourthe Company’s core specialties of plastic surgeons and dermatologists.
The Company seeks to establish strong ongoing relationships with its customers through the upgradeability of the Company’s products, sales of extended service contracts, the refilling of hand piecespiece refills and replacement of disposable tips, ongoing training and support, and by distributing skincare products in Japan. The Company primarily targets its marketing efforts to practitioners through office visits, workshops, trade shows, webinars and trade journals. The Company also markets to potential patients through brochures, workshops and its website. In addition, the Company offers clinical forums with recognized expert panelists to promote advanced treatment techniques using ourthe Company’s products to further enhance customer loyalty and uncover new sales opportunities.
Competition
The industry in which the Company operates in is subject to intense competition. The Company’s products compete against conventional non-energy-based treatments, such as electrolysis, Botox and collagen injections, chemical peels, microdermabrasion and sclerotherapy. The products also compete against laser and other energy-based products offered by other public companies, such as HologicAbbvie (acquired Cynosure in March 2017)Allergan, formerly Zeltiq), El.En S.p.A, XIO Group (acquired Lumenis in September 2015), Allergan (acquired Zeltiq in April 2017),Sientra, Bausch Health (Valeant)(formerly Valeant Pharmaceuticals), Vieve, Soliton, InMode and Lutronic, as well as private companies, including Sisram, Candela (formerly Syneron Candela, (acquiredacquired in 2017 by an affiliate of private equity funds advised by Apax Partners), Sciton, InMode, BTL Industries and several others. Additionally, in early 2020, the affiliated private equity funds of Baring Private Equity Asia completed the acquisition of Lumenis, a leading provider of specialty energy-based medical devices across the fields of aesthetics, urology, ophthalmology, ENT and gynecology, with an international presence. Also in late 2019, Clayton, Dubilier & Rice entered into an agreement under which its-managed funds acquired Cynosure, LLC, a leader in medical aesthetics systems and technologies, from Hologic, Inc. Cynosure develops, manufactures, and markets medical aesthetic treatment systems for dermatologists, plastic surgeons, medical spas and other healthcare practitioners, with sales and distribution worldwide.
Competition among providers of laser and other energy-based devices for the aesthetic market is characterized by extensive research and development efforts, and innovative technology. While the Company attempts to protect its products through patents and other intellectual property rights, there are few barriers to entry that would prevent new entrants or existing competitors from developing products that would compete directly with ours.the Company. There are many companies, both public and private, that are developing innovative devices that use both energy-based and alternative technologies. Some of these competitors have greater resources than the Company does or product applications for certain sub-markets in which the Company does not participate. Additional competitors may enter the market, and the Company is likely to compete with new companies in the future. To compete effectively, the Company has to demonstrate that ourthe Company’s products are attractive alternatives to other devices and treatments by differentiating ourthe Company’s products on the basis of performance, brand name, service and price. The Company has encountered, and expects to continue to encounter, potential customers who, due to existing relationships with ourthe Company’s competitors, are committed to, or prefer, the products offered by these competitors. Competitive pressures may result in price reductions and reduced margins for ourthe Company’s products.
The Company also sells skincare products in Japan under the exclusive distribution agreement with ZO which granted the Company the exclusive right to promote, market, sell, and distribute the products produced by ZO in Japan. ZO’s skincare products compete against other Physician-dispensed skincare brands developed and marketed by other companies, such as Environ, Navision and Revision Skincare.
Research and Development
The Company focuses its research and development efforts on innovation and improvement for products and services that align with its mission: themission. The Company consistently strives to understand its customers’ expectations for total excellence. The Company accomplishes this by its commitment to continuous improvement in design, manufacturing, and service, which the Company believes provides for superior products and services to ensure on going customer satisfaction, trust and loyalty. The Company seeks to comply with all applicable domestic and international regulations to maintain the highest quality.
As of December 31, 2018,2020, the Company’s research and development activities were conducted by a staff of 38 employees with a broad base of experience in lasers, optoelectronics, software, and other related disciplines. The Company develops working relationships with outside contract engineering and design consultants, giving ourthe Company’s team additional technical and creative breadth. The Company works closely with thought leaders and customers, to understand unmet needs and emerging applications in aesthetic medicine.
Acquisitions, Investments, and Distribution Agreements
The Company’s strategy of providing a broad range of therapeutic capabilities requires a wide variety of technologies, products, and capabilities. The rapid pace of technological development in the aesthetic device industry and the specialized expertise required in different areas make it difficult for the Company to develop a broad portfolio of technological solutions. In addition to internally generated growth through research and development efforts, the Company has considered, and expects to continue to consider, acquisitions, investments, and distribution agreements to provide access to new products and technologies in both new and existing markets.
The Company expects to further ourthe Company’s strategic objectives and strengthen its existing businesses by making future acquisitions and investments, or by entering into new distribution agreements in areas that the Company believes it can acquire or stimulate the development of new technologies and products. Mergers and acquisitions of medical technology companies, as well as distribution relationships, are inherently risky and no assurance can be given that any acquisition will be successful or will not materially adversely affect the Company’s consolidated operations, financial condition and/orand cash flows.
Service and Support
The Company’s products are engineered to enable quick and efficient service and support. There are several separate components of our products, each of which can easily be removed and replaced. The Company believes that quick and effective delivery of service is important to its customers. As of December 31, 2018, the Company had 65 people in our global service department. Internationally, the Company provides direct service support in Australia, Austria, Belgium, France, Germany, Hong Kong, Japan, Spain, Switzerland and the United Kingdom. Services and support outside of these direct markets are made through a worldwide distributor network in over 40 countries.
The Company offers post-warranty services to its customers through extended service contracts that cover replacement parts and labor for a term of one, two, or three years. The Company also offers services on a time-and-materials basis for detachable hand piece replacements, parts and labor. Customers are notified before their initial warranty expires and are able to purchase extended service plans covering replacement parts and labor.
In countries where the Company is represented by distributor partners, customers are serviced through the distributor. Distributors are generally provided 14 to 16 months warranty coverage for parts only, with labor customarily provided to the end customer by the distributor. The Company’s Titan, truSculpt 3D and truSculpt iD hand pieces generally include a warranty for a set number of shots, instead of for a period of time.
Manufacturing
The Company manufactures its products with components and subassemblies supplied by vendors and assembles and tests each of its products at the Brisbane, California facility.facility, and at third party contract manufacturers’ facilities. Quality control, cost reduction and inventory management are top priorities of the manufacturing operations.
The Company purchases certain components, subassemblies, and assembled systems from a limited number of suppliers. The Company has flexibility with its suppliers to adjust the number of components and subassemblies as well as the delivery schedules. The forecasts are based on historical demands and sales projections. Lead times for components and subassemblies may vary significantly depending on the size of the order, time required to fabricate and test the components or subassemblies, specific supplier requirements and current market demand for the components and subassemblies. The potential for disruption of supply is reduced by maintaining sufficient inventories and identifying additional suppliers. The time required to qualify new suppliers for some components, or to redesign them, could cause delays in ourthe Company’s manufacturing. To date, the Company has not experienced significant delays in obtaining any of its components or subassemblies. The Company uses small quantities of common cleaning products in its manufacturing operations, which are lawfully disposed of through a normal waste management program. The Company does not forecast any material costs due to compliance with environmental laws or regulations.
The Company is required to manufacture our products in compliance with the FDA’s Quality System Regulation (“QSR”). The QSR covers the methods and documentation of the design, testing, control, manufacturing, labeling, quality assurance, packaging, storage and shipping of our products. The FDA enforces the QSR through periodic unannounced inspections. The Company had an FDA full quality system audit in March 2017. There were no significant findings or observations as a result of this audit, however our failure to maintain compliance with the QSR requirements could result in the shutdown of our manufacturing operations and the recall of our products, which would have a material adverse effect on our business. In the event that one of our suppliers fails to maintain compliance with specified quality requirements, the Company may have to qualify a new supplier and could experience manufacturing delays as a result. The Company has opted to maintain quality assurance and quality management certifications to enable us to market our products in the U.S., the member states of the EU, the European Free Trade Association and countries which have entered into Mutual Recognition Agreements with the EU. In January 2018, the Company conducted our recertification audit to the requirements of ISO 13485:2003 under the Medical Device Single Audit Program (“MDSAP”) for the 5 regulatory jurisdictions signatory to MDSAP (FDA - US, Health Canada - Canada, Therapeutic Goods Administration (“TGA”) - Australia, Pharmaceuticals and Medical Devices Agency (“PMDA”) - Japan, and Agência Nacional de Vigilancia Sanitária (“ANVISA”) - Brazil); and for the EU under Europäische Norm (“EN”) International Standards Organization (“ISO”) 13485:2012 and Medical Device Directive (MDD”) 93/42/EEC. The Company passed the recertification audit establishing compliance with ISO 13485:2003 under MDSAP; EN ISO 13458:2012; and MDD 93/42/EEC. The MDSAP and EU certification can be used to establish compliance with Good Manufacturing Practices (“GMP”), QSR, and Quality Management System (“QMS”) requirements for all six regulatory jurisdictions, replacing routine audits from each regulatory jurisdiction. Our manufacturing facility is ISO 13485 certified.
Patents and Proprietary Technology
The Company relies on a combination of patent, copyright, trademark and trade secret laws, and non-disclosure, confidentiality, and invention assignment agreements to protect ourthe Company’s intellectual property rights. As of February 28, 2019,January 25, 2021, the Company had 3226 issued U.S. patents and 5 pending U.S. patent applications. The Company intends to file for additional patents and trademarks to continue to strengthen ourthe Company’s intellectual property rights. Patents typically have a 20-year term from the application filing date. There can be no assurance that pending patent applications will result in the issuance of patents, that patents issued to or licensed by the Company will not be challenged or circumvented by competitors, or that these patents will be found to be valid or sufficiently broad to protect ourthe Company’s technology or to provide the Company with a competitive advantage.
The Company has also obtained certain trademarks and trade names for ourthe Company’s products and maintain certain details about ourthe Company’s processes, products, and strategies as trade secrets. In the U.S. and several foreign countries, the Company registers its Company name and several of its product names as trademarks, including Cutera,, AcuTip, AcuTip, CoolGlide,, CoolGlide excel,, excel,, enlighten, Juliet, LimeLight,, myQ,, Pearl,, ProWave 770, , ProWave LX, SecretRF, Secret RF, Solera (discontinued as of January 2018), PRO, Titan,, truSculpt and xeo.xeo. The Company may have common law rights in other product names, including excel V,, Pearl Fractional,, Solera, Titan and excel HR. The Company intends to file for additional patents and trademarks to continue to strengthen ourthe Company’s intellectual property rights.
The Company relies on non-disclosure and non-competition agreements with employees, technical consultants, and other parties to protect, in part, trade secrets and other proprietary technology. The Company also requires them to agree to disclose and assign to usthe Company all inventions conceived in connection with the relationship. There can be no assurance that these agreements will not be breached, that the Company will have adequate remedies for any breach, that others will not independently develop equivalent proprietary information or that third parties will not otherwise gain access to ourthe Company’s trade secrets and proprietary knowledge.
For additional information, please refer to Item 1A. Risk Factors of this Annual Report on Form 10-K, under the section entitled “Risk“Risk Factors - Intellectual property rights may not provide adequate protection for some or all of ourthe Company’s products, which may permit third parties to compete against usthe Company more effectively, and wethe Company may be involved in future costly intellectual property litigation, which could impact ourthe Company’s future business and financial performance.”
Government Regulation
United States
The Company’s products are medical devices subject to regulation by numerous government agencies, including the FDA and counterpart agencies outside the U.S.U.S. To varying degrees, each of these agencies require usthe Company to comply with laws and regulations governing the research, development, testing, manufacturing, labeling, pre-market clearance or approval, marketing, distribution, advertising, promotion, record keeping, reporting, tracking, and importing and exporting of medical devices. In the U.S., FDA regulations govern the following activities that the Company performsperforms and will continue to perform to ensure that medical products distributed domestically or exported internationally are safe and effective for their intended uses:
● product design and development;
● product testing;
● product manufacturing;
● product safety;
● product labeling;
● product storage;
● record keeping;
● pre-market clearance or approval;
● advertising and promotion;
● production;
● product sales and distribution; and
● complaint handling.
● | product design and development; |
● | product testing; |
● | product manufacturing; |
● | product safety; |
● | product labeling; |
● | product storage; |
● | record keeping; |
● | pre-market clearance or approval; |
● | advertising and promotion; |
● | production; |
● | product sales and distribution; and |
● | complaint handling. |
FDA’s Pre-market Clearance and Approval Requirements
Unless an exemption applies, each medical device the Company wishes to commercially distribute in the U.S. will require either prior 510(k) clearance, or de novo or pre-market approval from the FDA. The FDA classifies medical devices into one of three classes. Devices deemed to pose lower risks are placed in either classClass I or II. For Class II, which requires the manufacturer tomust submit to the FDA a pre-market notification requesting permission to commercially distribute the device. This process is generally known as 510(k) clearance. Some low risk devices are exempted from this requirement. Devices deemed by the FDA to pose the greatest risk, such as life-sustaining, life-supporting or implantable devices, or devices deemed not substantially equivalent to a previously cleared 510(k) device, are placed in classClass III, requiring more rigorous pre-market approval. All of ourthe Company’s current products are classClass II devices.
510(k) Clearance Pathway
When 510(k) clearance is required, the Company must submit a pre-market notification demonstrating that ourthe Company’s proposed device is substantially equivalent to a previously cleared 510(k) device or a device that was in commercial distribution before May 28, 1976 for which the FDA has not yet called for the submission of Pre-Market Approval, or "PMA", applications. By regulation, the FDA is required to clear or deny 510(k), pre-market notification within 90 days of submission of the application. As a practical matter, clearance often takesmay take significantly longer. Thelonger, as FDA may require further information, including clinical data, to make a determination regarding substantial equivalence.additional information. Laser devices used for aesthetic procedures, such as hair removal, have generally qualified for clearance under 510(k) procedures.
The following table details the indications for which the Company received a 510(k) clearance for ourthe Company’s products and when these clearances were received.
FDA Marketing Clearances: |
| Date Received: |
Laser-based products: |
|
|
- treatment of vascular lesions |
| June 1999 |
- hair removal |
| March 2000 |
- permanent hair reduction |
| January 2001 |
- treatment of benign pigmented lesions and pseudo folliculitis barbae, commonly referred to as razor bumps, and for the reduction of red pigmentation in scars |
| June 2002 |
- treatment of wrinkles |
| October 2002 |
- treatment to increase clear nail in patients with onychomycosis | April 2011 | |
- expanded spot size to 5 mm for clear nail in patients with onychomycosis | May 2013 | |
- addition of Alexandrite 755 nm laser wavelength for hair removal, permanent hair reduction, |
| December 2013 |
- addition of treatment of mild to moderate inflammatory acne vulgaris | March 2016 | |
- enlighten picosecond and nanosecond 532/1064 nm for the treatment of benign pigmented lesions |
| August 2014 |
- enlighten picosecond and nanosecond 532/1064 nm for multi-colored tattoo removal |
| November 2014 |
- enlighten III picosecond and nanosecond 532/1064 nm for multi-colored tattoo removal and treatment of benign pigmented lesion and picosecond 670 nm |
|
|
|
| |
- enlighten III | April 2016 | |
- enlighten III addition of tattoo removal | October 2017 | |
- enlighten Micro Lens Array (MLA) for treatment of acne scars |
| December 2018 |
Pulsed-light technologies: |
|
|
- treatment of pigmented lesions |
| March 2003 |
- hair removal and vascular treatments |
| March 2005 |
|
| |
InfraredTitan technology for deep dermal heating for the temporary relief of minor muscle and joint pain and for the temporary increase in local circulation where applied |
| February 2004 |
|
| |
Solera tabletop console: |
|
|
- for use with theTitan hand piece |
| October 2004 |
- for use with |
| January 2005 |
|
| |
Pearl product for the treatment of wrinkles |
| March 2007 |
|
| |
Pearl Fractional product for skin resurfacing and coagulation |
| August 2008 |
|
|
|
truSculpt radio frequency product |
|
|
- |
| April 2008 |
|
| |
|
| |
- Temporary reduction in circumference of the abdomen |
| December 2016 |
-truSculpt |
| August 2017 |
-truSculpt iD: For non-invasive lipolysis of the abdomen and for |
| June 2018 |
- truSculpt flex: for improvement of abdominal tone, strengthening of abdominal muscles, and development of firmer abdomen; and strengthening, toning, and firming of buttocks and thighs | June 2019 |
Pre-Market Approval (“PMA”) Pathway
A PMA must be submitted to the FDA if the device cannot be cleared through the 510(k) process. A PMA must be supported by extensive data, including but not limited to, technical, preclinical, clinical trials, manufacturing and labeling to demonstrate to the FDA’s satisfaction the safety and effectiveness of the device. No device that the Company developed to date requires pre-market approval, although development of future devices or clearances may require pre-market approval.
Product Modifications
Product Modifications
Pursuant to FDA regulations, after a device receives 510(k) clearance, or a PMA, any modification that could significantly affect its safety or effectiveness, or that would constitute a major change in its intended use, labeling and biocompatibility, requires a new clearance or approval.clearance. The FDA requires manufacturers to make this determination initially, but the FDA can review any such decision and may disagree with a manufacturer’s determination. To date, the Company has modified aspects of ourthe Company’s products after receiving regulatory clearance and determined that new 510(k) clearances are not required for these modifications. If the FDA disagrees with ourthe Company’s determination not to seek a new 510(k) clearance, or PMA, the FDA may retroactively require the Company to seek 510(k) clearance or pre-market approval. The FDA could also require the Company to cease marketing and distribution and/or recall the modified device until 510(k) clearance or pre-market approval is obtained. Also, in these circumstances, the Company may be subject to significant regulatory fines or penalties.clearance.
Clinical Trials
Clinical Trials
When FDA approval of a class I, classClass II or class III device requires human clinical trials, and if the device presents a “significant risk,” as defined by the FDA, to human health, the device sponsor is required to file an Investigational Device Exemption, or IDE, application with the FDA and obtain IDE approval prior to commencing the human clinical trial. If the device is considered a “non-significant” risk, IDE submission to the FDA is not required. Instead, only approval from the Institutional Review Board (“IRB”), overseeingis required to proceed with the planned and IRB approved clinical trialtrial/study.
The Company is required. Human clinical studies are generally required to manufacture the Company’s products in connectioncompliance with approvalthe FDA’s Quality System Regulation (“QSR”) and the international quality management standard for medical systems ISO 13485:2016. The QSR and ISO 13485 cover the methods and documentation of class III devicesthe design, testing, control, manufacturing, labeling, quality assurance, packaging, storage and may be requiredshipping of the Company’s products. Since 2017, the Company has been enrolled in the Medical Device Single Audit Program (“MDSAP”). The MDSAP allows a single audit of a medical device manufacturer’s Quality Management System (“QMS”), which satisfies the requirements of 5 regulatory jurisdictions (FDA - US, Health Canada - Canada, Therapeutic Goods Administration (“TGA”) - Australia, Pharmaceuticals and Medical Devices Agency (“PMDA”) - Japan, and Agência Nacional de Vigilancia Sanitária (“ANVISA”) - Brazil); and for class Ithe EU under Europäische Norm (“EN”) International Standards Organization (“ISO”) 13485:2016 and II devices. The IDE application must be supported by appropriate data, such as animal and laboratory testing results, showing that it is safe to test the deviceMedical Device Directive (MDD)/EU Medical Device Regulation MDR”).
MDSAP re-certification occurs every three years with a surveillance audit taking place annually. Major findings during these audits or an increase in humans and that the testing protocol is scientifically sound. The IDE must be approved in advancefield reportable events could trigger regulatory enforcement action including by the FDA forFDA. The Company’s manufacturing facility is ISO 13485 certified. The Company had a specified numbersuccessful MDSAP re-certification audit in January 2021. There were no significant findings or observations as a result of patients. Clinical trials for a significant risk device may begin oncethis audit; however, the application is reviewed and cleared byCompany’s failure to maintain compliance with the FDAQSR requirements could result in the shutdown of the Company’s manufacturing operations and the appropriate institutional review boards atrecall of the clinical trial sites. Future clinical trialsCompany’s products, which would have a material adverse effect on the Company’s business. In the event that one of our products may require thatthe Company’s suppliers fails to maintain compliance with specified quality requirements, the Company submitsmay have to qualify a new supplier and obtains clearancecould experience manufacturing delays as a result. The Company has opted to maintain quality assurance and quality management certifications to enable the Company to market the Company’s products in the U.S., the member states of an IDE from the FDA prior to commencing clinical trials. The FDA,EU, the European Free Trade Association and countries which have entered into Mutual Recognition Agreements with the IRB at each institution at which a clinical trial is being performed, may suspend a clinical trial at any time for various reasons, including a belief that the subjects are being exposed to an unacceptable health risk.EU.
Pervasive and Continuing Regulation
After a device is placed on the market, numerous regulatory requirements apply. These include:
● Quality system regulations, which require manufacturers, including third-party manufacturers, to follow stringent design, testing, control, documentation and other quality assurance procedures during all aspects of the manufacturing process;
● Labeling regulations and FDA prohibitions against the promotion of products for un-cleared, unapproved or “off-label” uses;
● Medical device reporting regulations, which require that manufacturers report to the FDA if their device may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if the malfunction were to recur; and
● Post-market surveillance regulations, which apply when necessary to protect the public health or to provide additional safety and effectiveness data for the device.
The FDA has broad post-market and regulatory enforcement powers. The Company is subject to unannounced inspections by the FDA and the Food and Drug Branch of the California Department of Health Services (or “CDHS”), to determine ourthe Company’s compliance with the QSR and other applicable regulations, and these inspectionswhich may include the manufacturing facilities of ourthe Company’s subcontractors. In the past, our prior facility has been inspected, and observations were noted. There were no findings that involved a material violation of regulatory requirements. Our responses to these observations have been accepted by the FDA and CDHS, and the Company believes that it is in substantial compliance with the QSR. OurCompany’s current manufacturing facility has been inspected by the FDA and the CDHS. The FDA and the CDHS noted observations, but there were no findings that involved a material violation of regulatory requirements. OurThe Company’s responses to those observations have been accepted by the FDA and CDHS.
The Company is also regulated under the Radiation Control for Health and Safety Act, which requires laser products to comply with performance standards, including design and operation requirements, and manufacturers to certify in product labeling and in reports to the FDA that their products comply with all such standards. The lawregulations also requiresrequire laser manufacturers to file new product and annual reports, maintain manufacturing, testing and sales records, and report product defects. Various warning labels must be affixed and certain protective devices installed, depending on the class of the product.
Failure to comply with applicable regulatory requirements can result in enforcement action by the FDA, which may include any of the following sanctions:
● | Warning letters, fines, injunctions, consent decrees and civil penalties; |
● | Repair, replacement, recall or seizure of the Company’s products; |
● | Operating restrictions or partial suspension or total shutdown of production; |
● | Refusing the Company’s requests for 510(k) clearance of new products, new intended uses, or modifications to existing products; |
● | Withdrawing 510(k) clearance that have already been granted; and |
● |
|
The FDA also has the authority to require the Company to repair, replace or refund the cost of any medical device that it has manufactured or distributed. If any of these events were to occur, they could have a material adverse effect on the Company’s business.
The Company is also subject to a wide range of federal, state and local laws and regulations, including those related to the environment, health and safety, land use and quality assurance. The Company believes that compliance with these laws and regulations as currently in effect will not have a material adverse effect on ourthe Company’s capital expenditures, earnings and competitive and financial position.
International
International
International sales of medical devices are subject to foreign governmental regulations, which vary substantially from country to country. The time required to obtain clearance or approval by a foreign country may be longer or shorterdifferent than that required for FDA clearance or approval, andclearance. And the clearance or approval requirements may be different from those in the U.S.
In Japan, the Company is actively seeking approvals for products to supplement ourthe Company’s existing approvals for enlighten,excel V,excel HR, LimeLight, ProWave, Solera,Titan,truSculpt truSculpt iDand xeo.
In the European Economic Area or EEA, (which(“EEA”), which is composed of the 28 Member States of the EU plus Norway, Liechtenstein and Iceland),Iceland, a single regulatory approval process exists, and conformity with the legal requirements is represented by the CE mark. While it remains somewhat unresolved, the cabinet of the United Kingdom agrees that the UK should maintain conformity with the CE mark process following Brexit. Other countries, such as Switzerland, have entered into Mutual Recognition Agreements and allow the marketing of medical devices that meet EU requirements. The EU has adopted numerous directives and European Standardization Committees have promulgated voluntary standards regulating the design, manufacture, clinical trials, labeling and adverse event reporting for medical devices. Devices that comply with the requirements of a relevant directive will be entitled to bear CE conformity marking, indicating that the device conforms to the essential requirements of the applicable directives and, accordingly, can be commercially distributed throughout the EEA and countries which have entered into a Mutual Recognition Agreement. The method of assessing conformity varies depending on the type and class of the product, but normally involves a combination of self-assessment by the manufacturer and a third-party assessment by a Notified Body, an independent and neutral institution appointed by a country to conduct the conformity assessment. This third-party assessment may consist of an audit of the manufacturer’s quality system and specific testing of the manufacturer’s device. An assessment by a Notified Body in one member state of the EEA, or one country which has entered into a Mutual Recognition Agreement is required in order for a manufacturer to commercially distribute the product throughout these countries. ISO 9001 and ISO 13845 certification are voluntary harmonized standards. Compliance establishes the presumption of conformity with the essential requirements for a CE Marking. In February 2000, ourthe Company’s facility was awarded the ISO 9001 and EN 46001 certification.
In March 2003, the Company received ourthe Company’s ISO 9001 updated certification (ISO 9001:2000) as well as ourthe Company’s certification for ISO 13485:1996 which replaced ourthe Company’s EN 46001 certification. In March 2004, the Company received ourthe Company’s ISO 13485:2003 certification and in March 2006, March 2009, and January 2012 wethe Company passed ISO 13485 recertification audits. In January 2015, the Company passed a recertification audit establishing compliance with the requirements of EN ISO 13485:2012, CAN/CSA ISO 13485:2003, and MDD 93/42/EEC. In January 2018, the Company conducted ourthe Company’s recertification audit to the requirements of ISO 13485:2003 under the Medical Device Single Audit Program (MDSAP)MDSAP for the 5five regulatory jurisdictions signatory to MDSAP (FDA - US, Health Canada - Canada, TGA - Australia, PMDA - Japan, and ANVISA - Brazil); and for the EU under EN ISO 13485:2012 and MDD 93/42/EEC. The Company passed the recertification audit establishing compliance with ISO 13485:2003 under MDSAP; EN ISO 13458:2012;2016 and MDD 93/42/EEC. In January 2019,2021, the Company passed the upgraderecertification audit establishingre-confirming compliance with ISO 13485:ISO13485:2016 and the surveillance audit under MDSAP. The MDSAP and EU certification can be used to establishdemonstrate compliance with GMP/QSR/QMS requirements for all sixfive regulatory jurisdictions, replacing routine audits from each regulatory jurisdiction. For cause audits can still occur.
Applicability of Anti-Corruption Laws and Regulations
The Company’s worldwide business is subject to the U.S. Foreign Corrupt Practices Act of 1977 (the “FCPA”), the United Kingdom Bribery Act of 2010 (the “UK Bribery Act”) and other anti-corruption laws and regulations applicable in the jurisdictions where the Company operates. The FCPA can be used to prosecute companies in the U.S. for arrangements with physicians, or other parties outside the U.S., if the physician or party is a government official of another country and the arrangement violates the law of that country. The UK Bribery Act prohibits both domestic and international bribery, as well as bribery across both public and private sectors. There are similar laws and regulations applicable to Cuterathe Company outside the U.S., all of which are subject to evolving interpretations. For additional information, please refer to Item 1A. Risk Factors of this Annual Report on Form 10-K, under the sections entitled “Risk Factors – the Company’s failure to comply with rules relating to bribery, foreign corrupt practices and privacy and security laws may subject the Company to penalties and adversely impact ourthe Company’s reputation and business operations.”
Patient Privacy and Security Laws
Various laws worldwide protect the confidentiality of certain patient health and other consumer information, including patient medical records, and restrict the use and disclosure of patient health information by healthcare providers. Privacy standards in Europe and Asia are becoming increasingly strict, enforcement action and financial penalties related to privacy in the EU are growing, and new laws and restrictions are being passed. The management of cross-border transfers of information among and outside of EU member countries is becoming more complex, which may complicate ourthe Company’s clinical research and commercial activities, as well as product offerings that involve transmission or use of data. The Company will continue its efforts to comply with those requirements and to adapt ourthe Company’s business processes to those standards.
In the U.S., the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), as amended by the Health Information Technology and Clinical Health Act (“HITECH”) and their respective implementing regulations, including the final omnibus rule published on January 25, 2013, imposes specified requirements relating to the privacy, security and transmission of individually identifiable health information. Among other things, HITECH makes HIPAA’s privacy and security standards directly applicable to “business associates,” defined as independent contractors or agents of covered entities that create, receive, maintain or transmit protected health information in connection with providing a service for or on behalf of a covered entity. HITECH also increased the civil and criminal penalties that may be imposed against covered entities, business associates and possibly other persons, and gave state attorneys new general authority to file civil actions for damages or injunctions in federal courtscourt to enforce the federal HIPAA laws and seek attorney’s fees and costs associated with pursuing federal civil actions. In addition, state laws govern the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways, thus complicating compliance efforts. The Company potentially operates as a business associate to covered entities in a limited number of instances. In those cases, the patient data that the Company receives may include protected health information, as defined under HIPAA. Enforcement actions can be costly and interrupt regular operations of its business. While the Company has not been named in any such actions, if a substantial breach or loss of data from ourthe Company’s records were to occur, the Company could become a target of such litigation.
In the EU, Regulation 2016/679 on the protection of natural persons with regard to the processing of personal data and on the free movement of such data (“General Data Protection Regulation” or “GDPR”) came into effect on May 25, 2018. The GDPR replaces Directive 95/46/EC (“Data Protection Directive”). While many of the principles of the GDPR reflect those of the Data Protection Directive, for example in relation to the requirements relating to the privacy, security and transmission of individually identifiable health information, there are a number of changes. In particular: (1) pro-active compliance measures are introduced, such as the requirement to carry out a Privacy Impact Assessment and to appoint a Data Protection Officer where health data is processed on a “large scale;” and (2) the administrative fines that can be levied are significantly increased, the maximum being the higher of €20 million, or 4%, of the total worldwide annual turnover of the group in the previous financial year. While we believe we are compliant with GDPR, the recent implementation of regulation, coupledThe Company will continue its efforts to comply with the early limited enforcement action make it difficultGDPR requirements and to assess.adapt the Company’s business processes to those requirements.
Environmental Health and Safety Laws
The Company is also subject to various environmental health and safety laws and regulations worldwide. Like other medical device companies, ourthe Company’s manufacturing and other operations involve the use and transportation of substances regulated under environmental health and safety laws including those related to the transportation of hazardous materials. To the best of ourthe Company’s knowledge at this time, the Company does not expect that compliance with environmental protection laws will have a material impact on ourthe Company’s consolidated results of operations, financial position or cash flows.
Employees and Human Capital
As of December 31, 2018,2020, the Company had 402323 employees, compared to 367447 employees as of December 31, 2017. Of the 402 employees at December 31, 2018, 161 were in sales and marketing, 89 in manufacturing operations, 77 in technical service, 38 in research and development and 37 in general and administrative.2019. The Company believes that its future success will depend in part on ourthe Company’s continued ability to attract, hire and retain qualified personnel. None of ourthe Company’s employees are represented by a labor union, and the Company believes its employee relations are good. The Company is committed to fostering a diverse and inclusive workplace that attracts and retains exceptional talent. Through ongoing employee development, comprehensive compensation and benefits, and a focus on health, safety and employee wellbeing, the Company strives to help its employees in all aspects of their lives so they can do their best work.
Diversity, Equity and Inclusion
The Company is committed to create and maintain a diverse and safe work environment to capture the ideas and perspectives that fuel innovation and enable its workforce, customers, and communities to succeed in creating the future of medical aesthetics. The Company strives to create an inclusive workplace where people can design, manufacture, and market a comprehensive portfolio of aesthetic laser and energy-based products that enable its customers (the practitioner) to provide safe and effective treatments. Its commitment to diversity and inclusion starts at the highest levels of the Company.
Employee Engagement
The Company regularly collects feedback to better understand and improve the employee experience and identify opportunities to continually strengthen its culture. The Company wants to know what is working well, what the Company can do better and how well its associates understand and practicing its cultural values. In 2020, nearly 86% of its employees participated in its annual employee survey.
Leadership development and training
At Cutera, the Company believes that the best leaders are the ones who come from within. These leaders learn with Cutera, grow with Cutera and reach their potential through challenging job experiences. The Company provides deliberate learning opportunities by offering valuable training resources for employees in order to ensure its people have everything they need to succeed both personally and professionally. The Company’s employees are encouraged to take responsibility for their own development and create learning plans that best fit their needs and development goals.
Health, Safety and Wellness
The physical health, financial wellbeing, life balance and mental health of its employees is vital to its success. The Company sponsors wellness initiatives designed to enhance physical, financial, and mental wellbeing for all employees. The Company has successfully implemented a number of safety and social distancing measures within its premises to protect the health and safety of associates who are required to be on-premise to support its business.
Available Information
The Company makes its periodic and current reports, including the Company's Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to those reports, filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as well as its charters for the Company's Audit and Compensation Committees and its Code of Ethics, available free of charge, on the Company’s website as soon as practicable after such material is electronically filed or furnished with the Securities and Exchange Commission (the “SEC”). The Company’s website address is www.cutera.comand the reports are filed under “SEC Filings,” under “Financials” on the Company-InvestorInvestor Relations portion of ourthe Company’s website. These reports and other information concerning the Company may be accessed through the SEC’s website at www.sec.gov.
|
The Company operates in a rapidly changing economic and technological environment that presents numerous risks, many of which are driven by factors that the Company cannot control or predict. The Company’s business, financial condition and results of operations may be impacted by a number of factors. In addition to the factors discussed elsewhere in this report, the following risks and uncertainties could materially harm ourthe Company’s business, financial condition or results of operations, including causing ourthe Company’s actual results to differ materially from those projected in any forward-looking statements. The following list of significant risk factors is not all-inclusive or necessarily in order of importance. Additional risks and uncertainties not presently known to the Company, or that the Company currently deemdeems immaterial, also may materially adversely affect usthe Company in future periods. You should carefully consider these risks and uncertainties before investing in ourthe Company’s securities.
Summary of Risk Factors
The Company’s business, financial condition, operating results and cash flows are subject to numerous risks and uncertainties that are summarized below. The below summary of risk factors should be read together with the more detailed discussion of risks set forth following this section under the heading “Risk Factors,” as well as elsewhere in this Annual Report on Form 10-K.
Risks Related tothe Company’s Business and its Industry
■ | The Company’s business, financial condition, liquidity, capital, and results of operations have been, and may continue to be, adversely affected by the COVID-19 pandemic. |
■ | The increase in sales of skincare products in Japan may be temporarily caused by the change in its customer’s spending habit due to the COVID-19 pandemic. |
■ | Any defects in the design, material or workmanship of its products, defective design, material or workmanship or misuse of its products will cause additional costs, including product recalls and product liability suits, and harm the Company’s reputation. |
■ | Failure in hiring, training and retaining Sales professional and skilled and experienced personnel, or changes to management will cause adversely affects the Company’s operation and operation results. |
■ | The aesthetic equipment market is characterized by rapid innovation, product innovation and high competition. |
■ | The Company competes against companies that offer alternative solutions to its products, have greater resources, or have a larger installed base of customers and broader product offerings than the Company’s. |
■ | The Company’s business is subject to regulatory requirements, laser performance standards, federal regulatory reforms, FDA and other government agencies’ regulation and oversight which may negatively affect its business, financial condition and results of operations if the Company fails to comply with them. |
■ | The Company's products may cause or contribute to adverse medical events or be subject to failures or malfunctions that would be subject to sanctions that could harm its reputation, business, financial condition and results of operations. |
■ | The Company may be unable to obtain or maintain international regulatory qualifications or approvals for its current or future products and indications, which could harm its business. |
■ | Failure in International expansion and economic and other risks associated with international sales and operations could adversely affect the Company’s business. |
■ | Some of the Company’s manufacturing operations are dependent upon third-party suppliers, making its vulnerable to supply shortages and price fluctuations, which could harm its business. |
■ | Reduction or interruption in supply and an inability to develop alternative sources for supply may adversely affect the Company’s manufacturing operations and related product sales. |
■ | If customers are not trained and/or the Company’s products are used by non-licensed practitioners, it could result in product misuse and adverse treatment outcomes, which could harm the Company’s reputation, result in product liability litigation, distract management and result in additional costs, all of which could harm the Company’s business. |
■ | The Company’s products are subject to clinical trial process which is lengthy and expensive with uncertain outcomes. Delays or failures in the Company's clinical trials will prevent it from commercializing any modified or new products. |
■ | Intellectual property rights may not provide adequate protection for some or all the Company’s products, or the Company may be involved in future costly intellectual property litigation. |
■ | The expense and potential unavailability of insurance coverage for the Company’s customers could adversely affect its ability to sell its products, and therefore adversely affect its financial condition. |
■ | Any acquisitions that the Company makes could result in operating difficulties, dilution, and other consequences that may adversely impact the Company’s business and results of operations. |
■ | Inability to access credit on favorable terms for the funding of the Company’s operations and capital projects may be limited due to changes in credit markets. |
■ | Security breaches, cyber-security incidents and other disruptions could compromise the Company’s information and impact the Company’s business, financial condition or results of operations. |
■ | Macroeconomic political and market conditions, and catastrophic events may adversely affect the Company’s business, results of operations, financial condition and the trading price of the notes and the stock. |
■ | The Company has a relatively limited number of shares of common stock outstanding, which could result in the increase in volatility of its stock price and the trading price of the notes. |
■ | Disaster or other similar event could cause damage to its facilities and equipment, which might require the Company to cease or curtail sales of these sole sourced platforms. |
■ | Income tax audits or similar proceedings or changes in accounting standards may have a material adverse effect on the Company’s results of operations and financial position. |
Risks Related to the Notes
■ | Although the notes are referred to as convertible senior notes, they are effectively subordinated to any of the Company's secured debt and any liabilities of its subsidiaries. |
■ | Regulatory actions and other events may adversely affect the trading price and liquidity of the notes. |
■ | Volatility in the market price and trading volume of the Company's common stock could adversely impact the trading price of the notes. |
■ | The Company may still incur substantially more debt or take other actions which would intensify the risks discussed above. |
■ | The Company may not have the ability to raise the funds necessary to settle conversions of the notes in cash or to repurchase the notes upon a fundamental change, and its future debt may contain limitations on its ability to pay cash upon conversion or repurchase of the notes. |
■ | The conditional conversion feature of the notes, if triggered, may adversely affect the Company's financial condition and operating results. |
■ | The accounting method for the notes could adversely affect the Company's financial condition and operating results. |
■ | Holders of notes will not be entitled to any rights with respect to the Company's common stock, but they will be subject to all changes made with respect to the Company's common stock to the extent the Company satisfies its conversion obligation, in whole or in part, with shares of its common stock. |
■ | The conditional conversion feature of the notes could result in holders receiving less than the value of the Company's common stock into which the notes would otherwise be convertible. |
■ | Upon conversion of the notes, holders may receive less valuable consideration than expected because the value of the Company's common stock may decline after holders exercise their conversion right but before the Company satisfies it conversion obligation. |
■ | The notes are not protected by restrictive covenants. |
■ | The increase in the conversion rate for notes converted in connection with a make-whole fundamental change or during a redemption period may not adequately compensate holders for any lost value of their notes as a result of such transaction or redemption. |
■ | The conversion rate of the notes may not be adjusted for all dilutive events. |
■ | Provisions in the indenture governing the notes may deter or prevent a business combination that may be favorable to the holders. |
■ | The capped call transactions may affect the value of the notes and the Company's common stock. |
■ | The Company is subject to counterparty risk with respect to the capped call transactions. |
■ | Some significant restructuring transactions may not constitute a fundamental change, in which case the Company would not be obligated to offer to repurchase the notes. |
■ | The Company has not registered the notes or the common stock issuable upon conversion, if any, which will limit the ability of holders to resell them. |
■ | The Company cannot assure the holders of the notes that an active trading market will develop for the notes. |
■ | Any adverse rating of the notes may cause their trading price to fall. |
■ | The holders of the notes may be subject to tax if the Company makes or fails to make certain adjustments to the conversion rate of the notes even though the holders do not receive a corresponding cash distribution. |
■ | The Company may redeem the notes at its option, which may adversely affect the holders' return. |
■ | The notes will initially be held in book-entry form and, therefore, holders must rely on the procedures and the relevant clearing systems to exercise their rights and remedies. |
Risks Related to Ownership of the Company'sCommon Stock
■ | Anti-takeover provisions contained in the Company's amended and restated certificate of incorporation and amended and restated bylaws, as well as provisions of Delaware law, could impair a takeover attempt. |
■ | The Company's business could be negatively affected by activist shareholders. |
■ | If securities or industry analysts do not publish or cease publishing research or reports about the Company, its business, its market or its competitors, or if they adversely change their recommendations regarding the Company's common stock, the market price and trading volume of its notes and common stock could decline. |
■ | The Company does not expect to declare any dividends on its common stock in the foreseeable future. |
■ | If the Company raises additional capital through the sale of shares of the Company’s common stock, convertible securities or debt in the future, its stockholders’ ownership in the Company could be diluted and restrictions could be imposed on the Company’s business. |
Risks Related to the Company’s Business and its Industry
The effects of the COVID-19 pandemic have affected how the Company and its customers are operating its businesses, and the duration and extent to which this will impact its future results of operations and overall financial performance remains uncertain.
The COVID-19 pandemic and related public health measures have affected how the Company and its customers are operating their businesses and have materially and adversely affected the Company’s business and the Company’s financial results. To date, the impact includes: a) the deferral of procedures using its products, b) disruptions or restrictions on the ability of many of the Company’s employees and of third parties on which the Company relies, to work effectively, including “stay-at-home” orders and similar government actions; and c) temporary closures of its facilities and of the facilities of the Company’s customers and suppliers. If the pandemic has a substantial impact on its employees’ or customers’ businesses and productivity, the Company’s results of operations and overall financial performance may be materially and adversely affected. The global macroeconomic effects of the pandemic may persist for an indefinite period, even after the pandemic has subsided.
As jurisdictions throughout the world continue to respond to the pandemic, the degree of the foregoing impacts may increase in scope or magnitude or the Company may experience additional adverse effects in one or more regions. Any other outbreaks of contagious diseases or other adverse public health developments in countries where the Company operates or where its customers or suppliers are located could also have a material and adverse effect on its business, financial condition and results of operations.
Due to the COVID-19 pandemic, customers and their patients have been, and in certain regions continue to be, required, or are choosing, to defer elective procedures in which the Company's products otherwise could be used, and many facilities that specialize in the procedures in which the Company's products otherwise could be used have temporarily closed and in some cases continue to be temporarily closed or operating at reduced hours. In addition, even after the pandemic subsides or governmental orders no longer prohibit or recommend against performing such procedures, patients may continue to defer such procedures due to personal concerns. Further, facilities at which its products typically are used may not reopen or, even if they reopen, patients may elect to have procedures performed at facilities that are, or are perceived to be, lower-risk, such as private surgery centers, and the Company's products may not be approved at such facilities, and the Company may be unable to have the Company's products approved for use at such facilities on a timely basis, or at all. The effect of the pandemic on the broader economy could also negatively affect demand for elective procedures using its products, both in the near- and long-term. Workforce limitations and travel restrictions resulting from government actions taken to contain the spread of COVID-19 have and will continue to adversely affect almost every aspect of its business. If a significant percentage of the Company's workforce, or of the workforce of third parties on which the Company relies, cannot work, including because of illness or travel or government restrictions, its operations will be negatively affected. Because of government restrictions and social distancing guidelines in many countries around the world, there is an increased reliance on working from home for the Company's workforce and on the workforce of third parties on which the Company rely. For example, most of the Company's sales personnel and third-party agents currently are working largely using virtual and online engagement tools and tactics, which may be less effective than its typical in-person sales and marketing programs. In addition, the Company reduced access to its hands-on customer trainings, which, in turn, adversely impacted the Company's ability to educate and train customers on the proper use of the Company's products, which may make surgeons less comfortable using, and therefore less likely to use, the Company's products. The Company expects that “stay-at-home” orders will also limit its ability to develop, and therefore launch, the products the Company believes will drive the Company’s future revenue growth on the timelines the Company anticipated previously, or at all, and could also delay the planned launch of products in 2021 and beyond. It may also cause the Company not to submit required filings on its previous timelines, including with the FDA, or other regulatory bodies, both in the U.S. and outside the U.S. The continued spread of COVID-19 has adversely impacted the Company's clinical trial operations in the United States. In addition, changes impacting workforce function at the FDA and other regulatory bodies, as well as changes impacting workforce function at the facilities at which the Company seeks to have new products approved for use, could adversely impact the timing of when the Company's new products are cleared for marketing and approved for use, either of which would adversely impact the timing of its ability to sell these new products and would have a material and adverse effect on the Company's revenue growth.
As a result of the COVID-19 outbreak, some of the Company’s customers are being required to shelter-in-place and are not working. In cases where the Company’s customers are working, they are performing fewer procedures. When they are performing procedures, customers are mostly focused on medically necessary procedures that should not be delayed. Non-urgent, non-essential procedures are getting cancelled or delayed. As a result of fewer aesthetic procedures being performed and anxiety about the economic future, the Company’s customers may cancel orders for laser systems or will use less consumables. Some of the Company’s customers will feel less confident about making investments in their practices and focus on retaining their cash. As a result of cash conservation efforts by the Company’s customers, the Company may also encounter problems collecting on its receivables, which will impact the Company’s cash position and could result in negative cash flows.
Further, disruptions in the manufacture and distribution of the Company's products or in its supply chain may occur as a result of the COVID-19 pandemic, including for the reasons above, or other events that result in staffing shortages, production slowdowns, stoppages, or disruptions in delivery systems, any of which could materially and adversely affect the Company's ability to manufacture or distribute its products, or to obtain the raw materials and supplies necessary to manufacture and distribute the Company’s products, in a timely manner, or at all.
The Company may also experience other unknown adverse impacts from COVID-19 that cannot be predicted. For example, customers and other facilities at which the Company sells its products may renegotiate their purchase prices, including as a result of, or the perception that they may be suffering, financial difficulty as a result of the pandemic. Similarly, facilities at which the Company seeks to sell its products in the future may require price reductions relative to the price at which the Company previously expected to sell its products. Reduction in the prices at which the Company sells products to existing customers may have a material and adverse effect on its future financial results and reductions in the prices at which the Company expected to sell products would have a material and adverse effect on its expectations for revenue growth.
Further, the global capital markets experienced, and the Company expects will continue to experience, disruption and volatility due to the COVID-19 pandemic, adversely impacting access to capital not only for the Company, but also for its customers and suppliers who need access to capital. Their inability to access capital in a timely manner, or at all, could adversely impact demand for its products and/or adversely impact its ability to manufacture or supply its products, any of which could have a material and adverse effect on the Company's business.
The extent to which theCOVID-19pandemic will impact the Company’s business going forward will depend on numerous evolving factors that cannot be reliably predicted, including the duration and scope of the pandemic; governmental, business, and individuals’ actions in response to the pandemic; and the impact on economic activity including the possibility of recession or financial market instability.
The Company expects the customers will return and the amount of revenue to increase in 2021 compared to 2020 as the economic environment outlook due to the COVID-19 pandemic improves; however, the COVID-19 outbreak continues to be fluid and the aftermath of the business and economic disruptions due to the COVID-19 in 2020 is still uncertain, making it difficult to forecast the final impact it could have on the Company’s future operations. The spread of the coronavirus, which caused a broad impact in 2020 globally, including restrictions on travel, shifting work force to work remotely and quarantine policies put into place by businesses and governments, had a material economic effect on the Company’s business. Notably, healthcare facilities in many countries effectively banned elective procedures. Many of the Company’s products are used in aesthetic elective procedures and as such, the bans on elective procedures substantially reduced the Company’s sales and marketing efforts in the early months of the pandemic. The Company cannot presently predict the scope and severity of any impacts in future periods from the business shutdowns or disruptions due to the COVID-19 pandemic, but the impact on economic activity such as the possibility of recession or financial market instability could have a material adverse effect on the Company’s business, revenue, operating results, cash flows and financial condition.
The increase in sales of skincare products in Japan may be temporary and sales of Skincare products may decline in the future.
During 2020, the Company experienced a significant increase in sales of skincare products under the exclusive distribution agreement with ZO which allows the Company to sell ZO’s skincare products in Japan. The reason for the increase in skincare products sales might have been the result of changes in customers’ spending habits to purchase more aesthetic treatments which could be applied at home due to limitations on in-person aesthetic procedures, social distancing and mask wearing requirements due to the COVID-19 pandemic. Future growth in sales of skincare products depends on the customers’ spending habits, which may change back to original spending habits after the COVID-19 pandemic. Such changes may have a material adverse effect on the Company’s revenue, operating results and cash flows.
The Company may be deemed ineligible to have received the PPP loan, and the Company may be required to repay the PPP loan in its entirety and could be subject to penalties. In addition, with respect to any portion of the PPP loan not forgiven, the Company may default on payment or breach provisions of the PPP loan.
On April 22, 2020, the Company received loan proceeds of $7.1 million pursuant to the Paycheck Protection Program (the “PPP”) under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The Company believes that the current economic uncertainty makes the loan necessary to support ongoing operations.
The application for these funds required the Company to, in good faith, certify that the current economic uncertainty made the loan request necessary to support the ongoing operations of the Company. Subsequently released guidance instructs all applicants and recipients to take into account their current business activity and the Company's ability to access other sources of liquidity sufficient to support ongoing operations in a manner that is not significantly detrimental to their business. On April 28, 2020, in press conference remarks, the Secretary of the U.S. Department of the Treasury stated that the SBA intends to perform a review of PPP loans over $2.0 million. The required certification made by the Company is subject to interpretation. If, despite the good-faith belief that given the Company’s circumstances the Company satisfied all eligible requirements for the PPP loan, it is later determined the Company was ineligible to apply for and receive the PPP loan, the Company may be required to repay the PPP loan in its entirety and the Company could be subject to additional penalties.
The loan, which is in the form of a promissory note, dated April 21, 2020, between the Company and Silicon Valley Bank as the lender (the “Loan”), matures on April 21, 2022 and bears interest at a fixed rate of 1.00% per annum, payable monthly commencing in September 2021. There is no prepayment penalty. Under the terms of the PPP, all or a portion of the principal may be forgiven if the Loan proceeds are used for qualifying expenses as described in the CARES Act, such as payroll costs, benefits, rent, and utilities. No assurance can be provided that the Company will obtain forgiveness of the Loan in whole or in part. With respect to any portion of the Loan that is not forgiven, the Loan will be subject to customary provisions for a loan of this type, including customary events of default relating to, among other things, payment defaults and breaches of the provisions of the Loan. The PPP loan will be derecognized upon repayment of the loan in accordance with its terms and/or upon confirmation of forgiveness from the SBA.
The trading price of the Company’s notes and common stock may fluctuate substantially due to several factors, some of which are discussed below. Further, the Company has a relatively limited number of shares of common stock outstanding, a large portion of which is held by a small number of investors, which could result in the increase in volatility of its stock price and the trading price of the notes.
There has been recent volatility in the price of the Company’s common stock. The Company believes this is due in part to the overall impact of COVID-19 on the aesthetic industry and its partial recovery, the remaining open territories associated with the Company’s North America salesforce, and other factors. As a result of the Company’s relatively limited public float, its common stock may be less liquid than the stock of companies with broader public ownership. Among other things, trading of a relatively small volume of the Company’s common stock may have a greater impact on the trading price for the Company’s notes and shares than would be the case if the Company’s public float were larger. The public market price of the Company’s common stock has in the past fluctuated substantially and, due to the current concentration of stockholders, the trading price of the notes and the common stock may continue to do so in the future. The market price for the Company’s notes and common stock could also be affected by a number of other factors, including the general market conditions unrelated to the Company’s operating performance, including market volatility as a result of the COVID-19 outbreak.
The market price for the Company’s notes and common stock could also be affected by a number of other factors, including:
● | the general market conditions unrelated to the Company’s operating performance; |
● | sales of large blocks of the Company’s common stock, including sales by the Company’s executive officers, directors and large institutional investors; |
● | quarterly variations in the Company’s, or the Company’s competitors’, results of operations; |
● | actual or anticipated changes or fluctuations in the Company’s results of operations; | |
● | actual or anticipated changes in analysts’ estimates, investors’ perceptions, recommendations by securities analysts or the Company’s failure to achieve analysts ‘estimates; |
● | the announcement of new products, service enhancements, distributor relationships or acquisitions by the Company or the Company’s competitors; |
● | the announcement of the departure of a key employee or executive officer by the Company or the Company’s competitors; |
● | regulatory developments or delays concerning the Company’s, or the Company’s competitors’ products; and |
● | the initiation of any litigation by the Company or against the Company, including the lawsuit initiated by the Company on January 31, 2020 in Federal District Court in California against Lutronic Aesthetics, Inc. as previously disclosed on February 3, 2020, or against the Company. |
Actual or perceived instability and / or volatility in the Company’s stock price could reduce demand from potential buyers of the Company’s stock, thereby causing the trading price of the Company’s notes and stock to either remain depressed or to decline further. In addition, if the market for medical-device company stocks or the stock market in general experiences a loss of investor confidence, the trading price of the Company’s notes and stock could decline for reasons unrelated to the Company’s business, results of operations or financial condition. The trading price of the Company’s notes and common stock might also decline in reaction to events that affect other companies in the Company’s industry even if these events do not directly affect us. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been brought against that company. Any future securities litigation could result in substantial costs and divert the Company’s management’s attention and resources from the Company’s business. This could have a material adverse effect on the Company’s business, results of operations and financial condition.
Covenants in the Loan and Security Agreement governing the Company's revolving credit facility may restrict its operations, and if the Company does not effectively manage its business to comply with these covenants, its financial condition could be adversely impacted.
The Company entered into a Loan and Security Agreement with Silicon Valley Bank in July 2020, which provides for a four-year secured revolving loan facility in an aggregate principal amount of up to $30.0 million (the “senior credit facility”). The senior credit facility contains various restrictive covenants, including, among other things, minimum liquidity and revenue requirements, restrictions on the Company's ability to dispose of assets, make acquisitions or investments, incur debt or liens, make distributions to its stockholders, or enter into certain types of related party transactions. These restrictions may restrict the Company's current and future operations, particularly the Company's ability to respond to certain changes in its business or industry, or take future actions. Pursuant to the senior credit facility, the Company granted the parties thereto a security interest in substantially all of its assets. See Note 12 of the notes to the Company's consolidated financial statements and the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources Loan and Security Agreement” in Part II, Item 8 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2020. The Company’s ability to meet these restrictive covenants can be impacted by events beyond the Company’s control and the Company may be unable to do so. The Company’s senior credit facility provides that its breaches or failure to satisfy certain covenants constitutes an event of default. Upon the occurrence of an event of default, the Company’s lenders could elect to declare all amounts outstanding under its debt agreements to be immediately due and payable. In addition, the Company's lenders would have the right to proceed against the assets the Company provided as collateral pursuant to the senior credit facility. If the debt under its senior credit facility was to be accelerated, the Company may not have sufficient cash on hand or be able to sell sufficient collateral to repay it, which would have an immediate adverse effect on the Company's business and operating results.
The Company’s annual and quarterly operating results may fluctuate in the future, which may cause the Company’s sharetrading price for the notes and shares to decline.
The Company’s net sales, expenses and operating results may vary significantly from year to year and quarter to quarter for several reasons, including, without limitation:
● the ability of the Company’s sales force to effectively market and promote the Company’s products, and the extent to which those products gain market acceptance;
● the inability to meet the Company'sCompany’s debt repayment obligations under the Loan and Security Agreement with Wells Fargo Bank, N.A. (the“Revised Revolving Line of Credit”)its senior credit facility due to insufficient cash;
● the possibility that cybersecurity breaches, data breaches, and other disruptions could compromise ourthe Company’s information or result in the unauthorized disclosure of confidential information;
● the existence and timing of any product approvals or changes;
● the rate and size of expenditures incurred on the Company’s clinical, manufacturing, sales, marketing, and product development efforts;
● the Company’s ability to attract and retain personnel;
● the availability of key components, materials and contract services, which depends on the Company’s ability to forecast sales, among other things;
● investigations of the Company’s business and business-related activities by regulatory or other governmental authorities;
● variations in timing and quantity of product orders;
● temporary manufacturing interruptions or disruptions;
● the timing and success of new product and new market introductions, as well as delays in obtaining domestic or foreign regulatory approvals for such introductions;
● increased competition, patent expirations or new technologies or treatments;
● impact of the FDA communication letter regarding “vaginal rejuvenation” procedures using energy-based devices on sales of the Company's products;
● product recalls or safety alerts;
● litigation, including product liability, patent, employment, securities class action, stockholder derivative, general commercial and other lawsuits;
● volatility in the global market and worldwide economic conditions;
● changes in tax laws, including changes domestically and internationally, or exposure to additional income tax liabilities;
● the impact of the new EU privacy regulations (GDPR) on the Company’s resources;
● the financial health of ourthe Company’s customers and their ability to purchase ourthe Company’s products in the current economic environment; and
● other unusual or non-operating expenses, such as expenses related to mergers or acquisitions, may cause operating results to vary.vary; and
● an epidemic or pandemic, such as the current COVID-19 pandemic.
As a result of any of these factors, the Company’s consolidated results of operations may fluctuate significantly, which may in turn cause its sharethe trading price of the notes and the shares to fluctuate.
If defects are discovered in the Company’sCompany’s products, the Company may incur additional unforeseenunforeseen costs, customers may not purchase the Company’s Company’s product and the Company’sCompany’s reputation may suffer.
The Company’s success depends on the quality and reliability of its products. While the Company’s subject components are sourcedsources and products manufactured to stringent quality specifications and processes, the Company’s products incorporate different components including optical components, and other medical device software, any of which may contain errors or exhibit failures, especially when products are first introduced. In addition, new products or enhancements may contain undetected errors or performance problems that, despite testing, are discovered only after commercial shipment. Because ourthe Company’s products are designed to be used to perform complex surgical procedures, due to the serious and costly consequences of product failure, the Company and its customers have an increased sensitivity to such defects. In the past, the Company has voluntarily recalled certain products. Although ourthe Company’s products are subject to stringent quality processes and controls, the Company cannot provide assurance that its products will not experience component aging, errors, or performance problems. If the Company experiences product flaws or performance problems, any or all of the following could occur:
●
| delays in product shipments; |
● | loss of revenue; |
● | delay in market acceptance; |
● | diversion of the Company’s resources; |
● | damage to the Company’s reputation; |
● | product recalls; | |
● | regulatory actions; | |
● | increased service or warranty costs; or | |
● | product liability claims. |
Costs associated with product flaws or performance problems could have a material adverse effect on ourthe Company’s business, financial condition, results of operations or cash flows.
The success and continuing development of ourthe Company’s products depends, in part, upon maintaining strong relationships with physicians and other healthcare professionals.
If the Company fails to maintain ourthe Company’s working relationships with physicians and other ancillary healthcare and aesthetic professionals, the Company’s products may not be developed and marketed in line with the needs and expectations of the professionals who use and support ourthe Company’s products. Physicians assist usthe Company as researchers, marketing consultants, product consultants, and public speakers, and the Company relies on these professionals to provide usthe Company with considerable knowledge and experience. If the Company is unable to maintain these strong relationships, the development and marketing of ourthe Company’s products could suffer, which could have a material adverse effect on ourthe Company’s consolidated financial condition and results of operations.
The Company relies heavily on its sales professionalsprofessionals to market and sell its products worldwide. If the Company is unable to hire, effectively train, manage, improve the productivity of, and retain ourthe Company’s sales professionals, the Company’the Company’ss business will bebe harmed, which would impair its future revenue and profitability.
The Company’s success largely depends on ourthe Company’s ability to hire, train, manage, train, and improve the productivity levels of the Company’s sales professionals worldwide. Because of the Company’s focus on non-core practitioners in the past, several of its sales professionals do not have established relationships with the core market, consisting of dermatologists and plastic surgeons, or where those relationships exist, they are not appropriately strong.
Competition for sales professionals who are familiar with, and trained to sell in, the aesthetic equipment market continues to be robust. As a result, the Company occasionally loses ourits sales people to competitors. The Company’s industry is characterized by a few established companies that compete vigorously for talented sales professionals. Some of its sales professionals leave the Company for jobs that they perceive to be better opportunities, both within and outside of the aesthetic industry. For instance, in the second halffirst quarter of 2018,2020, the Company experienced significant turnover of ourthe Company’s sales professionals, including several people in key sales leadership positions. Most of these sales professionals went to work for a competitor. We believeThe Company believes the loss of these sales professionals may negatively impacted ourthe Company’s sales performance in the secondfirst half of 2018.2020. The Company believes it has adequate measures in place to protect ourthe Company’s proprietary and confidential information when employees leave ourthe Company, however the ability to enforce these measures varies from jurisdiction to jurisdiction and wethe Company must make a case-by-case decision regarding legal enforcement action. For instance, covenants not-to-compete are not allowed in many states, and if allowed, difficult to enforce in many jurisdictions. Furthermore, such legal enforcement actions are expensive and wethe Company cannot give any assurance that these enforcement actions will be successful.
However, the Company also continues to hire and train new sales people, including several from ourthe Company’s competitors. Several of the Company’s sales employees and sales management are recently hired or transferred into different roles, and it will take time for them to be fully trained to improve their productivity. In addition, due to the competition for sales professionals in ourthe Company’s industry, the Company also recruits sales professionals from outside the industry. Sales professionals from outside the industry typically take longer to train and become familiar with ourthe Company’s products and the procedures in which they are used. As a result of a lack of industry knowledge, these sales professionals may take longer to become productive members of ourthe Company’s sales force.
The Company trains its existing and recently recruited sales professionals to better understand ourthe Company’s existing and new product technologies and how they can be positioned against ourthe Company’s competitors’ products. These initiatives are intended to improve the productivity of ourthe Company’s sales professionals and ourthe Company’s revenue and profitability. It takes time for the sales professionals to become productive following their training and there can be no assurance that the newly recruited sales professionals will be adequately trained in a timely manner, or that the Company direct sales productivity will improve, or that the Company will not experience significant levels of attrition in the future.
Measures the Company implements in an effort to recruit, retain, train and manage ourthe Company’s sales professionals, strengthen their relationships with core market physicians, and improve their productivity may not be successful and may instead contribute to instability in its operations, additional departures from ourthe Company’s sales organization, or further reduce ourthe Company’s revenue and harm ourthe Company’s business. If the Company is not able to improve the productivity and retention of ourthe Company’s North American and international sales professionals, then the Company’s total revenue, profitability and stock price may be adversely impacted.
The aesthetic equipment market is characterized by rapid innovation. To compete effectively, the Company must develop and/or acquire new products, seek regulatory clearance, market them successfully, and identify new markets for ourthe Company’s technology.
The aesthetic light and energy-based treatment system industry is subject to continuous technological development and product innovation. If the Company does not continue to innovate and develop new products and applications, ourthe Company’s competitive position will likely deteriorate as other companies successfully design and commercialize new products and applications or enhancements to ourthe Company’s current products. The Company created products to apply ourthe Company’s technology to body contouring, hair removal, treatment of veins, tattoo removal and skin revitalization, including the treatment of diffuse redness, skin laxity, fine lines and wrinkles via hemostasis and coagulation, skin texture, pore size and benign pigmented lesions, etc. For example, the Company introduced Juliet,, a product for women’s intimate health, in December 2017, Secret RF,, a fractional RF microneedling device for skin revitalization, in January 2018, enlighten SR in April 2018, and truSculpt iD in July 2018.2018, excel V+ in February 2019, truSculpt flex in June 2019, and the Secret Pro, a device combining the benefits of RF microneedling with the capabilities of a fractional, ablative CO2 laser in September of 2020. To grow in the future, the Company must continue to develop and/or acquire new and innovative aesthetic products and applications, identify new markets, and successfully launch the newly acquired or developed product offerings.
To successfully expand the Company’s product offerings, the Company must, among other things:
● develop or otherwise acquire new products that either add to or significantly improve our current product offerings;
● obtain regulatory clearance for these new products;
● convince our existing and prospective customers that our product offerings are an attractive revenue-generating addition to their practice;
● sell our product offerings to a broad customer base;
● identify new markets and alternative applications for our technology;
● protect our existing and future products with defensible intellectual property; and
● satisfy and maintain all regulatory requirements for commercialization.
● | develop or otherwise acquire new products that either add to or significantly improve the Company’s current product offerings; | |
● | obtain regulatory clearance for these new products; |
● | convince the Company’s existing and prospective customers that the Company’s product offerings are an attractive revenue-generating addition to their practice; | |
● | sell the Company’s product offerings to a broad customer base; | |
● | identify new markets and alternative applications for the Company’s technology; | |
● | protect the Company’s existing and future products with defensible intellectual property; and | |
● | satisfy and maintain all regulatory requirements for commercialization. |
Historically, product introductions have been a significant component of the Company’s financial performance. To be successful in the aesthetics industry, the Company believes it needs to continue to innovate. The Company’s business strategy is based, in part, on its expectation that the Company will continue to increase or enhance its product offerings. The Company needs to continue to devote substantial research and development resources to make new product introductions, which can be costly and time consuming to its organization.
The Company also believes that, to increase revenue from sales of new products, the Company needs to continue to develop its clinical support, further expand and nurture relationships with industry thought leaders, and increase market awareness of the benefits of its new products. However, even with a significant investment in research and development, the Company may be unable to continue to develop, acquire or effectively launch and market new products and technologies regularly, or at all. If the Company fails to successfully commercialize new products or enhancements, its business may be harmed.
While the Company attempts to protect ourits products through patents and other intellectual property, there are few barriers to entry that would prevent new entrants or existing competitors from developing products that compete directly with ours.the Company’s. The Company expects that any competitive advantage the Company may enjoy from current and future innovations may diminish over time as companies successfully respond to our,the Company’s, or create their own, innovations. Consequently, the Company believes that it will have to continuously innovate and improve ourthe Company’s products and technology to compete successfully. If the Company is unable to innovate successfully, its products could become obsolete and its revenue could decline as its customers and prospectsprospective customers purchase its competitors’ products.
DemanDemand for the Company’d for ours products in any of the Company’sCompany’s markets could be weakened by several factors, including:
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| inability to develop and market the Company’s products to the core market specialties of dermatologists and plastic surgeons; | |
● | poor financial performance of market segments that attempt to introduce aesthetic procedures to their businesses; | |
● | the inability to differentiate the Company’s products from those of the Company’s competitors; | |
● | competitive threat from new innovations, product introductions capturing mind and wallet share; | |
● | reduced patient demand for elective aesthetic procedures; | |
● | failure to build and maintain relationships with opinion leaders within the various market segments; and | |
● | the lack of credit financing, or an increase in the cost of borrowing, for some of the Company’s potential customers. |
If the Company does not achieve anticipated demand for ourthe Company’s products, there could be a material adverse effect on its total revenue, profitability, employee retention and stock price.
The search for a permanent President and Chief Executive Officer (“CEO”), may cause uncertainty regarding the future of the Company’s business, impact employee hiring and retention, increase the volatility in our stock price, and adversely impact the Company’s revenue, operating results, and financial condition.
On January 4, 2019, James A. Reinstein resigned as President and Chief Executive Officer and a member of the Company’s board of directors (“Board”). Since then the Company’s current Chief Operating Officer, R. Jason Richey has been acting as Chief Operating Officer and Interim CEO.
The Board is conducting a search for a new President and CEO. The Board’s search for a President and CEO, and any related speculation and uncertainty regarding our future business strategy and direction in connection with the search and the appointment of a President and CEO, may cause or result in:
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If the Company is unable to mitigate these or other potential risks related to the uncertainty caused by the Board’s search for and appointment of a President and CEO, it may disrupt the Company’s business or adversely impact its revenue, operating results, and financial condition. Further, there can be no assurance that the Company will be able to attract a qualified permanent President and CEO who has the qualifications to lead the Company or that the Company can hire a President and CEO on acceptable terms.
Exposure to United Kingdom political developments, including the effect of its withdrawal from the European Union, could be costly and difficult to comply with and could seriously harm the Company’s business.
In June 2016, a referendum was passed in the United Kingdom to leave the European Union, commonly referred to as “Brexit.” This decision created an uncertain political and economic environment in the United Kingdom and other European Union countries. The United Kingdom formally left the European Union on January 31, 2020. The long-term nature of the United Kingdom’s relationship with the European Union is unclear and there is considerable uncertainty as to when any agreement will be reached and implemented. The political and economic instability created by Brexit has caused and may continue to cause significant volatility in global financial markets and uncertainty regarding the regulation of data protection in the United Kingdom. In particular, although the United Kingdom enacted a Data Protection Act in May 2018 that is consistent with the EU General Data Protection Regulation, uncertainty remains regarding how data transfers to and from the United Kingdom will be regulated. The full effect of Brexit is uncertain and it is not possible to determine the extent of the impact of the Brexit. Consequently, no assurance can be given about the impact of the outcome and the Company’s business, including operational and tax policies, may be seriously harmed or require reassessment.
The Company depends on skilled and experienced personnel to operate its global business effectively. Changes to management or the inability to recruit, hire, train and retain qualified personnel, could harm the Company’sCompany’s ability to successfully manage, develop and expand its business, which would impair the Company’sCompany’s future revenue and profitability.
The Company’s success largely depends on the skills, experience and efforts of the Company’s officers and other key employees. The loss of any of the Company’s executive officers could weaken its management expertise and harm the Company’s business, and it may not be able to find adequate replacements on a timely basis, or at all. Except for Change of Control and Severance Agreements for the Company’s executive officers and a few key employees, the Company does not have employment contracts with any of its officers or other key employees. Any of the Company’s officers and other key employees may terminate their employment at any time and their knowledge of the Company’s business and industry may be difficult to replace. The Company does not have a succession plan in place for each of its officers and key employees. In addition, the Company does not maintain “key person” life insurance policies covering any of the Company’s employees.
In addition to dependence on the Company’s officers and key employees, the Company is highly dependent on the principal members of our management,other sales personnel and scientific personnel. For example, in the second halffirst quarter of 2018,2020 the Company experienced significanta few turnover of ourits sales professionals, including several people in key sales leadership positions. Most of these sales professionals went to work for a competitor. We believe the loss of these sales professionals negatively impacted our sales performance in the second half of 2018. Additionally, the Company’s product development plans depend, in part, on the Company’s ability to attract and retain engineers with experience in medical devices. Attracting and retaining qualified personnel will be critical to ourthe Company’s success, and competition for qualified personnel is intense. The Company may not be able to attract and retain personnel on acceptable terms given the competition for such personnel among technology and healthcare companies and universities. The loss of any of these persons or the Company’s inability to attract, train and retain qualified personnel could harm ourthe Company’s business and ourthe Company’s ability to compete and become profitable.
Security breaches, cyber-security incidents and other disruptions could compromise ourthe Company’s information and impact ourthe Company’s business, financial condition or results of operations.
The Company relies on networks, information management software and other technology, or information systems, including the Internet and third-party hosted services, to support a variety of business processes and activities, including procurement and supply chain, manufacturing, distribution, invoicing, order processing and collection of payments. The Company uses information systems to process financial information and results of operations for internal reporting purposes and to comply with regulatory financial reporting, legal and tax requirements. In addition, the Company depends on information systems for digital marketing activities and electronic communications among ourthe Company’s locations around the world and between company personnel as well as customers and suppliers. Because information systems are critical to many of ourthe Company’s operating activities, ourthe Company’s business processes may be impacted by system shutdowns or service disruptions. These disruptions may be caused by failures during routine operations such as system upgrades or user errors, as well as network or hardware failures, malicious or disruptive software, computer hackers, geopolitical events, natural disasters, failures or impairments of telecommunications networks, or other catastrophic events. These events could result in unauthorized disclosure of material confidential information. If ourthe Company’s information systems suffer severe damage, disruption or shutdown and the Company business continuity plans do not effectively resolve the issues in a timely manner, wethe Company could experience delays in reporting ourthe Company’s financial results and wethe Company may lose revenue and profits as a result of ourthe Company’s inability to timely manufacture, distribute, invoice and collect payments. Misuse, leakage or falsification of information could result in a violation of data privacy laws and regulations and damage ourthe Company’s reputation and credibility, and could expose usthe Company to liability. The Company may also be required to spend significant financial and other resources to remedy the damage caused by a security breach or to repair or replace networks and information systems. Like most major corporations, the Company’s information systems are a target of attacks. As
A cyber security attack or other incident that bypasses the Company’s information systems security could cause a security breach which may lead to a material disruption to the Company’s information systems infrastructure or business and may involve a significant loss of December 2018, webusiness or patient health information. If a cyber security attack or other unauthorized attempt to access the Company’s systems or facilities were successful, it could result in the theft, destructions, loss, misappropriation or release of confidential information or intellectual property, and could cause operational or business delays that may materially impact the Company’s ability to provide various healthcare services. Any successful cyber security attack or other unauthorized attempt to access the Company’s systems or facilities also could result in negative publicity which could damage the Company’s reputation or brand with the Company’s patients, referral sources, payors or other third parties and could subject the Company to a number of adverse consequences, the vast majority of which are not insurable, including but not limited to disruptions in the Company’s operations, regulatory and other civil and criminal penalties, fines, investigations and enforcement actions (including, but not limited to, those arising from the SEC, Federal Trade Commission, Office of Civil Rights, the OIG or state attorneys general), fines, private litigation with those affected by the data breach, loss of customers, disputes with payors and increased operating expense, which either individually or in the aggregate could have a material adverse effect on the Company’s business, financial position, results of operations and liquidity.
The Company has not had any disruptions to ourits information systems that have materially affected ourits business, financial condition or results of operations. However, there can be no assurance that such disruptions will notmay occur and have a material adverse effect on usthe Company in the future.
Changes in accounting standards and estimates could have a material adverse effect on ourthe Company’s results of operations and financial position.
Generally accepted accounting principles and the related authoritative guidance for many aspects of ourthe Company’s business, including revenue recognition, inventories, warranties, leases, income taxes, expected credit losses, fair-value measurements, and stock-based compensation, are complex and involve subjective judgments. Changes in these rules or changes in the underlying estimates, assumptions or judgments by ourthe Company’s management could have a material adverse effect on ourthe Company’s results of operations and may retroactively affect previously reported results. For example, recently issued authoritative guidance for lease accounting willcredit losses may result in a significant increaseimpact to long-term assets and liabilities given we have a significant number of leases.allowance for doubtful accounts.
The Company'sCompany’s ability to access credit on favorable terms, if necessary, for the funding of ourthe Company’s operations and capital projects may be limited due to changes in credit markets.
TheOn July 9, 2020, the Company recently revisedterminated its Revolving Credit Facility with Wells Fargo Bank, N.A. The Original Revolving Line of Credit contained financial and other covenants as well as the maintenance of a leverage ratio not to exceed 2.5 to 1.0 and a TTM adjusted EBITDA of not less than $10 million. During the third quarter of 2018, the Company determined that it was in violation of certain financial covenants in the Original Revolving Line of Credit. Upon receipt of this notice, wesubsequently entered into discussions with Wells Fargo to amend and revise certain terms of the Original Revolving Line of Credit. Following the end of the Company’s third quarter, on or about November 2, 2018, it entered into a First Amendment and Waiver to the Loan and Security Agreement with Wells FargoSilicon Valley Bank (the “First Amended“SVB Revolving Line of Credit”). The First Amendedagreement provides for a four-year secured revolving loan facility in an aggregate principal amount of up to $30.0 million. The SVB Revolving Line of Credit provided for an original principal amountmatures on July 9, 2024. As of $15 million, withDecember 31, 2020, the ability to request an additional $10 million and a waiverCompany had not drawn on this credit facility.
A violation of any existing defaultsof the covenants could result in a default under the OriginalSVB Revolving Line of Credit as long asthat would permit Silicon Valley Bank to restrict the Company is in compliance withCompany’s ability to further access the termsrevolving line of credit for loans and letters of credit and require the First Amended Revolving Lineimmediate repayment of Credit, including revised financial and otherany outstanding loans under the agreement. In addition, these covenants as well.
Subsequentare subject to December 2018,renegotiation at the Company again determined that it was in violationbeginning of certain financial covenantseach fiscal year, which further reduces the Company’s ability to anticipate whether this source of capital will continue to be available in the First Amended Revolving Line of Credit. We again entered into discussions with Wells Fargo to amend and revise certain terms of the First Amended Revolving Line of Credit. On or about, March 11, 2019 the Company entered into a Second Amendment and Waiver to the Loan and Security Agreement with Wells Fargo (the “Second Amended Revolving Line of Credit”). The Second Amended Revolving Line of Credit requires the Company to maintain a minimum cash balance of $15 million at Wells Fargo, but removes all other covenants so long as no money is drawn on the line of credit. At such time as the Company elects to draw on the Second Amended Revolving Line of Credit, however, the Company must be in compliance with the various financial covenants or it will not be able to access the credit.near term.
Additionally, although the Company does not currently carry any debt, in the past, the credit markets and the financial services industry have experienced disruption characterized by the bankruptcy, failure, collapse or sale of various financial institutions, increased volatility in securities prices, diminished liquidity and credit availability and intervention from the U.S. and other governments. Continued concerns about the systemic impact of potential long-term or widespread downturn, energy costs, geopolitical issues, the availability and cost of credit, the global commercial and residential real estate markets and related mortgage markets and reduced consumer confidence have contributed to increased market volatility. The cost and availability of credit has been and may continue to be adversely affected by these conditions. The Company cannot be certain that funding for ourthe Company’s capital needs will be available from ourthe Company’s existing financial institutions and the credit markets if needed, and if available, to the extent required and on acceptable terms. The SVB Revolving Line of Credit Facility terminates on May 30, 2021July 9, 2024 and if the Company cannot renew or refinance this facility or obtain funding when needed, in each case on acceptable terms, such conditions may have an adverse effect on ourthe Company’s revenues and results of operations.
The Company’sCompany’s ability to report timely and accurate information could be negatively impacted by its plan to implement a new accounting and enterprise resource planning (“(“ERP”ERP”) system.
The Company is in the process of implementing a new accounting and ERP system. The Company has not previously had a comprehensive ERP system and to date has relied on a myriad of non-integrated systems, as well as manual processes. A system implementation of this magnitude entails a significant degree of inherent risk. The key elements of this implementation include the conversion of data from existing systems to the new system and the design of the new system to process and report financial and other transactions in an accurate and complete manner. If these, or other aspects of the implementation are not executed successfully, then its ability to report timely and accurate information could be negatively impacted. Failure to report required information in a timely orand accurate fashion could result in financial penalties, fines and other administrative actions. Such events could have a material adverse effect on ourthe Company’s total enterprise value and stock price.
Additionally, the process of implementing a new ERP system is capital intensive and includes the inherent risk of incurring significant additional costs should the time and resourceresources requirements of the implementation be greater than what the Company currently anticipates.
Macroeconomic political and market conditions, and catastrophic events may adversely affect ourthe Company’s business, results of operations, financial condition and stock price.the trading price of the notes and the stock.
OurThe Company’s business is influenced by a range of factors that are beyond ourthe Company’s control, including:
● | general macro-economic and business conditions in the Company’s key markets of North America, Japan, Asia Pacific, the Middle East, Europe and Australia; | |
● | the lack of credit financing, or an increase in the cost of borrowing, for some of the Company’s potential customers due to increasing interest rates and lending requirements; | |
● | the overall demand for the Company’s products by the core market specialties of dermatologists and plastic surgeons; | |
● | the timing and success of new product introductions by the Company or the Company’s competitors or any other change in the competitive landscape of the market for non-surgical aesthetic procedures, including consolidation among the Company’s competitors; | |
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| the level of awareness of aesthetic procedures and the market adoption of the Company’s products; |
● | changes in the Company’s pricing policies or those of the Company’s competitors; |
● | governmental budgetary constraints or shifts in government spending priorities; |
● | general political developments, both domestic and in the Company’s foreign markets, including economic and political uncertainty caused by elections; |
● | natural disasters; |
● | tax law changes; |
● | currency exchange rate fluctuations; and |
● | any trade restrictions or higher import taxes that may be imposed by foreign countries against products sold internationally by U.S. companies. |
Macroeconomic developments, like global recessions and financial crises could negatively affect ourthe Company’s business, operating results, or financial condition which, in turn, could adversely affect ourthe Company’s stock price. A general weakening of, and related declining corporate confidence in, the global economy or the curtailment in government or corporate spending could cause current or potential customers to reduce their budgets or be unable to fund product or upgrade application purchases, which could cause customers to delay, decrease or cancel purchases of ourthe Company’s products and services or cause customers not to pay usthe Company or to delay paying usthe Company for previously purchased products and services.
In addition, political unrest in regions like the Middle East, terrorist attacks around the globe and the potential for other hostilities in various parts of the world, potential public health crises and natural disasters continue to contribute to a climate of economic and political uncertainty that could adversely affect ourthe Company’s results of operations and financial condition, including ourthe Company’s revenue growth and profitability.
Macroeconomic declines, negative political developments, adverse market conditions and catastrophic events may cause a decline in ourthe Company’s revenue, negatively affect ourthe Company’s operating results, adversely affect ourthe Company’s cash flow and could result in a decline in ourthe Company’s stock price.
The price of the Company’s common stock has decreased by approximately 60% for the twelve months ended December 31, 2018 and may fluctuate substantially due to several factors, some of which are discussed below. Further, the Company has a relatively limited number of shares of common stock outstanding, a large portion of which is held by a small number of investors, which could result in the increase in volatility of its stock price.
The price of the Company’s common stock has decreased by approximately 60% for the twelve months ended December 31, 2018 due in part to the deceleration in total revenue growth and profitability and other factors. As a result of our relatively small public float, our common stock may be less liquid than the stock of companies with broader public ownership. Among other things, trading of a relatively small volume of our common stock may have a greater impact on the trading price for our shares than would be the case if our public float were larger. The public market price of our common stock has in the past fluctuated substantially and, due to the current concentration of stockholders, may continue to do so in the future.
The market price for our common stock could also be affected by a number of other factors, including:
● the general market conditions unrelated to our operating performance;
● sales of large blocks of our common stock, including sales by our executive officers, directors and our large institutional investors;
● quarterly variations in our, or our competitors’, results of operations;
● actual or anticipated changes or fluctuations in our results of operations;
● actual or anticipated changes in analysts’ estimates, investors’ perceptions, recommendations by securities analysts or our failure to achieve analysts’ estimates;
● the announcement of new products, service enhancements, distributor relationships or acquisitions by us or our competitors;
● the announcement of the departure of a key employee or executive officer by us or our competitors;
● regulatory developments or delays concerning our, or our competitors’ products; and
● the initiation of any litigation by us or against us.
Actual or perceived instability and / or volatility in our stock price could reduce demand from potential buyers of our stock, thereby causing our stock price to either remain depressed or to decline further. In addition, if the market for medical-device company stocks or the stock market in general experiences a loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, results of operations or financial condition. The trading price of our common stock might also decline in reaction to events that affect other companies in our industry even if these events do not directly affect us. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been brought against that company. Any future securities litigation could result in substantial costs and divert our management’s attention and resources from our business. This could have a material adverse effect on our business, results of operations and financial condition.
The Company may fail to meet its publicly announced guidance or other expectations about its business and future operating results, which could cause its stock price to decline.
The Company started providing, and may continue to provide, financial guidance about its business and future operating results. In developing this guidance, the Company’s management must make certain assumptions and judgments about its future operating performance, including but not limited to projected hiring of sales professionals, growth of revenue in the aesthetic device market, increase or decrease of its market share, costs of production of its recently introduced products, and stability of the macro-economic environment in our key markets. Furthermore, analysts and investors may develop and publish their own projections of our business, which may form a consensus about our future performance. The Company’s business results may vary significantly from such guidance or that consensus due to a number of factors, many of which are outside of our control, and which could adversely affect its operations and operating results. Furthermore, if the Company makes downward revisions of our previously announced guidance, or if our publicly announced guidance of future operating results fails to meet expectations of securities analysts, investors or other interested parties, the price of our common stock could decline.
To successfully market and sell ourthe Company’s products internationally, the Company must address many issues that are unique to the Company'sCompany’s international business. Furthermore, international expansion is a key component of ourthe Company’s growth strategy, although ourthe Company’s international operations and foreign transactions expose usthe Company to additionaladditional operational challenges that the Company might not otherwise face.
The Company is focused on international expansion as a key component of ourits growth strategy and havehas identified specific areas of opportunity in various international markets. International revenue is a material component of ourthe Company’s business strategy and represented 37%48% of ourits total revenue in 20182020 compared to 38%42% of ourthe Company’s total revenue in 2017.2019. The Company depends on third-party distributors andemploys a direct sales force in the major markets throughout Europe as well as Canada, Japan and Australia/New Zealand while using third-party distributors to sell its products internationally,in several other country in the Middle East, Asia, and theSouth America in particular. The Company may be unable to increase or maintain its level of international revenue.revenue due to supply chain disruptions or loss of distributor relationship.
The Company has experienced significant turnover of our internationalthe Company’s North America sales team induring the past. For instance, the Company announced on February 9, 2018, that Miguel Pardos resigned his position as Executive Vice President, International Salesfirst quarter of Cutera, effective on February 28, 2018. Cutera reassigned Mr. Pardos’ duties among existing members of the International team.2020. Though the departurethese departures did not have an adverse effect on the Company'sCompany’s international sales, itthey added additional pressure on the existing members.global sales team. While the Company continues to have a direct sales and service organization in Australia, New Zealand, Japan, France, Belgium, Spain, Germany, Switzerland and the United Kingdom, a significant portion of its international revenue is generated through its network of distributors. Though the Company continues to evaluate and replace non-performing distributors and has recently brought greater focus on collaboratingto collaboration with its distributordistribution partners, there can be no assurance given that these initiatives will result in improved international revenue or profitability in the future.
To grow the Company’s business, it will needis essential to improve productivity in current sales territories and expand into new territories. However, direct sales productivity may not improve and distributors may not accept ourthe Company’s business or commit the necessary resources to market and sell ourthe Company’s products toat the level of ourCompany’s expectations. If the Company is not able to increase or maintain international revenue growth, ourthe Company’s total revenue, profitability and stock price may be adversely impacted.
If the Company fails to renew any of its distribution agreements as they expire under the terms of the particular agreement, its revenues and cash flow may be adversely affected.
The Company's business may suffer if any of its distribution partners terminates or otherwise fails to renew its distribution agreement with the Company and the Company is otherwise unable to replace such agreement with a distribution agreement containing similar terms. For example, the Company's distribution agreement with ZO to distribute certain of their proprietary skincare products in Japan expires in June 2021. If ZO fails to renew the distribution agreement or it terminates the distribution agreement early for any reason, the Company's revenues and cash flow may be adversely affected.
Economic and other risks associated with international sales and operationsoperations could adversely affect the Company’sCompany’s business.
In 2018, 37%2019, 42% of ourthe Company’s total revenue was from customers outside of North America. The Company expects its sales from international operations and export sales to continue to be a significant portion of ourthe Company’s revenue. The Company has placed a particular emphasis on increasing its growth and presence in international markets. The Company’s international operations and sales are subject, in varying degrees, to risks inherent in doing business outside the U.S. These risks include:
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| changes in trade protection measures, including embargoes, tariffs and other trade barriers, and import and export regulations and licensing requirements; |
● | instability and uncertainties arising from the global geopolitical environment, such as economic nationalism, populism, protectionism and anti-global sentiment; |
● | changes in tax laws and potential negative consequences from the interpretation, application and enforcement by governmental tax authorities of tax laws and policies; |
● | unanticipated changes in other laws and regulations or in how such provisions are interpreted or administered; |
● | reduced protection for intellectual property rights in some countries and practical difficulties of enforcing intellectual property and contract rights abroad; |
● | possibility of unfavorable circumstances arising from host country laws or regulations, including those related to infrastructure and data transmission, security and privacy; |
● | currency exchange rate fluctuations and restrictions on currency repatriation; | |
● | difficulties and expenses related to implementing internal control over financial reporting and disclosure controls and procedures; | |
● | disruption of sales from labor and political disturbances; | |
● | regional safety and security considerations; | |
● | increased costs and risks in developing, staffing and simultaneously managing global sales operations as a result of distance as well as language and cultural differences; | |
● | increased management, travel, infrastructure and legal compliance costs associated with having multiple international operations; | |
● | lengthy payment cycles and difficulty in collecting accounts receivable; | |
● | preference for locally-produced products, as well as protectionist laws and business practices that favor local companies; | |
● | outbreak or escalation of insurrection, armed conflict, terrorism or war; and | |
● | supply chain disruption or the loss of distributor relationships. |
Changes in the geopolitical or economic environments in the countries in which the Company operates could have a material adverse effect on ourthe Company’s financial condition, results of operations or cash flows. For example, changes in U.S. policy regarding international trade, including import and export regulation and international trade agreements, could also negatively impact ourthe Company’s business. In 2018, the U.S. imposed tariffs on certain goods imported from China and certain other countries, which has resulted in retaliatory tariffs by China and other countries. Additional tariffs imposed by the U.S. on a broader range of imports, or further retaliatory trade measures taken by China or other countries in response, could adversely impact ourthe Company’s financial condition and results of operations.
The Company’s global operations are required to comply with the U.S. Foreign Corrupt Practices Act of 1977, as amended (“FCPA”), Chinese anti-corruptionanti- corruption laws, U.K. Bribery Law, and similar anti-bribery laws in other jurisdictions, and with U.S. and foreign export control, trade embargo and customs laws. If the Company fails to comply with any of these laws, the Company could suffer civil and criminal sanctions.
Additionally, the Company continues to monitor Brexit and its potential impacts on ourthe Company’s results of operations and financial condition. VolatilityFollowing the end of the “Brexit” Transition Period, from 1 January 2021 onwards, the Medicines and Healthcare Products Regulatory Agency (“MHRA”) will be responsible for the UK medical device market. The new regulations will require medical devices to be registered with the MHRA (but manufacturers will be given a grace period of four to 12 months to comply with the new registration process). Manufacturers based outside the UK will need to appoint a UK Responsible Person to register devices with the MHRA in foreign currencies is expected to continue asline with the United Kingdom executes its exit fromgrace periods. By July 1, 2023, in the UK (England, Scotland, and Wales), all medical devices will require a UKCA (UK Conformity Assessed) mark but CE marks issued by EU notified bodies will remain valid until this time. However, UKCA marking alone will not be recognized in the EU. IfThe rules for placing medical devices on the United Kingdom's membershipNorthern Ireland market will differ from those in the EU terminates without an agreement (referred to as a “hard Brexit”), there could be increased costs from re-imposition of tariffs on trade between the United Kingdom and EU, increased transportation costs, shipping delays because of the need for customs inspections and procedures and shortages of certain goods. The United Kingdom will also need to negotiate its own tax and trade treaties with countries all over the world, which could take years to complete and could result in a material impact to our consolidated revenue, earnings and cash flow.UK.
In addition to the general risks that the Company faces outside the U.S., ourthe Company’s operations in emerging markets could involve additional uncertainties for us, including risks that governments may impose withholding or other taxes on remittances and other payments to us, or the amount of any such taxes may increase; governments may seek to nationalize ourthe Company’s assets; or governments may impose or increase investment barriers or other restrictions affecting ourthe Company’s business. In addition, emerging markets pose other uncertainties, including the difficulty of enforcing agreements, challenges collecting receivables, protection of ourthe Company’s intellectual property and other assets, pressure on the pricing of ourthe Company’s products and services, higher business conduct risks, ability to hire and retain qualified talent and risks of political instability. The Company cannot predict the impact such events might have on ourthe Company’s business, financial condition and results of operations.
In addition, compliance with laws and regulations applicable to ourthe Company’s international operations increases ourthe Company’s cost of doing business in foreign jurisdictions. The Company may be unable to keep current with changes in foreign government requirements and laws as they change from time to time. Failure to comply with these regulations could have adverse effects on ourthe Company’s business. In many foreign countries it is common for others to engage in business practices that are prohibited by ourthe Company’s internal policies and procedures or U.S. regulations applicable to us. In addition, although the Company has implemented policies and procedures designed to ensure compliance with these laws and policies, there can be no assurance that all of ourthe Company’s employees, contractors, distributors and agents will comply with these laws and policies. Violations of laws or key control policies by ourthe Company’s employees, contractors, distributors or agents could result in delays in revenue recognition, financial reporting misstatements, fines, penalties, or the prohibition of the importation or exportation of ourthe Company’s offerings and could have a material adverse effect on ourthe Company’s business operations and financial results.
To successfully market and sell third party products internationally, the Company must address many issues that are unique to the related distribution arrangements which could reduce ourthe Company’s available cash reserves and negatively impact ourthe Company’s profitability.
The Company has entered into distribution arrangements pursuant to which the Company utilizes its sales force and distributors to sell products manufactured by other companies. In Japan, the Company has a non-exclusive right to distribute a Q-switched laser product manufactured by a third party OEM. The Company also has an exclusive agreement with ZO to distribute certain of their proprietary skincare products in Japan. Each of these agreements requires usthe Company to purchase annual minimum dollar amounts of their products. Additionally, the Company has entered into distribution arrangements with other companies to promote and sell the Secret RF and Juliet products.
Each of these distribution agreements presents its own unique risks and challenges. For example, to sell skincare products the Company needs to invest in creating a sales structure that is experienced in the sale of such products and not in capital equipment. The Company needs to commit resources to train ourthe Company’s sales force, obtain regulatory licenses, and develop new marketing materials to promote the sale of these products. In addition, the minimum commitments and other costs of distributing products manufactured by these companies may exceed the incremental revenue that the Company derives from the sale of their products, thereby negatively impacting ourthe Company’s profitability and reducing ourthe Company’s available cash reserves.
If the Company does not make the minimum purchases required in the distribution contracts, or if the third party manufacturer revokes ourthe Company’s distribution rights, the Company could lose the distribution rights of the products, which would adversely affect the Company’s future revenue, results of operations, cash flows and its stock price.
The Company offers offers credit terms to some qualified customers and also to leasing companies to finance the purchase of its products. In the event that any of these customers default onon the amounts payable to us,the Company, its earnings may be adversely affected.
The Company generally offers credit terms of 30 to 90 days to qualified customers. In addition, from time to time, it offers certain key international distributors, with whom the Company has had an extended period of relationship and payment history, payment terms that are significantly longer than the regular 30 to 90 day terms. This allows such international distributordistribution partners to have its products in stock and provide its products to customers on a timely basis. As of December 31, 2018, one international distributor partner accounted for 3.4% of our outstanding accounts receivable balance.
While the Company believes it has an adequate basis to ensure that it collects its accounts receivable, the Company cannot provide any assurance that the financial position of customers to whom it has provided payment terms will not change adversely before the Company receives payment. In the event that there is a default by any of the customers to whom the Company has provided credit terms, the Company may recognize a bad debtcredit loss provision write-off charge in ourthe Company’s general and administrative expenses. If this bad debtwrite-off charge is material, it could negatively affect ourthe Company’s future results of operations, cash flows and its stock price.
Additionally, in the event of deterioration of general business conditions or the availability of credit, the financial strength and stability of ourthe Company’s customers and potential customers may deteriorate over time, which may cause them to cancel or delay their purchase of its products. In addition, the Company may be subject to increased risk of non-payment of its accounts receivables. The Company may also be adversely affected by bankruptcies or other business failures of ourthe Company’s customers and potential customers. A significant delay in the collection of funds or a reduction of funds collected may impact ourthe Company’s liquidity or result in bad debts.credit losses.
The Company’sCompany’s ability to effectively compete and generate additional revenue from new and existing products depends upon the Company’ the Company’ss ability to distinguish the Company and its products from the competitors and their products, and to develop and effectively market new and existing products. The Company’s sCompany’uccesss success is dependent on many factors, including the following:
● | speed of new and innovative product development; |
● | effective strategy and execution of new product launches; |
● | identification and development of clinical support for new indications of the Company’s existing products; |
● | product performance; |
● | product pricing; |
● | quality of customer support; |
● | development of successful distribution channels, both domestically and internationally; and |
● |
|
To compete effectively, the Company has to demonstrate that its new and existing products are attractive alternatives to other devices and treatments, by differentiating ourthe Company’s products on the basis of such factors as innovation, performance, brand name, service, and price. This is difficult to do, especially in a crowded aesthetic market. Some of the Company’s competitors have newer or different products and more established customer relationships than the Company does, which could inhibit ourthe Company’s market penetration efforts. For example, the Company has encountered, and expectexpects to continue to encounter, situations where, due to pre-existing relationships, potential customers decideddecide to purchase additional products from ourthe Company’s competitors. Potential customers also may need to recoup the cost of products that they have already purchased from ourthe Company’s competitors and may decide not to purchase ourthe Company’s products, or to delay such purchases. If the Company is unable to increase ourthe Company’s market penetration or compete effectively, its revenue and profitability will be adversely impacted.
The Company competes competes against companies that offeroffer alternative solutions to its products, have greater resources, or have greater resources, a larger installed base of customers and broader product offerings than ours.the Company’s. In addition, increased consolidation in the Company’s Company’s industry may lead to increased competition. If the Company is not able to effectively compete with these companies, it may harm its business.
The medical technology and aesthetic product markets are highly competitive and dynamic and are characterized by rapid and substantial technology development and product innovations. The Company’s products compete against conventional non-energy-based treatments, such as electrolysis, Botox and collagen injections, chemical peels, microdermabrasion and sclerotherapy. The Company’s products also compete against laser and other energy-basedenergy- based products offered by public companies. Further, other companies could introduce new products that are in direct competition with ourthe Company’s products. The Company may also face competition from manufacturers of pharmaceutical and other products that have not yet been developed. Competition with these companies could result in reduced selling prices, reduced profit margins and loss of market share, any of which would harm ourthe Company’s business, financial condition and results of operations.
Recently, thereThere has been consolidation in the aesthetic industry leading to companies combining their resources, which increases competition and could result in increased downward pressure on ourthe Company’s product prices. For example, Allergan acquired Zeltiq in April 2017, Hologic acquired Cynosure in March 2017, XIO Group acquired Lumenis in September 2015, and Valeant acquired Solta in January 2014. These consolidationsConsolidations have created newly-combined entities with greater financial resources, deeper sales channels and greater pricing flexibility than the Company. Rumored or actual consolidation of ourthe Company’s partners and competitors could cause uncertainty and disruption to ourthe Company’s business and can cause ourthe Company’s stock price to fluctuate.
The energy-based aesthetic market faces competition from non-energy-based medical products, such as Botox and collagen injections. Other alternatives to the use of our products include electrolysis, a procedure involving the application of electric current to eliminate hair follicles, and chemical peels. The Company may also face competition from manufacturers of pharmaceutical and other products that have not yet been developed.
If there is not sufficient consumer demand for thethe procedures performed with the Company’sCompany’s products, practitioner demand for its products could be inhibited, resulting in unfavorable operating results and reduced growth potential.
Continued expansion of the global market for laser and other-energy-based aesthetic procedures is a material assumption of ourthe Company’s business strategy. Most procedures performed using ourthe Company’s products are elective procedures not reimbursable through government or private health insurance, with the costs borne by the patient. The decision to utilize ourthe Company’s products may therefore be influenced by a number of factors, including:
●
| consumer disposable income and access to consumer credit, which as a result of an unstable economy, maybe significantly impacted; |
● | the cost, safety and effectiveness of alternative treatments, including treatments which are not based upon laser or other energy-based technologies and treatments which use pharmaceutical products; |
● | the success of the Company’s sales and marketing efforts; and |
● | the education of the Company’s customers and patients on the benefits and uses of the Company’s products, compared to competitors’ products and technologies. |
If, as a result of these factors, there is not sufficient demand for the procedures performed with ourthe Company’s products, practitioner demand for ourthe Company’s products could be reduced, which could have a material adverse effect on ourthe Company’s business, financial condition, revenue and result of operations.
The Company's products and its operations are subject to extensive government regulation and oversight in the United States. If the Company fails to obtain or maintain necessary regulatory clearances or approvals for its products, or if approvals or clearances for future products are delayed or not issued, it will negatively affect its business, financial condition and results of operations.
The Company's laser products are medical devices subject to extensive regulation in the United States and elsewhere, including by the FDA and its foreign counterparts. Government regulations specific to medical devices are wide ranging and govern, among other things:
● | product design, development, manufacture, and release; |
● | laboratory and clinical testing, labeling, packaging, storage and distribution; |
● | product safety and efficacy; |
● | premarketing clearance or approval; |
● | service operations; |
● | record keeping; |
● | product marketing, promotion and advertising, sales and distribution; |
● | post-marketing surveillance, including reporting of deaths or serious injuries and recalls and correction and removals; | |
● | post-market approval studies; and | |
● | product import and export. |
The FDA classifies medical devices into one of three classes on the basis of the intended use of the device, the risk associated with the use of the device for that indication, as determined by the FDA, and on the controls deemed by the FDA to be necessary to reasonably ensure their safety and effectiveness.
Class I includes devices with the lowest risk to the patient and are those for which safety and effectiveness can be assured by adherence to the FDA’s General Controls for medical devices, which include compliance with the applicable portions of the QSR facility registration and product listing, reporting of adverse medical events, and truthful and non-misleading labeling, advertising, and promotional materials. Class II devices are subject to the FDA’s General Controls, and special controls as deemed necessary by the FDA to ensure the safety and effectiveness of the device. These special controls can include performance standards, post-market surveillance, patient registries and FDA guidance documents.
While most Class I devices are exempt from the premarket notification requirement, manufacturers of most Class II devices are required to submit to the FDA a premarket notification under Section 510(k) of the FDCA requesting permission to commercially distribute the device. The FDA’s permission to commercially distribute a device subject to a 510(k) premarket notification is generally known as 510(k) clearance. Devices deemed by the FDA to pose the greatest risks, such as life sustaining, life supporting or some implantable devices, or devices that have a new intended use, or use advanced technology that is not substantially equivalent to that of a legally marketed device, are placed in Class III, requiring approval of a PMA application. Some pre-amendment devices are unclassified, but are subject to FDA’s premarket notification and clearance process in order to be commercially distributed. The Company's currently marketed products are Class II devices subject to 510(k) clearance, which the Company has obtained from the FDA.
Before a new medical device, or a new intended use of, claim for, or significant modification to an existing device, can be marketed in the United States, a company must first submit an application for and receive either 510(k) clearance pursuant to a premarket notification submitted under Section 510(k) of the FDCA, de-novo classification, or PMA approval from the FDA, unless an exemption applies. The 510(k), de-novo or PMA processes can be expensive, lengthy and unpredictable. The FDA’s 510(k) clearance process usually takes from three to 12 months, but can last longer. The process of obtaining a PMA approval is much more costly and uncertain than the 510(k) clearance process and generally takes from one to three years, or even longer, from the time the application is filed with the FDA. In addition, a PMA approval generally requires the performance of one or more clinical trials. Despite the time, effort and cost, a device may not be approved or cleared by the FDA. Any delay or failure to obtain necessary regulatory clearances or approvals could harm its business. Furthermore, even if the Company is granted regulatory clearances or approvals, they may include significant limitations on the indicated uses for the device, which may limit the market for the device.
The Company has obtained 510(k) clearances to market its products, such as the Juliet device. The FDA or other regulators could delay, limit, or deny clearance or approval of a device for many reasons, including:
● | The Company's inability to demonstrate to the satisfaction of the FDA or the applicable regulatory entity or notified body that the Company's currently marketed devices, or any other future device, and any accessories are substantially equivalent to a legally marketed predicate device or safe or effective for their proposed intended uses; |
● | the disagreement of the FDA with the design or implementation of any clinical trials or the interpretation of data from preclinical studies or clinical trials; |
● | serious and unexpected adverse device effects experienced by participants in its clinical trials; |
● | the insufficiency of the data from preclinical studies or clinical trials to support clearance or approval, where required; |
● | our inability to demonstrate that the clinical and other benefits of the device outweigh the risks; |
● | the failure of its manufacturing process or facilities to meet applicable requirements; and |
● | the potential for approval policies or regulations of the FDA or applicable foreign regulatory bodies to change significantly in a manner rendering its clinical data or regulatory filings insufficient for clearance or approval. |
The regulations to which the Company is subject are complex and have tended to become more stringent over time. Regulatory changes could result in restrictions on the Company's ability to carry on or expand its operations, higher than anticipated costs or lower than anticipated sales. The FDA enforces these regulatory requirements through, among other means, periodic unannounced inspections. The Company does not know whether it will be found compliant in connection with any future regulatory inspections. Moreover, the FDA and state authorities have broad enforcement powers. Its failure to comply with applicable regulatory requirements could result in enforcement action by any such agency. If any of these events were to occur, it would negatively affect the Company's business, financial condition and results of operations.
If the Company fails fails to comply with applicable regulatory requirements, it could result in enforcement action by the U.S. Food and Drug Administration,FDA, federal and state agencies or international regulatory bodies and ourthe Company’s commercial operations would be harmed.
The Company’s products are medical devices that are subject to extensive regulation in the U.S. by the FDA for manufacturing, labeling, sale, promotion, distribution and shipping.Theshipping. The FDA, state authorities and international regulatory bodies have broad enforcement powers. If the Company fails to comply with any U.S. law or any of the applicable regulatory requirements of the FDA, or federal or state agencies, or one of the international regulatory bodies, it could result in enforcement action by the agencies, which may include any of the following sanctions:
● warning letters, fines, injunctions, consent decrees and civil penalties;
●
| warning letters, fines, injunctions, consent decrees and civil penalties; |
● | repair, replacement, recall or seizure of the Company’s products; |
● | operating restrictions or partial suspension or total shutdown of production; |
● | refusing the Company’s requests for 510(k) clearance of new products, new intended uses, or modifications to existing products; |
● | withdrawing 510(k) clearance or pre-market approvals that have already been granted; and |
● | criminal prosecution. |
Federal regulatory reforms and changes occurring at the FDA could adverselyadversely affect the Company’sCompany’s ability to sell its products profitably and financial condition.
From time to time, legislation is drafted and introduced in Congress that could significantly change the statutory provisions governing the clearance or approval, manufacture and marketing of a device. It is impossible to predict whether legislative changes will be enacted or FDA regulations, guidance or interpretations changed, and what the impact of such changes, if any, may be.
In addition, FDA regulations and guidance are often revised or reinterpreted by the agency in ways that may significantly affect the Company’s business and ourthe Company’s products. Changes in FDA regulations may lengthen the regulatory approval process for medical devices and require additional clinical data to support regulatory clearance for the sale and marketing of ourthe Company’s new products. In addition, it may require additional safety monitoring, labeling changes, restrictions on product distribution or use, or other measures after the introduction of ourthe Company’s products to market. Either of these changes lengthen the duration to market, increase ourthe Company’s costs of doing business, adversely affect the future permitted uses of approved products, or otherwise adversely affect the market for its products.
For instance, on or about July 30, 2018, the FDA issued a public statement and sent letters to a number of companies in the medical aesthetics industry expressing concerns regarding “vaginal revitalization” procedures using energy-based devices. The Company’s Juliet device is promoted and used by physicians in procedures that are the subject of the FDA’s public warning. However, neither the Company nor its distribution partner were named in the announcement, and neither the Company nor its distribution partner have received a letter from the agency as of the date of this filing. Working with ourthe Company’s distribution partner and the FDA, the Company is assessing the potential parameters of an additional study regarding ourthe Company’s Juliet device to address the concerns highlighted in the FDA’s statement. However, there can be no assurances that wethe Company will reach an agreement with ourthe Company’s distribution partner on the execution details of such a study, or that such a study will be successful in addressing the FDA’s safety concerns with ourthe Company’s Juliet device.
Notwithstanding, the Company saw a significant slowdown in the sales of Juliet in the third and fourth quarters of 2018. The Company believes this relates to the safety letter, given the timing. The Company supports any action that helps ensure patient safety going forward. The Company has a robust, multi-functional process that reviews its promotional claims and materials to ensure they are truthful, not misleading, fair and balanced, and supported by sound scientific evidence.
Changes in funding or disruptions at the FDA and other government agencies caused by funding shortages or global health concerns could hinder their ability to hire and retain key leadership and other personnel, or otherwise prevent new or modified products from being developed, approved or commercialized in a timely manner or at all, or otherwise prevent those agencies from performing normal business functions on which the operation of the Company's business may rely, which could negatively impact its business.
The ability of the FDA to review and approve new products can be affected by a variety of factors, including government budget and funding levels, ability to hire and retain key personnel and accept the payment of user fees, and statutory, regulatory, and policy changes, and other events that may otherwise affect the FDA’s ability to perform routine functions. Average review times at the agency have fluctuated in recent years as a result. In addition, government funding of other government agencies on which the Company's operations may rely, including those that fund research and development activities is subject to the political process, which is inherently fluid and unpredictable.
Disruptions at the FDA and other agencies may also slow the time necessary for new product applications to be reviewed and/or approved by necessary government agencies, which would adversely affect its business. For example, in recent years, including for 35 days beginning on December 22, 2018, the U.S. government shut down several times and certain regulatory agencies, including the FDA, had to furlough critical employees and stop critical activities. Separately, in response to the COVID-19 pandemic, the FDA has indicated that it will consider alternative methods for inspections and could exercise discretion on a case-by-case basis to approve products based on a desk review, if a prolonged government shutdown occurs, or if global health concerns continue to prevent the FDA or other regulatory authorities from conducting their regular inspections, reviews, or other regulatory activities, it could significantly impact the ability of the FDA to timely review and process its regulatory submissions, which could have a material adverse effect on the Company's business.
If the Company fails fails to comply with the FDA’sFDA’s Quality System Regulation and laser performance standards, the Company’the Company’ss manufacturing operationsoperations could be halted, and its business would suffer.
The Company is currently required to demonstrate and maintain compliance with the FDA’s Quality System Regulation (the “QSR”). The QSR is a complex regulatory scheme that covers the methods and documentation of the design, testing, control, manufacturing, labeling, quality assurance, packaging, storage and shipping of ourthe Company’s products. Because ourthe Company’s products involve the use of lasers, ourthe Company’s products also are covered by a performance standard for lasers set forth in FDA regulations. The laser performance standard imposes specific record-keeping, reporting, product testing and product labeling requirements. These requirements include affixing warning labels to laser products, as well as incorporating certain safety features in the design of laser products.
The FDA enforces the QSR and laser performance standards through periodic unannounced inspections. The Company has had multiple quality system auditsinspections by the FDA, ouras well as audits the Company’s Notified Body, and other foreign regulatory agencies, with the most recent inspection by the FDA occurring under the Medical Device Single Audit Program in March, 2017.January 2021. There were no significant findings or observations as a result of this audit. Failure to take satisfactory corrective action in response to an adverse QSR inspection or its failure to comply with applicable laser performance standards could result in enforcement actions, including a public warning letter, a shutdown of ourthe Company’s manufacturing operations, a recall of its products, civil or criminal penalties, or other sanctions, such as those described in the preceding paragraph, which would cause its sales and business to suffer.
The Company is a sponsor of Biomedical Research. As such, the BIMO audits the Company and the Company is also subject to FDA regulations relating to the design and conduct of clinical trials. The Company areis subject to unannounced BIMO audits, with the most recent inspection by FDA occurring over 5 days in August 2016. There were no significant findings and only two observations as a result of this audit. OurThe Company’s responses to these observations were accepted by the FDA. Failure to take satisfactory corrective action in response to an adverse BIMO inspection or ourthe Company’s failure to comply with Good Clinical Practices could result in usthe Company no longer being able to sponsor Biomedical Research, the reversal of 510(k) clearances previously granted based on the results of clinical trials conducted to gain clinical data to support those 510(k) clearances, or enforcement actions, including a public warning letter, civil or criminal penalties, or other sanctions, such as those described in the preceding paragraph, which would cause ourthe Company’s sales and business to suffer.
If the Company modifies one of itsFDA-cleareddevices, it may need to seek a new clearance, which, if not granted, would prevent the Company fromfrom selling its modified products or cause it to redesign its products.
Any modifications to an FDA-cleared device that wouldcould significantly affect its safety or effectiveness or that would constitute a major change in its intended use would require a new 510(k) clearance or possibly a pre-market approval. The Company may not be able to obtain additional 510(k) clearance or premarket approvals for new products or for modifications to, or additional indications for, its existing products in a timely fashion, or at all. Delays in obtaining future clearance would adversely affect its ability to introduce new or enhanced products in a timely manner, which in turn would harm its revenue and future profitability.
The Company has made modifications to its devices in the past and may make additional modifications in the future that it believes do not or will not require additional clearance or approvals. If the FDA disagrees, and requires new clearances or approvals for the modifications, the Company may be required to recall and to stop marketing the modified devices, which could harm the Company’s operating results and require it to redesign its products.
The Company may be unable to obtain or maintain international regulatory qualifications or approvals for its current or future products and indications, whichwhich could harm its business.
Sales of the Company’s products outside the U.S. are subject to foreign regulatory requirements that vary widely from country to country. In addition, exports of medical devices from the U.S. are regulated by the FDA. Complying with international regulatory requirements can be an expensive and time-consumingtime- consuming process and approval is not certain. The time required for obtaining clearance or approvals, if required by other countries, may be longer than that required for FDA clearance or approvals, and requirements for such clearances or approvals may significantly differ from FDA requirements. The Company may be unable to obtain or maintain regulatory qualifications, clearances or approvals in other countries. The Company may also incur significant costs in attempting to obtain and in maintaining foreign regulatory approvals or qualifications. If the Company experience delays in receiving necessary qualifications, clearances or approvals to market its products outside the U.S., or if the Company fails to receive those qualifications, clearances or approvals, the Company may be unable to market its products or enhancements in international markets effectively, or at all, which could have a material adverse effect on ourthe Company’s business and growth strategy.
Any defects in the design, material or workmanshipworkmanship of its products may not be discovered prior to shipment to customers, whichwhich could materially increase its expenses, adversely impactimpact profitability and harm its business.
The design of the Company’s products is complex. To manufacture them successfully, the Company must procure quality components and employ individuals with a significant degree of technical expertise. If the Company’s designs are defective, or the material components used in its products are subject to wearing out, or if suppliers fail to deliver components to specification, or if its employees fail to properly assemble, test and package its products, the reliability and performance of its products willcould be adversely impacted.
If the Company’s products contain defects that cannot be repaired easily, inexpensively, or on a timely basis, the Company may experience:
●
| damage to the Company’s brand reputation; |
● | loss of customer orders and delay in order fulfillment; |
● | increased costs due to product repair or replacement; | |
● | inability to attract new customers; |
● | diversion of resources from the Company’s manufacturing and research and development departments into the Company’s service department; |
● | changes in share-based compensation; and |
● | legal action. |
The occurrence of any one or more of the foregoing could materially increase expenses, adversely impact profitability and harm ourthe Company’s business.
The Company's products may cause or contribute to adverse medical events or be subject to failures or malfunctions that the Company is required to report to the FDA, and if the Company fails to do so, the Company would be subject to sanctions that could harm its reputation, business, financial condition and results of operations. The discovery of serious safety issues with its products, or a recall of the Company's products either voluntarily or at the direction of the FDA or another governmental authority, could have a negative impact on the Company.
The Company is subject to the FDA’s medical device reporting regulations and similar foreign regulations, which require the Company to report to the FDA when the Company receives or becomes aware of information that reasonably suggests that one or more of its products may have caused or contributed to a death or serious injury or malfunctioned in a way that, if the malfunction were to recur, it could cause or contribute to a death or serious injury. The timing of its obligation to report is triggered by the date the Company becomes aware of the adverse event as well as the nature of the event. The Company may fail to report adverse events of which it becomes aware within the prescribed timeframe. The Company may also fail to recognize that it has become aware of a reportable adverse event, especially if it is not reported to the Company as an adverse event or if it is an adverse event that is unexpected or removed in time from the use of the product. If the Company fails to comply with its reporting obligations, the FDA could take action, including warning letters, untitled letters, administrative actions, criminal prosecution, imposition of civil monetary penalties, revocation of its device clearance or approval, seizure of its products or delay in clearance or approval of future products.
The FDA and foreign regulatory bodies have the authority to require the recall of commercialized products in the event of material deficiencies or defects in design or manufacture of a product or in the event that a product poses an unacceptable risk to health. The FDA’s authority to require a recall must be based on a finding that there is reasonable probability that the device could cause serious injury or death. The Company may also choose to voluntarily recall a product if any material deficiency is found. A government-mandated or voluntary recall by the Company could occur as a result of an unacceptable risk to health, component failures, malfunctions, manufacturing defects, labeling or design deficiencies, packaging defects or other deficiencies or failures to comply with applicable regulations. Product defects or other errors may occur in the future.
Depending on the corrective action the Company takes to redress a product’s deficiencies or defects, the FDA may require, or the Company may decide, that it will need to obtain new clearances or approvals for the device before the Company may market or distribute the corrected device. Seeking such clearances or approvals may delay its ability to replace the recalled devices in a timely manner. Moreover, if the Company does not adequately address problems associated with its devices, the Company may face additional regulatory enforcement action, including FDA warning letters, product seizure, injunctions, administrative penalties or civil or criminal fines.
Companies are required to maintain certain records of recalls and corrections, even if they are not reportable to the FDA. The Company may initiate voluntary withdrawals or corrections for its products in the future that the Company determines do not require notification of the FDA. If the FDA disagrees with its determinations, it could require the Company to report those actions as recalls and the Company may be subject to enforcement action. A future recall announcement could harm its reputation with customers, potentially lead to product liability claims against the Company and negatively affect its sales. Any corrective action, whether voluntary or involuntary, as well as defending itself in a lawsuit, will require the dedication of its time and capital, will distract management from operating its business and may harm its reputation and financial results.
Our products may in the future be subject to product recalls that could harm its reputation, business and financial results.
Medical devices can experience performance problems in the field that require review and possible corrective action. The occurrence of component failures, manufacturing errors, software errors, design defects or labeling inadequacies affecting a medical device could lead to a government-mandated or voluntary recall by the device manufacturer, in particular when such deficiencies may endanger health. The FDA requires that certain classifications of recalls be reported to the FDA within 10 working days after the recall is initiated. Companies are required to maintain certain records of recalls, even if they are not reportable to the FDA. The Company may initiate voluntary recalls involving its products in the future that the Company determines do not require notification of the FDA. If the FDA disagrees with its determinations, they could require the Company to report those actions as recalls. Product recalls may divert management attention and financial resources, expose the Company to product liability or other claims, harm its reputation with customers and adversely impact its business, financial condition and results of operations.
Clinical trials may be necessary to support future product submissions to the FDA. The clinical trial process is lengthy and expensive with uncertain outcomes, and often requires the enrollment of large numbers of patients, and suitable patients may be difficult to identify and recruit. Delays or failures in the Company's clinical trials will prevent it from commercializing any modified or new products and will adversely affect its business, operating results and prospects.
The Company has conducted clinical trials in the past and will likely conduct clinical trials in the future. Initiating and completing clinical trials necessary to support any future product candidates, will be time-consuming and expensive and the outcome uncertain. Moreover, the results of early clinical trials are not necessarily predictive of future results, and any product the Company advances into clinical trials may not have favorable results in later clinical trials. The results of preclinical studies and clinical trials of its products conducted to date and ongoing or future studies and trials of its current, planned or future products may not be predictive of the results of later clinical trials, and interim results of a clinical trial do not necessarily predict final results. The Company's interpretation of data and results from its clinical trials do not ensure that the Company will achieve similar results in future clinical trials. In addition, preclinical and clinical data are often susceptible to various interpretations and analyses, and many companies that have believed their products performed satisfactorily in preclinical studies and earlier clinical trials have nonetheless failed to replicate results in later clinical trials. Products in later stages of clinical trials may fail to show the desired safety and efficacy despite having progressed through nonclinical studies and earlier clinical trials. Failure can occur at any stage of clinical testing. The Company's clinical studies may produce negative or inconclusive results, and it may decide, or regulators may require us, to conduct additional clinical and non-clinical testing in addition to those the Company has planned.
● | the Company may be required to submit an IDE application to the FDA, which must become effective prior to commencing certain human clinical trials of medical devices, and the FDA may reject the Company's IDE application and notify the Company that it may not begin clinical trials; |
● | regulators and other comparable foreign regulatory authorities may disagree as to the design or implementation of its clinical trials; |
● | regulators and/or an IRB, or other reviewing bodies may not authorize the Company or its investigators to commence a clinical trial, or to conduct or continue a clinical trial at a prospective or specific trial site; | |
● | the Company may not reach agreement on acceptable terms with prospective contract research organizations, or CROs, and clinical trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites; |
● | clinical trials may produce negative or inconclusive results, and the Company may decide, or regulators may require the Company to conduct additional clinical trials or abandon product development programs; |
● | the number of subjects or patients required for clinical trials may be larger than the Company anticipates, enrollment in these clinical trials may be insufficient or slower than the Company anticipates, and the number of clinical trials being conducted at any given time may be high and result in fewer available patients for any given clinical trial, or patients may drop out of these clinical trials at a higher rate than the Company anticipates; |
● | the Company's third-party contractors, including those manufacturing products or conducting clinical trials on the Company's behalf, may fail to comply with regulatory requirements or meet their contractual obligations to the Company in a timely manner, or at all; | |
● | the Company might have to suspend or terminate clinical trials for various reasons, including a finding that the subjects are being exposed to unacceptable health risks; | |
● | the Company may have to amend clinical trial protocols or conduct additional studies to reflect changes in regulatory requirements or guidance, which it may be required to submit to an IRB and/or regulatory authorities for re-examination; | |
● | regulators, IRBs, or other parties may require or recommend that the Company or its investigators suspend or terminate clinical research for various reasons, including safety signals or noncompliance with regulatory requirements; | |
● | the cost of clinical trials may be greater than the Company anticipates; | |
● | clinical sites may not adhere to the clinical protocol or may drop out of a clinical trial; | |
● | the Company may be unable to recruit a sufficient number of clinical trial sites; | |
● | regulators, IRBs, or other reviewing bodies may fail to approve or subsequently find fault with its manufacturing processes or facilities of third-party manufacturers with which the Company enters into agreement for clinical and commercial supplies, the supply of devices or other materials necessary to conduct clinical trials may be insufficient, inadequate or not available at an acceptable cost, or the Company may experience interruptions in supply; | |
● | approval policies or regulations of the FDA or applicable foreign regulatory agencies may change in a manner rendering the Company's clinical data insufficient for approval; | |
● | the Company's current or future products may have undesirable side effects or other unexpected characteristics; and | |
● | impacts of regional or global public health crises including the ongoing COVID-19 pandemic could adversely affect any clinical trials the Company is conducting or plan to conduct, including delays or difficulties in enrolling or onboarding patients, initiating clinical sites, or obtaining the requisite regulatory approvals, interruption of key clinical trial activities, or supply chain disruptions that delay or make it more difficult or costly to obtain the supplies and materials the Company needs for clinical trials. |
Any of these occurrences may significantly harm the Company's business, financial condition and prospects. In addition, many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval of its product candidates.
Clinical trials must be conducted in accordance with the laws and regulations of the FDA and other applicable regulatory authorities’ legal requirements, regulations or guidelines, and are subject to oversight by these governmental agencies and IRBs at the medical institutions where the clinical trials are conducted. Conducting successful clinical studies will require the enrollment of large numbers of patients, and suitable patients may be difficult to identify and recruit. Patient enrollment in clinical trials and completion of patient participation and follow-up depends on many factors, including the size of the patient population, the nature of the trial protocol, the attractiveness of, or the discomforts and risks associated with, the treatments received by enrolled subjects, the availability of appropriate clinical trial investigators, support staff, and proximity of patients to clinical sites and able to comply with the eligibility and exclusion criteria for participation in the clinical trial and patient compliance. For example, patients may be discouraged from enrolling in its clinical trials if the trial protocol requires them to undergo extensive post-treatment procedures or follow-up to assess the safety and effectiveness of its products or if they determine that the treatments received under the trial protocols are not attractive or involve unacceptable risks or discomforts.
The Company depends on its collaborators and on medical institutions and CROs to conduct its clinical trials in compliance with good clinical practice ("GCP") requirements. To the extent its collaborators or the CROs fail to enroll participants for its clinical trials, fail to conduct the study to GCP standards or are delayed for a significant time in the execution of trials, including achieving full enrollment, the Company may be affected by increased costs, program delays or both. In addition, clinical trials that are conducted in countries outside the United States may subject the Company to further delays and expenses as a result of increased shipment costs, additional regulatory requirements and the engagement of non-U.S. CROs, as well as expose the Company to risks associated with clinical investigators who are unknown to the FDA, and different standards of diagnosis, screening and medical care.
Development of sufficient and appropriate clinical protocols to demonstrate safety and efficacy are required and the Company may not adequately develop such protocols to support clearance and approval. Further, the FDA may require the Company to submit data on a greater number of patients than the Company originally anticipated and/or for a longer follow-up period or change the data collection requirements or data analysis applicable to the Company's clinical trials. Delays in patient enrollment or failure of patients to continue to participate in a clinical trial may cause an increase in costs and delays in the approval and attempted commercialization of its products or result in the failure of the clinical trial. In addition, despite considerable time and expense invested in its clinical trials, the FDA may not consider the Company's data adequate to demonstrate safety and efficacy. Such increased costs and delays or failures could adversely affect its business, operating results and prospects.
The results of the Company's clinical trials may not support its product candidate claims or may result in the discovery of adverse side effects.
The Company cannot be certain that the results of its future clinical trials will support its future product claims or that the FDA will agree with its conclusions regarding them. Success in pre-clinical studies and early clinical trials does not ensure that later clinical trials will be successful, and the Company cannot be sure that the later trials will replicate the results of prior trials and pre-clinical studies. The clinical trial process may fail to demonstrate that its product candidates are safe and effective for the proposed indicated uses, which could cause the Company to abandon a product candidate and may delay development of others. Any delay or termination of the Company's clinical trials will delay the filing of its product submissions and, ultimately, its ability to commercialize its product candidates and generate revenues. It is also possible that patients enrolled in clinical trials will experience adverse side effects that are not currently part of the future product’s profile.
Product liability suits could be brought againstagainst the Company due to a defective design, material or workmanship or misuse of its products and could result in expensive and time-consuming litigation, payment of substantialsubstantial damages and an increase in its insurance rates.
If the Company’s products are defectively designed, manufactured or labeled, contain defective components or are misused, the Company may become subject to substantial and costly litigation by ourthe Company’s customers or their patients. Misusing ourthe Company’s products or failing to adhere to operating guidelines could cause significant eye and skin damage, and underlying tissue damage. In addition, if its operating guidelines are found to be inadequate, the Company may be subject to liability. The Company has been involved, and may in the future be involved, in litigation related to the use of its products. Product liability claims could divert management’s attention from its core business, be expensive to defend and result in sizable damage awards against the Company. The Company may not have sufficient insurance coverage for all future claims. The Company may not be able to obtain insurance in amounts or scope sufficient to provide the Company with adequate coverage against all potential liabilities. Any product liability claims brought against the Company, with or without merit, could increase ourthe Company’s product liability insurance rates or prevent usthe Company from securing continuing coverage, could harm its reputation in the industry and could reduce product sales. In addition, the Company historically experienced steep increases in its product liability insurance premiums as a percentage of revenue. If its premiums continue to rise, the Company may no longer be able to afford adequate insurance coverage.
The Company is currently involved in litigation that could adversely affect the Company’s Company’s business and financial results, divert management’smanagement’s attention from ourthe Company’s business, and subject the Company to significant liabilities.
As described under “Note 11- Commitments and Contingencies - Contingencies” in our consolidated financial statements included in this Annual Report on Form 10-K,On January 31, 2020, the Company isfiled a lawsuit in Federal District Court in California against Lutronic Aesthetics, Inc. and any involved corporate affiliates (“Lutronic”). The lawsuit claims include misappropriation of trade secrets in various litigation, which may adversely affectviolation of the Company’s financial conditionUniform Trade Secrets Act and may require us to devote significant resources to our defense of these claims.
Such litigation involves certain non-compete provisions of an agreement an employee of ours was a party to while employed by a competitor. The competitor alleges causes of action for breach of contract (against the employee)Defend Trade Secrets Act; Racketeer Influenced and intentionalCorrupt Organizations Act (“RICO”) violations; tortious interference with contractual relations (Cutera). Theand with prospective economic advantage; unfair competition as defined by the California Business and Professions Code; and aiding and abetting the breach of fiduciary duties and/or duty of loyalty owed by certain former Company believesemployees. On January 28, 2020, the non-compete provisions are unenforceable. The competitor has also threatenedCompany initiated legal action against certain former employees for multiple claims involving violations of these former employees’ explicit agreements with the Company, as well as violations of duties owed to file a complaint against another current employee based in Arizona. Asthe Company under California law.
In both of March 14, 2019,these actions, the Company seeks compensatory damages, equitable relief and punitive damages, as well as fees and costs related to the legal action. At this time, the Company is involved in several lawsuits worldwide, with most ofunable to predict the claims in various federal or state courts throughout the U.S.associated costs, expenses and timeline associated therewith. The complaints generally seek damages and other relief based on theories of breach of express and implied warranties, fraudulent and negligent misrepresentation/concealment, unjust enrichment, and violations of various state consumer protection statutes.
Although the Company is defending these matters vigorously, the Company cannot predict with certainty the outcome or effect of any claim or other litigation matter, and there can be no assurance as to the ultimate outcome of any litigation or proceeding. Litigation may have a material adverse effect on the Company because of potential adverse outcomes, defense costs, the diversion of our management'sthe Company’s management’s resources, availability of insurance coverage and other factors.
If customers are not trained and/or ourthe Company’s products are used by non-physicians,non-licensedpractitioners, it could result in product misuse and adverse treatment outcomes, which could harm ourthe Company’s reputation, result in product liability litigation, distract management and result in additional costs, all of which could harm ourthe Company’s business.
Because the Company does not require training for users of its products and sell its products at times to non-physicians,non-licensed practitioners, there exists an increased potential for misuse of ourthe Company’s products, which could harm ourthe Company’s reputation and ourthe Company’s business. U.S. federal regulations allow usthe Company to sell ourthe Company’s products to or on the order of “licensed practitioners.” The definition of “licensed practitioners” varies from state to state. As a result, ourthe Company’s products may be purchased or operated by physicians with varying levels of training, and in many states, by non-physicians, including nurse practitioners, chiropractors and technicians. Outside the U.S., many jurisdictions do not require specific qualifications or training for purchasers or operators of its products. The Company does not supervise the procedures performed with ourthe Company’s products, nor does the Company require that direct medical supervision occur—occur that is determined by state law. The Company and its distributors generally offer but do not require product training to the purchasers or operators of ourthe Company’s products. In addition, the Company sometimes sells its systems to companies that rent its systems to third parties and that provide a technician to perform the procedures. The lack of training and the purchase and use of its products by non-physicians may result in product misuse and adverse treatment outcomes, which could harm ourthe Company’s reputation and its business, and, in the event these result in product liability litigation, distract management and subject usthe Company to liability, including legal expenses.
Adverse conditions in the global banking industry and credit markets may adverselyadversely impact the value of the Company’s Company’s marketable investments or impair the Company’the Company’ss liquidity.
The primary objective of most of ourthe Company’s investment activities is to preserve principal. To achieve this objective, the Company invests its excess cash primarily in money market funds and in highly liquid debt instruments of the U.S. government and its agencies and U.S. municipalities, in commercial paper and high gradehigh-grade corporate debt. As of December 31, 2018, our2019, the Company’s balance in marketable investments was $9.5$7.6 million. The longer the duration of a security, the more susceptible it is to changes in market interest rates and bond yields. As yields increase, those securities with a lower yield-at-cost show a mark-to-market unrealized loss. For example, assuming a hypothetical increase in interest rates of one percentage point, there would not have any adverse impact the Company’s earnings. As a result, changes in the market interest rates will affect its future net income (loss).
The Company’sCompany’s manufacturing operations are dependent upon third-party suppliers, making its vulnerable to supply shortages and price fluctuations,fluctuations, which could harm its business.
Many of the components and materials that comprise itsthe Company’s products isare currently manufactured by a limited number of suppliers. In addition, all of the Company’s skincare products are manufactured by its sole supplier, ZO. A supply interruption or an increase in demand beyond ourthe Company’s current suppliers’ capabilities could harm ourthe Company’s ability to manufacture ourits products until a new source of supply is identified and qualified. The Company’s reliance on these suppliers subjects usthe Company to a number of risks that could harm its business, including:
● | interruption of supply resulting from modifications to or discontinuation of a supplier’s operations; |
● | delays in product shipments resulting from uncorrected defects, reliability issues or a supplier’s variation in a component; |
● | lack of long-term supply arrangements for key components with the Company’s suppliers; | |
● | inability to obtain adequate supply in a timely manner, or on reasonable terms; |
● | inability to redesign one or more components in the Company’s systems in the event that a supplier discontinues manufacturing such components and the Company’s inability to sources it from other suppliers on reasonable terms; |
● | difficulty locating and qualifying alternative suppliers for the Company’s components in a timely manner; |
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Any interruption in the supply of components or materials, or the Company’s inability to obtain substitute components or materials from alternate sources at acceptable prices in a timely manner, could impair its ability to meet the demand of the Company’s customers, which would have an adverse effect on the Company’s business.
Risks related to the reduction or interruption in supply and an inability to develop alternative sources for supply may adversely affect the Company’sCompany’s manufacturing operations and related product sales.
The Company maintains manufacturing operations at its facility in Brisbane, California, and purchasepurchases many of the components and raw materials used in manufacturing these products from numerous suppliers in various countries. Any problem affecting a supplier (whether due to external or internal causes) could have a negative impact on us.the Company.
In a few limited cases, specific components and raw materials are purchased from primary or main suppliers (or in some cases, a single supplier) for reasons related to quality assurance, cost-effectiveness ratio and availability. While the Company works closely with its suppliers to ensure supply continuity, the Company cannot guarantee that its efforts will always be successful. Moreover, due to strict standards and regulations governing the manufacture and marketing its products, it may not be able to quickly locate new supply sources in response to a supply reduction or interruption, with negative effects on its ability to manufacture its products effectively and in a timely fashion.
The Company’sCompany manufactures its goods at the Brisbane California site, as well as dual sourcing several product platforms at contract manufacturing is currently conductedshops for redundancy. A few of the product platforms such as Enlighten and excel HR are only capable of being produced at athe single site in Brisbane, and as such the occurrence of a catastrophic disaster or other similar event could cause damage to its facilities and equipment,equipment, which might require the Company to cease or curtail operations.sales of these sole sourced platforms.
The Company is vulnerable to damage from various types of disasters, including fires, earthquakes, terrorist acts, floods, power losses, communications failures, pandemics and similar events. If any such disaster were to occur, the Company may not be able to operate ourthe Company’s business at ourthe Company’s facility in Brisbane, California. Our manufacturing facilities require FDA approval, which could result in significant delays beforeBefore the Company could manufacture products from a replacement facility.facility, the Company’s manufacturing facilities which require regulatory agency approval, could require significant delays to obtain regulatory agency’s approval. The insurance the Company maintains may not be adequate to cover ourthe Company’s losses resulting from disasters or other business interruptions. Therefore, any such catastrophe could seriously harm ourthe Company’s business and consolidated results of operations.
Intellectual property rights may not provide adequate protection for some or all of ourthe Company’s products, which may permit third parties to compete against usthe Company more effectively.effectively.
The Company relies on patent, copyright, trade secret and trademark laws and confidentiality agreements to protect ourthe Company’s technology and products. At December 31, 2018,As of January 25, 2021, the Company had 32 issued 26 U.S. patents and 5 pending U.S. patent applications. Some of ourthe Company’s components, such as ourthe Company’s laser module, electronic control system and high-voltage electronics, are not, and in the future may not be, protected by patents. Additionally, the Company’s patent applications may not issue as patents or, if issued, may not issue in a form that will be advantageous to us. Any patents the Company obtains may be challenged, invalidated or legally circumvented by third parties. Consequently, competitors could market products and use manufacturing processes that are substantially similar to, or superior to, ours.the Company’s. The Company may not be able to prevent the unauthorized disclosure or use of ourthe Company’s technical knowledge or other trade secrets by consultants, vendors, former employees or current employees, despite the existence generally of confidentiality agreements and other contractual restrictions. Monitoring unauthorized uses and disclosures of ourthe Company’s intellectual property is difficult, and the Company does not know whether the steps it has taken to protect the Company’s intellectual property will be effective. Moreover, the laws of many foreign countries will not protect the Company’s intellectual property rights to the same extent as the laws of the U.S.
The absence of complete intellectual property protection exposes usthe Company to a greater risk of direct competition. Competitors could purchase one of the Company’s products and attempt to replicate some or all of the competitive advantages the Company derives from ourthe Company’s development efforts, design around ourthe Company’s protected technology, or develop their own competitive technologies that fall outside of the Company’s intellectual property rights. If the Company’s intellectual property is not adequately protected against competitors’ products and methods, the Company’s competitive position and its business could be adversely affected.
The Company may be involved in future costly intellectual property litigation, which could impact its future business and financial performance.
The Company’s competitors or other patent holders may assert that the Company’s present or future products and the methods the Company employs are covered by their patents. In addition, the Company does not know whether its competitors own or will obtain patents that they may claim prevent, limit or interfere with ourthe Company’s ability to make, use, sell or import ourthe Company’s products. For example, the Company received a letter from InMode Ltd.’s counsel indicating that the Secret RF product which it distributes in the U.S. on behalf of ILOODA Co. Ltd., a Korean company violates U.S. Patent No. 10,799,285, which was issued to InMode in October 2020. If the Company is unable to resolve this matter, it may have to discontinue selling the Secret RF product and may become involved in litigation or liable for damages as a result of its sales of the Secret RF product. Although the Company may seek to resolve any potential future claims or actions such as this one, it may not be able to do so on reasonable terms, or at all. If, following a successful third-party action for infringement, the Company cannot obtain a license or redesign ourthe Company’s products, it may have to stop manufacturing and selling the applicable products and ourthe Company’s business would suffer as a result. In addition, a court could require usthe Company to pay substantial damages, and prohibit usthe Company from using technologies essential to ourthe Company’s products, any of which would have a material adverse effect on ourthe Company’s business, results of operations and financial condition.
The Company may become involved in litigation not only as a result of alleged infringement of a third party’s intellectual property rights but also to protect ourthe Company’s own intellectual property. For example, the Company has been involved in litigation to protect the trademark rights associated with its company name or the names of its products. Infringement and other intellectual property claims, with or without merit, can be expensive and time-consumingtime- consuming to litigate, and could divert management’s attention from its core business.
The expense and potential unavailabilityunavailability of insurance coverage for the Company’sCompany’s customers could adverselyadversely affect its ability to sell its products, and therefore adversely affect its financial condition.
Some of the Company’s customers and prospective customers have had difficulty procuring or maintaining liability insurance to cover their operation and use of its products. Medical malpractice carriers are withdrawing coverage in certain states or substantially increasing premiums. If this trend continues or worsens, the Company’s customers may discontinue using ourthe Company’s products and potential customers may opt against purchasing laser-based products due to the cost or inability to procure insurance coverage. The unavailability of insurance coverage for ourthe Company’s customers and prospects could adversely affect its ability to sell its products, and that could harm its financial condition.
From time to time the Company may become subject to income tax audits or similar proceedings, and as a result the Company may incur additional costs and expenses or owe additional taxes, interest and penaltiespenalties that may negatively impact its operating results.
The Company is subject to income taxes in the U.S. and certain foreign jurisdictions where it operates through a subsidiary, including Australia, Belgium, Canada, France, Germany, Hong Kong, Japan, Spain, Switzerland, Italy and the United Kingdom. The Company’s determination of its tax liability is subject to review by applicable domestic and foreign tax authorities.
The Company is currently undergoing through sales tax examination in Germany (“Cutera GmbH”)audit as of December 31, 2020 and underwent an income tax audits for its German and Japanese subsidiaries for the tax years ended December 31, 2011 through 2013 and are uncertain of the potential outcome of this examination. The Company underwent audits for our California sales and use tax returns for the period July 2013 through June 2016, and Canadian goods and services tax and harmonized sales tax returns for the period January 2013 to July 2015.2018. Although these income tax audits resulteddid not result in immaterialany adjustments, the final timing and resolution of any future tax examinations are subject to significant uncertainty and could result in ourthe Company’s having to pay amounts to the applicable tax authority in order to resolve examination of ourits tax positions. An increase or decrease of tax related to tax examination resolution could result in a change in the Company’s income tax accrual and could negatively impact its financial position, results of operations or cash flows.
The Company may be adversely affected by changes in U.S. tax laws, importation taxes and other changes that may be imposed by the current administration.
The Company is subject to taxes in the U.S. and other jurisdictions. Tax rates in these jurisdictions may be subject to significant change due to economic and/or political conditions. A number of other factors may also impact ourthe Company’s future effective tax rate including:
● | the jurisdictions in which profits are determined to be earned and taxed; |
● | the resolution of issues arising from tax audits with various tax authorities; |
● | changes in valuation of the Company’s deferred tax assets and liabilities; |
● | increases in expenses not deductible for tax purposes, including write-offs and impairment of goodwill in connection with acquisitions; | |
● | changes in availability of tax credits, tax holidays, and tax deductions; |
● | changes in share-based compensation; and |
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In the U.S., the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act (collectively, the “Affordable Care Act”), for example, has the potential to significantly impact the pharmaceutical and medical device industries. The Affordable Care Act imposed, among other things, an annual excise tax of 2.3% on any entity that manufactures or imports medical devices offered for sale in the U.S. Due to subsequent legislative amendments the excise tax has beenwas suspended for the period January 1, 2016 to December 31, 2019, and, absent further legislative action, will be reinstated starting January 1, 2020, which may result in a2019. The excise tax was repealed at the end of 2019. The repeal of the excise tax had no material adverse effectimpact on ourthe Company’s financial condition orand cash flows.
Any acquisitions that the Company makes makes could result in operating difficulties, dilution, and other consequences that may adversely impact ourthe Company’s business and results of operations.
While the Company from time to time evaluates potential acquisitions of businesses, products and technologies, and anticipates continuing to make these evaluations, the Company has no present understandings, commitments or agreements with respect to any material acquisitions or collaborative projects. The Company may not be able to identify appropriate acquisition candidates or strategic partners, or successfully negotiate, finance or integrate any businesses, products or technologies that the Company acquire.
The Company has limited experience as a team with acquiring companies and products. Furthermore, the integration of any acquisition and management of any collaborative project may divert management’s time and resources from ourthe Company’s core business and disrupt the Company’s operations and it may incur significant legal, accounting and banking fees in connection with such a transaction. Acquisitions could diminish ourthe Company’s available cash balances for other uses, result in the incurrence of debt, contingent liabilities, or amortization expenses, and restructuring charges. Also, the anticipated benefits or value of its acquisitions or investments may not materialize and could result in an impairment of goodwill and/or purchased long-lived assets.
The CompanyCompany’s failure to address these risks or other problems encountered in connection with ourthe Company’s past or future acquisitions and investments could cause usthe Company to fail to realize the anticipated benefits of such acquisitions or investments, incur unanticipated liabilities, and harm ourthe Company’s business and ourthe Company’s financial condition or results.
The Company’sCompany’s failure to comply with rules relating to bribery, foreign corrupt practices, and privacy and security laws may subject the Company to penaltiespenalties and adversely impact its reputation and business operations.
The CompanyCompany’s business is subject to regulation and oversight worldwide including:
● | the FCPA, which prohibits corporations and individuals from paying, offering to pay or authorizing the payment of anything of value to any foreign government official, government staff member, political party or political candidate in an attempt to obtain or retain business or to otherwise influence a person working in an official capacity; |
● | the UK Bribery Act, which prohibits both domestic and international bribery, as well as bribery across both public and private sectors; and bribery provisions contained in the German Criminal Code, which, pursuant to draft legislation being prepared by the German government, may make the corruption and corruptibility of physicians in private practice and other healthcare professionals a criminal offense; |
● | Health Insurance Portability and Accountability Act of 1996, as amended by The Health Information Technology for Economic and Clinical Health Act, which governs the conduct of certain electronic healthcare transactions and protects the security and privacy of protected health information; and |
● | analogous state and foreign law equivalents of each of the above laws, such as state laws that require device companies to comply with the industry’s voluntary compliance guidelines and the applicable compliance guidance promulgated by the federal government; and state laws governing the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts. |
● the FCPA, which prohibits corporations and individuals from paying, offering to pay or authorizing the payment of anything of value to any foreign government official, government staff member, political party or political candidate in an attempt to obtain or retain business or to otherwise influence a person working in an official capacity;
● the UK Bribery Act, which prohibits both domestic and international bribery, as well as bribery across both public and private sectors; and bribery provisions contained in the German Criminal Code, which, pursuant to draft legislation being prepared by the German government, may make the corruption and corruptibility of physicians in private practice and other healthcare professionals a criminal offense;
● Health Insurance Portability and Accountability Act of 1996, as amended by The Health Information Technology for Economic and Clinical Health Act , which governs the conduct of certain electronic healthcare transactions and protects the security and privacy of protected health information; and
● analogous state and foreign law equivalents of each of the above laws, such as state laws that require device companies to comply with the industry’s voluntary compliance guidelines and the applicable compliance guidance promulgated by the federal government; and state laws governing the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts.
The risk of being found in violation of these laws is increased by the fact that many of them have not been fully interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of interpretations. Because of the breadth of these laws and the narrowness of the statutory exceptions and safe harbors available under such laws, it is possible that some of the Company’s business activities, including ourthe Company’s relationships with practitioners and thought leaders worldwide, some of whom recommend, purchase and/or use ourthe Company’s devices, as well as the Company’s sales agents and distributors, could be subject to challenge under one or more of such laws. The Company is also exposed to the risk that ourthe Company’s employees, independent contractors, principal investigators, consultants, vendors, independent sales agents and distributors may engage in fraudulent or other illegal activity. While the Company has policies and procedures in place prohibiting such activity, misconduct by these parties could include, among other infractions or violations, intentional, reckless and/or negligent conduct or unauthorized activity that violates FDA regulations, including those laws that require the reporting of true, complete and accurate information to the FDA, manufacturing standards, laws that require the true, complete and accurate reporting of financial information or data or other commercial or regulatory laws or requirements. It is not always possible to identify and deter misconduct by ourthe Company’s employees and other third parties, and the precautions the Company takes to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting the Company from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations.
There are similar laws and regulations applicable to usthe Company outside the U.S., all of which are subject to evolving interpretations. Global enforcement of anti-corruptionanti- corruption laws, including but not limited to the UK Bribery Act, the Brazil Clean Companies Act, and continued enforcement in the Europe, Middle East and Asia Pacific has increased substantially in recent years, with more frequent voluntary self-disclosures by companies, aggressive investigations and enforcement proceedings by governmental agencies, and assessment of significant fines and penalties against companies and individuals. The Company’s operations create the risk of unauthorized payments or offers of payments by one of its employees, consultants, sales agents, or distributors because these parties are not always subject to its control. It is the Company’s policy to implement safeguards to discourage these practices; however, its existing safeguards and any future improvements may prove to be less than effective, and its employees, consultants, sales agents, or distributors may engage in conduct for which the Company might be held responsible. Any alleged or actual violations of these regulations may subject usthe Company to government scrutiny, severe criminal or civil sanctions and other liabilities, and could negatively affect its business, reputation, operating results, and financial condition.
On July 27, 2017, the United Kingdom’s Financial Conduct Authority announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. These reforms may cause LIBOR to cease to exist, new methods of calculating LIBOR to be established or the establishment of an alternative reference rate(s). These consequences cannot be entirely predicted and could have an adverse impact on the market value for or value of LIBOR-linked securities, loans, and other financial obligations or extensions of credit held by the Company. Changes in market interest rates may influence returns on financial investments and could reduce its earnings and cash flows.
While the Company believes it has a strong culture of compliance and adequate systems of control, and it seeks continuously to improve its systems of internal controls and to remedy any weaknesses identified, there can be no assurance that the policies and procedures will be followed at all times or will effectively detect and prevent violations of the applicable laws by one or more of its employees, consultants, agents or partners and, as a result, the Company may be subject to penalties and material adverse consequences on its business, financial condition or results of operations.
Risks Related to the Notes
Although the notes are referred to as convertible senior notes, they are effectively subordinated to any of the Company's secured debt and any liabilities of its subsidiaries.
The notes will be the Company's senior unsecured obligations and will rank:
senior in right of payment to all of its indebtedness that is expressly subordinated in right of payment to the notes; |
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● | effectively junior to any of its secured indebtedness to the extent of the value of the assets securing such indebtedness, including any amount outstanding under the Company's senior credit facility; and |
● | structurally junior to all indebtedness and other liabilities of its current or future subsidiaries (including trade payables). |
In the event of the Company's bankruptcy, liquidation reorganization or other winding up, the Company's assets that secure secured indebtedness will be available to pay obligations on the notes only after all such secured indebtedness has been repaid in full from such assets. There may not be sufficient assets remaining to pay amounts due on any or all of the notes then outstanding.
In addition the notes are the Company's obligations exclusively and are not guaranteed by any of its subsidiaries. A portion of the Company's operations are conducted through, and a portion of its consolidated assets are held by its subsidiaries. Accordingly, the Company's ability to service its debt, including the notes, depends, in part, on the results of operations of its subsidiaries and upon the ability of such subsidiaries to provide the Company with cash, whether in the form of dividends, loans or otherwise, to pay amounts due on its obligations, including the notes. The Company's subsidiaries are separate and distinct legal entities and have no obligation contingent or otherwise, to make payments on the notes or to make any funds available for that purpose. The Company's right to receive any assets of any of its subsidiaries upon such subsidiary’s bankruptcy, liquidation or reorganization and, therefore, the right of the holders of notes to participate in those assets, will be subject to prior claims of creditors of the subsidiary, including trade creditors, and such subsidiary may not have sufficient assets remaining to make any payments to the Company as a shareholder or otherwise. In addition, dividends, loans or other distributions to the Company from such subsidiaries may be subject to contractual and other restrictions and are subject to other business and tax considerations. The indenture governing the notes will not prohibit the Company from incurring additional senior debt or secured debt, nor will it prohibit any of the Company's current or future subsidiaries from incurring additional liabilities.
As of December 31, 2020, the Company had $7.2 million of indebtedness for borrowed money outstanding, all of which would be effectively senior to the notes to the extent of the collateral securing such indebtedness, and its subsidiaries had no indebtedness or other liabilities (after excluding intercompany obligations and liabilities of a type not required to be reflected on a balance sheet of such subsidiaries in accordance with GAAP).
Regulatory actions and other events may adversely affect the trading price and liquidity of the notes.
The Company expects that many investors in, and potential purchasers of, the notes will employ or seek to employ, a convertible arbitrage strategy with respect to the notes. Investors would typically implement such a strategy by selling short the common stock underlying the notes and dynamically adjusting their short position while continuing to hold the notes. Investors may also implement this type of strategy by entering into swaps on its common stock in lieu of or in addition to short selling the common stock.
The SEC and other regulatory and self-regulatory authorities have implemented various rules and taken certain actions, and may in the future adopt additional rules and take other actions, that may impact those engaging in short selling activity involving equity securities (including its common stock). Such rules and actions include Rule 201 of SEC Regulation SHO, the adoption by the Financial Industry Regulatory Authority, Inc. and the national securities exchanges of a “Limit Up-Limit Down” program, the imposition of market-wide circuit breakers that halt trading of securities for certain periods following specific market declines, and the implementation of certain regulatory reforms required by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Any governmental or regulatory action that restricts the ability of investors in or potential purchasers of, the notes to effect short sales of the Company's common stock, borrow its common stock or enter into swaps on the Company's common stock could adversely affect the trading price and the liquidity of the notes.
Volatility in the market price and trading volume of the Company's common stock could adversely impact the trading price of the notes.
The Company expects that the trading price of the notes will be significantly affected by the market price of its common stock. The stock market in recent years has experienced significant price and volume fluctuations that have often been unrelated to the operating performance of companies. The market price of the Company's common stock could fluctuate significantly for many reasons, including in response to the risks described in this section, elsewhere in this offering memorandum or the documents incorporated by reference in this offering memorandum or for reasons unrelated to its operations, many of which are beyond the Company's control, such as reports by industry analysts, investor perceptions or negative announcements by its customers, competitors or suppliers regarding their own performance, as well as industry conditions and general financial, economic and political instability. A decrease in the market price of the Company's common stock would likely adversely impact the trading price of the notes. The market price of the Company's common stock could also be affected by possible sales of its common stock by investors who view the notes as a more attractive means of equity participation in the Company and by hedging or arbitrage trading activity that the Company expects to develop involving its common stock. This trading activity could, in turn, affect the trading price of the notes.
The Company may still incur substantially more debt or take other actions which would intensify the risks discussed above.
The Company and its subsidiaries may incur substantial additional debt in the future, subject to the restrictions contained in its existing and future debt agreements, some of which may be secured debt. The Company will not be restricted under the terms of the indenture governing the notes from incurring additional debt, securing existing or future debt, recapitalizing its debt, repurchasing its stock, pledging its assets, making investments, paying dividends, guaranteeing debt or taking a number of other actions that are not limited by the terms of the indenture governing the notes that could have the effect of diminishing the Company's ability to make payments on the notes when due.
The Company may not have the ability to raise the funds necessary to settle conversions of the notes in cash or to repurchase the notes upon a fundamental change, and its future debt may contain limitations on its ability to pay cash upon conversion or repurchase of the notes.
Holders of the notes will have the right to require the Company to repurchase all or a portion of their notes upon the occurrence of a fundamental change before the maturity date at a repurchase price equal to 100% of the principal amount of the notes to be repurchased, plus accrued and unpaid interest, if any. In addition, upon conversion of the notes, unless the Company elects to deliver solely shares of its common stock to settle such conversion (other than paying cash in lieu of delivering any fractional share), the Company will be required to settle a portion or all of its conversion obligation in respect of the notes being converted in cash. Moreover, the Company will be required to repay the notes in cash at their maturity unless earlier converted, redeemed or repurchased. However, the Company may not have enough available cash or be able to obtain financing at the time the Company is required to make repurchases of notes surrendered therefor or pay cash with respect to notes being converted or at their maturity.
In addition, the Company's ability to repurchase notes or to pay cash upon conversions of notes or at their maturity may be limited by law, regulatory authority or agreements governing its future indebtedness. The Company's failure to repurchase notes at a time when the repurchase is required by the indenture or to pay cash upon conversions of notes or at their maturity as required by the indenture would constitute a default under the indenture. A default under the indenture or the fundamental change itself could also lead to a default under agreements governing the Company's existing and future indebtedness. Moreover, the occurrence of a fundamental change under the indenture could constitute an event of default under any such agreement. If the payment of the related indebtedness were to be accelerated after any applicable notice or grace periods, the Company may not have sufficient funds to repay the indebtedness.
The conditional conversion feature of the notes, if triggered, may adversely affect the Company's financial condition and operating results.
In the event the conditional conversion feature of the notes is triggered, holders of the notes will be entitled to convert their notes at any time during specified periods at their option. If one or more holders elect to convert their notes, unless the Company elects to satisfy the Company's conversion obligation by delivering solely shares of its common stock (other than paying cash in lieu of delivering any fractional share), the Company would be required to settle a portion or all of its conversion obligation in cash, which could adversely affect the company's liquidity. In addition, even if holders of notes do not elect to convert their notes, the Company could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the notes as a current rather than long-term liability, which would result in a material reduction of its net working capital.
The accounting method for the notes could adversely affect the Company's financial condition and operating results.
The accounting method for initially reflecting the notes on the company's balance sheet, accruing interest expense for the notes and reflecting the underlying shares of the Company's common stock in its reported diluted earnings per share may adversely affect its reported earnings and financial condition.
The Company expects that, under current accounting principles, the initial liability carrying amount of the notes will be the fair value of a similar debt instrument that does not have a conversion feature, valued using its cost of capital for straight, unconvertible debt. The Company expects to reflect the difference between the net proceeds from this offering and the initial carrying amount as a debt discount for accounting purposes, which will be amortized into interest expense over the term of the notes. As a result of this amortization, the interest expense that the Company expects to recognize for the notes for accounting purposes will be greater than the cash interest payments the Company will pay on the notes, which will result in lower reported income or higher reported losses. The lower reported income or higher reported losses resulting from this accounting treatment could depress the trading price of its common stock and the notes.
However, in August 2020, the Financial Accounting Standards Board published an Accounting Standards Update, or ASU 2020-06, eliminating the separate accounting for the debt and equity components as described above. ASU 2020-06 will be effective for SEC-reporting entities for fiscal years beginning after December 15, 2021 (or, in the case of smaller reporting companies, December 15, 2023), including interim periods within those fiscal years. However, early adoption is permitted in certain circumstances for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years.
When ASU 2020-06 is adopted by the Company, the Company expects the elimination of the separate accounting described above to reduce the interest expense that the Company expects to recognize for the notes for accounting purposes. In addition, ASU 2020-06 eliminates the use of the treasury stock method for convertible instruments that can be settled in whole or in part with equity, and instead require application of the “if-converted” method. Under that method, diluted earnings per share would generally be calculated assuming that all the notes were converted solely into shares of common stock at the beginning of the reporting period, unless the result would be anti-dilutive. The application of the if-converted method may reduce the Company's reported diluted earnings per share.
Furthermore, if any of the conditions to the convertibility of the notes is satisfied, then the Company may be required under applicable accounting standards to reclassify the liability carrying value of the notes as a current, rather than a long-term, liability. This reclassification could be required even if no noteholders convert their notes and could materially reduce the Company's reported working capital.
Holders of notes will not be entitled to any rights with respect to the Company's common stock, but they will be subject to all changes made with respect to the Company's common stock to the extent the Company satisfies its conversion obligation, in whole or in part, with shares of its common stock.
Holders of notes will not be entitled to any rights with respect to the Company's common stock (including, without limitation, voting rights and rights to receive any dividends or other distributions on its common stock) prior to the conversion date relating to such notes (if the Company has elected to settle the conversion by delivering solely shares of its common stock (other than paying cash in lieu of delivering any fractional share)) or the last trading day of the observation period (if the Company elects to pay and deliver, as the case may be, a combination of cash and shares of its common stock in respect of the relevant conversion), but holders of notes will be subject to all changes affecting the Company's common stock. For example, if an amendment is proposed to the Company's certificate of incorporation or bylaws requiring stockholder approval and the record date for determining the stockholders of record entitled to vote on the amendment occurs prior to the conversion date related to a holder’s conversion of its notes (if the Company has elected to settle the relevant conversion by delivering solely shares of its common stock (other than paying cash in lieu of delivering any fractional share)) or the last trading day of the observation period (if the Company elects to pay and deliver, as the case may be, a combination of cash and shares of its common stock in respect of the relevant conversion), such holder will not be entitled to vote on the amendment, although such holder will nevertheless be subject to any changes affecting its common stock.
The conditional conversion feature of the notes could result in holders receiving less than the value of the Company's common stock into which the notes would otherwise be convertible.
Prior to the close of business on the business day immediately preceding December 15, 2025, holders may convert their notes only if specified conditions are met. If the specific conditions for conversion are not met, holders will not be able to convert their notes, and holders may be unable to receive the value of the cash, common stock or a combination of cash and common stock, as applicable, into which their notes would otherwise be convertible.
Upon conversion of the notes, holders may receive less valuable consideration than expected because the value of the Company's common stock may decline after holders exercise their conversion right but before the Company satisfies it conversion obligation.
Under the notes, a converting holder will be exposed to fluctuations in the value of the Company's common stock during the period from the date such holder surrenders notes for conversion until the date the Company satisfies its conversion obligation.
Upon conversion of the notes, the Company will satisfy its conversion obligation by paying or delivering, as the case may be, cash, shares of its common stock, or a combination of cash and shares of its common stock, at the Company's option. If the Company satisfies its conversion obligation solely in cash or through payment and delivery, as the case may be, of a combination of cash and shares of its common stock, the amount of cash and shares of common stock, if any, due upon conversion will be based on a daily conversion value calculated on a proportionate basis for each trading day in a 40 trading day observation period. This period would be: (i) subject to clause (ii), if the relevant conversion date occurs prior to December 15, 2025, the 40 consecutive trading day period beginning on and including, the second trading day immediately succeeding such conversion date; (ii) if the relevant conversion date occurs during a redemption period, the 40 consecutive trading days beginning on and including, the 41st scheduled trading day immediately preceding the date that is specified as the redemption date in the related notice of redemption; and (iii) subject to clause (ii), if the relevant conversion date occurs on or after December 15, 2025, the 40 consecutive trading days beginning on and including, the 41st scheduled trading day immediately preceding the maturity date. Accordingly, if the price of the Company's common stock decreases during this period, the value of consideration holders receive will be adversely affected. In addition, if the market price of the Company's common stock at the end of such period is below the average of the daily volume weighted-average prices of the Company's common stock during such period, the value of any shares of the Company's common stock that holders will receive in satisfaction of its conversion obligation will be less than the value used to determine the number of shares that holders will receive.
If the Company elects to satisfy its conversion obligation solely in shares of the Company's common stock upon conversion of the notes, the Company will be required to deliver the shares of its common stock, together with cash for any fractional share, on the second business day following the relevant conversion date. Accordingly, if the price of the Company's common stock decreases during this period, the value of the shares that holders receive will be adversely affected and would be less than the conversion value of the notes on the conversion date.
The notes are not protected by restrictive covenants.
The indenture governing the notes will not contain any financial or operating covenants or restrictions on the payments of dividends, the incurrence of indebtedness or the issuance or repurchase of securities by the Company or any of its subsidiaries. The indenture will not contain any covenants or other provisions to afford protection to holders of the notes in the event of a fundamental change or other corporate transaction involving the Company subject to certain exceptions.
The increase in the conversion rate for notes converted in connection with a make-whole fundamental change or during a redemption period may not adequately compensate holders for any lost value of their notes as a result of such transaction or redemption.
If a make-whole fundamental change occurs prior to the maturity date or upon its issuance of a notice of redemption the Company will, under certain circumstances, increase the conversion rate by a number of additional shares of its common stock for notes converted in connection with such make-whole fundamental change or during the related redemption period. The increase in the conversion rate will be determined based on the date on which the specified corporate transaction becomes effective or the redemption notice date, as applicable, and the price paid (or deemed to be paid) per share of the Company's common stock in such transaction or on such redemption notice date. The increase in the conversion rate for notes converted in connection with a make-whole fundamental change or during a redemption period may not adequately compensate holders for any lost value of their notes as a result of such transaction or redemption. Furthermore, if the Company calls only a portion of the outstanding notes for redemption, only those notes called (or deemed called) for redemption will become convertible as a result of such call for redemption and only the conversion rate of notes converted in connection with such notice of redemption will be increased. Accordingly, notes not called for redemption will not become convertible if not otherwise convertible at such time and will remain outstanding, and may have reduced liquidity and a resulting reduced trading price.
Our obligation to increase the conversion rate for notes converted in connection with a make-whole fundamental change or during a redemption period could be considered a penalty, in which case the enforceability thereof would be subject to general principles of reasonableness and equitable remedies.
The conversion rate of the notes may not be adjusted for all dilutive events.
The conversion rate of the notes is subject to adjustment for certain events, including, but not limited to, the issuance of certain stock dividends on the Company's common stock, the issuance of certain rights or warrants, subdivisions, combinations, distributions of capital stock, indebtedness, or assets, cash dividends and certain issuer tender or exchange offers. However, the conversion rate will not be adjusted for other events, such as a third-party tender or exchange offer or an issuance of the Company's common stock for cash, that may adversely affect the trading price of the notes or its common stock. An event that adversely affects the value of the notes may occur, and that event may not result in an adjustment to the conversion rate.
Provisions in the indenture governing the notes may deter or prevent a business combination that may be favorable to holders.
If a fundamental change occurs prior to the maturity date, holders of the notes will have the right, at their option, to require the Company to repurchase all or a portion of their notes. In addition, if a make-whole fundamental change occurs prior the maturity date, the Company will in some cases be required to increase the conversion rate for a holder that elects to convert its notes in connection with such make-whole fundamental change. Furthermore, the indenture governing the notes will prohibit the Company from engaging in certain mergers or acquisitions unless, among other things, the surviving entity assumes the Company's obligations under the notes. These and other provisions in the indenture could deter or prevent a third party from acquiring the Company even when the acquisition may be favorable to holders.
The capped call transactions may affect the value of the notes and the Company's common stock.
In connection with the pricing of the notes, the Company intend to enter into capped call transactions with the counterparties. The capped call transactions will cover, subject to customary adjustments, the number of shares of the Company's common stock initially underlying the notes. The capped call transactions are expected generally to reduce the potential dilution to the Company's common stock upon any conversion of the notes. If the initial purchasers exercise their option to purchase additional notes, the Company expects to enter into additional capped call transactions with the counterparties.
The Company expects that, in connection with establishing their initial hedge of the capped call transactions, the counterparties or their respective affiliates may enter into various derivative transactions with respect to the Company's common stock and/or purchase shares of its common stock concurrently with or shortly after the pricing of the notes, including with certain investors in the notes. This activity could increase (or reduce the size of any decrease in) the market price of the Company's common stock or the notes at that time.
In addition, the Company expects that the counterparties or their respective affiliates may modify their hedge positions by entering into or unwinding various derivatives with respect to its common stock and/or purchasing or selling the Company's common stock or other securities in secondary market transactions following the pricing of the notes and prior to the maturity of the notes and are likely to do so on each exercise date of the capped call transactions. This activity could also cause or prevent an increase or a decrease in the market price of the Company's common stock or the notes, which could affect their ability to convert the notes and, to the extent the activity occurs during any observation period related to a conversion of notes, it could affect the amount and value of the consideration that holders will receive upon conversion of the notes.
In addition, if any such capped call transactions fail to become effective, whether or not this offering of notes is completed, the counterparties (or their respective affiliates) may unwind their hedge positions with respect to the Company's common stock, which could adversely affect the price of the Company's common stock and the value of the notes.
The Company does not make any representation or prediction as to the direction or magnitude of any potential effect that the transactions described above may have on the price of the notes or the shares of the Company's common stock. In addition, the Company does not make any representation that the counterparties will engage in these transactions or that these transactions, once commenced, will not be discontinued without notice.
The Company is subject to counterparty risk with respect to the capped call transactions.
The counterparties to the capped call transactions that the Company expects to enter into are financial institutions, and the Company will be subject to the risk that one or more of the counterparties may default or otherwise fail to perform, or may exercise certain rights to terminate, their obligations under the capped call transactions. The Company's exposure to the credit risk of the counterparties will not be secured by any collateral.
Global economic conditions have in the past resulted in the actual or perceived failure or financial difficulties of many financial institutions. If a counterparty to one or more capped call transactions becomes subject to insolvency proceedings, the Company will become an unsecured creditor in those proceedings with a claim equal to its exposure at the time under such transaction. the Company's exposure will depend on many factors but, generally, its exposure will increase if the market price or the volatility of the Company's common stock increases. In addition, upon a default or other failure to perform, or a termination of obligations, by a counterparty, the counterparty may fail to deliver the consideration required to be delivered to the Company under the capped call transactions and it may experience more dilution than the Company currently anticipates with respect to its common stock. The Company can provide no assurances as to the financial stability or viability of the counterparties.
Some significant restructuring transactions may not constitute a fundamental change, in which case the Company would not be obligated to offer to repurchase the notes.
Upon the occurrence of a fundamental change, holders have the right to require the Company to repurchase all or a portion of their notes. However, the fundamental change provisions will not afford protection to holders of notes in the event of other transactions that could adversely affect the notes. For example, transactions such as leveraged recapitalizations, refinancings, restructurings or acquisitions initiated by the Company may not constitute a fundamental change requiring the Company to offer to repurchase the notes. In the event of any such transaction the holders would not have the right to require the Company to repurchase the notes, even though each of these transactions could increase the amount of its indebtedness, or otherwise adversely affect its capital structure or any credit ratings, thereby adversely affecting the holders of notes.
The Company has not registered the notes or the common stock issuable upon conversion, if any, which will limit their ability to resell them.
The notes and the shares of common stock issuable upon conversion of the notes, if any, have not been registered under the Securities Act or any state securities laws. Unless the notes and any shares of common stock issuable upon conversion of the notes, if any, have been registered, they may not be transferred or resold except in a transaction exempt from or not subject to the registration requirements of the Securities Act and applicable state securities laws. The Company does not intend to file a registration statement for the resale of the notes and the common stock, if any, into which the notes are convertible.
The Company cannot assure holders that an active trading market will develop for the notes.
Prior to this offering, there has been no trading market for the notes, and the Company does not intend to apply to list the notes on any securities exchange or to arrange for quotation on any automated dealer quotation system. The Company has been informed by the initial purchasers that they intend to make a market in the notes after the offering is completed. However, the initial purchasers may cease their market-making at any time without notice. In addition, the liquidity of the trading market in the notes, and the market price quoted for the notes, may be adversely affected by changes in the overall market for this type of security and by changes in the Company's financial performance or prospects or in the prospects for companies in its industry generally. As a result, the Company cannot assure holders that an active trading market will develop for the notes. If an active trading market does not develop or is not maintained, the market price and liquidity of the notes may be adversely affected. In that case holders may not be able to sell their notes at a particular time or holders may not be able to sell their notes at a favorable price.
Any adverse rating of the notes may cause their trading price to fall.
The Company does not intend to seek a rating on the notes. However, if a rating service were to rate the notes and if such rating service were to lower its rating on the notes below the rating initially assigned to the notes or otherwise announces its intention to put the notes on credit watch, the trading price of the notes could decline.
Holders may be subject to tax if the Company makes or fails to make certain adjustments to the conversion rate of the notes even though holders do not receive a corresponding cash distribution.
The conversion rate of the notes is subject to adjustment in certain circumstances, including the payment of cash dividends. If the conversion rate is adjusted as a result of a distribution that is taxable to the Company's common stockholders, such as a cash dividend, holders may be deemed to have received a dividend subject to U.S. federal income tax without the receipt of any cash. In addition, a failure to adjust (or to adjust adequately) the conversion rate after an event that increases their proportionate interest in the Company could be treated as a deemed taxable dividend to holders if the failure to adjust (or to adjust adequately) is made in connection with a distribution of cash or other property to the Company's common stockholders. If a make-whole fundamental change occurs prior to the maturity date or the Company issues a notice of redemption under some circumstances, the Company will increase the conversion rate for notes converted in connection with the make-whole fundamental change or during the related redemption period. Such increase may also be treated as a distribution subject to U.S. federal income tax as a dividend. It is unclear whether any such deemed dividend would be eligible for the preferential tax treatment generally available for dividends paid by U.S. corporations to certain U.S. holders. If holders are a non-U.S. holders, any deemed dividend generally would be subject to U.S. federal withholding tax at a 30% rate, or such lower rate as may be specified by an applicable treaty, which may be set off against subsequent payments with respect to the notes (or common stock into which the notes convert). The Company do not currently expect to make distributions on its common stock, although no assurance can be given in this regard.
The Company may redeem the notes at its option, which may adversely affect their return.
The Company may not redeem the notes prior to March 20, 2024. On or after March 20, 2024 it may redeem for cash all or any portion of the notes, at its option if the last reported sale price of its common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on and including, the trading day immediately preceding the date on which the Company provides notice of redemption at a redemption price equal to 100% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. If the Company calls any note for redemption, holders may convert their note called for redemption (or any portion thereof) at any time prior to the close of business on the second scheduled trading day immediately preceding the applicable redemption date. Prevailing interest rates at the time the Company redeem the notes may be lower than the interest rate on the notes. Upon such redemption or conversion, the cash comprising the redemption price, in the case of a redemption, or the applicable conversion consideration, in the case of a conversion in connection with a redemption notice, in either case, may not fully compensate holders for any future interest payments that holders would have otherwise received or for any other lost time value of their notes.
The notes will initially be held in book-entry form and, therefore, holders must rely on the procedures and the relevant clearing systems to exercise their rights and remedies.
Unless and until certificated notes are issued in exchange for book-entry interests in the notes, owners of the book-entry interests will not be considered owners or holders of notes. Instead, DTC, or its nominee, will be the sole holder of the notes. Payments of principal, interest (including any additional interest), cash amounts due upon conversion and other amounts owing on or in respect of the notes in global form will be made to the paying agent, which will make the payments to DTC. Thereafter, such payments will be credited to DTC participants’ accounts that hold book-entry interests in the notes in global form and credited by such participants to indirect participants. Unlike holders of the notes themselves, owners of book-entry interests will not have the direct right to act upon the Company's solicitations for consents or requests for waivers or other actions from holders of the notes. Instead, if a holder owns a book-entry interest, such holder will be permitted to act only to the extent such holder has received appropriate proxies to do so from DTC or, if applicable, a participant. The Company cannot assure holders that the procedures implemented for the granting of such proxies will be sufficient to enable holders to vote on any requested actions on a timely basis.
Risks Related to Ownership of the Company's Common Stock
Anti-takeover provisions contained in the Company's amended and restated certificate of incorporation and amended and restated bylaws, as well as provisions of Delaware law, could impair a takeover attempt.
The Company's amended and restated certificate of incorporation, amended and restated bylaws and Delaware law contain provisions which could have the effect of rendering more difficult, delaying or preventing an acquisition deemed undesirable by the Company's board of directors. Among other things, the Company's amended and restated certificate of incorporation and amended and restated bylaws include provisions:
● | authorizing a classified board of directors whose members serve staggered three-year terms; |
● | authorizing “blank check” preferred stock, which could be issued by the Company's board of directors without stockholder approval and may contain voting, liquidation, dividend and other rights superior to its common stock; |
● | limiting the liability of, and providing indemnification to, its directors and officers; | |
● | limiting the ability of its stockholders to call and bring business before special meetings; |
● | requiring advance notice of stockholder proposals for business to be conducted at meetings of the Company's stockholders and for nominations of candidates for election to its board of directors; and |
● | controlling the procedures for the conduct and scheduling of board of directors and stockholder meetings. |
These provisions, alone or together, could delay or prevent hostile takeovers and changes in control or changes in the Company's management.
As a Delaware corporation, the Company is also subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation Law (the “DGCL”), which prevents certain stockholders holding more than 15% of its outstanding capital stock from engaging in certain business combinations without approval of the holders of at least two-thirds of the Company's outstanding common stock not held by such stockholder.
Any provision of the Company's amended and restated certificate of incorporation, amended and restated bylaws or Delaware law that has the effect of delaying, preventing or deterring a change in control could limit the opportunity for its stockholders to receive a premium for their shares of the Company's capital stock, and could also affect the price that some investors are willing to pay for its common stock.
The Company's business could be negatively affected by activist shareholders.
Responding to actions by activist shareholders could be costly and time-consuming, disrupt the Company's operations and divert the attention of management and its employees. Additionally, perceived uncertainties as to the Company's future direction as a result of shareholder activism or changes to the composition of its board of directors may lead to the perception of a change in the direction of its business or other instability, which may be exploited by its competitors, cause concern to the Company's current or potential customers, and make it more difficult to attract and retain qualified personnel. If customers choose to delay, defer or reduce transactions with the Company or do business with its competitors instead of the Company, then the Company's business, financial condition and operating results would be adversely affected. In addition, the share price of its common stock and the trading price of the notes could experience periods of increased volatility as a result of shareholder activism.
If securities or industry analysts do not publish or cease publishing research or reports about the Company, its business, its market or its competitors, or if they adversely change their recommendations regarding the Company's common stock, the market price and trading volume of its notes and common stock could decline.
The trading market for the Company's notes and common stock will be influenced, to some extent, by the research and reports that securities or industry analysts publish about the Company, its business, its market or its competitors. If any of the analysts who cover the Company adversely change their recommendations regarding its common stock or provide more favorable recommendations about its competitors, the market price of the Company's notes and common stock would likely decline. If any of the analysts who cover the Company cease coverage of the company or fail to regularly publish reports on it, the Company could lose visibility in the financial markets, which in turn could cause the market price and trading volume of its notes and common stock to decline.
The Company does not expect to declare any dividends on its common stock in the foreseeable future.
The Company does not anticipate declaring any cash dividends to holders of its common stock in the foreseeable future. Consequently, investors may need to rely on sales of its common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment. Investors seeking cash dividends should not purchase shares of its common stock.
If the Company raises additional capital through the sale of shares of the Company’s common stock, convertible securities or debt in the future, its stockholders’ ownership in the Company could be diluted and restrictions could be imposed on the Company’s business.
On April 21, 2020, the Company issued and sold an aggregate of 2,742,750 shares of the Company’s common stock, par value $0.001 per share at a price to the public of $10.50 per share. The shares include the full exercise of the underwriter’s option to purchase an additional 357,750 shares of common stock. The Company received net proceeds from the offering of approximately $26.5 million, after deducting underwriting discounts, commissions, and offering expenses of $2.1 million. In addition to this offering, the Company may issue shares of its common stock or securities convertible into its common stock to raise additional capital in the future. To the extent the Company issues such securities, its stockholders may experience substantial dilution and the trading price of the Company’s common stock could decline. If the Company obtains funds through a credit facility or through the issuance of debt or preferred securities, such debt or preferred securities could have rights senior to the existing stockholders’ rights as a common shareholder, which could impair the value of the Company’s common stock.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
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The Company occupies 66,000 square feet for its U.S. Corporate office in Brisbane, California, under a lease which extends through January 31, 2023.2028. The original lease expired on December 31, 2017, and the Company entered into a Second Amendment on July 6, 2017 that extended the term of the lease from December 31, 2017 to January 31, 2023.2023 and a Third Amendment on July 9, 2020 that extended the term of the lease to January 31, 2028. The amendment provides for the following: a) The extension of the lease term, with the extended term to begin on February 1, 2023 and continue until January 31, 2028; b) the abatement of the monthly base rent for the four month period beginning September 1, 2020 and ending December 31, 2020; c) the amendment of monthly base rent during the extension term to approximately $0.2 million for January 2021 with annual increases of 3.5% thereafter; and d) the waiver by the Company of its early termination right in the lease. Pursuant to the terms of the SecondThird Amendment to the Lease Agreement, the Company has the option to extend the term of the lease by an additional 60 months. Additionally, the Company also has a one-time option to terminate the amended lease early effective as of December 31, 2020, in return for payment of a termination fee.
In addition, the Company has leased office facilities in certain countries as follows:
Country | Square Footage | Lease termination or Expiration | ||
Japan | Approximately 5,896 | Two leases, one of which was | ||
France | Approximately 2,239 | One lease which expires in October 2021. | ||
Spain | Approximately 3,584 | One lease which was set to expire in January 31, 2021 but was extended for another two years to January 31, 2023. | ||
Belgium | Approximately 151 | One lease signed effective |
The Company believes that these facilities are suitable and adequate for its current and future needs for at least the next twelve months.
LEGAL PROCEEDINGS |
From time to time, the Company may be involved in legal and administrative proceedings and claims of various types. For a description of material pending legal and regulatory proceedings and settlements as of December 31, 2018,2020, please see Note 11 to the Company’s consolidated financial statements entitled “Commitments and Contingencies,” Part II Item 8, included in this Annual Report on Form 10-K.
MINE SAFETY DISCLOSURES |
Not applicable.
MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Stock Exchange Listing
The Company’s common stock trades on The NASDAQ Global Select Market under the symbol “CUTR.” As of March 1, 2019,2021, the closing sale price of its common stock was $17.72$35.12 per share.
Common Stockholders
The Company had 5 stockholders of record as of March 1, 2019. Since many stockholders choose to hold their shares under the name of their brokerage firm, the2021. The Company estimates thatbelieves the actual number of stockholders was over 4,700 shareholders.is greater than this number of record holders and includes stockholders who are beneficial owners, but whose shares are held in “street” name by brokers and other nominees. This number of holders of record also does not include stockholders whose shares may be held in trust by other entities.
Issuer Purchases of Equity Securities
There were no repurchases of ourthe Company’s common stock under the Company’s Stock Repurchase Program in 2018.2020.
Sales of Unregistered Securities
The Company did not sell any unregistered securities during the period covered by this Annual Report on Form 10-K.
Dividends
For a discussion regarding the Company’s intentions with respect to dividends, see the section titled “Stock-based Compensation Expense” set forth inPart II Item 7 of this Annual Report on Form 10-K.
Securities Authorized for Issuance under Equity Compensation Plans
The information required by this Item regarding equity compensation plans is incorporated by reference to the information set forth in Part III Item 12 of this Annual Report on Form 10-K.
Performance Graph
The graph set forth below compares theCutera, Inc.'s cumulative 5-Year total stockholdershareholder return on our common stock between December 31, 2013, and December 31, 2018, with the cumulative total return for (1) our common stock, (2)returns of the NASDAQ Composite index and (3) the NASDAQ Medical Equipment Index overindex. The graph tracks the same period. This graph assumesperformance of a $100 investment in the investmentCompany’s common stock and in each index (with the reinvestment of $100.00 onall dividends) from December 31, 2013 in our common stock, the NASDAQ Composite Index, and the NASDAQ Medical Equipment Index,2015 to December 31, 2020.
TheIn accordance with SEC rules, the information contained under “Performance Graph” isshall not be deemed filedto be “soliciting material,” or to be “filed” with the SEC or subject to the SEC’s Regulation 14A or 14C, other than as provided under Item 201(e) of Regulation S-K, or to the liabilities of Section 18 of the Securities and Exchange Commission and is notAct of 1934, as amended, except to the extent that the Company specifically request that the information be incorporatedtreated as soliciting material or specifically incorporate it by reference in any of our filingsinto a document filed under the Securities Act, of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this 10-K and irrespective of any general incorporation language in those filings.amended.
SELECTED FINANCIAL DATA |
The following selected consolidated financial data should be read in conjunction with ourthe Company’s Consolidated Financial Statements and the accompanying Notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this report. The selected data in this section is not intended to replace the Consolidated Financial Statements.
Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||||||||||||||||||
Consolidated Statements of Operations Data (in thousands, except per share data): | 2018 | 2017 | 2016 | 2015 | 2014 | 2020* | 2019* | 2018* | 2017 | 2016 | ||||||||||||||||||||||||||||||
Net revenue | $ | 162,720 | $ | 151,493 | $ | 118,056 | 94,761 | $ | 78,138 | $ | 147,683 | $ | 181,712 | $ | 162,720 | $ | 151,493 | 118,056 | ||||||||||||||||||||||
Cost of revenue | 82,338 | 65,383 | 49,921 | 40,478 | 34,765 | 71,911 | 83,549 | 82,338 | 65,383 | 49,921 | ||||||||||||||||||||||||||||||
Gross profit | 80,382 | 86,110 | 68,135 | 54,283 | 43,373 | 75,772 | 98,163 | 80,382 | 86,110 | 68,135 | ||||||||||||||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||||||||||||||||||
Sales and marketing | 58,420 | 52,070 | 41,563 | 35,942 | 32,246 | 52,766 | 71,109 | 58,420 | 52,070 | 41,563 | ||||||||||||||||||||||||||||||
Research and development | 14,359 | 12,874 | 11,232 | 10,733 | 10,543 | 14,322 | 15,085 | 14,359 | 12,874 | 11,232 | ||||||||||||||||||||||||||||||
General and administrative | 20,995 | 14,090 | 12,943 | 12,129 | 11,203 | 31,512 | 24,033 | 20,995 | 14,090 | 12,943 | ||||||||||||||||||||||||||||||
Lease termination income | -- | (4,000 | ) | -- | -- | -- | — | — | — | (4,000 | ) | — | ||||||||||||||||||||||||||||
Total operating expenses | 93,774 | 75,034 | 65,738 | 58,804 | 53,992 | 98,600 | 110,227 | 93,774 | 75,034 | 65,738 | ||||||||||||||||||||||||||||||
Income (loss) from operations | (13,392 | ) | 11,076 | 2,397 | (4,521 | ) | (10,619 | ) | (22,828 | ) | (12,064 | ) | (13,392 | ) | 11,076 | 2,397 | ||||||||||||||||||||||||
Interest and other income, net | (123 | ) | 884 | 323 | 293 | 226 | (579 | ) | (199 | ) | (123 | ) | 884 | 323 | ||||||||||||||||||||||||||
Income (loss) before income taxes | (13,515 | ) | 11,960 | 2,720 | (4,228 | ) | (10,393 | ) | (23,407 | ) | (12,263 | ) | (13,515 | ) | 11,960 | 2,720 | ||||||||||||||||||||||||
Income tax (benefit) provision | 17,255 | (18,033 | ) | 143 | 212 | 219 | 470 | 85 | 17,255 | (18,033 | ) | 143 | ||||||||||||||||||||||||||||
Net income (loss) | $ | (30,770 | ) | $ | 29,993 | $ | 2,557 | $ | (4,440 | ) | $ | (10,612 | ) | $ | (23,877 | ) | $ | (12,348 | ) | $ | (30,770 | ) | $ | 29,993 | $ | 2,557 | ||||||||||||||
Net income (loss) per share: | ||||||||||||||||||||||||||||||||||||||||
Basic | $ | (2.23 | ) | $ | 2.16 | $ | 0.19 | $ | (0.32 | ) | $ | (0.74 | ) | $ | (1.43 | ) | $ | (0.88 | ) | $ | (2.23 | ) | $ | 2.16 | $ | 0.19 | ||||||||||||||
Diluted | $ | (2.23 | ) | $ | 2.04 | $ | 0.19 | $ | (0.32 | ) | $ | (0.74 | ) | $ | (1.43 | ) | $ | (0.88 | ) | $ | (2.23 | ) | $ | 2.04 | $ | 0.19 | ||||||||||||||
Weighted-average number of shares used in per share calculations: | ||||||||||||||||||||||||||||||||||||||||
Basic | 13,771 | 13,873 | 13,225 | 13,960 | 14,254 | 16,691 | 14,096 | 13,771 | 13,873 | 13,225 | ||||||||||||||||||||||||||||||
Diluted | 13,771 | 14,728 | 13,753 | 13,960 | 14,254 | 16,691 | 14,096 | 13,771 | 14,728 | 13,753 |
As of December 31, | As of December 31, | |||||||||||||||||||||||||||||||||||||||
Consolidated Balance Sheet Data (in thousands): | 2018 | 2017 | 2016 | 2015 | 2014 | 2020* | 2019* | 2018* | 2017 | 2016 | ||||||||||||||||||||||||||||||
Cash, cash equivalents and marketable investments | $ | 35,575 | $ | 35,912 | $ | 54,074 | $ | 48,407 | $ | 81,146 | $ | 47,047 | $ | 33,921 | $ | 35,575 | $ | 35,912 | $ | 54,074 | ||||||||||||||||||||
Working capital (current assets less current liabilities) | 39,578 | 45,063 | 59,460 | 49,398 | 81,900 | 51,938 | 36,424 | 39,578 | 45,063 | 59,460 | ||||||||||||||||||||||||||||||
Total assets | 97,637 | 111,238 | 91,854 | 77,518 | 108,913 | 132,733 | 113,738 | 97,637 | 111,238 | 91,854 | ||||||||||||||||||||||||||||||
Total long-term liabilities | 21,495 | 9,174 | 3,631 | 3,034 | 2,455 | |||||||||||||||||||||||||||||||||||
Retained earnings (accumulated deficit) | (24,010) | 2,947 | (27,046) |
| (29,672) |
| (25,232) |
| (60,235 | ) | (36,358 | ) | (24,010 | ) | 2,947 | (27,046 | ) | |||||||||||||||||||||||
Total stockholders’ equity | 46,386 | 64,893 | 61,010 | 50,034 | 80,508 | 56,880 | 45,942 | 46,386 | 64,893 | 61,010 |
* Financial results for year ended December 31, 2020, 2019 and 2018, as compared to the years ended December 31, 2017 2016, 2015, and 20142016 reflect the effects of adopting ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)” and the related amendments, (ASC 606), which provided a new basis of accounting for ourthe Company’s revenue arrangements during fiscal year 2018. The adoption of ASC 606 limits the comparability of revenue and certain expenses, including revenues and costs and operating expenses presented in the resultsstatement of operations for the yearyears ended December 31, 2020, 2019 and 2018, when compared to the years ended December 31, 2017 2016, 2015, and 2014. For additional information regarding the impact from2016. The adoption of this accounting standard, seeASC 606 also limits the comparability of certain balance sheet items, including total assets, for the years ended December 31, 2020, 2019 and 2018 when compared to the years ended December 31, 2017 and 2016. See Note 1, “Revenue Recognition” to the Consolidated Financial Statements set forth in Item 8 of this Annual Report on Form 10-K.
Financial results for year ended December 31, 2020 and 2019, as compared to the years ended December 31, 2018, 2017 and 2016 also reflect the effects of adopting ASU 2016-02, "Leases," (also known as ASC Topic 842) which requires, among other items, lease accounting to recognize most leases as assets and liabilities on the balance sheet. The adoption of ASC 842 limits the comparability of certain balance sheet items for the year ended December 31, 2020 and 2019 when compared to the years ended December 31, 2018, 2017 and 2016. For additional information regarding the impact from adoption of this accounting standard, See Note 1, “Leases” to the Consolidated Financial Statements set forth in Item 8 of this Annual Report on Form 10-K.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The
The followingdiscussionshouldbereadinconjunctionwith our audited financial statements and notes thereto for the Company’sauditedfinancialstatementsandnotestheretoforthefiscalyearendedDecember31, 2018. 2020.ThisAnnualReportonForm10-K,includingthefollowingsections,containsforward-lookingstatementswithinthe meaningofthePrivateSecuritiesLitigationReformActof1995.ThroughoutthisReport,andparticularlyinthisItem7,theforward-lookingstatementsarebaseduponthe following sections, contains forward-looking statements within Company’scurrentexpectations,estimatesandprojectionsandthatreflectthe meaning of Company’sbeliefsandassumptionsbaseduponinformationavailabletothe Private Securities Litigation Reform Act Companyatthedateof 1995. Throughout this Report, and particularly in this Item 7, the forward-looking statements are based upon our current expectations, estimates and projections and that reflect our beliefs and assumptions based upon information available to us at the date of this Report. In somecases, you can identify these statements by words such as “may,” “might,“might,” “could,”“will,” “should,“should,” “expects,” “expects,“plans,”“anticipates,” “plans,“likely,” “anticipates,“believes,” “believes,“estimates,”“intends,” “estimates,“forecasts,” “predicts,“foresees,” “predicts,” “potential” or “continue,” and other similar terms.These forward-looking statements arenotguaranteesoffutureperformanceandaresubjecttorisks,uncertainties, andassumptionsthataredifficulttopredict.The Company’s Company’sactualresults,performanceorachievementscoulddiffermateriallyfromthoseexpressedorimpliedbytheforward-lookingstatements.Theforward-lookingstatementsinclude,butarenotlimitedto,statementsrelatingtothe forward-looking statements. The forward-looking statements include, but are not limited Company’sfuturefinancialperformance,theabilityto statements relating to our future financial performance, growthe ability to grow our Company’sbusiness,increase our the Company’srevenue,manageexpenses, generate additional cash, achieveandmaintainprofitability,developand commercialize existing and new productsandapplications, improve the performance of our the Company’sworldwide sales anddistribution network, and to the outlook regarding long term prospects. The Company cautions you not to place undue reliance on these forward-looking statements, which reflectmanagement’s analysisonly as of thedate of thisAnnual Reporton Form 10-K. The Companyundertakes no obligation to update forward-looking statements to reflect events or circumstances occurring afterthedate of this Form 10-K.
SomeoftheimportantfactorsthatcouldcausetheCompany’sresultstodiffermateriallyfromthoseinthe Company’s results to differ materially from those forward-lookingstatements,andadiscussionofotherrisksanduncertainties,arediscussedin our forward-looking statements, and a discussion of other risks and uncertainties, are discussed in Item1A—RiskFactors.TheCompany encourages encouragesyoutoreadthatsectioncarefullyaswellasother risksdetailedfromtimetotimein our filings with the Company’sfilingswiththeSEC.
Introduction
The Management’s Discussion and Analysis or (“MD&A,&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. | |
●
| CriticalAccountingPoliciesandEstimates.This section describes the key accounting policies that are affected by critical accounting estimates. |
● | RecentAccountingGuidance.This section describes the issuance and effect of new accounting pronouncements that are or may be applicable to us. |
● | ResultsofOperations.This section provides the Company’s analysis and outlook for the significant line items on the Company’s Consolidated Statements of Operations. | |
● | LiquidityandCapitalResources. 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, 2020. |
Executive Summary
Company Description
The Company is a leading medical device company specializing in the research, development, manufacture, marketing and servicing of light and other energy basedenergy-based aesthetics systems for practitioners worldwide. In addition to internal development of products, the Company distributes third party sourced products under ourthe Company’s own brand names. The Company offers easy-to-use products which enable practitioners to perform safe and effective aesthetic procedures, including treatment for body contouring, skin resurfacing and revitalization, tattoo removal, removal of benign pigmented lesions, vascular conditions, hair removal, toenail fungus and women's intimate health. OurThe Company’s platforms are designed to be easily upgraded to add additional applications and hand pieces, which provide flexibility for ourthe Company’s customers as they expand their practices. In addition to systems and upgrade revenue, the Company generates revenue from the sale of post warranty service contracts, providing services for products that are out of warranty, hand piece refills and other per procedure related revenue on select systems and distribution of third-party manufactured skincare products. The Company also expands its revenues from sales of third-party skincare products by utilizing its network and relationships with physicians and practitioners.
The Company’s ongoing research and development activities primarily focus on developing new products, as well as improving and enhancing the Company’s portfolio of existing products. The Company also explores ways to expand the Company’s product offerings through alternative arrangements with other companies, such as distribution arrangements. The Company introduced Juliet, a product for women’s intimate health, in December 2017, SecretRF, a fractional RF microneedling device for skin revitalization, in January 2018, enlightenSRin April 2018, andtruSculptiDin July 2018, excel V+ in February 2019 truSculpt iDflex in June 2019, Secret PRO in July 2018.2020 and excel V+III during the fourth quarter of 2020.
The Company’s corporate headquarters and U.S. operations are located in Brisbane, California, where the Company conducts manufacturing, warehousing, research and development, regulatory, sales and marketing, service, and administrative activities. The Company markets sells and services the Company’s products through direct sales and service employees in North America (including Canada), Australia, Austria, Belgium, France, Germany, Hong Kong, Japan, Spain, Switzerland and the United Kingdom. Sales and Services outside of these direct markets are made through a worldwide distributor network in over 4042 countries.
Products and Services
The Company derives revenue from the sale of Products and Services. Product revenue includes revenue from the sale of systems, hand pieces and upgrade of systems (collectively “Systems” revenue), replacement hand pieces, truSculptiDcycle refills, and truSculpt flex cycle refills, as well as single use disposable tips applicable to Juliet andSecret Secret RF (“Consumables” revenue), and the sale of third party manufactured skincare products (“Skincare” revenue); and the leasing of equipment through a membership program . A system consists of a console that incorporates a universal graphic user interface, a laser and (or) other energy basedenergy-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 basedenergy-based module is sometimes contained in the hand piece such as with the Company’s Pearl and Pearl Fractional applications instead of within the console.
The Company offers customers the ability to select the system that best fits their practice at the time of purchase and then to cost-effectively add applications to their system as their practice grows. This provides customers the flexibility to upgrade their systems whenever they choose and provides us with a source of additional Systems revenue. The Company’s primary system platforms include: excel, enlighten, Juliet, Secret RF, truSculpt and xeo.
Skincare revenue relates to the distribution of ZO’s skincare products in Japan.
Service includes prepaid service contracts, training services, enlighten installation, direct billings for detachable hand piece replacements and revenue for parts, customer marketing support and labor on out-of-warranty products.
Significant Business Trends.
The Company believes that the ability to grow revenue will be primarily dependent on the following:
● continuing to expand the Company’s product offerings, both through internal development and sourcing from other vendors;
● ongoing investment in the Company’s global sales and marketing infrastructure;
● use of clinical results to support new aesthetic products and applications;
● enhanced luminary development and reference selling efforts (to develop a location where Company’s products can be displayed and used to assist in selling efforts);
● customer demand for the Company’s products;
● weakening against the U.S. dollar of key international currencies in which the Company transacts (e.g. Australian Dollar, Japanese Yen, Euro, Swiss Franc and British Pound);
● consumer demand for the application of the Company’s products;
● marketing to physicians in the core dermatology and plastic surgeon specialties, as well as outside those specialties; and
● generating recurring revenue from the Company’s growing installed base of customers through the sale of system upgrades, services, hand piece refills, truSculpt cycles, skincare products and replacement tips for Juliet and Secret RF products.
For a detailed discussion of the significant business trends impacting the Company’s business, please see the section titled “Results of Operations” below.
Factors that May Impact Future Performance
The Company’s industry is impacted by numerous competitive, regulatory and other significant factors. The Company’s industry is highly competitive and the Company’s future performance depends on the Company’s ability to compete successfully. Additionally, the Company’s future performance is dependent upon the ability to continue to expand the Company’s product offerings with innovative technologies, obtain regulatory clearances for the Company’s products, protect the proprietary technology of the products and manufacturing processes, manufacture the products cost-effectively, and successfully market and distribute the products in a profitable manner. If the Company fails to execute on the aforementioned initiatives, the Company’s business would be adversely affected.
On July 30, 2018, the FDA issued a public statement and sent letters to a number of companies in the medical aesthetics industry expressing concerns regarding “vaginal rejuvenation” procedures using energy-based devices. The Company was not named in the announcement, and the Company has not received a letter from the agency, however the Company’s Juliet device is promoted and used by physicians in procedures that are the subject of the FDA’s public statement. The Company is not aware of any adverse events resulting from the use of Juliet , and believes that Juliet’s development and promotion is based on science and clinical evidence. Notwithstanding, the Company experienced a significant slowdown in the sale of Juliet systems in the third and fourth quarters of 2018. The Company believes this relates to the safety letter, given the timing.
The Company supports any action that helps ensure patient safety going forward. The Company has a robust, multi-functional process that reviews its promotional claims and materials to ensure they are truthful, not misleading, fair and balanced, and supported by sound scientific evidence.
A detailed discussion of these and other factors that could impact the Company’s future performance are provided in (1) the Company’s Annual Report on Form 10-K for the year ended December 31, 2017- Part I, Item 1A “Risk Factors.” (2) the Company’s reports and registration statements filed and furnished from time to time with the SEC, and (3) other announcements the Company makes from time to time.
Critical accounting policies, significant judgments and use of estimates
The preparation of the Company’s Consolidated Financial Statements and related disclosures in conformity with generally accepted accounting principles in the U.S. (“GAAP”) requires the Company to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. These estimates, judgments and assumptions are based on historical experience and on various other factors that the Company believes are reasonable under the circumstances. The Company periodically reviews its estimates and make 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.
Critical accounting estimates, as defined by the SEC, are those that are most important to the portrayal of the Company’s financial condition and results of operations and require our management’s most difficult and subjective judgments and estimates of matters that are inherently uncertain. The Company’s critical accounting estimates are as follows:
Revenue Recognition
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.
The Company's system sale arrangements generally 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 contract. The Company’s system sale arrangements include a combination of the following performance obligations: the system and software license (considered as one performance obligation), system accessories (hand pieces), training, other accessories, extended service contracts and marketing 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 of the performance obligations at a point in time. Systems, system accessories (hand pieces), training, time and materials services are also sold on a stand-alone basis, and related performance obligations are satisfied at a point in time. 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.
Nature of Products and ServicesPearl
Systems
System revenue represents the sale of a system or an upgrade of an existing system. 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. 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 Fractionalapplications instead of within the console.
The Company offers customers the ability to select the system that best fits their practice at the time of purchase and then to cost-effectively add applications to their system as their practice grows. This provides customers the flexibility to upgrade their systems whenever they choose and provides the Company with a source of additional Systems revenue. The Company’s primary system platforms include excel,enlighten,Juliet,SecretRF,truSculptand xeo.
The Company concludes that the system or upgrade and the right to use the embedded software represent a single performance obligation as the software license is integralSkincare revenue relates to the functionalitydistribution of the system or upgrade.
The Company does not identify calibration and installation services for systems other than enlighten as performance obligations because such services are immaterial in the context of the contract. The related costs to complete calibration and installation for systems other than enlighten are immaterial. Calibration and installation services for enlighten systems are identified as separate performance obligations.
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. The Company recognizes revenue on a cash basis for system sales to international direct end-customer sales that have not been credit approved, as the performance obligations in the contract are satisfied. For systems sold through credit approved distributors, revenue is recognized at the time of shipment.
The Company’s system arrangements generally do not provide a right of return. The Company provides a standard one-year warranty coverage for all systems sold to end-customers to cover parts and service, and extended service plans that vary by the type of product and the level of service desired.
The Company typically receives payment for its system consoles and other accessories within 30 days of shipment. Certain international distributor arrangements allow for longer payment terms.
Skincare products
The Company sells third-party manufacturedZO’s skincare products in Japan. The third-party skincare products are purchased from thea third-party manufacturersmanufacturer and sold to medical offices and licensed physicians. The Company acts as the principal in this arrangement, as itthe Company determines the price to charge customers for the skincare products and controls the products before they are transferred to the customer. Skincare products are typically sold in
Service includes prepaid service contracts, in which the skincare products represent the sole performance obligations. The Company recognizes revenue for skincare products at a point in time, generally upon shipment.enlighteninstallation, customer marketing support and labor on out-of-warranty products.
Consumables (Other accessories)Significant Business Trends
The Company treats its customers' purchasesbelieves that the ability to grow revenue will be primarily impacted by the following:
● | continuing to expand the Company’s product offerings, both through internal development and sourcing from other vendors; | |
● | ongoing investment in the Company’s global sales and marketing infrastructure; |
● | use of clinical results to support new aesthetic products and applications; | |
● | enhanced luminary development and reference selling efforts (to develop a location where Company’s products can be displayed and used to assist in selling efforts); |
● | customer demand for the Company’s products; |
● | consumer demand for the application of the Company’s products; |
● | marketing to physicians in the core dermatology and plastic surgeon specialties, as well as outside those specialties; and |
● | generating recurring revenue from the Company’s growing installed base of customers through the sale of system upgrades, services, hand piece refills, truSculptcycles, skincare products and replacement tips for Julietand SecretRFproducts. |
For a detailed discussion of replacement Titan, truSculpt 3D and truSculpt iD hand pieces as Consumable revenue, which provides the Company with a source of recurring revenue from existing customers. The Company’s recently launched Juliet and Secret RF products have single use disposable tips which must be replaced after every treatment. Sales of these consumable tips further enhancesignificant business trends impacting the Company’s recurring revenue. Hand piece refillsbusiness, please see the section titled “Results of Operations” below.
Critical accounting policies, significant judgments and use of estimates
The preparation of the Company’s legacy truSculpt productaudited 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 accounted formaterial 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 accordancethe 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 critical accounting policies, judgments and estimates should be read in conjunction with the Company’s standard warrantyaudited consolidated financial statements and service contract policies.the notes thereto and other disclosures included in this report.
For an analysis of the Company’s Critical Accounting Policies and Estimates please refer to Note 1 “Summary of significant accounting policies” to the Company’s audited consolidated financial statements included in Part II, Item 8 of this report.
The Company believes the following critical accounting policies, estimates and assumptions may have a material impact on reported financial condition and operating performance and may involve significant levels of judgment to account for highly uncertain matters or are susceptible to significant change:
Extended contract servicesRevenue Recognition
See "Part II, Item 8. Revenue Recognition, Note 1" to the consolidated financial statements for the year ended December 31, 2020, included in this Annual Report on Form 10-K for additional information about the Company’s revenue recognition policy, significant judgement and criteria for recognizing revenue.
The Company offers post-warrantyenters into contracts with multiple performance obligations where customers purchase a combination of systems and services. Determining whether systems and services to its customers through extended service contractsare considered distinct performance obligations that cover replacement parts and laborshould be accounted for separately requires judgment. The Company determines the transaction price for a term of one, two,contract based on the consideration it expects to receive in exchange for the transferred goods or three years.services. To the extent the transaction price includes variable consideration, such as expected price adjustments for returns, the Company applies judgment when estimating variable consideration and when estimating the extent to which the transaction price is subject to the constraint on variable consideration. The Company also offers servicesevaluates constraints based on a time-and-materials basis for detachable hand piece replacements, partsits historical and labor. These post-warranty services serve as additional sources of recurring revenue from the Company’s installed product base. Service contract revenue is recognized over time, using a time based measure of progress, as the customers benefit from the service throughout the service period. 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 system to be provided within 90 to 180 days of purchase. The Company considers training as a separate performance obligation as customers can immediately benefit from the training due to the fact that theprojected experience with similar customer already has the system. Training is also sold separately from systems. The Company recognizes revenue for training when the training is provided. Training is not required for customers to use the systems.
Customer Marketing Support
In North America, the Company offers marketing and consulting phone support to its customers who purchase its truSculpt 3D and truSculpt iD systems. These customer marketing support services include a practice development model and marketing training, performed remotely with ongoing phone consultations for six months from date of purchase. The Company considers customer marketing support a separate performance obligation, and recognizes revenue over the six-month term of the contracts.
Significant Judgments
More judgments and estimates are required under ASC Topic 606 than were required under the previous revenue recognition guidance, ASC Topic 605. Revenue recognition under ASC Topic 606 for the Company’s arrangements may be dependent on contract-specific terms.
JudgmentThe Company allocates revenue to each performance obligation in proportion to the relative standalone selling prices and recognize revenue when control of the related goods or services is requiredtransferred for each performance obligation.
The Company utilizes the observable standalone selling price when available, which represents the price charged for the performance obligation when sold separately. When standalone selling prices for systems or services are not directly observable, the Company determines the standalone selling prices using relevant information available and applies suitable estimation methods including, but not limited to, determinethe cost plus a margin approach.
The Company determines the standalone selling price ("SSP"(“SSP”), for each distinct performance obligation. The Company estimates SSPs for each performance obligation as follows:
Systems: The SSPs for systems are based on directly observable sales in similar circumstances to similar customers. When SSP is not directly observable, the Company estimates SSP using the expected cost plus margin approach.
Training: SSP isThe SSPs for extended service contracts are based on observable priceprices when sold on a standalone basis.
Extended warranty: SSP is based on observable price when sold on a standalone basis (by customer type).
Customer Marketing Support: SSP is estimated based on cost plus a margin.
The Company will combine two or more contracts entered into at or near the same time with the same customer (or related parties of the customer) and account for the contracts as a single contract. If a group of agreements are so closely related that they are, in effect, part of a single arrangement, such agreements are deemed to be one arrangement for revenue recognition purposes. The Company exercises significant judgment to evaluate the relevant facts and circumstances in determining whether the separate agreements should be accounted for separately or as, in substance, a single arrangement. The Company’s judgments about whether a group of contracts comprise a single arrangement can affect the allocation of consideration to the distinct performance obligations, which could have an effect on results of operations for the periods involved.
The Company is required to estimate the total consideration expected to be received from contracts with customers. Generally, the Company has not experienced significant returns from or refunds to customers. These estimates require significant judgment and the change in these estimates could have an effect on the Company's results of operations during the periods involved.
Bill and Hold Arrangement
Under the ASC 605 in 2017, the Company segregated certain products for one order at the request of a customer for a limited period of time at a third-party storage facility (“bill -and -hold”). Revenue recognition for the bill-and-hold transaction requires consideration of, among other things, whether the customer has made a written fixed commitment to purchase the product; the existence of a substantial business purpose for the arrangement; the bill-and-hold arrangement is at the request of the customer; the scheduled delivery date must be reasonable and consistent with the buyer's business purpose; title and risk of ownership must pass to the customer and no additional performance obligations exist by the Company, at the time of the bill-and-hold the product is complete and ready for shipment and the product has been segregated from the Company's inventory. The Company recognized revenue of $938,000 for that bill-and-hold transaction in 2017.
The Company recognized revenue of $0 and $938,000 for a bill-and-hold transaction in 2018 and 2017 respectively. There were no such transactions in 2016.
Loyalty Program
The Company launched a customerCompany’s loyalty program during the third quarter of 2018 for qualified customers located in the U.S. and Canada. Under the program, customers accumulate points based on the customers purchasing ortheir purchasing levels. Once a loyalty program member achieves a certain tier level, the member earns a reward.reward such as the right to attend the Company’s advanced training event for truSculpt, or a ticket for the Company’s annual forum. A customer’s account has tomust be in good standing in order to receive the benefits of the rewards program. Rewards are givenearned on a quarterly basis and must be used in the following quarter. Customers receive a notification regarding their rewards tier by the fifth (5th) day of 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 salesrevenue at the time the reward is earned.
Deferred Sales Commissions
Incremental costs of obtaining a contract, including sales commissions, are allocated to the distinct goods and services to which they relate based on the relative stand-alone selling prices. Incremental costs related to obligations delivered at inception are recognized at contract inception. Those related to obligations delivered over time are capitalized and amortized on a straight-line basis over the expected customer relationship period if the Company expects to recover those costs. 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 for the Company’s product and service arrangements.
Valuation of Goodwill
Goodwill represents the excess of the purchase price over the fair value of net identifiable assets and liabilities.
Goodwill is initially valued based on the excess of the purchase price of a business combination over the fair value of acquired net assets recognized and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized.
Goodwill is not amortized, but is tested for impairment annually, at the reporting unit level, in the fourth quarter and whenever events or circumstances indicate impairment may exist. An impairment charge is recorded for the amount, if any, by which the carrying amount of goodwill exceeds its implied fair value. See "Part II, Item 8. Financial Statements, Note 1" in the accompanying Notes to consolidated financial statements for more information.
Capitalized Cloud Computing Costs
The Company capitalizes costs incurred related to implementation costs incurred in a hosting arrangement that is a service contract to develop or obtain internal-use software in accordance with ASU No. 2018-15, "Intangibles (Topic 350): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract," which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The capitalized implementation costs are then amortized over the term of the hosting arrangement inclusive of expected contract renewals, which is generally three to five years. See "Part II, Item 8. Financial Statements, Note 1" in the accompanying Notes to consolidated financial statements for more information. The Company periodically assesses the capitalized implementation costs for impairment. If the Company determines that an impairment is necessary, the Company records an impairment loss.
Leases
Lessee
The Company is a party to certain operating and finance leases for vehicles, office space and storages. The Company’s material operating leases consist of office space, as well as storage facilities. The Company’s leases generally have remaining terms of 1 to 10 years, some of which include options to renew the leases for up to 5 years.
The Company determines if a contract contains a lease at inception. Right of Use Assets and lease liabilities are recognized at the lease commencement date. Operating lease liabilities represent the present value of lease payments not yet paid. Operating lease Right of Use 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.
The Company recognizes expense for these leases on a straight-line basis over the lease term. Additionally, 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.
Total capitalized costs asLessor
Beginning in 2020, the Company also enters into leasing transactions, in which the Company is the lessor, offered through the Company's membership program. All of the yearCompany's leases for equipment rentals were initially accounted for as operating leases. The lease agreements are typically for three years; however, the customer has the right to terminate the lease after twelve months with no penalty. As such, the Company has determined that the expected term of the lease is twelve-months. Rental charges are a fixed monthly fee, paid at the beginning of each month, over the term of the lease. Along with the leased equipment, the membership program provides customers with a warranty service and a fixed amount of consumables per month for the term of the lease, which are classified as non-lease components. The Company has made an accounting policy election to account for qualifying lease components and associated non-lease components as a single component; accordingly, a lease component and an associated warranty service non-lease component are combined and accounted for as an operating lease. The consumables do not qualify for the practical expedient and are accounted for as a separate non-lease component.
The initial direct costs related to the Company’s operating leases for equipment rentals include the related commissions paid to employees upon the origination of a lease agreement. These costs are included in Other current assets and prepaid expenses on the consolidated balance sheets and are amortized over the lease term of twelve-months.
During the fourth quarter ended December 31, 20182020, some of the membership program agreements were $5.2 million and are included in other long-term assets inamended to grant the Company’s consolidated balance sheet. Amortization of this asset was $1.8 millionlessees an option to purchase the leased system from the Company, at any time during the year ended December 31, 2018period of 12 months from signing the amended agreement. For contracts signed under the amended membership agreement, the Company classified and accounted for the arrangement as sales-type leases, as the Company determined it is included in sales and marketing expense inreasonably certain that the Company’s consolidated statements of operations.customer will exercise the purchase option.
ValuationAt the commencement of Inventoriesthe sales-type leases, the Company derecognized the underlying equipment and recognized a lease receivable if collectability criteria was met.
The Company states its inventoriesadopted ASC Topic 842 on January 1, 2019, applying the modified retrospective method to all leases existing at the date of initial application. The comparative information has not been adjusted and continues to be reported under the accounting standards in effect for the prior period.
See "Part II, Item 8. Financial Statements, Notes 1 and 11" in the accompanying Notes to consolidated financial statements for more information.
Valuation of Inventories
Inventories are stated at the lower of cost and net realizable value, computedcost being determined on a standard cost basis which approximates actual cost on a first-in, first-out basis. Net realizable value is the estimated selling priceprices in the ordinary course of the Company’s business, less reasonably predictable costcosts of completion, disposal, and transportation. Standard costs are monitored and updated quarterly or as necessary, to reflect changes in raw material costs, labor to manufacture the product and overhead rates.
The cost basis of the Company’s inventory is reduced for any products that are considered excess or obsolete based upon assumptions about future demand and market conditions. The Company provides for excess and obsolete inventories when conditions indicate that the inventory cost is not recoverable due to physical deterioration, forecast usage, obsolescence, reductions in estimated future demand and reductions in selling prices. Inventory provisions are measured as the difference between the cost of inventory and net realizable value to establish a lower cost basis for the inventories. The Company balances the need to maintain strategic inventory levels with the risk of obsolescence due to changing technology, timing of new product introductions and customer demand levels. Unfavorable changes in market conditions may result in a need for additional inventory provisions that could adversely impact our gross margins. Conversely, favorable changes in demand could result in higher gross margins when product that had previously been written down is sold.
The Company includes demonstration units within inventories. Demonstration units are carried at cost and amortized over an estimated economic life of two years. Amortization expense related to demonstration units is recorded in Products cost of revenue or in the respective operating expense line based on which function and purpose for which the demonstration units are being used. Proceeds from the sale of demonstration units are recorded as revenue and all costs incurred to refurbish the systems prior to sale are charged to cost of revenue.
See "Part II, Item 8. Financial Statements, Note 1" in the accompanying Notes to consolidated financial statements for more information.
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 Company’s equity incentive plans provide for the grant of incentive stock options, non-statutory stock options, RSAs, restricted stock units (“RSUs”), stock appreciation rights, performance stock units, performance shares, and other stock or cash awards. See "Part II, Item 8. Financial Statements, Note 6" in the accompanying Notes to consolidated financial statements for more information.
The Company accounts for stock-based compensation costs in accordance with the accounting standards for share-based compensation, which require that all share basedshare-based payments to employees and non-employees be recognized in the consolidated statements of operations based on their fair values. The Company grants stock options, restricted stock units (“RSUs”) and performance stock units (“PSUs”) equity awards and employee stock purchase plan ("ESPP").
Stock Options
The Company accounts for stock-based compensation in accordance with the fair value recognition provisions of U.S. GAAP. To value options, the Company uses the Black- ScholesBlack-Scholes option-pricing model using the single-option approach which requiresto determine the fair value of options granted. Option-pricing models require the input of highly subjective assumptions, particularly for the expected stock price volatility and complex assumptions.the expected term of options. The risk-free interest rate is based on the U.S. Treasury yield for a duration similar to the expected term at the date of grant. The Company recognizeshas never paid any cash dividends on its common stock and it has no intention to pay a dividend at this time; therefore, the expense associated with options using a single award approachCompany assumes that no dividends will be paid over the requisite service period.expected terms of option awards. The Company accounts for all stock options awardeddetermines the assumptions to nonemployees atbe used in the fair valuevaluation of option grants as of the consideration received ordate of grant. As such, the fair value ofCompany uses different assumptions during the equity instrument issued, as calculated using the Black-Scholes model. The Company subjects stockyear if it grants options granted to non-employees to periodic revaluation at each reporting date as the underlying equity instruments vest.different dates.
The assumptions used in the Black-Scholes-option pricing model to determine the fair value of an award include the following:
● Expected term –Term: The expected term represents the weighted-average period that the recipient of the option will retain their vested stock options before exercising them.are expected to be outstanding prior to being exercised. The Company determines expected term is based on the observed and expected time to post-vesting exercise of options by employees. The Company use historical exercise patterns and its expectation of previously grantedthe time it will take for employees to exercise options in relation to stock price movements to derive an employee behavioral pattern used to forecast expected exercise patterns. The expected term of groups of employees that have similar historical exercise patterns has been considered separately for valuation purposes.still outstanding.
●Expected Volatility – The: For the underlying stock price volatility of our stock. Thethe Company’s stock, the Company estimates volatility solely based on a 50-50 blend of ourthe Company’s historical volatility and the implied volatility of freely traded options of ourits stock in the open marketprice.
● Expected risk-free interest rateForfeitures: The amount of stock-based compensation recognized during a period is based on the value of the portion of the awards that are ultimately expected to vest. Under ASC 718, the Company has made an accounting policy to estimate forfeitures at the time awards are granted and dividend rate over the expected term.revises, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
Risk-Free Interest Rate: The risk-free interest rate is based on the U.S. treasury yield curve in effect at the time of grant for the expected term of the stock option.
Restricted Stock Units
The Company grants RSUs to ourthe Company’s directors, officers and management employees and non-employees. The fair value of RSUs is based on the stock price on the grant date using a single-award approach. The RSUs are subject to a service vesting condition and are recognized on a straight-line basis over the requisite service period. For RSUs to non-employees, the Company recognizes expense on an accelerated attribution method and these equity awards are re-measured at fair value at the end of each reporting period, with the changes in fair value recorded to stock-based compensation expense in the period in which the change occurs. Shares are issued on the vesting dates, net of applicable tax withholding requirements to be paid by usthe Company on behalf of the recipient. As a result, the actual number of shares issued will be fewer than the actual number of RSUs outstanding. Furthermore, the Company records the obligation for withholding amounts to be paid by usthe Company as a reduction to additional paid-in capital.
Performance Stock Units
Performance stock units are granted to ourthe Company’s officers and management employees and non-employees. PSU’s with operational measurement goals are measured at the market price of ourthe Company’s stock on the date of grant, whereas PSUs with market-based measurement goals are measured using a Monte-Carlo simulation option-pricing model. The Monte-Carlo simulation option-pricing model uses the same input assumptions as the Black-Scholes model; however, it also further incorporates into the fair-value determination the possibility that the market condition may not be satisfied.grant. The final number of shares of common stock issuable at the end of the performance measurement period, subject to the recipient’s continued service through that date, is determined based on the expected degree of achievement of the performance goals. For PSUs to non-employees, the Company recognizes expense on an accelerated attribution method and these equity awards are re-measured at fair value at the end of each reporting period, with the changes in fair value recorded to stock-based compensation expense in the period in which the change occurs. Stock-based compensation expense for PSUs is recognized based on the expected degree of achievement of the performance goals over the vesting period. However, stock-based compensation expense for market-based PSU awards are recognized regardless of whether the market condition is satisfied, provided that the requisite service has been provided. On the vesting date of PSU awards, the Company issues fully-paidfully paid up common stock, net of the minimum statutory tax withholding requirements to be paid by usthe Company and records the obligation for withholding amounts as a reduction to additional paid-in capital.
Forfeiture Rates
During 2020 and 2019, the Company’s Board granted to executive officers, senior management and certain employees PSUs that vest subject to the recipients’ continued service and to the achievement of certain operational goals for the Company’s 2020 and 2019 fiscal year which consist of the achievement of revenue targets for consumable products, revenue targets for international revenue, and certain operational milestones related to product performance and business management.
On April 1, 2020, the Company issued RSUs to settle bonuses owed to management under the 2019 Management Bonus Program. In the past, the Company paid these bonuses with cash on hand. However, due to the economic conditions resulting from COVID-19, fully vested shares were issued in lieu of cash. The Company issued 209,981 shares related to this bonus payment to management and recognized $2.6 million in stock-based compensation expense during fiscal year 2020. The Company also recorded an equivalent reduction in bonus expense as a result of the settlement of the bonus in shares.
For a significant majority of the Company’s awards, share-based compensation expense is recognized on a straight-line basis over the requisite service period, which ranges from one to four years depending on the award. The Company recognizes share-based compensation expense for the portion of the equity award that is expected to vest over the requisite service period and develops an estimate of the number of share-based awards which will ultimately vest, primarily based on historical experience within separate groups of employees.employees and expectations regarding achievement of PSU goals for PSU awards. The forfeiture rates used in 20182020 ranged from 0% to 17%20.8%. The estimated forfeiture rate is reassessed periodically throughout the requisite service period. Such estimates are revised if they differ materially from actual forfeitures. As required, the forfeiture estimates will be adjusted to reflect actual forfeitures when an award vests. For the award types discussed above, if the employee or non-employee terminates employment prior to being vested in an award, then the award is forfeited.
ProvisionModifications of the terms of outstanding awards may result in significant increases or decreases in share-based compensation. During the third quarter of 2020, the Company’s Board modified RSUs awards granted to certain senior management that vest subject to the recipients’ continued service.
There were no significant modifications to the terms of outstanding options, and PSUs during 2020.
During the quarter ended March 31, 2020, the Company’s Board of Directors granted its executive officers, senior management, and certain employees 98,580 PSUs. The PSUs granted in the quarter ended March 31, 2020 vest subject to the recipients continued service and to the achievement of specific optional and regulatory milestones.
On August 2, 2020, the Board awarded its new CFO, Rohan Seth, an option grant for 60,000 shares, which vests over 5 years, and a PSU award covering a target of 22,423 shares, which vests over 2.5 years and is subject to performance-based criteria relating to the achievement of certain goals with 40% based on achievement of Finance department goals and 60% based on the Company’s achievement of financial performance. The maximum number of shares that may vest under the award is 150% of the target number of shares of Common Stock subject to the award.
See "Part II, Item 8. Financial Statements, Notes 1 and 6" in the accompanying Notes to consolidated financial statements for more information.
Income Taxes
The provision for income taxes is determined using the asset and liability approach of accounting for income taxes. Under this approach, deferred taxes represent the estimated future tax effects of temporary differences between book and tax treatment of assets and liabilities and carryforwards to the extent they are realizable.
The Company is subject to taxes on earnings in both the U.S. and various foreign jurisdictions. AsOn a global taxpayer, significant judgments and estimatesquarterly basis, the Company assesses the realizability of its deferred tax assets. For those jurisdictions where tax carryforwards are required in evaluating our uncertain tax positions and determining our provision for income taxes on earnings. The Company recognizes tax benefits from uncertain tax positions only if itlikely to expire unused or the projected operating results indicate that realization is not more likely than not, a valuation allowance is recorded to offset the deferred tax asset within that jurisdiction. In assessing the need for a valuation allowance, the Company considers future taxable income and ongoing prudent and feasible tax planning strategies. In the event that the Company determines that it would be able to realize its deferred tax position will be sustained on examination byassets in the taxing authorities, based on the technical meritsfuture in excess of the position. The tax benefits recognizednet recorded amount, a reduction of the valuation allowance would increase income in the financial statements fromperiod such positionsdetermination was made. Likewise, should the Company determine that it would not be able to realize all or part of its net deferred tax asset in the future, a reduction to the deferred tax asset would be charged to income in the period such determination was made.
The Company’s net taxable temporary differences and tax carryforwards are then measured based onrecorded using the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.enacted tax rates expected to apply to taxable income in the periods in which the deferred tax liability or asset is expected to be settled or realized. Should the expected applicable tax rates change in the future, an adjustment to the Company’s deferred taxes would be credited or charged, as appropriate, to income in the period such determination was made.
The Company’s effective tax rates have differed from the statutory rate primarily due to changes in the valuation allowance, foreign operations, research and development tax credits, state taxes, and certain benefits realized related to stock option activity. The Company’s current effective tax rate does not assume U.S. taxes on undistributed profits of foreign subsidiaries. These earnings could become subject to incremental foreign withholding or U.S. federal and state taxes, should they either be deemed or actually remitted to the U.S. The Company’s future effective tax rates could be adversely affected by earnings being lower in countries where the Company has lower statutory rates and being higher in countries where the Company has higher statutory rates, or by changes in tax laws, accounting principles, interpretations thereof, net operating loss carryback, research, and development tax credits, and due to changes in the valuation allowance ofapplied to its U.S. deferred tax assets. In addition, the Company is subject to the examination of ourthe Company’s income tax returns by the Internal Revenue Service and other tax authorities. The Company regularly assesses the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of ourthe Company’s provision for income taxes.
Undistributed earnings of the Company’s foreign subsidiaries atas of December 31, 20182020 are considered to be indefinitely reinvested and, accordingly, no provision for federal and state income taxes has been provided thereon. Due to the Transition Tax and Global Intangible Low-Tax Income (“GILTI”) regimes as enacted by the 2017 Tax Act, those foreign earnings will not be subject to federal income taxes when actually distributed in the form of a dividend or otherwise. The Company, however, could still be subject to state income taxes and withholding taxes payable to various foreign countries. The amounts of taxes which the Company could be subject to are not material to the accompanying financial statements.
In December 2017,On March 27, 2020, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting ImplicationsU.S. federal government enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). The CARES Act changed several of the Tax Cuts and Jobs Act (“SAB 118”), which allows companies to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. Since the 2017 Tax Act was passed late in the fourth quarter of 2017, and ongoing guidance and accounting interpretation was yet to be issued, the Company’s accounting of the transition tax and deferred tax re-measurements was incomplete as of December 31, 2017. The Company filed its 2017 Federalexisting U.S. corporate income tax returnlaws by, among other things, increasing the amount of deductible interest, allowing companies to carry back certain Net Operating Losses (“NOLs”) and increasing the amount of NOLs that corporations can use to offset income. Further, in December 2020, the fourth quarterConsolidated Appropriations Act, 2021 was signed into law. It clarified that gross income does not include any amount that would otherwise arise from the forgiveness of 2018.a PPP loan. The Company’s final analysis andCARES Act did not have a material impact ofon the 2017 Tax Act is reflected in theCompany's income tax provision, deferred tax assets and liabilities, and related tax disclosures for the year ended December 31, 2018. There was a net increase of approximately $0.3 million to the originally estimated $7.3 million remeasurement of deferred tax assets. The Company considers the $0.3 million true-up to be an immaterial change in estimate which has been reflected within the measurement period in accordance with SAB 118.taxes payable.
In January 2018, the FASB released guidance on the accounting for tax on the GILTI provisions of the 2017 Tax Act. The GILTI provisions impose a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. The guidance indicates that either accounting for deferred taxesCompany periodically assesses its exposures related to GILTI inclusionsits global provision for income taxes and believe that it has appropriately accrued taxes for contingencies. Any reduction of these contingent liabilities or treating any taxes on GILTI inclusions as aadditional assessment would increase or decrease income, respectively, in the period cost are both acceptable methods subject to an accounting policy election. The Company has elected to treat any taxes on GILTI inclusions as a period cost.such determination was made.
The Company records a liability for uncertain tax positions that do not meet the more likely than not standard as prescribed by the authoritative guidance for income tax accounting. The Company records tax benefits for only those positions that it believes will more likely than not be sustained. For positions that the Company believes that it is more likely than not that it will prevail, the Company records a benefit considering the amounts and probabilities that could be realized upon ultimate settlement. If the Company judgment as to the likely resolution of the uncertainty changes, if the uncertainty is ultimately settled or if the statute of limitation related to the uncertainty expires, the effects of the change would be recognized in the period in which the change, resolution or expiration occurs. The Company has included in ourthe Company’s Consolidated Balance Sheet a long-term income tax liability for unrecognized tax benefits and accrued interest and penalties of $394,000$1,864 and $1,461 as of December 31, 2018. At this time, the Company is unable to make a reasonably reliable estimate of the timing of payments in individual years beyond 12 months due to uncertainties2020 and December 31, 2019, respectively. See “Part II, Item 8. Financial Statements, Note 7. Income Taxes” in the timing of tax audit outcomes. As a result, this amount is not included in the contractual obligations table above.accompanying Notes to consolidated financial statements for more information.
Litigation
The Company has been, and may in the future become, subject to a number of legal proceedings involving securities litigation, product liability, intellectual property, contractual disputes, trademark and copyright, and other matters. The Company records a liability and related charge to earnings in its consolidated financial statements for legal contingencies when the loss is considered probable and the amount can be reasonably estimated. OurThe Company’s assessment is reevaluated each accounting period and is based on all available information, including discussion with any outside legal counsel that represents us. 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 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.
Off-Balance Sheet Arrangements
The Company does not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance, variable interest or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of December 31, 2018,2020, the Company was not involved in any unconsolidated transactions.
Recent Accounting GuidancePronouncement
For a full description of recentIn addition to the impacts from new accounting pronouncements including the respective effective dates of adoption and effects on results of operations and financial conditionincluded above see Note 1 — “Summary of Significant Accounting Pronouncements” in the Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K. for a complete discussion of recent accounting pronouncements adopted and not adopted.
Results of Operations
The following table sets forth selected consolidated financial data expressed as a percentage of net revenue.
Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||
2018 | 2017 | 2016 | 2020 | 2019 | 2018 | |||||||||||||||||||
Net revenue | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | ||||||||||||
Cost of revenue | 51 | % | 43 | % | 42 | % | 49 | % | 46 | % | 51 | % | ||||||||||||
Gross profit | 49 | % | 57 | % | 58 | % | 51 | % | 54 | % | 49 | % | ||||||||||||
Operating expenses: | ||||||||||||||||||||||||
Sales and marketing | 36 | % | 34 | % | 35 | % | 36 | % | 39 | % | 36 | % | ||||||||||||
Research and development | 9 | % | 8 | % | 10 | % | 10 | % | 8 | % | 9 | % | ||||||||||||
General and administrative | 13 | % | 9 | % | 11 | % | 20 | % | 13 | % | 13 | % | ||||||||||||
Lease termination income | — | (2 | )% | — | ||||||||||||||||||||
Total operating expenses | 58 | % | 50 | % | 56 | % | 66 | % | 61 | % | 58 | % | ||||||||||||
Income (loss) from operations | (8 | )% | 7 | % | 2 | % | ||||||||||||||||||
Interest and other income, net | — | % | 1 | % | — | % | ||||||||||||||||||
Income (loss) before income taxes | (8 | )% | 8 | % | 2 | % | ||||||||||||||||||
Income tax (benefit) provision | 11 | % | (12 | )% | — | % | ||||||||||||||||||
Net income (loss) | (19 | )% | 20 | % | 2 | % | ||||||||||||||||||
Loss from operations | (15 | )% | (7 | )% | (8 | )% | ||||||||||||||||||
Interest and other expense, net | (1 | )% | — | % | — | % | ||||||||||||||||||
Loss before income taxes | (16 | )% | (7 | )% | (8 | )% | ||||||||||||||||||
Income tax provision | — | % | — | % | 11 | % | ||||||||||||||||||
Net loss | (16 | )% | (7 | )% | (19 | )% |
Net Revenue
The following table sets forth selected consolidated revenue by major geographic area and product category with changes thereof.
Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | 2018 | % Change | 2017 | % Change | 2016 | 2020 | % Change | 2019 | % Change | 2018 | ||||||||||||||||||||||||||||||
Revenue mix by geography: | ||||||||||||||||||||||||||||||||||||||||
United States | $ | 101,862 | 8 | % | $ | 94,581 | 44 | % | $ | 65,513 | $ | 61,202 | -42 | % | $ | 106,243 | 4 | % | $ | 101,862 | ||||||||||||||||||||
International | $ | 60,858 | 7 | % | $ | 56,912 | 8 | % | $ | 52,543 | 86,481 | 15 | % | 75,469 | 24 | % | 60,858 | |||||||||||||||||||||||
Consolidated total revenue | $ | 162,720 | 7 | % | $ | 151,493 | 28 | % | $ | 118,056 | $ | 147,683 | -19 | % | $ | 181,712 | 12 | % | $ | 162,720 | ||||||||||||||||||||
United States as a percentage of total revenue | 63 | % | 62 | % | 55 | % | 41 | % | 58 | % | 63 | % | ||||||||||||||||||||||||||||
International as a percentage of total revenue | 37 | % | 38 | % | 45 | % | 59 | % | 42 | % | 37 | % | ||||||||||||||||||||||||||||
Revenue mix by product category: | ||||||||||||||||||||||||||||||||||||||||
Systems | ||||||||||||||||||||||||||||||||||||||||
– North America | $ | 93,977 | 6 | % | $ | 88,338 | 51 | % | $ | 58,595 | ||||||||||||||||||||||||||||||
– Rest of World | 38,618 | 3 | % | 37,544 | 10 | % | 34,126 | |||||||||||||||||||||||||||||||||
- North America | $ | 50,721 | -48 | % | $ | 96,718 | 3 | % | $ | 93,977 | ||||||||||||||||||||||||||||||
- Rest of World | 40,045 | -8 | % | 43,760 | 13 | % | 38,618 | |||||||||||||||||||||||||||||||||
Total Systems | 132,595 | 5 | % | 125,882 | 36 | % | 92,721 | 90,765 | -35 | % | 140,478 | 6 | % | 132,595 | ||||||||||||||||||||||||||
Consumables | 4,162 | 71 | % | 2,436 | (2 | )% | 2,498 | 9,287 | -4 | % | 9,648 | 132 | % | 4,162 | ||||||||||||||||||||||||||
Skincare | 5,778 | 33 | % | 4,342 | 14 | % | 3,809 | 25,061 | 194 | % | 8,512 | 47 | % | 5,778 | ||||||||||||||||||||||||||
Total Products | 142,535 | 7 | % | 132,660 | 99,028 | 125,113 | -21 | % | 158,638 | 11 | % | 142,535 | ||||||||||||||||||||||||||||
Service | 20,185 | 7 | % | 18,833 | (1 | )% | 19,028 | 22,570 | -2 | % | 23,074 | 14 | % | 20,185 | ||||||||||||||||||||||||||
Total Net revenue | $ | 162,720 | 7 | % | $ | 151,493 | 28 | % | $ | 118,056 | $ | 147,683 | -19 | % | $ | 181,712 | 12 | % | $ | 162,720 |
Total Net Revenue
The Company’s revenue increaseddecreased by 7%$34.0 million, or 19%, for the year ended December 31, 2018,2020, compared to 2017,2019, due primarily to strong demand forsignificant decline in sales in the Company’s new products -North America market as a direct result of the truSculpt portfolio of productsand Secret RF systems, primarilyCOVID-19 pandemic. The decrease was partially offset by softnessincrease in the overall women’s health market, competitive trends affecting certain legacy system pricing, and greater than expected turnover in our North American salesforce in the fourth quarter on 2018.sales of Skincare products.
Revenue by Geography
The Company’s U.S. revenue increased 8%decreased by $45.0 million, or 42%, for the year ended December 31, 2018,2020, compared to 2017. This increasethe same period in 2019. The decrease was due primarily to the introduction of Secret RF COVID-19 pandemic. In response to the pandemic, government authorities imposed mandatory business closures, shelter-in place and Juliet work-from-home orders and social distancing protocols during January 2018, and truSculpt iD in July 2018.2020 that significantly impacted the Company’s business operation.
The Company’s U.S. revenue increased 44% in 2017,$4.4 million, or 4%, for the year ended December 31, 2019 compared to 2016.2018. The increase in U.S. revenue was due primarily a resultto continued demand of revenue generated fromthe truSculpt portfolio, including the launch ofrecently launched truSculpt 3D flex, as well as continued growth of our enlighten III,the Company’s excel HR Vand xeo products, partially offset by decline in sales of some of our legacy systems.+ system.
The Company’s international revenue increased 7%$11.0 million, or 15%, for the year ended December 31, 2018,2020, compared to 2017. Thethe same period in 2019, driven primarily by an increase wasin skincare product sales in Japan as a result of increased marketing and promotional efforts, as well as changes in customers behavior due to growththe COVID-19 as some consumers opted to purchase skincare products rather than go to a doctor’s office for treatment due to the COVID 19 pandemic, partially offset by decrease in the Company’sCompany's distributor business indue to the Middle East and Asia (excluding Japan).COVID-19 pandemic.
The Company’s international revenue increased 8% in 2017,$14.6 million, or 24%, for the year ended December 31, 2019 compared to 2016. The increase in international revenue was2018, driven primarily a result ofby increases in the Company’s direct business in Japan, Australia, as well as increases in our distributor business in the Middle East, Europeservice revenue, systems, skincare products and Asia, partially offset by a decline in revenue from our direct business in Europe and our Latin America distributors.consumables.
Revenue by Product Type
Systems Revenue
Systems revenue in North America increased 5%decreased by $46.0 million, or 48%, for the year ended December 31, 2018,2020, compared to 2017,the same period in 2019, due primarily to the COVID-19 pandemic that impacted system sales. The Rest of the World systems revenue decreased by $3.7 million, or 8%, compared to the same period in 2019. The decrease in Rest of the World revenue was primarily due to salesa decrease in the U.S. andCompany’s distributor business in the introduction ofMiddle East due to the COVID-19 pandemic.
Systems revenue in North America increased $2.7 million, or 3%, for the year ended December 31, 2019, compared to the same period in 2018, due primarily to the recently launched Secret RF excel Vand Juliet during January 2018,+ and truSculpt iD in July 2018flex. systems. The Rest of the World systems revenue increased 3%by $5.1 million, or 13%, for the year ended December 31, 2018, compared to 2017.the same period in 2018. The increase in Rest of the World revenue was primarily a result of an increase in the Company’s direct business in Asia excluding Japan,Pacific and Europe, as well as increasesan increase in the Company’s distributor business in the Middle East and Europe, partially offset by decreases indue to the Company’s direct business in Australiaexpansion to these markets and Europe.new products launches.
The Company’s Systems revenue increased by 36% in 2017, compared to 2016. This increase in Systems revenue was primarily attributable to revenue generated by the launch of truSculpt 3D and enlighten III.
Consumables Revenue
Consumables revenue increased 71%decreased $0.4 million, or 4%, for the year ended December 31, 2018,2020, compared to 2017.the same period in 2019. The decrease in consumables revenue was primarily due to decreased sales in installed base oftruSculpt iD, Secret RF, and truSculpt flex, each of which have a consumable element, as well as the decline in usage of the consumables due to the COVID-19 pandemic.
Consumables revenue increased $5.5 million, or 132%, for the year ended December 31, 2019, compared to the same period in 2018. The increase in consumables revenue was due to the introduction of SecretRF and Juliet during January 2018,2019, and truSculptiDin July 2018,2019, each of which have consumable elements.
Skincare Revenue
The Company’s consumables revenue decreased 2%from Skincare products in 2017Japan increased $16.5 million, or 194%, for the year ended December 31, 2020, compared to 2016.the same period in 2019. This decreaseincrease was due primarily to declinesincreased marketing and promotional efforts, as well as changes in Titan consumables revenue caused by reduced utilization, partially offset by an increase in truSculpt 3D consumables revenue.
Skincare Revenuecustomers behavior due to the COVID-19 pandemic as some consumers opted to purchase skincare products rather than go to a doctor's office for treatment.
The Company’s revenue from Skincare products in Japan increased 33%$2.7 million, or 47%, for the year ended December 31, 2018,2019, compared to 2017.the same period in 2018. This increase was due primarily to increased marketing and promotional activities.activities, and a temporary increase in consumer demand due to changes in the Japanese consumption tax rate from 8% to 10% effective October 1, 2019.
The Company’s skincare revenue increased 14% in 2017, compared to 2016. This increase was primarily due to expanded product offerings of this distributed product, as well as an increase in the value of the Japanese Yen versus the U.S Dollar by approximately 4% and 10% in 2017 and 2016, respectively, when compared to prior periods.
Service Revenue
The Company’s Service revenue increased 7%decreased $0.5 million, or 2%, for the year ended December 31, 2018,2020, compared to 2017.the same period in 2019. This decrease was due primarily to decreased sales of service contracts and support and maintenance services provided on a time and materials basis to the Company’s network of international distributors due to the COVID-19 pandemic.
The Company’s Service revenue increased $2.9 million, or 14%, for the year ended December 31, 2019, compared to the same period in 2018. This increase was due primarily to increased sales of service contracts, and support and maintenance services provided on a time and materialmaterials basis to the Company's network of international distributors.
The Company’s Service revenue decreased 1% in 2017, compared to 2016.Gross Profit
Gross Profit
Year Ended December 31, | ||||||||||||||||||||
(Dollars in thousands) | 2018 | % Change | 2017 | % Change | 2016 | |||||||||||||||
Gross Profit | $ | 80,382 | (7 | )% | $ | 86,110 | 26 | % | $ | 68,135 | ||||||||||
As a percentage of total revenue | 49 | % | 57 | % | 58 | % |
Year Ended December 31, | ||||||||||||||||||||
(Dollars in thousands) | 2020 | % Change | 2019 | % Change | 2018 | |||||||||||||||
Gross Profit | $ | 75,772 | (23 | )% | $ | 98,163 | 22 | % | $ | 80,382 | ||||||||||
As a percentage of total revenue | 51 | % | 54 | % | 49 | % |
The Company’s cost of revenue consists primarily of material, personnel expenses, product warranty costs, and manufacturing overhead expenses.
Gross profit as a percentage of revenue for the year ended December 31, 2020 decreased from 54% to 51%, compared to same period in 2019. The decrease in gross profit as a percentage of revenue was primarily driven by a lower overhead absorption on lower revenue, the decline in the average sales price of systems due to the COVID-19 pandemic and reduction-in-force and furloughed costs implemented by the Company also continues to makeduring the first nine months of 2020, partially offset by costs savings from the reduction-in-force and furlough and continuous investments in its international direct service support as well asand operational improvement activities.
Gross marginprofit as a percentage of revenue for the year ended December 31, 2018 declined 8%2019 increased from 49% to 54%, compared to the same period in 2017.2018. The reducedincrease in gross margins during 2018profit as a percentage of revenue was due primarily to:
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The gross marginlargely driven by demand for the Company's new products with higher margins, as well as strong growth in consumables and skincare products. The year ended December 31, 2017 declined 1%, compared2018 also included a $5 million product remediation charge when the Company recognized a liability for a product remediation plan related to of one of its legacy systems. The accrued expense consisted of the same periodestimated cost of materials and labor to replace the component in 2016, due primarily to increasedall units that were under the Company's standard warranty costs, as well as higher Service personnel costs due to investments in additional headcount to fuel future growth.or were covered under existing service contracts.
Sales and Marketing
Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | 2018 | % Change | 2017 | % Change | 2016 | 2020 | % Change | 2019 | % Change | 2018 | ||||||||||||||||||||||||||||||
Sales and marketing | $ | 58,420 | 12 | % | $ | 52,070 | 25 | % | $ | 41,563 | $ | 52,766 | (26 | )% | $ | 71,109 | 22 | % | $ | 58,420 | ||||||||||||||||||||
As a percentage of total revenue | 36 | % | 34 | % | 35 | % | 36 | % | 39 | % | 36 | % |
Sales and marketing expenses consist primarily of personnel expenses, expenses associated with customer-attended workshops and trade shows, post-marketingpost- marketing studies, advertising and training.
The $18.3 million, or 26%, decrease in sales and marketing expenses for the year ended December 31, 2020 compared to the same period in 2019 was due primarily to:
● | $8.0 million decrease in labor costs due to a decrease in commission as a result of lower sales, salary reduction, furloughs and reductions-in-force in early 2020; |
● | $4.8 million decrease in promotional and product demonstration expenses due to cancellation of trade shows and promotional events as a result of the COVID-19 pandemic; |
● | $3.3 million decrease in travel related expenses resulting from the travel restrictions due to the COVID-19 pandemic; |
● | $1.1 million decrease in stock-based compensation due to decreased headcount; and |
● | $1.1 million decrease in consulting and outside professional fees. |
The $6.4$12.7 million, or 22%, increase in sales and marketing expenses for the year ended December 31, 20182019 compared to 2017the same period in 2018 was due primarily to:
● | $ |
● | $ |
● | $1.9 million increase in consulting and outside professional fees; |
● | $1.2 million increase in software user license fees and other expenses; |
● | $0.5 million of higher travel related expenses in North America resulting from increased headcount; and |
● | $ |
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The $10.5 million increase in sales and marketing expenses for the year ended December 31, 2017 compared to 2016 was due primarily to:
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Research and Development ((“R&D”)“R&D”)
Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | 2018 | % Change | 2017 | % Change | 2016 | 2020 | % Change | 2019 | % Change | 2018 | ||||||||||||||||||||||||||||||
Research and development | $ | 14,359 | 12 | % | $ | 12,874 | 2 | % | $ | 11,232 | $ | 14,322 | (5 | )% | $ | 15,085 | 5 | % | $ | 14,359 | ||||||||||||||||||||
As a percentage of total revenue | 9 | % | 8 | % | 10 | % | 10 | % | 8 | % | 9 | % |
R&D expenses consist primarily of personnel expenses, clinical research, regulatory and material costs. R&D expenses increaseddecreased by $1.5$0.8 million, or 12%5%, and represented 9% of total net revenue duringfor the year ended December 31, 2018,2020, compared to 8% of total net revenuethe same period in 2017. This increase2019. The decrease in expense for the year ended December 31, 2020 was due primarily to $0.6 million decrease in salaries and benefits due to cost cutting measures implemented in response to the COVID 19 pandemic, $0.5 million decrease in consulting services and $0.3 million decrease in travel and other costs, offset by a net increase in material cost related to ongoingand equipment costs used for research and development efforts.activities of $0.6 million.
R&D expenses increased by $1.6 million or 13%, and represented 10% of total net revenue during5% for the year ended December 31, 2017,2019, compared to 11% of total net revenuethe same period in 2016. This2018. The increase in expense of $0.7 million for the year ended December 31, 2019 was due primarily to $0.9 million of higher personnel expenses driven primarily by an increase in headcount and $0.5 million increase in consulting expenses.stock-based compensation.
General and Administrative ((“G&A”)“G&A”)
Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | 2018 | % Change | 2017 | % Change | 2016 | 2020 | % Change | 2019 | % Change | 2018 | ||||||||||||||||||||||||||||||
General and administrative | $ | 20,995 | 49 | % | $ | 14,090 | 9 | % | $ | 12,943 | $ | 31,512 | 31 | % | $ | 24,033 | 14 | % | $ | 20,995 | ||||||||||||||||||||
As a percentage of total revenue | 13 | % | 9 | % | 11 | % | 21 | % | 13 | % | 13 | % |
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 $6.9$7.5 million, or 49%31%, and represented 13% of total net revenue duringfor the year ended December 31, 2018,2020, compared to 9% of total net revenuethe same period in 2017,2019. The increase in expenses was due primarily to:to $5.2 million increase in professional fees, consulting services and legal fees, $1.6 million increase in credit loss expense, $0.5 million increase in software user license expense and $0.8 million increase due to a write off of capitalized Enterprise Resource Planning cloud computing costs, partially offset by $0.4 million decrease in personnel related expenses, including stock-based compensation expense, and $0.2 million decrease in travel and other expense.
G&A expenses increased 14% for the year ended December 31, 2019, compared to the same period in 2018. The increase in expenses of $3.0 million was due primarily to $1.1 million of personnel related expenses, inclusive of a $1.3 million decrease in stock-based compensation, $0.9 million increase in professional fees, consulting services and legal fees related to the ongoing implementation efforts of a new Enterprise Resource Planning system and $ 0.6 million related to executive severance costs. |
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General and Administrative expenses increased $1.1 million in 2017, compared to 2016, primarily due to:
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Interest and Other Income (expense),Expense, Net
Interest and other income, net, consists of the following:
Year Ended December 31, | |||||||||||||||||||||
(Dollars in thousands) | 2018 | % Change | 2017 | % Change | 2016 | ||||||||||||||||
Total interest and other income (expense), net | $ | (123 | ) | (114 | )% | $ | 884 | 174 | % | $ | 323 | ||||||||||
As a percentage of total net revenue | (0.1 | )% | 0.6 | % | 0.3 | % |
Year Ended December 31, | ||||||||||||||||||||
(Dollars in thousands) | 2020 | % Change | 2019 | % Change | 2018 | |||||||||||||||
Total interest and other expense, net | $ | (579 | ) | 191 | % | $ | (199 | ) | 62 | % | $ | (123 | ) | |||||||
As a percentage of total net revenue | 0.0 | % | (0.1 | )% | (0.1 | )% |
Interest and other expense, net increased $0.4 million, or 191%, for the year ended December 31, 2020, compared to 2019. The increase was primarily due to an amortization of loan costs related to the revolving loan obtained from Silicon Valley Bank during the year ended December 31, 2020 and a decrease in interest income from marketable investments.
Net interest and other income decreased $1.0 million or (114%)expense was marginally higher for the year ended December 31, 2018,2019 compared to 2017. This decrease was due primarily to an increase in interest expense related to significant financing components included in our multi-year post-warranty service contracts for customers who make payment more than onethe year in advance of receiving the service under the new revenue standard effective January 1, 2018, an increase in net foreign exchange losses, as well as a decrease in interest income from the Company’s marketable investments resulting from a decrease in the investment balance. The Company adopted the new revenue standard under modified retrospective method and so there was no equivalent expense last year.ended December 31, 2018.
Income Tax ProvisionTaxProvision
Year Ended December 31, | |||||||||||||||||||||
(Dollars in thousands) | 2018 | $ Change | 2017 | $ Change | 2016 | ||||||||||||||||
Income (loss) before income taxes | $ | (13,515 | ) | $ | 25,475 | $ | 11,960 | $ | 9,240 | $ | 2,720 | ||||||||||
Income tax (benefit) provision | 17,255 | 35,288 | (18,033 | ) | (18,176 | ) | 143 |
Year Ended December 31, | ||||||||||||||||||||
(Dollars in thousands) | 2020 | $ Change | 2019 | $ Change | 2018 | |||||||||||||||
Income loss before income taxes | $ | (23,407 | ) | $ | (11,144 | ) | $ | (12,263 | ) | $ | 1,252 | $ | (13,515 | ) | ||||||
Income tax provision | 470 | 385 | 85 | (17,170 | ) | 17,255 |
During the year ended December 31, 2018,2020, the Company incurred income tax expense in foreign jurisdictions as the Company applied a full valuation allowance of $16.9 million against certainall U.S. federal and state deferred tax assets. In 2017,During the year ended December 31, 2019, the Company recordedincurred income tax expense in foreign jurisdictions which was partially offset by an income tax benefit of $18.0 million. This tax benefit was primarily$0.3 million related to a ($26.3) millionthe release of our valuation allowance against certain U.S deferredreserves for uncertain tax assets, which was partially offset by $7.3 million for the revised measurement of our U.S deferred tax assets resulting from the 2017 US Tax Act, $0.7 million current tax expense and $0.3 million of other deferred tax expense.positions in Germany.
Liquidity and Capital Resources
Sources and Uses of Cash
The Company’s principal source of liquidity is cash from maturity and sales of marketable investments and cash generated from the issuance of common stock through exercise of stock options and the Company’s employee stock purchasing program. 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 and investments are 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.
As of December 31, 20182020 and December 31, 2017,2019, the Company had $39.6$51.9 million and $45.1$36.4 million of working capital, respectively. Cash and cash equivalents plus marketable investments increased by $13.1 million to $47.0 million as of December 31, 2020, from $33.9 million as of December 31, 2019, primarily as a result of cash obtained from financing activities, including net proceeds from the Company’s secondary offering of $26.5 million and proceeds from the PPP loan of $7.1 million, partially offset by a decrease in sales caused by the business disruptions due to the COVID-19 pandemic. The Company’s $6.4 million cash inflow from investing activities is due primarily to the liquidation of marketable investments.
As of December 31, 2019, and December 31, 2018, the Company had $36.4 million and $39.6 million of working capital, respectively. Cash and cash equivalents plus marketable investments decreased by $0.3$1.7 million to $33.9 million as of December 31, 2019, from $35.6 million as of December 31, 2018, from $35.9 million as of December 31, 2017, primarily as a result of the decline in the Company’s stock price that impacted cash provided by the exercise of stock options and the Company’s employee stock purchasing program, increased inventory purchases related to the increasing demand of our products, and an increase in investments in sales, service and other management headcount to facilitate continued revenue expansion. Cash and cash equivalents plus marketable investments decreased by $18.2 million to $35.9 million as of December 31, 2017, from $54.1 million as of December 31, 2016, primarily as a result of the Company’s share buyback program in 2017, increased inventory purchases related to the increasing demand of our products, and an increase in investments in sales, service, and other management headcount to facilitate continued revenue expansion.
Cash, Cash Equivalents and Marketable Investments
The following table summarizes ourthe Company’s cash and cash equivalents and marketable investments (in thousands):
Year ended December 31, | ||||||||||||
(Dollars in thousands) | 2018 | 2017 | Change | |||||||||
Cash, cash equivalents and marketable securities: | ||||||||||||
Cash and cash equivalents | $ | 26,052 | $ | 14,184 | $ | 11,868 | ||||||
Marketable investments | 9,523 | 21,728 | (12,205 | ) | ||||||||
Total | $ | 35,575 | $ | 35,912 | $ | (337 | ) |
Year ended December 31, | ||||||||||||
(Dollars in thousands) | 2020 | 2019 | Change | |||||||||
Cash, cash equivalents and marketable securities: | ||||||||||||
Cash and cash equivalents | $ | 47,047 | $ | 26,316 | $ | 20,731 | ||||||
Marketable investments | — | 7,605 | (7,605 | ) | ||||||||
Total | $ | 47,047 | $ | 33,921 | $ | 13,126 |
Consolidated Cash Flow Data
In summary, ourthe Company’s cash flows were as follows:
Year ended December 31, | Year ended December 31, | |||||||||||||||||||||||
(Dollars in thousands) | 2018 | 2017 | 2016 | 2020 | 2019 | 2018 | ||||||||||||||||||
Cash flows provided by (used in): | ||||||||||||||||||||||||
Operating activities | $ | 307 | $ | 14,287 | $ | 1,992 | $ | (16,934 | ) | $ | (2,217 | ) | $ | 308 | ||||||||||
Investing activities | 10,773 | 17,694 | (3,392 | ) | 6,389 | 1,067 | 10,773 | |||||||||||||||||
Financing activities | 788 | (31,572 | ) | 4,307 | 31,276 | 1,414 | 787 | |||||||||||||||||
Net increase (decrease) increase in cash and cash equivalents | $ | 11,868 | $ | 409 | $ | 2,907 | ||||||||||||||||||
Net increase in cash and cash equivalents | $ | 20,731 | $ | 264 | $ | 11,868 |
Cash Flows fromfrom Operating Activities
Net cash used in operating activities was $16.9 million during 2020, which was due primarily to:
● | $23.9 million net loss adjusted for non-cash related items consisting primarily of stock-based compensation expense of $10.1 million, $2.6 million amortization of capitalized contract costs, $2.1 million of provision for credit losses and $1.4 million depreciation and amortization. |
● | $6.0 million cash used as a result of a decrease in accounts payable; |
● | $3.2 million cash used due to an increase in other current assets and prepaid expenses; |
● | $3.0 million cash used as a result of a decrease in deferred revenue; |
● | $2.6 million cash used as a result of an increased accounts receivable; |
● | $2.1 million cash used due to increase other long-term assets; |
● | $0.8 million cash used as a result of a decrease in extended warranty liabilities; partially offset by |
● | $5.4 million cash generated as a result of a decrease in inventories; and |
● | $0.9 million cash generated as a result of increased accrued liabilities. |
Net cash used in operating activities was $2.2 million during 2019, which was due primarily to:
● | $12.3 million net loss adjusted for non-cash related items consisting primarily of stock-based compensation expense of $9.8 million, $2.9 million amortization of capitalized contract costs and $1.5 million depreciation and amortization expenses; |
● | $5.9 million cash used due to an increase in inventories; |
● | $3.4 million cash used to increase long term assets; |
● | $2.5 million cash used as a result of increased accounts receivables; |
● | $1.8 million cash used to increase other current assets and prepaid expenses; |
● | $1.4 million cash used for increased inventory purchases leading to an increase in accounts payable; |
● | $1.2 million cash used as a result of a decrease in extended warranty liabilities; partially offset by |
● | $7.2 million cash generated by an increase in accrued liabilities; and |
● | $1.7 million cash generated as a result of increased deferred revenue. |
Net cash provided by operating activities was $0.3 million during 2018, which was due primarily to:
● | $30.8 million net loss as adjusted for non-cash related items consisting primarily of valuation allowance against certain U.S. differed tax assets of | |
● | $17.4 million (excluding the $1.2 million tax effect of the ASC 606 Adoption), stock-based compensation expense of $7.2 million, $1.3 million provision for |
● | $4.3 million cash generated from an increase in accounts payable due primarily to increased inventory related purchases; |
● | $ |
● | $1.3 million cash generated as a result of increased deferred revenue; |
● | $0.8 million cash generated as a result of a decrease in inventories; |
● | $0.1 million cash generated due to a decrease in other long liabilities; partially offset by |
● | $3.8 million cash used to |
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● | $1.1 million cash used to increase other current assets and prepaid expenses; and |
● | $0.1 million cash used as a result of increased accounts |
Cash Flows from Investing Activities
Net cash provided by investing activities was $6.4 million during 2020, which was attributable primarily to:
● | $ |
The Company generated net cash of $14.3 million in operating activities during 2017, which was primarily attributable to:
● | $ |
● | $ |
Net cash provided by investing activities was $1.1 million during 2019, which was attributable primarily to:
● | $ |
● | $ |
● | $1.0 million of cash used to purchase property, equipment and software. |
Cash Flows from Investing Activities
Net cash provided by investing activities was $10.8 million during 2018, which was attributable primarily to:
● | $23.1 million in net proceeds from the sales and maturities of marketable investments; partially offset by |
● | $ |
● | $ |
Cash Flows from Financing Activities
Net cash provided by financing activities was $31.3 million during 2020, which was primarily due to:
● | $ |
Net cash provided net cash of $17.7 million from investing activities in 2017, primarily attributable to:
● | $ |
● | $ |
● | $3.4 million of cash used for taxes paid related to net share settlement of equity awards; and |
● | $0.5 million of cash used to |
Net cash provided by financing activities was $1.4 million during 2019, which was primarily due to:
● | $2.9 million proceeds from the issuance of common stock due to employee exercising their stock options and |
● | $0.8 million of cash used for taxes paid related to net share settlement of equity awards; and |
Cash Flows from Financing Activities
● | $0.6 million of cash used to pay capital lease obligations. |
Net cash provided by financing activities was $0.8 million during 2018, which was primarily due to:
● | $4.4 million proceeds from |
● | $3.1 million of cash |
|
|
Net cash used in financing activities in 2017 was $31.6 million, which was primarily due to:
|
|
|
|
● | $ |
Adequacy of Cash Resources to Meet Future Needs
The Company had cash and cash equivalents and marketable investments of $35.6$47.0 million as of December 31, 2018. The2020. For fiscal year 2020, the Company’s principal source of liquidity in the year ended December 31, 2018 is cash generated from proceeds received from its April 2020 offering, the PPP loan, maturity and sales of marketable investments and cash generated from the issuance of common stock through exercise of stock options and the Company’s employee stock purchasing program. In addition, on March 9, 2021, the Company issued and sold $125 million aggregate principal amount of 2.25% Convertible Senior Notes. The Company believes that the existing cash resources are sufficient to meet the Company’s anticipated cash needs for working capital and capital expenditures for at least the next several years.years, but there can be no assurances.
Loan and Security Agreement
On May 30, 2018,July 9, 2020, the Company andterminated its undrawn revolving line of credit with Wells Fargo Bank, N.A. (“Wells Fargo”)and subsequently entered into a Loan and Security Agreement (the “Originalwith Silicon Valley Bank for a four-year secured revolving loan facility (“SVB Revolving Line of Credit”) in the originalan aggregate principal amount of $25up to $30.0 million. The OriginalSVB Revolving Line of Credit terminatesmatures on May 30, 2021.July 9, 2024. As of December 31, 2018,2020, there were no borrowings under the OriginalSVB Revolving Line of Credit.
Covenants
On July 9, 2020, the Company terminated its undrawn revolving line of credit with Wells Fargo and subsequently entered into a Loan and Security Agreement with Silicon Valley Bank. The Originalagreement provides for a four-year secured revolving loan facility (“SVB Revolving Line of Credit containedCredit”) in an aggregate principal amount of up to $30.0 million. See "Part II, Item 8. Financial Statements, Note 12. Debt" in the accompanying Notes to consolidated financial statements for more information.
The Loan and otherSecurity Agreement with Silicon Valley Bank contains customary affirmative covenants, such as financial statement reporting requirements and delivery of borrowing base certificates, as well as the maintenance of a leverage ratio not to exceed 2.5 to 1.0 and a TTM adjusted EBITDA of not less than $10 million. A violation of any of thecustomary covenants could result in a default under the Original Revolving Line of Credit that would permit the lenders to restrict the Company’s ability to, further access the revolving lineamong other things, incur additional indebtedness, sell certain assets, guarantee obligations of credit for loansthird parties, declare dividends, or make certain distributions, and letters of credit and require the immediate repayment of any outstanding loans under the Loan and Security Agreement.
During the third quarter of 2018 the Company was notified that it was in violation ofundergo a merger or consolidation or certain financial covenants in the Original Revolving Line of Credit. Upon receipt of this notice, the Company entered into discussions with Wells Fargo to amend and revise certain terms of the Original Revolving Line of Credit. Following the end of our third quarter, on or about November 2, 2018, the Company entered into a First Amendment and Waiver to theother transactions. The Loan and Security Agreement also contains certain financial condition covenants, including maintaining a quarterly minimum revenue of $90.0 million, determined in accordance with Wells Fargo (the “First Amended Revolving LineGAAP on a trailing twelve-month basis. This quarterly minimum revenue requirement is subject to renegotiation at the beginning of Credit”).each fiscal year.
The First AmendedAs of December 31, 2020, the Company had not drawn on the SVB Revolving Line of Credit provided for an original principal amount of $15 million, with the ability to request an additional $10 million, and a waiver of any existing defaults under the Original Revolving Line of Credit as long as the Company is in compliance with the termsall financial covenants of the RevisedSVB Revolving Line of Credit.
Similar to the Original Revolving Line of Credit, the First Amended Revolving Line of Credit contained revised financial and other covenants as well as the maintenance of a leverage ratio not to exceed 2.0 to 1.0 and a graduated scale of TTM adjusted EBITDA of not less than $1 million as of the last day of the 2018 third fiscal quarter; $2.5 million as of the last day of the 2018 fourth fiscal quarter; $4 million as of the last day of the 2019 first and second fiscal quarters; $6.5 million as of the last day of the 2019 third fiscal quarter; and $10 million as of the last day of each fiscal quarter.
Subsequent to December 2018, the Company again determined that it was in violation of certain financial covenants in the First Amended Revolving Line of Credit. The Company again entered into discussions with Wells Fargo to amend and revise certain terms of the First Amended Revolving Line of Credit. On or about, March 11, 2019 the Company entered into a Second Amendment and Waiver to the Loan and Security Agreement with Wells Fargo (the “Second Amended Revolving Line of Credit”). The Second Amended Revolving Line of Credit requires the Company to maintain a minimum cash balance of $15 million at Wells Fargo, but removes all other covenants so long as no money is drawn on the line of credit. The Company may draw down on the line of credit at the time it reaches and maintains TTM adjusted EBITDA of not less than $10 million, and a leverage ratio not to exceed 2.5 to 1.0.
Contractual Obligations
The following are ourthe Company’s contractual obligations, consisting of future minimum lease commitments related to facility and vehicle leases as of December 31, 2018:2020:
Payments Due by Period ($’000’s) | Payments Due by Period ($’000’s) | |||||||||||||||||||||||||||||||||||||||
Contractual Obligations | Total | Less Than 1 Year | 1-3 Years | 3-5 Years | More Than 5 Years | Total | Less Than 1 Year | 1-3 Years | 3-5 Years | More Than 5 Years | ||||||||||||||||||||||||||||||
Operating leases | $ | 11,223 | $ | 3,011 | $ | 5,503 | $ | 2,709 | $ | — | $ | 21,448 | $ | 3,062 | $ | 6,319 | $ | 5,759 | $ | 6,308 | ||||||||||||||||||||
Capital leases | 1,015 | 576 | 287 | 152 | — | |||||||||||||||||||||||||||||||||||
Finance leases | 635 | 374 | 261 | — | — | |||||||||||||||||||||||||||||||||||
Total leases | 12,238 | 3,587 | 5,790 | 2,861 | $ | — | $ | 22,083 | $ | 3,436 | $ | 6,580 | $ | 5,759 | $ | 6,308 |
Purchase Commitments
The Company maintains certain open inventory purchase commitments with ourits suppliers to ensure a smooth and continuous supply for key components. The Company’s liability in these purchase commitments is generally restricted to a forecasted time-horizon as agreed between the parties. These forecasted time-horizonsan agreed-upon period. Such time periods can vary among different suppliers. The Company’s open inventory purchase commitments as ofwere not material for the year ended December 31, 2018 were $1.7 million2020. 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 $7.2 million respectively for 2019 and 2020.
Operations.
Other
In the normal course of business, we enterthe 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 ourthe Company’s directors and executive officers. OurThe 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.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
InterestRateandMarketRisk
The primary objective of the Company’s investment activities is to preserve principal while at the same time maximizing the income the Company receives from investments without significantly increasing risk. To achieve this objective, the Company maintains its portfolio of cash equivalents and short- and long-term investments in a variety of high qualityhigh-quality securities, including U.S. treasuries, U.S. government agencies, corporate debt, cash deposits, money market funds, commercial paper, non-U.S. government agency securities, and municipal bonds. The securities are classified as available-for-sale and consequently are recorded at fair value with unrealized gains or losses reported as a separate component of accumulated other comprehensive loss. The weighted average maturity of the Company’s portfolioCompany had no marketable securities as of December 31, 2018 was approximately 0.3 years. If interest2020.
On July 27, 2017, the United Kingdom’s Financial Conduct Authority announced that it intends to stop persuading or compelling banks to submit LIBOR rates rise,after 2021. These reforms may cause LIBOR to cease to exist, new methods of calculating LIBOR to be established or the establishment of an alternative reference rate(s). While the Company expects that reasonable alternatives to LIBOR will be implemented prior to the 2021 target date or that the 2021 cessation date may be extended, the Company cannot predict the consequences and timing of these developments, and could have an adverse impact on the market value for or value of ourLIBOR-linked securities, loans, and other financial obligations or extensions of credit held by the Company. The changes may influence returns on financial investments may decline, whichand could result in a realized loss if we are forced to sell an investment before its scheduled maturity. A hypothetical increase in interest rate by one percentage point would have resulted in no impact onreduce the Company’s total investment portfolio.earnings and cash flows.
The uncertain financial markets have resultedcould result in a tightening in the credit markets, a reduced level of liquidity in many financial markets, and extreme volatility in fixed income and credit markets. The credit ratings of the securities we havethe Company has invested in could further deteriorate and may have an adverse impact on the carrying value of these investments.
As of December 31, 2018,2020, the Company had not drawn on the SVB Revolving Line of Credit. Subsequent to December2018, the Company again determined that it was in violation of certain financial covenants in the First Amended Revolving Line of Credit. The Company again entered into discussions with Wells Fargo to amend and revise certain terms of the First Amended Revolving Line of Credit. On or about, March11, 2019, the Company entered into a Second Amendment and Waiver to the Loan and Security Agreement with Wells Fargo (the “Second Amended Revolving Line of Credit”). The Second Amended Revolving Line of Credit requires the Company to maintain a minimum cash balance of $15 million at Wells Fargo, but removes all other covenants so long as no money is drawn on the line of credit. Overall interest rate sensitivity is primarily influenced by any amount borrowed on the line of credit and the prevailing interest rate on the line of credit facility. The effective interest rate on the line of credit facility is based on a floating per annum rate equal to the LIBOR rate.greater of either 1.75% above the Prime Rate or 5%. The LIBOR ratePrime Rate was 2.52%3.25% as of December 31, 2018,2020, and accordingly the Company may incur additional expenses if the Company has an outstanding balance on the line of credit and the LIBOR ratePrime Rate increases in future periods.
Inflation
The Company does not believe that inflation has had a material effect on the Company’s business, financial condition, or results of operations. If the Company’s costs were to become subject to significant inflationary pressures, the Company may not be able to fully offset such higher costs through price increases. The Company’s inability or failure to do so could harm the Company’s business, financial condition, and results of operations.
Foreign Exchange Fluctuations
The Company generates revenue in Japanese Yen, Euros, Australian Dollars, Canadian Dollars, British Pounds and Swiss Francs. Additionally, a portion of the Company’s operating expenses and assets and liabilities are denominated in each of these currencies. Therefore, fluctuations in these currencies against the U.S. dollar could materially and adversely affect the Company’s results of operations upon translation of the Company’s revenue denominated in these currencies, as well as the remeasurementre-measurement of the Company’s international subsidiaries’ financial statements into U.S. dollars.
The Company has historically not engaged in hedging activities relating to the Company’s foreign currency denominated transactions, given the Company has a natural hedge resulting from the Company’s foreign cash receipts being utilized to fund the respective local currency expenses.transactions.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
CUTERA,INC.ANDSUBSIDIARYCOMPANIES
ANNUALREPORTONFORM10-K
INDEXTOCONSOLIDATEDFINANCIALSTATEMENTS
The following Consolidated Financial Statements of the Registrant and its subsidiaries are required to be included in Item 8:
| 2.0% of the outstanding shares of common stock on such date; or |
| an amount as determined by the Board of Directors. |
The Company’s Board of Directors did not increase the shares available for future grant on January 1, 2019, 20182021, 2020 and 2017.2019. The price of the common stock purchased is the lower of 85% of the fair market value of the common stock at the beginning or end of a six month-month offering period. In the years ended December 31, 2020, 2019, and 2018, 2017and 2016, under the 2004 ESPP, the Company issued 64,511, 78,47956,751, 82,810, and 79,92264,511 shares, respectively. At December 31, 2018, 627,0732020, 704,954 shares remained available for future issuance.
Option and Award Activity
Activity under the 19982004 Plan and 20042019 Equity Incentive Plan is summarized as follows:
Options Outstanding | ||||||||||||||||||||
Shares Available For Grant | Number of Shares | Weighted- Average Exercise Price | Weighted-Average Remaining Contractual Life (in years) | Aggregate Intrinsic Value (in $ millions ) (1) | ||||||||||||||||
Balances as of December 31, 2015 | 1,263,425 | 2,148,797 | $ | 9.31 | 3.4 | $ | 7.9 | |||||||||||||
Options granted | (162,000 | ) | 162,000 | $ | 11.55 | |||||||||||||||
Options exercised | — | (1,051,138 | ) | $ | 8.89 | |||||||||||||||
Options cancelled (expired or forfeited) | 143,187 | (143,187 | ) | $ | 12.93 | |||||||||||||||
Stock awards granted | (1,018,005 | ) | — | — | ||||||||||||||||
Stock awards cancelled (expired or forfeited) | 495,050 | — | — | |||||||||||||||||
Balances as of December 31, 2016 | 721,657 | 1,116,472 | $ | 9.56 | 3.7 | $ | 8.7 | |||||||||||||
Options granted | (278,250 | ) | 278,250 | $ | 31.00 | |||||||||||||||
Options exercised | — | (488,398 | ) | $ | 8.96 | |||||||||||||||
Options cancelled (expired or forfeited) | 66,405 | (66,405 | ) | $ | 16.54 | |||||||||||||||
Stock awards granted | (873,881 | ) | — | — | ||||||||||||||||
Stock awards cancelled (expired or forfeited) | 258,935 | — | — | |||||||||||||||||
Additional shares reserved(2) | 1,600,000 | — | — | |||||||||||||||||
Balances as of December 31, 2017 | 1,494,866 | 839,919 | $ | 16.46 | 3.99 | $ | 24.4 | |||||||||||||
Options granted | (21,010 | ) | 21,010 | $ | 50.65 | |||||||||||||||
Options exercised | — | (271,902 | ) | $ | 9.99 | |||||||||||||||
Options cancelled (expired or forfeited) | 81,322 | (81,322 | ) | $ | 21,55 | |||||||||||||||
Stock awards granted | (562,070 | ) | ||||||||||||||||||
Stock awards cancelled (expired or forfeited) | 148,197 | |||||||||||||||||||
Balances as of December 31, 2018 | 1,141,305 | 507,705 | $ | 20.52 | 3.52 | $ | 2.00 | |||||||||||||
Exercisable as of December 31, 2018 | 335,348 | $ | 14.68 | 2.73 | $ | 1.87 | ||||||||||||||
Vested and expected to vest, net of estimated forfeitures, as of December 31, 2018 | 485,469 | $ | 19.88 | 3.42 | $ | 19.86 |
Options Outstanding | |||||||||||||||||||||
Shares Available For Grant | Number of Shares | Weighted- Average Exercise Price | Weighted-Average Remaining Contractual Life (in years) | Aggregate Intrinsic Value (in millions ) (1) | |||||||||||||||||
Balances as of December 31, 2017 | 1,494,866 | 839,919 | $ | 16.46 | 3.99 | $ | 24.4 | ||||||||||||||
Options granted | (21,010 | ) | 21,010 | $ | 50.65 | ||||||||||||||||
Options exercised | — | (271,902 | ) | $ | 9.99 | ||||||||||||||||
Options cancelled (expired or forfeited) | 81,322 | (81,322 | ) | $ | 21.55 | ||||||||||||||||
Stock awards granted | (562,070 | ) | — | — | |||||||||||||||||
Stock awards cancelled (expired or forfeited) | 148,197 | — | — | ||||||||||||||||||
Balances as of December 31, 2018 | 1,141,305 | 507,705 | $ | 20.52 | 3.52 | $ | 2.00 | ||||||||||||||
Additional shares reserved(2) | 700,000 | ||||||||||||||||||||
Options exercised | — | (160,798 | ) | $ | 10.03 | ||||||||||||||||
Options cancelled (expired or forfeited) | 51,208 | (51,208 | ) | $ | 24.61 | ||||||||||||||||
Stock awards granted | (1,538,128 | ) | — | — | |||||||||||||||||
Stock awards cancelled (expired or forfeited) | 407,320 | — | — | ||||||||||||||||||
Balances as of December 31, 2019 | 761,705 | 295,699 | $ | 25.52 | 3.19 | $ | 3.04 | ||||||||||||||
Additional shares reserved(2) | 600,000 | ||||||||||||||||||||
Options granted | (71,088 | ) | 71,088 | $ | 14.85 | ||||||||||||||||
Options exercised | — | (73,227 | ) | $ | 12.91 | ||||||||||||||||
Options cancelled (expired or forfeited) | 76,553 | (76,553 | ) | $ | 36.65 | ||||||||||||||||
Stock awards granted | (804,949 | ) | — | — | |||||||||||||||||
Stock awards cancelled (expired or forfeited) | 522,949 | — | — | ||||||||||||||||||
Balances as of December 31, 2020 | 1,085,170 | 217,007 | $ | 22.35 | 3.75 | $ | 1.47 | ||||||||||||||
Exercisable as of December 31, 2020 | 132,641 | $ | 24.60 | 2.84 | $ | 1.47 | |||||||||||||||
Vested and expected to vest, net of estimated forfeitures, as of December 31, 2020 | 212,025 | $ | 22.31 | 3.63 | $ | 1,451 |
| Based on the closing stock price of |
| Approved by the board of directors and stockholders in |
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the aggregate difference between the Company’s closing stock price on the last trading day of the fiscal year and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on December 31, 2018. 2020. The aggregate intrinsic amount changes based on the fair market value of the Company’s common stock. Total intrinsic value of options exercised in 2018, 20172020,2019 and 20162018 was $8.3$0.4 million, $8.0$1.0 million, and $3.6$8.3 million, respectively. The options outstanding and exercisable at December 31, 2018 2020 were in the following exercise price ranges:
Exercise Prices | Number Outstanding | Contractual Life (in years) | Number Outstanding | |||||||||||||||||||
$6.88 | – | $7.44 | 28,832 | 0.58 | 28,832 | |||||||||||||||||
$8.80 | 97,268 | 1.44 | 97,268 | |||||||||||||||||||
$9.65 | – | $10.79 | 54,564 | 3.01 | 49,544 | |||||||||||||||||
$10.80 | – | $11.24 | 57,521 | 3.18 | 47,293 | |||||||||||||||||
$11.67 | – | $17.90 | 72,583 | 2.44 | 48,855 | |||||||||||||||||
$18.55 | – | $25.70 | 71,250 | 5.21 | 28,512 | |||||||||||||||||
$39.30 | 72,000 | 5.83 | 23,230 | |||||||||||||||||||
$43.40 | 6,510 | 6.45 | — | |||||||||||||||||||
$47.40 | 38,927 | 5.86 | 10,564 | |||||||||||||||||||
$53.90 | 8,250 | 5.30 | 1,250 |
Exercise Prices |
Number Outstanding | Contractual Life (in years) | Number Exercisable | ||||||||||||
$9.65 | - | $10.79 | 22,319 | 1.08 | 22,319 | ||||||||||
$10.80 | - | $14.04 | 34,459 | 2.23 | 34,459 | ||||||||||
$14.01 | 60,000 | 4.59 | 0 | ||||||||||||
$15.32 | - | $18.55 | 8,396 | 2.64 | 8,271 | ||||||||||
$18.93 | 11,088 | 9.83 | 0 | ||||||||||||
$19.55 | 10,000 | 3.32 | 9,375 | ||||||||||||
$25.70 | 11,000 | 3.59 | 9,730 | ||||||||||||
$39.30 | 45,000 | 3.83 | 37,292 | ||||||||||||
$47.40 | 7,745 | 3.96 | 6,132 | ||||||||||||
$53.90 | 7,000 | 4.20 | 5,063 | ||||||||||||
$9.65 | - | $53.9 | 217,007 | 3.75 | 132,641 |
Stock Awards (RSU and PSU) Activity Table
StockAwards(RSUandPSU)ActivityTable
Information with respect to RSUs and PSUs activity is as follows (in thousands):
Number of | Weighted-Average Grant- Date Fair | Aggregate Fair Value(1) | Aggregate Intrinsic Value | Number of | Weighted-Average Grant- Date Fair | Aggregate Fair Value(1) | Aggregate Intrinsic Value (2) | |||||||||||||||||||||||||
Shares | Value | (in thousands) | (in thousands) | Shares | Value | (in thousands) | (in thousands) | |||||||||||||||||||||||||
Outstanding at December 31, 2015 | 371,630 | $ | 12.39 | $ | 4,753 | |||||||||||||||||||||||||||
Granted | 480,191 | $ | 10.80 | |||||||||||||||||||||||||||||
Vested (3) | (172,990 | ) | $ | 12.56 | $ | 1,906 | (5) | |||||||||||||||||||||||||
Forfeited | (233,514 | ) | $ | 11.36 | ||||||||||||||||||||||||||||
Outstanding at December 31, 2016 | 445,317 | $ | 11.15 | $ | 7,726 | |||||||||||||||||||||||||||
Granted | 412,208 | $ | 28.74 | |||||||||||||||||||||||||||||
Vested (3) | (224,799 | ) | $ | 10.91 | $ | 5,168 | (6) | |||||||||||||||||||||||||
Forfeited | (122,139 | ) | $ | 13.56 | ||||||||||||||||||||||||||||
Outstanding at December 31, 2017 | 510,587 | $ | 24.88 | $ | 23,155 | 510,587 | $ | 24.88 | $ | 23,155 | ||||||||||||||||||||||
Granted | 265,124 | $ | 44.57 | 265,124 | $ | 44.57 | ||||||||||||||||||||||||||
Vested (3) | (231,515 | ) | $ | 21.10 | $ | 9,483 | (6) | (231,515 | ) | $ | 21.10 | $ | 9,483 | (4) | ||||||||||||||||||
Forfeited | (69,905 | ) | $ | 20.01 | (69,905 | ) | $ | 20.01 | ||||||||||||||||||||||||
Outstanding at December 31, 2018 | 474,291 | $ | 38.44 | $ | 8,072 | 474,291 | $ | 38.44 | $ | 8,072 | ||||||||||||||||||||||
Granted | 963,814 | $ | 18.68 | |||||||||||||||||||||||||||||
Vested (3) | (172,281 | ) | $ | 33.66 | $ | 6,169 | (5) | |||||||||||||||||||||||||
Forfeited | (161,022 | ) | $ | 37.91 | ||||||||||||||||||||||||||||
Outstanding at December 31, 2019 | 1,104,802 | $ | 22.10 | $ | 37,442 | |||||||||||||||||||||||||||
Granted | 667,694 | $ | 20.66 | |||||||||||||||||||||||||||||
Vested (3) | (684,491 | ) | $ | 17.82 | $ | 12,036 | (6) | |||||||||||||||||||||||||
Forfeited | (308,248 | ) | $ | 23.24 | ||||||||||||||||||||||||||||
Outstanding at December 31, 2020 | 779,757 | $ | 23.96 | $ | 18,800 |
(1) Represents the value of the Company’s stock on the date that the restricted stock units and performance stock units vest.
(2) Based on the closing stock price of the Company’s stock of $24.11 on December 31, 2020, $35.81 on December 31, 2019, $17.02 on December 31, 2018, and $45.35 on December 31, 2017. (3) The number of restricted stock units vested includes shares that the Company withheld on behalf of the employees to satisfy the statutory tax withholding requirements. (4) On the grant date, the fair value for these vested awards was $4.9 million. (5) On the grant date, the fair value for these vested awards was $5.9 million. (6) On the grant date, the fair value for these vested awards was $12.2 million. |
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Stock-Based Compensation
Stock-based compensation expense for the years ended December 31, 2018, 20172020, 2019 and 20162018 was as follows (in thousands):
Year Ended December 31, | ||||||||||||
2018 | 2017 | 2016 | ||||||||||
Stock options | $ | 838 | $ | 815 | $ | 989 | ||||||
RSUs | 4,648 | 1,813 | 1,508 | |||||||||
PSUs | 1,105 | 2,093 | 967 | |||||||||
ESPP | 566 | 389 | 249 | |||||||||
Total stock-based compensation expense | $ | 7,157 | $ | 5,110 | $ | 3,713 |
Year Ended December 31, | ||||||||||||
2020 | 2019 | 2018 | ||||||||||
Stock options | $ | 370 | $ | 622 | $ | 838 | ||||||
RSUs | 8,849 | 4,786 | 4,648 | |||||||||
PSUs | 666 | 3,948 | 1,105 | |||||||||
ESPP | 224 | 476 | 566 | |||||||||
Total stock-based compensation expense | $ | 10,109 | $ | 9,832 | $ | 7,157 |
As of December 31, 2018, 2020, the unrecognized compensation cost, net of expected forfeitures, was $12.8$0.7 million for stock options, and stock awards, which will be recognized over an estimated weighted-average remaining amortization period of 2.633.9 years. The unrecognized compensation cost, net of expected forfeitures, for stock awards, including performance-based awards, was $12.3 million, which will be recognized over an estimated weighted-average remaining amortization period of 2.3 years. For the ESPP, the unrecognized compensation cost, net of expected forfeitures, was $272,000,$0.1 million, which will be recognized over an estimated weighted-average amortization period 0.33 years.
The Company issues new shares of common stock upon the exercise of stock options, vesting of RSUs and PSUs, and the issuance of ESPP shares. The amount of cash received from these issuances (excluding PSUs),through exercise of options and shares purchased through ESPP, net of taxes withheld and paid, in 2020,2019 and 2018 2017and 2016 was $1.3$1.6 million, $4.0$3.9 million and $9.5$1.3 million.
Total stock-based compensation expense recognized during the year ended December 31, 2018, 20172020, 2019 and 20162018 was recorded in the Consolidated Statement of Operations as follows (in thousands):
Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||
2018 | 2017 | 2016 | 2020 | 2019 | 2018 | |||||||||||||||||||
Cost of revenue | $ | 743 | $ | 660 | $ | 341 | $ | 1,665 | $ | 1,572 | $ | 743 | ||||||||||||
Sales and marketing | 2,105 | 1,642 | 1,179 | 3,385 | 4,510 | 2,105 | ||||||||||||||||||
Research and development | 824 | 936 | 596 | 1,669 | 1,536 | 824 | ||||||||||||||||||
General and administrative | 3,485 | 1,872 | 1,597 | 3,390 | 2,214 | 3,485 | ||||||||||||||||||
Total stock-based compensation expense | $ | 7,157 | $ | 5,110 | $ | 3,713 | $ | 10,109 | $ | 9,832 | $ | 7,157 |
Valuation Assumptions and Fair Value of Stock Options and ESPP Grants
The Company uses the Black-Scholes option pricing model to estimate the fair value of options granted under its equity incentive plans and rights to acquire stock granted under its employee stock purchase plan. The Company based the weighted average estimated fair values of the employee stock option grantsoptions and rights granted under the employee stock purchase plan as well asand the weighted average assumptions used in calculating theseto calculate the grant date fair values, on estimates at the date of grant,are as follows:
Stock Options | Stock Purchase Plan | |||||||||||||||||||||||
2018 | 2017 | 2016 | 2018 | 2017 | 2016 | |||||||||||||||||||
Expected term (in years) (1) | 3.7 | 3.70 | 3.83 | 0.50 | 0.50 | 0.50 | ||||||||||||||||||
Risk-free interest rate (2) | 2.6 | % | 1.73 | % | 1.09 | % | 2.34 | % | 1.14 | % | 0.46 | % | ||||||||||||
Volatility(3) | 44 | % | 40 | % | 40 | % | 61 | % | 42 | % | 39 | % | ||||||||||||
Dividend yield(4) | — | % | — | % | — | % | — | % | — | % | — | % | ||||||||||||
Weighted average estimated fair value at grant date | $ | 18.0 | $ | 9.98 | $ | 3.72 | $ | 9.6 | $ | 8.21 | $ | 3.22 |
Stock Options | Stock Purchase Plan (ESPP) | |||||||||||||||||||||||
2020 | 2019 | 2018 | 2020 | 2019 | 2018 | |||||||||||||||||||
Expected term (in years) (1) | 4.84 | 3.65 | 3.70 | 0.50 | 0.50 | 0.50 | ||||||||||||||||||
Risk-free interest rate (2) | 0.15 | % | 1.64 | % | 2.60 | % | 0.11 | % | 2.49 | % | 2.34 | % | ||||||||||||
Volatility(3) | 63 | % | 54 | % | 44 | % | 76 | % | 70 | % | 61 | % | ||||||||||||
Dividend yield(4) | 0 | % | 0 | % | 0 | % | 0 | % | 0 | % | 0 | % | ||||||||||||
Weighted average estimated fair value at grant date | $ | 7.63 | $ | 14.83 | $ | 18.00 | $ | 6.13 | $ | 9.60 | $ | 9.60 |
| The expected term represents the period during which the Company’s stock-based awards are expected to be outstanding. The estimated term is based on historical experience of similar awards, giving consideration to the contractual terms of the awards, vesting requirements and expectation of future employee behavior, including post-vesting terminations. The expected term of groups of employees that have similar historical exercise patterns has been considered separately for valuation purposes. |
| The risk-free interest rate is based on U.S. Treasury debt securities with maturities close to the expected term of the option or ESPP participation right as of the date of grant. |
| Estimated volatility is based on historical volatility. The Company |
(4) | The Company has not paid dividends since its inception. |
The Company periodically estimates forfeiture rates based on its historical experience withinfor separate groups of employees and adjusts the stock-based paymentcompensation expense accordingly. The forfeiture rates used in 20182020 ranged from 0% to 17%20.8%.
Non-Employee Stock-Based Compensation
Stock-based compensation expense related to stock options granted to non-employees is recognized based on the fair value of the stock options, determined using the Black-Scholes option pricing model, as they are earned. The awards generally vest over the time period the Company expects to receive services from the nonemployee. The Company revalues stock options granted to non-employees at each reporting date as the underlying equity instruments vest.
The Company granted 3,384 RSUs to non-employees during the year ended December 31, 2018, 7,745 stock options and 2,478 RSUs during the year ended 2017, and zero shares during the year ended 2016. The 7,745 stock options granted in 2017 vests over 4 years at 25% on the first anniversary of the grant date and 1/48th each month thereafter.
The 3,384 RSUs granted in 2018 vests over 4 years at 25% each anniversary of the grant date. These RSUs and stock options were granted in exchange for consulting services to be rendered and are measured and recognized as they are earned.
Stock Awards Withholdings
For Stock Awards granted to employees, the number of shares issued on the date the Stock Awards vest is net of the tax withholding requirements paid on behalf of the employees. In 2018, 20172020,2019, and 2016,2018, the Company withheld 193,573, 42,695 and 77,049 64,490, and 56,157sharesshares of common stock, respectively, to satisfy its employees’ tax obligations of $3,130,360, $1,469,000$3.4 million, $0.8 million and $619,000,$3.1 million, respectively. The Company paid this amount in cash to the appropriate taxing authorities. Although shares withheld are not issued, they are treated as common stock repurchases for accounting and disclosure purposes, as they reduce the number of shares that would have been issued upon vesting.
NOTE 7—7—INCOME TAXES
The Company files income tax returns in the U.S. federal and various state and local jurisdictions and foreign jurisdictions. The Company’s income (loss) before provision for income taxes consisted of the following (in thousands):
Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||
2018 | 2017 | 2016 | 2020 | 2019 | 2018 | |||||||||||||||||||
U.S. | $ | (14,177 | ) | $ | 11,203 | $ | 2,207 | $ | (25,793 | ) | $ | (13,037 | ) | $ | (14,177 | ) | ||||||||
Foreign | 662 | 757 | 513 | 2,386 | 774 | 662 | ||||||||||||||||||
Income (loss) before income taxes | $ | (13,515 | ) | $ | 11,960 | $ | 2,720 | |||||||||||||||||
Loss before income taxes | $ | (23,407 | ) | $ | (12,263 | ) | $ | (13,515 | ) |
The components of the provision (benefit) for income taxes are as follows (in thousands):
Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||
2018 | 2017 | 2016 | 2020 | 2019 | 2018 | |||||||||||||||||||
Current: | ||||||||||||||||||||||||
Federal | $ | (15) | $ | 148 | $ | — | $ | 0 | $ | 0 | $ | (15 | ) | |||||||||||
State | 123 | 71 | 16 | (53 | ) | 101 | 123 | |||||||||||||||||
Foreign | 303 | 511 | 131 | 747 | (76 | ) | 303 | |||||||||||||||||
Total Current | 411 | 730 | 147 | 694 | 25 | 411 | ||||||||||||||||||
Deferred: | ||||||||||||||||||||||||
Federal | 15,674 | (17,393) | (24) |
| 2 | 2 | 15,674 | |||||||||||||||||
State | 1,230 | (1,348) | (2) |
| 1 | 1 | 1,230 | |||||||||||||||||
Foreign | (60) | (22) | 22 | (227 | ) | 57 | (60 | ) | ||||||||||||||||
Total Deferred | 16,844 | (18,763) | (4) |
| (224 | ) | 60 | 16,844 | ||||||||||||||||
Tax provision | $ | 17,255 | $ | (18,033) | $ | 143 | $ | 470 | $ | 85 | $ | 17,255 |
The Company’s net deferred tax asset consistsassets consist of the following (in thousands):
December 31, | ||||||||
2018 | 2017 | |||||||
Net operating loss carryforwards | $ | 11,227 | $ | 8,604 | ||||
Stock-based compensation | 1,040 | 1,179 | ||||||
Other accruals and reserves | 1,924 | 1,663 | ||||||
Credits | 10,857 | 11,781 | ||||||
Foreign | 457 | 399 | ||||||
Accrued warranty | 1,863 | 847 | ||||||
Depreciation and amortization | 2,024 | 1,592 | ||||||
Other | 282 | 303 | ||||||
Deferred tax asset before valuation allowance | 29,674 | 26,368 | ||||||
Valuation allowance | (27,865) | (7,242) | ||||||
Deferred tax asset after valuation allowance | 1,809 | 19,126 | ||||||
Deferred tax liability | (1,269) | — | ||||||
Deferred tax liability on goodwill | (83) | (71) | ||||||
Net deferred tax asset | $ | 457 | $ | 19,055 |
December 31, | ||||||||
2020 | 2019 | |||||||
Net operating loss carryforwards | $ | 18,270 | $ | 14,507 | ||||
Stock-based compensation | 869 | 1,111 | ||||||
Other accruals and reserves | 3,670 | 2,202 | ||||||
Credits | 12,653 | 11,887 | ||||||
Accrued warranty | 976 | 924 | ||||||
Depreciation and amortization | 2,191 | 2,354 | ||||||
Other | 979 | 897 | ||||||
Operating Lease Liability | 4,311 | 3,949 | ||||||
Deferred tax asset before valuation allowance | 43,919 | 37,831 | ||||||
Valuation allowance | (38,321 | ) | (32,350 | ) | ||||
Deferred tax asset after valuation allowance | 5,598 | 5,481 | ||||||
Deferred contract acquisition costs | (803 | ) | (1,076 | ) | ||||
Goodwill | (110 | ) | (97 | ) | ||||
Right of Use Asset | (4,042 | ) | (3,885 | ) | ||||
Net deferred tax asset | $ | 643 | $ | 423 |
The differences between the U.S. federal statutory income tax rates to the Company’s effective tax rate are as follows:
Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||
2018 | 2017* | 2016* | 2020 | 2019 | 2018 | |||||||||||||||||||
U.S. federal statutory income tax rate | 21.00 | % | 34.00 | % | 34.00 | % | 21.00 | % | 21.00 | % | 21.00 | % | ||||||||||||
State tax rate | (4.95) | (5.59) |
| (14.56) |
| 2.77 | 2.82 | (4.95 | ) | |||||||||||||||
Meals and entertainment | (2.66) | 2.15 | 7.56 | (0.65 | ) | (2.83 | ) | (2.66 | ) | |||||||||||||||
Permanent differences | (2.87 | ) | (2.58 | ) | 0 | |||||||||||||||||||
Stock-based compensation | 13.66 | (21.55) | 14.36 | (1.07 | ) | 3.78 | 13.66 | |||||||||||||||||
SAB 118 Change in Estimate | (2.43) | — | 0 | 0 | (2.43 | ) | ||||||||||||||||||
Foreign rate differential | 0.11 | (0.50) | (0.16) |
| (1.05 | ) | (0.34 | ) | 0.11 | |||||||||||||||
Other | (1.21) | 0.65 | (2.15) | 0.15 | (0.33 | ) | (1.21 | ) | ||||||||||||||||
General business credit | 4.31 | (2.72) | (9.25) | 2.74 | 8.14 | 4.31 | ||||||||||||||||||
Change in Federal Tax Rate | — | 60.98 | — | |||||||||||||||||||||
Valuation allowance | (155.49) | (218.17) | (24.57) |
| (25.51 | ) | (38.60 | ) | (155.49 | ) | ||||||||||||||
Change in prior year reserves | 0.40 | 2.53 | 0 | |||||||||||||||||||||
Deferred true-up | 2.08 | 5.71 | 0 | |||||||||||||||||||||
Effective tax rate | (127.66) | % | (150.75) | % | 5.23 | % | (2.01 | )% | (0.70 | )% | (127.66 | )% |
* Other balance in 2017 and 2016 was reclassified for consistency with current year.
As of December 31, 2020, the Company recorded a valuation allowance of $38.3 million for the portion of the deferred tax asset that it does not expect to be realized. The valuation allowance on the Company’s net deferred taxes increased by $6.0 million and $4.5 million during the years ended December 31, 2020 and 2019, respectively. The changes in valuation allowance are primarily due to additional U.S. deferred tax assets and liabilities incurred in the respective year. The Company assesses the ability to realize itshas $0.6 million of net deferred tax assets by evaluating all available evidence, both positive and negative,in foreign jurisdictions, which management believes are more-likely-than-not to be realized given the expectation of future earnings in these jurisdictions. The Company continues to monitor the realizability of the U.S. deferred tax assets taking into account multiple factors, including (1) cumulativethe results of operations in recent years, (2) sourcesand magnitude of recent income (loss), (3) estimates of future taxable income and (4) the length of net operating loss andexcess tax credit carryforward periods. Such assessment is required on a jurisdiction-by-jurisdiction basis. In making such assessment, significant weight is given to evidence that can be objectively verified.
The Company’s deferred tax assets are primarily comprised of U.S. Net Operating Loss (“NOL”), tax credit and other deferred tax assets relating to book-to-tax temporary differences.deductions for stock-based compensation. The Company had recorded and maintainedintends to continue maintaining a full valuation allowance against those neton its U.S. deferred tax assets until there is sufficient evidence to reduce them to their estimated net realizable value through September 30, 2017. Assupport the reversal of December 31, 2017, the Company determined that it is more likely than not thatall or some portion of these allowances. Release of all, or a portion, of the netvaluation allowance would result in the recognition of certain deferred tax assets would be realizedand a decrease to income tax expense for federal and U.S. states, except California, and therefore recorded a net valuation allowancethe period the release of $26.3 million.
As of each reporting date, the Company’s management considers new evidence, both positive and negative, that could impact management’s view with regard to future realization of deferred tax assets. As of December 31, 2018, in part because in the current year, the Company achieved three years of cumulative pre-tax losses in the U.S. federal tax jurisdiction, management determined that sufficient negative evidence exists as of December 31, 2018, to conclude that it is more likely than not that certain of its net deferred taxes would not be realizable, and therefore, recorded a valuation allowance in the amount of $16.9 million accordingly.recorded.
At December 31, 2018, 2020, the Company had approximately $45.7$76.6 million and $20.5$36.6 million of federal and state net operating loss carryforwards, respectively, available to offset future taxable income. The federal and state net operating loss carryforwards, if not utilized will generally begin to expire in 2029 through 2038. $11.82039. Approximately $34.9 million of total federal net operating loss carryforwards were generated post December 31, 2017 and have no expiration. At December 31, 2018, 2020, the Company had research and development tax credits available to offset federal, California and Massachusetts tax liabilities in the amount of $6.7$6.3 million, $7.4$7.8 million and $0.3$0.2 million, respectively. Federal credits will begin to expire in 2024, California state tax credits have no expiration, and Massachusetts tax credits begin to expire in 2021.
On March 27, 2020, the U.S. federal government enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). The utilization of NOL carryforwards and tax credits may be subject to a substantial annual limitation due to the ownership change limitations provided by Section 382CARES Act changed several of the existing U.S. Internal Revenue Codecorporate income tax laws by, among other things, increasing the amount of deductible interest, allowing companies to carry back certain Net Operating Losses (“IRC”NOLs”), and similarincreasing the amount of NOLs that corporations can use to offset income. Further, in December 2020, the Consolidated Appropriations Act, 2021 was signed into law. It clarified that gross income does not include any amount that would otherwise arise from the forgiveness of a PPP loan. The CARES Act did not have a material impact on the Company's income tax provision, deferred tax assets and liabilities, and related taxes payable.
Federal and state provisions. The annual limitation may result in the expiration of NOL carryforwards and tax credits before utilization. The Company completed an IRC Section 382 analysis through December 31, 2018 and determined that there were no significant limitations tolaws can impose substantial restrictions on the utilization of NOL or tax credit carryforwards. As such, the NOLnet operating loss and tax credit carryforwards presented are not expected to expire unutilized, unless there is a future ownershipin the event of an “ownership change,” as determined bydefined in Section 382 of the IRC.Internal Revenue Code. The Company has determined that no significant limitation would be placed on the utilization of the Company’s net operating loss and tax credit carryforwards due to prior ownership changes.
UndistributedNaN deferred tax liabilities have been recorded relating to the earnings of the Company’s foreign subsidiaries at December 31, 2018since all such earnings are consideredintended to be indefinitely reinvested and, accordingly, no provision for federal and state income taxes has been provided thereon. Due toreinvested. The amount of the Transition Tax and GILTI regimes as enacted by the 2017 Tax Act, those foreignunrecognized deferred tax liability associated with these earnings will not be subject to federal income taxes when actually distributed in the form of a dividend or otherwise. The Company, however, could still be subject to state income taxes and withholding taxes payable to various foreign countries. The amounts of taxes which the Company could be subject to are not material to the accompanying financial statements.is immaterial.
In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”), which allows companies to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. Since the 2017 Tax Act was passed late in the fourth quarter of 2017, and ongoing guidance and accounting interpretation was yet to be issued, the Company’s accounting of the transition tax and deferred tax re-measurements was incomplete as of December 31, 2017. The Company filed its 2017 Federal corporate income tax return in the fourth quarter of 2018. The Company’s final analysis and impact of the 2017 Tax Act is reflected in the tax provision and related tax disclosures for the year ended December 31, 2018. There was a net increase of approximately $0.3 million to the originally estimated $7.3 million remeasurement of deferred tax assets. The Company considers the $0.3 million true-up to be an immaterial change in estimate which has been reflected within the measurement period in accordance with SAB 118.
In January 2018, the FASB released guidance on the accounting for tax on the GILTI provisions of the 2017 Tax Act. The GILTI provisions impose a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. The guidance indicates that either accounting for deferred taxes related to GILTI inclusions or treating any taxes on GILTI inclusions as a period cost are both acceptable methods subject to an accounting policy election. The Company has elected to treat any taxes on GILTI inclusions as a period cost.
Uncertain Tax Positions
The Company establishes reserves for uncertain tax positions based on the largest amount that is more-likely-than-notmore-likely-than-not to be sustained. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. The Company performs a two-steptwo-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement.
Although the Company believes it has adequately reserved for its uncertain tax positions, no assurance can be given that the final tax outcome of these matters will not be different. The Company adjusts these reserves in light of changing facts and circumstances, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impact the provision for income taxes in the period in which such determination is made. The provision for income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate, as well as the related net interest and penalties.
The Company files U.S., state, and foreign income tax returns in jurisdictions with varying statutes of limitations. The 2005 through 20182020 tax years generally remain subject to examination by U.S. federal and California state tax authorities due to the Company’s net operating loss and credit carryforwards. For significant foreign jurisdictions, the 20112015 through 20172020 tax years generally remain subject to examination by their respective tax authorities.
The following table summarizes the activity related to the Company’s gross unrecognized tax benefits, excluding related interest and penalties, in December 31, 2016 to December 31, 2018 (into December 31, 2020 (in thousands):
Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||
2018 | 2017 | 2016 | 2020 | 2019 | 2018 | |||||||||||||||||||
Balance at beginning of year | $ | 1,519 | $ | 707 | $ | 651 | $ | 1,426 | $ | 1,563 | $ | 1,519 | ||||||||||||
Decreases related to prior year tax positions | (70) | 643 | — | (32 | ) | (291 | ) | (70 | ) | |||||||||||||||
Increases related to prior year tax positions | — | 25 | — | |||||||||||||||||||||
Increases related to current year tax positions | 114 | 169 | 56 | 470 | 129 | 114 | ||||||||||||||||||
Balance at end of year | $ | 1,563 | $ | 1,519 | $ | 707 | $ | 1,864 | $ | 1,426 | $ | 1,563 |
It is the Company’s policy to recognize interest and penalties related to income tax matters in income tax expense. The amount of interest and penalties recognized in income tax expense was immaterial for the years ended December 31, 2020 and December 31, 2019. As of December 31, 2018, 2020, the Company had 0 accrued interest and penalties of $107,000 related to uncertain tax positions.
NOTE 8—8—NET LOSS PER SHARE
Basic net income (loss)loss per share is computed usingby dividing the net loss by the weighted-average number of shares outstanding during the period. In periodsperiod, without consideration for potential dilutive shares of net income, diluted shares outstanding include the dilutive effect ofcommon stock, such as in-the-money equity awards (stock options, restricted stock units, performance stock unitsRSUs, PSUs and employee stock purchase plan contributions), which is calculated based on. Shares of common stock subject to repurchase are excluded from the average share priceweighted-average shares. Since the Company was in a loss position for each fiscal period using the treasury stock method. In accordance with ASC 260, the assumed proceeds under the treasury stock method include the average unrecognized compensation expense of in-the money stock options and restricted stock units. This results in the assumed buyback of additional shares, thereby reducing the dilutive impact of equity awards.
Diluted earningsall periods presented, basic net loss per share is the same as basic earningsdiluted net loss per share forsince the periods in which the Company had a net loss because the inclusioneffects of outstanding common stock equivalents would be anti-dilutive.potentially dilutive securities are antidilutive.
The following table sets forth the computation of basic and diluted net income (loss)loss and the weighted average number of shares used in computing basic and diluted net income (loss)loss per share (in thousands, except per share data):
Year Ended December 31, | ||||||||||||
2018 | 2017 | 2016 | ||||||||||
Numerator: | ||||||||||||
Net Income(loss) | $ | (30,770) | $ | 29,993 | $ | 2,577 | ||||||
Denominator: | ||||||||||||
Weighted average shares of common stock outstanding used in computing net income (loss) per share, basic | 13,771 | 13,873 | 13,225 | |||||||||
Dilutive effect of incremental shares and share equivalents | — | 855 | 528 | |||||||||
Weighted average shares of common stock outstanding used in computing net income (loss) per share, diluted | 13,771 | 14,728 | 13,753 | |||||||||
Net income(loss) per share: | ||||||||||||
Net income (loss) per share, basic | $ | (2.23) | $ | 2.16 | $ | 0.19 | ||||||
Net income (loss) per share, diluted | $ | (2.23) | $ | 2.04 | $ | 0.19 |
Year Ended December 31, | ||||||||||||
2020 | 2019 | 2018 | ||||||||||
Numerator: | ||||||||||||
Net loss (in thousands) | $ | (23,877 | ) | $ | (12,348 | ) | $ | (30,770 | ) | |||
Denominator: | ||||||||||||
Weighted average shares of common stock outstanding used in computing net loss per share, basic and diluted | 16,691 | 14,096 | 13,771 | |||||||||
Net loss per share: | ||||||||||||
Net loss per share, basic and diluted | $ | (1.43 | ) | $ | (0.88 | ) | $ | (2.23 | ) |
On March 9, 2021, the Company issued and sold $125 million aggregate principal amount of 2.25% Convertible Senior Notes. Such issuance will have the impact on the number of potential common shares outstanding in the future periods. See Note 13 – "Subsequent Events" for detailed discussion.
The following numbers of shares outstanding, prior to the application of the treasury stock method, were excluded from the computation of diluted net income (loss)loss per common share for the period presented because including them would have had an anti-dilutive effect (in thousands):
Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||
2018 | 2017 | 2016 | 2020 | 2019 | 2018 | |||||||||||||||||||
Options to purchase common stock | 664 | 42 | 220 | 244 | 417 | 664 | ||||||||||||||||||
Restricted stock units | 432 | 9 | 24 | 724 | 559 | 432 | ||||||||||||||||||
Employee stock purchase plan shares | 133 | — | — | 87 | 111 | 133 | ||||||||||||||||||
Performance stock units | 43 | — | — | 68 | 178 | 43 | ||||||||||||||||||
Total | 1,272 | 51 | 244 | 1,123 | 1,265 | 1,272 |
NOTE9—9—DEFINEDCONTRIBUTIONPLAN
In the U.S., the Company has an employee savings plan (“401(k)(“401(k) Plan”) that qualifies as a deferred salary arrangement under Section 401(k)401(k) of the Internal Revenue Code. Eligible employees may make voluntary contributions to the 401(k)401(k) Plan up to 100% of their annual compensation, subject to statutory annual limitations. In 2018, 20172020,2019 and 2016,2018, the Company made discretionary contributions under the 401(k)401(k) Plan of $0.2 million, $0.4 million $0.3 million and $0.2$0.4 million, respectively.
For the Company’s Japanese subsidiary, a discretionary employee retirement plan has been established. In addition, for some of the Company’s other foreign subsidiaries, the Company deposits funds with insurance companies, third-partythird-party trustees, or into government-managed accounts consistent with the requirements of local laws. The Company has fully funded or accrued for its obligations as of December 31, 2018, 2020, and the related expense for each of the three years then ended was not significant.
NOTE 10—10—SEGMENT INFORMATION AND REVENUE BY GEOGRAPHYGEOGRAPHY AND PRODUCTS
Segment reporting is based on the “management approach,” following the method that management organizes the Company’scompany’s reportable segments for which separate financial information is made available to, and evaluated regularly by, the chief operating decision maker in allocating resources and in assessing performance. The Company’s chief operating decision maker ismakers ("CODM") are its Chief Executive Officer ("CEO") and Chief Financial Officer (“CFO”), who makes decisionmake decisions on allocating resources and in assessing performance. The CEO reviewsand CFO review the Company's consolidated results as one1 operating segment. In making operating decisions, the CEOCODM primarily considers consolidated financial information, accompanied by disaggregated information about revenues by geography and product. All of the Company’s principal operations and decision-making functions are located in the U.S. The Company’s CEO viewsCODM view its operations, manages its business, and uses one measurement of profitability for the one operating segment - which sells aesthetic medical equipment and services, and distributes skincare products, to qualified medical practitioners. Substantially all of the Company’s long-lived assets are located in the U.S.
The following table presents a summary of revenue by geography for the year ended December 31, 20182020, 2019 and 20172018 (in thousands):
Year Ended December 31, | ||||||||||||
2020 | 2019 | 2018 | ||||||||||
Revenue mix by geography: | ||||||||||||
United States | $ | 61,202 | $ | 106,243 | $ | 101,862 | ||||||
Japan | 43,265 | 24,142 | 17,819 | |||||||||
Asia, excluding Japan | 11,900 | 16,110 | 15,467 | |||||||||
Europe | 9,503 | 10,596 | 8,875 | |||||||||
Rest of the world | 21,813 | 24,621 | 18,697 | |||||||||
Total Consolidated revenue | $ | 147,683 | $ | 181,712 | $ | 162,720 | ||||||
Revenue mix by product category: | ||||||||||||
Systems | $ | 90,765 | $ | 140,478 | $ | 132,595 | ||||||
Consumables | 9,287 | 9,648 | 4,162 | |||||||||
Skincare | 25,061 | 8,512 | 5,778 | |||||||||
Total product revenue | 125,113 | 158,638 | 142,535 | |||||||||
Service | 22,570 | 23,074 | 20,185 | |||||||||
Total Consolidated revenue | $ | 147,683 | $ | 181,712 | $ | 162,720 |
Year Ended December 31, | ||||||||||||
2018 | 2017 | 2016 | ||||||||||
Revenue mix by geography: | ||||||||||||
United States | $ | 101,862 | $ | 94,581 | $ | 65,513 | ||||||
Japan | 17,819 | 17,264 | 14,727 | |||||||||
Asia, excluding Japan | 15,467 | 13,719 | 13,445 | |||||||||
Europe | 8,875 | 8,317 | 7,539 | |||||||||
Rest of the world | 18,696 | 17,612 | 16,832 | |||||||||
Total Consolidated revenue | $ | 162,720 | $ | 151,493 | $ | 118,056 | ||||||
Revenue mix by product category: | ||||||||||||
Systems | $ | 132,594 | $ | 125,883 | $ | 92,721 | ||||||
Consumables | 4,162 | 2,435 | 2,498 | |||||||||
Skincare | 5,778 | 4,342 | 3,809 | |||||||||
Total product revenue | 142,535 | 132,660 | 99,028 | |||||||||
Service | 20,185 | 18,833 | 19,028 | |||||||||
Total Consolidated revenue | $ | 162,720 | $ | 151,493 | $ | 118,056 |
NOTE 11—11–COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company is a party to certain operating and finance leases for vehicles, office space and storages facilities. The Company’s material operating leases consist of office space, as well as storage facilities and finance leases consist of automobiles. The Company’s leases generally have remaining terms of 1 to 10 years, some of which include options to renew the leases for up to 5 years. The Company leases space for operations in the United States, Japan, Belgium, France, and Spain. In addition to the above facility leases, the Company also routinely leases automobiles for certain sales and field service employees under finance leases.
In February 2016, the FASB issued ASU 2016-02, "Leases," (also known as ASC Topic 842) which requires, among other items, lease accounting to recognize most leases as assets and liabilities on the balance sheet. Qualitative and quantitative disclosures are enhanced to better present the amount, timing and uncertainty of cash flows arising from leases. In July 2018, the FASB issued ASU 2018-11, "Targeted Improvements," which gives the option to apply the transition provisions of ASU 2016-02 at its adoption date instead of at the earliest comparative period presented in its financial statements. In addition, ASU 20182018-11 provides a practical expedient that permits lessors to not separate non-lease components from the associated lease component if certain conditions are met. Also in July 2018, the FASB issued ASU 2018-10, "Codification Improvements to ASC Topic 842, Leases," which clarifies certain aspects of ASU 2016-02.
The Company adopted ASU 2016-02, as of January 1, 2019, using the modified retrospective method, to all leases existing at the date of initial application. The comparative period information has not been restated and continues to be reported under the accounting standards in effect for the period presented. The new standard provides a number of optional practical expedients in transition. The Company elected the package of practical expedients permitted under the transition guidance within the new standard, which allowed the Company to carry forward the Company’s historical conclusions about lease identification, lease classification and initial direct costs. The Company also elected the practical expedient related to land easements, allowing the Company to carry forward the Company’s accounting treatment for land easements on existing agreements. The Company did not elect the practical expedient to use hindsight in determining the lease term.
The adoption of the new standard resulted in the recording of additional lease assets and lease liabilities of $10.2 million and $10.1 million, respectively, as of January 1, 2019, based on the present value of the remaining minimum rental payments under current leasing standards for existing operating leases. The difference between the additional lease assets and lease liabilities resulted from rent-free periods which were previously recorded as deferred rent. The Company’s accounting for finance leases remained substantially unchanged. The standard had no material impact on the Company’s consolidated net earnings, results of operations, comprehensive loss, statements of changes in equity, and cash flows.
Effect of Adoption of the New Lease Standard (ASC Topic 842) on Consolidated Financial Statements
The following table summarizes the effects of adopting Topic 842 on the Company’s consolidated balance sheet as of January 1, 2019 (in thousands):
As reported under Topic 842 | Adjustments | Balances under Prior GAAP | ||||||||||
Operating lease right-of-use assets | $ | 10,049 | $ | (10,049 | ) | $ | 0 | |||||
Operating lease liabilities | (2,430 | ) | 2,430 | 0 | ||||||||
Other long-term liabilities* | 0 | 140 | 140 | |||||||||
Operating lease liabilities, net of current portion | (7,759 | ) | 7,759 | 0 |
*Deferred rent included in other long-term liabilities
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.
The Company recognizes expense for these leases on a straight-line basis over the lease term. Additionally, 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, | |||||||||
2020 | 2019 | ||||||||
Assets | Classification | ||||||||
Right-of-use assets | Operating lease right-of-use assets | $ | 17,076 | $ | 7,702 | ||||
Finance lease | Property and equipment, net(1) | 467 | 1,008 | ||||||
Total leased assets | $ | 17,543 | $ | 8,710 |
(1) Finance lease assets included in Property and equipment, net (in thousands):
Year Ended December 31, | |||||||||
2020 | 2019 | ||||||||
Liabilities | Classification | ||||||||
Operating lease liabilities | |||||||||
Operating lease liabilities, current | Operating lease liabilities | $ | 2,260 | $ | 2,800 | ||||
Operating lease liabilities , non-current | Operating lease liabilities, net of current portion | 15,950 | 5,112 | ||||||
Total operating lease liabilities | $ | 18,210 | $ | 7,912 |
Year Ended December 31, | |||||||||
Classification | 2020 | 2019 | |||||||
Finance lease liabilities | |||||||||
Finance lease liabilities, current | Accrued liabilities | $ | 370 | $ | 541 | ||||
Finance lease liabilities, non-current | Other long-term liabilities | 241 | 578 | ||||||
Total finance lease liabilities | $ | 611 | $ | 1,119 |
Lease costs during the twelve months ended December 31, 2020 and December 31, 2019 (in thousands):
Year Ended December 31, | |||||||||
2020 | 2019 | ||||||||
Finance lease cost | Amortization expense | $ | 431 | $ | 704 | ||||
Finance lease cost | Interest for finance lease | $ | 63 | $ | 88 | ||||
Operating lease cost | Operating lease expense | $ | 3,275 | $ | 2,892 |
Cash paid for amounts included in the measurement of lease liabilities during the twelve months ended December 31, 2020 and December 31, 2019 were as follows (in thousands):
Year Ended December 31, | |||||||||
2020 | 2019 | ||||||||
Operating cash flow | Finance lease | $ | 63 | $ | 88 | ||||
Financing cash flow | Finance lease | $ | 537 | $ | 649 | ||||
Operating cash flow | Operating lease | $ | 2,139 | $ | 2,820 |
FacilityMaturities of lease liabilities
Maturities of operating lease liabilities were as follows as of December 31, 2020 (in thousands):
Amount | ||||
2021 | $ | 3,062 | ||
2022 | 3,112 | |||
2023 | 3,207 | |||
2024 | 2,884 | |||
2025 | 2,875 | |||
Thereafter | 6,308 | |||
Total lease payments | 21,448 | |||
Less: imputed interest | (3,238 | ) | ||
Present value of lease liabilities | $ | 18,210 |
Vehicle Leases
As of December 31, 2018, the Company was committed to minimum lease payments for facilities and other leased assets under long-term non-cancelable operating leases as follows (in thousands):
Year Ending December 31, | Amount | |||
2019 | $ | 3,011 | ||
2020 | 2,939 | |||
2021 | 2,564 | |||
2022 | 2,495 | |||
2023 and thereafter | 214 | |||
Future minimum rental payments | $ | 11,223 |
Gross rent expense recognized in the years ended December 31, 2018, 2017 and 2016 was $2.9 million, $1.5 million and $1.6 million, respectively.
Vehicle Leases
As of December 31, 2018, 2020, the Company was committed to minimum lease payments for vehicles leased under long-term non-cancelable capitalfinance leases as follows (in thousands):
Amount | ||||
2021 | $ | 374 | ||
2022 | 249 | |||
2023 | 12 | |||
Total lease payments | 635 | |||
Less: imputed interest | (24 | ) | ||
Present value of lease liabilities | $ | 611 |
Year Ending December 31, | Amount | |||
2019 | $ | 576 | ||
2020 | 287 | |||
2021 | 152 | |||
Future minimum lease payments | $ | 1,015 |
Weighted-average remaining lease term and discount rate, as of December 31, 2020, were as follows:
Lease Term and Discount Rate | ||||
Weighted-average remaining lease term (years) | ||||
Operating leases | 6.7 | |||
Finance leases | 2.2 | |||
Weighted-average discount rate | ||||
Operating leases | 4.7 | % | ||
Finance leases | 5.6 | % |
Lessor Information related to the Company’s system leasing
The Company also enters into leasing transactions, in which the Company is the lessor, offered through the Company's membership program. The Company's leases for equipment rentals were all accounted for as operating leases during the second and third quarter of 2020.
During the fourth quarter ended December 31, 2020, certain of the membership program agreements were amended, granting the customers the exclusive right and option to purchase the leased system from the Company, at any time during the period of 12 months from signing the amended agreement. For contracts signed under the amended membership agreement, the Company classified and accounted for the arrangements as sales-type leases as of December 31, 2020, as the Company determined it is reasonably certain that the customer will exercise the purchase option
For the sales-type leases, the net investment of the Company’s lease receivable is measured at the commencement date and is included in the consolidated balance sheets as a component of Other current assets and prepaid expenses. The following table, which reflects management’s assumption that lessees will exercise the purchase option, summarizes the amount of sales-type lease income included in product revenue in the accompanying consolidated statements of operations for the year ended December 31, 2020 (in thousands):
Year Ended December 31, 2020 | ||||
Gross future lease payments from Customers | $ | 790 | ||
Less: Present value of lease receipts and purchase option price(1) | 683 | |||
Difference between undiscounted cash flows and discounted cash flows | $ | 107 |
(1) Present value of lease receipts and purchase option price was included in Product revenue in the Company's Consolidated Statement of Operations in the year ended December 31, 2020.
The revenue related to non-lease components, which comprise service contracts and consumables, are deferred and recognized either over time or at the point of delivery. The non-lease component revenue amount as of December 31, 2020 was immaterial.
Equipment lease revenue for operating lease agreements is recognized over the life of the lease. The following table summarizes the amount of operating lease income included in product revenue in the accompanying consolidated statements of operations for the year ended December 31, 2020 (in thousands):
Year Ended December 31, 2020 | ||||
Operating lease income from equipment rentals | $ | 367 |
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 a forecasted time-horizon as agreed between the parties.an agreed-upon period. These forecasted time-horizonsperiods 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 The Company’s open inventory purchase commitments with its suppliers as of December 31, 2018 were $1.7 million and $7.2 million respectively, for 2019 and 2020.services.
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, commercial disputes, employee disputes, and contractual lawsuits in the ordinarynormal course of business. These matters are subject to many uncertainties and outcomes that are not predictable and that may not be known for extended periods of time. 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.
In November 2019, the Company’s former Executive Vice President and CFO Sandra A. Gardiner announced her resignation from the Company. On November 7, 2019, Ms. Gardiner filed an arbitration demand against the Company in connection with the terms of her employment and resignation. The Company settled this matter with Ms. Gardiner during the second quarter of 2020 with a cash payment of $0.4 million and issuance of 15,408 shares of common stock.
As of December 31, 2018 2020 and December 31, 2017,2019, the Company had accrued $171,000$0.4 million and $91,000,Nil, 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.
NOTE 12—12—DEBT
Loan and Security Agreement
On May 30, 2018, the Company and Wells Fargo Bank, N.A. (“Wells Fargo”) entered into a Loan and Security Agreement (the “Original“Wells Fargo Revolving Line of Credit”) in the original principal amount of $25 million.
On July 9, 2020, the Company terminated its undrawn revolving line of credit with Wells Fargo and subsequently entered into a Loan and Security Agreement with Silicon Valley Bank for a four-year secured revolving loan facility (“SVB Revolving Line of Credit”) in an aggregate principal amount of up to $30.0 million. The OriginalSVB Revolving Line of Credit terminatesmatures on May 30, 2021. As of December 31, 2018, there were no borrowings under the Original Revolving Line of Credit.July 9, 2024.
Covenants
The OriginalIn order to draw on the full amount of the SVB Revolving Line of Credit, contained financial and other covenants as well as the maintenance of a leverage ratio notCompany must satisfy certain liquidity ratios. If the Company is unable to exceed 2.5 to 1.0 and a Trailing Twelve Month ("TTM") adjusted EBITDA of not less than $10 million. A violation of any of the covenants could result in a defaultmeet these liquidity ratios, then availability under the Original Revolving Line of Credit that would permit the lenders to restrict the Company’s ability to further access the revolving line is calculated as 80% of creditthe Company’s qualifying accounts receivable. The proceeds of the revolving loans may be used for loansgeneral corporate purposes. The Company’s obligations under the Loan and lettersSecurity Agreement with Silicon Valley Bank are secured by substantially all of creditthe assets of the Company. Interest on principal amount outstanding under the revolving line shall accrue at a floating per annum rate equal to the greater of either 1.75% above the Prime Rate or five percent (5.0%). The Company paid a non-refundable revolving line commitment fee of $0.3 million, on the effective date of the Loan and requireSecurity Agreement with Silicon Valley Bank of July 9, 2020, and the immediate repaymentCompany is required to pay an anniversary fee of any outstanding loans under$0.3 million on each twelve month anniversary of the effective date of the Loan and Security Agreement.
During the third quarter of 2018, the Company was notified that it was in violation of certain financial covenants in the Original Revolving Line of Credit. Upon receipt of this notice, the Company entered into discussions with Wells Fargo to amend and revise certain terms of the Original Revolving Line of Credit. Following the end of the Company's third quarter, on or about November 2, 2018, the Company entered into a First Amendment and Waiver to theThe Loan and Security Agreement with Wells Fargo (the “First Amended Revolving LineSilicon Valley Bank contains customary affirmative covenants, such as financial statement reporting requirements and delivery of Credit”).
The First Amended Revolving Line of Credit provided for an original principal amount of $15 million, with the ability to request an additional $10 million and a waiver of any existing defaults under the Original Revolving Line of Credit as long as the Company is in compliance with the terms of the Revised Revolving Line of Credit.
Similar to the Original Revolving Line of Credit, the First Amended Revolving Line of Credit contained revised financial and other covenantsborrowing base certificates, as well as customary covenants that restrict the maintenanceCompany’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 leverage ratio not to exceed 2.0 to 1.0 and a graduated scale of TTM adjusted EBITDA of not less than $1 million as of the last day of the 2018 third fiscal quarter; $2.5 million as of the last day of the 2018 fourth fiscal quarter; $4 million as of the last day of the 2019 first and second fiscal quarters; $6.5 million as of the last day of the 2019 third fiscal quarter; and $10 million as of the last day of each fiscal quarter.
Subsequent to December 2018, the Company again determined that it was in violation ofmerger or consolidation or certain financial covenants in the First Amended Revolving Line of Credit.other transactions. The Company again entered into discussions with Wells Fargo to amend and revise certain terms of the First Amended Revolving Line of Credit. On or about, March 11, 2019 the Company entered into a Second Amendment and Waiver to the Loan and Security Agreement with Wells Fargo (the “Second Amended Revolving Line of Credit”). The Second Amended Revolving Line of Credit requires the Company to maintainalso contains certain financial condition covenants, including maintaining a minimum cash balancerevenue of $15$90.0 million, at Wells Fargo, but removes all other covenants so long as no moneydetermined in accordance with GAAP on a trailing twelve-month basis. This minimum revenue requirement is drawn on the line of credit. The Company may draw down on the line of creditperformed quarterly and subject to renegotiation at the time it reaches and maintains TTM adjusted EBITDAbeginning of not less than $10 million, and a leverage ratio not to exceed 2.5 to 1.0.each fiscal year.
As of December 31, 2020, the date of this filing, there were no borrowings under eitherCompany had not drawn on the Second Amended Revolving Line of Credit, First Amended Revolving Line of Credit, or the OriginalSVB Revolving Line of Credit and the Company is in compliance with all financial covenants of the RevisedSVB Revolving Line of Credit.
NOTE 13—RELATED PARTIESThe Paycheck Protection Program (PPP) Loan
In 2018 and 2017, On April 22, 2020, the Company paid $63,000received loan proceeds of $7.1 million pursuant to the Paycheck Protection Program (the “PPP”) under the Coronavirus Aid, Relief, and $196,000, respectively, toEconomic Security Act (the “CARES Act”). The loan, which is in the form of a former board member Mr. Dave Gollnick for product development, clinical sales and marketing support services. In addition, as of December 31, 2016,promissory note dated April 21, 2020, between the Company granted Mr. Gollnick 6,500 RSUs withand Silicon Valley Bank as the lender, matures on April 21, 2022 and bears interest at a grant-date fair value of $87,100, that vest over three years at thefixed rate of 33.33%1.00% per year on eachannum, payable monthly commencing September 2021. There is no prepayment penalty. Under the terms of the three anniversaries fromPPP, all or a portion of the vesting commencement dateprincipal may be forgiven if the loan proceeds are used for qualifying expenses as described in the CARES Act, such as payroll costs, benefits, rent, and utilities. No assurance is provided that the Company will obtain forgiveness of October 28, 2016,the loan in whole or in part. With respect to any portion of the loan that is not forgiven, the loan will be subject to him continuing to provide consulting and/ or board services to the Company. The Company’s Audit Committee approved the extension of Mr. Gollnick’s consulting agreement through December 31, 2018 at the rate of $200 per hourcustomary provisions for a maximumloan of 40 hours per week.this type, including customary events of default relating to, among other things, payment defaults and breaches of the provisions of the loan.
The Company signed an agreement with a real estate firm, T3 Advisors, effective September 2017, to assistapplication for these funds required the Company to, in real estate related issues (including strategic planning and search for new facilities). One of T3 Advisors’ Senior Vice President "Mr. Austin Barrett" is relatedgood faith, certify that the current economic uncertainty made the loan request necessary to Greg Barrett – a membersupport the ongoing operations of the Company’s boardCompany. Subsequently released guidance instructs all applicants and recipients to take into account their current business activity and the Company's ability to access other sources of directors. In 2018 and 2017,liquidity sufficient to support ongoing operations in a manner that is not significantly detrimental to their business. On April 28, 2020, in press conference remarks, the Secretary of the U.S. Department of the Treasury stated that the SBA intends to perform a review of PPP loans over $2.0 million. The required certification made by the Company incurred $192,000is subject to interpretation. If, despite the good-faith belief that given the Company’s circumstances the Company satisfied all eligible requirements for the PPP loan, it is later determined the Company was ineligible to apply for and $38,000 respectively, relatedreceive the PPP loan, the Company may be required to T3 Advisors Real estate brokerage services.repay the PPP loan in its entirety and the Company could be subject to additional penalties. The company is in the process of applying for forgiveness of the PPP Loan, as of December 31, 2020. However, the Company can provide no assurance that the loan will be forgiven.
The PPP loan will be derecognized upon repayment of the loan in accordance with its terms and/or upon confirmation of forgiveness from the SBA.
NOTE 14—CORRECTION OF PRIOR PERIOD IMMATERIAL ERROR
During the three months ended June 30, 2018, management discovered that the Company had not recorded the tax effect of the adoption of ASC Topic 606 in the balance sheet of the unaudited condensed consolidated financial statements as of March 31, 2018. Upon adoption of ASC Topic 606, the Company recorded an increase to retained earnings of $5.0 million for contracts still in force as of January 1, 2018. The tax effect of the ASC Topic 606 adoption was $1.2 million.
The Company evaluated the impact of the error on prior periods and determined that the effect was not material to the financial statements as of and for the three months ended March 31, 2018 and six months ended June 30, 2018. The Company corrected the error in the unaudited condensed consolidated financial statements as of and for the six months ended June 30, 2018. The correction of the error increased the Company's deferred tax liability by $1.2 million and decreased retained earnings by $1.2 million (Note 1) as of January 1, 2018.
The Company’s condensed consolidated statements of operations, comprehensive income (loss) and cash flows for the three months ended March 31, 2018, the three, six and nine months ended September 30, 2018, and the consolidated statements for the year ended December 31, 2018 were not affected by this correction of the error. Accordingly, the Company's loss per share for the three months ended March 31, 2018, the three, six and nine months ended September 30, 2018, and the year ended December 31, 2018 remains unchanged.
NOTE 15—13—SUBSEQUENT EVENTS EVENTS
The Company evaluates events or transactions that occur after the balance sheet date through to the date which the financial statements are issued, for potential recognition or disclosure in its consolidated financial statements in accordance with Subsequent Events.
Effective January 4, 2019, James A. Reinstein resigned from his positionOn March 9, 2021, the Company offered $125 million aggregate principal amount of 2.25% convertible senior notes due 2026 (the “notes”) in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as Chief Executive Officer and as a memberamended (the “Securities Act”). Cutera also granted the initial purchasers of the Company's board of directors. Effective as of that same date, the board of directors appointed the Company’s current Chief Operating Officer, R. Jason Richeynotes an option to serve as Interim President and Chief Executive Officerpurchase up to an additional $13.25 million aggregate principal amount of the notes on the same terms and conditions. The Initial Purchasers exercised their option in full on March 5, 2021, bringing the total aggregate principal amount of the Notes to $138.25 million.
The Company whileentered into capped call transactions, in connection with the boardoffering, with one or more of directors conductsthe initial purchasers and/or their respective affiliates and/or other financial institutions (the “option counterparties”). The capped call transactions are expected generally to reduce potential dilution to Cutera’s common stock upon any conversion of notes, with such reduction subject to a searchcap. If the initial purchasers exercise their option to purchase additional notes, the Company expects to enter into additional capped call transactions with the option counterparties.
The net proceeds from the offering, before deducting purchasers’ discounts and offering expenses were approximately $134.1 million. The Company used $16.1 million of the net proceeds to pay the cost of the capped call transactions described above and the remainder of the net proceeds for the Company’s next Chief Executive Officer.general corporate purposes, which may include working capital, capital expenditures and potential acquisitions and strategic transactions.
In connection with Mr. Reinstein's resignation,the offering, the Company entered into Amendment No.1 to Loan and Security Agreement on March 4, 2021, which amends the Company’s Loan and Security Agreement, dated as of July 9, 2020 between the Company, as borrower, and Silicon Valley Bank. The Amendment amends the Loan and Security Agreement to (i) permit the Company to issue the Notes and perform its obligations in connection therewith, and (ii) permit the Capped Call transactions.
The Company has become aware that InMode Ltd. has filed a Separation Agreementcomplaint with the United States International Trade Commission alleging that Ilooda, Co., Ltd’s Secret RF fractional radiofrequency microneedling system, distributed in the United States by the Company, infringes U.S. Patent No.10,799,285 ("285 patent"). The complaint has not been served on the Company. The Company intends to vigorously defend against this lawsuit and, release with him. Pursuant tobased on a preliminary investigation, believes that the Separation Agreement, Mr. Reinstein will serve as a consultantCompany has strong defenses and that this patent is likely invalid in view of prior art. Based on the current information available to the Company, it believes that any possible loss will not be material. If, following a successful third-party action for six months to assist with transition matters. In accordance withinfringement, the Separation Agreement and General Release filed as Exhibit 10.2 to Form 8-K filed on January 9, 2019, Mr. Reinstein will receiveCompany cannot obtain a cash payment of approximately $0.6 million, equivalent to (i) twelve (12) months of his annual base salary as in effect on the Separation Date, and (ii) 100% of his actual bonuslicense for the prior fiscal year, consistent withCompany’s products, it may have to stop selling the 2018 MBP program payout, less applicable withholdings. The payment was made to Mr. Reinstein within thirty (30) days after the effective date. He will also vest in outstanding equity awards of 4,667 shares through April 4, 2019.products.
SUPPLEMENTARY FINANCIAL DATA (UNAUDITED)
(Inthousands,exceptpershareamounts)
Quarter ended: | Dec. 31, 2020 | Sept. 30, 2020 | June 30, 2020 | March 31, 2020 | Dec. 31, 2019 | Sept. 30, 2019 | June 30, 2019 | March 31, 2019 | ||||||||||||||||||||||||
Net revenue | $ | 49,943 | $ | 39,132 | $ | 26,369 | $ | 32,239 | $ | 51,795 | $ | 46,117 | $ | 47,774 | $ | 36,026 | ||||||||||||||||
Cost of revenue | 21,877 | 17,386 | 14,745 | 17,903 | 23,005 | 19,884 | 21,943 | 18,717 | ||||||||||||||||||||||||
Gross profit | 28,066 | 21,746 | 11,624 | 14,336 | 28,790 | 26,233 | 25,831 | 17,309 | ||||||||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||||||||||
Sales and marketing | 14,656 | 12,286 | 11,035 | 14,789 | 20,323 | 17,691 | 16,992 | 16,104 | ||||||||||||||||||||||||
Research and development | 4,029 | 3,432 | 2,991 | 3,870 | 4,463 | 3,643 | 3,273 | 3,706 | ||||||||||||||||||||||||
General and administrative | 7,938 | 7,239 | 8,529 | 7,806 | 5,933 | 7,308 | 5,267 | 5,525 | ||||||||||||||||||||||||
Total operating expenses | 26,623 | 22,957 | 22,555 | 26,465 | 30,719 | 28,642 | 25,532 | 25,335 | ||||||||||||||||||||||||
Income (loss) from operations | 1,443 | (1,211 | ) | (10,931 | ) | (12,129 | ) | (1,929 | ) | (2,409 | ) | 299 | (8,026 | ) | ||||||||||||||||||
Interest and other income (expense), net | 7 | (382 | ) | 3 | (207 | ) | (20 | ) | (146 | ) | 46 | (79 | ) | |||||||||||||||||||
Income (loss) before income taxes | 1,450 | (1,593 | ) | (10,928 | ) | (12,336 | ) | (1,949 | ) | (2,555 | ) | 345 | (8,105 | ) | ||||||||||||||||||
Income tax provision (benefit) | (738 | ) | 664 | 466 | 78 | 139 | 73 | (243 | ) | 115 | ||||||||||||||||||||||
Net income (loss) | $ | 2,188 | $ | (2,257 | ) | $ | (11,394 | ) | $ | (12,414 | ) | $ | (2,088 | ) | $ | (2,628 | ) | $ | 588 | $ | (8,220 | ) | ||||||||||
Net income (loss) per share-basic | $ | 0.12 | $ | (0.13 | ) | $ | (0.67 | ) | $ | (0.86 | ) | $ | (0.15 | ) | $ | (0.19 | ) | $ | 0.04 | $ | (0.59 | ) | ||||||||||
Net income (loss) per share- diluted | $ | 0.12 | $ | (0.13 | ) | $ | (0.67 | ) | $ | (0.86 | ) | $ | (0.15 | ) | $ | (0.19 | ) | $ | 0.04 | $ | (0.59 | |||||||||||
Weighted average number of shares used in per share calculations: | ||||||||||||||||||||||||||||||||
Basic | 17,653 | 17,603 | 17,055 | 14,433 | 14,261 | 14,182 | 14,086 | 14,017 | ||||||||||||||||||||||||
Diluted | 17,840 | 17,603 | 17,055 | 14,433 | 14,261 | 14,182 | 14,356 | 14,017 |
SUPPLEMENTARY FINANCIAL DATA (UNAUDITED)
(In thousands, except per share amounts)
Quarter ended: | Dec. 31, 2018 | Sept. 30, 2018 | June 30, 2018 | March 31, 2018 | Dec. 31, 2017 | Sept. 30, 2017 | June 30, 2017 | March 31, 2017 | ||||||||||||||||||||||||
Net revenue | $ | 45,469 | $ | 40,573 | $ | 42,553 | $ | 34,125 | $ | 47,632 | $ | 38,173 | $ | 36,389 | $ | 29,299 | ||||||||||||||||
Cost of revenue | 26,683 | 18,688 | 20,176 | 16,791 | 20,299 | 15,963 | 15,343 | 13,778 | ||||||||||||||||||||||||
Gross profit | 18,786 | 21,885 | 22,377 | 17,334 | 27,333 | 22,210 | 21,046 | 15,521 | ||||||||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||||||||||
Sales and marketing | 15,318 | 14,479 | 15,535 | 13,088 | 15,362 | 13,148 | 12,787 | 10,773 | ||||||||||||||||||||||||
Research and development | 3,464 | 3,244 | 4,095 | 3,556 | 3,481 | 3,467 | 2,981 | 2,945 | ||||||||||||||||||||||||
General and administrative | 5,494 | 5,160 | 4,902 | 5,439 | 3,947 | 3,379 | 3,548 | 3,216 | ||||||||||||||||||||||||
Lease termination income | — | — | — | — | — | (4,000 | ) | — | — | |||||||||||||||||||||||
Total operating expenses | 24,276 | 22,883 | 24,532 | 22,083 | 22,790 | 15,994 | 19,316 | 16,934 | ||||||||||||||||||||||||
Income (loss) from operations | (5,490 | ) | (998 | ) | (2,155 | ) | (4,749 | ) | 4,543 | 6,216 | 1,730 | (1,413 | ) | |||||||||||||||||||
Interest and other income, net | (44 | ) | (49 | ) | (129 | ) | 98 | 138 | 197 | 276 | 273 | |||||||||||||||||||||
Income (loss) before income taxes | (5,534 | ) | (1,047 | ) | (2,284 | ) | (4,651 | ) | 4,681 | 6,413 | 2,006 | (1,140 | ) | |||||||||||||||||||
Income tax provision | 20,760 | (174 | ) | (712 | ) | (2,619 | ) | (18,199 | ) | 225 | 59 | (118 | ) | |||||||||||||||||||
Net income (loss) | $ | (26,293 | ) | $ | (873 | ) | $ | (1,572 | ) | $ | (2,032 | ) | $ | 22,880 | $ | 6,188 | $ | 1,947 | $ | (1,022 | ) | |||||||||||
Net income (loss) per share—basic | $ | (1.89 | ) | $ | (0.06 | ) | $ | (0.11 | ) | $ | (0.15 | ) | $ | 1.66 | $ | 0.44 | $ | 0.14 | $ | (0.07 | ) | |||||||||||
Net income (loss) per share—diluted | $ | (1.89 | ) | $ | (0.06 | ) | $ | (0.11 | ) | $ | (0.15 | ) | $ | 1.57 | $ | 0.42 | $ | 0.13 | $ | (0.07 | ) | |||||||||||
Weighted average number of shares used in per share calculations: | ||||||||||||||||||||||||||||||||
Basic | 13,932 | 13,851 | 13,709 | 13,587 | 13,744 | 13,973 | 13,935 | 13,840 | ||||||||||||||||||||||||
Diluted | 13,932 | 13,851 | 13,709 | 13,587 | 14,569 | 14,767 | 14,629 | 13,840 |
CUTERA, INC.
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
For the Years Ended December 31, 2018, 2017 ANDQUALIFYINGACCOUNTS
(inthousands)
FortheYearsEndedDecember31,2020, 2019and 20201168
Balance at Beginning of Year | Additions | Deductions | Balance at End of Year | Balance at Beginning of Year | Additions | Deductions | Balance at End of Year | |||||||||||||||||||||||||
Deferred tax assets valuation allowance | ||||||||||||||||||||||||||||||||
Year ended December 31, 2020 | $ | 32,350 | $ | 7,986 | $ | 2,015 | $ | 38,321 | ||||||||||||||||||||||||
Year ended December 31, 2019 | $ | 27,865 | $ | 7,396 | $ | 2,911 | $ | 32,350 | ||||||||||||||||||||||||
Year ended December 31, 2018 | $ | 7,242 | $ | 22,770 | $ | 2,147 | $ | 27,865 | $ | 7,242 | $ | 22,770 | $ | 2,147 | $ | 27,865 | ||||||||||||||||
Year ended December 31, 2017 | $ | 31,751 | $ | 617 | $ | 25,126 | $ | 7,242 | ||||||||||||||||||||||||
Year ended December 31, 2016 | $ | 27,616 | $ | 6,755 | $ | 2,620 | $ | 31,751 |
Balance at Beginning of Year | Additions | Deductions | Balance at End of Year | |||||||||||||
Allowance for doubtful accounts receivable | ||||||||||||||||
Year ended December 31, 2018 | $ | 9 | $ | 1,880 | $ | 632 | $ | 1,257 | ||||||||
Year ended December 31, 2017 | $ | 21 | $ | 14 | $ | 26 | $ | 9 | ||||||||
Year ended December 31, 2016 | $ | 4 | $ | 21 | $ | 4 | $ | 21 |
Balance at Beginning of Year | Additions | Deductions | Balance at End of Year | |||||||||||||
Allowance for credit losses, accounts receivable | ||||||||||||||||
Year ended December 31, 2020 | $ | 1,354 | $ | 2,144 | $ | 1,900 | $ | 1,598 | ||||||||
Year ended December 31, 2019 | $ | 1,257 | $ | 1,361 | $ | 1,264 | $ | 1,354 | ||||||||
Year ended December 31, 2018 | $ | 9 | $ | 1,880 | $ | 632 | $ | 1,257 |
ITEM |
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None.
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Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) that are designed to ensure that information required to be disclosed in ourthe Company’s Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to ourthe Company’s management, including ourthe Company’s principal executive officer and principal financial officer, as appropriate, to allow for timely decisions regarding required disclosure.
As required by SEC Rule 13a-15(b), the Company carried out an evaluation, under the supervision and with the participation of ourthe Company’s management, including ourthe Company’s principal executive officer and principal financial officer, of the effectiveness of the design and operation of ourthe Company’s disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K. Based on the foregoing, the Company’s Interim Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level.
Attached as exhibits to this Annual Report are certifications of the Company’s CEO and CFO, which are required in accordance with Rule 13a-14 of the Securities Exchange Act of 1934, as amended (Exchange Act). This Controls and Procedures section includes the information concerning the controls evaluation referred to in the certifications, and it should be read in conjunction with the certifications for a more complete understanding of the topics presented.
Inherent Limitations Over Internal Controls
OurThe Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. OurThe Company’s internal control over financial reporting includes those policies and procedures that:
● | pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of |
● | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that |
● | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of |
Management, including the Company’s CEO and CFO, does not expect that ourthe Company’s internal controls will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of internal controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Also, any evaluation of the effectiveness of controls in future periods are subject to the risk that those internal controls may become inadequate because of changes in business conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management’s Report on Internal Control Over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is(as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act Rules 13a-15(f). UnderAct) to provide reasonable assurance regarding the supervisionreliability of the Company’s financial reporting and the preparation of Consolidated Financial Statements for external purposes in accordance with the participation of our management,U.S. GAAP.
Management, including Company’s CEO and CFO, assessed the Company conducted an assessment of the effectiveness of ourCompany’s internal control over financial reporting as of December 31, 2020. Management based its assessment on the frameworkcriteria established in Internal Control Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Commission (2013 framework). Management’s assessment included evaluation of elements such as the design and operating effectiveness of key financial reporting controls, process documentation, accounting policies, and the Company's overall control environment.
Based on the results of ourthis assessment, under the framework in the Internal Control-Integrated Framework (2013), the Company’s management has concluded that the Company’s internal control over financial reporting was effective as of December 31, 2018.the end of the fiscal year to provide reasonable assurance regarding the reliability of financial reporting and the preparation of Consolidated Financial Statements for external reporting purposes in accordance with U.S. GAAP.
The effectiveness of ourthe Company’s internal control over financial reporting as of December 31, 2018,2020, has been audited by an independent registered public accounting firm, as stated in their attestation report, which is included in their annual report under “Item 8. Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.
Changes in Internal Control over Financial Reporting
There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended December 31, 2018,2020 that have materially affected, or are reasonably likely to materially affect, the Company’sCompany's internal control over financial reporting.
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None
Certain information required by Part III is omitted from this report on Form 10-K and is incorporated herein by reference to ourthe Company’s definitive Proxy Statement for ourthe Company’s next Annual Meeting of Stockholders (the “Proxy Statement”), which we intendthe Company intends to file pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended, within 120 days after December 31, 2018.2020.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
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The information required by this item concerning our directors and corporate governance is incorporated by reference to the information set forth inunder the section titled “Directors and Corporate Governance”following captions in the Company’s Proxy Statement. Information required by this item concerning the Company’s executive officersStatement, all of which is incorporated herein by referencereference: “Proposal No. 1 – Election of Class I Directors”, “Board and Committee Information”, “Executive Officers” and “Additional Information – Stockholder Proposals to the information set forth in the section entitled “Executive Officers of the Company” in the Company’s Proxy Statement. Information regarding our Section 16 reporting compliance and code of business conduct and ethics is incorporated by reference to the information set forth in the section entitled “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” in the Company’s Proxy Statement.be Presented at Next Annual Meeting.”
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The information required by this item regarding executive compensationset forth under the following captions in the Proxy Statement, all of which is incorporated herein by reference to the information set forth in the sections titledreference: “Executive Compensation” and “Compensation for Directors” in the Company’s Proxy Statement.Compensation.”
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
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The information required by this item regarding security ownershipis set forth under the following captions in the Proxy Statement, all of certain beneficial owners and managementwhich is incorporated herein by reference to the information set forth in the section titledreference: “Security Ownership of Certain Beneficial Owners and ManagementManagement.”
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Certain Relationships and Related Stockholder Matters” in the Company’s Proxy Statement.Transactions
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The information required by this item regarding certain relationships and related transactions and director independenceis set forth under the following captions in the Proxy Statement, all of which is incorporated herein by reference to the information set forth in the sections titledreference: “Certain Relationships and Related Transactions” and “Directors and Corporate Governance” in the Company’s Proxy Statement.Related-Party Transactions.”
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The information required by this item regarding principal accountant fees and servicesis set forth under the following captions in the Proxy Statement, which is incorporated by reference to the information set forth in the section titled “Principal Accountant Fees and Services” in the Company’s Proxy Statement.herein by reference: “Proposal No. 2, Ratification of Independent Registered Public Accounting Firm.”
ITEM (a) The following documents are filed in Part II of the Annual Report on the Original 10-K: 1. Financial Statements: Financial Statements: See "Index to Consolidated Financial Statements" within the Consolidated Financial Statements. 2. Financial Statement Schedules: Financial Statement Schedules; not applicable or the required information is otherwise included in the Consolidated Financial Statements and accompanying notes. 3. Exhibits: The exhibits listed in the accompanying index to exhibits are filed, furnished, or incorporated by reference as part of this Form 10-K. The following is a list of such Exhibits: Exhibit Index |
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Exhibit No. |
| Description |
3.1 |
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3.2 |
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4.1 |
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4.2 | ||
10.1* |
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10.2* |
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10.3* |
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10.4 |
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10.5 |
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10.6 | ||
10.7* |
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10.8* |
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10.9 |
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10.10* |
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10.11* |
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10.12* |
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10.13* |
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10.14 | ||
10.15 | ||
10.16 | ||
10.17* |
10.18 |
10.19 | ||
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10.21 | ||
10.22* | ||
10.23* | ||
10.24* |
Exhibit No. | Description | |
23.1+ |
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24.1 |
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| Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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| Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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101.INS | Inline XBRL Instance Document | |
101.SCH | Inline XBRL Taxonomy Extension Schema Document | |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF | Inline XBRL Taxonomy Extension Definition Document | |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
* | Management contract or compensatory plan |
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None
None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, in the city of Brisbane, State of California, on the18ththe 23rd day of March, 2019.
2021.
CUTERA, INC. | |||
By: | /s/ | ||
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Chief | |||
KNOW ALL MEN AND WOMEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Jason R. Richey,David H. Mowry, and Sandra A. Gardiner,Rohan Seth, and each of them, as his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution for him or her and in his or her name, place, and stead, in any and all capacities to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the U.S. Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done therewith, as fully to all intents and purposes as they might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, and any of them or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
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Signature |
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| Date | ||
/s/ DAVID H. MOWRY | Chief Executive | March 23, 2021 | ||
David H. Mowry | ||||
/s/ ROHAN SETH | Chief Financial Officer (Principal Financial and Accounting |
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Officer) |
| March 23, 2021 | ||
Rohan Seth | ||||
/s/ J. DANIEL PLANTS | | Chairman of the Board of Directors |
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| March | ||
J. Daniel Plants | ||||
/s/ GREGORY A. BARRETT
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| March 23,2021 | ||
Gregory A. Barrett | ||||
/s/ JOSEPH E. WHITTERS |
| Director | March | |
Joseph E. Whitters | ||||
/s/ TIM O’SHEA | Director | March 23, 2021 | ||
Tim O’Shea | ||||
/s/ KATHERINE S. ZANOTTI | Director | March 23, 2021 | ||
Katherine S. Zanotti |
96