UNITEDSTATES
SECURITIES ANDEXCHANGECOMMISSION
Washington, D.C. 20549
FORM10-Q
(Mark One)
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 20192020
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to_____.
Commissionfilenumber: File Number: 000-50644
Cutera,Inc.
(Exact name of registrant as specified in its charter)
Delaware | 77-0492262 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
3240 Bayshore Blvd., Brisbane, California 94005
(Address of principal executive offices)
(415) 657-5500
(Registrant’s telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each |
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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). 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,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:Act (check one):
Large accelerated filer ☐ | Accelerated filer ☒ | Non-accelerated filer ☐ | Smaller reporting company ☐ | Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes ☐ No ☒
The number of shares of Registrant’s common stock issued and outstanding as of July 31, 20192020, was 14,168,034.
17,593,798.
FORM 10-Q
TABLEOFCONTENTS
Page | ||||
PART I | ||||
Item 1 | 3 | |||
| 3 | |||
| 4 | |||
| Condensed Consolidated Statements of Comprehensive | 5 | ||
| 6 | |||
8 | ||||
| 9 | |||
Item 2 | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 24 | ||
Item 3 | 36 | |||
Item 4 | 37 | |||
PART II | ||||
Item 1 | 37 | |||
Item 1A | 37 | |||
Item 2 | 39 | |||
Item 3 | 39 | |||
Item 4 | 39 | |||
Item 5 | 39 | |||
Item 6 | 40 | |||
40 |
In this Quarterly Report on Form 10-Q, “Cutera,” “the Company,” “we,” “us” and “our”“its” refer to Cutera, Inc. and its consolidated subsidiaries.
This report may contain references to the Company’sits proprietary intellectual property, including among others, trademarks for its systems and ancillary products,AcuTip Cutera®®, CoolGlide®AccuTip®, CoolGlide®, CoolGlide excel®excel®, enlighten®enlighten®, excel HR®HR®, excel V®V®, excel V+®, LimeLight®, MyQ®, Pearl®, PicoGenesis™, LimeLight®ProWave®, MyQ®Solera®, Pearl®Titan®, PicoGenesis™truSculpt®, ProWave®truSculpt® flex, Vantage®, Solera®, Titan®, truSculpt®, truSculpt®flex, Vantage®, and xeoxeo® ®.
These trademarks and trade names are the property of Cutera or the property of ourits consolidated subsidiaries and are protected under applicable intellectual property laws. Solely for convenience, ourits trademarks and tradenames referred to in this Quarterly Report on Form 10-Q may appear without the ® or ™ symbols, but such references are not intended to indicate in any way that the Company will not assert, to the fullest extent under applicable law, its rights to these trademarks and tradenames.
ITEM 1. | FINANCIAL STATEMENTS (UNAUDITED) |
ITEM1. FINANCIALSTATEMENTS (UNAUDITED)
CUTERA, INC.
CUTERA,INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(inthousands,exceptshareandpersharedata)(unaudited)
(unaudited)
June 30, 2019 | December 31, | June 30, 2020 | December 31, 2019 | |||||||||||||
Assets | ||||||||||||||||
Assets | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash and cash equivalents | $ | 27,668 | $ | 26,052 | $ | 33,659 | $ | 26,316 | ||||||||
Marketable investments | 4,002 | 9,523 | 12,894 | 7,605 | ||||||||||||
Accounts receivable, net | 24,919 | 19,637 | ||||||||||||||
Accounts receivable, net of allowance for credit losses of $1,796 and $1,355, respectively | 13,826 | 21,556 | ||||||||||||||
Inventories | 26,889 | 28,014 | 31,240 | 33,921 | ||||||||||||
Other current assets and prepaid expenses | 4,536 | 3,972 | 5,313 | 5,648 | ||||||||||||
Total current assets | 88,014 | 87,198 | 96,932 | 95,046 | ||||||||||||
Property and equipment, net | 2,834 | 2,672 | 2,417 | 2,817 | ||||||||||||
Deferred tax asset | 458 | 457 | 419 | 423 | ||||||||||||
Operating lease right-of-use assets | 8,990 | — | 7,577 | 7,702 | ||||||||||||
Goodwill | 1,339 | 1,339 | 1,339 | 1,339 | ||||||||||||
Other long-term assets | 6,311 | 5,971 | 4,733 | 6,411 | ||||||||||||
Total assets | $ | 107,946 | $ | 97,637 | $ | 113,417 | $ | 113,738 | ||||||||
Liabilities and Stockholders' Equity | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Accounts payable | $ | 11,441 | $ | 11,279 | $ | 11,681 | $ | 12,685 | ||||||||
Accrued liabilities | 27,026 | 23,300 | 20,423 | 30,307 | ||||||||||||
Operating lease liabilities | 1,276 | — | 1,526 | 2,800 | ||||||||||||
Extended warranty liability | 2,399 | 3,159 | 1,660 | 1,999 | ||||||||||||
Deferred revenue | 10,717 | 9,882 | 9,345 | 10,831 | ||||||||||||
Total current liabilities | 52,859 | 47,620 | 44,635 | 58,622 | ||||||||||||
Deferred revenue, net of current portion | 3,142 | 2,684 | 2,434 | 3,391 | ||||||||||||
Income tax liability | 93 | 394 | 93 | 93 | ||||||||||||
Long-Term Debt | 7,149 | - | ||||||||||||||
Operating lease liabilities, net of current portion | 7,888 | — | 6,262 | 5,112 | ||||||||||||
Other long-term liabilities | 782 | 553 | 345 | 578 | ||||||||||||
Total liabilities | 64,764 | 51,251 | 60,918 | 67,796 | ||||||||||||
Commitments and Contingencies (Notes 12 and 13) | ||||||||||||||||
Commitments and Contingencies (Notes 11 and 12) | ||||||||||||||||
Stockholders’ equity: | ||||||||||||||||
Common stock, $0.001 par value; authorized: 50,000,000 shares; issued and outstanding: 14,142,296 and 13,968,852 shares at June 30, 2019 and December 31, 2018, respectively | 14 | 14 | ||||||||||||||
Common stock, $0.001 par value; authorized: 50,000,000 shares; issued and outstanding:17,567,688 and 14,315,586 shares at June 30, 2020 and December 31, 2019, respectively | 18 | 14 | ||||||||||||||
Additional paid-in capital | 74,870 | 70,451 | 112,644 | 82,346 | ||||||||||||
Accumulated deficit | (31,642 | ) | (24,010 | ) | (60,166 | ) | (36,358 | ) | ||||||||
Accumulated other comprehensive loss | (60 | ) | (69 | ) | ||||||||||||
Accumulated other comprehensive income (loss) | 3 | (60 | ) | |||||||||||||
Total stockholders’ equity | 43,182 | 46,386 | 52,499 | 45,942 | ||||||||||||
Total liabilities and stockholders’ equity | $ | 107,946 | $ | 97,637 | $ | 113,417 | $ | 113,738 |
The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
Three Months Ended | Six Months Ended | Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||
June 30, | June 30, | June 30, | June 30, | |||||||||||||||||||||||||||||
2019 | 2018 | 2019 | 2018 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||
Net revenue: | ||||||||||||||||||||||||||||||||
Products | $ | 41,968 | $ | 37,650 | $ | 72,730 | $ | 66,914 | $ | 21,745 | $ | 41,968 | $ | 48,136 | $ | 72,730 | ||||||||||||||||
Service | 5,806 | 4,903 | 11,070 | 9,764 | 4,624 | 5,806 | 10,472 | 11,070 | ||||||||||||||||||||||||
Total net revenue | 47,774 | 42,553 | 83,800 | 76,678 | 26,369 | 47,774 | 58,608 | 83,800 | ||||||||||||||||||||||||
Cost of revenue: | ||||||||||||||||||||||||||||||||
Products | 18,393 | 17,045 | 33,935 | 30,967 | 12,206 | 18,393 | 26,309 | 33,935 | ||||||||||||||||||||||||
Service | 3,550 | 3,131 | 6,725 | 6,000 | 2,539 | 3,550 | 6,339 | 6,725 | ||||||||||||||||||||||||
Total cost of revenue | 21,943 | 20,176 | 40,660 | 36,967 | 14,745 | 21,943 | 32,648 | 40,660 | ||||||||||||||||||||||||
Gross profit | 25,831 | 22,377 | 43,140 | 39,711 | 11,624 | 25,831 | 25,960 | 43,140 | ||||||||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||||||||||
Sales and marketing | 16,992 | 15,535 | 33,096 | 28,623 | 11,035 | 16,992 | 25,823 | 33,096 | ||||||||||||||||||||||||
Research and development | 3,273 | 4,095 | 6,979 | 7,651 | 2,991 | 3,273 | 6,862 | 6,979 | ||||||||||||||||||||||||
General and administrative | 5,267 | 4,902 | 10,792 | 10,341 | 8,529 | 5,267 | 16,336 | 10,792 | ||||||||||||||||||||||||
Total operating expenses | 25,532 | 24,532 | 50,867 | 46,615 | 22,555 | 25,532 | 49,021 | 50,867 | ||||||||||||||||||||||||
Income (loss) from operations | 299 | (2,155) | (7,727) | (6,904) | (10,931 | ) | 299 | (23,061 | ) | (7,727 | ) | |||||||||||||||||||||
Interest and other income (expense), net | 46 | (129) | (33) | (31) | 3 | 46 | (204) | (33) | ||||||||||||||||||||||||
Income (loss) before income taxes | 345 | (2,284) | (7,760) | (6,935) | (10,928 | ) | 345 | (23,265 | ) | (7,760 | ) | |||||||||||||||||||||
Income tax benefit | (243) | (712) | (128) | (3,331) | ||||||||||||||||||||||||||||
Income tax expense (benefit) | 466 | (243 | ) | 543 | (128) | |||||||||||||||||||||||||||
Net income (loss) | $ | 588 | $ | (1,572) | $ | (7,632) | $ | (3,604) | $ | (11,394 | ) | $ | 588 | $ | (23,808 | ) | $ | (7,632 | ) | |||||||||||||
Net income (loss) per share: | ||||||||||||||||||||||||||||||||
Basic | $ | 0.04 | $ | (0.11) | $ | (0.54) | $ | (0.26) | $ | (0.67 | ) | $ | 0.04 | $ | (1.51 | ) | $ | (0.54 | ) | |||||||||||||
Diluted | $ | 0.04 | $ | (0.11) | $ | (0.54) | $ | (0.26) | $ | (0.67 | ) | $ | 0.04 | $ | (1.51 | ) | $ | (0.54 | ) | |||||||||||||
Weighted-average number of shares used in per share calculations: | ||||||||||||||||||||||||||||||||
Weighted-average number of shares used in per share calculations | ||||||||||||||||||||||||||||||||
Basic | 14,086 | 13,709 | 14,051 | 13,649 | 17,055 | 14,086 | 15,744 | 14,051 | ||||||||||||||||||||||||
Diluted | 14,356 | 13,709 | 14,051 | 13,649 | 17,055 | 14,356 | 15,744 | 14,051 |
The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)LOSS
(inthousands)
(unaudited)(Unaudited)
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Net income (loss) | $ | 588 | $ | (1,572) | $ | (7,632) | $ | (3,604) | ||||||||
Other comprehensive income (loss): | ||||||||||||||||
Available-for-sale investments | ||||||||||||||||
Net change in unrealized gains (losses) on available-for-sale investments | 3 | 18 | 9 | (4) | ||||||||||||
Less: Reclassification adjustment for (gains) losses on investments recognized during the period | — | — | — | 9 | ||||||||||||
Net change in unrealized gains and losses on available-for-sale investments | 3 | 18 | 9 | 5 | ||||||||||||
Tax provision | — | — | — | — | ||||||||||||
Other comprehensive income, net of tax | 3 | 18 | 9 | 5 | ||||||||||||
Comprehensive income (loss) | $ | 591 | $ | (1,554) | $ | (7,623) | $ | (3,599) |
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Net income (loss) | $ | (11,394 | ) | $ | 588 | $ | (23,808 | ) | $ | (7,632 | ) | |||||
Other comprehensive income: | ||||||||||||||||
Available-for-sale investments | ||||||||||||||||
Net change in unrealized gain on available-for-sale investments | - | 3 | - | 9 | ||||||||||||
Less: Reclassification adjustment for losses on investments recognized during the period | 2 | - | 63 | - | ||||||||||||
Net change in unrealized gain on available-for-sale investments | 2 | 3 | 63 | 9 | ||||||||||||
Other comprehensive gain, net of tax | 2 | 3 | 63 | 9 | ||||||||||||
Comprehensive income (loss) | $ | (11,392 | ) | $ | 591 | $ | (23,745 | ) | $ | (7,623 | ) |
The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(in thousands, except share amounts)
Three and Six Months Ended June 30, 2020
Common Stock | Additional Paid-in | Accumulated | Accumulated Other Comprehensive | Total Stockholders’ | ||||||||||||||||||||
Shares | Amount | Capital | Deficit | Income (loss) | Equity | |||||||||||||||||||
Balance at December 31, 2019 | 14,315,586 | $ | 14 | $ | 82,346 | $ | (36,358 | ) | $ | (60 | ) | $ | 45,942 | |||||||||||
Issuance of common stock for employee purchase plan | 39,248 | - | 437 | - | - | 437 | ||||||||||||||||||
Exercise of stock options | 46,128 | - | 411 | - | - | 411 | ||||||||||||||||||
Issuance of common stock in connection with public offering, net of offering costs of $2,303 | 2,742,750 | 3 | 26,493 | - | - | 26,496 | ||||||||||||||||||
Issuance of common stock in settlement of restricted and performance stock units, and net of shares withheld for employee taxes. | 423,976 | 1 | (3,118 | ) | - | - | (3,117 | ) | ||||||||||||||||
Stock-based compensation expense | - | - | 6,075 | - | - | 6,075 | ||||||||||||||||||
Net loss | - | - | - | (23,808 | ) | - | (23,808 | ) | ||||||||||||||||
Net change in unrealized gain on available-for-sale investments | - | - | - | - | 63 | 63 | ||||||||||||||||||
Balance at June 30, 2020 | 17,567,688 | $ | 18 | $ | 112,644 | $ | (60,166 | ) | $ | 3 | $ | 52,499 |
Common Stock | Additional Paid-in |
Accumulated | Accumulated Other Comprehensive | Total Stockholders’ | ||||||||||||||||||||
Shares | Amount | Capital | Deficit | Income (loss) | Equity | |||||||||||||||||||
Balance at April 1, 2020 | 14,578,146 | $ | 15 | $ | 82,292 | $ | (48,772 | ) | $ | 1 | $ | 33,536 | ||||||||||||
Issuance of common stock for employee purchase plan | 39,248 | - | 437 | - | - | 437 | ||||||||||||||||||
Exercise of stock options | 23,837 | - | 210 | - | - | 210 | ||||||||||||||||||
Issuance of common stock in connection with public offering, net of offering costs of $2,303 | 2,742,750 | 3 | 26,493 | - | - | 26,496 | ||||||||||||||||||
Issuance of common stock in settlement of restricted and performance stock units, and net of shares withheld for employee taxes. | 183,707 | - | (883 | ) | - | - | (883 | ) | ||||||||||||||||
Stock-based compensation expense | - | - | 4,095 | - | - | 4,095 | ||||||||||||||||||
Net loss | - | - | - | (11,394 | ) | - | (11,394 | ) | ||||||||||||||||
Net change in unrealized gain on available-for-sale investments | - | - | - | - | 2 | 2 | ||||||||||||||||||
Balance at June 30, 2020 | 17,567,688 | $ | 18 | $ | 112,644 | $ | (60,166 | ) | $ | 3 | $ | 52,499 |
Three and Six Months Ended June 30, 2019
Common Stock | Additional Paid-in | Retained Earnings (Accumulated | Accumulated Other Comprehensive | Total Stockholders’ | Common Stock | Additional Paid-in | Accumulated | Accumulated Other Comprehensive | Total Stockholders’ | |||||||||||||||||||||||||||||||||||||||
Shares | Amount | Capital | Deficit) | Income (loss) | Equity | Shares | Amount | Capital | Deficit | Income (loss) | Equity | |||||||||||||||||||||||||||||||||||||
Balance at December 31, 2018 | 13,968,852 | $ | 14 | $ | 70,451 | $ | (24,010) |
| $ | (69) | $ | 46,386 | 13,968,852 | $ | 14 | $ | 70,451 | $ | (24,010 | ) | $ | (69 | ) | $ | 46,386 | |||||||||||||||||||||||
Issuance of common stock for employee purchase plan | 53,803 | — | 832 | — | — | 832 | 53,803 | - | 832 | - | - | 832 | ||||||||||||||||||||||||||||||||||||
Exercise of stock options | 40,454 | — | 331 | — | — | 331 | 40,454 | - | 331 | - | - | 331 | ||||||||||||||||||||||||||||||||||||
Issuance of common stock in settlement of restricted and performance stock units, net of shares withheld for employee taxes, and stock awards | 79,187 | — | (570) | — | — | (570) | ||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock in settlement of restricted and performance stock units, and net of shares withheld for employee taxes. | 79,187 | - | (570 | ) | - | - | (570 | ) | ||||||||||||||||||||||||||||||||||||||||
Stock-based compensation expense | — | — | 3,826 | — | — | 3,826 | - | - | 3,826 | - | - | 3,826 | ||||||||||||||||||||||||||||||||||||
Net loss | — | — | — | (7,632) | — | (7,632) | - | - | - | (7,632 | ) | - | (7,632 | ) | ||||||||||||||||||||||||||||||||||
Net change in unrealized loss on available-for-sale investments | — | — | — | — | 9 | 9 | ||||||||||||||||||||||||||||||||||||||||||
Net change in unrealized gain on available-for-sale investments | - | - | - | - | 9 | 9 | ||||||||||||||||||||||||||||||||||||||||||
Balance at June 30, 2019 | 14,142,296 | $ | 14 | $ | 74,870 | $ | (31,642) | $ | (60) | $ | 43,182 | 14,142,296 | $ | 14 | $ | 74,870 | $ | (31,642 | ) | $ | (60 | ) | $ | 43,182 |
Common Stock | Additional Paid-in | Retained Earnings (Accumulated | Accumulated Other Comprehensive | Total Stockholders’ | Common Stock | Additional Paid-in | Accumulated | Accumulated Other Comprehensive | Total Stockholders’ | |||||||||||||||||||||||||||||||||||||||
Shares | Amount | Capital | Deficit) | Income (loss) | Equity | Shares | Amount | Capital | Deficit | Income (loss) | Equity | |||||||||||||||||||||||||||||||||||||
Balance at April 1, 2019 | 14,035,375 | $ | 14 | $ | 71,399 | $ | (32,230) | $ | (63) | $ | 39,120 | 14,035,375 | $ | 14 | $ | 71,399 | $ | (32,230) | $ | (63) | $ | 39,120 | ||||||||||||||||||||||||||
Issuance of common stock for employee purchase plan | 53,803 | — | 832 | — | — | 832 | 53,803 | - | 832 | - | - | 832 | ||||||||||||||||||||||||||||||||||||
Exercise of stock options | 25,422 | — | 200 | — | — | 200 | 25,422 | - | 200 | - | - | 200 | ||||||||||||||||||||||||||||||||||||
Issuance of common stock in settlement of restricted and performance stock units, net of shares withheld for employee taxes, and stock awards | 27,696 | — | (80) | — | — | (80) | ||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock in settlement of restricted and performance stock units, and net of shares withheld for employee taxes. | 27,696 | - | (80) | - | - | (80) | ||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation expense | — | — | 2,519 | — | — | 2,519 | - | - | 2,519 | - | - | 2,519 | ||||||||||||||||||||||||||||||||||||
Net income | — | — | — | 588 | — | 588 | - | - | - | 588 | - | 588 | ||||||||||||||||||||||||||||||||||||
Net change in unrealized loss on available-for-sale investments | — | — | — | — | 3 | 3 | ||||||||||||||||||||||||||||||||||||||||||
Net change in unrealized gain on available-for-sale investments | - | - | - | - | 3 | 3 | ||||||||||||||||||||||||||||||||||||||||||
Balance at June 30, 2019 | 14,142,296 | $ | 14 | $ | 74,870 | $ | (31,642) | $ | (60) | $ | 43,182 | 14,142,296 | $ | 14 | $ | 74,870 | $ | (31,642 | ) | $ | (60 | ) | $ | 43,182 |
The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(in thousands, except share amounts)
Three and Six Months Ended June 30, 2018
Common Stock | Additional Paid-in | Retained Earnings (Accumulated | Accumulated Other Comprehensive | Total Stockholders’ | ||||||||||||||||||||
Shares | Amount | Capital | Deficit) | Income (loss) | Equity | |||||||||||||||||||
Balance at December 31, 2017 | 13,477,973 | $ | 13 | $ | 62,025 | $ | 2,947 | $ | (92) |
| $ | 64,893 | ||||||||||||
Adjustment to opening balance for ASC 606 adoption | — | — | — | 3,813 | — | 3,813 | ||||||||||||||||||
Issuance of common stock for employee purchase plan | 34,776 | — | 1,154 | — | — | 1,154 | ||||||||||||||||||
Exercise of stock options | 188,859 | 1 | 1,884 | — | — | 1,885 | ||||||||||||||||||
Issuance of common stock in settlement of restricted and performance stock units, net of shares withheld for employee taxes, and stock awards | 122,644 | — | (2,665) | — | — | (2,665) | ||||||||||||||||||
Stock-based compensation expense | — | — | 3,893 | — | — | 3,893 | ||||||||||||||||||
Net income | — | — | — | (3,604) | — | (3,604) | ||||||||||||||||||
Net change in unrealized loss on available-for-sale investments | — | — | — | — | 5 | 5 | ||||||||||||||||||
Balance at June 30, 2018 | 13,824,252 | $ | 14 | $ | 66,291 | $ | 3,156 | $ | (87) | $ | 69,374 |
Common Stock | Additional Paid-in | Retained Earnings (Accumulated | Accumulated Other Comprehensive | Total Stockholders’ | ||||||||||||||||||||
Shares | Amount | Capital | Deficit) | Income (loss) | Equity | |||||||||||||||||||
Balance at April 1, 2018 | 13,824,252 | $ | 14 | $ | 62,057 | $ | 5,888 | $ | (104) |
| $ | 67,855 | ||||||||||||
Adjustment to opening balance for ASC 606 adoption | — | — | — | (1,160) | — | (1,160) | ||||||||||||||||||
Issuance of common stock for employee purchase plan | — | — | 1,154 | — | — | 1,154 | ||||||||||||||||||
Exercise of stock options | — | — | 1,251 | — | — | 1,251 | ||||||||||||||||||
Issuance of common stock in settlement of restricted and performance stock units, net of shares withheld for employee taxes, and stock awards | — | — | (377) | — | — | (377) | ||||||||||||||||||
Stock-based compensation expense | — | — | 2,206 | — | — | 2,206 | ||||||||||||||||||
Net income | — | — | — | (1,572) | — | (1,572) | ||||||||||||||||||
Net change in unrealized loss on available-for-sale investments | — | — | — | — | 17 | 17 | ||||||||||||||||||
Balance at June 30, 2018 | 13,824,252 | $ | 14 | $ | 66,291 | $ | 3,156 | $ | (87) | $ | 69,374 |
The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(inthousands)
(unaudited)
Six Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2019 | 2018 | 2020 | 2019 | |||||||||||||
Cash flows from operating activities: | ||||||||||||||||
Net loss | $ | (7,632) | $ | (3, 604) | $ | (23,808 | ) | $ | (7,632 | ) | ||||||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||||||||||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||||||
Stock-based compensation | 3,826 | 3,893 | 6,075 | 3,826 | ||||||||||||
Depreciation of tangible assets | 815 | 544 | 715 | 815 | ||||||||||||
Amortization of contract acquisition costs | 1,412 | 822 | 1,392 | 1,412 | ||||||||||||
Impairment of capitalized cloud computing costs | 805 | - | ||||||||||||||
Change in deferred tax asset | (1) | (3,324) | 4 | (1 | ) | |||||||||||
Provision for doubtful accounts receivable | (19) | 487 | ||||||||||||||
Provision for credit losses | 1,696 | (19 | ) | |||||||||||||
Other | 151 | (25) | 198 | 151 | ||||||||||||
Changes in assets and liabilities: | ||||||||||||||||
Accounts receivable | (5,263) | (1,832) | 6,034 | (5,263 | ) | |||||||||||
Inventories | 1,125 | (1,356) | 2,681 | 1,125 | ||||||||||||
Other current assets and prepaid expenses | (614) | (569) | 316 | (614 | ) | |||||||||||
Other long-term assets | (1,752) | (1,578) | (519 | ) | (1,752 | ) | ||||||||||
Accounts payable | 162 | 3,741 | (1,004 | ) | 162 | |||||||||||
Accrued liabilities | 3,779 | (4,325) | (9,754 | ) | 3,779 | |||||||||||
Extended warranty liabilities | (760) | — | (339 | ) | (760 | ) | ||||||||||
Other long-term liabilities | (140) | 70 | - | (140 | ) | |||||||||||
Deferred revenue | 1,293 | 546 | (2,443 | ) | 1,293 | |||||||||||
Income tax liabilities | (301) | 7 | - | (301 | ) | |||||||||||
Net cash used in operating activities | (3,919) | (6,503) | (17,951 | ) | (3,919 | ) | ||||||||||
Cash flows from investing activities: | ||||||||||||||||
Acquisition of property, equipment and software | (316 | ) | (581) | (435 | ) | (316 | ) | |||||||||
Disposal of property and equipment | 20 | 38 | - | 20 | ||||||||||||
Proceeds from sales of marketable investments | — | 13,044 | ||||||||||||||
Proceeds from maturities of marketable investments | 9,600 | 2,500 | 10,900 | 9,600 | ||||||||||||
Purchase of marketable investments | (4,020) | (4,390) | (16,167 | ) | (4,020 | ) | ||||||||||
Net cash provided by investing activities | 5,284 | 10,611 | ||||||||||||||
Net cash provided by (used in) investing activities | (5,702 | ) | 5,284 | |||||||||||||
Cash flows from financing activities: | ||||||||||||||||
Proceeds from exercise of stock options and employee stock purchase plan | 1,163 | 3,038 | 848 | 1,163 | ||||||||||||
Proceeds from long-term debt | 7,149 | - | ||||||||||||||
Gross proceeds from equity offering | 28,799 | - | ||||||||||||||
Offering costs on the equity offering | (2,303 | ) | ||||||||||||||
Taxes paid related to net share settlement of equity awards | (570) | (2,664) | (3,117 | ) | (570 | ) | ||||||||||
Payments on finance lease obligations | (342) | (234) | (380 | ) | (342 | ) | ||||||||||
Net cash provided by financing activities | 251 | 140 | 30,996 | 251 | ||||||||||||
Net increase in cash and cash equivalents | 1,616 | 4,248 | 7,343 | 1,616 | ||||||||||||
Cash and cash equivalents at beginning of period | 26,052 | 14,184 | 26,316 | 26,052 | ||||||||||||
Cash and cash equivalents at end of period | $ | 27,668 | $ | 18,432 | $ | 33,659 | $ | 27,668 | ||||||||
Supplemental disclosure of non-cash items: | ||||||||||||||||
Assets acquired under finance lease | $ | 903 | $ | 533 | $ | 27 | $ | 903 |
The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Description of Operations and Principles of Consolidation
Cutera, Inc. (“Cutera” or the “Company”) provides laser and energy-based aesthetic systems for practitioners worldwide. The Company designs, develops, manufactures, distributes and markets light and energy-based product platforms for use by physicians and other qualified practitioners, enabling them to offer safe and effective aesthetic treatments to their customers. The Company currently markets the following system platforms: excel, enlighten, Juliet, Secret RF, truSculpt and xeo. Several of the Company’s systems offer multiple hand pieces and applications, providing customers the flexibility to upgrade their systems. The sales of (i) systems, system upgrades, and hand pieces and upgrade of systems (collectively “Systems” revenue); (ii) replacement hand pieces,truSculpt iD andtruSculpt flexcycle refills, as well as single use disposable tips applicable toJuliet andSecret RF (“Consumables” revenue); and (iii) the distribution of third party manufactured skincare products (“Skincare” revenue); are collectively classified as “Products” revenue. In addition to Products revenue, the Company generates revenue from the sale of post-warranty service contracts, parts, detachable hand piece replacements (except for Titan, truSculpt 3D,,truSculpt iD and and truSculptflex) and service labor for the repair and maintenance of products that are out of warranty, all of which are collectively classified as “Service” revenue.
HeadquarteredThe Company’s corporate headquarters and U.S. operations are located in Brisbane, California, where the Company operates wholly-owned subsidiariesconducts manufacturing, warehousing, research and development, regulatory, sales and marketing, service, and administrative activities. The Company markets, sells and services the Company’s products through direct sales and service employees in North America (including Canada), Australia, Austria, Belgium, 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, sellSales and service the Company’s productsServices outside of the United States.these direct markets are made through a worldwide distributor network in over 40 countries. 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, 2019 and 2018, its results of operations, comprehensive income (loss), consolidated statements of changes in equity for the three and six months ended June 30, 2019 and 2018, and cash flows for the six months ended June 30, 2019 and 2018. The December 31, 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 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, 2018 filed with the Securities and Exchange Commission (the “SEC”) on March 18, 2019.
Accounting Policies
These unaudited Condensed Consolidated Financial Statements are prepared in accordance with the rules and regulations of the SEC applicable to interim financial statements. While these statements reflect all normal recurring adjustments that are, in the opinion of management, necessary for fair presentation of the results of the interim period, they do not include all of the information and footnotes required by GAAP for complete financial statements. These Condensed Consolidated Financial Statements should be read in conjunction with the financial statement disclosures in our annual report on Form 10-K for the year ended December 31, 2018 filed with the SEC on March 18, 2019.
The Company uses the same accounting policies in preparing quarterly and annual financial statements. Unless otherwise noted, amounts presented within the Notes to Condensed Consolidated Financial Statements refer to the Company’s continuing operations. Notes 2 and 13 provide information about the Company’s adoption of new accounting standards for leases.
Use of Estimates
The preparation of 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 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.
On an ongoing basis, management evaluates its estimates, including those related to warranty obligations, sales commission, accounts receivable and sales allowances, valuation of inventories, fair 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. Management bases 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 global financial markets, cybersecurity breaches and other disruptions that could compromise the Company’s information or results, management of international activities, competition from substitute products and larger companies, ability to obtain and maintain regulatory approvals, government regulations and oversight, patent and other types of litigation, ability to protect proprietary technology from counterfeit versions of the Company's products, strategic relationships and dependence on key individuals.
On January 30, 2020, the World Health Organization, or WHO, announced a global health emergency because of the COVID-19 outbreak, and the risks to the international community as the virus spreads globally beyond its point of origin.
In March 2020, the WHO declared the COVID-19 outbreak a pandemic, based on the rapid increase in exposure globally. The COVID-19 outbreak is negatively affecting the United States and global economies. As the COVID-19 outbreak continues to spread, governmental authorities ordered quarantines, shelter-in-place, and restrictions on the conduct of business operations related to the COVID-19 outbreak. These measures and restrictions had an impact on the Company's business, which led the Company to implement cost control measures, and results of operations during the six months ended June 30, 2020. The Company expects the COVID-19 outbreak to continue to affect its operations and those of third parties on which the Company relies, which could cause disruptions in its supply chain and contract manufacturing operations. Though the shelter-in-place orders were lifted or eased allowing certain businesses to open up, government authorities may order additional restrictions, quarantines or shelter-in-place. The Company has commenced limited manufacturing and currently has inventory on hand for the next 120-180 days to meet its forecasted demand, but the Company must be able to continue to have access to its supply chain to meet demand beyond that period.
Beginning in the second half of its first quarter of 2020, and through the date of this report, the Company has experienced decreasing levels of customer demand for its products. As a result of COVID-19, some of its customers are required to shelter-in-place and are not working.
In response to the COVID-19 outbreak, the Company took actions to reduce expenses, including discontinuing nonessential services and programs, instituting controls on travel and entertainment, implementing further cost-cutting measures and evaluating whether improved efficiencies can be obtained in its workforce. For example, the directors on the Company's board of directors agreed to a 25% reduction in their fees, the Company's Chief Executive Officer and its President and Chief Operating Officer had a 25% reduction in their salaries and other members of management had significant reductions in their salaries, which will remain in place until such time as the Company's business operations and economic conditions improve. The Company also instituted salary reductions for the remainder of its employees and furloughs or reductions-in-force that have affected approximately 42% of its workforce. In addition, in order to further conserve cash, bonuses owed to management from the 2019 Management Bonus Program were paid mostly in equity (Note 8) rather than in cash.
As a result of the events and impact surrounding the COVID-19 pandemic, the Company assessed whether any impairment of its goodwill or its long-lived assets had occurred, and has determined that no charges other than an impairment loss of $0.8 million on capitalized cloud computing costs related to the indefinite delay of the implementation of cloud-based enterprise resource planning software as of June 30, 2020. The Company’s assumptions about future conditions important to its assessment of potential impairment of its long-lived assets, and goodwill, including the impacts of the COVID–19 pandemic and other ongoing impacts to its business, are subject to uncertainty, and the Company will continue to monitor these conditions in future periods as new information becomes available, and will update its analyses accordingly.
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 consolidated statements of financial position as of June 30, 2020 and 2019, its consolidated statements of results of operations, comprehensive loss, changes in equity, and cash flows for the three and six months ended June 30, 2020, and 2019. The December 31, 2019 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 results for the entire year or any other interim period. Presentation of certain prior year balances have been updated to conform with current year presentation. 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, 2019 filed with the Securities and Exchange Commission (the “SEC”) on March 16, 2020.
Accounting Policies
These unaudited condensed consolidated financial statements are prepared in accordance with the rules and regulations of the SEC applicable to interim financial statements. While these statements reflect all normal recurring adjustments that are, in the opinion of management, necessary for fair presentation of the results of the interim period, they do not include all of the information and footnotes required by GAAP for complete financial statements. These condensed consolidated financial statements should be read in conjunction with the financial statement disclosures in its annual report on Form 10-K for the year ended December 31, 2019 filed with the SEC on March 16, 2020.
The Company uses the same accounting policies in preparing quarterly and annual financial statements. Unless otherwise noted, amounts presented within the Notes to condensed consolidated financial statements refer to the Company’s continuing operations. Note 1 provides information about the Company’s adoption of the new accounting standard for credit losses.
Use of Estimates
The preparation of 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 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.
On an ongoing basis, management evaluates its estimates, including those related to warranty obligations, sales commission, allowance for credit losses, and sales allowances, valuation of inventories, fair value of goodwill, useful lives of property and equipment, impairment testing for long-lived-assets, 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 period of benefit used to capitalize and amortize contract acquisition costs, variable consideration, contingent liabilities, recoverability of deferred tax assets, and effective income tax rates. Management bases 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.
Recently Adopted Accounting Pronouncements
Adopted
In FebruaryJune 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, "Leases,No.2016-13, Financial Instruments-Credit Losses (Topic 326):" (also knownMeasurement of Credit Losses on Financial Instruments", which replaces the incurred loss methodology with an expected credit loss methodology that is referred to as ASC Topic 842) which requires, among other items, a lesseethe current expected credit loss (CECL) methodology. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. The amendments in this update are required to recognize most leases as assets and liabilities on the balance sheet. Qualitative and quantitative disclosures were enhanced to better understand the amount, timing and uncertainty of cash flows arising from leases. In July 2018, the FASB issued ASU 2018-11, "Targeted Improvements," which gives the option to apply the transition provisions of ASU 2016-02 at its adoption date instead of at the earliest comparative period presented in its financial statements. In addition, ASU 2018-11 provides a practical expedient that permits lessors to not separate non-lease components from the associated lease component if certain conditions are met. Also in July 2018, the FASB issued ASU 2018-10, "Codification Improvements to ASC Topic 842, Leases," which clarifies certain aspects of ASU 2016-02.
The Company adopted ASU 2016-02, as of January 1, 2019,be applied using the modified retrospective method with an adjustment to all leases existing ataccumulated deficit and are effective for the dateCompany beginning with fiscal year 2020, including interim periods. The measurement of initial application. The comparative period information has not been restated and continues to be reportedexpected credit losses under the accounting standards in effectCECL methodology is applicable to financial assets measured at amortized cost, including loan receivables, available for the period presented. The new standard provides a numbersale securities and held-to-maturity debt securities. An entity with available for sale securities and trade receivables will be required to use historical loss information, current conditions, and reasonable and supportable forecasts to determine expected lifetime credit losses. Pooling of optional practical expedients in transition.assets with similar risk characteristics is also required. 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 easementsadopted ASU 2016-13 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 2020 on a modified retrospective basis. Upon adoption, 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 nodid not have a material impact on the Company’s condensed consolidated net earnings, results of operations, comprehensive loss, statements of changes in equity, and cash flows.
See Notes 2 and 12 for additional accounting policy and transition disclosures regarding ASC Topic 842.
In August 2018, the FASB issued ASU No. 2018-15, "Intangibles (Topic 350): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract", which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This standard also requires customers to amortize the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement inclusive of expected contract renewals. The new standard becomes effective for the Company after December 15, 2019 and early adoption is permitted.Consolidated Financial Statements.
The Company adopted this standard effective April 1, 2019, on a prospective basis for applicable implementation costs. The adoption of this guidance prospectively resultedidentified trade receivables and available-for-sale debt securities as impacted by the new guidance. However, the Company determined that the historical losses related to these available-for-sale debt securities are not material as the Company invests in the capitalization of software development costs of $0.5 million during the three months ending June 30, 2019. These costs relate to implementation of a new Enterprise Resource Planning (ERP) system and are included in “other current assets and prepaid expenses” on the balance sheet.high grade short-term securities.
IssuedThe Company establishes an allowance for credit losses on trade receivables based on the credit quality of clients, current economic conditions, the age of the accounts receivable balances, historical loss information, and current conditions and forecasted information, and write-off amounts against the allowance when they are deemed uncollectible.
The Company’s allowance for credit losses was $1.8 million and $1.4 million as of June 30, 2020 and December 31, 2019. During the three and six months ended June 30, 2020, the Company recognized a provision for credit losses of $1.2 million and $1.8 million and wrote off $0.2 million and $1.3 million against the allowance for credit losses, respectively.
In August 2018, the FASB issued ASU 2018-13, "FairNo.2018-13, “Fair Value Measurement (Topic 820)820): Disclosure Framework-ChangesFramework- Changes to the Disclosure Requirements for Fair Value Measurement"Measurement”, which modifies to improve the fair value measurement reporting of financial instruments. The amendments in this update require, among other things, added disclosure requirements onof the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. This guidance isThe amendments in this update eliminate, among other things, disclosure of the reasons for and amounts of transfers between Level 1 and Level 2 for assets and liabilities that are measured at fair value on a recurring basis and an entity's valuation processes for Level 3 fair value measurements. The amendments in this update are effective for the Company beginning with fiscal years,year 2020, with early adoption permitted. Retrospective application is required for all amendments in this update except the added disclosures, which should be applied prospectively. The adoption of the amendments in this update did not have a material impact on the Company’s consolidated financial position and results of operations.
Recently Issued Accounting Pronouncements Not Yet Adopted by the Company
In December 2019, the FASB issued ASU No.2019-12 “Income Taxes (Topic 740)-Simplifying the Accounting for Income Taxes”, to remove certain exceptions and improve consistency of application, including, among other things, requiring that an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim periodsperiod that includes the enactment date. The amendments in this update will be effective for the Company beginning with fiscal year 2021, with early adoption permitted. Most amendments within those fiscal years, beginning after the standard are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis. The adoption of the amendments in this update is not expected to have a material impact on the Company’s consolidated financial position and results of operations.
In March 2020, the FASB issued ASU No.2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” ASU No.2020-04 provides optional expedients and exceptions for applying U.S. GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another rate that is expected to be discontinued. The amendments in ASU No.2020-04 are effective for all entities as of March 12, 2020 through December 15, 2019. Early adoption is permitted. 31, 2022. The Company is currently evaluatingassessing the effectimpact of ASU No.2020-04 and the new guidance will haveLIBOR transition on its consolidated financial statements.
Note 2. Effect of Adoption of the New Lease Standard (ASC Topic 842) on Condensed Consolidated Financial Statements
The Company adopted ASC Topic 842 on January 1, 2019, applyingreviewed all other recently issued, but not yet effective, accounting pronouncements and does not expect the modified retrospective method to all leases existing at the datefuture adoption of initial application. The comparative information has not been adjusted and continues to be reported under the accounting standards in effect for the prior period.
The following table summarizes the effects of adopting Topic 842any such pronouncements will have a material impact on the Company’sCompany's interim condensed consolidated balance sheet as of January 1, 2019 (in thousands):financial statements.
As reported under Topic 842 | Adjustments | Balances under Prior GAAP | ||||||||||
Operating lease right-of-use assets | $ | 10,049 | $ | (10,049 | ) | $ | — | |||||
Operating lease liabilities | (2,430 | ) | 2,430 | — | ||||||||
Other long-term liabilities* | — | 140 | 140 | |||||||||
Operating lease liabilities, net of current portion | (7,759 | ) | 7,759 | — |
*Deferred rent included in other long-term liabilities
Note 3.2. Cash, Cash Equivalents and Marketable Investments
The Company invests its cash primarily in money market funds U.S. Treasury bills and in highly liquid debt instruments of U.S. federal and municipal governments and their agencies, commercial paper and corporate 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 the Company's foreign subsidiaries maintain a limited amount of cash in their local banks to cover short termtheir short-term operating expenses.
The Company determines the appropriate classification of its investments in marketable securitiesinvestments at the time of purchase and re-evaluates such designation at each balance sheet date. The Company’s marketable securities areinvestments 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 marketableavailable-for-sale debt securities are carriedmeasured at fair value, with the unrealized gains and losses reported as a component of stockholders’ equity. Any realized gains orvalue. Credit losses on the sale of marketableimpaired available-for-sale debt securities are determinedrecognized through an allowance for credit losses. Credit losses recognized on a specific identification method, and such gains and lossesan available-for-sale debt security should not reduce the net carrying amount of the available-for-sale debt security below its fair value. Any changes in fair value unrelated to credit are reflectedrecognized as a component of interest andan unrealized gain or loss in other income, net.comprehensive income.
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, 2019 and December 31, 2018::
June 30, 2019 | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Market Value | ||||||||||||||||||||||||||||
June 30, 2020 | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Market Value | ||||||||||||||||||||||||||||
Cash and cash equivalents | $ | 27,669 | $ | — | $ | (1) | $ | 27,668 | $ | 33,659 | $ | - | $ | - | $ | 33,659 | ||||||||||||||||
Marketable investments: | ||||||||||||||||||||||||||||||||
U.S. government notes | 1,397 | 1 | — | 1,398 | 3,198 | - |
| - | 3,198 | |||||||||||||||||||||||
U.S. government agencies | — | — | — | — | ||||||||||||||||||||||||||||
Municipal securities | — | — | — | — | ||||||||||||||||||||||||||||
Commercial paper | 1,393 | — | — | 1,393 | 9,693 | 3 |
| - | 9,696 | |||||||||||||||||||||||
Corporate debt securities | 1,211 | 1 | (1) | 1,211 | ||||||||||||||||||||||||||||
Total marketable investments | 4,001 | 2 | (1) | 4,002 | 12,891 | 3 |
| - | 12,894 | |||||||||||||||||||||||
Total cash, cash equivalents and marketable investments | $ | 31,670 | $ | 2 | $ | (2) | $ | 31,670 | $ | 46,550 | $ | 3 | $ | - | $ | 46,553 |
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 |
December 31, 2019 | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Market Value | ||||||||||||
Cash and cash equivalents | $ | 26,316 | $ | - | $ | - | $ | 26,316 | ||||||||
Marketable investments | ||||||||||||||||
U.S. government notes | 4,114 |
| - |
| - | 4,114 | ||||||||||
Commercial paper | 3,491 |
| - |
| - | 3,491 | ||||||||||
Total marketable investments | 7,605 |
| - |
| - | 7,605 | ||||||||||
Total cash, cash equivalents and marketable investments | $ | 33,921 | $ | - | $ | - | $ | 33,921 |
As of June 30, 2019 2020 and December 31, 2018, 2019, the grossnet unrealized lossesgains were $2,000$3,000 and $9,000,none, respectively, and were related to interest rate changes on available-for-sale marketable investments. The Company has concluded that it is more-likely-than-notmore-likely-than-not that the securities will be held until maturity or the recovery of their cost basis. NoNaN 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, 2019 (in2020 (in thousands):
Amount | Amount | |||||||
Due in less than one year | $ | 4,002 | $ | 12,894 | ||||
Due in 1 to 3 years | — |
| - | |||||
Total marketable investments | $ | 4,002 | $ | 12,894 |
Note 4.3. Fair Value of Financial Instruments
Fair value is an exit price representing the amount that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value hierarchy contains three levels of inputs that may be used to measure fair value in accordance with ASC 820, as follows:
● Level 1: inputs, which include quoted prices in active markets for identical assets or liabilities; ● Level 2: inputs, which include observable inputs other than Level 1 inputs, such as quoted prices for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability. For available-for-sale securities, the Company reviews trading activity and pricing as of the measurement date. When sufficient quoted pricing for identical securities is not available, the Company uses market pricing and other observable market inputs for similar securities obtained from various third-party data providers. These inputs either represent quoted prices for similar assets in active markets or have been derived from observable market data; and ● Level 3: inputs, which include unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the underlying asset or liability. Level 3 assets and liabilities include those whose fair value measurements are determined using pricing models, discounted cash flow methodologies, or similar valuation techniques, as well as significant management judgment or estimation. |
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In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as considers counterparty credit risk in its assessment of fair value.
As of June 30, 2019, 2020, 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, 2020 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Cash equivalents: | ||||||||||||||||
Money market funds | $ | 14,097 | $ | - | $ | - | $ | 14,097 | ||||||||
Marketable investments: | ||||||||||||||||
Available-for-sale-securities | 3,198 | 9,696 |
| - | 12,894 | |||||||||||
Total assets at fair value | $ | 17,295 | $ | 9,696 | $ | - | $ | 26,991 |
June 30, 2019 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Cash equivalents: | ||||||||||||||||
Money market funds | $ | 4,339 | $ | — | $ | — | $ | 4,339 | ||||||||
U.S. Treasury bills | 1,345 | — | — | 1,345 | ||||||||||||
Commercial paper | — | 4,091 | — | 4,091 | ||||||||||||
Marketable investments: | ||||||||||||||||
Available-for-sale securities | — | 4,002 | — | 4,002 | ||||||||||||
Total assets at fair value | $ | 5,684 | $ | 8,093 | $ | — | $ | 13,777 |
As of December 31, 2018, 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 was as follows (in thousands):
December 31, 2018 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||||||||||
December 31, 2019 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||||||||||
Cash equivalents: | ||||||||||||||||||||||||||||||||
Money market funds | $ | 3,036 | $ | — | $ | — | $ | 3,036 | $ | 6,311 | $ | - | $ | - | $ | 6,311 | ||||||||||||||||
Commercial paper | — | 1,047 | — | 1,047 | ||||||||||||||||||||||||||||
Marketable investments: | �� | |||||||||||||||||||||||||||||||
Short term marketable investments: | ||||||||||||||||||||||||||||||||
Available-for-sale securities | — | 9,523 | — | 9,523 | 4,114 | 3,491 |
| - | 7,605 | |||||||||||||||||||||||
Total assets at fair value | $ | 3,036 | $ | 10,570 | $ | — | $ | 13,606 | $ | 10,425 | $ | 3,491 | $ | - | $ | 13,916 |
Money market funds and U.S. Treasury bills are highly liquid investments and are actively traded. The pricing information on these investment instruments are readily available and can be independently validated as of the measurement date. This approach results in the classification of these securities as Level 1 of the fair value hierarchy.
Corporate debt, U.S. government-backed securities, and commercial paper are measured at fair value using Level 2 inputs. The Company reviews trading activity and pricing for these investments as of each measurement date. When sufficient quoted pricing for identical securities is not available, the Company uses market pricing and other observable market inputs for similar securities obtained from various third party data providers. These inputs represent quoted prices for similar assets in active markets or these inputs have been derived from observable market data. This approach results in the classification of these securities as Level 2 of the fair value hierarchy. The average remaining maturity of the Company’s Level 2 investments as of June 30, 2019 2020 is less than nine months0.2 years 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, 2019 2020 and December 31, 2018, 2019, respectively.
Note 5.4. Balance Sheet Details
Inventories
As of June 30, 2019 2020 and December 31, 2018, 2019, inventories consist of the following (in thousands):
June 30, | December 31, 2018 | June 30, 2020 | December 31, 2019 | |||||||||||||
Raw materials | $ | 15,130 | $ | 16,991 | $ | 17,678 | $ | 17,935 | ||||||||
Work in process | 1,465 | 2,306 | 2,175 | 2,016 | ||||||||||||
Finished goods | 10,294 | 8,717 | 11,387 | 13,970 | ||||||||||||
Total | $ | 26,889 | $ | 28,014 | $ | 31,240 | $ | 33,921 |
Other Long-term Assets
During the quarter ended June 30, 2020, the Company recognized in general and administrative expense an impairment loss of $0.8 million for capitalized cloud computing costs related to a cloud-based enterprise resource planning software. The capitalized cloud computing costs were recorded in Other long-term assets on the balance sheet.
Accrued Liabilities
As of June 30, 2019 2020 and December 31, 2018, 2019, accrued liabilities consist of the following (in thousands):
June 30, | December 31, 2018 | June 30, 2020 | December 31, 2019 | |||||||||||||
Accrued payroll and related expenses | $ | 11,102 | $ | 9,377 | $ | 7,880 | $ | 14,341 | ||||||||
Sales and marketing accruals | 2,183 | 2,379 | 1,289 | 2,527 | ||||||||||||
Warranty liability | 4,832 | 4,666 | ||||||||||||||
Warranty liability (see Note 5) | 3,155 | 4,401 | ||||||||||||||
Sales tax | 2,826 | 2,935 | 2,619 | 3,922 | ||||||||||||
Other | 6,083 | 3,943 | 5,480 | 5,116 | ||||||||||||
Total | $ | 27,026 | $ | 23,300 | $ | 20,423 | $ | 30,307 |
Product Remediation Liability
During the fourth quarter of 2018, the Company recognized a liability for a product remediation plan related to one of its legacy systems. This product remediation plan,was related to a voluntary action initiated by the Company includesto replace a component in one of the Company’s legacy products. The remediation plan consists primarily of replacement of a component in one of our legacy products.the system. The accrued liability consistsconsisted of the cost of materials and labor to replace the component in all units that are under the Company's standard warranty or are covered under anthe existing Extended Warranty contract.extended warranty contracts. The Company recorded a liability of approximately $5.0 million related to this product remediation plan, of which $1.1 million was utilized in the fourth quarter of 2018.
As of June 30, 2020 and December 31 2018, 2019, approximately $0.7$0.5 million of the total product remediation liability balance was related toaccrued as a component of the Company’s product warranty and included inas Warranty liability within accrued liabilities, and $3.2$1.7 million isand $2.1 million, respectively, was separately recorded as Extended Warranty Liability.warranty liabilities.
In the six months ended June 30, 2019, 2020, the Company utilized $0.2settled $0.4 million related to Extended warranty liability. NaN amounts of the product warranty and $0.7 million related to extended warranty liability. were settled in the six months ended June 30, 2020. As of June 30, 2019, 2020, the product remediation warranty and extended warranty liability were $0.6$0.5 million and $2.4$1.7 million, respectively.
Note 6.5. Warranty and Extended Service Contract
The Company has a direct field service organization in North America (including Canada). Internationally, the Company provides direct service support in Australia, Belgium, France, Germany, Hong Kong, Japan, Spain and Switzerland, as well as through third-partythird-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-partythird-party service providers.
After the original warranty period, maintenance and support are offered on an 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.incurred.
The following table provides the changes in the product standard warranty accrual for the three and six months ended June 30, 2019 2020 and 20182019 (in thousands):
Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||
June 30, | June 30, | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||
2019 | 2018 | 2019 | 2018 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||
Beginning Balance | $ | 4,064 | $ | 3,373 | $ | 4,668 | $ | 3,508 | $ | 3,398 | $ | 4,064 | $ | 4,401 | $ | 4,668 | ||||||||||||||||
Add: Accruals for warranties issued during the period | 2,708 | 2,311 | 4,152 | 4,575 | 1,100 | 2,708 | 1,960 | 4,152 | ||||||||||||||||||||||||
Less: Settlements made during the period | (1,940) | (2,123) | (3,988) | (4,522) | (1,343 | ) | (1,940 | ) | (3,206 | ) | (3,988 | ) | ||||||||||||||||||||
Ending Balance | $ | 4,832 | $ | 3,561 | $ | 4,832 | $ | 3,561 | $ | 3,155 | $ | 4,832 | $ | 3,155 | $ | 4,832 |
The settlements presented in the table exclude costs related to extended service contract cost, which was and $0.1 million and $0.3 million in the three and six months ended June 30, 2020, respectively, to replace a component in one of the Company's legacy products.
Note 7.6. 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. AsApproximately 80% of June 30, 2019, approximately 77% of the Company’s deferred revenue balance of $13.9$11.8 million as of June 30, 2020 will be recognized over the next 12 months.
The following table provides changes in the deferred service contract revenue balance for the three and six months ended June 30, 2019 2020 and 20182019 (in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Beginning Balance | $ | 12,969 | $ | 12,475 | $ | 14,222 | $ | 11,855 | ||||||||
Add: Payments Received | 2,356 | 5,309 | 5,582 | 9,451 | ||||||||||||
Less: Revenue | (3,546 | ) | (3,925 | ) | (8,025 | ) | (7,447 | ) | ||||||||
Ending Balance | $ | 11,779 | $ | 13,859 | $ | 11,779 | $ | 13,859 |
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Beginning Balance | $ | 12,475 | $ | 11,015 | $ | 11,855 | $ | 11,656 | ||||||||
Add: Payments received | 5,309 | 4,739 | 9,451 | 8,416 | ||||||||||||
Less: Revenue recognized | (3,925) | (3,947) | (7,447) | (8,265) | ||||||||||||
Ending Balance | $ | 13,859 | $ | 11,807 | $ | 13,859 | $ | 11,807 |
Costs for extended service contracts were $2.3 million and $3.5 million, respectively, for the three and six months ended June 30, 2020, respectively, and $2.2 million and $4.2 million, respectively, for the three and six months ended June 30, 2019, and $2.0 million and $ 3.9 million, respectively, for the three and six months ended June 30, 2018.2019.
Note 8.7. Revenue
Effective January 1, 2018, the Company recognizes revenue under ASC Topic 606.Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for promised goods or services. The Company’s performance obligations are satisfied either over time or at a point in time. Revenue from performance obligations that are transferred to customers over time accounted for approximately 13%18% and 9%13% respectively, of the Company’s total revenue for the six months ended June 30, 2019 2020 and 2018.2019.
The Company has certain system sale arrangements that contain multiple products and services. For these bundled sale arrangements, the Company accounts for individual products and services as separate performance obligations if they are distinct. The Company’s products and services are distinct if a customer can benefit from the product or service on its own or with other resources that are readily available to the customer, and if the Company’s promise to transfer the products or service to the customer is separately identifiable from other promises in the sale arrangements. The Company’s system sale arrangements can include all or a combination of the following performance obligations: the system and software license (considered as one performance obligation), system accessories (hand pieces), training, other accessories, extended service contracts, marketing services, and marketingtime and materials services.
For the Company’s system sale arrangements that include an extended service contract, the period of service commences at the expiration of the Company’s standard warranty offered at the time of the system sale. The Company considers the extended service contracts terms in the arrangements that are legally enforceable to be performance obligations. Other than extended service contracts and marketing services, which are satisfied over time, the Company generally satisfies all performance obligations at a point in time. Systems, system accessories (hand pieces), service contracts, training, and time and materials services are also sold on a stand-alone basis, and these performance obligations are satisfied at a point in time. For contracts with multiple performance obligations, the Company allocates the transaction price of the contract to each performance obligation on a relative standalone selling price basis.
Nature of Products and Services
Systems
Systems revenue is generated from the sale of systems and from the sale of upgrades to existing systems. A system consists of a console that incorporates a universal graphic user interface, a laser or other energy based module, control system software and high voltage electronics, as well as one or more hand pieces. In certain applications, the laser or other energy-based module is contained in the hand piece, such as with the Company’sPearlandPearl Fractional applications, rather than within the console.
The Company offers customers the ability to select the system that best fits their practice at the time of purchase and then to cost-effectively add applications to their system as their practice grows. This provides customers the flexibility to upgrade their systems whenever they choose and provides the Company with a source of additional Systems revenue.
The system or upgrade and the right to use the embedded software represent a single performance obligation as the software license is integral to the functionality of the system or upgrade.
The Company does not identify calibration and installation services for systems other than enlighten as performance obligations because such services are immaterial in the context of the sale arrangement.contract. The related costs to complete calibration and installation for systems other than enlighten are immaterial. Calibration and installation services for enlighten systems are identified as separate performance obligations.
For systems sold directly to end-customers that are credit approved, revenue is recognized when the Company transfers control to the end-customer, which occurs when the product is shipped to the customer or when the customer receives the product, depending on the nature of the arrangement. In international markets whereWhen collectability is not established in advance of receipt of payment from the Company has a direct presence,customer, revenue is recognized on cash basis, for system sales to end-use customers in whichupon the collectibility criterion has not been established, whenlater of the receipt of payment or the satisfaction of the performance obligations in the sale arrangement are satisfied.obligation. For systems sold through credit approved distributors, revenue is recognized at the time of shipment.shipment to the distributor.
The Company typically receives payment for its system consoles and other accessories within 30 days of shipment. Certain international distributor arrangements allow for longer payment terms.
Skincare products
The Company sells third-partythird-party manufactured skincare products in Japan. The third-partythird-party skincare products are purchased from the third-partya third-party manufacturer and sold to licensed physicians. The Company acts as the principal in this arrangement, as it determines the price to charge customers for the skincare products, and controls the products before they are transferred to the customer. Sales of skincare products are typically the subject of contracts in which the skincare products represent the sole performance obligations. The Company recognizes revenue for skincare products at a point in time.
Consumables (Other accessories)and other accessories
The Company treatsclassifies its customers' purchases of replacement cycles for truSculpt iD and truSculpt flex, as well as replacement Titan and truSculpt 3D hand pieces, as Consumable revenue, which provides the Company with a source of recurring revenue from existing customers. The Juliet and Secret RF products have single use disposable tips which must be replaced after every treatment. Sales of these consumable tips further enhance the Company’s recurring revenue. HandThe Company’s systems offer multiple hand pieces and applications, which allow customers to upgrade their systems. The Company classifies as product revenue the sales of systems, system upgrades, hand pieces, hand piece refills (applicable to Titan® and truSculpt) and the distribution of the Company’s legacy truSculpt product are accounted for in accordance with the Company’s standard warranty and service contract policies.third-party manufactured skincare products.
Extended contract services
The Company offers post-warranty services to its customers through extended service contracts that cover parts and labor for a term of one, two, or three years. Service contract revenue is recognized over time, using a time basedtime-based measure of progress, as the customers benefit from the service throughout the service period. The Company also offers services on a time-and-materials basis for systems and detachable hand piece replacements. Revenue related to services performed on a time-and-materials basis is recognized when performed. These post-warranty services serve as additional sources of recurring revenue from the Company’s installed product base.
Training
Sales of systems to customers include training on the use of the system to be provided within 180 days of purchase. The Company considers training a separate performance obligation as customers can immediately benefit from the training together with the customer’s system. Training is also sold separately from systems. The Company recognizes revenue for training when the training is provided. Training is not required for customers to use the systems.
Customer Marketing Support
In North America, the Company offers marketing and consulting phone support to its customers across all system platforms. These customer marketing support services include a practice development model and marketing training, performed remotely with ongoing phone consultations for six months from date of purchase. The Company considers customer marketing support a separate performance obligation, and recognizes revenue over the six-monthsix-month term of the contracts.
Significant Judgments
The determination of whether two or more contracts entered into at or near the same time with the same customer should be combined and accounted for as one contract may require the use of significant judgment. In making this determination, the Company considers whether the contracts are negotiated as a package with a single commercial objective, have price interdependencies, or promise goods or services that represent a single performance objectiveobligation.
While the Company’s contractspurchase agreements do not provide customers with a contractual right of return, the Company maintains a sales allowance to account for potential returns or refunds as a reduction in transaction price at the time of sale. The Company estimates sales returns and other variable consideration based on historical experience.
The Company determines standalone selling price ("SSP") for each performance obligation as follows:
● | Systems: The SSPs for systems are based on directly observable sales in similar circumstances to similar customers. |
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● | Extended warranty/Service contracts: SSP is based on observable price when sold on a standalone |
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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 loyalty program, customers accumulate points based on their purchasing levels. Oncelevels which can be redeemed for such rewards as the right to attend the Company’s advanced training event for truSculpt, or a loyalty program member achieves a certain tier level,ticket for the member earns a reward.Company’s annual forum. A customer’s account must be in good standing to receive the benefits of the rewards program. Rewards are earned on a quarterly basis and must be used in the following quarter. Customers receive a notification regarding their rewards tier by the fifth day of the following quarter. All unused rewards are forfeited. The fair value of the reward earned by loyalty program members is included in accrued liabilities and recorded as a reduction of net revenue at the time the reward is earned. As of June 30, 2020 and December 31, 2019, the accrual for the loyalty program included in accrued liabilities was $0.2 million and $0.2 million, respectively.
Deferred Sales Commissions
Incremental costs of obtaining a contract, including saleswhich consist primarily of commissions and related payroll taxes, are capitalized and amortized on a straight-line basis over the expected customer relationship period.period of benefit, except for costs that are recognized when product is sold. 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.
Total capitalized costs as of June 30, 2020 and December 31, 2019, respectively, were $5.0$3.7 million and $4.6 million and are included in otherOther long-term assets in the Company’s condensed consolidated balance sheet. Amortization expense for these assets was $0.7 million and $1.4 million, respectively, during the three and six months ended June 30, 2019 2020 and $0.7 million and $1.4 million respectively, during the three and six months ended June 30, 2019. The amortization expense related to these capitalized costs is included in sales and marketing expense in the Company’s condensed consolidated statement of operations. Amortization expense was $0.4 million and $0.8 million, respectively, during the three and six months ended June 30, 2018.
Note 9.8. Stockholders’ Equity and Stock-based Compensation Expense
2019 Equity Incentive Plan
AtIssuances of Common Stock
On April 21, 2020, the Company issued and sold an aggregate of 2,742,750 shares of the Company’s Annual Meetingcommon stock, par value $0.001 per share at a price to the public of Stockholders on $10.50 per share. The shares include the full exercise of the underwriter’s option to purchase an additional 357,750 shares of common stock. The Company received net proceeds from the offering of approximately $26.5 million, after deducting underwriting discounts, commissions, and offering expenses of $2.1 million.
Stock-Based Compensation
The Company’s equity incentive plans are broad-based, long-term programs intended to attract and retain talented employees and align stockholder and employee interests. In June 14, 2019, the Company’s 2020, stockholders approved thean amendment and restatement of the Amended and Restated 20042019 Equity Incentive Plan (the “Prior Plan”) as the Amended and Restated 2019 Equity Incentive Plan (the “Amended“Restated Plan”) and Restated Plan”). The Amended and Restated Plan amended the Prior Plan to: (i) increase the number ofapproved an additional 600,000 shares, available for future grant by 700,000 (in addition to the 9,701,192 shares provided under the Prior Plan); (ii) extend the term of the Prior Plan to the date of the Annual Meeting of the Company’s stockholders in 2029; (iii) amend the Prior Plan to eliminate the requirement for awards granted on or after June 14, 2019 that any shares subject to awards with an exercise price less than fair market value on the date of such grant will be counted against the Plan as 2.12 shares for each full value share awarded as set forth in Section 3(b) of the Prior Plan; (iv) amend the Prior Plan to remove the requirement that any shares subject to awards with an exercise price less than fair market value on the date of such grant will be counted against the Plan as 2.12 shares for each full value share awarded as set forth in Section 3(b) of the Prior Plan; (v) amend Section 11 of the Prior Plan related to non-employee director initial and annual awards; (vi) amend the Prior Plan to remove certain provisions relating to the “performance based compensation” exception under Section 162(m) of the Internal Revenue Code of 1986, as amended; (vii) include a minimum one-year vesting period with respect to awards granted under the Amended and Restated Plan; and (viii) include certain other editorial and administrative amendments to the Prior Plan.
On June 11, 2019, the Company’s board of directors (“the “Board”) also approved amended and restated the Company’s Stock Ownership Guidelines adopted on July 28, 2017 in their entirety, to require all officers (as defined by Rule 16a-1(f) of the Securities Exchange Act of 1934, as amended) to hold at least 50% of any shares received pursuant to stock options, stock appreciation rights, vested restricted stock awards (“RSAs”), restricted stock units (“RSUs”), performance shares or performance units (net of taxes) for a minimum of one year following vesting and delivery.
On June 11, 2019, the Board also adopted a Clawback Policy to permit recovery of certain compensation paid to Named Executive Officers (as defined in Item 402 of Regulation S-K) of the Company if the Compensation Committee of the Board determines that a Named Executive Officer (i) has violated law, the Company’s Code of Business Conduct and Ethics, or any significant ethics or compliance policies, and (ii) such conduct results in material financial or reputational harm, or results in a need for a restatement of the Company’s consolidated financial statements.
grants. The Amended and Restated Plan provides for the grant of incentive stock options, non-statutory stock options, RSAs, RSUs,restricted stock units (“RSUs”), stock appreciation rights, performance stock units, performance shares, and other stock or cash awards.
The Company issued 22,344 and 42,236 RSUs toCompany’s Board of Directors granted its non-employee directors during the three and six months ended June 30, 2019. The Board granted to executive officers, senior management and certain employees 307,355nil and 71,678 performance stock units (“PSUs”) during the three and six months for the quarter ended June 30, 2019.2020, respectively. The PSUs granted in the six monthsquarter ended June 30, 2019 2020 vest subject to the recipients continued service and to the achievement of certain operational goals for the Company’s 20192020 fiscal year which consist of the achievement of revenue targets for consumable products, revenue targets for international revenue, and certain operational milestonesthe achievement of specific product milestones.
On April 1, 2020, the Company issued RSUs to settle bonuses owed to management under the 2019 Management Bonus Program. In the past, the Company has paid these bonuses with cash on hand. However, due to the economic conditions resulting from COVID-19, fully vested shares were issued in lieu of cash. The Company issued 209,981 shares related to product performance.this bonus payment to management and recognized $2.6 million in stock-based compensation expense. The Company also recorded an equivalent reduction in bonus expense as a result of the settlement of the bonus in shares.
The Company’s Board of Directors also granted its executive officers, senior management and certain employees 21,32453,819 and 267,106421,417 RSUs, respectively, during the three and six months month periods ended June 30, 2019. 2020. The annual RSUs granted vest over four years at 25% on each anniversary of the grant date.
Under the Restated Plan, as amended, the Company issued 207,544 and 470,104 shares of common stock during the three and six months ended June 30, 2020, respectively, in conjunction with stock options exercised and the vesting of RSUs and PSUs, net of shares withheld for employee taxes.
As of June 30, 2019, 2020, there was approximately $13.0$15.5 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 1.82.6 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 predecessor plans to the 2019 Equity IncentiveRestated Plan areis 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 | ||||||||
Additional shares reserved | 700,000 | — | — | |||||||||
Stock awards granted* | (1,319,304) | — | — | |||||||||
Options exercised | — | (42,066) | 7.87 | |||||||||
Options canceled | 41,573 | (41,573) | 20.60 | |||||||||
Stock awards canceled* | 299,374 | — | — | |||||||||
Balance, June 30, 2019 | 862,948 | 424,066 | $ | 21.77 |
*The Company had a “fungible share” provision in the Prior Plan whereby for each full-value award (RSU/PSU) issued or canceled under the Prior Plan required the subtraction or add back of 2.12 shares from or to the Shares Available for Grant, respectively. The Company’s stockholders approved the removal of the “fungible share” provision for awards granted on or after June 14, 2019 upon adoption of the Amended and Restated Plan at the Company’s 2019 Annual Meeting of Stockholders held on June 14, 2019.
Options Outstanding | ||||||||||||
Shares Available for Grant | Number of Stock Options Outstanding | Weighted- Average Exercise Price | ||||||||||
Balance, December 31, 2019 | 761,705 | 295,699 | $ | 25.52 | ||||||||
Additional shares reserved | 600,000 | - | - | |||||||||
Stock awards granted | (707,555 | ) | - | - | ||||||||
Options exercised | - | (46,128 | ) | 4.85 | ||||||||
Options canceled | 44,177 | (44,177 | ) | 39.07 | ||||||||
Stock awards canceled | 364,555 | - | - | |||||||||
Balance, June 30, 2020 | 1,062,882 | 205,394 | $ | 26.33 |
Non-Employee Stock-Based Compensation
The Company granted 9,303 RSUs and 11,920 PSUs to non-employees during the six months ended June 30, 2019. The RSUs granted vest over four years at 25% on each anniversary of the grant date. The PSUs vest over a year subject to the same performance criteria as employees. The PSUs granted in the three and six months ended June 30, 2019 vest subject to the recipients continued service and to the achievement of certain operational goals for the Company’s 2019 fiscal year.
Stock-based Compensation Expense
Stock-based compensation expense by department recognized during the three and six months ended June 30, 2019 2020 and 2018 were2019 was as follows (in thousands):
Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||
June 30, | June 30, | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||
2019 | 2018 | 2019* | 2018 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||
Cost of revenue | $ | 404 | $ | 227 | $ | 673 | $ | 380 | $ | 743 | $ | 404 | $ | 1,033 | $ | 673 | ||||||||||||||||
Sales and marketing | 997 | 715 | 1,715 | 1,204 | 1,251 | 997 | 1,970 | 1,715 | ||||||||||||||||||||||||
Research and development | 370 | 262 | 633 | 453 | 769 | 370 | 1,090 | 633 | ||||||||||||||||||||||||
General and administrative | 748 | 1,002 | 805 | 1,856 | 1,332 | 748 | 1,982 | 805 | ||||||||||||||||||||||||
Total stock-based compensation expense | $ | 2,519 | $ | 2,206 | $ | 3,826 | $ | 3,893 | $ | 4,095 | $ | 2,519 | $ | 6,075 | $ | 3,826 |
*Included in the six-month ended June 30, 2019 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 10.9. Net Income (Loss)Loss Per Share
Basic net income (loss)loss per share is computed using the weighted-average number of shares outstanding during the period. In periods of net income, diluted shares outstanding include the dilutive effect of in-the-money equity awards (stock options, RSUs, PSUsrestricted 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.
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)loss and the weighted average number of shares used in computing basic and diluted net income (loss)loss per share (in thousands, except per share data):
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Numerator | ||||||||||||||||
Net income (loss) (in thousands) | $ | 588 | $ | (1,572) | $ | (7,632) | $ | (3,604) | ||||||||
Denominator | ||||||||||||||||
Weighted average shares of common stock outstanding used in computing net income (loss) per share, basic | 14,086 | 13,709 | 14,051 | 13,649 | ||||||||||||
Dilutive effect of incremental shares and share equivalents | 270 | — | — | — | ||||||||||||
Weighted average shares of common stock outstanding used in computing net income (loss) per share, diluted | 14,356 | 13,709 | 14,051 | 13,649 | ||||||||||||
Net income (loss) per share: | ||||||||||||||||
Net income (loss) per share, basic | $ | 0.04 | $ | (0.11) | $ | (0.54) | $ | (0.26) | ||||||||
Net income (loss) per share, diluted | $ | 0.04 | $ | (0.11) | $ | (0.54) | $ | (0.26) |
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Numerator: | ||||||||||||||||
Net income (loss) | $ | (11,394 | ) | $ | 588 | $ | (23,808 | ) | $ | (7,632 | ) | |||||
Denominator: | ||||||||||||||||
Weighted average shares of common stock outstanding used in computing net income (loss) per share, basic | 17,055 | 14,086 | 15,744 | 14,051 | ||||||||||||
Dilutive effect of incremental shares and share equivalents | - | 270 | - | - | ||||||||||||
Weighted average shares of common stock outstanding used in computing net loss per share, diluted | 17,055 | 14,356 | 15,744 | 14,051 | ||||||||||||
Net loss per share: | ||||||||||||||||
Net income (loss) per share, basic and diluted | $ | (0.67 | ) | $ | 0.04 | $ | (1.51 | ) | $ | (0.54 | ) |
The following numbers of shares outstanding, prior to the application of the treasury stock method, were excluded from the computation of diluted net income (loss)loss per common share for the periodperiods presented because including them would have had an anti-dilutive effect (in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Options to purchase common stock | 231 | 192 | 253 | 466 | ||||||||||||
Restricted stock units | 803 | 178 | 736 | 460 | ||||||||||||
Performance stock units | 71 |
| - | 145 | 162 | |||||||||||
Employee stock purchase plan shares | 58 |
| - | 58 | 94 | |||||||||||
Total | 1,163 | 370 | 1,192 | 1,182 |
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Options to purchase common stock | 192 | 710 | 466 | 758 | ||||||||||||
Restricted stock units | 178 | 449 | 460 | 422 | ||||||||||||
Performance stock units | — | 49 | 162 | 36 | ||||||||||||
Employee stock purchase plan shares | — | 73 | 94 | 73 | ||||||||||||
Total | 370 | 1,281 | 1,182 | 1,289 |
Note 11.10. Income Taxes
The Company calculates the provision for income taxes during interim reporting periods by applying an estimate of the annual effective tax rate for the full fiscal year to ordinary income or loss for the interim reporting period. When applicable, the year-to-date tax provision reflects adjustments from discrete tax items.
For the three and six months ended June 30, 2020, the Company's income tax expense was $0.5 million and $0.5 million, respectively, compared to income tax benefits of $0.2 million and $0.1 million the three and six months ended June 30, 2019, respectively.
The Company's income tax benefitexpense for the three months ended June 30, 2019 2020 is due primarily to the release of reserve for uncertain tax position in Germany of $0.3 million, partially offset by income taxes in non-U.S. operations. Theforeign jurisdictions. As the Company's U.S. operations continueare projecting to be in a taxable loss position in fiscal year 2020,and based on all available objectively verifiable evidence during the three months ended June 30, 2020, the Company maintainsbelieves it is more likely than not that the tax benefits of the U.S. losses incurred will not be realized. Accordingly, the Company will continue to maintain a 100%full valuation allowance against itson the U.S. deferred tax assets.
For On March 27, 2020, the threeU.S. federal government enacted the Coronavirus Aid, Relief, and six months ended June 30, 2019,Economic Security Act (“CARES Act”). The CARES Act changed several of the existing U.S. corporate income tax laws by, among other things, increasing the amount of deductible interest, allowing companies to carryback certain Net Operating Losses (“NOLs”) and increasing the amount of NOLs that corporations can use to offset income. The CARES Act did not have a material impact on the Company's income tax benefits were $0.2 millionprovision, deferred tax assets and $0.1 million, comparedliabilities, and related taxes payable. The Company is currently assessing the future implications of these provisions within the CARES Act on the Company's Consolidated Financial Statements, but does not expect the impact to tax benefits of $0.7 million and $3.3 million, respectively, for the same periods in 2018.be material.
Note 11. Leases
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 expectedis a party 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 June 30, 2019, and December 31, 2018, the Company maintained a 100% valuation allowance against its U.S. deferred tax assets. There was no valuation allowance during the three months ended June 30, 2018 other than the California jurisdiction.
Management’s judgment is required in determining any valuation allowance recorded against deferred tax assets. In evaluating the ability to recover deferred tax assets, the Company considers available positive and negative evidence giving greater weight to its more recent cumulative losses, and lesser weight to its projected financial results, due to the subjectivity involved in forecasting future periods. The Company also considers, 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.
Note 12. Leases
The Company hascertain operating and finance leases for vehicles, office space and storages.storages facilities. The Company’s material operating leases consist of office space, as well as storage facilities.facilities, and finance leases consist of automobiles. The Company’s facility leases generally have remaining terms of 1 to 10 years, some of which include options to renew the leases for up to 5 years. The Company leases space for operations in the United States, Japan, Belgium, France and Spain. In addition to the above facility leases, the Company also routinely leases automobiles for certain sales and field service employees under operatingfinance 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 yet paid. Operating lease assets represent the right to use an underlying asset and are based upon the operating lease liabilities adjusted for prepayments or accrued lease payments, initial direct costs, lease incentives, and impairment of operating lease assets. To determine the present value of lease payments not yet paid, the Company estimates the incremental secured borrowing rates corresponding to the maturities of the leases. The Company based the rate estimates on prevailing financial market conditions, credit analysis, and management judgment.
The Company recognizes expense for these leases on a straight-line basis over the lease term. Additionally, tenant incentives used to fund leasehold improvements are recognized when earned and reduce ourthe Company’s right-of-use asset related to the lease. These are amortized through the right-of-use asset as reductions of expense over the lease term. In June 2020, the Company amended its Japan Tokyo office lease by extending the lease by three years through 2024.
Below is supplementalSupplemental balance sheet information related to leases is as follows (in thousands):
Leases | Classification | June 30, 2020 | ||||||||
Assets | Classification | June 30, 2019 | ||||||||
Right-of-use assets | Operating lease assets | $ | 8,990 | Operating lease assets | $ | 7,577 | ||||
Finance lease | Property and equipment, net* | 1,327 | Property and equipment, net* | 707 | ||||||
Total leased assets | Total leased assets | $ | 10,317 | Total leased assets | $ | 8,284 |
*Finance lease assets included in Property and equipment, net. |
Liabilities
Liabilities | Classification | ||||
Operating lease liabilities | |||||
Operating lease liabilities, current | Operating lease liabilities | 1,526 | |||
Operating lease liabilities, non-current | Operating lease liabilities, net of current portion | 6,262 | |||
Total Operating lease liabilities | $ | 7,788 | |||
Finance lease liabilities | |||||
Finance lease liabilities, current | Accrued liabilities* | 501 | |||
Finance lease liabilities, non-current | Other long-term liabilities | 345 | |||
Total Finance lease liabilities | $ | 846 |
Operating lease liabilities | |||||
Operating lease liabilities, current | Operating lease liabilities | $ | 1,276 | ||
Operating lease liabilities , non-current | Operating lease liabilities, net of current portion | 7,888 | |||
Total Operating lease liabilities | $ | 9,164 |
|
Finance lease liabilities | |||||
Finance lease liabilities, current | Accrued liabilities | $ | 640 | ||
Finance lease liabilities, non-current | Other long-term liabilities | 782 | |||
Total Finance lease liabilities | $ | 1,422 |
Lease costs during the three months ended June 30, 2019:
Finance lease cost | Amortization expense | $ | 188 | ||
Finance lease cost | Interest for finance lease | 21 | |||
Operating lease cost | Operating lease expense | 717 |
Lease costs during the six months ended June 30, 2019: | |||||
Finance lease cost | Amortization expense | $ | 371 | ||
Finance lease cost | Interest for finance lease | 40 | |||
Operating lease cost | Operating lease expense | 1,441 |
Cash paid for amounts included in the measurement of lease liabilities during the three months ended June 30, 2019 were as follows: | |||||
Operating cash flow | Finance lease | $ | 21 | ||
Financing cash flow | Finance lease | 253 | |||
Operating cash flow | Operating lease | 699 |
Cash paid for amounts included in the measurement of lease liabilities during the six months ended June 30, 2019 were as follows:
Operating cash flow | Finance lease | $ | 40 | ||
Financing cash flow | Finance lease | 415 | |||
Operating cash flow | Operating lease | 1,404 |
* Finance lease liabilities included in Accrued liabilities |
Lease costs during the three months ended June 30, 2020: | |||||
Finance lease cost | Amortization expense | $ | 277 | ||
Finance lease cost | Interest for finance lease | 16 | |||
Operating lease cost | Operating lease expense | 728 |
Lease costs during the six months ended June 30, 2020: | |||||
Finance lease cost | Amortization expense | $ | 425 | ||
Finance lease cost | Interest for finance lease | 35 | |||
Operating lease cost | Operating lease expense | 1,456 |
Cash paid for amounts included in the measurement of lease liabilities during the six months ended June 30, 2020 were as follows: | |||||
Operating cash flow | Finance lease | $ | 35 | ||
Financing cash flow | Finance lease | 380 | |||
Operating cash flow | Operating lease | 1,454 |
Maturities of lease liabilities
Facility leases
Maturities of leasefacility leases liabilities were as follows as of June 30, 2019 (in2020 (in thousands):
| Operating leases | |||||||
Remainder of 2019 | $ | 1,416 | ||||||
2020 | 2,868 | |||||||
Year Ending June 30, | Amount | |||||||
Remainder of 2020 | $ | 1,439 | ||||||
2021 | 2,613 | 2,959 | ||||||
2022 | 2,607 | 2,988 | ||||||
2023 and thereafter | 352 | |||||||
2023 | 706 | |||||||
2024 and thereafter | 106 | |||||||
Total lease payments | 9,856 | 8,198 | ||||||
Less: imputed interest | 692 | (410 | ) | |||||
Present value of lease liabilities | $ | 9,164 | $ | 7,788 |
Vehicle Leases
As of June 30, 2019, 2020, the Company was committed to minimum lease payments for vehicles leased under long-term non-cancelable finance leases as follows (in thousands):
| Operating leases | |||
Remainder of 2019 | $ | 456 | ||
2020 | 499 | |||
2021 | 379 | |||
2022 | 234 | |||
Total lease payments | 1,568 | |||
Less: imputed interest | 146 | |||
Present value of lease liabilities | $ | 1,422 |
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):
| Operating leases | |||
2019 | $ | 3,011 | ||
2020 | 2,939 | |||
2021 | 2,564 | |||
2022 | 2,495 | |||
2023 and thereafter | 214 | |||
Future minimum rental payments | $ | 11,223 |
Vehicle Leases - U.S.
As of December 31, 2018, the Company was committed to minimum lease payments for vehicles leased under long-term non-cancelable capital leases as follows (in thousands):
| Operating leases | |||
2019 | $ | 576 | ||
2020 | 287 | |||
2021 | 152 | |||
Future minimum lease payments | $ | 1,015 |
Year Ending June 30, | Amount | |||
Remainder of 2020 | $ | 249 | ||
2021 | 395 | |||
2022 | 253 | |||
2023 | 11 | |||
Total lease payments | 908 | |||
Less: imputed interest | (62 | ) | ||
Present value of lease liabilities | $ | 846 |
Weighted-average remaining lease term and discount rate, as of June 30, 2019, 2020, were as follows:
Lease Term and Discount Rate | June 30, 2020 | |||
Weighted-average remaining lease term (years) | ||||
Operating leases | ||||
Finance leases | ||||
Weighted-average discount rate | ||||
Operating leases | % | |||
Finance leases | 5.6 | % |
Note 13.12. Contingencies
The Company is named from time to time as a party to other legal proceedings, product liability, commercial disputes, employee disputes, and contractual lawsuits in the ordinarynormal course of business. A liability and related charge are recorded to earnings in the Company’s consolidated financial statements for legal contingencies when the loss is considered probable and the amount can be reasonably estimated. The assessment is re-evaluated each accounting period and is based on all available information, including discussion with outside legal counsel. If a reasonable estimate of a known or probable loss cannot be made, but a range of probable losses can be estimated, the low-end of the range of losses is recognized if no amount within the range is a better estimate than any other. If a material loss is reasonably possible, but not probable and can be reasonably estimated, the estimated loss or range of loss is disclosed in the notes to the consolidated financial statements. The Company expenses legal fees as incurred.
In November 2019, the Company’s former Executive Vice President and CFO Sandra A. Gardiner announced her resignation from the Company. On November 7, 2019, Ms. Gardiner filed an arbitration demand against the Company in connection with the terms of her employment and resignation. This matter was settled during the second quarter of 2020 with a cash payment of $0.4 million and issuance of 15,408 shares of common stock.
As of June 30, 2019 2020 and December 31, 2018, 2019, the Company had zero and $171,0000 accrued respectively,expense 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 likely.possible.
Note 14.13. Debt
Loan and Security Agreement
On May 30, 2018, the Company and Wells Fargo Bank, N.A. (“Wells Fargo”) entered into a Loan and Security Agreement (the “Original 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 adjusted EBITDA of not less than $10 million, and a leverage ratio not to exceed 2.5 to 1.0.
On or about March 19, 2020, the Company entered into a Third Amendment and Waiver to the Loan and Security Agreement with Wells Fargo (the “Third Amended Revolving Line of Credit”). The Third Amended Revolving Line of Credit required the Company to maintain a minimum cash, cash equivalents, and marketable investments balance of $15 million at all Financial Institutions utilized by the Company, and maintained the removal of all other covenants (under the second amendment) so long as no money was drawn on the line of credit.
Due to the receipt of the PPP loan, the Loan and Security Agreement with Wells Fargo was amended in June 2020 as the Company violated a covenant and obtained a waiver for those covenants related to the overall indebtedness due to the receipt of the PPP loan.
As of June 30, 2019, 2020, the Company had not drawn on the Original Revolving Line of Credit and the Company iswas in compliance with all financial covenants of the Original Revolving Line of Credit, as amendedamended. Refer to the subsequent events footnote for more details.
The Paycheck Protection Program (PPP) Loan
On April 22, 2020, the Company received loan proceeds of $7.1 million pursuant to the Paycheck Protection Program (the “PPP”) under the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act. The loan, which is in the form of a promissory note dated April 21, 2020, between the Company and Silicon Valley Bank as the lender, matures on April 21, 2022 and bears interest at a fixed rate of 1.00% per annum, payable monthly commencing October 2020. There is no prepayment penalty. Under the terms of the PPP, all or a portion of the principal may be forgiven if the Loan proceeds are used for qualifying expenses as described in the CARES Act, such as payroll costs, benefits, rent, and utilities. No assurance is provided that the Company will obtain forgiveness of the loan in whole or in part. With respect to any portion of the loan that is not forgiven, the loan will be subject to customary provisions for a loan of this type, including customary events of default relating to, among other things, payment defaults and breaches of the provisions of the loan. The PPP loan is recorded as Promissory note on the consolidated balance sheets.
The application for these funds required the Company to, in good faith, certify that the current economic uncertainty made the loan request necessary to support the ongoing operations of the Company. Subsequently released guidance instructs all applicants and recipients to take into account their current business activity and the Company's ability to access other sources of liquidity sufficient to support ongoing operations in a manner that is not significantly detrimental to their business. On April 28, 2020, in press conference remarks, the Secretary of the U.S. Department of the Treasury stated that the SBA intends to perform a review of PPP loans over $2.0 million. The required certification made by the FirstCompany is subject to interpretation. If, despite the good-faith belief that given the Company’s circumstances the Company satisfied all eligible requirements for the PPP Loan, it is later determined the Company was ineligible to apply for and Second Amendmentreceive the PPP Loan, the Company may be required to repay the Revolving LinePPP Loan in its entirety and the Company could be subject to additional penalties. The PPP loan will be derecognized upon repayment of Credit.the loan in accordance with it terms and/or upon confirmation of forgiveness from the SBA.
Note 15.14. Segment Reportingreporting
Segment reporting is based on the “management approach,” following the method that management organizes the company’sCompany’s reportable segments for which separate financial information is made available to, and evaluated regularly by, the chief operating decision maker in allocating resources and in assessing performance. The Company’s chief operating decision maker ("CODM") is its Chief Executive Officer ("CEO"), who makes decisions on allocating resources and in assessing performance. The CEO reviews the Company's consolidated results as one1 operating segment. In making operating decisions, the CEO primarily considers consolidated financial information, accompanied by disaggregated information about revenues by geography and product. All of the Company’s principal operations and decision-making functions are located in the U.S. The Company’s CEO views its operations, manages its business, and uses one measurement of profitability for the one operating segment - which sells aesthetic medical equipment and services, and distributes skincare products, to qualified medical practitioners. Substantially all of the Company’s long-lived assets are located in the U.S.
The following table presents a summary of revenue by geography for the three and six months ended June 30, 2019 2020 and 2018:2019 (in thousands):
Three Months Ended June 30, | ||||||||
2019 | 2018 | |||||||
Revenue mix by geography: | ||||||||
United States | $ | 28,147 | $ | 28,132 | ||||
Japan | 5,337 | 3,946 | ||||||
Asia, excluding Japan | 4,547 | 4,231 | ||||||
Europe | 2,504 | 1,803 | ||||||
Rest of the world | 7,239 | 4,441 | ||||||
Total consolidated revenue | $ | 47,774 | $ | 42,553 | ||||
Revenue mix by product category: | ||||||||
Products | $ | 37,539 | $ | 35,291 | ||||
Consumables | 2,654 | 1,057 | ||||||
Skincare | 1,775 | 1,302 | ||||||
Total product revenue | $ | 41,968 | $ | 37,650 | ||||
Service | 5,806 | 4,903 | ||||||
Total consolidated revenue | $ | 47,774 | $ | 42,553 |
The following table presents a summary of revenue by geography for the six months ended June 30, 2019 and 2018:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Revenue mix by geography: | ||||||||||||||||
United States | $ | 10,915 | 28,147 | 24,699 | 48,547 | |||||||||||
Japan | 8,517 | 5,337 | 15,679 | 10,631 | ||||||||||||
Asia, excluding Japan | 1,846 | 4,547 | 5,075 | 7,642 | ||||||||||||
Europe | 1,325 | 2,504 | 4,141 | 5,240 | ||||||||||||
Rest of the world | 3,766 | 7,239 | 9,014 | 11,740 | ||||||||||||
Total consolidated revenue | $ | 26,369 | 47,774 | 58,608 | 83,800 | |||||||||||
Revenue mix by product category: | ||||||||||||||||
Products | 15,541 | 37,539 | 36,500 | 64,748 | ||||||||||||
Consumables | 1,426 | 2,654 | 3,959 | 4,599 | ||||||||||||
Skincare | 4,778 | 1,775 | 7,677 | 3,383 | ||||||||||||
Total product revenue | $ | 21,745 | 41,968 | 48,136 | 72,730 | |||||||||||
Service | 4,624 | 5,806 | 10,472 | 11,070 | ||||||||||||
Total consolidated revenue | $ | 26,369 | 47,774 | 58,608 | 83,800 |
Six Months Ended June 30, | ||||||||
2019 | 2018 | |||||||
Revenue mix by geography: | ||||||||
United States | $ | 48,547 | $ | 49,268 | ||||
Japan | 10,631 | 7,501 | ||||||
Asia, excluding Japan | 7,642 | 7,074 | ||||||
Europe | 5,240 | 4,373 | ||||||
Rest of the world | 11,740 | 8,462 | ||||||
Total consolidated revenue | $ | 83,800 | $ | 76,678 | ||||
Revenue mix by product category: | ||||||||
Products | $ | 64,748 | $ | 62,530 | ||||
Consumables | 4,599 | 1,826 | ||||||
Skincare | 3,383 | 2,558 | ||||||
Total product revenue | $ | 72,730 | $ | 66,914 | ||||
Service | 11,070 | 9,764 | ||||||
Total consolidated revenue | $ | 83,800 | $ | 76,678 |
Note 16—15.Subsequent Events
The Company has determined based on the evaluation that there are no material subsequent events exist other than the following:
Loan and Security Agreement
On July 2, 2019, 9, 2020, the Board appointed David H. MowryCompany and Silicon Valley Bank entered into a Loan and Security Agreement. The agreement provides for a four-year secured revolving loan facility in an aggregate principal amount of up to $30.0 million. In order to draw on the full amount, the Company must satisfy certain liquidity ratios. If the Company is unable to meet these liquidity ratios, then availability under the revolving line is calculated as CEO80% of the Company’s qualifying accounts receivable. The Company effectivemust also meet certain quarterly revenue targets on a trailing twelve-month basis as part of his employment commencement date, July 8, 2019.the financial covenants. This clause is subject to renegotiation at the beginning of each fiscal year. The proceeds of the revolving loans may be used for general corporate purposes. The Company’s obligations under the Loan Agreement are secured by substantially all of the assets of the Company. On the same date,day, the Board also increased the numberCompany terminated its undrawn revolving line of directors constituting the Board from six to seven directors and appointed Mr. Mowry to the Board, effective as of July 8, 2019.credit with Wells Fargo Bank, N.A. (as referenced in Note 13).
Mr. Mowry’s base salary is $650,000 and he is not entitled to receive any board compensation during the period of his employment. Mr. Mowry is also eligible to participate in the Company’s 2019 Management Bonus Program on a prorated basis to reflect the period during 2019 that Mr. Mowry is employed with the Company, and his target bonus percentage is equal to 80% of his base salary, as well as severance and other standard employment benefits. As an additional compensation, the Board awarded Mr. Mowry 67,897 RSUs, which vest over 4 years at 25% per year, and a PSU award covering a target of 67,897 shares, subject to certain performance-based criteria and scheduled to vest over 4 years from 2019 through 2022.
Following the appointment of a permanent CEO, the Board promoted Mr. Jason Richey, the Interim CEO and Chief Operating Officer to President of the Company, effective July 8, 2019. His base salary was increased from $505,000 to $575,000.
The Board also granted Mr. Richey an RSU award covering 27,159 shares which vest in four equal installments on each of the one-, two-, three-, and four-year anniversaries of July 8, 2019, subject to Mr. Richey’s continued employment through the applicable vesting date, and an RSU award covering 27,159 shares, which vest on January 1, 2020, subject to Mr. Richey’s continued employment through such date.
Headquarters Office Lease Amendment
On July 9, 2020, the Company amended its lease agreement for its headquarters building located at 3420 Bayshore Boulevard, Brisbane, California. The amendment provides for the following:
● | the extension of the lease term, with the extended term to begin on February 1, 2023 and continue until January 31, 2028; |
● | the abatement of the monthly base rent for the four month period beginning September 1, 2020 and ending December 31, 2020; |
● | the amendment of monthly base rent for the current term and the extension term to approximately $0.2 million for January 2021 with annual increases of 3.5% thereafter; and |
● | the waiver by the Company of its early termination right in the lease. |
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
This Management’s Discussion and Analysis should be read in conjunction with the Company’s financial condition and results of operations in conjunction with the Company’s unaudited Condensed Consolidated Financial Statementscondensed consolidated financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q and the Company’s audited financial statements and notes thereto for the year ended December 31, 2018,2019, included in its Annual Reportannual report on Form 10-K filed on March 18, 201916, 2020 with the U.S. Securities and Exchange Commission (SEC)("SEC").
Unless otherwise indicated, all results presented are prepared in a manner that complies, in all material respects, with accounting principles generally accepted in the United States of America (“GAAP”). Additionally, unless otherwise indicated, all changes identified for the current-period results represent comparisons to results for the prior corresponding fiscal period.
Special note regarding forward-looking statements
This report contains forward-looking statements that involve risks and uncertainties. The Company’s actual results could differ materially from those discussed in the forward-looking statements. The statements contained in this report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended, ("the Exchange Act"). Forward lookingForward-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, 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
Risks Related to the risksCompany’s Business
The Company’s net sales, expenses and uncertainties summarized below:operating results may vary significantly from year to year and quarter to quarter for several reasons, including, without limitation:
● |
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● | 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 Company could no longer have access to cash due to the Company's inability to meet |
● | a determination that the |
● | the existence and timing of any product approvals or changes; |
● | the rate and size of expenditures incurred on |
● |
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● | the availability of key components, materials and contract services, which depends on |
● | investigations of |
● | variations in timing and quantity of product orders; |
● | temporary manufacturing interruptions or disruptions; |
● | the timing and success of new product and new market introductions, as well as delays in obtaining domestic or foreign regulatory approvals for such introductions; |
● | increased competition, patent expirations or new technologies or treatments; |
● | impact of the FDA communication letter regarding “vaginal rejuvenation” procedures using energy-based devices on sales of the Company's products; |
● | product recalls or safety alerts; |
● | litigation, including product liability, patent, employment, securities class action, stockholder derivative, general commercial and other lawsuits; |
● | volatility in the global market and worldwide economic conditions; |
● | changes in tax laws, including changes domestically and internationally, or exposure to additional income tax liabilities; |
● | the impact of the new EU privacy regulations, the General Data Protection Regulation on the Company’s resources; |
● | the financial health of |
● | other unusual or non-operating expenses, such as expenses related to mergers or acquisitions, may cause operating |
Introduction
The Management’s Discussion and Analysis, or MD&A, is organized as follows:
● | Executive Summary.This section provides a general description and history of the Company’s business, a brief discussion of the its product lines and the opportunities, trends, challenges and risks the Company focuses on in the operation of |
● | Critical Accounting Policies and Estimates.This section describes the key accounting policies that are affected by critical accounting estimates. |
● | Results of Operations.This section provides the Company’s analysis and outlook for the significant line items on |
● | Liquidity and Capital Resources.This section provides an analysis of the Company’s liquidity and cash flows, as well as a discussion of |
Executive Summary
Company Description
The Company is a leading medical device company specializing in the research, development, manufacture, marketingglobal provider of laser and servicing of light and other energy based aestheticsenergy-based aesthetic systems for practitioners worldwide. The Company designs, develops, manufactures, distributes and markets light and energy-based product platforms for use by physicians and other qualified practitioners (collectively, “practitioners”), enabling them to offer safe and effective aesthetic treatments to their customers. In addition, to products developed internally, the Company distributes third party sourced products under our own brand names.third-party manufactured skincare products. The Company currently offers easy-to-use products based on the following key platforms: enlighten, excel HR, truSculpt, excel V, xeo, and Secret RF— each of which enableenables physicians and other qualified practitioners to perform safe and effective aesthetic procedures, including treatment for body contouring, skin resurfacing and revitalization, tattoo removal, removal of benign pigmented lesions, vascular conditions, hair removal, and toenail fungus and women's health. Thefungus. Many of the Company’s platforms are designed to be easily upgraded to add additional applications and hand pieces, which provide flexibility for ourthe Company’s customers as they expand their practices. In addition to systems and upgrade revenue, the Company generates revenue from the sale of post warranty service contracts, providing services for products that are out of warranty, hand piece refills and other per procedure related revenue on select systems, as well as distributing third-party manufactured skincare products.
The Company’s ongoing research and development activities primarily focus on developing new products, as well as improving and enhancing the Company’s portfolio of existing products. The Company also explores ways to expand the Company’s product offerings through alternative arrangements with other companies, such as distribution arrangements. The Company introduced Juliet, a product for women’s health, in December 2017, Secret RF, a fractional RF microneedling device for skin revitalization, in January 2018, enlighten SR in April 2018, truSculpt iD in July 2018, excel V+ in February 2019 and truSculpt flex in June 2019.
The Company’s corporate headquarters and U.S. operations are located in Brisbane, California, where the Company conducts manufacturing, warehousing, research and development, regulatory, sales and marketing, service, and administrative activities. The Company markets, sells and services the Company’s products through direct sales and service employees in North America (including Canada), Australia, Austria, Belgium, France, Germany, Hong Kong, Japan, Spain, Switzerland and the United Kingdom. Sales and Services outside of these direct markets are made through a worldwide distributor network of distributors in over 40 countries.
Products and Services
The Company derives revenue from the sale of Products and Services. Product revenue includes revenue from the sale of systems, hand pieces and upgrade of systems (collectively “Systems” revenue), replacement hand pieces, truSculpt iDcycle refills, and truSculpt flex 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) 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’s primary system platforms include: excel, enlighten,, Juliet, Secret RF, truSculptand xeo.
During the second quarter, the Company wrote-off $0.8 million of inventory on hand related to its Juliet platform due to declining sales. Sales related to Juliet has been declining due to the COVID-19 pandemic and the FDA letter issued on July 30, 2018 expressing concerns regarding “vaginal rejuvenation” procedures using energy-based devices.
Skincare revenue relates to the distribution of ZO’s skincare products in Japan.
Service revenue includes prepaid service contracts, training services, enlighteninstallation, direct billings for detachable hand piece replacements and revenue for parts, customer marketing support and labor on out-of-warranty products.
Significant Business Trends
The Company believes that its ability to grow revenue will be primarily dependent on the following:
● | continuing to expand the Company’s product offerings, both through internal development and sourcing from other vendors; |
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| ● | marketing to physicians in the core dermatology and plastic surgeon specialties, as well as outside those specialties; and |
● | generating recurring revenue from the Company’s growing installed base of customers through the sale of |
The global spread of COVID-19 has created significant volatility, uncertainty and economic disruption. The Company’s first six months results were impacted by a decline in patient volumes associated with COVID-related shutdowns. However, the extent to which the coronavirus pandemic impacts the Company's business, operations, and financial results is still uncertain and will depend on numerous evolving factors that the Company may not be able to accurately predict, including:
● | the duration and scope of the pandemic; |
● | governmental, business and individual actions taken in response to the pandemic and the impact of those actions on global economic activity, as well as the Company’s ability to avail itself of programs intended to assist businesses during the pandemic; |
● | the actions taken in response to economic disruption; |
● | the impact of business disruptions; |
● | business failures of Companies we may utilize to source the Company's supplies from and the customers we may serve; |
● | the impact of staff availability during and post the pandemic; and |
● | the Company's ability to provide its services, including as a result of the Company's employees or the Company's customers and suppliers working remotely and/or closures of offices and facilities. |
For a detailed discussion of the significant business trends impacting the Company’sits 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.
The Company, and other medical aesthetic companies, are facing increased scrutiny by the Food and Drug Administration (the “FDA”) with respect to products for vaginal health. On July 30, 2018, the FDA issued a public statement and sent letters to a number
The Company believes it has a robust, multi-functional process that reviews its promotional claims and materials to ensure they are truthful, not misleading, fair and balanced, and supported by sound scientific evidence. A detailed discussion of these and other factors that could impact the Company’s future performance are provided in (1) the Company’s Annual Report on Form 10-K for the year ended December 31, 2018-2019, as amended on April 14, 2020 - Part I, Item 1A “Risk Factors,” (2) the Company’s reports and registration statements filed and furnished from time to time with the SEC, including the S-3 and Prospectus Supplement related to the Company’s recent public offering filed on April 2 and 26, 2020, respectively, and (3) other announcements the Company makes from time to time.
Impact of COVID-19 on Company’s business and operations
On January 30, 2020, the World Health Organization, or WHO, announced a global health emergency because of the COVID-19 outbreak, and the risks to the international community as the virus spreads globally beyond its point of origin. In March 2020, the WHO declared the COVID-19 outbreak a pandemic, based on the rapid increase in exposure globally. The COVID-19 outbreak is negatively affecting the United States and global economies. As the COVID-19 outbreak continues to spread, governmental authorities ordered quarantines, shelter-in-place, and restrictions on the conduct of business operations related to the COVID-19 outbreak. These measures and restrictions had an impact on the Company's business, which led the Company to implement cost control measures, and results of operations during the six months ended June 30, 2020. The Company recently hiredexpects the COVID-19 outbreak to continue to affect its operations and those of third parties on which the Company relies, which could cause disruptions in its supply chain and contract manufacturing operations. Though the shelter-in-place orders were lifted or eased allowing certain businesses to open up, government authorities may order additional restrictions, quarantines or shelter-in-place. As a newresult, the extent of the COVID- 19 impact on the Company's supply chain and its future revenues is difficult for the Company to quantify at this time. The Company has commenced limited manufacturing and currently has inventory on hand for the next 120-180 days to meet its forecasted demand, but the Company must be able to continue to have access to its supply chain to meet demand beyond that period.
Beginning in the second half of its first quarter of 2020, and through the date of this report, the Company has experienced decreasing levels of customer demand for its products. As a result of COVID-19, some of its customers are required to shelter-in-place and are not working.
The Company's customers not subject to shelter-in-place requirements are performing fewer procedures and their customers are mostly focused on medically necessary procedures that should not be delayed. Non-urgent, non-essential procedures such as those attendant to our products are often cancelled or delayed. As a result of fewer aesthetic procedures being performed and anxiety about the economic future, the Company's customers may cancel orders for laser systems or use fewer consumables. Some of the Company's customers will feel less confident about making investments in their practices and focus on retaining their cash. As a result of cash conservation efforts by its customers, the Company may also encounter problems collecting on its receivables. The COVID-19 pandemic continues to be fluid and uncertain, making it difficult to forecast the final impact it could have on the Company’s future operations. The Company cannot presently predict the scope and severity of further potential business shutdowns or disruptions, but if the Company or any of the third parties with whom the Company engages were to experience shutdowns or other business disruptions, the Company’s ability to conduct business in the manner and on the timelines presently planned could be materially and negatively impacted, which could have a material adverse effect on the Company’s business and the Company’s revenues, operating results, cash flows and financial condition. The factors and trends related to the sale of the Company’s products and consumables may also impact demand for service contracts. A reduction in customer orders would reduce the amount of revenue that the Company expects to generate. The Company expects this reduction to continue at least through the third quarter of 2020, and perhaps for the remainder of 2020 and beyond, but its extent cannot be quantified at this time. The aforementioned factors and trends may also impact demand for its service contracts. The Company's customers’ patients are also impacted by the economic outlook due to the current pandemic. Elective aesthetic procedures are less of a priority than other items for those patients that have lost their jobs, are furloughed, have reduced work or have to allocate their cash to other priorities. The Company expects that many of the patients of its customers will return slowly as the economic environment improves and revenue from its customers will begin to improve again as a result of the economic conditions improving and more procedures being performed. Additionally, the continued spread of the COVID-19 pandemic could adversely impact our clinical trial operations, including our ability to recruit and retain patients and principal investigators and site staff who, as healthcare providers, may have heightened exposure to the COVID-19 pandemic if an outbreak occurs in their geography.
In response to the COVID-19 outbreak, the Company took actions to reduce expenses, including discontinuing nonessential services and programs, instituting controls on travel and entertainment, implementing further cost-cutting measures and evaluating whether improved efficiencies can be obtained in its workforce. For example, the directors on the Company's board of directors agreed to a 25% reduction in their fees, the Company's Chief Executive Officer (“CEO”), who was also elected to serve on the Company’s Board of Directors. His prior experience is primarily with medical device companies, but not within the aesthetics industry specifically. In addition, recently hired executives may view the business differently than priorand its President and Chief Operating Officer had a 25% reduction in their salaries and other members of management had significant reductions in their salaries, which will remain in place until such time as the Company's business operations and over timeeconomic conditions improve. The Company also instituted salary reductions for the remainder of its employees and furloughs or reductions-in-force that have affected approximately 42% of its workforce. In addition, in order to further conserve cash, bonuses owed to management from the 2019 Management Bonus Program were paid mostly in equity (Note 8) rather than in cash.
While the Company has continued to operate with remote employees and essential employees on site, an extended implementation of this Governmental mandate could impact its ability to operate effectively and conduct ongoing future manufacturing or research and development. In assessing its own cash conservation options the Company has reduced its employees’ work hours, furloughed employees and implemented a reduction-in-force. The Company may make changesalso solicit voluntary leaves of absence from its employees as the Company implements cash conservation strategies. Its ongoing operations may be impacted as a result of employees assuming additional roles and responsibilities within its organization and the Company would have fewer resources available to run its operations, which would reduce its expenses but could also negatively impact its business operations and revenue as a result. The Company may also encounter voluntary departures of key employees due to any of the foregoing actions that Company undertakes.
The ultimate impact of the COVID-19 outbreak is highly uncertain and subject to change. This impact could have a material, adverse impact on its liquidity, capital resources, operations and business and those of the third parties on which Company relies. The extent to which the COVID-19 outbreak impacts its results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the COVID-19 outbreak and the actions to contain the COVID-19 outbreak or treat its impact, among others. The Company does not yet know the full extent of potential delays or impacts on its business, financial condition and results of operations. Additionally, while the potential economic impact brought by, and the duration of, the COVID-19 outbreak pandemic is difficult to assess or predict, the impact of the COVID-19 outbreak on the global financial markets may reduce its ability to raise additional capital through equity linked or debt financings, which could negatively impact its short-term and long-term liquidity and its ability to operate on a timely basis, or at all.
On March 27, 2020, Congress enacted the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") to provide certain relief as a result of the COVID-19 outbreak. The primary provisions of the CARES Act applicable to us include;
● | compensation, benefits, and payroll relief for employers; | |
● | certain amendments to the limitations on the deductibility of interest contained in Section 163(j) of the Internal Revenue Code of 1986, as amended, for taxable years beginning in 2019 and 2020; and |
● | an allowance of net operating loss carrybacks for taxable years beginning in 2018 and before 2021. |
The Company continuously evaluates how the benefits from the CARES Act and other pandemic-driven governmental legislation and programs would impact its financial position, results of operations and cash flows.
On April 22, 2020, the Company received loan proceeds of $7.1 million pursuant to the existing personnel and their responsibilities, our strategic focus, operations or business plans.Paycheck Protection Program (the “PPP”) under the CARES Act. The Company believes that the current economic uncertainty makes the loan necessary to support ongoing operations.
The PPP loan, which is in the form of a promissory note, dated April 21, 2020, between the Company and Silicon Valley Bank as the lender, matures on April 21, 2022 and bears interest at a fixed rate of 1.00% per annum, payable monthly commencing in six months. There is no prepayment penalty. Under the terms of the PPP, all or a portion of the principal may be forgiven if the loan proceeds are used for qualifying expenses as described in the CARES Act, such as payroll costs, benefits, rent, and utilities. The Company’s goal is to apply the proceeds of the loan to the list of enumerated items that allow for a significant portion of the loan to be forgiven but the Company can giveprovide no assurancesassurance that itthe Company will be ablesuccessful in its efforts to properly managedo so and may need to pay the principal and interest of the PPP loan back as a result. With respect to any such shiftportion of the loan that is not forgiven, the loan will be subject to customary provisions for a loan of this type, including customary events of default relating to, among other things, payment defaults and breaches of the provisions of the loan.
There are risks and uncertainty regarding the PPP loan as the Company may be deemed ineligible to receive the PPP loan, and the Company may be required to repay the PPP loan in focus, or that any changesits entirety and could be subject to its business, would ultimately prove successful.penalties. In addition, leadership transitionswith respect to any portion of the PPP loan not forgiven, the Company may default on payment or breach provisions of the loan. The PPP loan will be derecognized upon repayment of the loan in accordance with it terms and/or upon confirmation of forgiveness from the SBA.
On July 9, 2020, the Company and management changes can be inherently difficultSilicon Valley Bank entered into a Loan and Security Agreement. The agreement provides for a four-year secured revolving loan facility in an aggregate principal amount of up to manage and may cause uncertainty or a disruption$30.0 million. In order to draw on the Company’s business or may increasefull amount, the likelihood of turnover in key officers and employees. The Company’s success depends in part on having a successful leadership team.Company must satisfy certain liquidity ratios. If the Company cannot effectively manageis unable to meet these liquidity ratios, then availability under the leadership transitionsrevolving line is calculated as 80% of the Company’s qualifying accounts receivable. The Company must also meet certain quarterly revenue targets on a trailing twelve-month basis as part of the financial covenants. This clause is subject to renegotiation at the beginning of each year. The proceeds of the revolving loans may be used for general corporate purposes. The Company’s obligations under the Loan Agreement are secured by substantially all of the assets of the Company. On the same day, the Company terminated its undrawn revolving line of credit with Wells Fargo Bank, N.A.. The terms of the Silicon Valley Bank Loan and management changes, itSecurity Agreement include restrictive covenants, such as limitations on our ability to incur additional debt and certain operating restrictions that could make it more difficultadversely impact its ability to successfully operate its business and pursue its business goals.conduct business.
Critical Accounting Policies, Significant Judgmentsaccounting policies, significant judgments and Useuse of Estimates.estimates
The preparation of the Company’s unaudited Condensed Consolidated Financial Statementsconsolidated financial statements and related disclosures in conformity with GAAPnotes requires usthe Company to make judgments, estimates judgments and assumptions that affect the reported amounts of assets, liabilities, revenuerevenues and expenses. Theseexpenses, and related disclosure of contingent assets and liabilities. The Company has based its estimates judgments and assumptions are based on historical experience and on various other factorsassumptions that we believe arethe Company believes to be reasonable under the circumstances. The Company periodically reviews its estimates and makemakes adjustments when facts and circumstances dictate. To the extent that there are material differences between these estimates and actual results, the Company’sits 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 reported under the accounting standards in effect for the period presented. The adoption of the new standard resulted in the recording of additional net lease assets and lease liabilities of $10.3 million and $10.4 million, respectively, as of January 1, 2019, based on the present value of the remaining minimum rental payments under current leasing standards for existing operating leases. The difference between the additional lease assets and lease liabilities, was recorded as deferred rent. The standard had no material impact on the Company’s condensed consolidated statements of operations, comprehensive loss, statements of changes in equity, and cash flows. Refer to notes 2 and 12 to the unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional accounting policy and transition disclosures.
The Company also adopted ASU No. 2018-15 during the second quarter of fiscal year 2019. The adoption resulted in the capitalization of software development costs of $0.5 million during the three months ending June 30, 2019, relatedAn accounting policy is considered to implementation of a new Enterprise Resource Planning. The amount is included in other current assets and prepaid expensesbe critical if it requires an accounting estimate to be made based on the balance sheet.
Critical accounting estimates, as defined by the SEC, are those that are most important to the portrayal of our financial condition and results of operations and require our management’s most difficult and subjective judgments and estimates ofassumptions about matters that are inherently uncertain.highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the consolidated financial statements. The Company believes that its critical accounting policies reflect the more significant estimates and assumptions used in the preparation of its audited consolidated financial statements. The accounting policies and estimates that the Company considers to be critical, subjective, and requiring judgment in their application are summarized in “Item 7—Management’s7-Management’s Discussion and Analysis of Financial Condition and Results of Operations” in ourits Annual Report on Form 10-K for the year ended December 31, 20182019 filed with the SEC on March 18, 2019. With the exception of the change for the accounting of leases16, 2020, as a result of the adoption of ASU 2016-02 and the adoption of ASU No. 2018-15, thereamended on April 14, 2020. There have been no new or material changes to the significant accounting policies discussed in the Company’s Annual Report on Form 10-K that are of significance, or potential significance, to the Company.
As a result of the events and impact surrounding the COVID-19 pandemic, the Company assessed whether any impairment of its goodwill or its long-lived assets had occurred. The Company recognized an impairment loss of $0.8 million on capitalized cloud computing costs related to implementation of cloud-based enterprise resource planning software during the quarter ended June 30, 2020. The Company’s assumptions about future conditions important to its assessment of potential impairment of its long-lived assets, and goodwill, including the impacts of the COVID–19 pandemic and other ongoing impacts to its business, are subject to uncertainty, and the Company will continue to monitor these conditions in future periods as new information becomes available, and will update its analyses accordingly.
Results of Operations
The following table sets forth selected consolidated financial data for the periods indicated, expressed as a percentage of total revenue, net.net revenue. Percentages in this table and throughout ourits discussion and analysis of financial condition and results of operations may reflect rounding adjustments.
Three Months Ended | Six Months Ended | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||
June 30, | June 30, | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||||
Net Revenue | 100 | % | 100 | % | 100 | % | 100 | % | ||||||||||||||||||||||||
Cost of revenue | 56 | % | 46 | % | 56 | % | 49 | % | ||||||||||||||||||||||||
Gross Margin | 44 | % | 54 | % | 44 | % | 51 | % | ||||||||||||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||||||||||||||||||
Net revenue | 100% |
| 100% |
| 100% |
| 100% |
| ||||||||||||||||||||||||
Cost of revenue | 46% |
| 47% |
| 49% |
| 48% |
| ||||||||||||||||||||||||
Gross margin | 54% |
| 53% |
| 51% |
| 52% |
| ||||||||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||||||||||
Operating Expenses: | ||||||||||||||||||||||||||||||||
Sales and marketing | 36% |
| 37% |
| 39% |
| 37% |
| 42 | % | 36 | % | 44 | % | 39 | % | ||||||||||||||||
Research and development | 7% |
| 10% |
| 8% |
| 10% |
| 11 | % | 7 | % | 12 | % | 8 | % | ||||||||||||||||
General and administrative | 11% |
| 12% |
| 13% |
| 13% |
| 32 | % | 11 | % | 28 | % | 13 | % | ||||||||||||||||
Total operating expenses | 54% |
| 59% |
| 60% |
| 60% |
| 85 | % | 54 | % | 84 | % | 60 | % | ||||||||||||||||
Income (loss) from operations | 1% |
| (5)% |
| (9)% |
| (9)% |
| (41 | )% | 1 | % | (39 | )% | (9 | )% | ||||||||||||||||
Interest and other income, net | —% |
| —% |
| —% |
| —% |
| - | % | - | % | - | % | - | % | ||||||||||||||||
Income (loss) before income taxes | 1% |
| (5)% |
| (9)% |
| (9)% |
| (41 | )% | 1 | % | (39 | )% | (9 | )% | ||||||||||||||||
Provision (benefit) for income taxes | (1)% |
| —% |
| —% |
| (4)% |
| 2 | % | (1 | )% | 1 | % | - | % | ||||||||||||||||
Net income (loss) | —% |
| (5)% |
| (9)% |
| (5)% |
| (43 | )% | - | % | (40 | )% | (9 | )% |
Revenue
The timing of the Company’s revenue is significantly affected by the mix of system products, installation, training, consumables and extended contract services. The revenue generated in any given period is also impacted by whether the revenue is recognized over time or at a point in time, upon completion of delivery. For an additional description on revenue, see Note 1 in the notes to consolidated financial statements on the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 20182019 and Note 7 to the unaudited Condensed Consolidated Financial Statementscondensed consolidated financial statements included in Item I, Part 1 of this Quarterly Report on Form 10-Q.
Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for promised goods or services. The Company’s performance obligations are satisfied either over time or at a point in time. Revenue from performance obligations that are transferred to customers over time accounted for approximately 13%18% and 9%13% of the Company’s total revenue for the six months ended June 30, 20192020 and June 30, 2018,2019, respectively. Revenue recognized over time relates to revenue from the Company’s extended service contracts and marketing services. Revenue recognized upon deliveryat a point in time is primarily generated by the sales of systems, consumables and skincare.
Total Net Revenue
Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | 2019 | % Change | 2018 | 2019 | % Change | 2018 | 2020 | 2019 | % Change | 2020 | 2019 | % Change | ||||||||||||||||||||||||||||||||||||
Revenue mix by geography: | ||||||||||||||||||||||||||||||||||||||||||||||||
United States | $ | 28,147 | —% |
| $ | 28,132 | $ | 48,547 | (1)% |
| $ | 49,268 | $ | 10,916 | $ | 28,147 | (61 | )% | $ | 24,700 | $ | 48,547 | (49 | )% | ||||||||||||||||||||||||
International | 19,627 | 36% |
| 14,421 | 35,253 | 29% |
| 27,410 | 15,453 | 19,627 | (21 | )% | 33,908 | 35,253 | (4 | )% | ||||||||||||||||||||||||||||||||
Consolidated total revenue | $ | 47,774 | 12% |
| $ | 42,553 | $ | 83,800 | 9% |
| $ | 76,678 | $ | 26,369 | $ | 47,774 | (45 | )% | $ | 58,608 | $ | 83,800 | (30 | )% | ||||||||||||||||||||||||
United States as a percentage of total revenue | 59% |
| 66% |
| 58% |
| 64% |
| 41 | % | 59 | % | 42 | % | 58 | % | ||||||||||||||||||||||||||||||||
International as a percentage of total revenue | 41% |
| 34% |
| 42% |
| 36% |
| 59 | % | 41 | % | 58 | % | 42 | % | ||||||||||||||||||||||||||||||||
Revenue mix by product category: | ||||||||||||||||||||||||||||||||||||||||||||||||
Systems - North America | $ | 26,491 | 2% |
| $ | 25,886 | $ | 44,071 | (2)% |
| $ | 44,830 | $ | 8,214 | $ | 26,491 | (69 | )% | $ | 18,596 | $ | 44,071 | (58 | )% | ||||||||||||||||||||||||
Systems - Rest of World | 11,048 | 17% |
| 9,405 | 20,677 | 17% |
| 17,700 | ||||||||||||||||||||||||||||||||||||||||
Systems - International | 7,328 | 11,048 | (34 | )% | 17,904 | 20,677 | (13 | )% | ||||||||||||||||||||||||||||||||||||||||
Total Systems | 37,539 | 6% |
| 35,291 | 64,748 | 4% |
| 62,530 | 15,542 | 37,539 | (59 | )% | 36,500 | 64,748 | (44 | )% | ||||||||||||||||||||||||||||||||
Consumables | 2,654 | 151% |
| 1,057 | 4,599 | 152% |
| 1,826 | 1,425 | 2,654 | (46 | )% | 3,958 | 4,599 | (14 | )% | ||||||||||||||||||||||||||||||||
Skincare | 1,775 | 36% |
| 1,302 | 3,383 | 32% |
| 2,558 | 4,778 | 1,775 | 169 | % | 7,678 | 3,383 | 127 | % | ||||||||||||||||||||||||||||||||
Total Products | 42,968 | 11% |
| 37,650 | 72,730 | 9% |
| 66,914 | 21,745 | 41,968 | (48 | )% | 48,136 | 72,730 | (34 | )% | ||||||||||||||||||||||||||||||||
Service | 5,806 | 18% |
| 4,903 | 11,070 | 13% |
| 9,764 | 4,624 | 5,806 | (20 | )% | 10,472 | 11,070 | (5 | )% | ||||||||||||||||||||||||||||||||
Total Net Revenue | $ | 47,774 | 12% |
| $ | 42,553 | $ | 83,800 | 9% |
| $ | 76,678 | $ | 26,369 | $ | 47,774 | (45 | )% | $ | 58,608 | $ | 83,800 | (30 | )% |
The Company’s total net revenue increaseddecreased by 12%45% and 9%30% in the three and six month periodsperiod ended June 30, 2020, respectively, compared to the same period in 2019 respectively,as a result of decline in the demand of the Company’s products as a direct result of the COVID-19 pandemic.
Revenue by Geography
The Company’s U.S. revenue decreased by $17.2 million, or 61%, in the three months ended June 30, 2020, and decreased by $23.8 million, or 49%, in the six months ended June 30, 2020, compared to the same periods in 2018, due primarily to strong growth in the Company’s international business, and demand for the Company’s product lines – the truSculpt iD, Secret RF, and the recently launched systems, excel V+ and truSculptflex, offset by softness in the overall women’s health market, competitive trends affecting certain legacy system pricing, and the continued impact from turnover in our North American salesforce in the fourth quarter of 2018.
Revenue by Geography:
The Company’s U.S. revenue was flat for the three months ended June 30, 2019, and decreased by $0.8 million, or 1%, for the six months ended June 30, 2019, compared to the same periods in 2018.2019. This decrease for the six months ended June 30, 2019 was due primarily to softnesssignificant decline in sales in the overall women’s health market, competitive trends affecting certain legacy system pricing, and greater than expected turnover in our North American salesforce in the fourth quarter on 2018 impacting revenue growth in North America market as a direct result of the COVID-19 pandemic. The global spread of COVID-19 has created significant volatility, uncertainty and economic disruption. In response to the pandemic, government authorities imposed mandatory business closures, shelter-in place and work-from-home orders and social distancing protocols. Government authorities began lifting these restrictions during the first halfsecond quarter and patients of 2019.the Company’s customers’ have started returning slowly. However the economic situation is still uncertain as the COVID-19 virus continues to spread in certain parts of the world.
The Company’s international revenue increaseddecreased by $5.2$4.2 million, or 36%21%, and $7.8$1.3 million, or 29%4%, in the three and six months ended June 30, 2019,2020, respectively, compared to the same periods in 2018.2019. The increasedecrease was mostly due to strong demand indecreased sales as a direct result of the Company's recurring revenue, including service, skincare products and procedure related consumables.COVID-19 pandemic.
Revenue by Product Type:Type
Systems Revenue
Systems revenue in North America increaseddecreased by $0.5$18.3 million, or 2%69%, and decreased by $0.8$25.5 million, or 2%58%, in the three and six months and ended June 30, 2019,2020, respectively, compared to the same periods in 2018,2019, mainly due to the softnesssignificant decline in system sales in the overall women’s healthCompany’s North America market, competitive trends affecting certain legacy system pricing and greater than expected turnoverwhich represents the Company’s biggest market. The significant decline in our North American salesforcesystems revenue in the fourth quarterNorth America market was as a direct result of 2018, impacting the first half year sales of 2019. COVID-19 pandemic.
The Rest of the World systems revenue increased 17% fordecreased by $3.7 million, or 34% and decreased by $2.8 million, or 13% in the three and six months ended June 30, 2019, compared to same periods in 2018. The increase in Rest of the World revenue was2020, respectively, primarily as a result of an increase in the Company’s direct business in Asia Pacific and Europe due to strong demand in recurring revenue, including service, skincare products and procedure related consumables, and an increase in the Company’s distributor business in the Middle East.COVID-19 pandemic.
Consumables Revenue
Consumables revenue increased $2.3decreased by $1.2 million and $0.6 million, or 151%,46% and $3.5 million, or 152%14%, for the three and six months ended June 30, 2019,2020, respectively, compared to the same periods in 2018.2019. The increasedecrease in consumables revenue was primarily due to the introductiondecreasing sales in installed base oftruSculpt iD, Secret RF and Juliet during January 2018,, and truSculpt iDflex, in July 2018, each of which have a consumable elements.element as well as the decline in usage of the consumables due to the COVID-19 pandemic.
Skincare Revenue
The Company’s revenue from Skincare products in Japan increased $0.5by $3 million and $4.3 million, or 36%,169% and $0.8 million, or 32%127%, for the three and six months ended June 30, 2019,2020, respectively, compared to the same periods in 2018.2019. This increase was due primarily to (i) increased marketing and promotional activities, and (ii) a temporary increaseas well as changes in consumer demandcustomers behavior due to changes in the Japanese consumption tax rate effective October 1, 2019.COVID-19 pandemic as some consumers opted to purchase skincare products rather than going to a doctor's office for treatment.
Service Revenue
The Company’s Service revenue increased $0.9decreased $1.2 million, or 18%20%, and $1.3decreased by $0.6 million, or 13%5%, for the three and six months ended and June 30, 2019,2020, respectively, compared to the same periods in 2018.2019. This increasedecrease was due primarily to increaseddecreased sales of service contracts, and support and maintenance services provided on a time and materials basis to the Company's network of international distributors.distributors, due to the COVID-19 pandemic.
Gross Profit
Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | 2019 | % Change | 2018 | 2019 | % Change | 2018 | 2020 | 2019 | % Change | 2020 | 2019 | % Change | ||||||||||||||||||||||||||||||||||||
Gross profit | $ | 25,831 | 15 | % | $ | 22,377 | $ | 43,140 | 9 | % | $ | 39,711 | ||||||||||||||||||||||||||||||||||||
Gross Profit | $ | 11,624 | $ | 25,831 | (55 | )% | $ | 25,960 | $ | 43,140 | (40 | )% | ||||||||||||||||||||||||||||||||||||
As a percentage of total net revenue | 54 | % | 53 | % | 51 | % | 52 | % | 44 | % | 54 | % | 44 | % | 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, which is positively impacting the Company’s international revenue.activities.
Gross marginsprofit as a percentage of revenue decreased 10% and 7% for the three months ended June 30, 2019 increased by 1%, compared to same period in 2018. The increase in gross margins in the three months ended June 30, 2019 was largely driven by demand for the Company's new products with higher gross margins – the truSculpt iD, Secret RF, and the newly launched systems, excel V+ and truSculpt flex, as well as continues strong growth in recurring revenue, including service, skincare products and procedure related consumables.
Gross margin for the six months ended June 30, 2019 declined by 1%,2020, respectively, compared to the same periodperiods in 2018.2019. The decrease in gross profit as a percentage of revenue was primarily driven by lower overhead absorption on lower revenue, and the decline in gross margins during the six months ended June 30, 2019 wasaverage sales price of systems due to the softness inCOVID-19 pandemic, and reduction-in-force and furloughed costs implemented by the overall women’s health market, competitive trends affecting certain legacy system pricing,Company during the quarter, partially offset by costs savings from the reduction-in-force and greater than expected turnover in our North American salesforce in the fourth quarter of 2018 impacting growth in the first half of 2019.furlough.
Sales and Marketing
Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | 2019 | % Change | 2018 | 2019 | % Change | 2018 | 2020 | 2019 | % Change | 2020 | 2019 | % Change | ||||||||||||||||||||||||||||||||||||
Sales and marketing | $ | 16,992 | 9 | % | $ | 15,535 | $ | 33,096 | 16 | % | $ | 28,623 | ||||||||||||||||||||||||||||||||||||
Sales and Marketing | $ | 11,035 | $ | 16,992 | (35 | )% | $ | 25,823 | $ | 33,096 | (22 | )% | ||||||||||||||||||||||||||||||||||||
As a percentage of total net revenue | 36 | % | 37 | % | 39 | % | 37 | % | 42 | % | 36 | % | 44 | % | 39 | % |
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$5.9 million, increaseor 35%, decrease in sales and marketing expenses duringfor the three months ended June 30, 2019,2020 compared to the same period in 2018,2019 was due primarily to:
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● | $ |
● | $ |
The $4.4$7.3 million, or 16% increase22%, decrease in sales and marketing expenses for the six months ended June 30, 20192020 compared to the same periodsperiod in 20182019 was due primarily to:
● | $ |
● | $ |
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Research and Development (“R&D”)
Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | 2019 | % Change | 2018 | 2019 | % Change | 2018 | 2020 | 2019 | % Change | 2020 | 2019 | % Change | ||||||||||||||||||||||||||||||||||||
Research and development | $ | 3,273 | (20)% |
| $ | 4,095 | $ | 6,979 | (9)% |
| $ | 7,651 | $ | 2,991 | $ | 3,273 | (9 | )% | $ | 6,862 | $ | 6,979 | (2 | )% | ||||||||||||||||||||||||
As a percentage of total net revenue | 7% |
| 10% |
| 8% |
| 10% |
| 11 | % | 7 | % | 12 | % | 8 | % |
R&D expenses consist primarily of personnel expenses, clinical research, regulatory and material costs. R&D expenses decreased by $0.8$0.3 million, or 20%, and $0.7 million or 9%, and represented 7% and 8%11% of total net revenue, in the three and six months ended June 30, 2019,2020, compared to 10% of total net revenue7% for the same period in each of the three and six months ended June 30, 2018. This2019. The decrease in expense was due primarily to $0.9$0.7 million increase in stock based compensation due mainly to the settlement of the Company's accrued bonus liability in shares, partially offset by a reduction in bonus expense of $0.4 million as a result of the settlement of the bonus in shares.
R&D expenses decreased by $0.1 million, and represented 12% of total net revenue, in the six months ended June 30, 2020, compared to 8% for the same period in 2019. This decrease in R&D expenses was due primarily to $0.4 million decrease in material expenses, and $0.3 million decrease in personnel related expenses;consulting costs due to COVID-19, partially offset by a $0.3 million increase in consulting relatedpersonnel expenses.
General and Administrative (“G&A”)
Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | 2019 | % Change | 2018 | 2019 | % Change | 2018 | 2020 | 2019 | % Change | 2020 | 2019 | % Change | ||||||||||||||||||||||||||||||||||||
General and administrative | $ | 5,267 | 7% |
| $ | 4,902 | $ | 10,792 | 4% |
| $ | 10,341 | ||||||||||||||||||||||||||||||||||||
General and Administrative | $ | 8,529 | $ | 5,267 | 62 | % | $ | 16,336 | $ | 10,792 | 51 | % | ||||||||||||||||||||||||||||||||||||
As a percentage of total net revenue | 11% |
| 12% |
| 13% |
| 13% |
| 32 | % | 11 | % | 28 | % | 13 | % |
G&A expenses consist primarily of personnel expenses, legal, accounting, audit and tax consulting fees, as well as other general and administrative expenses. G&A expenses increased by $0.4$3.3 million, or 7%62%, and $0.5$5.5 million, or 8%51%, and represented 32% and 28% of total net revenue in the three and six months ended June 30, 2020, respectively, compared to 11% and 13% of total net revenue in the three and six months ended June 30, 2019, compared torespectively. The $3.3 million increase for the same 12% and 13% of total net revenue in the three and six months ended June 30, 2018. The increase2020 was due primarily to $1.4$1.3 million of increased professionalcredit losses and $1.0 million for legal fees, and consulting serviceswrite-off of capitalized cloud computing costs of $0.8 million, $0.5 million of severance payments related to the ongoing implementation effortsreduction-in-force and $0.6 million increase in stock based compensation due mainly to the settlement of a new Enterprise Resource Planning solution during the six months ended June 30, 2019;Company's accrued bonus liability in shares, partially offset by personnel related expenses.a reduction in bonus expense of $0.9 million as a result of the settlement of the bonus in shares.
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 June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | 2019 | $ Change | 2018 | 2019 | $ Change | 2018 | 2020 | 2019 | % Change | 2020 | 2019 | % Change | ||||||||||||||||||||||||||||||||||||
Interest and other income (expense), net | $ | 46 | 175 |
| $ | (129) | $ | (33) | (2) |
| $ | (31) | ||||||||||||||||||||||||||||||||||||
Interest and other income (expense), net | $ | 3 | $ | 46 | (93 | )% | $ | (204 | ) | $ | (33 | ) | 518 | % | ||||||||||||||||||||||||||||||||||
As a percentage of total net revenue | —% |
| —% |
| —% |
| —% |
| - | % | - | % | - | % | - | % |
Interest and other income (expense), net, decreased by $175,000 to result in income of $46,000$43,000 or 93% in the three months ended June 30, 2020, compared to the same period in 2019. An increase inThe decrease was due primarily to interest income from the Company’she Company's marketable investments andoffset by foreign exchange gains in the three months ended June 30, 2019 compared to foreign exchangeand losses, in the three months ended June 30, 2018, were offset by an increase inand interest expense related to the estimated interest expense for advance payment related toPPP loan, lease financing costs and significant financing components included in the Company’s multi-year post-warranty service contracts for customers who make payment more than one year in advance of receiving the service under ASC Topic 606.the new revenue standard effective January 1, 2018.
Interest and other income (expense), net, increased $2,000 to $33,000 expense$0.2 million or 518% in the six months ended June 30, 2020, compared to the same period in 2019. AnThis increase was due primarily to foreign exchange losses, interest expense related to the PPP loan, lease financing costs and the significant financing components included in the Company’s multi-year post-warranty service contracts for customers who make payment more than one year in advance of receiving the service under the new revenue standard effective January 1, 2018, partially offset by interest income from the Company’s marketable investments in the six months ended June 30, 2019, compared to the same period in 2018, was offset by an increase in interest expense related to the estimated interest expense for advance payment related to service contracts under ASC Topic 606.investments.
Provision for Income Taxes
Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | 2019 | $ Change | 2018 | 2019 | $ Change | 2018 | 2020 | 2019 | $ Change | 2020 | 2019 | $ Change | ||||||||||||||||||||||||||||||||||||
Income (loss) before income taxes | $ | 345 | $ | 2,629 | $ | (2,284) | $ | (7,760) | (825) | $ | (6,935) | $ | (10,928 | ) | $ | 345 | $ | (11,273 | ) | $ | (23,265 | ) | $ | (7,760 | ) | $ | 15,505 | |||||||||||||||||||||
Provision (benefit) for income taxes | (243) | 469 | (712) | (128) | 3,203 | (3,331) | ||||||||||||||||||||||||||||||||||||||||||
Provision (benefit) for income tax | 466 | (243 | ) | 709 | 543 | (128 | ) | 671 |
For the three and six months ended June 30, 2019,2020, the Company’sCompany's income tax benefits were $0.2expense was $0.5 million and $0.1$0.5 million, respectively, compared to income tax benefits of $0.7$0.2 and $3.3$0.1 million in the same periods in 2018. In2019.
The Company's income tax expense for the three and six months ended June 30, 2019,2020 is due primarily to increase in Japan skincare revenue which increased the Company calculated the provision for income taxes for interim reporting periods by applying an estimate ofin foreign jurisdictions.
As the annual effective tax rate forCompany's U.S. operations are projecting to be in a taxable loss position in fiscal year 2020, and based on all available objectively verifiable evidence during the full year to ordinary income or loss for the reporting period. The Company’s income tax benefit in the three and six months ended June 30, 2019 was primarily related to2020, the release of reserve for uncertainCompany believes it is more likely than not that the tax position in Germany during the second quarter end June 30, 2019. The releasebenefits of the reserve resulted in a tax benefit of $0.3 million for the six months ended June 30, 2019.
As of June 30, 2019, and December 31, 2018,U.S. losses incurred will not be realized. Accordingly, the Company maintainswill continue to maintain a 100%full valuation allowance against itson the U.S. deferred tax assets. There was no valuation allowance during the six months ended June 30, 2018 other than the California jurisdiction.
On March 27, 2020, the U.S. federal government enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). The CARES Act changed several of the existing U.S. corporate income tax laws by, among other things, increasing the amount of deductible interest, allowing companies to carryback certain Net Operating Losses (“NOLs”) and increasing the amount of NOLs that corporations can use to offset income. The CARES Act did not have a material impact on our first-quarter income tax provision, deferred tax assets and liabilities, and related taxes payable. The Company is currently assessing the future implications of these provisions within the CARES Act on its Consolidated Financial Statements, but does not expect the impact to be material.
Liquidity and Capital Resources
The Company’s principal source of liquidity is cash generated from maturity and sales of marketable investments, and cash generated from the issuance of common stock through exercise of stock options, net proceeds from a public offering and the Company’s employee stock purchasing program. On July 9, 2020, the Company and Silicon Valley Bank entered into a Loan and Security Agreement. The agreement provides for a four-year secured revolving loan facility in an aggregate principal amount of up to $30.0 million. In order to draw on the full amount, the Company must satisfy certain liquidity ratios. If the Company is unable to meet these liquidity ratios, then availability under the revolving line is calculated as 80% of the Company’s qualifying accounts receivable. The Company must also meet certain quarterly revenue targets on a trailing twelve-month basis as part of the financial covenants. This clause is subject to renegotiation at the beginning of each year. The proceeds of the revolving loans may be used for general corporate purposes.
On April 22, 2020, the Company received loan proceeds of $7.1 million pursuant to the Paycheck Protection Program (the “PPP”) under the CARES Act. The loan, which is in the form of a promissory note dated April 21, 2020, between the Company and Silicon Valley Bank as the lender, matures on April 21, 2022 and bears interest at a fixed rate of 1.00% per annum, payable monthly commencing October 2020. There is no prepayment penalty. Under the terms of the PPP, all or a portion of the principal may be forgiven if the Loan proceeds are used for qualifying expenses as described in the CARES Act, such as payroll costs, benefits, rent, and utilities. The PPP loan will be derecognized upon repayment of the loan in accordance with it terms and/or upon confirmation of forgiveness from the SBA.
The Company actively manages its cash usage and investmentsinvestment of liquid cash to ensure the maintenance of sufficient funds sufficient to meet its operationaldaily needs. The majority of the Company’s cash and investments are held in U.S. banks. Ourbanks and its foreign subsidiaries maintain a limited amount of cash in their local banks to cover their short-term operating expenses.
As of June 30, 20192020 and December 31, 2018,2019, the Company had $35.2$52.3 million and $39.6$36.4 million of working capital, respectively. Cash and cash equivalents, plus marketable investments decreasedincreased by $3.9$12.7 million to $31.7$46.6 million as of June 30, 2019,2020, from $35.6$33.9 million as of December 31, 2018,2019, primarily due to settling accounts payablean increase in cash from financing activities offset by the Company’s loss from operations due to the sales decline as a result of COVID-19 and settlement of accrued liabilities as well as increased investments in sales, service and other management headcount to facilitate revenue growth.of December 31, 2019.
Cash, Cash Equivalents and Marketable Investments
The following table summarizes ourthe Company's cash, cash equivalents and marketable investments:
(Dollars in thousands) | June 30, 2020 | December 31, 2019 | Change | |||||||||
Cash and cash equivalents | $ | 33,659 | $ | 26,316 | $ | 7,343 | ||||||
Marketable investments | 12,894 | 7,605 | 5,289 | |||||||||
Total | $ | 46,553 | $ | 33,921 | $ | 12,632 |
Cash Flows
(Dollars in thousands) | June 30, | December 31, 2018 | Change | |||||||||
Cash and cash equivalents | $ | 27,668 | $ | 26,052 | $ | 1,616 | ||||||
Marketable investments | 4,002 | 9,523 | (5,521) | |||||||||
Total | $ | 31,670 | $ | 35,575 | $ | (3,905) |
Six Months Ended June 30, | ||||||||
(Dollars in thousands) | 2020 | 2019 | ||||||
Net cash flow provided by (used in): | ||||||||
Operating activities | $ | (17,951 | ) | $ | (3,919 | ) | ||
Investing activities | (5,702 | ) | 5,284 | |||||
Financing activities | 30,996 | 251 | ||||||
Net increase (decrease) in cash and cash equivalents | $ | 7,343 | $ | (1,616 | ) |
CCash Flows
Six Months Ended June 30, | ||||||||
(Dollars in thousands) | 2019 | 2018 | ||||||
Net cash flow provided by (used in): | ||||||||
Operating activities | $ | (3,919) | $ | (6,503) | ||||
Investing activities | 5,284 | 10,611 | ||||||
Financing activities | 251 | 140 | ||||||
Net increase in cash and cash equivalents | $ | 1,616 | $ | 4,248 |
Cashash Flows from Operating Activities
Net cash used in operating activities in the six months ended June 30, 2020 was approximately $18.0 million, which was primarily due to:
● | $23.8 million net loss as adjusted for non-cash related items consisting primarily of stock-based compensation expense of $6.1 million, $2.1 million of depreciation and amortization expenses, 1.7 million of provision for credit losses and $0.8 million related to impairment of software development costs; | |
● | $10.8 million cash used to settle accounts payable and accrued liabilities; | |
● | $6.0 million from decrease in accounts receivables; | |
● | $2.7 million from decrease in inventories; | |
● | $2.4 million from decreased in deferred revenue; | |
● | $0.5 million from decrease in other long term assets; and | |
● | $0.3 million used to settle extended warranty liabilities. |
Net cash used in operating activities in the six months ended June 30, 2019 was approximately $4.0 million, which was primarily due to:
● | $7.6 million net loss as adjusted for by non-cash related items consisting primarily of stock-based compensation expense of $3.8 million, and $2.2 million of depreciation and amortization expenses; |
● | $5.3 million increase in accounts receivables; |
● | $3.8 million increase in accrued liabilities due primarily to due to the timing of vendor payments in the ordinary course of business; |
● | $2.3 million decrease in pre-paid expenses and other long term assets; |
● | $1.3 million generated from an increase in deferred revenue; |
● | $1.1 million used to increase inventories; |
● | $0.8 million used to settle extended warranty liabilities; |
● | $0.4 million decrease in other long-term liabilities, including tax liability of $0.3 million; and |
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Cash Flows from Investing Activities
Net cash used in operatinginvesting activities was $5.7 million in the six months ended June 30, 20182020, which was approximately $6.5 million, primarily due to:
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Cash Flows from Investing Activities
Net cash provided by investing activities was $5.3 million in the six months ended June 30, 2019, which was primarily due to:
● | $9.6 million in net proceeds from the maturities of marketable investments; partially offset by |
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Cash Flows from Financing Activities
Net cash provided by investingfinancing activities was $10.6$31.0 million in the six months ended June 30, 2018,2020, which was primarily due to:
● | $ |
● | $ | |
● | $0.8 million net proceeds from the issuance of common stock due to employees exercising their stock options and purchasing stock through the Employee Stock Purchase Plan (“ESPP”) program; offset by | |
● | $3.1 million of cash used for taxes related to net share settlement of equity awards; and | |
● | $0.4 million of cash used to |
Cash Flows from Financing Activities
Net cash used in financing activities was $251,000$0.3 million in the six months ended June 30, 2019, which was primarily due to:
● | $1.2 million net proceeds from the issuance of common stock due to employees exercising their stock options and purchasing stock through the Employee Stock Purchase Plan (“ESPP”) program; offset by |
● | $0.6 million of cash used for taxes related to net share settlement of equity awards; and |
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Net cash provided by financing activities was $140,000 in the six months ended June 30, 2018, primarily due to:
● | $ |
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Adequacy of Cash Resources to Meet Future Needs
The Company had cash, cash equivalents, and marketable investments of $31.7$46.6 million as of June 30, 2019.2020. For the first six months ended June 30, 2019,of 2020, the Company’s principal source of liquidity is cash generated from proceeds received from its April 2020 offering, the PPP loan, maturity and sales of marketable investments and cash generated from the issuance of common stock through exercise of stock options and ESPP. the Company’s employee stock purchasing program.
On April 21, 2020, the Company received net proceeds of approximately $26.5 million from a public offering of its common stock, after deducting underwriting discounts and commissions and estimated offering expenses payable by the Company. The Company intends to use the net proceeds of the offering to fund growth initiatives, market development activities related thereto and to provide for general corporate purposes, which may include working capital, capital expenditures, clinical trials, other corporate expenses and acquisitions of complementary products, technologies or businesses.
On April 22, 2020, the Company received loan proceeds of $7.1 million pursuant to the Paycheck Protection Program (the “PPP”) under the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act. There are risks and uncertainties regarding the PPP loan as the Company may be deemed ineligible to receive the PPP loan, and the Company may be required to repay the PPP loan in its entirety and could be subject to penalties. In addition, with respect to any portion of the PPP loan not forgiven, the Company may default on payment or breach provisions of the loan. The PPP loan will be derecognized upon repayment of the loan in accordance with it terms and/or upon confirmation of forgiveness from the SBA.
On July 8, 2020, the Company and Silicon Valley Bank entered into a Loan and Security Agreement. The agreement provides for a four-year secured revolving loan facility in an aggregate principal amount of up to $30.0 million. In order to draw on the full amount, the Company must satisfy certain liquidity ratios. If the Company is unable to meet these liquidity ratios, then availability under the revolving line is calculated as 80% of the Company’s qualifying accounts receivable. The Company must also meet certain quarterly revenue targets on a trailing twelve-month basis as part of the financial covenants. This clause is subject to renegotiation at the beginning of each year. The proceeds of the revolving loans may be used for general corporate purposes. The Company’s obligations under the Loan Agreement are secured by substantially all of the assets of the Company.
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,12 months, but there can be no assurances.
Loan and Security Agreement
On May 30, 2018, the Company and Wells Fargo Bank, N.A. (“Wells Fargo”) entered into a Loan and Security Agreement (the “Original Revolving Line of Credit”) in the original principal amount of $25 million. The Original Revolving Line of Credit terminates on May 30, 2021.
The Original Revolving Line of Credit contained financial and other covenants as well as the maintenance of a leverage ratio not to exceed 2.5 to 1.0 and a trailing twelve months ("TTM") adjusted EBITDA of not less than $10 million. A violation of any of the covenants could result in a default under the Original Revolving Line of Credit that would permit the lenders to restrict the Company’s ability to further access the revolving line of credit for loans and letters of credit and require the immediate repayment of any outstanding loans under the Loan and Security Agreement.
During the third quarter of 2018, the Company received notice that it was in violation of certain financial covenants in the Original Revolving Line of Credit and entered into discussions with Wells Fargo to amend and revise certain terms of the Original Revolving Line of Credit.
On or about November 2, 2018, the Company entered into a First Amendment and Waiver to the Loan and Security Agreement with Wells Fargo (the “First Amended Revolving Line of Credit”). The First Amended Revolving Line of Credit provided for aan 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 TTMtrailing twelve months adjusted EBITDA of not less than $10 million, and a leverage ratio not to exceed 2.5 to 1.0.
A violationOn or about March 19, 2020, the Company entered into a Third Amendment and Waiver to the Loan and Security Agreement with Wells Fargo (the “Third Amended Revolving Line of any of the covenants could result in a default under the SecondCredit”). The Third Amended Revolving Line of Credit that would permitrequires the lendersCompany to restrictmaintain a minimum cash, cash equivalents, and marketable investments balance of $15 million at all Financial Institutions utilized by the Company’s ability to further accessCompany, and maintains the revolvingremoval of all other covenants (under the second amendment) so long as no money is drawn on the line of credit for loanscredit.
As the Company received a PPP loan, the Loan and lettersSecurity Agreement with Wells Fargo was amended in June 2020. This amendment waived certain requirements from Wells Fargo as the overall indebtedness and increased with receipt of credit and require the immediate repayment of any outstanding loans under the Second Amended Revolving Line of Credit.PPP loan.
As of June 30, 2019,2020, the Company entered into a Fourth Amendment and Waiver to the Loan and Security Agreement with Wells Fargo because the Company had not drawn on the Original Revolving Line of Creditviolated a financial covenant related to indebtedness and theobtained a waiver from Wells Fargo. The Company is in compliance with all financial covenants of the Original Revolving Line of Credit, as amended, byand has not drawn down on the Firstlone of credit.
The Company terminated the Third Amended Revolving Line of Credit andsubsequent to the Second Amended Revolving Lineissuance of Credit.the June 30, 2020 financial statements. Refer to the subsequent events footnote for more details.
Commitments and Contingencies
As of the date of this report, other than changes related to adoption of the new lease accounting standard effective January 1, 2019, and as described in Notes 2 and 12 to the Condensed Consolidated Financial Statements, there were no material changes to the Company’s contractual obligations and commitments outside the ordinary course of business since March 18, 2019,16, 2020, as reported in the Company’s Annual Report on 2019 Form 10-K, for the year ended December 31, 2018, as amended in Form 10-K/A filed with the SEC on March 18, 2019.April 14, 2020.
ITEM 3. | 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, 2018,2019, filed with the SEC on March 18, 2019.16, 2020, , as amended on April 14, 2020, the Company’s reports and registration statements filed and furnished from time to time with the SEC, including the S-3 and Prospectus Supplement related to the Company’s recent public offering filed on April 2 and 20, 2020, respectively, and other announcements the Company makes from time to time.
Interest Rate Fluctuationsand Market Risk
The primary objective of the Company’s investment activities is to preserve principal while at the same time maximizing the income the Company receives from investments without significantly increasing risk. To achieve this objective, the Company maintains its portfolio of cash equivalents and short- and long-term investments in a variety of high quality securities, including U.S. treasuries, U.S. government agencies, corporate debt, cash deposits, money market funds, commercial paper, non-U.S. government agency securities, and municipal bonds. The securities are classified as available-for-sale and consequently are recorded at fair value with unrealized gains or losses reported as a separate component of accumulated other comprehensive loss.
The weighted average maturity of the Company’s portfolio as of June 30, 20192020 was approximately 0.30.2 years. If interest rates rise, the market value of ourits 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.
On July 27, 2017, the United Kingdom’s Financial Conduct Authority announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. These reforms may cause LIBOR to cease to exist, new methods of calculating LIBOR to be established or the establishment of an alternative reference rate(s). These consequences cannot be entirely predicted and could have an adverse impact on the market value for or value of LIBOR-linked securities, loans, and other financial obligations or extensions of credit held by the Company. Changes in market interest rates may influence returns on financial investments and could reduce its earnings and cash flows.
The uncertain financial markets could result in a tightening in the credit markets, a reduced level of liquidity in many financial markets, and extreme volatility in fixed income and credit markets. The credit ratings of the securities the Company has invested in could further deteriorate and may have an adverse impact on the carrying value of these investments.
As of June 30, 2019,2020, the Company had not drawn on the Original Revolving Line of Credit.Credit, as amended. 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 2.2%0.16% as of June 30, 2019,2020, and accordingly the Company may incur additional expenses if the Company has an outstanding balance on the line of credit and the LIBOR rate increases in future periods.
Inflation
The Company does not believe that inflation has had a material effect on the Company’s business, financial condition, or results of operations. If the Company’s costs were to become subject to significant inflationary pressures, the Company may not be able to fully offset such higher costs through price increases. The Company’s inability or failure to do so could harm the Company’s business, financial condition, and results of operations.
Foreign Exchange Fluctuations
The Company generates revenue in Japanese Yen, Euros, Australian Dollars, Canadian Dollars, British Pounds and Swiss Francs. Additionally, a portion of the Company’s operating expenses and assets and liabilities are denominated in each of these currencies. Therefore, fluctuations in these currencies against the U.S. dollar could materially and adversely affect the Company’s results of operations upon translation of the Company’s revenue denominated in these currencies, as well as the remeasurementre-measurement of the Company’s international subsidiaries’ financial statements into U.S. dollars.
The Company has historically not engaged in hedging activities relating to the Company’s foreign currency denominated transactions, given the Company has a natural hedge resulting from the Company’s foreign cash receipts being utilized to fund the respective local currency expenses.transactions.
CONTROLS AND PROCEDURES |
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
An evaluation as of the three months June 30, 20192020 was carried out under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer ("CEO") and Interim 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 Interim CFO, as appropriate, to allow timely decisions regarding required disclosure. Based upon that evaluation, the Company’s CEO and Interim CFO concluded that the Company’s disclosure controls and procedures were effective at June 30, 2019. 2020.
Attached as exhibits to this Quarterly Report are certifications of the Company’s CEO and Interim 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
ThereThe Company implemented certain controls related to the adoption of FASB ASC 326 Financial Instruments – Credit Losses, effective January 1, 2020. 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 326 Financial Instruments – Credit Losses, there were no changes in the Company’s internal control over financial reporting during the threesix months ended June 30, 20192020 that have materially affected, or are reasonably likely to materially affect, ourthe Company's 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 CEOChief Executive Officer and CFOInterim 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.
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 11 to the Company’s consolidated financial statements entitled “Commitments and Contingencies,” in the Annual Report on Form 10-K for the year ended December 31, 2018,2019, filed with the SEC on March 18, 2019.16, 2020, as amended on April 14, 2020.
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RISK FACTORS |
ThereOther than as set forth below, there are no material changes from the Risk Factors previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018,2019, filed with the SEC on March 18, 2019.16, 2020.
The Company may be deemed ineligible to receive the PPP loan, and the Company may be required to repay the PPP loan in its entirety and could be subject to penalties. In addition, with respect to any portion of the PPP loan not forgiven, the Company may default on payment or breach provisions of the PPP loan.
On April 22, 2020, the Company received loan proceeds of $7.1 million pursuant to the Paycheck Protection Program (the “PPP”) under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). The Company believes that the current economic uncertainty makes the loan necessary to support ongoing operations.
The application for these funds required the Company to, in good faith, certify that the current economic uncertainty made the loan request necessary to support the ongoing operations of the Company. Subsequently released guidance instructs all applicants and recipients to take into account their current business activity and the Company's ability to access other sources of liquidity sufficient to support ongoing operations in a manner that is not significantly detrimental to their business. On April 28, 2020, in press conference remarks, the Secretary of the U.S. Department of the Treasury stated that the SBA intends to perform a review of PPP loans over $2.0 million. The required certification made by the Company is subject to interpretation. If, despite the good-faith belief that given the Company’s circumstances the Company satisfied all eligible requirements for the PPP loan, it is later determined the Company was ineligible to apply for and receive the PPP loan, the Company may be required to repay the PPP loan in its entirety and the Company could be subject to additional penalties.
The loan, which is in the form of a promissory note, dated April 21, 2020, between the Company and Silicon Valley Bank as the lender (the “Loan”), matures on April 21, 2022 and bears interest at a fixed rate of 1.00% per annum, payable monthly commencing in six months. There is no prepayment penalty. Under the terms of the PPP, all or a portion of the principal may be forgiven if the Loan proceeds are used for qualifying expenses as described in the CARES Act, such as payroll costs, benefits, rent, and utilities. No assurance is provided that the Company will obtain forgiveness of the Loan in whole or in part. With respect to any portion of the Loan that is not forgiven, the Loan will be subject to customary provisions for a loan of this type, including customary events of default relating to, among other things, payment defaults and breaches of the provisions of the Loan. The PPP loan will be derecognized upon repayment of the loan in accordance with it terms and/or upon confirmation of forgiveness from the SBA.
A pandemic, epidemic or outbreak of an infectious disease, such as COVID-19, or coronavirus, may materially and adversely affect the Company's business and financial results.
The recent outbreak of COVID-19 originated in Wuhan, China, in December 2019 and has since spread globally, including to the United States, Europe, Asia and South America, where the Company currently sells its products. On March 11, 2020, the World Health Organization declared COVID-19 a pandemic. Such events have resulted and the Company expects, will continue to result, in a period of business disruption. As a result of the COVID-19 outbreak, some of the Company's customers are being required to shelter-in-place and are not working. In cases where the Company's customers are working, they are performing fewer procedures. When they are performing procedures, customers are mostly focused on medically necessary procedures that should not be delayed. Non-urgent, non-essential procedures are getting cancelled or delayed. As a result of fewer aesthetic procedures being performed and anxiety about the economic future, the Company's customers may cancel orders for laser systems or will use less consumables. Some of the Company's customers will feel less confident about making investments in their practices and focus on retaining their cash. As a result of cash conservation efforts by the Company's customers, the Company may also encounter problems collecting on its receivables, which will impact the Company's cash position and could result in negative cash flows.
In response to the COVID-19 pandemic, the Company has recently taken action to reduce the expense associated with its workforce which could negatively affect the Company’s operations and the morale of its employees.
In response to the COVID-2019 pandemic, the Company’s Chief Executive Officer and President and Chief Operating Officer have each agreed to a 25% reduction in their salaries and other members of management have also agreed to significant reductions in their salaries, until such time as the Company’s business operations and economic conditions improve. The Company has also instituted salary reductions for the remainder of its employees and furloughs or reductions-in-force that have affected approximately 42% of the Company’s workforce. The actions the Company has taken may negatively impact the morale of its workforce, leading to a decrease in the quality of work or the voluntary departure of additional employees. Workers placed on furlough may find other jobs and decide not to work at the Company in future. Although the Company expects the roles of its furloughed and former employees will be performed by others for the time being, their skills sets may not allow them to perform the work as proficiently or efficiently as others. As a result of the actions the Company has taken to preserve cash, its workforce may become strained, morale may decline and the quality of work may suffer, all of which could negatively affect the Company’s business operations and adversely impact its revenue as a result.
A reduction in customer orders would reduce the amount of revenue that the Company expect to obtain. The Company expects the amount of revenue to increase slightly in the third quarter of 2020, and perhaps for the remainder of 2020, compared to the second quarter 2020, but its extent cannot be quantified at this time.
The aforementioned factors and trends may also impact demand for the Company's service contracts. The Company's customers’ patients are also feeling the economic impact of the current epidemic. Elective aesthetic procedures are less of a priority than other items for those patients that have lost their jobs, are furloughed, have reduced work hours or have to allocate their cash to other priorities. As result, the patients of the Company's customer may delay or cancel entirely their aesthetic procedures. Additionally, the continued spread of COVID-19 could adversely impact the Company's clinical trial operations, including the Company's ability to recruit and retain patients and principal investigators and site staff who, as healthcare providers, may have heightened exposure to COVID-19 if an outbreak occurs in their geography. The spread of COVID-19, or another infectious disease, could also result in delays or disruptions in the Company's supply chain or adversely affect its manufacturing facilities and personnel. The Company currently has inventory on hand to meet its forecasted demand for the next 120-180 days, but the Company must be able to continue to have access to the Company's supply chain to meet demand beyond that period. The COVID-19 outbreak continues to be fluid and uncertain, making it difficult to forecast the final impact it could have on the Company's future operations. The Company cannot presently predict the scope and severity of any potential business shutdowns or disruptions, but if the Company or any of the third parties with whom the Company engages were to experience shutdowns or other business disruptions, the Company's ability to conduct its business in the manner and on the timelines presently planned could be materially and negatively impacted, which could have a material adverse effect on its business, revenues, operating results, cash flows and financial condition.
Macroeconomic political and market conditions, disease outbreaks and catastrophic events may adversely affect the Company’s business, results of operations, financial condition and stock price.
The Company’s business is influenced by a range of factors that are beyond the Company’s control, including pandemics, like the COVID-19 outbreak.
The price of the Company’s common stock may fluctuate substantially due to several factors, some of which are discussed below. Further, the Company has a relatively limited number of shares of common stock outstanding, a large portion of which is held by a small number of investors, which could result in the increase in volatility of its stock price.
There has been volatility in the price of the Company’s common stock since December 1, 2019, decreasing from $37 per share to $9.19 per share as of the closing of March 20, 2020. The Company believes this is due in part to significant turnover of the Company’s North America sales team, the COVID-19 pandemic, and other factors. As a result of the Company’s relatively limited public float, its common stock may be less liquid than the stock of companies with broader public ownership. Among other things, trading of a relatively small volume of the Company’s common stock may have a greater impact on the trading price for the Company’s shares than would be the case if the Company’s public float were larger. The public market price of the Company’s common stock has in the past fluctuated substantially and, due to the current concentration of stockholders, may continue to do so in the future. The market price for the Company’s common stock could also be affected by a number of other factors, including the general market conditions unrelated to the Company’s operating performance, including market volatility as a result of the COVID-19 outbreak.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
None.
DEFAULTS UPON SENIOR SECURITIES |
None.
MINE SAFETY DISCLOSURES |
None.
OTHER INFORMATION |
None.
EXHIBITS |
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Pursuant to the requirements of theSection 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 8th7th day of August, 2019.
2020.
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