☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
2021
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
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| Delaware | 77-0492262 | ||||
| (State or other jurisdiction of incorporation or
| (I.R.S. Employer Identification No.) | ||||
| 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 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 ☒x No ☐
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| Large accelerated filer | ☐ | Accelerated filer | ☒ | Non-accelerated filer | ☐ | Smaller reporting company | ☐ | Emerging growth company | ☐ | ||||||||||||||||||||
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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.
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®.ITEM 1.FINANCIAL STATEMENTS (UNAUDITED)
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2020 | December 31, 2019 | September 30, 2021 | December 31, 2020 | ||||||||||||||||
Assets | Assets | ||||||||||||||||||
Current assets: | Current assets: | ||||||||||||||||||
Cash and cash equivalents | $ | 29,394 | $ | 26,316 | Cash and cash equivalents | $ | 162,486 | $ | 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 $1,227 and $1,598, respectively | Accounts receivable, net of allowance for credit losses of $1,227 and $1,598, respectively | 30,760 | 21,962 | ||||||||||||||||
Inventories | 29,333 | 33,921 | Inventories | 35,493 | 28,508 | ||||||||||||||
Other current assets and prepaid expenses | 6,892 | 5,648 | Other current assets and prepaid expenses | 13,350 | 8,779 | ||||||||||||||
Total current assets | 96,262 | 95,046 | Total current assets | 242,089 | 106,296 | ||||||||||||||
Property and equipment, net | 2,391 | 2,817 | Property and equipment, net | 2,205 | 2,299 | ||||||||||||||
Deferred tax asset | 500 | 423 | Deferred tax asset | 589 | 643 | ||||||||||||||
Operating lease right-of-use assets | 17,645 | 7,702 | Operating lease right-of-use assets | 15,269 | 17,076 | ||||||||||||||
Goodwill | 1,339 | 1,339 | Goodwill | 1,339 | 1,339 | ||||||||||||||
Other long-term assets | 5,290 | 6,411 | Other long-term assets | 6,955 | 5,080 | ||||||||||||||
Total assets | $ | 123,427 | $ | 113,738 | Total assets | $ | 268,446 | $ | 132,733 | ||||||||||
Liabilities and Stockholders' Equity | Liabilities and Stockholders' Equity | ||||||||||||||||||
Current liabilities: | Current liabilities: | ||||||||||||||||||
Accounts payable | $ | 6,799 | $ | 12,685 | Accounts payable | $ | 7,259 | $ | 6,684 | ||||||||||
Accrued liabilities | 25,644 | 30,307 | Accrued liabilities | 44,295 | 32,295 | ||||||||||||||
Operating lease liabilities | 1,608 | 2,800 | Operating lease liabilities | 2,394 | 2,260 | ||||||||||||||
Extended warranty liability | 1,497 | 1,999 | |||||||||||||||||
| PPP loan payable | PPP loan payable | — | 3,630 | ||||||||||||||||
Deferred revenue | 9,580 | 10,831 | Deferred revenue | 9,188 | 9,489 | ||||||||||||||
Total current liabilities | 45,128 | 58,622 | Total current liabilities | 63,136 | 54,358 | ||||||||||||||
Deferred revenue, net of current portion | 2,244 | 3,391 | Deferred revenue, net of current portion | 1,492 | 1,748 | ||||||||||||||
Income tax liability | 93 | 93 | |||||||||||||||||
Long-term debt | 7,167 | 0 | |||||||||||||||||
Operating lease liabilities, net of current portion | 16,497 | 5,112 | Operating lease liabilities, net of current portion | 14,117 | 15,950 | ||||||||||||||
| PPP loan payable, net of current portion | PPP loan payable, net of current portion | — | 3,555 | ||||||||||||||||
| Convertible notes, net of unamortized debt issuance costs of $4,225 | Convertible notes, net of unamortized debt issuance costs of $4,225 | 134,025 | — | ||||||||||||||||
Other long-term liabilities | 292 | 578 | Other long-term liabilities | 333 | 242 | ||||||||||||||
Total liabilities | 71,421 | 67,796 | Total liabilities | 213,103 | 75,853 | ||||||||||||||
Commitments and Contingencies (Notes 11 and 12) | |||||||||||||||||||
| Commitments and Contingencies (Notes 12) | Commitments and Contingencies (Notes 12) | 0 | 0 | ||||||||||||||||
Stockholders’ equity: | 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: 17,951,534 and 17,679,232 shares at September 30, 2021 and December 31, 2020, respectively | Common stock, $0.001 par value; authorized: 50,000,000 shares; issued and outstanding: 17,951,534 and 17,679,232 shares at September 30, 2021 and December 31, 2020, respectively | 18 | 18 | ||||||||||||||||
Additional paid-in capital | 114,410 | 82,346 | Additional paid-in capital | 109,563 | 117,097 | ||||||||||||||
Accumulated deficit | (62,423 | ) | (36,358 | ) | Accumulated deficit | (54,238) | (60,235) | ||||||||||||
Accumulated other comprehensive income (loss) | 1 | (60 | ) | ||||||||||||||||
Total stockholders’ equity | 52,006 | 45,942 | Total stockholders’ equity | 55,343 | 56,880 | ||||||||||||||
Total liabilities and stockholders’ equity | $ | 123,427 | $ | 113,738 | Total liabilities and stockholders’ equity | $ | 268,446 | $ | 132,733 | ||||||||||
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Nine Months Ended September 30, September 30, 2020 2019 2020 2019 Net revenue: Products Service Total net revenue Cost of revenue: Products Service Total cost of revenue Gross profit Operating expenses: Sales and marketing Research and development General and administrative Total operating expenses Loss from operations Other expense Loss before income taxes Income tax expense (benefit) Net loss Net loss per share: Basic and Diluted Weighted-average number of shares used in per share calculations Basic and Diluted Three Months Ended
September 30,Nine Months Ended
September 30, 2021 2020 2021 2020 Net revenue: $ 33,254 $ 40,315 $ 81,390 $ 113,045 Products $ 50,694 $ 33,254 $ 146,056 $ 81,390 5,878 5,802 16,350 16,872 Service 6,690 5,878 19,585 16,350 39,132 46,117 97,740 129,917 Total net revenue 57,384 39,132 165,641 97,740 Cost of revenue: 14,017 16,343 40,326 50,278 Products 20,259 14,017 59,483 40,326 3,369 3,541 9,708 10,266 Service 3,700 3,369 11,234 9,708 17,386 19,884 50,034 60,544 Total cost of revenue 23,959 17,386 70,717 50,034 21,746 26,233 47,706 69,373 Gross profit 33,425 21,746 94,924 47,706 Operating expenses: 12,286 17,691 38,109 50,786 Sales and marketing 19,190 12,286 52,668 38,109 3,432 3,643 10,294 10,622 Research and development 5,802 3,432 14,764 10,294 7,239 7,308 23,575 18,100 General and administrative 7,807 7,239 23,633 23,575 22,957 28,642 71,978 79,508 Total operating expenses 32,799 22,957 91,065 71,978 (1,211 ) (2,409 ) (24,272 ) (10,135 ) (382 ) (146 ) (586 ) (180 ) (1,593 ) (2,555 (24,858 ) (10,315 ) 664 73 1,207 (55 ) $ (2,257 ) $ (2,628 ) $ (26,065 ) $ (10,260 ) Income (loss) from operations Income (loss) from operations 626 (1,211) 3,859 (24,272) Interest and other income (expense), net: Interest and other income (expense), net: Amortization of debt issuance costs Amortization of debt issuance costs (225) — (492) — Interest on convertible notes Interest on convertible notes (768) — (1,737) — Gain on extinguishment of PPP loan Gain on extinguishment of PPP loan — — 7,185 — Other expense, net Other expense, net (561) (382) (1,976) (586) Total interest and other income (expense), net Total interest and other income (expense), net (1,554) (382) 2,980 (586) Income (loss) before income taxes Income (loss) before income taxes (928) (1,593) 6,839 (24,858) Income tax expense Income tax expense 462 664 842 1,207 Net income (loss) Net income (loss) $ (1,390) $ (2,257) $ 5,997 $ (26,065) $ (0.13 ) $ (0.19 ) $ (1.59 ) $ (0.73 ) 17,603 14,182 16,368 14,095 Net income (loss) per share: Net income (loss) per share: Basic Basic $ (0.08) $ (0.13) $ 0.34 $ (1.59) Diluted Diluted $ (0.08) $ (0.13) $ 0.33 $ (1.59) Weighted-average number of shares used in per share calculations: Weighted-average number of shares used in per share calculations: Basic Basic 17,945 17,603 17,860 16,368 Diluted Diluted 17,945 17,603 18,327 16,368
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
INCOME (LOSS) Three Months Ended Nine Months Ended September 30, September 30, 2020 2019 2020 2019 Net loss Other comprehensive income: Available-for-sale investments Net change in unrealized gain (loss) on available-for-sale investments Less: Reclassification adjustment for (gains) losses on investments recognized during the period Net change in unrealized gain on available-for-sale investments Other comprehensive gain (loss), net of tax Comprehensive loss $ (2,257 ) $ (2,628 ) $ (26,065 ) $ (10,260 ) (2 ) 1 (2 ) 10 0 0 63 0 (2 ) 1 61 10 (2 ) 1 61 10 $ (2,259 ) $ (2,627 ) $ (26,004 ) $ (10,250 ) Three Months Ended
September 30,Nine Months Ended
September 30,2021 2020 2021 2020 Net income (loss) $ (1,390) $ (2,257) $ 5,997 $ (26,065) Other comprehensive gain: Available-for-sale investments Net change in unrealized gain (loss) on available-for-sale investments — (2) — (2) Reclassification adjustment for losses on investments recognized during the period — — — 63 Net change in unrealized gain (loss) on available-for-sale investments — (2) — 61 Other comprehensive gain (loss), net of tax — (2) — 61 Comprehensive income (loss) $ (1,390) $ (2,259) $ 5,997 $ (26,004)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ STOCKHOLDERS’ EQUITY
| Common Stock | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Income (loss) | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | 17,679,232 | $ | 18 | $ | 117,097 | $ | (60,235) | $ | — | $ | 56,880 | ||||||||||||||||||||||||
| Issuance of common stock for employee purchase plan | 38,991 | — | 648 | — | — | 648 | |||||||||||||||||||||||||||||
| Exercise of stock options | 57,498 | — | 1,408 | — | — | 1,408 | |||||||||||||||||||||||||||||
| Purchase of capped call | — | — | (16,134) | — | — | (16,134) | |||||||||||||||||||||||||||||
| Issuance of common stock in settlement of restricted and performance stock units, net of shares withheld for employee taxes | 175,813 | — | (1,963) | — | — | (1,963) | |||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | 8,507 | — | — | 8,507 | |||||||||||||||||||||||||||||
| Net income | — | — | — | 5,997 | — | 5,997 | |||||||||||||||||||||||||||||
| Balance at September 30, 2021 | 17,951,534 | $ | 18 | $ | 109,563 | $ | (54,238) | $ | — | $ | 55,343 | ||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Income (loss) | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balance at July 1, 2021 | 17,933,020 | $ | 18 | $ | 106,173 | $ | (52,848) | $ | — | $ | 53,343 | ||||||||||||||||||||||||
| Issuance of common stock for employee purchase plan | — | — | 3 | — | — | 3 | |||||||||||||||||||||||||||||
| Exercise of stock options | 3,900 | — | 156 | — | — | 156 | |||||||||||||||||||||||||||||
| Issuance of common stock in settlement of restricted and performance stock units, net of shares withheld for employee taxes | 14,614 | — | (511) | — | — | (511) | |||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | 3,742 | — | — | 3,742 | |||||||||||||||||||||||||||||
| Net loss | — | — | — | (1,390) | — | (1,390) | |||||||||||||||||||||||||||||
| Balance at September 30, 2021 | 17,951,534 | $ | 18 | $ | 109,563 | $ | (54,238) | $ | — | $ | 55,343 | ||||||||||||||||||||||||
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 | 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 | ||||||||||||
Common Stock | Additional Paid-in | Retained Earnings (Accumulated | Accumulated Other Comprehensive | Total Stockholders’ | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Capital | Deficit) | Income (loss) | Equity | Common Stock | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Income (loss) | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at July 1, 2019 | 14,142,296 | $ | 14 | $ | 74,870 | $ | (31,642 | ) | $ | (60 | ) | $ | 43,182 | ||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2019 | Balance at December 31, 2019 | 14,315,586 | $ | 14 | $ | 82,346 | $ | (36,358) | $ | (60) | $ | 45,942 | |||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for employee purchase plan | Issuance of common stock for employee purchase plan | 39,248 | — | 437 | — | — | 437 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Exercise of stock options | 38,966 | ─ | 437 | ─ | ─ | 437 | Exercise of stock options | 46,878 | — | 419 | — | — | 419 | ||||||||||||||||||||||||||||||||||||||||||||||
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 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock in settlement of restricted and performance stock units, net of shares withheld for employee taxes | 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) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock in connection with public offering, net of offering cost of $2,303 | Issuance of common stock in connection with public offering, net of offering cost of $2,303 | 2,742,750 | 3 | 26,492 | — | — | 26,495 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation expense | ─ | ─ | 3,178 | ─ | ─ | 3,178 | Stock-based compensation expense | — | — | 8,057 | — | — | 8,057 | ||||||||||||||||||||||||||||||||||||||||||||||
Net loss | ─ | ─ | ─ | (2,628 | ) | ─ | (2,628 | ) | Net loss | — | — | — | (26,065) | — | (26,065) | ||||||||||||||||||||||||||||||||||||||||||||
Net change in unrealized loss on available-for-sale investments | ─ | ─ | ─ | ─ | 1 | 1 | Net change in unrealized loss on available-for-sale investments | — | — | — | — | 61 | 61 | ||||||||||||||||||||||||||||||||||||||||||||||
Balance at September 30, 2019 | 14,199,821 | $ | 14 | $ | 78,305 | $ | (34,270 | ) | $ | (59 | ) | $ | 43,990 | ||||||||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2020 | 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 | Common Stock | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Income (loss) | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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 July 1, 2020 | Balance at July 1, 2020 | 17,567,688 | $ | 18 | $ | 112,644 | $ | (60,166) | $ | 3 | $ | 52,499 | |||||||||||||||||||||||||||||||||||||||||||||||
Exercise of stock options | 79,420 | ─ | 767 | ─ | ─ | 767 | Exercise of stock options | 750 | — | 8 | 8 | ||||||||||||||||||||||||||||||||||||||||||||||||
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 | Issuance of common stock in settlement of restricted and performance stock units, net of shares withheld for employee taxes | 57,411 | — | (224) | — | — | (224) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation expense | ─ | ─ | 7,004 | ─ | ─ | 7,004 | Stock-based compensation expense | — | — | 1,982 | — | — | 1,982 | ||||||||||||||||||||||||||||||||||||||||||||||
Net loss | ─ | ─ | ─ | (10,260 | ) | ─ | (10,260 | ) | Net loss | — | — | — | (2,257) | — | (2,257) | ||||||||||||||||||||||||||||||||||||||||||||
Net change in unrealized loss on available-for-sale investments | ─ | ─ | ─ | ─ | 10 | 10 | Net change in unrealized loss on available-for-sale investments | — | — | — | — | (2) | (2) | ||||||||||||||||||||||||||||||||||||||||||||||
Balance at September 30, 2019 | 14,199,821 | $ | 14 | $ | 78,305 | $ | (34,270 | ) | $ | (59 | ) | $ | 43,990 | ||||||||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2020 | Balance at September 30, 2020 | 17,625,849 | $ | 18 | $ | 114,410 | $ | (62,423) | $ | 1 | $ | 52,006 | |||||||||||||||||||||||||||||||||||||||||||||||
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2020 2019 Cash flows from operating activities: Net loss Adjustments to reconcile net loss to net cash used in operating activities: Stock-based compensation Depreciation of tangible assets Amortization of contract acquisition costs Impairment of capitalized cloud computing costs - Change in deferred tax asset Provision for credit losses Change in right-of-use asset - Other Changes in assets and liabilities: Accounts receivable Inventories Other current assets and prepaid expenses Other long-term assets Accounts payable Accrued liabilities Extended warranty liabilities Other long-term liabilities - Deferred revenue Income tax liabilities - Net cash used in operating activities Cash flows from investing activities: Acquisition of property and equipment Disposal of property and equipment - Proceeds from maturities of marketable investments Purchase of marketable investments Net cash provided by (used in) investing activities Cash flows from financing activities: Proceeds from exercise of stock options and employee stock purchase plan Proceeds from long-term debt - Gross proceeds from equity offering - Offering costs on the equity offering - Taxes paid related to net share settlement of equity awards Payments on finance lease obligations Net cash provided by financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period Supplemental disclosure of non-cash items: Assets acquired under operating lease Nine Months Ended September 30, 2021 2020 Cash flows from operating activities: $ (26,065 ) $ (10,260 ) Net income (loss) Net income (loss) $ 5,997 $ (26,065) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: 8,057 7,004 Stock-based compensation 8,507 8,057 1,056 1,184 Depreciation and amortization Depreciation and amortization 1,014 1,056 2,017 2,169 Amortization of contract acquisition costs 1,430 2,017 Amortization of debt issuance costs Amortization of debt issuance costs 492 — 805 Impairment of capitalized cloud computing costs 182 805 (77 ) (2 ) Change in deferred tax asset 54 (77) 1,750 647 Provision for credit losses 101 1,750 250 Gain on sale of property and equipment Gain on sale of property and equipment (45) — PPP loan forgiveness PPP loan forgiveness (7,185) — Change in right-of-use assets Change in right-of-use assets 1,681 250 327 55 Other — 327 Changes in assets and liabilities: 2,209 (4,232 ) Accounts receivable (8,899) 2,209 4,588 (6,028 ) Inventories (6,926) 4,588 (1,273 ) (1,423 ) Other current assets and prepaid expenses (4,571) (1,273) (1,701 ) (2,608 ) Other long-term assets (3,487) (1,701) (5,886 ) 2,861 Accounts payable 575 (5,886) (4,559 ) 4,900 Accrued liabilities 11,782 (5,061) (502 ) (927 ) (140 ) Operating lease liabilities Operating lease liabilities (1,573) — (2,398 ) 907 Deferred revenue (557) (2,398) (301 ) (21,402 ) (6,194 ) Net cash provided by (used in) operating activities Net cash provided by (used in) operating activities (1,428) (21,402) Cash flows from investing activities: (774 ) (524 ) 45 Acquisition of property, equipment, and software Acquisition of property, equipment, and software (382) (774) Proceeds from disposal of property and equipment Proceeds from disposal of property and equipment 71 — 19,000 11,450 Proceeds from maturities of marketable investments — 19,000 (24,411 ) (8,304 ) Purchase of marketable investments — (24,411) (6,185 ) 2,667 Net cash used in investing activities Net cash used in investing activities (311) (6,185) Cash flows from financing activities: 856 1,600 Proceeds from exercise of stock options and employee stock purchase plan 2,056 856 7,167 28,798 (2,303 ) Purchase of capped call Purchase of capped call (16,134) — Proceeds from PPP loan Proceeds from PPP loan — 7,167 Proceeds from issuance of Convertible notes Proceeds from issuance of Convertible notes 138,250 — Payment of issuance costs of Convertible notes Payment of issuance costs of Convertible notes (4,717) — Proceeds from equity offering Proceeds from equity offering — 28,798 Cost of equity offering Cost of equity offering — (2,303) (3,340 ) (750 ) Taxes paid related to net share settlement of equity awards (1,963) (3,340) (513 ) (496 ) Payments on finance lease obligations (314) (513) 30,665 354 Net cash provided by financing activities 117,178 30,665 3,078 (3,173 ) Net increase in cash and cash equivalents Net increase in cash and cash equivalents 115,439 3,078 26,316 26,052 Cash and cash equivalents at beginning of period 47,047 26,316 $ 29,394 $ 22,879 Cash and cash equivalents at end of period $ 162,486 $ 29,394 Supplemental disclosure of non-cash items: Assets acquired under finance lease $ 27 $ 903 Assets acquired under finance lease $ 271 $ 27 $ 10,623 $ 11,734 Assets acquired under operating lease $ 123 $ 10,623 Gain on extinguishment of PPP loan Gain on extinguishment of PPP loan $ 7,185 $ — Supplemental disclosure of cash flow information: Supplemental disclosure of cash flow information: Income tax paid Income tax paid $ 763 $ —
updated to conform with current year presentation. All significant intercompany accounts and transactions have been eliminated upon consolidation. The accompanying condensed consolidated financial statements should be read in conjunction with the Company’s previously filed audited financial statements and the related notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2020 filed with the Securities and Exchange Commission (the “SEC”) on March 23, 2021. flows. 23, 2021. 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.FraxisSecret PRO, Juliet, Secret RF,truSculpt andxeo. Several of the Company’s systems offer multiple hand pieces and applications, providing customers the flexibility to upgrade their systems. The sales of (i) systems, system upgrades, and hand pieces (collectively “Systems” revenue); (ii) replacement hand pieces,Titan, truSculpt3D, 3D,truSculpt iD andtruSculpt flex cycle refills, as well as single use disposable tips applicable to FraxisSecret PRO JulietandSecret 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 ProductsProduct 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 flexflex) and service labor for the repair and maintenance of products that are out of warranty, all of which are collectively classified as “Service” revenue.selectionselect 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’sits products through directits sales and service employees in North America (including Canada), Australia, Austria, Belgium, France, Germany, Hong Kong, Japan, the Netherlands, 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 condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All inter-company transactionseliminated. 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.On January 30,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-19COVID-19 outbreak a pandemic. The COVID-19COVID-19 outbreak ishas negatively affectingaffected the United States and global economies. AsThough the COVID-19 outbreak continued toeconomy is gradually recovering as of the third quarter of 2021, the timing and extent of a full global economic recovery is still uncertain. The spread governmental authorities ordered quarantines, shelter-in-place,of the coronavirus and the Delta variant in particular, has impacted the global economy broadly in 2020 and 2021, including restrictions on travel, shifting workconduct ofCompany’s business operations related toduring the COVID-19 outbreak. In certain geographies, these measures remainyear ended December 31, 2020 and in place on some level,the nine months ended September 30, 2021. Healthcare facilities in many countries effectively banned elective procedures and these measures and restrictionsthis had and continue to have, ana significant impact on the Company's business. The COVID-19 impact,Company. 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. The COVID-19 outbreak also impactedAlthough the Company’s resultsrevenues and profits have improved compared to the first three quarters of operations during the nine months ended September 30, 2020. The Company expects the COVID-19 outbreak to continue to affect its operations and those of third parties on which the Company relies, which could cause disruptions in the Company’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 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 fiscal 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 withoverall economic outlook has also improved in 2021, the existing installed base that utilize procedure based consumable products. As a resultCOVID-19 outbreak continues to be fluid especially in light of COVID-19, some of its customers have been required to shelter-in-placethe Delta variant, 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.9In response to the COVID-19 outbreak, the Company took actions to reduce expenses, including discontinuing nonessential services and programs, instituting cost controls on travel and entertainment, implementing further cost-cutting measures and evaluating whether the workforce is able to execute additional efficiency improvements’. For example, the directorslong-term impact on the Company's board of directors agreedbusiness due 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.COVID-19 is still uncertain. The Company also instituted salary reductions forcannot presently predict the remainderscope and severity of its employees and initiated furloughs and subsequent reductions-in-force that initially affected approximately 42%any impacts in future periods from business shutdowns or disruptions due to the COVID-19 pandemic, but the impact on economic activity including the possibility of its workforce. Only 22% ofrecession or financial market instability could have a material adverse effect on the Company’s workforce was impacted as of the third quarter of 2020, as several previously furloughed positions endedbusiness, revenue, operating results, cash flows and the employees have come backfinancial condition.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 were necessary during the nine months ended September 30, 2021, other than an impairment loss of $0.8$0.2 million on capitalized cloud computing costs related to the indefinite delay of the implementation of cloud-based enterprise resource planning software had occurred as of September 30, 2020. customer relationship management ("CRM") software. The Company’s assumptions aboutCompany will continue to monitor 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,which are subject to uncertainty, anduncertainty.will continue to monitor these conditionssell ZO’s skincare products in future periods as new information becomes available, and will update its analyses accordingly.Unaudited Interim Financial InformationInJapan. The reason for the opinionincrease in skincare products sales may have been the result of the Company,COVID-19 pandemic changing customers’ spending habits, resulting in customers purchasing aesthetic treatments that were able to be applied at home, due to limitations on in-person aesthetic procedures. Future growth in sales of skincare products depends on customers maintaining spending habits adopted during the accompanying unaudited condensed consolidated financial statements included in this report reflect all adjustments (consisting of only normal recurring adjustments) necessary forCOVID-19 pandemic. If customers revert to original spending habits after the COVID-19 pandemic, such changes may have a fair statement of its consolidated statements of financial position as of September 30, 2020 and 2019, its consolidated statements ofmaterial adverse effect on the Company’s revenue, operating results, of operations, comprehensive loss, changes in equity, and cash flows for the three and nine months ended September 30, 2020, and 2019. The December 31, 2019 condensed consolidated balance sheet was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles in the United States of America (“GAAP”). The results for interim periods are not necessarily indicative of results for the entire year or any other interim period. Presentation of certain prior year balances have been updated to conform with current year presentation. The accompanying condensed consolidated financial statements should be read in conjunction with the Company’s previously filed audited financial statements and the related notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2019 filed with the Securities and Exchange Commission (the “SEC”) on March 16, 2020, and amended in a filing on Form 10-K/A with the SEC on April 14, 2020.10-K10-K for the year ended December 31, 2019 2020 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.Notesnotes to condensed 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.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.10
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
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
Recently Issued Accounting Pronouncements Not Yet Adopted by the Company
In December 2019, the FASB issued ASU No.2019-12 “Income
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 liquidconvertible debt instruments of U.S. federalby removing the beneficial conversion and municipal governments and their agencies, commercial paper and corporate debt securities. All highly liquid investmentscash conversion separation models for convertible instruments. Under the amendment, the embedded conversion features are no longer separated from the host contract for convertible instruments with stated maturities of three months or less from date of purchaseconversion features that 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 banksnot required 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 andbe accounted for as available-for-sale securities. Investments with remaining maturitiesderivatives or that do not result in substantial premiums accounted for as paid-in capital. The update also amends the accounting for certain contracts in an entity’s own equity that are currently accounted for as derivatives because of more than one year are viewed byspecific settlement provisions. In addition, the Company as available to support current operationsnew guidance modifies how particular convertible instruments and are classified as current assets undercertain contracts that may be settled in cash or shares impact 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 should not reduce the net carrying amountcomputation of the available-for-sale debt security below its fair value. Any changes in fair value unrelated to credit are recognized as an unrealized gain or loss in other comprehensive income.
The following tables summarize the components, and the unrealized gains and losses position, related to the Company’s cash, cash equivalents and marketable investments (in thousands):
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 of 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.diluted earnings per share. The Company has concluded that it is more-likely-than-not thatearly adopted the securities will be held until maturity or the recovery of their cost basis. No securities were in an unrealized loss position for more than 12 months.
guidance on a prospective basis effective January 1, 2021. See Note 13 – Debt.
| (Dollars in thousands) | September 30, 2021 | December 31, 2020 | |||||||||
| Cash and cash equivalents | $ | 162,486 | $ | 47,047 | |||||||
Amount | ||||
Due in less than one year | $ | 13,046 | ||
Due in 1 to 3 years | ─ | |||
Total marketable investments | $ | 13,046 | ||
Fairis 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. including cash and cash equivalents.820, as follows:● 820:● 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-partythird-party data providers. These inputs either represent quoted prices for similar assets in active markets or have been derived from observable market data; and● considersconsidering counterparty credit risk in its assessment of fair value.
As of September 30, 2020, financial assets measured - Debt 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 Level 2 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.
September 30, 2020 December 31, 2019 Raw materials Work in process Finished goods Total September 30, 2020 December 31, 2019 Accrued payroll and related expenses Sales and marketing accruals Inventory accruals Warranty liability (see Note 5) Sales tax Other Total2020 2021 and December 31, 2019, 2020, inventories consist of the following (in thousands): $ 15,627 $ 17,935 1,567 2,016 12,139 13,970 $ 29,333 $ 33,921 Other Long-term Assets During the nine months ended September 30,
2021December 31,
2020Raw materials $ 18,858 $ 14,874 Work in process 1,978 1,030 Finished goods 14,657 12,604 Total $ 35,493 $ 28,508 2020, the Company recognized in general2021 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 LiabilitiesAs of September 30, 2020 and December 31, 2019, 2020, accrued liabilities consist of the following (in thousands): $ 9,121 $ 14,341 2,011 2,527 2,579 1,008 2,924 4,401 3,590 3,922 5,419 4,108 $ 25,644 $ 30,307 September 30,
2021December 31,
2020Bonus and payroll-related accruals $ 18,220 $ 12,197 Sales and marketing accruals 3,515 2,352 Accrued inventory in transit 4,623 2,476 Product warranty 3,926 4,124 Accrued sales tax 7,085 5,343 Other accrued liabilities 6,926 5,803 Total $ 44,295 $ 32,295 1412
Remediation LiabilityDuring 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 consists of cost of materials and labor to replace the component in all units that are under the Company's standard warranty or are covered under the existing extended warranty contracts. The Company recorded a liability of approximately $5.0 million in 2018.As of September 30, 2020 and December 31 2019, approximately $0.5 million of the total product remediation liability balance was accrued as a component of the Company’s product warranty and included in accrued liabilities, and $1.5 million and $2.0 million, respectively, was separately recorded as Extended warranty liabilities.In the nine months ended September 30, 2020, the Company settled $0.5 million 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 were $0.5 million and $1.5 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, Austria, Belgium, France, Germany, Hong Kong, Japan, andthe Netherlands, Spain, 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-partythird-party service providers.
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 table exclude costs related to extended service contracts cost, which were $0.2 million and $0.5 million in the three and nine months ended September 30, 2020, respectively, to replace a component in one of the Company's legacy products.
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Beginning Balance | $ | 4,438 | $ | 4,815 | $ | 4,124 | $ | 6,400 | |||||||||||||||
| Add: Accruals for warranties issued during the period | 803 | 1,274 | 3,970 | 3,234 | |||||||||||||||||||
| Less: Settlements made during the period | (1,315) | (1,668) | (4,168) | (5,213) | |||||||||||||||||||
| Ending Balance | $ | 3,926 | $ | 4,421 | $ | 3,926 | $ | 4,421 | |||||||||||||||
installationtraining and training.extended marketing support services. Approximately 81%86% of the Company’s deferred revenue balance of $11.8$10.7 million as of September 30, 2020 2021 will be recognized over the next 12 months.15
The following table provides changes in the deferred revenue balance for the three and nine months ended September 30, 2020 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 September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Beginning balance | $ | 11,403 | $ | 11,779 | $ | 11,237 | $ | 14,222 | |||||||||||||||
| Add: Payments received | 3,880 | 3,854 | 13,226 | 9,314 | |||||||||||||||||||
| Less: Revenue | (2,576) | (762) | (4,851) | (2,342) | |||||||||||||||||||
| Less: Revenue recognized from beginning balance | (2,027) | (3,047) | (8,932) | (9,370) | |||||||||||||||||||
| Ending balance | $ | 10,680 | $ | 11,824 | $ | 10,680 | $ | 11,824 | |||||||||||||||
respectively.Effective January 1, 2018, the Company recognizes revenue under ASC Topic 606.17% and 13% respectively,12% of the Company’sCompany's total revenue for the three and nine months ended September 30, 2021, and 15% and 17% of the Company's total revenue for the three and nine months ended September 30, 2020, and 2019.system salesystems sales 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 orenergy 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 Pearland 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 Company does not identify calibration and installation services for systems other than enlighten as performance obligations because such services are immaterial in the context of the contract. The related costs to complete calibration and installation for systems other than enlighten are immaterial. Calibration and installation services for enlighten systems are identified as separate performance obligations.at the time ofupon shipment to the distributor.16
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.
upon shipment. Operating lease income was not material for the three and nine months ended September 30, 2021 or 2020. services Options Outstanding Shares Available for Grant Number of Stock Options Outstanding Weighted- Average Exercise Price Balance, December 31, 2019 Additional shares reserved Stock awards granted Options exercised Options canceled Stock awards canceled Balance, September 30, 2020 Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 Cost of revenue Sales and marketing Research and development General and administrative Total stock-based compensation expense Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Numerator: Net loss Denominator: Weighted average shares of common stock outstanding used in computing net income (loss) per share, basic Dilutive effect of incremental shares and share equivalents Weighted average shares of common stock outstanding used in computing net loss per share, diluted Net loss per share: Net loss per share, basic and dilutedthird-partythird-party manufactured skincare products in Japan. The third-party skincare products are purchased from a third-partythird-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. The Company acts as the principal in thisSales 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., as well as replacement hand pieces, Titan and truSculpt 3D hand pieces, and single use disposable tips applicable to Secret PRO, 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 have product 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.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 is classified in Other current assets and prepaid expenses on the condensed consolidated balance sheets (See Note 11) - Leases). Revenue from equipmentThere were no sales-type leases was not material induring the three and nine months ended September 30, 2021 or 2020.service contractsa termterms 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.Significant JudgmentsThe 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.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 service contracts: SSP is based on observable price when sold on a standalone to similar customers.17Loyalty ProgramThe Company launchedhas a customer loyalty program during the third quarter of 2018 for qualified customers located in the U.S., Canada, Australia and Canada.New Zealand. Under the loyalty program, customers accumulate points based on their purchasing levels, whichcustomers accumulate points that can be redeemed for such rewards as the right to attend the Company’s advanced training event for the following quarter. Customers receive a notification regarding their rewards tier by the fifth day of the following quarter. All unused rewards are forfeited. The fair value of the reward earned by loyalty program members is included in accrued liabilities and recorded as a reduction of net revenue at the time the reward is earned. As of September 30, 2020 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.capitalizeddeferred and amortized on a straight-line basis over thean expected period of benefit estimated to be two to three years, 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.2020 2021 and December 31, 2019, respectively,2020 were $3.8 million and $3.4 million, and $4.6 millionrespectively, and are included in Other long-term assets in the Company’s condensed consolidated balance sheet. Amortization expense for these assets was $0.4 million and $1.4 million during the three and nine months ended September 30, 2021, respectively, and was $0.6 million and $2.0 million respectively, during the three and nine months ended September 30, 2020, and $0.8 million and $2.2 million respectively, during the three and nine months ended September 30, 2019.respectively. The amortization expense related to these capitalized costs is included in sales and marketing expense in the Company’s condensed consolidated statement of operations. Stockholders’ Stockholders’ Equity and Stock-based Compensation ExpenseIssuances of Common StockOn 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 CompensationJune 2020, September 2021, stockholders approved an amendment and restatement of the 2019 Equity Incentive Plan (the “Prior Plan”) as the Amended and Restated 2019 Equity Incentive Plan (the “Restated Plan”) and approved an additional 600,000450,000 shares available 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,("PSUs"), and other stock or cash awards.itsthe Company's executive officers, senior management and certain employees 22,423 and 94,101 performance stock units (“PSUs”)463,593 PSUs during the three and nine months ended September 30, 2020, respectively. The PSUs granted in the three and nine months ended September 30, 2020 2021. Of this total, 198,591 units vest subject to the recipients continued service and to theCompany’s achievement of certain operational goals for the Company’s 20202021 fiscal year which consistrelated to product milestones, sales and commercial milestones and certain cost reduction targets. In addition, there is a service requirement related to half of the granted quantity that requires the grant recipient to provide one year of service subsequent to the milestone achievement date.revenue targets for consumable products,milestones associated with each vesting quantity and the achievement of specific product milestones.On April 1, 2020, the Company issued RSUs to settle bonuses owed to managementcontinued service.2019 Management Bonus Program. In the past, the Company has paid these bonuses with cash on hand. However, due to the economic conditions resulting from COVID-19, fully vested shares were issued in lieu of cash. The Company issued 209,981 shares related to this bonus payment to management and recognized $2.6 million in stock-based compensation expense. The Company also recorded an equivalent reduction in bonus expenseCompany's equity incentive plans is summarized as a result of the settlement of the bonus in shares.The Company’s Board of Directors also granted its executive officers, senior management and certain employees follows:Shares
Available
for GrantBalance, December 31, 2020 1,085,170 Additional shares reserved 450,000 RSUs granted (213,522) PSUs granted (463,593) Options granted (172,139) Stock awards canceled / forfeited / expired 295,392 Options canceled / forfeited / expired 24,090 Balance, September 30, 2021 1,005,398 zero and 421,417 RSUs, during the three and nine months ended September 30, 2020, respectively, and granted stock options for 60,000 shares of common stock during the three and nine months ended September 30, 2020. The annual RSUs granted vest over Options Outstanding Number of
Stock Options
OutstandingWeighted-
Average
Exercise
PriceWeighted Average Remaining Term
(in Years)Balance, December 31, 2020 217,007 $ 22.35 3.75 Options granted 172,139 $ 30.71 Options exercised (57,498) $ 24.49 Options canceled / forfeited / expired (24,090) $ 32.90 Balance, September 30, 2021 307,558 $ 25.80 4.84 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.1816Stock Awards Outstanding Number of Awards Outstanding Weighted Average Grant Date Fair Value per Share Balance, December 31, 2020 779,757 $ 23.96 RSUs granted 213,522 $ 36.80 PSUs granted 463,593 $ 41.23 Awards released (175,813) $ 22.45 Stock awards canceled / forfeited / expired (298,028) $ 27.24 Balance, September 30, 2021 983,031 $ 33.91 As of September 30, 2020, there was approximately $12.8 million of unrecognized compensation expense, net of projected forfeitures, for stock options and stock awards. The expense is expected to be recognized over the remaining weighted-average period of 2.48 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 is summarized as follows: 761,705 295,699 $ 25.52 600,000 ─ (789,978 ) 60,000 ─ (46,878 ) 8.77 64,959 (64,959 ) 38.14 431,096 ─ 1,067,782 243,862 $ 26.33 and 2019 werewas as follows (in thousands): 2019* $ 326 $ 430 $ 1,359 $ 1,103 648 1,365 2,618 3,080 254 443 1,344 1,076 754 940 2,736 1,745 $ 1,982 $ 3,178 $ 8,057 $ 7,004 *IncludedThree Months Ended
September 30,Nine Months Ended
September 30,2021 2020 2021 2020 Cost of revenue $ 330 $ 326 $ 908 $ 1,359 Sales and marketing 711 648 1,954 2,618 Research and development 1,020 254 1,628 1,344 General and administrative 1,681 754 4,017 2,736 Total stock-based compensation expense $ 3,742 $ 1,982 $ 8,507 $ 8,057 nine-month ended September30,2019stock-based compensation expense diluted net income (loss) per share, and includes the effect of potential share settlement for the Convertible notes, if the effect is dilutive.charge in connection with the accelerated vestingweighted average number of 4,667 shares of common stock outstanding during the Company’s former CEO, in accordance with his separation agreement dated January 4, 2019.Note 9. Net Loss Per ShareBasic net loss per shareperiod. Diluted EPS is computed usingbased on the weighted-averageweighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period. In periods of net income, dilutedperiod using the treasury stock method and the if-converted method. Dilutive potential common shares include outstanding include the dilutive effect of in-the-money equity awards (stockstock options, restricted stock units, performance stock units, ESPP shares and employee stock purchase plan contributions), whichconversion shares under the Convertible notes. The diluted EPS is calculated basedcomputed with the assumption that the Company will settle the convertible debt in shares, rather than cash.the average share price for each fiscal period using the treasury stock method. Diluted earnings per share is the same as basic earningsdiluted net income per share for the periods in whichnine months ended September 30, 2021.hadentered into concurrently with the issuance of the Convertible notes, as this effect would be anti-dilutive. In the event of conversion of a netConvertible note, shares delivered to the Company under the capped call will offset the dilutive effect of the shares that the Company would issue under the Convertible notes. In the three and nine months ended September 30, 2021, the “if-converted method” was not applied as the effect would have been anti-dilutive.becauseper common share and diluted loss per common share are the same in each respective period as the inclusion of outstanding common stock equivalentsany potentially issuable shares would be anti-dilutive.lossincome (loss) and the weighted average number of shares used in computing basic and diluted net lossincome (loss) per share (in thousands, except per share data): $ (2,257 ) $ (2,628 ) $ (26,065 ) $ (10,260 ) 17,603 14,182 16,368 14,095 ─ ─ ─ ─ 17,603 14,182 16,368 14,095 $ (0.13 ) $ (0.19 ) $ (1.59 ) $ (0.73 ) Three Months Ended
September 30,Nine Months Ended
September 30,2021 2020 2021 2020 Numerator: Net income (loss) used in calculating net income (loss) per share, basic and diluted $ (1,390) $ (2,257) $ 5,997 $ (26,065) Denominator: Weighted average shares of common stock outstanding used in computing net income (loss) per share, basic 17,945 17,603 17,860 16,368 Dilutive effect of incremental shares and share equivalents: Options — — 70 — RSUs — — 297 — PSUs — — 81 — ESPP — — 19 — Weighted average shares of common stock outstanding used in computing net income (loss) per share, diluted 17,945 17,603 18,327 16,368 Net income (loss) per share: Net income (loss) per share, basic $ (0.08) $ (0.13) $ 0.34 $ (1.59) Net income (loss) per share, diluted $ (0.08) $ (0.13) $ 0.33 $ (1.59) 19
The following numbers of shares outstanding, prior to the application of the treasury stock method and the if-converted method, were excluded from the computation of diluted net lossincome (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, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Options to purchase common stock | 232 | 398 | 246 | 443 | ||||||||||||
Restricted stock units | 733 | 648 | 735 | 523 | ||||||||||||
Performance stock units | 24 | 221 | 83 | 166 | ||||||||||||
Employee stock purchase plan shares | 17 | 94 | 57 | 94 | ||||||||||||
Total | 1,006 | 1,361 | 1,121 | 1,226 | ||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Capped call | 4,167 | — | 4,167 | — | |||||||||||||||||||
| Convertible notes | 4,167 | — | 4,167 | — | |||||||||||||||||||
| Options to purchase common stock | 308 | 232 | 187 | 246 | |||||||||||||||||||
| Restricted stock units | 528 | 733 | 72 | 735 | |||||||||||||||||||
| Performance stock units | 455 | 24 | 24 | 83 | |||||||||||||||||||
| Employee stock purchase plan shares | 22 | 17 | — | 57 | |||||||||||||||||||
| Total | 9,647 | 1,006 | 8,617 | 1,121 | |||||||||||||||||||
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.2020, 2021, the Company's income tax expense werewas $0.5 million and $0.8 million, respectively, compared to $0.7 million and $1.2 million respectively, compared to income tax expense of $73,000 and income tax benefit of $55,000 for the three and nine months ended September 30, 2019, 2020, respectively.20202021 is due primarily to income taxes in foreign jurisdictions. AsThe PPP loan forgiveness recognized during the Company's U.S. operations are projecting to be in anine months ended September 30, 2021 is excluded from taxable loss position in fiscal year 2020, and based on all available objectively verifiable evidence, the Company believes it is more likely than not that the tax benefitsincome under Section 1106(i) 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 Company continues to maintain a full valuation allowance on its U.S. deferred tax assets.
storagesstorage 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 1one to 10ten years, and some facility leases of which include options to renew the leases for up to 5five years. The Company leases space for operations in the United States, Japan,Australia, Belgium, France, Japan 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.20
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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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 | |||
|
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 | |||
|
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 | |||
| Leases | Classification | September 30, 2021 | December 31, 2020 | ||||||||||||||
| Assets | |||||||||||||||||
| Right-of-use assets | Operating lease assets | $ | 15,269 | $ | 17,076 | ||||||||||||
| Finance lease | Property and equipment, net | 377 | 467 | ||||||||||||||
| Total leased assets | $ | 15,646 | $ | 17,543 | |||||||||||||
| Liabilities | Classification | September 30, 2021 | December 31, 2020 | ||||||||||||||
| Operating lease liabilities | |||||||||||||||||
| Operating lease liabilities, current | Operating lease liabilities | $ | 2,394 | $ | 2,260 | ||||||||||||
| Operating lease liabilities, non-current | Operating lease liabilities, net of current portion | 14,117 | 15,950 | ||||||||||||||
| Total Operating lease liabilities | $ | 16,511 | $ | 18,210 | |||||||||||||
| Finance lease liabilities | |||||||||||||||||
| Finance lease liabilities, current | Accrued liabilities | $ | 497 | $ | 370 | ||||||||||||
| Finance lease liabilities, non-current | Other long-term liabilities | 333 | 242 | ||||||||||||||
| Total Finance lease liabilities | $ | 830 | $ | 612 | |||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||
| Lease costs | Classification | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||||
| Finance lease cost | Amortization expense | $ | 103 | $ | 121 | $ | 340 | $ | 545 | ||||||||||||||||||||
| Finance lease cost | Interest for finance lease | $ | 12 | $ | 14 | $ | 40 | $ | 49 | ||||||||||||||||||||
| Operating lease cost | Operating lease expense | $ | 882 | $ | 752 | $ | 2,641 | $ | 2,208 | ||||||||||||||||||||
| Nine Months Ended September 30, | |||||||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities | Classification | 2021 | 2020 | ||||||||||||||
| Operating cash flow | Finance lease | $ | 38 | $ | 49 | ||||||||||||
| Financing cash flow | Finance lease | $ | 314 | $ | 513 | ||||||||||||
| Operating cash flow | Operating lease | $ | 2,324 | $ | 1,987 | ||||||||||||
Year Ending December 31, | Amount | |||
Remainder of 2020 | $ | 114 | ||
2021 | 3,038 | |||
2022 | 3,083 | |||
2023 | 3,177 | |||
2024 and thereafter | 12,061 | |||
Total lease payments | 21,473 | |||
Less: imputed interest | (3,265) | |||
Present value of lease liabilities | $ | 18,208 | ||
| As of September 30, 2021 | Amount | ||||
| Remainder of 2021 | $ | 771 | |||
| 2022 | 3,135 | ||||
| 2023 | 3,173 | ||||
| 2024 | 2,877 | ||||
| 2025 | 2,875 | ||||
| 2026 and thereafter | 6,308 | ||||
| Total lease payments | 19,139 | ||||
| Less: imputed interest | 2,628 | ||||
| Present value of lease liabilities | $ | 16,511 | |||
Year Ending December 31, | Amount | |||
Remainder of 2020 | $ | 108 | ||
2021 | 370 | |||
2022 | 246 | |||
2023 | 11 | |||
Total lease payments | 735 | |||
Less: imputed interest | (36 | ) | ||
Present value of lease liabilities | $ | 699 | ||
| As of September 30, 2021 | Amount | ||||
| Remainder of 2021 | $ | 130 | |||
| 2022 | 453 | ||||
| 2023 | 199 | ||||
| 2024 | 132 | ||||
| 2025 | 9 | ||||
| Total lease payments | 923 | ||||
| Less: imputed interest | 93 | ||||
| Present value of lease liabilities | $ | 830 | |||
| Lease Term and Discount Rate | September | 30, 2021 | ||||||
Weighted-average remaining lease term (years) | ||||||||
Operating leases | 6.0 | |||||||
Finance leases | 1.7 | |||||||
Weighted-average discount rate | ||||||||
Operating leases | 4.8 | % | ||||||
Finance leases | 6.5 | % | ||||||
The Information related to the Company
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 Other current assets and prepaid expenses on the condensed consolidated balance sheets as a component of other current assets and are amortized overprepaid expenses. As of December 31, 2020, the lease termCompany recorded $0.7 million of twelve-months. The amountrevenue for the sales-type leases in the condensed consolidated statement of initial direct costsoperations and the related amortizationlease receivable in other current assets of the condensed consolidated balance sheet.
In determiningrespectively. During the proper classificationthree and treatmentnine months ended September 30, 2021, the Company received a full payment of $0.1 million and $0.3 million from a customer who exercised a purchase option. As of September 30, 2021, the lease receivable balance included in other current assets 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 condensed consolidated statements of operations for the periodsnine months 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.
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 equipment2021 was immaterial for the three and nine months ended September 30, 2020.
Year Ending September 30, | Amount | |||
Equipment under operating lease, gross | $ | 305 | ||
Less: accumulated depreciation | (8 | ) | ||
Equipment under operating lease, net | $ | 297 | ||
In November 2019, 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 termsapplicable products.2020 2021 and December 31, 2019, 2020, the Company had 0 accrued expense$0.8 million and $0.4 million, 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.likely.
Credit. Loan and Security AgreementOn May 30, 2018, and Wells Fargo Bank, N.A. (“Wells Fargo”) entered into a Loan and Security Agreement (the “Original Revolving Line of Credit”) in the originalissued $138.3 million aggregate principal amount of $25.0 million.Onconvertible 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 about November 2, 2018, a combination thereof, at the Company entered into a First Amendment and Waiver toCompany’s election. The Convertible notes are presented as Convertible notes, net of unamortized debt issuance costs, on the Loan and Security Agreement with Wells Fargo (the “First Amended Revolving Linecondensed consolidated balance sheet. Proceeds from the offering were $133.6 million, net of Credit”). The First Amended Revolving Line of Credit provided for an originalissuance costs, including initial purchasers fees.$15.0 million, withNotes was convertible into 30.1427 shares of the abilityCompany’s common stock at a conversion price of $33.18 per share. The conversion rate for the Convertible notes is subject to request an additional $10.0 million, and a waiver of any existing defaults underadjustment for certain events as set forth in the Original Revolving Line of Credit as long asIndenture governing the Company isConvertible notes. The Convertible notes will mature on March 15, 2026, unless earlier converted, redeemed, or repurchased in complianceaccordance with the terms of the First Amended Revolving LineConvertible notes. No sinking fund is provided for the Notes. As of Credit.September 30, 2021, the net carrying amount of the Company’s Convertible notes was $134.0 million and the unamortized debt issuance costs were $4.2 million.2322Onabout March 11, 2019, 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.September 30,
2021December 31,
2020Outstanding principal amount $ 138,250 $ — Unamortized debt issuance costs (4,225) — Carrying Value $ 134,025 $ — Second Amendment and Waivercap 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 anti-dilution 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. 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. 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.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-yearfour-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.twelve monthtwelve-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.condition covenants, including maintaining a quarterly minimum revenue of $90.0 million, determined in accordance with GAAP on a trailing twelve-month basis. Thistwelve-month basis, but which is only applicable if the Company has an outstanding balance under the loan facility.subject to renegotiation atin compliance with all financial covenants of the beginningSVB Revolving Line of each fiscal year.$7.1$7.2 million pursuant to the Paycheck Protection Program (the “PPP”) under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”).CARES Act. The loan, which iswas in the form of a promissory note dated April 21, 2020,between the Company and Silicon Valley Bank as the lender, maturesoriginally matured on April 21, 2022and bearsbore interest at a fixed rate of 1.00%per annum, payable monthly commencing October 2020. September 2021. There is was no prepayment penalty. Under the terms of the PPP, all or a portion of the principal maybe have been forgiven if the loan proceeds arewere 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 thewhole 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 ofJune 2021 under the provisions of the loan. The PPP loan isCARES Act, and a $7.2 million gain on forgiveness was recorded as a promissory note included in Long-term debtGain 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 operationsextinguishment 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 the proceedscondensed consolidated statement 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.24
Note 14. Segment reporting
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 September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Revenue mix by geography: | |||||||||||||||||||||||
| United States | $ | 22,737 | $ | 15,443 | $ | 64,553 | $ | 40,142 | |||||||||||||||
| Japan | 19,335 | 11,497 | 53,311 | 27,176 | |||||||||||||||||||
| Asia, excluding Japan | 3,790 | 3,204 | 9,869 | 8,279 | |||||||||||||||||||
| Europe | 3,651 | 2,769 | 12,703 | 6,910 | |||||||||||||||||||
| Rest of the World, other than United States, Asia and Europe | 7,871 | 6,219 | 25,205 | 15,233 | |||||||||||||||||||
| Total consolidated revenue | $ | 57,384 | $ | 39,132 | $ | 165,641 | $ | 97,740 | |||||||||||||||
| Revenue mix by product category: | |||||||||||||||||||||||
| Products | $ | 32,191 | $ | 24,121 | $ | 96,079 | $ | 60,621 | |||||||||||||||
| Consumables | 3,684 | 2,304 | 11,040 | 6,263 | |||||||||||||||||||
| Skincare | 14,819 | 6,829 | 38,937 | 14,506 | |||||||||||||||||||
| Total product revenue | 50,694 | 33,254 | 146,056 | 81,390 | |||||||||||||||||||
| Service | 6,690 | 5,878 | 19,585 | 16,350 | |||||||||||||||||||
| Total consolidated revenue | $ | 57,384 | $ | 39,132 | $ | 165,641 | $ | 97,740 | |||||||||||||||
Note 15. Subsequent Events
The Company has determined that there are no material subsequent events as
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March 23, 2021.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 condensed 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"(“SEC”), and amended in a filing with the SEC on Form 10-K/Aon April 14, 2020.(“GAAP”(“GAAP”). Additionally, unless otherwise indicated, all changes identified for the current-period results represent comparisons to results for the prior corresponding fiscal period.25
Special note regarding forward-looking 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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•Executive Summary. This section provides a general description and history |
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The Company introduced
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 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.
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| •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 | |
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| •consumer demand for the application | |
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The global spread of COVID-19 has created significant volatility, uncertaintythe Company’s products;
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On January 30,
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 including 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.
monitor these conditions in future periods as new information becomes available.
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.
As
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Net Revenue | 100% | 100% | 100% | 100% | ||||||||||||
Cost of revenue | 44% | 43% | 51% | 47% | ||||||||||||
Gross Margin | 56% | 57% | 49% | 53% | ||||||||||||
Operating Expenses: | ||||||||||||||||
Sales and marketing | 31% | 39% | 39% | 39% | ||||||||||||
Research and development | 9% | 8% | 11% | 8% | ||||||||||||
General and administrative | 19% | 16% | 24% | 14% | ||||||||||||
Total operating expenses | 59% | 63% | 74% | 61% | ||||||||||||
Loss from operations | (3)% | (6)% | (25)% | (8)% | ||||||||||||
Other expense | (1) | ─% | (1)% | ─% | ||||||||||||
Loss before income taxes | (4)% | (6)% | (26)% | (8)% | ||||||||||||
Provision (benefit) for income taxes | 2% | ─% | 1% | ─% | ||||||||||||
Net loss | (6)% | (6)% | (27)% | (8)% | ||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Net revenue | 100 | % | 100 | % | 100 | % | 100 | % | |||||||||||||||
| Cost of revenue | 42 | % | 44 | % | 43 | % | 51 | % | |||||||||||||||
| Gross margin | 58 | % | 56 | % | 57 | % | 49 | % | |||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Sales and marketing | 33 | % | 31 | % | 32 | % | 39 | % | |||||||||||||||
| Research and development | 10 | % | 9 | % | 9 | % | 11 | % | |||||||||||||||
| General and administrative | 14 | % | 19 | % | 14 | % | 24 | % | |||||||||||||||
| Total operating expenses | 57 | % | 59 | % | 55 | % | 74 | % | |||||||||||||||
| Income (loss) from operations | 1 | % | (3) | % | 2 | % | (25) | % | |||||||||||||||
| Amortization of debt issuance costs | — | % | — | % | — | % | — | % | |||||||||||||||
| Interest on Convertible notes | (1) | % | — | % | (1) | % | — | % | |||||||||||||||
| Gain on extinguishment of PPP loan | 0 | % | — | % | 4 | % | — | % | |||||||||||||||
| Other expense, net | (1) | % | (1) | % | (1) | % | (1) | % | |||||||||||||||
| Income (loss) before income taxes | (2) | % | (4) | % | 4 | % | (25) | % | |||||||||||||||
| Income tax expense | 1 | % | 2 | % | 1 | % | 1 | % | |||||||||||||||
| Net income (loss) | (2) | % | (6) | % | 4 | % | (27) | % | |||||||||||||||
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 International Consolidated total revenue United States as a percentage of total revenue International as a percentage of total revenue Revenue mix by product category: Systems - North America Systems - International Total Systems Consumables Skincare Total Products Service Total Net Revenue pandemic improved. $ 15,443 $ 26,425 (42 )% $ 40,142 $ 74,972 (46 )% 23,689 19,692 20 % 57,598 54,945 5 % $ 39,132 $ 46,117 (15 )% $ 97,740 $ 129,917 (25 )% 39 % 57 % 41 % 58 % 61 % 43 % 59 % 42 % $ 13,700 $ 24,121 (43 )% $ 32,296 $ 68,192 (53 )% 10,421 10,837 (4 )% 28,325 31,514 (10 )% 24,121 34,958 (31 )% 60,621 99,706 (39 )% 2,304 2,510 (8 )% 6,263 7,109 (12 )% 6,829 2,847 140 % 14,506 6,230 133 % 33,254 40,315 (18 )% 81,390 113,045 (28 )% 5,878 5,802 1 % 16,350 16,872 (3 )% $ 39,132 $ 46,117 (15 )% $ 97,740 $ 129,917 (25 )% Three Months Ended September 30, Nine Months Ended September 30, (Dollars in thousands) 2021 % Change 2020 2021 % Change 2020 Revenue mix by geography: North America $ 26,710 44 % $ 18,488 $ 75,794 67 % $ 45,483 Japan 19,335 68 % 11,497 53,311 96 % 27,176 Rest of World 11,339 24 % 9,147 36,536 46 % 25,081 Consolidated total revenue $ 57,384 47 % $ 39,132 $ 165,641 69 % $ 97,740 North America as a percentage of total revenue 47 % 47 % 46 % 47 % Japan as a percentage of total revenue 34 % 29 % 32 % 28 % Rest of World as a percentage of total revenue 19 % 23 % 22 % 26 % Revenue mix by product category: Systems - North America $ 20,680 51 % $ 13,700 $ 57,353 78 % $ 32,296 Systems – Rest of World (including Japan) 11,511 10 % 10,421 38,726 37 % 28,325 Total Systems 32,191 33 % 24,121 96,079 58 % 60,621 Consumables 3,684 60 % 2,304 11,040 76 % 6,263 Skincare 14,819 117 % 6,829 38,937 168 % 14,506 Total Products 50,694 52 % 33,254 146,056 79 % 81,390 Service 6,690 14 % 5,878 19,585 20 % 16,350 Total Net Revenue $ 57,384 47 % $ 39,132 $ 165,641 69 % $ 97,740 decreasedincreased by 15%47% and 25%69% in the three and nine month periodnine-month periods ended September 30, 2020,2021, respectively, compared to the same periodperiods 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.U.S. revenue decreased by $11.0 million, or 42%, in the three months ended September 30, 2020, and decreased by $34.8 million, or 46%, in the nine months ended September 30, 2020, compared to the same periods in 2019. This decrease was due primarily to significant decline 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 and economic disruption. In response to the pandemic, government authorities imposed mandatory business closures, shelter-in place and work-from-home orders and social distancing protocols. Government authorities began lifting these restrictions during the second quarter and patients 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.The Company’s international revenue increased by $4.0$8.2 million or 20%44%, and $2.7$30.3 million or 5%,67% in the three and nine months ended September 30, 2020,2021, respectively, compared to the same periods in 2019.2020. The increase was mostly due primarily to increasea significant recovery in Skincare products sales 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.Revenue by Product TypeSystems RevenueSystems revenue in North America decreasedmarket as the U.S. economic outlook improved in the first three quarters of 2021.$10.4 million and $35.9$7.8 million or 43%68%, and 53%,$26.1 million or 96% in the three and nine months andmonth periods ended September 30, 2020,2021, respectively, compared to the same periods in 2019, mainly2020, due to thea significant declineincrease in system sales in theof Skincare products. 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 of the COVID-19 pandemic.The Rest of the World systems revenue decreasedincreased by $0.4 million and $3.2$2.2 million or 4%24%, and 10%,$11.5 million or 46% in the three and nine monthsmonth periods ended September 30, 2020, respectively, primarily as a result of the COVID-19 pandemicConsumables RevenueConsumables revenue decreased by $0.2 million and $0.8 million, or 8% and 12%, for the three and nine months ended September 30, 2020,2021, respectively, compared to the same periods in 2019.2020. The decreaseincrease was mostly due to growth in the Company’s business in Australia and Europe.decreasing sales inincreasing installed base of truSculpt iD, Secret RF, truSculpt 3Dand truSculpt flex, each of which have a consumable element, as well as the decline in usage of the consumables due to the COVID-19 pandemic.element.
Skincare Revenue
pandemic.
basis.
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||
(Dollars in thousands) | 2020 | 2019 | % Change | 2020 | 2019 | % Change | ||||||||||||||||||
Gross Profit | $ | 21,746 | $ | 26,233 | (17)% | $ | 47,706 | $ | 69,373 | (31)% | ||||||||||||||
As a percentage of total net revenue | 56% | 57% | 49% | 53% | ||||||||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | 2021 | 2020 | Change | 2021 | 2020 | Change | |||||||||||||||||||||||||||||
| Gross profit | $ | 33,425 | $ | 21,746 | $ | 11,679 | $ | 94,924 | $ | 47,706 | $ | 47,218 | |||||||||||||||||||||||
| As a percentage of total net revenue | 58.2 | % | 55.6 | % | 2.7 | % | 57.3 | % | 48.8 | % | 8.5 | % | |||||||||||||||||||||||
Company's gross margin.
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||
(Dollars in thousands) | 2020 | 2019 | % Change | 2020 | 2019 | % Change | ||||||||||||||||||
Sales and Marketing | $ | 12,286 | $ | 17,691 | (31)% | $ | 38,109 | $ | 50,786 | (25)% | ||||||||||||||
As a percentage of total net revenue | 31% | 39% | 39% | 39 | % | |||||||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | 2021 | 2020 | Change | 2021 | 2020 | Change | |||||||||||||||||||||||||||||
| Sales and Marketing | $ | 19,190 | $ | 12,286 | $ | 6,904 | $ | 52,668 | $ | 38,109 | $ | 14,559 | |||||||||||||||||||||||
| As a percentage of total net revenue | 33.4 | % | 31.4 | % | 2.0 | % | 31.8 | % | 39.0 | % | (7.2) | % | |||||||||||||||||||||||
The $5.4 million, or 31%, decrease in sales
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The $12.7 million, or 25% decreaseto higher revenue. Also contributing to the increase in sales and marketing expenses for the nine months ended September 30, 2020 comparedwere marketing costs related to same periodnew business, trade shows and other promotions, and a resumption 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, | |||||||||||||||||||||||
(Dollars in thousands) | 2020 | 2019 | % Change | 2020 | 2019 | % Change | ||||||||||||||||||
Research and development | $ | 3,432 | $ | 3,643 | (6)% | $ | 10,294 | $ | 10,622 | (3)% | ||||||||||||||
As a percentage of total net revenue | 9% | 8% | 11% | 8% | ||||||||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | 2021 | 2020 | Change | 2021 | 2020 | Change | |||||||||||||||||||||||||||||
| Research and development | $ | 5,802 | $ | 3,432 | $ | 2,370 | $ | 14,764 | $ | 10,294 | $ | 4,470 | |||||||||||||||||||||||
| As a percentage of total net revenue | 10.1 | % | 8.8 | % | 1.3 | % | 8.9 | % | 10.5 | % | (1.6) | % | |||||||||||||||||||||||
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.
headcount.
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||
(Dollars in thousands) | 2020 | 2019 | % Change | 2020 | 2019 | % Change | ||||||||||||||||||
General and Administrative | $ | 7,239 | $ | 7,308 | (1)% | $ | 23,575 | $ | 18,100 | 30% | ||||||||||||||
As a percentage of total net revenue | 18% | 16% | 24% | 14% | ||||||||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | 2021 | 2020 | Change | 2021 | 2020 | Change | |||||||||||||||||||||||||||||
| General and administrative | $ | 7,807 | $ | 7,239 | $ | 568 | $ | 23,633 | $ | 23,575 | $ | 58 | |||||||||||||||||||||||
| As a percentage of total net revenue | 13.6 | % | 19.0 | % | (5.4) | % | 14.3 | % | 24.1 | % | (9.9) | % | |||||||||||||||||||||||
G&A expenses decreasedincreased by $0.1$0.6 million, or 1%, infor the three months ended September 30, 2020, as2021, compared to the same period in 2019. 2020. The increase was due primarily to $2.1 million higher personnel expenses driven primarily by an increase in headcount partially offset by a decrease of $1.6 million in outside services, fees and other administrative expenses.
G&A expenses increased by $5.5 million, or 30%, in the nine months ended September 30, 2020 as2021, compared to the same period in 2019. G&A2020. The increase was due primarily to $3.5 million higher personnel expenses represented 24%driven primarily by an increase in headcount, offset by a decrease of revenue$3.8 million in outside services, fees and other administrative expenses.
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | 2021 | 2020 | Change | 2021 | 2020 | Change | |||||||||||||||||||||||||||||
| Interest and other expense, net | $ | (1,554) | $ | (382) | $ | (1,172) | $ | 2,980 | $ | (586) | $ | 3,566 | |||||||||||||||||||||||
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, 2020,2021, compared to the same periods in 2019. The increase in other expense in both periods was2020, due primarily due to a decrease$7.2 million gain resulting from the forgiveness of the PPP loan and accrued interest. This gain was partially offset by $1.7 million 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.
Three Months Ended September 30, Nine Months Ended September 30, (Dollars in thousands) 2020 2019 $ Change 2020 2019 $ Change Loss before income taxes Provision (benefit) for income tax respectively. March 2021. The Company actively manages its cash usage $ (1,593) $ (2,555) $ 962 $ (24,858) $ (10,315) $ (14,543) 664 73 591 1,207 (55) 1,262 For the three and nine months ended September 30, 2020, the Company's income tax expense was $0.7 million and $1.2 million, respectively, compared to income tax benefit of $73,000 and income tax expense of $55,000, in the same periods in 2019. Three Months Ended September 30, Nine Months Ended September 30, (Dollars in thousands) 2021 2020 Change 2021 2020 Change Income tax provision $ 462 $ 664 $ (202) $ 842 $ 1,207 $ (365) expenseexpenses were $0.5 million and $0.8 million for the three and nine months ended September 30, 2021, respectively, compared to $0.7 million and $1.2 million for the same periods in 2020, is due primarily to the increase in Japan skincare revenue which increased income and the associated 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 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.isin the nine months ended September 30, 2021, was cash generated from maturity and sales of marketable investments, cash generatednet proceeds 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 facilityConvertible notes in an aggregate principal amount of up to $30.0 million. In order to draw on the full amount, the Company must satisfy certain liquidity ratios. If the Company is unable to meet these liquidity ratios, then availability under the revolving line is calculated as 80% of the Company’s qualifying accounts receivable. The Company must also meet certain quarterly revenue targets on a trailing twelve-month basis as part of the financial covenants. This clause is subject to renegotiation at the beginning of each year. The proceeds of the revolving loans may be used for general corporate purposes.On April 22, 2020, the Company received loan proceeds of $7.1 million pursuant to the Paycheck Protection Program (the “PPP”) under the CARES Act. The loan, which is in the form of a promissory note dated April 21, 2020, between the Company and Silicon Valley Bank as the lender, matures on April 21, 2022 and bears interest at a fixed rate of 1.00% per annum, payable monthly commencing October 2020. There is no prepayment penalty. Under the terms of the PPP, all or a portion of the principal may be forgiven if the loan proceeds are used for qualifying expenses as described in the CARES Act, such as payroll costs, benefits, rent, and utilities. The 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. 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 itsbanks. The Company's foreign subsidiaries maintain a limited amount of cash in their local banks to cover their short-term operating expenses.20202021 and December 31, 2019,2020, the Company had $51.6$179.0 million and $36.4$51.9 million of working capital, respectively. Cash and cash equivalents plus marketable investments increased by $8.5$115.4 million to $42.4$162.5 million as of September 30, 2020,2021 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 the Company’s loss from operations due$16.1 million in premiums paid for separate capped call transactions related to the sales decline as a resultissuance of COVID-19 and settlement of accrued liabilities as of December 31, 2019.the Convertible notes.
Cash, Cash Equivalents and Marketable Investments
(Dollars in thousands) | September 30, 2020 | December 31, 2019 | Change | |||||||||
Cash and cash equivalents | $ | 29,394 | $ | 26,316 | $ | 3,078 | ||||||
Marketable investments | 13,046 | 7,605 | 5,441 | |||||||||
Total | $ | 42,440 | $ | 33,921 | $ | 8,519 | ||||||
| (Dollars in thousands) | September 30, 2021 | December 31, 2020 | Change | ||||||||||||||
| Cash and cash equivalents | $ | 162,486 | $ | 47,047 | $ | 115,439 | |||||||||||
Nine Months Ended September 30, | ||||||||
(Dollars in thousands) | 2020 | 2019 | ||||||
Net cash flow provided by (used in): | ||||||||
Operating activities | $ | (21,402) | $ | (6,194) | ||||
Investing activities | 6,185 | 2,667 | ||||||
Financing activities | 30,665 | 354 | ||||||
Net increase (decrease) in cash and cash equivalents | $ | 29,394 | $ | (3,173) | ||||
| Nine Months Ended September 30, | |||||||||||
| (Dollars in thousands) | 2021 | 2020 | |||||||||
| Net cash flow provided by (used in): | |||||||||||
| Operating activities | $ | (1,428) | $ | (21,402) | |||||||
| Investing activities | (311) | (6,185) | |||||||||
| Financing activities | 117,178 | 30,665 | |||||||||
| Net increase in cash and cash equivalents | $ | 115,439 | $ | 3,078 | |||||||
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mainly reflecting the net loss for the period of $26.1 million.
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Cash Flows from Investing Activities
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mainly reflecting net purchases of marketable investments.
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Cash Flows from Financing Activities
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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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for taxes related to net settlement of equity awards.
On April 21, 2020, the Company received net proceeds of approximately $26.5notes, partially offset by $16.1 million fromin premiums paid concurrently for a public offering of its common stock, after deducting underwriting discounts and commissions and estimated offering expenses payable by the Company.separate capped call transaction. The Company intends to use the net proceedscash generated in the first three quarters of the offering2021 to fund growth initiatives and 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”). There are risks and uncertainties regarding the PPP loan as the Company may be deemed ineligible to receive the PPP loan, and the Company may be required to repay the PPP loan in its entirety and could be subject to penalties. In addition, with respect to any portion of the PPP loan not forgiven, the Company may default on payment or breach provisions of the loan. The 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.
Commitmentsmonths.
AsSeptember 15 of each year. 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 Agreement
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. In orderSee Note 13 – Debt in the accompanying notes to draw on the full amount, the Company must satisfy certain liquidity ratios. consolidated financial statements for more information.
The Loan and Security Agreement 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 acovenants.
floating per annum rate equal to the Prime rate. The Prime rate was 3.25% as of September 30,
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.
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Evaluation of Disclosure Controls and Procedures
2021.
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Other than23, 2021.
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, andInflation 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 itsour business, financial condition and results of operations.
Due
Further, disruptions in the manufacture and distribution of the Company's products or in itsglobal 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 expectsinflationary pressures, 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 itsour business, revenues, operatingfinancial condition and 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.
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 anissued $138.3 million aggregate principal amount of up to $30.0 million.Convertible notes in a private placement offering on March 5, 2021. 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 disposenotes bear interest at a rate 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 132.25% 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 our consolidated financial statements andreduce the section titled “Management’s Discussion and Analysispotential dilution 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.common stock upon any conversion of the Notes. 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.
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capped calls were purchased for $16.1 million.
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| Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |||||||
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| 101.ins | 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 | ||||||||
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| CUTERA, INC. | |||||
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/s/ Rohan Seth | |||||
Rohan Seth | |||||
| Chief Financial Officer | |||||
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