SEC Filing | Cutera Inc.

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cutr-20220930

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, 2022


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to_____.

Commission File Number: 000-50644

Cutera, Inc.

(Exact name of registrant as specified in its charter)


Delaware			77-0492262
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)

3240 Bayshore Blvd., Brisbane, California 94005

(Address of principal executive offices)

(415) 657-5500

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock ($0.001 par value)	CUTR	The NASDAQ Stock Market, LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes 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 filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes ☐ No x

The number of shares of Registrant’s common stock issued and outstanding as of October 31, 2022, was 19,615,478.

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CUTERA, INC.

FORM 10-Q

TABLE OF CONTENTS


		Page
PART I	FINANCIAL INFORMATION

Item 1	Financial Statements (unaudited)	3
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Operations	4
	Condensed Consolidated Statements of Comprehensive Income (Loss)	5
	Condensed Consolidated Statements of Changes in Stockholders’ Equity	6
	Condensed Consolidated Statements of Cash Flows	8
	Notes to Condensed Consolidated Financial Statements	9
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
Item 3	Quantitative and Qualitative Disclosures About Market Risk	41
Item 4	Controls and Procedures	41

PART II	OTHER INFORMATION

Item 1	Legal Proceedings	42
Item 1A	Risk Factors	42
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	43
Item 3	Defaults Upon Senior Securities	43
Item 4	Mine Safety Disclosures	43
Item 5	Other Information	44
Item 6	Exhibits	45
	Signature	46

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In this Quarterly Report on Form 10-Q, “Cutera,” “the Company,” “we,” “us” and “its” refer to Cutera, Inc. and its consolidated subsidiaries.

This report may contain references to its proprietary intellectual property, including among others, trademarks for its systems and ancillary products, "AviClearTM," "Cutera®," "AccuTip 500®," “CoolGlide®,” “CoolGlide excel®,” “enlighten®,” “excel HR®,” “excel V®,” “excel V+®,” “LimeLight®,” "MyQ®," “Pearl®,” “PICO Genesis®,” “ProWave 770®,” “Solera®,” “Titan®,” “truSculpt®,” “truSculpt iDTM,” “truSculpt flexTM,”"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, 2022		December 31, 2021
Assets
Current assets:
Cash and cash equivalents	$	45,880	$	164,164
Marketable investments	204,946		—
Accounts receivable, net of allowance for credit losses of $1,504 and $899, respectively	35,876		31,449
Inventories, net	55,938		39,503
Other current assets and prepaid expenses	23,672		14,545
Total current assets	366,312		249,661

Property and equipment, net	34,479		3,019
Deferred tax assets	626		778
Goodwill	1,339		1,339
Operating lease right-of-use assets	13,033		14,627
Other long-term assets	11,668		10,169
Restricted cash	700		700
Total assets	$	428,157	$	280,293

Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	34,176	$	7,891
Accrued liabilities	50,791		54,100
Operating lease liabilities	2,712		2,419
Deferred revenue	10,579		9,490
Total current liabilities	98,258		73,900

Deferred revenue, net of current portion	1,822		1,335
Operating lease liabilities, net of current portion	11,642		13,483
Convertible notes, net of unamortized debt issuance costs of $8,869 and $4,007, respectively	300,256		134,243
Other long-term liabilities	685		763
Total liabilities	412,663		223,724

Commitments and Contingencies (Note 13)

Stockholders’ equity:
Common stock, $0.001 par value; authorized: 50,000,000 shares; issued and outstanding: 19,607,751 and 17,995,344 shares at September 30, 2022 and December 31, 2021, respectively	20		18
Additional paid-in capital	148,535		114,724
Accumulated other comprehensive loss	(336)		—
Accumulated deficit	(132,725)		(58,173)
Total stockholders’ equity	15,494		56,569
Total liabilities and stockholders’ equity	$	428,157	$	280,293

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,
	2022		2021		2022		2021
Net revenue:
Products	$	56,540	$	50,694	$	167,195	$	146,056
Service	6,268		6,690		17,851		19,585
Total net revenue	62,808		57,384		185,046		165,641
Cost of revenue:
Products	25,255		20,259		74,066		59,483
Service	3,305		3,700		9,900		11,234
Total cost of revenue	28,560		23,959		83,966		70,717
Gross profit	34,248		33,425		101,080		94,924

Operating expenses:
Sales and marketing	26,488		19,190		78,433		52,668
Research and development	6,389		5,802		19,747		14,764
General and administrative	10,804		7,807		35,554		23,633
Total operating expenses	43,681		32,799		133,734		91,065
(Loss) income from operations	(9,433)		626		(32,654)		3,859
Interest and other (expense) income, net:
Amortization of debt issuance costs	(400)		(225)		(917)		(492)
Interest on convertible notes	(1,739)		(768)		(3,666)		(1,737)
Loss on extinguishment of convertible notes	—		—		(34,423)		—
Gain on extinguishment of PPP loan	—		—		—		7,185
Other income (expense), net	265		(561)		(2,018)		(1,976)
Total interest and other (expense) income, net	(1,874)		(1,554)		(41,024)		2,980
(Loss) income before income taxes	(11,307)		(928)		(73,678)		6,839
Income tax expense	827		462		874		842
Net (loss) income	$	(12,134)	$	(1,390)	$	(74,552)	$	5,997

Net (loss) income per share:
Basic	$	(0.62)	$	(0.08)	$	(3.95)	$	0.34
Diluted	$	(0.62)	$	(0.08)	$	(3.95)	$	0.33
Weighted-average number of shares used in per share calculations:
Basic	19,593		17,945		18,897		17,860
Diluted	19,593		17,945		18,897		18,327

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,
	2022		2021		2022		2021
Net (loss) income	$	(12,134)	$	(1,390)	$	(74,552)	$	5,997
Other comprehensive loss:
Available-for-sale investments
Net change in unrealized loss on available-for-sale investments	(153)		—		(336)		—
Other comprehensive loss, net of tax	(153)		—		(336)		—
Comprehensive (loss) income	$	(12,287)	$	(1,390)	$	(74,888)	$	5,997

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 STOCKHOLDERS’ EQUITY

(in thousands, except share amounts)

Three and Nine Months Ended September 30, 2022


	Common Stock			Additional Paid-in Capital		Accumulated Deficit		Accumulated Other Comprehensive Loss		Total Stockholders’ Equity
	Shares	Amount
Balance at December 31, 2021	17,995,344	$	18	$	114,724	$	(58,173)	$	—	$	56,569
Issuance of common stock for employee purchase plan	27,810	—		1,063		—		—		1,063
Exercise of stock options	27,023	—		624		—		—		624
Issuance of common stock in settlement of restricted and performance stock units, net of shares withheld for employee taxes	203,226	—		(4,820)		—		—		(4,820)
Stock-based compensation expense	—	—		13,021		—		—		13,021
Purchase of capped call, inclusive of issuance cost of $353	—	—		(32,024)		—		—		(32,024)
Issuance of common stock in extinguishment of convertible notes	1,354,348	2		55,947		—		—		55,949
Net change in unrealized loss on available-for-sale investments	—	—		—		—		(336)		(336)
Net loss	—	—		—		(74,552)		—		(74,552)
Balance at September 30, 2022	19,607,751	$	20	$	148,535	$	(132,725)	$	(336)	$	15,494


	Common Stock			Additional Paid-in Capital		Accumulated Deficit		Accumulated Other Comprehensive Loss		Total Stockholders’ Equity
	Shares	Amount
Balance at June 30, 2022	19,560,163	$	20	$	144,628	$	(120,591)	$	(183)	$	23,874
Exercise of stock options	12,179	—		248		—		—		248
Issuance of common stock in settlement of restricted and performance stock units, net of shares withheld for employee taxes	35,409	—		(586)		—		—		(586)
Stock-based compensation expense	—	—		4,245		—		—		4,245
Net change in unrealized loss on available-for-sale investments	—	—		—		—		(153)		(153)
Net loss	—	—		—		(12,134)		—		(12,134)
Balance at September 30, 2022	19,607,751	$	20	$	148,535	$	(132,725)	$	(336)	$	15,494

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Three and Nine Months Ended September 30, 2021


	Common Stock			Additional Paid-in Capital		Retained Earnings (Accumulated Deficit)		Accumulated Other Comprehensive Income (Loss)		Total Stockholders’ Equity
	Shares	Amount
Balance at December 31, 2020	17,679,232	$	18	$	117,097	$	(60,235)	$	—	$	56,880
Issuance of common stock for employee purchase plan	38,991	—		648		—		—		648
Exercise of stock options	57,498	—		1,408		—		—		1,408
Purchase of capped call	—	—		(16,134)		—		—		(16,134)
Issuance of common stock in settlement of restricted and performance stock units, net of shares withheld for employee taxes	175,813	—		(1,963)		—		—		(1,963)

Stock-based compensation expense	—	—		8,507		—		—		8,507
Net income	—	—		—		5,997		—		5,997

Balance at September 30, 2021	17,951,534	$	18	$	109,563	$	(54,238)	$	—	$	55,343


	Common Stock			Additional Paid-in Capital		Accumulated Deficit		Accumulated Other Comprehensive Income (Loss)		Total Stockholders’ Equity
	Shares	Amount
Balance at June 30, 2021	17,933,020	$	18	$	106,173	$	(52,848)	$	—	$	53,343
Issuance of common stock for employee purchase plan	—	—		3		—		—		3
Exercise of stock options	3,900	—		156		—		—		156
Issuance of common stock in settlement of restricted and performance stock units, net of shares withheld for employee taxes	14,614	—		(511)		—		—		(511)
Stock-based compensation expense	—	—		3,742		—		—		3,742
Net loss	—	—		—		(1,390)		—		(1,390)

Balance at September 30, 2021	17,951,534	$	18	$	109,563	$	(54,238)	$	—	$	55,343

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,
	2022		2021
Cash flows from operating activities:
Net (loss) income	$	(74,552)	$	5,997
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Stock-based compensation	13,021		8,507
Depreciation and amortization	1,603		1,014
Amortization of contract acquisition costs	1,815		1,430
Amortization of debt issuance costs	917		492
Unrealized gain on foreign exchange forward	(292)		—
Impairment of capitalized cloud computing costs	—		182
Change in deferred tax assets	152		54
Provision for excess and obsolete inventories	110		1,335
Provision for credit losses	677		101
Loss (gain) on sale of property and equipment	86		(45)
Gain on extinguishment of PPP loan	—		(7,185)
Change in right-of-use assets	1,976		1,681
Loss on extinguishment of convertible notes	34,423		—
Changes in assets and liabilities:
Accounts receivable	(5,104)		(8,899)
Inventories, net	(28,725)		(8,261)
Other current assets and prepaid expenses	(8,835)		(4,571)
Other long-term assets	(3,644)		(3,487)
Accounts payable	20,442		575
Accrued liabilities	(3,684)		11,782
Operating lease liabilities	(1,930)		(1,573)
Deferred revenue	1,576		(557)
Net cash used in operating activities	(49,968)		(1,428)
Cash flows from investing activities:
Acquisition of property and equipment	(14,107)		(382)
Proceeds from disposal of property and equipment	—		71
Proceeds from maturities of marketable investments	47,000		—
Purchase of marketable investments	(252,282)		—
Net cash used in investing activities	(219,389)		(311)
Cash flows from financing activities:
Proceeds from exercise of stock options and employee stock purchase plan	1,687		2,056
Taxes paid related to net share settlement of equity awards	(4,820)		(1,963)
Purchase of capped call	(31,671)		(16,134)
Payment of issuance costs of capped call	(353)		—
Proceeds from issuance of convertible notes	240,000		138,250
Payment of issuance costs of convertible notes	(7,602)		(4,717)
Extinguishment of convertible notes	(45,777)		—
Payments on finance lease obligations	(391)		(314)
Net cash provided by financing activities	151,073		117,178
Net (decrease) increase in cash, cash equivalents and restricted cash	(118,284)		115,439
Cash, cash equivalents, and restricted cash at beginning of period	164,864		47,047
Cash, cash equivalents, and restricted cash at end of period	$	46,580	$	162,486
Supplemental non-cash investing and financing activities:
Assets acquired under finance lease	$	689	$	271
Assets acquired under operating lease	$	549	$	123
Transfer of inventories to property and equipment	$	12,180	$	—
Acquisition of property and equipment	$	5,843	$	—
Supplemental disclosure of cash flow information:
Cash paid for interest	$	2,685	$	—
Income tax paid	$	1,909	$	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”) is a leading provider of aesthetic and dermatology solutions for practitioners worldwide. The Company develops, manufactures, distributes, and markets energy-based product platforms for use by medical practitioners, enabling them to offer safe and effective 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, and single use disposable tips applicable to Secret PRO and Secret RF, as well as AviClear (“Consumables” revenue); and (iii) the distribution of third party manufactured skincare products (“Skincare” revenue); 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.

In March 2022, the Company received 510(k) clearance from the U.S. Food and Drug Administration for the AviClear acne treatment device ("AviClear"). AviClear is a laser treatment that offers a safe, prescription-free solution for acne. AviClear is currently available in a limited commercial capacity in the U.S. and the Company expects a full commercial launch by the end of the current calendar year.

The Company’s corporate headquarters and U.S. operations are located in Brisbane, California, where the Company conducts manufacturing, warehousing, research and development, regulatory, sales and marketing, service, and administrative activities. The Company markets, sells and services 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, 2022 and December 31, 2021, 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, 2022, and 2021. The December 31, 2021 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 the current year presentation. All 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, 2021 filed with the Securities and Exchange Commission (the “SEC”) on March 1, 2022.

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, product liability matters, ability to protect proprietary technology from counterfeit versions of the Company's products, strategic relationships and dependence on key individuals.

The COVID-19 outbreak and related variants have negatively affected the United States and global economies. The Company cannot presently predict the scope and severity of any impacts in future periods from business shutdowns or

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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.

In addition, the world is currently experiencing widespread inflation. Household budgets could become tight with cash being conserved and spent on essential items like housing, gas, food, clothing and healthcare. Given the inflationary environment, fewer funds may be spent on aesthetic treatments, which may translate into less demand for the Company's products and less revenue as a result.

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 three and nine months ended September 30, 2022. The Company will continue to monitor future conditions important to its assessment of potential impairment of its long-lived assets and goodwill.

In 2021, the Company 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 Company relies on ZO as the sole supplier for skincare products. 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.

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.

Derivatives

Derivatives are recognized at fair value and reported on a gross basis. The Company enters into forward currency exchange contracts to mitigate the impact of currency fluctuations on transactions denominated in nonfunctional currencies, thereby limiting the Company's risk that would otherwise result from changes in exchange rates. Forward currency exchange contracts are recorded at their fair value each period.

Leases

The Company incurs costs to fulfill its lease agreement obligations with its AviClear device lessees. These costs consist of freight, installation, and training. In addition to these mobilization costs, the Company incurs commission costs associated with the placement of the AviClear device. The Company capitalizes commission costs and has made a policy election to capitalize the mobilization costs.

In the three months ended September 30, 2022, the Company capitalized $0.7 million of mobilization costs and $1.3 million of deferred commission costs. These costs are recorded in Other long-term assets in the Company's condensed consolidated balance sheets and will be amortized over the expected lease term.

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 commissions, allowance for credit losses, sales allowances, fair value of investments, 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

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the Company’s leases, variables used in calculating the fair value of the Company's equity awards, expected achievement of performance based vesting criteria and management performance bonuses, assumptions used in operating and sales-type lease classifications, the standalone selling price of the Company's products and services, the period of benefit used to capitalize and amortize contract acquisition costs, variable considerations, 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 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 14 – Debt.

Note 2. Cash, Cash Equivalents and Marketable Investments

The Company invests its cash primarily in money market funds and in highly liquid debt instruments of U.S. federal and municipal governments and their agencies. All highly liquid investments with stated maturities of three months or less from date of purchase are classified as cash equivalents and all highly liquid investments with stated maturities of greater than three months are classified as marketable investments. The majority of the Company’s cash and investments are held in U.S. banks and U.S. Treasuries. The Company's foreign subsidiaries maintain a limited amount of cash in their local banks to cover their short term operating expenses.

The Company determines the appropriate classification of its investments in marketable securities at the time of purchase and re-evaluates such designation at each balance sheet date. The Company’s marketable securities have been classified and accounted for as available-for-sale securities. Investments with remaining maturities of more than one year are viewed by the Company as available to support current operations and are classified as current assets under the caption marketable investments in the accompanying condensed consolidated balance sheets. Investments in available-for-sale debt securities are measured at fair value under the guidance in ASC 320. Credit losses on impaired available-for-sale debt securities are recognized through an allowance for credit losses. Under ASC 326, credit losses recognized on an available-for-sale debt security should not reduce the net carrying amount of the available-for-sale debt security below its fair value. Any changes in fair value unrelated to credit are recognized as an unrealized gain or loss in other comprehensive income.

The following table summarizes the Company's cash and cash equivalents and marketable investments (in thousands):


			Gross		Gross		Fair
	Amortized		Unrealized		Unrealized		Market
September 30, 2022	Cost		Gains		Losses		Value
Cash and cash equivalents	$	45,880	$	—	$	—	$	45,880
Non-current restricted cash	700		—		—		700
Cash, cash equivalents, and restricted cash as reported within the Consolidated Statements of Cash Flows	46,580		—		—		46,580
Marketable investments - U.S. Treasury	205,282		13		(349)		204,946
Total	$	251,862	$	13	$	(349)	$	251,526

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			Gross		Gross		Fair
	Amortized		Unrealized		Unrealized		Market
December 31, 2021	Cost		Gains		Losses		Value
Cash and cash equivalents	$	164,164	$	—	$	—	$	164,164
Non-current restricted cash	700		—		—		700
Cash, cash equivalents, and restricted cash as reported within the Consolidated Statements of Cash Flows	$	164,864	$	—	$	—	$	164,864

At September 30, 2022 and December 31, 2021, net unrealized losses were $0.3 million and nil, respectively, and were related to interest rate changes on available-for-sale marketable investments. The Company has concluded that it is more-likely-than-not that the securities will be held until maturity or the recovery of their cost basis. No securities were in an unrealized loss position for more than 12 months. The restricted cash balance relates to an outstanding letter of credit for $0.7 million provided to a supplier.

The following table summarizes the contractual maturities of the Company’s available-for-sale securities, classified as marketable investments, as of September 30, 2022 (in thousands):


September 30, 2022	Amount
Due in less than one year	$	205,282

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.

As of September 30, 2022, financial assets measured and recognized at fair value on a recurring basis and classified under the appropriate level of the fair value hierarchy as described above were as follows (in thousands):

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September 30, 2022	Level 1		Level 2
Cash equivalents:
Money market funds	$	960	$	—
Marketable investments:
Available-for-sale securities	204,946		—
Derivative assets:
Foreign exchange forward			292
Total	$	205,906	$	292

At December 31, 2021, the Company had no money market funds, marketable investments or derivative assets.

See Note 14 - Debt for the carrying amount and estimated fair value of the Company’s 2.25% Convertible Senior Notes due 2026 (the “2026 Notes”) and 2.25% Convertible Senior Notes due 2028 (the “2028 Notes” and, together with the 2026 Notes, the “Convertible Notes”).

Note 4. Derivative Instruments

The Company uses foreign currency exchange forward contracts to manage the impact of currency exchange fluctuations on earnings and cash flow. The Company does not enter into derivative instruments for speculative purposes. The Company is exposed to potential credit loss in the event of nonperformance by counterparties on its outstanding derivative instruments but the Company does not anticipate nonperformance by any of its counterparties. Should a counterparty default, the Company's maximum loss exposure would be the potential asset balance of the instrument.

The cash flow effect of the derivative instruments settlement is recorded in cash flow from operations.

September 30, 2022

Classification

Foreign Exchange Forward

(Dollars in thousands)

Gross notional amount

N/A

6,596

Fair value

Other current assets and prepaid expenses

292

Unrealized gain

Other income (expense), net

292

Note 5. Balance Sheet Details

Inventories, net

As of September 30, 2022 and December 31, 2021, inventories consist of the following (in thousands):


	September 30, 2022		December 31, 2021
Raw materials	$	30,707	$	24,035
Work in process	2,126		2,124
Finished goods	23,105		13,344
Total	$	55,938	$	39,503

Other current assets and prepaid expenses

Other current assets and a prepaid expenses, consists of the following (in thousands):

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	September 30, 2022		December 31, 2021
Deposits with vendors	$	12,905	$	4,389
Foreign tax receivable	5,606		7,612
Prepayments	4,863		2,544
Foreign exchange forward	292		—
Other	6		—
Total	$	23,672	$	14,545

Property and Equipment, net

Property and equipment, net, consists of the following (in thousands):


	September 30, 2022		December 31, 2021
Leasehold improvements	$	776	$	826
Equipment leasing	—		107
AviClear devices	9,454		—
Office equipment and furniture	1,928		1,527
Machinery and equipment	5,328		3,140
Assets under construction	21,550		843
	39,036		6,443
Less: Accumulated depreciation	(4,557)		(3,424)
Property and equipment, net	$34,479		$3,019

Materials related to the AviClear acne treatment device were classified as inventories at December 31, 2021. The Company received 510(k) clearance from the U.S. Food and Drug Administration in March 2022 and in April 2022 placed the first devices in service. From April 2022, the materials used in the construction of the AviClear device have been classified as Assets under construction and the manufactured devices, including devices available for lease and devices placed in service, have been classified as AviClear devices.

Accrued Liabilities

As of September 30, 2022 and December 31, 2021, accrued liabilities consist of the following (in thousands):


	September 30, 2022		December 31, 2021
Bonus and payroll-related accruals	$	17,719	$	21,649
Sales and marketing accruals	6,055		4,808
Accrued inventory in transit	5,171		4,265
Product warranty	3,802		3,947
Accrued sales tax	6,298		9,110
Other accrued liabilities	11,746		10,321
Total	$	50,791	$	54,100

Note 6. 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.

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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, 2022 and 2021 (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Beginning Balance	$	4,189	$	4,438	$	3,947	$	4,124
Add: Accruals for warranties issued during the period	1,235		803		4,467		4,145
Less: Settlements made during the period	(1,622)		(1,315)		(4,612)		(4,343)
Ending Balance	$	3,802	$	3,926	$	3,802	$	3,926

Note 7. 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 to three-year terms. Deferred revenue also includes payments for training. Approximately 85% of the Company’s deferred revenue balance of $12.4 million as of September 30, 2022 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, 2022 and 2021 (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Beginning balance	$	11,527	$	11,403	$	10,825	$	11,237
Add: Payments received	5,738		3,880		14,755		13,226
Less: Revenue from current period sales	(487)		(2,576)		(4,569)		(4,851)
Less: Revenue recognized from beginning balance	(4,377)		(2,027)		(8,610)		(8,932)
Ending balance	$	12,401	$	10,680	$	12,401	$	10,680

Costs for extended service contracts were $1.4 million and $4.6 million for the three and nine months ended September 30, 2022, respectively, and were $2.1 million and $6.3 million for the three and nine months ended September 30, 2021, respectively.

Note 8. 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 8% and 7% of the Company's total revenue for the three and nine months ended September 30, 2022, respectively, and 12% for each of the three and nine months ended September 30, 2021.

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 one performance obligation), system accessories (hand pieces), training, other accessories, extended service contracts, marketing services, and time and materials services.

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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. For contracts with multiple performance obligations, the Company allocates the transaction price of the contract to each performance obligation on a relative standalone selling price basis.

Nature of Products and Services

Systems

Systems revenue is generated from the sale of systems and from the sale of upgrades to existing systems. A system consists of a console that incorporates a universal graphic user interface, a laser or other energy-based module, control system software and high voltage electronics, as well as one or more hand pieces. In certain applications, the laser or other energy-based module is contained in the hand piece 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.

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 at the time of shipment to the distributor.

The Company typically receives payment for its system consoles and other accessories within 30 days of shipment. Certain international distributor arrangements allow for longer payment terms.

Skincare products

The Company sells third-party manufactured skincare products in Japan. The 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 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 at a point in time 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, xeo and truSculpt 3D hand pieces, and single use disposable tips applicable to Secret PRO, and Secret RF as Consumable revenue. The Secret PRO and Secret RF products' 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.

Extended service contract

The Company offers post-warranty services to its customers through extended service contracts that cover parts and labor for a term of one to 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

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with the customer’s system. Training is also sold separately from systems. The Company recognizes revenue for training when the training is provided.

Significant Judgments

The Company determines standalone selling price ("SSP") for each performance obligation as follows:

•Systems: The SSPs for systems are based on directly observable sales in similar circumstances to similar customers.

•Extended warranty/Service contracts: SSP is based on observable price when sold on a standalone basis to similar customers.

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, 2022 and December 31, 2021, the liability for the loyalty program included in accrued liabilities was $0.2 million and $0.5 million, respectively.

Deferred Sales Commissions

Incremental costs of obtaining a contract, which consist 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.

Total capitalized costs as of September 30, 2022 and December 31, 2021 were $5.1 million and $4.2 million, respectively, and are included in Other long-term assets in the Company’s condensed consolidated balance sheet. Amortization expense for these assets was $0.6 million and $1.8 million during the three and nine months ended September 30, 2022, respectively, and $0.4 million and $1.4 million during three and nine months ended September 30, 2021, 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 9. Stockholders’ Equity 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. The 2019 Equity Incentive Plan (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 166,421 PSUs during the nine months ended September 30, 2022. The majority of these PSUs vest subject to the Company’s achievement of certain operational goals for the 2022 fiscal year related to product and commercial milestones. 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.

The Company’s Board of Directors also granted its executive officers and senior management 184,313 RSUs and 278,903 non-qualified stock options (“NQs”) during the nine months ended September 30, 2022. The RSUs and NQs vest over four years with one-fourth vesting on the first anniversary of the vesting commencement date of January 1, 2022 and 1/36th of the remaining underlying shares vest each month thereafter.

Activity under the Company's equity incentive plans is summarized as follows:

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			Shares Available for Grant
Balance, December 31, 2021			947,347
Additional shares reserved			600,000
RSUs granted			(184,313)
PSUs granted			(166,421)
Options granted			(278,903)
Stock awards canceled / forfeited / expired			123,151
Options canceled / forfeited / expired			18,033
Balance, September 30, 2022			1,058,894

Options Outstanding

Number of
Stock Options
Outstanding

Weighted-
Average
Exercise
Price

Weighted Average Remaining Term
(in Years)

Balance, December 31, 2021