UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2020March 31, 2021
OR
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to_____.
Commission File Number: 000-50644
Cutera, Inc.
(Exact name of registrant as specified in its charter)
Delaware | 77-0492262 |
(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’sRegistrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock ($0.001 par value) | CUTR | The NASDAQ Stock Market, LLC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically 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 (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 October 31, 2020,April 30, 2021, was 17,632,64917,803,274.
FORM 10-Q
TABLE OF CONTENTS
Page | ||
PART I | ||
Item 1 | ||
Condensed Consolidated Statements of Changes in Stockholders’Equity | ||
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Item 2 |
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Item 3 |
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Item 4 |
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PART II | ||
Item 1 |
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Item 1A |
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Item 2 |
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Item 3 |
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Item 4 |
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Item 5 |
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Item 6 |
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In this Quarterly Report on Form 10-Q, “Cutera,” “the Company,” “we,” “us” and “its” refer to Cutera, Inc. and its consolidated subsidiaries.
This report may contain references to its proprietary intellectual property, including among others, trademarks for its systems and ancillary products, Cutera®Cutera®,AccuTip®, CoolGlide®AccuTip®, CoolGlide®, CoolGlide excel®excel®, enlighten®enlighten®, excel HR®HR®, excel V®V®, excel V+®, LimeLight®LimeLight®, MyQ®MyQ®, Pearl®Pearl®, PicoGenesis™PicoGenesis™,ProWave®, Solera®, Titan®, truSculpt®, truSculpt® flex, Secret PRO®,ProWave®, Solera®, Titan®, truSculpt®, truSculpt® flex, Vantage®,Fraxis PRO®, Secret RF® and xeo®xeo®.
These trademarks and trade names are the property of Cutera or the property of its consolidated subsidiaries and are protected under applicable intellectual property laws. Solely for convenience, its 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) |
CUTERA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
(unaudited)
September 30, 2020 | December 31, 2019 | March 31, 2021 | December 31, 2020 | |||||||||||||
Assets | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash and cash equivalents | $ | 29,394 | $ | 26,316 | $ | 164,932 | $ | 47,047 | ||||||||
Marketable investments | 13,046 | 7,605 | ||||||||||||||
Accounts receivable, net of allowance for credit losses of $1,505 and $1,354, respectively | 17,597 | 21,556 | ||||||||||||||
Accounts receivable, net of allowance for credit losses of $1,611 and $1,598, respectively | 24,151 | 21,962 | ||||||||||||||
Inventories | 29,333 | 33,921 | 34,578 | 28,508 | ||||||||||||
Other current assets and prepaid expenses | 6,892 | 5,648 | 10,339 | 8,779 | ||||||||||||
Total current assets | 96,262 | 95,046 | 234,000 | 106,296 | ||||||||||||
Property and equipment, net | 2,391 | 2,817 | 2,373 | 2,299 | ||||||||||||
Deferred tax asset | 500 | 423 | 598 | 643 | ||||||||||||
Operating lease right-of-use assets | 17,645 | 7,702 | ||||||||||||||
Operating lease-right-of-use assets | 16,570 | 17,076 | ||||||||||||||
Goodwill | 1,339 | 1,339 | 1,339 | 1,339 | ||||||||||||
Other long-term assets | 5,290 | 6,411 | 4,853 | 5,080 | ||||||||||||
Total assets | $ | 123,427 | $ | 113,738 | $ | 259,733 | $ | 132,733 | ||||||||
Liabilities and Stockholders' Equity | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Accounts payable | $ | 6,799 | $ | 12,685 | $ | 5,031 | $ | 6,684 | ||||||||
Accrued liabilities | 25,644 | 30,307 | 41,329 | 31,079 | ||||||||||||
Operating lease liabilities | 1,608 | 2,800 | 2,351 | 2,260 | ||||||||||||
PPP loan payable | 6,352 | 3,630 | ||||||||||||||
Extended warranty liability | 1,497 | 1,999 | 1,039 | 1,216 | ||||||||||||
Deferred revenue | 9,580 | 10,831 | 10,019 | 9,489 | ||||||||||||
Total current liabilities | 45,128 | 58,622 | 66,121 | 54,358 | ||||||||||||
Deferred revenue, net of current portion | 2,244 | 3,391 | 1,718 | 1,748 | ||||||||||||
Income tax liability | 93 | 93 | ||||||||||||||
Long-term debt | 7,167 | 0 | ||||||||||||||
Operating lease liabilities, net of current portion | 16,497 | 5,112 | 15,394 | 15,950 | ||||||||||||
PPP loan payable, net of current portion | 851 | 3,555 | ||||||||||||||
Convertible notes, net of unamortized debt issuance costs of $4,665 | 133,585 | 0 | ||||||||||||||
Other long-term liabilities | 292 | 578 | 434 | 242 | ||||||||||||
Total liabilities | 71,421 | 67,796 | 218,103 | 75,853 | ||||||||||||
Commitments and Contingencies (Notes 11 and 12) | ||||||||||||||||
Commitments and Contingencies (Notes 12) | ||||||||||||||||
Stockholders’ equity: | ||||||||||||||||
Common stock, $0.001 par value; authorized: 50,000,000 shares; issued and outstanding: 17,625,849 and 14,315,586 shares at September 30, 2020 and December 31, 2019, respectively | 18 | 14 | ||||||||||||||
Common stock, $0.001 par value; authorized: 50,000,000 shares; issued and outstanding: 17,801,926 and 17,679,232 shares at March 31, 2021 and December 31, 2020, respectively | 18 | 18 | ||||||||||||||
Additional paid-in capital | 114,410 | 82,346 | 102,206 | 117,097 | ||||||||||||
Accumulated deficit | (62,423 | ) | (36,358 | ) | (60,594 | ) | (60,235 | ) | ||||||||
Accumulated other comprehensive income (loss) | 1 | (60 | ) | |||||||||||||
Total stockholders’ equity | 52,006 | 45,942 | 41,630 | 56,880 | ||||||||||||
Total liabilities and stockholders’ equity | $ | 123,427 | $ | 113,738 | $ | 259,733 | $ | 132,733 | ||||||||
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 | Nine Months Ended | Three Months Ended | ||||||||||||||||||||||
September 30, | September 30, | March 31, | ||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | 2021 | 2020 | |||||||||||||||||||
Net revenue: | ||||||||||||||||||||||||
Products | $ | 33,254 | $ | 40,315 | $ | 81,390 | $ | 113,045 | $ | 43,551 | $ | 26,391 | ||||||||||||
Service | 5,878 | 5,802 | 16,350 | 16,872 | 6,117 | 5,848 | ||||||||||||||||||
Total net revenue | 39,132 | 46,117 | 97,740 | 129,917 | 49,668 | 32,239 | ||||||||||||||||||
Cost of revenue: | ||||||||||||||||||||||||
Products | 14,017 | 16,343 | 40,326 | 50,278 | 18,331 | 14,103 | ||||||||||||||||||
Service | 3,369 | 3,541 | 9,708 | 10,266 | 3,627 | 3,800 | ||||||||||||||||||
Total cost of revenue | 17,386 | 19,884 | 50,034 | 60,544 | 21,958 | 17,903 | ||||||||||||||||||
Gross profit | 21,746 | 26,233 | 47,706 | 69,373 | 27,710 | 14,336 | ||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||
Sales and marketing | 12,286 | 17,691 | 38,109 | 50,786 | 15,068 | 14,789 | ||||||||||||||||||
Research and development | 3,432 | 3,643 | 10,294 | 10,622 | 4,112 | 3,870 | ||||||||||||||||||
General and administrative | 7,239 | 7,308 | 23,575 | 18,100 | 7,365 | 7,806 | ||||||||||||||||||
Total operating expenses | 22,957 | 28,642 | 71,978 | 79,508 | 26,545 | 26,465 | ||||||||||||||||||
Loss from operations | (1,211 | ) | (2,409 | ) | (24,272 | ) | (10,135 | ) | ||||||||||||||||
Other expense | (382 | ) | (146 | ) | (586 | ) | (180 | ) | ||||||||||||||||
Income (loss) from operations | 1,165 | (12,129 | ) | |||||||||||||||||||||
Interest and other expense, net: | ||||||||||||||||||||||||
Amortization of debt issuance costs | (52 | ) | 0 | |||||||||||||||||||||
Interest on Convertible notes | (191 | ) | 0 | |||||||||||||||||||||
Other expense, net | (1,023 | ) | (207 | ) | ||||||||||||||||||||
Total interest and other expense, net | (1,266 | ) | (207 | ) | ||||||||||||||||||||
Loss before income taxes | (1,593 | ) | (2,555 | (24,858 | ) | (10,315 | ) | (101 | ) | (12,336 | ) | |||||||||||||
Income tax expense (benefit) | 664 | 73 | 1,207 | (55 | ) | |||||||||||||||||||
Income tax expense | 258 | 78 | ||||||||||||||||||||||
Net loss | $ | (2,257 | ) | $ | (2,628 | ) | $ | (26,065 | ) | $ | (10,260 | ) | $ | (359 | ) | $ | (12,414 | ) | ||||||
Net loss per share: | ||||||||||||||||||||||||
Basic and Diluted | $ | (0.13 | ) | $ | (0.19 | ) | $ | (1.59 | ) | $ | (0.73 | ) | $ | (0.02 | ) | $ | (0.86 | ) | ||||||
Weighted-average number of shares used in per share calculations | ||||||||||||||||||||||||
Weighted-average number of shares used in per share calculations: | ||||||||||||||||||||||||
Basic and Diluted | 17,603 | 14,182 | 16,368 | 14,095 | 17,768 | 14,433 | ||||||||||||||||||
The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
(Unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Net loss | $ | (2,257 | ) | $ | (2,628 | ) | $ | (26,065 | ) | $ | (10,260 | ) | ||||
Other comprehensive income: | ||||||||||||||||
Available-for-sale investments | ||||||||||||||||
Net change in unrealized gain (loss) on available-for-sale investments | (2 | ) | 1 | (2 | ) | 10 | ||||||||||
Less: Reclassification adjustment for (gains) losses on investments recognized during the period | 0 | 0 | 63 | 0 | ||||||||||||
Net change in unrealized gain on available-for-sale investments | (2 | ) | 1 | 61 | 10 | |||||||||||
Other comprehensive gain (loss), net of tax | (2 | ) | 1 | 61 | 10 | |||||||||||
Comprehensive loss | $ | (2,259 | ) | $ | (2,627 | ) | $ | (26,004 | ) | $ | (10,250 | ) | ||||
Three Months Ended | ||||||||
March 31, | ||||||||
2021 | 2020 | |||||||
Net loss | $ | (359 | ) | $ | (12,414 | ) | ||
Other comprehensive loss: | ||||||||
Available-for-sale investments | ||||||||
Reclassification adjustment for losses on investments recognized during the period | 0 | 61 | ||||||
Net change in unrealized loss on available-for-sale investments | 0 | 61 | ||||||
Other comprehensive gain, net of tax | 0 | 61 | ||||||
Comprehensive loss | $ | (359 | ) | $ | (12,353 | ) | ||
The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’STOCKHOLDERS’ EQUITY
(in thousands, except share amounts)
Three and NineMonths Ended March 31, 2021 and 2020September 30, 2020
Common Stock | Additional Paid-in | Accumulated | Accumulated Other Comprehensive | Total Stockholders’ | ||||||||||||||||||||
Shares | Amount | Capital | Deficit | Income (loss) | Equity | |||||||||||||||||||
Balance at July 1, 2020 | 17,567,688 | $ | 18 | $ | 112,644 | $ | (60,166 | ) | $ | 3 | $ | 52,499 | ||||||||||||
Exercise of stock options | 750 | ─ | 8 | ─ | ─ | 8 | ||||||||||||||||||
Issuance of common stock in settlement of restricted stock units, net of shares withheld for employee taxes | 57,411 | ─ | (224 | ) | ─ | ─ | (224 | ) | ||||||||||||||||
Stock-based compensation expense | ─ | ─ | 1,982 | ─ | ─ | 1,982 | ||||||||||||||||||
Net loss | ─ | ─ | ─ | (2,257 | ) | ─ | (2,257 | ) | ||||||||||||||||
Net change in unrealized gain on available-for-sale investments | ─ | ─ | ─ | ─ | (2 | ) | (2 | ) | ||||||||||||||||
Balance at September 30, 2020 | 17,625,849 | $ | 18 | $ | 114,410 | $ | (62,423 | ) | $ | 1 | $ | 52,006 | ||||||||||||
Common Stock | Additional Paid-in | Retained Earnings (Accumulated | Accumulated Other Comprehensive | Total Stockholders’ | ||||||||||||||||||||
Shares | Amount | Capital | Deficit) | Income (loss) | Equity | |||||||||||||||||||
Balance at December 31, 2020 | 17,679,232 | $ | 18 | $ | 117,097 | $ | (60,235 | ) | $ | 0 | $ | 56, 880 | ||||||||||||
Exercise of stock options | 24,090 | 0 | 396 | 0 | 0 | 396 | ||||||||||||||||||
Purchase of capped call | - | 0 | (16,134 | ) | 0 | 0 | (16,134 | ) | ||||||||||||||||
Issuance of common stock in settlement of restricted and performance stock units, net of shares withheld for employee taxes | 98,604 | 0 | (999 | ) | 0 | 0 | (999 | ) | ||||||||||||||||
Stock-based compensation expense | - | 0 | 1,846 | 0 | 0 | 1,846 | ||||||||||||||||||
Net loss | - | 0 | 0 | (359 | ) | 0 | (359 | ) | ||||||||||||||||
Balance at March 31, 2021 | 17,801,926 | $ | 18 | $ | 102,206 | $ | (60,594 | ) | $ | 0 | $ | 41,630 | ||||||||||||
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 | 46,878 | ─ | 419 | ─ | ─ | 419 | ||||||||||||||||||
Issuance of common stock in connection with public offering, net of offering costs of $2,303 | 2,742,750 | 3 | 26,492 | ─ | ─ | 26,495 | ||||||||||||||||||
Issuance of common stock in settlement of restricted and performance stock units, net of shares withheld for employee taxes | 481,387 | 1 | (3,341 | ) | ─ | ─ | (3,340 | ) | ||||||||||||||||
Stock-based compensation expense | ─ | ─ | 8,057 | ─ | ─ | 8,057 | ||||||||||||||||||
Net loss | ─ | ─ | ─ | (26,065 | ) | ─ | (26,065 | ) | ||||||||||||||||
Net change in unrealized gain on available-for-sale investments | ─ | ─ | ─ | ─ | 61 | 61 | ||||||||||||||||||
Balance at September 30, 2020 | 17,625,849 | $ | 18 | $ | 114,410 | $ | (62,423 | ) | $ | 1 | $ | 52,006 | ||||||||||||
Three and Nine Months Ended September 30, 2019
Common Stock | Additional Paid-in | Retained Earnings (Accumulated | Accumulated Other Comprehensive | Total Stockholders’ | ||||||||||||||||||||
Shares | Amount | Capital | Deficit) | Income (loss) | Equity | |||||||||||||||||||
Balance at July 1, 2019 | 14,142,296 | $ | 14 | $ | 74,870 | $ | (31,642 | ) | $ | (60 | ) | $ | 43,182 | |||||||||||
Exercise of stock options | 38,966 | ─ | 437 | ─ | ─ | 437 | ||||||||||||||||||
Issuance of common stock in settlement of restricted and performance stock units, net of shares withheld for employee taxes, and stock awards | 18,559 | ─ | (180 | ) | ─ | ─ | (180 | ) | ||||||||||||||||
Stock-based compensation expense | ─ | ─ | 3,178 | ─ | ─ | 3,178 | ||||||||||||||||||
Net loss | ─ | ─ | ─ | (2,628 | ) | ─ | (2,628 | ) | ||||||||||||||||
Net change in unrealized loss on available-for-sale investments | ─ | ─ | ─ | ─ | 1 | 1 | ||||||||||||||||||
Balance at September 30, 2019 | 14,199,821 | $ | 14 | $ | 78,305 | $ | (34,270 | ) | $ | (59 | ) | $ | 43,990 | |||||||||||
Common Stock | Additional Paid-in | Retained Earnings (Accumulated | Accumulated Other Comprehensive | Total Stockholders’ | Common Stock | Additional Paid-in | Retained Earnings (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 | |||||||||||||||||||||||||||||||||||
Issuance of common stock for employee purchase plan | 53,803 | ─ | 833 | ─ | ─ | 833 | ||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2019 | 14,315,586 | $ | 14 | $ | 82,346 | $ | (36,358 | ) | $ | (60 | ) | $ | 45,942 | |||||||||||||||||||||||||||||||||||
Exercise of stock options | 79,420 | ─ | 767 | ─ | ─ | 767 | 22,291 | 0 | 200 | 0 | 0 | 200 | ||||||||||||||||||||||||||||||||||||
Issuance of common stock in settlement of restricted and performance stock units, net of shares withheld for employee taxes, and stock awards | 97,746 | ─ | (750 | ) | ─ | ─ | (750 | ) | ||||||||||||||||||||||||||||||||||||||||
Issuance of common stock in settlement of restricted and performance stock units, net of shares withheld for employee taxes | 240,269 | 1 | (2,234 | ) | 0 | 0 | (2,233 | ) | ||||||||||||||||||||||||||||||||||||||||
Stock-based compensation expense | ─ | ─ | 7,004 | ─ | ─ | 7,004 | - | 0 | 1,980 | 0 | 0 | 1,980 | ||||||||||||||||||||||||||||||||||||
Net loss | ─ | ─ | ─ | (10,260 | ) | ─ | (10,260 | ) | - | 0 | 0 | (12,414 | ) | 0 | (12,414 | ) | ||||||||||||||||||||||||||||||||
Net change in unrealized loss on available-for-sale investments | ─ | ─ | ─ | ─ | 10 | 10 | - | 0 | 0 | 0 | 61 | 61 | ||||||||||||||||||||||||||||||||||||
Balance at September 30, 2019 | 14,199,821 | $ | 14 | $ | 78,305 | $ | (34,270 | ) | $ | (59 | ) | $ | 43,990 | |||||||||||||||||||||||||||||||||||
Balance at March 31, 2020 | 14,578,146 | $ | 15 | $ | 82,292 | $ | (48,772 | ) | $ | 1 | $ | 33,536 | ||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months Ended September 30, | Three Months Ended March 31, | |||||||||||||||
2020 | 2019 | 2021 | 2020 | |||||||||||||
Cash flows from operating activities: | ||||||||||||||||
Net loss | $ | (26,065 | ) | $ | (10,260 | ) | $ | (359 | ) | $ | (12,414 | ) | ||||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||||||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||||||||||
Stock-based compensation | 8,057 | 7,004 | 1,846 | 1,980 | ||||||||||||
Depreciation of tangible assets | 1,056 | 1,184 | ||||||||||||||
Depreciation and amortization | 361 | 360 | ||||||||||||||
Amortization of contract acquisition costs | 2,017 | 2,169 | 545 | 717 | ||||||||||||
Amortization of debt issuance costs | 52 | 0 | ||||||||||||||
Impairment of capitalized cloud computing costs | 805 | - | 182 | 0 | ||||||||||||
Change in deferred tax asset | (77 | ) | (2 | ) | 45 | 15 | ||||||||||
Provision for credit losses | 1,750 | 647 | 218 | 590 | ||||||||||||
Gain on sale of property and equipment | (59 | ) | 0 | |||||||||||||
Change in right-of-use asset | 250 | - | 604 | 645 | ||||||||||||
Other | 327 | 55 | 0 | 35 | ||||||||||||
Changes in assets and liabilities: | ||||||||||||||||
Accounts receivable | 2,209 | (4,232 | ) | (2,407 | ) | 5,306 | ||||||||||
Inventories | 4,588 | (6,028 | ) | (6,021 | ) | (3,020 | ) | |||||||||
Other current assets and prepaid expenses | (1,273 | ) | (1,423 | ) | (1,560 | ) | 807 | |||||||||
Other long-term assets | (1,701 | ) | (2,608 | ) | (500 | ) | (207 | ) | ||||||||
Accounts payable | (5,886 | ) | 2,861 | (1,653 | ) | 1,919 | ||||||||||
Accrued liabilities | (4,559 | ) | 4,900 | 10,199 | (6,567 | ) | ||||||||||
Extended warranty liabilities | (502 | ) | (927 | ) | (177 | ) | (234 | ) | ||||||||
Other long-term liabilities | - | (140 | ) | |||||||||||||
Operating lease liabilities | (563 | ) | (645 | ) | ||||||||||||
Deferred revenue | (2,398 | ) | 907 | 500 | (1,253 | ) | ||||||||||
Income tax liabilities | - | (301 | ) | |||||||||||||
Net cash used in operating activities | (21,402 | ) | (6,194 | ) | ||||||||||||
Net cash provided by (used in) operating activities | 1,253 | (11,966 | ) | |||||||||||||
Cash flows from investing activities: | ||||||||||||||||
Acquisition of property and equipment | (774 | ) | (524 | ) | ||||||||||||
Disposal of property and equipment | - | 45 | ||||||||||||||
Acquisition of property, equipment, and software | (101 | ) | (230 | ) | ||||||||||||
Proceeds from disposal of property and equipment | 52 | 0 | ||||||||||||||
Proceeds from maturities of marketable investments | 19,000 | 11,450 | 0 | 6,800 | ||||||||||||
Purchase of marketable investments | (24,411 | ) | (8,304 | ) | 0 | (3,930 | ) | |||||||||
Net cash provided by (used in) investing activities | (6,185 | ) | 2,667 | (49 | ) | 2,640 | ||||||||||
Cash flows from financing activities: | ||||||||||||||||
Proceeds from exercise of stock options and employee stock purchase plan | 856 | 1,600 | 396 | 201 | ||||||||||||
Proceeds from long-term debt | 7,167 | - | ||||||||||||||
Gross proceeds from equity offering | 28,798 | - | ||||||||||||||
Offering costs on the equity offering | (2,303 | ) | - | |||||||||||||
Purchase of capped call | (16,134 | ) | 0 | |||||||||||||
Proceeds from issuance of Convertible notes | 138,250 | 0 | ||||||||||||||
Payment of issuance costs of Convertible notes | (4,717 | ) | 0 | |||||||||||||
Taxes paid related to net share settlement of equity awards | (3,340 | ) | (750 | ) | (999 | ) | (2,234 | ) | ||||||||
Payments on finance lease obligations | (513 | ) | (496 | ) | (115 | ) | (183 | ) | ||||||||
Net cash provided by financing activities | 30,665 | 354 | ||||||||||||||
Net cash provided by (used in) financing activities | 116,681 | (2,216 | ) | |||||||||||||
Net increase (decrease) in cash and cash equivalents | 3,078 | (3,173 | ) | 117,885 | (11,542 | ) | ||||||||||
Cash and cash equivalents at beginning of period | 26,316 | 26,052 | 47,047 | 26,316 | ||||||||||||
Cash and cash equivalents at end of period | $ | 29,394 | $ | 22,879 | $ | 164,932 | $ | 14,774 | ||||||||
Supplemental disclosure of non-cash items: | ||||||||||||||||
| Assets acquired under finance lease | $ | 27 | $ | 903 | $ | 25 | $ | 0 | ||||||||
Assets acquired under operating lease | $ | 10,623 | $ | 11,734 | $ | 123 | $ | 0 | ||||||||
Debt issuance costs accrued | $ | 452 | $ | 0 | ||||||||||||
Supplemental disclosure of cash flow information: | ||||||||||||||||
Income tax paid | $ | 458 | $ | 75 | ||||||||||||
The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.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 energy-based aesthetic systems for practitioners worldwide. The Company develops, manufactures, distributes, and markets 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:enlighten, excel, FraxisSecret PRO, Juliet, Secret RF, truSculpt truSculpt and xeo. Several of the Company’s systems offer multiple hand pieces and applications, providing customers the flexibility to upgrade theirsystems. The sales of (i) systems, system upgrades, and hand pieces (collectively “Systems” revenue); (ii) replacement hand pieces,Titan, truSculpt3D,truSculpt iDand truSculpt flexcycle refills, as well as single use disposable tips applicable to FraxisSecret PRO, Julietand Secret RF (“(“Consumables”revenue); (iii) the distribution of third party manufactured skincare products (“Skincare” revenue); and (iv) the leasing of equipment through a membership program; 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 forTitan, truSculpt 3D, truSculpt iD andtruSculpt flex and service labor for the repair and maintenance of products that are out of warranty, all of which are collectively classified as “Service” revenue.
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 also maintains regional distribution centers (“RDCs”) in selection locations across the U.S. These RDCs serve as forward warehousing for systems and service parts in various geographies. 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 Servicesservices outside of these direct markets are made through a worldwide distributor network in over 4042 countries. The condensedCondensed consolidated financial statements include the accounts of the Company and its subsidiaries. All inter-company transactions and balances have been eliminated.
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, business disruptions that are caused by natural disasters or pandemic events, management of international activities, competition from substitute products and larger companies, the Company’s ability to obtain and maintain regulatory approvals, government regulations and oversight, patent and other types of litigation, the Company’s ability to protect proprietary technology from counterfeit versions of the Company's products, strategic relationships and dependence on key individuals.
OnIn January 30, March2020,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. The COVID-19 outbreak ishas negatively affectingaffected the United States and global economies. AsThe spread of the COVID-coronavirus, which caused a broad impact in 192020 outbreak continued to spread, governmental authorities ordered quarantines, shelter-in-place, andglobally, including restrictions on the conduct of business operations relatedtravel, shifting work force to the COVID-19 outbreak. In certain geographies, these measures remain inwork remotely and quarantine policies put into place on some level,by businesses and these measures and restrictionsgovernments, had and continue to have, an impacta material economic effect on the Company's business. The COVID-Company’s business during the year ended 19December 31, 2020. impact,Notably, healthcare facilities in many countries effectively banned elective procedures. Many of the Company’s products are used in aesthetic elective procedures and as such, the bans on elective procedures substantially reduced the Company’s sales and marketing efforts in the early months of the pandemic and led the Company to implement cost control measures. TheAlthough the Company’s revenues and profits have improved compared to the first, second, and third quarters of fiscal 2020, which were hard hit during the pandemic, and the overall economic outlook due to the COVID-19 outbreak also impacted the Company’s results of operations during thepandemic improves in nine2021, months ended September 30, 2020. The Company expects the COVID-19 outbreak continues to continuebe fluid and the aftermath of the business and economic disruptions due to affect itsthe COVID-19 is still uncertain, making it difficult to forecast the final impact it could have on the Company’s future operations, and those of third parties on which the Company relies, which could causeincluding disruptions in the Company’sCompany's 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 manufacturingcannot presently predict the scope and currently has inventory on hand forseverity of any impacts in future periods from the next 180-240 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 and the on-going procedures performed with the existing installed base that utilize procedure based consumable products. As a result of COVID-19, some of its customers have been required to shelter-in-place and cease operation of their practice. In other cases, as aesthetic practices reopened and resumed treating patients, practitioners were obligated to implement new safety procedures resulting in fewer patients treated.
In responsebusiness shutdowns or disruptions due to the COVID-19 outbreak,pandemic, but the Company took actions to reduce expenses, including discontinuing nonessential services and programs, instituting cost controlsimpact on travel and entertainment, implementing further cost-cutting measures and evaluating whethereconomic activity such as the workforce is able to execute additional efficiency improvements’. For example, the directorspossibility of recession or financial market instability could have a material adverse effect on the Company's board of directors agreed to a 25% reduction in their fees, the Company's Chief Executive OfficerCompany’s business, revenue, operating results, cash flows 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.financial condition. The Company also instituted salary reductions for the remainder of its employees and initiated furloughs and subsequent reductions-in-force that initially affected approximately 42% of its workforce. Only 22% of the Company’s workforce was impacted as of the third quarter of 2020, as several previously furloughed positions ended and the employees have come backcontinues to work.
In addition, to facilitate the conservation of cash, bonuses owed to management from the 2019 Management Bonus Program were paid mostly in equity (Note 8) rather than in cash during the second quarter of 2020.
As a result of the events and impact surrounding the COVID-19 pandemic, the Company assessedassess whether any impairment of its goodwill or its long-lived assets hadhas occurred and has determined that no charges other than an impairment loss of $0.8$0.2 million on capitalized cloud computingimplementation costs related to the indefinite delay of the implementation of cloud-based enterprise resource planningcustomer relationship management (“CRM”) software had occurred as ofduring the September 30, 2020three months ended March 31, 2021.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.
The Company has experienced a significant increase in sales of skincare products under the exclusive distribution agreement with ZO Skin Health, Inc. (“ZO”), which allows the Company to sell ZO’s skincare products in Japan. The reason for the increase in skincare products sales might have been the result of changes in customers’ spending habits to purchase more aesthetic treatments which could be applied at home due to limitations on in-person aesthetic procedures, social distancing and mask wearing requirements due to the COVID-19 pandemic. Future growth in sales of skincare products depends on the customers’ spending habits, which may revert to original spending habits after the COVID-19 pandemic. Such changes may have a material adverse effect on the Company’s revenue, operating results, and cash flows.
Unaudited Interim Financial Information
In the opinion of the Company, the accompanying unaudited condensedCondensed consolidated financial statements included in this report reflect all adjustments (consisting of only normal recurring adjustments) necessary for a fair statement of its Condensed consolidated statements of financial position as of September 30, 2020March 31, 2021 and 2019,2020, and its Condensed consolidated statements of results of operations, comprehensive loss, changes in equity, and cash flows for the three and ninemonths ended September 30, 2020,March 31, 2021, and 2019.2020. The December 31, 20192020 condensedCondensed 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 condensedCondensed 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, 20192020 filed with the Securities and Exchange Commission (the “SEC”) on March 16, 2020, and amended in a filing on Form 10-K/A with the SEC on April 14, 2020.
23, 2021.
Accounting Policies
These unaudited condensedCondensed 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 condensedCondensed 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, 20192020 filed with the SEC on March 16, 2020, and amended in a filing on Form 10-K/A with the SEC on April 14, 2020.23, 2021.
The Company uses the same accounting policies in preparing quarterly and annual financial statements. Unless otherwise noted, amounts presented within the Notesnotes to condensedCondensed consolidated financial statements refer to the Company’s continuing operations. Note 113 provides information about the Company’s adoption of the new accounting standard for credit losses.
debt with conversion and other options which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts in an entity’s own equity.
The Company issued $138.3 million of convertible senior notes ("Notes" or "Convertible notes") in a private placement offering on March 5, 2021. The Convertible notes bear interest at a rate of 2.25% per year. In accordance with ASU 2020-06, “Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging— Contracts in Entity’s Own Equity (Subtopic 815-40),” the Company recorded the Convertible notes in long-term debt with no separation between the Convertible notes and the conversion option. Each reporting period, the Company will determine whether any criteria is met for the note holders to have the option to redeem the Convertible notes early, which will result in a change in the classification of the Convertible notes to current liabilities.
The costs associated with issuance of the Convertible notes, including underwriters’ fees are presented in the Condensed consolidated balance sheet as a direct deduction from the carrying amount of the Convertible notes. The debt issuance costs are amortized over the life of the Convertible notes as additional non-cash interest expense.
In connection with issuance of the Convertible notes, the Company entered into capped call transactions with certain option counterparties. The capped call transactions are generally designated to reduce the potential dilution of the Company's common stock upon any conversion of the Notes. The capped calls were purchased for $16.1 million and recorded as a reduction to additional paid in capital in the Condensed consolidated balance sheet as of March 31, 2021.
Use of Estimates
The preparation of condensedCondensed 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 condensedCondensed 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, implicit and 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,assumptions used in operating and sales-type lease classification, 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, residual value of leased equipment, useful life, lease term 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.
Accounting for Leases as a Lessor
In the second quarter of 2020, the Company began leasing equipment to customers through a membership program where the customer pays a fixed monthly fee over the lease term. Along with the leased equipment, the membership program provides customers with a warranty service and a fixed amount of consumables per month for the term of the lease. The Company has made an accounting policy election to account for qualifying lease components and associated non-lease components as a single component; accordingly, a lease component and an associated warranty service non-lease component are combined and accounted for as an operating lease. The consumables do not qualify for the practical expedient and are accounted for as a separate non-lease component in accordance with Topic 606 on Revenue from Contracts with Customers. The Company allocates the membership program contract consideration to each component proportionately on a relative standalone selling price basis.
The lease agreements are typically for three years; however, the customer has the ability to terminate the lease after twelve months with no penalty. As such, the Company has determined the initial term of the lease to be twelve-months, after which the lease converts to a month-to-month lease for up to an additional two years. Rental charges are a fixed monthly fee, paid at the beginning of each month, over the term of the lease.
All leases entered into to date under the membership program are classified as operating leases. The underlying asset in an operating lease arrangement is carried at depreciated cost within property and equipment, net, on the condensed consolidated balance sheets. Depreciation is calculated using the straight-line method over the useful life of the leased asset and is recognized as cost of product revenue. The depreciable basis is the original cost of the equipment less the estimated residual value of the equipment at the end of the lease term.
The Company recognizes operating lease revenue on a straight-line basis over the lease term and expenses deferred initial direct costs on the same basis. Operating lease revenue is included within product revenue on the consolidated statements of operations. Impairment of equipment under operating leases is assessed on the same basis as other long-lived assets.
See Note 11 of the Notes to the condensed consolidated financial statements for more information regarding leasing arrangements.
Recently Adopted Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No.2016-13, Financial Instruments-Credit Losses (Topic 326):"Measurement of Credit Losses on Financial Instruments", which replaces the incurred loss methodology with an expected credit loss methodology that is referred to as the 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 be applied using the modified retrospective method with an adjustment to accumulated deficit and are effective for the Company beginning with fiscal year 2020, including interim periods. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables, available for sale 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 assets with similar risk characteristics is also required. The Company adopted ASU 2016-13 on January 1, 2020 on a modified retrospective basis. Upon adoption, the standard did not have a material impact on the consolidated financial statements.
The Company identified 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 high grade short-term securities.
The 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 increased from $1.4 million at December 31, 2019 to $1.5 million at September 30, 2020, due to increase in aged accounts receivable. During the three and nine months ended September 30, 2020, the Company recognized a provision for credit losses of $53,000 and $1.8 million, respectively, and wrote off $0.3 million and $1.5 million against the allowance for credit losses, respectively.
In August 2018, the FASB issued ASU No.2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework- Changes to the Disclosure Requirements for Fair Value Measurement”, to improve the fair value measurement reporting of financial instruments. The amendments in this update require, among other things, added disclosure of the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The 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 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“Income Taxes (Topic 740)-Simplifying the Accounting for Income Taxes”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 period that includes the enactment date. The amendmentsCompany adopted this guidance in this update will be effective for the Company beginning with fiscal year 2021,three with early adoption permitted. Most amendments within the standard are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis. months ended March 31, 2021. The adoption of the amendments in this update isguidance did not expected to have a material impact on the Company’s consolidated financial position and results of operations.
In MarchAugust 2020, the FASB issued ASU No. 2020-04,06, “Reference Rate Reform"Debt – Debt with Conversion and Other Options (Topic 848470): Facilitation of and Derivatives and Hedging – Contracts in Entity’s Own Equity (Topic 815)." This amendment simplifies the Effects of Reference Rate Reform on Financial Reporting.” ASUaccounting for convertible debt instruments by removing the beneficial conversion and cash conversion separation models for convertible instruments. Under the amendment, the embedded conversion features are No.no longer separated from the host contract for convertible instruments with conversion features that are 2020-04not 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 expectedrequired to be discontinued. The amendments in ASU No.2020-04 are effective for all entities as of March 12, 2020 through December 31, 2022. The Company is currently assessing the impact of ASU No.2020-04 and the LIBOR transition on its consolidated financial statements.
The Company reviewed all other recently issued, but not yet effective, accounting pronouncements and does not expect the future adoption of any such pronouncements will have a material impact on the Company’s consolidated financial statements.
Note 2. Cash, Cash Equivalents and Marketable Investments
The Company invests its cash primarily in money market funds and in highly liquid debt instruments of U.S. federal and municipal governments and their agencies, commercial paper and corporate debt securities. All highly liquid investments with stated maturities of three months or less from date of purchase are classified as cash equivalents; all highly liquid investments with stated maturities of greater than three months are classified as marketable investments. The majority of the Company’s cash and investments are held in U.S. banks and the Company's foreign subsidiaries maintain a limited amount of cash in their local banks to cover their short-term operating expenses.
The Company determines the appropriate classification of its marketable investments at the time of purchase and re-evaluates such designation at each balance sheet date. The Company’s marketable investments 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 available-for-sale debt securities are measured at fair value. Credit losses on impaired available-for-sale debt securities are recognized through an allowance for credit losses. Credit losses recognized on an available-for-sale debt security shouldderivatives or that do not reduceresult in substantial premiums accounted for as paid-in capital. The update also amends the net carrying amountaccounting for certain contracts in an entity’s own equity that are currently accounted for as derivatives because of specific settlement provisions. In addition, the available-for-sale debt security below its fair value. Any changesnew guidance modifies how particular convertible instruments and certain contracts that may be settled in fair value unrelated to credit are recognized as an unrealized gaincash or loss in other comprehensive income.shares impact the computation of diluted earnings per share. The Company early adopted the guidance on a prospective basis effective January 1, 2021. See Note 13 – Debt.
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):
September 30, 2020 | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Market Value | ||||||||||||
Cash and cash equivalents | $ | 29,394 | $ | ─ | $ | ─ | $ | 29,394 | ||||||||
Marketable investments: | ||||||||||||||||
U.S. government notes | 3,149 | ─ | ─ | 3,149 | ||||||||||||
| Commercial Paper | 8,546 | 8,546 | ||||||||||||||
| Corporate Debt Securities | 1,350 | 1 | ─ | 1,351 | ||||||||||||
Total marketable investments | 13,045 | 1 | ─ | 13,046 | ||||||||||||
Total cash, cash equivalents and marketable investments | $ | 42,439 | $ | 1 | $ | ─ | $ | 42,440 | ||||||||
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 securities | 7,605 | ─ | ─ | 7,605 | ||||||||||||
Total cash, cash equivalents and marketable securities | $ | 33,921 | $ | ─ | $ | ─ | $ | 33,921 | ||||||||
As ofNote September 30, 2020 and December 31, 2019, the net unrealized gains were $1,000 and zero, respectively, and were related to interest rate changes on available-for-sale marketable investments. The Company has concluded that it is more-likely-than-not that the securities will be held until maturity or the recovery of their cost basis. No2. securities were in an unrealized loss position for more than 12 months. Cash, Cash Equivalents
The following table summarizes the contractual maturities of the Company’s available-for-saleCompany's cash and cash equivalents (in thousands):
(Dollars in thousands) | March 31, 2021 | December 31, 2020 | ||||||
Cash and cash equivalents | $ | 164,932 | $ | 47,047 | ||||
The Company has 0 marketable securities classified as marketable investments, as of September 30, 2020 (March 31, 2021 in thousands):
Amount | ||||
Due in less than one year | $ | 13,046 | ||
Due in 1 to 3 years | ─ | |||
Total marketable investments | $ | 13,046 | ||
and December 31, 2020.
Note 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.
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.
See Note 13
As of September 30, 2020, financial assets measured for the carrying amount and recognized atestimated fair value on a recurring basis and classified under the appropriate level of the fair value hierarchy as described above were as follows (in thousands):
September 30, 2020 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Cash equivalents: | ||||||||||||||||
Money market funds and commercial paper | $ | 13,951 | $ | ─ | $ | ─ | $ | 13,951 | ||||||||
Marketable investments: | ||||||||||||||||
Available for sale securities | 3,149 | 9,897 | ─ | 13,046 | ||||||||||||
Total assets at fair value | $ | 17,100 | $ | 9,897 | $ | ─ | $ | 26,997 | ||||||||
As of December 31, 2019, financial assets measured and recognized at fair value on a recurring basis and classified under the appropriate level of the fair value hierarchy as described above was as follows (in thousands):
December 31, 2019 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Cash equivalents: | ||||||||||||||||
Money market funds | $ | 6,311 | $ | ─ | $ | ─ | $ | 6,311 | ||||||||
Short term marketable investments: | ||||||||||||||||
Available-for-sale securities | 4,114 | 3,491 | ─ | 7,605 | ||||||||||||
Total assets at fair value | $ | 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 LevelConvertible notes due 22026. investments as of September 30, 2020 is 0.2 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 three and nine months ended September 30, 2020 and the year ended December 31, 2019, respectively.
Note 4. Balance Sheet Details
Inventories
As of September 30, 2020March 31, 2021 and December 31, 2019,2020, inventories consist of the following (in thousands):
September 30, 2020 | December 31, 2019 | March 31, 2021 | December 31, 2020 | |||||||||||||
Raw materials | $ | 15,627 | $ | 17,935 | $ | 15,335 | $ | 14,874 | ||||||||
Work in process | 1,567 | 2,016 | 1,359 | 1,030 | ||||||||||||
Finished goods | 12,139 | 13,970 | 17,884 | 12,604 | ||||||||||||
Total | $ | 29,333 | $ | 33,921 | $ | 34,578 | $ | 28,508 | ||||||||
Other Long-term Assets Accrued Liabilities
During the nine months ended September 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. There was 0 impairment loss recognized in the three months ended September 30, 2020. The capitalized cloud computing costs were recorded in other long-term assets on the balance sheet.
Accrued Liabilities
As of September 30, 2020March 31, 2021 and December 31, 2019,2020, accrued liabilities consist of the following (in thousands):
September 30, 2020 | December 31, 2019 | |||||||
Accrued payroll and related expenses | $ | 9,121 | $ | 14,341 | ||||
Sales and marketing accruals | 2,011 | 2,527 | ||||||
Inventory accruals | 2,579 | 1,008 | ||||||
Warranty liability (see Note 5) | 2,924 | 4,401 | ||||||
Sales tax | 3,590 | 3,922 | ||||||
Other | 5,419 | 4,108 | ||||||
Total | $ | 25,644 | $ | 30,307 | ||||
March 31, 2021 | December 31, 2020 | |||||||
Accrued payroll and related expenses | $ | 12,558 | $ | 12,197 | ||||
Sales and marketing accruals | 3,134 | 2,352 | ||||||
Accrued inventory in transit | 7,501 | 2,476 | ||||||
Product warranty | 3,351 | 2,908 | ||||||
Accrued sales tax | 6,935 | 5,343 | ||||||
Other accrued liabilities | 7,850 | 5,803 | ||||||
Total | $ | 41,329 | $ | 31,079 | ||||
Product Remediation Liability
During the fourth quarter of 2018, the Company recognized a liability for a product remediation plan related to one of its legacy systems. This was related to a voluntary action initiated by the Company to replace a component in one of the Company’s legacy products. The remediation plan consists primarily of replacement of a component in the system. The accrued liability consistsconsisted of the estimated cost of materials and labor to replace the component in all units that arewere under the Company's standard warranty or arewere covered under the existing extended warranty contracts. The Company recorded a liability of approximately $5.0 million in 2018.
As of September 30, 2020March 31, 2021 and December 31 2019,2020, approximately $0.5$0.4 million of the total product remediation liability balance was accruedrecorded as a component of the Company’s product warranty and included in accrued liabilities, and $1.5$1.0 million and $2.0$1.2 million, respectively, was separately recorded as Extendedextended warranty liabilities.
In the nine months ended September 30, 2020, the Company settled $0.5 millionliability. Total costs incurred related to Extended warranty liability. NaN amounts of the product remediation warranty were settled in the nine months ended September 30, 2020. As of September 30, 2020, the product remediation warranty and extended warranty liability during the three months ended March 31, 2021 were $0.50 and $0.2 million, respectively. Total costs incurred related to product warranty and $1.5extended warranty liability during the three months ended March 31, 2020 were Nil and $0.2 million, respectively.
Note 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, and Switzerland, as well as through third-party service providers in Spain and the United Kingdom. In several other countries, where the Company does not have a direct presence, the Company provides service through a network of distributors and third-party service providers.
After the original warranty period, maintenance and support are offered on 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.incurred, except the one-time extended service contracts charge of $3.2 million recorded in the year ended December 31, 2018 related to the cost to replace a component in one of the Company's legacy products.
The following table provides the changes in the product standard warranty accrual for the three months ended March 31, 2021 and nine2020 (in thousands):
Three Months Ended | ||||||||
March 31, | ||||||||
2021 | 2020 (1) | |||||||
Beginning Balance | $ | 2,908 | $ | 4,401 | ||||
Add: Accruals for warranties issued during the period | 1,525 | 860 | ||||||
Less: Settlements made during the period | (1,082 | ) | (1,863 | ) | ||||
Ending Balance | $ | 3,351 | $ | 3,398 | ||||
(1) | The ending product warranty accrual balance excludes $1.0 million and $1.8 million as of March 31, 2021 and 2020, respectively, related to one-time extended service contracts costs to replace components in one of the Company’s legacy products. |
The $1.1 million and $1.9 million of settlements made in the three months ended September 30, 2020March 31, 2021 and 20192020, (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Beginning Balance | $ | 3,155 | $ | 4,832 | $ | 4,401 | $ | 4,668 | ||||||||
Add: Accruals for warranties issued during the period | 1,274 | 1,504 | 3,234 | 5,656 | ||||||||||||
Less: Settlements made during the period | (1,505 | ) | (1,930 | ) | (4,711 | ) | (5,918 | ) | ||||||||
Ending Balance | $ | 2,924 | $ | 4,406 | $ | 2,924 | $ | 4,406 | ||||||||
The settlements presented in the tablerespectively, exclude costs related to extended service contractscontract cost which wereof $0.2 million and $0.5 million in each of the three and nine months ended September 30, 2020, respectively,respective periods to replace a component in one of the Company's legacy products.
Note 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-year terms. Deferred revenue also includes payments for installationtraining and training.extended marketing support service. Approximately 81%85% of the Company’s deferred revenue balance of $11.8$11.7 million as of September 30, 2020March 31, 2021 will be recognized over the next 12 months.
The following table provides changes in the deferred revenue balance for the three and ninemonths ended September 30, 2020March 31, 2021 and 20192020 (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Beginning Balance | $ | 11,779 | $ | 13,859 | $ | 14,222 | $ | 11,855 | ||||||||
Add: Payments Received | 3,854 | 3,624 | 9,314 | 13,075 | ||||||||||||
Less: Revenue | (3,809 | ) | (4,010 | ) | (11,712 | ) | (11,457 | ) | ||||||||
Ending Balance | $ | 11,824 | $ | 13,473 | $ | 11,824 | $ | 13,473 | ||||||||
Three Months Ended | ||||||||
March 31, | ||||||||
2021 | 2020 | |||||||
Balance at beginning of quarter | $ | 11,237 | $ | 14,222 | ||||
Add: Payments received | 4,929 | 3,571 | ||||||
Less: Revenue | (445 | ) | (592 | ) | ||||
Less: Revenue included in the beginning balance and recognized as revenue in the current quarter | (3,984 | ) | (4,232 | ) | ||||
Balance at end of quarter | $ | 11,737 | $ | 12,969 | ||||
Costs for extended service contracts were $1.9$2.0 million and $5.6$2.2 million respectively, for the three and ninemonths ended September 30, 2020,March 31, 2021 and $2.3 million and $6.5 million, respectively, for the three2020, and nine months ended September 30, 2019.respectively.
Note 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 17%12% and 13%18% respectively, of the Company’s total revenue for the ninethree months ended September 30, 2020March 31, 2021 and 2019.2020.
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 time 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 basedenergy-based module, control system software and high voltage electronics, as well as one or more hand pieces. In certain applications, the laser or other energy-based module is contained in the hand piece, such as with the Company’s Pearl and Pearl 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
For systems sold directly to end-customers that are credit approved, revenue is recognized when the Company transfers control to the end-customer, which occurs when the product is shipped to the customer or when the customer receives the product, depending on the nature of the arrangement. When collectability is not established in advance of receipt of payment from the customer, revenue is recognized upon the later of the receipt of payment or the satisfaction of the performance obligation. For systems sold through credit approved distributors, revenue is recognized at the time of shipment to the distributor.
The Company typically receives payment for its system consoles and other accessories within 30 days of shipment. Certain international distributor arrangements allow for longer payment terms.
Skincare products
The Company sells third-party manufactured skincare products in Japan. The third-party skincare products are purchased from a third-party manufacturer and sold to medical offices and licensed physicians. The Company warrants that the skincare products are free of significant defects in workmanship and materials for 90 days from shipment. These are typically sold in a separate contract as the only performance obligations. The Company acts as the principal in this arrangement, as the Company 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.time upon shipment.
Consumables andother accessories
The Company classifies its customers' purchases of replacement cycles for truSculpt iD and truSculpt flex,, as well as replacement hand pieces, Titan and truSculpt 3D hand pieces, and single use disposable tips applicable to Secret PRO, Juliet, and Secret RF, as Consumable revenue, which provides the Company with a source of recurring revenue from existing customers. The Juliet and Secret RF products haveproducts' single use disposable tips which must be replaced after every treatment. Sales of these consumable tips further enhance the Company’s recurring revenue. The 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 third-party manufactured skincare products.
Equipment leasing
The Company leases equipment to customers through membership programs and receives a fixed monthly fee over the term of the arrangement. The Company classifies its lease income as product revenue andrevenue. The Company recognizes itlease income over the term of the lease (Notes 1if the lease is classified as an operating lease. For agreements that grant customers the right to purchase the leased system, the Company typically classifies the lease as a sales-type lease as the Company has determined it is reasonably certain that the customer will exercise the purchase option. On the commencement of sales-type leases, the Company recognizes revenue upfront in product revenue and the corresponding receivables recorded in other current assets and prepaid expenses on the Condensed consolidated balance sheets (See Note 11). There was no revenue recognized for sales-type leases for the three months ended March 31, 2021. Revenue from equipment leases, which was accounted for as operating leases, was not material infor the three and ninemonths ended September 30, 2020.March 31, 2021.
Extended service contracts 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-based measure of progress, as 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.
The Company classifies as product revenue the sales of systems, system upgrades, hand pieces, hand piece refills (applicable to Titan® and truSculpt), equipment leasing and the distribution of third-party manufactured skincare products.
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-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 obligation.
While the Company’s purchase agreements do not provide customers with a contractual right of return, the Company maintains a sales allowance to account for potential returns or refunds as a reduction in transaction price at the time of sale. The Company estimates sales returns and other variable consideration based on historical experience.
The Company determines standalone selling price ("SSP") for each performance obligation as follows:
● | Systems: The SSPs for systems are based on directly observable sales in similar circumstances to similar customers. |
● | Extended |
Loyalty Program
The Company launchedhas 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 which can be redeemed for such rewards as the right to attend the Company’s advanced training event for truSculpt, or a ticket for the Company’s annual forum. A customer’s account 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 reductionreduction. of net revenue at the time the reward is earned. As of September 30, 2020March 31, 2021 and December 31, 2019, 2020,the accrualliability for the loyalty program included in accrued liabilities was $0.4 million and $0.2$0.3 million, respectively.
Deferred Sales Commissions
Incremental costs of obtaining a contract, which consist primarily of commissions and related payroll taxes, are capitalized and amortized on a straight-line basis over the expected period of benefit, 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 September 30, 2020March 31, 2021 and December 31, 2019,2020 respectively, were $3.4 million, and $4.6 millionrespectively, and are included in Otherother long-term assets in the Company’s condensedCondensed consolidated balance sheet. Amortization expense for these assets was $0.6$0.5 million and $2.0$0.7 million, respectively, during the three and ninemonths ended September 30, 2020March 31, 2021 and $0.8 million and $2.2 million respectively, during the three2020 andnine months ended September 30, 2019.The amortization expense related to these capitalized costs is included in salesSales and marketing expense in the Company’s condensedCondensed consolidated statement of operations.
Note 8. Stockholders’Stockholders’ Equity and Stock-based Compensation Expense
Issuances of Common Stock
On April 21, 2020, the Company issued and sold an aggregate of 2,742,750 shares of the Company’s common stock, par value $0.001 per share at a price to the public of $10.50 per share. The shares include the full exercise of the underwriter’s option to purchase an additional 357,750 shares of common stock. The Company received net proceeds from the offering of approximately $26.5 million, after deducting underwriting discounts, commissions, and offering expenses of $2.1 million.
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 20202019, , stockholders approved an amendment and restatement of the Amended and Restated 2004 Equity Incentive Plan as the 2019 Equity Incentive Plan (the “Prior Plan”) as the Amended and Restated “2019 Equity Incentive Plan (the “Restated Plan”) and approved an additional 600,000700,000 shares, available for future grants (in addition to the 9,701,192 shares provided under the Prior Plan). In June 2020, stockholders approved additional 600,000 shares for future grants. The Restated2019 Plan provides for the grant of incentive stock options, non-statutory stock options, RSAs restricted stock units (“RSUs”), stock appreciation rights, performance stock units, performance shares, and other stock or cash awards.
The Company’s Board of Directors granted its executive officers and senior management and certain employees 22,423 and 94,10188,588 performance stock units (“PSUs”) during the three and ninemonths ended September 30, 2020,March 31, 2021. respectively. The PSUs granted in the three and ninemonths ended September 30, 2020March 31, 2021 vest subject to the recipients continued service and to the Company’s achievement of certain operational goals for the Company’s 20202021 fiscal year which consist of the achievement of revenue targets for consumable products,related to product milestones, sales and the achievement of specific product milestones.commercial structure improvement and certain cost reduction targets.
On
The Company’s Board of Directors also granted its executive officers and senior management 56,597 RSUs and certain employees zero and 421,417 RSUs,68,673 non-qualified stock options (“NQs”) during the three months ended March 31, 2021. The RSUs and NQs vest over four years with one-fourth vesting on the first anniversary of the vesting commencement date of January 1, 2021 and 1/36 of the underlying shares vest each month thereafter.
During the quarter ended September 30, 2019 the Company's Board awarded its new CEO, David H. Mowry, 67,897 shares, which are scheduled to vest over 4 years from 2019 through 2022 (the 2019 tranche is 15% of the award, or 10,185 PSUs; the 2020 tranche is 25% of the award, or 16,974 PSUs; the 2021 tranche is 30% of the award, or 20,369 PSUs; 2020 tranche is 30% of the award, or 20,369 PSUs). These PSUs are subject to certain performance-based criteria related to achieving financial metrics in the Board approved annual budgets for the years 2019 through 2022. As of March 31, 2021, the Company concluded that the 2019,2020and nine2021 tranches met the criteria for measurement and recognition. 8,657 shares of the 2019 tranche vested during the three months ended SeptemberMarch 31, 2020. None of the shares for the 2020 tranche vested. The 2022 tranches do not meet the criteria for measurement and recognition as of March 31, 2020 and will meet the criteria for measurement and commencement of recognition when the Company’s Board of Directors establishes the financial metrics for 2022. On April 28, 2021, notwithstanding the prior sentence, the Company’s Board of Directors approved the vesting of Mr. Mowry’s 2020 tranche. Upon the approval, 16,974 shares vested. The Company will account for it as a modification of the performance award in the second quarter ending June 30, 2021.
On August 2, 2020respectively,, the Board awarded its new CFO, Rohan Seth, an option grant for 60,000 shares, which vests over 5 years, and granted stock options for 60,000a PSU award covering a target of 22,423 shares, which vests over 2.5 years and is subject to performance-based criteria relating to the achievement of certain goals with 40% based on achievement of Finance department goals and 60% based on the Company’s achievement of financial performance goals. All of the Finance department goals were met and 8,971 shares, or 40%, of the award vested and was released upon the Board’s approval on April 28, 2021.
Under the 2019 Plan, the Company issued 122,694 shares of common stock during the three and ninemonths ended September 30, 2020.March 31, 2021, 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 58,161 and 528,265 shares of common stock during the three and nine months ended September 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 September 30, 2020, March 31, 2021there was approximately $12.8 million of, the unrecognized compensation expense,cost, net of projectedexpected forfeitures, was $1.6 million for stock options, which will be recognized over an estimated weighted-average remaining amortization period of 3.9 years. The unrecognized compensation cost, net of expected forfeitures, for stock options and stock awards. The expense is expected toawards, including performance-based awards, was $13.9 million, which will be recognized over thean estimated weighted-average remaining weighted-averageamortization period of 2.482.1 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 Restated Plan is2019 Plans are summarized as follows:
Options Outstanding | Options Outstanding | |||||||||||||||||||||||
Shares Available for Grant | Number of Stock Options Outstanding | Weighted- Average Exercise Price | Shares Available for Grant | Number of Stock Options Outstanding | Weighted- Average Price | |||||||||||||||||||
Balance, December 31, 2019 | 761,705 | 295,699 | $ | 25.52 | ||||||||||||||||||||
Additional shares reserved | 600,000 | ─ | ||||||||||||||||||||||
Balance, December 31, 2020 | 1,085,170 | 217,007 | $ | 22.35 | ||||||||||||||||||||
Stock awards granted | (789,978 | ) | 60,000 | (234,227 | ) | 68,673 | 32.87 | |||||||||||||||||
Options exercised | ─ | (46,878 | ) | 8.77 | - | (24,090 | ) | 16.41 | ||||||||||||||||
Options canceled | 64,959 | (64,959 | ) | 38.14 | 2,500 | (2,500 | ) | 39.30 | ||||||||||||||||
Stock awards canceled | 431,096 | ─ | 58,232 | - | - | |||||||||||||||||||
Balance, September 30, 2020 | 1,067,782 | 243,862 | $ | 26.33 | ||||||||||||||||||||
Balance, March 31, 2021 | 911,675 | 259,090 | $ | 25.53 | ||||||||||||||||||||
Stock-based Compensation Expense
Stock-based compensation expense by department recognized during the three and ninemonths ended September 30, 2020March 31, 2021 and 20192020 were as follows (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019* | |||||||||||||
Cost of revenue | $ | 326 | $ | 430 | $ | 1,359 | $ | 1,103 | ||||||||
Sales and marketing | 648 | 1,365 | 2,618 | 3,080 | ||||||||||||
Research and development | 254 | 443 | 1,344 | 1,076 | ||||||||||||
General and administrative | 754 | 940 | 2,736 | 1,745 | ||||||||||||
Total stock-based compensation expense | $ | 1,982 | $ | 3,178 | $ | 8,057 | $ | 7,004 | ||||||||
*Included in thenine-month ended September30,2019stock-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.
Three Months Ended | ||||||||
March 31, | ||||||||
2021 | 2020 | |||||||
Cost of revenue | $ | 144 | $ | 290 | ||||
Sales and marketing | 721 | 719 | ||||||
Research and development | 301 | 321 | ||||||
General and administrative | 680 | 650 | ||||||
Total stock-based compensation expense | $ | 1,846 | $ | 1,980 | ||||
Note 9. Net Loss Per Share
Basic net lossearnings per share (“EPS”) is computed usingbased on the weighted-averageweighted average number of shares of common stock outstanding during the period. In periods of net income, diluted shares outstanding include the dilutive effect of in-the-money equity awards (stock options, restricted stock units, performance stock units and employee stock purchase plan contributions), whichDiluted EPS is calculatedcomputed based on the weighted average share price for each fiscalnumber of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method or the if-converted method. Dilutive potential common shares include outstanding stock options, stock awards, shared performance stock awards, and conversion shares under the Convertible notes.
Diluted earningsAs of March 31, 2021, the Company’s Convertible notes were convertible into 4,167,232 shares of common stock. The Company receives shares or cash, at its option, under the capped call transactions which will always be anti-dilutive to EPS. For the three months ended March 31,2021 and 2020, basic loss per common share isand diluted loss per common share are 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 equivalentsany potentially issuable shares would be anti-dilutive.
The following table sets forth the computation of basic and diluted net loss and the weighted average number of shares used in computing basic and diluted net loss per share (in thousands, except per share data):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | |||||||||||||||||||
Numerator: | ||||||||||||||||||||||||
Net loss | $ | (2,257 | ) | $ | (2,628 | ) | $ | (26,065 | ) | $ | (10,260 | ) | $ | (359 | ) | $ | (12,414 | ) | ||||||
Denominator: | ||||||||||||||||||||||||
Weighted average shares of common stock outstanding used in computing net income (loss) per share, basic | 17,603 | 14,182 | 16,368 | 14,095 | ||||||||||||||||||||
Weighted average shares of common stock outstanding used in computing net loss per share, basic | 17,768 | 14,433 | ||||||||||||||||||||||
Dilutive effect of incremental shares and share equivalents | ─ | ─ | ─ | ─ | 0 | 0 | ||||||||||||||||||
Weighted average shares of common stock outstanding used in computing net loss per share, diluted | 17,603 | 14,182 | 16,368 | 14,095 | 17,768 | 14,433 | ||||||||||||||||||
Net loss per share: | ||||||||||||||||||||||||
Net loss per share, basic and diluted | $ | (0.13 | ) | $ | (0.19 | ) | $ | (1.59 | ) | $ | (0.73 | ) | $ | (0.02 | ) | $ | (0.86 | ) | ||||||
The following numbers of shares outstanding, prior to the application of the treasury stock method, were excluded from the computation of diluted net loss per common share for the periods presented because including them would have had an anti-dilutive effect (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended | ||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | March 31, | ||||||||||||||||||||
2021 | 2020 | |||||||||||||||||||||||
Convertible notes(1)(2) | 4,167 | 0 | ||||||||||||||||||||||
Options to purchase common stock | 232 | 398 | 246 | 443 | 245 | 276 | ||||||||||||||||||
Restricted stock units | 733 | 648 | 735 | 523 | 585 | 669 | ||||||||||||||||||
Performance stock units | 24 | 221 | 83 | 166 | 92 | 216 | ||||||||||||||||||
Employee stock purchase plan shares | 17 | 94 | 57 | 94 | 30 | 71 | ||||||||||||||||||
Total | 1,006 | 1,361 | 1,121 | 1,226 | 5,119 | 1,232 | ||||||||||||||||||
(1) | Anti-dilutive convertible notes were calculated under the if-converted method for the three months ended March 31, 2021. |
(2) | The Company entered into capped call transactions with certain financial institutions, which are generally designated to reduce common stock dilution upon conversion of the Convertible notes. The capped call transactions are excluded from the computation of diluted net loss per common share as their effect would be anti-dilutive. |
Note 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 ninemonths ended September 30, 2020,March 31, 2021, the Company's income tax expense were $0.7 million and $1.2 million, respectively,was $258,000, compared to incomethe tax expense of $73,000 and income tax benefit of $55,000$78,000 for the three and ninemonths ended September 30, 2019, March 31, 2020.respectively.
The Company's income tax expense for the three months ended September 30, 2020March 31, 2021 is due primarily to income taxes in foreign jurisdictions. As the Company'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, theThe Company believes it is more likely than not that the tax benefits of the U.S. losses incurred will not be realized. Accordingly, the Company will continuecontinues to maintain a full valuation allowance on theits U.S. deferred tax assets.
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 carry back 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 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 the Company's consolidated financial statements, but does not expect the impact to be material.
Note 11. Leases
The Company is a party to certain operating and finance leases for vehicles, office space and storages facilities. The Company’s material operating leases consist of office space, as well as storage facilities and finance leases consist of automobiles. The Company’s facility leases generally have remaining terms of 1 to 10 years, and some facility leases of which include options to renew the leases for up to 5 years. The Company leases space for operations in the United States, Japan, Belgium, France and Spain. In addition to the above facility leases, the Company also routinely leases automobiles for certain sales and field service employees under finance leases.
The Company determines if a contract contains a lease at inception. Operating lease assets and liabilities are recognized at the lease commencement date. Operating lease liabilities represent the present value of lease payments not yet paid. Operating lease assets represent the right to use an underlying asset and are based upon the operating lease liabilities adjusted for prepayments or accrued lease payments, initial direct costs, lease incentives, and impairment of operating lease assets. To determine the present value of lease payments not yet paid, the Company estimates the incremental secured borrowing rates corresponding to the maturities of the leases. The Company based the rate estimates on prevailing financial market conditions, credit analysis, and management judgment.
The Company recognizes expense for these leases on a straight-line basis over the lease term. Additionally, tenant incentives used to fund leasehold improvements are recognized when earned and reduce the Company’s right-of-use (“ROU”) asset related to the lease. These are amortized through the right-of-useROU 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.
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:
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Supplemental balance sheet information related to leases is as follows (in thousands):
Leases | Classification | September 30, 2020 | |||
Assets | |||||
Right-of-use assets | Operating lease right-of-use assets | $ | 17,645 | ||
Finance lease | Property and equipment, net* | 563 | |||
Total leased assets | $ | 18,208 | |||
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Liabilities | Classification | ||||
Operating lease liabilities | |||||
Operating lease liabilities, current | Operating lease liabilities | 1,608 | |||
Operating lease liabilities, non-current | Operating lease liabilities, net of current portion | 16,497 | |||
Total operating lease liabilities | $ | 18,105 | |||
Finance lease liabilities | |||||
Finance lease liabilities, current | Accrued liabilities* | 407 | |||
Finance lease liabilities, non-current | Other long-term liabilities | 292 | |||
Total finance lease liabilities | $ | 699 | |||
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Lease costs during the three months ended September 30, 2020: | |||||
Finance lease cost | Amortization expense | $ | 121 | ||
Finance lease cost | Interest for finance lease | 14 | |||
Operating lease cost | Operating lease expense | 752 | |||
Lease costs during the nine months ended September 30, 2020: | |||||
Finance lease cost | Amortization expense | $ | 545 | ||
Finance lease cost | Interest for finance lease | 49 | |||
Operating lease cost | Operating lease expense | 2,208 | |||
Cash paid for amounts included in the measurement of lease liabilities during the nine months ended September 30, 2020 were as follows: | |||||
Operating cash flow | Finance lease | $ | 49 | ||
Financing cash flow | Finance lease | 513 | |||
Operating cash flow | Operating lease | 1,987 | |||
Supplemental balance sheet information related to leases was as follows (in thousands):
Leases | Classification | March 31, 2021 | December 31, 2020 | ||||||
Assets | |||||||||
Right-of-use assets | Operating lease assets | $ | 16,570 | $ | 17,076 | ||||
Finance lease | Property and equipment, net (1) | 418 | 467 | ||||||
Total leased assets | $ | 16,988 | $ | 17,543 | |||||
(1) Finance lease assets included in Property and equipment, net in the Condensed consolidated balance sheets.
Liabilities | March 31, 2021 | December 31, 2020 | |||||||
Operating lease liabilities | |||||||||
Operating lease liabilities, current | Operating lease liabilities | $ | 2,351 | $ | 2,260 | ||||
Operating lease liabilities, non-current | Operating lease liabilities, net of current portion | 15,394 | 15,950 | ||||||
Total Operating lease liabilities | $ | 17,745 | $ | 18,210 | |||||
Finance lease liabilities | |||||||||
Finance lease liabilities, current | Accrued liabilities (1) | $ | 418 | $ | 370 | ||||
Finance lease liabilities, non-current | Other long-term liabilities | 434 | 241 | ||||||
Total Finance lease liabilities | $ | 852 | $ | 611 | |||||
(1)Finance lease liabilitiesincluded in accrued liabilities in the Condensed consolidated balance sheets.
Lease costs during the three months ended March 31, 2021 and 2020 (in thousands):
Three Months Ended March 31, | |||||||||
Lease costs | 2021 | 2020 | |||||||
Finance lease cost | Amortization expense | $ | 127 | $ | 149 | ||||
Finance lease cost | Interest for finance lease | $ | 14 | $ | 19 | ||||
Operating lease cost | Operating lease expense | $ | 878 | $ | 728 | ||||
Cash paid for amounts included in the measurement of lease liabilities during the three months ended March 31, 2021 and 2020 was as follows (in thousands):
Three Months Ended March 31, | |||||||||
Cash paid for amounts included in the measurement of lease liabilities | 2021 | 2020 | |||||||
Operating cash flow | Finance lease | $ | 14 | $ | 19 | ||||
Financing cash flow | Finance lease | $ | 115 | $ | 120 | ||||
Operating cash flow | Operating lease | $ | 772 | $ | 727 | ||||
Facilityleases
Maturities of facility leases were as follows as of September 30, 2020March 31, 2021 (in thousands):
Year Ending December 31, | Amount | |||||||
Remainder of 2020 | $ | 114 | ||||||
2021 | 3,038 | |||||||
As of March 31, 2021 | Amount | |||||||
Remainder of 2021 | $ | 2,327 | ||||||
2022 | 3,083 | 3,152 | ||||||
2023 | 3,177 | 3,189 | ||||||
2024 and thereafter | 12,061 | |||||||
2024 | 2,879 | |||||||
2025 | 2,875 | |||||||
2026 and thereafter | 6,308 | |||||||
Total lease payments | 21,473 | 20,730 | ||||||
Less: imputed interest | (3,265) | 2,985 | ||||||
Present value of lease liabilities | $ | 18,208 | $ | 17,745 | ||||
Vehicle Leases
As of September 30, 2020,March 31, 2021, the Company was committed to minimum lease payments for vehicles leased under long-term non-cancelable finance leases as follows (in thousands):
Year Ending December 31, | Amount | |||||||
Remainder of 2020 | $ | 108 | ||||||
2021 | 370 | |||||||
As of March 31, 2021 | Amount | |||||||
Remainder of 2021 | $ | 342 | ||||||
2022 | 246 | 377 | ||||||
2023 | 11 | 141 | ||||||
Total lease payments | 735 | 860 | ||||||
Less: imputed interest | (36 | ) | 8 | |||||
Present value of lease liabilities | $ | 699 | $ | 852 | ||||
Weighted-average remaining lease term and discount rate, as of September 30, 2020,March 31, 2021, were as follows:
Lease Term and Discount Rate |
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Weighted-average remaining lease term (years) | ||||
Operating leases | ||||
Finance leases | ||||
Weighted-average discount rate | ||||
Operating leases | 4.7 | % | ||
Finance leases | % | |||
Lessor Information related to the Company’ leasess system leasing
TheDuring fiscal year ended December 31, 2020, the Company also entersentered into leasing transactions, in which the Company is the lessor, offered through the Company's membership program. The Company's leases for equipment rentals arewere all accounted for as operating leases. The leaseleases during the second and third quarters of 2020.
During the fourth quarter ended December 31, 2020, certain of the membership program agreements are typicallywere amended, granting the customers the exclusive right and option to purchase the leased system from the Company, at any time during the period of 12 months from signing the amended agreement. For contracts signed under the amended membership agreement, the Company classified and accounted for three years; however,the arrangements as sales-type leases as of December 31, 2020, as the Company determined it is reasonably certain that the customer haswill exercise the ability to terminatepurchase option.
For the lease after twelve months with no penalty. As such,sales-type leases, the Company has determined the expected termnet investment of the Company’s lease to be twelve-months. Rental charges are a fixed monthly fee, paidreceivable is measured at the beginning of each month, over the term of the lease.
The initial direct costs related to the Company’s operating leases for equipment rentals include the related commissions paid to employees upon the origination of a lease agreement. These costs arecommencement date and is included in Otherthe Condensed consolidated balance sheets as a component of other current assets and prepaid expenses on expenses. As of December 31, 2020, the condensedCompany recorded $0.7 million of revenue for the sales-type leases in the Condensed consolidated balance sheets and are amortized over the lease termstatement of twelve-months. The amount of initial direct costsoperations and the related amortizationlease receivable in other current assets of the Condensed consolidated balance sheet. There was 0 revenue recognized duringfrom the sales-type lease arrangement for the three months ended March 31, 2021 and nine2020. During the three months ended September 30, 2020March 31, 2021, the Company received a full payment of $0.1 million from a customer who exercised its purchase option. As of March 31, 2021, the lease receivable balance included in other current assets of the Condensed consolidated balance sheet was immaterial.$0.6 million.
In determining the proper classification and treatment of the equipment leases, the Company used significant judgment in forming the following assumptions and estimates: lease term, useful life and residual value of the leased equipment.
Equipment lease revenue for operating lease agreements is recognized over the life of the lease. The following table summarizes the amount of operating lease income included in productProduct revenue in the accompanying condensedCondensed consolidated statements of operations for the periods ended September 30, 2020 (in thousands):
Three months ended | Nine months ended | |||||||
Operating lease income from equipment rentals | $ | 160 | $ | 160 | ||||
The revenue related to the non-lease component is recognized at the point of delivery. The non-lease component revenue is immaterial for the three and nine months ended September 30, 2020.March 31, 2021
The following table, which reflects management’s assumption of an expected lease term of twelve months, summarizes expected future minimum equipment lease revenue under existing leases as of September 30 ,2020 (in thousands):
Amount | ||||
2021 | $ | 1,039 | ||
Total future minimum rental revenues | $ | 1,039 | ||
The cost of customer leased equipment is recorded within property and equipment, net, in the condensed consolidated balance sheet and depreciated over the equipment’s estimated useful life of four and a half years. Depreciation expense on customer leased equipment was immaterial for the three and nine months ended September 30, 2020.$0.1 million.
Year Ending September 30, | Amount | |||
Equipment under operating lease, gross | $ | 305 | ||
Less: accumulated depreciation | (8 | ) | ||
Equipment under operating lease, net | $ | 297 | ||
Note 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 normal course of business. A liability and related charge are recorded to earnings in the Company’s consolidated financial statements for legal contingencies when the loss is considered probable and the amount can be reasonably estimated. The assessment is re-evaluated each accounting period and is based on all available information, including discussion with outside legal counsel. If a reasonable estimate of a known or probable loss cannot be made, but a range of probable losses can be estimated, the low-end of the range of losses is recognized if no amount within the range is a better estimate than any other. If a material loss is reasonably possible, but not probable and can be reasonably estimated, the estimated loss or range of loss is disclosed in the notes to the consolidated financial statements. The Company expenses legal fees as incurred.
InInMode Ltd. filed a complaint with the United States International Trade Commission alleging that Ilooda, Co., Ltd’s Secret RF fractional radiofrequency microneedling system, distributed in the United States by the Company, infringes U.S. Patent November 2019, No.10,799,285 ("285 patent"). The Company intends to vigorously defend against this lawsuit and, based on a preliminary investigation, believes that the Company has strong defenses and that the patent claim at issue is likely invalid in view of prior art. Based on the current information available to the Company, it believes that any possible loss will not be material. If, following a successful third-party action for infringement, the Company cannot obtain a license for the Company’s former Executive Vice President and CFO Sandra A. Gardiner announced her resignation fromproducts, it may have to stop selling 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.applicable products.
As of September 30, 2020March 31, 2021 and December 31, 2019, 2020,the Company had 0 accrued expense$0.4 million and $0, respectively related to various pending contractualcommercial and product liability lawsuits. The Company does not believe that a material loss in excess of accrued amounts is reasonably possible.
Note 13. Debt
Convertible notes, net of unamortized debt issuance costs
In March 2021, the Company issued $138.3 million of convertible senior notes due on March 15, 2026 in a private placement offering. The Convertible notes bear interest at a rate of 2.25% per year payable semiannually in arrears on March 15 and September 15 of each year, beginning on September 15, 2021. Upon conversion, the Convertible notes will be convertible into cash, shares of the Company’s common stock or a combination thereof, at the Company’s election. The Convertible notes are presented as Convertible notes, net of unamortized debt issuance costs, on the Condensed consolidated balance sheet. Proceeds from the offering were $133.6 million, net of issuance costs, including underwriters’ fees.
Initially, each $1,000 principal amount of Notes was convertible into 30.1427 shares of the Company’s common stock at a conversion price of $33.18 per share, and the Notes may be convertible into 4,167,232 shares of common stock. The conversion rate is subject to adjustment for certain events as set forth in the Indenture governing the Convertible notes. The Convertible notes will mature on March 15, 2026, unless earlier converted, redeemed, or repurchased in accordance with the terms of the Convertible notes. No sinking fund is provided for the Notes. As of March 31, 2021, the net carrying amount of the Company’s Convertible notes was $133.6 million and the unamortized debt issuance costs were $4.7 million.
Holders may convert their Notes at their option prior to the close of business on the business day immediately preceding December 15, 2025, in multiples of $1,000 principal amount, only under the following circumstances:
● | During any fiscal quarter commencing after the fiscal quarter ending on June 30, 2021 (and only during such fiscal quarter), if the last reported sale price of the common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on and including, the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of the conversion price for the Convertible notes on each applicable trading day; | |
● | During the 5-business day period after any 5 consecutive trading day period (the “measurement period”) in which the “trading price” per $1,000 principal amount of Convertible notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company's common stock and the conversion rate on each such trading day; | |
● | The Company calls such Convertible notes for redemption, at any time prior to the close of business on the second scheduled trading day immediately preceding the redemption date; or | |
● | Upon the occurrence of specified corporate events. |
On or after December 15, 2025, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their Notes, in multiples of $1,000 principal amount, at the option of the holder regardless of the foregoing circumstances.
As of March 31, 2021, the if-conversion value of the Convertible notes did not exceed the principal amount of $138.3 million.
The Company may not redeem the Convertible notes prior to March 20, 2024. On or after March 20, 2024, the Company may redeem for cash all or any portion of the Notes, at the Company’s option, if the last reported sale price of the Company’s common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption at a redemption price equal to 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. If the Company elects to redeem fewer than all of the outstanding Notes, at least $50.0 million aggregate principal amount of Notes must be outstanding and not subject to redemption as of the relevant redemption notice date.
If a fundamental change occurs, note holders have the option to require the Company to repurchase any portion or all of their Convertible notes in $1,000 principal increments for cash. The price for such repurchase is calculated as 100% of the principal amounts of Notes, plus accrued and unpaid interest to the day immediately preceding the Fundamental Change repurchase date. Additionally, holders of the Notes who convert in connection with a fundamental change are, under certain circumstances, entitled to an increase in conversion rate.
The Convertible notes are general senior unsecured obligations that rank senior to any of the Company’s indebtedness that is explicitly subordinated to the Notes. The Notes have equal rank in right of payment with all existing and future unsecured indebtedness that is not subordinated to the Notes. The Notes will be junior to any of the Company’s secured indebtedness to the extent of the value of the assets securing such indebtedness. The Notes do not contain any financial or operating covenants or any restrictions on the payment of dividends, the issuance of other indebtedness or the issuance or repurchase of securities by the Company.
The estimated fair value of the Convertible notes was approximately $156.9 million as of March 31, 2021, which the Company determined through consideration of market prices. The fair value is classified as Level 2, as defined in Note 3.
The following table presents outstanding principal amount and carrying value of the Convertible notes (in thousands):
March 31, 2021 | December 31, 2020 | |||||||
Outstanding principal amount | $ | 138,250 | $ | 0 | ||||
Unamortized debt issuance costs | (4,665 | ) | 0 | |||||
Carrying Value | $ | 133,585 | $ | 0 | ||||
In connection with issuance of the Convertible notes, the Company entered into capped call transactions with certain option counterparties. The capped call transactions are generally designated to reduce the potential dilution of the Company's common stock upon any conversion or settlement of the Notes or to offset any cash payment the Company is required to make in excess of the principal amount upon conversion of the Notes, as the case may be, with such reduction or offset subject to a cap based on the cap price. If the market price per share of the Company’s common stock exceeds the cap price of the capped calls transaction, then the Company’s stock would experience some dilution and/or the capped call would not fully offset the potential cash payments, in each case to the extent the then-market price per share of its common stock exceeds the cap price. Under the capped call transactions, the Company purchased from the option counterparties capped call options that in the aggregate relate to the total number of shares of the Company's common stock underlying the Convertible notes, with a strike price equal to the conversion price of the Convertible notes and with an initial cap price equal to $45.5350, which represents a 75% premium over the last reported sale price of the Company's common stock of $26.02 per share on March 4,2021, with certain adjustments to the settlement terms that reflect standard antidilution provisions. The capped-call transactions expire over 40 consecutive scheduled trading days ended on March 12, 2026. The capped calls were purchased for $16.1 million and recorded to stockholders’ equity. The Company evaluated the capped call transaction under authoritative accounting guidance and determined that it should be accounted for as a separate transaction and classified as a net reduction to Additional paid-in capital within stockholders’ equity with no recurring fair value measurement recorded.
The Company early adopted ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging— Contracts in Entity’s Own Equity (Subtopic 815-40). In accordance with Subtopic 470-20 and 815-40, as revised by ASU 2020-06, the Company records the Convertible notes in long-term debt with no separation between the Notes and the conversion option. Each reporting period, the Company will determine whether any criteria is met for the note holders to have the option to redeem the Notes early, which could result in a change in the classification of the Notes to current liabilities.
Issuance Cost
The issuance costs related to the Convertible notes is presented in the Condensed consolidated balance sheet as a direct deduction from the carrying amount of the Convertible notes. During the three months ended March 31, 2021, the Company incurred direct costs associated with the issuance of Convertible notes and recorded approximately $4.7 million of issuance costs.
The issuance costs are amortized using an effective interest method basis over the term of the Convertible notes and accordingly the Company recorded approximately $52,000 of amortization of debt issuance costs during the three months ended March 31, 2021.
The effective interest rate on the Convertible notes is 2.97%. Interest expense for the three months ended March 31, 2021 totaled approximately $243,000, of which $191,000 relates to accruing the semiannual interest payment, which was included in accrued liabilities on the Company's Condensed consolidated balance sheet as of March 31, 2021. The remaining $52,000 relates to the amortization of debt issuance costs.
Loan and Security Agreement
On May 30, 2018, the Company and Wells Fargo Bank, N.A. (“Wells Fargo”) entered into a Loan and Security Agreement (the “Original“Wells Fargo Revolving Line of Credit”) in the original principal amount of $25.0$25 million.
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 $15.0 million, with the ability to request an additional $10.0 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 $15.0 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 $10.0 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 $15.0 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 2020as 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.
On July 9, 2020, the Company terminated its undrawn revolving line of credit with Wells Fargo and subsequently entered into a Loan and Security Agreement with Silicon Valley Bank. The agreement providesBank for a four-year secured revolving loan facility (“SVB Revolving Line of Credit”) in an aggregate principal amount of up to $30.0 million. The SVB Revolving Line of Credit matures on July 9, 2024.
In order to draw on the full amount of the SVB Revolving Line of Credit, 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 proceeds of the revolving loans may be used for general corporate purposes. The Company’s obligations under the Loan and Security Agreement with Silicon Valley Bank are secured by substantially all of the assets of the Company. Interest on principal amount outstanding under the revolving line shall accrue at a floating per annum rate equal to the greater of either 1.75% above the Prime Rate or five percent (5.0%). The Company paid a non-refundable revolving line commitment fee of $0.3 million, on the effective date of the Loan and Security Agreement with Silicon Valley Bank of July 9, 2020, and the Company is required to pay an anniversary fee of $0.3 million on each twelve month-month anniversary of the effective date of the Loan and Security Agreement. The revolving line matures on July 9, 2024. As of September 30, 2020, the Company had not drawn on the credit facility.
The Loan and Security Agreement with Silicon Valley Bank contains customary affirmative covenants, such as financial statement reporting requirements and delivery of borrowing base certificates, as well as customary covenants that restrict the Company’s ability to, among other things, incur additional indebtedness, sell certain assets, guarantee obligations of third parties, declare dividends, or make certain distributions, and undergo a merger or consolidation or certain other transactions. The Loan and Security Agreement also contains certain financial condition covenants, including maintaining a quarterly minimum revenue of $90.0 million, determined in accordance with GAAP on a trailing twelve-month basis. This quarterly minimum revenue requirement is subject to renegotiation at the beginningcurrently being renegotiated with SVB as of each fiscal year.March 31, 2021.
On March 4, 2021, the Loan and Security Agreement dated July 9, 2020 was amended to (i) permit the Company to issue the Convertible notes and perform its obligations in connection therewith, and (ii) permit the Capped Call transactions.
As of March 31, 2021, the Company had not drawn on the SVB Revolving Line of Credit and the Company is in compliance with all financial covenants of the SVB Revolving Line of Credit.
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 Act (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, 2022and bears interest at a fixed rate of 1.00%per annum, payable monthly commencing October 2020September 2021. . There is no prepayment penalty. Under the terms of the PPP, all or a portion of the principal maybe forgiven if the loan proceeds are used for qualifying expenses as described in the CARES Act, such as payroll costs, benefits, rent, and utilities. Noassurance 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 a promissory note included in Long-term debt on the Company’s 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 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 maybe required to repay the PPP loan in its entirety and the Company could be subject to additional penalties. The Company applied for the proceedsforgiveness of the loan toPPP Loan during the listfirst quarter of enumerated items covered under2021. The application is going through the CARES Act that allow for a significant portionSBA’s review as of the loan to be forgiven. However theMarch 31, 2021. The Company can provide no assurance that the loan will be forgiven.
The PPP loan will be derecognized upon repayment of the loan in accordance with itits terms and/or upon confirmation of forgiveness from the SBA.
Note 14. Segment reporting
Segment reporting is based on the “management approach,” following the method that management organizes the Company’s reportable segments for which separate financial information is made available to, and evaluated regularly by, the chief operating decision maker in allocating resources and in assessing performance. The Company’s chief operating decision makermakers ("CODM") isare its Chief Executive Officer ("CEO") and Chief Financial Officer (“CFO”), who makesmake decisions on allocating resources and in assessing performance. The CEO reviewsand CFO review the Company's consolidated results as 1one operating segment. In making operating decisions, the CEOCODM primarily considers consolidated financial information, accompanied by disaggregated information about revenues by geography and product. All of the Company’s principal operations and decision-making functions are located in the U.S. The Company’s CEO viewsCODM view its operations, manages its business, and uses one measurement of profitability for the one operating segment - which sells aesthetic medical equipment and services, and distributes skincare products, to qualified medical practitioners. Substantially all of the Company’s long-lived assets are located in the U.S.
The following table presents a summary of revenue by geography for the three andmonths nine months ended September 30, 2020March 31, 2021 and 20192020 (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Revenue mix by geography: | ||||||||||||||||
United States | $ | 15,443 | 26,425 | 40,142 | 74,972 | |||||||||||
Japan | 11,497 | 7,511 | 27,176 | 18,142 | ||||||||||||
Asia, excluding Japan | 3,204 | 3,754 | 8,279 | 11,396 | ||||||||||||
Europe | 2,769 | 1,907 | 6,910 | 7,147 | ||||||||||||
Rest of the world | 6,219 | 6,520 | 15,233 | 18,260 | ||||||||||||
Total consolidated revenue | $ | 39,132 | 46,117 | 97,740 | 129,917 | |||||||||||
Revenue mix by product category: | ||||||||||||||||
Products* | 24,121 | 34,958 | 60,621 | 99,706 | ||||||||||||
Consumables | 2,304 | 2,510 | 6,263 | 7,109 | ||||||||||||
Skincare | 6,829 | 2,847 | 14,506 | 6,230 | ||||||||||||
Total product revenue | $ | 33,254 | 40,315 | 81,390 | 113,045 | |||||||||||
Service | 5,878 | 5,802 | 16,350 | 16,872 | ||||||||||||
Total consolidated revenue | $ | 39,132 | 46,117 | 97,740 | 129,917 | |||||||||||
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Three Months Ended March 31, | ||||||||
2021 | 2020 | |||||||
Revenue mix by geography: | ||||||||
United States | $ | 18,844 | $ | 13,784 | ||||
Japan | 16,555 | 7,162 | ||||||
Asia, excluding Japan | 2,403 | 3,229 | ||||||
Europe | 4,424 | 2,816 | ||||||
Rest of World other than United States, Asia and Europe | 7,442 | 5,248 | ||||||
Total consolidated revenue | $ | 49,668 | $ | 32,239 | ||||
Revenue mix by product category: | ||||||||
Products | $ | 28,320 | $ | 20,958 | ||||
Consumables | 2,925 | 2,533 | ||||||
Skincare | 12,306 | 2,900 | ||||||
Total product revenue | 43,551 | 26,391 | ||||||
Service | 6,117 | 5,848 | ||||||
Total consolidated revenue | $ | 49,668 | $ | 32,239 | ||||
Note 15. Subsequent Events
The Company has determined that there are no material subsequent events as
ITEM 2. |
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This Management’sManagement’s Discussion and Analysis should be read in conjunction with the Company’sCompany’s financial condition and results of operations in conjunction with the Company’sCompany’s unaudited condensedCondensed consolidated financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q and the Company’sCompany’s audited financial statements and notes thereto for the year ended December 31, 2019,2020, included in its annual report on Form 10-K filed on March 16, 2020 with the U.S. Securities and Exchange Commission ("SEC")(“, and amended in a filing with the SEC”) on Form 10-K/Aon April 14, 2020.March 23, 2021.
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”(“GAAP”). Additionally, unless otherwise indicated, all changes identified for the current-period results represent comparisons to results for the prior corresponding fiscal period.
Special note regarding forward-looking statements
This report contains forward-looking statements that involve risks and uncertainties. The Company’s actual results could differ materially from those discussed in the forward-looking statements. The statements contained in this report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended, ("the Exchange Act"). Forward-looking statements are often identified by the use of words such as, but not limited to, “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might”, “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.
Risks Related to the Company’s Business
The Company’s net sales, expenses and operating results may vary significantly from year to year and quarter to quarter for several reasons, including, without limitation:
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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 its business. |
● | 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 its | |
● | Liquidity and Capital Resources. This section provides an analysis of the Company’s liquidity and cash flows, as well as a discussion of its |
Executive Summary
Company Description
The Company is a global providerleading medical device company specializing in the research, development, manufacture, marketing and servicing of laserlight and other energy-based aestheticaesthetics 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 themIn addition to offer safe and effective aesthetic treatments to their customers. In addition,internal development of products, the Company distributes third-party manufactured skincare products.third party sourced products under the Company’s own brand names. The Company currently offers easy-to-use products based on the following key platforms: enlighten, excel HR, truSculpt, excel V, xeo,Secret RF and Fraxis PRO— each of which enables physicians and other qualifiedenable practitioners to perform safe and effective aesthetic procedures, including treatment for body contouring, skin resurfacing and revitalization, tattoo removal, removal of benign pigmented lesions, vascular conditions, hair removal, toenail fungus and toenail fungus. Many of thewomen's intimate health. The Company’s platforms are designed to be easily upgraded to add additional applications and hand pieces, which provide flexibility for the Company’s customers as they expand their practices. In addition to systems and upgrade revenue, the Company generates revenue from the sale of post warranty service contracts, providing services for products that are out of warranty, hand piece refills and other per procedure related revenue on select systems and distribution of third-party manufactured skincare products. The Company also expands its revenues from sales of third-party skincare products by utilizing its network and relationships with physicians and practitioners.
The Company’s ongoing research and development activities primarily focus on developing new products, as well as improving and enhancing the Company’s portfolio of existing products. The Company also explores ways to expand the Company’s product offerings through alternative arrangements with other companies, such as distribution arrangements. The Company introduced Juliet, a product for women’s intimate health, in December 2017, SecretRF, a fractional RF microneedling device for skin revitalization, in January 2018, enlightenSR in April 2018, truSculptiD in July 2018, excel V+ in February 2019 truSculpt flex in June 2019, Secret PRO in July 2020 and excel V+III during the fourth quarter of 2020.
The Company’s corporate headquarters and U.S. operations are located in Brisbane, California, where the Company conducts manufacturing, warehousing, research and development, regulatory, sales and marketing, service, and administrative activities. The Company also maintains regional distribution centers (“RDCs”) in selected locations across the U.S. These RDCs serve as forward warehousing for systems and service parts in various geographies. The Company markets sells and services the Company’s products through direct sales and service employees in North America (including Canada), Australia, Austria, Belgium, France, Germany, Hong Kong, Japan, Spain, Switzerland and the United Kingdom. Sales and Services outside of these direct markets are made through a worldwide distributor network in over 4042 countries.
Products and Services
The Company derives revenue from the sale of Products and Services. Product revenue includes revenue from the sale of systems, hand pieces and upgrade of systems (collectively “Systems” revenue), replacement hand pieces, truSculptiDcycle refills, and truSculpt flexcycle refills, as well as single use disposable tips applicable to Juliet and SecretRF(“ (“Consumables” revenue), the sale of third party manufactured skincare products (“Skincare” revenue),; and income from the leasing of equipment (“Equipment leasing” revenue).through a membership program. A system consists of a console that incorporates a universal graphic user interface, a laser and (or) other energy basedenergy-based module, control system software and high voltage electronics, as well as one or more hand pieces. However, depending on the application, the laser or other energy basedenergy-based module is sometimes contained in the hand piece such as with the Company’s PearlandPearlFractionalapplications instead of within the console.
The Company offers customers the ability to select the system that best fits their practice at the time of purchase and then to cost-effectively add applications to their system as their practice grows. This provides customers the flexibility to upgrade their systems whenever they choose and provides the Company with a source of additional Systems revenue. The Company’s primary system platforms include:include excel,enlighten,Juliet,SecretRF,truSculptand xeo.
Skincare revenue relates to the distribution of ZO’s skincare products in Japan. The skincare products are purchased from a third-party manufacturer and sold to medical offices and licensed physicians. The Company acts as the principal in this arrangement, as the Company determines the price to charge customers for the skincare products and controls the products before they are transferred to the customer.
Service revenue includes prepaid service contracts, enlighteninstallation, 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; | |
● | ongoing investment in the Company’s global sales and marketing infrastructure; |
● | use of clinical results to support new aesthetic products and applications; | |
● | enhanced luminary development and reference selling efforts (to develop a location where Company’s products can be displayed and used to assist in selling efforts); |
● | customer demand for the Company’s products; |
● | consumer demand for the application of the Company’s products; |
● | marketing to physicians in the core dermatology and plastic surgeon specialties, as well as outside those specialties; and |
● | generating recurring revenue from the Company’s growing installed base of customers through the sale of system upgrades, services, hand piece refills, truSculptcycles, skincare products and |
The global spread of COVID-19 has created significant volatility, uncertainty and economic disruption. The Company’s first nine months results were impacted by a decline in patient volumes associated with COVID-related shutdowns. However, the full 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:
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For a detailed discussion of the significant business trends impacting its 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 supports any reasonable action that helps ensure patient safety going forward. The Company has a robust, multi-functional process that reviews its promotional claims and materials to ensure they are truthful, not misleading, fair and balanced, and supported by sound scientific evidence.
A detailed discussion of these and other factors that could impact the Company’s future performance are provided in (1) the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, as amended on April 14, 2020 -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)(2) other announcements the Company makes from time to time.
Impact of COVID-19 on Company’sCompany’s business and operations
On January 30, In March2020, 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.pandemic. The COVID-19 outbreak ishas negatively affectingaffected the United States and global economies. AsThe spread of the COVID-19 outbreak continues to spread, governmental authorities ordered quarantines, shelter-in-place, andcoronavirus, which caused a broad impact in 2020 globally, including restrictions on the conduct of business operations relatedtravel, shifting work force to the COVID-19 outbreak. These measureswork remotely and restrictionsquarantine policies put into place by businesses and governments, had an impacta material economic effect on the Company'sCompany’s business whichduring the year ended December 31, 2020. Notably, healthcare facilities in many countries effectively banned elective procedures. Many of the Company’s products are used in aesthetic elective procedures and as such, the bans on elective procedures substantially reduced the Company’s sales and marketing efforts in the early months of the pandemic and led the Company to implement cost control measures,measures. Although the Company’s operation and results of operations duringhave significantly improved as the nine months ended September 30, 2020. The Company expectseconomic outlook due to the COVID-19 outbreak to continue to affect its operations and those of third parties on which the Company relies, which could cause disruptionspandemic improves 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 result, the extent of2021, 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 180-240 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 pandemicoutbreak continues to be fluid and the aftermath of the business and economic disruptions due to the COVID-19 is still uncertain, making it difficult to forecast the final impact it could have on the Company’s future operations, including disruptions in the Company's supply chain and contract manufacturing operations. The Company cannot presently predict the scope and severity of further potentialany impacts in future periods from the business shutdowns or disruptions due to the COVID-19 pandemic, but if the Companyimpact on economic activity such as the possibility of recession 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, whichfinancial market instability could have a material adverse effect on the Company’s business, and the Company’s revenues,revenue, operating results, cash flows and financial condition. The factorsCompany continues to assess whether any impairment of its goodwill or its long-lived assets has occurred, and trends relatedhas determined that no charges other than an impairment loss of $0.2 million on capitalized implementation costs of cloud-based CRM software during the three months ended March 31, 2021. The Company’s assumptions about future conditions important to its assessment of potential impairment of its long-lived assets, and goodwill, including the saleimpacts of the Company’s productsCOVID–19 pandemic and consumables may also impact demand for service contracts. A reduction in customer orders would reduce the amount of revenue thatother ongoing impacts to its business, are subject to uncertainty, and the Company expectswill continue to generate.monitor these conditions in future periods as new information becomes available, and will update its analyses accordingly.
The Company'sCompany has experienced a significant increase in sales of skincare products under the exclusive distribution agreement with ZO Skin Health, Inc., which allows the Company to sell ZO’s skincare products in Japan. The reason for the increase in skincare products sales might have been the result of changes in customers’ patients are also impacted by the economic outlookspending habits to purchase more aesthetic treatments which could be applied at home due to limitations on in-person aesthetic procedures, social distancing and mask wearing requirements due to the currentCOVID-19 pandemic. Elective aesthetic procedures are lessFuture growth in sales of a priority than other items for those patients that have lost their jobs, are furloughed, have reduced work or haveskincare products depends on the customers’ spending habits, which may revert 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 oforiginal spending habits after 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,pandemic. Such changes 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 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 initially affected approximately 42% of its workforce. Twenty-two percent (22%) of the workforce was impacted as of the end of the third quarter of 2020. In addition, in order to further conserve cash, bonuses owed to management from the 2019 Management Bonus Program were paid mostly in equity (see Note 8 of the notes to our consolidated financial statements in Part I of this Quarterly Report on Form 10-Q) 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 also 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;
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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 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 applied the proceeds of the loan to the list of enumerated items covered under the CARES Act that allow for a significant portion of the loan to be forgiven. However the Company can provide no assurance that the loan will be forgiven and may need to pay the principal and interest of the PPP loan back as a result. 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.
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 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 its terms and/or upon confirmation of forgiveness from the SBA.
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 fiscal year. The proceeds of the revolving loans may be used for general corporate purposes. The Company’s obligations under the Loan and Security 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 Security Agreement include restrictive covenants, such as limitationseffect on the Company’s ability to incur additional debtrevenue, operating results and certain operating restrictions that could adversely impact its ability to conduct business.cash flows.
Critical accounting policies, significant judgments and use of estimates
The preparation of the Company’s consolidated financial statements and related notes requires the Company to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. The Company has based its estimates on historical experience and on various other assumptions that the Company believes to be reasonable under the circumstances. The Company periodically reviews its estimates and makes adjustments when facts and circumstances dictate. To the extent that there are material differences between these estimates and actual results, its financial condition or results of operations will be affected.
An accounting policy is considered to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in 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’s Discussion and Analysis of Financial Condition and Results of Operations” in its Annual Report on Form 10-K for the year ended December 31, 20192020 filed with the SEC on March 16, 2020, as amended on April 14, 2020. There23, 2021. Except the new policies explained below, 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.
AsThe Company established new accounting policies to account for the Convertible notes and related transactions during the first quarter of 2021.
The Company issued $138.3 million of convertible senior notes in a private placement offering on March 5, 2021. The notes bear interest at a rate of 2.25% per year. In accordance with ASU 2020-06, the Company recorded the Notes in long-term debt with no separation between the notes and the conversion option. Each reporting period, the Company will determine whether any criteria are met for the note holders to have the option to redeem the notes early, which will result in a change in the classification of the eventsnotes to current liabilities.
The issuance costs related to the Convertible notes are presented in the balance sheet as a direct deduction from the carrying amount of the Convertible notes..
In connection with issuance of the notes, the Company entered into capped call transactions with certain option counterparties. The capped call transactions are generally designated to reduce the potential dilution of the Company's common stock upon any conversion of the notes. The capped calls were purchased for $16.1 million and impact surroundingrecorded as a reduction to stockholders’ equity.
Basic loss per share of common stock is calculated by dividing net income available to common stockholders by the COVID-19 pandemic,weighted average number of common shares outstanding for the respective period in accordance with ASC 260. Diluted loss per common share reflects the potential dilution that would occur if contracts to issue common stock were exercised or converted into common stock. For the three months ended March 31, 2021, basic loss per common share and diluted loss per common share are the same as any potentially dilutive shares would be anti-dilutive to the periods. See Note 9 the unaudited Condensed consolidated financial statements included in Item I, Part 1 of this Quarterly Report on Form 10-Q.
The Company assessed whether any impairment of its goodwill or its long-lived assets had occurred. The Company recognizedoccurred and has determined that no charges other than an impairment loss of $0.8$0.2 million on capitalized implementation costs of cloud computing costs related to implementationwere deemed necessary under applicable accounting standards as of cloud-based enterprise resource planning software during the nine months ended September 30, 2020.March 31, 2021. 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 net revenue. Percentages in this table and throughout its discussion and analysis of financial condition and results of operations may reflect rounding adjustments.
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended | ||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | March 31, | ||||||||||||||||||||
Net Revenue | 100% | 100% | 100% | 100% | ||||||||||||||||||||
2021 | 2020 | |||||||||||||||||||||||
Net revenue | 100 | % | 100 | % | ||||||||||||||||||||
Cost of revenue | 44% | 43% | 51% | 47% | 44 | % | 56 | % | ||||||||||||||||
Gross Margin | 56% | 57% | 49% | 53% | ||||||||||||||||||||
Gross margin | 56 | % | 44 | % | ||||||||||||||||||||
Operating Expenses: | ||||||||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||
Sales and marketing | 31% | 39% | 39% | 39% | 30 | % | 46 | % | ||||||||||||||||
Research and development | 9% | 8% | 11% | 8% | 8 | % | 12 | % | ||||||||||||||||
General and administrative | 19% | 16% | 24% | 14% | 15 | % | 24 | % | ||||||||||||||||
Total operating expenses | 59% | 63% | 74% | 61% | 53 | % | 82 | % | ||||||||||||||||
Loss from operations | (3)% | (6)% | (25)% | (8)% | ||||||||||||||||||||
Other expense | (1) | ─% | (1)% | ─% | ||||||||||||||||||||
Income/(Loss) from operations | 2 | % | (38 | )% | ||||||||||||||||||||
Amortization of debt issuance costs | 0 | % | - | % | ||||||||||||||||||||
Interest on Convertible notes | 0 | % | - | % | ||||||||||||||||||||
Other expense, net | (2 | )% | (1 | )% | ||||||||||||||||||||
Loss before income taxes | (4)% | (6)% | (26)% | (8)% | 0 | % | (39 | )% | ||||||||||||||||
Provision (benefit) for income taxes | 2% | ─% | 1% | ─% | ||||||||||||||||||||
Income tax expense | 1 | % | - | % | ||||||||||||||||||||
Net loss | (6)% | (6)% | (27)% | (8)% | (1 | )% | (39 | )% | ||||||||||||||||
Revenue
The timing of the Company’s revenue is significantly affected by the mix of system products, installation, training, consumables and extended service contracts.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, 20192020 and Note 7 to the unaudited condensedCondensed 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 17%12% and 13%18% of the Company’s total revenue for the ninethree months ended September 30,March 31, 2021 and March 31, 2020, and September 30, 2019, respectively. Revenue recognized over time relates to revenue from the Company’s extended service contracts and marketing services. Revenue recognized at a point in timeupon delivery is primarily generated by the sales of systems, consumables and skincare.
Total Net Revenue
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||
(Dollars in thousands) | 2020 | 2019 | % Change | 2020 | 2019 | % Change | ||||||||||||||||||
Revenue mix by geography: | ||||||||||||||||||||||||
United States | $ | 15,443 | $ | 26,425 | (42 | )% | $ | 40,142 | $ | 74,972 | (46 | )% | ||||||||||||
International | 23,689 | 19,692 | 20 | % | 57,598 | 54,945 | 5 | % | ||||||||||||||||
Consolidated total revenue | $ | 39,132 | $ | 46,117 | (15 | )% | $ | 97,740 | $ | 129,917 | (25 | )% | ||||||||||||
United States as a percentage of total revenue | 39 | % | 57 | % | 41 | % | 58 | % | ||||||||||||||||
International as a percentage of total revenue | 61 | % | 43 | % | 59 | % | 42 | % | ||||||||||||||||
Revenue mix by product category: | ||||||||||||||||||||||||
Systems - North America | $ | 13,700 | $ | 24,121 | (43 | )% | $ | 32,296 | $ | 68,192 | (53 | )% | ||||||||||||
Systems - International | 10,421 | 10,837 | (4 | )% | 28,325 | 31,514 | (10 | )% | ||||||||||||||||
Total Systems | 24,121 | 34,958 | (31 | )% | 60,621 | 99,706 | (39 | )% | ||||||||||||||||
Consumables | 2,304 | 2,510 | (8 | )% | 6,263 | 7,109 | (12 | )% | ||||||||||||||||
Skincare | 6,829 | 2,847 | 140 | % | 14,506 | 6,230 | 133 | % | ||||||||||||||||
Total Products | 33,254 | 40,315 | (18 | )% | 81,390 | 113,045 | (28 | )% | ||||||||||||||||
Service | 5,878 | 5,802 | 1 | % | 16,350 | 16,872 | (3 | )% | ||||||||||||||||
Total Net Revenue | $ | 39,132 | $ | 46,117 | (15 | )% | $ | 97,740 | $ | 129,917 | (25 | )% | ||||||||||||
Three Months Ended March 31, | ||||||||||||
(Dollars in thousands) | 2021 | % Change | 2020 | |||||||||
Revenue mix by geography: | ||||||||||||
North America | $ | 22,298 | 45 | % | $ | 15,373 | ||||||
Japan | 16,555 | 131 | % | 7,162 | ||||||||
Rest of World | 10,815 | 11 | % | 9,704 | ||||||||
Consolidated total revenue | $ | 49,668 | 54 | % | $ | 32,239 | ||||||
North America as a percentage of total revenue | 45 | % | 48 | % | ||||||||
Japan as a percentage of total revenue | 33 | % | 22 | % | ||||||||
Rest of World as a percentage of total revenue | 22 | % | 30 | % | ||||||||
Revenue mix by product category: | ||||||||||||
Systems - North America | $ | 16,785 | 62 | % | $ | 10,382 | ||||||
Systems – Rest of World (including Japan) | 11,535 | 9 | % | 10,576 | ||||||||
Total Systems | 28,320 | 35 | % | 20,958 | ||||||||
Consumables | 2,925 | 15 | % | 2,533 | ||||||||
Skincare | 12,306 | 324 | % | 2,900 | ||||||||
Total Products | 43,551 | 65 | % | 26,391 | ||||||||
Service | 6,117 | 5 | % | 5,848 | ||||||||
Total Net Revenue | $ | 49,668 | 54 | % | $ | 32,239 | ||||||
The Company’s total net revenue decreasedincreased by 15% and 25%54% in the three and nine monthmonths period ended September 30, 2020, respectively,March 31, 2021 compared to the same period in 20192020 as a result of declinerecovery in the demand of the Company’s products and services as a direct result ofthe economic outlook due to the COVID-19 pandemic.pandemic improves.
Revenue by Geography
The Company’s U.S.North America revenue decreasedincreased by $11.0$6.9 million, or 42%45%, in the three months ended September 30, 2020, and decreased by $34.8 million, or 46%, in the nine months ended September 30, 2020,March 31, 2021 compared to the same periodsperiod in 2019. This decrease2020. The increase was due primarily to significant declinerecovery in sales in the North America market as a direct result of the COVID-19 pandemic. The global spread of COVID-19 has created significant volatility, uncertainty andU.S. economic disruption. In responseoutlook becomes optimistic due 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 duringaccelerating rate of vaccination in the second quarter and patientsUnited States.
Revenue in Japan increased by $9.4 million, or 131%, due to a significant increase in sales of 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.Skincare products.
The Company’s internationalRest of World revenue increased by $4.0$1.1 million, or 20%, and $2.7 million, or 5%11%, in the three and nine months ended September 30, 2020, respectively,March 31, 2021 compared to the same periodsperiod in 2019.2020. The increase was mostly due to increasegrowth in Skincare products salesthe Company’s direct business in Japan as due to the COVID 19 pandemic some consumers opted to purchase skincare products rather than going to a doctor's office for treatment.Australia and Europe.
Revenue by Product Type
Systems Revenue
Systems revenue in North America decreasedincreased by $10.4 million and $35.9$6.4 million, or 43% and 53%62%, in the three and nine months and ended September 30, 2020, respectively,March 31, 2021 compared to the same periodsperiod in 2019,2020, mainly due to the significant decline in system sales inrecovery from the Company’s North America market, which represents the Company’s biggest market. The significant decline in systems revenue in the North America market was as a direct result ofbusiness disruptions caused by the COVID-19 pandemic.
The Rest of the World (including Japan) systems revenue decreasedincreased by $0.4 million and $3.2 million, or 4% and 10%,9% in the three and nine months ended September 30,March 31, 2021 compared to the same period in 2020, respectively, primarily as a result ofdue to increased sales in the COVID-19 pandemicCompany’s direct business in Australia and Europe, partially offset by decreased sales from distributors in Middle East and Asian regions.
Consumables Revenue
Consumables revenue decreasedincreased by $0.2 million and $0.8$0.4 million, or 8% and 12%15%, for the three and nine months ended September 30, 2020, respectively,March 31, 2021 compared to the same periodsperiod in 2019.2020. The decreaseincrease in consumables revenue was primarily due to the decreasing sales inincreasing installed base of truSculpt iD, Secret RF, truSculpt 3Dand truSculpt flex, in June 2019 each of which have a consumable element, as well as the decline in usage of the consumables due to the COVID-19 pandemic.element.
Skincare Revenue
The Company’s revenue from Skincare products in Japan increased by $4.0 million and $8.3$9.4 million, or 140% and 133%324%, for the three and nine months ended September 30, 2020, respectively,March 31, 2021 compared to the same periodsperiod in 2019. This2020. The increase was due primarily to increased marketing and promotional activities as well asand the changes in customers behavior due to the COVID-19 pandemic as some consumers optedcustomer’s spending habits to purchase skincare products rather than going to a doctor's office for treatment.more aesthetic treatments which could be applied at home.
Service Revenue
The Company’s Service revenue increased $0.1$0.3 million, or 1%5%, for the three months ended September 30, 2020 and decreased $0.5 million, or 3%, for the nine months ended September 30, 2020,March 31, 2021 compared to the same periodsperiod in 2019. The2020. This increase for the three months ended September 30, 2020 was due primarily to increased sales of service contracts, and support and maintenance services provided on a time and materials basis to the Company's network of international distributors The decrease in the nine months ended September 30, 2020 was primarily due to decreased sales of service contracts and support and maintenance services provided on a time and materials basis to the Company's network of international distributors, due to the COVID-19 pandemic.basis.
Gross Profit
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended March 31, | ||||||||||||||||||||||||||||||||||
(Dollars in thousands) | 2020 | 2019 | % Change | 2020 | 2019 | % Change | 2021 | % Change | 2020 | |||||||||||||||||||||||||||
Gross Profit | $ | 21,746 | $ | 26,233 | (17)% | $ | 47,706 | $ | 69,373 | (31)% | ||||||||||||||||||||||||||
Gross profit | $ | 27,710 | 93 | % | $ | 14,336 | ||||||||||||||||||||||||||||||
As a percentage of total net revenue | 56% | 57% | 49% | 53% | 56 | % | 44 | % | ||||||||||||||||||||||||||||
The Company’s cost of revenue consists primarily of material, personnel expenses, product warranty costs, and manufacturing overhead expenses. The Company also continues to make investments in its international direct service support, as well as operational improvement activities.
Gross profit as a percentage of revenue decreased 1% and 4% for the three and nine months ended September 30, 2020, respectively,March 31, 2021 increased 12%, compared to the same periodsperiod in 2019.2020. The decreaseincrease in gross profit as a percentage of revenue was primarily driven by lower overhead absorption on lower revenue, anda recovery from the business disruptions occurred since March 2020 as a result of the COVID-19 pandemic, which resulted in the decline in the average sales price of systems due to the COVID-19 pandemic, and reduction-in-force and furloughed costs implemented by the Company during the quartersthree months ended June 30, 2020 and September 30, 2020, partially offset by costs savings from the reduction-in-force and furlough.March 31, 2020.
Sales and Marketing
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended March 31, | ||||||||||||||||||||||||||||||||||
(Dollars in thousands) | 2020 | 2019 | % Change | 2020 | 2019 | % Change | 2021 | % Change | 2020 | |||||||||||||||||||||||||||
Sales and Marketing | $ | 12,286 | $ | 17,691 | (31)% | $ | 38,109 | $ | 50,786 | (25)% | ||||||||||||||||||||||||||
Sales and marketing | $ | 15,068 | 2 | % | $ | 14,789 | ||||||||||||||||||||||||||||||
As a percentage of total net revenue | 31% | 39% | 39% | 39 | % | 30 | % | 46 | % | |||||||||||||||||||||||||||
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 $5.4 million, or 31%, decrease in salesSales and marketing expenses for the three months ended September 30, 2020March 31, 2021 increased by $0.3 million, or 2%, compared to the same period in 2019 was2020 due primarily to:
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The $12.7 million, or 25% decrease in sales and marketing expenses for the nine months ended September 30, 2020 compared to same period in 2019 was due primarily to:
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Research and Development (“(“R&D”&D”)
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended March 31, | ||||||||||||||||||||||||||||||||||
(Dollars in thousands) | 2020 | 2019 | % Change | 2020 | 2019 | % Change | 2021 | % Change | 2020 | |||||||||||||||||||||||||||
Research and development | $ | 3,432 | $ | 3,643 | (6)% | $ | 10,294 | $ | 10,622 | (3)% | $ | 4,112 | 6 | % | $ | 3,870 | ||||||||||||||||||||
As a percentage of total net revenue | 9% | 8% | 11% | 8% | 8 | % | 12 | % | ||||||||||||||||||||||||||||
R&D expenses consist primarily of personnel expenses, clinical research, regulatory and material costs. R&D expenses decreasedincreased by $0.2 million, and represented 9% of total net revenue,or 6%, in the three months ended September 30, 2020,March 31, 2021 compared to 8% for the same period in 2019.2020. The decrease in expenseincrease was due primarily to $0.2 million and $0.3 million decreases in stock based compensation and bonus, respectively as the Company instituted salary reductions for the remainder of its employees and initiated furloughs and subsequent reductions-in-force, partially offsethigher personnel expenses driven primarily by $0.3 millionan increase in parts and supplies spending.headcount.
R&D expenses decreased by $0.3 million, and represented 11% of total net revenue, in the nine months ended September 30, 2020, compared to 8% for the same period in 2019. The decrease in R&D expenses was due primarily to $1.0 million decrease in employee related expenses as the Company instituted salary reductions for the remainder of its employees and initiated furloughs and subsequent reductions-in-force, partially offset by $0.2 million increase in stock based compensation, and $0.5 million increase in materials spending.
General and Administrative (“(“G&A”&A”)
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended March 31, | ||||||||||||||||||||||||||||||||||
(Dollars in thousands) | 2020 | 2019 | % Change | 2020 | 2019 | % Change | 2021 | % Change | 2020 | |||||||||||||||||||||||||||
General and Administrative | $ | 7,239 | $ | 7,308 | (1)% | $ | 23,575 | $ | 18,100 | 30% | ||||||||||||||||||||||||||
General and administrative | $ | 7,365 | (6 | )% | $ | 7,806 | ||||||||||||||||||||||||||||||
As a percentage of total net revenue | 18% | 16% | 24% | 14% | 15 | % | 24 | % | ||||||||||||||||||||||||||||
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 decreased by $0.1$0.4 million, or 1%6%, in the three months ended September 30, 2020, as compared to the same period in 2019. G&A expensesand represented 18%15% of total net revenue in the three months ended September 30, 2020 asMarch 31, 2021 compared to 16%24% of total net revenue in the nine months ended September 30, 2019.same period in 2020. The $0.1 million decrease was mainly due primarily to a $0.9$0.6 million decrease in employees related expenses as the Company instituted salary reductions for the remainder of its employeesinside and initiated furloughsoutside services fees and subsequent reductions-in-force, $0.2$0.3 million decrease in credit card fees and $0.8losses, partially offset by $0.7 million increase in legal fees, partially offset by a $0.4 million increase in professional fees and consulting services.
G&A expenses increased by $5.5 million, or 30%, in the nine months ended September 30, 2020 as compared to the same period in 2019. G&A expenses represented 24% of revenue in the nine months ended September 30, 2020 as compared to 14% of revenue in the nine months ended September 30, 2019. The increase in expenses was due primarily to $2.4 million of increased professional fees and consulting services, $1.1 million of bad debt expense, and a $2.4 million increase in legal fees, partially offset by a $0.4 million decrease in employee related expenses as the Company instituted salary reductions for the remainder of its employees and initiated furloughs and subsequent reductions-in-force.
Other Expense
Other expense consists of the following:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||
(Dollars in thousands) | 2020 | 2019 | % Change | 2020 | 2019 | % Change | ||||||||||||||||||
Other expense | $ | (382) | $ | (146) | 162% | $ | (586) | $ | (180) | 226% | ||||||||||||||
As a percentage of total net revenue | 1% | ─% | 1% | ─% | ||||||||||||||||||||
Other expense increased $0.2 million or 162% and $0.4 million or 225% in the three and nine months ended September 30, 2020, compared to the same periods in 2019. The increase in other expense in both periods was primarily due to a decrease in interest income from the Company’s marketable investments from the prior period, and an increase in estimated interest expense for advance payment related to service contracts.
fees.
Interest and Other expense, Net
Interest and other expense, net, consists of the following:
Three Months Ended March 31, | ||||||||||||
(Dollars in thousands) | 2021 | % Change | 2020 | |||||||||
Interest and other expense, net | $ | (1,2663 | ) | 512 | % | $ | (207 | ) | ||||
As a percentage of total net revenue | (3 | )% | (1 | )% | ||||||||
Interest and other expense, net, increased $1.1 million or 512% in the three months ended March 31, 2021 compared to the same period in 2020. The increase was due primarily to $0.2 million interest expense from the Convertible notes issued in March 2021, and $1.0 million increase in realized and unrealized foreign exchange rate loss related to intercompany receivables.
Provision for Income Taxes
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended March 31, | ||||||||||||||||||||||||||||||||||
(Dollars in thousands) | 2020 | 2019 | $ Change | 2020 | 2019 | $ Change | 2021 | $ Change | 2020 | |||||||||||||||||||||||||||
Loss before income taxes | $ | (1,593) | $ | (2,555) | $ | 962 | $ | (24,858) | $ | (10,315) | $ | (14,543) | $ | (101 | ) | $ | 12,235 | $ | (12,336 | ) | ||||||||||||||||
Provision (benefit) for income tax | 664 | 73 | 591 | 1,207 | (55) | 1,262 | ||||||||||||||||||||||||||||||
Income tax provision | $ | 258 | $ | 180 | $ | 78 | ||||||||||||||||||||||||||||||
For the three and nine months ended September 30, 2020,March 31, 2021, the Company's income tax expense was $0.7 million and $1.2 million, respectively,$258,000, compared to income tax benefit of $73,000 and incomethe tax expense of $55,000, in$78,000 for the same periodsperiod in 2019.
2020. The increase in the Company's income tax expense for the three and nine months ended September 30, 2020 isMarch 31, 2021 was due primarily to the increase in Japan skincare revenue which increased income and the associated income taxes in foreign jurisdictions.
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As the Company'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 three and nine months ended September 30, 2020, the Company believes 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 full valuation allowance on the U.S. deferred tax assets.
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 the Company's third-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 maturitynet proceeds from the issuance of the Convertible notes and sales of marketable investments, 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 calculatedprogram as 80% of the Company’s qualifying accounts receivable. The Company must also meet certain quarterly revenue targets on a trailing twelve-month basiswell 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 Company applied the proceeds of the loan to the list of enumerated items covered under the CARES Act that allow for a significant portion of the loan to be forgiven. However the Company can provide no assurance that the loan will be forgiven. The PPP loan will be derecognized upon repayment of the loan in accordance with it terms and/or upon confirmation of forgivenesscash generated from the SBA.
operating activities. The Company actively manages its cash usage and investment of liquid cash to ensure the maintenance of sufficient funds to meet its daily needs. The majority of the Company’s cash and investmentscash equivalent are held in U.S. banks and its foreign subsidiaries maintain a limited amount of cash in their local banks to cover their short-term operating expenses.
As of September 30, 2020March 31, 2021 and December 31, 2019,2020, the Company had $51.6$167.9 million and $36.4$51.9 million of working capital, respectively. Cash and cash equivalents plus marketable investments increased by $8.5$117.9 million to $42.4$164.9 million as of September 30, 2020,March 31, 2021 from $33.9$47.0 million as of December 31, 2019,2020, primarily due to an increase in cashnet proceeds from financing activities, including cash generated from proceeds received from its April 2020 offering,the issuance of the Convertible notes, partially offset by $16.1 million in premiums paid at the Company’s loss from operations due to the sales decline as a result of COVID-19 and settlement of accrued liabilities as of December 31, 2019.same time for separate capped call transactions.
Cash, Cash Equivalents and Marketable Investments
The following table summarizes the Company’sits cash, cash equivalents and marketable investments:
(Dollars in thousands) | September 30, 2020 | December 31, 2019 | Change | March 31, 2021 | December 31, 2020 | Change | ||||||||||||||||||
Cash and cash equivalents | $ | 29,394 | $ | 26,316 | $ | 3,078 | $ | 164,932 | $ | 47,047 | $ | 117,885 | ||||||||||||
Marketable investments | 13,046 | 7,605 | 5,441 | |||||||||||||||||||||
Total | $ | 42,440 | $ | 33,921 | $ | 8,519 | ||||||||||||||||||
Cash Flows
Nine Months Ended September 30, | Three Months Ended March 31, | |||||||||||||||
(Dollars in thousands) | 2020 | 2019 | 2021 | 2020 | ||||||||||||
Net cash flow provided by (used in): | ||||||||||||||||
Operating activities | $ | (21,402) | $ | (6,194) | $ | 1,253 | $ | (11,966 | ) | |||||||
Investing activities | 6,185 | 2,667 | (49 | ) | 2,640 | |||||||||||
Financing activities | 30,665 | 354 | 116,681 | (2,216 | ) | |||||||||||
Net increase (decrease) in cash and cash equivalents | $ | 29,394 | $ | (3,173) | $ | 117,885 | $ | (11,542 | ) | |||||||
Cash Flows from Operating Activities
Net cash used in operating activities in the ninethree months ended September 30, 2020March 31, 2021 was approximately $21.4$1.3 million, which was due primarily to:
● | $0.4 million net loss adjusted for non-cash related items consisting primarily of stock-based compensation expense of $1.8 million, $0.6 million non-cash changes in ROU assets, $0.5 million amortization of capitalized contract costs, $0.4 million depreciation and amortization and $0.2 million of provision for credit losses. | |
● | $10.2 million cash generated as a result of an increase in accrued liabilities; | |
● | $0.5 million cash generated due to an increase in deferred revenue; partially offset by | |
● | $6.0 million cash used as a result of an increase in Inventory; | |
● | $2.4 million cash used as a result of an increased accounts receivable; | |
● | $1.7 million cash used due to a decrease in accounts payable; | |
● | $1.6 million cash used as a result of an increase in other current assets and prepaid expenses; | |
● | $0.6 million cash used as a result of a decrease in operating lease liabilities; and | |
● | $0.5 million cash used as a result of an increase in other long-term assets. |
Cash Flows from Investing Activities
Net cash provided by investing activities was $49,000 in the three months ended March 31, 2021, which was attributable primarily to:
● | $101,000 of cash used to purchase property, equipment, and software. |
Cash Flows from Financing Activities
Net cash provided by financing activities was $116.7 million in the three months ended March 31, 2021, which was primarily due to:
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Net cash used in operating activities in the nine months ended September 30, 2019 was approximately $6.2 million, which was primarily due to:
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Cash Flows from Investing Activities
Net cash used in investing activities was $6.2 million in the nine months ended September 30, 2020, which was primarily due to:
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Net cash provided by investing activities was $2.7 million in the nine months ended September 30, 2019, which was primarily due to:
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Cash Flows from Financing Activities
Net cash provided by financing activities was $30.7 million in the nine months ended September 30, 2020, which was primarily due to:
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Net cash used in financing activities was $0.4 million in the nine months ended September 30, 2019, 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 $42.4$164.9 million as of September 30, 2020.March 31, 2021. For the first ninethree months of 2020,2021, the Company’s principal source of liquidity is cash generated$133.5 million of net proceeds from proceeds received from its April 2020 offering, the PPP loan, maturity and salesissuance of marketable investmentsthe Company’s notes, partially offset by $16.1 million in premiums paid at the same time for separate capped call transactions, and cash generated from the issuance of common stock through exercise of stock options and 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 Act (the “CARES Act”(“CARES”). Act. There are risksrisk and uncertaintiesuncertainty regarding the PPP loanLoan as the Company may be deemed ineligible to receive the PPP loan,Loan, and the Company may be required to repay the PPP loanLoan in its entirety and could be subject to penalties. In addition, with respect to any portion of the PPPSBA loan not forgiven, the Company may default on payment or breach provisions of the loan. The Company applied the proceeds of the loan to the list of enumerated items covered under the CARES Act that allow for a significant portion of the loan to be forgiven. However the Company can provide no assurance that the loan will be forgiven. The PPP loan will be derecognized upon repayment of the loan in accordance with it terms and/or upon confirmation of forgiveness from the SBA.
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. The Company’s obligations under the Loan and Security Agreement are secured by substantially all of the assets of the Company. As of September 30, 2020, no amounts were drawn on the revolving loan facility.Loan.
The Company believesbelieve that the existing cash resources areand cash equivalents and the cash available under the revolving credit facility will be sufficient to meet the Company’s anticipated cash needs for working capital and capital expenditures for at least the next 12 months, but there can be no assurances.foreseeable future.
CommitmentsDebt
In March 2021, the Company issued $138.3 million of convertible notes due on March 15, 2026 in a private placement offering. The Convertible notes bear interest at a rate of 2.25% per year payable semiannually in arrears on March 15 and Contingencies
AsSeptember 15 of each year, beginning on September 15, 2021. The Convertible notes are presented as long-term debt, net of debt discount. Proceeds from the dateoffering were $133.5 million, net of this report, thereissuance costs, including underwriters’ fees, which were no material changes to the Company’s contractual obligations and commitments outside the ordinary course of business since March 16, 2020, as reportedrecorded in the Company’s Annual Report on 2019 Form 10-K, as amended in Form 10-K/A filed on April 14, 2020.
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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, 2019, filed with the SEC on March 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 and 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 September 30, 2020 was approximately 0.2 years. If interest rates rise, the market value of its 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.
Loan and Security AgreementCondensed consolidated balance sheet.
On July 9, 2020, the Company terminated its undrawn revolving line of credit with Wells Fargo Bank, N.A. and the Company and Silicon Valley Banksubsequently entered into a Loan and Security Agreement.Agreement with Silicon Valley Bank. The agreement provides for a four-year secured revolving loan facility (“SVB Revolving Line of Credit”) in an aggregate principal amount of up to $30.0 million. See Note 13 – Debt in the accompanying notes to consolidated financial statements for more information.
In order to draw onconnection with the full amount,offering, the Company must satisfy certain liquidity ratios.entered into Amendment No. 1 to Loan and Security Agreement on March 4, 2021, which amends the Company’s Loan and Security Agreement, dated as of July 9, 2020 between the Company, as borrower, and Silicon Valley Bank. The Company’s obligations underAmendment amends the Loan and Security Agreement are secured by substantially all of the assets of the Company. On the same day,to (i) permit the Company terminatedto issue the Convertible notes and perform its undrawn revolving line of credit with Wells Fargo Bank, N.A. Interest on principal amount outstanding underobligations in connection therewith, and (ii) permit the revolving line shall accrue at a floating per annum rate equal to the greater of 1.75% above the Prime Rate and five percent (5.0%). The Company is required to pay a non-refundable revolving line commitment fee of $0.3 million, on effective date of the Loan and Security Agreement (July 9, 2020), and an anniversary fee of $0.3 million for each twelve (12) month anniversary of the effective date of the Loan and Security Agreement. The revolving line matures on July 9, 2024. As of September 30, 2020, the Company had not drawn on the credit facility.Capped Call transactions.
The Loan and Security Agreement with Silicon Valley Bank contains customary affirmative covenants, such as financial statement reporting requirements and delivery of borrowing base certificates, as well as customary covenants that restrict ourthe Company’s ability to, among other things, incur additional indebtedness, sell certain assets, guarantee obligations of third parties, declare dividends, or make certain distributions, and undergo a merger or consolidation or certain other transactions. The Loan and Security Agreement also contains certain financial condition covenants, including maintaining a quarterly minimum revenue of $90.0 million, determined in accordance with GAAP on a trailing twelve (12) monthtwelve-month basis. This quarterly minimum revenue requirement is currently being renegotiated with SVB as of March 31, 2021.
On March 4, 2021, the Loan and Security Agreement dated July 9, 2020 was amended to (i) permit the Company to issue the Convertible notes and perform its obligations in connection therewith, and (ii) permit the Capped Call transactions.
As of March 31, 2021, the Company had not drawn on the SVB Revolving Line of Credit and the Company is in compliance with all financial covenants of the SVB Revolving Line of Credit.
Commitments and Contingencies
As of the date of this report, there were no material changes to the Company’s contractual obligations and commitments outside the ordinary course of business since March 23, 2021, as reported in the Company’s Annual Report on 2020 Form 10-K.
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, 2020, filed with the SEC on March 23, 2021 and other announcements the Company makes from time to time.
Interest Rate and Market Risk
As of March 31, 2021, the Company had not drawn on the Original Revolving Line of 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 Prime rate. The Prime rate was 3.25% as of March 31, 2021, and accordingly the Company may incur additional expenses if the Company has an outstanding balance on the line of credit and the Prime 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 re-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.
ITEM 4. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
An evaluation as of September 30, 2020March 31, 2021 was carried out under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), of the effectiveness of the Company’s “disclosure controls and procedures.” Rule 13a-15(e) under the Exchange Act defines “disclosure controls and procedures” as controls and other procedures of a company that are designed to ensure that the information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the company’s management, including its CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure. Based upon that evaluation, the Company’s CEO and CFO concluded that the Company’s disclosure controls and procedures were effective at September 30, 2020.March 31, 2021.
Attached as exhibits to this Quarterly Report are certifications of the Company’s CEO and CFO, which are required in accordance with Rule 13a-14 of the Exchange Act. This Controls and Procedures section includes the information concerning the controls evaluation referred to in the certifications, and it should be read in conjunction with the certifications for a more complete understanding of the topics presented.
Changes in Internal Control over Financial Reporting
The Company implemented certain controls related to the adoption of FASB ASC 326 Financial Instruments – Credit Losses, effective January 1, 2020.Convertible notes issued in the three months ended March 31, 2021. These controls were designed and implemented to ensure the completeness and accuracy over financial reporting. With the exception of thethese additional controls, implemented for FASB ASC 326 Financial Instruments – Credit Losses, and Controls over lessor arrangements, there were no changes in the Company’s internal control over financial reporting during the ninethree months ended September 30, 2020March 31, 2021 that have materially affected, or are reasonably likely to materially affect, the 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 Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation as of the end of the period covered by this report, that the Company’s disclosure controls and procedures were effective to provide reasonable assurance that the objectives of the Company’s disclosure control system were met.
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 tosee Note 1112 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, 2019,2020, filed with the SEC on March 16, 2020, as amended on April 14, 2020.23, 2021.
RISK FACTORS |
Other than as set forth below, thereThere 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, 2019,2020, filed with the SEC on March 16, 2020, and amended in a filing with the SEC on Form 10-K/A on April 14, 2020.
Investing in the Company’s common shares involves a high degree of risk. The following risk factors describe circumstances or events that could have a negative effect on to the Company business, financial condition or operating results. You should consider the following risks carefully, together with all the other information in this Quarterly Report on Form 10-Q, including to the Company's consolidated financial statements and notes thereto, before you invest in Company’s common shares. If any of the following risks occur, the Company’s business, financial condition, or operating results could be adversely affected. As a result, the trading price of our common shares could decline, and you could lose part or all of your investment. Additional risks and uncertainties not currently known to the Company or that the Company currently believe are not material could also impair to the Company’s business, financial condition or operating results
Risk Related to COVID-19
The COVID-19 pandemic has, and may for the foreseeable future, materially and adversely affected our business and our financial results. The COVID-19 pandemic has materially and adversely impacted our business and we expect the impact to continue through at least the duration of the pandemic as regions respond to local conditions. To date, the impact includes: a) the deferral of procedures using our products, b) disruptions or restrictions on the ability of many of the Company's employees and of third parties on which we rely, to work effectively, including “stay-at-home” orders and similar government actions; and c) temporary closures of our facilities and of the facilities of the Company's customers and suppliers.
As jurisdictions throughout the world continue to respond to the pandemic, the degree of the foregoing impacts may increase in scope or magnitude or the Company may experience additional adverse effects in one or more regions. Any other outbreaks of contagious diseases or other adverse public health developments in countries where the Company operates or where its customers or suppliers are located could also have a material and adverse effect on its business, financial condition and results of operations.
Due to the COVID-19 pandemic, customers and their patients have been, and in certain regions continue to be, required, or are choosing, to defer elective procedures in which the Company's products otherwise could be used, and many facilities that specialize in the procedures in which the Company's products otherwise could be used have temporarily closed and in some cases continue to be temporarily closed or operating at reduced hours. In addition, even after the pandemic subsides or governmental orders no longer prohibit or recommend against performing such procedures, patients may continue to defer such procedures due to personal concerns. Further, facilities at which its products typically are used may not reopen or, even if they reopen, patients may elect to have procedures performed at facilities that are, or are perceived to be, lower-risk, such as private surgery centers, and the Company's products may not be approved at such facilities, and the Company may be unable to have the Company's products approved for use at such facilities on a timely basis, or at all. The effect of the pandemic on the broader economy could also negatively affect demand for elective procedures using its products, both in the near- and long-term. Workforce limitations and travel restrictions resulting from government actions taken to contain the spread of COVID-19 have and will continue to adversely affect almost every aspect of its business. If a significant percentage of the Company's workforce, or of the workforce of third parties on which the Company relies, cannot work, including because of illness or travel or government restrictions, its operations will be negatively affected. Because of government restrictions and social distancing guidelines in many countries around the world, there is an increased reliance on working from home for the Company's workforce and on the workforce of third parties on which the Company rely. For example, most of the Company's sales personnel and third party agents currently are working largely using virtual and online engagement tools and tactics, which may be less effective than its typical in-person sales and marketing programs. In addition, the Company reduced access to its hands-on customer trainings, which, in turn, adversely impacted the Company's ability to educate and train customers on the proper use of the Company's products, which may make surgeons less comfortable using, and therefore less likely to use, the Company's products. The Company expects that “stay-at-home” orders will also limit its ability to develop, and therefore launch, the products the Company believes will drive our future revenue growth on the timelines the Company anticipated previously, or at all, and could also delay the planned launch of products in 2021 and beyond. It may also cause the Company not to submit required filings on its previous time tables, including with the FDA, or other regulatory bodies, both in the U.S. and outside the U.S. The continued spread of COVID-19 has adversely impacted the Company's clinical trial operations in the United States. In addition, changes impacting workforce function at the FDA and other regulatory bodies, as well as changes impacting workforce function at the facilities at which the Company seeks to have new products approved for use, could adversely impact the timing of when the Company's new products are cleared for marketing and approved for use, either of which would adversely impact the timing of its ability to sell these new products and would have a material and adverse effect on the Company's revenue growth.
Further, disruptions in the manufacture and distribution of the Company's products or in its supply chain may occur as a result of the COVID-19 pandemic, including for the reasons above, or other events that result in staffing shortages, production slowdowns, stoppages, or disruptions in delivery systems, any of which could materially and adversely affect the Company's ability to manufacture or distribute its products, or to obtain the raw materials and supplies necessary to manufacture and distribute our products, in a timely manner, or at all.
The Company may also experience other unknown adverse impacts from COVID-19 that cannot be predicted. For example, customers and other facilities at which the Company sells its products may renegotiate their purchase prices, including as a result of, or the perception that they may be suffering, financial difficulty as a result of the pandemic. Similarly, facilities at which the Company seeks to sell its products in the future may require price reductions relative to the price at which the Company previously expected to sell its products. Reduction in the prices at which the Company sells products to existing customers may have a material and adverse effect on its future financial results and reductions in the prices at which the Company expected to sell products would have a material and adverse effect on its expectations for revenue growth.
Further, the global capital markets experienced, and the Company expects will continue to experience, disruption and volatility due to the COVID-19 pandemic, adversely impacting access to capital not only for the Company, but also for its customers and suppliers who need access to capital. Their inability to access capital in a timely manner, or at all, could adversely impact demand for its products and/or adversely impact its ability to manufacture or supply its products, any of which could have a material and adverse effect on the Company's business.
The 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 (the “CARES Act”). The Company believes that the current economic uncertainty makes the loan necessary to support ongoing operations.
The application for these funds required the Company to, in good faith, certify that the current economic uncertainty made the loan request necessary to support the ongoing operations of the Company. Subsequently released guidance instructs all applicants and recipients to take into account their current business activity and the Company's ability to access other sources of liquidity sufficient to support ongoing operations in a manner that is not significantly detrimental to their business. On April 28, 2020, in press conference remarks, the Secretary of the U.S. Department of the Treasury stated that the SBA intends to perform a review of PPP loans over $2.0 million. The required certification made by the Company is subject to interpretation. If, despite the good-faith belief that given the Company’s circumstances the Company satisfied all eligible requirements for the PPP loan, it is later determined the Company was ineligible to apply for and receive the PPP loan, the Company may be required to repay the PPP loan in its entirety and the Company could be subject to additional penalties.
The loan, which is in the form of a promissory note, dated April 21, 2020, between the Company and Silicon Valley Bank as the lender (the “Loan”), matures on April 21, 2022 and bears interest at a fixed rate of 1.00% per annum, payable monthly commencing in 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 can be provided that the Company will obtain forgiveness of the Loan in whole or in part. With respect to any portion of the Loan that is not forgiven, the Loan will be subject to customary provisions for a loan of this type, including customary events of default relating to, among other things, payment defaults and breaches of the provisions of the Loan. The PPP loan will be derecognized upon repayment of the loan in accordance with 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 late 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 outbreak, 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. Twenty-two percent (22%) of the workforce was impacted as of the third quarter of 2020. 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 thefourthquarter of 2020, compared to the third 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 180-240 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.
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 $37.00 per share to $18.97 per share as of the closing of September 30, 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.
Covenants in the Loan and Security Agreement governing our revolving credit facility may restrict our operations, and if we do not effectivelymanage our business to comply with these covenants, our financial condition could be adversely impacted
The Company entered into a Loan and Security Agreement with Silicon Valley Bank in July 2020, which provides for a four-year secured revolving loan facility in an aggregate principal amount of up to $30.0 million. The term loan and revolving credit facility contains various restrictive covenants, including, among other things, minimum liquidity and revenue requirements, restrictions on our ability to dispose of assets, make acquisitions or investments, incur debt or liens, make distributions to our stockholders, or enter into certain types of related party transactions. These restrictions may restrict our current and future operations, particularly our ability to respond to certain changes in our business or industry, or take future actions. Pursuant to the Loan and Security Agreement, we granted the parties thereto a security interest in substantially all of our assets. See Note 13 of the notes to our consolidated financial statements and the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources Loan and Security Agreement” in Part II, Item 7 of this Quarterly Report on Form 10-Q. The Company's ability to meet these restrictive covenants can be impacted by events beyond the Company's control and we may be unable to do so. The Company's Loan and Security Agreement provide that our breach or failure to satisfy certain covenants constitutes an event of default. Upon the occurrence of an event of default, the Company's lenders could elect to declare all amounts outstanding under its debt agreements to be immediately due and payable. In addition, our lenders would have the right to proceed against the assets we provided as collateral pursuant to the Loan and Security Agreement. If the debt under our Loan and Security Agreement was to be accelerated, we may not have sufficient cash on hand or be able to sell sufficient collateral to repay it, which would have an immediate adverse effect on our business and operating results.
23, 2021.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
None.The Company issued $138.3 million of Convertible notes in a private placement offering on March 5, 2021. The notes bear interest at a rate of 2.25% per year. In connection with issuance of the notes, the Company entered into capped call transactions with certain option counterparties. The capped call transactions are generally expected to reduce the potential dilution of the Company's common stock upon any conversion of the Notes. The capped calls were purchased for $16.1 million.
DEFAULTS UPON SENIOR SECURITIES |
None.
MINE SAFETY DISCLOSURES |
None.
OTHER INFORMATION |
None.
EXHIBITS |
Exhibit No. | Description | |
3.2 | ||
3.4 | ||
4.1 | ||
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| Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1 | ||
| Instance Document | |
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| Inline XBRL Taxonomy Extension Schema Document | |
101.cal | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
101.def | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
101.lab | Inline XBRL Taxonomy Extension Label Linkbase Document | |
101.pre | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
104 | Cover Page Interactive Data File (formatted as |
Pursuant to the requirements of Section 13 or 15(d) of The Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Brisbane, State of California, on the 9th10th day of November, 2020. May, 2021.
CUTERA, INC. | |
/S/ | |
Rohan Seth | |
Chief Financial Officer | |
(Principal Financial and Accounting Officer) |