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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2021
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to_____.
Commission File Number: 000-50644
Cutera, Inc.
(Exact name of registrant as specified in its charter)
Delaware77-0492262
(State or other jurisdiction of incorporation or
organization)
(I.R.S. Employer Identification No.)
3240 Bayshore Blvd., Brisbane, California 94005
(Address of principal executive offices)
(415) 657-5500
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock ($0.001 par value)CUTRThe NASDAQ Stock Market, LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes    x    No    ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes x     No    ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act (check one):
Large accelerated filerAccelerated filer Non-accelerated filerSmaller reporting companyEmerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.):    Yes    ☐    No    x
The number of shares of Registrant’s common stock issued and outstanding as of July 30, 2021, was 17,942,446.


Table of Contents
CUTERA, INC.
FORM 10-Q
TABLE OF CONTENTS
Page



Table of Contents
In this Quarterly Report on Form 10-Q, “Cutera,” “the Company,” “we,” “us” and “its” refer to Cutera, Inc. and its consolidated subsidiaries.
This report may contain references to its proprietary intellectual property, including among others, trademarks for its systems and ancillary products, Cutera®,AccuTip®, CoolGlide®, CoolGlide excel®, enlighten®, excel HR®, excel V®, excel V+®, LimeLight®, MyQ®, Pearl®, PicoGenesis,ProWave®, Solera®, Titan®, truSculpt®, truSculpt® flex, Secret PRO®, Secret RF® and xeo®.
These trademarks and trade names are the property of Cutera or the property of its consolidated subsidiaries and are protected under applicable intellectual property laws. Solely for convenience, its trademarks and tradenames referred to in this Quarterly Report on Form 10-Q may appear without the ® or symbols, but such references are not intended to indicate in any way that the Company will not assert, to the fullest extent under applicable law, its rights to these trademarks and tradenames.
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PART I. FINANCIAL INFORMATION
ITEM 1.    FINANCIAL STATEMENTS (UNAUDITED)
CUTERA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
(unaudited)
June 30,
2021
December 31,
2020
Assets
Current assets:
Cash and cash equivalents$169,200 $47,047 
Accounts receivable, net of allowance for credit losses of $1,639 and $1,598, respectively
25,903 21,962 
Inventories34,591 28,508 
Other current assets and prepaid expenses8,856 8,779 
Total current assets238,550 106,296 
Property and equipment, net2,148 2,299 
Deferred tax asset592 643 
Operating lease right-of-use assets15,919 17,076 
Goodwill1,339 1,339 
Other long-term assets5,615 5,080 
Total assets$264,163 $132,733 
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable$6,210 $6,684 
Accrued liabilities41,343 31,079 
Operating lease liabilities2,422 2,260 
PPP loan payable 3,630 
Extended warranty liability649 1,216 
Deferred revenue9,695 9,489 
Total current liabilities60,319 54,358 
Deferred revenue, net of current portion1,708 1,748 
Operating lease liabilities, net of current portion14,705 15,950 
PPP loan payable, net of current portion 3,555 
Convertible notes, net of unamortized debt issuance costs of $4,450
133,800  
Other long-term liabilities288 242 
Total liabilities210,820 75,853 
Commitments and Contingencies (Notes 12)
Stockholders’ equity:
Common stock, $0.001 par value; authorized: 50,000,000 shares; issued and outstanding: 17,933,020 and 17,679,232 shares at June 30, 2021 and December 31, 2020, respectively
18 18 
Additional paid-in capital106,173 117,097 
Accumulated deficit(52,848)(60,235)
Total stockholders’ equity53,343 56,880 
Total liabilities and stockholders’ equity$264,163 $132,733 
The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
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CUTERA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
Three Months Ended
June 30,
Six Months Ended
June 30,
2021202020212020
Net revenue:
Products$51,812 $21,745 $95,363 $48,136 
Service6,777 4,624 12,894 10,472 
Total net revenue58,589 26,369 108,257 58,608 
Cost of revenue:
Products20,893 12,206 39,224 26,309 
Service3,907 2,539 7,534 6,339 
Total cost of revenue24,800 14,745 46,758 32,648 
Gross profit33,789 11,624 61,499 25,960 
Operating expenses:
Sales and marketing18,410 11,035 33,478 25,823 
Research and development4,850 2,991 8,962 6,862 
General and administrative8,461 8,529 15,826 16,336 
Total operating expenses31,721 22,555 58,266 49,021 
Income (loss) from operations2,068 (10,931)3,233 (23,061)
Interest and other income (expense), net:
Amortization of debt issuance costs(215) (267) 
Interest on convertible notes(778) (969) 
Gain on extinguishment of PPP loan7,185  7,185  
Other income (expense), net(392)3 (1,415)(204)
Total interest and other income (expense), net5,800 3 4,534 (204)
Income (loss) before income taxes7,868 (10,928)7,767 (23,265)
Income tax expense122 466 380 543 
Net income (loss)$7,746 $(11,394)$7,387 $(23,808)
Net income (loss) per share:
Basic$0.43 $(0.67)$0.41 $(1.51)
Diluted$0.39 $(0.67)$0.40 $(1.51)
Weighted-average number of shares used in per share calculations:
Basic 17,862 17,055 17,815 15,744 
Diluted22,453 17,055 20,855 15,744 
The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
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CUTERA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(Unaudited)
Three Months Ended
June 30,
Six Months Ended
June 30,
2021202020212020
Net income (loss)$7,746 $(11,394)$7,387 $(23,808)
Other comprehensive gain:
Available-for-sale investments
Reclassification adjustment for losses on investments recognized during the period 2  63 
Net change in unrealized gain on available-for-sale investments 2  63 
Other comprehensive gain, net of tax 2  63 
Comprehensive income (loss)$7,746 $(11,392)$7,387 $(23,745)
The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
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CUTERA, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERSEQUITY
(in thousands, except share amounts)
Three and Six Months Ended June 30, 2021
Common StockAdditional
Paid-in
Capital
Retained
Earnings
(Accumulated
Deficit)
Accumulated
Other
Comprehensive
Income (loss)
Total
Stockholders’
Equity
SharesAmount
Balance at December 31, 202017,679,232 $18 $117,097 $(60,235)$ $56,880 
Issuance of common stock for employee purchase plan38,991 — 645 — — 645
Exercise of stock options53,598 — 1,252 — — 1,252 
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
161,199 — (1,452)— — (1,452)
Stock-based compensation expense
— — 4,765 — — 4,765 
Net income— — — 7,387 — 7,387 
Balance at June 30, 202117,933,020 $18 $106,173 $(52,848)$ $53,343 
Common StockAdditional
Paid-in
Capital
Retained
Earnings
(Accumulated
Deficit)
Accumulated
Other
Comprehensive
Income (loss)
Total
Stockholders’
Equity
SharesAmount
Balance at March 31, 202117,801,926 $18 $102,206 $(60,594)$ $41,630 
Issuance of common stock for employee purchase plan38,991 — 645 — — 645
Exercise of stock options29,508 — 856 — — 856 
Issuance of common stock in settlement of restricted and performance stock units, net of shares withheld for employee taxes
62,595 — (453)— — (453)
Stock-based compensation expense
— — 2,919 — — 2,919 
Net income— — — 7,746 — 7,746 
Balance at June 30, 202117,933,020 $18 $106,173 $(52,848)$ $53,343 








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Three and Six Months Ended June 30, 2020

Common StockAdditional
Paid-in
Capital
Retained
Earnings
(Accumulated
Deficit)
Accumulated
Other
Comprehensive
Income (loss)
Total
Stockholders’
Equity
SharesAmount
Balance at December 31, 201914,315,586 $14 $82,346 $(36,358)$(60)$45,942 
Issuance of common stock for employee purchase plan39,248 — 437 — — 437 
Exercise of stock options46,128 — 411 — — 411 
Issuance of common stock in settlement of restricted and performance stock units, net of shares withheld for employee taxes
423,976 1 (3,118)— — (3,117)
Issuance of common stock in connection with public offering, net of offering cost of $2,303
2,742,750 3 26,493 — — 26,496 
Stock-based compensation expense
— — 6,075 — — 6,075 
Net loss— — — (23,808)— (23,808)
Net change in unrealized loss on available-for-sale investments
— — — — 63 63 
Balance at June 30, 202017,567,688 $18 $112,644 $(60,166)$3 $52,499 
 
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Common StockAdditional
Paid-in
Capital
Retained
Earnings
(Accumulated
Deficit)
Accumulated
Other
Comprehensive
Income (loss)
Total
Stockholders’
Equity
SharesAmount
Balance at March 31, 202014,578,146 $15 $82,292 $(48,772)$1 $33,536 
Issuance of common stock for employee purchase plan39,248 — 437 — — 437 
Exercise of stock options23,837 — 210 210 
Issuance of common stock in settlement of restricted and performance stock units, net of shares withheld for employee taxes
183,707  (883)— — (883)
Issuance of common stock in connection with public offering, net of offering cost of $2,303
2,742,750 3 26,493 26,496 
Stock-based compensation expense
— — 4,095 — — 4,095 
Net loss— — — (11,394)— (11,394)
Net change in unrealized loss on available-for-sale investments
— — — — 2 2 
Balance at June 30, 202017,567,688 $18 $112,644 $(60,166)$3 $52,499 
The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
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CUTERA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six Months Ended June 30,
20212020
Cash flows from operating activities:
Net income (loss)$7,387 $(23,808)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Stock-based compensation4,765 6,075 
Depreciation and amortization707 715 
Amortization of contract acquisition costs1,003 1,392 
Amortization of debt issuance costs267  
Impairment of capitalized cloud computing costs182 805 
Change in deferred tax asset51 4 
Allowance for credit losses492 1,696 
Gain on sale of property and equipment(82) 
Gain on extinguishment of PPP loan(7,185) 
Change in right-of-use assets604  
Other 198 
Changes in assets and liabilities:
Accounts receivable(4,433)6,034 
Inventories(5,958)2,681 
Other current assets and prepaid expenses(77)316 
Other long-term assets(1,720)(519)
Accounts payable(474)(1,004)
Accrued liabilities10,220 (9,754)
Extended warranty liabilities(567)(339)
Operating lease liabilities(530) 
Deferred revenue166 (2,443)
Net cash provided by (used in) operating activities4,818 (17,951)
Cash flows from investing activities:
Acquisition of property, equipment, and software(370)(435)
Proceeds from disposal of property and equipment71  
Proceeds from maturities of marketable investments 10,900 
Purchase of marketable investments (16,167)
Net cash used in investing activities(299)(5,702)
Cash flows from financing activities:
Proceeds from exercise of stock options and employee stock purchase plan1,897 848 
Purchase of capped call(16,134) 
Proceeds from issuance of Convertible notes138,250 7,149 
Payment of issuance costs of Convertible notes(4,717) 
Proceeds from equity offering 28,799 
Cost of equity offering (2,303)
Taxes paid related to net share settlement of equity awards(1,451)(3,117)
Payments on finance lease obligations(211)(380)
Net cash provided by financing activities117,634 30,996 
Net increase in cash and cash equivalents122,153 7,343 
Cash and cash equivalents at beginning of period47,047 26,316 
Cash and cash equivalents at end of period$169,200 $33,659 
Supplemental disclosure of non-cash items:
Assets acquired under finance lease$25 $27 
Assets acquired under operating lease$123 $1,169 
Gain on extinguishment of PPP loan$7,185 $ 
Debt issuance costs accrued$452 $ 
Supplemental disclosure of cash flow information:
Income tax paid$458 $ 
The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
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CUTERA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies 
Description of Operations and Principles of Consolidation
Cutera, Inc. (“Cutera” or the “Company”) provides energy-based aesthetic systems for practitioners worldwide. The Company develops, manufactures, distributes, and markets energy-based product platforms for use by physicians and other qualified practitioners, enabling them to offer safe and effective aesthetic treatments to their customers. The Company currently markets the following system platforms: enlighten, excel, Secret PRO, Juliet, Secret RF, truSculpt and xeo. Several of the Company’s systems offer multiple hand pieces and applications, providing customers the flexibility to upgrade their systems. The sales of (i) systems, system upgrades, and hand pieces (collectively “Systems” revenue); (ii) replacement hand pieces, Titan, truSculpt 3D,truSculpt iD and truSculpt flex cycle refills, as well as single use disposable tips applicable to Secret PRO, Juliet and Secret RF (“Consumables” revenue); (iii) the distribution of third party manufactured skincare products (“Skincare” revenue); and (iv) the leasing of equipment through a membership program; are collectively classified as “Products” revenue. In addition to Products revenue, the Company generates revenue from the sale of post-warranty service contracts, parts, detachable hand piece replacements (except for Titan, truSculpt 3D, truSculpt iD and truSculpt flex) and service labor for the repair and maintenance of products that are out of warranty, all of which are collectively classified as “Service” revenue.
The Company’s corporate headquarters and U.S. operations are located in Brisbane, California, where the Company conducts manufacturing, warehousing, research and development, regulatory, sales and marketing, service, and administrative activities. The Company also maintains regional distribution centers (“RDCs”) in select 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 its products through its sales and service employees in North America (including Canada), Australia, Austria, Belgium, France, Germany, Hong Kong, Japan, Spain, Switzerland, and the United Kingdom. Sales and services outside of these direct markets are made through a worldwide distributor network in over 42 countries. The condensed consolidated financial statements include the accounts of the Company and its subsidiaries.
Basis of Presentation

In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements included in this report reflect all adjustments necessary for a fair statement of its condensed consolidated statements of financial position as of June 30, 2021 and December 31, 2020, and its condensed consolidated statements of results of operations, comprehensive income (loss), changes in equity, and cash flows for the three and six months ended June 30, 2021, and 2020. The December 31, 2020 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. 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.
Risks and Uncertainties
The Company's future results of operations involve a number of risks and uncertainties. Factors that could affect the Company's future operating results and cause actual results to vary materially from expectations include, but are not limited to, rapid technological change, continued acceptance of the Company's products, stability of global financial markets, cybersecurity breaches and other disruptions that could compromise the Company’s information or results, business disruptions that are caused by natural disasters or pandemic events, management of international activities, competition from substitute products and larger companies, ability to obtain and maintain regulatory approvals, government regulations and oversight, patent and other types of litigation, ability to protect proprietary technology from counterfeit versions of the Company's products, strategic relationships and dependence on key individuals.
In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. The COVID-19 outbreak has negatively affected the United States and global economies. Though the economy is gradually recovering as of the second quarter of 2021, the timing and extent of a full global economic recovery is still uncertain. The spread of the coronavirus and the Delta variant in particular, has impacted the global economy broadly in 2020, including restrictions on travel, shifting work
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forces to work remotely and quarantine policies put into place by businesses and governments, had a material economic effect on the Company’s business during the year ended December 31, 2020 and in the six months ended June 30, 2021. Healthcare facilities in many countries effectively banned elective procedures and this had a significant impact on the 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. Although the Company’s revenues and profits have improved compared to the first half of fiscal 2020 and the overall economic outlook has also improved in 2021, the COVID-19 outbreak continues to be fluid especially in light of the Delta variant, and the long-term impact on the Company's business due to COVID-19 is still uncertain. The Company cannot presently predict the scope and severity of 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 recession or financial market instability could have a material adverse effect on the Company’s business, revenue, operating results, cash flows and financial condition.
The Company continues to assess whether any impairment of its goodwill or its long-lived assets has occurred and has determined that no charges, other than an impairment loss of $0.2 million on capitalized implementation costs of cloud-based customer relationship management (“CRM”) software occurred were necessary during the six months ended June 30, 2021. The Company 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 which are subject to uncertainty.
The Company has experienced a significant increase in sales of skincare products under the exclusive distribution agreement with ZO Skin Health, Inc. (“ZO”), which allows the Company to sell ZO’s skincare products in Japan. The reason for the increase in skincare products sales may have been the result of changes in customers’ spending habits as customers purchased more aesthetic treatments that were able to be applied at home, due to limitations on in-person aesthetic procedures, social distancing and mask wearing requirements due to the COVID-19 pandemic. Future growth in sales of skincare products depends on customers’ spending habits, which may revert to original spending habits after the COVID-19 pandemic. Such changes may have a material adverse effect on the Company’s revenue, operating results, and cash flows.
Accounting Policies
These unaudited condensed consolidated financial statements are prepared in accordance with the rules and regulations of the SEC applicable to interim financial statements. While these statements reflect all normal recurring adjustments that are, in the opinion of management, necessary for fair presentation of the results of the interim period, they do not include all of the information and footnotes required by GAAP for complete financial statements. These condensed consolidated financial statements should be read in conjunction with the financial statement disclosures in its annual report on Form 10-K for the year ended December 31, 2020 filed with the SEC on March 23, 2021.
The Company uses the same accounting policies in preparing quarterly and annual financial statements. Unless otherwise noted, amounts presented within the notes to condensed consolidated financial statements refer to the Company’s continuing operations. Note 13 provides information about the Company’s adoption of the new accounting standard for debt with conversion and other options, which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts in an entity’s own equity.
The Company issued $138.3 million of convertible senior notes ("Notes" or "Convertible notes") in a private placement offering on March 5, 2021. The Convertible notes bear interest at a rate of 2.25% per year. In accordance with Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2020-6, DebtDebt with Conversion and Other Options (Subtopic 470-20) and Derivatives and HedgingContracts in Entitys Own Equity (Subtopic 815-40), the Company recorded the Convertible notes as long-term debt with no separation between the Convertible notes and the conversion option. Each reporting period, the Company will determine whether any criteria is met for the note holders to have the option to redeem the Convertible notes early, which will result in a change in the classification of the Convertible notes to current liabilities.
The circumstances described in the paragraph above were met during the second quarter of 2021 as the Company's stock traded at a price in excess of the conversion price, and as a result, the Notes are convertible at the option of the holder from July 1, 2021 until September 30, 2021. Upon any conversion of the Convertible notes, the Company would be required to pay or deliver, as the case may be, cash, shares of its common stock, or a combination of cash and shares of its common stock, at the Company’s election. To the extent there are any conversions during the period from July 1, 2021 until September 30, 2021, the Company intends to settle such conversions by issuing shares of common stock; therefore, as of June 30, 2021, the Convertible notes have been included as long term liability on the condensed consolidated balance sheet.
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The costs associated with issuance of the Convertible notes, including underwriters’ fees, are presented in the condensed consolidated balance sheet as a direct deduction from the carrying amount of the Convertible notes. The debt issuance costs are being amortized over the life of the Convertible notes as additional non-cash interest expense.
In connection with issuance of the Convertible notes, the Company entered into capped call transactions with certain option counterparties. The capped call transactions are generally designated to reduce the potential dilution of the Company's common stock upon any conversion of the Notes. The capped calls were purchased for $16.1 million and recorded as a reduction to additional paid in capital in the condensed consolidated balance sheet as of June 30, 2021.
The Company capitalized cloud computing systems implementation costs of $0.6 million during the three months ending June 30, 2021. These costs relate to an on-going implementation of a new Enterprise Resource Planning system and are included in Other long-term assets and Other current assets and prepaid expenses on the condensed consolidated balance sheet.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with GAAP requires the Company’s management to make estimates and assumptions that affect the amounts reported of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the accompanying notes, and the reported amounts of revenue and expenses during the reported periods. Actual results could differ materially from those estimates.
On an ongoing basis, management evaluates its estimates, including those related to warranty obligations, sales commission, allowance for credit losses, 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, variables used in calculating the fair value of the Company's equity awards, expected achievement of performance based vesting criteria, management performance bonuses, 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, 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.
Recently Adopted Accounting Pronouncements
In December 2019, the FASB issued ASU No. 2019-12 Income Taxes (Topic 740)-Simplifying the Accounting for Income Taxes, to remove certain exceptions and improve consistency of application, including, among other things, requiring that an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date. The Company adopted this guidance in the three and six months ended June 30, 2021. The adoption of this guidance did not have a material impact on the Company’s consolidated financial position and results of operations.
In August 2020, the FASB issued ASU No. 2020-6, Debt – Debt with Conversion and Other Options (Topic 470) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Topic 815), to simplify the accounting for convertible debt instruments by removing the beneficial conversion and cash conversion separation models for convertible instruments. Under the amendment, the embedded conversion features are no longer separated from the host contract for convertible instruments with conversion features that are not required to be accounted for as derivatives 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 specific settlement provisions. In addition, the new guidance modifies how particular convertible instruments and certain contracts that may be settled in cash or shares impact the computation of diluted earnings per share. The Company early adopted the guidance on a prospective basis effective January 1, 2021. See Note 13 – Debt.
Note 2. Cash, Cash Equivalents
The following table summarizes the Company's cash and cash equivalents (in thousands):
(Dollars in thousands)June 30,
2021
December 31,
2020
Cash and cash equivalents$169,200 $47,047 
The Company had no marketable securities as of June 30, 2021 and December 31, 2020.
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Note 3. Fair Value of Financial Instruments
The Company measures certain financial assets at fair value, including cash and cash equivalents.
The fair value hierarchy contains the following three levels of inputs that may be used to measure fair value, in accordance with ASC 820:
Level 1: inputs, which include quoted prices in active markets for identical assets or liabilities;
Level 2: inputs, which include observable inputs other than Level 1 inputs, such as quoted prices for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability. When sufficient quoted pricing for identical securities is not available, the Company uses market pricing and other observable market inputs for similar securities obtained from various third-party data providers. These inputs either represent quoted prices for similar assets in active markets or have been derived from observable market data; and
Level 3: inputs, which include unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the underlying asset or liability. Level 3 assets and liabilities include those whose fair value measurements are determined using pricing models, discounted cash flow methodologies, or similar valuation techniques, as well as significant management judgment or estimation.
In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as considering counterparty credit risk in its assessment of fair value.
See Note 13 - Debt for the carrying amount and estimated fair value of the Company’s Convertible notes due 2026.
Note 4. Balance Sheet Details
Inventories
As of June 30, 2021 and December 31, 2020, inventories consist of the following (in thousands):
June 30,
2021
December 31,
2020
Raw materials$15,862 $14,874 
Work in process1,145 1,030 
Finished goods17,584 12,604 
Total$34,591 $28,508 
Accrued Liabilities
As of June 30, 2021 and December 31, 2020, accrued liabilities consist of the following (in thousands):
June 30,
2021
December 31,
2020
Accrued payroll and related expenses$16,427 $12,197 
Sales and marketing accruals3,124 2,352 
Accrued inventory in transit4,469 2,476 
Product warranty3,789 2,908 
Accrued sales tax5,439 5,343 
Other accrued liabilities8,095 5,803 
Total$41,343 $31,079 
Product Remediation Liability
During the fourth quarter of 2018, the Company recognized a liability for a product remediation plan related to one of its legacy systems. This was related to a voluntary action initiated by the Company to replace a component in one of the Company’s
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legacy products. The remediation plan consists primarily of replacement of a component in the system. The accrued liability consisted of the estimated cost of materials and labor to replace the component in all units that were under the Company's standard warranty or were covered under the existing extended warranty contracts. The Company recorded a liability of approximately $5.0 million in 2018.
As of June 30, 2021 and December 31, 2020, approximately $0.3 million of the total product remediation liability balance was recorded as a component of the Company’s product warranty and included in accrued liabilities, and $0.7 million and $1.2 million, respectively, was separately recorded as extended warranty liability.
During the three and six months ended June 30, 2021, the Company recorded $0.1 million and $0.2 million, respectively, of excess reserve related to extended warranty and product warranty. Total costs incurred (including excess reversals) related to product warranty and extended warranty liability during the three and six months ended June 30, 2021 were $0.1 million and $0.5 million, respectively. Total costs incurred related to product warranty and extended warranty liability during the three and six months ended June 30, 2020 were Nil and $0.3 million, respectively.
Note 5. Warranty and Extended Service Contract
The Company has a direct field service organization in North America (including Canada). Internationally, the Company provides direct service support in Australia, Belgium, France, Germany, Hong Kong, Japan, Spain, Switzerland, and the United Kingdom. In several other countries, where the Company does not have a direct presence, the Company provides service through a network of distributors and third-party service providers.
After the original warranty period, maintenance and support are offered on an extended service contract basis or on a time and materials basis. The Company provides for the estimated cost to repair or replace products under standard warranty at the time of sale. Costs incurred in connection with extended service contracts are recognized at the time when costs are incurred, except for a one-time extended service contracts charge of $3.2 million recorded in the year ended December 31, 2018 related to the cost to replace a component in one of the Company's legacy products.
The following table provides the changes in the product warranty accrual for the three and six months ended June 30, 2021 and 2020 (in thousands):
Three Months Ended
June 30,
Six Months Ended
June 30,
20212020 (1)20212020 (1)
Beginning Balance$3,351 $3,398 $2,908 $4,401 
Add: Accruals for warranties issued during the period2,210 1,100 3,735 1,960 
Less: Settlements made during the period(1,772)(1,343)(2,854)(3,206)
Ending Balance$3,789 $3,155 $3,789 $3,155 
(1)The ending product warranty accrual balance excludes 0.6 million and 1.7 million as of June 30, 2021 and 2020, respectively, related to one-time extended service contracts costs to replace components in one of the Company’s legacy products.
The $1.8 million and $2.9 million of settlements made in the three and six months ended June 30, 2021, and $1.3 million and $3.2 million made in the three and six months ended June 30, 2020, respectively, exclude costs related to extended service contract cost of $0.1 million and $0.3 million in the respective periods, incurred to replace a component in one of the Company's legacy products.
Note 6. Deferred Revenue
The Company records deferred revenue when revenue is to be recognized subsequent to invoicing. For extended service contracts, the Company generally invoices customers at the beginning of the extended service contract term. The Company’s extended service contracts typically have one, two or three year terms. Deferred revenue also includes payments for training and extended marketing support service. Approximately 84% of the Company’s deferred revenue balance of $11.4 million as of June 30, 2021 will be recognized over the next 12 months.
The following table provides changes in the deferred revenue balance for the three and six months ended June 30, 2021 and 2020 (in thousands):
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Three Months Ended
June 30,
Six Months Ended
June 30,
2021202020212020
Beginning balance$11,737 $12,969 $11,237 $14,222 
Add: Payments received4,423 2,554 9,352 6,125 
Less: Revenue(1,834)(1,107)(2,279)(1,699)
Less: Revenue included in the beginning balance and recognized as revenue in the current quarter(2,923)(2,637)(6,907)(6,869)
Ending balance$11,403 $11,779 $11,403 $11,779 
Costs for extended service contracts were $2.2 million and $4.2 million for the three and six months ended June 30, 2021, respectively, and were $2.3 million and $3.5 million for the three and six months ended June 30, 2020, respectively.
Note 7. Revenue
Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for promised goods or services. The Company’s performance obligations are satisfied either over time or at a point in time. Revenue from performance obligations that are transferred to customers over time accounted for approximately 12% of the Company's total revenue for the three months ended June 30, 2021 and 2020, and 18% of the Company's total revenue for the six months ended June 30, 2021 and 2020.  
The Company has certain system sale arrangements that contain multiple products and services. For these bundled sale arrangements, the Company accounts for individual products and services as separate performance obligations if they are distinct. The Company’s products and services are distinct if a customer can benefit from the product or service on its own or with other resources that are readily available to the customer, and if the Company’s promise to transfer the products or service to the customer is separately identifiable from other promises in the sale arrangements. The Company’s system sale arrangements can include all or a combination of the following performance obligations: the system and software license (considered as one performance obligation), system accessories (hand pieces), training, other accessories, extended service contracts, marketing services, and time and materials services.
For the Company’s system sale arrangements that include an extended service contract, the period of service commences at the expiration of the Company’s standard warranty offered at the time of the system sale. The Company considers the extended service contracts terms in the arrangements that are legally enforceable to be performance obligations. Other than extended service contracts and marketing services, which are satisfied over time, the Company generally satisfies all performance obligations at a point in time. Systems, system accessories (hand pieces), service contracts, training, and time and materials services are also sold on a stand-alone basis, and these performance obligations are satisfied at a point in time. For contracts with multiple performance obligations, the Company allocates the transaction price of the contract to each performance obligation on a relative standalone selling price basis.
Significant Judgments
The determination of whether two or more contracts entered into at or near the same time with the same customer should be combined and accounted for as one contract may require the use of significant judgment. In making this determination, the Company considers whether the contracts are negotiated as a package with a single commercial objective, have price interdependencies, or promise goods or services that represent a single performance obligation.
While the Company’s purchase agreements do not provide customers with a contractual right of return, the Company maintains a sales allowance to account for potential returns or refunds as a reduction in transaction price at the time of sale. The Company estimates sales returns and other variable consideration based on historical experience.
The Company determines the 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 warranty/Service contracts: SSP is based on observable price when sold on a standalone basis (by customer type).
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Nature of Products and Services
Systems
Systems revenue is generated from the sale of systems and from the sale of upgrades to existing systems. A system consists of a console that incorporates a universal graphic user interface, a laser or other energy-based module, control system software and high voltage electronics, as well as one or more hand pieces. In certain applications, the laser or other energy-based module is contained in the hand piece, such as with the Company’s Pearl and Pearl Fractional applications, rather than within the console.
The Company offers customers the ability to select the system that best fits their practice at the time of purchase and then to cost-effectively add applications to their system as their practice grows. This provides customers the flexibility to upgrade their systems whenever they choose and provides the Company with a source of additional Systems revenue.
The system or upgrade and the right to use the embedded software represent a single performance obligation as the software license is integral to the functionality of the system or upgrade.
For systems sold directly to end-customers that are credit approved, revenue is recognized when the Company transfers control to the end-customer, which occurs when the product is shipped to the customer or when the customer receives the product, depending on the nature of the arrangement. When collectability is not established in advance of receipt of payment from the customer, revenue is recognized upon the later of the receipt of payment or the satisfaction of the performance obligation. For systems sold through credit approved distributors, revenue is recognized upon shipment to the distributor.
The Company typically receives payment for its system consoles and other accessories within 30 days of shipment. Certain international distributor arrangements allow for longer payment terms.
Skincare products
The Company sells third-party manufactured skincare products in Japan. The skincare products are purchased from a third-party manufacturer and sold to medical offices and licensed physicians. The Company warrants that the skincare products are free of significant defects in workmanship and materials for 90 days from shipment. These are typically sold in a separate contract as the only performance obligations. The Company acts as the principal in this arrangement, as the Company determines the price to charge customers for the skincare products and controls the products before they are transferred to the customer. The Company recognizes revenue for skincare products upon shipment.
Consumables and other accessories
The Company classifies its customers' purchases of replacement cycles for truSculpt iD and truSculpt flex, as well as replacement hand pieces, Titan and truSculpt 3D hand pieces, and single use disposable tips applicable to Secret PRO, Juliet, and Secret RF, as Consumable revenue, which provides the Company with a source of recurring revenue from existing customers. The Juliet and Secret RF products' single use disposable tips 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.
Equipment leasing
The Company leases equipment to customers through membership programs and receives a fixed monthly fee over the term of the arrangement. The Company classifies its lease income as product revenue. The Company recognizes lease income over the term of the lease if the lease is classified as an operating lease. For agreements that grant customers the right to purchase the leased system, the Company typically classifies the lease as a sales-type lease as the Company has determined it is reasonably certain that the customer will exercise the purchase option. On the commencement of sales-type leases, the Company recognizes revenue upfront in product revenue and the corresponding receivables recorded in other current assets and prepaid expenses on the condensed consolidated balance sheets (See Note 11 - Leases). There was no revenue recognized for sales-type leases for the three and six months ended June 30, 2021 or 2020. Revenue from equipment leases, which was accounted for as operating leases, was not material for the three and six months ended  June 30, 2021 or 2020.
Extended contract services
The Company offers post-warranty services to its customers through extended service contracts that cover parts and labor for terms 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
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basis for systems and detachable hand piece replacements. Revenue related to services performed on a time-and-materials basis is recognized when performed. These post-warranty services serve as additional sources of recurring revenue from the Company’s installed product base.
Training
Sales of systems to customers include training on the use of the system to be provided within 180 days of purchase. The Company considers training a separate performance obligation as customers can immediately benefit from the training together with the customer’s system. Training is also sold separately from systems. The Company recognizes revenue for training when the training is provided. Training is not required for customers to use the systems.
Customer Marketing Support
In North America, the Company offers marketing and consulting phone support to its customers across all system platforms. These customer marketing support services include a practice development model and marketing training, performed remotely with ongoing phone consultations for six months from date of purchase. The Company considers customer marketing support a separate performance obligation, and recognizes revenue over the six-month term of the contracts.
Loyalty Program
The Company has a customer loyalty program for qualified customers located in the U.S. and Canada. Under the loyalty program, based on their purchasing levels, customers accumulate points that can be redeemed for such rewards as the right to attend the Company’s advanced training event for truSculpt, or a ticket for the Company’s annual forum. A customer’s account must be in good standing to receive the benefits of the rewards program. Rewards are earned on a quarterly basis and must be used in the following quarter. All unused rewards are forfeited. The fair value of the reward earned by loyalty program members is included in accrued liabilities and recorded as a reduction of net revenue at the time the reward is earned. As of June 30, 2021 and December 31, 2020, the liability for the loyalty program included in accrued liabilities was $0.6 million and $0.3 million, respectively.
Deferred Sales Commissions
Incremental costs of obtaining a contract, which consist primarily of commissions and related payroll taxes, are capitalized and amortized on a straight-line basis over the expected period of benefit, except for costs that are recognized when product is sold. The Company uses the portfolio method to recognize the amortization expense related to these capitalized costs related to initial contracts and such expense is recognized over a period associated with the revenue of the related portfolio, which is generally two to three years.
Total capitalized costs as of June 30, 2021 and December 31, 2020 were $3.6 million and $3.4 million, respectively, and are included in Other long-term assets in the Company’s condensed consolidated balance sheet. Amortization expense for these assets was $0.5 million and $1.0 million during the three and six months ended June 30, 2021, respectively, and was $0.7 million and $1.4 million during the three and six months ended June 30, 2020, respectively. The amortization related to these capitalized costs is included in sales and marketing expense in the Company’s condensed consolidated statement of operations.
Note 8. StockholdersEquity and Stock-based Compensation Expense
The Company’s equity incentive plans are broad-based, long-term programs intended to attract and retain talented employees and align stockholder and employee interests. In June 2019, stockholders approved an amendment and restatement of the Amended and Restated 2004 Equity Incentive Plan as the 2019 Equity Incentive Plan (the “2019 Plan”) and approved an additional 700,000 shares, available for future grants (in addition to the 9,701,192 shares provided under the Prior Plan). In June 2021, stockholders approved an additional 450,000 shares for future grants. The 2019 Plan provides for the grant of incentive stock options, non-statutory stock options, RSAs restricted stock units (“RSUs”), stock appreciation rights, performance stock units, performance shares, and other stock or cash awards.
The Company issued 4,085 PSUs to a non-employee director during the three months ended June 30, 2021. The Company’s Board of Directors granted its executive officers, senior management and certain employees 82,549 and 171,137 performance stock units (“PSUs”) during the three and six months ended June 30, 2021. The PSUs granted in the three and six months ended June 30, 2021 vest subject to continued service and the Company’s achievement of certain operational goals for the 2021 fiscal year related to product milestones, sales and commercial milestones and certain cost reduction targets.
The Company issued 29,361 RSUs to its non-employee directors during the three months ended June 30, 2021. The Company’s Board of Directors also granted its executive officers and senior management 73,186 and 129,783 RSUs and 103,466 and
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172,139 non-qualified stock options (“NQs”) during the three and six months ended June 30, 2021, respectively. The RSUs and NQs vest over four years with one-fourth vesting on the first anniversary of the vesting commencement date of January 1, 2021 and 1/36th of the underlying shares vesting each month thereafter.
On September 30, 2019, the Company's Board awarded its new CEO, David H. Mowry, 67,897 shares, which were scheduled to vest over four years from 2019 through 2022 (the 2019 tranche is 15% of the award, or 10,185 PSUs; the 2020 tranche is 25% of the award, or 16,974 PSUs; the 2021 tranche is 30% of the award, or 20,369 PSUs; the 2022 tranche is 30% of the award, or 20,369 PSUs). These PSUs are subject to certain performance-based vesting criteria related to the achievement of financial metrics included in the Board approved annual budgets for the years 2019 through 2022. As of June 30, 2021, the 2019, 2020 and 2021 tranches met the criteria for measurement and recognition. 8,657 shares of the 2019 tranche vested during the three months ended March 31, 2020. The 2020 tranche did not vest in accordance with the initial terms, however, during the quarter ending June 30, 2021, the Company’s Board of Directors approved the vesting of Mr. Mowry’s 2020 PSU tranche. Upon this modification to the vesting terms of the 2020 PSU tranche, the Company recognized $0.5 million of stock-based compensation expense in the quarter ending June 30, 2021.
Under the 2019 Plan, the Company issued 92,103 and 214,797 shares of common stock during the three and six months ended June 30, 2021, in conjunction with stock options exercised and the vesting of RSUs and PSUs, net of shares withheld for employee taxes.
As of June 30, 2021, the unrecognized compensation cost, net of expected forfeitures, was $2.0 million for stock options, which will be recognized over an estimated weighted-average remaining amortization period of 3.6 years. The unrecognized compensation cost, net of expected forfeitures, for stock awards, including performance-based awards, was $16.1 million, which will be recognized over an estimated weighted-average remaining amortization period of 2.0 years. The actual expense recorded in the future may vary 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 2019 Plans is summarized as follows:
Options Outstanding
Shares
Available
for Grant
Number of
Stock Options
Outstanding
Weighted-
Average
Exercise
Price
Weighted Average Remaining Term
 (in Years)
Aggregate Intrinsic Value
(in Millions)
Balance, December 31, 20201,085,170 217,007 $22.35 3.75$1.47 
Additional shares reserved450,000 — $— 
Awards granted(354,735)— $— 
Options granted(172,139)172,139 $30.71 
Options exercised (53,598)$23.34 
Stock awards canceled / forfeited / expired212,571 — $— 
Options canceled / forfeited / expired16,224 (16,224)$33.27 
Balance, June 30, 20211,237,091 319,324 $26.14 5.13$7.34 

Stock Awards Outstanding
Number of Awards OutstandingWeighted Average Grant Date Fair Value per ShareAggregate Intrinsic Value
(in Millions)
Balance, December 31, 2020779,757 $23.96 $18.80 
Stock awards granted354,735 $31.48 
Awards released(161,199)$22.33 
Stock awards canceled / forfeited / expired(212,571)$28.00 
Balance, June 30, 2021760,722 $26.68 $7.34 


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Stock-based Compensation Expense
Stock-based compensation expense by department recognized during the three and six months ended June 30, 2021 and 2020 was as follows (in thousands):
Three Months Ended
June 30,
Six Months Ended
June 30,
2021202020212020
Cost of revenue$434 $743 $578 $1,033 
Sales and marketing522 1,251 1,243 1,970 
Research and development307 769 608 1,090 
General and administrative1,656 1,332 2,336 1,982 
Total stock-based compensation expense$2,919 $4,095 $4,765 $6,075 

Note 9. Net Income (Loss) Per Share
On January 1, 2021, the Company adopted the accounting standard update to simplify the accounting for convertible debt instruments. The Company now uses the if converted method for its Convertible notes in calculating the diluted net income per share, and includes the effect of potential share settlement for the Convertible notes, if the effect is dilutive.
Basic earnings per share (“EPS”) is computed based on the weighted average number of shares of common stock outstanding during the period. Diluted EPS is computed based on the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method or the if-converted method. Dilutive potential common shares include outstanding stock options, stock awards, performance stock awards, and conversion shares under the Convertible notes. The diluted EPS is computed with the assumption that the Company will settle the convertible debt in shares, rather than cash.

As of June 30, 2021, the Company’s Convertible notes were potentially convertible into 4,167,232 shares of common stock. The Company used the if converted stock method to calculate the potential dilutive effect of the conversion spread on diluted net income per share, for the three and six months ended June 30, 2021.

The denominator for diluted net income per share does not include any effect from the capped call transactions the Company entered into concurrently with the issuance of the Convertible notes, as this effect would be anti-dilutive. In the event of conversion of a Convertible 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.

For the three and six months ended June 30, 2020, basic loss per common share and diluted loss per common share are the same as inclusion of any potentially issuable shares would be anti-dilutive.
The following table sets forth the computation of basic and diluted net income (loss) and the weighted average number of
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shares used in computing basic and diluted net income (loss) per share (in thousands, except per share data):
Three Months Ended
June 30,
Six Months Ended
June 30,
2021202020212020
Numerator:
Net income (loss) used in calculating net income (loss) per share, basic$7,746 $(11,394)$7,387 $(23,808)
Interest expense on Convertible notes, net of tax758  740  
Amortization of debt issuance cost, net of tax209  204  
Net income used in calculating net income per share, diluted$8,713 $(11,394)$8,331 $(23,808)
Denominator:
Weighted average shares of common stock outstanding used in computing net income (loss) per share, basic17,862 17,055