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, 2017~~

March 31, 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:~~File Number: 000-50644

Cutera, Inc.

(Exact name of registrant as specified in its charter)

~~Delaware~~		~~77-0492262~~


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

3240 Bayshore Blvd., Brisbane, California 94005

(Address of principal executive offices)

(415) 657-5500

(Registrant’s’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 ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ 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 ~~and post~~ such files). Yes ☒x No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated ~~filer”~~filer,” “smaller reporting company,�� and ~~“smaller reporting~~“emerging growth company” in Rule 12b-2 of the Exchange Act (check one):

Large accelerated filer ☐

☒

Accelerated filer ☒

☐

Non-accelerated filer ☐

☐

Smaller reporting company ☐

☐

Emerging growth company

☐

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

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

The number of shares of ~~Registrant~~’sRegistrant’s common stock issued and outstanding as of ~~October 31, 2017~~May 6, 2022, was ~~13,854,966.~~

18,163,389.

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CUTERA, INC.

FORM 10-Q

TABLE OF CONTENTS

		~~Page~~
			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)~~ Loss		5
	Condensed Consolidated Statements of Changes in Stockholders’ Equity		6
	Condensed Consolidated Statements of Cash Flows			6 7
			Notes to Condensed Consolidated Financial Statements		7 8
Item 2			~~Management~~’sManagement’s Discussion and Analysis of Financial Condition and Results of Operations		16 26
Item 3			Quantitative and Qualitative Disclosures About Market Risk		25 36
Item 4			Controls and Procedures		25 36

PART II			OTHER INFORMATION

Item 1			Legal Proceedings		26 37
Item 1A			Risk Factors		26 37
Item 2			Unregistered Sales of Equity Securities and Use of Proceeds		26 37
Item 3			Defaults Upon Senior Securities		27 38
Item 4			Mine Safety Disclosures		27 38
Item 5			Other Information		27 38
Item 6			Exhibits		28 39
			Signature		29 40

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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®,”“CoolGlideexcel®,”“enlighten®,”“excelHR®,”“excelV®,”“excelV+®,”“LimeLight®,” "MyQ®," “Pearl®,”“PICO Genesis®,”“ProWave 770®,”“Solera®,”“Titan®,” “truSculpt®,”“truSculpt iDTM,”“truSculpt flexTM,”"Secret PRO,”“SecretRF®,”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~~

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

CUTERA, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

(unaudited)

September 30, 2017

December 31, 2016

Assets

Current assets:

Cash and cash equivalents
$ 14,784 $ 13,775
Marketable investments
35,692 40,299
Accounts receivable, net
19,604 16,547
Inventories
23,728 14,977
Other current assets and prepaid expenses
2,894 2,251
Total current assets
96,702 87,849

Property and equipment, net
1,842 1,907
Deferred tax asset
384 377
Intangibles, net
— 2
Goodwill
1,339 1,339
Other long-term assets
381 380
Total assets
$ 100,648 $ 91,854

Liabilities and Stockholders' Equity

Current liabilities:

Accounts payable
$ 5,805 $ 2,598
Accrued liabilities
22,203 17,397
Deferred revenue
8,801 8,394
Total current liabilities
36,809 28,389

Deferred revenue, net of current portion
1,950 1,705
Income tax liability
171 168
Other long-term liabilities
505 582
Total liabilities
39,435 30,844

Commitments and Contingencies (Note 11)

Stockholders’ equity:

Convertible preferred stock, $0.001 par value; authorized: 5,000,000 shares; none issued and outstanding
— —
Common stock, $0.001 par value; authorized: 50,000,000 shares; issued and outstanding: 13,906,439 and 13,773,389 shares at September 30, 2017 and December 31, 2016, respectively
14 14
Additional paid-in capital
81,195 88,114
Accumulated deficit
(19,933
)
(27,046
)
Accumulated other comprehensive loss
(63
)
(72
)
Total stockholders’ equity
61,213 61,010

Total liabilities and stockholders’ equity
$ 100,648 $ 91,854


	March 31, 2022		December 31, 2021
Assets
Current assets:
Cash and cash equivalents	$	57,732	$	164,164
Marketable investments	74,047		—
Accounts receivable, net of allowance for credit losses of $1,093 and $899, respectively	33,169		31,449
Inventories	51,680		39,503
Other current assets and prepaid expenses	20,156		14,545
Total current assets	236,784		249,661

Property and equipment, net	3,009		3,019
Deferred tax asset	737		778
Operating lease right-of-use assets	14,330		14,627
Goodwill	1,339		1,339
Other long-term assets	9,792		10,169
Restricted cash	700		700
Total assets	$	266,691	$	280,293

Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	13,646	$	7,891
Accrued liabilities	48,044		54,100
Operating lease liabilities	2,628		2,419
Deferred revenue	9,719		9,490
Total current liabilities	74,037		73,900

Deferred revenue, net of current portion	1,345		1,335
Operating lease liabilities, net of current portion	13,007		13,483
Convertible notes, net of unamortized debt issuance costs of $3,788 and $4,007, respectively	134,462		134,243
Other long-term liabilities	680		763
Total liabilities	223,531		223,724

Commitments and Contingencies (Note 12)	0		0

Stockholders’ equity:
Common stock, $0.001 par value; authorized: 50,000,000 shares; issued and outstanding: 18,132,949 and 17,995,344 shares at March 31, 2022 and December 31, 2021, respectively	18		18
Additional paid-in capital	116,468		114,724
Accumulated other comprehensive loss	(11)		—
Accumulated deficit	(73,315)		(58,173)
Total stockholders’ equity	43,160		56,569
Total liabilities and stockholders’ equity	$	266,691	$	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

Nine Months Ended

September 30,

September 30,

2017

2016

2017

2016

Net revenue:

Products
$ 33,486 $ 25,493 $ 89,688 $ 65,903
Service
4,687 4,788 14,173 14,278
Total net revenue
38,173 30,281 103,861 80,181
Cost of revenue:

Products
13,859 10,160 38,843 26,804 ��
Service
2,104 2,378 6,241 7,155
Total cost of revenue
15,963 12,538 45,084 33,959
Gross profit
22,210 17,743 58,777 46,222

Operating expenses:

Sales and marketing
13,148 10,574 36,708 30,002
Research and development
3,467 2,914 9,393 8,335
General and administrative
3,379 2,716 10,143 9,933
Lease termination income
(4,000
)
— (4,000
)
—
Total operating expenses
15,994 16,204 52,244 48,270
Income (loss) from operations
6,216 1,539 6,533 (2,048
)
Interest and other income, net
197 166 746 527
Income (loss) before income taxes
6,413 1,705 7,279 (1,521
)
Provision for income taxes
225 61 166 115
Net income (loss)
$ 6,188 $ 1,644 $ 7,113 $ (1,636
)

Net income (loss) per share:

Basic
$ 0.44 $ 0.12 $ 0.51 $ (0.12
)
Diluted
$ 0.42 $ 0.12 $ 0.48 $ (0.12
)

Weighted-average number of shares used in per share calculations:

Basic
13,973 13,163 13,917 13,102
Diluted
14,767 13,544 14,733 13,102


	Three Months Ended March 31,
	2022		2021
Net revenue:
Products	$	52,066	$	43,551
Service	5,948		6,117
Total net revenue	58,014		49,668
Cost of revenue:
Products	22,912		18,331
Service	3,314		3,627
Total cost of revenue	26,226		21,958
Gross profit	31,788		27,710

Operating expenses:
Sales and marketing	24,944		15,068
Research and development	6,499		4,112
General and administrative	13,502		7,365
Total operating expenses	44,945		26,545
(Loss) income from operations	(13,157)		1,165
Interest and other expense, net:
Amortization of debt issuance costs	(219)		(52)
Interest on convertible notes	(778)		(191)
Other expense, net	(755)		(1,023)
Total interest and other expense, net	(1,752)		(1,266)
Loss before income taxes	(14,909)		(101)
Income tax expense	233		258
Net loss	$	(15,142)	$	(359)

Net loss per share:
Basic	$	(0.84)	$	(0.02)
Diluted	$	(0.84)	$	(0.02)
Weighted-average number of shares used in per share calculations:
Basic	18,080		17,768
Diluted	18,080		17,768

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)~~

LOSS

(in thousands)

~~(unaudited)~~

Three Months Ended

Nine Months Ended

September 30,

September 30,

2017

2016

2017

2016

Net income (loss)
$ 6,188 $ 1,644 $ 7,113 $ (1,636
)
Other comprehensive income (loss):

Available-for-sale investments

Net change in unrealized gains (losses) on available-for-sale investments
5 (24
)
13 56
Less: Reclassification adjustment for gains on investments recognized during the period
— (1
)
(4
)
(1
)
Net change in unrealized gain and losses on available-for-sale investments
5 (25
)
9 55
Tax provision (benefit)
— (9
)
— 20
Other comprehensive income (loss), net of tax
5 (16
)
9 35
Comprehensive income (loss)
$ 6,193 $ 1,628 $ 7,122 $ (1,601
)

(Unaudited)


	Three Months Ended March 31,
	2022		2021
Net loss	$	(15,142)	$	(359)
Other comprehensive loss:
Available-for-sale investments
Net change in unrealized loss on available-for-sale investments	(11)		—
Other comprehensive loss, net of tax	(11)		—
Comprehensive loss	$	(15,153)	$	(359)

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~~

CHANGES IN STOCKHOLDERS’ EQUITY

(in ~~thousands)~~

~~(unaudited)~~

Nine Months Ended September 30,

2017

2016

Cash flows from operating activities:

Net income (loss)
$ 7,113 $ (1,636
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

Stock-based compensation
3,623 2,652
Depreciation and amortization
750 733
Other
(67
)
(45
)
Changes in assets and liabilities:

Accounts receivable
(3,048
)
(61
)
Inventories
(8,751
)
(4,400
)
Other current assets and prepaid expenses
(633
)
(690
)
Other long-term assets
(1
)
(60
)
Accounts payable
3,207 1,324
Accrued liabilities
4,757 886
Other long-term liabilities
— (247
)
Deferred revenue
652 (1,187
)
Income tax liability
3 (18
)
Net cash provided by (used) in operating activities
7,605 (2,749
)

Cash flows from investing activities:

Acquisition of property, equipment and software
(443
)
(311
)
Disposal of property and equipment
53 17
Proceeds from sales of marketable investments
9,154 6,153
Proceeds from maturities of marketable investments
39,612 20,135
Purchase of marketable investments
(44,156
)
(23,944
)
Net cash provided by investing activities
4,220 2,050

Cash flows from financing activities:

Repurchase of common stock
(13,776
)
(4,873
)
Proceeds from exercise of stock options and employee stock purchase plan
4,566 6,798
Taxes paid related to net share settlement of equity awards
(1,332
)
(601
)
Payments on capital lease obligations
(274
)
(218 )
Net cash used in financing activities
(10,816
)
1,106

Net increase in cash and cash equivalents
1,009 407
Cash and cash equivalents at beginning of period
13,775 10,868
Cash and cash equivalents at end of period
$ 14,784 $ 11,275

Supplemental disclosure of non-cash items:

Assets acquired under capital lease
$ 257 $ 580

thousands, except share amounts)

Three Months Ended March 31, 2022 and 2021


	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
Exercise of stock options	7,459	—		151		—		—		151
Purchase of capped call	—	—		—		—		—		—
Issuance of common stock in settlement of restricted and performance stock units, net of shares withheld for employee taxes	130,146	—		(2,450)		—		—		(2,450)
Stock-based compensation expense	—	—		4,043		—		—		4,043
Net loss	—	—		—		(15,142)				(15,142)
Net change in unrealized loss on available-for-sale investments	—	—		—		—		(11)		(11)
Balance at March 31, 2022	18,132,949	$	18	$	116,468	$	(73,315)	$	(11)	$	43,160


	Common Stock			Additional Paid-in Capital		Accumulated Deficit		Accumulated Other Comprehensive Loss		Total Stockholders’ Equity
	Shares	Amount
Balance at December 31, 2020	17,679,232	$	18	$	117,097	$	(60,235)	$	—	$	56,880
Exercise of stock options	24,090	—		396		—		—		396

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	98,604	—		(999)		—		—		(999)
Stock-based compensation expense	—	—		1,846		—		—		1,846
Net loss	—	—		—		(359)		—		(359)
Balance at March 31, 2021	17,801,926	$	18	$	102,206	$	(60,594)	$	—	$	41,630

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)

Three Months Ended March 31,
2022 2021
Cash flows from operating activities:
Net loss $ (15,142) $ (359)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Stock-based compensation 4,043 1,846
Depreciation and amortization 427 361
Amortization of contract acquisition costs 652 545
Amortization of debt issuance costs 219 52
Impairment of capitalized cloud computing costs — 182
Change in deferred tax asset 41 45
Provision for excess and obsolete inventories 358 193
Provision for credit losses 192 218
Loss (gain) on sale of property and equipment 14 (59)
Change in right-of-use assets 638 604
Changes in assets and liabilities:
Accounts receivable (1,912) (2,407)
Inventories (12,535) (6,214)
Other current assets and prepaid expenses (5,611) (1,560)
Other long-term assets (385) (500)
Accounts payable 5,755 (1,653)
Accrued liabilities (5,989) 10,022
Operating lease liabilities (608) (563)
Deferred revenue 239 500
Net cash (used in) provided by operating activities (29,604) 1,253
Cash flows from investing activities:
Acquisition of property, equipment, and software (321) (101)
Proceeds from disposal of property and equipment — 52
Purchase of marketable investments (74,058) —
Net cash used in investing activities (74,379) (49)
Cash flows from financing activities:
Proceeds from exercise of stock options and employee stock purchase plan 151 396
Purchase of capped call — (16,134)
Proceeds from issuance of convertible notes — 138,250
Payment of issuance costs of convertible notes — (4,717)
Taxes paid related to net share settlement of equity awards (2,450) (999)
Payments on finance lease obligations (150) (115)
Net cash (used in) provided by financing activities (2,449) 116,681
Net (decrease) increase in cash, cash equivalents and restricted cash (106,432) 117,885
Cash, cash equivalents, and restricted cash at beginning of period 164,864 47,047
Cash, cash equivalents, and restricted cash at end of period $ 58,432 $ 164,932
Supplemental disclosure of non-cash items:
Assets acquired under finance lease $ 57 $ 25
Assets acquired under operating lease $ 320 $ 123
Debt issuance costs accrued $ — $ 452
Supplemental disclosure of cash flow information:
Cash paid for interest $ 1,577 $ 14
Income tax paid $ 1,100 $ 458

The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.

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CUTERA, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Summary of Significant Accounting Policies

Description of Operations and Principles of Consolidation

Cutera, Inc. ((“Cutera” or the “Company”) is a ~~global~~leading provider of ~~laser~~aesthetic and ~~other energy-based aesthetic systems~~dermatology solutions for practitioners worldwide. The Company ~~designs,~~ develops, manufactures, distributes, and markets ~~laser and other~~ energy-based product platforms for use by ~~physicians and other qualified~~medical practitioners, ~~which enable~~enabling them to offer safe and effective aesthetic treatments to their customers. The Company currently markets the following ~~key~~ system platforms: AviClear,enlighten,^®, excel, HR^®, Secret PRO, Secret RF,truSculpt^®~~, excel V~~^®, and xeo^®. ~~The~~ Several of the Company’s systems offer multiple hand pieces and applications, ~~which allow~~providing customers the flexibility to upgrade their systems. The sales of (i) systems, system upgrades, and hand pieces ~~(classified as~~(collectively “Systems” revenue); (ii) replacement hand ~~piece~~pieces, Titan, truSculpt 3D, truSculpt iD and truSculpt flex cycle refills, as well as single use disposable tips applicable to ~~Titan~~^®Secret PRO and ~~truSculpt~~ ~~(classified as “Hand Piece Refills”)~~Secret RF (“Consumables” revenue); and (iii) the distribution of third party manufactured skincare products ~~(classified as "Skincare”~~(“Skincare” revenue); ~~and~~are collectively classified as “Products” revenue. In addition to ~~Products~~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 isare collectively classified as “Service” revenue.

~~Headquartered~~

In March 2022, the Company received the U.S. Food and Drug Administration's 510(k) clearance of the AviClear acne treatment device ("AviClear"). AviClear is a laser treatment that offers a safe, prescription-free solution for acne. AviClear will be rolled out to physicians in the United States throughout 2022.

The Company’s corporate headquarters and U.S. operations are located in Brisbane, California, where the Company ~~has wholly-owned subsidiaries that are currently operational~~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, ~~Canada,~~ France, Germany, Hong Kong, Japan, the Netherlands, Spain, Switzerland, and the United Kingdom. ~~These subsidiaries market, sell~~Sales and ~~service the Company’s products~~services outside of ~~the United States.~~these direct markets are made through a worldwide distributor network in over 42 countries. The ~~Condensed Consolidated Financial Statements~~condensed consolidated financial statements include the accounts of the Company and its subsidiaries. ~~All inter-company accounts, transactions and balances have been eliminated.~~

~~Unaudited Interim Financial Information~~

~~The interim~~

Basis of Presentation

In the opinion of the Company, the accompanying unaudited condensed consolidated financial ~~information included in this report is unaudited. The Condensed Consolidated Financial Statements~~statements included in this report reflect all adjustments ~~(consisting only of normal recurring adjustments) that the Company considers~~ necessary for ~~the~~a fair ~~presentation~~statement of ~~the~~its condensed consolidated statements of financial position as of March 31, 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 ~~interim periods covered~~three months ended March 31, 2022, and ~~of the financial condition of the Company at the date of the interim balance sheet.~~2021. The December 31, ~~2016 Condensed Consolidated Balance Sheet~~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 ~~the~~ 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 intercompany accounts and transactions have been eliminated upon consolidation. The ~~Condensed Consolidated Financial Statements~~accompanying condensed consolidated financial statements should be read in conjunction with the ~~Company~~’sCompany’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, ~~2016~~2021 filed with the Securities and Exchange Commission (the “SEC”) on March ~~15, 2017.~~

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

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on the Company’s business during the year ended December 31, 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 as the economic outlook improved in 2021 and into 2022, the COVID-19 outbreak continues to be fluid, 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 three months ended March 31, 2022. 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.
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 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, 2021 filed with the SEC on March 1, 2022.
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.

Use of Estimates

The preparation of ~~interim Condensed Consolidated Financial Statements~~condensed consolidated financial statements in conformity with GAAP requires the ~~Company~~’sCompany’s management to make estimates and assumptions that affect the amounts reported of assets and ~~disclosed in~~liabilities and disclosure of contingent assets and liabilities at the ~~Condensed Consolidated Financial Statements~~date of the condensed consolidated financial statements and the accompanying ~~notes. These estimates are based on management's best knowledge~~notes, and the reported amounts of ~~current events~~revenue and ~~actions we may undertake in~~expenses during the ~~future.~~reported periods. Actual results could differ materially from those estimates.

On an ongoing basis, ~~the Company~~management evaluates ~~these~~its estimates, including those related to ~~revenue elements,~~ warranty obligations, sales ~~commissions, accounts receivable and~~commission, allowance for credit losses, sales allowances, ~~provision for excess and obsolete~~fair value of investments, valuation of inventories, fair ~~values~~value of ~~marketable investments,~~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 ~~values~~value of the Company's equity awards, expected achievement of performance ~~stock units~~based vesting criteria, management performance bonuses, assumptions used in operating and ~~options~~sales-type lease classification, the standalone selling price of the Company's products and services, the period of benefit used to ~~purchase the Company’s stock,~~capitalize and amortize contract acquisition costs, variable consideration, contingent liabilities, recoverability of deferred tax assets, ~~legal matters and claims,~~residual value of leased equipment, lease term and effective income tax ~~rates, among others.~~rates. Management bases ~~these~~ 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.

~~Recent~~

Recently Adopted Accounting Pronouncements ~~Not Yet Adopted~~

~~Revenue Recognition~~

In ~~May 2014, the Financial Accounting Standards Board ("FASB”), jointly with the International Accounting Standards Board, issued~~ Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers. This new standard will replace most of the existing revenue recognition guidance in GAAP when it becomes effective and permits the use of either the retrospective or the modified retrospective method (or cumulative effect transition method).

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The standard's core principle is that a reporting entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying this new guidance to contracts within its scope, an entity will: (1) identify the contract(s) with a customer, (2) identify the performance obligation in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when (or as) the entity satisfies a performance obligation. Additionally, this new guidance would require significantly expanded disclosures about revenue. The new standard is effective for annual reporting periods (including interim reporting periods within those annual periods) beginning after December ~~15, 2017. Entities have the option of using either a full retrospective or a modified retrospective approach to adopt this new standard.~~

~~While the Company has not completed its evaluation,~~ ~~the Company currently plans to adopt this accounting standard in the first quarter of fiscal year 2018 using the modified retrospective method. Based on the~~ ~~analysis performed through the third quarter of 2017, the Company believes that the timing and measurement of revenue recognition under its contracts with customers for its~~ ~~Products and Services will not change significantly.~~ ~~However, the basis of revenue recognition will change to one based on the transfer of control of products and services. Also based on the analysis performed,~~ the Company expects that incremental contract acquisition costs of obtaining revenue generating contracts, such as sales commissions paid in connection with system sales with multi-year post-warranty service contracts, would be capitalized and amortized over the ~~customer relationship period~~. Under the current guidance, the Company expenses such costs when incurred. The Company is in the process of calculating the adjustment that would be required for capitalizing the sales commissions to accumulated deficit ~~and completing the analysis and documentation required for the implementation of ASC 606~~ ~~upon adoption of the standard on January 1, 2018.~~

The new revenue standard is principle-based and interpretation of those principles may vary from company to company based on their unique circumstances. It is possible that interpretation, industry practice, and guidance may evolve as companies and the accounting profession work to implement this new standard. As the Company completes its evaluation of this new standard, new information may arise that could change the Company’s current understanding of the impact to revenue and expense recognized. Additionally, the Company will continue to monitor industry activities and any additional guidance provided by regulators, standards setters, or the accounting profession and adjust the Company’s assessment and implementation plans accordingly.

The new standard requires comprehensive disclosures of quantitative and qualitative information that enables users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The Company is in the process of preparing the expanded disclosures required under ASC 606.

~~Accounting for Leases~~

~~In February 2016,~~2019, the FASB issued ASU No. ~~2016-02, Leases~~2019-12Income Taxes (Topic ~~842), which amends~~740)-Simplifying the existing accounting standards for leases. The new standard requires lessees to record a right-of-use asset and a corresponding lease liability on the balance sheet (with the exception of short-term leases). The new standard also requires expanded disclosures regarding leasing arrangements. The new standard becomes effective for the Company in the first quarter of fiscal year 2019 and early adoption is permitted. The new standard is required to be adopted using the modified retrospective approach and requires application of the new standard at the beginning of the earliest comparative period presented. The Company generally does not finance purchases of equipment or other capital, but does lease some of its facilities. Several of the Company’s customers finance purchases of its system products through third party lease companies and not directly with the Company. The Company does not believe that the new standard will change customer buying patterns or behaviors for its products. T~~he Company expects that upon adoption, right-of-use assets and lease liabilities will be recognized in the balance sheet in amounts that will be material.~~

Accounting for Income Taxes

~~In October 2016,~~, to remove certain exceptions and improve consistency of application, including, among other things, requiring that an entity reflect the ~~FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfer of Assets Other than Inventory, which requires the recognition of the income tax consequences~~effect of an ~~intra-entity transfer of an asset, other than inventory, when the transfer occurs. This ASU will be effective for the Company~~enacted change in tax laws or rates in the ~~first quarter of 2018. This ASU is required to be adopted using the modified retrospective approach, with a cumulative catch-up adjustment to retained earnings~~annual effective tax rate computation in the interim

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period ~~of adoption.~~that includes the enactment date. The Company ~~does~~adopted this guidance starting January 1, 2021. The adoption of this guidance did not ~~believe that adopting this ASU will~~ have a material impact on the Company’s consolidated financial ~~Statements.~~

~~Adopted Accounting Pronouncement~~

~~Beginning fiscal year 2017,~~position and results of operations.

In August 2020, the ~~Company adopted~~FASB issued ASU No. ~~2016-09, Improvements~~ 2020-6, Debt – Debt with Conversion and Other Options (Topic 470) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Topic 815), to ~~Employee Share-based Payment Accounting, which changes among other things, how~~simplify the ~~tax effects of share-based awards~~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 ~~recognized. ASU No. 2016-09 requires excess tax benefits and tax deficiencies~~no longer separated from the host contract for convertible instruments with conversion features that are not required to be ~~recognized~~accounted for as derivatives or that do not result in ~~the provision~~substantial premiums accounted for ~~income taxes~~ as ~~discrete items in the period when the awards vest or are settled, whereas previously such income tax effects were generally recorded as part of additional~~ paid-in capital. The ~~provision~~update also amends the accounting for ~~income taxes~~certain contracts in an entity’s own equity that are currently accounted for as derivatives because of specific settlement provisions. In addition, the ~~three~~new guidance modifies how particular convertible instruments and ~~nine months ended September 30, 2017, included excess tax benefits~~ ~~of $50,000 and $160,000, respectively. The recognized excess tax benefits resulted from share-based compensation awards primarily associated with employee equity plans~~certain contracts that ~~were vested or~~may be settled in cash or shares impact the three and nine months ended September 30, 2017. This ASU also eliminates the requirement to reclassify cash flows related to excess tax benefits from operating activities to financing activities on the consolidated statementscomputation of ~~cash flows.~~diluted earnings per share. The Company ~~also excluded~~early adopted the ~~related tax benefits when applying the treasury stock method for computing diluted shares outstanding~~guidance on a prospective basis as required by this ASU. In addition, the Company elected to continue its current practice of estimating expected forfeitures. The amount of excess tax benefits and deficiencies recognized in the provision for income taxes will fluctuate from period to period based on the price of the Company’s stock, the volume of share-based instruments settled or vested, and the value assigned to share-based instruments under GAAP.

effective January 1, 2021. See Note 13 – Debt.

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~~Significant Accounting Policies~~

~~There have been no~~ additional new or material changes to the significant accounting policies discussed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016, that are of significance or potential significance to the Company.

Note 2. Cash, Cash Equivalents and Marketable Investments

The Company invests its cash primarily in money market funds ~~commercial paper, corporate notes~~ and ~~bonds,~~in highly liquid debt instruments of U.S. federal and municipal ~~bonds,~~governments and ~~debt securities issued by the U.S. government and its~~their agencies. ~~The Company considers~~All highly liquid investments with stated maturities of three months or less from date of purchase are classified as cash equivalents; all highly liquid investments with ~~an original maturity of three months or less at the time of purchase, to be cash equivalents. 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 ~~are~~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,”~~available-for-sale securities. Investments with remaining maturities of more than one year are ~~carried at fair value with unrealized gains and losses reported~~viewed by the Company as ~~a component of stockholders’ equity, are held for use in~~available to support current operations and are classified inas 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 ~~“marketable investments.”~~

an unrealized gain or loss in other comprehensive income.

The following ~~tables summarize~~table summarizes the ~~components,~~Company's cash and ~~the unrealized gains and losses position, related to the Company’s cash,~~ cash equivalents and marketable investments (in thousands):

September 30, 2017

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair Market
Value

Cash and cash equivalents:

Cash
$ 6,703 $ — $ — $ 6,703
Money market funds
1,636 — — 1,636
Commercial paper
6,445 — — 6,445
Total cash and cash equivalents
14,784 — — 14,784

Marketable investments:

U.S. government notes
5,133 — (4
)
5,129
U.S. government agencies
— — — —
Municipal securities
201 — — 201
Commercial paper
15,942 1 (1
)
15,942
Corporate debt securities
14,419 9 (8
)
14,420
Total marketable investments
35,695 10 (13
)
35,692

Total cash, cash equivalents and marketable investments
$ 50,479 $ 10 $ (13
)
$ 50,476

December 31, 2016

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair Market
Value

Cash and cash equivalents:

Cash
$ 6,672 $ — $ — $ 6,672
Money market funds
6,053 — — 6,053
Commercial paper
1,050 — — 1,050
Total cash and cash equivalents
13,775 — — 13,775

Marketable investments:

U.S. government notes
8,403 4 (9
)
8,398
U.S. government agencies
3,918 — (2
)
3,916
Municipal securities
1,325 — — 1,325
Commercial paper
12,299 2 (2
)
12,299
Corporate debt securities
14,366 3 (8
)
14,361
Total marketable investments
40,311 9 (21
)
40,299

Total cash, cash equivalents and marketable investments
$ 54,086 $ 9 $ (21
)
$ 54,074


			Gross		Gross		Fair
	Amortized		Unrealized		Unrealized		Market
March 31, 2022	Cost		Gains		Losses		Value
Cash and cash equivalents	$	57,732	$	—	$	—	$	57,732
Non-current restricted cash	700		—		—		700
Cash, cash equivalents, and restricted cash as reported within the Consolidated Statements of Cash Flows	58,432		—		—		58,432
Marketable investments - U.S. Treasury	74,058		—		(11)		74,047
Total	$	132,490	$	—	$	(11)	$	132,479

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~~As of~~ ~~September 30, 2017~~


			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 March 31, 2022 and December 31, ~~2016, total gross~~2021, the net unrealized losses were ~~$13,000~~$11 thousand and ~~$21,000,~~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~~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 cash is restricted to support an outstanding letter of credit for $0.7 million provided to a supplier.

The following table summarizes the contractual maturities of the ~~Company~~’sCompany’s available-for-sale securities, classified as marketable investments, as of ~~September 30, 2017~~March 31, 2022 (in thousands):

Amount

Due in less than one year
$ 30,410
Due in 1 to 3 years
5,282
Total marketable investments
$ 35,692


March 31, 2022	Amount
Due in less than one year	$	74,058

Note 3. Fair Value of Financial Instruments

~~Fair~~

The Company measures certain financial assets at fair value, ~~is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.~~ including cash and cash equivalents.

The fair value hierarchy ~~distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources~~ ~~(observable inputs)~~ ~~and (2) an entity’s own assumptions about market participant assumptions developed based on~~contains the ~~best information available in the circumstances (~~~~unobservable~~following three levels of inputs~~). The~~ that may be used to measure fair value, ~~hierarchy consists of three broad levels,~~in accordance with ASC 820:

•Level 1: inputs, which ~~gives the highest priority to unadjusted~~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 1) ~~and the lowest priority to~~3: inputs, which include unobservable inputs ~~(Level 3).~~ ~~The three levels of~~that are supported by little or no market activity and that are significant to the fair value ~~hierarchy~~of the underlying asset or liability. Level 3 assets and liabilities include those whose fair value measurements are ~~described below:~~

●

~~Level 1:~~ ~~Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities.~~

●

~~Level 2:~~ Directly or indirectly observable inputs as of the reporting date through correlation with market data, including quoted prices for similar assets and liabilities in active markets and quoted prices in markets that are not active. Level 2 also includes assets and liabilities that are valued using models or other pricing methodologies that do not require significant judgment since the input assumptions used in the models, such as interest rates and volatility factors, are corroborated by readily observable data from actively quoted markets for substantially the full term of the financial instrument.

●

~~Level 3:~~ Unobservable inputs that are supported by little or no market activity and reflect the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions.

determined using pricing models, discounted cash flow methodologies, or similar valuation techniques, as well as significant management judgment or estimation.

In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as ~~considers~~considering counterparty credit risk in its assessment of fair value.

As of ~~September 30, 2017,~~March 31, 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):

September 30, 2017

Level 1

Level 2

Level 3

Total

Cash equivalents:

Money market funds
$ 1,636 $ — $ — $ 1,636
Commercial paper
— 6,445 — 6,445
Marketable investments:

Available-for-sale securities
— 35,692 — 35,692
Total assets at fair value
$ 1,636 $ 42,137 $ — $ 43,773

As of December 31, 2016, financial assets measured and recognized at fair value on a recurring basis and classified under the appropriate level of the fair value hierarchy as described above was as follows (in thousands):

December 31, 2016

Level 1

Level 2

Level 3

Total

Cash equivalents:

Money market funds
$ 6,053 $ — $ — $ 6,053
Commercial paper
— 1,050 — 1,050
Marketable investments:

Available-for-sale securities
— 40,299 — 40,299
Total assets at fair value
$ 6,053 $ 41,349 $ — $ 47,402


March 31, 2022	Level 1		Level 2		Level 2
Cash equivalents:
Money market funds	$	948	$	—	$	—
Marketable investments:
Available-for-sale securities	74,047		—		—
Total	$	74,995	$	—	$	—

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~~The~~

At December 31, 2021, the Company~~’s Level 2 investments include U.S. government-backed securities~~ had no money market funds or marketable investments.

See Note 13 - Debt for the carrying amount and corporate securities that are valued based upon observable inputs that may include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data including market research publications. The weighted average remaining maturityestimated fair value of the Company’s ~~Level 2 investments as of September 30, 2017 is less than 1 year and all of these investments are rated by S&P and Moody’s at A- or better.~~

convertible notes due 2026.

Note 4. Balance Sheet Details

Inventories

As of ~~September 30, 2017~~March 31, 2022 and December 31, ~~2016,~~2021, inventories consist of the following (in thousands):

September 30, 2017

December 31, 2016

Raw materials
$ 18,201 $ 10,966
Finished goods
5,527 4,011
Total
$ 23,728 $ 14,977

March 31,
2022 December 31,
2021
Raw materials $ 31,134 $ 24,035
Work in process 2,902 2,124
Finished goods 17,644 13,344
Total $ 51,680 $ 39,503

Accrued Liabilities

As of ~~September 30, 2017~~March 31, 2022 and December 31, ~~2016,~~2021, accrued liabilities consist of the following (in thousands):

September 30, 2017

December 31, 2016

Accrued payroll and related expenses
$ 10,869 $ 9,036
Sales and marketing programs
3,060 706
Warranty liability
2,940 2,461
Sales tax
2,206 2,373
Other
3,128 2,821
Total
$ 22,203 $ 17,397


	March 31, 2022		December 31, 2021
Bonus and payroll-related accruals	$	16,639	$	21,649
Sales and marketing accruals	3,678		4,808
Accrued inventory in transit	3,530		4,265
Product warranty	3,874		3,947
Accrued sales tax	9,853		9,110
Other accrued liabilities	10,470		10,321
Total	$	48,044	$	54,100

Note 5. Product Warranty

The Company provides a standard one-year warranty on all systems. For direct sales to end customers, warranty coverage provided is for labor and parts necessary to repair the systems during the warranty period. For sales to distributors, we provide a 14 to 16 month warranty for parts only. The distributor provides the labor to their end customer.

The Company has a direct field service organization in ~~the U.S.~~North America (including Canada). Internationally, the Company provides direct service support ~~through its wholly-owned subsidiaries~~ in Australia, Austria, Belgium, ~~Canada,~~ France, Germany, Hong Kong, Japan, the Netherlands, Spain, Switzerland, and the United Kingdom. In several other countries, where itthe 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 aan extended service contract basis or on a time and materials basis. The Company provides ~~for~~ the estimated cost to repair or replace products under standard warranty at the time of sale. Costs incurred in connection with extended service contracts are 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, 2017~~March 31, 2022 and ~~2016~~2021 (in thousands):

Three Months Ended

Nine Months Ended

September 30,

September 30,

2017

2016

2017

2016

Beginning Balance
$ 2,877 $ 2,000 $ 2,461 $ 1,819
Add: Accruals for warranties issued during the period
959 1,202 5,038 3,634
Less: Warranty related expenses during the period
(896
)
(1,102
)
(4,559
)
(3,353
)
Ending Balance
$ 2,940 $ 2,100 $ 2,940 $ 2,100


	Three Months Ended March 31,
	2022		2021
Beginning Balance	$	3,947	$	2,908
Add: Accruals for warranties issued during the period	1,462		1,525
Less: Settlements made during the period	(1,535)		(1,082)
Ending Balance	$	3,874	$	3,351

Note 6. Deferred ~~Service Contract~~ Revenue

The Company generates Service revenue from the sale of extended service contracts and from time and material services provided to customers who are not under a warranty or extended service contract. Service contract revenue is recognized on a straight-line basis over the period of the applicable contract. Service revenue from time and material services is recognized as the services are provided.

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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 and extended marketing support services. Approximately 88% of the Company’s deferred revenue balance of $11.1 million as of March 31, 2022 will be recognized over the next 12 months.

The following table provides changes in the deferred ~~service contract~~ revenue balance for the three months ended March 31, 2022 and ~~nine month ended September 30, 2017 and 2016~~2021 (in thousands):

Three Months Ended

Nine Months Ended

September 30,

September 30,

2017

2016

2017

2016

Beginning Balance
$ 10,013 $ 10,223 $ 9,431 $ 10,469
Add: Payments received
3,178 2,517 10,290 8,825
Less: Revenue recognized
(3,233
)
(3,447
)
(9,763
)
(10,001
)
Ending Balance
$ 9,958 $ 9,293 $ 9,958 $ 9,293


	Three Months Ended March 31,
	2022		2021
Beginning balance	$	10,825	$	11,237
Add: Payments received	4,864		4,929
Less: Revenue	(458)		(445)
Less: Revenue recognized from beginning balance	(4,167)		(3,984)
Ending balance	$	11,064	$	11,737

Costs ~~incurred by the Company~~ for ~~servicing~~ extended service contracts were ~~$1.2~~$1.7 million and ~~$1.7~~$2.0 million for the three months ended ~~September~~March 31, 2022, and March 31, 2021, 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 and 7% and 12% of the Company's total revenue for the three months ended March 31, 2022, and March 31, 2021, 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 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.

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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 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 ~~2017~~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 ~~2016, respectively;~~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 upon shipment.

Consumables andother accessories

The Company classifies its customers' purchases of replacement cycles for truSculpt iD and truSculpt flex, as well as replacement hand pieces, xeo 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.

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 to four 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.

Loyalty Program

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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 March 31, 2022 and December 31, 2021, the liability for the loyalty program included in accrued liabilities was $0.3 million and $0.5 million, respectively.

Deferred Sales Commissions

Incremental costs of obtaining a contract, which consist 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 March 31, 2022 and December 31, 2021 were $3.5 million and $4.2 million, respectively, and ~~$4.9~~are included in Other long-term assets in the Company’s condensed consolidated balance sheet. Amortization expense for these assets was $0.7 million ~~for~~and $0.5 million during the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2022, and ~~2016,~~March 31, 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 7.8. Stockholders’ Equity and Stock-based Compensation Expense

~~Amended~~

The Company’s equity incentive plans are broad-based, long-term programs intended to attract and ~~Restated 2004~~retain talented employees and align stockholder and employee interests. The 2019 Equity Incentive Plan

T~~he Company’s Board of Directors (“Board”~~ (the "2019 Plan") and stockholders approved the amendment and restatement of the 2004 equity incentive plan (“Amended and Restated 2004 Equity Incentive Plan”) in April and June 2017, respectively. The amendments included the extension of the term of the plan to the date of the annual meeting of the Company’s stockholders in 2022, an increase in the number of shares available for future grant by 1,600,000 shares, and other terms of the plan. The Amended and Restated 2004 Equity Incentive Plan provides for the grant of incentive stock options, non-statutory stock options, restricted stock ~~restricted stock~~ units ~~("RSUs"~~(“RSUs”), ~~stock appreciation rights,~~ performance stock units ("PSUs"), ~~performance shares,~~ and other stock or cash awards.

The Company’s Board of Directors granted the Company's executive officers, senior management and certain employees 90,658 PSUs during the three months ended March 31, 2022. 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 95,761 RSUs and 207,062 non-qualified stock options (“NQs”) during the three months ended March 31, 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 1/36 of the remaining underlying shares vest each month thereafter.

Activity under the ~~Company’s Amended and Restated 2004 Equity Incentive Plan for the nine months ended September 30, 2017~~Company's equity incentive plans is summarized as follows:

Options Outstanding

Shares
Available
for Grant

Number of
Stock Options
Outstanding

Weighted-
Average Exercise
Price

Balance as of December 31, 2016
721,657 1,116,472 $ 9.56
Additional shares reserved
1,600,000
Options granted
(154,000
)
154,000 21.82
Stock awards granted^{(1) (2)}
(558,694
)

Options exercised
— (447,673
)
8.90
Options canceled
53,393 (53,393
)
16.58
Stock awards canceled⁽¹⁾
110,278
Balance as of September 30, 2017
1,772,634 769,406 $ 11.91

	~~(1)~~	~~The Company has a “fungible share” provision in its Amended and Restated 2004 Equity Incentive Plan whereby~~

			Shares Available for ~~each full-value award issued or~~Grant
Balance, December 31, 2021			947,347

RSUs granted			(95,761)
PSUs granted			(90,658)
Options granted			(207,062)
Stock awards canceled ~~under the Amended and Restated 2004 Equity Incentive Plan requires the subtraction or addition of 2.12 shares from or to the shares available for grant, as applicable.~~ / forfeited / expired			22,568
Options canceled / forfeited / expired			2,072
Balance, March 31, 2022			578,506

~~(2)~~

~~Included in the 'Stock awards granted' total of~~ ~~558,694~~, are 221,540 fungible shares relating to 104,500 of PSUs granted. These PSUs may result in a lower number of shares of common stock that may be released on January 1, 2018, based on PSUs forfeited due to employment terminations and the degree of achievement of two performance goals compared to targets that were pre-determined by the Board and disclosed in a Current Report on Form 8-K filed with the SEC on January 11, 2017.

Table of ~~September 30, 2017, unrecognized~~Contents


	Options Outstanding
	Number of Stock Options Outstanding	Weighted- Average Exercise Price		Weighted Average Remaining Term (in Years)
Balance, December 31, 2021	287,175	$	25.89	4.92
Options granted	207,062	$	35.34
Options exercised	(7,459)	$	20.24
Options canceled / forfeited / expired	(2,072)	$	32.87
Balance, March 31, 2022	484,706	$	29.99	6.88


	Stock Awards Outstanding
	Number of Awards Outstanding	Weighted Average Grant Date Fair Value per Share
Balance, December 31, 2021	1,032,904	$	35.00
RSUs granted	95,761	$	39.53
PSUs granted	90,658	$	34.16
Awards released	(190,967)	$	28.04
Stock awards canceled / forfeited / expired	(21,081)	$	40.00
Balance, March 31, 2022	1,007,275	$	36.57

Stock-based Compensation Expense

Stock-based compensation expense ~~net of projected forfeitures, related to non-vested equity awards issued under~~by department recognized during the three months ended March 31, 2022 and 2021 was as follows (in thousands):


	Three Months Ended March 31,
	2022		2021
Cost of revenue	$	459	$	144
Sales and marketing	576		721
Research and development	980		301
General and administrative	2,028		680
Total stock-based compensation expense	$	4,043	$	1,846

Note 9. Net Loss Per Share

On January 1, 2021, the Company~~’s Amended~~ 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 ~~Restated 2004 Equity Incentive Plan and~~includes the ~~2004 Employee Stock Purchase Plan~~effect of potential share settlement for the convertible notes, if the effect is dilutive.

Basic earnings per share (“~~ESPP”~~EPS”), ~~was approximately~~ ~~$4.9 million. This expense~~ is ~~expected to be recognized over the remaining weighted-average period of 1.88 years. The actual expense recorded in the future may be higher or lower~~computed based on ~~a number of factors, including, actual forfeitures experienced and~~ the ~~degree of achievement of the performance goals related to the granted PSUs.~~

~~Pursuant to the Company’s Amended and Restated 2004 Equity Incentive Plan and the ESPP, the Company issued the following~~weighted average number of shares of common stock outstanding during the ~~three and nine months ended September 30, 2017 and 2016:~~

Three Months Ended

Nine Months Ended

September 30,

September 30,

2017

2016

2017

2016

Stock options
77,511 413,588 447,673 706,522
Stock awards, net of shares withheld to satisfy employees’ minimum income tax withholding
9,881 8,107 152,972 114,832
ESPP
— — 51,185 41,980
Total stock issued
87,392 421,695 651,830 863,334

~~Table~~period. Diluted EPS is computed based on the weighted average number of ~~Contents~~

~~Stock Repurchase Program~~

On February 8, 2016, the Company announced that Board approved the expansion of its Stock Repurchase Program by $10 million, under which the Company is authorized to repurchase shares of its common stock. As of December 31, 2016, there remained an additional $5.1 million in the Stock Repurchase Program to use for repurchasing the Company’s common stock. On February 13, 2017 and July 28, 2017 the Company’s Board of Directors approved the expansion of its Stock Repurchase Program by an additional $5 million and $25 million, respectively.

~~In the three and nine~~ months ended September 30, 2017, the Company repurchased 184,536 and 518,780 shares of its common stock for approximately $6.7 million and $13.8 million, respectively. As of September 30, 2017, there remained an additional $21.4 million available in the Stock Repurchase Program to repurchase shares of common ~~stock. All shares repurchased were retired and returned to authorized but unissued status.~~

~~Stock-based Compensation Expense~~

~~Stock-based compensation expense~~ ~~by department recognized during~~stock plus the ~~three and nine months ended September 30, 2017 and 2016, were as follows (in thousands):~~

Three Months Ended

Nine Months Ended

September 30,

September 30,

2017

2016

2017

2016

Cost of revenue
$ 101 $ 73 $ 377 $ 254
Sales and marketing
394 239 1,215 844
Research and development
157 131 633 416
General and administrative
345 127 1,398 1,138
Total stock-based compensation expense
$ 997 $ 570 $ 3,623 $ 2,652

~~Note 8.~~ ~~Lease Termination Income~~

On May 2, 2017, the Company entered into a building lease with the intent to relocate its corporate headquarters to a new facility in Fremont, California. On July 6, 2017, the Company agreed to terminate this lease in return for a lump sum receipt from the lessoreffect of $4.0 million. Simultaneously with the execution of the lease termination, the Company entered into an amendment to its existing lease agreement for the Company to maintain its corporate headquarters in its current facility in Brisbane, California. This amendment extends the term of the lease from December 31, 2017 to January 31, 2023. The $4.0 million is reported as “Lease termination income,” as a component of operating expenses, in the Company’s Condensed Consolidated Statements of Operations for the three and nine month periods ending September 30, 2017.

~~Note~~ 9~~. Net Income (Loss) Per Share~~

~~Basic net income (loss) per share is computed using the weighted-average number of~~dilutive potential common shares outstanding during the ~~period. In periods of net income, diluted~~period using the treasury stock method and the if-converted method. Dilutive potential common shares include outstanding ~~include the dilutive effect of in-the-money equity awards (stock~~stock options, restricted stock units, performance stock units, ESPP shares and ~~employee stock purchase plan contributions), which~~conversion shares under the convertible notes. The diluted EPS is ~~calculated based on~~computed with the average share price for each fiscal period using the treasury stock method. Under the treasury stock method, the amount the employee must pay for the equity award, and the amount of compensation cost for future serviceassumption that the Company ~~has not yet recognized, are all assumed~~will settle the convertible debt in shares, rather than cash.

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As of March 31, 2022, the Company’s convertible notes were potentially convertible into 4,167,232 shares of common stock. The Company used the if-converted method to ~~be used to repurchase shares. Diluted earnings per share is~~calculate the ~~same as basic earnings~~potential dilutive effect of the conversion spread on diluted net income per share for the ~~periods in which~~three months ended March 31, 2022.

The denominator for diluted net income (loss) per share does not include any effect from the capped call transactions the Company ~~had~~entered into concurrently with the issuance of the convertible notes, as this effect would be anti-dilutive. In the event of conversion of a ~~net~~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 months ended March 31, 2022, the “if-converted method” was not applied as the effect would have been anti-dilutive.

For the three months ended March 31, 2022, a basic loss ~~because~~per common share and diluted loss per common share are the same in each respective period as the inclusion of ~~outstanding common stock equivalents~~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)~~loss and the weighted average number of shares used in computing basic and diluted net ~~income (loss)~~loss per share (in thousands, except per share data):

Three Months Ended

Nine Months Ended

September 30,

September 30,

2017

2016

2017

2016

Numerator

Net income (loss)
$ 6,188 $ 1,644 $ 7,113 $ (1,636
)
Denominator

Weighted average shares of common stock outstanding used in computing net income (loss) per share, basic
13,973 13,163 13,917 13,102
Dilutive effect of incremental shares and share equivalents
794 381 816 —
Weighted average shares of common stock outstanding used in computing net income (loss) per share, diluted
14,767 13,544 14,733 13,102
Net income (loss) per share:

Net income (loss) per share, basic
$ 0.44 $ 0.12 $ 0.51 $ (0.12
)
Net income (loss) per share, diluted
$ 0.42 $ 0.12 $ 0.48 $ (0.12
)


	Three Months Ended March 31,
	2022		2021
Numerator:
Net loss used in calculating net loss per share, basic and diluted	$	(15,142)	$	(359)
Denominator:
Weighted average shares of common stock outstanding used in computing net loss per share, basic	18,080		17,768
Dilutive effect of incremental shares and share equivalents:
Options	—		—
RSUs	—		—
PSUs	—		—
ESPP	—		—
Weighted average shares of common stock outstanding used in computing net loss per share, diluted	18,080		17,768
Net loss per share:
Net loss per share, basic	$	(0.84)	$	(0.02)
Net loss per share, diluted	$	(0.84)	$	(0.02)

The following numbers of ~~weighted~~ 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)~~loss per common share for the ~~period~~periods presented because including them would have had an anti-dilutive effect (in thousands):

Three Months Ended

Nine Months Ended

September 30,

September 30,

2017

2016

2017

2016

Options to purchase common stock
42 1,740 31 1,952
Restricted stock units
— 334 6 395
Performance stock units
— 64 — 81
Employee stock purchase plan shares
— 40 — 83
Total
42 2,178 37 2,511

Three Months Ended
March 31,
2022 2021
Capped call 4,167 4,167
Convertible notes 4,167 4,167
Options to purchase common stock 485 245
Restricted stock units 526 585
Performance stock units 482 92
Employee stock purchase plan shares 32 30
Total 9,859 9,286

Note 10.10. Income Taxes

~~The Company calculates~~

For the provision for income taxes during interim reporting periods by applying an estimate of the annual effective tax rate for the full fiscal year to “ordinary” income or loss (pretax income or loss excluding unusual or infrequently occurring discrete items) for the reporting period. When applicable, the year-to-date tax provision reflects adjustments from discrete tax items. In the quarter ended December 31, 2016, the Company adopted ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting. As a result of the adoption of the ASU No. 2016-09, the ~~nine~~three months ended ~~September 30, 2017 tax provision includes~~March 31, 2022, the discrete accounting of the net tax benefit of excess compensation cost (“windfalls”). In the periods prior to the adoption of ASU No. 2016-09, the tax benefit of windfalls and tax deficiencies (“shortfalls”) were recorded in equity to the extent of previous windfalls, and then to the income statement.

~~For the~~ nine- month period ended September 30, 2016, the Company used a discrete effective tax rate method to calculate the provision for income taxes. The Company determined that since small changes in estimated “ordinary” income would result in significant changes in the estimated annual effective tax rate, the historical method would not provide a reliable estimate for the fiscal nine-month period ended September 30, 2016.

~~The Company~~’sCompany's income tax expense was $0.2 million, compared to the tax expense of ~~$225,000 and $166,000~~$0.3 million for the three ~~and nine~~ months ended September 30, 2017, respectively, related primarily to the Company’s U.S. and non-U.S. operations based on the annual effective tax rate method. In addition, it included a tax benefit for excess tax deductions of approximately $50,000 and $160,000 recorded discretely in the three and nine months ended September 30, 2017, respectively. March 31, 2021.

The ~~Company’s~~Company's income tax expense for the three ~~and nine~~ months ended ~~September 30, 2016 was $61,000~~March 31, 2022 and ~~$115,000, respectively, and related primarily~~2021, is due to income taxes ~~of the Company’s non-U.S. operations.~~

in foreign jurisdictions. The Company utilizes the asset and liability method of accounting for income taxes, under which deferred taxes are determined based on the temporary differences between the financial statement and tax basis of assets and liabilities using enacted tax rates expectedcontinues to ~~be in effect during the years in which the basis differences reverse. A~~maintain a full valuation allowance is recorded when it is more likely than not that some of the deferred tax assets will not be realized. Significant management judgment is required in determining any valuation allowance recorded against deferred tax assets. In evaluating the ability to recover deferred tax assets, the Company considered available positive and negative evidence giving greater weight to its recent historical financial results and lesser weight to its projected financial results, due to the subjectivity involved in forecasting future periods. The Company also considered, commensurate with its objective verifiability, the forecast of future taxable income including the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. As of September 30, 2017 and December 31, 2016 the Company had a 100% valuation allowance againston its U.S. deferred tax assets. In

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 ~~near future, as and when the Company concludes that sufficient positive evidence, including its estimate of future taxable income, exists~~leases for up to support a reversal of all or a portion of the valuation allowance, then the Company expects that a significant portion of any release of the valuation allowance will be recorded as an income tax benefit at the time of release, which will have a material impact on the financial statements. Thereafter, the income tax expense recorded in future quarters could also be significantly higher than it has been since fiscal year 2009, when we recorded a valuation allowance for our U.S. deferred tax assets.

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~~Note 1~~1~~. Commitments and Contingencies~~

~~Operating~~ ~~Lease~~s

five years. The Company leases space for operations in the United States, Australia, Belgium, France, Japan and ~~France. Future minimum lease commitments under the Company’s facility operating leases as of September 30, 2017 were as follows (in thousands):~~

Year Ending September 30,

Amount

2018
$ 2,446
2019
2,677
2020
2,743
2021
2,593
2022
2,477
2023 and beyond
838
Total future minimum lease payments
$ 13,774

Spain. In addition to the above facility leases, the Company also routinely leases automobiles for certain sales and field service employees under ~~operating leases for which~~finance leases.

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The Company determines if a contract contains a lease at inception. Operating lease assets and liabilities are recognized at the ~~remaining committed~~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 ~~material.~~

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 lease term.

Supplemental balance sheet information related to leases was as follows (in thousands):

Leases Classification March 31,
2022 December 31,
2021
Assets
Right-of-use assets Operating lease assets $ 14,330 $ 14,627
Finance lease Property and equipment, net 403 392
Total leased assets $ 14,733 $ 15,019

Liabilities Classification March 31,
2022 December 31,
2021
Operating lease liabilities
Operating lease liabilities, current Operating lease liabilities $ 2,628 $ 2,419
Operating lease liabilities, non-current Operating lease liabilities, net of current portion 13,007 13,483
Total Operating lease liabilities $ 15,635 $ 15,902
Finance lease liabilities
Finance lease liabilities, current Accrued liabilities $ 520 $ 554
Finance lease liabilities, non-current Other long-term liabilities 680 730
Total Finance lease liabilities $ 1,200 $ 1,284

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Lease costs during the three months ended March 31, 2022 and 2021 (in thousands):
Three Months Ended
March 31,
Lease costs Classification 2022 2021
Finance lease cost Amortization expense $ 161 $ 127
Finance lease cost Interest for finance lease $ 21 $ 14
Operating lease cost Operating lease expense $ 915 $ 878
Cash paid for amounts included in the measurement of lease liabilities during the three months ended March 31, 2022 and 2021 was as follows (in thousands):
Three Months Ended
March 31,
Cash paid for amounts included in the measurement of lease liabilities Classification 2022 2021
Operating cash flow Finance lease $ 21 $ 14
Financing cash flow Finance lease $ 150 $ 115
Operating cash flow Operating lease $ 792 $ 772
Facilityleases
Maturities of facility leases were as follows as of March 31, 2022 (in thousands):
As of March 31, 2022 Amount
Remainder of 2022 $ 2,469
2023 3,332
2024 2,904
2025 2,875
2026 2,970
2027 and thereafter 3,338
Total lease payments 17,888
Less: imputed interest 2,253
Present value of lease liabilities $ 15,635
Vehicle Leases
As of March 31, 2022, the Company was committed to minimum lease payments for vehicles leased under long-term non-cancelable finance leases as follows (in thousands):
As of March 31, 2022 Amount
Remainder of 2022 $ 491
2023 349
2024 411
2025 21
2026 1
Total lease payments 1,273
Less: imputed interest 73
Present value of lease liabilities $ 1,200

20
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Weighted-average remaining lease term and discount rate, as of March 31, 2022, were as follows:
Lease Term and Discount Rate March 31, 2022
Weighted-average remaining lease term (years)
Operating leases 5.5
Finance leases 2.1
Weighted-average discount rate
Operating leases 4.7 %
Finance leases 6.6 %

Note 12. Contingencies

The Company is named from time to time as a party to other legal proceedings, product liability, commercial disputes, employee disputes, and contractual lawsuits ~~and other general corporate matters~~ in the normal course of business. A liability and related charge are recorded to earnings in the Company’s consolidated financial statements for legal contingencies when the loss is considered probable and the amount can be reasonably estimated. The assessment is re-evaluated each accounting period and is based on all available information, including discussion with outside legal counsel. If a reasonable estimate of a known or probable loss cannot be made, but a range of probable losses can be estimated, the low-end of the range of losses is recognized if no amount within the range is a better estimate than any other. If a material loss is reasonably possible, but not probable and can be reasonably estimated, the estimated loss or range of loss is disclosed in the notes to the consolidated financial statements. The Company ~~routinely assesses~~expenses legal fees as incurred.

On January 31, 2020, the ~~likelihood~~Company filed a lawsuit against Lutronic Aesthetics in the United States District Court for the Eastern District of ~~any adverse judgments~~California. Lutronic employs numerous former Company employees. The complaint against Lutronic generally alleges claims for (1) misappropriation of trade secrets in violation of state and federal law; (2) violation of the Racketeer Influenced and Corrupt Organizations Act (RICO); (3) interference with contractual relations; (4) interference with prospective economic advantage; (5) unfair competition; and (6) aiding and abetting. On March 13, 2020, the court entered a temporary restraining order against Lutronic generally prohibiting it from using or ~~outcomes~~disseminating the Company's confidential, proprietary, or trade secret information. The order also prohibits Lutronic, for two years, from using such information for the purpose of soliciting, or conducting business with, certain specified customers. At the parties’ request, the Court subsequently entered a preliminary injunction providing for the same restrictions in the restraining order. On February 9, 2022, the Company filed a motion seeking leave from the court to file a second amended complaint. In addition to the above-referenced claims against Lutronic Aesthetics, the proposed amended complaint alleges additional claims against it, including (1) violation of the Lanham Act; (2) unlawful business practices; (3) false advertising; and (4) trademark infringement. The proposed amended complaint also seeks to add Lutronic Corporation (the Korean parent company of Lutronic Aesthetics) as an additional defendant, and also alleges against it the above-described claims for misappropriation of trade secrets, violation of RICO, interference with contractual relations and prospective economic advantage, unfair competition, and aiding and abetting. Discovery is ongoing and no trial date has been scheduled.

As of March 31, 2022 and March 31, 2021, the Company had accrued $0.5 million and $0.4 million, respectively, related to ~~legal matters~~various pending commercial and ~~claims,~~product liability lawsuits. The Company does not believe that a material loss in excess of accrued amounts is reasonably likely.

Note 13. Debt

Convertible notes, net of unamortized debt issuance costs

In March 2021, the Company issued $138.3 million aggregate principal amount of convertible senior notes due on March 15, 2026 in a private placement offering. The convertible notes bear interest at a rate of 2.25% per year payable semiannually in arrears on March 15 and September 15 of each year, beginning on September 15, 2021. Upon conversion, the convertible notes will be convertible into cash, shares of the Company’s common stock or a combination thereof, at the Company’s election. The convertible notes are presented as convertible notes, net of unamortized debt issuance costs, on the condensed consolidated balance sheet. Proceeds from the offering were $133.6 million, net of issuance costs, including initial purchasers fees.

Initially, each $1,000 principal amount of Notes was convertible into 30.1427 shares of the Company’s common stock at a conversion price of $33.18 per share. The conversion rate for the convertible notes is subject to adjustment for certain events as

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set forth in the Indenture governing the convertible notes. The convertible notes will mature on March 15, 2026, unless earlier converted, redeemed, or repurchased in accordance with the terms of the convertible notes. No sinking fund is provided for the Notes. As of March 31, 2022, the net carrying amount of the Company’s convertible notes was $134.5 million and the unamortized debt issuance costs were $3.8 million.

Holders may convert their Notes at their option prior to the close of business on the business day immediately preceding December 15, 2025, in multiples of $1,000 principal amount, only under the following circumstances:

•During any fiscal quarter commencing after the fiscal quarter ending on June 30, 2021 (and only during such fiscal quarter), if the last reported sale price of the common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on and including, the last trading day of the immediately preceding fiscal quarter, is greater than or equal to 130% of the conversion price for the convertible notes on each applicable trading day;

•During the 5-business day period after any 5 consecutive trading day period (the “measurement period”) in which the “trading price” per $1,000 principal amount of convertible notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company's common stock and the conversion rate on each such trading day;

•The Company calls such convertible notes for redemption, at any time prior to the close of business on the second scheduled trading day immediately preceding the redemption date; or

��Upon the occurrence of specified corporate events.

On or after December 15, 2025, and until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their Notes, in multiples of $1,000 principal amount, at the option of the holder regardless of the foregoing circumstances.

The circumstances described in the first bullet of the paragraph above were not met during the first quarter of 2022. As of March 31, 2022, the Notes are not convertible and this condition will remain until June 30, 2022. The notes may become convertible in future periods. Upon any conversion requests 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 with respect to such conversion requests. To the extent there are any conversion requests during the twelve months ending March 31, 2023, the Company intends to settle such conversion requests in shares of common stock. Therefore, as of March 31, 2022, the convertible notes have been included as Long-term debt on the condensed consolidated balance sheet.

The Company may not redeem the convertible notes prior to March 20, 2024. On or after March 20, 2024, the Company may redeem for cash all or any portion of the Notes, at the Company’s option, if the last reported sale price of the Company’s common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption at a redemption price equal to 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. If the Company elects to redeem fewer than all of the outstanding Notes, at least $50.0 million aggregate principal amount of Notes must be outstanding and not subject to redemption as of the relevant redemption notice date.

If a specified corporate event occurs, note holders have the option to require the Company to repurchase any portion or all of their convertible notes in $1,000 principal increments for cash. The price for such repurchase is calculated as 100% of the principal amounts of Notes, plus accrued and unpaid interest to the day immediately preceding the Fundamental Change repurchase date. Additionally, holders of the Notes who convert in connection with a fundamental change are, under certain circumstances, entitled to an increase in conversion rate.

The convertible notes are general senior unsecured obligations that rank senior to any of the Company’s indebtedness that is explicitly subordinated to the Notes. The Notes have equal rank in right of payment with all existing and future unsecured indebtedness that is not subordinated to the Notes. The Notes will be junior to any of the Company’s secured indebtedness to the extent of the value of the assets securing such indebtedness. The Notes do not contain any financial or operating covenants or any restrictions on the payment of dividends, the issuance of other indebtedness or the issuance or repurchase of securities by the Company.

The estimated fair value of the convertible notes was approximately $295.4 million as of March 31, 2022, which the Company determined through consideration of market prices. The fair value measurement is classified as Level 2, as defined in Note 3.

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The following table presents the outstanding principal amount and carrying value of the convertible notes (in thousands):


	March 31, 2022		December 31, 2021
Outstanding principal amount	$	138,250	$	138,250
Unamortized debt issuance costs	(3,788)		(4,007)
Carrying Value	$	134,462	$	134,243

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 intended to reduce the potential dilution of the Company's common stock upon any conversion or settlement of the Notes or to offset any cash payment the Company is required to make in excess of the principal amount upon conversion of the Notes, as the case may be, with such reduction or offset subject to a cap based on the cap price. If the market price per share of the Company’s common stock exceeds the cap price of the capped calls transaction, then the Company’s stock would experience some dilution and/or the capped call would not fully offset the potential cash payments, in each case to the extent the then-market price per share of its common stock exceeds the cap price. Under the capped call transactions, the Company purchased from the option counterparties capped call options that in the aggregate relate to the total number of shares of the Company's common stock underlying the convertible notes, with a strike price equal to the conversion price of the convertible notes and with an initial cap price equal to $45.5350, which represents a 75% premium over the last reported sale price of the Company's common stock of $26.02 per share on March 4, 2021, with certain adjustments to the settlement terms that reflect standard anti-dilution provisions. The capped call transactions expire over 40 consecutive scheduled trading days ended on March 12, 2026. The capped calls were purchased for $16.1 million. The Company evaluated the capped call transaction under authoritative accounting guidance and determined that it should be accounted for as a separate transaction and classified as a net reduction to Additional paid-in capital within stockholders’ equity with no recurring fair value measurement recorded.

The Company early adopted ASU 2020-6, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging— Contracts in Entity’s Own Equity (Subtopic 815-40) on January 1, 2021. In accordance with Subtopic 470-20 and 815-40, as revised by ASU 2020-6, the Company records the convertible notes in long-term debt with no separation between the Notes and the conversion option. Each reporting period, the Company will determine whether any criteria is met for the note holders to have the option to redeem the Notes early, which could result in a change in the classification of the Notes to current liabilities.

Debt Issuance Cost

The issuance costs related to the convertible notes are presented in the condensed consolidated balance sheet as a direct deduction from the carrying amount of the convertible notes.

The issuance costs are amortized using an effective interest method basis over the term of the convertible notes and accordingly the Company recorded approximately $0.2 million of amortization of debt issuance costs during the three months ended March 31, 2022.

The effective interest rate on the convertible notes is 2.97%. Interest expense for the three months ended March 31, 2022, including the amortization of debt issuance cost, totaled approximately $1.0 million.

Loan and Security Agreement

On July 9, 2020, the Company entered into a Loan and Security Agreement with Silicon Valley Bank for a four-year secured revolving loan facility (“SVB Revolving Line of Credit”) in an aggregate principal amount of up to $30.0 million. The SVB Revolving Line of Credit matures on July 9, 2024.

In order to draw on the full amount of the SVB Revolving Line of Credit, the Company must satisfy certain liquidity ratios. If the Company is unable to meet these liquidity ratios, then availability under the revolving line is calculated as 80% of the Company’s qualifying accounts receivable. The proceeds of the revolving loans may be used for general corporate purposes. The Company’s obligations under the Loan and Security Agreement with Silicon Valley Bank are secured by substantially all of the assets of the Company. Interest on principal amount outstanding under the revolving line shall accrue at a floating per annum rate equal to the greater of either 1.75% above the Prime Rate or five percent (5.0%). The Company paid a non-refundable revolving line commitment fee of $0.3 million, on the effective date of the Loan and Security Agreement with Silicon Valley Bank of July 9, 2020, and the Company is required to pay an anniversary fee of $0.3 million on each twelve-month anniversary of the effective date of the Loan and Security Agreement.

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The Loan and Security Agreement with Silicon Valley Bank contains customary affirmative covenants, such as financial statement reporting requirements and delivery of borrowing base certificates, as well as ~~ranges~~customary covenants that restrict the Company’s ability to, among other things, incur additional indebtedness, sell certain assets, guarantee obligations of ~~probable losses. A determination~~third parties, declare dividends, or make certain distributions, and undergo a merger or consolidation or certain other transactions. The Loan and Security Agreement also contains certain financial covenants, including maintaining a quarterly minimum revenue of $90.0 million, determined in accordance with GAAP on a trailing twelve-month basis, but which is only applicable if the Company has an outstanding balance under the loan facility.

On March 4, 2021, the Loan and Security Agreement dated July 9, 2020 was amended to (i) permit the Company to issue the convertible notes and perform its obligations in connection therewith, and (ii) permit the Capped Call transactions.

On or about May 28, 2021, the Loan and Security Agreement was amended. The amendment removed the quarterly minimum revenue requirement but kept in place the other financial covenants.

As of March 31, 2022, the Company had not drawn on the SVB Revolving Line of Credit and the Company is in compliance with all financial covenants of the ~~amount~~SVB Revolving Line of Credit.

The Paycheck Protection Program (PPP) Loan

On April 22, 2020, the Company received loan proceeds of $7.2 million pursuant to the Paycheck Protection Program (the “PPP”) under the CARES Act. The loan, which was in the form of a promissory note dated April 21, 2020, between the Company and Silicon Valley Bank as the lender, originally matured on April 21, 2022 and bore interest at a fixed rate of 1.00% per annum, payable monthly commencing September 2021. There was no prepayment penalty. Under the terms of the ~~reserves required,~~PPP, all or a portion of the principal may have been forgiven if ~~any,~~the loan proceeds were used for ~~these contingencies~~qualifying expenses as described in the CARES Act, such as payroll costs, benefits, rent, and utilities.

The PPP loan and related accrued interest were forgiven in June 2021 under the provisions of the CARES Act, and a $7.2 million gain on forgiveness was recorded as Gain on extinguishment of PPP loan in the condensed consolidated statement of operations.

Note 14. Segment reporting

Segment reporting is based on the “management approach,” following the method that management organizes the Company’s reportable segments for which separate financial information is made ~~after analysis~~available to, and evaluated regularly by, the chief operating decision maker in allocating resources and in assessing performance. The Company’s chief operating decision makers ("CODM") are its Chief Executive Officer ("CEO") and Chief Financial Officer (“CFO”), who make decisions on allocating resources and in assessing performance. The CEO and CFO review the Company's consolidated results as 1 operating segment. In making operating decisions, the CODM primarily considers consolidated financial information, accompanied by disaggregated information about revenues by geography and product. All of ~~each known issue, historical experience, whether it is more likely than not that~~ the ~~Company shall incur a loss,~~Company’s principal operations and ~~whether the loss is estimable. As of September 30, 2017, there were~~ ~~no material exposures beyond the amounts accrued~~decision-making functions are located in the ~~Company's financial statements.~~

U.S. The ~~Company is not currently~~Company’s CODM view its operations, manages its business, and uses one measurement of profitability for the 1 operating segment - which sells aesthetic medical equipment and services, and distributes skincare products, to qualified medical practitioners. Substantially all of the Company’s long-lived assets are located in the U.S.

The following table presents a ~~party to any material legal proceedings.~~

summary of revenue by geography and product category for the three months March 31, 2022 and 2021 (in thousands):

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~~ITEM 2.~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

~~Caution Regarding Forward-Looking Statements~~


	Three Months Ended March 31,
	2022		2021
Revenue mix by geography:
United States	$	24,474	$	18,948
Japan	17,503		16,555
Asia, excluding Japan	3,609		1,989
Europe	4,191		5,001
Rest of the World, other than United States, Asia and Europe	8,237		7,175
Total consolidated revenue	$	58,014	$	49,668
Revenue mix by product category:
Products	$	36,514	$	28,320
Consumables	3,903		2,925
Skincare	11,649		12,306
Total product revenue	52,066		43,551
Service	5,948		6,117
Total consolidated revenue	$	58,014	$	49,668

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Management’s Discussion and Analysis should be read in conjunction with the Company’s financial condition and results of operations in conjunction with the Company’s unaudited condensed consolidated financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q (“and the Company’s audited financial statements and notes thereto for the year ended December 31, 2021, included in its annual report on Form ~~10-Q”~~10-K filed with the U.S. Securities and Exchange Commission (“SEC”) on March 1, 2022.

Unless otherwise indicated, all results presented are prepared in a manner that complies, in all material respects, with accounting principles generally accepted in the United States of America (“GAAP”). Additionally, unless otherwise indicated, all changes identified for the current-period results represent comparisons to results for the prior corresponding fiscal period.

Special note regarding forward-looking statements

This report contains forward-looking statements that involve risks and uncertainties. The Company’s actual results could differ materially from those discussed in the forward-looking statements. The statements contained in this report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act ~~of 1933~~ and Section 21E of the Securities Exchange Act of 1934, as amended, ~~(the “Exchange Act”~~("the Exchange Act"). ~~The Private Securities Litigation Reform Act~~Forward-looking statements are often identified by the use of ~~1995 provides a “safe harbor” for certain forward-looking statements.~~ ~~The~~ words such as, but not limited to, “anticipate,” “believe,” ~~“potential,~~“can,” ~~“forecast,~~“continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” ~~“expect,” “anticipate,” “plan,” “intend,” “foresee,~~“seek,” “should,” ~~“would,~~“strategy,” ~~“could,~~“target,” ~~“may,~~“will,” ~~“estimate,” “project” or other~~“would” and similar expressions ~~are~~or variations intended to identify forward-looking statements. These ~~forward-looking~~ statements are based on ~~our current expectations~~the beliefs and beliefs concerning future developments and their potential effects on us. There can be no assurance that future developments affecting us will be those that we anticipate. All discussion concerning our expectations for future revenues and operating results areassumptions of the Company’s management based on ~~our forecasts for our existing operations. These~~information currently available to management. Such forward-looking statements ~~involve significant risks and uncertainties (some of which are beyond our control) and assumptions. They~~ are subject to ~~change based on various factors, including but not limited to the~~ risks, uncertainties and ~~uncertainties summarized below:~~

	●	~~changes in our common stock price;~~
	●	~~changes in our profitability;~~
	●	~~regulatory activities and announcements, including the failure to obtain regulatory approvals for our new products;~~
	●	~~effectiveness of our internal controls over financial reporting;~~
	●	~~fluctuations in future quarterly operating results;~~
	●	~~failure to comply with, or changes in, laws, regulations or administrative practices affecting government regulation of our products, including, but not limited to, United States~~ ~~Food and Drug Administration laws and regulations;~~
	●	~~failure to establish, expand or maintain market acceptance or payment for the purchase of our products;~~
	●	~~failure to maintain the current regulatory approvals for our indications;~~
	●	~~unfavorable results from clinical studies;~~
	●	~~variations in sales and~~ ~~operating expenses relative to estimates;~~
	●	~~our dependence on certain suppliers and manufacturers to provide certain materials, components and contract services necessary for the production of our products;~~
	●	~~product liability-related losses and costs;~~
	●	~~protection, expiration and validity of our intellectual property;~~
	●	~~changes in technology, including the development of superior or alternative technology or devices by competitors;~~
	●	~~failure to comply with applicable domestic laws and regulations, including federal and state privacy and security laws and regulations;~~
	●	~~failure to comply with foreign laws and regulations;~~
	●	~~international operational and economic risks and concerns;~~
	●	~~failure to attract or retain key personnel;~~
	●	~~losses or costs from pending or future lawsuits and governmental investigations;~~
	●	~~changes in accounting rules that adversely affect the characterization of our consolidated results of income, financial position or cash flows;~~
	●	~~changes in customer spending patterns;~~
	●	~~continued volatility in the global market and worldwide economic conditions;~~
	●	~~changes in tax laws or exposure to additional income tax liabilities;~~
	●	~~failure to adequately secure our information technology systems from hacker intrusion, malicious viruses and other cybercrime attacks; and~~
	●	~~weather or natural disasters that interrupt our business operations or the business operations of our customers~~.

~~Other~~other important factors that could cause ~~our~~ actual results and the timing of certain events to differ materially from ~~our projected~~future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are ~~described~~not limited to, those identified below and those discussed in ~~(1) “Part~~the section titled “Risk Factors” included under Part II, Item 1A. Risk Factors” and elsewhere in this Form 10-Q, (2) our Annual Report on Form 10-K for the period ended December 31, 2016 (“2016 Form 10-K”), (3) our reports and registration statements filed and furnished from time to time with the U.S. Securities and Exchange Commission (“SEC”) and (4) other announcements we make from time to time.

~~Readers are cautioned not to place undue reliance on~~1A below.

Furthermore, such forward-looking statements ~~which~~ speak only as of the date of this report. ~~We undertake~~ Except as required by law, the Company undertakes no obligation to update ~~or revise~~ any forward-looking statements to reflect events or circumstances after the date ~~they are made, whether as a result~~ of new information, future events or otherwise. You should read the following discussion and analysis in conjunction with our unaudited Condensed Consolidated Financial Statements and related notes included elsewhere in this report. Operating results for the three and nine months ended September 30, 2017 are not necessarily indicative of future results, including the full fiscal year. You should also refer to our “Annual Consolidated Financial Statements,” “Notes” thereto, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors” contained in our 2016 Form 10-K.

such statements.

16Introduction

~~Table of Contents~~

~~Introduction~~

The ~~Management~~’sManagement’s Discussion and Analysis, or MD&A, is organized as follows:

●

~~Executive Summary.~~ This section provides a general description and history of our business, a brief discussion of our product lines and the opportunities, trends, challenges and risks we focus on in the operation of our business.

●

~~Critical Accounting Policies and Estimates.~~ ~~This section describes the key accounting policies that are affected by critical accounting estimates.~~

●

~~Results of Operations.~~ ~~This section provides our analysis and outlook for the significant line items on our Condensed Consolidated Statements of Operations.~~

●

~~Liquidity and Capital Resources.~~ ~~This section provides an analysis of our liquidity and cash flows, as well as a discussion of our commitments.~~

•Executive Summary. This section provides a general description and history of the Company’s business, a brief discussion of its product lines and the opportunities, trends, challenges and risks the Company focuses on in the operation of its business.

•Critical Accounting Policies and Estimates. This section describes the key accounting policies that are affected by critical accounting estimates.

•Results of Operations. This section provides the Company’s analysis and outlook for the significant line items on its condensed consolidated statements of operations.

•Liquidity and Capital Resources. This section provides an analysis of the Company’s liquidity and cash flows, as well as a discussion of its Commitments that existed as of March 31, 2022.

Executive Summary

Company Description

~~We are~~

The Company is a leading ~~medical device company specializing in the research, development, manufacture, marketing~~provider of aesthetic and ~~servicing of laser and other energy-based aesthetics systems~~dermatology solutions for practitioners worldwide. ~~We offer~~In addition to internal development of products, the Company distributes third party sourced products under the Company’s own brand names. The Company offers easy-to-use products which enable ~~physicians and other qualified~~medical practitioners to perform safe and effective ~~aesthetic~~ procedures, including treatment ~~of vascular conditions~~for body contouring, skin resurfacing and revitalization, tattoo removal, removal of benign pigmented lesions, vascular conditions, hair ~~removal, skin rejuvenation, body contouring, skin resurfacing, tattoo~~ removal, and toenail ~~fungus treatment.~~ ~~Our~~fungus. The Company’s platforms are designed to be easily upgraded to add additional applications and hand pieces, which provide flexibility for ~~our~~the Company’s customers as they expand their practices. ~~The sales of systems, system upgrades, hand pieces, hand piece refills (applicable to~~ ~~Titan~~ ~~and~~ ~~truSculpt~~~~) and the distribution of third party manufactured skincare products are classified as “Products” revenue.~~ In addition to ~~Products~~systems and upgrade revenue, ~~we generate~~the Company generates revenue from the sale of ~~post-warranty~~post warranty service contracts, ~~parts, detachable hand piece replacements (except~~providing services for~~Titan~~ ~~and~~ ~~truSculpt~~~~) and service labor for the repair and maintenance of~~ products that are out of warranty, ~~all~~hand piece refills and other per procedure related revenue on select systems and distribution of ~~which is classified~~third-party manufactured skincare products. The Company also expands its revenues from sales of third-party skincare products by utilizing its network and relationships with physicians and practitioners.

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The Company’s ongoing research and development activities primarily focus on developing new products, as ~~“Service” revenue.~~

~~Our~~well as improving and enhancing the Company’s portfolio of existing products. The Company also explores ways to expand the Company’s product offerings through alternative arrangements with other companies, such as distribution arrangements. The Company introduced SecretRF, a fractional RF microneedling device for skin revitalization, in January 2018, enlightenSR in April 2018, truSculptiD in July 2018, excel V+ in February 2019, truSculpt flex in June 2019, Secret PRO in July 2020, excel V+III during the fourth quarter of 2020, and AviClear in April 2022.

The Company’s corporate headquarters and U.S. operations are located in Brisbane, California, where ~~we conduct our~~the Company conducts manufacturing, warehousing, research and development, regulatory, sales and marketing, service, and administrative activities. ~~We have wholly-owned subsidiaries located~~The Company markets sells and services the Company’s products through direct sales and service employees in North America (including Canada), Australia, Austria, Belgium, ~~Canada,~~ France, Germany, Hong Kong, Japan, Netherlands, Spain, Switzerland and the United Kingdom. ~~We market, sell~~Sales and ~~service our products~~Services outside of ~~the United States~~these direct markets are made through ~~our direct employees, third party service providers, as well as~~ a ~~global~~worldwide distributor network in over 4042 countries.

Products and Services

~~Our~~

The Company derives revenue ~~is derived~~ from the sale of Products and Services. ~~Our Products~~Product revenue ~~is derived~~includes revenue from the sale of ~~Systems, Hand~~ ~~Piece Refills (applicable~~systems, hand pieces and upgrade of systems (collectively “Systems” revenue), replacement hand pieces, truSculptiD cycle refills, and truSculpt flex cycle refills, as well as single use disposable tips applicable to ~~Titan~~ ~~and~~ ~~truSculpt~~)SecretRF (“Consumables” revenue), and the ~~distribution~~sale of third party manufactured ~~Skincare products. Systems revenue includes the sales of new systems and additional applications that customers purchase as their practice grows.~~skincare products (“Skincare” revenue). A system consists of a console that incorporates a universal graphic user interface, a laser ~~and/~~and or other energy-based module, control system software and high voltage electronics, ~~and~~as well as one or more hand pieces. ~~Our~~However, depending on the application, the laser or other energy-based module is sometimes contained in the hand piece.

The Company offers customers the ability to select the system that best fits their practice at the time of purchase and then to cost-effectively add applications to their system as their practice grows. This provides customers the flexibility to upgrade their systems whenever they choose and provides the Company with a source of additional Systems revenue. The Company’s primary system platforms ~~include:~~

●

e~~nlighten~~

●

~~excel HR~~

●

~~truSculpt~~

●

~~excel V~~

●

xeo

~~Other than~~include excel,enlighten,SecretRF,truSculpt and xeo.

In March 2022, the ~~above mentioned five primary systems, we~~Company received the U.S. Food and Drug Administration's ("FDA") 510(k) clearance of the AviClear acne treatment device.

AviClear is a laser treatment that offers a safe, prescription-free solution for acne. In addition to reducing existing acne, clinical trials show that future breakout episodes are shorter, less intense, and more infrequent following the AviClear procedure. Further, acne clearance results continue to ~~generate~~improve over time, demonstrating the long-term efficacy of this novel treatment. Importantly, no pain mitigation was utilized or required by any clinical study participant.

Acne vulgaris is a nearly universal skin disease, with approximately 50 million North American teens and young adults seeking treatment each year. Overproduction of sebum by the sebaceous glands is one of the leading causes of acne. AviClear tackles acne at the source by selectively targeting the sebocytes and suppressing sebum production. This product is a 1726 nm laser device designed to treat inflammatory acne vulgaris. AviClear delivers optimal therapeutic energy in conjunction with the AviCool feature to ensure safety and scalability of the procedure across all skin types and acne severities. AviClear is currently available in a limited commercial capacity in the U.S. and will be rolled out to physicians in the United States throughout 2022. The AviClear device incorporates a revenue ~~from our legacy products such as~~ ~~GenesisPlus~~^TM, ~~CoolGlide~~^®~~, and a third-party sourced system called~~ ~~myQ~~^® ~~for the Japanese market. We have renewed our distribution contract for the sale of~~ ~~myQ~~share model, resulting in ~~Japan on a non-exclusive basis through September 30, 2018. For our~~ ~~Titan~~ ~~and~~ ~~truSculpt~~ hand pieces, after a set number of treatments have been performed, the customer is required to send the hand piece back to the factory for refurbishment, which we refer to as “refilling” the hand piece. In Japan, we also distribute ZO Medical Health Inc. (“ZO”) skincare products.

~~Service~~recurring revenue.

Skincare revenue relates to the distribution of ZO’s skincare products in Japan. The skincare products are purchased from a third-party manufacturer and sold to medical offices and licensed physicians. The Company acts as the principal in this arrangement, as the Company determines the price to charge customers for the skincare products and controls the products before they are transferred to the customer.

Service revenue includes prepaid service contracts, ~~direct billings for detachable hand piece replacements (except for~~ ~~Titan~~ ~~and~~ ~~truSculpt~~~~) and revenue for parts~~customer marketing support and labor on out-of-warranty products.

Significant Business Trends

~~We believe~~

The Company believes that ~~our~~its ability to grow revenue will be primarily dependent on the following:

●

~~Consumer demand for the applications of our products~~;

●

~~Customer (physicians and other practitioners) demand for our products~~;

●

~~Continuing to expand our product offerings ─ both through internal development and sourcing from other vendors~~;

•the successful commercialization of AviClear

•continuing to expand the Company’s product offerings, both through internal development and sourcing from other vendors;

•ongoing investment in the Company’s global sales and marketing infrastructure;

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●

~~Ongoing investment in our global sales and marketing infrastructure~~;

	●	~~Use of clinical results to support new aesthetic products and applications~~;
	●	~~Increased collaboration with key opinion leaders of our industry to assist us in selling efforts;~~

●

~~Marketing to physicians in the core dermatology and plastic surgery specialties, as well as outside those specialties; and~~

●

~~Generating ongoing revenue from our growing installed base of customers through the sale of systems, system upgrades, hand piece refills, skincare products, and services.~~

•use of clinical results to support new aesthetic products and applications;

•enhanced physician development and reference selling efforts (to develop a location where Company’s products can be displayed and used to assist in selling efforts);

•customer demand for the Company’s products;

•consumer demand for the application of the Company’s products;

•marketing to those practitioners focused on aesthetic and dermatological conditions; and

•generating recurring revenue from the Company’s growing installed base of customers through the sale of system upgrades, services, hand piece refills, truSculpt cycles, skincare products and replacement tips for the Secret RF product.

For a detailed discussion of the significant business trends impacting ~~our~~its business, please see the section titled “Results of Operations” below.

Factors that May Impact Future Performance

~~Our~~

The Company’s industry is impacted by numerous competitive, regulatory ~~macroeconomic~~ and other significant factors. ~~Our~~The Company’s industry is highly competitive and ~~our~~the Company’s future performance depends on ~~our~~the Company’s ability to compete successfully. Additionally, ~~our~~the Company’s future performance ~~depends on our~~ is dependent upon the ability to continue to expand ~~our~~the Company’s product offerings ~~develop~~with innovative technologies, obtain regulatory clearances for ~~our~~the Company’s products, protect the proprietary technology of ~~our~~the products and ~~our~~ manufacturing processes, manufacture ~~our~~the products cost-effectively, and successfully market and distribute ~~our~~the products in a profitable manner. If ~~we fail~~the Company fails to execute on the aforementioned initiatives, ~~our~~the Company’s business ~~could~~would be adversely affected.

The Company supports any reasonable action that helps ensure patient safety going forward. The Company has a robust, multi-functional process that reviews its promotional claims and materials to ensure they are truthful, not misleading, fair and balanced, and supported by sound scientific evidence.

A detailed discussion of these and other factors that could impact ~~our~~the Company’s future performance are provided in (1) ~~“Part II, Item 1A. Risk Factors” and elsewhere in this Form 10-Q, (2) our 2016~~the Company’s Annual Report on Form 10-K ~~(3) our reports~~for the year ended December 31, 2021- Part I, Item 1A “Risk Factors,” and ~~registration statements filed and furnished~~(2) other announcements the Company makes from time to ~~time~~time.

Impact of COVID-19 on Company’s business and operations

The COVID-19 outbreak and related variants have negatively affected the United States and global economies. The spread of the coronavirus has impacted the global economy broadly in 2021 and 2020, including restrictions on travel, shifting work 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, 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 operation and results of operations have significantly improved as the economic outlook improved in 2021 and into 2022, the COVID-19 outbreak continues to be fluid, and the aftermath of the business and economic disruptions due to the COVID-19 is still uncertain, making it difficult to forecast the final impact it could have on the Company’s future operations, including disruptions in the Company's supply chain and contract manufacturing operations. The Company cannot presently predict the scope and severity of 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 three months ended March 31, 2022. 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.

In 2021, the Company experienced a significant increase in sales of skincare products under the exclusive distribution agreement with ZO Skin Health, Inc., which allows the ~~SEC,~~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 ~~(4) other announcements we make from time to time.~~

cash flows.

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Critical ~~Accounting Policies~~accounting policies, significant judgments and ~~Estimates~~

use of estimates

The preparation of ~~our Condensed Consolidated Financial Statements~~the Company’s consolidated financial statements and related ~~disclosures in conformity with GAAP~~notes requires usthe Company to make judgments, estimates ~~judgments~~ and assumptions that affect the reported amounts of assets, liabilities, ~~revenue~~revenues and ~~expenses. These~~expenses, and related disclosure of contingent assets and liabilities. The Company has based its estimates ~~judgments and assumptions are based~~ on historical experience and on various other ~~factors~~assumptions that ~~we believe are~~the Company believes to be reasonable under the circumstances. WeThe Company periodically ~~review our~~reviews its estimates and ~~make~~makes adjustments when facts and circumstances dictate. To the extent that there are material differences between these estimates and actual results, ~~our~~its financial condition or results of operations will be affected.

~~Critical~~

An accounting ~~estimates, as defined by the SEC, are those that are most important~~policy is considered to ~~the portrayal of our financial condition and results of operations and require our management’s most difficult and subjective judgments and estimates of~~be critical if it requires an accounting estimate to be made based on assumptions about matters that are ~~inherently uncertain.~~ highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the consolidated financial statements. The Company believes that its critical accounting policies reflect the more significant estimates and assumptions used in the preparation of its audited consolidated financial statements.

The accounting policies and estimates that ~~we consider~~the Company considers to be critical, subjective, and requiring judgment in their application are summarized in “Item ~~7—Management’s~~7-Management’s Discussion and Analysis of Financial Condition and Results of Operations” in ~~our 2016~~its Annual Report on Form ~~10-K.~~10-K for the year ended December 31, 2021 filed with the SEC on March 1, 2022. There have been no ~~significant~~new or material changes to the significant accounting policies discussed in the Company’s Annual Report on Form 10-K that are of significance, or potential significance, to the Company.

The Company established new accounting policies to account for the convertible notes and ~~estimates disclosed~~related transactions during the first quarter of 2021.

The Company issued $138.3 million of convertible senior notes in ~~our~~a private placement offering on March 5, 2021. The notes bear interest at a rate of 2.25% per year. In accordance with ASU 2020-06, the Company recorded the Notes in long-term debt with no separation between the notes and the conversion option. Each reporting period, the Company will determine whether any criteria are met for the note holders to have the option to redeem the notes early, which will result in a change in the classification of the notes to current liabilities.

The issuance costs related to the convertible notes are presented in the balance sheet as a direct deduction from the carrying amount of the convertible notes. See Note 13 of the unaudited condensed consolidated financial statements included in Item I, Part 1 of this Quarterly Report on Form ~~10-K.~~

10-Q.

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Results of Operations

The following table sets forth selected consolidated financial data for the periods indicated, expressed as a percentage of total net ~~total~~ revenue. Percentages in this table and throughout ~~our~~its discussion and analysis of financial condition and results of operations may reflect rounding adjustments.

Three Months Ended

Nine Months Ended

September 30,

September 30,

2017

2016

2017

2016

Net revenue
100
%
100
%
100
%
100
%
Cost of revenue
42
%
41
%
43
%
42
%
Gross margin
58
%
59
%
57
%
58
%

Operating expenses:

Sales and marketing
34
%
35
%
35
%
37
%
Research and development
9
%
10
%
9
%
11
%
General and administrative
9
%
9
%
10
%
12
%
Lease termination income
(10
)%
— (3
)%
—
Total operating expenses
42
%
54
%
51
%
60
%

Income (loss) from operations
16
%
5
%
6
%
(2
)%
Interest and other income, net
1
%
1
%
1
%
—
Income (loss) before income taxes
17
%
6
%
7
%
(2
)%

Provision for income taxes
1
%
—
%
—
%
—
%
Net income (loss)
16
%
6
%
7
%
(2
)%

Three Months Ended
March 31,
2022 2021
Net revenue 100 % 100 %
Cost of revenue 45 % 44 %
Gross margin 55 % 56 %
Operating expenses:
Sales and marketing 43 % 30 %
Research and development 11 % 8 %
General and administrative 23 % 15 %
Total operating expenses 77 % 53 %
Income (loss) from operations (23) % 2 %
Amortization of debt issuance costs — % — %
Interest on convertible notes (1) % — %
Other expense, net (1) % (2) %
Income (loss) before income taxes (26) % 0 %
Income tax expense — % 1 %
Net loss (26) % (1) %

Revenue

The timing of the Company’s revenue is significantly affected by the mix of system products, installation, training, consumables and extended contract services. The revenue generated in any given period is also impacted by whether the revenue is recognized over time or upon completion of delivery. For an additional description on revenue, see Note 1 in the notes to consolidated financial statements on the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021 and Note 7 to the unaudited condensed consolidated financial statements included in Item I, Part 1 of this Quarterly Report on Form 10-Q.

Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for promised goods or services. The Company’s performance obligations are satisfied either over time or at a point in time. Revenue from performance obligations that are transferred to customers over time accounted for approximately 7% and 12% of the Company’s total revenue for the three months ended March 31, 2022 and 2021, respectively. Revenue recognized over time relates to revenue from the Company’s extended service contracts and marketing services. Revenue recognized upon delivery is primarily generated by the sales of systems, consumables and skincare.

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Total Net Revenue

Three Months Ended September 30,

Nine Months Ended September 30,

(Dollars in thousands)

2017

% Change

2016

2017

% Change

2016

Revenue mix by geography:

United States
$ 23,275 52
%
$ 15,356 $ 64,058 52
%
$ 42,216
Rest of World
14,898 —

14,925 39,803 5
%
37,965
Consolidated total revenue
$ 38,173 26
%
$ 30,281 $ 103,861 30
%
$ 80,181

United States as a percentage of total revenue
61
%
51
%
62
%
53
%
Rest of World as a percentage of total revenue
39
%
49
%
38
%
47
%

Revenue mix by product category:

Systems – North America
$ 21,869 57
%
$ 13,896 $ 58,955 60
%
$ 36,808
Systems – International
9,993 —

9,983 26,014 6
%
24,448
Total Systems
31,862 33
%
23,879 84,969 39
%
61,256
Service
4,687 (2
)%
4,788 14,173 (1
)%
14,278
Hand Piece Refills
595 (1
)%
602 1,743 (8
)%
1,886
Skincare
1,029 2
%
1,012 2,976 8
%
2,761
Consolidated total revenue
$ 38,173 26
%
$ 30,281 $ 103,861 30
%
$ 80,181

~~Total Net Revenue:~~

~~Our~~


	Three Months Ended March 31,
(Dollars in thousands)	2022			% Change		2021
Revenue mix by geography:
North America	$	28,853		29	%	$	22,402
Japan	17,503			6	%	16,555
Rest of World	11,658			9	%	10,711
Consolidated total revenue	$	58,014		17	%	$	49,668

North America as a percentage of total revenue	50		%			45		%
Japan as a percentage of total revenue	30		%			33		%
Rest of World as a percentage of total revenue	20		%			22		%

Revenue mix by product category:
Systems - North America	$	22,707		35	%	$	16,785
Systems - Rest of World (including Japan)	13,807			20	%	11,535
Total Systems	36,514			29	%	28,320
Consumables	3,903			33	%	2,925
Skincare	11,649			(5)	%	12,306
Total Products	52,066			20	%	43,551
Service	5,948			(3)	%	6,117
Total Net Revenue	$	58,014		17	%	$	49,668

The Company’s total net revenue increased by ~~$7.9~~$8.3 million or ~~26%, and $23.7 million, or 30%,~~17% in the three ~~and nine~~ months ended ~~September 30, 2017, respectively, compared to the same periods in 2016, due primarily to an increase in the volume of systems sold.~~

~~Revenue by Geography:~~

~~Our U.S. revenue increased by $~~7.9 million, or 52%, and by $21.8 million, or 52%, in the three and nine months ended September 30, 2017, respectively, compared to the same periods in 2016. This growth was due primarily to an increase in the volume of ~~truSculpt~~ ~~systems sold as a result of the launch of our~~ ~~truSculpt 3D~~ ~~in the second quarter ended June 30, 2017, as well as increased sales headcount, marketing and promotional activities.~~

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~~Our revenue~~ ~~outside the U.S. was $14.9 million for each of the three month periods ended September 30, 2017 and September 30, 2016. For the nine months ended September 30, 2017,~~March 31, 2022, compared to the same period in ~~2016,~~2021, as a result of recovery in the demand of the Company’s products and services as the economic outlook due to the COVID-19 pandemic improved.

Revenue by Geography

The Company’s North America revenue ~~outside the U.S.~~ increased by ~~$1.8~~$6.5 million or ~~5%. This growth~~29%, in the three months ended March 31, 2022, compared to the same period in 2021. The increase was primarily ~~attributable~~due to ~~revenue growth~~a recovery in sales following an improvement in conditions related to the COVID-19 pandemic.

Revenue in Japan ~~Australia, and~~increased by $0.9 million or 6%, in the ~~Middle East, offset~~three months ended March 31, 2022, compared to the same period in ~~part~~2021, due to an increase in system sales.

The Company’s Rest of World revenue increased by $0.9 million or 9%, in the three months ended March 31, 2022, compared to the same period in 2021. The increase was mostly driven by a ~~decline~~recovery in ~~revenue from Latin America.~~

sales following an improvement in conditions related to the COVID-19 pandemic.

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Revenue by Product ~~Type:~~

Type

Systems Revenue

Systems revenue in North America increased by $~~7.9~~$5.9 million or ~~57%, and by $22.2 million, or 60%~~35%, in the three ~~and nine~~ months ended ~~September 30, 2017, respectively, compared to the same periods in 2016. This growth was primarily attributable to an increase in revenue from~~ ~~truSculpt~~ 3D~~, enlighten~~ ~~III~~, xeo~~and~~ ~~excel HR~~ ~~products, offset by a small decline in revenue from~~ ~~excel V~~. In addition, the North America revenue growth was the result of increased sales headcount, higher productivity of our field sales representatives, and the impact of additional marketing and promotional activities.

~~International~~ Systems revenue was $10 million for each of the three months ended September 30, 2017 and September 30, 2016. International Systems revenue increased by $1.6 million, or 6%, in the nine months ended September 30, 2017,March 31, 2022, compared to the same period in ~~2016. This growth was driven primarily~~2021, mainly due to the recovery from the business disruptions caused by the COVID-19 pandemic.

System revenue in the Rest of the World (including Japan) increased ~~revenue from~~ ~~enlighten III~~~~and~~ ~~xeo~~, ~~partially offset~~ by ~~a decline in revenue from our~~ ~~excel V~~ ~~product.~~

~~Service Revenue~~

~~Our worldwide Service revenue~~ ~~was relatively flat~~$2.3 million or 20%, in the three ~~and nine~~ months ended ~~September 30, 2017,~~March 31, 2022, compared to the same ~~periods~~period in ~~2016.~~

~~Hand Piece Refills~~2021, primarily due to increased sales in the Company’s direct businesses in Australia and Europe, partially offset by decreased sales from distributors in Middle East and Asian regions and a $0.8 million adverse impact from weakening foreign currencies, namely the Euro, Australian Dollar and Japanese Yen.

Consumables Revenue

~~Revenue from our Hand Piece Refills was flat during~~

Consumables revenue increased by $1.0 million or 33%, in the three months ended ~~September 30, 2017, and declined by $143,000 or 8%, in the nine months ended September 30, 2017,~~March 31, 2022, compared to the same ~~periods~~period in ~~2016. This decrease was primarily due to reduced utilization of the~~ ~~Titan~~ ~~hand pieces.~~

~~Skincare Revenue~~

~~Revenue~~ ~~from our Skincare products~~2021. The increase in ~~Japan was flat during the three months ended September 30, 2017, and increased by $215,000, or 8%, in the nine months ended September 30, 2017, compared to the same periods in 2016. This increase~~consumables revenue was primarily due to the ~~launch~~increasing installed base of ~~new product lines~~truSculpt iD, Secret RF, Secret PRO and truSculpt flex, each of which have a consumable element.

Skincare Revenue

The Company’s revenue from Skincare products in Japan decreased by $0.7 million or 5%, in the three months ended March 31, 2022, compared to the same period in 2021. This decrease was due to a $1.1 million adverse impact from the weakening Japanese Yen. The Company will continue to be exposed to fluctuations in the exchange rate between U.S. Dollars and Japanese Yen, as the Company's skincare revenue is denominated in Japanese Yen.

Service Revenue

The Company’s Service revenue decreased $0.2 million or 3%, in the three months ended March 31, 2022, compared to the same period in 2021. This decrease was due primarily to decreased sales of service contracts, and support and maintenance services, as well as ~~increased marketing and promotional activities for this distributed product.~~

the availability of certain parts.

Gross Profit

~~Our~~


	Three Months Ended March 31,
(Dollars in thousands)	2022			2021			Change
Gross profit	$	31,788		$	27,710		$	4,078
As a percentage of total net revenue	54.8		%	55.8		%	(1.0)		%

The Company’s cost of revenue consists primarily of material, personnel expenses, product warranty costs, and manufacturing overhead expenses.

Gross ~~margin in~~profit as a percentage of revenue for the three ~~and nine~~ months ended ~~September 30, 2017,~~March 31, 2022 decreased one percentage point compared to the same ~~periods~~period in ~~2016, declined slightly~~2021. The decrease in gross profit as a percentage of revenue was primarily ~~due to:~~

●

a ~~reduction in the average selling prices in international markets, largely driven by~~ ~~enlighten~~ ~~system sales; and~~

●

i~~ncreased warranty, personnel and overhead costs in support of higher revenue levels; partially offset by~~

●

~~higher~~ ~~margins generated from our~~ ~~truSculpt 3D~~ ~~system launched in North America in May 2017 and in select European countries in September 2017.~~

driven by an increase in manufacturing overhead, partially offset by a favorable portfolio mix.

Sales and Marketing


	Three Months Ended March 31,
(Dollars in thousands)	2022			2021			Change
Sales and Marketing	$	24,944		$	15,068		$	9,876
As a percentage of total net revenue	43.0		%	30.3		%	12.7		%

~~Table of Contents~~

Sales and marketing expenses consist primarily of personnel expenses, expenses associated with customer-attended workshops and trade shows, post-marketing studies, advertising, and ~~advertising.~~ training.

Sales and marketing expenses ~~as a percentage of revenue declined to~~ ~~34% and 35% during~~for the three ~~and nine~~ months ended ~~September 30, 2017, respectively,~~March 31, 2022, increased $9.9 million compared to ~~35%~~the same period in 2021. These increases reflected headcount growth related to preparing for the launch of the AviClear device and 37% during the three and nine months ended September 30, 2016, respectively. The reduction in sales and marketing expense as a percent of revenue was due primarily to improved leverage of our sales and marketing expenses, as well as an increase

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in ~~our direct sales employee productivity.~~

~~The $2.6 million, or 24%,~~commission costs due to higher revenue. Also contributing to the increase in sales and marketing expenses ~~during the three months ended September 30, 2017, compared~~were marketing costs related to ~~the same period~~new business, trade shows and other promotions, and a resumption in ~~2016, was due primarily to:~~

●

$~~2.0 million increase in personnel related expenses, largely driven by increased headcount and commission expenses in support of higher revenue levels;~~

●

~~$217,000~~ ~~increased promotional expenses, primarily in North America; and~~

●

$~~185,000 increased marketing consulting services in the U.S.~~

~~Sales and marketing expenses increased by $6.7 million, or 22%, in the nine months ended September 30, 2017, compared to the same period in the prior year, due primarily to:~~

●

$~~4.6 million increase in personnel related expenses, largely driven by increased headcount and commission expenses in support of higher revenue levels;~~

●

$~~781,000 increased promotional expenses, primarily in North America;~~

●

~~$574,000~~ ~~increased marketing consulting services in the U.S.; and~~

●

~~$512,000~~ ~~increased travel related expenses, primarily in North America, resulting from the increased headcount supporting higher revenue levels.~~

travel activities.

Research and Development (“(“R~~&D”~~&D”)


	Three Months Ended March 31,
(Dollars in thousands)	2022			2021			Change
Research and development	$	6,499		$	4,112		$	2,387
As a percentage of total net revenue	11.2		%	8.3		%	2.9		%

R&D expenses consist primarily of personnel expenses, clinical research, regulatory and material costs. R&D expenses increased by $~~553,000, and represented 9% of total net revenue,~~$2.4 million, in the three months ended ~~September 30, 2017,~~March 31, 2022, compared to ~~10% for~~ the same period in ~~2016. This~~2021. These increases were due primarily to higher personnel expenses driven by an increase in ~~expense was due primarily to:~~

●

$~~336,000 increase in personnel and consulting related expenses due to increased~~ headcount and ~~product development activities; and~~

●

~~$141,000 increased material spending relating to new product development.~~

~~R&D expenses increased by $1.1 million, and represented 9% of total net revenue, in the nine months ended September 30, 2017, compared to 11% for the same period in 2016. This~~ increase in ~~expense was due primarily to:~~

●

$~~749,000 increase in personnel and consulting related expenses due to increased headcount and product development activities; and~~

●

~~$136,000 increased material spending relating to new product development.~~

outside services.

General and Administrative (“(“G~~&A”~~&A”)

Three Months Ended September 30,

Nine Months Ended September 30,

(Dollars in thousands)

2017

% Change

2016

2017

% Change

2016

General and administrative

$
3,379

24
%

$
2,716

$
10,143

2
%

$
9,933

As a percentage of total net revenue

9
%

9
%

10
%

12
%


	Three Months Ended March 31,
(Dollars in thousands)	2022			2021			Change
General and administrative	$	13,502		$	7,365		$	6,137
As a percentage of total net revenue	23.3		%	14.8		%	8.4		%

~~Table of Contents~~

G&A expenses consist primarily of personnel expenses, legal, ~~fees,~~ accounting, audit and tax consulting fees, ~~and~~as well as other general and administrative expenses. G&A expenses increased by ~~$663,000 and represented 9% of total net revenue in both~~$6.1 million, for the three months ended ~~September 30, 2017 and 2016. The increase in G&A expenses was due primarily to:~~

●

$~~595,000 increase in personnel related expenses due to increased headcount; and~~

●

$~~112,000 increased consulting service fees; partially offset by~~

●

$~~146,000 reduction in legal fees.~~

~~G&A expenses~~ ~~increased by $210,000 and represented 10% of total net revenue in the nine months ended September 30, 2017, compared to 12% in the same period in 2016, due primarily to:~~

●

$~~720,000 increase in personnel related expenses due primarily to increased headcount;~~

●

$~~471,000 increased consulting service fees; and~~

●

$~~155,000 increased credit card fees as a result of increased North America system revenue; partially offset by~~

●

~~$1.2 million~~ ~~one-time litigation settlement expense and related legal fees associated with a matter settled in the second quarter of 2016, not recurring in 2017.~~

~~Lease Termination Income~~

In July 2017, we agreed to terminate the building lease for a new facility in Fremont, California, which was entered into in May 2017. In conjunction with this lease termination, we received a lump sum termination payment of $4.0 million from the landlord.

~~Interest and Other Income, Net~~

~~Interest and other income (net), consists of the following:~~

Three Months Ended September 30,

Nine Months Ended September 30,

(Dollars in thousands)

2017

% Change

2016

2017

% Change

2016

Interest income
$ 145 81
%
$ 80 $ 388 65
%
$ 235
Other income (expense), net
52 (40
)%
86 358 23
%
292
Total interest and other income, net
$ 197 19
%
$ 166 $ 746 42
%
$ 527

~~Interest and other income, net, increased $31,000 in the three months ended September 30, 2017,~~March 31, 2022, compared to the same period in ~~2016. This~~2021. The increase was due primarily to $2.4 million higher personnel expenses driven by an increase in ~~interest~~headcount and $4.0 million of enterprise resource planning (ERP) system implementation expense.

Interest and Other income ~~from our marketable investments resulting from higher investment balances as well as higher rates of return, partially offset by a reduction in net foreign exchange gains.~~

(expense), Net

Interest and other income ~~(net)~~(expense), net, consists of the following:


	Three Months Ended March 31,
(Dollars in thousands)	2022		2021		Change
Interest and other expense, net	$	1,752	$	1,266	$	486

Interest and other expense, net increased $~~219,000 in~~$0.5 million for the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2022, compared to the same period in ~~2016. This was~~2021, due ~~primarily~~ to ~~an increase~~interest expense related to convertible notes issued in interest income from our marketable investments resulting from higher investment balance as well as higher rates of return, and increase in vendor discounts for early payments, partially offset by higher interest payments for leased vehicles.

March 2021.

Provision for Income Taxes

~~For~~


	Three Months Ended March 31,
(Dollars in thousands)	2022		2021		Change
Income tax provision	$	233	$	258	$	(25)

The Company's income tax expenses were $0.2 million for the three months ended ~~September 30, 2017, our income tax expense was $225,000,~~March 31, 2022, compared to ~~$61,000 in~~$0.3 million for the same period in ~~2016. For the nine months ended September 30, 2017, our income tax expense was $166,000, compared to $115,000 in the same period in 2016.~~

~~In the three~~2021.

Liquidity and ~~nine months ended September 30, 2017, we calculated the provision for income taxes for interim reporting periods by applying an estimate~~Capital Resources

The Company’s principal source of the "annual effective tax rate" for the full fiscal year to ordinary income. The result related primarily to U.S. alternative minimum taxes as we are able to utilize our net operating losses brought forward. In addition, we recorded discretely the net tax benefit of excess equity compensation costs (“windfalls”) of approximately $50,000 and $160,000liquidity in the three ~~and nine~~ months ended ~~September 30, 2017, respectively.~~

~~For our income tax~~ ~~provision in~~March 31, 2022, was cash generated from net proceeds from the three and nine months ended September 30, 2016, the tax expense was primarily related to income taxes of our non-U.S. operations as our U.S. operations were in a loss position and we had a 100% valuation allowance against them. We did not record a year-to-date tax benefit associated with the projected 2016 U.S. tax expense due to historical losses and uncertainties related to the projected income.

~~Table of Contents~~

Due to the uncertainty regarding the timing and extent of our future profitability, we continue to record a full valuation allowance to offset our U.S. deferred tax assets, which primarily represent future income tax benefits associated with our operating losses because we do not currently believe that the positive evidence outweighs the negative evidence. ~~In the near future, if we conclude that sufficient positive evidence (including our estimate of future taxable income) exists to support a reversal of all or a portion~~issuance of the ~~valuation allowance, we expect that a significant portion of any release of the valuation allowance will be recorded as an income tax benefit at the time of release,~~ ~~which will have a material impact on our financial statements.~~ ~~In addition, as and when we discontinue recording a valuation allowance against our deferred tax assets, we expect that our income tax expense recorded~~convertible notes in ~~future quarters will also be significantly higher than it has been since fiscal year 2009, when we recorded a valuation allowance for our U.S. deferred tax assets.~~

~~Liquidity and Capital Resources~~

~~Liquidity is the measurement of our ability to meet potential~~March 2021. The Company actively manages its cash requirements, fund the planned expansion of our operations and acquire businesses. Our sources of cash include operating activities, stock option exercises, ESPP contributions, and the liquidation of marketable investments. We actively manage our cash usage ~~and investment of liquid cash~~ to ensure the maintenance of sufficient funds to meet ~~our~~its daily needs. The majority of ~~our~~the Company’s cash, cash equivalents, and investments are held in U.S. ~~banks and our~~banks. The Company's foreign subsidiaries maintain a limited amount of cash in their local banks to cover ~~their~~ short-term operating expenses.

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As of March 31, 2022 and December 31, 2021, the Company had $162.7 million and $175.8 million of working capital, respectively. Cash, cash equivalents, restricted cash and marketable investments decreased by $32.4 million to $132.5 million as of March 31, 2022 from $164.9 million as of December 31, 2021, primarily due to cash used in operating activities.

Cash, Cash Equivalents, Restricted Cash and Marketable Investments

The following table summarizes ~~our~~its cash, cash equivalents, restricted cash and marketable investments:

(Dollars in thousands)

September 30,
2017

December 31,
2016

Change

Cash and cash equivalents
$ 14,784 $ 13,775 $ 1,009
Marketable investments
35,692 40,299 (4,607
)
Total
$ 50,476 $ 54,074 $ (3,598
)

(Dollars in thousands) March 31, 2022 December 31, 2021 Change
Cash and cash equivalents $ 57,732 $ 164,164 $ (106,432)
Restricted cash 700 700 —
Marketable investments 74,047 — 74,047
Total $ 132,479 $ 164,864 $ (32,385)

Cash Flows

Nine Months Ended September 30,

(Dollars in thousands)

2017

2016

Net cash flow provided by (used in):

Operating activities
$ 7,605 $ (2,749
)
Investing activities
4,220 2,050
Financing activities
(10,816
)
1,106
Net increase (decrease) in cash and cash equivalents
$ 1,009

$ 407

Three Months Ended March 31,
(Dollars in thousands) 2022 2021
Net cash flow (used in) provided by:
Operating activities $ (29,604) $ 1,253
Investing activities (74,379) (49)
Financing activities (2,449) 116,681
Net (decrease) increase in cash and cash equivalents $ (106,432) $ 117,885

Cash Flows from Operating Activities

~~Net cash generated from operating activities in the~~ ~~nine months ended September 30, 2017 was $7.6 million, due primarily to:~~

●

$11.4 million generated by net income of $7.1 million, which included a non-recurring $4.0 million of lease termination income, and was further increased by non-cash related items of $3.6 million of stock-based compensation expense and $750,000 in depreciation and amortization expenses;

●

~~$4.8 million of increased cash due to an increase in accrued liabilities as a result of higher personnel and warranty costs;~~

●

~~$3.2 million of increased cash~~ ~~due to an increase in accounts payable as a result of increased material purchases to support higher revenue levels;~~

●

~~$652,000 generated from an increase in deferred revenue; partially offset by~~

●

~~$8.8 million used to increase inventories in support of a greater volume of product sales;~~

●

~~$3.0 million used as a result of increased accounts receivables resulting from the higher revenue; and~~

●

~~$633,000 used to increase other assets and pre-paid expenses.~~

Net cash used in operating activities in the ~~nine~~three months ended ~~September 30, 2016~~March 31, 2022, was ~~$2.7~~$29.6 million, which ~~was due primarily to:~~

●

~~$1.7 million generated~~ ~~by a net loss of $1.6 million, offset by~~reflected net income, adjusted for non-cash ~~related~~ items, ~~of $2.7 million stock-based compensation expense and $733,000 in depreciation and amortization expenses;~~

●

~~$1.3 million generated from an increase in accounts payable primarily as a result of higher inventory purchases for the increased volume of business;~~

●

~~$886,000 generated from an increase in accrued liabilities primarily related to higher personnel expenses; partially offset by~~

~~Table~~ of ~~Contents~~$8.6 million, and changes in assets and liabilities of $21.0 million. The increase in current assets mainly reflects an increase in inventory and deposits with vendors related to the launch of AviClear.

●

~~$4.4 million used to increase inventory;~~

●

~~$1.2 million used in deferred revenue resulting primarily from the amortization of deferred service contract revenue; and~~

●

~~$690,000 used to increase other current assets and prepaid expenses primarily related to insurance premiums and future marketing tradeshows.~~

Cash Flows from Investing Activities

~~We generated net~~

Net cash ~~of $4.2~~used in investing activities was $74.4 million in ~~our investing activities in~~ the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2022, which was attributable ~~primarily to:~~

●

$~~48.8 million in net proceeds from~~to the ~~sales and maturities of marketable investments; partially offset by~~

●

$~~44.2 million of cash used to~~ purchase ~~marketable investments; and~~

●

$~~443,000 of cash used to purchase property, equipment and software.~~

~~We generated net cash~~ of ~~$2.1 million in our investing activities in the nine months ended September 30, 2016, which was attributable primarily to:~~

●

~~$26.3 million in net proceeds from the sales and maturities of marketable investments; partially offset by~~

●

~~$23.9 million of cash used to purchase marketable investments; and~~

●

~~$311,000 of cash used to purchase property, equipment and software.~~

marketable investments.

Cash Flows from Financing Activities

Net cash used in financing activities was $~~10.8~~$2.4 million in the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2022, which was primarily due ~~to:~~

●

$~~13.8 million used to repurchase common stock;~~

●

$~~1.3 million of cash used for taxes paid related to net share settlement of equity awards;~~

●

$~~274,000 used to pay down our capital lease obligations; partially offset by~~

●

$~~4.6 million of cash generated from the issuance of common stock due to employees exercising their stock options and purchasing stock through the ESPP program.~~

~~Net cash provided by financing activities was $1.1 million in the nine months ended September 30, 2016, which was primarily due to:~~

●

~~proceeds of $6.2 million from the issuance of common stock due to employees exercising their stock options and purchasing stock through the ESPP program; partially offset by~~

●

~~repurchase of common stock for $4.9 million; and~~

●

~~payments for capital lease obligations of $218,000.~~

to taxes paid related to net share settlement of equity awards.

Adequacy of Cash Resources to Meet Future Needs

The Company had cash and cash equivalents of $57.7 million and marketable investments of $74.0 million as of March 31, 2022. In the first quarter of 2022, the Company’s principal source of liquidity was cash generated from proceeds received from the issuance of the Company’s notes in March 2021. The Company intends to use the net proceeds of the issuance to fund growth initiatives and market development activities and to provide for general corporate purposes, which may include working capital, capital expenditures, clinical trials, other corporate expenses and acquisitions of complementary products, technologies, or businesses.

The Company believes that the existing cash and cash equivalents and ~~investments of $50.5 million as of September 30, 2017. For~~ the ~~nine months ended September 30, 2017, we financed our operations and stock repurchases through~~ cash ~~generated by our operating activities, sales and maturities of marketable investments and from~~available under the ~~sale of stock due to employees exercising their stock options and purchasing stock through the ESPP program.~~

~~As of September 30, 2017, we had $21.4 million remaining under our Board approved Stock Repurchase Program. We believe the existing capital resources, including cash, cash equivalents and investments of $50.5 million, are~~revolving credit facility will be sufficient to meet ~~our operating and capital requirements~~the Company’s anticipated cash needs for at least the next ~~several years, and enable us to repurchase stock pursuant to our Stock Repurchase Program.~~

~~In July 2017, we agreed to terminate the building lease for a new facility in Fremont, California, entered into in May 2017.~~ ~~In conjunction with this lease termination, we received a lump sum termination payment of $4.0 million~~12 months from the ~~landlord. Except for~~date the ~~foregoing, cash used to fund our operating activities~~financial statements are issued, but there can be no assurances.

Debt

In March 2021, the Company issued $138.3 million aggregate principal amount of convertible notes due on March 15, 2026 in ~~certain historical quarters, purchase fixed assets~~a private placement offering. The convertible notes bear interest at a rate of 2.25% per year payable semiannually in arrears on March 15 and ~~repurchase our common stock, we~~September 15 of each year. The convertible notes are ~~unaware~~presented as long-term debt, net of any other known trends or any known demands, commitments, events or uncertainties, including collectability of our accounts receivable, that will result in, or that are reasonably likely to result in, liquidity increasing or decreasing in any material way.

debt discount. Proceeds

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from the offering were $133.6 million, net of issuance costs, including underwriters’ fees, which were recorded in the condensed consolidated balance sheet.

On July 9, 2020, the Company terminated its undrawn revolving line of credit with Wells Fargo and subsequently entered into a Loan and Security Agreement with Silicon Valley Bank. The agreement provides for a four-year secured revolving loan facility (“SVB Revolving Line of Credit”) in an aggregate principal amount of up to $30.0 million. See Note 13 – Debt in the accompanying notes to consolidated financial statements for more information.

On March 4, 2021, the Loan and Security Agreement was amended to (i) permit the Company to issue the convertible notes, and (ii) to permit the capped call transactions.

On or about May 28, 2021, the Loan and Security Agreement was amended. The amendment removed the quarterly minimum revenue requirement but kept in place the other financial covenants.

As of March 31, 2022, the Company had not drawn on the SVB Revolving Line of Credit and the Company is in compliance with all financial covenants of the SVB Revolving Line of Credit.

Commitments and Contingencies

~~Contractual Obligations~~

~~The following are our contractual obligations, consisting~~

As of ~~future minimum lease commitments related to facility~~ ~~leases as~~the date of ~~September 30, 2017:~~

Payments Due by Period ($’000’s)

Contractual Obligations

Total

Less Than
1 Year

1-3 Years

3-5 Years

More Than
5 Years

Operating leases
Operating leases
Operating leases 13,774 2,446 $ 5,420 $ 5,070 $ 838

In addition to the above facility leases, we also routinely lease automobiles for certain sales and field service employees under operating leases for which the remaining committed lease payments are not material.

~~Except as set forth above,~~this report, there ~~have been~~were no material changes to ~~our~~the Company’s contractual obligations and commitments ~~and contingencies from those disclosed~~outside the ordinary course of business since March 1, 2022, as reported in ~~our 2016~~the Company’s Annual Report on 2021 Form 10-K.

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~~ITEM 3.~~

~~QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK~~

~~There have been no material changes~~

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

A summary of the key market risks facing the Company is disclosed below. For a detailed discussion, please see the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on March 1, 2022 and other announcements the Company makes from time to time.

The conditional conversion feature of the convertible notes, if triggered, may adversely affect the Company's financial condition and operating results.

During any fiscal quarter commencing after the fiscal quarter ending on September 30, 2021 (and only during such fiscal quarter), if the last reported sale price of the common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on and including, the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of the conversion price for the convertible notes on each applicable trading day. This condition was not met during the first quarter of 2022. As of March 31, 2022, the Notes are not convertible and this condition will remain until June 30, 2022. The notes may become convertible in future periods. Upon any conversion requests 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 with respect to such conversion requests.

Interest Rate and Market Risk

As of March 31, 2022, the Company had not drawn on the Original Revolving Line of Credit, as amended. Overall interest rate sensitivity is primarily influenced by any amount borrowed on the line of credit and the prevailing interest rate on the line of credit facility. The effective interest rate on the line of credit facility is based on a floating per annum rate equal to the ~~Company’s market risk during~~Prime rate. The Prime rate was 3.50% as of March 31, 2022, and accordingly the ~~nine months ended September 30, 2017. For~~Company may incur additional expenses if the Company has an outstanding balance on the line of credit and the Prime rate increases in future periods.

Inflation

The Company experienced inflationary pressure on its business, but the impact was mitigated through ongoing cost improvement initiatives. If the Company’s costs were to become subject to significant inflationary pressures, the Company may not be able to fully offset such higher costs through price increases. The Company’s inability or failure to do so could harm the Company’s business, financial condition, and results of operations.

Foreign Exchange Fluctuations

The Company generates revenue in Japanese Yen, Euros, Australian Dollars, Canadian Dollars, British Pounds, and Swiss Francs. Additionally, a ~~discussion~~portion of the Company’s ~~exposure to market risk, refer~~operating expenses, and assets and liabilities are denominated in each of these currencies. Therefore, fluctuations in these currencies against the U.S. dollar could materially and adversely affect the Company’s results of operations upon translation of the Company’s revenue denominated in these currencies, as well as the re-measurement of the Company’s international subsidiaries’ financial statements into U.S. dollars. The Company has historically not engaged in hedging activities relating to the Company’s ~~market risk disclosures set forth in Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” of the 2016 Form 10-K.~~

foreign currency denominated transactions.

ITEM 4.CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

~~Attached as exhibits to this Quarterly Report are certifications of our Chief Executive Officer (“CEO”)~~

The Company maintains disclosure controls and ~~consultant Chief Financial Officer (“CFO”)~~, ~~which are required~~procedures (as defined in ~~accordance with Rule 13a-14 of~~Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”). This Controls and Procedures section includes the information concerning the controls evaluation referred to in the certifications, and it should be read in conjunction with the certifications for a more complete understanding of the topics presented.

We conducted an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures (as defined in the Rules 13a-15(e) and 15d-15(e) under the Exchange Act) (“Disclosure Controls”) as of the end of the period covered by this Report required by Exchange Act Rules 13a-15(b) or 15d-15(b). The controls evaluation was conducted under the supervision and with the participation of our management, including the CEO and CFO. Based on this evaluation, the CEO and CFO have concludedamended) that ~~as of the end of the period covered by this report the disclosure controls and procedures were effective at a reasonable assurance level.~~

~~Definition of Disclosure Controls~~

~~Disclosure Controls~~ are ~~controls and procedures~~ designed to ~~reasonably assure~~ensure that information required to be disclosed in ~~our reports filed under~~ the Company’s Exchange Act ~~such as this Report,~~reports is recorded, processed, summarized and reported within the time periods specified in the ~~SEC~~’sSEC’s rules and ~~forms. Disclosure Controls are also designed to reasonably assure~~forms and that such information is accumulated and communicated to ~~our~~the Company’s management, including the Company’s principal executive officer and principal financial officer, as appropriate, to allow for timely decisions regarding required disclosure.

Management identified a material weakness in the year ended December 31, 2021, over the Company’s internal control over financial reporting. This material weakness is related to ineffective information technology general controls (“ITGCs”) in the areas of user access and segregation of duties related to certain information technology (“IT”) systems that support the Company’s financial reporting process at its Japan subsidiary. Although this material weakness did not result in any material misstatement of the Company's consolidated financial statements for the periods presented, it could lead to a material misstatement of account balances or disclosures. Accordingly, management concluded that this deficiency constitutes a material weakness.

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As required by SEC Rule 13a-15(b), the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. The Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) concluded that the Company’s disclosure controls and procedures were not effective as of March 31, 2022, at the reasonable assurance level, as a result of the material weakness in internal controls, which was disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2021. Notwithstanding this material weakness, the Company’s management, including the CEO and CFO, has concluded that the consolidated financial statements, included in the 2021 Annual Report on Form 10-K, and in the Form 10-Q for the three months ended March 31, 2022, fairly present, in all material respects, the Company's financial condition, results of operations and cash-flows for the periods presented in conformity with generally accepted accounting principles.

Remediation Plans

The Company has begun the process of designing and implementing effective internal control measures to remediate this material weakness. The Company's efforts include reviewing user access to IT systems that support financial reporting and implementing additional controls designed to detect potential material misstatements that may arise as ~~appropriate~~a result of user access and segregation of duties conflicts at the Company's Japan subsidiary. The actions the Company is taking are subject to ~~allow timely decisions regarding required disclosure. Our Disclosure Controls include components~~ongoing executive management review and are also subject to audit committee oversight. The Company will not be able to fully remediate this material weakness until these steps have been completed and have been operating effectively for a sufficient period of time. If the Company is unable to successfully remediate this material weakness, or if in the future, the Company identifies further material weaknesses in its internal control over financial reporting, ~~which consists~~the Company may not detect errors on a timely basis, and its condensed financial statements may be materially misstated.

Changes in Internal Control over Financial Reporting

In January 2022, the Company completed the implementation of a new ERP system. Accordingly, the Company modified the design and operation of certain internal control processes ~~designed~~and procedures relating to ~~provide reasonable assurance regarding the reliability of its financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles~~this new ERP system. Other than these ERP system implementation changes, there were no changes in the ~~U.S. To the extent that components of our~~Company's internal control over financial reporting during the quarter ended March 31, 2022 that have materially affected, or are ~~included within Disclosure Controls, they are included in~~reasonably likely to materially affect, the ~~scope of our annual controls evaluation.~~

Company's internal control over financial reporting.

~~Table of Contents~~

Limitations on the Effectiveness of Controls

~~Our management, including the CEO and CFO, does not expect that our disclosure controls or internal control over financial reporting will prevent all error and all fraud.~~

A control system, no matter how well ~~designed~~conceived and operated, can provide only reasonable, not absolute, assurance that the ~~control system~~’s objectives ~~will be met. Further,~~of the ~~design of a~~ control system ~~must reflect the fact that there~~ are ~~resource constraints, and the benefits of controls must be considered relative to their costs.~~met. Because of ~~the~~ inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, ~~and instances of fraud,~~ if any, within a company have been detected. ~~These inherent limitations include~~Accordingly, the ~~realities~~Company’s disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that ~~judgments in decision making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by~~ the ~~individual acts of some persons, by collusion of two or more people, or by management override~~objectives of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitations in a cost-effectiveCompany’s disclosure control system ~~misstatements due to error or fraud may occur and not be detected.~~

~~Changes in Internal Control over Financial Reporting~~

~~There were no changes in our internal control over financial reporting that occurred during the most recent fiscal quarter that have materially affected, or~~ are ~~reasonably likely to materially affect, our internal control over financial reporting.~~

met.

PART II. OTHER INFORMATION

~~ITEM 1.~~

~~LEGAL PROCEEDINGS~~

~~We are named from~~

ITEM 1. LEGAL PROCEEDINGS

From time to time, asthe Company may be involved in legal and administrative proceedings and claims of various types. For a ~~party~~description of the Company’s material pending legal and regulatory proceedings and settlements, see Note 11 to ~~product liability~~the Company’s consolidated financial statements entitled “Commitments and ~~contractual lawsuits~~Contingencies,” in the ~~normal course of business. We routinely assess~~Annual Report on Form 10-K for the ~~likelihood of any adverse judgments or outcomes related to legal matters and claims, as well as ranges of probable losses. A determination of~~year ended December 31, 2021, filed with the amount of the reserves required, if any, for these contingencies is made after analysis of each known issue, historical experience, whether it is more likely than not that we shall incur a loss, and whether the loss is estimable. We are not currently a party to any material legal proceedings.

SEC on March 1, 2022.

~~ITEM 1A.~~

~~RISK FACTORS~~

~~Our business faces many risks.~~ ~~Any of~~

ITEM 1A. RISK FACTORS

There are no material changes from the ~~risks referenced~~Risk Factors previously disclosed in ~~this Form 10-Q or our other SEC filings could have a material impact~~the Company’s Annual Report on our business and consolidated financial position or results of operations. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also impair our business operations.

~~For detailed discussion of risk factors that should be understood by any investor contemplating investment in our stock, please refer to “Part I. Item 1A. Risk Factors” in our 2016~~ Form 10-K ~~and elsewhere in this Form 10-Q.~~

~~Our ability to reverse all or any part of the valuation allowance against our U.S. deferred tax assets is uncertain.~~

~~We have recorded a full valuation allowance against our U.S. deferred tax assets due to the uncertainty of the ultimate realization of the future benefits of those assets.~~ To the extent we determine that all, or a portion of, our valuation allowance is no longer necessary, we will reverse the valuation allowance and recognize an income tax benefit in the reported financial statement earnings in that period. Once the valuation allowance is eliminated or reduced, its reversal will no longer be available to offset our current financial statement tax provision in future periods. We believe that there is a possibility that, within the next 3-12 months, sufficient positive evidence may become available to allow us to reach a conclusion that a significant portion of the valuation allowance will no longer be needed. Release of the valuation allowance would result in the recognition of certain deferred tax assets and a decrease to income tax expense for the ~~period~~fiscal year ended December 31, 2021, filed with the ~~release is recorded. However, the exact timing and amount of the valuation allowance release are subject to change~~SEC on the basis of the level of profitability that we are able to actually achieve. Due to significant estimates used to determine the valuation allowance and the potential for changes in facts and circumstances, the Company cannot guarantee that it will be able to reverse all or any of the valuation allowance or that the Company will not need to increase its deferred tax asset valuation allowance in the future.

March 1, 2022.

~~ITEM 2.~~

~~UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS~~

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The ~~following table summarizes~~Company issued $138.3 million aggregate principal amount of convertible notes in a private placement offering on March 5, 2021. The notes bear interest at a rate of 2.25% per year. In connection with issuance of the ~~activity related~~notes, the Company entered into capped call transactions with certain option counterparties. The capped call transactions are generally expected to reduce the potential dilution of the Company's common stock ~~repurchases~~upon any conversion of the Notes. The capped calls were purchased for ~~the three~~ ~~months ended September 30, 2017~~ ~~(in thousands except per share data)~~:

Period

Total Number
of Shares
Purchased

Average Price
Paid
per Share

Total Number of
Shares Purchased
as Part of
Publicly Announced
Plans or Programs

Approximate
Dollar Value
of Shares
That May Yet
Be Purchased
Under the Plans
or Program

July 1-31, 2017

—

—

—

28,110

August 1-31, 2017

109

34.71

109

24,340

September 1-30, 2017

76

38.99

76

21,380

July 1, 2017 - September 30, 2017

185

$
36.47

185

$
21,380

$16.1 million.

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~~As of December 31, 2016, we had $5.1 million available in our Stock Repurchase Program.~~ ~~On February 13, 2017 and July 28, 2017, our Board of Directors approved an incremental $5 million and $25 million, respectively, to be added to the Stock Repurchase Program.~~

In the three months ended September 30, 2017, we repurchased 184,536 shares for approximately $6.7 million, or $36.47 per share, and retired and returned them to an authorized but unissued status. As of September 30, 2017, $21.4 million remained available for future repurchases of our stock.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

None.

ITEM 5. OTHER INFORMATION

None.

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ITEM 6.EXHIBITS

~~Exhibit~~ ~~No.~~		~~Description~~
~~3.4~~ Exhibit No.			⁽¹⁾		~~Bylaws of the Company.~~ Description
3.2
~~3.5~~	⁽⁵⁾			~~Second~~ Amended and Restated Certificate of Incorporation of the ~~Company (as~~Registrant (filed as Exhibit 3.5 to its Quarterly Report on Form 10-Q filed ~~with the state of Delaware)~~on November 7, 2017 and incorporated herein by reference).
3.4					Bylaws of the Registrant (filed as Exhibit 3.4 to its Current Report on Form 8-K filed on January 8, 2015 and incorporated herein by reference).
4.1		⁽²⁾			Specimen Common Stock certificate of the ~~Company.~~Registrant (filed as Exhibit 4.1 to its Annual Report on Form 10-K filed on March 25, 2005 and incorporated herein by reference).
4.2*
~~10.26~~	⁽³⁾	~~Lease termination agreement relating to 6530 Paseo Padre Parkway Fremont, California,~~ Employment Offer Letter dated July 6,19, 2017 by and between ~~the Company~~Cutera, Inc. and ~~SI 28, LLC.~~Michael Karavitis
4.3*
~~10.27~~	⁽⁴⁾	~~Second Amendment to Brisbane Technology Park Lease~~Change of Control and Severance Agreement dated ~~July 6, 2017~~February 1, 2018 by and between ~~the Company~~Cutera, Inc. and ~~BMR-BAYSHORE BOULEVARD LP.~~Michael Karavitis
4.4*
~~10.28~~	⁽⁵⁾	~~Transition Agreement~~Employment Offer Letter dated ~~July 12, 2017~~September 23, 2019 by and between ~~the Company~~Cutera, Inc. and ~~Ronald J. Santilli.~~Guy Thier
4.5*
~~10.29~~	⁽⁵⁾	~~Consulting~~Change of Control and Severance Agreement dated ~~July 12, 2017~~October 7, 2019 by and between ~~the Company~~Cutera, Inc. and ~~Sandra A. Gardiner~~Guy Th i e r
31.1
~~31.1~~				Certification of ~~the~~ Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
~~31.2~~				Certification of ~~the~~ Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
~~32.1~~				Certification of ~~the~~ Chief Executive Officer and ~~the~~ Chief Financial Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.ins					Instance Document
~~101.ins~~ 101.sch					~~XBRL Instance Document~~

~~101.sch~~		Inline XBRL Taxonomy Extension Schema Document
101.cal
~~101.cal~~		Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.def
~~101.def~~		Inline XBRL Taxonomy Extension Definition Linkbase Document
101.lab
~~101.lab~~		Inline XBRL Taxonomy Extension Label Linkbase Document
101.pre
~~101.pre~~		Inline XBRL Taxonomy Extension Presentation Linkbase Document

	~~(1)~~	~~Incorporated by reference from our Current Report on Form 8-K filed on January 8, 2015.~~
104		~~(2)~~	~~Incorporated by reference from our Annual Report on Form 10-K filed with the SEC on March 25, 2005.~~			Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

	~~(3)~~	~~Filed as Exhibit 10.26 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on August 7, 2017, and incorporated by reference.~~
	~~(4)~~	~~Filed as Exhibit 10.27 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on August 7, 2017, and incorporated by reference.~~
	~~(5)~~	~~Filed herewith.~~

* Management contract or compensatory plan

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SIGNATURE

Pursuant to the requirements of Section 13 or 15(d) of ~~the~~The Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Brisbane, State of California, on the ~~7th~~10th day of ~~November, 2017.~~

May, 2022.

	~~CUTERA, INC.~~
			CUTERA, INC.
			~~/S/ SANDRA A. GARDINER~~
			~~Sandra A. Gardiner~~ /s/ Rohan Seth
			~~Consultant~~ Rohan Seth
			Chief Financial Officer
	(Principal Financial and Accounting Officer)

	September 30, 2017			December 31, 2016
Assets
Current assets:
Cash and cash equivalents	$	14,784		$	13,775
Marketable investments		35,692			40,299
Accounts receivable, net		19,604			16,547
Inventories		23,728			14,977
Other current assets and prepaid expenses		2,894			2,251
Total current assets		96,702			87,849

Property and equipment, net		1,842			1,907
Deferred tax asset		384			377
Intangibles, net		—			2
Goodwill		1,339			1,339
Other long-term assets		381			380
Total assets	$	100,648		$	91,854

Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	5,805		$	2,598
Accrued liabilities		22,203			17,397
Deferred revenue		8,801			8,394
Total current liabilities		36,809			28,389

Deferred revenue, net of current portion		1,950			1,705
Income tax liability		171			168
Other long-term liabilities		505			582
Total liabilities		39,435			30,844

Commitments and Contingencies (Note 11)

Stockholders’ equity:
Convertible preferred stock, $0.001 par value; authorized: 5,000,000 shares; none issued and outstanding		—			—
Common stock, $0.001 par value; authorized: 50,000,000 shares; issued and outstanding: 13,906,439 and 13,773,389 shares at September 30, 2017 and December 31, 2016, respectively		14			14
Additional paid-in capital		81,195			88,114
Accumulated deficit		(19,933	)		(27,046	)
Accumulated other comprehensive loss		(63	)		(72	)
Total stockholders’ equity		61,213			61,010

Total liabilities and stockholders’ equity	$	100,648		$	91,854

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2017			2016		2017			2016
Net revenue:
Products	$	33,486		$	25,493	$	89,688		$	65,903
Service		4,687			4,788		14,173			14,278
Total net revenue		38,173			30,281		103,861			80,181
Cost of revenue:
Products		13,859			10,160		38,843			26,804	��
Service		2,104			2,378		6,241			7,155
Total cost of revenue		15,963			12,538		45,084			33,959
Gross profit		22,210			17,743		58,777			46,222

Operating expenses:
Sales and marketing		13,148			10,574		36,708			30,002
Research and development		3,467			2,914		9,393			8,335
General and administrative		3,379			2,716		10,143			9,933
Lease termination income		(4,000	)		—		(4,000	)		—
Total operating expenses		15,994			16,204		52,244			48,270
Income (loss) from operations		6,216			1,539		6,533			(2,048	)
Interest and other income, net		197			166		746			527
Income (loss) before income taxes		6,413			1,705		7,279			(1,521	)
Provision for income taxes		225			61		166			115
Net income (loss)	$	6,188		$	1,644	$	7,113		$	(1,636	)

Net income (loss) per share:
Basic	$	0.44		$	0.12	$	0.51		$	(0.12	)
Diluted	$	0.42		$	0.12	$	0.48		$	(0.12	)

Weighted-average number of shares used in per share calculations:
Basic		13,973			13,163		13,917			13,102
Diluted		14,767			13,544		14,733			13,102

September 30, 2017	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Market Value
Cash and cash equivalents:
Cash	$	6,703	$	—	$	—		$	6,703
Money market funds		1,636		—		—			1,636
Commercial paper		6,445		—		—			6,445
Total cash and cash equivalents		14,784		—		—			14,784

Marketable investments:
U.S. government notes		5,133		—		(4	)		5,129
U.S. government agencies		—		—		—			—
Municipal securities		201		—		—			201
Commercial paper		15,942		1		(1	)		15,942
Corporate debt securities		14,419		9		(8	)		14,420
Total marketable investments		35,695		10		(13	)		35,692

Total cash, cash equivalents and marketable investments	$	50,479	$	10	$	(13	)	$	50,476

December 31, 2016	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Market Value
Cash and cash equivalents:
Cash	$	6,672	$	—	$	—		$	6,672
Money market funds		6,053		—		—			6,053
Commercial paper		1,050		—		—			1,050
Total cash and cash equivalents		13,775		—		—			13,775

Marketable investments:
U.S. government notes		8,403		4		(9	)		8,398
U.S. government agencies		3,918		—		(2	)		3,916
Municipal securities		1,325		—		—			1,325
Commercial paper		12,299		2		(2	)		12,299
Corporate debt securities		14,366		3		(8	)		14,361
Total marketable investments		40,311		9		(21	)		40,299

Total cash, cash equivalents and marketable investments	$	54,086	$	9	$	(21	)	$	54,074

	Amount
Due in less than one year	$	30,410
Due in 1 to 3 years		5,282
Total marketable investments	$	35,692

September 30, 2017	Level 1		Level 2		Level 3		Total
Cash equivalents:
Money market funds	$	1,636	$	—	$	—	$	1,636
Commercial paper		—		6,445		—		6,445
Marketable investments:
Available-for-sale securities		—		35,692		—		35,692
Total assets at fair value	$	1,636	$	42,137	$	—	$	43,773

	September 30, 2017		December 31, 2016
Raw materials	$	18,201	$	10,966
Finished goods		5,527		4,011
Total	$	23,728	$	14,977

	September 30, 2017		December 31, 2016
Accrued payroll and related expenses	$	10,869	$	9,036
Sales and marketing programs		3,060		706
Warranty liability		2,940		2,461
Sales tax		2,206		2,373
Other		3,128		2,821
Total	$	22,203	$	17,397

				Options Outstanding
	Shares Available for Grant			Number of Stock Options Outstanding			Weighted- Average Exercise Price
Balance as of December 31, 2016		721,657			1,116,472		$	9.56
Additional shares reserved		1,600,000
Options granted		(154,000	)		154,000			21.82
Stock awards granted^{(1) (2)}		(558,694	)
Options exercised		—			(447,673	)		8.90
Options canceled		53,393			(53,393	)		16.58
Stock awards canceled⁽¹⁾		110,278
Balance as of September 30, 2017		1,772,634			769,406		$	11.91

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2017		2016		2017		2016
Stock options		77,511		413,588		447,673		706,522
Stock awards, net of shares withheld to satisfy employees’ minimum income tax withholding		9,881		8,107		152,972		114,832
ESPP		—		—		51,185		41,980
Total stock issued		87,392		421,695		651,830		863,334

Year Ending September 30,	Amount
2018	$	2,446
2019		2,677
2020		2,743
2021		2,593
2022		2,477
2023 and beyond		838
Total future minimum lease payments	$	13,774


Leases	Classification	March 31, 2022		December 31, 2021
Assets
Right-of-use assets	Operating lease assets	$	14,330	$	14,627
Finance lease	Property and equipment, net	403		392
Total leased assets		$	14,733	$	15,019


Liabilities	Classification	March 31, 2022		December 31, 2021
Operating lease liabilities
Operating lease liabilities, current	Operating lease liabilities	$	2,628	$	2,419
Operating lease liabilities, non-current	Operating lease liabilities, net of current portion	13,007		13,483
Total Operating lease liabilities		$	15,635	$	15,902

Finance lease liabilities
Finance lease liabilities, current	Accrued liabilities	$	520	$	554
Finance lease liabilities, non-current	Other long-term liabilities	680		730
Total Finance lease liabilities		$	1,200	$	1,284


		Three Months Ended March 31,
Lease costs	Classification	2022		2021
Finance lease cost	Amortization expense	$	161	$	127
Finance lease cost	Interest for finance lease	$	21	$	14
Operating lease cost	Operating lease expense	$	915	$	878


		Three Months Ended March 31,
Cash paid for amounts included in the measurement of lease liabilities	Classification	2022		2021
Operating cash flow	Finance lease	$	21	$	14
Financing cash flow	Finance lease	$	150	$	115
Operating cash flow	Operating lease	$	792	$	772


As of March 31, 2022	Amount
Remainder of 2022	$	2,469
2023	3,332
2024	2,904
2025	2,875
2026	2,970
2027 and thereafter	3,338
Total lease payments	17,888
Less: imputed interest	2,253
Present value of lease liabilities	$	15,635


Lease Term and Discount Rate	March 31, 2022
Weighted-average remaining lease term (years)
Operating leases	5.5
Finance leases	2.1
Weighted-average discount rate
Operating leases	4.7	%
Finance leases	6.6	%

(Dollars in thousands)	September 30, 2017		December 31, 2016		Change
Cash and cash equivalents	$	14,784	$	13,775	$	1,009
Marketable investments		35,692		40,299		(4,607	)
Total	$	50,476	$	54,074	$	(3,598	)

Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Program
July 1-31, 2017		—		—		—		28,110
August 1-31, 2017		109		34.71		109		24,340
September 1-30, 2017		76		38.99		76		21,380
July 1, 2017 - September 30, 2017		185	$	36.47		185	$	21,380