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

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

For the quarterly period ended ~~June 30, 2018~~March 31, 2019

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

For the transition period from _____ to_____.

Commission ~~file number:~~File Number: 000-50644

Cutera,Inc.

(Exact name of registrant as specified in its charter)

Delaware

~~(State~~or~~other~~~~jurisdiction~~of~~incorporation~~or~~organization)~~

77-0492262

(State or other jurisdiction of incorporation or

organization)

(I.R.S.~~employer~~~~identification~~~~no.~~ Employer Identification No.)

3240BayshoreBlvd.,Brisbane,California94005

(Addressofprincipalexecutiveoffices)

(415)657-5500

(Registrant’stelephonenumber,includingareacode)

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

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)~~submit). Yes ☒No ☐

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

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 ~~Registrant had 13,836,800~~number of shares of Registrant’s common stock ~~$0.001 par value per share,~~issued and outstanding as of ~~July 31, 2018.~~April 30, 2019, was 14,036,972.

Table of Contents

CUTERA, INC.

FORM 10-Q

TABLEOFCONTENTS

~~Page~~

				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)~~Loss		5
		Condensed Consolidated Statements of ~~Cash Flows~~Changes in Equity		6
		Condensed Consolidated Statements of Cash Flows		7
		Notes to Condensed Consolidated Financial Statements	7	8
Item 2		Management’s Discussion and Analysis of Financial Condition and Results of Operations	21	23
Item 3		Quantitative and Qualitative Disclosures About Market Risk	29
~~Item 4~~	~~Controls and Procedures~~	30

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

~~Item 1~~	~~Legal Proceedings~~	31
~~Item 1A~~	~~Risk Factors~~	31
~~Item 2~~	~~Unregistered Sales of Equity Securities and Use of Proceeds~~	31
~~Item 3~~	~~Defaults Upon Senior Securities~~	31
Item 4		~~Mine Safety Disclosures~~Controls and Procedures	31
~~Item 5~~	~~Other Information~~	31
~~Item 6~~	~~Exhibits~~	32

PART II		~~Signature~~OTHER INFORMATION

Item 1		Legal Proceedings		32
Item 1A		Risk Factors		32
Item 2		Unregistered Sales of Equity Securities and Use of Proceeds		33
Item 3		Defaults Upon Senior Securities		33
Item 4		Mine Safety Disclosures		33
Item 5		Other Information		33
Item 6		Exhibits		33
		Signature		33

Table of Contents

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

This report may contain references to our proprietary intellectual property, including among others, trademarks for our systems and ancillary products, Accutip^®, Coolglide^®, Coolglide Excel^®, enlighten^®, Excel HR^®, Excel V^®, Excel V+^®,Limelight^®, MyQ®, Pearl^®, Pico Genesis™, ProWave^®, Solera^®, Titan^®, TruSculpt^®, Vantage^®, and Xeo^®.

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 we will not assert, to the fullest extent under applicable law, our rights to these trademarks and tradenames.

PART I. FINANCIAL INFORMATION

~~ITEM~~ITEM 1.~~FINANCIAL~~~~STATEMENTS~~

FINANCIAL STATEMENTS (UNAUDITED)

CUTERA,INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(inthousands,exceptshareandpersharedata)

(unaudited)

	June 30, 2018		December 31, 2017		March 31, 2019		December 31, 2018
Assets
Current assets:
Cash and cash equivalents	$	18,432	$	14,184	$	19,158	$	26,052
Marketable investments		10,573		21,728		7,939		9,523
Accounts receivable, net		22,122		20,777		19,136		19,637
Inventories		30,138		28,782		26,659		28,014
Other current assets and prepaid expenses		3,469		2,903		4,864		3,972
Total current assets		84,734		88,374		77,756		87,198

Property and equipment, net		2,632		2,096		2,407		2,672
Deferred tax asset		21,219		19,055		451		457
Operating lease-right-of-use assets						9,442		—
Goodwill		1,339		1,339		1,339		1,339
Other long-term assets		5,807		374		5,960		5,971
Total assets	$	115,731	$	111,238	$	97,355	$	97,637

Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	10,743	$	7,002	$	10,337	$	11,279
Accrued liabilities		22,756		26,848		21,788		23,300
Operating lease liabilities						1,840		—
Extended warranty liability						2,667		3,159
Deferred revenue		9,288		9,461		10,263		9,882
Total current liabilities		42,787		43,311		46,895		47,620

Deferred revenue, net of current portion		2,519		2,195		2,828		2,684
Income tax liability		386		379		399		394
Operating lease liabilities, net of current portion						7,759		—
Other long-term liabilities		665		460		354		553
Total liabilities		46,357		46,345		58,235		51,251

Commitments and Contingencies (Note 14)
Commitments and Contingencies (Notes 12 and 13)

Stockholders’ equity:
Common stock, $0.001 par value; authorized: 50,000,000 shares; issued and outstanding: 13,824,252 and 13,477,973 shares at June 30, 2018 and December 31, 2017, respectively		14		13
Common stock, $0.001 par value; authorized: 50,000,000 shares; issued and outstanding: 14,035,375 and 13,968,852 shares at March 31, 2019 and December 31, 2018, respectively						14		14
Additional paid-in capital		66,291		62,025		71,399		70,451
Accumulated deficit		3,156		2,947		(32,230)		(24,010	)
Accumulated other comprehensive loss		(87)		(92)		(63)		(69	)
Total stockholders’ equity		69,374		64,893		39,120		46,386

Total liabilities and stockholders’ equity	$	115,731	$	111,238	$	97,355	$	97,637

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

Table of Contents

CUTERA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

	Three Months Ended				Six Months Ended				Three Months Ended
	June 30,				June 30,				March 31,
	2018		2017		2018		2017		2019		2018
Net revenue:
Products	$	37,650	$	31,727	$	66,914	$	56,202	$	30,762	$	29,264
Service		4,903		4,662		9,764		9,486		5,264		4,861
Total net revenue		42,553		36,389		76,678		65,688		36,026		34,125
Cost of revenue:
Products		17,045		13,840		30,967		24,984		15,541		13,922
Service		3,131		1,503		6,000		4,137		3,176		2,869
Total cost of revenue		20,176		15,343		36,967		29,121		18,717		16,791
Gross profit		22,377		21,046		39,711		36,567		17,309		17,334

Operating expenses:
Sales and marketing		15,535		12,787		28,623		23,560		16,104		13,088
Research and development		4,095		2,981		7,651		5,926		3,706		3,556
General and administrative		4,902		3,548		10,341		6,764		5,525		5,439
Total operating expenses		24,532		19,316		46,615		36,250		25,335		22,083
Income (loss) from operations		(2,155)		1,730		(6,904)		317
Loss from operations										(8,026)		(4,749)
Interest and other income (expense), net		(129)		276		(31)		549		(79)		98
Income (loss) before income taxes		(2,284)		2,006		(6,935)		866
Provision (benefit) for income taxes		(712)		59		(3,331)		(59)
Net income (loss)	$	(1,572)	$	1,947	$	(3,604)	$	925
Loss before income taxes										(8,105)		(4,651)
Income tax expense (benefit)										115		(2,619)
Net loss									$	(8,220)	$	(2,032)

Net income (loss) per share:
Basic	$	(0.11)	$	0.14	$	(0.26)	$	0.07
Diluted	$	(0.11)	$	0.13	$	(0.26)	$	0.06
Net loss per share:
Basic and Diluted									$	(0.59)	$	(0.15)

Weighted-average number of shares used in per share calculations:
Basic		13,709		13,935		13,649		13,888
Diluted		13,709		14,629		13,649		14,633
Basic and Diluted										14,017		13,587

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

Table of Contents

CUTERA, INC.

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

(inthousands)

~~(unaudited)~~(Unaudited)

Three Months Ended

Six Months Ended

June 30,

June 30,

2018

2017

2018

2017

Net income (loss)
$ (1,572 ) $ 1,947 $ (3,604) $ 925
Other comprehensive income (loss):

Available-for-sale investments

Net change in unrealized gains (losses) on available-for-sale investments
18 5 (4) 8
Less: Reclassification adjustment for gains (losses) on investments recognized during the period
— — 9 (4)

Net change in unrealized gains and losses on available-for-sale investments
18 5 5 4
Tax provision
— — — —
Other comprehensive income (loss), net of tax
18 5 5 4
Comprehensive income (loss)
$ (1,554 ) $ 1,952 $ (3,599) $ 929

	Three Months Ended
	March 31,
	2019		2018
Net loss	$	(8,220)	$	(2,032)
Other comprehensive loss:
Available-for-sale investments
Net change in unrealized gain (loss) on available-for-sale investments		6		(21)
Less: Reclassification adjustment for losses on investments recognized during the period		—		9
Net change in unrealized gain (loss) on available-for-sale investments		6		(12)
Tax benefit		—		—
Other comprehensive gain (loss), net of tax		6		(12)
Comprehensive loss	$	(8,214)	$	(2,044)

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

Table of Contents

CUTERA, INC.

~~CONDENSED~~ CONSOLIDATED STATEMENTS OF ~~CASH FLOWS~~CHANGES IN STOCKHOLDERS’ EQUITY

(in thousands, except sh~~thousands)~~are amounts)

~~(unaudited)~~

Three Months and Year Ended March 31, 2019 and 2018

Six Months Ended June 30,

2018

2017

Cash flows from operating activities:

Net income (loss)
$ (3,604) $ 925
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

Stock-based compensation
3,893 2,626
Depreciation of tangible assets
544 492
Amortization of contract acquisition costs
822 —
Change in deferred tax assets
(3,324) —
Provision for doubtful accounts receivable 487 (3)
Other
(25) (42)
Changes in assets and liabilities:

Accounts receivable
(1,832) (1,641)

Inventories
(1,356) (1,936)

Other current assets and prepaid expenses
(569) (545)
Other long-term assets
(1,578) (1)
Accounts payable
3,741 1,695
Accrued liabilities
(4,325) 1,534
Other long-term liabilities
70 —
Deferred revenue
546 784
Income tax liability
7 2
Net cash provided by (used in) operating activities
(6,503) 3,890

Cash flows from investing activities:

Acquisition of property, equipment and software
(581)

(210)
Disposal of property and equipment
38 40
Proceeds from sales of marketable investments
13,044 6,754
Proceeds from maturities of marketable investments
2,500 24,812
Purchase of marketable investments
(4,390) (25,863)
Net cash provided by investing activities
10,611 5,533

Cash flows from financing activities:

Repurchase of common stock
— (7,041)

Proceeds from exercise of stock options and employee stock purchase plan
3,038 3,871
Taxes paid related to net share settlement of equity awards
(2,664) (1,167)

Payments on capital lease obligations
(234) (182)

Net cash provided by (used) in financing activities
140 (4,519)

Net increase in cash and cash equivalents
4,248 4,904
Cash and cash equivalents at beginning of period
14,184 13,775
Cash and cash equivalents at end of period
$ 18,432 $ 18,679

Supplemental disclosure of non-cash items:

Assets acquired under capital lease
$ 533 $ 257

	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
Exercise of stock options		15,032		—		131			—			—			131
Issuance of common stock in settlement of restricted and performance stock units, net of shares withheld for employee taxes, and stock awards		51,491		—		(490	)		—			—			(490	)
Stock-based compensation expense		—		—		1,307			—			—			1,307
Net loss		—		—		—			(8,220	)		—			(8,220	)
Net change in unrealized gain on available-for-sale investments		—		—		—			—			6			6
Balance at March 31, 2019		14,035,375	$	14	$	71,399		$	(32,230	)	$	(63	)	$	39,120

	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		—		—		—			4,973			—			4,973
Exercise of stock options		66,167		—		633			—			—			633
Issuance of common stock in settlement of restricted and performance stock units, net of shares withheld for employee taxes, and stock awards		90,014		1		(2,289	)		—			—			(2,288	)
Stock-based compensation expense		—		—		1,688			—			—			1,688
Net loss		—		—		—			(2,032	)		—			(2,032	)
Net change in unrealized loss on available-for-sale investments		—		—		—			—			(12	)		(12	)
Balance at March 31, 2018		13,634,154	$	14	$	62,057		$	5,888		$	(104	)	$	67,855

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

Table of Contents

CUTERA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Three Months Ended March 31,
	2019		2018
Cash flows from operating activities:
Net loss	$	(8,220)	$	(2,032)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation		1,307		1,688
Depreciation of tangible assets		411		254
Amortization of contract acquisition costs		690		373
Change in deferred tax asset		6		(2,737)
Provision for doubtful accounts receivable		98		187
Other		103		(162)
Changes in assets and liabilities:
Accounts receivable		403		915
Inventories		1,355		(2,197)
Other current assets and prepaid expenses		(916)		1,753
Other long-term assets		(679)		(2,150)
Accounts payable		(942)		1,204
Accrued liabilities		(1,467)		(6,727)
Extended warranty liabilities		(492)		—
Other long-term liabilities		(140)		35
Deferred revenue		525		(456)
Income tax liabilities		5		5
Net cash used in operating activities		(7,953)		(10,047)

Cash flows from investing activities:
Acquisition of property, equipment and software		(65)		(104	)
Proceeds from sales of marketable investments		—		13,044
Proceeds from maturities of marketable investments		3,200		—
Purchase of marketable investments		(1,586)		(4,390	)
Net cash provided by investing activities		1,549		8,550

Cash flows from financing activities:
Proceeds from exercise of stock options and employee stock purchase plan		131		633
Taxes paid related to net share settlement of equity awards		(490)		(2,288)
Payments on finance lease obligations		(131)		(122)
Net cash used in financing activities		(490)		(1,777)

Net decrease in cash and cash equivalents		(6,894)		(3,274)
Cash and cash equivalents at beginning of period		26,052		14,184
Cash and cash equivalents at end of period	$	19,158	$	10,910

Supplemental disclosure of non-cash items:
Assets acquired under capital lease	$	192	$	284

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

Table of Contents

CUTERA, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note1.SummaryofSignificantAccountingPolicies

Description of Operations and Principles of Consolidation

Cutera, Inc. (“Cutera” or the “Company”) is a global provider of laser and ~~other~~ energy-based aesthetic systems for practitioners worldwide. The Company designs, develops, manufactures, distributes and markets ~~laser~~light 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: excel, ~~V, excel HR,~~ enlighten, Juliet, Secret RF, truSculpt and xeo. The Company’s systems offer multiple hand pieces and applications, ~~which allow~~allowing customers to upgrade their systems. The sales of (i) systems, system upgrades and hand pieces (“Systems” revenue); (ii) hand piece refills applicable to Titan, truSculpt 3D and truSculpt iD, as well as single use disposable tips applicable to Juliet and Secret RF (“Consumables” revenue); and (iii) the distribution of third party manufactured skincare products ("(“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 3Dand truSculpt iD) and service labor for the repair and maintenance of products that are out of warranty, all of which isare classified as “Service” revenue.

Headquartered in Brisbane, California, the Company has 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’s products outside of the United States. The Condensed Consolidated Financial Statements include the accounts of the Company and its subsidiaries. All inter-company transactions and balances have been eliminated.

Unaudited Interim Financial Information

In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements included in this report reflect all adjustments (consisting of only normal recurring adjustments) necessary for a fair statement of its financial position as of ~~June 30,~~March 31, 2019 and 2018, its results of operations, ~~for the three and six months periods ended June 30, 2018, and 2017,~~ comprehensive ~~income (loss) for the three and six months periods ended June 30, 2018 and 2017,~~loss, consolidated statements of changes in equity, and cash flows for the ~~six~~three months ended ~~June 30, 2018,~~March 31, 2019, and ~~2017.~~2018. The December 31, ~~2017~~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’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, ~~2017~~2018 filed with the Securities and Exchange Commission (the “SEC”) on March ~~26, 2018.~~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 U.S. 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. Notes 2 and 13 provide information about the Company’s adoption of new accounting standards for leases. Unless otherwise noted, amounts presented within the Notes to Condensed Consolidated Financial Statements refer to the Company’s continuing operations.

Use of Estimates

The preparation of ~~interim~~ Condensed Consolidated Financial Statements in conformity with GAAP requires the Company’s management to make estimates and assumptions that affect the amounts reported of assets and liabilities and disclosure of contingent assets and liabilities at the date of the ~~condensed consolidated financial~~Condensed Consolidated Financial Statements and the accompanying notes, and the reported amounts of revenue and expenses during the reported periods. Actual results could differ materially from those estimates.

Table of Contents

On an ongoing basis, ~~the Company~~management evaluates ~~their~~its estimates, including those related to warranty ~~obligation,~~obligations, sales commission, accounts receivable and sales allowances, valuation of inventories, fair ~~values~~value of goodwill, useful lives of property and equipment, incremental borrowing rates related to the Company’s leases, assumptions regarding variables used in calculating the fair value of the Company's equity awards, expected achievement of performance based vesting criteria, management performance bonuses, fair value of investments, the standalone selling price of the Company's products and services, the customer life and period of benefit used to capitalize and amortize contracts acquisition costs, variable consideration, contingent liabilities, recoverability of deferred tax assets, and effective income tax ~~rates, among others.~~rates. Management bases ~~their~~ 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.

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 world 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 ~~approval,~~approvals, government regulations and oversight, patent and other ~~litigations,~~types of litigation, ability to protect proprietary technology from counterfeit versions of the Company's products, strategic relationships and dependence on key individuals. If the Company fails to adhere to ongoing Food and Drug Administration (the "FDA") Quality System Regulation, the FDA may withdraw its market clearance or take other action. The Company's manufacturers and suppliers may encounter supply interruptions or problems during manufacturing due to a variety of reasons, including failure to comply with applicable regulations, including the FDA's Quality System Regulation, equipment malfunction and environmental factors, any of which could delay or impede the Company's ability to meet demand.

~~Comparability~~Recently Adopted Accounting Pronouncements

The Company adopted the new revenue standard effective January 1, 2018, using the modified retrospective method. Prior period financial statements were not retrospectively restated. The consolidated balance sheet as of December 31, 2017 and results of operations for the three and six months ended June 30, 2017 were prepared using an accounting standard that was different than that in effect for the three and six months ended June 30, 2018. As a result the consolidated balance sheets as of June 30, 2018 and December 31, 2017 are not directly comparable, nor are the condensed consolidated statement of operations for the three and six months ended June 30, 2018 and June 30, 2017.

~~Table of Contents~~

~~Adopted Accounting Pronouncements~~

In ~~May 2014,~~February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) ~~2014-09, “Revenue from Contracts with Customers,” amending revenue recognition guidance~~2016-02, "Leases," (also known as ASC Topic 842) which requires, among other items, a lessee to recognize most leases as assets and ~~requiring more detailed~~liabilities on the balance sheet. Qualitative and quantitative disclosures were enhanced to ~~enable users of financial statements to~~better understand the ~~nature,~~ amount, timing and uncertainty of ~~revenue and~~ cash flows arising from ~~contracts with customers. The amended guidance, herein referred~~leases. In July 2018, the FASB issued ASU 2018-11, "Targeted Improvements," which gives the option to asapply 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 606, is effective for annual and interim reporting periods beginning after December 15, 2017, with early adoption permitted for public companies effective for annual and interim reporting periods beginning after December 15, 2016. 842, Leases," which clarifies certain aspects of ASU 2016-02.

The Company adopted ~~the new revenue standard in the first quarter~~ASU 2016-02, as of ~~fiscal year 2018~~January 1, 2019, using the modified retrospective ~~method.~~method, to all leases existing at the date of initial application. The ~~Company recognized the cumulative effect of applying the new revenue standard as an adjustment to retained earnings. The~~ comparative period information has not been restated and continues to be reported under the accounting standards in effect for the period presented. The new standard provides a number of optional practical expedients in transition. The Company elected the package of practical expedients permitted under the transition guidance within the new standard, which allowed the Company to carry forward the Company’s historical conclusions about lease identification, lease classification and initial direct costs. The Company also elected the practical expedient related to land easements, allowing the Company to carry forward the Company’s accounting treatment for land easements on existing agreements. The Company did not elect the practical expedient to use hindsight in determining the lease term.

The adoption of the new standard resulted in the recording of additional lease assets and lease liabilities of $10.3 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 accounting for finance leases remained substantially unchanged. The standard had no material impact on the Company’s condensed consolidated net earnings, results of operations, comprehensive loss, statements of changes in equity, and cash flows.

See ~~Note~~Notes 2 ~~– Revenue Recognition,~~and 12 Leases for additional accounting policy and transition ~~disclosures.~~disclosures regarding ASC Topic 842.

~~Other Accounting Pronouncements Not Yet Adopted~~

In June 2018, the FASB issued ASU No. 2018-07, ~~"Compensation –Stock~~"Compensation-Stock Compensation (Topic 718): Improvement to Nonemployee Share-Based Payment Accounting". The new guidance changes the accounting for nonemployee awards including: (1) ~~Equity-classified~~equity-classified share-based payment awards issued to nonemployees will be measured on the grant date, instead of the previous requirement to remeasure the awards through the performance completion date, (2) ~~For~~for performance conditions, compensation cost associated with the award will be recognized when the achievement of the performance condition is probable, rather than upon achievement of the performance condition, and (3) ~~The~~the current requirement to reassess the classification (equity or liability) for nonemployee awards upon vesting will be eliminated, except for awards in the form of convertible instruments. The new guidance also clarifies that any share-based payment awards issued to customers should be evaluated under ASC Topic 606. The amendments in the new guidance are effective for annual and interim reporting periods beginning after December 15, 2018, with early adoption permitted for public companies, but no earlier than an entity’s adoption date of ASC Topic 606. The Company ~~will adopt~~adopted the new standard effective January 1, 2019. ~~The Company is still currently evaluating the~~There was no material impact upon adoption of ~~adopting~~ the new ~~standard.~~standard to the financial statements.

Table of Contents

Other Accounting Pronouncements

Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract

In ~~February 2016,~~August 2018, the FASB issued ASU No. ~~2016-02, "Leases"~~2018-15, Intangibles (Topic ~~842),~~350): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which ~~amends~~aligns the ~~existing accounting standards~~requirements for ~~leases. The new standard requires lessees~~capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred 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~~develop or obtain internal-use software. This standard also requires ~~expanded disclosures regarding leasing arrangements.~~customers to amortize the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement. The new standard becomes effective for the Company ~~in the first quarter of fiscal year~~after December 15, 2019 and early adoption is permitted. The ~~new~~Company is planning to early adopt this standard on a prospective basis for applicable implementation costs, and is ~~required~~currently assessing the impact of the adoption of this guidance to ~~be adopted using the modified retrospective approach and requires application~~its financial statements.

Note 2. Effect of Adoption of the new lease standard at the beginning of the earliest comparative period presented. The Company finances its fleet of vehicles used by its field sales and service employees and has facility leases. 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. The Company will adopt the new standard effective January 1, 2019. The 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.

~~Note 2. Revenue recognition~~(ASC Topic 842) on Condensed consolidated financial statements

The Company adopted ASC Topic ~~606, "Revenue from Contracts with Customers,"~~842, Lease, on January 1, ~~2018,~~2019, applying the modified retrospective method to all ~~contract agreements that were~~leases existing at the date of initial application. The comparative information has not ~~completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not~~been adjusted and ~~continue~~continues to be reported under the accounting standards in effect for the prior period. ~~A cumulative catch up adjustment was recorded to beginning retained earnings to reflect the impact of all existing arrangements under Topic 606.~~

Upon adoption of the Topic 606, the Company recorded an increase to retained earnings, net of deferred tax liability of $3.8 million (Note 12) for contracts still in force as of January 1, 2018 for the following items in the first and second quarters of 2018:

●	$237,000 reduction in deferred revenue balances for the differences in the amount of revenue recognition for the Company’s revenue streams as a result of allocation of revenue based on standalone selling prices to the Company’s various performance obligations.

●

$151,000 increase in deferred revenue balances, related to the accretion of financing costs for multi-year post-warranty service contracts for customers who pay more than one year in advance of receiving the service. The Company estimated interest expense for such advance payments under the new revenue standard.

●	~~$210,000 for variable consideration on sale transactions.~~

●	$4.7 million for the capitalization of the incremental contract acquisition costs, such as sales commissions paid in connection with system sales. These contract acquisition costs were capitalized and will be amortized over the period of anticipated support renewals. The Company expensed such costs when incurred under the prior guidance.
●	~~$1.2 million deferred tax liability related to the direct tax effect of the ASC 606 adoption.~~

The Company’s revenue consists of product and service revenue resulting from the sale of systems, training on the systems, extended service contracts, consumables and other accessories. The Company accounts for a contract with a customer when there is a legally enforceable contract between the Company and the customer, the rights of the parties are identified, the contract has commercial substance, and collectability of the contract consideration is probable. Revenues are recognized when control of the promised goods or services are transferred to the Company’s customers, in an amount that reflects the consideration that the Company expects to receive in exchange for those goods or services.

The Company's system sale arrangements generally contain multiple products and services. For these bundled sale arrangements, the Company accounts for individual products and services as separate performance obligations if they are distinct, which is if a product or service is separately identifiable from other items in the bundled package, and if a customer can benefit from it on its own or with other resources that are readily available to the customer. The Company’s system sale arrangements include a combination of the following performance obligations: The System and software license (considered as one performance obligation), system accessories (hand pieces), training, other accessories, extended service contracts and marketing services. For the Company’s system sale arrangements that include an extended service contract, the period of service commences at the expiration of the Company’s standard warranty offered at the time of the system sale. The Company considers the extended service contracts terms in the arrangements that are legally enforceable to be performance obligations. Other than extended service contracts and marketing services (which are satisfied over time), the Company generally satisfies all of the performance obligations at a point in time. Systems, system accessories (hand pieces), training, and time and material services are also sold on a stand-alone basis.

~~Table of Contents~~

The following table summarizes the effects of adopting Topic ~~606~~842 on the Company’s condensed consolidated balance ~~sheet~~sheets as of ~~June 30, 2018:~~January 1, 2019 (in thousands):

As reported under
Topic 606

Adjustments

Balances under
Prior GAAP

(In thousands)

Other long-term assets
$ 5,807 $ 5,325 $ 482
Deferred tax asset 21,219 (1,160) 22,379
Accrued liabilities
22,756 (111) 22,867
Deferred revenue
11,807 (255) 11,552
Retained earnings (deficit)
3,156 4,530 (1,374)

	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)		—

~~The following table summarizes the effects of adopting Topic 606 on the Company’s condensed consolidated income statement for the three months ended June 30, 2018:~~

*Deferred rent included in other long-term liabilities

As reported under
Topic 606
Adjustments
Balances under
Prior GAAP

(In thousands)
Products revenue
$ 37,650 $ 55 $ 37,595
Service revenue
4,903 69 4,834
Sales and marketing
15,535 (463) 15,998
Interest and other income, net*
(129) (64) (65)

~~The following table summarizes the effects~~

Table of ~~adopting Topic 606 on Company’s condensed consolidated income statement for the six months ended June 30, 2018:~~

As reported under
Topic 606
Adjustments Balances under Prior GAAP

(In thousands)
Products revenue
$ 66,914 $ 65 $ 66,849
Service revenue
9,764 133 9,631
Sales and marketing
28,623 (648 ) 29,271
Interest and other income, net*
(31 ) (129 ) 98
Contents

* ~~Included in interest and other income, net, is the estimated interest expense for advance payment related to service contracts under the new revenue standard.~~

~~Adoption of the standard had no impact on total net cash from or used in operating, investing, or financing activities within the condensed consolidated statements of cash flows.~~

As part of the Company's adoption of ASC 606, the Company elected to use the following practical expedients: (i) not to adjust the promised amount of consideration for the effects of a significant financing component when the Company expects, at contract inception, that the period between the Company's transfer of a promised product or service to a customer and when the customer pays for that product or service will be one year or less; (ii) to expense costs as incurred for costs to obtain a contract when the amortization period would have been one year or less; (iii) not to recast revenue for contracts that begin and end in the same fiscal year; and (iv) not to assess whether promised goods or services are performance obligations if they are immaterial in the context of the contract with the customer.

N~~ote 3~~. Note 3. Cash, Cash ~~Equivalent~~Equivalents and Marketable Investments

The Company invests its cash primarily in money market funds and in highly liquid debt instruments of U.S. federal and municipal governments and their agencies, commercial paper and corporate debt 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 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 ~~its~~the Company's foreign subsidiaries maintain a limited amount of cash in their local banks to cover their 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 have been classified and accounted for as available-for-sale securities. Investments with remaining maturities of more than one year are viewed by the Company as available to support current operations and are classified as current assets under the caption marketable investments in the accompanying 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. Any realized gains or losses on the sale of marketable securities are determined on a specific identification method, and such gains and losses are reflected as a component of interest and other income, net.

~~Table of Contents~~

The following tables summarize the components, and the unrealized gains and losses position, related to the Company’s cash, cash equivalents and marketable investments (in thousands) ~~as of June 30, 2018 and December 31, 2017:~~:

June 30, 2018

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair Market
Value

Cash and cash equivalents:

Cash
$ 15,545 $ — $ — $ 15,545
Money market funds
2,887 — — 2,887
Total cash and cash equivalents
18,432 — — 18,432

Marketable investments:

U.S. government notes
6,012 — (8
)
6,004
Municipal securities
200 — (1
)
199
Corporate debt securities
4,388 — (18
)
4,370
Total marketable investments
10,600 — (27
)
10,573

Total cash, cash equivalents and marketable investments
$ 29,032 $ — $ (27
)
$ 29,005

December 31, 2017	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Market Value
Cash and cash equivalents:
Cash	$	14,058	$	—	$	—		$	14,058
Money market funds		126		—		—			126
Total cash and cash equivalents		14,184		—		—			14,184
March 31, 2019										Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Market Value
Cash and cash equivalents										$	19,158	$	—	$	—		$	19,158

Marketable investments:
U.S. government notes		11,885		—		(15	)		11,870		1,405		—		—			1,405
U.S. government agencies											2,694		—		—			2,694
Municipal securities		201		— —		(1	)		200		202		—		—			202
Commercial paper		1,836		—		(3	)		1,833		2,437		—		—			2,437
Corporate debt securities		7,838		2		(15	)		7,825		1,204		—		(3	)		1,201
Total marketable investments		21,760		2		(34	)		21,728		7,942		—		(3	)		7,939

Total cash, cash equivalents and marketable investments	$	35,944	$	2	$	(34	)	$	35,912	$	27,100	$	—	$	(3	)	$	27,097

1011

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 ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, the net unrealized losses were ~~$27,000~~$3,000 and ~~$34,000,~~$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 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’s available-for-sale securities, classified as marketable investments as of ~~June 30, 2018~~March 31, 2019 (in thousands):

	Amount		Amount
Due in less than one year	$	9,573	$	7,939
Due in 1 to 3 years		1,000		—
Total marketable investments	$	10,573	$	7,939

Note 4. Fair Value of Financial Instruments

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. 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. ~~Carrying amounts of the~~The Company’s financial instruments ~~including~~include cash equivalents, marketable investments, accounts receivable, accounts payable and accrued ~~liabilities,~~liabilities. Carrying amounts of the Company's financial instruments approximate their fair values as of the balance sheet dates ~~because of~~given their generally short maturities. 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 three levels of the fair value hierarchy are described below in accordance towith ASC 820:

● Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities.

● Level 2: Directly or indirectly observable inputs as of the reporting date through correlation with market data, including quoted prices for similar assets and liabilities in active markets and quoted prices in markets that are not active. Level 2 also includes assets and liabilities that are valued using models 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 corroborated by readily observable data from actively quoted markets for substantially the full term of the financial instrument.

● Level 3: Unobservable inputs that are supported by little or no market activity and reflect the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions.

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.

Table of Contents

As of ~~June 30, 2018,~~March 31, 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):

June 30, 2018	Level 1		Level 2		Level 3		Total
March 31, 2019									Level 1		Level 2		Level 3		Total
Cash equivalents:
Money market funds	$	2,887	$	—	$	—	$	2,887	$	3,061	$	—	$	—	$	3,061
Commercial paper										—		2,693		—		2,693
Marketable investments:
Available-for-sale securities		—		10,573		—		10,573		—		7,939		—		7,939
Total assets at fair value	$	2,887	$	10,573	$	—	$	13,460	$	3,061	$	10,632	$	—	$	13,693

As of December 31, ~~2017,~~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 ~~were~~was as follows (in thousands):

December 31, 2017

Level 1

Level 2

Level 3

Total

Cash equivalents:

Money market funds
$ 126 $ — $ — $ 126
Marketable investments:

Available-for-sale securities
— 21,728 — 21,728
Total assets at fair value
$ 126 $ 21,728 $ — $ 21,854

~~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

The Company’s Level 1 financial assets are money market funds with fair values that are based on quoted market prices. The Company’s Level 2 investments include U.S. government-backed securities and corporate securities that are valued based upon observable inputs that may include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data including market research publications. The average remaining maturity of the Company’s Level 2 investments as of ~~June 30, 2018~~March 31, 2019 is less than 7 months and all of these investments are rated by S&P and Moody’s at 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 ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, respectively.

Note5. BalanceSheetDetails

Inventories

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

	June 30, 2018		December 31, 2017		March 31, 2019		December 31, 2018
Raw materials	$	17,875	$	19,160	$	16,864	$	16,991
Work in progress		2,846		2,744
Work in process						1,325		2,306
Finished goods		9,417		6,878		8,470		8,717
Total	$	30,138	$	28,782	$	26,659	$	28,014

Accrued Liabilities

~~Liabilities~~

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

	June 30, 2018		December 31, 2017		March 31, 2019		December 31, 2018
Accrued payroll and related expenses	$	10,712	$	12,567	$	8,892	$	9,377
Sales and marketing accruals		2,283		3,710		2,089		2,379
Warranty liability		3,561		3,508		4,064		4,666
Sales tax		2,388		2,920		2,970		2,935
Other		3,812		4,143		3,773		3,943
Total	$	22,756	$	26,848	$	21,788	$	23,300

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 was related to a voluntary action initiated by the Company to replace a component in one of the Company’s legacy products. The remediation plan consists primarily of replacement of a component in the system. The accrued liability consisted of cost of materials and labor to replace the component in all units that are under the Company's standard warranty or are covered under the existing extended warranty contracts. The Company recorded approximately $5.0 million related to this remediation, of which $1.1 million was utilized in the fourth quarter of 2018. Approximately $0.7 million of the remaining unutilized balance was related to product warranty and included in accrued liabilities and $3.2 million was separately recorded as Extended warranty liability.

In the three months ended March 31, 2019, the Company utilized $0.1 million related to product warranty and $0.5 million related to extended warranty liability. As of March 31, 2019, product warranty and extended warranty liability were $0.6 million and $2.7 million, respectively.

Table of Contents

Note 6. Warranty and Extended Service ~~Contracts~~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, as well as through third-party service providers in ~~Spain and~~ the United Kingdom. In several other countries, where the Company does not have a direct presence, the Company provides service through a network of distributors and third-party service providers.

After the original warranty period, maintenance and support are offered on 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 six~~ months ended ~~June 30,~~March 31, 2019 and 2018 ~~and 2017~~ (in thousands):

	Three Months Ended				Six Months Ended				Three Months Ended
	June 30,				June 30,				March 31,
	2018		2017		2018		2017		2019		2018
Beginning Balance	$	3,373	$	2,735	$	3,508	$	2,461	$	4,668	$	3,508
Add: Accruals for warranties issued during the period		2,311		1,944		4,575		4,079		1,444		2,264
Less: Settlements made during the period		(2,123)		(1,802)		(4,522)		(3,663)		(2,048)		(2,399)
Ending Balance	$	3,561	$	2,877	$	3,561	$	2,877	$	4,064	$	3,373

The $2.0 million settlements as of March 31, 2019 exclude cost related to extended service contract cost of $0.5 million to replace a component in one of the Company's legacy products (See Note 5).

Note 7. Deferred Revenue

The Company records deferred revenue when revenue is to be recognized subsequent to invoicing. For extended service contracts, the Company generally invoices customers at the beginning of the extended service contract term. The Company’s extended service contracts typically have one, two or three year terms. Deferred revenue also includes payments for installation, training and extended marketing support service. Approximately 78% of the Company’s deferred revenue balance of $13.1 million as of March 31, 2019 will be recognized over the next 12 months.

The following table provides changes in the deferred service contract revenue balance for the three months ended March 31, 2019 and 2018 (in thousands):

	Three Months Ended
	March 31,
	2019		2018
Beginning Balance	$	11,855	$	10,719
Add: Payments received		4,142		2,995
Less: Revenue recognized		(3,522)		(3,347)
Ending Balance	$	12,475	$	10,367

~~Table of Contents~~

Costs for extended service contracts were $2.0 million and $1.9 million, for the three months ended March 31, 2019 and 2018, respectively.

Note 7.8. 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 9%15% and 14% of the Company’s total revenue for the ~~six~~three months ended ~~June 30, 2018.~~March 31, 2019 and 2018, respectively.

Table of Contents

The ~~Company's~~Company has certain system sale arrangements ~~generally~~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 ~~which is if a product or service is separately identifiable from other items in the bundled package, and~~ if a customer can benefit from itthe product or service on its own or with other resources that are readily available to the ~~customer.~~customer, and if the Company’s promise to transfer the products or service to the customer is separately identifiable from other promises in the contract. The Company’s system sale arrangements include a combination of the following performance obligations: the system and software license (considered as one performance obligation), system accessories (hand pieces), training, other accessories, extended service contracts and marketing services.

For the Company’s system sale arrangements that include an extended service contract, the period of service commences at the expiration of the Company’s standard warranty offered at the time of the system sale. The Company considers the extended service contracts terms in the arrangements that are legally enforceable to be performance obligations. Other than extended service contracts and marketing services, ~~(which~~which are satisfied over ~~time),~~time, the Company generally satisfies all ~~of the~~ performance obligations at a point in time. ~~System,~~Systems, system accessories (hand pieces), training, time and ~~material~~materials services are also sold on a stand-alone basis, and related performance obligations are satisfied at a point in time. For contracts with multiple performance obligations, the Company allocates the transaction price of the contract to each performance obligation on a relative ~~basis using its~~ standalone selling ~~price. The stated contract value is the transaction~~ price ~~to be allocated to the separate performance obligations.~~basis.

Nature of Products and Services

Systems

System revenue represents the sale of a system or an upgrade of an existing system. A system consists of a console that incorporates a universal graphic user interface, a laser ~~and~~ or other energy based module, control system software and high voltage electronics, as well as one or more hand pieces. However, depending on the application, the laser or other energy based module is sometimes contained in the hand piece such as with the Company’s Pearl and Pearl 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 usthe Company with a source of additional Systems revenue.

The Company ~~has concluded~~concludes that 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 ~~considers set-up or~~does not identify calibration and installation anservices for systems other than enlighten as performance obligations because such services are immaterial ~~promise as set-up or~~in the context of the contract. The related costs to complete calibration and installation for systems other than enlightenare immaterial. Calibration and installation services for enlighten systems ~~takes only a short time. The related costs to complete set-up or installation~~ are ~~immaterial to the Company. The~~ ~~enlighten~~ ~~system is one performance obligation and the calibration or installation service is a~~identified as separate performance ~~obligation.~~obligations.

For systems sold directly to end-customers that are credit approved, revenue is recognized when the Company transfers control to the end-customer, which occurs when the product is shipped to the customer or when the customer receives the product, depending on the nature of the arrangement. The Company recognizes revenue on cash basis for system sales to international direct ~~end-customer sales~~end-customers that have not been credit approved, ~~after satisfying all remaining~~when the performance obligations ofin the ~~agreement.~~contract are satisfied. For systems sold through credit approved distributors, revenue is recognized at the time of shipment. The Company’s system arrangements generally do not provide a right of return. The Company provides a standard one-year warranty coverage for all systems sold to end-customers to cover parts and service, and extended service plans that vary by the type of product and the level of service desired.

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

Skincare products

The Company sells third-party manufactured skincare products in Japan. The ~~Company purchases and inventories these~~ third-party skincare products are purchased from the third-party manufacturers and ~~sells them~~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. Skincare products are typically sold in contracts in which the skincare products represent the sole performance obligations. The Company recognizes revenue for skincare products at a point in time, ~~generally~~ upon shipment.

~~Table of Contents~~

Consumables (Other accessories)

The Company treats its customers' ~~purchase~~purchases of replacement Titan, truSculpt 3D and truSculpt iD hand pieces as Consumable revenue, which provides the Company with a source of recurring revenue from existing customers. The ~~Company’s recently launched~~ Julietand Secret RFproducts have single use disposable tips which ~~need to~~must be replaced after every treatment. ~~Sale~~Sales of these consumable tips further enhance the Company’s recurring ~~revenue stream.~~revenue. Hand piece refills of the Company’s legacy truSculptproduct are accounted for in accordance with the Company’s standard warranty and service contract policies.

Extended contract services

The Company offers post-warranty services to its customers through extended service contracts that cover ~~preventive maintenance and or replacement~~ parts and labor for a term of one, two, or three ~~years, or by direct billing~~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, parts and labor. 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. Service revenue is recognized over time as the customers benefit from the service throughout the service period. Revenue related to services performed on a time-and-materials basis is recognized when performed. For the Company's performance obligations recognized over time, revenue is generally recognized using a time-based measure

Table of ~~progress reflecting generally consistent efforts to satisfy those performance obligations throughout the arrangement term.~~

Contents

Training

Sales of ~~system~~systems to customers include training on the use of the system to be provided within 90180 days of purchase. The Company considers training as a separate performance obligation as customers can immediately benefit from the training ~~due to~~together with the ~~fact that the customer already has 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.

Customer Marketing Support

In North America, the Company offers marketing and consulting phone support to its customers ~~who purchase its~~ ~~truSculpt 3D~~ ~~and~~ ~~truSculpt iD~~ ~~systems.~~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 ~~allocates and~~ recognizes revenue over the six-month term of ~~support. The Company determines~~ the ~~standalone selling price based on cost plus a margin.~~contracts.

Significant Judgments

More judgments and estimates are required under Topic 606 than were required under the previous revenue recognition guidance, Topic 605. Revenue recognition under Topic 606 for the Company’s arrangements may be dependent on contract-specific terms.

~~The~~ ~~enlighten~~ system includes the related software license as one performance obligation and the calibration/installation services are accounted for as separate performance obligations. The calibration/installation is a separate performance obligation for the ~~enlighten~~ ~~system because a knowledgeable third-party could perform this service.~~

The Company ~~has however concluded that set-up or installation for all other systems (excluding the~~ ~~enlighten~~ ~~system) is perfunctory as the set-up or installation for systems other than~~ ~~enlighten~~ ~~take only a short time and the related costs to complete set-up or installation are immaterial.~~

~~Table of Contents~~

~~Judgment is required to determine the standalone selling price ("SSP") for each distinct performance obligation. The Company estimates SSPs for each performance obligation as follows:~~

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

~~Training: SSP is based on observable price when sold on a standalone basis.~~

~~Extended warranty: SSP is based on observable price when sold on a standalone basis (by customer type).~~

~~Marketing program: SSP is estimated based on cost plus margin.~~

~~The Company will combine~~combines two or more contracts entered into at or near the same time with the same customer ~~(or related parties of the customer)~~ and ~~account~~accounts for the contracts as a single contract. IfThe contracts are negotiated as a ~~group of agreements are so closely related that they are, in effect, part of~~package with a single ~~arrangement, such agreements are deemed to be one arrangement for revenue recognition purposes.~~commercial objective. The Company exercises significant judgment to ~~evaluate~~determine whether each separate contract in the relevant facts and circumstances in determining whether the separate agreements should be accounted for separately or as, in substance, a single arrangement. The Company’s judgments about whether a group ofcombined contracts ~~comprise a single arrangement can affect the allocation of consideration to the~~contains distinct performance obligations, which could have an effect on results of operations for the periods involved.

The Company is required to estimate the total consideration expected to be received from contracts with customers. In limited circumstances, the consideration expected to be received is variable based on the specific terms of the ~~contract or based on the Company’s expectations of the term of the~~ contract. ~~Generally, the~~The Company has not experienced significant returns or refunds to customers. ~~These estimates require~~Estimating consideration expected to be received from contracts with customers requires significant judgment and the change in these estimates could have an effect on its results of operations during the periods involved.

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: Set-up or installation for all other systems, excluding the enlighten system, 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.

Loyalty Program

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 programs, 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 has to be in good standing in order to receive the benefits of the rewards program. Rewards are given on a quarterly basis and must be used in the following quarter. Customers receive a notification regarding their rewards tier by the fifth (5th) day of the following quarter. All unused rewards are forfeited. The fair value of the reward earned by loyalty program members is included in accrued liabilities and recorded as a reduction of net revenue at the time the reward is earned.

Table of Contents

Deferred Sales Commissions

Incremental costs of obtaining a contract, including sales commissions, are capitalized and amortized on a straight-line basis over the expected customer relationship ~~period if the Company expects to recover those costs.~~period. The Company uses the portfolio method to recognize the amortization expense related to these capitalized costs related to initial contracts and such expense is recognized over a period associated with the revenue of the related portfolio, which is generally two to three ~~years for the Company’s product and service arrangements.~~years.

Total net capitalized costs as of ~~June 30, 2018~~March 31, 2019 were ~~$5.3~~$5.1 million and are included in other ~~long-term~~ assets in the Company’s condensed consolidated balance sheet. Amortization of ~~this asset~~these assets was ~~$0.4~~$0.7 million ~~and $0.8 million, respectively,~~ during the three ~~and six~~ months ended ~~June 30, 2018~~March 31, 2019 and is included in sales and marketing expense in the Company’s condensed consolidated ~~statements~~statement of operations.

~~Table of Contents~~

Note ~~8. Contract balance~~

The Company’s service contracts include an upfront payment for the one, two or three-year contract terms. The timing of receipt of payment and timing of performance of the services create timing differences that result in deferred revenue on the Company’s condensed consolidated balance sheet. The advance payments under these contracts are recorded in deferred revenue, and the Company recognizes the revenue when earned. Contracted but unsatisfied performance obligations were approximately $11.8 million as of June 30, 2018, of which the Company expects to recognize approximately 78% of the revenue over the next 12 months and the remainder thereafter.

The Company's deferred contract revenue consists of service revenue, training and product revenue. Deferred contract revenue balance is comprised mainly of Service revenue. The Company generates Service revenue from the sale of extended service contracts and from time and material services provided to customers who are not under a warranty or extended service contract. Service contract revenue is 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.

~~The following table provides changes in the deferred contract revenue balance for the three and six months ended June 30, 2018 and 2017 (in thousands):~~

Three Months Ended

Six Months Ended

June 30,

June 30,

2018

2017

2018

2017

Beginning Balance
$ 11,015 $ 9,555 $ 11,656 $ 9,431
Add: Payments received
4,739 3,721 8,416 7,112
Less: Revenue recognized
(3,947) (3,263)

(8,265) (6,530)

Ending Balance
$ 11,807 $ 10,013 $ 11,807 $ 10,013

~~Costs for extended service contracts for the three and six months ended June 30, 2018, were $2.0 million and 3.9 million, respectively.~~

~~Note~~ 9. Stockholders’ ~~Equit~~yEquity and Stock-based Compensation Expense

As of March 31, 2019, the Company had the following stock-based employee compensation plans:

2004 Equity Incentive Plan and 1998 Stock Plan

In 1998, the Company adopted the 1998 Stock Plan, or 1998 Plan, under which 4,650,000 shares of the Company’s common stock were reserved for issuance to employees, directors and consultants. On January 12, 2004, the Board of Directors adopted the 2004 Equity Incentive Plan, or 2004 Plan. A total of 1,750,000 shares of common stock were originally reserved for issuance pursuant to the 2004 ~~Equity Incentive~~ Plan. In addition, the shares reserved for issuance under the 2004 ~~Equity Incentive~~ Plan included shares reserved but un-issued under the 1998 Plan and shares returned to the 1998 Plan as the result of termination of options or the repurchase of shares. In 2012, the stockholders approved a “fungible share” provision whereby each full-value award issued under the 2004 ~~Equity Incentive~~ Plan results in a requirement to subtract 2.12 shares from the shares reserved under the 2004 Plan.

~~Activity~~Options granted under the ~~Company’s Amended~~1998 Plan and ~~Restated~~ 2004 ~~Equity~~Plan may be incentive stock options or non-statutory stock options. Stock purchase rights may also be granted under the 2004 Plan. Incentive stock options may only be granted to employees. The Board of Directors determines the period over which options become exercisable. Options granted under the 2004 Plan ~~as amended, is summarized as follows:~~to employees generally vest over a four-year term from the vesting commencement date and become exercisable 25% on the first anniversary of the vesting commencement date and an additional 1/48th monthly anniversary date until all of the shares have become exercisable.

Options Outstanding

Shares
Available
for Grant

Number of
Stock Options
Outstanding

Weighted-
Average Exercise
Price

Balance, December 31, 2017
1,494,865 839,919 $ 16.46
Options granted
(21,010) 21,010 50.65
Stock awards granted⁽¹⁾
(395,511) — —
Options exercised
— (188,859) 9.98
Options canceled
43,833 (43,833) 20.33
Stock awards canceled⁽¹⁾
93,390 — —
Balance, June 30, 2018
1,215,567 628,237 $ 19.28

The Company issued 19,892 Restricted Stock Units (“RSUs”) to its non-employee directors during the quarter ended March 31, 2019. The Company’s Board of Directors granted its executive officers, senior management and certain employees 307,355 Performance Stock Units (“PSUs”) during the quarter ended March 31, 2019. The PSUs granted in quarter ended March 31, 2019 vest subject to the recipients continued service and to the achievement of certain operational goals for the Company’s 2019 fiscal year which consist of the achievement of revenue targets for consumable products, implementation of the new enterprise resource planning (“ERP”) system for North America and the achievement of specific product milestones.

~~(1)~~

The Company’s Board of Directors also granted its executive officers, senior management and certain employees 245,782 RSUs during the quarter ended March 31, 2019. The annual RSUs granted vest over four years at 25% on each anniversary of the grant date.

~~The~~~~Company~~~~has~~a~~“fungible~~~~share”~~~~provision~~in~~its~~~~Amended~~~~and~~~~Restated~~~~2004~~~~Equity~~~~Incentive~~~~Plan~~~~whereby~~~~for~~~~each~~~~full-value~~~~award~~~~(RSU/PSU)~~~~issued~~or~~canceled~~~~under~~~~the~~~~Plan~~~~requires~~~~the~~~~subtraction~~or~~add~~~~back~~of~~2.12~~~~shares~~~~from~~orto~~the~~~~Shares~~~~Available~~~~for~~~~Grant,~~~~respectively.~~

Under the 2004 ~~Equity Incentive~~ Plan, as amended, the Company issued ~~346,279~~66,523 shares of common stock during the ~~six~~three months ended ~~June 30, 2018,~~March 31, 2019, in conjunction with stock options exercised and the vesting of RSUs and PSUs.

As of ~~June 30, 2018,~~March 31, 2019, there was approximately ~~$19.8~~$14.9 million of unrecognized compensation expense, net of projected forfeitures, for stock options and stock awards. The expense is expected to be recognized over the remaining weighted-average period of ~~2.5~~1.9 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 PSUs granted.

Activity under the 1998 and 2004 Plans are summarized as follows:

			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
Stock awards granted*		(1,259,808)		—		—
Options exercised		—		(16,644)		7.87
Options canceled		22,198		(22,198)		21.19
Stock awards canceled*		265,261		—		—
Balance, March 31, 2019		168,956		468,863	$	20.94

*The Company has a “fungible share” provision in its 2004 Plan whereby for each full-value award (RSU/PSU) issued or canceled under the Plan requires the subtraction or add back of 2.12 shares from or to the Shares Available for Grant, respectively. In the Company’s 2019 Proxy Statement, filed on April 30, 2019, the Company is seeking stockholder approval to remove the “fungible share” provision for awards granted on or after June 14, 2019.

Non-Employee Stock-Based Compensation

The Company granted ~~3,384~~9,303 RSUs and ~~3,384~~11,920 PSUs to non-employees during the ~~six months~~quarter ended ~~June 30, 2018,~~March 31, 2019, and ~~7,745 stock options and 2,478~~3,384 RSUs during the year ended December 31, ~~2017.~~2018. The ~~stock options~~PSUs granted to non-employee vest over ~~4 years at 25% on the first anniversary of the grant date and 1/48th each month thereafter.~~a year subject to same performance criteria as employees. The ~~RSUs~~PSUs granted in quarter ended March 31, 2019 vest ~~over 4 years at 25% on each anniversary of the grant date, whiles vesting of the PSUs is~~ subject to the ~~recipient's~~recipients continued service and to the achievement of ~~pre-established metrics. These RSUs/PSUs~~certain operational goals for the Company’s 2019 fiscal year which consist of the achievement of revenue targets for international system revenue, implementation of the new ERP system for North America and stock options were granted in exchange for consulting services to be rendered and are measured and recognized as they are earned. The Company revalues stock options granted to non-employees at each reporting date as the ~~underlying equity instruments vest.~~achievement of specific product milestones.

1617

Table of Contents

Stock-based Compensation Expense

Stock-based compensation expense by department recognized during the three ~~and six~~ months ended ~~June 30,~~March 31, 2019 and 2018 ~~and 2017~~ were as follows (in thousands):

	Three Months Ended				Six Months Ended				Three Months Ended
	June 30,				June 30,				March 31,
	2018		2017		2018		2017		2019		2018
Cost of revenue	$	227	$	147	$	380	$	276	$	269	$	154
Sales and marketing										718		489
Employee		660		401		1,112		821
Non-Employee		55		—		92		—
Research and development		262		239		453		476		263		191
General and administrative		1,002		444		1,856		1,053		57		854
Total stock-based compensation expense	$	2,206	$	1,231	$	3,893	$	2,626
Total stock-based compensation expense*									$	1,307	$	1,688

*Included in the stock-based compensation expense is the charge in connection with the accelerated vesting of 4,667 shares of the Company’s former CEO, in accordance with his separation agreement dated January 4, 2019.

Note ~~10.~~10. Net Loss Per Share

Basic net income (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 and employee stock purchase plan contributions), which is calculated based on the average share price for each fiscal period using the treasury stock method. In accordance with ASC 260, the assumed proceeds under the treasury stock method include the average unrecognized compensation expense of in-the money stock options and restricted stock units. This results in the assumed buyback of additional shares, thereby reducing the dilutive impact of equity awards.

Diluted 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.

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 June 30, Six Months Ended June 30,
2018 2017 2018 2017
Net income (loss)
$ (1,572) $ 1,947 $ (3,604) $ 925
Denominator

Weighted average shares of common stock outstanding used in computing net

income (loss) per share, basic
13,709 13,935 13,649 13,888
Dilutive effect of incremental shares and share equivalents
— 694 — 745
Weighted average shares of common stock outstanding used in computing net income (loss) per share, diluted
13,709 14,629 13,649 14,633
Net income (loss) per share:

Net income (loss) per share, basic
$ (0.11) $ 0.14 $ (0.26) $ 0.07
Net income (loss) per share, diluted
$ (0.11) $ 0.13 $ (0.26) $ 0.06

	Three Months Ended March 31, 2019		Three Months Ended March 31, 2018
Numerator:
Net loss	$	(8,220)	$	(2,032)
Denominator:
Weighted average shares of common stock outstanding used in computing net income (loss) per share, basic		14,017		13,587
Dilutive effect of incremental shares and share equivalents		—		—
Weighted average shares of common stock outstanding used in computing net income (loss) per share, diluted		14,017		13,587
Net income (loss) per share:
Net income (loss) per share, basic and diluted	$	(0.59)	$	(0.15)

The following numbers of shares outstanding, prior to the application of the treasury stock method, were excluded from the computation of diluted net income (loss) per common share for the period presented because including them would have had an anti-dilutive effect (in thousands):

Three Months Ended

Six Months Ended

June 30,

June 30,

2018

2017

2018

2017

Options to purchase common stock
710 66 758 53
Restricted stock units
449 3 422 2
Performance stock units
49 — 36 —
Employee stock purchase plan shares
73 — 73 —
Total
1,281 69 1,289 55

~~Table of Contents~~

	Three Months Ended
	March 31,
	2019		2018
Options to purchase common stock		485		807
Restricted stock units		366		396
Performance stock units		21		23
Employee stock purchase plan shares		66		34
Total		938		1,260

~~Note 11.~~Note 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"~~ordinary income or loss ~~(pretax income or loss excluding unusual or infrequently occurring discrete items)~~ for the interim reporting period. When applicable, the year-to-date tax provision reflects adjustments from discrete tax items.

Table of Contents

The Company's income tax ~~benefits~~expense for the three ~~and six~~ months ended ~~June 30, 2018 reflect a projected~~March 31, 2019 relates primarily to income ~~tax benefit for U.S. and~~taxes of the Company's non-U.S. operations ~~resulting in an~~based on the annual effective tax rate ~~applied~~method. The Company's U.S. operations continue to be in a loss position and the ~~year-to-date ordinary loss. This~~Company maintains a 100% valuation allowance against its U.S. deferred tax ~~benefit is increased by excess tax benefits generated by stock deductions exercised or vested in the three and six months ended June 30, 2018.~~assets.

For the three ~~and six~~ months ended ~~June 30, 2018,~~March 31, 2019, the Company's income tax ~~benefit~~expense was ~~$712,000 and $3,331,000 respectively,~~$115,000 compared to ~~income~~a tax ~~expense~~benefit of ~~$59,000 and~~$2.6 million for the same period in 2018. The income tax benefit ~~of $59,000 for the same periods in 2017. The income tax benefits~~ for the three ~~and six~~ months ended ~~June 30,~~March 31, 2018 ~~include~~includes a tax benefit for excess tax deductions of approximately ~~$1.14~~$1.5 million, ~~and $2.6 million, respectively,~~ recorded discretely in the reporting period.

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 when it is more likely than not that some of the deferred tax assets will not be realized. As of March 31, 2019, and December 31, ~~2017,~~2018, the Company ~~released its~~had a 100% valuation allowance against its U.S. ~~federal and all other domestic state net~~ deferred tax ~~assets except for California and Massachusetts. The Company maintained this~~assets. There was no valuation allowance ~~position through June 30, 2018.~~ during the three months ended March 31, 2018 other than the California jurisdiction.

Significant management judgment is required in determining any valuation allowance recorded against deferred tax assets. In evaluating the ability to recover deferred tax assets, the Company considered ~~all~~ available positive and negative ~~evidence.~~evidence giving greater weight to its recent cumulative losses 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 and the impact of the Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”).~~strategies.

Note 12. ~~Correction of Prior Period Immaterial Error~~Leases

~~During~~The Company has 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 ~~three months ended June 30, 2018, management discovered that~~leases for up to 5 years. The Company leases space for operations in the United States, Japan and France. In addition to the above facility leases, the Company ~~had~~also routinely leases automobiles for certain sales and field service employees under operating leases.

The Company determines if a contract contains a lease at inception. Operating lease assets and liabilities are recognized at the lease commencement date. Operating lease liabilities represent the present value of lease payments not ~~recorded~~yet paid. Operating lease assets represent the ~~tax effect~~right to use an underlying asset and are based upon the operating lease liabilities adjusted for prepayments or accrued lease payments, initial direct costs, lease incentives, and impairment of operating lease assets. To determine the present value of lease payments not yet paid, the Company estimates the incremental secured borrowing rates corresponding to the maturities of the ~~adoption~~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 ~~ASC 606 in~~expense over the lease term.

Supplemental balance sheet ~~of the unaudited condensed consolidated financial statements~~information related to leases was as follows:

Leases (in thousands)	Classification	March 31, 2019
Assets
Right-of-use assets	Operating lease assets	$	9,442
Finance lease	Property and equipment, net^*		842
Total leased assets		$	10,284

*Finance leases assets included in Property and equipment, net.

Liabilities
Operating lease liabilities
Operating lease liabilities, current	Operating lease liabilities		1,840
Operating lease liabilities , non-current	Operating lease liabilities, net of current portion		7,759
Total Operating lease liabilities		$	9,599

Finance lease liabilities
Finance lease liabilities, current	Accrued liabilities^*		614
Finance lease liabilities, non-current	Operating lease liabilities		354
Total Finance lease liabilities		$	968

* Finance lease liabilities included in Accrued liabilities

Lease cost as of March 31, ~~2018. Upon adoption of the Topic 606, the Company recorded an increase to retained earnings of $5.0 million for contracts still in force~~2019 were as ~~of January 1, 2018. The tax effect of the 606 adoption was $1.2 million.~~follows:

~~The Company evaluated the impact of the error on prior period~~Finance lease cost: Total amortization expense and ~~determined that the effect was not material to the financial statements as of and~~interest for finance lease during the three months ended March 31, ~~2018~~2019 were $183 and six months ended June 30, 2018. The Company corrected the error in the unaudited condensed consolidated financial statements as of and for the six months ended June 30, 2018. The correction of the error increased deferred tax liability by $1.2 million and decreased retained earnings by $1.2 million (Note 2) as of January 1, 2018.$19, respectively.

~~The Company’s condensed consolidated statements of operations, comprehensive income (loss) and cash flows for~~Operating lease cost: Total operating lease expense during the three months ended March 31, ~~2018, and~~2019 was $724.

Cash paid for amounts included in the ~~three and six months ended June 30, 2018 were not affected by this correction~~measurement of ~~the error. Accordingly, the Company's loss per share for~~lease liabilities during the three months ended March 31, 2019 were as follows:

Operating cash flow from finance leases for the three months was $19.

Financing cash flow from finance leases for the three months was $131.

Operating cash flow from operating leases for the three months was $705.

Table of Contents

Maturities of lease liabilities

Maturities of lease liabilities were as follows as of March 31, 2019 (in thousands):

Year Ending March 31,	Amount
Remainder of 2019	$	2,113
2020		2,852
2021		2,591
2022		2,559
2023 and thereafter		282
Total lease payments		10,397
Less: imputed interest		798
Present value of lease liabilities	$	9,599

Vehicle Leases

As of March 31, 2019, the Company was committed to minimum lease payments for vehicles leased under long-term non-cancelable capital leases as follows (in thousands):

Year Ending March 31,	Amount
Remainder of 2019	$	573
2020		296
2021		161
2021		7
Total lease payments		1,037
Less: imputed interest		69
Present value of lease liabilities	$	968

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:

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):

Year Ending December 31,	Amount
2019	$	3,011
2020		2,939
2021		2,564
2022		2,495
2023 and thereafter		214
Future minimum rental payments	$	11,223

Vehicle Leases - US

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):

Year Ending December 31,	Amount
2019	$	576
2020		287
2021		152
Future minimum lease payments	$	1,015

Weighted-average remaining lease term and discount rate, as of March 31, 2019, were as follows:

Lease Term and Discount Rate	March 31, 2019
Weighted-average remaining lease term (years)
Operating leases		3.7
Finance leases		3.0
Weighted-average discount rate
Operating leases		4.4	%
Finance leases		5.6	%

Table of Contents

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 in the normal course of business. A liability and related charge are recorded to earnings in the Company’s consolidated financial statements for legal contingencies when the loss is considered probable and the ~~three~~amount can be reasonably estimated. The assessment is re-evaluated each accounting period and ~~six months ended June 30,~~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 March 31, 2019 and December 31, 2018, ~~remains unchanged.~~the Company had accrued Nil and $171,000 respectively, related to various pending contractual and product liability lawsuits. The Company does not believe that a material loss in excess of accrued amounts is reasonably possible.

Note 14. Debt

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.

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 ("TTM") adjusted EBITDA of not less than $10 million, and a leverage ratio not to exceed 2.5 to 1.0.

As of March 31, 2019, the Company had not drawn on the Revolving Line of Credit and the Company is in compliance with all financial covenants of the Original Revolving Line of Credit, as amended by the First Amended Revolving Line of Credit and the Second Amended Revolving Line of Credit.

Note ~~13.~~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 ~~decision~~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 ~~viewed~~views its operations, ~~managed~~manages its business, and ~~used~~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.

Table of Contents

The following table presents a summary of revenue by geography for the three months ~~ended June 30,~~March 31 2019 and 2018 ~~and 2017~~ (in thousands):

Three Months Ended June 30,

2018

2017

Revenue mix by geography:

United States
$ 28,132 $ 24,239
Japan
3,946 3,710
Asia, excluding Japan
4,231 2,830
Europe
1,803 1,219
Rest of the world
4,441 4,391
Total consolidated revenue
$ 42,553 $ 36,389
Revenue mix by product category:

Products
$ 35,291 $ 30,115
Consumables
1,057 649
Skincare
1,302 963
Total product revenue
$ 37,650 $ 31,727
Service
4,903 4,662
Total consolidated revenue
$ 42,553 $ 36,389

~~The following table presents a summary of revenue by geography for the six months ended June 30, 2018 and 2017 (in thousands):~~

	Six Months Ended June 30,				Three Months Ended March 31,
	2018		2017		2019		2018
Revenue mix by geography:
United States	$	49,268	$	40,783	$	20,400	$	21,136
Japan		7,501		7,590		5,294		3,555
Asia, excluding Japan		7,074		6,014		3,095		2,843
Europe		4,373		3,445		2,736		2,570
Rest of the World		8,462		7,856
Rest of the world						4,501		4,021
Total consolidated revenue	$	76,678	$	65,688	$	36,026	$	34,125
Revenue mix by product category:
Products	$	62,530	$	53,107	$	27,209	$	27,239
Consumables		1,826		1,148		1,945		769
Skincare		2,558		1,947		1,608		1,256
Total product revenue	$	66,914	$	56,202	$	30,762	$	29,264
Service		9,764		9,486		5,264		4,861
Total consolidated revenue	$	76,678	$	65,688	$	36,026	$	34,125

1822

Table of Contents

~~Note~~ 14~~. Commitments and Contingencies~~

~~Operating Leases~~

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

Year Ending December 31

Amount

2018
$ 1,494
2019
2,971
2020
2,913
2021
2,525
2022
2,495
2023 and beyond
214
Total future minimum lease payments
$ 12,612

In addition to the above facility leases, the Company also routinely leases automobiles for certain sales and field service employees under capital leases. The remaining committed lease payments as of June 30, 2018 was $1.15 million.

~~Contingencies~~

The Company is named from time to time as a party to other legal proceeds product liability, commercial disputes, employee disputes, and contractual lawsuits in the normal course of business. A liability and related charge are recorded to earnings in the Company’s consolidated financial statements for legal contingencies when the loss is considered probable and the amount can be reasonably estimated. The assessment is re-evaluated each accounting period and is based on all available information, including discussion with outside legal counsel. If a reasonable estimate of a known or probable loss cannot be made, but a range of probable losses can be estimated, the low-end of the range of losses is recognized if no amount within the range is a better estimate than any other. If a material loss is reasonably possible, but not probable and can be reasonably estimated, the estimated loss or range of loss is disclosed in the notes to the consolidated financial statements. The Company expenses legal fees as incurred.

As of June 30, 2018 and December 31, 2017, the Company had accrued $137,000 and $91,000, respectively related to various pending contractual and product liability lawsuits. The Company does not believe that a material loss in excess of accrued amounts is reasonably possible.

~~Table of Contents~~

~~Note 15. Debt~~

~~Loan and Security Agreement~~

On May 30, 2018, the Company and Wells Fargo Bank, N.A. (“Wells Fargo”) entered into a Loan and Security Agreement (the “Revolving Line of Credit”) in the original principal amount of $25,000,000. The Revolving Line of Credit terminates on May 30, 2021. The purpose of the Revolving Line of Credit is to provide working capital and to fund the Company’s general business requirements.

The Revolving Line of Credit bears interest at a variable interest rate equal to the LIBOR Rate plus a defined LIBOR Rate Margin based on the then-current Leverage Ratio (a ratio of funded debt to the Trailing Twelve Month ("TTM") Adjusted EBITDA).

The Revolving Line of Credit provides for borrowing limits that range from $5,000,000 to a maximum of $25,000,000 during the term of the Revolving Line of Credit. Additionally, the Company agrees to pay a variable unused commitment fee to Wells Fargo equal to (a) 0.25% per annum if the Leverage Ratio is less than 1.0 to 1.0, (b) 0.30% per annum if the Leverage Ratio is equal to or greater than 1.0 to 1.0, but less than 2.0 to 1.0, and (c) 0.35% per annum if the Leverage Ratio is equal to or greater than 2.0 to 1.0.

The Revolving Line of Credit is secured by a pledge of security interest in all the shares of each material subsidiary, together with all proceeds, all cash, stock and other moneys and property paid thereon, all rights to subscribe for securities declared or granted, and all other cash and noncash proceeds, as security for the performance of the obligations. As of June 30, 2018, there were no borrowings under the Revolving Line of Credit.

~~Covenants~~

The Loan and Security Agreement contains financial and other covenants as well as the maintenance of a leverage ratio not to exceed 2.5 to 1.0 and a TTM adjusted EBITDA of not less than $10 million. A violation of any of the covenants could result in a default under the Loan and Security Agreement 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. As of June 30, 2018, the Company is in compliance with all financial covenants.

~~Table of Contents~~

ITEM 2.

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

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

~~You~~This Management’s Discussion and Analysis should be read in conjunction with the ~~following management’s discussion and analysis of the Company~~Company’s ’s financial condition and results of operations in conjunction w~~ith~~with the Company’s unaudited condensed ~~consolidat~~edconsolidated financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q and ~~with~~ the Company’s audited financial statements and notes thereto for the year ended December 31, ~~2017,~~2018, included in ~~the~~its annual report on Form 10-K filed on March ~~26, 2018~~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 and Section 21E of the Securities Exchange Act of 1934, as amended, ("the Exchange Act"). Forward-looking statements are often identified by the use of words such as, but not limited to, “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “seek,” “should,” “strategy,” “target,” “will,” “would” and similar expressions or variations intended to identify forward- looking statements. These statements are based on the beliefs and assumptions of the Company’s management based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in the section titled “Risk Factors” included under Part II, Item 1A below.

Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, ~~we undertake~~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 ~~the Company’s~~our common stock price;

●	~~the inability for the Company to access cash due to insufficient cash or the failure to meet the debt repayment obligations under the Revolving line of credit;~~

●	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;
	●	the inability to meet the Company's debt repayment obligations under the Loan and Security Agreement with Wells Fargo Bank, N.A. 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~~our clinical, manufacturing, sales, marketing and product development efforts;

●

~~the Company’s~~our ability to obtain and retain personnel;

●

the availability of key components, materials and contract services, which depends on ~~the Company’s~~our ability to forecast sales, among other things;

●

investigations of ~~the Company’s~~our business and business-related activities by regulatory or other governmental authorities;

●

variations in timing and quantity of product orders;

●

temporary manufacturing interruptions or disruptions;

●

the timing and success of new product and new market introductions, as well as delays in obtaining domestic or foreign regulatory approvals for such introductions;

●

increased competition, patent expirations or new technologies or treatments;

	●	impact of the FDA communication letter regarding “vaginal rejuvenation” procedures using energy-based devices on sales of the Company's products;
	●	product recalls or safety alerts;

●

litigation, including product liability, patent, employment, securities class action, stockholder derivative, general commercial and other lawsuits;

●

~~continued~~ volatility in the global market and worldwide economic ~~conditions, including, but not limited to, the impact of events such as Brexit;~~conditions;

●

changes in tax laws, including ~~the new U.S. tax reform,~~changes domestically and ~~changes due to Brexit,~~internationally, or exposure to additional income tax liabilities;

●

the impact of the new ~~European Union~~EU privacy regulations, ~~(the~~the General Data Protection ~~Regulation)~~Regulation on the Company’s ~~resources - the failure to comply could result in fines;~~resources;

●

the financial health of ~~the Company’s~~our customers and their ability to purchase ~~the Company’s~~our products in the current economic environment; ~~and;~~and

●

other unusual or non-operating expenses, such as expenses related to mergers or acquisitions, may cause operating result variations.

Table of Contents

Introduction

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

●

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

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

●	Results of Operationsof~~Operations.~~. This section provides the Company’s analysis and outlook for the significant line items on ~~the Company’s~~its Condensed Consolidated Statements of Operations.

●	Liquidity and Capital Resources~~and~~~~Capital~~~~Resources.~~. This section provides an analysis of the Company’s liquidity and cash flows, as well as a discussion of ~~the Company’s commitments~~its Commitments that existed as of ~~June 30, 2018.~~March 31, 2019.

~~Table of Contents~~

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 aesthetics systems for practitioners worldwide. In addition to internal development of products, ~~we distribute~~the Company distributes third party sourced products under ~~the Company’s~~our own brand names. ~~We offer~~The Company offers easy-to-use products which enable ~~physicians and other qualified~~ practitioners to perform safe and effective aesthetic procedures, including treatment for body contouring, skin resurfacing and ~~rejuvenation,~~revitalization, tattoo removal, removal of benign pigmented lesions, vascular conditions, hair removal, toenail fungus and ~~vaginal~~women's intimate health. The Company’s platforms are designed to be easily upgraded to add additional applications and hand pieces, which provide flexibility for ~~the Company’s~~our customers as they expand their practices. In addition to systems and upgrade revenue, ~~we generate~~the Company generates revenue from the sale of post warranty service contracts, providing services for products that are out of warranty, hand piece refills and other per procedure related revenue on select systems, and distribution of third-party manufactured skincare products.

The Company’s ongoing research and development activities ~~are~~ primarily ~~focused~~focus on developing new products, as well as improving and enhancing the Company’s portfolio of existing products. The Company ~~is exploring~~also explores ways to expand the Company’s product offerings through ~~the launch of new products.~~alternative arrangements with other companies, such as distribution arrangements. The Company introduced Juliet, a product for women’s intimate health, in December 2017, SecretRF, a fractional RF microneedling device for skin ~~rejuvenation,~~revitalization, in January 2018, e~~nlighten~~enlighten SRin April 2018, ~~and~~ truSculpt iDin July ~~2018.~~2018 and excel V+ in February 2019.

The Company’s corporate headquarters and U.S. operations are located in Brisbane, California, ~~from~~ where the Company conducts manufacturing, warehousing, research and development, regulatory, sales and marketing, service, and administrative activities. The Company markets, sells and services the Company’s products through direct sales and service employees in ~~the U.S.~~North America (including Canada), Australia, Austria, Belgium, ~~Canada,~~ France, Germany, Hong Kong, Japan, Spain, Switzerland and the United Kingdom. Sales and ~~Service~~Services outside of these direct markets are made through a worldwide distributor network in over 40 countries.

Products and Services

The ~~Company’s~~Company derives revenue ~~is derived~~ from the sale of Products and Services. Product revenue ~~is derived~~includes revenue from the sale of systems, hand pieces and upgrade of systems ~~(“Systems”~~(collectively “Systems” revenue), ~~sale of~~ replacement hand pieces,truSculpt iD cycle refills, as well as single use disposable tips applicable to Juliet and Secret RF(“ (“Consumables” revenue), and the sale of 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 module, control system software and high voltage electronics, as well as one or more hand pieces. However, depending on the application, the laser or other energy based module is sometimes contained in the hand piece such as with the Company’s Pearl and Pearl Fractionalapplications instead of within the console.

The Company offers customers the ability to select the system that best fits their practice at the time of purchase and then to cost-effectively add applications to their system as their practice grows. This provides customers the flexibility to upgrade their systems whenever they choose and provides us with a source of additional Systems revenue. The Company’s primary system platforms include: excel, enlighten, Juliet, Secret RF, truSculpt and xeo.

Skincare revenue relates to the distribution of ZO’s skincare products in Japan.

~~The Company’s primary system platforms include:~~ ~~excel V, excel HR, enlighten, Juliet, Secret RF, truSculpt~~ ~~and~~ ~~xeo~~.

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

Table of Contents

Significant Business Trends

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

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

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

●	use of clinical results to support new aesthetic products and applications;

●	enhanced luminary development and reference selling efforts (to develop a location where ~~Company’s~~our products can be displayed and used to assist in selling efforts);

●	customer demand for ~~the Company’s~~our products;

●	~~strengthening~~weakening against the U.S. dollar of key international currencies in which we transact ~~(e.g. Australian~~(Australian Dollar, Japanese Yen, Euro, Swiss Franc and British Pound);

●	consumer demand for the application of ~~the Company’s~~our products;

●	marketing to physicians in the core dermatology and plastic surgeon specialties, as well as outside those specialties; and

●	generating recurring revenue from ~~the Company’s~~our growing installed base of customers through the sale of system upgrades, services, hand piece refills, skincare products and replacement tips for Julietand SecretRFproducts.

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

Factors that May Impact Future Performance

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

On July 30, 2018, the FDA issued a public statement and sent letters to a number of companies in the medical aesthetics industry expressing concerns regarding “vaginal rejuvenation” procedures using energy-based devices. The Company was not named in the announcement, and the Company has not received a letter from the agency, however the Company’s Juliet device is promoted and used by physicians in procedures that are the subject of the FDA’s public statement. The Company is not aware of any adverse events resulting from the use of Juliet, and believes that Juliet’s development and promotion is based on science and clinical evidence. Notwithstanding, the Company experienced a significant slowdown in the sale of Juliet systems in the third and fourth quarters of 2018 and first quarter of 2019. The Company believes this relates to the safety letter, given the timing.

The Company supports any action that helps ensure patient safety going forward. The Company has a robust, multi-functional process that reviews its promotional claims and materials to ensure they are truthful, not misleading, fair and balanced, and supported by sound scientific evidence.

A detailed discussion of these and other factors that could impact the Company’s future performance are provided in (1) ~~Part I, Item 1A “Risk Factors” and elsewhere in this Form 10-Q, (2)~~ the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2017, (3)~~2017- Part I, Item 1A “Risk Factors,” (2) the Company’s reports and registration statements filed and furnished from time to time with the SEC, and ~~(4)~~(3) other announcements the Company makes from time to time.

~~Table of Contents~~

Critical accounting policies, significant judgments and use of estimates

The ~~Company's management discussion and analysis~~preparation of ~~financial condition and results of operations are based upon~~ the Company’s ~~unaudited condensed consolidated financial statements. For the three~~Condensed Consolidated Financial Statements and six months ended June 30, 2018, the Company’s income tax benefit was $712,000 and $3,331,000, respectively, compared to income tax expense of $59,000 and income tax benefit of $59,000 for the same periodsrelated disclosures in 2017. In the six months ended June 30, 2018, the Company calculated the provision for income taxes for interim reporting periods by applying an estimate of the "annual effective tax rate" for the full year to ordinary income or loss for the reporting period. The Company’s income tax benefit for the six months ended June 30, 2018 reflects a projected income tax benefit for U.S. and non-U.S. operations resulting in an annual effective tax rate applied to the year-to-date ordinary loss. The income tax benefit includes excess tax benefits generated by stock deductions exercised or vested in the six months ended June 30, 2018.

For the Company’s income tax provision in the six months ended June 30, 2017, the tax benefit was primarily related to projected U.S. alternative minimum taxes and income taxes from non-U.S. operations. The income tax benefit resulted from applying the annual effective tax rate by the year-to-date ordinary loss. The projected income tax reflected utilization of net operating loss carryforwards. However, the tax effect of such utilization was offset by a change in valuation allowance for the six months ended June 30, 2017 condensed consolidated financial statements, which have been prepared in accordanceconformity with ~~accounting principles generally accepted in the United States of America, (“U.S. GAAP”). The preparation of these condensed consolidated financial statements~~GAAP requires us to make estimates, judgments and ~~judgments~~assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. ~~On an ongoing basis, we evaluate the Company’s critical accounting policies~~These estimates, judgments and ~~estimates. The Company~~assumptions are based ~~the estimates~~ on historical experience and on various other ~~assumptions~~factors that we believe are reasonable under the circumstances. The Company ~~believes~~periodically reviews its estimates and make adjustments when facts and circumstances dictate. To the extent that there are material differences between these estimates and actual results, the Company’s financial condition or results of operations will be affected.

The Company adopted ASU 2016-02 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 ~~reasonable~~reported under the accounting standards in effect for the period presented. The adoption of the new standard resulted in the ~~circumstances, the results~~recording of ~~which form the basis for making judgments about the carrying values of~~additional net lease assets and lease liabilities ~~that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions~~of $10.3 million and ~~conditions. The Company’s significant accounting policies are more fully described in Note~~$10.4 million, respectively, as of January 1, 2019, based on the present value of the ~~accompanying~~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 ~~in Note 2~~transition disclosures.

Table of Contents

Critical accounting estimates, as defined by the SEC, are those that are most important to the ~~Company’s audited consolidated~~portrayal of our financial ~~statements contained~~condition and results of operations and require our management’s most difficult and subjective judgments and estimates of matters that are inherently uncertain. The accounting policies and estimates that the Company considers to be critical, subjective, and requiring judgment in ~~the~~their application are summarized in “Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2018 filed with the SEC on March ~~26, 2018 with the SEC.~~18, 2019. With the exception of the change ~~in revenue recognition~~for the accounting of leases as a result of the adoption of ~~ASC~~ Topic ~~606, (see Notes 2 and 7)~~842, there have been no new or material changes to the ~~critical~~significant accounting policies ~~and estimates~~ discussed in the Company’s Annual Report on Form 10-K ~~for the fiscal year ended December 31, 2017,~~ that are of 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 total revenue, net. Percentages in this table and throughout ~~the Company’s~~our discussion and analysis of financial condition and results of operations may reflect rounding adjustments.

Three Months Ended

Six Months Ended

June 30,

June 30,

2018

2017

2018

2017

Net revenue
100% 100%

100% 100%

Cost of revenue
47% 42%

48% 44%

Gross margin
53% 58%

52% 56%

Operating expenses:

Sales and marketing
37% 35%

37% 36%

Research and development
10% 8%

10% 9%

General and administrative
12% 10%

13% 10%

Total operating expenses
59% 53%

60% 55%

Income (loss) from operations
(5)% 5%

(9) 1%

Interest and other income (expense), net
— 1%

— 1%

Income (loss) before income taxes
(5)% 6%

(9) 2%

Provision (benefit) for income taxes
— — (4)% —
Net income (loss)
(5)% 6%

(5)% 2%

~~Table of Contents~~

	Three Months Ended
	March 31,
	2019		2018

Net revenue		100%		100%
Cost of revenue		52%		49%
Gross margin		48%		51%

Operating expenses:
Sales and marketing		45%		38%
Research and development		10%		10%
General and administrative		15%		16%
Total operating expenses		70%		64%

Loss from operations		(22)%		(14)%
Interest and other income, net		—%		—%
Loss before income taxes		(22)%		(14)%

Benefit for income taxes		—%		(8)%
Net loss		(22)%		(6)%

Revenue

~~The Company primarily generates revenue from the sale of systems, training on the systems, extended service contracts, consumables and other accessories.~~ 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 21 in the notes to consolidated financial statements on the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, ~~2017~~2018 and ~~Notes 2 and 7 in~~Note 8 to the ~~accompanying~~ unaudited condensed consolidated financial ~~statements.~~statements included in Item I, Part 1 of this Quarterly Report on Form 10-Q.

AsRevenue is recognized upon transfer of ~~June 30, 2018,~~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 9%15.0% of the Company’s total revenue ~~is recognized over time,~~for the three months ended March 31, 2019 and ~~the remainder of the revenue is recognized upon completion of delivery.~~March 31, 2018, respectively. Revenue recognized over time relates to revenue from the Company’s extended service contracts and ~~customer~~ marketing ~~support.~~services. Revenue recognized upon delivery is primarily generated by the sales of ~~system,~~systems, consumables and skincare.

~~During the first and second quarters~~

Table of fiscal year 2018, the Company recognized revenue based on the ASU No.2014-09, “Revenue from Contracts with Customers (Topic 606),” but revenue for the three and six months ended June 30, 2017 was recognized based on Topic 605. Therefore, the periods are not directly comparable. For additional information on the impact of the new accounting standard on the Company’s revenue, see Notes 2 and 7 in the accompanying unaudited condensed consolidated financial statements.

Contents

Total Net Revenue

Three Months Ended June 30,

Six Months Ended June 30,

(Dollars in thousands)

2018

% Change

2017

2018

% Change

2017

Revenue mix by geography:

United States
$ 28,132 16% $ 24,239 $ 49,268 21%

$ 40,783
International
14,421 19% 12,150 27,410 10%

24,905
Consolidated total revenue
$ 42,553 17% $ 36,389 $ 76,678 17%

$ 65,688

United States as a percentage of total revenue
66%

67%

64%

62%

International as a percentage of total revenue
34%

33%

36%

38%

Revenue mix by product category:

Systems
- North America
$ 25,886 14% $ 22,626 $ 44,830 21%

$ 37,086
- Rest of World
9,405 26% 7,489 17,700 10%

16,021
Total Systems
35,291 17% 30,115 62,530 18%

53,107
Consumables
1,057 63% 649 1,826 59%

1,148
Skincare
1,302 35% 963 2,558 31%

1,947
Total Products
37,650 19% 31,727 66,914 19%

56,202

Service
4,903 5% 4,662 9,764 3% 9,486
Total Net Revenue
$ 42,553 17% $ 36,389 $ 76,678 17%

$ 65,688

~~Total Net Revenue:~~

	Three Months Ended March 31,
(Dollars in thousands)	2019		% Change		2018
Revenue mix by geography:
United States	$	20,400		(3)%	$	21,136
International		15,626		20%		12,989
Consolidated total revenue	$	36,026		6%	$	34,125

United States as a percentage of total revenue		57%				62%
International as a percentage of total revenue		43%				38%

Revenue mix by product category:
Systems – North America	$	17,580		(7)%	$	18,944
Systems – International		9,629		16%		8,295
Total Systems		27,209		0%		27,239
Consumables		1,945		153%		769
Skincare		1,608		28%		1,256
Total Products		30,762		5%		29,264
Service		5,264		8%		4,861
Total Net Revenue	$	36,026		6%	$	34,125

The Company’s revenue increased by ~~17% for~~6% in the three ~~and six months periods~~month period ended ~~June 30, 2018,~~March 31, 2019, compared to the same ~~periods~~period in ~~2017,~~2018, due primarily to ~~increased~~strong growth in the Company’s international revenue, and demand for the Company’s new products – the truSculptiD, Secret RF, and the newly launched excel V+ system, ~~revenues.~~offset by softness in the overall women’s health market, competitive trends affecting certain legacy system pricing, and greater than expected turnover in our North American salesforce in the fourth quarter of 2018 that continues to have an impact during the first quarter of 2019.

Revenue by ~~Geography:~~Geography

The Company’s U.S. revenue ~~increased~~decreased by ~~$3.9~~$0.7 million, or ~~16%~~3%, ~~and $8.5 million, or 21% respectively for~~in the three ~~and six~~ months ended ~~June 30, 2018,~~March 31, 2019, compared to the same ~~periods~~period in ~~2017.~~2018. This ~~increase~~decrease was due primarily to ~~new products introduced into~~softness in the overall women’s health market, competitive trends affecting certain legacy system pricing, and greater than expected turnover in ~~January 2018.~~our North American salesforce in the fourth quarter on 2018 that continued to have an impact through the first quarter of 2019.

The Company’s international revenue increased ~~$2.3~~by $2.6 million, or ~~19%~~20%, ~~and $2.5 million, or 10% for~~in the three ~~and six~~ months ended ~~June 30, 2018,~~March 31, 2019, compared to the same ~~periods~~period in ~~2017.~~2018. The increase was due to growth in the Company’s business in Japan, Asia excluding Japan, and Europe, partially offset by decline in sales in the Middle ~~East and Asia including Japan.~~East.

Revenue by Product ~~Type:~~Type

SystemsRevenue

Systems revenue in North America ~~increased~~decreased by ~~$3.3~~$1.4 million, or ~~14%~~7%, ~~and $7.7 million, or 21% , respectively, for~~in the three ~~and six~~ months ended ~~June 30, 2018,~~March 31, 2019, compared to the same ~~periods~~period in ~~2017,~~2018 due to ~~strong sales~~the softness in the ~~U.S.~~overall women’s health market, competitive trends affecting certain legacy system pricing, and ~~new products launched since~~greater than expected turnover in our North American salesforce in the ~~second~~fourth quarter of ~~2017.~~2018 that continued to have an impact through the first quarter of 2019. The Rest of the World systems revenue increased ~~by $2.0 million or 26%~~16%, ~~and $1.7 million, or 10%, respectively.~~for the three months ended March 31, 2019, compared to same period in 2018. The increase in Rest of the World revenue was primarily a result of an increase in the Company’s direct business in Japan, Asia ~~including~~excluding Japan, ~~as well as increases~~and Europe, partially offset by a decline in the Company’s distributor business in the Middle ~~East and Europe, partially offset by decreases in the Company’s direct business in Australia and Europe.~~East.

ConsumablesRevenue

Consumables revenue increased ~~by $408,000, or 63%~~153%, ~~and $678,000, or 59%~~ for the three ~~and six~~ months ended ~~June 30, 2018, respectively,~~March 31, 2019, compared to the same ~~periods~~period in ~~2017.~~2018. The increase in consumables revenue was due to the introduction of ~~truSculpt 3D~~ ~~in May 2017,~~ Secret RFand Juliet during January 2018, and truSculpt iD in July 2018, each of which have consumable elements.

~~Table of Contents~~

SkincareRevenue

The Company’s revenue from Skincare products in Japan increased ~~by $339,000, or 35%~~28%, ~~and $611,000, or 31%~~ for the three ~~and six~~ months ended ~~June 30, 2018, respectively,~~March 31, 2019, compared to the same ~~periods~~period in ~~2017.~~2018. This increase was due primarily to increased marketing and promotional activities.

ServiceRevenue

The Company’s Service revenue increased ~~by $241,000,~~$0.4 million, or 5%8%, ~~and $278,000, or 3%~~ for the three ~~and six~~ months ended ~~June 30, 2018, respectively,~~March 31, 2019, compared to ~~the same periods in 2017.~~2018. This increase was due primarily to increased sales of ~~system parts~~service contracts, support and maintenance services provided on a time and materials basis to the Company's network of international distributors.

Table of Contents

Gross Profit

	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended March 31,
(Dollars in thousands)	2018		% Change		2017		2018		% Change		2017		2019		% Change		2018
Gross profit	$	22,377		6%	$	21,046	$	39,711		9%	$	36,567	$	17,309		—%	$	17,334
As a percentage of total net revenue		53%				58%		52%				56%		48%				51%

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.

Gross ~~margins in~~margin for the three ~~and six~~ months ended ~~June 30, 2018 decreased by 5% and 4% respectively,~~March 31, 2019 declined 3%, compared to the same period in ~~2017. In each of the three and six month periods, a higher percentage of product revenue came from our distributor network in Rest of the World. Reduced~~2018. The reduced gross margins ~~were~~during 2019 was due primarily ~~to:~~to lower average system pricing across the legacy portfolio, including continued pricing pressure on the enlighten system.

●	~~In the three months ended June 30, 2018, Rest of World product revenue generated from distributors increased to 65% from 50% for the same period in 2017;~~
●	~~In the six months ended June 30, 2018, Rest of World product revenue generated from distributors increased to 60% from 49% for the same period in 2017;~~

●	~~Slightly lower average system pricing across the legacy portfolio. The Company experienced continued pricing pressure on the average selling price of the Company’s~~ ~~enlighten~~ ~~system due to ongoing sales programs and normal business activities; and~~
●	~~Reduction in margins due to increased warranty related expenses for the Company’s system platforms that are more complex and have a higher material cost than the Company’s legacy products.~~

Sales and Marketing

	Three Months Ended June 30,							Six Months Ended June 30,							Three Months Ended March 31,
(Dollars in thousands)	2018		% Change			2017		2018		% Change			2017		2019		% Change		2018
Sales and marketing	$	15,535		21	%	$	12,787	$	28,623		21	%	$	23,560	$	16,104		23%	$	13,088
As a percentage of total net revenue		37%					35%		37%					36%		45%				38%

Sales and marketing expenses consist primarily of personnel expenses, expenses associated with customer-attended workshops and trade shows, post-marketing studies, advertising and training.

The ~~$2.7~~$3.0 million increase in sales and marketing expenses ~~during~~for the three months ended ~~June 30, 2018,~~March 31, 2019 compared to ~~the~~ same period in ~~2017,~~2018 was due primarily to:

●

$~~1.7~~1.3 million ~~net~~ increase in personnel related expenses, ~~which were driven primarily by higher headcount and commissions~~including $0.3 million increase in ~~North America~~stock-based compensation due to ~~higher revenue;~~increased headcount;

●

$~~0.3 million of stock based compensation due to higher headcount;~~

●	~~$0.3 million of higher travel related expenses in North America, resulting from greater related activity and increased headcount; and~~

●	~~$0.4~~0.9 million of higher promotional and product demonstration expenses, primarily in North ~~America.~~

~~The $5.1 million increase in sales and marketing expenses during the six months ended June 30, 2018, compared to the same period in 2017, was due primarily to:~~

●	~~$2.8 million net increase in personnel related expenses, which were driven primarily by higher headcount and commissions in North America due to higher revenue;~~America;

●

$0.5 million of ~~stock based compensation due to higher headcount;~~

●	~~$0.7 million of~~ higher travel related expenses ~~in North America,~~ resulting from ~~greater related activity and~~ increased headcount; and

●

$~~1.1~~0.3 million ~~of higher promotional~~increase in consulting and ~~product demonstration expenses, primarily in North America.~~other outside services.

~~Table of Contents~~

Research and Development (“R&D”)

	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended March 31,
(Dollars in thousands)	2018		% Change		2017		2018		% Change		2017		2019		% Change		2018
Research and development	$	4,095		37%	$	2,981	$	7,651		29%	$	5,926	$	3,706		4%	$	3,556
As a percentage of total net revenue		10%				8%		10%				9%		10%				10%

R&D expenses consist primarily of personnel expenses, clinical research, regulatory and material costs. R&D expenses increased by ~~$1.1 million or 37%,~~$150,000, and represented 10% of total net revenue, in the three months ended ~~June 30, 2018,~~March 31, 2019, compared to ~~8% of total net revenue~~10% for the same period in ~~2017.~~2018. This increase in expense was due primarily to ~~$1.1 million of~~ increased material expenses, as well as higher personnel expenses driven primarily by an increase in headcount and consulting ~~related expenses.~~

R&D expenses increased by $1.7 million or 29%, and represented 10% of total net revenue, in the six months ended June 30, 2018, compared to 9% of total net revenue for the same period in 2017. This increase in expense was due primarily to $1.7 million of increased personnel (including $0.6 million of stock-based compensation, due to headcount increase) and consulting related expenses.

General and Administrative (“G&A”)

	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended March 31,
(Dollars in thousands)	2018		% Change		2017		2018		% Change		2017		2019		% Change		2018
General and administrative	$	4,902		38%	$	3,548	$	10,341		53%	$	6,764	$	5,525		2%	$	5,439
As a percentage of total net revenue		12%				10%		13%				10%		15%				16%

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~~were relatively flat, increasing by ~~$1.4 million~~$86,000, or ~~38%~~2%, and represented ~~12%~~15% of total net revenue in the three months ended ~~June 30, 2018,~~March 31, 2019, compared to ~~10% of total net revenue~~16% in the same period in ~~2017, due primarily to $1.4 million of increased personnel related expenses, including $1.0 million of stock-based compensation, due to headcount increase.~~

~~G&A expenses increased by $3.6 million,~~2018. Reductions in legal and ~~represented 13% of total net revenue~~accounting fees in the ~~six~~three months ended ~~June 30, 2018,~~March 31, 2019, compared to ~~10% of total net revenue in~~ the same period in ~~2017, due primarily to:~~2018, were offset by costs incurred related to the implementation of a new Enterprise Resource Planning solution.

●	~~$1.5 million of increased fees related to professional fees and consulting services;~~

●	~~$1.8 million of stock based compensation due to headcount increase;~~

●	~~$0.2 million of increased other personnel related expenses due to headcount increase; and~~

●	~~$0.1 million of increased legal fees.~~

Table of Contents

Interest and Other Income, ~~(expense),~~ Net

Interest and other income (expense), net, consists of the following:

	Three Months Ended June 30,							Six Months Ended June 30,						Three Months Ended March 31,
(Dollars in thousands)	2018			% Change		2017		2018		% Change		2017		2019		% Change		2018
Total interest and other income (expense), net	$	(129	)		(147)%	$	276	$	(31)		(106)%	$	549
Interest and other income, net														$	(79)		(181)%	$	98
As a percentage of total net revenue		0%					1%		0%				1%		—%				—%

Interest and other income (expense), net, decreased ~~$405,000~~$177,000 or ~~(147)% and $580,000 or (106)%, respectively,~~181% in the three ~~and six~~ months ended ~~June 30, 2018,~~March 31, 2019, compared to the same period in ~~2017.~~2018. This decrease was due primarily to an increase in net foreign exchange losses, as well as a decrease in interest income from the Company’s marketable investments resulting from a decrease in the investment balance.

~~Table of Contents~~

Provision for Income Taxes

	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended March 31,
(Dollars in thousands)	2018		% Change		2017		2018		% Change		2017		2019		$ Change		2018
Income (loss) before income taxes	$	(2,284)		(214)%	$	2,006	$	(6,935)		(901)%	$	866	$	(8,105)	$	(3,454)	$	(4,651)
Provision (benefit) for income taxes		(712)		(1,307)%		59		(3,331)		5,546%		(59)
Income tax (benefit) provision													$	115	$	(2,734)	$	(2,619)

For the three ~~and six~~ months ended ~~June 30, 2018, the Company’s income tax benefits were $712,000 and $3,331,000, compared to~~March 31, 2019, our income tax expense was $115,000 compared to a tax benefit of ~~$59,000 and income tax benefits of $59,000~~$2.6 million in the same ~~periods~~period in ~~2017.~~2018. In the three ~~and six~~ months ended ~~June 30, 2018,~~March 31, 2019, the Company calculated the provision for income taxes for interim reporting periods by applying an estimate of the ~~"annual~~annual effective tax ~~rate"~~rate for the full year to ordinary income or loss for the reporting period. The Company’s income tax benefit for the three and six months ended June 30, 2018 reflect a projected income tax benefit for U.S. and non-U.S. operations resulting in an annual effective tax rate applied to the year-to-date ordinary loss. The income tax benefit includes excess tax benefits generated by stock deductions exercised or vestedexpense in the three ~~and six~~ months ended ~~June 30, 2018.~~

~~The~~March 31, 2019 was primarily related to income taxes of our non-U.S. operations as our U.S. operations were in a loss position and the Company had a 100% valuation allowance against them. As of March 31, 2019, and December 31, 2018, the Company had a 100% valuation allowance against its U.S. deferred tax ~~provision (benefit) for~~assets. There was no valuation allowance during the three ~~and six~~ months ended ~~June 30, 2017 related primarily to U.S. alternative minimum taxes as~~March 31, 2018 other than the Company was able to utilize the net operating losses brought forward against the Company’s projected income for fiscal year 2017. In addition, the Company recorded discretely the net tax benefit of excess equity compensation costs (“windfalls”) of approximately $59,000 and $110,000 in the three and six months ended June 30, 2017, respectively.California jurisdiction.

Liquidity and Capital Resources

~~Liquidity is the measurement of the Company’s ability to meet potential cash requirements, fund the planned expansion of the Company’s operations and acquire businesses.~~ The Company’s ~~sources~~principal source of liquidity is cash ~~include operations,~~from maturity and sales ~~and maturity~~ of marketable investments and cash generated from the issuance of common stock ~~option exercises,~~through exercise of stock options and the Company’s employee stock ~~purchases.~~purchasing program. The Company actively manages ~~the~~its cash usage and investment of liquid cash to ensure the maintenance of sufficient funds to meet ~~the Company’s~~its daily needs. The majority of the Company’s cash and investments are held in U.S. banks and ~~the Company’s~~its foreign subsidiaries maintain a limited amount of cash in their local banks to cover their short-term operating expenses.

~~At June 30, 2018~~As of March 31, 2019 and December 31, ~~2017,~~2018, the Company had ~~$41.2~~$30.9 million and ~~$45.1~~$39.6 million of working capital, ~~respectively, and the Company’s cash~~respectively. Cash and cash equivalents ~~and~~plus marketable investments ~~totaled $29.0~~decreased by $8.5 million ~~and $35.9~~to $27.1 million as of ~~June 30, 2018 and~~March 31, 2019, from $35.6 million as of December 31, ~~2017 respectively. The Company’s combined cash and cash equivalents and marketable investments balance decreased by $6.9 million for the six months ended June 30,~~ 2018, ~~principally due to the~~primarily as a result of settlement of accounts payable and accrued liabilities, ~~increased inventory purchases related to the increasing demand of the Company’s products,~~ and an increase in investments in sales, service and other management headcount to facilitate continued revenue expansion. ~~The following table summarizes the Company’s cash and cash equivalents and marketable investments:~~

Cash, Cash Equivalents and Marketable Investments

The following table summarizes our cash, cash equivalents ~~marketable investments~~ and ~~restricted~~marketable investments:

(Dollars in thousands)	June 30, 2018		December 31, 2017		Change		March 31, 2019		December 31, 2018		Change
Cash and cash equivalents	$	18,432	$	14,184	$	4,248	$	19,158	$	26,052	$	(6,894)
Marketable investments		10,573		21,728		(11,155)		7,939		9,523		(1,584)
Total	$	29,005	$	35,912	$	(6,907)	$	27,097	$	35,575	$	(8,478)

Cash Flows

	Six Months Ended June 30,				Three Months Ended March 31,
(Dollars in thousands)	2018		2017		2019		2018
Net cash flow provided by (used in):
Operating activities	$	(6,503)	$	3,890	$	(7,953)	$	(10,047)
Investing activities		10,611		5,533		1,549		8,550
Financing activities		140		(4,519)		(490)		(1,777)
Net increase in cash and cash equivalents	$	4,248	$	4,904
Net decrease in cash and cash equivalents					$	(6,894)	$	(3,274)

2729

Table of Contents

Cash Flows from Operating Activities

Net cash used in operating activities ~~was $6.5 million~~ in the ~~six~~three months ended ~~June 30, 2018,~~March 31, 2019 was approximately $8.0 million, which was due primarily to:

●

$~~3.6~~8.2 million net loss as adjusted for non-cash related items consisting primarily of stock-based compensation expense of ~~$3.9~~$1.3 million ~~income tax benefit of $3.3 million, $0.5 million provision for doubtful accounts receivable,~~ and ~~$1.4~~$1.1 million depreciation and amortization expenses;

●	~~$3.7 million generated from an increase in accounts payable due primarily to increased material purchases;~~

●	$~~4.3~~2.4 million cash used to ~~decrease~~settle accounts and accrued liabilities;

●

$~~2.2~~1.6 million cash used to increase pre-paid expenses and other long term ~~assets.;~~

assets;

●

$~~1.8~~1.4 million generated due to decrease in inventories;

	●	$0.5 million used to settle extended warranty liabilities;
	●	$0.5 million generated as a result of increased deferred revenue; and
	●	$0.4 million used as a result of increased accounts ~~receivables;~~

●	~~$1.4 million used to increase inventories; and~~

●	~~$0.5 million generated from an increase in deferred revenue.~~

~~Net cash provided by operating activities was $3.9 million in the six months ended June 30, 2017, which was due primarily to:~~

●	$4.0 million generated due to the net income of $925,000 increased by non-cash related items of $3.1 million consisting primarily of stock-based compensation expense of $2.6 million and depreciation and amortization expenses of $492,000;

●	~~$1.7 million generated from an increase in accounts payable due primarily to increased material purchases;~~

●	~~$1.5 million generated from an increase in accrued liabilities due primarily to higher personnel and warranty costs; and~~

●	~~$0.8 million generated from an increase in deferred revenue; partially offset by~~

●	~~$1.9 million used to increase inventories;~~

●	~~$1.6 million used as a result of increased accounts receivables; and~~

●	~~$0.5 million used to increase pre-paid expenses.~~receivables.

Cash Flows from Investing Activities

Net cash provided by investing activities was ~~$10.6~~$1.6 million in the ~~six~~three months ended ~~June 30, 2018,~~March 31, 2019, which was attributable primarily to:

●

$~~15.5~~3.2 million in net proceeds from the ~~sales and~~ maturities of marketable investments; partially offset by

	●	$~~4.4~~1.6 million of cash used to purchase marketable ~~investments; and~~
●	~~$0.6 million of cash used to purchase property, equipment and software.~~

~~Net cash provided by investing activities was $5.5 million in the six months ended June 30, 2017, which was attributable primarily to:~~

●	~~$31.6 million in net proceeds from the sales and maturities of marketable investments; partially offset by~~

●	~~$25.9 million of cash used to purchase marketable investments; and~~

●	~~$0.2 million of cash used to purchase property, equipment and software.~~investments.

Cash Flows from Financing Activities

Net cash ~~provided by~~used in financing activities was ~~$140,000~~$409,000 in the ~~six~~three months ended ~~June 30, 2018,~~March 31, 2019, which was primarily due to:

●

$~~3.0 million~~131,000 net proceeds from ~~exercise~~the issuance of common stock due to employees exercising their stock options and ~~employee~~purchasing stock ~~purchase plan,~~through the Employee Stock Purchase Plan (“ESPP”) program; offset by

●

$~~2.7 million~~131,000 of cash used to pay capital lease obligations; and

	●	$490,000 of cash used for taxes ~~paid~~ related to net share settlement of equity ~~awards; and~~
●	~~$0.2 million of cash used to pay capital lease obligations.~~

~~Net cash used in financing activities was $4.5 million in the six months ended June 30, 2017, which was primarily due to:~~

●	~~$7.0 million used to repurchase common stock;~~

●	~~$1.2 million of cash used for taxes paid related to net share settlement of equity awards;~~

●	~~$0.2 million used to pay down our capital lease obligations; partially offset by~~

●	~~$3.9 million proceeds from exercise of stock options and employee stock purchase plan.~~awards.

Adequacy of Cash Resources to Meet Future Needs

The Company had cash, cash equivalents, and marketable investments of ~~$29.0~~$27.1 million as of ~~June 30, 2018.~~March 31, 2019. For the first ~~six~~three months of ~~2018,~~2019, the Company’s principal source of liquidity is cash from maturity and sales of marketable investments and cash generated from the issuance of common stock through exercise of stock options and the Company’s employee stock purchasing program. The Company 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.

~~Table of Contents~~

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 ~~“Revolving~~“Original Revolving Line of Credit”) in the original principal amount of ~~$25,000,000.~~$25 million. The Original Revolving Line of Credit terminates on May 30, 2021.

The ~~purpose of the~~Original Revolving Line of Credit is to provide working capital and to fund the Company’s general business requirements. The Revolving Line of Credit bears interest at a variable interest rate equal to the LIBOR Rate plus a defined LIBOR Rate Margin based on the then-current Leverage Ratio (a ratio of funded debt to the Trailing Twelve Month ("TTM") Adjusted EBITDA).

The Revolving Line of Credit provides for borrowing limits that range from $5,000,000 to a maximum of $25,000,000 during the term of the Revolving Line of Credit. Additionally, the Company agrees to pay a variable unused commitment fee to Wells Fargo equal to (a) 0.25% per annum if the Leverage Ratio is less than 1.00 to 1.00, (b) 0.30% per annum if the Leverage Ratio is equal to or greater than 1.00 to 1.00, but less than 2.00 to 1.00, and (c) 0.35% per annum if the Leverage Ratio is equal to or greater than 2.00 to 1.00.

The Revolving Line of Credit is secured by a pledge of security interest in all the shares of each material subsidiary, together with all proceeds, all cash, stock and other moneys and property paid thereon, all rights to subscribe for securities declared or granted, and all other cash and noncash proceeds, as security for the performance of the Obligations. As of June 30, 2018, there were no borrowings under the Revolving Line of Credit.

~~Covenants~~

~~The Loan and Security Agreement contains~~contained financial and other covenants as well as the maintenance of a leverage ratio not to exceed ~~2.5:~~2.5 to 1.0 and a TTM adjusted EBITDA of not less than $10 million. A violation of any of the covenants could result in a default under the ~~Loan and Security Agreement~~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.

Table of Contents

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 ~~June 30, 2018,~~March 31, 2019, the Company had not drawn on the Revolving Line of Credit and the Company is in compliance with all financial ~~covenants.~~covenants of the Original Revolving Line of Credit, as amended by the First Amended Revolving Line of Credit and the Second Amended Revolving Line of Credit.

Commitments and Contingencies

~~During~~As of the ~~six months ended June 30, 2018,~~date of this report, other than changes related to adoption of the new lease accounting standard as described in Notes 2 and 13 to the Condensed Consolidated Financial Statements, there were no material changes to the Company’s contractual obligations and commitments ~~and contingencies described under Management’s Discussion and Analysis~~outside the ordinary course of ~~Financial Condition and Results of Operations~~business since March 18, 2019, as reported in the ~~Annual Report on~~Company’s 2018 Form ~~10-K for the year ended December 31, 2017, filed with the SEC on March 26, 2018.~~10-K.

ITEM 3. ~~QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK~~

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

A summary of the key market risks facing the 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, ~~2017,~~2018, filed with the SEC on March ~~26, 2018.~~18, 2019.

Interest Rate ~~Fluctuations~~and Market Risk

The Company holds cash equivalents as well as short-term and long-term fixed income securities. The Company’s investment portfolio includes fixed and floating rate securities. Changes in interest rates could impact the Company’s anticipated interest income. Fixed rate securities may have their fair market value adversely impacted due to fluctuations in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, the Company’s future investment income may fall short of expectation due to changes in interest rates or we may suffer losses in principal if forced to sell securities which have declined in market value due to changes in interest rates. The primary objective of the Company’s investment activities is to preserve principal while at the same time maximizing ~~yields~~the income the Company receives from investments without significantly increasing risk. To achieve this objective, ~~we invest~~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, ~~instruments of the U.S. Government and its agencies~~cash deposits, money market funds, commercial paper, non-U.S. government agency securities, and municipal ~~bonds, high grade corporate bonds, commercial paper, CDs~~bonds. The securities are classified as available-for-sale and ~~money markets, and, by policy, restrict the Company’s exposure to any single type~~consequently are recorded at fair value with unrealized gains or losses reported as a separate component of ~~investment or issuer by imposing concentration limits. To minimize the exposure due to adverse shifts in interest rates, we maintain investments at a~~accumulated other comprehensive loss. The weighted average maturity of ~~generally less than eighteen months.~~the Company’s portfolio as of March 31, 2019 was approximately 0.2 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 have resulted in a tightening in the credit markets, a reduced level of liquidity in many financial markets, and extreme volatility in fixed income and credit markets. The credit ratings of the securities we have invested in could further deteriorate and may have an adverse impact on the carrying value of these investments.

As ~~at June 30, 2018,~~of March 31, 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 ~~2.09%~~2.60% as of ~~June 30, 2018,~~March 31, 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 ~~increase~~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.

Table of Contents

The Company has historically not engaged in hedging activities relating to the Company’s foreign currency denominated transactions, given the Company has a natural hedge resulting from the Company’s foreign cash receipts being utilized to fund the respective local currency expenses.

~~Table of Contents~~

ITEM 4.CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

An evaluation as of ~~June 30, 2018~~March 31, 2019 was carried out under the supervision and with the participation of the Company’s management, including the Company’s Interim 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 ~~June 30, 2018.~~March 31, 2019.

Attached as exhibits to this Quarterly Report are certifications of the Company’s CEO and CFO, which are required in accordance with Rule 13a-14 of the Exchange Act. This Controls and Procedures section includes the information concerning the controls evaluation referred to in the certifications, and it should be read in conjunction with the certifications for a more complete understanding of the topics presented.

Changes in Internal Control over Financial Reporting

~~There~~The Company implemented certain controls related to the adoption of FASB ASC 842, effective January 1, 2019. These controls were designed and implemented to ensure the completeness and accuracy over financial reporting. With the exception of the controls implemented for FASB ASC 842, there were no changes in the Company’s internal control over financial reporting ~~that occurred~~during the ~~Company’s most recent fiscal quarter~~three months ended March 31, 2019 that have materially affected, or are reasonably likely to materially affect, ~~the Company’s~~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 Chief Executive Officer and Chief Financial Officer 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.

~~Table of Contents~~

PART II. OTHER INFORMATION

ITEM 1. ~~LEGAL PROCEEDINGS~~

LEGAL PROCEEDINGS

From time to time, the Company may be involved in legal and administrative proceedings and claims of various types. For a description of the Company’s material pending legal and regulatory proceedings and settlements refer to Note 1213 to the Company’s consolidated financial statements entitled ~~“Litigation~~“Commitments and ~~Related Matters,~~Contingencies,” in the Annual Report on Form 10-K for the year ended December 31, ~~2017,~~2018, filed with the SEC on March ~~26, 2018.~~18, 2019.

ITEM 1A. ~~RISK FACTORS~~

The Company’s business faces many risks. Any of the risks referenced in this Form 10-Q or the Company’s other SEC filings could have a material impact on the Company’s business and consolidated financial position or results of operations. Additional risks and uncertainties not presently known to the Company or that the Company currently believes to be immaterial may also impair the Company’s business operations.

RISK FACTORS

There ~~have been~~are no material changes infrom the risk factors set forth in Part I, Item 1A, "Risk Factors" in the Company's Annual Report on Form 10-K for the year ended December 31, 2017. For detailed discussion of risk factors that should be understood by any investor contemplating investment in the Company’s stock, please refer to Part I, Item 1A, "Risk Factors"Risk Factors previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, ~~2017,~~2018, filed with the SEC on March ~~26, 2018 and elsewhere in this Form 10-Q.~~18, 2019.

Table of Contents

ITEM 2. ~~UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS~~

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. ~~DEFAULTS UPON SENIOR SECURITIES~~

DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. ~~MINE SAFETY DISCLOSURES~~

MINE SAFETY DISCLOSURES

None.

ITEM 5. ~~OTHER INFORMATION~~

OTHER INFORMATION

None.

~~Table of Contents~~

ITEM 6. ~~EXHIBITS~~

EXHIBITS

Exhibit No.		Description
~~3.1~~3.2		Amended and Restated Certificate of Incorporation of the Registrant (filed as Exhibit 3.5 to our Quarterly Report on Form 10-Q filed on November 7, 2017 and incorporated herein by reference).
~~3.2~~
3.4		Bylaws of the Registrant (filed as Exhibit 3.4 to our Current Report on Form 8-K filed on January 8, 2015 and incorporated herein by reference).

4.1		Specimen Common Stock certificate of the Registrant (filed as Exhibit 4.1 to our Annual Report on Form 10-K filed on March 25, 2005 and incorporated herein by reference).
~~10.18~~		~~Loan and Security Agreement in the original principal amount of $25,000,000 by~~
10.14		Cutera, Inc. ~~in favor of Wells Fargo Bank, N.A. effective May 30, 2018 (filed as Exhibit 10.1 to our Current Report on Form 8-K filed on June 4, 2018~~2004 Amended and ~~incorporated herein by reference)~~Restated Equity Incentive Plan.

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

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

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

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~~10th day of ~~August, 2018.~~May, 2019.

	CUTERA, INC.

	/S/ SANDRAA.GARDINER
	Sandra A. Gardiner
~~Executive~~~~Vice~~~~President~~~~and~~~~Chief~~~~Financial~~~~Officer~~ ~~(Principal~~~~Financial~~~~and~~~~Accounting~~~~Officer)~~	Executive Vice President, Chief Financial Officer
	(Principal Financial and Accounting Officer)

3233

	As reported under Topic 606		Adjustments		Balances under Prior GAAP
	(In thousands)

Other long-term assets	$	5,807	$	5,325	$	482
Deferred tax asset		21,219		(1,160)		22,379
Accrued liabilities		22,756		(111)		22,867
Deferred revenue		11,807		(255)		11,552
Retained earnings (deficit)		3,156		4,530		(1,374)

	As reported under Topic 606			Adjustments			Balances under Prior GAAP

	(In thousands)
Products revenue	$	66,914		$	65		$	66,849
Service revenue		9,764			133			9,631
Sales and marketing		28,623			(648	)		29,271
Interest and other income, net*		(31	)		(129	)		98

Year Ending December 31	Amount
2018	$	1,494
2019		2,971
2020		2,913
2021		2,525
2022		2,495
2023 and beyond		214
Total future minimum lease payments	$	12,612