UNITEDSTATES

SECURITIES ANDEXCHANGECOMMISSION

Washington, D.C. 20549

FORM10-Q

(Mark One)

☒

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, ~~2017~~2019

☐

TRANSITIONREPORTPURSUANTTOSECTION13OR15(d)OFTHESECURITIESEXCHANGEACTOF1934

For the transition period _____ to_____.

Commission file number: 000-50644

Cutera, Inc.

(Exact name of registrant as specified in its charter)


Delaware	77-0492262
(Stateorotherjurisdictionofincorporationororganization)	(I.R.S.EmployerIdentificationNo.)

3240BayshoreBlvd.,Brisbane,California94005

(Addressofprincipalexecutiveoffices)

(415)657-5500

(Registrant’stelephonenumber,includingareacode)

Notapplicable

(Formername,formeraddressandformerfiscalyear,ifchangedsincelastreport)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock ($0.001 par value)	CUTR	The NASDAQ Stock Market, LLC

~~Delaware~~		~~77-0492262~~
~~(State or other jurisdiction of incorporation or organization)~~		~~(I.R.S. employer identification no.)~~

~~3240 Bayshore Blvd., Brisbane, California 94005~~

~~(Address of principal executive offices)~~

~~(415) 657-5500~~

~~(Registrant’s telephone number, including area code)~~

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 ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ 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 ~~and post~~ such files). Yes ☒No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated ~~filer”~~filer,” “smaller reporting company,” and ~~“smaller reporting~~“emerging growth company” in Rule 12b-2 of the Exchange ~~Act (check one):~~Act:

~~Large accelerated filer~~ ☐

Large accelerated filer ☐Accelerated filer ☒Non-accelerated filer ☐Smaller reporting company ☐Emerging growth company ☐

~~Accelerated filer~~ ☒

~~Non-accelerated filer~~ ☐

~~Smaller reporting company~~ ☐

~~Emerging growth company~~ ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes ☐No ☒

The number of shares of ~~Registrant~~’sRegistrant’s common stock issued and outstanding as of ~~October 31, 2017~~November 1, 2019 was ~~13,854,966.~~14,233,487.

Table of Contents

CUTERA, INC.

FORM 10-Q

TABLEOFCONTENTS

PART I	FINANCIALINFORMATION	Page


Item 1	FinancialStatements(unaudited)	3
	CondensedConsolidatedBalanceSheets	3
	CondensedConsolidatedStatementsofOperations	4
	CondensedConsolidatedStatementsofComprehensiveIncome(Loss)	5
	CondensedConsolidatedStatementsofCashFlows	8
	NotestoCondensedConsolidatedFinancialStatements	9
Item 2	Management’sDiscussionandAnalysisofFinancialConditionandResultsofOperations	24
Item 3	QuantitativeandQualitativeDisclosuresAboutMarketRisk	33
Item 4	ControlsandProcedures	33

PART II	OTHERINFORMATION

Item 1	LegalProceedings	35
Item 1A	RiskFactors	35
Item 2	UnregisteredSalesofEquitySecuritiesandUseofProceeds	35
Item 3	DefaultsUponSeniorSecurities	35
Item 4	MineSafetyDisclosures	35
Item 5	OtherInformation	35
Item 6	Exhibits	36
	Signature	36

Table of Contents

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

~~FORM 10-Q~~This report may contain references to the Company’s proprietary intellectual property, including among others, trademarks for its systems and ancillary products, AcuTip®, CoolGlide®, CoolGlide excel®, enlighten®, excel HR®, excel V®, excel V+®, LimeLight®, MyQ®, Pearl®, PicoGenesis™, ProWave®, Solera®, Titan®, truSculpt®, truSculpt® flex, Vantage®, and xeo®.

~~TABLE OF CONTENTS~~These trademarks and trade names are the property of Cutera or the property of our consolidated subsidiaries and are protected under applicable intellectual property laws. Solely for convenience, our trademarks and tradenames referred to in this Quarterly Report on Form 10-Q may appear without the ® or ™ symbols, but such references are not intended to indicate in any way that the Company will not assert, to the fullest extent under applicable law, its rights to these trademarks and tradenames.

		~~Page~~
~~PART I~~	~~FINANCIAL INFORMATION~~

~~Item 1~~	~~Financial Statements (unaudited)~~	3
	~~Condensed Consolidated Balance Sheets~~	3
	~~Condensed Consolidated Statements of Operations~~	4
	~~Condensed Consolidated Statements of Comprehensive Income (Loss)~~	5
	~~Condensed Consolidated Statements of Cash Flows~~	6
	~~Notes to Condensed Consolidated Financial Statements~~	7
~~Item 2~~	~~Management’s Discussion and Analysis of Financial Condition and Results of Operations~~	16
~~Item 3~~	~~Quantitative and Qualitative Disclosures About Market Risk~~	25
~~Item 4~~	~~Controls and Procedures~~	25

~~PART II~~	~~OTHER INFORMATION~~

~~Item 1~~	~~Legal Proceedings~~	26
~~Item 1A~~	~~Risk Factors~~	26
~~Item 2~~	~~Unregistered Sales of Equity Securities and Use of Proceeds~~	26
~~Item 3~~	~~Defaults Upon Senior Securities~~	27
~~Item 4~~	~~Mine Safety Disclosures~~	27
~~Item 5~~	~~Other Information~~	27
~~Item 6~~	~~Exhibits~~	28
	~~Signature~~	29

~~Table of Contents~~

PART I. FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS (UNAUDITED)

~~CUTERA, INC.~~

CUTERA, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

(unaudited)

	September 30, 2017			December 31, 2016			September 30, 2019		December 31, 2018
Assets
Current assets:
Cash and cash equivalents	$	14,784		$	13,775		$	22,879	$	26,052
Marketable investments		35,692			40,299			6,448		9,523
Accounts receivable, net		19,604			16,547			23,222		19,637
Inventories		23,728			14,977			34,042		28,014
Other current assets and prepaid expenses		2,894			2,251			5,334		3,972
Total current assets		96,702			87,849			91,925		87,198

Property and equipment, net		1,842			1,907			2,771		2,672
Deferred tax asset		384			377			459		457
Intangibles, net		—			2
Operating lease right-of-use assets								8,332		—
Goodwill		1,339			1,339			1,339		1,339
Other long-term assets		381			380			6,410		5,971
Total assets	$	100,648		$	91,854		$	111,236	$	97,637

Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	5,805		$	2,598		$	14,140	$	11,279
Accrued liabilities		22,203			17,397			28,096		23,300
Operating lease liabilities								634		—
Extended warranty liability								2,232		3,159
Deferred revenue		8,801			8,394			10,164		9,882
Total current liabilities		36,809			28,389			55,266		47,620

Deferred revenue, net of current portion		1,950			1,705			3,309		2,684
Income tax liability		171			168			93		394
Operating lease liabilities, net of current portion								7,888		—
Other long-term liabilities		505			582			690		553
Total liabilities		39,435			30,844			67,246		51,251

Commitments and Contingencies (Note 11)
Commitments and Contingencies (Notes 12 and 13)

Stockholders’ equity:
Convertible preferred stock, $0.001 par value; authorized: 5,000,000 shares; none issued and outstanding		—			—
Common stock, $0.001 par value; authorized: 50,000,000 shares; issued and outstanding: 13,906,439 and 13,773,389 shares at September 30, 2017 and December 31, 2016, respectively		14			14
Stockholders’ equity:
Common stock, $0.001 par value; authorized: 50,000,000 shares; issued and outstanding: 14,199,821 and 13,968,852 shares at September 30, 2019 and December 31, 2018, respectively								14		14
Additional paid-in capital		81,195			88,114			78,305		70,451
Accumulated deficit		(19,933	)		(27,046	)		(34,270)		(24,010)
Accumulated other comprehensive loss		(63	)		(72	)		(59)		(69)
Total stockholders’ equity		61,213			61,010

Total liabilities and stockholders’ equity	$	100,648		$	91,854
Total stockholders’ equity								43,990		46,386
Total liabilities and stockholders’ equity							$	111,236	$	97,637

The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.

Table of Contents

CUTERA, INC.

CONDENSEDCONSOLIDATEDSTATEMENTSOFOPERATIONS

(inthousands,exceptpersharedata)

(unaudited)

~~CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS~~

~~(in thousands, except per share data)~~

~~(unaudited)~~

	Three Months Ended					Nine Months Ended						Three Months Ended				Nine Months Ended
	September 30,					September 30,						September 30,				September 30,
	2017			2016		2017			2016			2019		2018		2019		2018
Net revenue:
Products	$	33,486		$	25,493	$	89,688		$	65,903		$	40,315	$	35,675	$	113,045	$	102,589
Service		4,687			4,788		14,173			14,278			5,802		4,898		16,872		14,662
Total net revenue		38,173			30,281		103,861			80,181			46,117		40,573		129,917		117,251
Cost of revenue:
Products		13,859			10,160		38,843			26,804	��		16,343		15,909		50,278		46,876
Service		2,104			2,378		6,241			7,155			3,541		2,779		10,266		8,779
Total cost of revenue		15,963			12,538		45,084			33,959			19,884		18,688		60,544		55,655
Gross profit		22,210			17,743		58,777			46,222			26,233		21,885		69,373		61,596

Operating expenses:
Sales and marketing		13,148			10,574		36,708			30,002			17,691		14,479		50,786		43,102
Research and development		3,467			2,914		9,393			8,335			3,643		3,244		10,622		10,895
General and administrative		3,379			2,716		10,143			9,933			7,308		5,160		18,100		15,501
Lease termination income		(4,000	)		—		(4,000	)		—
Total operating expenses		15,994			16,204		52,244			48,270			28,642		22,883		79,508		69,498
Income (loss) from operations		6,216			1,539		6,533			(2,048	)
Interest and other income, net		197			166		746			527
Income (loss) before income taxes		6,413			1,705		7,279			(1,521	)
Provision for income taxes		225			61		166			115
Net income (loss)	$	6,188		$	1,644	$	7,113		$	(1,636	)
Loss from operations													(2,409)		(998)		(10,135)		(7,902)
Interest and other expense, net													(146)		(49)		(180)		(80)
Loss before income taxes													(2,555)		(1,047)		(10,315)		(7,982)
Income tax expense (benefit)													73		(174)		(55)		(3,505)
Net loss												$	(2,628)	$	(873)	$	(10,260)	$	(4,477)

Net income (loss) per share:
Net loss per share:
Basic	$	0.44		$	0.12	$	0.51		$	(0.12	)	$	(0.19)	$	(0.06)	$	(0.73)	$	(0.33)
Diluted	$	0.42		$	0.12	$	0.48		$	(0.12	)	$	(0.19)	$	(0.06)	$	(0.73)	$	(0.33)

Weighted-average number of shares used in per share calculations:
Basic		13,973			13,163		13,917			13,102			14,182		13,851		14,095		13,717
Diluted		14,767			13,544		14,733			13,102			14,182		13,851		14,095		13,717

The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.

Table of Contents

CUTERA, INC.

CONDENSEDCONSOLIDATEDSTATEMENTSOFCOMPREHENSIVELOSS

(inthousands)

(unaudited)

~~CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)~~

~~(in thousands)~~

~~(unaudited)~~

Three Months Ended

Nine Months Ended

September 30,

September 30,

2017

2016

2017

2016

Net income (loss)
$ 6,188 $ 1,644 $ 7,113 $ (1,636
)
Other comprehensive income (loss):

Available-for-sale investments

Net change in unrealized gains (losses) on available-for-sale investments
5 (24
)
13 56
Less: Reclassification adjustment for gains on investments recognized during the period
— (1
)
(4
)
(1
)
Net change in unrealized gain and losses on available-for-sale investments
5 (25
)
9 55
Tax provision (benefit)
— (9
)
— 20
Other comprehensive income (loss), net of tax
5 (16
)
9 35
Comprehensive income (loss)
$ 6,193 $ 1,628 $ 7,122 $ (1,601
)

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2019		2018		2019		2018
Net loss	$	(2,628)	$	(873)	$	(10,260)	$	(4,477)
Other comprehensive loss:
Available-for-sale investments
Net change in unrealized gains on available-for-sale investments		1		13		10		9
Less: Reclassification adjustment for (gains) losses on investments recognized during the period		—		—		—		9
Net change in unrealized gains and losses on available-for-sale investments		1		13		10		18
Tax provision		—		—		—		—
Other comprehensive income, net of tax		1		13		10		18
Comprehensive loss	$	(2,627)	$	(860)	$	(10,250)	$	(4,459)

The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.

Table of Contents

CUTERA, INC.

CONDENSEDCONSOLIDATEDSTATEMENTSOFCHANGESINSTOCKHOLDERS’EQUITY

~~CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS~~(inthousands,exceptshareamounts)

~~(in thousands)~~

(unaudited)

Nine Months Ended September 30,

2017

2016

Cash flows from operating activities:

Net income (loss)
$ 7,113 $ (1,636
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

Stock-based compensation
3,623 2,652
Depreciation and amortization
750 733
Other
(67
)
(45
)
Changes in assets and liabilities:

Accounts receivable
(3,048
)
(61
)
Inventories
(8,751
)
(4,400
)
Other current assets and prepaid expenses
(633
)
(690
)
Other long-term assets
(1
)
(60
)
Accounts payable
3,207 1,324
Accrued liabilities
4,757 886
Other long-term liabilities
— (247
)
Deferred revenue
652 (1,187
)
Income tax liability
3 (18
)
Net cash provided by (used) in operating activities
7,605 (2,749
)

Cash flows from investing activities:

Acquisition of property, equipment and software
(443
)
(311
)
Disposal of property and equipment
53 17
Proceeds from sales of marketable investments
9,154 6,153
Proceeds from maturities of marketable investments
39,612 20,135
Purchase of marketable investments
(44,156
)
(23,944
)
Net cash provided by investing activities
4,220 2,050

Cash flows from financing activities:

Repurchase of common stock
(13,776
)
(4,873
)
Proceeds from exercise of stock options and employee stock purchase plan
4,566 6,798
Taxes paid related to net share settlement of equity awards
(1,332
)
(601
)
Payments on capital lease obligations
(274
)
(218 )
Net cash used in financing activities
(10,816
)
1,106

Net increase in cash and cash equivalents
1,009 407
Cash and cash equivalents at beginning of period
13,775 10,868
Cash and cash equivalents at end of period
$ 14,784 $ 11,275

Supplemental disclosure of non-cash items:

Assets acquired under capital lease
$ 257 $ 580

Nine and Three Months Ended September 30, 2019

	Common Stock				Additional Paid-in		Retained Earnings (Accumulated		Accumulated Other Comprehensive		Total Stockholders’
	Shares		Amount		Capital		Deficit)		Income (loss)		Equity

Balance at December 31, 2018		13,968,852	$	14	$	70,451	$	(24,010)	$	(69)	$	46,386
Issuance of common stock for employee purchase plan		53,803		—		833		—		—		833
Exercise of stock options		79,420		—		767		—		—		767
Issuance of common stock in settlement of restricted and performance stock units, net of shares withheld for employee taxes, and stock awards		97,746		—		(750)		—		—		(750)
Stock-based compensation expense		—		—		7,004		—		—		7,004
Net loss		—		—		—		(10,260)		—		(10,260)
Net change in unrealized loss on available-for-sale investments		—		—		—		—		10		10
Balance at September 30, 2019		14,199,821	$	14	$	78,305	$	(34,270)	$	(59)	$	43,990

	Common Stock				Additional Paid-in		Retained Earnings (Accumulated		Accumulated Other Comprehensive		Total Stockholders’
	Shares		Amount		Capital		Deficit)		Income (loss)		Equity

Balance at July 1, 2019		14,142,296	$	14	$	74,870	$	(31,642)	$	(60)	$	43,182
Exercise of stock options		38,966		—		437		—		—		437
Issuance of common stock in settlement of restricted and performance stock units, net of shares withheld for employee taxes, and stock awards		18,559		—		(180)		—		—		(180)
Stock-based compensation expense		—		—		3,178		—		—		3.178
Net loss		—		—		—		(2,628)		—		(2,628)
Net change in unrealized loss on available-for-sale investments		—		—		—		—		1		1
Balance at September 30, 2019		14,199,821	$	14	$	78,305	$	(34,270)	$	(59)	$	43,990

The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.

Table of Contents

CUTERA, INC.

CONDENSEDCONSOLIDATEDSTATEMENTSOFCHANGESINSTOCKHOLDERS’EQUITY

(inthousands,exceptshareamounts)

(unaudited)

Nine and Three Months Ended September 30,2018

	Common Stock				Additional Paid-in		Retained Earnings (Accumulated		Accumulated Other Comprehensive		Total Stockholders’
	Shares		Amount		Capital		Deficit)		Income (loss)		Equity

Balance at December 31, 2017		13,477,973	$	13	$	62,025	$	2,947	$	(92)	$	64,893
Adjustment to opening balance for ASC 606 adoption		—		—		—		3,813		—		3,813
Issuance of common stock for employee purchase plan		34,776		—		1,154		—		—		1,154
Exercise of stock options		241,021		1		2,448		—		—		2,449
Issuance of common stock in settlement of restricted and performance stock units, net of shares withheld for employee taxes, and stock awards		136,820		—		(2,971)		—		—		(2,971)
Stock-based compensation expense		—		—		5,524		—		—		5,524
Net loss		—		—		—		(4,477)		—		(4,477)
Net change in unrealized loss on available-for-sale investments		—		—		—		—		18		18
Balance at September 30, 2018		13,890,590	$	14	$	68,180	$	2,283	$	(74)	$	70,403

	Common Stock				Additional Paid-in		Retained Earnings (Accumulated		Accumulated Other Comprehensive		Total Stockholders’
	Shares		Amount		Capital		Deficit)		Income (loss)		Equity

Balance at July 1, 2018		13,824,252	$	14	$	66,291	$	3,156	$	(87)	$	69,374
Exercise of stock options		52,162		—		565		—		—		565
Issuance of common stock in settlement of restricted and performance stock units, net of shares withheld for employee taxes, and stock awards		14,176		—		(307)		—		—		(307)
Stock-based compensation expense		—		—		1,631		—		—		1,631
Net loss		—		—		—		(873)		—		(873)
Net change in unrealized loss on available-for-sale investments		—		—		—		—		13		13
Balance at September 30, 2018		13,890,590	$	14	$	68,180	$	2,283	$	(74)	$	70,403

The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.

Table of Contents

CUTERA, INC.

CONDENSEDCONSOLIDATEDSTATEMENTSOFCASHFLOWS

(inthousands)

(unaudited)

	Nine Months Ended September 30,
	2019		2018
Cash flows from operating activities:
Net loss	$	(10,260)	$	(4,477)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation		7,004		5,524
Depreciation of tangible assets		1,184		849
Amortization of contract acquisition costs		2,169		1,304
Change in deferred tax asset		(2)		(3,507)
Provision for doubtful accounts receivable		647		877
Other		55		215
Changes in assets and liabilities:
Accounts receivable		(4,232)		(5,544)
Inventories		(6,028)		(2,540)
Other current assets and prepaid expenses		(1,423)		(797)
Other long-term assets		(2,608)		(2,301)
Accounts payable		2,861		6,319
Accrued liabilities		4,900		(4,177)
Extended warranty liabilities		(927)		—
Other long-term liabilities		(140)		105
Deferred revenue		907		58
Income tax liabilities		(301)		(27)
Net cash used in operating activities		(6,194)		(8,119)

Cash flows from investing activities:
Acquisition of property, equipment and software		(524)		(1,214)
Disposal of property and equipment		45		41
Proceeds from sales of marketable investments		—		13,044
Proceeds from maturities of marketable investments		11,450		8,050
Purchase of marketable investments		(8,304)		(4,390)
Net cash provided by investing activities		2,667		15,531

Cash flows from financing activities:
Proceeds from exercise of stock options and employee stock purchase plan		1,600		3,603
Taxes paid related to net share settlement of equity awards		(750)		(2,971)
Payments on finance lease obligations		(496)		(362)
Net cash provided by financing activities		354		270

Net increase (decrease) in cash and cash equivalents		(3,173)		7,682
Cash and cash equivalents at beginning of period		26,052		14,184
Cash and cash equivalents at end of period	$	22,879	$	21,866

Supplemental disclosure of non-cash items:
Assets acquired under finance lease	$	903	$	610

The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.

Table of Contents

CUTERA, INC.

NOTESTOCONDENSEDCONSOLIDATEDFINANCIALSTATEMENTS

Note1.SummaryofSignificantAccountingPolicies

Description of Operations and Principles of Consolidation

Cutera, Inc. ((“Cutera” or the “Company”) ~~is a global provider of laser and other~~provides energy-based aesthetic systems for practitioners worldwide. The Company designs, develops, manufactures, distributes and markets ~~laser and other~~ energy-based product platforms for use by physicians and other qualified practitioners, ~~which enable~~enabling them to offer safe and effective aesthetic treatments to their customers. The Company currently markets the following ~~key~~ system platforms: ~~enlighten~~^®, excel, HR^®,enlighten, Juliet, Secret RF, truSculpt^®~~, excel V~~^®, and xeo^®. ~~The~~ Several of the Company’s systems offer multiple hand pieces and applications, ~~which allow~~providing customers the flexibility to upgrade their systems. The sales of (i) systems, system upgrades, and hand pieces ~~(classified as~~(collectively “Systems” revenue); (ii) replacement hand ~~piece~~pieces, truSculpt iD and truSculpt flex cycle refills, as well as single use disposable tips applicable to ~~Titan~~Juliet^® and ~~truSculpt~~Secret RF ~~(classified as “Hand Piece Refills”)~~(“Consumables” revenue); and (iii) the distribution of third party manufactured skincare products ~~(classified as "Skincare”~~(“Skincare” revenue); ~~and~~are collectively classified as “Products” revenue. In addition to Products revenue, the Company generates revenue from the sale of post-warranty service contracts, parts, detachable hand piece replacements (except for Titan, truSculpt 3D, truSculpt iD and truSculpt flex) and service labor for the repair and maintenance of products that are out of warranty, all of which isare collectively classified as “Service” revenue.

Headquartered in Brisbane, California, the Company ~~has~~operates wholly-owned subsidiaries ~~that are currently operational~~ in Australia, Belgium, Canada, France, Germany, Hong Kong, Japan, Spain, Switzerland and the United Kingdom. The Company’s wholly owned subsidiary in Italy is currently dormant. These active subsidiaries market, sell and service the ~~Company~~’sCompany’s products outside of the United States. The Condensed Consolidated Financial Statements include the accounts of the Company and its subsidiaries. All inter-company ~~accounts,~~ transactions and balances have been eliminated.

Unaudited Interim Financial Information

~~The interim financial information included in this report is unaudited. The~~In the opinion of the Company, the accompanying unaudited Condensed Consolidated Financial Statements included in this report reflect all adjustments (consisting of only of normal recurring adjustments) ~~that the Company considers~~ necessary for ~~the~~a fair ~~presentation~~statement of ~~the~~its financial position as of September 30, 2019 and 2018, its results of operations, comprehensive income (loss), consolidated statements of changes in equity for the ~~interim periods covered~~three and ofnine months ended September 30, 2019 and 2018, and cash flows for the ~~financial condition of the Company at the date of the interim balance sheet.~~nine months ended September 30, 2019 and 2018. The December 31, ~~2016 Condensed Consolidated Balance Sheet~~2018 condensed consolidated balance sheet was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles in the United States of America (“GAAP”). The results for interim periods are not necessarily indicative of ~~the~~ results for the entire year or any other interim period. The accompanying Condensed Consolidated Financial Statements should be read in conjunction with the ~~Company~~’sCompany’s previously filed audited financial statements and the related notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, ~~2016~~2018 filed with the Securities and Exchange Commission (the “SEC”) on March ~~15, 2017.~~18, 2019.

Accounting Policies

These unaudited Condensed Consolidated Financial Statements are prepared in accordance with the rules and regulations of the SEC applicable to interim financial statements. While these statements reflect all normal recurring adjustments that are, in the opinion of management, necessary for fair presentation of the results of the interim period, they do not include all of the information and footnotes required by GAAP for complete financial statements. These Condensed Consolidated Financial Statements should be read in conjunction with the financial statement disclosures in our annual report on Form 10-K for the year ended December 31, 2018 filed with the SEC on March 18, 2019.

The Company uses the same accounting policies in preparing quarterly and annual financial statements. Unless otherwise noted, amounts presented within the Notes to Condensed Consolidated Financial Statements refer to the Company’s continuing operations. Notes 2 and 12 provide information about the Company’s adoption of new accounting standards for leases.

Use of Estimates

The preparation of ~~interim~~ Condensed Consolidated Financial Statements in conformity with GAAP requires the ~~Company~~’sCompany’s management to make estimates and assumptions that affect the amounts reported of assets and ~~disclosed in~~liabilities and disclosure of contingent assets and liabilities at the date of the Condensed Consolidated Financial Statements and the accompanying ~~notes. These estimates are based on management's best knowledge~~notes, and the reported amounts of ~~current events~~revenue and ~~actions we may undertake in~~expenses during the ~~future.~~reported periods. Actual results could differ materially from those estimates.

On an ongoing basis, ~~the Company~~management evaluates ~~these~~its estimates, including those related to ~~revenue elements,~~ warranty obligations, sales ~~commissions,~~commission, accounts receivable and sales allowances, ~~provision for excess and obsolete~~valuation of inventories, fair ~~values~~value of ~~marketable investments,~~goodwill, useful lives of property and equipment, incremental borrowing rates related to the Company’s leases, assumptions regarding variables used in calculating the fair ~~values~~value of the Company's equity awards, expected achievement of performance ~~stock units~~based vesting criteria, management performance bonuses, fair value of investments, the standalone selling price of the Company's products and ~~options~~services, the period of benefit used to ~~purchase the Company’s stock,~~capitalize and amortize contracts acquisition costs, variable consideration, contingent liabilities, recoverability of deferred tax assets, ~~legal matters and claims,~~ and effective income tax ~~rates, among others.~~rates. Management bases ~~these~~ estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.

~~Recent Accounting Pronouncements Not Yet Adopted~~

~~Revenue Recognition~~

~~In May 2014, the Financial Accounting Standards Board ("FASB”), jointly with the International Accounting Standards Board, issued~~ Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers. This new standard will replace most of the existing revenue recognition guidance in GAAP when it becomes effective and permits the use of either the retrospective or the modified retrospective method (or cumulative effect transition method).

~~Table of Contents~~

The standard's core principle is that a reporting entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying this new guidance to contracts within its scope, an entity will: (1) identify the contract(s) with a customer, (2) identify the performance obligation in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when (or as) the entity satisfies a performance obligation. Additionally, this new guidance would require significantly expanded disclosures about revenue. The new standard is effective for annual reporting periods (including interim reporting periods within those annual periods) beginning after December 15, 2017. Entities have the option of using either a full retrospective or a modified retrospective approach to adopt this new standard.

~~While the Company has not completed its evaluation,~~ ~~the Company currently plans to adopt this accounting standard in the first quarter of fiscal year 2018 using the modified retrospective method. Based on the~~ ~~analysis performed through the third quarter of 2017, the Company believes that the timing and measurement of revenue recognition under its contracts with customers for its~~ ~~Products and Services will not change significantly.~~ ~~However, the basis of revenue recognition will change to one based on the transfer of control of products and services. Also based on the analysis performed,~~ the Company expects that incremental contract acquisition costs of obtaining revenue generating contracts, such as sales commissions paid in connection with system sales with multi-year post-warranty service contracts, would be capitalized and amortized over the ~~customer relationship period~~. Under the current guidance, the Company expenses such costs when incurred. The Company is in the process of calculating the adjustment that would be required for capitalizing the sales commissions to accumulated deficit ~~and completing the analysis and documentation required for the implementation of ASC 606~~ ~~upon adoption of the standard on January 1, 2018.~~

The new revenue standard is principle-based and interpretation of those principles may vary from company to company based on their unique circumstances. It is possible that interpretation, industry practice, and guidance may evolve as companies and the accounting profession work to implement this new standard. As the Company completes its evaluation of this new standard, new information may arise that could change the Company’s current understanding of the impact to revenue and expense recognized. Additionally, the Company will continue to monitor industry activities and any additional guidance provided by regulators, standards setters, or the accounting profession and adjust the Company’s assessment and implementation plans accordingly.

The new standard requires comprehensive disclosures of quantitative and qualitative information that enables users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The Company is in the process of preparing the expanded disclosures required under ASC 606.

~~Accounting for Leases~~

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which amends the existing accounting standards for leases. The new standard requires lessees to record a right-of-use asset and a corresponding lease liability on the balance sheet (with the exception of short-term leases). The new standard also requires expanded disclosures regarding leasing arrangements. The new standard becomes effective for the Company in the first quarter of fiscal year 2019 and early adoption is permitted. The new standard is required to be adopted using the modified retrospective approach and requires application of the new standard at the beginning of the earliest comparative period presented. The Company generally does not finance purchases of equipment or other capital, but does lease some of its facilities. Several of the Company’s customers finance purchases of its system products through third party lease companies and not directly with the Company. The Company does not believe that the new standard will change customer buying patterns or behaviors for its products. T~~he Company expects that upon adoption, right-of-use assets and lease liabilities will be recognized in the balance sheet in amounts that will be material.~~

~~Accounting for Income Taxes~~

In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfer of Assets Other than Inventory, which requires the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. This ASU will be effective for the Company in the first quarter of 2018. This ASU is required to be adopted using the modified retrospective approach, with a cumulative catch-up adjustment to retained earnings in the period of adoption. The Company does not believe that adopting this ASU will have a material impact on the financial Statements.

~~Adopted Accounting Pronouncement~~

Beginning fiscal year 2017, the Company adopted ASU No. 2016-09, Improvements to Employee Share-based Payment Accounting, which changes among other things, how the tax effects of share-based awards are recognized. ASU No. 2016-09 requires excess tax benefits and tax deficiencies to be recognized in the provision for income taxes as discrete items in the period when the awards vest or are settled, whereas previously such income tax effects were generally recorded as part of additional paid-in capital. The provision for income taxes for the three and nine months ended September 30, 2017, included excess tax benefits of $50,000 and $160,000, respectively. The recognized excess tax benefits resulted from share-based compensation awards primarily associated with employee equity plans that were vested or settled in the three and nine months ended September 30, 2017. This ASU also eliminates the requirement to reclassify cash flows related to excess tax benefits from operating activities to financing activities on the consolidated statements of cash flows. The Company also excluded the related tax benefits when applying the treasury stock method for computing diluted shares outstanding on a prospective basis as required by this ASU. In addition, the Company elected to continue its current practice of estimating expected forfeitures. The amount of excess tax benefits and deficiencies recognized in the provision for income taxes will fluctuate from period to period based on the price of the Company’s stock, the volume of share-based instruments settled or vested, and the value assigned to share-based instruments under GAAP.

Table of Contents

~~Significant~~Risks and Uncertainties

The Company's future results of operations involve a number of risks and uncertainties. Factors that could affect the Company's future operating results and cause actual results to vary materially from expectations include, but are not limited to, rapid technological change, continued acceptance of the Company's products, stability of global financial markets, cybersecurity breaches and other disruptions that could compromise the Company’s information or results, management of international activities, competition from substitute products and larger companies, ability to obtain and maintain regulatory approvals, government regulations and oversight, patent and other types of litigation, ability to protect proprietary technology from counterfeit versions of the Company's products, strategic relationships and dependence on key individuals.

Recently Adopted Accounting ~~Policies~~Pronouncements Adopted

~~There have~~In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, "Leases," (also known as ASC Topic 842) which requires, among other items, a lessee to recognize most leases as assets and liabilities on the balance sheet. Qualitative and quantitative disclosures were enhanced to better understand 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 2018-11 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 no ~~additional~~restated and continues to be reported under the accounting standards in effect for the period presented. The new ~~or material changes~~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 ~~significant~~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 ~~policies discussed~~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 $10.3 million and $10.4 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 results from rent-free periods which were previously recorded as deferred rent. The Company’s ~~Annual Report~~accounting for finance leases remained substantially unchanged. The standard had no material impact on ~~Form 10-K~~the Company’s condensed consolidated net earnings, results of operations, comprehensive loss, statements of changes in equity, and cash flows.

See Notes 2 and 12 for additional accounting policy and transition disclosures regarding ASC Topic 842.

In August 2018, the FASB issued 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. This standard also requires customers to amortize the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement inclusive of expected contract renewals. The Company adopted this standard effective April 1, 2019, on a prospective basis for applicable implementation costs. The adoption of this guidance prospectively resulted in the capitalization of software development costs of $0.4 and $0.9 million during the three and six months ending September 30, 2019. These costs relate to implementation of a new Enterprise Resource Planning and Customer Relationship Management systems and are included in “other current assets and prepaid expenses” on the balance sheet.

Table of Contents

Note 2. Effect of Adoption of the New Lease Standard (ASC Topic 842) on Condensed Consolidated Financial Statements

The Company adopted 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 ~~fiscal year ended December 31, 2016, that are~~prior period.

The following table summarizes the effects of ~~significance or potential significance to~~adopting Topic 842 on the ~~Company.~~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)

$ —
Operating lease liabilities
(2,430)

2,430 —
Other long-term liabilities*
— 140 140
Operating lease liabilities, net of current portion
(7,759)

7,759 —

*Deferred rent included in other long-term liabilities

Note 2.3. Cash, Cash Equivalents and Marketable Investments

The Company invests its cash primarily in money market funds, U.S. Treasury bills and in highly liquid debt instruments of U.S. federal and municipal governments and their agencies, commercial paper and corporate ~~notes and bonds, municipal bonds, and~~ debt ~~securities issued by the U.S. government and its agencies. The Company considers~~securities. All highly liquid investments with stated maturities of three months or less from date of purchase are classified as cash equivalents; all highly liquid investments with ~~an original maturity of three months or less at the time of purchase, to be cash equivalents. Investments with~~stated maturities of greater than three months are classified as marketable investments. The majority of the Company’s cash and investments are held in U.S. banks and the Company's foreign subsidiaries maintain a limited amount of cash in their local banks to cover short term operating expenses.

The Company determines the appropriate classification of its investments in marketable securities at the time of purchase and re-evaluates such designation at each balance sheet date. The Company’s marketable securities are classified and accounted for as ~~“available-for-sale,”~~available-for-sale securities. Investments with remaining maturities of more than one year are viewed by the Company as available to support current operations and are classified as current assets under the caption marketable investments in the accompanying condensed consolidated balance sheets. Investments in marketable securities are carried at fair value, with the unrealized gains and losses reported as a component of ~~stockholders’ equity,~~stockholders’ equity. Any realized gains or losses on the sale of marketable securities are ~~held for use in current operations~~determined on a specific identification method, and such gains and losses are ~~classified in current assets~~reflected as ~~“marketable investments.”~~a component of interest and other income, net.

The following tables summarize the components, and the unrealized gains and losses position, related to the ~~Company~~’sCompany’s cash, cash equivalents and marketable investments (in thousands): as of September 30, 2019 and December 31, 2018:

September 30, 2017

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair Market
Value

Cash and cash equivalents:

Cash
$ 6,703 $ — $ — $ 6,703
Money market funds
1,636 — — 1,636
Commercial paper
6,445 — — 6,445
Total cash and cash equivalents
14,784 — — 14,784

Marketable investments:

U.S. government notes
5,133 — (4
)
5,129
U.S. government agencies
— — — —
Municipal securities
201 — — 201
Commercial paper
15,942 1 (1
)
15,942
Corporate debt securities
14,419 9 (8
)
14,420
Total marketable investments
35,695 10 (13
)
35,692

Total cash, cash equivalents and marketable investments
$ 50,479 $ 10 $ (13
)
$ 50,476
December 31, 2016

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair Market
Value

Cash and cash equivalents:

Cash
$ 6,672 $ — $ — $ 6,672
Money market funds
6,053 — — 6,053
Commercial paper
1,050 — — 1,050
Total cash and cash equivalents
13,775 — — 13,775
September 30, 2019

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair Market
Value

Cash and cash equivalents
$ 22,879 $ — $ — $ 22,879

Marketable investments:

U.S. government notes
8,403 4 (9
)
8,398 3,904 1 — 3,905
U.S. government agencies
3,918 — (2
)
3,916
Municipal securities
1,325 — — 1,325
Commercial paper
12,299 2 (2
)
12,299 2,141 — — 2,141
Corporate debt securities
14,366 3 (8
)
14,361 402 — — 402
Total marketable investments
40,311 9 (21
)
40,299 6,447 1 — 6,448

Total cash, cash equivalents and marketable investments
$ 54,086 $ 9 $ (21
)
$ 54,074 $ 29,326 $ 1 $ — $ 29,327

911
Table of Contents

December 31, 2018

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair Market
Value

Cash and cash equivalents
$ 26,052 $ — $ — $ 26,052

Marketable investments:

U.S. government notes
1,397 — — 1,397
U.S. government agencies
2,677 — — 2,677
Municipal securities
200 — — 200
Commercial paper
2,433 — — 2,433
Corporate debt securities
2,825 — (9)

2,816
Total marketable investments
9,532 — (9)

9,523

Total cash, cash equivalents and marketable investments
$ 35,584 $ — $ (9)

$ 35,575
As of September 30, ~~2017~~2019 and December 31, ~~2016, total~~2018, the gross unrealized gains and losses were ~~$13,000~~$1,000 and ~~$21,000,~~$(9,000), respectively, and were related to interest rate changes on available-for-sale marketable investments. The Company has concluded that it is ~~more- likely- than- not~~more-likely-than-not that the securities will be held until maturity or the recovery of their cost basis. No securities were in an unrealized loss position for more than 12 months.

The following table summarizes the contractual maturities of the ~~Company~~’sCompany’s available-for-sale securities, classified as marketable investments as of September 30, ~~2017~~2019 (in thousands):

Amount

Amount

Due in less than one year
$ 30,410 $ 6,448
Due in 1 to 3 years
5,282 —
Total marketable investments
$ 35,692 $ 6,448

Note 3.4. Fair Value of Financial Instruments

Fair value is ~~defined as~~an exit price representing the ~~price~~amount that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants aton the measurement date. The fair value hierarchy ~~distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources~~ ~~(observable inputs)~~ ~~and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (~~~~unobservable inputs~~~~). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities~~ ~~(Level 1)~~ ~~and the lowest priority to unobservable inputs~~ ~~(Level 3).~~ ~~The~~contains three levels of ~~the~~inputs that may be used to measure fair value, ~~hierarchy are described below:~~in accordance with ASC 820, as follows:

●

Level 1: ~~Quoted~~ inputs, which include quoted prices ~~(unadjusted)~~ in active markets ~~that are accessible at the measurement date~~ for identical assets or ~~liabilities.~~liabilities;

●

Level 2: ~~Directly or indirectly~~ inputs, which include observable inputs other than Level 1 inputs, such as ~~of the reporting date through correlation with market data, including~~ quoted prices for similar assets ~~and~~or liabilities, ~~in active markets and~~ quoted prices for identical or similar assets or liabilities in markets that are not ~~active. Level 2 also includes assets and liabilities~~active, or other inputs that are ~~valued using models~~observable or ~~other pricing methodologies that do not require significant judgment since the input assumptions used in the models, such as interest rates and volatility factors, are~~can be corroborated by ~~readily~~ observable market data ~~from actively quoted markets~~ for substantially the full term of the ~~financial instrument.~~asset or liability. For available-for-sale securities, the Company reviews trading activity and pricing as of the measurement date. When sufficient quoted pricing for identical securities is not available, the Company uses market pricing and other observable market inputs for similar securities obtained from various third-party data providers. These inputs either represent quoted prices for similar assets in active markets or have been derived from observable market data; and

●

Level 3: ~~Unobservable~~ inputs, which include unobservable inputs that are supported by little or no market activity and ~~reflect~~that are significant to the ~~use~~fair value of ~~significant management judgment. These values~~the underlying asset or liability. Level 3 assets and liabilities include those whose fair value measurements are ~~generally~~ determined using pricing models, ~~for which the assumptions utilize management’s estimates of market participant assumptions.~~discounted cash flow methodologies, or similar valuation techniques, as well as significant management judgment or estimation.

In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as considers counterparty credit risk in its assessment of fair value.

As of September 30, ~~2017,~~2019, financial assets measured and recognized at fair value on a recurring basis and classified under the appropriate level of the fair value hierarchy as described above were as follows (in thousands):

September 30, 2017	Level 1		Level 2		Level 3		Total
September 30, 2019									Level 1		Level 2		Level 3		Total
Cash equivalents:
Money market funds	$	1,636	$	—	$	—	$	1,636	$	3,061	$	—	$	—	$	3,061
Commercial paper		—		6,445		—		6,445		—		4,344		—		4,344
Marketable investments:
Available-for-sale securities		—		35,692		—		35,692		—		6,448		—		6,448
Total assets at fair value	$	1,636	$	42,137	$	—	$	43,773	$	3,061	$	10,792	$	—	$	13,853

Table of Contents

As of December 31, ~~2016,~~2018, financial assets measured and recognized at fair value on a recurring basis and classified under the appropriate level of the fair value hierarchy as described above was as follows (in thousands):

December 31, 2016

Level 1

Level 2

Level 3

Total

Cash equivalents:

Money market funds
$ 6,053 $ — $ — $ 6,053
Commercial paper
— 1,050 — 1,050
Marketable investments:

Available-for-sale securities
— 40,299 — 40,299
Total assets at fair value
$ 6,053 $ 41,349 $ — $ 47,402
10
~~Table of Contents~~
December 31, 2018

Level 1

Level 2

Level 3

Total

Cash equivalents:

Money market funds
$ 3,036 $ — $ — $ 3,036
Commercial paper
— 1,047 — 1,047
Marketable investments:

Available-for-sale securities
— 9,523 — 9,523
Total assets at fair value
$ 3,036 $ 10,570 $ — $ 13,606

Money market funds and U.S. Treasury bills are highly liquid investments and are actively traded. The ~~Company~~’spricing information on these investment instruments are readily available and can be independently validated as of the measurement date. This approach results in the classification of these securities as Level ~~2 investments include~~1 of the fair value hierarchy.
Corporate debt, U.S. government-backed securities, and ~~corporate~~commercial paper are measured at fair value using Level 2 inputs. The Company reviews trading activity and pricing for these investments as of each measurement date. When sufficient quoted pricing for identical securities ~~that are valued based upon~~is not available, the Company uses market pricing and other observable market inputs ~~that may include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided~~for similar securities obtained from various third party data providers. These inputs represent quoted prices for similar assets in active markets ~~benchmark~~or these inputs have been derived from observable market data. This approach results in the classification of these securities ~~bids, offers and reference data including market research publications.~~as Level 2 of the fair value hierarchy. The ~~weighted~~ average remaining maturity of the Company’s Level 2 investments as of September 30, ~~2017~~2019 is less than ~~1 year~~nine months and all of these investments are rated by S&P and Moody’s at A-A or better. The Company recognizes transfers between levels of the fair value hierarchy as of the end of the reporting period. There were no transfers within the hierarchy during the quarter and year ended September 30, 2019 and December 31, 2018, respectively.

Note 4.5. Balance Sheet Details

Inventories

As of September 30, ~~2017~~2019 and December 31, ~~2016,~~2018, inventories consist of the following (in thousands):

	September 30, 2017		December 31, 2016		September 30, 2019		December 31, 2018
Raw materials	$	18,201	$	10,966	$	18,637	$	16,991
Work in process						2,242		2,306
Finished goods		5,527		4,011		13,163		8,717
Total	$	23,728	$	14,977	$	34,042	$	28,014

AccruedLiabilities

As of September 30, ~~2017~~2019 and December 31, ~~2016,~~2018, accrued liabilities consist of the following (in thousands):

	September 30, 2017		December 31, 2016		September 30, 2019		December 31, 2018
Accrued payroll and related expenses	$	10,869	$	9,036	$	13,073	$	9,377
Sales and marketing programs		3,060		706
Sales and marketing accruals						2,229		2,379
Warranty liability		2,940		2,461		4,406		4,666
Sales tax		2,206		2,373		3,152		2,935
Other		3,128		2,821		5,236		3,943
Total	$	22,203	$	17,397	$	28,096	$	23,300

~~Note 5. Warranty~~

Product Remediation Liability

During the fourth quarter of 2018, the Company recognized a liability for a product remediation plan related to one of its legacy systems. This product remediation plan, a voluntary action initiated by the Company, includes the replacement of a component in one of our legacy products. The accrued liability consists of the cost of materials and labor to replace the component in all units under the Company's standard warranty or covered under an existing Extended Warranty contract as of the fourth quarter of 2018. The Company ~~provides a standard one-year~~recorded approximately $5.0 million related to this product remediation plan, of which $1.1 million was utilized in the fourth quarter of 2018. As of December 31, 2018, approximately $0.7 million of the balance was related to product warranty ~~on all systems. For direct sales~~and included in accrued liabilities, and $3.2 million was separately recorded as Extended Warranty Liability.

Table of Contents

In the nine months ended September 30, 2019, the Company utilized $0.2 million related to ~~end customers,~~product warranty ~~coverage provided is for labor~~ and ~~parts necessary~~$0.9 million related to ~~repair~~extended warranty liability. As of September 30, 2019, the ~~systems during the~~product remediation warranty ~~period. For sales to distributors, we provide a 14 to 16 month~~and extended warranty ~~for parts only. The distributor provides the labor to their end customer.~~liability were $0.5 million and $2.2 million, respectively.

Note 6. Warranty and Extended Service Contract

The Company has a direct field service organization in ~~the U.S.~~North America (including Canada). Internationally, the Company provides direct service support ~~through its wholly-owned subsidiaries~~ in Australia, Belgium, ~~Canada,~~ France, Germany, Hong Kong, Japan, Spain and Switzerland, ~~and~~as well as through third-party service providers in the United Kingdom. In ~~several~~ other countries, where itthe Company does not have a direct presence, the Company provides service through a network of distributors and third-party service providers.

After the original warranty period, maintenance and support are offered on aan extended service contract basis or on a time and materials basis. The Company provides for the estimated cost to repair or replace products under standard warranty at the time of sale. Costs incurred in connection with extended service contracts are recognized at the time when costs are incurred, except the one-time extended service contracts charge of $3.2 million in December 31, 2018, related to the cost to replace a component in one of the Company's legacy products.

The following table provides the changes in the product standard warranty accrual for the three and nine months ended September 30, ~~2017~~2019 and ~~2016~~2018 (in thousands):

	Three Months Ended						Nine Months Ended						Three Months Ended				Nine Months Ended
	September 30,						September 30,						September 30,				September 30,
	2017			2016			2017			2016			2019		2018		2019		2018
Beginning Balance	$	2,877		$	2,000		$	2,461		$	1,819		$	4,832	$	3,561	$	4,668	$	3,508
Add: Accruals for warranties issued during the period		959			1,202			5,038			3,634			1,504		1,589		5,656		6,164
Less: Warranty related expenses during the period		(896	)		(1,102	)		(4,559	)		(3,353	)
Less: Settlements made during the period														(1,930)		(1,510)		(5,918)		(6,032)
Ending Balance	$	2,940		$	2,100		$	2,940		$	2,100		$	4,406	$	3,640	$	4,406	$	3,640

Note 6.7. Deferred ~~Service Contract~~ Revenue

The Company ~~generates Service~~records deferred revenue ~~from the sale of~~when revenue is to be recognized subsequent to invoicing. For extended service contracts, ~~and from time and material services provided to~~the Company generally invoices customers ~~who are not under a warranty or~~at the beginning of the extended service ~~contract. Service~~ contract term. The Company’s extended service contracts typically have one, two or three year terms. Deferred revenue isalso includes payments for installation, training and extended marketing support service. As of September 30, 2019, approximately 75% of the deferred revenue balance of $13.5 million will be recognized ~~on a straight-line basis~~ over the ~~period of the applicable contract. Service revenue from time and material services is recognized as the services are provided.~~next 12 months.

~~Table of Contents~~

The following table provides changes in the deferred service contract revenue balance for the three and nine ~~month~~months ended September 30, ~~2017~~2019 and ~~2016~~2018 (in thousands):

	Three Months Ended						Nine Months Ended						Three Months Ended				Nine Months Ended
	September 30,						September 30,						September 30,				September 30,
	2017			2016			2017			2016			2019		2018		2019		2018
Beginning Balance	$	10,013		$	10,223		$	9,431		$	10,469		$	13,859	$	11,807	$	11,855	$	11,656
Add: Payments received		3,178			2,517			10,290			8,825			3,624		3,609		13,075		12,025
Less: Revenue recognized		(3,233	)		(3,447	)		(9,763	)		(10,001	)		(4,010)		(4,097)		(11,457)		(12,362)
Ending Balance	$	9,958		$	9,293		$	9,958		$	9,293		$	13,473	$	11,319	$	13,473	$	11,319

Costs ~~incurred by the Company~~ for ~~servicing~~ extended service contracts were ~~$1.2~~$2.3 million and ~~$1.7~~$6.5 million, respectively, for the three and nine months ended September 30, ~~2017~~2019, and ~~2016, respectively; and $4.2~~$1.7 million and ~~$4.9~~$5.7 million, respectively, for the three and nine months ended September 30, 2018.

Note 8. Revenue

Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for promised goods or services. The Company’s performance obligations are satisfied either over time or at a point in time. Revenue from performance obligations that are transferred to customers over time accounted for approximately 13% and 9% respectively, of the Company’s total revenue for the nine months ended September 30, ~~2017~~2019 and ~~2016, respectively.~~2018.

Table of Contents

The Company has certain system sale arrangements that contain multiple products and services. For these bundled sale arrangements, the Company accounts for individual products and services as separate performance obligations if they are distinct. The Company’s products and services are distinct if a customer can benefit from the product or service on its own or with other resources that are readily available to the customer, and if the Company’s promise to transfer the products or service to the customer is separately identifiable from other promises in the sale arrangements. The Company’s system sale arrangements can include all or a combination of the following performance obligations: the system and software license (considered 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 performance obligations at a point in time. Systems, system accessories (hand pieces), training, and time and materials services are also sold on a stand-alone basis, and these 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 Services

Systems

Systems revenue is generated from the sale of systems and from the sale of upgrades to existing systems. A system consists of a console that incorporates a universal graphic user interface, a laser or other energy based module, control system software and high voltage electronics, as well as one or more hand pieces. In certain applications, the laser or other energy-based module is contained in the hand piece, such as with the Company’s Pearl and PearlFractional applications, rather than within the console.

The Company offers customers the ability to select the system that best fits their practice at the time of purchase and then to cost-effectively add applications to their system as their practice grows. This provides customers the flexibility to upgrade their systems whenever they choose and provides the Company with a source of additional Systems revenue.

The system or upgrade and the right to use the embedded software represent a single performance obligation as the software license is integral to the functionality of the system or upgrade.

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 sale arrangement. 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. When collectability is not established in advance of receipt of payment from the customer, revenue is recognized upon the later of the receipt of payment or the satisfaction of the performance obligation. For systems sold through credit approved distributors, revenue is recognized at the time of shipment to the distributor.

The Company typically receives payment for its system consoles and other accessories within 30 days of shipment. Certain international distributor arrangements allow for longer payment terms.

Skincareproducts

The Company sells third-party manufactured skincare products in Japan. The third-party skincare products are purchased from the third-party manufacturer and sold to licensed physicians. The Company acts as the principal in this arrangement, as it determines the price to charge customers for the skincare products, and controls the products before they are transferred to the customer. Sales of skincare products are typically the subject of contracts in which the skincare products represent the sole performance obligations. The Company recognizes revenue for skincare products at a point in time, at time of shipment.

Consumables(Otheraccessories)

The Company treats its customers' purchases of replacement cycles for truSculpt iD and truSculpt flex, as well as replacement Titan and truSculpt 3D hand pieces, as Consumable revenue, which provides the 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 the Company’s legacy truSculpt product are accounted for in accordance with the Company’s standard warranty and service contract policies.

Table of Contents

Extendedcontractservices

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. 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. The Company also offers services on a time-and-materials basis for systems and detachable hand piece replacements. Revenue related to services performed on a time-and-materials basis is recognized when performed. These post-warranty services serve as additional sources of recurring revenue from the Company’s installed product base.

Training

Sales of systems to customers include training on the use of the system to be provided within 180 days of purchase. The Company considers training a separate performance obligation as customers can immediately benefit from the training together with the customer’s 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.

CustomerMarketingSupport

In North America, the Company offers marketing and consulting phone support to its customers across all system platforms. 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

The determination of whether two or more contracts entered into at or near the same time with the same customer should be combined and accounted for as one contract may require the use of significant judgment. In making this determination, the Company considers whether the contracts are negotiated as a package with a single commercial objective, have price interdependencies, or promise goods or services that represent a single performance objective

While the Company’s purchase agreements do not provide customers with a contractual right of return, the Company maintains a sales allowance to account for potential returns or refunds as a reduction in transaction price at the time of sale. The Company estimates sales returns and other variable consideration based on historical experience.

The Company determines standalone selling price ("SSP") for each performance obligation as follows:

●	Systems: The SSPs for systems are based on directly observable sales in similar circumstances to similar customers. When SSP is not directly observable, the Company estimates SSP using the expected cost plus margin approach.
●	Training: SSP is based on observable price when sold on a standalone basis.

●	Extended warranty/Service contracts: 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.

●	Set-up /Installation: SSP is based on observable price when sold on a standalone basis. Set-up or installation for all systems, excluding the enlightensystem, is immaterial in the context of the contract. The related costs to complete set-up or installation are immaterial.

The calibration and installation service of the enlighten system are treated as separate performance obligations because the Company regularly sells enlighten systems without the calibration and installation service.

LoyaltyProgram

The Company launched a customer loyalty program during the third quarter of 2018 for qualified customers located in the U.S. and Canada. Under the loyalty program, customers accumulate points based on their purchasing levels. Once a loyalty program member achieves a certain tier level, the member earns a reward. A customer’s account must be in good standing to receive the benefits of the rewards program. Rewards are earned on a quarterly basis and must be used in the following quarter. Customers receive a notification regarding their rewards tier by the fifth 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 revenue at the time the reward is earned. As of September 30, 2019, the accrual for the loyalty program included in accrued liabilities was $0.2 million.

Deferred Sales Commissions

Incremental costs of obtaining a contract, which consist primarily of commissions and related payroll taxes, are capitalized and amortized on a straight-line basis over the expected period of benefit. 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.

Table of Contents

Total capitalized costs as of September 30, 2019 were $4.7 million and are included in other assets in the Company’s condensed consolidated balance sheet. Amortization expense for these assets was $0.8 million and $2.2 million respectively, during the three and nine months ended September 30, 2019 and is included in sales and marketing expense in the Company’s condensed consolidated statement of operations. Amortization expense was $0.5 million and $1.3 million, respectively, during the three and nine months ended September 30, 2018.

Note ~~7. Stockholders~~’9. Stockholders’ Equity and Stock-based Compensation Expense

The Company’s equity incentive plans are broad-based, long-term programs intended to attract and retain talented employees and align stockholder and employee interests. In June 2019, stockholders approved an amendment and restatement of the Amended and Restated 2004 Equity Incentive Plan

T~~he Company’s Board of Directors (“Board”~~ (the “Prior Plan”) as the 2019 Equity Incentive Plan (the “2019 Plan”) and ~~stockholders~~ approved the amendment and restatement of the 2004 equity incentive plan (“Amended and Restated 2004 Equity Incentive Plan”) in April and June 2017, respectively. The amendments included the extension of the term of the plan to the date of the annual meeting of the Company’s stockholders in 2022, an ~~increase in the number of~~additional 700,000 shares, available for future ~~grant by 1,600,000~~grants (in addition to the 9,701,192 shares ~~and other terms of~~provided under the ~~plan.~~Prior Plan). The ~~Amended and Restated 2004 Equity Incentive~~2019 Plan provides for the grant of incentive stock options, non-statutory stock options, ~~restricted stock,~~RSAs, restricted stock units ~~("RSUs"~~(“RSUs”), stock appreciation rights, performance stock units, ~~("PSUs"),~~ performance shares, and other stock or cash awards.

~~Activity under~~The Company awarded zero and 42,236 RSUs to its non-employee directors during the ~~Company’s Amended~~three and ~~Restated 2004 Equity Incentive Plan for~~nine months ended September 30, 2019, respectively. Executive officers, senior management and certain employees were awarded 10,185 and 375,252 performance stock units (“PSUs”) by the Board of Directors (“Board”) during the three and nine months ended September 30, 2019, respectively. The PSUs granted in the nine months ended September 30, ~~2017 is summarized~~2019 vest subject to the recipients’ continued service and the achievement of certain performance goals for the Company’s 2019 fiscal year established by the Board and relating to the achievement of revenue targets for consumable products, revenue targets for international revenue, and specific operational milestones related to product performance and IT systems implementation projects. On September 5, 2019, the Board made a modification to all the PSU grants outstanding as ~~follows:~~of September 4, 2019, such that 15% of the PSUs will now vest upon the achievement of revenue targets for consumable products or revenue targets for international revenue rather than upon the achievement of targets related to IT systems implementation projects. The modified PSUs were valued at the Company’s share price on the date of the modification. The impact due to the PSU modification was $0.2 million.

Options Outstanding

Shares
Available
for Grant

Number of
Stock Options
Outstanding

Weighted-
Average Exercise
Price

Balance as of December 31, 2016
721,657 1,116,472 $ 9.56
Additional shares reserved
1,600,000
Options granted
(154,000
)
154,000 21.82
Stock awards granted^{(1) (2)}
(558,694
)

Options exercised
— (447,673
)
8.90
Options canceled
53,393 (53,393
)
16.58
Stock awards canceled⁽¹⁾
110,278
Balance as of September 30, 2017
1,772,634 769,406 $ 11.91
The 10,185 PSUs awards during the three months ended September 30, 2019, relate to 15% of 67,897 shares the Company's Board awarded its new CEO, David H. Mowry, scheduled to vest over 4 years from 2019 through 2022. These PSUs are subject to certain performance-based criteria related to achieving financial metrics in the Board approved annual budgets for the years 2019 through 2022. As of September 30, 2019, the Company concluded that only the 2019 tranche meets the criteria for measurement and recognition. However the 2020-2022 tranches (2020 tranche = 25% of the target number of the PSUs; 2021 tranche = 30% of the target number of the PSUs; and 2022 tranche = 30% of the target number of the PSUs) do not meet the criteria for measurement and recognition as of September 30, 2019, and will meet the criteria for measurement and commencement of recognition when the Company’s Board of Directors establishes the financial metrics for each fiscal year.

~~(1)~~
The Board also awarded executive officers, senior management and certain employees 147,317 and 414,423 RSUs during the three and nine months ended September 30, 2019, respectively. 25% of the RSUs granted vest on each of the first four anniversaries of the vest date subject to the recipients’ continued service.
The Company has a “fungible share” provision in its Amended and Restated 2004 Equity Incentive Plan whereby for each full-value award issued or canceled under the Amended and Restated 2004 Equity Incentive Plan requires the subtraction or addition of 2.12 shares from or to the shares available for grant, as applicable.
~~(2)~~
~~Included in the 'Stock awards granted' total of~~ ~~558,694~~, are 221,540 fungible shares relating to 104,500 of PSUs granted. These PSUs may result in a lower number of shares of common stock that may be released on January 1, 2018, based on PSUs forfeited due to employment terminations and the degree of achievement of two performance goals compared to targets that were pre-determined by the Board and disclosed in a Current Report on Form 8-K filed with the SEC on January 11, 2017.

As of September 30, ~~2017,~~2019, there was approximately $15.8 million of unrecognized compensation expense, net of projected forfeitures, ~~related to non-vested equity awards issued under the Company’s Amended~~for stock options and ~~Restated 2004 Equity Incentive Plan and the 2004 Employee Stock Purchase Plan (“ESPP”),~~ ~~was approximately~~ ~~$4.9 million. This~~stock awards. The expense is expected to be recognized over the remaining weighted-average period of ~~1.88~~1.65 years. The actual expense recorded in the future may be higher or lower based on a number of factors, including, actual forfeitures experienced and the degree of achievement of the performance goals related to the ~~granted PSUs.~~PSUs granted.

~~Pursuant to~~Activities under the ~~Company’s Amended~~2004 and ~~Restated 2004~~2019 Equity Incentive ~~Plan and the ESPP, the Company issued the following number of shares of common stock during the three and nine months ended September 30, 2017 and 2016:~~Plans are summarized as follows:

Three Months Ended

Nine Months Ended

September 30,

September 30,

2017

2016

2017

2016

Stock options
77,511 413,588 447,673 706,522
Stock awards, net of shares withheld to satisfy employees’ minimum income tax withholding
9,881 8,107 152,972 114,832
ESPP
— — 51,185 41,980
Total stock issued
87,392 421,695 651,830 863,334

Options Outstanding

Shares
Available
for Grant

Number of
Stock Options
Outstanding

Weighted-
Average Exercise
Price

Balance, December 31, 2018
1,141,305 507,705 $ 20.52
Additional shares reserved
700,000 — —
Stock awards granted*
(1,486,688)

— —
Options exercised
— (81,032) 9.47
Options canceled
42,873 (42,873)

20.18
Stock awards canceled*
313,623
Balance, September 30, 2019
711,113 383,800 $ 22.89
*TheCompanyhada“fungibleshare”provisioninthePriorPlanwherebyforeachfull-valueaward(RSU/PSU)issuedorcanceledunderthePriorPlanrequiredthesubtractionoraddbackof2.12sharesfromortotheSharesAvailableforGrant,respectively.TheCompany’sstockholdersapprovedtheremovalofthe“fungibleshare”provisionforawardsgrantedonorafterJune14,2019uponadoptionoftheAmendedandRestatedPlanatthe Company’s2019AnnualMeetingofStockholdersheldonJune14,2019.

1217
Table of Contents

~~Stock Repurchase Program~~Non-Employee Stock-Based Compensation
On February 8, 2016, the Company announced that Board approved the expansion of its Stock Repurchase Program by $10 million, under which the Company is authorized to repurchase shares of its common stock. As of December 31, 2016, there remained an additional $5.1 million in the Stock Repurchase Program to use for repurchasing the Company’s common stock. On February 13, 2017 and July 28, 2017 the Company’s Board of Directors approved the expansion of its Stock Repurchase Program by an additional $5 million and $25 million, respectively.

InThe Company granted 9,303 RSUs and 11,920 PSUs to non-employees during the nine months ended September 30, 2019. The RSUs granted vest over four years at 25% on each anniversary of the grant date. The PSUs vest over a year subject to the same performance criteria as the PSUs granted to employees. The PSUs granted in the three and nine months ended September 30, ~~2017,~~2019 vest subject to the Company repurchased 184,536 and 518,780 shares of its common stock for approximately $6.7 million and $13.8 million, respectively. As of September 30, 2017, there remained an additional $21.4 million available in the Stock Repurchase Program to repurchase shares of common stock. All shares repurchased were retired and returned to authorized but unissued status.recipients continued service.

Stock-based Compensation Expense

Stock-based compensation expense by department recognized during the three and nine months ended September 30, ~~2017~~2019 and ~~2016,~~2018 were as follows (in thousands):

Three Months Ended

Nine Months Ended

Three Months Ended

Nine Months Ended

September 30,

September 30,

September 30,

September 30,

2017

2016

2017

2016

2019

2018
2019* 2018
Cost of revenue
$ 101 $ 73 $ 377 $ 254 $ 430 $ 196 $ 1,103 $ 576
Sales and marketing
394 239 1,215 844 1,365 540 3,080 1,744
Research and development
157 131 633 416 443 164 1,076 617
General and administrative
345 127 1,398 1,138 940 731 1,745 2,587
Total stock-based compensation expense
$ 997 $ 570 $ 3,623 $ 2,652 $ 3,178 $ 1,631 $ 7,004 $ 5,524

*Includedinthenine-monthendedSeptember30,2019stock-basedcompensationexpenseisthechargeinconnectionwiththeacceleratedvestingof4,667sharesoftheCompany’sformerCEO,inaccordancewithhisseparationagreementdatedJanuary4,2019.

Note 8. ~~Lease Termination Income~~

On May 2, 2017, the Company entered into a building lease with the intent to relocate its corporate headquarters to a new facility in Fremont, California. On July 6, 2017, the Company agreed to terminate this lease in return for a lump sum receipt from the lessor of $4.0 million. Simultaneously with the execution of the lease termination, the Company entered into an amendment to its existing lease agreement for the Company to maintain its corporate headquarters in its current facility in Brisbane, California. This amendment extends the term of the lease from December 31, 2017 to January 31, 2023. The $4.0 million is reported as “Lease termination income,” as a component of operating expenses, in the Company’s Condensed Consolidated Statements of Operations for the three and nine month periods ending September 30, 2017.

~~Note~~ 9.10. Net ~~Income (Loss)~~Loss Per Share

Basic net ~~income (loss)~~loss per share is computed using the weighted-average number of shares outstanding during the period. In periods of net income, diluted shares outstanding include the dilutive effect of in-the-money equity awards (stock options, ~~restricted stock units, performance stock units~~RSUs, PSUs and employee stock purchase plan contributions), which is calculated based on the average share price for each fiscal period using the treasury stock method. Under the treasury stock method, the amount the employee must pay for the equity award, and the amount of compensation cost for future service that the Company has not yet recognized, are all assumed to be used to repurchase shares.

Diluted earnings per share is the same as basic earnings per share for the periods in which the Company had a net loss because the inclusion of outstanding common stock equivalents would be anti-dilutive.

~~Table of Contents~~

The following table sets forth the computation of basic and diluted net income (loss) and the weighted average number of shares used in computing basic and diluted net income (loss) per share (in thousands, except per share data):

Three Months Ended

Nine Months Ended

September 30,

September 30,

2017

2016

2017

2016

Numerator

Net income (loss)
$ 6,188 $ 1,644 $ 7,113 $ (1,636
)
Denominator

Weighted average shares of common stock outstanding used in computing net income (loss) per share, basic
13,973 13,163 13,917 13,102
Dilutive effect of incremental shares and share equivalents
794 381 816 —
Weighted average shares of common stock outstanding used in computing net income (loss) per share, diluted
14,767 13,544 14,733 13,102
Net income (loss) per share:

Net income (loss) per share, basic
$ 0.44 $ 0.12 $ 0.51 $ (0.12
)
Net income (loss) per share, diluted
$ 0.42 $ 0.12 $ 0.48 $ (0.12
)

Three Months Ended

Nine Months Ended

September 30,

September 30,

2019

2018

2019

2018

Numerator

Net loss (in thousands)
$ (2,628) $ (873) $ (10,260) $ (4,477)
Denominator

Weighted average shares of common stock outstanding used in computing net loss per share, basic
14,182 13,851 14,095 13,717
Dilutive effect of incremental shares and share equivalents
— — — —
Weighted average shares of common stock outstanding used in computing net loss per share, diluted
14,182 13,851 14,095 13,717
Net loss per share:

Net loss per share, basic
$ (0.19) $ (0.06) $ (0.73) $ (0.33)
Net loss per share, diluted
$ (0.19) $ (0.06) $ (0.73) $ (0.33)
18
Table of Contents

The following numbers of ~~weighted~~ 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):

Three Months Ended

Nine Months Ended

Three Months Ended

Nine Months Ended

September 30,

September 30,

September 30,

September 30,

2017

2016

2017

2016

2019

2018

2019

2018

Options to purchase common stock
42 1,740 31 1,952 398 607 443 707
Restricted stock units
— 334 6 395 648 411 523 419
Performance stock units
— 64 — 81 221 24 166 19
Employee stock purchase plan shares
— 40 — 83 94 47 94 82
Total
42 2,178 37 2,511 1,361 1,089 1,226 1,227

Note 10.11. Income Taxes

The Company calculates the provision for income taxes during interim reporting periods by applying an estimate of the annual effective tax rate for the full fiscal year to “ordinary” income or loss (pretax income or loss excluding unusual or infrequently occurring discrete items) for the reporting period. When applicable, the year-to-date tax provision reflects adjustments from discrete tax items. In the quarter ended December 31, 2016, the Company adopted ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting. As a result of the adoption of the ASU No. 2016-09, the nine months ended September 30, 2017 tax provision includes the discrete accounting of the net tax benefit of excess compensation cost (“windfalls”). In the periods prior to the adoption of ASU No. 2016-09, the tax benefit of windfalls and tax deficiencies (“shortfalls”) were recorded in equity to the extent of previous windfalls, and then to the income statement.

For ~~the~~ nine- month period ended September 30, 2016, the Company used a discrete effective tax rate method to calculate the provision for income taxes. The Company determined that since small changes in estimated “ordinary” income would result in significant changes in the estimated annual effective tax rate, the historical method would not provide a reliable estimate for the fiscal nine-month period ended September 30, 2016.

~~The Company’s income tax expense of $225,000 and $166,000 for~~ the three and nine months ended September 30, ~~2017,~~2019, the Company's income tax expense and benefit were $73,000 and $55,000, respectively, ~~related~~compared to tax benefits of $174,000 and $3,505,000, respectively, for the same periods in 2018.

The Company's income tax benefit for the nine month ended September 30, 2019 is due primarily to the ~~Company’s U.S. and non-U.S. operations based~~release of reserve for uncertain tax position in Germany of $0.3 million, partially offset by income taxes in foreign jurisdictions. Based on ~~the annual effective tax rate method. In addition, it included a tax benefit for excess tax deductions of approximately $50,000 and $160,000 recorded discretely in~~all available objectively verifiable evidence during the three and nine months ended September 30, ~~2017, respectively. The Company’s income tax expense for~~2019, the ~~three and nine months ended September 30, 2016 was $61,000 and $115,000, respectively, and related primarily to income taxes of the Company’s non-U.S. operations.~~

~~The~~ Company utilizes the asset and liability method of accounting for income taxes, under which deferred taxes are determined based on the temporary differences between the financial statement and tax basis of assets and liabilities using enacted tax rates expected to be in effect during the years in which the basis differences reverse. A valuation allowance is recorded whenbelieves it is more likely than not that ~~some~~the tax benefits of the ~~deferred tax assets~~U.S. losses incurred will not be realized. ~~Significant management judgment is required in determining any~~Accordingly, the Company will continue to maintain a full valuation allowance ~~recorded against deferred tax assets. In evaluating~~on the ability to recover deferred tax assets, the Company considered available positive and negative evidence giving greater weight to its recent historical financial results and lesser weight to its projected financial results, due to the subjectivity involved in forecasting future periods. The Company also considered, commensurate with its objective verifiability, the forecast of future taxable income including the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. As of September 30, 2017 and December 31, 2016 the Company had a 100% valuation allowance against its U.S. deferred tax assets. ~~In the near future, as and when the Company concludes that sufficient positive evidence, including its estimate of future taxable income, exists to support a reversal of all or a portion of the~~There was no valuation allowance ~~then~~during the ~~Company expects that a significant portion of any release of~~three months ended September 30, 2018 other than the valuation allowance will be recorded as an income tax benefit at the time of release, which will have a material impact on the financial statements. Thereafter, the income tax expense recorded in future quarters could also be significantly higher than it has been since fiscal year 2009, when we recorded a valuation allowance for our U.S. deferred tax assets.California jurisdiction.

Table of Contents

Note 11~~. Commitments and Contingencies~~12. Leases

~~Operating~~ ~~Lease~~s

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 leases space for operations in the United States, Japan, Belgium, France and ~~France. Future minimum lease commitments under the Company’s facility operating leases as of September 30, 2017 were as follows (in thousands):~~

Year Ending September 30,

Amount

2018
$ 2,446
2019
2,677
2020
2,743
2021
2,593
2022
2,477
2023 and beyond
838
Total future minimum lease payments
$ 13,774
Spain. In addition to the above facility leases, the Company also routinely leases automobiles for certain sales and field service employees under operating ~~leases for which~~leases.
The Company determines if a contract contains a lease at inception. Operating lease assets and liabilities are recognized at the ~~remaining committed~~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 ~~material.~~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 our 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):
Assets
Classification

September 30,
2019

Right-of-use assets
Operating lease assets
$ 8,332
Finance lease
Property and equipment, net^*
1,152
Total leased assets
$ 9,484
*Finance lease assets included in Property and equipment, net.
Liabilities
Classification

September 30,
2019

Operating lease liabilities

Operating lease liabilities, current
Operating lease liabilities
$ 634
Operating lease liabilities , non-current
Operating lease liabilities, net of current portion
7,888
Total operating lease liabilities
$ 8,522
Finance lease liabilities

Finance lease liabilities, current
Accrued liabilities
$ 570
Finance lease liabilities, non-current
Other long-term liabilities
690
Total finance lease liabilities
$ 1,260
Lease costs during the three months ended September 30, 2019:
Finance lease cost
Amortization expense
$ 175
Finance lease cost
Interest for finance lease
25
Operating lease cost
Operating lease expense
727
Lease costs during the nine months ended September 30, 2019:
Finance lease cost
Amortization expense
$ 546
Finance lease cost
Interest for finance lease
65
Operating lease cost
Operating lease expense
2,168
Cash paid for amounts included in the measurement of lease liabilities during the three months ended September 30, 2019 were as follows:
Operating cash flow
Finance lease
$ 25
Financing cash flow
Finance lease
175
Operating cash flow
Operating lease
708
Cash paid for amounts included in the measurement of lease liabilities during the nine months ended September 30, 2019 were as follows:
Operating cash flow
Finance lease
$ 65
Financing cash flow
Finance lease
590
Operating cash flow
Operating lease
2,112
20
Table of Contents
Maturities of lease liabilities
Maturities of lease liabilities were as follows as of September 30, 2019 (in thousands):

Operating leases

Remainder of 2019
$ 722
2020
2,868
2021
2,613
2022
2,607
2023 and thereafter
351
Total lease payments
9,161
Less: imputed interest
639
Present value of lease liabilities
$ 8,522
Vehicle Leases
As of September 30, 2019, the Company was committed to minimum lease payments for vehicles leased under long-term non-cancelable finance leases as follows (in thousands):

Operating leases

Remainder of 2019
$ 185
2020
541
2021
400
2022
240
Total lease payments
1,366
Less: imputed interest
106
Present value of lease liabilities
$ 1,260
As previously disclosed in our 2018 Annual Report on Form 10-K and under the previous lease accounting, maturities of lease liabilities were as follows as of December 31, 2018:

~~Contingencies~~Facility 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):

Operating leases

2019
$ 3,011
2020
2,939
2021
2,564
2022
2,495
2023 and thereafter
214
Future minimum rental payments
$ 11,223
Vehicle Leases – U.S.
As of December 31, 2018, the Company was committed to minimum lease payments for vehicles leased under long-term non-cancelable capital leases as follows (in thousands):

Operating leases

2019
$ 576
2020
287
2021
152
Future minimum lease payments
$ 1,015
21
Table of Contents
Weighted-average remaining lease term and discount rate, as of September 30, 2019, were as follows:
Lease Term and Discount Rate
Weighted-average remaining lease term (years)
Operating leases
3.3
Finance leases
2.8
Weighted-average discount rate
Operating leases
4.4
%
Finance leases
5.6
%

Note 13. 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 ~~and other general corporate matters~~ in the ~~normal~~ordinary course of business. ~~The Company routinely assesses~~A liability and related charge are recorded to earnings in the ~~likelihood of any adverse judgments or outcomes related to~~Company’s consolidated financial statements for legal ~~matters and claims, as well as ranges of probable losses. A determination of the amount of the reserves required, if any, for these~~ contingencies ~~is made after analysis of each known issue, historical experience, whether it is more likely than not that the Company shall incur a loss, and whether~~when the loss is ~~estimable.~~ 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.

As of September 30, ~~2017, there were~~ no2019 and December 31, 2018, the Company had zero and $171,000 accrued, respectively, related to various pending contractual and product liability lawsuits. The Company does not believe that a material ~~exposures beyond~~loss in excess of accrued amounts is reasonably likely.

Note 14. Debt

On May 30, 2018, the ~~amounts accrued~~Company and Wells Fargo Bank, N.A. (“Wells Fargo”) entered into a Loan and Security Agreement (the “Original Revolving Line of Credit”) in the ~~Company's financial statements.~~original principal amount of $25 million. The Original Revolving Line of Credit terminates on May 30, 2021.

On or about November 2, 2018, the Company entered into a First Amendment and Waiver to the Loan and Security Agreement with Wells Fargo (the “First Amended Revolving Line 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 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 trailing twelve months adjusted EBITDA of not less than $10 million, and a leverage ratio not to exceed 2.5 to 1.0.

As of September 30, 2019, the Company had not drawn on the Original Revolving Line of Credit and the Company is ~~not currently a party~~in compliance with all financial covenants of the Original Revolving Line of Credit, as amended by the First and Second Amendment to ~~any material legal proceedings.~~the Revolving Line of Credit.

Note 15. Segment Reporting

Segment reporting is based on the “management approach,” following the method that management organizes the company’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 ("CODM") is its Chief Executive Officer ("CEO"), who makes decisions on allocating resources and in assessing performance. The CEO reviews the Company's consolidated results as one operating segment. In making operating decisions, the CEO 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 views 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.

1522

Table of Contents

~~ITEM 2.~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

The following table presents a summary of revenue by geography for the three months ended September 30, 2019 and 2018:

Three Months Ended September 30,

2019

2018

Revenue mix by geography:

United States
$ 26,425 $ 24,329
Japan
7,511 5,021
Asia, excluding Japan
3,754 4,348
Europe
1,907 2,356
Rest of the world
6,520 4,519
Total consolidated revenue
$ 46,117 $ 40,573
Revenue mix by product category:

Products
$ 34,958 $ 33,197
Consumables
2,510 1,055
Skincare
2,847 1,423
Total product revenue
$ 40,315 $ 35,675
Service
5,802 4,898
Total consolidated revenue
$ 46,117 $ 40,573

~~Caution Regarding Forward-Looking Statements~~The following table presents a summary of revenue by geography for the nine months ended September 30, 2019 and 2018:

Nine Months Ended September 30,

2019

2018

Revenue mix by geography:

United States
$ 74,972 $ 73,597
Japan
18,142 12,522
Asia, excluding Japan
11,396 11,422
Europe
7,147 6,729
Rest of the world
18,260 12,981
Total consolidated revenue
$ 129,917 $ 117,251
Revenue mix by product category:

Products
$ 99,706 $ 95,727
Consumables
7,109 2,881
Skincare
6,230 3,981
Total product revenue
$ 113,045 $ 102,589
Service
16,872 14,662
Total consolidated revenue
$ 129,917 $ 117,251

Note 16. Subsequent Events

The Company has determined based on the evaluation that no material subsequent events exist other than the following:

On November 1, 2019, Sandra A. Gardiner, the Company's Executive Vice President and Chief Financial Officer, informed the Company that she intends to resign her position with the Company to pursue another opportunity. At that time, the Company offered to enter into a resignation agreement whereby Ms. Gardiner would resign her position with the Company as of November 15, 2019, with compensation in return for certain transition assistance through the end of the Company’s fiscal year, and her release of certain claims.

The Company was not able to reach agreement with Ms. Gardiner on the terms of her separation. On November 7, 2019, the Company received a Demand for Arbitration from Ms. Gardiner related to the terms of her separation from the Company. In the demand Ms. Gardiner alleges claims related to the negotiation of her separation agreement including fraudulent inducement or promissory fraud, negligent misrepresentation or omission, breach of contract, breach of the covenant of good faith and fair dealing promissory estoppel, and violations of the California Unfair Business Practices - Business & Professions Code. The Company believes it has viable defenses to each of these claims, and it intends to defend itself against these claims.

Also on November 7, 2019, the Company’s Board of Directors appointed Dave Mowry, the Company’s current Chief Executive Officer, to serve as Interim Chief Financial Officer of the Company until the Board appoints a successor Chief Financial Officer. The Nominating and Governance Committee of the Board of Directors of the Company is actively searching for qualified candidates to serve as the Company’s Chief Financial Officer, which individual also performs the functions of the Company’s principal financial officer.

Table of Contents

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ThisManagement’sDiscussionandAnalysisshouldbereadinconjunctionwiththeCompany’sfinancialconditionandresultsofoperationsin conjunction with the Company’s unaudited Condensed Consolidated Financial Statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q (“and the Company’s audited financial statements and notes thereto for the year ended December 31, 2018, included in its Annual Report on Form ~~10-Q”~~10-K filed on March 18, 2019 with the U.S. Securities and Exchange Commission (SEC).

Unless otherwise indicated, all results presented are prepared in a manner that complies, in all material respects, with accounting principles generally accepted in the United States of America (“GAAP”). Additionally, unless otherwise indicated, all changes identified for the current-period results represent comparisons to results for the prior corresponding fiscal period.

Special note regarding forward-looking statements

This report contains forward-looking statements that involve risks and uncertainties. The Company’s actual results could differ materially from those discussed in the forward-looking statements. The statements contained in this report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended, ~~(the “Exchange Act”~~("the Exchange Act"). ~~The Private Securities Litigation Reform Act~~Forward looking statements are often identified by the use of ~~1995 provides a “safe harbor” for certain forward-looking statements.~~ ~~The~~ words such as, but not limited to, “anticipate,” “believe,” ~~“potential,~~“can,” ~~“forecast,~~“continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” ~~“expect,” “anticipate,” “plan,” “intend,” “foresee,~~“seek,” “should,” ~~“would,~~“strategy,” ~~“could,~~“target,” ~~“may,~~“will,” ~~“estimate,” “project” or other~~“would” and similar expressions ~~are~~or variations intended to identify ~~forward-looking~~forward- looking statements. These ~~forward-looking~~ statements are based on ~~our current expectations~~the beliefs and beliefs concerning future developments and their potential effects on us. There can be no assurance that future developments affecting us will be those that we anticipate. All discussion concerning our expectations for future revenues and operating results areassumptions of the Company’s management based on ~~our forecasts for our existing operations. These~~information currently available to management. Such forward-looking statements ~~involve significant~~are subject to risks, uncertainties and ~~uncertainties (some~~other important factors that could cause actual results and the timing of ~~which~~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 ~~beyond our control)~~not limited to, those identified below and ~~assumptions. They~~those discussed in the section titled “Risk Factors” included under Part II, Item 1A below.

Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, the Company undertakes no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements. The statements are subject to change based on various factors, including but not limited to the risks and uncertainties summarized below:

	●	changes in ~~our~~the Company’s common stock price;
●	●	~~changes in our profitability;~~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 existence and timing of any product approvals or changes;
●	~~regulatory activities~~the inability to meet the Company's debt repayment obligations, if any, under the Loan and ~~announcements, including~~Security Agreement with Wells Fargo Bank, N.A., as amended by the ~~failure~~First Amendment and Waiver to the Loan and Security Agreement and the Second Amendment and Waiver to the Loan and Security Agreement, due to insufficient cash;
●	the possibility that cybersecurity breaches, data breaches, and other disruptions could compromise our 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 obtain 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 ~~our~~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;
●	●	~~effectiveness of our internal controls over financial reporting;~~product recalls or safety alerts;
●	●	~~fluctuations in future quarterly operating results;~~litigation, including product liability, patent, employment, securities class action, stockholder derivative, general commercial and other lawsuits;
●	●	~~failure to comply with, or changes in, laws, regulations or administrative practices affecting government regulation of our products, including, but not limited to, United States~~ ~~Food and Drug Administration laws and regulations;~~
	●	~~failure to establish, expand or maintain market acceptance or payment for the purchase of our products;~~
	●	~~failure to maintain the current regulatory approvals for our indications;~~
	●	~~unfavorable results from clinical studies;~~
	●	~~variations in sales and~~ ~~operating expenses relative to estimates;~~
	●	~~our dependence on certain suppliers and manufacturers to provide certain materials, components and contract services necessary for the production of our products;~~
	●	~~product liability-related losses and costs;~~
	●	~~protection, expiration and validity of our intellectual property;~~
	●	~~changes in technology, including the development of superior or alternative technology or devices by competitors;~~
	●	~~failure to comply with applicable domestic laws and regulations, including federal and state privacy and security laws and regulations;~~
	●	~~failure to comply with foreign laws and regulations;~~
	●	~~international operational and economic risks and concerns;~~
	●	~~failure to attract or retain key personnel;~~
	●	~~losses or costs from pending or future lawsuits and governmental investigations;~~
	●	~~changes in accounting rules that adversely affect the characterization of our consolidated results of income, financial position or cash flows;~~
	●	~~changes in customer spending patterns;~~
	●	~~continued~~ 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, the General Data Protection Regulation on the Company’s resources;
●	~~failure~~the financial health of the Company’s customers and their ability to ~~adequately secure our information technology systems from hacker intrusion, malicious viruses and other cybercrime attacks;~~purchase the Company’s products in the current economic environment; and
●	●	~~weather~~other unusual or ~~natural disasters that interrupt our business operations~~non-operating expenses, such as expenses related to mergers or ~~the business operations of our customers~~.acquisitions, may cause operating result variations.

Other factors that could cause our actual results to differ from our projected results are described in (1) “Part II, Item 1A. Risk Factors” and elsewhere in this Form 10-Q, (2) our Annual Report on Form 10-K for the period ended December 31, 2016 (“2016 Form 10-K”), (3) our reports and registration statements filed and furnished from time to time with the U.S. Securities and Exchange Commission (“SEC”) and (4) other announcements we make from time to time.

~~Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of this report.~~ We undertake no obligation to update or revise any forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise. You should read the following discussion and analysis in conjunction with our unaudited Condensed Consolidated Financial Statements and related notes included elsewhere in this report. Operating results for the three and nine months ended September 30, 2017 are not necessarily indicative of future results, including the full fiscal year. You should also refer to our “Annual Consolidated Financial Statements,” “Notes” thereto, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors” contained in our 2016 Form 10-K.

1624

Table of Contents

Introduction

The ~~Management~~’sManagement’s Discussion and Analysis, or MD&A, is organized as follows:

●

Executive ~~Summary.~~Summary.This section provides a general description and history of ~~our~~the Company’s business, a brief discussion of ~~our~~the product lines and the opportunities, trends, challenges and risks ~~we focus~~the Company focuses on in the operation of our business.

●

CriticalAccountingPoliciesandEstimates.This section describes the key accounting policies that are affected by critical accounting estimates.

●

ResultsofOperations.This section provides ~~our~~the Company’s analysis and outlook for the significant line items on ~~our~~the Company’s Condensed Consolidated Statements of Operations.

●

LiquidityandCapitalResources.This section provides an analysis of ~~our~~the Company’s liquidity and cash flows, as well as a discussion of ~~our commitments.~~the Company’s commitments that existed as of September 30, 2019.

Executive Summary

Company Description

~~We are~~The Company is a leading medical device company specializing in the research, development, manufacture, marketing and servicing of ~~laser~~light and other ~~energy-based~~energy based aesthetics systems for practitioners worldwide. ~~We offer~~In addition to products developed internally, the Company distributes third party sourced products under our own brand names. The Company offers easy-to-use products ~~which~~that enable ~~physicians and other qualified~~ practitioners to perform safe and effective aesthetic procedures, including treatment ~~of vascular conditions~~for body contouring, skin resurfacing and revitalization, tattoo removal, removal of benign pigmented lesions, vascular conditions, hair removal, ~~skin rejuvenation, body contouring, skin resurfacing, tattoo removal and~~ toenail fungus ~~treatment.~~ ~~Our~~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 our customers as they expand their practices. ~~The sales of systems, system upgrades, hand pieces, hand piece refills (applicable to~~ ~~Titan~~ ~~and~~ ~~truSculpt~~~~) and the distribution of third party manufactured skincare products are classified as “Products” revenue.~~ In addition to ~~Products~~systems and upgrade revenue, ~~we generate~~the Company generates revenue from the sale of ~~post-warranty~~post warranty service contracts, ~~parts, detachable hand piece replacements (except~~providing services for~~Titan~~ ~~and~~ ~~truSculpt~~~~) and service labor for the repair and maintenance of~~ products that are out of warranty, ~~all of which is classified~~hand piece refills and other per procedure related revenue on select systems, as ~~“Service” revenue.~~well as distributing third-party manufactured skincare products.

~~Our~~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, truSculpt iD in July 2018, excel V+ in February 2019 and truSculpt flex in September 2019.

The Company’s corporate headquarters and U.S. operations are located in Brisbane, California, where ~~we conduct our~~the Company conducts manufacturing, warehousing, research and development, regulatory, sales and marketing, service, and administrative activities. ~~We have wholly-owned subsidiaries located~~The Company markets, sells and services the Company’s products through direct sales and service employees in North America (including Canada), Australia, Belgium, ~~Canada,~~ France, Germany, Hong Kong, Japan, Spain, Switzerland and the United Kingdom. ~~We market, sell~~Sales and ~~service our products~~Services outside of ~~the United States~~these direct markets are made through ~~our direct employees, third party service providers, as well as~~ a ~~global distributor~~ network of distributors in over 40 countries.

Products and Services

~~Our~~The Company derives revenue ~~is derived~~ from the sale of Products and Services. ~~Our Products~~Product revenue ~~is derived~~includes revenue from the sale of ~~Systems, Hand~~ ~~Piece Refills (applicable to~~systems, hand pieces and upgrade of systems (collectively “Systems” revenue), replacement hand pieces, ~~Titan~~truSculpt iD and truSculpt flex) cycle refills, as well as single use disposable tips applicable to Juliet and Secret RF (“Consumables” revenue), and the ~~distribution~~sale of ~~third party manufactured Skincare products. Systems revenue includes the sales of new systems and additional applications that customers purchase as their practice grows.~~skincare products (“Skincare” revenue). A system consists of a console that incorporates a universal graphic user interface, a laser ~~and/or~~and (or) other ~~energy-based~~energy based module, control system software and high voltage electronics, ~~and~~as well as one or more hand pieces. ~~Our~~However, depending on the application, the laser or other energy based module is sometimes contained in the hand piece such as with the Company’s Pearl and Pearl Fractional applications instead of within the console. The Company offers customers the ability to select the system that best fits their practice at the time of purchase and then to cost-effectively add applications to their system as their practice grows. This provides customers the flexibility to upgrade their systems whenever they choose and provides us with a source of additional Systems revenue. The Company’s primary system platforms include:

●

e~~nlighten~~

●

~~excel HR~~

●

excel, enlighten, Juliet, Secret RF, truSculpt

●

~~excel V~~

●

xeo

~~Other than the above mentioned five primary systems, we continue to generate revenue from our legacy products such as~~ ~~GenesisPlus~~^TM, ~~CoolGlide~~^®~~, and a third-party sourced system called~~ ~~myQ~~^® ~~for the Japanese market. We have renewed our distribution contract for the sale of~~ ~~myQ~~ ~~in Japan on a non-exclusive basis through September 30, 2018. For our~~ ~~Titan~~ and ~~truSculpt~~ xeo~~hand pieces, after a set number of treatments have been performed, the customer is required to send the hand piece back~~.

Skincare revenue relates to the ~~factory for refurbishment, which we refer to as “refilling” the hand piece. In Japan, we also distribute ZO Medical Health Inc. (“ZO”)~~distribution of ZO’s skincare ~~products.~~products in Japan.

Service ~~revenue relates to~~includes prepaid service contracts, training services, enlighten installation, direct billings for detachable hand piece replacements ~~(except for~~ ~~Titan~~ ~~and~~ ~~truSculpt~~) and revenue for parts, customer marketing support and labor on out-of-warranty products.

Significant Business Trends

~~We believe~~The Company believes that ~~our~~its ability to grow revenue will be primarily dependent on the following:

●

~~Consumer demand for the applications of our products~~;

●

~~Customer (physicians and other practitioners) demand for our products~~;

●

~~Continuing~~continuing to expand ~~our~~the Company’s product offerings, ─ both through internal development and sourcing from other ~~vendors~~;vendors;

~~Table of Contents~~

●

~~Ongoing~~ongoing investment in ~~our~~the Company’s global sales and marketing ~~infrastructure~~;infrastructure;

	●	~~Use~~use of clinical results to support new aesthetic products and ~~applications~~;applications;
	●	~~Increased collaboration with key opinion leaders of our industry~~enhanced luminary development and reference selling efforts (to develop a location where Company’s products can be displayed and used to assist us in selling ~~efforts;~~efforts);

	●	~~Marketing~~customer demand for the Company’s products;
●	marketing to physicians in the core dermatology and plastic ~~surgery~~surgeon specialties, as well as outside those ~~specialties~~;specialties; and

●

~~Generating ongoing~~generating recurring revenue from ~~our~~the Company’s growing installed base of customers through the sale of systems ~~system upgrades, hand piece refills, skincare products, and services.~~with a Consumable revenue component.

For a detailed discussion of the significant business trends impacting ~~our~~the Company’s business, please see the section titled “Results of Operations” below.

Table of Contents

Factors that May Impact Future Performance

~~Our~~The Company’s industry is impacted by numerous competitive, regulatory ~~macroeconomic~~ and other significant factors. ~~Our~~The Company’s industry is highly competitive and ~~our~~the Company’s future performance depends on ~~our~~the Company’s ability to compete successfully. Additionally, ~~our~~the Company’s future performance ~~depends on our~~ is dependent upon the ability to continue to expand ~~our~~the Company’s product offerings ~~develop~~with innovative technologies, obtain regulatory clearances for ~~our~~the Company’s products, protect the proprietary technology of ~~our~~the products and ~~our~~ manufacturing processes, manufacture ~~our~~the products cost-effectively, and successfully market and distribute ~~our~~the products in a profitable manner. If ~~we fail~~the Company fails to execute on the aforementioned initiatives, ~~our~~the Company’s business ~~could~~would be adversely affected.

The Company, and other medical aesthetic companies, are facing increased scrutiny by the Food and Drug Administration (the “FDA”) with respect to products for vaginal health. 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. Although the Company did not receive such a letter at that time, we carefully considered the FDA’s broader concerns articulated in the letter and elected to implement certain commercial and promotional initiatives that addressed the FDA’s stated concerns, including ceasing to promote the Juliet device for “vaginal rejuvenation” procedures until we and the manufacturer assessed the implications of recent FDA considerations for devices in this category. Subsequently, on or about September 3, 2019, the Company received correspondence from the FDA related to its distributed product, the Juliet laser, expressing similar concerns to the letter issued in July, 2019. The Company responded to the FDA’s correspondence outlining measures already taken that we believe address the FDA’s concerns. The Company expects to continue to market Juliet consistent with its currently cleared indications: coagulation, vaporization, ablation or cutting of soft tissue (skin) in Dermatology, Plastic Surgery, Oral Surgery, ENT, Gynecology, General Surgery, Podiatry and Ophthalmology (skin around the eyes), as well as skin resurfacing on the face and body. Lost sales of the Juliet device and its hand pieces, has and will likely continue, to impact our revenue. The Company believes, however, that a higher level of scrutiny from regulatory authorities ultimately will benefit us as well as our customers and patients.

The Company believes it 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 ~~our~~the Company’s future performance are provided in (1) ~~“Part II, Item 1A. Risk Factors” and elsewhere in this Form 10-Q, (2) our 2016~~the Company’s Annual Report on Form 10-K ~~(3) our~~for the year ended December 31, 2018- 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 ~~(4)~~(3) other announcements ~~we make~~the Company makes from time to time.

The Company recently hired a new Chief Executive Officer, who was also elected to serve on the Company’s Board of Directors. His prior experience is primarily with medical device companies, but not within the aesthetics industry specifically. In addition, recently hired executives may view the business differently than prior members of management, and over time may make changes to the existing personnel and their responsibilities, our strategic focus, operations or business plans. The Company can give no assurances that it will be able to properly manage any such shift in focus, or that any changes to its business, would ultimately prove successful. In addition, leadership transitions and management changes can be inherently difficult to manage and may cause uncertainty or a disruption to the Company’s business or may increase the likelihood of turnover in key officers and employees. The Company’s success depends in part on having a successful leadership team. If the Company cannot effectively manage the leadership transitions and management changes, it could make it more difficult to successfully operate its business and pursue its business goals.

On November 1, 2019, Sandra A. Gardiner, the Company's Executive Vice President and Chief Financial Officer resigned. Since then, the Company’s current Chief Executive Officer, David H. Mowry has been acting as Chief Executive Officer and Interim Chief Financial Officer. The Board is conducting a search for a new Chief Financial Officer. The Board’s search for a Chief Financial Officer, and any related speculation and uncertainty regarding our future business strategy and direction in connection with the search and the appointment of a Chief Financial Officer, may cause or result in: 1) Disruption of our business or distraction of our employees and management; 2) Difficulty recruiting, hiring, motivating and retaining talented and skilled personnel, including a permanent Chief Financial Officer; 3) Departures of other members of management; 4) Increased stock price volatility; and 4) Difficulty in establishing, maintaining or negotiating business or strategic relationships or transactions.

If the Company is unable to mitigate these or other potential risks related to the appointment and transition of a Chief Financial Officer, 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 Chief Financial Officer or that the Company can hire a Chief Financial Officer on acceptable terms.

Brexit

On June 23, 2016, the United Kingdom held a referendum in which voters approved an exit from the European Union, commonly referred to as “Brexit.” On March 29, 2017, the UK government gave formal notice of its intention to leave the EU and began the process of negotiating the future terms of the UK’s relationship with the EU. Brexit could adversely affect UK, regional (including European) and worldwide economic and market conditions and could contribute to instability in global financial and foreign exchange markets, including volatility in the value of the British Pound and Euro. For the three months ended September 30, 2019 and 2018, net sales generated from the Company’s European operations constituted approximately 4% and 6%, respectively, of total net sales. For the nine months ended September 30, 2019 and 2018, net sales generated from our European operations constituted approximately 6% and 6%, respectively.

Negotiations between the UK and the EU continue about provisions of the withdrawal agreement. Unless the deadline is further extended, the UK will leave the EU on January 31, 2020. Although the long-term effects of Brexit will depend on any agreements the UK makes to retain access to the EU markets, Brexit has created additional uncertainties that may ultimately result in new regulatory costs and challenges for medical device companies and increased restrictions on imports and exports throughout Europe. This could adversely affect the Company’s ability to conduct and expand its operations in Europe and may have an adverse effect on the Company’s overall business, financial condition and results of operations. For additional information on how Brexit could affect its business, see “Part I, Item 1A Risk Factors - Economic and other risks associated with international sales and operations could adversely affect the Company’s business” of our 2018 Form 10-K.

Critical Accounting Policies, Significant Judgments and ~~Estimates~~Use of Estimates.

The preparation of ~~our~~the Company’s unaudited Condensed Consolidated Financial Statements and related disclosures in conformity with GAAP requires us 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 we believe are reasonable under the circumstances. WeThe Company periodically ~~review our~~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, ~~our~~the Company’s financial condition or results of operations will be affected.

The Company adopted Accounting Standards Update ("ASU") 2016-02, "Leases", (also known as ASC Topic 842) in the first quarter of fiscal year 2019 using the modified retrospective method, to all leases existing at the date of initial application. The comparative information has not been restated and continues to be reported under the accounting standards in effect for the period presented. The adoption of the new standard resulted in the recording of additional net lease assets and lease liabilities of $10.3 million and $10.4 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, was recorded as deferred rent. The standard had no material impact on the Company’s condensed consolidated statements of operations, comprehensive loss, statements of changes in equity, and cash flows. Refer to notes 2 and 12 to the unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional accounting policy and transition disclosures.

Table of Contents

The Company also adopted ASU No. 2018-15 during the second quarter of fiscal year 2019. The adoption resulted in the capitalization of software development costs of $0.5 and $0.9 million during the three and nine months ending September 30, 2019, related to implementation of a new Enterprise Resource Planning and Customer Relationship Management systems. The amount is included in other current assets and prepaid expenses on the balance sheet.

Critical accounting estimates, as defined by the SEC, are those that are most important to the portrayal of our financial condition and results of operations and require our ~~management~~’smanagement’s most difficult and subjective judgments and estimates of matters that are inherently uncertain. The accounting policies and estimates that ~~we consider~~the Company considers to be critical, subjective, and requiring judgment in their application are summarized in “Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our ~~2016~~Annual Report on Form ~~10-K. There~~10-K for the year ended December 31, 2018 filed with the SEC on March 18, 2019. With the exception of the change for the accounting of leases as a result of the adoption of ASU 2016-02 and the adoption of ASU No. 2018-15, there have been no ~~significant~~new or material changes to the significant accounting policies ~~and estimates disclosed~~discussed in ~~our~~the Company’s Annual Report on Form ~~10-K.~~

~~Table~~10-K that are of ~~Contents~~

significance, or potential significance, to the Company.

Results of Operations

The following table sets forth selected consolidated financial data for the periods indicated, expressed as a percentage of ~~net~~ total ~~revenue.~~revenue, net. Percentages in this table and throughout our discussion and analysis of financial condition and results of operations may reflect rounding adjustments.

Three Months Ended

Nine Months Ended

Three Months Ended

Nine Months Ended

September 30,

September 30,

September 30,

September 30,

2017

2016

2017

2016

2019

2018

2019

2018

Net revenue
100
%
100
%
100
%
100
%
100% 100% 100% 100%
Cost of revenue
42
%
41
%
43
%
42
%
43% 46% 47% 47%
Gross margin
58
%
59
%
57
%
58
%
57% 54% 53% 53%

Operating expenses:

Sales and marketing
34
%
35
%
35
%
37
%
39% 36% 39% 37%
Research and development
9
%
10
%
9
%
11
%
8% 8% 8% 9%
General and administrative
9
%
9
%
10
%
12
%
16% 13% 14% 13%
Lease termination income
(10
)%
— (3
)%
—
Total operating expenses
42
%
54
%
51
%
60
%
63% 57% 61% 59%

Income (loss) from operations
16
%
5
%
6
%
(2
)%
Loss from operations
(6)% (3)% (8)% (7)%
Interest and other income, net
1
%
1
%
1
%
— —% —% —% —%
Income (loss) before income taxes
17
%
6
%
7
%
(2
)%
Loss before income taxes
(6)% (3)% (8)% (7)%

Provision for income taxes
1
%
—
%
—
%
—
%
Net income (loss)
16
%
6
%
7
%
(2
)%
Provision (benefit) for income taxes
—% —% —% (3)%
Net loss
(6)% (3)% (8)% (4)%
Revenue
The timing of the Company’s revenue is significantly affected by the mix of system products, installation, training, consumables and extended contract services. The revenue generated in any given period is also impacted by whether the revenue is recognized over time or at a point in time, upon completion of delivery. For an additional description on revenue, see Note 1 in the notes to consolidated financial statements on the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018 and Note 8 to the unaudited Condensed Consolidated Financial Statements included in Item I, Part 1 of this Quarterly Report on Form 10-Q.
Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for promised goods or services. The Company’s performance obligations are satisfied either over time or at a point in time. Revenue from performance obligations that are transferred to customers over time accounted for approximately 13% and 9% of the Company’s total revenue for the nine months ended September 30, 2019 and September 30, 2018, respectively. Revenue recognized over time relates to revenue from the Company’s extended service contracts and marketing services. Revenue recognized upon delivery is primarily generated by the sales of systems, consumables and skincare.
27
Table of Contents

Total Net Revenue

Three Months Ended September 30,

Nine Months Ended September 30,

(Dollars in thousands)

2017

% Change

2016

2017

% Change

2016

Revenue mix by geography:

United States
$ 23,275 52
%
$ 15,356 $ 64,058 52
%
$ 42,216
Rest of World
14,898 —

14,925 39,803 5
%
37,965
Consolidated total revenue
$ 38,173 26
%
$ 30,281 $ 103,861 30
%
$ 80,181

United States as a percentage of total revenue
61
%
51
%
62
%
53
%
Rest of World as a percentage of total revenue
39
%
49
%
38
%
47
%

Revenue mix by product category:

Systems – North America
$ 21,869 57
%
$ 13,896 $ 58,955 60
%
$ 36,808
Systems – International
9,993 —

9,983 26,014 6
%
24,448
Total Systems
31,862 33
%
23,879 84,969 39
%
61,256
Service
4,687 (2
)%
4,788 14,173 (1
)%
14,278
Hand Piece Refills
595 (1
)%
602 1,743 (8
)%
1,886
Skincare
1,029 2
%
1,012 2,976 8
%
2,761
Consolidated total revenue
$ 38,173 26
%
$ 30,281 $ 103,861 30
%
$ 80,181

Three Months Ended September 30,

Nine months Ended September 30,

(Dollars in thousands)

2019

% Change

2018

2019

% Change

2018

Revenue mix by geography:

United States
$ 26,425 9% $ 24,329 $ 74,972 2% $ 73,597
International
19,692 21% 16,244 54,945 26% 43,654
Consolidated total revenue
$ 46,117 14% $ 40,573 $ 129,917 11% $ 117,251

United States as a percentage of total revenue
57% 60% 58% 63%
International as a percentage of total revenue
43% 40% 42% 37%

Three Months Ended September 30,

Nine months Ended September 30,

(Dollars in thousands)

2019

% Change

2018

2019

% Change

2018

Revenue mix by product category:

Systems - North America
$ 24,121 7% $ 22,628 $ 68,192 1% $ 67,458
Systems - Rest of World
10,837 3% 10,569 31,514 11% 28,269
Total Systems
34,958 5% 33,197 99,706 4% 95,727
Consumables
2,510 138% 1,055 7,109 147% 2,881
Skincare
2,847 100% 1,423 6,230 56% 3,981
Total Products
40,315 13% 35,675 113,045 10% 102,589
Service
5,802 18% 4,898 16,872 15% 14,662
Total Net Revenue
$ 46,117 14% $ 40,573 $ 129,917 11% $ 117,251
The Company’s revenue increased by 14% and 11% in the three and nine month periods ended September 30, 2019, respectively, compared to the same periods in 2018, due primarily to strong growth in the Company’s international business, an increase in consumables sales, and demand for the Company’s recently launched systems, excel V+ and truSculpt flex, offset by softness in the overall women’s health market, and competitive trends affecting certain legacy system pricing.
Revenue by Geography:

The Company’s U.S. revenue increased 9% and 2% in the three and nine month periods ended September 30, 2019, respectively, compared to the same periods in 2018. This increase in both the three and nine month periods was due primarily to continued demand of the ~~Total Net Revenue:~~truSculpt portfolio, including the recently launched truSculpt flex, as well as the Company’s excel V+ system.

~~Our~~ ~~total~~The Company’s international revenue increased by ~~$7.9~~$3.4 million, or ~~26%~~21%, and ~~$23.7~~$11.3 million, or ~~30%,~~26% in the three and nine months ended September 30, ~~2017, respectively,~~2019, compared to the same periods in ~~2016, due~~2018, driven primarily ~~to an increase~~by increases in ~~the volume of systems sold.~~
~~Revenue by Geography:~~
~~Our U.S. revenue increased by $7.9 million, or 52%,~~service, skincare products and ~~by $21.8 million, or 52%, in the three and nine months ended September 30, 2017, respectively, compared to the same periods in 2016. This growth was due primarily to an increase in the volume of~~ ~~truSculpt~~ ~~systems sold as a result of the launch of our~~ ~~truSculpt 3D~~ ~~in the second quarter ended June 30, 2017, as well as increased sales headcount, marketing and promotional activities.~~
19
~~Table of Contents~~
~~Our revenue~~ outside the U.S. was $14.9 million for each of the three month periods ended September 30, 2017 and September 30, 2016. For the nine months ended September 30, 2017, compared to the same period in 2016, revenue outside the U.S. increased by $1.8 million, or 5%. This growth was primarily attributable to revenue growth in Japan, Australia, and the Middle East, offset in part by a decline in revenue from Latin America.consumables.

Revenue by Product Type:
SystemsRevenue
Systems revenue in North America increased by $~~7.9~~$1.5 million, or ~~57%~~7%, and ~~by $22.2~~$0.7 million, or ~~60%~~1%, in the three and nine months and ended September 30, 2019, respectively, compared to the same periods in 2018, due primarily to the recently launched excel V+ and truSculpt flex systems. The Rest of the World systems revenue increased 3% and 11% for the three and nine months ended September 30, ~~2017, respectively,~~2019, compared to the same periods in ~~2016. This growth~~2018. The increase in Rest of the World revenue was primarily ~~attributable to~~a result of an increase in ~~revenue from~~ the Company’s direct business in Asia Pacific and Europe, as well as an increase in the Company’s distributor business in the Middle East.
28
Table of Contents
~~truSculpt~~ 3D~~, enlighten~~ ~~III~~, xeoConsumables ~~and~~Revenue
~~excel HR~~ ~~products, offset by a small decline in revenue from~~ ~~excel V~~. In addition, the North America revenue growth was the result of increased sales headcount, higher productivity of our field sales representatives, and the impact of additional marketing and promotional activities.
~~International~~ ~~Systems revenue was $10 million for each of the three months ended September 30, 2017 and September 30, 2016. International Systems~~Consumables revenue increased ~~by $1.6~~$1.5 million, or 6%138%, ~~in the nine months ended September 30, 2017, compared to the same period in 2016. This growth was driven primarily by increased revenue from~~ ~~enlighten III~~and ~~xeo~~$4.2 million, or 147%, ~~partially offset by a decline in revenue from our~~ ~~excel V~~ ~~product.~~
~~Service Revenue~~
~~Our worldwide Service revenue~~ ~~was relatively flat in~~for the three and nine months ended September 30, ~~2017,~~2019, respectively, compared to the same periods in ~~2016.~~
~~Hand Piece Refills Revenue~~
~~Revenue from our Hand Piece Refills was flat during~~2018. The increase in consumables revenue for the three months ended September 30, ~~2017, and declined by $143,000 or 8%~~2019 was primarily due to the increasing installed base of truSculpt iD, introduced in July 2018. The increase in consumables revenue for the nine months ended September 30, ~~2017,~~2019 was primarily due to truSculpt iD, followed by Secret RF, each of which have a consumable element.
SkincareRevenue
The Company’s revenue from Skincare products in Japan increased $1.4 million, or 100%, and $2.2 million, or 56%, for the three and nine months ended September 30, 2019, respectively, compared to the same periods in ~~2016.~~2018. This ~~decrease~~increase was due primarily to increased marketing and promotional activities, and a temporary increase in consumer demand due to ~~reduced utilization of~~changes in the Japanese consumption tax rate from 8% to 10% effective October 1, 2019.
~~Titan~~Service ~~hand pieces.~~Revenue

~~Skincare Revenue~~
~~Revenue~~ ~~from our Skincare products in Japan was flat during~~The Company’s Service revenue increased $0.9 million, or 18%, and $2.2 million, or 15%, for the three ~~months ended September 30, 2017,~~ and ~~increased by $215,000, or 8%, in the~~ nine months ended September 30, ~~2017,~~2019, respectively, compared to the same periods in ~~2016.~~2018. This increase was due primarily ~~due~~to increased sales of service contracts, and support and maintenance services provided on a time and materials basis to the ~~launch~~Company's network of ~~new product lines as well as increased marketing and promotional activities for this distributed product.~~international distributors.

Gross Profit

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended September 30,

Nine Months Ended September 30,

(Dollars in thousands)

2017

% Change

2016

2017

% Change

2016

2019

% Change

2018

2019

% Change

2018

Gross profit
$ 22,210 25
%
$ 17,743 $ 58,777 27
%
$ 46,222 $ 26,233 20% $ 21,885 $ 69,373 13% $ 61,596
As a percentage of total net revenue
58
%
59
%
57
%
58
%
57% 54% 53% 53%
~~Our~~The Company’s cost of revenue consists primarily of material, personnel expenses, product warranty costs, and manufacturing overhead expenses. The Company also continues to make investments in its international direct service support, as well as operational improvement activities, which is positively impacting the Company’s international revenue.
Gross ~~margin in~~margins for the three ~~and nine~~ months ended September 30, ~~2017,~~2019 increased by 3%, compared to same period in 2018. The increase in gross margins in the three months ended September 30, 2019 was largely driven by demand for the Company's new products with higher gross margins, as well as strong growth in consumables and skincare products. Gross margin was 53% for each of the nine month periods ~~in 2016, declined slightly primarily due to:~~ended September 30, 2019 and 2018.

●
a ~~reduction in the average selling prices in international markets, largely driven by~~ ~~enlighten~~ ~~system sales; and~~
●
i~~ncreased warranty, personnel and overhead costs in support of higher revenue levels; partially offset by~~
●
~~higher~~ ~~margins generated from our~~ ~~truSculpt 3D~~ ~~system launched in North America in May 2017 and in select European countries in September 2017.~~

Sales and Marketing

Three Months Ended September 30,

Nine Months Ended September 30,

(Dollars in thousands)

2017

% Change

2016

2017

% Change

2016

Sales and marketing
$ 13,148 24
%
$ 10,574 $ 36,708 22
%
$ 30,002
As a percentage of total net revenue
34
%
35
%
35
%
37
%
20
~~Table of Contents~~

Three Months Ended September 30,

Nine Months Ended September 30,

(Dollars in thousands)

2019

% Change

2018

2019

% Change

2018

Sales and marketing
$ 17,691 22% $ 14,479 $ 50,786 18%

$ 43,102
As a percentage of total net revenue
39% 36% 39% 37%

Sales and marketing expenses consist primarily of personnel expenses, expenses associated with customer-attended workshops and trade shows, post-marketing studies, advertising and ~~advertising. Sales and marketing expenses as a percentage of revenue declined to~~ 34% and 35% during the three and nine months ended September 30, 2017, respectively, compared to 35% and 37% during the three and nine months ended September 30, 2016, respectively. The reduction in sales and marketing expense as a percent of revenue was due primarily to improved leverage of our sales and marketing expenses, as well as an increase in our direct sales employee productivity.training.

The $~~2.6~~$3.2 million or ~~24%,~~22% increase in sales and marketing expenses ~~during~~for the three months ended September 30, ~~2017,~~2019 compared to ~~the~~ same period in ~~2016,~~2018, was due primarily to:

●
$~~2.0~~1.4 million net increase in personnel related expenses, ~~largely~~ driven primarily by increased headcount and ~~commission expenses in support of~~commissions related to higher ~~revenue levels;~~revenues;

●
$~~217,000~~ 1.0 million increased ~~promotional expenses, primarily in North America; and~~stock-based compensation as a result of increased headcount;

●
$~~185,000 increased marketing~~0.6 million increase in professional fees and consulting services related to the ongoing implementation efforts of a new Customer Relationship Management system; and
●
$0.2 million higher promotional and product demonstration expenses, primarily in ~~the U.S.~~North America.
��
~~Sales~~The $7.7 million or 18% increase in sales and marketing expenses ~~increased by $6.7 million, or 22%, in~~for the nine months ended September 30, ~~2017,~~2019 compared to ~~the~~ same period in ~~the prior year,~~2018, was due primarily to:

●
$~~4.6~~4.1 million net increase in personnel related expenses, ~~largely~~ driven primarily by increased headcount and ~~commission expenses in support of~~commissions related to higher ~~revenue levels;~~revenues;

●
$~~781,000~~1.3 million increased ~~promotional expenses, primarily in North America;~~stock-based compensation as a result of increased headcount;

●
$~~574,000~~ ~~increased marketing~~1.3 million increase in professional fees and consulting services inrelated to the ~~U.S.;~~ongoing implementation efforts of a new Customer Relationship Management system; and

●
$~~512,000~~ ~~increased travel related~~1.0 million higher promotional and product demonstration expenses, primarily in North ~~America, resulting from the increased headcount supporting higher revenue levels.~~America.

29
Table of Contents
ResearchandDevelopment(“R&D”)

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended September 30,

Nine Months Ended September 30,

(Dollars in thousands)

2017

% Change

2016

2017

% Change

2016

2019

% Change

2018

2019

% Change

2018

Research and development
$ 3,467 19
%
$ 2,914 $ 9,393 13
%
$ 8,335 $ 3,643 12% $ 3,244 $ 10,622 (3)% $ 10,895
As a percentage of total net revenue
9 % 10
%
9
%
11
%
8% 8% 8% 9%

R&D expenses consist primarily of personnel expenses, clinical research, regulatory and material costs. R&D expenses increased by $~~553,000,~~$0.4 million, or 12%, and ~~represented 9% of total net revenue,~~decreased by $0.2 million or 3%, in the three and nine months ended September 30, 2019, respectively, compared to the same period in 2018. The increase in expense in the three months ended September 30, ~~2017, compared~~2019 was due primarily to ~~10% for the same period~~an increase in ~~2016.~~stock-based compensation. This ~~increase~~decrease in expense was due primarily ~~to:~~to decrease in material cost related to ongoing research and development efforts.

●
$~~336,000 increase in personnel and consulting related expenses due to increased headcount and product development activities; and~~
●
~~$141,000 increased material spending relating to new product development.~~

~~R&D expenses increased by $1.1 million, and represented 9% of total net revenue, in the nine months ended September 30, 2017, compared to 11% for the same period in 2016. This increase in expense was due primarily to:~~
●
$~~749,000 increase in personnel and consulting related expenses due to increased headcount and product development activities; and~~
●
~~$136,000 increased material spending relating to new product development.~~
General
~~General~~ andAdministrative(“G&A”)

Three Months Ended September 30,

Nine Months Ended September 30,

(Dollars in thousands)

2017

% Change

2016

2017

% Change

2016

General and administrative

$
3,379

24
%

$
2,716

$
10,143

2
%

$
9,933

As a percentage of total net revenue

9
%

9
%

10
%

12
%
21
~~Table of Contents~~

Three Months Ended September 30,

Nine Months Ended September 30,

(Dollars in thousands)

2019

% Change

2018

2019

% Change

2018

General and administrative
$ 7,308 42% $ 5,160 $ 18,100 17% $ 15,501
As a percentage of total net revenue
16% 13% 14% 13%

G&A expenses consist primarily of personnel expenses, legal, ~~fees,~~ accounting, audit and tax consulting fees, ~~and~~as well as other general and administrative expenses. G&A expenses increased by ~~$663,000 and represented 9% of total net revenue~~$2.2 million, or 42%, in ~~both~~ the three months ended September 30, ~~2017 and 2016.~~2019 as compared to the same period in 2018. G&A represented 16% of revenue in the three months ended September 30, 2019 as compared to 13% of revenue in the three months ended September 30, 2018. The increase in ~~G&A~~ expenses was due primarily ~~to:~~to $1.0 million of personnel related expenses, inclusive of $0.3 million increase 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 $0.5 million related to credit card fees and allowances for doubtful accounts due to higher revenue levels from a year ago.
●
$~~595,000 increase in personnel related expenses due to increased headcount; and~~
●
$~~112,000 increased consulting service fees; partially offset by~~
●
$~~146,000 reduction in legal fees.~~

G&A expenses increased by ~~$210,000 and~~$2.6 million, or 17%, in the nine months ended September 30, 2019 as compared to the same period in 2018. G&A represented ~~10%~~14% of ~~total net~~ revenue in the nine months ended September 30, ~~2017,~~2019 as compared to ~~12%~~13% of revenue in the ~~same period~~nine months ended September 30, 2018. The increase in ~~2016,~~expenses was due primarily ~~to:~~
●
$~~720,000 increase in personnel related expenses due primarily to increased headcount;~~
●
$~~471,000 increased consulting service fees; and~~
●
$~~155,000 increased credit card fees as a result~~to $1.4 million of increased professional fees and consulting services related to the ongoing implementation efforts of ~~increased North America system revenue; partially offset by~~
●
~~$1.2 million~~ ~~one-time litigation settlement expense and related legal fees associated with a matter settled in the second quarter of 2016, not recurring in 2017.~~
~~Lease Termination Income~~
~~In July 2017, we agreed to terminate the building lease for~~ a new ~~facility in Fremont, California, which was entered into in May 2017. In conjunction with this lease termination, we received~~Enterprise Resource Planning and Customer Relationship Management systems, $0.8 million increased personnel related costs primarily related to executive separation and recruitment and $0.4 million increased credit card fees due to higher revenue levels from a ~~lump sum termination payment of $4.0 million from the landlord.~~year ago.

Interest and Other Income (Expense), Net
Interest and other income ~~(net)~~(expense), net, consists of the following:

Three Months Ended September 30,

Nine Months Ended September 30,

(Dollars in thousands)

2017

% Change

2016

2017

% Change

2016

Interest income
$ 145 81
%
$ 80 $ 388 65
%
$ 235
Other income (expense), net
52 (40
)%
86 358 23
%
292
Total interest and other income, net
$ 197 19
%
$ 166 $ 746 42
%
$ 527

Three Months Ended September 30,

Nine Months Ended September 30,

(Dollars in thousands)

2019

$ Change

2018

2019

$ Change

2018

Interest and other expense, net
$ (146) $ (97) $ (49) $ (180) $ (100) $ (80)
As a percentage of total net revenue
—% —% —% —%

Interest and other ~~income,~~expense, net, increased $~~31,000~~$97,000 to $146,000 and $100,000 to $180,000 in the three months ended September 30, 2017, compared to the same period in 2016. This was due primarily to an increase in interest income from our marketable investments resulting from higher investment balances as well as higher rates of return, partially offset by a reduction in net foreign exchange gains.
~~Interest~~ and ~~other income (net) increased $219,000 in the~~ nine months ended September 30, ~~2017, compared~~2019, respectively. The increase in net expense in both periods was primarily due to increase in foreign exchange losses offset by interest income from the ~~same period in 2016. This was due primarily to~~Company’s marketable investments from a year ago, and an increase in estimated interest ~~income from our marketable investments resulting from higher investment balance as well as higher rates of return, and increase in vendor discounts~~expense for ~~early payments, partially offset by higher interest payments for leased vehicles.~~ advance payment related to service contracts.
Provision for Income Taxes

Three Months Ended September 30,

Nine Months Ended September 30,

(Dollars in thousands)

2017

% Change

2016

2017

% Change

2016

Income (loss) before income taxes
$ 6,413 276
%
$ 1,705 $ 7,279 579
%
$ (1,521
)
Provision for income taxes
225 269
%
61 166 44
%
115

Three Months Ended September 30,

Nine Months Ended September 30,

(Dollars in thousands)

2019

$ Change

2018

2019

$ Change

2018

Loss before income taxes
$ (2,555)

$ (1,508)

$ (1,047)

$ (10,315)

$ (2,333)

$ (7,982)

Provision (benefit) for income taxes
73 247 (174)

(55)

3,450 (3,505)

For the three ~~months ended~~ ~~September 30, 2017, our income tax expense was $225,000, compared to $61,000 in the same period in 2016. For the~~and nine months ended September 30, ~~2017, our~~2019, the Company’s income tax expense ~~was $166,000,~~and benefit were $73,000 and $55,000, respectively, compared to ~~$115,000~~tax benefits of $174,000 and $3,505,000 in the same ~~period~~periods in ~~2016.~~
2018. In the three and nine months ended September 30, ~~2017, we~~2019, the Company calculated the ~~provision for~~ income ~~taxes~~tax provision for interim reporting periods by applying an estimate of the ~~"annual~~annual effective tax ~~rate"~~rate for the full ~~fiscal~~ year to ordinary ~~income.~~income or loss for the reporting period. The ~~result~~Company’s income tax benefit in the nine month ended September 30, 2019 was primarily related ~~primarily~~ to ~~U.S. alternative minimum taxes as we are able to utilize our net operating losses brought forward. In addition, we recorded discretely~~ the ~~net~~release of a reserve for uncertain tax positions in Germany during the second quarter end June 30, 2019. The release of the reserve resulted in a tax benefit of ~~excess equity compensation costs (“windfalls”) of approximately $50,000 and $160,000 in~~$0.3 million for the ~~three and~~ nine months ended September 30, ~~2017, respectively.~~2019.

~~For our income~~As of September 30, 2019 and December 31, 2018, the Company maintains a 100% valuation allowance against its U.S. deferred tax ~~provision in~~ assets. There was no valuation allowance during the ~~three and~~ nine months ended September 30, ~~2016,~~2018 other than the tax expense was primarily related to income taxes of our non-U.S. operations as our U.S. operations were in a loss position and we had a 100% valuation allowance against them. We did not record a year-to-date tax benefit associated with the projected 2016 U.S. tax expense due to historical losses and uncertainties related to the projected income.California jurisdiction.

2230
Table of Contents

Due to the uncertainty regarding the timing and extent of our future profitability, we continue to record a full valuation allowance to offset our U.S. deferred tax assets, which primarily represent future income tax benefits associated with our operating losses because we do not currently believe that the positive evidence outweighs the negative evidence. In the near future, if we conclude that sufficient positive evidence (including our estimate of future taxable income) exists to support a reversal of all or a portion of the valuation allowance, we expect that a significant portion of any release of the valuation allowance will be recorded as an income tax benefit at the time of release, ~~which will have a material impact on our financial statements.~~ ~~In addition, as and when we discontinue recording a valuation allowance against our deferred tax assets, w~~e expect that our income tax expense recorded in future quarters will also be significantly higher than it has been since fiscal year 2009, when we recorded a valuation allowance for our U.S. deferred tax assets.
Liquidity and Capital Resources

~~Liquidity~~The Company’s principal source of liquidity is cash from maturity and sales of marketable investments and cash generated from the ~~measurement~~issuance of ~~our ability to meet potential cash requirements, fund the planned expansion~~common stock through exercise of ~~our operations and acquire businesses. Our sources of cash include operating activities,~~ stock ~~option exercises, ESPP contributions,~~options and the ~~liquidation of marketable investments. We~~Company’s Employee Stock Purchasing Plan (“ESPP”). The Company actively ~~manage our~~manages its cash ~~usage~~ and ~~investment of liquid cash~~investments to ensure the maintenance of funds sufficient ~~funds~~ to meet ~~our daily~~its operational needs. The majority of ~~our~~the Company’s cash and investments are held in ~~U.S. banks and our~~banks. Our foreign subsidiaries maintain a limited amount of cash in their local banks to cover their short-term operating expenses.

As of September 30, 2019 and December 31, 2018, the Company had $36.7 million and $39.6 million of working capital, respectively. Cash and cash equivalents, plus marketable investments decreased by $6.2 million to $29.3 million as of September 30, 2019, from $35.6 million as of December 31, 2018, primarily due to settling accounts payable and accrued liabilities, as well as increased investments in sales, service and other management headcount to facilitate revenue growth.
Cash,CashEquivalentsandMarketableInvestments

The following table summarizes our cash, cash equivalents and marketable investments:
(Dollars in thousands)

September 30,
2017

December 31,
2016

Change

September 30,
2019

December 31,
2018

Change

Cash and cash equivalents
$ 14,784 $ 13,775 $ 1,009 $ 22,879 $ 26,052 $ (3,173)
Marketable investments
35,692 40,299 (4,607
)
6,448 9,523 (3,075)
Total
$ 50,476 $ 54,074 $ (3,598
)
$ 29,327 $ 35,575 $ (6,248)

Cash Flows

Nine Months Ended September 30,

Nine Months Ended September 30,

(Dollars in thousands)

2017

2016

2019

2018

Net cash flow provided by (used in):

Operating activities
$ 7,605 $ (2,749
)
$ (6,194)

$ (8,119)

Investing activities
4,220 2,050
Investing activities
2,667 15,531
Financing activities
(10,816
)
1,106 354 270
Net increase (decrease) in cash and cash equivalents
$ 1,009

$ 407 $ (3,173)

$ 7,682

Cash Flows from Operating Activities

Net cash ~~generated from~~used in operating activities in the nine months ended September 30, ~~2017~~2019 was ~~$7.6~~approximately $6.2 million, primarily due ~~primarily~~ to:

●
$~~11.4~~10.3 million ~~generated by~~ net ~~income of $7.1 million, which included a non-recurring $4.0 million of lease termination income, and was further increased~~loss as adjusted for by non-cash related items ~~of $3.6 million~~consisting primarily of stock-based compensation expense of $7.0 million, and ~~$750,000 in~~$3.3 million of depreciation and amortization expenses;

●
$~~4.8~~6.0 million ~~of increased cash due~~used to an increase ~~in accrued liabilities as a result of higher personnel and warranty costs;~~inventories;

●
$~~3.2~~4.9 million ~~of increased cash~~ ~~due to an~~ increase in ~~accounts payable as a result of increased material purchases~~accrued liabilities due primarily to ~~support higher revenue levels;~~accrued payroll and related expenses;

●
$~~652,000 generated from an~~4.2 million increase in ~~deferred revenue; partially offset by~~accounts receivables;

●
$~~8.8~~4.0 million ~~used to~~ increase ~~inventories~~ in ~~support of a greater volume of product sales;~~pre-paid expenses and other long term assets;

●
$~~3.0~~2.9 million generated from an increase in accounts payable, due primarily to increased material purchases;
●
$0.9 million used ~~as a result of increased accounts receivables resulting~~to settle extended warranty liabilities;
●
$0.9 million generated from ~~the higher~~an increase in deferred revenue; and

●
$~~633,000 used to increase~~0.4 million decrease in other ~~assets and pre-paid expenses.~~long-term liabilities, including a tax liability of $0.3 million.

Net cash used in operating activities in the nine months ended September 30, ~~2016~~2018 was ~~$2.7~~approximately $8.1 million, ~~which was~~primarily due ~~primarily~~ to:
●
~~$1.7 million generated~~ ~~by a net loss of $1.6 million, offset by non-cash related items of $2.7 million stock-based compensation expense and $733,000 in depreciation and amortization expenses;~~
●
~~$1.3 million generated from an increase in accounts payable primarily as a result of higher inventory purchases for the increased volume of business;~~
●
~~$886,000 generated from an increase in accrued liabilities primarily related to higher personnel expenses; partially offset by~~
23
~~Table of Contents~~

●
$4.4 million ~~used to increase inventory;~~net loss as adjusted for non-cash related items consisting primarily of stock-based compensation expense of $5.5 million, income tax benefit of $3.6 million, $0.9 million provision for doubtful accounts receivable, and $2.1 million depreciation and amortization expenses;

●
$~~1.2~~6.3 million generated from an increase in accounts payable due primarily to increased inventory related purchases;
●
$4.2 million cash used to settle accrued liabilities;
●
$3.1 million cash used to increase pre-paid expenses and other long term assets;
●
$5.5 million used ~~in deferred revenue resulting primarily from the amortization~~as a result of ~~deferred service contract revenue;~~increased account receivables; and

●
$~~690,000~~2.5 million used to increase ~~other current assets and prepaid expenses primarily related to insurance premiums and future marketing tradeshows.~~ inventories.
31
Table of Contents
Cash Flows from Investing Activities
~~We generated net~~Net cash ~~of $4.2 million in our~~provided by investing activities was $2.7 million in the nine months ended September 30, ~~2017, which was attributable~~2019, primarily due to:

●
$~~48.8~~11.5 million in net proceeds from the ~~sales and~~ maturities of marketable investments; partially offset by

●
$~~44.2~~8.3 million of cash used to purchase marketable investments; and

●
$~~443,000~~0.5 million of cash used to purchase property, equipment and software.

~~We generated net~~Net cash ~~of $2.1 million in our~~provided by investing activities was $15.5 million in the nine months ended September 30, ~~2016,~~2018, which was attributable primarily to:

●
$~~26.3~~21.1 million in net proceeds from the sales and maturities of marketable investments; partially offset by

●
$~~23.9~~4.4 million of cash used to purchase marketable investments; and

●
$~~311,000~~1.2 million of cash used to purchase property, equipment and software.
Cash Flows from Financing Activities
Net cash ~~used in~~provided by financing activities was $~~10.8~~$0.4 million in the nine months ended September 30, ~~2017, which was~~2019, primarily due to:

●
$~~13.8~~1.6 million ~~used to repurchase common stock;~~
●
$~~1.3 million of cash used for taxes paid related to~~ net ~~share settlement of equity awards;~~
●
$~~274,000 used to pay down our capital lease obligations; partially offset by~~
●
$~~4.6 million of cash generated~~proceeds from the issuance of common stock due to employees exercising their stock options and purchasing stock through the ~~ESPP program.~~ESPP; offset by
●
$0.7 million of cash used for taxes related to net share settlement of equity awards; and
●
$0.5 million of cash used to pay finance lease obligations.

Net cash provided by financing activities was ~~$1.1 million~~$270,000 in the nine months ended September 30, ~~2016,~~2018, which was primarily due to:

●
$3.6 million proceeds ~~of $6.2 million~~ from ~~the issuance~~exercise of ~~common stock due to employees exercising their~~ stock options and ~~purchasing~~employee stock ~~through the ESPP program; partially~~purchase plan, offset by

●
~~repurchase~~$3.0 million of ~~common stock~~cash used for ~~$4.9 million;~~taxes paid related to net share settlement of equity awards; and

●
~~payments for~~$0.4 million of cash used to pay capital lease ~~obligations of $218,000.~~ obligations.

Adequacy of Cash Resources to Meet Future Needs
WeThe Company had cash, cash equivalents, and marketable investments of $~~50.5~~$29.3 million as of September 30, ~~2017.~~2019. For the nine months ended September 30, ~~2017, we financed our operations~~2019, the Company’s principal source of liquidity is cash from maturity and ~~stock repurchases through cash generated by our operating activities,~~ sales ~~and maturities~~ of marketable investments and cash generated from the ~~sale~~issuance of common stock ~~due to employees exercising their~~through exercise of stock options and ~~purchasing stock through~~ the ~~ESPP program.~~ESPP. 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, but there can be no assurances.
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 Revolving Line of Credit”) in the original principal amount of $25 million. The Original Revolving Line of Credit terminates on May 30, 2021.
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 trailing twelve months ("TTM") adjusted EBITDA of not less than $10 million. A violation of any of the 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 line of credit for loans 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 received notice that it was in violation of certain financial covenants in the Original Revolving Line of Credit and entered into discussions with Wells Fargo to amend and revise certain terms of the Original Revolving Line of Credit.
On or about November 2, 2018, the Company entered into a First Amendment and Waiver to the Loan and Security Agreement with Wells Fargo (the “First Amended Revolving Line of Credit”). The First Amended Revolving Line of Credit provided for a 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 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.
A violation of any of the covenants could result in a default under the Second Amended Revolving Line of Credit that would permit the lenders to restrict the Company’s ability to further access the revolving line of credit for loans and letters of credit and require the immediate repayment of any outstanding loans under the Second Amended Revolving Line of Credit.

As of September 30, ~~2017, we~~2019, the Company had $~~21.4 million remaining under our Board approved Stock Repurchase Program. We believe~~not drawn on the ~~existing capital resources, including cash, cash equivalents~~Original Revolving Line of Credit and ~~investments~~the Company is in compliance with all financial covenants of ~~$50.5 million, are sufficient to meet our operating~~the Original Revolving Line of Credit, as amended by the First Amended Revolving Line of Credit and ~~capital requirements for~~ the ~~next several years, and enable us to repurchase stock pursuant to our Stock Repurchase Program.~~
~~In July 2017, we agreed to terminate the building lease for a new facility in Fremont, California, entered into in May 2017.~~ ~~In conjunction with this lease termination, we received a lump sum termination payment~~Second Amended Revolving Line of $4.0 million from the landlord. Except for the foregoing, cash used to fund our operating activities in certain historical quarters, purchase fixed assets and repurchase our common stock, we are unaware of any other known trends or any known demands, commitments, events or uncertainties, including collectability of our accounts receivable, that will result in, or that are reasonably likely to result in, liquidity increasing or decreasing in any material way.Credit.
24
~~Table of Contents~~

Commitments and Contingencies
~~Contractual Obligations~~
~~The following are our contractual obligations, consisting~~As of ~~future minimum lease commitments~~the date of this report, other than changes related to ~~facility~~ ~~leases~~adoption of the new lease accounting standard effective January 1, 2019, and as ~~of September 30, 2017:~~

Payments Due by Period ($’000’s)

Contractual Obligations

Total

Less Than
1 Year

1-3 Years

3-5 Years

More Than
5 Years

Operating leases
Operating leases
Operating leases 13,774 2,446 $ 5,420 $ 5,070 $ 838
~~In addition~~described in Notes 2 and 12 to the ~~above facility leases, we also routinely lease automobiles for certain sales and field service employees under operating leases for which the remaining committed lease payments are not material.~~
~~Except as set forth above,~~Condensed Consolidated Financial Statements, there ~~have been~~were no material changes to ~~our~~the Company’s contractual obligations and commitments ~~and contingencies from those disclosed~~outside the ordinary course of business since March 18, 2019, as reported in ~~our 2016~~the Company’s Annual Report on Form ~~10-K.~~10-K for the year ended December 31, 2018, as filed with the SEC on March 18, 2019.

32
Table of Contents
~~ITEM 3.~~
~~QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK~~

~~There have been no material changes to~~ITEM 3.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A summary of the ~~Company~~’skey market ~~risk during~~risks facing the ~~nine months ended September 30, 2017.~~Company is disclosed below. For a detailed discussion, please see the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on March 18, 2019.
Interest Rate Fluctuations
The primary objective of the Company’s ~~exposure~~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 quality securities, including U.S. treasuries, U.S. government agencies, corporate debt, cash deposits, money market ~~risk, refer~~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 portfolio as of September 30, 2019 was approximately 0.3 years. If interest rates rise, the market value of our investments may decline, which could result in a realized loss if the Company is 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 on the Company’s total investment portfolio.
The uncertain financial markets could 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 the Company has invested in could further deteriorate and may have an adverse impact on the carrying value of these investments.
As of September 30, 2019, the Company had not drawn on the Revolving 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. The LIBOR rate was 2.02% as of September 30, 2019, and accordingly the Company may incur additional expenses if the Company has an outstanding balance on the line of credit and the LIBOR 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 remeasurement 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 ~~market risk disclosures set forth in Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” of~~foreign currency denominated transactions, given the ~~2016 Form 10-K.~~Company has a natural hedge resulting from the Company’s foreign cash receipts being utilized to fund the respective local currency expenses.

ITEM 4.CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures
An evaluation as of the three months September 30, 2019 was carried out under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), of the effectiveness of the Company’s “disclosure controls and procedures.” Rule 13a-15(e) under the Exchange Act defines “disclosure controls and procedures” as controls and other procedures of a company that are designed to ensure that the information required to be disclosed by a company in the reports that it files or submits under the Exchange Act 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 the company’s management, including its CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure. Based upon that evaluation, the Company’s CEO and CFO concluded that the Company’s disclosure controls and procedures were effective at September 30, 2019. Attached as exhibits to this Quarterly Report are certifications of ~~our Chief Executive Officer (“CEO”)~~the Company’s CEO and ~~consultant Chief Financial Officer (“CFO”)~~,CFO, which are required in accordance with Rule 13a-14 of the ~~Securities~~ Exchange ~~Act of 1934, as amended (“Exchange Act”).~~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.
We conducted an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures (as defined in the Rules 13a-15(e) and 15d-15(e) under the Exchange Act) (“Disclosure Controls”) as of the end of the period covered by this Report required by Exchange Act Rules 13a-15(b) or 15d-15(b). The controls evaluation was conducted under the supervision and with the participation of our management, including the CEO and CFO. Based on this evaluation, the CEO and CFO have concluded that as of the end of the period covered by this report the disclosure controls and procedures were effective at a reasonable assurance level.
~~Definition of Disclosure Controls~~
Disclosure Controls are controls and procedures designed to reasonably assure that information required to be disclosed in our reports filed under the Exchange Act, such as this Report, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure Controls are also designed to reasonably assure that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. Our Disclosure Controls include components of internal control over financial reporting, which consists of control processes designed to provide reasonable assurance regarding the reliability of its financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles in the U.S. To the extent that components of our internal control over financial reporting are included within Disclosure Controls, they are included in the scope of our annual controls evaluation.

2533
Table of Contents
~~Limitations on the Effectiveness of Controls~~
Our management, including the CEO and CFO, does not expect that our disclosure controls or internal control over financial reporting will prevent all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be 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 controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Changes in Internal Control over Financial Reporting
There were no changes in ~~our~~the Company’s internal control over financial reporting ~~that occurred~~ during the ~~most recent fiscal quarter~~three months ended September 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on the Effectiveness of Controls
A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected. Accordingly, the Company’s disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that the objectives of the Company’s disclosure control system are met. As set forth above, the Company’s CEO and CFO have concluded, based on their evaluation as of the end of the period covered by this report, that the Company’s disclosure controls and procedures were effective to provide reasonable assurance that the objectives of the Company’s disclosure control system were met.
34
Table of Contents
PART II. OTHER INFORMATION

~~ITEM 1.~~
~~LEGAL PROCEEDINGS~~

~~We are named from~~ITEM1.LEGALPROCEEDINGS
From time to time, asthe Company may be involved in legal and administrative proceedings and claims of various types. For a ~~party~~description of the Company’s material pending legal and regulatory proceedings and settlements refer to ~~product liability~~Note 11 to the Company’s consolidated financial statements entitled “Commitments and ~~contractual lawsuits~~Contingencies,” in the ~~normal course of business. We routinely assess~~Annual Report on Form 10-K for the ~~likelihood of any adverse judgments or outcomes related to legal matters and claims, as well as ranges of probable losses. A determination of~~year ended December 31, 2018, filed with the amount of the reserves required, if any, for these contingencies is made after analysis of each known issue, historical experience, whether it is more likely than not that we shall incur a loss, and whether the loss is estimable. We are not currently a party to any material legal proceedings.SEC on March 18, 2019.
~~ITEM 1A.~~
~~RISK FACTORS~~

~~Our business faces many risks.~~ Any of the risks referenced in this Form 10-Q or our other SEC filings could have a material impact on our business and consolidated financial position or results of operations. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also impair our business operations.ITEM 1A.     RISK FACTORS

~~For detailed discussion of risk factors that should be understood by any investor contemplating investment~~There are no material changes from the Risk Factors previously disclosed in ~~our stock, please refer to “Part I. Item 1A. Risk Factors” in our 2016~~the Company’s Annual Report on Form 10-K ~~and elsewhere in this Form 10-Q.~~
~~Our ability to reverse all or any part of the valuation allowance against our U.S. deferred tax assets is uncertain.~~
~~We have recorded a full valuation allowance against our U.S. deferred tax assets due to the uncertainty of the ultimate realization of the future benefits of those assets.~~ To the extent we determine that all, or a portion of, our valuation allowance is no longer necessary, we will reverse the valuation allowance and recognize an income tax benefit in the reported financial statement earnings in that period. Once the valuation allowance is eliminated or reduced, its reversal will no longer be available to offset our current financial statement tax provision in future periods. We believe that there is a possibility that, within the next 3-12 months, sufficient positive evidence may become available to allow us to reach a conclusion that a significant portion of the valuation allowance will no longer be needed. Release of the valuation allowance would result in the recognition of certain deferred tax assets and a decrease to income tax expense for the ~~period~~fiscal year ended December 31, 2018, filed with the ~~release is recorded. However, the exact timing and amount of the valuation allowance release are subject to change~~SEC on the basis of the level of profitability that we are able to actually achieve. Due to significant estimates used to determine the valuation allowance and the potential for changes in facts and circumstances, the Company cannot guarantee that it will be able to reverse all or any of the valuation allowance or that the Company will not need to increase its deferred tax asset valuation allowance in the future.March 18, 2019.
~~ITEM 2.~~
~~UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS~~

~~The following table summarizes the activity related to stock repurchases for the three~~ ~~months ended September 30, 2017~~ ~~(in thousands except per share data)~~ITEM 2.         UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS:

Period

Total Number
of Shares
Purchased

Average Price
Paid
per Share

Total Number of
Shares Purchased
as Part of
Publicly Announced
Plans or Programs

Approximate
Dollar Value
of Shares
That May Yet
Be Purchased
Under the Plans
or Program

July 1-31, 2017

—

—

—

28,110

August 1-31, 2017

109

34.71

109

24,340

September 1-30, 2017

76

38.99

76

21,380

July 1, 2017 - September 30, 2017

185

$
36.47

185

$
21,380

None.
ITEM 3.        DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4.        MINE SAFETY DISCLOSURES
None.
ITEM 5.        OTHER INFORMATION
None.

2635
Table of Contents
~~As of December 31, 2016, we had $5.1 million available in our Stock Repurchase Program.~~ ~~On February 13, 2017 and July 28, 2017, our Board of Directors approved an incremental $5 million and $25 million, respectively, to be added to the Stock Repurchase Program.~~
In the three months ended September 30, 2017, we repurchased 184,536 shares for approximately $6.7 million, or $36.47 per share, and retired and returned them to an authorized but unissued status. As of September 30, 2017, $21.4 million remained available for future repurchases of our stock.
27
~~Table of Contents~~

ITEM 6.EXHIBITS

Exhibit
No.
Description
~~3.4~~
3.2 ⁽¹⁾
~~Bylaws of the Company.~~
~~3.5~~
⁽⁵⁾
~~Second~~ Amended and Restated Certificate of Incorporation of the ~~Company (as filed with the state of Delaware)~~Registrant (Delaware).
~~4.1~~
⁽²⁾
~~Specimen Common Stock certificate of the Company.~~
~~10.26~~
⁽³⁾
~~Lease termination agreement relating to 6530 Paseo Padre Parkway Fremont, California,~~ ~~dated July 6, 2017 by and between the Company and SI 28, LLC.~~
~~10.27~~ ⁽⁴⁾
~~Second Amendment to Brisbane Technology Park Lease dated July 6, 2017 by and between the Company and BMR-BAYSHORE BOULEVARD LP.~~
~~10.28~~ ⁽⁵⁾ ~~Transition Agreement dated July 12, 2017 by and between the Company and Ronald J. Santilli.~~
~~10.29~~ ⁽⁵⁾
~~Consulting Agreement dated July 12, 2017 by and between the Company and Sandra A. Gardiner~~

3.4 ⁽¹⁾ Bylaws of the Registrant.
4.1 ⁽²⁾ Specimen Common Stock certificate of the Registrant.
~~31.1~~10.14 ⁽³⁾
Cutera, Inc. 2004 Amended and Restated Equity Incentive Plan.
31.1
Certification of ~~the~~ Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2
Certification of ~~the~~ Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
~~32.1~~
32.1
Certification of ~~the~~ Chief Executive Officer and ~~the~~ Chief Financial Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.ins
~~XBRL~~ Instance Document
101.sch
XBRL Taxonomy Extension Schema Document
101.cal
XBRL Taxonomy Extension Calculation Linkbase Document
101.def
XBRL Taxonomy Extension Definition Linkbase Document
101.lab
XBRL Taxonomy Extension Label Linkbase Document
101.pre
XBRL Taxonomy Extension Presentation Linkbase Document

(1)
Incorporatedbyreferencefrom ~~our Current Report~~ the Company’s RegistrationStatementonForm ~~8-K filed~~ S-1(RegistrationNo.333-111928)whichwasdeclaredeffectiveon ~~January 8, 2015.~~
March30,2004.

(2)
Incorporatedbyreferencefrom ~~our Annual Report on Form 10-K filed with~~ the Company’s AnnualReportonForm10-KfiledwiththeSEConMarch25,2005.
(3)
~~Filed as Exhibit 10.26 to~~ Incorporatedbyreferencefromthe ~~Company’s Quarterly Report~~ Company’s DefinitiveProxyStatementonForm ~~10-Q~~ 14AfiledwiththeSECon ~~August 7, 2017, and incorporated by reference.~~April30,2018.
(4)
~~Filed as Exhibit 10.27 to the Company’s Quarterly~~ IncorporatedbyreferencefromCurrentReportonForm ~~10-Q~~ 8-Kfiled ~~with the SEC on August 7, 2017, and incorporated by reference.~~May9,2018.
(5)
~~Filed herewith.~~IncorporatedbyreferencefromCurrentReportonForm8-KfiledSeptember5,2018.

28
~~Table of Contents~~
(6)
Incorporatedbyreferencefromthe Company’s DefinitiveProxyStatementonForm14AfiledwiththeSEConApril30,2019 and June 11, 2019.

SIGNATURE

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 the ~~7th~~12th day of November, ~~2017.~~2019.

CUTERA, INC.
/S/ ~~SANDRA A. GARDINER~~
DAVID H MOWRY
~~Sandra A. Gardiner~~David H. Mowry
~~Consultant~~Chief Executive Officer and Interim Chief Financial Officer
(Principal Financial and Accounting Officer)

2936

	As reported under Topic 842		Adjustments		Balances under Prior GAAP
Operating lease right-of-use assets	$	10,049	$	(10,049)	$	—
Operating lease liabilities		(2,430)		2,430		—
Other long-term liabilities*		—		140		140
Operating lease liabilities, net of current portion		(7,759)		7,759		—

September 30, 2017	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Market Value
Cash and cash equivalents:
Cash	$	6,703	$	—	$	—		$	6,703
Money market funds		1,636		—		—			1,636
Commercial paper		6,445		—		—			6,445
Total cash and cash equivalents		14,784		—		—			14,784

Marketable investments:
U.S. government notes		5,133		—		(4	)		5,129
U.S. government agencies		—		—		—			—
Municipal securities		201		—		—			201
Commercial paper		15,942		1		(1	)		15,942
Corporate debt securities		14,419		9		(8	)		14,420
Total marketable investments		35,695		10		(13	)		35,692

Total cash, cash equivalents and marketable investments	$	50,479	$	10	$	(13	)	$	50,476

December 31, 2016	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Market Value
Cash and cash equivalents:
Cash	$	6,672	$	—	$	—		$	6,672
Money market funds		6,053		—		—			6,053
Commercial paper		1,050		—		—			1,050
Total cash and cash equivalents		13,775		—		—			13,775
September 30, 2019										Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Market Value
Cash and cash equivalents										$	22,879	$	—	$	—	$	22,879


Marketable investments:
U.S. government notes		8,403		4		(9	)		8,398		3,904		1		—		3,905
U.S. government agencies		3,918		—		(2	)		3,916
Municipal securities		1,325		—		—			1,325
Commercial paper		12,299		2		(2	)		12,299		2,141		—		—		2,141
Corporate debt securities		14,366		3		(8	)		14,361		402		—		—		402
Total marketable investments		40,311		9		(21	)		40,299		6,447		1		—		6,448

Total cash, cash equivalents and marketable investments	$	54,086	$	9	$	(21	)	$	54,074	$	29,326	$	1	$	—	$	29,327

December 31, 2018	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Market Value
Cash and cash equivalents	$	26,052	$	—	$	—	$	26,052

Marketable investments:
U.S. government notes		1,397		—		—		1,397
U.S. government agencies		2,677		—		—		2,677
Municipal securities		200		—		—		200
Commercial paper		2,433		—		—		2,433
Corporate debt securities		2,825		—		(9)		2,816
Total marketable investments		9,532		—		(9)		9,523

Total cash, cash equivalents and marketable investments	$	35,584	$	—	$	(9)	$	35,575

	Amount		Amount
Due in less than one year	$	30,410	$	6,448
Due in 1 to 3 years		5,282		—
Total marketable investments	$	35,692	$	6,448

				Options Outstanding
	Shares Available for Grant			Number of Stock Options Outstanding			Weighted- Average Exercise Price
Balance as of December 31, 2016		721,657			1,116,472		$	9.56
Additional shares reserved		1,600,000
Options granted		(154,000	)		154,000			21.82
Stock awards granted^{(1) (2)}		(558,694	)
Options exercised		—			(447,673	)		8.90
Options canceled		53,393			(53,393	)		16.58
Stock awards canceled⁽¹⁾		110,278
Balance as of September 30, 2017		1,772,634			769,406		$	11.91

Year Ending September 30,	Amount
2018	$	2,446
2019		2,677
2020		2,743
2021		2,593
2022		2,477
2023 and beyond		838
Total future minimum lease payments	$	13,774

Assets	Classification	September 30, 2019
Right-of-use assets	Operating lease assets	$	8,332
Finance lease	Property and equipment, net^*		1,152
Total leased assets		$	9,484

Liabilities	Classification	September 30, 2019
Operating lease liabilities
Operating lease liabilities, current	Operating lease liabilities	$	634
Operating lease liabilities , non-current	Operating lease liabilities, net of current portion		7,888
Total operating lease liabilities		$	8,522

Finance lease liabilities
Finance lease liabilities, current	Accrued liabilities	$	570
Finance lease liabilities, non-current	Other long-term liabilities		690
Total finance lease liabilities		$	1,260

Finance lease cost	Amortization expense	$	175
Finance lease cost	Interest for finance lease		25
Operating lease cost	Operating lease expense		727

Operating cash flow	Finance lease	$	25
Financing cash flow	Finance lease		175
Operating cash flow	Operating lease		708

	Operating leases
Remainder of 2019	$	722
2020		2,868
2021		2,613
2022		2,607
2023 and thereafter		351
Total lease payments		9,161
Less: imputed interest		639
Present value of lease liabilities	$	8,522

	Operating leases
2019	$	3,011
2020		2,939
2021		2,564
2022		2,495
2023 and thereafter		214
Future minimum rental payments	$	11,223

Lease Term and Discount Rate
Weighted-average remaining lease term (years)
Operating leases	3.3
Finance leases	2.8
Weighted-average discount rate
Operating leases	4.4	%
Finance leases	5.6	%

	Three Months Ended September 30,									Nine Months Ended September 30,
(Dollars in thousands)	2017			% Change			2016			2017			% Change			2016
Revenue mix by geography:
United States	$	23,275			52	%	$	15,356		$	64,058			52	%	$	42,216
Rest of World		14,898			—			14,925			39,803			5	%		37,965
Consolidated total revenue	$	38,173			26	%	$	30,281		$	103,861			30	%	$	80,181

United States as a percentage of total revenue		61	%					51	%		62	%					53	%
Rest of World as a percentage of total revenue		39	%					49	%		38	%					47	%

Revenue mix by product category:
Systems – North America	$	21,869			57	%	$	13,896		$	58,955			60	%	$	36,808
Systems – International		9,993			—			9,983			26,014			6	%		24,448
Total Systems		31,862			33	%		23,879			84,969			39	%		61,256
Service		4,687			(2	)%		4,788			14,173			(1	)%		14,278
Hand Piece Refills		595			(1	)%		602			1,743			(8	)%		1,886
Skincare		1,029			2	%		1,012			2,976			8	%		2,761
Consolidated total revenue	$	38,173			26	%	$	30,281		$	103,861			30	%	$	80,181

	Three Months Ended September 30,						Nine months Ended September 30,
(Dollars in thousands)	2019		% Change		2018		2019		% Change		2018
Revenue mix by product category:
Systems - North America	$	24,121		7%	$	22,628	$	68,192		1%	$	67,458
Systems - Rest of World		10,837		3%		10,569		31,514		11%		28,269
Total Systems		34,958		5%		33,197		99,706		4%		95,727
Consumables		2,510		138%		1,055		7,109		147%		2,881
Skincare		2,847		100%		1,423		6,230		56%		3,981
Total Products		40,315		13%		35,675		113,045		10%		102,589
Service		5,802		18%		4,898		16,872		15%		14,662
Total Net Revenue	$	46,117		14%	$	40,573	$	129,917		11%	$	117,251

(Dollars in thousands)	September 30, 2017		December 31, 2016		Change			September 30, 2019		December 31, 2018		Change
Cash and cash equivalents	$	14,784	$	13,775	$	1,009		$	22,879	$	26,052	$	(3,173)
Marketable investments		35,692		40,299		(4,607	)		6,448		9,523		(3,075)
Total	$	50,476	$	54,074	$	(3,598	)	$	29,327	$	35,575	$	(6,248)

Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Program
July 1-31, 2017		—		—		—		28,110
August 1-31, 2017		109		34.71		109		24,340
September 1-30, 2017		76		38.99		76		21,380
July 1, 2017 - September 30, 2017		185	$	36.47		185	$	21,380

Exhibit No.			Description
~~3.4~~	3.2 ⁽¹⁾	~~Bylaws of the Company.~~

~~3.5~~	⁽⁵⁾	~~Second~~ Amended and Restated Certificate of Incorporation of the ~~Company (as filed with the state of Delaware)~~Registrant (Delaware).

~~4.1~~	⁽²⁾	~~Specimen Common Stock certificate of the Company.~~

~~10.26~~	⁽³⁾	~~Lease termination agreement relating to 6530 Paseo Padre Parkway Fremont, California,~~ ~~dated July 6, 2017 by and between the Company and SI 28, LLC.~~

~~10.27~~	⁽⁴⁾	~~Second Amendment to Brisbane Technology Park Lease dated July 6, 2017 by and between the Company and BMR-BAYSHORE BOULEVARD LP.~~

~~10.28~~	⁽⁵⁾	~~Transition Agreement dated July 12, 2017 by and between the Company and Ronald J. Santilli.~~

~~10.29~~	⁽⁵⁾	~~Consulting Agreement dated July 12, 2017 by and between the Company and Sandra A. Gardiner~~

	3.4 ⁽¹⁾	Bylaws of the Registrant.

	4.1 ⁽²⁾	Specimen Common Stock certificate of the Registrant.

	~~31.1~~10.14 ⁽³⁾	Cutera, Inc. 2004 Amended and Restated Equity Incentive Plan.

	31.1	Certification of ~~the~~ Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.


31.2		Certification of ~~the~~ Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

~~32.1~~	32.1	Certification of ~~the~~ Chief Executive Officer and ~~the~~ Chief Financial Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.ins			~~XBRL~~ Instance Document

101.sch			XBRL Taxonomy Extension Schema Document

101.cal			XBRL Taxonomy Extension Calculation Linkbase Document

101.def			XBRL Taxonomy Extension Definition Linkbase Document

101.lab			XBRL Taxonomy Extension Label Linkbase Document

101.pre			XBRL Taxonomy Extension Presentation Linkbase Document

	(1)	Incorporatedbyreferencefrom ~~our Current Report~~ the Company’s RegistrationStatementonForm ~~8-K filed~~ S-1(RegistrationNo.333-111928)whichwasdeclaredeffectiveon ~~January 8, 2015.~~ March30,2004.

(2)	Incorporatedbyreferencefrom ~~our Annual Report on Form 10-K filed with~~ the Company’s AnnualReportonForm10-KfiledwiththeSEConMarch25,2005.

	CUTERA, INC.

	/S/ ~~SANDRA A. GARDINER~~ DAVID H MOWRY
	~~Sandra A. Gardiner~~David H. Mowry
	~~Consultant~~Chief Executive Officer and Interim Chief Financial Officer
	(Principal Financial and Accounting Officer)