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
Unless otherwise indicated, all results presented are prepared in a manner that
complies, in all material respects, with accounting principles generally
accepted in
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 the 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
Executive Summary Company Description
The Company is a leading medical device company specializing in the research, development, manufacture, marketing and servicing of light and other energy-based aesthetics systems 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 practitioners to perform safe and effective aesthetic procedures, including treatment for body contouring, skin resurfacing and revitalization, tattoo removal, removal of benign pigmented lesions, vascular conditions, hair removal, toenail fungus and women's intimate health. 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 Juliet, a
product for women's intimate health, in
The Company's corporate headquarters and
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 Juliet and Secret RF ("Consumables" revenue), the sale of third party manufactured skincare products ("Skincare" revenue); and the leasing of equipment through a membership program. 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 such as with the Company's Pearl and Pearl Fractional applications instead of within the console.
The Company offers customers the ability to select the system that best fits their practice at the time of purchase and then to cost-effectively add applications to their system as their practice grows. This provides customers the flexibility to upgrade their systems whenever they choose and provides the Company with a source of additional Systems revenue. The Company's primary system platforms include excel, enlighten, Juliet, Secret RF, truSculpt and xeo.
Skincare revenue relates to the distribution of ZO's skincare products in
Service revenue includes prepaid service contracts, enlighten installation, customer marketing support and labor on out-of-warranty products.
Significant Business Trends
The Company believes that its ability to grow revenue will be primarily dependent on the following:
? 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;
? use of clinical results to support new aesthetic products and applications; ? enhanced luminary 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 physicians in the core dermatology and plastic surgeon
specialties, as well as outside those specialties; 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 Juliet and Secret RF products.
For a detailed discussion of the significant business trends impacting its business, please see the section titled "Results of Operations" below.
Factors that May Impact Future Performance
The Company's industry is impacted by numerous competitive, regulatory and other significant factors. The Company's industry is highly competitive and the Company's future performance depends on the Company's ability to compete successfully. Additionally, the Company's future performance is dependent upon the ability to continue to expand the Company's product offerings with innovative technologies, obtain regulatory clearances for the Company's products, protect the proprietary technology of the products and manufacturing processes, manufacture the products cost-effectively, and successfully market and distribute the products in a profitable manner. If the Company fails to execute on the aforementioned initiatives, the Company's business would be adversely affected.
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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 the Company's
future performance are provided in (1) the Company's Annual Report on Form 10-K
for the year ended
Impact of COVID-19 on Company's business and operations
In
The Company has experienced a significant increase in sales of skincare products
under the exclusive distribution agreement with
Critical accounting policies, significant judgments and use of estimates
The preparation of the Company's consolidated financial statements and related notes requires the Company to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. The Company has based its estimates on historical experience and on various other assumptions that the Company believes to be reasonable under the circumstances. The Company periodically reviews its estimates and makes adjustments when facts and circumstances dictate. To the extent that there are material differences between these estimates and actual results, its financial condition or results of operations will be affected.
An accounting policy is considered to be critical if it requires an accounting estimate to be made based on assumptions about matters that are 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 the Company considers to be critical,
subjective, and requiring judgment in their application are summarized in "Item
7-Management's Discussion and Analysis of Financial Condition and Results of
Operations" in its Annual Report on Form 10-K for the year ended
The Company established new accounting policies to account for the Convertible notes and related transactions during the first quarter of 2021.
The Company issued
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..
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In connection with issuance of the notes, the Company entered into capped call
transactions with certain option counterparties. The capped call transactions
are generally designated to reduce the potential dilution of the
Company's common stock upon any conversion of the notes. The capped calls were
purchased for
Basic loss per share of common stock is calculated by dividing net income
available to common stockholders by the weighted average number of common shares
outstanding for the respective period in accordance with ASC 260. Diluted loss
per common share reflects the potential dilution that would occur if contracts
to issue common stock were exercised or converted into common stock. For the
three months ended
The Company assessed whether any impairment of its goodwill or its long-lived
assets had occurred and has determined that no charges other than an impairment
loss of
Results of Operations
The following table sets forth selected consolidated financial data for the periods indicated, expressed as a percentage of total net revenue. Percentages in this table and throughout its discussion and analysis of financial condition and results of operations may reflect rounding adjustments.
Three Months Ended March 31, 2021 2020 Net revenue 100 % 100 % Cost of revenue 44 % 56 % Gross margin 56 % 44 % Operating expenses: Sales and marketing 30 % 46 % Research and development 8 % 12 % General and administrative 15 % 24 % Total operating expenses 53 % 82 % Income/(Loss) from operations 2 % (38 )% Amortization of debt issuance costs 0 % - % Interest on Convertible notes 0 % - % Other expense, net (2 )% (1 )% Loss before income taxes 0 % (39 )% Income tax expense 1 % - % Net loss (1 )% (39 )% 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 at a point in time, 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
Revenue is recognized upon transfer of control of promised products or services
to customers in an amount that reflects the consideration to which the Company
expects to be entitled in exchange for promised goods or services. The Company's
performance obligations are satisfied either over time or at a point in time.
Revenue from performance obligations that are transferred to customers over time
accounted for approximately 12% and 18% of the Company's total revenue for the
three months ended
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