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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 March 31, 2022
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to_____.
Commission File Number: 000-50644
Cutera, Inc.
(Exact name of registrant as specified in its charter)
Delaware77-0492262
(State or other jurisdiction of incorporation or
organization)
(I.R.S. Employer Identification No.)
3240 Bayshore Blvd., Brisbane, California 94005
(Address of principal executive offices)
(415) 657-5500
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock ($0.001 par value)CUTRThe NASDAQ Stock Market, LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes    x    No    ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes x     No    ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act (check one):
Large accelerated filerAccelerated filer Non-accelerated filerSmaller reporting companyEmerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.):    Yes    ☐    No    x
The number of shares of Registrant’s common stock issued and outstanding as of May 6, 2022, was 18,163,389.


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



In this Quarterly Report on Form 10-Q, “Cutera,” “the Company,” “we,” “us” and “its” refer to Cutera, Inc. and its consolidated subsidiaries.
This report may contain references to its proprietary intellectual property, including among others, trademarks for its systems and ancillary products, "AviClearTM," "Cutera®," "AccuTip 500®," “CoolGlide®,” “CoolGlide excel®,” “enlighten®,” “excel HR®,” “excel V®,” “excel V+®,” “LimeLight®,” "MyQ®," “Pearl®,” “PICO Genesis®,” “ProWave 770®,” “Solera®,” “Titan®,” “truSculpt®,” “truSculpt iDTM,” “truSculpt flexTM,”"Secret PRO,” “Secret RF®,” and “xeo®.”
These trademarks and trade names are the property of Cutera or the property of its consolidated subsidiaries and are protected under applicable intellectual property laws. Solely for convenience, its trademarks and tradenames referred to in this Quarterly Report on Form 10-Q may appear without the ® or symbols, but such references are not intended to indicate in any way that the Company will not assert, to the fullest extent under applicable law, its rights to these trademarks and tradenames.
2

PART I. FINANCIAL INFORMATION
ITEM 1.    FINANCIAL STATEMENTS (UNAUDITED)
CUTERA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
(unaudited)
March 31,
2022
December 31,
2021
Assets
Current assets:
Cash and cash equivalents$57,732 $164,164 
Marketable investments74,047  
Accounts receivable, net of allowance for credit losses of $1,093 and $899, respectively
33,169 31,449 
Inventories51,680 39,503 
Other current assets and prepaid expenses20,156 14,545 
Total current assets236,784 249,661 
Property and equipment, net3,009 3,019 
Deferred tax asset737 778 
Operating lease right-of-use assets14,330 14,627 
Goodwill1,339 1,339 
Other long-term assets9,792 10,169 
Restricted cash700 700 
Total assets$266,691 $280,293 
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable$13,646 $7,891 
Accrued liabilities48,044 54,100 
Operating lease liabilities2,628 2,419 
Deferred revenue9,719 9,490 
Total current liabilities74,037 73,900 
Deferred revenue, net of current portion1,345 1,335 
Operating lease liabilities, net of current portion13,007 13,483 
Convertible notes, net of unamortized debt issuance costs of $3,788 and $4,007, respectively
134,462 134,243 
Other long-term liabilities680 763 
Total liabilities223,531 223,724 
Commitments and Contingencies (Note 12)
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 capital116,468 114,724 
Accumulated other comprehensive loss(11) 
Accumulated deficit(73,315)(58,173)
Total stockholders’ equity43,160 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.
3

CUTERA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
Three Months Ended
March 31,
20222021
Net revenue:
Products$52,066 $43,551 
Service5,948 6,117 
Total net revenue58,014 49,668 
Cost of revenue:
Products22,912 18,331 
Service3,314 3,627 
Total cost of revenue26,226 21,958 
Gross profit31,788 27,710 
Operating expenses:
Sales and marketing24,944 15,068 
Research and development6,499 4,112 
General and administrative13,502 7,365 
Total operating expenses44,945 26,545 
(Loss) income from operations(13,157)1,165 
Interest and other expense, net:
Amortization of debt issuance costs(219)(52)
Interest on convertible notes(778)(191)
Other expense, net(755)(1,023)
Total interest and other expense, net(1,752)(1,266)
Loss before income taxes(14,909)(101)
Income tax expense233 258 
Net loss$(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 
Diluted18,080 17,768 
The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
4

CUTERA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
(Unaudited)
Three Months Ended
March 31,
20222021
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.
5

CUTERA, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERSEQUITY
(in thousands, except share amounts)
Three Months Ended March 31, 2022 and 2021
Common StockAdditional
Paid-in
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Loss
Total
Stockholders’
Equity
SharesAmount
Balance at December 31, 202117,995,344 $18 $114,724 $(58,173)$ $56,569 
Exercise of stock options7,459 — 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, 202218,132,949 $18 $116,468 $(73,315)$(11)$43,160 

Common StockAdditional
Paid-in
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Loss
Total
Stockholders’
Equity
SharesAmount
Balance at December 31, 202017,679,232 $18 $117,097 $(60,235)$ $56,880 
Exercise of stock options24,090 — 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, 202117,801,926 $18 $102,206 $(60,594)$ $41,630 

The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
6

CUTERA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months Ended March 31,
20222021
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 compensation4,043 1,846 
Depreciation and amortization427 361 
Amortization of contract acquisition costs652 545 
Amortization of debt issuance costs219 52 
Impairment of capitalized cloud computing costs 182 
Change in deferred tax asset41 45 
Provision for excess and obsolete inventories358 193 
Provision for credit losses192 218 
Loss (gain) on sale of property and equipment14 (59)
Change in right-of-use assets638 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 payable5,755 (1,653)
Accrued liabilities(5,989)10,022 
Operating lease liabilities(608)(563)
Deferred revenue239 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 plan151 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 period164,864 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.
7

CUTERA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies 
Description of Operations and Principles of Consolidation
Cutera, Inc. (“Cutera” or the “Company”) is a leading provider of aesthetic and dermatology solutions for practitioners worldwide. The Company develops, manufactures, distributes, and markets energy-based product platforms for use by medical practitioners, enabling them to offer safe and effective aesthetic treatments to their customers. The Company currently markets the following system platforms: AviClear, enlighten, excel, Secret PRO, Secret RF, truSculpt and xeo. Several of the Company’s systems offer multiple hand pieces and applications, providing customers the flexibility to upgrade their systems. The sales of (i) systems, system upgrades, and hand pieces (collectively “Systems” revenue); (ii) replacement hand pieces, Titan, truSculpt 3D, truSculpt iD and truSculpt flex cycle refills, as well as single use disposable tips applicable to Secret PRO and Secret RF (“Consumables” revenue); and (iii) the distribution of third party manufactured skincare products (“Skincare” revenue); are collectively classified as “Products” revenue. In addition to Product revenue, the Company generates revenue from the sale of post-warranty service contracts, parts, detachable hand piece replacements (except for Titan, truSculpt 3D, truSculpt iD and truSculpt flex) and service labor for the repair and maintenance of products that are out of warranty, all of which are collectively classified as “Service” revenue.
In March 2022, the Company received 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 conducts manufacturing, warehousing, research and development, regulatory, sales and marketing, service, and administrative activities. The Company markets, sells and services its products through its sales and service employees in North America (including Canada), Australia, Austria, Belgium, France, Germany, Hong Kong, Japan, the Netherlands, Spain, Switzerland, and the United Kingdom. Sales and services outside of these direct markets are made through a worldwide distributor network in over 42 countries. The condensed consolidated financial statements include the accounts of the Company and its subsidiaries.
Basis of Presentation
In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements included in this report reflect all adjustments necessary for a fair statement of its condensed consolidated statements of financial position as of 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 three months ended March 31, 2022, and 2021. The December 31, 2021 condensed consolidated balance sheet was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles in the United States of America (“GAAP”). The results for interim periods are not necessarily indicative of results for the entire year or any other interim period. Presentation of certain prior year balances have been updated to conform with current year presentation. All intercompany accounts and transactions have been eliminated upon consolidation. The accompanying condensed consolidated financial statements should be read in conjunction with the Company’s previously filed audited financial statements and the related notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2021 filed with the Securities and Exchange Commission (the “SEC”) on March 1, 2022.
Risks and Uncertainties
The Company's future results of operations involve a number of risks and uncertainties. Factors that could affect the Company's future operating results and cause actual results to vary materially from expectations include, but are not limited to, rapid technological change, continued acceptance of the Company's products, stability of global financial markets, cybersecurity breaches and other disruptions that could compromise the Company’s information or results, business disruptions that are caused by natural disasters or pandemic events, management of international activities, competition from substitute products and larger companies, ability to obtain and maintain regulatory approvals, government regulations and oversight, patent and other types of litigation, ability to protect proprietary technology from counterfeit versions of the Company's products, strategic relationships and dependence on key individuals.
The COVID-19 outbreak and related variants have negatively affected the United States and global economies. The 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
8

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 condensed consolidated financial statements in conformity with GAAP requires the Company’s management to make estimates and assumptions that affect the amounts reported of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the accompanying notes, and the reported amounts of revenue and expenses during the reported periods. Actual results could differ materially from those estimates.
On an ongoing basis, management evaluates its estimates, including those related to warranty obligations, sales commission, allowance for credit losses, sales allowances, fair value of investments, valuation of inventories, fair value of goodwill, useful lives of property and equipment, impairment testing for long-lived-assets, implicit and incremental borrowing rates related to the Company’s leases, variables used in calculating the fair value of the Company's equity awards, expected achievement of performance based vesting criteria, management performance bonuses, assumptions used in operating and sales-type lease classification, the standalone selling price of the Company's products and services, the period of benefit used to capitalize and amortize contract acquisition costs, variable consideration, contingent liabilities, recoverability of deferred tax assets, residual value of leased equipment, lease term and effective income tax rates. Management bases estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.
Recently Adopted Accounting Pronouncements
In December 2019, the FASB issued ASU No. 2019-12 Income Taxes (Topic 740)-Simplifying the Accounting for Income Taxes, to remove certain exceptions and improve consistency of application, including, among other things, requiring that an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim
9

period that includes the enactment date. The Company adopted this guidance starting January 1, 2021. The adoption of this guidance did not have a material impact on the Company’s consolidated financial position and results of operations.
In August 2020, the FASB issued ASU No. 2020-6, Debt – Debt with Conversion and Other Options (Topic 470) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Topic 815), to simplify the accounting for convertible debt instruments by removing the beneficial conversion and cash conversion separation models for convertible instruments. Under the amendment, the embedded conversion features are no longer separated from the host contract for convertible instruments with conversion features that are not required to be accounted for as derivatives or that do not result in substantial premiums accounted for as paid-in capital. The update also amends the accounting for certain contracts in an entity’s own equity that are currently accounted for as derivatives because of specific settlement provisions. In addition, the new guidance modifies how particular convertible instruments and certain contracts that may be settled in cash or shares impact the computation of diluted earnings per share. The Company early adopted the guidance on a prospective basis effective January 1, 2021. See Note 13 – Debt.
Note 2. Cash, Cash Equivalents and Marketable Investments
The Company invests its cash primarily in money market funds and in highly liquid debt instruments of U.S. federal and municipal governments and their agencies. All highly liquid investments with stated maturities of three months or less from date of purchase are classified as cash equivalents; all highly liquid investments with stated maturities of greater than three months are classified as marketable investments. The majority of the Company’s cash and investments are held in U.S. banks and U.S. Treasuries. The Company's foreign subsidiaries maintain a limited amount of cash in their local banks to cover their short term operating expenses.
The Company determines the appropriate classification of its investments in marketable securities at the time of purchase and re-evaluates such designation at each balance sheet date. The Company’s marketable securities have been classified and accounted for as available-for-sale securities. Investments with remaining maturities of more than one year are viewed by the Company as available to support current operations and are classified as current assets under the caption marketable investments in the accompanying condensed consolidated balance sheets. Investments in available-for-sale debt securities are measured at fair value under the guidance in ASC 320. Credit losses on impaired available-for-sale debt securities are recognized through an allowance for credit losses. Under ASC 326, credit losses recognized on an available-for-sale debt security should not reduce the net carrying amount of the available-for-sale debt security below its fair value. Any changes in fair value unrelated to credit are recognized as an unrealized gain or loss in other comprehensive income.
The following table summarizes the Company's cash and cash equivalents and marketable investments (in thousands):

GrossGrossFair
AmortizedUnrealizedUnrealizedMarket
March 31, 2022CostGainsLossesValue
Cash and cash equivalents$57,732 $— $— $57,732 
Non-current restricted cash700 — — 700 
Cash, cash equivalents, and restricted cash as reported within the Consolidated Statements of Cash Flows58,432 — — 58,432 
Marketable investments - U.S. Treasury74,058  (11)74,047 
Total$132,490 $ $(11)$132,479 


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GrossGrossFair
AmortizedUnrealizedUnrealizedMarket
December 31, 2021CostGainsLossesValue
Cash and cash equivalents$164,164 $— $— $164,164 
Non-current restricted cash700 — — 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, 2021, the net unrealized losses were $11 thousand and nil, respectively, and were related to interest rate changes on available-for-sale marketable investments. The Company has concluded that it is more-likely-than-not that the securities will be held until maturity or the recovery of their cost basis. No securities were in an unrealized loss position for more than 12 months. The 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’s available-for-sale securities, classified as marketable investments, as of March 31, 2022 (in thousands):

March 31, 2022Amount
Due in less than one year$74,058 
Note 3. Fair Value of Financial Instruments
The Company measures certain financial assets at fair value, including cash and cash equivalents.
The fair value hierarchy contains the following three levels of inputs that may be used to measure fair value, in accordance with ASC 820:
Level 1: inputs, which include quoted prices in active markets for identical assets or liabilities;
Level 2: inputs, which include observable inputs other than Level 1 inputs, such as quoted prices for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability. When sufficient quoted pricing for identical securities is not available, the Company uses market pricing and other observable market inputs for similar securities obtained from various third-party data providers. These inputs either represent quoted prices for similar assets in active markets or have been derived from observable market data; and
Level 3: inputs, which include unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the underlying asset or liability. Level 3 assets and liabilities include those whose fair value measurements are determined using pricing models, discounted cash flow methodologies, or similar valuation techniques, as well as significant management judgment or estimation.
In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as considering counterparty credit risk in its assessment of fair value.
As of 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):
March 31, 2022Level 1Level 2Level 2
Cash equivalents:
      Money market funds $948 $ $ 
Marketable investments:
      Available-for-sale securities74,047   
            Total $74,995 $ $ 
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At December 31, 2021, the Company had no money market funds or marketable investments.
See Note 13 - Debt for the carrying amount and estimated fair value of the Company’s convertible notes due 2026.
Note 4. Balance Sheet Details
Inventories
As of March 31, 2022 and December 31, 2021, inventories consist of the following (in thousands):
March 31,
2022
December 31,
2021
Raw materials$31,134 $24,035 
Work in process2,902 2,124 
Finished goods17,644 13,344 
Total$51,680 $39,503 
Accrued Liabilities
As of March 31, 2022 and December 31, 2021, accrued liabilities consist of the following (in thousands):
March 31,
2022
December 31,
2021
Bonus and payroll-related accruals$16,639 $21,649 
Sales and marketing accruals3,678 4,808 
Accrued inventory in transit3,530 4,265 
Product warranty3,874 3,947 
Accrued sales tax9,853 9,110 
Other accrued liabilities10,470 10,321 
Total$48,044 $54,100 
Note 5. Product Warranty
The Company has a direct field service organization in North America (including Canada). Internationally, the Company provides direct service support in Australia, Austria, Belgium, France, Germany, Hong Kong, Japan, the Netherlands, Spain, Switzerland, and the United Kingdom. In several other countries, where the Company does not have a direct presence, the Company provides service through a network of distributors and third-party service providers.
After the original warranty period, maintenance and support are offered on an extended service contract basis or on a time and materials basis. The Company provides the estimated cost to repair or replace products under standard warranty at the time of sale. Costs incurred in connection with extended service contracts are generally recognized at the time when costs are incurred.
The following table provides the changes in the product warranty accrual for the three months ended March 31, 2022 and 2021 (in thousands):
Three Months Ended
March 31,
20222021
Beginning Balance$3,947 $2,908 
Add: Accruals for warranties issued during the period1,462 1,525 
Less: Settlements made during the period(1,535)(1,082)
Ending Balance$3,874 $3,351 
Note 6. Deferred Revenue
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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 revenue balance for the three months ended March 31, 2022 and 2021 (in thousands):
Three Months Ended
March 31,
20222021
Beginning balance$10,825 $11,237 
Add: Payments received4,864 4,929 
Less: Revenue(458)(445)
Less: Revenue recognized from beginning balance(4,167)(3,984)
Ending balance$11,064 $11,737 
Costs for extended service contracts were $1.7 million and $2.0 million for the three months ended 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 days of shipment. Certain international distributor arrangements allow for longer payment terms.
Skincare products
The Company sells third-party manufactured skincare products in Japan. The skincare products are purchased from a third-party manufacturer and sold to medical offices and licensed physicians. The Company warrants that the skincare products are free of significant defects in workmanship and materials for 90 days from shipment. The Company acts as the principal in this arrangement, as the Company determines the price to charge customers for the skincare products and controls the products before they are transferred to the customer. The Company recognizes revenue for skincare products upon shipment.
Consumables and other accessories
The Company classifies its customers' purchases of replacement cycles for truSculpt iD and truSculpt flex, as well as replacement hand pieces, xeo and truSculpt 3D hand pieces, and single use disposable tips applicable to Secret PRO, and Secret RF, as Consumable revenue, 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
14

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 are included in Other long-term assets in the Company’s condensed consolidated balance sheet. Amortization expense for these assets was $0.7 million and $0.5 million during the three months ended March 31, 2022, and 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 8. StockholdersEquity and Stock-based Compensation Expense
The Company’s equity incentive plans are broad-based, long-term programs intended to attract and retain talented employees and align stockholder and employee interests. The 2019 Equity Incentive Plan (the "2019 Plan") provides for the grant of incentive stock options, non-statutory stock options, restricted stock units (“RSUs”), performance stock units ("PSUs"), and other stock or cash awards.
The Company’s Board of Directors granted the Company's executive officers, senior management and certain employees 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 equity incentive plans is summarized as follows:
Shares
Available
for Grant
Balance, December 31, 2021947,347 
RSUs granted(95,761)
PSUs granted(90,658)
Options granted(207,062)
Stock awards canceled / forfeited / expired22,568 
Options canceled / forfeited / expired2,072 
Balance, March 31, 2022578,506 

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Options Outstanding
Number of
Stock Options
Outstanding
Weighted-
Average
Exercise
Price
Weighted Average Remaining Term
 (in Years)
Balance, December 31, 2021287,175 $25.89 4.92
Options granted207,062 $35.34 
Options exercised(7,459)$20.24 
Options canceled / forfeited / expired(2,072)$32.87 
Balance, March 31, 2022484,706 $29.99 6.88

Stock Awards Outstanding
Number of Awards OutstandingWeighted Average Grant Date Fair Value per Share
Balance, December 31, 20211,032,904 $35.00 
RSUs granted95,761 $39.53 
PSUs granted90,658 $34.16 
Awards released(190,967)$28.04 
Stock awards canceled / forfeited / expired(21,081)$40.00 
Balance, March 31, 20221,007,275 $36.57 
Stock-based Compensation Expense
Stock-based compensation expense by department recognized during the three months ended March 31, 2022 and 2021 was as follows (in thousands):
Three Months Ended
March 31,
20222021
Cost of revenue$459 $144 
Sales and marketing576 721 
Research and development980 301 
General and administrative2,028 680 
Total stock-based compensation expense$4,043 $1,846 
Note 9. Net Loss Per Share
On January 1, 2021, the Company adopted the accounting standard update to simplify the accounting for convertible debt instruments. The Company now uses the if converted method for its convertible notes in calculating the diluted net income (loss) per share, and includes the effect of potential share settlement for the convertible notes, if the effect is dilutive.
Basic earnings per share (“EPS”) is computed based on the weighted average number of shares of common stock outstanding during the period. Diluted EPS is computed based on the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method and the if-converted method. Dilutive potential common shares include outstanding stock options, restricted stock units, performance stock units, ESPP shares and conversion shares under the convertible notes. The diluted EPS is computed with the assumption that the Company will settle the convertible debt in shares, rather than cash.

16

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 calculate the potential dilutive effect of the conversion spread on diluted net income per share for the 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 entered into concurrently with the issuance of the convertible notes, as this effect would be anti-dilutive. In the event of conversion of a Convertible note, shares delivered to the Company under the capped call will offset the dilutive effect of the shares that the Company would issue under the convertible notes. In the three 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 per common share and diluted loss per common share are the same in each respective period as the inclusion of any potentially issuable shares would be anti-dilutive.

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The following table sets forth the computation of basic and diluted net loss and the weighted average number of shares used in computing basic and diluted net loss per share (in thousands, except per share data):
Three Months Ended
March 31,
20222021
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, basic18,080 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, diluted18,080 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 shares outstanding, prior to the application of the treasury stock method and the if-converted method, were excluded from the computation of diluted net loss per common share for the periods presented because including them would have had an anti-dilutive effect (in thousands):
Three Months Ended
March 31,
20222021
Capped call4,167 4,167 
Convertible notes4,167 4,167 
Options to purchase common stock485 245 
Restricted stock units526 585 
Performance stock units482 92 
Employee stock purchase plan shares32 30 
Total9,859 9,286 
Note 10. Income Taxes
For the three months ended March 31, 2022, the Company's income tax expense was $0.2 million, compared to the tax expense of $0.3 million for the three months ended March 31, 2021.
The Company's income tax expense for the three months ended March 31, 2022 and 2021, is due to income taxes in foreign jurisdictions. The Company continues to maintain a full valuation allowance on its U.S. deferred tax assets.
Note 11. Leases
The Company is a party to certain operating and finance leases for vehicles, office space and storage facilities. The Company’s operating leases consist of office space, as well as storage facilities and finance leases consist of automobiles. The Company’s leases generally have remaining terms of one to ten years, some of which include options to renew the leases for up to five years. The Company leases space for operations in the United States, Australia, Belgium, France, Japan and Spain. In addition to the above facility leases, the Company also routinely leases automobiles for certain sales and field service employees under finance leases.
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The Company determines if a contract contains a lease at inception. Operating lease assets and liabilities are recognized at the lease commencement date. Operating lease liabilities represent the present value of lease payments not yet paid. Operating lease assets represent the right to use an underlying asset and are based upon the operating lease liabilities adjusted for prepayments or accrued lease payments, initial direct costs, lease incentives, and impairment of operating lease assets. To determine the present value of lease payments not yet paid, the Company estimates the incremental secured borrowing rates corresponding to the maturities of the leases. The Company based the rate estimates on prevailing financial market conditions, credit analysis, and management judgment.
The Company recognizes expense for these leases on a straight-line basis over the lease term. Additionally, tenant incentives used to fund leasehold improvements are recognized when earned and reduce the Company’s right-of-use (“ROU”) asset related to the lease. These are amortized through the ROU asset as reductions of expense over the lease term.
Supplemental balance sheet information related to leases was as follows (in thousands):
LeasesClassificationMarch 31,
2022
December 31,
2021
Assets
Right-of-use assetsOperating lease assets$14,330 $14,627 
Finance leaseProperty and equipment, net403 392 
Total leased assets$14,733 $15,019 

LiabilitiesClassificationMarch 31,
2022
December 31,
2021
Operating lease liabilities
Operating lease liabilities, currentOperating lease liabilities$2,628 $2,419 
Operating lease liabilities, non-currentOperating lease liabilities, net of current portion13,007 13,483 
Total Operating lease liabilities$15,635 $15,902 
Finance lease liabilities
Finance lease liabilities, currentAccrued liabilities$520 $554 
Finance lease liabilities, non-currentOther long-term liabilities680 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 costsClassification20222021
Finance lease costAmortization expense$161 $127 
Finance lease costInterest for finance lease$21 $14 
Operating lease costOperating 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 liabilitiesClassification20222021
Operating cash flowFinance lease$21 $14 
Financing cash flowFinance lease$150 $115 
Operating cash flowOperating lease$792 $772 
Facility leases
Maturities of facility leases were as follows as of March 31, 2022 (in thousands):
As of March 31, 2022Amount
Remainder of 2022$2,469 
20233,332 
20242,904 
20252,875 
20262,970 
2027 and thereafter3,338 
Total lease payments17,888 
Less: imputed interest2,253 
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, 2022Amount
Remainder of 2022$491 
2023349 
2024411 
202521 
20261 
Total lease payments1,273 
Less: imputed interest73 
Present value of lease liabilities$1,200 

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Weighted-average remaining lease term and discount rate, as of March 31, 2022, were as follows:
Lease Term and Discount RateMarch 31, 2022
Weighted-average remaining lease term (years)
Operating leases5.5
Finance leases2.1
Weighted-average discount rate
Operating leases4.7 %
Finance leases6.6 %
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 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 expenses legal fees as incurred.
On January 31, 2020, the Company filed a lawsuit against Lutronic Aesthetics in the United States District Court for the Eastern District of 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 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 various pending commercial and 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 five-business day period after any five 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 customary covenants that restrict the Company’s ability to, among other things, incur additional indebtedness, sell certain assets, guarantee obligations of third parties, declare dividends, or make certain distributions, and undergo a merger or consolidation or certain other transactions. The Loan and Security Agreement also contains certain financial 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 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 PPP, all or a portion of the principal may have been forgiven if the loan proceeds were used for 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 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 one 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 the Company’s principal operations and decision-making functions are located in the U.S. The Company’s CODM view its operations, manages its business, and uses one measurement of profitability for the one 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 summary of revenue by geography and product category for the three months March 31, 2022 and 2021 (in thousands):
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Three Months Ended
March 31,
20222021
Revenue mix by geography:
United States$24,474 $18,948 
Japan17,503 16,555 
Asia, excluding Japan3,609 1,989 
Europe4,191 5,001 
Rest of the World, other than United States, Asia and Europe8,237 7,175 
Total consolidated revenue$58,014 $49,668 
Revenue mix by product category:
Products$36,514 $28,320 
Consumables3,903 2,925 
Skincare11,649 12,306 
Total product revenue52,066 43,551 
Service5,948 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 Managements Discussion and Analysis should be read in conjunction with the Companys financial condition and results of operations in conjunction with the Companys unaudited condensed consolidated financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q and the Companys audited financial statements and notes thereto for the year ended December 31, 2021, included in its annual report on Form 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 and Section 21E of the Securities Exchange Act of 1934, as amended, ("the Exchange Act"). Forward-looking statements are often identified by the use of words such as, but not limited to, “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “seek,” “should,” “strategy,” “target,” “will,” “would” and similar expressions or variations intended to identify forward-looking statements. These statements are based on the beliefs and assumptions of the Company’s management based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in the section titled “Risk Factors” included under Part II, Item 1A below.
Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, the Company undertakes no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.
Introduction
The Management’s Discussion and Analysis, or MD&A, is organized as follows:
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 
The Company is a leading provider of aesthetic and dermatology solutions for practitioners worldwide. 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 medical practitioners to perform safe and effective procedures, including treatment for body contouring, skin resurfacing and revitalization, tattoo removal, removal of benign pigmented lesions, vascular conditions, hair removal, and toenail fungus. The Company’s platforms are designed to be easily upgraded to add additional applications and hand pieces, which provide flexibility for the Company’s customers as they expand their practices. In addition to systems and upgrade revenue, the Company generates revenue from the sale of post warranty service contracts, providing services for products that are out of warranty, hand piece refills and other per procedure related revenue on select systems and distribution of 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 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 Secret RF, a fractional RF microneedling device for skin revitalization, in January 2018, enlighten SR in April 2018, truSculpt iD 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 the Company conducts manufacturing, warehousing, research and development, regulatory, sales and marketing, service, and administrative activities. The Company markets sells and services the Company’s products through direct sales and service employees in North America (including Canada), Australia, Austria, Belgium, France, Germany, Hong Kong, Japan, Netherlands, Spain, Switzerland and the United Kingdom. Sales and Services outside of these direct markets are made through a worldwide distributor network in over 42 countries.
Products and Services
The Company derives revenue from the sale of Products and Services. Product revenue includes revenue from the sale of systems, hand pieces and upgrade of systems (collectively “Systems” revenue), replacement hand pieces, truSculpt iD cycle refills, and truSculpt flex cycle refills, as well as single use disposable tips applicable to Secret RF (“Consumables” revenue), and the sale of third party manufactured skincare products (“Skincare” revenue). A system consists of a console that incorporates a universal graphic user interface, a laser and or other energy-based module, control system software and high voltage electronics, as well as one or more hand pieces. 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 excel, enlighten, Secret RF, truSculpt and xeo.
In March 2022, the 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 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 share model, resulting in recurring revenue.
Skincare revenue relates to the distribution of ZO’s skincare products in Japan. The skincare products are purchased from a third-party man