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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 September 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 October 29, 2021, was 17,956,709.


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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)
September 30,
2021
December 31,
2020
Assets
Current assets:
Cash and cash equivalents$162,486 $47,047 
Accounts receivable, net of allowance for credit losses of $1,227 and $1,598, respectively
30,760 21,962 
Inventories35,493 28,508 
Other current assets and prepaid expenses13,350 8,779 
Total current assets242,089 106,296 
Property and equipment, net2,205 2,299 
Deferred tax asset589 643 
Operating lease right-of-use assets15,269 17,076 
Goodwill1,339 1,339 
Other long-term assets6,955 5,080 
Total assets$268,446 $132,733 
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable$7,259 $6,684 
Accrued liabilities44,295 32,295 
Operating lease liabilities2,394 2,260 
PPP loan payable 3,630 
Deferred revenue9,188 9,489 
Total current liabilities63,136 54,358 
Deferred revenue, net of current portion1,492 1,748 
Operating lease liabilities, net of current portion14,117 15,950 
PPP loan payable, net of current portion 3,555 
Convertible notes, net of unamortized debt issuance costs of $4,225
134,025  
Other long-term liabilities333 242 
Total liabilities213,103 75,853 
Commitments and Contingencies (Notes 12)
Stockholders’ equity:
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 capital109,563 117,097 
Accumulated deficit(54,238)(60,235)
Total stockholders’ equity55,343 56,880 
Total liabilities and stockholders’ equity$268,446 $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
September 30,
Nine Months Ended
September 30,
2021202020212020
Net revenue:
Products$50,694 $33,254 $146,056 $81,390 
Service6,690 5,878 19,585 16,350 
Total net revenue57,384 39,132 165,641 97,740 
Cost of revenue:
Products20,259 14,017 59,483 40,326 
Service3,700 3,369 11,234 9,708 
Total cost of revenue23,959 17,386 70,717 50,034 
Gross profit33,425 21,746 94,924 47,706 
Operating expenses:
Sales and marketing19,190 12,286 52,668 38,109 
Research and development5,802 3,432 14,764 10,294 
General and administrative7,807 7,239 23,633 23,575 
Total operating expenses32,799 22,957 91,065 71,978 
Income (loss) from operations626 (1,211)3,859 (24,272)
Interest and other income (expense), net:
Amortization of debt issuance costs(225) (492) 
Interest on convertible notes(768) (1,737) 
Gain on extinguishment of PPP loan  7,185  
Other expense, net(561)(382)(1,976)(586)
Total interest and other income (expense), net(1,554)(382)2,980 (586)
Income (loss) before income taxes(928)(1,593)6,839 (24,858)
Income tax expense462 664 842 1,207 
Net income (loss)$(1,390)$(2,257)$5,997 $(26,065)
Net income (loss) per share:
Basic$(0.08)$(0.13)$0.34 $(1.59)
Diluted$(0.08)$(0.13)$0.33 $(1.59)
Weighted-average number of shares used in per share calculations:
Basic 17,945 17,603 17,860 16,368 
Diluted17,945 17,603 18,327 16,368 
The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
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CUTERA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(Unaudited)
Three Months Ended
September 30,
Nine Months Ended
September 30,
2021202020212020
Net income (loss)$(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)
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 Nine Months Ended September 30, 2021
Common StockAdditional
Paid-in
Capital
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 — 648 — — 648
Exercise of stock options57,498 — 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, 202117,951,534 $18 $109,563 $(54,238)$ $55,343 
Common StockAdditional
Paid-in
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Income (loss)
Total
Stockholders’
Equity
SharesAmount
Balance at July 1, 202117,933,020 $18 $106,173 $(52,848)$ $53,343 
Issuance of common stock for employee purchase plan — 3 — — 3
Exercise of stock options3,900 — 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, 202117,951,534 $18 $109,563 $(54,238)$ $55,343 








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Three and Nine Months Ended September 30, 2020

Common StockAdditional
Paid-in
Capital
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 options46,878 — 419 — — 419 
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
2,742,750 3 26,492 — — 26,495 
Stock-based compensation expense
— — 8,057 — — 8,057 
Net loss— — — (26,065)— (26,065)
Net change in unrealized loss on available-for-sale investments
— — — — 61 61 
Balance at September 30, 202017,625,849 $18 $114,410 $(62,423)$1 $52,006 
 
Common StockAdditional
Paid-in
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Income (loss)
Total
Stockholders’
Equity
SharesAmount
Balance at July 1, 202017,567,688 $18 $112,644 $(60,166)$3 $52,499 
Exercise of stock options750 — 8 8 
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
— — 1,982 — — 1,982 
Net loss— — — (2,257)— (2,257)
Net change in unrealized loss on available-for-sale investments
— — — — (2)(2)
Balance at September 30, 202017,625,849 $18 $114,410 $(62,423)$1 $52,006 
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)
Nine Months Ended September 30,
20212020
Cash flows from operating activities:
Net income (loss)$5,997 $(26,065)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Stock-based compensation8,507 8,057 
Depreciation and amortization1,014 1,056 
Amortization of contract acquisition costs1,430 2,017 
Amortization of debt issuance costs492  
Impairment of capitalized cloud computing costs182 805 
Change in deferred tax asset54 (77)
Provision for credit losses101 1,750 
Gain on sale of property and equipment(45) 
PPP loan forgiveness(7,185) 
Change in right-of-use assets1,681 250 
Other 327 
Changes in assets and liabilities:
Accounts receivable(8,899)2,209 
Inventories(6,926)4,588 
Other current assets and prepaid expenses(4,571)(1,273)
Other long-term assets(3,487)(1,701)
Accounts payable575 (5,886)
Accrued liabilities11,782 (5,061)
Operating lease liabilities(1,573) 
Deferred revenue(557)(2,398)
Net cash provided by (used in) operating activities(1,428)(21,402)
Cash flows from investing activities:
Acquisition of property, equipment, and software(382)(774)
Proceeds from disposal of property and equipment71  
Proceeds from maturities of marketable investments 19,000 
Purchase of marketable investments (24,411)
Net cash used in investing activities(311)(6,185)
Cash flows from financing activities:
Proceeds from exercise of stock options and employee stock purchase plan2,056 856 
Purchase of capped call(16,134) 
Proceeds from PPP loan 7,167 
Proceeds from issuance of Convertible notes138,250  
Payment of issuance costs of Convertible notes(4,717) 
Proceeds from equity offering 28,798 
Cost of equity offering (2,303)
Taxes paid related to net share settlement of equity awards(1,963)(3,340)
Payments on finance lease obligations(314)(513)
Net cash provided by financing activities117,178 30,665 
Net increase in cash and cash equivalents115,439 3,078 
Cash and cash equivalents at beginning of period47,047 26,316 
Cash and cash equivalents at end of period$162,486 $29,394 
Supplemental disclosure of non-cash items:
Assets acquired under finance lease$271 $27 
Assets acquired under operating lease$123 $10,623 
Gain on extinguishment of PPP loan$7,185 $ 
Supplemental disclosure of cash flow information:
Income tax paid$763 $ 
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, 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 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 Product 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, the Netherlands, 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 September 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 nine months ended September 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 third 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 and 2021, 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 nine months ended September 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 three quarters 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 were necessary during the nine months ended September 30, 2021, other than an impairment loss of $0.2 million on capitalized costs of cloud-based customer relationship management ("CRM") software. 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 the 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 COVID-19 pandemic. If customers 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 may 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 and third quarters of 2021, as the Company's stock traded at a price in excess of the conversion price. As a result, the Notes were convertible at the option of the holder from July 1, 2021 until September 30, 2021, and are currently convertible from October 1, 2021 until December 31, 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. The Company did not receive any conversion requests in the three months ended September 30, 2021. To the extent there are any conversion requests during the period from October 1, 2021 until December 31, 2021, the Company intends to settle such conversion requests by issuing shares of common stock. Therefore, as of September 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 September 30, 2021.
The Company capitalized cloud computing systems implementation costs of $1.2 million and $1.8 million during the three and nine months ended September 30, 2021, respectively. 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 nine months ended September 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)September 30,
2021
December 31,
2020
Cash and cash equivalents$162,486 $47,047 
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The Company had no marketable securities as of September 30, 2021 and December 31, 2020.
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 September 30, 2021 and December 31, 2020, inventories consist of the following (in thousands):
September 30,
2021
December 31,
2020
Raw materials$18,858 $14,874 
Work in process1,978 1,030 
Finished goods14,657 12,604 
Total$35,493 $28,508 
Accrued Liabilities
As of September 30, 2021 and December 31, 2020, accrued liabilities consist of the following (in thousands):
September 30,
2021
December 31,
2020
Bonus and payroll-related accruals$18,220 $12,197 
Sales and marketing accruals3,515 2,352 
Accrued inventory in transit4,623 2,476 
Product warranty3,926 4,124 
Accrued sales tax7,085 5,343 
Other accrued liabilities6,926 5,803 
Total$44,295 $32,295 
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Note 5. Product Warranty
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, the Netherlands, 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 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 generally recognized at the time when costs are incurred.
The following table provides the changes in the product warranty accrual for the three and nine months ended September 30, 2021 and 2020 (in thousands):
Three Months Ended
September 30,
Nine Months Ended
September 30,
2021202020212020
Beginning Balance$4,438 $4,815 $4,124 $6,400 
Add: Accruals for warranties issued during the period803 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 
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 services. Approximately 86% of the Company’s deferred revenue balance of $10.7 million as of September 30, 2021 will be recognized over the next 12 months.
The following table provides changes in the deferred revenue balance for the three and nine months ended September 30, 2021 and 2020 (in thousands):
Three Months Ended
September 30,
Nine Months Ended
September 30,
2021202020212020
Beginning balance$11,403 $11,779 $11,237 $14,222 
Add: Payments received3,880 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 
Costs for extended service contracts were $2.1 million and $6.3 million for the three and nine months ended September 30, 2021, respectively, and were $1.9 million and $5.6 million for the three and nine months ended September 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 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, respectively.
The Company has certain systems 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 or
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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).
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 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. The Company acts as the principal in this
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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, and Secret RF, as Consumable revenue, which provides the Company with a source of recurring revenue from existing customers. The Secret RF product single use disposable tips must be replaced after every treatment. 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 is classified in Other current assets and prepaid expenses on the condensed consolidated balance sheets (See Note 11 - Leases). There were no sales-type leases during the three and nine months ended September 30, 2021 or 2020. Operating lease income was not material for the three and nine months ended September 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 basis for systems and detachable hand piece replacements. Revenue related to services performed on a time-and-materials basis is recognized when performed.
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.
Loyalty Program
The Company has a customer loyalty program for qualified customers located in the U.S., Canada, Australia and New Zealand. 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 September 30, 2021 and December 31, 2020, the liability for the loyalty program included in accrued liabilities was $0.4 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 deferred and amortized on a straight-line basis over an expected period of benefit estimated to be two to three years, except for costs that are recognized when product is sold.
Total capitalized costs as of September 30, 2021 and December 31, 2020 were $3.8 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 $0.4 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 during the three and nine months ended September 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.
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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 September 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, restricted stock units (“RSUs”), performance stock units ("PSUs"), and other stock or cash awards.
The Company’s Board of Directors granted the Company's executive officers, senior management and certain employees 463,593 PSUs during the nine months ended September 30, 2021. Of this total, 198,591 units vest subject to 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. 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.

In July 2021, the Company granted 265,002 units to certain employees. This grant consists of four separate vesting quantities that will vest from April 2023 through June 2024 upon the achievement of milestones associated with each vesting quantity and continued service.
Activity under the Company's equity incentive plans is summarized as follows:
Shares
Available
for Grant
Balance, December 31, 20201,085,170 
Additional shares reserved450,000 
RSUs granted(213,522)
PSUs granted(463,593)
Options granted(172,139)
Stock awards canceled / forfeited / expired295,392 
Options canceled / forfeited / expired24,090 
Balance, September 30, 20211,005,398 

Options Outstanding
Number of
Stock Options
Outstanding
Weighted-
Average
Exercise
Price
Weighted Average Remaining Term
 (in Years)
Balance, December 31, 2020217,007 $22.35 3.75
Options granted172,139 $30.71 
Options exercised(57,498)$24.49 
Options canceled / forfeited / expired(24,090)$32.90 
Balance, September 30, 2021307,558 $25.80 4.84

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Stock Awards Outstanding
Number of Awards OutstandingWeighted Average Grant Date Fair Value per Share
Balance, December 31, 2020779,757 $23.96 
RSUs granted213,522 $36.80 
PSUs granted463,593 $41.23 
Awards released(175,813)$22.45 
Stock awards canceled / forfeited / expired(298,028)$27.24 
Balance, September 30, 2021983,031 $33.91 
Stock-based Compensation Expense
Stock-based compensation expense by department recognized during the three and nine months ended September 30, 2021 and 2020 was as follows (in thousands):
Three Months Ended
September 30,
Nine Months Ended
September 30,
2021202020212020
Cost of revenue$330 $326 $908 $1,359 
Sales and marketing711 648 1,954 2,618 
Research and development1,020 254 1,628 1,344 
General and administrative1,681 754 4,017 2,736 
Total stock-based compensation expense$3,742 $1,982 $8,507 $8,057 
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 (loss) 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 and the if-converted method. Dilutive potential common shares include outstanding stock options, restricted stock units, performance stock units, ESPP shares 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 September 30, 2021, the Company’s Convertible notes were potentially convertible into 4,167,232 shares of common stock. The Company used the if-converted method to calculate the potential dilutive effect of the conversion spread on diluted net income per share for the nine months ended September 30, 2021.

The denominator for diluted net income (loss) 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. 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.

For the three and nine months ended September 30, 2020, and the three months ended September 30, 2021, basic loss per common share and diluted loss per common share are the same in each respective period as the inclusion of any potentially issuable shares would be anti-dilutive.

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The following table sets forth the computation of basic and diluted net income (loss) and the weighted average number of shares used in computing basic and diluted net income (loss) per share (in thousands, except per share data):
Three Months Ended
September 30,
Nine Months Ended
September 30,
2021202020212020
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, basic17,945 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, diluted17,945 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)

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 income (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,
2021202020212020
Capped call4,167  4,167  
Convertible notes4,167  4,167  
Options to purchase common stock308 232 187 246 
Restricted stock units528 733 72 735 
Performance stock units455 24 24 83 
Employee stock purchase plan shares22 17  57 
Total9,647 1,006 8,617 1,121 
Note 10. Income Taxes
For the three and nine months ended September 30, 2021, the Company's income tax expense was $0.5 million and $0.8 million, respectively, compared to $0.7 million and $1.2 million for the three and nine months ended September 30, 2020, respectively.
The Company's income tax expense for the three and nine months ended September 30, 2021 is due primarily to income taxes in foreign jurisdictions. The PPP loan forgiveness recognized during the nine months ended September 30, 2021 is excluded from taxable income under Section 1106(i) of 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.
On March 27, 2020, the U.S. federal government enacted the CARES Act, which changed several of the existing U.S. corporate income tax laws by, among other things, increasing the amount of deductible interest, allowing companies to carry back certain Net Operating Losses (“NOLs”) and increasing the amount of NOLs that corporations can use to offset income. The CARES Act did not have a material impact on the Company's income tax provision, deferred tax assets and liabilities, and related taxes
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payable. The Company is currently assessing the future implications of these provisions within the CARES Act on the Company's consolidated financial statements, but does not expect the impact to be material.
Note 11. Leases
The Company is a party to certain operating and finance leases for vehicles, office space and storage facilities. The Company’s operating leases consist of office space, as well as storage facilities and finance leases consist of automobiles. The Company’s leases generally have remaining terms of one to ten years, some of which include options to renew the leases for up to five years. The Company leases space for operations in the United States, 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.
The Company determines if a contract contains a lease at inception. Operating lease assets and liabilities are recognized at the lease commencement date. Operating lease liabilities represent the present value of lease payments not yet paid. Operating lease assets represent the right to use an underlying asset and are based upon the operating lease liabilities adjusted for prepayments or accrued lease payments, initial direct costs, lease incentives, and impairment of operating lease assets. To determine the present value of lease payments not yet paid, the Company estimates the incremental secured borrowing rates corresponding to the maturities of the leases. The Company based the rate estimates on prevailing financial market conditions, credit analysis, and management judgment.
The Company recognizes expense for these leases on a straight-line basis over the lease term. Additionally, tenant incentives used to fund leasehold improvements are recognized when earned and reduce the Company’s right-of-use (“ROU”) asset related to the lease. These are amortized through the ROU asset as reductions of expense over the